July 12,2006 Shanghai Pudong Development Bank (600000.SS) Goldman Sachs Global Investment Research 1 July 12,2006 ACTION Buy Shanghai Pudong Development Bank Return Potential: 20% 1H2006 NPAT in line; affirm Buy Source of opportunity SPDB reported headline 1H2006 NPAT of Rmb1.59 bn (China GAAP), up 31% yoy following a change in accounting policy for securities investment that revised up 1H2005 NPAT (China GAAP) by 10%. We maintain our FY2006 estimates (IFRS) of Rmb3.63 bn, and reiterate our Buy rating on SPDB due to strong earnings growth, a potential valuation re-rating due to the potential Citigroup stake increase to 19.9%, and management improvements due to key outside hires such as Chief Credit Officer, Chief Treasury, and Deputy Head of Consumer banking. Growth Returns * Multiple Volatility Volatility Multiple Returns * Growth Investment Profile: Shanghai Pudong Development 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. 600000.SS Asia Pacific Banks Peer Group Average Catalyst We believe SPDB catalysts include: (1) strong 1H2006/3Q2006 results; and (2) potential Citigroup stake increase to 19.9% as early as 1H2007. We wait for the detailed 1H2006 results on August 11 to confirm the strong earnings growth outlook for SPDB in 2006, driven by strong pre-provision profit growth and normalization of credit costs if provision coverage does not increase beyond 149%. Reported PPOP excluding investment income and business tax (China GAAP) in 1H2006 grew 18% yoy, in line with our estimate (IFRS) of about 19%. Although 1H2006 NPAT (China GAAP) represents 44% of our 2006ENPAT (IFRS, Rmb1.96 bn for 1H2006), we believe SPDB’s 2H2006 NPAT could be higher than 1H2006, given higher earnings assets and NIM recovery in 2H2006 because of loan repricing post the rate hike in April and the recovery of money market yields. Valuation Our 12-month price target is Rmb11.61, based on 2.05X 2007EBVPS. SPDB now trades at a reasonable 14.7X 2006 adjusted P/E and 12X 2007 adjusted P/E after taking into account maximum 41% EPS dilution from the potential capital offering of 700mn shares and private placement to Citigroup. Key risks Key risks include a macro hard landing, earnings missing estimates, and significant delay in, or cancellation of, Citigroup’s stake increase. INVESTMENTLISTMEMBERSHIP Asia Pacific Buy List Coverage View: Attractive China: Banks Key data Current Price (Rmb) 9.76 Price target (Rmb) 11.61 Market cap (Rmb mn / US$ mn) 38,210.4 / 4,782.3 Foreign ownership (%) -- 12/0512/06E 12/07E 12/08E EPS (Rmb) 0.650.931.141.31 EPS growth (%) 30.141.822.915.1 P/B (X) 188.8.131.52.5 P/E (X) 14.910.58.67.4 Dividend yield (%) 1.32.02.32.7 P/PPOP (X) 184.108.40.206.9 PPOP growth (%) 20.625.218.816.4 Preprovision ROA (%) 220.127.116.11.5 Credit cost (%) 0.80.70.70.7 ROA (%) 0.500.580.610.60 ROE (%) 17.321.021.921.2 Price performance chart 7.0 7.5 8.0 8.5 9.0 9.5 10.0 10.5 11.0 11.5 12.0 12.5 Jul-05 Oct-05 Jan-06 Apr-06 2,000 2,200 2,400 2,600 2,800 3,000 3,200 3,400 3,600 3,800 4,000 4,200 Shanghai Pudong Development Bank (L) FTSEXinhua 600 Index (R) Share price performance (%) 3 month 6 month 12 month Absolute (10.1) (8.4) 33.3 Rel. to FTSEXinhua 600 Index (30.8) (39.9) (25.5) Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 7/11/2006 close. Ning Ma +852-2978-1677 | firstname.lastname@example.org Goldman Sachs (Asia) L.L.C. Roy Ramos +852-2978-0457 | email@example.com Goldman Sachs (Asia) L.L.C. Jennifer Meng +852-2978-0169 | firstname.lastname@example.org Goldman Sachs (Asia) L.L.C. Analysts employed by non-US affiliates are not required to take the NASD/NYSE analyst exam. The Goldman Sachs Group, Inc. does and seeks 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 Reg AC certification, see the text preceding the disclosures. For other important disclosures go to /research/hedge.html. The Goldman Sachs Group, Inc. Global Investment Research July 12,2006 Shanghai Pudong Development Bank (600000.SS) Goldman Sachs Global Investment Research 2 Shanghai Pudong Development Bank: Summary financials Profit model (Rmb mn) 12/0512/06E 12/07E 12/08EBalance sheet (Rmb mn) 12/0512/06E 12/07E 12/08E Net interest income 13,099.216,305.619,356.022,680.2 Gross loans 377,438.8446,145.8522,311.7612,920.9 Non-interest income 1,255.11,310.91,543.51,845.0 NPLs 7,444.79,030.510,998.813,525.4 Operating revenue 14,354.317,616.520,899.524,525.2 Loan loss reserves 10,727.713,003.915,618.418,949.0 Non-interest expense (6,834.9) (8,201.9) (9,714.5) (11,502.0) Total interest earning assets 554,420.4653,736.2766,896.9897,911.6 Preprovision oper profits 7,519.49,414.611,185.013,023.2 Other non-interest earning assets 19,102.321,382.824,366.824,166.0 Total provision charge (3,180.2) (3,266.2) (3,754.5) (4,470.7) Total assets 573,522.7675,118.9791,263.7922,077.6 Associates 0.00.00.00.0 Customer deposits 507,437.9597,671.5698,710.8817,580.2 Pretax profit 4,339.26,148.57,430.58,552.6 Total interest-bearing liabilities 545,076.8642,715.4753,877.5879,035.4 Tax (1,781.2) (2,520.9) (2,972.2) (3,421.0) Total equity 15,969.518,605.222,179.226,282.1 Minorities 0.00.00.00.0 Net profit 2,558.03,627.64,458.35,131.5 CAMEL ratios (%) 12/0512/06E 12/07E 12/08E C: Tier 1 capital ratio 18.104.22.168.8 Dividends (509.0) (750.5) (884.3) (1,028.5) C: Equity/loans 22.214.171.124.4 Dividends payout (%) 19.920.719.820.0 C: Equity/assets 126.96.36.199.9 A: NPL ratio 2.02.02.12.2 Earnings growth drivers (%) 12/0512/06E 12/07E 12/08EA: Loan loss reserves/NPLs 144.1144.0142.0140.1 Net interest margin 188.8.131.52.6 E: Net interest margin 184.108.40.206.6 Provision charge/total loans 0.90.80.70.8 E: Non int inc/oper revenues 8.747.447.397.52 YoYGrowth (%) E: Cost-income ratio 47.646.646.546.9 Customer deposits 27.817.816.917.0 E: ROAA 0.500.580.610.60 Loans 21.418.117.017.2 L: Loan/deposit ratio 72.372.572.572.7 Net interest income 24.524.518.717.2 Fee income 13.730.535.035.0 Key CAMELOT assumptions 12/0512/06E 12/07E 12/08E Non-interest income 29.34.417.719.5 GSCAMELOT fair P/B (X) -- -- 2.1 -- Operating revenue 24.922.718.617.3 GSCAMELOT fair P/E (X) -- -- 13.0 -- Operating expenses 29.920.018.418.4 Risk-free rate (%) 4.04.04.04.0 Preprovision Operating profit 20.625.218.816.4 Equity risk premium (%) 220.127.116.11.5 Provision charges 1.52.715.019.1 CAMELOT beta (X) -- -- 1.3 -- Pretax profit 39.841.720.915.1 Risk-adjusted cost of equity (%) -- -- 13.8 -- Net profit 30.141.822.915.13-yr adjusted DPSCAGR (%) -- -- 19.4 -- EPS 30.141.822.915.1 Sustainable ROE estimate (%) -- -- 15.8 -- DPS 8.347.517.816.3 LT dividend payout estimate (%) -- -- 30.0 -- Ex-growth bond-equivalent P/B (X) -- -- 1.1 -- Market dimensions 12/0512/06E 12/07E 12/08E No of branches 350.0 -- -- -- Loan portfolio (%) 12/0512/06E 12/07E 12/08E No of staff (000) 10,151.0 -- -- -- Commercial & corporate 85.083.480.978.5 Revenues/staff (Rmb) 1,414.1 -- -- -- Mortgages/home loans 12.714.917.119.3 Net profit/staff (Rmb) 252.0 -- -- -- Consumer 15.016.619.121.5 Valuation (current price) 12/0512/06E 12/07E 12/08E DuPont analysis (%) 12/0512/06E 12/07E 12/08E ROE 17.321.021.921.2 P/E basic (X) 14.910.58.67.4 x leverage 3.13.03.03.1 P/B (X) 18.104.22.168.5 = ROA 0.500.580.610.60 P/PPOP (X) 22.214.171.124.9 Dividend yield (%) 1.32.02.32.7 % of assets 12/0512/06E 12/07E 12/08E Net interest income 126.96.36.199.6 EPS, basic (Rmb) 0.650.931.141.31 Fee income 0.10.10.10.1 EPS, fully-diluted (Rmb) 0.650.931.141.31 Non-interest income 0.20.20.20.2 Operating revenue 188.8.131.52.9 EPS, basic growth (%) 30.141.822.915.1 Operating expenses 184.108.40.206.3 EPS, fully diluted Growth (%) 30.141.822.915.1 Preprovision Operating profit 220.127.116.11.5 Loan loss provisions 0.60.50.50.5 BVPS (Rmb) 4.084.755.676.71 Pretax profits 0.81.01.01.0 DPS (Rmb) 0.130.190.230.26 Taxes 0.30.40.40.4 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates. Analyst Contributors Ning Ma email@example.com Roy Ramos firstname.lastname@example.org Jennifer Meng email@example.com July 12,2006 Shanghai Pudong Development Bank (600000.SS) Goldman Sachs Global Investment Research 3 We expect strong 1H2006 operating results SPDB is scheduled to report 1H2006 results on August 11. We expect strong operating results driven by: 18%-20% loan growth, strong fee income growth and stable/improving asset quality. It remains to be seen whether SPDB’s NPL provision coverage will increase beyond 149% in 1Q2006. Although 1H2006 NIM may remain under pressure yoy due to the higher securities investment yields and money market yields in 1H2005, we believe SPDB’s NIM should recover as loans reprice at higher rates post the lending rate hike in April, and as money market and debt yields have recovered since 2Q2006. July 12,2006 Shanghai Pudong Development Bank (600000.SS) Goldman Sachs Global Investment Research 4 RegAC I, Ning Ma, 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) Ning Ma: Asia Pacific Financials. Asia Pacific Financials: Bangkok Bank, Bank of Ayudhya, Bank of China, Bank of Communications, Bank of East Asia, BOCHong Kong (Holdings), Bursa Malaysia, Cathay Financial, China Construction Bank, China Life Insurance Company, China Merchants Bank, Chinatrust Financial Holdings, CITICInt'l Financial, Cosmos Bank, Daegu Bank, Dah Sing Banking Group, Dah Sing Financial Holdings, DBSGroup Holdings, Fubon Financial Holdings, Hana Financial Group, Hang Seng Bank, Hong Kong Exchanges, HSBCHoldings, Hua Xia Bank, ICBC (Asia), Kasikornbank, Kookmin Bank, Krung Thai Bank, Liu Chong Hing Bank, Mega Financial Holdings, Oversea-Chinese Banking Corp., PICCProperty and Casualty, Ping An Insurance Group, Polaris Securities, Pusan Bank, Samsung Fire & Marine, Shanghai Pudong Development Bank, Shenzhen Development Bank, Shin Kong Financial Holdings, Shinhan Financial Group, Siam Commercial Bank, Singapore Exchange, SinoPac Holdings, Standard Chartered Bank, Taishin Financial Holdings, Thanachart Capital, TISCOBank, United Overseas Bank, Wing Hang Bank, Wing Lung Bank, Woori Finance Holdings, Yuanta Core Pacific. Company-specific regulatory disclosures The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research. Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Shanghai Pudong Development Bank (Rmb9.76) Goldman Sachs had a non-investment banking securities-related services client relationship during the past 12 months with: Shanghai Pudong Development Bank (Rmb9.76) Goldman Sachs had a non-securities services client relationship during the past 12 months with: Shanghai Pudong Development Bank (Rmb9.76) Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global coverage universe Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 26% 59% 15% 58% 52% 47% As of April 1,2006, Goldman Sachs Global Investment Research had investment ratings on 2,048 equity securities. 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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 MJJASONDJFMAMJJASONDJFMAMJJASONDJFM 2003200420052006 6 8 10 12 14 2,000 2,250 2,500 2,750 3,000 3,250 3,500 3,750 IL Sep 27 OP Nov 3 Shanghai Pudong Development Bank (600000.SS) Goldman Sachs rating and stock price target history Currency: Chinese Renminbi Source: Goldman Sachs Investment Research for ratings and price targets; Reuters for daily closing prices as of 04/01/06. Rating Price target Price target at removal FTSEXinhua 600 Index; pricing by FactSet Covered by Ning Ma, as of Sep 13,2004 Not covered by current analyst 7.69 6.93 7.47 8.35 10.75 12.70 S to ck P ric e In de x P ric e The price targets shown should be considered in the context of all prior published Goldman Sachs research, which may or may not have included price targets, as well as developments relating to the company, its industry and financial markets. July 12,2006 Shanghai Pudong Development Bank (600000.SS) Goldman Sachs Global Investment Research 6 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 Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has 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 should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does 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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