INVESTMENT IDEAS | TUESDAY, 12 MAY 2015 1/10 TUESDAY, 12 MAY 2015 1/10 INVESTMENT IDEAS NEXT GENERATION: ENERGY TRANSITION A STRONGER COMMITMENT TOWARDS A CLEANER CHINA China is getting serious about environmental regulation. The ‘Airpocalypse’ of January 2013 was the first catalyst and the more recent documentary ‘Under the Dome’ only accelerated this trend in public awareness. In fact, the government has committed to making environment protection an emerging ‘pillar industry’, which will require investments of RMB 2 trillion (USD 320 billion) per year over the next 5 five years. Given the growing public consensus, along with the policy imperative, our growth market investment specialists believe that the ‘Cleaner China’ theme represents a long-term trend to which investors should pay close attention. 2013 ‘AIRPOCALYPSE’ AS A CATALYST FOR CHANGE In January 2013, a blanket of warm air settled over the Chinese capital, trapping beneath it the pollution from the region’s 200 coal-fired power plants and more than five million cars. The concentration of particles hit forty times the level that the World Health Organisation deems as safe, making the air worse than any smoking lounge and causing hospitals to report 30% increases in patient admissions. This ‘airpocalypse’ injected a new urgency into Chinese debate about the environment, which was further reinforced by the documentary on Chinese pollution by renowned investigative journalist, Chai Ming, called ‘Under the dome’, which attracted over 100 million viewers in less than forty eight hours in March 2015. 2000. While the US and Europe are cutting their emissions by about 70 million tonnes per year combined, China is still increasing its own by over 500 million tonnes per year. This makes the Chinese environmental challenge a unique global threat – and as such should further push the topic to the forefront of the Chinese policy agenda. POLICY FOR ENVIRONMENTAL PROTECTION The environmental urgency has not gone unnoticed by the government. Indeed, it has already unveiled a series of reforms to restrict air pollution. For instance, in 2013, it started the country’s first carbon market, made prosecuting environmental crimes easier and made local officials more accountable for air-quality problems in their areas. According to the People’s Bank of China, China will need to invest RMB 2 trillion (USD 320 billion) every year over the next 5 five years to meet reduction targets. NEW INITIATIVES ANNOUNCED BY PREMIER LI In his annual ‘Government Work Report’ to China’s lawmakers at the opening of their 2015 plenary session in March 2015 (during the National People’s Congress), Premier Li called pollution “a blight on peoples’ quality of life and a trouble that weighs on their hearts”. He delivered a report that introduced important new, stricter environmental regulations. Specifically, these included the following initiatives: - CHINA AS A GLOBAL ENVIRONMENTAL THREAT The situation in China also has a global implication. In 1990, China’s greenhouse-gas emissions made up just 10% of the world’s total. Today, China’s emissions make up over 30% of the world’s total, accounting for two-thirds of the global growth in carbon-dioxide emissions since - Expanding the seven city carbon trading pilot platform to a national scheme. Cutting 2015 emissions substantially. Carbon dioxide intensity will be cut by at least 3.1% reducing both chemical oxygen demand and ammonia nitrogen emissions by about 2% and reducing emissions of sulphur Investment Solutions & Advisory, Investment Specialists & Writing | Please find important legal information at the end of this document. INVESTMENT IDEAS | TUESDAY, 12 MAY 2015 - - - - - dioxide by around 3% and nitrogen oxides by about 5%. A pledge to enforce environmental laws and regulations, cracking down on illegal emissions and ensuring that heavy penalties are handed out to any offenders and to hold officials who allow illegal emissions accountable for their conduct. The government will promote the use of new-energy vehicles, reduce vehicle exhaust emissions, raise the national fuel quality standard and provide higher quality petrol and diesel. All highly polluting vehicles registered before 2005 will be banned from the roads Implementing the ‘Water Act’ - strengthening pollution control for rivers, lakes, and sea and investing over RMB 800 billion in new water conservation project construction. New 3rd-party environment pollution controls and stricter punishment for polluters. Further execution of the ‘Air Act’. Encouraging industrial solid waste recycling usage, nuclear and hydro energy plants. All of these initiatives and financial commitments should benefit companies involved either in the quest for clean energy (gas, wind and hydro) or better water and waste treatment. CONCLUSION FOR INVESTORS In short, the National People’s Congress has this year committed further to making environment protection an emerging 'pillar industry'. These initiatives have already made China the world’s largest investor in green energy – a trend which is likely only to accelerate. Our research department wrote in more detail about China’s efforts to curb pollution in their Baer®Insight of 30 April 2013 entitled ‘Cleaner China – Striving to curb Pollution’. That pub- 2/10 lication preceded the launch of the JB Tracker Certificate on the Cleaner China Basket I, which has earned investors nearly 70% over the last two years, outperforming the MSCI China Total Return Index by 20%. Our Growth Market Investment Specialists have now selected a revised basket of stocks that are set to benefit from the strengthening important secular trend in the Chinese economic development process. The new JB Tracker Certificate on the Cleaner China basket II represents a roll-over of the JB Tracker Certificate on the Cleaner China basket I. This product is in subscription until 22 May 2015, 17.00 CET. Please see further details on the next page. JULIUS BAER NEXT GENERATION ‘Cleaner China’ is part of the Next Generation theme ‘Energy Transition’. Fossil fuel dependence, high prices, climate change and pollution are some of the challenges spurring energy investments and innovation. We are in the midst of transition where new technologies move the world towards a cleaner, more efficient use of all available resources. The Next Generation Investment Philosophy at Julius Baer focuses on forward-looking structural changes and fundamental imbalances within the economy and society at large and thus looks beyond short-term markets. By spotting megatrends such as demographic shifts, ecological balance and technological progress, and by turning our insights into promising investments, we help our clients not only to make a difference in their portfolio but also to preserve wealth for the next generation. www.juliusbaer.com/nextgeneration INVESTMENT IDEAS | TUESDAY, 12 MAY 2015 3/10 INVESTMENT OPPORTUNITIES JB Tracker on the Cleaner China Basket II Suitability The product is suitable for investors with a high risk tolerance who are seeking exposure to stocks benefitting from the anti-pollution efforts and investments in China. Highlights The basket consists of ten equally weighted stocks (at issue date). Tracker certificates allow the investor to fully participate in the performance of the underlying. Julius Baer provides a secondary market for the product, but investors should be aware of the spread risk (bid/ask margin). Due to the Government commitment to enforcing stricter environmental regulations with regards to pollution, shares of companies active in clean energy (gas, wind and hydro), water and waste treatment are expected to generate some above market returns in China. Indicative terms Underlying Cleaner China Basket II Currency USD ISIN CH0263888247 Number of Holdings 10 Participation 100% Issue date 02.06.15 Issue price USD 100.00 Subscription until 22.05.2015 - 17:00 CET Maturity date 26.05.16 Redemption date 02.06.16 Issuer Bank Julius Baer & Co. Ltd, Zurich Issuer Rating A1 (Moody’s) Constituents of the Cleaner China Basket II Company ISIN Sector Currency Price Target Price* FY1 Div. yield Julius Baer P/E Research Rating China Everbright International HK0257001336 Industrials HKD 15.12 14.75 28.64 0.86% Buy China Longyuan Power Grp. CNE100000HD4 Utilities HKD 9.50 10.92 17.02 1.14% not covered Guangdong Investment HK0270001396 Utilities HKD 11.08 10.52 16.61 2.52% not covered China Gas Holdings BMG2109G1033 Utilities HKD 13.44 15.40 20.58 1.10% not covered Huaneng Renewables Corp CNE100000WS1 Utilities HKD 3.44 3.60 16.02 1.16% not covered Beijing Enterprises Water BMG0957L1090 Utilities HKD 6.59 6.75 25.94 1.37% not covered Wasion Group Holdings KYG9463P1081 Information Technology HKD 11.76 11.88 14.85 2.53% not covered Xinjiang Goldwind Sc. & Tech CNE100000PP1 Industrials HKD 17.62 17.68 17.04 2.80% not covered Huadian Fuxin Energy Corp CNE100001F60 Utilities HKD 3.92 5.11 10.40 1.88% not covered Beijing Enterprises Holdings HK0392044647 Industrials HKD 71.60 72.13 15.63 1.67% not covered Data as of 12 May 2015; Source: Bloomberg Finance L.P., Julius Baer *Target prices: Bloomberg Finance L.P. consensus target INVESTMENT IDEAS | TUESDAY, 12 MAY 2015 4/10 EQUITY RESEARCH Frequently used abbreviations Abbreviation Description Abbreviation Description Abbreviation Description CAGR Compound annual growth rate EPS Earnings per share P/B Price-to-book value DCF Discounted cash flow EV Enterprise value P/E Price-to-earnings ratio DY Dividend yield FCF Free cash flow PEG P/E divided by year-onyear EPS growth EBIT Earnings before interest and taxes MV Market value ROE Return on equity EBITDA Earnings before interest, taxes, depreciation and amortisation Rating system for global equity research (stock rating) Buy/Overweight Expected to outperform the MSCI regional industry group by at least 5% in the coming 9–12 months, unless otherwise stated. Hold/Neutral Expected to perform in line (±5%) with the MSCI regional industry group in the coming 9–12 months, unless otherwise stated. Reduce/Underweight Expected to underperform the MSCI regional industry group by at least 5% in the coming 9–12 months, unless otherwise stated. Risk rating system for global equity research Low/medium/high Level of expected share price volatility in the next 9-12 months. FIXED INCOME RESEARCH Frequently used abbreviations Abbreviation Description Abbreviation Description Abbreviation Description Ccy Currency NC Next call date (at the discretion of the issuer) YTC Yield to Call; in % Cpn Coupon N.R. Not rated by Julius Baer Bond Research YTM Yield to maturity; in % DUR Duration in years NP Next put date (at the discretion of the holder) YTP Yield to Put; in % Incr. Increment; smallest possible positive change of the nominal amount tradable (on top of the minimum nominal investment size). W-Tax Withholding Tax held back at source (best effort basis; source: Euroclear/Julius Baer host system). YTW Yield to worst; in % Mdy’s Moody’s YAS Yield adjusted spread; option adjusted risk premium in basis points over respective government bond yield curve. ASW Asset Swap Spread; spread over LIBOR in basis points Rating system for Fixed Income Buy Within its risk category, the issuer is highly recommended due to its financial and business condition (strong balance sheet, income statement, cash flow and good position in the industry). Debt instruments of the issuer are regarded as an attractive investment from a risk/return perspective. Hold Maintain position based on stable credit fundamentals and/or average expected return characteristics within peer group. Sell The rating is changed to Sell, depending on a significant deterioration in the fundamental data of the issuer in relation to the industry peers. The investment is no longer justified from a risk/return perspective for the relevant category. INVESTMENT IDEAS | TUESDAY, 12 MAY 2015 5/10 Risk categories for Fixed Income Research Conservative issuer Top rating preserved throughout a normal business cycle. Mainly supranational issuers, top-rated sovereigns and bodies that are directly and fully guaranteed by these institutions. Quality issuer Top rating preserved throughout a normal business cycle. Sovereigns and corporate issuers that are very likely to service and repay debt within a five-year credit scenario. Opportunistic issuer Attractive risk/return profile in the current credit scenario but are subject to rating downgrade risk and, thus, might be exchanged periodically. Issuers that are quite likely to service and repay debt within the five-year credit scenario. Speculative issuer (Sub-) investment grade issuers in Europe, USA and Emerging Markets. Investors must note that these issuers are subject to a higher default frequency and that an active management of these positions is crucial. Non-investment grade Investment grade Credit ratings, following the definitions and methodology of credit rating agencies Moody’s S&P Fitch / I BCA Credit rating definition Aaa AAA AAA Obligations rated Aaa are judged to be of the higher quality, with minimal credit risk. Aa1 AA+ AA Aa2 AA AA- Obligations rated Aa are judged to be of high quality and are subject to very low credit risk. Aa3 AA- A1 A+ A+ A2 A A A3 A- A- Baa1 BBB+ BBB+ Baa2 BBB BBB Baa3 BBB- BBB- Ba1 BB+ BB+ Ba2 BB BB Ba3 BB- BB- B1 B+ B+ B2 B B B3 B- B- Caa1 CCC+ CCC+ Caa2 CCC CCC Caa3 CCC- CCC- Ca CC CC+ C CC Obligations rated A are considered upper-medium grade and are subject to low credit risk. Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics. Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk. Obligations rated B are considered speculative and are subject to high credit risk. Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk. Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest. CCC D DDD Obligations rated C are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest. COMMODITY RESEARCH Rating system for commodities Bullish (Buy) Julius Baer commodity research sees upside from current spot prices. Neutral (Hold) Julius Baer commodity research believes prices to remain range-bound. Bearish (Sell) Julius Baer commodity research sees downside from current spot prices. INVESTMENT IDEAS | TUESDAY, 12 MAY 2015 6/10 CURRENCY RESEARCH Frequently used abbreviations Major currencies Other currencies AUD Australian dollar JPY Japanese yen BRL Brazilian real MXN Mexican peso CAD Canadian dollar NOK Norwegian krone CNH Chinese yuan (offshore version) MYR Malaysian ringgit CHF Swiss franc NZD New Zealand dollar CNY Chinese yuan (onshore version) PLN Polish zloty EUR Euro SEK Swedish krone CZK Czech koruna RMB Chinese renminbi GBP British pound USD US dollar HUF Hungarian forint RUB Russian ruble INR Indian rupee TRY Turkish lira KRW Korean won ZAR South Africa rand Rating system for currencies Positive Significant outperformance of a currency. Return from the expected change in the bilateral exchange rate + the relative carry of the currency pair. Neutral Marginal outperformance of a currency. Return from the expected change in the bilateral exchange rate + the relative carry of the currency pair. Negative Based on negative expected total returns of a currency. FUND SOLUTIONS Frequently used abbreviations Abbreviation Description Abbreviation Description NAV Net asset value TER Total expense ratio Investment styles for funds Independent growth The product seeks to generate positive returns (Libor plus), irrespective of market movements. Opportunistic The performance of the product depends on a manager’s longer term ideas that may result in shorter term underperformance. Market exposure The product creates full and diversified exposure to the respective underlying market with the aim of generating relative outperformance. Prudent participation The product builds controlled exposure to the underlying investment universe and is therefore supposed to lose less in bear markets. Distribution types for funds Accumulation All capital income (e.g. dividends, interest income) is reinvested. Income Capital income (e.g. dividends, interest income) is distributed among investors. The amount of distributed capital income is at the discretion of the fund manager. INVESTMENT IDEAS | TUESDAY, 12 MAY 2015 7/10 Julius Baer risk rating for funds The Julius Baer Product Risk Rating divides financial instruments into four risk categories taking into account different risk factors, such as volatility, credit default risk, currency risk and other risk factors, depending on the instrument type. The risk category “Low” does not mean “risk free”. The Julius Baer Product Risk Rating is not aligned with the risk classification of the product provider (e.g. the SSRI for UCITS funds). For a full discussion of the risks associated with an investment in this fund, prospective investors should carefully review the current official fund documentation, such as the Prospectus, the Offering Memorandum, Product Highlight Sheet, Key Facts Sheet and the Key Investor Information Document (KIID), as applicable. Low Funds of the category “low” tend to experience small fluctuations of the investment value under normal market conditions, resulting in a very limited potential for capital losses but also have limited potential for income and capital growth. Moderate Funds of the category “moderate” offer a combination of modest income and growth potential but may experience short term losses and moderate fluctuations of the investment value. Considerable Funds of the category “considerable” may experience the risk of considerable fluctuation of the investment value while offering higher potential for capital growth and income. High Funds of the category “high” are exposed to significant risk and fluctuation including the loss of the investment value, while providing the potential to maximize long term growth opportunities. MISCELLANEOUS Frequently used abbreviations Abbreviation Description Abbreviation Description Abbreviation Description ETC Exchange Traded Commodity KG Kilogram Mln Million ETF Exchange Traded Fund mBtu Million British Thermal Units Oz Ounces ISIN International Securities Identification Number Frequently used abbreviations for indices Abbreviation Description Abbreviation Description Abbreviation Description AEX Amsterdam Exchange Index (Dutch stock market index) HIS Hang Seng Index (Hong Kong stock market index) SMI Swiss Market Index CAC40 Cotation Assistée en Continu (French stock market index) KFX Copenhagen Index (Danish stock market index) SPX Standard & Poor’s Index DAX Deutscher Aktien Index (German stock market index) MEXBOL Mexican Bolsa (Mexican stock market index) TPX Topix – Tokyo Stock Price Index (Japanese stock market index) FTSE100 FTSE Group Index (London stock market index) OMX Stockholm Index (Swedish stock market index) Definitions Conversion premium Percentage amount of price paid for the convertible security exceeding its current straight price. Delta Calculated ratio of price change if underlying changes by 1%. Nominal Nominal; minimum nominal investment size (in respective currency). Payment rank Rank with respect to payment of distributions for the security. INVESTMENT IDEAS | TUESDAY, 12 MAY 2015 8/10 IMPORTANT LEGAL INFORMATION This publication constitutes marketing material and is not the result of independent financial research. Therefore the legal requirements regarding the independence of financial research do not apply. This material is not independent from the proprietary interests of Julius Baer, which may conflict with your interests. The information and opinions expressed in this publication were produced by Bank Julius Baer & Co. Ltd., Zurich, as of the date of writing and are subject to change without notice. This publication is intended for information purposes only and does not constitute an offer or an invitation by, or on behalf of, Julius Baer to make any investments. 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