20 asia quants revision based strategy 03may13

8/14/2019 20 Asia Quants Revision Based Strategy 03May13

1/26See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Equity Research

ANCHOR

REP

ORT

Asia revision-based strategy: The power of consensus change

A revision strategy that takes consensusratings and target prices into account

With Asia EMI likely to slow or move sideways through 2013, we believerevision-based investment strategies are likely to continue the momentum.

Our analysis indicates that investors can earn the best incremental returnsand improve IR when consensus rating revisions are corroborated withearnings revision signals.

Checking target price potential can further bolster the performance of arevision-based strategy in Asia Pacific ex-Japan, suggesting this factor isinformative in identifying mispriced companies.

We recommend a revision-based strategy looking at consensus earningsand rating revisions and, concurrently, taking into consideration upside/downside potential as reflected by consensus target prices.

Key analysis in this Anchor Report includes:

An approach to analyze style performance in the four-phase earningsrevision cycle, from recovery to expansion, slowdown and downturn.

We examine the efficacy and correlations of various revision-based

indicators, and evaluate the performance of composite revision factors. We set out an earnings revision-based strategy that takes consensus

rating changes and target price potential into account, and discuss thestrategy performance in developed Pacific ex-Japan and emergingAsia through rigorous back-tests.

May 3, 2013

Research analysts

Quantitative Research

Sandy Lee - [email protected]+852 2252 2101

Rico Kwan, CFA - [email protected]

+852 2252 2102


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Nomura | Asia revision-based strategy May 3, 2013

Research analysts

Quantitative Research

Sandy Lee - NIHK

[email protected]

+852 2252 2101

Rico Kwan, CFA - NIHK

[email protected]

+852 2252 2102

Asia revision-based strategySIA QUANTITATIVE

EQUITY RESEARCH

The power of consensus change

A revision strategy that takesconsensus ratings and targetprices into account

May 3, 2013

We recommend a strategy to go long stocks with better consensusforecast earnings and recommendation revisions while at the sametime with high target price potential, and short stocks with worseconsensus forecast earnings and rating revisions, and concurrentlywith low or negative target price potential.

We believe Asia earnings momentum indicators are unlikely to enteran expansion phase but could slow or move sideways in the rest of2013. The phase of the earnings revision cycle is important for styleselection. We adopt a simple approach to analyze the styleperformance in the four-phase earnings revision cycle, from recoveryto expansion, slowdown, and downturn. In a slowdown phase, priceand earnings momentum styles dominated, while value factors(especially B/P) saw a declining impact compared to a recoveryphase. We think revision-based investment strategies are likely tomaintain the positive momentum as we progress through 2013.Valuation wise, the revision style also looks cheaper than that ofvalue of late, in our view.

Analysts investment opinions typically influence share prices. Amongvarious revision-based indicators, we observe that earnings revisionand change in consensus rating indicators have worked consistentlyin both developed and emerging Asia, and interestingly, the twofactors have low return correlation. We show that investors can earnthe best incremental returns and improve information ratio whenconsensus rating revisions are corroborated with forecast earningsrevision signals.

Further, it makes sense for investors to consider how muchinformation in estimate revisions is already reflected in stock priceswhen implementing a revision strategy. We observe that the targetprice potential factor, defined as the divergence between consensus

target prices and current stock prices, is positively correlated withvalue factor E/P but negatively correlated with revision-basedindicators, and thus it can be used as an alternative value measure tointegrate with a revision strategy to enhance diversification.

We formulate a revision-based strategy by primarily looking atconsensus earnings estimate revisions and rating changes and, atthe same time, taking into consideration the upside and downsidepotentials as reflected by the target price potential factor. We revealthat checking target price potential can further bolster theperformance of a revision-based strategy in Asia, suggesting thefactor is informative in identifying mispriced companies. Additionally,the strategy is more profitable on the long side than on the short sidein emerging Asia. This makes the strategy accessible to a wider

range of institutional investors given the limitation of short-sellingcapabilities in some emerging markets, in our view. We present ourlatest stock ideas based on the recommended strategy.

See Appendix A-1 for analystcertification, importantdisclosures and the status ofnon-US analysts.


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Contents

Revision-based strategies likely to keep the momentum through 2013 3Style performance in different earnings momentum phases 4

Information provided by equity analysts efficacy of revision-based

indicators 7Effectiveness of the revision-based indicators 7Correlation among the revision-based indicators 9

Improving earnings-revision strategy by integrating other types of analyst

signals 11Consensus rating changes can add value when they are corroborated with earnings

revision signals 11Utilizing consensus target price to check upside and downside potential 12A revision-based strategy that takes consensus rating changes and target price

potential into account 14Optimization simulation considering turnover costs 16Stock ideas from our proposed revision strategy 18

Appendix A-1 22


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Revision-based strategies likely to keepthe momentum through 2013The performance of revision-related factors deteriorated in 4Q12 but has recovered

since January. In contrast, high-risk and value (high B/P) stocks have underperformed

since the latter half of January. It is important to assess whether earnings revision-

related strategies are likely to be effective in the rest of 2013, in our view.

Fig. 1: Performance of reversal, value and risk factors

Note: Universe is based on MSCI constituents. Data run to 26 April 2013.

Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

Fig. 2: Performance of momentum, revision, and size factors

Note: Universe is based on MSCI constituents. Data run to 26 April 2013.

Source: Worldscope, I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies

Earnings expectation and revision trends are important drivers for style performance.

The regional MSCI AC Asia Pacific ex-Japan index currently trades at consensus 12-

month forward P/E of roughly 11.9x roughly a 6% discount to the long-term average of

12.6x. Meanwhile, I/B/E/S consensus estimate reveals 13.8% FY2013 EPS growth for

Asia Pacific ex-Japan region. In Quants factor Dynamics(March 15, 2013), we

mentioned that our Asia earnings momentum index1is recovering since 4Q12, but the

recent median StarMine predicted surprise (forward 12-month) scores2remain negative

and have seen a downturn, particularly in Asia emerging markets. This may imply the

risk of downgrades to consensus estimates, we believe.

Fig.3: EMI and Median StarMine predicted surprise developed Pacific ex-Japan

Note: Universe is based on MSCI constituents.

Source: I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies

Fig. 4: EMI and median StarMine predicted surprise emerging Asia


Source: I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies

1Our earnings momentum index looks at the degree of the revision to consensus forecasts of FY2

EPS and assesses how the prevailing estimates differs from the past three-month average.2StarMine predicted surprise is defined as the difference between the I/B/ES consensus and

SmartEstimates (which put higher weightings on top rated analysts forecasts and more recentestimates).

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Median StarMine predicted

surprise scores remain negative

and have seen a downturn,

particularly in Asia emerging

markets

The performance of revision-

related factors has recovered

since January


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On the macro front, our economists believe that China growth will likely slow through this

year and have recently revised down their 2013 GDP growth forecast to 7.5% from 7.7%

and CPI inflation forecast to 3.1% from 3.5%, and maintain the view that credit growth

will likely slow (Asia Insights Fixed Income Research, 15 April, 2013). We observe an

increasingly uncertain economic policy environment amid concerns over slower global

growth. Overall in Asia, we believe our earnings momentum indicators are unlikely to

enter an expansionary phase but could slow or move sideways in the rest of 2013.

In this report, we examine the importance of an earnings revision strategy in the current

earnings phases and focus on studying the efficacy of different consensus revision-based indicators. We then use the findings to devise an effective earnings revision-

based strategy that employs different types of revision signals including consensus rating

changes and also take target price potential into consideration.

Style performance in different earnings momentum phases

An earnings revision cycle is closely linked with the macro environment and has

important implications on style performance. We adopt a simple approach used by our

Japan quant team3to analyze the earnings revision cycle. Here we use our aggregate

earnings momentum index (EMI) instead of the OECD leading indicator, as the leading

indicator comes out with a lag of two months. We calculate the standard scores of the

EMI and take the 1stdifferential of the index to map the cycle as shown below. We divide

the cycle into four phases, from the trough of the earnings cycle the phases move in a

counterclockwise direction from recovery to expansion, slowdown, and downturn.

Fig. 5: Earnings revision cycle

Source: Nomura Quantitative Strategies

We show in below Figures that the phase of the cycle is important for style selection.

When earnings momentum recovered from the trough of the earnings cycle, such as in

2009 and Q4 2012, value (particularly B/P), smaller-cap, and high-risk stocks

outperformed, while price momentum and profitability styles underperformed. Both price

and earnings momentum factors resumed the positive impact in an expansion phase

while value stocks (especially E/P) continued to bode well. In a slowdown phase, price

and earnings momentum styles dominated while profitability saw a rising impact. In

contrast, value factors, especially B/P, underperformed. Defensive high dividend yield

and low-risk stocks performed well in a downturn. Even if we check the EMI phase at

each month-end and observe the subsequent month style performance, results indicate

that the linkage between EMI phases and factor performance is intuitive.

3Business cycle clocks and quant factors, Global Quantitative Research Monthly, 16 February,

2012.

1stdiff

Level

I (recovery)

II (expansion)III(slowdown)

IV(downturn)

The phase of the EMI cycle is

important for style selection

Earnings momentum indicators

could slow or move sideways

through this year

We adopt a simple approach to

analyze the earnings revision

cycle

We attempt to formulate an

effective earnings revision-basedstrategy that utilizes different

types of revision signals


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Fig. 6: Earnings momentum index and 1stdiff

Note: We use the monthly aggregate earnings momentum index (EMI) since end-December 1998. Universe is based onMSCI AC Asia Pacific ex-Japan Index. Source: I/B/E/S, MSCI, Nomura Quantitative Strategies

Fig. 7: Average monthly style return (long-short) in different EMI phases

Note: See Figure 33 for style definition. Data run to end-March 2013. Shaded styles are top performers in the EMI cycle. Universe is based on MSCI AC Asia Pacific ex-JapanIndex. Source: I/B/E/S, MSCI, Nomura Quantitative Strategies

It is also worthwhile to note that revision strategy is typically positively correlated with

price momentum but in some ways sees distinct characteristics. Performance of price

momentum strategy tends to be much more volatile compared to revision. Historically

there were periods of months when price momentum was crushed by the sharp risk-relief

value rally during the recovery phase and hence this made price momentum strategy

relatively less consistent than revision-based strategies in Asia.

As we believe the Asia EMI is unlikely to enter an expansion phase but could slow or

move sideways through this year, we expect earnings revision-based investment

strategies to see better performance as we progress through 2013. From a valuation

viewpoint, we are still positive on risk style on a medium-term basis as high-risk stocks

remains inexpensive on z-score. But notably the revision as an investment style currently

looks cheaper compared to the value style.

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Change in EMI (1st d iff, RHS)

AP EMI (LHS, z-sco re)

Recovery Expansion Slowdown Downturn

EMI Level < 0 >= 0 >= 0 < 0

1st diff >= 0 >= 0 < 0 < 0

Sample months 39 48 31 52

Recovery Expansion Slowdown Downturn Recovery Expansion Slowdown Downturn

Size * 1.16 0.11 -0.51 0.06 1.04 -0.09 -0.35 0.21

Momentum -0.84 0.89 1.15 0.49 -0.66 0.78 1.34 0.33

Yield 0.21 0.09 0.21 1.19 0.37 0.41 0.04 0.91

Valuation 1.34 0.89 0.22 0.61 1.68 0.81 0.06 0.58

E/P 0.93 0.88 0.31 0.57 1.44 0.88 0.18 0.34

B/P 1.12 0.25 -0.30 0.18 0.93 0.21 -0.31 0.38Revision 0.47 0.76 0.75 0.67 0.43 0.60 0.74 0.87

Growth 0.23 0.15 0.22 -0.37 0.29 0.00 0.05 -0.24

Profitability -0.30 0.40 0.71 -0.32 0.26 0.33 0.42 -0.48

ROE -0.44 0.27 0.75 0.19 0.05 0.35 0.43 -0.02

Risk * -0.77 -0.13 0.30 0.74 -0.63 0.44 -0.20 0.51

EMI phase and style return on the same month EMI phase and subsequent month style return

Judging from the Asia earnings

outlook, we expect revision-

based investment strategies to

see better performance as we

progress through 2013

In Asia, revision strategy has

been more consistent than price

momentum strategy


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Fig. 8: Valuation of composite value and risk styles

Notes: Chart shows the relative median B/P between the top and bottom quintileportfolio by corresponding style. Data run to 26 April 2013.


Fig. 9: Valuation of ROE, DY, and revision styles

Notes: Chart shows the relative median B/P between the top and bottom quintileportfolio by corresponding style. Data run to 26 April 2013.


Fig. 10: Relative P/B of top versus bottom quintiles by investment styles (z-scores)

Note: See Figure 33 for style definition. Long-term average is calculated since 1999. Data run to 26 April 2013.


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(Ratio)(Ratio) Composite Value - Relative P/B (LHS)

Composite Risk - Relative P/B (RHS)

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(Ratio)(Ratio) Quality by ROE- Relative P/B (LHS)

Revision - Relative P/B (RHS)

DY - Relative P/B (RHS)

Size* Momentum Div Yield Valuation Revision Growth Profitability Risk

Current ratio 0.66 1.55 1.05 0.34 1.03 1.27 2.03 0.59

Long-term average 0.59 1.67 0.85 0.31 1.16 1.30 2.40 0.67

Standard deviations 0.10 0.31 0.12 0.04 0.15 0.17 0.24 0.09

Z-score 0.71 -0.38 1.64 0.82 -0.84 -0.16 -1.52 -0.79


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Information provided by equity analysts efficacy of revision-based indicatorsEquity analysts study companies financial performance and earnings prospects, and

provide investment opinions including earnings forecasts, recommendations, and target

prices to investors. Their investment opinions typically influence share prices. Academic

literatures and investment professionals have analyzed the delayed market responses to

analysts opinions, and such phenomenon can be explained by behavioral finance. First,

sell-side analysts typical following the flock behavior and their tendency to stay close tothe consensus can potentially induce exploitable inefficiencies into the market. Second,

the market does not necessarily discount fully analysts earnings revisions or rating

changes when the information becomes available, as analysts may revise their forecasts

at different times, causing delays in the dissemination of information. Third, investors

may react cautiously to new information provided from equity analysts, and such under-

reaction provides opportunities to generate alphas.

Effectiveness of the revision-based indicators

Which types of revision indicators are effective in Asia Pacific ex-Japan region, and in

developed Pacific ex-Japan and emerging Asia? In this section, we examine the

performance of various revision-based indicators, namely, revision index, earnings

revision, change in consensus rating, change in target price, StarMine predicted

surprise, change in revision index, and change in earning revision. We focus on how

informative are these indicators compared with each other.

Fig. 11: Performance (long-short) of revision-based indicators in Asia Pacific ex-Japan

Note: See Figure 32 for factor definition. The sample period is from 1999 for all factors except for change in target price,which is started from 2002. Returns are annualized figures. Universe is based on MSCI constituents.

Source: I/B/E/S, MSCI, Nomura Quantitative Strategies

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(%) Revision index Earnings revision

Ch ange in consensus rating Ch an ge in target p rice

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index

Earnings

revision

Change in

consensus

rating

Change in

target price

StarMine

predicted

surprise

Change in

RI

Change in

ER

Asia Pacific ex-Japan

Annualised average return (%) 8.05 9.53 9.13 6.53 6.89 1.84 2.01

Annualised risk (%) 4.42 6.63 4.24 6.04 5.47 4.17 4.45

Information ratio 1.82 1.44 2.15 1.08 1.26 0.44 0.45

Turnover (1-way, L/S, %) 121 80 146 127 86 170 140

Developed Pacific ex-Japan


Annualised risk (%) 7.43 8.96 7.06 8.20 8.09 6.46 6.44


Turnover (1-way, L/S, %) 123 79 148 129 91 171 140

Emerging Asia


Annualised risk (%) 5.33 7.39 5.12 6.75 6.57 4.81 5.36


Turnover (1-way, L/S, %) 120 81 146 127 85 169 140

Equity analysts investment

opinions typically influence share

prices, and market responses

could be delayed

We examine the performance of

various revision-based indicators


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Stocks in the respective regional universes are put into five groups based on each

indicator, and their returns are measured assuming long the top quintile and short the

quintile with the lowest factor scores, with monthly rebalancing on stock portfolios. In the

above Figure, we show their factor performances assuming an equal-weighted

approach. Results do not consider transaction costs.

In Asia Pacific ex-Japan, all revision-based indicators delivered positive annualized long-

short returns. The top three best-performing factors have been earnings revision

(9.53%), change in consensus rating (9.13%), and revision index (8.05%). By information

ratio (IR), the change in consensus rating factor, defined as the m-m difference in I/B/E/Sconsensus rating, has delivered lower volatility in monthly returns compared with the

revision index and earnings revision indicators, thus leading to higher IR of 2.15 before

transaction costs, but we note that turnover of the factor is also high. In contrast, the

indicators measuring the rate of change in revision index and earnings revision have

registered the lowest IRs.

In developed Pacific ex-Japan, change in consensus rating, earnings revision, and

change in target price ranked the top three best-performing factors by annualized long-

short returns and IRs. Meanwhile, earnings revision, revision index, and change in

consensus rating indicators have performed well in emerging Asia. Overall, the revision

index indicator has fared relatively better in emerging Asia than that in developed Pacific

ex-Japan, while earnings revision and change in consensus rating indicators have

worked more consistently in both developed Pacific ex-Japan and emerging Asia.

Fig. 12: Performance (long-only excess return) of revision-based indicators in AsiaPacific ex-Japan

Note: See Figure 32 for factor definition. The sample period is from 1999 for all factors except for change in target price,which is started from 2002. Returns are annualized figures. Universe is based on MSCI constituents.


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(%) Revision index Earnings revision

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index

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revision

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rating

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Annualised excess return (%) 4.27 5.00 5.22 3.85 4.13 1.95 1.83

Annualised active risk (%) 3.03 3.54 2.51 3.31 3.06 2.64 2.74


Turnover (1-way long-only, %) 59 40 72 62 43 84 68

Developed Pacific ex-Japan





Emerging Asia





The top three best-performing

revision-based indicators in the

region are earnings revision,

change in consensus rating, and

revision index

Earnings revision and change in

consensus rating indicators have

worked more consistently in both

developed Pacific ex-Japan and

emerging Asia



worked more consistently in both

developed Pacific ex-Japan and

emerging Asia


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The figure above indicates the long-only excess returns of revision-based indicators. We

note that the leading revision indicators are profitable when focusing on long-side

portfolios only, making them applicable and practical for investors who face short-selling

limitations in some of the Asia emerging markets. Overall, we observe similar results on

long-side performance, with change in consensus rating and earnings revision indicators

faring better in Asia Pacific ex-Japan.

Correlation among the revision-based indicators

Figure below reveals the return correlations among these revision-based indicators.

Among the top factors, earnings revision and change in consensus rating indicators give

the lowest factor return correlation. This brings us to believe that the information

contained in consensus rating revision could be different from the earnings revision, and

incorporating consensus rating change indicator in an earnings revision strategy can add

value and improve strategy performance.

Fig. 13: Correlation among the revision-based indicators

Note: See Figure 32 for factor definition. Universe is based on MSCI AC Asia Pacific ex-Japan Index.


Earnings-revision strategies generally deliver consistent returns over the long run in

Asia. In below Figures, we take a closer look at the relationship between the rate of

change in earnings revision and monthly factor returns of the four leading revision-basedindicators: earnings revision, revision index, change in consensus rating, and change in

target price. As we highlighted in previous section, there is no surprise that revision

strategy relatively underperformed during the initial phase of the earnings recovery cycle,

especially at the time when value and high-risk stocks recovered, such as in early 2009.

But notably, change in consensus rating indicator continued to perform well during this

period. This further increases our confidence that investors can gain incremental excess

returns by combining the consensus forecast earnings and rating revision information.

Fig. 14: Monthly returns of earnings revision indicator andmedian earnings revision change

Note: Universe is based on MSCI AC Asia Pacific ex-Japan Index.


Fig. 15: Monthly returns of change in consensus ratingindicator and median earnings revision change



Revision

index

Earnings

revision

Change in

consensus

rating

Change in

target price

StarMine

predicted

surprise Change in RI Change in ER

Revision index 1.00 0.57 0.13 0.45 0.37 0.34 0.10

Earnings revision 0.57 1.00 0.08 0.64 0.52 -0.04 0.04

Change in consensus rating 0.13 0.08 1.00 0.06 0.11 0.05 0.12

Change in target price 0.45 0.64 0.06 1.00 0.49 -0.19 -0.05

StarMine predicted surprise 0.37 0.52 0.11 0.49 1.00 -0.05 -0.03

Change in RI 0.34 -0.04 0.05 -0.19 -0.05 1.00 0.23

Change in ER 0.10 0.04 0.12 -0.05 -0.03 0.23 1.00

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We believe investors can gain

incremental excess returns by

incorporating the earnings

revision and consensus rating

change information



low factor return correlation

The leading revision indicators

are profitable when focusing on

long-side portfolios only


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Fig. 16: Monthly returns of revision index indicator andmedian earnings revision change



Fig. 17: Monthly returns of change in target price indicatorand median earnings revision change



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Improving earnings-revision strategy byintegrating other types of analyst signalsIn the previous section of this report, we showed that analyst opinions on earnings

revisions and changes in consensus ratings are useful information when seeking higher

returns. Here we show how investors can improve returns by incorporating the two

revision-based indicators. Further, while these revision signals are proven effective to

generate alpha, it makes sense to avoid buying (selling) stock with little upside

(downside) potential, in our view. We thus consider using an additional value like factor,i.e. the divergence between consensus target price and the stock price, to formulate a

more profitable strategy.

Consensus rating changes can add value when they arecorroborated with earnings revision signals

We first study if the performance of an earnings-revision strategy can be improved by

taking into consideration of other revision-based indicators. Here we use earnings

revision indicator as the core factor as it has worked more consistently than revision

index in both developed Pacific ex-Japan and emerging Asia. We construct various

composite revision factors incorporating earnings revision signals with other revision-

based indicators. We illustrate the methodology in below Figure.

Fig. 18: Methodology of composite revision factor

Note: Normalised value is equal to (factor value country average) / standard deviations. Factor marked with * is reverse-based. Source: Nomura Quantitative Strategies

We show the performance of these composite revision factors in below Figures. Results

indicate that investors can earn the best incremental returns by integrating earnings

revision and change in consensus rating indicators. The performance of this composite

revision factor mix improves performance considerably, to 12.6pp from some 9.5pp

annual long-short return in Asia Pacific ex-Japan, when consensus rating revisioninformation is used in conjunction with earnings revision signals. IR has been improved

to 2.5 (before transaction costs), from 1.44 and 2.15 for simple earnings revision and

consensus rating change factor, respectively.

We first construct composite

revision factors incorporating

earnings revision and other

revision-based indicators

Investors can earn the best

incremental returns and enhance

IR by integrating earnings

revision and change in

consensus rating indicators

In this section, we consider

integrating various revision-

based signals to formulate a

profitable strategy


13/26


12

Fig. 19: Performance (long-short) of composite revision factors in Asia Pacific ex-Japan

Note: See Figure 32 for factor definition. The sample period is from 1999 for all factors except for composite factor withchange in target price, which is started from 2002. Returns are annualized figures. Universe is based on MSCIconstituents.


The implications of these results are that consensus recommendation revisions can add

value when they are corroborated with earnings revision signals. We believe equity

analysts typically revise company recommendations less frequently than earnings

forecasts, and they will consider more information such as a companys valuations,

cashflows, other financial estimates and assumptions when they determine

recommendations. Thus, we can use consensus rating change as an additional

confirmation signal.

Utilizing consensus target price to check upside anddownside potential

While the composite revision factor incorporating earnings revisions and consensus

rating change signals are proven informative to generate alpha in Asia, it makes sensefor investors to consider the current share price level and the upside potential, in our

view, when implementing the strategy. There are conventional ways to do this, including

evaluating forecast earnings-to price (E/P) multiple or target prices.

Forecast E/P is a common value factor and is well known to be an effective factor in

Asia. Equity analysts not only project earnings but also share prices target prices. We

would like to consider the divergence between consensus target price and the current

stock price4as an alternative measure to check the upside and downside potential. We

name this factor target price potential.

In previous section, we showed that among the revision-based indicators, change in

target price has worked better in developed Pacific ex-Japan, but yielded lower IR in

emerging Asia. Here we examine the target price potential factor. Our quant analysts in

Japan found that Japanese equities with a large positive divergence between consensus

4Defined as the percentage difference between consensus target price and current stock price.

-50

0

50

100

150

200

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

(%) Earnings revision ER - Revision index

ER - Change in CR ER - Change in TP

ER - StarMine PS ER - Change in RI

ER - Change in ER

Earnings

revision

ER - Revision

index

ER - Change

in CR

ER - Change

in TP

ER - StarMine

PS

ER - Change

in RI

ER - Change

in ER



Annualised risk (%) 6.63 5.60 5.00 6.59 6.33 5.08 5.15


Turnover (1-way, L/S, %) 80 100 121 100 79 144 128Developed Pacific ex-Japan


Annualised risk (%) 8.96 7.94 7.78 8.45 8.62 7.37 7.77


Turnover (1-way, L/S, %) 79 101 123 103 81 146 128

Emerging Asia


Annualised risk (%) 7.39 6.37 6.00 7.34 7.38 5.64 5.83


Turnover (1-way, L/S, %) 81 100 121 99 78 144 127

It makes sense for investors to

consider the current share pricelevel when implementing a

revision-based strategy

We define target price potential

as the percentage difference

between consensus target price

and current stock price

The implications are that

consensus recommendation

revisions can add value when

they are corroborated with

earnings revision signals

We compare performance of

target price potential and E/P

factors


14/26


13

target price and current price tend to have strong returns, and vice versa5. Here we

examine if the factor has an impact on Asia stock prices and compare its performance

with that of E/P.

We use same grouping simulation approach as in the previous section and create

quintile portfolios based on the percentage difference between consensus target price

and the current stock price. The sample period is from year 2002 when the consensus

target prices data become available.

Fig. 20: Performance (long-short) of target price potentialand forecast E/P factors in Asia Pacific ex-Japan



Fig. 21: Performance (long-short) of target price potentialand forecast E/P factors by region



We show the performance of target price potential and forecast E/P factors in the above

Figure. Returns do not include transaction costs. We note that the target price potential

factor has delivered higher annual long-short return (4.8%) and IR (0.51) than E/P (3.9%

return and IR of 0.47) in developed Pacific ex-Japan since 2002. Notably, performance

of the factor is particularly strong since 2009. In emerging Asia, the target price potential

factor has underperformed E/P in the long run, but yielded better returns and similar IR

(due to higher volatility) since the start of 2012.

It is interesting to point out that performance of target price potential factor is positively

correlated with E/P (correlation is 0.65) but negatively correlated with revision-based

indicators, including the target price change factor, as observed in the below Figure.

Thus, we believe it is prudent to consider target price potential as an alternative value

measure to integrate with the composite revision factor and enhance diversification.

Fig. 22: Correlation between target price potential factor and other revision indicators

Note: See Figure 32 for factor definition. Universe is based on MSCI constituents.


5Investment strategy using consensus target prices, 6 April 2006.

0

20

40

60

80

100

120

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

(%)

Target p rice potential

Forecast E/P

Targetprice

potential

Forecast

E/P

Annualisedaveragereturn(%) 6.72 9.10

Annualisedrisk(%) 7.92 5.92

Informationratio 0.85 1.54

-200

20

40

60

80

100

120

140

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

(%)Target pri ce potential -dev. Pac x J

Forecast E/P - dev. Pac x J

Target price potential - emerging Asia

Forecast E/P - emerging Asia

Targetprice

potential

Forecast

E/P

Targetprice

potential

Forecast

E/P

Annualisedaveragereturn(%) 4.84 3.93 7.41 10.76

Annualisedrisk(%) 9.42 8.32 8.53 6.52

Informationratio 0.51 0.47 0.87 1.65

DevelopedPacificexJP EmergingAsia

Revision

index

Earnings

revision

Change in

consensus

rating

Change in

target price

StarMine

predicted

surprise Change in RI Change in ER

Asia Pacific ex-Japan -0.47 -0.50 0.01 -0.56 -0.42 -0.08 -0.12

Developed Pacific ex-Japan -0.07 -0.22 0.10 -0.21 -0.06 0.09 0.16

Emerging Asia -0.46 -0.52 -0.09 -0.57 -0.48 -0.06 -0.21

Target price potential factor

outperformed E/P in developed

Pacific ex-Japan, but

underperformed E/P in EM Asia

The factor is positive correlated

with E/P and can be used as an

alternative value measure to

integrate with composite factor

and enhance diversification


15/26


14

A revision-based strategy that takes consensus ratingchanges and target price potential into account

Based on the findings outlined in the previous section, we formulate a revision-based

strategy by primarily looking at consensus earnings revisions and rating changes and, at

the same time, taking into consideration upside and downside potential as reflected by

the divergence between consensus target prices and current stock prices.

We first divide the Asia Pacific ex-Japan universe into five groups based on the

composite revision factor, computed using earnings revision and change in consensus

rating indicators. The high-revision basket consists of the stocks in the top quintile in

each market and sector, whereas the low-revision basket comprises those stocks in the

corresponding bottom quintile. Separately, we also divide the regional universe in each

market and sector into half, based on the target price potential. We then long the stocks

that are in the high-revision group (top quintile) and with high target price potential (top-

half), and short those stocks that are in the low-earnings-revision group (bottom quintile)

and with low or negative target price potential (bottom half). We illustrate the

methodology to create the long- and short-side portfolios in the below Figure.

Fig. 23: Methodology of the revision-based strategy


We measure the performance assuming equal-weighted and monthly rebalancing of

stock portfolios. The Figures below show a performance summary of the suggested

revision-based strategy in Asia Pacific ex-Japan, developed Pacific ex-Japan, and

emerging Asia regions, respectively. We note that checking target price potential can

further bolster the returns of the revision-based strategy in all regions. In Asia Pacific ex-

Japan, the strategy improves performance significantly, from 11.8pp to 16.1pp annual

long-short return, when the target price potential is used for confirming the upside and

downside potential. Volatility of the strategy is higher than that for the composite revision

factor due to the reduced number of stocks in the portfolios.

Methodology

Checking target price potential

can further bolster the returns of

revision-based strategy


16/26


15

Fig. 24: Performance of revision-based strategy that takes consensus rating changesand target price potential into account

Note: Universe is based on MSCI constituents. Trading costs are assumed 30bp.


Fig. 25: Performance of revision-based strategy (DM Asia)



Fig. 26: Performance of revision-based strategy (EM Asia)



The results suggest that the target price potential factor is informative in identifying

mispriced companies. Instead of simply selecting stocks with positive consensus

earnings revisions and rating changes, it is important for investors to determine how

much information in estimate revisions is already reflected in stock prices.

We would also like to point out that our strategy is less volatile and also more profitable

on the long side than on the short side, especially in emerging Asia. This makes the

strategy accessible to a wider range of institutional investors given the limitation of short-selling capabilities in some emerging markets.

-50

0

50

100

150

200

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

(%)

Revis ion with target pr ice potential (L/S)

Comp osite revision indicator (L/S)

Composite

revision(L/S) Long/short L ongexcess Shortexcess L/Saftercosts

Annualisedaveragereturn(%) 11.78 16.14 9.36 6.78 5.50

Annualisedaveragerisk(%) 4.68 7.56 4.92 5.34 7.50

Informationratio 2.52 2.14 1.90 1.27 0.73

Averageturnover(1way,%) 121.18 145.87 72.81 73.06 145.87

Averagenumberofstocks 286 113 62 51 113

Revisionwithtargetpricepotential

0

20

40

60

80

100

120

140

160

180

200

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

(%)

Revision with target price potential (L/S)


Composite

revision( L/ S) L on g/ sh or t L on gexcess Shortexcess L/Saftercosts

Annualisedaverage

return

(%) 10.55 14.95 7.46 7.50 4.02






-50

0

50

100

150

200

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

(%)Revis ion with target price potential (L/S)


Composite

revision( L/ S) L on g/ sh or t L on gexcess Shortexcess L/Saftercosts

Annualisedaverage

return

(%) 12.31 17.02 10.07 6.95 6.39






Results suggest that target price

potential factor is informative in

identifying mispriced companies

The strategy is less volatile and

also more profitable on the long

side than on the short side,especially in Emerging Asia


17/26


16

Optimization simulation considering turnover costs

We have shown in the previous section of this report that the recommended revision-

based strategy incorporating consensus rating changes and target price potential signals

can boost the alpha of a simple earnings revision strategy. Next, we consider turnover

and trading costs. The revision-based strategy typically has higher portfolio turnover

compared to other conventional investment styles such as value investing. High portfolio

turnover could make the return lower due to transaction costs. Thus, it is important to

consider a practical portfolio optimization simulation considering turnover and other

constraints.

Here we test the proposed revision-based strategy through the portfolio management

process, by comparing three cases as a source of alpha each month, 1) a simple

earnings revision factor; 2) the composite revision factor incorporating consensus

earnings and recommendation revision information, 3) our suggested revision strategy

using the composite revision factor and also checking the target price potential. We

attempt to construct optimized portfolios which utilize the alphas from these cases, with

restricted turnover and risk control, and are able to be implemented more practically.

We run the portfolio optimization simulation since end-December 2002 using the

following parameters.

Fig. 27: Summary of portfolio optimization simulation


The Figure below presents the back-test results. Results confirm that even though

revision-based strategy tends to have higher turnover, the proposed revision strategy

can obtain better risk-adjusted performance compared with a simple earnings revision

factor and the composite revision indicator, even when taking turnover costs into

account. Over the back-testing period, the optimized long-short portfolios delivered an

absolute return of 15.65% pa in Asia Pacific ex-Japan (or circa 14.2% after trading costs

assuming 30bp), with an annualized risk of 7.8%, leading to an information ratio of 2.0

before considering trading costs (or 1.8 net of transaction costs).

Universe MSCI AC Asia Pacific ex-Japan

Sample period end-December 2002 to 26-April 2013 on a monthly basis

Method Long-short portfolio optimisation (Axioma Robust Optimisation)

Objective Maximise alpha

1. Earnings revision indicator

2. Composite revision indicator (ERI + change in consensus rating)

3. Composite revision indicator, add target price potential with weight of 0.5

Total risk control (annualised) Maximum 8%

Turnover control (1-way) Maximum 20%

Long/Short ratio control 1 to 1

Portfolio size Maximum 80 stocks each on long and short side

Country and sector neutral Yes

Asset weight control Minimum 0.5%; maximum 10% on the long and short side, respectively

Rebalancing End of every month

Performance Subsequent one-month total return in USD

Cases: Alpha factor(s)

The back test results confirm

that the proposed revision

strategy leads to better

performance after considering

turnover and costs

We test the proposed revision-

based strategy by conducting

portfolio optimization simulation

with restricted turnover, risk

control, and other constraints


18/26


17

Fig. 28: Performance of optimized long-short portfolios in Asia Pacific ex-Japan

Note: Universe is based on MSCI constituents. Trading costs are assumed 30bp.


When focus on the optimized long-side portfolios only, the proposed strategy also has

worked consistently in the Asia Pacific ex-Japan region, with excess returns and IR

particularly higher in emerging Asia (below Figure). This leads us to believe that

investors can practically apply our proposed revision strategy into their portfolio

construction process to seek additional alphas.

0

20

40

6080

100

120

140

160

180

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

(%)Earnings-revision indicator

Comp osite revision indicator

Comp osite revision & target price potential

Optimised long-short portfolios Earnings-revision

indicator

Composite revision

indicator

Composite revision &

target price potential

Annualised return (%) 12.61 15.59 15.65

Average annualised risk (%) 8.76 8.40 7.81

Annualised return/SD 1.44 1.86 2.00

Average turnover (1-way; %) 20.67 20.46 20.37

Average total names (Long/short) 142 144 150

Return after transaction costs (%) 11.11 14.09 14.17

Annualised return/SD after costs (%) 1.27 1.68 1.81

When focus on the optimized

long-side portfolios only, the

proposed strategy delivered

better excess returns and IR in

emerging Asia


19/26


18

Fig. 29: Performance of optimized long-only portfolios by regions

Note: Universe is based on MSCI constituents. Trading costs are assumed 30bp. Active performance is the long-sideexcess return over the corresponding regional benchmark.


Stock ideas from our proposed revision strategy

To conclude, we present our latest stock ideas based on the recommended earnings-

revision strategy that incorporate consensus rating changes and target price potential

information. The Figure below features stocks with better consensus forecast earnings

and recommendation revisions while at the same time with high target price potential.

These companies are singled out as those that tend to have positive impact on stock

prices. The next Figure presents our short allocations and highlights the stock group with

worse consensus forecast earnings and rating revisions, and simultaneously with low or

negative target price potential. These companies reflect a greater likelihood of

underperformance, in our view.

0

10

20

30

40

50

60

70

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

(%)Asia Pacific ex-JP

Develo ped Pacific ex-JP

Emerging Asia

Optimised long-only portfolios Asia Pacific ex-JP Developed Pacific ex-JP Emerging Asia

Annualised active return (%) 5.76 2.13 5.10

Average annualised active risk (%) 4.43 1.88 4.20

Annualised active return/SD 1.30 1.13 1.21

Average turnover (1-way; %) 9.79 9.92 9.82

Average total names 80 79 80

Active return after transaction costs (%) 5.05 1.41 4.39

Annualised active return/SD after costs (%) 1.14 0.75 1.04

We highlight the latest stock

ideas based on our proposed

revision strategy


20/26


19

Fig. 30: Stock ideas (long allocation) based on revision strategy incorporating consensus rating and target price information

Note: Data as of 30 April 2013. Stocks highlighted are those that fall in the top quintile (group 1) of each market and sector by composite revision factor, and those that are withhigh target price potential (top half). Universe is based on MSCI constituents.


Market

Bloomberg

code Company Sector

Mkt cap

(US$mn)

Avg daily turnover

(US$mn)

Earnings

revision (%)

Change in consensus

rating

Target price

potential (%)

Australia CWN AU Crown Consumer Discretionary 10,092 19.96 2.25 -0.08 0.00

Australia ASX AU ASX Financials 6,838 27.23 2.08 -0.07 -6.17

Australia SHL AU Sonic Healthcare Health Care 5,454 17.62 -1.16 -0.14 0.82

Australia AIO AU Asciano Industrials 5,468 19.65 3.16 0.00 9.19

Australia FMG AU Fortescue Metals Group Materials 11,313 71.64 2.97 -0.11 41.12

Australia SGM AU Sims Metal Management Materials 2,049 12.13 -1.06 -0.21 25.46

Australia APA AU APA Group Utilities 5,648 12.04 -0.91 -0.08 -10.09

China 175 HK Geely Automobile Holdings Consumer Discretionary 4,157 29.58 5.24 0.00 15.68

China 1044 HK Hengan International Group Consumer Staples 12,701 26.72 -0.03 0.00 1.73

China 2628 HK China Life Insurance Financials 76,936 101.45 -0.16 -0.16 22.86China 1800 HK China Communications Construction Industrials 13,671 20.39 1.14 -0.05 21.15

China 762 HK China Unicom Hong Kong Telecommunication Services 33,827 47.82 -0.31 -0.10 23.60

China 836 HK China Resources Power Holdings Utilities 15,622 22.69 7.15 0.04 1.63

China 902 HK Huaneng Power International Inc Utilities 14,958 24.24 11.45 0.03 -1.65

Hong Kong 27 HK Galaxy Entertainment Group Consumer Discretionary 18,835 46.02 1.61 0.01 5.27

Hong Kong 83 HK Sino Land Financials 9,785 12.86 2.98 0.00 21.53

Hong Kong 16 HK Sun Hung Kai Properties Financials 38,616 82.70 1.71 -0.06 18.34

Hong Kong 20 HK Wheelock & Co Financials 11,310 7.17 7.11 0.00 9.29

Hong Kong 13 HK Hutchison Whampoa Industrials 46,311 71.74 3.10 -0.14 13.57

Hong Kong 316 HK Orient Overseas International Industrials 3,717 4.38 0.12 -0.26 23.04

Hong Kong 1038 HK Cheung Kong Infrastructure Utilities 18,106 10.28 -0.02 0.00 -2.86

India BJAUT IN Bajaj Auto Consumer Discretionary 10,107 1.12 -3.75 -0.16 10.03

India HMCL IN Hero Motocorp Consumer Discretionary 6,098 1.56 -3.90 -0.24 9.41

India UNSP IN United Spirits Consumer Staples 5,371 15.72 1.84 -0.09 -8.63

India CAIR IN Cairn India Energy 11,059 1.86 -0.08 -0.27 21.63

India ICICIBC IN ICICI Bank Financials 24,906 7.11 4.44 -0.05 14.34

India RCAPT IN Reliance Capital Financials 1,607 8.83 4.97 0.00 47.44

India RECL IN Rural Electrification Corp Financials 4,111 0.89 4.32 0.00 13.81

India DRRD IN Dr Reddy'S Laboratories Health Care 6,377 0.67 -0.72 -0.05 2.10

India SCS IN Satyam Computer Services Information Technology 2,409 0.89 1.86 -0.09 18.35

India SESA IN Sesa Goa Materials 2,567 1.11 7.79 -0.13 16.60

India STLT IN Sterlite Industries India Materials 5,954 1.47 -1.06 -0.12 23.38

India RELI IN Reliance Infrastructure Utilities 1,831 6.01 5.21 -0.04 75.25

Indonesia GGRM IJ Gudang Garam Consumer Staples 9,832 11.18 -1.73 -0.20 15.07

Indonesia BDMN IJ Bank Danamon Indonesia Financials 6,359 2.95 1.50 -0.02 0.21

Indonesia ISAT IJ Indosat Telecommunication Services 3,353 1.49 -4.53 0.00 12.02

Korea 000270 KS Kia Motors Corp Consumer Discretionary 20,171 88.05 -2.92 -0.06 26.00

Korea 000810 KS Samsung Fire & Marine Insurance Financials 10,000 16.66 -3.17 -0.03 21.82

Korea 068270 KS Celltrion Inc Health Care 5,759 130.05 49.58 -0.50 103.49

Korea 034020 KS Doosan Heavy Industries Industrials 3,936 15.25 -3.78 -0.06 45.36

Korea 010140 KS Samsung Heavy Industries Industrials 7,348 51.32 -0.28 -0.06 38.11

Korea 000880 KS Hanwha Corp Materials 2,124 4.79 -2.91 0.00 36.22

Korea 010130 KS Korea Zinc Materials 5,406 37.49 -11.81 -0.03 47.46

Malaysia GENM MK Genting Malaysia Consumer Discretionary 7,338 5.92 -1.60 -0.08 8.16

Malaysia SAKP MK Sapurakencana Petroleum Energy 5,231 16.55 8.20 0.00 18.87

Malaysia MAY MK Malayan Banking Financials 26,686 53.04 0.30 -0.13 3.53

Malaysia ULHB MK Uem Land Holdings Financials 3,570 8.12 6.03 -0.05 4.94

Malaysia GAM MK Gamuda Industrials 2,789 11.06 1.45 0.00 10.61

Malaysia PCHEM MK Petronas Chemicals Group Materials 17,170 6.48 0.14 -0.18 -0.29Philippines AEV PM Aboitiz Equity Ventures Inc Industrials 7,647 2.58 2.31 0.00 -11.29

Philippines TEL PM Philippine Long Distance Telephone Telecommunication Services 15,989 12.68 -0.70 -0.07 -5.68

Philippines EDC PM Energy Development Corp Utilities 2,966 2.47 -3.31 -0.08 16.74

Singapore GENS SP Genting Singapore Plc Consumer Discretionary 15,235 28.89 -0.93 -0.18 -3.52

Singapore WIL SP Wilmar International Consumer Staples 17,294 17.76 -0.37 0.00 12.36

Singapore CAPL SP Capitaland Financials 12,928 33.83 0.31 0.00 15.70

Singapore YZJ SP Yangzijiang Shipbuilding Holdings Industrials 2,956 4.52 1.60 -0.11 10.91

Singapore ST SP Singapore Telecommunications Telecommunication Services 52,151 65.04 0.00 0.00 -11.37

Taiwan 2201 TT Yulon Motor Consumer Discretionary 2,693 5.55 1.62 -0.19 17.26

Taiwan 2823 TT China Life Insurance Co/Taiwan Financials 2,277 11.11 8.14 -0.09 5.88

Taiwan 2891 TT Chinatrust Financial Holding Financials 7,466 30.35 1.31 -0.11 9.32

Taiwan 2603 TT Evergreen Marine Corp Taiwan Industrials 1,968 3.15 0.21 -0.06 14.10

Taiwan 2474 TT Catcher Technology Information Technology 3,342 63.75 5.59 -0.25 4.84

Taiwan 3008 TT Largan Precision Information Technology 3,625 52.19 -1.59 -0.52 3.60

Taiwan 3673 TT TPK Holding Information Technology 6,714 85.08 12.12 -0.19 2.38

Taiwan 1710 TT Oriental Union Chemical Corp Materials 977 2.78 -3.01 -0.44 10.30

Taiwan 3045 TT Taiwan Mobile Telecommunication Services 12,461 12.72 -2.63 0.00 -1.49

Thailand KTB TB Krung Thai Bank Financials 11,809 41.34 1.12 -0.14 13.88

Thailand PTTGC TB PTT Global Chemical Materials 11,215 33.17 3.31 -0.03 19.11


21/26


20

Fig. 31: Stock ideas (short allocation) based on revision strategy incorporating consensus rating and target price information

Note: Data as of 30 April 2013. Stocks highlighted are those that fall in the bottom quintile (group 5) of each market and sector by composite revision factor, and those that arewith low target price potential (bottom half). Universe is based on MSCI constituents.


Market

Bloomberg

code Company Sector

Mkt cap

(US$mn)

Avg daily turnover

(US$mn)

Earnings

revision (%)

Change in consensus

rating

Target price

potential (%)

Australia FLT AU Flight Centre Consumer Discretionary 3,974 16.52 1.11 0.11 -13.71

Australia CFX AU CFS Retail Property Trust Group Financials 6,459 17.41 0.24 0.08 -6.68

Australia TCL AU Transurban Group Industrials 10,489 34.70 -7.35 0.13 -6.94

Australia AWC AU Alumina Materials 2,444 13.87 -42.56 0.29 11.31

Australia JHX AU James Hardie Industries Materials 4,649 13.45 -2.07 0.08 -9.44

Australia SPN AU SP Ausnet Utilities 4,387 6.65 -2.73 0.00 -10.68

China 1114 HK Brilliance China Automotive Holdings Consumer Discretionary 6,152 19.97 -1.60 0.22 10.07

China 881 HK Zhongsheng Group Holdings Consumer Discretionary 2,741 3.37 -13.69 0.00 1.46

China 135 HK Kunlun Energy Energy 15,749 45.86 -4.19 0.18 17.27

China 998 HK China Citic Bank Financials 30,478 27.05 -0.63 0.20 11.39China 410 HK Soho China Financials 4,302 6.44 -8.64 0.09 -3.33

China 460 HK Sihuan Pharmaceutical Holdings Health Care 2,901 7.12 0.67 0.03 -5.89

China 1919 HK China Cosco Holdings Industrials 5,265 4.64 -47.92 -0.01 -3.79

China 2866 HK China Shipping Container Lines Industrials 3,686 6.71 -24.83 -0.07 14.86

China 267 HK Citic Pacific Industrials 4,416 8.61 -23.07 0.00 13.82

China 2600 HK Aluminum Corp Of China Materials 7,674 5.50 -81.58 -0.14 -1.96

China 2168 HK Yingde Gases Materials 1,884 7.02 -5.92 0.63 9.55

China 941 HK China Mobile Telecommunication Services 220,028 140.24 -2.97 0.10 4.08

China 1193 HK China Resources Gas Group Utilities 6,233 8.28 1.86 0.05 -6.56

Hong Kong 551 HK Yue Yuen Industrial Holdings Consumer Discretionary 5,705 6.53 -10.25 0.07 4.75

Hong Kong 11 HK Hang Seng Bank Financials 31,977 21.78 -1.11 0.08 -9.19

Hong Kong 302 HK Wing Hang Bank Financials 3,177 2.60 -0.84 0.03 3.80

Hong Kong 293 HK Cathay Pacific Airways Industrials 6,914 12.32 -6.34 -0.06 9.04

Hong Kong 3 HK Hong Kong & China Gas Utilities 26,148 20.38 -0.76 0.11 -14.75

India MM IN Mahindra & Mahindra Consumer Discretionary 10,519 1.55 -3.00 0.03 5.98

India UBBL IN United Breweries Consumer Staples 3,604 1.81 -1.27 0.10 -22.88

India ONGC IN Oil & Natural Gas Corp Energy 51,921 1.64 0.98 -0.02 7.87

India CBK IN Canara Bank Financials 3,409 0.66 0.00 0.04 9.63

India SIEM IN Siemens/India Industrials 3,602 0.74 -11.43 -0.05 4.75

India JSTL IN JSW Steel Materials 2,909 3.18 -5.60 0.05 6.63

Indonesia BBCA IJ Bank Central Asia Financials 27,261 13.51 2.20 0.09 -5.81

Indonesia TLKM IJ Telekomunikasi Indonesia Telecommunication Services 24,260 25.69 1.88 0.18 -6.51

Korea 030000 KS Cheil Worldwide Inc Consumer Discretionary 2,841 9.56 0.70 0.10 -1.47

Korea 037620 KS Mirae Asset Securities Financials 1,755 5.64 1.96 0.12 -16.85

Korea 005940 KS Woori Investment & Securities Financials 2,123 9.12 -10.60 0.07 14.42

Korea 000100 KS Yuhan Corp Health Care 2,127 6.97 0.02 0.00 6.71

Korea 010620 KS Hyundai Mipo Dockyard Industrials 1,961 8.36 -19.44 0.00 30.48

Korea 002380 KS KCC Corp Industrials 3,124 7.45 -24.10 0.00 17.13

Korea 036570 KS Ncsoft Corp Information Technology 3,302 41.56 -7.32 -0.02 18.13

Korea 010060 KS OCI Materials 3,064 24.26 -23.23 0.03 31.37

Malaysia UMWH MK UMW Holdings Consumer Discretionary 5,491 9.95 0.17 0.31 -10.57

Malaysia PETD MK Petronas Dagangan Energy 7,713 3.06 -0.24 0.00 -13.69

Malaysia AFG MK Alliance Financial Group Financials 2,269 2.34 -0.26 0.35 -2.17

Malaysia HLBK MK Hong Leong Bank Financials 8,935 2.87 -0.09 0.10 1.54

Malaysia MMHE MK Malaysia Marine & Heavy Engineering Industrials 2,004 1.62 -6.36 0.00 6.12

Malaysia SIME MK Sime Darby Industrials 18,646 19.45 -6.22 0.04 6.81

Malaysia LMC MK Lafarge Malayan Cement Materials 2,770 1.12 -0.50 0.09 -7.90

Philippines GLO PM Globe Telecom Inc Telecommunication Services 4,600 2.78 -0.32 0.00 -14.42

Philippines AP PM Aboitiz Power Utilities 6,669 3.25 -1.77 0.00 3.68

Singapore SPH SP Singapore Press Holdings Consumer Discretionary 5,792 30.10 -2.78 0.40 -5.49

Singapore AREIT SP Ascendas REIT Financials 4,999 20.88 0.68 0.47 -5.78

Singapore STH SP Starhub Telecommunication Services 6,602 6.35 -0.30 0.03 -21.90

Taiwan 2204 TT China Motor Consumer Discretionary 1,355 1.71 -1.92 -0.04 -0.29

Taiwan 2880 TT Hua Nan Financial Financials 4,902 3.03 -1.02 0.05 -3.80

Taiwan 6239 TT Powertech Technology Information Technology 1,303 17.20 -6.35 0.22 -2.04

Taiwan 2384 TT Wintek Corp Information Technology 648 12.41 -150.00 0.08 -14.46

Thailand IRPC TB IRPC PCL Energy 2,854 6.33 -8.71 0.37 6.61


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Fig. 32: Definition of factors

Note: The factors marked with * are reverse-based.


Fig. 33: Definition of investment styles

Note: The factors marked with * are reverse-based.


Type Factors Definition

Size, price momentum & Market cap * Log of US$ market cap

Liquidity Price momentum (1M) Past 1-month local currency return

Price momentum (12M -1M) Last 12-month return less the last 1 month return in local currency

Volume turnover ratio Past 1-month trading volume / shares outstanding at month-end

Valuation Dividend yield F12-month DPS / stock price

Earnings yield F12-month EPS / stock price

B/P Actual BPS / stock price

Cashflow yield F12-month cashflow per share / stock price

EBITDA/EV (F12-month net profit + actual interest expense + actual depreciation) / (market cap +

interest-bearing debt - cash - short-tern marketable securities)

Revision & earnings yield Revision index (Number of upward analyst revisions - number of downward analyst revisions) / total

number of analysts estimate

Earnings revision indicator (FY2) FY2 EPS / previous 3-month average FY2 EPS

Change in earnings yield F12-month earnings yield - past 3-month average earnings yield

StarMine predicted surprise (SmartEstimate F12-month - consensus mean) / max(divisor, |mean|)

Normalised E/P (F12-month earnings yield - average earnings yield in past 36 months) / standard

deviation of the earnings yields in the past 36 months

Change in consensus rating Current consensus rating score - previous month consensus rating score

Change in target price Consensus target price / previous month target price - 1 ) x 100%

Change in revision index Current revision index - previous month revision index

Change in earnings revision Current earnings revision indicator - previous month ERI

Target price potential (Consensus target price / current stock price - 1) x 100%

Growth Sales growth (FY2) FY2 sales / FY1 sales

EPS growth (FY2) FY2 EPS / FY1 EPS

Financial & operating efficiency Return on equity F12-month net profit / actual shareholders equity

Shareholders equity ratio Actual shareholders equity / actual total assets

Pretax profit margin F12-month pretax profit / F12-month sales

Risk Volatility Past 36-month price return volatility

Estimate dispersion I/B/ES FY1 consensus EPS standard deviation / absolute value for FY1 consensus

EPS

Default probability * Default probability estimated using Merton model

Style Factors Definition

Size * Market cap Log of US$ market cap

Momentum Price momentum (12M -1M) Last 12-month return less the last 1-month return in local currency

Yield Dividend yield F12-month DPS / stock price

Valuation Earnings yield F12-month EPS / stock price

B/P Actual BPS / stock price

Revision Revision index (Number of upward analyst revisions - number of downward analystrevisions) / total number of analysts' estimate

Growth Sales growth (FY2) FY2 sales / FY1 sales

EPS growth (FY2) FY2 EPS / FY1 EPS

Profitability Return on equity F12-month net profit / actual shareholders' equity

Change in pretax profit margin FY2 pretax profit margin - FY1 pretax profit margin

Risk * Volatility Past 36-month price return volatility

Estimate dispersion I/B/ES FY1 consensus EPS standard deviation / absolute value for FY1

consensus EPS

Default probability Default probability estimated using Merton model


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Appendix A-1

Any Authors named on this report are Research Analysts unless otherwise indicated

Analyst Certification

We, Sandy Lee and Rico Kwan, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about

any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly orindirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to anyspecific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other NomuraGroup company.

Important Disclosures

Online availability of research and conflict-of-interest disclosuresNomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne.Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspxorrequested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please [email protected] help.The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, aportion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are

not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject toFINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securitiesheld by a research analyst account.Nomura Global Financial Products Inc. (NGFP) Nomura Derivative Products Inc. (NDPI) and Nomura International plc. (NIplc) areregistered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, andNIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report.

Any authors named in this report are research analysts unless otherwise indicated. Industry Specialistsidentified in some Nomura Internationalplc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they havecoverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Marketing

Analystsidentified in some Nomura research reports are research analysts employed by Nomura International plc who are primarilyresponsible for marketing Nomuras Equity Research product in the sector for which they have coverage. Marketing Analysts may alsocontribute to research reports in which their names appear and publish research on their sector. Distribution of ratings (Global)The distribution of all ratings published by Nomura Global Equity Research is as follows: 43% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 40% of companies with thisrating are investment banking clients of the Nomura Group*.46% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 48% of companies withthis rating are investment banking clients of the Nomura Group*.11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 23% of companies withthis rating are investment banking clients of the Nomura Group*.

As at 31 March 2013. *The Nomura Group as defined in the Disclaimer section at the end of this report.Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin AmericaThe rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock.

Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited managementdiscretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriatevaluation methodology such as discounted cash flow or multiple analysis, etc. STOCKS

A rating of 'Buy',indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ' Neutral',indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ' Reduce', indicates thatthe analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ' Suspended', indicates that the rating,target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstancesincluding, but not limited to, when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company.Benchmarks are as follows: United States/Europe: please see valuation methodologies for explanations of relevant benchmarks for stocks,which can be accessed at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global EmergingMarkets (ex-Asia):MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS

A 'Bullish'stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A ' Neutral'stance,indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A ' Bearish'stance, indicates thatthe analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.


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Explanation of Nomura's equity research rating system in Japan and Asia ex-JapanSTOCKSStock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price,subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock,based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy'recommendation indicates thatpotential upside is 15% or more. A 'Neutral'recommendation indicates that potential upside is less than 15% or downside is less than 5%. A'Reduce'recommendation indicates that potential downside is 5% or more. A rating of 'Suspended'indicates that the rating and target pricehave been suspended temporarily to comply with applicable regulations and/or fi rm policies in certain circumstances including when Nomura isacting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelledas 'Not rated'or shown as 'No rating'are not in regular research coverage of the Nomura entity identified in the top banner. Investors shouldnot expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS

A 'Bullish'rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positiveabsolute recommendation. A 'Neutral'rating means most stocks in the sector have (or the weighted average recommendation of the stocksunder coverage is) a neutral absolute recommendation. A 'Bearish'rating means most stocks in the sector have (or the weighted averagerecommendation of the stocks under coverage is) a negative absolute recommendation.Target Price

A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may beimpeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if thecompany's earnings differ from estimates.

DisclaimersThis document contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or,with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1

herein or identified elsewhere in the document. The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates orsubsidiaries and may refer to one or more Nomura Group companies including: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; NomuraInternational plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New York, US; Nomura International (Hong Kong) Ltd. (NIHK),Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. (NFIK), Korea (Information on Nomura analysts registered with the KoreaFinancial Investment Association ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr); Nomura Singapore Ltd. (NSL),Singapore (Registration number 197201440E, regulated by the Monetary Authority of Singapore); Nomura Australia Ltd. (NAL), Australia(ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financialservices licence number 246412; P.T. Nomura Indonesia (PTNI), Indonesia; Nomura Securities Malaysia Sdn. Bhd. (NSM), Malaysia; NIHK,Taipei Branch (NITB), Taiwan; Nomura Financial Advisory and Securities (India) Private Limited (NFASL), Mumbai, India (Registered

Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; Tel: +91 22 4037 4037,Fax: +91 22 4037 4111; SEBI Registration No: BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034, MCX:INE261299034) and NIplc, Madrid Branch (NIplc, Madrid). CNS Thailand next to an analysts name on the front page of a research reportindicates that the analyst is employed by Capital Nomura Securities Public Company Limited (CNS) to provide research assistance services toNSL under a Research Assistance Agreement. CNS is not a Nomura entity.THIS MATERIAL IS: (I) FOR YOUR PRIVATE INFORMATION, AND WE ARE NOT SOLICITING ANY ACTION BASED UPON IT; (II) NOT TOBE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION WHERE

SUCH OFFER OR SOLICITATION WOULD BE ILLEGAL; AND (III) BASED UPON INFORMATION FROM SOURCES THAT WE CONSIDERRELIABLE, BUT HAS NOT BEEN INDEPENDENTLY VERIFIED BY NOMURA GROUP.Nomura Group does not warrant or represent that the document is accurate, complete, reliable, fit for any particular purpose or merchantableand does not accept liability for any act (or decision not to act) resulting from use of this document and related data. To the maximum extentpermissible all warranties and other assurances by Nomura group are hereby excluded and Nomura Group shall have no liability for the use,misuse, or distribution of this information.Opinions or estimates expressed are current opinions as of the original publication date appearing on this material and the information,including the opinions and estimates contained herein, are subject to change without notice. Nomura Group is under no duty to update thisdocument. Any comments or statements made herein are those of the author(s) and may differ from views held by other parties within NomuraGroup. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, ifappropriate, seek professional advice, including tax advice. Nomura Group does not provide tax advice.Nomura Group, and/or its officers, directors and employees, may, to the extent permitted by applicable law and/or regulation, deal as principal,agent, or otherwise, or have long or short positions in, or buy or sell, the securities, commodities or instruments, or options or other derivativeinstruments based thereon, of issuers or securities mentioned herein. Nomura Group companies may also act as market maker or liquidityprovider (within the meaning of applicable regulations in the UK) in the financial instruments of the issuer. Where the activity of market maker

20 asia quants revision based strategy 03may13

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