July 10,2006 Beijing Capital (600008.SS) Gao Hua Securities Investment Research 1 July 10,2006 COMPANYUPDATE Beijing Capital (600008.SS) Establishing 2007 target price; no change in view What's changed No change in view. We have rolled forward to a 2007 DCF-based target price, which remains Rmb5.40/share. We also maintain our 2006E and 2007EEPS estimates of Rmb0.20 and Rmb0.24, respectively. Implications Business as usual. The company remains on the lookout for new projects outside Beijing to grow capacity. Within Beijing, we believe the company will consolidate the sewage business in the 2Q financial statements. Valuation Our 12-month DCF-based target price of Rmb5.40 implies 12% potential upside. The shares are trading at 20X 2007E earnings; this is in line with other A-share peers. Within the water sector, we prefer Shanghai Municipal Raw Water (600649.SS, Neutral). Although it is also trading at 20X 2007 P/E, we believe Shanghai Raw Water has the best fundamentals momentum of the stocks in our coverage in terms of asset and earnings growth. We continue to think that further asset injections in tap water and sewage treatment assets would be positive for the company. Key risks Key risks to our investment view and target price include lower-than-expected tariff increases and water volume sold. INVESTMENTLISTMEMBERSHIP Neutral Coverage View: Neutral China: Water Growth Returns * Multiple Volatility Volatility Multiple Returns * Growth Investment Profile: Beijing Capital Low High Percentile 20th 40th 60th 80th 100th * Returns = Return on Capital For a complete description of the investment profile measures please refer to the disclosure section of this document. 600008.SS Asia Pacific Utilities Peer Group Average Key data Current Price (Rmb) 4.82 Price target (Rmb) 5.40 Market cap (Rmb mn / US$ mn) 10,604.0 / 1,327.8 Foreign ownership (%) -- 12/0512/06E 12/07E 12/08E EPS (Rmb) New 0.220.200.240.27 EPS revision (%) 0.00.73.50.6 EPS growth (%) (1.8) (9.7) 23.212.0 EPS (dil) (Rmb) New 0.220.200.240.27 P/E (X) 22.024.419.817.7 P/B (X) 126.96.36.199.1 EV/EBITDA (X) 15.717.012.210.6 Dividend yield (%) 188.8.131.52.0 ROE (%) 10.99.411.312.0 Price performance chart 3.0 3.5 4.0 4.5 5.0 5.5 6.0 Jul-05 Oct-05 Jan-06 Apr-06 1,000 1,200 1,400 1,600 1,800 2,000 2,200 Beijing Capital (L) Shanghai SEAShare Index (R) Share price performance (%) 3 month 6 month 12 month Absolute 8.43.645.7 Rel. to Shanghai SEAShare Index (15.3) (27.2) (14.6) Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 7/10/2006 close. Franklin Chow, CFA +86(10)6535-3012 | email@example.com Beijing Gao Hua Securities Company Limited Stephen Oldfield +852-2978-1326 | firstname.lastname@example.org Goldman Sachs (Asia) L.L.C. Qi Zhou +86(10)6535-3054 | email@example.com Beijing Gao Hua Securities Company Limited Christopher Wong +852-2978-1274 | firstname.lastname@example.org Goldman Sachs (Asia) L.L.C. Beijing Gao Hua Securities Company Limited and its affiliates do and seek to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For analyst certification, see the text preceding the disclosures. For other important disclosures, contact your investment representative. Beijing Gao Hua Securities Company Limited Investment Research July 10,2006 Beijing Capital (600008.SS) Gao Hua Securities Investment Research 2 Beijing Capital: Summary financials Profit model (Rmb mn) 12/0512/06E 12/07E 12/08EBalance sheet (Rmb mn) 12/0512/06E 12/07E 12/08E Total revenue 470.91,193.31,875.22,526.4 Cash & equivalents 1,439.3771.41,019.9774.4 Cost of goods sold (137.5) (386.9) (603.3) (903.3) Accounts receivable 30.860.394.8127.7 SG&A (158.9) (268.2) (353.4) (458.7) Inventory 30.364.7100.9151.1 R&D -- -- -- -- Other current assets 323.1329.9329.9329.9 Other operating profit/(expense) 429.7280.1274.2268.3 Total current assets 1,823.51,226.41,545.61,383.2 EBITDA 604.2818.31,192.81,432.7 Net PP&E 2,340.14,369.95,633.26,766.2 Depreciation & amortization (94.4) (261.2) (357.9) (444.4) Net intangibles 103.9100.396.793.1 EBIT 509.8557.1834.9988.3 Total investments 4,106.04,113.74,125.04,134.1 Interest income 13.5184.108.40.206 Other long-term assets 0.00.00.00.0 Interest expense (140.1) (154.8) (227.8) (300.8) Total assets 8,373.59,810.311,400.512,376.5 Income/(loss) from uncons. subs.133.781.253.353.3 Others 9.4 (3.0) (3.0) (3.0) Accounts payable 51.595.0148.1221.7 Pretax profits 526.3492.2666.8747.3 Short-term loans 1,527.91,718.61,878.7943.0 Income tax (40.9) (48.4) (103.3) (110.7) Other current liabilities 380.7207.4262.2269.7 Minorities (3.9) (9.1) (28.2) (36.8) Total current liabilities 1,960.12,020.92,289.01,434.4 Long-term debt 1,617.72,387.43,142.24,445.2 Net income pre-preferred 481.5434.7535.4599.8 Other long-term liabilities 24.724.724.724.7 Preferred dividends 0.00.00.00.0 Total long-term liabilities 1,642.42,412.13,166.94,469.9 Net income (pre-exceptionals) 481.5434.7535.4599.8 Total liabilities 3,602.54,433.15,455.95,904.3 Post tax exceptionals 0.00.00.00.0 Net income 481.5434.7535.4599.8 Common stock & premium 3,805.03,805.03,805.03,805.0 Other common equity 792.3830.81,061.91,287.0 EPS (basic, pre-except) (Rmb) 0.220.200.240.27 Total common equity 4,597.34,635.84,866.95,091.9 EPS (basic, post-except) (Rmb) 0.220.200.240.27 Minority interest 173.6741.51,077.61,380.3 EPS (diluted, post-except) (Rmb) 0.220.200.240.27 DPS (Rmb) 0.180.140.170.19 Total liabilities & equity 8,373.59,810.311,400.512,376.5 Dividend payout ratio (%) 82.270.070.070.0 Free cash flow yield (%) 1.1 (17.8) (7.7) (6.7) BVPS (Rmb) 2.092.112.212.31 Growth & margins (%) 12/0512/06E 12/07E 12/08ERatios 12/0512/06E 12/07E 12/08E Sales growth 50.6153.457.134.7 ROE (%) 10.99.411.312.0 EBITDA growth 8.235.445.820.1 ROA (%) 6.24.85.05.0 EBIT growth 2.29.349.918.4 ROACE (%) 220.127.116.11.1 Net income growth (1.8) (9.7) 23.212.0 Inventory days 61.144.850.150.9 EPS growth (1.8) (9.7) 23.212.0 Receivables days 18.513.915.116.1 Gross margin 70.867.667.864.2 Payable days 89.669.173.574.7 EBITDA margin 128.368.663.656.7 Net debt/equity (%) 37.171.982.290.6 EBIT margin 108.346.744.539.1 Interest cover - EBIT (X) 4.03.93.83.4 Cash flow statement (Rmb mn) 12/0512/06E 12/07E 12/08EValuation 12/0512/06E 12/07E 12/08E Net income pre-preferred dividends 481.5434.7535.4599.8 P/E basic (X) 22.024.419.817.7 D&A add-back 94.4261.2357.9444.4 P/B (X) 18.104.22.168.1 Minorities interests add-back 22.214.171.124.8 EV/EBITDA (X) 15.717.012.210.6 Net inc/(dec) working capital (4.2) (200.7) 37.3 (2.0) Div yield (%) 126.96.36.199.0 Other operating cash flow (14.5) (0.8) 0.00.0 Cash flow from operations 561.1503.5958.81,079.0 Additional metrics 12/0512/06E 12/07E 12/08E Capital expenditures (349.0) (2,706.8) (1,617.5) (1,573.8) Volume output -- -- -- -- Acquisitions 0.00.00.00.0 Demand growth (%) -- -- -- -- Divestitures 0.4420.00.00.0 Total capacity (MW) -- -- -- -- Others 107.7 (7.7) (11.3) (9.1) Attributable capacity (MW) -- -- -- -- Cash flow from investments (240.9) (2,294.5) (1,628.8) (1,582.9) Peak demand (MW) -- -- -- -- Utilization rate (%) -- -- -- -- Dividends paid (common & pref) (132.0) (396.0) (304.3) (374.8) Reserve margin (%) -- -- -- -- Inc/(dec) in debt 272.5960.4914.9367.2 Weighted average tariffs ($/kWh) -- -- -- -- Common stock issuance (repurchase) 0.00.00.00.0 Unit fuel costs -- -- -- -- Other financing cash flows (123.6) 558.7307.9265.9 Cash flow from financing 16.91,123.2918.6258.4 Total cash flow 335.8 (667.9) 248.5 (245.5) Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates. Analyst Contributors Franklin Chow, CFA email@example.com Stephen Oldfield firstname.lastname@example.org Qi Zhou email@example.com Christopher Wong firstname.lastname@example.org July 10,2006 Beijing Capital (600008.SS) Gao Hua Securities Investment Research 3 RegAC I, Franklin Chow, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Investment profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as 30-day historical volatility, annualized and adjusted for dividends. Quantum Quantum is Goldman Sachs proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. Disclosures Coverage group(s) of stocks by primary analyst(s) Franklin Chow, CFA: China Utilities. China Utilities: Beijing Capital, GDPower Development, Guangdong Electric, Guangdong Investment, Shanghai Municipal Raw Water, Shenergy, Tianjin Capital. Company-specific regulatory disclosures The following disclosures relate to relationships between Goldman Sachs Gao Hua Securities Company Limited ("Goldman Sachs Gao Hua") and companies covered by the Investment Research Division of Beijing Gao Hua Securities Company Limited ("Gao Hua Securities") and referred to in this research. There are no company-specific disclosures for: Beijing Capital (Rmb4.82) and Shanghai Municipal Raw Water (Rmb5.52) Ratings, coverage groups and views and related definitions Buy, Neutral, Sell -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25-35% of stocks as Buy and 10-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage group may vary as determined by the regional Investment Review Committee. Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership. Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at . The analyst assigns one of the following coverage views which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. Not Rated (NR). The investment rating and target price, if any, have been removed pursuant to Gao Hua Securities policy when Goldman Sachs Gao Hua is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). We have suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and July 10,2006 Beijing Capital (600008.SS) Gao Hua Securities Investment Research 4 should not be relied upon. Coverage Suspended (CS). We have suspended coverage of this company. Not Covered (NC). We do not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded. 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