Asia 2017 - Bernstein

NOVEMBER 2016
ASIA 2017:
THE NEW ECONOMY WON.
WHAT NOW?
The questions "here" are the same as the questions

"there": New Energy, FinTech, Quality, and Infrastructure
The natural division of investment controversies globally between emerging market and
developed market is breaking down. Commodity consumption, government appetite for
reform, and financial system risk all still matter in emerging markets, just not as much.
Investment controversies in Asia now come down to disintermediation, competitive

moats, incremental return on investment, and the "twilight" for the losers. It is these same
questions that define investment controversies everywhere.
We explore the role of FinTech in India and China, New Energy in Asia and globally, the
search for Quality companies in Asia, and the lessons for India from Chinese
infrastructure investment over the last 15 years.
The highest-conviction ideas for 2017 from the contributing analysts are: CCB, KMB,
Wuliangye, Inpex, VA Tech Wabag, Keyence, Samsung Electronics, China Unicom, and
Jiangsu Hengrui.
SEE DISCLOSURE APPENDIX OF THIS REPORT FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS
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PORTFOLIO MANAGER'S SUMMARY

For each of the last four years, we have presented our combined view on the most
important questions facing investors focused on China in the year ahead. This year, we
broaden our gaze to Asia as a whole, reflecting our broadening coverage. Overall, we now
cover ~150 stocks across 16 sectors in 12 Asian markets.
What is striking when putting together the most important questions for investors in Asia
in 2017 is how similar those questions are to the issues confronting investors in
developed markets at present: FinTech; New Energy; the search for competitive moats
and high-Quality companies; and the role of hard (bridges and tunnels) and soft (4G)
infrastructure in accelerating growth. In this Blackbook, we consider questions in relation
to the lessons China offers to India in terms of developing infrastructure and capital stock,
the future of energy, how to identify Quality companies in Asia, and the risk of
disintermediation to the banking sector from FinTech in China and India.
The questions that have dominated our discussion of Asia ex-Japan in prior years
commodity demand growth and geological scarcity; government appetite for reform and
foreign investment; the risk that high-growth markets and sectors are "frauds" and
"bubbles"; and the ability of emerging markets to aggregate capital and manage public
and private debt are, in many cases, receding. Said differently, the New Economy won.
Economic growth in emerging Asia is now, irreversibly, about services and the consumer.
As we saw in 2016, there will still be cycles in terms of commodity prices and rotation in
and out of the Old Economy. But the broad direction of equity market in Asia is clear: the
Asian consumer's desire for entertainment, apparel, transport, credit, financial security,
information, and pizza will drive public equity market investment opportunities in Asia
just the way it does in the developed world to a far greater extent than the contents of
the Five-Year Plan (any Five-Year Plan).
The highest conviction ideas of contributing analysts are: CCB, KMB, Wuliangye, Inpex, VA
Tech Wabag, Keyence, Samsung Electronics, China Unicom, and Jiangsu Hengrui.
Michael W. Parker michael.parker@bernstein.com +852-2918-5747

Neil Beveridge, Ph.D. neil.beveridge@bernstein.com +852-2918-5741
Gautam Chhugani gautam.chhugani@bernstein.com +65-6230-4654
Venugopal Garre venugopal.garre@bernstein.com +65-6230-4651
Jay Huang, Ph.D. jay.huang@bernstein.com +852-2918-5746
Wei Hou wei.hou@bernstein.com +852-2918-5756
Chris Lane chris.lane@bernstein.com +852-2918-5710
Euan McLeish euan.mcleish@bernstein.com +852-29185780
Laura Nelson Carney, PhD laura.nelson.carney@bernstein.com +852-2918-5727
Mark C. Newman mark.newman@bernstein.com +852-2918-5753
November 29, 2016
ASIA 2017: THE NEW ECONOMY WON. WHAT NOW? 1

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2 ASIA 2017: THE NEW ECONOMY WON. WHAT NOW?

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TABLE OF CONTENTS
SIGNIFICANT RESEARCH CONCLUSIONS 5

THE OLD ECONOMY AND THE NEW 17
The New Economy won the war and lost the battle in Asia in 2016
THE SEARCH FOR QUALITY CONTINUES 57
What can booze and drugs teach us about Quality companies in Asia?
IS IT INDIA'S TURN? PART I 127
What can we learn from China's rise?
IS IT INDIA'S TURN? PART II 179
Is it on the right track? Where are the opportunities for investors?
CONSUMER CREDIT IN CHINA AND INDIA 233
Which market faces more risk of disintermediation from FinTech players?
THE FUTURE OF ENERGY 261
Evolution or revolution?
FINANCIAL OVERVIEW EXHIBITS 321

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SIGNIFICANT RESEARCH CONCLUSIONS

THE QUESTIONS HERE ARE JUST 2017 will be exceptional for investing in Asia ex-Japan in one respect: for perhaps the first
LIKE THE QUESTIONS THERE time, it will be just like investing anywhere else.
The two most important industries in the world for most of the last 100 years and in
th
emerging markets today (still, just) are banks and energy. Throughout the 20 century,
the ability to aggregate and deploy large amounts of capital into energy-intensive,
commodity-intensive, labor-intensive projects was the "killer app" that shaped the
modern age. Electrification, highway systems, telecommunications networks, pipelines,
aviation, shipping, and construction together with oil, gas, and coal production itself, all
relied on the twin pillars of banks to provide capital at low cost and an infrastructure to
provide the energy to build an early version of machines building machines.
Over the first decade-and-a-half of this century, that capability aggregating and
deploying capital is how China separated itself from the rest of emerging markets and,
in particular, Brazil, Russia, and India.
Today, the banking sector and the energy sector, globally and in Asia, are under attack.
And the banking sector and the energy sector, globally and in Asia, are losing. In this
Blackbook, we explore FinTech and the Future of Energy and how these battles are
playing out in Asia. However, an aspect of our analysis that is easy to overlook is the fact
that Asia merely provides the backdrop. Fintech and the Future of Energy are global and
largely location-agnostic trends that are playing out at the same time in Asia, in the United
States, and in Europe. For the first time, the questions "here" are the same as the
questions "there."
In almost every industry, globally, new technologies with disruptive potential are attracting
capital. The difference between successful innovation and false dawn comes down
broadly to two factors, in our view: first, the depth and breadth of the "moat" (and the new
entrant's ability to cross it); and second, the return on incremental investment for new
entrants and incumbents. For successful innovations, the new entrants (or at least their
technologies) eventually win. Switching costs determine the length of the loser's
"twilight."
In this Blackbook, we look at the depth and breadth of the "moat" and the new entrant's
ability to cross it in Asia in two ways.
First, Laura Nelson Carney, our Asia-Pacific healthcare analyst, and Euan McLeish, our
Asia-Pacific beverages analyst, look at incumbent "moats" and the ability of new entrants
to cross them in terms of management quality and product quality in Asia. Most
quantitative-based metrics for Quality in Asia miss a number of good companies because
of either selection bias (MSCI inclusion is, in some ways, a lagging indicator) or data
sufficiency problems. Yet management and product Quality of new (and, almost by
definition, small) entrants are a key determining factors to disruption. Many Quant screens

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systematically miss the relevant universe. We consider Quality in Asia from the ground up.
We look at false positives and false negatives in two diverse sectors healthcare and
beverages to determine if there are common, systematic trends in terms of what we
miss.
Second, our Asia-Pacific telecommunications analyst Chris Lane, our India capital goods
and infrastructure analyst Venugopal Garre, and our Asian capital goods analyst Jay
Huang consider the lessons that India can learn from Chinese infrastructure investment
over the last 15 years. Lumping developing economies with developed markets when it
comes to the risk of disruption only makes sense where the emerging market
infrastructure is up to the task. For example, given problems with power supply in India, is
electric vehicle adoption over the next 15 years a threat to incumbent vehicle
manufacturers in India to the same extent it is in China, the United States, and Europe? Is
FinTech a significant risk for a population largely communicating on second-hand 2G
phones (see Exhibit 1)? The quality of national infrastructure may itself represent a "moat"
at least in India for the kind of the developed-market disruption model we are
discussing.
EXHIBIT 1: Mobile wallet usage is fast expanding relative to plastic cards
Transaction Volume (INR in Bn) 3,132
2,407
2,056
1,900
1,540 1,591
1,213
955
429
206
29 82
FY14 FY15 FY16 FY17*
Mobile Wallets Debit Cards Credit Cards

Transaction Volume Growth (Y0Y)
190%
182%
152%
108%
28% 25% 27% 31% 27% 29% 30%

23%
FY14 FY15 FY16 FY17*
* FY2017 estimates are based on actual values during the April-August 2016 period.
Source: RBI and Bernstein analysis.
We then look at the return on incremental investment for new entrants and incumbents in
terms of both energy and financial disintermediation.

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Returns on incremental investment determine the success or failure of new technology.

The next ton of coal is deeper and less accessible than the last. Almost by definition, costs
rise and returns fall over time. Renewable energy is a technology and a manufacturing
process: costs fall with experience, rising expertise, and size; returns scale with increasing
efficiency and throughput. The end state is preordained based on incremental returns on
investment. The question is timing: the length of the twilight.
First, our Chinese banks analyst Wei Hou and our India financials analyst Gautam
Chhugani look at the emergence of financial technologies (FinTech) in China and India and
the risk that these financial innovations pose to both the financial system and to
incumbent banks (both SOEs and the private sector). As in any sector, where the cost of
the incumbent to retain customers is higher than the cost to the innovator to acquire
customers (retail branch versus online banking), the switch in the sector over time is clear.
Second, our global energy storage and electric vehicles analyst Mark Newman and our
Asia-Pacific oil & gas analyst Neil Beveridge review the Future of Energy. Given the
increasing likelihood that either through compliance with fleet fuel-efficiency standards
or in response to customer demand electric vehicles will become a larger and larger
part of annual auto sales (perhaps as high as 25% by 2025), we consider the effects on
oil, coal, and gas and the switching cost from fossil fuels looking out decades.
At the end of 2016, the questions "here" (in emerging markets in Asia) are largely the
same as the questions "there" (developed markets globally): Quality, Infrastructure,
FinTech, and New Energy.
THE NEW ECONOMY WON THE In Asia, the New Economy finally "won" in 2016. Measured by long-term stock market
WAR AND LOST THE BATTLE IN performance, sources of economic growth across the region, falling energy intensity, and
ASIA IN 2016
the sources of profit growth in the public equity marketsthe Old Economy is over.
Emerging Asia will never have a traditional "industrialization" phase where the majority of
economic output comes from manufacturing, construction, and industry. Since the largest
economies in Asia are now through that phase or (like India) are unlikely to ever enter it, it
is now all about services (see Exhibit 2). That does not mean that the equity value of the
Old Economy will fall monotonically each year. Energy and materials were the two
best-performing sectors in Asia in 2016. The rallies in materials and energy this year
reflect both the recovery in the underlying commodity prices since the first quarter and
the mean reversion within the sectors regionally. Quality and Growth continue to look
extraordinarily expensive in Asia.
Value and Income continue to look extraordinarily cheap. But the gap has closed since the
mid-year. The materials and energy stocks were the primary beneficiaries of this shift in
the second half. We believe that the historically high gap between Quality and Growth,
and Value and Income will continue to close.

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EXHIBIT 2: Pan-Asia agriculture/industry/services GDP share (1967-2015E)
60% 0.30
0.29
50%
0.28
0.27
40%
0.26
30% 0.25
0.24
20%
0.23
0.22
10%
0.21
0% 0.20
Energy Intensity (RHS) Agriculture Industry Services
Source: World Bank, and Bernstein estimates and analysis.
We also believe that owning financials and utilities are a better way to participate in the
mean reversion in 2017, rather than chasing energy and miners.
EXHIBIT 3: Profit pool (1H2016) share by sector for MXAPJ EXHIBIT 4: Profit growth(1H2016-1H2015) share by sector for
MXAPJ
Includes only those sectors which had postive Net Income
growth (1H16 v 1H15), ex one-off gains/losses for BABA,
Consumer
Energy Staples Internet Health BHP, Vedanta, South 32, Rio Tinto, and Fortescue
3% 2% Care
2% 1%
Utilities Healthcare Utilities
4% 17% 1%
Materials
4%
Financials
Telecom 45%
6%
Industrials Internet
7% 52%
Real Materials
Estate 30%
8%
Consumer IT (ex
Discr Internet)
8% 10%
Note: Excludes one-off gains/losses for BABA, BHP, Vedanta, South 32, Rio
Tinto, and Fortescue.
Source: Bloomberg L.P. and Bernstein analysis.

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Compared to historical valuation multiples, financials and utilities remain at or more than
one standard deviation below the long-term trend. Energy and miners are at or above
long-term average valuation multiples.
The Asian consumer continues to look strong. Profit growth has been dominated by
consumer-driven sectors like the Internet and healthcare (see Exhibit 3 and Exhibit 4). The
Asian consumer's desire for entertainment, apparel, transport, credit, financial security,
information, and pizza will drive public equity market investment opportunities in Asia. The
Asia Blue Chips now reflect this reality. Tencent, Alibaba, AIA, China Life, HDFC, Samsung,
and TSMC among others largely play on the Asian consumer more than on Asian
manufacturing capabilities.
We maintain a "focus list" that reflects, in part, confidence in Asia Blue Chips in an
environment of a healthy Asian consumer and a structural, long-term rotation to the New
Economy. We also include high-conviction thematic ideas that largely sit within the
consumer sector. In addition, we incorporate stocks in the "focus list" that follow the
direction implied by our factor analysis. Currently, that means dividend and FCF-yielding
stocks are inexpensive on a P/B and P/E basis versus their history. At present, that means
a clear overweight toward financials (China Life, AIA, Bank Mandiri, ANZ, CCB, and ICBC)
and utilities (Huaneng Power, KEPCO, and China Resources Power). We are net neutral on
energy between Shenhua (a "Short") and PTT E&P.
QUALITY IN ASIA Quality has proven more elusive to investors in Asia than in developed markets. The
longstanding gripe about investing in Asia where are the companies with rapid earnings
growth, high ROIC, good management teams, large competitive advantages, and strong
balance sheets? has, in 2016, narrowed down to: I cannot possibly own any more
Tencent.
Our Quality tools for Asia are arguably unreliable for one of four reasons:
We use too narrow a hunting ground (we only look at stocks already inside the MSCI
All Country World Index, and our regional Asian factor analysis only considers
companies with a market cap above US$1 billion);
We demand too long a historical dataset (we exclude stocks where historical data on
a number of factors is unavailable, yet some of the best-quality businesses in Asia are
newer than in developed markets);
Our selection criteria (strong balance sheet, low debt, high ROIC, and little associate
income) generates stock recommendations like Huabao (a Chinese PLA tobacco
additives company) or Dong E-E Jiao (a "traditional" medicine company making
products derived from donkey skin and urine that lack evidence for efficacy) that do
not really resemble anyone's idea of quality; or
We overlook or ignore the reality that Quality in emerging Asia looks different to
Quality in developed markets (e.g., some Quality companies in growth phases choose
to make temporary trade-offs between growth and ROIC, addressable markets in

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Asia can be much higher growth than in developed markets, and robust risk
mitigation strategies are even more important in Asia).
EXHIBIT 5: What does Quality look like in Asiaand how to evaluate it? Our seven-dimension Quality framework
Quality of Parameters to assess Quant proxy we used Fundamental
analysis needed
Strategy Expanding margins (targeted mix shift) Increasing net income margin (2014-18E)
Clarity and focus of growth strategy

Optimized mix of products or service offerings

Strength of distribution reach

Exposure to and mitigation against key risks

Products or services Investment in future products 3 yr average R&D spend to net sales (201215)

Clear differentiation versus competitors

Affordability of products

Strength of brand and reputation

% of revenue from outside home market

Addressable market Consistent sales growth Net sales growth CAGR (2014-18E)
Size and growth of addressable market (s)

Market structure

Earnings and Earnings derived primarily from core business 3 yr average % of income from asc income (2012-15)
financial returns
ROIC > WACC 3 yr historical average ROIC / WACC (2012-15)
Strong FCF yield 3 yr historical average free cash flow yield (2012-15)
Capital structure and Balance sheet strength 3 yr average net debt to assets (2012-15)
financial statements
Optimized capital allocation

Clean and consistent revenue booking approach

Fair value of goodwill and intangible assets

Management Depth of relevant experience

Diversity

Higher founder ownership (if applicable)

Free from historical corporate governance scandals

Reasonable level of exposure to related transactions

Investors Savvier shareholders % institutional ownership
Foreign ownership

Source: Bernstein analysis.
The nature of what Quality means in emerging Asia is a little different than in developed
markets (see Exhibit 5). The next question is: how and why? What are the core set of
differences that should color how we think about what Quality means in Asia? We see at
least five differences to point out:
Less mature industries and companies in Asia: Many companies (and industries) are in
growth phases of their development, which comes with trade-offs against what
would be defined as high Quality in mature companies elsewhere. This often means
trade-offs between ROIC and growth (either in scale or margins). For fast-growing
companies in Asia, sometimes management teams, choose growth over margins.
Thus, we may see a period of contracted margins, when compared to peers in
developed markets. A simple generalization that overlooks this temporal trade-off
may lead to overlooking high-Quality companies.

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Shorter histories of historical data in many companies: In some sectors and countries
in Asia (healthcare included), many of the largest companies are all less than five
years old. Global quant approaches often look for five years of historical data, which
knocks out many Asian companies (particularly in new economy sectors).
Quality management looks different than those in developed markets: Founders are
often still running the company, family members are often still involved, and
professional management teams are less common than in developed markets. This
can mean that narrower diversity and depth of experience are the norm. Moreover,
the prioritization of management capabilities varies depending on the stage of
industry development.
Competitive differentiation: Competitive differentiation can be more fleeting than in

developed markets, given the pace at which business models, products, and ideas
are copied and improved upon (particularly in China). Strong balance sheets look
different in Asia; in some sectors, many companies sit on mountains of cash and carry
little to no debt.
We identify Quality companies in the Asia healthcare and beverages sectors that meet our
criteria, but which the normal pass using developed market filters might miss. We think
there are lessons here across Asia beyond these two sectors.
INFRASTRUCTURE IN CHINA On a number of economic indicators, India resembles China in 2000-05. Over this period,
AND INDIAANY LESSONS? China pursued an aggressive policy of infrastructure development, urbanization, and
export growth, which has made it the world's largest economy on a PPP basis. China's
GDP has expanded at a 10% CAGR, contributing a net increase of 30% of global GDP,
and China's share of total global GDP expanded from 4.5% in 2004 to 15% in 2015. If the
highest-level question is whether India's infrastructure today can match China's and
facilitate the development market "disruption model" we outline, the answer is: if all that
the disruption requires is a phone, then the answer is "yes."
EXHIBIT 6: India is far behind China in EXHIBIT 7: railroads EXHIBIT 8: air travel
infrastructure build and usage like
highways
Length of Highway per Sq. Railway Goods Transported Air Freight Transported per
0.50 Km of Land Area per Capita Capita
15
0.40 2000
0.30 10
1500
km
ton-km
ton-km
0.20 1000
5
0.10 500
0.00 0 0
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
China India China India China India
Source: Government websites and Bernstein Source: Government websites and Bernstein Source: Government websites and Bernstein
analysis. analysis. analysis.

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(Can the China miracle be repeated? The sectoral focus in India is following China's lead
from a decade-and-a-half ago: improving infrastructure, increasing the manufacturing
mix (although mostly import substitution), and broad efforts at easing the business
environment (see Exhibit 6 to Exhibit 8). The approval of the Goods and Services Tax
(GST), efforts to tweak labor laws, introduction of the Contract Disputes Act,
commencement of ease of business rankings for states, and reducing FDI caps in some
sectors are key areas of policy progress.
EXHIBIT 9: shipping EXHIBIT 10: and electricity EXHIBIT 11: India is comparable to China
in clean water access
Container Port Traffic per Electric Power Consumption Access to Improved Water
0.15
Capita per Capita Source (% of Population)
20-Foot Equivalent Units (TEUs)
KWh per Capita 4,000 100%

0.10 3,000 90%
2,000 80%
0.05
1,000 70%
0 60%
0.00
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
India's rise may not be as fast as China's, and growth is likely to happen in spurts and
cycles, but we have no doubt that it will happen (see Exhibit 9 to Exhibit 11). Over the long
term, we do expect infra build and manufacturing to accelerate, but we see less scope for
India to emerge as a manufacturing-exports-led economy over the next decade. We see
the development of some industries such as defense manufacturing though, as India
continues to push for import substitution.
As India continues to see macro growth, rising per capita incomes coupled with
urbanization should continue to aid consumer discretionary, including autos (shift to
premium focus) and consumer electricals/durables. Telecom services (Bharti, a key pick)
should continue to grow, while e-commerce will develop, providing opportunities in its
supply chain (including logistics). Construction will provide opportunities, but we see
building products and consumer electricals as a better way to play that. In manufacturing,
apart from the emergence of a new manufacturing supply chain in the defense sector, we
expect opportunities to eventually emerge for ports and freight operators.
THE INEVITABLE RISE OF China and India operate in a different regulatory framework. Banks in China are subject to
FINTECH IN INDIA AND CHINA strong regulatory influence on pricing and volumes. Even private-owned banks face
challenges in maintaining the independence of their day-to-day operations. Indian banks,
however, are free to price their loans and expand their volumes.
The two markets went through a period of rapid credit expansion leading to an eventual
credit slowdown. China expanded credit rapidly in the last six years, with credit-to-GDP

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already reaching 200% of GDP now. The growth of credit was also heavily skewed
toward public sectors (local governments and state-owned enterprises), where leverage
has become unsustainably high. India, on the other hand, expanded system credit at
almost a 21% CAGR over the last decade-and-a-half. The consequences of rapid credit
expansion in India have been significant corporate credit stress and choking of corporate
credit growth.
EXHIBIT 12: Comparison of FinTech companies with traditional financial institutions
30.0%
Small Loan Company

Lending (RMB936bn/
USD140bn)
Typical MSE Lending
cutoff
20.0%
Gray/Private Lending
Credit Card (RMB10tn/USD1.5tn)
(RMB3.6tn/
17.5% USD500bn)
Internet Bank Loan Coverage
(Today): Shadow Banking
15.0% RMB27bn /USD4bn (RMB19tn/USD2.8tn)
P2P Lending
(RMB680bn/
USD100bn)
12.5%
Interest Rates (%)
Webank Loan Coverage (Future)
10.0%
Scenario-Based MSE Lending
Lending (RMB19.3tn)
7.5%
(RMB14bn/
USD2bn) Large Corporate Lending
(RMB53.7tn/USD7.9tn)
5.0%
Banking Channel
2.5%
Non-Banking Channel
0.0%
0 7.5K 15K 75K 1M & Above
Average Loan Amount (USD)
Source: Wangdaizhijia, CBRC, iResearch, corporate reports, and Bernstein estimates and analysis.
With corporate growth slowing down, the next growth horizon is consumer retail lending.
Low credit penetration in India is driven by the fact that a huge base of population (~500
million estimated) is below certain income thresholds that are typically not targeted by
banks. In China, further headroom for growth exists in consumer lending due to the
under-serviced household sector, the need to rebalance the economy to a consumption-
driven growth model, and an improving credit infrastructure with private investments. In
this context, we believe the rise of FinTech companies is inevitable in both markets, but
with different near-term opportunities.
FinTech in China will be more credit led versus India, where payment will be the main
theme in coming years. In China, where basic banking coverage is high and the e-payment
market structure has matured (dominated by Alipay and Tenpay), future growth
opportunities for tech players will focus on providing complementary value-add services
such as MSE and consumer lending (see Exhibit 12). However, in India, the immediate
opportunity for the new entrants is providing microcredit, payments, and financial

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inclusion to a large segment often ignored by banks. The new, niche business models are
focused on consumer credit (e.g., small finance banks providing microfinance and small
ticket loans), while the payments within the FinTech space could have a material impact
on traditional banking.
China banking has been highly regulated with two interesting characteristics: 1) high
government ownership, with state-owned banks accounting for ~40% of total market
share; and 2) strong government influence through loan quota, pricing controls, and
frequent policy guidance. This means that even the privately owned banks in China are
subject to significant government influence on their day-to-day operations.
In India, system leverage reflected by bank credit-to-GDP looks much lower relative to
China (55% of GDP versus China at 200% of GDP). However, the number does not reflect
the period of rapid credit expansion that India underwent in the last decade-and-a-half at
almost a 21% CAGR. This translated to significant overleveraging of corporate balance
sheets, resulting in significant credit stress within the banking system. While similar to
China, state-owned banks still dominate ~75% of system credit. However, the regulatory
landscape in India is significantly liberalized: 1) there are no pricing controls across loans
and deposits; and 2) policy guidance is aimed at providing a framework to govern the
banks and their policies (including accounting policies). However, there is a strong focus
on financial inclusion and providing loans to the priority sectors such as agriculture and
financially excluded customer segments.
THE FUTURE OF ENERGYAND Advanced batteries are enabling revolutions in both transportation and energy. Not only
THE LONG TWILIGHT OF are batteries the major component driving the adoption of EVs, they also allow
CARBON
renewables penetration to grow from today's current low base. EVs are faster, cleaner,
better, and will in the next 10 years also be cheaper than fossil-fuel-powered cars.
Today, EVs, particularly from Tesla, are starting a high-end disruption of the auto industry,
and as battery costs fall, we believe that disruption will continue down to the low-end.
While the losers in this disruption are obvious, the list of winners is more difficult. We
believe that the winners include battery makers, and the battery supply chain, new-
entrant EV makers, and forward-looking utilities that embrace EVs and renewable
technologies. Losers, we believe, include traditional car OEMs and auto-parts suppliers
that will be forced to either disrupt themselves and render obsolete their combustion
engine technology and assets, or fight the inevitable EV trend, and thus be disrupted by
new EV entrants.
In terms of the impact on demand for fossil fuels and other sources of energy supply, our
conclusion is that, given the size of the gasoline-fueled base and the scale of EV
production today, over the next 10 years, the impact on oil, natural gas, and electricity
demand is minimal (see Exhibit 14 and Exhibit 15). The multiple to put on fossil fuel
producers, given that things are only going one direction, is the entirety of the demand.
We are valuing the long twilight.

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EXHIBIT 13: The coming peak in global energy demand: Peak coal in 2020, peak oil 2030-35, and peak energy in 2050-60
1400
PeakOil
Energy Demand, (Quadrillion Btu)
203035
1200 1.5%
Efficiency
PeakCoal
1000 202025
2.0%
800 Efficiency
600
2.5%
Efficiency
400 2015
200
0
1820 1850 1880 1910 1940 1970 2000 2030 2060 2090
1.5% Energy Eff. 2.0% Energy Eff 2.5% Energy Eff
Source: BP Statistical Review, IEA, World Bank, IMF, Smil (1994), Maddison (2007), and Bernstein estimates (2016 and beyond) and analysis.
Coal demand has peaked, or is close to peak levels (see Exhibit 13). Despite the
renaissance for coal stocks in 2016 on a recovery in coal pricing, the outlook for the
commodity remains negative. Coal must be displaced from the energy mix if Paris
Agreement targets are to be met. Even without U.S. compliance with the Paris Agreement,
the brute force of the economics suggests no positive outcome for the industry, unless
carbon capture technology is developed. At this stage, this looks like a remote possibility.
We would avoid coal.
Oil demand has yet to peak and we see another 15 years of demand growth, with a peak
in the early to mid-2030s. While EVs are a threat, there remains considerable uncertainty
around adoption, and over the next 10 years, the impact is likely to be minimal. Moreover,
even if gasoline peaks in the mid-2020s on fuel-efficiency measures, oil demand for
petrochemicals and jet travel will continue to drive overall growth. Over the next five years,
we expect oil prices to increase, which will be good for oil stocks that have low costs and
organic growth. Longer term, peak oil demand will be a negative for OPEC producers with
long reserves life and owners of marginal assets with long reserves life such as oil sands.
One risk to oil demand is that of long reserves life owners seeking to accelerate
production to avoid the risk of getting stranded. While this is a risk, we have yet to see this
behavior.
The growth outlook for natural gas is positive over the next 30 years, with demand likely to
double. Gas cannot be the long-term solution (given carbon emissions), but it can act as a
bridge to a low carbon future. The biggest risks to gas are battery technology improving to
a point where renewables can become reliable sources of energy, or countries ignoring
the Paris Agreement and, therefore, coal not being displaced. Shale has transformed the
supply outlook in North America and potentially for LNG, which could lead to structurally
low prices, and over time, a break with the oil linkage. Low-cost gas supplies, downstream
gas volume plays, and LNG infrastructure companies (regas terminals and shipping) could
be winners.

BERNSTEIN
EXHIBIT 14: Currently, fossil fuels (coal, oil, and gas) account EXHIBIT 15: Oil took 30 years and natural gas took 68 years
for 80% of energy demand to go from 1% to 10%
600 100%
90%
500
80%
70%
400
60%
300 50%
40%
200
30%
20%
100
10%
0 0%
Biomass Coal Crude Oil Natural Gas Biomass Coal Crude Oil Natural Gas
Hydro Nuclear Solar,Wind Hydro Nuclear Solar,Wind
Source: BP Statistical Review, Smil (1994), Maddison (2007), and Bernstein Source: BP Statistical Review, Smil (1994), Maddison (2007), and Bernstein
analysis. analysis.
Solar and wind are technologies where costs continue to fall and energy conversion
efficiencies continue to increase. The problem with these renewable energy sources has
been threefold: cost, intermittency, and scale. In terms of cost, solar and wind are
approaching the levelized cost of energy in most major markets. The intermittency
problem of renewables is largely resolved in a world of 1.6 billion electric vehicles. In that
environment, there is power "demand" (whether in the form of usage or storage) 24x7.
Intermittency is irrelevant. The real problem for renewables today is scale.
VALUATION METHODOLOGY See the disclosure appendix for valuation methodologies for the stocks included in this
Blackbook.
RISKS See the disclosure appendix for risks for the stocks included in this Blackbook.
INVESTMENT IMPLICATIONS See the "investment implications" sections at the end of each chapter in this Blackbook.

BERNSTEIN
THE OLD ECONOMY AND THE NEW

The New Economy won the war and lost the battle in Asia in 2016
2016 is the year when the New Economy "won" in Asia. The observations that China is
slowing structurally, that the economy is transitioning to services, and that consumption is
the key driver for economic growth going forward have become market orthodoxy. You
simply cannot pick a fight with anyone over the notion that China's decade-and-a-half
period of elevated, energy-intensive, credit-intensive, industrial-focused growth is over.
Tencent is now China's largest publicly listed company. China Mobile is No. 2. There are
half a billion 4G subscribers in China, ~25 million in India and counting.
With its largest growth engine shifting down, Asia's rate of economic development will
inevitably slow and its commodity and energy intensity will fall structurally and irreversibly.
The labor market in China will continue its shift to cities and to services. Manufacturing as
a source of employment in China has peaked. China is now spending more on robots each
year than either Japan or the United States.
The Asian consumer's desire for entertainment, apparel, transport, credit, financial
security, information, and pizza will drive public equity market investment opportunities in
Asia just the way it does in the developed world to a far greater extent than the
contents of the Five-Year Plan (any Five-Year Plan). The Asia Blue Chips now reflect this
reality. Tencent, Alibaba, AIA, China Life, HDFC, Samsung, and TSMC among others
are plays on the Asian consumer more than on Asian manufacturing capabilities.
The paradox is that it wasn't Narendra Modi's election in March 2014 that turned views on
Asia's appetite for reform. It wasn't the IPO of Alibaba in September 2014 that convinced
equity investors that China is a developed, or at least a modern, economy. It wasn't the
queues at stores around the world to buy the Samsung Galaxy S6 in April 2015 that
ended questions about the capability of Asia (outside of Japan) to build brands and
technology for which consumers globally will pay a premium.
Counterintuitively, the capitulation occurred in a year where the Old Economy roared back
and the New Economy in Asia stumbled: exploding Samsung handsets (not exploding
handset sales; exploding handsets); capital flight paranoia in China; the election of an Old
School political strongman in the Philippines; and the overnight cancellation of billions of
dollars' worth of hard currency in India in an attempt to "smoke out" the beneficiaries of
the black economy. The solidification of the New Economy as the driving force in Asia
just as it is in the rest of the world occurred during a period where the policy intent of
the Chinese government is less clear than it has been in a decade or more and during a
year in which commodities rallied.
The debate about the transition in China's economy to services and consumption has
ended. However, overweighting Chinese services and consumption-exposed stocks at

BERNSTEIN
the expense of all others has been an inferior investment strategy this year. In 2016, the
New Economy won the war but lost the battle.
The year began with a collapse in equity markets globally brought on in large part by
continuing concern about the stability of the Shanghai equity market, the RMB, and the
Chinese economy in general. In the first quarter, the unprecedented outflows of foreign
currency from China led to the inference that China's reliance on credit-fueled growth
was now unsustainable. Those outflows slowed in March. The solution was: more credit. A
massive credit expansion in the first quarter found its way into steel rebar, construction
activity, and property prices. The industrial economy stabilized. So did sentiment across
Asia.
EXHIBIT 16: What worked in 2016 by sector (within the top 300 stocks by market cap in MSCI ACWI Asia ex-Japan)
40% 38%
35%
30%
25%
20% 18%
15%
12%
9% 8%
10% 7%
4% 4% 3%
5%
0%
-1%
-5% -2%
Source: Bloomberg L.P., MSCI, FactSet, and Bernstein analysis.
The second half of 2016 in Asia has been defined by in no particular order
Samsung's exploding lithium ion batteries, Philippines President Roderigo Duterte's
campaign of extrajudicial violence and his rotation toward China, succession uncertainty
in Thailand after the King's death in October, a Chinese property market "bubble," and the
extraordinary measures being taken in India by the BJP to reduce corruption and the black
economy by cancelling hard currency.
In short, as we sit here in Hong Kong at the end of 2016, we may be talking about the New
Economy. But this still doesn't feel like Mountain View.

BERNSTEIN
This chapter is set out in seven parts, specifically:
The Old Economy rally in 2016 and the health of the Asian consumer
What our factor valuation suggests about Asia in 2017
Old Economy outperforms, but is it cheap? What to own in 2017
No, seriously, it's over: The New Economy wins (and loses)a long-term study
Risk #1: A surprise from China
Risk #2: A surprise from the United States
Can we talk about the New China yet?
THE OLD ECONOMY RALLY IN 2016 AND THE HEALTH OF

THE ASIAN CONSUMER
Two seemingly unconnected dynamics have defined Asia in 2016. First, the rally in
materials and in commodity producing markets (Australia and Indonesia). Second, the
strength of the consumer in Asia's largest markets (China, India, South Korea, and
Indonesia).
The rallies in oil, coal, iron ore, and copper this year demonstrate that the Old Economy in
general and commodities in particular are not "dead yet." Since January, iron ore prices
have increased 80% to US$78/ton; coal prices have increased 117% to US$110/ton;
and oil prices have increased 67% to US$47/barrel from a low of US$28/barrel in
February. The twilight in which the Old Economy now finds itself as a consequence of
falling energy and commodity intensity in Asia should presumably involve a derating in
historical multiples over time. After all, the super-cycle (led by demand from China for just
about everything from 2005 to 2012) is now over. But that does not preclude the kind of
sharp mean reversion we have seen over the last nine months.

BERNSTEIN
EXHIBIT 17: What worked in 2016 by country (within the top 300 stocks by market cap in MSCI ACWI Asia ex-Japan)
25%
20%
20%
17%
15% 15%
15%
10%
9%
10%
6%
5% 5%
5%
3%
0%
-2%
-5%
TH ID AU TW CN IN KR PH HK SG MY
Across the 300 largest Asia stocks in the MSCI All World Index (equally weighted), the
sectors that performed the best in 2016 (through the middle of November) were
materials and energy (see Exhibit 16). The best-performing stocks in these sectors were
Fortescue (materials), South 32 (materials), Vedanta (materials), PTT E&P (energy), Bharat
Petroleum (energy), and Shenhua (energy).
By market, Thailand, Indonesia, and Australia stand out based on the 300 largest Asia
ex-Japan stocks in the MSCI All World Index (equally weighted) (see Exhibit 17). Indeed,
none of these markets is exactly a reflection of the New Economy or the rise of the Asian
consumer.
Of course, Asia is going to be consuming oil, coal, iron ore, copper, and natural gas in
larger and larger volumes for years. China will continue to add 800 million tons of steel to
its capital stock each year. India's infrastructure plan remains ambitious, as we outline in
this Blackbook. At the same time, even as markets have become comfortable with the idea
that there is no return to 2011, all of the Old Economy sectors rallied in 2016.
That simply leads to the question: now what?
On a 10-year view, Indonesia, the Philippines, Thailand, India, and Malaysia have been the
best-performing equity markets regionally. Over the long, long term, equity market
performance in emerging Asia reflects none of: GDP growth differentials; the
sophistication of the consumer; or the number of high-quality/high ROIC businesses
domiciled in the country and listed on the exchange (see Exhibit 18).

BERNSTEIN
EXHIBIT 18: Asia 10-year total return (dividends reinvested)
10-Year Total Return 10-Year Annualized Return

325%
14.6% 16.0%
275% 12.8% 14.0%
11.2%
225% 12.0%
175% 8.4% 8.0% 10.0%
7.2%
290% 8.0%
125% 5.9%
234% 5.0% 5.0%
188% 4.6% 4.4% 6.0%
75% 3.1%
125% 116% 4.0%
101% 77%
25% 63% 62% 57% 54% 36% 2.0%
-25% 0.0%
TWSE Index Taiwan
HSI Index Hong-Kong
AS51 Index Australia

FBMKLCI Index Malaysia
SENSEX Index India
FSSTI Index Singapore

PSEI Index Philippines
SET Thailand Index
SHCOMP Index China
KOSPI Index S. Korea
MXAPJ Index MSCI Asia

JCI Index Indonesia
(Ex- Japan)
Year-to-date, the Indonesian market is, once again, one of the best performers next to
Thailand (see Exhibit 19). The Shanghai Composite lags. The rank order again reflects
in large part the performance of commodities over the course of the year.
EXHIBIT 19: Asia year-to-date return (dividends reinvested)

20% 17.9%
14.9%
15% 11.9%
10%
6.1% 5.4% 4.9%
5% 2.2% 1.9% 1.0% 0.3%
0%
-1.1%
-5%
-4.5%
-10%
TWSE Index Taiwan
HSI Index Hong-Kong

MXAPJ Index MSCI Asia (Ex-
AS51 Index Australia
FSSTI Index Singapore
NKY Index Japan

SET Thailand Index
PSEI Index Philippines

JCI Index Indonesia
SENSEX Index India
KOSPI Index S. Korea
FBMKLCI Index Malaysia

Japan)

BERNSTEIN
Yet the performance of materials and energy in 2016 sits at odds with the overarching
impression of the largest markets in Asia in 2016. Each month, we track consumer
sentiment and the growth in demand for consumer products and services in China, India,
Indonesia, and South Korea. This is the second dynamic playing out in Asia ex-Japan this
year: the strength of the Asian consumer.
We believe that the growth rates and momentum reflected in our monthly snapshots
demonstrate the underlying mood in the market. Are airline passenger volumes increasing
in China? How about online sales of cosmetics in South Korea? Two-wheeler sales in
Indonesia and point-of-sale card transactions in India, in our view, provide a direct insight
into the services economy and the consumer.
Throughout the year, the Asian consumer has gone from broadly resilient to outright
strong (see Exhibit 20). The New Economy as measured by smartphones, e-commerce,
card transactions, and air travel is booming throughout Asia.
We set out Exhibit 20 as a mosaic of high-frequency data on the Asian consumer from
(largely) non-governmental sources. The idea behind compiling this data (movie box
office, airline passenger volumes, 3G and 4G subscriber growth) is that it reflects
discretionary spending by consumers in these markets, and therefore, the mood of the
consumer about their individual economic position. In consumption-driven economies,
that's what matters.
Over the course of the year, the trend has been broadly positive and improving. The green
dots are advancing. To the extent that there is noticeable weakness anywhere, it is
Indonesia (two-wheeler sales, airline passenger volumes, and hotel occupancy are all
down year-over-year).

BERNSTEIN
EXHIBIT 20: Asia consumer metrics

Monthly
Reporting Metrics Country Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep 16 Oct 16
Housing Sales Price Index Korea
Two-Wheelers Sales India
Retail Sales Index Indonesia
Airline Passengers China
Shanghai Airport Flights China
100 City Resi Prop Prices China
Chinese Tourist Arrivals Korea
Retail Sales Korea
Total Online Sales Korea
Online Sales: Cosmetics Korea
Online Sales: Travel Arrangements Korea
Consumer Credit India
Airline Passengers India
Card Transactions (POS) Indonesia
Card Transactions (POS) India
Car Sales Indonesia
Car Sales China
Bank Total Credit India
Airline Passengers Indonesia
Cards Addition Indonesia
Hotel Occupancy Rate (%) Indonesia
3G Mobile Additions India
Consumer Confidence China
China Mobile 4G Mobile Subs China
Movie Box Office China
Weekend Movie Box Office Korea
Cards Addition India
Car Sales India
Non-Manufacturing PMI China
Consumer Confidence Index Korea
Two-Wheelers Sales Indonesia
Car Sales Korea
Source: Bloomberg L.P., Haver, China NBS, RBI, Bank Indonesia, Statistics Korea, company filings, and Bernstein analysis.
Meanwhile, we also track Old Economy metrics in these four markets. Our key metrics
include power demand, excavator sales, industrial production, manufacturing PMI, and rail
volumes. Exhibit 21 essentially captures the industrial metrics that five years ago in
emerging Asia markets and 40 years ago in developed markets were considered to
reflect the economic reality: manufacturing, construction, and industrial demand.
Today, these sectors are certainly still important. However, in China, something like
70-80% of growth comes from the services sector. In India, that number is in the 60-70%
range. Across Asia ex-Japan, the figure is roughly 70%. In short, in emerging Asia, the
industrial economy is not determinative of the economic outlook. The consumer and the
services sectors are.
The Old Economy in Asia over the course of 2016 improved markedly, specifically in
China and Korea. The improvement in industrial metrics in China was far from organic. It
was a function of the spike in credit formation growth in the first quarter, which found its
way into construction and commodities over the course of the year. By our measure, the
Old Economy largely stood still in India and Indonesia (see Exhibit 21).

BERNSTEIN
EXHIBIT 21: Asia industrial metrics

Monthly
Reporting Metrics Country Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep 16 Oct 16
Electricity Generation India
Manufacturing PMI Indonesia
Total Social Financing
YTD flows
China
Industrial Production YoY Indonesia
Power Production Korea
New Housing Starts YoY China
Power Production China
Excavator Sales China
Truck Unit Sales China
New Housing Starts YoY Korea
CPI India
Trucks Sales India
PMI India
BOK Manufacturing Survey Korea
Exports: Ships Korea
Manufacturing PMI China
BOK Non-Manufacturing Survey Korea
Corporate Credit India
Railway Freight China
Exports India
Truck Unit Sales Korea
Exports Indonesia
Export Trade USD YoY China
Import Trade USD YoY China
Export Trade USD YoY Korea
Import Trade USD YoY Korea
Exports: Electronics & Electronic
Products
Korea
Imports India
IP Growth India
Imports Indonesia
Commercial Vehicle Sales Indonesia
Source: Bloomberg L.P., Haver, China NBS, RBI, Bank Indonesia, Statistics Korea, company filings, and Bernstein analysis.
WHAT OUR FACTOR VALUATION SUGGESTS ABOUT ASIA IN

2017
Our assertion that the New Economy has won in Asia (and our dismissal of the Old
Economy) is arguably premature in a year when the best-performing market was Thailand
and the best-performing sectors were materials and energy.
The reason for our conviction is really a function of five things: first, long-term stock
market performance in Asia by sector (see Exhibit 23 and Exhibit 26); second, sources of
economic growth across the region (see Exhibit 43); third, falling energy intensity (see
Exhibit 42); and fourth, the sources of profit growth in the public equity markets across
Asia (see Exhibit 57 and Exhibit 58).
In short, the war between the Old and the New Economy is over. Emerging Asia will never
have a traditional "industrialization" phase where the majority of economic output comes
from manufacturing, construction, and industry. Since the largest economies in Asia are

BERNSTEIN
now through that phase, or (like India) are unlikely to ever enter it, it is now all about
services.
However, the fifth and primary gauge that we use to judge the reality that the New
Economy won is that the Old Economy/New Economy debate had precisely no impact on
the key stock market controversy of 2016 which is: mean reversion among commodities.
The transition of Asian economies toward services and consumption and the rising
penetration of mobile Internet usage among citizens in emerging markets in Asia
continued unimpeded. It just wasn't the or even a dominant dynamic in terms of stock
market performance this year.
Over the last 10 years in China, the New Economy has consistently outperformed.
Viewing long-term performance in Chinese equities based solely upon index performance
gives a fairly dreary impression of investing during what has been the most dynamic time
in economic growth in China ever. The number of people living in poverty in China fell from
almost 700 million people (60% of the population) in 1990 to 15% (200 million) in 2005
and less than 2% today. The developmental economic statistics are incredible in terms of
the alleviation of human suffering in one generation. The returns from Chinese equity
indices are far more prosaic, on a number of levels.
Over the last decade, MSCI China, the Hang Seng China Enterprises Index, and the
Shanghai Composite have achieved annualized returns of 4.2%, 2.2%, and 3.9%,
respectively (see Exhibit 22).
EXHIBIT 22: Total return for MSCI EM, MSCI China, HSCEI, and SHCOMP from the end of 2006 until now (with dividends
reinvested) (December 31, 2006 = 100)
250
MSCI EM MSCI China HSCEI SHCOMP
200
150
150 146
124
100 121
50
0
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15
However, if you approach the same data from a slightly different perspective, you see a
very different pattern.

BERNSTEIN
Entertain for a moment the following counterfactual. What if, 15 years ago, China's
National Development and Reform Commission (NDRC) and State-Owned Assets
Supervision and Administration Commission (SASAC) had determined that none of
China's state-owned enterprises (SOEs) should be publicly listed? In short, what if the
wave of SOE IPOs that began in the early 2000s and continues today had never
happened?
The Chinese government certainly did not need the cash from the SOE IPOs. There was a
clear intent for China to overinvest and to accept depressed returns on invested capital
for some extended period of time while it built out its hard infrastructure nationwide.
Therefore, there were good reasons for the government to decide against listing the oil,
gas, coal, power, steel, cement, and bank sectors (to name just a few).
At the top of that list would be the cumulative hit to the reputation of corporate China as a
result of all of those poor capital allocation decisions and miserable return profiles, in the
name of national service. There is a universe where that long-term damage could well
have been enough to dissuade the NDRC from ever approving the wave of IPOs from
Chinese SOEs. It is not, however, this universe.
If that approach (no SOE IPOs) had been adopted, non-SOEs and New Economy sectors
would dominate the Chinese equity market, and our discussion about China. The
"Commanding Heights" the asset-heavy, debt-heavy, slow-growing, labor-intensive
sectors that represent the bulk of Chinese public markets and indices would not exist
as investment "opportunities." And in that circumstance, the performance of Chinese
equity markets and indices would be very different.
EXHIBIT 23: China New versus Old Economy, SOE versus non-SOE (December 29, 2006 = 100)
450
Non-SOE
New Economy
400
SOE
350 Old Economy
322
SHCOMP
HSCEI 321
300
250
200 179
178
150 145
125
100
50
-
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Note: Includes Chinese stocks >US$500 million market cap as of 2006-end listed in HK and NY. Stocks given equal weighting starting at 2006-end.

BERNSTEIN
We have calculated the performance of the Old Economy versus the New Economy (and
SOEs versus non-SOEs) in China over the last 10 years. We only included stocks that
were listed in 2006 in our analysis (Tencent is in; BABA is out). The New Economy and the
non-SOEs outperform the Old Economy by a wide margin and have roughly trebled in
value over the last 10 years (see Exhibit 23).
In short, if this had been the approach that SASAC had adopted in 2000, we would be
having a very different conversation about the Chinese equity market. For a start, the
"Chinese economic miracle" might still be a thing. Instead, all we can say is that quite
emphatically the New Economy won, in terms of equity market performance and (as we
detail later) in terms of the transition of the Chinese economy towards services and the
consumer.
The services sector is now over half of the Chinese economy and it represents over 70%
of GDP growth. The services sector accounts for 50% more jobs in China than the
industrial economy. These are transitions within the structure of the economy that have
occurred in the last five years and where the transition, once made, is not reversed.
As goes China, so goes the rest of the region. China represents 62% of GDP across the
broader Asia ex-Japan region (including India, Malaysia, Indonesia, Taiwan, Vietnam,
Singapore, the Philippines, Hong Kong, Thailand, and South Korea) (see Exhibit 24).
EXHIBIT 24: Share of Asia GDP (2015) EXHIBIT 25: Share of Asia GDP growth (US$ terms; 2015)
Taiwan, Philippines, Vietnam,
3% Indonesia, Malaysia, 1%
Vietnam, Hong Kong, 1%
5% 2%
1% 3%
Singapore,
2% India,
Philippines,
12%
2%
Hong Kong, India,
2% 13%
Thailand,
2%
Korea,
8%
China, 62%
China,
81%
Note: Includes only those economies that grew in US$ terms.
Source: Haver and Bernstein analysis. Source: Haver and Bernstein analysis.
Even with that level of "market share," China was a "share gainer" in 2015 and will be
again this year, given the average rate of growth in the region. In 2015, China captured
81% of GDP growth share in the region. China, Hong Kong, the Philippines, Vietnam, and
India were the economies on a US$ basis that grew in 2015 (see Exhibit 25).

BERNSTEIN
A similar trend in terms of outperformance of the New Economy and non-SOEs is clear
across Asia. However, the dispersion is nowhere near as great, which does not reflect well
on Chinese SOEs. The New Economy stocks and the non-SOEs from within the MSCI Asia
ex-Japan (on an equal weighted basis) outperform the Old Economy and the non-SOEs
(see Exhibit 26).
EXHIBIT 26: MSCI Asia-Pacific ex-Japan constituents total return, end of 2006 until now (equal weighted, New versus Old
Economy; SOEs versus non-SOEs) (December 31, 2006 = 100)
250
224
225
217
211
200
209
175
150
125
New Economy
100
Non-SOE
75 SOE
Old Economy
50
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15
That outperformance from high-growth, high-ROIC companies (tech, Internet, consumer

discretionary, insurance, and healthcare) has taken a backseat this year, at least since the
summer across Asia.
We track, on a monthly basis, the performance of seven factors across the 300 largest
Asia-domiciled stocks in the MSCI All Country World Index. We rank those stocks by
factor (P/E and P/B representing Value; FCF yield and dividend yield representing
Income; ROE representing Quality; long-term growth representing Growth; and 12-month
price movement representing Momentum).
We then evaluate the performance of the 60 stocks with the most favorable investment
characteristics, given the factor involved (lowest P/E for Value) against the 60 stocks with
the least favorable investment characteristics (lowest ROE for Quality). Essentially, we
calculate the performance of a long/short portfolio that owns the top quintile and is
"short" the bottom quintile for each factor, rebalanced quarterly.
Over the last 10 years in Asia, Quality and Growth have outperformed (along with FCF
yield). Between 2014 and 2015, Quality and Growth outperformed Value and Income (see
Exhibit 27). Through October year-to-date, these two factors have underperformed
Income and Value (see Exhibit 28).

BERNSTEIN
EXHIBIT 27: Momentum, Growth, and Quality outperformed Value and Income from January 2014 to December 2015
Annualized returns (LHS) Return risk ratio (RHS)

10.0% 1.0
8.0% 0.8
6.0% 0.6
4.0% 0.4
2.0% 0.2
0.0% 0.0
-2.0% -0.2
-4.0% -0.4
-6.0% -0.6
-8.0% -0.8
-10.0% -1.0
Momentum Long term ROE Dividend Yield FCF Yield Price to book 12m FPE
growth
Source: MSCI, FactSet, and Bernstein analysis.
The massive underperformance of Momentum (which simply chases what has worked for
the last 12 months) reflects the fact that we are in the midst of a change in sentiment
across the market right now. In short, we believe that the growth bubble in Asia is at risk.
EXHIBIT 28: What worked in 2016 by factor
Annualized returns (LHS) Return risk ratio (RHS)

25.0% 2.5
20.0% 2.0
15.0% 1.5
10.0% 1.0
5.0% 0.5
0.0% 0.0
-5.0% -0.5
-10.0% -1.0
-15.0% -1.5
FCF Yield Dividend Yield Price to book 12m FPE Long term ROE Momentum
growth
Source: MSCI, FactSet, and Bernstein analysis.

BERNSTEIN
Along with calculating factor performance each month, we also calculate factor valuation.
To do this, we look at the ratio of the P/B multiple of the median stock in the top quintile
for a given factor and the P/B multiple of the median stock in the bottom quintile. For a
Value factor like P/E, the median stock in the top (most attractive) quintile will always have
a lower P/B multiple than the median stock in the bottom quintile. The Factor valuation
ratio will, therefore, always be below 1. For a factor like Growth, the factor valuation ratio
will always be above 1. Factor valuation is less focused in the absolute value of the ratio
than in how it moves over time.
When Value is out of favor, the "cheap" stocks will generally exhibit depressed valuations
relative to history, and the "expensive" stocks (the bottom quintile for a Value factor) trade
at elevated valuations relative to history. The factor valuation ratio will, therefore, be low
relative to history. The tech boom of the late 1990s is the clearest example of a period
where Value was out of favor and Growth was where the market focused.
Another example of that kind of market: right now. Exhibit 29 reflects factor valuation for
Growth and Value over the last 26 years in Asia. Currently, Growth is expensive relative to
its history in Asia (the darker green line; see the online version for colors) and Value is
cheap (the lighter green line). In fact, the dispersion between Growth and Value right now
is as high as it has been at any time since the tech boom and bust of the late 1990s and
early 2000s.
EXHIBIT 29: Value-Growth divergence (P/B versus five-year EPS growth factors)
6.0 0.3
Growth (LHS)
End of the tech bubble China
5.0 Value (RHS)
slowdown
Valuation of the Growth Factor
Valuation of the Value Factor

concerns;
China
4.0 devaluation 0.2
3.0
2.0 0.1
1.0 Onset of the financial crisis

Aftermath of the Asian financial crisis,
beginning of the "dot-com" bubble
0.0 0.0
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Source: MSCI, FactSet, Bloomberg L.P., and Bernstein analysis.
All that said, one of the reasons why energy and materials have been the two best-
performing sectors in Asia over the last 12 months is because that divergence has started
to close this year. The crocodile jaws were widening between late 2014 and early 2016.
They are now closing.

BERNSTEIN
In China and across Asia, that has meant that, this year, the New Economy (telecom,
technology, consumer, and other service-related sectors) has underperformed the Old
Economy (materials, energy, banks, real estate, and other industrial-related sectors), as
shown in Exhibit 30. Stock market performance in Asia and globally has been turbulent
this year. Markets almost everywhere collapsed in January, and rallied from the early
summer. Call it the Brexit rally, but emerging markets benefited from a rotation out of
Europe.
Over the course of 2016, the Old Economy outperformed the New Economy in China and
across Asia (see Exhibit 31) in a break from the 10-year trend. We do not as we set out
at the beginning of this chapter believe that this implies that the footing of Asian
economies is moving back to energy-intensive, commodity-intensive activities. It does
suggest that valuations had reached extremes in divergence at the start of 2016 (Tencent
good, oil bad), and that these valuations are now mean reverting to some extent.
Over the entire period, the Shanghai Composite has underperformed, and while still up
some 30% compared to the end of 2014 it saw a sharper sell-off in January and a more
muted recovery over the summer.
EXHIBIT 30: China Old Economy versus New Economy, SOE versus non-SOE in 2016 (total return, dividends reinvested)
(December 31, 2015 = 100)
110
102
100 101
100
99
97
92
90
Old Economy
HSCEI
80
Non-SOE
SOE
New Economy
SHCOMP
70
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16
Note: Includes Chinese stocks >US$500 million market cap as of 2015-end listed in HK and NY. Stocks given equal weighting.
The answer may be as simple as the fact that foreign investors remain burned by the
Shanghai stock suspensions in the summer of 2015 and domestic retail investors are
chasing opportunities in the Chinese real estate market at present.

BERNSTEIN
EXHIBIT 31: MSCI Asia-Pacific ex-Japan constituents total return: 2016 year-to-date (equal weighted, New versus Old
Economy; SOEs versus non-SOEs) (December 31, 2015 = 100)
115
110
109
105 105
103
100 100
95
Old Economy
Non-SOE
90 SOE
New Economy
85
More broadly, across Asia, as tumultuous a year as it has been, the Old Economy has
outperformed the New Economy clearly, but almost regardless of allocation
performance is positive.
What we believe we are seeing is simply reversion to the mean from the extremes in
valuation from earlier in the year. The delta between Growth and Value is closing, but
mainly through the fact that energy and materials have rallied.
We calculate across the seven factors that we track the delta between the current
valuation "percentile" for a given factor (that is, how cheap or expensive is that factor
relative to history) and the extreme valuation (that is, the 99th or the 1st percentile). In
short, we look at how far a factor is from being the most expensive or the cheapest it has
ever been. We then aggregate the results for the seven factors. If all factors are at the 50th
percentile, the score in Exhibit 32 would be 350. The expected "score" is, therefore, 175.
This summer, on this calculation, the seven factors were cumulatively at their most
extreme position in at least 20 years. Growth and Value were both in the top decile versus
history. Income and Value were both in their bottom decile versus history. Since that time,
factor valuations have started to revert.
This reversion year-to-date across Asia has largely benefited materials and energy. The
sector in Asia that has not benefited from the rotation from Growth and Quality into Value
and Income to the same extent is financials. Given the poor performance of financials in
much of the region over the last 10 years, banks may simply be the last option through
which the incremental investor will participate in mean reversion, once all the other
options are exhausted.

BERNSTEIN
EXHIBIT 32: Magnitude of divergence between factor valuation percentiles
300
250
200
150
100
Magnitude of divergence between
valuation of factors was at its most
50 extreme this summer
0
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Average +1 / -1 std dev
Even though the rotation out of the New Economy and into the older, stodgier parts of the
market is clear, there are exceptions. BAT (Baidu, Alibaba, and Tencent), on a combined
basis, continue to outperform both MSCI China and the Big 4 Chinese banks year-to-date,
despite the fact that Baidu is down ~12% through mid-November (see Exhibit 33).
EXHIBIT 33: BAT versus Chinese banks versus the MSCI China year-to-date total return (dividends reinvested)
30.0%
MSCI China Big 4 Banks BAT
20.0%
10.0% 10.7%
5.1%
0.0% 3.0%
-10.0%
-20.0%
-30.0%

BERNSTEIN
Chinese banks are up for the year but, so far, the rotation into Value and Income has, to a
large extent, eluded financials.
OLD ECONOMY OUTPERFORMS, BUT IS IT CHEAP?
For the last few years, there has been something tribal about the New Economy/Old
Economy debate globally. Back in 2012, when Peabody was forecasting that China would
import 1 billion tons of coal by 2020 and Canadian oil sands were the price-setting
source of oil globally, the view that the Chinese economy (and the Indian economy after it,
and the Indonesian and Vietnamese economies after it) would continue to develop on an
energy- and commodity-intensive footing took on a religious fervor.
To suggest that the Chinese economy might either slow or transition away from energy-
intensive industry activity to services was interpreted as reflecting an uncharitable
skepticism about developmental economics in general and Chinese and Indian economic
policymaking in particular.
As we prepare to close the books on 2016, what is clear is that this year you did not have
to believe that Chinese steel installed stock would reach the U.S. levels by 2020 to make
money investing in Fortescue or BHP. You simply had to believe that the companies would
remain solvent long enough for the iron ore price to bounce. The "left for dead" consensus
at the start of the year across oil, gas, coal, and commodities, in general, was evidently
overdone.
EXHIBIT 34: MSCI Asia ex-Japan forward P/E by sector EXHIBIT 35: MSCI Asia ex-Japan P/B by sector
35.0x 8.0x 7.6x

32x 5-yr Average 5-yr Average
Current 7.0x Current
30.0x
6.0x
25.0x 5.2x
21x 20x 5.0x
20x
20.0x
16x 16x 4.0x
14x 3.2x
15.0x
12x 3.0x
11x
10x 2.2x
10.0x 2.0x 1.9x
2.0x 1.7x 1.6x
1.5x
1.2x
5.0x 1.0x
0.0x 0.0x
Source: Bloomberg L.P. and Bernstein analysis. Source: Bloomberg L.P. and Bernstein analysis.
As we point out elsewhere in this Blackbook, in the 19th century, it took decades for coal
to replace wood as the dominant energy source globally and a similar period of time in the

BERNSTEIN
20th century for oil to replace coal. Even if electric vehicles do reach ~100% of additions
to the auto fleet by 2030 and oil consumption globally peaks at that time, oil demand will
continue to be measured in the tens of millions of barrels per day well into the 2040s, at
least.
There is a glide path associated with that kind of obsolescence in both the commodity and
equity markets. Said differently, there is a permanent impairment or derating that is
appropriate for these sectors if we now know how the story is going to end and roughly
when (albeit decades from now). But that doesn't preclude over- and under-shooting and
mean reversion along the way.
At present, oil and gas and metals and mining are trading broadly at their five-year
averages on a P/B basis in Asia. On a P/E basis, metals and mining is trading at almost
20x forward earnings. Yes, this is lower than the five-year average, but the five-year
average includes periods where the industry was completely shelled out and many
constituents within the index had negative earnings (and are excluded from our
calculation) or very low earnings, which served to flatten P/E multiples. Oil and gas is at its
five-year average on a P/E basis (see Exhibit 34 and Exhibit 35).
The obvious question is: why should these sectors be trading at anywhere near their
long-term averages? The largest growth market for energy globally over the last two
decades is now transitioning to services. Peak coal has already occurred globally. Peak oil
should be sometime between 2025 and 2035. The question of stranded assets is likely to
compel those sitting on fossil fuel reserves to maximize production (and minimize
stranded reserves), regardless of profit per barrel or per ton. As that reality sets in, the
sector should derate from its historical trading range. In Asia, oil and gas is currently at its
historical (five-year) trading range (see Exhibit 36). We, therefore, expect that while the
prospects for Income and Value in 2017 look good opportunities within the energy
sector will become more difficult to identify strictly based on mean reversion.
EXHIBIT 36: Oil and gas average P/B MSCI Asia-Pacific ex-Japan
2.8x
2.6x
2.4x
2.2x
2.0x
1.8x
1.6x
1.4x
1.2x
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
Oil & Gas Average +1 STD -1 STD

BERNSTEIN
Within the metals and mining sector, the long-term prospects are only slightly less grim.
The valuations, however, are far more challenging after the run that the sector has had
this year in Asia.
The long-term "bull case" for metals and mining in Asia is premised on the low levels of
steel in terms of capital stock per capita in China and throughout Asia. The capital stock of
steel in the United States is something in the range of 12,000 kg/capita. In China, it is
roughly half that. But as China adds ~800 million tons of steel to its capita stock annually,
the rough math suggests that China will reach the U.S. levels of capital stock within 10
years. There is no other emerging Asian market that has any chance of coming close.
The inference is that Chinese demand for iron ore and met coal will plunge sometime in
the middle of the next decade, in the best case scenario. Again, for resource producers,
this means that the payback on an additional ton of production capacity has to be less
than 10 years and that the risk of stranded assets, both as China switches to a
replacement level of demand or simply never reaches the U.S. installed stock, should
inform investment decisions immediately.
The prospects in terms of thermal coal, where demand growth is already negative, are
even worse. Leaving aside prospects for copper, nickel, lithium, etc., the risk that the
metals and mining sector presents as a vehicle to participate in a mean-reverting Value or
Income rally in 2017 is that the rally has already occurred in Asia.
EXHIBIT 37: Metals and mining average P/B MSCI Asia-Pacific ex-Japan
2.0x
1.8x
1.6x
1.4x
1.2x
1.0x
0.8x
0.6x
Metals & Mining Average +1 STD -1 STD
Metals and mining stocks have rallied in Asia over the course of 2016 and are now trading
at close to one standard deviation above their long-term averages on a P/B basis (see
Exhibit 37). Given the New Economy transition in Asia that we describe elsewhere in this
chapter, we believe that continuing outperformance is unlikely.

BERNSTEIN
Two sectors that traditionally offer dividend yield and low multiples on a P/B or P/E basis
(that is, Value and Income darlings) are utilities and financials.
Both the utilities and the financial sectors in Asia have largely been overlooked over the
past six months. The obvious reason to avoid these sectors now is the same as the reason
to avoid them a year ago: rising U.S. interest rates are likely to force up dividend yields
within bond-proxy sectors like utilities and financials. In China, non-performing loan
concerns are perennial.
The first counterargument is that all this was true a year ago and so is already priced in.
Second, FCF yield and dividend yield have been the best-performing factors in Asia over
the last 10 months. FCF yield was the best-performing factor in Asia between 2006 and
2015. Over the last quarter century, FCF yield was the third-best-performing factor with
an annualized return of ~7%. Many utilities look attractive on this basis in Asia.
And, if unconvinced by the yield argument, the best-performing factors in Asia over the
last 25 years were the Value factors: P/B and P/E. Both utilities and financials look cheap
on these metrics at present.
Utilities across MSCI Asia ex-Japan are currently more than one standard deviation below
their historical average. Unlike oil and gas and metals and mining, we see no reason for a
long-term derating of the utilities sector in Asia (see Exhibit 38).
EXHIBIT 38: Utilities average P/B MSCI Asia-Pacific ex-Japan
2.2x
2.0x
1.8x
1.6x
1.4x
1.2x
Utilities Average +1 STD -1 STD
Financials are similarly more than one standard deviation below their long-term average
(see Exhibit 39).

BERNSTEIN
EXHIBIT 39: Financials Average P/B MSCI Asia-Pacific ex-Japan
2.2x
2.0x
1.8x
1.6x
1.4x
1.2x
Financials Average +1 STD -1 STD
The Best Ideas presented by our sector analysts who have contributed to this Blackbook
are from a sector allocation perspective constrained by sector coverage. Within this
list, CCB also appears in our factor analysis as being attractive on a one-year forward P/E
and P/B basis, Samsung Electronics is attractive on a P/E and FCF yield basis, and China
Unicom is attractive on a P/B basis (see Exhibit 40).
EXHIBIT 40: Bernstein Best Ideas Asia

Consensus Current P/B Dividend Bernstein
No. Long Ticker Sector Country
1-yr Fwd P/E Ratio Yield % Rating
1 CCB 939 HK Financials China 5.3x 0.8x 5.9 outperform
2 Wuliangye 000858 CH Staples China 16.0x 2.9x 2.3 outperform
3 Kotak Mahindra Bank KMB IN Financials India 23.2x 4.2x 0.1 outperform
4 Inpex 1605 JP Energy Japan 25.0x 0.6x 1.7 outperform
5 VA Tech Wabag VATW IN Utilities India 14.6x 2.7x 0.8 outperform
6 Keyence 6861 JP Technology Japan 27.6x 4.4x 0.2 outperform
7 Samsung Electronics 005930 KS Technology South Korea 8.9x 1.1x 1.3 outperform
8 China Unicom 762 HK Telecoms China 23.4x 0.8x 2.4 outperform
9 Jiangsu Hengrui 600276 CH Health Care China 30.9x 9.2x 0.2 outperform
Average 19.4x 3.0x 1.7
MSCI APxJ 12.6x 1.4x 3.0
Source: Bloomberg L.P. (as of the close at November 25, 2016) and Bernstein analysis.
We maintain a "focus list" that reflects, in part, confidence in Asia Blue Chips in an
consumer sector (see Exhibit 41).
In addition, we incorporate stocks in the focus list that follow the direction implied by our
factor analysis. Currently, that means dividend and FCF yielding stocks that are
inexpensive on a P/B and P/E basis versus their history and within the 300 largest Asia-

BERNSTEIN
domiciled companies in the MSCI All Country World Index. At present, that means a clear
overweight toward financials China Life, AIA, Bank Mandiri, ANZ (not covered), CCB,
and ICBC) and utilities Huaneng Power, KEPCO, and China Resources Power (all
three not covered).
We are net neutral on energy between Shenhua (a "Short") (not covered) and PTT E&P.
EXHIBIT 41: Bernstein focus list

Consensus Current
Dividend Bernstein
No. Long Ticker Sector Country 1-yr Fwd P/B
Yield % Rating
P/E Ratio
Blue Chips
1 China Life 2628 HK Financials China 17.7x 1.7x 2.5 outperform
2 AIA 1299 HK Financials Hong Kong 16.9x 2.0x 1.6 outperform
3 Bank Mandiri BMRI IJ Financials Indonesia 11.9x 1.7x 2.4 outperform
4 Tencent* 700 HK Technology China 28.7x 10.0x 0.2 NA
5 Alibaba* BABA US Technology China 23.3x 6.4x 0.0 NA
6 Samsung Electronics 005930 KS Technology South Korea 9.1x 1.1x 1.3 outperform
Thematic
7 Wuliangye 000858 CH Staples China 16.1x 2.9x 2.3 outperform
8 Amorepacific Corp* 090430 KS Staples South Korea 25.9x 5.3x 0.4 NA
9 Sands China 1928 HK Discretionary China 25.1x 8.9x 5.4 market-perform
10 GCL-Poly* 3800 HK Technology China 7.0x 0.8x 0.0 NA
Factor Portfolio
11 Hyundai Motors 005380 KS Discretionary South Korea 5.4x 0.4x 1.5 outperform
12 PTT E&P PTTEP TB Energy Thailand 14.4x 0.9x 3.4 market-perform
13 ANZ* ANZ AU Financials Australia 11.5x 1.4x 8.2 NA
14 CCB 939 HK Financials China 5.3x 0.8x 5.9 outperform
15 ICBC 1398 HK Financials China 5.1x 0.8x 6.1 outperform
16 MediaTek 2454 TT Technology Taiwan 12.6x 1.6x 4.8 market-perform
17 ASE 2311 TT Technology Taiwan 11.5x 1.7x 4.7 outperform
18 China Resources Power* 836 HK Utilities China 7.3x 0.9x 6.8 NA
19 Huaneng Power* 902 HK Utilities China 7.5x 0.7x 11.9 NA
20 KEPCO* 015760 KS Utilities South Korea 3.9x 0.4x 6.7 NA
Consensus Current
Dividend Bernstein
No. Short Ticker Sector Country 1-yr Fwd P/B
Yield % Rating
P/E Ratio
1 Great Wall 2333 HK Discretionary China 6.1x 1.3x 0.0 underperform
2 ANTA* 2020 HK Discretionary China 17.7x 5.4x 2.9 NA
3 China Resources Beer 291 HK Staples China 25.6x 3.5x 0.0 underperform
4 China Shenhua* 1088 HK Energy China 10.8x 0.9x 2.4 NA
5 Asian Paints* APNT IN Materials India 34.9x 15.5x 0.9 NA
* Not covered by Bernstein, all estimates in the above table are Bloomberg consensus.
Note: See recent reports on Asian Insurance (Asian Insurance: The Trumpflation Trade - Which life insurer would benefit the most?), South East Asian Banks
(Indonesian banks Q3 16 PEP: growth still weak, but asset quality stable and outlook positive), Samsung (Samsung: Putting the cash hoard to use - Investing in
artificial intelligence and the car of the future), Sands China (Global Gaming: Macau's inflection is in full swing. Looking ahead, the growth prospects are
promising; staying positive on the sector), Asian Autos (The Long View: Ride sharing in China - opportunities, challenges, and Chinese consumer attitudes), Asian
Semiconductors and Semiconductor Equipment (The Long View: "Made in China 2025" - How much does it take?) for important disclosures and analyst
certifications.
Source: Bloomberg L.P. (as of the close at November 25, 2016) and Bernstein analysis.

BERNSTEIN
We acknowledge that we could have attempted to avoid China and still satisfied the
conclusion from our factor analysis to overweight Value and Income. However, as we
describe here, it is not clear to us that simply avoiding companies domiciled in China does
much to solve China risk across Asia. And if the search is for high yield and stocks trading
at depressed P/E and P/B multiples, the conclusion is, once again, China.
NO, SERIOUSLY, IT'S OVER: THE NEW ECONOMY WINS (AND

LOSES)
Early in this chapter, we made the assertion that the New Economy won in Asia. We
believe that this is axiomatic from the way that the stocks across the region have traded
over the last 10 years and the evolution of China toward services and consumption over
the last few years. But it is also true when you look across Asia, in general.
The services sector became the largest part of the Chinese economy in 2013. Services
made up more than 50% of the Chinese economy in 2015. There is a tendency to believe
that China is leading the way in this respect in Asia and that other smaller markets will
follow China's course of industrialization.
However, China is not the "early adopter" of industrialization. China is largely the
exception. Industrial activity and manufacturing only become the largest part of China's
economy in the 1960s. And China had a famously conflicted relationship with the
allocation of capital by market forces for another 30-odd years after that. During this
period, Taiwan, Korea, Hong Kong, and Singapore moved through the industrialization
period and embraced services.
EXHIBIT 42: Pan-Asia agriculture/industry/services GDP share (1967-2015)
60% 0.30
0.29
50%
0.28
0.27
40%
0.26
30% 0.25
0.24
20%
0.23
0.22
10%
0.21
0% 0.20
Energy Intensity (RHS) Agriculture Industry Services
Source: World Bank and Bernstein analysis.

BERNSTEIN
China began the industrialization process in full in the 1990s, and industrial activity as
the dominant share of Chinese economic activity started to fade only in the last few
years. The implication is: Asia as a whole is not going to have an "industrialization
phase" where the largest component of the regional economy is industrial activity. Korea,
Taiwan, Hong Kong, Singapore, and now China have moved through that period. India
may never get there. The rest of the regional economy Vietnam, Thailand, the
Philippines, Indonesia, Malaysia are too small to fight against the tide of the services
sector. Services and consumption will only gain share within the regional economy.
Again, the New Economy in Asia and most other places won.
There are a variety of implications of the fact that the services sector now drives the
largest share of the emerging Asian economy. As recently as 2011, that was not the case
(see Exhibit 43). For current purposes, the most significant is the implication of energy
and commodities.
Energy and commodity intensity will continue to fall across Asia. Asian oil, gas, and coal
consumption is unlikely to fall in aggregate terms any time soon, but the rate of growth
will slow as the means of energy production become more efficient. More to the point, the
services sector is simply a far less energy-intensive source of economic activity compared
to manufacturing, construction, or the industrial economy in general.
EXHIBIT 43: Pan-Asia agriculture/industry/services GDP growth share (1968-2015)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Agriculture Industry Services

BERNSTEIN
RISK #1: A SURPRISE FROM CHINA
The focus list we have constructed (see Exhibit 41) assumes a benevolent economic
environment in Asia over the course of 2017. Given that the consumer in emerging Asia's
four-largest markets looks healthy (see Exhibit 20) and commodity prices have returned
to a level where the tail risk from unserviceable loans made to oil or coal producers sitting
on the balance sheets of ill-disciplined Asian banks has now faded, the simplest
explanation for a view of Asia in 2017 without macro shocks of any kind is: why not?
The alternate interpretation is: the expectation of a period of "smooth sailing" in Asia is
simply the triumph of hope over recent experience.
Equity market volatility over the last two years has been a function of the "Short Bull
Market" in Shanghai, a sell-off from mid-summer 2015 in the wake of the Shanghai stock
suspensions, the RMB devaluation in August 2015, foreign currency outflows from China
between November 2015 and January 2016, and more RMB devaluations in January
2016 (see Exhibit 44).
In these environments in Asia, there are simply few places to turn. We favor pairwise
country correlations as a means of gauging market stress across Asia. In short, when
markets sell off across Asia, they all sell off (see Exhibit 44).
EXHIBIT 44: Average pairwise country correlation and MSCI Asia ex-Japan
0.6 Onset of the financial crisis 700

China slowdown
Average pairwise country concerns; China
correlation (LHS) devaluation
600
0.5 MXAPJ (RHS)
500
0.4
Correlation
Long-term 400
Index
average(pair
0.3 wise country
correlation) 300
0.2
200
Sovereign
0.1 debt crisis in
Europe 100
0.0 0
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Over the almost two years beginning in September 2014 until the early part of this
summer, China was under a constant barrage of economic, market, and financial stress.
The "Short Bull Market" began in September 2014, at the same time as the Chinese
property market was turning. The "bull" market lasted through July 2015, when the

BERNSTEIN
Shanghai stock market turned and the exchange regulators started suspending stocks
rather than permitting bearish sentiment to erase all of the gains of the previous nine
months, and in the absence of an institutional investor base that might be expected to
step in.
EXHIBIT 45: Key market events in China over the last two years (December 31, 2013 = 100)
Stock market
300.0 Episodes of
colllapse
capital flight
Stock market
250.0 rally between
Sep'14 - Jul'15 Reacceleration in
credit growth
200.0
150.0
100.0
Currency
50.0 devaluation
Property market decline announcement
0.0
Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16
MSCI China SHCOMP
The following month (August 2015), the RMB depreciation began. At that point,
consensus thinking became that Chinese policymakers had taken leave of their senses.
The domestic stock market continued to soften and foreign currency outflows began to
pick up (see Exhibit 46).

BERNSTEIN
EXHIBIT 46: China foreign currency reserve flows
150
100
50
US$ B
-50
The period betweeen Nov '15 -

-100
Jan '16 saw aggregate outflows
of US$295bn
-150
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jan-11
Sep-11
Nov-11
Jan-12
Sep-12
Nov-12
Jan-13
Sep-13
Nov-13
Jan-14
Sep-14
Nov-14
Jan-15
Sep-15
Nov-15
Jan-16
Sep-16
Mar-11
May-11
Mar-12
May-12
Mar-13
May-13
Mar-14
May-14
Mar-15
May-15
Mar-16
May-16
Source: PBOC, Haver, and Bernstein analysis.
Foreign currency outflows hit a peak over the three months from November 2015 to
January 2016.
The policy response to currency outflows and a real danger of capital flight from China
was threefold: drain RMB liquidity outside China so as to make shorting the RMB more
difficult for U.S. and European hedge funds; create two-way volatility in the value of the
currency so as to create uncertainty in the minds of Chinese corporations and residents
seeking to move funds out of China or simply leave funds out of China and extend credit to
the industrial economy so as to change economic sentiment domestically. In combination,
it worked. Net foreign currency outflows have fallen back to somewhere between -$30
billion and are a positive number over the last six months. On a base of $3.1 trillion, that is
not a near- or even a medium-term risk.
The massive credit impulse in China in the first quarter eventually found its way to the
commodities complex, to construction, and to the property market. Property prices in
China have now been rising steadily since the first quarter of 2015 (see Exhibit 47).

BERNSTEIN
EXHIBIT 47: Residential property price movement
14,000 Residential property prices declined 2.8% 20.0%

annualized between Jan '14 and Mar '15
12,000 15.0%
10.0%
10,000
5.0%
8,000
0.0%
6,000
-5.0%
4,000
-10.0%
2,000 -15.0%
0 -20.0%
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep
13 13 13 13 13 13 14 14 14 14 14 14 15 15 15 15 15 15 16 16 16 16 16
100 City Resi Prop Prices (RMB/sq.m) (LHS) YoY Growth (RHS)
Source: Haver and Bernstein analysis.
In short, the risk of a Chinese financial crisis is present at all times in Asia. That said, as we
exit 2016, that risk seems lower than a year ago and certainly lower than nine months
ago. Yet it would be foolish to dismiss the possibility altogether.
Two things are clear.
First, there is nowhere to hide in Asia from a true Chinese financial crisis. China is ~80% of
economic growth in the region. Chinese near misses over the last few years have seen
spikes in pairwise correlations and fund flows out of Asia. Buying Australian banks,
Korean cosmetics producers, or Taiwanese tech companies will not help. It is all
interconnected.
Second, the market across Asia bounces back from near misses, quickly. Over the last two
years, we have seen no sign of a "penalty box" (in the ice hockey sense of the term). Asian
markets go up or they go down. A spike in fears around China will cause Asian markets to
fall. There is no less of a controversial statement in 2017. But if you are bearish on China
by which we mean you are expecting a true financial crisis then you are, by definition,
bearish on Asia too.

BERNSTEIN
RISK #2: A SURPRISE FROM THE UNITED STATES
It would be tantamount to professional malpractice to write a "year ahead" report at the

end of 2016 without mentioning that U.S. President-elect Donald Trump makes good
copy (as the New York media has known for years). Now, his ability to move tabloids at
newsstands in New York subway stations is transitioning to an ability to move markets.
Never before has the United States been led by an individual with so little political,
economic, diplomatic, or foreign policy experience. How could we resist dedicating a few
pages to what might happen.
First, there is good news in all of this. When measured through the perspective of the U.S.
Misery Index (oil price, inflation, interest rates, and unemployment), the United States is
currently either below or significantly below long-term averages dating back to 1980 (see
Exhibit 48). Accordingly, the need for an immediate set of policy changes once President
Trump is sworn in similar to TARP in 2008, or the American Recovery and Reinvestment
Act of 2009 seems unnecessary. Said differently, he could do nothing.
EXHIBIT 48: U.S. Misery Index, 1980-present

10% 100
9% 90
8% 80
Oil price( US$ / barrel)

7% 70
6% 60
4.7%
5% 43.41 50
4% 40
3% 30
1.8%
2% 1.5% 20
1% 10
0% 0
Oil Price (RHS) Inflation Interest Rate Unemployment
+/-1 Current Average
Source: Bloomberg L.P., and Bernstein estimates and analysis.
The risk, however, to Asian markets is not from changes in U.S. fiscal, monetary, trade, or
foreign policy that are painful but necessary, given market conditions.
Rather, the risk is a "surprise" from U.S. trade or foreign policy that has implications in
Asia. Any forecast in November 2016 about what the President-elect might do in January
or during the course of 2017 is flawed due to the lack of any political track record,

BERNSTEIN
consistent ideology, or coherent policy statements in which to judge likely actions and
fidelity to past statements once in office.
EXHIBIT 49: Relationship between average pairwise country correlation and S&P VIX 500 in 2016
0.60 Average pairwise country correlation (LHS) S&P 500 VIX (RHS) 30
0.55 Pairwise correlations

in Asia have started to 25
rise over the last 4
weeks
0.50
20
0.45
15
0.40
0.35 10
Jul-16
Feb-16
Mar-16
May-16
Aug-16
Sep-16
Oct-16
Nov-16
Jan-16
Apr-16
Jun-16
Markets globally are (at November 15) reacting to the assumption that President-elect
Trump will embark upon fiscal stimulus in the United States, maintain existing trade and
military relationships in Europe and Asia, and be able to cope with whatever geopolitical
events in Asia or globally that occur or are manufactured to test the new President.
Let's hope so.
The less benign interpretation is that four years is a long time. Each Presidency is
confronted with surprise events in or from parts of the world or domestic constituencies
that few forecast ahead of time. It is those events currently unknown that we are
going to spend most of the next 12 months discussing when it comes to U.S. trade,
economic, and foreign policy. We, like everyone else, just don't know what they are.
A further risk (currently discounted) is that, with an apparent mandate to break

longstanding trade and military relationships in Asia and elsewhere, President-elect
Trump follows through. Any Asian statesman or woman (or at least any North Korean or
Chinese one) worth his or her salt will almost certainly be agitating to manipulate events in
such a way as to place Trump at odds with his stated policies, the Republican Congress,
traditional U.S. allies in the region, and 70 years of post-World War II relations in Asia.
What could go wrong?
We are in no position to comment on the geopolitical risk that a change in the nature of
longstanding U.S. alliances in East Asia might create. Clearly, it is in China's interests if

BERNSTEIN
U.S. influence in the region declines. There is an obvious fault line between the stated
policies of the President-elect and the longstanding arrangements between the United
States and Japan, Korea, and Taiwan, respectively. How that plays out is unclear. What is
also unclear is the new administration's ability to compartmentalize trade, territorial, and
diplomatic disputes with China. This is a cornerstone of modern U.S. foreign policy and
statesmanship in general.
What is clear is that the key risk to the regional economy in this part of the world is a
disruption to trade flows because of import quotas or tariffs imposed by the new
administration on markets that are deemed to be "stealing" U.S. jobs.
Asia ex-Japan currently represents something in the area of ~27% of global trade (see
Exhibit 50). The EU represents one-third. Other markets comprise roughly one-quarter of
global trade. The United States is less than 10%.
EXHIBIT 50: Share of global gross exports EXHIBIT 51: Global gross exports (1995-August 2016)
20.0
Jan - Aug Sep - Dec
18.0
Others 16.0
Indonesia
23%
1% EU
35% 14.0
Thailand
1%
12.0
US$ Trillion
Russia
2% 10.0
India
2% 8.0
Taiwan
2% 6.0
Singapore
2% China 4.0
Hong US 13%
Kong 2.0
Japan 9%
3%
4% 0.0
Korea
3%
Source: IMF, Bloomberg L.P., and Bernstein analysis. Source: WTO and Bernstein analysis.
Global trade has been falling since 2014, in part due to the declining value of
commodities, in part due to the on-shoring of manufacturing, and in part due to the
strength of the U.S. dollar in recent years, which has served to reduce the value of (for
example) French wine or Korean cosmetics when measured in U.S. dollars.
Across Asia, South Korea is the market that stands out in terms of risk from global trade.
Almost 20% of Korean GDP is linked to exports. For a nation of 48 million that produces 8
million cars annually, and half the world's ships and smartphones, trade is not
surprisingly important (see Exhibit 52). For China, gross exports are less than 10% of
GDP. For the United States, it is less than 5%. Chinese exports total roughly $2 trillion per
year (see Exhibit 53).

BERNSTEIN
EXHIBIT 52: Gross exports (US$) and as a percentage of GDP EXHIBIT 53: Gross Chinese exports (1990-October 2016)
(2H2015-1H2016)
Gross Exports as a % of GDP 2.5

6.0 35% Jan - Oct Nov - Dec
5.0 30%
2.0
25%
4.0
US$ Trillion
1.5
US$ Trillion
20%
3.0
15%
1.0
2.0
10%
1.0 5% 0.5
0.0 0%
Japan
India
Indonesia
China
US
Korea
EU
0.0
Source: WTO, Haver, Bloomberg L.P., and Bernstein analysis. Source: Bloomberg L.P. and Bernstein analysis.
The contours of what a trade dispute might look like are unclear. U.S. and Chinese
combined exports to one another are roughly half a trillion dollars annually. The notion
that China's trade surplus represents China "winning" in terms of global trade reflects a
willful ignorance of the nature of global supply chains and the benefits to foreign
companies of low-cost Chinese manufacturing, together with the scale and infrastructure
benefits of operating in China.
In short, as was demonstrated in 2016, the risk of the worst case scenario when it comes
to China is likely to get priced in at various times during the year. It is naive to simply state
that "cooler heads will prevail." Cooler heads have not prevailed so far. However, it is
unnecessarily fatalistic to assume that every Chinese manufactured product to the United
States is hit with a ~40% tariff from January 21, 2017.
Just like everyone else, we have no ability to forecast the details of the new
administration's trade or economic policies. What is clear is that the risk of a trade dispute
between China and the United States and of efforts from China to pressure the new
administration to act on various inflammatory statements about relationships with
traditional allies in Asia are higher in 2017 than they were in 2016.
The United States and China are geopolitical rivals, along with important trade partners,
and counterparties to significant foreign direct and indirect investment. The relationship is
always going to be a little fraught. But whatever the risks here in recent years, they have
not fallen.

BERNSTEIN
EXHIBIT 54: China Exports to the United States/United States exports to China (1995-September 2016)
450 25%
400
350 20%
300
15%
US$ Billion
250 China Exports to US
200
US Exports to China 10%
150
% of Total China Exports
100 5%
% of Total US Exports
50
0 0%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
LTM 2016
Source: Bloomberg L.P., Haver, and Bernstein analysis.
CAN WE TALK ABOUT THE NEW CHINA YET?
One of the real surprises of first-half results among the 1,800 Chinese-domiciled
companies that we track was the profit share contribution from Chinese Internet
companies. We track earnings results for ~1,800 companies with market capitalizations
of greater than US$1 billion that are China-domiciled and listed in Shanghai, Hong Kong,
or New York; plus obvious China "plays" like the Macau gaming stocks.
In the first half of 2016, Internet companies represented 3% of the US$7 trillion in market
cap that we follow and one-third of the profits (see Exhibit 55 and Exhibit 56). Viewed
from one perspective, the Internet will eat the world.
Of course, it is possible to quibble that materials (6% by market cap; 32% of profits in the
first half) has a similarly out-sized effect in China. And in the first half of 2016, this is true.
However, as we outlined earlier, we do not think that the rebound in metals and mining in
2016 is sustainable. On the other hand, a platform for 1.3 billion people to communicate,
be entertained, be educated, and purchase goods and services in a faster and more
convenient fashion than ever before in the history of civilization has been possible, in a
market still growing at 5-7% annually, has some legs.

BERNSTEIN
EXHIBIT 55: Profit pool (1H2016) share by sector for China EXHIBIT 56: Profit growth (1H2016-1H2015) share by sector
for China
Materials, IT (Ex Health- Includes only those sectors which had
Consumer care, postive net income growth (1H16 vs.
2% Internet),
Staples, 2% 1H15), ex BABA one-off
2% 2%
Energy, Health
Internet, 1% Care,
Other, IT (Ex
2% 8%
0% Internet),
Utilities, 10%
4% Internet,
33%
Telecom,
5%
Consumer Consumer
Discr, Staples,
6% 17%
Financials,
64%
Industrials,
9%
Materials,
32%
Note: Excludes one-off gain for BABA in 1H2015.
Source: Bloomberg L.P. and Bernstein analysis. Source: Bloomberg L.P. and Bernstein analysis.
The split is even more profound outside of China. Across the MSCI Asia-Pacific ex-Japan,
the Internet names accounted for more than 50% of earnings in the first half of 2016. In
fact, only four sectors improved profitability in Asia in the first half of 2016: healthcare,
materials, utilities, and the Internet. In short, less than 25% of the market cap accounted
for 100% of profits across the MSCI Asia-Pacific ex-Japan in the first half of 2016 (see
Exhibit 57 and Exhibit 58). There is no greater reflection of the fact that the New Economy
has "won" in Asia ex-Japan than the fact that across the region all of the profit pool
went to four sectors, and the Internet and healthcare accounted for ~70% of the profits.
For the last few years, as part of this annual exercise, we have encouraged our analysts to
identify the Chinese companies that they believe represent true competitive threats
globally.
In 2014, across our consumer analysts (autos, staples, beverages, luxury goods, IT
hardware, and telecom), we identified Lenovo and Xiaomi as competitive threats to non-
Chinese incumbents globally. In 2015, across our tech, capital goods, and healthcare
analysts, when we looked for Chinese companies that could "out-innovate," we identified
Jiangsu Hengrui, SMIC, Hua Hong, China Mobile, Shanghai Electric, and Hollysys (see
Exhibit 59). This group on an equal-weighted basis has outperformed MSCI China by
~350bps over the last 12 months.
This year, Euan McLeish, our Asia Beverages Analyst, and Laura Nelson Carney, our Asia
Healthcare Analyst, cast a wider net in the search for quality in Asia among their coverage,
and what the implications are, more broadly. We are not giving up on the notion of

BERNSTEIN
innovative, quality companies in China. We are simply broadening our gaze in this annual
endeavor consistent with the firm's broader push into Asia.
EXHIBIT 57: Profit pool (1H2016) share by sector for MXAPJ EXHIBIT 58: Profit growth(1H2016-1H2015) share by sector
for MXAPJ
Includes only those sectors which had postive Net Income
growth (1H16 v 1H15), ex one-off gains/losses for BABA,
Consumer
Energy Staples Internet Health BHP, Vedanta, South 32, Rio Tinto, and Fortescue
3% 2% Care
2% 1% Health
Utilities Care Utilities
4% 17% 1%
Materials
4%
Financials
Telecom 45%
6%
Industrials Internet
7% 52%
Real Materials
Estate 30%
8%
Consumer IT (ex
Discr Internet)
8% 10%
Note: Excludes one-off gains/losses for BABA, BHP, Vedanta, South 32, Rio
Tinto, and Fortescue.
The final piece in terms of the New Economy "winning" in Asia is that Asia's largest
economy starts producing things (specifically technology) that the rest of the world wants
to buy not simply because they are cheaper than the alternative but because they are
better.
We continue to wait for China's "Sony Walkman" moment. That is the missing piece in our
view that the New Economy won the war in Asia. We are not going to predict a Chinese-
designed gadget as the stocking stuffer of choice for Christmas 2017. However, the
signs from Chinese companies like NextEV and its electric vehicles (private; see
Exhibit 61 and Exhibit 62), DJI and its commercial and personal drones (private; see
Exhibit 60), and BYD (see Exhibit 63) have never been better.

BERNSTEIN
IN SUMMARY
1. In Asia, the New Economy finally "won" in 2016. Measured by long-term stock market
performance, sources of economic growth across the region, falling energy intensity, and
the sources of profit growth in the public equity marketsthe Old Economy/New
Economy war is over. Emerging Asia will never have a traditional "industrialization" phase
where the majority of economic output comes from manufacturing, construction, and
industry. Since the largest economies in Asia are now through that phase or (like India) are
unlikely to ever enter it, it is now all about services.
2. That does not mean that the equity value of the Old Economy will fall monotonically
each year. Energy and materials were the two best-performing sectors in Asia in 2016.
The rally in materials and energy this year reflects both the recovery in the underlying
commodity prices since the first quarter and mean reversion within the sectors regionally.
EXHIBIT 59: 12-month return for MSCI China versus basket EXHIBIT 60: DJI Phantom 2above Kennedy Town in Hong
of "out-innovators": Jiangsu Hengrui, SMIC, Hua Hong, Kong
China Mobile, Shanghai Electric, and Hollysys
15.0%
"Out-Innovators"
10.0% MSCI China
5.0% 4.7%
0.0% 1.1%
-5.0%
-10.0%
-15.0%
-20.0%
-25.0%
Jul-16
Nov-15
Dec-15
Jan-16
Jun-16
Feb-16
Mar-16
Apr-16
Aug-16
Sep-16
Oct-16
Nov-16
May-16
Source: Bloomberg L.P. and Bernstein analysis. Source: Private collector with permission.
3. Quality and Growth continue to look extraordinarily expensive in Asia. Value and Income
continue to look extraordinarily cheap. But the gap has closed since mid-year. The
materials and energy stocks were the primary beneficiaries of this shift in the second half.
4. We believe that the historically high gap between Quality and Growth and Value and
Income will continue to close. We believe that owning financials and utilities are a better
way to participate in the mean reversion in 2017, rather than chasing energy and miners.
Compared to historical valuation multiples, financials and utilities remain at or more than
one standard deviation below the long-term trend. Energy and miners are at or above
long-term average valuation multiples.
5. The Asian consumer continues to look strong. The profit pool in Asia is dominated by
the Internet and healthcare. The Asian consumer's desire for entertainment, apparel,

BERNSTEIN
transport, credit, financial security, information, and pizza will drive public equity market
investment opportunities in Asia. The Asia Blue Chips now reflect this reality. Tencent,
Alibaba, AIA, China Life, HDFC, Samsung, and TSMC among others are largely plays
on the Asian consumer more than on Asian manufacturing capabilities.
EXHIBIT 61: NextEV Formula E Vehicle EXHIBIT 62: NextEV Formula E Vehicle
Source: Company materials, with permission. Source: Company materials, with permission.
6. The risks to Asia in 2017 reflect a little of the old (a financial collapse in China) and the
new. The "new," in this instance, means: a trade war between the United States and China;
or elevated risk premiums due to the changes in relations between Taiwan, South Korea,
and Japan and the United States, should the President-elect proceed with statements
made on the campaign trail about cost reimbursement from east Asian allies for the U.S.
military presence in Asia, arming Japan with nuclear weapons, and extracting better
"deals" from U.S. trade partners.
EXHIBIT 63: Denza - The new version (BEV) is using a 62KWh LFP pack and has a range >320km; pre-subsidy MSRP is
RMB416k and the post-incentive price is RMB306k
Source: BYD Denza with permission.
7. Attempting to avoid these risks and invest in Asia is simply not possible. It is not clear to
us that owning an Asia security of a company that is not domiciled in China does much to

BERNSTEIN
solve China risk or U.S. trade policy risk. These are risks, but not actionable ones unless
the action is to take Asia ex-Japan exposure to zero.
8. The other lesson from 2016 is that the market across Asia bounces back from near
misses. Over the last two years, we have seen no sign of a "penalty box" (in the ice hockey
sense of the term). Asian markets go up or they go down. A spike in fears around China
will cause Asian markets to fall. There is no less of a controversial statement in 2017. But
if you are bearish on China by which we mean you are expecting a true financial crisis
then you are, by definition, bearish on Asia too.
9. We maintain a focus list that reflects, in part, confidence in Asia Blue Chips in an
consumer sector.
10. In addition, we incorporate stocks in the focus list that follow the direction implied by
our factor analysis. Currently, that means dividend and FCF yielding stocks that are
inexpensive on a P/B and P/E basis versus their history. At present, that means a clear
overweight toward financials (China Life, AIA, Bank Mandiri, ANZ, CCB, and ICBC) and
utilities (Huaneng Power, KEPCO, and China Resources Power). We are net neutral
Energy between Shenhua (a "Short") and PTT E&P.

BERNSTEIN

BERNSTEIN
THE SEARCH FOR QUALITY CONTINUES

What can booze and drugs teach us about Quality companies in
Asia?
OUR QUEST FOR THE HOLY GRAIL
Quality has proven more elusive to investors in Asia than in developed markets. The
longstanding gripe about investing in Asia where are the companies with rapid earnings
growth, high ROIC, good management teams, large competitive advantages, and strong
balance sheets? has, in 2016, narrowed down to: I cannot possibly own any more
Tencent (700.HK, not covered).
Bernstein has historically searched for Quality companies globally and in Asia using three
different quantitative screening approaches (summarized in Exhibit 64). We noticed that
these approaches yield a number of interesting false positives and false negatives and
tried to learn something from them. Firm-wide, our quant Quality tools for Asia are
arguably unreliable for one of four reasons: we screen too narrow a "hunting ground" (only
the MSCI All Country World Index), we eliminate companies without a long financial
history, the numbers look great but products or services sold are of questionable Quality
or ethics, and/or we ignore the reality that Quality in emerging Asia looks different than in
developed markets.
We believe that Quality companies need to have achieved durable profitability and
sustainable competitive advantages. For many companies in Asia (and emerging markets
more broadly), the ability to capture economic rents is tied to local dynamics such as
commodity demand and favorable regulation. Those rents and the resultant high
returns can disappear faster in Asia than in ROW. As a result, identifying high-Quality
stocks in Asia is more challenging than in developed markets, where firms have
established wider and deeper competitive moats.
In this chapter, we propose a new cross-sector, seven-dimension framework and

screening tool for identifying Quality in Asian companies (a combination of quantitative
and qualitative fundamental factors) and use three example sectors (Asia-Pacific
pharmaceuticals, healthcare services, and alcoholic beverages) to explore what Quality
looks like in Asia.
By recognizing and embracing what's unique about operating in Asia and applying both
quantitative and qualitative fundamental filters, we hope to sharpen the search for Quality
companies and to we hope unearth hidden gems that you might not have heard of.

BERNSTEIN
This chapter is set out in seven parts, specifically:
A review of our previous attempts to capture Quality in Asia
False positives and false negatives abound what can we learn from them?
Pharmaceuticals what's in Quality Asian drugs?
Healthcare services what do Quality hospital operators look like in Asia?
Beverages what makes Quality tipple?
Where to invest? Results from our revised Quality-in-Asia quant screeninghappy

hunting
Investment implications
A REVIEW OF OUR PREVIOUS ATTEMPTS TO CAPTURE

QUALITY IN ASIA
QUALITY IN ASIA HAS PROVEN The longstanding gripe about investing in Asia where are the companies with rapid
MORE ELUSIVE THAN IN earnings growth, high ROIC, good management teams, large competitive advantages, and
DEVELOPED MARKETS
strong balance sheets? has, in 2016, narrowed down to: I cannot possibly own any more
Tencent.
Why search for Quality companies via quantitative approaches? Multi-factor quantitative
models for stock selection have been explored by many successful funds investing in
Quality and other strategies. One of the most famous factor models is the "magic formula"
by Joel Greenblatt.1 Factors refer to quantitative metrics that can be extracted from
financial statements (e.g., sales, net income, EBITDA margins, R&D ratio of revenue, and
net debt ratio) and used as proxies for certain desirable characteristics of the underlying
company. For example, Growth can be assessed by revenue CAGR or net income CAGR,
Profitability by margins, Returns by ROE or ROIC, and Liquidity by net debt ratios.
Bernstein has historically screened for Quality companies in Asia using three different
quantitative factor screening approaches (summarized in Exhibit 64; more details on each
of them can be found in the appendix at the end of this chapter). In this chapter, we
explore: 1) Bernstein's historical screening approaches using Quality factors to find
investable targets, 2) what we can learn from Asian false negatives and false positives
generated by these global approaches, and 3) whether we can embrace what's different
about Asian companies in how we look for Quality.
1
https://www.magicformulainvesting.com/.

BERNSTEIN
EXHIBIT 64: Summary of Bernstein's historical efforts to screen for Quality in Asia
European Equity Strategy US Quantitative Research Asia-Pacific Equity Strategy
Inigo Fraser-Jenkins Ann Larson Michael Parker
Global quant Markets Size Bernstein global quant Markets Size Regional quant Markets Size
Quality proxy Quality model parameters Quality factor screening
(ranking based on 6 factors) (sequential filters)
Latest ROE MSCI All Latest ROE MSCI All Net debt to assets below 30% MSCI Market cap
> USD 1 B
All World (all > USD ROE volatility All World (all > USD Free cash flow positive Asia Ex-
Index 1.2 B cap) Index 1.2 B cap) Japan
Index
One-year sales growth Non-operating income or loss of
less than 20% of operating income
Latest net margins ROIC materially higher than the

cost of capital
Sequential trend stability

of ROE
Net Cash Ratio Volatility

(Net Cash Ratio = [Cash &
Equivalents Short-Term
Debt Long-Term
Debt]/Market Cap)
FALSE POSITIVES AND FALSE NEGATIVES ABOUND WHAT

CAN WE LEARN FROM THEM?
While quantitative screening tools are very helpful in narrowing the universe of potential
quality companies to consider, they are also imperfect; so, simply picking stocks based on
predefined metrics is not without pitfalls. The devil is always in the detail for example,
certain factors can carry positive or negative meanings at different growth stages of a
company or under different market conditions, even within the same market. This means
that generalization, while useful as a screening tool, has the potential to create false
positive or false negative signals. Take net-debt ratios as an example for a growing
company, a reasonable level of debt funding can boost production expansion and be a
positive; however, when financial markets tighten, leverage can create a large burden and
become a negative. False positive or false negative signals are common in any quant-
based screening model (not just for Quality).
In this chapter, we do not seek to replace the use of Quality factor models, but to explore
what can be learned from the false positive and false negative results they generate to
help us arrive at a more nuanced definition of Quality that is specific to the uniqueness of
Asian markets.
Our typical quant Quality screening criteria (strong balance sheet, low debt, high ROIC,
and little associate income) generate either false positive (doesn't really resemble
anyone's common sense idea of quality) or false negative (commonly known Quality
companies that somehow evade the factors used in quant Quality screens) stock
recommendations. Why?

BERNSTEIN
Firm wide, our Quality tools for Asia are arguably unreliable for one of four reasons:
We use too narrow a hunting ground (we only look at stocks already inside the MSCI
All Country World Index and the regional Asian factor analysis only considers
companies with a market cap above US$1 billion);
We demand for too long a historical dataset (we exclude stocks where historical data
on a number of factors is unavailable, yet some of the best Quality businesses in Asia
are newer than in developed markets);
Our selection criteria (strong balance sheet, low debt, high ROIC, and little associate
income) generates stock recommendations like Huabao (a Chinese PLA tobacco
additives company) or Dong-E-E Jiao (a "traditional" medicine company making
products derived from donkey skin and urine that lack evidence for efficacy) that do
not really resemble anyone's idea of quality; and
We overlook or ignore the reality that Quality in emerging Asia looks different to
Quality in developed markets (e.g., some Quality companies in growth phases choose
to make temporary trade-offs between growth and ROIC, addressable markets in
Asia can witness much higher growth than in developed markets, and robust risk
mitigation strategies are even more important in Asia).
In general, the companies that score well on Quality parameters, both qualitative and
quantitative, are the ones that have achieved sustainable profitability and competitive
advantages. The ability to capture economic rents in emerging markets is often tied to
dynamics (commodity demand and favorable regulation) that can change quickly. Those
rents and the resultant high returns can quickly disappear. As a result, we believe
identifying high-Quality names is more challenging in Asia than in developed markets,
where firms have established competitive moats that can be more sustainable.
Exhibit 65 summarizes the price performance and quant screening quintiles by using two
of Bernstein's historical quant Quality screening approaches for top healthcare stocks
(Asia-Pacific pharmaceuticals and healthcare services combined) and Exhibit 66 shows
the data for the Asia-Pacific consumer staples sector (including beverages).
Here, we highlight some of the notable false positives and false negatives arising in
traditional quant screens that stand out to us and discuss what we can learn from them.
The remainder of this chapter will focus on a discussion of what Quality looks like in these
three example sectors Asia-Pacific pharmaceuticals, healthcare services, and
beverages.
NOTABLE FALSE NEGATIVES Pharmaceuticals

(NOT EXHAUSTIVE)
Jiangsu Hengrui Medicine Company (600276.CH, outperform). Hengrui is one of the
largest pharma companies in China and appears in the top Quality quintile in
Bernstein's global quant Quality model. However, it was knocked out of Bernstein's
regional factor-based Quality screening tool (which screens only the top 300 stocks

BERNSTEIN
in the MSCI ACWI Asia ex-Japan). Based on a fundamental analysis, we think that
Jiangsu Hengrui is the highest-Quality pharmaceutical company in China by a wide
margin. It has a stronger portfolio of products in the market, deeper and more
innovative pipeline, deeper bench of overseas experience in its management and key
talent, strong balance sheet and consistency of returns (ROIC far higher than WACC),
margin expansion, and earnings growth. It has the second-largest pharma sales
force in China, competitive advantages in several therapeutic areas in China
(including oncology), has been growing its ANDA generics business in the United
States, and has been free from the type of sales corruption and corporate
governance scandals that have rocked many of its peers.
CSPC Pharmaceutical (1093.HK, outperform). CSPC is included in the MSCI World

and appears in the top quintile in Bernstein's global quant Quality model, but was
also knocked out of Bernstein's regional factor-based Quality screening tool (which
screens only the top 300 stocks in the MSCI ACWI Asia ex-Japan). In our view, CSPC
is one of the stronger "old guard" Chinese generic pharmaceutical companies.
Despite rising pricing pressure and policy uncertainty, demand for medicine is
accelerating and the majority of drugs consumed will continue to be generic drugs
made by domestic manufacturers. CSPC has demonstrated its ability to consistently
churn out new generic drugs every year, steadily expand margin expansion (via a mix
shift), and maintain an ROIC that is multiples higher than its WACC. CSPC has also
avoided the type of sales corruption or corporate governance scandals that have
negatively affected many pharma companies in China.
Kalbe Farma (KLBF.IJ, market-perform). Kalbe is included in the MSCI World and
screened into the top quintile in Bernstein's global quant Quality model, but was also
knocked out of Bernstein's factor-based Quality screening tool (which screens only
the top 300 stocks in the MSCI ACWI Asia ex-Japan). It is a well-run business that has
faced a challenging external environment this year (with the rollout of universal
health insurance forcing its pharma mix to shift toward more low-margin products
and slower recovery of domestic consumption affecting growth in its consumer
health and nutritional businesses). While pharmaceuticals is only about a quarter of
Kalbe's revenue (consumer health, nutritional products, and distribution make up the
rest), Kalbe has sustainable advantages in both its scale (with the largest market
share of the Indonesian drug market at 11%, compared to its closest peer with 5%)
and the depth and breadth of its distribution reach (which is hard to replicate in an
archipelago of 17,000 islands with weak national transport infrastructure). Kalbe has
been investing for the future, beyond the end of the rollout of the JKN universal
healthcare scheme by building plants to manufacture generic oncology drugs and by
bringing biosimilars to Indonesia.
Healthcare services
Bumrungrad Hospital (BH.TH, market-perform) appears in the global quant Quality

model but not in our regional factor-based screening. It is a well-managed Premium
hospital in ASEAN. Until this year, it has historically delivered 25% earnings growth
every year (except during the GFC), driven by smart management, steadily growing
revenue intensity per patient, and price increases. This year, Bumrungrad faces

BERNSTEIN
headwinds from weak oil price and global macroeconomic outlook and slowing
patient volumes from the Middle East. A new CEO (who was previously running a
hospital group in the UAE) has just taken the helm at Bumrungrad in September.
Mitra Keluarga (MIKA.IJ, not covered). Mitra Keluarga doesn't appear in the
Bernstein's global Quality model or in the factor-based Quality tool. It is the largest
(by market cap) and best Quality of the Indonesian hospital operators. It is a family-
run business focused on building community-based hospitals in Jakarta and
Surabaya, designed to serve the population living within a few kilometer radius of
each facility. It has steadily grown (though far slower than its local rival, Siloam) and
expanded its margins to the highest in the world of any major hospital operator (34%
EBIDTA margin).
Alcoholic beverages
Kweichou Moutai (600519.CN, outperform). Moutai screens favorably in the top

quintile of Bernstein's global quant Quality model, but was knocked out in Bernstein's
factor-based Quality screening tool (which screens only the top 300 stocks in the
MSCI ACWI Asia ex-Japan). In our view, Moutai is the highest-Quality spirits company
in Asia-Pacific. It focuses on the high-margin, rapid-growth, Ultra Premium baijiu
segment in China, and has unparalleled brand equity and best-in-class consumer
awareness across the nation. The company has sustained more than 70% EBIT
margin over the last five years and this is the highest margin among all major liquor
companies globally.
Yibin Wuliangye (000858.CN, outperform). Wuliangye also screens favorably in the

top quintile of Bernstein's global quant Quality model, but was knocked out in
Bernstein's factor-based Quality screening tool (which screens only the top 300
stocks in the MSCI ACWI Asia ex-Japan). Wuliangye earns a world-class EBIT margin
(38% in 2015) and offers a granular portfolio of intrinsically differentiated Ultra
Premium brands extending down to the Standard segment. The company has a clear
and sensible growth strategy leveraging on its strong brand equity and a deep
distribution network. In addition to the Ultra Premium regular Wuliangye brand,
Premium/Standard products also contribute meaningfully to both the top line and
the bottom line, making the company well positioned to capture the consumption
upgrade of middle class consumers in China.
NOTABLE FALSE POSITIVES Pharmaceuticals

(NOT EXHAUSTIVE)
Sihuan Pharmaceutical (460.HK, market-perform): Sihuan screens into the second
quintile in both the Bernstein quant Quality model and Bernstein's regional
factor-based quant tool. We believe that Sihuan is a false positive in these screens
quant screens miss some of the reasons to be concerned about Sihuan's core
business. For instance, 95% of its revenue comes from neuro-protective drugs to
treat acute ischemic stroke (a therapeutic approach that is not used outside China).
The drug lacks robust evidence for efficacy in international medical literature (only
used in China, "named and shamed" for lacking evidence for efficacy in provincial

BERNSTEIN
monitoring lists, and CFDA recently issued a warning about cerebroprotein

containing drugs). Further, Sihuan uses a high-compliance-risk third-party sales
model (that was under investigation before its lengthy 11-month trading suspension
began) and has had a number of clouds of corporate governance uncertainty
following it in the past. What lies ahead for Sihuan is highly uncertain it is hard to
see how the business could turn around organically. There are no (known)
meaningful catalysts on the near-term horizon for Sihuan.
Shanghai RAAS Blood Products (002252.CH, not covered). RAAS is the largest
healthcare company in China by market cap and screens favorably (second quintile)
in our global quant Quality model. Like other domestic plasma companies, RAAS has
enjoyed structural growth in past years due to long-term shortage in blood products
in China and strict regulations banning imports of foreign blood products (except in
certain shortage situations, including albumin). However, there has been some
uncertainty over corporate governance for decades. The controlling shareholder of
RAAS has been using shares of RAAS as collateral for loans to invest in other
businesses. Earnings have been historically volatile and often include large non-
recurring items. The founder, Kieu Hoang, is a Vietnamese Chinese who lived in the
United States. How he managed to gain access to the Chinese market in the 1980s
has been the subject of much (unsubstantiated) speculation. While this chapter
deliberately excludes discussion of valuation, in this case, it is worth pointing out that
RAAS trades at roughly double the multiple (70x P/E) of its closest competitors,
CBPO (33x P/E) and Hualan (41x P/E).
Dong-E E-Jiao (000433.CH, not covered). Dong-E also screens favorably (second
quintile) in the Bernstein quant Quality model and the regional factor tool. Dong-E is a
TCM company that manufactures a line of E-Jiao. E-Jiao, developed from donkey
skin, is marketed as a "blood enricher" and a nutritional supplement for women.
However, there is no clear evidence for efficacy of E-Jiao products and concerns
about counterfeit versions plague the market overall (and Dong-E E-Jiao specifically).
According to Shandong E-Jiao Trade Association, annual consumption of E-Jiao
products in China translates to 5,000 tons of donkey hides required to make them, or
about 4 million donkeys slaughtered per year. ChinaAg estimates the demand for
E-Jiao to be even higher equivalent to 10 million donkey skins a year. However,
only about 3,000 tons are available per year, and each year the supply dwindles.
Sometimes, the meat goes to waste because the skin is the most valued part of a
donkey. China's donkey population has fallen from 11 million in the 1990s to less
than 5 million today. It is estimated that about 40% of E-Jiao products in circulation
in China are fake. Horse hide is the closest genetic substitute and difficult for
consumers to distinguish, but a feared counterfeit because TCM doctors believe that
it can induce miscarriages in pregnant women (though there is no robust clinical
evidence of this either). Dong-E E-Jiao raises its own donkeys and is the producer of
the most prestigious, premium-branded E-Jiao products. Local media report that
Dong-E E-Jiao has raised its prices 16 times in the last decade (translates to a 23%
CAGR in price) and is trying to launch other products to diversify its revenues (e.g.,
donkey meat hot pot and donkey meat steamed buns).

BERNSTEIN
Healthcare services
China Resources Phoenix Healthcare Group (1515.HK, market-perform). Phoenix

also screens favorably (first quintile) in the Bernstein's quant Quality model and
regional factor-based tool. However, we believe it to be a false positive for a few
reasons. Phoenix has historically (since IPO, though not before) adopted an old
asset-light model to manage hospitals in the Beijing area and which was popular with
investors (many called it "the Four Seasons of hospitals in China") and enabled it to
grow quickly. But it has run into serious headwinds recently. IRRs of its new "invest-
operate-transfer" (IOT) projects are much lower than the original ones and there have
been many delays in newer projects (e.g., Baoding). The turnarounds are based on
squeezing hospitals on costs for better financial efficiency, not improving the clinical
quality of healthcare provided. Phoenix had difficulty in maintaining a continued
stream of new IOT projects and has been relying heavily on drug sales, which is an
increasingly uncertain position to be in as the government cracks down further on
hospitals making too much money from drug sales. Earlier this year, Phoenix
announced a reverse-merger with another large hospital group (China Resource's
hospital group), which doubles its bed count, and acquired two more hospitals from
CITIC Medical. Significant uncertainty exists on the future profitability of the merged
entity. Corporate governance question marks have lingered around Phoenix for a few
years, but may be at least partly alleviated by the merger. Only one member of the
group-level management and board (the founder) has meaningful hospital
management experience.
Alcoholic beverages
China Resources Beer (291.HK, underperform). CRB ranked in the second quintile in
stocks in the MSCI ACWI Asia ex-Japan), but did not rank in the global quant Quality
model. CRB is the largest beer company in China by volume (1.4x the size of #2
Tsingtao), but its EBIT margin remains stubbornly low (7% in 2015) and its ROIC of
6% is below WACC. Management is primarily focused on extending its volume
market share lead over the short to medium term instead of enhancing margins, and
we expect continued reinvestment to result in broadly flat margins and ROIC less
than WACC over the medium term.

BERNSTEIN
EXHIBIT 65: Price performance and quant screening scores for the top Asia-Pacific healthcare companies (including both
pharmaceuticals and healthcare services)
Quality Quintile Quality Quintile Share Price Performance
Market Cap
Company (Bernstein Quality (Factor-based
($Bil) 2012 2013 2014 2015 YTD
Model) approach)
Takeda Pharmaceutical Co Ltd 34 2 3 14% 25% 4% 21% -24%
Astellas Pharma Inc 32 1 1 24% 61% 35% 3% -10%
Sun Pharmaceutical Industries Ltd 24 1 2 48% 54% 46% -1% -16%
Eisai Co Ltd 19 2 2 13% 13% 15% 73% -17%
Shionogi & Co Ltd 18 1 1 45% 59% 37% 76% -5%
Chugai Pharmaceutical Co Ltd 17 1 3 30% 41% 27% 43% -22%
Jiangsu Hengrui Medicine Co Ltd 16 1 na 12% 39% 9% 70% 10%
Daiichi Sankyo Co Ltd 16 3 4 -13% 45% -12% 49% -5%
Shanghai RAAS Blood Products Co Ltd 16 2 na 2% 249% 90% 76% -3%
Terumo Corp 14 2 3 -6% 49% 9% 37% 3%
Kangmei Pharmaceutical Co Ltd 13 2 na 17% 37% -13% 116% 6%
Sinopharm Group Co Ltd 12 2 na 30% -8% 23% 13% 13%
IHH Healthcare Bhd 12 1 5 nm 15% 25% 37% -5%
Olympus Corp 11 3 1 65% 100% 28% 12% -25%
Bangkok Dusit Medical Services PCL 10 1 2 38% 4% 46% 30% 0%
Lupin Ltd 10 1 1 37% 48% 57% 29% -21%
Kyowa Hakko Kirin Co Ltd 9 1 5 -10% 37% -2% 69% -12%
Fosun Pharma 8 1 na 23% 87% 8% 11% 2%
Dr Reddy's Laboratories Ltd 8 2 2 16% 39% 28% -4% 5%
Shanghai Pharmaceuticals Holding Co 8 3 na 0% 33% 12% 21% 1%
Searainbow Holding Corp 7 4 na 55% 120% 50% 7% 69%
Sumitomo Dainippon Pharma Co Ltd 7 2 4 18% 59% -29% 22% 27%
Aurobindo Pharma Ltd 7 1 1 122% 107% 189% 54% -12%
Cipla Ltd/India 7 2 3 29% -3% 56% 4% -16%
Tasly Pharmaceutical Group Co Ltd 6 1 na 32% 55% -4% 0% 0%
Beijing Tongrentang Co Ltd 6 3 na 27% 20% 5% 99% -29%
CSPC Pharmaceutical 6 2 na 30% 174% 12% 16% -1%
Cadila Healthcare Ltd 6 1 na 28% -10% 97% 2% 16%
Dong-E-E-Jiao Co Ltd 6 1 na -6% -2% -6% 40% 12%
Kalbe Farma Tbk PT 5 1 na 56% 18% 46% -28% 13%
Sino Biopharm 5 1 na 60% 66% 14% 51% -26%
Hualan Biological Engineering Inc 5 1 na -16% 36% 16% 32% 30%
Divi's Laboratories Ltd 5 1 na 42% 11% 41% 34% 6%
Hanmi Science Co ltd 4 2 na 89% 76% 28% 752% -33%
Bumrungrad Hospital PCL 4 2 na 59% 19% 61% 50% -12%
Sihuan Pharmaceutical Hldgs 2 2 na 24% 108% 47% -16% -56%
Phoenix Healthcare Group 2 na na nm nm 15% -37% 34%
Note: Highlighted stocks are under our coverage. For percentiles, 1 = high Quality, 100 = low Quality. For quintiles, 1 = high Quality, 5 = low Quality.

BERNSTEIN
EXHIBIT 66: Price performance and quant screening scores for the top consumer staples (including beverages)
Share Price Performance
Quality Quintile Quality Quintile
Market Cap
Company (Bernstein Quality (Factor-based
($Bil) 2012 2013 2014 2015 YTD
Model) approach)
Japan Tobacco Inc 71 1 1 35% 40% -3% 34% -17%

Kweichow Moutai Co Ltd 58 1 na 8% -39% 62% 27% 42%
ITC Ltd 43 1 1 42% 12% 15% -11% 12%
Seven & i Holdings Co Ltd 35 2 4 14% 72% 4% 27% -22%
Hanjaya Mandala Sampoerna Tbk PT 33 2 2 54% 4% 10% 38% 1%
Hindustan Unilever Ltd 26 1 2 29% 9% 33% 14% -7%
Kao Corp 24 1 1 7% 47% 44% 31% -19%
Unilever Indonesia Tbk PT 23 1 2 11% 25% 24% 15% 8%
Wuliangye Yibin Co Ltd 19 1 na -14% -45% 37% 27% 26%
Amorepacific Corp 18 1 2 15% -18% 122% 87% -14%
Thai Beverage PCL 17 na na 61% 37% 28% 0% 36%
Asahi Group Holdings Ltd 16 3 4 9% 61% 26% 1% -5%
YILI 16 2 na 8% 78% 10% 15% 9%
CP ALL PCL 16 2 1 78% -9% 1% -8% 55%
Kirin Holdings Co Ltd 16 5 4 8% 50% -1% 10% 10%
Jiangsu Yanghe Brewery 15 1 na -13% -56% 94% 21% -1%
Wilmar International Ltd 15 4 5 -33% 2% -5% -9% 13%
MEIJI Holdings Co Ltd 13 3 2 17% 81% 63% 83% -12%
KT&G Corp 12 2 2 -1% -8% 2% 37% 1%
Aeon Co Ltd 12 5 5 -7% 44% -15% 54% -21%
LG Household & Health Care Ltd 11 2 1 35% -17% 14% 69% -20%
Ajinomoto Co Inc 11 1 2 24% 33% 47% 28% -29%
SHUANGHUI 11 2 na -17% 63% -33% -3% 9%
Shiseido Co Ltd 10 3 4 -14% 39% 0% 49% 13%
AMOREPACIFIC Group 10 2 3 83% -1% 115% 48% 1%
Uni-President Enterprises Corp 10 2 2 29% 7% -1% 14% 0%
Hengan International Group Co Ltd 9 1 1 -4% 31% -12% -10% -16%
Gudang Garam Tbk PT 9 1 1 -9% -25% 45% -9% 12%
President Chain Store Corp 8 1 1 -6% 33% 18% -16% 14%
FamilyMart UNY Holdings Co Ltd 8 3 2 14% 35% -5% 24% 21%
Indofood CBP Sukses Makmur Tbk PT 8 1 1 50% 31% 28% 3% 26%
Luzhou Laojiao Co Ltd 7 1 na -5% -43% 1% 33% 25%
China Resources Beer Holding 7 3 2 5% -8% -37% 2% 7%
Tsingtao Brewery Co Ltd 6 4 na 6% 43% -20% -33% -13%
Tsingtao Brewery Co Ltd 6 3 na -1% 48% -15% -21% -6%
United Spirits Ltd 4 3 na 286% 37% 7% 7% -34%
United Breweries Ltd 3 1 na 142% -17% 8% 13% -8%
Beijing Yanjing Brewery Co Ltd 3 4 na -16% 44% -1% 3% -8%
Emperador Inc 2 na na 83% 42% -3% -14% -20%
Sapporo Holdings Ltd 2 4 na -4% 58% 16% 4% 8%
Guangzhou Zhujiang Brewery Co Ltd 1 na na -7% 9% 35% 19% -13%
Note: Highlighted stocks are under our coverage. For percentiles, 1 = high Quality, 100 = low Quality. For quintiles, 1 = high Quality, 5 = low Quality.

BERNSTEIN
WHAT IS DIFFERENT ABOUT QUALITY IN ASIA?
If we take the earlier discussion as evidence that the nature of what Quality means in
emerging Asia is a little different from that in developed markets, the next question to ask
is how and why? What are the core set of differences that should color how we think
about what Quality means in Asia? We see at least five differences to point out:
Less mature industries and companies in Asia: Many companies (and industries) are
in growth phases of their development, which comes with trade-offs against what
would be defined as high Quality in mature companies elsewhere. This often means
trade-offs between ROIC and growth (either in scale or margins). For fast-growing
companies in Asia, sometimes management teams choose growth over margins.
Thus, we may see a period of contracted margins, when compared to peers in
developed markets. A simple generalization that overlooks this temporal trade-off
may lead to overlooking high-Quality companies.
Shorter histories of historical data in many companies: In some sectors and countries
in Asia (healthcare included), many of the largest companies are all less than five
years old. Global quant approaches often look for five years of historical data, which
knocks out many Asian companies (particularly in new economy sectors).
Quality management looks different from that in developed markets. Founders are
often still running the company, family members are often still involved and
professional management teams are less common than in developed markets. This
can mean that narrower diversity and depth of experience are the norm. Moreover,
the prioritization of management capabilities varies depending on the stage of
industry development.
Competitive differentiation can be more fleeting than in developed markets, given

the pace at which business models, products, and ideas are copied and improved
upon (particularly in China).
Strong balance sheets look different in Asia; in some sectors, many companies sit on
mountains of cash and carry little to no debt.
With this in mind, we took a blank sheet approach to create a new seven-dimension
checklist for what Quality looks like in Asia see Exhibit 67. We look for focused strategy,
quality of products/services, attractive addressable markets, earnings and financial
returns, capital structure and financial statements, management, and investors. The
relative importance of these seven dimensions varies considerably across sectors. We
define a few parameters to look for within each of the seven dimensions. Some of these
parameters can be assessed by quantitative analysis of proxy metrics (e.g., expanding
margins, balance sheet strength, and institutional ownership), while others cannot and
require fundamental analysis (e.g., size and growth of addressable market, strength of
brand, and clarity of growth strategy). A good way to approach the search for Quality is
broad quant-based screening of thousands of companies to narrow the field to dozens,
followed by judicious use of targeted fundamental analysis into very specific questions to

BERNSTEIN
avoid "boiling the ocean" and make maximal use of limited resources. This is an approach
that many investors take already; we hope to add incrementally to the discussion of what
minimal set of fundamental analysis is necessary on top of quant screening to arrive at the
most investable answers. We have deliberately excluded valuation from this discussion of
Quality.
EXHIBIT 67: What does Quality look like in Asiaand how to evaluate it? Our seven-dimension Quality framework
Quality of Parameters to assess Quant proxy we used Fundamental
analysis needed
Strategy Expanding margins (targeted mix shift) Increasing net income margin (2014-18E)
Clarity and focus of growth strategy

Optimized mix of products or service offerings

Strength of distribution reach

Exposure to and mitigation against key risks

Products or services Investment in future products 3 yr average R&D spend to net sales (201215)

Clear differentiation versus competitors

Affordability of products

Strength of brand and reputation

% of revenue from outside home market

Addressable market Consistent sales growth Net sales growth CAGR (2014-18E)
Size and growth of addressable market (s)

Market structure

Earnings and Earnings derived primarily from core business 3 yr average % of income from asc income (2012-15)
financial returns
ROIC > WACC 3 yr historical average ROIC / WACC (2012-15)
Strong FCF yield 3 yr historical average free cash flow yield (2012-15)
Capital structure and Balance sheet strength 3 yr average net debt to assets (2012-15)
financial statements
Optimized capital allocation

Clean and consistent revenue booking approach

Fair value of goodwill and intangible assets

Management Depth of relevant experience

Diversity

Higher founder ownership (if applicable)

Free from historical corporate governance scandals

Reasonable level of exposure to related transactions

Investors Savvier shareholders % institutional ownership
Foreign ownership


BERNSTEIN
PHARMACEUTICALS WHAT'S IN QUALITY ASIAN DRUGS?
INDUSTRY CONTEXT The pharmaceutical industry is highly heterogeneous across different markets in Asia.
Exhibit 68 and Exhibit 69 summarize how different macro drivers promote growth and
top-down cost containment measures impede growth in each market (or not). We think
the different regional markets can be bucketed into the three groups discussed here,
each with very different dynamics and outlook:
High-growth markets (e.g., China, Indonesia, India, and Vietnam). These markets tend
to have stronger macroeconomic growth, faster growing total health expenditure,
faster expansion of the middle class, and high out-of-pocket health expenditure (35-
60% of total health expenditure). These markets all have mandatory price cuts,
strong promotion of generics usage, and (so far) lack international reference pricing
or health economics ("cost-effectiveness") mindset in reimbursement-decision
making. All four will see major health reforms and health policy disruptions on the
near- to medium-term horizon. Our initial coverage focuses on China and Indonesia.
Large, mature, steady growth markets (e.g., Japan, Australia, and Korea). These
markets are characterized by stable, low single-digit pharmaceutical market growth,
weaker macroeconomic growth, lower out-of-pocket proportion of total health
expenditure (15-35%), and industry maturity. Government cost-containment
measures are more sophisticated, tending to include formal health technology
assessment (HTA) and pharmaco-economics in reimbursement decisions, mandatory
price cuts, and prescribing controls. Korea has an emerging biotech industry with
many investment opportunities.
Lower growth, stable, smaller markets (e.g., Taiwan, Thailand, Philippines, Malaysia,
Bangladesh, Hong Kong, and Singapore). These markets behave in between the two
categories discussed earlier. They tend to be less well developed because modest
pharmaceutical sales growth (4-11%) and small total market sizes (US$1-US$5
billion) make them less attractive for multinational pharma companies to invest in.
Healthcare systems in these markets vary in their maturity (Singapore, Taiwan, Hong
Kong, and Thailand are relatively mature while Philippines, Malaysia, and Bangladesh
are still changing and will see major reforms). Government cost-containment
measures tend to be simpler in nature (price cuts, patient contributions, and
promotion of generics).
The universe of pharma companies across Asia ex-Japan varies widely by size the
top 30 range from US$4 billion to US$30+ billion in market size (see Exhibit 73).

BERNSTEIN
EXHIBIT 68: Macro drivers for healthcare growth vary considerably by country our initial coverage focuses on high-growth
markets
* Represented as % of total health expenditure 2009-2014 (for reference the United States is 11% and France 7%).
Source: IMS Health, World Bank Health Expenditure database, WHO, Population Reference Bureau, World Population Data Sheet, and Bernstein analysis.
EXHIBIT 69: Government cost-containment measures (that can impede pharmaceutical growth) also vary across the region
Source: IMS Health, Ministries of Health, and Bernstein analysis.

BERNSTEIN
EXHIBIT 70: Asia-Pacific pharmaceutical companies by market cap

40
Market Cap (USD B)
35
Market cap (USD B)
30
25
20
15
10
5
0
Note: Our coverage companies are Jiangsu Hengrui, Kalbe Farma, CSPC, Sino Biopharm, and Sihuan Pharma.
DRIVERS OF QUALITY IN ASIAN Next, we discuss three of the seven key drivers of Quality described in Exhibit 67, that we
PHARMACEUTICAL COMPANIES think are among the most important, and what they mean in the context of Asian
pharmaceutical companies:
Quality of products/services: Investment in R&D pipeline, differentiation, portfolio;
Quality of earnings and financial returns (high and expanding margins), and
Quality of management.
The exercise is by no means exhaustive, but rather meant to provide a tour through
several sectors instead of a deep dive into one only we would be delighted to discuss
the other dimensions of Quality in pharma companies if you are interested.
Quality of products/services: Investment in R&D pipeline, differentiation, portfolio

The simplest, first-order, commonsense questions that come to mind in any discussion
about Quality of drug companies are the most important ones to focus on Is this
company selling drugs that actually work? Is it developing new medicines that really cure
diseases? Considering the Quality of a drug company's products has two layers in-line
portfolio of drugs already sold in the market and pipeline of future drugs in development.
Both are simple to evaluate in theory, but very difficult in practice.
In evaluating emerging market pharma companies' in-line portfolios of drugs already

being sold, we encourage investors to ask the question: "Are these drugs widely accepted
as clinically useful or essential, inside and outside the home market?" We think that one
proxy way to screen for a rough answer to this question is to assess the percentage that

BERNSTEIN
generics companies' portfolios overlap with the WHO Essential Drug List2 and observe a
wide spread across the big listed Chinese generic drug companies (see Exhibit 71).
EXHIBIT 71: Quality of in-line portfolio of drugs: Percentage of overlap by revenue with the 2015 WHO Essential Medicine's list
for major Chinese pharmaceutical companies
90% 83%
% of revenue from drugs in the
WHO Essential Medicines list
80%
70%
60%
50%
40% 36%
30%
21%
20% 14%
7%
10%
0%
0%
HEC Pharma Hengrui Sino Biopharm CSPC Sihuan 3SBio
Note: Our coverage companies are Jiangsu Hengrui, Sino Biopharm, CSPC, and Sihuan.
Source: WHO Essential Medicines List 2015 (most recent), IMS, and Bernstein estimates and analysis.
On the R&D side, there is no simple quantitative metric that can generalize the potential of
a pipeline or single product in development. R&D by itself bears failure risk and the
success rate of early-stage pipelines can be very low. When examining the value of the
pipeline assets, one should start by modeling the potential revenue of a given asset by
looking at addressable market, competitive landscape, novelty or differentiation of
mechanism of action, reason to believe clinical trial attrition is better (or worse) than
average, most likely pricing scenario, and affordability of out-of-pocket and/or clear path
to reimbursement. There is no simple numerical metric as a "rule-of-thumb" for the quality
of R&D assessment is a more nuanced process that involves interviewing doctors and
digesting all relevant academic literature. One measure is by outputs, which could be the
number of innovative regulatory filings investigational new drugs (INDs) or new drug
applications designated the highest innovative category. In China, the historical definition
of Category 1.1 (submission categories redefined a few months ago) meant most
innovative, first-in-the-world in China, not yet used anywhere else in the world (though
was used in a looser way in practice). Exhibit 72 and Exhibit 73 rank order Chinese
pharmacos by cumulative number of category 1.1 Investigational New Drug (IND) and
New Drug Application (NDA) submissions since 2007.
2
See http://www.who.int/medicines/publications/essentialmedicines/EML2015_8-May-15.pdf (2015 is the most recent
list available).

BERNSTEIN
EXHIBIT 72: Quality of pipeline: Number of Category 1.1 (most EXHIBIT 73: Quality of pipeline: Number of Category 1.1 NDAs
innovative) IND applications submitted in China submitted in China (2007-16 YTD)
(2007-16 YTD)
JiangsuHengrui 79 JiangsuHengrui 11
JiangsuHansoh 60 OtsukaPharma 5
Inst.MateriaMedica 41 ZhejiangXianju 4
ChiMed 27 JiangsuHansoh 4
Novartis 24 JiangsuNhwaSaide 4
Pfizer 23 HebeiMedicalUni 3
AstraZeneca 22 HarbinPharma 3
ZhejiangHisunPharma 21 AllistPharma 3
GDDongyangguang 20 SZChipscreen 2
SihuanPharma 19 ZhejiangBetta 2
QiluPharma 19 ZhejiangMed 2
SinoBiopharm 17 Simcere 2
SimcerePharma 13 AnhuiHuanqiu 2
Quintiles 13 HealthstarMedical 2
TIPRPharmaResponsible 13 TianjinChaseSun 2
HefeiSiuFung 11 FudanZhangjiang 2
Sanofi 10 HZZhongmeiHuadong 2
ShenzhenChipscreen 10 Novartis 2
CSPC 9 YangtzeRiver 2
LuyePharma 7 Kangzhe 2
Note: Red bars indicate Bernstein Asia-Pacific healthcare coverage companies. Note: Red bars indicate Bernstein Asia-Pacific healthcare coverage companies.
See the online version for colors. See the online version for colors.
Source: GBI, CFDA, and Bernstein analysis. Source: GBI, CFDA, and Bernstein analysis.

BERNSTEIN
EXHIBIT 74: Parameters to be considered in valuing innovative pharmaceutical pipeline assets
Quality of earnings and financial returns (high and expanding margins)
While pharmaceutical margins can vary widely (from 5% to -95%), in general, it is a very
high-margin sector. Active pharmaceutical ingredient (API) and unbranded generic drugs
are the most commoditized products and command the lowest margins (typically single-
digit net margins). The newest and most innovative drugs sold in the United States (where
pricing is typically highest) earn the margins. Exhibit 75 summarizes the range of gross
margins for Asian pharma companies Jiangsu Hengrui is the highest at 87%. Continued
downward drug pricing pressure is a reality in all developed and emerging markets
(particularly for generics), even with Donald Trump elected as U.S. President.
Pharmaceutical companies in Asia often improve overall margins via mix shift adding
higher-margin new products to the portfolio. For example, CSPC had a gross margin of
47% in 2015 and is seeking to add 300 bps of gross margin (or 150 bps of net margin)
per year for each of the next three years via faster growth in sales of its oncology products
and launch of three new cancer drugs generic Iressa (gefitinib), generic Velcade
(bortezomib), and generic Abraxane (albumin bound paclitaxel). While absolute margins
can vary widely by type and category of drug, we look for steady margin expansion in
Quality Asian pharmaceutical businesses.

BERNSTEIN
EXHIBIT 75: Gross margins for Asia-Pacific pharmaceutical companies

100%
87%
90% 79% 76%
80% 70%
Gross margin (%)
69% 67% 66%

70% 63% 60% 59% 57%
60% 55% 52% 49% 48% 47%
50%
36% 35%
40% 29%
30%
20%
10%
0%
Note: Our coverage companies are Jiangsu Hengrui, Sino Biopharm, Sihuan Pharma, CSPC, and Kalbe Farma.
Among Asia's larger pharmaceutical companies, most generate ROIC well in excess of
their cost of capital as a result of the higher-margin nature of the industry. The best
Quality companies in Asia have both high margins and ROIC at least 2-3x their WACC
Jiangsu Hengrui, in particular. Exceptions to this include companies like Celltrion Inc
(068270.KS, not covered) and Hanmi Pharma (128940.KS, not covered) that have been
making large investments in R&D in recent years that bring ROIC down near or below
WACC (see Exhibit 76).

BERNSTEIN
EXHIBIT 76: Pharma companies that are shifting their product mix toward branded generics and innovative drugs can enjoy
both high margin and high ROIC
Pharma 3Y avg ROIC/WACC vs. Gross Margin

90%
Hengrui
80%
SinoBiopharm
Sun
Hanmi
70% Lupin
Sihuan
Cadila
Gross Margin (%)
Celltrion
60% Cipla Attractiveproduct
DrReddy's mixandvaluechain
Aurobindo
50%
Majorinvestments CSPC
Kalbe
in recentyears
40%
Tasly
Baiyunshan Massmarket genericsplayers
30%
sellinglowermarginprodcuts
20%
0.5 1.0 1.5 2.0 2.5 3.0
3Y avg ROIC/WACC
Source: Bloomberg L.P., corporate reports and presentations, and Bernstein estimates and analysis.
Can a Quality company run at slim or negative margins? We think the answer is yes, when
Quality comes from the depths of a world-class pipeline and a clear and deliberate trade-
off is made, investment in future growth traded off against current margins. These are
companies at the other end of the spectrum smaller, newer biotech companies
investing heavily in new R&D with few or no products yet launched post negative margins.
BeiGene (BGNE.NYSE, not covered) is a clinical-stage biotechnology company, based in
Beijing, targeting oncology. It is developing four clinical-stage innovative drugs a BTK
inhibitor for blood cancer, a PARP inhibitor for ovarian tumor, a RAF inhibitor for NSCLC,
and a PD-1 inhibitor for solid tumors and combinations. BeiGene will remain in clinical
stage for two more years with negative margin cash burned for R&D. We have
confidence in the quality of the pipeline, talent and potential of the company, though it will
keep losing money for a while. Genexine (096700.KS, not covered) is another example of
a Quality company spending a lot, temporarily, on R&D (see Exhibit 77 and Exhibit 78).

BERNSTEIN
EXHIBIT 77: Operating margins of BeiGene EXHIBIT 78: Operating margins of Genexine
0% 20%
-100% 0%
-20%
-200%
-40%
-300%
-60%
-400%
-80%
-500%
-100%
-600% -120%
-700% -140%
2013 2014 2015 2013 2014 2015
Source: Capita lIQ and Bernstein analysis. Source: Capital IQ and Bernstein analysis.
Quality of management
In Asian pharmaceutical businesses attempting to pivot from a historical focus on
generics to building innovative R&D capabilities, we think the single most-important
determinant of Quality is people. The potential ability of Asian biopharma companies to
innovate globally-relevant new medicines has been debated for several years now. While
we are seeing some evidence of progress, we cannot yet point to a single global
blockbuster drug that originated in Asia (outside of Japan). Pessimists continue to argue
that real innovation in drug discovery and development comes from an elusive, perfect
mix of factors that cannot be copied: Art (nuanced "drug hunter" judgment and
interpretation that can only come from decades of experience), serendipity (ability to
capitalize opportunistically on unexpected connections), science (vast armies of
technically proficient scientists and cutting-edge lab equipment), culture (a corporate
culture and incentive system that reward risk-taking, dissenting voices, space for
entrepreneurial connectivity between scientists), process (intelligently designed stage-
gates and cross-functional project team structure, celebration of fast failures, relatively
flat committee structures that disaggregate advisory and decision-making functions), and
Genexine (vibrant and interconnected scientific community of academics, startups, and
emerging companies).
We disagree. The only part of this equation that cannot be copied and learned is the
artbut it can be bought or hired. The most ambitious Asian pharma companies, large
and small, are stacking their senior and mid-level R&D ranks with staff with overseas
experience (known as "sea turtles" (haiku) in China). They understand both the leading-
edge best thinking and the intractable problems entrenched in how big pharma and
biotech discovers and develops new medicines. Historically, China's PhD "brain drain" was
more permanent than that of other countries the U.S. National Science Foundation
reported that 92% of Chinese PhD graduates were still living in the United States five
years after graduation (versus 81% for Indians and 41% for South Koreans). It isn't
possible to track the total number of pharmaceutical "sea turtles" in China, but recent

BERNSTEIN
anecdotal evidence in several well-known examples are changing. Discussions with our
coverage companies suggest the trend may be reversing. For example, Dr. Xiaodong
Wang returned to China five years ago after a 25-year prestigious academic career in the
United States to run the National Institute of Biological Science (NIBS, a new institute of
the Chinese Academy of Science modeled loosely after the Howard Hughes Medical
Institute) and to co-found one of China's most innovative and exciting oncology biotech
companies, BeiGene. The company has attracted a star-studded cast of scientists with
impressive overseas resumes, including Dr. Howard Liang (now CFO and Head of
Strategy, formerly lead U.S. biotech analyst at Leerink and scientist at Abbott), Dr. Amy
Peterson (now Chief Medical Officer for Immuno-Oncology, formerly VP of Clinical
Development at Medivation, Medical Director at Genentech), and Dr. Jane Huang (now
Chief Medical Officer for Hematology, formerly VP and Head of Clinical Development at
Acerta Pharma, Medical Director at Genentech).
Take the example of Jiangsu Hengrui. Global Head of R&D, R&D COO, and Head of
Biology all have experience in top MNCs and have rich experience and in-depth
knowledge of how to conduct innovative R&D (see Exhibit 79). Over the years, Hengrui
has differentiated from peers by the ability to successfully execute R&D plans.
Within our coverage, Jiangsu Hengrui stands out as a great example. While Chairman Sun
hasn't worked in an MNC, he has been running Hengrui since 1990 (when he was 32
years old and it was a small factor) and has hired a deep bench of talent with overseas
experience to help him drive the business. For example, Dr. Lianshan Zhang returned to
China in 2012 to serve as Global Head of R&D and General Manager of Hengrui after a
career at Lilly and Marcadia Biotech in the United States. Similarly, Dr. Weikang Tao was
hired last year to serve as site head of Hengrui's Shanghai innovative R&D site after
spending more than a decade rising through Merck as a biochemist in the United States.
Together they have hired many returnees in R&D, all the way down to the project manager
level. The opportunity is to combine the best of the West with the speed and scale
arbitrage that China offers.

BERNSTEIN
EXHIBIT 79: Jiangsu Hengrui has hired many R&D staff with MNC experience and technical degrees, including top brass
Source: Hengrui presentations and website, and Bernstein estimates and analysis.
QUALITY COMPANIES TO Next, we highlight a handful of pharma companies that we believe are higher Quality
HIGHLIGHT WITHIN AND based on a combination of quant screening outputs and qualitative fundamental analysis
BEYOND OUR COVERAGE
above it (see Exhibit 67):
Companies mentioned earlier in discussion on false negatives ARE:
Jiangsu Hengrui
CSPC Pharmaceutical
Kalbe Farma
Additional companies (not under our coverage) to highlight (not exhaustive):
Hanmi Pharmaceutical (128940 KS, not covered): Hanmi is included in the MSCI
World, so did appear in the top quality quintile in Bernstein's global quant Quality
model but was knocked out of Bernstein's factor-based Quality screening tool (which
screens only the top 300 stocks in the MSCI ACWI Asia ex-Japan). Recent scandal
not withstanding (accusations of insider trading made after Hanmi delayed
disclosure of the termination of a collaboration it had on a third-generation EGFR
lung cancer drug for 12 hours in October), Hanmi is one of the larger and higher
Quality pharmaceutical companies in Korea. It has invested for almost a decade
(much like Jiangsu Hengrui) in building robust innovative R&D capabilities and signed
five high-profile development and commercialization partnership deals with foreign
companies in one year.

BERNSTEIN
Pharma Engine (4162.TT, not covered) is a Taiwanese biotech company that has
been gathering steam since 2003 but gets knocked out of many Quality screens for
its size (US$805 million market cap) and shallower history of marketed products. It
was funded by TTY Biopharm and Taiwanese venture investors and IPO-ed in 2012
with only 12 employees. Its founder, Dr. Grace Yeh, has a long previous career in
academic science and at Millennium Pharmaceuticals in the United States. The
company adopts a lean "no research, development only" business model. It focuses
on the development of new drugs for the treatment of cancer and Asia-prevalent
diseases with only a few products. Its lead product Onivyde (liposome-formulated
irinotecan) is approved by USFDA for pancreatic cancer and is in development for
five other cancers. In addition to this, it is co-developing a radio sensitizing agent
PEP503 (crystalline hafnium oxide) globally with NanoBiotix as a class III medical
device.
Yichang HEC ChangJiang Pharma (1558.HK, not covered) is the dominant

manufacturer of oseltamivir, the front-line drug against influenza. HEC has a solid
product line, including yimitasvir phosphate for hepatitis C and an insulin product.
The company has demonstrated the ability to execute clinical trials and to launch
products in different regions. The recent joint venture with TaiGen provides further
evidence of the R&D quality of the company.
Luye Pharma Group (2186.HK, not covered) is a Chinese pharmaceutical formulation

company with overseas aspirations. Luye's primary technology platform is liposome-
and microsphere-formulated drugs; this type of formulation acts to extend
pharmacokinetics and reduce side effects. Luye has oncology, cardiovascular,
metabolism, and central nerve system products on the market in China and
psychiatry (microsphere-formulated second-generation antipsychotic risperidone) in
development in the United States. Luye has developed the liposome platforms over
the year and maintains a 50% market share of paclitaxel in China. It recently began
adding to its stable of formulation technology platforms with the acquisition of
Acino's patch business in July 2016 for US$274 million. We think that, historically,
Luye has been given too much credit by the market for being innovative, but that it is
a company narrowly focused on and good at formulation.

BERNSTEIN
HEALTHCARE SERVICES WHAT DO QUALITY HOSPITAL

OPERATORS LOOK LIKE IN ASIA?
INDUSTRY CONTEXT In most Asian countries, private hospitals currently represent a minority of total hospitals
(see Exhibit 83). However, measuring public-private mix by hospital count misrepresents
(overstates) the current contribution of private hospitals to the broader healthcare system
because public hospitals can be far larger than private. First Affiliated University Hospital
of Zhengzhou in Henan, the largest hospital in the world, has a staggering 7,000 beds and
10,000 in its plans (dwarfing the largest hospital in the United States, New York
Presbyterian Weill Cornell Medical Centre, which has 2,391 beds). In China, private
hospitals are 21% of total hospitals, but only 8% of total hospital beds. Earlier this year,
the Chinese government set a target to ensure that 20% of hospital beds in China be
private by 2020E.
Governments are increasingly looking to the private sector to meet overwhelming

demand and alleviate overburdened public hospitals. Exhibit 82 and Exhibit 83 present
our forecast for the growth of hospital beds by country and the mix of public and private
hospitals (by number of hospitals). In Indonesia, the introduction of a new Universal Health
Coverage scheme (JKN) has created a tidal wave of increased demand on Indonesia's
hospitals, and the government is looking to solve the problem by boosting the number of
private hospitals. Similarly in Malaysia, private hospital development projects are given
special fast-track status in being listed in the NKEA as Entry Point Projects (EPPs) to
receive government assistance. In Thailand, the private hospital industry is more mature,
and the leading players [such as Bangkok Dusit Medical Services] are investing in growing
their networks.
Exhibit 80 shows the various healthcare services companies by market capitalization.

Most of the Asian countries have lower number of doctors per 10,000 population as
compared to other countries (see Exhibit 81 and Exhibit 82). As per Exhibit 21, a higher
proportion of adult mortality is attributed to communicable diseases (i.e., preventable with
stronger healthcare services infrastructure) in Asia. Exhibit 85 to Exhibit 87 present the
breakdown of healthcare expenditure if it's public or private or via health insurance
plan.

BERNSTEIN
EXHIBIT 80: Asia-Pacific healthcare services companies by market cap
14
12
Market cap (USD B)
10
8
6
4
2
0
Note: Our coverage companies are IHH, Bangkok Dusit, Bumrungrad, and CR Phoenix.
EXHIBIT 81: Number of doctors per 10,000 population

35 33
28 High-income countries average
per 10,000 (2006-13)
30
Number of doctors
25
25 23
21
19
20
15
15 11 12 12
10 7
4
5 2
0
US UK China Japan Australia South India Indonesia Thailand Philippines Singapore Malaysia Vietnam
Korea*
Note: Our coverage countries are China, Indonesia, Thailand, Singapore, and Malaysia.
Source: WHO World Health Statistics and Bernstein analysis.

BERNSTEIN
EXHIBIT 82: Asia lags the United States and WHO EXHIBIT 83: A minority of hospitals are private in most Asian
recommended minimum hospital bed count per 10,000 countries
people
60 56
High income country average 100%
21% 24%
# of hospital beds per
50 31% 36% 30%

10,000 population
42 80% 44% 40%

38 60% 59%
40 35
29 60%
30 23
21 19 20 20 40%
17 17 79% 76%
20
13
69% 64% 70% 60%
56%
9 7 20% 40% 41%
10 5
0 0%
2006-2012 % public % private

2020E
High income country average
Note: Mix calculated by number of hospitals, not number of beds (if calculated
by number of beds, the percentage of private hospitals becomes smaller
because some public hospitals are far larger than private ones).
Source: NP Institute, GBI, China Statistical Yearbook, Ministry of Health of India, Source: NP Institute, GBI, China Statistical Yearbook, Australian Institute of
Ministry of Health and Family Welfare and Ministry of Health of Indonesia, Health and Welfare, Ministry of Health of India, Ministry of Health and Family
Ministry of Health of Malaysia, Frost & Sullivan, Ministry of Health of Singapore, Welfare and Ministry of Health of Indonesia, Ministry of Labor and Welfare of
World Bank, expert interviews, and Bernstein estimates and analysis. Japan, Ministry of Health of Malaysia, Frost & Sullivan, Ministry of Health of
Singapore, and Bernstein estimates and analysis.
EXHIBIT 84: In Asia, a higher proportion of adult mortality is attributed to communicable diseases (i.e., preventable with
stronger healthcare services infrastructure)
% of age standardized adult
mortality per 100,000 popl'n
100%
80%
65% 70% 72%
60% 77% 78% 76% 76% 76% 74%
85% 88% 86% 88%
40%
20% 24% 19%

11% 9% 18% 23% 19% 16% 16%
6% 7% 6% 4%
9% 7% 13% 8% 14% 11% 11% 8% 10%
0% 5% 5% 5% 5%
US UK China Japan Australia South India Indonesia Thailand Philippines Singapore Malaysia Vietnam
Korea
Injuries Communicable diseases Non-communicable diseases
Note: Red indicates communicable diseases (preventable with stronger healthcare infrastructure). See the online version for colors.
Source: WHO World Health Statistics and Bernstein analysis.

BERNSTEIN
EXHIBIT 85: Breakdown of total EXHIBIT 86: Percent of private EXHIBIT 87: Percent of private healthcare
healthcare expenditure: Public versus healthcare expenditure that is out-of- expenditure that is via a pre-paid health
private pocket insurance plan
Vietnam 55% Vietnam 83%
Vietnam
Malaysia 45% Malaysia 79%
Malaysia 8%
Singapore 67% Singapore 94%
Singapore 2%
Philippines 63% Philippines 84%
Philippines 7%
Thailand 22% Thailand 56%
Thailand 7%
Indonesia 62% Indonesia 76% Indonesia 2%
India 70% India 86% India 3%
South Korea 45% South Korea 79% South Korea 3%
China 44% China 79% China 3%
High income avg 39% High income avg 38% High income avg 19%
Australia 32% Australia 60% Australia 8%
Japan 18% Japan 81% Japan 2%
UK 17% UK 57% UK 1%
US 52% US 22% US 33%
Public Private
Source: WHO World Health Statistics and Bernstein Source: WHO World Health Statistics and Bernstein Source: WHO World Health Statistics and Bernstein
DRIVERS OF QUALITY IN ASIAN Investors often use per-bed financial metrics as proxies for fundamental operating Quality
HEALTHCARE SERVICES (e.g., EV/bed, revenue per bed, and EBITDA/bed), though there are many caveats to how
COMPANIES
they are calculated and not all hospitals disclose enough information (see Exhibit 88). We
think that, while useful, these metrics don't tell the whole story. Here, we discuss three of
the seven drivers of Quality described in Exhibit 67 and what they mean in the context of
Asian hospital operators:
Quality of products/services exposure to medical tourism as a proxy for Quality of

clinical service offered,
High and expanding margins, and
Quality of management.
As discussed previously, the exercise is by no means exhaustive, but rather meant to

provide a tour through several sectors instead of a deep dive into one only we would be
delighted to discuss the other dimensions of Quality in hospital companies if you are
interested.

BERNSTEIN
EXHIBIT 88: Commonly used proxy Quality measures in Asia-Pacific healthcare services companies (hospital operators)
Scale - bed Revenue / bed EBITDA / bed EV / bed
CIQ Ticker Ticker Company name EBITDA margin
count in 2015 (USD/ bed) (USD/ bed) (USD/ bed)
OUR COVERAGE
KLSE:IHH IHH IHH Healthcare Berhad 8,898 0.248 0.064 1.654 26%
SET:BDMS BDMS Bangkok Dusit Medical Services 7669 0.241 0.053 1.469 22%
SET:BH BH Bumrungrad Hospital 580 0.887 0.264 6.373 30%
SEHK:1515 1515 Phoenix Healthcare Group Co. Ltd 5800 0.030 0.005 0.184 16%
CHINA
SEHK:1515 1515 Phoenix Healthcare Group Co. Ltd 5800 0.030 0.005 0.184 16%
SZSE:300015 300015 Aier Eye Hospital Group Co., Ltd. 6000 0.085 0.019 0.914 22%
SEHK:3886 3886 Town Health International Medical N/A clinics only 1%
NasdaqGS:KANG KANG iKang Healthcare Group N/A clinics only 19%
SEHK:383 383 China Medical & HealthCare Group 9%
SEHK:1509 1509 Harmonicare Medical Holdings 561 0.209 0.039 0.338 19%
SEHK:2120 2120 Wenzhou Kangning Hospital 2185 0.020 0.006 0.135 28%
SEHK:2138 2138 Union Medical Healthcare N/A clinics only 34%
SEHK:722 722 UMP Healthcare Holdings N/A clinics only 9%
SHSE:600763 600763 Topchoice Medical Investment N/A clinics only 27%
THAILAND
SET:BDMS BDMS Bangkok Dusit Medical Services 7669 0.241 0.053 1.469 22%
SET:BH BH Bumrungrad Hospital 580 0.887 0.264 6.373 30%
SET:RAM RAM Ramkhamhaeng Hospital 25%
SET:VIBHA VIBHA Vibhavadi Medical Center 2107 0.076 0.020 0.575 26%
SET:CHG CHG Chularat Hospital Public 392 0.259 0.065 2.213 26%
SET:BCH BCH Bangkok Chain Hospital 2178 0.081 0.021 0.489 26%
MALAYSIA & SINGAPORE

KLSE:IHH IHH IHH Healthcare 8,898 0.248 0.064 1.654 26%
KLSE:KPJ KPJ KPJ Healthcare 2912 0.244 0.028 0.479 12%
SGX:BSL BSL Raffles Medical Group 200 1.662 0.340 8.838 20%
INDONESIA
JKSE:SILO SILO Siloam International Hospitals 4900 0.072 0.008 0.219 12%
JKSE:MIKA MIKA Mitra Keluarga Karyasehat 1725 0.103 0.034 1.698 33%
JKSE:SAME SAME Sarana Meditama Metropolitan 269 0.161 0.048 1.111 30%
INDIA
NSEI:APOLLOHOSP APOLLOHOSP Apollo Hospitals Enterprise 9215 0.098 0.013 0.320 12%
BSE:532843 532843 Fortis Healthcare 4700 0.140 0.005 0.284 9%
AUSTRALIA and SOUTH AFRICA

ASX:RHC RHC Ramsay Health Care 25000 0.262 0.036 0.538 14%
ASX:SHL SHL Sonic Healthcare N/A clinics, labs and hospitals 16%
ASX:HSO HSO Healthscope 4800 0.359 0.064 0.825 18%
ASX:PRY PRY Primary Health Care N/A clinics, labs and hospitals 22%
ASX:LHC LHC LifeHealthcare Group 12686 0.006 0.001 0.007 16%
USA
NYSE:HCA HCA HCA Holdings 44000 0.915 0.180 1.389 20%
NYSE:UHS UHS Universal Health Services 27482 0.337 0.062 0.600 18%
NYSE:THC THC Tenet Healthcare 22525 0.855 0.099 0.854 12%
NYSE:CYH CYH Community Health Systems 30000 0.651 0.076 0.629 12%
NYSE:DVA DVA DaVita HealthCare Partners 18%
NasdaqGS:LPNT LPNT LifePoint Health 8243 0.671 0.077 0.669 11%
NYSE:MD MD MEDNAX 22%
Source: Capital IQ, Bloomberg L.P., and Bernstein analysis.
Quality of products/services exposure to medical tourism (can be a proxy for Quality of

clinical offering)
In our view, Quality of clinical care should be the most important Quality driver even at the
company level. However, it is difficult to measure outside-in and objectively. Unlike the
United States and other developed markets, few private hospital companies in Asia
disclose robust clinical outcomes data, except in limited circumstances when it is useful
for marketing purposes.
Joint Commission International (JCI) accreditation is one proxy measure of clinical quality
that both patients (particularly overseas patients) and investors consider. It is a U.S.-
originated Quality framework accreditation process that is difficult to attain. Exhibit 89
summarizes the number of JCI accreditations by hospital companies. This is an indicator
of likely medical tourism. Having some non-zero and stable or growing proportion of

BERNSTEIN
revenue driving from medical tourism is another proxy Quality indicator to look for (see
Exhibit 90 to Exhibit 92).
EXHIBIT 89: JCI accreditations in listed private hospital operators in Asia
14 13
12
12
10
8 7
6 4 4
4 3
2 2
2 1 1
0 0 0 0
0
Note: Our coverage companies are IHH, BDMS, CR Phoenix, and Bumrungrad.
Source: JCI website and Bernstein analysis.
EXHIBIT 90: The share of revenue from Exhibit 91: The share of revenue from Exhibit 92: The share of revenue from
domestic versus international patients: domestic versus international patients: domestic versus international patients:
Bumrungrad Hospital Bangkok Dusit Medical Services IHH Healthcare
9%
35% 30%
65% 70%
91%
Revenue from Medical Tourism Revenue from Medical Tourism Revenue from Medical Tourism
Domestic Revenue Domestic Revenue Domestic Revenue
Source: Corporate reports and Bernstein analysis. Source: Corporate reports and Bernstein analysis. Source: Corporate reports and Bernstein analysis.
What does medical tourism really mean in Asia? Medical tourism is an arbitrage of Quality
and/or cost of healthcare across borders. Large cost savings for similar or higher Quality
of care than is available at home are possible (see Exhibit 93 and Exhibit 94).

BERNSTEIN
EXHIBIT 93: How big is the healthcare cost arbitrage in Asia? Medical procedure cost savings normalized to pricing in top
private hospitals in the United States
0%
average cost in USA

Cost savings versus
-20% -25%
-30%
-40% -40%
-40% -45%
-50%
-40% -60%
-45% -65%
-60%
-60%
-65% -65%
-80% -75%
-80%
-100% -90%
USA Singapore Mexico Costa Rica South Thailand Taiwan Malaysia India
Korea
Source: Patients Beyond Borders, World Edition (2015), private correspondence with Patients Beyond Borders, Malaysia Healthcare Travel Council (MHTC), OECD,
and Bernstein analysis.
EXHIBIT 94: How big is the healthcare cost arbitrage in Asia? Average medical procedure costs by country
Common medical procedures - comparative 2014 average costs (USD)
Procedure US Singapore Mexico Costa Rica South Korea Thailand Taiwan Malaysia India
Coronary artery bypass graft - CABG 88,000 54,500 37,800 31,500 29,000 23,000 21,000 20,800 14,400
Valve replacement with bypass 85,000 49,000 34,000 29,000 33,000 22,000 18,000 18,500 11,900
Hip replacement 33,000 21,400 11,500 14,500 15,500 16,500 10,500 12,500 8,000
Knee replacement 34,000 19,200 12,800 9,500 15,000 11,500 12,000 12,500 7,500
Spinal fusion 41,000 27,800 22,500 17,000 18,000 16,000 18,000 17,900 9,500
IVF cycle, excluding medication 15,000 9,450 7,800 NA 7,500 6,500 4,800 7,200 3,300
Gastric bypass 18,000 13,500 13,800 11,200 12,500 12,000 13,000 8,200 6,800
4-implant porcelain dental bridge 23,000 12,000 8,500 9,500 10,500 10,500 9,500 7,800 7,200
Implant-supported dentures (upper and lower) 10,500 6,400 4,200 4,400 5,800 3,900 4,600 3,800 3,500
Full facelift 12,500 8,750 5,250 4,500 5,900 5,300 5,600 5,500 3,500
Rhinoplasty 6,200 4,750 2,800 3,400 4,700 4,300 3,500 3,600 2,800
Note: Costs vary based on location, materials and equipment used, and individual requirements. Figures are averages and reflect more common incidence of cost. All
figures are in US$. Estimates include all treatment-related costs but exclude travel and accommodation.
Source: Patients Beyond Borders, World Edition (2015), private correspondence with Patients Beyond Borders, MHTC Malaysia Healthcare, OECD, and Bernstein
analysis.
Quality of earnings and financial returns (high and expanding margins)
Asian hospitals can operate at a higher margin than U.S. peers (see Exhibit 95). One
important factor is that Asian hospitals don't face the same pricing pressure as U.S. peers,
because the mix of who is paying the bills is very different in Asia. The majority of revenue
for most Asian hospitals comes from patients paying out of pocket, for e.g., BDMS (see
Exhibit 96). However, in the United States, the majority of revenue comes from large
organized payers government and private, for e.g., HCA (see Exhibit 97). Group payers
have better negotiation power and bring pricing pressure to suppliers; whereas in Asia,
hospitals don't face the pressure from collective negotiation and can maintain a higher
margin.

BERNSTEIN
EXHIBIT 95: EBITDA margin of Asia-Pacific healthcare services companies and U.S. peers
40%
34%
35% 31%
EBITDA margin (%)
30% 26% 26% 25%

25% 22% 22% 21%
20% 20% 20%
20% 18% 17% 17% 16% 18% 17%
14% 13%
15% 11% 11% 12% 11% 10%
10% 8%
4%
5% 1%
0%
Note: Our coverage companies are Mitra Keluarga, Bangkok Chain, Aier, and Healthscope.
Fast-expanding hospitals face a trade-off between the pace of expansion and margins. In
Asia, the best Quality hospital companies can find alternative ways to maintain relatively
high margins while expanding the network by managing individual new properties tightly.
For example, IHH Healthcare Berhad, Bangkok Dusit Medical Services, and Mitra Keluarga
can turn new hospitals to EBITDA positive faster than U.S. peers. Mitra Keluarga sets their
internal target for each now hospital to break even within three months (while a global
norm is several years or longer). Some companies, such as Aier Eye Hospitals
(300015.CH, not covered), choose to incubate the newer hospitals while they mature to
profitability off the balance sheet of the listco.
EXHIBIT 96: In ASEAN, a majority of hospital revenues is EXHIBIT 97: In the United States, this looks very different:
derived from out-of-pocket payers: BDMS (64%) is a typical Only 7% of HCA revenue is from out-of-pocket payment
example
BDMS revenue mix by payor (%) HCA revenue mix by payor (%)
4% 3%
7%
8% 9%
21%
54%
64% 30%
Self-pay Private insurance

Contract Others Managed care Medicare
Social security Medicaid Self-pay
Source: Company filings and Bernstein analysis. Source: Company filings and Bernstein analysis.

BERNSTEIN
Hospital businesses are asset- and capital-intensive and face more difficult trade-offs
between growth and margins against ROIC. Many of the region's larger hospital
companies currently generate ROIC below their costs of capital. The best Quality
companies in Asia have both high margins and ROIC at least 2-3x their WACC including
Bangkok Dusit Medical Services , Bumrungrad, Mitra Keluarga, and Aier Eye Hospital.
Others including China Resources Phoenix Healthcare Group (F), Siloam International
Hospital (SILO.IJ, not covered) and KPJ Healthcare (KPJ.MK, not covered) have invested in
expanding so aggressively that both ROIC and margins suffer (see Exhibit 98). IHH can be
argued to be an in-between case the business is well-run, and turnaround of each new
hospital added to the network is efficient but it expands by building and buying flagship
locations in capital cities that are very expensive, which significantly hurts ROIC.
EXHIBIT 98: Expanding hospital companies in Asia are asset- and capital-intensive businesses and face tougher trade-offs
between margin and ROIC than do pharmaceutical companies
Hospitals: 3Y avg ROIC/WACC vs. EBITDA Margin

40%
35%
MitraKeluarga
30% Bumrungrad
TopChoice BangkokChain
EBITDA Margin (%)
25% IHH
BangkokDusit
Aier
20% Primary
Phoenix Healthscope
Sonic Differentiated offering,
15%
Ramsay wellmanagedexpansion
Apollo
KPJ
10% Siloam Sacrificemargintoo much
todriverapidexpansion?
5%
Fortis
TownHealth
0%
-0.2 0.3 0.8 1.3 1.8 2.3 2.8 3.3
3Y avg ROIC/WACC
Source: Bloomberg L.P., corporate reports and presentations, and Bernstein estimates and analysis.
Quality of management
The structural drivers of growth in demand for private healthcare services are compelling
and sustained growing middle classes, rising incomes, aging populations, and
disproportionately high burden of chronic diseases and, therefore, attract many
speculators to set up hospital businesses in Asia, particularly in China. We see
management teams of investors and managers from other industries or groups of doctors
without hospital management experience as a red flag. Running a hospital business well is
very difficult we think high-Quality hospital operators need a strong professional
management team with deep experience in hospital administration. We observe a wide

BERNSTEIN
mix of management quality in Asian hospital companies; with ASEAN companies tending
to have stronger management than Chinese peers. Exhibit 99 highlights a few examples.
EXHIBIT 99: Management profiles for some Asia-Pacific Healthcare Services companies
Source: Company filings and Bernstein analysis.
QUALITY COMPANIES TO Next, we highlight a handful of hospital companies that we believe are higher Quality
HIGHLIGHT WITHIN AND based on a combination of quant screening outputs and qualitative fundamental analysis
BEYOND OUR COVERAGE
above it (see Exhibit 67). Our top two picks in the hospital sector do appear in global quant
Quality screening approaches Bangkok Dusit Medical Services and IHH Healthcare
Berhad.
Companies mentioned in our earlier discussion of false negatives:
Mitra Keluarga
Bumrungrad Hospital
Additional companies to highlight:

BERNSTEIN
Sarana Meditama (SAME.IJ, not covered) currently operates three hospitals in the
Jakarta area, totaling around 500 beds. Management has a steady plan to build or
acquire five additional hospitals by 2018. Management is fully devoted to the
operation and has been running the hospitals at high efficiency. It has a clear
preference for greenfield expansion over acquisition.
Aier Eye Hospital (300015.CH, not covered) is not in the MSCI Index and is, thus,
excluded from both Bernstein's global quant Quality model and Bernstein's factor-
based Quality model. We have a positive view on Aier. Management wisely chooses a
niche market of combination of scalability and sophistication. Aier first invests and
incubates ophthalmology clinics in an industry-focused fund off-balance sheet,
before acquiring them when they are matured with positive cash flow. There is still
room for Aier to dive down to rural and less developed areas. Management has
demonstrated the ability to expand into new territory and manage a large network.
Wenzhou Kangning Hospital (2120.HK, not covered) manages one psychiatric

hospital in Wenzhou, Zhejiang province. The company is effectively running one site
with a few clinics. Kangning ranks high in the quant model due to fast revenue
growth in past years, high institutional holdings, and concentration on its main
business.
BEVERAGES WHAT MAKES A QUALITY TIPPLE?
INDUSTRY CONTEXT Asia-Pacific is the largest region in the global spirits industry (US$125 billion, 47% of
total retail sales value, RSV) and the second-largest region in global beer (US$194 billion,
31% of RSV) (see Exhibit 100 and Exhibit 101). Chinese baijiu alone accounts for 28% of
global spirits RSV, larger than the overall Americas spirits industry. Over the last 10 years,
Asia-Pacific has been, by far, the largest contributor to global growth, accounting for 51%
of total alcohol RSV growth between 2005 and 2015 (see Exhibit 102). We expect Asia-
Pacific to remain the key driver of global alcohol value growth over the medium term,
driven by rising consumer incomes across the region.

BERNSTEIN
EXHIBIT 100: Asia-Pacific spirits account for 47% of the EXHIBIT 101: Asia-Pacific beer accounts for 31% of the global
global spirits retail value beer retail value
Global Beer Retail Sales Value

(2015)
4% 12% Total APAC:

31%
29% 17%
38%
China APAC ex China Americas

Europe & CIS African & ME
Source: IWSR and Bernstein analysis. Source: Canadean and Bernstein analysis.
EXHIBIT 102: Asia-Pacific accounted for 51% of global value growth between 2005 and 2015
Incremental Alcohol Sales Value by Region (2005-15, US$bn)
%of 51% 30% 15% 4% 2% (3%) 100%

total
13.2 7.3 -8.4
44.9
89.2
296.3
150.1
Asia Pacific Latin America North America Eastern Europe Africa & ME Western Europe World
Source: IWSR, Euromonitor, and Bernstein estimates and analysis.
In addition to China, India and Japan are meaningful spirits markets and Japan, South
Korea, Vietnam, and Australia are scale beer markets (see Exhibit 103 and Exhibit 104).

BERNSTEIN
EXHIBIT 103: China swamps other Asia-Pacific markets in EXHIBIT 104: but in beer, the value split is more broad
terms of spirits value across the region
APAC Spirits Retail Sales Value APAC Beer Retail Sales Value
(2015) (2015)
2%
4% 2% 7%
5%
4%
2% 8%
7% 42%
9%
13%
14% 59%
2% 15%
3% 3%
China India Japan
China Baijiu China Other India Thailand South Korea Vietnam
Japan Thailand South Korea Philippines Australia New Zealand

Australia Other Other
Source: IWSR and Bernstein analysis. Source: Canadean and Bernstein analysis.
Global alcohol industry consolidation has had a relatively low impact on the Asia-Pacific
region to date. In Asia-Pacific, only 14% of spirits RSV and 27% of beer RSV are
generated by global companies compared to global averages of 28% in spirits and 45%
in beer (see Exhibit 105 and Exhibit 106). Eleven out of the top 15 largest spirits and beer
companies in the region are listed and there are 36 Asia-Pacific-listed alcohol companies
with market caps more than US$500 million (see Exhibit 107 and Exhibit 108).
EXHIBIT 105: Global distillers are underrepresented in Asia- EXHIBIT 106: and the same holds for global brewers
Pacific
Share of Global Beer Companies

(2015 Retail Sales)
Global
Average:
45%
79% 1.7x
54%
47% 45%
27%
Africa & ME Americas Western Eastern Asia Pacific

Europe Europe
Source: Company financials, and Bernstein estimates and analysis. Source: Company financials, and Bernstein estimates and analysis.

BERNSTEIN
EXHIBIT 107: Eleven out of the top 15 spirits companies in Asia-Pacific are listed
Top 15 APAC-Domiciled Spirits Companies (2014 Net Sales, US$m)
5,361
4,776
3,250 3,112
2,350
1,739
909 848 813 789 782
430 335 327 307
Note: Blue shading denotes unlisted companies (see the online version for colors).
Source: Bloomberg L.P., corporate reports, and Bernstein estimates and analysis.
EXHIBIT 108: The largest listed brewers in Asia-Pacific operate in China
Top Asia-Pacific-Domiciled Brewers (2014 Net Sales, US$m)

4,714
4,433
3,972
3,186
2,129
1,961
1,477
1,282 1,227 1,204
971 838 747 661 640
468 406 305
Note: Excludes companies majority-controlled by global brewers. Blue shading denotes unlisted companies (see the online version for colors)

BERNSTEIN
DRIVERS OF QUALITY FOR In this section, we discuss in more detail how the fundamental Quality factors listed in
BEVERAGE COMPANIES IN ASIA- Exhibit 67 can help us to identify Quality beverage companies in Asia-Pacific. We focus on
PACIFIC
the following fundamental Quality factors:
Quality of strategy, which is underpinned by:
Quality of products/services for beverage businesses focused on Premium

consumer price points, and
Attractiveness of the market structure for beverage businesses focused on

Mainstream consumer price points.
Growth of addressable market
Quality of strategy
In our view, Quality of beverage companies is focused on growing in attractive markets
where they have relevant competitive advantages that allow them to earn superior and
sustainable margins.
Spirits companies in Asia-Pacific command the highest margins globally, whereas beer
margins in the region are relatively lackluster (see Exhibit 109 and Exhibit 110). In 2015,
the baijiu market leader Moutai commanded 73% EBIT margin compared to the 7% EBIT
margin for China Resources Beer, the largest brewer in China. We prefer spirits
companies in the region for this reason.
EXHIBIT 109: Asia-Pacific spirits companies have some of the highest EBIT margins globally
80% 73%
70%
60%
50%
50%
40%38%38%
40%
29%
30%
20%
20%
12%
9%
10% 5%
1%
0%
-10%
Note: Asia-Pacific spirits listed companies are shaded green (see the online version for colors).

BERNSTEIN
EXHIBIT 110: whereas, beer EBIT margins are relatively low in the international context
45%
40%
36%
35%
32% 32%
30%
25%
20%
20% 19%
15% 15%
15% 13%
10%
10% 7% 7% 7% 6% 6% 6%
4% 4%
5%
0%
Note: Asia-Pacific beer listed companies are shaded green (see the online version for colors).
This pattern of superior margins for Asia-Pacific spirits companies translates into a
substantially higher ROIC. The weighted average3 ROIC for listed spirits companies in the
region is 20% compared to 6% for listed beer companies. The key driver of this
differential ROIC between alcohol segments comes down to the consumer price points
that the companies are targeting. In China, for example, the key spirits players focus on
the Premium, Super Premium, and Ultra Premium baijiu segments, while the brewers
focus on Mainstream beer. On a like-for-like basis (per liter of pure alcohol), the consumer
price of Ultra Premium baijiu (Moutai and Wuliangye's focus) is 16x higher than that of
Mainstream beer (China Resources Beer and Tsingtao's focus). As a result, the value chain
for most spirits companies is more attractive than for most beer companies (see
Exhibit 111).
3
Weighted average based on net sales.

BERNSTEIN
EXHIBIT 111: The value chain for high-end spirits is significantly richer than for more Mainstream products like beer; this
underpins superior margins
2015 Average Retail Value per Liter of Pure Alcohol (RMB)
3,260
2,419
1,918
917
667 671
549
254 257 343
117 136 171 200
30
FABs
Value Baijiu
Premium Beer
S. Premium Baijiu
Huangjiu
Grape Wine
Brandy
Economy Beer
Mainstream+ Beer
U. Premium Baijiu
Low Price Baijiu
Standard Baijiu
Premium Baijiu
Whisky
Mainstream Beer
Note: Asia-Pacific Beverages covered categories are shaded green. See the online version for colors.
Source: IWSR, BPC, China NBS, Nielsen, and Bernstein estimates and analysis.
Relatively few listed beer companies or Mainstream-focused spirits companies in Asia

generate ROIC in excess of their cost of capital as a result of constrained value chains and
fragmented industry structures (see Exhibit 112). Exceptions to this include ThaiBev
(THBEV.SP, underperform) (the largest spirits company in Thailand) and SABECO (not
covered) (the largest brewer in Vietnam), which deliver attractive returns as a result of
local scale advantages. A strong industry structure and scale advantage are necessary
conditions for Mainstream-focused beverage companies to generate attractive returns.
The majority of high ROIC Quality beverage companies in Asia-Pacific compete in the
Premium spirits segments. Examples of Quality spirits companies are Moutai, Wuliangye,
and Jiangsu Yanghe Brewery (002304.CN, not covered) in Chinese baijiu. These
companies are able to command sustainably high consumer prices for their core products
as a result of a clear intrinsic product differentiation, which consumers value.

BERNSTEIN
EXHIBIT 112: Mainstream-focused companies operating in fragmented industry structures generate sub-standard economic
value added (EVA)
3yearavg.ROIC/WACCvs.Sales/L
200.0
30.0 Moutai
25.0
Wuliangye
Baijiu:Highly
Sales/L(USD)
20.0 attractivevalue
chain
Mainstreamplayersw/ Fenjiu
15.0 fragmentedmarket
Yanghe
structure
10.0 Gujing Mainstreamplayers w/
Distillery attractivemarket
HiteJinro Luzhou
5.0 ThaiBev structure
Sapporo Asahi Changyu Laojiao
ZhujiangBrewery Sabeco
CRB Tsingtao Habeco
0.0 UBL
Yanjing
0.0x 0.5x 1.0x 1.5x 2.0x 2.5x 3.0x 3.5x
ROIC/WACC
Note: Kirin, United Spirits, Chongqing Beer, and Swellfun have negative three-year-average ROIC and, thus, are excluded in the chart.
Source: Bloomberg L.P., corporate reports and presentations, Haver Analytics, and Bernstein estimates and analysis.
We use Moutai, Wuliangye, and Yanghe as examples of Quality Premium spirits

companies and ThaiBev and Saigon Alcohol Beer and Beverages Corporation (SABECO) as
examples of Quality Mainstream companies in order to explore the fundamental drivers of
Quality in the remainder of this chapter.
Quality of products/services intrinsically differentiated products are necessary to sustain

price premiums and margins over time
In order for a Premium-focused strategy to be sustainable over the long term, the product
offerings must be underpinned by real intrinsic differentiation that is clearly understood
by consumers (e.g., differentiated flavors and aroma, unique production process and raw
materials, and clear geographic provenance). The process of laddering product benefits is
often referred to as "Category Strategy" by the global alcohol companies. Brands that
display unique characteristics that cannot be replicated by competitors are able to
command Premium pricing sustainably, and these companies deliver superior margins
over the long term (see Exhibit 113).

BERNSTEIN
EXHIBIT 113: By communicating a ladder of product benefits to consumers, brand owners can justify sustainably high prices
Overtly drivingpremiumization
Increasinglyintrinsicdifferentiation thatjustifiesthehigherpriceinconsumers'mind,e.g.:
CATEGORYSTRATEGY...
Unique
Distinctstyles Superiorraw Differentiated
production Productaging
andflavors materials alcoholcontent
method
Clearcategorycodessoconsumersknowwhytheyarepayingupandwhat theygetfortheextra,e.g.:
Descriptorsthatmeansomethingand Visualcuesandpackagingthat
notjustahollow"Premium" communicatesproductbenefits
In our view, Chinese baijiu is the most intrinsically differentiated beverage category in the
world. It is the only major alcohol type that is produced via solid-state fermentation (as
opposed to the liquid-state fermentation process used for almost all other alcohol types)
and the category is segmented into different aromas, which are as distinct from one
another as Scotch is from Tequila or Rum (see Exhibit 114).
EXHIBIT 114: The four main baijiu aromas are highly differentiated
Jiang Xiang Nong Xiang Qing Xiang Mi Xiang

(Sauce Aroma) (Strong Aroma) (Light Aroma) (Rice Aroma)
Flavor intensity Higher.....................................................Lower

Full fiery flavor
Bold, savory Crisp, light flavor
(think Tequilla) Mild and floral
Tasting note flavor, soy sauce like high alcohol
with nutty sweetness
fragrance Sake or Shochu
sweetness
Sorghum & rice
Key ingredients Sorghum only Multiple grains Rice
bran
Fermentation Stone lined pits Mud pits Clay pots Earthenware jars
Shanxi and North Guangxi,
Key province Guizhou Sichuan
China Guangdong
Wuliangye,
Fenjiu,
Luzhou Lao Jiao, Guilin Sanhua,
Key producers Moutai Niulanshan
Yanghe, Kiukiang
Erguotou
Shuijingfang
Consumer Aroma 29% 33% 38% 18%
preference
Source: Bernstein 2016 China Alcohol Consumer Usage and Attitudes survey and Bernstein analysis.
The level of intrinsic product differentiation in baijiu escalates as the consumer price point
increases (see Exhibit 115). Low-end and value baijius (91% of industry volumes) are
normally made of industrially produced alcohol with added flavors and are packaged in
basic containers. These products command low consumer prices and generate low

BERNSTEIN
margins. Ultra Premium baijius at the other end of the spectrum (0.2% of industry
volumes) are often produced in heritage cellars that can be 600+ years old, contain
significant amounts of aged liquors that add character, smoothness, complexity, and
balance to the aroma and flavor and are presented in elaborate and appealing packaging
(see Exhibit 116). Ultra Premium baijiu companies can command EBIT margins of
c.40-70%.
EXHIBIT 115: Intrinsic differentiation and product benefits ladder up across the baijiu process spectrum and justify higher
price points
Source: IWSR, corporate reports and websites, and Bernstein estimates and analysis.
Moutai and Wuliangye are by far the most well-known Ultra Premium baijiu brands and are
two of the highest-Quality alcohol companies in the region. In the 2016 Bernstein
Chinese Alcohol Consumer Usage and Attitudes survey, Moutai and Wuliangye recorded
national Spontaneous Awareness scores more than 2x the next brand. This reflects their
unique product characteristics, sustainable competitive advantages, and, in our view,
places them among the highest-Quality beverage companies in the region.
Yanghe is another high-Quality baijiu company. While the Yanghe brand scores lower in
terms of national Spontaneous Awareness than the likes of Moutai and Wuliangye, it has a
strong following at the regional level. In its home province of Jiangsu, Yanghe has a
Spontaneous Awareness score of 45% compared to its national score of 11% (see
Exhibit 117 and Exhibit 118). The Yanghe products do not have the same heritage as
Moutai and Wuliangye, but they are clearly differentiated in terms of standout blue
packaging, unique bottle shape, and a more modern and active approach to consumer
marketing. Yanghe mainly competes at Standard and Premium consumer price points,
where its offerings have strong brand equity compared to Moutai and Wuliangye's brands
at the same price points. Yanghe's Ocean Blue brand achieved a higher brand equity
score than the key competitors in the Premium segment (see Exhibit 119 to
Exhibit 121).

BERNSTEIN
EXHIBIT 116: Yanghe's Premium brand, Ocean Blue, is differentiated from competitor products by its unique packaging
Source: Company websites, Jiuxian.com, and Bernstein analysis.
EXHIBIT 117: Moutai and Wuliangye are by far the strongest EXHIBIT 118: Yanghe has strong awareness in its home
brands in consumers' minds at the national level province of Jiangsu
Spontaneous Awareness Yanghe Brand Spontaneous

(all alcohol consumers) Awareness by Province
70% 45%
60%
28%
26% 24%
23% 22% 20%
20% 20% 19% 19%
27%
21% 19%
16% 14%
13% 11%
Source: Bernstein 2016 China Alcohol Consumer Usage and Attitudes survey. Source: Bernstein 2016 China Alcohol Consumer Usage and Attitudes survey.

BERNSTEIN
EXHIBIT 119: Moutai and Wuliangye are EXHIBIT 120: Yanghe and Luzhou Lao EXHIBIT 121: Luzhou LaoJiao has the
the strongest Ultra Premium brands Jiao are the strongest Premium brands strongest Standard brand
Super & Ultra Premium Baijiu Premium Baijiu Brand Equity Standard Baijiu Brand Equity
Brand Equity
110
112 103 104 102 98
97 90
91
97
96
Moutai Wuliangye Luzhou Laojiao

Moutai Wuliangye Luzhou Laojiao Yanghe Moutai Wuliangye Luzhou Laojiao Yanghe
Note: Scores are indexed as average score = 100; Note: Scores are indexed as average score = 100; Note: Scores are indexed as average score = 100;
brands for Super and Ultra Premium segments are: brands for the Premium segment are: Wangzi of brands for the Standard segment are: Yingbin of
Fetien of Moutai, Wuliangye, and Guojiao 1573 of Moutai, Wuliangchun (250) of Wuliangye, Tequ of Moutai, Wuliangchun (60) of Wuliangye, Touqu of
Luzhou Laojiao; Yanghe doesn't have a Super or Luzhou Laojiao, and Ocean Blue of Yanghe. Luzhou Laojiao, and Daqu of Yanghe.
Ultra Premium offering.
Source: Bernstein 2016 China Alcohol Consumer Source: Bernstein 2016 China Alcohol Consumer
Source: Bernstein 2016 China Alcohol Consumer Usage and Attitudes survey. Usage and Attitudes survey.
Usage and Attitudes survey.
Attractiveness of market structure: Market consolidation and scale advantage are

necessary conditions for a profitable Mainstream-focused strategy
In Mainstream beverage segments, the value chains are constrained by relatively low
consumer prices. This means that a lean cost structure and an ability to leverage fixed
costs across large volumes are necessary conditions in order to generate attractive
margins. Exhibit 122 compares industry EBIT margins versus market concentration
(measured by the Hirschman Herfindahl Index) for 41 beer industries around the world.
Firstly, as displayed by the red (big) circle in Exhibit 122, there are no examples of
fragmented beer industries with high margins. Secondly, there is a clear relationship
between higher industry concentration and higher industry margins.
Highly concentrated alcoholic beverage industries in Asia-Pacific include the Philippines,

Australia, South Korea, Vietnam, Thailand, and India in beer and Thailand in Mainstream
spirits.
Companies operating in consolidated Mainstream markets with high relative market

shares command higher margins than their smaller competitors. In more fragmented
Mainstream alcohol markets, such as Chinese beer, Indian beer, and Indian spirits,
margins are lower.

BERNSTEIN
EXHIBIT 122: Scale and market concentration are necessary conditions for a profitable Mainstream strategy
Beer EBIT Margin % vs Market Concentration for 41 Markets (2014)

45
HighlyConcentratedMarket>1,800HHI
40 Philippines
35
No
30 countries Australia
EBIT margin %
25
here
SouthKorea
20 Vietnam
Japan
15
Thailand
10
5 China'15 India
China'10
China'12
-
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000
Market Concentration (HHI)
Source: Plato, Canadean, and Bernstein estimates and analysis.
EXHIBIT 123: Market leaders with high market shares relative to the #2 players generate superior margins in Mainstream
beverages
Monopolymarkets Duopoly markets Competitivemarkets

#1EBITmargin 50% 47% 36% 30% 15% 21%(1) 20% 13% 12% 10% 9% 7%
#ofMajorPlayers 1 1 2 2 2 4 3 4 4 3 5 5
3.5x
10.0x
ThaiBev SanMiguel
5.0x
3.0x
(Relativemarketshares:#1vs.#2)
UnitedSpirits
2.5x UnitedBrewery
HiteJinro
BoonRawd
2.0x Emperador
Oriental CRB
CUB Brewery Sabeco
1.5x (ProForma) Asahi
1.0x
0.5x
0.0x
Thailand Philippine Australia South Thailand Japan Philippine Vietnam South India Beer India China Beer
Spirits Beer Beer Korea Beer Beer Spirits Beer Korea Spirits
Beer Spirits
Note: (1) Asahi margins reflect full malt beer focus; (2) relative market share is defined as #1 player's market share divided by #2 player's market share.
Source: IWSR, Canadean, and Bernstein estimates and analysis.

BERNSTEIN
ThaiBev (spirits) is the only listed Mainstream beverage player in Asia-Pacific that has
been able to translate its spirits clear scale advantage into attractive margins. The
remaining four players in monopoly or duopoly markets identified in Exhibit 123 are
owned by either global beverage companies (CUB in Australia beer and Oriental
Breweries in South Korea beer) or local conglomerates (San Miguel beer in the Philippines
and Boon Rawd in Thailand beer). Other listed Mainstream-focused beverage companies
in Asia-Pacific generate low margins with the exception of Asahi and Emperador, but
these companies generate ROIC below WACC (see Exhibit 112).
ThaiBev is the largest beverage company in Thailand and its profitability is driven by
Mainstream spirits, which accounted for 83% of net profit (excluding associates) in 2015.
In spirits, it commands an 87% volume market share which affords it strong leverage with
distributors and retailers. It has an unparalleled production footprint with 18 distilleries
compared to the next-largest competitor with only one (see Exhibit 124 and Exhibit 125).
This comprehensive production grid results in a low cost-to-serve that cannot be
replicated at the product price point. We like ThaiBev's current strategy, which focuses on
spirits and, to a growing extent, beer. However, its Vision 2020 strategy is targeting a
pivot to non-alcoholic beverages which we expect to dilute its ROIC and may bring its
Quality status into question.
EXHIBIT 124: ThaiBev is clearly the national leader in spirits EXHIBIT 125: ThaiBev has an unparalleled spirits production
footprint in Thailand
Spirits Industry
Volume and Value Share (2015)
1% 9% 8%
1% 2%
2% 4%
7%
87%
79%
Volume Value
ThaiBev Diageo
United Wine & Distillers Pernod Ricard
Other
Source: IWSR, corporate reports, and Bernstein estimates and analysis. Source: Company websites and presentations, and Bernstein analysis.
SABECO is the largest brewer in Vietnam with a 38% national market share (see Exhibit
126), which is 1.7x the next-largest player, Heineken. The company's stronghold is the
south of Vietnam where it has a c.44% share and is c.2.2x the size of Heineken. SABECO's
strong Saigon Red, 333, and Saigon Special brands dominate the Mainstream segment
and, given its scale, they are must-stock brands for distributers and retailers. In our view,
this scale advantage is sustainable and is the key driver of SABECO's attractive margins

BERNSTEIN
(13% EBIT margin) and sustained high ROIC (c.34% average in 2013-15). SABECO is
89.6% state-owned and is expected to IPO in either late 2016 or early 2017.
EXHIBIT 126: SABECO is the largest brewer in Vietnam with a 38% market share
Vietnam Beer Market Share (2015)
Others
14%
Carlsberg
8% SABECO
38%
HABECO
17%
Heineken
23%
Source: Canadean, and Bernstein estimates and analysis.
Size and growth of addressable market

A strong outlook for consumer demand enables beverage companies to sustain or
enhance margins either by increasing prices or increasing sales volumes and leveraging
fixed costs. In our view, the highest-Quality companies are focused on growing price
points and geographies.
Based on the proprietary Bernstein Global Spirits Affordability Model, we forecast strong
volume growth for Premium and above Chinese baijiu with a 11-15% volume CAGR
through 2020 compared to the overall industry 0.7% CAGR. We expect these growth
dynamics to underpin the Quality baijiu names, including Moutai, Wuliangye, and Yanghe.
Based on our Global beer Affordability Model, we forecast strong growth of Premium
Chinese beer with an 8% CAGR through 2020 compared to overall industry growth of 2%
in the same period, rapid growth across beer price points in Vietnam, and more modest
growth in other countries. Despite the attractive Premium beer growth dynamics in China,
we do not expect this to translate into meaningful margin enhancement in the short to
medium term. In Vietnam, we expect attractive growth to enhance margins and ROIC for
SABECO and Hanoi Beer Alcohol and Beverage Joint Stock Corp (HABECO) in beer.
Our Global Beer and Spirits Affordability models are based on the insight that demand for
a given price point of spirits or beer increases when it takes less than 30 minutes of work
to earn enough money to afford a standard serving. Exhibit 127 and Exhibit 128 show this
relationship for spirits and Exhibit 129 and Exhibit 130 illustrates this for beer. On
average, Standard spirits are already highly affordable in all of the major Asia-Pacific

BERNSTEIN
countries and, hence, we forecast lackluster growth for the segment. Mainstream beer,
Premium spirits, and Premium beer, however, are currently unaffordable to the average
person in many emerging Asian countries (and we expect rising incomes to drive the
growth of these segments).
EXHIBIT 127: Standard spirits are affordable in China and EXHIBIT 128: but Premium spirits are unaffordable for the
major Asia-Pacific countries average person and we expect Premium to grow as
affordability increases
Standard Spirits Affordability Premium Spirits Affordability

90 countries 2000-2014 89 countries 1999-2014
1
7
0.9
THA 30 minutes threshold
6 0.8
Per Capita Consumption(L)

Per Capita Consumption (L)
30 minutes threshold
0.7
5
0.6
4 0.5
0.4
3
0.3 KOR
2 0.2 JPN
0.1 THA
1 PHL
CHN 0
JPN CHN
0 15 30 45 60 75 90 105 120
0 KOR PHL IND
- 15 30 45 60 75 90 105 120 Minutes of work to earn a standard serving
Minutes of work to earn 40 mililiters of spirits
Note: (1) A standard serving is 40ml of spirits (30ml for China); (2) we include Note: (1) A standard serving is 40ml of spirits (30ml for China); (2) India is
Standard and below segments of Thai Spirits in the calculation to reflect the fact 341 mins/0.0 L and is off the chart.
that low-price spirits is the Mainstream segment in Thailand.
Source: IWSR, the United Nations, and Bernstein estimates and analysis.
Source: IWSR, the United Nations, and Bernstein estimates and analysis.

BERNSTEIN
EXHIBIT 129: Mainstream beer is not affordable yet in most EXHIBIT 130: Similarly, Premium beer is only affordable in
Asia-Pacific countries Japan so far
Mainstream Beer Affordability Premium Beer Affordability

75 Countries, 1999-2014 69 Countries, 1999-2014
120 50
45
30 minutes threshold 30 minute threshold
100 40
Per capita consumption (L)
Per capita consumption (L)

35
80
30
60 25
20
THA
40 15
CHN VNM
10
20 KOR KOR VNM
PHL 5 JPN
JPN THA PHL IND
- IND - CHN
- 15 30 45 60 75 90 105 120 135 150 165 180 - 15 30 45 60 75 90 105 120 135 150 165 180 195 210 225 240 255
Minutes of work to earn a bottle (500ml) Minutes of work to earn a bottle (500ml)
Source: Canadean, UN, Nielsen, Canback, and Bernstein estimates and Source: Canadean, UN, Nielsen, Canback, and Bernstein estimates and
analysis. analysis.
HIGHEST-QUALITY COMPANIES Next, we highlight a handful of alcoholic beverage companies that we believe are higher
WITHIN AND BEYOND OUR Quality based on a combination of quant screening outputs and qualitative fundamental
COVERAGE
analysis.
Quality companies mentioned in the earlier discussion of false negatives:
Kweichou Moutai
Yibin Wuliangye
Additional Quality Chinese baijiu companies (non-exhaustive):

Jiangsu Yanghe Brewery (002304.CN, not covered). Yanghe ranks very favorably (top
quintile) in Bernstein's global quant Quality model but was knocked out in Bernstein's
factor-based Quality screening tool (which screens only the top 300 stocks in the
MSCI ACWI Asia ex-Japan). Yanghe is the third-largest Chinese baijiu company with a
focus on its home Jiangsu province. After launching its "Blue Classic" brand in 2003,
the company has been growing its top line rapidly at a 37% CAGR during 2005-15,
incentivized by its management's shareholding (22% ownership by management).
Shanxi Xinghuacun Fen Wine (600809.CN, not covered). Fen Wine is not included
either in the top Quality quintile in Bernstein's global quant Quality model or in
stocks in the MSCI ACWI Asia ex-Japan). The company generates a ROIC of 12% and
has an EBIT margin of 18%. Fen Wine was designated one of the four National
baijius in China during the First National Tasting in 1952. Based in Shanxi, the
company has more than one century of baijiu production history and is now the
leading baijiu player in its home province with a focus on the mid- to high-end baijiu.

BERNSTEIN
Yantai Changyu Pioneer Wine (200869.CN, not covered). Changyu is not included
has an EBIT margin of 29%. Changyu is a leading alcoholic beverages company in
China, mainly producing and selling locally produced grape wine and brandy
products. The company has one of the highest consumer awareness among
domestic grape wine brands and owns extensive distribution networks nationally.
Anhui Gujing Distillery Company (200596.CN, not covered). Gujing Distillery is not
included either in the top Quality quintile in Bernstein's global quant Quality model or
in Bernstein's factor-based Quality screening tool (which screens only the top 300
has an EBIT margin of 16%. Gujing Distillery is a leading baijiu company and is one of
the eight National baijius in China with a strong presence in its home Anhui province.
Its signature baijiu Gujinggong has a strong aroma (Nong Xiang) which is the same
aroma as Wuliangye.
Non-China Quality alcoholic beverage companies (non-exhaustive):

Saigon beer-Alcoholic Beverages Corporation (SABECO) (non-public, not covered).
Sabeco is expected to IPO in 1Q2017, so is not included either in the top Quality
quintile in Bernstein's global quant Quality model or in Bernstein's factor-based
Quality screening tool. As the largest beer company in Vietnam with c.38% market
share (1.7x the second-largest player Heineken), Sabeco enjoyed rapid growth
over the past few years, driven by a large population of young people and rising
income levels. SABECO's strong Saigon Red, 333, and Saigon Special brands
dominate the Mainstream segment and, given their scale, they are must-own stock
brands for distributers and retailers. In our view, this scale advantage is sustainable
and is the key driver of SABECO's attractive margins (13% EBIT margin) and high
ROIC (c.34% average in 2013-15).
Thai Beverage Public Company (THBEV.SP, underperform). ThaiBev is not included

has an EBIT margin of 25%. ThaiBev is Thailand's largest alcoholic beverages
company with an 87% market share in spirits and a 40% market share in beer.
ThaiBev's extensive spirits production footprint and distribution networks create a
very high entry barrier for potential rivals and, as a result, the spirits division
generates a sustained 50% EBIT margin. However, the company's current focus on
the attractive spirits and beer industries may be in jeopardy given its Vision 2020
strategy to derive more than 50% of revenues from non-alcoholic drinks by 2020.

BERNSTEIN
WHERE TO INVEST? RESULTS FROM OUR REVISED

QUALITY-IN-ASIA QUANT SCREENINGHAPPY HUNTING
Based on our above analysis of what differentiates quality companies in emerging Asia
(and where and how that is different than in developed markets), we attempted to
translate our seven dimensions of Quality (see Exhibit 67) into a Bloomberg-based quant
screening tool that screens for eight Quality parameters as proxies across 12 markets in
Asia, evaluating all companies with a market cap above US$500 million. Exhibit 131
summarizes the parameters and markets we screened.
Exhibit 132 and Exhibit 133 summarize the results (companies scoring in the top and
bottom Quality quintiles) for the three sectors we have mainly focused on in this chapter
Asia-Pacific Beverages, Healthcare Services, and Pharmaceuticals. We will publish the
results of a broader screen across all sectors in a future report.
These results are not an absolute snapshot of Quality (i.e., they may still contain some red
herrings), but we believe they provide a better shortlist by which we can begin a targeted
and an efficient layer of fundamental analysis to look into the other dimensions of Quality,
which can only be assessed by fundamental analysis.
EXHIBIT 131: Quality factors and markets considered

Revised Asia quality parameters Markets Size
(score based on at least 7 of 8 factors)
Net sales growth CAGR (2014-18E) Hong Kong Thailand market cap
above
Increasing net income margin (2014-18E) Shenzhen Vietnam USD 500 M
3-yr average R&D spend to net sales (2012-15) Shanghai Philippines
3-yr average % of income from asc income (2012-15) India Singapore
3-yr historical average ROIC / WACC (2012-15) Malaysia South Korea
3-yr historical average free cash flow yield (2012-15) Indonesia Japan
3-yr average net debt to assets (2012-15)
% of institutional ownership
Note: Estimates are taken from Bloomberg L.P.

BERNSTEIN
EXHIBIT 132: Results: Companies scoring in the top two Quality quintiles Asia-Pacific pharmaceuticals
Market Cap
Ticker Company (USD M) Quintile Ranks
600519 CH Equity Kweichow Moutai Co Ltd 58,487 1
HEIM MK Equity Heineken Malaysia Bhd 1,230 1
600809 CH Equity Shanxi Xinghuacun Fen Wine Factory Co Ltd 2,926 1
200596 CH Equity Anhui Gujing Distillery Co Ltd 3,123 1
603369 CH Equity Jiangsu King's Luck Brewery JSC Ltd 2,442 1
600197 CH Equity Xinjiang Yilite Industry Co Ltd 972 1
000568 CH Equity Luzhou Laojiao Co Ltd 7,078 1
000858 CH Equity Wuliangye Yibin Co Ltd 19,244 1
600779 CH Equity Sichuan Swellfun Co Ltd 1,232 2
000799 CH Equity JiuGui Liquor Co Ltd 1,041 2
FNH MK Equity Fraser & Neave Holdings Bhd 2,121 2
002646 CH Equity Qinghai Huzhu Barley Wine Co Ltd 1,310 2
002304 CH Equity Jiangsu Yanghe Brewery Joint-Stock Co Ltd 15,195 2
2593 JP Equity Ito En Ltd 3,245 3
200869 CH Equity Yantai Changyu Pioneer Wine Co Ltd 3,148 2
000080 KS Equity Hite Jinro Co Ltd 1,300 3
CAB MK Equity Carlsberg Brewery Malaysia Bhd 1,048 2
TWE AU Equity Treasury Wines 5,917 2
603919 CH Equity Jinhui Liquor Co Ltd 1,444 2
033920 KS Equity Muhak Co Ltd 574 3
THBEV SP Equity Thai Beverage PCL 17,125 3
2579 JP Equity Coca-Cola West Co Ltd 3,332 3
600199 CH Equity Anhui Golden Seed Winery Co Ltd 811 3
Note: Highlighted stocks are covered by Bernstein.
EXHIBIT 133: Results: Companies scoring in the top two Quality quintiles Asia-Pacific healthcare services
Market Cap
300015 CH Equity Aier Eye Hospital Group Co Ltd 5,042 1
MIKA IJ Equity Mitra Keluarga Karyasehat Tbk PT 3,034 1
600763 CH Equity Topchoice Medical Investment Corp 1,572 1
1515 HK Equity Phoenix Healthcare Group Co Ltd 2,043 1
SILO IJ Equity Siloam International Hospitals Tbk PT 859 1
4694 JP Equity BML Inc 1,153 1
2120 HK Equity Wehzhou Kangning Psychiatric 361 1
BH TB Equity Bumrungrad Hospital PCL 3,779 1
4544 JP Equity Miraca Holdings Inc 2,740 2
1509 HK Equity Harmonicare 488 2
RHC AU Equity Ramsay 10,950 2
1099 HK Equity Sinopharm Group Co Ltd 12,933 2
RFMD SP Equity Raffles Medical Group Ltd 1,885 2
9729 JP Equity Tokai Corp/Gifu 605 2
300244 CH Equity Zhejiang Dian Diagnostics Co Ltd 2,648 2
000963 CH Equity Huadong Medicine Co Ltd 5,335 2

BERNSTEIN
EXHIBIT 134: Results: Companies scoring in the top two Quality quintiles Asia-Pacific beverages
Market Cap
600519 CH Equity Kweichow Moutai Co Ltd 58,487 1
HEIM MK Equity Heineken Malaysia Bhd 1,230 1
600809 CH Equity Shanxi Xinghuacun Fen Wine Factory Co Ltd 2,926 1
200596 CH Equity Anhui Gujing Distillery Co Ltd 3,123 1
603369 CH Equity Jiangsu King's Luck Brewery JSC Ltd 2,442 1
600197 CH Equity Xinjiang Yilite Industry Co Ltd 972 1
000568 CH Equity Luzhou Laojiao Co Ltd 7,078 1
000858 CH Equity Wuliangye Yibin Co Ltd 19,244 1
600779 CH Equity Sichuan Swellfun Co Ltd 1,232 2
000799 CH Equity JiuGui Liquor Co Ltd 1,041 2
FNH MK Equity Fraser & Neave Holdings Bhd 2,121 2
002646 CH Equity Qinghai Huzhu Barley Wine Co Ltd 1,310 2
002304 CH Equity Jiangsu Yanghe Brewery Joint-Stock Co Ltd 15,195 2
2593 JP Equity Ito En Ltd 3,245 3
200869 CH Equity Yantai Changyu Pioneer Wine Co Ltd 3,148 2
000080 KS Equity Hite Jinro Co Ltd 1,300 3
CAB MK Equity Carlsberg Brewery Malaysia Bhd 1,048 2
TWE AU Equity Treasury Wines 5,917 2
603919 CH Equity Jinhui Liquor Co Ltd 1,444 2
033920 KS Equity Muhak Co Ltd 574 3
THBEV SP Equity Thai Beverage PCL 17,125 3
2579 JP Equity Coca-Cola West Co Ltd 3,332 3
600199 CH Equity Anhui Golden Seed Winery Co Ltd 811 3
INVESTMENT IMPLICATIONS
ASIA-PACIFIC We rate two stocks outperform: Jiangsu Hengrui Medicine Company (12-month target
PHARMACEUTICALS price RMB57.0) and CSPC Pharmaceutical (12-month target price HKD8.6). We rate
three stocks market-perform (two pharmaceuticals and one hospital company): Sino
Biopharmaceutical (1177.HK, 12-month target price, HKD5.8), Sihuan Pharmaceutical
(460.HK, 12-month target price HKD1.8), and Kalbe Farma (KLBF.IJ, 12-month target
price IDR1,460). More broadly, we like companies with strong management teams which
have experience in managing multinational companies; deeper and more patient-focused
R&D; a wide portfolio of in-line products; products sold outside of the home market,
including in developed markets; and better clarity on growth strategy.
ASIA-PACIFIC HEALTHCARE We rate two stocks outperform: Bangkok Dusit Medical Services (BDMS.TB, 12-month
SERVICES target price THB28.2) and IHH Healthcare Berhad (IHH.MK, 12-month target price
MYR7.5). We rate two stocks market-perform: China Resources Phoenix Healthcare
Group (1515.HK, 12-month target price HKD11.0), and Bumrungrad Hospital (BH.TB,
12-month target price THB184.0). More broadly, we like companies with strong
management teams which have deep experience in running hospitals; wide service

BERNSTEIN
offerings and a strategic footprint; clinical services and outcomes that are genuinely
approaching (or striving to reach) global standards; and better clarity on growth strategy.
ASIA-PACIFIC BEVERAGES We rate two stocks outperform (both baijiu spirits companies): Wuliangye Yibin
(000858.CH, 12-month target price RMB57.3) and Kweichou Moutai (600519.CH,
12-month target price RMB410.9). We rate four stocks underperform: China Resources
Beer (291.HK, 12-month target price HKD12.3), Tsingtao (168.HK, 12-month target
price HKD25.0/600600.CH, 12-month target price RMB22.0), ThaiBev (THBEV.SP, 12-
month target price SGD0.78), and Kirin Holdings (2503.JP, 12-month target price was
raised to JPY1,423 on November 24, 2016). We rate one stock market-perform: Asahi
(2502.JP, 12-month target price JPY3,515.1). More broadly, we like Premium-focused
companies with intrinsically differentiated brands; Mainstream-focused companies with
scale advantage; management teams which are pursuing profit enhancement, and
markets with attractive value growth prospects.

BERNSTEIN
EXHIBIT 135: Valuation table: Asia-Pacific pharmaceuticals

20161117 Rel.Perf. Price Market 12Mavgtrading EPSCAGR EV/EBITDA P/E PEGRatio Div FCF
ticker 30D YTD LTM Market Value($m) Volume(USD) 1417E 2015 2016E 2015 2016E 2015 2016E Yield(% Yield(%)
BERNSTEINcoverage(ourestimates)
KalbeFarma KLBFIJ 15.9% 10.6% 8.1% 1,460 5,109
JiangsuHengrui 600276CH 2.2% 11.9% 6.4% 45.8 15,658
SihuanPharma 460HK 10.3% 56.1% 56.3% 1.9 2,479
SinoBiopharm 1177HK 6.9% 23.9% 18.6% 5.4 5,131
CSPCPharma 1093HK 2.6% 0.5% 13.6% 8.0 6,211
BERNSTEINcoverage(consensus)
JiangsuHengrui 600276CH 2.2% 11.9% 6.4% 46 15,658 39,923,171 25% 38.9x 31.5x 49.3x 38.7x 1.54 1.23 1.68
KalbeFarma KLBFIJ 15.9% 10.6% 8.1% 1,460.0 5,109 4,881,745 13% 22.1x 19.5x 34.2x 29.9x 2.43 2.15 2.15
CSPCPharma 1093HK 2.6% 0.5% 13.6% 8.0 6,211 11,658,111 21% 17.1x 14.8x 28.0x 22.8x 0.87 0.72 1.38
SinoBiopharm 1177HK 6.9% 23.9% 18.6% 5.4 5,131 15,710,341 12% 11.9x 10.5x 21.7x 19.5x 0.93 0.82 0.96
SihuanPharma 460HK 10.3% 56.1% 56.3% 1.9 2,479 15,431,075 3% 4.4x 5.8x 8.9x 8.9x 3.47
Chinabiopharma(consensus)
Sinopharm 1099HK 8.2% 11.9% 6.6% 34.8 12,414 17,957,803 17% 10.5x 9.4x 23.0x 18.5x 0.92 0.81 1.33 12.42
YunnanBaiyao 000538CH 4.7% 3.6% 36,506,102 11%
ShanghaiPharm 2607HK 6.7% 15.4% 9.9% 19.4 7,591 4,327,985 12% 13.0x 11.6x 16.1x 14.4x 1.37 1.23 0.97
ShanghaiFosunPharma 2196HK 1.9% 6.7% 2.8% 24.0 8,242 5,256,154 18% 29.7x 26.5x 22.2x 17.6x 1.14 0.99 0.41
Tasly 600535CH 8.9% 1.4% 5.2% 40.3 6,345 28,239,400 9% 19.4x 20.6x 28.1x 28.2x 0.13
GuangzhouBaiyunshan 874HK 1.8% 14.5% 9.6% 18.8 5,720 2,395,322 5% 17.0x 19.0x 16.5x 16.3x 0.00 8.68
ShandongDongEEJiao 000423CH 2.9% 14.5% 20.2% 59.9 5,702 71,394,364 13% 19.5x 17.4x 23.9x 21.7x 1.68
Huadong 000963CH 5.0% 10.5% 5.1% 73.4 5,192 26,351,493 18% 19.2x 16.3x 28.2x 25.4x 1.93
TonghuaDongbao 600867CH 0.6% 3.0% 7.6% 23.3 4,827 21,214,331 29% 50.5x 37.8x 67.4x 52.1x 0.40
CMS 867HK 0.0% 11.2% 20.0% 12.7 4,072 6,136,546 23% 25.8x 18.5x 26.8x 20.8x 0.86 0.71 1.65 3.76
SichuanKelun 002422CH 5.0% 6.3% 2.7% 17.4 3,652 17,387,677 35.6x 1.09
ShandongWeigao 1066HK 1.2% 3.6% 12.6% 5.1 2,966 3,497,515 9% 11.0x 10.7x 17.0x 17.8x 1.45
Livzon 1513HK 0.4% 23.3% 30.3% 46.0 3,209 770,520 19% 19.7x 15.9x 25.9x 21.9x 1.23 2.56
3SBio 1530HK 2.1% 27.8% 14.1% 7.9 2,563 7,383,733 25% 29.7x 18.5x 28.6x 24.2x 0.00 2.56
Luye 2186HK 6.6% 38.4% 30.0% 5.0 2,136 6,015,223 13% 12.7x 12.2x 18.1x 16.5x 0.67 0.58 0.00 1.88
ChiMed HCMUS 5.0% 11.4% 11.4% 12.0 1,451 774,349
Beigene BGNEUS 13.4% 53.8% 53.8% 36.9 1,219 3,007,266 118% 0.00
Bloomage 963HK 5.8% 35.4% 24.2% 12.4 580 1,262,613 18% 16.1x 11.8x 19.3x 17.9x 0.25 4.24
Lee'sPharma 950HK 2.2% 27.8% 28.2% 7.0 532 494,034 6% 11.5x 12.4x 17.1x 17.6x 1.53
FudanZhangjiang 1249HK 5.5% 12.4% 7.8% 4.4 141 38,778 0.00
Taiwan(censensus)
OBI 4174TT 19.9% 58.2% 47.0% 274.0 1,473 17,735,706 23% 1.23
ScinoPharm 1789TT 7.3% 26.5% 24.1% 38.0 906 3,645,852 24% 24.6x 19.6x 46.2x 38.5x 3.25
PharmaEngine 4162TT 9.6% 2.8% 18.3% 206.0 791 11,617,152 21% 35.6x 22.5x 36.7x 25.3x 0.24
TaiGen 4157TT 4.1% 12.7% 4.6% 29.5 662 1,825,893 32.6x 1.73
SyneuRx 6575TT 14.2% 60.5% 60.5% 103.0 331 1,548,649
TheVax 6567TT 16.2% 35.4% 35.4% 106.0 297 114,217 3.30
Medigen 3176TT 2.1% 24.8% 26.1% 64.3 280 1,912,190 3.24
TaiwanLiposome 4152TT 3.5% 15.9% 4.6% 124.0 217 261,552 4% 8.33
Koreabiopharma(consensus)
Celltrion 068270KS 4.7% 23.9% 25.3% 104,700 10,378 81,575,900 54% 37.5x 35.3x 100.8x 63.1x 0.84
HanmiPharma 128940KS 5.9% 47.2% 48.1% 384,500 3,411 62,484,847 149% 22.4x 26.2x 524.0x 40.0x 7.49
Yuhan 000100KS 16.8% 21.8% 30.4% 213,000 2,019 9,873,880 1% 17.0x 15.8x 18.6x 18.9x
GreenCross 006280KS 1.3% 14.5% 18.5% 156,500 1,555 8,916,027 10% 15.0x 17.4x 17.0x 31.5x 4.18
ViroMed 084990KS 3.2% 47.5% 48.0% 94,300 1,280 21,935,929 33% 5,388.6x
SKChemical 006120KS 0.5% 13.9% 7.1% 62,400 1,290 8,865,180 35% 21.1x 13.4x 30.0x 12.7x 30.39
LGLifeScience 068870KS 0.2% 0.3% 7.6% 60,800 857 9,533,633 41% 21.0x 15.5x 75.3x 34.9x 2.09
Bukwang 003000KS 4.2% 2.6% 10.2% 26,100 829 10,587,244 1.06
MedyTox 096530KS 4.5% 13.5% 7.7% 32,800 732 6,927,072 32% 57.5x 34.1x 105.6x 114.4x 0.31
ChongKunDang 185750KS 14.4% 11.9% 28.7% 107,500 860 14,110,523 4.89
Genexine 095700KS 3.4% 8.6% 4.3% 42,900 649 4,139,367 0.00 0.72
Binex 053030KS 15.3% 9.3% 12.4% 17,700 471 10,439,523
Medipost 078160KS 13.2% 38.3% 43.8% 59,700 399 7,516,787 1.11
Indiabiopharma(consensus)
Sun SUNPIN 7.4% 17.1% 9.7% 680 24,081 44,941,788 5% 19.8x 18.7x 22.6x 30.2x 1.14 1.00 0.15 2.07
Lupin LPCIN 1.5% 22.4% 20.8% 1,426 9,466 35,079,383 12% 18.3x 19.8x 26.4x 29.2x 1.22 1.06 0.53 9.63
Dr.Reddy's DRRDIN 6.0% 3.3% 6.7% 3,211 7,837 22,243,941 2% 16.4x 14.2x 23.9x 21.6x 2.24 1.47 0.62
Cipla CIPLAIN 7.0% 16.1% 14.2% 546 6,455 15,082,038 16% 21.0x 16.1x 33.5x 24.6x 2.01 1.54 0.37 1.29
Aurobindo ARBPIN 11.6% 18.3% 13.9% 716 6,169 25,548,509 22% 17.4x 14.1x 26.0x 20.8x 0.90 0.75 0.35 0.29
Cadila CDHIN 4.1% 14.2% 9.4% 374 5,641 7,474,073 22% 24.0x 17.7x 35.1x 25.4x 1.35 1.06 0.86 2.71
Piramal PIELIN 23.9% 41.1% 42.1% 1,415 3,597 3,474,265 96% 54.4x 31.0x 119.1x 59.7x 1.24 32.37
Glenmark GNPIN 2.6% 4.0% 9.0% 885 3,678 8,751,675 25% 19.8x 17.3x 32.9x 30.6x 1.03 0.92 0.23 2.89
Biocon BIOSIN 8.4% 67.5% 95.3% 868 2,557 11,333,084 19% 26.9x 22.6x 43.8x 39.3x 2.85 2.46
Wockhardt WPLIN 14.8% 52.0% 54.2% 734 1,195 24,309,975 6% 12.0x 16.5x 17.6x 17.9x 0.00 5.76
Globalpeers(consensus)
Roche ROGVX 0.2% 16.0% 14.7% 232 200,365 347,695,204 7% 11.2x 10.7x 16.6x 15.7x 2.23 2.08 4.97
Novartis NOVNVX 3.1% 16.8% 19.5% 72 189,261 415,611,689 4% 13.9x 14.6x 14.4x 15.2x 4.64 4.44 5.84
Pfizer PFEUS 1.7% 1.0% 2.8% 32 193,945 1,075,530,780 9% 10.7x 10.7x 14.6x 13.2x 2.70 2.50 3.69 6.61
NovoNordisk NVOUS 18.4% 43.4% 39.0% 33 83,895 103,521,025 10% 17.9x 15.2x 1.66 1.58
Gilead GILDUS 4.6% 24.9% 27.3% 76 100,127 920,925,070 5% 4.0x 4.8x 6.2x 6.7x 2.37 16.65
Allegan AGNUS 12.7% 37.4% 34.2% 196 73,343 1,006,576,413 6% 10.0x 11.2x 12.7x 14.5x 1.17 0.97 0.00 3.50
BMS BMYUS 13.9% 18.3% 14.5% 56 93,923 540,286,883 21% 23.1x 16.0x 29.4x 19.7x 1.12 1.07 2.70 1.44
Teva TEVAUS 8.9% 42.0% 36.5% 38 34,799 358,201,595 2% 11.5x 10.1x 7.0x 7.4x 0.80 0.74
Merck MRKGR 3.0% 5.1% 0.2% 94 43,789 46,465,961 12% 14.6x 11.8x 19.2x 15.2x 1.70 1.62 4.34
Mylan MYLUS 4.0% 29.9% 25.2% 38 20,280 271,374,916 10% 11.3x 9.8x 8.7x 8.0x 0.49 0.44 0.00 10.10
MSCIAsiaExJapan MXASJINDEX 4.7% 3.2% 2.0% 516
MSCIAsiaExJapanHealthcare MXASJHCINDE 5.9% 10.4% 9.4% 692.1
S&P500 SPXINDEX 2.4% 6.5% 6.2% 2,177

BERNSTEIN
EXHIBIT 136: Valuation table: Asia-Pacific healthcare services

20161117 Rel.Perf. Price Market 12Mavgtrading EPSCAGR EV/EBITDA P/E PEGRatio Div FCF
ticker 30d YRD LTM Market Value($m) Volume(USD) 1518E 2015A 2016E 2015A 2016E 2015E 2016E Yield(%Yield(%)
BERNSTEINcoverage(ourestimates)
Phoenix 1515HK 7.3% 32.5% 6.0% 12.0 2,006
Bumrungrad BHTB 6.6% 12.3% 9.8% 185.0 3,803
BangkokDusit BDMSTB 1.9% 1.3% 12.8% 22.0 9,614
IHH IHHMK 0.9% 3.6% 4.7% 6.3 11,908
BERNSTEINcoverage(consensus)
IHH IHHMK 0.9% 3.6% 4.7% 6.3 11,908 10,971,481 17% 26.6x 23.7x 55.1x 52.8x 3.29 2.67 #N/AN/ 0.82
BangkokDusit BDMSTB 1.9% 1.3% 12.8% 22.0 9,614 20,550,900 14% 27.6x 25.5x 44.6x 39.7x 3.34 2.97 #N/AN/ 1.46
Bumrungrad BHTB 6.6% 12.3% 9.8% 185.0 3,803 9,081,004 7% 24.6x 23.7x 39.4x 38.7x 6.17 5.63 #N/AN/ 2.12
Phoenix 1515HK 7.3% 32.5% 6.0% 12.0 2,006 5,429,470 19% 42.4x 32.6x 36.8x 33.3x 1.70 1.43 0.00 2.57
China(consensus)
AierEye 300015CH 4.2% 5.5% 2.1% 33.3 4,882 21,326,737 33% 44.6x 35.5x 76.0x 56.8x 0.96
ZhejiangDianDiagnostics 300244CH 1.9% 14.1% 24.7% 33.2 2,661 30,591,429 35% 74.2x 49.6x 86.8x 66.7x 0.97
TigerMed 300347CH 7.3% 2.0% 14.9% 30.1 2,081 20,093,204 16% 60.6x 75.3x 0.58
TopChoiceMedical 600763CH 3.7% 30.4% 38.2% 34.1 1,592 23,304,385 26% 34.8x 38.0x 74.1x 60.0x 0.30
iKang KANGUS 5.5% 15.9% 3.7% 17.2 1,168 8,843,792 0.00
TownHealth 3886HK 0.0% 20.6% 20.1% 1.3 1,271 1,304,039 0.77
ChinaMedical&HealthcareGroup 383HK 4.9% 21.8% 10.4% 0.4 803 423,475 0.00 12.18
Harmonicare 1509HK 28.0% 14.0% 20.7% 6.0 582 876,667 8% 15.8x 16.4x 34.4x 35.6x 3.15 2.65 1.04 1.82
WehzhouKangningPsychiatric 2120HK 2.8% 18.4% 2.5% 37.8 355 754,300 31% 22.8x 21.3x 42.9x 34.8x 1.24 0.93 0.75 6.48
UnionMedical 2138HK 4.8% 20.8% 20.8% 2.4 303 337,482 0.80 2.73
ConcordMedical CCMUP 5.3% 9.3% 11.6% 4.4 195 8,756 4.6x 318.7x 19.1x 0.00
UMP 722HK 3.1% 24.1% 40.3% 1.2 117 299,276 17.9x 32.4x
HumanHealthHoldings 1419HK 8.5% 41.3% 41.3% 2.0 91 1,665,421 16.3x 1.54 3.98
Thailand(consensus)
Ramkhamhaeng RAMTB 17.4% 75.0% 66.7% 3500.0 1,185 15,005 1.05
Vibhavadi VIBHATB 3.6% 47.9% 77.5% 2.8 1,055 3,098,168 14% 28.7x 27.6x 47.3x 35.5x 0.15
BangkokChain BCHTB 9.5% 52.5% 91.7% 13.8 971 3,454,417 28% 28.0x 21.9x 70.8x 47.4x 1.95 1.64 2.98
Chularat CHGTB 11.9% 6.0% 16.5% 2.8 875 3,678,609 17% 38.9x 33.9x 56.4x 49.5x 4.20 3.47 1.28 0.41
ChiangMaiRamMedical CMRTB 2.9% 54.3% 76.5% 4.7 529 464,351 0.69
Ladprao LPHTB 1.7% 42.7% 52.6% 8.9 187 1,851,261 30% 32.3x 24.0x 61.0x 39.2x 2.67
Malaysia(consensus)
KPJ KPJMK 0.2% 0.5% 0.7% 4.2 1,004 751,927 7% 16.0x 15.2x 29.2x 30.2x 3.82 3.36 1.62 5.16
Indonesia(consensus)
MitraKeluarga MIKAIJ 2.5% 18.8% 16.6% 2,850 3,096 1,689,893 18% 53.2x 45.6x 72.8x 61.2x 2.86 2.46 0.88 1.21
Siloam SILOIJ 6.3% 2.0% 11.1% 10,000 863 1,969,089 43% 21.1x 17.4x 132.2x 109.2x 0.38
SaranaMeditanma SAMEIJ 10.9% 7.9% 18.4% 2,860 252 126,697 12% 25.1x 21.5x 59.8x 99.3x 7.13
India(consensus)
Apollo APHSIN 11.3% 18.4% 9.5% 1197 2,452 4,340,566 10% 24.9x 22.7x 46.3x 44.8x 1.71 1.24 0.50 3.29
Fortis FORHIN 9.5% 10.4% 2.1% 161 1,100 3,010,384 236% 86.7x 47.3x 134.8x 0.00 0.13
NaryanaHealth NARHIN 4.3% 30.0% 30.0% 325 978 2,490,827 39.4x 325.0x 0.00 0.88
Australia
Ramsay RHCAU 9.7% 3.9% 7.4% 71 10,678 26,846,520 14% 16.2x 14.0x 35.4x 30.5x 1.65 1.47 1.69 2.83
Sonic SHLAU 2.6% 23.2% 12.4% 22 6,848 21,205,307 9% 15.8x 13.3x 23.7x 21.0x 2.55 2.31 3.36 4.26
PrimaryHealthcare PRYAU 6.6% 56.8% 4.3% 4 1,432 11,008,767 2% 7.0x 7.4x 17.0x 17.8x 3.27 10.00
Healthscope HSOAU 22.4% 15.4% 20.5% 2 2,921 23,669,346 8% 13.6x 12.8x 23.2x 20.5x 2.87 2.63 3.29 6.11
Globalhealthcareservices(consensus)
UniversalHealthServices UHSUS 2.7% 0.5% 2.1% 120.1 11,644 95,720,635 9% 9.3x 9.0x 17.4x 16.4x 1.82 1.66 0.33 6.99
HCA HCAUS 8.5% 8.7% 6.2% 73.5 27,554 234,929,419 14% 7.6x 7.3x 13.6x 10.9x 0.95 0.90 0.00 9.78
TenetHealthcareCorp THCUS 28.7% 45.8% 49.7% 16.4 1,636 60,873,508 5% 8.1x 7.6x 8.1x 13.4x 0.72 0.44 0.00 9.28
CommunityHealthSystems CYHUS 45.4% 74.8% 75.6% 5.5 625 61,333,134 30% 5.7x 7.5x 1.6x 157.1x 0.00 48.78
Chinadistributors(consensus)
Sinopharm 1099HK 8.2% 11.9% 6.6% 34.8 12,414 17,957,803 17% 10.5x 9.4x 23.0x 18.5x 0.92 0.81 1.33 12.42
ShanghaiPharm 2607HK 6.7% 15.4% 9.9% 19.4 7,591 4,327,985 12% 13.0x 11.6x 16.1x 14.4x 1.37 1.23 0.97
Jointown 600998CH 1.3% 8.7% 8.7% 21.3 5,107 19,526,851 23% 33.2x 25.9x 50.4x 41.0x 0.24
Globaldistributors(consensus)
McKesson MCKUS 11.9% 28.3% 23.7% 141.5 31,987 318,081,432 21% 11.8x 11.0x 11.3x 11.3x 1.12 1.12 0.79 14.89
AmerisourceBergen ABCUS 1.1% 24.0% 20.5% 78.9 17,357 212,049,403 18% 11.3x 10.0x 13.8x 12.4x 1.21 1.08 1.72 17.76
MSCIAsiaExJapan MXASJINDEX 4.7% 3.2% 2.0% 515.9

MSCIAsiaExJapanHealthcare MXASJHCIND 5.9% 10.4% 9.4% 692.1
S&P500 SPXINDEX 2.4% 6.5% 6.2% 2,177

BERNSTEIN
EXHIBIT 137: Valuation table: Asia-Pacific beverages

Trading Share (In US$ mm) P/E (x) EV/EBITDA (x) ROIC (%) Dividend (%) EPS CAGR
Ticker Currency Price Market cap EV 2016E 2017E 2018E 2016E 2017E 2018E 2015A 2015A 2015-18E
China Beer (H-Share)
China Reso291 HK HKD 16.3 6,819 8,215 37.8x 24.8x 22.6x 11.3x 10.5x 9.8x 3.6% NM NM
Tsingtao H 168 HK HKD 32.0 5,928 4,405 24.9x 24.9x 23.6x 13.8x 13.4x 12.8x 7.2% 1.6% -2.4%
Mean 31.4x 24.8x 23.1x 12.5x 11.9x 11.3x 5.4% 1.6% -2.4%
Median 31.4x 24.8x 23.1x 12.5x 11.9x 11.3x 5.4% 1.6% -2.4%
China Beer (A-share)
Tsingtao A 600600 CH CNY 31.5 5,928 4,405 27.8x 26.8x 25.3x 13.7x 13.5x 12.8x 7.2% 1.4% -0.6%
Yanjing 000729 CH CNY 7.6 3,158 2,953 40.0x 37.6x 32.3x 13.7x 13.1x 12.1x 3.0% 1.0% 13.5%
Chongqing 600132 CH CNY 18.5 1,317 1,264 32.4x 24.6x 21.5x 21.1x 15.4x 15.0x -6.6% 1.3% 27.7%
Mean 33.4x 29.7x 26.4x 16.2x 14.0x 13.3x 1.2% 1.2% 13.5%
Median 32.4x 26.8x 25.3x 13.7x 13.5x 12.8x 3.0% 1.3% 13.5%
China Baijiu
Moutai 600519 CH CNY 320.0 59,264 51,629 23.2x 20.5x 18.0x 13.0x 11.4x 10.1x 26.4% 1.8% 12.9%
Wuliangye 000858 CH CNY 34.9 19,543 14,566 18.7x 16.2x 14.4x 10.1x 8.8x 8.0x 14.3% 2.2% 14.3%
Luzhou Lao000568 CH CNY 34.5 7,126 6,442 27.3x 22.4x 18.7x 18.3x 15.6x 13.7x 12.4% 2.9% 20.6%
Yanghe 002304 CH CNY 68.4 15,186 14,391 17.9x 15.8x 14.1x 12.1x 10.8x 9.6x 19.9% 2.1% 13.3%
Mean 21.8x 18.7x 16.3x 13.4x 11.6x 10.3x 18.3% 2.3% 15.3%
Median 20.9x 18.3x 16.2x 12.6x 11.1x 9.8x 17.1% 2.1% 13.8%
Other APAC Beverage companies
Kirin 2503 JT JPY 1,856.0 16,144 24,728 16.4x 16.4x 15.5x 10.0x 9.6x 9.1x 5.8% 2.3% NM
Asahi 2502 JT JPY 3,655.0 16,821 19,608 17.8x 17.2x 16.1x 9.6x 8.9x 8.6x 6.9% 1.3% 1.8%
ThaiBev THBEV SP SGD 0.9 16,914 17,784 22.8x 20.4x 18.9x 19.5x 17.5x 16.3x 13.9% 3.6% 6.3%
Sapporo 2501 JT JPY 2,874.0 2,155 4,295 19.5x 17.6x 16.4x 9.2x 8.9x 8.7x 1.8% 1.3% 19.3%
United SpirUNSP IN INR 2,040.1 4,468 5,013 79.7x 60.7x 40.8x 38.0x 35.5x 27.8x -3.4% 0.1% NM
United BrewUBBL IN INR 903.5 3,600 3,631 73.8x 65.0x 53.2x 29.8x 27.3x 23.4x 10.0% 0.1% 20.4%
EmperadorEMP PM PHP 7.3 2,418 2,572 16.7x 15.3x 13.9x 13.3x 12.2x 10.7x 9.3% 1.7% 6.7%
Treasury WTWE AU AUD 10.5 6,006 6,015 34.1x 27.2x 22.7x 16.3x 12.9x 11.2x 3.0% 2.6% 37.0%
Coca Cola CCL AU AUD 9.5 5,598 6,659 17.5x 17.0x 16.3x 8.2x 8.0x 7.7x 9.6% 6.0% 3.7%
Mean 33.1x 28.5x 23.8x 17.1x 15.7x 13.7x 6.3% 2.1% 13.6%
Median 19.5x 17.6x 16.4x 13.3x 12.2x 10.7x 6.9% 1.7% 6.7%
International Brewers
ABInBev ABI BB EUR 103.5 230,371 269,329 30.3x 22.7x 20.4x 14.8x 10.7x 10.0x 9.9% 3.1% 2.7%
Carlsberg CARLB DC DKK 612.5 13,863 18,363 21.7x 18.2x 16.4x 9.9x 9.3x 8.9x -1.6% 1.5% 11.4%
Heineken HEIA NA EUR 73.7 46,781 59,231 20.2x 18.6x 16.7x 12.4x 11.8x 11.1x 8.9% 1.5% 10.8%
Molson Co TAP US USD 105.9 22,715 22,642 31.2x 18.0x 18.3x 12.9x 9.1x 8.6x 4.1% 1.7% 15.2%
Efes AEFES TI TRY 18.4 3,449 6,143 26.9x 19.9x 16.6x 10.6x 9.4x 8.3x 3.9% 2.4% NM
AmBev ABEV3 BZ BRL 18.1 89,321 85,417 22.0x 18.8x 16.9x 14.3x 12.5x 11.4x 26.7% 4.0% 9.7%
Mean 25.4x 19.4x 17.6x 12.5x 10.5x 9.7x 8.6% 2.4% 10.0%
Median 24.4x 18.7x 16.8x 12.7x 10.0x 9.4x 6.5% 2.1% 10.8%
International Spirits Companies
Diageo DGE LN GBP 20.9 65,186 77,676 23.8x 20.1x 18.6x 19.7x 17.0x 15.9x 12.8% 2.9% 7.4%
Pernod RI FP EUR 106.1 31,042 40,137 20.5x 19.2x 17.9x 14.1x 13.7x 13.0x 5.6% 1.6% 7.4%
Remy Mart RCO FP EUR 72.8 3,989 4,454 32.7x 28.5x 25.3x 18.7x 16.5x 15.1x 7.0% 1.9% 14.9%
Campari CPR IM EUR 9.0 5,736 6,925 26.2x 21.5x 19.6x 15.7x 13.9x 13.1x 6.4% 1.0% 11.5%
Brown FormBF/B US USD 47.0 18,916 20,698 27.8x 26.6x 24.5x 19.4x 19.1x 17.8x 22.3% 1.3% 5.9%
Mean 26.2x 23.2x 21.2x 17.5x 16.0x 15.0x 10.8% 1.7% 9.4%
Median 26.2x 21.5x 19.6x 18.7x 16.5x 15.1x 7.0% 1.6% 7.4%

BERNSTEIN
APPENDIX: IN-DEPTH REVIEW OF OUR ATTEMPTS

FIRM-WIDE TO CAPTURE QUALITY IN ASIA
In this section, we review in detail the three quantitative approaches developed by the
Bernstein European Equity Strategy team, U.S. Quantitative Research team, and the Asia-
Pacific Equity Strategy team to search for Quality companies that are described earlier
in this chapter. We describe the approaches and their results below.
EUROPEAN EQUITY STRATEGY Our European equity strategy colleagues represent Quality using ROE as the simplest
TEAM'S GLOBAL QUANT proxy. If long-term history is any guide, Quality is bound to disappoint in Asia, having
QUALITY SCREEN ROE AS A
delivered 3% annualized returns over the last 25 years (see Exhibit 138). However, over
PROXY
the last 10 years and also over the last five years, Quality has delivered the best risk-
adjusted returns compared to the other factors (such as Value, Growth, Income, and
Momentum).
Using this ROE-based Quality proxy, we measured the performance of the Quality factor
across the universe of the 300 largest Asian stocks in the MSCI All Country World Index.
Our methodology was to split the group of 300 into quintiles based on their ROEs. The top
quintile contains stocks with the best ROE and the bottom quintile contains stocks with
the lowest ROE. To measure factor performance, we look at the difference in the total
monthly returns (in US$) of the top quintile (equal weighted average for all stocks in the
quintile) and the bottom quintile.
EXHIBIT 138: ROE performance (100 = December 31, 1989)
250
Annualized returns for ROE
1990 - 2015: 3%
200 2005 - 2015: 5.5%
ROE recovered its 1998
levels only in 2010
150
100
50 Between Aug '98 and

Apr '99, ROE collapsed 74%
on an annualized basis
0
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15

BERNSTEIN
Quality has underperformed relative to other factors such as Value (P/B and 12-month
forward P/E) and Income (Dividend Yield and FCF Yield) over the last 25 years, both in
terms of annualized returns and on a return-risk ratio basis (see Exhibit 139).
EXHIBIT 139: Factor performance, annualized returns, global versus Asia ex-Japan (1990-2015)
10.0% Annualized Returns (LHS) Return Risk Ratio (RHS) 0.7
9.0%
0.6
8.0%
7.0% 0.5
6.0%
0.4
5.0%
0.3
4.0%
3.0% 0.2
2.0%
0.1
1.0%
0.0% 0.0
12m Fwd PE Div Yield FCF Yield P/B ROE LT Growth 12m price
movement
Source: MSCI, Bloomberg L.P., FactSet, Thomson Reuters, and Bernstein analysis.
However, over the last five years, Quality (by a simple ROE proxy) has performed very well
in Asia (ex-Japan), generating 5.5% annualized returns during this period. On a risk-
adjusted basis, it has been the best-performing factor over the last five years in Asia (ex-
Japan) (see Exhibit 140).
EXHIBIT 140: Annualized return risk ratio across factors, global versus Asia ex-Japan (2011-2015)
7.0% 0.7
Annualized Returns (LHS) Return Risk Ratio (RHS)
5.0% 0.5
3.0% 0.3
1.0% 0.1
-1.0% -0.1
-3.0% -0.3
-5.0% -0.5
-7.0% -0.7
12m price ROE Div Yield FCF Yield LT Growth 12m Fwd PE P/B
movement
Source: MSCI, Bloomberg L.P., FactSet, Thomson Reuters, and Bernstein analysis.

BERNSTEIN
Almost as a consequence of the strong performance of the Quality factor in Asia (ex-
Japan) over the last five years, the P/B valuations of the high-ROE stocks relative to the
low-ROE stocks are near historical highs (see Exhibit 141).
EXHIBIT 141: ROE factor valuations, Asia (ex-Japan)
6.0
Current valuations are 47%
higher than the long term
average
5.0
P/B valuation
4.0
3.0
2.0
1.0
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
ROE Average +1 / -1 std dev
Source: FactSet, MSCI, and Bernstein analysis.
U.S. QUANTITATIVE RESEARCH The Bernstein Quality Model developed by our U.S. Quant team ranks stocks within each
TEAM'S GLOBAL QUANT region based on the following six factors to arrive at a composite quality score:
QUALITY MODEL SIX-FACTOR
COMPOSITE SCORE
Latest ROE
ROE volatility
Year-over-year sales growth
Latest net margins
Sequential trend stability of ROE
Net cash ratio volatility (net cash ratio = [cash & equivalents short-term debt
long-term debt]/market cap)
For China A-shares, due to lack of reliable historical data, only ROE, year-over-year sales
growth, and net margins are used as parameters to construct the composite quality score.
The composite Quality scores are calculated on a region-relative basis. So, it is possible
for a dual-listed stock to have two different composite Quality scores based on its region
of listing.
Based on the composite Quality score, the stocks are ranked into quintiles. Quintile rank 1
indicates the highest-Quality stocks, while quintile rank 5 indicates the lowest Quality
stocks.

BERNSTEIN
We screen ~2,900 stocks across 11 regional markets with market capitalizations of

greater than US$1 billion. Due to data sufficiency issues, the Bernstein Quality Model was
only able to generate Quality scores for ~1,600 of these names (see Exhibit 142). Nearly
83% of the stocks in our universe that did not have sufficient data to form a Quality score
were from the China A-shares basket.
EXHIBIT 142: Composition of our Quality screening universe (for the Bernstein Quality Model)
2000 100%
1800 90%
1600 80%
1400 70%
1200 60%
1000 50%
800 40%
600 30%
400 20%
200 10%
0 0%
No. of stocks screened for quality scores (LHS) % of stocks with quality scores (RHS)
Note: China (Shanghai Composite and Shenzhen Composite), Japan (Nikkei 225), India (Nifty CNX500), Korea (KOSPI200), Taiwan (TWSE), Hong Kong (HSCEI
and HSI), Indonesia (JCI Index), Thailand (SET50), Malaysia (FBMKLCI Index), Singapore (STI Index), and Philippines (PCOMP Index).
Source: Bloomberg L.P., MSCI, and Bernstein analysis.
China-listed stocks (Shanghai and Shenzhen listed) formed 51% of stocks for which the
Quality scores were generated by the Bernstein Quality Model (see Exhibit 143).
Industrials formed the largest sector (see Exhibit 144).
EXHIBIT 143: The composition of the Quality screening EXHIBIT 144: The composition of the Quality screening
universe for the Bernstein Quality Model (by region) universe for the Bernstein Quality Model (by sector)
2% China Industrials
2% 2%2% Japan Consumer Discretionary
5% 3%2%
India 4% Materials
6% 22%
Korea Financials
6%
Taiwan 7% Information Technology
7% 51%
Hong Kong
7% Consumer Staples
Indonesia 13% Health Care
8% Thailand Real Estate
12%
Malaysia Utilities
Singapore 12%
13% 12% Energy
Philippines Telecommunication Services
Source: Bloomberg L.P., MSCI, and Bernstein analysis. Source: Bloomberg L.P., MSCI, and Bernstein analysis.
In another quantitative method to identify Quality stocks, we adopted the factor-based

approach developed by our Europe Strategy team. We use ROE as a proxy for Quality. We

BERNSTEIN
identify the largest 300 stocks in Asia ex-Japan that are in the MSCI All Country World ex-
Japan Index. We rank the 300 names from this investment universe, from the highest to
the lowest in terms of ROE values. The top 60 stocks with the highest ROE form the top
quintile and the bottom 60 stocks with the lowest ROE form the bottom quintile. Within
the universe, China forms the dominant country (see Exhibit 145) and financials (see
Exhibit 146) have the highest representation within sectors.
EXHIBIT 145: The composition of the Quality screening EXHIBIT 146: The composition of the Quality screening
universe for the factor-based approach (by geography) universe for the factor-based approach (by sector)
China Financials
3% India 4% Industrials
3%3% 6%
Australia Consumer Discretionary
4% 26% 6% 23%
5% Korea Real Estate
6%
Hong Kong Materials
7%
Taiwan 8% Consumer Staples
Thailand 10% Technology
10%
14% Malaysia 8% Telecom
Indonesia 10% Energy
11% 9%
12% Philippines 9% Utilities
Singapore Health Care
Source: Bloomberg L.P., FactSet, MSCI, and Bernstein analysis. Source: Bloomberg L.P., FactSet, MSCI, and Bernstein analysis.
Exhibit 147 presents the price performance of the top 30 Quality stocks as indicated by
the Bernstein Quality Model. The list is dominated by financials, which form 15 of the top
30 high-Quality names. Exhibit 148 presents the list of the top 30 stocks by market
capitalization. This list is dominated by technology names, while there are only five
financials, in contrast to the top 30 Quality names from the Bernstein Quality Model,
which was dominated by financials.

BERNSTEIN
EXHIBIT 147: Price performance of the top 30 stocks by market cap (as indicated by the Bernstein Quality Model)
Quality Percentile Quality Quintile Share Price Performance
Market Cap
Ticker Company Sector (Bernstein Quality (Factor-based
($Bil) 2012 2013 2014 2015 YTD
Model) approach)
700 HK Equity Tencent Holdings Ltd 260 Technology 2 2 60% 99% -77% 36% 39%
941 HK Equity China Mobile Ltd 248 Telecom 35 3 19% -11% 13% -3% 7%
601398 CH Equity ICBC 233 Financials 16 na -2% -14% 36% -6% -4%
1398 HK Equity ICBC 233 Financials 57 2 19% -5% 8% -17% 2%
005930 KS Equity Samsung Electronics Co Ltd 206 Technology 79 3 44% -10% -3% -5% 26%
7203 JT Equity Toyota Motor Corp 190 Consumer Discretionary 9 1 56% 60% 18% -1% -20%
857 HK Equity PetroChina Co Ltd 189 Energy 100 5 14% -23% 1% -41% 6%
601857 CH Equity PetroChina Co Ltd 189 Energy 96 na -7% -15% 40% -23% -12%
601939 CH Equity China Construction Bank Corp 186 Financials 10 na 1% -10% 63% -14% -11%
939 HK Equity China Construction Bank Corp 186 Financials 40 2 15% -6% 9% -17% 8%
2330 TT Equity TSMC 151 Technology 1 1 28% 9% 34% 1% 31%
601288 CH Equity Agricultural Bank of China Ltd 151 Financials 10 na 7% -11% 50% -13% -3%
1288 HK Equity Agricultural Bank of China Ltd 151 Financials 41 2 15% -1% 3% -19% 3%
5 HK Equity HSBC Holdings PLC 147 Financials 39 na 38% 4% -12% -16% -5%
601988 CH Equity Bank of China Ltd 145 Financials 10 na 0% -10% 58% -3% -15%
3988 HK Equity Bank of China Ltd 145 Financials 51 4 21% 3% 22% -21% 1%
9437 JT Equity NTT DOCOMO Inc 100 Telecom 6 2 -12% -99% 2% 40% 3%
9432 JT Equity Nippon Telegraph & Telephone Corp 95 Telecom 33 3 -8% 56% 10% -22% -3%
2318 HK Equity Ping An Insurance Group Co of China 94 Financials 18 2 27% 7% 14% -46% -6%
601318 CH Equity Ping An Insurance Group Co of China 94 Financials 14 na 32% -8% 79% -52% -5%
386 HK Equity China Petroleum & Chemical Corp 88 Energy 98 5 7% -28% -1% -25% 25%
600028 CH Equity China Petroleum & Chemical Corp 88 Energy 82 na -4% -35% 45% -24% 0%
2628 HK Equity China Life Insurance Co Ltd 86 Financials 54 4 32% -4% 26% -18% -17%
601628 CH Equity China Life Insurance Co Ltd 86 Financials 58 na 21% -29% 126% -17% -24%
2914 JT Equity Japan Tobacco Inc 81 Consumer Staples 1 1 -99% 40% -3% 34% -11%
9433 JT Equity KDDI Corp 80 Telecom 3 1 -99% 6% 18% -59% -3%
1299 HK Equity AIA Group Ltd 80 Financials 34 4 25% 29% 11% 8% 13%
9984 JT Equity SoftBank Group Corp 77 Telecom 27 1 39% 193% -22% -15% 8%
TCS IS Equity Tata Consultancy Services Ltd 72 Technology 1 1 8% 73% 18% -5% -2%
8306 JT Equity Mitsubishi UFJ Financial Group Inc 71 Financials 67 4 41% 51% -4% 14% -32%
Source: Bloomberg L.P., FactSet, MSCI, and Bernstein analysis.

BERNSTEIN
EXHIBIT 148: Price performance of the top 30 stocks by market cap (as indicated by the factor-based approach)
Quality Percentile Share Price Performance
Market Cap
Company Sector (Bernstein Quality
($Bil) 2012 2013 2014 2015 YTD
Model)
Alibaba Group Hldg ADR 267 Technology na nm nm nm -22% 27%
Taiwan Semiconductor Mfg 153 Technology 1 28% 9% 34% 1% 31%
Tata Consultancy 71 Technology 1 nm nm nm -5% -2%
Baidu ADR 64 Technology na -14% 77% 28% -17% -7%
Telstra Corp 48 Telecom na 31% 20% 14% -6% -10%
ITC 44 Consumer Staples 7 42% 12% 15% -11% 13%
CSL 37 Healthcare na 68% 28% 26% 21% 0%
Infosys 36 Technology 1 nm nm nm -44% -6%
Sands China 36 Consumer Discretionary 12 55% 87% -40% -30% 29%
Telekomunikasi Indonesia 33 Telecom 3 28% -76% 33% 8% 37%
Housing Dev Finance Corp 34 Financials na 27% -4% 43% 11% 7%
Hongkong Exch & Clearing 33 Financials 36 6% -2% 33% 16% 3%
Netease com ADR 33 Technology na -5% 85% 26% 83% 44%
Coal India 30 Energy 6 18% -18% 32% -14% -5%
Bank Central Asia 30 Financials 9 14% 5% 37% 1% 20%
Formosa Petrochemical 29 Energy 46 -8% -5% -16% 15% 29%
PICC Ppty & Casualty H 25 Financials 29 3% 6% 31% 2% -16%
Bank Rakyat Indonesia 23 Financials 6 3% 4% 61% -2% 7%
Woolworths Ltd 23 Consumer Staples na 17% 15% -9% -20% -1%
Siam Cement 18 Materials na 28% -13% 11% 1% 11%
Siam Cement Fgn 18 Materials na 28% -13% 11% 1% 11%
Wipro 17 Technology 3 -1% 42% -1% 1% -15%
HCL Technologies 17 Technology 1 59% 104% 26% -46% -3%
Largan Precision Co 17 Technology 1 37% 56% 97% -5% 63%
CP All PCL 16 Consumer Staples 31 -11% -9% 1% -8% 55%
Westfield Corp 15 Real Estate na 35% -4% -11% 5% -1%
Brambles 15 Industrials na 5% 22% 16% 9% 4%
Advanced Info Service 14 Telecom 2 49% -5% 26% -39% 2%
SK Holdings 13 Industrials 40 -12% 31% 58% 13% -5%
LG Household & Health 13 Consumer Staples 21 35% -17% 14% 69% -14%
Source: Bloomberg L.P., FactSet, MSCI, and Bernstein analysis.
ASIA-PACIFIC EQUITY STRATEGY What does our Asia-Pacific Equity Strategy team's more recent regional analyses based
TEAM'S REGIONAL QUANT on quantitative proxies say about Quality stocks in Asia? About a year and a half ago, we
QUALITY SCREEN FILTER BY
attempted to identify Quality stocks in Asia based on four characteristics: balance sheet
FOUR QUALITY
CHARACTERISTICS strength, execution ability, management quality, and sustainable competitive advantages
(Asia Strategy: Quality in Asia... What Does It Look Like and Can You Get Paid for It?). We
adopted four quantitative proxies for these characteristics:
Net debt to assets below 30%;
Free cash flow positive;
Non-operating income or loss of less than 20% of operating income; and
ROIC materially higher than the cost of capital.
We used free cash flow as a measure of execution capabilities. We used non-operating

income as a measure of transparency, and therefore, management integrity arguing that a
quality management team will report the basis upon which they make money. We used

BERNSTEIN
ROIC as a measure to reflect sustainable competitive advantage and low debt to reflect
financial prudence.
We applied this approach to the MSCI Asia ex-Japan universe, the Shanghai Composite,
the Shenzhen Composite, and the Hong Kong Stock Exchange.
EXHIBIT 149: Composition of Quality universe and Quality stocks in Asia ex-Japan
1,600 25
1,400
20
1,200
1,000
15
800
10
600
400
5
200
0 0
MSCI Asia ex- Shanghai Shenzhen HKSE KOSPI 200 Nifty CNX500
Japan Composite Composite
Stock universe for quality screening (LHS) No. of quality stocks (RHS)
Source: Bloomberg L.P., MSCI, and Bernstein analysis.
Of the 682 companies in MSCI Asia ex-Japan with market capitalizations greater than
US$1 billion, 21 stocks satisfied our Quality metrics consistently since 2009. The Quality
list is dominated by names from technology, healthcare, consumer, and telecom (see
Exhibit 150). In addition to MSCI Asia ex-Japan, we selected ~3,500 stocks with market
capitalizations greater than US$1 billion, spread across the Shanghai Composite (944),
the Shenzhen Composite (1431), the Hong Kong Stock Exchange (446), KOSPI 200
(200), and the Nifty CNX500 (500). We applied our Quality filters to arrive at a list of 33
Quality stocks across these markets (see Exhibit 151).

BERNSTEIN
EXHIBIT 150: Price performance of Quality stocks from MSCI Asia ex-Japan
Market Cap
Company Sector (Bernstein Quality (Factor-based
($Bil) 2012 2013 2014 2015 YTD
Model) approach)
TSMC 153 Technology 1 1 28% 9% 34% 1% 30%
Tata Consultancy 71 Technology 1 1 8% 73% 18% -5% -3%
ITC 44 Consumer Staples 7 1 42% 12% 15% -11% 11%
CSL 37 Healthcare na 1 68% 28% 26% 21% -1%
PT Telkom 33 Telecom 3 1 28% -76% 33% 8% 37%
NAVER 26 Technology na 2 8% 219% -2% -8% 29%
Unilever Indonesia 26 Consumer Staples 5 2 11% 25% 24% 15% 21%
Woolworths 23 Consumer Staples na 1 17% 15% -9% -20% -1%
Asian Paints 17 Materials 3 2 71% -89% 54% 17% 34%
HCL Tech 17 Technology 1 1 59% 104% 26% -46% -5%
Haier 5 Consumer Discretionary na na 63% 98% -18% -15% -17%
Largan 17 Technology 1 1 37% 56% 97% -5% 63%
Advanced Info 14 Telecom 2 1 49% -5% 26% -39% 3%
Shenzhou Intl 10 Consumer Discretionary na 2 66% 66% -12% 74% 14%
DiGi.com 9 Telecom 5 1 36% -6% 24% -12% -8%
Singapore Exchange 6 Financials 6 na 14% 4% 8% -1% -6%
Divi's Lab 5 Healthcare 2 na 42% 11% 41% -33% 6%
China Medical System 4 Healthcare na na 16% 38% 55% -11% 11%
BEC W orld 1 Consumer Discretionary 1 na 58% -29% 1% -40% -35%
Berjaya Sports 1 Consumer Discretionary na na 1% -9% -13% -13% 4%
FIH 1 Consumer Discretionary na na -1% -13% -1% -33% -22%
Note: For percentiles, 1 = high Quality, 100 = low Quality. For Quintiles, 1 = high Quality, 5 = low Quality.
EXHIBIT 151: Price performance of Quality stocks from Mainland China, Hong Kong, Korea, and India
Market Cap
Company Sector (Bernstein Quality (Factor-based
($Bil) 2012 2013 2014 2015 YTD
Model) approach)
Samsung Electronics 213 Information Technology 79 3 44% -10% -3% -5% 26%
Tata Consultancy 71 Information Technology 1 1 8% 73% 18% -5% -2%
Kweichow Moutai 57 Consumer Staples 16 na 8% -39% 48% 15% 41%
ITC 44 Consumer Staples 7 1 42% 12% 15% -11% 13%
Infosys 36 Information Technology 1 1 -16% 50% -43% -44% -6%
NAVER 26 Information Technology 20 2 8% 219% -2% -8% 29%
Amorepacific Corp 19 Consumer Staples 2 2 15% -18% 122% -81% -10%
Asian Paints 17 Materials 3 2 71% -89% 54% 17% 33%
HCL Tech 17 Information Technology 1 1 59% 104% 26% -46% -3%
Jiangsu Yanghe Brewery 15 Consumer Staples 10 na -28% -56% 94% -13% 0%
LG Household 13 Consumer Staples 21 1 35% -17% 14% 69% -14%
Hero Moto 10 Consumer Discretionary 6 1 0% 9% 50% -13% 27%
Shenzhou Intl. 10 Consumer Discretionary na 2 66% 66% -12% 74% 17%
NMDC 7 Materials 0 na 3% -14% 2% -38% 30%
Fuyao Glass 7 Consumer Discretionary 10 na 9% -5% 46% 25% 18%
Aisino 6 Information Technology 35 na -25% 36% 51% 83% -19%
Halla Visteon 6 Consumer Discretionary 59 na 9% 64% 25% 7% 10%
Dong-E-E-Jiao 6 Healthcare 2 na -6% -2% -6% 40% 12%
Divi's Lab 5 Healthcare 2 na 42% 11% 41% -33% 11%
Haier 5 Consumer Discretionary na na 63% 98% -18% -15% -14%
China Medical System 4 Healthcare na na 16% 38% 55% -11% 12%
Colgate 4 Consumer Staples 38 na 58% -14% 32% -46% -6%
P&G 3 Consumer Staples 0 na 46% 10% 91% -3% 24%
VTech 3 Information Technology na na 12% 16% 10% -28% 13%
Shandong Denghai Seeds 2 Consumer Staples 10 na -18% 47% -8% -47% 4%
Kehua Bio-Engineering 2 Healthcare 28 na 2% 60% 26% 37% -21%
Biostime 2 Consumer Staples na na 77% 186% -77% 0% 24%
Hebei Chengde Lolo 2 Consumer Staples 16 na -3% 78% -10% -25% -13%
Grand Korea Leisure 1 Consumer Discretionary 0 na 57% 41% -20% -25% -5%
Shandong Shanda WIT 1 Healthcare 0 na 33% 95% -15% 35% 38%
Sa Sa 1 Consumer Discretionary na na 48% 43% -40% -52% 33%
Huabao 1 Materials na na -3% 12% 48% -55% 7%
Shandong Luoxin 1 Healthcare na na 56% -20% 127% -17% -25%
Note: For percentiles, 1 = high Quality, 100 = low Quality. For Quintiles, 1 = high Quality, 5 = low Quality.

BERNSTEIN
Clearly, quantitative approaches have their limitations. For one, the Quality screening
universe generally tends to be restricted to the large-cap stocks present in MSCI indices.
This is particularly true for the factor-based approach. The factor-based approach also
relies on mean reversion (the valuation of factors tends to revert to the long-term average)
to assign stocks within the factor to a long-short portfolio, which, in turn, determines the
top and bottom quintiles. This clearly does not take into account the risk of disruption. In
the event of disruption, the mean reversion may not happen at all. This is especially true
for healthcare where the success of a new, untested drug or the strength of the new drug
pipeline may result in a higher risk of disruption.
The Bernstein Quality Model developed by our U.S. Quant team calculates quality scores
for the stocks relative to the region they are listed in. Therefore, the function of a stock
being in a high-Quality or a low-Quality quintile is as much a function of its inherent
Quality as it is about the Quality of other stocks in the region. In addition, given the
quintile-based rankings of Quality stocks, we end up with 300 top quintile Quality names
in a universe of 1,500 stocks. To imagine that there are 300 top Quality names in Asia
tends to be a little hard to digest from a fundamental, non-quant perspective.
In Exhibit 152, we summarize the quantitative approaches discussed in this section. One
of the key differences that emerge is that financials dominate the top-Quality names in the
Bernstein Quality Model. However, in our analysis using quantitative proxies, we have
excluded financials on the basis that cash flow and debt metrics, for example, aren't
particularly useful measures and that we believe that banks are rarely able to achieve
sustainable competitive advantages.
EXHIBIT 152: A summary of quantitative approaches

Quantitative Approach Screening criteria Screening universe Dominant top quality sectors
Bernstein Quality Model Latest ROE Financials (19%)
China Mainland (A - shares)
ROE volatility Industrials (16%)
1-year sales growth
Latest net margins Financials (18%)
Emerging Asia
Sequential trend stability of ROE Technology (14%)
Net cash ratio volatility
Industrials (34%)
Developed Asia (Japan, Singapore, Hong Kong)
Financials (13%)
Factor-based approach ROE Consumer Staples (17%)
MSCI All Country World Asia ex-Japan Index Technology (13%)
Healthcare (5%)
Quantitative proxies Net debt to assets below 30% Technology (24%)
MSCI Asia ex-Japan
Positive free cash flow Consumer Discretionary (24%)
Non-operating income / (loss) as
% of operating income
ROIC materially higher than cost
of capital China Mainland (A - shares), India (Nifty Consumer Staples (30%)
CNX500), Korea (KOSPI 200) Technology (21%)
Consumer Discretionary (21%)

BERNSTEIN

BERNSTEIN
IS IT INDIA'S TURN? PART I

What can we learn from China's rise?
OVERVIEW
By a number of economic indicators, India today is similar to China in 2000-05. Over this
period, China pursued an aggressive policy of infrastructure development, urbanization,
and export growth, which have made it the world's largest economy on a PPP basis.
China's GDP has expanded at a 10% CAGR, contributing a net increase of 30% of global
GDP, and China's share of total global GDP expanded from 4.5% in 2004 to 15% in
2015.
With the rate of growth in China now inevitably slowing, the world is starting to turn its
attention to India, which will soon pass China to become the world's most populous
country. Can the China miracle be repeated?
In this chapter, we compare and contrast the differences in India today with those of
China of the early 2000s. We also review the policies that helped propel China forward in
growth and the resulting implications for investors.
This chapter is divided into three sections:
India today is similar to China in 2000-2005but with some important differences
Key lessons from the last 15 years of Chinese development
Investment implications from Chinese returns over the last 15 years
INDIA TODAY IS AT A SIMILAR LEVEL OF DEVELOPMENT TO

CHINA IN 2000-05
GDP per capita in China reached US$7,925 per annum at the end of 2015, growing at a
remarkable 10.7% CAGR since 1978 when Deng Xiaoping first started to reform and
open up the economy (see Exhibit 153). In comparison, GDP per capita in India today is at
c.US$1,600 per annum. While the gap seems incredibly large, India today is basically
equivalent to where China was in 2004.
Over the last 11 years since China was at current Indian levels of GDP per capita, GDP for
China has expanded at a 10% CAGR contributing a net increase of 30% of global GDP,
and China's share of total global GDP has expanded from 4.5% to 15% over this period
(see Exhibit 154).

BERNSTEIN
Other comparisons between China and India all point to India's current level of
development similar to where China was between 2000 and 2005. With China's rate of
growth now slowing, many investors are questioning whether India can repeat the miracle
and propel global growth forward similar to how China has over the past 10-15 years.
In this chapter, we hope to illuminate the stark differences in the structure of the
economies of these two giants at a similar stage of growth, and review:
The difference in composition of GDP and drivers of growth
The role of Foreign Direct Investment (FDI) and the ease of doing business
Demographic trends and implications
We expect these differences will lead to a different path for India, but we also believe
there is much that India can learn from China.
EXHIBIT 153: China GDP per capita is 5x that of India

9,000
0.8X 1.1X 1.3X 1.7X 2.0X 2.1X 2.4X 2.3X 2.5X 3.4X 3.3X 4.3X 4.8X 5.0X
8,000
GDP per capita, current prices US$
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2015
India China
Note: GDP per capita is in nominal terms. There is an additional impact of current movements against the USD.

BERNSTEIN
EXHIBIT 154: Share of world GDP by country (%)
15 14.8
India
China
10
5 4.5
2.8
1.4 1.6 1.7
0
1990 2004 2015
Until the late 1980s, both the economies were at a similar scale. China's pace of growth
only lifted to 10% levels post the Chinese economic reforms of 1978-84 (see Exhibit
155). India has experienced a slower rate of growth (6-7%) since the beginning of its
reforms in the early 1990s.
EXHIBIT 155: Real GDP CAGR (%): China's GDP growth rate has outperformed India's since the 1970s
11 10 11
China
10 9 India
9
8 8
7
7 7
6
6 6 6
5
4 4
4
3
3
2
1
0 Years
196070 197080 198090 199000 200010 201015
Note: Real GDP is in USD, not PPP.

BERNSTEIN
COMPONENTS OF GROSS The composition of the GDP of India today is very different from that of China in 2000-05.
DOMESTIC PRODUCT While on a per capita basis India is now at a similar size to that of China of 2004,
DIFFERENT DRIVERS
manufacturing (including mining) comprises only 20% for India today versus 41% for
China in 2004 India instead has larger agricultural and service sectors (see Exhibit
156). On a consumption basis, India has been driven by households, whereas China has
had relatively high gross capital formation and higher government expenditures (see
Exhibit 157).
EXHIBIT 156: Manufacturing has historically accounted for a large share of the GDP for China
2004 2015
100
90
80 41
47
70 56 55
Share in GDP (%)
60
50
40 41
17 36 20
30
20
27 24
10 19 16
0
China India China India
Agriculture Manufacturing Services
Note: Manufacturing includes mining.
Source: World Bank, RBI, China's National Bureau of Statistics (China NBS), and Bernstein analysis.

BERNSTEIN
EXHIBIT 157: India is a consumption-driven economy but China is an investment-driven economy
2004 2015
100
32 34
80
43 46
Share in GDP (%)
60
40 58 58
41 37
20
14 11 14 11
0
-20
Government Consumption Capital Formation Net Exports
Source: World Bank, RBI, China NBS, and Bernstein analysis.
The higher level of capital formation in the Chinese economy has resulted in significantly
different levels of infrastructure development between the two countries. To anyone
visiting Shanghai and Mumbai, the differences are very stark even in the business
capitals of the two countries.
Whether we look at highway density, goods transported per capita by rail or air, power
consumption per capita, or air passengers per capita, it is clear that the level of activity in
India is in many cases well below the 15-year "GDP per capita gap" and closer to a 20-25-
year gap (see Exhibit 158 to Exhibit 162). The only infrastructure metric where India is
comparable to China is on access to improved water facilities (see Exhibit 163).
The gap is also wide in consumer durables, including the ownership of cars, televisions,
refrigerators, and air conditioners (see Exhibit 164 to Exhibit 167). However, the gap is
less severe in IT-related fields closer to around five years in smartphone and the
Internet penetration (see Exhibit 168 and Exhibit 169). Other consumer metrics such as
credit card penetration also show India trailing considerably.

BERNSTEIN
EXHIBIT 158: India is far behind China in EXHIBIT 159: railroads. EXHIBIT 160: air travel
infrastructure build and usage like
highways
Length of Highway per Sq. Railway Goods Transported Air Freight Transported per
0.50 Km of Land Area per Capita Capita
15
0.40 2000
0.30 10
1500
km
ton-km
ton-km
0.20 1000
5
0.10 500
0.00 0 0
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
EXHIBIT 161: shipping EXHIBIT 162: and electricity EXHIBIT 163: India is comparable to
China in clean water access
Container Port Traffic per Electric Power Consumption Access to Improved Water
0.15
Capita per Capita Source (% of Population)
20-Foot Equivalent Units (TEUs)
4,000 100%
KWh per Capita
0.10 3,000 90%
2,000 80%
0.05
1,000 70%
0 60%
0.00 1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
EXHIBIT 164: India is also far behind EXHIBIT 165: televisions EXHIBIT 166: refrigerators.
China in durables ownership, including
cars
Passenger Vehicle TV Household Peneration Refrigerator Household

Ownership Penetration
140%
8.0% 120% 100%
100% 80%
6.0%
80%
60%
4.0% 60%
40% 40%
2.0% 20% 20%
0%
0%
0.0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
China India
Source: Organisation Internationale des Source: Government websites and Bernstein Source: Government websites, Ernst & Young (EY),
Constructeurs d'Automobiles (OICA) and Bernstein analysis. and Bernstein analysis.
analysis.

BERNSTEIN
EXHIBIT 167: and air conditioners EXHIBIT 168: However, India's gap to EXHIBIT 169: and Internet penetration
China is narrower in smartphone
penetration
Air Conditioner Household Smartphone Penetration Internet Penetration

Penetration
60% 60%
100% 50%
50%
80% 40%
40%
60% 30%
30%
40% 20%
20%
20% 10%
10%
0% 0%
0%
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2007 2008 2009 2010 2011 2012 2013 2014
Source: Government websites, EY, and Bernstein Source: Gartner and Bernstein analysis. Source: World Bank and Bernstein analysis.
analysis.
THE ROLE OF INTERNATIONAL The huge local market, business supportive policies, the availability of lower wages, and
TRADE IN DRIVING GROWTH less stringent labor laws made China an attractive destination for Western investment.
Over time, ecosystems and supply chains developed, helping China to become the export
hub of the world. In India, a lack of government focus, skilled labor, stringent labor laws,
and bureaucratic approval processes created barriers to investment.
While China's exports have grown 10x in the last 12-13 years, achieving an overall net
export balance of over US$550 billion, India remains a net importer, with an export scale
comparable to what China had in 2002-03 (see Exhibit 170 and Exhibit 171). The
composition of exports for China is almost entirely manufactured goods (95%), while for
India, the pie is much smaller, and manufactured goods account for only ~70% of total
exports (see Exhibit 172 and Exhibit 173).
EXHIBIT 170: China's net goods exports are US$560 billion EXHIBIT 171: whereas India is a net importer with export
against gross exports of US$2.1 trillion volumes similar to China in 2002/03
2,500 2,500
China Trade of goods (US$ bn) India Trade of goods (US$ bn)
2,000 2,000
1,500 1,500
1,000 1,000
500 500
- -
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Net exports (US$bn) Imports (US$bn) Net imports (US$bn) Imports (US$bn)
Exports (US$bn) Exports (US$ bn)
Source: IMF and Bernstein analysis. Source: IMF and Bernstein analysis.

BERNSTEIN
EXHIBIT 172: Since the early 2000s, over 90% of China's exports have been manufactured goods
100% 5%
6% 10% 7%
13% 12%
15%
80% 7%
29% 8%
60%
91% 92% 94% 94% 94%
85% 88%
40% 26% 82%
76%
63%
20%
26%
0%
1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015
Metals Agriculture Food Others Fuel Manufacturedproducts
EXHIBIT 173: Manufactured goods only represent ~70% of India's exports; fuel and food rank much higher than in China
100%
8% 8% 6%
12%
16% 18% 13% 11% 15% 19%
13%
80% 17% 17%
12%
25% 9% 8% 11%
60%
40% 72% 72% 76% 74% 78% 77%

66% 67% 71%
65%
58%
20%
0%
1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015
Manufactured Metals Agriculture Fuel Food Others
AUTO MANUFACTURING HAS While India's manufacturing sector has failed to gain a significant share in international
BEEN AN OUTLIER IN INDIA markets, automobiles have been an outlier. Most of India's current auto/auto parts market
is domestically manufactured, and India fares well in exports of two-wheel vehicles.
The genesis of this was the government's automobile policy adopted in 1993. This
allowed for automatic approvals for foreign holdings up to 51%, a reduction in excise and
import duties (for components, etc.), as well as indigenization schedules for foreign
vendors. The large domestic base with low levels of existing ownership and increasing
incomes made India an attractive market for foreign producers. Not surprising, a large

BERNSTEIN
number of international companies formed partnerships with Indian vendors. The

establishment of manufacturing facilities by international companies led to the
development of a large number of auto ancillary providers, a few of which have expanded
to become large exporters for global manufacturers. On the finished vehicle side, exports
are largely for two-wheelers for which Africa and other developing countries are key
markets. Moreover, a number of international producers are exporting to other
geographies, capitalizing on the lower labor costs as well as spare domestic capacity.
While manufacturing units in India started as pure assembly operations (major

components were imported), the growing scale of local demand and local customization
requirements enabled a large number of auto parts manufacturers to establish domestic
operations. With growing domestic scale and a focus on quality, as well as lower labor
costs, India is now exporting components to leading global manufacturers. Today, India is
a net exporter in the auto sector, with passenger vehicle exports at a similar level to China
(see Exhibit 174 and Exhibit 175).
EXHIBIT 174: India is a net exporter of both vehicles and auto EXHIBIT 175: and has a similar level of exports of
components passenger vehicles as China
7,000 Auto exports (US$ mn)

India auto trade (US$ mn)
30,000 28,281
6,000 5,654
25,000
5,000
3,885 3,795 20,000

4,000
3,000 15,000
2,000 10,000
6,449
5,654
1,000 780 5,000 3,885 3,677
235 780
31
- -
Auto parts Passenger Goods vehicles Auto parts Passenger Goods vehicles
vehicles vehicles
Exports (US$ mn) Imports (US$ mn) India China
Source: UN Comtrade and Bernstein analysis. Source: UN Comtrade and Bernstein analysis.
SERVICES: INDIA IS VERY Another key difference between the two countries is in service exports. On an aggregate
STRONG IN IT SERVICES LIKE basis, China's service exports at US$211 billion appear to be well ahead of India, which is
CHINA IS IN TRADE-RELATED
at US$155 billion. However, in China, exports are largely led by travel (tourism) and
SERVICES
services related to construction and trade which, in turn, depend on goods exported
from China. India, on the other hand, is highly skewed to pure services with a large
dependence on computer and IT-related services (see Exhibit 176 and Exhibit 177). This
is clearly another area where India should continue to invest and grow.

BERNSTEIN
EXHIBIT 176: Growth in service exports over 15 years EXHIBIT 177: The value of service exports by segment
yoy growth in services revenue from exports 100%
70%
90%
60% 29%
80%
50% 45%
70%
40%
60%
30%
50% 10%
20% 47%
40%
10%
30% 27%
0%
20% 13%
-10%
10% 18%
-20% 12%
0%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
India China
India China Transportation Travel Computer & IS Others
Source: UN Comtrade and Bernstein analysis. Source: UN Comtrade and Bernstein analysis.
THE ROLE OF FOREIGN DIRECT Both India and China are attractive for international companies looking to access cheaper
INVESTMENT (FDI) labor as well as a large domestic market. However, while China has been one of the most
favored FDI destinations, India failed to scale up (see Exhibit 178). The current FDI run
rate in India is less than one-fifth that of China.
We believe that the differences are largely explained by: 1) the earlier opening up of
China's economy (from 1978) than that of India (1990s); 2) China's superior
infrastructure; 3) an easier business climate with regard to approvals; and 4) China's
vertical structure with a single regulatory body as opposed to the federal structure in India
with multiple government bodies (RBI, the Foreign Investment Promotion Board, the
Ministry of Commerce, etc.), which make approvals in India significantly slower and more
cumbersome.
While for China the bulk of the FDI is concentrated in manufacturing and real estate (over
60%), in India the highest share has gone into the services sector, led by computer
services (see Exhibit 179 and Exhibit 180).

BERNSTEIN
EXHIBIT 178: FDI in India is less than one-fifth that of China

300
FDI inflow comparison (US$ bn)
250
250 241
200
150 133 131
100
58
44 42 44
50 34 36
20 24
0 3 0 4 1 4 4 4
-
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
India China
EXHIBIT 179: Breakdown of FDI in China by sector (2014) EXHIBIT 180: Breakdown of equity FDI in India by sector
(FY2016)
Tech IT & Utility, Others, Power, Pharma,
Telecom,
Serv., Computing, 2% 5% 2% 2% Construc
3% 3% tion,
2%
0%
Tourism,
Financials,
3%
3%
Transport & Chemicals,

Manu-
Logistics, 4%
facturing,
4% Auto,
33%
Wholesale 6%
Others,
& Retail, 37%
8%
Trading,
Leasing & 10%
Comm.
Serv.,
10% Computer
Software,
Services,
Property, 15% 17%
29%
Source: China NBS and Bernstein analysis. Source: Department of Industrial Policy and Promotion, and Bernstein analysis.
EASE OF DOING BUSINESS Neither India nor China score highly on the "ease of doing business" metric; however, here
again, China is significantly ahead. China has traditionally scored in the 80-90 range as
compared to India, which is nearer to 130 (note, in this case, the lower the better). These
rankings are significantly lower than other leading manufacturing and service companies
globally the United States ranks at 8, the United Kingdom at 7, and Korea at 5 (see
Exhibit 181).

BERNSTEIN
India significantly lags China in three areas: registering property, insolvency laws, and
enforcing contracts the only area where India appears to score more favorably is in
obtaining credit. These rankings have remained relatively constant over the last decade
(see Exhibit 182 and 183).
EXHIBIT 181: Rankings for key/large manufacturing- and services-focused countries globally
Spain, 32
UK, 7 France, 29
Canada, 22
Korea, 5 Mexico, 47
Germany, 17 Philippines, 99 India, 130
Russia, 40
Australia, 15 Indonesia, 91 Brazil, 123
Italy, 50
Japan, 34 China, 78 Argentina, 116
United States, 8
0 20 40 60 80 100 120 140

Rankings for ease of doing business
Source: World Bank Group and Bernstein analysis.
EXHIBIT 182: Rankings for both countries have largely remained similar across years
160
Rankings for ease of doing business
142
140 133 134 132 132 134 131 130
120 122
120
96
100 89 91 91 90
83 83 84
79 78
80
60
40
20
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
China India
Source: World Bank Group and Bernstein analysis.

BERNSTEIN
EXHIBIT 183: Major reforms undertaken by China and India

Areas China India
Eliminated minimum capital and certification requirement to
2015
commence operations
Eliminated the requirements of minimum capital and a capital Reduced registration fees, but introduced a requirement to file
2014
Starting a verification report from an auditing firm declaration before starting a business
Business Exempted micro and small companies from paying several
2012
administrative fees from January 2012 to December 2014
Established an online VAT registration system and replaced
2010
physical stamps with online versions
2012 Streamlined and centralized preconstruction approvals Established strict time limits for preconstruction approvals
Dealing with
Construction Electronic processing for building permit applications and
permits 2007 allowed online application of safety certificates for construction
companies
Eliminated internal wiring inspections (in Delhi) and improved
2015
Getting working processes of utilities (in Mumbai)
electricity Reduced the security deposit for getting a connection (in
2014
Mumbai)
Introducing credit information on industry regulations, which
2013
guaranteed borrowers right to check their data
New property law expanded range of assets that can be used as
Getting credit 2008
collateral (Included receivables)
Introduced a new law that gave secured creditors a priority in Launched unified and centralized collateral registry; credit
2007
payment information made available at the private credit bureau
Protecting Enhanced disclosure requirements by board members; more

minority 2014 remedies for prejudicial related-party transactions; additional
investors safeguards for shareholders
Social security contribution rate reduced for Shanghai
2015
companies
Enhanced electronic system for filing/paying taxes; adopted new
2014
communication channels in its taxpayer service
Paying taxes 2011 Introduced mandatory electronic filing and payment for VAT
Unified the tax regimes for domestic and foreign enterprises;

2010 Abolished the FBT and improved electronic payment system
clarification on calculation of taxable income for corporates
Reduced corporate income tax rate and unified the criteria and
2008
accounting methods for tax deductions
2009 Relaxed trade credit restrictions
Implemented an electronic data interchange system, thereby

2008
Trading across reducing time taken for exports
borders
ICEGATE system for online lodging of customs declarations,
2007 risk management, and electronic payments; system also allows
shipping lines to submit cargo manifest in advance
Amended its civil procedure code to streamline and speed up all

2013
Enforcing court proceedings
contracts Tightened the rules on enforcement of judgments, limiting ways
2008
to hide assets and escape enforcement
New enterprise bankruptcy law containing reorganization
Resolving procedures allowed the formation of creditors committees,
2007
insolvency granted rights to secured creditors, and established a role for
professional bankruptcy administrators
DEMOGRAPHICS: INDIA IS A Both India and China had similar population demographics in the 1970s a population
YOUNGER COUNTRY, WITH AN growth rate of ~2% and an age pyramid highly skewed toward a younger population, with
AGE DEMOGRAPHY SIMILAR TO
~40% of the population below the age of 14. It was at this stage that China enacted the
THAT OF CHINA OF 1995
one-child policy (1979), slowing population growth and shifting the median age upward.
India, on the other hand, continued to grow at a much faster pace supported by improved
healthcare and higher income levels (see Exhibit 184).

BERNSTEIN
Today, only 18% of the population is below the age of 14 in China versus 29% in India
(see Exhibit 185 and Exhibit 186). In fact, the age demography of India today is similar to
that of China in 1995. Moreover, both countries have made incredible progress in the
elimination of poverty. While in the early 1990s over 50% of Chinese and nearly 50% of
Indians were living below the poverty line (on a PPP adjusted basis), by 2013, this had
fallen to 2% for China and 18% for India (see Exhibit 187). In just under two decades, over
890 million people were alleviated from poverty in these two countries.
EXHIBIT 184: Population growth in India has outpaced China
2.5 2.3
2.2 China
2.1 2.1
India
2.0 1.9
1.8
Populationgrowth(%)
1.6
1.5
1.5
1.3
1.1
1.0
0.6 0.5
0.5
0.0
196070 197080 198090 199000 200010 201015
EXHIBIT 185: China age profile: The population of young EXHIBIT 186: India is a relatively young country 30% of the
people has declined sharply population is below 14 years
100% 100%
90% 90%
80% 80%
70% 70% 55 53 54
54 53 53 54 54 55 56 57
57 58 59
61 61 63
60% 63 63 60% 63
65
69 70 68 50%
50%
40% 40%
30% 30%
20% 40 42 41 40 39
20% 40 41 40 40
36
39 38 36 34
31 32 30 29
30 29 26
10% 21 18 18
10%
0% 0%
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
0-14 15-59 60-64 65+ 0-14 15-59 60-64 65+
Source: United Nations Age and Development database, and Bernstein Source: United Nations Age and Development database, and Bernstein
analysis. analysis.

BERNSTEIN
EXHIBIT 187: There has been a significant decline in poverty levels in the two countries
70 67
%ofpopulationbelowpovertyline
China
60 India
50 45
41
40 38
30
21 18
20
10 8
2
0
1990 2000 2011 2013
Note: Data interpolated only for selective years.
CHINA'S DEMOGRAPHY WAS In the late 1990s and early 2000s, the bulk of the population of China was in the 25-35-
WELL-PLACED FOR STRONG year old range. This provided China with a large and cheap workforce, which helped
GROWTH IN THE LATE 2000S
enable growth over the next 15 years. However, the one-child policy dramatically dropped
NOW IT IS AGEING
the birth rate, leading to a gradual increase in the median age. Today, 8% of the
population is over 65 years old, and that is expected to climb to 16% over the next 20
years (see Exhibit 188). This will have a negative impact on the growth outlook as the
population of workers starts to shrink, and will put strains on government finances as
healthcare costs rise. In January 2016, the one-child policy was officially dropped as
China tries to boost the size of the younger generation.
In contrast, India fares well in age demography. Twenty-nine percent of the population is
currently under 14, and the size of the workforce is expected to grow by 165 million over
the next 10 years (ages 15-60) (see Exhibit 189).
Basic education remains a big gap between the two countries. India significantly lags
China, with 27% of the population classified as illiterate and two-thirds still living in rural
areas (see Exhibit 190). Only 15% of Indians have progressed to a senior secondary level
or above, compared to 23% in China (see Exhibit 191).
HOWEVER, THE NUMBER OF While the number of people taking up research positions is lower in India, the number of
UNDERGRADUATES IS HIGHER undergraduates is higher with a large share of them specializing in engineering. Most of
IN INDIA FOCUS IS MORE
these engineering graduates are heading for IT services the IT industry has been
TOWARD SERVICES
generating c.0.2 million new jobs annually for the last few years (see Exhibit 192 and
Exhibit 193).

BERNSTEIN
EXHIBIT 188: China: The share of people above the age of 65 EXHIBIT 189: India: Age pyramid
will increase
100 100
90 18 18 18 18 18 90 24 24
29 26 24
80 80
70 70
60 60
50 64 61 59 50
68 67
40 40 66 68 66 66
63
30 30
20 7 7 20
5 7
10 6 16 10 4
8 10 11 14 3 3 4 5
0 0 5 4 4 5 6
2015 2020 2025 2030 2035 2015 2020 2025 2030 2035
114 1559 6064 65+ 114 1559 6064 65+
Source: World Bank, and Bernstein estimates (2016 and beyond) and analysis. Source: World Bank, and Bernstein estimates (2016 and beyond) and
analysis.
EXHIBIT 190: China is now mostly urban, while India remains EXHIBIT 191: India still has a large illiterate population
mostly rural
100 100
100% 100% JuniorCollege
9% 7%
Diploma 0% 1%
90% 7%
SeniorSecondary 14%
33% Urban
80%
23%
70% 56%
60% JuniorSecondary 39%
50%
32%
40%
67% Rural
30% 3%
44% Primary,belowPrimary 27%
20%
10% Others
27%
6%
Illiterate
0% 5%
Source: World Bank, Census India, and Bernstein analysis. Source: Census India, World Bank, and Bernstein analysis.

BERNSTEIN
EXHIBIT 192: India has a higher number of university EXHIBIT 193: India also has a greater focus on engineering
graduates and students with Master's degrees, but a smaller and science
number of PhDs
25 23.5 Agri 4% 1% 4% 1%
Education 5%
China 9% 15%
Economics
20 India 18.2 Law 8% 3% 1%
Numberofpeople(inmn)
Medicine
15
Eng./Science 22% 33%
10
Admin/Art/SS 52%
5 44%
3.4
1.5
0.3 0.1
0
PHDs Masters Undergraduates China India
Note: For China, short-term courses are not included. Note: For China, the breakdown is for students with normal courses in higher
education institutes (HEIs).
Source: National Bureau of Statistics (India), Ministry of HRD (India), and
Bernstein analysis. Source: National Bureau of Statistics (India), Ministry of HRD (India), and
Bernstein analysis.
R&D INDIA SIGNIFICANTLY Globally, developed countries spend 2-3% of their GDP on R&D, with the bulk of it coming
LAGS CHINA IN THE NUMBER OF from the private sector. China has scaled up its R&D expenditure over the last two
STUDENTS WITH PHDS, AND
decades, increasing from c.1% in 2000 to over 2% now. On the output side, the number
R&D SPENDING
of patents filed has seen a sevenfold increase over the last 10 years (see Exhibit 194 and
Exhibit 195). India, in contrast, has failed to scale up its R&D expenditure. On the
services/tech side, a large part of the growth has been in IT services where the level of
R&D is relatively low. In the manufacturing sector, tech hardware is largely imported.
Many large engineering vendors have entered into partnerships with international vendors
rather than develop their own technology.
Investment in research and development in India as a percentage of GDP has remained

flattish at 0.8% of GDP over the last decade, with only one-third of it coming from the
private sector (as opposed to the bulk of expenditure coming from the private sector
globally). Accordingly, the number of patents filed in India has seen very slow growth and
has been flattish over the last five years.

BERNSTEIN
EXHIBIT 194: R&D expenditure as a percentage of GDP in China has increased over time, while that it has been flat in India
2.5%
R&D Expense (% of GDP)
2.0%
1.9%
2.0%
1.8%
1.7% 1.7%
1.5%
1.5% 1.3%
1.4% 1.4%
1.2%
1.1%
1.1%
1.0% 0.9% 0.9%
0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8%
0.6%
0.7% 0.7%
0.7% 0.7% 0.7% 0.7% 0.7% 0.7%
0.6% 0.6%
0.6%
0.5%
0.0%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
China India
EXHIBIT 195: China has had exponential growth in patent filing in the last two decades
1,000 928
No. of Patents Filed
900 825
Thousands
800
700 653
600 526
500
391
400
315
290
300 245
211
173
200 130
105
80
100 47 50 52 63 29 35 37 34 40 42 44 43 43
10 4 11 4 14 3 20 4 19 5 19 7 23 9 2510 9 5 9 11 11 13 17 24
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
China India
INDIA HAS A LOWER The lower focus on R&D in India can also been seen in the number of researchers involved
PERCENTAGE OF THE in R&D in India. Even in the mid-1990s, the number of researchers in China was ahead of
POPULATION FOCUSING ON R&D
India's current number (see Exhibit 196); today, it is almost 6x higher.
In 2014, China had 2.5x more PhD students enrolled than in India (see Exhibit 197).
Within this group, China has more science, engineering, and medical students (see Exhibit
198), whereas India has a greater share of students studying agriculture and "other"
courses (which comprises social science, Indian languages, and commerce).

BERNSTEIN
EXHIBIT 196: Number of researchers in R&D (per million people) is significantly lower in India
1,000
857 903
China
800 India
600 547
443
400
200 152 135 157

110
0
1996 2000 2005 2010
EXHIBIT 197: Number of PhDs enrolled in India in 2014 was EXHIBIT 198: China has a higher share of PhDs in
less than half the number in China engineering, science, and medical science
55,989 23 45
1% 100%
Law 5%
5% 14%
NumberofPHDs Agriculture
10%
Engineering 36%
18%
6%
23,067
Science 19%
MedicalScience 13% 50%
Other 22%
Source: National Bureau of Statistics (India), Ministry of HRD (India), and Source: National Bureau of Statistics (India), Ministry of HRD (India), and
Bernstein analysis. Bernstein analysis.

BERNSTEIN
WHAT CAN INDIA LEARN FROM THE LAST 15 YEARS OF

CHINESE DEVELOPMENT?
After 35 years of rapid growth, China is often seen as an economic miracle. In this section,
we discuss in detail at how China's policies have driven this miracle. Among the various
policy documents, we believe the series of five-year plans are the most useful to provide a
continuous frame-by-frame picture of what the central government tried to do. We focus
on the policies and progress made over the last 15 years the period is likely to be most
similar to the next 15 years in India. However, given the continuity of China's reforms and
economic progress since 1978, we will also refer to earlier periods.
We have identified five key lessons from China's economic miracle that we believe could
benefit India: (1) Broad-based industrialization; (2) Focus on human capital and
technology; (3) Installation of world-leading infrastructure; (4) Global integration; and (5)
Broad and pragmatic market liberalization. Of these, we believe the "secret sauce" is
found in the last two.
Market liberalization and global integration have been the twin bedrocks of China's reform
since 1978, and correspond to the often quoted "Reform and Open Up" directive (
). For the Indian government to replicate this will not be easy. It took a special mix of
historical endowments and burden for the Chinese government to be able to pursue
market liberalization and global integration for so long and so successfully. India has a
different mix of historical influences.
Nevertheless, learning these lessons will be useful for India's economic development, and
for investors to understand where India may be heading. We review all five key policies
here.
1. HIGHER VALUE, BROAD- The rise of China's economy is well-documented. Rapid industrialization is often cited as a
BASED INDUSTRIALIZATION primary driver. However, we believe the true picture is more complicated than this.
The industrial sector was already the largest portion of Chinese GDP in 1980,
contributing to 44% of total GDP (see Exhibit 199). Its share has not increased over the
past 35 years. However, given its size, it has been the largest contributor of GDP growth
(see Exhibit 200). The contribution from agriculture has steadily declined, while all other
sectors (especially the "Others" segment) have expanded.
China's economic miracle is not just about an increasing portion of the economy moving
into production of manufactured goods. It was about moving up the manufacturing ladder,
producing more value-added and sophisticated products, and about the industrialization
of every part of the economy, from farming to construction, logistics, and to services.

BERNSTEIN
EXHIBIT 199: Contrary to popular misconception, China did not see a greater share of the economy move into the industrial
sector over the last 35 years; the industrial segment has always been the largest contributor to the economy (at 36-44%)
China's GDP Contribution by Sector

100%
9% 10% 10% 11% Others
90% 16% 19% 18% 20%
5% 5% 6%
2% 2% 5%
4% 4% 4% Transport & Logistics
80% 2% 5% 6% 5%
3% 5% 6% 6% 4%
4% 6%
6% 5% 5% 6%
70% 6% Property
6% 7% 7%
5%
30% 28% 4% 6%
60% 20% 7% Construction
27% 15% 12% 10%
50% 9%
4% 8% 8% 7% 9% Finance
9% 10%
40% 7%
Agriculture
30%
20% 44% 41% 40% 42% 40% Wholesale & Retail

38% 37% 36%
10% Industrial
0%
1980 1985 1990 1995 2000 2005 2010 2014
Source: China NBS and Bernstein analysis.
EXHIBIT 200: The industrial segment has also constantly been the largest contributor to GDP growth over the last 35 years;
its share increased until 2005, peaking at 43%
China's Incremental GDP Contribution by Sector

100%
11% 9% 12%
90% 18% Others
5% 8% 24% 23% 23%
5%
3% 4%
80% 5% 5% 4%
5% 7% Transport & Logistics
5% 5% 7% 4%
70% 5% 7%
9% 5% 7% 6%
5% 6% Property
5% 8%
60% 26% 17% 3% 8%
4%
26% 9% 8% 9% Construction
50% 7%
8% 7% 9%
9% 10% Finance
40% 13% 5% 11%
30% Agriculture
20% 43% 39% 43%

35% 39%
32% 30% Wholesale & Retail
10%
Industrial
0%
1980-1985 1985-1990 1990-1995 1995-2000 2000-2005 2005-2010 2010-2014
When talking about industrialization in China, many people instinctively think of labor-
intensive sweatshops, manufacturing of low value-added merchandise. This included the
export-oriented manufacturing plants established by global MNCs such as Nike in China's
free trade zones, as well as domestic factories that supplied the world with cheap

BERNSTEIN
production capacity. China became the world's factory. Global consumers benefited from
the flood of cheap apparel, shoes, toys, and other similarly simple manufactured
merchandise.
What is often overlooked is the dramatic growth in China's manufacturing of more

complicated machines, transport equipment, electrical appliances, and electronics. Since
1990, the textile, rubber, and metal merchandise share has declined from 27% of total
industrial exports to just 18%. In contrast, machinery and transportation equipment has
increased its contribution from 12% to 48% (see Exhibit 201). Machinery includes
electric motors, transformers, circuit breakers, compressors, and related parts.
Transportation includes finished automobiles, ships, rail locomotives, and related parts.
Over the last 15 years, China has also began producing its own finished goods in home
appliances, televisions, computers, mobile phones, cameras, meters and precision
measurement devices, medical equipment, bullet train systems, and even nuclear power
stations. By 2014, ~30% of its exports were from these high-technology products (see
Exhibit 202). The same development also happened in the domestic market what was
historically imported became locally produced.
EXHIBIT 201: The share of light manufacturing products commonly associated with China's development like textiles,
rubber, plastic, and metal merchandise declined over the 1990-2000 period, and but has been steady since then; in
contrast, more advanced products like machinery and transport equipment have gained share significantly
China's Industrial Production Export Share by Product Segment

100% 5% 5%
8% 7% 6% 6%
90%
12%
80% 25%
37%
70% 49% 52% 48%
60%
53%
50%
43%
40% 39%
30% 27% 25% 28%
20%
27% 25%
10% 19% 18% 17% 18%
0%
1990 1995 2000 2005 2010 2014
Textile, Rubber, Metals Miscellaneous Machinery and Transport Equipment Petrochemical
Source: China NBS, China Customs, and Bernstein analysis.

BERNSTEIN
EXHIBIT 202: In particular, an increasing proportion of exports came from machinery, electrical equipment, and electronic
products; the high-tech segment accounted for a significant portion
Share of Total China Export

70%
59%
60% 56% 56%
50%
42%
40%
32% 31%
29% 28%
30%
20%
10%
N/A N/A
0%
1996 2000 2005 2010 2014
Machinery, Electric and Electronic Products High-Tech Products
Source: China NBS, China Customs, and Bernstein analysis.
Home appliances were an early example. Global branded air conditioners initially
dominated the Chinese market in the 1980s and the early 1990s. In the late 1990s,
manufacturing started to switch to China, and local brands also began to flourish. By the
late 2000, China became the largest manufacturer of air conditioners, and local brands
grew to dominate the domestic market. By 2015, China manufactured ~80% of the
world's air conditioners, producing 156 million units (see Exhibit 203). Local brands made
up ~90% of total units sold in the domestic market (see Exhibit 204); brands like Gree,
Haier, and Midea are gradually going global. A similar pattern is seen in other consumer
electric and electronic products such as washing machines (see Exhibit 205),
refrigerators (see Exhibit 206), laptops (see Exhibit 207), and now mobile phones (see
Exhibit 208).

BERNSTEIN
EXHIBIT 203: China air conditioner production volume grew EXHIBIT 204: China's domestic air conditioner market is
12x between 1998 and 2015 dominated by local brands
China Air Conditioner Production 2015 China Air Conditioner Sales

Volume (Million Units) Volume Brand Share
180 Internation
al Brands,
156
160 11%
145
139
140 131
124
120 109
Gree, 28%
100 Other
80 81 81 Local
80
64 68 68 Brands,
60 25%
48
40 31
23
18
20 12 13 Midea,
Haier,
25%
12%
-
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: China NBS and Bernstein analysis. Source: China Air Conditioner Yearbook (2015) and Bernstein analysis.
EXHIBIT 205: China's washing machine production followed EXHIBIT 206: as has its refrigerator production
a similar pattern
China Washing Machine Production China Refrigerator Production

(Million Units) (Million Units)
80.0 100.0
88.0
70.0 90.0
60.0 80.0
70.0
50.0
60.0
40.0
50.0
30.0 40.0
20.0 30.0
10.0 20.0 10.6
0.0 10.0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0.0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: China NBS and Bernstein analysis. Source: China NBS and Bernstein analysis.

BERNSTEIN
EXHIBIT 207: In electronic products, China's laptop EXHIBIT 208: Meanwhile, China's production of mobile
production grew ~6x between 2004 and 2012, before phones has continued to grow unabated, increasing ~75x
declining with the rest of the PC market between 1998 and 2014
China Laptop Production (Million China Mobile Handset Production

Units) (Million Units)
300 1,800 1,682
253 1,600
250 227
1,400
200 1,200
1,000
150
800
100 600
400
50 32
200 22
0 0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Rapid industrialization took place with a homegrown capital goods sector. Between 2000
and 2014, China's production of power generators and motor engines increased 11x and
10x, respectively (see Exhibit 209 and Exhibit 210); China's bullet trains are all locally
produced, with the manufacturing of most components also localized (see Exhibit 211); in
advanced nuclear power stations, the localization ratio steadily increased to reach >80%
(see Exhibit 212); in industrial automation, Chinese companies' share increased from 25%
in 2009 to 33% in 2015 (see Exhibit 213).
Today, as China continues to develop, its industrial sector exhibits a wide spectrum of
technological capabilities, ranging from "technology absorbers" to true innovators and
original technology owners (see Exhibit 214).

BERNSTEIN
EXHIBIT 209: In heavy industries, China's production of EXHIBIT 210: and its output of motor engines surged by a
power generators grew ~11x between 2000 and 2014, as similar multiple
measured in KWh
Power Generators (Million KWh) China Motor Engines Produced

(Million KWh)
160
2,500
140
120
2,000
100
80 1,500
60
40 1,000
20
500
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014 -
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Power Generators (Million KWh)
EXHIBIT 211: High-speed train locomotives: China has localized most of the components going into bullet trains; most of the
suppliers are also Chinese
Source: Bernstein Asian Capital Goods team.

BERNSTEIN
EXHIBIT 212: Nuclear power plants: Chinese companies now produce almost all of the components for their nuclear power
plants with AP1000 technology; they compete for contracts to build them overseas
Designated Components Supplier

Key components Technology Adopter Sanmen 1 Haiyang 1 Sanmen 2 Haiyang 2
Pressure vessel SEG, First Heavy Doosan Heavy Doosan Heavy First Heavy SEG
Control rods SEG NCMD NCMD SEG SEG
Reactor internals SEG NCMD NCMD SEG SEG
Steam generator SEG, HEC Doosan Heavy Doosan Heavy HEC SEG
Pressurizer SEG DEC SEG DEC
Main pump HEC CW-EMD CW-EMD HEC HEC
Reactor coolant piping First Heavy, Erzhong First Heavy First Heavy SEG SEG
Safety injection tank SEG SEG SEG SEG
Fuel handling equip. SEG SEG SEG
Valves Westinghouse
Steam turbine generator MHI/HEC MHI/HEC MHI/HEC MHI/HEC
Localcontentlevelincreases
Note: Shaded boxes are Chinese companies (SEG is Shanghai Electric, HEC is Harbin Electric, and DEC is Dongfeng Electric).
Source: Bernstein Asian Capital Goods team.
EXHIBIT 213: Local substitution is an ongoing trend in the Chinese industrial automation space
Market Share of Domestic Players

35%
32.8% 33.0%
32.3% 32.6%
30.0%
30%
27.1%
24.8%
25%
20%
2009 2010 2011 2012 2013 2014 2015
Source: China Automation Market Research Seminar (CAMRS), company filings, and Bernstein estimates and analysis.

BERNSTEIN
EXHIBIT 214: Chinese companies exhibit a wide range of technology capabilities in the industrial and automation space
Originative
Adaptive Railwayequipment
DCS (processautomation)
Nuclear/coalfiredpower
Constr.equip. Laserprocessing
T&D Videosurveillance
Absorptive Windturbine
Motioncontrol
Chinese company
Hydraulicvalve Agri.equip.
technology level
Robot/Vision
Gasturbine
Factorydiscretecontrol
CHINA'S DEVELOPMENT IS All three countries began industrialization by producing low-end products, while also
SIMILAR TO THAT OF JAPAN, developing capabilities for more sophisticated products. Today, each is a leader in a
SOUTH KOREA, AND TAIWAN
different array of high-tech industries: Taiwan in semiconductor production, South Korea
in shipbuilding and consumer electronics, and Japan in many sectors ranging from
industrial robots to pharmaceuticals.
Developing the heavy and high-tech industrial sector was an explicit policy of the Chinese
government. As early as the 8th Five-Year Plan (1990-95), the State Council identified the
"need to use modern equipment and production methods to rebuild our companies" In
the 10th Five-Year Plan (2000-05), the heavy industrial segment was devoted an entire
paragraph; the government targeted to increase the share of machinery, electric, and
electronic equipment exports to 50% by 2005.
Even within agriculture, government policy has been to industrialize. The 10th Five-Year
Plan targets the scaling-up of farming and husbandry operations, utilizing larger and
better equipment, and harnessing modern agricultural science and technologies. To build
scale, it also promoted the trading of rural land usage rights an especially difficult and
sensitive issue. Improving the efficiency of the agriculture sector was expected to free up
greater excess labor, so the plan also called for an orderly flow of 40 million rural workers
into urban areas between 2000 and 2005 and the generation of a similar number of
urban employment opportunities to cater to them. This led to accelerated urbanization,
and the development of a large pool of human capital to build and support more advanced
industries there.

BERNSTEIN
We can also see this in the numbers. Between 1995 and 2012, total workers in
agriculture, husbandry, fishery, and forestry declined by 16% (see Exhibit 215).
Meanwhile, the installed base of combine harvesters increased 20x from just 75k units in
1995 to 1.6 million in 2014 (see Exhibit 216). Total output of various produce grew
dramatically during that period (see Exhibit 217).
While the service industry had its own section in each of the various five-year plans, it was
clearly lower in importance than the industrial and agricultural sectors for the
government. Within services, the government also prioritized those that are more relevant
for manufacturing than consumption. In the 8th Five-Year Plan, the prioritized order of
importance of the service sector was: commercial or professional services, finance,
insurance, and tourism. The objective was to reduce employment pressures, increase
capital accumulation, and promote economic restructuring.
By 2000, the 10th Five-Year Plan considered consumer and business services separately.
Within consumer services, the priority was on residential property development and
related industries (e.g., furnishing and property management); tourism was seen as the
next biggest thing. Other consumption-driven industries like retail, restaurant, and
entertainment (among others) were put into one category. In contrast, business services
were more diversified, ranging from franchising, distribution, logistics, banking, insurance,
to various professional services or intermediaries (e.g., accounting, legal, consulting, and
IT).
EXHIBIT 215: Total labor in agriculture, husbandry, forestry, EXHIBIT 216: while the level of industrialization increased;
and fishery dropped by 16% between 1995 and 2012 the total installed base of combine harvesters grew 20x
between 1995 and 2014
China Agriculture / Husbandry / China Installed Base of Combines

Forestry / Fishery Workers (Million) (KUnits)
350 323 1,800
1,585
300 1,600
270
1,400
250
1,200
200 1,000
150 800
600
100
400
50 200 75
0 -
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

BERNSTEIN
EXHIBIT 217: Growth in agricultural, husbandry, forestry, and fishery products grew rapidly from 1995 to 2014
China Agricultural Output Growth (1995-2014)

500%
462%
450%
400%
350%
300%
250%
195%
200%
157%
150%
100%
66%
50% 30%
0%
Crops Vegetables Fruits Meat Seafood (1996-2014)
THE NEW THEME IS "Made in China 2025" is the latest national policy supporting industrial transformation. It
TRANSFORMATION AND has four pillars (see Exhibit 218): smart manufacturing, encouraging much higher levels of
UPGRADE
automation in manufacturing; supply chain debottlenecking, aiming to promote local
substitution and further removing the dependence on imported core components; green
development, taking the environment and energy efficiency much more seriously; and
high-end equipment exports with a focus on overseas infrastructure development ("one
belt, one road"). All four pillars reinforce the overarching theme of upgrading the
manufacturing sector to make it smarter, environmentally friendlier, more self-sufficient,
and more competitive globally.
The Chinese government, wary of the overcapacity built during the booming years, is also
actively driving a transformation within China's industrial sector further shifting the
growth engine from low-end manufacturing (the production of steel, coal, and shoes) to
advanced equipment manufacturing (nuclear power, high-speed rail, automation, and
others), with the aim to continue to move up the value chain. According to the "strategic
emerging industries" policy plan, China aims to grow seven identified sectors from 8% of
GDP in 2015 to 15% by 2020, indicating a CAGR of 20% (see Exhibit 219). Recent data
points suggest that the transformation and upgrading of these sectors is progressing
well; financial indicators for equipment and high-tech industries are generally healthier
than the broad industrial sector (see Exhibit 220 to Exhibit 222).

BERNSTEIN
EXHIBIT 218: Four modules of the "Made in China 2025" blueprint
Smart
manufacturing
Local
(industrial
substitution
automation)
Green Incubating
development global champions
EXHIBIT 219: China's ongoing transformation: An upgrade in the manufacturing sector
Strategic Emerging Industries Output as % of GDP

20%
Energy saving
Information technology
Bio-tech
15% Alternative energy
High-end equipment mfg
Advanced materials
10% New engergy vehicle
15%
5%
8%
0%
2015 2020
Source: State Council, China NBS, and Bernstein analysis.

BERNSTEIN
EXHIBIT 220: The high-tech manufacturing PMI is consistently above the manufacturing PMI and stayed well above 50%
despite a dip in February 2016
High-Tech Mfg PMI vs. General Mfg Industry PMI

60%
55.6%
54.8% 54.6%
55% 53.2%
53.1% 53.0%
52.2% 52.4% 52.6% 52.4%
51.3%
50.8%
50% 48.9%
50.0% 49.7% 49.8% 49.8% 49.6% 49.7% 50.2% 50.1% 50.1% 50.0% 49.9% 50.4% 50.4%
49.4% 49.0%
45%
Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16
High-Tech Mfg PMI Mfg PMI
EXHIBIT 221: High-tech manufacturing value-add growth is consistently above general manufacturing growth; equipment
manufacturing has shown a sign of recovery since July 2016
Value-add Growth of High Tech Mfg, Equipment Mfg and General Mfg
14% 12.20%
11.50% 11.60% 11.80%
12% 10.5% 10.4% 10.8% 10.3%
9.2% 9.6% 9.60% 9.70%
10%
8%
6% 7.70%
6.80% 6.70% 6.70% 7.20% 7.00% 7.20% 6.90% 7.20% 7.20% 7.00% 6.80%
6.60% 6.50%
4% 6.00%
2%
0%
High Tech Mfg Growth Mfg Growth Equipment Mfg

BERNSTEIN
EXHIBIT 222: China's ongoing transformation: An upgrade in the manufacturing sector
Profit Growth by Sector (Jan-Aug 2016, y/y)

25%
20%
15%
10% 19.8%
8.4% 14.1%
5%
0%
Industrial Manufacturing Electronics
Source: State Council, China NBS, and Bernstein analysis.
2. HUMAN CAPITAL AND Transforming itself from being the factory of the world's cheap merchandise, to building
TECHNOLOGY HAS BEEN KEY TO the machinery and electronic equipment to run these factories, requires a deep bench of
DEVELOPMENT
talent that can learn, adapt, and advance the latest technologies and sciences. The
Chinese government's five-year plans have always had a chapter on education, talent
development, and R&D.
Education initiatives span across all levels. The 10th Five-Year Plan, for instance, set a
target to increase junior secondary level enrollment rates to 90%, senior secondary level
enrollment rates to 60%, and higher education enrollment rates to 15% by 2005. In
addition, the government also promoted other forms of professional training. The
government also supported various ways to improve education quality and increase
capacity encouraging the establishment of private and community schools and allowing
higher learning institutions greater autonomy in setting their own syllabuses.
Results of these initiatives have been good. By 2014, the average years of education had
risen to 9.3 years from 7.9 in 2000 (see Exhibit 223); almost 90% of adults in China have
completed at least nine years of schooling, and the senior secondary level enrollment rate
has reached 82.5%. The number of people with higher education qualifications (diploma
and above) has increased from 3% of the total population in 1990 to 21% in 2010 (see
Exhibit 224).
Apart from building talent organically, the government targeted talent from abroad,
especially in the form of returnees (or the well-known "sea-turtles"). The 10th Five-Year
Plan sought to attract international talent, especially those who are leaders in their
respective fields. It also encouraged Chinese students to study abroad, to make
reasonable use of international education resources, and sought to attract them back by
guaranteeing their freedom of movement. As a result, the number of new overseas
students has grown from 39k in 2000 to 460k, while the number of overseas students
returning to China has increased from less than 10k in 2000 to 365k in 2014 (see

BERNSTEIN
Exhibit 225). As China becomes wealthier, overseas students are becoming more willing
to return, and the virtuous cycle spins faster. In 2000, total returnees were about 40% of
students that had gone abroad three years ago; by 2015, that ratio has gone beyond
100%.
The government is also progressively increasing research and development intensity. The
10th Five-Year Plan aimed to increase R&D spending to 1.5% of GDP by 2005; the 11th
Five-Year Plan targeted 2% by 2010. While actual spending levels fell short of the
targets, the trajectory remained firmly positive. R&D spending increased from just 0.6% of
GDP in 1995 to 1.3% in 2005 and to 2% in 2014 (see Exhibit 226). Total annual patents
filed has also increased from 41k to 1.2 million domestically and 3.8k to 93.3k
internationally (see Exhibit 227 and 228). China already produces 18% of the patents
granted around the world (see Exhibit 229). In some fields, like telecommunications
equipment, Chinese companies (e.g., Huawei and ZTE) have already been leading the
industry. R&D spending in China is also sustainable, as it is driven by corporations instead
of the government: in 2002, ~64% of total R&D was spent by corporations; this increased
to 79% by 2014 (see Exhibit 230). A full 80% of incremental R&D dollars between those
12 years were funded by the corporate sector.
The Chinese government has always recognized the strong link between education and
R&D on the one hand, and industries and the economy on the other. As early as the 8th
Five-Year Plan, the government had set this guiding principal: "economic development
must rely on technology and science; technology and science must also be for economic
development." Part of its approach is to recognize "up-and-coming" and/or "economically
critical" fields of research and guide resources in that direction. As early as 1990, the 8th
Five-Year Plan recognized biological engineering, digital IT, telecommunications, and
th
automation as some of the more promising areas. In 2000, the 10 Five-Year Plan added
high-speed broadband, bio-semiconductors, vaccines, among others, to the mix.

BERNSTEIN
EXHIBIT 223: Average years of education for the Chinese EXHIBIT 224: The number of people with advanced degrees
population have increased steadily over the last ~15 years (diploma and above) has increased from 2% in 1990 to 8%
in 2000 and 21% in 2010
China Average Years of Education for China Population by Education Level

Population Aged 15 and Over
100% 1%
2% 1%
7% 6%
9.5 7% Bachelor or
9.3 90%
9% 15% above
9.1 80%
9 31% Diploma
70% 16%
8.5 60% 42%
8.5 Senior High
50%
36%
7.9 40%
8 Junior High
30% 59%
7.5 20% 41%
27% Primary or
10% below
7 0%
2000 2005 2010 2014 1990 2000 2010
Source: State Council, China Census, Sun Yat-Sen University, and Bernstein Source: China Census and Bernstein analysis.
analysis.
EXHIBIT 225: The number of Chinese students going overseas has increased 22x from 1995 to 2014; the number of overseas
students returning to China has expanded 60x; almost all overseas students now decide to return to China
China Students Going Overseas and Returning

900 124% 140%
119%
800
104% 107% 120%
700 94%
100%
600 81%
76%
500 69% 460 80%
400 414 58%
400 52% 340 354 365
60%
285
300 36% 37% 41% 36% 38% 229
273
29% 28% 180 186 40%
200 125 117 115 119 134 144 108 135
84
44 69 20%
100 206 217 227 187 248 399 12 18 20 25 35 42
0 0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Students Going Overseas (K) Overseas Students Returning (K) % of Overseas Students Returning*
* Overseas students returning this year as a percentage of students going overseas three years ago.

BERNSTEIN
EXHIBIT 226: China's R&D expenditure increased from 0.6% of GDP in 1995 to 2% in 2014
China R&D Expenditure as % of GDP

2.5%
1.99%2.02%
1.91%
2.0% 1.78%
1.66%1.71%
1.44%
1.5% 1.31%1.37%1.37%
1.21%
1.06%1.12%
0.89%0.94%
1.0%
0.64%0.65%0.75%
0.57%
0.56%
0.5%
0.0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
EXHIBIT 227: Patents granted to Chinese EXHIBIT 228: while outside of China, it increased 24x
companies/institutions within China increased 28x between
1995 and 2014
Patents Originating from China Patents Originating From China

Granted in China (K) Granted Outside of China (K)
1,400 100 93.3
1,209
90
1,200
80
1,000 70
800 60
50
600 40
400 30
20
200
41 10 3.8
0 0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

BERNSTEIN
EXHIBIT 229: Patents granted to Chinese companies/institutions now make up 18% of global patents, although they are
still predominantly granted within China
Global Patents Granted by Country of Origin and Patent Authority

100%
90%
80%
70%
60%
50%
40%
70%
30%
20%
10% 18%
0% 2% 1% 1% 2%
EPO (Europe) JPO (Japan) KIPO (Korea) SIPO (China) USPTO (US) Global
China Other
EXHIBIT 230: China's R&D is also sustainable, with corporations funding ~79% of the expenditure, up from 64% in 2002
China R&D Spending Share by Funding Source

100%
90% 24.7% 24.6% 25.1% 22.7% 22.6% 22.1% 21.2%
28.9% 28.2% 26.4% 25.9%
80% 36.0% 33.2%
70%
60%
50%
40% 74.1% 75.3% 75.4% 74.9% 77.3% 77.4% 77.9% 78.8%
71.1% 71.8% 73.6%
30% 64.0% 66.8%
20%
10%
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Corporate Government
3. WORLD-LEADING China is often criticized, by those who only read about the country in newspapers, for
INFRASTRUCTURE overbuilding and leaving behind empty highways, which lead to nowhere. The claim is
false. China does not yet have overcapacity in infrastructure. As Exhibit 237 shows, there
is a strong correlation between per capita GDP and per capita fixed assets formation, and
China is right in line. It is often easy to overlook the importance of building world-class
infrastructure ahead of demand to propel growth. Much of the incremental infrastructure
capacity has been utilized quickly.

BERNSTEIN
The 8th Five-Year Plan discusses this point: "As infrastructure building requires a high
level of investment and lead-time, with relatively low prices and fees, we need to plan
early, implement policies that promote investment, and raise finance through multiple
channels."
An example of this is the highway system. In the 10th Five-Year Plan, the government set a
target of 25k km of highways by 2005. Between 2000 and 2014, the length of total roads
in China doubled and highways grew 6x (see Exhibit 231 and Exhibit 232). During the
same period, total civilian vehicles on the road grew even faster, increasing over 8x (see
Exhibit 233). In addition, road cargo traffic volumes exploded due to the rise of
e-commerce, with total tonnage moved by road growing ~230% between 2000 and
2014. Total parcels delivered increased 126-fold, from just 110 million packages in 2000
to ~14 billion in 2014.
The same pattern of rapid expansion of infrastructure capacity being quickly utilized by
faster-growing demand is seen across many areas. In electricity, generation capacity
grew from 135 billion KWh in 2000 to 563 billion KWh in 2014, increasing 3.2-fold;
usage has grown from 125 billion KWh to 533 billion, or 3.3-fold, over the same time
period (see Exhibit 234). Growth in residential power consumption has grown faster than
industrial. For seaports, the total length of piers increased 2.8x between 2000 and 2014
and the total number of berths increased 2.3x; meanwhile, total port throughput has
increased 5.1-fold (see Exhibit 235). For railways, the total track length increased 63%
from 2000 to 2014, mostly driven by the construction of tracks for bullet trains (i.e.,
multiple unit locomotives); meanwhile, passenger traffic grew 124% and cargo traffic
grew 114% (see Exhibit 236).
EXHIBIT 231: Total length of roads in EXHIBIT 232: highways increased EXHIBIT 233: but both were
China increased 200% between 2000 590%... outstripped by the accelerating growth
and 2014, while of on-road civilian vehicles, which grew
810%
Road (Thousand Km) Highway (Thousand Km) Civilian Vehicles On-road

(Million)
450 120
400 160
100
350 140
300 +200% 80 +590% 120 +810%
250 100
60
200 390 112 80
146
150 330 40 60
74
100 40 78
132 159 20 41
50 16 20 16 32
0 0 0
2000 2005 2010 2014 2000 2005 2010 2014 2000 2005 2010 2014
Source: China NBS and Bernstein analysis. Source: China NBS and Bernstein analysis. Source: China NBS and Bernstein analysis.

BERNSTEIN
EXHIBIT 234: China: Electricity capacity EXHIBIT 235: China: Seaport capacity EXHIBIT 236: China: Railway capacity
versus usage versus usage versus usage
Electricity (2000-2014 Growth) Seaports (2000-2014 Growth) Railway (2000-2014 growth)

450% 394% 600% 140% 124%
513%
400% 114%
500% 120%
318% 325%
350%
100%
300% 400%
250% 280% 80% 63%
300% 234%
200% 60%
150% 200%
40%
100%
100% 20%
50%
0% 0% 0%
Capacity Total Usage Residential Seaport Pier Seaport Seaport Track Length Passenger Cargo Traffic
Usage Length Berths Throughput Traffic
Source: China NBS and Bernstein analysis. Source: China NBS and Bernstein analysis. Source: China NBS and Bernstein analysis.
China has also aimed to build world-leading infrastructure that can have a strong
multiplier effect for the industries and consumption. Some have stalled, such as the 3.2km
Maglev track between Shanghai Pudong Airport and an arbitrary station slightly closer to
the city center (but still quite far away). But many others have flourished, for example: 1)
China's various deep water ports carrying its international trade are now competing with
Hong Kong and its world-leading 4G, and 2) fiber network now drives vigorous growth in
e-commerce, the Internet content, and applications. China is now embarking on the
construction of large datacenters to support the future growth of digital media, including
HD and 4K content.
Infrastructure building requires strong centralized political power. It is needed to

coordinate projects that span and affect multiple administrative regions to push
through vested interests and raise sufficient finances. For example, the Southern Water
for North () project aims to divert water from the more humid South to the more
arid North. The project is expected to cost RMB120 billion. Construction began in 2002;
two of the diversion waterways were completed in 2013 and 2014, respectively, while
another is still being appraised. Construction passes through five populous provinces
where 330k residents had to be relocated. Other examples include the Three Gorges
Dam that took 12 years to build and had cost RMB180 billion, including ~RMB80 billion to
relocate the 1.2 million residents affected. Another is the bullet train system in China,
which has cost over RMB1 trillion so far, and each line has operated at a loss in the initial
few years. For better or worse, it is difficult to imagine any other administration in the
world stomaching these projects.
Exhibit 237 also suggests that China is likely to continue its infrastructure development,
but there will be a subtle shift of focus while the last two decades were more about the
national infrastructure backbones (national highways, high-speed rail networks, power
infrastructure, etc.), the next decade will see an increasing focus on upgrading municipal
infrastructure (for example, subways and solid waste and waste water treatment facilities,
as well as smart cities). Since 2008, China built 40k km of railways, almost half of which
are high-speed rail (see Exhibit 238). Going forward, China will likely continue to develop
the railway network but the incremental mileage added very year has already peaked and
should soon start declining (see Exhibit 239). In the meantime, there is a stronger push for

BERNSTEIN
investment at the municipal level, as we can see from the public-private partnership (PPP)
project pipelines (see Exhibit 240 to Exhibit 242) and from the accelerated development
of subways in some 70 cities (see Exhibit 243).
EXHIBIT 237: Infrastructure investment in China is likely to continue
Accumulated Gross Fixed Capital Formation per Capita (US$)

100,000
Qatar R = 0.87
90,000
Switzerland
80,000
GDP per Capita (US$)
70,000
Australia
60,000 Singapore Sweden
USA
50,000
UAE
40,000 Israel France
Japan
30,000 Saudi Arabia
Korea
20,000 Russia Greece
Indonesia China (2025E)
10,000 Malaysia
China (today)
0 India
0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000
Source: World Bank, IMF, Haver, Bernstein Asian Strategy team, and Bernstein analysis.
EXHIBIT 238: China's railway operating length reached 120k km in 2015; we estimate it will reach 151k km by 2020
China Railway Operating Length (000 Km)

180 12th5yearplan
160 151
140
30
(000 Km)
120
120
112
103 19
98 16 28
100 91 93 11
9 12
80 86 5 7 6 9
80
85 86 87 89 92
78 80 83 84
60
2008 2009 2010 2011 2012 2013 2014 2015E 2020E
Others Inter-city/Fast High speed
Source: Haver, China's National Development and Reform Commission (NDRC) website, and Bernstein estimates and analysis.

BERNSTEIN
EXHIBIT 239: China's latest (July 2016) "Mid-to-Long Term Railway Development Plan" confirms a gradual slowdown
Incremental High-Speed Rail Length in Each 5-Year Period (km)
13,867
11,000
8,000
7,000
5,133
2006-2010 2011-2015 2016E-2020E 2021E-2025E 2026E-2030E
Source: China's NDRC website, and Bernstein estimates and analysis.
EXHIBIT 240: Municipal works are the priority of PPP in EXHIBIT 241: PPP projects in municipal works focus on
China subways, municipal roads, and waste water treatment
Planned Investment of PPP Projects Planned Investment of PPP Projects

Breakdown by Type in Municipal Works: Breakdown
Total:RMB10,599bn by Type Waste
Water
Total:RMB2,783bn Treatment
Environ- 7%
mental Others
Protection 17% Municipal
5% Works
26%
Municipal
Tourism Others Road
5% 33% 14% Water
supply
Public 5%
Housing
Road
6%
22%
Area Low-
Refuse
develop- impact
Other Treatment
ment Develop- Subway
Transpor- 2%
10% ment 37%
tation Railway 2%
6% 3%
Source: China Public Private Partnerships Center (CPPPC) and Bernstein Source: CPPPC and Bernstein analysis.
analysis.

BERNSTEIN
EXHIBIT 242: The relative importance of PPP across sectors varies significantly, with high-impact areas being water
treatment, subways, and environmental protection
Planned Investment of PPP Projects as % of 2016-2020 Total FAI

70% High ImpactArea Medium ImpactArea
60% 55%
50%
42%
40% 36%
30%
23%
20% 17%
13%
9% 8%
10% 7% 7%
4% 2% 3%
0%
Waste Water Subway Environmental Low-impact Refuse Road Culture & Arts Healthcare Hydro & Railway Education Smart City Total
Treatment Protection Development Treatment Irrigation
PPP
Investment 184 1,041 492 68 58 2,364 178 185 307 327 167 43 10,599
(RMBbn)
Note: PPP as % of FAI =Planned investment of PPP projects / Projected accumulative FAI in 2016-20E.
Source: China NBS, CPPPC, Originwater, Henan Province Bureau of Statistics (HPBS), Sina, and Bernstein estimates and analysis.
EXHIBIT 243: Subway development will accelerate; operating length to double in 2020 versus 2015
China Subway Operating Length (000 Km)

8 12th5yearplan
7.0
7
5
(000 Km)
4
3.2
2.9
3 2.4
2.1
2 1.7
1.5
1.0
0.8
1
0
2008 2009 2010 2011 2012 2013 2014 2015 2020E
Subway
Source: China's NDRC website, and Bernstein estimates and analysis.
4. GLOBAL INTEGRATION One of the two bedrocks of China's reform starting in 1978 was to "open up" to the world.
Since then, this motto has been a mainstay of all the subsequent five-year plans. In the 8th
Five-Year Plan, over a decade after the beginning of that reform, then Premier Li Peng
explained the strategy across three dimensions:

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Export: Enhance the level of value-add, focus on industrial products including light
manufacturing, machinery, electric and electronics, and high-tech products and
generate foreign exchange
Import: Focus the limited foreign exchange on importing advanced technology and
manufacturing equipment; also need a certain scale of imports to maintain healthy
trade balance with partners
Foreign Direct Investment: Direct FDI toward export-oriented industries, high-tech

industries, and selected large infrastructure projects; integrate FDI; and upgrade
domestic corporate technology
To encourage cooperation from foreign companies and governments, Premier Li Peng

promised that China would maintain the continuity and stability of its "Open Up" policy.
By 2000 (the year before China became a member of the WTO), China was ready to
expand its engagement with the world. The 10th Five-Year Plan called for reducing tariff
rates, allowing foreign capital to invest in industries ranging from banking to telecom, and
encouraging foreign capital to participate in SOE reform as well as infrastructure
development in central and western China. Also for the first time, China instituted the
"Walk Out" policy, encouraging Chinese companies to invest overseas for technology and
resources.
We have seen earlier that the export strategy worked according to plan. So did the import
strategy. Machinery and transport equipment as a share of total imports increased from
32% in 1990 to 44% in 2005, before falling back to below 40% (see Exhibit 244).
Imports also increased steadily in line with exports, keeping the trade surplus as a
percentage of total trade and GDP relatively stable (see Exhibit 245). Despite on-and-off
trade disputes, mainly with the United States and some parts of Europe, China managed
to increase the total trade value by 6.5x with North America and 8x with Europe between
2000 and 2014.

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EXHIBIT 244: China increased machinery and transport EXHIBIT 245: China also increased imports in step with
equipment as a share of total imports from 32% in 1990 to exports; the trade surplus has been relatively stable as a
44% in 2005, before falling back to below 40% share of total trade and GDP
Machinery and Transport Equipment China Import and Export

Share of Total Imports
2,500 10.0%
50% 9.0%
44% 2,000 8.0%
45%
40% 41% 7.0%
39%
40% 37% 1,500 6.0%
35% 5.0%
32%
1,000 4.0%
30% 3.0%
25% 500 2.0%
1.0%
20%
0 0.0%
15% 1990 1995 2000 2005 2010 2014
10% Imports (Billion USD; Left)

Exports (Billion USD; Left)
5%
Trade surplus as % of total trade
0%
1990 1995 2000 2005 2010 2014 Trade surplus as % of GDP
In terms of FDI, the total value increased 33x between 1990 and 2014 (see Exhibit 246);
even between 2000 and 2014, it had tripled. Employees hired by foreign companies in
China increased from 6.4 million (or 2.8% of total urban employees) to 29.6 million (or
7.5% of the total) in the same time frame (see Exhibit 247).
Since 1997, over 60% of foreign capital has been invested in the industrial and
manufacturing sector, reaching a peak of 70% in 2005 (see Exhibit 248). As a group, FDI
companies have also been net exporters (see Exhibit 249). Furthermore, given the current
sophistication of China's industrial sector (as previously mentioned), it is clear that the
acquisition of advanced technology from FDI has also worked as a policy.
Since 2005, while industrial manufacturing remains the main destination of FDI flow, an
increasing portion is diverted to property development, professional services, wholesale,
and retail. It is unclear whether this is due to increased unwillingness by foreign
companies to bring technology into China. We doubt that is the case, especially given the
recent establishment of R&D centers by the likes of Intel and Apple and the construction
of fabs by TSMC. The more likely reason is that the earlier cost advantages enjoyed by
moving low-end manufacturing to China is now disappearing as the opportunity costs of
China's labor, land, and other resources become more expensive.

BERNSTEIN
EXHIBIT 246: China's inbound FDI grew 33x from 1990 to EXHIBIT 247: FDI corporations now employ 7.5% of total
2014 urban employees, up from 2.8% in 2000
China's Inbound Foreign Direct China Urban Employees in Foreign,

Investment (Billion USD) Hong Kong, Macau & Taiwan Invested
Companies (mn)
140.0
119.6 35.0 12.0%
120.0 29.6
105.7 30.0 10.0%
100.0 +33.3x 25.0 7.5%
8.0%
18.2
80.0 20.0
60.3 12.5 6.0%
60.0 15.0 4.4% 5.3%
37.5 40.7 4.0%
10.0 6.4
40.0 2.8%
5.0 2.0%
20.0
3.5 0.0 0.0%
0.0 2000 2005 2010 2014
1990 1995 2000 2005 2010 2014
Hong Kong, Macau & Taiwan Companies
Foreign Companies
As % of Total Urban Employees (Right)
EXHIBIT 248: Over 60% of FDI funds were invested in the EXHIBIT 249: FDI corporations have been net exporters
manufacturing industry from 1997 to at least 2005
Share of China's Total Inbound FDI by Foreign Direct Investment

Industry Corporations' Import and Export
Balance (Billion USD)
100%
90% 12.0
25% 21%
26% 30%
80% 38% 10.0
9%
70% 11% 11%
8.0
60% 23%
50% 6.0
29%
40% 4.0
70%
30% 62% 63%
47% 2.0
20%
33%
10% 0.0
0%
1997 2000 2005 2010 2014
Import Export Balance*
Manufcturing Property Others
* Positive number indicates net exports; negative indicates net imports.

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5. BROAD AND PRAGMATIC It could easily appear as if the China miracle may have been a planned one. The central
MARKET LIBERALIZATION government provided a blueprint for rebuilding the nation through successive five-year
plans, which were well-executed and delivered the intended results.
However, the dictated industry policies by themselves cannot explain China's success. For
example, the Chinese government has wanted to develop heavy industry ever since it
came into power in 1949. All efforts prior to the 1978 reform led to failures and even
disasters, such as the Great Leap Forward in 1958-1961 that ultimately starved tens of
millions to death.
We believe there are two secret sauces for the China Miracle the two most dramatic
changes since the 1978 reform. One was mentioned earlier the opening up of its
economy; reintegrating into the world; and trading, investing, and cooperating with former
enemies. The other is market liberalization.
Flip open any five-year plan since 1978, and you will find a large section dedicated to the
topic of "Drive Reform With Determination." China's leadership in 1978 had witnessed
decades of economic failures under communist dogma, including the Great Leap Forward
and the Cultural Revolution. For them, "reform" meant to break away from that dogma,
and pursue anything that would lead to economic development and improve living
standards.
According to the 8th Five-Year Plan, it meant reforming the existing state-owned system
into a mixed ownership economy, where state, corporate, and private ownership can
coexist. It meant reforming the central planning system, so that administrative and
market-based systems of allocating resources can coexist. Reform is also a continuous
process, because there are always new challenges and "social conflicts" that can surface.
Reform also has undefined solutions that require further exploration.
In the 10th Five-Year Plan, reform was ascribed more precise actions. SOEs'
administrative, social, and commercial functions were separated. Exit paths for poorly-
performing SOEs were established. Private and foreign capital was encouraged to
participate in SOE restructuring (except in the most sensitive industries). Corporations
became the key entities making investments, while banks reviewed credit-lending
applications independently, with the government playing only a guiding role. State banks
were commercialized their ownership was diversified although the government
retained control. Markets were formed for commodities, futures, and corporate bonds.
Currency was moved from a fixed rate to a floating peg.
By the 12th Five-Year Plan, reform is entering even deeper territory. For remaining SOEs,
it was about separating government's supervisory and shareholder roles, with separate
treatment of SOEs' welfare versus commercial objectives the government encouraging
more public listings and corporatization for the latter. The government ensured equal
treatment of private companies and enhanced protection for private investors. Financial
markets were expanded, diversified, and extended to include various tiers of equity, bond,
and futures markets. Interest rates were liberalized, and there has been a push for gradual
liberalization of the capital account.

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The common thread that runs through all of these is to liberalize markets to private
participation, reduce state influence, and allow the market to drive resource allocation.
The results show that the implementation has been successful. In terms of employment,
total urban employment by private enterprises (domestic and foreign) as well as the
number of self-employed, which have surged from 40 million in 2000 to 198 million in
2014, or from 17% of the total urban workforce to 50% (see Exhibit 250). The share of
urban employees working for SOEs and government institutions has fallen from 96 million
to 68 million over the same period, or from 41% of the total to 17%.
From an investment perspective, private enterprises (domestic and foreign) accounted for
41% of annual fixed asset investment (FAI) as of 2014, up from 34% in 2006 (earlier data
is not available). In contrast, investments by SOEs and the government have fallen from
33% to 27% in the same time period. The trend is also clearly downward since the
4-trillion mega stimulus post-2008 (see Exhibit 251).
EXHIBIT 250: The share of urban employees working for government/SOEs/co-operatives declined from 41% in 2000 to 17%
in 2014, while the number of employees working for joint-stock corporations increased from 5% to 21% during the same
time period; and the number of private enterprises or the self-employed increased from 17% to 50%
Proportion of China Urban Employees by Type Employing Entity

60%
50%
50%
41%
40%
30%
21%
20% 17% 17%
10% 5%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
SOEs, Gov't Institutions and Co-ops Limited Liability / Joint Stock Corporations Private and Self-Employed
Note: SOEs include fully government-owned enterprises; co-operatives are community or group owned; limited liability and joint stock corporations include fully,
partially and non-government-owned enterprises, but usually involve multiple investing/owning/shareholding legal entities; private and self-employed include
both domestic and foreign entities without any government ownership.

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EXHIBIT 251: FAI by SOEs and government institutions fell from 33% of the total in 2006 to just 27% in 2014; investment by
private and the self-employed (domestic and foreign) increased from 34% to 41% in the same time period
Proportion of China Fixed Asset Investment by Type of Investing Entity

45% 41%
39%
40% 36% 36% 37% 38% 37%
35% 34% 35% 36%
35% 33% 34% 32%
34% 33% 32%
31% 32%
31% 31% 30% 31%
30% 29%
30% 28% 27%
25%
20%
15%
10%
5%
0%
2006 2007 2008 2009 2010 2011 2012 2013 2014
SOEs, Gov't Institutions and Co-ops Limited Liability / Joint Stock Corporations Private and Self-Employed
Note: SOEs include fully government-owned enterprises; co-operatives are community or group owned; limited liability and joint stock corporations include fully,
partially and non-government-owned enterprises, but usually involves multiple investing/owning/shareholding legal entities; private and the self-employed
include both domestic and foreign entities without any government ownership.
China's market liberalization has been broad based, covering almost all industries. SOEs
in strategic industries like oil and gas are spinning off competitive segments of the
businesses like retail and refining from the more strategic production. Non-competitive
pipeline networks are also being separated. The recent Sinopec sale of ~30% of its retail
business is an example. Public welfare industries like healthcare and education are also
encouraging private and foreign participation. In education, the share of undergraduates
attending private universities increased from 21% in 2009 to 24% in 2014, while the
share of preschoolers in private institutions increased from 43% to 52% (see
Exhibit 252). In healthcare, private hospitals' share of total beds increased from 11% in
2010 to 19% in 2014, while the share of patient visits increased from ~8% to ~11% (see
Exhibit 253).
It is not just about downsizing SOEs and encouraging private enterprises to enter the
market. It is also about removing administrative complexity, streamlining processes, and
downsizing administrative departments. Some of the policies include replacing
administrative approval protocols with registration and selective checking protocols; and
more recently piloting a "prohibition list" in free trade zones (hence, allowing anything that
is not legally prohibited).
The Chinese government has also been pragmatic; there is no hard rule on what should be
driven by the market and what by the state. The government has been flexible, deferring
to the private sector when it is demonstrated to produce better economic results. Take
the residential housing industry as an example: the original plan envisioned in the 10th
Five-Year Plan was for subsidized public housing ( or ) to be the
dominant force to improve the quality of housing. The target was to increase average
living space per urban resident to 22 square meters by 2005. However, by 2003, it was

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clear that government housing was unable to meet that target, while commercial housing
has been filling that vacuum since then (see Exhibit 254). In 2003, the government
passed policies for the private sector to drive the housing market. Currently, commercial
housing () makes up 74% of total new housing construction area in China, and the
average living space per urban resident reached 33 square meters by 2012.
EXHIBIT 252: The share of undergraduates attending private EXHIBIT 253: The private hospital share of total hospital
universities increased from 21% in 2009 to 24% in 2014, beds increased from 11% in 2010 to ~19% in 2014, while the
while the share of preschoolers in private institutions share of patient visits increased from ~8% to ~11%
increased from 43% to 52%
Share of Students in Private Private Hospital Share of Total

Institutions 18.8%
20%
60% 18%
52%
50% 16%
43%
14%
40% 12% 11.0% 10.9%
30% 24% 10% 8.1%
21%
8%
20%
12% 10% 6%
10% 4%
0% 2%
University Senior High Pre-school 0%
(Undergraduate) Beds Patient Visits
2009 2014 2010 2014
Source: China NBS and Bernstein analysis. Source: Ministry of Health and Bernstein analysis.
EXHIBIT 254: The share of commercial (or private) construction of new residential properties increased from ~20% in the
1990s to 75% by 2014, driving a huge increase in China's housing construction activity; this is despite the initial
government policy to rely more on public housing
New Housing in China - Area Under Construction (Billion Square Meter)

8.0 75% 80%
67% 70% 72%
7.0 65% 70%
61%
57% 59% 58%
6.0 54% 60%
50%
5.0 45% 50%
38% 4.9 5.2
4.0 34% 3.9 4.3 40%
28% 3.1
3.0 23% 23% 2.5 30%
20% 20% 22% 2.2
2.0 1.9 20%
1.3 1.5
0.4 0.4 0.5 0.6 0.7 0.9 1.1
0.3 0.3 0.3
1.0 1.8 1.7 1.9 1.9 1.9 1.7 10%
1.1 1.2 1.2 1.3 1.4 1.3 1.2 1.2 1.1 1.1 1.1 1.1 1.3 1.4
- 0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Non-Commercial Commercial Commercial Share (Right Axis)

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FINAL OBSERVATIONS ON THE When we look across China's policies and what they actually achieved over the last few
CHINA MIRACLE decades, there are a few important observations:
Economic development has been the single most important objective. All the five-year
plans quoted variations of the same saying: "Economic development is the last word."
It is seen as the only way to resolve all the problems that China had: alleviate poverty,
ensure social stability, increase people's happiness, and (more implicitly) strengthen
communist party rule. As mentioned earlier, the prior decades of economic and social
strife drove this attitude.
Pragmatic trial and error. One of Deng Xiaoping's most-often quoted sayings is:
"Doesn't matter if it's a black or white, if it catches rats, it's a good cat." This
symbolized the ultimate pragmatism of the Chinese reform. There is no right answer;
there is only trial and error, and whichever answer that works at the time.
Broad and comprehensive. All cylinders of the Chinese economy pumped together
primary, secondary, and tertiary; consumer and industry; human capital and hard
infrastructure; and reforms of financial markets, taxation, and laws. Some may be
slower than others, but they are all moving forward. Consumer demand drove
localization of manufactured goods; infrastructure spending drove the indigenous
machinery and heavy industry. Both drove the demand for talent, while the supply of
talent grew with improved economy. The economy developed on all fronts
simultaneously.
Stability and continuity. Social and political stability provides a foundation for
economic development. Continuity of policies provides investors and entrepreneurs
certainty. Since 1978, the communist party has ruled under pretty much the same
guiding policy principals of "Reform and Open Up."
Building followed by upgrading. China has been relentlessly building up its domestic
manufacturing sector and infrastructure in the last three decades not a perfect
process but certainly crucial to the country's success to date. More importantly,
China has recently shifted gears to emphasize upgrades directing investment to
transform existing capacities with the hope to make it a new growth engine for the
economy.
Equally important is to take note of what the Chinese government did not include in the
five-year plans. There were very few references to labor laws. There were no overly
burdensome targets (GDP growth targets were always around 7% to 8%, despite years of
over-achievement). There was no requirement to buy China. It was pragmatic policies and
profits not partisan politics or patriotism which drove the China miracle.

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INVESTMENT IMPLICATIONS FROM CHINESE RETURNS

OVER THE LAST 15 YEARS
To understand where key opportunities in the development of India are likely to be, it is
useful to review the experience of investors in the Chinese economy over the past 15
years. Not surprisingly, the "winning" sectors have shifted as the economy transitions from
infrastructure-led growth to consumer-led consumption, and from manufacturing to
services.
We have analyzed returns over the last 15 years in two 10-year periods. The first period
(2001-11) shows a much greater bias to sectors involved in infrastructure development.
The second period (2006-16) is led by healthcare, consumer discretionary, and services
In the first period, the lead sectors were: Oil, gas, and fuels (722%); beverages (638%);
aerospace and defense (318%); electrical equipment (313%); telecom services (280%);
food and staples (271%); construction materials (246%); food products (236%);
automobiles (234%); and banks (217%). Of these, only one (automobiles) was in the top
10 list in the 2006-16 period as total returns accelerated to 480%. Two other sectors
(aerospace and defense, and construction materials) showed higher returns in the second
period (increasing slightly to 332% and 336%), but this wasn't enough for either to
remain in the top 10. Returns for food products were broadly similar, but the other six
categories showed significantly slower growth in the second decade.
Returns in the second period were led by biotechnology (994%); healthcare (925%);
pharmaceuticals (718%); software and Internet services (640%); distributors (605%);
healthcare technology (550%); textiles, apparel, and luxury goods (531%); electronic
equipment (484%); automobiles (480%); and auto components (479%). All of these
categories showed meaningful acceleration in the second decade versus the first.
We expect the key performing sectors in India over the next 15 years to vary from what we
have seen in China largely due to the differences in starting position and policy. The
general shift toward greater consumer discretionary spending is likely to be a common
theme as Indian disposable incomes rise over this period.
SECTOR-SPECIFIC INVESTMENT Asia-Pacific Telecommunications: We believe the growth in India offers attractive
IMPLICATIONS opportunities. We prefer Bharti Airtel (outperform) as the scale player in the market and
rate Idea Cellular underperform. In China, we rate both China Unicom and China Telecom
outperform and our preferred scale player China Mobile market-perform due to near-term
ARPU headwinds.
India Capital Goods: We see good opportunities in consumer discretionary led by an

improvement in per capita income and urbanization. Construction and building materials
should benefit from continued infrastructure investment. Ports and logistics benefit from
improving economic growth and increased growth in e-commerce. The manufacturing

BERNSTEIN
mix will improve and we see pockets of growth in defense. Key stocks in our coverage
include Adani Ports, Bharat Electronics, Crompton Consumer and Container Corporation
(all outperform).
Asian Capital Goods: Hollysys, Shanghai Electric, and Zoomlion (all outperform) are key
beneficiaries of China's continued infrastructure investment. Keyence and Cognex are
both automation pure plays, benefiting from the upgrading trend. We rate Keyence
outperform and Cognex market-perform. Investment in China's railway sector has already
peaked and will soon start to decline. We rate CRRC market-perform and Zhuzhou CRRC
Times underperform.
EXHIBIT 255: Top returning industries in China between 2001 and 2011 (based on listed companies)
Top Returning Industries in China, 2001-2011
2001-2011 2006-2016
Top 10 Industry Segments, 2001-2011 Ranking Total Shareholder Ranking Total Shareholder
(out of 53) Return (out of 53) Return
Oil, Gas & Consumable Fuels 1 722% 52 39%
Beverages 2 638% 28 262%
Aerospace & Defense 3 318% 23 332%
Electrical Equipment 4 313% 42 194%
Telecommunication Services 5 280% 50 94%
Food & Staples Retailing 6 271% 46 138%
Construction Materials 7 246% 22 336%
Food Products 8 236% 32 235%
Automobiles 9 234% 9 480%
Banks 10 217% 41 196%
Note: Data includes all listed companies in Hong Kong and China since November 2006, with the main risk exposed to mainland China; the period of measuring
return is from November 2006 to November 2016.
EXHIBIT 256: Top returning industries in China between 2006 and 2016 (based on listed companies)
Top Returning Industries in China, 2006-2016
2006-2016 2001-2011
Top 10 Industry Segments, 2006-2016 Ranking Total Shareholder Ranking Total Shareholder
(out of 53) Return (out of 53) Return
Biotechnology 1 994% 24 107%
Health Care Providers & Services 2 925% 26 101%
Pharmaceuticals 3 718% 11 211%
Software, Internet, and Services 4 640% 45 46%
Distributors 5 605% 17 148%
Health Care Technology, Equipment & Supplies 6 550% 15 162%
Textiles, Apparel & Luxury Goods 7 531% 29 93%
Electronic Equipment, Instruments & Components 8 484% 44 47%
Auto Components 10 479% 25 102%
Note: Data includes all listed companies in Hong Kong and China since November 2006, with the main risk exposed to mainland China; the period of measuring
return is from November 2006 to November 2016.

BERNSTEIN
IS IT INDIA'S TURN? PART II

Is it on the right track? Where are the opportunities for investors?
OVERVIEW
In this chapter, we review current policies in India and opportunities for investors.
Over the past three years, we have seen three common themes: 1) the government wants
to repair and build rather than release new policies; 2) a focus is on streamlining and
improving processes and not just on short-term results; and 3) lower populism with a
higher focus on free market economics.
The sectoral focus is largely on improving infrastructure, increasing manufacturing mix

(import substitution initially), and broad efforts at easing the business environment.
Approval of the Goods and Services Tax (GST), efforts to tweak labor laws, introduction of
the Contract Disputes Act, commencement of ease of business rankings for states, and
reducing FDI caps in some sectors are key areas of policy progress.
While we admit that the government agenda in India is on the right path, apart from the
need to develop a sense of urgency to execute, we see some "tweaking" required to
improve implementation and propose four key measures: 1) the process of planning
needs to be strengthened; 2) new infrastructure investments should be government-led,
with the private sector being only an operator of assets or an investor in operational
projects; 3) the manufacturing agenda should be more focused with an emphasis on
scale; and 4) basic education should be strengthened and higher education focused to
improve R&D capabilities and innovation.
India's rise may not be as fast as China's, and growth is likely to happen in spurts and
cycles, but we have no doubt that it will happen. Over the long term, we do expect infra
build and manufacturing to accelerate, but we see less scope for India to emerge as a
manufacturing-exports-led economy over the next decade. We see development of some
industries such as defense manufacturing though, as India continues to push for import
substitution.
As India continues to see macro growth, rising per capita incomes coupled with
urbanization should continue to aid consumer discretionary, including autos (shift to
premium focus) and consumer electricals/durables. Telecom services (Bharti, a key pick)
should continue to grow, while e-commerce will develop, providing opportunities in its
supply chain (including logistics). Construction will provide opportunities, but we see
building products and consumer electricals as a better way to play that. In manufacturing,
apart from the emergence of a new manufacturing supply chain in the defense sector, we
expect opportunities to eventually emerge for ports and freight operators.

BERNSTEIN
This chapter is set out in three parts, specifically:
India today: What is the government's agenda?
Policy proposals to drive India forward
INDIA TODAY: WHAT IS THE GOVERNMENT'S AGENDA?
BROAD POLICIES OVER THE India had a closed economy for the first three decades after obtaining independence in
PAST 50 YEARS 1947. Its economic policy was characterized by focused industrial development
controlled by the government, the encouragement of small-scale industries, and a
socialistic pattern of society, with a focus on alleviating poverty. The state was the
principal entity allocating funds for industrial development, as well as for licensing and
regulating.
The limited success of these policies in reducing poverty and improving efficiencies, led,
in the mid-1970s, to the formation of new committees to evaluate government policies on
trade, the role of the public sector, and fiscal controls. In the late 1980s, 32 industries
were delicensed and in 1988, in a more radical step, a negative list of 32 industries was
created, implying that any industry not on this list was deemed to be delicensed. Excess
regulations, employee protectionism, and high levels of bureaucracy (multiplicity of
departments) had led to inefficient operations for the public sector, forcing the
government to finance deficits and investments of these public sector enterprises.
By the 1990s, large fiscal deficits and high levels of external debt, coupled with a
deteriorating balance of payments (impacted by the surge in oil prices caused by the Gulf
War), led to a series of reforms over 1990-92. The policy changes were focused toward
making the economy more market friendly (reduction in trade barriers and liberalization of
foreign investment policies) and to ensure stabilization of the economy.
While growth from the 1950s to the late 1980s has ranged in the 3.5% annual range,
post-liberalization and opening of the economy, growth CAGR edged up to 6.5% (see
Exhibit 257 and Exhibit 258).

BERNSTEIN
EXHIBIT 257: Real GDP growth rate until 1990s had been slow
10 RealGDPgrowthrate(%) 9 10
8 7 8 7 7
7 7
6 6 6 6 6
6 5 5
5
4 3 3 4 4
4 3 3
2 2 1 2
1
0
0 1
2
3
4
6 5
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Source: Company data and Bernstein analysis.
EXHIBIT 258: GDP growth cyclical, but on an average has grown at a CAGR of 6.5% (based on old series data)
GDPgrowth
10 9 10 9
% GDPgrowthnewseries
9 9 9
8 8 8
8 7
7 7 7 7 7 7
7 6 6
6 6 5
5 5
5 4 4 5
4 4
4
3
2 1
1
0
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
From being an economy with a large mix of agriculture, India has moved to a largely
service-oriented one over the past 50 years (see Exhibit 259).

BERNSTEIN
EXHIBIT 259: Share of services has gradually increased that for agriculture has declined
%
100
90 19 16 16
30 25
37 37 3 2
80 45 2
3 15 15
70 2 15
1 1 16
60 16
1 14 14
50 11
40 51 54 55
40 44
30 38 37
33
20
10
10 10 11 12 12 12 12 11
0
FY51 FY61 FY71 FY81 FY91 FY01 FY11 FY16
Agri Mining Manufacturing Services Construction&Others
Source: Planning Commission, RBI, and Bernstein analysis.
A summary of key policies across various Five-Year Plan periods is highlighted in Exhibit 4
and Exhibit 261.
EXHIBIT 260: Government policies in the Five-Year Plans for agriculture, manufacturing, and infrastructure
Agriculture Manufacturing Infrastructure
Participation of private sector in infra development

Public investment in agri, short gestation projects Railways tariff rationalization, electrification of routes
Minimum support price policy Removal of bureaucratic controls Commercialization of land owned by railways
Rationalization of input subsidy policy Opening up of industries for private participation Dedicated lines for goods movement
8th/9th
Agriculture R&D Simplification of industrial exit policy Connectivity of roads with ports, railways
Agricultural marketing infrastructure Towards abolishment of administered price mechanism Simplifying land acquisition
Availability of credit Port productivity, increasing containerization
Independent port tariff regulatory authority
New capital assets in irrigation, rural infra, power

Industrial policy environment for private enterprises Focus on both center and states infra
Cropping intensity
Bringing down traffic to East Asian levels over 3 years Railways, road, aviation and telecom
10th Irrigation and rain water harvesting projects
Industrial liberalization from center to state levels Increased private participation in road
Agricultural technologies
Development of small scale industrial sector Focus on improving Rural road connectivity
Diversification of agricultural products
PPP model
Irrigation/water management programs Power and logistics infrastructure
Railways, Roads, Ports, Airports & Telecom
Developing district level agri plans Vocational training capacity
11th Rural infra development - Bharat Nirman programs
Credit to farmers Strengthening micro SMEs, their financing
Irrigation, rural electrification, roads, water, sanitation
Food security Removing bottlenecks to economies of scale for SMEs
Urban infra development through JNNURM
Irrigation, credit, seeds, post-harvest technologies Ease of doing business

Land productivity in rain-fed areas Physical infrastructure led by power/logistics Attract higher investment from private sector
12th Address Imbalances in crop pattern, nutrient use Shift up in the manufacturing value-chain Roads, Railways, Ports, Airports & Telecom
Fertilizers, procurement prices & ground water Overhaul of labor laws Urban infrastructure
stress Continued focus on the growth of MSME sector
Source: Planning Commission and Bernstein analysis.

BERNSTEIN
EXHIBIT 261: Government policies in the Five-Year Plans for power, financial services, and trade sectors
Power Financial Services Trade
Early completion of projects Private sector participation in the financial sector Removal of quantitative restrictions on exports
T&D investments - lower AT&C losses Restructuring of the insurance sector Re-orientation of incentives for goods & services
8th/9th Rationalization of the electricity tariff structure Focus on creation of a debt market Exchange rate management
Participation of private sector Establishment of debt recovery tribunals Removal of infra bottlenecks hampering exports
Renewable energy sources particularly hydro De-regulations of rates for commercial banks & DFIs Import de-licensing, reduction in tariffs
Widening and deepening of capital markets Removed quantitative restrictions on exports

Increasing share of hydro and nuclear power
Financing to agri, unorganized manufacturing & Infra Sector-specific export promotion packages
10th Reducing AT&C losses
Opening up the insurance sector Policy support for services exports
Private investments in power distribution
Reducing govt. stake to 33% in PSU bank More investment relaxations for SEZ
Increasing overall capacity
Strengthening the regulatory system Policy & technology to improve financial inclusion Exports of commercial crops, agri processed products
Reducing AT&C loss Promote SHG and MFI to provide rural credit access Simplifying procedures of document requirements
11th
Improving rural electrification through RGGVY Revitalization of co-operative credit institutions Improving infrastructure to international standards
Improve the open access system Creation of a national payments system Focus on fuller neutralization of taxes
Renewable energy - wind, solar, biomass
Pursue regional & bilateral trade negotiations
Resolving fuel supply issues (coal, gas)
Penetration of formal banking and insurance services Trade with ASEAN, Africa, LATAM and SAARC
Debt restructuring plan for discoms
12th Co-operatives to improve rural areas financing Automation and procedural simplification
Early implementation of open access
SMEs financing through VCs & angel investors Promote technological upgradation of exports
Renewable energy focus on Wind and Solar
Reduce manufacturer dependence on imports
Source: Planning Commission and Bernstein analysis.
AGRICULTURE Since the country obtained independence, the share of agriculture in overall GDP has
gradually declined, from the 45% levels in FY1951 to c.15% levels by FY2016. The
decline can largely be attributed to faster growth of other segments, primarily led by
services.
Policies for agriculture have largely been similar across Plans there has been an
increasing emphasis on food security and addressing imbalances in resources for
agriculture (including usage of groundwater).
The early phase pre Green Revolution: India tried to pursue a policy of self-sufficiency,
especially for staples (rice, wheat, and pulses), focusing on increasing cultivated area;
however, trade was largely restricted with quotas and tariff restrictions. The Land Ceiling
Act was enacted, restricting large land holdings, and cooperative credit institutions were
strengthened. Additionally, a few major irrigation projects were undertaken. Growth in
agriculture during this phase was largely driven by expansion and consolidation of area
under irrigation.
Food shortages and the Green Revolution 1960s to 1980s: Given limited scope for
increasing the land under cultivation, there were instances of food shortages, which led to
an increased focus on land productivity. This involved importing high-yielding seeds and
higher usage of fertilizers and irrigation, which led to a sharp jump in wheat and rice
production (see Exhibit 262).

BERNSTEIN
India's agricultural policy over the past three decades

Post the Green Revolution, the Indian agriculture sector has not seen any major
reforms. Agriculture policy in India has centered on the objectives of attaining food
sufficiency, maintaining stable prices for end consumers (low inflation), and ensuring
profits for the farmers. These are managed through certain specific policies
including: 1) minimum support price (see Exhibit 263); 2) food subsidies for
consumers; 3) subsidies for farmers; and 4) specific trade policies. The relatively high
control of the agriculture sector has kept it relatively delinked from market forces. A
high level of subsidies, to ensure lower prices for consumers, and relatively low
investment in infrastructure and R&D have kept production growth low in the last few
decades.
The National Agricultural Policy was announced in 2000, which aimed to attain an
annual growth rate of 4% for the agricultural sector over FY2000-20. However, no
major policy actions were undertaken by the government. The government, in its
Five-Year Plans, has acknowledged the increasing subsidies for the sector and lower
investments; however, little has been done to remedy this.
EXHIBIT 262: Production of food grains in India (summer and winter crop aggregates)
300 FoodgrainproductionMMT
+16%
250 +9%
+39%
200
+13%
150 +70%
100
50
0
FY67
FY68
FY69
FY70
FY71
FY72
FY73
FY74
FY75
FY76
FY77
FY78
FY79
FY80
FY81
FY82
FY83
FY84
FY85
FY86
FY87
FY88
FY89
FY90
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Source: Government of India (GoI) and Bernstein analysis.

BERNSTEIN
EXHIBIT 263: Minimum support prices (MSPs) are in place that provide a floor for purchases of grains from farmers
32%
PaddyMSPYoYgrowth
16%
14%
12%
10%
8%
6%
4%
2%
0%
FY79
FY80
FY81
FY82
FY83
FY84
FY85
FY86
FY87
FY88
FY89
FY90
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
YTDFY17
Source: GoI and Bernstein analysis.
The pace of increase in the area of irrigated land in India has been slow in the past 60
years, with irrigated land as a percent of overall agricultural only increasing from 15% to
35%. Over 65% of agricultural land continues to be dependent on the monsoons (see
Exhibit 264)
EXHIBIT 264: Pace of increase in irrigated land area has been slow
%ofagriculturalland
Irrigatedlandas%ofagriculturalland
60 57 57 58 58 58 58
54
50
40 36
31
30 27
22
20 18
14 15
10
0
FY51 FY61 FY71 FY81 FY91 FY01 FY11
Source: Ministry of Agriculture (India) and Bernstein analysis.

BERNSTEIN
MANUFACTURING The concern over the low share of manufacturing in India has repeatedly been highlighted
by the government over the past decade. In 2005, the then Prime Minister highlighted his
concern on the low share of manufacturing and rejected the proposition that India can
skip the manufacturing stage of development and move directly to a service/knowledge-
based economy, as according to him, a substantial manufacturing base was needed to
absorb the workforce. The National Manufacturing Competitive Council prepared the
National Strategy for Manufacturing in 2006, parts of which were included in the 12th
Five-Year Plan; however, it remained largely as a concept.
EXHIBIT 265: Excerpt from the Prime Minister's speech at the Annual General Meeting of FICCI in 2005
"An economy of our size and scope cannot ignore the manufacturing sector. A modern manufacturing sector is also essential for the
development of our scientific and technological base, for the growth of our knowledge economy and for our national security as well.
I am concerned that the share of manufacturing in national income has shown only a marginal improvement from 15.8 per cent in
1991 to about 17 per cent in recent years. This should be somewhere in the range of 30 per cent to 35 per cent. This requires
manufacturing to keep growing at 12 percent to 14 per cent in the next decade. "
Source: Press Information Bureau (PIB), Prime Minister's Office (India), and Bernstein analysis.
2011 onward National Manufacturing Policy, 2011

The Planning Commission released a National Manufacturing Policy in 2011, which aimed
at increasing the share of manufacturing from 16% to 25% by FY2022, along with the
creation of 100 million additional jobs. This was the first comprehensive National Policy
on Manufacturing with specific targets. These included:
Establishment of National Investment and Manufacturing Zones, each spread over

5,000 hectares with special provisions for approvals and regulations regarding labor,
taxes, etc.
Special attention to employment-intensive industries (textile, gems, food processing,

etc.), capital goods, industries with strategic significance (aerospace, IT hardware,
electronics, telecom, defense, solar), industries where India has competitive
advantage (pharma and medical equipment), and SMEs.
To rationalize regulatory procedures (reduce the number of approvals) as well as

simplify exit mechanisms for businesses.
Technology acquisition and development, and setting up a Technology Acquisition

and Development Fund.
While there were investment and manufacturing zones set up along the Dedicated Freight
Corridors, nothing much was done over the next two years in other areas and the
government in 2014 had highlighted that the policy is a long-term process without
specifying the near-term agenda.
The key changes over the last 25 years have been an emphasis on easing the environment
for doing business, the overhauling of labor laws, and an increasing focus on the
improvement of logistics. Reservation for SMEs (in the past), the high cost of logistics,
lack of technology or ability to attract talent, and the high cost of inputs (power and

BERNSTEIN
interest rates) have all eventually impacted manufacturing in India. Manufacturing growth
has remained at low levels, and while various governments have expressed concern on
this, little has been done to drive growth.
For a long period in India, various products were reserved for manufacture in small-scale
industries, and although the reservations have been slowly removed over the years, the
benefits are yet to accrue (see Exhibit 266).
EXHIBIT 266: Small-scale industry contributes to a large mix of the manufacturing economy
ShareofMSMEoutputintotalmanufacturingoutput
Grossrevenues(US$bn) %
US$bn
300 278 40
275
254 35
250 229
204 212 30
200 184
25
150 20
15
100
10
50
5
0 0
Source: Ministry of Micro, Small, and Medium Enterprise (MSME; India) and Bernstein analysis.
One sector that has done relatively well in terms of domestic manufacturing is the auto
sector. This is due to the protection provided to domestic vendors through high import
duties on the import of fully built cars. Import duties are relatively low on components like
engines, etc. This is, however, not the case with electronics manufacturing or power
equipment, as import duties are relatively low (see Exhibit 267).

BERNSTEIN
EXHIBIT 267: Import duties are low on most products
Category Import duty (%)

Grinders, mixers, juice extractors 10%
Vacuum cleaners 10%
Shavers/hair removing appliances 10%
LEDs 0%
Lamps 10%
Solar PV cells 0%
Diodes, transistors 0%
Electric insulators/wire/cables 7.5%
Other machines 7.5%
Electronic ICs (memories, amplifiers) 0%
Televisions 10%
Telephone sets 0%
Sound/Video recording apparatus 10%
Storage devices 10%
Switches, fuses > 1,000V 7.5%
Voltage limiters, plugs >1,000V 7.5%
Switches <15 amps 10.0%
Other switches 7.5%
Circuit breakers 7.5%
Fuses, plugs, sockets, lamp holders, etc. 7.5-10%
Alarms 10%
Signaling equipment for railways 7.5%
Electric motors 7.50%
Electric generating sets 7.5-10%
Electric transformers 7.50%
Tractors 10%
Passenger vehicles (10+ passengers) 40%
Passenger Vehicles 125%
Goods vehicles 40%
Parts & accessories of vehicles 10%
Motorcycles 100%
Source: Ministry of Commerce (India) and Bernstein analysis.
INFRASTRUCTURE Key themes in infrastructure have been increasing private participation, improving
transportation infrastructure (road, rail, and ports), and telecom infrastructure. The Five-
Year Plans over the past decade have seen a larger focus on urban infrastructure (metro
and water supply). The mix of contribution from private sector in infrastructure and power
has also increased in each Plan period.

BERNSTEIN
Power: The focus of the Plans has largely been on thermal power, and capacity targets
were scaled up in every Plan. An increasing focus on transmission investments was also a
key feature. The aim to reduce aggregate technical and commercial (AT&C) losses has
been in all Plans; however, not much has been achieved. The focus in the last two Plans
has also been on improving state distribution companies' (discoms') financials and
resolving fuel supply issues.
EXHIBIT 268: Share of private sector investment in infrastructure increased in the 10th and 11th Five-Year Plans
60 %
Shareofprivateinvestment 55
50 48
50 46
44 42
40 39
36 37
34 33
31
30 26
22
20
10
0
FY12(RE)
FY13E
FY14E
FY15E
FY16E
FY17E
FY07
FY08
FY09
FY10
FY11
10thplan
12thplan
11thplan
Note: RE = revised estimates.
Source: Planning Commission (India) and Bernstein analysis.
There has been a fair degree of success in setting up of telecom infra, and for a small
period in expanding roads infrastructure.
TRADE The Indian economy was opened to the international market in 1990s, and post this
period there have been measures to ease processes and remove bottlenecks. However,
there has never been a directed policy to make India a relevant exporter of goods, and any
commentary has largely been restricted to promoting agricultural exports. There has been
commentary around policy support for service exports, indicating that services have
always been the key focus area for the government.

BERNSTEIN
EXHIBIT 269: India's market share (%) in global exports is very small
1.8 1.7 1.7

Indiasshareinglobalexports(%) 1.6
1.6 1.6
1.6 1.5
1.4 1.3
1.2
1.2 1.1 1.1
1.1 1.0 1.0 1.1
1.0 1.0 0.9
1.0 0.9
0.8 0.8
0.8 0.8 0.6 0.7 0.8
0.8 0.7 0.7 0.6 0.6
0.6 0.5 0.5 0.5 0.5 0.6 0.6 0.7
0.6 0.5 0.5 0.6 0.5 0.5 0.5 0.5 0.5 0.6 0.6 0.6
0.6 0.5 0.5
0.4 0.5
0.4 0.5 0.5
0.4
0.2
0.0
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: Planning Commission (India) and Bernstein analysis.
EDUCATION The focus on education and R&D has been one of the backbones of the strong
sustainable growth in China over the last two decades. The focus has been across the
spectrum from improving the literacy rate to guiding resources for research in science
and technology. While India too had plans for improving education levels in the country
the focus has largely been at a basic level, to improve literacy rates and the quality of
education in relatively backward areas.
A structured approach to increasing literacy rates in India started in the 1980s multiple
programs were launched for teachers' training (1987), women's education (1989), adult
education (1988), mid-day meals (1995), and availability of a school within 1km of every
village. This had a relatively low success rate.
The 9th Five-Year Plan (1997-02) recognized education as the "most vital and crucial
investment" in human development. Significant steps were taken toward the 2000s by
enacting the Fundamental Right to Free and Compulsory Education for children in the age
group of 6-14 years as well as launching the "Sarva Shiksha Abhiyan" in the 2000s, which
aimed at enrollment of all children in schools or other alternatives by 2003 and their
completing five years of primary education by 2007, as well as targeting universal
retention by 2010. While targets for these programs were missed, one of the major
achievements was the increase in the net enrollment ratio from 80% levels in 2000 to
90%+ levels by 2007 (see Exhibit 270). For adults, literacy improved from 64.8% to 74%
over 2001-11.

BERNSTEIN
EXHIBIT 270: Enrollment rate at the primary level is improving
India
100 % World
92
86 86 88 87 89 87 91 89 91 89 91 89 91 89 90 89 92 89 89
90 84 84 85 84 86
80 80 79
80
70
60
50
40
30
20
10
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
While there has been improvement in the enrollment rate and years of schooling (number
of years spent in school) at 5.1 years, we note that steep dropout rates after elementary
education (students not continuing with the middle school level) and extremely low
attendance in schools (making enrollment rates meaningless; attendance below 60% in
some areas) have continued to impact the pace of improvement in education levels in the
country (see Exhibit 271).
The latest Plan (12th Five-Year Plan) has set targets for reducing dropout rates (below
10%), increasing enrollment at the secondary level to 90% and the senior secondary level
to 65%, raising overall literacy to 80% (from 73%), and reducing the gender gap in
literacy to <10% (over 15% in 2011). We believe that improving literacy and enrollment
rates in elementary education has always been the focus for the government; however,
implementation has lagged, which can be partially attributed to high poverty levels in the
country.
While there have been specific programs/targets for elementary education plans, on the
higher education side, the focus has been more on improving the quality of teachers,
modernizing curriculums, increasing capacity, improving infrastructure, etc.
In the 11th Five-Year Plan, targets were set up for new engineering and management
institutes (IITs, IIMs, etc.) and for improving the quality of colleges in various states of
India. Over the past 15 years, the growth in the number of universities for undergraduate
education has also been driven by the setting up of a large number of private institutes
(largely to meet the demand in the IT sector); however, they are largely focused on
information technology education.

BERNSTEIN
EXHIBIT 271: Dropout rates may have reduced a bit, but still remain high
287 280
275
254 259 262
Primaryenrollment,mn(IV) 237 244
UpperPrimaryenrollment,mn(VIVIII)
194 135 140 132
Secondaryenrollment,mn
135 134
Universityenrollment,mn 136
155 132 134
110 114
11 63 64
97 62
81 58 60
55 57
74 52
3 46 57 43 51 55 54
24 2 34 44 46 49
35 8 38 40
19 0 13 3 21 5 19 5 29 29 30
3 7 1 9 14 16 17 19 21 28
195051
196061
197071
198081
199091
200001
200506
200607
200708
200809
200910
201011
201112
201213(E)
Source: Education Ministry of India (including estimates) and Bernstein analysis.
There has been an acknowledgement of limited research and doctoral education across
Plan periods by the government; however, nothing substantial has been done. Efforts
have been limited to fund allocations (however, with no clear focus programs) and setting
up of new institutes. However, there have been no long-term targets. While the key issue
that Indian research institutions lag their global peers in terms of infrastructure and
quality has been acknowledged by the government, there have been no broad-based
steps taken in this regard.
The current Plan (12th Five-Year Plan) talks about supporting universities to reach global
standards and the promotion of basic scientific research. As far as specific targets are
concerned, the current Plan aims to establish about 10 inter-institutional centers (for
interdisciplinary research) as well as 20 centers of excellence. While these efforts are
going in the right direction, implementation is slow; given the pace of development
globally, unless the pace increases, India is always likely to lag in innovation.
As far as specific sectors are concerned, there has been a lack of consistency and focus
areas across Plans. While, in general, there have been no specific sectors identified, the
10th Five-Year Plan aimed to gain a competitive edge in robotics, bio-informatics, and
new material technology, but these were missing in the Plans released thereafter.

BERNSTEIN
India's current agenda for development

The current government had the following key agenda points in its election manifesto
outlined in 2014. Over the past three years, based on what the government has been
articulating, we see three common themes: 1) the government wants to repair and build
rather than release new policies; 2) the focus is on streamlining and improving processes
and not just on short-term results; and 3) lower populism with a higher focus on free
market economics. The sectoral focus is largely on improving infrastructure and reviving
manufacturing in India (see Exhibit 272 and Exhibit 273).
EXHIBIT 272: Key agendas as outlined in the election manifesto
WorkonfreightcorridorsandexpediteIndustrialcorridors
Nationalhighwayprojectstobeexpedited Railways
ModernizeexistingportsanddevelopnewonesandSagar LaunchDiamondquadrilateral highspeedtrainnetwork
Malaproject Railwaysmodernizationandequipstationswithadequateinfra
PPPwillbeencouragedwhileregulatorwillbegivenautonomy Water
andaccountability STPtopreventriverpollution,Desalinationplantsfordrinking
waterincoastalcities,Facilitatepipedwatertoallhouseholds
NextGenerationinfra Energy
SetupGasGridtomakegasavailabletohouseholdsandIndustry Givepushtorenewablesourcesofenergyandexpandand
strengthenNationalsolarmission
SetupaNationalOpticalFiberNetworkuptovillagelevel
Transport
Createpublictransportsystemreducedependenceonpersonal Innovation
vehicles Encourageandincentivizeprivatesectorinvestmentsin
Launchanintegratedpublictransportsystem science&Technologyandinhighendresearchaimedtowards
Developwaterwaysforpassengerandcargotransport innovation
Developnationallogisticsnetworkforfastermovementofgoods Promotionofinnovationbycreatingacomprehensivenational
systemofinnovation
Manufacturing
Agriculture
SetupworldclassinvestmentandIndustrialregionsasglobal
Strengthenandexpandruralcreditfacilities hubsofmanufacturing
Createclusterbasedstoragesystems Facilitatesettingupofsoftwareandhardwaremanufacturing
Implementfarminsuranceschemetotakecareofcroploss units
AdoptaNationalLandusepolicywhichwilllookatthescientific SMEsector:AvailabilityofcreditthroughSMEbank,adoption
acquisitionofnoncultivablelandtoprotectinterestoffarmers ofIT,supportinearnings.
Education Singlewindowclearances
Publicspendingoneducationtoberaisedto6%ofGDP Decisionmakingonenvironmentclearanceswillbemade
Universalizationofsecondaryschooleducationandskills transparentandtimebound
development
Source: Election manifesto of NDA government (India) and Bernstein analysis.

BERNSTEIN
EXHIBIT 273: Agenda of the current government
Government'sagenda
Growthdrivers Infrastructure Overallpolicies
Transportation Urban Increasing Streamlining Fiscal/Monetary

Agriculture Manufacturing Services
/Utilities Infrastructure transparency Approvalprocess Policies
FDI BlackMoney
Railway
Cropinsurance FocusSectors WaterSupply DirectBenefit Landacquisition Inflationtarget
Policiesfor Road Transfer
Irrigation EaseofDoing Metro bill FIscalDeficit
startups Port Increasing
scheme Business Cleanlinesss ForestClearane target
Power Banking
Technology Participation
Broadly, a summary of the key agenda points is that India appears to be trying to do
everything now: grow manufacturing, set up smart cities, improve urban infra, improve
logistics, focus on improving transparency, etc. (see Exhibit 274).
End-market focus:
Infrastructure: Focus is on roads, railways, and water.
Manufacturing: The broad theme is centered around "Make in India" and the sub-
theme is "import substitution."
Broad areas:
Improve the reach of banking/improve transparency: Reduce incidence of black
money, and focus on direct transfers for various subsidies.
Improve ease of business: Expect improvement in the ease of business rankings.

BERNSTEIN
EXHIBIT 274: Policies of the Indian government in key sectors

Sectors Government policies Policies Implementation
Labor laws being repealed - to give higher flexibility to employers
Improving ease of doing business - promoting competition among states
Manufacturing Make in India program to drive domestic manufacturing
Increasing foreign investment limits through relaxing FDI limits
Focus on private participation in defense orders
Services Fund for startups and tax exemption
Agriculture Programs for crop insurance and irrigation
Urban Plan for 100 smart cities
Infrastructure Metro rails being constructed in most of the key cities
Increasing the share of renewable - specific targets
Power State distribution companies restructuring program
Drive use of efficient appliances to reduce energy consumption
Increase private participation (railway stations)
Railways
Overhaul railway structure to bring about efficiency
Programs to declare black money
Improving
Targeted policies with direct benefit transfers
transparency
Program for inclusion of entire population to the banking system
Easing land acquisition; however, not able to because of lack of majority
Approval
Improve environmental clearance process - delinking from forest clearance
process
Higher disclosure through online portals
Taxation Streamlining and standardizing indirect taxes by introducing uniform tax - GST
Cleanliness
Social Girl education
Public toilet and household toilet scheme
MANUFACTURING AIM TO The current government has a focus on the manufacturing sector with a large number of
INCREASE MANUFACTURING policy measures. Share of manufacturing (ex-mining) in the overall GDP has only doubled
SHARE TO 25% BY FY2022
to 17% levels now, from the very low 8% levels in the 1950s, and this compares with
35-40% for China. While the end of the licensing regime was supposed to be a huge
boost for the manufacturing sector in India, it never scaled up, as it was impacted by:
1) free trade agreements with other countries and the low competitiveness of Indian
manufacturers in both domestic and global markets; and 2) the difficulty of doing
business in India (land, environment, labor, and a complicated tax regime), the
regulation/supervision by government in non-essential areas, the unavailability of
adequate supply chains, logistics, and infrastructure.
Make in India
The current government has announced a national program called "Make in India," which
aims to develop manufacturing in India. A large portion of the current program appears to
be repackaging of the earlier programs, but it does better in going into specifics and
implementation in certain key areas.
Delhi-Mumbai Industrial Corridor (DMIC)

The Delhi-Mumbai Industrial Corridor is an infrastructure development program of the
government of India, which aims to develop manufacturing hubs between Delhi and
Mumbai along the Western dedicated freight corridor (WDFC). This is largely a continuity
of policy, as the DMIC was conceptualized in India prior to the current government coming
into power.

BERNSTEIN
In Phase 1, five investment regions (minimum area of 200 sq km) and three industrial
areas (minimum area of 100 sq km) are being developed. The entire program aims to first
develop the trunk infrastructure of road, rail, air, water, sewage, effluent treatment plants,
etc., and then attract private developers to lease and set up manufacturing facilities. The
development of a large number of manufacturing facilities along the DFC should provide
additional traffic to the railways, both for EXIM (export, import) and domestic transport,
and since Container Corporation is setting up six multi-modal logistic parks along the
WDFC, it should be able to take a high share of this potential traffic.
Tenders for trunk infrastructure are being awarded, and DMIC management targets to
complete the trunk infrastructure (road, water, effluent treatment, etc.) by 2018. Key
tenders for Dholera have been awarded recently the road network tender has been
awarded to L&T, while administrative building construction was awarded to Cube
Construction.
EXHIBIT 275: Investment region and industrial corridor being built around the WDFC
Source: DMIC and Bernstein analysis.
Four other Industrial corridors are also in the planning stage (see Exhibit 276).

BERNSTEIN
EXHIBIT 276: Other industrial corridors in the early stages of planning
Perspective planning finalized and approved by the respective State Government

Four Nodes in the State of Maharashtra and six nodes in the State of Karnataka have been
identified under perspective planning of which one node from each State Government is to be
shortlisted for the master planning
Bengaluru Mumbai State Government of Karnataka had identified Dharwad as the first industrial node in Karnataka
Industrial Corridor under the BMEC. DMICDC, the nodal agency of project, has initiated the work of master planning
of Dharwad node in Karnataka
Tender documents for selection of Consultants for Detailed Master Planning and Preliminary
Engineering of Dharwad has been shared withthe State Government of Karnataka for review
Identification of site in Maharashtra is under consideration by the State Government
Master planning of three identified nodes namely Ponneri, Tumkur, and Krishnapatnam in CBIC
has been completed.The Preliminary Environment impact Assessment Study for these nodes is
under progress. The State Government has been asked to finalize legal framework for signing of
Chennai Mumbai Industrial
State Support Agreements (SSA) and shareholder agreement
Corridor
Prespective planning is completed
Tender package for detailed master planning and preliminary engineering for identified nodes,
i.e., Krishnapatnam and Ponneri have already been issued; will be issued soon for Tumkur
Envisaged as a part of the East Coast Economic Corridor linking Kolkata - Chennai - Tuticorin
The Conceptual development plan has been completed by Asian Development Bank (ADB)
Visakhapatnam Chennai ADB has initiated master planning for two nodes namely Visakhapatnam and Srikalahasti
Industrial Corridor Yerpedu in the last quarter of 2016, likely to be completed in 2016
Department of Economic Affairs has accorded approval of project loan of USD500mn and
program loan of USD125mn from ADB to the Govt. of Andhra Pradesh for VCIC project
EDMICDC has been entrusted with the work of undertaking the feasibility study of AKIC as the
nodal agency
Perspective planning to be completed by Sep-16
Amritsar Kolkata Industrial
M/S LEA Associates South Asia Pvt. Ltd. has been appointed as a project consultant for the
Corridor
preparation of the perspective plan
Detailed master planning and preliminary engineering will be taken up after the completion of the
perspective planning and acquisition of land by respective State Govts.
Setting up of coastal economic zones

India is planning to set up coastal economic zones of 400-500 sq km each with access to
deep-draft ports and which will enjoy a 10-year tax holiday.
Defense sector localization is a part of the "Make in India" program

Historically, capital procurement for the defense sector in India (direct orders or orders
through public sector units) has largely been through imports. This has not only led to the
outflow of a large amount of funds every year, but also has limited R&D investment in the
defense sector in India. Defense has now been categorized as one of the key sectors
under the "Make in India" program and there have been a large number of policy
announcements around it, to drive indigenization and to increase participation of
domestic private players (see Exhibit 277).

BERNSTEIN
EXHIBIT 277: Lots of policy progress

Policy Keychanges
AnewcategoryBuyIndianIndigenousDesignDevelopmentandManufacturingadded
Itrequires40%indigenouscontentfordomesticdesign&60%fornonindigenousdesigns
DefenseCapitalProcurementpolicy
Indigenouscontentrequirementinthe"Buy"categoryraisedfrom30%to40%
10%weightagegiventoasuperiorbid
49%underautomaticroute
FDIrelaxation
Above49%undergovt.routeformoderntechnology
Partialproductionnowtreatedascommencementofproduction
Liberalizationofthelicensingpolicy Validityoflicenseincreasedfrom3to5years
Thelistofitemsrequiringlicensecutdowndrastically
ClarityonthelistofitemsrequiringNOC
Simplificationofexportregulation NoneedofEndUserCertificateforparts,components,accessoriesofweaponsystems/platforms
NOCapplicationprocesssimplified
Thechangeofoffsetpartnersaswellascomponentsofoffsetallowedevenaftersigningthecontract
Relaxationintheoffsetpolicy Servicesallowedinthedischargeofoffset(withsomeconditions)
NoneedtodiscloseIndianoffsetpartners/offsetcomponentatthetimeofoffsetcontract
Clarityinthedefinitionofindigenous IndigenouscontentclearlydefinedinDPP2013
Allowedtoprivatecompanies,similartothatallowedtothepublicsectorearlier
Levelplayingfieldforprivatecompanies
Excise/Customdutyexemptiontoprivatecompanieswithdrawn
Astrategicpartnershipframeworkbeingworkedupon
Strategicpartnership
Companiestobeselectedforspecificplatform,andthenprojectstobeawardedonnomination
Source: Ministry of Defense (India) and Bernstein analysis.
Apart from policy development, there does appear to be intent too, given that a large
number of projects have been finalized under the Buy (Indian) and Make (Indian) category
(see Exhibit 278).
EXHIBIT 278: Intent also seems high a large number of projects have been approved under the Buy (Indian) and Make
(Indian) category (the number of projects in each category are highlighted in the chart)
55%
49
FY11 12
FY12 22
5
FY13 3 3
4 0
FY14
1
FY15 17 6
1
4 9 0
FY16
7 5 0
YTDFY17 7 1
2 2 0
1
Buy(Indian)&Buy&Make(Indian) Buy(Global) OtherCategories
Over the last decade, while India has built capability in land vehicles, missiles,
shipbuilding, and submarines, complex communication systems orders, including
Battlefield Management Systems and Tactical Communication Systems, are being
awarded to domestic vendors, which will eventually help drive indigenization of defense
communication systems in the country. While large, complex, time-bound projects are still

BERNSTEIN
likely to be imported, most of these programs have clauses for partial manufacturing in
India (see Exhibit 279).
EXHIBIT 279: Defense order pipeline for domestic vendors

Cost Ordering Execution
Project Status Bidders
(Rs bn) year timeline
Techno commercial negotiations underway. ABG
Shipyard, Pipavav (Reliance Defense) and L&T
shortlisted L&T with Navantia, Spain
Landing Platform Docks 160 L&T has tied up with Navantia, Pipavav with French FY17 6 years Pipavav Defence with DCNS
DCNS and ABG with Alion (US) ABG Shipyard with Alion, US
Two for private companies. Assist Hindustan Shipyard
to construct remaining two
Battlefield Management Prototype being prepared to take 2+ years L&T Tata Power
400 FY19 5-7 years
System BEL-Rolta JV and L&T-Tata Power SED shortlisted Bharat Electronics and Rolta
* Tata Motors, General Dynamics,

Bharat Forge
Fighter Infantry Combat EOI issued, response from six have been received
600 FY20 8-10 years * BAE -Mahindra consortium,
System (FICV) Contract sharing of 70:30 with L1/L2
* L&T -Ashok Leyland Consortium
* Ordinance Factory
Five firms L&T, Cochin Shipyard, Mazagon Dock,
Six P-75 conventional L&T
500 Hindustan Shipyard, L&T, Reliance Defence FY17/18 7 years
submarines Pipavav Shipyard
Strategic partner guidelines are awaited
Prototype being prepared, to take 12-18 months

Tactical Communication L&T, Tata Power and HCL Tech
150 BEL and L&T-Tata Power SED and HCL JV shortlisted FY18 5.-7 years
Systems Bharat Electronics
Contract sharing of 70:30 with L1/L2
100 Tracked gun systems,

57 Final winner selected. Award awaited FY17 5-6 years L&T, Samsung awarded
155mn
1) L&T Nexter, France JV;
Towed gun system 150 Tenders in place. Negotiations likely mid CY17 FY20 NA 2) Mahindra Defence;
3) Bharat Forge- Elbit JV
1) L&T Nexter, France JV;
814 Mounted gun system Approved in Nov-14
158 FY20 NA 2) Mahindra Defence;
(155mn) Tenders yet to be floated. 2018 bid
3) Bharat Forge- Elbit JV
Total (Private sector) 2,175
LR SAM 80 Pricing under discussions. Trial runs over BEL nominated authority
Akash Missiles 50 Orders expected in FY17 BEL nominated authority
QR SAM 50 Trial runs on. Expect ordering by FY19 BEL nominated authority
Tejas 120 Order finalisation in FY17 HAL, Some part to BEL
Defence PSU orders 300
INFRASTRUCTURE: KEY FOCUS 1. Urban infrastructure a state subject, with a push from central government
AREA OF THE CURRENT
Urban infrastructure (transport, water, and sanitation) is a state subject, which has led to
GOVERNMENT
inequitable attention across states, with a high level of under-investment across cities.
While traffic congestion has increased in most cities, the bulk of the major cities (22 of the
32 cities) have their groundwater overexploited. Given that the central government has a
limited role to play in it, a centralized policy is not possible in this area.
While the central government does not have a direct role to play in the development of
state-level infrastructure, the Ministry of Urban Development, a central government
ministry, conceives programs/schemes that provide assistance/incentives to states to
undertake development programs (see Exhibit 280). An example is the metro rail
program, first conceptualized in India in 1990s (in Kolkata). The second metro project

BERNSTEIN
became operational more than a decade later. Urban transport is largely a state subject,
and none of the states came forward to incur the large amount of capex (INR1.5-INR2
billion per km) required to build a metro railway. Sensing the unwillingness on the part of
state governments, the central government announced a scheme that would contribute
20% of the funding required for metro rail construction.
EXHIBIT 280: Programs for development of infrastructure in public transport, water, sanitation, etc.
Policy Keyfeatures
NationalUrbanTransport Centralgovt.providesfundingtotheextentof20%equity/subordinatedebtiftheprojecttakenasaJVwiththe
Policy(2006) centralgovtorgivenasVGFiftheprojectistakenupasPPP
SelectedstatesprovidedwithassistanceofRs1bneachforfiveconsecutiveyears
Focusoncoreinfrastructurecleanwatersupply,sanitation,solidwastemanagement,efficienturbanmobility,
SmartCities(2015)
affordablehousing,ITconnectivity,powersupply,health,education,etc.
TotalapprovedfundingofRs480bn
Anationalcampaigntocleanstreet,roads,andprovidebasicsanitationfacilities
SwachhBharat(2014) AimtoachieveopendefecationfreeIndiabyOctober2019.Rs12,000wasprovidedtoBPLfamilyfortoilet
construction
AtalMissionforRejuvenationandUrbanTransformationforprojectsinwater,seweragefacilities,drainage,
parkingspaces,publictransport,andgreeneryandparks
AMRUT(replacesJNNURM) Budgetallocatedtotheprogram.ProjectbasedapproachinwhichMoUDapprovestheStateActionPlanoncea
(2015) yearcomprisingmultipleprojectsproposedbythestates
Targettoimplementthisin500citieswithapopulationof0.1mn+
TotalapprovedfundingofRs500bn
Source: Ministry of Urban Development (India) and Bernstein analysis.
2. Smart Cities and housing

Smart City is a program launched by the current government to develop infrastructure
and amenities in 98 cities in the country to make them sustainable. Smart City proposals
for these cities were submitted by the respective state governments, and from those, 20
cities have been selected to be financed in FY2016. Of the remaining, 40 cities will be
included in FY2017 and the remaining 38 will be included in FY2018. In the first year,
INR2 billion is being allocated to each of these 20 states, which will be reduced to
INR1 billion for the next three years.
In June 2015, a "Housing for All" program was announced by the central government, with
an aim to provide affordable housing to the urban poor. This program has a proposal to
build 20 million houses by FY2022. The key components are:
Slum redevelopment program with the help of the private sector;
Affordable housing through offering better credit schemes with an element of

subsidy; and
Generic affordable housing with private and public sector assistance.
The overall assistance from the central government is envisaged to be

US$15-US$30 billion.

BERNSTEIN
Government data suggests that until now, US$6.5 billion has been approved for
construction of 0.6 million houses and as of April 2016, about 2,500 cities and towns
have been identified.
3. Power Solar, energy efficiency, increased domestic coal usage

There are two key issues that are currently being faced by the power sector in India:
1) weak financials for state discoms (distribution companies) limiting their ability to incur
capex to increase efficiency and not offtaking enough power from utilities; and
2) weak financials of private sector utilities impacted by unviable power purchase
agreements as well as fuel supply issues.
While a large number of reforms have been undertaken by the government, the biggest
one is the restructuring of the state discoms, which we believe is a key bottleneck. On the
fuel supply front, there is a push to improve domestic coal production (see Exhibit 281).
The focus on energy efficiency and the various programs under it has seen good traction
in the last two years. The government through EESL has implemented multiple programs
for the distribution of energy-efficient LED, tube lights, street lights, fans, agricultural
pumps, and air conditioners (in the works) to deflate power demand in India, and thereby
to assist in improving capital efficiency.
EXHIBIT 281: Key reforms in the power sector in the last two years
Powersector
ProgramlaunchedinNov15forrestructuringofdiscoms;15stateshavealreadysignedforit
Statediscom 75%ofthedebtwillbetakenoverbystategovt.andremaining25%tobereissuedatlowerrates
restructuring(UDAY TotaldiscomdebtofcUS$66bnatSep15end
program) Stateswillhavetotakeoverfuturelossesofdiscomsingradedmanner;shareincreasingeveryyear
TargetofreducingAT&Clossto15%andadequatetariffhike,toremoverevenuecostgapbyFY19
Coalauctions:74coalblocksauctioned/allotted;however,progresshasbeenslowaftertheauctions
Rationalizationofcoallinkages:Swappingoflinkagestoreducetransportationcosts
Fuelavailabilityreforms Flexibilityinutilizationofdomesticcoalforcentralorstategovt.powerplants
HigherfocusonincreasingdomesticproductionbyCoalIndia
Gasauctions
Targetof100GWofsolarand60GWofwindbyFY22;RPOobligationincreasedto8%withFY22deadline
Increasingshareof
Investmentingreenenergytransmissioncorridors;solarparkstoprovidesupportinginfrastructure
renewables
CessincreasedoncoalfromRs50toRs400inphases,disincentivizingthermalpower
EnergyefficientappliancesbeingprovidedatlowerpriceswithEMIpaymentsupport
Energyefficiency
MultipleprogramsforLED,tubelights,streetlighting,fans,agriculturalpumps,airconditioners,etc.
programs
Weestimatedemanddeflationby16GW,whichimplies20GWcapacity(at80%PLF)
Source: Ministry of Power (India) and Bernstein analysis.
4. Railways
Inadequate fare hikes, inefficient operations, and inadequate capex to build infrastructure
have been the three key issues for the Indian Railways. The current government is working
on addressing all these issues by setting up a separate regulator for fare determination,
restructuring of the Railway Board, and raising additional money through innovative
mechanisms to increase the capex run rate (see Exhibit 282). While these are positive,
medium-term headwinds of low passenger/freight traffic growth along with the impact of
the Seventh Pay Commission is likely to limit internal cash flow generation.

BERNSTEIN
EXHIBIT 282: Key policy measures being undertaken in Indian Railways

Railways Policies
Noseparaterailway DividendwillnolongerhavetobepaidagainstGrossBudgetarySupport;shouldhelpinimprovingcashflows
budget Separatefocusonrailwaybudgethadshiftedittobemorepopulist
Unificationandrationalizationofcadresinsenioremployeestoreducedepartmentalizationandbureaucracy
RestructuringofRailway Crossfunctiondirectoratestobesetuptofocusonnonfarerevenue,speed,IT,motivepower,etc.
Board Railwayplanning&investmentorganizationtobesetupforinfrastructuredevelopment
PossibilityofbringingRailwayPSUsunderaholdingcompany,whichshouldhelpcompaniesleverage
RegulatortobesetupindependentoftheMinistry,whichwillberesponsibleforfixingfares
Stepstorationalizefare
Newpremiumtrainsandfacilitiesbeinglaunchedwithhigherfares
DedicatedFreight Toensurefasterandcheapertransportationofgoods
Corridors FreightCorridortodecongestexistingroutesforfasteraswellashighercapacityofpassengertransport
Source: Ministry of Railways (India) and Bernstein analysis.
5. Ports
The port sector in India has seen rapid development over the last decade, primarily as a
result of the opening of the sector to private companies (guidelines were issued in
October 1996). However, the traffic mix in India is largely EXIM, with transshipment
comprising a very small portion of the overall traffic (5%). Coastal traffic comprises c.20%
of the overall port traffic, while in EXIM traffic, over 75% is for imports, given that India is a
net importer of goods as commodities form a large part of India's imports (see Exhibit
283).
India does not have any large ports near its southern tip, which is close to global shipping
line routes. While a port in Vizhinjam, Kerala, is being constructed, it will take a few years
to commission and the capacity is too small to have any meaningful impact. There have
been few steps to promote coastal movement of traffic.
EXHIBIT 283: Little scope for policy changes in ports

Porttraffic Policies
Cabotagerestrictions Relaxationforportswheretransshipmenttrafficisatleast50%oftheoveralltraffic
relaxed Foreignvesselscannowtransportcontainersto/fromtransshipmentportsandotherIndianports
GreenChannelClearance Coastaltrafficdoesnotrequirecustomsclearance
forcoastaltraffic Majorportsaskedtohaveexclusiveberthswithassociatedstoragespace&separategatesforcoastalcargo
Source: Ministry of Ports & Shipping (India) and Bernstein analysis.
6. Roads
Key issues that have impacted tendering and execution of road projects in India include
delays in clearances and weak financials of developers. On the execution front, delays in
approvals have been addressed by ensuring that 80% of land has to be acquired before
the tendering process. This, however, implies that a delay in land acquisition will delay the
tendering process. On the funding front, steps have been taken to deleverage the private
sector, the benefits of which should be seen over the longer term. In the meantime, the
bulk of the projects are being funded by the National Highway Authority of India (NHAI) as
well as funding mechanisms such as the Hybrid Annuity Model. Given limited fund
availability with the NHAI and the increasing cost of land acquisition (post the recent

BERNSTEIN
changes to the Land Acquisition Bill), the pace of tendering is likely to be capped in the
medium term (see Exhibit 284).
EXHIBIT 284: Key policy changes in the road sector

Roads Policies
LimitedinterestforPPPprojects;roadsbeingbidundertheHybridAnnuityModel
HybridAnnuityModel
40%oftheprojectcostbeingprovidedbythegovernment
Projectsnowbeingbidonlyafter80%oflandhasbeenacquired
Approvals
Forestandenvironmentclearancedelinkedsothatforestclearanceisnotneededforhighwayprojects
Developersallowedtoexittheprojecttwoyearsfromstartofoperations
Financialflexibility SlowmovingprojectsbeingprovidedonetimefundingfromtheNHAIpostduediligence
InvITstoenablecompaniestomonetizeoperationalassetsthroughpublicmarketlistings
Source: Ministry of Roads (India) and Bernstein analysis.
AGRICULTURE Current policies of the government
The agriculture sector in India currently faces issues of: 1) degrading soil quality;
2) variation in water supply and droughts; 3) low investment in logistics infrastructure for
agricultural products; and 4) low R&D and technology. As in the case of previous
governments, the current government's policies with regard to the agriculture sector
appear to be limited. The government has announced two schemes: 1) the Pradhan Mantri
Fasal Bima Yojana; and 2) the Pradhan Mantri Gram Sichai Yojana. The first one is a crop
insurance scheme (see Exhibit 285).
EXHIBIT 285: Few recent steps

Programs Keyhighlights
PradhanMantriFasalBima
Cropinsuranceschemewherefarmerswillhavetogive2%aspremium
Yojana
PradhanMantriGramSichai Amalgamationofmanyongoingschemesforirrigationandsupplyofwatertofarms
Yojana OutlayofRs19bnforFY17
IndianCouncilforFertilizer&NutrientResearchsetup
Fertilizerresearchorganizaion Focusoncreationofnewgradeofsoilnutrients
Promotionofecofriendlymicronutrients&pesticidecoatedslowreleasefertilizers
Source: Ministry of Agriculture (India) and Bernstein analysis.
BROAD MEASURES TO EASE Key areas of focus required from the government to support the growth of manufacturing
BUSINESS ENVIRONMENT in India include: 1) infrastructure development; 2) easing labor laws; 3) logistics, including
tax simplification; 4) easing the approval process and overall support for operations; and
5) support for technology/R&D (see Exhibit 286). Steps have already been initiated in
infrastructure and logistics as well as taxation (GST) to ease the approval process (an
unsuccessful attempt was made to make changes to the current Land Acquisition Act).

BERNSTEIN
EXHIBIT 286: Some progress in key areas of focus required
Technology/R&D Infrastructure
oNomajorinitiative o Industrialcorridorsbeingconstructed
oDedicatedfreightcorridors
oNationalmanufacturingzoneproposed
oRoadconstructionaccelarated
oPowersupplyimproving
Manufacturing
Easeofdoing
business Laborlaws
oState rankingsonEaseofdoingbusiness
oLandacquisitionremainsbottleneck oMultiplebillsinthepipeline
oMultipleservicesintroducedthroughonlineportal oToincreaseflexibilityforemployers
oProposaltoeaseclearanceforexport/import
Logistics(taxes)
oGST onetaxreplacesmultipleindirecttaxes
A more granular view of policy changes (including those proposed) is provided in

Exhibit 287.
EXHIBIT 287: Key policy changes in the past two years

Policies Keychanges
Corporatetaxratetobereducedfrom30%to25%overfouryearsfromFY17
Goodsandservicetaxpassed,targettoimplementfromApr2017
Taxrate Investmentallowanceat15%tomanufacturingcompanies,whichinvestsmorethanUS$4.17mnayear
Facilityforrevisionreturnsextendedtomanufacturersaswell
3yeartaxholidaysforstartups
Periodofindustriallicenseincreasedfromtwotothreeyears
Industriallicense Twoextensionsoftwoyearseachallowedintheinitialvalidityofthreeyears
Applicationforindustriallicense,industrialentrepreneurmemorandummadeonline
UniversalAccountNumbermakingprovidentfundaccountportable
Laborlaws Multiplelaborlawsonwages,retrenchment,workingconditions,socialsecuritybeingintroducedtomakeitmoreflexible
foremployersandatthesametimeimproveworkingconditionsforworkers
Inventives 25%capitalsubsidyoncapexforelectronicsclusters;twoproposalsreceivedforNoidaandGujarat
Newdisputeresolutionmechanism Noretrospectiveamendments
Excisedutyscrappedoninputs,parts,componentsformanufactureofphones,routers,modems,settopboxes,adapters,
Excisedutyremoved
headsets,batteries,etc;efforttopromotetheirassemblyinIndia
NationalIntellectualPropertyright ComprehensiveIPRpolicylaidoutwithsevenkeyobjectivestobeundertakenbyvariousMinistries
Source: Department of Industrial Policy (India) and Bernstein analysis.
Labor laws
Stringent and archaic labor laws have been a key deterrent for international companies
looking to set up manufacturing in India. Key issues include: 1) restrictions on hiring of
contract labor; 2) difficulty in retrenching labor or to bring technological changes; and
3) difficult industry relations with a large number of labor unions. India's manufacturing

BERNSTEIN
sector has seen a large number of strikes as well as a few lockdowns, which has led to a
loss of work hours. More recently, the days lost to strikes in India have been decreasing.
EXHIBIT 288: Disruptions due to labor strikes in India
35 No.ofmandayslost(inmillions)
30 30
30
27 27
25 24 23
20
20 18
17
15 14 13 13
10
5 3
2
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Ministry of Labor (India) and Bernstein analysis.
The problem with Indian labor laws is that most of them were formulated over 50 years
ago and are not well suited to the current environment. While there have been changes in
the last 25 years, post the opening of the economy, the pace of change has been very
slow. The current government has proposed multiple bills that aim to make retrenchment
easier, increase benchmark wages, and exempt smaller factories from the ambit of these
regulations.
In addition to these changes, other labor codes being discussed include those for working
conditions and social security. These laws aim to provide higher flexibility to employers,
which will likely lead to increased investment in manufacturing (see Exhibit 289).
EXHIBIT 289: Key bills that are likely to be taken up in the upcoming Parliament session
Laborlaws Keyhighlights
Replaces44laborlawswithfourlawsrelatedtoindustrialrelationsandamodellawforstatestoadopt
Companiestobeallowedtoreducenumberofemployeesby300withouttakinggovt.approval
LaborCodeonIndustrial
Adequatenoticeperiodtobegivenbeforestrikeoralockdown;lockoutcannotbedeclaredduringstrikeand
RelationsBill
viceversa
Tradeunionsformationrequire100memberoratleast10%membership
Governmentaimingtotableitintheupcomingwintersession
Laborcodeonwages Toreplacefourolderwagerelatedlaws,whichare4070yearsold
Thelawtobemandatoryacrossthecountryandextendstoallsegments
Toexcludeallmanufacturingunitsthatemploylessthan40workers
SmallFactoriesBill
Allsmallfactoriestobebroughtundercommonregulationsexemptionfrom14centrallaws

BERNSTEIN
Taxes
The GST Bill was passed by the Parliament of India in 2016, on implementation of which
the entire nation will have one indirect tax replacing the current large number of taxes
levied by the central and the state governments. This is expected to provide a
considerable benefit to companies, which can plan their manufacturing and logistics
better (see Exhibit 290).
EXHIBIT 290: GST

Goods and Services Tax (GST)
A single indirect tax which replaces all the existing indirect taxes
The tax will only be applicable on supply of goods and services
Scope
Tax which are replaced include excise, service, customs, VAT, SAD, CVD
Applicable on all goods and services except those on exempt list
Four tax slabs (5%, 12%, 18%, 28%) have been proposed for GST
Additional cess will be applicable on luxury items and demerit goods
Features
Two components - Central GST and State GST
To be levied at each stage of sale applicable only to the portion of value added
Bankruptcy Code
The Bankruptcy Code was established in India in May 2016 and allows for a faster
resolution in case of defaults, unlocking the unproductive capital stuck in the economy
(see Exhibit 291).
EXHIBIT 291: Insolvency and Bankruptcy Code

Insolvency and Bankruptcy Code
Time bound mechanism to lenders to deal with a distressed debtor
Applicable to companies, partnerships, and individuals (other than financial firms)
Scope
Separate framework for bankruptcy resolution of banks and other financial entities
Default should be minimum of Rs 100,000
Passed in May-16
Any of a financial creditor or an operational creditor can initiate IRP
Insolvency resolution Time bound resolution of insolvency (180 days)
process In case insolvency is not resolved within the time line, assets could be sold to repay borrowers
Revival plan needs to be approved by 75% of the creditors
Secured creditors and workmen dues for preceding 24 months have the highest priority
Liquidation
Government dues are below creditors (secured and unsecured), workmen, and employee dues
Technology
One of the key issues with the domestic manufacturing sector has been the lack of
domestic technology and the high dependence on foreign OEMs for technology. This
makes Indian manufacturers uncompetitive/unable to tap international markets; and even
for domestic markets, a large number of manufacturing facilities end up being simple

BERNSTEIN
assembly facilities. Domestic technology development is a long process and while steps
have been taken by formulating/articulating a National Intellectual Property Policy (only a
guiding policy) and launching the Technology Acquisition and Development Fund (to
support domestic technology development), these positives may not be a key driver in the
near term.
Increasing competition among states

Given the high level of bureaucratic involvement and the federal structure, easing of the
operating business environment is likely to be a long process. Last year, in June 2015, the
central government came out with a framework to assess and rank states in terms of ease
of doing business, which could eventually be used by foreign companies before making
investments in particular states. This is an annual exercise to increase competitiveness
among states to attract investment, thus helping to improve the overall ranking of the
country (see Exhibit 292).
The ranking is based on a 340-point business reform action plan proposed by the central
government. The states are being asked to submit evidence of policy reforms and have
been ranked accordingly for the past two years. Based on the reforms, Andhra Pradesh
and Telangana have been ranked first among the major states, while Himachal Pradesh,
Tamil Nadu, Delhi, and Kerala have the lowest rankings. Reforms by various states
include: single-window systems (for regulatory, environmental, and fiscal incentive
approvals), automated construction permit approvals through online portals, inspection
reforms (related to labor, taxes, and the environment), and mechanisms to resolve
commercial disputes and paperless courts.
EXHIBIT 292: Ranking of states in India on ease of doing business

2016 2015 Single window Tax Commercial disputes, Construction Environment Inspection
State
rank rank system reforms paper-less courts permits labor reforms reforms
Andhra 1 2 Y Y Y Y Y
Telangana 1 13 Y Y Y Y Y
Gujarat 3 1 Y Y Y Y Y Y
Chattisgarh 4 4 Y Y Y Y Y Y
MP 5 5 Y Y Y Y Y Y
Haryana 6 14 Y Y Y Y Y
Jharkhand 7 3 Y Y Y Y
Rajasthan 8 6 Y Y Y Y Y Y
Uttarakhand 9 23 Y Y Y Y
Maharashtra 10 8 Y Y Y Y Y
Orissa 11 7 Y Y Y
Punjab 12 16 Y Y Y Y
Karnataka 13 9 Y Y Y
UP 14 10 Y Y Y Y
West Bengal 15 11 Y Y
Bihar 16 21 Y Y
Himachal 17 17
Tamil Nadu 18 12 Y
Delhi 19 15
Kerala 20 18

BERNSTEIN
Increasing transparency
The government has announced various schemes to ensure that their benefit directly
reach the end consumer, and at the same time has come out with a nationwide program
for financial inclusion (see Exhibit 293).
In India, only 3-4% of the overall population pays taxes. Additionally, there is under-
reporting, which has led to a large parallel economy, which is, in general, not accounted
for in government taxes. The government had announced a scheme that allows individuals
to declare black money by paying higher taxes (45%). Over INR652 billion of income was
disclosed under this scheme (see Exhibit 296).
Thereafter, in early November 2016, the government announced the demonetization of

notes of INR500 and INR1,000 denominations in order to curtail black money.
EXHIBIT 293: Government programs to increase transparency

Programs
IntroducedinJun15forfourmonths
BlackMoneyLaw
Taxationof60%,totaldeclarationofRs42bn
IncomeDisclosure IntroducedinJun15forfourmonths
Scheme Taxationof45%,includingpenalties;deadlineofSep16
DirectBenefitTransfer Directtransferofsubsidiesandotherschemestobeneficiaryaccountstoreducecorruption
BankingforAll JanDhanYojanaafinancialinclusionprogram,toensureaccesstobankingservicesforall
EXHIBIT 294: Value of INR500 and INR100 notes in EXHIBIT 295: The percent of cash in circulation that is in
circulation (US$ billion) INR500 and INR1,000 denominations
US$bn Rs500Notes
130 Rs500Notes Rs1,000Notes
122
120 Rs1,000Notes Otherdenominations
110
102
197 220 252
100 97 100%
90 88 86
78 80% 45% 46%
80 48%
70
60
60%
50
40%
40 40% 39% 38%
30
20%
20
10 16% 15% 13%
0%
0
FY14 FY15 FY16 FY14 FY15 FY16
Source: RBI and Bernstein analysis. Source: RBI and Bernstein analysis.

BERNSTEIN
EXHIBIT 296: Income declaration scheme launched in June 2015

Income Declaration Scheme Jun-15
Scheme to allow citizens to declare undisclosed income
Launched in Jun-16, declaration deadline of 30th Sep-16
Scope
Payment of taxes deadline of Sep-17, with 3 milestones (25% has to be paid by Nov-16)
No scrutiny by IT department for such declaration
Tax rate of 30%, 7.5% of "Krishi Kalyan Cess" and 7.5% of penalty
Taxation
Total of 45% of tax
Success Rs652bn of undisclosed amount was declared by Sep-16
Policies for startups
Over the past three to four years, a large number of new businesses have come up in the
services sector (e-commerce and technology companies). The current government has
released policies with regard to lower taxes for them in the initial years and a fund to
support startups.
STREAMLINING APPROVAL Project delays are common approval process is long

PROCESSES STILL A LOT OF
Delays in project awarding and execution are common in India. Common hurdles include a
SCOPE FOR IMPROVEMENT
long process of planning, design changes, and delays in approvals, tendering, court
litigations, and protests. The timeline between conceptualization to final ordering often
extends into decades. In approvals, two of the key bottlenecks are land acquisition and
getting environment-related (including forest, wildlife, coastal, etc.) clearances (see
Exhibit 297).
EXHIBIT 297: Land acquisition and environmental clearances are two key bottlenecks
Project Keyprovisions
Newcategorizationofindustrybasedonpollutionload(red,orange,green,andwhite)
Newcategorizationof Whiteindustries,nonpolluting,donotneedenvironmentalclearance
industries Redcategory,whichhas60industries,willnotbeallowedtosetupineconomicfragilearea
Redindustriesincludeautomobiles,batteries,O&G,thermal&nuclearpowerplants,pharma,etc.
Environment Validity Environmentalclearancevalidityincreasedfromfivetosevenyears;canberenewedforaperiodofthreeyears
clearance OnlinesubmissionforToRandEnvironmentalclearanceaswellasforestclearance
Standardizationoftermsofreferencefor38sectors
Streamliningapproval Noenvironmentalclearanceneededforbigbuildingprojects(above0.2mnsqft)
Delegationofpowertoregionalempoweredcommitteefordiversionregardingsmallerforestareas(upto40
hectares)andforlinearprojects
AnewLandAcquisitionBillwaspassedin2013,whichcameintoeffectinJan.2014
Land Consentof80%ofownersneededforprivateprojectsandconsentof70%ofpeopleneededforpublicprojects
acquisition Socialimpactassessementfortheprojectsexceptcertainspecificcategoryofprojects
Compensationforlandacquisitionat4xforrurallandandtwiceforurbanareas
Source: Ministry of Environment and Forest (MoEF; India), and Bernstein analysis.

BERNSTEIN
The new Land Acquisition Act, passed in 2013, makes it difficult to acquire land,
especially for private development, as it requires approval from 70-80% of land owners.
Additionally, an environmental impact assessment will be carried out. The rehabilitation
and resettlement package includes providing a house in case of acquisition of a house
and land in case of land acquisition. Compensation of a job or INR0.5 million, a
subsistence allowance of INR3,000/month for a year, and other allowances of INR0.125
million that include transportation allowances, resettlement allowances, and one-time aid
need to be given to affected people.
The key issue with the current Land Acquisition Act is not pricing, but the long procedure
and processes that are not in the interests of either the farmers (sellers) or the industries
(buyers) (see Exhibit 298).
EXHIBIT 298: Land acquisition process in India

Inconsultationwithgramsabha inruralareas
SIAexemptedifacquisition SocialImpactAssessment andequivalentbodyinurbanareas
underurgencyclause
Preparation&publicationofstudy ApublichearingforpreparationofSIA
Appraisalbyanexpertgroup
CScommitteeif>100acreselseadelegatedcommittee
willascertainwhetherconsentofatleast80%people
Examinationbyacommittee soughtincaseofprivatecompaniesand70%forPPP
< 12months
PreliminaryNotification
60days Surveyandcensusof
Rehabilitation&Resettlement affectedfamilies
Objectionbyinterestedparties PreparationofdraftR&Rscheme
< 12months
Publichearing
Noticetoperson
Publication&declarationofR&R interested
2years Determinationofpriceofland+
assetsattachedbycollected
R&RAward
Fullpaymentofcompensation
R&REntitlements
LandPossessionbyCollector >3monthsfromthedateofawardofcompensation

BERNSTEIN
What has been done so far?

The government realized the consequences of the new land law and, hence, attempted to
amend it in order to ease land acquisition for infrastructure projects. We have highlighted
some of the proposed amendments below. But these were not cleared in the Parliament
as the current government does not have a majority in the Upper House (Rajya Sabha).
Key amendments proposed: Exemption from certain provisions of the land acquisition
process for projects in five key sectors: 1) defense; 2) rural infrastructure; 3) affordable
housing; 4) industrial corridors (undertaken by the government, limited to 1km on either
side of the road/railway corridor); and 5) infrastructure projects, including PPP projects,
where the government owns the land. Key exemptions included: 1) consent clause (70%
for PPP projects); 2) social impact assessment; and 3) allowing the acquisition of multi-
crop land.
FDI Policy
From 1991, a series of steps were taken, including adoption of dual routes of approval for
FDI and increases in the foreign equity participation limit to 51% for existing companies.
While manufacturing, agriculture, mining, etc., have been opened to 100% FDI, limits have
been increased for telecom and retail over the years. FDI policy in India has seen periodic
revisions since the opening of the economy in the 1990s. The last two years have seen a
large number of revisions (see Exhibit 299).
EXHIBIT 299: Key changes in FDI policies over the last two years in India
Sector Changes
Brownfieldairports 100%automaticroute
49%automaticroute
Defence Approvalroutebeyond49%formoderntechnologyaccess
Earliergovernmentapprovalwasrequired
Construction Relaxationofnormswithregardtominimumcapitalizationandarea
Relaxationof30%sourcingnormsforhightechsectors
Singlebrandretail
Relaxationofsourcingnormsforthreeyears
49%automaticrouteforregionalairtransport
Civilaviation
100%automaticbrownfieldairportprojects
Broadcasting 100%automaticrouteforcablenetwork,mobileTV,andcarriageservices
Pharmaceuticals
74%isautomatic,andadditionalstakerequiresapproval
(Brownfield)
Foodproducttrading 100%govt.approvalfortradingoffoodproductsmanufacturedinIndia
Source: Department of Industrial Policy and promotion (DIPP; India) and Bernstein analysis.

BERNSTEIN
EXHIBIT 300: Annual FDI inflows to India
60
55
TotalEquityFDI(US$bn)
50 TotalFDIInflows(US$bn) 47
45
42 40
40 38 36
35 35 35 34
31 31 30
30 26
23 25 21 22 24
20
12
10 9
6 5 6 6
4
24 4 3 2 3
0
YTDFY17
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
POLICY PROPOSALS TO DRIVE INDIA FORWARD
1. CENTRALIZED LONG-TERM One of the key learnings from China is the continuity of policy and a focused approach to
PLANNING FOR POLICY reforms. Another is the long-term approach, for example building infrastructure ahead of
CONTINUITY
requirements, as this eventually gets utilized. Doing that helps ensure a smoother
trajectory for long-term growth; on the other hand, India largely created infrastructure
only after severe shortages emerged.
A key case in point is the development of the power business, which started only after
decades of large power deficits. Even when growth emerged, it was poorly planned, as
there was no coordinated effort to increase production of coal and spruce up railway
infrastructure. There were numerous examples of power plants not having coal because
evacuation infrastructure from coal mines was not set up, or there were delays in
transmission access.
Similarly, while ports, power plants, etc. were built, evacuation infrastructure took time to
come up. Metro rails were built, but enough planning for feeder services was not done
around the stations, leading to congestion of roads. In short, there was no planning and no
coordination. Growth was approached haphazardly, as there has been a lack of a strong
political vision. There were no targets and no dreams.
There is lack of continuity in policies due to a frequent change of governments at various

levels (state, center, etc.), leading to frequent changes of plans. In Tamil Nadu for
example, over a 10-12 year period, various governments flip-flopped between the setting
up of a monorail or a metro; they simply could not decide.

BERNSTEIN
Another issue is the multiple planning authorities spread across the center, state and
municipalities. Lack of coordination among them leads to frequent delays in the planning
of various projects across end markets. Our broad calculation for several key projects
suggests typical delays of over 10 years from conceptualization to tendering.
What can India do?
Centralize planning and implement nation-building activities: A radical solution could

be that, for critical projects, planning and implementation, including tendering,
should be done through a "central planning mechanism," with the state governments
only providing local implementation support. These key projects should also be
delinked from political considerations through the setting up of, say, an "infra
execution company," as a public sector undertaking. This body, in theory, could take
up all relevant infra projects rather than multiple departments across the center and
state focusing on this.
Create long-term planning for key infrastructure projects: Infrastructure project

planning, in general, has been ad hoc, with no specific targets. In general, there have
been announcements of projects, and on the success of the projects (after many
delays), similar projects are taken up in other areas as well. Similar to the solar target,
the government should have specific targets for each of the sectors for the next 15
years. Resources, including land could thus be acquired much in advance, based on
these targets. There should be mechanisms to prevent change in long-term targets
with progress highlighted every year as a percentage of the long-term targets to
bring about greater accountability.
Build ahead of demand: Yes, there is challenge in doing that as that leads to under-
utilization and may not generate enough returns. But that is the only solution.
Otherwise, growth will only come in spurts in India. India moved from one lane to two
lanes for roads and then from two to four etc., while in some cases, a direct move
from one lane to four could have helped reduce costs and time in developing these
projects. India is building only one bullet train, which will also take 10 years to be
implemented, in our view. Is there even a plan for such trains for connecting other
cities? This highlights the piecemeal approach to growth, which is unlikely to really
change things a lot.
Need to set specific timelines: An implementable initiative could be that specific

timelines are set involving all the key stakeholders at the initial stage. Given that there
are a large number of stakeholders involved, including the specific ministry,
state/central government, and various approval bodies (land acquisition and
environmental clearance), specific short timelines should be created for every
approving body. An online portal should be created with a live status of all the
projects. Processes should be standardized, leaving little room for delays. There was
a plan though to have all projects above INR10 billion in size to be tracked online,
ensuring that delays at each stage of approval are noticed much earlier in the stage
of a project lifecycle.

BERNSTEIN
Need to resolve land acquisition issues: While land acquisition had been tough in
India, the new land acquisition law for the acquisition of land for public use, which
was passed in 2013, has made it even tougher. While the acquisition cost has been
set at 4x the market value in rural areas and 2x the market value in urban areas, thus
bringing some standardization to the acquisition process, it is not pricing but a few
additional provisions that have been added which makes the entire acquisition
process slower.
What can India learn from China?

The Chinese land acquisition model is different: In China, most of the agricultural land
is owned by the government and farmers work on it on contract. Farmland needed
for business/infrastructure is first acquired by the government (implying giving
notice to those working on the land on contract on a potential acquisition). The
government acquisition process is quick with no social impact assessment and a very
short period of time for objection. While earlier there were no regulations against
inadequate compensation, the Chinese government for the first time recently
granted citizens the right to sue government bodies for inadequate compensation.
India cannot follow China: Given the democratic federal structure and also the
individual ownership of land parcels, it is not possible for India to follow the China
model of land acquisition. The land is entirely held by individuals and the Land
Acquisition Act specifies a long acquisition process. With 60% of land being used for
Agriculture in India it becomes even more difficult to acquire land.
EXHIBIT 301: Over 60% of land is fertile and used for agriculture in the following
Unirrigatedland 40%
Twocropirrigation 37%
60%
Otherirrigationland 23%
While the ideal scenario would be to modify the land acquisition law to allow for faster
acquisition of land, given the democratic setup of India, alternative methods have to be
found. In our view, strengthening of a planning process is essential, so that land can be

BERNSTEIN
acquired in advance. Land acquisition should be a continuous process and not project
specific, in our view.
Establishment of land banks
Various state governments should build land banks through continuous acquisition going
through the normal route and then allocating it to industries when required. This method
offers a few key benefits: 1) the process is likely to face lower resistance, given that the
land is being acquired by the government in a common pool of land; and 2) the availability
of large parcels of land at various locations should make it easier for industries to plan,
thus making the states attractive to investors (including international companies).
2. INFRASTRUCTURE Over the past few Five-Year Plan periods, there has been an increasing focus on
DEVELOPMENT SHOULD BE LED attracting private sector investments in India, especially in the infrastructure development
BY THE GOVERNMENT
phase (see Exhibit 302). Private sector investments in infra, in general, sported low IRRs
across various infra assets. We also note that most companies have often shown a
tendency to bid aggressively and have shown a limited ability to understand and price risk.
EXHIBIT 302: Sharp increase in the mix of private sector investments in capital formation in India from the late 1990s
46% 51% 43% 39% 45% 43% 48% 38%

55% 56%
61% 61%
78% 74% 76% 75% 78% 72%
54% 49% 57% 61% 55% 57% 52% 62%

45% 44%
39% 39%
22% 26% 24% 25% 22% 28%
Mar81
Mar83
Mar85
Mar87
Mar89
Mar91
Mar93
Mar95
Mar97
Mar99
Mar01
Mar03
Mar05
Mar07
Mar09
Mar11
Mar13
Mar15
Public Private
Source: GoI national accounts and Bernstein analysis.
Our broad analysis of IRR for about 80 projects worth US$50 billion suggests that the
bulk of them have IRR below the cost of equity (see Exhibit 303). Low IRRs have led to
contractual disputes and court cases in the past, leading to, firstly, a clogging of bank
debt in stuck projects, and secondly, an inability to invest more due to a lack of cash flow
generation. This is a result of aggressive bidding and not due to the lack of demand for
infrastructure in India.

BERNSTEIN
It is often highlighted that projects such as metros may not be viable in India, as the cost
of construction may not be very different from that of developed countries; but the
addition of real estate parcels could spruce up returns. We believe that these things don't
help because in a competitive world (especially in a positive liquidity environment and
sentiment), all the benefits provided to a project get factored in the bid, eventually leading
to no improvement in the IRR potential of a project. So, this works if the government
develops these projects as the government will benefit from real estate monetization, and
the ability of the government to fund long-term debt at lower rates, including access to
multilateral funding, is much better.
EXHIBIT 303: IRR profile of PPP infra and power projects: No. of projects in a certain IRR range highlighted below; several
projects in India are below the cost of equity threshold of 12-14%
Costof
equity
% threshold
18 17
16
14
14
12 11 11 11
10
10
8
6
4
4
2 2
2
0
<5 57 710 1012 1214 1417 1720 2022 2225
IRRRange
Source: Bernstein estimates and analysis.
What should India do?
Projects should be government-owned initially. Private sector experience in infrastructure

assets, in general, has not been very successful. Returns have been low, impacted by
delays in execution, aggressive bids, and lower-than-expected revenue. We believe, given
that infrastructure assets are utilities and have a far higher economic impact than the
returns from the individual assets, government should be investing in these projects.
Given the criticality of the infrastructure projects, we believe that infrastructure assets
should be completely government-owned during the initial stage of construction. Private
sector involvement should be there in construction and in, say, operating the asset. In
addition, after operating it for a few years, the government could look at offloading the
asset to the private sector through a bidding process.

BERNSTEIN
One option that is being experimented with is a hybrid model, where private sector funds
are offered as an annuity sort of a return, which is not linked to toll collection performance
and so on. While there would be bidding for this, given the low risk and volatility, the
private sector would largely know upfront as to what returns it is bidding for. This also
reduces the risk of future disputes.
3. A LARGER PUSH FOR Barring a few specific traditional sectors, such as autos, steel, cement, and oil and gas,
INDUSTRIALIZATION REQUIRED manufacturing in India has been in small-scale industries. Over 36% of the manufacturing
FOCUS ON BUILDING SCALE
output in India stems from the MSME sector with an annual output of c.US$280 billion.
Though there has been a push to remove the reservations for small and medium
industries in order to attract capital and technology to build scale in manufacturing, this
has not translated yet into any relevant mix change into more organized manufacturing for
these products.
EXHIBIT 304: Share of MSME in total manufacturing EXHIBIT 305: There is no longer any industry reserved for
the MSME sector
ShareofMSMEoutputintotalmanufacturingoutput ListofIndustriesdereservedforMSME
No.
Grossrevenues(US$bn) 400 392
US$bn %
300 278 40
275 350
254 35
250 229 300
204 212 30
200 250
184
25
200 193
150 20
150 126
15
100 100 79
10
50 39
50 20
5 14
1
0
0 0
FY97 FY03 FY05 FY07 FY08 FY09 FY11 FY16
Source: GoI and Bernstein analysis. Source: GoI and Bernstein analysis.
High-technology sectors such as IT hardware, electronics, and machines have

significantly lower manufacturing bases. India imports over 60% of its electronics product
requirements and has minimal exports (see Exhibit 306).

BERNSTEIN
EXHIBIT 306: There has been a sharp increase in the imports of electronic components in India
40
35.9
35 32.3 31.9
Electrical/ElectronicComponent(US$bn) 29.6 29.8
30
24.5 25.5
25 22.5
20 18.5
15 14.1
11.1
10 8.3
6.3
4.3
5 2.7 3.0
1.2 1.2 1.0 0.7 0.9 0.9 1.3 2.1 1.6 2.0 2.0 2.3
0
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: Ministry of Commerce (India) and Bernstein analysis.
What is required?
Focus on scale: There should be attempts to increase the scale of manufacturing by

attracting large companies to invest in India rather than focusing on SMEs, as the
SME sector suffers from cost issues, the inability to spend on innovation, high
financing costs, and they cannot attract good talent.
Identify specific industries: India should also identify industries where it wants to
develop global capabilities rather than having a generic "Make in India" program that
offers infrastructure to any industry. For example, defense could be one key area.
Incentivize FDI in manufacturing: Apart from reducing FDI caps, global companies
should be offered incentives to invest in India and partnerships with Indian
companies should be promoted.
4. FOCUS ON HUMAN CAPITAL We have highlighted in the "Is It India's Turn? Part I" chapter of this Blackbook about the
AND INNOVATION relatively low R&D intensity of the Indian economy. China is moving from "Made in China"
to "Innovated in China," and though India is currently at the first step, "Make in India,"
moves should be made now on improving innovation in the economy.
In terms of education too, there is a sharp decline in the number of students pursuing
higher studies or doing research; something essential for technology development, a key
requirement for the manufacturing sector. In addition to the lack of opportunities,
inadequate infrastructure and remuneration for students pursuing PhDs is another key
factor. This has been the trend in the past and the result is that, while India does well in

BERNSTEIN
basic services, in terms of technology, it has to either import the product or has to tie up
with international vendors for technology imports.
What should India do?

Secondary education should continue to be a focus area: While the numbers indicate
that not much has been achieved (over 25% uneducated), the skew is driven by the
older population (50% over 50 years of age illiterate) and gender disparity (35% of
girls uneducated). While enrollment rates at the primary level have improved, the
focus should continue to be on increasing enrollment rates for secondary education
and for the education of girls.
Diversify undergraduate education: Attractiveness of undergraduate specialization is

driven largely by the job market. Today, it is highly skewed toward information
technology. A large portion of it is toward relatively low skillset businesses such as
process outsourcing. In our view, improvement in job markets in other specializations
in manufacturing and technology should automatically lead to a shift of balance;
however, this is likely to be over the long term, with the efforts of government to
increase the share of manufacturing in India.
Solicit international talent: Organic development of talent and research is likely to be

very slow and the impact should take decades before material benefits start
accruing. The government should focus on attracting international talent (PhDs in
their areas) to various government jobs, providing them with a favorable work
environment, freedom of work, and high monetary incentives.
Incentivize international universities to set up institutes in India: A focused approach to

encourage international technical universities to set up institutes in India, would not
only help retain some of the talent that flows outside, but also help improve the
overall level of research in other universities as well.
Making research lucrative: While infrastructure is an issue, lack of adequate

opportunities and inadequate monetary compensation are other issues that have
made research (PhD education) unattractive in the country. Research education
should be made more lucrative by improving compensation for research
professionals, having tie-ups with other countries for international exchanges, and
having lucrative monetary awards for patents and research papers. India has a few
strong undergraduate institutions and specific strategies should be formulated to
leverage their competitive advantage to drive the growth of research in these
institutes.
Steps to improve the quality of research: Steps should be taken to improve the quality
of research in Indian education institutions through international collaborations,
improved infrastructure, and also making research more lucrative to those pursuing it
including providing opportunities for jobs. Currently, a PhD in India does not have
any edge in terms of salary compared to a postgraduate (Master's degree holder).
Targeted schemes for technology development: The government should announce

targeted schemes for technology development, where it shares the burden of R&D

BERNSTEIN
expenditures to incentivize manufacturing companies. There are some measures in

this direction but these need to be broad-based to all Industry clusters.
Technology transfer rather than assembly: When collaborating with international

vendors, the Indian government should have a policy to ensure that technology
transfer to Indian companies occurs after a certain period of time. There should be
policies ensuring that Indian vendors are able to manufacture completely in-house
after a specified period of collaboration. Until now, for major programs on technology
transfer, government companies have been partners, leading to low levels of scale
up on imbibing new technologies and using them for developing new products. The
private sector should be encouraged to participate in joint ventures and the policy of
protecting government companies should be discontinued, as seen in the case of the
power equipment sector. Most foreign joint ventures in the private sector are
underutilized.
KEY OPPORTUNITIES TO PROFIT Outperformers in China over the last 15 years will they outperform in India?
FROM THE GROWTH IN INDIA
While the size of India is similar to that of China in 2004, the large difference in
AND INDIAN CONSUMER
INCOMES demographics (age), income levels, skillsets, the service/manufacturing mix in GDP,
export orientation versus domestic consumption, etc., could lead to totally different
industries emerging in India over the next 10 years as compared to what did well in China
over the last decade.
In China, the 2001-11 phase (industrialization phase) saw better performance from
resource, infra, and industrial products as well as consumer-related sectors. With
maturing industrialization, almost all these sectors dropped in performance (except
autos), and were replaced by relatively high-technology newer industries such as biotech,
healthcare, pharma, software & services and electronic equipment. Most of these newer
industries did not have a large base in the previous decade; hence, growth for these also
benefited from a low base (see Exhibit 307 and Exhibit 308).
EXHIBIT 307: Most of the best-performing industries in China in the 2001-11 phase lagged in the 2006-16 phase
2001-2011 2006-2016
Top 10 Industry Segments in 2001-2011 Ranking Ranking
Total Return Total Return
(out of 53) (out of 53)
Oil, Gas & Consumable Fuels 1 722% 52 39%
Beverages 2 638% 28 262%
Aerospace & Defense 3 318% 23 332%
Electrical Equipment 4 313% 42 194%
Telecommunication Services 5 280% 50 94%
Food & Staples Retailing 6 271% 46 138%
Construction Materials 7 246% 22 336%
Food Products 8 236% 32 235%
Banks 10 217% 41 196%

BERNSTEIN
EXHIBIT 308: Most of the best-performing industries in China over 2006-16 had relatively muted performance in the 2001-11
phase
2006-2016 2001-2011
Top 10 Industry Segments in 2006-2016 Ranking Ranking
Total Return Total Return
(out of 53) (out of 53)
Biotechnology 1 994% 24 107%
Health Care Providers & Services 2 925% 26 101%
Pharmaceuticals 3 718% 11 211%
Software, Internet and Services 4 640% 45 46%
Distributors 5 605% 17 148%
Health Care Technology, Equipment & Supplies 6 550% 15 162%
Textiles, Apparel & Luxury Goods 7 531% 29 93%
Electronic Equipment, Instruments & Components 8 484% 44 47%
Auto Components 10 479% 25 102%
Source: Bloomberg L.P. and Bernstein analysis
In contrast, India has not been through sustained phases of industrialization there have
been rather shorter cycles of five to seven years, with a strong upcycle seen in the
2003-08 phase and a down cycle since 2009.
A few sectors that have done well across cycles include autos (including components),
pharma (export driven), consumer (domestic consumption), and NBFCs (including housing
finance companies), while information technology services that had done well in the
2001-11 phase have seen moderation in the last few years. Along with staples, consumer
discretionary has also seen good performance over the last decade. Among the smaller
sectors, building materials, chemicals (which includes paints), and electrical equipment
have also done well (see Exhibit 309).
EXHIBIT 309: Sectors that have done well in India over the 2006-16 period
Total shareholder return
Sectors Over November 2006- November 2016 Key companies
Consumer Finance 668% M&M Finance, Sundaram Finance
Building Products 526% Electrosteel, Kajaria, Somany Ceramics
Chemicals 504% Asian Paints, UPL, Godrej Industries, Pidilite, Castrol India
Personal Products 480% Dabur, Emami, Godrej Consumer, Procter & Gamble
Pharmaceuticals 375% Sun Pharma, Dr. Reddy, Lupin, Glenmark Pharma
Auto Components 307% Bharat Forge, Motherson Sumi, Exide Industries
Thrifts & Mortgage Finance 307% Gruh Finance, HDFC, Dewan Housing
Automobiles 229% Tata Motors, Maruti Suzuki, M&M, TVS Motors
Textiles, Apparel & Luxury Goods 227% Titan, Raymond, Arvind, Bata
Electrical equipment/goods 222% Crompton Greaves, Havells

BERNSTEIN
We have the following key takeaways, post comparison of sectoral return patterns in
China and India.
More cyclical with short upcycles: Given the difference in the structure of economy
and growth drivers, growth periods in India and China have been different. While in
China we have had long phases of industrialization, in India growth in industrial (and
infra) sectors is cyclical, sustaining for only five to seven years. Hence, while in China
we were able to see 10-year compounders in resource sectors, in India these sectors
have gone through cycles; hence, returns over longer periods have been limited.
Consumption-driven sectors should, however, see growth: While industrial growth is

cyclical, consumption is a structural story in India, driven by increasing income levels.
Sectors such as electrical equipment (including domestic appliances) and consumer
discretionary should continue to see growth in India.
2006-16 phase Chinese sectors in early stage in India: Many of the sectors that had
done well in China in the 2006-16 phase (biotech, healthcare technology, electronic
equipment, software & services, etc.) are in the nascent stage in India and are likely to
take some time to emerge in the public markets. Pharmaceuticals and autos are
already large sectors in India, with pharma being export driven.
We conclude that India remains a consumption-driven economy, and while the overall
GDP growth trajectory appears to be inching up at a slower growth rate than in China,
overall per capita GDP will continue to improve, eventually leading to an increase in
discretionary expenses. Apart from this, investments in infrastructure and manufacturing
could improve the opportunity for construction vendors. However, unless there is a
change in the planning and implementation process for this sector, we expect growth to
remain cyclical or rather happen in spurts. Hence, we see limited reasons for a buy and
hold strategy in the construction segment in India.
Discretionary autos, consumer electricals

This is a fairly well-understood theme, but rising incomes, coupled with increasing
urbanization, will continue to increase demand for both cars and electrical products and
eventually also lead to an increase in the demand for premium products. So, we expect
companies that are able to move up the premium curve to benefit in the long term.

BERNSTEIN
EXHIBIT 310: Indian urbanization levels are currently low
Share of urban population (%) in 2015

100.0 93.5
89.4
90.0 85.7
81.6 82.6 82.5
80.0 75.3
70.0 64.8
60.0 55.6 53.7

50.0
40.0 32.7
30.0
20.0
10.0
-
India China United United South Brazil Indonesia Australia Germany Japan Korea,
States Kingdom Africa Rep.
Share of urban population (%) in 2015
EXHIBIT 311: Number of the million-plus urban agglomeration to continue to scale up
Mn.
90 83
No.ofmillionplusurbanagglomeration
80
71
70 65
60 53
50
40 35
30
20
10
0
2001 2011 2021E 2031E 2041E
Source: GoI, and Bernstein estimates and analysis.
Telecom and e-commerce

We continue to see growth for telecom services in India. With the penetration of
smartphones and the Internet expected to increase further, we expect this to increase the
importance of online retail and associated logistics. However, online could serve as a

BERNSTEIN
disruption for some consumer categories (TV, white goods, and appliances) (see
Exhibit 312 to Exhibit 315).
EXHIBIT 312: Increasing penetration of wireless broadband EXHIBIT 313: Smartphone sales an enabler
Mn. Mn.
140 132 350
304
300 269
120
240
100 250 223
83 208
80 200
169
60 150 130
46 107
40 100 82
50
20 50
21
2 2 3 6 11
0 0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017E
2018E
2019E
2020E
2017E
2018E
Mar14 Mar15 Mar16
Source: Telecom Regulatory Authority of India (TRAI) and Bernstein analysis. Source: World Bank, Internet Live Statistics, and Bernstein estimates and
analysis.
EXHIBIT 314: We expect the mobile subscriber base to grow EXHIBIT 315: Global mobile spend as % of GDP
1,500 120%
2.0%
1,429
1,400
1,400 1,360 1.8% 1.74%
110%
1,317
1,300 1,272 1.6% 1.53%
1,226 99.6% 1.40% 1.41%
Mobile spend as a % of GDP
100% 1.4%
1,200 1,178 1.29%
93.2%
1,130
1.2% 1.11% 1.11%
1,100 1,080 90%
1,023 1.0%
1,000 970 86.0%

80% 0.8%
900 0.6%
77.0%
70%
800 0.4%
0.2%
700 60%
Mar'15
Mar'16E
Mar'17E
Mar'18E
Mar'19E
Mar'20E
Mar'21E
Mar'22E
Mar'23E
Mar'24E
Mar'25E
0.0%
Thailand
(FY15)
Indonesia
(2015E)
(2020E)
(FY21E)
Philippines
(2015E)
(2015E)
India
China
China
India
(2014)
Mobile subscribers (mn) SIM Penetration (%)
Source: IMF, TRAI, corporate reports, and Bernstein estimates and analysis. Source: IMF, TRAI, corporate reports, and Bernstein estimates and analysis.
Construction and building products

We expect opportunities to emerge in the construction for both infrastructure and real
estate, but expect this to be cyclical. Hence, investors will have to still evaluate these
companies from that perspective. A combination of improvement in demand from infra

BERNSTEIN
and real estate should drive up consumption of building products such as ceramics,
paints, and cement.
Manufacturing largely defense, eventually ports

In the entire program for manufacturing in India, we see larger opportunities for defense
sector indigenization, as this is not about increasing funding to the sector but more about
sourcing increasingly from India. We expect the defense supply chain to benefit, given the
plans to increase local sourcing. While Bharat Electronics is a key vendor exposed to
these spends, some private companies will eventually be able to benefit.
An improving manufacturing presence in India could eventually increase EXIM trade

flows. Overall, port volumes can, hence, see some leg up over the next 10-15 years,
although in the medium term, we expect only a 5% CAGR. There are a very limited number
of companies in this space and among those, Adani Ports has a much better offering,
given access to ports across the country (see Exhibit 316).
While we highlight broad sectors that will benefit in the long term, one would have to still
select stocks within these sectors based on the individual opportunity spectrum,
valuations, etc.
EXHIBIT 316: Key sectors that will benefit in the long term
Discretionary Maruti, Hero Honda, Bajaj Auto, Eicher Motors

Consumer electricals Crompton consumer, Havells, V guard
Construction L&T, small cap construction vendors
Cement and building materials Ultratech, Shree cement, Asian Paints
Ports and Logistics Adani Ports, CONCOR , Blue Dart, GATI etc
Defence L&T, Bharat Forge, Bharat Electronics
In China, the 2001-11 phase (industrialization phase) saw better performance from the
resources, infrastructure, industrial products, and consumer (staples)-related sectors.
Over the past decade though, industries such as biotech, healthcare, pharma, software &
services, and electronic equipment have generated better stock returns.
While in India, over the past decade, we have seen better stock returns from consumer,
pharma, and autos. Over the next decade, we see opportunities remaining strong in
consumer discretionary (including autos), led by improvement in per capita incomes and
urbanization. We continue to see growth for telecom operators and the e-commerce
sector (expect more listings). That apart, India needs to do a catch-up in infrastructure;
hence, construction and building materials sectors will remain beneficiaries, although
building will remain cyclical. Ports and logistics should benefit from improving economic
growth and an increase in the penetration of e-commerce. Manufacturing mix will improve
in India, but not at the pace and extent seen in China. We see pockets of opportunities in

BERNSTEIN
manufacturing, with defense and auto comps offering a better visibility. Key stocks that
benefit in our coverage include Bharat Electronics, Adani Ports, Container Corporation
(CONCOR), Bharti Airtel, and Crompton Consumer.
BHARAT ELECTRONICS Bharat Electronics is a listed pureplay defense manufacturing company, exposed to an
increase in government spends on defense and an increased focus on indigenization. We
rate the stock outperform. Our target price of INR1,552 is based on DCF methodology,
with a WACC of 11.4% and a terminal growth rate of 5.5% from FY2026 onward.
Strong order pipeline: We see a current order pipeline for key orders at over US$14 billion,
most of which will be finalized over the next two years (see Exhibit 317).
Missile systems: Apart from Akash missiles (where the next phase is also under
planning), Bharat Electronics is the nominated vendor for manufacturing LR SAM
(long-range surface-to-air missiles) and QR SAM (quick-reaction surface-to-air
missiles). We expect these to be awarded by FY2019.
Generic communication solutions: The company is exposed to the communication

modules for Tejas (manufactured by Hindustan Aeronautics) LCA. Approval for the
first tranche of Tejas is likely to be obtained in FY2016.
Two large communication systems: Bharat Electronics has also been shortlisted as
one of the last two competing vendors for tactical communication systems (TCSs)
and battlefield management systems (BMSs). The company will be competing
against the L&T consortium. The prototypes for these projects are likely to be
awarded in FY2016-17.
EXHIBIT 317: Potential order pipeline for Bharat Electronics (aggregate US$14 billion)
Project Order size (Rs mn)

Akash Missiles for Air Force 50,000
LR SAM (barak 8) 80,000
QR SAM 50,000
Night vision devices 10,000
Oprtonics for T90 28,000
Tejas 10,000
Rafale (MMRCA) 25,000
Tactical Communication System 120,000
Battlefield Management System 520,000
Evidence of acceleration visible in order inflows: While the pace of ordering from private
sector vendors has remained slow due to the lack of a coherent policy for awards, there
has been a sharp increase in inflows for Bharat Electronics, led by the increased push
from the government (see Exhibit 318).

BERNSTEIN
EXHIBIT 318: Bharat Electronics: Order inflows have scaled up
180,000
160,000 OrderinflowRsmn
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Source: Company data, and Bernstein estimates and analysis.
ADANI PORTS Adani Ports is a key beneficiary of the increase in port volumes, led by an improvement in
economic activity and an eventual beneficiary of an increase in port volumes, led by an
improved manufacturing infrastructure in India. We expect the manufacturing part of the
story to take over a decade or even more, as India needs to first build a competitive
advantage in exports that will help it gain market share in global volumes. For Adani Ports,
the key advantage is the access to ports on both the west and east coasts of India, leading
to a higher opportunity to gain market share (see Exhibit 319 and Exhibit 320).
EXHIBIT 319: We expect Adani Ports to benefit from an improved macro for port volumes in the long term and market share
in the medium term
%
40 37
37
Bulk marketshare
35 32
Containermarketshare
30 29
26
25 24
20 18
15 13 14
13 12
11 11 12
10 8 9 9 8 9
5 6
5 3 4 4
0
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Source: Company data, and Bernstein estimates and analysis.

BERNSTEIN
EXHIBIT 320: Adani Ports' asset snapshot: Has port assets across the eastern and western coasts in India
Greenfield ports Portterminals MundraJVports Acquiredports Logisticsupport
Mundra Ennore CT3withMSC Dhamra KutchRail
Dahej(Petronet)Port Murmagao CT4withCMACGM Katupalli AdaniLogistic
Multi-cargo terminals
Hazira Port Vizag
Bulk terminals
Coal terminals
Container terminals
VizhinjamPort Kandla
CONCOR Container Corporation (CONCOR) should benefit from: 1) improvements in market share
for Railways (see Exhibit 321), post the setting up of dedicated freight corridors; and 2)
overall port volume recovery over the long term, driven by macro growth. With over 77%
market share in container transport in India, we expect CONCOR to remain a key
beneficiary.
EXHIBIT 321: CONCOR's Railway market share to gain as India continues to invest in infrastructure
% 30
29 30
30
28
Railmarketshareincontainers 25
25 23
22 21 22 22
21 21
20
15
10
0
FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E
Source: Ministry of Railways (India), and Bernstein estimates and analysis.

BERNSTEIN
While container traffic growth at the ports in India has been in low single digits over the
past year, over the next three years we expect growth to recover to high single digits,
driven by some macro support and increase in the containerization of cargo (see
Exhibit 322). We also expect long-term growth to be dependent on the success of the
plans to set up new manufacturing hubs in India.
EXHIBIT 322: Container traffic has a high correlation with overall growth in the economy in India
BHARTI AIRTEL Bharti Airtel is the leading telecommunications company in India with a 29% overall share.
The company is diversified across cellular, fixed broadband, and PayTV services for
consumers in India, and has been a leading supplier of integrated telecommunications
solutions for Indian enterprises. Outside of India, the company also owns leading mobile
operators in 15 countries in Africa, and has stakes in leading operators in Bangladesh and
Sri Lanka.
The mobile market in India has significant upside growth potential. Roughly half of the
Indian population still does not own a phone. Of those that do, only 65% currently use
data, and of those that use data, only half are using 3G or better phones. Bharti is one of
the two operators with national 4G coverage and is well positioned to profit from the
expected data explosion over the next 10 years.
We forecast EBITDA to grow at a 7% CAGR over the next 10 years and for net profit to
accelerate to compound growth in the low double digits (see Exhibit 323 to Exhibit 325).

BERNSTEIN
EXHIBIT 323: Bharti Airtel has grown revenue at 15% per year over the last seven years to INR965 billion; much of it was
driven by the acquisition of Zain in Africa
Bharti Airtel
1,200
CAGR 14.5%
Zain's Africa 965 10.1%

1,000 920
operations 857 16
acquired in Jun'10 16 13.9%
769 251
800 715 17
Total Revenue (Billion INR)
269
12 272
595
240
600 198
131
375 418
400 5.8%
708
645
576
487 519 524
476 465
200
0 CAGR
(101) (68) (1) (3) (8) (8) (10) (11) FY2009-16
-200
FY'09 FY'10 FY'11 FY'12 FY'13 FY'14 FY'15 FY'16
India Africa South Asia Elimination Total Bharti Airtel
Note: Bharti Airtel started reporting South Asia as a separate region from FY2013 prior to which it was included under India. Hence, India business included
Indian and South Asian operations until FY2012. Since the African operations were acquired in FY2011, three-year (2011-14) CAGR has been shown for Africa.
Source: Corporate reports and Bernstein analysis.
EXHIBIT 324: In FY2010-16, Bharti Airtel EBITDA grew 12.6% EXHIBIT 325: Bharti Airtel's EBITDA margin trends
per year
Bharti Airtel
CAGR 50%
342 12.6%
350 314 NA 40.8% 40.1% 40.9%
0.0% 37.0% 39.0%
53 40% 35.5%
35.8%
300 276
1 61
Bharti Airtel EBITDA (Billion INR)
32.5%
237 233 35.4%
250 33.7%
- 71 30% 33.2% 32.2% 34.1%
201 30.2%
53 63
200 168 - 26.5% 26.2% 26.2%
- 9.2% 20% 22.7%
21.9%
150 290 21.0%
252
100 206
171 172 184 170
10%
5.9%
50
-1.2%
0%
0 (1) (0) (1) CAGR -5.0%
2010-16 -7.7%
-50 -10%
FY'10 FY'11 FY'12 FY'13 FY'14 FY'15 FY'16 FY'09 FY'10 FY'11 FY'12 FY'13 FY'14 FY'15 FY'16
India Africa South Asia Total Bharti Airtel

India Africa South Asia Bharti Airtel
Note: Africa EBITDA CAGR from FY2011 to FY2016.
Source: Corporate reports and Bernstein analysis. Source: Corporate reports and Bernstein analysis.

BERNSTEIN
CROMPTON CONSUMER We rate Crompton Consumer outperform, as it is a branded play on potential growth for
the consumer electricals segment in India (see Exhibit 326 and Exhibit 327).
EXHIBIT 326: ECD accounts for over 70% of mix EXHIBIT 327: The bulk of ECD is contributed by fans and
pumps
100%
Lightingproduct 30% 32% 30% 28%
Fans 56% 57% 58% 59% 62% 62% 62%
ECD 70% 69% 70% 72%

Pumps 40% 40% 38% 35% 29% 29% 28%
Appliances 9% 9% 10%
4% 3% 4% 6%
Mar10
Mar11
Mar12
Mar13
Mar14
Mar15
Mar16
Mar13 Mar14 Mar15 Mar16
Source: Corporate reports and Bernstein analysis. Source: Corporate reports and Bernstein analysis.

BERNSTEIN

BERNSTEIN
CONSUMER CREDIT IN CHINA AND

INDIA
Which market faces more risk of disintermediation from FinTech
players?
OVERVIEW
China and India operate in different regulatory frameworks and, thus, could have different
manifestations of their credit cycles. Banks in China are subject to strong regulatory
influence in pricing and volume. Even privately owned banks face challenges in
maintaining the independence of their day-to-day operations. Indian banks, however, are
free to price their loans and expand their volumes. We believe this difference could make
credit cycles more market-linked in India and more policy-driven in China.
Both markets went through a period of rapid credit expansion leading to an eventual
credit slowdown. China expanded credit rapidly in the last six years with social credit-to-
GDP already reaching 200% of GDP now. The growth of credit was also heavily skewed
toward the public sectors (local governments and state-owned enterprises), where
leverage has become unsustainably high. India, on the other hand, expanded system
credit at almost 21% CAGR over the last decade-and-a-half. The consequences of rapid
credit expansion in India have been significant corporate credit stress and choking of
corporate credit growth.
With corporate growth slowing down, the next growth horizon is consumer retail lending.
While market penetration seems to be lower across both economies, India on mere credit
penetration seems nine years behind China. Low credit penetration in India is driven by
the fact that a huge base of the population (~500 million estimated) is below certain
income thresholds that are typically not targeted by banks. In China, further headroom
growth headroom exists in consumer lending due to the under-serviced household
sector, the need to rebalance the economy to a consumption-driven growth model, and
an improving credit infrastructure with private investments.
In this context, we believe the rise of FinTech companies is inevitable in both markets, but
with different near-term opportunities. China will be more credit led versus India, where
payment will be the main theme in coming years. In China, where basic banking coverage
is high and the e-payment market structure has matured, tech players will focus on
providing complementary value-add services such as MSE and consumer lending. In India,
the immediate opportunity for the new entrants is providing microcredit, payments, and
financial inclusion to a large segment often ignored by banks. The new, niche business
models are focused on consumer credit (e.g., small finance banks providing microfinance
and small ticket loans), while the payments within the FinTech space could have a material
impact on traditional banking.

BERNSTEIN
In this chapter, we discuss the following topics:
China and India: An overview of the financials landscape;
Regulation in India is more market-driven than China, though both economies have
strong proactive regulators;
Both economies has gone through a period of rapid credit expansion leading to a
system credit slowdown;
As system credit slowed down, household and consumer credit remain the growth
horizon for banks;
FinTech in China is more credit led, while in India, it is more payment led; and
CHINA AND INDIA: AN OVERVIEW OF THE FINANCIALS

LANDSCAPE
In this chapter, we compare banking development and the financial market system in India
and China, with a focus on consumer credit and FinTech.
Despite both being developing countries, China and India face markedly different market
contexts of credit issuance and system leverage. Due to the credit binge from 2009,
China, overall, has much higher system leverage with total credit-to-GDP already reaching
200% of GDP by the end of 2015. However, looking at the mix, the majority (70%+) of
total social credit in China is allocated to public or semi-public sectors such as local
government-affiliated entities as well as SOEs. In addition, China banking has been highly
regulated with two interesting characteristics: 1) high government ownership, with state-
owned banks accounting for ~40% of total market share; and 2) strong government
influence through loan quotas, pricing controls, and frequent policy guidance. This means
that even the privately owned banks in China are subject to significant government
influence on their day-to-day operations.
almost a 21% CAGR. This translated to significant overleveraging of corporate balance
sheets, resulting in significant credit stress within the banking system. While similar to
China, state-owned banks still dominate ~75% of system credit. However, the regulatory
landscape in India is significantly liberalized: 1) there are no pricing controls across loans
and deposits; and 2) policy guidance is aimed at providing a framework to govern the
banks and their policies (including accounting policies). However, there is a strong focus
on financial inclusion and providing loans to the priority sectors such as agriculture and
financially excluded customer segments.

BERNSTEIN
Household debt levels and penetration are both low in the two countries relative to other
global markets. However, given the late evolution of consumer credit in India (early 2000s
initially and a resurgence in the last three to four years after the consumer credit stress in
2008-09), the depth of the consumer credit segment is dismal relative to China. Also
within household debt, consumption credit accounts for a small share in the mix of both
countries as well. With continued economic development and a shift toward
consumption-led growth models, we see a substantial growth potential of consumer
credit in both countries.
FinTech in China will be more credit led versus India, where it would be massively
payments led. In China, where basic financial inclusion is already high and the e-payment
market has matured (dominated by Alipay and Tenpay), future growth opportunities for
tech players really lie in providing complementary value-added lending services to MSEs
and consumers. However, in India, the immediate horizon of growth is providing payments
and financial inclusion to the large segment of the population in the annual income range
of US$1.3-US$3k, which is often ignored by banks.
In India, financial inclusion is a massive opportunity for FinTech players and new entrants.
Almost ~500 million population are estimated to be within the financial inclusion market
segment, which is typically ignored by private banks and inefficiently served by state-
owned banks. This presents a large opportunity for FinTech entrants and new niche
banking business models. Mobile wallet players converting into banks in India is the most
disruptive trend, in our view. Paytm is the market leader in mobile payments.
In China, while we do not expect the FinTech firms to disrupt incumbent banking players
in the near term due to limited overlap in their targeted client base, the growth potential is
also high, given the structural change in the economic growth model (to be more
consumption led), large gaps in existing bank offerings, and improvement in general credit
infrastructure with a wave of private investment underway. We forecast credit lending
offered by FinTech companies in China could grow to US$600 billion by 2020, equal to 3-
4% of system credit outstanding. P2P lending is expected to account for the majority
share of the FinTech credit pool due to light capital and balance sheet requirements,
versus Internet banks and scenario-based lending. In our view, the overall FinTech
landscape in China will be dominated by large technology conglomerates with deep
pockets, a large existing user base, and full financials licenses (e.g. Ant Financial, Tencent,
and JD Financial).

BERNSTEIN
REGULATION IN INDIA IS MORE MARKET-DRIVEN THAN

CHINA, THOUGH BOTH ECONOMIES HAVE STRONG
PROACTIVE REGULATORS
Compared to most global markets, Chinese financial markets, especially the banking
sector, face strong influence from the government. First of all, state-owned banks
account for over 40% of market share in terms of loans outstanding in China and the
operations of these entities are directly controlled by the central and local governments.
In addition, financial regulators in China tend to be fairly hands-on when it comes to
regulating a bank's day-to-day activities. Apart from the normal regulatory requirement
such as capital adequacy, leverage, and liquidity profiles, banks in China also face
additional scrutiny on the volume and pricing of their lending activities through regulatory
loan quotas and benchmark rate controls from the PBOC. In fact, full interest rate
liberalization was not implemented in the country until November 2015, and even today,
banks face window guidance pressure from the central bank in setting their deposit rates.
The consequence of such tight regulation is that even privately owned banks tend to be
subject to great government influence in their day-to-day operations and find it
challenging to act as independent commercial entities.
The regulatory landscape in India is significantly liberalized compared to China: 1) there

are no pricing controls across loans and deposits with free market-based pricing; and 2)
policy guidance is aimed at providing a framework to govern the banks and their policies
(including accounting policies). There are no absolute volume quotas on pricing. However,
there is a strong focus on financial inclusion and providing loans to the priority sectors,
such as agriculture, and financially excluded customer segments. Banks need to maintain
40% of their balance sheets toward priority sector loans as defined by norms (see
Exhibit 328).
EXHIBIT 328: China's financial market and banks face significantly more government influence than those in India
China India
1.Financialsystemishighlyregulatedwithmultipleregulators 1.Financialsystemiswellregulatedwithmultipleregulators
(MoF,PBOC,CBRC,CSRC,CIRC) (RBI,SEBI,IRDA,NHB)
Regulatorybodies
2.StatecouncilandNationalPeople'sCongresshaddirect 2.Regulatorstendtomaintainanindependentpositionfrom
controloverregulators thegovernment
1.Strongpoliticalinfluencewithexecutivesinmajorbanks
1.Stateownedbanks(70%marketshare)havestruggledwith
beingeffectivelyhighlevelgovernmentofficials
politicalinterventioninthepastthoughgovernmentis
Politicalinfluenceon 2.PBOCisthedefactosetteroflendingratesanddeposit
improvingtheirgovernancerecently
financialmarkets rates
2.Lendingratesanddepositratesaremarketdriven
3.Centralgovernmenthasthedirectinfluenceoverloan
3.Loangrowthdrivenbydemandsupplydynamics
growth
1.Regulatorshavestrongabilitytoimplement/enforce
1.RegulatorsinIndiaarestrongandproactive
regulationontraditionalbankingsystem
Regulatorypractices 2.Policyguidanceisaimedatprovidingaframeworktogovern
2.Buttheirinfluenceonshadowbankingislimitedandnotup
thebanksandtheirpolicies
todate

BERNSTEIN
BOTH ECONOMIES WENT THROUGH A PERIOD OF RAPID

CREDIT EXPANSION LEADING TO A SYSTEM CREDIT
SLOWDOWN
Historically, China has maintained a relatively stable system leverage with total credit-to-
GDP hovering around 120%. Since 2009, however, credit growth in China has
accelerated substantially due to the government-led stimulus program after the global
financial crisis and the credit binge at banks. Between 2009 and 2015, total credit in
China has more than doubled to RMB140 trillion, or US$21.3 trillion. Non-loan financing,
such as shadow banking transactions and bonds, have contributed a great portion of the
incremental credit growth in China over the last few years and now account for close to
30% of total credit outstanding in the country. On the other hand, economic growth has
structurally slowed down from double digits to 6-7% in more recent years, driven by
sluggish global demand for exports and weakening private investments in the domestic
economy. As a result, total credit-to-GDP has skyrocketed to around 200% in China at the
end of 2015 (see Exhibit 329). Such rampant growth of leverage has alerted policy
makers as well as market practitioners both inside and outside the country and is widely
viewed as unsustainable. In this context, overall credit growth in China needs to slow
down markedly in the medium term.
almost a 21% CAGR (see Exhibit 330). This translated to significant overleveraging of
corporate balance sheets, resulting in significant credit stress within the banking system.
However, the regulator has been proactive in driving the banks to transparently recognize
the credit stress. The system NPLs reached ~7.4% of total system loans and almost 9.6%
for the top six state-owned banks in India in 1HFY2017. While the NPL recognition
process is still in progress, corporate credit has completely slowed down, driven by weak
corporate capex and limited capital supply from state-owned banks. Industrial credit
growth has almost reached a point of zero growth. State-owned banks being ~75% of the
system, credit has been affected by weak balance sheets, thereby constraining credit
supply.

BERNSTEIN
EXHIBIT 329: China's total social credit has been growing EXHIBIT 330: India's Credit has grown rapidly to INR75
rapidly to RMB140 trillion, equal to ~200% of GDP; the trillion or US$1.1 trillion in the last 15 years, but the
total social credit-to-GDP ratio increased 83% from 2008 to penetration level is still low at ~55% of GDP
2015
Total Credit to Private Sector in Bank credit in India (INR trn)

China
(USD Trillion) US$1.1trn
198%ofGDP 75
25
20
15 115%ofGDP
10
5
5
-
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
FY'02
FY'03
FY'04
FY'05
FY'06
FY'07
FY'08
FY'09
FY'10
FY'11
FY'12
FY'13
FY'14
FY'15
FY'16
Total Bank Loans Total non-loan financing
Note: Under our definition, total credit to private sector includes credit
extended to SOEs, local government borrowings, policy loans, and LGFVs
borrowings, but excludes credits extended to the central government and Note: Data refers to net bank credit for all Scheduled Commercial Banks
local government bonds. (SCBs). Data is shown for fiscal years ending in March.
Source: PBOC, and Bernstein estimates and analysis. Source: RBI and Bernstein analysis.
AS SYSTEM CREDIT SLOWS, HOUSEHOLD AND CONSUMER

CREDIT REMAINS THE GROWTH HORIZON FOR BANKS
Despite the high system leverage, households only account for less than 20% of the total
system credit (to private sectors) in China. This is because a large part of "private sector"
borrowing is, in fact, channeled to local governments and government-affiliated entities
such as their financing platforms and SOEs (see Exhibit 331). In 2015, China's household
debt-to-GDP ratio was around 40% (see Exhibit 333), far below the 60-80% range seen
in other developed markets. This suggests substantial headroom for future growth of this
type of credit in coming years. On the supply side, banks have also been actively shifting
their loan allocation to the household sector, with loan growth in this sector at 15-20%
over the last few years, much higher than the corporate loan growth of 10-13%. Looking
at the incremental loan growth, the shift to the household sector is even more pronounced
and is still accelerating. Across our coverage banks, around 70-80% of net incremental
loans issued in the last 12 months were to the household sector. Such an aggressive shift
at Chinese banks was driven by a range of factors, including high NPL pressure in the
corporate loan book, low risk-weighting and capital consumption of retail loans, and
booming property market that led to a surge in mortgage loan issuance.

BERNSTEIN
EXHIBIT 331: Looking at the mix of underlying credit in EXHIBIT 332: However, in India, retail credit (household
China, public and semi-public entities account for the credit) accounts for only ~17% of total bank credit
majority of credit; household credit only accounts for 20%
of total credit to the private sector
Distribution of India Bank Credit by Segment
Distribution of China Credit by Segment
(INR trn)
(RMB Tn) Government,
1 , 1%
SOE,
Policy Households, 11 , 17%
loans 11 , 17%
Households 17, 12%
27, 20%
Local govt.
MSE 21, 15%
16, 12%
MSE,
18 , 26%
Mid & Large
Pvt Ent,
SOE
27 , 39%
40, 29%
Mid-large
private
enterprise
16, 12%
Note: Data as of March 2015 end and refers to net bank credit for all SCBs.
Note: PBOC, and Bernstein estimates and analysis. Source: RBI and Bernstein analysis.
While India has a large concentration of credit to industrial enterprises (both SOE, and
large and small), retail household credit is still small at 17% of total bank credit (see
Exhibit 332). The consumer credit products (car loans, salaried home loans, personal
loans, and credit cards) were unleashed in India by private banks in the early 2000s (i.e.,
2003 onward). However, by 2008-09, banks ran into asset quality issues due to weak
credit rating infrastructure and customer overleveraging/organized frauds. Post that, the
consumer credit infrastructure, including a credit bureau, has been developed. Banks
have been more risk conscious and have built internal risk systems and targeted internal
bank customers with significant internal transaction history. Thus, in the last two years,
consumer credit (i.e., personal loans and credit cards) have made a comeback. Household
credit penetration at 10% and consumer credit penetration in India at ~4% is dismal
relative to China and other world markets. We believe the growth of consumer credit in
India is on structurally strong grounds relative to the last consumer cycle that ended
within five years (see Exhibit 336). If we compare India's household credit growth
trajectory, it seems India is still around nine years behind China (see Exhibit 337 and
Exhibit 338).

BERNSTEIN
EXHIBIT 333: India and China's retail credit-to-GDP is 10% and 40%, respectively, while most developed countries are in
the range of 60-80%
FinancialDeepening:GDPperCapitavs.HousehouldDebt
140
as%ofGDP
Australia Switzerland
Denmark
120
Netherlands
y=0.0012x+22.002
HouseholdDebtas%ofGDP(2015)
100 R=0.5673
Canada
Norway
NewZealand
Korea UK
Sweden
80 US
Portugal
Thailand Japan
Malaysia
Spain HK
Finland
Greece
60 Belgium Singapore
France Ireland
Germany
Austria
China Taiwan
Italy Israel
40 Chile
Poland
SouthAfrica
Czech
Brazil
20 Turkey Hungary
Russia
Indonesia Mexico SaudiArabia
India
Argentina
0
10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000
GDPperCapita(US$,2015)
Source: Bank for International Settlements (BIS), World Bank, and Bernstein estimates and analysis.

BERNSTEIN
EXHIBIT 334: In China, retail has shown strong growth EXHIBIT 335: In India, retail has been accelerating in the past
momentum in the past few years at 15-20% per annum, couple of years to reach a nearly 20% growth rate even as
outpacing corporate loan growth and total loan growth corporate credit slowed down due to heightened corporate
stress
China Bank Loan Growth (%, YoY) Indian Bank Loan Growth (%, Y-o-Y)
35% 70%
60%
30%
50%
25%
40%
20% 30%
15% 20%
10%
10%
0%
5%
Mar'02
Mar'03
Mar'04
Mar'05
Mar'06
Mar'07
Mar'08
Mar'09
Mar'10
Mar'11
Mar'12
Mar'13
Mar'14
Mar'15
Mar'16
Retail Loans Total Loans Retail g Total g Corporate g
Corporate Loans
Note: Data refers to net bank credit growth for a sample of 46 SCBs; corporate
credit assumed to refer to an aggregate of industry and services credit.
Source: PBOC, and Bernstein estimates and analysis.

BERNSTEIN
EXHIBIT 336: We believe that the current consumer credit cycle (FY2011 onward) is relatively durable and healthier than
the previous one (FY2000-07) due to various developments in the areas of credit bureaus setup, credit analytics, customer
profiling, and fraud detection
Consumer credit: What is different this time?

Cycle 1: FY 2000-07 Cycle 2: FY 2011 onwards
CIBIL, currently
maintains ~215mn
Credit Bureau 4 credit bureaus*: CIBIL consumer & ~10mn
commercial records
Not in existence started in 2004, rest in
2010.
Bank credit Banks are upgrading

analytics No past historic data analytics, leveraging
internal credit data &
external sources For HDFC Bank, ~70%
of credit card book &
~50% of personal loan
Banks are focusing on book is with internal
Banks moved to low ticket
Customer profile internal mass affluent customers
customers in open market
customers.
Significant cases of Banks have built fraud

Organized fraud organized fraud, duplicate score cards and
accounts, skips strengthened systems
For HDFC Bank, ~70%

of personal loan book
sourced from own
Channel More reliance on own branches
Open market, 3rd party
channel internal sourcing
* Four credit bureaus are Credit Information Bureau Limited (CIBIL), Equifax Credit Information Services, Experian Credit Information Company, and CRIF High
Mark Credit Information Services.
Source: CIBIL website, HDFC Bank's 1QFY17 earnings call transcript, and Bernstein analysis.
EXHIBIT 337: The penetration rate for household debt EXHIBIT 338: Benchmarked against China, India is about
remains low despite recent rapid GDP growth in India nine years behind
Penetration vs. Per Capita Income China: Penetration vs. Per Capita
Income
12% 7,000 45% 16,000
40%
40% Indiaishere, 14,000
10% 6,000
35% 9yearsbehind
10% 12,000
5,000
8% 30%
10,000
4,000 25%
6% 8,000
3,000 20%
6,000
4% 15%
2,000
10% 4,000
2% 11%
1,000 2,000
5%
0% - 0% -
GDP per capita, PPP (current USD), RHS GDP per capita, PPP (current USD). RHS
Household debt to GDP % Household debt to GDP %
Source: Haver, and Bernstein estimates and analysis. Source: Haver, and Bernstein estimates and analysis.

BERNSTEIN
The growth headroom for consumer credit (non-mortgage) within household credit is even
higher
Within household debt, mortgage is by far the main credit product in China. At RMB12.4
trillion or US$1.9 trillion, mortgage loans account for almost 45% of total household loans
in the country in 2015. Consumption credit currently only accounts for 30% of total
household debt in China, or 10% of GDP. This level of penetration is markedly lower than
developed Asian and Western markets, which tend to see consumer credit-to-GDP at
20-25%. Within consumer credit, credit cards are the main borrowing channel for
Chinese households, with total outstanding balance at RMB3.2 trillion or US$0.5 trillion.
But the overall credit card penetration in the country is also fairly low, at 0.3 cards per
head. In most of the developed markets, the ratio is more in the range of two to three
cards per head. In addition, Chinese credit cards tend to have relatively low limit per card
(US$1.5-US$2K range) and low revolving balances (see Exhibit 339 to Exhibit 341).
India has a mere 26 million credit cards (as of July 2016), which merely translates to 0.02
credit cards per person. However, the mystery behind the low number in India lies in the
addressable market. Private banks have typically addressed the mass-affluent customer
segment (approximately annual income of US$5,000 and above), which is about 16
million in population. Thus, to expand this market segment, either banks would have to
customize underwriting methods to a higher credit-risk segment or new players would
have to provide credit card substitutes and address the segments excluded from
obtaining credit cards.
EXHIBIT 339: In China, consumption-related loan is only EXHIBIT 340: In India, within the retail book, consumption-
RMB6.6 trillion (~10% of GDP), less than 30% of total retail related loans amount to INR5.8 trillion/US$87 billion or a
credit mere 4% of GDP, thereby offering huge growth potential
China: Household Loan Breakdown Retail Loan Breakdown in India

(2015, USD Trillion) (FY'16 , INR Trillion)
5.0 Consumercredit:INR 5.8trn/US$ 87bn

ConsumerCredit:
4.0 RMB6.6tn 16
US$210bn
1.2 14 0.7
3.0 12
3.9
0.5 10
0.0 0.4
2.0 0.5 4.2 8 1.5
13.9
6
1.0 1.9 4 7.5
2
0.0 -
Note: Others include education loans.
Source: PBOC, Haver, and Bernstein estimates and analysis. Source: RBI and Bernstein analysis.

BERNSTEIN
EXHIBIT 341: Compared to peers, penetration of consumer credit is still low for both India and China
Consumer Credit as % of GDP

30
Student Loans in US: ~7.5% of GDP (US$1.4tn)
25
20
15
10 8.2
5 4.3
0
India Japan China Singapore US Korea HK Canada
Source: Central Banks, Haver, and Bernstein estimates and analysis.
Over the next few years, household credit in China has the potential to grow to
RMB45 trillion by 2020 or 44% of GDP. This represents a CAGR of 12% per year (a
conservative growth assumption in our view). We believe consumer credit will be the main
driver of the next wave of household credit growth, driven by three factors: 1) government
tightening of mortgage lending; 2) credit cycle impact on MSE or personal operating loan
growth; and 3) continued shift to a consumption-led economy and increasing penetration
of consumption credit (see Exhibit 342 and Exhibit 343.
We expect Indian consumer credit to grow at about a 20% CAGR for the next five years.
Within consumer credit, credit cards, personal loans, auto loans, and mortgage would
continue to drive credit growth (see Exhibit 344 and Exhibit 345).

BERNSTEIN
EXHIBIT 342: Assuming China's GDP per capita grows to EXHIBIT 343: China's retail credit is expected to grow at 12%
US$15k-US$20k, we expect the retail would grow to 48-54% per annum, to RMB43 trillion by 2020 (equal to 31% of the
of GDP total system loan)
Retail Loan Growth Projection Retail Credit Outstanding Balance

(USD Trillion)
60
Retail Loan (Household Credit) as % of GDP
7.5
55 54
7.0
5 YrCAGR:12%
6.5
50 48
6.0
45 44 5.5
5.0
40
40 2020E 4.5
4.0
35 2015A
3.5
30 3.0
7,925 11,436 15,000 20,000 2015A 2016E 2017E 2018E 2019E 2020E
GDP per Capita (US$) Retail Credit Outstanding Balance (USD Trillion)
Source: BIS, World Bank, and Bernstein estimates and analysis. Source: PBOC, and Bernstein estimates and analysis.
EXHIBIT 344: Going forward, we expect retail credit in India EXHIBIT 345:Personal loans and credit cards are expected
to maintain a pace of a 20% CAGR drive credit growth in India
Retail Credit Outstanding Balance

(in INR trn)
US$0.5trn
35.4
US$0.2trn
13.9
FY'16A FY'17E FY'18E FY'19E FY'20E FY'21E
Note: USD:INR at 66.3 as of March 2016 end. Assumed the same level for ^ As of August 2016.
March 2021.
Source: RBI, and Bernstein estimates and analysis.

BERNSTEIN
FINTECH IN CHINA IS MORE CREDIT LED, WHILE IN INDIA, IT

IS MORE PAYMENTS LED
With a fairly high degree of financial inclusion in China and maturing e-payment market
structure (dominated by Alipay and Tenpay), consumer credit will be the key growth driver
for not just banks but also new market entrants such as FinTech players. In China, apart
from banks, consumer credit is also provided by non-bank financial institutions such as
small loan companies, pawn shops, and car financing companies. A new group of market
entrants sponsored by FinTech companies have also been marching in and could
potentially pose more competitive threats to banks. The consumer credit products offered
by FinTech companies are mostly credit-based lending with flexible application and
repayment options. Their credit sanctioning is supported by Big Data analysis based on a
large volume of proprietary payment or credit data. They tend to have more overlap with
the banks' existing consumer credit products than those from the non-bank financial
institutions (NBFIs).
India's significant growth potential lies in promoting financial inclusion. In our view,
providing payments and banking services to the financial inclusion segment (~500 million
population as per Exhibit 357) would be the first wave of FinTech for India. As people
enter the formal banking system and transaction histories are established, the next wave
of FinTech would be more credit-led in India, though niche lending opportunities (e.g.,
credit card substitutes and SME lending platforms) would continue to grow in the near to
medium term.
CHINA FINTECH COMPANIES Lured by the strong growth potential, a number of FinTech companies have already
ARE MARCHING INTO THE moved into the consumer finance/MSE lending business areas. Currently, there are three
CONSUMER FINANCE SPACE
main business models: P2P, Internet banks, and scenario-based lending (see Exhibit 346
and Exhibit 347). In this section, we provide a high-level overview of each lending
business model and its impact on banks. We conclude that the overall impact on the
banking sector is moderate with new market entrants having the potential to grab up to 3-
4% of banking business/revenues by 2020. Alternatively, this could be viewed as
marginal lost growth opportunity for banks in China. We do not believe the technology
players can displace the banks in the medium term due to their funding, capital, and risk
management constraints.
However, on individual banks, the impact may vary substantially. In the foreseeable future,
the FinTech players will be mainly focusing on the MSE and retail banking, hence, adding
competitive pressure on incumbents without competitive advantage or differentiated
offerings in these areas. We believe the local city and rural commercial banks are most
vulnerable in the unfolding technology disruption, given their weak management and poor
IT infrastructure. On the other hand, we remain positive on the Big 4 banks, given their
more diversified business portfolio, scale advantage, and abundant financial resources

BERNSTEIN
EXHIBIT 346: Overview of business models of P2P, Internet banks, and scenario-based lending
P2P InternetBanks ScenarioBasedLending
Actasthemiddleman,matchinglenders Ecommercecompanieslendtocustomers
Actasnormalbanks,offeringloansto
BusinessModel andborrowers;householdaccountsfor whentheymakepurchaseonthewebsites,
householdandMSEclients
mostofthelenders similartoMerchantCreditintheUS
Household,MSE,smallloancompaniesand
TargetCustomer Household,MSE Ecommercecustomers
leasingcompanies
AvgBorrowingAmount
15k75k 1k15k 1k1.5k
(USD)
FundingSource Onlinedepositors Sponsors'equityandinterbankfunding Sponsors'equity
Nowarehousecreditrisk,butexposedto
RiskAllocation Warehousecreditrisk Warehousecreditrisk
operationalriskslikeKYCissuesandfraud
EXHIBIT 347: We see three types of consumer credit offering from FinTech players in China, namely P2P, Internet banks,
and scenario-based lending
Key Players & Market Share Current Market Size Impact on Banks Market Size Forecast (2020E)
Lufax (10%) P2P loan balance: RMB680 bn Lost consumer and MSE loan RMB3.4 tn/USD500 bn
P2P Eloan (4%) (as of Aug 2016, 0.65% of RMB loan growth opportunity (2.5% of bank sector loans)
Yirendai (3%) and 0.44% of TSF)
Webank (14%) Internet Banking total loan balance Lost MSE loan growth RMB519 bn/USD75 bn
Internet Banks Mybank (86%) RMB27 bn (As of 2015A) opportunity (0.4% of bank sector loans)
Sichuan Xiwang
Senario-Based Lending Alibaba (Huabei, , 58%) RMB13.2 bn as of 2Q'2015 Lost credit cards and consumer RMB 507bn/USD 75bn
Jingdong (Baitiao, , 42%) loan growth opportunity (0.35% of bank sector loans)
Overall Alibaba, Tencent, JD, Baidu <1% bank revenue pool ~3% of bank credit business

BERNSTEIN
EXHIBIT 348: Comparison of FinTech companies with traditional financial institutions
30.0%
Small Loan Company

Lending (RMB936bn/
USD140bn)
Typical MSE Lending
cutoff
20.0%
Gray/Private Lending
Credit Card (RMB10tn/USD1.5tn)
(RMB3.6tn/
17.5% USD500bn)
Internet Bank Loan Coverage
(Today): Shadow Banking
15.0% RMB27bn /USD4bn (RMB19tn/USD2.8tn)
P2P Lending
(RMB680bn/
USD100bn)
12.5%
Interest Rates (%)
Webank Loan Coverage (Future)
10.0%
Scenario-Based MSE Lending
Lending (RMB19.3tn)
7.5%
(RMB14bn/
USD2bn) Large Corporate Lending
(RMB53.7tn/USD7.9tn)
5.0%
Banking Channel
2.5%
Non-Banking Channel
0.0%
0 7.5K 15K 75K 1M & Above
Average Loan Amount (USD)
EXHIBIT 349: Compared with banks, FinTech companies have both strong advantages and obvious disadvantages
FinTech Banks
Consumer
Offercustomerorientedproducts;abletocustomizeproducts
Offerstandardizedproducts
Service
targetingspecificcustomergroup
Affluenttransactiondata,especiallypurchasebehavior
TransactionData Affluentpersonalfinancialinformationdata
relateddata
ITInfrastructure StrongITinfrastructurewithrobustdevelopersteam Mediocreinfrastructuredraggedbylegacysystems
FundingCost Highfundingcostasequityisamajorfundingsource Lowfundingcost,thankstolargedepositbase

Strongcapitalbasewithwellestablishedaccesstocapital
CapitalBase WeakcapitalizedwithrelianceonPEandVCfunding
markets
DefaultData Limiteddefaultdataduetoshortoperatinghistory Largedefaultdatabaseonbothhouseholdandcorporate
Risk
Primitiveriskmanagementcapability Prudentandsophisticatedriskmanagementsystem
Management
Source: Corporate reports, and Bernstein estimates and analysis.
CHINA EMERGING FORCES #1- Despite continuously high "problematic" platforms exposure and imperative needs for
P2P business model transformation, we are positive for the long-run growth potential of P2P
in China, underpinned by rising penetration of MSE plus consumer credit (excluding
mortgages), and ongoing substitution by P2P loans. We expect the P2P loan balance to
reach RMB3.4 trillion by 2020E, growing to 5.0% of MSE plus consumer credit (excluding
mortgages) balance and roughly 2.4% of system loans. However, not all P2P platforms

BERNSTEIN
can survive in the long term, given the rising regulatory pressure and unfolding credit
cycle. The most promising platforms should be those focused on genuine consumer
credit lending (versus collateralized MSE loans), with diversified lending portfolio and low
average borrowing amount, in addition to a lean operation with limited off-line branches
and staff team. In the medium term, we believe the P2P platform will mainly cannibalize
the operations of small loan companies and pawn shops in China rather than directly
compete against banks, as their client base has limited overlap with banks in general (see
Exhibit 350).
EXHIBIT 350: For P2P business, we identify three types of operating models for P2P players in China; with pure credit-
based P2P lending only making up 5-10% of the overall market now, it is, from our perspective, the most sustainable
business model to win in the long run
Credit-based lending to individuals Guarantee/Collateral-based lending Securitization-based lending
Business Models
(P2P) (P2B, P2C) (P2N)
Small: Normally, below RMB100,000 (~15k Large: RMB100,000 Several RMB mm Wide range: RMB50,000 Several RMB
Average Borrowing Amount
USD) (15k ~ 1mn USD) mm (7.5k-1mm USD)
1-3 Months Borrowing: ~18%
Borrowing Rates (Annualized) Wide range: 8%-20% 10%-13%
Over 12 Months Borrowing 9-14%
Duration 1-3 Years Wide range: Several months 3 Years Below 1 Year
Total: RMB3-10 bn
Guarantee/Collateral-based: RMB150 bn Financial Leasing: RMB2 bn
Transaction Volume (2014FY) RMB14 bn
Lending to corporates: RMB100 bn Small Loan: RMB2 bn
Pawnshop: RMB250 mn
% of Total P2P Volume (2014FY) 5-10% ~90% 0-5%
Credit enhancement of guarantees / Underlying assets are sourced from financial

No collateral & guarantee is required, as loan
collaterals is required; institutions, including small loan companies,
issuance is mainly based on income/wealth
Characteristics Guarantee is from individuals or professional pawnshops, and financial leasing companies;
level;
guarantee companies; P2P platforms re-package these assets and
Low average borrowing amount
Collaterals include property and auto sell to individual investors
Hongling (); PP Money ();

Paipai Dai (); Renren Dai ();
Representative Platforms Lufax (); Price Capital China Business ();
Yilong Dai (); Yiren Dai ();
Youli (); Dianjinsuo ();
CHINA EMERGING FORCES #2: Since 2014, six new private banks have been approved in China, including three backed
INTERNET BANKS by Internet players. MyBank and WeBank have already started issuing loans, but we
believe a lack of deposit franchise and small capital base will be the key bottlenecks for
these players' future growth. With only organic capital compounding, we estimate the
maximum amount that Internet banks' loan balance can reach is RMB520 billion, or
0.40% of bank loans by 2020. As such, these new Internet banks are unlikely to disrupt
the major national banks, given their limited scale (see Exhibit 351 and Exhibit 352).

BERNSTEIN
EXHIBIT 351: Among the six recently licensed private banks, three are Internet banks, including WeBank (Tencent),
MyBank (Ant Financial), and Xiwang Bank (Xiaomi)
Formal Approval Registered
Major Shareholders Registered Capital Focused Areas
Granted Location
Tencent 30%
Shenzhen Qianhai Webank RMB3bn
Jul-14 Shenzhen Baiyeyuan 20% (~450mm USD) Online credit-based lending

Liye 20%
Internet Banks
Ant Financial 30%

Zhejiang Mybank Sep-14 Zhejiang Fosun 25% RMB4bn Online banking to retail and MSE
Wanxiang Sannong18% (~600mm USD) customers
Jingbo Jinrun 16%
Sichuan Xiwang Bank Jun-16 Sichuan New Hope Group 30% Focus on Internet banking to retail
RMB3bn
Xiaomi 30% (~450mm USD) and MSE customers;
Hongqi Chain Co. 15% Has some offline presence
Wenzhou Minshang Bank Jul-14 Wenzhou Zhengtai29% RMB2bn MSE, personal business owners,
Huafeng20% (~300mm USD) retail, agricultural
Tianjin Jincheng Bank Jul-14 Tianjin HuaBei 20% RMB5bn

Corporate business
Maigou 18% (~750mm USD)
Huarui Bank Sep-14 Shanghai FTZ JuneYao 30% RMB5bn Dedicated in serving Shanghai Free
Meters Bonwe 15% (~750mm USD) Trade Zone customers
Source: Press releases, CBRC, and Bernstein analysis.
EXHIBIT 352: Taking the more established WeBank as an example, its product offerings are in direct competition with
traditional banks and P2Ps
Small Loan
Webank P2P Credit Card Loans Bank MSE Loans Company/Pawnshop
Lending
No specific maturity Revolving balance
requirement, but we Predominantly within 12 (predominantly within 12
Duration 1-3 years 3-6 months
estimate most of the loans months months and for short-term
are within 12 months consumption uses)
18%
Interest Rates 18% 13-15% (Effective rate: 10-12%, 7-8% 25%-30%
(Annualized)
including interest-free period)
Interbank funding
(RMB2.0 bn/USD300mm); Private investors into P2P Customer deposit Bank loan and its own capital
Funding source Customer deposit
registered capital (RMB3.0 platform
bn/USD450mm)
Moderate. Mostly credit- Moderate. Credit-based Stringent. Mostly Stringent. Mostly

Lenient. Credit-based based lending, but lending. Lending quota is collateral-based lending. collateral-based lending
lending. Loan quota and borrowers have to provide based on personal credit Borrowers also need to (mainly real estate)
Risk Management lending targets are wealth proof docs, incl. score provide wealth proof docs
automatically decided by salary payslip and property
credit reference model ownership
1) Credit-backed:
RMB500,000(~75k USD) Between RMB 500,000 and
Between RMB20,000 and Between RMB100,000 and 2) Natural person guarantee: up to 5,000,000 (75K-750K USD)
83% of credit cardholders
RMB200,000 (3K-30K RMB150,000 (15K-22K RMB1,500,000 (~225k USD)
Lending Quota Limit have lending quota below
USD) USD) 3) Joint guarantee: up to Generally, capped at 50%-
RMB50,000(7.5k USD)
RMB3,000,000 (~450k USD) 80% of the collaterals
4) Collateral-backed: up to appraisal value
RMB5,000,000 (~735k USD)
Possibly linked to online

Widely accepted for both
Payment Function payment: Tenpay and None None None
online and offline payment
Alipay
Webank (Tencent),
Typical Players LUFAX, Renren Dai ICBC, CCB, CMB Minsheng, CMB Huirong, Credit China
Wangshang Bank (Alibaba)
CHINA EMERGING FORCES #3: Along with the rapid growth of China e-commerce, scenario-based lending (i.e., online
SCENARIO-BASED LENDING purchase/sales related credit cross-sell) has emerged as an important area of China's
FinTech universe. Given the strong tie with e-commerce platforms, the market is
dominated by Alibaba-backed Huabei (market share: 58%) and Jingdong-backed Baitiao

BERNSTEIN
(market share: 42%). We estimate the lending balance has potential to grow to RMB507
billion by 2020. But the near-term constraint comes from the balance sheet as this type of
lending is mainly funded by own capital. Players, in the future, need to find ways to
increase their balance sheet turnover (e.g., ABS re-packaging) as seen in Exhibit 353 to
Exhibit 355.
EXHIBIT 353: The business model of scenario-based lending is highly identical to that of credit card
Jingdong Baitiao Credit Card
Processing Time <24 hours to process application 7 days to process application
1) 3-12 installment period 1) 3 to 24 installment period

Interest & Fee
2) 0.5% interest per installment (AER at 6-7%) 2) 0.75%-0.95% Interest per Installment (AER at 9-12%)
5% of minimum payment amount

Overdue Penalty 0.03% daily interest
plus 0.05% daily interest
Documents Required for ID Card; Income Proof;

ID Card
Application Employee Reference Letter
Limit Usually less than RMB10,000 (~1.5K USD) Depends on credit score
Repayment Date 30 days Interest-free Max 50 days Interest-free
Source: Corporate reports, and Bernstein estimates and analysis.
EXHIBIT 354: As of 2015-end, FinTech had a credit balance of EXHIBIT 355: that said, the threat of FinTech to established
RMB668 billion, accounting for 1.7% of total consumer credit; banks would be limited; FinTech would only take ~3.2% of
nonetheless, we expect it will grow at 46% per annum for the total system credit by 2020
next five years; we estimate the balance to be RMB4.4
trillion in 2020, equal to 10.1% of total consumer credit
FinTech Credit Growth Projection % of Total System Credit

(USD Billion)
3.5%
800
3.0%
700 5Year
600 CAGR: 46% 2.5%
500 2.0%
400
1.5%
300
1.0%
200
0.5%
100
0 0.0%
2015A 2020E 2015A 2020E
P2P Internet Bank Scenario-Based Lending % of Total System Credit
Source: Corporate reports, and Bernstein estimates and analysis. Source: Corporate reports, and Bernstein estimates and analysis.
INDIA IS AN India is one of the least penetrated markets in the world in terms of bank credit, including
UNDERPENETRATED MARKET household credit. Household debt amounts to a meager 10% of GDP as compared to

BERNSTEIN
40% for China and 60-80% range for the developed economies (see Exhibit 356). The
low retail credit penetration, thereby, offers massive potential for durable growth as India
moves up the income ladder in the coming years.
EXHIBIT 356: Globally, India's retail credit-to-GDP ratio is one of the lowest at ~10% compared to China's 40% as well as the
60-80% range for most of the developed countries
FinancialDeepening:GDPperCapitavs.HousehouldDebt
140 as%ofGDP
Australia Switzerland
Denmark
120
Netherlands
y=0.0012x+22.002
HouseholdDebtas%ofGDP(2015)
100 Canada
R=0.5673
Norway
NewZealand
Korea UK
Sweden
80 US
Portugal
Thailand Japan
Malaysia
Spain HK
Finland
Greece
60 Belgium Singapore
France Ireland
Germany
Austria
China Taiwan
Italy Israel
40 Chile
Poland
SouthAfrica
Czech
Brazil
20 Turkey Hungary
Russia
Indonesia Mexico SaudiArabia
India
Argentina
0
10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,00
GDPperCapita(US$,2015)
Source: BIS, World Bank, and Bernstein estimates and analysis.
INDIA: A MARKET OF THREE We believe India is a market comprising three sub-markets "addressable" market,
MARKETS "inclusion" market, and "hard to include" market (see Exhibit 357).
The "addressable market" is categorized by annual income levels of more than US$3,000
with an estimated size of 314 million people. This market is catered to by the private as
well as state-owned banks offering standardized products (salaried home loans/personal
loans, new car loans, mid-corporate loans, etc.). We believe this market is well penetrated
and is gradually moving toward perfect competition.
The "hard to include" market is categorized by annual income levels of less than
US$1,300 with an estimated size of 364 million people. It comprises the deprived class of
the society, supported to some extent by government subsidies and benefits. This
segment is almost entirely outside of the country's financial system, given that it is
unviable to serve the same.

BERNSTEIN
The "inclusion" market is the one that we are most excited about as it is highly under-
penetrated, thereby, offering significant growth opportunities. It is categorized by annual
income levels between US$1,300 and US$3,000, with an estimated population size of
522 million. Currently, this market is being served by state-owned banks, non-banking
financial companies (NBFCs), and niche banks offering customized products (used car
loans, micro enterprise loans, affordable housing loans, etc.). We believe this segment
needs unique business models to cater to its financial needs, given that it tends to operate
in the informal segment of the economy.
EXHIBIT 357: The financial inclusion opportunity in India is a big white space
Annual income band Total Pop. Market focus Nature of competition Products
US$ (mn)
Salaried
Standardized products
White space fast home /
First > 15K (54K*) Private closing in urban personal
16
addressable banks ~10 private banks loans
market 7.5K to 15K (27K to 54K) 27 competing for

State-owned customers New car loans
3K to 7.5K (11K to 27K) 271 Moving toward
banks
perfect competition Mid-corp
314 Loans
Informal
State-owned
Differentiated products
1.3K to 3K (4.6K to 11K) Big white space and Affordable
Inclusion 522
banks home loans
under-penetration
market
Used car
NBFCs Opportunity for loans
NBFCs and niche
small finance banks
New niche Micro
enterprises
banks loans
< 1.3K (<4.6K) 364

Hard to Government
include subsidies/benefits transfer
market to the deprived
1,200
100%
Note: Figures in brackets represent PPP.
Source: McKinsey Global Institute and Bernstein analysis.
INDIA: ENTRY OF NEW ECLECTIC For several years, the Indian government and the Indian regulator have been working hard
MIX OF FINTECH PLAYERS WITH to promote financial inclusion, i.e., bringing the earlier mentioned "inclusion" market into
UNIQUE BUSINESS MODELS
the formal financial space. In recent years, the government, under Prime Minister Modi's
leadership, and the Reserve Bank of India, under Governor Rajan's leadership (2013-16),
has taken a series of steps to unleash disruptive competition in the banking sector. The
regulator has opened bank licensing on-tap and granted about 23 new licenses till date
two new universal banks, 10 niche small finance banks, and about 11 potential payment
banks (of which three dropped off), all with significant strengths in the financial inclusion
space. This has resulted in a new eclectic mix of players entering the banking fray
microfinance players, private NBFCs, telcos, FinTech payments players, as well as the
Post Office of India (see Exhibit 358).

BERNSTEIN
EXHIBIT 358: New entrants in India aimed at financial inclusion
FOUR KEY AREAS OF FINANCIAL Thus, the India FinTech landscape is fast evolving, encouraged by proactive regulation.
DISRUPTION IN INDIA: We identify four areas of disruption that are most relevant to banks in India (see Exhibit
PAYMENTS TO DRIVE THE FIRST
359). Of the four disruptive trends, we believe that the conversion of mobile wallet players
WAVE OF FINTECH
into banks is likely to be the most impactful on the banking landscape. Mobile wallets are
one of the popular means being used today to allow convenient payments/remittances.

BERNSTEIN
EXHIBIT 359: Players participating in alternate financial services are focused and well-funded
INDIA: SURGE IN USAGE OF Mobile wallet payments have become 20% of debit card volumes in a mere three years
MOBILE WALLETS since their launch. The government's recent move to demonetize high denomination notes
and, thereby, discourage the use of cash has provided a multi-fold boost to mobile wallet
providers in the country (see Exhibit 360).
EXHIBIT 360: Mobile wallet usage is fast expanding relative to plastic cards
Note: FY2017 estimates are based on actual values during the April-August 2016 period.

BERNSTEIN
PAYTM: THE BIG DISRUPTOR TO Paytm, the mobile wallet market leader backed by Alibaba (US$680 million funding), has
WATCH OUT FOR IN INDIA been recently licensed by the RBI to launch a payments bank. We note Paytm's
conversion to a bank could have a disruptive impact on the payments ecosystem and
related bank deposits.
We lay out Paytm's business model in Exhibit 361. Paytm started as a wallet with the
modest objective to recharge prepaid mobile connections, but has now entered all
merchant payment categories (utilities, mom and pop stores, cabs, media and
entertainment, travel, etc.), and could build a self-sufficient mobile payment ecosystem
with strong presence both on the issuing side and the acquiring side of the network. If
Paytm is successful in building a ubiquitous payments ecosystem, it would have
significant synergies on retail deposits as customers would be more willing to maintain a
higher deposit float with Paytm. Further, lower bank account fees and higher yield and
liquidity management would be sweeteners. Paytm has also been very aggressive in
branding and advertising with big ticket media promotions, which increases the costs of
maintaining customer mindshare for banks.
EXHIBIT 361: Paytm disrupting India payments and banking
Source: Paytm website and Bernstein analysis.
Our proprietary survey shows big overlap between Paytm's and banks' customers
We surveyed Paytm customers and find the overlap with bank customers to be almost
50%. Further, Paytm offers physical merchant stores a payment proposition at "zero
merchant discount fees" (versus ~1.5% MDR being charged by banks on POS terminals).
Paytm also promises to offer deposits at market yields using liquid money market
instruments and potentially low miscellaneous transaction charges that banks usually

BERNSTEIN
charge (e.g., average minimum balance charge, balance checking, etc.). In all, 49% of
Paytm customers identified "Convenience" as the top reasons to transact and close to
20% complained about acceptance or safety of plastic cards. Close to 46% mentioned
"discounts/cashback" as reasons to transact, increasing the cost for banks to increase
customer engagement and mindshare (see Exhibit 362).
EXHIBIT 362: Paytm high overlap with young bank customers, could easily substitute plastic for the youth
Source: YouGov, and Bernstein proprietary consumer survey.
INDIA: PAYTM'S MOBILE The Indian FinTech space has truly taken off only over the past one year with support from
WALLET BASE IS SET TO SOON the regulator. Hence, we think the best way to measure the progress of these players is by
CROSS THE DEBIT CARD BASE
tracking the customer base they are acquiring. Paytm has already reached a customer
OF THE LARGEST BANK IN INDIA
base of ~150 million mobile wallet users, which is more than 70% of the total debit cards
issued by the largest bank in the country SBI at 203 million. The latest step by the
government to demonetize high denomination notes as of November 8, 2016, has proved
a multi-fold boost to user base and transaction volume for Paytm. Consequently, Paytm
has announced that it will meet its target of 500 million users by 2018 end, two years
earlier than previously envisaged (see Exhibit 363).

BERNSTEIN
EXHIBIT 363: Paytm user base to soon outpace the plastic user base of large banking players in India
India: Population vs. number of debit cards / mobile wallets (in mn)
1,283
Demonetisationboost>
Targetof 500mnusers
advancedby2yearsto
697 2018end.
203
150
Population All Indian banks: #Debit Larget Indian Bank - SBI: Paytm: #Mobile wallets
cards #Debit cards
Note: Population data as of March 2016 end and debit cards data as of July 2016 end from the RBI. Paytm wallets data from management interview to
newspapers as of November 2016.
Source: RBI, ET, and Bernstein analysis.
INDIA: SO WHICH REVENUE If Paytm and other FinTech ventures manage to structurally shift the fee economics for
STREAMS OF THE BANKS ARE the banks, the following fees seems to be under the first line of attack: payment-related
LIKELY TO BE DISRUPTED?
fees, bank transaction charges and bancassurance/mutual fund-related fees, which
account for ~25% to 30% of the fee pool of private banks. However, we believe that the
impact of this would be felt in the medium term over the next two to three years (see
Exhibit 364).
EXHIBIT 364: Which revenue streams are under the first line of attack by disruptors?
Source: Industry interviews and Bernstein analysis.

BERNSTEIN
Chinese Banks: China banks are now trading at an average P/B ratio of 0.76x, still below
their historical trough of 0.9x. We believe the current valuation provides a good entry point
into the sector. Within China banks, the Big 4 were trading at ~11% discount versus mid-
sized banks. However, this discount is not sustainable in our view, given the stronger
fundamentals of the Big 4 banks. We expect more resilient operating performance from
the Big 4 banks in the coming quarters, which would lead to a reversal of the discounts of
large banks. We continue to prefer big SOE banks over the mid-sized banks. In the H-
share market, we rate BOC, CCB, and ICBC outperform, we rate ABC, BOCOM, and CMB s
market-perform, and Minsheng, PSBC, and CITIC Bank underperform.
India Financials: Over the past one year, the Indian financial landscape has witnessed
significant changes driven by regulation, technology, and competitive forces. Going
forward, we believe that the following themes will play out in India consumer credit,
electronic payments, and financial inclusion which will impact our stocks. In our
coverage universe, we highlight three stocks that are likely to outperform based on these
themes. We rate HDFCB outperform as it relatively stands out on stellar asset quality and
differentiated franchise in high-yield retail products (personal loans, credit cards, and
small business loans. We also rate Chola (NBFC) and Equitas (small finance bank)
outperform as they provide a pure play to ride the financial inclusion tailwind. They offer
strong growth prospects driven by idiosyncratic factors and strong management teams.

BERNSTEIN

BERNSTEIN
THE FUTURE OF ENERGY

Evolution or revolution?
OVERVIEW
The future of energy boils down to two key questions. First, how quickly aggregate energy
consumption will grow, and second, how will the global energy mix evolve.
On energy consumption, we see slower growth ahead than in the past. Demographics, the
secular decline in global energy intensity, and improvements in energy efficiency will all
combine to slow energy growth. While emerging markets still have plenty of room to grow
per capita consumption, growth will be more modest than in the recent past.
The Paris climate change agreement and changes in technology will result in some
profound shifts in the energy mix. But, while it is clear that the energy mix will
decarbonize, the pace of change in the mix is less clear. While renewable energy has had
explosive growth over the recent past, history shows that energy transitions are multi-
decade events.
Within transport, one of the greatest controversies shaping the future is the rise in electric
vehicles. Advanced batteries, the major component driving the adoption of EVs, have the
potential to disrupt transport and energy markets. While there remains considerable
uncertainty around the pace of EV adoption, the impact on oil markets over the next
decade is likely to be small, given the size of the parc.
While there are clear risks to gasoline demand in the longer term from the rise of EVs,
there are positive implications for electricity demand, which will benefit low carbon fuels.
For investors, the outlook for coal remains negative, despite the recent rally in prices.
While oil remains under pressure in the near term, the oil age is not yet over and cuts in
investment could lead to supply shortages at the end of the decade. Renewables and
natural gas have the greatest growth ahead, but positioning at the low end of the cost
curve will be critical.
This chapter includes the following topics:
The battery enabled revolution(s)
The emerging threat on gasoline demand from electric vehicles
The electric slide the impact on power of electric vehicles
The outlook for energy

BERNSTEIN
THE BATTERY ENABLED REVOLUTION(S)
Advanced batteries are enabling revolutions in both transportation and energy. Not only
are batteries the major component driving the adoption of EVs, they also allow
and as battery costs fall, we believe that disruption will continue down to the low-end.
EV ECONOMICS KEEPS GETTING For the long-term mass adoption of EVs, the economics has to make sense. EVs have to
BETTER POWERED BY BETTER be able to compete with internal combustion engines (ICEs) even without subsidies,
AND CHEAPER BATTERIES
appeal to consumers, and be cost competitive. The main driver of incremental costs for
EVs is the battery pack, which for a 500km range/60kWh capacity costs around
US$20,000 today compared with a gasoline engine that costs around US$5,000. Add to
that another US$2,000 for the electric motor and inverter, and the gap is even wider. But
battery costs are falling fast and even more rapidly than our earlier estimates. Due to this,
the long-term economics looks increasingly good for EVs and better than ICEs, thus
powering mass adoption.
EXHIBIT 365: Our updated battery pack price projections: New battery technologies lead the cost reductions
EVbatterypackpricereduction
LFPforChina
600 NMCforglolbal
500 NMC111
prevalent
NMC622+
400
(<5%)silicon
NMC811+
$/kWh
(<10%)silicon
300
>10%Silicon Solidstate Future?
battery
200 (LiAir...)
100

BERNSTEIN
EXHIBIT 366: Are our cost estimates aggressive enough? Going back to 2011, our cost estimates have proven too high
Batterypackpriceoldest.vs.new
700
600
500
USD$/kWh
400
2011est.
300
2014 est.
200
2016Janest.
2016Novest.
100
0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Source: SNE Research, and Bernstein estimates (2016 and beyond) and analysis.
While battery costs are falling, making EVs cheaper for a wider population, ICE costs are
projected to increase as compliance to fuel efficiency and emissions standards becomes
more difficult and costlier. Compliance with China's 2020 fuel economy targets will likely
incur costs of close to US$1,000 per car, while a similar amount would likely be required
to get to 2025 (to compare, the U.S. EPA's mid-term review of its 2017-25 rules specify
similar amounts). New emission norms will also incur further compliance costs we
estimate, for example, that China's sixth-generation emissions norms will require
incremental hardware costs in the range of US$200-US$300 per car. Therefore, we
believe that the crossover in EV powertrain costs versus ICEs is inevitable.
Notably, however, there is a meaningful risk that the regulatory burden on the OEMs in the
United States may, in fact, be pushed back under the new Trump administration. Since the
election results became clear, the U.S. OEMs in particular have grown increasingly
hopeful that the new government would prove more pro-industry, and implement a
scaling back of the 2017-25 fuel economy rules in the United States (the California and
section 177 states would still require OEMs to increase the scale of their ZEV volumes
through 2025 at least). If this were to take place, we would expect the lower regulatory
burden on the OEM industry to have a negative impact on EV sales and potentially battery
costs by association, given the latter's relationship with battery manufacturing scale.

BERNSTEIN
EXHIBIT 367: EV versus ICE powertrain cost comparison the crossover is inevitable, with timing dependent on compliance
costs for ICEs
Powertraincostcomparisionfor60kWh/500kmrange(w/osubsidy)
35
30
25
USD$K
20 crossover
~2026
15 $15k
~20 yrs $7k
10 TCO parity ~10 yrs
TCO parity
5
BEV ICEaggressivecompliance ICEpoorcompliance
Note: The analysis is based on a 60KWh BEV; the cost of an ex-battery power train part for an EV is estimated at US$2,000.
Source: Bloomberg L.P., SNE Research, and Bernstein estimates and analysis.
However, even before the upfront cost reaches parity, it is important to remember that the
running costs of an EV are significantly lower than that of an ICE (we estimate around
US$700-850 annual savings for an average driver in China and Europe). In addition, the
fact that EVs are faster, cleaner, and overall better than ICEs should allow EVs to sell for a
higher price than ICE cars even for the mainstream mass markets.
THE THREE WAVES OF EV We believe that we are reaching an inflection point in the adoption of EVs, moving firmly
ADOPTION from the first wave of early adopter environmentalists to mainstream premium adopters.
Except for Tesla, the second wave is driven mainly by plug-in hybrid electric vehicles
(PHEVs), which is an easier and cheaper way for auto OEMs to meet rising emission
standards.
We breakdown EV adoption into three waves: 1) early adopter environmentalists;

2) mainstream premium; and 3) affordable majority.
The first wave of early adopter environmentalists was dominated by vehicles such as
the Nissan LEAF and the Chevy Volt, and a range of other EVs that targeted the
affordable majority but weren't quite good enough. In short, battery technology and
costs are not yet competitive with ICEs and there are many reasons not to buy EVs,
including insufficient driving range of typically 100 miles or less and an upfront cost
that is still higher than a competing ICE car. However, the first ~0.5% of adopters still
went ahead with this option, more so to make a statement.

BERNSTEIN
The second wave is primarily driven by EVs' enhanced performance and the
associated "cool" factor, where customers are paying a premium for a premium
product. Tesla's Model S was the first in this wave, and has arguably been way ahead
of the competition thus far. But we see a slew of new cars in 2016 addressing this
mainstream premium segment, including the Tesla Model X and several PHEVs from
BMW, Audi, Mercedes, etc. The mainstream premium EV market is currently over
12% of all cars sold.
The third wave will target the affordable majority, i.e., the remaining ~87% of the car
market, with better and cheaper batteries that allow for more affordable cars with
more driving range. By the end of 2016, we will see GM's Bolt the first ever pure
EV to address this segment, powered by ever-improving battery technology
followed by Tesla's Model 3 in late 2017.
The second wave of mainstream premium EVs, dominated by German plug-in hybrids for
the next two years at least, doesn't need to compete with ICEs on cost, just like the iPhone
doesn't need to compete with Xiaomi on cost. This "luxury" segment is the ideal market to
drive EV adoption for the next few years, as proven by Tesla's success; the addressable
market for luxury autos is a whopping ~12% (versus 2015 adoption of plug-ins at 0.6%)
(see Exhibit 370).
The third wave will finally target the majority "mainstream and economically attractive"
segment, driven by the GM Bolt and Tesla Model 3, and we expect a slew of other pure
EVs to follow, starting in earnest in 2018. This, we believe, can propel EVs to the real
tipping point of mass adoption.

BERNSTEIN
EXHIBIT 368: The three waves of EV adoption: Second wave still going strong
Year 2011 2012 2013 2014 2015 2016 2017 2018
First Wave Chevrolet Volt
Nissan LEAF
Early Adopter Smart ED
Environmentalists BYD e6
Mitsubishi i-MiEV
BMW Active E
Ford Focus Electric
Honda Fit EV
"making a statement" Ford C-MAX Energi
Toyota RAV4
Toyota Prius Plug-in
Ford Fusion Energi
Honda Accord
Chevrolet Spark
~1% of car market Fiat 500E
Volvo V60
BYD Qin
BMW i3
Mercedes B-Class Electric
Volkswagen e-Golf
Kia Soul EV
Volvo XC90 T8
VW Passat GTE Plug-in
Second Wave Tesla Model S
Cadillac ELR
Mainstream premium Porsche Panamera S E-Hybrid
BMW i8
Porsche Cayenne S E-Hybrid
BMW 5-series PHEV
Audi A3 e-Tron
BMW X5 eDrive
"Performance & cool" Tesla Model X
BMW 3-series PHEV
BMW 7-series PHEV
Mercedes S550 PHEV
~12% of car market Audi Q7 e-Tron
Audi Q8 e-Tron
NextEV SUV
JLR
Third Wave Chevrolet Bolt
Tesla Model 3
Affordable majority .
.
~87% of car market .

BERNSTEIN
EXHIBIT 369: The three waves of EV adoption: Third wave has just begun
EV Three Major Adoption Waves
2nd
BMW i8 - PHEV
2nd
- BEV
Porsche Panamera
Affordability (MSRP in US$ 000s)
Tesla Model X
Tesla Model S
Cadillac ELR
Mainstream
Premium
~50
BMW i3 GM Bolt
Ford Focus
Fiat 500E Nissan LEAF Tesla Model 3
Smart
1st 3rd
Chevrolet Spark
Affordable Majority
Early Adopter Environmentalists
~250
Performance (Range per single charge; km)
First Wave Second Wave - BEV Second Wave - PHEV Third Wave
EXHIBIT 370: The second wave alone addresses the 12% of premium luxury vehicles sold in the market today
Luxury Global Passenger Vehicle Sales

12 13.0%
12.5%
(as % of total global auto sales)

10
12.0%
Annual Sales in Millions
11.5%
Luxury Penetration
8
11.0%
6 10.5%
10.0%
4
9.5%
9.0%
2
8.5%
0 8.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Luxury Luxury as % of Total (RHS)
Source: IHS and Bernstein analysis

BERNSTEIN
GOVERNMENT POLICY ALSO Moreover, it shouldn't be forgotten how important government policy has been and will
HELPING UNTIL CROSSOVER continue to be to drive EV adoption for the next decade, perhaps until pure EVs compare
more evenly to ICEs on overall cost/performance metrics. China has led the way in this
regard with not only generous subsidies but also license plate fee exemptions and fewer
driving restrictions for EVs (see Exhibit 371).
EXHIBIT 371: Government support for EVs in different countries

China
Subsidy Total RMB 110K ($) for BEV range 250km and RMB 60K ($) for PHEV in 2016
Tax cut Exempt from the purchase tax (~10% of the vehicle price)
Receive free license (~RMB 85K for an ICE in Shanghai) and exempt from license plate
License plate
lottery in cities such as Beijing
Others Exempt from driving restrictions in cities such as Beijing, Shanghai, and Hangzhou
The subsidy will be cut by 20% in 2017 and again in 2019 and will be suspended after
Time
2020
Infrastructure Aiming to deploy 12K charging stations and 4.8mn charging poles
Asia South Korea
Subsidy $12.1K for EV
Tax incentives for BEV (can be as much as $3.8K from both national and local
Tax cut
governments)
Others Reduced purchase tax, insurance premiums, parking fees, etc.
Time Starting from 2016
Aiming to deploy fast charging stations in 2020, to make them available at an average of
Infrastructure
one within a two-km radius in Seoul
Japan
Tax cut Tax amount depends on the level of fuel efficiency and type of the vehicle
Time Starting from 2009
Germany
Subsidy 4K euro for BEV and 3K euro for PHEV
Tax cut Exemption from paying vehicle tax for 10yrs
Others 25% tax rate reduction on electricity used for charging EVs at work by employees
Time Starting from July 2016 and to expire by the end of 2019
Europe France
Super-bonus program: 10K euro incentive package (inc. amount for scrapping an ICE)
Subsidy
for a BEV and 7.7K euro for a PHEV
Regions provide either total or 50% exemption from the registration tax for alternative
Tax cut
fuel vehicles
Time Starting from 2015 and the regular bonus will be decreased starting from 2017
USA
Federal subsidy of $2.5k to 7.5k depending on kWh capacity, additional state subsidies
Subsidy
North (CA $2.5k, CO $5k, etc.)
In many states, EV drivers get access to the High Occupancy Vehicle (HOV); discount on
Others
America insurance
Plan to add 48 national EV charging corridors on highways in addition to the current 16K
Infrastructure
stations
Note: The "time" indicates the starting year of certain policies listed above.
Given China's aggressive policies, we now see the country taking the role of the largest EV
market in the world with the fastest growth (see Exhibit 372). Furthermore, given this
stellar growth, coupled with hardline protectionist measures, domestic players are
benefiting the most, including battery makers, EV makers, and battery
component/chemical suppliers.

BERNSTEIN
EXHIBIT 372: Plug-in EV (BEV+PHEV) adoption by region: China moving into the lead in 2016 and expected to extend lead in
the coming years driven by aggressive government policy
5.0%
4.5%
4.0%
3.5%
Penetrationrate
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
China Europe NorthAmerica RoW Global
Source: SNE Research, IHS, and Bernstein estimates and analysis.
PREDICTING THE IMPOSSIBLE: Predicting the adoption of disruptive technologies has always been a difficult task.
PASSENGER VEHICLE Adoption tends to disappoint in the short term and then blast through the most bullish
ELECTRIFICATION ESTIMATES
estimates in the longer term. We believe the difficulty with EVs is not predicting their
THROUGH TO 2040
success, as we believe they will succeed and eventually dominate shipments and indeed
the fleet. Nor is there difficulty in predicting the curve we have experience from multiple
technology disruptions that follow the typical "S-curve." Rather, the difficulty is in
predicting the inflection point when the adoption really picks up to the mainstream
(>5% adoption) and the slope of the adoption curve.
From studying previous technology adoption curves, we consistently see this "S-curve."
And although the rate of adoption does vary somewhat, it has typically taken five to 10
years to go from 5% adoption to 50% in the United States (see Exhibit 373 and Exhibit
374). Globally, however, these curves can take longer due to the need for infrastructure
and differing levels of wealth globally.

BERNSTEIN
EXHIBIT 373: Penetration curves for TVs and handsets in the United States
Penetration waves in the US - TV vs. Handsets

180%
160%
As % of US Population/Households
140%
120%
Total
100% TV Handsets
Overall TV
80% CRT
TV
B&W Smartphone
60%
40%
Feature
20% & Basic
TV
Phones
Flat Screen
0%
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016E
2018E
2020E
Note: TV figures on a household basis; handset figures on an individual basis. Handset penetration prior to 1994 on a global basis; prior to 2002 on a North
America basis; all other datasets on a U.S. basis. The U.S. handset penetration projections for 2015 and onward are based on Strategy Analytics.
Source: Gartner, Calgary Executives Association (CEA) Fast Facts, Strategy Analytics, United Nations, and Bernstein estimates and analysis.
EXHIBIT 374: Global penetration of smartphones (% of annual handset shipments)
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E
Source: Strategy analytics, and Bernstein estimates and analysis.

BERNSTEIN
PASSENGER VEHICLE Based on our previous experience with technology adoption, we plot three different
ELECTRIFICATION ESTIMATES scenarios for the next 30 years (see Exhibit 375 to Exhibit 378):
EXPLAINED
Rapid adoption scenario: In this scenario, we assume EV cost parity with ICEs will be
reached by 2025 and rapid adoption will follow. Like all technologies, adoption
should follow the typical S-curve, as in TVs, PCs, handsets, and smartphones,
reaching 25% of shipments in developed markets by 2025 and the majority by 2030.
In our estimates, China leads the market, but other emerging markets lag our
developed market estimates due to lack of infrastructure and lower willingness to
invest in the short term (see Exhibit 379). In this, we assume rapid adoption, similar to
what we have seen playing out in smartphones and other technologies. We also
assume EV cost parity with ICEs will be reached by 2025, and all car makers will
respond by phasing out ICEs in favor of the faster, better, cleaner, and cheaper
battery-powered cars. This case also assumes no major bottlenecks to adoption
from batteries, battery materials, or other component supplies.
Slow adoption scenario: In this scenario, we assume cost parity with ICEs will be
reached by 2030, slightly later due to poor enforcement of fuel efficiency and
emissions standards. This scenario follows the S-curve trajectory but with a later
inflection and a much slower adoption due to severe bottlenecks arising in either
batteries, battery materials or other component supplies. This case also assumes a
much slower pick-up in emerging markets due to the lack of infrastructure and/or
funds to invest in promoting EVs (see Exhibit 380).
Epic fail scenario: In this scenario, we assume failure of pure EVs due to either battery
suppliers not executing to expected cost declines, exploding EVs causing
widespread safety concerns, or ICEs together with hybrid technology improving
beyond our expectations. We also still see a market for start-stop vehicles (SSVs) and
48-volt battery technology, which will be powered in the future mostly by lithium-ion
batteries, but we see pure EVs dropping off after peaking in 2024 (see Exhibit 381).

BERNSTEIN
EXHIBIT 375: Starting from 2023, our new BEV+PHEV (slow adoption scenario) estimations diverged from the old
projections, especially for BEV
20.0% BEV+PHEV Penetration Projections

18.0%
16.0% 2nd 3rd

1st
EV Penetration of Auto Market
"Early Adopter "Mainstream "Affordable

14.0% Environmentalists" Premium" Majority"
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Old PHEV Old BEV New BEV New PHEV
EXHIBIT 376: Plug-in EV (BEV + PHEV) adoption as a percentage of car shipments

100%
90%
80%
70%
Penetration rate
60%
50%
40%
30%
20%
10%
0%
Rapid adoption Slow adoption Epic fail Old Base case

BERNSTEIN
EXHIBIT 377: Passenger vehicle battery market size projections: US$460 billion market by 2035 in the rapid adoption
scenario
500
Passenger vehicle battery market size, $billions
450
400
350
300
250
200
150
100
50
Rapid adoption Slow adoption Epic fail Old Base
EXHIBIT 378: Passenger vehicle battery market size in GWh annual shipments: Up to 140 "Tesla-size" Gigafactories needed
by 2035
6,000
Passenger vehicle battery shipment in GWh/year
5,000
4,000
3,000
2,000
1,000
Rapid adoption Slow adoption Epic fail Old Base

BERNSTEIN
EXHIBIT 379: The rapid adoption scenario: BEV preferred; EV cost parity with ICE will be reached by 2025
100%
90%
80%
70%
Penetration rate
60%
50%
40%
30%
20%
10%
0%
BEV PHEV HEV 48V+SS
EXHIBIT 380: The slow adoption scenario: Anticipating bottlenecks and slower adoption in emerging markets
100%
90%
80%
70%
Penetration rate
60%
50%
40%
30%
20%
10%
0%
BEV PHEV HEV 48V+SS

BERNSTEIN
EXHIBIT 381: The epic fail scenario: Pure EVs fail due to costs, safety concerns, or improvements in ICEs and hybrid
technology
100%
90%
80%
70%
Penetration rate
60%
50%
40%
30%
20%
10%
0%
BEV PHEV HEV 48V+SS
THE EMERGING THREAT ON GASOLINE DEMAND FROM

ELECTRIC VEHICLES
THE IMPACT ON GASOLINE Gasoline has been one of the largest drivers of global oil demand growth over the past 15
DEMAND FROM ELECTRIC years, but is the golden age drawing to an end? The outlook for gasoline will be shaped by
VEHICLES
a number of factors. First, vehicle ownership will continue to increase on higher income
levels in emerging economies, with China and over time India being key growth markets.
Second, the continued improvement in fuel efficiency will weigh on fuel consumption,
eventually denting gasoline demand. Third, the replacement of gasoline cars with EVs,
while still embryonic, will have a significant impact in the long term.
We believe that gasoline demand for passenger light-duty vehicles (PLDVs) will peak in
the early 2020s (see Exhibit 382), and then head into a secular decline, as improvements
in fuel efficiency will outweigh the growth in vehicle parc. While no one doubts that the
growth in EVs could be disruptive to the oil industry, changes will not happen overnight.
EVs have yet to achieve mainstream commerciality, which would enable them to compete
with ICEs. Even in our most optimistic scenario, EVs will represent less than 5% of the
total PV parc by 2025.
Beyond 2025, the rate of decline in oil demand could vary significantly, depending on the
pace of EV adoption. We have considered three scenarios in accessing the outlook for
EVs and oil demand. In our base case (slow adoption), we assume that EV sales
penetration will exceed 40% by 2040, with pure EVs driving the growth beyond 2025. In
this case, gasoline demand in 2040 will be 19% lower than that in 2025. Under our bear

BERNSTEIN
case (epic fail), which assumes a slower EV adoption, gasoline demand will slip by 10%
from 2025 to 2040. In our most aggressive bull case (rapid adoption), which assumes EV
sales penetration will be over 95% by 2040, gasoline demand will fall 60% from 2025 to
2040.
EXHIBIT 382: Global gasoline demand will flatten off by 2025 in all three cases on an improvement of fuel efficiency, and
will have a more significant decline from 2025 onward due to rising EV adoption
26
24
Gasoline demand, MMbbls/d
22
20
18
16
14
12
10
8
Bear case Base case Bull case
Source: The International Energy Agency (IEA), and Bernstein estimates and analysis.
Clearly, the peaking of fuel demand for light passenger vehicles in 2020-25 is hardly
positive for oil investors. While EVs represent a risk to our forecasts, it will take years for
EVs to put a material dent in the gasoline pool. Moreover, oil demand growth over the next
decade will be largely driven by diesel, jet fuel, and petrochemicals. This means that oil
demand can continue to grow, even if gasoline demand doesn't.
Based on our estimates, we believe that global oil demand will peak around 2030 (see
Exhibit 383). Under our base case and bear case, oil demand in 2040 is expected to be
5-7% lower than the peak, which is relatively contained. In our bull case, oil demand in
2040 will fall 15% from peak levels, due to the proliferation of pure EVs.

BERNSTEIN
EXHIBIT 383: As gasoline demand flattens off by 2025, oil demand is expected to peak around 2030
105
103
101
Oil demand, MMbbls/d
99
97
95
93
91
89
87
85
Bear Case Base Case Bull Case
Source: IEA, and Bernstein estimates and analysis.
While EV penetration could ultimately reach 100%, there is a limit to how much oil
demand will be replaced by EVs. Currently, the transport sector accounts for 55% of
global oil consumption (see Exhibit 385), of which 46% is represented by gasoline
demand for passenger vehicles (see Exhibit 386). This implies that gasoline demand
comprises a quarter of global oil demand (see Exhibit 387). If gasoline passenger vehicles
are completely replaced by EVs, this will reduce global oil demand by a quarter,
eventually.
EXHIBIT 384: Oil demand by country, 2014 EXHIBIT 385: End use for oil globally by sector, 2014
Other Power
13% 6%
Other Non- OECD
OECD, Americas,
26% Buidlings
26%
8%
Other
Industry
5%
OECD
Other Asia, Europe,
13% PetroChem
14% Transport
13%
55%
OECD Asia
China, Oceania,
11% 9%
Source: IEA and Bernstein analysis. Source: IEA and Bernstein analysis.

BERNSTEIN
EXHIBIT 386: Breakdown of oil demand in the transport EXHIBIT 387: Breakdown of oil demand by product: Gasoline
segment: Fuel demand for passenger vehicles represents makes up around a quarter of total demand
46% of total transport demand
Rail Other
Shipping 1% Industry
10% Power 6% Other
6% Transport
(Deisel, Jet)
Air Travel Buildings
30%
11% 9%
Road
Gasoline
46% Petro-
chemicals
12%
Road Diesel Motor

32% Other Gasoline
13% 24%
Source: IEA and Bernstein analysis. Source: IEA and Bernstein analysis.
GROWTH IN GLOBAL The outlook for gasoline demand growth is a function of growth in the global light
PASSENGER VEHICLE PARC passenger vehicle parc and fuel efficiency. While it took a century for global vehicle
ownership to reach 1 billion, we expect that it will reach 1.7 billion over the next 25 years
(see Exhibit 388), implying a CAGR of 2%, which is predominantly driven by developing
economies. With the global population growing from 7 billion to 9 billion, there will also be
2 billion new potential motorists over the next 20 years ready to take the wheel.
EXHIBIT 388: The vehicle parc for PLDV is expected to grow from 1 billion to 1.7 billion over the next 25 years
2,000 10,000
World population, Mil

1,800 9,000
Global PV parc, Mil
1,600 8,000
1,400 7,000
1,200 6,000
1,000 5,000
800 4,000
600 3,000
400 2,000
200 1,000
0 0
2016E
2018E
2020E
2022E
2024E
2026E
2028E
2030E
2032E
2034E
2036E
2038E
2040E
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Car parc (million) Population (million)
Source: World Bank, IHS, IEA, and Bernstein estimates and analysis.
Much of the growth in global vehicle ownership will come from the emerging market on
rising income levels. Vehicle ownership tends to be highly elastic to per capita GDP. Once
real GDP per capita exceeds US$5,000, demand for automobiles tends to reach an
inflection point. Today, vehicle ownership in emerging markets is a fraction of that in the
West. In the OECD countries, for example, car penetration is greater than 500 vehicles
per 1,000 persons compared with less than 100 in non-OECD countries (see Exhibit
389).

BERNSTEIN
EXHIBIT 389: PLDV ownership per 1,000 people: Non-OECD countries will narrow the gap in vehicle ownership with OECD
countries over the next 20 years on increasing wealth
900
PV parc per 1,000 people
800
700
600
500
400
300
200
100
-
2010 2015 2020E 2030E 2040E
US OECD Europe Other OECD World China Other non-OECD
Source: World Bank, IEA, and Bernstein estimates and analysis.
Considering the increase in global population and vehicle ownership, we have estimated
the global light vehicle parc through to 2040, which is summarized in Exhibit 390. These
numbers are largely in line with consensus industry forecasts. We expect growth in OECD
demand to remain stable at 0.8% over the next 25 years, as both population growth and
vehicle ownership remain relatively flat. Ownership levels in non-OECD countries are
expected to increase rapidly at a 5.2% CAGR through to 2025 led by China. Beyond
2025, the growth rate will slow (2.3% growth), as emerging economies reach a more
mature stage and China demand starts to slow as it approaches saturation.
EXHIBIT 390: Global PV parc is expected to reach 1.7 billion by 2040

Global car parc, M CAGR
2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2030E 2035E 2040E 15-25 25-40 15-40
OECD
US 241 244 247 249 252 256 260 263 266 268 270 273 275 277 285 291 296 1.1% 0.5% 0.7%
OECD Europe 236 238 240 242 246 251 255 258 262 265 268 271 274 277 289 298 305 1.4% 0.6% 0.9%
Other OECD 167 170 173 175 178 180 183 185 186 188 190 191 192 194 199 203 206 1.0% 0.4% 0.6%
Total OECD 645 653 660 666 677 687 697 706 714 721 728 735 741 748 773 792 807 1.2% 0.5% 0.8%
Non-OECD
China 103 122 143 164 181 197 213 230 247 264 281 298 314 329 392 440 476 7.2% 2.5% 4.4%
Other non-OECD 204 215 225 235 242 249 257 267 277 288 300 313 325 337 387 428 460 3.6% 2.1% 2.7%
Total non-OECD 307 337 367 399 422 446 470 496 524 552 581 611 639 665 779 868 936 5.2% 2.3% 3.5%
World 951 989 1,027 1,065 1,099 1,133 1,167 1,202 1,238 1,274 1,310 1,346 1,380 1,413 1,553 1,660 1,743 2.9% 1.4% 2.0%
Source: IHS, and Bernstein estimates and analysis.
THE RISE OF FUEL EFFICIENCY While increasing vehicle ownership is expected to drive gasoline demand, it will be
partially offset by the improvement in fuel efficiency. More and more governments around
the world will enforce policies to limit the consumption of oil in transport due to economic
and environmental factors. Over the next decade, new standards in the largest markets,
including the United States (CAFE), Europe (EU CO2 rules), and China (MIIT), will require
automakers to significantly improve the fuel efficiency of their fleets. The Global Fuel
Economy Initiative (GFEI) has set a target of reducing emissions by 50% in new car fuel
consumption by 2030 (see Exhibit 391).

BERNSTEIN
EXHIBIT 391: Government-mandated fuel economy standards for light-duty vehicles by country: The GFEI has set a target of
reducing emissions by 50% in new car fuel consumption by 2030
80
75
Headline fuel-efficiency
70
standard, mpge
65
60
55
50
45
40
35
30
2010 2015 2020 2025 2030
US OECD Europe China World
Note: Forward years (2016 and beyond) are based on the industry standard from the GFEI.
Source: GFEI and Bernstein analysis.
While this sounds impressive, it should be noted that actual fuel efficiencies are generally
20-30% below the headline Corporate Average Fuel Economy (CAFE) standard.
Additional tests developed and used by the Environmental Protection Agency (EPA)
enable a more accurate measure of fuel efficiency, which is posted on the window of new
vehicles (window label). For example, the Honda Civic has a headline CAFE standard of
40mpg, but the window label is only 29mpg. Using the Toyota Camry as an example, the
fuel efficiency has improved at a 1.2% CAGR from 2000 to 28mpge in 2016, which is still
25% below the current CAFE standard in the United States (37.6mpg), or 35% below the
CAFE standard in 2020 (43mpg) (see Exhibit 392).
EXHIBIT 392: Fuel efficiency of the Toyota Camry has only been rising at a 1.2% CAGR from 2000 to 2016, lower than the
improvement implied by both the window label and the headline CAFE standard
70
EU 2020: 64mpg
60
50 China 2020: 47mpg

mpge
40 US 2020: 43mpg
30
20
10
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
City Highway Combined
Source: U.S. Department of Energy, GFEI estimates (2016 and beyond), corporate reports, and Bernstein analysis.
To capture the discrepancy, we assume that the actual fuel efficiency of new light
passenger vehicles is 72% of headline CAFE standards (a 28% discount). For example,

BERNSTEIN
light passenger vehicles in the United States will have to achieve an average fuel
efficiency of 51.3mpg by 2025, which translates into 36.9mpg in our model. Based on the
CAFE standard (in mpg) in each key market, we have calculated the actual average fuel
efficiency (in liters/100km) of the entire fleet at the regional level. The average fuel
efficiency is expected to improve significantly in all regions over the next 25 years (see
Exhibit 393). From 2025 onward, we assume that the fuel efficiency of ICEs will remain
flat, given limits imposed by technology, although this may be somewhat conservative. But
the average fuel efficiency of the fleet will continue to improve as older vehicles will be
replaced with newer vehicles with better fuel efficiency.
EXHIBIT 393: Average fuel efficiency is expected to improve significantly in each key regional market
12
Fuel efficiency, L/100km
10
-
2015 2020E 2030E 2040E
Other non-OECD US World China OECD Europe Other OECD
Source: GFEI, and Bernstein estimates and analysis.
FACTORING IN DISTANCE To calculate the future demand for gasoline requires an estimate of the global vehicle
TRAVELED TO OVERALL FUEL parc, fuel consumption, and average distance traveled per vehicle. We find that the
EFFICIENCY
average distance traveled has been flattish over the past five years. In the United
kingdom, the distance traveled has also not increased since 1995 despite economic
growth. A similar trend has emerged in the United States from around 2005, where
vehicle miles traveled peaked and has since leveled off. To err on the conservative side,
we assume that the distance traveled per passenger vehicle will stay constant for all
regions from 2018 onward (see Exhibit 394).
EXHIBIT 394: Average travel per PLDV: Distance traveled is assumed to be stable going forward
25,000
20,000
km per year
15,000
10,000
5,000
-
2015 2020E 2030E 2040E
US OECD World Non-OECD Europe China
Source: IEA, and Bernstein estimates and analysis.

BERNSTEIN
Based on planned fuel-efficiency standards and distance traveled per region, we expect
the average fuel efficiency of the global passenger vehicle fleet to improve by 40% from
9.7L/100km in 2012 to 5.7L/100km in 2040 (see Exhibit 395). While the expected
improvement in fuel efficiency of the overall fleet is impressive, the average fuel efficiency
of the entire fleet is still worse than the official CAFE standard (3.7L/100km), because the
CAFE standard only applies to vehicles produced during the year. Assuming a scrappage
rate of 5.5% per year, it takes over 18 years for the entire fleet to be replaced. For the
non-OECD region excluding China, we have assumed a lower scrappage rate of 4.4%,
which is in line with the historical average.
EXHIBIT 395: Average fuel efficiency is expected to improve from 9.7L/100km in 2012 to 5.7L/100km by 2040
10
9
Fuel efficiency, L/100km
8
7
6
5
4
3
2
1
0
Source: GFEI, and Bernstein estimates and analysis.
IMPACT OF EVS ON OIL DEMAND Technology, gasoline prices, costs, and consumer behavior will drive the rate of EV
adoption. Up until 2015, annual xEV (including BEV, PHEV and HEV) sales penetration has
stayed below 5% as battery technology and costs are not yet competitive with
conventional gasoline engines or ICEs. It is impossible to predict exactly how quickly EVs
will grow, but we can make an educated guess. To account for different views that prevail
within Bernstein, we have created three scenarios: base case, bear case, and bull case.
The major difference between the three cases is the rate of EV adoption. By 2025, we
assume that the sales penetration of xEVs (battery weighted sum of HEV, PHEV, and BEV)
will reach 16% in the base case, 12% in the bear case, and 27% in the bull case. By 2040,
xEV sales penetration reaches 43% in the base case, 29% in the bear case, and 96% in
the bull case.
Under the base case, we assume that the sales penetration of xEVs will remain relatively
limited until 2025, as xEV adoption continues to face constraints, such as fuel economy,
total cost of ownership, and availability of supporting infrastructure like charging stations.
After 2025, EV adoption is likely to take off as infrastructure becomes more widespread
and costs become more competitive. In the bear case, we assume that these constraints
will continue to weigh on EV adoption, and EV sales will still be dominated by regular
hybrids for the next 25 years. Under the bull case, the sales penetration of xEVs increases
at a significantly faster pace, from 4% in 2015 to over 27% by 2025, and close to 95% by
2035 (see Exhibit 396). In this scenario, we expect pure EVs to drive industry growth from
2020 onward.

BERNSTEIN
EXHIBIT 396: xEV sales penetration will reach 25%, 35%, and 95% by 2035 in the bear case (epic fail), base case (slow
adoption), and bull case (rapid adoption), respectively
100%
EV sales penetration, %
80%
60%
40%
20%
0%
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
Bear case (Epic Fail) Base case (Slow Adoption) Bull case (Rapid Adoption)
Source: IHS, and Bernstein estimates (2016 and beyond) and analysis.
However, annual EV sales penetration is not equivalent to the amount of gasoline being
substituted. The amount of oil demand from light passenger vehicles replaced by EVs will
hinge on the penetration of the global parc of EVs. The penetration of car parc is
calculated based on the ownership of each type of xEV, multiplied by a fuel replacement
factor (100% for battery electric vehicles, 75% for plug-in hybrid electric vehicles, and
20% for hybrid electric vehicles). Battery electric vehicles (BEVs) run exclusively on
electricity, while hybrid electric vehicles (HEVs) and plug-in hybrid electric vehicles
(PHEVs) require both electric motors and gasoline engines. HEVs have a higher
dependence on gasoline, as the gasoline engine remains as the main source of energy
and the vehicle cannot be recharged. For PHEVs, the electric motor is the major power
source, which is complemented by the gasoline engine to extend the range.
Despite the introduction of new EV models, EVs will remain an insignificant portion of the
global parc for light passenger vehicles over the next 10 years. The effective EV parc
penetration will stay below 5% in all three cases in 2025, given that they are growing from
a small base (see Exhibit 397). Beyond 2025, the growth trajectory will be starkly
different across the three cases. In the "base case," we assume that the effective EV parc
penetration will increase from less than 5% in 2025 to 17% by 2040, and to 32% in
2050. In the "bear case," the global parc of xEVs will remain relatively insignificant at less
than 10% by 2050. Under the "bull case," both overall EV adoption and the share of BEVs
are substantially higher, leading to a much higher penetration of the global parc of 60%
by 2040 and close to 87% by 2050.

BERNSTEIN
EXHIBIT 397: Effective EV parc penetration in the bull case is significantly higher than that in the base case (~3x) and bear
case (~10x) by 2050
100%
90%
Effective EV parc
80%
penetration, %
70%
60%
50%
40%
30%
20%
10%
0%
Bear case Base case Bull case
Note: Effective EV parc penetration considers the fuel replacement factor for each type of xEV: 100% for battery electric vehicles, 75% for plug-in hybrid
electric vehicles, and 20% for hybrid electric vehicles.
Source: IEA, IHS, and Bernstein estimates and analysis.
While global EV penetration will increase, the growth of EVs will differ among regions.
Intuitively, the adoption of EVs will be faster in OECD countries, compared to non-OECD
countries. Based on our estimates, effective EV parc penetration will be around 45% by
2050 in OECD countries, which is more than double of that in non-OECD countries (see
Exhibit 398 and Exhibit 399).
EXHIBIT 398: OECD: Effective EV parc penetration EXHIBIT 399: Non-OECD: Effective EV parc penetration
100% 100%
90% 90%
80% 80%
Non-OECD EV effective
parc penetration, %
parc penetration, %
70% 70%
OECD EV effective
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
2016E
2018E
2020E
2022E
2024E
2026E
2028E
2030E
2032E
2034E
2036E
2038E
2040E
2042E
2044E
2046E
2048E
2050E
2012
2014
2016E
2018E
2020E
2022E
2024E
2026E
2028E
2030E
2032E
2034E
2036E
2038E
2040E
2042E
2044E
2046E
2048E
2050E
2012
2014
Bear Case Base Case Bull Case Bear Case Base Case Bull Case
Note: Effective EV parc penetration considers the fuel replacement factor for Note: Effective EV parc penetration considers the fuel replacement factor for
each type of xEV: 100% for BEVs, 75% for PHEVs, and 20% for HEVs. each type of xEV: 100% for BEVs, 75% for PHEVs, and 20% for HEVs.
Source: IHS, and Bernstein estimates and analysis. Source: IHS, and Bernstein estimates and analysis.
The key assumptions of EV sales penetration and parc penetration under the three cases
are tabulated in Exhibit 400.

BERNSTEIN
EXHIBIT 400: Key assumptions of the three cases

xEV as % xEV as % xEV (effective) as %
of Sales of Parc of Parc
2025E 2035E 2025E 2035E 2025E 2035E
Base Case 16.2% 36.0% 7.6% 21.7% 2.8% 11.0%
Bear Case 12.4% 23.8% 6.5% 15.3% 2.1% 5.2%
Bull Case 27.4% 94.0% 10.3% 46.7% 4.3% 35.7%
Note: Effective EV parc penetration considers the fuel replacement factor for each type of xEV: 100% for BEVs, 75% for PHEVs, and 20% for HEVs.
With the help of rising EV adoption, the average fuel efficiency of the global PV fleet will
be improved significantly by 2040 under the "base case," and to a greater extent the "bull
case." While the improvement in fuel efficiency of the ICEs will boost fuel efficiency to
43.6mpg by 2040, this will still fall short of the official CAFE standard of 60.6mpg (see
Exhibit 401), given that fuel consumption in the real world is often less efficient than in the
test environment. After accounting for the increasing penetration of xEVs, the average
fuel efficiency of the global vehicle fleet will exceed the official standard by 2040.
EXHIBIT 401: Global average of fuel efficiency

World average fuel efficiency (Window label, assumed to be 72% of headline CAFE standard)
Unit: mpge 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2030E 2035E 2040E
Avg ICE 29.4 30.3 31.3 32.3 33.1 33.9 34.7 35.6 36.8 38.0 39.3 40.7 42.2 43.6 43.6 43.6
Weighted avg (ICE & EV)
Base Case 30.6 31.7 32.7 33.8 34.9 35.9 37.1 38.3 39.8 41.4 43.2 45.1 47.1 52.7 57.5 62.6
Bear Case 30.6 31.7 32.7 33.8 34.8 35.7 36.8 37.9 39.3 40.7 42.2 43.8 45.3 47.7 48.8 49.5
Bull Case 30.6 31.7 32.7 33.8 34.9 36.1 37.5 39.0 40.9 43.1 45.5 48.4 52.0 74.3 97.2 101.5
World average fuel efficiency (Headline CAFE standard)

Unit: mpge 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2030E 2035E 2040E
Avg ICE 40.9 42.1 43.5 44.8 46.0 47.1 48.2 49.4 51.1 52.8 54.6 56.6 58.6 60.6 60.6 60.6
Weighted avg (ICE & EV)
Base Case 41.7 43.0 44.4 45.8 47.0 48.3 49.6 50.9 52.7 54.6 56.5 58.7 60.9 65.1 68.4 72.2
Bear Case 41.7 43.0 44.4 45.8 47.0 48.2 49.4 50.7 52.4 54.1 55.9 57.8 59.6 61.6 61.7 61.6
Bull Case 41.7 43.0 44.4 45.8 47.1 48.4 49.8 51.4 53.4 55.6 58.0 60.8 63.9 80.8 98.2 102.2
Source: GFEI, IHS, and Bernstein estimates and analysis.
Incorporating the impact of rising vehicle parc, improving fuel economy, and growth of
EVs under different scenarios, we have estimated future global gasoline demand, which is
shown in Exhibit 402 to Exhibit 404. Gasoline demand will flatten off around 2020-25,
and the decline rate will vary significantly from 2025 onward depending on the growth of
EVs. Under our base case, we estimate that global gasoline demand will fall at a 1.4%
CAGR from 2025 to 20.2MMbbls/d in 2040. The decline in gasoline demand will be less
severe at a -0.7% CAGR from 2025 to 2040 in the bear case. In the bull case, gasoline
demand will likely drop substantially from 2025 to 2040 at a -5.6% CAGR, implying that
by 2040, gasoline demand will be almost 60% lower than the peak consumption level.

BERNSTEIN
EXHIBIT 402: Base case: Global gasoline demand forecast

Base Case - gasoline demand, MMbbls/d CAGR
2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2030E 2035E 2040E 15-25 25-40 15-40
OECD
US 8.8 8.9 9.2 9.2 9.1 9.1 9.0 8.8 8.7 8.5 8.3 8.0 7.8 6.6 5.7 5.0 -1.6% -3.0% -2.4%
OECD Europe 2.0 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.8 1.8 1.8 1.7 1.7 1.4 1.2 1.1 -1.5% -2.9% -2.3%
Other OECD 3.3 3.2 3.3 3.3 3.3 3.2 3.2 3.2 3.1 3.0 3.0 2.9 2.8 2.5 2.3 2.0 -1.6% -2.2% -2.0%
Total OECD 14.1 14.1 14.4 14.4 14.3 14.2 14.1 13.9 13.6 13.3 13.0 12.6 12.2 10.6 9.2 8.0 -1.6% -2.8% -2.3%
Non-OECD
China 2.1 2.3 2.4 2.6 2.8 3.0 3.2 3.3 3.4 3.6 3.7 3.7 3.8 3.9 4.0 4.1 4.5% 0.5% 2.1%
Other non-OECD 7.5 7.5 8.0 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.7 8.8 8.9 8.8 8.4 8.1 1.0% -0.6% 0.0%
Total non-OECD 9.5 9.7 10.5 10.8 11.0 11.3 11.5 11.8 12.0 12.2 12.4 12.5 12.6 12.7 12.4 12.2 1.9% -0.3% 0.6%
World 23.6 23.8 24.9 25.1 25.3 25.5 25.6 25.6 25.6 25.5 25.4 25.1 24.9 23.3 21.6 20.2 0.0% -1.4% -0.8%
Source: IHS, GFEI, IEA, and Bernstein estimates and analysis.
EXHIBIT 403: Bear case: Global gasoline demand forecast

Bear Case - gasoline demand, MMbbls/d CAGR
2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2030E 2035E 2040E 15-25 25-40 15-40
OECD
US 8.8 8.9 9.2 9.2 9.1 9.1 9.0 8.8 8.7 8.5 8.3 8.1 7.9 6.9 6.3 6.0 -1.5% -1.8% -1.7%
OECD Europe 2.0 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.8 1.8 1.8 1.7 1.7 1.5 1.4 1.3 -1.3% -1.5% -1.4%
Other OECD 3.3 3.2 3.3 3.3 3.3 3.2 3.2 3.2 3.1 3.0 3.0 2.9 2.8 2.6 2.5 2.4 -1.6% -1.0% -1.2%
Total OECD 14.1 14.1 14.4 14.4 14.3 14.2 14.1 13.9 13.6 13.3 13.0 12.7 12.4 11.0 10.2 9.8 -1.5% -1.6% -1.5%
Non-OECD
China 2.1 2.3 2.4 2.6 2.8 3.0 3.2 3.3 3.4 3.6 3.7 3.7 3.8 4.0 4.1 4.3 4.5% 0.9% 2.3%
Other non-OECD 7.5 7.5 8.0 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.8 8.9 8.8 8.6 8.5 1.0% -0.3% 0.2%
Total non-OECD 9.5 9.7 10.5 10.8 11.0 11.3 11.5 11.8 12.0 12.2 12.4 12.5 12.7 12.8 12.7 12.8 1.9% 0.1% 0.8%
World 23.6 23.8 24.9 25.1 25.3 25.5 25.6 25.7 25.7 25.6 25.5 25.2 25.0 23.9 22.9 22.6 0.1% -0.7% -0.4%
EXHIBIT 404: Bull case: Global gasoline demand forecast

Bull Case - gasoline demand, MMbbls/d CAGR
2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2030E 2035E 2040E 15-25 25-40 15-40
OECD
US 8.8 8.9 9.2 9.2 9.1 9.1 9.0 8.8 8.7 8.5 8.2 8.0 7.7 5.9 4.0 2.2 -1.8% -7.9% -5.5%
OECD Europe 2.0 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.8 1.8 1.7 1.7 1.6 1.3 0.8 0.5 -1.6% -8.1% -5.6%
Other OECD 3.3 3.2 3.3 3.3 3.3 3.2 3.2 3.2 3.1 3.0 2.9 2.8 2.7 2.3 1.6 0.9 -1.8% -7.1% -5.0%
Total OECD 14.1 14.1 14.4 14.4 14.3 14.2 14.1 13.8 13.6 13.3 12.9 12.5 12.1 9.5 6.4 3.6 -1.8% -7.7% -5.4%
Non-OECD
China 2.1 2.3 2.4 2.6 2.8 3.0 3.1 3.3 3.4 3.5 3.6 3.7 3.7 3.6 2.9 2.1 4.3% -3.8% -0.6%
Other non-OECD 7.5 7.5 8.0 8.1 8.2 8.3 8.4 8.5 8.6 8.6 8.7 8.7 8.7 8.1 6.5 4.6 0.9% -4.1% -2.2%
Total non-OECD 9.5 9.7 10.5 10.8 11.0 11.3 11.5 11.8 12.0 12.2 12.3 12.4 12.4 11.7 9.4 6.7 1.8% -4.0% -1.8%
World 23.6 23.8 24.9 25.1 25.3 25.5 25.6 25.6 25.6 25.4 25.2 24.9 24.5 21.2 15.8 10.3 -0.1% -5.6% -3.5%
IMPLICATIONS FOR THE OIL Electric vehicles could be a major disruptive force in global transportation over the
MARKET coming years but not quite yet. While EVs have yet to achieve mainstream commerciality,
which would enable them to compete with conventional engines, advances in battery
technology could change this. Clearly, the growth in EVs could be disruptive for oil
demand where light passenger vehicles account for one in every four barrels consumed,
but change will not happen overnight.

BERNSTEIN
EXHIBIT 405: We believe there could be one more super-cycle in oil before demand peaks in 2030-35
120 Demand peak at

105Mmbbls/d by 2030
100
Oil demand, MMbls/d
Rise of OPEC
80
and 1980s oil
crash
60
40
20
Start of Texas
oil boom
0
1850 1900 1950 2000 2050 2100
Oil Demand MMbls/d
Source: BP Statistical Review, and Bernstein estimates (2016 and beyond) and analysis.
Assuming oil demand grows to 105MMbbls/d and then declines to less than
20MMbbls/d by 2100 (consistent with the G7 target to end the fossil fuel industry, but
allowing for some demand in petrochemicals, which will always need some oil), we will
need 2.3 trillion barrels of oil over the rest of the century (see Exhibit 406). Current proven
reserves are 1.7 trillion barrels. Most of these reserves (70%) are within OPEC, with only
20% in non-OPEC countries outside of the Former Soviet Union (FSU). This implies that
we need to continue to explore for oil and develop new reserves. However, the picture will
likely look different in 2030. The cumulative global oil demand from 2030 until the end of
the century will amount to 1.7 billion barrels, which will be in line with the size of proven
reserves (see Exhibit 407). While stranded carbon is not yet a tangible risk for oil
companies, it will ultimately become a risk which investors will not be able to ignore.

BERNSTEIN
EXHIBIT 406: Assuming oil demand grows to 105MMbls/d EXHIBIT 407: Oil demand from 2030 to 2100 will be
and then declines to less than 20MMbl/d by 2100, we will consistent with world proven reserves
need 2.3 trillion barrels of oil over the rest of the century
2,500 1,800
1,600
342
2,000 1,400
142
1,200
1,500 342
bn bbls
bn bbls
1,000
142
2,264 800 1,710
1,000
600 1,216
1,216 400
500
200
0 0
World Oil Demand World Proven World Oil Demand World Proven
2015-2100 bn bbls Reserves (End 2015) 2030-2100 bn bbls Reserves (End 2030)
bn bbls bn bbls
World demand OPEC FSU Non-OPEC World demand OPEC FSU Non-OPEC
Source: BP Statistical Review, and Bernstein estimates (2016 onward) and Source: BP Statistical Review, and Bernstein estimates (2016 onward) and
analysis. analysis.
THE ELECTRIC SLIDE THE IMPACT ON POWER OF

ELECTRIC VEHICLES
THE IMPACT OF ELECTRIC Globally, power consumption in 2015 was ~24,000TWh, another all-time high according
VEHICLES ON ELECTRICITY to the BP Energy Survey. Over the last quarter century, power consumption per capita has
DEMAND
increased by almost 50%, from 2,255KWh per capita to 3,280KWh per capita. Power
consumption increased in 2015 globally by 0.9%, a deceleration after having increased
annually by just over 3% for the two decades from 1995 to 2014.
In our view, that slowdown in power consumption growth in 2015 is not an aberration.
The single-largest driver of power consumption growth globally over the last two decades
has been China. As Chinese GDP growth slows and its level of power intensity falls,
Chinese power consumption growth has already reset to a lower level. As a rough
shorthand calculation, China's "power multiplier" the ratio of power consumption
growth to real GDP growth has gone from a multiple to a fraction over the last five
years. This is the same evolution that every developed economy steps through. China is
making that transition now. The "power multiplier" for 25 developed and developing
markets over the last 10 years is set out in Exhibit 408.
At the same time, power consumption growth in the United States, Europe, and Japan has
been falling for roughly a decade as among other things light bulbs, refrigerators,
and air conditioners become more energy efficient. Some of the decline in power
consumption in developed markets also has to do with electricity-intensive manufacturing
moving to lower-cost jurisdictions and the location of power demand moving with the
manufacturing. The same thing will occur in China as the production of t-shirts, plastic

BERNSTEIN
toys, and sneakers moves from Guangdong to Bangladesh, for example. However, on a
global basis, the net effect in terms of power consumption is close to zero.
The simple inference is that we are moving into an environment where given the end of
China's "super-normal," "super-industrial" growth phase power demand growth
globally is likely to slow considerably and could even begin to fall in coming decades,
depending on the assumptions around energy efficiency and overall economic growth
from industrial activity.
The wrinkle to that inference is the electric vehicle.
If the global auto fleet (or even a material portion of it) is going to be converted to running
on electric motors over the next few decades, power demand is likely to remain resilient.
However, we believe that there are reasons to expect that a return to low-to-mid-single-
digit growth in power demand globally is unlikely, even in the most aggressive electric
vehicle adoption scenarios that we outline in this chapter.
There are four considerations to bear in mind.
First, in the "static" analysis where the entire motor vehicle fleet is converted to electric
vehicles tomorrow, the rough increase in total power generation globally would be in the
range of 15%. In short, electric vehicles represent a significant boost to power demand
globally, but are far short of a "game changer" even in the most extreme (and fanciful)
scenario.
EXHIBIT 408: 10-year power multipliers selection of 25 developed and developing nations
1.74
2.0
1.24
1.19
1.5
1.12
1.12
1.05
1.04
1.02
Power Multiplier (10-year)
1.02
0.96
0.94
0.91
0.88
1.0
0.60
0.58
0.46
0.37
0.28
0.23
0.18
0.5
0.13
0.13
-0.14
-0.01
-0.37
-0.53
0.0
-0.5
-1.0
India
Indonesia
Nigeria
Vietnam
World
Egypt
Bangladesh
Thailand
South Korea
China
Pakistan
Russia
United States
Japan
United Kingdom
Italy
Germany
Brazil
Philippines
Australia
France
South Africa
Spain
Canada
Turkey
Mexico
Source: World Bank, EIA, and Bernstein analysis.
Second, power consumption in the United States peaked in 2007, in Europe, power
consumption peaked in 2008, and in Japan, power consumption peaked in 2008. In the
OECD, power consumption peaked in 2006. In short, in the key end markets for electric

BERNSTEIN
vehicles over the next decade- and in the markets where we estimate x-EVs will reach
ubiquitous status first, power demand is already falling as light bulbs, refrigerators, and
every other electrical appliance become more efficient. The adoption of electric vehicles
in this market may "stop the bleeding" but is unlikely to represent a growth opportunity. In
fact, the "EV effect" may well be imperceptible from the aggregate power demand
statistics.
Third, in the developing world, the largest driver of electricity consumption growth over
the last decade and the last quarter century has been China. As Chinese economic growth
slows and Chinese electricity intensity (power consumption per unit of GDP) falls, the
double-digit power demand growth rates of the last decade will not be repeated (see
Exhibit 409 and Exhibit 410). A conversion of the fleet to electricity will boost power
demand. It will not reaccelerate power demand growth to the recent record highs. The
basis of economic growth in China is now services-oriented. One of many implications is
that power consumption growth has stalled structurally. Power demand from
manufacturing activity in particular may migrate to other low-cost jurisdictions. However,
aggregate power demand is unlikely to return to the elevated levels of the last two
decades, EVs or not.
Fourth, the transition of the fleet to electric vehicles is going to play out over decades.
Much of the analysis in this section is focused on the speed at which EV sales reach 25%
of auto sales. Bullish estimates (and the estimates of many auto manufacturers) suggest
that this level of EV sales could be achieved by 2025. That would mean taking annual BEV
(or "pure" EVs) sales from ~350,000 in 2016 and PHEV, BEV and Hybrid sales of
~700,000 to 25 million in a decade. However, even if achieved, that would mean the
share of the total auto fleet would still be in the low single digits. In short, the transition
may be inevitable. But it is also slow. Second-order effects like the increase on power
demand are, therefore, long-dated phenomena.
A STATIC ANALYSIS OF POWER The math around just how large the incremental demand for electricity globally from
CONSUMPTION GLOBALLY IF electric vehicles will be is pretty simple. Things only get confusing when you start
ALL AUTOS WERE ELECTRIC
debating the speed of the transition.
The first task is to dispense with the static analysis: how big would the increase in power
demand be if all motor vehicles on the road everywhere in the world today were powered
by electric motors?
Currently, global power consumption is 24,000TWh (see Exhibit 411). The global auto
fleet is, we estimate, 1.1 billion vehicles. Global miles driven are 10,559 billion annually, or
16,894 billion km. If you assume that every car owner in the world wakes up tomorrow
and finds a Tesla Model 3 with a 60KWh battery in their driveway, power demand
would increase by 15%.
The math works as follows: most pure EVs today offer something in the range of 5km per
KWh, and therefore a 300km range. At that efficiency, something in the region of
3,400TWh of incremental electricity would be required globally to "power" the 100% EV

BERNSTEIN
auto fleet to drive 17 billion km each year. This represents a 14% increase in power
generation globally compared with 2015's output.
EXHIBIT 409: Global Power multiplier and power EXHIBIT 410: Global Power demand and power demand
consumption per capita, 1991-2015 growth, 1991-2015
Power Multiplier (LHS) Power Demand(LHS)
1.80 Power Consumption per Capita (RHS) 3,500 30,000 Power Demand Growth (RHS) 7.0%
6.5%
1.60 1.54 3,280 6.0%
3,000 24,098
25,000
1.40 5.0%
2,500
1.20 20,000 4.0%
2,255
TWh
2,000
KWH pa
1.00 3.0%
15,000 12,101
0.80 1,500 2.0%
0.60 10,000 1.0%

1,000 0.9%
0.40 0.35
0.0%
500 5,000
0.20 -1.0%
0.00 - 0 -2.0%
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Source: BP Energy Survey, World Bank, and Bernstein analysis. Source: BP Energy Survey, World Bank, and Bernstein analysis
There are a few simplifying assumptions here. First of all, the world is not going to wake
up to 1.1 billion EVs tomorrow. Second, the auto fleet is going to get larger over time and,
therefore, the total number of EVs that would have to be produced in order to achieve
100% penetration at the fleet level will be higher than 1.1 billion. Of course, this
assumption itself makes an assumption about the rate of auto sales in the world of
autonomous ride-sharing fleets 10-15 years from now.
There are also implicit assumptions here in relation to the density of charging
infrastructure required to service a fleet of this size. It is entirely possible that if it is
possible to charge your car wherever you park it, range anxiety will fall. That has
implications for the size of the battery required in each vehicle, and therefore vehicle
weight, and, in turn, fuel efficiency (km per KWh).
Regardless, the wider point is that the end of the gasoline-fueled internal combustion
engine automobile (diesel trucks excluded) would result in a drop in oil consumption of
roughly 25% globally and an increase in electricity consumption globally of ~15%.
We note that there is an obvious question to ask about why a technological innovation like
affordable electric vehicles (and the low-cost energy storage technology that would
enable widespread adoption of EVs) would not result in a similar replacement cycle for
diesel-power vehicles, or diesel generators in various industrial activities in developed
markets and for basic power supply in developing markets.

BERNSTEIN
These questions will be addressed in a later in this chapter.
EXHIBIT 411: Global power demand by source of electricity, 2007-15

Global Power Demand Model 2007 2008 2009 2010 2011 2012 2013 2014 2015
GDP Growth 4% 2% -2% 4% 3% 2% 2% 3% 2%
Power Multiplier 1.08x 1.07x 0.48x 1.49x 1.03x 1.04x 1.07x 0.91x 0.35x
Power Consumption per Capita (KWh pa) 3,002 3,026 2,966 3,122 3,185 3,231 3,275 3,315 3,280
Installed Capacity (MW)

Fossil Fuels 3,007,340 3,104,110 3,226,720 3,370,570 3,485,390 3,602,420 3,634,940 3,638,400 3,656,525
Hydroelectric 933,100 969,230 1,007,600 1,043,300 1,076,640 1,108,420 1,108,420 1,108,420 1,108,420
Nuclear 371,510 371,490 370,810 375,090 368,570 372,690 371,690 375,770 377,320
Solar 9,370 16,226 24,514 41,346 71,810 100,818 139,048 179,998 230,606
Wind 94,080 121,786 160,096 197,663 239,183 284,698 320,633 371,893 434,722
Other 58,900 65,720 71,060 77,650 89,080 97,200 98,450 100,150 101,658
Total Installed Capacity 4,474,300 4,648,562 4,860,800 5,105,619 5,330,673 5,566,247 5,673,181 5,774,631 5,909,251
Installed Capacity Growth (%)

Fossil Fuels 4.1% 3.2% 3.9% 4.5% 3.4% 3.4% 0.9% 0.1% 0.5%
Hydroelectric 3.6% 3.9% 4.0% 3.5% 3.2% 3.0% 0.0% 0.0% 0.0%
Nuclear 0.0% 0.0% -0.2% 1.2% -1.7% 1.1% -0.3% 1.1% 0.4%
Solar 40.5% 73.2% 51.1% 68.7% 73.7% 40.4% 37.9% 29.4% 28.1%
Wind 27.0% 29.4% 31.5% 23.5% 21.0% 19.0% 12.6% 16.0% 16.9%
Other 4.7% 11.6% 8.1% 9.3% 14.7% 9.1% 1.3% 1.7% 1.5%
Total 4.1% 3.9% 4.6% 5.0% 4.4% 4.4% 1.9% 1.8% 2.3%
Utilization Rates (%)

Fossil Fuels 52.8% 51.5% 48.9% 50.2% 50.3% 50.0% 49.8% 50.4% 50.0%
Hydroelectric 38.5% 39.3% 37.7% 38.6% 37.9% 38.6% 39.4% 40.2% 40.6%
Nuclear 84.4% 84.2% 83.4% 84.7% 81.5% 76.1% 76.5% 77.7% 78.1%
Solar 10.5% 10.9% 11.5% 11.6% 12.9% 13.5% 13.6% 13.7% 14.1%
Wind 23.2% 23.2% 22.5% 21.8% 22.8% 22.9% 24.3% 23.6% 23.8%
Other 59.1% 58.0% 56.6% 57.7% 54.8% 52.1% 53.2% 56.6% 58.6%
Power Generation (TWh)

Fossil Fuels 13,639 13,787 13,572 14,509 15,116 15,535 15,779 16,043 15,962
Hydroelectric 3,092 3,277 3,261 3,466 3,516 3,693 3,822 3,908 3,946
Nuclear 2,748 2,739 2,713 2,768 2,653 2,472 2,493 2,543 2,577
Solar 7 12 21 33 64 102 143 191 253
Wind 171 219 278 342 436 526 644 716 841
Other 298 316 339 376 400 425 456 492 518
Total Power Generation 19,955 20,350 20,184 21,494 22,185 22,753 23,336 23,894 24,098
Memo: Y/Y Growth 4.7% 2.0% -0.8% 6.5% 3.2% 2.6% 2.6% 2.4% 0.9%
Power Generation Growth

Fossil Fuels 6.6% 1.1% -1.6% 6.9% 4.2% 2.8% 1.6% 1.7% -0.5%
Hydroelectric 1.4% 6.0% -0.5% 6.3% 1.4% 5.0% 3.5% 2.3% 1.0%
Nuclear -2.1% -0.3% -1.0% 2.0% -4.1% -6.8% 0.8% 2.0% 1.3%
Solar 35.5% 65.4% 67.8% 62.6% 91.5% 59.7% 39.9% 33.8% 32.6%
Wind 28.4% 28.2% 26.7% 23.0% 27.6% 20.8% 22.3% 11.3% 17.4%
Other 7.9% 6.1% 7.2% 10.9% 6.4% 6.3% 7.2% 7.9% 5.3%
Total Power Generation Growth 4.7% 2.0% -0.8% 6.5% 3.2% 2.6% 2.6% 2.4% 0.9%
Source: BP Energy Survey, World Bank, and Bernstein analysis.
FALLING POWER DEMAND IN Our "rapid adoption" forecast suggests that by 2025, plug-in hybrids and battery electric
THE UNITED STATES, EUROPE, vehicles (the two categories that will plug into the grid) will represent ~18% of auto sales
AND JAPAN, AND HOW ELECTRIC
globally and over 20% in Europe, China, and North America. If you assume an 11-year life,
VEHICLE SALES MIGHT REVERSE
THESE TRENDS OVER THE NEXT the implication is that 45 million electric vehicles will be on the road, most of them in
DECADE developed markets and in China. Our "rapid adoption" scenario estimates that almost
43% of vehicles manufactured in 2025 will be pure EVs or plug-ins and that this number
grows to almost half in 2030. By 2035, 80% of all vehicles manufactured globally will be
pure electric vehicles or plug-ins, and the pure EVs continue to take share as the
percentage for pure EVs hits ~80% by 2050 (see Exhibit 412). BEVs and PHEVs hit 94%
of production in 2050.

BERNSTEIN
For the purposes of this exercise, we have limited ourselves to three cases, and even then
with four contributors to the forecast we have had to make compromises around
each case. There is certainly an argument that range anxiety (and therefore the need for
two power trains in a large percentage of electric vehicles for the next 20 years at least)
will dissipate as recharging infrastructure becomes universally available in most markets.
The simple comparison is: people got used to the risk of running out of gas almost
immediately when they first bought a Model T a century ago. Few early motorists hitched
their horse to the back of their Model T in 1917 for fear of getting stranded without gas or
transportation. Presumably no motorists were doing this by 1950. Our "rapid adoption"
scenario assumes that 14% of vehicle production in 2050 are PHEVs so the assumption
is that the 21st century motorist is far more risk averse than their great grandparents a
century earlier.
EXHIBIT 412: The rapid adoption scenario implies that the percentage for pure EVs hits ~80% of the fleet by 2050, globally
100%
BEV (PV) PHEV (PV)
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
2026E
2027E
2028E
2029E
2030E
2031E
2032E
2033E
2034E
2035E
2036E
2037E
2038E
2039E
2040E
2041E
2042E
2043E
2044E
2045E
2046E
2047E
2048E
2049E
2050E
Source: BP Survey, World Bank, and Bernstein estimates and analysis.
In any event, that is the "rapid adoption" scenario assumption we are using. A "Crazy
Uncle" scenario would have EVs at ~100% of the additions to the auto fleet by 2030, or
thereabouts. In short, the alternate, more extreme, argument is that new technologies
either work or they fail. If they work, the transition is extraordinarily fast.
Regardless, the "rapid adoption" scenario is sufficient to make the point about
incremental electricity demand. It is the only scenario that we develop in this chapter in
terms of the impact on electricity demand. The difference of opinion comes down entirely
to the slope of the adoption curve from 2025 to 2030. The point here is: the "rapid
adoption" scenario is as bad (roughly speaking) as it might get over the next 10 years.
In the United States, power consumption peaked in the middle of the last decade. We
expect that even under the scenario where no electric vehicles are added to the auto

BERNSTEIN
fleet globally power consumption in the United States and in all developed markets will
continue to decline. Adding the "rapid adoption" scenario in terms of EV additions to the
fleet in the United States, power consumption growth will become positive again in the
early 2020s and will restore power consumption in the country to its current level by the
late 2020s.
In the "rapid adoption" scenario, power consumption in 2050 is 11% greater than power
consumption today entirely because of the growth of the EV fleet and the fleet overall (see
Exhibit 413).
EXHIBIT 413: U.S. power demand: Falling power demand in the United States and how electric vehicles might reverse this
trend
Electricity Demand ex EV (TWh)

6,000
Electricity demand for EV (TWh)
5,000
4,000
3,000
2,000
1,000
0
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
2026E
2027E
2028E
2029E
2030E
2031E
2032E
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2034E
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2036E
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2050E
SLOWING POWER DEMAND Chinese power consumption growth is still positive and will continue to increase even
GROWTH IN THE DEVELOPING without electric vehicles for decades. The addition of electric vehicles to the fleet starts to
WORLD AND HOW ELECTRIC
accelerate Chinese power consumption growth from 2030. Between 2030 and 2050,
VEHICLE SALES MIGHT
ACCELERATE THESE TRENDS 80% of the incremental Chinese power consumption is as a result of the addition of
OVER THE NEXT DECADE electric vehicles to the fleet (see Exhibit 414).

BERNSTEIN
EXHIBIT 414: China power demand: Slowing power demand in China is reaccelerated, thanks to EVs
14,000
Electricity demand ex EV (TWh)
12,000 Electricity Demand for EV (TWh)
10,000
8,000
6,000
4,000
2,000
0
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
2026E
2027E
2028E
2029E
2030E
2031E
2032E
2033E
2034E
2035E
2036E
2037E
2038E
2039E
2040E
2041E
2042E
2043E
2044E
2045E
2046E
2047E
2048E
2049E
2050E
2015
Globally, we estimate that power consumption growth excluding the impact of electric
vehicles would peak in the late 2030s. With the addition of electric vehicles to the fleet,
the demand for electricity will increase until at least 2050 (see Exhibit 415).
EXHIBIT 415: Global electricity demand: EV-led demand for electricity to increase at least until 2050
60,000
Electricity Demand ex EV (TWh)
Electricity Demand for EV (TWh)

50,000
40,000
30,000
20,000
10,000
0
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
2026E
2027E
2028E
2029E
2030E
2031E
2032E
2033E
2034E
2035E
2036E
2037E
2038E
2039E
2040E
2041E
2042E
2043E
2044E
2045E
2046E
2047E
2048E
2049E
2050E

BERNSTEIN
The overarching conclusion in terms of incremental power demand globally, as a result of

the switch of the motor vehicle fleet to electricity, is underwhelming due to the timing
involved for EVs to reach critical mass in the auto fleet, and because of the fact that power
consumption in developed markets is already falling. Electric vehicles will serve merely to
soften the blow in terms of electricity demand. In summary, it is all happening too slowly to
have real effects on aggregate power demand.
EXHIBIT 416: BEV + PHEV sales
100
China Europe North America ROW
80
60
mn
40
20
0
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
Source: BP Survey, and Bernstein estimates (2016 and beyond) and analysis.
OTHER CONSIDERATIONS FOR There are several important caveats in any analysis of the implications of electric vehicles
POWER DEMAND IMPLICIT IN A on power consumption globally. All of these caveats reflect the dangers of changing just
TRANSITION GLOBALLY TO EVS
one variable in any analysis. Specifically, the above analysis assumes that only one thing
happens: electric vehicles slowly leach into the auto fleet. The alternative is that if the
technology around batteries improves to a level where EVs (BEVs and PHEVs) represent
24% of global auto sales in 2025, what are the implications across the energy complex,
not just for gasoline-powered motor vehicles?
Adoption could be faster

The first and obvious question is: if 25% of auto buyers are purchasing electric vehicles in
2025, why would anyone purchase an internal combustion engine in 2030 or 2035? The
implication of a quarter of the market switching to EVs in the next decade is that the
technology is superior. A superior technology will generally not share a market with an
inferior technology for three decades. The transition is painfully fast. It is for this reason
that no one owns (or at least buys) analog mobile phones, cathode ray tube televisions, or
cassette players any more. This is also the reason that you do not have a typewriter in your
office (see Exhibit 416).
The "Crazy Uncle" position on electric vehicles is that auto sales will either be close to
100% EV by 2030 or close to zero. New technologies succeed or they fail. Regardless, by

BERNSTEIN
2030, electric vehicles might be close to 100% of additions to the fleet but would still be
a small fraction of the total fleet. The impact on power demand globally would still be
close to a rounding error.
Still need renewables

As has been pointed out elsewhere, the incremental electric vehicle does not necessarily
improve air quality in large cities or reduce CO2 emissions globally. The question is: where
is that EV being purchased and what is the fuel source for the power station that serves
the incremental EV? If the incremental electric vehicle is being powered by electricity
from an old, inefficient, heavily polluting Chinese coal-fired power station, progress
against CO2 emissions is actually impaired by the transition to EVs.
Of course, no one is suggesting that the fleet conversion to EVs is going to be powered by
electricity from old, inefficient, heavily polluting Chinese coal-fired power stations.
Regardless of the aggregate global demand for electricity, the transition to renewables is
a necessary part of the roll-out of EVs globally.
Our conclusion that total power demand globally is unlikely to materially change over the
next two decades is not the same thing as saying that there is no role or demand for
renewables over the next two decades. Quite the opposite is true. As demand remains
stable, renewables will tend to replace existing coal-fired power stations globally. The
biggest problems with renewables to date have been cost and the fact that they are
intermittent sources of electricity supply. In any environment where electricity cannot be
stored, intermittency is fatal for any source of power supply no matter how cheap. Yet
electric vehicles are simply batteries on wheels. Said differently, electric vehicles and
renewable energy are perfect complements. As costs for renewables fall, the political "hit"
in most jurisdictions to regulators, policy makers, and politicians in mandating this
transition fall.
Distribution infrastructure
Similarly, the conclusion that the power generation capacity in aggregate does not need
to materially change over the next 10 years as EV adoption picks up speed is very
different from the conclusion about electricity distribution infrastructure in developed and
developing markets. In developed and most developing markets, 99% of the
infrastructure required to serve the rising EV fleet is already in place: the power
generation, transmission, and distribution infrastructure already exists. However, there is
a "last meter" task for distribution utilities building the charging units and stations in every
garage and parking space throughout their service territory.
We expect activity here to skyrocket over the next 10 years. In most jurisdictions in
developed markets, this expenditure can be included within the "rate base" from which
regulated utilities calculate their permitted returns. Said differently, once utilities gain
confidence that this fleet of EVs is going to materialize and that their regulators will
support the investment and permit the expenditure to be "rate-based," the power
companies will jump at the chance to build.

BERNSTEIN
More is more
The implicit assumption in all of this discussion is that power intensity in developed
markets will fall over time. Part of the reason that power consumption growth is falling in
developed markets is the fact that the energy efficiency requirements across the board
(CAFE standards, electricity rates in electrical appliances) are tightening. This, in turn, is a
response to concerns about CO2 emissions and climate change.
But consider a counter-factual: incremental electricity generation produced zero

incremental CO2 emissions and it is also extraordinarily cheap. In this circumstance,
desalinization systems in developing markets become a lot more affordable. Power
consumption could actually start rising again rapidly with negative externalities. This isn't
a 2020 or 2025 event. However, some caution is necessary when looking at our charts
(see Exhibit 413 to Exhibit 415) that extend to 2050 and assume falling power
consumption over time is a given. Falling CO2 emissions over time is a necessary
constraint to long-term thinking. Falling power consumption is not, once those two
dynamics are separated.
They're not coming back for 25%; they're coming back for everything
Finally, the above analysis calculates the implications if the gasoline-fueled auto fleet is
converted partly to electric vehicles by 2050. The 10-year impact is limited.
The obvious question is: if EV technology improves to the level where EVs are 80-90% of
auto sales by 2050, why are we limiting our analysis to the 25% of oil that goes into
gasoline-powered engines? Surely, with the implied continuing improvement in battery
technology over the next 35 years, we could eliminate the use of oil, gas, and coal in most
end markets (petrochemicals might be the one exception; diesel trucks and diesel
generation in non-grid connected locations are easy, and much larger targets).
That question just how big could renewables and energy storage get is the subject of
the next section.
RENEWABLE ENERGY WILL BE The controversies around renewable energy have changed in recent years. Until quite
BIG; BUT WHAT ARE THE LIMITS recently (2013-14), the entire proposition of broad-based adoption of renewable energy
AND WHEN?
was dismissed as simply being too impractical and too costly. Just two or three years ago,
the idea that renewables could compete with fossil fuels on a cost basis without subsidies
or the benefit of an (avoided) carbon tax was not viewed as credible.
Yet over the last few years, as the cost of solar and wind in the most favorable conditions
hit the mid-single-digit pennies per KWh (~4-6 US cents/KWh), assumptions about long-
term implications have changed, at least when it comes to cost.

BERNSTEIN
EXHIBIT 417: Solar levelized cost of energy in China versus alternate sources of electricity supply
8 7.50
Solar Installed Cost Equiv. (USD/W)
7
Solar installed cost required to reach parity vs.
6 other types of generation on an LCOE basis
(US$/KWh)
5
4 3.50
3 0.09 0.07 0.07 0.04 0.03 0.034
1.80
2
1.23 1.15 1.00 0.90 0.86
1 0.71 0.65
0.32 0.27 0.27
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 Solar Gas Wind Nuclear Coal Hydro
Solar 2016E
Source: BP Energy Survey, Bloomberg L.P., corporate reports, and Bernstein estimates and analysis.
We have been documenting the decline in solar costs in China since 2011. The
implication based on the cost trajectory is simple. Wind and solar are technologies that
improve over time with R&D and with costs falling with scale. Fossil fuels are extractive
industries where costs tend to rise over time. With wind and solar costs at (call it) U.S.
cents 4-5/KWh in the most favorable conditions, once a carbon tax (or a renewables
portfolio standard, or clean energy subsidies) is tacked on, there is no or little difference in
costs between fossil fuels and renewables even today.
These calculations are tremendously sensitive to local area meteorological conditions and
to the source (and cost) of natural gas supply. Nuclear is likely to be far more expensive in
developed markets than the reported costs in China. However, the broader point is that
the order of magnitude difference in cost per KWh from a decade ago has narrowed to a
few pennies in most markets.
When you add on the cost of electricity transmission and distribution and a margin for the
grid operator and the local distributor, the delta between renewables and fossil fuels as
sources of electricity is often not all that material in terms of delivered, retail price. Retail
prices globally are generally between US$0.15/KWh and US$0.35/KWh. A difference of
two cents between solar and gas in China or four cents between wind and coal is no
longer debilitating to the goal of "de-carbonization."
That sounds like good news. But the debate has moved on.

BERNSTEIN
EXHIBIT 418: Wind and solar share of the global energy EXHIBIT 419: Residential power prices today versus solar
market in 2005-15 plus energy storage (unsubsidized) in 2012-18E (US$/KWh)
20.0% 40% $0.60

Market share $7.40/W Solar Cost / KWh
18.0% Growth share 33.4% 35% $0.50 Storage Cost / KWh
$0.50
Residential Power Price (USD/KWh)

16.0% $0.45
30%
14.0% $0.41
$0.40
25%
Growth Share
Market Share
12.0% 0.27 $4.94/W
18.6% 0.23
10.0% 20% $0.30 0.22 $0.29 $3.18/W
14.2%
8.0% $0.23
15% 0.12
6.0% $0.20
10% 0.10
4.0%
1.6% 0.23 0.22
1.9% 5% $0.10 0.19
2.0% 1.4% 0.17
0.13
0.0% 0%
$-
2012 2013 2014 2015E 2016E 2017E 2018E
Source: BP survey, Bloomberg L.P., and Bernstein estimates and analysis. Source: Corporate reports, and Bernstein estimates and analysis.
LESS COSTLY, YES; BUT STILL The above analysis fails to tackle the cost of energy storage. When renewable energy was
IMPRACTICAL the immaterial contributor to the energy mix, the marginal supply of electricity from
incremental wind turbines or solar panels had an almost imperceptible impact on the
overall operation of the generation, transmission, and distribution infrastructure. At the
marginal, the intermittent nature of renewable energy is not relevant.
But that is no longer the scenario that regulators, policymakers, and utilities are trying to
address. In recent years, there have been instances in markets as diverse as Texas (United
States), the United Kingdom, Australia, and Germany where renewables have represented
the majority of or at least a large proportion of the total electricity supply.
Yes, we are referring to sunny Sunday afternoons in Germany and, particularly, windy
nights in Texas. However, as the installed base of renewables increases, the ability of wind
and solar generation to simply "tag along" mostly unnoticed by the existing infrastructure
largely diminishes. Even the most environmentally-focused regulator will surely start to
wonder as wind and solar take a greater and greater share of energy generation at certain
windows during the year: what do we do if, all of a sudden, the wind stops blowing?
The answer, at the moment, is fire up the gas-fired power stations.
If that is always the answer, then among other things CO2 emissions levels will fall as
coal-fired power stations are shut down in coming decades and wind and solar take a
great share of the energy mix. But that decline in C02 emissions will not be at the rate
which the United Nations Intergovernmental Panel on Climate Change believes is
necessary in order to prevent total CO2 emissions globally hitting 2,900 gigatons, the
level at which temperatures are likely to rise above 2 degrees centigrade.

BERNSTEIN
In short, there are a ton of assumptions in all aspects of this work. However, if we take the
2 degrees C as a hard ceiling, and assume that notwithstanding the clear, recent loss of
political support for environmental initiatives in the United States a global consensus
forms around cutting anthropomorphic CO2 emissions from fossil fuels to zero over the
next few decades, a more extreme solution is required than simply adding more wind and
solar generation capacity.
DEFINE "PRACTICAL" IN THE As we point out elsewhere in this chapter, the prospect of reducing CO2 emissions from
CONTEXT OF AN EXISTENTIAL fossil fuels to near zero in the next 20 or 30 years is daunting.
THREAT
Of course, the conversion of the auto fleet to electric vehicles would eliminate 25% of oil
consumption globally. We (or some of us) believe that with improvements in the
technology (lithium ion batteries in particular) getting internal combustion engines off
the road globally could be done by 2045 or 2050.
Essentially, if electric vehicles are superior to internal combustion engine vehicles within
10 years, demand for gasoline-fueled vehicles will fall to zero roughly five years after that.
New superior technologies do not share markets well with older, inferior technologies. In
that circumstance, we will simply see a generic substitution cycle within the existing fleet
in developed and most developing markets. Average vehicle life is ~11 years. Therefore,
this is a decade-and-a-half process. That is math, not technology or environmental
legislation at work.
If battery technology is advanced enough to remove gasoline from the passenger vehicle
fleet, it will presumably be advanced enough to remove diesel from the commercial fleet
and from industrial uses everywhere and residential uses in developing markets. Bunker
oil and heating oil will go the same way.
In terms of oil consumption, that leaves aviation (~6% of usage) and petrochemicals
(~15-20%). Substituting jet fuel is simply a function of energy density. Once the energy
density (i.e., weight) of batteries rises above the energy density of jet fuel (and, therefore,
below the weight of jet fuel on a million BTU basis), consumer demand not to be
transported at 600 miles an hour in a carbon fiber tube loaded down with highly
flammable liquid will presumably become quite high. Plus, batteries in planes will be
cheaper.
Petrochemicals are a knottier problem. However, eliminating the final few barrels of oil
consumption globally is not the most difficult question. The most difficult question is: how
to eliminate coal and gas from the power generation fleet globally?
China provides a good example. In China, power generation in 2015 was almost
6,000TWh, or roughly 25% of power generation globally. Of that, just over 70% comes
from coal and gas (see Exhibit 420). Over 60% of generation capacity in China is coal or
gas-fired (see Exhibit 421).

BERNSTEIN
EXHIBIT 420: China's power generation share in 2015 EXHIBIT 421: China's share of installed capacity in 2015
Solar
Wind Solar
Nuclear 2%
3% 2%
3%
Nuclear
2%
Wind
9%
Hydro
18%
Hydro
Gas 21%
2%
Coal
61%
Coal
73%
Gas
4%
Source: Haver, BP Energy Survey, Bernstein analysis Source: Haver, BP Energy Survey, Bernstein analysis
This presents two problems.
First, there is a massive construction task over the next two to three decades to replace
coal-fired power stations with renewables. This initiative would have to be replicated
globally. Of course, coal-fired power stations, by their very nature, depreciate and are
retired over time. Suggesting that they will be replaced with a new technology does not
seem particularly controversial. Given that the industry in China and the rest of the world
has 30 years to complete the replacement cycle and has even incentives to do so, the idea
that the fleet could be converted entirely by 2045 is not preposterous. The straight
substitution to a comparable LCOE source of power generation entails zero incremental
costs.
Second, the problem is more complex than simply capital allocation and construction.
Specifically, renewables are intermittent in nature and wind and solar generation
fluctuates during the year seasonally. Wind farms, therefore, operate at a lower utilization
than coal-fired power stations. There is a need for redundant capacity in various locations
within each market. This turns an engineering problem (how to store electricity) into a
statistics problem (what are the chances none of the wind farms are operating at any
given moment). In other words, you have to double or treble the levelized cost of energy
for wind or solar (see Exhibit 417). A massive "overbuild" of wind and solar capacity
along with a conversion of the auto fleet to electric is required, as well as utility-scale
storage.
To be clear, we do not believe that there is any chance even on a 30-year view that
seasonal power storage (charge the battery in July, consume the power in February) will
be economic. The working capital cost of that solution is prohibitive unless power is truly
too cheap to meter in 30 years' time.

BERNSTEIN
EXHIBIT 422: The latest technology from 1987Dynatex Mobile Phone, Microsoft, Toyota MR2, Boeing 747, and the Space
Shuttle; more importantly, what's not pictured are the Internet, Antiretroviral Treatment, AR, VR, ADAS, and Automation
Source: Wikimedia commons and Twitter.
The solution has to be redundant wind and solar capacity, regional transmission to bring
wind power in a China context from Mongolia to the east coast of China, and a
tremendous amount of storage in the motor vehicle fleet and in the utility- and domestic-
scale energy storage. Dismissing the possibility that this can occur out of hand seems as
foolhard as stating categorically that it will. Contrasting the technology that existed 30
years ago with what exists today in the same category is fun (Dynatex Mobile Phone,
Microsoft, Toyota MR2, Boeing 747, and the Space Shuttle (see Exhibit 422). But what is
more important is the technology that exists today that literally had no analogy in 1987:
the Internet, antiretroviral treatment, AR, VR, ADAS, and automation.
The difference between 1987 and 2017, in terms of personal computing and mobility,
and 2017 and 2047, when it comes to the future of energy, is that the stakes today are far
higher. No one was suggesting in 1987 that the ability to fit the computing power of a PC
(or a pallet load of PCs) into your pocket represented the solution to an existential threat
to the species. Dismissing any outcome in terms of the future of energy and the
conversion of energy into a technology over the next decade as either "impractical" or
"too costly" seems to us to fail to appreciate the extent of progress over the last five years
in both energy storage and renewables.
The solution we are outlining here is not science fiction. All of the required technologies
exist today. They are simply costly at present, given the state of the relevant technology
today. However, the lesson we learn from the renewable energy and energy storage
sector over the last 10 years is that, if you dont like the current costjust wait.

BERNSTEIN
THE OUTLOOK FOR ENERGY
FIVE KEY TRENDS TO DECIDE What is the future of energy? In many ways, this boils down to two questions. First, the
THE FUTURE OF ENERGY outlook for aggregate energy consumption will it be strong or weak? Second, how will
the energy mix change over time? In forecasting the future of energy, we see five key
trends that have emerged, which we expect will decide the future. The first trend is the
slowdown in the growth rate of energy consumption. While China has turbo-charged
global energy consumption over the past two decades, this growth is coming to an end.
While India and Africa have yet to industrialize, it is doubtful if we will see a repeat of the
surge in energy consumption that took place in the boom years of the 2000s. The second
trend is the dramatic fall in renewable energy costs, which has enabled significant
expansion of solar and wind within the energy mix and which are now increasingly
competitive with other sources of energy. While there are questions on how quickly and to
what level of the energy mix solar and wind can reach (partly related to energy storage
technology), there is no question that renewables have a long way to go. The third trend,
or rather event, is the Paris Agreement. While the Trump Presidency throws into doubt the
commitment of the United States to carbon emission reduction plans, the Paris
Agreement will be hard to undo, in our view. Going forward, the shift to a lower carbon
energy mix seems inevitable. The fourth trend is the surge in interest in EVs. While EVs
have been around for a long time, a decline in battery costs as a result of improvements in
energy-storage technology and greater interest in the environment have increased
interest in EVs among consumers and auto manufacturers. Given that transport is one of
the largest segments of energy demand, the electrification of transport would
fundamentally change the energy mix, slowing oil but growing electricity demand. The
final trend is the shift toward increased fuel efficiency through technology and greener
policies. In everything, from LEDs to combustion engines, the march of energy efficiency
is relentless and shows more signs of increasing rather than slowing.
ENERGY DEMAND GROWTH Over the last 200 years, energy demand growth has increased from 20 to 600 quadrillion
BTU, or 13 trillion tons of oil equivalent. Without this growth in energy supply, modern
civilization (heating, lighting, and mobility) would not have been possible. Rapid growth in
energy supply was led by fossil fuels. Indeed, without fossil fuels, the increase in human
population from 1 billion to 7.5 billion would not have been possible. Looking back at the
past 100 years, growth in energy demand has gone in lockstep with global economic
growth (see Exhibit 423).

BERNSTEIN
EXHIBIT 423: Growth in global population and energy demand
700 12000
600 10000
Population Million
500
8000
400
6000
300
4000
200
100 2000
0 0
1820 1870 1920 1970 2020 2070
World Energy Demand Population
Source: BP Statistical Review, IEA, World Bank, IMF estimates (2016 and beyond), Smil (1994), Maddison (2007), and Bernstein analysis.
However, energy demand growth is now showing signs of slowing. In 2015, energy
demand increased only 1% year-over-year (see Exhibit 424). Global energy consumption
per capita is lower today than it was three years ago. While there have been periods of
weak energy demand growth previously such as the early 1980s, early 1990s, or the
recent financial crisis these were periods of economic contraction. What makes the
recent slowdown in energy consumption unusual is that global GDP growth is still above
3.1%, which is only 20% below the long-term average of 3.8%. Part of the reason for the
slowdown is China, as it reorients its economy away from energy-intensive growth. But
there is a lot more to it than this as we will explain here.
EXHIBIT 424: Global energy demand growth slowed to 1% in 2015; is slow growth the shape of things to come?
6%
Primary Energy Demand Growth
5%
4%
3%
2%
1%
0%
-1%
-2%
Source: BP Statistical Review, and Bernstein estimates and analysis.
Another surprise has been that the slowdown in energy consumption has taken place
amid a collapse in energy prices. Lower energy prices should be positive for demand,
although perhaps not for emerging markets, which have been battered by the fall in
commodity prices. While there has been a general trend of declining energy consumption
growth over the past 60 years, there has also been an inverse relationship between
energy demand growth and energy costs. Higher prices mean lower growth and vice

BERNSTEIN
versa demand after all does have elasticity to costs. Back in the 1970s, when the cost
of global energy consumption reached 10% of global GDP, global energy demand growth
was hammered. Over the past two years, primary energy costs have fallen from 6% of
world GDP to 3% of GDP (see Exhibit 425). This should create a demand response, but
whether there is a delayed response remains to be seen. So while low energy prices
should be boosting demand, there is clearly something holding this back.
EXHIBIT 425: Primary energy costs have declined to 3% of GDP, but energy demand has not responded to this
12% 6%
Global Primary Enegy Costs as
Energy Demand Growth

10% 5%
4%
8% 3%
% of Global GDP
6% 2%
4% 1%
0%
2% -1%
0% -2%
Energy As % of GDP Energy Demand Growth
Source: IMF, BP Statistical Review, Bloomberg L.P., and Bernstein estimates and analysis.
Another part of the reason for the slowdown in energy consumption is the secular decline
in energy intensity. Primary energy intensity (energy consumption per unit of GDP) tends
to decline as countries become wealthier and shift from industrial-led growth to less
energy-intensive consumer-led growth. While developed economies have been in secular
decline for decades (in terms of energy intensity), emerging market economies are
catching up quickly (see Exhibit 426). Over the past 10 years in particular, the decline in
energy intensity in China (which is the largest global energy consumer by a wide margin)
has been intense. As China undergoes a profound shift from industrial-led to consumer-
led growth, it would seem that energy intensity would fall further.

BERNSTEIN
EXHIBIT 426: Energy intensity is declining across all major economies

Total Non-OECD China
60
India FSU
Africa Total OECD
Energy Intensity, MMbtu / 2005 US$'000
US Europe
50 Australia Japan
Korea Canada
Brazil Germany
France UK
40
Spain Italy
Indonesia Turkey
Netherlands Chile
30 Greece Czech Rep
Poland Taiwan
Malaysia Argentina
Non-OECD Europe Belgium
20
10
0
200 2000 20000
Log (Real GDP per Capita, 2005 US$/person)
Source: BP Statistical Review, World Bank, and Bernstein estimates and analysis.
The trend of declining global energy intensity is not a new one. During the early part of the
Industrial Revolution, the energy intensity of the global economy was around 30 million
BTU per US$1,000 of GDP. Early steam engines were incredibly inefficient. Since the
mid-1850s however, the energy intensity of the global economy has been declining (see
Exhibit 427). By 1980, the energy intensity of the global economy was roughly 50% of
that during the early phase of the Industrial Revolution. Today, the energy intensity of the
global economy has halved again and stands at 8.5 million BTU per US$1,000 of GDP, or
roughly 30% of the early industrial age. The secular decline in energy intensity of the
global economy has been well entrenched for over 50 years, and we expect the trend to
continue.
EXHIBIT 427: Energy intensity of the global economy has been falling since the middle of the Industrial Revolution; we
expect this to continue
35
30
MMbtu/$000 GDP
Energy Intensity,
High energyintensity
25
duringearlyindustrial EnergyIntensiy plateau's
EnergyIntensiy declines
20 revoluluton betwenWW1andWWII
consistenlyfrom1970's
Energyintensity
15 declinesfrom
midlate1800's
10
5 Energyintensity 2015
c.50%of50yearsago
0
1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
Source: BP Statistical Review, IEA, World Bank, IMF estimates (2016 and beyond), Smil (1994), Maddison (2007), and Bernstein analysis.
In some ways, slower energy demand growth should not be a surprise. Indeed, there are a
number of factors that are driving the secular decline in growth:

BERNSTEIN
The first and most obvious is the slowing of world population growth, and as a result
global economic growth. While global population growth averaged 2% per annum in the
1950s, it has slowed to 1.2% per annum currently. By 2050, global population growth is
likely to slow down to 0.5% per annum and reach 0.1% per annum by the end of the
century as the population peaks. As a result, global economic growth is likely to slow
down from around 3% per annum today to less than 2% per annum by the end of the
century. This will inevitably slow down energy demand growth regardless of the changes
to the energy intensity of the world economy (see Exhibit 428).
EXHIBIT 428: Both the world's population and economic EXHIBIT 429: Energy intensity is improving at around 2.5%
growth are expected to slow per year and will slow demand
7% 1.0%
6%
2%
0.0%
5%
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
4%
-1.0%
3% 1%
2% -2.0%
1%
-3.0%
0% 0%
1951
1957
1963
1969
1975
1981
1987
1993
1999
2005
2011
2017
2023
2029
2035
2041
2047
2053
2059
2065
2071
2077
2083
2089
2095
-4.0%
GDP Growth, LHS Population Growth, RHS
Change in Energy Intensity
Source: IMF, UN, and Bernstein estimates and analysis. Source: IMF, BP Statistical Review, Smil (1994), Maddison (2007), and
Bernstein estimates and analysis.
The second factor is the shift from industrial-led growth to services-led growth, which is
by nature, less energy intensive. As emerging markets become wealthier, it is inevitable
that they will shift their focus of economic activity toward less energy-intensive services-
led growth (like the West). This will obviously lower the energy intensity of economic
growth, which is clearly playing out in countries like China today (see Exhibit 429).
The third factor is an improvement in technology. Better technology is leading to a step

change in energy efficiency, which, in turn, is being driven not only by a desire to reduce
costs, but also to reduce the carbon intensity of the economy. Transport, buildings,
industry, and appliances are all being targeted by governments around the world for
energy-efficiency savings. For example, LED lights use 75% less energy than
incandescent lighting. In the United States alone, LED lighting could reduce energy
consumption by 348TWh (8% of current electricity demand). In transport, there are
specific government targets across all major countries to improve fuel efficiency in
passenger vehicles, freight transport, shipping, and air travel. Over the next 15 years, we
expect vehicle fuel efficiency to improve by a 2-3% CAGR. This will act as a further drag
on energy consumption growth (see Exhibit 430).

BERNSTEIN
EXHIBIT 430: Decline in oil intensity will be larger than the improvement in fuel efficiency
1.0
Relative to 2015 levels, x
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
Oil Intensity Motor Vehicles Heavy-Duty Trucks Aircraft Ships Petrochemicals
2025 2030 2040
Source: Bernstein estimates (2025 and beyond) and analysis.
The fourth factor is the peak in travel. Around 40% of global energy is consumed in
transport. As many readers are aware, travel speeds have not really improved over the
past 20 years. Since the Industrial Revolution, the average travel distance in the United
Kingdom has increased by 7,000 miles as we have shifted from the horse and cart to
automobiles and jet aircraft. This has resulted in a large increase in energy consumption.
However, in the West, there are signs that mobility has peaked as a result of the peak in
transport speeds along highways and in major cities. Given that there are only so many
hours in the day available for travel, as transport speeds peak, distance traveled has also
peaked. Unless we can find a way to travel faster, per capita consumption of energy on
transport demand cannot grow further in developed markets. While there is scope to
increase travel distances in emerging markets as the car becomes more affordable to the
masses, heavy congestion in major cities could become a limiting factor.
Future energy demand growth depends on two things: economic growth and the energy
intensity of economic growth. For energy demand to grow, annual economic growth has
to exceed the annual decline in energy intensity. However, these are moving in opposite
directions. Over the past 50 years, the energy intensity of the world economy has declined
by an average of 1.2% each year. The rate of decline is increasing however, given some of
the changes we described earlier (population growth, technology, and shift to services).
Over the past five years, energy intensity has been declining at closer to 2% per annum,
although the trend has been improving. The key point is that when energy intensity
declines exceed global GDP growth, demand will peak.
Based on most long-term estimates, global growth is likely to remain above 2.5% per
annum through to 2050. However, beyond this point, given the decline in population
growth, we would expect global growth to fall below this. Assuming that energy intensity
of the global economy continues to improve at around 2% CAGR (the current rate of
improvement), then energy demand will peak around the end of the century at around
1,000 quadrillion BTU. On the other hand, if the decline in energy intensity increases to a
2.5% CAGR, then energy demand could peak around 2060. Alternatively, if the reduction
in energy intensity declines to around 1.5% CAGR, then energy demand would continue

BERNSTEIN
to grow toward the end of the decade. These are clearly wide-ranging estimates (see
Exhibit 431).
EXHIBIT 431: The coming peak in global energy demand: Peak coal in 2020, peak oil in 2030-25, and peak energy in 2050-60
1400
PeakOil
203035
1200 1.5%
Efficiency
PeakCoal
1000 202025
2.0%
800 Efficiency
600
2.5%
Efficiency
400 2015
200
0
1820 1850 1880 1910 1940 1970 2000 2030 2060 2090
1.5% Energy Eff. 2.0% Energy Eff. 2.5% Energy Eff.
With an increase in energy demand, per capita energy consumption has also increased
gradually (see Exhibit 432). The late 1800s, the boom years following World War II, and
more recently the emergence of China in the 2000s have all seen energy demand
increase to 70 trillion BTU per capita annually. The IEA projects that energy consumption
per capita will remain flat for the next 25 years, which is consistent with our more bearish
energy demand outlook of a 2.5% CAGR decline in energy intensity. If this is correct, it
would imply that peak energy per capita has already arrived. While this seems unlikely,
environmental concerns are likely to mean that there is more pressure to improve energy
efficiency going forward.

BERNSTEIN
EXHIBIT 432: Global energy consumption per capita has peaked; we expect to see per capita energy consumption decline
post 2040
12,000 140
120
Trillion btu per Capita per Year

10,000
Energy demand
100
Population, Millions
plateausas
8,000 energypricesrise
80
6,000
60
4,000 Steady increaseinpercapita Emergence
inglobalenergyconsumption Rapidrise 40
ofChina
inpercapita increases
2,000 consumption percapita 20
postWWII consumption
onrapid growth
0 0
1820 1870 1920 1970 2020 2070
Population 1.5% Energy Eff. 2.5% Energy Eff. 2% Energy Eff.
HOW THE ENERGY MIX WILL The future of energy not only depends on demand, but also on changes in the mix. Energy
CHANGE consumption is largely driven by industry (power and feedstock), transport, and buildings
(heating and cooling). Transport accounts for around 30% of primary energy demand.
Unlike other segments where electricity is a major supplier, the transport sector draws its
energy almost exclusively from fossil fuels, the most important of which is oil (see
Exhibit 433).
EXHIBIT 433: Global energy system in 2010
Source: IEA World Energy Outlook.

BERNSTEIN
Within the global energy mix, there are three major controversies in terms of how the
energy mix will change going forward. First, how quickly and to what level will solar and
wind grow within the energy mix, given the decline in costs? Second, how quickly will coal
be pushed out of the mix, given stricter carbon emission controls? Third, how quickly will
electric vehicles grow within the global transport fleet?
Over the past 200 years, the global energy mix has evolved considerably and become far
more diverse. In the early 1800s, at the start of the Industrial revolution, the energy mix
was dominated by biomass. Coal become the most important fuel of the 19th century after
the start of the Industrial Revolution and peaked in 1900 at around 50% of the energy
mix. Oil became the most important fuel of the 20th century following the discoveries in
North America and the advent of the motor vehicle, reaching close to 45% of the energy
mix in the 1970s (see Exhibit 434 and Exhibit 435).
EXHIBIT 434: Fossil fuels have underpinned growth in EXHIBIT 435: How long will the transition to clean energy
energy demand and global economic growth over the 20th take? Oil took 30 years and natural gas took 68 years to go
century; currently, fossil fuels (coal, oil, and gas) account from 1% to 10%; solar and wind reached 1% of the energy
for 80% of global energy demand mix in 2012
600 100%
90%
500
80%
70%
400
60%
300 50%
40%
200
30%
20%
100
10%
0
0%
Biomass Coal Crude Oil Natural Gas

Biomass Coal Crude Oil Natural Gas
Hydro Nuclear Solar, Wind
Hydro Nuclear Solar, Wind
analysis. analysis.
Natural gas has become increasingly important, and now accounts for 24% of the energy
mix. While gas has yet to reach the same levels as coal or oil, there still appears to be
plenty of scope for gas to grow further within the mix. Despite the longevity of
hydropower, it has never reached more than 10% of the energy mix. Similarly, nuclear
power reached a maximum of only 7% and has been significantly impaired by the
Fukushima nuclear disaster and the global retreat from nuclear power.

BERNSTEIN
Changes within the energy mix do not happen quickly. Today, fossil fuels (coal, oil, and
gas) account for around 80% of energy consumption, while renewables (solar and wind)
account for 1%. It took over 40 years for coal to increase its share from 1% to 10% of the
energy mix. Oil took slightly longer, close to 50 years, to go from 1% to 10%. Natural gas
took over 60 years to go from 1% to 10% of the mix. Hydro and nuclear passed 1%
decades ago but both have failed to reach 10% of the energy mix. While solar and wind
have the potential for significant growth ahead, the transition will take time.
For every new fuel that has emerged, it has taken longer to increase its share in the
energy mix, and the ultimate level of penetration in the mix has been lower. This is simply
because it takes longer to replace incumbent fuels as the overall energy market grows in
size. In 2012, solar and wind reached 1% of the energy mix. While they are currently
increasing their share of the energy mix by 20% annually, they are starting from a low
base. Based on the experience from other fuels, it could take 40 years for the renewables
to reach 10% of the energy mix. While there is much optimism that the transition will go
more quickly, the reality is that it will be difficult to happen overnight (see Exhibit 436).
EXHIBIT 436: How long will it take solar and wind to penetrate the energy mix?
Hydro Hydroreached7%Max
Nuclear Nuclear reached7%Max
Gas 25%andrising2015
Oil 45% Max1970s

Coal 52% Max1900s
Solar/Wind Solar/Windreached1%ofenergymixin2012
0 10 20 30 40 50 60 70 80 90 100
Years to Reach Penetration in Energy Mix
1% to 5% 5% to 10%
Source: BP Statistical Review, Smil (1994), Maddison (2007), and Bernstein estimates and analysis.
Moreover, solar and wind are interruptible sources of energy. Until energy storage
solutions (batteries) are available at a reasonable cost, there is a natural limit to how much
share renewables can take within the mix. For example, while solar energy and wind could
provide 100% of the power on a summer's day in Northern Europe, what happens in
January or February, when there is little sunlight? Unless batteries become affordable so
that seasonal storage of electricity becomes viable (we doubt this in the near future), there
will be a limit to what extent renewables can penetrate without causing massive
overcapacity. Given that gas is the cleanest fossil fuel and highly flexible, it makes sense
that natural gas and gas-fired power could be the obvious source of energy to
complement growth in renewables.
One of the biggest impacts on future energy consumption and the energy mix is the Paris
Agreement reached at the end of 2015. According to the IEA, allowable levels of
cumulative carbon emissions between 2011 and 2100 are 1,300GT. To reach a limit of
1.5 degrees C (which is the stated aim of the Paris Agreement), 550GT of cumulative CO2

BERNSTEIN
are allowed. For a 3 degrees C outcome, 2,800GT of CO2 would be allowable, although
this is far more than that allowed by the Paris Agreements (see Exhibit 437).
EXHIBIT 437: Cumulative CO2 emissions allowable under IPCC estimates

Cumulative CO2 emissions from 1870 in GT CO2
Net Warming <1.5 Deg C <2 Deg C <3 Deg C
Fraction of
simulations 66% 50% 33% 66% 50% 33% 66% 50% 33%
meeting goal
Complex models,
RCP scenarios 2,250 2,250 2,500 2,900 3,000 3,300 4,200 4,500 4,850
only
Simple model, 2,300 to 2,400 to 2,550 to 2,900 to 2,950 to 4,150 to 5,250 to
No Data n/a
WGIII scenarios 2,350 2,950 3,150 3,200 3,800 5,750 6,000
Cumulative CO2 emissions from 2011 in GT CO2
Complex models,
RCP scenarios 400 550 850 1,000 1,300 1,500 2,400 2,800 3,250
only
Simple model, 600 to 750 to 1,150 to 1,150 to 2,350 to 3,500 to
No Data 550 to 600 n/a
WGIII scenarios 1,150 1,400 1,400 2,050 4,000 4,250
Source: IPCC, and Bernstein estimates and analysis.
Given that annual CO2 emissions are around 50GT, we have already used up 200GT of
the remaining budget over the past four years. Taking into account that approximately
78% of emissions come from fossil fuels, allowable emissions from 2016 onward are
around 858GT for the "2 degrees C" case and 2,028GT for the "3 degrees C" case. For
the "1.5 degrees C" case, unless we can eliminate fossil fuels in the next 10 years, this
seems a highly unlikely goal (see Exhibit 438).
EXHIBIT 438: Remaining CO2 emissions allowable for fossil fuels production and combustion from 2014
Warming Scenario
Future CO2-eq Emissions Avaliable 1.5 Deg C 2 Deg C 3 Deg C
1
CO2-eq Emissions From 2011 550 1,300 2,800
2
Emissions From 2011-14 (Inc) 200 200 200
CO2-eq Emissions From 2015 350 1,100 2,600
CO2-eq Emissions From 2015 for Fossil Fuels3 273 858 2,028
Note 1: From IPCC 2014 Summary Report.
Note 2: Assume 50GT CO2-eq per year for 2011-14.
Note 3: Assume 78% of CO2-eq emissions from fossil fuels.
Source: IPCC, and Bernstein estimates and analysis.
To limit global warming within the Paris Agreement targets, energy consumption needs to
peak as early as possible, and the shift to lower carbon fuels needs to happen now. Exhibit
439 and Exhibit 440 show what would be needed to limit future total carbon emissions to
around 2,000GT (2015-2100) to keep global temperatures from warming by no more
than 3 degrees C. In this case, energy demand peaks in 2050-60 (consistent with the
peak in per capita energy consumption and a 2.5% improvement in energy intensity of the
economy).; coal demand declines immediately, while oil demand peaks in 2030; solar and
wind increase from 1% of the energy mix to 10% over the next 20 years and end up at
65% of the energy mix by 2100; fossil fuels account for less than 20% by 2100; natural
gas increases to about 35% of the mix and becomes the most important contributor to

BERNSTEIN
the energy mix by 2050, before declining toward the end of the century. In this respect,
gas is the bridging fuel to the future, which many oil and gas companies are betting on.
EXHIBIT 439: Energy supply to limit carbon emissions to EXHIBIT 440: Energy mix to limit carbon emissions to
2,100GT (2015-20), consistent with global warming of <3 2,100GT (2015-20), consistent with global warming of <3
degrees C degrees C
20,000 100%
18,000 90%
16,000 80%
14,000 70%
12,000 60%
MOTE
10,000 50%
8,000 40%
6,000 30%
4,000 20%
2,000 10%
0 0%
1965
1972
1979
1986
1993
2000
2007
2014
2021
2028
2035
2042
2049
2056
2063
2070
2077
2084
2091
2098
1965
1973
1981
1989
1997
2005
2013
2021
2029
2037
2045
2053
2061
2069
2077
2085
2093
Coal Oil Gas Nuclear Hydro Solar/Wind Coal Oil Gas Nuclear Hydro Solar/Wind
estimates (2016 and beyond) and analysis. estimates (2016 and beyond) and analysis.
If the world is to limit global warming within 2 degrees C, then more aggressive action
needs to be taken. The only way to keep within the "2 degrees C" limit is to see an
immediate decline in all fossil fuels, including natural gas. To reach the carbon emissions
target, solar and wind would have to reach 50% of the energy mix by 2030 (up from 1%
today) and renewables 70% by 2050 (see Exhibit 441 and Exhibit 442). This is probably
not realistic, but it shows what needs to be done, if governments are to deliver on the
Paris Agreement.

BERNSTEIN
EXHIBIT 441: Energy supply to limit carbon emissions to EXHIBIT 442: Energy mix to limit carbon emissions to 850GT
850GT (2015-20), consistent with global warming of <2 (2015-20), consistent with global warming of <8 degrees C
degrees C
20,000 100%
18,000 90%
16,000 80%
14,000 70%
12,000 60%
MTOE
10,000 50%
8,000 40%
6,000 30%
4,000 20%
2,000 10%
0 0%
1965
1972
1979
1986
1993
2000
2007
2014
2021
2028
2035
2042
2049
2056
2063
2070
2077
2084
2091
2098
1965
1973
1981
1989
1997
2005
2013
2021
2029
2037
2045
2053
2061
2069
2077
2085
2093
Coal Oil Gas Nuclear Hydro Solar/Wind Coal Oil Gas Nuclear Hydro Solar/Wind
estimates (2016 and beyond) and analysis. estimates (2016 and beyond) and analysis.
This conclusion is similar to that of the IEA. In IEA's new policies scenario for future energy
demand, both natural gas and renewable energy grow strongly, while oil and coal peak in
around 2030. In the 450 scenario (which is required to keep global warming within 2
degrees C), gas continues to grow but becomes relatively flat by 2030, while renewables
grow to 40% of the mix by then (see Exhibit 443 and Exhibit 444). The key conclusion is
that the world should limit global warming to 2 degrees C or less, and push fossil fuels,
including natural gas, lower in the energy mix. But with practical limitations on how quickly
renewables can grow within the energy mix over the next 20 years, the next best solution
is to displace coal with natural gas and build a low carbon bridge to the future where
renewables can reach higher penetrations.

BERNSTEIN
EXHIBIT 443: New policies world energy mix under the IEA EXHIBIT 444: IEA's 450 scenario: World energy mix (required
base case to limit global warming to 2 degrees C)
5000 6500
6000
4500
5500
4000 5000
4500
MTOE
MTOE
3500
4000
3000 3500
3000
2500
2500
2000 2000
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
Coal Oil Gas Non-Fossil Fuel Coal Oil Gas Non-Fossil Fuel
Source: IEA, and Bernstein estimates (2016 and beyond) and analysis. Source: IEA, and Bernstein estimates (2016 and beyond) and analysis.
INDUSTRY IMPLICATIONS
INDUSTRY IMPLICATIONS First, global energy demand growth is slowing. While it is impossible to predict whether
energy demand will peak this century or not is too long term to worry about, but future
growth in energy is likely to be slower than it has been in the past, given demographic
shifts, technology, and the shift toward a services-led economy. While unlimited free
power from solar and wind energy and cheap batteries is a utopian dream and could
completely change how we think about power, this is not the world we live in today.
Second, the shift toward natural gas and renewables will continue to be unrelenting.
While coal is enjoying a mini-renaissance, the outlook remains profoundly negative. Oil
has longer to go, but it too will peak within a couple of decades. While the cost of wind and
solar energy is also dropping quickly, their growth in the energy mix looks assured.
Interruptibility remains their Achilles heel. As battery costs continue to fall, we expect
renewables to play a much larger role in the energy mix than they do today, but this
transition will take time as experience has shown from other fuels, and their ultimate
penetration in the mix may be limited unless seasonal energy storage can be made to
work economically. Natural gas is the more controversial fuel. From a practical point of
view, natural gas makes sense as a bridging fuel, but only if it can compete with coal and
renewables. If policy makers are serious about lowering emissions as quickly as possible,
then gas may not be the solution, but then again it is hard to see what the alternative is.
Third, slowing energy demand and peak energy demand will be deflationary for energy
prices, but that could, in turn, stimulate higher levels of demand. Solar, wind, and energy
storage costs are falling. The world has more than enough fossil fuel reserves than it will
ever need relative to the remaining carbon budget. While peak energy demand may seem
a long way off, it is worth remembering that coal reserves currently stand at over 100

BERNSTEIN
years, while oil and gas reserves are over 50 years. The world in a nutshell is not short of
energy.
EXHIBIT 445: Remaining reserves of CO2 from combustion EXHIBIT 446: this increases to 80% if 3 degrees C limit is
of fossil fuels relative to remaining carbon emissions; only applied
one-third of remaining reserves are burnable
3,000 2512GTCO2 3,000 2512GTCO2

RemainingProven RemainingProven
ReservesEnd2014 ReservesEnd2014
2,500 2,500
2,000 2,000
GT CO2-eq
GT CO2-eq
1,556 1,556
1,500 1,500
2,028
1,000 1,000 3 Deg C Limit
2015+
616 858 616
500 2 Deg C Limit 500
342 2015+ 342
0 0
Remaining Reserves Remaining Carbon Remaining Reserves Remaining Carbon
Budget Budget
Gas Oil Coal Gas Oil Coal
Source: BP Statistical Review, IPCC, and Bernstein estimates and analysis. Source: BP Statistical Review, IPCC, and Bernstein estimates and analysis.
The final conclusion is that the transition to a lower cost, cleaner energy world will not be
linear. Growth will continue to be lumpy depending on the rise of China and India. Many
industries and energy supplying countries will be disrupted and there could be volatility.
While the outlook may seem deflationary today, there will be many more commodity
cycles to invest through between now and peak energy.
INVESTOR IMPLICATIONS Coal demand has peaked, or is close to peak levels. Despite the renaissance for coal
stocks in 2016 on a recovery in coal pricing, the outlook for the commodity remains
negative. Coal must be displaced from the energy mix if Paris Agreement targets are to be
met. We see no positive outcome for the industry, unless carbon capture technology is
developed. At this stage, this looks like a remote possibility. We would avoid coal.
Oil demand has yet to peak and we see another 15 years of demand growth, with a peak
in the early to mid-2030s. While EVs are a threat, there remains considerable uncertainty
around adoption, and over the next 10 years the impact is likely to be minimal. Moreover,
even if gasoline demand peaks in the mid-2020s on fuel-efficiency measures, oil demand
for petrochemicals and jet travel will continue to drive overall growth. Over the next five
years, we expect oil prices to increase, which will be good for oil stocks that have low
costs and organic growth. Longer term, peak oil demand will be a negative for OPEC
producers with long reserves life and owners of marginal assets with long reserves life
such as oil sands. One risk to oil demand is that the long reserves life owners seeking to
accelerate production to avoid the risk of getting stranded. While this is a risk, we have yet
to see this behavior.

BERNSTEIN
The growth outlook for natural gas is positive over the next 30 years, with demand likely to
double. While gas cannot be the long-term solution (given carbon emissions), it can play a
bridging role to a low carbon future. The biggest risks to gas are battery technology
improving to a point where renewables can become reliable sources of energy, or
countries ignoring the Paris Agreement and, therefore, coal not being displaced. Shale
has transformed the supply outlook in North America and potentially for LNG, which could
lead to structurally low prices, and over time, a break with the oil linkage. Low-cost gas
supplies, downstream gas volume plays, and LNG infrastructure companies (regas
terminals and shipping) could be winners.
Nuclear energy has had a miserable 40 years. Three Mile Island followed by Chernobyl
and Fukushima have cemented the idea of nuclear as a dangerous or at least exotic
technology in the minds of consumers and regulators. The cost overruns at Hinkley Point
have scarred U.K. consumers and regulators for very different reasons. China is at present
continuing to build out a fleet of nuclear power stations, and installed capacity is still
intended to grow from less than 20GW today to over 100GW in 10 years' time. That will
turn nuclear in China from a negligible part of the energy mix to a low-single-digit
percentage contributor, and that is in the most robust market for nuclear globally.
Regardless, the window for nuclear to be considered a viable, stand-alone alternative to
fossil fuels has passed.
Solar and wind are technologies where costs continue to fall and energy conversion
efficiencies continue to increase. The problem with these renewable energy sources has
been threefold: cost, intermittency, and scale. In terms of cost, solar and wind are
approaching the levelized cost of energy in most major markets. The heavy subsidies of a
decade ago are all but unnecessary. The intermittency problem of renewables is all but
resolved in a world of 1.6 billion electric vehicles. In short, in such an environment, there is
"demand" (whether in the form of usage or storage) 24x7. The real problem for
renewables today is scale. At less than 2% of global energy supply (although contributing
one-third of energy growth share), wind and solar are barely moving the needle in terms of
CO2 emissions. Their impact on terminal values of long-lived fossil fuel reserves is
another question.
Advanced batteries are enabling revolutions in both transportation and energy. Not only
are batteries the major component driving the adoption of EVs, they also allow
and as battery costs fall, we believe that disruption will continue down to the low end.
While the losers in this disruption are obvious, the list of winners is more difficult. We
conclude that the winners include battery makers and the battery supply chain, new-
entrant EV makers, and forward-looking utilities that embrace EVs and renewables
technologies. Losers, we believe, include traditional car OEMs and auto-parts suppliers
that will be forced to either disrupt themselves and render obsolete their combustion
engine technology and assets, or fight the inevitable EV trend, and thus be disrupted by
new EV entrants.

BERNSTEIN

BERNSTEIN
FINANCIAL OVERVIEW EXHIBITS
EXHIBIT 447: Asia-Pacific Healthcare: Pharmaceuticals

CSPCPharmaceutical JiangsuHengrui KalbeFarma SihuanPharma SinoBiopharma
1093.HK 600276.CH KLBF.IJ 460.HK 1177.HK
Rating O O M M M
PricesasofNov.23,2016 7.84 46.10 1,500.00 1.96 5.30
TradingCurrency HKD CNY IDR HKD HKD
TargetPrice 8.60 57.00 1,460.00 1.80 5.80
52WeekRange 5.98.6 34.847.4 1135.01815.0 1.44.4 4.67.8
MarketCapitalization(US$billion) 6.1 15.7 5.1 2.5 5.1
TTMPerformance 7.5% 9.1% 13.6% 55.4% 26.4%
TTMRelativePerformance 4.8% 6.3% 10.9% 58.2% 29.2%
BernsteinEPSForecast
2016E 0.35 1.25 50.66 0.20 0.26
2017E 0.40 1.66 59.56 0.20 0.27
2018E 0.46 2.03 67.10 0.20 0.28
EPSAnnualChange
2015A16E 24.6% 12.3% 18.5% 315.6% 8.3%
2016E17E 14.4% 33.1% 17.6% 0.2% 2.3%
2017E18E 15.6% 22.2% 12.7% 1.5% 4.5%
ConsensusEPS
2016E 0.35 1.18 48.85 0.21 0.27
2017E 0.43 1.48 54.99 0.21 0.30
2018E 0.51 1.80 61.18 0.24 0.35
P/EonBernsteinEPSForecast
2016E 22.5x 37.0x 29.6x 9.9x 20.4x
2017E 19.7x 27.8x 25.2x 9.9x 19.9x
2018E 17.0x 22.7x 22.4x 9.8x 19.1x
SharesOutstanding(mil.) 5,958 2,342 46,875 10,364 5,239
Yield 1.40% 0.18% 1.27% 0.83% 1.13%
DividendperShare 0.1 0.1 19.0 0.0 0.1
Note: The stocks are benchmarked against the MSCI Asia-Pacific Excl. Japan Index, which had a closing price of 430.16 as of November 23, 2016.

BERNSTEIN
EXHIBIT 448: Asia-Pacific Healthcare: Hospital Services

BangkokDusitMedicalServices BumrungradHospital IHHHealthcare PhoenixHealthcare
BDMS.TB BH.TB IHH.MK 1515.HK
Rating O M O M
PricesasofNov.23,2016 22.80 189.50 6.43 12.02
TradingCurrency THB THB MYR HKD
TargetPrice 28.2 184.00 7.50 11.00
52WeekRange 19.624.7 148.0232.0 6.26.8 5.814.2
MarketCapitalization(US$billion) 9.9 3.9 11.9 2.0
TTMPerformance 12.9% 13.1% 1.2% 5.6%
TTMRelativePerformance 10.1% 15.8% 4.0% 2.8%
2016E 0.56 4.15 0.11 0.47
2017E 0.61 4.39 0.13 0.58
2018E 0.71 4.79 0.16 NA
EPSAnnualChange
2015A16E 10.2% 4.8% 0.7% 87.2%
2016E17E 9.1% 5.7% 13.1% 23.7%
2017E18E 15.7% 9.1% 22.1% NA
ConsensusEPS
2016E 0.55 4.78 0.12 0.36
2017E 0.62 5.22 0.15 0.43
2018E 0.72 5.70 0.18 0.56
2016E 40.6x 45.7x 57.0x 25.7x
2017E 37.2x 43.2x 50.4x 20.8x
2018E 32.1x 39.6x 41.3x NA
SharesOutstanding(mil.) 15,491 867 8,224 819
Yield 0.44% 1.27% 0.47% NA
DividendperShare 0.1 2.4 0.0 NA
Note: The stocks are benchmarked against the MSCI Asia-Pacific Excl. Japan Index, which had a closing price of 430.16 as of November 23, 2016.

BERNSTEIN
EXHIBIT 449: Asia-Pacific Beverages

ChinaResources
Wuliangye KweichowMoutai TsingtaoH TsingtaoA Asahi Kirin ThaiBeverage
Beer
000858.CH 600519.CH 291.HK 168.HK 600600.CH 2502.JP 2503.JP THBEV.SG
Rating O O U U U M U U
PricesasofNov.23,2016 35.05 312.95 16.94 31.00 31.13 3,710 1,829 0.90
TradingCurrency CNY CNY HKD HKD CNY JPY JPY SGD
TargetPrice 57.3 410.9 12.3 25.00 22.00 3,515 1,423 0.78
52WeekRange 22.4638.07 196.64324.73 11.1318.04 25.8035.35 26.4934.49 31643993 14551883 0.661.06
MarketCapitalization(US$billion) 19.2 56.9 7.1 5.8 5.8 16.2 15.1 15.7
TTMPerformance 35.3% 46.0% 25.4% 11.2% 8.2% 3.6% 8.9% 30.9%
TTMRelativePerformance 28.9% 39.1% 19.5% 15.4% 12.5% 8.2% 3.8% 24.7%
OperatingCurrency CNY CNY CNY CNY CNY JPY JPY THB
2016E 1.93 14.22 0.27 1.08 1.08 212.68 105.39 0.94
2017E 2.28 16.38 0.47 1.07 1.07 205.54 104.35 1.04
2018E 2.71 19.05 0.52 1.14 1.14 213.68 103.56 1.17
EPSAnnualChange
2015A16E 18.8% 15.2% N/M 17.7% 17.7% 5.0% 10.1% 4.9%
2016E17E 18.1% 15.2% 75.4% 1.3% 1.3% 3.4% 1.0% 9.8%
2017E18E 18.5% 16.3% 11.2% 6.2% 6.2% 4.0% 0.8% 12.6%
ConsensusEPS
2016E 1.87 13.78 0.38 1.12 1.13 190.47 88.56 1.04
2017E 2.16 15.64 0.59 1.12 1.17 212.86 88.31 1.16
2018E 2.43 17.74 0.64 1.18 1.25 227.01 94.77 1.25
2016E 18.1x 22.0x 56.8x 25.4x 28.7x 17.4x 17.3x 23.6x
2017E 15.3x 19.1x 32.4x 25.8x 29.1x 18.1x 17.5x 21.5x
2018E 13.0x 16.4x 29.1x 24.3x 27.4x 17.4x 17.7x 19.1x
SharesOutstanding(mil.) 3,796 1,256 3,244 1,351 1,351 458 913 25,110
Yield 2.3% 2.0% 28.8% 1.3% 1.3% 1.3% 2.5% 2.7%
DividendperShare 0.80 6.17 4.88 0.39 0.39 50.00 45.12 0.61
Note: Kirin's TP was raised to JPY1,423 on November 24, 2016. The stocks are benchmarked against the MSCI Asia-Pacific Excl. Japan Index, which had a
closing price of 430.16 as of close November 23, 2016.

BERNSTEIN
EXHIBIT 450: Asia-Pacific Telecommunication

BhartiAirtel IdeaCellular ChinaMobile ChinaTelecom ChinaUnicom
BHARTI.IN IDEA.IN 941.HK 728.HK 762.HK
Rating O U M O O
PricesasofNov.23,2016 301.00 72.50 83.70 3.64 8.90
TradingCurrency INR INR HKD HKD HKD
TargetPrice 360.0 60.00 100.00 5.00 11.50
52WeekRange 282.30385.00 65.80149.75 79.0099.30 3.284.34 7.7010.26
TTMPerformance 11.4% 46.9% 9.6% 4.5% 15.5%
TTMRelativePerformance 13.3% 48.8% 8.8% 7.9% 17.4%
OperatingCurrency INR INR CNY CNY CNY
2017E 16.38 2.84 5.09 0.24 0.03
2018E 15.05 1.42 4.97 0.24 0.25
2019E 19.46 1.99 5.71 0.27 0.39
EPSAnnualChange
2016A17E 8.1% 66.7% 3.9% 4.6% 92.1%
2017E18E 8.1% 50.0% 2.4% 3.0% 616.2%
2018E19E 29.2% 39.9% 14.7% 10.9% 56.6%
ConsensusEPS
2017E 12.81 2.81 5.29 0.24 0.18
2018E 13.87 1.87 5.79 0.28 0.35
2019E 17.80 2.35 6.31 0.30 0.50
2017E 18.4x 25.5x 16.4x 15.4x 254.9x
2018E 20.0x 51.0x 16.8x 15.0x 35.6x
2019E 15.5x 36.4x 14.7x 13.5x 22.7x
SharesOutstanding(mil.) 3,997 3,601 251 80,932 23,947
Yield 0.4% 0.9% 3.2% 2.4% 2.4%
Note: The following companies also have dual listings (closing prices were as of November 23, 2016).
China Mobile: ticker CHL (ADR), had a closing price of US$53.90, is rated market-perform, and has a target price of US$64.62.
China Unicom: ticker CHU (ADR), had a closing price of US$11.35, is rated outperform, and has a target price of US$14.86; ticker 600050.CN, had a closing
price of CNY 5.80, is rated market-perform, and has a target price of CNY 3.79.
China Telecom: ticker CHA (ADR), had a closing price of US$47.05, is rated outperform, and has a target price of US$64.37.
Benchmarks with closing prices as of November 23, 2016:

Stocks trading in Hong Kong are benchmarked against the MSCI Asia-Pacific Excl. Japan Index, which had a closing price of 430.16.
Stocks trading in the United States are benchmarked against the S&P 500, which had a closing price of 2,204.72.

BERNSTEIN
EXHIBIT 451: India Capital Goods and Infrastructure

CromptonConsumer AdaniPorts ContainerCorporation BharatElectronics VATechWabag
CROMPTONIN ADSEZIN CCRIIN BHEIN VATWIN
Rating O O O O O
PricesasofNov.23,2016 146.00 263.70 1,127.25 1,294.10 478.05
TradingCurrency INR INR INR INR INR
TargetPrice 201.00 340.00 1,606.0 1,552.00 750.00
52WeekRange 125191.35 169.15317 1050.851544 10081416.85 408.8734
TTMPerformance nm 2.4% 20.7% 3.1% 32.4%
OperatingCurrency INR INR INR INR INR
2017E 4.6 15.0 42.8 64.3 24.2
2018E 6.0 14.0 48.9 70.6 31.5
2019E 7.5 18.5 55.5 80.0 38.7
EPSAnnualChange
2016A17E 174% 9% 6% 11% 42%
2017E18E 30% 7% 14% 10% 30%
2018E19E 25% 32% 13% 13% 23%
ConsensusEPS
2017E 4.7 16.2 45.3 61.8 26.2
2018E 5.7 16.5 54.7 68.2 33.4
2019E 6.8 18.7 63.0 78.3 35.3
2017E 31.8x 17.5x 26.3x 20.1x 19.8x
2018E 24.4x 18.8x 23.1x 18.3x 15.2x
2019E 19.6x 14.3x 20.3x 16.2x 12.4x
SharesOutstanding(mil.) 7.1 77.6 446.0 425.7 203.0
Yield 0.8% 0.4% 0.9% 1.0% 1.1%
Note: The stocks trading in India are benchmarked against the MSCI Asia-Pacific Excl. Japan Index, which had a closing price of 430.16 as of November 23,
2016.

BERNSTEIN
EXHIBIT 452: Asian Capital Goods

Shanghai Electric CRRC ZZCSR Time Hollysys Zoomlion Keyence Cognex
2727.HK 1766.HK 3898.HK HOLI 1157.HK 6861.JP CGNX
Rating O M U O O O M
Prices as of Nov. 23, 2016 3.75 7.06 40.25 19.25 3.34 77,010 60.84
Currency HKD HKD HKD USD HKD JPY USD
Target Price 5.60 8.00 36.00 30.00 6.10 95,000 50.60
52-Week Range 3.0-5.3 6.5-10.7 33.6-59.3 15.0-22.9 2.0-3.5 50500.0-75820.0 28.0-53.5
Market Capitalization (USD B) 14.3 37.7 2.8 1.2 4.7 42.7 4.9
TTM Performance -23.7% -28.1% -23.2% -0.7% 5.6% 11.1% 63.8%

TTM Relative Performance -26.6% -32.0% -25.4% -7.7% 6.6% 25.1% 56.8%
SCB EPS Forecast HKD HKD HKD USD HKD JPY USD
2016E 0.25 0.59 3.30 2.25 (0.00) 2,529 1.30
2017E 0.30 0.60 3.35 2.69 0.41 2,985 1.50
2018E 0.37 0.62 3.34 3.21 0.55 3,549 1.90
EPS Annual Change

2015A-16E 25.2% 8.6% 5.1% 12.9% n.a. 11.8% (40.2%)
2016E-17E 17.8% 2.0% 1.4% 19.8% n.a. 18.0% 15.5%
2017E-18E 23.8% 4.1% (0.3%) 19.4% 33.9% 18.9% 26.4%
Consensus EPS HKD HKD HKD USD HKD JPY USD

2016E 0.20 0.50 2.86 2.23 -0.06 2,424 1.49
2017E 0.21 0.54 3.17 2.36 0.04 2,742 1.67
2018E 0.24 0.61 3.58 2.59 0.13 3,065 1.97
P/E on SCB EPS Forecast

2016E 14.7x 12.0x 12.2x 8.6x n.a. 30.4x 46.9x
2017E 12.5x 11.8x 12.0x 7.2x 8.2x 25.8x 40.6x
2018E 10.1x 11.3x 12.0x 6.0x 6.1x 21.7x 32.1x
Note: For HOLI and 6861.JP, the base year is 2017E.
The following companies also have dual listings (closing prices were as of November 23, 2016).
Shanghai Electric: ticker 601727.CN, had a closing price of CNY8.42 as of August 30, 2016, is rated underperform, and has a target price of CNY4.50; the
stock was suspended since August 30, 2016.
CRRC: ticker 601766.CN, had a closing price of CNY10.49, is rated underperform, and has a target price of CNY6.62.
Zoomlion: ticker 000157.CN, had a closing price of CNY4.81, is rated market-perform, and has a target price of CNY4.90.

Stocks trading in the United States are benchmarked against the S&P 500, which had a closing price of 2,204.72.
Stocks trading in Japan are benchmarked against the MSCI Japan Index, which had a closing price of 870.91.

BERNSTEIN
EXHIBIT 453: Chinese Banks
CCB BOC ICBC ABC CMB BOCOM CITIC Minsheng PSBC
939HK 3988HK 1398HK 1288HK 3968HK 3328HK 998HK 1988HK 1658HK

Rating O O O M M M U U U
PricesasofNov23,2016 5.70 3.46 4.64 3.21 18.70 6.01 5.02 8.75 4.20
TradingCurrency HKD HKD HKD HKD HKD HKD HKD HKD HKD
TargetPrice 10.20 6.70 9.30 3.30 23.20 5.20 3.00 5.90 4.00
52WeekRange 4.316.14 2.833.77 3.725.12 2.503.48 12.7220.45 4.246.33 4.005.42 6.139.15 4.114.85
MarketCapitalization(US$billion) 181.2 143.2 228.5 150.3 65.5 59.0 40.5 48.5 43.5
TTMPerformance 1.4% 7.5% 6.8% 1.9% 5.4% 0.7% 0.0% 14.4%
TTMRelativePerformance 6.1% 12.3% 11.6% 2.8% 10.1% 4.0% 4.7% 9.6%
OperatingCurrency CNY CNY CNY CNY CNY CNY CNY CNY CNY
2016 1.06 0.67 0.87 0.59 2.77 1.00 0.78 1.22 0.48
2017E 1.09 0.74 0.92 0.62 3.34 1.04 0.53 1.20 0.51
2018E 1.28 0.80 1.09 0.78 4.35 1.15 0.91 1.83 0.58
EPSAnnualChange
2016A17E 3.2% 9.3% 5.1% 4.2% 20.8% 3.5% 31.4% 1.2% 6.0%
2017E18E 17.0% 9.0% 19.3% 27.0% 30.4% 11.3% 70.4% 52.2% 13.3%
ConsensusEPS
2017E 1.06 0.66 0.89 0.61 2.99 1.01 0.97 1.50 0.60
2018E 1.10 0.69 0.94 0.64 3.22 1.04 1.03 1.59 0.68
2017E 5.2x 4.7x 5.1x 5.2x 5.6x 5.8x 9.4x 7.3x 8.3x
2018E 4.5x 4.3x 4.2x 4.1x 4.3x 5.2x 5.5x 4.8x 7.3x
SharesOutstanding(mil.) 250 294 356 325 25 74 49 36 69
Yield 5.7% 6.0% 5.9% 6.1% 4.3% 5.3% 5.0% 3.7%
DividendperShare 0.32 0.21 0.27 0.20 0.80 0.32 0.25 0.32 N/A
Note: The following companies also have dual listings (closing prices were as of November 23, 2016).
ICBC: ticker 601398 (China A Share), had a closing price of CNY4.45 is rated outperform, and has a target price of CNY7.77.
BOC: ticker 601988 (China A Share), had a closing price of CNY3.45, is rated outperform, and has a target price of CNY5.60.
CCB: ticker 601939 (China A Share), had a closing price of CNY5.40, is rated outperform, and has a target price of CNY8.52.
ABC: ticker 601288 (China A Share), had a closing price of CNY3.21, is rated market-perform, and has a target price of CNY2.76.
CMB: ticker 600036 (China A Share), had a closing price of CNY18.84, is rated market-perform, and has a target price of CNY19.38.
BOCOM: ticker 601328 (China A Share), had a closing price of CNY5.86, is rated underperform, and has a target price of CNY4.34.
CITIC Bank: ticker 601998 (China A Share), had a closing price of CNY6.89, is rated underperform, and has a target price of CNY2.51.
Minsheng: ticker 600016 (China A Share), had a closing price of CNY9.37, is rated underperform, and has a target price of CNY4.93.

Source: Bloomberg, SNL, corporate reports, and Bernstein estimates and analysis.

BERNSTEIN
EXHIBIT 454: India Financials

HDFCBank Chola Equitas KotakBank
HDFCB.IN CIFC.IN EQUITAS.IN KMB.IN
Rating O O O O
PricesasofNov.23,2016 1,185 990 153 766
TradingCurrency INR INR INR INR
TargetPrice 1,510 1,400 210 1,010
52WeekRange 9281318.45 582.51243.9 134.15206.25 585.75836
TTMPerformance 11.3% 54.0% 39.1% 13.1%
OperatingCurrency INR INR INR INR
2017E 58 46.9 6.1 27
2018E 69 60.8 7.0 35
2019E 84 81.6 11.3 44
EPSAnnualChange
2016A17E 19% 25% 2% 59%
2017E18E 18% 30% 15% 28%
2018E19E 23% 34% 61% 28%
ConsensusEPS
2017E 58 48.0 5.9 27
2018E 71 62.0 7.5 33
2019E 87 75.9 10.1 42
2017E 20.4x 21.1x 25.1x 28.4x
2018E 17.3x 16.3x 21.8x 22.2x
2019E 14.1x 12.1x 13.5x 17.4x
SharesOutstanding(mil.) 2,532 156 335.4 1,835
Yield 1.0% 0.5% 4.0% 0.1%
DividendperShare 11.6 5.00 6.09 0.8
Note:
Consolidated EPS considered for KMB and Equitas. Standalone EPS considered for HDFCB and Chola.
Equitas listed on stock exchanges on April 21, 2016 so TTM performance reflects performance since the date of listing based on its issue price.
In calculating the TTM relative performance against the benchmark, ~3% depreciation of INR against USD has been accounted for. This is because the
benchmark performance is USD denominated, while stock performance is INR denominated.
The stocks are benchmarked against the MSCI Asia-Pacific Excl. Japan Index, which had a closing price of 430.16 as of November 23, 2016.

BERNSTEIN
EXHIBIT 455: Global Energy Storage & Electric Vehicles and Global Memory & Consumer Electronics
SamsungSDI SamsungElectronics SamsungElectronics(Pref) SMSN.Li MXEF MXAPJ
006400.KS 005930.KS 005935.KS
Rating O O O O
PricesasofNov.23,2016 93,900.00 1,649,000.00 1,301,000.00 697.50 855.92 428.08
TradingCurrency KRW KRW KRW USD
TargetPrice 160,000.0 2,000,000.00 1,800,000.00 868.14
52WeekRange 87300131000 10880001088000 9100001500000 452.50765.00
TTMPerformance 16.0% 30.8% 17.1% 27.3%
TTMRelativePerformance
OperatingCurrency KRW KRW KRW
2016 4,650.83 165,772.30 165,772.30 165,772.30
2017E 5,509.22 204,045.87 204,045.87 204,045.87
2018E 7,155.23 206,995.47 206,995.47 206,995.47
2019E
EPSAnnualChange
2016A17E 18.5% 23.1% 23.1% 23.1%
2017E18E 29.9% 1.4% 1.4% 1.4%
2018E19E
ConsensusEPS
2017E 4997.63 174,182
2018E 8524.32 189,332
2019E
2017E 17.0x 8.1x 6.4x
2018E 13.1x 8.0x 6.3x
2019E
SharesOutstanding(mil.) 70 141 21 281
Yield 1.1% 1.3% 1.7%
DividendperShare 1,000.0 22,000.00 22,050.00
Note: Samsung SDI is benchmarked against the MSCI Asia-Pacific Excl. Japan Index. Samsung Electronics, Samsung Electronics (Pref), and SMSN.Li are
benchmarked against the MSCI Emerging Markets Index.

BERNSTEIN
EXHIBIT 456: Asia-Pacific Oil & Gas

PetroChina Sinopec CNOOC PTTEP Inpex Woodside Oil Search Santos Reliance ONGC
857.HK 386.HK 883.HK PTTEP.TB 1605.JP WPL.AU OSH.AU STO.AU RIL.IN ONGC.IN
Rating M M O M O M O M O M
Prices as of Nov. 23, 2016 5.4 5.5 10.2 82.8 1,098.0 30.8 7.2 4.2 1,009.0 279.9
Currency HKD HKD HKD THB JPY AUD AUD AUD INR INR
Target Price 6.3 6.0 12.8 87.0 1575.0 31.2 9.5 5.3 1268.0 252.0
52-Week Range 4.2-6.0 3.9-6.0 6.4-10.9 41.3-86.8 735-1266 23.8-30.9 5.6-8.4 2.5-5.1 888.1-1129.6 187.8-297.4
Market Capitalization (US$ billion) 192.5 88.3 58.5 9.2 14.5 19.2 8.1 5.5 47.5 34.8
TTM Performance -5.6% 9.7% 19.1% 17.8% -9.8% 3.8% -13.6% 4.5% 4.3% 20.2%
TTM Relative Performance -8.4% 6.9% 16.3% 15.0% 1.0% 1.0% -16.3% 1.7% 1.5% 17.5%
Bernstein EPS Forecast

2016E 0.03 0.31 0.08 6.78 33.85 1.21 0.18 -0.78 86.09 26.33
2017E 0.32 0.33 1.27 8.34 90.48 2.04 0.40 0.33 99.84 43.00
2018E 0.41 0.38 1.53 9.18 127.59 1.98 0.48 0.42 100.25 na
EPS Annual Change

2015A-16E (85.7)% (5.1)% (86.9)% na 194.6% 2782.2% na na (8.2)% 59.5%
2016E-17E 835.7% 6.2% 1478.4% 22.9% 167.3% 68.2% 121.0% na 16.0% 63.3%
2017E-18E 26.7% 13.8% 20.2% 10.1% 41.0% (2.9)% 17.7% 28.4% 0.4% na
Consensus EPS
2016E 0.05 0.35 -0.04 3.93 20.56 1.37 0.12 0.01 88.64 21.92
2017E 0.28 0.44 0.65 5.60 43.24 1.65 0.28 0.23 95.77 26.72
2018E 0.51 0.55 1.07 6.91 79.13 2.09 0.36 0.37 93.79 30.21
P/E on Bernstein EPS Forecast

2016E 157.1x 17.3x 126.3x 12.2x 32.4x 25.4x 39.3x -5.4x 11.7x 10.6x
2017E 16.8x 16.3x 8.0x 9.9x 12.1x 15.1x 17.8x 12.7x 10.1x 6.5x
2018E 13.3x 14.3x 6.7x 9.0x 8.6x 15.6x 15.1x 9.9x 10.1x na
Shares Outstanding (mil.) 21,099 25,513 44,647 3,970 1,462 842 1,523 1,776 3,242 8,555
Yield 1.01% 3.01% 3.66% 3.33% 1.65% 3.40% 0.94% 1.19% 1.05% 3.04%
Dividend per Share 0.05 0.16 0.37 2.76 18.09 1.05 0.07 0.05 10.60 8.50
Note: The following companies also have secondary listings (closing prices were as of November 23, 2016).
PetroChina: ticker PTR, had a closing price of US$68.66, is rated market-perform, and has a target price of US$81.29.
PetroChina: ticker 601857.CH, had a closing price of CNY7.59, is rated underperform, and has a target price of CNY5.25.
Sinopec: ticker SNP, had a closing price of US$70.07, is rated market-perform, and has a target price of US$77.42.
Sinopec: ticker 600028.CH, had a closing price of CNY5.09, is rated underperform, and has a target price of CNY5.00.
CNOOC: ticker CEO, had a closing price of US$130.13, is rated outperform, and has a target price of US$165.16.
Reliance: ticker RIGD.LI, had a closing price of US$29.50, is rated outperform, and has a target price of US$38.04.

Stocks trading in Australia, Hong Kong, India, and Thailand are benchmarked against the MSCI Asia-Pacific Excl. Japan Index, which had a closing price of
430.16.
Stocks trading in the United States are benchmarked against the S&P 500, which had a closing price of 2204.72.
Stocks trading in London are benchmarked against the MSCI Emerging Markets Index, which had a closing price of 855.92.
Stocks trading in Japan are benchmarked against the MSCI Japan Index, which had a closing price of 870.91

Disclosure Appendix
VALUATION METHODOLOGY
ASIA-PACIFIC PHARMACEUTICALS
We value pharmaceutical stocks using a blended average of three forward-looking approaches that capture different aspects of value
cash flows, earnings, and sales. First, we use discounted cash flow analysis (DCF) as a foundation because it allows us to factor in a bottom-
up, multi-year view of growth and cash flows deriving from new pipeline projects coming on line. We calculate WACC for each company and
use a 3% terminal growth rate (from 2026E) across our coverage, a slight premium above long-term global GDP growth expectations of
around 2.5%. We include phase II and III development assets and discount for clinical attrition. Second and third, we use two different SOTP
approaches to value pharmaceutical companies based on peer multiples for price-to-earnings (P/E) and price-to-sales (P/S). We apply
different peer group multiples to the different parts of the business (generics and API portions of the businesses command a lower valuation
than world-class R&D-focused portions of the business) and weight them according to percentage of projected 2018 revenue derived from
each business.
ASIA-PACIFIC HEALTHCARE SERVICES
We value hospital operators using a blended average of three approaches that capture different aspects of value cash flows, earnings, and
returns. First, we use DCF as a foundation because it allows us to factor in a bottom-up, multi-year view of growth and cash flows deriving
from new pipeline projects coming on line. We calculate WACC for each company and use a 3% terminal growth rate (from 2026E) across
our coverage, a slight premium above long-term global GDP growth expectations of around 2.5%. Second, we apply future year 2017 P/E
peer group multiples to Bernstein estimates for 2018 EPS and discount back to a 12-month target price. We do it this way because current-
year P/Es are high and widely variable across the group. Third, we use an ROIC-based valuation methodology to assess value in light of
returns using EV/IC to ROIC/WACC. Fast-growing, pure-play private hospital companies are capital- and asset-intensive businesses, so
valuations should correlate with the degree to which a company can generate returns on its capital base, grow business profitably (i.e., bring
new investment projects into profitability quickly and efficiently create value ROIC > WACC) and (if applicable) return capital to
shareholders. We built a regression of the relationship between EV/IC and ROIC/WACC across private hospital companies in Asia ex-Japan
(R2 = 0.73) and used the slope and y-intercept of that relationship plus company-specific WACC, forecasted ROIC, and IC to calculate
implied EV (and price).
ASIA-PACIFIC BEVERAGES
We value beverage stocks based on relative P/E multiples backed up by conservative DCF. We believe that the two most important drivers of
P/E are profit growth and return on invested capital (ROIC). We measure stock performance relative to other consumer staples companies
around the region using the MSCI Asia Consumer Staples Index as our benchmark. We apply sector premiums/discounts based on the
outlook for growth and margins. We believe that stocks with higher long-term growth rates and higher ROIC should carry the highest
multiples, and so we apply incremental company premiums or discounts to individual stocks to reflect their outlook for growth and returns.
We use forward EPS estimates (CY 2017) to set our target prices.
ASIA-PACIFIC TELECOMMUNICATIONS
We use DCF as the long-term foundation of our valuations. Having a multi-year view allows us to specifically model any slowing in
penetration, take-up of new services (i.e., 3G or 4G), new capex and spectrum expenditures, and/or the impact of changes in industry
structure or regulations (i.e., NBN/NGN deployments in Australia and Singapore). It also allows us to forecast increased competition, subtle
changes in market share, and a general erosion of EBITDA margins all key component of our long-term industry view. In general, we
forecast 10 years out and then calculate a terminal value based on the "average" performance from year 10.
However, we recognize that the market tends to react more strongly to short-term signals than a DCF view would imply, and use EV/EBITDA
multiples as a way of forecasting the near-term impact of market dynamics. We know purists won't like this. EBITDA is not an official
accounting definition and can be manipulated. For this reason, we do not try to compare EV/EBITDA valuations across different companies
(unless a lot of care has been taken to normalize both), but rather use it as a company-specific measure to assess the current position versus
the past trading range.
In the end, our target prices are a blend of the long-term DCF and the short-term EV/EBITDA multiple. We adjust the ratios between the two
to reflect our view of whether the market is more sensitive to long-term or short-term factors.
China Telecom Corp Ltd: For China Telecom, we use a WACC of 9.2%. Our long-term DCF model assumes dominance of two-thirds of the
fixed-line market and a long-term 15% share of mobile subscribers. We assume long-term EBITDA will be 32% of revenues and capital
intensity will be 17% of revenues by 2024; long-term ROIC will be 14%. China Telecom is currently trading in the middle of their historical
EV/EBITDA trading range. For EV/EBITDA valuation, we expect its multiple to increase to international average levels as the Chinese telco
sector rerates upward.
China Mobile Ltd: For China Mobile, we use a WACC of 10.5%, which is based on the company's current (not optimal) capital structure that
has very little debt. Our DCF is based on the assumption that China Mobile continues to dominate the Chinese mobile market although its
share is expected to fall slowly overtime and its EBITDA margin is maintained at 42%. Partially offsetting this is a gradual fall in capex
intensity to 16% of revenue by 2024. Long-term ROIC is assumed to be 25%. For EV/EBITDA valuation, we expect China Mobile to trade at
international average levels as the Chinese telco sector rerates.
China Unicom Hong Kong Ltd: For China Unicom, we use a WACC of 9.4%. We assume EBITDA margins falls to 34%, capex ratio falls to
19% of revenues, and ROIC grows to 13% by 2024. For EV/EBITDA valuation, we expect China Unicom to trade at a lower multiple than
peers. We expect its financials to face further pressure from the loss of high-value subscribers to China Mobile's LTE network, especially at
the top line.
Bharti Airtel Ltd: For Bharti Airtel, we expect it to maintain current mobile revenue share. For simple DCF, we use a WACC of 10.6%; we
expect its long-term EBITDA margin to moderate to 36%, capex intensity to moderate to 15%, and long-term ROIC to improve to 16%. We
also use sum-of-the-parts (SOTP) valuation, in which we use DCF to value Indian non-infrastructure and African operations, use EV/EBITDA
multiple to value South Asia and our DCF valuation for Bharti Infratel. For EV/EBITDA valuation, we expect Bharti to remain at the recent
multiple.
Idea Cellular Ltd: For Idea Cellular, we assume it maintains a long-term mobile revenue share, EBITDA margin contracts to 31% of service
revenue, and capex intensity trends to ~16% of service revenue. Long-term ROIC is expected to be ~11%. For EV/EBITDA-based valuation,
we assume it will remain at the recent high multiple, as its top-line momentum continues from share gain through entering into new markets.
INDIA CAPITAL GOODS AND INFRASTRUCTURE
We value India capital goods stocks using discounted cash flow as well as multiple (P/B and P/B) methodology depending on the business
model.
While we value most of the companies using discounted cash flow, a few businesses with a steady earnings trajectory are valued using price-
to-earnings multiples. Businesses that are in the initial phase, are loss-making, and have limited long-term visibility are valued using price-to-
book methodology.
Infrastructure assets are valued using the DCF methodology.
Bharat Electronics Ltd: We value Bharat Electronics using the DCF methodology. We discount FCFF using the firm's WACC to arrive at a
value of the firm. We forecast FCFF for a period of 10 years and calculate a terminal value for the firm assuming a steady state terminal
growth rate. From the firm value, we subtract net debt to arrive at the equity value of the firm.
Crompton Greaves Consumer Electricals Ltd: We value CG Consumer Electricals using the DCF methodology. We discount FCFF using the
firm's WACC to arrive at a value of the firm. We forecast FCFF for a period of 10 years and calculate a terminal value for the firm, assuming a
steady state terminal growth rate. From the firm value, we subtract net debt to arrive at the equity value of the firm.
Adani Ports & Special Economic Zone Ltd: We value Adani Ports using an SOTP approach. Individual assets in our SOTP are valued using
DCF methodology. We discount FCFF using the firm's WACC to arrive at a value of the firm. From the firm value, we subtract net debt to
arrive at the equity value of the firm.
Container Corp of India Ltd: We value the company using DCF methodology. We discount FCFF using the firm's WACC to arrive at a value of
the firm. We forecast FCFF for a period of 10 years and calculate a terminal value for the firm, assuming a steady state terminal growth rate.
From the firm value, we subtract net debt to arrive at the equity value of the firm.
VA Tech Wabag Ltd: We value VA Tech Wabag using DCF methodology. We discount FCFF using the firm's WACC to arrive at a value of the
firm. We forecast FCFF for a period of 10 years and calculate a terminal value for the firm assuming a steady state terminal growth rate. From
the firm value, we subtract net debt to arrive at the equity value of the firm.
ASIAN CAPITAL GOODS
We value our Asian capital goods names using the fair P/B multiple, which we derive from each company's normalized ROE and cost of
equity. This method allows us to understand cyclical companies through the cycle. We maintain dual A- and H-share ratings when stocks
have both categories of shares listed on the relevant exchange. We derive our A-share target prices by translating the H-share target prices
from HKD to RMB. As a general matter, we then assign our rating for A-share stocks by comparing this translated price to the current A-
share price. Thus, there will be situations where the H-share and A-share ratings on a related security may differ from one another. For our
global automation names (Keyence and Cognex), we value them using DCF and cross-check with fair EV/IC (based on ROIC). We believe
these two methods fit best with the companies' asset structure with very light invested capital. Both methods allow us to treat operating and
non-operating assets separately, therefore, properly accounting for the value of the companies' core operations.
Shanghai Electric Group Co Ltd: We derive our target price of HKD5.60 by applying a target P/B multiple of 1.4x to our 2H2017E BVPS of
HKD4.14, which is based on long-term underlying ROE of 10.7%. Our target price is equivalent to 19.5x 2017E P/E and 7.6x 2017E
EV/EBITDA.
Zoomlion Heavy Industry Science and Technology Co Ltd: We derive our target price of HKD6.10 by applying a target P/B multiple of 0.96x
to our 2H2017E BVPS of HKD6.42, which is based on long-term underlying ROE of 10.3%. Our target price is equivalent to 14.9x P/E and
13.9x EV/EBITDA, both based on our 2017 estimates.
CRRC Corp Ltd: We derive our target price of HKD8.00 by applying a target P/B multiple of 1.6x to our December 2017E BVPS of HKD5.1,
which is based on long-term underlying ROE of 13.5%. Our target price is equivalent to 13.3x P/E and 7.5x EV/EBITDA, all based on our
calendar year 2017 estimates.
Zhuzhou CRRC Times Electric Co Ltd: We derive our target price of HKD36.00 by applying a target P/B multiple of 2.1x to our December
2017E BVPS of HKD17.2, which is based on long-term underlying ROE of 18.6%. Our target price is equivalent to 10.7x P/E and 12.8x
EV/EBITDA, all based on our calendar year 2017 estimates.
Hollysys Automation Technologies Ltd: We derive our target price of USD30.00 by applying a target P/B multiple of 2.1x to our December
2017E BVPS of USD14.3, which is based on long-term underlying ROE of 19.0%. Our target price is equivalent to 12.3x P/E and 10.1x
EV/EBITDA, all based on our calendar year 2017 estimates.
Cognex Corp: We value the company using DCF and cross check with fair EV/IC (based on ROIC). We believe these two methods fit best with
the company's asset structure with very light invested capital. Both methods allow us to treat operating and non-operating assets separately,
therefore properly accounting for the value of the company's core operations.
Keyence Corp: We value Keyence using DCF and cross check with fair EV/IC (based on ROIC). We believe these two methods fit best with
the company's asset structure with very light invested capital. Both methods allow us to treat operating and non-operating assets separately,
therefore properly accounting for the value of the company's core operations.
CHINESE BANKS
We adopt a hybrid approach to valuing Chinese banks. Our valuation methodology relies on a target price-to-book multiple that incorporates:
A long-term normalized price-to-book multiple, which is based on the Gordon Growth Model and is calculated using long-term
normalized profitability (measured by ROE forecast), a terminal growth rate and our estimated bank-specific cost of equity; and
A near-term trough price-to-book multiple, which is driven by projected stressed case NPL formation and benchmark "trough
valuation P/B multiples" observed during banking crises in other global markets.
We include the near-term "trough P/B multiples" in our valuation methodology to reflect the valuation pressure on bank shares over the next
one to two years, as the current credit cycle continues to unfold and the Chinese economic growth moves into lower gear. We currently
assign 65% weighting on long-term normalized P/B and 35% weighting on near-term "trough P/B" to arrive at our target P/B multiples for
each of the banks we cover. With such weightings, we have essentially applied discount factors ranging between 15% and 25% on banks'
long-term "fair value" P/B multiples to reflect the near term valuation pressure, which we believe will prevail over the next 12-24 months. We
then apply the blended target P/B multiples to our book value for 1H 2016Ato derive our target prices.
Exhibit 1 shows the company-specific details of valuation methodology. Based on the results of our valuation analysis, we rate CCB, ICBC,
and BOC outperform. We rate ABC, CMB, and BOCOM market-perform. We rate CITIC Bank and Minsheng Bank underperform.
EXHIBIT 1: Summary of coverage banks valuation methodology (except PSBC)

Valuation Summary Price-to-BV: H Share
2016H1
Long-
Long- BV per Price 12-Month
Term Growth Current Current Price
Ke Term Trough P/B Share Target Current (A) Rating Target Appreciation Rating
ROE Rate (H) (HK$)
P/B (HK$) (HK$) Potential
CCB 15.5% 11.4% 7.0% 1.93 0.62 7.63 1.34 0.75 0.82 O 10.20 5.70 79% O
BOC 14.7% 11.1% 6.5% 1.78 0.60 5.37 1.25 0.64 0.75 O 6.70 3.46 94% O
ICBC 15.0% 11.1% 7.0% 1.95 0.71 6.72 1.39 0.69 0.77 O 9.30 4.64 100% O
ABC 12.8% 13.1% 6.5% 0.95 0.43 4.64 0.72 0.69 0.80 M 3.30 3.21 3% M
CMB 17.0% 14.0% 8.0% 1.50 0.82 19.46 1.19 0.96 1.13 M 23.20 18.70 24% M
BOCOM 12.0% 13.7% 7.5% 0.73 0.38 9.18 0.57 0.65 0.74 M 5.20 6.01 13% U
CITIC 11.0% 15.7% 8.0% 0.39 0.29 8.70 0.34 0.58 0.92 U 3.00 5.02 40% U
Minsheng 12.8% 14.7% 8.0% 0.72 0.32 10.92 0.54 0.80 1.00 U 5.90 8.75 33% U
Long-term P/B Value = (ROE - g) / (Ke - g)
Note: Closing prices as at November 23, 2016.
Postal Savings Bank of China: Our valuation methodology for PSBC relies on a target P/B multiple that incorporates a long-term normalized
P/B multiple, which is based on the Gordon Growth Model and is calculated using long-term normalized profitability (measured by ROE
forecast), a terminal growth rate, and our estimated bank-specific cost of equity. A trough P/B multiple, adopted for valuation at other
Bernstein coverage banks, hasn't been applied for PSBC, mainly due to PSBC's relatively clean balance sheet, and hence, lower asset risk.
We then apply the target P/B multiple to our BVPS forecast for 2016E to derive our target price. Exhibit 2 shows the company-specific
details of our valuation methodology. Based on the results of our valuation analysis, we rate PSBC underperform.
EXHIBIT 2: Summary of PSBC Valuation Methodology
Valuation Summary H Share
Long- 2016E
Term BVPS Price Current
Growth Long-Term Appreciation
Rating ROE Ke (HK$) Target Price
Rate Target P/B Potential
(HK$) (HK$)
PSBC U 13.0% 13.8% 10.0% 0.80 4.96 4.00 4.20 5%
Long-term P/B Value = (ROE - g) / (Ke - g)
Note: Closing prices as at November 23, 2016.
INDIA FINANCIALS
India is a growth market and investors generally seek growth-based returns in India. We believe all banks in India trade on what market
believes as the sustainable earnings growth momentum. Banks that have sustained cross-cycle earnings growth despite sector asset quality
concerns trade at a premium. On the other hand banks that have been inconsistent in earnings growth get penalized by the market until they
build investor confidence again. We value our coverage stocks on a target P/E multiple based on one-year forward earnings calibrated by
trading history and our expectation of three-year sustainable earnings growth. We use a one-year forward multiple based on FY2019
earnings to arrive at a FY2018-end target price. We corroborate our target price earnings multiples with a P/BV-based multiple as a
secondary check. We also believe the market can be brutal with growth stocks if the growth story shows any structural weakness and thus
we constantly stress-test for structural growth weakness across our industry and company investment thesis. This methodology works for
banks under NPL stress too as we expect earnings to largely normalize by FY2019.
GLOBAL ENERGY STORAGE & ELECTRIC VEHICLES AND GLOBAL MEMORY & CONSUMER ELECTRONICS
Samsung SDI: The KRW160k target price for Samsung SDI is based on 1.0x our 2016E BVPS, and is also at a 25% discount to our SOTP fair
value.
Samsung Electronics Co Ltd: Our KRW2.0 million target price represents 8.0x our 2018 diluted EPS excluding one-year-forward net cash
(10.0x P/E including cash) versus the 10.0x P/E long-term average. This corresponds to a ~20% conglomerate discount on our sum-of-the-
parts valuation. This also corresponds to 1.3x 2017 book, below the long-term average P/B of 1.4x. We value Samsung Electronics
preferred shares at 0.9x the common shares.
ASIA-PACIFIC OIL & GAS
We value Asian integrated companies by identifying the forward price to cash flow (P/CF) multiples they should trade at based on the
historical relationship between P/CF multiple and three-year average ROACE. Our estimates of forward cash flow per share and reserve life
are for 2017E. We have assumed the Brent oil price of US$70/bbl for 2017.
We value Asian upstream oil and gas companies by identifying the forward price to cash (P/CF) flow multiples they should trade at based on
the historical relationship between P/CF multiple and reserve life. Our estimates of forward cash flow per share and reserve life are for 2017
unless the 2018 estimates are significantly different (including Inpex and Oil Search). We have assumed the Brent oil price of US$70/bbl for
2017 and 2018.
For RIL, we use a sum-of-the-parts valuation methodology.
RISKS
ASIA-PACIFIC PHARMACEUTICALS
Downside risks to our target prices for our coverage stocks: Innovative R&D is inherently risky and many clinical trials fail. High-profile phase
III failures in any of our coverage companies could damage their sentiment and growth outlook. High-profile corruption investigations into
any of our coverage companies can damage their reputation and growth outlooks for years. While healthcare is more resilient to an economic
slowdown than other sectors, out-of-pocket expenditure will be affected first by a worsening economy. Worsening downward pricing
pressure via restarting of more aggressive provincial tendering, multiple drug withdrawals leading up to the 2018 deadline for
manufacturers to submit retrospective bioequivalence data to the new standard for all EDL drugs, and or additional category-wide CFDA
warnings could all lead to further downside for pharma companies. Upside risks: Faster-than-expected rollout of hospital reform,
subsequent waves of national price negotiation pilots for innovative drugs, broader inclusions than expected in the new NRDL expected out
by the end of 2016 could boost pharmaco revenue faster than expected.
ASIA-PACIFIC HEALTHCARE SERVICES
Downside risks to our target prices for our coverage stocks: Worsening economic outlook would create downward pressure on volumes by
reducing the number of people who can afford out-of-pocket healthcare expenditure. Civil unrest or outbreak of MERS, Zika, or other
infectious disease in the region would negatively affect patient volumes by deterring uninfected local people from visiting hospitals. Upside
risks: Unexpected turns in healthcare reforms and faster-than-expected adoption of private health insurance can positively affect the private
sector. Chinas private hospital sector is relatively small; larger or higher profile M&As by one company could all result in faster growth than
we forecast and benefit the entire sector by association (e.g., if China Resources Phoenix Healthcare Group achieves its very aggressive goal
to double from ~12,000 beds to ~24,000 in a year).
ASIA-PACIFIC BEVERAGES
Downside risks to our target prices for our coverage stocks: Economic shock to the economy that could materially impair consumption
expenditure, leading to lower-than-expected consumption of alcoholic beverages. Material increase in the excise tax could raise consumer
prices resulting in lower consumption and/or lower producer profits. Corporate government-related issues (i.e., abuse of cash balance) could
destroy minority shareholders' value. Upside risks: Potential M&A transactions in beer markets could lead to further market consolidation and
bring meaningful synergies. Managements' focus shift from market share gain/topline growth to profit maximization would improve the
companies' profitability. The decrease in raw material prices could lead to margin expansion and/or volume increase, as products become
more affordable to consumers.
Given the importance of retail investors to the A-share markets, A-share listed stocks may be relatively more volatile than their H-share listed
counterparts. Upside or downside risks could come from Chinese government policies as China looks to control the rate of growth of its
economy in general, or capital markets in particular. These policies may manifest in market rules that affect A- and H- shares differently.
We maintain dual A- and H-share ratings when stocks have both categories of shares listed on the relevant exchange. We derive our A-share
target prices by translating the H-share target prices from HKD to RMB. As a general matter, we then assign our ratings for A-share stocks
by comparing this translated price to the current A-share prices. Thus, there will be situations where the H-share and A-share ratings on a
related security may differ from one another.
ASIA-PACIFIC TELECOMMUNICATIONS
As a sector, telecommunications companies are subject to a number of key risks, which investors should consider.
Regulatory risks Telecommunications is a highly regulated industry and as a result, the financial performance and long-term
value of individual companies can be highly impacted by regulation. Key risk include: industry-specific taxes (i.e., on service revenues or
hardware), spectrum licenses or renewals (auctions, auction structures, incentives for new entrants, and reserve prices can extract a
significant value from operators), regulated rates of interconnect or leasing of key assets, and structural separation of key assets (i.e.,
NGN/NBN in Australia and Singapore).
Technology obsolescence risk The underlying technologies that enable both fixed and mobile networks are constantly being
updated. Data access speeds that were state-of-the-art one year ago can be uncompetitive a few years later. Operators must continue to
maintain and upgrade their networks in order to remain competitive.
Service disruption risk Telecommunications is a service industry and revenues are dependent on being able to continue to
provide high-quality services to end customers. Frequent network outages, network congestion, dropped calls, and/or poor data speeds can
result in customer dissatisfaction leading to customer churn and falling revenues. Power failures, cable cuts, and/or damage to key
infrastructure (i.e., exchanges) can have a substantial impact on revenues.
Currency risks Many companies in our coverage earn revenues in foreign currencies and others have issued debt in foreign
currencies. Both result in exchange rate risks. Some of this risk can be hedged for periods of time but large fluctuation between the reporting
currency and other material currencies may have a material impact on financial performance.
China Telecom Corp Ltd: The key risks to our valuation on China telecom are Unicom's operational recovery in mobile coming at a cost to
telecom's momentum; mobile's continued aggressive fixed broadband pricing, pulling down China Telecom's fixed revenue more than
expected; and failure to achieve WACC-level ROIC in the long run.
China Mobile Ltd: The key risk to our valuation on China Mobile is the impact of the phasing out of domestic long-distance and national
roaming is larger than we have modeled, leading to a significant decline in revenue and profit over the next 12 months. Key upside risks are
the impact of domestic long-distance; national roaming is significantly less than what Q3 result suggests; and an improvement in capital
management and an increase in dividend payout ratio at the full-year results.
China Unicom Hong Kong Ltd: The key risks to our valuation on China Unicom are inability to turnaround its mobile operations; Mobile's
continued aggressive fixed broadband pricing, pulling down Unicom's fixed revenue more than expected; and the failure to achieve WACC-
level ROIC in the long run.
Bharti Airtel Ltd: The key downside risks to our valuation on Bharti Airtel are a greater-than-expected impact from Reliance Jio's market
entry, or losing leadership position in India's mobile market due to another operator (e.g., Vodafone) merging with or acquiring others. The
key upside risk is regulatory changes that speed up market consolidation, while allowing Bharti to maintain market leadership.
Idea Cellular Ltd: The key upside risks to our valuation on Idea Cellular are Reliance Jio's market entry making a smaller impact on competitive
dynamics, or Idea Cellular being acquired at a significant premium to fair value, including synergies. The key downside risk is increased
competitive intensity from Reliance Jio market entry or other operators.
INDIA CAPITAL GOODS AND INFRASTRUCTURE
Sector risks are: Slower-than-expected recovery: We expect the current cycle to be low beta with recovery expectations in certain end
markets. Slower-than-expected reforms as well as ordering could lead to overall delay in recovery in these markets.
Bharat Electronics Ltd
A cabinet proposal has been circulated to scrutinize the level of advances offered by the defense sector; hence, any cut in
advances could have a material impact on earnings and valuations.
The defense sector is prone to delays in orders and execution, which remain key risks.
Competition from the private sector is increasing leading to a significant risk due to order losses in large communication systems
orders starting FY2017.
Crompton Greaves Consumer Electricals Ltd
Lower lighting growth: We see the risk of lower lighting growth for the company impacted by market share loss in the LED market
to other stronger brands.
Lower-than-expected growth in discretionary expenditure could impact sales of appliances: The company's appliances segment
is relatively small. The segment growth will partly depend on market growth. Lower economic growth could impact discretionary spend,
leading to lower market growth for appliances.
Adani Ports & Special Economic Zone Ltd
Cash use: Adani port has been supporting other group companies such as Adani Power and Adani Enterprises through advances
for business development and extension of credit lines for cargo handling. Adani Power has high leverage, and hence, a cause for concern.
Extension of Mundra port concession: The company is still in talks with Gujarat Maritime Board for the extension of concession life
beyond 2031. As per the FY2015 annual report of the company, "The company has expanded port infrastructure facilities through approved
supplementary concession agreement (pending to be concluded), which will be effective until the year 2040, whereby port infrastructure has
been developed at Wandh, Mundra to handle coal cargo. The said agreement is in the process of being signed by GoG and GMB although the
part of the coal terminal at Wandh is recognized as commercially operational w.e.f. February 1, 2011."
Lower-than-expected volume growth for coal: Improving domestic coal production and weaker demand growth have led to
moderation in demand for imported coal. While we expect coal imports to remain weak in the medium term, a steep decline in imports could
impact traffic growth at Dhamra, Dahej, and Mormagao ports. We expect coastal traffic to increase to 85MMT by FY2020, from c.60MMT
currently; however, there could be a downside risk due to a delay in decision making by power plants and the Coal India subsidiaries.
Market share loss to Jawaharlal Nehru Port Trust (JNPT): Expansion of JNPT and DFC commissioning should decongest traffic at
JNPT, which could lead to some traffic loss for Gujarat-based ports. We do not expect any significant traffic loss for North India-based cargo
shifting a few shipping lines could impact traffic growth.
Container Corp of India Ltd
Delay in commissioning of DFC and DMIC: Concor's traffic growth is dependent on DFC commissioning. Delays in commissioning
from the current target of FY2019-20 is a significant downside risk to our estimates. In addition, delays in the commissioning of JNPT
expansion could have some impact on container traffic growth, in turn, affecting railway traffic.
EXIM imbalance to impact margins: A further increase in EXIM imbalance could lead to higher empties, in turn, leading to
deterioration in margins.
Inability of Concor to pass on haulage charge increases: The inability of Concor to pass on haulage charge increases, fearing risks
of market share loss due to higher competition, could lead to deterioration in margins, impacting earnings.
VA Tech Wabag Ltd
Working capital risks: A significant portion of the orders for VA Tech Wabag comes from municipal government bodies, many of
which do not have healthy financials. Payments for large projects are based on milestones, and there is also customer retention money which
is kept as a guarantee for on-time and successful project completions. There are also customer advances that are largely offset by advances
to suppliers. We see a risk in terms of receivables days, given that some of them have been outstanding for over six months.
Cost and time overruns in project execution: Many of the domestic projects executed by VA Tech Wabag are government orders
and are generally more prone to delays. Even in international markets, most of the orders are from government-controlled entities. These
projects are more prone to approval and payment delays impacting project execution. The company has exposure to various geographies, so
country-specific issues could also emerge.
Competition from international companies: While VA Tech Wabag is the largest pure-play water company in India, there is
increasing competition from international companies. Many of these international companies, such as IDE technologies, Degremont, Veolia,
Doshion, etc., have far superior technologies, and many have formed joint ventures with domestic companies. An increased focus in the
domestic market from these international companies could be a risk to VA Tech's market share in India and could drive down margins.
ASIAN CAPITAL GOODS
Given the importance of retail investors to the A-share markets, A-share listed stocks may be relatively more volatile than their H-share listed
counterparts. Upside or downside risks could come from Chinese government policies as China looks to control the rate of growth of its
economy in general, or capital markets in particular. These policies may manifest in market rules that affect A- and H- shares differently. The
risks to our Chinese Capital Goods names are mainly macroeconomic driven. Chinese government policies may also lead to increased or
decreased demand in the various end markets. The risks to our global automation names (Keyence and Cognex) are mainly associated with
the global macro economy. Fluctuations in manufacturing sector utilization may result in near-term fluctuations in growth rates. In addition,
there is currency risk to both names.
Shanghai Electric Group Co Ltd: The risks to our target price for SEG are mainly driven by the power-related government policies in China.
Should unexpected, significant deviation from current policy occur in certain types of power sources (mainly thermal, nuclear, and wind),
related equipment segments will have different growth prospects. The deviation could occur in both directions.
Zoomlion Heavy Industry Science and Technology Co Ltd: The risks to our target price for Zoomlion are mainly macroeconomic driven. In the
event of significantly higher or lower investment in infrastructure in China, the companies' revenue and earnings could deviate from our
forecast, resulting in upside or downside risk. In addition, monetary policy impacts the cash flow of construction projects, and, in turn,
impacts the liquidity of construction equipment owners. A national level credit crunch could lead to a higher rate of default by customers, and
therefore, additional impairment of assets by the manufacturers. On the other hand, overstimulus could result in faster growth and upside
risk in the near term, but further build overcapacity in the installed base and depress growth in the longer term.
CRRC Corp Ltd and Zhuzhou CSR Times: The risks to our view on the Chinese Railway Equipment stocks (CRRC and Zhuzhou CSR Times)
are mainly driven by government policy in the sector. Unexpected change of policy may result in higher or lower demand, or a change of the
competitive landscape. The last point also includes the uncertainty in the final resolution of competition between Times and its counterpart
under CNR, a CRRC subsidiary. In addition, the sentiment toward export and "one belt, one road" may drive share prices temporarily away
from their intrinsic values, and poses upside risk to CRRC and Times.
Hollysys Automation Technologies Ltd: The risks to our view on Hollysys are mainly macroeconomic driven. In the event of prolonged
weakening of the overall economy and its industrials sectors, sector capex may shrink and the spending on automation products and
systems may fall below our estimate. Our three-to-five-year forecast assumes Hollysys' success in entering subway control and discrete
automation. The risk is that the progress is slower than expected.
Keyence Corp and Cognex Corp: The risks are mainly associated with the global macro economy. Our analysis shows that the companies'
growth correlates with the overall utilization of manufacturing capacity in the major economies. Fluctuations in utilization may lead to
unexpected near-term fluctuations in growth rates. A global recession, as severe as that of 2009, may even result in a decline in Keyence's
revenue. In addition, there is currency risk associated with the exchange rate of JPY.
CHINESE BANKS
We see three major risks to Chinese bank stocks in the near term:
"Hard-landing" of Chinese economy: With a large portion of their assets and earnings from cyclical traditional lending businesses,
Chinese banks operating results and valuations are highly influenced by changes in macroeconomic conditions in China. In our analysis, we
are forecasting a mild but steady deceleration in real GDP growth in China from 7.7% in 2013 to 6.8% in 2017, as the country undergoes
market reforms to restructure its economy. However, should a hard-landing scenario take place, i.e., real GDP growth decelerates sharply to
<5% in the near term, we expect a large number of corporates and individuals to face difficulties in meeting their financial obligations,
leading to severe deterioration of credit quality in the banking system. The rising NPL formation would not only weaken banks' earnings and
profitability but also weigh on their valuation multiples.
Regulatory risks: Chinese banks are arguably the most heavily regulated institutions in the world. In addition to bank
capital/leverage requirements, which are common in other major economies, banks in China also face strict regulations on their deposit-
taking/lending business, with regulator-prescribed loan quotas, cap on deposit rate, loan to deposit ratios, etc. As part of the wider economic
reform, Chinese regulators are initiating financial reforms that will fundamentally change the way banks operate in China. While we believe
the regulators will carefully pace themselves to minimize market impact, there is still a risk that the financial reforms will cause significant
disruption in banks operations and negatively impact their earnings and profitability, which would negatively impact the banks' share
performance.
Disruptive competition from new entrants: Historically, Chinese banks as a group has largely been immune to competition from
both domestic and foreign market entrants, thanks to the onerous licensing requirements and strict ownership control. As regulators move
toward relaxing their control on bank ownership and further opening up the market to foreign institutions, we expect the number of new
market entrants to rise in future. While we do not believe the new entrants, e.g., privately owned banks, have the capacity to challenge the
large national banks in the near term, there is a risk that the aggressive expansion of new entrants may disrupt market pricing and heat up
competition for clients, leading to weakened top-line growth and profitability of the banks we cover. This would naturally have knock-on
impacts on their share performance.
INDIA FINANCIALS
Big recovery in macroeconomic growth leads to a revival in investment projects boosting broad-based corporate loan demand
Banks counter net interest margin pressures by going up the risk curve sharply and boosting earnings in the near term
Private banks cut deposit rates sharply to absorb the pressure on loan yields much faster than rate reduction on loans
HDFC Bank
The bank faces significant margin pressure beyond our expectations in line with industry trends
It is unable to drive operating leverage and scale across its retail lending business to enable significant costs savings in operating
expenditure
HDFC has to meaningfully slow down credit cards and personal loan book growth due to unexpected risk concerns
Chola
Chola faces unprecedented stress and margin compression in its loan against the property home equity business
It is unable to manage a transition to the 90-day NPL norm due to significant spiraling of overdue loans
Chola's commercial vehicles portfolio growth could be impacted by cash crackdown in the short term
Any significant key man risk from a change in top leadership
Equitas
Equitas witnesses significant cost and time overruns in conversion to banks and depresses ROEs longer than market expectation
Equitas and the entire microfinance industry suffers from overheating and customer overleverage, resulting in high NPLs
Equitas' commercial vehicles and microfinance portfolio growth could be impacted by cash crackdown in the short term
Any significant key man risk from a change in top leadership
Kotak
KMB continues its conservative loan growth behavior which is lower than market expectations
KMB is unable to reduce operating costs following the integration of its ING franchise and fails to improve branch productivity
Key man risk from change in its top leadership
GLOBAL ENERGY STORAGE & ELECTRIC VEHICLES AND GLOBAL MEMORY & CONSUMER ELECTRONICS
Samsung SDI Co Ltd: Samsung SDI's earnings growth depends on the adoption of electric vehicles and energy storage systems to boost
battery revenues and profits. Any change in strategy by automakers, or lack of cost declines would reduce this upside. In addition, display still
plays a large role on the equity income line. A small-battery profit recovery depends on utilization of their polymer lines, which in turn
depends on orders from customers, including parent Samsung Electronics. Risks to display (driving equity income) include supply/demand
balance pressuring pricing, and hence, margins.
Samsung Electronics Co Ltd: The biggest downside risks to our target price for Samsung Electronics are: (1) heightened competition and
reduced margins in the handset business; (2) loss of technology leadership in memory to competitors; (3) margins contracting in the NAND
industry contrary to our thesis; (4) a sell-off in Korean and/or Asian equities, as SEC is the largest component of the KOSPI; (5) reductions in
handset subsidies, which would adversely impact high-end smartphone profits; (6) a delayed DRAM recovery due to worsening
cannibalization of PCs by tablets; (7) abrupt strengthening of the Korean won, which would reduce revenue and increase costs; and (8)
litigation/component risks from Apple.
ASIA-PACIFIC OIL & GAS
Risks to energy and commodity stocks include economic conditions and commodity price swings. If the global, U.S., or Chinese economies
turn down significantly, global demand growth for commodities could decelerate, putting pressure on prices, and thus on the cash flow of
producers. Economic swings also affect refiners.
SRO REQUIRED DISCLOSURES

References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited
, Sanford C. Bernstein (Canada) Limited, and Sanford C. Bernstein (business registration number 53193989L), a unit of
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No. 199703364C, collectively.
Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration,
productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating
investment banking revenues.
Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the U.S.
and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian companies),
versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside of the Asia
Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless otherwise
specified. We have three categories of ratings:
Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.
Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.
Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.
Not Rated: The stock Rating, Target Price and/or estimates (if any) have been suspended temporarily.
As of 11/28/2016, Bernstein's ratings were distributed as follows: Outperform - 45.8% (0.4% banking clients) ; Market-Perform - 41.2%
(0.0% banking clients); Underperform - 12.8% (0.0% banking clients); Not Rated - 0.2% (0.0% banking clients). The numbers in parentheses
represent the percentage of companies in each category to whom Bernstein provided investment banking services within the last twelve (12)
months.
Neil Beveridge maintains a long position in BP PLC (BP).
Accounts over which Bernstein and/or their affiliates exercise investment discretion own more than 1% of the outstanding common stock of
the following companies 998.HK / China CITIC Bank Corp Ltd, 005930.KS / Samsung Electronics Co Ltd.
The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non-investment banking-
securities related services and received compensation for such services 998.HK / China CITIC Bank Corp Ltd, 601998.CH / China CITIC
Bank Corp Ltd.
An affiliate of Bernstein received compensation for non-investment banking-securities related services from the following companies
998.HK / China CITIC Bank Corp Ltd, 601998.CH / China CITIC Bank Corp Ltd.
This research publication covers six or more companies. For price chart disclosures, please visit www.bernsteinresearch.com, you can also
write to either: Sanford C. Bernstein & Co. LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105 or Sanford C.
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is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, Director of
Compliance, 30 Cecil Street, #28-08 Prudential Tower, Singapore 049712.
12-Month Rating History as of 11/28/2016

Ticker Rating Changes
000157.CH M (RC) 12/07/15
000858.CH O (IC) 09/07/16
005930.KS O (IC) 08/10/11
005935.KS O (IC) 08/10/11
006400.KS O (IC) 06/11/14
1093.HK O (IC) 09/23/15
1157.HK O (IC) 02/18/14
1177.HK M (IC) 09/23/15
1288.HK M (IC) 09/16/14
1398.HK O (IC) 09/16/14
1515.HK M (IC) 09/23/15
1605.JP O (RC) 02/18/14
1658.HK U (IC) 09/29/16
168.HK U (RC) 11/02/16 M (IC) 09/07/16
1766.HK M (IC) 09/08/15
1988.HK U (IC) 09/16/14
2502.JP M (IC) 09/07/16
2503.JP U (IC) 09/07/16
2727.HK O (RC) 07/15/15
291.HK U (IC) 09/07/16
3328.HK M (IC) 09/16/14
386.HK M (RC) 09/16/14
3898.HK U (IC) 09/08/15
3968.HK M (IC) 09/16/14
3988.HK O (IC) 09/16/14
460.HK M (RC) 03/08/16 N (IC) 09/23/15
600016.CH U (IC) 07/30/15
600028.CH U (IC) 06/01/15
600036.CH M (IC) 07/30/15
600050.CH M (RC) 10/30/15
600276.CH O (IC) 09/23/15
600519.CH O (IC) 09/07/16
600600.CH U (IC) 09/07/16
601288.CH M (IC) 07/30/15
601328.CH U (IC) 07/30/15
601398.CH O (IC) 07/30/15
601727.CH U (RC) 05/08/15
601766.CH U (IC) 09/08/15
601857.CH U (IC) 06/01/15
601939.CH O (IC) 07/30/15
601988.CH O (IC) 07/30/15
601998.CH U (IC) 07/30/15
6861.JP O (IC) 06/06/16
728.HK O (RC) 11/09/16 M (RC) 10/30/15
762.HK O (RC) 08/18/16 M (RC) 10/30/15
857.HK M (RC) 11/01/13
883.HK O (RC) 10/07/14
939.HK O (IC) 09/16/14
941.HK M (RC) 10/27/16 O (IC) 10/17/13
998.HK U (IC) 09/16/14
ADSEZ.IN O (IC) 06/23/16
BDMS.TB O (IC) 09/23/15
BH.TB M (IC) 09/23/15
BHARTI.IN O (IC) 05/05/15
BHE.IN O (IC) 06/23/16
CCRI.IN O (IC) 06/23/16
CEO O (RC) 10/07/14
CGNX M (IC) 06/06/16
CHA O (RC) 11/09/16 M (RC) 10/30/15
CHL M (RC) 10/27/16 O (IC) 10/17/13
CHU O (RC) 08/18/16 M (RC) 10/30/15
CIFC.IN O (IC) 11/16/16
CROMPTON.I O (IC) 06/23/16
EQUITAS.IN O (IC) 11/16/16
HDFCB.IN O (IC) 11/16/16
HOLI O (IC) 09/08/15
IDEA.IN U (IC) 05/05/15
IHH.MK O (IC) 09/23/15
KLBF.IJ M (IC) 09/23/15
KMB.IN O (IC) 11/16/16
ONGC.IN M (RC) 11/17/09
OSH.AU O (IC) 06/29/09
PTR M (RC) 11/01/13
PTTEP.TB M (RC) 11/07/12
RIGD.LI O (RC) 05/27/13
RIL.IN O (RC) 05/27/13
SMSN.LI O (IC) 08/10/11
SNP M (RC) 09/16/14
STO.AU M (RC) 08/22/16 O (RC) 11/16/15
THBEV.SP U (IC) 09/07/16
VATW.IN O (IC) 06/23/16
WPL.AU M (RC) 05/29/14
Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated
Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change
OTHER DISCLOSURES
A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and
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BERNSTEIN ASIA 2017: THE NEW ECONOMY WON. WHAT NOW?

Asia 2017 - Bernstein

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NOVEMBER 2016

The questions "here" are the same as the questions

Investment controversies in Asia now come down to disintermediation, competitive

PORTFOLIO MANAGER'S SUMMARY

Michael W. Parker michael.parker@bernstein.com +852-2918-5747

ASIA 2017: THE NEW ECONOMY WON. WHAT NOW? 1

2 ASIA 2017: THE NEW ECONOMY WON. WHAT NOW?

SIGNIFICANT RESEARCH CONCLUSIONS 5

ASIA 2017: THE NEW ECONOMY WON. WHAT NOW? 3

4 ASIA 2017: THE NEW ECONOMY WON. WHAT NOW?

SIGNIFICANT RESEARCH CONCLUSIONS

ASIA 2017: THE NEW ECONOMY WON. WHAT NOW? 5

EXHIBIT 1: Mobile wallet usage is fast expanding relative to plastic cards

Transaction Volume (INR in Bn) 3,132

FY14 FY15 FY16 FY17*

Mobile Wallets Debit Cards Credit Cards

28% 25% 27% 31% 27% 29% 30%

FY14 FY15 FY16 FY17*

Source: RBI and Bernstein analysis.

6 ASIA 2017: THE NEW ECONOMY WON. WHAT NOW?

Returns on incremental investment determine the success or failure of new technology.

ASIA 2017: THE NEW ECONOMY WON. WHAT NOW? 7

EXHIBIT 2: Pan-Asia agriculture/industry/services GDP share (1967-2015E)

Energy Intensity (RHS) Agriculture Industry Services

Source: World Bank, and Bernstein estimates and analysis.

8 ASIA 2017: THE NEW ECONOMY WON. WHAT NOW?

ASIA 2017: THE NEW ECONOMY WON. WHAT NOW? 9

Clarity and focus of growth strategy

Size and growth of addressable market (s)

10 ASIA 2017: THE NEW ECONOMY WON. WHAT NOW?

Competitive differentiation: Competitive differentiation can be more fleeting than in

China India China India China India

ASIA 2017: THE NEW ECONOMY WON. WHAT NOW? 11

KWh per Capita 4,000 100%

China India China India China India

12 ASIA 2017: THE NEW ECONOMY WON. WHAT NOW?

EXHIBIT 12: Comparison of FinTech companies with traditional financial institutions

Webank Loan Coverage (Future)

ASIA 2017: THE NEW ECONOMY WON. WHAT NOW? 13

14 ASIA 2017: THE NEW ECONOMY WON. WHAT NOW?

1.5% Energy Eff. 2.0% Energy Eff 2.5% Energy Eff

ASIA 2017: THE NEW ECONOMY WON. WHAT NOW? 15

16 ASIA 2017: THE NEW ECONOMY WON. WHAT NOW?

THE OLD ECONOMY AND THE NEW

THE OLD ECONOMY AND THE NEW 17

Source: Bloomberg L.P., MSCI, FactSet, and Bernstein analysis.

18 ASIA 2017: THE NEW ECONOMY WON. WHAT NOW?

This chapter is set out in seven parts, specifically:

What our factor valuation suggests about Asia in 2017

Old Economy outperforms, but is it cheap? What to own in 2017

Risk #1: A surprise from China

Risk #2: A surprise from the United States

Can we talk about the New China yet?

THE OLD ECONOMY RALLY IN 2016 AND THE HEALTH OF

THE OLD ECONOMY AND THE NEW 19

Source: Bloomberg L.P., MSCI, FactSet, and Bernstein analysis.

That simply leads to the question: now what?

20 ASIA 2017: THE NEW ECONOMY WON. WHAT NOW?

EXHIBIT 18: Asia 10-year total return (dividends reinvested)

10-Year Total Return 10-Year Annualized Return

TWSE Index Taiwan

HSI Index Hong-Kong

AS51 Index Australia

FSSTI Index Singapore