jp morgan emerging markets

% of globalconsumption

20

24

28

32

36

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

US

EM

Stock Ideas for 2010Emerging Equity Markets Year Ahead

Emerging Markets Equity Research02 December 2009

J.P. Morgan Securities (Asia Pacific) Limited

See page 396 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan 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.

Emerging MarketsEquity Research

Adrian MowatAC

(852) [email protected]

For a full list of authors pleaserefer to the sector and countryhead list on the back page

Source: J.P. Morgan Economics.

The chart shows emerging economies and US consumption as a percentage of global consumption.

2

Emerging Markets Equity Research 02 December 2009

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Market Year Ahead - Stocks for 2010 What to own • Banks: China, Korea, Taiwan, Thailand, Brazil, Mexico,

Turkey, Russia, South Africa, MENA • Consumer Discretionary: Brazil, Mexico • Technology: ex-PC ODMs • Internet & Media: China, Turkey, South Africa, Russia • Transportation: especially, airlines • Other Industrials: India capex and investment cycle • Telecom capital management: Malaysia, Taiwan • Energy: Brazil, Russia • Smaller sectors in country: China internet, China gas,

China food inflation, Indonesian interest rate sensitive, Abu Dhabi Real Estate, South African Platinum Focus on sectors within countries rather than country

recommendations

What to avoid • Telcos: China, India, Korea, Brazil, Mexico, Central

Europe • Utilities • Cement: China, India • Consumer Staples: India, Indonesia, Brazil, Mexico • Consumer Discretionary: South Africa • Smaller sectors in country: Taiwan Insurance, Dubai

Property A detailed view on our country and sector recommendations within EM is available on Page 11. For more detail please

see country and sector pages.

97 Top Picks See pages 109 to 287

Examples of top picks Code Top Picks County To PT (%) VAKBN TI Vakifbank Turkey 73 GAZP RU Gazprom Russia 71 CTCM US CTC Media Russia 69 006400 KS Samsung SDI South Korea 67 ASYAB TI Bank Asya Turkey 66 2610 TT China Airlines Taiwan 60 LH TB Land & Houses Thailand 60 TOP TB Thai Oil Public Company Thailand 56 QTEL QD Qtel Qatar 55 LSRG LI LSR Russia 54

Source: J.P. Morgan. Note: To PT = Returns to analyst price target from 27 Nov 2009.

48 Stocks to Avoid See pages 289 to 371

Examples of stocks to avoid Code Stocks to avoid County To PT (%) TII US Telmex Internacional Mexico (34) 2498 TT HTC Corp Taiwan (31) TMX US Telmex Mexico (26) USIM5 BZ Usiminas Brazil (23) 762 HK China Unicom Hong Kong (22) 2338 HK Weichai Power China (22) 857 HK PetroChina China (21) MER PM Manila Electric Co Philippines (21) PCU US Southern Copper United States (21) HUVR IN Hindustan Unilever India (20)

Source: J.P. Morgan. Note: To PT = Returns to analyst price target from 27 Nov 2009.

The Year Ahead Process The goal of this document is to present our key strategy themes for 2010 using most and least favored stocks from J.P. Morgan’s team of analysts.

Both J.P. Morgan EM equity research analysts and our macroeconomic team have been involved in the production of this document. The process started with the Strategy Team briefing analysts on our key themes and macroeconomic forecasts for 2010. Analysts then reviewed their earnings models and presented their top picks and stocks to avoid to both their sector and country strategists. The sector and country teams then produced their list of top long and short ideas, which were then compiled by the regional strategy teams. These ideas form the core of this document.

Table of contents Investment strategy ............................................................ 4

Surprises for 2010 ............................................................26

Rates outlook....................................................................27

Economic outlook ............................................................32

Economic forecasts ..........................................................42

Country strategy ...............................................................47

Sector strategy..................................................................77

Summary tables of stock ideas .........................................93

Top picks........................................................................109

Stocks to avoid ...............................................................289

Strategy dashboards........................................................373

3



Higher Markets with Higher Volatility The drivers – three steps to heaven 1. Compression in risk premiums

2. Economic and earnings recovery

3. Overshoot as risk-free rates remain low for long

(See page 4 for details)

Potential returns MSCI EM end-2010 target 1300 (+30%) • Implied end-2010 forward P/E of 14x (J.P. Morgan

estimate)

• Currency, earnings estimate revisions, and low riskfree rates provide upside.

(See page 4 for details)

Investment themes 1. Stay high beta for now – front-loaded returns

2. Economic growth surprises pessimistic expectations

3. 2010 is the year of G3 monetary stimulus – no change in G3 rates in 2010

4. Earnings estimate revisions drive markets

5. Focus on sectors in countries

6. Policy normalization outside G3 – source of volatility rather than a cap on returns

7. Inflation ends the party in emerging markets before developed markets. Enjoy the party until inflation exceeds central bank target zone

8. M&A

9. BRIC consumers

(See page 4)

Risks are high for year-one of recovery • Investor driven correction in commodity prices

• G3 bond volatility

• Lack of G3 policy flexibility

• Rapid rise in EM inflation resulting in faster tightening

• Risk appetite fades, driving investors back into low beta defensive markets like SA, Israel and Malaysia

• Dubai World debt moratorium impacts ability to raise EM corporate debt

(For more risks please see page 12)

Key issues for 2010 – briefing notes 1. A longer perspective on asset performance

2. The policy risk to the asset inflation trade

3. And now the monetary stimulus

4. The rolling recovery trade of 2009: and settling the decoupling debate

5. Potential bond market volatility

6. Now is the time for earnings estimate revisions

7. Falling inflation with growth

8. Fiscal outlook

9. South Africa - 2010 Soccer World Cup Winners

(See page 15)

Market performance Figure 1: MSCI EM and MSCI World

0200400600800

100012001400

88 90 92 94 96 98 00 02 04 06 08

MSCI EM MSCI World

Source: Bloomberg. Chart rebased to 100 in 1988

4



Emerging Market Equity Strategy For now we remain positive on EM equities. The factors supporting the powerful recovery from the October 2008 lows remain in place. These conditions are: compression in excessive risk premiums, economic and earnings recovery trade, and overshoot as risk-free rates remain low. MSCI EM could retest its all-time high.

Our end-2010 index target for MSCI EM is 1300, +30%. This implies an end-2010 forward PE of 14. The return is 10% in excess of consensus earnings forecasts. In our view, the difference will be made up of currency appreciation and earnings revisions.

The low for EM was 454 on 27 October 2008. The index has more than doubled since then. To retest its high the index would need to increase by 38%. The low in developed markets was on 9 March. The MSCI World index has rallied 70% from its 2009 low.

Stay high beta, for now – front-loaded returns Early 2010 conditions should continue to be very favourable for EM equities in our view, with strong growth, positive earnings estimate revisions, acceptable inflation, and ongoing rally in credit markets. The stage three of the bull market is an overshoot in valuations as risk-free rates stay low for long.

A less favourable base effect for inflation plus a potential slowing in earnings estimate revisions may make 2H10 more challenging. P/Es could decline in this phase.

Figure 2: Bungee jump or slingshot?

70100130160190220250280310

-24m -18m -12m -6m Trough +6m +12m +18m +24m

Gulf WarMex ican crisisAsian crisisTech bubbleCredit crisis

Source: Datastream, 27 October 2009. Note: Chart shows the performance of MSCI EM US$ index two years pre and post crisis lows. Note: MSCI EM (USD) is indexed to 100 at the trough of each crisis.

Figure 3: Beta versus PE

Turkey

Thailand

Taiw an

S Africa

Russia

PolandPhilMex ico

Malay sia

Korea

Indonesia

India

HungaryCzech

China

Brazil

8.0

10.0

12.0

14.0

16.0

18.0

0.4 0.6 0.8 1.0 1.2 1.4

Source: Bloomberg. Note: Two year weekly beta for MSCI indices vs. MSCI EM. Forward PE on y-axis and Beta on the x-axis.

Figure 4: EM consumption exceeded US consumption in 2008!

16

20

24

28

32

36

40

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

US

EM

Source: J.P. Morgan economics. Note: Chart shows EM and US consumption as % of global consumption.

A quick review EM survived ‘the big ugly experiment’: a combination of a severe financial shock, the deepest developed consumer recession since WWII, the lagged impact of anti-inflation policies, and a sharp drop in commodity prices. The main conclusion of the experiment is that the domestic inflation/monetary cycles were more dominant than external demand. This economic decoupling during the stress test supports a higher relative valuation of EM equities versus developed world equities. But global capital flows do link EM monetary policy to record low G3 rates resulting in the risk of a boom bust cycle and asset bubbles. Policymakers in EM are moving to restrict capital flows and non-conventional measures to control asset prices. A combination of higher economic and asset volatility, with policy risk, may be negative for equity valuations.

5



Risks are high for the first year of the global recovery The bulk of the risks are global rather than EM centric. Please see page 12 for risks. The three key risks or sources of volatility are:

• G3 bond volatility

• Commodity volatility

• Policy risks

Post the synchronized global recession and the credit crunch, EM has earned a lower risk premium. Emerging economies led the global recovery. Decoupling proved? Decoupling in a global economy and capital markets was literally impossible. But EMs did prove they can generate their own recovery rather than rely on the developed world consumer. EM consumption exceeded US consumption in 2008.

An overweight in EM equities vs DM is consensus; as is an OW in BRICs vs EM. Both have been successful strategies. However, EM was led by sectors driven by global growth, not local; note the performance of our demand classification indices, global consumer +97% , global price taker +95%, ahead of domestic consumption +58% (these indices are published in our weekly dashboards).

Bungee jump or slingshot? EM equities have recovered 115% from their 2008 lows. EMBI spreads have tightened from a peak of 865bp to 310bp. But the three-year CAGR for EM equities is just 4% and EMBI spreads averaged 195bp in 06/07.

The catalyst for the rally from March was the evidence of stabilization in developed world end-demand. Cyclical sectors outperformed: technology, materials, consumer discretionary and energy.

Extreme volatility in equities, currencies, commodities and bonds makes assessment of fair value very difficult. Many investors struggled to join the rally this year as they anchored on the lows and were reluctant to buy after sharp gains. To provide a longer perspective please see the briefing note, a longer perspective on asset performance. This reviews three, five and eight year CAGR.

The five-year CAGR for MSCI BRIC is 22%, ahead of MSCI EM CAGR of 14% and significantly ahead of MSCI World’s +1%. The material and energy bull market partly explains the outperformance of BRIC,

although non-commodity sectors have also done well. Within EM, the previously important markets of Korea, Malaysia, Mexico, Taiwan and South Africa underperformed. This is consistent with the underperformance of nominal GDP in these countries. BRIC nominal GDP is 60% of EM nominal GDP. Will non-BRIC markets drop off the radar screen? Yes, unless they offer a premium growth rate or acceleration in trend growth. There are strong arguments in favour of Indonesia joining the BRIC grouping. But the country needs to demonstrate to long-term direct investors that there is sufficient effective protection of their legal interest in order to be permanently promoted to the BRIC league.

An overweight BRIC consumer is consensus. This has been a good trade with strong relative returns from BRIC financials and consumer discretionary. The valuations relative to history and market are high; Brazil, Brazil Materials, Brazil Energy, Brazil Financials, India Financials, Mexico Materials, SA Materials and Indonesia are more than one standard deviation above their long-term average relative to history and EM. However, the premium in these sectors is modest compared to the actual returns achieved (for more see page 9).

Figure 5: Performance of BRIC vs MSCI EM

70

100

130

160

Jan-02 Jan-04 Jan-06 Jan-08 Source: Datastream, 24 November 2009.

6



Economic growth surprises low expectations In our view, the consensus is skeptical of sustainable growth. This supports a cyclical bias even with the ISM above 50. Our base case is:

• No change in G3 interest rates in 2010

• Above-consensus US and European 2010 GDP growth of 3.3% and 2.6% respectively

The three drivers of economic growth in 2010 are: • Industrial production/inventory cycle

• Exports

• Delayed monetary stimulus

The relationship between final sales and production indicates substantial de-stocking in the past three quarters. As end demand slowly recovers, production needs to increase faster due to low inventories. The turn in IP is typically durable and sustained for 13 months on average. This is a normal feature of a recovery.

Global growth of 3.5% in 2010 should support a recovery in external demand for most economies. Sequential trends are consistent with 2010 oya% export growth.

2010 is the year of G3 monetary stimulus Three conditions are required for a monetary stimulus: available credit; low market rates; and willing borrowers. If credit markets continue to rally and J.P. Morgan economic growth numbers are correct, these conditions will be met in 2010. Counter-intuitively exit strategies signal that the monetary stimulus is building. Note, this is primarily a developed market event. China monetary stimulus fed through rapidly. Current account deficit economies will benefit from this delayed stimulus into 2010, i.e., India, Turkey, South Africa, etc. (See page 17 for more on the delayed monetary stimulus.)

Earnings estimate revisions will now drive stocks Stocks are driven primarily by earnings estimate revisions rather than a compression in risk premiums. This argues for a cyclical bias. Potentially ‘scarred and overworked’ analysts are even slower to upgrade. In this phase, markets trade expensive. Please see Steve Malin’s briefing on page 19 for more on the power of earnings estimate revisions after the economic recovery.

Figure 6: Tracking inventory - Global IP and final sales proxy

85

90

95

100

105

110

115

00 01 02 03 04 05 06 07 08 09 10

J.P.Morgan final sales proxy

Industrial production

Source: J.P. Morgan, September 2009.

Figure 7: Sequential recovery in exports growth (% oya)

-50-40-30-20-10

010203040

Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09

Korea

Taiwan

China

Source: J.P. Morgan, October 2009.

Figure 8: Emerging markets can rise with interest rates (%)

0

300

600

900

1200

1500

88 90 92 94 96 98 00 02 04 06 080

2

4

6

8

10

Fed Funds target rate (RHS)

MSCI EM Index (LHS)

Source: Datastream, MSCI, IBES, J.P. Morgan economics

Focus on sectors in countries The rolling country-by-country growth recovery trade is done. Economic decoupling occurred with the global recovery led by India, Indonesia and China. The balance of EM Asia, Brazil, Russia and Turkey recovered a quarter before DM (see page 18 for more on the rolling recovery). Country asset allocation needed to lead the economic recovery by a quarter. Thus country relative performance changed during the year. Sector strategy was more stable with a bias towards cycles.

7



Now that the rolling recovery trade is done, the confidence in country calls is lower. Focus on key sectors within countries that offer: (1) High probability of positive EPS revisions (2) High secular and/or defensive growth

The Secular and Cyclical Trade Overweight Turkey: We believe that Turkey could outperform EM and CEEMEA as structurally lower inflation and interest rates result in higher trend; India in the mid-90s is good example of this trend. The IMF standby program, if signed, should ease Turkey’s reliance on external financing and reduce the crowding out of the private sector. These improved fundamentals are neither reflected in valuations nor relative performance. Turkey’s forward PE of 9 is at a significant discount to MSCI EM's 13. The index has marginally underperformed MSCI EM year to date. Since mid-March 2009, the local currency index is in line with MSCI EM.

Higher trend growth and lower interest rates are positive for Turkish banks, a large part of the benchmark. We forecast an acceleration of earnings growth from 10-20% in 2010 to 20-30% in 2011.

Deterioration in global credit markets and/or delays in negotiating a deal with the IMF are a threat. J.P. Morgan forecasts a 2010 current account deficit of 2% of GDP.

Overweight Mexico Catalysts are clear. A robust 3.3% - around 100bps above consensus - US economic recovery, led by manufacturing (+4.5% in 2010), which is the key linkage between the US and Mexico. IP is 30% of Mexico GDP, and 80% of exports go to the US. Mexico’s historical beta to global GDP recovery is over 2.0x. This drives a forecast 11 point Mexico GDP swing into next year, the second highest globally and arguably with upside risks. The currency also offers short-term upside, as a clear EM underperformer YTD, and with oil prices (1/3 fiscal revenue) set to remain high. In this context, fiscal and rating concerns are overdone and likely well-priced short term, though remain real long term, as fiscal revenue/GDP is low (22% GDP), and poorly structured (off falling oil production).

The market is under-owned by foreign investors; local pension funds only have 8% in domestic equities, and EM investors are OW, but focused on the defensive 2/3 of the market. We focus on the 1/3 cyclical portion of the market for cheaper asset values, and stronger earnings

leverage. We are also bullish the S+P 500, and the correlation with the Mexbol is very high. The market is trading below its 5-year average multiple, and earnings momentum is positive (Q3 index EPS +20% oya).

Figure 9: Turkey – Structurally low policy rates and inflation

0

10

20

30

40

50

03 04 05 06 07 08 09

CPI Policy Rate

Source: J.P. Morgan economics, October 2009.

Figure 10: Mexico - second highest GDP swing (11pt) in 2010

0%

3%

6%

9%

12%

15%Ru

ssia

Mex

ico

Turk

ey

Taiw

an

Chile

Braz

il

Sout

h Af

rica

Kore

a

India

China

Source: J.P. Morgan economics. Note: Chart shows the difference between 2009 and 2010 GDP growth forecast.

Figure 11: Secular decline in interest rates

-3 -1 2 5 7 10

RussiaChina

Malay siaTaiw an

South AfricaKorea

ThailandIndia

IndonesiaPhilippines

Mex icoBrazil

Turkey

Source: J.P. Morgan economics. Difference between 5 year average policy rate (2004-08) and Average forecasted policy rate in 2009-10, ranked by greatest difference.

8



Policy normalization outside G3 Not all countries will be subject to the same disinflationary forces. A number of smaller economies, quasi peripheral to the G3, have suffered much less during the recession, and are thus likely to normalize monetary policy earlier. Israel and Australia have started increasing policy rates and are set to continue. Other countries will likely follow suit in coming months—Norway, Czech, Korea, and Brazil—by our forecast, an earlier start of the rate normalization cycle should benefit their currencies and hurt their bond markets. The impact on their equity markets is less obvious but will likely be a small negative.

Inflation ends the party in EM before DM The inflation cycle could be desynchronized. EM inflation models are unlikely to be accurate due to the short history of post pegged exchange rate inflation. Asia is more at risk due to limited currency appreciation relative to LATAM and EMEA. All one can do is monitor the data. The table below is published in both Perspectives and Portfolios and Key Trades and Risks every two weeks. The table monitors inflation relative to central bank target zones. Inflation today is benign but base effects in 2010 will be less favorable. The message from the previous inflation cycle was to sell equities when the inflation rate breached the central banks’ target zone.

Conditions supportive for M&A activity Low funding costs and generally healthy balance sheets provide supportive financial conditions for corporate activity. Improvement in the global economic situation is increasing the confidence of business and financial investors. The diversity of potential participants makes

today’s situation unusual. At the simplest level companies are returning capital to investors either via higher dividends or through capital reduction. EM companies continue to expand regionally and globally. Private equity funds are far more developed and disciplined compared to the past. Most of the large private equity funds will continue to lead deals. This is not a one-way trend, with EM companies now acquiring developed-world businesses.

Figure 12: MSCI EM PE and US interest rates (%)

5

1015

2025

3035

40

88 90 92 94 96 98 00 02 04 06 080

2

4

6

8

10MSCI EM Fw d PE (LHS)

Fed Funds target rate (RHS)

Source: Datastream, MSCI, IBES, J.P. Morgan economics

Figure 13: EM average policy rates (%)

-5

0

5

10

15

20

25

98 99 00 01 02 03 04 05 06 07 08 09

Nominal

Real

Source: J.P. Morgan economics, September 2009.

9



Table 1: Monetary policy and inflation

% Inflation Target

(Central Bank) Current CPI Food CPI Change in CPI in

last 12 months CPI Forecast 2009 end (J.P. Morgan)

J.P. Morgan forecast 2009

US core PPI na 1.8 na (2.2) 2.7 On Hold US core CPI na 1.5 na (1.0) 1.7 On Hold US Unit Labor Costs na (1.4) na 0.0 na On Hold Inflation Data Japan CPI - -2.2 -0.5 -4.3 -1.3 On Hold Malaysia CPI 2.5 - 3.0 -2.0 -19.5 -10.2 0.2 On Hold Taiwan CPI 2.0 -0.9 1.4 -4.0 -0.8 On Hold China CPI 4.8 -0.8 1.5 -5.4 -0.6 On Hold Czech CPI 2.0-4.0 -0.3 -5.8 -6.7 1.2 On Hold Chile CPI 3.0 (±1.0) 0.2 1.0 -8.6 1.5 On Hold Thailand CPI 0-3.5 0.4 1.6 -3.5 -0.9 On Hold Philippines CPI 3.0-5.0 0.7 2.2 -11.1 2.0 On Hold India Wholesale Price Index 5.5 1.5 15.7 -9.3 8.2 On Hold South Korea CPI 2.5 - 3.5 2.0 4.6 -2.8 2.8 On Hold Indonesia CPI 4.0-6.0 2.6 4.8 -9.2 4.7 On Hold Colombia CPI 3.5 - 4.5 3.2 2.2 -4.4 4.5 On Hold Poland CPI 1.5 - 3.5 3.4 4.5 -1.1 3.5 On Hold Israel CPI 1.0 - 3.0 3.8 1.6 0.5 na On Hold Brazil CPI 4.5 (±2) 4.3 3.5 -1.9 5.1 On Hold Mexico CPI 3 (±1) 4.9 7.0 -0.6 5.4 On Hold Hungary CPI 2.0-4.0 4.9 3.0 -0.8 4.2 Easing Turkey CPI 7.5(±2) 5.1 5.8 -6.9 6.1 Easing South Africa CPI 3.0 - 6.0 6.1 4.9 -7.0 7.2 On Hold Russia CPI 10.5 15.1 8.4 6.6 12.0 On Hold Venezuela CPI 19.5 28.9 na -7.1 na Accommodating Source: Bloomberg, J.P. Morgan Economics. 4 November 2009. Inflation targets are extracted from ‘EM Inflation: Trouble Beyond the Headlines’, Hensley et al, 7 July 2008.

Check the valuation signal Expensive (more than 1sd above 10 year average PE) Relative to country/sector history

• Brazil, Mexico, India and Indonesia • Energy: Brazil and China • Materials: Mexico, SA, Brazil, Korea, Taiwan • Financials: Brazil, Korea, India, SA, Taiwan • China Industrials and Mexico CS

Cheap (At or less than 10 year average PE) Relative to country/sector history

• Turkey, Israel, Chile, Thailand • IT: Korea, Taiwan and India • Telecom: SA and China • Russia energy, Israel Healthcare, Turkey financials

Relative to EM • Brazil and Indonesia • Financials: Brazil and India • Materials: Mexico, Brazil, SA • Energy: Brazil

Relative to EM • Russia, Turkey, SA, Korea, Poland, China, Hungary Israel,

Chile, Taiwan, Malaysia, Philippines, Thailand • IT: Korea, Taiwan, India • Telecom: SA, China, Mexico • CD: Korea and SA • Financials: Turkey, China • Korea Industrials, Russia energy, Israel Healthcare

10



Table 2: Hindsight sector valuations Sector 12m Forward PE 12m Forward PE relative to EM

Current

10yr Average +1sd -1sd Current

10yr Average +1sd -1sd

Brazil Financials 13.2 9.4 11.4 7.4 1.0 0.9 1.0 0.7 Russia Energy 6.9 7.2 9.6 4.8 0.5 0.7 0.9 0.5 Brazil Energy 13.0 6.8 9.7 4.0 1.0 0.6 0.8 0.4 Russia 8.7 8.1 10.5 5.8 0.7 0.7 0.9 0.5 Brazil 13.6 7.8 10.1 5.5 1.0 0.7 0.8 0.6 Turkey Financials 8.1 9.5 13.2 5.8 0.6 0.9 1.2 0.5 South Africa Energy 9.6 8.3 10.1 6.5 0.7 0.7 0.9 0.5 Korea Financials 10.8 8.0 10.1 5.9 0.8 0.7 0.9 0.6 Mexico Materials 16.5 8.2 10.6 5.7 1.3 0.7 1.0 0.5 Korea Industrials 9.5 8.4 11.6 5.2 0.7 0.8 1.0 0.5 South Africa Materials 18.9 12.5 15.7 9.2 1.5 1.1 1.4 0.9 Mexico Telecommunication Services 12.7 12.4 14.8 10.1 1.0 1.1 1.3 1.0 India Energy 13.8 10.5 14.5 6.4 1.1 1.0 1.3 0.6 Turkey 9.0 9.6 12.4 6.9 0.7 0.9 1.1 0.7 Korea Consumer Staples 13.5 11.2 15.1 7.3 1.0 1.0 1.4 0.7 Mexico 14.6 12.0 13.7 10.3 1.1 1.1 1.2 1.0 India Financials 21.2 12.4 18.9 5.8 1.6 1.1 1.6 0.6 Brazil Materials 15.0 8.0 10.0 6.0 1.2 0.7 0.9 0.6 South Africa 11.9 10.0 11.4 8.6 0.9 0.9 1.0 0.8 Korea 10.0 9.1 11.0 7.2 0.8 0.8 1.0 0.7 India 17.7 14.1 17.5 10.8 1.4 1.3 1.5 1.1 Poland 15.1 12.9 16.0 9.8 1.2 1.2 1.4 1.0 Korea Information Technology 10.2 11.2 16.2 6.2 0.8 1.0 1.6 0.5 Israel Health Care 12.4 21.5 32.5 10.6 1.0 1.9 3.0 0.9 Mexico Consumer Staples 18.4 15.0 17.5 12.4 1.4 1.4 1.6 1.1 Korea Consumer Discretionary 8.7 7.9 10.0 5.9 0.7 0.7 0.9 0.6 India Information Technology 20.1 25.3 48.5 2.2 1.5 2.2 3.7 0.7 South Africa Consumer Discretionary 12.0 10.3 12.4 8.1 0.9 0.9 1.1 0.8 South Africa Telecommunication Services 10.4 14.7 25.7 3.7 0.8 1.3 2.0 0.6 China Telecommunication Services* 12.5 15.8 23.6 8.1 1.0 1.4 2.0 0.7 South Africa Financials 9.9 8.3 9.8 6.7 0.8 0.8 0.9 0.6 China Financials 14.4 14.1 19.0 9.3 1.1 1.3 1.7 0.9 China 14.8 13.5 18.2 8.7 1.1 1.2 1.6 0.9 Taiwan Information Technology 15.7 18.2 30.7 5.6 1.2 1.7 3.0 0.4 Hungary 10.9 9.9 11.9 8.0 0.8 0.9 1.0 0.8 Israel 11.7 15.9 19.6 12.1 0.9 1.5 1.8 1.1 Chile 15.2 15.6 17.7 13.4 1.2 1.4 1.6 1.2 Korea Materials 9.7 7.3 9.6 5.0 0.7 0.7 0.8 0.5 Indonesia 14.0 9.1 12.3 6.0 1.1 0.8 1.0 0.6 Taiwan 16.8 14.9 19.1 10.7 1.3 1.4 1.8 1.0 Thailand 10.9 13.9 34.6 -6.9 0.8 1.2 2.4 0.0 China Industrials 18.5 13.5 17.3 9.6 1.4 1.2 1.5 1.0 Taiwan Materials 17.1 11.6 14.7 8.5 1.3 1.1 1.3 0.8 Malaysia 15.6 14.4 16.4 12.4 1.2 1.3 1.5 1.2 Taiwan Financials 20.2 14.5 17.1 11.9 1.6 1.3 1.6 1.1 China Energy* 12.5 9.4 11.9 6.9 1.0 0.8 1.1 0.6 EM 13.0 11.1 13.0 9.1 - - - - Philippines 14.9 14.0 16.3 11.7 1.1 1.3 1.5 1.1 Source: IBES, Datastream. Red (dark grey) denotes expensive ie more than 1sd, Green (light grey) denotes at or less than 10 year average. Note: * China Energy and China Telecom averages are from June 2000.

11



Focus on sectors within countries rather than country recommendations The table below provides a level summary of our views on sectors within countries. Financials are 25%, Materials is 15% and Energy is 16% of EM. All recommendations are relative to EM. The Industrials sector consists of an eclectic group of stocks. We do not rate the sector. We are overweight early cyclicals and transportation sub-sectors.

Table 3: Key country and sector recommendations PE EPS Growth ROE US$ Return (%) 09E 10E 11E 09E 10E (%) Country/Sector Wts Reco 1 yr 3 yr 5 yr X X X (%) (%) CAGR 05 10E

DY 10E

% 10E%03-08

AvgEM 100 -- 106 22 119 15.8 12.7 10.8 (4) 24 7.2 2.2 13.0 15.6 Brazil 16.8 N 155 97 371 16.6 13.3 11.4 (11) 25 4.8 2.7 14.6 18.6 Brazil Materials 4.8 N 174 124 393 20.8 14.1 11.5 (40) 48 2.9 2.4 11.9 28.2 Brazil Energy 4.6 OW 199 150 581 15.1 13.0 12.3 (22) 16 3.2 2.3 37.3 27.1 Brazil Financials 3.7 OW 156 72 490 15.9 12.9 10.6 6 24 5.8 2.3 15.7 21.9 China 18.3 UW 103 53 191 17.5 14.3 12.2 9 22 13.5 2.2 14.2 15.5 China Financials 7.2 OW 120 67 270 17.4 13.6 11.1 18 29 29.3 2.4 15.6 10.8 China Energy 3.2 UW 131 50 201 15.4 13.1 11.6 (11) 17 6.6 2.7 14.7 21.0 China Telecommunication 2.4 UW 20 20 197 12.3 12.4 11.8 (14) (0) 14.8 3.5 14.9 18.1 China Industrials 1.6 n/a 97 37 86 22.2 17.1 13.9 56 29 3.9 1.4 8.0 11.7 Hungary 0.6 N 109 (6) 43 12.5 10.9 8.6 (41) 15 (1.5) 1.8 11.1 22.3 India 7.5 OW 124 25 184 20.7 17.0 13.9 3 22 14.0 1.0 15.0 20.9 India Financials 1.9 OW 145 30 219 25.1 20.7 17.1 (2) 21 13.3 0.9 11.3 15.9 India Energy 1.3 OW 105 60 367 17.4 12.7 11.4 7 37 18.3 1.1 15.6 20.7 India IT 1.2 N 114 (1) 117 21.5 18.5 15.6 2 16 17.9 1.3 27.0 30.0 Indonesia 1.8 N 209 57 207 15.8 14.5 12.2 7 10 14.2 2.7 23.7 24.8 Israel 2.7 UW 57 47 94 15.3 11.8 10.1 19 30 10.7 1.4 12.9 12.6 Israel Health Care 1.5 UW 32 68 103 15.9 11.9 NA 8 34 16.6 0.9 NA 16.1 Korea 12.6 N 128 (1) 84 13.7 11.2 9.3 44 22 4.6 1.2 10.3 13.7Korea IT 3.5 OW 135 (6) 58 18.2 14.2 10.9 NM 28 3.9 0.2 10.4 17.2 Korea Financials 2.4 OW 172 (12) 101 16.0 11.6 9.3 (27) 38 0.2 1.0 7.8 10.9 Korea Industrials 1.9 n/a 108 (10) 174 11.2 9.7 8.5 55 15 15.4 1.3 12.8 10.7 Korea Materials 1.8 N 182 76 215 12.0 10.0 8.7 (12) 20 5.8 1.6 11.7 16.9 Korea CD 1.4 N 164 19 79 10.5 9.5 7.9 56 10 8.6 1.4 12.0 13.6 Korea Consumer Staples 0.7 N 52 (3) 101 13.9 13.6 12.0 9 2 11.9 1.7 16.9 14.9 Malaysia 2.7 UW 65 41 85 18.1 15.6 13.1 0 16 6.4 2.7 10.9 12.9 Mexico 4.4 OW 69 4 127 18.1 14.9 12.1 9 22 7.0 2.3 15.2 18.2 Mexico Telecommunication 1.8 UW 51 17 189 13.2 12.4 11.2 24 7 16.3 3.3 39.4 30.4 Mexico Consumer Staples 1.0 N 63 22 153 22.4 18.1 14.5 23 24 13.9 1.3 14.9 15.3 Mexico Materials 0.7 OW 199 (26) 59 48.4 20.5 10.1 (48) 136 (13.7) 2.0 2.6 14.4 Philippines 0.4 OW 86 23 125 16.8 15.1 13.2 24 11 5.5 3.8 14.3 13.2 Poland 1.3 N 55 (10) 76 16.8 14.6 11.3 (34) 15 (3.0) 3.3 9.6 15.6 Russia 6.6 OW 103 (26) 72 11.3 8.6 6.5 (33) 32 4.5 1.3 10.5 15.8 Russia Energy 4.0 OW 84 (34) 57 7.9 6.8 5.5 (24) 15 2.3 1.4 11.9 16.0 South Africa 6.9 N 91 19 89 14.9 11.6 9.4 (13) 29 11.8 2.8 14.7 18.4 South Africa Materials 1.9 UW 106 (1) 69 34.6 17.9 13.7 (45) 93 20.6 1.4 7.8 10.3 South Africa Financials 1.8 OW 80 18 70 11.7 9.7 7.8 (14) 21 7.4 4.1 13.3 19.2 SA Telecommunication 0.9 UW 63 44 116 11.9 10.3 9.0 2 16 13.8 2.4 19.2 26.7 SA Consumer Discretionary 0.8 N 150 38 125 14.8 12.1 9.8 11 22 12.0 2.0 16.5 20.9 South Africa Energy 0.7 UW 83 27 139 12.0 9.4 7.4 (18) 28 9.4 3.0 16.7 23.7 Taiwan 11.1 OW 92 5 37 30.5 19.1 13.4 8 60 (0.7) 3.0 6.4 12.4 Taiwan IT 6.6 OW 118 (3) 43 33.2 18.8 12.3 (13) 77 4.0 2.9 6.7 13.3 Taiwan Financials 1.7 OW 93 (8) (4) 29.2 19.5 15.2 NM 50 6.0 2.7 5.0 6.1 Taiwan Materials 1.4 UW 62 44 89 27.3 21.5 16.2 (17) 27 (13.0) 3.1 6.8 19.7 Thailand 1.2 OW 94 16 61 12.4 11.2 9.3 28 10 (2.4) 3.3 13.7 19.4 Turkey 1.3 OW 96 23 87 9.7 8.8 7.4 6 11 11.1 2.8 16.6 17.4 Turkey Financials 0.8 OW 127 35 128 8.3 7.9 6.6 23 5 16.4 2.0 18.3 17.1 Source: J.P. Morgan Asian strategy team, MSCI, Datastream. Table sorted by descending weight in index, countries first followed by country-sectors. 10 November 2009.

12



Risks to our strategyBond market volatility The end of QE plus banks unwilling to add to duration risk is a dangerous technical situation for government bonds. Risks assets typically struggle as bond yields rapidly increase to "normal" levels. Please see Mercury Rising on page 22 which highlights the relationship between bond market volatility and EM corrections.

Dubai World debt moratorium Our base case is that this is a Dubai-specific rather than pan-EM issue. The risk is that we underestimate the damage to investor confidence in the region.

Lack of G3 policy flexibility High fiscal deficits and record low interest rates limit policymakers’ ability to respond to a relapse in growth. A growth relapse is not our base case. If it occurred it would be a serious blow to risk assets. Credit spreads could expand and equities fall. Please see page 23 for a review of the impact of fiscal stimulus on growth and potential fiscal drag in 2011.

Central banks target asset prices We are in a post Greenspan world; central banks target asset prices and the common wisdom is that the market cannot be trusted. Brazil "got away with" market intervention. The Brazilian market outperformed last week despite implementing a 2% tax on speculative inflows. This tax is politically appealing as it targets international "speculators" who are viewed to be behind the credit crunch and putting at risk Brazilian manufacturing jobs (and they do not get a vote in the 2010 Brazilian presidential election). China and India already have capital controls. It is now open season for non-market policies as central banks attempt to manage conflicting policy goals. Be careful in the consensus asset inflation trade.

More rapid increase in Asian inflation With the exception of Thailand, J.P. Morgan's inflation forecasts for 2010 are within the central bank target zones. Modeling inflation in emerging economies is difficult due to the short history of floating exchange rates and large weighting to food and other primary products. The base effect for commodities is notably unfavourable in 1H10. There is a risk that inflation increases faster than our forecast. This would be negative for equities.

The lack of a valuation cushion Valuations in EM and DM are mid a wide and statistically debatable valuation range. If news flow remains incrementally positive then it is not a challenge to performance, but there is no valuation cushion.

Figure 14: Global Bond Supply ($tr)

$0

$1

$2

$3

$4

$5

$6

$7

2009 2010

Gov ernment Agencies, Supra, Muni, etc

Corporates incl Gov t Guranteed Securitized

Source: J.P. Morgan. Global bond supply and demand 2009 in $tr, demand and supply figures are annualized, supply is calculated by the change in bond out standings at face value, demand is calculated by the change in bond out standings at market value. 2010 forecast $tr, demand and supply figures are annualized.

Figure 15: Global Bond Demand ($tr)

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$1

$2

$3

$4

$5

$6

$7

2009 2010

QE Banks FX Reserv es Retail Bond Funds Other

Source: J.P. Morgan. Global bond supply and demand 2009 in $tr, demand and supply figures are annualized, supply is calculated by the change in bond out standings at face value, demand is calculated by the change in bond out standings at market value. 2010 forecast $tr, demand and supply figures are annualized.

13



Uncertain outlook for commodity Financial investors’ influence on commodity prices is now substantial .Commodities rallied prior to the recovery rather than typically lagging the recovery. With zero interest rates investor flows could remain strong, pushing up commodity prices which would be negative for growth. It is also possible that flows reverse. Upwardly sloping forward curves result in a negative roll or high cost of carry for financial investors. Investors may become discouraged by the low returns available due to the negative carry.

Figure 16: Oil forward curve ($/bbl)

75

80

85

90

95

100

10 11 12 13 14 15 16 17

Crude Oil, WTI : 11/24/2009

Source: Bloomberg.

Figure 17: The financial investor is also driving commodities Cumulative inflows into commodity fund by year (US$ billion)

8.912.1

20.117.513.0

39.9

05

1015202530354045

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2004 20052006 20072008 2009

Source: J.P. Morgan, up to October 2009.

Carry trade volatility The carry trade is a poorly defined term. We use it as shorthand for investors’ desire to generate a return when cash returns are zero. This may simply be the switch from cash to higher risk asset. It will also include currency forwards as investors search for higher yielding FX. Invariably momentum in risk assets will attract the leveraged investor. The correction in carry trades can be sharp.

Renminbi and Asian currencies The RMB effectively re-pegged to the US dollar 15 months ago. With headline inflation and exports down year over year, we see no catalyst for Beijing to change policy until mid 2010. The RMB is anchoring other Asian currencies as they try to maximize export competitiveness.

Election-induced volatility Several emerging markets go into election in 2010. This could be a source of volatility for the markets. Korea’s regional election in June 2010 is going to be the last nation-wide election before the presidential election in 2012, meaning the current ruling party is likely to put every effort to win the election. Brazil elects a new president in October 2010. The base case is the current PT-led centre-left coalition remains in power. With fewer macro issues in play this time around, the potential outcome is less dramatic, though pre-election volatility is likely, and sectoral and micro risks are on the rise. Colombia elects a new President in May 2010, with uncertainty as to whether current President Uribe can run again.

Table 4: 2010 Election Calendar Jan Feb Mar

Colombia Legislative election 14 Mar

Apr Hungary Parliamentary election

May Philippines Legislative & Presidential election, 10 May Colombia Presidential election, 30 May

Jun Czech Republic Parliamentary, First Round Hungary Presidential election Korea Regional election

Jul Aug

Sep Oct Poland Presidential election, First Round Brazil Presidential election, First Round 3 Oct

Nov Dec

Source: IFES.

14



Managing Risks Risks for the first year of recovery are high. Investors should consider protecting their portfolios. Option implied volatility has fallen from the highs in 2008, it is reasonable to buy portfolio insurance by going long index puts.

Recent research from J.P. Morgan's Equity Derivatives and Delta one strategy team shows that investors who want to protect their portfolios beyond a three-month period had to bear a 30% annualized cost of rolling the long VIX futures position. The research suggests that the recent increase in correlation between the USD, VIX and equity prices can be used as a more efficient way to achieve diversification and portfolio insurance. While we believe that investors should not overemphasize this casual relationship between asset markets and the USD, we recommend building a small USD long in portfolios to protect against sharp market corrections. This tail risk is particularly important for investors reporting performance in USD terms; if equity markets were to drop 20%, and the USD appreciates by 17%, a dollar-denominated foreign portfolio would fall in value by

35%. Since January 2009, on average, the VIX tended to increase by 1.2 points for every 1% strengthening in the Dollar and this was strongly negatively correlated with equity markets.

Our base case assumes emerging market FX appreciation. Hedging the portfolio with a position in USD is an inexpensive way to diversify sudden EM FX depreciation when risk aversion spikes.

Figure 18: Correlation between DXY and EM FX index - Very Negative

-1.0

-0.8

-0.6

-0.4

-0.2

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0.2

93 95 97 99 01 03 05 07 09 Source: Bloomberg.

15



A longer perspective on asset performanceTo avoid being drowned by an anchor and provide an objective perspective of asset performance, we look back at three, five and eight-year US$ returns. The three-year CAGR for EM equities is just 4.3%. This is higher than -6.8% CAGR return from DM equities. MSCI EM outperformed the DM world index over these years. More recently, ‘BIC’ has driven returns as Russia underperformed by 16% over three years and 4% over three years. Note the divergence in performance of oil and Russian equities and ruble. At a sector level, Commodities have outperformed, along with consumer stocks. Financials managed to outperform only marginally. IT has been the worst performing sector.

Currency returns are a meaningful part of the US$ returns on equity indices. The currency bloc matters, as shown in Table 6. CE3 currencies have appreciated the most, along with the Euro. Interestingly, Asian currencies ex the RMB and Thai Baht, have been laggards. The Mexican Peso is a notable underperformer in Latam. Table 5: MSCI EM Sector performance (% for US$ indices) MSCI EM Sector Weight 3yr CAGR 5yr CAGR 8yr CAGR EM Energy 15.0 5 19 24 EM Materials 6.6 10 18 22 EM Cons Disc 5.4 5 11 18 EM Cons Staples 2.2 11 19 17 EM Utilities 0.0 7 17 17 EM Financials 12.9 5 15 16 EM Industrials 5.3 0 11 16 EM Telecoms 3.5 2 13 12 EM IT 8.9 -3 7 8 Source: MSCI. Sorted descending 8 year CAGR. Grey line separates perf rel to EM

Table 6: Currency and commodity performance (%) Currency 3yr CAGR 5yr CAGR 8yr CAGR WTI Crude 10 9 19 GSCI Industrial Metals -8 10 13 Czech Koruna 7 6 10 GSCI Agricultural Index 9 14 10 Euro 5 3 7 Hungarian Forint 4 1 6 Polish Zloty 2 3 5 Brazilian Real 8 10 5 S African Rand -1 -5 4 Thai Baht 3 4 4 Chinese Yuan 5 4 2 EM Currency Basket 0 1 2 Israeli Shekel 5 3 2 Malaysian Ringgit 2 2 1 Philipine Peso 2 4 1 Indonesian Rupiah -1 -1 1 Korean Won -7 -2 1 Taiwanese Dollar 1 0 1 Russian Ruble -3 0 0 Indian Rupee -1 -1 0 Turkish Lira -1 -1 0 Mexican Peso -5 -3 -4 Dollar Index -4 -2 -6 Source: Bloomberg. Sorted descending 8 year CAGR. Grey line separates perf rel to EM . J.P. Morgan. The EM Currency Basket is calculated using the difference in the returns in the MSCI EM local and USD indices. All performance versus the US$ except Dollar Index

Table 7: Major EM country index performance (% for US$ indices) Country Weight 3yr CAGR 5yr CAGR 8yr CAGR Colombia 0.6 17 27 40 Egypt 0.5 0 25 34 Peru 0.7 28 31 33 Indonesia 1.8 11 21 32 Czech Republic 0.4 2 15 30 Brazil 16.8 21 30 26 India 7.5 6 21 22 BRIC 49.1 8 21 21 China 18.3 13 21 19 Hungary 0.6 -7 3 17 Russia 6.5 -13 8 17 Thailand 1.2 1 6 17 South Africa 7.0 2 9 16 Chile 1.3 10 15 16 Turkey 1.3 2 9 16 EM 100 4 13 16 Morocco 0.3 7 19 15 Mexico 4.4 -1 15 15 Korea 12.6 -3 11 13 Poland 1.3 -8 7 12 Philippines 0.4 3 14 12 Malaysia 2.7 8 9 11 Israel 2.7 10 11 9 Taiwan 11.1 -4 2 4 World - -7 0 2 Source: MSCI. Sorted descending 8 year CAGR. Grey line separates perf rel to EM

Table 8: Major EM country sector CAGR returns (%)

Country Sector Weight 3 year CAGR

5 year CAGR

8 year CAGR

Brazil Materials 4.8 27 32 38 India Energy 1.3 16 35 35 Brazil Energy 4.6 32 41 33 S Africa Cons Disc 0.8 9 13 31 China Energy 3.3 12 21 30 India Financials 1.9 8 25 30 S Africa Telecoms 0.9 12 13 29 Brazil Financials 3.7 17 37 28 Korea Materials 1.8 19 22 24 Korea Industrials 1.9 -5 20 21 Korea Cons Discr 1.4 5 11 20 Mexico Telecoms 1.8 4 21 20 India IT 1.2 -2 15 18 Korea Cons Staples 0.7 -2 14 18 Turkey Financials 0.7 8 16 18 China Financials 7.2 17 28 18 Israel Health Care 1.5 18 14 17 Russia Energy 3.9 -15 8 16 Taiwan Materials 1.4 7 6 16 Korea IT 3.5 -3 9 16 Mexico Cons Staples 1.0 6 18 15 China Industrials 1.6 9 11 15 S Africa Financials 1.8 2 6 14 China Telecoms 2.3 4 21 12 S Africa Materials 1.9 -2 8 12 Mexico Materials 0.7 -11 7 10 Korea Financials 2.3 -6 13 8 Taiwan Financials 1.7 -5 -3 4 South Africa Energy 0.7 6 16 3 Taiwan IT 6.6 -4 5 1 Source: MSCI. Sorted descending 8 year CAGR. Grey line separates perf rel to EM .

16



The Policy Risk to the Asset Inflation TradeOn 19 October 2009, the Brazil government announced a 2% upfront charge for foreign investors making portfolio investments in local fixed income and equities (IOF). The government was concerned about the pace of Real (BRL) appreciation; +35% ytd. If BRL resumes its appreciation trend further measures are possible.

Minister Mantega said that the “FX floating regime” remains in place and he is supportive of capital markets, but the intention is to avoid “excessive BRL appreciation.” Brazilian authorities have voiced concern about the exchange rate, and the more the BRL appreciates the greater the policy risks. We believe that with Brazil’s successful experiment last week, there is the risk that other central banks attempt non-market policies to manage conflicting policy goals.

The Brazil government's move was not a surprise as they were vocal about their concerns with BRL appreciation. The size and breadth of the move, however, was a surprise. Between March and October 2008, Brazil imposed a 1.5% IOF on fixed income investments by foreigners. The currency continued to appreciate until July 2008.

MSCI Brazil underperformed MSCI EM by only 1% in the week post the imposition of IOF (19-23 October 2009). Brazil has ‘gotten away’ with the capital control. This is in sharp contrast the Thai experience (see below)

Policy risks growing The lack of a sustained negative response to Brazil’s capital control measure may encourage other central banks to implement non-conventional policies. This, we believe, is a risk to the consensus asset inflation trade.

Learning from the Thai experience In December 2006, the Thai government imposed FX controls on all inbound portfolio capital. The initial rules implied that foreigners would have to deposit 30% of the funds brought into the country as a reserve with the central bank and only the remaining 70% could be invested. For withdrawing capital within one year, only two-thirds of the amount would be refunded.

The stock market dropped 17% the following day. This pushed the government to change their stance and limit the controls to inflows in bonds and commercial paper.

Figure 19: A muted response from Brazil

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108

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116

01-Oct 07-Oct 13-Oct 19-Oct 25-Oct

MSCI Brazil

BRL Currency

Source: MSCI, Bloomberg, J.P. Morgan. The Brazilian Real index is inverted. Indices rebased to 100 on 1 October 2009. The red line shows the announcement of the IOF tax. Figure 20: Relative performance post knee-jerk reaction positive

100101102103104105106107108

01-Oct 07-Oct 13-Oct 19-Oct 25-Oct

MSCI Brazil relativ e to MSCI EM

Source: MSCI, Bloomberg, J.P. Morgan.

Figure 21: The Thai experience—Impact on currency

32.5

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37.5

1-Dec-06 22-Dec-06 12-Jan-07 2-Feb-07 23-Feb-07

Thai Baht Onshore

Thai Baht Offshore

Source: Bloomberg.

Figure 22: The Thai experience – Impact on the stock market

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1-Dec-06 22-Dec-06 12-Jan-07 2-Feb-07 23-Feb-07 Source: MSCI, Bloomberg.

17



And now the monetary stimulus Monetary stimulus requires three conditions: available credit, at an attractive interest rate, and willing borrowers. An ongoing rally in the credit markets provides the first two conditions. By mid-2010 several quarters of economic expansion should boost business confidence. Initially the effect will be a reduction in borrowers’ propensity to repay loans. This is a developed world event. The monetary stimulus in EM, particularly in China, fed through rapidly in 2009.

The technical position in investment-grade bonds may get more favorable. The negative carry between short-term working capital loans and long term interest rates should discourage further bond issuance. The momentum of returns in credit markets is likely to continue to attract

investors. This combination results in further spread reduction and absolute decline in yields. Higher risk bonds are likely to follow this trend.

The irony of the post-credit-crunch interest-rate dynamic is that the improvement in credit markets allows central banks to move away from emergency interest rates. Investors should view this as a bullish sign. As we highlighted in our guide to monetary policy in EM (26 August 2009, Mowat et al) the nominalization of interest rates is concurrent with strong markets and economies. It is only when higher inflation drives central bank policy action, that investors should sell equities. Please see our extended markers for a summary of inflation and central bank target ranges.

Figure 23: Compression in excessive risk premium – Yields for government and corporate bonds plus earnings yield for US and emerging equity markets

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Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09

Negativ e Yields

Juli Av g : 6%

US HY

CEMBIEM Earnings y ield

US Earnings y ield

EMBI

1 month T-Bill

JULIUS 10 y r

High Low Avg 05-07 Spot Diff US High Yield 21.0 7.5 8.4 9.8 1.4 CEMBI 14.3 5.7 6.4 7.0 0.6 US EARNINGS YIELD 11.4 6.1 6.6 6.9 0.3 EMBI 12.0 6.3 7.0 6.7 (0.3) JULI 8.7 4.9 5.7 5.3 (0.4) US 10 Yr 5.2 2.1 4.6 3.5 (1.1) EM EARNINGS YIELD 17.3 6.8 8.7 7.6 (1.2) 1 Month T-Bill 5.2 (0.1) 4.0 0.1 (4.0)

Source: J.P. Morgan, Bloomberg, 6 November 2009.Note: JULI = J.P. Morgan high grade bond index, CEMBI = emerging market corporate bond index

18



The rolling recovery trade of 2009: And settling the decoupling debate The debate on economic decoupling is settled. Emerging economies led the recovery out of the synchronized recession in 4Q08. Growth remains robust despite weak exports. Domestic inflation and monetary conditions appear to be the dominant drivers of EM growth. The evidence of capital market decoupling is more limited. Correlation between DM and EM is a function of common investors. That said, the low in EM equities was on 27 October 2008, four months ahead of the developed equity markets.

China, India and Indonesia led the economic recovery in 1Q09. This recovery broadened to the balance of Asia,

Brazil, Russia and Turkey in 2Q09. Developed economies returned to growth in 3Q09. Finally Hungary and South Africa return to growth in 4Q09. Markets typically outperformed in the three months prior to their recovery. Within EM exporters started to outperform in 2Q09.

The rolling recovery trade is now mature. For the past two years, stock price movements have been dominated by macro factors. In 2010, we would expect a more normal balance of stock specific factors and macro factors driving share prices.

Table 9: Rolling with the decoupled recovery – Real GDP growth (QoQ SAAR) in key Emerging markets; recession in red, recovery in green

QoQ saar Avg 2003-

2007 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09E 4Q09E 1Q10E 2Q10E 3Q10E 4Q10EEM Asia 8.4 7.6 4.9 3.8 -5.3 2.5 12.6 9.8 5.3 6.8 7.0 7.3 7.0China 11.1 10.7 8.7 5.8 2.4 8.4 14.8 10.0* 9.1 9.0 9.5 9.3 8.7India 9.3 6.9 5.9 7.7 1.6 8.2 6.7 9.0 -1.0 10.0 7.0 9.6 9.0Indonesia 5.8 5.9 6.8 5.2 1.9 4.9 4.3 5.3 3.5 5.5 6.0 6.0 6.0Korea 4.4 4.4 1.7 1.0 -18.8 0.5 11.0 12.3 4.0 2.0 3.5 3.5 3.5Malaysia 6.1 7.2 2.3 0.6 -8.8 -17.7 12.8 6.1 4.5 1.6 4.9 4.9 4.9Philippines 5.7 0.4 7.1 3.0 1.1 -8.1 10.0 4.0 4.0 5.0 5.0 5.0 5.0Taiwan 5.1 3.6 -2.3 -2.9 -27.2 -10.2 20.7 11.5 4.2 3.8 4.0 3.8 3.8Thailand 5.8 4.7 0.3 2.2 -21.5 -7.2 9.6 7.0 5.3 4.9 5.7 7.0 7.0Lat Am 5.2 5.4 4.7 1.4 -8.5 -10.0 0.8 6.0 5.6 4.7 3.2 3.9 2.3Brazil 4.1 7.5 6.2 5.5 -12.8 -3.8 7.8 7.2 6.7 4.3 5.0 4.0 4.0Colombia 6.4 -1.4 2.9 0.0 -5.6 1.1 2.7 1.9 3.2 3.5 4.3 5.5 4.5Mexico 3.5 4.5 1.1 -2.7 -9.2 -21.2 -4.4 10.1 7.5 3.7 -0.6 3.3 -0.9EMEA 6.4 6.1 5.1 3.4 -9.3 -20.2 2.2 6.6 5.0 3.5 3.3 3.4 3.6Czech 5.6 0.5 5.0 1.8 -5.0 -17.9 0.4 4.5 5.0 2.8 2.5 2.2 2.0Hungary 3.4 3.5 -0.9 -3.8 -7.4 -10.0 -7.9 -2.0 2.5 2.0 2.0 2.5 2.5Poland 5.5 6.1 4.1 1.6 -0.4 0.4 2.8 5.5 3.0 2.5 3.0 3.5 3.5Russia 7.4 7.2 7.1 5.9 -14.2 -33.6 4.9 9.5 6.5 4.5 4.0 4.0 4.5South Africa 4.7 1.7 5.0 0.2 -1.8 -6.4 -3.0 0.5 3.4 4.4 3.8 3.6 4.1Turkey 6.8 7.7 -4.5 -5.6 -21.6 -14.4 19.1 11.7 4.5 0.0 3.6 8.2 8.2USA 2.9 -0.7 1.5 -2.7 -5.4 -6.4 -0.7 3.5 3.5 3.0 4.0 4.0 3.5Euro area 2.1 3.1 -1.3 -1.5 -7.1 -9.6 -0.7 3.0 2.5 3.0 3.0 3.0 2.5Japan 2.1 3.5 -2.8 -5.1 -12.8 -12.4 2.3 3.0 2.5 2.5 1.5 1.5 2.0Australia 3.4 3.0 1.4 1.3 -2.8 1.6 2.5 1.2 3.8 2.1 2.4 4.4 6.2Hong Kong 6.8 4.1 -3.9 -3.2 -7.4 -16.1 13.9 9.0 5.0 4.2 4.0 3.8 3.5Singapore 7.7 12.2 -7.7 -2.1 -16.4 -12.2 20.7 14.9 -2.0 4.1 7.4 8.2 8.2Source: Actual data plus J.P. Morgan estimates, 11 November 2009. *Reported for China.

19



Reiterating our overweight on earnings revisions Steve MalinAC, Head of Quant Research

Those familiar with our research may detect a sense of irony in our title because the reality is that there are very few periods when we would not advocate being overweight on earnings revisions—it is after all one of the most consistent quant strategies for alpha delivery.

Occasionally earnings revisions do fail, as they did last year and early this year. The severity of the underperformance was dramatic and enough to make some ask the question “Is it broken for good?” We believe not. Based on the strength of the recovery from prior failure periods we believe that now is exactly the time to focus on changes in earnings estimates.

Why do earnings revisions work? Earnings revisions belong to the momentum family of alpha drivers. Research into momentum is extensive and while the jury is still out as to why it works, even the most ardent advocates of ‘efficient markets’ struggle to deny that it exists. Whilst this isn’t the forum for a detailed discussion, arguably the most convincing arguments for ‘why earnings revisions work’ stem from behavioral finance.

In this field the behavior and reaction of analysts to events that make them acknowledge their under/over-stated opinion about a company’s future have been studied in depth. In a nutshell earnings revisions trend and are serially correlated (i.e. when one analyst upgrades others follow), the market typically under-reacts to these changes and this makes the signal systematically exploitable.

Do they work in emerging markets? Using our extensive global back-testing infrastructure we have investigated the performance of various forms of earnings momentum in numerous universes. The conclusion is invariably the same. Earnings revisions have been a strong driver of returns over the long term in emerging markets – indeed it is one of the strongest universes for observing the phenomena globally.

Figure 24: The L/S return to Earnings Revisions in GEM

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e

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-08

Source: Thomson, J.P. Morgan calcs.

Why did they fail recently? During the crisis and subsequent recovery macro drivers, not micro drivers such as earnings revisions were driving markets. The rapid deterioration in the economic data took analysts by surprise and for most of 2008 and part of 2009 analysts simply played catch-up. As far as the market was concerned EPS changes were at best not relevant and at worst behind the curve resulting in the strategy generating negative returns.

Have they failed before? The recent period was a record period of underperformance but earnings revisions have failed before; notably in 97 and 01 (See below).

Remember, momentum relies on serial correlation. That is, what has worked in the past is most likely to continue to work in the future. Conditions of rapid changes in risk appetite plus limited guidance from companies have contributed to the underperformance of the strategy. The period 97/98 was the Asia financial crisis and 01/02 was the fallout from the Tech sell-off as well as Sep 11th. This was followed by a slight recovery before the Asia region lurched into SARS.

What happened next? The point that we would most like to stress is that in both previous ‘failure cases’ when revisions started to work again they did extremely well. Whilst this is observable on the 12-month rolling return chart above, for clarity we also demonstrate this in the annotated draw-down chart and success rate (i.e. the number of positive L/S return months in the rolling year) chart below.

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From March 1998 Earnings Revisions generated +32% of alpha on a long/short basis as it recovered very quickly. Similarly Jan 02 to Aug 03 saw a +28% L/S return.

What has happened this time? (So far) The ‘drought’ in the performance of earnings revisions was finally broken at the end of May. Subsequently investing in earnings revisions has been a winning strategy five months in succession (and it is again up this month at the time of writing).

In summary we continue to be very optimistic about the earnings revisions based strategies in the current environment. The speed and magnitude of previous recoveries in performance are evident and we are already seeing effectiveness improve.

In addition the fundamental support for earnings revisions is strong. The correlation between stocks and markets continues to drop back suggesting that ‘micro’ is getting the better of ‘macro’ and hence stock picking opportunities are likely to continue to improve.

With the revisions environment having normalized and all the ‘easy yards’ already accomplished for valuations it seems reasonable that attention will remain on earnings going forwards. With clarity returning as each reporting period passes and the endorsement of most market strategists (who are suggesting the economic picture will continue to improve), the stage appears set.

How do you find revisions for stocks? We calculate earnings revision rankings for stocks and sectors globally on a daily basis. Please contact Steve Malin or Rob Smith at [email protected] for more in formation on accessing the latest information via our web portal or to receive latest changes direct to your inbox.

Figure 25: The 12-month rolling return to Earnings Revisions in GEM

-30%

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Figure 26: Draw-down analysis – Recovery periods are strong

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Figure 27: Strategy success rate (rolling year)

0%

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Sharp Recovery following Sharp fall in effectiveness

Average success rate > 70% of months in any rolling 12 month period


Figure 28: Recent returns… back on track

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The odd couple: Above-trend growth and falling core inflation (David Hensley AC and Joseph LuptonAC extracts from ‘Global core inflation falling fast’, GDW 21 August 2009)

J.P. Morgan’s global economic outlook stands apart from the consensus. The forecast is for a sustained return to above-trend growth beginning this quarter and a continued slide in core inflation to near zero in the developed economies (DM) by late next year (see Slack Attack, Global Issues, May 29, 2009). This sounds incongruous; however a resumption of above trend-growth accompanied by falling core inflation is standard operating procedure after deep economic downturns. Developed market core inflation is now at 1.1% oya, down from the peak at 1.9% oya in August last year. The current level is equal to the previous low in 2003. This is accompanied by depressed wage growth.

The output gap and the death of the pricing power Our core inflation forecast is underpinned by the huge output gap in the economy. This large and growing amount of resource slack is a reflection of the extraordinarily low levels of aggregate demand and resource utilization. Global output gap is estimated to reach -4.9% of GDP in 2Q09. The measure of resource utilization, which is a weighted average of the rates of unemployment and manufacturing capacity utilization, was 3.8 standard deviations below its norm. In the past, economic recessions and the accompanying buildup of slack consistently have delivered a significant decline in core inflation and wage growth (see Slack Attack).

Core inflation tends to move slowly in the developed world, meaning that the full transmission of resource slack to pricing tends to occur with a lag. The large decline in core inflation to date was magnified by pass-through from energy prices in 2H08. The death of pricing power is apparent when looking at core inflation and energy prices in 1H09 casually. This shows little a pass through of the bounce in energy prices into core inflation. Either businesses were unable to pass through higher energy costs because of the weak economy, or this was offset by disinflationary pressure elsewhere. Either way, it appears that the surging output gap already is taking a toll on pricing power.

EM decline limited to Asia The shallower recession in EM suggests a smaller reduction in core inflation for the group. However, the actual reduction has been more dramatic with core inflation falling 1.5% to 2.4% from last year’s peak. This decline is entirely due to EM Asia, especially China. Core inflation has plateaued in Latam and CEEMEA.

Figure 29: Developed market core inflation (US core ex tobacco) %oya

1.0

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Source: J.P. Morgan.

Figure 30: Resource utilization and core CPI, developed economies

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Figure 31: EM consumer prices excluding food and energy % change over 12 months

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Fear bond market volatility – Mercury may rise in 2010EM equities typically correct when bond market volatility rise. Statically this is when the 10-year UST yield exceeds two standard deviations versus its three month moving average. Since 2004, the mercury rising indicator has correctly signaled corrections in seven out of 10 occasions.

Yields are low but the curve is steep The current 10-year UST yield of 3.5% is low relative to the long term history. But the yield is steep; the average curve is 1.75%. The curve steepness rewards duration risk and banks have rapid accumulated USTs. The appetite is finite.

US fiscal deficit The US Fiscal deficit is estimated at US$1.35 trillion in 2010 following a deficit of US$1.6 trillion for 2009. The net US treasury paper issuance in 2010 is estimated at US$1.8 trillion; this is larger than the US$1.6 trillion estimated to be issued in 2009. Potentially, the market’s inability to digest the large sustained fiscal deficits and issuance of treasury papers may cause UST yields to rise rapidly in 2010.

End of quantitative easing Reinforced by the FOMC statement in November, we expect the Fed to continue with its already scheduled purchases, concluding purchases in 1Q10. Our baseline does not expect any further announcements of new

purchasing programs, nor does it expect the Fed to alter the already announced amounts of purchases. The end of quantitative easing could result in higher bond yields in 2010.

The mercury rising indicator We define a rapid adjustment in 10-year UST yields as a change in the yields that is greater than 2 standard deviations relative to the three-month moving average.

We emphasize that this indicator does not identify market tops. Note that in March 2006 the indicator signaled a “sell”, and although three-month forward returns were -5% in EM equities, the MSCI EMF rallied a further 15% from March levels before peaking in May 2006. As a result, we interpret the signal as an early warning sign to begin reducing risk.

We believe that emerging markets are susceptible to sharp corrections as volatility spikes in global markets. Our work on quantifying the relationship between the direction of US Treasury yields and EM equity returns suggests that the probability of such a correction in 2010 is high if UST yields rise rapidly and increases the risk of a rapid adjustment. We advise investors to monitor the pace of change in 10-year UST yields in 2010.

Figure 32: The mercury rising indicator – MSCI EM and UST # of standard deviations from three-month moving average

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MSCI EM (Log scale RHS)

Source: Bloomberg, MSCI, J.P. Morgan.

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The manic-depressive's guide to the fiscal outlookOriginally from the GDW, 11 September 2009 The fiscal impetus from the economic stimulus package ramped up earlier this year. More recently, the overall flow of spending is starting to level off and, looking ahead a few quarters, spending will decline incrementally. This prospect has raised fears of a “double-dip” recession as the boost to growth from the stimulus turns into a drag. Given the most likely path for spending, these fears appear greatly overblown. The reason is that spending ramped up much more quickly than it will ramp down. As such, the drag from waning stimulus over the course of the next year should be relatively modest: By our calculations the drag should be less than 1% point on average. A more significant hit could come in early 2011, when not only do most of the stimulus measures come off, but some of the Bush-era tax cuts are set to expire. While that prospect poses downside risk to 2011, much political uncertainty remains regarding how much stimulus will roll off versus be renewed.

While the likelihood of a stimulus-induced double-dip in 2010 looks comfortably low, the longer-term budget outlook remains uncomfortably perilous. We project that the federal budget deficit for FY2010 will come in at $1,350bn, an improvement from the $1,600bn projected for FY2009 but not a huge improvement given how terrible the backdrop was for the last fiscal year. Looking further ahead, the stream of deficits in either the administration’s or the CBO’s estimates looks very worrying. As bad as that is, estimates that also realistically incorporate current policies look terrifying. There have been episodes in the past when deficit projections looked awful—such as the early 1990s—but the outcome turned out better. That said, the challenges look much greater this time around and will require even more political will to be resolved.

Stimulus so far Through September 4, $96bn of stimulus funds have been paid out, which is about 19% of the $500B allocated to spending measures.

The bar chart presents our estimates of how much the stimulus has contributed, and will contribute, to overall growth. According to our estimates, the stimulus has contributed, or will contribute, about 2-3%-pts to GDP growth, on average, in each of the last three quarters of the year.

Figure 33: Estimated contribution of fiscal policy to GDP growth

-3-2-101234

2009 2010 2011

Source: J.P. Morgan. % saar. Includes

After that, going into next year we expect that stimulus support will decline and subtract from GDP growth, on average in the magnitude of about 0.5%-pt per quarter. The growth rate drag in 2010 is expected to be smaller than the growth rate boost in 2009 because the stimulus spending should decline at a slower pace than it increased. That holds true at least until the beginning of 2011, at which point things get interesting. Currently, not only should much of the stimulus spending begin to dry up in 2011, but the Making Work Pay tax credit for lower-income households and the Bush-era tax cuts for upper-income households are both scheduled to expire at the beginning of 2011.

Fiscal challenge for DM The deficit for the 2009 fiscal year is likely to come in a little under $1,600bn. We project a deficit for FY2010 of $1,350bn. Considering how dire the economic and financial situation was in the 2009 fiscal year, the improvement in 2010 does not look all that impressive. We do not have official deficit projections for years further out, though it is safe to project an incredibly gloomy fiscal outlook. Our best guess for FY2011 is a deficit of around $1,100bn—that is, after incorporating the expiration of the Bush tax cuts. (In the event, the expiration of upper-income Bush tax cuts should add about $30bn to FY2011 revenue). For years beyond 2011 the improvement in the deficits is likely to be only modest and nowhere near enough to bring the deficit anywhere close to balance. Over the next 10 years, even the administration’s assessment of the budget outlook sees the deficit never falling below $700bn, and the cumulative deficits over that period are projected to be $9tn. While the CBO has yet to update its estimate of the administration’s budget, when it does it will likely add $1tn to the administration’s 10-year deficit total. A similarly gloomy picture emerges from analysis conducted by the Committee for a Responsible Federal

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Budget, which realistically extends current policies—such as the AMT patch—to arrive at a $12.6tn 10-year deficit estimate.

Another case in point is Japan. The latest OECD data (June 2009) showed that gross financial liabilities (debt) of Japan’s general government were 172% of GDP in 2008, and are expected to exceed 200% by 2010, by far the highest level among major countries

One grim point should be noted to connect the comments earlier in this note to the immediately preceding discussion. As we noted regarding early 2011, even modest fiscal “restraint”— coming from a starting point of 11% of GDP deficits— will be a hit to economic growth. If, at some point, the political establishment shows the will to return the deficit to a more reasonable 2-3% of GDP, the cumulative drag of a fiscal rebalancing of up to 8% of GDP poses a long run cyclical drag; the implications of the political establishment not showing that will, however, is even more depressing.

Fiscal Cushion in EM Public sector debt to GDP ratios in Emerging markets are much better developed markets. The public sector debt as a percent of GDP is the largest in Brazil and India among the emerging markets, and we expect it to be around 70% for Brazil and 46% for India in 2010. This makes for good comparison with the G3 countries where the public debt is as much as the GDP itself or even more.

For more, see Key Trades and Risks, Mowat et al, October 21, 2009, and JGB challenge: Exploding public debt amid falling domestic saving, October 21, 2009.

Table 10: General Government Fiscal Deficit (% of GDP)

Fiscal Position Change 2008 to 2009 Public debt (%

of GDP) 2008 2009 Cyclical Disc 2010 F

Global -2.6 -6.8 -2.5 -1.7 naDeveloped -3.1 -7.7 -2.9 -1.7 naUS1 -3.2 -10.2 -5.0 -2.0Japan -6.0 -9.7 -1.7 -2.0 227Euro area -2.0 -4.0 -1.0 -1.0 naUK -5.9 -9.1 -1.6 -1.6 82

Emerging -0.8 -3.5 -1.3 -1.5 naLatam -0.6 -3.3 -1.7 -1.0 naBrazil -1.3 -2.5 -0.9 -0.3 70Chile 8.7 -4.5 -10.6 -2.6 9Colombia -1.4 -3.0 -1.6 0.0 44Mexico -1.8 -3.9 -0.7 -1.4 36Peru 2.4 -1.6 -1.5 -2.5 25Em Asia -1.4 -3.6 -0.1 -2.1 NaChina2 -0.5 -3.0 -0.4 -2.1 20Hong Kong -5.0 -6.0 2.0 -3.0 NaIndia -6.5 -6.3 5.2 -5.0 46Indonesia -1.3 -2.4 -1.1 0.0 35Korea 1.5 -2.0 -2.4 -1.1 44Malaysia -4.8 -7.0 -1.0 -1.2 44Philippines -1.3 -1.5 -0.2 0.0 62Singapore 5.0 -2.0 -7.0 0.0 naTaiwan -1.2 -3.6 -1.8 -0.6 naThailand -2.5 -5.0 -1.1 -1.4 39CEEMEA 0.8 -3.6 -3.8 -0.5 naCzech Rep -2.0 -5.0 -3.0 0.0 38Hungary -3.0 -2.6 0.4 0.0 80Israel -0.3 -3.0 -2.7 0.0 naPoland -2.5 -3.2 -0.7 0.0 53Russia 5.7 -4.0 -8.6 -1.1 7South Africa 1.0 -3.8 -3.2 -1.6 38Turkey -1.3 -2.3 -1.0 0.0 50Source: J.P. Morgan economics 'Priming the Pump’, Lupton and Hensley, 13 February 09 1: Discretionary stimulus for the US only includes spending and tax measures related to boosting economic activity and not the measures being undertaken to support financial markets. Consequently, roughly $400bn of financial support is included as cyclical. 2: China’s widely announced stimulus plan amounted to roughly 7% of GDP in 2009. However, we only show the 30% of this, that is expected to be financed by the public sector.

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South Africa - 2010 Soccer World Cup WinnersFigure 34 summarizes the average outperformance of equity market sectors relative to MSCI World in the previous three World Cups (earlier historical analysis constrained by data availability). IT, Telcos and Consumer Discretionary were the stand-out sector winners during previous World Cups. We expect similar benefits for these sectors in SA with MTN, in particular, appearing very well-placed given that it is the first African World Cup Sponsor, making it a direct beneficiary from increased sales and awareness.

We expect accommodation, transportation, food, beverage, and leisure sectors to benefit from soccer-related consumption. SABMiller, City Lodge, Sun International, Comair, 1Time, Naspers, Rainbow, Famous Brands and Imperial would be our top strategy picks in these sectors. A beneficiary in the banking sector

is likely to be FirstRand given that it is an official sponsor and via the Visa link benefits from tapping into that customer base.

Construction was an early beneficiary of the World Cup spending given the capex on new soccer stadiums, transport links etc, but much of this has largely occurred and we believe for this sector to be rejuvenated it requires new private sector capex to be forthcoming, in particular, new mining capex.

Our favourite SA Soccer World Cup strategy picks include MTN, Vodacom, SABMiller, City Lodge, Sun International, Naspers, FirstRand, Rainbow, Famous Brands, Comair, 1Time, Imperial and Bidvest

.

Figure 34: Hosting countries’ equity sector performance relative to MSCI World sectors

05

10152025303540

IT

Telec

oms

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. Disc

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Source: MSCI, Datastream, J.P. Morgan calculations. Chart shows the % rel. performance versus MSCI World, six months in the run-up to World Cup

Table 11: SA Soccer World Cup strategy picks Bloomberg Ticker Price JPM Rec. Analyst

MTN MTN SJ 119.8 OW Jean-Charles Lemardeley Vodacom VOD SJ 55.9 Neutral Jean-Charles Lemardeley SABMiller SAB SJ 209.9 Neutral Mike J. Gibbs City Lodge CLH SJ 78.2 NR - Sun International SUI SJ 93.9 NR - Naspers NPN SJ 282.9 OW Ziyad Joosub FirstRand FSR SJ 17.4 OW Mervin Naidoo Rainbow RBW SJ 15.9 Neutral Vikhyat Sharma Famous Brands FBR SJ 20.0 NR - Comair COM SJ 2.2 NR - 1Time 1TM SJ 0.8 NR - Imperial IPL SJ 82.1 NR - Bidvest BVT SJ 121.7 NR - Source: J.P. Morgan estimates. Note: JPMorgan does not have coverage of certain of the stocks in the leisure, air transport and industrial sectors as shown above. City Lodge, Sun International, Famous Brands, Comair, 1 Time, Imperial and Bidvest have been included in our list of top picks purely to reflect our positive stance on Soccer World Cup-related stocks. J.P. Morgan has no fundamental opinion on these companies.

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Surprises for 2010 The US dollar strengthens. This is driven by the better-than-expected US growth. Initially, emerging equity markets and commodities decline as traders assume that the casual inverse relationship between EM equities and the DXY will dominate. The “new dollar funded” carry trade unwinds, adding to the sell-off. Eventually, as investors recognize that healthy US growth is good for equities, markets recover. And of course, the “old yen funded” carry trade is reinstated.

The renminbi appreciates by more than 10%. Our base case is a very modest appreciation from Rmb/US$6.82 to 6.5 by end-10. A recovery in exports plus the move to positive inflation encourages Beijing to allow faster appreciation. Other Asian currencies rally more than the Rmb. This move combined with the increased use of Rmb in trade settlement is the start of the Asian renminbi block.

MSCI announces that it will include China A-shares in standard indices. Initially, a limited investibility factor is applied. Assuming a 35% free-float in the A-share market, China moves from 18% to 37% of MSCI EM. This event is destabilizing. Investors have the Hobson choice of needing to be ahead of large capital inflows but recognizing they are buying expensive stocks.

Run on the Japanese yen and Japanese Government Bonds. International investors would require a risk premium to fund a country where public sector debt to GDP is 190% in 2009 (J.P. Morgan estimate) but for now, Japan’s excess savings are sufficient. In JGB challenge: exploding public debt amid falling domestic savings, Kanno et al, 21 October 2009, we estimate that assuming no major fiscal initiatives, demographic demands should push this ratio to 300% by 2019. Current demographic trend could push the savings rate to zero in five years. This, plus the strong yen hollowing out Japanese manufacturing, could require foreign savings to fill the gap. Today’s 10-year JGB yield of 1.34% is too low to attract foreign capital.

Too many speculators drink at the commodity’s kool-aid fountain; commodity and energy prices rise choking off a fragile recovery.

In contrast to above, commodity investors become frustrated with low financial returns due to the cost of roll (upward sloping future curves). This results in 2009 record inflows into energy and commodity funds reversing. Although the sharp fall in commodity and energy prices is unnerving, the resulting stimulus underpins the recovery.

Developed economies property markets, after a relief rally, stagnate in real terms as better economic data drive up mortgage costs.

EM FX bubble builds despite unconventional policies used to lean against the trend.

None of these events reflect an official J.P. Morgan view; they are intended to stimulate discussion

DXY strength…new carry trade unwinds

Rmb stronger than 6.5/US$

China 37% of EM

Run on JPY and JGB

Momentum of flows in commodity funds pushes up prices and chokes growth

Run on commodity funds

Don’t be too keen to return to property

EM FX momentum unstoppable

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Emerging Market Rates Outlook Joyce ChangAC (1-212) 834-4203

[email protected] J.P. Morgan Securities Inc., New York

Emerging Markets pass a stress test Investing in EM assets has been a one-way bet over the past year. Across all asset classes (e.g., equities, sovereign credit, corporate credit and local markets), EM strongly outperformed (chart 1). Going into 2010, EM fundamental and financial markets outlook remain robust. EM is shedding its image as the most volatile asset class. The outperformance of EM fixed income in the midst of market turbulence in 2008 and the subsequent outperformance over the past year as the market recovered have resulted in a re-rating of EM risk. Even frontier EM countries have outperformed. With EM growth and yields well above developed markets, EM will continue to move into the mainstream as an asset class in 2010. We expect a first quarter rally as both EMBIG cashflows and strategic inflows from non-traditional investors are high. External demand for EM assets remains strong and we expect inflows into EM fixed income to reach $30-35bn in 2010 compared to only $18bn this year. Worldwide pension funds are starting from a position of close to zero allocation to Emerging Markets, and yet assets are more than $17bn. New and growing sources of inflows include high grade crossover investors, US pension and endowment allocations, sovereign wealth funds and Japanese retail allocations.

Figure 35: Asset class performance

Source: J.P. Morgan, 1-J.P. Morgan commodity total return index, 2-Barclays capital global aggregate

2009 will be remembered as the year that EM carried the global economy, with EM consumption well

surpassing that of the US. Indeed, over the past four years, EM contributed more to global GDP growth than the whole of developed markets. In 2010, EM growth will recover to 5.8%oya, with risks to the upside, while G-3 growth will remain below par at only 2.7%. We recommend overweight positions in EM credit (both sovereign and corporate) versus developed fixed income markets. We also expect EM local markets, as tracked in J.P. Morgan’s GBI-EM index, to generate double-digit returns next year.

2009 will be remembered as the year that EM carried the global economy, with EM consumption well surpassing that of the US. Indeed, over the past four years, EM contributed more to global GDP growth than the whole of developed markets. In 2010, EM growth will recover to 5.8%oya, with risks to the upside, while G-3 growth will remain below par at only 2.7%. We recommend overweight positions in EM credit (both sovereign and corporate) versus developed fixed income markets. We also expect EM local markets, as tracked in J.P. Morgan’s GBI-EM index, to generate double-digit returns next year.

EM valuations more compelling than US High Grade markets Yields for the EMBIG have fallen to 6.49% (close to the record low of 6.34% reached in April 2007), but remain much higher than US investment grade yields (5.2%) and yields for the Barclay’s Global Aggregate index (3%). Other US fixed income asset classes will deliver near flat or negative returns for the full year 2010, assuming our preliminary spread and yield forecasts for 2010 are accurate. We expect EMBIG returns in 2010 to reach a maximum of 6.5% compared to 4.5% for US investment grade. We have been overweight the EMBIG for the past seven months and upgraded several smaller weighted EM countries in the benchmark index last week. In addition to our overweight recommendations in Dominican Republic, Indonesia, Mexico, and Russia, we upgraded Poland, Hungary, Jamaica, and Belize to Overweight. We downgraded high beta Venezuela to Marketweight from Overweight and maintained the overweight in Argentina but switch assets for relative value considerations.

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EM sovereigns have already prefinanced one-third of the total $66bn EM sovereign financing needs. EM sovereign issuance for the year reached $71 billion last week. Note that five countries – Argentina, Poland, Russia, Turkey and Venezuela – account for nearly 50% of total EM sovereign issuance needs. Technicals for the EMBIG remain favorable as coupons and amortizations are also the highest in 1Q10, with cashflow of $21.5 billion to be put to work (chart 2). EM sovereign cash flows will total $56.4bn in 2010 versus $66.5bn in sovereign financing requirements.

Figure 36: EMBIG coupons and amortizations highest in 1Q10


Shift the focus to local markets: GBI-EM returns to reach 12% in 2010 After a brief dip during the credit crisis, international demand for EM bond markets is growing again, particularly for high carry markets. The weak USD trend will persist next year and J.P. Morgan forecasts EUR/USD bottoming at 1.62 in mid-2010 before recovering to end the year at 1.50. The Fed is proving more comfortable with a zero rate environment than almost every other G-10 or EM central bank and the most recent balance of payments data indicate that the US is also suffering from a re-emergence of net FDI/M&A outflows and weaker equity inflows than other countries, highlighting that USD weakness is more than a simple carry trade.

Figure 37: EM local yields remain attractive


We favor the higher carry currencies going into 2010 and recommend TRY, RUB, PLN and HUF in particular, as all are likely to deliver returns in excess of 15%. While FX intervention is likely to intensify in Asia and Latin America, CEEMEA countries are more focused on FX reserve accumulation. Brazil was the outperformer in 2009 (+25%), but the most attractive opportunities for 2010 are concentrated in the CEEMEA region. Appetite for local rates remains subdued due to the growing uncertainty about the timing and pace of monetary policy normalization. EM local markets debt returns (USD unhedged) break down roughly into half local rates returns and half FX returns. Our bottoms-up return forecast for the GBI-EM Global Diversified index, which is the leading EM local markets benchmark, is 12% in 2010.

EM Corporates likely to outperform EM sovereigns and US High Grade The resilience shown by EM Corporates throughout the credit crisis has improved their profile amongst investors, with the asset class likely to garner a greater following as valuations in developed credit markets look increasingly expensive. Although the pace of the market’s recovery has brought us back to pre-crisis levels, we believe that there is still room for spreads to tighten and set a year-end 2010 target for the CEMBI Broad at 300bp versus 388bp at present. . There were notable casualties in 2009, with combined defaults and debt exchanges rising to 10.8% of the EM corporate high yield bond stock (compared with a par-weighted default rate of 10.96% and 16.24% including distressed exchanges in the US high yield market), many of the concerns that shaped expectations for a more serious

29



collapse and prolonged period of market weakness at the end of 2008—such as rising capital flight and mounting external refinancing risks in Russia, unhedged corporate derivative exposures in Brazil and Mexico, the downturn in and overheated real estate markets in China and Dubai respectively, and short-term FX funding needs in Korea—have come to pass without prompting broader systemic failures.

At the aggregate level, we move EM Corporates as an asset class (CEMBI Broad) to Overweight relative to EM sovereigns (EMBIG) and US credit (JULI). At the regional level, we expect credits from Asia and Europe to contribute the lion’s share of the spread tightening followed by Latin America, while at the country level we still expect some of the more significant spread opportunities in higher beta countries such as Indonesia, India, Kazakhstan and Argentina, although note that these account for less than 6% of the corporate index. We believe that Russian corporate performance will be much more muted in 2010 despite the macro backdrop for Russia and the CIS, which is likely to be significantly improved as commodity prices recover. We do not believe that developments in Dubai will have a long-term impact on the EM quasi-sovereign sector outside of the Middle East region.

Economic recovery to prompt earlier tightening in EM during 2010 While the world needs accommodative policies, a one-size fits all policy stance is increasingly inappropriate as utilization rates are widely divergent despite a world generating synchronized above-trend growth. The most severe decline in employment by far has taken place in the US where utilization rates stand at historic lows. By contrast, our aggregate measure of EM utilization rates is close to its long-term norm (chart 3). In addition to the relatively modest loss of jobs in emerging market economies, this contrast reflects the very high EM utilization rates at the time the recession began. With policymakers having moved uniformly into aggressive easing mode at this time last year, a quicker move toward EM policy normalization is appropriate.

Asset price inflation is also become a greater concern, particularly for EM Asia central bankers. Easy monetary conditions, high household savings rates, intact banking systems, and strong housing demand have led to sharp rebounds in residential real estate prices. The dollar carry trade is fueled both by low US rates and the understanding that Asian currencies are artificially low.

We project a total of 14 countries across EM regions tightening monetary policy next year, either by raising reserve requirements or interest rates.

However, the still depressed size of the global pie is an obstacle to the relative adjustments that are needed and markets have arguably priced too much tightening in. Even after three quarters of expansion, EM export volumes stand about 10% below their previous peak. For China, which provided an important part of demand stimulus to lift the global economy, export volumes are still 20% below their peaks. It is in this context that Chinese authorities can justify their dollar peg. Other Asian export-intensive countries, in turn, maintain a tight leash on their currencies in order to limit the loss of competitiveness against China. A world in which US interest rates are likely to remain close to zero and the renminbi is held artificially low may serve domestic needs but is producing undesirable consequences and finger-pointing on a global level.

The reluctance to lean too heavily on rate hikes has prompted EM policymakers to rely on other measures. EM foreign exchange reserves have increased by US$700 bn this year to reach US$4.2 trillion and some countries are actively managing bank reserve requirements. Brazil recently introduced a financial transactions tax (IOF) on portfolio inflows and other countries are shifting in a similar direction.

EM issuance to go further down the credit curve The issuance outlook for 2010 remains biased towards investment grade bonds. In 2009, we estimate that 60% of issuance from EMBIG-eligible sovereign issuers came from investment grade credits. In net terms, we estimate that issuance year-to-date has been just below the full-year coupons and amortizations by $1.7bn. However, we estimate investment grade net issuance at $6.0bn, contributing towards the upward drift in index rating. For 2010, we estimate gross EMBIG sovereign issuance at $66.5bn, with net issuance estimated at $14.4bn. Of this net issuance figure, we estimate investment grade net supply will reach $9.7bn, or 68% of the total, again contributing to upward ratings momentum.

EM Corporates, mainly quasi-sovereigns, have issued $118bn this year—decisively breaking through our full year forecast of $103bn—concentrated in investment grade issuance. Rather than slowing down as the end of year approaches, supply remains extremely

30



strong with a record of over $23bn sold in the month of October, and 60% of total supply for the year issued since July. Deal sizes have averaged $720mn, substantially larger than previous averages of $380mn in 2008 and $371mn in 2007, as quasi-sovereign and investment grade corporates have dominated the new issue space. Of the $118bn issued this year, roughly 61% has come from the quasi-sovereign segment (including supranational banks), just under one-quarter from investment grade corporates, and the balance of around 15% from high yield corporates. We estimate that the EM corporate bond stock now stands at $589bn versus $529bn at the start of the year.

Sovereign ratings downgrades were much lighter during the recent down cycle and thus ratings agencies have been less aggressive in upgrading countries since the financial storm has passed. Rating downgrades exceeded upgrades in 2008 and so far in 2009 for S&P and Moody’s, after eight years in a row in which the up moves exceeded the down ones. However, this will reverse again in 2010, when the number of upgrades is expected to be small but to exceed downgrades. Since 2008, the following sovereigns have been downgraded: El Salvador, Estonia, Hungary, Jamaica, Latvia, Lithuania, Mexico, Nigeria and Ukraine. However, a handful of EM countries have actually been upgraded, including Belize, Bolivia, Chile, Ecuador, Indonesia, Lebanon, Pakistan, Philippines, South Africa, Uruguay, and most notably Brazil. In contrast, the ratings cycle point to more downgrades in the developed market countries in the coming years. Indeed, using current and projected debt/GDP levels, the analysis of our global fixed income analysts finds that Spain, Ireland and Greece may suffer additional 1-2 notch downgrades by 2011.

EM fixed income inflows will catch up in 2010 We estimate cumulative inflows to EM debt real money funds at $17.8 billion so far this year, the majority of which has come from strategic allocations (chart 4). Next year, inflows should rebound to the $30-35bn range recorded in 2006-2008. Real money remains overweight as asset allocations increase, while hedge funds have not increased exposure. Indeed, in their 3Q09 update, Hedge Fund Research (HFR) noted that Emerging Market hedge fund assets increased to $86.5bn but only because of performance, with net flows virtually flat at -$37mn, bringing year-to-date net outflows to $8.9bn. By contrast,

inflows to Emerging Market dedicated funds have increased sharply from the end-April lows.

Figure 38: Cumulative flows to US real money funds has reached $18bn year-to-date, excluding fund flows from Japan

-20

-10

0

10

20

30

40

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2005 2006 2007 2008 2009

US$ b


Japanese demand for carry is strong and rising. Cumulative inflows from Japan to Emerging Market bonds over the past 5 years had reached $38bn, and has also been far more stable than similar inflows to EM bond funds in the US and Europe. The pattern of inflows from Japan has shifted significantly over the past few years. Earlier inflows were to EM hard currency bond funds, but these ceased in early 2008. Inflows to EM local currency bond funds started increasing more rapidly in mid-2007 and peaked in 3Q08, although they have started to grow again since mid-2009. Inflows to EM hard currency funds have now resumed, but only in EM FX overlay strategies in which the investor buys USD-denominated credit assets but the coupon is paid out in currencies ranging from AUD, to ZAR, TRY and BRL.

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Trading themes Stay overweight the EMBIG versus US High Grade. EMBIG spreads to tighten to 250bp by end-2010, implying a total return of maximum 6.5% compared to only 4.5% for US High Grade and flat returns in other US fixed income markets. Position for a rally in 1Q10, when nearly 50% of EMBIG cashflows ($51.8bn) are generated. Strategic inflows into EM fixed income have reached $18bn so far in 2009 and may more than double next year with increased demand from non-traditional investors. We stay overweight Argentina, Belize, Dominican Republic, Hungary, Indonesia, Jamaica, Mexico, Poland and Russia sovereign debt.

Overweight EM Corporates vs. both EM sovereigns and US High Grade We forecast the CEMBI Broad at 325bp versus 403bp currently, with the EM high yield corporate default rate to fall to 2.2% from an estimated 12.3% this year. EM Corporate credits from Asia and Emerging Europe offering the most attractive opportunities, while new issues continue to offer better liquidity than secondary market. While refinancing risk was clearly a concern last year, access to alternative sources of capital including local markets, has reduced this risk in a number of key markets. In 2010, we expect the default rate for the asset class to fall to 2.2% of the EM corporate high yield bond stock or just under 1% of the total bond stock.

Shift the focus to local markets, with the GBI-EM return likely to reach 12% in 2010 EM FX appreciation will endure at least through 1H10 amid USD weakness. We favor the higher carry currencies going into 2010 and recommend TRY, RUB, PLN and HUF in particular, as all are likely to deliver returns in excess of 15%.

EM Asia local yield curves likely to be higher and flatter by end-2010 Inflation and monetary policy are the big questions for Asia, not growth. It will be difficult to bring interest rates up as long as central banks resist fx appreciation. In addition, continued capital inflows are likely into Asian bonds as the growth differential between Asia and developed market economies expands further. Since some of these flows will be parked in local bonds, it is not clear that yield curves will immediately rise from here—at least not in 1H10. Only in 2Q10, when we expect it will become clear that Chinese tightening and/or fx appreciation is near, will we see curves meaningfully flatten across the region.

The economic recovery will see monetary stimulus removed across CEEMEA The central banks of Poland, South Africa, the Czech Republic, Turkey and Israel are expected to tighten policy in 2010. In Hungary and Russia currency appreciation is expected to result in further easing. However, the normalization of monetary policy should not prevent bond markets from delivering positive returns in 2010, as this unwind is already anticipated in bond prices. The divergence between fx-implied yields and local t-bill yields and the lack of concerns over capital controls suggests carry trades are better expressed in local instruments. Spreads are especially wide in 1-year t-bills versus fx implied rates in Israel (195bp), Hungary (150bp) and Poland (130bp).

Linkers offer best value in Latin America rates While central banks have been focusing on current goldilocks (the 4Q09 rebound has taken place amid low inflation) and in some cases even protest the tightening priced in by local yield curves, market participants have been wary of policy rate levels and fiscal policies that are turning increasingly pro-cyclical. The “low for long” message seems at odds with the fact that Latin countries are coming out of this recession with much tighter slack than G3 and in some cases already buoyant credit markets. We favor outright exposure through linkers across the region. They look especially cheap in Chile and Colombia. In Chile we recommend receiving 2Y UF outright. On the breakeven side, Mexico stands-out. We believe inflation is unlikely to move below 5% in 2010 due to the fiscal reform, and recommend buying 3Y B/E inflation through UDI-TIIE swaps

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Emerging Asia Economic outlook

David FernandezAC (65) 6882-2461

[email protected] J.P. Morgan Securities Singapore Private Limited

EM Asia growth set to return to trend in 2010, but watch for choppiness After a traumatic entrance into 2009 that set the stage for a full-year growth performance (4.2%) well below the region’s potential, EM Asia is set to turn in a solid, trend-like year of growth in 2010. Indeed, if the J.P. Morgan forecast of US GDP growth reaching 3.5% is achieved, then there is upside risk to our forecast of 7.3% GDP growth in EM Asia next year.

At the same time, developed market growth still poses a downside risk to EM Asian GDP as our region remains full-coupled to the fortunes of the US and the Euro Area, in particular. Domestic stimulus, including sizable monetary support, has clearly helped China and other key countries in the region recover quickly in 2009. However, it is exactly the concern over DM growth (with no bravado of de-coupling heard from Asian policymakers) that will ensure that stimulative policies are only gradually normalized in 2010.

A useful reminder of the volatility of the GDP growth in EM Asia is playing out as we enter 2010 as the region rolls down after achieving extremely high growth in the middle of 2009. On the J.P. Morgan forecast, EM Asia is on track to slow down to about a 5% growth pace in 4Q after averaging over 11% in 2Q and 3Q. It is a clear possibility that some high beta economies such as Singapore actually contract in 4Q. So, while the growth recovery in EM Asia has been undeniably impressive, markets should tighten their safety belts as choppiness looks like could be a continuing theme going into 2010.

Figure 39: EM Asia—GDP growth

0

-5

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5

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2005 2006 2007 2008 2009 2010

%q/q, saar

oya

Forecasts

Source: J.P. Morgan economics.

Early policy normalization from India and Korea, but don’t get carried away Policymakers in China and the rest of EM Asia are still unlikely to make major adjustments to monetary policy in the near term. The Bank of Korea and the Reserve Bank of India have been leaders in signalling to the market that they will be willing to begin to normalize monetary conditions relatively early, with policy rate changes expected from both Korea and India in 1Q10.

But the BoK MPC is also aware that the market has taken that message to heart and is pricing in 100-150bp of tightening over the next six months. Indonesia is another case where we believe the market has gotten ahead of itself. For 2010, Bank Indonesia believes that inflation will return to “normal levels in the 5±1% range” and importantly sees medium-term inflation declining toward 3% over time based on the strong commitment by BI and the government to fighting inflation. Clearly, this is not a central bank that wants to feed expectations of early tightening. Overall, be aware that the market can overshoot in its expectations of tightening, and we should expect Asian policymakers to tread carefully in sending such signals too strongly, especially early in 2010.

The market is also keenly focused on China, but we similarly think expectations of policy changes there may be overdone. We think PBoC will move in stages, relying more on open market operations to withdraw excess liquidity, and combine that with sector-specific actions, like a partial withdrawal of the stimulus provided to real estate late last year, to contain the risk of an asset bubble and inflation. As for policy adjustment through the Rmb, China’s policymakers still view the 2010 economic recovery in developed markets, especially in the US, with a high degree of uncertainty. Over time, possibly by 2Q, they may take a view that global recovery is on a surer footing, with a turn to positive oya export growth from China being a concrete signal of such a turn. But, only when such confidence is achieved will the Rmb begin to resume a gradual appreciation trend. J.P. Morgan’s forecast is for Rmb/US$ to reach 6.5 by end-10, with the appreciation only taking on meaningful momentum by 2Q10.

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After dropping in 2009, EM Asia’s external surpluses stabilize For two consecutive years, EM Asia’s CA surpluses have dropped significantly. However, the global growth recovery and an expectation that oil prices will stay in a range of $70-90, should make 2010 a year of stabilization in the region’s CA surplus. In total, EM Asia is expected to run a CA surplus of 5.3% of GDP compared with 5.5% in 2009. Importantly, China’s surplus will stabilize as a share of GDP, meaning the absolute size of the surplus will rise by over $40 billion versus 2009. On the other side, Korea and Thailand are expected to see strong domestic growth which will push import growth higher than exports, resulting still in CA surpluses, but of a smaller magnitude.

Table 12: Asia—Current account balance forecasts 2007 2008 2009E 2010E Japan 212.739 158.867 133.941 115.677 Australia -50.279 -44.683 -41.780 -50.840 New Zealand -19.289 -11.706 -5.342 -9.591 Em Asia 518.596 489.034 460.478 468.875 ex China and India 164.643 114.292 165.449 141.090 China 371.833 404.905 326.213 368.346 Hong Kong 25.527 30.623 26.113 25.863 India -18.668 -29.733 -31.195 -41.040 Indonesia 10.155 0.312 6.094 5.173 Korea 7.335 -5.292 38.463 17.120 Malaysia 29.105 38.722 32.576 40.148 Philippines 7.119 4.227 5.852 3.051 Singapore 39.167 22.878 14.105 17.521 Thailand 14.049 -2.503 12.912 4.818 Taiwan 32.975 24.894 29.345 27.875

Source: J.P Morgan economics. Figures in US$ billions.

Except for south Asia, the rest of the region will again run significant CA surpluses. Combined with capital inflows from equity and fixed income, as well as FDI, we forecast regional FX reserves to rise another $350 billion in 2010. Global rebalancing certainly has a long way to go.

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CEEMEA Differentiated Rebound

Michael MarreseAC (1-212) 834-4876

[email protected] J.P. Morgan Securities Inc

Energy Exporters to Shine J.P. Morgan forecasts that 2010 average CEEMEA growth will be 4.5% (at potential) given that a substantial amount of global de-leveraging has already occurred, a significant part of the global economy remains committed to fiscal stimulus, and global interest rates are forecast to remain low. Yet for 2010 we foresee great differentiation across countries, with only Russia, Qatar, and Nigeria predicted to grow faster than potential. Our 2010 growth forecast for Russia (5%) is well above consensus, and we see upside risks to that forecast given buoyant oil prices, sound macro management, declining interest rates, and an anticipated revival in consumption. For Turkey, our forecast of 5% growth is based on our belief that an IMF agreement will be reached by early 2010, allowing the authorities to avoid crowding out the private sector. Even though the South African consumer will remain under pressure until well into 2010, better external conditions, an inventory rebound and the 2010 FIFA World Cup are likely to produce 3% growth by our estimates.

Recent GDP data showed that countries with IMF-imposed fiscal restraints and a large share of fx borrowing - Hungary and Romania - remained in recession in the past quarter, although the pace of their output contraction eased. The magnitude of fiscal tightening has been by far the greatest in Hungary - the main reason for its underperformance. The recovery in the rest of Central Europe has been much more closely aligned with the Euro area cycle as these countries have been able to implement modest fiscal stimulus and were much less exposed to fx borrowing.

We predict 2011 growth will be even stronger than in 2010 across most of the region, with even Hungary and Romania returning to an acceptable pace of expansion. Upside risks to our 2011 forecasts are related to interest rates remaining low for even longer than we forecast and to potentially higher commodity prices than we are incorporating (for example, we assume oil prices will be 11% higher than the 2009 average in 2010 and 21% higher in 2011). Downside risks include increasing capital controls and protectionism.

Other 2010 CEEMEA indicators are mostly reassuring. Inflation remains within acceptable limits in most

countries. Current-account balances are moving into surpluses for most energy exporters, except for comfortably financeable deficits in Nigeria and Egypt. Only in Romania do we forecast a rapidly widening current account deficit. There is fiscal consolidation across all CEEMEA countries because revenue performance is set to improve and the size of fiscal stimulus packages is declining.

Table 13: CEEMEA GDP growth forecasts

Real GDP (%) 2009 2010 2011 Potential GDP GrowthCzech Rep -4.0 2.5 4.0 4.0Egypt** 4.7 5.0 5.5 6.0Hungary -6.5 1.0 4.0 3.5Israel 0.0 3.0 4.5 4.0Kazakhstan 0.3 2.0 2.8 7.0Nigeria 2.8 9.6 8.0 8.0Poland 1.7 3.2 4.0 4.5Qatar 10.0 22.0 14.6 4.6Romania -6.0 2.0 5.0 5.0Russia -8.5 5.0 5.0 4.0South Africa -2.0 3.0 3.5 3.2Turkey -5.3 5.0 5.5 5.5UAE 0.3 2.9 4.2 3.5Ukraine -15.2 3.0 5.0 4.5CEEMEA* -3.8 4.5 5.0 4.6Source: National statistics offices and J.P. Morgan estimates *Weighted average; **Fiscal year

Table 14: CEEMEA Macro 2010 Forecasts CA Balance

% of GDPFiscal Balance

% of GDP Public debt

% of GDPCPI

%eopCzech Rep -2.5 -4.0 37.8 3.2Egypt** -3.1 -8.5 78.0 15.3Hungary -2.0 -3.8 80.5 3.0Israel 2.0 -4.0 84.0 3.4Kazakhstan 6.2 0.0 10.4 8.0Nigeria -3.0 -0.3 12.0 8.1Poland -2.8 -5.5 53.5 2.5Qatar*** 42.1 15.8 6.2 4.5Romania -6.5 -7.0 24.5 6.0Russia 4.0 -5.6 7.4 7.5South Africa -4.8 -6.2 37.9 4.9Turkey -2.6 0.9 51.4 5.1UAE 10.6 8.6 16.4 4.2Ukraine -0.9 -6.2 43.0 15.8CEEMEA* 1.3 -3.1 33.7 6.2Source: National statistics offices and J.P. Morgan estimates *Weighted average; **Fiscal year; *** Inflation is average not eop

35



Brazil: Monetary policy normalization in sight Fabio Akira HashizumeAC (55-11) 3048-3634

[email protected] Banco J.P. Morgan S.A.

• Reduced economic slack and expansionary fiscal policies to trigger early normalization in rates

• New measures to lean against BRL strength are likely

• Hold positive carry DVO1 neutral exposure

Fundamentals and politics in 2010 Brazil enjoyed a non-inflationary economic recovery in 2009. After facing the sharpest recession of its recent history, Brazil’s economy printed an impressive 7.8%q/q (saar) growth rate in 2Q09. Encouragingly, the economic data flow thereafter is indicating that the slowdown, if any, in the second half of this year will be just marginal. Thus, Brazil stands out as one of the few countries registering positive growth rates already this year (0.3%), and the risk to our 5.0% forecast for 2010 is becoming biased to the upside. The pillar of this year’s recovery has been household consumption—supported by a strong labor market, fiscal and quasi-fiscal stimuli, and an early revival in credit markets. Although consumption will remain upbeat next year, we think the main driver of next year’s GDP will be a rebound in capital formation. So far, huge economic slack at the beginning of the year along with the exchange rate appreciation has supported strong activity indicators without stoking inflation. IPCA inflation should end 2009 at 4.3%, down from 5.9% in 2008, but we see increasing inflation risks for 2010.

Emerging inflation risks will require early policy normalization in 2010. The side effect of a faster-than anticipated recovery has been a tightening of all measures of economic slack: among others, the unemployment rate is close to historical lows, and the manufacturing utilization rate is already above its long-term average. This suggests that some degree of normalization in the current stimulative stance of fiscal and monetary policies is necessary to reduce prospective inflationary risks. However, 2010 is an election year and thus fiscal policy is unlikely to adjust in the near term. In fact, fiscal authorities are signaling that next year’s 3.3% of GDP target for the primary surplus will be downgraded to accommodate the generous expenditure side of the 2010 budget in the face of underperforming tax revenues. This places the burden of anti-inflation policy on monetary authorities, and we forecast a

tightening cycle of 200bp in 2010, with most of the hikes implemented in the first half of next year.

The unbalanced policy mix is conducive to further appreciation—and further FX intervention. The likely combination of an expansionary fiscal policy, higher interest rates, and global USD weakness supports a stronger BRL. In turn, this is likely to trigger a new round of ad hoc measures to curb currency appreciation. Much like the 2% IOF tax on foreign capital inflows of last month, we believe new measures will produce noise, but will not be able to contain BRL strength driven by a global trend of USD weakness. Thus, we could see the USD/BRL as low as 1.60 during the first half of 2010. However, in the second half, when our global FX strategists anticipate a reversion in the weak USD trend, and Brazil’s current account deficit will be heading to a level above 3.0% of GDP, we believe BRL could start to depreciate, ending the year at 1.75 against USD.

Presidential elections are important to clarify fiscal policy beyond 2010. In October, Brazilians will go to the polls to elect a new president, after eight years of the Lula administration. We think a large shift in economic policy is unlikely, but the leading contenders have not yet unveiled their ideas on this front. What is becoming increasingly necessary, is a fiscal adjustment at the beginning of the next administration, given the pace of deterioration of fiscal accounts in recent months, and the prospects for next year.

Market strategy In FX, buy (1x2) 2-month 1.734 USD put/BRL call spread (1.734;1.662): Entered October 23 at 190bp cost.

In rates, receive Jan’13 versus pay Jan’15 (DV01 neutral steepener): Entered November 20 at 43bp.

Favor NTNF ’17 over BRL Global ’16: Entered June 26 at 207bp.

Receive Jan’13 versus pay Jan’12 and Jan’14 (1x2x1 fly): Entered October 23 at 40bp. Target: 15bp; stop: 55bp.

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Russia: Recovering from deep recession Anatoliy ShalAC 7(495) 937-7321

[email protected] J.P. Morgan Bank International LLC

• Russia’s GDP expected to grow 5% in 2010

• BoP to be supportive for ruble strengthening

• Despite gradual fiscal consolidation, Russia is likely to issue US$9 billion of Eurobonds next year

Fundamentals and politics in 2010 We expect Russia’s economy to expand annually 5% in 2010 and 2011, recovering from the deep recession of 2008-2009, when the peak to trough GDP decline exceeded 12%. With the initial impulse received from net exports and higher commodity prices, the economy will, however, need to find a stronger 2010 underpinning for domestic demand (which in 2009 has been weak). Both consumption and investment are likely to be supported by spillover effects from higher oil revenues, improving confidence, and easing financial conditions. The corporate sector is expected to enjoy better access to external financing, while domestic banks, after a sharp phase of deleveraging (the loan to deposit ratio dropped from 1.13 to 1.00 during January – September 09), are expected to restart lending from early 2010. The renewed buildup of reserves by the CBR and external financing of fiscal deficits by MinFin are expected to keep domestic liquidity abundant.

Disinflation is expected to continue through 1H10, despite increasing money supply and lower policy rates. As the amount of slack in the economy remains high—the negative output gap of around 5% of potential GDP is expected to close slowly in coming years—while the ruble is strengthening, core inflation will keep slowing.

Supported by higher commodity prices, the balance of payments is expected to exhibit a large surplus next year. The current account is projected to be 4% of GDP in 2010, down from an estimated 4.8% in 2009. Although export revenues will rise on higher oil prices (Urals up from US$59 to US$68/bbl in 2010), this will be offset by growing imports, which are expected to recover on the back of a strengthening ruble and domestic demand. We also conservatively assume that net private capital outflows could moderate from around US$40 billion in 2009 to US$20 billion in 2010. However, should oil prices surprise on the upside or the CBR be too rigid in exchange rate and interest rate policies, speculative

capital inflows may well bring net flows closer to breakeven.

Gradual fiscal consolidation and higher oil prices are unlikely to prevent Russia from issuing US$9 billion of Eurobonds in 2010 and a similar amount in 2011. With Urals at US$68/bbl, we see Russia’s federal budget deficit at 5.6% of GDP next year, a small improvement from just above 6% expected in 2009. This reduction is likely to come from measures to contain spending and higher tax collection from the non-oil sector. That said, despite higher oil prices, the budget’s oil revenues are likely to shrink as a percentage of GDP due to a stronger ruble. As a result, the non-oil fiscal gap, which better describes the fiscal position of an oil economy, may shrink more than the headline deficit from -14.1% in 2009 to -12.8% in 2010 and -10.2% in 2011. Despite these improvements, we expect that Russia’s financing needs will remain high and will be only partially covered by use of oil savings. In 2010, Russia may need to borrow up to US$20 billion on domestic and US$9 billion on Eurobond markets, we estimate.

Market strategy Stay overweight in EMBIG: We expect Russia’s new Eurobonds to be SEC-registered, which may be followed by SEC registration of existing ’18s, ’28s, and ’30s notes. This should trigger inclusion of those bonds in the Barclays Capital US Aggregate Index, and attract a new client pool to purchase Russian SEC-registered issues.

We recommend short USD/RUB for 2010: The prospect of further dollar weakness and higher commodity prices bodes well for RUB in 2010. Further, as growth recovers and reserves return to a more comfortable level, the CBR is expected to scale back its intervention and allow faster appreciation. We target USD/RUB 26.5 and 33 versus the basket by end-2010.

We recommend long 4-year OFZs: While supply is increasing, the CBR continues to provide liquidity to the banking system to support issuance, while encouraging banks to increase the quality of balance sheet assets, indicating a bias to support government debt supply.

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India: RBI to focus on financial stability Jahangir AzizAC (9122) 6157-3385

[email protected] J.P. Morgan India Private Limited

• Industry derives strength from increased festive demand; capital goods expansion is welcome

• Mixed external trade signals suggest the recovery is still not secure

• RBI to be on guard against shift in inflation expectations; tightening likely in 1Q10

Fundamentals and politics in 2010 Industrial activity strengthened in September supported by festive demand. But October Markit manufacturing PMI declined to 55 due to destocking after the festivals. In details, IP strengthened as total production grew a healthy 1.1%m/m (sa), to be up a robust 9.1%oya. With this, the average for the first half of FY10 improved to 6.5%oya from 5.0% in the first half of FY09. September production derived support from capital goods (7.5%m/m, sa) and consumer durables (4.3%). Continued strength in motor vehicle sales and increased production of white goods to meet festival demand also likely boosted total output. On a year-ago basis, IP growth is expected to print relatively strong numbers in the second half of FY10, largely supported by a very low base from the abysmally weak growth last year.

Merchandise trade data continue to show mixed signs of revival. The trade deficit narrowed to US$7.8 billion in September from US$8.3 billion in August. A modest gain in exports (1.6%m/m, sa) together with a contraction in imports (-5.6%) helped narrow the trade gap. With this, the trade deficit for the first half of FY10 stood at US$46.7 billion versus US$76.0 billion in first half of FY09. Sequentially, exports expanded for the sixth consecutive month. However, the year-ago comparison continued to contract (-13.8%oya), weighed down by last year’s high base. Imports contracted for the ninth consecutive month (-31.3%oya). Still-weak exports together with sluggish nonoil imports suggest that the pace of economic revival is not yet secure.

Upside pressure from food prices is likely to ease, but year-ago prints to rise on a fading favorable base effect. October inflation declined 0.2%m/m (sa) to be up 1.34% on a year-ago basis. The fall in overall inflation was largely driven by the dip in prices of primary articles. Importantly, the food index, as well as the overall index sequentially declined for the first time since

February this year. A muted pace of core inflation (0.0%m/m, sa) suggests that demand-side pressures remain weak. The upward pressure on food prices is likely to ease as the heightened festive demand declines. Expectations of an improved winter crop will also help alleviate the pressure. However, a rise in global commodity prices will be critical in determining the impact on overall prices. On headline inflation, with the high base effect expected to fade, the year-ago prints will likely increase. We expect the year-ago print to be around 7.5% by end-March 2010.

On policy, increased focus on financial stability would keep the RBI on guard against material shifts in inflation expectations. Even if core inflation remains benign, we expect that fears of easy liquidity spawning potential asset price bubbles could prompt the central bank to tighten. In October, RBI withdrew unconventional measures that were deemed no longer necessary with improving domestic and financial markets. We expect that the tightening will likely be initiated by a 50bp hike in the cash reserve ratio followed by 25bp hikes in the policy rates in 1Q10 and 2Q10.

Market strategy In FX, we recommended holding on to USD/INR shorts, entered at 46.95, and target 45 by December: The push toward a stronger INR continues as risk sentiment improves and capital flows continue to be strong. Offshore parties have driven the INR rally so far. Onshore exporters have yet to position and retain the key to the next down move, which will depend on the timing of the introduction of economic reform bills in Parliament.

In rates, we are bullish on 5-year bonds, but neutral on OIS swaps: Yields are at one-year highs, as the G-sec calendar is coming to an end in January, and as loan growth remains anemic. However, the 1-year swap has dropped into the LAF corridor, so further downside is limited. Meanwhile, we are not keen to pay as negative carry is extremely steep.

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China: Recovery despite policy fine-tuning Grace NgAC (852) 2800-7002

[email protected] JPMorgan Chase Bank, N.A., Hong Kong

• Exports, consumption, and housing should be key growth drivers in 2H09 and 2010

• CPI and PPI on recovering trend, but sequential trend rose at a slower pace in October

• Major near-term monetary policy shift unlikely; central bank focus is on managing excess liquidity

Fundamentals and politics in 2010 China’s economy continued to record a solid pace of recovery in 3Q09, rising at 8.9%oya. In seasonally adjusted terms, we calculate that real GDP rose 10.0%q/q (saar) in 3Q, easing modestly from the 14.8% spike in 2Q. October data confirmed that the Chinese economy’s upbeat momentum continued into 4Q, adding to the strong gain in activity seen in September. The latest data also support our view that the major sources of growth in the Chinese economy have been broadening from public investment to include consumption, private investment, and the steady recovery in exports.

We expect the economy to continue to grow solidly in the coming quarters. On the back of the 3Q GDP report, we have fine-tuned the 2009 full-year GDP growth forecast to 8.6% (previous forecast: 8.4%), while keeping the 2010 GDP growth forecast at 9.5%. Continuing with the theme of broadening sources of growth, we expect the key growth drivers to include a solid recovery in exports. Our global team is looking for a sustained, synchronized expansion of the global economy through 2010. As such, net external trade, which had been a significant drag on China’s overall growth since late last year, would likely come back to contribute positively to GDP growth again. On the domestic front, we look for a broad-based pickup in private consumption, along with improving labor markets and hence household income, on top of further fiscal stimulus, and marked expansion in private housing investment as well as other private sector investment.

Encouragingly, the growth-inflation balance improved somewhat in October, with notable easing in the pace of the sequential gain in food prices and PPI. October headline CPI fell 0.5%oya, translating into a slower pace of monthly gain of 0.2%m/m, compared to 0.3%m/m and 0.4% in September and August, respectively, which in turn reflects the slower pace of the rise in food prices. While pipeline inflation pressure from

the PPI front picked up strongly during 3Q, it has eased going into 4Q. If this trend continues, it should further calm inflation concerns going into next year.

It will be important to monitor the authorities’ macro policy tone, especially in the run-up to the annual central economic work summit to be held early next month. On monetary policy, we expect the PBoC to normalize overall monetary conditions in stages, relying on open market operations to withdraw excess liquidity in the near term, combined with sector-specific actions like a partial withdrawal of the stimulus provided to real estate to contain the risk of an asset bubble and inflation. We expect the benchmark policy rates to start rising by mid-2010, with a total of two 27bp hikes over the rest of next year. On the currency front, the PBoC’s latest tone hints at greater flexibility in the exchange rate, which would likely begin sometime in 2Q10 in our view, when over-year-ago export growth resumes and when officials are convinced the global recovery is on a sure footing. Our forecast is for CNY/USD to reach 6.5 by end-2010.

Market strategy In FX, we remain short USD/CNY via the longer-dated 12-month NDFs: Policymakers should tighten into 2010 as growth and exports settle into a more sustainable pattern. The NDF dollar discount and negative carry to short USD/CNY widened during President Obama’s recent official visit to China, but we view this pre-positioning as overdone, and would look to build short USD/CNY positions should the NDFs pull back.

In interest rate markets, we stay with our recommendation of a 1s/5s steepening trade on the ND-OIS swap curve: Liquidity will remain flush until the RRR is hiked (likely in 2Q) as ongoing open market operation withdrawals are not strong enough to fully sterilize FX inflows. Meanwhile, the long end of the curve will suffer as upbeat growth is priced into the 5-year sector.

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South Africa: A slow recovery is in store Graham StockAC (44-20) 7777-3430

[email protected] JPMorgan Chase Bank N.A, London Branch

• The consumer will remain under pressure until well into 2010

• Inflation pressures will continue to ease and the output gap will allow rates to stay low

• The political outlook is settled, but pressures for higher spending will persist

Fundamentals and politics in 2010 The South African economy has suffered given the global contraction. We estimate that domestic economic activity only just turned positive last quarter. Monthly economic activity reports have revealed fewer signs of a recovery in consumer spending than in other countries. While the drags from sticky inflation and labor market uncertainty should fade as 2010 progresses, the drop in household wealth and restricted access to credit will likely dampen expenditure growth relative to growth in disposable income until late in the year.

A bounce is on the way. Despite lackluster consumer spending, we think the improvement in external demand and easing in inventory reduction is set to boost GDP, helping to lift the economy out of recession. We believe that the inventory drawdown in the first half of 2009 has created the scope for a bounce when the cycle finally turns, and we expect economic growth of 3% in 2010. The banking sector has weathered the crisis in better shape than its counterparts elsewhere, which will help to underpin the recovery. We estimate the 2010 FIFA World Cup will add around 0.4%-pts to GDP next year.

The downward trend in inflation will likely be interrupted by base effects at the start of 2010. The significant output gap, fading supply shocks in food inflation, and pass-through from rand strength since March should all sustain the ongoing moderation in headline inflation, which fell to 6.1%oya in September. Base effects from sharp declines in food and fuel prices at end-2008 will delay re-entry into the 3-6% target band until the first quarter of 2010, but headline inflation will hold close to the midpoint through much of the year. Although electricity tariff hikes of up to 45% pose the main threat to the inflation outlook, we think the large output gap and moderate pace of recovery will encourage the SARB to keep rates on hold at 7% until late in 2010.

The current account adjustment should fade steadily as domestic demand recovers. The slowdown in domestic activity and lower dividend outflows should bring the current account deficit down to 4.7% of GDP this year. We expect a similar level in 2010 as household consumption expenditure lags the recovery. Financing for the deficit remains comfortable, thanks to buoyant portfolio, FDI, and public sector borrowing inflows.

President Zuma assumed office in April 2009 and the ANC’s dominance remains intact. Nevertheless, slow growth and heavy job losses are likely to fuel social pressures and criticism of the government from within the ANC and its alliance partners. The government has not engaged in active fiscal stimulus beyond allowing the deficit to widen due to the weak revenue performance and pushing ahead with existing infrastructure investment plans. The consolidated 2009/10 fiscal year budget deficit is expected to widen to around 7.5% of GDP, taking the public sector borrowing requirement to 12% of GDP as the parastatals maintain their investment programs. We are encouraged by the expenditure discipline shown in the Medium-Term Budget Policy Statement, and expect the government to be market-friendly.

Market strategy Marketweight external debt: Net 2010 issuance of US$2 billion will be absorbed easily, but we think South Africa will remain vulnerable to any global downturn.

In local rates, we recommend overweight positions for 2010. International and local investors are closing out their underweight positions. Bonds should benefit from lower inflation expectations and high local yields should be attractive for carry-focused investors. Supply from national government and parastatal issuers is a concern, but the high yields compensate adequately for this factor.

We are neutral USD/ZAR for 2010: The early resumption of equity portfolio flows and a narrowing of the current account deficit resulted in a strong ZAR performance in 2009. At a grassroots level, opposition to ZAR appreciation has increased and, in our view, there is a risk that some controls are imposed on inflows. Therefore, with the SARB once again accumulating reserves, we project 7.40 in USD/ZAR at end-2010, broadly unchanged.

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Emerging Markets Corporate Outlook - 2010 Warren MarAC (1-212) 834-4274

[email protected] J.P. Morgan Securities Inc.

The resilience shown by EM corporates throughout the credit crisis has improved their profile among investors, with the asset class likely to garner a greater following as valuations in developed credit markets look increasingly expensive. Although there were notable casualties in 2009, with combined defaults and debt exchanges rising to 12.3% of the EM corporate high yield bond stock (compared with a par-weighted default rate of 16.24% including distressed exchanges in the US high yield market), many of the concerns that shaped expectations for a more serious collapse and prolonged period of market weakness at the end of 2008—such as rising capital flight and mounting external refinancing risks in Russia, unhedged corporate derivative exposures in Brazil and Mexico, the downturn in China’s real estate market, and short-term FX funding needs in Korea—have come to pass without prompting broader systemic failures. Of particular note was the generally proactive and targeted response of governments in respective markets to provide financial support packages to ease financial stress in the corporate sector. The one exception was of course Dubai, which decided recently to call a standstill on the debt of its largest state-owned entity, Dubai World and its property subsidiary Nakheel. Looking to 2010, we remain constructive on EM corporates as an asset class despite this year’s stellar performance. Although the pace of the market’s recovery has brought us back to pre-crisis levels, we believe that there is still room for spreads to tighten toward our 2010 year-end target of 325bp for the CEMBI Broad versus 403bp as of November 30, 2009. We do not expect the recent Dubai event to have a long-lasting impact on EM corporate valuations outside of the Middle East region and see this spread compression next year driven by stable yields and rising interest rates, based on the core assumption that the shape of the global recovery will remain robust and technicals generally supportive. We also note that the EM corporate indices have rebalanced toward higher-quality assets over the course of 2009, given the bias of new issuance this year. With over 80% of new issuance coming from investment grade credits (versus an overall debt stock that is 69% investment grade), there has been an associated tightening in index spreads. We caution that our year-end point target is unlikely to be reached in a straight line as market volatility returns in an intensifying debate over the pace at which monetary policies are normalized globally.

Our strategy for 2010 recognizes that yields have retraced to historical lows and spreads to levels closer to long-run averages, and that tighter valuations will need to be driven much more by relative value considerations. At the aggregate level, we move EM corporates as an asset class (CEMBI Broad) to Overweight relative to EM sovereigns (EMBIG) and US credit (JULI). At the regional level, we expect credits from Asia and Europe to contribute the lion’s share of the spread tightening, followed by Latin America, while at the country level we still expect some of the more significant spread opportunities to be in the higher-beta countries such as Indonesia, India, Kazakhstan, and Argentina, although note that these account for less than 6% of the corporate index. We believe that Russian corporate performance will be more muted in 2010 despite the improved macro backdrop as commodity prices recover. Looking into the first quarter of 2010, we are likely to continue to favor new issues for adding risk, with supply expected to reach around US$128bn. New issues in our view are most likely to offer investors the best avenue for adding meaningful positions with secondary market liquidity expected to remain constrained. Looking out over the first half of 2010, we favor a more active approach to rotating out of lower-beta credits and into higher-beta opportunities in order to enhance overall returns (premised on credit fundamentals continuing to show sequential improvements) and selectively taking profits in names that were the first to benefit from the market’s recovery, and where technicals have clearly contributed to pushing prices beyond fair value. Table 15: Key forecasts

Current/year-to-date (as of

November 30, 2009

2010 targets

and forecasts)

Direction/market impact

CEMBI Broad (SOT) 403 325 ↓; positive EM corporate supply (US$ millions)

118,166 127,500 ↑; neutral

Asia 41,693 45,000 Emerging Europe 20,283 30,000 Latin America 38,313 42,500 Middle East and Africa 17,877 10,000 EM corporate defaults (%)1 12.3 2.2 ↓; positive Asia 11.0 2.4 Emerging Europe 18.4 2.1 Latin America 5.9 2.0 Middle East and Africa 4.4 2.9 Source: J.P. Morgan 1. Current year-to-date and 2010 default rates calculated as a percentage of Total Bond Stock as of December 31, 2008, and October 30, 2009, respectively and assumes that Nakheel defaults in 2009.

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Given the foregoing, we have identified three different sets of recommendations: High-conviction trades: driven by a particular event or expectations for an individual credit; High-beta recommendations: based on an assumption that market fundamentals and technicals remain supportive of an aggressive strategy; and Low-beta recommendations: based on an assumption that market conditions deteriorate, suggesting more defensive positioning. The high conviction trades are summarized in the table below, but for the extended table of high and low beta recommendations please see our detailed report ‘Emerging Markets Corporate Strategy and Outlook for 2010’ dated November 23rd.

Table 16: High-Conviction Buy Recommendations Issue Ticker, rating Region Z-spread/ price Rationale Chinatrust UT2 5.625% call 2015

CHIFIN, Baa1/BBB/A-

Asia 600bp After raising US$1 billion of equity, concerns over asset quality drag should be eased.

DBS FRN call 2016 DBSSP, Aa2/A+/A+

Asia DM+261bp FRNs remain chronically cheap, but we like the prospects for longer-duration FRNs to trade up as and when US rates shift higher. High-quality bank is defensive in downturns.

ICICI 6.375% call 2017 ICICI Baa3/BB/BB Asia 535bp One of the highest-yielding bonds in Asia, with reassurance from dated structure. September earnings demonstrate bank is shifting to more defensive franchise, which we believe spreads do not yet reflect.

Henderson Land 5.5% 2019 HENLND, NR/NR/NR

Asia 260bp Offers best value in the HK property space, in our view. Currently trades 60-65bp wider than Swire, but we believe the fair value is just 20bp wider. Lack of ratings has been a key overhang on performance.

Korea Hydro 6.25% 2014 KOHNPW, A2/A/A+

Asia 199bp Our top pick in the Korean quasi-sovereign corporate land. Though supply in the space could continue to be an overhang in the near term, taking a medium-term view, we see value in these bonds.

BUMA 11.75% 2014 PTBMMU, Ba3/NR/BB-

Asia 942bp We like this as a short- to medium-term play. BUMA is Indonesia’s second-largest coal mining contractor, with almost all the major miners as its customers. In our view, one of the few better-quality HY corporates yielding in double digits.

Ciliandra 10.75% 2011 CLPKIJ, B2/NR/BB-

Asia 736bp Short-dated bond with decent carry. Expect company to successfully refinance/ exchange with the capital markets now open. Also sitting on high cash balance. Self-sustaining operations even at CPO prices of US$450/ton (versus ytd average of around US$600/ton).

Lippo Karawaci 8.875% 2011 LIPPO, B1/B/B+ Asia 893bp Stable recurrent income from hotels and hospitals portfolio provides a cushion in the current downturn. Has lower structural subordination risks compared to China property counterparts.

Lai Fung 9.125% 2014 LAIFNG, B1/B+/NR

Asia 857bp Benefits from a portfolio of investment properties that provides stable rental income that helps to fund working capital needs.

Paiton 9.34% 2014 PAITON, B1/B/NR Asia 647bp Indonesian IPP with PLN as sole off-taker. Bonds have sinking fund provision, which reduces average life to around 2.3 years. We believe there are sufficient protective mechanisms in place for the existing lenders before the company starts raising debt for the new plant.

Gazprom 10.5% 2014 GAZPRU, Baa1/NR/NR

CEEMEA 436bp Among the cheapest Gazprom bonds on the curve, like 52bp pickup to 8.125% ’14s. The negative basis of -195bp to 5-year GAZPRU CDS also looks attractive.

Alrosa 8.875% 2014 ALROSA, Ba3/NR/B

CEEMEA 602bp The cheapest of Russian quasi-sovereigns; expect the company’s credit profile to improve further in 2010.

Alliance Bank 9.25% 2013 ALLIBK, C/SDRD CEEMEA US$29.5 We believe that Alliance offers the best upside potential amongst the distressed Kazakh names. We see restructuring well advanced and deal risk low.

ATF 9.25% 2012 ATFBP, Ba3/B/B- CEEMEA 731bp A full subsidiary of Italy’s Unicredito, ATF is well provisioned and well capitalized and likely to further gain market share in 2010. Good outright value and cheap to ’16s.

Pricing as of November 12, 2009. Source: J.P. Morgan.

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Economics Forecasts GDP and CPI growth forecasts Real GDP % over a year ago Real GDP % over previous period, saar Consumer Prices % over a year ago 2008 2009E 2010E 2Q09 3Q09 4Q09E 1Q10E 2Q10E 3Q10E 4Q10E 2Q09 4Q09E 2Q10E 4Q10EThe Americas United States 0.4 -2.5 3.2 -0.7 2.8 3.5 3.0 4.0 4.0 3.5 -1.6 1.2 2.2 1.1Canada 0.4 -2.6 2.4 -3.4 0.5 3.0 3.0 3.0 3.5 4.0 -0.9 0.8 1.4 2.3Latin America 3.8 -3.1 4.0 2.0 5.7 6.0 4.7 3.1 4.0 1.9 5.9 5.6 6.8 7.2Argentina 6.8 -4.0 4.0 1.1 -14.0 -4.0 12.0 10.0 6.0 4.0 5.9 6.0 10.0 10.2Brazil 5.1 0.3 5.0 7.8 7.2 6.7 4.3 5.0 4.0 4.0 4.4 4.2 4.5 4.7Chile 3.2 -1.5 5.0 -1.2 4.6 10.0 6.0 4.0 2.0 3.0 -0.6 -0.8 2.0 2.6Colombia 2.4 -0.5 3.0 2.7 1.9 3.2 3.5 4.3 5.5 4.5 3.2 3.3 3.9 4.3Ecuador 6.5 -1.0 1.5 -1.0 -2.0 0.0 2.0 2.5 4.0 4.0 3.5 3.5 2.4 4.0Mexico 1.3 -7.0 3.5 -1.1 12.2 7.5 3.7 -0.6 3.3 -0.9 5.1 4.6 5.3 5.2Peru 9.8 1.0 5.4 -1.6 8.0 13.0 3.0 3.5 3.5 4.0 1.9 1.1 1.5 2.0Venezuela 4.8 -2.5 1.5 -4.1 -7.8 5.0 3.0 3.0 5.0 0.0 28.7 29.0 34.2 37.9Asia/Pacific Japan -0.7 -5.2 2.4 2.7 4.8 2.5 2.5 1.5 1.5 2.0 -2.2 -1.8 -1.8 -1.3Australia 2.4 1.0 2.9 2.5 1.2 3.8 2.1 2.4 4.4 6.2 1.3 2.1 2.5 2.6New Zealand 0.1 -1.3 2.8 0.3 2.5 2.1 2.6 4.3 3.4 2.8 1.7 2.6 2.4 1.7Asia ex Japan 5.8 4.2 7.3 12.4 9.3 5.4 6.9 7.1 7.3 6.9 1.4 2.7 4.3 3.4China 9.0 8.6 9.5 14.8 10.0 9.1 9.0 9.5 9.3 8.7 -1.3 0.9 3.2 2.7Hong Kong 2.4 -3.3 4.5 14.8 1.6 5.0 4.2 4.0 3.8 3.5 -0.9 -0.4 0.6 2.1India 6.1 6.0 7.5 6.7 9.0 -1.0 10.0 7.0 9.6 9.0 11.8 12.2 11.9 6.2Indonesia 6.1 4.3 5.3 4.3 5.3 3.5 5.5 6.0 6.0 6.0 2.8 2.8 4.9 6.0Korea 2.2 0.2 4.7 11.0 12.3 4.0 2.0 3.5 3.5 3.5 2.0 2.5 3.0 3.3Malaysia 4.6 -2.4 5.0 10.1 9.4 4.5 1.6 4.9 4.9 4.9 -2.4 -1.2 0.5 1.5Philippines 3.8 1.5 5.0 7.0 4.1 4.0 5.0 5.0 5.0 5.0 0.3 3.0 3.6 3.7Singapore 1.1 -2.1 6.5 21.7 14.2 -3.6 8.2 7.0 4.9 4.9 -0.4 -0.8 1.9 1.8Taiwan 0.7 -3.0 5.8 18.8 8.3 6.0 3.8 5.0 4.6 3.5 -1.3 -1.0 1.8 2.1Thailand 2.6 -3.1 6.1 9.0 5.5 5.3 4.9 5.7 7.0 7.0 -2.2 1.4 4.6 4.0Africa/Middle East Israel 4.0 0.0 3.0 1.0 2.2 2.5 3.0 3.0 3.0 3.0 3.2 3.3 3.4 3.3South Africa 3.1 -2.0 3.0 -3.0 0.5 3.4 4.4 3.8 3.6 4.1 6.4 6.2 4.3 4.8Europe Euro area 0.6 -3.9 2.5 -0.7 1.5 2.5 3.0 3.0 3.0 2.5 -0.4 0.3 0.9 1.2Germany 1.0 -4.7 3.4 1.8 2.9 4.0 3.5 3.5 3.5 2.5 -0.4 0.3 0.5 0.3France 0.3 -2.3 2.5 1.1 1.1 2.5 3.0 3.0 3.0 2.5 -0.5 0.6 1.0 0.7Italy -1.0 -4.8 1.7 -1.9 2.4 1.0 2.0 2.0 2.0 2.5 0.1 1.0 1.4 1.0Norway 2.1 -1.1 2.8 1.3 2.0 3.0 3.0 3.0 3.0 3.0 1.8 1.3 1.0 0.4Sweden -0.5 -4.2 3.2 1.2 0.7 4.0 4.0 3.5 3.5 3.0 -1.1 -0.3 0.8 0.5Switzerland 1.8 -1.3 2.2 -1.0 1.8 2.3 2.5 2.5 3.0 3.0 -1.0 -0.4 0.6 0.7United Kingdom 0.6 -4.6 1.6 -2.3 -1.2 2.0 2.0 2.5 2.8 3.5 1.5 2.2 2.3 1.4Emerging Europe 4.1 -5.3 4.0 2.1 4.7 4.9 3.4 3.2 3.3 3.6 7.0 6.2 5.2 5.3Czech Republic 2.7 -4.0 2.5 1.2 3.2 5.0 2.8 2.5 2.2 2.0 0.1 0.6 1.9 3.6Hungary 0.6 -6.5 1.0 -7.9 -7.0 3.5 3.0 2.5 2.5 3.5 5.0 5.1 3.7 2.8Poland 5.0 1.7 3.2 2.8 5.5 3.0 2.5 3.0 3.5 3.5 3.5 3.4 2.1 2.3Romania 7.1 -6.0 2.0 … … … … … … … 5.0 4.7 5.5 6.5Russia 5.6 -8.5 5.0 4.5 7.9 6.5 4.5 4.0 4.0 4.5 11.4 9.5 7.0 7.4Turkey 0.9 -5.3 5.0 … … … … … … … 5.3 5.0 6.3 5.2Global 1.3 -2.5 3.3 1.4 3.4 3.4 3.4 3.6 3.7 3.4 -0.1 1.2 1.9 1.6Developed markets 0.4 -3.4 2.7 -0.3 2.3 2.9 2.8 3.1 3.2 3.0 -1.0 0.5 1.1 0.8Emerging markets 5.0 0.7 5.8 7.6 7.3 5.4 5.6 5.3 5.7 5.0 3.5 4.0 5.0 4.6Source: J.P. Morgan economics, 27 November 2009.

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Sources of GDP Growth Share of Real GDP Contribution to Real GDP growth GDP Deflator Y/Y Country 2007 2008 2009 2010 2007 2008 2009 2010 2008 2009 2010 USA Real GDP 2.1 0.4 -2.4 3.3 2.4 1.5 0.8 Consumption 88.7 88.7 90.9 89.8 2.2 0.4 0.0 1.8 Fixed investment 16.2 15.0 11.8 12.8 -0.6 -1.2 -3.5 1.4 Net external demand -4.9 -3.7 -2.7 -2.6 0.6 1.2 1.0 0.0 UK Real GDP 2.6 0.6 -4.7 1.6 3.0 0.8 1.7 Consumption 84.7 85.4 88.2 87.9 1.6 1.1 -1.3 1.0 Fixed investment 18.7 17.6 13.9 13.8 1.5 -1.0 -4.3 0.1 Net external demand -3.4 -2.9 -2.1 -1.6 -0.5 0.5 0.9 0.4 Euro Real GDP 2.7 0.6 -3.9 2.5 2.3 1.2 1.3 Consumption 76.3 76.5 79.5 78.6 1.8 0.6 0.0 1.1 Fixed investment 22.2 22.0 20.0 20.4 0.5 0.0 -2.7 0.9 Net external demand 1.5 1.6 0.4 1.0 0.4 0.0 -1.1 0.5 Japan Real GDP 2.3 -0.7 -5.2 2.4 -0.9 0.0 -2.0 Consumption 72.1 73.1 76.9 76.2 0.9 0.6 -0.1 1.3 Fixed investment 23.2 22.0 20.4 20.0 0.2 -1.4 -2.6 0.0 Net external demand 4.7 4.9 2.7 3.9 1.2 0.1 -2.5 1.1 Australia Real GDP 4.0 2.4 1.0 2.9 6.7 0.3 1.1 Consumption 73.7 74.1 74.3 73.6 2.9 2.2 0.9 1.5 Fixed investment 28.6 29.9 27.8 28.0 3.1 2.0 -1.9 1.0 Net external demand -2.3 -4.0 -2.1 -1.6 -2.0 -1.8 1.9 0.4 Brazil Real GDP 5.7 5.1 0.3 5.0 5.9 4.0 4.5 Consumption 78.4 78.6 81.0 81.3 4.6 4.3 2.6 4.3 Fixed investment 19.3 21.2 18.6 19.7 2.2 2.9 -2.6 2.1 Net external demand 2.3 0.2 0.4 -1.1 -1.1 -2.1 0.2 -1.5 China Real GDP 13.0 9.0 8.6 9.5 7.6 -0.5 2.5 Consumption 48.9 48.7 48.9 48.9 4.7 4.2 4.4 4.5 Fixed investment 41.7 42.4 45.4 45.7 5.6 4.6 6.8 4.7 Net external demand 9.4 8.8 5.7 5.4 2.7 0.2 -2.6 0.2 Czech Republic Real GDP 6.1 2.7 -4.0 2.5 14.2 8.0 12.2 Consumption 68.2 68.3 71.9 71.1 2.6 2.0 0.7 1.0 Fixed investment 31.0 29.3 25.8 27.8 2.8 -0.9 -4.5 2.6 Net external demand 0.8 2.4 2.3 1.1 0.7 1.6 -0.2 -1.2 Hong Kong Real GDP 6.4 2.4 -3.3 4.5 1.4 -0.5 0.8 Consumption 68.2 67.7 69.6 69.8 5.3 1.0 -0.3 3.3 Fixed investment 20.9 20.2 19.8 19.8 1.6 -0.3 -1.0 0.9 Net external demand 10.8 12.2 10.6 10.4 -0.6 1.6 -2.0 0.3 Hungary Real GDP 1.2 0.6 -6.5 1.0 3.5 4.0 3.0 Consumption 74.1 73.4 74.0 72.1 -1.2 -0.2 -4.3 -1.2 Fixed investment 22.5 22.8 15.6 15.1 -0.7 0.5 -8.2 -0.4 Net external demand 3.5 3.8 10.4 12.9 3.1 0.3 6.0 2.6 India Real GDP 9.1 6.1 6.0 7.5 8.5 4.5 5.8 Consumption 66.9 66.5 64.7 63.2 5.2 3.6 2.1 3.2 Fixed Investment 37.4 39.3 41.7 45.8 5.2 4.3 4.9 7.5 Net external demand -4.3 -5.8 -6.3 -9.0 -1.3 -1.8 -0.9 -3.3 Indonesia Real GDP 6.3 6.1 4.3 5.3 18.3 6.0 6.5 Consumption 65.4 65.3 66.3 66.1 3.2 3.9 3.8 3.3 Fixed investment 25.1 25.1 23.8 24.1 2.4 1.5 -0.2 1.5 Net external demand 9.5 9.6 9.9 9.8 0.6 0.7 0.8 0.5 Korea Real GDP 5.1 2.2 0.2 4.7 2.7 0.2 2.0 Consumption 67.6 67.2 68.2 67.6 3.5 1.1 1.1 2.5 Fixed investment 28.9 28.4 23.9 25.8 0.9 0.1 -4.5 3.1 Net external demand 3.4 4.4 7.9 6.6 0.7 1.1 3.5 -1.0 Malaysia Real GDP 6.3 4.6 -2.4 5.0 10.3 2.0 5.0 Consumption 63.4 66.1 65.0 63.8 6.1 5.7 -2.6 2.0 Fixed investment 22.4 20.8 19.8 23.3 1.2 -0.5 -1.5 4.7 Net external demand 14.2 13.1 15.2 12.9 -1.0 -0.5 1.8 -1.7 Mexico Real GDP 3.6 1.3 -7.0 3.5 6.6 3.1 3.7 Consumption 80.0 80.1 80.9 80.3 2.9 1.1 -4.8 2.2 Fixed investment 22.9 23.8 21.7 22.3 1.3 1.2 -3.6 1.4 Net external demand -2.9 -3.9 -2.6 -2.6 -0.6 -1.0 1.5 -0.1

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Sources of GDP Growth (cont'd) Share of Real GDP Contribution to Real GDP growth GDP Deflator Y/Y Country 2007 2008 2009 2010 2007 2008 2009 2010 2008 2009 2010 Philippine Real GDP 7.1 3.8 1.5 5.0 7.5 3.0 4.0 Consumption 84.2 84.7 85.0 84.6 5.2 3.7 1.7 3.8 Fixed investment 12.1 13.9 14.9 17.5 -3.2 2.4 1.2 3.5 Net external demand 3.7 1.4 0.1 -2.1 5.1 -2.3 -1.3 -2.2 Poland Real GDP 6.8 5.0 1.7 3.2 5.0 1.7 3.2 Consumption 78.4 79.4 79.8 79.5 3.7 4.9 1.8 2.2 Fixed investment 26.0 25.5 22.5 21.9 5.3 0.8 -2.6 0.0 Net external demand -4.4 -4.9 -2.4 -1.3 -2.2 -0.7 2.5 1.0 Russia Real GDP 8.1 5.6 -8.5 5.0 19.2 3.0 6.5 Consumption 73.6 76.3 80.8 79.5 8.2 7.0 -2.4 2.7 Fixed investment 30.0 32.5 18.1 19.3 6.5 4.3 -16.0 2.2 Net external demand -3.6 -8.9 1.1 1.1 -6.7 -5.8 9.9 0.1 Singapore Real GDP 7.8 1.1 -2.1 6.5 1.1 -0.5 2.5 Consumption 48.5 49.7 50.0 48.6 2.3 1.7 -0.7 1.7 Fixed investment 20.3 29.9 28.5 28.1 1.9 10.0 -2.0 1.4 Net external demand 31.2 20.4 21.5 23.3 3.6 -10.6 0.7 3.3 South Africa Real GDP 5.1 3.1 -2.0 3.0 10.8 8.0 6.0 Consumption 87.5 87.4 87.7 86.6 5.4 2.6 -1.4 1.5 Fixed investment 20.3 20.5 19.9 21.4 1.1 0.8 -1.0 2.2 Net external demand -7.8 -7.9 -7.5 -8.1 -1.4 -0.3 0.5 -0.8 Taiwan Real GDP 5.7 0.1 -3.8 5.8 -2.4 -0.2 1.0 Consumption 65.8 65.7 68.9 67.4 1.4 0.0 0.7 2.4 Fixed Investment 19.0 17.0 13.9 14.6 0.5 -2.0 -3.6 1.5 Net external demand 15.2 17.3 17.1 18.0 3.8 2.1 -0.8 1.9 Thailand Real GDP 4.9 2.6 -3.1 6.1 2.3 2.5 5.0 Consumption 60.9 60.7 62.3 60.8 1.7 1.3 -0.3 2.2 Fixed investment 23.1 24.0 20.0 23.5 0.3 1.5 -4.6 5.0 Net external demand 16.0 15.4 17.8 15.7 3.0 -0.2 1.8 -1.1 Turkey Real GDP 4.7 0.9 -5.3 5.0 11.7 5.5 5.3 Consumption 79.0 79.0 79.4 78.5 3.8 0.7 -3.8 3.0 Fixed investment 25.6 23.9 20.4 21.3 2.1 -1.5 -4.5 1.9 Net external demand -4.6 -2.9 0.2 0.2 -1.2 1.7 3.0 0.1 Source: J.P. Morgan economics.

45



Interest Rate Forecasts

Official interest rate Current Change from Aug '07 (bp) Last change Next meeting

Forecast next change Dec 09E Mar 10E Jun 10E Sep 10E Dec 10E

Global GDP-weighted average 1.31 -341 1.30 1.32 1.36 1.43 1.48excluding US GDP-weighted average 1.86 -257 1.85 1.88 1.94 2.04 2.12Developed GDP-weighted average 0.49 -365 0.50 0.51 0.52 0.54 0.57Emerging GDP-weighted average 4.54 -246 4.47 4.56 4.71 4.94 5.13Latin America GDP-weighted average 5.75 -306 5.75 6.13 6.66 6.94 7.03CEEMEA GDP-weighted average 4.78 -222 4.44 4.29 4.23 4.58 4.87EM Asia GDP-weighted average 4.00 -232 4.00 4.07 4.17 4.34 4.53 The Americas GDP-weighted average 0.75 -484 0.75 0.79 0.85 0.88 0.89United States Federal funds rate 0.125 -512.5 16 Dec 08 (-87.5bp) 16 Dec 09 on hold 0.125 0.125 0.125 0.125 0.125Canada Overnight funding rate 0.25 -425 21 Apr 09 (-25bp) 08 Dec 09 on hold 0.25 0.25 0.25 0.25 0.25Brazil SELIC overnight rate 8.75 -275 22 Jul 09 (-50bp) 09 Dec 09 Jan 10 (+50bp) 8.75 9.75 10.75 10.75 10.75Mexico Repo rate 4.50 -275 17 Jul 09 (-25bp) 27 Nov 09 Jun 10 (+25bp) 4.50 4.50 4.75 5.25 5.25Chile Discount rate 0.50 -500 9 Jul 09 (-25bp) 10 Dec 09 2Q 10 (+50bp) 0.50 0.50 1.00 2.00 3.50Colombia Repo rate 4.00 -525 25 Sep 09 (-50bp) 23 Nov 09 on hold 4.00 4.00 4.00 4.00 4.00Peru Reference rate 1.25 -350 6 Aug 09 (-75bp) 10 Dec 09 on hold 1.25 1.25 1.25 1.25 1.25 Europe/Africa GDP-weighted average 1.36 -323 1.32 1.31 1.30 1.39 1.46Euro area Refi rate 1.00 -300 7 May 09 (-25bp) 03 Dec 09 on hold 1.00 1.00 1.00 1.00 1.00United Kingdom Repo rate 0.50 -525 5 Mar 09 (-50bp) 10 Dec 09 3Q 10 (+25bp) 0.50 0.50 0.50 0.75 1.00Sweden Repo rate 0.25 -325 2 Jul 09 (-25bp) 16 Dec 09 on hold 0.25 0.25 0.25 0.25 0.25Norway Deposit rate 1.50 -325 28 Oct 09 (+25bp) 16 Dec 09 3 Feb 10 (+25bp) 1.50 1.75 2.00 2.25 2.25Czech Republic 2-week repo rate 1.25 -200 6 Aug 09 (-25bp) 16 Dec 09 2Q 10 (+25bp) 1.25 1.25 1.75 2.50 3.00Hungary 2-week deposit rate 7.00 -75 19 Oct 09 (-50bp) 23 Nov 09 24 Nov 09 (-50bp) 6.00 5.50 5.50 5.50 5.50Israel Base rate 0.75 -325 23 Aug 09 (+25bp) 23 Nov 09 1Q 10 (+25bp) 0.75 1.25 2.25 3.25 4.00Poland 7-day intervention rate 3.50 -125 24 Jun 09 (-25bp) 25 Nov 09 3Q 10 (+25bp) 3.50 3.50 3.50 4.00 4.50Romania Base rate 8.00 100 29 Sep 09 (-50bp) 05 Jan 09 1Q 10 (-25bp) 8.00 7.75 7.50 7.25 7.00Russia 1-week deposit rate 4.75 150 29 Oct 09 (-50bp) 24 Nov 09 24 Nov 09 (-50bp) 4.00 3.50 3.00 3.00 3.00South Africa Repo rate 7.00 -300 13 Aug 09 (-50bp) 17 Dec 09 4Q 10 (+50bp) 7.00 7.00 7.00 7.00 7.50Switzerland 3-month Swiss Libor 0.25 -225 12 Mar 09 (-25bp) 10 Dec 09 on hold 0.25 0.25 0.25 0.25 0.25Turkey Overnight borrowing rate 6.50 -1100 19 Nov 09 (-25bp) 17 Dec 09 3Q 10 (+50bp) 6.50 6.50 6.50 7.50 8.00 Asia/Pacific GDP-weighted average 2.08 -147 2.09 2.14 2.21 2.31 2.42Australia Cash rate 3.50 -300 3 Nov 09 (+25bp) 01 Dec 09 1 Dec 09 (+25bp) 3.75 4.00 4.50 4.75 5.00New Zealand Cash rate 2.50 -575 30 Apr 09 (-50bp) 09 Dec 09 8 Jul 10 (+50bp) 2.50 2.50 2.50 3.50 4.00Japan Overnight call rate 0.10 -40 19 Dec 08 (-20bp) 18 Dec 09 on hold 0.10 0.10 0.10 0.10 0.10Hong Kong Discount window base 0.50 -625 17 Dec 08 (-100bp) 17 Dec 09 on hold 0.50 0.50 0.50 0.50 0.50China 1-year working capital 5.31 -171 22 Dec 08 (-27bp) 2Q 09 3Q 10 (+27bp) 5.31 5.31 5.31 5.58 5.85Korea Base rate 2.00 -300 12 Feb 09 (-50bp) 09 Dec 09 1Q 10 (+25bp) 2.00 2.25 2.50 2.75 3.00Indonesia BI rate 6.50 -175 5 Aug 09 (-25bp) 03 Dec 09 on hold 6.50 6.50 6.50 6.50 6.50India Repo rate 4.75 -300 21 Apr 09 (-25bp) 1Q 10 1Q 10 (+25bp) 4.75 5.00 5.25 5.25 5.25Malaysia Overnight policy rate 2.00 -150 24 Feb 09 (-50bp) 24 Nov 09 2Q 10 (+25bp) 2.00 2.00 2.25 2.50 3.00Philippines Reverse repo rate 4.00 -200 9 Jul 09 (-25bp) 17 Dec 09 4Q 10 (+25bp) 4.00 4.00 4.00 4.00 4.25Thailand 1-day repo rate 1.25 -200 8 Apr 09 (-25bp) 02 Dec 09 2Q 10 (+25bp) 1.25 1.25 1.50 1.75 2.00Taiwan Official discount rate 1.25 -188 18 Feb 09 (-25bp) 4Q 09 4Q 10 (+12.5bp) 1.25 1.25 1.25 1.25 1.375Source: J.P. Morgan economics, 20 November 2009. Bold denotes move this week and forecast changes. Underline denotes policy meeting during upcoming week.

46



Exchange rate Forecasts FX rate vs US dollar annual average FX rate vs US dollar*** Quarter end forecasts Country 2005 2006 2007 2008 2009E 2010E 1Q09 2Q09 3Q09 Current 1Q10E 2Q10E 3Q10E 4Q10E Euro 1.22 1.27 1.39 1.48 1.42 1.56 1.32 1.40 1.46 1.49 1.55 1.62 1.55 1.50 Sterling 1.79 1.85 2.00 1.78 1.57 1.69 1.43 1.65 1.60 1.65 1.65 1.74 1.68 1.67 Yen 112 117 117 101 94 85 99 96 90 89 85 82 85 89 Australia 0.76 0.75 0.85 0.83 0.81 1.00 0.69 0.81 0.88 0.92 0.95 1.02 1.01 1.00 China 8.18 7.93 7.54 6.88 6.81 6.67 6.83 6.83 6.83 6.83 6.75 6.70 6.65 6.58 Hong Kong 7.79 7.77 7.80 7.77 7.76 7.79 7.75 7.75 7.75 7.75 7.77 7.78 7.80 7.80 India 44.0 45.1 40.7 44.6 47.8 43.3 50.6 47.8 47.7 46.6 45.0 43.5 42.8 42.0 Indonesia 9840 9135 9176 9730 10101 9175 11550 10208 9645 9465 9000 9000 9200 9500 Korea 1026 950 929 1127 1239 1120 1375 1275 1177 1159 1130 1130 1100 1120 Malaysia 3.78 3.64 3.41 3.34 3.49 3.29 3.65 3.52 3.46 3.39 3.35 3.30 3.25 3.25 Philippines 54.98 50.85 45.24 45.26 47.5 45.50 48.26 48.16 47.60 46.90 46.00 45.50 45.50 45.00 Singapore 1.67 1.58 1.49 1.40 1.43 1.35 1.52 1.45 1.41 1.39 1.36 1.35 1.34 1.33 Taiwan 32.30 32.65 32.79 31.44 32.44 30.50 33.92 32.86 32.00 32.39 31.00 30.50 30.50 30.00 Thailand 40.63 37.70 34.37 33.39 33.99 32.38 35.47 34.07 33.41 33.25 33.00 32.50 32.00 32.00 Argentina 2.94 3.08 3.12 3.19 3.86 4.08 3.71 3.80 3.84 3.80 4.00 3.95 4.10 4.25 Brazil 2.39 2.16 1.90 1.90 1.96 1.66 2.32 1.95 1.77 1.73 1.65 1.60 1.65 1.75 Chile 552 534 519 538 554 491 584 533 550 502 475 490 500 500 Colombia 2319 2379 2053 2045 2170 1931 2556 2143 1931 1969 1925 1850 1950 2000 Mexico 10.83 11.00 10.93 11.42 13.46 12.78 14.17 13.19 13.50 13.08 12.80 12.50 12.80 13.00 Peru 3.32 3.27 3.11 2.97 3.00 2.78 3.17 3.01 2.88 2.88 2.80 2.75 2.78 2.80 Venezuela 2.148 2.147 2.148 2.147 2.148 2.363 2.147 2.147 2.147 2.147 2.150 2.150 2.150 3.000 South Africa 6.40 7.01 7.00 8.41 8.02 7.35 9.54 7.73 7.52 7.60 7.40 7.20 7.40 7.40 Czech Republic 24.32 22.24 19.92 16.94 18.36 16.01 20.67 18.53 17.25 17.44 16.26 15.43 16.00 16.33 Hungary 204 211 179 169 196 165 233 194 184 181 168 157 165 170 Poland 3.25 3.11 2.69 2.43 3.07 2.55 3.50 3.17 2.87 2.79 2.65 2.47 2.55 2.53 Russia 28.42 26.92 25.29 25.53 30.83 26.41 33.96 31.16 30.03 28.99 26.85 25.41 26.45 26.94 Turkey 1.35 1.47 1.27 1.34 1.52 1.40 1.66 1.54 1.48 1.50 1.45 1.40 1.40 1.35 Source: Datastream, J.P. Morgan estimates, current as of 24 November 2009

Commodities Forecast Commodity Forecast Current 4Q09E 1Q10E 2Q10E 3Q10E 4Q10E WTI oil $/bbl 76.7 70.0 70.0 65.0 70.0 70.0 Natural gas $/mmbtu 3.2 5.0 6.0 5.5 5.8 6.5 Gold ($/oz) 1142 1000 1050 1000 1000 975 Silver ($/oz) 18.2 16.1 16.7 15.6 15.6 15.2 Platinum ($/oz) 1435 1275 1300 1325 1350 1375 Palladium ($/oz) 360 290 300 300 300 325 Copper ($/metric ton) 6731 5950 6250 6000 5750 5800 Aluminium ($/metric ton) 1720 1825 1900 1850 1825 1800 Zinc ($/metric ton) 2196 1850 1950 1900 1875 1850 Nickel ($/metric ton) 16658 18000 19000 17000 16500 16000 Corn ($/bushel) 3.6 3.7 4.0 4.2 4.1 4.1 Wheat ($/bushel) 4.0 5.0 5.4 5.4 5.2 5.1 Soybeans ($/bushel) 10.2 9.6 9.8 9.6 9.4 9.1 Source: J.P. Morgan, 20 November 2009.

47



EM

Mar

kets

’ Ove

rvie

ws

48



Brazil Stellar Growth amid Low Global Rates

Key country dynamics Brazilian growth at 5% (with upside potential) in 2010e is only behind China and India. A powerful infrastructure story related to the oil exploration in the presalt areas, the Soccer World Cup in 2014 and the Olympic Games in 2016 are key in attracting investment and enhancing the long-term growth potential. On the downside, yet another hiking cycle is likely to start in 2009, which could derail the attractive domestic demand story. Fiscal policy is lax, leading to an increase in debt, and the reversal of this trend is unlikely in 2010 considering the general elections. The presidential race could be noise and will determine policy direction as well as the continuation of enhanced role of the public sector in key sectors (oil, mining, utilities, among others).

Implications of a global recovery The global crisis presented Brazil with a stress test and it came through very successfully. It is now that Brazil is really enjoying the status of an investment grade country in terms of attracting global funds. Brazil remains the gold medalist in terms of high interest rates and therefore, is also attractive from the flow of funds point of view, leading the BRL to be the best among the best-performing currencies in the world in 2009. Authorities responded to that by imposing a 2% tax on foreign portfolio inflows, and exchange rate policy now remains an uncertainty.

How much have valuations already discounted a recovery We think that the key metric to watch is consensus EPS. They have increased by only 11% from the trough of the crisis until the present, a far cry from the average 36% rise in past cycles. As EPS rise, valuations which today are pretty much at record highs should abate. Still, we think Brazil deserves a premium to its historical values. The question now is how much of a premium is deserved on a relative basis.

Recommendations We have exposure to domestic cyclical names that benefit from a stronger consumer and are also upbeat on energy. On the domestic side we like homebuilder PDG, financial Santander, and CBD, which is repricing from a staple name to a discretionary. We like growth names NET and ALL. We remain OW Petrobras on higher oil prices and the growth coming from the new offshore wells. We avoid defensives utilities, telecom and staples.

Emy Shayo ChermanAC (55-11) 3048-6684 [email protected]

Banco J.P. Morgan S.A.

MSCI Brazil: Absolute and relative to MSCI Asia Pacific ex-Japan

0100200300400500600700

97 99 01 03 05 07 09Absolute Relativ e

Source: MSCI, Datastream.

Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%) Top picks Petrobras 39.2 PETR4 OW 212,864 13.1 11.9 3.0 3.3 1.7 17.4 Santander Brazil 23.0 SANB11 OW 50,351 17.3 13.5 1.3 1.7 3.3 12.0 Stocks to avoid Usiminas 50.3 USIM5 UW 14,452 37.8 14.6 1.3 3.5 2.1 10.9 CPFL Energia3 32.7 CPFE3 UW 9,040 13.0 11.2 2.5 2.9 8.5 27.2 Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 25 November 2009.

49



Brazil Scorecard Key Financial Data Summary Local Interest Rates and Inflation Trend

EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆2007 19.5 13.4 22.6 2.3 3 Month 8.7 0.1 na2008E -9.1 14.7 17.3 3.0 Long Bond 9.8 0.6 -1.02009E -11.4 16.6 14.5 2.7 Inflation 4.3 0.0 -0.12010E 24.9 13.3 17.4 2.9 Real 3 Month 4.3 0.1 na

Economic Forecasts Risk AppetiteGDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆2008 5.1 -0.2 0.2 0.0 BAA 2.9 0.0 na2009E 0.3 0.7 -0.3 0.7 EMBI 3.2 -0.7 0.82010E 5.0 0.5 -0.8 1.2 Country 2.2 -0.5 na

Country Relative -0.9 0.3 naEconomic Momentum Foreign Fund Flows (US$ mils)

GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo AvgGDP SAAR 6.7 4.3 5.0 4.0 EM Funds* 4,063 5,164 4,870

LatAm* 242 758 688Brazil 651 895 754

MSCI Brazil Absolute and Relative to EMF Index MSCI Fair value Range

EPS Integer over TimeCurrency Outlook (BRL/USD)

Source: MSCI, Bloomberg, IBES, Datastream, CEIC, J.P. Morgan, Consensus Economics. Unless stated all forecasts are J.P. Morgan’s. The scorecards are designed to assist in tracking trends and expectations. -3M∆ refers to the change in this factor over the past three months and +3M∆ refers to the forecast change in this factor over the next three months. The Economic Forecast table contains J.P. Morgan’s real GDP forecasts, the change in these forecasts over the past three months, the difference between these forecasts and the average for emerging markets and the final column is the difference between J.P. Morgan's forecast and consensus expectations. The MSCI Fair Value chart is designed to show current valuations relative 10 year valuation history. The vertical dotted line is the current index level. The five horizontal bars show a +/- one standard deviation range for these valuation measures. A dotted line to the left indicates a market that is cheap relative to history. *US Mutual fund subscriptions.

50

60

70

80

90

100

110

120

130

Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

2009 2010

0

200

400

600

800

1000

1200

Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09

Absolute Relative to MSCI EMF

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

Dec 04 Apr 06 Aug 07 Dec 08 Mar 10

Spot Forecast Consensus

J.P. Morgan forecast:end Dec 09: 1.80end Mar 10: 1.80end Jun 10: 1.80

Consensus

J.P. Morgan

(96225)

(104896)

(66011)

(123402)

(179326)

(213292)

(172103)

(212484)

(338028)

(224148)

(387224)

(241407)

0 50000 100000 150000 200000 250000 300000 350000 400000

FWD PER

PER

PBR

DY

BY/EY

BY/DY

50



China Focus on defensive growth in 2010

Key country dynamics We expect MSCI China to resume its rally from now to 1Q10, in light of positive fundamentals including: (1) the expected material improvements in the liquidity situation in early 2010 as banks tend to front-load their lending ; (2) our view that the government will not start serious tightening until at least 2QFY10; (3) China’s strong economic growth momentum; (4) the strong 4Q09 earnings results, to be released in 1QFY10; and (5) faster Rmb appreciation expected in 2010. The key investment strategy for 2010 should be to focus on stocks as characterized by defensive growth, given: (1) the expected broad-based tightening to kick in as of 2Q10; and (2) a potential sharp slowdown in fixed asset investment growth in 2011 as the two-year (FY09/10) economic stimulus policies fade away. Implications of a global recovery We expect China’s economy to continue to grow solidly in 2010 (real FY10 GDP growth forecast at 9.5%). Continuing with the theme of a sustained and synchronized expansion of the global economy through 2010, we expect net external trade would likely come back to contribute positively to GDP growth again. On the domestic front, we look for a broad-based pickup in private consumption, along with improving labor markets and hence household income, and marked expansion in private housing investment as well as other private sector investment. Meanwhile, we believe the central government has enough leeway to smooth growth should external demand or private activities disappoint again. How much have valuations already discounted a recovery We believe there is still a decent upside for MSCI China, as the expected solid earnings growth for corporate China should at least underpin its valuations at above historical mean levels. Based on our EPS growth forecast of 20.1% for MSCI China for FY10, we have our end-FY10 MSCI China index target of 78, based on 17.2x FY10E P/E, or a 10% premium above the long-term average trailing P/E. Recommendations We recommend to Overweight banks with good earnings visibility and the potential for NIM expansion, upstream energy (coal and oil) as an inflation hedge, and defensive growth stocks, which include internet, gas, tissue and diapers, and consumer staples. We Underweight property, the most-likely target for the potential tightening by the government, telecom, downstream commodities, shipping, and construction names. We introduce two pair trades: (1) Long Netease/Short China Unicom on lower penetration rate, thus greater growth potential for internet sector than telecom sector; and (2) Long Xinao Gas/Short Datang International on better growth prospects for gas sector than IPPs.

Frank LiAC (852) 2800-8511 [email protected]


Flagship reports • Views from the Bund • Where to find the next ten-baggers (September

07, 2009) • Focus on defensive growth (October 21, 2009) • China Strategy Dashboards

MSCI China: Absolute and relative to MSCI Asia Pacific ex-Japan

1030507090

110130150



MSCI performance table 2wk 3mth YTDMSCI China 2.7 12.2 61.3Weightings in Region 18.4%MSCI Total Mkt Cap. (US$B) 572.32009 P/E Ratio (x) 17.62010 P/E Ratio (x) 14.42011 P/E Ratio (x) 12.22010 Yield (%) 2.62010 ROE (%) 16.2Source: Datastream, IBES, MSCI, JPMorgan estimates. Prices and valuations are as of November 20, 2009

Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE

Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%) Top picks Xinao Gas 17.28 2688.HK OW 2,341 21.2 18.5 0.8 0.9 1.4 12.6 Baidu.com 386.37 BIDU US OW 13,374 63.0 42.2 6.1 9.2 0.0 29.6 Bank of China – H 4.53 3988.HK OW 153,822 12.3 8.7 0.3 0.5 5.2 20.5 China Mengniu Dairy 23.7 2319.HK OW 5,309 25.6 22.4 0.8 0.9 0.0 16.3 China Yurun Food 17.76 1068.HK OW 3,833 14.7 11.2 1.2 1.6 2.3 25.6 Stocks to avoid China Unicom 10.42 0728.HK UW 31,679 23.9 34.6 0.4 0.3 1.3 3.0 Datang Intl 3.72 0991.HK N 5,596 25.6 15.6 0.1 0.2 3.1 9.4 Source: Bloomberg, J.P. Morgan estimates. Share prices and valuations are as of 5 November 2009. Note: Price and valuation for the US-Listed Baidu are updated as of 4 November 2009.

51



China Scorecard Key Financial Data Summary Local Interest Rates and Inflation Trend

EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆2007 31.2 16.8 19.4 2.2 3 Month 2.0 0.0 -1.22008E -12.7 19.2 15.0 2.1 Long Bond 3.7 0.2 -0.32009E 9.1 17.6 15.0 2.2 Inflation -0.8 0.4 1.72010E 22.0 14.4 16.2 2.6 Real 3 Month 2.8 -0.4 -2.9

Economic Forecasts Risk AppetiteGDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆2008 9.0 0.1 4.1 0.0 BAA 2.9 0.0 na2009E 8.6 0.2 8.0 0.3 EMBI 3.2 -0.7 0.82010E 9.5 0.5 3.7 0.0 Country 0.8 -0.4 na



Asia ex Japan* 1,245 1,566 1,452China -50 499 611

EPS Integer over Time

MSCI China Absolute and Relative to EMF Index MSCI Fair value Range

Currency Outlook (CNY/USD)


60

70

80

90

100

110

120


2009 2010

0

100

200

300

400

500

600

700

800



6.0

6.5

7.0

7.5

8.0

8.5



J.P. Morgan


Consensus

(30)

(41)

(27)

(43)

(47)

(47)

(61)

(67)

(132)

(77)

(123)

(72)

10 30 50 70 90 110 130 150

FWD PER

PER

PBR

DY

BY/EY

BY/DY

52



India Recovery to broaden; challenging policy environment

Key country dynamics We are constructive on economic growth and corporate earnings over 2010. A low base effect should help too, particularly over 1H. Financial markets appear to have stabilized. The decisive mandate in the national elections gives the government considerable policy flexibility to pursue reforms and growth. Corporate and consumer sentiment have improved considerably due to these positives.

The government and regulators face challenges on the policy front though. Given rising inflation, we expect a tightening in monetary policy over 1H. The fiscal deficit remains at elevated levels, raising the specter of a withdrawal of fiscal stimuli at some point over CY10. Any delayed impact of the deficient monsoon on consumption remains a near-term cyclical risk.

Implications of a global recovery The Indian economy is relatively less dependent on exports (c15%). A global recovery is likely to have a positive impact on IT services, metals and energy. More significant is the dependence on foreign capital. A sustained improvement herein is imperative to fund local growth.

How much have valuations already discounted a recovery? Indian equities have re-rated sharply since March on the back of an improvement in global risk appetite and the decisive mandate in the national elections. Current valuations at 15x FY11E are at a marginal discount to historic comparatives and factor in healthy growth expectations (estimated at 21% over FY11E). Rising inflation and potential tightening in monetary policy imply that market returns over CY10 could be led more by forecast earnings growth as compared to re-rating.

Recommendations We expect the government policy to focus on reviving the investment cycle. We overweight capital goods and infrastructure. A pick up in credit growth coupled with bottoming out of asset quality issues augurs well for financials. We are selective on global sectors given volatility in data flow and an appreciating rupee. The lagged impact of a deficient monsoon and a potential withdrawal of fiscal stimuli are key risk factors for the consumption cycle. Telecom and cement sectors will remain adversely impacted due to competitive pressures.

Bharat IyerAC (91-22) 6157-3600 [email protected]

J.P. Morgan Securities Indta Pvt. Ltd.

Flagship reports • Stratoscope • Color of Money • Q-View MSCI India: Absolute and relative to MSCI Asia Pacific ex-Japan

0100200300400500600700



MSCI performance table 2wk 3mth YTDMSCI India 6.0 15.8 86.1Weightings in Region 7.5% MSCI Total Mkt Cap. (US$B) 232.6 2009 P/E Ratio (x) 21.1 2010 P/E Ratio (x) 17.3 2011 P/E Ratio (x) 14.1 2010 Yield (%) 1.1 2010 ROE (%) 17.0 Source: Datastream, IBES, MSCI, JPMorgan estimates. Prices and valuations are as of November 20, 2009

Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rating (US$MM) FY 10E FY11E FY 10E FY11E FY10E (%) FY10E (%) Top picks Infosys Technologies 2,218 INFY.BO OW 27,166 21 18 107 124 1.2 29 ICICI Bank 849 ICBK.BO OW 20,197 27 NA 32 NA 1.4 8 Unitech 86 UNTE.BO OW 4,431 15 13 6 7 0.2 12 Larsen & Toubro 1,576 LART.BO N 20,208 27 23 58 68 0.7 22 Stocks to avoid Hindustan Unilever 265 HLL.BO UW 12,414 25 22 10 12 3.0 106 Reliance Power 144 RPOL.BO UW 7,417 55 43 3 3 0.0 4 Idea Cellular 50 IDEA.BO UW 3,320 46 NA 1 (4) 0.0 6 Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 10 November 2009.

53



India Scorecard Key Financial Data Summary Local Interest Rates and Inflation Trend

EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆2007 18.6 21.5 20.1 1.3 3 Month 3.7 -0.1 -0.72008E -1.1 21.8 16.3 1.0 Long Bond 7.3 -0.2 0.22009E 3.3 21.1 15.9 1.0 Inflation 11.7 0.0 0.52010E 21.7 17.3 17.0 1.1 Real 3 Month -8.1 -0.1 -1.1

Economic Forecasts Risk AppetiteGDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆2008 6.1 -0.1 1.2 0.0 BAA 2.9 0.0 na2009E 6.0 -0.2 5.4 -1.2 EMBI 3.2 -0.7 0.82010E 7.5 0.3 1.7 na Country na na na

Country Relative na na naEconomic Momentum Foreign Fund Flows (US$ mils)

GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo AvgGDP SAAR -1.0 10.0 7.0 9.6 EM Funds* 4,063 5,164 4,870

Asia ex Japan* 1,245 1,566 1,452India 1,153 1,405 1,310

MSCI India Absolute and Relative to EMF Index MSCI Fair value Range

EPS Integer over TimeCurrency Outlook (INR/USD)


60

70

80

90

100

110

120

130


2009 2010

0

100

200

300

400

500

600

700

800



38

40

42

44

46

48

50

52

54




Consensus

J.P. Morgan

(322)

(389)

(466)

(361)

(416)

(378)

(538)

(783)

(833)

(698)

(1015)

(553)

150 300 450 600 750 900 1050

FWD PER

PER

PBR

DY

BY/EY

BY/DY

54



Indonesia Opportunity knocking

Key country dynamics A resilient economy, benign inflation, easy liquidity and favorable politics have aligned to drive Indonesian equities significantly higher in 2009. We believe that the country is on the cusp of a substantial opportunity to raise its growth trajectory in coming years. The newly-formed presidential delivery unit offers a structure to deliver on high current expectations about infrastructure development and reform, evidence of its success could be a source of further upside. We see domestic cyclical momentum driving earnings in FY10E, and the credit cycle is also showing signs of life. Inflation risks could drive rates mildly higher, but see a case for lower real rates, supported sovereign credit rating upgrades. The major risk is weak execution on growth and governance reforms.

Implications of a global recovery The resilience of growth and the stability of the fiscal, and BoP positions through the crisis have raised Indonesia’s economic and political credibility. As growth returns elsewhere, Indonesia’s allure as a pocket of growth, which brought it attention in 2009, may diminish next year.

How much have valuations already discounted a recovery In 2010 the emphasis may shift from recovery to growth. Market valuations are over 1sigma higher than long-term valuations, and to some extent, therefore, probably discount future earnings revisions. However, FY10E EPS forecasts have risen 11% over the past six months, but remain 27% below where they were a year back.

Recommendations Our main thematics to play in Indonesia remain—interest rate-sensitive sectors, power sector supply chain/feedstock, and domestic consumption plays. We have Overweight rating on Astra International—as a high-quality rate sensitive and consumption exposure. We also are incrementally positive on banks, with BCA as our main Overweight. We recommend PTBA among coal stocks—a beneficiary from any improved thrust on infrastructure development. Finally, we recommend ANTM, where we think that a strong volume growth profile could be boosted if the company grows from being a preferred partner for mining MNCs seeking avenues to invest in Indonesia. Our main Underweight recommendations are Unilever and BRI.

Aditya SrinathAC (62-21) 5291-8573 [email protected]

PT J.P. Morgan Securities Indonesia

Flagship reports • Currency + Commodity (March 20, 2009) • An Agenda for the Next 5 years (May-09) • Notes of Caution (Sept-09) MSCI Indonesia: Absolute and relative to MSCI Asia Pacific ex-Japan

0

100

200

300

400



MSCI performance table 2wk 3mth YTDMSCI Indonesia 5.0 9.5 88.6Weightings in Region 1.8%MSCI Total Mkt Cap. (US$B) 56.32009 P/E Ratio (x) 21.12010 P/E Ratio (x) 15.02011 P/E Ratio (x) 12.62010 Yield (%) 3.12010 ROE (%) 24.3Source: Datastream, IBES, MSCI, JPMorgan estimates. Prices and valuations are as of November 20, 2009

Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%) Top picks Astra International 29,800 ASII IJ OW 12,759 14.2 11.7 2,096 2,540 2.8% 24.9% BCA 4,600 BBCA IJ OW 11,995 17.4 12.9 265 356 3.0% 29.2% PTBA 14,450 PTBA IJ OW 3,494 10.5 23.6 1,371 612 2.4% 22.6% ANTM 2,300 ANTM IJ OW 2,302 49.1 18.8 46.9 122.3 1.0% 13.6% Stocks to avoid Unilever 10,200 UNVR IJ UW 8,166 29.4 24.0 347 425 350 89.8% Bank Rakyat 7,200 BBRI IJ UW 9,392 12.5 10.5 577 684 3.2% 28.4% Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.

55



Indonesia Scorecard Key Financial Data Summary Local Interest Rates and Inflation Trend

EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆2007 61.4 17.3 27.4 3.2 3 Month 6.6 0.0 0.22008E -1.4 17.5 27.0 2.6 Long Bond 10.3 -0.4 0.22009E 6.8 16.4 25.3 2.6 Inflation 2.7 0.0 0.12010E 9.6 15.0 24.3 3.1 Real 3 Month 3.9 -0.1 0.1

Economic Forecasts Risk AppetiteGDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆2008 6.1 0.0 1.2 0.0 BAA 2.9 0.0 na2009E 4.3 0.2 3.7 0.0 EMBI 3.2 -0.7 0.82010E 5.3 0.3 -0.5 -0.3 Country na na na

Country Relative na na naEconomic Momentum


Asia ex Japan* 1,245 1,566 1,452Indonesia 113 82 81


Foreign Fund Flows (US$ mils)

MSCI Indonesia Absolute and Relative to EMF Index MSCI Fair value Range

Currency Outlook (IDR/USD)


60

70

80

90

100

110

120

130


2009 2010

0

100

200

300

400

500

600

700

800



8,000

9,000

10,000

11,000

12,000

13,000

14,000



Consensus

J.P. Morgan forecast:end Dec 09: 9000end Mar 10: 9000end Jun 10: 9200

J.P. Morgan

(1341)

(2160)

(1431)

(2395)

(2591)

(952)

(3544)

(3015)

(4961)

(6218)

(5684)

0 1000 2000 3000 4000 5000 6000 7000 8000

FWD PER

PER

PBR

DY

BY/EY

BY/DY

56



Malaysia Looking for deliverance

Key country dynamics We expect PM Najib Razak’s administration to pick up pace in awarding many of the much-anticipated large-scale infrastructure projects and focusing on the implementation of earlier-announced policy reform measures in 2010. With global economies recovering, private sector confidence is likely to return, enabling the new policy measures to gain traction. Also, domestic liquidity conditions remain relatively flush with interest rates at an all-time low of 2% for the Overnight Policy Rate and LD ratios still at 78%. Bank Negara continues to mop up M$200B of excess liquidity as at end-September 2009. We expect inflationary conditions to remain benign with our current forecast for 2010 at 0.8%, although we do expect Malaysia to raise interest rates for 2010 by 100bp to 3% beginning 2Q10, in line with the region as the economic momentum gains strength. Implications of a global recovery The improvement in the external sector due to the global recovery will boost near-term growth as the new administration looks to stimulate domestic growth with new liberalization policies design to spur private investment. Public expenditure will gradually be reduced from peak deficit levels of 7.4% in 2009 as the government looks towards the private sector to stimulate economic growth. Confidence in PM Najib’s administration is key as the government has been prone to policy flip flops in the past. How much have valuations already discounted a recovery Current forward P/Es of 16x are between +1std and +2std dev. levels. However, with some scope for further earnings upgrades as the economic recovery flows through, we believe there is still scope for further upside to the market over the next 12 months. Also, foreign investors are underweight on the Malaysian market. In our view, should the government execute on its reform measures, we expect to see foreign investors return, driving P/E multiples to 17-18x, similar to the past few market peaks. Recommendations Incremental foreign portfolio flow will drive up valuations of key liquid stock names, especially those with a positive macro outlook in light of the structural reform expected. Top picks are Public and AMMB on banks, Tenaga for GLCs reform and Genting. Avoid stocks lacking growth or catalyst, are YTL Power (yield plays to underperform) and MISC (lacks near-term catalyst).

Chris Oh, CFAAC (60-3) 2770-4728 [email protected]

JPMorgan Securities (Malaysia) Sdn. Bhd. (18146-X)

Flagship reports • Looking for Deliverance (11/05/2009) • 2010 Budget (10/23/2009) • Introducing June 2010 KLCI of 1350 (08/20/2009) • 2H09 market outlook (06/10/2009) • 2nd Stimulus Package (03/10/2009) • Shifting Sands Series (02/04/2009, 03/27/2009,

04/09/2009, 04/23/2009, 07/16/2009) MSCI Malaysia: Absolute and relative to MSCI Asia Pacific ex-Japan

20

40

60

80

100

120



MSCI performance table 2wk 3mth YTDMSCI Malaysia 1.2 8.5 47.0Weightings in Region 2.7% MSCI Total Mkt Cap. (US$B) 83.8 2009 P/E Ratio (x) 18.3 2010 P/E Ratio (x) 15.8 2011 P/E Ratio (x) 13.1 2010 Yield (%) 3.1 2010 ROE (%) 12.3 Source: Datastream, IBES, MSCI, JPMorgan estimates. Prices and valuations are as of November 20, 2009

Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%) Top picks Public Bank 10.9 PBKF MK OW 11257 15.2 12.9 0.72 0.85 3.9 29.5 Tenaga 8.4 TNB MK OW 10655 15.6 14.3 0.53 0.62 2.8 9.3 Genting 7.15 GENT MK OW 7745 24.9 20.3 0.29 0.35 0.7 9.4 AMMB 4.7 AMM MK OW 4142 13.6 11.4 0.32 0.39 1.7 11.0 Stocks to avoid MISC 8.9 MISF MK N 9680 25.9 20.2 0.34 0.44 3.9 5.9 YTL Power 2.15 YTLP MK N 3755 14.4 10.7 0.15 0.20 2.1 18.2 Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009. MISC Berhad - F: We downgraded to UW with new PT of M$7.7 on November 24." and "YTL Power: We downgraded to UW on November 19.

57



Malaysia Scorecard Key Financial Data Summary Local Interest Rates and Inflation Trend

EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆2007 44.3 15.7 14.5 3.2 3 Month 2.1 0.0 0.02008E -14.1 18.3 11.5 2.9 Long Bond 4.3 0.2 0.02009E 0.0 18.3 11.0 2.7 Inflation -2.1 0.4 0.92010E 15.7 15.8 12.3 3.1 Real 3 Month 4.2 -0.4 -0.9

Economic Forecasts Risk AppetiteGDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆2008 4.6 -0.5 -0.3 0.0 BAA 2.9 0.0 na2009E -2.4 0.6 -3.0 1.4 EMBI 3.2 -0.7 0.82010E 5.0 0.6 -0.8 0.8 Country 1.6 -0.2 na



Asia ex Japan* 1,245 1,566 1,452Malaysia 45 -18 -87

MSCI Malaysia Absolute and Relative to EMF Index MSCI Fair value Range

EPS Integer over TimeCurrency Outlook (MYR/USD)


60

70

80

90

100

110


2009 2010

-150-100

-500

50100150200250300



2.9

3.0

3.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

4.0




Consensus

J.P. Morgan

(319)

(391)

(342)

(370)

(196)

(323)

(521)

(693)

(1301)

(650)

(1115)

(715)

0 300 600 900 1200 1500 1800 2100

FWD PER

PER

PBR

DY

BY/EY

BY/DY

58



Mexico Cyclical Upside

Key country dynamics Mexico suffered in 2009 from a cyclically weak economy, driven by the US and H1N1 influenza. Fiscal and rating concerns were also high, as the government implemented a contentious and watered-down 1.0% GDP fiscal adjustment despite the macro weakness. Nevertheless, Mexico’s fiscal revenue/GDP remains low (22% GDP) and poorly structured (1/3 oil). The equity market performed better, helped by index composition (70% defensives) and hence robust earnings (positive 2009, despite GDP plunge).

For 2010 we expect a 10.5-point swing of Mexico GDP (from -7.0% to +3.5%), the second highest we forecast globally, after Russia (13.5 points). With the output gap to remain large and inflationary pressures likely ones of supply-side shock, we see a rate hike only in June 2010, and +75bps for the year. Risk/reward is high given strong US linkages and fiscal dynamics.

Implications of a global recovery Mexico historical GDP beta to global recovery is over 2.0x, vs overall EM 1.3x. Main driver is the US (destination of 80% exports) and manufacturing. We forecast 4.5% 2010 growth in US manufacturing after -11.4% in 2009e. Oil remains important. US$59 bbl is the budgetary oil forecast, comfortably below our $70 end-2010 forecast and spot closer to $80. The peso has lagged the YTD rally in EM currencies, and there is arguably upside risk.

How much have valuations already discounted a recovery? MSCI Mexico 12m forward earnings fell 27% peak to trough and have rebounded 13%. They remain 20% from their highs. This recovery should continue (recent Q3 earnings +20% oya, with 60% of Mexbol reports beating consensus). The market is trading around 14.6x 2010e earnings, below the 5-year average (15.6x). We see room for earnings to surprise on the back of the GDP recovery, as well as US$ gains on an appreciating peso. Recommendations Our portfolio is focused on the 1/3 of the index made up of cyclicals (banks, homebuilders, steel, cement, mining), where we see greater earnings recovery leverage and cheaper asset valuations, rather than on the more defensive (staples and telecoms) 2/3s of the index.

Ben LaidlerAC (212) 622-5252 [email protected]

J.P. Morgan Securities Inc.

MSCI Mexico: Absolute and relative to MSCI Asia Pacific ex-Japan

0100200300400500600700800



Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%) Top picks Ternium 32.5 TX OW 6,515 26.2 15.2 1.2 2.1 4.2 8.4 Urbi 26.2 URBI* OW 1,986 13.3 10.1 2.0 2.6 0.0 13.8 Stocks to avoid Telmex Internacional 15.1 TII UW 13,561 22.4 20.4 0.7 0.7 2.5 9.7 Telmex 17.7 TMX UW 16,104 10.7 12.0 1.6 1.5 4.0 48.6 Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 25 November 2009.

59



Mexico Scorecard Key Financial Data Summary Local Interest Rates and Inflation Trend

EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆2007 12.4 14.4 25.1 2.5 3 Month 4.8 0.1 na2008E -27.2 19.7 8.3 2.0 Long Bond 5.2 0.1 na2009E 8.9 18.1 8.7 2.3 Inflation 4.9 -0.2 -0.32010E 21.6 14.9 17.2 2.5 Real 3 Month -0.1 0.3 na

Economic Forecasts Risk AppetiteGDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆2008 1.3 0.0 -3.6 0.0 BAA 2.9 0.0 na2009E -7.0 -0.5 -7.6 0.0 EMBI 3.2 -0.7 0.82010E 3.5 -1.5 -2.3 0.7 Country 2.1 -0.6 na


GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo AvgGDP SAAR 7.5 3.7 -0.6 3.3 EM Funds* 4,063 5,164 4,870

LatAm* 242 758 688Mexico 98 52 -17


MSCI Mexico Absolute and Relative to EMF Index MSCI Fair value Range

Currency Outlook (MXN/USD)


60

70

80

90

100

110


2009 2010

50

100

150

200

250300

350

400

450

500



9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0



Consensus


J.P. Morgan

(19534)

(11984)

(15042)

(27110)

(9498)

(30060)

(26417)

(36774)

(41868)

(36263)

0 10000 20000 30000 40000 50000 60000

FWD PER

PER

PBR

DY

BY/EY

BY/DY

60



Philippines Positioned for a consumption-led upturn

Key country dynamics With nearly 80% of the country’s GDP driven by private consumption, economic growth has proven to be resilient through the crisis. The main fuel for domestic consumption is the strength in OFW remittances due to strong demand for Filipino workers abroad, who are increasingly higher-skilled and higher-paid service workers. The sustained double-digit growth in the BPO sector and its multiplier effect on the economy should likewise remain a driver as these are relatively higher-paid employees. Main weaknesses in the Philippine dynamic remain weak foreign direct investments and the government’s lack of fiscal flexibility that has crowded out the private sector and hampered the investment cycle in the country. Implications of a global recovery Positioned for a consumption led upturn: We believe the Philippines economy in 2010 will move to an above-trend and above-consensus growth of 5%oya, driven by a revival in consumption and government spending. Remittances should continue to positively surprise as the job order pipeline remains robust, equivalent to seven months worth of deployment with a bias for service and professional workers. National elections are scheduled in May, where it is estimated that the five presidential candidates alone will spend at least Php25 billion, equivalent to 0.3% of GDP. As domestic confidence recovers, there is also sizable pent-up demand in the economy to boost growth, reflected by the all-time high spread between GNP and GDP. Corporate balance sheets are robust to support expansion plans to capture this consumption upturn. How much have valuations already discounted a recovery Valuations are still attractive: The PSEi now stands near its LT average P/E of 15x. Valuations are still attractive, in our view, with previous rallies after a bear market low having reached a high of +1SD-2SD (18x-22x). Furthermore, we believe consensus estimates remain conservative with plenty of room for upgrades. Following downgrades of as much as -30%, the Street has only upgraded EPS by 6%. Recommendations Our favored sectors are property, banks, and utilities, which have compelling valuations and attractive growth prospects. Our top picks are ALI, MBT, EDC, and MWC. Our top avoid is Meralco.

Kelly Lim-BateAC (632) 878-1188 [email protected]

J.P. Morgan Securities Philippines Inc.

Flagship reports • Philippine Strategy: Hitting a macro sweet spot

(Sept 24, 2009) • Philippine Trendwatch: 3Q09 Turning the corner

(Oct 06, 2009) • Philippine Real Estate: Buy on Dips (Jun 17, 2009) • Metrobank: Upgrade to OW on PPOP/RoE

momentum (Nov 5, 2009) • Ayala Corp: More upside (Jul 10, 2009) MSCI Philippines: Absolute and relative to MSCI Asia Pacific ex-Japan

10

30

50

70

90

110



MSCI performance table 2wk 3mth YTDMSCI Philippines 5.2 10.0 57.8Weightings in Region 0.4% MSCI Total Mkt Cap. (US$B) 13.4 2009 P/E Ratio (x) 17.0 2010 P/E Ratio (x) 15.4 2011 P/E Ratio (x) 13.5 2010 Yield (%) 4.0 2010 ROE (%) 15.5 Source: Datastream, IBES, MSCI, JPMorgan estimates. Prices and valuations are as of November 20, 2009

Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%) Top picks Ayala Land 12 ALI OW 3319 40.9 40.3 0.29 0.30 0.5 7.2 Metrobank 43.5 MBT OW 1677 16.5 11.2 2.63 3.88 2.3 10.9 Energy Dev. Corp 4.15 EDC OW 1328 10.9 11.0 0.38 0.38 3.2 24.2 Manila Water 16.25 MWC OW 700 9.0 8.1 1.80 2.01 3.2 24.2 Stock to avoid Manila Electric 207 MER N 4883 30.0 18.0 6.90 11.51 2.8 21.6 Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 12 November 2009.

61



Philippines Scorecard Key Financial Data Summary Local Interest Rates and Inflation Trend

EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆2007 8.3 17.9 14.1 4.0 3 Month 3.8 -0.1 0.32008E -16.0 21.3 12.3 3.4 Long Bond 7.9 0.0 0.62009E 25.1 17.0 14.9 3.8 Inflation 1.6 1.6 1.42010E 10.8 15.4 15.5 4.0 Real 3 Month 2.2 -1.7 -1.1

Economic Forecasts Risk AppetiteGDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆2008 3.8 -0.8 -1.1 0.0 BAA 2.9 0.0 na2009E 1.5 0.1 0.9 -0.6 EMBI 3.2 -0.7 0.82010E 5.0 0.0 -0.8 0.9 Country 2.4 -0.6 na



Asia ex Japan* 1,245 1,566 1,452Philippines 98 9 -19

MSCI Philippines Absolute and Relative to EMF Index MSCI Fair value Range

EPS Integer over TimeCurrency Outlook (PHP/USD)


0

100

200

300

400

500



36

38

40

42

44

46

48

50

52

54

56

58




Consensus

J.P. Morgan

(282)

(435)

(308)

(741)

(525)

(896)

(503)

(761)

(1436)

(901)

0 500 1000 1500 2000 2500 3000

FWD PER

PER

PBR

DY

BY/EY

BY/DY

60

70

80

90

100

110


2009 2010

62



Russia Leveraged play on cyclical recovery

Key country dynamics Russia has been a top performer among GEMs since the February trough (MSCI RU +150%), but it is still a laggard from the start of the downturn in July 2008. The country has been hard hit by one of the worst GDP contractions (2009 JPMe -8.5%), with JPMe earnings falling -30% y/y. Surging risks resulted, in addition to earnings declines, in a nasty multiples contraction. Conversely, the recent rerating reflects a better outlook.

Implications of a global recovery The oil price, Russia’s key external variable, has more than doubled since January; the main economic aggregates have picked up and the ruble has gained over 20% from its low. The MSCI Russia 12M forward P/E has risen to 9.5x from 3x ytd. Forward EPS bottomed out in April, rising c.40% to date. With 2010 JPMe real GDP growth at 5.0%, we expect a recovery in earnings and a leaner cost base is a margin booster, in addition to rising revenue. Banks should be able to cut provisioning expense, the main bottom line spoiler, by over 50-75%, in our view. As the CBR reduced the benchmark rate by 400bp this year and with liquidity improving, the leveraged segments - like materials, telecoms and developers - should see big relief from lower interest expenses. We estimate 2010 aggregate earnings should rise 41% and the momentum should extend into 2011. The extensive 2009-2011 earnings swings reflect the dependence on cyclical commodities.

How much have valuations already discounted a recovery? At a 9.5x MSCI Russia 12M forward P/E, the 30% discount to GEMs is abnormally high (against the 3Y pre-crisis average of 15%). Moreover, Russia’s earnings growth (>40% in 2010E and 2011E), is double the GEMs average, invalidating the main reason for the discount in our view.

Recommendations We remain OW Russia in the GEM context owing to our OW stance on Energy –we see the most upside in Energy, Telecoms and Financials. Our top picks include Gazprom (on expected volumes and price recovery), Sberbank (with strong margins driving revenue and decline in provisioning allowing for recovery of earnings), and MMK (due to the expected pick-up of domestic demand). Our choice of stock to avoid is Severstal.

Alex Kantarovich AC (7-495) 967-3172 [email protected]

J.P. Morgan Bank International LLC

Flagship reports • Russia-2010: well-positioned among GEMs

(11/06/2009) • Real winners of $100 oil (10/14/2009) • Index targets upped, earnings to replace COE as

main driver (07/29/2009) • Earnings at trough, risk premiums contracting,

international liquidity wanted (04/14/2009) MSCI Russia: Absolute and relative to MSCI Asia Pacific ex-Japan

0

100

200

300

400

500



Top picks and stocks to avoid Mkt cap P/E (x) EPS ($) Div. yield ROE Price ($) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%) Top picks Gazprom 6.30 GAZP RU OW 144,366 6.96 5.76 0.90 1.09 0.8% 12.3% Sberbank 2.50 SBER RU OW 55,147 103.8 17.2 0.02 0.15 0.9% 12.6% Stocks to avoid Severstal 8.80 CHMF RU UW 8,868 n/a 15.9 -0.40 0.55 0.7% 6.4% Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of cob 23 November 2009.

63



Russia Scorecard Key Financial Data Summary Local Interest Rates and Inflation Trend

EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆2007 30.8 7.3 16.5 1.8 3 Month 9.3 -2.0 na2008E -3.6 7.6 15.9 0.7 Long Bond 9.3 -2.0 na2009E -33.5 11.3 10.7 1.3 Inflation 9.7 -1.9 -0.22010E 32.3 8.6 13.1 1.7 Real 3 Month -0.4 -0.2 na

Economic Forecasts Risk AppetiteGDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆2008 5.6 0.0 0.7 0.0 BAA 2.9 0.0 na2009E -8.5 0.0 -9.1 -0.8 EMBI 3.2 -0.7 0.82010E 5.0 0.0 -0.8 2.0 Country 2.5 -1.4 na

Country Relative -0.7 -0.7 naEconomic Momentum Foreign Fund Flows (US$ mils)


EM Europe* -157 171 102Russia 187 173 -81


MSCI Russia Absolute and Relative to EMF Index MSCI Fair value Range

Currency Outlook (RUB/USD)


40

60

80

100

120

140


2009 2010

0

100

200

300

400

500

600



23

27

31

35

39

43



Consensus


J.P. Morgan

(447)

(345)

(508)

(441)

(932)

(1130)

(1378)

(1677)

0 500 1000 1500 2000 2500

FWD PER

PER

PBR

DY

BY/EY

BY/DY

Not meaningful

Not meaningful

64



South Africa Catch-up and carry trade in 2010

Key country dynamics We forecast a rebound in SA real GDP growth to 3% in 2010 from -2% in 2009, driven by inventory restocking and a recovery in mining & manufacturing production. While SA’s earnings recovery has lagged and been disappointing in 2009, we believe it could surprise on the upside in 2010. The fall in SA earnings growth in 2009 is the biggest on record versus previous earnings recessionary periods (-28% vs ave EPS fall -9.3%). Implications of a global recovery The strongest beneficiary of the global recovery in SA is the high beta rand exchange rate, which we expect to remain strong in 1H10. The rand has been one of the best performing currencies in 2009 supported by the carry trade, high commodity prices and healthy risk appetite and we expect this to persist in 1H10 as the dollar is forecast to remain weak. Later in 2010 as the dollar regains its footing, we expect some rand weakness and hedge for this via Platinum exposure. Our bottom-up earnings estimates for 2010 are similar for Resources, Financials and Industrials at 20-25%. In 2011E, however, we see a stronger rebound in Resources earnings (+41% versus c20% for Financials & Industrials) on some rand weakness. This suggests a tilt to Resources in 2H10. In 1H10, however, domestic cyclical stocks should continue to be supported by an extended period of flat short rates. How much have valuations already discounted a recovery SA’s valuations are undemanding; forward P/E of 11.9 versus 13 for MSCI EM. SA has underperformed MSCI EM year to date in local currency terms (SA 39.6% vs 70% for EMF). In dollars SA performance has been marginally lower than EMF (SA 99% vs 102% for EMF). While MSCI EMF has rerated 125% in 2009 to date, MSCI SA has rerated only 47%. We expect some rerating catch-up in 2010 as SA’s economic recovery gathers momentum, having lagged the recovery in the rest of EM. Recommendations We recommend OW domestic SA, but include Platinum too as a rand hedge. Our favourite sectors: Media, Banks, General Industrials, selected Retailers and Platinum. Our top stock picks include Anglo Plat, Northam, Absa, JD Group and Naspers. Our choice of stocks to avoid is Nedbank.

Deanne GordonAC (+27) 21 712 0875 [email protected]

J.P. Morgan Equities Ltd

Flagship reports

• South African Year Ahead: Team SA – stronger earnings kick in 2010 (26/11/2009)

• Investment in South Africa: Cyclical Recovery and rerating catch-up (01/10/2009)

• Fund Managers’ Companion: Continue to favour cyclicals (07/08/2009)

MSCI South Africa: Absolute and relative to MSCI Asia Pacific ex-Japan

0

100

200

300

400



Top picks and stocks to avoid Mkt cap P/E (x) EPS (TKY) Div. yield ROE Price (ZAR) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%) Top picks Anglo Plat 70500 AMS SJ OW 22067 66.5 31.2 1060.0 2260.0 NM 14.5% ABSA 12600 ASA SJ OW 11617 11.0 8.2 1216.5 1581.4 5.5% 18.4% Northam 4100 NHM SJ OW 1938 22.4 31.3 183.0 131.0 1.5% 5.6% JD Group 4370 JDG SJ OW 1034 37.5 7.3 116.5 597.1 0.1 18.8% Naspers 28200 NPN SJ OW 15002 23.9 19.2 1178.8 1469.1 NM 12.0% Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of cob 23 November 2009.

65



South Africa Scorecard Key Financial Data Summary Local Interest Rates and Inflation Trend

EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆2007 21.5 14.0 18.3 3.6 3 Month 7.0 0.0 na2008E 8.3 12.9 17.6 3.5 Long Bond 9.0 1.6 na2009E -13.4 14.9 14.9 2.8 Inflation 6.1 -0.6 0.02010E 28.7 11.6 17.4 3.4 Real 3 Month 0.9 0.6 na

Economic Forecasts Risk AppetiteGDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆2008 3.1 0.0 -1.8 0.0 BAA 2.9 0.0 na2009E -2.0 0.0 -2.6 0.0 EMBI 3.2 -0.7 0.82010E 3.0 0.5 -2.8 0.7 Country 1.7 -0.7 na



EM Europe* -157 171 102South Africa 298 789 710

MSCI South Africa Absolute and Relative to EMF Index MSCI Fair value Range

EPS Integer over TimeCurrency Outlook (ZAR/USD)


65

75

85

95

105

115

125

135


2009 2010

-50

0

50

100

150200

250

300

350

400



5.0

7.0

9.0

11.0

13.0

15.0




Consensus

J.P. Morgan

(518)

(546)

(560)

(520)

(546)

(508)

(725)

(765)

(1098)

(706)

(1110)

(727)

300 600 900 1200 1500 1800

FWD PER

PER

PBR

DY

BY/EY

BY/DY

66



South Korea Won to be a big swing factor in 2010

Key country dynamics Three key dynamics for the Korea market in 2010 are expected to be: (1) Won’s movement; (2) an interest rate hike; and (3) regional election. First, the market’s concern that Korean exporters would be sizably hampered by a strong Won in 2010 seems overdone, in our view. Market consensus for Won/US$ by end-10 has fallen near to 1,000 vs. J.P. Morgan’s forecast of 1,150. We remain bullish on Korean auto makers in particular, expecting strong sales volume growth would outweigh the adverse impact of FX move. Second, monetary policy normalization is expected to begin in 1Q10, which is potential negative for the Korean consumer segment due to the household sector’s rising debt service burden. However, the funding cost of corporates with lower credit rating is not likely to rise significantly, as there is further room for credit spread contraction with credit spread of BBB-rated corporates still remaining 400bp higher than the pre-crisis level. Last, upcoming regional election in June 2010 is going to be the last nation-wide election before the presidential election in 2012, meaning the current ruling party is likely to put every effort to win the election. Potentially, the current government might extend some pro-growth policies and try to keep housing prices stable. If property market prices move up to a worrisome level, however, it is a risk for a more aggressive monetary tightening. Implications of a global recovery Korean economic indicators have surprised the market on the upside until recently with further acceleration of 3Q09 real GDP growth. However, we expect Korea’s economic growth to track relatively moderate and stable contour in 2010. The market focus now seems to be moving to liquidity flows. Korean equity funds invested in domestic market have been showing large outflows in 2009 YTD despite more than the 40% rally. We expect fund inflows into equity funds going into 2010, but the magnitude of fund inflows to equity funds is likely to be the key to how high KOSPI can reach from the current level. How much have valuations already discounted a recovery J.P. Morgan considers the current market has largely reflected the economic recovery story and prices in some moderation down the road, expecting relatively moderate upside of KOSPI. Our KOSPI target is 1,850 by the end of 2010, based on our price target for companies under our coverage universe and a forward P/E multiple of 11.8x. Recommendations We remain bullish on export names and the financial sector for 2010, keeping Hyundai Motors and Shinhan Financial Group on our top picks list, while we prefer low beta stocks in the consumer universe such as Amorepacific.

Scott SeoAC (822) 758-5759 [email protected]

J.P. Morgan Securities (Far East) Ltd, Seoul Branch

Flagship reports • J.P. Morgan's Heart & Seoul - KRW fears likely to

be short-lived (Feb/25/2009) • J.P. Morgan's Heart & Seoul - 2Q09 earnings

preview (July/10/2009) • J.P. Morgan's Heart & Seoul - 3Q09 earnings

preview (Oct/13/2009) MSCI South Korea: Absolute and relative to MSCI Asia Pacific ex-Japan

0

100

200

300

400

500

97 99 01 03 05 07 09

Absolute Relativ e Source: MSCI, Datastream.

MSCI performance table 2wk 3mth YTDMSCI South Korea 3.7 4.5 50.8Weightings in Region 12.8% MSCI Total Mkt Cap. (US$B) 398.3 2009 P/E Ratio (x) 14.3 2010 P/E Ratio (x) 11.7 2011 P/E Ratio (x) 9.7 2010 Yield (%) 1.2 2010 ROE (%) 12.0 Source: Datastream, IBES, MSCI, JPMorgan estimates. Prices and valuations are as of November 20, 2009

Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%) Top picks Hyundai Motor 104,000 005380 KS OW 19,419 9.6 9.1 10,798 11,486 0.96 14.2 Samsung SDI 147,000 006400 KS OW 5,658 22.2 16.8 6,627 8,758 1.30 7.3 Shinhan FG 45,750 055550 KS OW 18,410 14.7 10.5 3,122 4,365 1.97 11.8 Amorepacific 845,000 090430 KS OW 4,123 24.2 22.6 34,940 37,312 0.83 17.2 SK Energy 111,500 096770 KS OW 8,700 9.7 7.9 11,357 13,955 2.08 15.0 Stock to avoid S-Oil Corp 57,900 010950 KS N 5,526 10.6 9.9 5,457 5,841 3.11 16.0 Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009. Amorepacific upgraded to OW on November 7.

67



Korea Scorecard Key Financial Data Summary Local Interest Rates and Inflation Trend

EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆2007 9.8 13.1 13.5 1.6 3 Month 2.9 0.1 -0.52008E -36.7 20.7 8.0 1.1 Long Bond 5.4 0.0 -0.42009E 44.7 14.3 10.7 1.1 Inflation 2.0 0.4 0.52010E 22.0 11.7 12.0 1.2 Real 3 Month 1.0 -0.3 -1.1

Economic Forecasts Risk AppetiteGDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆2008 2.2 -0.3 -2.7 0.0 BAA 2.9 0.0 na2009E 0.2 1.0 -0.4 1.8 EMBI 3.2 -0.7 0.82010E 4.7 0.7 -1.1 1.0 Country na na na



Asia ex Japan* 1,245 1,566 1,452Korea 1,404 2,066 1,947

MSCI Korea Absolute and Relative to EMF Index MSCI Fair value Range

EPS Integer over TimeCurrency Outlook (KRW/USD)


50

60

70

80

90

100

110

120


2009 2010

050

100

150

200250300

350

400450



850

950

1,050

1,150

1,250

1,350

1,450

1,550

1,650



J.P. Morgan forecast:end Dec 09: 1130end Mar 10: 1130end Jun 10: 1110 Consensus

J.P. Morgan

(184)

(319)

(282)

(221)

(143)

(176)

(379)

(495)

(684)

(670)

(370)

0 300 600 900 1200

FWD PER

PER

PBR

DY

BY/EY

BY/DY

68



Taiwan Year of sustainable growth

Key country dynamics Potential positive catalysts for Taiwan include: (1) broader-based growth in global economy; (2) continued earnings upgrades; (3) recovered capex and capex cycle; (4) cross-strait development and achievement; and (5) consensus underweight on Taiwan by EM PMs. Meanwhile, potential negative risks include: (1) the end of monetary easing; (2) strong currency; and (3) delay in free trade agreement negotiations. In 2009/10, Taiwan experienced a structural change driven by the pro-growth China policy, fiscal stimulus and tax reform.

Implications of a global recovery Taiwan as an export-driven economy is highly leveraged to the global economic cycle. We believe the strength of the recovery in 2010 will be rather strong considering the degree of contraction in 2009 is the sharpest in history. Historical experience suggests that there is potential 10-15% upside to our recently upgraded 2010 GDP growth estimate for Taiwan of 5.8%. During the recession, Taiwan’s CBC has cut the discount rate seven times to a historical low of 1.25%. Unprecedented monetary easing leads to a huge increase in liquidity. Together with fiscal stimulus and capital repatriation, liquidity will remain one of the drivers in the equity market next year, in our view.

How much have valuations already discounted a recovery Consensus earnings estimates have been consistently revising up since March this year. MSCI-Taiwan forward P/E is now at around 21x, versus the historical range of 12x-40x post tech bubble. While today’s valuation is around the average of the historical range, we believe earnings upgrades will be a powerful driver for the equity market’s performance and stock re-rating in 2010. We recommend investors focus on sectors or stocks that will deliver above-peer or sector average growth in 2010.

Recommendations Taiwan remains an Overweight market in our regional portfolio. By sector, we are Overweight on tech and financial with funding sources from telecom and consumer. Within tech, we prefer branded PC over ODM, and white-box handset over smartphone. In financial, we prefer brokers and banks than insurance. Our top picks are UMC, Acer, Hon Hai, Fubon and Nan Ya Plastics, while we would avoid Quanta, HTC and Taishin FHC. Our Dec-10 index target is 8800, based on the analysis of the historical trend P/E and 2010 forward earnings.

Nick LaiAC (886-2) 2725-9864 [email protected]

J.P. Morgan Securities (Taiwan) Limited.

Flagship reports • Upgrade Taiwan to OW (03/30/2009) • Another step forward on China policy (04/15/2009) • Upgrade index target to 8,000 (04/28/2009) • Circle of life: from recovery to growth (09/01/2009) • The weight on a strong NT$ (10/12/2009) • Seeking for growth in 2010 (10/23/2009) MSCI Taiwan: Absolute and relative to MSCI Asia Pacific ex-Japan

20

50

80

110

140



MSCI performance table 2wk 3mth YTDMSCI Taiwan 2.5 13.1 60.4Weightings in Region 11.1% MSCI Total Mkt Cap. (US$B) 344.3 2009 P/E Ratio (x) 30.6 2010 P/E Ratio (x) 19.3 2011 P/E Ratio (x) 13.4 2010 Yield (%) 3.3 2010 ROE (%) 10.0 Source: Datastream, IBES, MSCI, JPMorgan estimates. Prices and valuations are as of November 20, 2009

Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%) Top picks UMC 15.5 2303 TT OW 6,184 69.3 15.4 0.22 1.01 0.0 6.0 Acer 77.8 2353 TT OW 6,419 17.5 12.0 4.44 6.48 3.9 17.6 Hon Hai 132.0 2317 TT OW 34,788 16.4 13.0 8.05 10.12 1.9 18.2 Fubon FHC 38.8 2881 TT OW 9,673 14.7 11.6 2.63 3.33 5.2 14.0 Nan Ya Plastics 53.2 1303 TT OW 12,833 32.3 22.1 1.65 2.40 2.9 8.2 Stocks to avoid Quanta 65.5 2382 TT UW 7,497 10.8 10.3 6.05 6.37 4.9 20.6 HTC 340.0 2498 TT UW 8,314 11.0 13.6 31.01 25.06 5.9 27.6 Taishin FHC 12.7 2887 TT UW 2,716 7.6 17.8 1.66 0.71 5.5 6.5 Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.

69



Taiwan Scorecard Key Financial Data Summary Local Interest Rates and Inflation Trend

EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆2007 28.2 10.5 17.3 4.6 3 Month 0.9 0.0 -0.42008E -68.7 33.4 5.6 3.7 Long Bond 1.4 -0.1 0.32009E 9.2 30.6 6.5 3.0 Inflation -1.2 0.5 0.22010E 58.7 19.3 10.0 3.3 Real 3 Month 2.1 -0.5 -0.6

Economic Forecasts Risk AppetiteGDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆2008 0.1 0.0 -4.8 0.0 BAA 2.9 0.0 na2009E -3.8 0.0 -4.4 0.6 EMBI 3.2 -0.7 0.82010E 5.8 0.4 0.0 1.3 Country na na na



Asia ex Japan* 1,245 1,566 1,452Taiwan 1,668 1,059 1,012

MSCI Taiwan Absolute and Relative (vs EMF) Index MSCI Fair value Range

EPS Integer over TimeCurrency Outlook (TWD/USD)


0

20

40

60

80

100

120


2009 2010

-200-150

-100

-50

050

100

150

200250



29

30

31

32

33

34

35

36

37

38



Consensus


J.P. Morgan

(120)

(140)

(225)

(267)

(200)

(427)

(252)

(421)

(311)

(1422)

(1152)

0 500 1000 1500 2000 2500 3000 3500

FWD PER

PER

PBR

DY

BY/EY

BY/DY

70



Thailand Strong outlook with implementation risk

Key country dynamics Key positives are: (1) a multi-year pro-cyclical fiscal stimulus that will augment external demand; (2) sustained high excess liquidity that supports risk assets; and (3) potential for earnings upgrades, particularly in banks/property. Key negatives are: (1) propensity for renewed political turbulence; (2) potential weak implementation on fiscal stimulus; and (3) unpredictable policy/governance environment.

Implications of a global recovery The primary impact of the downturn on Thailand has been operational, rather than on the balance sheet. With exports accounting for 70% of GDP, the impact of the sharp fall in external demand drove what will likely be a -3.1% GDP contraction in 2009. A moderate total external debt of US$65 billion or 25% of GDP allowed balance sheets to remain solvent. However, the impact of lower government revenue and increased stimulus expenditure has raised public debt/GDP to 45% from 37% pre-crisis. Thailand is also very leveraged into an external demand recovery, with strong second-order effects on private consumption likely as employment ramps up. Thailand is also distinguished by a policy initiative to deploy a large (US$43 billion) pro-cyclical fiscal stimulus from 2010-12. The front-end of the stimulus is labor- and rural-intensive and is targeted to deliver a large multiplier effect that should allow Thailand to outperform regional peers in 2010.

How much have valuations already discounted a recovery A modest recovery in 2010 has been discounted by the SET’s 60% rise YTD. However, expectations are low, in our view, and likely to see further upgrades in 2010. We note that although 2010 earnings forecasts fell 32% from the peak to trough, upgrades have been just 5%. SET and MSCI Thai valuations have gone from bargain basement levels in early Mar-09 to above LT averages and back again, with the 12-month forward P/E for MSCI Thai now at 11.5x (post-2000 mean of 10.9x). We anticipate earnings revisions combined with multiple expansion back to the levels of 2003 (12x or +0.5 standard deviation above LT average P/E) could underpin the upside in the SET well above 800 in 2010. Post-previous downturns in 2003 and 2006, P/E ratings peaked at 12x and 15x, respectively.

Sriyan PieterszAC (662) 684-2670 [email protected]

JPMorgan Securities (Thailand) Limited

Flagship reports • Thai banks: Increase in earnings estimates

(October 12, 2009) • Thai Investor Tour (September 23, 2009) • Back to 2003? (August 20, 2009) • Revisiting valuations (June 8, 2009) MSCI Thailand: Absolute and relative to MSCI Asia Pacific ex-Japan

20

50

80

110

140



MSCI performance table 2wk 3mth YTDMSCI Thailand -0.9 4.2 53.0Weightings in Region 1.2% MSCI Total Mkt Cap. (US$B) 37.5 2009 P/E Ratio (x) 12.5 2010 P/E Ratio (x) 11.3 2011 P/E Ratio (x) 9.4 2010 Yield (%) 3.8 2010 ROE (%) 14.4 Source: Datastream, IBES, MSCI, JPMorgan estimates. Prices and valuations are as of November 20, 2009

Top picks and stocks to avoid Mkt cap P/E (x) EPS (Bt) Div. yield ROE Price (Bt) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%) Top picks Siam Commercial Bank 78.75 SCB.BK OW 8,002 12.6 10.7 6.3 7.4 2.8 17.0 Land & Houses (F) 6.30 LHf.BK OW 1,892 17.7 17.2 0.4 0.4 5.8 14.1 C P All 19.10 CPALL.BK OW 2,571 20.9 17.4 0.9 1.1 4.3 31.9 PTT 234.00 PTT.BK OW 19,852 11.3 9.2 20.7 25.5 3.6 16.0 Thai Oil 40.75 TOP.BK OW 2,490 6.1 5.8 6.7 7.1 7.4 19.8 Stocks to avoid TMB Bank 1.12 TMB.BK N 1,394 23.1 14.7 0.0 0.1 0.0 6.8 Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.

71



Thailand Scorecard Key Financial Data Summary Local Interest Rates and Inflation Trend

EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆2007 -37.3 25.1 7.4 4.3 3 Month 1.4 0.0 -0.12008E 56.6 16.0 11.6 3.6 Long Bond 4.4 0.8 -0.42009E 28.7 12.5 14.3 3.3 Inflation 0.5 1.5 0.92010E 10.1 11.3 14.4 3.8 Real 3 Month 0.9 -1.5 -1.0

Economic Forecasts Risk AppetiteGDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆2008 2.6 -0.8 -2.3 0.0 BAA 2.9 0.0 na2009E -3.1 0.0 -3.7 0.7 EMBI 3.2 -0.7 0.82010E 6.1 0.0 0.3 3.1 Country 0.5 0.0 na



Asia ex Japan* 1,245 1,566 1,452Thailand -254 129 90


MSCI Thailand Absolute and Relative to EMF Index MSCI Fair value Range

Currency Outlook (THB/USD)


60

70

80

90

100

110

120


2009 2010

0

50

100

150

200

250

300

350

400



27

29

31

33

35

37

39

41

43




Consensus

J.P. Morgan

(115)

(231)

(218)

(184)

(127)

(127)

(381)

(466)

(914)

(379)

(840)

(500)

0 300 600 900 1200 1500

FWD PER

PER

PBR

DY

BY/EY

BY/DY

72



Turkey Inflection point in 2010

Key country dynamics J.P. Morgan forecast a GDP recovery in 2010 to 5% versus the 5.3% contraction in 2009. The conditions and timing of the IMF agreement outlook will influence the economic outlook. We expect the IMF three-year stand by program with total funding of US$ 45 billion to be signed in 2010. The program will ease Turkey’s reliance on external financing and reduce the crowding out of the private sector. The government borrowing program will dominate the financial markets in 1Q10. Banks should benefit from higher credit growth in 2H10. The recession has created a substantial output gap, limiting the risk of inflation.

Implications of a global recovery Turkey’s current account deficit was less than forecast in 2009 due to modest import growth combined with resilient exports, notably ex EU. Turkish exporters will benefit from a recovery in European and middle-east demand and an increase in tourism as discretionary spending recovers. A $1/bbl rise in oil prices (assuming a similar rise in other energy prices) widens Turkey’s CAD about $500 million. For the 2010 outlook, our economist assumes a 13% increase in energy prices over the 2009 average.

How much have valuations already discounted a recovery Turkey’s valuations are undemanding; forward PE of 9 versus 13 for MSCI EM. The index has marginally underperformed MSCI EM year to date. Since mid-March 2009, the local currency index is in line with MSCI EM while it has outperformed by 30% in US$ terms. Turkish financials are flat relative to EM financials YTD and have marginally outperformed by 13% since mid-March. Turkey valuations discount a recovery in line with the EM benchmark

Recommendations We are neutral Turkey recognizing the importance of the agreement with the IMF next year. We forecast a moderation in financials EPS growth from 30-50% growth in 2009 to 10-20% in 2010. We forecast 2011 EPS growth to accelerate towards 20-30%; which in our view will get gradually priced in 2H10. Current valuations (single digit PE 10E; P/NAV average of about 1.5) are not pricing in medium-term growth prospects and earnings acceleration in 2H10 and 2011E. Media companies should benefit from a recovery in business discretionary spending and auto companies focused on exports should be leveraged to the Euro zone recovery. The key medium call on Turkey is whether it has moved into a period of sustained single digit inflation and interest rates. This should help Turkish trend growth accelerate.

Adrian MowatAC (852) 2800-8599 [email protected]


MSCI Turkey: Absolute and relative to MSCI EMEA

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MSCI performance table 2wk 3mth YTDMSCI Turkey -4.5 -5.6 58.9Weightings in Region 1.3% MSCI Total Mkt Cap. (US$B) 40.8 2009 P/E Ratio (x) 9.7 2010 P/E Ratio (x) 8.8 2011 P/E Ratio (x) 7.4 2010 Yield (%) 3.5 2010 ROE (%) 17.3 Source: Datastream, IBES, MSCI. Prices and valuations are as of November 20, 2009

Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%) Top picks Asya 3.1 ASYAB TI OW 1845.5 10 6.8 0.3 0.5 4.0% 22.1% Vakifbank 3.2 VAKBN TI OW 5428 7.5 6.5 0.4 0.5 5.5% 17.8% Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 20 November 2009.

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Turkey Scorecard Key Financial Data Summary Local Interest Rates and Inflation Trend

EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆2007 56.9 9.2 18.5 4.7 3 Month 7.1 -1.3 na2008E -11.2 10.3 16.7 3.9 Long Bond 8.2 -1.7 -1.72009E 6.4 9.7 17.7 2.8 Inflation 5.1 -0.2 -0.12010E 10.8 8.8 17.3 3.5 Real 3 Month 2.0 -1.1 na

Economic Forecasts Risk AppetiteGDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆2008 0.9 -0.8 -4.0 0.0 BAA 2.9 0.0 na2009E -5.3 -0.6 -5.9 0.5 EMBI 3.2 -0.7 0.82010E 5.0 2.0 -0.8 1.5 Country 2.5 -0.6 na



EM Europe* -157 171 102Turkey 21 -1 -33


MSCI Turkey Absolute and Relative to EMF Index MSCI Fair value Range

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74



MENA Geared play into a global economic recovery

Key country dynamics The economic backdrop for the MENA region is relatively resilient. Benefiting from several years of high budget surpluses and the ~70% recovery in the oil price since its lows in Feb-09, we expect the Gulf countries to continue their growth path, mainly driven by sizeable infrastructure projects (e.g. KSA, Qatar, UAE) budgeted at an estimated oil price of around $40/bbl (vs JPME $69). Historical market valuations and foreign ownership remain relatively low compared with other EMs. We believe the reaction of the global equity markets to the recent Dubai World restructuring announcement has been overdone and feel going forward there is an increasing need for differentiation between Dubai and the other MENA markets. Dubai accounts for 7% of the market weight of the GCC200 index.

Implications of a global recovery In our view the MENA region is a geared play into a global economic recovery, mainly due to its natural resource wealth (e.g. ~2/3 of world oil reserves and ~45% of world gas reserves) supporting sovereign flows and regional investments. In the U.A.E., we believe the government’s intention is to limit the restructuring to Dubai World (incl. property developer Nakheel) and federal support is likely to be more selective going forward. We see the USD5bn in bonds recently taken up by two Abu Dhabi banks for the DFSF and reaffirming statements from the U.A.E. Central Bank to support liquidity of the U.A.E banking system as a clear sign of federal unity.

How much have valuations already discounted a recovery? With regional issues being addressed and worked out (e.g. restructuring of Dubai World, Saad/Algosaibi debts), we believe the lagging performance of regional equity markets is likely to catch up with the recent strong EM performance. While global risk appetite for equities continues to increase, the GCC200 index is still around 50% below its high in Jan-08, whereas the MSCI EM is only around 25% below its high in Nov-07.

Recommendations We accept that the restructuring of Dubai World could have been better communicated to financial markets, but believe that the reaction of the financial markets to this news creates attractive opportunities for investors in our preferred MENA names with no or little exposure to Dubai: Aldar Properties (Aldar) in the property sector, First Gulf Bank (FGB) in the financial sector and Qatar Telecom (Qtel) in the telecom sector.

Christian KernAC (971-4) 428 1789 [email protected]

JPMorgan Chase Bank, N.A., Dubai Branch

Flagship reports • MENA Telecom Sector - Initiating coverage on

GCC telecoms (Oct 8, 2009) • MENA Property Sector - Initiating coverage on UAE

property (Aug 10, 2009) • MENA Financial Sector - Initiating coverage on

UAE banks (Jul 1, 2009) Figure 1: GCC200 vs EM

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MXEF Index BGCC200 Index Source: Bloomberg

Table 1: Market Weights of BGCC200 Saudi Arabia 52% Qatar 14% Kuwait 12% Abu Dhabi 11% Dubai 7% Oman 2% Bahrain 2%

Source: Bloomberg and J.P. Morgan.

Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%) Top picks Aldar 5.46 ALDAR UH OW 3,835 7.98 6.42 0.68 0.85 0.0% 11.0% FGB 18.75 FGB UH OW 7,025 8.59 7.81 2.18 2.40 1.9% 17.0% Qtel 150.90 Qtel QD OW 6,093 5.75 5.83 20.39 20.42 7.3% 11.1% Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of cob 23 November 2009.

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MENA Equity Research Extended stock coverage into MENA region

Over the past few months, we have built our Dubai-based equity research team and have extended stock coverage into the MENA region. With financials, real estate and telecoms, we cover the three main sectors in the MENA region. This already includes more than a dozen key stocks in our coverage universe which we will extend on an ongoing basis.

Financials – Abu Dhabi banks attractively positioned vs CEEMEA peers We believe Abu Dhabi banks are attractively placed to benefit from balance sheet growth, driven by economic flows arising out of a) the rising price of crude oil supporting the Abu Dhabi's finances and b) Abu Dhabi's continuing infrastructure investments supported by strong capitalization and sovereign backing within the shareholding structure. Notwithstanding the further expected asset quality deterioration, to some extent potentially arising out of the Dubai World restructuring (where NBAD and FGB have limited exposure vs. their balance sheet size) and its secondary impacts, we believe that strong coverage ratios and pre-provisioning profits provide an ample buffer for our OW Abu Dhabi names to suffer a rise in NPLs without making any losses on the bottom line. Rising investor risk appetite in GEMs and attractive valuations of Abu Dhabi banks - trading at a more than 20% NAV discount vs. their CEEMEA peers - is likely in our view to help close the 35%-45% upsides to Dec-10 PTs that we see in our OW Abu Dhabi stocks. Our key recommendation within MENA financials is First Gulf Bank.

Real estate – need for differentiation As the local equity markets gradually absorb the impact of the announced restructuring of Dubai World and the recent rise in Dubai and Abu Dhabi CDS spreads, we see an increasing need for differentiation between Dubai and Abu Dhabi fundamentals. We remain OW on Abu Dhabi property stocks and highlight that while investor risk appetite may reduce in the near to medium term, broad sector dynamics remain unchanged and favourable for Abu Dhabi-based property developers. As Dubai suffers from a housing surplus with vacancy levels as high as 25% in certain areas, Abu Dhabi continues to face a housing shortage unlikely to be met until 2011-2012 due to limited supply in the pipeline. While U.A.E. property prices are down 45-50% from peak levels, we prefer exposure to Abu Dhabi-based developers, as they enjoy stronger underlying fundamentals. Our key recommendation within MENA real estate is Abu Dhabi-focused Aldar Properties. Telecoms – good time to add to GCC telecom positions While local equity markets digest the Dubai World restructuring news, we highlight four reasons why we believe it is a good time to add to GCC telecom positions: 1) strong valuation support; 2) our expectations of good 4Q results; 3) room to catch up for GCC markets; and 4) risk appetite for emerging markets continues to improve. Our top pick within MENA telcos is Qatar Telecom, rated Overweight with more than 50% prospective upside and one of our key stock calls in our JPM CEEMEA telecom universe.

MENA Equity Research: Christian KernAC (Telecoms/Infrastructure) (971-4) 428-1789 [email protected] JPMorgan Chase Bank, N.A., Dubai Branch

Alex Comer (Petrochemicals) (44-20) 7325-1964 [email protected] J.P. Morgan Securities Ltd.

Naresh Bilandani (Financials) (971-4) 428-1763 [email protected] JPMorgan Chase Bank, N.A., Dubai Branch

Muneeza Hasan (Real Estate/Construction) (971-4) 428-1766 [email protected] JPMorgan Chase Bank, N.A., Dubai Branch

Ranjan Sharma (91-22) 6157-3305 [email protected]

J.P. Morgan India Private Limited

For MENA Equity Sales advice, please contact: Stephen Daly (971-4) 428-1715 [email protected] JPMorgan Chase Bank, N.A., Dubai Branch

Sadiq Hussain (971-4) 428-1741 [email protected] JPMorgan Chase Bank, N.A., Dubai Branch

Flagship reports

• MENA Telecom Sector - Initiating coverage on GCC telecoms (Oct 8, 2009)

• SABIC – A geared play on oil and cyclical recovery: Initiate with OW (Sept 3, 2009)

• MENA Property Sector - Initiating coverage on UAE property (Aug 10, 2009)

• MENA Financial Sector - Initiating coverage on UAE banks (Jul 1, 2009)

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Agribusiness, Pulp and Paper Long Logistics, Short Sugar

Key sector dynamics The agribusiness sector is more about supply than demand. Hence, the global recovery is less of a factor than the outlook for supply, with some exceptions. The three exceptions within our coverage are: (1) ethanol demand; (2) cotton demand; and (3) freight prices. The pulp and paper sector is more leveraged to rising economic activity than the agribusiness sector.

Implications of a global recovery Because it is linked to higher economic activity and rising oil prices, ethanol demand should benefit next year. However, demand is also tied to government policies and, in Brazil, sales of flexfuel vehicles. In fact, demand has continued to be strong throughout the downturn in Brazil due to incentives for car purchases. Hence it is hard to see a significant acceleration of the trend next year. Cotton demand, on the other hand, is tied to global economic recovery, and we are starting to see signs of an improvement, which would benefit producers such as SLC Agricola (SLCE3/N). However, the global cotton stock-to-use ratio is still extremely high at 47%, so we expect it will take some time to work this down to more “bullish” levels. Finally, logistics prices will benefit as industrial activity picks up, tightening the availability of transportation. Pulp and paper sector demand benefits from economic recovery – due both to rising consumer demand and to rising employment (printing and writing papers). While we expect employment to be a laggard, rising consumer demand should benefit demand for consumer packaging, such as boxboard.

How much have valuations already discounted a recovery? We think valuations for the sugar/ethanol sector are the most stretched, with the market valuing peak earnings (on peak sugar prices) as the new normal. Grain markets seem to be factoring in some recovery in supply-demand in both the grains and cotton. On the other hand, we think the pulp/paper and logistics sectors are not giving full value to the recovery.

Recommendations Our top pick in the LatAm agribusiness sector is railroad operator ALL (ALLL11/OW). We also like the pulp/paper producer Suzano (SUZB5/BZ). We would highlight sugar/ethanol stocks as ones to avoid, especially Acucar Guarani (ACGU3/UW), which is the most levered and least profitable of the three producers.

Brazil Agribusiness Debbie Bobovnikova, CFAAC (1-212) 622 3489 [email protected]


Flagship reports

• Suzano : Inflection Point in Earnings - Upgrade to OW (11/10/2009)

• SLC Agricola : Lowering Est and Price Target on Lower 09/10 Growth Outlook (10/27/2009)

• LatAm Agribusiness : Sector Guide: Key Discussions at 2nd Annual Conference (10/22/2009)

• SLC Agricola : Disappointing 2Q Results - Adj. Est. and Downgrading to Neutral, Intro 2010 Price Target (08/13/2009)

• ALL: CEO Call Highlights (4/19/2009) • LatAm Agribusiness: Sugar Logistics

Agreement - LT Positive for ALL (3/10/2009)

MSCI EM Agribusiness: Absolute and relative to MSCI EM

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Top picks and stocks to avoid Mkt cap P/E (x) EPS (Ps) Div. yield ROE Price Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%) Top picks ALL 16.45 ALLL11 OW 6,185 24.1 18.1 0.74 0.87 1.7% 17.0% Suzano 17.90 SUZB5 OW 3,059 6.2 14.8 2.79 1.18 0.7% 7.9% Stocks to avoid Guarani 4.94 ACGU3 UW 811 NM 45.2 -0.29 0.11 0 2.9% Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 25 November 2009.

79



Autos & Industrials Focus on sustainable growth names

Key sector dynamics Looking into 2010, we believe the regional auto sector should be supported by key positives including: (1) continued demand recovery, as driven by rising household disposable income, low penetration, and a relatively loose credit environment. Among others, China is riding the third auto boom on the breakout of car demand in tier-three cities. In India, the acceleration in economic growth could be conducive for sustained auto demand recovery entering 2010; and (2) accommodative policies. We believe the chance for China to renew the preferential tax cut policies on expiration at the end of the year is at around 70% as the government wants to ensure policy continuity for promoting domestic consumption. In India, while some of the stimulus measures (such as excise duty cuts) may be partially rolled back next year, the overall policy environment remains favorable; and (3) relatively low cost of raw materials. On the other hand, a possible sharp rebound in oil prices and potential monetary tightening could still weigh on the sector: a broad-based tightening in China is expected to kick in as of 2Q10, while India’s central bank has signaled that it will end its stance of monetary easing in early 2010. Implications of a global recovery The synchronized global economic recovery and resultant rebound in auto demand recovery in developed markets could benefit most export-oriented auto players such as Korean names. For China and India, whose auto markets are generally domestic consumption-driven, a solid recovery in exports could help improve their labor markets, their household disposable income growth and their car consumption. Meanwhile, we expect more Chinese auto companies may seek mergers and acquisitions in overseas markets in 2010 on the back of the improved economic outlook in developed markets. How much have valuations already discounted a recovery Regional auto producers are generally trading at around mid-cycle valuations, with leading auto names trading at above mid-cycle valuations. For instance, DongFeng Motor is now trading at 11.2x FY10E P/E, about one-standard deviation above the average historical prospective P/E of 8.3x. Meanwhile, Maruti Suzuki is trading at 15.4x FY10E P/E, versus its trough prospective P/E of 8.0x, and historical average prospective P/E of 14.0x. Recommendations We prefer domestic consumption-driven auto names such as China autos and India autos due to the low penetration rates in these markets to exports-driven auto names such as Korean autos. Our top picks within the region include Maruti Suzuki, Astra International, Hyundai Motor and Yulon Motor. Our stocks to avoid list includes Weichai Power.

Frank LiAC (852)-2800-8511 [email protected]


Flagship reports • DongFeng Motor Co., Ltd.–Pole position (Jan

16, 2009) • China autos–Staging an earlier-than-

expected recovery in FY09 (Mar 30, 2009) • AutoWIN & Auto WINdata–Regional auto

sector views, sales trends, forecasts etc (Monthly)

• Brilliance China–A phoenix is China’s auto sector(Oct 30, 2009)

• India Auto Manufacture: Stay invested, More steam ahead (Aug 6, 2009)

• Hyundai Mobis: Small step to holding co., stronger recurring profit profile, battery venture in the works. Upgrade to OW (Aug 30, 2009)

MSCI Autos and MSCI Autos relative to MSCI Emerging Markets Autos

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Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%) Top picks Hyundai Motor Company 94600 005380 KS OW 17762 8.8 8.2 10798 11486 1.6 10.1 Astra International 32000 ASII IJ OW 13587 15.3 12.6 2097 2541 3.2 24.9 DongFeng Motor Co., Ltd. 11.0 489 HK OW 12207 15.0 13.2 0.7 0.8 1.3 23.6 Maruti Suzuki India Ltd 1567 MSIL IN OW 9716 37.2 19.9 42.2 78.8 0.4 21.6 Yulon Motor Co., Ltd. 39.0 2201 TT OW 1895 41.5 56.6 0.9 0.7 0.5 1.8 Stock to avoid Weichai Power 60.3 2338 HK N 6941 9.9 8.6 6.1 7.0 0.8 45.2 Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009. *Indian companies have March year-end.

80



Consumer Selective stock picking

Key sector dynamics Discretionary consumption trends in Asia will continue to be influenced by wage growth and ‘wealth creation’ from the property market and local stock markets. The return of modest inflation in food prices augurs well for staples. An end to aggressive discounting to clear inventories is near, which should aid margin recovery. In LATAM, declining interest spreads, easing credit supply, increasing consumer confidence, higher disposable income, increase in employment, and declining food inflation have allowed for a better share of wallet for discretionary items. However, retail sales growth in Mexico still remains under pressure. In 2010 we believe earnings growth for Russian consumer names should be driven by recovery in consumption, business expansion and M&A activity, as well as a stronger ruble. Implications of a global recovery Export driven economies such as China and Korea should benefit the most from global recovery. Better economic fundamentals, stability in wages, employment and improving confidence should propel consumer spending in 2010. We expect consolidation to continue for LATAM food and beverages and Russian retail. However, all is not well for SA and Mexico. There is a risk that household credit growth could remain muted for long in SA, depressing household consumption. Mexico, which relies heavily on the US through exports and workers' remittances, will take a while before it revives. How much have valuations already discounted a recovery We are positive on dominant staples in Asia and expect them to benefit from benign inflation. Expectations are quite low for Chinese discretionary names. In LATAM, though current prices have started to reflect the strong recovery in retail sales, they are still 20-35% below peak. In SA, furniture counters still have scope to rerate. Our sector analysts in Russia are of the view that expected recovery in consumer purchasing power is partially priced in. Recommendations We like United Spirits in Asia as a play on the fastest growing spirits market globally. Our top picks in CEEMEA are JD Group and Magnit in CEEMEA, and FEMSA and LAME in LATAM.

Vineet Sharma, CFAAC (852) 2800-8523 [email protected] J.P. Morgan Securities (Asia Pacific) Limited

Andrea TeixeiraAC

(1-212) 622-6735 [email protected]

Alan AlanisAC

(1-212) 622-3697 [email protected]. Morgan Securities Inc.

Sean HolmesAC

(27-11) 507-0373 [email protected] J.P. Morgan Equities Ltd.

Elena JouronovaAC +7 495 967 3888 [email protected] J.P. Morgan Bank International LLC

Flagship reports • Identifying potential short-term and long

term winners (10/18/09) • China Discretionary: Time to take profit or

ride the momentum? (06/09/09) • SA Retail: In pursuit of value • Russian Retail: Growth outlook improving

on faster expansion and stronger FX MSCI EM Consumer: Absolute and relative to MSCI EM

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Source: MSCI, Datastream. Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)Top picks JD Group 4340 JDG SJ OW 937 37.3 7.3 116.5 597.1 0.0 18.8Femsa 45.2 FMX US OW 16174 24.7 20.3 1.8 2.2 1.1 10.3China Mengniu Dairy Co. 23.1 2319 HK OW 5165 28.2 24.8 0.8 0.9 0.0 17.5United Spirits Limited 1228 UNSP IN OW 3309 44.0 34.8 27.9 35.3 0.3 12.6LAME 13.9 LAME4 BZ OW 5519 58.8 34.9 0.2 0.4 1.1 62.9Magnit OAO 59.5 MGNT RU OW 4953 91.5 58.9 0.7 1.0 0.0 29.3Stocks to avoid Massmart 8519.0 MSM SJ UW 2270 14.4 14.7 592 581 4.4 35.8Soriana 31.8 SORIANAB MM UW 4376 20.6 18.5 1.5 1.7 0.5 9.3Hindustan Unilever Ltd. 284.3 HUVR IN UW 13305 25.3 27.3 11.3 10.4 2.6 99.5Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

81



Energy Oil price recovery done

Key sector dynamics Demand data does not support current oil prices, and inventories are high and OPEC’s compliance is fading. Weak demand and non-OPEC production would put downward pressure on oil. We expect gasoline demand to stay weak, due to weak US demand. Distillate demand is expected to return to growth as a dominating EM market product. Since 2009, Russian oils have had to pay lower royalties and have enjoyed extensive tax breaks on Greenfield developments. We might see further tax initiatives to encourage output growth in Russia. In LATAM, active rigs have increased 2% since August ’07 while they have declined 44% in the US and 9% in the Middle East, the largest producing region globally

Implications of a global recovery Oil prices are at the high-end of the trading range (US$60- 80/bbl). High oil prices have pushed oil companies’ earnings up. In Russia, we estimate output might be up be over 1% in 2009E and could rise by 2.6% y/y in 2010E (to 10.1MMbppd), driven by the launch of East Siberian greenfields projects. In Asia, Petchem had a strong recovery but ME capacity is still missing. Next year this capacity should have a major negative impact on margins, despite a potential pick-up in demand.

How much have valuations already discounted a recovery Our sector analysts in Asia are positive on integrated and refining relative to upstream/ petchem. Integrated/less oil leverage stocks are currently cheapest with rerating or positive news being potential drivers. Russian integrated oils are also trading at 12%-19% discounts to historical average PERs, and have not yet discounted a recovery.

Recommendations We like Rosneft and Gazprom in CEEMEA, and Sinopec and SK Energy in Asia. In LATAM, we prefer stocks that can deliver production growth on top of revenue enhancement driven by the value of crude. Our top picks reflect our optimism for Brazilian offshore: OGX and Petrobras. Our stock to avoid is Ecopetrol.

Brynjar Bustnes AC (852) 2800-8578 [email protected]

J.P.Morgan Securities (Asia Pacific) Limited

Nadia KazakovaAC

(7-495) 937 7329 [email protected]

J.P Morgan Securities Ltd.

Sergio TorresAC (212) 622-3378 [email protected]

J.P. Morgan Securities

Flagship reports

• One Minute on Oil (ad hoc) • Crude Reality (weekly) • Russian Gas: Gazprom revisited • Russia Integrated Oils: Oil shares hit year-

endPTs. • Petrobras: More Oil Than Meets the Eye

MSCI EM Energy: Absolute and relative to MSCI EM

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Source: MSCI, Datastream. Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)Top picks Gazprom 5.6 GAZP RU OW 133282 6.3 5.2 0.9 1.1 0.0 12.3Rosneft 7.9 ROSN LI OW 83620 11.8 7.2 0.7 1.1 1.4 19.5SK Energy Co Ltd 108000 096770 KS OW 8512 9.5 7.7 11357 13955 2.1 14.7Sinopec Corp - H 6.4 386 HK OW 136013 8.6 8.3 0.7 0.8 3.0 16.6Petrobras 38.5 PETR4 BZ OW 206917 12.9 11.7 3.0 3.3 1.7 17.4OGX 1430 OGXP3 BZ OW 26309 nm nm 16.4 5.7 0.0 3.8Stocks to avoid Lukoil 55.6 LKOH RU N 47291 6.6 6.4 8 9 2.5 12.5Ecopetrol 2600.0 ECOPETL CB UW 53189 16.8 13.2 154 197 4.6 27.1PetroChina 9.4 857 HK UW 339259 15.4 13.8 0.6 0.7 3.2 14.0Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

82



Financials Credit trends improving

Key sector dynamics We expect credit demand to recover cyclically in EM in sync with economic growth and backed by a continuation of monetary policy. Nominal interest rate increases are expected to drive modest NIM expansion. Credit trends are improving in the region and this bodes well for the re-emergence of loan growth. Valuations are pretty cheap in CEEMEA and we believe P/NAV above 3 could be the peak of the market by 2011. We fear non conventional intervention in credit markets in Asia. Implications of a global recovery Bank earnings lag economic recoveries, and to that extent, 2010 promises to be a seriously positive earnings recovery year in EM. We might however see regulatory insistence on reducing leverage in the business over the next few years. In LATAM, economic conditions differ throughout the region. We expect an increase in loan origination and a fall in early stage delinquencies in Brazil. The move from deflation to inflation would improve the NIMs in Chilean banks. In CEEMEA, Turkish financials should do well in the medium to long term. SA banks are likely to be a 2H story in our view and could underperform in 1H vs some of their peers in CEE, Turkey, Russia and GCC because of a delayed earnings rebound, defensive balance sheets and investor preference for higher beta banking stocks. How much have valuations already discounted a recovery Despite a substantial 121% rally in MSCI Asia financials from Mar-09 lows, we see an c20% upside to consensus estimates in Asia. Similarly in LATAM, as profits improve we see meaningful multiple expansion still likely at Bradesco, Santander Brasil and Bancolombia. In CEEMEA, valuations are still cheap and have not completely discounted a recovery. Recommendations Our top picks in Asia include BOC (growth opportunity), Fubon (a play on structural turnaround in Taiwan). In LATAM, we like Santander Brasil. Our top picks from CEEMEA are Vakifbank (cheap valuation) and Sberbank.

Sunil GargAC (852) 2800-8518 [email protected]


Paul FormankoAC

(+44) 207-325-6028 [email protected]

J.P. Morgan Securities Ltd.

Saul MartinezAC (1-212) 622-3602 [email protected]


Flagship reports

• From Fear to Growth (05-09) • The Empire Strikes Back (10 -09) • CEEMEA Financials: Beyond 2009 • MENA Financials: Initiating coverage on

UAE banks • Santander Brasil: Closing the GAAP

MSCI EM Financials: Absolute and relative to MSCI EM

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Source: MSCI, Datastream. Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)Top picks Vakifbank 3.1 VAKBN TI OW 5059 6.8 5.8 0.5 0.5 6.1 18.9Bank of China - H 4.1 3988 HK OW 145716 12.7 9.0 0.3 0.5 5.0 21.3Shinhan Financial Group 44150 055550 KS OW 17845 16.2 10.6 2717 4165 2.0 11.8Fubon Financial Holdings 36.0 2881 TT OW 9034 13.6 10.8 2.6 3.3 5.6 14.0Santander Brazil 22.0 SANB11 BZ OW 47594 16.5 12.9 1.3 1.7 3.3 12.0Sberbank 2.2 SBER RU OW 48139 111.5 14.9 0.0 0.2 0.9 12.6Stocks to avoid Nedbank Group Ltd 11120.0 NED SJ UW 7334 12.3 9.1 901 1216 4.9 13.2Bank Rakyat Indonesia 7650.0 BBRI IJ UW 9896 13.3 11.2 577 684 3.0 28.4Banorte 45.9 GFNORTEO MM N 7083 15.8 13.1 2.9 3.5 0.4 15.2Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

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India IT services Improving fundamentals but mostly reflected in share prices; we see limited upside

Key sector dynamics The IT services and software sector has seen a good rebound in terms of revenues, earnings and share prices along with greater confidence from CIOs to spend on technology. While the sector saw better resilience than global IT even in 2008 due to the anti-cyclical nature of the sector (cost pressure in downturns force CIOs to move work offshore due to significant cost savings), improvement in outlook for the banking sector has been a key driver in the past three months. We note that the banking sector is the largest contributor of revenues for Indian IT companies. Moving forward, developed market economic recovery (primarily the US and the UK) and general CIO sentiment remain key for the sustenance of growth in 2010. The other key variable is currency—a strengthening rupee will be negative for the sector.

Implications of a global recovery We believe that the global downturn has led to further polarization of business towards large players. Further, Satyam’s debacle and expanding service portfolio of large players are accelerating the move towards large players. We believe that large players would be the first ones to benefit from the recovery as technology spending improves. However, a sustained recovery should eventually benefit mid-sized players as well. Further, we do think that hardware and semiconductor has a higher leverage to economic recovery and would benefit more than IT services (given that IT services is slightly anti-cyclical).

How much have valuations already discounted a recovery We believe that valuations for the sector are largely discounting a recovery with most analysts already factoring in ~20% growth in 2010E and P/Es at 17-19x. We do not see a significant P/E re-rating from here with estimate upgrades key for further share price upsides. Hence, we expect stocks to have limited absolute upside (~10-15%), although downsides may be limited as well given continued global recovery.

Recommendations Infosys remains our top pick in the large-cap sector given its top-tier execution and management quality. Among mid-caps, we believe Mindtree has the best management and quality systems. Vanceinfo is our pick from the Chinese IT services sector. Among stocks to avoid, we are negative on HCL Infosystems.

Manoj SinglaAC (91-22) 6157-3587 [email protected]


Flagship reports

• Indian IT Services: (11/05/2009) • Hexaware: Turnaround at mid-cycle (10/09/2009) • Polaris Software: A leveraged play to the recovery

in financial services IT spending (10/09/2009) • Infotech Enterprises: Engineered for growth

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Top picks and stocks to avoid Mkt cap P/E (x) EPS Div. yield ROE Price Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%) Top picks MindTree Ltd. 634.5 MTCL IN OW 537 80.8 12.6 7.9 50.4 0.8 33.8 Infosys Technologies 2327.9 INFO IN OW 28638 22.8 21.8 102 107 1.3 29.6 VanceInfo Technologies Inc. 17.6 VIT US OW 782 34.5 26.1 0.5 0.7 0.0 19.2 Stock to avoid HCL Infosystems 146.8 HCLI IN N 687 10.5 10.1 14.0 14.6 4.1 18.7 Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.

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Internet and Media Expect reaccelerating ad spend growth

Key sector dynamics Advertising is going through a deep global recession that has hit previously fast growing emerging markets harder than developed markets, as some of the price increases in recent years have unraveled. Most markets in Central and Eastern Europe are down 25-35% from 2008. While television is holding up better than print and other media (except online), it is also shrinking in excess of 20% in most markets. Many broadcasters report that they believe they have reached the trough, although the recovery has yet to start. Online portals in Asia are likely to see a gradual recovery in earnings in FY10, mainly driven by the increased online ad spending. We expect internet ad spending in China to see significant pick up in 2010, benefited by higher ad rates, and events like World Expo and World Cup. The structural growth of Korean online market on the other hand is capped given Korea’s high penetration of online ads. The online recruitment industry in India is a late cycle-play on the economic recovery.

Implications of a global recovery Recovery in EM advertising markets post crisis and deep recessions usually takes 2-3 years. This would point to stabilization in 2H09/1H10, followed by a fairly rapid recovery. In our view, while the secular concerns that have been in place since long before the crisis are still in place, this is more than offset by the still strong growth potential in ad markets in the region. Chinese domestic spending growth will likely lead to a pick-up in financial services, auto, real estate and general industries ad-spending next year.

How much have valuations already discounted a recovery Most internet stocks have recovered YTD in 2009. 2010 recovery still has not fully reflected in the share prices. Stocks of CEEMEA broadcasters, particularly CTCM and CME, have only partially priced in the recovery.

Recommendations Our top picks in the space are Russian broadcaster CTC Media and internet companies Sohu.com, Info Edge India, Baidu & NCsoft.

Jean-Charles LemardeleyAC (44-20) 7325 5763 [email protected]

J.P. Morgan Securities Ltd

Dick WeiAC

(852) 2800-8535 [email protected]


Manoj SinglaAC (91-22) 6157-3587 [email protected]


Flagship reports

• CEEMEA Telecoms and Media: Key Sector Views and Global Weekly Perspective

• NCsoft: Aion's flight to the US and Europe

MSCI EM Internet and Media: Absolute and relative to MSCI EM

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Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)Top picks Sohu.Com 56.0 SOHU US OW 2154 15.2 13.2 3.7 4.2 0.0 24.5CTC Media 15.0 CTCM US OW 2276 17.8 15.6 0.8 1.0 0.0 19.7Info Edge India 806.4 INFOE IN OW 472 36.9 38.3 21.9 21.1 0.0 16.2Baidu.com 442.2 BIDU US OW 15338 72.1 48.3 6.1 9.2 0.0 36.0NCsoft 145000.0 036570 KS OW 2682 71.5 77.4 2029 1874 0.0 7.6Stocks to avoid The9 Limited 7.6 NCTY US N 214 NM NM -1.7 -2.1 0.0 -18.1Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

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Metals and Mining Emerging Stronger in 2010

Key sector dynamics We are bullish on the real estate sector, driven by robust demand from China and expected above trend growth in the developed economies in 2010. However, what could contain external supply is a strengthening ruble and rand. This could force the exporters to shrink their export flow in exchange for the benefits of domestic supply. This especially holds true for Russia which expects a +16% y/y growth in steel demand (JPM e). In SA, platinum supply is likely to be constrained by ongoing enforced safety-related production stoppages, low rand PGM basket prices, an uncertain outlook for an inadequate electricity and water supply to fund new mining projects, and uncertainty regarding BBBEE/nationalisation issues.

Implications of a global recovery The demand for commodities is highly leveraged to a global recovery, and the commodities sector should emerge much stronger in 2010. The demand situation is improving across the world, driven earlier by restocking demand and later by recovery in real demand, mainly in China. The key risks remain in the form of stabilization of inventories at below-normal levels.

How much have valuations already discounted a recovery The market sees a steady recovery path for the sector in 2010. In SA, we believe the ingredients are coming together for another surge in PGM prices, possibly in 2010/11. On the other hand, valuations seem stretched in LATAM. The stocks in the sector already seem to be discounting healthy growth in volumes along with a robust pricing scenario.

Recommendations We like MMK (strong domestic footprint) in Russia. In SA, the only “shop for platinum” in the world our top pick is highly geared AngloPlat. In LATAM, we continue to prefer stocks that are cheap, at least on a relative basis. Our top picks are Ternium and Group Mexico. We recommend that investors avoid Usiminas (UW), as we maintain our cautious view on Brazilian flat-steel prices.

Steve ShepherdAC

(27-11) 507 0386 [email protected]

Yuriy VlasovAC

(7-495) 967-7033 [email protected] J.P. Morgan Bank International LLC

Rodolfo R. De Angele, CFAAC (55-11) 3048-3888 [email protected]


Flagship reports

• Platinum Foresight: Recovery Ahead • Russian Steel : Time to revisit investment

case • Russian Metals & Mining: Shifting the

goalpost to end of 2010 • Latin Steels: Expectations are just too high MSCI EM Metals and Mining: Absolute and relative to MSCI EM

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Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)Top picks Grupo Mexico 30.5 GMEXICOB MM OW 18135 19.5 13.7 0.1 0.2 3.4 23.2Ternium 33.4 TX US OW 6686 26.9 15.6 1.2 2.1 4.1 8.4MMK 0.7 MAGN RU OW 8269 74.0 18.5 0.01 0.04 1.4 4.9Northam Platinum Ltd 3950.0 NHM SJ OW 1883 21.6 30.2 183 131 1.5 5.6Anglo Platinum 73504.0 AMS SJ OW 23168 69.3 32.5 1060 2260 0.0 14.5Stocks to avoid Usiminas 50.5 USIM5 BZ UW 14367 38.0 14.6 1.3 3.5 2.1 10.9Southern Copper 35.9 PCU US UW 30481 30.4 20.3 1.2 1.8 2.5 31.9Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

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Real estate Away from manufacturers to landowners

Key sector dynamics EM homebuilders rebounded strongly in 2009, primarily on account of low interest rates and abundant liquidity. On the other hand, property prices in the MENA region and Russia fell c. 35-50% from their 2008 peak. We expect property prices to stabilize next year as the macroeconomic landscape improves and demand starts to recover. In LatAm, we prefer the Brazil HBs over the Mexico HBs given a more favorable growth outlook in Brazil.

Implications of a global recovery With improving global dynamics and strengthening oil prices, the UAE and Russian economic fundamentals are stabilizing. The liquidity situation, which was very tight in 1H09, is easing, with banks opening up to mortgage lending. On the back of Dubai World restructuring, we see an increasing need for differentiation between Dubai and Abu Dhabi fundamentals; broad sector dynamics continue to remain favorable for Abu Dhabi based property developers. In Asia, homebuilders would face competition in markets like China and India where strong debt and equity capital markets have restored the balance sheets of second or third-tier homebuilders who may now compete for land and with new launches. In LATAM, Brazil should grow stronger than Mexico; we see upside in both.

How much have valuations already discounted a recovery Real estate prices have limited downside in Abu Dhabi and Russia from current levels with tough industry fundamentals gradually being priced in. Property prices are down c. 45-50% from peaks in the UAE and 35% in Russia. In LatAm, we believe that a recovery is more priced in for Mexico HBs relative to Brazil HBs. Residential home pricing has rebounded in most of Asia, and regulators are acting to stem exceptional price increases as we saw in Korea, Singapore. Asian property stocks are trading at a 17% discount to NAVs, with some mild potential for discount narrowing in 2010.

Recommendations Our top pick from MENA is Abu Dhabi focused Aldar Properties. We favour homebuilder LSR in Russia. Our top picks among the LatAm HBs are PDG and Urbi. In Asia, we like stocks with greater commercial real estate exposure. We retain our UW on China HBs, and are OW on HK REITs.

Christopher GeeAC (65) 6882-2345 [email protected] J.P. Morgan Securities Singapore Private Limited

Elena JouronovaAC

+7 495 967 3888 [email protected] JPMorgan Bank International LLC

Muneeza HasanAC

+971 4 428-1766 [email protected] JPMorgan Chase Bank N.A. Dubai Branch

Adrian E HuertaAC (52 81) 8152-8720 [email protected] J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero

Flagship reports

• MENA Property Sector-Initiating coverage on UAE property

• Russian Homebuilders • The Bricks & Mortar Report • Asian REITs Report: August 09 • BZ-HB – Benefiting from the Crisis MSCI EM Real Estate: Absolute and relative to MSCI EM

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Source: MSCI, Datastream. Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)Top picks Aldar Properties 5.5 ALDAR UH OW 3867 8.1 6.5 0.7 0.9 0.0 11.0Urbi 25.3 URBI* MM OW 1889 12.8 9.7 2.0 2.6 0.0 13.8PDG Realty 17.4 PDGR3 BZ OW 3647 21.2 14.7 0.8 1.2 1.2 19.7LSR 6.5 LSRG LI OW 3044 50.0 17.6 0.1 0.4 0.0 11.8Ayala Land 11.8 ALI PM OW 3231 40.1 39.4 0.3 0.3 0.5 7.1Stocks to avoid Homex 71.0 HOMEX* MM N 1824 9.7 8.2 7.3 8.7 0.0 19.2Beijing Capital Land 4.0 2868 HK N 1063 19.2 12.0 0.2 0.3 2.8 14.1New World China Land 2.9 917 HK UW 2146 10.1 20.2 0.3 0.1 2.4 2.1Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

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Semiconductor The margin trends between upstream and downstream would be the key factor to watch

Key sector dynamics We went through a sudden and substantial inventory de-stocking to re-stocking in a short period, mainly driven by macro issues. Now, the global market volatility has already been covered and overall situation is back to normal. In 2009, downstream companies (especially assemblers) have enjoyed decent margins due to low component prices and better expected end-demand, while component makers suffered from margin pressure due to falling UT given high fixed costs. We expect the trend to reverse in 2010 since semiconductor companies are likely see robust volume recovery with an end-demand recovery.

Implications of a global recovery We expect key end-demand to show double-digit growth in 2010, with 10.3% increase in PC shipments, 12.1% increase in handset market, and 20% growth in LCD TV. Due to the low base in 2009 and ongoing ASP decline, we expect overall market size to be still below recent peak level. Hence, we forecast the tech space to experience more moderate growth rather than a sharp recovery due to a combination of ASP decline and relatively high base in 2H09.

How much have valuations already discounted a recovery Most tech stocks are trading at mid-cycle valuations, except for some sub-sectors such as TFT-LCD (close to trough value) and LED (close to peak value). Hence, earnings momentum in sub-sectors would be key catalysts to individual stocks since current share prices seem to be priced in a moderate recovery in 2010.

Recommendations We prefer multi-year growth story such as rechargeable battery for EV (SDI), LED TV theme (SEMCO), and solar supply chains (OCI). We continue to believe foundry and back-end companies are likely to benefit given robust volume growth and relatively moderate ASP decline. We recommend a pair trading (Long Korea panels and Short Taiwan panels) in the TFT-LCD space. For DRAMs, we expect DRAM price momentum to start loosening by the year-end, so investors would find a good entry point after a share price correction.

JJ ParkAC (822) 758-5717 [email protected]

J.P.Morgan Securities (Far East) Limited, Seuoul Branch

Flagship reports

• Semiconductor Migration (09/21/2009) • Display Tracker (09/29/2009) • Korea Technology (10/14 /2009) • TSMC: Looking for… (10/08/2009) • IC Assembly & Testing (10/18/2009) MSCI Semiconductors and MSCI Semiconductors relative to MSCI Emerging Markets Semiconductors

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Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%) Top picks Powertech Technology Inc 88.2 6239 TT OW 1826 11.0 8.2 8.0 10.8 5.1 27.6 LG Display 30950 034220 KS OW 9439 11.3 8.6 2738 3612 2.3 12.7 TSMC 60.0 2330 TT OW 48056 17.5 13.8 3.4 4.4 5.0 25.1 UMC 15.6 2303 TT OW 6266 69.8 15.5 0.2 1.0 0.0 6.0 Stock to avoid AU Optronics 32.9 2409 TT UW 8982 NM 43.6 -2.0 0.8 0.0 2.3 Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009. LG Display upgraded to OW on November 12.

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Technology Hardware Content meeting hardware

Key sector dynamics Our three sector-wide themes are: (1) content becomes the key focus: cloud computing, smartphone app store, internet explorer TV—favoring companies involved in application store, input and network interface; (2) hardware commoditization leads up to a secular fall in hardware price point; (3) accelerated outsourcing—LCD TV mega outsourcing trend and Nokia moving away from Japanese vendors; (4) handset winners take it all—iPhone ending exclusivity, Moto moving to whitebox model for EM; and (5) PC pricing power shifting from ODMs to brands.

Implications of a global recovery Downstream pricing power is falling. Consumers are trading down during the downturn—this will likely continue as employment rate is still weak. A much faster-than-expected recovery in global manufacturing is causing supply bottlenecks, e.g., labor shortage is re-surfacing in Chinese coastal areas, while upstream vendors are now running at high utilization rates.

Corporate IT spending will likely pick up from 2010 onward, due to a rebound in corporate profits and also an aging PC installation base. We expect a gradual, rather than a sharp, rebound, due to the high unemployment rate.

How much have valuations already discounted a recovery Most PC stocks are now trading at three-year high in valuations, both on P/E and P/B terms; thus Windows 7 launch is already in the price, and partially due to the corporate upgrade cycle as well. Handset stocks are still trading towards the lower-end of the historical range, though probably justified considering a much slower growth trajectory in the next decade.

Recommendations Pricing power (Acer and AsusTek) and an addressable market expansion (Hon Hai, AAC Acoustics and Mediatek) are the key criteria for our stock picks. We would avoid areas with elevated competition (HTC, Quanta and BYD Electronics). With the uncertainty in the timing of corporate upgrade cycle, we prefer a pair trade strategy to LONG Catcher and AVOID Compal.

Alvin KwockAC (852) 2800-8533 [email protected]

J.P. Morgan Securities (Asia Pacific) Ltd.

Flagship reports

• Acer: More catalysts for margin upside in 2010/11, introduce Jun-10 TP at NT$83 (8/20/2009)

• Mediatek: Smartphone strategy: Low price device, lots of contents (9/15/2009)

• PC forecasts: Unit resilient in 2009, raise 2010/11 forecasts on corporate rebound and rising EM penetration (9/21/2009)

• Notebook ODMs: 2003-04 Déjà vu: Win 7 Optimism, Calpella GM woes (9/25, 2009)

• Hon Hai: Improving revenue outlook for 2010, raise PT to NT$155 (11/5/2009)

• China IT Distribution Primer: A complex web (11/13/2009)

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Source: MSCI, Datastream. Top picks and stocks to avoid Price Code Rating Mkt cap P/E (x) EPS (LC) Div. yield ROE (LC) (US$MM) 09E 10E 09E 10E 10E (%) 10E (%) Top picks MediaTek Inc. 504.0 2454 TT OW 16993 14.5 11.9 34.8 42.4 4.9 37.4 Acer Inc 79.5 2353 TT OW 6604 17.9 12.3 4.4 6.5 3.8 17.6 AAC Acoustic 10.1 2018 HK OW 1607 19.7 12.6 0.5 0.8 3.2 26.4 ASUSTek Computer 63.0 2357 TT OW 8275 22.0 13.1 2.9 4.8 2.5 11.6 Hon Hai Precision 135.0 2317 TT OW 35820 16.8 13.3 8.0 10.1 1.9 18.0 Stocks to avoid Quanta Computer Inc. 63.1 2382 TT UW 7271 10.4 9.9 6.1 6.4 5.1 20.6 HTC Corp 362.5 2498 TT UW 8925 12.9 14.8 28.1 24.6 5.4 24.6 BYD Electronic 5.7 285 HK UW 1646 22.8 16.3 0.2 0.3 0.0 11.4 Pair Trade Long Catcher 80.2 2474 TT OW 1,653 15.4 11.0 5.2 7.3 2.8 12.9 Avoid Compal 40.35 2324 TT UW 5,024 10.6 11.6 3.8 3.5 5.9 14.8 Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.

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Telecom Limited exposure in selective growth markets

Key sector dynamics As a non-cyclical sector, telecom stocks have been less sensitive to an improving macro economic environment in 2009; specific local market competition risks matter more. In CEEMEA, the crisis has had a visible impact on revenue growth, resulting in significantly slower growth in previously fast expanding markets or even contraction in the more mature ones. Within Asia, in 2009, the perceived growth markets of India and China have been burdened with excess capacity and competition.

Implications of a global recovery Although telecom revenues are closely correlated to GDP growth, the swings in telecom revenues above or below GDP tend to be small, indicating that telcos should be good defensive stocks. Select stocks in CEEMEA offer exposure to high growth markets in Africa. Growth in Asia remains sluggish despite the recovery due to competition and overcapacity; we recommend investors own ex-growth Taiwanese and Malay stocks with strong capital management ideas

How much have valuations already discounted a recovery Telecom sector share price underperformance YTD is not surprising. We expect this trend to last into 2010 and therefore we remain Underweight the sector for next year. The MSCI EM telecom index has lagged the broader MSCI EM index by nearly 30% YTD. Valuations in the sector are not rich but not cheap either. We think the sector is close to fairly valued, so a selective exposure is better.

Recommendations Telecoms in emerging markets are largely going ex-growth. We recommend exposure to stocks that are exposed to selective growth markets or are focused on capital management. In CEEMEA, a number of reasonably priced growth stocks are available. Our top picks are MTN, QTel and Turk Telekom. Central European incumbents are unattractive. In Asia, we recommend defensive Far East Tone. Telmex, in Latam, should be avoided as it faces declining core voice trends, aggressive regulation and in 2010 negative impact of new taxes and is richly valued. China suffers overcapacity and China Unicom, is vulnerable to further downside.

Andre BaggioAC (55-11) 3048-3427 [email protected] Banco J.P. Morgan S.A.

Jean-Charles LemardeleyAC +44 (0) 20 7325 5763 [email protected]

J.P. Morgan Securities Ltd

Tim StoreyAC (852) 2800-8563 [email protected]


Flagship reports • CEEMEA Telecoms and Media: Key Sector

Views and Global Weekly Perspective • CEEMEA Telecoms: Revisiting the secular

growth case (February 06, 2009) • LatAm Mobile: Lessons on termination

rates from Europe (Jul-09) • Br Mobile Key call: Quality Matters (Jul-09) • AP Telecom Daily • Asia Telecom Outlook (April/7/2009) • China: 3G too expensive (Oct/6/2009)

MSCI EM Telecom: Absolute and relative to MSCI EM

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Source: MSCI, Datastream. Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)Top picks Turk Telekom 4.4 TTKOM TI OW 9987 9.6 7.2 0.5 0.6 10.0 35.3Qtel 148.7 QTEL QD OW 5989 7.5 7.3 20 20 7.4 19.3MTN Group Limited 11465.0 MTN SJ OW 27920 11.3 9.7 1016 1180 2.5 21.6Far EasTone Tele. 37.0 4904 TT OW 3729 13.3 11.9 2.8 3.1 7.3 14.0Totvs 104.5 TOTS3 BZ OW 1853 20.2 15.8 5.2 6.6 1.1 34.1Stocks to Avoid Magyar Telekom 726.0 MTEL HB UW 4133 9.0 8.9 81 82 10.2 9.6Telmex 17.9 TMX US UW 16224 11.0 12.3 1.6 1.5 4.0 48.6China Unicom 10.3 762 HK UW 31314 26.8 38.8 0.4 0.3 1.2 3.0Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

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Transportation Darkest before dawn

Key sector dynamics We forecast a moderate 7% and 8% rebound in passenger and shipping volumes in 2010, respectively. However, upside surprises are possible as passenger and cargo demand has historically grown at 1.7x and 2.0x real GDP growth, respectively, and J.P. Morgan Economics team forecasts a 7.2% real GDP growth for Asia ex-Japan in 2010. We are more bullish on the airline and land transport sectors’ earnings recovery than shipping as the former does not face structural overcapacity once demand normalizes. Airport operators’ performance is strongly correlated to passenger traffic volumes, and given Mexico’s exposure to tourism, we believe the sector could benefit significantly from a synchronized economic recovery. A smaller supply-demand gap could drive an earlier re-rating. Rebounding fuel prices are less of a concern when demand recovers, as surcharges help to offset this impact. Most transport stocks benefit from a weak US$ given their large US$ capex and debt. This downturn will drive consolidation but cross-border M&As are more difficult due to regulatory restrictions and political sensitivity.

Implications of a global recovery Transport stocks are early cyclicals and have begun to price in part of the recovery. Most are near their historical average valuations. Although the stocks could trade range-bound for the near-term or correct when they announce weak 2H/4Q results, we see any weakness as a good opportunity to accumulate airlines, select shipping and land transport companies as they have historically provided large returns in a cyclical upturn. We expect traffic to improve in 2010 mainly due to better comps.

How much have valuations already discounted a recovery Looking at P/E 12 months forward, companies are trading on average at an 8% premium to the last 24 months’ average. GAP is trading with the highest premium, 19%, vs 6% for Asur and 1% for OMA.

Recommendations Our top picks are Asur, Container Corp of India and China Airlines.

Corrine PngAC (65) 6882-1514 [email protected]

J.P. Morgan Securities Singapore Private Limited

Adrian E HuertaAC

(52 81) 8152-8720 [email protected]

J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero

Flagship reports

• Airline Traffic Monitor (Monthly) • Transportation: 2H09 Outlook and Beyond • MX-AP – Not ready to take off MSCI EM Transportation: Absolute and relative to MSCI EM

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Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)Top picks Asur 63.0 ASURB MM OW 1445 20.1 17.1 3.1 3.7 3.5 17.2Container Corporation of India 1155.0 CCRI IN OW 3221 18.3 16.9 63.1 68.4 1.2 21.5China Airlines 10.0 2610 TT OW 1410 NM 80.0 -2.3 0.1 0.0 1.3Stocks to avoid GAP 35.4 GAPB MM N 1520 19.6 18.7 1.8 1.9 5.0 34.3China Cosco Holdings 9.7 1919 HK N 18608 NM 49.2 -0.3 0.2 0.4 4.2China Southern Airlines 2.5 1055 HK N 5529 33.2 82.4 0.1 0.0 0.0 2.3Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

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Utilities Still a defensive sector

Key sector dynamics The long term growth prospects of utilities in EM remains positive due to low penetration. However, regulated prices and returns, raw material price inflation and competition in some markets make this sector unattractive. In Russia, a considerable portion of the wholesale electricity market has been liberalized. In Asia, Hong Kong/Indian/Thailand power utilities have an automatic cost pass-through mechanism and are preferred as they are insulated to cost price inflation. Latam utilities face a lot of competition and tight government returns.

Implications of a global recovery Utilities’ volumes are linked to the global recovery and the uptick in IP. However, they are likely to underperform the market and unlikely to re-rate significantly as some utilities face margin pressures. We expect 2010 will be more supportive for power equipment manufacturers.

How much have valuations already discounted a recovery Following the significant re-rating since Mar-09, most of the utilities in Asia are trading at close to our price targets, and hence we do believe recovery has been well discounted by the market already. Russian utilities seem attractive if earnings projections are based on continuing market liberalization.

Recommendations In Brazil, we recommend looking at the distribution companies and the Chilean utility ENERSIS (ENERSIS/ENI), due to its leverage to a recovery in electricity demand in the Andean countries. In Russia, RusHydro is an interesting stock, as it is becoming attractive on a relative basis. RusHydro trades at 5.6x 2011E EV/EBITDA vs. 9.7x for international peers. In Asia, we recommend Xinao and PGAS within the gas utilities sector on >20% core EPS CAGR from FY08-11E on low penetration rates. We also like Tata Power on 25% EPS CAGR from FY08-11E driven by continued capacity addition protected by strong coal linkages.

Anderson Frey, CFAAC (1-212) 622 6615 [email protected]


Edmond LeeAC (852) 2800-8575 [email protected]


Sergey ArininAC (7-495) 967-7031 [email protected]


Flagship reports • BRAZILIAN ELECTRIC UTILITIES : 2010

Outlook (11/08/09) • ENERSIS: Long-Term Value, Recovery

Upside, Upgrade to OW (11/09/09) • China Infra-Strategy: From recovery

potential to sustainable GARP (Aug09) • China Power Checkers: Plenty of –VE

drivers but catch up potential intact (Oct09) • RusHydro: Looking beyond the accident: do

not overlook positive triggers, upgrading to OW (09/30/2009)

MSCI EM Utility: Absolute and relative to MSCI EM

30

70

110

150

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Top picks and stocks to avoid Mkt cap P/E (x) EPS (LC) Div. yield ROE Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)Top picks Enersis 182.8 ENERSIS CI OW 12070 8.4 9.1 22 20 4.5 18.6RusHydro 0.04 HYDR RU OW 9898 13.8 14.5 0.003 0.003 0.000 6.0Perusahaan Gas Negara 3575.0 PGAS IJ OW 9089 13.9 14.8 256 242 2.9 41.8Tata Power 1321.0 TPWR IN OW 6723 24.0 18.4 55.0 71.6 1.1 12.8Xinao Gas 18.2 2688 HK OW 2471 23.3 18.8 0.8 1.0 1.3 14.5Stocks to Avoid Sabesp 31.2 SBSP3 BZ UW 4040 5.5 5.8 5.7 5.4 4.7 10.0CPFL Energia 32.4 CPFE3 BZ UW 8851 12.9 11.1 2.5 2.9 8.6 27.2Datang International 3.3 991 HK N 12610 23.8 14.6 0.1 0.2 3.3 7.2Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

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Large-cap ideas: J.P. Morgan’s large-cap top picks

Share Price

Target %

Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%)Name Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010EGazprom 6 10 75.8 GAZP RU OW 133282 6.3 5.2 0.9 1.1 0.0 12.3Vakifbank 3 5 73.1 VAKBN TI OW 5104 6.8 5.8 0.5 0.5 6.1 18.9Aldar Properties 5.5 8 41.6 ALDAR UH OW 3867 8.1 6.5 0.7 0.9 0.0 11.0Rosneft 8.1 10.3 27.3 ROSN LI OW 85739 12.1 7.4 0.7 1.1 1.4 19.5Turk Telekom 4 6 36.4 TTKOM TI OW 10078 9.6 7.2 0.5 0.6 10.0 35.3Qtel 148.7 230.0 54.7 QTEL QD OW 5989 7.5 7.3 19.7 20.4 7.4 19.3SK Energy Co Ltd 108000 150000 38.9 096770 KS OW 8516 9.5 7.7 11357 13955 2.1 14.7First Gulf Bank 18.8 26.0 38.7 FGB UH OW 7019 8.6 7.8 2.2 2.4 1.9 16.9ABSA Group Ltd 12421 15371 23.8 ASA SJ OW 12012 10.9 8.1 1144 1542 5.2 18.4Hyundai Motor Company 94600 140000 48.0 005380 KS OW 17769 8.8 8.2 10798 11486 1.6 10.1Sinopec Corp - H 6.4 8.5 33.9 386 HK OW 136013 8.6 8.3 0.7 0.8 3.0 16.6LG Display 30950 40000 29.2 034220 KS OW 9444 11.3 8.6 2738 3612 2.3 12.7PTT Public Company 222 315 41.9 PTT TB OW 18910 10.7 8.7 20.7 25.5 3.8 16.0Bank of China - H 4 6 38.0 3988 HK OW 145716 12.7 9.0 0 0 5.0 21.3Enersis 185 241 30.2 ENERSIS CI OW 12217 8.4 9.1 21.8 20.0 4.4 18.6MTN Group Limited 11540 15843 37.3 MTN SJ OW 28599 11.4 9.8 1016 1180 2.5 21.6Shinhan Financial Group 44150 60000 35.9 055550 KS OW 17853 16.2 10.6 2717 4165 2.0 11.8Siam Commercial Bank 78.5 110.0 40.1 SCB TB OW 8009 12.5 10.6 6.3 7.4 2.8 16.7Fubon Financial Holdings 36 54 50.2 2881 TT OW 9037 13.6 10.8 3 3 5.6 14.0Petrobras 38.5 46.0 19.6 PETR4 BZ OW 209104 12.9 11.7 3.0 3.3 1.7 17.4All 16 21 35.5 ALLL11 BZ OW 6130 15.2 11.8 1.0 1.3 1.8 17.0MediaTek Inc. 504.0 630 25.0 2454 TT OW 16998 14.5 11.9 34.8 42.4 4.9 37.4Far EasTone Tele 37.0 45.0 21.6 4904 TT OW 3730 13.3 11.9 2.8 3.1 7.3 14.0Credicorp 72 88 22.7 BAP US N 5721 12.9 12.0 5.7 6.2 2.8 20.5Acer Inc 79.5 92.0 15.7 2353 TT OW 6606 17.9 12.3 4.4 6.5 3.8 17.6Copel 34 38 12.2 CPLE6 BZ OW 5300 9.4 12.4 3.6 2.7 2.1 7.9Astra International 32000.0 37000.0 15.6 ASII IJ OW 13587 15.3 12.6 2097 2541 3.2 24.9Public Bank (F) 10.9 14 26.6 PBKF MK OW 11289 15.2 12.9 0.7 0.8 3.9 29.5Santander Brazil 22 28 26.2 SANB11 BZ OW 48486 16.5 12.9 1 2 3.3 12.0Bancolombia 42.8 50.0 16.9 CIB US OW 8426 15.3 12.9 2.9 3.4 2.7 19.2ASUSTek Computer 63.0 70.0 11.1 2357 TT OW 8277 22.0 13.1 2.9 4.8 2.5 11.6Bank Central Asia (BCA) 4675 5500 17.6 BBCA IJ OW 12088 17.6 13.1 265 356 2.9 29.2DongFeng Motor Co., Ltd. 11.0 13.0 18.4 489 HK OW 12207 15.0 13.2 0.7 0.8 1.3 23.6Hon Hai Precision 135.0 155.0 14.8 2317 TT OW 35831 16.8 13.3 8.0 10.1 1.9 18.0Grupo Mexico 30.5 31.5 3.3 GMEXICOB MM OW 18350 19.5 13.7 0.1 0.2 3.4 23.2Unitech Ltd 79.3 120 51.3 UT IN OW 4055 10.8 13.7 7 6 0.1 17.2TSMC 60.0 72.0 20.0 2330 TT OW 48071 17.5 13.8 3.4 4.4 5.0 25.1Pacific Rubiales 15.0 18.0 20.2 PRE CN OW 3014 nm 14.0 -0.6 1.1 0.0 21.6Tenaga 8.4 10.3 22.3 TNB MK OW 10716 39.9 14.0 0.2 0.6 1.6 9.7Samsung SDI 125500 210000 67.3 006400 KS OW 4876 18.9 14.3 6627 8758 0.0 7.6RusHydro 0.0 0 9.0 HYDR RU OW 9898 13.8 14.5 0 0 0.0 6.0PDG Realty 17 19 10.3 PDGR3 BZ OW 3651 21.2 14.7 1 1 1.2 19.7Perusahaan Gas Negara 3575 4700 31.5 PGAS IJ OW 9089 13.9 14.8 256 242 2.9 41.8Sberbank 2.3 3.0 34.2 SBER RU OW 48571 112.5 15.0 0.0 0.2 0.9 12.6Suzano 17.6 22 25.0 SUZB5 BZ OW 3145 6.3 14.9 2.8 1.2 0.7 7.5AMMB Holdings 5 5.3 7.1 AMM MK OW 4331 15.5 15.4 0.3 0.3 1.6 11.0UMC 15.6 19.0 21.8 2303 TT OW 6268 69.8 15.5 0.2 1.0 0.0 6.0Ternium 31.8 31.0 (2.5) TX US OW 6373 26.9 15.6 1.2 2.1 4.3 8.4China Yurun Food Group 18 21 16.9 1068 HK OW 3877 19.0 16.7 1 1 1.5 20.6Container Corporation of India 1144 1260 10.1 CCRI IN OW 3187 18.1 16.7 63.1 68.4 1.2 21.5LSR 6.5 10.0 53.8 LSRG LI OW 3044 50.0 17.6 0.1 0.4 0.0 11.8Tata Power 1321.0 1450 9.8 TPWR IN OW 6713 24.0 18.4 55.0 71.6 1.1 12.8MMK 0.7 1.1 52.7 MAGN RU OW 8269 74.0 18.5 0.0 0.0 1.4 4.9Naspers Ltd 27900.0 34108.7 22.3 NPN SJ OW 15161 23.7 19.0 1179 1469 1.0 12.0Buenaventura 39.8 34.0 (14.7) BVN US N 10983 19.6 19.4 2.1 2.1 0.3 21.5Genting 7.1 8.5 20.6 GENT MK OW 7659 24.5 19.7 0.3 0.4 0.7 9.6Maruti Suzuki India Ltd 1567 1630 4.0 MSIL IN OW 9701 37.2 19.9 42.2 78.8 0.4 21.6Femsa 44.5 50.0 12.3 FMX US OW 15937 24.7 20.3 1.8 2.2 1.1 10.3Tambang Batubara Bukit 15800 22500 42.4 PTBA IJ OW 3818 12.7 21.1 1241 750 3.9 28.1

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Large-cap ideas: J.P. Morgan’s large-cap top picks (cont'd)

Share Price

Target %

Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%)Name Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010EInfosys Technologies 2327.9 2550.0 9.5 INFO IN OW 28593 22.8 21.8 102.0 107.0 1.3 29.6Nan Ya Plastics Corp 54.1 61.0 12.8 1303 TT OW 13143 32.9 22.5 1.6 2.4 2.9 8.2Amorepacific Corp 859000 998000 16.2 090430 KS OW 4282 24.6 23.0 34940 37312 0.0 18.5China Mengniu Dairy Co. Ltd. 23 23 (0.2) 2319 HK OW 5165 28.2 24.8 1 1 0.0 17.5ICICI Bank 851 NA - ICICIBC IN OW 20307 26.6 26.8 32 32 1.4 7.1Larsen & Toubro 1589.5 1675.0 5.4 LT IN N 20441 31.0 27.6 51.2 57.6 0.0 19.2Anglo Platinum 74900.0 91000.0 21.5 AMS SJ OW 24025 70.7 33.1 1060 2260 0.0 14.5United Spirits Limited 1228.0 1140.0 (7.2) UNSP IN OW 3304 44.0 34.8 27.9 35.3 0.3 12.6LAME 14.0 17.0 21.8 LAME4 BZ OW 5626 58.8 34.9 0.2 0.4 1.1 62.9Ayala Land 11.8 13.9 18.3 ALI PM OW 3230 40.1 39.4 0.3 0.3 0.5 7.1Baidu.com 434.2 460.0 5.9 BIDU US OW 15063 70.8 47.4 6.1 9.2 0.0 36.0Magnit OAO 59.5 80 34.5 MGNT RU OW 4953 91.5 58.9 0.7 1.0 0.0 29.3OGX 1416.0 2030.0 43.4 OGXP3 BZ OW 26325 nm nm 16.4 5.7 0.0 3.8Source: Datastream, MSCI, IBES, J.P. Morgan estimates Note: Prices and valuations as of November 27, 2009. Large cap are stocks with market cap over US$ 3 billion. Sorted in ascending order of 2010E PE

Large-cap ideas: J.P. Morgan’s large-cap stocks to avoid

Share Price

Target %

Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%)Name Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010ESabesp 32 32 1.2 SBSP3 BZ UW 4143 5.5 5.8 5.7 5.4 4.6 10.0Lukoil 56.8 75.0 32.0 LKOH RU N 48312 6.7 6.6 8.4 8.7 2.4 12.5Weichai Power 60.3 47.0 (22.0) 2338 HK N 6941 9.9 8.6 6.1 7.0 0.8 45.2Magyar Telekom 727.0 685.8 (5.7) MTEL HB UW 4148 9.0 8.9 80.8 81.9 10.2 9.6Nedbank Group Ltd 11250.0 10747.0 (4.5) NED SJ UW 7551 12.5 9.3 901 1216 4.8 13.2S-Oil Corp 54500 64000 17.4 010950 KS N 5232 10.0 9.3 5457 5841 3.3 16.3Quanta Computer Inc. 63 57.0 (9.7) 2382 TT UW 7273 10.4 9.9 6.1 6.4 5.1 20.6CPFL Energia 32.7 34.0 4.0 CPFE3 BZ UW 9027 12.9 11.1 2.5 2.9 8.5 27.2Bank Rakyat Indonesia 7650.0 6650.0 (13.1) BBRI IJ UW 9896 13.3 11.2 577 684 3.0 28.4Redecard 26.4 32.0 21.4 RDCD3 BZ N 10208 12.7 11.6 2.1 2.3 7.4 97.9YTL Power 2.3 2.1 (7.5) YTLP MK UW 3987 21.4 11.8 0.1 0.2 6.6 18.2Telmex 17.6 13.0 (26.3) TMX US UW 16052 11.0 12.3 1.6 1.5 4.1 48.6Banorte 47 49 5.4 GFNORTEO MM N 7253 15.8 13.1 2.9 3.5 0.4 15.2Ecopetrol 2585.0 2795.0 8.1 ECOPETL CB UW 52376 16.8 13.2 154 197 4.6 27.1Severstal 8 8 4.9 CHMF RU UW 7590 NM 13.7 -0.4 0.6 0.8 6.4PetroChina 9.4 7.4 (21.1) 857 HK UW 339259 15.4 13.8 0.6 0.7 3.2 14.0Cencosud 1490 1578 5.9 CENCOSUD CI UW 6586 17.4 14.4 84.5 102.0 2.1 9.8Datang International 3.3 4.3 28.7 991 HK N 12610 23.8 14.6 0.1 0.2 3.3 7.2Usiminas 50.0 38.5 (23.0) USIM5 BZ UW 14413 38.0 14.6 1.3 3.5 2.1 10.9HTC Corp 362.5 250.0 (31.0) 2498 TT UW 8927 12.9 14.8 28.1 24.6 5.4 24.6Grupo Modelo 65.3 60.0 (8.1) GMODELOC MM N 16314 24.2 18.0 2.7 3.6 2.3 14.7Manila Electric Company 209 165 (21.1) MER PM N 4997 30.3 18.2 7 12 3.5 20.1Soriana 31.8 31.0 (2.5) SORIANAB MM UW 4423 20.6 18.5 1.5 1.7 0.5 9.3Southern Copper 34.6 28 (20.6) PCU US UW 29444 30.4 20.3 1.2 1.8 2.5 31.9Telmex Internacional 15 10 (33.6) TII US UW 13512 23.4 21.3 1 1 2.4 9.7SQM 38.0 33.0 (13.1) SQM US UW 9995 30.9 25.5 1.3 1.5 0.0 28.2Unilever Indonesia Tbk 10950.0 9700.0 (11.4) UNVR IJ UW 8762 31.6 25.8 347 425 3.2 86.6Hindustan Unilever Limited 284.3 225.0 (20.9) HUVR IN UW 13284 25.3 27.3 11.3 10.4 2.6 99.5VTB 4.3 4 0.9 VTBR LI UW 22229 NM 38.6 -0.3 0.1 0.5 3.5China Unicom 10.3 8.0 (22.3) 762 HK UW 31314 26.8 38.8 0.4 0.3 1.2 3.0MISC Berhad - F 8.9 7.7 (13.0) MISF MK UW 9654 23.4 41.0 0.4 0.2 4.0 3.9AU Optronics 32.9 27.0 (17.9) 2409 TT UW 8985 NM 43.6 -2.0 0.8 0.0 2.3China Cosco Holdings, Ltd. 10 10.0 2.7 1919 HK N 18608 NM 49.2 -0.3 0.2 0.4 4.2Reliance Power 141.1 122.0 (13.5) RPWR IN UW 7246 138.3 54.4 1.0 2.6 0.0 4.4Idea Cellular Limited 49.0 45.0 (8.1) IDEA IN UW 3251 16.2 65.3 3.0 0.7 0.0 1.6China Southern Airlines 3 2 (16.7) 1055 HK N 5529 33.2 82.4 0 0 0.0 2.3Source: Datastream, MSCI, IBES, J.P. Morgan estimates Note: Prices and valuations as of November 27, 2009. Large cap are stocks with market cap over US$ 3 billion. Sorted in ascending order of 2010E PE

96



Mid-cap ideas: J.P. Morgan mid-cap top picks Name Share Price Target % Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%) Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010EThai Oil Public Company 39.8 62.0 56.0 TOP TB OW 2439 6.0 5.6 6.7 7.1 7.5 19.8Bank Asya 3.0 5.0 65.6 ASYAB TI OW 1779 9.4 6.7 0.3 0.5 3.6 22.0Powertech Technology Inc 88.2 108.0 22.4 6239 TT OW 1827 11.0 8.2 8.0 10.8 5.1 27.6Urbi 25.5 34.0 33.4 URBI* MM OW 1923 12.8 9.7 2.0 2.6 0.0 13.8Arca 37.4 44.0 17.6 ARCA* MM OW 2330 11.1 10.4 3.4 3.6 5.2 17.0Energy Development (EDC) 4.1 5.6 38.3 EDC PM OW 1610 10.6 10.7 0.4 0.4 9.3 24.2Metropolitan Bank 45.5 50.0 9.9 MBT PM OW 1744 17.0 11.5 2.7 4.0 2.6 1012.7AAC Acoustic 10.1 14.6 44.0 2018 HK OW 1607 19.7 12.6 0.5 0.8 3.2 26.4Sohu.Com 54 74 36.3 SOHU US OW 2087 14.8 12.8 4 4 0.0 24.5Land & Houses 6.0 9.5 59.7 LH TB OW 1794 14.8 13.3 0.4 0.4 7.5 17.3CTC Media 14.8 25.0 68.7 CTCM US OW 2255 17.6 15.4 0.8 1.0 0.0 19.7Totvs 102.0 125.0 22.5 TOTS3 BZ OW 1828 20.2 15.8 5.2 6.6 1.1 34.1Asur 61.6 53.0 (13.9) ASURB MM OW 1427 20.1 17.1 3.1 3.7 3.6 17.2PT Aneka Tambang Tbk 2250.0 2750.0 22.2 ANTM IJ OW 2251 48.0 18.4 46.9 122.3 1.0 13.6Xinao Gas 18 22 21.7 2688 HK OW 2471 23.3 18.8 0.8 1 1.3 14.5CP All Pcl 20.8 23.0 10.6 CPALL TB OW 2811 22.7 19.0 0.9 1.1 4.0 31.9Northam Platinum Ltd 3980.0 6100.0 53.3 NHM SJ OW 1930 21.7 30.4 183.0 131.0 1.5 5.6Yulon Motor Co., Ltd. 39.0 50.0 28.2 2201 TT OW 1895 41.5 56.6 0.9 0.7 0.5 1.8NCsoft 145000.0 190000.0 31.0 036570 KS OW 2683 71.5 77.4 2029.0 1873.6 0.0 7.6China Airlines 10.0 16.0 60.5 2610 TT OW 1410 NM 80.0 -2.3 0.1 0.0 1.3Source: Datastream, MSCI, IBES, J.P. Morgan estimates Note: Prices and valuations as of November 27, 2009. Mid cap are stocks with market cap between US$1billion & US$3billion. Sorted in ascending order of 2010E PE

Mid-cap ideas: J.P. Morgan mid-cap stocks to avoid Name Share Price Target % Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%) Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010EHomex 73.4 102.0 39.0 HOMEX* MM N 1904 9.7 8.2 7.3 8.7 0.0 19.2Beijing Capital Land 4 4 (12.5) 2868 HK N 1063 19.2 12.0 0.2 0.3 2.8 14.1TMB Bank Public Company 1.1 1.0 (6.5) TMB TB N 1337 22.1 14.1 0.0 0.1 0.0 6.8Massmart 8440.0 7390.0 (12.4) MSM SJ UW 2288 14.3 14.5 592.0 580.9 4.4 35.8BYD Electronic 5.7 3.6 (36.4) 285 HK UW 1646 22.8 16.3 0.2 0.3 0.0 11.4Taishin Financial Holdings 12.2 12.0 (1.2) 2887 TT UW 2146 7.3 17.1 1.7 0.7 5.9 6.5GAP 35.6 30.0 (15.8) GAPB MM N 1545 19.6 18.7 1.8 1.9 5.0 34.3New World China Land 2.9 3.2 9.0 917 HK UW 2146 10.1 20.2 0.3 0.1 2.4 2.1Exito 17140.0 17800.0 3.9 EXITO CB N 2478 32.7 30.2 526.0 570.3 0.4 3.4Source: Datastream, MSCI, IBES, J.P. Morgan estimates. Note: Prices and valuations as of November 27, 2009. Mid cap are stocks with market cap between US$1billion & US$3billion. Sorted in ascending order of 2010E PE. Note: BYD Electronic - We revised PT to HK$4.8 on November 29.

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Small-cap ideas: J.P. Morgan small-cap top picks Name Share Price Target % Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%) Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010EJD Group 4390.0 5253 19.7 JDG SJ OW 965 37.7 7.4 116.5 597.1 0.0 18.8Manila Water Company 16.0 19.0 18.8 MWC PM OW 680 10.7 9.5 1.5 1.7 3.2 22.1MindTree Ltd. 634.5 700.0 10.3 MTCL IN OW 536 80.8 12.6 7.9 50.4 0.8 33.8VanceInfo Technologies 16.6 23 38.3 VIT US OW 741 32.7 24.7 0.5 0.7 0.0 19.2Info Edge India 806.4 900 11.6 INFOE IN OW 472 36.9 38.3 21.9 21.1 0.0 16.2Source: Datastream, MSCI, IBES, J.P. Morgan estimates Note: Prices and valuations as of November 27, 2009. Small cap are stocks with market cap less than US$1billion. Sorted in ascending order of 2010E PE

Small-cap ideas: J.P. Morgan small-cap stocks to avoid Name Share Price Target % Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%) Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010EHCL Infosystems 146.8 160.0 9.0 HCLI IN N 686 10.5 10.1 14.0 14.6 4.1 18.7Guarani 4.9 NA - ACGU3 BZ UW 800 nm 44.9 -0.3 0.1 0.0 2.9The9 Limited 7.5 6.5 (12.8) NCTY US N 209 NM NM -1.7 -2.1 0.0 -18.1Source: Datastream, MSCI, IBES, J.P. Morgan estimates Note: Prices and valuations as of November 27, 2009. Small cap are stocks with market cap less than US$1billion. Sorted in ascending order of 2010E PE

98



Top Picks by country strategists Name Share Price Target % Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%) Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 20099E 2010E 2010E 2010EBrazil Petrobras 38.5 46.0 19.6 PETR4 BZ OW 209104 12.9 11.7 3.0 3.3 1.7 17.4All 15.5 21.0 35.5 ALLL11 BZ OW 6130 15.2 11.8 1.0 1.3 1.8 17.0Copel 33.9 38.0 12.2 CPLE6 BZ OW 5300 9.4 12.4 3.6 2.7 2.1 7.9Santander Brazil 22.2 28.0 26.2 SANB11 BZ OW 48486 16.5 12.9 1.3 1.7 3.3 12.0PDG Realty 17.2 19.0 10.3 PDGR3 BZ OW 3651 21.2 14.7 0.8 1.2 1.2 19.7Suzano 17.6 22.0 25.0 SUZB5 BZ OW 3145 6.3 14.9 2.8 1.2 0.7 7.5Totvs 102.0 125.0 22.5 TOTS3 BZ OW 1828 20.2 15.8 5.2 6.6 1.1 34.1LAME 14.0 17.0 21.8 LAME4 BZ OW 5626 58.8 34.9 0.2 0.4 1.1 62.9OGX 1416.0 2030.0 43.4 OGXP3 BZ OW 26325 nm nm 16.4 5.7 0.0 3.8China Bank of China - H 4.1 5.7 38.0 3988 HK OW 145716 12.7 9.0 0.3 0.5 5.0 21.3China Yurun Food Group 18.0 21.0 16.9 1068 HK OW 3877 19.0 16.7 0.9 1.1 1.5 20.6Xinao Gas 18.2 22.2 21.7 2688 HK OW 2471 23.3 18.8 0.8 1.0 1.3 14.5China Mengniu Dairy Co. Ltd. 23.1 23.0 (0.2) 2319 HK OW 5165 28.2 24.8 0.8 0.9 0.0 17.5Baidu.com 434.2 460 5.9 BIDU US OW 15063 70.8 47.4 6.1 9.2 0.0 36.0India Unitech Ltd 79.3 120.0 51.3 UT IN OW 4055 10.8 13.7 7.4 5.8 0.1 17.2Infosys Technologies 2327.9 2550.0 9.5 INFO IN OW 28593 22.8 21.8 102.0 107.0 1.3 29.6ICICI Bank 850.9 NA - ICICIBC IN OW 20307 26.6 26.8 32.0 31.8 1.4 7.1Larsen & Toubro 1589.5 1675.0 5.4 LT IN N 20441 31.0 27.6 51.2 57.6 0.0 19.2Indonesia Astra International 32000.0 37000 15.6 ASII IJ OW 13587 15.3 12.6 2097 2541 3.2 24.9Bank Central Asia (BCA) 4675.0 5500 17.6 BBCA IJ OW 12088 17.6 13.1 265 356 2.9 29.2PT Aneka Tambang Tbk 2250.0 2750 22.2 ANTM IJ OW 2251 48.0 18.4 47 122 1.0 13.6Tambang Batubara Bukit Asam 15800.0 22500 42.4 PTBA IJ OW 3818 12.7 21.1 1241 750 3.9 28.1Korea SK Energy Co Ltd 108000 150000 38.9 096770 KS OW 8516 9.5 7.7 11357 13955 2.1 14.7Hyundai Motor Company 94600 140000 48.0 005380 KS OW 17769 8.8 8.2 10798 11486 1.6 10.1Shinhan Financial Group 44150 60000 35.9 055550 KS OW 17853 16.2 10.6 2717 4165 2.0 11.8Samsung SDI 125500 210000 67.3 006400 KS OW 4876 18.9 14.3 6627 8758 0.0 7.6Amorepacific Corp 859000 998000 16.2 090430 KS OW 4282 24.6 23.0 34940 37312 0.0 18.5Malaysia Public Bank (F) 10.9 13.8 26.6 PBKF MK OW 11289 15.2 12.9 0.7 0.8 3.9 29.5Tenaga 8.4 10.3 22.3 TNB MK OW 10716 39.9 14.0 0.2 0.6 1.6 9.7AMMB Holdings 4.9 5.3 7.1 AMM MK OW 4331 15.5 15.4 0.3 0.3 1.6 11.0Genting 7.1 8.5 20.6 GENT MK OW 7659 24.5 19.7 0.3 0.4 0.7 9.6Mexico Urbi 25.5 34.0 33.4 URBI* MM OW 1923 12.8 9.7 2.0 2.6 0.0 13.8Arca 37.4 44.0 17.6 ARCA* MM OW 2330 11.1 10.4 3.4 3.6 5.2 17.0Grupo Mexico 30.5 31.5 3.3 GMEXICOB MM OW 18350 19.5 13.7 0.1 0.2 3.4 23.2Ternium 31.8 31.0 (2.5) TX US OW 6373 26.9 15.6 1.2 2.1 4.3 8.4Asur 61.6 53.0 (13.9) ASURB MM OW 1427 20.1 17.1 3.1 3.7 3.6 17.2Femsa 44.5 50.0 12.3 FMX US OW 15937 24.7 20.3 1.8 2.2 1.1 10.3Philippines Manila Water Company Inc 16.0 19.0 18.8 MWC PM OW 680 10.7 9.5 1.5 1.7 3.2 22.1Energy Development (EDC) 4.1 5.6 38.3 EDC PM OW 1610 10.6 10.7 0.4 0.4 9.3 24.2Metropolitan Bank 45.5 50.0 9.9 MBT PM OW 1744 17.0 11.5 2.7 4.0 2.6 1012.7Ayala Land 11.8 13.9 18.3 ALI PM OW 3230 40.1 39.4 0.3 0.3 0.5 7.1Russia Gazprom 5.6 9.9 75.8 GAZP RU OW 133282 6.3 5.2 0.9 1.1 0.0 12.3Sberbank 2.3 3.0 34.2 SBER RU OW 48571 112.5 15.0 0.0 0.2 0.9 12.6South Africa JD Group 4390.0 5253.0 19.7 JDG SJ OW 965 37.7 7.4 116 597 0.0 18.8ABSA Group Ltd 12421.0 15371.0 23.8 ASA SJ OW 12012 10.9 8.1 1144 1542 5.2 18.4Naspers Ltd 27900.0 34108.7 22.3 NPN SJ OW 15161 23.7 19.0 1179 1469 1.0 12.0Northam Platinum Ltd 3980.0 6100.0 53.3 NHM SJ OW 1930 21.7 30.4 183 131 1.5 5.6Anglo Platinum 74900.0 91000.0 21.5 AMS SJ OW 24025 70.7 33.1 1060 2260 0.0 14.5

99



Top Picks by country strategists (cont'd) Share Price Target % Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%)Name Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 20099E 2010E 2010E 2010ETaiwan Fubon Financial Holdings 36.0 54.0 50.2 2881 TT OW 9037 13.6 10.8 2.6 3.3 5.6 14.0Acer Inc 79.5 92 15.7 2353 TT OW 6606 17.9 12.3 4.4 6.5 3.8 17.6Hon Hai Precision 135.0 155 14.8 2317 TT OW 35831 16.8 13.3 8.0 10.1 1.9 18.0UMC 15.6 19.0 21.8 2303 TT OW 6268 69.8 15.5 0.2 1.0 0.0 6.0Nan Ya Plastics Corp 54.1 61.0 12.8 1303 TT OW 13143 32.9 22.5 1.6 2.4 2.9 8.2Thailand Thai Oil Public Company 39.8 62.0 56.0 TOP TB OW 2439 6.0 5.6 6.7 7.1 7.5 19.8PTT Public Company 222.0 315 41.9 PTT TB OW 18910 10.7 8.7 20.7 25.5 3.8 16.0Siam Commercial Bank 78.5 110 40.1 SCB TB OW 8009 12.5 10.6 6.3 7.4 2.8 16.7Land & Houses 6.0 9.5 59.7 LH TB OW 1794 14.8 13.3 0.4 0.4 7.5 17.3CP All Pcl 20.8 23.0 10.6 CPALL TB OW 2811 22.7 19.0 0.9 1.1 4.0 31.9Turkey Vakifbank 3.1 5 73.1 VAKBN TI OW 5104 6.8 5.8 0.5 0.5 6.1 18.9Bank Asya 3.0 5.0 65.6 ASYAB TI OW 1779 9.4 6.7 0.3 0.5 3.6 22.0MENA Aldar Properties 5.5 7.8 41.6 ALDAR UH OW 3867 8.1 6.5 0.7 0.9 0.0 11.0Qtel 148.7 230 54.7 QTEL QD OW 5989 7.5 7.3 19.7 20.4 7.4 19.3First Gulf Bank 18.8 26 38.7 FGB UH OW 7019 8.6 7.8 2.2 2.4 1.9 16.9Chile Enersis 185.1 241.0 30.2 ENERSIS CI OW 12217 8.4 9.1 21.8 20.0 4.4 18.6Peru Credicorp 71.7 88.0 22.7 BAP US N 5721 12.9 12.0 5.7 6.2 2.8 20.5Buenaventura 39.8 34 (14.7) BVN US N 10983 19.6 19.4 2.1 2.1 0.3 21.5Colombia Bancolombia 42.8 50.0 16.9 CIB US OW 8426 15.3 12.9 2.9 3.4 2.7 19.2Pacific Rubiales 15.0 18 20.2 PRE CN OW 3014 nm 14.0 -0.6 1.1 0.0 21.6Source: Datastream, MSCI, IBES, J.P. Morgan estimates Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE

100



Stocks to avoid by country strategists Name Share Price Target % Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%) Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010EBrazil Sabesp 31.6 32.0 1.2 SBSP3 BZ UW 4143 5.5 5.8 5.7 5.4 4.6 10.0CPFL Energia 32.7 34.0 4.0 CPFE3 BZ UW 9027 12.9 11.1 2.5 2.9 8.5 27.2Redecard 26.4 32.0 21.4 RDCD3 BZ N 10208 12.7 11.6 2.1 2.3 7.4 97.9Usiminas 50.0 38.5 (23.0) USIM5 BZ UW 14413 38.0 14.6 1.3 3.5 2.1 10.9Guarani 4.9 NA - ACGU3 BZ UW 800 nm 44.9 -0.3 0.1 0.0 2.9China Datang International 3.3 4.3 28.7 991 HK N 12610 23.8 14.6 0.1 0.2 3.3 7.2China Unicom 10.3 8.0 (22.3) 762 HK UW 31314 26.8 38.8 0.4 0.3 1.2 3.0India Hindustan Unilever Limited 284.3 225.0 (20.9) HUVR IN UW 13284 25.3 27.3 11.3 10.4 2.6 99.5Reliance Power 141.1 122.0 (13.5) RPWR IN UW 7246 138.3 54.4 1.0 2.6 0.0 4.4Idea Cellular Limited 49.0 45.0 (8.1) IDEA IN UW 3251 16.2 65.3 3.0 0.7 0.0 1.6Indonesia Bank Rakyat Indonesia 7650.0 6650.0 (13.1) BBRI IJ UW 9896 13.3 11.2 577.3 684.3 3.0 28.4Unilever Indonesia Tbk 10950.0 9700.0 (11.4) UNVR IJ UW 8762 31.6 25.8 346.8 425.0 3.2 86.6Korea S-Oil Corp 54500.0 64000.0 17.4 010950 KS N 5232 10.0 9.3 5457 5841 3.3 16.3Malaysia YTL Power 2.3 2.1 (7.5) YTLP MK UW 3987 21.4 11.8 0.1 0.2 6.6 18.2MISC Berhad - F 8.9 7.7 (13.0) MISF MK UW 9654 23.4 41.0 0.4 0.2 4.0 3.9Mexico Homex 73.4 102.0 39.0 HOMEX* MM N 1904 9.7 8.2 7.3 8.7 0.0 19.2Telmex 17.6 13.0 (26.3) TMX US UW 16052 11.0 12.3 1.6 1.5 4.1 48.6Banorte 46.5 49.0 5.4 GFNORTEO MM N 7253 15.8 13.1 2.9 3.5 0.4 15.2Grupo Modelo 65.3 60.0 (8.1) GMODELOC MM N 16314 24.2 18.0 2.7 3.6 2.3 14.7Soriana 31.8 31.0 (2.5) SORIANAB MM UW 4423 20.6 18.5 1.5 1.7 0.5 9.3GAP 35.6 30.0 (15.8) GAPB MM N 1545 19.6 18.7 1.8 1.9 5.0 34.3Telmex Internacional 15.1 10.0 (33.6) TII US UW 13512 23.4 21.3 0.7 0.7 2.4 9.7Philippines Manila Electric Company 209.0 165.0 (21.1) MER PM N 4997 30.3 18.2 6.9 11.5 3.5 20.1Russia Severstal 7.5 7.9 4.9 CHMF RU UW 7590 NM 13.7 -0.4 0.6 0.8 6.4VTB 4.3 4.3 0.9 VTBR LI UW 22229 NM 38.6 (0.3) 0.1 0.5 3.5Taiwan Quanta Computer Inc. 63.1 57.0 (9.7) 2382 TT UW 7273 10.4 9.9 6.1 6.4 5.1 20.6HTC Corp 362.5 250.0 (31.0) 2498 TT UW 8927 12.9 14.8 28.1 24.6 5.4 24.6Taishin Financial Holdings 12.2 12.0 (1.2) 2887 TT UW 2146 7.3 17.1 1.7 0.7 5.9 6.5Thailand TMB Bank Public Company 1.1 1.0 (6.5) TMB TB N 1337 22.1 14.1 0.0 0.1 0.0 6.8Chile Cencosud 1490.0 1578.0 5.9 CENCOSUD CI UW 6586 17.4 14.4 84.5 102.0 2.1 9.8SQM 38.0 33.0 (13.1) SQM US UW 9995 30.9 25.5 1.3 1.5 0.0 28.2Peru Southern Copper 34.6 27.5 (20.6) PCU US UW 29444 30.4 20.3 1.2 1.8 2.5 31.9Colombia Ecopetrol 2585.0 2795.0 8.1 ECOPETL CB UW 52376 16.8 13.2 154.3 197.5 4.6 27.1Exito 17140.0 17800.0 3.9 EXITO CB N 2478 32.7 30.2 526.0 570.3 0.4 3.4Source: Datastream, MSCI, IBES, J.P. Morgan estimates Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE

101



Top Picks by Sector Heads

Name Share Price

Target %

Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%) Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010EAuto Hyundai Motor Company 94600 140000 48.0 005380 KS OW 17769 8.8 8.2 10798 11486 1.6 10.1Astra International 32000 37000 15.6 ASII IJ OW 13587 15.3 12.6 2097 2541 3.2 24.9DongFeng Motor Co., Ltd. 11.0 13.0 18.4 489 HK OW 12207 15.0 13.2 0.7 0.8 1.3 23.6Maruti Suzuki India Ltd 1567 1630 4.0 MSIL IN OW 9701 37.2 19.9 42.2 78.8 0.4 21.6Yulon Motor Co., Ltd. 39.0 50.0 28.2 2201 TT OW 1895 41.5 56.6 0.9 0.7 0.5 1.8Agribusiness, Pulp and Paper All 15.5 21.0 35.5 ALLL11 BZ OW 6130 15.2 11.8 1.0 1.3 1.8 17.0Suzano 17.6 22.0 25.0 SUZB5 BZ OW 3145 6.3 14.9 2.8 1.2 0.7 7.5Consumer JD Group 4390 5253 19.7 JDG SJ OW 965 37.7 7.4 116.5 597.1 0.0 18.8Femsa 44.5 50.0 12.3 FMX US OW 15937 24.7 20.3 1.8 2.2 1.1 10.3China Mengniu Dairy Co. Ltd. 23.1 23.0 (0.2) 2319 HK OW 5165 28.2 24.8 0.8 0.9 0.0 17.5United Spirits Limited 1228 1140 (7.2) UNSP IN OW 3304 44.0 34.8 27.9 35.3 0.3 12.6LAME 14.0 17.0 21.8 LAME4 BZ OW 5626 58.8 34.9 0.2 0.4 1.1 62.9Magnit OAO 59.5 80.0 34.5 MGNT RU OW 4953 91.5 58.9 0.7 1.0 0.0 29.3Energy Gazprom 5.6 9.9 75.8 GAZP RU OW 133282 6.3 5.2 0.9 1.1 0.0 12.3Rosneft 8.1 10.3 27.3 ROSN LI OW 85739 12.1 7.4 0.7 1.1 1.4 19.5SK Energy Co Ltd 108000 150000 38.9 096770 KS OW 8516 9.5 7.7 11357 13955 2.1 14.7Sinopec Corp - H 6.4 8.5 33.9 386 HK OW 136013 8.6 8.3 0.7 0.8 3.0 16.6Petrobras 38.5 46.0 19.6 PETR4 BZ OW 209104 12.9 11.7 3.0 3.3 1.7 17.4OGX 1416 2030 43.4 OGXP3 BZ OW 26325 nm nm 16.4 5.7 0.0 3.8Financial Services Vakifbank 3.1 5.4 73.1 VAKBN TI OW 5104 6.8 5.8 0.5 0.5 6.1 18.9Bank of China - H 4.1 5.7 38.0 3988 HK OW 145716 12.7 9.0 0.3 0.5 5.0 21.3Shinhan Financial Group 44150 60000 35.9 055550 KS OW 17853 16.2 10.6 2717 4165 2.0 11.8Fubon Financial Holdings 36.0 54.0 50.2 2881 TT OW 9037 13.6 10.8 2.6 3.3 5.6 14.0Santander Brazil 22.2 28.0 26.2 SANB11 BZ OW 48486 16.5 12.9 1.3 1.7 3.3 12.0Sberbank 2.3 3.0 34.2 SBER RU OW 48571 112.5 15.0 0.0 0.2 0.9 12.6Internet & Media Sohu.Com 54.3 74.0 36.3 SOHU US OW 2087 14.8 12.8 3.7 4.2 0.0 24.5CTC Media 14.8 25.0 68.7 CTCM US OW 2255 17.6 15.4 0.8 1.0 0.0 19.7Info Edge India 806.4 900.0 11.6 INFOE IN OW 472 36.9 38.3 21.9 21.1 0.0 16.2Baidu.com 434.2 460.0 5.9 BIDU US OW 15063 70.8 47.4 6.1 9.2 0.0 36.0NCsoft 145000.0 190000.0 31.0 036570 KS OW 2683 71.5 77.4 2029 1874 0.0 7.6Metals & Mining Grupo Mexico 30.5 31.5 3.3 GMEXICOB MM OW 18350 19.5 13.7 0.1 0.2 3.4 23.2Ternium 31.8 31.0 (2.5) TX US OW 6373 26.9 15.6 1.2 2.1 4.3 8.4MMK 0.7 1.1 52.7 MAGN RU OW 8269 74.0 18.5 0.01 0.04 1.4 4.9Northam Platinum Ltd 3980.0 6100.0 53.3 NHM SJ OW 1930 21.7 30.4 183 131 1.5 5.6Anglo Platinum 74900.0 91000.0 21.5 AMS SJ OW 24025 70.7 33.1 1060 2260 0.0 14.5Real Estate Aldar Properties 5.5 7.8 41.6 ALDAR UH OW 3867 8.1 6.5 0.7 0.9 0.0 11.0Urbi 25.5 34.0 33.4 URBI* MM OW 1923 12.8 9.7 2.0 2.6 0.0 13.8PDG Realty 17.2 19.0 10.3 PDGR3 BZ OW 3651 21.2 14.7 0.8 1.2 1.2 19.7LSR 6.5 10.0 53.8 LSRG LI OW 3044 50.0 17.6 0.1 0.4 0.0 11.8Ayala Land 11.8 13.9 18.3 ALI PM OW 3230 40.1 39.4 0.3 0.3 0.5 7.1Technology - Hardware MediaTek Inc. 504.0 630.0 25.0 2454 TT OW 16998 14.5 11.9 34.8 42.4 4.9 37.4Acer Inc 79.5 92.0 15.7 2353 TT OW 6606 17.9 12.3 4.4 6.5 3.8 17.6AAC Acoustic 10.1 14.6 44.0 2018 HK OW 1607 19.7 12.6 0.5 0.8 3.2 26.4ASUSTek Computer 63.0 70.0 11.1 2357 TT OW 8277 22.0 13.1 2.9 4.8 2.5 11.6Hon Hai Precision 135.0 155.0 14.8 2317 TT OW 35831 16.8 13.3 8.0 10.1 1.9 18.0Technology - Tech Panel/Semiconductor Powertech Technology Inc 88.2 108.0 22.4 6239 TT OW 1827 11.0 8.2 8.0 10.8 5.1 27.6LG Display 30950 40000 29.2 034220 KS OW 9444 11.3 8.6 2738 3612 2.3 12.7TSMC 60.0 72.0 20.0 2330 TT OW 48071 17.5 13.8 3.4 4.4 5.0 25.1UMC 15.6 19.0 21.8 2303 TT OW 6268 69.8 15.5 0.2 1.0 0.0 6.0Technology - IT Services MindTree Ltd. 634.5 700.0 10.3 MTCL IN OW 536 80.8 12.6 7.9 50.4 0.8 33.8Infosys Technologies 2327.9 2550.0 9.5 INFO IN OW 28593 22.8 21.8 102 107 1.3 29.6VanceInfo Technologies Inc. 16.6 23.0 38.3 VIT US OW 741 32.7 24.7 0.5 0.7 0.0 19.2

102



Top Picks by Sector Heads (cont'd)

Name Share Price

Target %

Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%) Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010ETelecoms Turk Telekom 4.4 6.0 36.4 TTKOM TI OW 10078 9.6 7.2 0.5 0.6 10.0 35.3Qtel 148.7 230.0 54.7 QTEL QD OW 5989 7.5 7.3 20 20 7.4 19.3MTN Group Limited 11540.0 15843.0 37.3 MTN SJ OW 28599 11.4 9.8 1016 1180 2.5 21.6Far EasTone Telecommunications Co., Ltd 37.0 45.0 21.6 4904 TT OW 3730 13.3 11.9 2.8 3.1 7.3 14.0Totvs 102.0 125.0 22.5 TOTS3 BZ OW 1828 20.2 15.8 5.2 6.6 1.1 34.1Transportation Asur 61.6 53.0 (13.9) ASURB MM OW 1427 20.1 17.1 3.1 3.7 3.6 17.2Container Corporation of India Ltd 1144.4 1260.0 10.1 CCRI IN OW 3187 18.1 16.7 63.1 68.4 1.2 21.5China Airlines 10.0 16.0 60.5 2610 TT OW 1410 NM 80.0 -2.3 0.1 0.0 1.3Utilities Enersis 185.1 241.0 30.2 ENERSIS CI OW 12217 8.4 9.1 22 20 4.4 18.6RusHydro 0.04 0.04 9.0 HYDR RU OW 9898 13.8 14.5 0.003 0.003 0.000 6.0Perusahaan Gas Negara 3575.0 4700.0 31.5 PGAS IJ OW 9089 13.9 14.8 256 242 2.9 41.8Tata Power 1321.0 1450.0 9.8 TPWR IN OW 6713 24.0 18.4 55.0 71.6 1.1 12.8Xinao Gas 18.2 22.2 21.7 2688 HK OW 2471 23.3 18.8 0.8 1.0 1.3 14.5Source: Datastream, MSCI, IBES, J.P. Morgan estimates Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE

103



Stocks to Avoid by Sector Heads

Name Share Price

Target % Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%) Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010EAuto Weichai Power 60.3 47.0 (22.0) 2338 HK N 6941 9.9 8.6 6.1 7.0 0.8 45.2Agribusiness, Pulp and Paper Guarani 4.9 NA - ACGU3 BZ UW 800 nm 44.9 -0.3 0.1 0.0 2.9Consumer Massmart 8440.0 7390.0 (12.4) MSM SJ UW 2288 14.3 14.5 592 581 4.4 35.8Soriana 31.8 31.0 (2.5) SORIANAB MM UW 4423 20.6 18.5 1.5 1.7 0.5 9.3Hindustan Unilever Ltd. 284.3 225.0 (20.9) HUVR IN UW 13284 25.3 27.3 11.3 10.4 2.6 99.5Energy Lukoil 56.8 75.0 32.0 LKOH RU N 48312 6.7 6.6 8 9 2.4 12.5Ecopetrol 2585.0 2795.0 8.1 ECOPETL CB UW 52376 16.8 13.2 154 197 4.6 27.1PetroChina 9.4 7.4 (21.1) 857 HK UW 339259 15.4 13.8 0.6 0.7 3.2 14.0Financial Services Nedbank Group Ltd 11250.0 10747.0 (4.5) NED SJ UW 7551 12.5 9.3 901 1216 4.8 13.2Bank Rakyat Indonesia 7650.0 6650.0 (13.1) BBRI IJ UW 9896 13.3 11.2 577 684 3.0 28.4Banorte 46.5 49.0 5.4 GFNORTEO MM N 7253 15.8 13.1 2.9 3.5 0.4 15.2Internet & Media The9 Limited 7.5 6.5 (12.8) NCTY US N 209 NM NM -1.7 -2.1 0.0 -18.1Metals & Mining Usiminas 50.0 38.5 (23.0) USIM5 BZ UW 14413 38.0 14.6 1.3 3.5 2.1 10.9Southern Copper 34.6 27.5 (20.6) PCU US UW 29444 30.4 20.3 1.2 1.8 2.5 31.9Real Estate Homex 73.4 102.0 39.0 HOMEX* MM N 1904 9.7 8.2 7.3 8.7 0.0 19.2Beijing Capital Land 4.0 3.5 (12.5) 2868 HK N 1063 19.2 12.0 0.2 0.3 2.8 14.1New World China Land 2.9 3.2 9.0 917 HK UW 2146 10.1 20.2 0.3 0.1 2.4 2.1Technology - Hardware Quanta Computer Inc. 63.1 57.0 (9.7) 2382 TT UW 7273 10.4 9.9 6.1 6.4 5.1 20.6HTC Corp 362.5 250.0 (31.0) 2498 TT UW 8927 12.9 14.8 28.1 24.6 5.4 24.6BYD Electronic 5.7 3.6 (36.4) 285 HK UW 1646 22.8 16.3 0.2 0.3 0.0 11.4Technology - Tech Panel/Semiconductor AU Optronics 32.9 27.0 (17.9) 2409 TT UW 8985 NM 43.6 -2.0 0.8 0.0 2.3Technology - IT Services HCL Infosystems 146.8 160.0 9.0 HCLI IN N 686 10.5 10.1 14.0 14.6 4.1 18.7Telecoms Magyar Telekom 727.0 685.8 (5.7) MTEL HB UW 4148 9.0 8.9 81 82 10.2 9.6Telmex 17.6 13.0 (26.3) TMX US UW 16052 11.0 12.3 1.6 1.5 4.1 48.6China Unicom 10.3 8.0 (22.3) 762 HK UW 31314 26.8 38.8 0.4 0.3 1.2 3.0Transportation GAP 35.6 30.0 (15.8) GAPB MM N 1545 19.6 18.7 1.8 1.9 5.0 34.3China Cosco Holdings 9.7 10.0 2.7 1919 HK N 18608 NM 49.2 -0.3 0.2 0.4 4.2China Southern Airlines 2.5 2.1 (16.7) 1055 HK N 5529 33.2 82.4 0.1 0.0 0.0 2.3Utilities Sabesp 31.6 32.0 1.2 SBSP3 BZ UW 4143 5.5 5.8 5.7 5.4 4.6 10.0CPFL Energia 32.7 34.0 4.0 CPFE3 BZ UW 9027 12.9 11.1 2.5 2.9 8.5 27.2Datang International 3.3 4.3 28.7 991 HK N 12610 23.8 14.6 0.1 0.2 3.3 7.2Source: Datastream, MSCI, IBES, J.P. Morgan estimates. Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE. Note: BYD Electronic - We revised PT to HK$4.8 on November 29.

104



Contrarian calls 2009 losers picked to be 2010 winners (Stocks with relative underperformance end 2008 to date and top pick)

Name Share Price

Price Target

% Change Bloomberg JPM Mkt Cap, P/E (X) Yield (%) ROE (%)

Performance end 08 to date (%)

(LC) (LC) to target Code Rating US$ MM 2009E 2010E 2010E 2010E Absolute Rel to RegionTop Picks Gazprom 5.6 9.9 75.8 GAZP RU OW 133282 6.3 5.2 0.0 12.3 52.3 (16.6)Aldar Properties 5.5 7.8 41.6 ALDAR UH OW 3867 8.1 6.5 0.0 11.0 38.8 (30.2)Turk Telekom 4 6.0 36.4 TTKOM TI OW 10078 9.6 7.2 10.0 35.3 27.0 (41.9)JD Group 4390.0 5253.0 19.7 JDG SJ OW 965 37.7 7.4 0.0 18.8 47.4 (21.6)Qtel 148.7 230.0 54.7 QTEL QD OW 5989 7.5 7.3 7.4 19.3 35.8 (33.1)SK Energy Co Ltd 108000.0 150000.0 38.9 096770 KS OW 8516 9.5 7.7 2.1 14.7 58.4 (10.6)ABSA Group Ltd 12421.0 15371.0 23.8 ASA SJ OW 12012 10.9 8.1 5.2 18.4 42.0 (26.9)Sinopec Corp - H 6 9 33.9 386 HK OW 136013 8.6 8.3 3.0 16.6 35.4 (33.6)LG Display 30950.0 40000.0 29.2 034220 KS OW 9444 11.3 8.6 2.3 12.7 62.8 (6.2)PTT Public Company 222 315 41.9 PTT TB OW 18910 10.7 8.7 3.8 16.0 32.5 (36.4)Enersis 185.1 241.0 30.2 ENERSIS CI OW 12217 8.4 9.1 4.4 18.6 44.1 (24.8)Manila Water Company Inc 16.0 19.0 18.8 MWC PM OW 680 10.7 9.5 3.2 22.1 21.8 (47.2)MTN Group Limited 11540 15843.0 37.3 MTN SJ OW 28599 11.4 9.8 2.5 21.6 31.8 (37.1)Urbi 25.5 34.0 33.4 URBI* MM OW 1923 12.8 9.7 0.0 13.8 42.6 (26.4)Arca 37 44.0 17.6 ARCA* MM OW 2330 11.1 10.4 5.2 17.0 63.9 (5.0)Fubon Financial Holdings 36.0 54.0 50.2 2881 TT OW 9037 13.6 10.8 5.6 14.0 52.7 (16.3)Far EasTone Telecommunications 37.0 45.0 21.6 4904 TT OW 3730 13.3 11.9 7.3 14.0 0.7 (68.3)Credicorp 71.7 88.0 22.7 BAP US N 5721 12.9 12.0 2.8 20.5 47.8 (21.1)Public Bank (F) 10.9 13.8 26.6 PBKF MK OW 11289 15.2 12.9 3.9 29.5 30.7 (38.2)Bank Central Asia (BCA) 4675 5500.0 17.6 BBCA IJ OW 12088 17.6 13.1 2.9 29.2 66.8 (2.2)Sohu.Com 54.3 74.0 36.3 SOHU US OW 2087 14.8 12.8 0.0 24.5 18.3 (50.7)Land & Houses 6 10 59.7 LH TB OW 1794 14.8 13.3 7.5 17.3 65.3 (3.6)TSMC 60.0 72.0 20.0 2330 TT OW 48071 17.5 13.8 5.0 25.1 37.9 (31.1)Tenaga 8.4 10.3 22.3 TNB MK OW 10716 39.9 14.0 1.6 9.7 37.5 (31.5)Asur 61.6 53.0 (13.9) ASURB MM OW 1427 20.1 17.1 3.6 17.2 30.9 (38.1)Femsa 45 50.0 12.3 FMX US OW 15937 24.7 20.3 1.1 10.3 50.0 (18.9)Nan Ya Plastics Corp 54 61 12.8 1303 TT OW 13143 32.9 22.5 2.9 8.2 60.2 (8.7)Amorepacific Corp 859000 998000 16.2 090430 KS OW 4282 24.6 23.0 0.0 18.5 45.0 (23.9)United Spirits Limited 1228.0 1140.0 (7.2) UNSP IN OW 3304 44.0 34.8 0.3 12.6 42.5 (26.4)China Airlines 10.0 16.0 60.5 2610 TT OW 1410 NM 80.0 0.0 1.3 -7.5 (76.5)Source: Datastream, MSCI, IBES, J.P. Morgan estimates. Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE.

105



2009 winners picked to be 2010 losers (Stocks with relative outperformance end 2008 to date and stocks to avoid)

Name Share Price

Price Target % Change Bloomberg JPM Mkt Cap, P/E (X) Yield (%) ROE (%)

Performance end 08 to date (%)

(LC) (LC) to target Code Rating US$ MM 2009E 2010E 2010E 2010E Absolute Rel to RegionStocks to Avoid Lukoil 56.8 75 32.0 LKOH RU N 48312 6.7 6.6 2.4 12.5 73.8 4.8 Weichai Power 60.3 47.0 (22.0) 2338 HK N 6941 9.9 8.6 0.8 45.2 312.7 243.7 Quanta Computer Inc. 63.1 57 (9.7) 2382 TT UW 7273 10.4 9.9 5.1 20.6 87.0 18.0 HCL Infosystems 146.8 160.0 9.0 HCLI IN N 686 10.5 10.1 4.1 18.7 71.4 2.5 Bank Rakyat Indonesia 7650.0 6650.0 (13.1) BBRI IJ UW 9896 13.3 11.2 3.0 28.4 93.9 24.9 Beijing Capital Land 4.0 3.5 (12.5) 2868 HK N 1063 19.2 12.0 2.8 14.1 222.6 153.6 Banorte 46.5 49.0 5.4 GFNORTEO MM N 7253 15.8 13.1 0.4 15.2 97.6 28.7 Severstal 7.5 8 4.9 CHMF RU UW 7590 NM 13.7 0.8 6.4 130.8 61.8 TMB Bank Public Co. 1.1 1.0 (6.5) TMB TB N 1337 22.1 14.1 0.0 6.8 89.5 20.5 Cencosud 1490.0 1578.0 5.9 CENCOSUD CI UW 6586 17.4 14.4 2.1 9.8 111.3 42.4 Usiminas 50.0 38.5 (23.0) USIM5 BZ UW 14413 38.0 14.6 2.1 10.9 154.3 85.3 BYD Electronic 5.7 4 (36.4) 285 HK UW 1646 22.8 16.3 0.0 11.4 107.3 38.4 Taishin Financial Holdings 12.2 12.0 (1.2) 2887 TT UW 2146 7.3 17.1 5.9 6.5 113.4 44.4 Manila Electric Co. 209.0 165 (21.1) MER PM N 4997 30.3 18.2 3.5 20.1 253.6 184.6 Southern Copper 34.6 27.5 (20.6) PCU US UW 29444 30.4 20.3 2.5 31.9 123.3 54.3 Exito 17140.0 17800 3.9 EXITO CB N 2478 32.7 30.2 0.4 3.4 92.4 23.4 VTB 4.3 4.3 0.9 VTBR LI UW 22229 NM 38.6 0.5 3.5 89.9 20.9 Guarani 4.9 NA - ACGU3 BZ UW 800 nm 44.9 0.0 2.9 221.4 152.4 China Cosco Holdings 9.7 10 2.7 1919 HK N 18608 NM 49.2 0.4 4.2 80.7 11.8 China Southern Airlines 2.5 2.1 (16.7) 1055 HK N 5529 33.2 82.4 0.0 2.3 95.3 26.4 Source: Datastream, MSCI, IBES, J.P. Morgan estimates. Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE. Note: BYD Electronic - We revised PT to HK$4.8 on November 29.

106



Running with 2009 winners (Stocks with relative outperformance end 2008 to date and top picks)

Name Share Price

Target %

Change Bloomberg JPM Mkt Cap, P/E (X) Yield

(%) ROE

(%) Performance end 08 to

date (%) Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2010E 2010E Absolute Rel to RegionTop Picks Thai Oil Public Company 39.8 62.0 56.0 TOP TB OW 2439 6.0 5.6 7.5 19.8 76.0 7.0 Vakifbank 3.1 5.4 73.1 VAKBN TI OW 5104 6.8 5.8 6.1 18.9 168.0 99.0 Bank Asya 3.0 5.0 65.6 ASYAB TI OW 1779 9.4 6.7 3.6 22.0 161.6 92.7 Rosneft 8.1 10.3 27.3 ROSN LI OW 85739 12.1 7.4 1.4 19.5 111.2 42.3 First Gulf Bank 18.8 26.0 38.7 FGB UH OW 7019 8.6 7.8 1.9 16.9 104.9 36.0 Powertech Technology Inc 88.2 108.0 22.4 6239 TT OW 1827 11.0 8.2 5.1 27.6 72.2 3.2 Hyundai Motor Company 94600.0 140000.0 48.0 005380 KS OW 17769 8.8 8.2 1.6 10.1 164.0 95.1 Bank of China - H 4.1 5.7 38.0 3988 HK OW 145716 12.7 9.0 5.0 21.3 94.8 25.9 Shinhan Financial Group 44150.0 60000.0 35.9 055550 KS OW 17853 16.2 10.6 2.0 11.8 71.0 2.1 Siam Commercial Bank 78.5 110.0 40.1 SCB TB OW 8009 12.5 10.6 2.8 16.7 70.0 1.0 Energy Development Corp. 4.1 5.6 38.3 EDC PM OW 1610 10.6 10.7 9.3 24.2 168.7 99.7 Metropolitan Bank 45.5 50.0 9.9 MBT PM OW 1744 17.0 11.5 2.6 1012.7 99.5 30.6 Petrobras 38.5 46.0 19.6 PETR4 BZ OW 209104 12.9 11.7 1.7 17.4 124.8 55.9 All 15.5 21.0 35.5 ALLL11 BZ OW 6130 15.2 11.8 1.8 17.0 110.9 41.9 MediaTek Inc. 504.0 630.0 25.0 2454 TT OW 16998 14.5 11.9 4.9 37.4 132.5 63.5 Acer Inc 79.5 92.0 15.7 2353 TT OW 6606 17.9 12.3 3.8 17.6 91.3 22.4 Copel 33.9 38.0 12.2 CPLE6 BZ OW 5300 9.4 12.4 2.1 7.9 86.9 17.9 MindTree Ltd. 634.5 700.0 10.3 MTCL IN OW 536 80.8 12.6 0.8 33.8 178.0 109.0 AAC Acoustic 10.1 14.6 44.0 2018 HK OW 1607 19.7 12.6 3.2 26.4 191.4 122.4 Astra International 32000.0 37000.0 15.6 ASII IJ OW 13587 15.3 12.6 3.2 24.9 251.6 182.7 Bancolombia 42.8 50.0 16.9 CIB US OW 8426 15.3 12.9 2.7 19.2 86.8 17.9 ASUSTek Computer 63.0 70.0 11.1 2357 TT OW 8277 22.0 13.1 2.5 11.6 74.1 5.2 DongFeng Motor Co., Ltd. 11.0 13.0 18.4 489 HK OW 12207 15.0 13.2 1.3 23.6 339.2 270.2 Hon Hai Precision 135.0 155.0 14.8 2317 TT OW 35831 16.8 13.3 1.9 18.0 145.5 76.5 Grupo Mexico 30.5 31.5 3.3 GMEXICOB MM OW 18350 19.5 13.7 3.4 23.2 284.3 215.3 Unitech Ltd 79.3 120.0 51.3 UT IN OW 4055 10.8 13.7 0.1 17.2 87.0 18.0 Pacific Rubiales 15.0 18.0 20.2 PRE CN OW 3014 nm 14.0 0.0 21.6 691.7 622.7 Samsung SDI 125500.0 210000.0 67.3 006400 KS OW 4876 18.9 14.3 0.0 7.6 151.5 82.6 RusHydro 0.0 0.0 9.0 HYDR RU OW 9898 13.8 14.5 0.0 6.0 74.6 5.7 PDG Realty 17.2 19.0 10.3 PDGR3 BZ OW 3651 21.2 14.7 1.2 19.7 316.3 247.4 Perusahaan Gas Negara 3575.0 4700.0 31.5 PGAS IJ OW 9089 13.9 14.8 2.9 41.8 122.8 53.9 Sberbank 2.3 3.0 34.2 SBER RU OW 48571 112.5 15.0 0.9 12.6 201.4 132.4 Suzano 17.6 22.0 25.0 SUZB5 BZ OW 3145 6.3 14.9 0.7 7.5 94.2 25.2 AMMB Holdings 4.9 5.3 7.1 AMM MK OW 4331 15.5 15.4 1.6 11.0 102.4 33.5 UMC 15.6 19.0 21.8 2303 TT OW 6268 69.8 15.5 0.0 6.0 113.1 44.2 CTC Media 14.8 25.0 68.7 CTCM US OW 2255 17.6 15.4 0.0 19.7 211.7 142.7 Totvs 102.0 125.0 22.5 TOTS3 BZ OW 1828 20.2 15.8 1.1 34.1 277.2 208.2 China Yurun Food Group 18.0 21.0 16.9 1068 HK OW 3877 19.0 16.7 1.5 20.6 97.1 28.2 Container Corp. of India 1144.4 1260.0 10.1 CCRI IN OW 3187 18.1 16.7 1.2 21.5 93.0 24.0 LSR 6.5 10.0 53.8 LSRG LI OW 3044 50.0 17.6 0.0 11.8 755.3 686.3 PT Aneka Tambang Tbk 2250.0 2750.0 22.2 ANTM IJ OW 2251 48.0 18.4 1.0 13.6 139.3 70.4 Tata Power 1321.0 1450.0 9.8 TPWR IN OW 6713 24.0 18.4 1.1 12.8 75.8 6.9 MMK 0.7 1.1 52.7 MAGN RU OW 8269 74.0 18.5 1.4 4.9 174.1 105.1 Xinao Gas 18.2 22.2 21.7 2688 HK OW 2471 23.3 18.8 1.3 14.5 123.3 54.3 CP All Pcl 20.8 23.0 10.6 CPALL TB OW 2811 22.7 19.0 4.0 31.9 76.7 7.7 Naspers Ltd 27900.0 34108.7 22.3 NPN SJ OW 15161 23.7 19.0 1.0 12.0 110.3 41.4 Buenaventura 39.8 34.0 (14.7) BVN US N 10983 19.6 19.4 0.3 21.5 108.3 39.4 Genting 7.1 8.5 20.6 GENT MK OW 7659 24.5 19.7 0.7 9.6 94.4 25.5 Maruti Suzuki India Ltd 1567.2 1630.0 4.0 MSIL IN OW 9701 37.2 19.9 0.4 21.6 198.3 129.4 Tambang Batubara Bukit Asam 15800.0 22500.0 42.4 PTBA IJ OW 3818 12.7 21.1 3.9 28.1 165.5 96.5 Infosys Technologies 2327.9 2550.0 9.5 INFO IN OW 28593 22.8 21.8 1.3 29.6 112.2 43.3

107



Running with 2009 winners (Stocks with relative outperformance end 2008 to date and top picks) (cont'd)

Name Share Price

Target %

Change Bloomberg JPM Mkt Cap, P/E (X) P/E (X)Yield

(%) ROE

(%) Performance end 08 to

date (%) Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2010E 2010E Absolute Rel to RegionChina Mengniu Dairy Co. 23.1 23.0 (0.2) 2319 HK OW 5165 28.2 24.8 0.0 17.5 128.7 59.7 VanceInfo Technologies 16.6 23.0 38.3 VIT US OW 741 32.7 24.7 0.0 19.2 269.5 200.5 ICICI Bank 850.9 NA - ICICIBC IN OW 20307 26.6 26.8 1.4 7.1 91.9 23.0 Larsen & Toubro 1589.5 1675.0 5.4 LT IN N 20441 31.0 27.6 0.0 19.2 102.5 33.5 Northam Platinum Ltd 3980.0 6100.0 53.3 NHM SJ OW 1930 21.7 30.4 1.5 5.6 140.7 71.7 Anglo Platinum 74900.0 91000.0 21.5 AMS SJ OW 24025 70.7 33.1 0.0 14.5 77.4 8.5 LAME 14.0 17.0 21.8 LAME4 BZ OW 5626 58.8 34.9 1.1 62.9 196.9 127.9 Info Edge India 806.4 900.0 11.6 INFOE IN OW 472 36.9 38.3 0.0 16.2 102.3 33.4 Ayala Land 11.8 13.9 18.3 ALI PM OW 3230 40.1 39.4 0.5 7.1 85.2 16.2 Baidu.com 434.2 460.0 5.9 BIDU US OW 15063 70.8 47.4 0.0 36.0 238.7 169.7 Yulon Motor Co., Ltd. 39.0 50.0 28.2 2201 TT OW 1895 41.5 56.6 0.5 1.8 180.8 111.8 Magnit OAO 59.5 80.0 34.5 MGNT RU OW 4953 91.5 58.9 0.0 29.3 270.7 201.8 NCsoft 145000.0 190000.0 31.0 036570 KS OW 2683 71.5 77.4 0.0 7.6 204.4 135.5 OGX 1416.0 2030.0 43.4 OGXP3 BZ OW 26325 nm nm 0.0 3.8 263.0 194.1 Source: Datastream, MSCI, IBES, J.P. Morgan estimates Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE

108



Non-consensus top picks and stocks to avoid

Name Share Price

Target % Change Bloomberg JPM IBES Mkt Cap, P/E (X) Yield (%) ROE (%) Price (LC) (LC) to target Code Rating Rating US$ MM 2009E 2010E 2010E 2010ETop Picks Anglo Platinum 74900 91000 21.5 AMS SJ OW UW 24025 70.7 33.1 0.0 14.5Stocks to Avoid Sabesp 31.6 32.0 1.2 SBSP3 BZ UW OW 4143 5.5 5.8 4.6 10.0Lukoil 56.8 75.0 32.0 LKOH RU N OW 48312 6.7 6.6 2.4 12.5Homex 73.4 102.0 39.0 HOMEX* MM N OW 1904 9.7 8.2 0.0 19.2Weichai Power 60.3 47.0 (22.0) 2338 HK N OW 6941 9.9 8.6 0.8 45.2S-Oil Corp 54500 64000 17.4 010950 KS N OW 5232 10.0 9.3 3.3 16.3Quanta Computer Inc. 63.1 57.0 (9.7) 2382 TT UW OW 7273 10.4 9.9 5.1 20.6HCL Infosystems 147 160.0 9.0 HCLI IN N OW 686 10.5 10.1 4.1 18.7Redecard 26.4 32.0 21.4 RDCD3 BZ N OW 10208 12.7 11.6 7.4 97.9HTC Corp 363 250 (31.0) 2498 TT UW OW 8927 12.9 14.8 5.4 24.6CPFL Energia 32.7 34.0 4.0 CPFE3 BZ UW OW 9027 12.9 11.1 8.5 27.2Bank Rakyat Indonesia 7650 6650 (13.1) BBRI IJ UW OW 9896 13.3 11.2 3.0 28.4PetroChina 9.4 7.4 (21.1) 857 HK UW OW 339259 15.4 13.8 3.2 14.0Cencosud 1490 1578 5.9 CENCOSUD CI UW OW 6586 17.4 14.4 2.1 9.8Beijing Capital Land 4.0 3.5 (12.5) 2868 HK N OW 1063 19.2 12.0 2.8 14.1GAP 35.6 30.0 (15.8) GAPB MM N OW 1545 19.6 18.7 5.0 34.3YTL Power 2.3 2.1 (7.5) YTLP MK UW OW 3987 21.4 11.8 6.6 18.2Datang International 3.3 4.3 28.7 991 HK N OW 12610 23.8 14.6 3.3 7.2Grupo Modelo 65.3 60.0 (8.1) GMODELOC MM N OW 16314 24.2 18.0 2.3 14.7SQM 38.0 33.0 (13.1) SQM US UW OW 9995 30.9 25.5 0.0 28.2China Southern Airlines 2.5 2.1 (16.7) 1055 HK N OW 5529 33.2 82.4 0.0 2.3Usiminas 50.0 38.5 (23.0) USIM5 BZ UW OW 14413 38.0 14.6 2.1 10.9Severstal 7.5 7.9 4.9 CHMF RU UW OW 7590 NM 13.7 0.8 6.4Guarani 4.9 NA - ACGU3 BZ UW OW 800 nm 44.9 0.0 2.9AU Optronics 32.9 27.0 (17.9) 2409 TT UW OW 8985 NM 43.6 0.0 2.3Source: Datastream, MSCI, IBES, J.P. Morgan estimates. Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE.

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AAC Acoustics www.aacacoustic.com

Overweight HK$9.65

Price Target: HK$11

Company description AAC Acoustics is a manufacturer of miniature acoustic components, which are mainly used in mobile handsets. It manufactures speakers, receivers, MFDs, microphones, vibrators, and other acoustic components for handsets. Its key customers include Nokia, Motorola, and leading smartphone players such as Apple and RIM. The company is also diversifying into non-acoustic components, which include phone camera lenses, ceramic components and antennae.

Post mortem AAC continues to gain share within Nokia in speaker and receiver, as well as penetrating into new segments such as microphone and vibrator. Besides, smartphone opportunities and non-acoustic forays provide AAC a strong mid/long-term growth outlook, in our opinion. We expect its margins to continue to improve through 2010, mainly due to newer products and better mix (due to higher smartphone content).

Potential for earnings upgrades We estimate that a 1% upside in top line will lead to a 1.5% increase in net profit. We believe AAC is not sensitive to credit cost fluctuation as it is operating at minimal debt level.

How much recovery is priced into the stock? The stock has risen from nearly 4x forward P/E in Dec-08, when the handset industry was looking at a 10% decline in 2009, to about 12x forward P/E, when we are looking at a 12% handset industry growth in 2010. Hence, any improvement in handset outlook and better visibility should lead to a further re-rating of the stock.

Price target and key risks Our Dec-10 PT of HK$11 is based on our 10-year DCF valuation, assuming a WACC of 9%, a terminal growth rate of 0%, and a risk-free rate of 2.4%. Our PT implies an FY10E P/E of 14x, the mid-point of its historical trading range of 4x-20x. A key risk to our PT is global handset demand volatility.

HK/China Technology Hardware Charles GuoAC (852) 2800-8532 [email protected]


Price performance

0

3

6

9

12

Nov-08 Feb-09 M ay-09 Aug-09 Nov-09

AAC Acoustics (HK$)HSI (rebased)

Source: Bloomberg.

Performance 1M 3M 12M Absolute (%) 15.4 37.9 44.7 Relative (%) 9.8 31.5 66.7

Source: Bloomberg. Company data

52-week range (HK$) 2.20-10.22 Mkt cap. (HK$MM) 11,850 Mkt cap. (US$MM) 1,529 Avg daily value (US$MM) 1.9 Avg daily volume (MM) 2.0 Shares O/S (MM) 1,228 Date of price 5-Nov-09 Index: Hang Seng 21,479 Free float (%) 53 Exchange rate 7.8

Source: Bloomberg. Bloomberg: 2018 HK; Reuters: 2018.HK Rmb in millions, year-end December FY08 FY09E FY10E FY11E Sales 2,256 2,239 3,093 3,809 Net profit 590 596 873 1,072 EPS (Rmb) 0.48 0.49 0.71 0.87 FD EPS (Rmb) 0.48 0.49 0.71 0.87 DPS (Rmb) 0.10 0.19 0.28 0.35 Sales growth (%) 15.6% (0.8%) 38.2% 23.1% Net profit growth (%) 7.8% 0.2% 47.3% 22.8% EPS growth (%) 8.2% 1.1% 46.5% 22.7% ROE (%) 20.8% 18.2% 23.7% 25.1% P/E (x) 17.7 17.5 12.0 9.7 FD P/E (x) 17.7 17.5 12.0 9.7 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009. We raised our PT to HK$14.6 on 10 Nov 2009.

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AAC Acoustics: Summary of financials Profit and loss statement Rmb in millions, year-end December FY08 FY09E FY10E FY11ERevenues 2,256 2,239 3,093 3,809 Cost of Goods Sold 1,316 1,259 1,713 2,122Gross Profit 940 980 1,380 1,688 SGA &RD Expenses 272 275 327 396Operating Profit (EBIT) 631 651 983 1,206EBITDA 764 813 1175 1437 Interest Income 0 0 0 0 Interest Expense -10 -5 -4 -4 Investment Income (Exp.) 0 0 0 0 Non-Operating Income (Exp.) -5 8 0 0Earnings before tax 616 654 979 1,202 Tax -26 -62 -108 -132Net Income (Reported) 590 596 873 1072 Rmb EPS (Reported) 0.48 0.49 0.71 0.87BPS 2.53 2.79 3.22 3.74DPS 0.10 0.19 0.28 0.35Shares Outstanding (MM) 1,230 1,228 1,228 1,228Source: Company, J.P. Morgan estimates.

Balance sheet Rmb in millions, year-end December

FY08 FY09E FY10E FY11ECash and cash equivalents 1,283 1,167 1,474 1,840Accounts receivable 574 1,022 1,114 1,292Inventories 296 530 434 504Others 102 104 104 104Current assets 2,254 2,824 3,125 3,741 LT investments 0 0 0 0Net fixed assets 1,359 1,425 1,633 1,803Others 91 102 102 102Total assets 3,704 4,351 4,860 5,645 Liabilities ST loans 200 239 130 145Payables 366 632 719 836Others 23 53 59 69Total current liabilities 589 923 908 1050Long term debt 0 0 0 0Other liabilities 0 0 0 0Total liabilities 589 923 908 1050Shareholders' equity 3,108 3,428 3,952 4,595Source: Company, J.P. Morgan estimates.

Cash flow statement Rmb in millions, year-end December

FY08 FY09E FY10E FY11ENet Income 590 596 873 1,072Depr. & Amortisation 133 162 192 231Change in working capital 93 -389 99 -122Other 2 -5 -2 -2Cash flow from operations 818 364 1,163 1,178 Capex -438 -228 -400 -400Disposal/(purchase) -113 -11 0 0Cash flow from investing -551 -239 -400 -400Free cash flow 380 136 763 778 Equity raised/ (repaid) -66 -38 0 0Debt raised/ (repaid) 37 38 -108 15Other 0 -3 2 2Dividends paid 0 -239 -349 -429Cash flow from financing -28 -241 -456 -412 Net change in cash 232 -115 307 366Beginning cash 1,051 1,283 1,167 1,474Ending cash 1,283 1,167 1,474 1,840Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December FY08 FY09E FY10E FY11EGross Margin 41.7 43.8 44.6 44.3EBITDA margin 33.9 36.3 38.0 37.7Operating Margin 28.0 29.1 31.8 31.7Net Margin 26.2 26.6 28.2 28.1SG&A/Sales 12.1 12.3 10.6 10.4 Sales growth 15.6 -0.8 38.2 23.1Operating Profit Growth 5.5 3.2 50.9 22.7Net profit growth 7.8 0.2 47.3 22.8EPS (Reported) growth 8.2 1.1 46.5 22.7 Interest coverage (x) 62.9 134.3 243.6 298.9Net debt to total capital Net Cash Net Cash Net Cash Net CashNet debt to equity Net Cash Net Cash Net Cash Net Cash Asset Turnover 60.9 51.5 63.6 67.5Working Capital Turns (X) 1.4 1.3 1.5 1.6ROE 20.8 18.2 23.7 25.1ROIC 19.8 17.1 22.6 24.3ROIC (net of cash) 32.0 26.3 34.3 39.0Source: Company, J.P. Morgan estimates.

112



ABSA Group Ltd www.absa.co.za

Overweight R126.00 23 November 2009

Price Target: R153.71 Jun 2010

Company description Absa provides the most geared play on the domestic retail market and its investment banking division provides a more robust earnings base off which to grow in our view. Growth opportunities in Africa are currently limited to investment banking and bancassurance/wealth management. Absa is 58% held by Barclays.

Post mortem Mortgage impairment unwind should support earnings growth during FY10E and FY11E. We expect NIR growth to be a key earnings differentiator and ASA is well positioned for NIR growth from its: (i) large and established retail banking franchise, distribution and cross-sell ability; and (ii) established and growing corporate franchises, enjoying flow, scale as well as strong client relationships in our view.

Potential for earnings upgrades Top line across the SA banks is set remain relatively sluggish and the negative endowment should exacerbate margin pressure. We expect robust NIR growth and the mortgage impairment unwind should support earnings growth during FY10E and FY11E. A more expansionary stance introduces upside risk to FY10E, whilst a healthy banking system provides downside protection.

How much recovery is priced into the stock? Absa remains our top pick in the sector, with a cheap valuation not reflecting its strong ROE franchise and robust earnings trajectory in our view. Management instability however remains a key overhang.

Price target and key risks Our Jun-10 price target of 15,371c is calculated at the lower of our SOTP and economic valuation methodology, rolled forward at COE. Key risks to rating and PT include significant variation to our base case interest rate assumptions, while a collapse in the property market could significantly impact the value of realizations.

South Africa Computer Hardware Mervin NaidooAC (27-11) 507-0716 [email protected]

J.P. Morgan Equities Ltd.

Absa relative price performance

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1.0

2.0

3.0

02 03 04 05 06 07 08 09

Source: I-Net.

113



ABSA Group Ltd: Summary of Financials Profit and Loss Statement Ratio Analysis R mn millions, year end Dec FY08A FY09E FY10E FY11E R mn millions, year end Dec FY08A FY09E FY10E FY11E Per Share Data Net interest income 22,106 21,815 22,920 25,966 EPS Reported 1567.56 1143.53 1542.41 1987.04

% Change Y/Y 17.0% (1.3%) 5.1% 13.3% EPSAdjusted 1,412.10 1,216.48 1,581.38 2,039.56Non-interest income 13,343 14,947 17,585 20,005 % Change Y/Y 7.3% (13.9%) 30.0% 29.0%

Fees & commissions - - - - DPS 595 500 642 828% change Y/Y - - - - % Change Y/Y 6.2% -15.9% 28.4% 28.8%Trading revenues - - - - Dividend yield 5.5% 4.3% 5.5% 7.0%% change Y/Y - - - - Payout ratio 38.0% 43.8% 41.7% 41.6%

Other Income - - - - BV per share 6,950.10 7,892.95 8,878.82 10,125.50Total operating revenues 35,449 36,763 40,504 45,971 NAV per share 6,950.10 7,892.95 8,878.82 10,125.50

% change Y/Y 16.3% 3.7% 10.2% 13.5% Shares outstanding 680.3 718.2 718.9 721.1Admin expenses -21,193 -22,285 -24,029 -26,707 % change Y/Y 14.9% 5.2% 7.8% 11.1% Return ratios Other expenses - - - - RoRWA - - - -

Pre-provision operating profit 21,048 21,482 23,658 26,760 Pre-tax ROE - - - -% change Y/Y 27.5% 2.1% 10.1% 13.1% ROE 23.4% 16.4% 18.4% 20.9%

Loan loss provisions 8,858 14,513 14,147 14,933 RoNAV 23.7% 16.8% 18.7% 21.2%Other provisions - - - - Other nonrecurrent items - - - - Revenues Earnings before tax 15,209 11,220 15,606 20,315 NIM (NII / RWA) - - - -

% change Y/Y 8.0% (26.2%) 39.1% 30.2% Non-IR / average assets 1.9% 1.9% 2.1% 2.2%Tax (charge) 3,966 2,995 4,271 5,731 Total rev / average assets 5.2% 4.4% 4.9% 5.3%

% Tax rate 26.1% 25.0% 26.0% 27.0% NII / Total revenues 45.8% 35.5% 38.4% 42.3%Minorities 194 229 252 277 Fees / Total revenues 54.2% 64.5% 61.6% 57.7%Net Income (Reported) 10,592 7,996 11,083 14,307 Trading / Total revenues - - - - Balance sheet R mn millions, year end Dec FY08A FY09E FY10E FY11E R mn millions, year end Dec FY08A FY09E FY10E FY11E ASSETS Cost ratios Net customer loans 532,171 521,753 567,625 639,774 Cost / income 49.4% 50.1% 49.6% 49.2%

% change Y/Y 16.7% (2.0%) 8.8% 12.7% Cost / assets 3.0% 2.9% 2.9% 2.9%Loan loss reserves 8,858 14,513 14,147 14,933 Staff numbers 37,828 35,558 35,558 35,914Investments - - - - Other interest earning assets - - - - Balance Sheet Gearing

% change Y/Y - - - - Loan / deposit 132.1% 120.2% 127.7% 132.6%Average interest earnings assets 597,154 670,570 702,657 777,464 Investments / assets 4.2% 4.5% 4.5% 4.5%Goodwill 957 957 957 957 Loan / assets 68.8% 66.4% 66.3% 67.0%Other assets 62,228 67,206 72,583 78,389 Customer deposits / liabilities 60.6% 59.6% 58.3% 57.9%Total assets 773,758 785,714 856,082 955,051 LT Debt / liabilities 24.7% 25.9% 26.6% 26.8% LIABILITIES Asset Quality / Capital Customer deposits 436,914 431,200 458,084 506,686 Loan loss reserves / loans 1.6% 2.7% 2.4% 2.3%

% change Y/Y 18.6% (1.3%) 6.2% 10.6% NPLs / loans 3.5% 7.3% 6.4% 5.6%Long term funding 182,840 191,627 214,065 239,195 LLP / RWA - - - -Interbank funding - - - - Loan loss reserves / NPLs 46.8% 36.9% 38.2% 40.5%Average interest bearing liabs 402,730 434,057 444,642 482,385 Growth in NPLs 158.8% 107.8% (5.7%) (0.5%)Other liabilities - - - - RWAs - - - -Retirement benefit liabilities - - - - % YoY change - - - -Shareholders' equity - - - - Core Tier 1 - - - -Minorities 1,042 1,271 1,523 1,800 Total Tier 1 - - - -Total liabilities 720,792 723,111 786,083 875,594 Source: Company reports and J.P. Morgan estimates.

114



Acer Inc. www.acer.com

Overweight NT$77.8

Price Target: NT$92

Company description Acer (TWSE: 2353) is the No #2 notebook PC brand globally and operates four sub brands—Acer, Gateway, Packard Bell and e-machines. It operates a purely outsourced business model with what we believe to be a high degree of focus on channel management and branding.

Post mortem We believe Acer has negotiated the downturn well, with a strong focus on inventory, receivables management, and lower price points (netbooks). Acer has invested in the expansion of its China business. The company’s OP margins have also been on an upswing as Acer has kept its OPEX under a tight control. In 2009, Acer has benefited from the consolidation in the NB brand market share, and emerged as the clear No #2 in PCs, surpassing Dell.

Potential for earnings upgrades We believe the potential for upward earnings estimate revisions comes from OP margin upside through: (1) better pricing vis-à-vis ODM vendors; and (2) a focus on more profitable growth with disciplined pricing to distributors. Improvement in product mix towards emerging markets should also facilitate this process. Acer is trying to offer a broader SME product line and is also considering avenues to tap into the corporate market. If these come through, then we see upside risk to revenue growth assumptions for 2010.

How much recovery is priced into the stock? Acer’s strong execution and market share gains appear to be priced into its share price. What is not yet priced in, in our view, is the potential for margin expansion, which leaves room for earnings upside in 2010E. The market ascribes a zero value to Acer’s smartphone foray, which even if moderately successful, could trigger a re-rating.

Price target and key risks Our Jun-10 PT of NT$92 implies 15x 2010E core earnings, which we believe is fair, supported by 36%/19% OP profit growth in 2010/2011E, largely driven by OP margin expansion. A key risk to our PT is increase in competition.

Taiwan Computer Hardware Gokul HariharanAC (852) 2800-8564 [email protected]

Alvin KwockAC (852) 2800-8533 [email protected] J.P. Morgan Securities (Asia Pacific) Limited

Price performance

30

60

90

NT$

Nov-08 Feb-09 May-09 Aug-09 Nov-09

2353.TW share price (NT$)TSE (rebased)

Source: Bloomberg. Performance

1M 3M 12M Absolute (%) -1.8 14.3 72.1 Relative (%) -0.8 5.6 13.1


52-week range (NT$) 36.6-86.5 Mkt cap. (NT$B) 208.94 Mkt cap. (US$B) 6.42 Avg daily value (US$MM) 36.36 Avg daily volume (MM) 36.36 Shares O/S (MM) 2,686 Date of price 5-Nov-09 Index: TWSE 7.417 Free float (%) 68 Exchange rate 32.5

Source: Bloomberg.

Bloomberg: 2353.TT; Reuters: 2353.TW NT$ in billions, year-end December FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E Sales 546 574 668 766 ROE (%) 14.7 13.4 16.8 18.5 Operating profit 13.7 15.3 20.9 24.9 Core ROIC (%) 14.0 13.7 17.9 19.1 EBITDA 14.6 16.1 21.7 25.7 Core adjusted EPS 4.43 4.23 6.18 7.38 Pre-tax profit 14.8 15.3 21.7 26.3 Core OP growth (%) 55% 12% 36% 19% Net profit 11.7 11.8 17.4 21.0 Core adjusted P/E (x) 17.7 17.7 12.1 10.1 MV of employee bonus 2.1 2.2 3.1 3.8 Quarterly EPS (NT$) 1Q 2Q 3Q 4Q Adjusted net profit 11.7 11.8 17.4 21.0 EPS (FY08) 1.21 1.20 1.15 1.06 New Taiwan GAAP EPS (NT$)* 4.62 4.44 6.48 7.82 EPS (FY09E) 0.77 0.89 1.29 1.49 New Taiwan GAAP P/E (x) 16.8 17.5 12.0 9.9 EPS (FY10E) 1.36 1.38 1.76 1.96 NEW Taiwan GAAP EPS growth 4% -4% 46% 21% DPS (NT$) 3.60 2.00 3.15 4.10 YE BPS (NT$) 32.62 35.36 38.53 42.40 P/BV (x) 2.4 2.2 2.0 1.8 Jun-10 PT NT$ 92 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

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Acer Inc.: Summary of financials NT$ in millions, year-end December Income statement FY08 FY09E FY10E FY11E Ratio analysis FY08 FY09E FY10E FY11E % Revenues 546,274 574,380 667,558 765,826 Gross margin 10.4 10.1 10.6 10.6 Cost of Goods Sold 489,377 516,089 596,908 684,704 EBITDA margin 2.7 2.8 3.3 3.4 Gross profit 56,897 58,290 70,649 81,123 Operating margin 2.5 2.7 3.1 3.3 R&D Expenses 550 924 1,068 1,225 Net profit margin 2.1 2.1 2.6 2.7 SG&A Expenses 41,113 39,857 45,679 51,387 R&D/sales 0.1 0.2 0.2 0.2Operating Profit (EBIT) 13,683 15,275 20,928 24,917 SG&A/Sales 7.5 6.9 6.8 6.7EBITDA 14,639 16,091 21,706 25,661 Interest Income 1,208 570 1,075 1,209 Sales growth 18 5 16 15 Interest Expense -1,306 -562 -1,272 -1,349 EBIT growth 34 12 37 19 Investment Income (Exp.) 404 318 300 300 Net profit growth (%) -9 1 47 21 Non-Operating Income (Exp.) 428 (289) 708 1,189 EPS (Reported) growth -13 -4 46 21Earnings before tax 14,807 15,318 21,739 26,266 EPS (new TW GAAP) growth 4 -4 46 21 Tax -3,169 -3,479 -4,348 -5,253 Interest coverage (x) 10 27 16 18Net income 11,742 11,838 17,391 21,013 Net Debt to total Capital -9 -16 -12 -16Net Income (new TW GAAP) 11,742 11,838 17,391 21,013 Net debt to equity -10 -20 -14 -20

EPS (reported) (NT$) 4.62 4.44 6.48 7.82 Sales/Assets (x) 2.2 1.9 2.0 2.1EPS (new TW GAAP) (NT$) 4.62 4.44 6.48 7.82 Working Capital Turns (X) 3.0 3.1 3.2 0.0BPS (NT$) 32.62 35.36 38.53 42.40 ROE 14.7 13.4 16.8 18.5DPS (NT$) 2.00 3.15 4.10 5.00 ROIC 11.7 11.6 15.0 16.0Shares Outstanding (MM) 2,643 2,686 2,686 2,686 Core ROIC 14.0 13.7 17.9 19.1

Balance sheet FY08 FY09E FY10E FY11E Cash flow statement FY08 FY09E FY10E FY11E

Cash and Cash Equivalents 22,142 40,946 40,527 48,785 Net income 11,742 11,838 17,391 21,013Accounts receivable 108,668 138,570 162,508 178,899 Depreciation & amortisation 956 816 777 744Inventories 40,028 55,428 65,003 71,560 Other Non-Cash Items 0 0 0 0Others 15,553 16,859 19,772 20,730 Change in working capital -8,043 -11,412 -14,077 -3,949Current assets 186,391 251,804 287,810 319,973 Cash flow from operations 4,551 1,242 4,092 17,808

LT investments 6,774 9,174 9,125 8,844 Capex 1,673 1,019 0 0Net fixed assets 5,988 4,447 3,669 2,925 Disposal/ (purchase) 4,430 -2,400 49 281Other long term assets 44,290 33,499 33,499 33,499 Net Cash from Investing -6,350 9,116 49 281Total Assets 243,442 298,924 334,103 365,241 Free cash Flow -6,634 12,440 3,792 17,508

Liabilities Equity raised/(repaid) 5,634 -1,160 0 0ST Debt 9,337 1,360 1,578 1,626 Debt raised/(repaid) -8,709 8,589 3,530 779Payables 72,116 107,737 125,626 138,330 Other -2,274 6,304 0 0Others 67,862 67,437 71,897 79,149 Dividends -8,655 -5,286 -8,091 -10,610Total current liabilities 149,315 176,535 199,101 219,105 Cash flow from financing -14,004 8,447 -4,560 -9,831Long term debt 4,135 20,701 24,013 24,744 Other liabilities 7,115 7,517 7,517 7,517 Net change in cash -15,803 18,805 -420 8,259Total liabilities 160,565 204,752 230,631 251,366 Beginning cash 37,945 22,142 40,946 40,527Shareholder's equity 82,878 94,171 103,472 113,875 Ending cash 22,142 40,946 40,527 48,785Source: Company reports and J.P. Morgan estimates.

116



Aldar Properties www.aldar.com

Overweight Price: AED5.46

Price Target: AED7.8

Company description Aldar Properties is Abu Dhabi’s largest property developer, with a diversified construction portfolio and 37% sovereign ownership. Tasked with implementing Abu Dhabi’s Plan 2030, Aldar operates as a master developer, sourcing land for development, selling completed residential properties and developing recurring income-generating assets. Aldar was listed on the Abu Dhabi stock Exchange in April 2005, where the company has a foreign ownership limit of 40%.

Post mortem Al Raha Beach and Yas Island are the company’s two most important projects and account for over 70% of the total landbank under development. With a total built-up area of 6.4Mn Sq M, Al Raha is a mixed-used residential project with residential handovers starting from mid 2010. Yas Island, which accounts for a sizable portion of Aldar’s investment property portfolio, is one of the two key tourist destinations being developed in Abu Dhabi, with a flagship Formula 1 race track, theme parks, retail and hospitality. The two projects account for 54% of Aldar's SOTP-based NAV.

Potential for earnings upgrades For future sales, we assume 30-35% lower residential and land sale prices from the peak in 2008. However, while there have not been any new residential launches this year, the recent pick-up in land transactions is encouraging - 3Q09 land sales by Aldar were at prices that were 80-85% above our forecasts. As the market stabilizes and retail investors’ confidence is restored, better then forecast prices for future residential and land sales could serve as key triggers for profitability growth and stock performance.

Price target and key risks Aldar, our top pick and one of the preferred names in our EMEA property universe, trades at attractive valuations (30% discount to our Dec 2010 SOTP-based PT of AED7.8 – favourable compared to its regional peers at 20-25% premiums). Key risks include Aldar’s high exposure to external debt, where an extended property market downturn could restrict Aldar’s ability to meet its debt obligation. Although we see this as unlikely as the company enjoys strong govt. support and is critical to Abu Dhabi’s plan 2030.

MENA UAE Property Muneeza HasanAC (Real Estate/Construction) (971-4) 428-1766 [email protected] JPMorgan Chase Bank N.A. Dubai Branch

2

4

6

Dh


Price Performance

Source: Bloomberg

Performance 1M 3M 12M

Absolute (%) -12.0 17.7 9.3

Source: Bloomberg

Company data Price (Dh) 5.46 Date of price 23-Nov-09 Price Target (Dh) 7.8 52-week range (Rs) 6.65 - 1.96 Market cap (AED Mn) 14,075 Market cap (US$ Mn) 3,835

Source: Bloomberg & J.P. Morgan

Bloomberg: ALDAR UH; Reuters: ALDR.AD AED Mn; year end December FY08 FY09E FY10E FY11E Sales 4,978 2,574 7,189 6,901 Net profit 3,447 1,764 2,192 2,539 Headline EPS (AED) 1.34 0.68 0.85 0.98 Adjusted EPS (AED) 0.74 0.02 0.32 0.56 Sales growth (%) 306% -48% 179% -4% Net profit growth (%) 53% -49% 24% 16% P/E (x) 4.1 8.0 6.4 5.5 Net D/E 66% 124% 107% 94% P/BV 0.88 0.79 0.70 0.63 ROE (%) 21% 10% 11% 11% Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

117



Aldar Properties: Summary of Financials Profit and Loss statement FY08A FY09E FY10E FY11E Cash flow statement FY08A FY09E FY10E FY11EDh in millions, year-end Dec Dh in millions, year-end Dec Sales 4,978 2,574 7,189 6,901 Net Income 3,447 1,764 2,192 2,539

% change Y/Y 305.8% (48.3%) 179.3% (4.0%) Depreciation & amortisation 14 163 203 211Gross Profit 2,683 978 2,495 2,904 Change in working capital ex capex 2,335 (692) 525 5,164

% change Y/Y 379.2% (63.6%) 155.1% 16.4% Fair value gain on investment prop. -1,533 -1,700 -1,360 -1,088EBITDA 2,310 306 1,630 2,287 Other - - - -

% change Y/Y (4.3%) (86.8%) 433.1% 40.3% Cash flow from operations 4,645 (386) 2,155 7,451EBIT 3,818 1,843 2,788 3,164

% change Y/Y 59.4% (51.7%) 51.3% 13.5% Capex (16,341) (10,063) (904) (6,853)Net Interest (371) (79) (596) (625) Other adjustments (4,523) (544) (253) 417Earnings before tax 3,447 1,764 2,192 2,539 Free cash flow (9,060) (9,757) 1,015 318

% change Y/Y 77.5% (48.8%) 24.3% 15.8% Cashflow from Investments (20,864) (10,607) (1,157) (6,436)Revaluation gain 1,533 1,700 1,360 1,088 Net Income (Reported) 3,447 1,764 2,192 2,539 Debt raised/(repaid) 17,361 10,614 0 0

% change Y/Y 77.5% (48.8%) 24.3% 15.8% Dividends paid (232) 0 0 (51)Net Income (Adjusted) 1,914 64 832 1,451 Others (1,137) (457) 231 (65)

% change Y/Y 1494.2% (96.7%) 1206.9% 74.4% Cashflow from Financing 16,224 10,156 231 (65)Shares Outstanding 2,577.9 2,577.9 2,577.9 2,577.9 Change in Cash (196) (916) 633 325EPS (reported) 1.34 0.68 0.85 0.98 Beginning cash 3,358 3,163 2,246 2,879

% change Y/Y 53.1% (48.8%) 24.3% 15.8% Ending cash 3,163 2,246 2,879 3,204

Balance sheet FY08A FY09E FY10E FY11E Ratio Analysis FY08A FY09E FY10E FY11EDh in millions, year-end Dec Dh in millions, year-end Dec Cash and cash equivalents 12,066 11,150 11,783 12,108 Gross Margin 53.9% 38.0% 34.7% 42.1%Accounts receivable 5,651 6,176 5,751 5,866 EBITDA Margin 46.4% 11.9% 22.7% 33.1%Trading property under development 7,130 11,471 10,502 12,806 EBIT margin 76.7% 71.6% 38.8% 45.9%Other - - - - Adjusted net profit margin 38.4% 2.5% 11.6% 21.0%Current assets 24,847 28,798 28,036 30,781 SG&A/Sales 3.1% 5.0% 4.5% 4.5%Investment property 5,149 6,210 10,190 19,124 Investment property under development 15,804 21,394 20,287 16,645 Sales growth 305.8% (48.3%) 179.3% (4.0%)Others 1,098 1,642 1,895 1,478 EBITDA growth (4.3%) (86.8%) 433.1% 40.3%Total assets 49,767 61,520 64,042 71,795 Adjusted net profit growth 1494.2% (96.7%) 1206.9% 74.4%ST loans 2,683 2,683 2,683 2,683 Adjusted EPS growth 1274.8% (96.7%) 1206.9% 74.4%Payables 7,464 6,948 8,627 6,901 Others 2,136 1,878 299 7,303 Interest coverage (x) 10.3 23.3 4.7 5.1Total current liabilities 12,283 11,509 11,609 16,887 Net debt to Total Capital 21.1% 35.8% 33.4% 29.4%Long term debt 21,429 32,193 32,423 32,409 Net debt to Equity 75.1% 123.9% 107.2% 93.8%Other liabilities 1,546 1,696 1,927 1,912 Total liabilities 33,735 43,724 44,054 49,319 Sales/assets 10.0% 4.2% 11.2% 9.6%Minorities 0 0 0 0 ROE 21.5% 9.9% 11.0% 11.3%Shareholders' equity 16,032 17,796 19,988 22,476 ROCE 6.1% 0.3% 2.7% 3.8%Total Liabilities & Shareholders Equity 49,767 61,520 64,042 71,795 Source: Company reports and J.P. Morgan estimates.

118



América Latina Logística (ALL) www.all-logistica.com

Overweight R$15.5

Price Target: R$21.0

Company description América Latina Logística (ALL) is the largest independent provider of logistics services in South America. It operates rail service on over 20,000 km of track in Brazil and Argentina and has an intermodal trucking business. 70% of its volumes (and a higher % of profits) come from shipping agricultural products, mainly soy, soy meal, corn, sugar, and fertilizer.

Post mortem The company has continued to invest in efficiency and capacity expansion throughout the downturn, which should allow it to benefit from higher volumes and lower costs as well as from higher prices during the recovery. In addition, the economic downturn has increased new industrial business as clients focused again on cost control and decided to finally make the switch to cheaper rail transport (vs. truck).

Potential for earnings upgrades Economic recovery, as well as a significant recovery in agricultural production in Argentina and Brazil, will likely help ALL grow its front haul and back haul (mostly fertilizer) traffic. It should also force truck rates up, allowing ALL to increase its rates, which are referenced to truck rates.

How much recovery is priced into the stock? We think ALL valuations are not factoring in a significant recovery in volumes and yields next year. ALL is trading at 7.9x ’10e EBITDA compared to hist. avg of 10.6x. It’s also trading at a 10% discount to US peers, whereas historically it has traded at a significant premium.

Price target and key risks We have a R$21/share price target for Dec ’09. It is based on a mix of DCF analysis and a 10.6x historical multiple on 2010e EBITDA. Key risk is recovery in prices, diesel prices and operational problems (accidents). ALL shares are much less volatile than those of the rest of our agribusiness coverage.



Price performance R$

0.0

5.0

10.0

15.0

20.0

Nov-08 M ar-09 Jul-09 Nov-09

Source: Bloomberg.


Absolute (%) 22% 17% 33 % Relative (%) 19% 1% -49 %

Source: Bloomberg. As of Nov 17 09.

Company data 52-week range (BRL) 7.49-16.57 Mkt cap. (BRL) 10,808 Mkt cap. (US$MM) 6,276 Avg daily value (US$MM) 42.8 Avg daily volume (MM) 5.2 Shares O/S (MM) 688 Date of price 11/25/09 Index: iBovespa 67,917 Free float (%) 92% Exchange rate 1.7221

Source: Bloomberg Bloomberg: ALLL11 BZ; Reuters: ALLL11.SA BRL in millions, year-end December FY08 FY09E FY10E FY11E Sales 2,530 2,862 3,191 3,570 Net profit 293 448 598 772 EPS (LC) 0.51 0.78 1.04 1.34 FD EPS (LC) 0.05 0.07 0.09 0.11 DPS (LC) 0.13 0.19 0.26 0.34 Sales growth (%) 19% 13% 12% 12% Net profit growth (%) 35% 53% 33% 29% EPS growth (%) 35% 53% 33% 29% ROE (%) 11% 15% 17% 19% P/E (x) 30.3 19.8 14.8 11.5 FD P/E (x) 19.74 14.80 11.46 9.20 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

119



América Latina Logística: Summary of financials Profit and loss statement BRL in millions, year-end December FY08 FY09E FY10E FY11ERevenue 2,515 2,862 3,191 3,570% change Y/Y 18.7% 13% 12% 12%Gross margin (%) 51.6% 41% 40% 40%EBITDA 1,182 1,477 1,689 1,924% change Y/Y 29% 20% 14% 14%EBITDA margin (%) 47% 52% 53% 54%EBIT 933 1,043 1,140 1,293% change Y/Y 134% 17% 9% 13%EBIT margin (%) 37% 36% 36% 36%Net interest 206 -452 -354 -278Earnings before tax 222 591 787 1,016% change Y/Y -17% 62% 33% 29%Tax (16) -143 -189 -244as % of EBT -7% 24% 24% 24%Net income (reported) 206 448 598 772% change Y/Y -5% 53% 33% 29%Shares O/S (MM) 576 576 576 576EPS (reported) (LC) 0.36 0.78 1.04 1.34Source: Company, J.P. Morgan estimates.

Balance sheet BRL in millions, year-end December

FY08 FY09E FY10E FY11ECash and cash equivalents 2,643 1,635 1,302 1,050Accounts receivable 154 212 237 265Inventories 94 101 108 118Others 430 279 303 330Current assets 3,320 2,228 1,950 1,764LT investments 3,721 652 652 652Net fixed assets 4,724 4,331 4,665 4,975Total assets 11,765 10,128 10,185 10,309Liabilities ST loans 765 928 663 398Payables 987 Others 547 425 546 582Total current liabilities 2,300 2,145 2,060 1,912Long-term debt 5,049 3,530 3,278 3,026Other liabilities 1,902 1,384 1,329 1,274Total liabilities 9,251 7,059 6,667 6,212Shareholders’ equity 2,496 3,070 3,518 4,097BVPS (LC) 4.33 5.33 6.11 7.11Source: Company, J.P. Morgan estimates.

Cash flow statement BRL in millions, year-end December

FY08 FY09E FY10E FY11EEBIT 933 1,043 1,140 1,293Depreciation & amortization (194) -256 -310 -350Change in working capital -450 -22 125 51Taxes (49) -143 -189 -244Cash flow from operations 461 1,079 1,331 1,396Capex 790 -624 -644 -661Disposal/(purchase) Net interest (415) 222 198 159Free cash flow 363 -521 -333 -252Equity raised/(repaid) 0 0 0Debt raised/(repaid) 0 0 0Other -741 0 0 0Dividends - -112 -149 -193Beginning cash 1,816 2,196 1,635 1,302Ending cash 2,643 1,635 1,302 1,050DPS (LC) - 0.19 0.26 0.34Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December FY08 FY09E FY10E FY11EEBITDA margin 47% 52% 53% 54%Operating margin 37% 36% 36% 36%Net profit margin 8% 16% 19% 22%SG&A/sales 0.03 4% 3% 3%Sales growth 19% 13% 12% 12%Net profit growth -5% 53% 33% 29%Sales per share growth -31% 13% 12% 12%EPS growth -5% 53% 33% 29%Interest coverage (x) 1.08 1.77 2.24 3.28Net debt to total capital 0.27 92% 75% 58%Net debt to equity 1.27 0.92 0.75 0.58Sales/assets 0.21 0.28 0.31 0.35EBIT margin 37% 36% 36% 36%ROCE 0.10 0.13 0.14 0.15Assets/equity (x) 4.71 3.30 2.90 2.52ROI 1.8% 4.0% 6.0% 7.0%ROE 8.3% 15.0% 17.0% 19.0%Source: Company, J.P. Morgan estimates.

120



AMMB Holdings www.ambg.com.my

Overweight Price: M$4.70

Price Target: M$5.25

Company description AMMB Holdings is the holding company of the AmBank Group, one of Malaysia’s premier financial services group with leadership positions in the commercial banking, investment banking and insurance sectors. The AmBank Group has total assets of M$86.5B, 186 branches nationwide and a staff strength close to 10,000. Post mortem With a leading wholesale investment banking franchise, we expect the bank to benefit from the capital market pick-up in tandem with the improvement in the economy. Also, recent liberalization measures should create a more vibrant capital market which we believe AMMB will benefit from. We also expect ANZ management’s transformation efforts to pay off in the coming 18 months as the group has developed new income streams, namely treasury whilst strengthening the consumer and SME banking business and enhanced its risk management system.

Potential for earnings upgrades We see scope for significant earnings upgrades as the wholesale banking is a flow business where earnings flow straight through the bottom-line. Also, earlier concerns on rising credit costs should dissipate in tandem with the improving economy.

How much recovery is priced into the stock? The stock is trading at a P/B of 1.5x which we believe does not reflect the potential of the transformational changes that ANZ is putting through as well as the upside income potential for the wholesale banking business.

Price target and key risks Our Jun-10 PT of M$5.25 is based on a two-stage DDM model assuming sustainable ROEs of 16%. The key risk is that capital markets fail to recover and that the economic recovery stalls.

Malaysia Banks Chris Oh, CFAAC (60-3) 2770-4728 [email protected]


Price performance M$

12345

10-0

8

01-0

9

04-0

9

07-0

9

10-0

9

Source: Bloomberg.


Source: Bloomberg.

Company data 52-wk range (M$) 1.94-4.83 Mkt. cap (M$MM) 14,166.67 Mkt. cap (US$MM) 4,140.49 Liquidity (US$MM) 9.1 Avg. daily volume (MM) 7.2 Shares O/S (MM) 3,014.2 Date of price 5-Nov-09 KLCI Index 1254.0 Free float (%) 46.4 Exchange rate 3.42

Source: Bloomberg.

Bloomberg: AMM MK; Reuters: AMMB.KL M$ in millions, year-end March FY09 FY10E FY11E FY11E Net profit 861 935 1,262 1,569 Basic EPS (sen) 32.3 31.8 41.9 52.1 Cash adj. EPS (sen) 32.3 31.8 41.9 52.1 DPS (sen) 6.0 7.9 16.7 20.8 Basic EPS growth (%) 14.2 -1.5 31.7 24.4 ROE (%) 11.6 11.0 13.1 14.9 P/E (basic) (x) 14.6 14.8 11.2 9.0 BVPS (M$) 2.8 3.1 3.3 3.6 Tangible NAV 3.5 3.7 3.9 4.2 P/BV (x) 1.7 1.5 1.4 1.3 Div. yield (%) 1.3 1.7 3.6 4.4 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

121



AMMB Holdings: Summary of financials Income statement - M$mn 2009 2010E 2011E 2012E 09/08 10E/09E 11E/10E 12E/11E Balance sheet gearing 2009 2010E 2011E 2012E

Margins (% of earning assets) 2.19% 2.11% 2.06% 2.08% 3% -4% -2% 1% Loan/deposit 89% 92% 92% 92%Earning assets/assets 94% 94% 94% 94% 0% 1% 0% 0% Investment/assets 10% 10% 10% 9%NIM (as % of avg. assets) 2.05% 1.99% 1.95% 1.97% 3% -3% -2% 1% Loan/assets 63% 65% 65% 65%

Customer deposits/liab. 78% 79% 79% 79%Net interest income 1,776 1,814 1,885 2,081 10% 2% 4% 10% Long-term debt/liabilities 5% 4% 4% 3%

Total non-interest revenues 1,495 1,684 2,045 2,306 -14% 13% 21% 13%Fee income 457 463 606 697 -14% 1% 31% 15% Asset quality/capital 2009 2010E 2011E 2012EFX/trading gains (6) 132 178 222 -102% -2319% 35% 25% Loan loss reserves/loans 3.1% 3.5% 3.6% 3.6%Other operating income 1,044 1,089 1,261 1,387 12% 4% 16% 10% NPLs/loans 4.1% 4.8% 4.7% 4.6%Total operating revenues 3,271 3,498 3,929 4,387 -2% 7% 12% 12% Loan loss reserves/NPLs 75.1% 73.0% 76.7% 79.5%Operating costs (1,612) (1,699) (1,807) (1,867) 5% 5% 6% 3% Growth in NPLs -32.6% 22.9% 6.9% 0.0%Operating profit 1,659 1,799 2,123 2,520 -9% 8% 18% 19% Tier 1 Ratio 9.7% 11.8% 11.7% 12.1%Loan loss provisions (344) (431) (365) (352) -33% 25% -15% -4% Total CAR 15.5% 17.4% 16.8% 16.8%Other provisions (97) (80) (50) (50) Exceptionals - - - - Per share data 2009 2010E 2011E 2012EDisposals/ other income (0) (25) (25) (25) 0% 0% 0% 0% EPS (M$) 0.32 0.33 0.43 0.53Pre-tax profit 1,218 1,263 1,683 2,093 2% 4% 33% 24% Dividend (M$) 0.06 0.08 0.17 0.21Tax [rate] (339) (328) (421) (523) 28% 26% 25% 25% Payout ratio 0.19 0.24 0.39 0.39Minorities/preference dividends (17) - - - 0% 0% 0% 0% NAV 2.84 3.08 3.33 3.64Attributable net income 861 935 1,262 1,569 29% 9% 35% 24% Avg. Shares issued (MM) 2,723 2,941 3,014 3,014

Key balance sheet - M$mn 2009 2010E 2011E 2012E 09/08 10E/09E 11E/10E 12E/11E DuPont 2009 2010E 2011E 2012E

Net customer loans 56,948 60,118 66,078 71,316 8% 6% 10% 8% NIR/avg. assets 2.05% 1.99% 1.95% 1.97%Loans loss reserves (1,821) (2,177) (2,447) (2,690) -25% 20% 12% 10% Non IR/avg. assets 1.73% 1.85% 2.11% 2.18%Gross loans 58,769 62,295 68,525 74,007 7% 6% 10% 8% Non IR/total revenue 45.7% 48.1% 52.0% 52.6%Investments 8,806 9,285 9,793 10,329 -9% 5% 5% 5% Total rev/avg. assets 3.78% 3.85% 4.06% 4.15%Other earning assets 17,250 15,267 17,500 19,500 38% -11% 15% 11% Cost/income 49.3% 48.6% 46.0% 42.6%Average earning assets = (A) 81,020 85,836 91,332 99,827 7% 6% 6% 9% Cost/assets 1.86% 1.87% 1.87% 1.77%Goodwill 1,808 1,781 1,753 1,725 Goodwill amort.Total assets 89,893 91,942 101,433 109,883 8% 2% 10% 8% Operating ROAA 1.92% 1.98% 2.20% 2.38%

- - - - LLP/loans -0.59% -0.69% -0.53% -0.48%Interbank funding 6,135 6,239 6,881 7,446 0% 0% 0% 0% Loans/assets 67.9% 68.5% 70.9% 70.0%Customer deposits 64,132 65,217 71,928 77,827 15% 2% 10% 8% Other inc: provsLong-term bond funding 3,854 3,279 3,279 3,279 Pre-tax ROAA 1.41% 1.39% 1.74% 1.98%Other interest-bearing liabilities 3,215 3,107 3,558 4,046 -26% -3% 15% 14% Tax 27.9% 26.0% 25.0% 25.0%Average interest-bearing liab. = (B) 74,160 77,589 81,744 89,122 6% 5% 5% 9% MI -0.02% 0.00% 0.00% 0.00%Average assets 86,542 90,918 96,688 105,658 7% 5% 6% 9% ROAA 0.99% 1.03% 1.31% 1.49%Shareholders' equity 7,736 9,279 10,036 10,978 8% 20% 8% 9% RoRWA 1.34% 1.47% 1.86% 2.12%Risk-weighted assets 62,954 64,389 71,036 76,954 Equity/assets 8.61% 9.36% 9.99% 9.94%Average risk-weighted assets 64,414 63,672 67,713 73,995 2% -1% 6% 9% ROE 11.6% 11.0% 13.1% 14.9%

Source: Company, J.P. Morgan estimates

122



Amorepacific www.amorepacific.com

Overweight W837,000

Price Target: W998,000

Company description Amorepacific is the leading cosmetic company in Korea with a 35% market share in the domestic cosmetic market. It dominates in the premium channel, with over 60% of the door-to-door market and holds around a 16% share in the department store channel.

Post mortem The company is the leader in the Korean cosmetic segment where market leaders continue gaining pricing power and competitiveness. The company’s future value would come largely from its growth prospects in China. While the company has been expanding its stores over the past 4~5 years, its brand building efforts have been less of a focus area, thus the same-store sales growth has been 3~4%. Starting next year, Amorepacific will start to carry out mass-marketing through TV and this is likely to start boosting brand recognition. Together with its third brand introduction, Sul Hwa Soo, we expect Amorepacific’s sales growth to take on a stronger growth momentum going into 2011.

Potential for earnings upgrades In the near future, earnings surprise is likely to come from the domestic premium side, in our view. We believe there is a good chance that Amorepacific will narrow the market share gain it lost in the department store channel this year as foreign brands aggressively raised their prices due to currency movements.

How much recovery is priced into the stock? We believe there is around a 22% upside potential from the current share price over the next one year. The share currently trades at 20tx 2011E earnings. However, going into 2010, Amorepacific’s earnings growth could outshine other consumer companies. While 2010 prospects are priced in, the likely growth continuity into 2011 is not priced in for now.

Price target and key risks Our Dec-10 price target of W998,000 is based on 20x 2011E earnings. 20x is the average P/E since 2006. A key risk to our price target is domestic macro conditions.

South Korea Cosmetics Jinah LeeAC (822) 758-5723 [email protected]

J.P. Morgan Securities (Far East) Limited, Seoul Branch

Price performance

450,000

650,000

850,000

Oct-08 Feb-09 Jun-09 Oct-09HMC KOSPI

W


1M 3M 12M Absolute (%) 2.1 17.9 41.1 Relative (%) 3.8 17.3 (2.0)


52-week range (W) 875,000~524,000

Mkt cap. (WB) 4,892 Mkt cap. (US$MM) 4,188 Avg daily value (US$MM) 11.2 Avg daily volume 22,100 Shares O/S (MM) 6.9 Date of price 6-Nov-09 Index: KOSPI 1,572.46 Free float (%) 47 Exchange rate 1,168.0

Source: Bloomberg.

Bloomberg: 090430 KS; Reuters: 090430.KS Won in billions, year-end December

FY08 FY09E FY10E FY11E Sales 1,531 1,756 1,907 2,062 52-week range (W) 875,000~524,000 Operating profit 255 317 366 398 Market cap (WB) 4,892 Net profit 170 241 258 345 Market cap (US$MM) 4,188 EPS (W) 24,666 34,940 37,312 49,922 Shares issued (MM) 6.9 EPS growth (%) -4.3 41.7 6.8 33.8 Free Float (%) 47 P/E (x) 33.9 24.0 22.4 16.8 Avg daily value (US$MM) 11.2 Avg daily volume (Shares) 22,100 BVPS (W) 161,600 186,994 217,317 259,777 Index (KOSPI) 1,572.46 P/B (x) 5.2 4.5 3.9 3.2 Exchange rate (W/US$1) 1,168.0 DPS (W) 4,999 5,004 6,990 7,464 Dividend yield (%) 0.6 0.6 0.8 0.9 ROE (%) 15.3 18.7 17.2 19.2 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 6 November 2009.

123



Amorepacific: Summary of financials Won in billions, year-end December P/L 2007 2008 2009E 2010E 2011E B/S 2007 2008 2009E 2010E 2011E Net Sales 1,357 1,531 1,756 1,907 2,062 Total Assets 1,268 1,455 1,625 2,400 2,192

Cosmetics 1,108 1,269 1,469 1,605 1,738 Current Assets 414 445 481 561 878 Premium 754 816 891 930 965 Quick Assets 300 303 319 385 689 Mass 308 403 510 581 637 Inventory 114 142 161 176 190 Export 25 37 56 83 125

MB&S 249 261 287 303 324 Non-current Assets 854 1,010 1,145 1,276 1,314 Investment Assets 140 149 155 157 158 Operating Profit 249 255 317 366 398 Tangible Assets 651 779 912 1,041 1,078

Cosmetics 244 256 295 340 363 Intangible Assets 17 24 22 22 22 MB&S 4 0 22 27 35 Other Non-current Assets 46 58 56 56 56

OPM 72.3% 66.3% 71.7% 76.1% 76.4% Total Liabilities 315 340 372 400 429 Cosmetics 87.5% 80.1% 79.6% 83.8% 82.6% Current Liabilities 177 199 226 246 266 MB&S -2.6% -4.0% 27.7% 31.7% 39.7% Others 67 71 80 87 94 Non-opg Income 35 35 38 3 81 Non-current Liabilities 138 140 146 154 163 Interest Income 11 13 9 12 22 Gain on Equity Method 11 2 17 -13 34 Total Stockholders' Equity 953 1,115 1,291 1,500 1,793 Others 13 20 15 17 16 Paid-in Capital 35 35 35 35 35 Common Stock 29 29 29 29 29 Non-operating Expenses 35 46 35 28 23 Preferred Stock 5 5 5 5 5 Loss on Equity Method 28 35 19 14 8 Capital Surplus 713 713 713 713 713 Others 7 11 16 13 15 Capital Adjustment -1 -1 -2 -2 -2 Retained Earnings 203 339 545 754 1,047 Pre-tax profit 249 244 320 341 456 Income Taxes 71 74 79 84 112 Net Profit 178 170 241 258 345 C/F 2007 2008 2009E 2010E 2011E Ratio 2007 2008 2009E 2010E 2011E Operating CF 227 238 326 310 464 Growth Net profit 178 170 241 258 345 Sales growth 12.8% 14.6% 8.6% 8.1% Additions 108 125 106 110 110 Cosmetics 14.5% 15.8% 9.2% 8.3% Depreciation 50 57 64 78 83 Premium 8.2% 9.2% 4.3% 3.8% Prov for Severance 22 22 18 18 19 Mass 30.8% 26.6% 13.8% 9.7% Equity method loss 28 35 19 14 8 Export 48.0% 50.0% 50.0% 50.0% MB&S 4.8% 10.1% 5.4% 7.0% Deductions 14 8 11 24 -41 Operating profit growth 2.6% 24.2% 15.5% 8.7% Working capital -45 -49 -9 -31 -31 Cosmetics 4.5% 15.3% 15.2% 7.0% Receivablees 10 -18 -15 -11 -11 MB&S n.a. n.a. 18.5% 31.4% Inventory -31 -29 -19 -14 -14 Payables 7 11 6 5 5 Net profit growth -4.3% 41.7% 6.8% 33.8% Retirement pay -18 -20 -11 -11 -11 Equity method gain/oper profit 4.5% 0.9% 5.4% -3.6% 8.6% Cash Flows from Investing -221 -172 -232 -207 -120 Equity method loss/oper profit 11.4% 13.8% 6.0% 3.9% 2.1% Net contribution to operating profit -6.9% -12.9% -0.6% -7.5% 6.5% Cash Flows from Financing -31 -35 -35 -48 -52 EPS (Won) 25,770 24,666 34,940 37,312 49,922 Increase in Cash -25 32 60 55 293 P/E (times) 32.5 33.9 24.0 22.4 16.8 Cash at the Beginning 130 105 137 196 251 Cash at the End 105 137 196 251 441 Shares outstanding (MM) 6.9 6.9 6.9 6.9 6.9 BVPS (Won) 138,124 161,600 186,994 217,317 259,777 Price/Book 6.1 5.2 4.5 3.9 3.2 ROE (%) 18.7% 15.3% 18.7% 17.2% 19.2% DPS (W) 4,503 4,999 5,004 6,990 7,464 Source: J.P. Morgan estimates, Company data.

124



Anglo Platinum www.angloplatinum.com

Overweight Price: 73,384c

Price Target: 91,000c

Company description AMS is the world’s largest PGM producer, operating multiple sites in SA and Zimbabwe. Under Neville Nicolau (new CEO) the group is being restructured. A 15% (at least) headcount cut and the redrawing of operations management boundaries at problematical Rustenburg and at Amandelbult are positives. Nicolau is the first mining engineer at the helm in decades - and his experience should be key to “getting the mining right” after a decade of poor performance in our view. The group’s entered into JVs with mid-tier and BEE miners and has developed a significant 3rd party concentrate purchasing business. Moreover, by allowing some partners control of mines improved focus and better costs control should result, in our view.

Post mortem AMS has been a perennial underperformer in the Pt sector over the past decade. We can see this reversing under the new regime. Moreover, our analysis indicates that AMS is well positioned to move platinum production from its mines up by around 10% (200-250koz) within 6 months in response to strong demand, if needed - no other producer can do this.

Potential for earnings upgrades It is hard to accurately predict the impact of restructuring on costs. We think the market is likely to underestimate the potential benefits. AMS’ peers have little hope of matching it in terms of costs containment in our view. The group’s profits and valuation are highly geared to a recovery in rand metal prices.

How much recovery is priced into the stock? While the group is already factoring some price recovery, at mid-cycle prices, we estimate that it currently trades at around 80% of our fair value.

Price target and key risks Our Aug-10 DCF-based price target is R910/sh. The key risks are that the rand PGM basket price fails to recover and/or the ops fail to turn as we expect.

South Africa Gold & Precious Metals Steve ShepherdAC (27-11) 507 0386 [email protected]

Allan CookeAC (27-11) 507 0384 [email protected]


35,000

45,000

55,000

65,000

75,000

c


Price Performance

Source: Bloomberg


Absolute (%) 9.7 8.9 76.7

Source: Bloomberg

Company data Price(c) 73,384 Date of Price 23-Nov-09 Price Target (c) 91,000 Price Target End Date 31-Aug-10 52-week Range (c) 76,820 – 36,800 Mkt Cap (Rbn) 174.80 Shares O/S (mn) 238

Source: Bloomberg, J.P. Morgan

Bloomberg: AMS SJ; Reuters: AMSJ.J Rand millions, year-end Dec

FY08 FY09E FY10E FY11E Sales 50,765 36,735 44,351 55,196 Net profit 13,280 2,521 5,376 9,779 FD EPS (SAcps) 5,610 1,060 2,260 4,110 DPS (SAcps) 3,500 0 0 2,160 Sales growth (%) 8.9 -27.6 20.7 24.5 Net profit growth (%) 8.0 -81.0 113.2 81.9 EPS growth (%) 7.1 Nm 113.2 81.9 ROE (%) 45.6 7.9 14.5 23.3 FD P/E (x) 13.2 69.7 32.7 18.0

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

125



Anglo Platinum: Summary of Financials Production & Economic Assumptions Balance Sheet Year end Dec FY07A FY08A FY09E FY10E FY11E R in millions, year end Dec FY07A FY08A FY09E FY10E FY11EPlatinum ($/oz) 1,302 1,570 1,183 1,338 1,469 Property, Plant & Equipment 20,697 28,435 34,761 41,296 47,668Palladium ($/oz) 355 355 250 306 425 Net Fixed Assets 39,218 49,953 57,471 64,006 70,378Rhodium ($/oz) 4,344 5,174 1,458 1,788 2,625 Cash and Cash equivalents 3,833 2,476 1,210 2,088 2,613Nickel ($/ton) 37,567 21,583 14,831 15,875 15,000 Others 10,999 16,239 17,794 21,049 24,967Avg exch. rate (R/$) 7.04 8.08 8.56 8.65 9.24 Current Assets 14,832 18,715 19,003 23,137 27,580 Total Assets 54,050 68,668 76,474 87,142 97,958Cash Costs ($/oz Pt) 1,409 1,628 1,357 1,372 1,390 Current Liabilities 6,547 10,567 8,828 10,443 12,387Sales Volumes Debt 7,465 15,820 21,056 24,556 26,056Platinum (koz) 2,479 2,220 2,400 2,539 2,621 Other Liabilities 11,265 12,785 12,273 12,450 15,190Palladium (koz) 1,390 1,319 1,292 1,518 1,561 Shareholder's Equity 28,773 29,496 34,317 39,693 44,325Rhodium (koz) 307 311 326 344 345 Minorities 0 0 0 0 0Nickel (t) 20,273 16,036 19,615 24,679 25,400 Total Liabilities & Shareholders Equity 54,050 68,668 76,474 87,142 97,958 Profit & Loss Statement Ratio Analysis R in millions, year end Dec FY07A FY08A FY09E FY10E FY11E Year end Dec FY07A FY08A FY09E FY10E FY11ERevenues 46,616 50,765 36,735 44,351 55,196 Gross Margin (%) 41.0% 33.7% 10.2% 17.1% 25.9%

% change Y/Y 19.1% 8.9% (27.6%) 20.7% 24.5% EBITDA Margin (%) 44.1% 32.6% 17.2% 26.1% 34.0%EBITDA 20,573 16,540 6,302 11,566 18,778 EBIT Margin (%) 40.0% 34.8% 9.4% 16.8% 25.3%

% change Y/Y 14.0% (19.6%) (61.9%) 83.5% 62.4% Net Margin (%) 26.4% 26.2% 6.9% 12.1% 17.7%EBIT 18,654 17,654 3,471 7,442 13,976 FCF Margin (%) 6.9% 5.8% (19.4%) (6.4%) 2.9%

% change Y/Y 14.7% (5.4%) (80.3%) 114.4% 87.8% Net interest 221 118 (127) (57) (143) Interest Coverage (x) 84.4 149.6 27.4 130.2 97.9Earnings before tax 19,323 17,988 3,397 7,405 13,870 Net debt to equity (%) 12.6% 45.2% 57.8% 56.6% 52.9%

% change Y/Y 15.6% (6.9%) (81.1%) 118.0% 87.3% Sales/Assets (x) 0.9 0.8 0.5 0.5 0.6Tax (6,656) (4,470) (749) (1,888) (3,884)

Tax as % of EBT 34.4% 24.8% 22.1% 25.5% 28.0% ROE (%) 42.8% 45.6% 7.9% 14.5% 23.3%Net income (reported) 12,294 13,280 2,521 5,376 9,779 ROIC (%) 42.7% 35.1% 5.5% 9.5% 15.5%

% change Y/Y 4.6% 8.0% (81.0%) 113.2% 81.9% Shares Outstanding 234.70 236.80 238.15 238.20 238.20 P/E (x) 14.1 13.2 69.7 32.7 18.0EPS (Adjusted) 5,240 5,610 1,060 2,260 4,110 EV/EBITDA (x) 8.8 11.0 28.8 15.7 9.7

% change Y/Y NM 7.1% NM 113.2% 81.9% EV/FCF (x) 56.5 61.8 (25.5) (64.2) 112.9DPS (Gross) 5,200 3,500 0 0 2,160 Dividend Yield (%) 7.0% 4.7% 0.0% 0.0% 2.9%

% change Y/Y (1.9%) (32.7%) (100.0%) - - FCF Yield (%) 2.0% 1.8% (4.4%) (1.7%) 1.0% Cash Flow Statement Valuation & Recommendation R in millions, year end Dec FY07A FY08A FY09E FY10E FY11E NPV 86,200 EBIT 18,654 17,654 3,471 7,442 13,976 P/NPV 0.79 Depreciation & Amortization 2,757 3,313 3,899 4,384 4,937 PT 91,000 Change in working capital 110 2,555 (1,470) (1,640) (1,974) PT/NPV 1.1 Taxes (6,821) (1,799) (575) (123) (1,964) PT Date 31-Aug-10 Cash flow from Operations 13,862 17,296 4,256 9,803 14,840 Recommendation OW Capex (10,653) (14,362) (11,368) (12,628) (13,234) Weekly Mkt Turnover ($ millions) Disposals/(Purchase) 632 (194) 1,712 260 136 JSE 220 Net interest 5 (99) (78) (57) (143) LSE 0 Free Cash flow 3,209 2,934 (7,111) (2,824) 1,606 ADR 1 Free Cash flow per share 13.6 12.3 (29.9) (11.9) 6.7 Equity raised/ repaid 0 0 0 0 0 Debt raised/ repaid 7,575 10,501 4,445 3,500 1,500 Weekly Mkt Turnover/Mkt Cap (%) Dividends paid (12,658) (14,237) (61) 0 (2,573) JSE 1.0% Other 346 (262) (173) 0 0 LSE 0.0% ADR 0.0% Beginning Cash 4,724 3,833 2,476 1,210 2,088 Ending Cash 3,833 2,476 1,210 2,088 2,613 Source: Company reports and J.P. Morgan estimates.

126



Astra International www.astra.co.id

Overweight Rp29,800

Price Target: Rp37,000

Company description Astra International is part of the Jardine Matheson group. It is the partner/distributor for Japanese majors including Toyota, Daihatsu, Honda (two-wheelers) and Komatsu. Astra also holds majority stakes in United Tractors (59.5%) and Astra Agro Lestari (80%). Post mortem Astra’s solid balance sheet and reputation have resulted in market share gains during the downturn. We see improved pricing power, resulting from a stronger rupiah in core auto businesses, offsetting vulnerability from UNTR and AALI, which are weak currency beneficiaries. As a result of proactive management in the car and financial services business, supported by the strong growth in United Tractors, Astra should be able to end 2009 without a significant earnings decline, which we think is creditable. Potential for earnings upgrades We think that the auto cycle is in early stages of recovery, and have been surprised by two- and four-wheeler vehicle volumes in recent months. We think that the stronger-than-expected vehicle volumes could set the stage for earnings upgrades going into 2010. If the recovery in two-wheeler profitability seen in 3Q proves sustainable, it could provide added impetus to earnings. How much recovery is priced into the stock? We think that the emphasis on stock drivers is likely to shift from recovery to growth. The fact that a recovery which is underway is probably priced in, but the strength of the recovery is being underestimated. Price target and key risks We have an SOTP-based Dec-10 PT of Rp37,000 for Astra. Our PT uses J.P. Morgan PTs (DCF-based) for listed subsidiaries UNTR and AALI. We use the market values of smaller quoted holdings (Bank Permata, Astra Auto Parts and Astra Graphia) and DCF/DDM-based valuations for motor businesses and financial services business. Our valuation assumes a 10.5% risk-free rate and a 5.5% equity risk premium, translating into a 16% cost of equity. Using market values, as opposed to J.P. Morgan PTs, would imply a share price of Rp36,000 for Astra. Risks to our PT are if higher rates hit the recovery and the fact that the stock may be well owned. We see Astra as being in the midst of a re-rating relative to the market which is yet incomplete, and expect further outperformance.

Indonesia Auto Parts Aditya Srinath, CFAAC (62-21) 5291-8573 [email protected]


Price performance

5,000

20,000

35,000

Rp


ASII.JK share price (Rp)JCI (rebased)

Source: Bloomberg.

Performance

1M 3M 12M Absolute (%) -7.6 -1.4 212.1 Relative (%) -4.6 -1.1 134.4

Source: Bloomberg.

Company data

52-week range (Rp) 7,800-35,300 Mkt cap. (RpMM) 120,640,979 Mkt cap. (US$MM) 12,814 Avg daily val (US$MM) 12.82 Avg daily volume (MM) 2.75 Shares O/S (MM) 4,048 Date of price 5-Nov-09 Index: JCI 2382 Free float (%) 49.9 Exchange rate 9,415

Source: Bloomberg.

Bloomberg: ASII IJ; Reuters: ASII.JK Rp in mn, year-end Dec FY07A FY08E FY09E FY10E FY11ERevenue (Rp bn) 70,183 97,064 90,236 108,131 125,185Net Profit (Rp bn) 6,519 8,965 8,487 10,284 12,100Asia EPS (Rp) 1,610.35 2,214.75 2,096.50 2,540.53DPS (Rp) 644 910 839 1,016Revenue growth (%) 26.0% 38.4% -7.1% 19.8% 15.8%EPS growth (%) 75.6% 37.5% -5.3% 21.2%ROCE 21.6% 26.1% 22.5% 23.9% 24.7%ROE 26.4% 29.9% 23.8% 24.9% 25.2%P/E 18.8 13.7 14.5 11.9P/BV 4.5 3.6 3.2 2.3EV/EBITDA 1.1 0.9 1.2 1.2 1.0Dividend Yield 2.1% 3.0% 2.8% 3.3%

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

127



Astra International: Summary of financials Rp in billions, year end December Income statement Cash flow statement FY06 FY07 FY08E FY09E FY10E FY06 FY07 FY08E FY09E FY10E Revenues 55,709 70,183 97,064 90,236 108,131 EBIT 6,256 9,997 13,490 13,301 15,843

% change Y/Y (9.7%) 26.0% 38.4% (7.1%) 19.8% Depr. & amortization 1,921 2,292 2,542 3,295 3,675EBITDA 8,177 12,289 16,032 16,596 19,517 Change in working capital -128 737 -571 -3,011 -1,147

% change Y/Y -11.1% 50.3% 30.5% 3.5% 17.6% Taxes -1453 -2663 -3944 -3533 -3530EBIT 6,256 9,997 13,490 13,301 15,843 Cash flow from operations 5,505 9,549 11,162 8,770 12,811

% change Y/Y NM 59.8% 34.9% NM 19.1% EBIT Margin 11.2% 14.2% 13.8% 14.7% 14.6% Capex -3,455 -3,389 -9,094 -4,500 -3,500Net Interest -336 -288 142 -583 -786 Disposal/(purchase) -652 -541 -318 0 0Earnings before tax 5,944 10,634 14,960 14,183 15,950 Net Interest -336 -288 142 -583 -786

% change Y/Y -27.5% 78.9% 40.7% -5.2% 12.5% Other 4,333 -783 -4,076 -6,250 -9,414Tax -1,453 -2,663 -3,944 -3,533 -3,530 Free cash flow 2,049 6,160 2,069 4,270 9,311

as % of EBT 24.4% 25.0% 26.4% 24.9% 22.1% Net income (reported) 3,712 6,519 8,965 8,487 10,284 Equity raised/(repaid) 0 0 -0 0 0

% change Y/Y -31.9% 75.6% 37.5% -5.3% 21.2% Debt raised/(repaid) -3,341 -3,333 3,688 0 3,000Shares outstanding 4 4 4 4 4 Other -531 1,848 4,425 630 630EPS (reported) 916.94 1,610.35 2,214.75 2,096.50 2,540.53 Dividends paid -1,781 -2,607 -3,684 -3,395 -4,114

% change Y/Y (31.9%) 75.6% 37.5% (5.3%) 21.2% Beginning cash 4,510 5,239 6,523 8,944 4,199 Ending cash 5,239 6,523 8,944 4,199 3,613 DPS 440 644 910 839 1,016 Balance sheet Ratio Analysis FY06 FY07 FY08E FY09E FY10E FY06 FY07 FY08E FY09E FY10E Cash and cash equivalents 4,820 6,322 8,877 4,099 3,513 EBITDA margin 14.6% 17.4% 16.4% 18.3% 18.0%Accounts receivable 4,558 6,018 6,474 8,139 9,433 Operating margin 11.19% 14.19% 13.84% 14.69% 14.60%Inventories 4,001 4,582 8,666 7,226 8,284 Net margin 6.6% 9.3% 9.2% 9.4% 9.5%Others 2,024 2,409 2,040 3,214 3,851 Current assets 15,822 19,532 26,124 22,778 25,181 Sales per share growth (9.7%) 26.0% 38.4% (7.1%) 19.8%LT investments - - - - - Sales growth (9.7%) 26.0% 38.4% (7.1%) 19.8%Net fixed assets 13,030 14,127 20,679 21,884 21,710 Net profit growth -31.9% 75.6% 37.5% -5.3% 21.2%Total Assets 57,929 63,520 80,740 84,850 96,493 EPS growth (31.9%) 75.6% 37.5% (5.3%) 21.2% Liabilities Interest coverage (x) 24.36 42.68 - 28.47 24.82Short-term loans 12,963 10,998 12,979 12,800 12,800 Payables 3,390 4,434 6,815 5,713 6,554 Net debt to equity 83.8% 54.0% 48.6% 54.3% 55.6%Others 7,073 10,236 13,837 12,225 14,067 Sales/assets 0.94 1.16 1.35 1.09 1.20Total current liabilities 20,037 21,234 26,816 25,025 26,867 Assets/equity 2.59 2.36 2.44 2.23 2.20Long-term debt 10,215 8,848 10,554 10,733 13,733 ROE 17.3% 26.4% 29.9% 23.8% 24.9%Other liabilities 721 828 1,902 1,933 1,963 ROCE 13.5% 21.6% 26.1% 22.5% 23.9%Total Liabilities 31,498 31,512 40,163 38,681 43,653 Shareholders' equity 22,376 26,963 33,080 38,172 44,342 BVPS 5,527 6,660 8,172 9,430 13,053 Source: Company reports, J.P. Morgan estimates.

128



Asustek Computer www.asus.com

Overweight Price: NT$60.9

Price Target: NT$70

Company description Asus (TWSE: 2357) is the largest motherboards maker in the world. Starting with its MB business, Asus has rapidly grown in the NB space, especially for netbook. Currently, NB accounts for more than 70% of its revenue. The company’s products include MB, NB, Eee PC, GPS smartphone, and PC peripherals.

Post mortem After facing serious inventory issues in 4Q08 and burdened by a heavy mix of high-end products, Asus was in a restructuring mode in 1H09. It has reoriented product its line-up towards the mainstream market, and instituted more cost control measures, by adopting common platforms in NBs, and streamlining a number of models. As a result, Asus posted a strong recovery in profitability in 3Q09, with its NB volume also recovering back to 2008 levels.

Potential for earnings upgrades With a stronger-than-expected operating margin recovery in 3Q09, we believe the Street’s upward earning estimate revisions are still on. Our 2010 earnings estimate is about 17% higher than current Bloomberg consensus estimate. We expect revenue momentum to surprise on the upside in 2010, as Asus’ key markets—Eastern Europe and China—are likely to post strong growth in NB.

How much recovery is priced into the stock? Volume recovery in 2H09 for Asus appears to be priced into the stock, but we believe margin expectations have stayed low. Going into 2010, there is still investor skepticism regarding Asus’ ability to continue gaining market share and keep OP margins stable, which should provide an upside opportunity for the stock, in our view.

Price target and key risks Our Jun-10 PT of NT$70 implies 14x FY10E earnings, given the strong OP margin improvement and sustainability of Asus’ cost-down measures in notebook business. 14x P/E represents the mid-point of Asus’ historical trading range. A key risk to our PT is execution issues in the mainstream NB rollout.


Alvin KwockAC (852) 2800-8533 [email protected]


Price performance

20

50

80

NT$


2357.TW share price (NT$TSE (rebased)


1M 3M 12M Absolute (%) 13.20 23.28 30.11 Relative (%) 13.51 13.82 -12.68


52-week range (NT$) 29.4-63.8 Mkt cap. (NT$B) 259 Mkt cap. (US$B) 8 Avg daily value (US$B) 40 Avg daily volume (MM) 26 Shares O/S (MM) 4,247 Date of price 5-Nov-09 Index: TWSE 7,417.5 Free float (%) 95 Exchange rate 32.5

Source: Bloomberg.

Bloomberg: 2357.TT; Reuters: 2357.TW NT$ in billions, year-end December FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E Sales 266.9 236.6 277.3 316.1 YE BPS (NT$) 39.2 40.0 43.3 45.2 Operating profit 11.4 4.5 13.7 15.4 P/BV (x) 1.6 1.5 1.4 1.3 EBITDA 12.4 5.8 15.2 17.3 ROE 9.5 7.2 11.6 12.1 Pre-tax profit 20.6 14.0 24.3 27.0 Core ROIC (%) 16.6 3.6 0.8 6.0 Net profit 16.5 12.2 20.6 22.8 DPS (NT$) 4.3 2.0 1.5 2.9 MV of employee bonus 1.00 -0.15 2.27 2.55 Quarterly EPS (NT$) 1Q 2Q 3Q 4Q Adjusted net profit 16.5 12.2 20.6 22.8 EPS (FY08) 1.56 1.23 1.54 -0.66 New Taiwan GAAP EPS (NT$)* 3.73 2.87 4.82 5.34 EPS (FY09E) 0.11 -0.03 1.53 1.26 New Taiwan GAAP P/E (x) 16.3 21.2 12.6 11.4 EPS (FY10E) 0.99 1.04 1.36 1.43 sales growth -65% -11% 17% 14% New Taiwan GAAP EPS growth -26% -23% 68% 11% Normalized OP growth -44% -56% 218% 13% Jun -10 PT NT$ 70

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

129



Asustek Computer: Summary of financials NT$ in billions, year-end December Income statement Ratio analysis FY08 FY09E FY10E FY11E % FY08 FY09E FY10E FY11ERevenues 266.9 236.6 277.3 316.1 Gross Margin 14.8 12.1 15.1 14.9 Cost of Goods Sold 227.5 208.0 235.4 269.0 EBITDA margin 4.6 2.4 5.5 5.5Gross Profit 39.4 28.6 41.9 47.0 Operating Margin 4.3 1.9 4.9 4.9 R&D Expenses 7.3 6.0 7.0 7.9 Net Margin 6.2 5.2 7.4 7.2 SG&A Expenses 19.7 16.2 18.9 21.2 R&D/sales 2.7 2.5 2.5 2.5Operating Profit (EBIT) 11.4 4.5 13.7 15.4 SG&A/Sales 7.4 6.8 6.8 6.7EBITDA 12.4 5.8 15.2 17.3 Interest Income 1.1 1.0 1.0 1.1 Sales growth -11.3 17.2 14.0 Interest Expense -1.0 -0.9 -1.0 -0.9 Operating Profit Growth -60.4 203.0 12.7 Investment Income (Exp.) 4.0 7.0 7.6 7.9 Net profit (Adjusted) growth -25.7 68.5 10.7 Non-Operating Income (Exp.) 5.1 2.4 3.0 3.5 EPS (Reported) growth -23.1 68.0 10.7Earnings before tax 20.6 14.0 24.3 27.0 EPS (Adjusted) growth -23.1 68.0 10.7 Tax 4.1 1.7 3.7 4.2 Interest coverage (x) -11.8 -5.1 -13.4 -17.1Net Income (Reported) 16.5 12.2 20.6 22.8 Net debt to total capital -6.1 -6.7 -6.6 -4.2Net Income (Adjusted) 16.5 12.2 20.6 22.8 Net debt to equity -6.6 -7.3 -7.2 -4.5

EPS (Reported) (NT$) 3.73 2.87 4.82 5.34 Asset Turnover (%) 112.9 98.2 104.2 111.4EPS (Adjusted) (NT$) 3.73 2.87 4.82 5.34 Working Capital Turns (X) 3.2 4.8 5.8 6.1BPS (NT$) 39.21 40.00 43.31 45.23 ROE 9.5 7.2 11.6 12.1DPS (NT$) 1.98 1.54 2.88 0.00 ROCE 8.1 5.3 9.8 10.9Shares Outstanding (B) 4.4 4.3 4.3 4.3

Balance sheet Cash flow statement

FY08 FY09E FY10E FY11E FY09E FY10E FY11ECash and cash equivalents 23.7 27.0 29.1 25.7 Net Income 12.2 20.6 22.8Accounts receivable 43.2 40.1 47.2 53.2 Depr. & Amortisation 1.2 1.5 1.8Inventories 41.8 36.1 42.5 47.9 Change in working capital 9.3 -5.7 -4.9Others 10.9 11.7 13.8 15.5 Other 0.0 0.0 0.0Current assets 119.6 114.9 132.5 142.3 Cash flow from operations 22.8 16.4 19.8

LT investments 111.5 120.6 128.2 136.1 Capex -2.3 -1.5 -1.8Net fixed assets 3.7 4.8 4.8 4.8 Disposal/ (purchase) -8.1 -7.6 -7.9Others 1.6 0.6 0.6 0.6 Cash flow from investing -10.4 -9.1 -9.7Total assets 236.5 240.9 266.1 283.8 Free cash flow 20.4 14.9 17.9

ST loans 12.7 14.5 15.7 16.9 Equity raised/ (repaid) 1.4 0.0 0.0Payables 27.5 36.1 42.5 47.9 Debt raised/ (repaid) 1.8 1.2 1.2Others 26.7 19.4 22.8 25.7 Other -1.1 0.2 -2.3Total current liabilities 66.9 70.0 81.1 90.5 Dividends paid -8.4 -6.6 -12.3

Cash flow from financing -6.3 -5.2 -13.4Long term debt 0.0 0.0 0.0 0.0 Other liabilities 0.0 0.0 0.0 0.0 Net change in cash 6.0 2.1 -3.4Total liabilities 66.9 70.0 81.1 90.5 Beginning cash 23.7 27.0 29.1Shareholders' equity 166.8 170.9 185.1 193.3 Ending cash 29.7 29.1 25.7Source: Company reports and J.P. Morgan estimates.

130



Ayala Land www.ayalaland.com.ph

Overweight Php12.00

Price Target: Php13.90

Company description Ayala Land is the largest and most diversified developer in the Philippines with interests in housing, retail, office, and hotel development. It is a major landlord in the prime CBDs of Makati and Fort Bonifacio. While traditionally known as a high-end property developer, Ayala Land has in recent years leveraged on its brand equity to tap the lower-income markets.

Post mortem The company has over 4,000 ha of land bank that is good for at least 10 years of development. Its pricing power is strong owing to the Ayala reputation for quality products and services. Cost efficiency has been an ongoing issue for the company, but this could change with the new President at the helm who has a track record of reaping operational efficiency. We believe the company’s conservative balance sheet has allowed it weather the crisis well, and seize opportunities in striking joint-venture/land lease deals to grow its market share.

Potential for earnings upgrades Property volumes are highly leveraged to an economic upturn, fueled by growing overseas foreign remittances and low interest rates. The company’s move to aggressively launch more projects (in line with its target to double earnings and ROE in five years) should further boost volume sales. Potential margin increase from lower costs should lead to positive earnings estimate revisions, in our view.

How much recovery is priced into the stock? We believe the stock has priced in very little of a recovery as it is trading at a 42% discount to NAV, equivalent to -1SD, and more than the 35% average during the 2002-03 trough of the property market.

Price target and key risks Our Dec-10 PT of Php13.9 is based on a 25% discount to NAV, equivalent to the historical average of the past 17 years. Key risks to our PT are a decline in land values and a sharp rise in interest rates.

Philippines Real Estate Kelly Lim-BateAC (632) 878-1188 [email protected]

J.P. Morgan Securities Philippines Inc.

Price performance

02468

101214161820

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Source: Bloomberg.

Performance 1M 3M 12M Absolute (%) -12.8 6.8 65.3 Relative (%) -15.9 6.1 20.1

Source: Bloomberg.

Company data 52-week range (Php) 4.90-12.50 Mkt cap. (PhpMM) 155,556 Mkt cap. (US$MM) 3,330 Avg daily value (US$MM) 2 Avg daily volume (MM) 12.1 Shares O/S (MM) 12,963 Date of price 12-Nov-09 Index: PSEi 3,074 Free float (%) 46 Exchange rate 46.72

Source: Bloomberg.

Bloomberg: ALI PM.TT; Reuters: ALI.PS P h p in m n , y e a r -e n d D e c F Y 0 8 A F Y 0 9 E F Y 1 0 E F Y 1 1 E R e v e n u e 2 9 ,2 9 5 2 6 ,6 4 3 2 6 ,6 8 8 3 1 ,7 2 2 N e t P ro f it 4 ,8 1 2 .3 3 ,7 9 9 .7 3 ,8 6 9 .2 4 ,4 4 8 .4 E P S (P h p ) 0 .3 7 0 .2 9 0 .3 0 0 .3 4 D P S (P h p ) 0 .0 6 0 .0 6 0 .0 6 0 .0 6 R e v e n u e g ro w th (% ) 3 6 .3 % -9 .1 % 0 .2 % 1 8 .9 % E P S g ro w th (% ) 1 0 .3 % -2 1 .0 % 1 .8 % 1 5 .0 % R O C E 9 .9 % 7 .4 % 7 .6 % 8 .6 % R O E 1 0 .2 % 7 .5 % 7 .1 % 7 .7 % P /E ( x ) 3 2 .3 4 0 .9 4 0 .2 3 5 .0 P /B V (x ) 3 .2 2 .9 2 .8 2 .6 E V /E B IT D A ( x ) 2 6 .0 3 1 .4 2 9 .5 2 5 .1 D iv id e n d Y ie ld 0 .5 % 0 .5 % 0 .5 % 0 .5 %


131



Ayala Land: Summary of financials Php in millions, year-end December Income statement Cash flow statement FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E Revenues 21,490 29,295 26,643 26,688 31,722 EBIT 4,989 6,042 5,013 5,369 6,370

% change Y/Y (4.5%) 36.3% (9.1%) 0.2% 18.9% Depr. & amortization - - - - -EBITDA 4,989 6,042 5,013 5,369 6,370 Change in working capital 3,660 -1,223 1,992 1,989 1,371

% change Y/Y 3.6% 21.1% -17.0% 7.1% 18.6% Taxes -1556 -2065 -1575 -1698 -2079EBIT 4,989 6,042 5,013 5,369 6,370 Cash flow from operations 8,530 3,616 7,256 7,387 7,578

% change Y/Y 3.6% 21.1% NM 7.1% 18.6% EBIT Margin 23.2% 20.6% 18.8% 20.1% 20.1% Capex 1,390 -5,693 -5,340 -6,772 -8,694Net Interest 277 522 356 106 134 Disposal/(purchase) -810 918 -1,689 -716 518Earnings before tax 6,652 7,448 6,254 6,448 7,574 Net Interest 277 522 356 106 134

% change Y/Y 13.8% 12.0% -16.0% 3.1% 17.5% Other - - - - -Tax -1,556 -2,065 -1,575 -1,698 -2,079 Free cash flow 9,920 -2,077 1,916 615 -1,116

as % of EBT 23.4% 27.7% 25.2% 26.3% 27.4% Net income (reported) 4,386 4,812 3,800 3,869 4,448 Equity raised/(repaid) 1,361 -765 0 0 0

% change Y/Y 13.5% 9.7% -21.0% 1.8% 15.0% Debt raised/(repaid) -3,655 -2,710 -107 0 0Shares outstanding 13,035 12,963 12,963 12,963 12,963 Other -47 995 0 0 0EPS (reported) (Php) 0.34 0.37 0.29 0.30 0.34 Dividends paid -1,084 -951 -778 -778 -778

% change Y/Y 13.3% 10.3% (21.0%) 1.8% 15.0% Beginning cash 4,631 11,272 15,443 14,786 13,906 Ending cash 11,272 12,655 14,786 13,906 12,530 DPS (Php) 0.05 0.06 0.06 0.06 0.06 Balance sheet Ratio analysis FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E Cash and cash equivalents 13,626 15,443 14,786 13,906 12,530 EBITDA margin 23.2% 20.6% 18.8% 20.1% 20.1%Accounts receivable 11,125 15,796 12,092 11,392 12,563 Operating margin 24.50% 22.40% 20.15% 20.52% 20.50%Inventories 6,696 8,140 6,792 6,175 6,555 Net margin 20.4% 16.4% 14.3% 14.5% 14.0%Others 2,533 4,556 4,556 4,556 4,556 Current assets 33,979 43,935 38,226 36,030 36,206 Sales per share growth (4.7%) 37.1% (9.1%) 0.2% 18.9%LT investments 28,587 31,628 38,855 45,720 52,251 Sales growth (4.5%) 36.3% (9.1%) 0.2% 18.9%Net fixed assets 20,415 24,890 22,842 22,166 23,209 Net profit growth 13.5% 9.7% -21.0% 1.8% 15.0%Total Assets 82,981 100,453 99,923 103,916 111,665 EPS growth 13.3% 10.3% (21.0%) 1.8% 15.0% Liabilities Interest coverage (x) - - - - -Short-term loans 3,990 1,524 1,280 1,280 1,280 Payables 15,759 20,654 17,706 18,382 21,115 Net debt to equity -8.1% 2.8% 3.7% 5.0% 7.1%Others 790 1,205 1,094 1,090 1,280 Sales/assets 0.27 0.32 0.27 0.26 0.29Total current liabilities 20,539 23,383 20,079 20,752 23,675 Assets/equity 1.82 2.05 1.89 1.86 1.87Long-term debt 6,150 15,228 15,365 15,365 15,365 ROE 10.2% 10.2% 7.5% 7.1% 7.7%Other liabilities 5,547 6,799 5,536 4,884 4,992 ROCE 9.1% 9.9% 7.4% 7.6% 8.6%Total Liabilities 32,235 45,410 40,980 41,000 44,032 Shareholders' equity 45,705 49,028 52,827 55,919 59,589 BVPS (Php) 3.51 3.78 4.08 4.31 4.60 Source: Company reports and J.P. Morgan estimates.

132



Baidu www.baidu.com

Overweight US$386.37

Price Target: US$460.00

Company description Baidu is a leading internet search provider in China with a focus on Chinese web pages. The company generates majority of its revenue through pay-per-click advertising and customized search solutions. It is the number 1 site in China in terms of traffic reach, according to Alexa. Post mortem Baidu remains the dominant player in China’s search market with ~63% market share as of 3Q09 in China (according to Analysys). We expect Baidu to maintain its leadership in China due to: (1) its good Chinese search technology; (2) our view that Baidu’s products are tailored better to local needs; (3) its strong local brand name; (4) good relationship with the Chinese government; and (5) it has among the widest distribution networks in China (a key to market development and driving sales), and is well ahead of other competitors in search. Potential for earnings upgrades We believe there are earnings upside potential in 2010, with: (1) transition to Phoenix Nest monetization system; (2) domestic economic growth to lead to an upside in search ad spending; and (3) expect eCommerce growth to lead to search spending upside. We also expect some margin leverage in SG&A. How much recovery is priced into the stock? With a weak 4Q09 guidance, shares have recently seen some weakness. Hence, we believe investors have given a big discount to the potential ad recovery in 2010. We note that the softness is mainly due to the earlier-than-expected transition from the classic bidding system in Phoenix Nest. We expect incremental positive datapoint on ad segment in early 2010 to be the driver of the stock. Price target and key risks Our Dec-10 PT of US$460 is based on DCF valuation. Our nominal case DCF valuation suggests a valuation of: US$459.8. (20% long-term growth from 2014–2018E, 15% growth from 2019E – 2025E). We use WACC of 12% and 0% terminal growth. Downside risks to our rating and price target include: (1) slower-than-expected online search spending; (2) large infrastructure-related expense; (3) unsuccessful Japan initiatives; and (4) and potential margin decline due to TAC.

China IT and Internet Dick WeiAC (852) 2800-8535 [email protected]


Price performance US$

100

250

400

$

Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

BIDU share price ($)NASDAQ Composite (rebased)

Source: Bloomberg.


Absolute (%) 3.3 22.5 133.4 Relative (%) 2.8 15.0 90.1

Source: Bloomberg.

Company data 52-week range (US$) 100.5-439.9 Mkt cap. (Rmb MM) 100,700 Mkt cap. (US$ MM) 14,760 Avg daily value (US$MM) 60.7 Avg daily volume (MM) 1.8 Shares O/S (MM) 35 Date of price 12-Nov-09 Index: NASDAQ 2056 Free float (%) 74 Exchange rate 6.83

Source: Company, Bloomberg. Bloomberg: BIDU US; Reuters: BIDU US$ in millions, year-end December FY08 FY09E FY10E FY11E Sales 465.5 644.7 916.7 1,321.7 Net profit 152.5 213.5 322.9 470.3 GAAP EPS (US$) 4.39 6.13 9.15 13.14 Adj. EPS (US$) 4.74 6.51 9.56 13.59 DPS (US$) 0 0 0 0 Sales growth (%) 100.9 38.5 42.2 44.2 Net profit growth (%) 82.6 40.0 51.2 45.7 EPS growth (%) 82.5 39.7 49.3 43.6 ROE (%) 44.3 39.3 37.6 35.7 GAAP P/E (x) 97.4 69.7 46.7 32.5 Adj. P/E (x) 90.1 65.6 44.7 31.4 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 12 November 2009.

133



Baidu: Summary of financials Profit and loss statement US$ in millions, year-end December

FY08 FY09E FY10E FY11ERevenue 465.5 644.7 916.7 1,321.7% change Y/Y 100.9 38.5 42.2 44.2Gross margin (%) 64.0 63.4 62.6 62.4EBITDA 211.4 293.8 431.4 614.0% change Y/Y 107.0 39.0 46.8 42.3EBITDA margin (%) 45.4 45.6 47.1 46.5EBIT 159.6 232.2 352.6 516.4% change Y/Y 119.7 45.46 51.87 46.45EBIT margin (%) 34.3 36.0 38.5 39.1Net interest 6.9 5.6 15.7 26.0Earnings before tax 169.4 240.6 368.9 543.0% change Y/Y 107.1 42 53.34 47.19Tax 16.9 27.1 46.0 72.7as % of EBT 9.97 11.25 12.47 13.38Net income (reported) 152.5 213.5 322.9 470.3% change Y/Y 82.6 40.0 51.2 45.7Shares O/S (MM) 34.8 34.8 35.3 35.8EPS (reported) (US$) 4.39 6.13 9.15 13.14Source: Company, J.P. Morgan estimates.

Balance sheet US$ in millions, year-end December

FY08 FY09E FY10E FY11E Cash and cash equivalents 388 644 1,095 1,713Accounts receivable 14 20 30 41Inventories 0 0 0 0Others 14 24 36 50Current assets 415 688 1,161 1,805 LT investments 2 2 2 2Net fixed assets 129 160 173 187Other LT assets 28 30 29 28Total assets 573 880 1,366 2,021Liabilities ST loans 0 0 0 0Payables 62 87 138 196Others 62 89 137 189Total current liabilities 124 176 275 385Long term debt 0 0 0 0Other liabilities 0 1 1 1Total liabilities 124 177 275 386Shareholders' equity 450 703 1,090 1,636Source: Company, J.P. Morgan estimates.

Cash flow statement US$ in millions, year-end December

FY08 FY09E FY10E FY11E Net Income 153 214 323 470Depr. & Amortisation 40 48 64 82Change in working capital 24 36 76 85Other 38 13 14 16Cash flow from operations 254 311 477 653Capex / Investments -59 -81 -76 -94Others -34 0 0 0Cash flow from investing -93 -81 -76 -94Free cash flow 195 230 401 559Equity raised/ (repaid) -9 28 50 60Debt raised/ (repaid) 0 0 0 0Other 4 -3 0 0Dividends paid 0 0 0 0Cash flow from financing -5 25 50 60Net change in cash 176 257 451 618Beginning cash 211 388 644 1,095Ending cash 388 644 1,095 1,713Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December

FY08 FY09E FY10E FY11E EBITDA margin 45.4 45.6 47.1 46.5Operating Margin 34.3 36.0 38.5 39.1Net Margin 32.8 33.1 35.2 35.6R&D/sales 7.8 8.4 8.1 7.5SG&A/Sales 19.3 17.0 14.5 14.6Sales growth 100.9 38.5 42.2 44.2Operating Profit Growth 119.7 45.5 51.9 46.4Net profit growth 82.6 40.0 51.2 45.7Diluted EPS growth 82.5 39.7 49.3 43.6Net debt to total capital -86.2 -91.6 -100.4 -104.7Net debt to equity -86.2 -91.6 -100.4 -104.7Asset Turnover 81.2 73.3 67.1 65.4Working Capital Turns (X) 2.1 1.6 1.3 1.1ROE 44.3 39.3 37.6 35.7ROIC 42.8 38.5 36.2 34.1Source: Company, J.P. Morgan estimates.

134



Bank Asya www.bankasya.com

Overweight, AFL Price: TRY3.06

Price Target: TRY5.00

Company description The largest of four banks (and the only independent as the other 3 have been acquired by GCC strategic partners) in a niche, fast growth participation sector (CAGR in assets 03-09 c.35-40%) in Turkey. Its footprint includes 155 branches; it had some TRY11bn (US$7.3bn) in assets in Q3. Despite the severe 2008-09 recession, Asya delivered some 19% loan growth YTD to September and has made profits in every one of the past 11 quarters with average ROE near 20% - it has historically achieved ROE of over 30%.

Post mortem We expect profits of TRY285mn (EPS of TRY0.32 in 09E), up 15% yoy; despite the fact that due to its participation model Asya has been unable to benefit either from securities gains or more aggressive liability re-pricing enjoyed by its peers and cost of risk YTD has been running over 350bps in 2009. However, we expect EPS growth to accelerate towards 40% levels (net profits EPS of TRY0.45 in 10E and EPS TRY0.60 in 11E).

Potential for earnings upgrades At US$42bn market cap, the stock is still below the radar screen - we expect more international research coverage; JPM expects earnings upgrades to continue throughout 2010, supported by macro strengthening towards 5% GDP growth, driving some 34% loan growth in 10E and 26% by 11E, well supported by core Tier 1 of 14.5% (09E) and improving capital generation into recovery.

How much recovery is priced into the stock? From the February 09 trough, Asya shares have rallied over 200% from TRY1 to over TRY3. Since August the shares have stagnated, despite attractive valuation of <7 x PE (10E) and 1.4 P/NAV for what is essentially a mid 20s ROE franchise. JPM’s Gordon growth model suggests a TRY5 fair value (YE10E) - some 65% upside from present levels.

Price target and key risks Our Dec-10 PT of TRY5 is based on our Gordon growth model using 23% ROE, 15% COE & 5% LT growth rate. Key risks include further economic deterioration and the oil price hitting >$110, negatively impacting CAR.

CEEMEA Banks Paul FormankoAC (+44) 207-325-6028 [email protected]


0.5

1.5

2.5

3.5

TL


Price Performance

Source: Company data, Bloomberg


Absolute (%) -13.6 3.4 163.8 Company data

52-week range (LC) 3.68-0.94 Mkt cap. (TLMM) 2,,754 Mkt cap. (US$MM) 1,842 Avg daily value (US$MM) 18.4 Avg daily volume (MM) 9.3 Shares O/S (MM) 900 Date of price 23 Nov 09 Index: ISE 45801 Free float (%) 45.5% Exchange rate(USD/TRY) 1.5

Source: Bloomberg

Bloomberg: ASYAB TI Reuters: ASYAB.IS TRY million, year-end Dec FY08 FY09E FY10E FY11E Pre-provision op. profit 469 603 683 844 Net profit 247 285 404 537 EPS (TRY) 0.27 0.32 0.45 0.60 EPS growth (%) 11% 15% 42% 33% Tier I ratio (%) 13.1% 14.5% 13.2% 12.9% NPL ratio (%) 5.1% 7.5% 6.8% 5.8% Dividend yield 0% 0% 4% 5% RONAV (%) 22% 18% 22% 25% P/E (x) 11.2 9.7 6.8 5.1 P/NAV 2.0 1.6 1.4 1.2 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

135



Bank Asya: Summary of Financials Profit and Loss Statement Ratio Analysis TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E Per Share Data Net interest income 417 501 609 766 910 EPS Reported 0.25 0.27 0.32 0.45 0.60

% Change Y/Y 45.4% 20.2% 21.5% 25.8% 18.8% EPSAdjusted 0.25 0.27 0.32 0.45 0.60Non-interest income 245 357 459 437 533 % Change Y/Y 51.2% 11.4% 15.5% 41.9% 33.0%Fees & commissions 145 226 260 317 403 DPS 0.00 0.00 0.00 0.11 0.15

% change Y/Y 36.3% 56.3% 15.0% 22.0% 27.0% % Change Y/Y - - - - 33.0%Trading revenues 15 59 93 48 50 Dividend yield 0.0% 0.0% 0.0% 3.7% 4.9%

% change Y/Y 180.1% 305.3% 56.5% (48.4%) 4.2% Payout ratio 0.0% 0.0% 0.0% 25.0% 25.0%Other Income 85 72 106 72 80 BV per share 0.95 1.56 1.88 2.21 2.66Total operating revenues 662 859 1,068 1,203 1,443 NAV per share 0.95 1.56 1.88 2.21 2.66

% change Y/Y 45.2% 29.7% 24.4% 12.6% 19.9% Shares outstanding 900.0 900.0 900.0 900.0 900.0Admin expenses -147 -216 -259 -290 -334

% change Y/Y 39.1% 46.9% 20.0% 12.0% 15.0% Return ratios Other expenses (119) (174) (206) (230) (265) RoRWA 4.8% 3.0% 2.5% 3.0% 3.2%Pre-provision operating profit 396 469 603 683 844 Pre-tax ROE 36.7% 27.6% 23.0% 27.4% 30.6%

% change Y/Y 46.1% 18.3% 28.8% 13.1% 23.6% ROE 29.8% 21.8% 18.4% 22.0% 24.5%Loan loss provisions -123 -157 -248 -178 -173 RoNAV 29.8% 21.8% 18.4% 22.0% 24.5%Other provisions - - - - - Earnings before tax 273 312 356 505 672 Revenues

% change Y/Y 39.1% 14.3% 14.1% 41.9% 33.0% NIM (NII / RWA) 8.2% 7.2% 6.6% 6.6% 6.5%Tax (charge) (52) (65) (71) (101) (134) Non-IR / average assets 4.7% 5.0% 4.8% 3.7% 3.7%

% Tax rate 18.9% 21.0% 20.0% 20.0% 20.0% Total rev / average assets 12.7% 12.0% 11.2% 10.1% 10.1%Minorities 0 0 0 0 0 NII / Total revenues 63.0% 58.4% 57.0% 63.7% 63.1%Net Income (Reported) 221 247 285 404 537 Fees / Total revenues 21.9% 26.3% 24.4% 26.4% 27.9% Trading / Total revenues 0.7% 1.8% 18.5% 1.7% 1.4% Balance sheet TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E ASSETS Cost ratios Net customer loans 4,610 6,381 7,617 9,979 12,558 Cost / income 40.2% 45.4% 43.5% 43.3% 41.5%

% change Y/Y 50.6% 38.4% 19.4% 31.0% 25.9% Cost / assets 4.2% 4.8% 4.2% 4.1% 3.8%Loan loss reserves 145 197 347 436 522 Staff numbers 3,329 3,806 4,250 4,250 4,250Investments 136 192 400 437 480 Other interest earning assets 0 0 0 0 0 Balance Sheet Gearing

% change Y/Y - - - - - Loan / deposit 91.9% 105.2% 86.2% 94.7% 97.8%Average interest earnings assets 5,114 6,981 9,197 11,580 13,908 Investments / assets 2.2% 2.4% 3.7% 3.4% 3.1%Goodwill - 0 - - - Loan / assets 71.3% 78.2% 69.6% 79.3% 82.2%Other assets 132 288 425 514 706 Customer deposits / liabilities 92.7% 94.0% 96.8% 98.9% 99.6%Total assets 6,260 8,109 10,937 12,845 15,612 LT Debt / liabilities 5.8% 6.8% 4.3% 4.3% 4.5% LIABILITIES Asset Quality / Capital Customer deposits 4,698 5,843 8,555 10,266 12,568 Loan loss reserves / loans 3.2% 3.1% 4.6% 4.3% 4.6%

% change Y/Y 46.8% 24.4% 46.4% 20.0% 22.4% NPLs / loans 5.3% 5.1% 7.5% 6.8% 5.8%Long term funding 0 0 0 0 0 LLP / RWA 2.19% 1.46% 2.13% 1.18% 0.93%Interbank funding 313 458 398 470 597 Loan loss reserves / NPLs 61.4% 60.5% 60.7% 62.9% 80.0%Average interest bearing liabs 4,176 5,661 7,627 9,844 11,950 Growth in NPLs 82.7% 37.8% 75.7% 21.3% 7.5%Other liabilities 385 405 296 118 54 RWAs 5,620 10,702 11,642 15,071 18,615Retirement benefit liabilities - - - - - % YoY change 59.9% 90.4% 8.8% 29.4% 23.5%Shareholders' equity 854 1,404 1,688 1,991 2,394 Core Tier 1 15.2% 13.1% 14.5% 13.2% 12.9%Minorities 0 0 0 0 0 Total Tier 1 15.2% 13.1% 14.5% 13.2% 12.9%Total liabilities & Shareholders Equity 6,260 8,109 10,937 12,845 15,612 Source: Company reports and J.P. Morgan estimates.

136



Bank Central Asia www.klikbca.co.id

Overweight Rp4,600


Company description BCA is Indonesia’s largest private sector bank. The major shareholder is the Hartono family (Djarum group). The bank has a pre-eminent position in payment/transaction banking in Indonesia, and an exceptionally strong deposit franchise. The bank has a strong corporate lending business, and is expanding its presence in various consumer lending segments.

Post mortem BCA came through the crisis largely unscathed; its low LDR and high capitalization protected it from risks on the liabilities side, while pricing power in loans returned. Although non-performing loans rose starting in 4Q last year, they have started declining in 3QFY09.

Potential for earnings upgrades We think that the credit cycle in Indonesia is just starting to turn, while credit quality is likely to have bottom out. Mildly higher rates in 2010 could result in margin compression being arrested. Combined with lower tax rates, these add up to a positive picture for earnings. We think the consensus earnings growth of 15% for FY10E is too conservative; our forecasts are 13% higher than consensus.

How much recovery is priced into the stock? Among banks, BCA is strongly leveraged to a credit cycle recovery, with lending having outpaced industry growth in 6 out of last 7 years. We do not think that a credit cycle recovery is priced into BCA, as the stock has underperformed the JCI by 33% YTD and in line with the sector since the end of 3QFY09.

Price target and key risks We have a DDM-based Dec-10 PT of Rp5,500 for BCA (10.5% Rf, β=1, 15.8% cost of equity, normalized ROE: 29.44), in line with BCA’s 52-week high. High multiples are a risk to our PT, although they have sustained over the recent past. Investor perception on management changes if any could also be a risk to our PT.

Indonesia Banks Aditya Srinath, CFAAC (62-21) 5291-8573 [email protected]


Price performance

2,000

3,500

5,000

Rp


BBCA.JK share price (Rp)JCI (rebased)

Source: Bloomberg.


Absolute (%) 0.5 12.4 63.8 Relative (%) 3.5 12.7 -13.9

Source: Bloomberg.

Company data 52-week range (Rp) 2,275-5,500 Mkt cap. (RpMM) 113,413,046 Mkt cap. (US$MM) 11,995 Avg daily value (US$MM) 4.5 Avg daily volume (MM) 16.2 Shares O/S (MM) 24,655 Date of price 5-Nov-09 Index: JCI 2395 Free float (%) 52 Exchange rate 9,455.00

Source: Bloomberg.

Bloomberg: BBCA IJ; Reuters: BBCA JK Year-end Dec (Rp in mn) FY06A FY07A FY08A FY09E FY10EOperating Profit 6,577,242 6,520,046 9,422,056 11,258,657 12,425,255Net Profit 4,242,926 4,489,369 5,776,139 6,537,782 8,766,378Cash EPS (Rp) 172 182 234 265 356Fully Diluted EPS (Rp) 172 182 234 265 356DPS (Rp) 72 85 63 157 137EPS growth (%) 17.8% 5.8% 28.7% 13.2% 34.1%ROE 25.0% 23.3% 26.4% 25.8% 29.2%P/E 27.4 25.9 20.2 17.8 13.3BVPS (Rp) 733 829 944 1,109 1,328P/BV 6.4 5.7 5.0 4.3 3.6Div. Yield 1.5% 1.8% 1.3% 3.3% 2.9%


137



Bank Central Asia: Summary of financials Income Statement Growth Rates Rp in millions, year end Dec FY06 FY07 FY08 FY09E FY10E FY06 FY07 FY08 FY09E FY10E

NIM (as % of avg. assets) 7.5% 6.7% 7.3% 7.6% 7.5% Loans 13.5% 34.1% 36.9% 7.7% 21.2%Earning assets/assets 73.5% 67.9% 69.2% 73.6% 75.8% Deposits 17.9% 23.9% 10.8% 8.9% 15.1%Margins (% of earning assets) 5.5% 4.6% 5.0% 5.6% 5.7% Assets 17.7% 23.3% 12.6% 8.7% 16.8% Equity 14.0% 13.1% 13.9% 17.5% 19.7%Net Interest Income 9,006,566 9,029,239 11,675,823 14,409,658 16,436,368 RWA 11.6% 34.5% 35.6% 9.4% 5.1% Total Non-Interest Income 2,701,636 3,396,249 4,542,707 4,588,133 4,542,499 Net Interest Income 23.7% 0.3% 29.3% 23.4% 14.1%Fee Income 2,701,636 3,396,249 4,542,707 4,588,133 4,542,499 Non-Interest Income 5.9% 25.7% 33.8% 1.0% -1.0%Dealing Income - - - - - of which Fee Grth 5.9% 25.7% 33.8% 1.0% -1.0%Other Operating Income - - - - - Revenues 1904.5% 612.6% 3052.6% 1713.6% 1042.8%Total operating revenues 11,708,202 12,425,488 16,218,530 18,997,791 20,978,867 Costs 14.8% 15.1% 15.1% 13.9% 10.5% Pre-Provision Profits 22.6% -0.9% 44.5% 19.5% 10.4%Operating costs -5,130,960 -5,905,442 -6,796,474 -7,739,134 -8,553,612 Loan Loss Provisions 58.0% -66.8% 829.2% 77.3% -50.6% Pre-Tax - - - - -Pre-Prov. Profits 6,577,242 6,520,046 9,422,056 11,258,657 12,425,255 Attributable Income 17.9% 5.8% 28.7% 13.2% 34.1%Provisions 568,564 188,786 1,754,149 3,110,979 1,535,400 EPS 17.8% 5.8% 28.7% 13.2% 34.1%Other Inc/Exp. 57,925 70,370 52,136 224,349 68,118 DPS -19.6% 17.0% -25.8% 150.5% -12.9%Exceptionals - - - - - Disposals/ other income - - - - - Balance Sheet Gearing FY06 FY07 FY08 FY09E FY10EPre-tax 7,203,731 6,779,202 11,228,341 14,593,985 14,028,773 Loan/deposit 40.2% 43.6% 53.8% 53.2% 56.1%Tax 1,823,794 1,912,378 1,943,904 1,834,245 2,191,595 Investment/assets 27.8% 21.5% 16.2% 17.4% 15.5%Minorities -117 -117 0 0 0 Loan/Assets 33.8% 37.0% 44.8% 43.5% 45.3%Other Distbn. - - - - - Customer deposits/liab. 86.4% 86.8% 85.3% 85.5% 84.3%Attributable Income 4,242,926 4,489,369 5,776,139 6,537,782 8,766,378 LT debt/liabilities 1.3% 1.7% 2.1% 1.2% 1.1%

Per Share Data Rp FY06 FY07 FY08 FY09E FY10E Asset Quality/Capital FY06 FY07 FY08 FY09E FY10EEPS 172.15 182.09 234.28 265.17 355.56 Loan loss reserves/loans 2.8% 2.0% 2.4% 4.4% 4.2%DPS 72 85 63 157 137 NPLs/loans 1.3% 0.8% 0.6% 2.0% 1.4%Payout 42.1% 46.5% 26.8% 59.3% 38.5% Loan loss reserves/NPLs 0.0% 0.0% 0.0% 0.0% 0.0%Book value 733 829 944 1,066 1,301 Growth in NPLs -13.6% -16.1% 0.8% 260.0% -15.1%Fully Diluted Shares - - - - - Tier 1 Ratio 20.0% 17.3% 14.9% 16.4% 19.1% Total CAR 22.7% 19.6% 16.6% 17.9% 20.6%Key Balance sheet Rp in millions FY06 FY07 FY08 FY09E FY10E Du-Pont Analysis FY06 FY07 FY08 FY09E FY10ENet Loans 59,688,265 80,702,481 110,026,231 116,102,488 141,049,817 NIM (as % of avg. assets) 7.5% 6.7% 7.3% 7.6% 7.5%LLR -1,734,043 -1,686,152 -2,757,475 -5,343,629 -6,183,812 Earning assets/assets 73.5% 67.9% 69.2% 73.6% 75.8%Gross Loans 61,422,308 82,388,633 112,783,706 121,446,118 147,233,629 Margins (as % of Avg. Assets) 5.5% 4.6% 5.0% 5.6% 5.7%NPLs 798,021 669,697 674,769 2,428,922 2,061,271 Non-Int. Rev./ Revenues 23.1% 27.3% 28.0% 24.2% 21.7%Investments 49,139,082 46,777,950 39,810,702 46,558,992 48,261,992 Non IR/Avg. Assets 1.7% 1.7% 2.0% 1.8% 1.6%Other earning assets 7,810,359 9,222,138 14,501,875 16,018,526 18,649,026 Revenue/Assets 6.6% 5.7% 6.6% 7.1% 6.7%Avg. IEA 120,140,797 134,032,960 160,337,276 188,492,548 219,184,868 Cost/Income 43.8% 47.5% 41.9% 40.7% 40.8%Goodwill - - - - - Cost/Assets 3.1% 3.0% 2.9% 3.0% 3.0%Assets 176,798,726 218,005,008 245,569,856 266,872,414 311,630,335 Pre-Provision ROA 9.8% 8.7% 9.5% 10.1% 9.7% LLP/Loans 1.0% 0.2% 1.6% 2.7% 1.1%Deposits 152,736,195 189,172,191 209,528,921 228,154,034 262,571,409 Loan/Assets 35.3% 36.4% 42.1% 45.7% 46.4%Long-term bond funding 2,330,275 3,680,719 5,082,101 3,286,094 3,286,094 Other Prov, Income/ Assets 0.0% 0.0% 0.0% 0.1% 0.0%Other Borrowings 0 0 0 0 0 Operating ROA 4.0% 3.3% 4.1% 4.4% 4.3%Avg. IBL 143,052,642 173,959,690 203,731,966 223,025,575 248,648,815 Pre-Tax ROA 10.1% 8.8% 10.2% 11.5% 10.2%Avg. Assets 163,489,739 197,401,867 231,787,432 256,221,135 289,251,374 Tax rate - - - - -Common Equity 18,067,360 20,441,731 23,279,310 27,349,615 32,738,090 Minorities & Outside Distbn. -0.0% -0.0% 0.0% 0.0% 0.0%RWA 73,537,710 98,937,004 134,164,949 146,769,973 154,197,597 ROA 2.6% 2.3% 2.5% 2.6% 3.0%Avg. RWA 69,721,059 86,237,357 116,550,976 140,467,461 150,483,785 RORWA 6.1% 5.2% 5.0% 4.7% 5.8% Equity/Assets 10.4% 9.8% 9.4% 9.9% 10.4% ROE 25.0% 23.3% 26.4% 25.8% 29.2%Source: Company reports and J.P. Morgan estimates.

138



Bank of China – H www.boc.cn

Overweight HK$4.54

Price Target: HK$5.7

Company description One of the “big four” banks in China, BOC has the most extensive international branch network among all Chinese banks and a dominant over-40% market share in China’s FX-related banking business. It has a strong universal banking platform, with presence in investment banking, insurance, fund management, financial leasing. Post mortem Bank of China delivered stronger-than-sector average loan increase. In Rmb-denominated lending, market share increased by 1ppt. BoC is also a major beneficiary of stronger foreign-currency lending. The bank expects more market share gain and still relatively solid loan growth despite a slowdown. Meanwhile, asset quality further has been proven in the past one year, with significant improvement in asset quality and NPL coverage. We expect more ROE improvement going forward. A structural change in business mix may improve underlying profitability and NIM, particularly driven by the 5ppt increase in the percentage of Rmb-denominated loans, and rising spread in both Rmb and foreign-currency assets. Also, discontinuation of overseas securities provisioning will also contribute nearly 1ppt ROE improvement. Potential for earnings upgrades We believe NIM expansion could be bigger than its key peers and better than our expectation. The major potential upside surprise may come from the writeback of its overseas impairment reserves. With a provision ratio of 45% collectively on US MBS securities, we believe at least over US$2 billion can be written back. How much recovery is priced into the stock At 1.7x FY10E P/B and below 9x FY10E P/E, we believe the share price has not priced in the expected significant ROE improvement in the next two years or its better-than-peers earnings trend. Price target and key risks Our current DDM-based Dec-09 price target is HK$5.7, implying a P/BV of 2.4x and P/E of 12x (FY10E). We assume a risk-free rate of 5.3%, cost of equity of 11.1% and terminal “g” of 5.8%. Key risks to PT are unexpected prolonged weakness in US credit market and drastic Rmb appreciation.

China Banks Samuel ChenAC (852) 2800-8557 [email protected]

J.P. MorganSecurities(Asia Pacific) Limited

12M share price performance

1.5

2.5

3.5

4.5

5.5

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

H-share A-share

Source: Bloomberg.


H Absolute (%) 14.1 19.3 101.8A Absolute (%) 6.4 (9.6) 36.5

Source: Bloomberg.

Company data (H-shares) 52-week range (HK$) 1.84 – 4.66 Mkt cap (US$MM) 44,336 Mkt cap (A+H) (US$MM) 152,429 Avg daily val (US$MM) 173 Avg daily volume (MM) 325 Shares O/S (A+H MM) 253,839 Date of price 5-Nov-09 Index: I 21615 Free float (%) 100 Exchange rate 7.75

Source: Bloomberg.

3988 HK; 601988 CH RmbMM, Y/E Dec FY07 FY08 FY09E FY10E FY11E Attributable earnings 56,248 64,360 82,529 117,024 151,011 EPS (Rmb) 0.22 0.25 0.33 0.46 0.59 DPS (Rmb 0.10 0.13 0.16 0.21 0.27 EPS growth (%) 22.1 14.4 28.2 41.8 29.0 ROE (%) 14.0 14.5 16.9 21.3 23.6 ROA (%) 0.99 0.99 1.03 1.21 1.35 P/E (x) – H share 18.2x 15.9x 12.4x 8.8x 6.8x BVPS (Rmb) 1.66 1.83 2.01 2.32 2.72 P/BV (x) – H share 2.44x 2.21x 2.01x 1.74x 1.48x Div. yield (%)- H 2.5 3.2 4.0 5.1 6.6 Source: Company data, Bloomberg, J.P. Morgan estimates. Share price is as of 5 November 2009.

139



Bank of China – H: Summary of financials Rmb million, year end December 31 Income statement - Rmb mn 2007 2008 2009E 2010E 2011E Growth Rates 2007 2008 2009E 2010E 2011E

Margins (% of Earning Assets) 2.76% 2.63% 2.05% 2.28% 2.44% Loans 17% 16% 44% 18% 14%Earning Assets/Assets 98% 96% 99% 98% 99% Deposits 8% 16% 30% 16% 15%NIM (as % of avg. Assets) 2.70% 2.52% 2.02% 2.24% 2.41% Assets 12% 16% 25% 17% 15%

Equity 10% 10% 10% 15% 17%Net Interest Income 152,745 162,936 161,566 215,703 269,068

Net Interest Income 26% 7% -1% 34% 25%Total Non-Interest Revenues 31,427 56,750 62,846 72,817 86,766 Non-Interest Income 74% 81% 11% 16% 19%Fee income 35,535 39,947 47,140 58,735 71,285 of which Fee Grth 76% 12% 18% 25% 21%Dealing income -11,972 7,054 5,328 2,807 2,763 Revenues 32% 19% 2% 29% 23%Other operating income 7,864 9,749 10,378 11,275 12,718 Costs 23% 18% 2% 20% 21%Total operating revenues 184,172 219,686 224,411 288,520 355,834 Pre-Provision Profits 39% 20% 2% 35% 25%Operating costs -75,392 -89,078 -91,252 -109,398 -132,363 Loan Loss Provisions -33% 103% 1% 42% 8%Operating profit 108,780 130,608 133,159 179,121 223,471 Pre-Tax 34% -4% 30% 41% 28%Loan Loss Provisions -8,252 -16,792 -17,006 -24,182 -26,171 Attributable Income 31% 14% 28% 42% 29%Other provisions -12,011 -28,239 -3,616 3,363 5,982 EPS 22% 14% 28% 42% 29%Exceptionals 917 876 300 600 800 DPS 150% 30% 25% 28% 29%Disposals/ Other income 1,263 726 800 880 1,000Pre-tax profit 90,697 87,179 113,637 159,782 205,082 Balance Sheet Gearing 2007 2008 2009E 2010E 2011ETax -28,661 -21,285 -27,273 -38,348 -49,220Minorities/preference dividends -5,788 -1,534 -3,835 -4,410 -4,851 Loan/Deposit 65% 65% 72% 73% 72%Attributable net income 56,248 64,360 82,529 117,024 151,011 Investment/Assets 29% 24% 22% 21% 20%Common dividends 25,384 32,999 41,265 52,661 67,955 Loan/Assets 48% 47% 55% 55% 55%

Customer deposits/Liab. 79% 79% 81% 80% 80%LT Debt/Liabilities 1% 1% 1% 1% 1%

Per Share Data 2007 2008 2009E 2010E 2011E Asset Quality/Capital 2007 2008 2009E 2010E 2011Erestated EPS (Rmb/ share) 0.22 0.25 0.33 0.46 0.59 Loan loss reserves/Loans 3.5% 3.3% 2.4% 2.3% 2.2%restated DPS (Rmb/ share) 0.10 0.13 0.16 0.21 0.27 Impaired loan ratio 3.17% 2.76% 1.54% 1.21% 1.00%Payout 45% 51% 50% 45% 45% Impaired loan coverage 106% 117% 155% 187% 220%restated BVPS (Rmb/ share) 1.66 1.83 2.01 2.32 2.72 Growth in NPLs -13% 1% -19% -8% -6%Avg. Shares Issued 253,821 253,839 253,839 253,839 253,839PPOP per share 0.43 0.51 0.52 0.71 0.88 Tier 1 Ratio 10.7% 10.8% 9.7% 9.5% 9.7%

Total CAR 13.3% 13.4% 12.2% 12.0% 12.1%

Key balance sheet - Rmb mn 2007 2008 2009E 2010E 2011E Du-Pont Analysis 2007 2008 2009E 2010E 2011E

Net Customer Loans 2,754,493 3,189,652 4,644,187 5,472,823 6,262,050 NIR/Avg. Assets 2.70% 2.52% 2.02% 2.24% 2.41%Loans loss reserves (96,068) (106,494) (113,441) (126,603) (139,997) Non IR/Avg. Assets 0.56% 0.88% 0.79% 0.75% 0.78%Gross Loans 2,850,561 3,296,146 4,757,627 5,599,426 6,402,047 Non IR/Total Rev 17.1% 25.8% 28.0% 25.2% 24.4%Investments 1,712,927 1,646,208 1,877,456 2,138,132 2,381,082 Total Rev/Avg. Assets 3.25% 3.39% 2.81% 2.99% 3.18%Other Earning Assets 1,209,213 1,768,611 1,812,180 2,155,239 2,615,753 Cost/Income 40.9% 40.5% 40.7% 37.9% 37.2%Average Earning Assets 5,526,875 6,191,254 7,883,995 9,460,301 11,018,963 Cost/Assets 1.33% 1.38% 1.14% 1.13% 1.18%Goodwill Goodwill Amort. 0.0% 0.0% 0.0% 0.0% 0.0%Total assets 5,991,217 6,951,680 8,722,923 10,196,948 11,727,765 Pre-prov.g Op. ROAA 1.92% 2.02% 1.67% 1.86% 2.00%

LLP/Loans -0.31% -0.53% -0.40% -0.44% -0.40%Interbank funding 663,815 859,343 1,074,179 1,342,723 1,597,841 Loan/Assets 47.1% 49.2% 52.8% 57.6% 57.8%Customer deposits 4,400,111 5,102,111 6,614,742 7,687,214 8,838,238 Other inc:provs -0.17% -0.41% -0.03% 0.05% 0.07%LT Sub-debt 60,000 60,000 74,000 94,000 94,000 Pre-tax ROAA 1.60% 1.35% 1.42% 1.66% 1.83%Other Interest Bearing Liabilities 142,754 115,780 90,692 90,692 95,421 Tax 31.6% 24.4% 24.0% 24.0% 24.0%Avg. Interest Bearing Liab. 5,075,454 5,686,870 7,284,272 8,518,481 9,904,776 MI -0.10% -0.02% -0.05% -0.05% -0.04%Average Assets 5,659,435 6,471,449 7,994,048 9,649,134 11,181,603 ROAA 0.99% 0.99% 1.03% 1.21% 1.35%Shareholders' equity 420,430 464,258 510,788 589,836 690,158 RoRWA 1.56% 1.67% 1.79% 2.06% 2.30%Risk Weighted Assets 3,754,108 3,966,943 5,233,754 6,118,169 7,036,659 Equity/Assets 7.1% 6.8% 6.1% 5.7% 5.7%Avg. Risk Weighted Assets 3,611,563 3,860,526 4,600,348 5,675,961 6,577,414 ROE 14.0% 14.5% 16.9% 21.3% 23.6%

Source: Company reports and J.P. Morgan estimates.

140



Catcher Technology www.catcher.com.tw


Price Target: NT$112

Company description Catcher (TWSE: 2474) is a leading aluminum and magnesium casing maker in Taiwan. The company is primarily engaged in manufacturing and sales of a wide spectrum of light metal casing products in 3C area, but mainly in NB.

Post mortem Catcher’s profitability is highly dependent on: (1) the utilization rate; and (2) corporate demand. Given that PC brands prefer aluminum for their thin and light models, we expect Catcher to be a key beneficiary of this trend in 2010. In addition, a potential pick up in corporate demand from 2H10 should also help Catcher. While Foxconn Tech should benefit from rising metal adoption, Hon Hai’s aggressive notebook ODM plans could limit the upside for Foxconn Tech, which benefits Catcher.

Potential for earnings upgrades We believe the potential for upward earnings estimate revisions comes from both revenue and OP margin upside through: (1) an improvement in yield; and (2) a strong pick up in the utilization rate on favorable industry trend.

How much recovery is priced into the stock? The recovery in 2009 might be already in the price but we believe the strong momentum in 2010 is not. We believe the market is overly concerned about the impact on gross margins due to increasing competition and is not fully factoring in the extent of operating leverage in Catcher’s business model.

Price target and key risks Our Jun-10 PT of NT$112 is based on 15x FY10E earnings. 15x is the average P/E multiple since 2002, which we believe is a fair valuation for Catcher. With 40/12% potential earnings growth in 2010/11E and industry trends becoming in favor of light metal, we believe Catcher should merit a valuation re-rating as a pure-play notebook light metal vendor. A key risk to our PT is execution issue in the ramp up of new models in 2010.



Price performance

40

70

100NT$



Source: Bloomberg.

Performance 1M 3M 12M Absolute (%) -3.6 3.0 17.7 Relative (%) -2.6 -5.7 -41.3

Source: Bloomberg.

Company data 52-week range (NT$) 41.36-94.00 Mkt cap. (NT$MM) 53,326 Mkt cap. (US$MM) 1,639 Avg daily value (US$MM) 34 Avg daily volume (MM) 13.48 Shares O/S (MM) 664.9 Date of price 5-Nov-09 Index: TWSE 7,417 Free float (%) 70 Exchange rate 32.5

Source: Bloomberg.

Bloomberg: 2474.TT; Reuters: 2474.TW NT$ in millions, year-end December FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E Sales 19,049 18,422 24,610 29,215 ROE (%) 15.7% 10.5% 12.9% 13.4% Operating profit 4,989 3,747 5,375 6,018 Core ROIC (%) 17.5% 10.5% 13.9% 14.1% EBITDA 6,481 5,819 7,678 8,346 Cash div (NT$) 4.0 1.0 2.3 3.0 Pre-tax profit 4,932 4,073 5,715 6,407 Quarterly EPS (NT$) 1Q 2Q 3Q 4Q Net profit (reported) 4,346 3,449 4,843 5,432 EPS (FY07) 2.60 1.78 2.98 3.26 MV of employee bonus 543 427 586 657 EPS (FY08) 1.31 1.38 2.14 1.81 Net profit (adjusted) 4,346 3,449 4,843 5,432 EPS (FY09E) 1.00 1.10 1.41 1.71 New Taiwan GAAP EPS (NT$) 6.63 5.22 7.28 8.17 Sales growth 5% -3% 34% 19% New Taiwan GAAP P/E (x) 12.1 15.4 11.0 9.8 EPS growth -38% -21% 40% 12% YE BPS (NT$) 44.8 54.4 58.8 63.1 P/BV (x) 1.8 1.5 1.4 1.3 Net debt (3.49) net cash net cash net cash Jun-10 PT NT$ 112 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

141



Catcher Technology: Summary of financials NT$ in millions, year-end December Profit and loss statement Ratio analysis

FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11ERevenues 19,049 18,422 24,610 29,215 EBITDA margin (%) 34.0% 31.6% 31.2% 28.6%

% change Y/Y 5.3% -3.3% 33.6% 18.7% Operating margin (%) 26.2% 20.3% 21.8% 20.6%Gross margin (%) 40.2% 34.1% 35.7% 33.9% Net profit margin (%) 22.8% 18.7% 19.7% 18.6%EBITDA 6,481 5,819 7,678 8,346 SG&A/sales (%) 6.9% 6.9% 7.0% 6.5%

% change Y/Y -19.4% -10.2% 31.9% 8.7% EBITDA margin (%) 34.0% 31.6% 31.2% 28.6% Sales per share growth (%) 4.8% -4.1% 32.8% 18.7%

EBIT 4,989 3,747 5,375 6,018 Sales growth (%) 5.3% -3.3% 33.6% 18.7%% change Y/Y -32.9% -24.9% 43.5% 12.0% Net profit growth (repo’d) (%) -39.7% -20.7% 40.4% 12.1%EBIT margin (%) 26.2% 20.3% 21.8% 20.6% Net profit growth (adj) (%) -37.3% -20.7% 40.4% 12.1%

Net interest 83 -76 -8 -19 EPS growth (reported) (%) -40.0% -21.3% 39.6% 12.1%Earnings before tax 4,932 4,073 5,715 6,407 EPS growth (adjusted) (%) -37.6% -21.3% 39.6% 12.1%

% change Y/Y -36.0% -17.4% 40.3% 12.1% Tax 571 618 872 975 Interest Coverage (x) 19.7 19.8 37.2 37.9 as % of EBIT 11.4% 16.5% 16.2% 16.2% Net debt to total Capital (%) 9% -7% -1% -3%Net income (reported) 4,346 3,449 4,843 5,432 Net debt to equity (%) 12% -8% -2% -4%

% change Y/Y -39.7% -20.7% 40.4% 12.1% Sales/Assets (%) 43% 37% 44% 49%Net income (adjusted) 4,346 3,449 4,843 5,432 Assets/Equity (%) 151.0% 135.9% 142.2% 142.4%

% change Y/Y -37.3% -20.7% 40.4% 12.1% ROE (%) 15.7% 10.5% 12.9% 13.4%Shares outstanding (MM) 655 661 665 665 ROCE (%) 12.1% 7.5% 9.8% 10.1%EPS (reported) 6.63 5.22 7.28 8.17 EPS (adjusted) 6.63 5.22 7.28 8.17

Balance sheet Cash flow statement

FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11ECash and Cash Equivalents 7,375 11,250 10,305 11,704 EBIT 4,989 3,747 5,375 6,018Accounts receivable 8,206 8,017 11,173 12,133 Depreciation & amortisation 1,492 2,072 2,302 2,329Inventories 2,964 2,898 4,039 4,387 Change in working capital -4,950 -1,017 -4,420 -1,225Others 4,239 5,985 8,341 9,058 Taxes 571 618 872 975Current assets 22,783 28,150 33,858 37,282 Cash flow from operations 2,102 5,419 4,129 8,097

LT investments 413 486 526 569 Capex -7,115 -2,202 -3,000 -3,000Net fixed assets 19,894 20,024 20,721 21,393 Disposal/ (purchase) -853 921 -40 -43Total Assets 44,627 49,202 55,647 59,787 Net Interest 83 -76 -8 -19

Free cash Flow -5,013 3,217 1,129 5,097Liabilities ST bank loans 6,785 5,003 5,777 6,068 Payables 2,242 2,204 3,494 4,007 Equity raised/(repaid) 581 652 0 0Others 1,882 2,394 3,337 3,624 Debt raised/(repaid) 4,197 -2,531 1,289 485Total current liabilities 10,910 9,602 12,607 13,699 Other -2,608 2,285 -1,820 -2,125Long term debt 4,084 3,335 3,851 4,045 Dividends 15 -593 -1,496 -1,995Other liabilities 80 69 69 69 Beginning cash 10,972 7,375 11,250 10,305Total liabilities 15,074 13,006 16,528 17,813 Ending cash 7,375 11,250 10,305 11,704Shareholder's equity 29,553 36,196 39,120 41,974 DPS (NT$) 4.00 1.00 2.25 3.00 BVPS (NT$) 44.80 54.44 58.83 63.13 Source: Company reports and J.P. Morgan estimates.

142



China Airlines www.china-airlines.com

Overweight NT$9.99

Price Target: NT$16.00

Company description China Airlines (CAL) is Taiwan’s government-owned carrier with a well-balanced revenue mix, including 53% contribution from passenger revenue; 42% from cargo revenue; and 5% from other services.

Post mortem China Airlines has one of the youngest fleets versus Asian and global peers, implying better operating efficiency; its safety track record has improved significantly in the past five years. CAL also has easier access to credit and relatively low funding costs despite its high financial leverage.

Potential for earnings upgrades Direct flights represent a structural change for the Taiwan airlines and will likely start to have a bigger impact on the airline’s earnings in 2010. We expect, Contrary to the market’s common perception, CAL to be a bigger beneficiary of the progressive liberalization of China-Taiwan direct flights than EVA, with a c.17% boost to its 2010 revenue, helped by its 94% stake in Mandarin Airlines.

How much recovery is priced into the stock? Little of the recovery has been priced in as CAL has significantly lagged the market and sector recovery, and management continues to sound bearish on the outlook and it incurred substantial losses in 2009. However, we expect CAL to provide substantial absolute and relative upside in 2010 as the cycle and its earnings recover.

Price target and key risks Our Dec-10 PT of NT$16 based on 1.7x P/BV, 1 std dev above CAL’s average valuation, as we expect better-than-mid-cycle results in 2010 and near-peak-cycle earnings by 2011. Key risks to our PT include: (1) volatile fuel prices; (2) high gearing; (3) aircraft incidents; and (4) delays in cross-straits flights liberalization.

Taiwan Transportation, Airlines Corrine PngAC (65) 6882-1514 [email protected]


Price performance

8

12

16

NT$




1M 3M 12M Absolute (%) -6.5% -22.1% -5.1% Relative (%) -7.2% -29.4% -54.7%


52-week range (NT$) 8.67-14.58 Mkt cap. (NT$MM) 45,677 Mkt cap. (US$MM) 1,403 Avg daily value (US$MM) 16.35 Avg daily volume (MM) 39.65 Shares O/S (MM) 4,572 Date of price 5-Nov-09 Index: TWSE 7,417.46 Free float (%) 40 Exchange rate 33

Source: Bloomberg. Bloomberg: 2610 TT; Reuters: 2610.TW NT$ in millions, year-end December FY08 FY09E FY10E FY11E Sales 125,221 95,738 122,660 141,301 Net profit -32,352 -8,969 495 3,562 EPS (NT$) (7.11) (2.26) (0.12) (0.90) FD EPS (LC) (7.11) (2.26) (0.12) (0.90) DPS (NT$) 0.00 0.00 0.00 0.00 Sales growth (%) -1.4 -23.5 28.1 15.2 Net profit growth (%) nm nm nm 619 EPS growth (%) 1.036.5 -68.2 105.5 618.8 ROE (%) -75.4 -25.7 1.3 8.6 P/E (x) -1.4 -4.5 80.6 11.2 FD P/E (x) -1.4 -4.5 80.6 11.2 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

143



China Airlines: Summary of financials NT$ in millions, year end December Income statement Cash flow statement FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11ERevenue 126,993 125,221 95,738 122,660 141,301 EBIT 1,351 -10,206 -7,065 4,076 7,454

% change Y/Y 4.1% (1.4%) (23.5%) 28.1% 15.2% Depr. & amortization 10,863 10,310 10,388 10,837 11,286EBITDA 12,213 104 3,323 14,913 18,740 Change in working capital 7,092 1,977 -920 1,296 898

% change Y/Y -10.1% -99.2% 3102.7% 348.8% 25.7% Taxes -119 -95 200 -66 -478EBIT 1,351 -10,206 -7,065 4,076 7,454 Cash flow from operations 15,886 -2,252 -831 12,421 15,537

% change Y/Y NM NM NM NM 82.9% EBIT margin 1.1% -8.2% -7.4% 3.3% 5.3% Capex 953 5,389 -10,000 -10,000 -10,000Net interest -4,751 -4,097 -3,434 -3,723 -3,623 Disposal/(purchase) 15,456 10,894 0 0 0Earnings before tax -3,138 -36,690 -9,169 562 4,039 Net Interest -4,751 -4,097 -3,434 -3,723 -3,623

% change Y/Y -2239.1% 1069.2% -75.0% -106.1% 618.8% Other -3,318 -631 0 0 0Tax 619 4,339 200 -66 -478 Free cash flow 16,839 3,137 -10,831 2,421 5,537

As % of EBT 19.7% 11.8% 2.2% 11.8% 11.8% Net income (reported) -2,519 -32,352 -8,969 495 3,562 Equity raised/(repaid) - - - - -

% change Y/Y -441.1% 1184.5% -72.3% -105.5% 618.8% Debt raised/(repaid) -14,383 -7,599 -4,000 -2,000 -5,000Shares outstanding 4,026 4,551 3,972 3,972 3,972 Other - - - - -EPS (reported) (NT$) (0.63) (7.11) (2.26) 0.12 0.90 Dividends paid -469 0 0 0 0

% change Y/Y (426.8%) 1036.5% (68.2%) (105.5%) 618.8% Beginning cash 5,245 6,088 7,282 11,251 11,671 Ending cash 6,088 7,282 11,251 11,671 12,208 DPS (NT$) 0.00 0.00 0.00 0.00 0.00 Balance sheet Ratio analysis FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11ECash and cash equivalents 6,088 7,282 11,251 11,671 12,208 EBITDA margin 9.6% 0.1% 3.5% 12.2% 13.3%Accounts receivable 12,458 8,913 6,815 8,731 10,058 Operating margin 1.06% (8.15%) (7.38%) 3.32% 5.28%Inventories 5,381 5,152 3,939 5,046 5,813 Net margin -2.0% -25.8% -9.4% 0.4% 2.5%Others 3,429 930 886 926 954 Current assets 27,357 22,277 22,890 26,375 29,034 Sales per share growth (0.3%) (12.8%) (12.4%) 28.1% 15.2%LT investments 15,687 20,443 20,443 20,443 20,443 Sales growth 4.1% (1.4%) (23.5%) 28.1% 15.2%Net fixed assets 177,104 165,349 164,961 164,124 162,838 Net profit growth -441.1% 1184.5% -72.3% -105.5% 618.8%Total assets 230,808 218,060 218,116 220,972 222,553 EPS growth (426.8%) 1036.5% (68.2%) (105.5%) 618.8% Liabilities Interest coverage (x) 2.57 0.03 0.97 4.01 5.17Short-term loans 30,204 30,692 21,692 17,692 12,692 Payables 13,808 11,878 9,082 11,635 13,404 Net debt to equity 236.5% 284.0% 326.9% 284.0% 256.6%Others 10,918 32,436 30,957 32,764 34,015 Sales/assets 0.54 0.56 0.44 0.56 0.64Total current liabilities 54,930 75,006 61,730 62,091 60,110 Assets/equity 4.18 7.11 7.02 6.76 6.11Long-term debt 106,717 98,485 103,485 105,485 105,485 ROE (4.6%) (75.4%) (25.7%) 1.3% 8.6%Other liabilities 13,991 13,085 13,085 13,085 13,085 ROCE 0.7% -5.8% -4.4% 2.5% 4.6%Total liabilities 175,638 187,374 179,099 181,459 179,479 Shareholders' equity 55,170 30,686 39,017 39,513 43,075 BVPS (NT$) 13.70 6.74 9.82 9.95 10.84 Source: Company reports, J.P. Morgan estimates.

144



China Mengniu Dairy www.mengniu.com.cn

Overweight HK$23.70


Company description Mengjiu is a leading dairy producer in China. Its major products include liquid milk products and ice cream. In 2008, it was ranked No.1 in the sectors of liquid milk, yogurt and ice cream in China’s dairy industry.

Post mortem Liquid milk gross margin and EBIT margin are at the low-end in the China F&B sector. We believe one reason for this is the aggressive pricing of sector majors, Mengniu and Yili. EBIT margins of both companies have declined since 2002. Mengniu management indicated that after the melamine incident, the company has been focusing more on high-end product mix and profitability rather than on market share. We believe as dairy processors become more rational, EBIT margin would have more upside potential. Meanwhile, we believe the melamine incident in China has resulted in consumers being more willing to pay for high-end products.

Potential for earnings upgrades We have factored in raw milk price increases in China and the EBIT margin assumption for FY09 and FY10 are 6.5% and 7.2%, respectively. Earnings upgrades will come from margin expansion rather than from revenue surprises.

How much recovery is priced into the stock? The share price is trading at 25x FY09E earnings and 21x FY10E earnings. This is at the low end of big-cap China consumer staples.

Price target and key risks Our DCF-based Dec-09 price target is HK$23 (free cash flow = cash flow from operation – capex; WACC = 12%. We assume a terminal growth rate from 2018 of 2%). Key risks to our price target are: (1) if the selling expense surges again; (2) an unexpected change in raw milk prices; and (3) any food safety issue in China.

Country Food & Food Manufacture Jasmine BaiAC (852) 2800 8559 [email protected]


Price performance HK$

0

5

10

15

20

25


HK$

2319.HK Share Price (HK$


1M 3M 12M Absolute (%) 17.0 29.1 251.1 Relative (%) 11.9 24.3 206.4


52-week range (HK$) 6.2 – 23.7 Mkt cap. (HK$ MM) 41,146

Mkt cap. (US$MM) 5,309

Avg daily value (US$MM) 23.5 Avg daily volume (MM) 9.2 Shares O/S (MM) 1736 Date of price 5-Nov-09 Index: I 21479 Free float (%) 43.8 Exchange rate 7.75

Source: Bloomberg.

Bloomberg: 2319 HK; Reuters: 2319.HK Rmb in millions, year-end December FY08 FY09E FY10E FY11E Sales 23,865 25,106 27,239 29,941 Net profit (952) 1,347 1,615 1,857 EPS (Rmb) (0.61) 0.78 0.93 1.07 DPS (Rmb) 0.15 0.16 0.19 0.21 Sales growth (%) 11.9 5.2 8.5 9.9 Net profit growth (%) -201.7 -241.5 19.9 15.0 EPS growth (%) -191.8 -227.3 19.9 15.0 ROE (%) -21.3 15.7 16.3 16.3 P/E (x) -34.3 23.3 19.5 16.9 P/BV (x) 7.3 3.7 3.2 2.8 EV/EBITDA (x) -69.7 10.5 8.3 0.0 Dividend yield (%) 0.7% 0.9% 1.0% 1.2% Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

145



China Mengniu Dairy: Summary of financials Profit and loss statement Rmb in millions, year-end December FY08 FY09E FY10E FY11E Revenues 23,865 25,106 27,239 29,941

% change yoy 11.9% 5.2% 8.5% 9.9% Gross Profit 4,669 6,510 7,111 7,920 EBITDA (504) 2,337 2,727 3,116

% change yoy -130.8% -563.6% 16.7% 14.3% EBITDA margin (%) -2.1% 9.3% 10.0% 10.4% EBIT -1134 1640 1950 2276

% change yoy -201.6% -244.6% 18.9% 16.8% EBIT margin (%) -4.8% 6.5% 7.2% 7.6%

Net interest 15 9 39 68 Earnings before tax -1089 1664 2004 2361

% change yoy -196.4% -252.7% 20.4% 17.8% Tax 161 -200 -261 -354

% of EBT 14.8% 12.0% 13.0% 15.0% Net income -952 1347 1614 1854

% change yoy -201.7% -241.5% 19.8% 14.9% No. of shares outstanding

1562 1736 1736 1736

EPS (Rmb) -0.61 0.78 0.93 1.07 Source: Company, J.P. Morgan estimates.


FY08 FY09E FY10E FY11ECash and cash equivalents 3,042 4,934 6,243 7,162Accounts receivable 349 614 580 897Inventories 824 1,213 992 1,662Others 507 507 507 507Current assets 4,723 7,269 8,323 10,228Net fixed assets 5,751 5,893 6,207 6,087Other non current assets 559 574 590 606Total assets 11,033 13,736 15,119 16,921Liabilities Short Term loans 1,282 132 228 129Accounts payable 4,202 3,338 3,720 4,002Others 0 0 0 0Total current liabilities 5,483 3,470 3,948 4,131Long term debt 628 1,108 608 608Total liabilities 6,568 5,152 5,260 5,596Shareholder's equity 4,465 8,600 9,891 11,374BVPS (Rmb) 2.86 4.96 5.70 6.55 Source: Company, J.P. Morgan estimates.


FY08 FY09E FY10E FY11EEarnings before tax (1,134) 1,640 1,950 2,276 Depreciation & amortisation 640 707 787 850 Change in working capital 927 (1,518) 637 (705) Others 155 (191) (222) (286) Cash flow from operations 587 638 3,152 2,135 Capex (828) (850) (1,100) (730) Others (422) (15) (16) (17) Cash flow from investing (1,250) (865) (1,116) (747) Free Cash Flow (663) (227) 2,036 1,389 Equity raised/(repaid) 0 3,058 - - Debt raised/(repaid) 1,302 (670) (404) (99) Dividends paid (228) (269) (323) (371) Others 80 - - - Cash flow from financing 1,155 2,119 (727) (470) Net change in cash 492 1892 1309 919 DPS (Rmb) 0.15 0.16 0.19 0.21 Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December FY08 FY09E FY10E FY11EGross margin 19.6% 25.9% 26.1% 26.5%EBITDA margin -2.1% 9.3% 10.0% 10.4%Operating margin -4.8% 6.5% 7.2% 7.6%Net profit margin -4.0% 5.4% 5.9% 6.2% Sales growth 11.9% 5.2% 8.5% 9.9%Net profit growth -201.7% -241.5% 19.8% 14.9%EPS growth -191.8% -227.3% 19.8% 14.9% Net debt to equity -25.4% -43.0% -54.7% -56.5%Sales/assets (x) 2.2 1.8 1.8 1.8Assets/equity (x) 2.5 1.6 1.5 1.5ROE -21.3% 15.7% 16.3% 16.3%ROCE -20.4% 16.0% 17.5% 17.8% Source: Company, J.P. Morgan estimates.

146



China Yurun Food Group www.yurun.com.hk

Overweight HK$17.76

Company description China Yurun Food is a leading meat processing company in China. Its business includes upstream hog slaughtering and downstream meat processing. China Yurun has been expanding capacity over years and we expect it to benefit from industry consolidation. Post mortem With a one-year view, China Yurun should be a key beneficiary of hog price inflation in China. We expect hog prices to start increasing in December due to: (1) peak season of the Chinese New Year; and (2) potential hog supply reduction, if hog farmers sell more hogs now due to pig disease worry. China Yurun’s 70% EBIT comes from its slaughtering business, which benefits from hog price increases. Also, in case of a hog price upturn, we could see less inventory risk. Potential for earnings upgrades We have assumed hog prices at Rmb12.1/kg and Rmb13.8/kg for FY09 and FY10, respectively. If hog prices go beyond our expectation next year, this could be an upside risk to our earnings estimates. In 1H09, the company reported impressive product-mix improvement, which is likely to surprise margins on the upside. How much recovery is priced into the stock? China Yurun’s share price is trading at 23x of FY09E earnings and 17x FY10E earnings. We believe the margin expansion backed by products mix improvement has not priced in. Recommendation and key risks We see China Yurun as a half commodity, and a half branded consumer company. In our view, this is the best entry point in the cycle and we observe impressive product-mix improvement. Key risks to our view include: (1) outbreak of unexpected food safety issue in the pork processing sector; and (2) unexpected government action.

China Food & Food Manufacture Jasmine BaiAC (852) 2800 8559 [email protected]



579

1113151719


HK$

1068.HK Share Price (HK$


1M 3M 12M Absolute (%) 4.7% 39.0% 89.9% Relative (%) -0.4% 34.2% 45.2%


52-week range (HK$) 8.18 – 17.76 Mkt cap. (HK$ MM) 29,703 Mkt cap. (US$MM) 3,833 Avg daily value (US$MM) 17.17 Avg daily volume (MM) 8.9 Shares O/S (MM) 1673 Date of price Nov. 5, 2009 Index: HSI 21,479 Free float (%) 59.2% Exchange rate 7.75

Source: Bloomberg.

Bloomberg: 1068HK; Reuters: 1068.HK HK$ in millions, year-end December FY08 FY09E FY10E FY11E Sales 13,024 14,047 20,246 25,092 Net profit 1138 1525 1717 2003 EPS (HK$) 0.74 0.91 1.03 1.20 Sales growth (%) 50.8% 7.9% 44.1% 23.9% Net profit growth (%) 11.5% 49.9% 34.9% 16.6% Recurring EPS growth(%) 11.2% 37.5% 34.9% 16.6% EPS growth (%) 30.9% 24.0% 12.6% 16.6% ROE (%) 21.7% 19.0% 18.4% 18.5% P/E (x) 24.1 19.4 17.3 14.8 Recurring P/E (X) 32.0 23.3 17.3 14.8 P/BV (x) 5.2 3.7 3.2 2.7 EV/EBITDA (x) 23.5 15.6 13.2 10.7 Dividend yield (%) 1.1 1.3 1.5 1.7 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009. We revised PT to HK$21 on November 19.

147



China Yurun Food Group: Summary of financials HK$ in millions, year-end December Income statement Cash flow statement 2008 2009E 2010E 2011E 2008 2009E 2010E 2011ERevenues 13,024 14,047 20,246 25,092 EBIT 1,175 1,729 1,981 2,355

% change yoy 50.8% 7.9% 44.1% 23.9% Depreciation & amortization 129 160 301 420Gross Profit 1,690 2,193 2,950 3,589 Change in working capital 172 -499 -443 -346EBITDA 1304 1889 2282 2776 Others -282 -152 -235 -327 % change yoy 36.7% 44.8% 20.8% 21.6% Cash flow from operations 1,195 1,239 1,604 2,103EBITDA margin (%) 10.0% 13.4% 11.3% 11.1% EBIT 1175 1729 1981 2355 Capex -1882 -1938 -1740 -1158 % change yoy 34.8% 47.1% 14.6% 18.9% Sale of assets 0 - - - EBIT margin (%) 9.0% 12.3% 9.8% 9.4% Free Cash Flow -688 -699 -136 945Recurring EBIT 982 1609 1981 2355 Interest Expense 64 -52 -29 -26 Cash flow from investing -2,022 -1,938 -1,740 -1,158Earnings before tax 1238 1676 1951 2329 % change yoy 35.8% 35.3% 16.4% 19.3% Equity raised/(repaid) 31 1,675 - -Recurring earrings before tax 950 1554 1951 2329 % change yoy 16.7% 63.5% 25.6% 19.3% Tax -101 -151 -234 -326 Debt raised/(repaid) 250 -588 -81 -340

% of EBT -8.2% -9.0% -12.0% -14.0% Dividends paid -291 -390 -439 -512Net income 1138 1525 1717 2003 Cash flow from financing -10 697 -520 -852Recurring net income 849 1273 1717 2003 % change yoy 11.5% 49.9% 34.9% 16.6% Net change in cash -837 -2 -656 93No. of shares outstanding 1531 1669 1669 1669 Recurring EPS (HK$) 0.55 0.76 1.03 1.20 DPS (HK$) 0.19 0.23 0.26 0.31 EPS (HK$) 0.74 0.91 1.03 1.20 Balance sheet Ratio analysis

2008 2009E 2010E 2011E 2008 2009E 2010E 2011ECash and cash equivalents 1,209 1,293 637 730 Gross margin 13.0% 15.6% 14.6% 14.3%Trade & other receivables 704 1,003 1,446 1,792 EBITDA margin 10.0% 13.4% 11.3% 11.1%Inventories 703 988 1,441 1,792 Operating margin 9.0% 12.3% 9.8% 9.4%Others 640 71 71 71 Recuring operating margin 7.5% 11.5% 9.8% 9.4%Total current assets 3,256 3,356 3,596 4,386 Net profit margin 8.7% 10.9% 8.5% 8.0%Net fixed assets 2,588 4,372 5,817 6,561 Recurring net profit margin 6.5% 9.1% 8.5% 8.0%Others 2,477 2,385 2,379 2,373 Total assets 8,321 10,112 11,792 13,319 Sales growth 50.8% 7.9% 44.1% 23.9%Liabilities Net profit growth 11.5% 49.9% 34.9% 16.6%Short Term loans 1,096 638 0 0 EPS growth 30.9% 24.0% 12.6% 16.6%Trade & other payables 903 988 1,441 1,792 Others 20 20 20 20 Interest coverage (x) -18.4 33.1 68.2 92.1Total current liabilities 2,018 1,646 1,462 1,812 Net debt to equity 17.1% Net cash 3.4% Net cashLong term debt 1,011 364 950 636 Sales/assets (x) 1.6 1.4 1.7 1.9Others 57 57 57 57 Assets/equity (x) 1.6 1.3 1.3 1.2Total liabilities 3,086 2,067 2,469 2,505 ROE 21.7% 19.0% 18.4% 18.5%Shareholder's equity 5,235 8,045 9,323 10,814 ROCE 16.5% 19.6% 17.8% 18.7%Capital employeed 7112 8819 11154 12589 Recuring ROCE 13.8% 18.3% 17.8% 18.7%BVPS (HK$) 3.42 4.82 5.59 6.48 Sales/non-current assets (x) 2.57 2.08 2.47 2.81Source: Company, J.P. Morgan estimates.

148



Container Corporation of India Ltd. www.concorindia.com

Overweight Rs1,138.7

Price Target: Rs1,260

Company description Concor is India’s largest railway container transport operator with a market share in excess of 90%. Concor has a dominant network of 60 ICDs and over 200 rakes. The company is reliant on India’s foreign trade segment, as it derives 80% of revenue from this segment.

Post Mortem Concor has longstanding tie-ups with shippers and has invested in port infrastructure, which gives it a head-start over competition. We believe that the company enjoys pricing power and is likely to sustain its profitability, given the inherent advantages that containerized rail transport enjoy over other modes of transport. Further, in the current downturn, competition has been impacted as cash flows were impacted adversely given that they were in the midst of a capital intensive phase.

Potential for earnings upgrades The potential upgrades would be driven by stronger-than-anticipated volume growth in the export segments, which is leveraged to the global recovery.

How much recovery is priced into the stock? While container volumes have risen from trough levels, volumes remain benign. Consequently, while valuations have risen from trough levels, factoring in the recovery, we believe that as the growth momentum accelerates, valuations will likely re-rate further.

Price target and key risks We expect Concor’s earnings to grow by 22% over FY11E, driven by rising sales and an improved margin outlook (given the revival in the EXIM segment).We have a Mar-10 PT of Rs1,260—which is at a 10% premium to its DCF-based value. At this price, the stock is valued at one-year forward P/E of 15x on FY11E EPS, which is at a 10% premium to the company’s historical five-year trading multiple. We believe that the valuations are justified given that growth over the next 12-18 months will be driven by a revival in the EXIM segment (earnings growth of 22% in FY11E). Risks to our price target include a delayed global recovery as well as an increase in the competitive environment.

India Logistics & Freight Aditya MakhariaAC (91-22) 6157-3596 [email protected]


Price performance (Rs)

500700900

1,1001,300

Nov-

08

Feb-

09

May

-09

Aug-

09

Nov-

09

Source: Bloomberg.

Performance

1M 3M 12M Absolute (%) -6 +1 +75 Relative (%) -1 0 +16

Source: Company data, Bloomberg.

Company data

52-week range (Rs) 540-1,355 Mkt cap. (RsMM) 148,007 Mkt cap. (US$MM) 3,147 Avg daily value (US$MM) 2.0 Avg daily volume (MM) 0.1 Shares O/S (MM) 130 Date of price 5-Nov-09 Index: SENSEX 16064 Free float (%) 37 Exchange rate 47.03

Source: Bloomberg. Bloomberg: CCRI.IN; Reuters: CCRI.BO Rs n millions, year-end March FY08 FY09E FY10E FY11E Net sales 33,473 34,172 39,484 45,103 Net profit 7,505 7,915 8,909 10,902 EPS (Rs) 57.9 60.9 68.5 83.9 DPS (Rs) 13 14 14 17 Net sales growth (%) 10 2 16 14 Net profit growth (%) 8 5 13 22 EPS growth (%) 8 5 13 22 ROE (%) 23.6 21.0 20.1 20.7 BVPS (Rs) 245 289 342 405 P/E (x) 19.7 18.7 16.6 13.6 EV/EBITDA (%) 14.9 14.0 11.9 9.5 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

149



Container Corporation of India Ltd.: Summary of financials Profit and loss statement Rs in millions, year-end March

FY08 FY09 FY10E FY11ERevenues 33,473 34,172 39,484 45,103

% change Y/Y 10% 2% 16% 14% EBITDA 8,904 9,311 10,720 12,854

% change Y/Y 0% 5% 15% 20%EBITDA Margin (%) 26.6% 27.2% 27.2% 28.5%

Depreciation 1,063 1,159 1,330 1,537Other Income 1,645 2,111 2,106 2,659Interest Expense 0 0 0 0Earnings before tax 9,485 10,262 11,496 13,977 Tax 1,980 2,347 2,587 3,075

as % of EBT 20.9 22.9 22.5 22.0 Net Income (Adjusted) 7,505 7,915 8,909 10,902 Change (%) 8% 5% 13% 22%Prior Period adjustments 17 (3) - - Net Income (Reported) 7,522 7,912 8,909 10,902 Shares Outstanding (in M) 65 130 130 130 EPS (Adjusted) 57.9 60.9 68.5 83.9

% change Y/Y 8% 5% 13% 22%DPS (Rs) 13 14 14 17 Div Payout Ratio(%) 22% 23% 21% 21%Source: Company, J.P. Morgan estimates.

Balance sheet Rs in millions, year-end March

FY08 FY09 FY10E FY11ENet fixed assets 16,652 19,490 23,160 25,623Capital WIP 1,721 2,457 2,457 2,457Trade investments 1,554 2,031 2,531 3,031 Cash 15,215 17,635 20,168 25,973Accounts receivable 137 157 182 207Inventories 48 51 108 124Loans & Advances 3,621 3,936 4,253 4,601Current assets 19,021 21,780 24,711 30,905 Payables 4,144 4,802 5,106 5,560Others 1,227 1,395 1,230 1,437Total current liabilities 5,371 6,197 6,336 6,997 Net Current Assets 13,650 15,582 18,375 23,908Total Assets 33,576 39,560 46,522 55,018 Debt - - - - Deferred Tax 1,737 1,938 2,131 2,344 Share Capital 650 1,300 1,300 1,300 Networth 31,839 37,622 44,391 52,674 Liabilities 33,576 39,560 46,522 55,018 BVPS (Rs per share) 245 289 342 405Source: Company, J.P. Morgan estimates.

Cash flow statement

Rs in millions, year-end March

FY08 FY09 FY10E FY11E EBIT 7,840 8,151 9,390 11,317 Depreciation & amortization 1,063 1,159 1,330 1,537Dec/(Inc) in Working Capital (379) 336 (271) (207)Taxes (1,856) (2,147) (2,393) (2,862)Cash flow from operations 6,668 7,500 8,056 9,785 Extra ordinary Items 17 -3 0 0Net Capex -1,892 -4,733 -5,000 -4,000(Pur)/Sale of Invest. -237 -477 -500 -500Free cash flow 4,556 2,286 2,556 5,285Equity raised/ (repaid) 40 0 0 0Debt raised/ (repaid) 0 0 0 0Dividends paid -1,652 -1,977 -2,129 -2,140Net Interest (Paid)/ Recd 1,645 2,111 2,106 2,659CF fron financing activity 33 134 -23 519 Cash generated 4,589 2,420 2,533 5,805Beginning cash 10,626 15,215 17,635 20,168Ending cash 15,215 17,635 20,168 25,973Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end March

FY08 FY09 FY10E FY11E EBITDA margin(%) 26.6 27.2 27.2 28.5Sales growth(%) 10 2 16 14 Net profit growth(%) 8 5 13 22 EPS growth(%) 8 5 13 22 Dividend Payout (%) 22 23 21 21 P/E (x) 19.7 18.7 16.6 13.6Cash P/E (x) 17.2 16.3 14.5 11.9EV/EBITDA (x) 14.9 14.0 11.9 9.5EV/Sales (x) 4.0 3.8 3.2 2.7Price to Book Value (x) 4.6 3.9 3.3 2.8Dividend Yield(%) 1.1 1.2 1.3 1.5 Debt to equity (x) 0.0 0.0 0.0 0.0 Net profit margin(%) 22.4 23.2 22.6 24.2 Sales/assets (x) 1.0 0.9 0.8 0.8Assets/equity (x) 1.1 1.1 1.0 1.0ROE (%) 23.6 21.0 20.1 20.7ROCE (%) 28.2 25.9 24.7 25.4ROIC(%) 42.7 37.2 35.6 39.0Source: Company, J.P. Morgan estimates.

150



CP All Pcl www.cpall.co.th

Overweight Price: Bt19.10

Price Target: Bt23.00

Company description CPALL is the largest convenient store (CVS) operator in Thailand, managing 4,912 stores countrywide.

Post mortem CPALL has a quasi-monopoly position in the Thai convenience store space, with more than 10x more stores than its closest competitor, Family Mart (525 stores). 1H09 same store sales grew at a 9.1% Y/Y pace, which far exceeded its target of 3-5% despite aggressive store expansion, and was a major achievement in a deflationary environment. Its gross margin improved to 27.5% in 2Q09 from 27.2% in FY08, due to rising food product mix in stores.

Potential for earnings upgrades CPALL should see sales accelerate in an inflationary environment, supported by the end of the government’s subsidy on utilities, which should boost POS bill payment fees. The SP fiscal stimulus should also drive higher sales via the consumption multiplier. CPALL paid Bt0.60 dividend per share for FY08 operations (72% payout), and with high cash balances, we believe the company will continue its high dividend payout policy.

How much recovery is priced into the stock? CPALL has been a defensive outperformer, given its domestic orientation and net cash balance sheet. Its current P/E of 17.4x is near top historical range, but its superior growth profile justifies further re-rating, in our view, as does valuation based on enterprise value, free cash flow, and ROE.

Price target and key risks Our Dec-10 PT of Bt23 is based on our dividend discount model with a terminal growth of 4% and a WACC of 11.2% (assuming a risk-free rate of 5%, a risk premium of 6.2%, and a beta of 1). Key risks to our PT include higher-than-expected capex and operating expenses.

Thailand Broadlines/Department Stores Anne JirajariyavechAC (66-2) 684-2684 [email protected]


Price performance

8

14

20


CPALL.BK share price (Bt)SET (rebased)

Bt

Source: Bloomberg.

Performance 1M 3M 12M Absolute (%) -4.0 14.4 94.9 Relative (%) 1.1 7.9 45.8

Source: Bloomberg.

Company data 52-week range (Bt) 9.65-20.30 Mkt cap. (BtMM) 85,819 Mkt cap. (US$MM) 2,571 Avg daily value (US$MM) 5.0 Avg daily volume (MM) 4.9 Shares O/S (MM) 4,493 Date of price 5-Nov-09 Index: SET 682 Free float (%) 41 Exchange rate 33.38

Source: Bloomberg.

Bloomberg: CPALL TB; Reuters: CPALL.BK Bt in millions, year-end December FY08 FY09E FY10E FY11E Revenue 92,959 105,044 115,548 127,103 Net profit 3,740 4,109 4,929 5,389 EPS (Bt) 0.83 0.91 1.10 1.20 DPS (Bt) 0.60 0.69 0.82 0.90 Revenue growth (%) 20.0 13.0 10.0 10.0 EPS growth (%) 48.6 9.9 20.0 9.3 ROE (%) 31.2 29.7 31.9 31.3 P/E (x) 22.9 20.9 17.4 15.9 P/BV (x) 6.5 5.9 5.2 4.8 Dividend Yield (%) 3.1 3.6 4.3 4.7 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

151



CP All Pcl: Summary of financials Profit and Loss statement Cash flow statementTHB in millions, year-end Dec FY08A FY09E FY10E FY11E THB in millions, year-end Dec FY08A FY09E FY10E FY11E

Revenues 92,959 105,044 115,548 127,103 EBIT 4,107 5,179 6,303 6,933% change Y/Y 20.0 13.0 10.0 10.0 Depreciation & amortisation 2,223 2,729 3,426 4,138

Gross Margin (% ) 26.7 27.0 27.2 26.9 Change in working capital -663 106 1,138 1,308EBITDA 6,330 7,907 9,728 11,070 Taxes -862 -1,452 -1,756 -1,926

% change Y/Y 38.7 24.9 23.0 13.8 Cash flow from operations 4,805 6,562 9,110 10,453EBITDA Margin (% ) 6.8 7.5 8.4 8.7

EBIT 4,107 5,179 6,303 6,933 Capex -2,868 -4,490 -4,805 -5,142% change Y/Y 58.0 26.1 21.7 10.0 Disposal/ (purchase) 0 0 0 0EBIT Margin (% ) 4.4 4.9 5.5 5.5 Net Interest 493 383 383 383

Net Interest 576 450 450 450 Free cash flow 2,430 2,454 4,688 5,694Earnings before tax 4,684 5,629 6,753 7,383

% change Y/Y 50.2 20.2 20.0 9.3 Equity raised/ (repaid) 135 0 0 0Tax 946 1,520 1,823 1,993 Debt raised/ (repaid) 0 0 0 0

as % of EBT 20.2 27.0 27.0 27.0 Other -1,353 0 0 0Equity income and minorities 0.0 0.0 0.0 0.0 Dividends paid -1,565 -2,696 -3,082 -3,697Extra items 2.6 0.0 0.0 0.0 Beginning cash 9,340 8,987 8,745 10,351Net Income (Reported) 3,740 4,109 4,929 5,389 Ending cash 8,987 8,745 10,351 12,347

% change Y/Y 49.4 9.9 20.0 9.3Shares Outstanding 4,493 4,493 4,493 4,493 DPS 0.60 0.69 0.82 0.90EPS (reported) 0.83 0.91 1.10 1.20

% change Y/Y 49 10 20 9

Balance sheet Ratio AnalysisTHB in millions, year-end Dec FY08A FY09E FY10E FY11E % , year-end Dec FY08A FY09E FY10E FY11E

Cash and cash equivalents 8,987 8,745 10,351 12,347 EBITDA margin 6.8 7.5 8.4 8.7 Accounts receivable 97 97 97 97 Operating margin 4.2 4.7 5.2 5.2 Inventories 4,940 5,533 6,044 6,648 Net profit margin 4.0 3.9 4.3 4.2 Others 2,322 2,624 2,886 3,175Current assets 16,346 16,999 19,377 22,267

Sales per share growth 19.4 13.0 10.0 -100.0LT investments 7,961 7,961 7,961 7,961 Sales growth 20.0 13.0 10.0 10.0Net fixed assets 9,317 11,079 12,458 13,462 Net profit growth 49.4 9.9 20.0 9.3Total assets 33,624 36,038 39,796 43,690 EPS growth 48.6 9.9 20.0 9.3

LiabilitiesST loans 0 0 0 0 Net debt to total capital 0 0 0 0Payables 12,611 12,769 13,947 15,341 Net debt to equity n/a n/a n/a n/aOthers 6,487 7,330 8,063 8,870 Sales/ avg operating assets 5705 2744 2181 2184Total current liabilities 19,098 20,100 22,010 24,211 Assets/equity 281 260 257 253Long term debt 0 0 0 0 Net Debt/EBITDA -142 -111 -106 0Other liabilities 1,396 1,396 1,396 1,396 ROE 31.2 29.7 31.9 31.3Total liabilities 20,495 21,496 23,406 25,607Shareholders' equity 13,129 14,542 16,390 18,082BVPS 2.92 3.24 3.65 4.02


152



CTC Media www.ctcmedia.ru

Overweight Price: $15.59

Price Target: $25.00

Company description CTC Media is Russia’s leading independent broadcaster, operating three nationwide networks: CTC, Domashny and DTV, with a combined audience share of 12.7% over 9M09. The network’s programming is entertainment-focused, with almost all its revenue coming from the sale of television advertising. Major shareholders are MTG (39.44%) and Alfa Group (26%).

Post mortem Considering the very difficult operating environment in 2009, CTCM has fared relatively well, controlling costs better than its listed peers, gaining audience share and significantly boosting its power ratio. While part of the power ratio improvement may be reversed in 2010, we believe that it also in part reflects the strength of the franchise, while the cost and audience share performance underline the improvement in company management over the past two years.

Potential for earnings upgrades CTCM seems determined to keep advertising prices flat this year, as the average sell-out ratio for 2009 is likely to remain in the low 90% region. Encouragingly, CTC confirmed the reduction of long-term pricing contracts with Video International to roughly 30-35% (vs. 60-70% previously). This implies that there may be scope for price increases in 2H10 in case there is a more robust economic recovery in 2010. At this point, we see the scope for upgrades as moderate in 2010 but more significant in 2011 and beyond as we expect rapid recovery in the ad market then. In the long run, we believe that CTC Media offers investors exposure to strong secular growth prospects.

How much recovery is priced into the stock? Looking at implied valuations 3 to 4 years out, we believe that the recovery is only partially priced in.

Price target and key risks Our PT of $25 for year-end 2010 is based on a discounted terminal value and dividend analysis using an exit multiple of 13x P/E year end 2013E. Key downside risks are potential market share and earnings volatility in a highly fragmented Russian television market.

Russia Media Jean-Charles LemardeleyAC +44 (0) 20 7325 5763 [email protected]


0

5

10

15

20

$


Price Performance



Absolute (%) -17% 17% 290% Source: Company data, Bloomberg

Company data 52-week range ($) 20.07-2.37 Mkt cap. ($ bn) 2.5 Shares O/S (mn) 158 Date of price 23-Nov-09 Price Target End Date 31-Dec-10 Free float (%) 25% Avg daily volume (MM) 0.470 Avg daily value (US$MM) 7.1

Source: Company data, Bloomberg, J.P Morgan estimates

Bloomberg: CTCM US; Reuters: CTCM $ in millions, year end Dec FY08 FY09E FY10E FY11E Sales 640 481 534 690 Net profit 22 128 147 197 EPS 0.15 0.84 0.96 1.29 DPS 0.04 0 0 0.93 Sales growth (%) 35.60% -24.90% 11.10% 29.10% Net profit growth (%) -83.50% 470.60% 14.50% 34.20% EPS growth (%) NM 470.60% 14.50% 34.20% ROE (%) 4% 21% 21% 26% P/E (x) n/a 19.2 16.8 12.5 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

153



CTC Media: Summary of Financials Profit and Loss Statement Cash flow statement $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Revenues 640 481 534 690 859 Cash EBITDA 269 187 212 280 359

% Change Y/Y 35.6% -24.9% 11.1% 29.1% 24.5% Interest (3) (2) 4 8 10EBITDA 280 195 221 292 374 Tax (20) (54) (64) (87) (112)

% Change Y/Y 27.1% -30.4% 13.0% 32.4% 28.1% Other 15 14 2 33 2EBITDA Margin 43.8% 40.6% 41.3% 42.3% 43.5% Cash flow from operations 261 145 153 235 259

EBIT 34 184 209 280 362 % Change Y/Y -82.3% 439.1% 13.3% 34.1% 29.2% Capex PPE (5) (11) (8) (10) (13)EBIT Margin 5.3% 38.3% 39.1% 40.6% 42.1% Net investments (414) (12) (17) 0 0

Net Interest (3) (2) 4 8 10 CF from investments (419) (23) (25) (10) (13)PBT 4 184 214 290 373 Dividends (6) 0 0 (147) (236)

% change Y/Y -97.9% 4078.2% 16.5% 35.6% 28.7% Share (buybacks)/ issue - - - - -Net Income (clean) 22 128 147 197 251

% change Y/Y -83.5% 470.6% 14.5% 34.2% 27.4% CF to Shareholders (6) 0 0 (147) (236)Average Shares 152 152 152 152 152 FCF to debt (164) 123 128 78 10Clean EPS 0.15 0.84 0.96 1.29 1.65

% change Y/Y NM 470.6% 14.5% 34.2% 27.4% OpFCF (EBITDA - PPE) 264 177 204 270 346DPS 0.04 0.00 0.00 0.93 1.49 EFCF pre Div, PPE (158) 123 128 224 246 Balance sheet Ratio Analysis $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Cash and cash equivalents 98 199 321 414 473 EBITDA margin 43.8% 40.6% 41.3% 42.3% 43.5%Accounts Receivables 34 30 16 21 26 EBIT Margin 5.3% 38.3% 39.1% 40.6% 42.1%ST financial assets - - - - - Net profit margin 3.5% 26.6% 27.4% 28.5% 29.2%Others 131 116 44 57 71 Capex/sales 0.8% 2.2% 1.5% 1.5% 1.5%Current assets 263 344 381 491 569 Depreciation/Sales 2.1% 2.3% 2.2% 1.8% 1.5%LT investments 521 519 524 547 575 Net fixed assets 23 27 24 23 24 Revenue growth 35.6% -24.9% 11.1% 29.1% 24.5%Total assets 807 891 929 1,061 1,168 EBITDA Growth 27.1% -30.4% 13.0% 32.4% 28.1%ST loans 62 55 52 67 83 EPS Growth NM 470.6% 14.5% 34.2% 27.4%Payables 41 36 21 44 34 Others 89 86 74 96 120 Net debt/EBITDA (0.0) (0.7) (1.2) (1.2) (1.0)Total current liabilities 192 177 148 207 238 CF to Shareholders (6) 0 0 (147) (236)Long term debt 28 14 11 11 44 FCF to debt (164) 123 128 78 10Other liabilities 39 39 39 39 39 Total liabilities 260 230 197 258 320 OpFCF (EBITDA - PPE) 264 177 204 270 346Shareholders' equity 547 661 732 804 848 EFCF pre Div, PPE (158) 123 128 224 246 Source: Company reports and J.P. Morgan estimates.

154



DongFeng Motor Co., Ltd www.dfmc.com

Overweight HK$10.46


Company description DongFeng Motor Co., Ltd. is China’s third-largest auto producer operating a comprehensive auto-related business comprising passenger vehicles, commercial vehicles, auto engines and auto parts. Its market share in China’s passenger vehicles and commercial vehicles was around 11.3% in FY08. Post mortem DongFeng Motor is our top pick among large-cap names in China’s auto sector, as: (1) DFM, which holds a leading position in most of its wide range of auto businesses, is well positioned to ride China’s third auto boom due to the break out of car demand in tier-three cities due to its multi-strategic-partner business model (Honda, Nissan and PSA); and (2) it has been a consistent outperformer since its listing, whether during the cyclical upturn in FY06 and FY07, or during the cyclical downturn in FY05 and FY08. Potential for earnings upgrades We see good potential for consensus earnings estimate upgrades, because: (1) we expect its commercial vehicle business to perform much better than expected as of 2H09 due to accelerating fixed asset investment growth in China. We expect its commercial vehicle business to contribute Rmb608 million profit in FY09 compared with only Rmb75 million in 1H09; (2) we expect its DongFeng PSA business to contribute a much stronger-than-expected profit of Rmb1,002 million in FY09 versus around Rmb114 million in 1H09 because of the sharp rise in its PSA sales volume as of 2Q09. We now expect its Dongfeng PSA to sell 260,000 cars in FY09 versus its target of 210,000 and its PSA business’ breakeven point of around 200,000. How much recovery is priced into the stock? While its 326% return this year has discounted a lot of good news about the current third auto boom, and Dongfeng’s strong earnings growth, we still see 24% upside to our PT of HK$13, with an estimated over 20% rise in consensus FY09/FY10 earnings estimates in coming months. Price target and key risks Our Jun-10 price target of HK$13.0 is based on 14x FY10E P/E, which is two standard deviations above the average historical prospective P/E of 8.3x. Key risks to our price target include the possible removal of the vehicle purchase tax cut policy upon expiration at the end of the year.

China Auto & Industrials Frank LiAC 852-2800-8511 [email protected]


Price performance

0.02.04.06.08.0

10.012.0

Nov -08 Feb-09 May -09 Aug-09 Nov -09

Dongfeng Motor-H Share PriceHSCEI(rebased)


1M 3M 12M Absolute (%) 26 32 403 Relative (%) 19 25 326


52-week range (HK$) 1.45-10.52 Mkt cap. (HK$MM) 90,125 Mkt cap. (US$MM) 11,629 Avg daily value (US$MM) 19 Avg daily volume (MM) 26 Shares O/S (MM) 2,856 Date of price 5-Nov-09 HSCEI 12805 Free float (%) 31 Exchange rate 7.75

Source: Company data, Bloomberg.

Bloomberg: 489 HK; Reuters: 489.HK Rmb in millions, year-end December

FY07 FY08 FY09E FY10E FY11E Revenue 59,318 70,569 93,503 104,169 113,431 EBITDA 5,724 7,215 10,609 11,616 12,893 EBIT 3,941 5,190 8,127 9,080 10,236 Net profit 3,770 4,040 6,309 7,162 7,946 EPS (Rmb) 0.44 0.47 0.73 0.83 0.92 DPS (Rmb) 0.05 0.05 0.11 0.15 0.18 EV/EBITDA 13.5 10.2 5.6 4.7 3.8 EV/EBIT 19.6 14.2 7.3 6.1 4.8 Dividend yield (%) 0.5 0.5 1.3 1.8 2.2 P/E (x) 21.0 19.6 11.3 9.9 8.9 P/B (x) 4.5 3.7 2.6 2.1 1.8 ROE (%) 24 21 26 24 22 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

155



DongFeng Motor Co., Ltd: Summary of financials Rmb in millions, year-end December

Profit and Loss statement Cash flow statement FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E Revenues 59,318 70,569 93,503 104,169 113,431 Profit before tax 3,835 4,892 7,892 9,177 10,437

% change Y/Y 22.9 19.0 32.5 11.4 8.9 Depreciation & amortization 2,026 2,318 2,834 2,960 3,140 Gross profit 9,815 11,881 16,783 18,510 20,090 Change in working capital -48 1,657 1,276 589 490 % change Y/Y 19.6 21.0 41.3 10.3 8.5 Others -711 -1,119 -1,445 -2,123 -2,613

Gross margin (%) 16.5 16.8 17.9 17.8 17.7 Cash flow from operations 5,102 7,748 10,556 10,602 11,454 Operating profit 3,941 5,190 8,127 9,080 10,236

% change Y/Y 37.5 31.7 56.6 11.7 12.7 Purchase of fixed assets -2,751 -4,080 -4,000 -4,800 -4,800 Operating Margin (%) 6.6 7.4 8.7 8.7 9.0 Others -529 -3,700 -204 -254 206

Net Interest -175 -393 -265 49 181 Cash flow from investment -3,280 -7,780 -4,204 -5,054 -4,594 Earnings before tax 3,835 4,892 7,892 9,177 10,437

% change Y/Y 43.2 27.6 61.3 16.3 13.7 Equity raised/ (repaid) 0 0 0 0 0 Tax 202 -647 -1263 -1652 -2087 Debt raised/ (repaid) 105 435 -700 -1,000 -1,000 Net Income (Reported) 3770 4040 6309 7162 7946 Other -138 76 0 0 0

% change Y/Y 81 7 56 14 11 Dividends paid -345 -388 -388 -946 -1,253 Net Margin (%) 6.4 5.7 6.7 6.9 7.0 Cash flow from financing -378 123 -1,088 -1,946 -2,253

Wt. avg. share number (MM) 8616 8616 8616 8616 8616 Beginning cash 5,659 7,103 12,416 17,681 21,283 Wt. avg. EPS (Rmb) 0.44 0.47 0.73 0.83 0.92 Ending cash 7,103 12,416 17,681 21,283 25,890 Balance sheet Ratio analysis FY07 FY08 FY09E FY10E FY11E %, year-end December FY07 FY08 FY09E FY10E FY11E Cash and cash equivalents 10,473 14,113 19,378 22,980 27,587 Gross margin 16.5 16.8 17.9 17.8 17.7 Accounts receivable 2,229 2,101 2,784 3,101 3,377 Operating margin 6.6 7.4 8.7 8.7 9.0 Inventories 7,573 9,356 12,231 13,656 14,880 Net profit margin 6.4 5.7 6.7 6.9 7.0 Others 11,070 10,378 13,163 14,620 15,886 SG&A/sales 8.7 8.4 8.2 7.8 7.4 Current assets 31,345 35,948 47,555 54,358 61,730 Sales growth 22.9 19.0 32.5 11.4 8.9 LT investments 677 787 787 787 787 Net profit growth 81.2 7.2 56.2 13.5 11.0 Net fixed assets 16,438 18,189 18,713 21,036 23,208 Gross profit growth 19.6 21.0 41.3 10.3 8.5 Other LT assets 35,082 40,789 52,562 59,608 66,787 Operating profit growth 37.5 31.7 56.6 11.7 12.7 Total assets 52,197 59,765 72,063 81,430 90,782 ROE 23.6 20.7 25.9 23.6 21.6 ST loans 5,751 6,919 6,500 5,900 5,300 Payables 9,650 10,259 13,411 14,974 16,317 Others 13,599 16,285 19,973 22,199 24,112 Total current liabilities 29000 33463 39884 43072 45728 Long term debt 2514 1781 1500 1100 700 Other LT liabilities 284 319 236 236 236 Total non-current liabilities 2798 2100 1736 1336 936 Total liabilities 31798 35563 41620 44408 46664 Shareholders' equity 17713 21365 27286 33501 40194 Minority interest 2686 2837 3157 3521 3924

Source: Company, J.P. Morgan estimates.

156



Energy Development Corporation www.energy.com.ph

Overweight Php4.05


Company description Energy Development Corporation owns 150MW of steam capacity and 1050MW of power ‘plus’ steam capacity with take-or-pay contracts with NPC (for 695MW of total power capacity). EDC also owns a 60% stake in 112MW Pantabangan-Masiway hydro plant with the remaining stake being held by its parent, First Gen. Post mortem Although the financial crisis had limited impact on EDC’s core business, given its take-or-pay contracts and US$ linked tariffs, it was negatively affected due to its ¥-denominated debt and concerns about the financial viability of its recent parent, First Gen, given its premium pricing on EDC’s purchase undertaken by it in November 2007.

Potential for earnings upgrades We see potential earnings upgrades linked largely to the execution of its recently acquired 305MW Palipinon-Tonngonan. We could see upgrades in case of other efficiencies and rehabilitation of 49MW Northern Negros plant.

How much recovery is priced into the stock? We see upside risks to its current valuation, primarily driven by potential earnings upside from its recent plant acquisition and tax savings due to RE Law.

Price target and key risks Our DCF-based Dec-10 PT of Php5.6 implies FY10E P/E of 14.7x and 2.3% yield. We arrive at our PT by discounting EDC’s FCF to 2031, when the Geothermal Service Contract would expire. We incorporate terminal value but with a 0% ‘g’. Key risks to our PT include execution risk associated with the Palinpinon-Tongonan plant rehabilitation.

Independent Power Producers Ajay MirchandaniAC (65) 6882-2419 [email protected]


Price performance (Php)

0246

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08

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09

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-09

May

-09

Jul-0

9

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09




52-week range (Php) 2.7-4.1 Mkt cap. (PhpMM) 75,937 Mkt cap. (US$MM) 1,602 Avg daily value (US$MM) 2.5 Avg daily volume (MM) 30 Shares O/S (MM) 18,750 Date of price 5-Nov-09 Index: PSEi 2,944 Free float (%) 60 Exchange rate 47.6

Source: Bloomberg.

Bloomberg: EDC PM; Reuters: EDC.PS Php in millions, year-end December FY08 FY09E FY10E FY11E Recurring net profit 5,532 5,965 7,089 6,931 Recurring EPS (Php) 0.37 0.38 0.38 0.37 DPS (Php) 0.13 0.13 0.13 0.13 P/E (x) 13.7 12.7 10.7 11.0 P/BV (x) 2.2 2.3 2.4 2.1 EV/EBITDA (x) 8.7 8.8 7.7 7.2 Operating cash flow / EV (%) 8.2% 10.6% 12.0% 13.3% Dividend yield (%) 3.1% 3.3% 3.3% 3.2% RoE (%) 20.3% 22.1% 22.4% 19.2% Net debt (%) 122.1% 114.0% 109.6% 77.8% Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

157



Energy Development Corporation: Summary of financials Php in millions, year-end December Profit & loss statement Balance sheet FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E Electricity 12,518 13,544 16,344 17,161 Share capital 15,000 15,000 15,000 15,000 Steam 4,242 4,753 4,974 5,144 Reserves & Surplus 5,898 5,665 10,273 14,778 Others 726 784 823 0 Share holders equity 27,251 27,018 31,626 36,131 Consolidated Revenue 19,595 21,051 23,996 24,040 Minorities 1,484 1,688 1,912 2,156 Long term debt 23,557 30,924 36,529 36,133 BOT fees (394) (885) (1,400) (1,400) BOT lease obligations 0 0 0 0 Other purchased services & utilities (1,130) (1,331) (1,562) (1,410) Royalty fee payable 0 0 0 0 Operations & maintenance expenses (4,661) (5,434) (5,255) (5,384) Other non-current liabilities 1,339 1,339 1,339 1,339 Depreciation & Amortization (676) (775) (1,105) (1,234) Total Non-current Liabilities 24,896 32,263 37,868 37,473 Royalty fee (590) (214) (218) (222) Total Liabilities 53,632 60,969 71,406 75,759 Others (2,410) (3,072) (3,223) (3,326) Proforma EBITDA 10,409 10,113 12,339 12,298 Property, plant and equipment 5,280 5,417 16,304 17,166 EBITDA 10,409 10,113 12,339 12,298 Production wells/Intangible assets 9,389 9,107 8,825 8,543

EBIT 9,734 9,338 11,233 11,064 BOT power plants / concession receivable 32,647 30,536 28,306 25,950

Exploratory & development costs 1,000 1,000 1,000 1,000 Interest expenses (2,153) (2,958) (3,671) (3,305) Other Non-current assets 9,731 9,187 9,062 8,937 Interest Income 333 475 563 214 Current Assets 11,233 24,704 14,272 20,600 Cash and Bank Balances 957 13847 2248 8434 Profit before Tax 2,653 6,855 8,126 7,972 Account Receivables 5,412 5,814 6,628 6,640 taxation (1,308) (685) (813) (797) Other current assets 2,815 2,932 3,167 3,170 Profit after tax 1,308 5,965 7,089 6,931 Current Liabilities 15,648 18,982 6,363 6,437 Core Net Income 5,532 5,965 7,089 6,931 Accounts Payable 2,980 3,357 4,058 4,126

Current portion of debt & BOT fees 10,785 13,733 395 395

Key ratios other current liabilities 1,884 1,891 1,910 1,915 Total Assets 53,632 60,969 71,406 75,759 FY08 FY09E FY10E FY11E Gross Margins (%) 65.4% 62.6% 64.9% 65.0% Cash flow statement EBITDA Margins (%) 53.1% 48.0% 51.4% 51.2% Op Margin (%) 49.7% 44.4% 46.8% 46.0% FY08 FY09E FY10E FY11E Sales growth (%) 3.7% 7.4% 14.0% 0.2% EBITDA 10,450 10,113 12,339 12,298 Core Net profit growth (%) -1.3% 7.8% 18.8% -2.2% Concession Receivable impact 0 2,048 2,111 2,230 less: Net Interest (1,602) (2,483) (3,108) (3,092) No. of O/S shares (MM) 15,000 15,625 18,750 18,750 less: tax (1,731) (685) (813) (797) EPS (Php) 0.37 0.38 0.38 0.37 less: changes in Working Capital 2189 (134) (329) 58 DPS (Php) 0.13 0.13 0.13 0.13 Others (134) 0 0 0 Dvd payout ratio (%) 34% 35% 35% 35% Operational Cash Flow 9,172 8,859 10,200 10,697 Capital Expenditure (6,119) (505) (11,585) (1,690)

BVPS 1.8 1.7 1.7 1.9 Investment, dividend from associates 1,317 419 (0) (0)

Debt / Equity (%) 86.9% 114.5% 115.5% 100.0% Cash flow from investments (4,538) (86) (11,585) (1,690) Net Debt / Equity (%) 122.1% 114.0% 109.6% 77.8% Free cash Flow 4,634 8,773 (1,385) 9,007 ROE (%) 4.8% 22.1% 22.4% 19.2% Repayment of Debt (528) 10,428 (7,733) (395) ROCE (%) 12.7% 13.0% 14.9% 14.5% Payment of BOT Lease (245) (112) 0 0 EBITDA / Gross Interest 4.8 3.4 3.4 3.7 Dividends paid to shareholders (5,303) (2,088) (2,481) (2,426) EBITDA / Net Interest 5.7 4.1 4.0 4.0 Equity raised / write-offs / (404) (4111) 0 0 Cashflow from financing (6,976) 4,117 (10,215) (2,821) receivables (days) 156.2 157.8 156.7 148.0 Exchange rate 2 0 0 0 Movement in Net Debt/Net Cash (2,339) 12,890 (11,599) 6,186 Source: Company, J.P. Morgan estimates.

158



Enersis www.enersis.cl

Overweight Ch$189

Price Target: Ch$241

Company description Enersis is one of the main privately owned multinational electric power corporations in Latin America. It currently holds direct and indirect participation in electric power generation, transmission, and distribution businesses in Argentina, Brazil, Chile, Colombia, and Peru. The Enersis Group generating companies boast an installed capacity of 14,280 MW and through the distribution companies supply electricity to near 12.5 million customers, or approximately 45 million inhabitants. The controlling shareholder of Enersis is Endesa, a Spanish multinational that holds 60.62% ownership.

Post mortem Within a regional context, we believe the greatest recovery opportunities in the utilities space lie along the Andean corridor, where a combination of strong market position (leaders in key cities) and supportive regulatory frameworks should allow the company to capture demand recovery.

Potential for earnings upgrades Given the predictable cash flows of the company, we see modest upside risk on greater-than-expected demand recovery.

How much recovery is priced into the stock? Since Enersis is a defensive company listed in a defensive market, the shares have underperformed significantly in the past six months at both the regional and country level despite continued high cash generation and long-term value. Therefore, we feel that recovery is generally not priced in.

Price target and key risks We derive our PT of Ch$241 from our DCF-based SOTP analysis. Risks to our thesis include lower generation prices in Chile, upcoming distribution tariff settings, and AFP overhang,

Chile Latin American Utilities Brian P. ChaseAC +562 425 5245 [email protected]

Inversiones y Asesorias Chase Manhattan Ltda.


Absolute (%) -4.5 -5.7 7.4 Relative (%) 0.4 -5.7 -20.4

Source: Bloomberg

Company data 52-week range (LC) 161.2-208.5 Mkt cap. (LCBN) 6,171 Mkt cap. (US$MM) 12,379 Avg daily value (US$MM) 7.8 Avg daily volume (MM) Shares O/S (MM) 32.7 Date of price 11/25/2009 Index: IPSA Free float (%) 196 Exchange rate R$493/US$

Source: Bloomberg

Bloomberg: ENERSIS CI, ENI; Reuters: ENE.SN, ENI.N LC in /billions, year-end Dec 31 FY08 FY09E FY10E FY11E Sales 6,595.0 6,280.4 5,936.6 5,914.2 Net profit 599.28 712.16 654.11 678.35 EPS (LC) 18.35 21.81 20.03 20.78 FD EPS (LC) 18.35 21.81 20.03 20.78 DPS (LC) 3.9 12.1 8.6 8.9 Sales growth (%) 44.0% (4.8%) (5.5%) (0.4%) Net profit growth (%) 208.3% 9.7% (10.3%) 3.7% EPS growth (%) 208.3% 9.7% (10.3%) 3.7% ROE (%) 19.4% 18.9% 14.2% 12.4% Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

159



Enersis: Summary of financials Profit and loss statement LC in billions, year-end Dec 31

FY08 FY09E FY10E FY11ERevenue 6,595.0 6,280.4 5,936.6 5,914.2% change Y/Y 44.0% (4.8%) (5.5%) (0.4%)Gross margin (%) 48.2% 51.7% 52.0% 52.4%EBITDA 2,379.3 2,499.0 2,408.9 2,411.2% change Y/Y 53.9% 5.0% (3.6%) 0.1%EBITDA margin (%) 2,379.3 2,499.0 2,408.9 2,411.2EBIT 1,930.0 2,049.7 1,917.3 1,907.9% change Y/Y 6.2% -6.5% -0.5%EBIT margin (%) 29.3% 32.6% 32.3% 32.3%Net interest (319.0) (301.8) (296.1) (226.5)Earnings before tax 1,651.3 1,754.6 1,623.9 1,684.1% change Y/Y 6.3% -7.4% 3.7%Tax (396.6) (378.0) (389.7) (404.2)as % of EBT -20.5% -18.4% -20.3% -21.2%Net income (reported) 599.28 712.16 654.11 678.35% change Y/Y 208.3% 9.7% (10.3%) 3.7%Shares O/S (MM) 32.7 32.7 32.7 32.7EPS (reported) (LC) 18.35 21.81 20.03 20.78Source: Company, J.P. Morgan estimates.

Balance sheet LC in billions, year-end Dec 31

FY08 FY09E FY10E FY11ECash and cash equivalents 1,318.1 1,540.7 2,317.4 2,964.9Accounts receivable 1,338.3 1,381.6 1,301.8 1,330.0Inventories 99.4 96.4 91.9 92.6Others 171.0 177.5 167.2 170.9Current assets 2,926.8 3,196.2 3,878.4 4,558.4LT investments 2430.4 2386.7 2373.0 2359.4 Net fixed assets 8,577.3 8,748.9 8,855.2 9,075.7Total assets 13,934.4 14,331.8 15,106.5 15,993.4Liabilities ST loans 1,247.3 767.7 767.7 767.7Payables 1,099.8 1,039.8 991.7 999.0Others 338.2 326.6 307.7 314.4Total current liabilities 2,685.3 2,134.1 2,067.1 2,081.1Long-term debt 3,821.8 3,703.0 3,703.0 3,703.0Other liabilities 1398.2 1558.4 1558.4 1558.4 Total liabilities 7,905.3 7,395.5 7,328.5 7,342.5Shareholders’ equity 3,091.3 3,772.2 4,613.9 5,486.8BVPS (LC) 94.5 115.4 141.1 167.8Source: Company, J.P. Morgan estimates.

Cash flow statement LC in billions, year-end Dec 31

FY08 FY09E FY10E FY11ENet income 565.3 402.1 412.3 440.5Depreciation & amortization 609.2 575.1 575.2 582.6Change in working capital 191.8 876.6 597.8 715.0Cash flow from operations 1,366.4 1,853.9 1,585.3 1,738.1Capex (826.8) (889.6) (781.4) (691.0)Disposal/(purchase) (382.2) 0.0 0.0 0.0Intangibles (5.3) 0.0 0.0 0.0Investing Cash Flow (1,214.2) (889.6) (781.4) (691.0)Equity raised/(repaid) 0 0 0 0Debt raised/(repaid) 366.2 0.0 0.0 0.0Other 12.6 0.0 0.0 0.0Dividends (128.4) (395.7) (281.5) (292.2)Beginning cash 498.4 900.8 1469.4 1991.8 Ending cash 900.9 1,469.4 1,991.8 2,746.7DPS (LC) 3.9 12.1 8.6 8.9Net income 565.3 402.1 412.3 440.5Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end Dec 31 FY08 FY09E FY10E FY11EEBITDA margin 36.1% 39.8% 40.6% 40.8%Operating margin 29.3% 32.6% 32.3% 32.3%Net profit margin 9.1% 11.3% 11.0% 11.5%SG&A/sales -12.1% -11.9% -11.5% -11.6%Sales growth 44.0% (4.8%) (5.5%) (0.4%)Net profit growth 208.3% 9.7% (10.3%) 3.7%Sales per share growth 44.0% (4.8%) (5.5%) (0.4%)EPS growth 208.3% 9.7% (10.3%) 3.7%Interest coverage (x) 7.46 8.28 8.13 10.64Net debt to total capital 0.46 0.36 0.24 0.15Net debt to equity 1.21 0.78 0.47 0.27Sales/assets 0.47 0.44 0.39 0.37EBIT margin 0.29 0.33 0.32 0.32ROCE NA NA NA NAAssets/equity (x) 4.51 3.80 3.27 2.91ROI NA NA NA NAROE 19.4% 18.9% 14.2% 12.4%Source: Company, J.P. Morgan estimates.

160



Far Eastone Telecommunications www.fetnet.net

Overweight NT$37.00


Company description Far Eastone (FET) is a wireless operator in Taiwan with licences to operate both 2G and 3G networks. FET began 2G operations in January 1998 and acquired KG Telecom from the Koo Group in 2004. FET owns a 24.5% stake in NCIC, a small fixed-line operator in Taiwan focused on the enterprise segment. Douglas Hsu’s Far Eastern Group is FET’s largest shareholder with a 45.5% stake. Strategic partners, NTT DoCoMo and SingTel, hold 4.5% and 4.0% stakes in the company, respectively. Post mortem FET has a strong position in the Taiwan mobile market with a 26% market share, and has withstood the economic downturn very well, in our view. With a net cash balance sheet, and NT$19.5 billion in capital surplus and NT$9.0 billion in legal reserves, the pending changes in Taiwan corporate law means FET will be able to tap into these accounts to maintain high dividend levels if necessary. Capital management will be a key focus in 2010, in our view. Potential for earnings upgrades Mobile fundamentals at FET remain weak but have shown signs of turning the corner in the 3Q09 results. We believe earnings are likely to find a trough in 2009 as mobile business turns around and investors focus on 2010 numbers, which should be better than 2009. We believe the potential risk for upward earning estimates is high. Non-operating loss items are likely to narrow as the operating performance of NCIC turns positive in 2010. How much recovery is priced into the stock? Taiwan telcos are not recovery plays but are more known for their stable earnings streams and high dividend yields. We believe FET offers a little more excitement that that, although we expect an increase in positive news flow regarding China Mobile’s strategic stake. In our view, announcements regarding the strategic partnership in 2010 should heighten investor interest in the name and any JV investments with CM should be positive for FET in the long run. Price target and key risks Our DCF-based Dec-10 price target of HK$45 assumes a WACC of 9.4%, a terminal growth rate of -2%, and a beta of 1.05. Key risks to our PT are irrational mobile competition in Taiwan, and negative regulatory policies.

Taiwan Telecommunications Jimmy CheongAC (852) 2800-8566 [email protected]

J.P. Morgan Securities (Asia Pacific) Ltd

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NT$


1M 3M 12M Absolute (%) 0.1 -1.9 -10.5 Relative (%) -0.6 -9.2 -39.1

Source: Bloomberg.

Company data 52-week range (NT$) 29.25-41.00 Mkt cap. (NT$) 120,238 Mkt cap. (US$MM) 3,695 Avg daily value (US$MM) 7.2 Avg daily volume (MM) 6.3 Shares O/S (MM) 3,258.5 Date of price 5-Nov-09 Index: Taiwan SE 7,417 Free float (%) 42.0 Exchange rate (NT$/ US$) 32.54

Source: Bloomberg.

Bloomberg: 4904 TT; Reuters: 4904.TW NT$ in millions, year-end December FY08 FY09E FY10E FY11E Revenue 62,518 58,658 59,463 59,495 EBITDA 25,252 23,162 23,422 23,375 Net profit 10,161 9,049 10,111 10,706 EPS (NT$) 3.12 2.78 3.10 3.29 DPS (NT$) 2.80 2.42 2.70 2.86 Sales growth (%) -2.4% -6.2% 1.4% 0.1% Net profit growth (%) -12.6% -10.9% 11.7% 5.9% Dividend yield (%) 7.6 6.6 7.3 7.7 ROE (%) 13.5 12.7 14.0 14.4 P/E (x) 11.9 13.3 11.9 11.3 EV/EBITDA (x) 4.3 4.6 4.3 4.1 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

161



Far Eastone Telecommunications: Summary of financials NT$ in millions, year-end December

Profit and loss Balance sheet 2006 2007 2008 2009E 2010E 2006 2007 2008 2009E 2010E Revenue 67,227 64,037 62,518 58,658 59,463 Cash and equivalents 7,852 10,278 7,236 7,492 13,346

Accounts receivable 6,096 6,507 6,181 5,799 5,879 EBITDA 28,506 26,329 25,252 23,162 23,422 Inventories 973 671 853 800 811

Others 2,815 3,383 3,753 3,696 3,708 Depreciation (11,818) (11,213) (10,851) (10,988) (10,793) Total current assets 17,735 20,839 18,022 17,788 23,744 Amortization (111) (64) (61) (120) (120) Operating profit 16,578 15,052 14,341 12,053 12,509 Net fixed assets 54,666 48,929 45,428 41,471 37,819 EBIT 16,150 14,419 13,167 11,653 12,209 Other long term assets 21,280 26,773 25,048 26,557 26,208 Interest income 82 186 180 147 188 Interest expense (104) (42) (23) (33) (8) Total assets 93,681 96,541 88,499 85,816 87,771 Associates (22) 144 157 114 179 Profit before tax 16,128 14,563 13,324 11,767 12,388 ST loans 3,168 3,018 1,936 400 400 Tax (3,111) (3,141) (3,302) (2,918) (2,478) Others 12,438 12,115 13,303 12,226 11,970 Net profit 13,156 11,619 10,161 9,049 10,111 Total current liabilities 15,605 15,133 15,239 12,625 12,370 -9.7% -9.7% -8.5% -11.7% 5.3% Shares Out 3,873 3,873 3,259 3,259 3,259 Long term debt 2,822 74 27 27 27 EPS (NT$) 3.40 3.00 3.12 2.78 3.10 Other liabilities 463 919 991 991 991

Total liabilities 18,891 16,125 16,257 13,644 13,389 DPS (NT$) 3.10 3.10 2.80 2.42 2.70 DPS payout ratio 91% 103% 88% 87% 87% Shareholders' equity 74,790 80,415 72,241 72,172 74,383

Revenue growth -6.5% -4.7% -2.4% -6.2% 1.4% Total liabilities and equity 93,681 96,541 88,499 85,816 87,771 EBITDA growth -7.8% -7.6% -4.1% -8.3% 1.1% Net profit growth -10.6% -11.7% -12.6% -10.9% 11.7% (Net debt)/cash 2,768 8,828 7,030 8,822 14,676 EPS growth -10.6% -11.7% 3.9% -10.9% 11.7% Book value/share (NT$) 19.31 20.76 22.17 22.15 22.83 DPS growth 0.0% 0.0% -9.7% -13.4% 11.4% Ratios Cash flow 2006 2007 2008 2009E 2010E 2006 2007 2008 2009E 2010E

EBITDA margin 42.4% 41.1% 40.4% 39.5% 39.4% Cash flow from

operations 25,968 24,947 23,410 20,040 21,048

FCF margin 26.2% 25.5% 21.1% 21.7% 22.8% Capex (6,081) (5,786) (7,470) (7,031) (7,141) ROE 17.9% 15.2% 13.5% 12.7% 14.0% Cash flow from other

investing (454) (1,564) (154) (154) (154)

ROC 20.4% 18.6% 18.4% 16.6% 17.2% Cash flow from financing (16,222) (15,170) (18,828) (12,600) (7,899) ROA 17.2% 15.8% 15.5% 13.8% 14.4%

Change in cash for year 3,211 2,427 -3,042 255 5,854 Tax rate 19.3% 21.6% 24.8% 24.8% 20.0% Capex/sales 9.0% 9.0% 12.0% 12.0% 12.0% Beginning cash 4,640 7,852 10,279 7,236 7,492 Debt/capital 7.4% 3.7% 2.7% 0.6% 0.6% Closing cash 7,852 10,279 7,236 7,492 13,346 Net (debt) or cash/equity -3.7% -11.1% -9.9% -12.4% -20.0% Interest cover (x) -1,299 182 161 203 131

Source: Company and J.P. Morgan estimates.

162



FEMSA www.femsa.com


Price Target: $50

Company description FEMSA (FMX) is a leading beverage company and convenience store operator in Latin America, with $14bn in 2009E sales. The company operates through its 3 subsidiaries; Cerveza, which has beer operations in Mexico and Brazil and exports to the US; KOF, the largest Coke bottler in LatAm and second largest in world by sales volume and Oxxo, which is the largest and fastest growing chain of convenience stores in Mexico, with almost 7,000 locations and expanding at a pace of +800 stores per year. Post mortem FMX used the crisis to capture the trade-down of consumers looking for value. In our view, investors should pay special attention to such companies because they (1) are operating in oligopolies with low competitive intensity; (2) have strong brands and pricing power; (3) have high barriers to entry and (4) generate significant free cash flow with returns above cost of capital. Potential for earnings upgrades FEMSA being a leader in soft drinks has pricing power. In beer, they are price followers; the leaders are already taking pricing and they are following. Oxxo should continue to expand regardless of the economic scenarios. How much recovery is priced into the stock? FEMSA’s revenue and EBITDA will greatly benefit from a US economic recovery as in beer its stronghold territories are the North of Mexico. In our view, this not fully priced into the stock. Its current net debt/EBITDA ratio is 0.7x. Even without further economic improvements it has FCF yield of 10% with ROIC of 13%. The stock is trading at 7.4x '10E EBITDA. We believe there is upside risk to our estimates with the recovery and our Dec ‘10 $50 PT may be conservative. Price target and key risks Our Dec ’10 PT of $50 for FMX is based on SOTP valuation where we assign multiples to each of its business units. FMX has high correlation to Ps$ and so is expected to have more upside if the peso strengthens further. Risks are mainly macro, devaluation of Ps$ and large dilutive acquisitions.

Latin America Food & Beverages Alan AlanisAC (1-212) 622 3697 [email protected]



1525354555

Nov Feb May Aug Nov

Source: Bloomberg


Absolute (%) -0.9% 14.1% 63.5% Relative (%) -4.6% 3.0% 1.0%

Source: Bloomberg

Company data 52-week range (LC) 19.91-45.98 Mkt cap. (Ps MM) 207.53 Mkt cap. (US$MM) 16.2 Avg daily value (US$MM) 73.8 Avg daily volume (MM) 1.5 Shares O/S (MM) 358 Date of price 11/25/2009 Index: Mexican Bolsa 31,364 Free float (%) 60% Exchange rate 12.8

Source: Bloomberg.

Bloomberg: FMX US; Reuters: FMX.N Ps in millions, year-end December FY08 FY09E FY10E FY11E Sales 163,289 193,273 213,244 229,381 Net profit 8,964 12,968 15,594 17,352 EPS (LC) 2.51 3.62 4.36 4.85 FD EPS (LC) 2.51 3.62 4.36 4.85 DPS (LC) 0.45 0.45 0.54 0.65 Sales growth (%) 11% 18% 10% 8% Net profit growth (%) -25% 45% 20% 11% EPS growth (%) -25% 45% 20% 11% ROE (%) 11% 12% 13% 13% P/E (x) 32.5x 24.3x 20.0x 17.7x FD P/E (x) 32.5x 24.3x 20.0x 17.7x Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

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FEMSA: Summary of financials Profit and loss statement Ps in millions/billions, year-end December FY08 FY09E FY10E FY11E Revenue 163,289 193,273 213,244 229,381 % change Y/Y 11% 18% 10% 8% Gross margin (%) 46% 46% 44% 44% EBITDA 31,040 36,648 40,241 43,378 % change Y/Y 12% 18% 10% 8% EBITDA margin (%) 19% 19% 19% 19% EBIT 22,216 26,317 28,684 30,759 % change Y/Y 14% 18% 9% 7% EBIT margin (%) 14% 14% 13% 13% Net interest 4,188 4,769 3,889 3,201 Earnings before tax 13,119 18,914 22,277 24,789 % change Y/Y -22% 44% 18% 11% Tax 4,155 5,946 6,683 7,437 as % of EBT 32% 31% 30% 30% Net income (reported) 8,964 12,968 15,594 17,352 % change Y/Y -25% 45% 20% 11% Shares O/S (MM) 3,578 3,578 3,578 3,578 EPS (reported) (LC) 2.51 3.62 4.36 4.85 Source: Company, J.P. Morgan estimates.

Balance sheet Ps in millions/billions, year-end December

FY08 FY09E FY10E FY11E Cash and cash equivalents 9,110 15,095 22,792 33,473 Accounts receivable 10,759 12,179 10,971 11,682 Inventories 13,065 13,026 14,581 15,526 Others 6,083 5,451 6,770 7,209 Current assets 39,017 45,751 55,114 67,890 LT investments 65,299 69,468 64,060 58,242 Net fixed assets 61,425 70,640 78,029 85,788 Total assets 146,023 155,722 160,641 163,785 Liabilities ST loans 11,648 8,221 6,961 6,101 Others 32,104 32,856 36,019 38,354 Total current liabilities 43,752 41,077 42,981 44,455 Long-term debt 31,275 32,679 28,630 26,190 Other liabilities 13,118 14,093 15,612 16,623 Total liabilities 44,393 46,772 44,242 42,814 Shareholders’ equity 96,895 113,625 128,533 144,406 BVPS (LC) 27.08 31.75 35.92 40.36 Source: Company, J.P. Morgan estimates.

Cash flow statement Ps in millions/billions, year-end December

FY08 FY09E FY10E FY11E EBIT 22,216 26,317 28,684 30,759 Depreciation & amortization 8,824 10,331 11,557 12,619 Change in working capital 1,187 3 1,497 240 Taxes 4,155 5,946 6,683 7,437 Cash flow from operations 18,975 23,302 28,648 30,211 Capex 14,223 11,773 13,538 14,561 Disposal/(purchase) Net interest 4,188 4,769 3,889 3,201 Free cash flow 11,339 16,982 19,595 19,829 Equity raised/(repaid) 0 0 0 0 Debt raised/(repaid) 610 1,404 (4,049) (2,440) Other 1,045 975 1,519 1,012 Dividends 1,620 1,620 1,945 2,339 Beginning cash 10,456 9,110 15,095 22,792 Ending cash 13,313 25,083 22,792 33,473 DPS (LC) 0.45 0.45 0.54 0.65 Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December FY08 FY09E FY10E FY11E EBITDA margin 19.0% 19.0% 18.9% 18.9% Operating margin 13.6% 13.6% 13.5% 13.4% Net profit margin 5.5% 6.7% 7.3% 7.6% SG&A/sales 33% 32% 31% 31% Sales growth 11% 18% 10% 8% Net profit growth -25% 45% 20% 11% Sales per share growth 11% 18% 10% 8% EPS growth -25% 45% 20% 11% Interest coverage (x) 4.67 4.99 6.52 7.72 Net debt to total capital 24% 17% 8% -1% Net debt to equity 35% 23% 10% -1% Sales/assets 0.88 0.96 0.99 0.99 EBIT margin 14% 14% 13% 13% ROCE 22% 23% 24% 26% Assets/equity (x) 1.91 1.77 1.68 1.60 ROI 12% 13% 13% 13% ROE 11% 12% 13% 13% Source: Company, J.P. Morgan estimates.

164



First Gulf Bank www.fgb.ae

Overweight Price: AED 18.75

Price Target: AED 26.00

Company description First Gulf Bank is the 4th largest bank in the UAE and among the Top-10 banks in the MENA region (by assets). Incorporated in 1979, the bank is c.65% owned by the Abu Dhabi ruling family and commands a franchise of 18 branches in the UAE and presence in Libya, Singapore, Qatar, U.K. & India, c.1,000 full-time employees and c.$25bn in loans & c.$24bn in customer deposits.

Post mortem FGB’s key strengths, which we see benefiting its stock vs. peers, are i) robust capital (Tier I 17%, CAR 20% 09E) – among the best in CEEMEA space – backed by sovereign ownership giving comfort on b/s profile and ii) est. asset quality deterioration lower vs. CEEMEA peers, with NPLs peaking at just 3.5% 10E (incl. >100% coverage). FGB’s higher-than-peers exposure to Abu Dhabi retail / HNWI is reflected in its strong NIM of c.3.6% 09E, 3.4% 10E & fee income, >1% of avg. assets (peer Abu Dhabi banks lower) while FGB’s <20% C/I ratio 09E-11E clearly reflects the efficiency of its business model.

Potential for earnings upgrades We have been more conservative vs. mgmt. guidance on asset quality deterioration going into FY10E, expecting NPLs to peak at 3.5% 10E; lower than expected NPLs could provide material upside to JPM & consensus earnings estimates. FGB currently trades at a 30% discount to NAV valuations of Turkish, Russian & CEE banks under JPM coverage, despite being well poised to deliver comparable superior returns (RONAV 17%-19% 10E-11E). We believe that this valuation gap should narrow, with the fair trading multiple of FGB being 1.6x10E book in our view vs. 1.3x10E book currently, implying 34% upside from current price levels.

Price target and key risks Our Dec-10 PT of AED26/sh is based on the Gordon growth model using 17% ROE, 12.5% COE & 6% LT growth rate. Key risks include worse than expected loan/deposit growth or asset quality deterioration.

United Arab Emirates Banks Naresh BilandaniAC (+971) 44 281763 [email protected]

J.P. Morgan Chase Bank N.A., Dubai Branch

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Price Performance

Source: Bloomberg


Absolute (%) -1.1% 17.6% 81.2%

Source: Bloomberg

Company data 52-week range (Dh) 19.75-6.55 Mkt cap. (DhBN) 25.8 Mkt cap. (US$BN) 7.0 Avg daily value (US$MM) 3.15 Avg daily volume (MM) 0.65 Shares O/S (MM) 1,375 Date of price 23-Nov-09 Index: ADSMI Free float (%) 34.1% Exchange rate (Dh/$) 3.7

Source: Bloomberg

Bloomberg: FGB.UH; Reuters: FGB.AD AED, year-end Dec FY08 FY09E FY10E FY11E Pre-provision op. profit, mn 3,407 4,447 5,315 6,219 Net profit, mn 3,005 3,000 3,299 4,276 EPS 2.19 2.18 2.40 2.85 EPS growth (%) 50% 0% 10% 19% Tier I ratio (%) 14.6% 17.0% 16.1% 15.2% NPL ratio (%) 0.6% 2.0% 3.5% 3.1% Dividend yield 1.9% 1.7% 1.9% 2.3% RONAV (%) 23% 17% 17% 19% P/E (x) 8.6 8.6 7.8 6.6 P/NAV 1.6 1.4 1.2 1.1 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

165



First Gulf Bank: Summary of Financials Profit and Loss Statement Ratio Analysis Dh in millions, year end Dec FY07A FY08A FY09E FY10E FY11E Dh in millions, year end Dec FY07A FY08A FY09E FY10E FY11E Per Share Data Net interest income 1,331 2,580 3,871 4,340 4,850 EPSAdjusted 1.46 2.19 2.18 2.40 2.85

% Change Y/Y 10.2% 93.8% 50.0% 12.1% 11.7% % Change Y/Y 18.9% 49.7% (0.2%) 10.0% 18.8%Non-interest income 1,422 1,961 1,653 2,138 2,676 DPS 0.18 0.35 0.33 0.36 0.43Fees & commissions 462 1,114 1,305 1,631 1,956 % Change Y/Y (74.0%) 91.0% (5.7%) 10.0% 18.8%

% change Y/Y 63.9% 141.3% 17.1% 25.0% 19.9% Dividend yield 1.0% 1.9% 1.7% 1.9% 2.3%Trading revenues 399 66 261 372 509 Payout ratio 12.4% 15.9% 15.0% 15.0% 15.0%

% change Y/Y 363.9% (83.5%) 295.0% 42.4% 37.0% BV per share 7.36 11.81 13.14 15.29 16.54Other Income 561 781 87 135 211 NAV per share 7.36 11.81 13.14 15.29 16.54Total operating revenues 2,753 4,542 5,524 6,478 7,526 Shares outstanding 1,375.0 1,375.0 1,375.0 1,375.0 1,500.0

% change Y/Y 33.8% 65.0% 21.6% 17.3% 16.2% Core Operating Revenues - - - - - Return ratios Admin expenses 585 1,096 1,040 1,123 1,263 RoRWA 4.0% 3.4% 2.5% 2.3% 2.4%

% change Y/Y 54.0% 87.3% (5.1%) 8.0% 12.4% Pre-tax ROE 21.0% 22.8% 17.5% 16.9% 18.7%Other expenses 25 39 37 40 44 ROE 21.0% 22.8% 17.5% 16.9% 18.7%Pre-provision operating profit 2,142 3,407 4,447 5,315 6,219 RoNAV 21.0% 22.8% 17.5% 16.9% 18.7%

% change Y/Y 29.3% 59.0% 30.5% 19.5% 17.0% Loan loss provisions 207 566 1,478 2,066 2,011 Revenues Earnings before tax 2,008 2,997 2,997 3,296 4,271 NIM (NII / RWA) 2.1% 2.3% 2.9% 2.7% 2.5%

% change Y/Y 30.8% 49.3% 0.0% 10.0% 29.6% Non-IR / average assets 2.4% 2.2% 1.4% 1.6% 1.7%Tax (charge) 0 0 0 0 0 Total rev / average assets 4.6% 5.0% 4.7% 4.7% 4.6%

% Tax rate 0.0% 0.0% 0.0% 0.0% 0.0% NII / Total revenues 48.4% 56.8% 70.1% 67.0% 64.4%Minorities 0 8 3 3 5 Fees / Total revenues 16.8% 24.5% 23.6% 25.2% 26.0%Net Income (Reported) 2,008 3,005 3,000 3,299 4,276 Trading / Total revenues 14.5% 1.5% 4.7% 5.7% 6.8% Balance sheet Dh in millions, year end Dec FY07A FY08A FY09E FY10E FY11E Dh in millions, year end Dec FY07A FY08A FY09E FY10E FY11E ASSETS Cost ratios Net customer loans 44,409 79,363 93,543 112,511 138,412 Cost / income 22.2% 25.0% 19.5% 18.0% 17.4%

% change Y/Y 76.5% 78.7% 17.9% 20.3% 23.0% Cost / assets 0.8% 1.1% 0.9% 0.8% 0.7%Loan loss reserves 654 1,141 2,442 4,030 4,936 Other interest earning assets 23,273 17,822 23,111 25,916 28,677

% change Y/Y 10.3% (23.4%) 29.7% 12.1% 10.7% Balance Sheet Gearing Average interest earnings assets 56,974 82,434 106,920 127,541 152,758 Loan / deposit 85.0% 107.3% 106.3% 107.0% 109.7%Goodwill - - - - - Investments / assets 13.8% 9.3% 9.7% 9.0% 8.0%Other assets - - - - - Loan / assets 60.7% 73.8% 74.0% 76.1% 78.6%Total assets 73,198 107,522 126,330 147,762 176,077 Customer deposits / liabilities 85.9% 85.0% 83.5% 84.7% 85.7% LT Debt / liabilities 0.0% 0.0% 7.9% 6.7% 5.6%LIABILITIES Customer deposits 52,256 73,963 88,040 105,183 126,208 Asset Quality / Capital

% change Y/Y 51.8% 41.5% 19.0% 19.5% 20.0% Loan loss reserves / loans 1.8% 1.8% 2.8% 3.8% 3.8%Long term funding 0 0 8,510 8,510 8,510 NPLs / loans 1.0% 0.6% 2.0% 3.5% 3.1%Interbank funding 2,786 3,113 3,891 4,864 6,079 LLP / RWA 1.02% 1.03% 1.85% 2.55% 2.58%Other Interest Bearing Liabilities 5,785 9,985 5,031 5,634 6,479 Loan loss reserves / NPLs 144.4% 232.9% 128.7% 99.7% 109.4%Average interest bearing liabs 49,478 73,944 96,266 114,831 135,734 Tangible Equity/Assets - - - - -Other liabilities - - - - - RWAs 64,149 110,350 131,797 158,142 191,348Shareholders' equity 10,120 16,245 18,074 21,023 24,804 % YoY change 74.5% 72.0% 19.4% 20.0% 21.0%Minorities 0 374 374 374 374 Core Tier 1 15.5% 14.1% 12.8% 12.6% 12.3%Total liabilities & Shareholders Equity 73,198 107,522 126,330 147,762 176,077 Total Tier 1 15.0% 14.6% 17.0% 16.1% 15.2% Capital Adequacy Ratio 15.0% 14.1% 20.0% 18.5% 17.3% Source: Company reports and J.P. Morgan estimates.

166



Fubon Financial Holdings www.fubon.com/financial

Overwight NT$39.35

Price Target: NT$54

Company description Fubon is principally engaged in securities, banking, life insurance, and P&C sectors It recently expanded its life business through M&A. Its 19.9% stake in Xiamen City Bank, via 75%-owned Fubon Bank (HK), should provide a better entrance for a potential China opportunity, in our view.

Post mortem During the financial crisis, Fubon acquired one company. This acquisition has not only helped Fubon move up the rank to become the No #2 player in the life insurance industry but also provided support to its ROE.

Potential for earnings upgrades We believe Fubon is best positioned in the domestic reflation environment. Our estimated breakeven point for Fubon Life (pro forma) is only 3.1% versus 3.8%-4.0% for Cathay and Shinkong; this means Fubon should be best positioned for reflation and deserves a higher valuation (if unrealized gains on property gains are included). Meanwhile, Fubon has been redeploying capital to the property market and overseas bond market (i.e., carry trade) to improve its earnings.

How much recovery is priced into the stock? After the acquisition of the company, we expect the sustainable ROE of Fubon to improve to 13%-14% from the historical level of 7%-8%. This should be driven by: (1) strong profitability of life business; and (2) strong FYP growth, which should help lock-in low-cost liabilities. We do not think this has been fully priced in as the improved ROE should deserve higher P/BV (versus the current level of 1.6x P/BV).

Price target and key risks We remain OW on Fubon with our PT of NT$54 (SOTP-based, Dec-10). Key risks to our PT are: (1) a worse-than-expected recovery in exports, which could lead to credit-quality deterioration; (2) worse-than-expected outcome of cross-straits negotiations; (3) unfavorable regulatory changes and M&A terms.

Taiwan Banks Dexter HsuAC (886-2) 2725-9868 [email protected]

J.P. Morgan Securities (Taiwan) Limited

Price performance

0.5

1.0

1.5

2.0


Taishin (2887.TW) Taiex Source: TEJ.

Performance 1M 3M 12M Absolute (%) 0.8 24.5 89.6 Relative (%) -0.1 13.3 23.4

Source: TEJ.

Company data 52-week range (NT$) 16.65-40.45 Mkt cap. (NTMM) 319,733 Mkt cap. (US$MM) 9,901 Avg daily value (US$MM) 46.6 Avg daily volume (MM) 42.3 Shares O/S (MM) 8,125 Date of price 12-Nov-09 TSE 7,671 Free float (%) 52 Exchange rate 32.29

Source: Bloomberg.

Bloomberg: 2881 TT; Reuters: 2881.TW NT$ in millions, year-end December FY08 FY09E FY10E FY11E Operating profit 17,262 27,235 34,631 35,853 Net profit 10,875 21,404 27,060 26,905 EPS (NT$) 1.41 2.63 3.33 3.31 FD EPS (NT$) 1.41 2.63 3.33 3.31 DPS (NT$) 0.00 1.58 2.00 1.99 EPS growth (%) -24.6 87.0 26.4 -0.6 ROE (%) 7.0 13.0 14.0 12.9 P/E (x) 27.9 14.9 11.8 11.9 BVPS (NT$) 18.62 22.73 24.97 26.29 P/BV (x) 2.1 1.7 1.6 1.5 Dividend yield (%) 0.0 4.0 5.1 5.0 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 12 November 2009.

167



Fubon Financial Holdings: Summary of financials Income statement - NT$ mn 2007 2008 2009E 2010E 2011E Growth Rates 2007 2008 2009E 2010E 2011E

NIMs (as % of Avg. IEA) 1.43% 1.41% 2.01% 2.02% 2.13% Loans 6.3% 13.5% 7.8% 9.4% 10.4%Avg. IEA/Avg. Assets 108.6% 108.8% 102.5% 98.2% 100.8% Deposits 4.2% 17.6% 6.3% 4.1% 3.8%Margins (as % of Avg. Assets) 1.56% 1.54% 2.07% 1.99% 2.15% Assets 5.1% 10.7% 28.0% 8.2% 7.6%

Equity 1.3% -13.3% 28.5% 9.9% 5.3%Interest Earned 47,844 49,421 56,905 60,271 70,067 RWA 17.0% 7.0% 2.8% 6.2% 7.3%Interest Suspended 0 0 0 0 0Interest Expense -20,298 -20,084 -9,648 -7,152 -8,176Net Interest Income 27,547 29,336 47,257 53,119 61,891

Net Interest Income 3.1% 6.5% 61.1% 12.4% 16.5%Non-Interest Income 28,616 18,171 21,028 26,326 21,283 Non-Interest Income 27.3% -36.5% 15.7% 25.2% -19.2%Fees 15,294 10,467 14,017 16,767 17,546 of which Fee Grth 50.2% -31.6% 33.9% 19.6% 4.6%Insurance 2,763 1,563 -5,836 -7,178 -9,298 Revenues 14.2% -15.4% 43.7% 16.3% 4.7%Dealing 11,037 5,544 9,983 10,733 5,505 Costs 15.7% 3.7% 35.7% 9.2% 5.6%Other Revenues -478 597 2,864 6,004 7,530 Pre-Provision Profits 12.5% -36.0% 57.8% 27.2% 3.5%Total Revenues 56,162 47,507 68,285 79,445 83,174 Loan Loss Provisions -31.5% -46.5% -43.1% 30.1% 11.5%Costs -29,173 -30,245 -41,050 -44,814 -47,321 Pre-Tax 86.4% -29.6% 105.1% 26.8% 2.5%Pre-Prov. Profits 26,990 17,262 27,235 34,631 35,853 Attributable Income 71.8% -24.7% 96.9% 26.4% -0.6%Provisions -10,303 -5,512 -3,137 -4,082 -4,553 EPS 79.5% -24.6% 87.0% 26.4% -0.6%Other Inc/Exp. 0 0 0 0 0 DPS 50.0% -100.0% nm 26.4% -0.6%Exceptionals 0 0 0 0 0Disposals/ Other income 0 0 0 0 0 Balance Sheet Gearing 2007 2008 2009E 2010E 2011EPre-tax 16,687 11,751 24,098 30,549 31,300Tax -2,257 -878 -2,694 -3,489 -4,395 Loan/Deposits 81.9% 79.0% 80.1% 84.2% 89.5%Minorities 0 0 0 0 0 Investment/Assets 31.5% 33.7% 56.2% 56.0% 55.4%Other Distbn. 0 0 0 0 0 Loan/Assets 37.8% 38.7% 32.6% 33.0% 33.8%Attributable Income 14,430 10,873 21,404 27,060 26,905 Customer deposits/Liab. 49.7% 52.1% 43.3% 41.7% 40.2%

LT Debt/Liabilities 3.0% 3.1% 2.7% 2.5% 2.3%

Per Share Data (NT$/ share) 2007 2008 2009E 2010E 2011E Asset Quality/Capital 2007 2008 2009E 2010E 2011ELoan loss reserves/Loans 0.90% 0.70% 0.56% 0.54% 0.53%

EPS 1.87 1.41 2.63 3.33 3.31 NPL/Loans 1.18% 0.98% 0.73% 0.67% 0.61%DPS 1.50 0.00 1.58 2.00 1.99 Coverage 76.3% 71.4% 76.1% 80.9% 86.7%Payout 0% 112% 76% 63% 0% Growth in NPLs -33.9% -6.3% -19.4% 0.0% 0.0%Book Value 21.47 18.62 22.73 24.97 26.29Fully Diluted Shares 7,719 7,719 8,125 8,125 8,125 Tier 1 Ratio 9.56% 9.46% 9.72% 9.51% 9.35%

Total CAR 9.6% 11.2% 11.1% 10.8% 10.6%

Key balance sheet - NT$ mn 2007 2008 2009E 2010E 2011E Du-Pont Analysis 2007 2008 2009E 2010E 2011E

Net Loans 685,183 777,352 837,734 916,335 1,011,274LLR -6,245 -5,476 -4,698 -4,996 -5,357 Margins (as % of Avg. Assets) 1.56% 1.54% 2.07% 1.99% 2.15%Gross Loans 691,428 782,828 842,432 921,331 1,016,631 Non IR/Avg. Assets 1.62% 0.95% 0.92% 0.98% 0.74%NPLs 8,182 7,667 6,177 6,177 6,177 Non-Int. Rev./ Revenues 51.0% 38.2% 30.8% 33.1% 25.6%Investments 570,580 675,562 1,443,530 1,555,773 1,655,469 Revenue/Assets 3.18% 2.49% 2.99% 2.97% 2.88%Other Earning Assets 122,759 124,505 105,328 104,742 113,327 Cost/Income 51.9% 63.7% 60.1% 56.4% 56.9%Avg. IEA 1,374,421 1,483,830 1,987,093 2,486,568 2,683,636 Cost/Assets 1.65% 1.58% 1.79% 1.68% 1.64%Goodwill 497 497 0 0 0 of which Goodwill Amort. 0.00% 0.00% 0.00% 0.00% 0.00%Assets 1,812,745 2,006,720 2,567,627 2,779,190 2,990,759 Operating ROA 1.53% 0.90% 1.19% 1.30% 1.24%

LLP/Loans -1.55% -0.75% -0.39% -0.47% -0.47%Loan/Assets 37.6% 38.3% 35.3% 32.8% 33.4%

Deposits 836,544 984,101 1,046,233 1,088,878 1,130,351 Other Prov, Income/ Assets 0.00% 0.00% 0.00% 0.00% 0.00%Long-term bond funding 49,760 57,596 64,436 64,436 64,436 Pre-Tax ROA 0.94% 0.62% 1.05% 1.14% 1.08%Other Borrowings 132,306 64,587 103,584 104,291 78,784 Tax Rate -13.5% -7.5% -11.2% -11.4% -14.0%Avg. IBL 1,011,351 1,062,448 1,160,269 1,235,929 1,265,588 Minorities & Outside Distbn. 0.00% 0.00% 0.00% 0.00% 0.00%Avg. Assets 1,768,643 1,909,733 2,287,174 2,673,409 2,884,975 ROA 0.82% 0.57% 0.94% 1.01% 0.93%Common Equity 165,728 143,715 184,681 202,899 213,567 RoRWA 2.14% 1.45% 2.72% 3.29% 3.06%RWA 726,540 777,318 798,777 848,346 910,115 Equity/Assets 9.31% 8.10% 7.18% 7.25% 7.22%Avg. RWA 673,762 751,929 788,048 823,561 879,230 ROE 8.76% 7.03% 13.04% 13.96% 12.92%

Source: Company data, J.P. Morgan estimates.

Fubon Financial: SOTP valuation NT$MM Sh. Equity Implied P/BV Implied value % cont. Taipei Fubon Bank 83,525 1.79 149,135 35% Fubon Life 102,767 1.63 167,514 39% Fubon Securities 30,812 1.60 49,299 12% Fubon Insurance 19,278 1.70 32,772 8% Fubon Bank (Hong Kong) 14,862 1.35 20,063 5% Fubon Investment Trust 965 1.30 1,254 0% Others & Liabilities -17,526 1.00 -17,526 -4% Dividend 25,286 1.00 25,286 6% Total 214,681 1.99 427,797 100% Shares O/S 8,125 Fair Value 52.7 Source: J.P. Morgan estimates.

168



Gazprom www.gazprom.com

Overweight Price: 6.30

Price Target: $9.90

Company description Gazprom is the largest Russian gas producer. The company owns the Russian gas transportation network and holds the Russian gas export monopoly by law. We forecast the company’s gas output to decline 17% y/y to 458 bcm this year due to weak demand and recover 6% y/y in 2010E. Gazprom owns a 95.7% stake in Gazprom Neft (approx. 1 mmbpd annual crude output). Total proven hydrocarbon reserves amounted to 117 bn boe, 3P – 140 bn boe (end-2008). Gazprom owns power generating and other large non-core assets, including banking and real estate. The government is the largest shareholder in Gazprom with a 50.1% stake.

Post mortem The drop in domestic gas demand and output in 2009 proved deeper than expected. High-margin export sales were further weakened by oversupply of gas in Europe. We forecast gas price recovery in 2010 and improvement in export and domestic demand only from 2011. Short term, we believe Gazprom might struggle to place minimum contract volumes in Europe in 2009-2010, but it is unlikely to compromise on prices. Mid term, we see Gazprom’s position in Europe as relatively secure.

Potential for earnings upgrades We see potential for an earnings upgrade if volume recovery in 2010-2011 is faster than expected and oil/gas prices are higher than estimated (JPMe $70/bbl for 2010 and $87/bbl for 2011). Our EBITDA and net income estimates are a modest 5% above Bloomberg consensus for 2010-2011.

How much recovery is priced into the stock? Gazprom shares are traded at a 5.7x 12M forward PER, which suggests a 35-39% discount to 10-year and 5-year PER averages respectively, which might be excessive given that the company is at the trough of the earnings cycle.

Price target and key risks Our PT (Dec-10) for Gazprom is $9.9/share, based on a 50% DCF-based fair value (WACC at 10.0% and terminal growth rate at 2.5%) and 50% multiple-based PER (‘10E). The key risks: increasing competition, lower gas prices.

Russia Russian Oil & Gas Nadia KazakovaAC (7-495) 937 7329 [email protected]


3.0

4.0

5.0

6.0

7.0

$


Price Performance

Source: Bloomberg


Absolute (%) -16.2 8.2 40.0

Source: Bloomberg

Company data 52-week range ($) 2.98-6.88 Mkt cap. (US$MM) 144,366 Avg daily value (US$MM) 934 Avg daily volume (MM) 152 Shares O/S (MM) 22,915 Date of price 23-11-09 Index: RTS 1466.77 Free float (%) 40% Exchange rate 1


Bloomberg: GAZP RU; Reuters: GAZP.RTS $ in millions, year-end December FY08 FY09E FY10E FY11E Sales 141,520 96,011 112,363 134,672 Net profit 30,593 20,730 25,049 33,498 EPS (LC) 1.34 0.90 1.09 1.46 FD EPS (LC) 1.34 0.90 1.09 1.46 DPS (LC) 0.09 0.10 0.05 0.07 Sales growth (%) 52% -32% 17% 20% Net profit growth (%) 31% -32% 21% 34% EPS growth (%) 31% -32% 21% 34% ROE (%) 20% 12% 12% 14% P/E (x) 4.7 7.0 5.8 4.3 FD P/E (x) 4.7 7.0 5.8 4.3 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

169



Gazprom: Summary of Financials Profit and Loss Statement Cash flow statement $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Revenues 141,520 96,011 112,363 134,672 148,784 EBIT 51,112 28,483 33,841 42,244 50,894

% change Y/Y 52.2% (32.2%) 17.0% 19.9% 10.5% Depreciation & amortisation 7,861 8,071 8,858 10,840 11,411Gross Margin (%) 40.1% 45.9% 45.9% 46.9% 48.9% Change in working capital/Other (7,285) 4,578 (3,712) (5,612) (4,993)EBITDA 58,973 36,555 42,699 53,084 62,305 Taxes (10,853) (5,591) (6,880) (9,290) (11,374)

% change Y/Y 82.7% (38.0%) 16.8% 24.3% 17.4% Cash flow from operations 40,836 35,542 32,108 38,181 45,938EBITDA Margin 41.7% 38.1% 38.0% 39.4% 41.9%

EBIT 51,112 28,483 33,841 42,244 50,894 Capex (28,743) (19,969) (25,695) (29,512) (26,930)% change Y/Y 103.6% (44.3%) 18.8% 24.8% 20.5% Disposal/(Purchase)/Other (7,274) (15,883) (6,766) (5,456) (5,506)EBIT Margin 36.1% 29.7% 30.1% 31.4% 34.2% Net Interest (514) (1,466) (1,875) (1,559) (744)

Net Interest (514) (1,466) (1,875) (1,559) (744) Free cash flow 4,350 258 590 6,175 19,029Earnings before tax 42,726 27,463 33,381 44,780 54,884

% change Y/Y 26.3% (35.7%) 21.5% 34.2% 22.6% Equity raised/repaid (518) 0 0 0 0Tax (10,853) (5,591) (6,880) (9,290) (11,374) Debt Raised/repaid 2,647 (1,008) 5,410 7,381 (5,701)

as a % of EBT 21.2% 19.6% 20.3% 22.0% 22.3% Other (2,735) 1,319 (1,282) (2,376) (2,514)Net Income (Reported) 30,593 20,730 25,049 33,498 41,034 Dividends paid (2,463) (1,219) (1,585) (2,016) (2,764)

% change Y/Y 30.7% (32.2%) 20.8% 33.7% 22.5% Beginning cash 11,225 13,828 12,733 16,067 25,460Shares Outstanding 22,915.31 22,915.31 22,915.31 22,915.31 22,915.31 Ending cash 13,828 12,733 16,067 25,460 33,614EPS (reported) 1.34 0.90 1.09 1.46 1.79 DPS 0.10 0.05 0.07 0.09 0.12

% change Y/Y 30.7% (32.2%) 20.8% 33.7% 22.5% Balance sheet Ratio Analysis $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Cash and cash equivalents 11,689 12,733 16,067 25,460 33,614 EBITDA margin 41.7% 38.1% 38.0% 39.4% 41.9%Accounts receivable 22,980 25,118 29,518 35,285 39,284 Operating margin 36.1% 29.7% 30.1% 31.4% 34.2%Inventories 9,416 9,403 11,049 13,239 14,637 Net profit margin 21.6% 21.6% 22.3% 24.9% 27.6%Others 9,361 10,068 11,808 14,065 15,717 SG&A/Sales (1.6%) 7.8% 7.9% 7.5% 7.0%Current assets 53,446 57,321 68,442 88,050 103,251 Sales per share growth 8.6% 11.0% 10.9% 10.4% 9.9%LT investments 27,328 79,271 72,523 56,759 62,615 EPS growth 30.7% (32.2%) 20.8% 33.7% 22.5%Net fixed assets 136,685 157,381 180,738 219,722 234,396 Total assets 243,709 283,967 316,960 359,884 395,730 ROE 19.5% 11.6% 12.3% 14.1% 14.7% ROCE 19.4% 11.7% 11.7% 12.5% 13.9%Liabilities ST loans 14,982 16,733 10,053 12,313 13,295 Production (mboe/day) 10,076 8,553 9,032 9,285 9,366Payables 17,820 20,123 23,661 27,420 29,316 Production oil (mbpd) 1,163 1,151 1,151 1,194 1,178Others 0 699 740 798 799 Production gas (mboe/day) 8,914 7,403 7,881 8,091 8,188Total current liabilities 32,802 37,555 34,453 40,531 43,410 Refining throughput (mbpd) 566 687 760 613 613Long term debt 31,445 39,195 47,828 48,101 36,652 Other liabilities 12,432 14,859 15,822 16,872 17,747 Interest coverage (x) 99.5 19.4 18.1 27.1 68.4Total liabilities 76,679 91,610 98,103 105,504 97,809 Net debt to equity 20.8% 22.5% 19.1% 13.7% 5.5%Shareholders' equity 156,559 178,628 203,676 237,175 278,208 Net debt 34,738 43,196 41,814 34,954 16,334BVPS 6.83 7.80 8.89 10.35 12.14 Net debt/EBITDA (ny) 0.9 1.0 0.8 0.6 0.2 Source: Company reports and J.P. Morgan estimates.

170



Genting www.genting.com

Overweight Price M$7.15


Company description Genting Bhd is an investment holding company and its subsidiaries are principally involved in leisure and hospitality, where Genting Malaysia owns and operates the sole casino in Malaysia while Genting Singapore is set to open 1 of 2 casinos in Singapore next year. Other subsidiaries are involved in power generation, oil palm plantation, property development and oil & gas. Post mortem Its Malaysian resort has proven to be resilient in the crisis with visitor arrivals in 1H09 remaining flat Y/Y at 9.5MM, while revenue is up 2% Y/Y. Potential for earnings upgrades For its Malaysian resort, we have factored in a 6% decline in casino revenue and 5% decline in overall revenue in 2010 (vs. 2000 recovery of 7% post crisis). Meanwhile, our EBITDA forecast for Genting Singapore is below consensus estimates by 37% for FY10E and 24% for FY11E. How much recovery is priced into the stock? The stock has not fully priced in a recovery, in our view. Genting’s share price is still trading at approximately 20-25% discount to its SOTP (based on current share prices of listed subsidiaries), which is below the three-year average of 18%. Meanwhile, its subsidiary, Genting Malaysia, is trading at 6.4x FY10E EV/EBITDA, which is 1 std deviation below the eight-year mean of 8.3x. Price target and key risks Our Jun-10 PT is based upon a 15% discount to our SOTP value as we believe that discount will narrow slightly from the three-year average of 18% and current discount of 20-25% when Singapore opens next year. Genting Bhd will then become a purer casino play. In the past, the discount has narrowed to 0 once in early 2007 post the winning of Singapore casino license. In arriving at our SOTP value, Genting’s stakes in Genting Malaysia, Genting Singapore and Genting Plantations are valued at our PT of M$3.50, S$1.15 and M$6.70, respectively. Key risks to our PT are a slower-than-expected recovery in casino markets and prolonged health scares.

Malaysia Gaming Nicole GohAC (60-3) 2270-4702 [email protected]



2

4

6

8

10-0

8

01-0

9

04-0

9

07-0

9

10-0

9

Source: Bloomberg.

Performance 1M 3M 12M Absolute (%) 2.3 11.7 45.3 Relative (%) -0.8 5.1 6.1

Source: Bloomberg.

Company data 52-wk range (M$) M$3.08-7.87 Mkt. cap (M$MM) 26488.61 Mkt. cap (US$MM) 7741.81 Liquidity (US$MM) 15.2 Avg. daily volume (MM) 7.6 Shares O/S (MM) 3704.7 Date of price 5-Nov-09 KLCI Index 1254.0 Free float (%) 60.3 Exchange rate 3.42

Source: Bloomberg.

Bloomberg: GENT MK; Reuters: GENT.KL M$ millions, year-end December FY07 FY08 FY09E FY10E FY11E Sales 8,484 9,083 7,704 11,552 14,691 Core net profit 1,467 1,129 1,066 1,327 1,740 Core EPS (M$) 0.40 0.30 0.29 0.36 0.47 DPS (M$) 0.27 0.05 0.05 0.05 0.05 Sales growth (%) 22.2 7.1 -15.2 49.9 27.2 Net profit growth (%) 24.2 -23.0 -5.6 24.5 31.1 EPS growth (%) 23.9 -23.1 -5.6 24.5 31.1 ROE (%) 16.1 4.6 8.0 9.2 10.9 ROCE (%) 17.9 15.6 8.2 11.2 14.1 P/E (x) 18.1 23.5 24.9 20.0 15.2 P/BV (x) 2.1 2.1 1.99 1.8 1.7 EV/EBITDA (x) 8.3 9.1 12.5 9.9 7.0 Net div yield (%) 3.7 0.7 0.7 0.7 0.7 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

171



Genting: Summary of financials Profit and Loss statement Cash flow statementMYR in m illions, year-end Dec FY07A FY08A FY09E FY10E FY11E MYR in m illions, year-end Dec FY07A FY08A FY09E FY10E FY11E

Revenues 8,484 9,083 7,704 11,552 14,691 EBIT 3,170 2,847 2,205 2,879 4,013% change Y/Y 22.2 7.1 -15.2 49.9 27.2 Depreciation & amortisation 615 658 558 837 1,065

Gross Margin (% ) 44.6 38.6 35.9 32.2 34.6 Change in working capital 89 128 9 221 52EBITDA 3,785 3,505 2,763 3,716 5,078 Taxes (662) (751) (560) (772) (1,079)

% change Y/Y 11.1 -7.4 -21.2 34.5 36.6 Others (367) 216 302 371 465EBITDA Margin (% ) 44.6 38.6 35.9 32.2 34.6 Cash flow from operations 2,844 2,518 2,514 3,536 4,516

EBIT 3,170 2,847 2,205 2,879 4,013% change Y/Y 9.2 -10.2 -22.6 30.6 39.4 Capex (2,858) (5,539) (5,853) (4,361) (1,308)EBIT Margin (% ) 37.4 31.3 28.6 24.9 27.3 Disposal/ (purchase) 870 2,650 0 0 0

Net Interest -109 -54 -2 170 263 Others 318 265 0 0 0Earnings before tax 3,040 2,868 2,241 3,089 4,317 Free cash flow 1,175 (105) (3,340) (825) 3,208

% change Y/Y 10.6 -5.7 -21.9 37.9 39.8Tax (662) (751) (560) (772) (1,079) Debt raised/ (repaid) 2,467 1,088 7,874 (2,406) 1,152

as % of EBT 21.8 26.2 25.0 25.0 25.0 Equity raised/ (repaid) 0 0 1,730 0 0Net Income 1,989 569 1,066 1,327 1,740 D ividends paid (1,316) (524) (195) (195) (195)

% change Y/Y 32.2 -71.4 87.3 24.5 31.1 Other (871) (731) (293) (294) (293)Shares Outstanding 3704 3708 3708 3708 3708 Beginning cash 8,078 9,590 9,467 15,242 11,523Core EPS- M$ 0.396 0.304 0.287 0.358 0.469 Ending cash 9,590 9,467 15,242 11,523 15,395

% change Y/Y -2.7 -23.1 -5.6 24.5 31.1 Gross DPS - M$ 0.370 0.071 0.070 0.070 0.070Balance sheet Ratio AnalysisMYR in m illions, year-end Dec FY07A FY08A FY09E FY10E FY11E % , year-end Dec FY07A FY08A FY09E FY10E FY11E

Cash and cash equivalents 9,590 9,467 15,242 11,523 15,395 EBITDA margin 44.6 38.6 35.9 32.2 34.6 Accounts receivable 830 1,090 950 1,424 1,811 Operating margin 44.6 38.6 35.9 32.2 34.6 Inventories 311 376 603 951 1,170 Net profit margin 23.4 6.3 13.8 11.5 11.8 Others 268 201 1,005 2,088 3,676 SG&A/sales n.a. n.a. n.a. n.a. n.a.Current assets 10,999 11,133 17,800 15,985 22,053

Sales per share growth 21.9 6.9 (15.2) 49.9 27.2 LT investments 10,277 8,626 8,663 8,704 8,745 Sales growth 22.2 7.1 (15.2) 49.9 27.2 Net fixed assets 8,903 10,692 15,987 19,511 19,754 Net profit growth 32.2 (71.4) 87.3 24.5 31.1 Total assets 30,179 30,451 42,450 44,200 50,551 EPS growth (2.7) (23.1) (5.6) 24.5 31.1

Liabilities Interest coverage (x) 9.5 13.0 9.4 18.4 25.2 Payables 1,369 1,512 1,808 2,852 3,511 Net debt to total capital (x) Net cash Net cash Net cash Net cash Net cashST loans 1,293 442 1,293 1,293 1,293 Net debt to equity (x) Net cash Net cash Net cash Net cash Net cashOthers 258 251 251 251 251 Sales/assets (x) 0.3 0.3 0.2 0.3 0.3Total current liabilities 2,920 2,206 3,352 4,395 5,054 Assets/equity (x) 2.4 2.4 3.2 3.1 3.2Long term debt 4,029 5,414 12,438 10,032 11,183 ROE 16.1 4.6 8.0 9.2 10.9Other liabilities 1,692 1,417 2,032 3,022 4,520 ROCE 17.9 15.6 8.2 11.2 14.1 Total liabilities 8,642 9,037 17,821 17,449 20,757Shareholders' equity 12,355 12,442 13,313 14,446 15,991BVPS - M$ 3.34 3.36 3.59 3.90 4.31

Source: Company, J.P. Morgan estimates Genting Bhd—PT derivation Listed subsidiaries %

owned No of

shares Price (M$)

Market value M$ / share Valuation method

Genting Malaysia 48% 5,860 3.50 9,927 2.68 Based on JPM June-10 target price Genting Plantations 55% 753 6.70 2,774 0.75 Based on JPM June-10 target price Genting Singapore 54% 11,586 2.74 16,958 4.57 Based on JPM June-10 target price Landmarks 30% 481 1.42 202 0.05 Based on current share price of M$0.95/ share 29,862 8.05 Unlisted subsidiaries Power 100% 3,151 0.85 Based on 1.0X historical book Property 55% 506 0.14 Based on 1.0X book Management fees from Resorts 100% 5,328 1.44 Based on DCF Oil & gas 95% 443 0.12 Based on 10X P/E Wisma Genting 100% 97 0.03 Based on net BV 9,525 2.57 Company level cash / investments -2,118 -0.57 Total 37,268 - No of shares 3,708 - RNAV (M$/share) 10.05 10.05 % discount 15% 15% June-10 price target 8.54 8.54 Source: J.P. Morgan estimates.

172



Grupo Aeroportuario del Sureste www.asur.com.mx

Neutral Ps63.04

Price Target: Ps53.00

Company description ASUR has a 50-year concession to operate 9 airports in the southeast of Mexico. Its airport in Cancun, the biggest tourist destination in Mexico, is the second largest in Mexico and accounts for 47% of ASUR’s volumes. The company’s EBITDA margin, at 64%, topped the industry average of 61%in the 9M09.

Post mortem Mexican airports were severely impacted by the economic crisis that hit domestic and international traffic. The swine flu outbreak also had a significant negative impact in the 2Q09. We expect a gradual recovery that already started in 3Q, and we believe that international traffic will recover faster, especially on the back of a US economic recovery. In this case, we believe that ASUR is better positioned relative to its peers as it depends more on international traffic.

Potential for earnings upgrades The main upside risk to our estimates are related to a better-than-expected recovery in traffic volumes. We expect flat volumes in 4Q09 vs a 14% decrease in 3Q09 yoy, and for the full year we expect volumes to be down 9% and to recover 9% next year.

How much recovery is priced into the stock? Although ASUR’s share price has recover significantly over the last three months, YTD it is still underperforming, up 22% vs +40% for the Bolsa. We believe that as volumes start to recover we could see this underperformance start to reverse over the next coming months.

Price target and key risks We rate ASUR an OW relative to the other airport companies in Mexico. Our Dec-09 price target of Ps53 (US$41 per ADR) is based on a DCF model using a WACC of 10.5%. ASUR is the company most exposed to hurricanes, given its airports’ locations.

Mexico Airport Operators Adrian E HuertaAC (52 81) 8152-8720 [email protected]



Absolute (%) 11 11 84 Relative (%) 15 4 32

Source: Bloomberg.

Company data 52-week range (LC) 24.92-49.10 Mkt cap. (LCMM) 18,585 Mkt cap. (US$MM) 1,447 Avg daily value (US$MM) 3.8 Avg daily volume (MM) 0.2 Shares O/S (MM) 300.00 Date of price 11/25/2009 Index: IBOV 31,364 Free float (%) 74% Exchange rate 12.84

Source: Bloomberg.

Bloomberg: ASURB MM Reuters: ASURB MM.SA LC in millions, year-end December FY08 FY09E FY10E FY11E Sales 3,169 3,216 3,548 3,833 Net profit 1,049 941 1,107 1,223 EPS (LC) 3.50 3.14 3.69 4.08 FD EPS (LC) 3.50 3.14 3.69 4.08 DPS (LC) 2.00 6.28 2.19 2.58 Sales growth (%) 13.7% 1.5% 10.3% 8.0% Net profit growth (%) 100.9% -10.4% 17.7% 10.4% EPS growth (%) 100.9% -10.4% 17.7% 10.4% ROE (%) 15.3% 15.7% 17.2% 17.8% P/E (x) 18.0 20.1 17.1 15.5 FD P/E (x) 18.0 20.1 17.1 15.5 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25th November 2009.

173



Asur: Summary of financials Profit and loss statement LC in millions, year-end December

FY08 FY09E FY10E FY11ERevenue 3,169 3,216 3,548 3,833% change Y/Y 13.7% 1.5% 10.3% 8.0%Gross margin (%) NA NA NA NAEBITDA 1,985 1,972 2,202 2,389% change Y/Y 16.3% -0.6% 11.6% 8.5%EBITDA margin (%) 62.7% 61.3% 62.1% 62.3%EBIT 1,384 1,320 1,505 1,671% change Y/Y 18.7% -4.6% 14.0% 11.0%EBIT margin (%) 43.7% 41.0% 42.4% 43.6%Net interest 174 76 33 28Earnings before tax 1,548 1,386 1,538 1,698% change Y/Y 31.1% -10.5% 11.0% 10.4%Tax (499) (445) (431) (476)as % of EBT 32.2% 32.1% 28.0% 28.0%Net income (reported) 1,049 941 1,107 1,223% change Y/Y 100.9% -10.4% 17.7% 10.4%Shares O/S (MM) 300 300 300 300EPS (reported) (LC) 3.50 3.14 3.69 4.08Source: Company, J.P. Morgan estimates.

Balance sheet LC in millions, year-end December

FY08 FY09E FY10E FY11ECash and cash equivalents 1,734 636 426 751Accounts receivable 361 444 489 529Inventories 8 10 10 10Others 747 683 683 683Current assets 2,849 1,773 1,608 1,972LT investments 8,095 8,037 8,037 8,037Net fixed assets 6,430 6,508 7,211 7,393Total assets 17,375 16,318 16,857 17,403Liabilities ST loans 0 0 0 0Payables 10 35 39 42Others 585 279 279 279Total current liabilities 595 315 318 321Long-term debt 0 0 0 0Other liabilities 1,824 1,992 2,078 2,173Total liabilities 2,420 2,306 2,396 2,494Shareholders’ equity 14,955 14,012 14,460 14,908BVPS (LC) 49.85 46.71 48.20 49.69Source: Company, J.P. Morgan estimates.

Cash flow statement LC in millions, year-end December

FY08 FY09E FY10E FY11EEBIT 1,384 1,320 1,505 1,671Depreciation & amortization 602 653 697 718Change in working capital (90) (60) (42) (36)Taxes (499) (445) (431) (476)Cash flow from operations 946 1,423 1,848 2,000Capex (936) (670) (1,400) (900)Disposal/(purchase) 142 142 142 142Net interest 174 76 33 28Free cash flow 451 988 428 1,080Equity raised/(repaid) 0 0 0 0Debt raised/(repaid) 0 0 0 0Other 0 0 0 0Dividends (600) (1,884) (658) (775)Beginning cash 1,926 1,734 636 426Ending cash 1,734 636 426 751DPS (LC) 2.00 6.28 2.19 2.58Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December FY08 FY09E FY10E FY11EEBITDA margin 62.7% 61.3% 62.1% 62.3%Operating margin 43.7% 41.0% 42.4% 43.6%Net profit margin 33.1% 29.3% 31.2% 31.9%SG&A/sales 25.6% 26.6% 25.9% 25.5%Sales growth 13.7% 1.5% 10.3% 8.0%Net profit growth 101% -10% 18% 10%Sales per share growth 13.7% 1.5% 10.3% 8.0%EPS growth 100.9% -10.4% 17.7% 10.4%Interest coverage (x) 621.61 2,170.83 0.00 0.00 Net debt to total capital -11.6% -4.5% -2.9% -5.0%Net debt to equity -11.6% -4.5% -2.9% -5.0%Sales/assets 0.18 0.20 0.21 0.22 EBIT margin 43.7% 41.0% 42.4% 43.6%ROCE 10.1% 13.4% 13.9% 14.4%Assets/equity (x) 1.16 1.16 1.17 1.17 ROI 10.1% 13.4% 13.9% 14.4%ROE 15.3% 15.7% 17.2% 17.8%Source: Company, J.P. Morgan estimates.

174



Hon Hai Precision www.foxconn.com

Overweight Price: NT$132


Company description With strong execution and a unique business model, eCMMS, Hon Hai has become the largest electronics manufacturing services (EMS) provider globally. Its product portfolio includes all the 3C products.

Post mortem We believe Hon Hai has demonstrated its strong execution capability by eliminating costs aggressively and carrying out its moves into inner China plants, although the benefits are still yet to accrue completely. Revenue momentum however, has been disappointing in 2009, weighed down by higher corporate exposure and sharp revenue declines at the handset division, FIH. Apple iPhone momentum, however, has been quite strong in 2009.

Potential for earnings upgrades We expect revenue growth to surprise on upside in 2010, as server and networking should post significant rebound, once corporate demand recovers. Second, iPhone going non-exclusive in key markets should lift shipment outlook significantly, as Hon Hai remains the sole supplier. New initiatives like LCD TV EMS should start coming through in 2010, while FIH also could see a turnaround in revenue momentum as handset orders recover and smartphone ODM business model takes shape. We expect further improvements in OP margins as SG&A expenses and depreciation peak out in 2H09 and 1H10, respectively, while Hon Hai’s earnings power should be helped by much lower tax rates in new facilities.

How much recovery is priced into the stock? The margin recovery is now getting priced in, but revenue momentum should continue to surprise in 2010, in our view. In addition, operating leverage from FIH has also been underestimated by the market.

Price target and key risks Our Jun-10 PT of NT$155 is based on 14x FY10E earnings. Our current target multiple is at the low end of the stock’s historical trading multiple, given top-line growth is not likely to return to the 30+% level. Key risks to our PT include execution issues in new projects; and a delayed corporate IT spending cycle.


Alvin KwockAC (852) 2800-8533 [email protected] J.P. Morgan Securities (Asia Pacific) Limited

Price performance

40

80

120

NT$



Source: Bloomberg.



52-week range (NT$) 45.7-138.5 Mkt cap. (NT$B) 1,132 Mkt cap. (US$B) 34.8 Avg daily value (US$MM) 135.0 Avg daily volume (MM) 39.4 Shares O/S (MM) 8,579 Date of price 5-Nov-09 Index: TWSE 7,417.46 Free float (%) 78 Exchange rate 32.5

Source: Bloomberg. Bloomberg: 2317.TT; Reuters: 2317.TW NT$ in millions, year-end December FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E Sales 1,950 1,951 2,392 2,742 ROE (%) 15 17 17 17 Operating profit 73.3 83.9 111.4 126.9 Core ROIC (%) 14 15 18 19 EBITDA 106.0 124.9 156.7 174.9 DPS (cash, NT$) 2.3 1.0 2.5 3.2 Pre-tax profit 72.6 85.9 114.0 130.1 Quarterly EPS (NT$) 1Q 2Q 3Q 4Q Reported net profit 55.1 68.6 86.8 99.7 EPS (FY08) 1.93 1.43 2.12 1.09 MV of employee bonus 3.4 5.6 7.4 8.6 EPS (FY09E) 1.58 1.76 2.16 2.54 Adjusted net profit 55.1 68.6 86.8 99.7 EPS (FY10E) 2.08 2.25 2.68 3.11 New Taiwan GAAP EPS (NT$)* 6.57 8.05 10.12 11.62 sales growth 15% 0% 23% 15% New Taiwan GAAP P/E (x) 20 16 13 11 EPS growth -5% 22% 26% 15% P/BV (x) 3.1 2.5 2.2 1.9 Norm. OP growth -18% 16% 34% 14% YE BPS (NT$) 42 52 60 68 Net debt (11) net cash net cash net cash Jun-10 PT NT$ 155


175



Hon Hai Precision: Summary of financials NT$ in millions, year-end December

Income statement Ratio Analysis FY08 FY09E FY10E FY11E % FY08 FY09E FY10E FY11ERevenues 1,950.5 1,950.6 2,392.4 2,742.0 Gross Margin 8.8 9.2 9.0 8.7 Cost of Goods Sold 1,779.7 1,771.8 2,177.5 2,502.9 EBITDA margin 5.4 6.4 6.6 6.4 Gross Profit 170.8 178.8 214.9 239.2 Operating margin 3.8 4.3 4.7 4.6 R&D Expenses 23.7 23.6 24.4 26.3 Net profit margin 2.8 3.5 3.6 3.6 SG&A Expenses 71.2 67.4 73.2 79.0 R&D/sales 1.2 1.2 1.0 1.0Operating Profit (EBIT) 73.3 83.9 111.4 126.9 SG&A/Sales 3.6 3.5 3.1 2.9EBITDA 106.0 124.9 156.7 174.9 Interest Income 4.7 0.7 0.9 1.1 Sales growth 14.6 0.0 22.6 14.6 Interest Expense -6.7 -2.8 -2.9 -3.0 EBIT growth (21.6) 14.4 32.8 13.9 Investment Income (Exp.) 2.0 1.6 1.7 1.8 Net profit growth (29.0) 24.5 26.4 14.9 Other Non-Op Income (Exp.) -0.7 2.5 2.9 3.3 EPS (Reported) growth (30.3) 22.5 25.7 14.8 Earnings before tax 72.6 85.9 114.0 130.1 EPS (TW GAAP) growth (5.4) 22.5 25.7 14.8 Tax -15.9 -14.8 -21.1 -22.8 Interest coverage (x) 54 61 78 91Net Income (Reported) 55.1 68.6 86.8 99.7 Net debt to total capital 2.2 -2.8 -6.6 -11.2Net Income (Adjusted) 55.1 68.6 86.8 99.7 Net debt to equity 2.9 -3.6 -8.3 -13.6 EPS (Reported, NT$) 6.57 8.05 10.12 11.62 Asset Turnover 222 192 201 205EPS (Adjusted, NT$) 6.57 8.05 10.12 11.62 Working Capital Turns (X) 14.3 11.1 9.7 8.9 BPS (NT$) 42.36 52.45 60.16 68.47 ROE 15.5 16.9 16.8 16.9 DPS (NT$) 2.27 0.96 2.52 3.19 ROIC 11.9 13.6 13.8 14.2 Shares Outstanding (B) 8.39 8.53 8.58 8.58 ROIC (net of cash) 14.2 16.0 17.3 18.3Balance sheet Cash flow statement FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11ECash and Cash Equivalents 100.0 129.6 168.1 206.8 Net Income 55.1 68.6 86.8 99.7Account Receivables 267.3 332.0 400.2 451.6 Depr. & Amortisation 32.7 41.0 45.3 48.0Inventory 166.7 179.3 216.1 243.9 Change in working capital -0.3 -32.7 -24.7 -18.4Total Other Current Assets 24.7 40.4 48.7 54.9 Other 1.6 2.5 6.1 7.6Total Current Assets 558.7 681.2 833.0 957.3 Cash flow from operations 89.1 79.4 113.5 136.9 LT investments 35.0 55.6 79.3 103.1 Capex -84.1 -32.3 -34.6 -40.5Net fixed assets 253.9 245.3 234.5 227.0 Disposal/ (purchase) 18.9 -23.6 -31.7 -31.8Others 30.9 33.9 41.9 49.9 Cash flow from investing -65.2 -55.9 -66.3 -72.2Total assets 878.6 1,016.0 1,188.8 1,337.2 Free cash flow 5.0 47.1 78.9 96.5 ST Debt 59.9 43.9 43.9 43.9 Equity raised/ (repaid) -3.0 29.2 1.0 0.2Accounts Payable 266.1 325.5 394.1 446.2 Debt raised/ (repaid) -22.7 3.0 11.9 1.3Other Current Liabilities 96.1 96.9 116.8 131.9 Other -22.2 -15.5 6.1 7.5Total Current Liabilities 422.1 466.3 554.9 622.0 Dividends paid -20.4 -10.6 -27.8 -35.0 Cash flow from financing -68.3 6.0 -8.7 -26.0Long Term Debt 50.6 69.6 81.6 82.9 Other Long Term Liabilities 44.7 30.1 36.3 43.9 Net change in cash -44.4 29.6 38.6 38.7Total liabilities 517.5 566.1 672.7 748.7 Beginning cash 144.4 100.0 129.6 168.1Shareholders' equity 361.2 450.0 516.1 588.5 Ending cash 100.0 129.6 168.1 206.8


176



Hyundai Motor Company www.hyundai.com

Overweight W102,000


Company description Hyundai Motor Company (HMC) is the largest auto maker in Korea, with a 50% domestic market share. HMC owns 38% in KIA Motors, the second-largest auto maker in Korea, together dominating over 80% of the Korean market. Post mortem We believe market share gains achieved during the downturn will work as substantial leverage when demand normalizes in the US and Europe. Given geographical revenue exposure and product mix towards less luxury, HMC is favorably positioned to enjoy continued emerging market growth, in our view. On the cost side, reduction in COGS could be most substantial among leading auto makers as platform integration gains momentum. Potential for earnings upgrades Management guidance for 2010 global shipment is 3.3 million, implying a 10% Y/Y growth, versus our assumption of 3.2 million, implying a 7% Y/Y growth. Given high operating leverage, we estimate every 5% change creates +/- 15% swing in operating profit. We do not expect domestic plant volume to surprise on the upside. However, if (1) normalization of the US auto demand takes place faster than expected, and (2) China market’s growth is further fueled by extension of tax incentives, our assumption could prove to be conservative. How much recovery is priced into the stock? After a strong 2009, we expect a 9% Y/Y decline in 2010. We believe this potential pay-back in early 2010 is well known and partially priced in. On the other hand, we have increased shipment growth outlook for most of other global regions. Especially, we believe structural margin recovery in its US business is not priced in and will drive the share price in 2010. Price target and key risks Our Jun-10 base-case price target is based on 12x is W140,000. We apply a 10% premium to the mid-cycle P/E of 11x to derive our target multiple of 12x, given continued RP improvement and long-term value creation from the US market. Key downside risks to our PT include: (1) short-term volatility in FX; and (2) pay back in the domestic market in 1Q10.

South Korea Automobile Manufacture Wansun ParkAC (82-2) 758-5722 [email protected]


Price performance

30,000

70,000110,000

Oct-08 Feb-09 Jun-09 Oct-09HMC KOSPI

W




52-wk range (Won) 35,750-118,000

Mkt cap. (WB) 22,468

Mkt cap. (US$MM) 19,045

Avg daily val (US$MM) 187.6 Avg daily volume (MM) 2.1 Shares O/S (MM) 220.3 Date of price 5-Nov-09 Index: KOSPI 1,552.24 Free float (%) 62.9 Exchange rate 1,179.7

Source: Bloomberg. Bloomberg: 005380. KS; Reuters: 005380 KS Won in billions, year-end December FY08 FY09E FY10E FY11E Sales 32,190 31,058 32,349 33,917 Net profit 1,448 2,989 3,257 3,474 EPS (Won) 5,325 10,993 11,979 12,776 DPS (Won) 1,000 1,000 1,050 1,100 Sales growth (%) 5.6 -3.5 4.2 4.8 Net profit growth (%) -13.9 106.4 9.0 6.7 ROE (%) 8.5 15.6 14.7 13.8 P/E (x) 19.2 9.3 8.5 8.0 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

177



Hyundai Motor Company: Summary of financials Profit and loss statement Won in billions, year-end December FY08 FY09E FY10E FY11ERevenues 32,190 31,058 32,349 33,917

% change Y/Y 5.6 (3.5) 4.2 4.8 COGS 25,059 24,059 24,987 26,144Gross Profit 7,131 6,799 7,362 7,773

Gross Margin (%) 22.2 21.9 22.8 22.9 EBITDA 3,221 3,470 3,582 3,785Operating Profit 1,877 2,113 2,194 2,361

% change Y/Y 3.4 12.6 3.8 7.6 Operating Margin (%) 5.8 6.8 6.8 7.0

Net Interest 203 57 109 152Net equity method gains 21 1,276 1,816 1,830Recurring Profit 1,795 3,810 4,101 4,397Tax 347 821 844 923

as % of recurring profit 19.3 21.5 20.6 21.0 Net Income (Reported) 1,448 2,989 3,257 3,474

% change Y/Y (13.9) 106.4 9.0 6.7 Shares Outstanding (MM) 285 285 285 285EPS (reported) (Won) 5,325 10,993 11,979 12,776Source: Company, J.P. Morgan estimates.

Balance sheet Won in billions, year-end December

FY08 FY09E FY10E FY11ECash and cash equivalents 5,013 4,883 5,945 6,847Accounts receivable 2,513 2,334 2,330 2,465Inventories 1,809 1,729 1,771 1,873Others 965 864 932 986Current assets 10,301 9,810 10,978 12,171 LT investments 10,507 12,851 15,067 17,287Net fixed assets 11,360 11,548 11,627 11,799Total assets 32,168 34,209 37,672 41,257 ST loans 1,688 1,187 1,187 1,187Payables 2,444 2,420 2,610 2,760Others 3,784 3,457 3,728 3,943Total current liabilities 7,915 7,064 7,525 7,891 Long term debt 1,263 1,460 1,457 1,454Other liabilities 3,337 3,219 3,259 3,299Total liabilities 12,515 11,744 12,242 12,644Shareholders' equity 19,652 22,465 25,430 28,613BVPS (Won) 94,103 107,572 121,771 137,008Source: Company, J.P. Morgan estimates.

Cash flow statement Won in billions, year-end December

FY08 FY09E FY10E FY11EOperating profit 1,877 2,113 2,194 2,361Depreciation & amortization 1,344 1,356 1,387 1,424Change in working capital -1,059 11 354 75Taxes 347 821 844 923Cash flow from operations 2,024 3,248 3,601 3,616 Capex -1,495 -1,677 -1,845 -2,029Disposal/ (purchase) -841 -1,161 -400 -390Net Interest 203 57 109 152Free cash flow -312 409 1,356 1,197 Equity raised/ (repaid) 0 0 0 0Debt raised/ (repaid) 1,105 -304 -3 -3 Dividends paid -276 -236 -292 -292Beginning cash 4,496 5,013 4,883 5,945Ending cash 5,013 4,883 5,945 6,847DPS (Won) 1,000 1,000 1,050 1,100Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December FY08 FY09E FY10E FY11EGross margin (%) 22.2 21.9 22.8 22.9 Operating margin (%) 5.8 6.8 6.8 7.0 Net profit margin (%) 4.5 9.6 10.1 10.2 SG&A/sales (%) 16.3 15.1 16.0 16.0 Sales growth (%) 5.6 (3.5) 4.2 4.8 Operating profit growth (%) 3.4 12.6 3.8 7.6 Net profit growth (%) (13.9) 106.4 9.0 6.7 Interest coverage (x) (9.3) (36.9) (20.1) (15.6)Net debt to total capital (%) (11.7) (11.1) (14.9) (17.2)Net debt to equity (%) (10.5) (10.0) (13.0) (14.7)Sales/assets (x) 1.0 0.9 0.9 0.8 Assets/equity (x) 1.6 1.5 1.5 1.4 ROE (%) 8.5 15.6 14.7 13.8 ROCE (%) 12.8 12.4 11.4 11.0 Source: Company, J.P. Morgan estimates.

178



ICICI Bank www.icicibank.com

Overweight Rs845

Company description ICICI Bank is the second-largest bank in India with a market share of ~10%. It enjoys a leading market share in most retail loan segments. After the ~38% credit CAGR over FY04-08, ICICI is currently in a consolidation phase with a larger focus on profitability than growth.

Post mortem ICICI has rightly over the past six quarters slowed down on growth with greater emphasis on profitability. ICICI has been able to show considerable success in building a stronger liability franchise (~1,000bp increase in CASA), bringing costs under control (down ~30%) and stabilize asset quality. With improving CASA, lower operating costs and a lesser riskier asset portfolio, core ROAs are expected to show a significant improvement.

Potential for earnings upgrades With ICICI continuing with its cautious approach on credit growth, we believe stabilizing asset quality, lower slippages and credit costs could lead to potential earnings upgrade. We expect profitability for its international subsidiaries to improve as global economy recovers. Also, robust capital markets could provide upside potential through the listing of the insurance arm and strong earnings from the flow business.

How much recovery is priced into the stock? ICICI has recovered 3x from its March lows (0.5x one-year forward book- distress case scenario) and is currently trading at ~1.7x 1-year forward book. We believe the stock is currently pricing in an improving economic scenario but a revival in credit demand and lower slippages earnings can surprise positively.

Recommendation and key risks We have an Overweight recommendation on ICICI with significant improvement expected in core ROAs. Key risks to our recommendation are slower-than-expected credit growth revival and higher-than-expected slippages.

India Banks Sunil GargAC (852) 2800-8518 [email protected]


Price performance

050

100150200250300

Nov-

08

Feb-

09

May

-09

Aug-

09

Nov-

09

ICICI Sensex

Source: Bloomberg.


Absolute (%) -7 9 87 Relative (%) -3 8 29

Source: Bloomberg.

Company data 52-week range (Rs) 252-971 Mkt cap. (RsMM) 904,710 Mkt cap. (US$MM) 19,249 Avg daily value (US$MM) 105.1 Avg daily volume (MM) 7,200 Shares O/S (MM) 1113.7 Date of price 5-Nov-09 Free float (%) 96 Exchange rate Rs/US$ 47

Source: Bloomberg, J.P. Morgan estimates.

Bloomberg: ICICIBC IN; Reuters: ICB.BO Rs in millions, year-end March

FY05 FY06 FY07 FY08 FY09 Net profit 20,052 25,401 31,100 41,581 37,581 Basic EPS (rep'd) (Rs) 29.6 31.2 34.8 41.3 33.8 Basic EPS growth (%) 11.3 5.4 11.3 18.9 -18.3 P/E (basic) (x) 27.7 26.3 23.6 19.8 24.3 BVPS (Rs) 170.3 249.6 270.4 417.5 444.9 P/BV (x) 4.8 3.3 3.0 2.0 1.8 ROE (%) 19.5 14.6 13.4 11.7 7.8 Tier 1 ratio (%) 7.6 9.2 7.4 11.8 11.8 DPS (Rs) 8.5 8.5 10.0 11.0 11.0 Dividend yield (%) 1 1 1 1 1 Source: Company, Bloomberg, J.P. Morgan estimates. Share price as of 5 November, 2009.

179



ICICI Bank: Summary of financials


180



Info Edge India www.infoedge.in

Overweight Rs703

Price Target: Rs900

Company description Info Edge operates India’s leading online recruitment and classifieds portal (Naukri.com) launched in 1997 and forms the backbone of Info Edge’s business. It also generates revenue through a matrimony portal (Jeevansathi.com) and a property portal (99acres.com)—which are still in the development phase. It also has recently launched an education portal, Shiksha.com. Post mortem Info Edge’s revenue growth is leveraged to the hiring cycle in Indian IT and infrastructure sectors. The slowdown in the domestic economy impacted the revenue growth over the past year as companies reduced hiring levels. Potential for earnings upgrades We believe Info Edge is a late-cycle play on the economic recovery in India. We expect revenue growth to be driven by a recovery in domestic economy and Indian IT companies looking at hiring significant number of people over the next one-two years. With higher operating leverage and lower losses in other segments, earnings growth recovery should be sharper. Moreover, with competition potentially more impacted over the past two-three quarters, we believe Info Edge can gain market share as the recruitment segment recovers. How much recovery is priced into the stock? We estimate revenue/EPS CAGR of 27%/28% in FY10-12. We expect the stock price to track the earnings recovery over the next 9-12 months, driving our positive view on the stock. Price target and key risks Our Jun-10 price target of Rs900 is based on 30x one-year forward Jun-10E EPS—in line with the historical trading range. While valuations are not cheap, we note that global internet stocks trade at high valuations due to inherent operating leverage in the business model. Key downside risks to our price target are a decline in the overall economic recovery leading to lower recruitment than expected and a drop in market share due to increased competition across sites.

India Internet Nishit JasaniAC (91-22) 6157-3578 [email protected]


Price performance

020406080

100120

Jan-

08Fe

b-08

Mar

-08

Apr-0

8M

ay-0

8Ju

n-08

Jul-0

8Au

g-08

Sep-

08Oc

t-08

Nov-

08De

c-08

Jan-

09Fe

b-09

Mar

-09

Apr-0

9M

ay-0

9Ju

n-09

Jul-0

9Au

g-09

Sep-

09Oc

t-09

Nov-

09

Info Edge Sensex (rebased)

Source: Bloomberg.


Source: Bloomberg.

Company data 52-week range (Rs) 376-813 Mkt cap. (RsB) 19.2 Mkt cap. (US$MM) 408.0 Avg daily value (US$MM) 0.3 Avg daily volume (MM) 0.02 Shares O/S (MM) 27 Date of price 5-11-09 Index: Sensex 16063.9 Free float (%) 46 Exchange rate Rs47.0/US$

Source: Bloomberg,

Bloomberg: INFOE IN; Reuters: INED.BO Rs in millions, year-end March FY09 FY10E FY11E FY12E Sales 2,452 2,268 2,866 3,645 Net profit 597 575 749 944 EPS (Rs) 21.9 21.1 27.4 34.6 FD EPS (Rs) 21.9 21.1 27.4 34.6 DPS (Rs) 0.0 0.0 0.0 0.0 Sales growth (%) 12.0 -7.5 26.4 27.2 Net profit growth (%) 7.6 -3.7 30.3 26.0 EPS growth (%) 7.6 -3.7 30.3 26.0 ROE (%) 20.1 16.2 17.7 18.6 P/E (x) 32.2 33.4 25.6 20.3 FD P/E (x) 32.2 33.4 25.6 20.3 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

181



Info Edge India: Summary of financials Profit and loss statement Rs in millions, year-end March

FY09 FY10E FY11E FY12ERevenue 2,452 2,268 2,866 3,645% change Y/Y 12.0 -7.5 26.4 27.2Gross margin (%) n.m. n.m. n.m. n.m.EBITDA 669 597 867 1094% change Y/Y 5.5 -10.8 45.2 26.2EBITDA margin (%) 27.3 26.3 30.2 30.0EBIT 598 527 776 983% change Y/Y 3.3 -12.0 47.3 26.7EBIT margin (%) 24.4 23.2 27.1 27.0Net interest (17) 135 302 375 Earnings before tax 867 845 1,078 1,358% change Y/Y 10.3 -2.5 27.5 26.0Tax 270 271 329 414as % of EBT 31.2 32.0 30.5 30.5Net income (reported) 597 575 749 944% change Y/Y 7.6 -3.7 30.3 26.0Shares O/S (MM) 27 27 27 27EPS (reported) (Rs) 21.9 21.1 27.4 34.6Source: Company, J.P. Morgan estimates.


FY09 FY10E FY11E FY12ECash and cash equivalents 3,373 3,884 4,707 5,917Accounts receivable 38 40 53 65Inventories 0 0 0 0Others 185 298 380 461Current assets 3,596 4,222 5,140 6,442LT investments 57 16 16 16Net fixed assets 384 381 390 379Total assets 4,037 4,620 5,547 6,837Liabilities ST loans 0 0 0 0Payables 61 61 80 98Others 705 708 867 1,195Total current liabilities 766 769 947 1,294Long-term debt 3 5 5 5Other liabilities 0 0 0 0Total liabilities 769 773 952 1,298Shareholders’ equity 3,267 3,846 4,595 5,539BVPS (Rs) 119.7 140.9 168.4 202.9Source: Company, J.P. Morgan estimates.

Cash flow statement Rs in millions, year-end March

FY09 FY10E FY11E FY12EEBIT 598 527 776 983Depreciation & amortization 71 70 91 111Change in working capital -297 -102 84 255Taxes 270 271 329 414Cash flow from operations 371 543 924 1,309Capex -74 -67 -100 -100Disposal/(purchase) 371 543 924 1,309Net interest (17) 135 302 375 Free cash flow 297 476 824 1,209Equity raised/(repaid) 0 0 0 0Debt raised/(repaid) -1 2 0 0Other -11 4 0 0Dividends 0 0 0 0Beginning cash 3,119 3,373 3,884 4,707Ending cash 3,373 3,884 4,707 5,917DPS (Rs) 0.0 0.0 0.0 0.0Source: Company, J.P. Morgan estimates.

Ratio analysis Rs in millions, year-end March

FY09 FY10E FY11E FY12EEBITDA margin 27.3 26.3 30.2 30.0Operating margin 24.4 23.2 27.1 27.0Net profit margin 24.3 25.3 26.1 25.9SG&A/sales 17.7 17.9 17.3 17.0Sales growth 12.0 -7.5 26.4 27.2Net profit growth 7.6 -3.7 30.3 26.0Sales per share growth 12.0 -7.5 26.4 27.2EPS growth 7.6 -3.7 30.3 26.0Interest coverage (x) 34.7 52.0 68.3 86.5Net debt to total capital n.m. n.m. n.m. n.m.Net debt to equity n.m. n.m. n.m. n.m.Sales/assets 61.0 49.4 52.0 53.5EBIT margin 24.4 23.2 27.1 27.0ROCE 14.2 10.3 13.1 13.8Assets/equity (x) 1.2 1.2 1.2 1.2ROI n.m. n.m. n.m. n.m.ROE 20.1 16.2 17.7 18.6Source: Company, J.P. Morgan estimates.

182



Infosys Technologies www.infosys.com

Overweight Rs2,222


Company description Infosys is the bellwether stock in the Indian IT Services space with a revenue of US$4.7 billion in FY09. The company provides an array of services including application development and maintenance, package implementation, testing, BPO and consulting to 550+ clients. Infosys has 100,000+ employees and provides services across several verticals including the financial, manufacturing, telecom and retail sectors.

Post mortem Infosys has shown the anti-cyclical nature of the offshore industry over the past year with revenue still holding on despite the sharp fall in technology spending globally. In fact, there has been an increased move towards offshoring due to lower IT budgets and the pressure on CIOs to cut costs. Stability in global economies combined with the improved outlook of the financial sector has started to help Infosys and we expect growth to accelerate in 2010.

Potential for earnings upgrades Consensus FY10/11 EPS estimates for Infosys have moved up from ~Rs98/105 in the beginning of the year to ~Rs104/115 currently. While FY10 estimates might not increase from here, we expect further ~5-10% upgrades for FY11/12.

How much recovery is priced into the stock? While consensus estimates would move up further, we think valuations at FY11E P/E of 18x has already discounted most of the upside. Further, we believe that it will be difficult for Infosys to grow in excess of 20% given the huge base and our view that IT services spending growth will lag hardware and software in 2010.

Price target and key risks Our Jun-10 price target of Rs2,550 is based on a one-year forward P/E multiple of 19x—in line with target P/E multiples for TCS/Wipro and higher than the historical average for the past four-five years. Key risks to our price target are rupee/US$ appreciation and protectionism.

India IT Services Manoj SinglaAC (+91-22) 6157-3587 [email protected]


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Infosy s Sensex (rebased)

Source: Bloomberg.


Absolute (%) -4.4 5.9 68.1 Relative (%) 0.4 4.8 5.9

Source: Bloomberg.

Company data 52-week range (Rs) 1,065-2,421 Mkt cap. (RsB) 1,272.1 Mkt cap. (US$B) 27.0 Avg daily value (US$MM) 72.35 Avg daily volume (MM) 1.8 Shares O/S (MM) 573 Date of price 5-11-09 Index: Sensex 16063.9 Free float (%) 84 Exchange rate Rs47.8/US$

Source: Bloomberg.

Bloomberg: INFO IN; Reuters: INFY.BO Rs in millions, year-end March FY09 FY10E FY11E FY12E Sales 216,823 224,215 265,974 321,417 Net profit 58,411 61,256 71,188 83,844 EPS (Rs) 102.0 107.0 124.3 146.4 FD EPS (Rs) 102.0 107.0 124.3 146.4 DPS (Rs) 23.5 30.0 30.0 30.0 Sales growth (%) 29.9 3.4 18.6 20.8 Net profit growth (%) 30.1 4.9 16.2 17.8 EPS growth (%) 29.8 4.8 16.2 17.8 ROE (%) 32.6 29.9 28.7 27.4 P/E (x) 21.8 20.8 17.9 15.2 FD P/E (x) 21.8 20.8 17.9 15.2 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

183



Infosys Technologies: Summary of financials Profit and loss statement Rs in millions, year-end March

FY09 FY10E FY11E FY12ERevenue 216,823 224,215 265,974 321,417% change Y/Y 29.9 3.4 18.6 20.8Gross margin (%) 42.2 42.0 41.4 40.2EBITDA 71463 75350 88031 102967% change Y/Y 37.6 5.4 16.8 17.0EBITDA margin (%) 33.0 33.6 33.1 32.0EBIT 63,853 66,440 78,308 91,257% change Y/Y 38.9 4.1 17.9 16.5EBIT margin (%) 29.4 29.6 29.4 28.4Net interest 4,791 9,156 9,368 10,457 Earnings before tax 68,594 76,789 91,266 107,492% change Y/Y 29.4 11.9 18.9 17.8Tax 10,183 15,533 20,079 23,648as % of EBT 14.8 20.2 22.0 22.0Net income (reported) 58,411 61,256 71,188 83,844% change Y/Y 30.1 4.9 16.2 17.8Shares O/S (MM) 573 573 573 573EPS (reported) (INR) 102.0 107.0 124.3 146.4Source: Company, J.P. Morgan estimates.


FY09 FY10E FY11E FY12ECash and cash equivalents 109,910 129,886 164,698 215,765Accounts receivable 36,721 36,505 45,949 54,313Inventories 0 0 0 0Others 11,615 22,973 28,916 34,179Current assets 158,246 189,363 239,564 304,257LT investments 0 460 1,380 2,300Net fixed assets 46,662 41,483 42,800 42,130Total assets 221,951 249,108 301,546 366,489Liabilities ST loans 0 0 0 0Payables 254 102 129 157Others 26,983 23,781 25,102 26,271Total current liabilities 27,237 23,883 25,231 26,428Long-term debt 0 0 0 0Other liabilities 2,790 2,576 2,576 2,576Total liabilities 30,026 26,459 27,807 29,004Shareholders’ equity 191,924 222,649 273,738 337,485BVPS (INR) 335.2 388.8 478.1 589.4Source: Company, J.P. Morgan estimates.


FY09 FY10E FY11E FY12EEBIT 63,853 66,440 78,308 91,257Depreciation & amortization 7,610 8,911 9,723 11,710Change in working capital -3,050 -14,495 -14,040 -12,430Taxes 10,183 15,533 20,079 23,648Cash flow from operations 62,970 55,672 66,870 83,124Capex -13,372 -3,731 -11,040 -11,040Disposal/(purchase) 62,970 55,672 66,870 83,124Net interest 4,791 9,156 9,368 10,457 Free cash flow 49,598 51,941 55,830 72,084Equity raised/(repaid) -9,817 -13,085 -2,920 -2,920Debt raised/(repaid) 0 0 0 0Other 2,349 -214 0 0Dividends -13,147 -17,447 -17,178 -17,178Beginning cash 83,082 86,723 113,001 143,288Ending cash 109,910 129,886 164,698 215,765DPS (Rs) 23.5 30.0 30.0 30.0Source: Company, J.P. Morgan estimates.


FY09 FY10E FY11E FY12EEBITDA margin 33.0 33.6 33.1 32.0Operating margin 29.4 29.6 29.4 28.4Net profit margin 26.9 27.3 26.8 26.1SG&A/sales 12.8 12.4 12.0 11.8Sales growth 29.9 3.4 18.6 20.8Net profit growth 30.1 4.9 16.2 17.8Sales per share growth 29.7 3.4 18.6 20.8EPS growth 29.8 4.8 16.2 17.8Interest coverage (x) n.m. n.m. n.m. n.m.Net debt to total capital n.m. n.m. n.m. n.m.Net debt to equity n.m. n.m. n.m. n.m.Sales/assets 97.7 90.0 88.2 87.7EBIT margin 29.4 29.6 29.4 28.4ROCE 30.7 26.3 25.0 23.8Assets/equity (x) 1.2 1.1 1.1 1.1ROI 54.4 49.2 49.5 50.4ROE 32.6 29.9 28.7 27.4Source: Company, J.P. Morgan estimates.

184



JD Group www.jdgroup.co.za



Company description JD Group is a credit-based furniture retailer with eight chains in Southern Africa and one in Poland.

Post mortem a) Sharp earnings recovery off a depressed base: We expect the retailer’s core operating margin (traditional retail and financial services) to come in at c7% FY09E. This is well below the long-run average (14 years) of c14% and well off peak levels (c21%). b) Significant value unlock potential: We see opportunity for group RoE to improve from c10% FY08 to c30% over the medium term, driven by: i) margin recovery through stronger sales and lower bad debts, and ii) improved capital management in financial services.

Potential for earnings upgrades We see lower bad debts as a key earnings driver over the medium term – normalising to a bad debt ratio of c12% (from c23 H1 09).

How much recovery is priced into the stock? The share is priced on a 12m fwd P/E of 6.9x (33% discount to its historical rating), and at a 40% discount to the clothing retailers at 11.5x. In our view, its 12-month P/NAV rating of 1.3x is also not demanding; trading well below its historical average of 2.0x.

Price target and key risks Our May-10 PT of 5,253c is based on our SOTP P/E-based valuation. Risks include: sharper slowdown in volume growth and higher bad debts; stronger volume growth and better than expected control over costs; and corporate action which could potentially unlock significant value.

South Africa Speciality Retailing Sean HolmesAC (27-11) 507 0373 [email protected]


2,500

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4,500

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Price Performance

Source: Bloomberg


Absolute (%) 3.3 6.3 51.8 Source: Bloomberg

Company data Price(c) 4,570 Date of Price 23-Nov-09 Price Target (c) 5,253 Price Target End Date 31-May-10 52-week Range (c) 5,020 – 2,600 Mkt Cap (Rbn) 8.23 Shares O/S (mn) 180


Bloomberg: JDG SJ; Reuters: JDGJ.J Rand millions, year-end Aug

FY08 FY09E FY10E FY11E Sales 12,610 12,643 13,312 14,587 Net profit 514 192 986 1,283 FD EPS (SAcps) 298.27 116.47 597.06 776.84 DPS (SAcps) 152.00 67.67 302.40 393.45 Sales growth (%) -2.4 0.3 5.3 9.6 Net profit growth (%) -53.8 -62.6 412.6 30.1 EPS growth (%) -51.1 61.0 412.6 30.1 ROE (%) 10.4 4.0 18.8 21.8 FD P/E (x) 15.3 39.2 7.7 5.9


185



JD Group: Summary of Financials Income Statement Cash Flow Statement R in millions, year end Aug FY07 FY08 FY09E FY10E FY11E R in millions, year end Aug FY07 FY08 FY09E FY10E FY11E Sales 12,914 12,610 12,643 13,312 14,587 Cash flow from operating activities 715 1,253 136 555 723% YOY Change 8.2% (2.4%) 0.3% 5.3% 9.6% Cash flow from investing activities - - - - -Revenue - - - - - Cash flow from financing activities - - - - -% YOY Change - - - - - Net increase / (decrease) in cash - - - - -Operating Costs - - - - - Foreign exchange differences - - - - -% YOY Change - - - - - Cash at beginning of year - - - - -Bad Debts - - - - - Cash at end of year - - - - -% YOY Change - - - - - Operating Profit 1,591 797 871 1,493 1,897 Ratio Analysis % YOY Change -21.4% -49.9% 9.3% 71.4% 27.1% Taxation (398) (215) (544) (442) (587) Per Share Data Effective Tax rate 26.3% 29.5% 71.9% 30.5% 31.0% Diluted HEPS (cps) 609.80 298.27 116.47 597.06 776.84Net Profit after tax 1,113 514 192 986 1,283 % YOY Change (24.0%) (51.1%) (61.0%) 412.6% 30.1%% YOY Change (23.6%) (53.8%) (62.6%) 412.6% 30.1% DPS (cps) 303.00 152.00 67.69 302.40 393.45Headline Earnings - - - - - % YOY Change - - - - -% YOY Change - - - - - Dividend cover - - - - - NAV per share (cps) 2,838.2 2,834.5 3,001.8 3,392.4 3,802.0Balance sheet R in millions, year end Aug FY07 FY08 FY09E FY10E FY11E Profitability GP Margin - - - - -ASSETS Operating Margin - - - - -Total Non current assets - - - - - Operating costs/Revenue - - - - -Inventory - - - - - % YOY Change - - - - - Trading Densities Trade Debtors - - - - - Revenue per sqm - - - - -% YOY Change - - - - - Operating profit per sqm - - - - -Other current assets - - - - - Cash and Cash equivalents 975 1,135 1,095 1,349 1,472 Return Ratios Total Current assets - - - - - ROE 20.9% 10.4% 4.0% 18.8% 21.8%Total Assets 8,891 8,673 9,188 10,290 11,489 ROA 11.7% 5.9% 2.2% 10.1% 11.8% ROIC 35.2% 18.9% 25.8% 29.8% 25.8%EQUITY Ordinary Shareholders Equity 5,048 4,813 4,913 5,553 6,223 Capital Management Minority Interest - - 71 93 117 Net interest bearing debt/Equity - - - - -Total Equity 5,048 4,813 4,984 5,646 6,340 Net interest bearing debt/EBIT - - - - - Interest bearing liabilities - - - - - Credit Management Other non current liabilities - - - - - Total bad debts/Avg gross debtors - - - - -Total non current liabilities - - - - - Liquidity Trade accounts payable - - - - - Current Assets : Current Liabilities - - - - -Other current liabilities - - - - - Current Assets less Inventory : Current Liabilities - - - - -Total current liabilities - - - - - Total Liabilities 3,843 3,860 4,204 4,645 5,149 Source: Company reports and J.P. Morgan estimates.

186



Land & Houses www.lh.co.th



Company description Land & Houses (LH) is the largest residential developer in Thailand. LH has a pre-built single detached housing (SDH) model, and a very broad product range, from middle to upper end of the market. It has the largest share in the single-detached housing market and a significant presence in the townhouse market. Revenue from developing condominiums is still small relative to its peers, but is set to rise.

Post mortem Following the blow-out in global financial market in late FY08, consumer confidence slumped and access to bank credit tightened, causing a sharp cut-back in new property supply and demand. Hence, leading developers, such as LH, have gained market share. With improving demand, driven by low deposit returns, low mortgage rates, and improved availability of mortgages, pricing power has improved. Further, costs are falling as high priced materials inventory is depleted, boosting profit margins. With large banks, such as SCB, continuing to favor LH for both development and mortgage credits, market position is likely to strengthen in 2010.

Potential for earnings upgrades Short lead time of the pre-built model and a lengthening launch pipeline suggests that LH will be able to generate additional revenue upside in 2010/11, while a changing higher product mix should boost margin. Financial leverage to higher interest costs is low given a 49% gearing ratio.

How much recovery is priced into the stock? LH trades on a mid-range P/E of 17.2x, with an understated E, in our view. Historically, LH has traded up to 26x-30x in previous recoveries.

Price target and key risks Our Dec-10 PT of Bt8 is based on 21.7x FY10E EPS. The target P/E is based on the historical P/E average of LH during the three-year period from FY06-08. Key risks to our PT include consumer confidence, volatility in construction cost, and the job market.

Thailand Property Anne JirajariyavechAC (66-2) 684-2684 [email protected]


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LHf.BK share price (Bt)SET (rebased)

Bt

Source: Bloomberg.

Performance 1M 3M 12M Absolute (%) -12.5 -3.1 58.3 Relative (%) -7.4 -9.6 9.2

Source: Bloomberg.

Company data 52-week range (Bt) 2.56-7.75 Mkt cap. (BtMM) 63,163 Mkt cap. (US$MM) 1,892 Avg daily value (US$MM) 8.1 Avg daily volume (MM) 46.9 Shares O/S (MM) 10,026 Date of price 5-Nov-09 Index: SET 682 Free float (%) 51 Exchange rate 33.38

Source: Bloomberg.

Bloomberg: LH TB; Reuters: LHf.BK Bt in millions, year-end December FY08 FY09E FY10E FY11E Revenue 15,410 16,910 17,535 20,656 Net profit 3,428 3,567 3,671 4,383 EPS (Bt) 0.34 0.36 0.37 0.44 DPS (Bt) 0.34 0.36 0.37 0.44 Revenue growth (%) -14.0 7.8 3.8 16.8 EPS growth (%) -6.1 4.1 2.9 19.4 ROCE (%) 11.2 11.9 12.5 15.3 ROE (%) 13.7 13.7 14.1 16.9 P/E (x) 18.4 17.7 17.2 14.4 P/BV (x) 2.4 2.4 2.4 2.4 Dividend Yield (%) 5.4 5.6 5.8 6.9 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009. We raised our PT to Bt9.5 on 13 Nov 2009.

187



Land & Houses: Summary of financials Bt in millions, year-end December

Profit and Loss Statement Cash flow statement FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E Revenues 15,410 16,910 17,535 20,656 EBIT 4,490 5,003 5,122 6,063

% change Y/Y (14.0%) 7.8% 3.8% 16.8% Depr. & amortization 316 316 316 316EBIT 4,490 5,003 5,122 6,063 Change in working capital -1,954 1,260 533 -347

% change Y/Y 3.2% 11.4% 2.4% 18.4% Tax -927 -1229 -1266 -1516EBIT margin (%) 26.4% 27.3% 27.0% 27.3% Cash flow from operations 153 5,229 4,590 4,616

Net Interest - - - - Earnings before tax 4,366 4,529 4,669 5,631 Capex -169 -206 -125 -194

% change Y/Y 6.2% 3.7% 3.1% 20.6% Disposal/(purchase) - - - -Tax -927 -1,229 -1,266 -1,516 Net Interest - - - -

as % of EBT 110.1% 117.5% 116.5% 113.3% Free cash flow -15 5,023 4,465 4,422Net income (reported) 3,428 3,567 3,671 4,383

% change Y/Y 8.5% 4.1% 2.9% 19.4% Equity raised/(repaid) 2,720 -1 0 0Core net profit 3,506 3,367 3,471 4,183 Debt raised/(repaid) 2,339 0 -2,500 0

% change Y/Y 12.9% -4.0% 3.1% 20.5% Other 0 0 0 0Shares outstanding 10,026 10,026 10,026 10,026 Dividends paid -3,946 -3,567 -3,671 -4,383EPS (reported) (Bt) 0.34 0.36 0.37 0.44 Beginning cash 1,027 1,233 2,687 907

% change Y/Y (6.1%) 4.1% 2.9% 19.4% Ending cash 1,233 2,687 907 747Core EPS (Bt) 0.35 0.34 0.35 0.42 DPS (Bt) 0.34 0.36 0.37 0.44

% change Y/Y -2.3% -4.0% 3.1% 20.5% Balance sheet Ratio analysis FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E Cash and cash equivalents 1,233 2,687 907 747 EBIT Margin 26.4% 27.3% 27.0% 27.3%Accounts receivable 10 10 10 10 Operating margin 26.91% 26.23% 25.90% 26.41%Inventories 24,303 23,166 22,762 23,238 Net margin 20.2% 19.5% 19.3% 19.7%Others 384 384 384 384 Current assets 25,931 26,247 24,063 24,380 Sales per share growth (25.6%) 7.8% 3.8% 16.8%LT investments 11,335 11,335 11,335 11,335 Sales growth (14.0%) 7.8% 3.8% 16.8%Net fixed assets 8,891 8,574 8,258 7,942 Net profit growth 8.5% 4.1% 2.9% 19.4%Total Assets 46,156 46,156 43,656 43,656 EPS growth (6.1%) 4.1% 2.9% 19.4% Liabilities Interest coverage (x) - - - -ST Loans 4,433 4,433 4,433 4,433 Net debt to total capital 37.3% 32.0% 31.2% 32.6%Payables 1,353 1,353 1,353 1,353 Net debt to equity 59.7% 51.8% 49.1% 49.7%Others 1,324 1,324 1,324 1,324 Sales/assets 0.39 0.40 0.42 0.51Total current liabilities 7,111 7,111 7,111 7,111 Assets/equity 1.78 1.76 1.58 1.56Long-term debt 11,709 11,709 9,209 9,209 ROE 13.7% 13.7% 14.1% 16.9%Other liabilities 197 197 197 197 ROCE 11.2% 11.9% 12.5% 15.3%Total Liabilities 19,017 19,017 16,517 16,517 Minorities 1,183 1,183 1,183 1,183 Shareholders' equity 25,957 25,957 25,957 25,957 BVPS (Bt) 2.59 2.59 2.59 2.59 Source: Company reports and J.P. Morgan estimates.

188



Larsen & Toubro www.larsentoubro.com

Neutral Rs1,542.3


Company description L&T is a well established E&C company with businesses across verticals- infrastructure, metals, power, hydrocarbons etc. It has a heavy engineering and electricals business as well, and is capable of doing large turnkey projects from design to fabrication, construction and installation. L&T has forayed into finance, IT and infrastructure development, and now views these as core areas as well. L&T is professionally managed, with employee trust owning 12.7% of the shares, rest is held by institutions. Management is ambitious and has rightly identified growth areas from time to time, the most recent being power plant equipment in direct competition to BHEL.

Post mortem L&T has reported weak execution in 1H, although order inflows picked up substantially over the last 3 months mainly on the back of large power equipment and hydrocarbon orders. Post downturn, L&T has raised US$600MM equity funds for growth plans through the QIP and FCCB route.

Potential for earnings upgrades The current OB is strong and supports our revenue estimates through 1Q FY12. We, however, believe potential for near-term upgrades is limited. Reasons: A) asking rate of top-line growth, at ~18% for balance FY10, already implies a sharp pick-up in execution and growth, especially the hitherto slow-moving projects. B) E&C margins are already close to their all-time high. However, we expect the markets to react positively to any substantial pick-up in order flows, which should make it positive on FY12.

How much recovery is priced into the stock? Order flows were exceptionally strong in 2Q FY10. Management has generated expectations of continuation of these order flows—markets currently not believing it. Any signs of these big orders should be a key driver.

Price target and key risks Our SOTP-based Sep-10 PT at Rs1,675 (parent business: Rs1,413/share; balance contributed by subsidiaries: Rs172/share; and investments: Rs90/share) implies 24.8x FY11E EPS. Although expensive at 22.3x FY11E, continued order flow momentum will likely provide valuation support. Weak inflows and execution are key risks to our PT.

India Engineering Shilpa KrishnanAC (91-22) 6157-3580 [email protected]


Price performance Rs

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Source: Bloomberg.


Absolute (%) (9) (0) 75 Relative (%) (2) 1 20

Source: Bloomberg.

Company data 52-week range (Rs) 557-1800 Mkt cap. (RsB) 903 Mkt cap. (US$B) 19.0 Avg daily value (US$MM) 73.9 Avg daily volume (MM) 2.2 Shares O/S (MM) 598.9 Date of price 5-Nov-09 Index: BSE 16,064 Free float (%) 78% Exchange rate (Rs/US$) 47.4

Source: Bloomberg.

Bloomberg: LT.IN; Reuters: LART.BO Rs in millions, year-end March FY09 FY10E FY11E FY12E Net sales 404,799 446,638 523,403 633,367 Net profit 30,004 33,755 39,576 47,655 Consolidated EPS (Rs) 51.2 57.6 67.6 81.4 Net sales growth (%) 37.4 10.3 17.2 21.0 Net profit growth (%) 31.0 12.5 17.2 20.4 ROE (%) 28.3 29.1 17.9 18.0 ROCE (%) 16.1 15.2 15.3 16.9 P/E (x) 29.4 26.2 22.3 18.5 P/BV (x) 5.9 4.4 3.7 3.1 EV/EBITDA (x) 21.6 17.5 15.1 12.7 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

189



Larsen & Toubro: Summary of financials Profit and loss statement Rs in millions, year-end March

FY09 FY10E FY11E FY12ERevenues 404,799 446,638 523,403 633,367

% change Y/Y 37% 10% 17% 21%EBITDA 49,587 62,912 71,151 86,684

% change Y/Y 34% 27% 13% 22%EBITDA Margin (%) 12% 14% 14% 14%

EBIT 42,303 54,467 61,969 76,702% change Y/Y 32% 29% 14% 24%EBIT Margin (%) 10% 12% 12% 12%

Net Interest 1,134 (3,725) (2,462) (5,828)Earnings before tax 43,437 50,742 59,507 70,874

% change Y/Y 28% 17% 17% 19%Tax (14,257) (16,987) (19,932) (23,219)

as % of EBT 33% 33% 33% 33%Net Income (pre exceptionals) 30,004 33,755 39,576 47,655

% change Y/Y 31% 13% 17% 20%Shares Outstanding 585.7 585.7 585.7 585.7EPS (pre exceptionals) (Rs) 51.2 57.6 67.6 81.4

% change Y/Y 31% 13% 17% 20%Source: Company, J.P. Morgan estimates.


FY09 FY10E FY11E FY12ECash and cash equivalents 14,590 8,139 10,490 8,478 Net Current assets 116,935 156,872 163,210 212,082Investments 68055 87053 97662 108889Gross Fixed assets 186,388 202,822 208,761 225,772Acc. Depreciation 30,497 27,596 32,807 39,028Net Block 155,891 175,226 175,954 186,745Total assets 355,472 427,289 447,316 516,194 Liabilities Secured Loans 104,949 134,794 110,380 125,764 Unsecured Loans 98,751 89,899 94,765 100,604 Deferred Tax Liability 1,308 921 921 921 Share holder's Funds 150,463 201,674 241,249 288,904 Capital 1,171 1,171 1,171 1,171 Reserves and Surplus 149,291 200,502 240,078 287,733 BVPS (Rs) 257 344 412 493 Source: Company, J.P. Morgan estimates.


FY09 FY10E FY11E FY12EEBIT 42,303 54,467 61,969 76,702 Depreciation & amortisation 7,283 8,444 9,182 9,982 Change in working capital (31,386) (39,937) (6,339) (48,872)Taxes (14,257) (16,987) (19,932) (23,219)Others 8,204 2,386 (6,433) (9,589)Cash flow from operations 12,148 8,374 38,448 5,003 Capex (77,120) (16,434) (5,939) (17,011)Investments (12,531) (18,998) (10,609) (11,227)Free cash flow (77,504) (27,058) 21,900 (23,235) Equity raised/ (repaid) 587 0 0 0 Debt raised/ (repaid) 80,632 20,606 (19,548) 21,223 Dividends paid (5,556) 0 0 0 Beginning cash 15,608 14,590 8,139 10,490 Ending cash 14,590 8,143 10,495 8,484 Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end March FY09 FY10E FY11E FY12EEBITDA margin 12% 14% 14% 14% Net profit margin 7% 8% 8% 8% Sales growth 37% 10% 17% 21%Net profit growth 31% 13% 17% 20%EPS growth 31% 13% 17% 20% Net debt to total capital (ex-Inv) 53% 51% 44% 42% Sales/assets 1.1 1.0 1.2 1.2Assets/equity 2.4 2.1 1.9 1.8ROE 28% 29% 18% 18%ROCE 16% 15% 15% 17%Source: Company, J.P. Morgan estimates.

190



LG Display www.lgdisplay.com

Overweight W29,650


Company description LG Display Co., Ltd. Develops and manufactures digital display products. The company’s products include thin film transistor-liquid crystal displays (TFT-LCD) for notebook and desktop computer monitors, TVs, mobile phones, and medical equipment. LG display provides its products mainly to overseas markets. Post mortem Comparative advantage in LED TV panel production: According to management estimates, LGD will complete the full product line-ups for LED TV, and aims to achieve higher LED TV panel proportion than the industry average for 2010E. Given our expectation on LED TV penetration rate of 15-20% for the industry as a whole, the future growth outlook for LGD in emerging LED TV market looks bright. Potential for earnings upgrades The magnitude of panel price decline would be rather moderate: Given the inventory adjustment from downstream customers, demand is likely to show a continuous downward trend in 4Q09, which would result in panel price declines. However, we believe that the industry-wide inventory level will be maintained at a healthy level due to solid sell-through, especially during the China Golden Week. In addition, as the economy is recovering fast, the oversupply problem will likely be less severe than in previous years. how much recovery is priced into the stock? LGD will continue to generate stable FCF with an upward ROE trend: We believe LGD is likely to post strong FCF in FY10 and FY11, due to the increase in EBITDA along with the stable capex trend. We also expect ROE to remain in double-digits in the next two years. Compared to its global peers, we forecast LGD to show the highest sales growth on the back of an increase in fab efficiency and stable margins due to the strong customer base. Also, despite efficient fab, its current market capitalization as a percentage of total capacity is undervalued relative to its global peers. Price target and key risks We recently upgraded LGD to Overweight from our long-standing Neutral rating with our revised P/BV-based Dec-10 price target of W40,000. Our price target implies 1.2x FY10E book and 1.0x FY11E book, Given the sustainable FCF (W1.5 trillion/year) and double-digit ROE. Key risks to our PT are sudden and substantial changes in panel prices And a recovery in global consumption.

South Korea Semiconductors JJ ParkAC (822) 758 5717 [email protected]


Liang-Chun LinAC (886-2) 2725 9863 [email protected]

J.P. Morgan Securities (Taiwan) Ltd

Marcus ShinAC (822) 758 5712 [email protected]


Price performance

15,00025,00035,000

Oct-08 Feb-09 Jun-09 Oct-09LGD KOSPI

W

Source: Bloomberg, J.P. Morgan. Performance

1M 3M 12M Absolute (%) -8 -13 24 Relative (%) -5 -12 -8

Source: J.P. Morgan. Company data

52-week range (W) 40,950-17,250 Mkt cap. (WB) 10,609 Mkt cap. (US$MM) 8,993 Avg daily value (US$MM) 120.8 Avg daily volume (MM) 4.1 Shares O/S (MM) 358 Date of price 5-Nov-09 Index: KOSPI 1552 Free float (%) 57.9 Exchange rate 1,178/1

Source: Bloomberg, J.P, Morgan. Reuters: 034220.KS; Bloomberg: 034220 KS WB, year-end Dec FY08 FY09E FY10E FY11E Sales 16,264 20,088 21,188 22,682 Operating profit 1,735 1,103 1,478 1,910 Net profit 1,087 980 1,292 1,656 EPS (W) 3,037 2,738 3,612 4,627 Cash 3,423 2,051 1,707 2,311 ROE (%) 12.4 10.1 12.7 14.6 P/E (x) 9.8 10.8 8.2 6.4 BPS (W) 25,959 28,179 28,510 34,965 EV/EBITDA (x) 3.0 3.4 2.9 2.3 Div yield (%) 2 2 2 2 Source: Company reports, Bloomberg, J.P. Morgan estimates. Share price and valuations are as of 5 November, 2009. We upgraded to OW with PT of W40,000 on November 12.

191



LG Display: Summary of financials Won in billions, year-end December Income statement Balance sheet

FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E Revenues 16,264 20,088 21,188 22,682 Cash and Cash Equivalents 3,423 2,051 1,707 2,311 COGS 13,617 17,906 18,543 19,500 Accounts receivable 2,005 3,084 2,782 3,387 Depreciation 2,541 2,850 3,035 3,109 Inventories 1,137 1,357 1,334 1,223 Gross Profit 2,647 2,182 2,645 3,182 Others current assets 454 635 573 697 EBIT 1,735 1,103 1,478 1,910 Current assets 7,018 7,127 6,396 7,617 Net Interest Income 56 -15 -33 -6 Pre-tax Profit 1,311 1,084 1,494 1,914 LT investments 900 1,092 1,098 1,144 Tax Expense/(Credit) 225 104 202 258 Net fixed assets 9,270 9,918 9,960 10,224 Net Income 1,087 980 1,292 1,656 Other long term assets 200 210 206 178 Shares outstanding (mil.) 358 358 358 358 Total Assets 17,388 18,346 17,660 19,164 EPS (Won) 3,037 2,738 3,612 4,627 Sequential Growth ST Debt and CPLTD 1,154 1,314 1,051 220 Revenues 13% 24% 5% 7% Account Payables 988 1,981 1,861 2,051 Gross Profit 18% -18% 21% 20% Other current liabilities 2,644 2,241 2,022 2,461 EBIT 15% -36% 34% 29% Total current liabilities 4,786 5,536 4,934 4,733 Pre-tax Profit -15% -17% 38% 28% Long term debt 1,243 0 0 0 EPS -19% -10% 32% 28% Other Long term liabilities 581 1,063 1,010 705

Total liabilities 8,100 8,263 7,458 6,653 Shareholder's equity 9,289 10,083 10,201 12,511 Total Liabilities and Equity 17,388 18,346 17,660 19,164 BVPS (Won) 25,959 28,179 28,510 34,965

Cash flow statement Ratio analysis %, year-end December

FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E

Net Income 1,087 980 1,292 1,656 Gross Margin (%) 16.3% 10.9% 12.5% 14.0% Depreciation & amortization 2,541 2,850 3,035 3,109 EBIT Margin (%) 10.7% 5.5% 7.0% 8.4% Other non-cash items 0 0 0 0 Net profit margin (%) 6.7% 4.9% 6.1% 7.3% Change in working capital 1,814 -890 48 12 COGS/sales (%) 83.7% 89.1% 87.5% 86.0% Cash flow from operations 5,441 2,939 4,375 4,776 SG&A/sales (%) 3.2% 3.1% 3.2% 3.3% Purchase of PP&E -4,283 -3,498 -3,077 -3,373 Disposal/ (purchase) -595 -202 -2 -19 Sales per share growth (%) 13.3% 23.5% 5.5% 7.1% Cash flow from investing -4,878 -3,700 -3,079 -3,392 Sales growth (%) 13.3% 23.5% 5.5% 7.1% Equity raised/(repaid) 0 0 0 0 EBIT growth (%) 15.4% -36.5% 34.0% 29.2% Debt raised/(repaid) 965 -427 -466 -1,435 Net profit growth (%) -19.1% -9.9% 31.9% 28.1% Other charges -88 -185 -914 914 EPS growth (%) -19.1% -9.9% 31.9% 28.1% Cash dividends 0 0 -260 -260 Cash flow from Financing 878 0 0 -781 Interest Coverage (x) -11.3 -8.4 -17.2 -32.0 Net Changes in Cash 1,441 -1,372 -343 603 Inventory Turnover (x) 14.3 14.8 15.9 18.6 Beginning cash 1,981 3,423 2,051 1,707 Net Debt to total Capital (%) 3% 5% 5% -5% Ending cash 3,423 2,051 1,707 2,311 Net debt to equity (%) 5% 9% 8% -7% DPS (Won) 750 750 750 750 Sales/Assets (%) 94% 109% 120% 118%

Assets/Equity (%) 187% 182% 173% 153% ROE (%) 12% 10% 13% 15% ROIC (%) 14% 9% 11% 14%

Quarterly data Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY09E FY10E Sales 3,666 4,891 5,974 5,557 Sales 5,013 5,243 5,398 5,534 Net income -255 302 559 374 Net income 118 263 426 485 EPS (Won) -713 844 1,562 1,044 EPS (Won) 331 735 1,191 1,354 Source: Company data, J.P. Morgan estimates.

192



Lojas Americanas www.americanas.com.br

Overweight R$13.42/R$11.54

Price Target: R$17.00 (PN/LAME4)/ R$14.00 (ON/LAME3)

Company description Americanas is one of the most traditional retail chains in Brazil, operating 471 stores and three distribution centers. In addition, the company also has a 57% stake in B2W (N), the largest e-commerce platform in Brazil, and has a JV with Itau Unibanco (FAI) that offers credit and financial products to clients.

Post mortem LAME’s unique business model taps the fastest-growing segments of the population and has few competitors and resilient same store sales growth. In addition, the company announced that it will double the number of stores (by +400) in the next four years, which we believe is doable, given LAME’s accretive ROE, leading to faster breakeven of the new stores (1.5-2.5 years), and the low average number of employees (about 25/store). Also, with the decline in interest spreads, supported by strong economic recovery, the private label card penetration increased by 180bp yoy to 15.3% in 3Q.

Potential for earnings upgrades On the back of its aggressive store expansion plan, we expect LAME to post high-double-digit top-line growth for at least the next four years. In addition, LAME should also benefit from strong top-line growth at B2W, in which it has ~57% stake, supported by the greater availability of cheap financing.

How much recovery is priced into the stock? Although the stock has more than doubled year to date (like most retailers in Brazil), clearly reflecting the strong economic recovery; it is still ~ 29% below its highest level. Current valuations still look unwarranted, with LAME trading at 31% discount to historical P/E average which will likely narrow, in our view, given the aggressive store layout and strong 3Q results.

Price target and key risks Our Dec 2010 price targets of R$17/R$14 for PN/ON shares is based on a sum-of-the-parts DCF of the brick-and-mortar stores, financial, and internet divisions. Main risks to our thesis are (1) delay in FAI maturation, (2) economic slowdown, and (3) a potential hike in delinquency rates.

Brazil Retail Andrea TeixeiraAC (1-212) 622-6735 [email protected]


Price performance (R$)

3

6

9

12

15

Nov-

08

Dec-

08

Jan-

09

Feb-

09

Mar

-09

Apr-0

9

May

-09

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct-0

9

Nov-

09

Source: Bloomberg.

Performance 1M 3M 12M Absolute (%) 22.5% 25.1% 115.2% Relative (%) 18.2% 7.5% 29.0%

Source: Bloomberg.

Company data 52-week range (R$) 5.29 - 14.67 Mkt cap. (R$MM) 10,068 Mkt cap. (US$MM) 5,846 Avg daily value (US$MM) 18.7 Avg daily volume (MM) 2.6 Shares O/S (MM) 473 Date of price 25/11 Index: IBOV 67,917 Free float (%) 62.1% Exchange rate 1.72

Source: Bloomberg.

Bloomberg: LAME4 BZ / LAME3 BZ; Reuters: LAME4.SA / LAME3.SA R$ in millions, year-end December FY08 FY09E FY10E FY11E Sales 3,933 4,532 5,158 6,186 Net profit 117 177 290 379 EPS (R$) 0.16 0.24 0.40 0.52 FD EPS (R$) 0.16 0.24 0.40 0.52 DPS (R$) 0.05 0.19 0.15 0.12 Sales growth (%) 22.5% 15.2% 13.8% 19.9% Net profit growth (%) 13.2% 51.9% 63.6% 30.7% EPS growth (%) 13.4% 52.5% 63.6% 30.7% ROE (%) 43.7% 51.3% 62.9% 54.3% P/E (x) 78.7x 59.3x 36.3x 27.7x FD P/E (x) 78.7x 59.3x 36.3x 27.7x Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009. * The estimates are for the parent company

193



Lojas Americanas: Summary of financials Profit and loss statement R$ in millions, year-end December

FY08 FY09E FY10E FY11ERevenue 3,933 4,532 5,158 6,186% change Y/Y 22.5% 15.2% 13.8% 19.9%Gross margin (%) 31.2% 30.1% 30.8% 31.0%EBITDA 541 624 757 917% change Y/Y 37.5% 15.3% 21.4% 21.1%EBITDA margin (%) 13.8% 13.8% 14.7% 14.8%EBIT 419 508 625 765% change Y/Y 38.3% 21.3% 23.0% 22.4%EBIT margin (%) 10.6% 11.2% 12.1% 12.4%Net interest (208) (246) (302) (408)Earnings before tax 142 262 322 356% change Y/Y -8.0% 84.8% 23.1% 10.5%Tax (48) (97) (106) (101)as % of EBT 33.6% 37.1% 32.8% 28.3%Net income (reported) 117 177 290 379% change Y/Y 13.2% 51.9% 63.6% 30.7%Shares O/S (MM) 0.16 0.24 0.40 0.52EPS (reported) (R$) 0.16 0.24 0.40 0.52Source: Company, J.P. Morgan estimates. * The estimates are for the parent company.

Balance sheet R$ in millions, year-end December

FY08 FY09E FY10E FY11ECash and cash equivalents 1,097 1,161 888 882Accounts receivable 176 197 177 213Inventories 655 767 873 1,076Others 241 270 301 361Current assets 2,169 2,395 2,239 2,532LT investments 492 511 591 727Net fixed assets 913 917 1,098 1,382Total assets 3,892 4,118 4,132 4,739Liabilities ST loans 790 429 429 429Payables 954 1,117 1,012 1,247Others 255 299 223 275Total current liabilities 1,999 1,846 1,664 1,952Long-term debt 1,442 1,751 1,751 1,751Other liabilities 74 83 88 105Total liabilities 3,571 3,749 3,580 3,897Shareholders’ equity 321 369 553 842BVPS (R$) 0.44 0.51 0.76 1.16Source: Company, J.P. Morgan estimates. * The estimates are for the parent company.

Cash flow statement R$ in millions, year-end December

FY08 FY09E FY10E FY11EEBIT 419 508 625 765Depreciation & amortization 122 116 132 152Change in working capital 38 79 11 11Taxes (48) (97) (106) (101)Cash flow from operations 51 345 146 519Capex 274 84 232 300Disposal/(purchase) 0 0 0 0Net interest (208) (246) (302) (408)Free cash flow 86 288 302 346Equity raised/(repaid) (26) (2) 0 0Debt raised/(repaid) 607 (51) 0 0Other (114) 1 0 0Dividends (37) (136) (107) (89)Beginning cash 776 1,097 1,161 888Ending cash 1,097 1,161 888 882DPS (R$) 0.05 0.19 0.15 0.12Source: Company, J.P. Morgan estimates. * The estimates are for the parent company.

Ratio analysis %, year-end December FY08 FY09E FY10E FY11EEBITDA margin 13.8% 13.8% 14.7% 14.8%Operating margin 10.6% 11.2% 12.1% 12.4%Net profit margin 3.0% 3.9% 5.6% 6.1%SG&A/sales 20.5% 18.8% 18.7% 18.6%Sales growth 22.5% 15.2% 13.8% 19.9%Net profit growth 13.2% 51.9% 63.6% 30.7%Sales per share growth 22.7% 15.7% 13.8% 19.9%EPS growth 13.4% 52.5% 63.6% 30.7%Interest coverage (x) 1.20 (2.48) 1.93 1.62Net debt to total capital 0.44 0.40 0.47 0.43Net debt to equity 3.53 2.76 2.34 1.54Sales/assets 1.01 1.10 1.25 1.31EBIT margin 10.6% 11.2% 12.1% 12.4%ROCE 22.1% 22.4% 25.3% 27.5%Assets/equity (x) 12.1 11.2 7.5 5.6ROI 23.7% 34.7% 49.0% 52.1%ROE 43.7% 51.3% 62.9% 54.3%Source: Company, J.P. Morgan estimates. * The estimates are for the parent company.

194



LSR Group www.lsrgroup.ru

Overweight Price:$7.10


Company description LSR Group is one of the leading vertically-integrated developers in St. Petersburg, engaged in the high-end, upper-middle class and mass market residential and commercial housing segments. It is also the number one building materials company in the St. Petersburg and Leningrad regions, with the capacity to produce aggregates, various types of concrete and bricks.

Post mortem In 1H09 LSR suffered from a financing dry-up, a collapse in demand for building materials (the segment’s EBITDA fell 95% y/y) and weak housing sales. Nevertheless, the company solved debt and cash flow problems towards 2H09, emerging as one of the strongest players from the downturn: bonds were refinanced with new bank loans, financing was secured for the cement project, and several housing contracts were concluded with the government.

Potential for earnings upgrades For LSR high financial leverage (total debt at $1.2 bn, debt-to-equity is 110%) translates into high EPS sensitivity to cost of debt, implying that the company is a winner in the declining interest rate environment.

How much recovery is priced into the stock? LSR has been the darling of the market and one of the best performing Russian stocks in 2009 (+834% ytd vs. +135% for the RTS Index), driven by contracting risk premium. We believe the shares are likely to continue performing better than the Russian real estate universe on a 6-12 month horizon as in our view company fundamentals are not fully priced in.

Price target and key risks We assume 5% growth in ruble residential prices in St. Petersburg, a 25-50% increase in LSR’s building materials sales volumes and 5-10% higher prices. Our end-10 DCF-based PT is $10.0. The key risk we highlight is a slower than expected property market revival.

Russia Property Elena JouronovaAC (7 495 967 3888 [email protected]


0

2

4

6

8

$


Price Performance

Source: Bloomberg


Absolute (%) 1.4 94.5 680.2

Source: Bloomberg

Company data 52-week range ($) 0.53-7.49 Mkt cap. (US$MM) 3,323 Avg daily value (US$MM) 2.8 Avg daily volume (MM) 0.562 Shares O/S (mn) 468 Date of price 23-Nov-09 Index: RTS 1466.77 Free float (%) 18% Exchange rate 28.79

Source: Bloomberg

Bloomberg: LSRG LI; Reuters: LSRGq.L $ mn, year-end Dec FY08 FY09E FY10E FY11E Sales 2,004 1,415 1,935 2,016 Net profit (329) 60 175 247 EPS ($) -0.70 0.13 0.37 0.53 FD EPS ($) -0.70 0.13 0.37 0.53 DPS ($) 0 0 0 0 Sales growth (%) 42.9% -29.4% 36.8% 4.2% Net profit growth (%) n/a n/a 192% 41% EPS growth (%) n/a n/a 192% 41% ROE (%) 17.7% 9.9% 11.8% 14.3% P/E (x) n/a 54.6 19.2 13.4 FD P/E (x) n/a 54.6 19.2 13.4 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

195



LSR Group: Summary of financials Profit and Loss statement FY08A FY09E FY10E FY11E FY12E Cash flow statement FY08A FY09E FY10E FY11E FY12E$ in millions $ in millions Revenue 2,004 1,415 1,935 2,016 2,281 Net Income (329) 60 175 247 339

% change Y/Y 42.9% -29.4% 36.8% 4.2% 13.2% Depreciation & amortisation 82 57 60 75 86Gross Profit 724 484 591 669 788 Revaluation gain 665 65 0 0 0

% change Y/Y 54.6% -33.2% 22.1% 13.2% 17.8% Change in working capital (131) (82) (47) (35) (39)EBITDA 530 382 438 508 613 Other -112 24 5 8 10

% change Y/Y 71.4% -28.0% 14.9% 15.9% 20.8% Cash flow from operations 176 124 193 296 396EBIT (217) 259 378 433 528

% change Y/Y -138.6% -219.3% 45.7% 14.4% 22.0% Capex (704) (308) (142) (42) (49)Interest (108) (155) (153) (114) (91) Disposals/ (purchase) 0 0 0 0 -Earnings before tax -413 83 225 319 437 Free cash flow (528) (184) 52 254 348

% change Y/Y -184.5% -120.1% 170.8% 41.7% 37.0% Tax 91 (21) (45) (64) (87) Equity raised/(repaid) 0 0 0 0 0

as % of EBT (22.0%) (25.2%) (20.0%) (20.0%) (20.0%) Debt raised/(repaid) 364 228 -85 -169 -85Net Income (Reported) (329) 60 175 247 339 Other (81) 0 0 0 0

% change Y/Y -194.6% -118.3% 189.7% 41.7% 37.0% Dividends paid 0 0 0 0 0Shares Outstanding 468.3 468.3 468.3 468.3 468.3 Beginning cash 355 110 154 121 206EPS (reported) -0.70 0.13 0.37 0.53 0.72 Ending cash 110 154 121 206 470

% change Y/Y (194.6%) (118.3%) 189.7% 41.7% 37.0% DPS - - - - -

Balance sheet FY08A FY09E FY10E FY11E FY12E Ratio Analysis FY08A FY09E FY10E FY11E FY12E$ in millions $ in millions Cash and cash equivalents 110 155 122 206 469 Gross Margin 36.1% 34.2% 30.5% 33.2% 34.5%Accounts receivable 456 469 486 541 592 EBITDA Margin 26.5% 27.0% 22.7% 25.2% 26.9%Inventories 1,710 1,472 1,385 1,365 1,353 EBIT margin -10.8% 18.3% 19.5% 21.5% 23.1%Other 7 7 7 7 7 Adjusted net profit margin 10.3% 9.2% 9.0% 12.3% 14.9%Current assets 2,283 2,102 2,000 2,119 2,421 SG&A/Sales -13.8% -11.3% -11.0% -11.7% -11.4% LT investments 252 252 252 252 252 Sales growth 42.9% -29.4% 36.8% 4.2% 13.2%Net fixed assets 1,593 1,756 1,837 1,804 1,767 EBITDA growth 71.4% -28.0% 14.9% 15.9% 20.8%Total assets 3,877 3,858 3,837 3,923 4,187 Adjusted net profit growth 109.7% (37.0%) 34.7% 41.7% 37.0% Adjusted EPS growth 109.7% NM 34.7% 41.7% 37.0%ST loans 613 339 169 85 250 Payables 1,323 982 865 865 865 Interest coverage (x) 2.0 1.7 2.5 3.8 5.8Others 30 30 30 30 30 Net debt to Total Capital 29.5% 33.1% 32.0% 24.8% 14.9%Total current liabilities 1,967 1,351 1,065 980 1,146 Net debt to Equity 96.2% 95.8% 81.0% 55.0% 29.5%Long term debt 642 1,095 1,179 1,095 845 Sales/assets 0.5 0.4 0.5 0.5 0.5Other liabilities 78 78 78 78 78 Assets/equity 325.7% 289.1% 253.3% 221.7% 197.6%Total liabilities 2,686 2,523 2,322 2,153 2,068 ROE 17.7% 9.9% 11.8% 14.3% 16.4%Shareholders' equity 1,190 1,335 1,515 1,770 2,119 ROCE 23.4% 12.9% 13.6% 14.7% 17.3% Source: Company reports and J.P. Morgan estimates.

196



Magnit www.tander.ru



Company description Magnit is Russia's largest retailer in terms of store network: the chain operates 3,020 discounters and 22 hypermarkets with a net selling area of 988k sq m as of October 2009. The company is predominantly a regional player and focuses on small cities with fewer than 500k inhabitants. Magnit's operations are supported by an efficient logistics system that comprises 9 distribution centers with 184k sq m capacity and a fleet of 1,345 trucks, which allows the company to control 73% of its supplies.

Post mortem Magnit faces lower competition from modern retail as it operates in small regional towns. Coupled with increasing bargaining power with suppliers, this could allow the company to preserve its lucrative operating margins. Format-wise, diversification towards hypermarkets provides an opportunity to benefit in a recovery scenario. Armed with new capital, Magnit is likely to continue rapid store roll-out and gain market share; we forecast 2009-13 EBITDA CAGR of 29%, the highest in our consumer universe.

Potential for earnings upgrades A strengthening ruble creates upside potential to consensus earnings estimates for Magnit, in our view.

How much recovery is priced into the stock? Magnit trades in line with global retailers despite superior growth prospects. In historical terms valuations are c. 20% above the average pre-crisis level, but we expect consensus to move higher on faster store roll-out and better Fx.

Price target and key risks Our end-10 DCF-based PT is $17.5/GDR and $80/local share. We believe Magnit’s strong logistics backbone, recapitalized balance sheet (after the $370mn equity-raising in 3Q09) and experienced management team position it well for rapid expansion and double-digit earnings growth. Key risks are ruble weakness, slowing LFL sales growth and execution of the hypermarket strategy, in our view.

Russia Consumer Elena JouronovaAC (7 495 967 3888 [email protected]


2

6

10

14

$


Price Performance

Source: Bloomberg


Absolute (%) 10.0 31.2 308.6 Source: Bloomberg

Company data 52-week range ($) 2.76-15.40 Mkt cap. (US$MM) 5,952 Avg daily value (US$MM) 8.1 Avg daily volume (MM) 0.610 Shares O/S (MM) 445 Date of price 23-Nov-09 Index: RTS 1466.77 Free float (%) 46% Exchange rate 28.79

Source: Bloomberg

Bloomberg: MGNT LI; Reuters: MGNTq.L $ in millions, year-end Dec FY08 FY09E FY10E FY11E Sales 5,348 5,326 7,751 9,927 Net profit 188 272 421 552 EPS ($) 0.45 0.65 1.01 1.33 FD EPS ($) 0.45 0.65 1.01 1.33 DPS (LC) n/a n/a n/a n/a Sales growth (%) 45% 0% 46% 28% Net profit growth (%) 94% 45% 55% 31% EPS growth (%) 94% 45% 55% 31% ROE (%) 30% 26% 29% 29% P/E (x) 31.8 22.0 14.2 10.7 FD P/E (x) 31.8 22.0 14.2 10.7 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

197



Magnit: Summary of Financials Profit and Loss Statement Cash flow statement $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Revenues 5,348 5,326 7,751 9,927 12,454 EBT 260 348 540 708 880Cost of goods sold -4,188 -4,104 -5,970 -7,648 -9,615 Depreciation & amortisation 89 91 132 169 212Gross profit 1,160 1,222 1,781 2,279 2,839 Change In working capital 138 105 64 71 80Operating costs -847 -824 -1,199 -1,536 -1,927 Other (66) (77) (119) (156) (194)EBITDA 402 489 714 912 1,124 Cash flow from operations 420 467 617 792 978EBIT 313 398 582 743 912 Net Interest (60) (50) (42) (35) (32) Capex (567) (500) (584) (795) (720)Other 7 0 0 0 0 Other (9) 0 0 0 0Earnings before tax 260 348 540 708 880 Free cash flow (155) (33) 33 (3) 258Tax (72) (77) (119) (156) (194)

as % of EBT (27.6%) (22.0%) (22.0%) (22.0%) (22.0%) Financing cash flow 200 0 0 0 0Net Income (reported) 188 272 421 552 686 Dividends paid 0 0 0 0 0Net Income (adjusted) 188 272 421 552 686 Forex effect -51 0 0 0 0EPS (adjusted) 0.45 0.65 1.01 1.33 1.65 Net change in cash (6) (33) 33 (3) 258 Balance sheet Ratio Analysis $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Cash & cash equivalents 115 82 115 112 370 EBITDA margin 7.5% 9.2% 9.2% 9.2% 9.0%Accounts receivables 53 63 90 116 145 Operating margin 5.9% 7.5% 7.5% 7.5% 7.3%Inventories 323 370 544 718 929 Net profit margin 3.5% 5.1% 5.4% 5.6% 5.5%Other 2 2 2 2 2 SG&A/sales (15.8%) (15.5%) (15.5%) (15.5%) (15.5%)Total current assets 493 517 752 948 1,446 PP&E 1,331 1,740 2,193 2,818 3,327 Sales growth 45.5% (0.4%) 45.5% 28.1% 25.5%Other non-current assets 20 20 20 20 20 EBITDA growth 83.2% 21.7% 46.0% 27.7% 23.3% EBIT growth 89.0% 27.3% 46.1% 27.7% 22.8%Total assets 1,844 2,277 2,964 3,786 4,793 Net profit growth 94.3% 44.8% 55.1% 31.0% 24.4% Short term debt 243 229 229 229 229 Gross Debt 406 384 384 384 384Payables 583 642 924 1,194 1,515 Net Debt 291 301 269 272 14Other 0 0 0 0 0 Net Debt/EBITDA 0.7 0.6 0.4 0.3 0.0Total current liabilities 826 871 1,153 1,423 1,744 Interest coverage (x) 5.2 8.0 13.9 21.0 28.3Long term debt 163 155 155 155 155 Net Debt to Equity 34.8% 24.4% 16.4% 12.4% 0.5%Other 18 18 18 18 18 Sales/assets 2.9 2.3 2.6 2.6 2.6Total non-current liabilities 181 173 173 173 173 Assets/equity 2.2 1.8 1.8 1.7 1.7 ROE 29.7% 26.2% 29.3% 28.8% 27.1%Shareholders' equity 837 1,234 1,638 2,190 2,876 ROA 10.8% 13.2% 16.1% 16.4% 16.0%Total equity & liabilities 1,844 2,277 2,964 3,786 4,793 ROIC 19.2% 21.7% 25.0% 25.2% 24.4% Source: Company reports and J.P. Morgan estimates.

198



Manila Water www.manilawater.com

Overweight Php16.00


Company description Manila Water operates a water distribution network within East Zone of Metro Manila under a concession agreement, which will expire in 2022 (being extended to 2037), earning an allowed ‘real’ IRR of 9.3% on its investments. Post mortem While free cash flow remains negative for Manila Water, with its low gearing, tariff hike is the key driver for the company, in our view. While we did not see any tariff hike at the start of the year, this was more than offset by (a) inflation adjustment; and (b) concession extension of 15 years earlier in the year.

Potential for earnings upgrades While we see limited upside risk to our earning estimates, given the relatively high visibility for annual tariff hikes, we should see earnings growth coming through due to the concession extension allowed earlier this year because of lower depreciation expenses.

How much recovery is priced into the stock? We see upside risk to the current share price, as we believe the concession extension has not been fully priced in. Moreover, we believe the upcoming annual tariff hike should act as a key catalyst.

Price target and key risks Our Dec-09 PT of Php19 implies 12.7x FY09E P/E, 7.6x EV/EBITDA, and 2.4% yield. We derive our PT by discounting Manila Water’s FCF until 2037 (when the ‘extended’ concession expires), and estimate cash flows will turn positive only by 2015/16. In our DCF valuation, we assume a risk-free rate of 8.5%, a terminal growth rate of 0%, and a beta of 1.0. Key risks to our PT include delays in the implementation of allowed tariff increases; and a worse-than-expected delay in implementation of the extension.

Water Ajay MirchandaniAC (65) 6882-2419 [email protected]



05

101520

Nov-

08

Feb-

09

May

-09

Aug-

09

Nov-

09


1M 3M 12M Absolute (%) 1.6 3.2 6.7 Relative (%) -2.8 -3.3 -40.1


52-week range (Php) 9.4-16.5 Mkt cap. (PhpMM) 32,317 Mkt cap. (US$MM) 679 Avg daily value (US$MM) 0.7 Avg daily volume (MM) 3.5 Shares O/S (MM) 2,020 Date of price 5-Nov-09 Index: PSEi 2,944 Free float (%) 38 Exchange rate 47.6

Bloomberg: MWC PM; Reuters: MWC PS Php in millions, year-end December FY08 FY09E FY10E FY11E Adjusted net profit 2,748 3,630 4,057 4,546 EPS (Php) 1.14 1.50 1.68 1.88 % growth Y/Y 4% 32% 12% 12% DPS (Php) 0.35 0.46 0.52 0.58 P/E (x) 14.1 10.7 9.5 8.5 P/BV (x) 2.1 1.8 1.5 1.3 EV/EBITDA (x) 7.2 6.6 6.0 5.5 Dividend yield (%) 2.8% 3.7% 4.1% 4.6% RoE (%) 21% 23% 22% 21% Net debt 49% 54% 58% 58% Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

199



Manila Water: Summary of financials Php in millions, year-end December Profit & loss statement Balance sheet FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E Core Revenue 8,914 10,529 11,858 13,286 Share capital 5368 5368 5368 5368 Others 82 85 87 90 Preferred Stock 900 900 900 900 Total Revenue 8,996 10,614 11,946 13,376 Reserves & Surplus 8776 11287 14094 17238

cost of preferred & treasury stock& others (594) (594) (594) (594)

Operating Costs (1,930) (2,346) (2,573) (2,798) Share holders equity 14,458 16,961 19,768 22,913 SG&A expenses (576) (651) (686) (723) Long term debt 12897 12008 17328 16940 Depreciation & Amortization (1891) (1293) (1439) (1658) Other non-current liabilities 1,307 1,369 1,423 1,479 Foreign currency differential less FX gain (losses) (28) (300) (300) (300)

Service Concession Obligation 3475 3475 3475 3475

Total Liabilities 32,137 33,814 41,994 44,807 EBITDA 6,380 7,232 8,299 9,465 EBIT 4,490 5,940 6,861 7,807 Service Con. Assets / PPE 24637 29611 34372 39164 Interest Expense (689) (1,041) (1,320) (1,542) Non Current Assets 3137 3137 3137 3137 Interest Income 205 244 263 287 Current Assets 8595 6313 9947 7912 Profit before tax 4,256 5,243 5,854 6,552 Cash and Bank Balances 7357 4851 8300 6067 Income tax (1,469) (1,573) (1,756) (1,966) Account Receivables 593 701 789 884 Profit after tax 2,788 3,670 4,097 4,586 Other current assets 645 762 858 961 less Preferred Dividends (40) (40) (40) (40) Current Liabilities 4231 5247 5462 5405 Accounts Payable 2740 3277 3117 2886 Net Income 2,748 3,630 4,057 4,546 current portion of debt 455 907 1235 1358 Other current liabilities 110 110 110 110 Total Assets 32,137 33,814 41,994 44,807 Key ratios Cash flow statement FY08 FY09E FY10E FY11E EBITDA Margins (%) 71.6% 68.7% 70.0% 71.2% FY08 FY09E FY10E FY11E EBIT Margin (%) 50.4% 56.4% 57.9% 58.8% EBITDA 6380 7232 8299 9465 less: Net Interest (484) (797) (1057) (1255) No. of O/S shares (Mils) 2019.8 2019.8 2019.8 2019.8 less: tax (951) (1547) (1710) (1913)

EPS (Php) 1.14 1.50 1.68 1.88 less: changes in Working Capital 501 312 (344) (430)

DPS (Php) 0.35 0.46 0.52 0.58 Others 568 0 0 0 Dvd payout ratio (%) 31% 31% 31% 31% Operational Cash Flow 6014 5201 5188 5867 BVPS 6.0 7.0 8.2 9.5 Capital Expenditure (3826) (5950) (6200) (6450) Debt / Equity (%) 92.4 76.2 93.9 79.9 Net Debt (%) 48.7 53.9 57.6 58.5 others (3929) (324) 0 0 ROE (%) 20.7% 23.4% 22.3% 21.5% Cash flow from investments (7755) (6274) (6200) (6450) ROCE (%) 19.3% 20.6% 20.1% 19.6% Free cash flow (1741) 0 0 0 Dividends Paid (887) (1159) (1291) (1441) EBITDA / Gross Interest Expense 9.3 6.9 6.3 6.1 Debt paid 5429 (336) 5698 (265) others (349) 62 54 56 Accounts receivables (days) 24.3 24.3 24.3 24.3 Cashflow from financing 4193 (1433) 4461 (1651)

Movement in Net Debt/Net Cash 2,452 (2,506) 3,449 (2,233)


200



Maruti Suzuki India Ltd. www.marutisuzuki.com



Company description Maruti Suzuki India Ltd, a 54% subsidiary of Suzuki Motor Corporation of Japan, is India’s largest passenger car company with a market share of over 50% in the domestic car market. Maruti is emerging as a manufacturing base for Suzuki globally, as the company has ramped up exports of the small car ‘A Star’ to Europe.

Post mortem Maruti’s broad-based portfolio in the mass market A2 segment along with its widespread distribution network and strong brand equity have enabled the company to sustain a 50% market share in the domestic market. Over the year, the company has diversified revenues by ramping up its exports (c.15% of sales).

Potential for earnings upgrades The potential upgrades would be driven by higher-than-expected domestic economic growth which could result in volume growth surprising on the upside.

How much recovery is priced into the stock? The growth in the Indian passenger car segment (+16% YTD) has been aided by the stimulus measures as well as revival in economic growth. While stock valuations have expanded to reflect a pick-up in growth, the share price should now be driven by sustained volume growth (given the improving domestic growth outlook).

Price target and key risks We expect volume growth to come in at 15% CAGR over FY09-11E, driven by a revival in domestic markets. We expect EBITDA margins to expand on improved utilization levels, given the revival in growth. As a result, we expect earnings to grow at 50% CAGR over FY09-11E. We have a Mar-10 PT of Rs1,630, based on 13x one-year forward cash earnings. We are valuing the company in line with growth cycle multiples, which is at the upper end of the valuation band, i.e. +1 standard deviation above the mean. Key risks to our PT include a slowdown in the economy and depreciation of Rs vs. yen.

India Automobiles Aditya MakhariaAC (91-22) 6157-3596 [email protected]


Price performance

-500

1,0001,5002,000

N-08

F-09

M-0

9

A-09

N-09

Source: Bloomberg.


Absolute (%) -7 +3 +141 Relative (%) -2 +2 +80

Source: Bloomberg.

Company data 52-week range (Rs) 428-1,740 Mkt cap. (RsMM) 429,367 Mkt cap. (US$MM) 9,130 Avg daily value (US$MM) 35.4 Avg daily volume (MM) 1.1 Shares O/S (MM) 289 Date of price 5-Nov-09 Index: SENSEX 16064 Free float (%) 46 Exchange rate 47.03

Source: Bloomberg.

Bloomberg: MSIL.IN; Reuters: MRTI.BO Rs in millions, year-end March

FY08 FY09 FY10E FY11E Net sales 179,362 204,554 267,202 310,413 Net profit 17,308 12,186 22,771 27,426 EPS (Rs) 59.9 42.2 78.8 94.9 Cash EPS (Rs) 79.5 66.6 107.1 125.3 DPS (Rs) 5.0 3.5 6.3 7.1 Net sales growth (%) 22 14 31 16 EPS growth (%) 11 -30 87 20 Cash EPS growth (%) 25 -16 61 17 ROE (%) 20.6 13.0 19.9 19.6 P/E (x) 24.8 35.2 18.9 15.7 Cash P/E (x) 18.7 22.3 13.9 11.9 EV/EBITDA (x) 17.1 23.8 12.8 10.7 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

201



Maruti Suzuki India Ltd: Summary of financials Profit and loss statement Rs in millions, year–end March FY08 FY09 FY10E FY11E Revenues 179,362 204,554 267,202 310,413

% change Y/Y 22% 14% 31% 16% EBITDA 22,432 16,189 29,392 33,959

% change Y/Y 13% -28% 82% 16%EBITDA margin (%) 12.5% 7.9% 11.0% 10.9%

EBIT 16,750 9,124 21,215 25,165% change Y/Y -3% -46% 133% 19%

Interest expense 596 510 217 193 Other income 8,876 9,985 11,424 13,332 Earnings before tax 25,030 16,757 32,072 38,304

% change Y/Y 10% -33% 91% 19%Tax 7,722 4,571 9,301 10,878

as % of EBT 30.9% 27.3% 29.0% 28.4%Net income (Adjustedl) 17,308 12,186 22,771 27,426

% change Y/Y 11% -30% 87% 20%Shares outstanding 289 289 289 289EPS (pre-exceptional) 59.9 42.2 78.8 94.9

% change Y/Y 11% -30% 87% 20%Dividend per share 5.0 3.5 6.3 7.1 Div payout (%) 8% 8% 8% 8%Source: Company, J.P. Morgan estimates.

Balance sheet Rs in millions, year – end March

FY08 FY09 FY10E FY11ECash 3,240 19,390 23,630 27,788Cash equivalents 48,656 27,907 32,907 42,907Accounts receivable 6,555 9,189 10,249 13,607Inventories 10,380 9,023 13,909 17,009Others 10,734 17,309 18,942 20,738Current assets 79,565 82,818 99,636 122,049LT investments 3,151 3,826 3,826 3,826Net fixed assets 40,328 49,321 59,143 68,350Total assets 123,044 135,965 162,606 194,225 Liabilities Payables 24,492 30,169 34,291 39,527Others 3,695 3,807 4,761 5,152Total current liabilities 28,187 33,976 39,052 44,679 Total debt 9,001 6,988 7,488 7,988 Other liabilities 1,701 1,551 1,668 1,791 Total liabilities 38,889 42,515 48,208 54,457 Shareholders’ equity 1,445 1,445 1,445 1,445Shareholders’ net worth 84,154 93,449 114,398 139,767 BVPS (Rs per share) 291 323 396 484Source: Company, J.P. Morgan estimates.

Cash flow statement Rs in millions, year–end March

FY08 FY09 FY10E FY11E EBIT 16,750 7,282 20,865 25,165Depreciation & amortization 5,682 7,065 8,178 8,794Dec/(Inc) in Working Capital -266 -2,063 -2,503 -2,627Taxes -7,696 -4,721 -9,184 -10,756Cash flow from operations 14,470 7,563 17,355 20,576 Net Capex -17,024 -16,058 -18,000 -18,000(Pur) / Sale of investments -17,715 20,074 -5,000 -10,000Net Interest (Paid)/ Recd -596 -510 -217 -193Cash flow from investing -35,335 3,506 -23,217 -28,193 Income from Investments 8,876 9,985 11,424 13,332 Change in net worth -248 -1,880 0 0Debt raised/ (repaid) 2,693 -2,013 500 500Other Dividends paid -1,445 -1,011 -1,822 -2,057Cash generated -10,989 16,150 4,241 4,158Beginning cash 14,228 3,240 19,390 23,630Ending cash 3,239 19,390 23,631 27,788Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end March

FY08 FY09 FY10E FY11EEBITDA margin 12.5 7.9 11.0 10.9Net profit margin 9.7 6.0 8.6 8.9 Sales growth 22 14 31 16 Net profit growth 11 (30) 87 20 EPS growth 11 (30) 87 20 Cash EPS Growth 25 (16) 61 17 P/E (x) 24.8 35.2 18.9 15.7Cash PE (x) 18.7 22.3 13.9 11.9EV/EBITDA (x) 17.1 23.8 12.8 10.7EV/Sales (x) 2.1 1.9 1.4 1.2Price to Book Value (x) 5.1 4.6 3.8 3.1 Dividend Yield 0.3 0.2 0.4 0.5 Debt to equity 0.1 0.1 0.1 0.1 ROE 20.6 13.0 19.9 19.6 ROCE 27.0 16.9 26.1 25.7 Source: Company, J.P. Morgan estimates.

202



MediaTek Inc. www.mediatek.com



Company description Mediatek is a leading ables company across all applications it is present: among the top 3 in handset baseband; #1 in HDTV controller; #1 in PC optical storage and DVD/Blu-ray; and among the top 3 in GPS. Its key customers are China handset brands, LGE, Sony, Samsung and Philips. Post mortem In 2009, Mediatek has replicated its success in other emerging markets. We believe the past recession has helped the company, as the “cheaper good effect” has turned consumers more receptive to whitebox products. Potential for earnings upgrades Consensus expects about 10-15% revenue growth in 2010, which we believe is too conservative considering a 15% EM unit growth. Mediatek has gained a 6-7%/year EM share since 2005. With a 33% of the global EM share in 2009, we believe Mediatek may not hit a ceiling until its reaches a 50-60% share, based on the experiences in China handset market and mature markets such as consumer DVD. We believe market is too bearish on the company’s ASP and margin outlook. As the China handset market is moving from traditional feature phones to pseudo-smartphones, Mediatek may pull away from competition if it faces a lot more building blocks to get there (such as content/apps; improved graphics for better 3D UI; WiFi/touchpad controller); Mediatek has prepared for this trend for 2-3 years. Content is also another significant driver for the long term, in our view. How much recovery is priced into the stock? Despite a strong run up YTD, we believe the stock only reflects a 93% EPS growth in 2009, but not future growth opportunities in non-China share gains, global brand opportunities (LG/Moto) and its content story. The stock is still trading near the low-end of its historical range and well below global comps. Price target and key risks Our Jun-10 PT of NT$630 is based on 15x FY10E earnings (vs. the historical P/E range of 14x-30x), or ~0.9x PEG in 2009-11E. We believe 15x is fair, given our expectation of 22%/14% EPS growth in 2010/11. A key risk to our PT is if Spreadtrum brings in a global chip vendor as a strategic shareholder; this could promptly reduce the product breadth disadvantage vs. Mediatek.

Taiwan Semiconductors Alvin KwockAC (852) 2800-8533 [email protected]

Charles Guo (852) 2800-8532 [email protected]


Price performance

150

300

450NT$




1M 3M 12M Absolute (%) -9.1 1.3 71.8 Relative (%) -8.8 -6.5 15.3


52-week range (NT$) 176.65-540.00 Mkt cap. (NT$B) 523.3 Mkt cap. (US$B) 16.09 Avg daily val (US$MM) 128.81 Avg daily volume (MM) 9.42 Shares O/S (MM) 1,090 Date of price 5-Nov-09 Index: TWSE 7,417.46 Free float (%) 80.8 Exchange rate 32.5

Source: Bloomberg.

Bloomberg: 2454 TT; Reuters: 2454.TW NT$ in billions, year-end December FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E Sales 90.2 115.8 142.2 164.8 ROE (%) 22.9 39.9 37.4 33.2Operating profit 22.1 37.7 47.1 53.1 CORE ROIC (%) 60.3 130.5 152.7 160.2Pre-tax profit 21.1 38.7 49.8 57.0 Quarterly EPS (NT$) 1Q 2Q 3Q 4QNet profit 19.2 37.6 46.4 53.0 EPS (FY09E) 3.83 4.84 6.70 2.68MV of employee bonus 1.1 9.8 11.6 14.2 EPS (FY10E) 6.51 8.52 10.85 8.88New Taiwan GAAP EPS 18.0 34.8 42.4 48.4 EPS (FY11E) 7.25 10.40 12.80 11.98New Taiwan GAAP P/E (x) 26.6 13.8 11.3 9.9 Performance 1M 3M 6M 12MCash 38.7 68.6 105.4 142.6 Absolute (%) -9.1 1.3 22.1 71.8Gross debt 0.0 0.0 0.0 0.0 Relative (%) -8.8 -6.5 5.0 15.3Equity 81.6 107.0 140.8 178.2 TWSE index (%) -0.3 8.3 16.3 49.0YE BPS (NT$) 75.9 98.1 128.2 162.3 DCF value (6/2010) NT$ 747 Cash div. (NT$/share) 18.6 13.9 24.7 30.4 Price target (6/2010) NT$ 630 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

203



MediaTek Inc.: Summary of financials NT$ in billions, year-end DecemberIncome statement Ratio analysis FY07A FY08A FY09E FY10E FY11E % FY07A FY08A FY09E FY10E FY11E Revenues 80.4 90.2 115.8 142.2 164.8 Gross Margin 57.4 53.7 58.8 58.6 57.9 Cost of Goods Sold 34.2 41.8 47.7 58.8 69.4 EBITDA margin 41.8 27.7 35.3 34.5 33.4 Gross Profit 46.2 48.4 68.1 83.3 95.3 Operating Margin 41.0 24.5 32.6 33.2 32.2 R&D Expenses 9.1 15.8 14.2 19.4 22.3 Net Margin 43.0 21.3 32.5 32.6 32.2 SG&A Expenses 4.1 4.0 4.5 5.2 5.7 R&D/sales 11.3 17.6 12.2 13.6 13.5 Operating Profit (EBIT) 33.0 22.1 37.7 47.1 53.1 SG&A/Sales 5.1 4.5 3.9 3.7 3.5 EBITDA 33.6 25.0 40.9 49.0 55.0 Interest Income 1.6 1.3 0.6 2.5 3.6 Sales growth 51.7 12.2 28.3 22.7 15.9 Interest Expense 0.0 0.0 0.0 0.0 0.0 Operating Profit Growth 45.0 -32.8 70.3 25.0 12.6 Investment Income (Exp.) 1.6 0.0 0.3 0.2 0.3 Net profit growth 53.1 -44.5 96.1 23.2 14.3 Non-Op Income (Exp.) -0.1 -2.3 0.2 0.0 0.0 EPS (Reported) growth 49.9 -45.8 92.8 22.0 14.0 Earnings before tax 36.0 21.1 38.7 49.8 57.0 EPS (New GAAP) growth 149.7 -27.9 92.8 22.0 14.0 Tax -1.5 -1.9 -1.1 -3.5 -4.0 Net Income (Reported) 34.6 19.2 37.6 46.4 53.0 Net debt to total capital -53.2 -47.4 -64.2 -74.8 -80.1 Net Income (New TW GAAP) 26.0 19.2 37.6 46.4 53.0 Net debt to equity -53.2 -47.4 -64.2 -74.8 -80.1 NT$ EPS (Reported) 33.3 18.0 34.8 42.4 48.4 Asset Turnover 82.6 93.4 80.9 74.8 70.7 EPS (New Taiwan GAAP) 25.0 18.0 34.8 42.4 48.4 Working Capital Turns (X) 1.8 2.2 2.7 2.0 1.6 BPS 81.6 75.9 98.1 128.2 162.3 ROE 45.0 29.9 52.0 46.1 41.5 DPS 14.0 18.6 13.9 24.7 30.4 ROIC 43.2 21.5 39.4 35.6 31.2 Shares Outstanding (MM) 1,039.0 1,063.4 1,082.0 1,092.1 1,095.2 ROIC (net of cash) 96.8 43.3 91.2 119.3 139.8 Balance sheet Cash flow statement FY07A FY08A FY09E FY10E FY11E FY07A FY08A FY09E FY10E FY11E Cash and cash equivalents 45.7 38.7 68.6 105.4 142.6 Net Income 34.6 19.2 37.6 46.4 53.0 Accounts receivable 5.5 2.5 12.9 17.3 19.2 Depr. & Amortisation 0.7 2.9 3.2 1.9 1.9 Inventories 9.5 3.4 4.0 5.6 6.4 Change in working capital -6.6 13.4 6.1 5.1 2.2 Others 1.9 1.2 5.3 7.2 8.0 Other 0.0 0.0 0.0 0.0 0.0 Current assets 62.6 45.8 90.9 135.5 176.2 Cash flow from ops. 28.7 35.5 46.9 53.3 57.1 LT investments 27.6 35.1 40.2 40.4 40.7 Capex -1.1 -2.9 -0.2 -3.9 -3.9 Net fixed assets 5.2 5.2 2.3 4.3 6.3 Disposal/ (purchase) -5.1 -16.1 -4.3 -0.2 -0.3 Others 1.9 10.5 9.7 9.7 9.7 Cash flow from investing -6.2 -19.0 -4.6 -4.1 -4.2 Total assets 97.3 96.6 143.1 190.0 233.0 Free cash flow 27.6 32.6 46.6 49.4 53.2 Liabilities Equity raised/ (repaid) 3.3 3.2 19.7 14.5 17.6 ST loans 0.0 0.0 0.0 0.0 0.0 Debt raised/ (repaid) 0.0 0.0 0.0 0.0 0.0 Payables 6.6 3.8 8.0 11.4 12.9 Other 0.0 0.0 0.0 0.0 0.0 Others 4.6 11.1 28.0 37.7 41.8 Dividends paid -14.5 -19.8 -15.0 -27.0 -33.3 Total current liabilities 11.3 14.9 36.1 49.1 54.7 Cash flow from financing -11.2 -16.5 4.7 -12.5 -15.7 Long term debt 0.0 0.0 0.0 0.0 0.0 Other liabilities 0.1 0.1 0.1 0.1 0.1 Net change in cash 11.3 -0.1 47.0 36.7 37.3 Total liabilities 11.4 15.0 36.1 49.1 54.8 Beginning cash 39.4 45.7 38.7 68.6 105.4 Shareholders' equity 85.9 81.6 107.0 140.8 178.2 Ending cash 50.7 45.6 85.6 105.4 142.6 Source: Company, J.P. Morgan estimates.

204



Metropolitan Bank & Trust Co. www.metrobank.com.ph

Overweight Php41.00


Company description Metrobank is one of the top three banks in the Philippines. MBT was established in 1962 and achieved progress in the 1980s after it obtained its universal banking license and acquired a controlling interest in PSBank. MBT offers a full range of banking products, including bancassurance, insurance, and investment management. With assets of nearly Php777 billion, the bank has over 700 domestic branches. Post mortem MBT has made significant improvement in its credit risk management over the past three years. Entire credit risk underwriting process was revamped, while relationship-based lending and exceptions are being curtailed. Asset quality has been stable in the past two years, with NPL ratio at 4.8% in June 2009, versus the system NPL and NPA ratio of 3.79% and 4.38%, respectively. Potential for earnings upgrades MBT has a high operating leverage. We estimate that every 5% change in top line translates into a corresponding 14% change in PPOP and a 17% change in EPS. Bottom-line impact of credit cost changes is also substantial—every 10bp change corresponds to a 4% change in EPS. How much recovery is priced into the stock? RoE has been in single digits over the past 10 years, except in 2007 due to the exceptional boost from bond gains. This was primarily driven by higher credit costs. We expect improvement in credit risk management and the charge-off of the remaining SPV debt of Php4.8 billion this year to be key catalysts for a re-rating. Price target and key risks Our Dec-10 PT of Php50 is based on a 2-stage DDM. We use a fair P/BV-based multiple of 0.92x, with a normalized RoE of 13.4%, cost of capital of 14%, and a growth rate of 7%. Key risks to our PT include a delay in clean-up of the book, and capital call.

Philippines Banks Harsh Wardhan ModiAC (65) 6882-2450 [email protected]


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MBT.PS share price (PhpPSE (rebased)

Source: Reuters.


Source: Reuters.

Company data 52-week range (Php) 43-19.50 Mkt cap. (PhpMM) 74,098 Mkt cap. (US$MM) 1,555 Avg daily value (US$MM) 2.2 Avg daily volume (MM) 2.3 Shares O/S (MM) 1,807 Date of price 5-Nov-09 Index: PSEi 2,945 Free float (%) 44 Exchange rate 47.6

Source: Bloomberg. Bloomberg: MBT PM; Reuters: MBT.PS Php in millions, year-end December FY08 FY09E FY10E FY11E Operating profit 10,361 13,475 14,619 17,354 Net profit 4,408 4,844 7,154 9,574 EPS (Php) 2.44 2.68 3.96 5.30 DPS (Php) 0.60 0.80 1.20 1.60 EPS growth (%) -39.9% 9.9% 47.7% 33.8% ROE (%) 7.2% 8.0% 11.1% 13.7% P/E (x) 16.8 15.3 10.4 7.7 BVPS (Php) 32.5 34.3 36.9 40.4 P/BV (x) 1.26 1.20 1.11 1.02 Div yield (%) 1.5% 2.0% 2.9% 3.9% Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

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Metropolitan Bank & Trust Co.: Summary of financials Income statement - Php mn 2007 2008 2009E 2010E 2011E Growth Rates 2007 2008 2009E 2010E 2011EMargins (% of Earning Ass 3.52% 3.46% 3.51% 3.58% 3.62% Loans 7% 17% 4% 12% 13%Earning Assets/Assets 89% 90% 91% 91% 91% Deposits 8% 11% 5% 13% 10%NIM (as % of avg. Assets) 3.15% 3.12% 3.18% 3.25% 3.30% Assets 10% 7% 8% 10% 8%

Equity 3% -7% 5% 7% 9%Net Interest Income 21,466 23,069 25,256 28,186 31,249

Net Interest Incom 12% 7% 9% 12% 11%Total Non-Interest Revenue 14,906 11,486 13,831 12,930 14,049 Non-Interest Income 2% -23% 20% -7% 9%Fee income 5,507 6,783 6,444 7,088 7,797 of which Fee Grth 10% 23% -5% 10% 10%FX/Trading gains 5,757 -504 3,482 1,741 1,741 Revenues 8% -5% 13% 5% 10%Other operating income 3,642 5,208 3,906 4,101 4,511 Costs 6% 9% 6% 3% 5%Total operating revenues 36,371 34,555 39,087 41,116 45,297 Pre-Provision Prof 11% -27% 30% 8% 19%Operating costs -22,174 -24,194 -25,612 -26,497 -27,943 Loan Loss Provision -4% -58% -5% -44% -44%Operating profit 14,198 10,361 13,475 14,619 17,354 Pre-Tax 47% 4% 4% 48% 34%Loan Loss Provisions -7,787 -3,248 -3,087 -1,730 -975 Attributable Incom 27% -37% 10% 48% 34%Other provisions 0 0 -3,000 -1,500 -800 EPS 21% -40% 10% 48% 34%Exceptionals 0 0 0 0 0 DPS 20.0% -50.0% 33.3% 50.0% 33.3%Disposals/ Other income 1,396 992 1,000 1,000 1,000Pre-tax profit 7,807 8,104 8,388 12,389 16,579 Balance Sheet Gea 2007 2008 2009E 2010E 2011ETax -88 -3,027 -2,852 -4,212 -5,637Minorities/preference dividen -675 -669 -692 -1,022 -1,368 Loan/Deposit 58% 61% 61% 61% 63%Attributable net income 7,043 4,408 4,844 7,154 9,574 Investment/Assets 18% 19% 23% 22% 22%

Loan/Assets 43% 47% 45% 46% 48%Customer deposits/ 74% 77% 74% 76% 77%LT Debt/Liabilities 3% 2% 3% 3% 2%

Per Share Data 2007 2008 2009E 2010E 2011E Asset Quality/Cap 2007 2008 2009E 2010E 2011EEPS (Php/ share) 4.1 2.4 2.7 4.0 5.3 Loan loss reserves/ -4.2% -3.8% -3.5% -3.2% -2.8%DPS (Php/ share) 1.2 0.6 0.8 1.2 1.6 NPLs/loans 5.0% 4.2% 4.5% 4.2% 3.9%Payout 29.6% 24.6% 29.8% 30.3% 30.2% Loan loss reserves/ 80% 86% 76% 73% 69%NAV 35.5 32.5 34.3 36.9 40.4 Growth in NPLs -18% -2% 9% 7% 5%Avg. Shares Issued 1,736 1,807 1,807 1,807 1,807

Tier 1 Ratio 9.1% 9.7% 10.1% 10.0% 10.4%Total CAR 13.9% 13.4% 13.6% 13.1% 13.4%

Key balance sheet - Php m 2007 2008 2009E 2010E 2011E Du-Pont Analysis 2007 2008 2009E 2010E 2011ENet Customer Loans 304,898 358,163 372,686 419,162 474,283 NIR/Avg. Assets 3.15% 3.12% 3.18% 3.25% 3.30%Loans loss reserves 12,769 13,541 13,127 13,357 13,332 Non IR/Avg. Asset 2.18% 1.55% 1.74% 1.49% 1.48%Gross Loans 317,667 371,704 385,813 432,520 487,615 Non IR/Total Rev 41.0% 33.2% 35.4% 31.4% 31.0%Investments 127,359 147,501 185,815 198,822 212,739 Total Rev/Avg. As 5.33% 4.67% 4.92% 4.75% 4.79%Other Earning Assets 200,994 191,118 194,465 217,223 220,848 Cost/Income 61.0% 70.0% 65.5% 64.4% 61.7%Average Earning Assets = 610,626 666,068 719,101 787,553 863,723 Cost/Assets 3.25% 3.27% 3.23% 3.06% 2.95%Total assets 716,068 764,809 823,336 908,712 984,058 Operating ROAA 0.9% 1.0% 1.3% 1.5% 1.7%

LLP/Loans -2.5% -0.9% -0.8% -0.4% -0.2%Customer deposits 529,543 585,307 612,236 690,736 757,416 Other inc:provs 0.00% 0.00% 0.38% 0.17% 0.08%Long-term bond funding 18,620 15,856 22,199 22,199 22,199 Pre-tax ROAA 1.1% 1.1% 1.1% 1.4% 1.8%Other Interest Bearing Liabili 93,429 94,642 116,498 118,388 120,373 Tax -1.1% -37.4% -34.0% -34.0% -34.0%Average Interest Bearing L 578,013 633,023 686,293 752,380 824,970 MI -0.1% -0.1% -0.1% -0.1% -0.1%Average Assets 682,427 740,439 794,073 866,024 946,385 ROAA 1.0% 0.6% 0.6% 0.8% 1.0%Shareholders' equity 74,476 69,005 72,403 77,388 84,071 RoRWA 1.7% 0.9% 0.9% 1.3% 1.5%Risk Weighted Assets 452,295 501,085 543,402 599,750 639,638 Equity/Assets 9.2% 8.3% 7.6% 7.4% 7.4%Average Risk Weighted As 418,974 476,690 522,243 571,576 619,694 ROE 11.2% 7.2% 8.0% 11.1% 13.7% Source: Company data, J.P. Morgan estimates.

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MindTree www.mindtree.com

Overweight Rs603

Price Target: Rs700

Company description MindTree is a mid-sized Indian IT services company, founded in 1999. The company is structured into two business units that focus on software development (IT Services) and R&D services. The company has clients that range from Fortune 100 companies to enterprise software organizations. It had posted an industry-leading revenue growth of 42% over FY05-09. The company has a marquee client base, systems/processes that are ahead of its mid-cap peer group and higher offshore mix than peers.

Post mortem MindTree saw a revenue slowdown from some of its customers impacted by the slowdown. The company is now seeing increasing volumes from most of its top-tier customers; this, we believe, led to 4% Q/Q volume growth in the past quarter and expectation of a volume recovery going forward. Given the good execution and increased deal signings, we believe MindTree is in a position to post a 15-20% revenue growth over the next 1-2 years with stable margins.

Potential for earnings upgrades We expect a 10%-15% upside to consensus’ FY10/11 EPS estimates for MindTree, and believe the stock will re-rate as consensus estimates increase over the next 1-2 quarters.

How much recovery is priced into the stock? We believe IT spend recovery will affect mid-cap Indian IT stocks with a lag compared to large-caps. Hence, we expect mid-caps to see more absolute upside than large caps and MindTree is our top pick in the mid-cap space.

Price target and key risks Our Jun-10 price target of Rs700 is based on a one-year forward P/E multiple of 12x—at a 30%-35% discount to the target P/E multiples of top-tier Indian IT companies (Infosys/TCS/Wipro). Key risks to our price target are rupee/US$ appreciation and protectionism.

India IT Services Manoj SinglaAC (91-22) 6157-3587 [email protected]


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MindTree Sensex (rebased)

Source: Bloomberg.


Source: Bloomberg.

Company data 52-week range (Rs) 181-650 Mkt cap. (Rs B) 22.76 Mkt cap. (US$MM) 483.8 Avg daily value (US$MM) 4.2 Avg daily volume (MM) 0.41 Shares O/S (MM) 38 Date of price 5-Nov-09 Index: Sensex 16,063.9 Free float (%) 23 Exchange rate (Rs/US$) 47.0

Source: Bloomberg. Bloomberg: MTCL IN; Reuters: MINT.BO Rs in millions, year-end March FY09 FY10E FY11E FY12E Sales 10,126 12,867 15,017 17,908 Net profit 300 1,965 2,079 2,512 EPS (Rs) 7.9 50.4 53.3 62.8 FD EPS (Rs) 7.9 50.4 53.3 62.8 DPS (Rs) 1.0 4.5 5.5 6.5 Sales growth (%) 36.9 27.1 16.7 19.2 Net profit growth (%) -71.0 554.9 5.8 20.8 EPS growth (%) -71.0 554.9 5.8 20.8 ROE (%) 5.6 33.8 28.7 27.1 P/E (x) 76.7 12.0 11.3 9.6 FD P/E (x) 76.7 12.0 11.3 9.6 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

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MindTree: Summary of financials Profit and loss statement Rs in millions, year-end March

FY09 FY10E FY11E FY12ERevenue 10,126 12,867 15,017 17,908% change Y/Y 36.9 27.1 16.7 19.2Gross margin (%) 39.1 33.4 33.0 33.0EBITDA 2641 2449 3009 3665% change Y/Y 110.6 -7.3 22.9 21.8EBITDA margin (%) 26.1 19.0 20.0 20.5EBIT 2,173 1,798 2,289 2,858% change Y/Y 142.0 -17.2 27.3 24.8EBIT margin (%) 21.5 14.0 15.2 16.0Net interest (83) 50 157 283 Earnings before tax 325 2,237 2,446 3,140% change Y/Y -70.9 587.3 9.4 28.4Tax 25 272 367 628as % of EBT 7.8 12.2 15.0 20.0Net income (reported) 300 1,965 2,079 2,512% change Y/Y -71.0 554.9 5.8 20.8Shares O/S (MM) 39 39 40 41EPS (reported) (Rs) 7.9 50.4 53.3 62.8Source: Company, J.P. Morgan estimates.


FY09 FY10E FY11E FY12ECash and cash equivalents 477 1,533 2,901 4,806Accounts receivable 2,150 2,586 3,068 3,639Inventories 0 0 0 0Others 1,231 1,995 2,542 3,015Current assets 3,858 6,114 8,511 11,461LT investments 2,920 0 0 0Net fixed assets 2,438 2,677 2,557 2,349Total assets 9,360 8,998 11,275 14,017Liabilities ST loans 0 0 0 0Payables 2,499 2,274 2,720 3,252Others 0 0 0 0Total current liabilities 2,499 2,274 2,720 3,252Long-term debt 1,394 31 31 31Other liabilities 164 370 370 370Total liabilities 4,057 2,674 3,121 3,653Shareholders’ equity 5,304 6,323 8,154 10,364BVPS (Rs) 136.1 162.2 203.9 252.9Source: Company, J.P. Morgan estimates.


FY09 FY10E FY11E FY12EEBIT 2,173 1,798 2,289 2,858Depreciation & amortization 469 650 720 807Change in working capital 717 -1,425 -583 -513Taxes 25 272 367 628Cash flow from operations 1,485 1,191 2,217 2,807Capex -317 -889 -600 -600Disposal/(purchase) 1,485 1,191 2,217 2,807Net interest (83) 50 157 283 Free cash flow 1,169 302 1,617 2,207Equity raised/(repaid) -292 -740 2 2Debt raised/(repaid) 476 -1,363 0 0Other -58 206 0 0Dividends -44 -205 -251 -304Beginning cash 1,942 477 1,533 2,901Ending cash 477 1,533 2,901 4,806DPS (Rs) 1.0 4.5 5.5 6.5Source: Company, J.P. Morgan estimates.


FY09 FY10E FY11E FY12EEBITDA margin 26.1 19.0 20.0 20.5Operating margin 21.5 14.0 15.2 16.0Net profit margin 3.0 15.3 13.8 14.0SG&A/sales 17.7 19.4 17.7 17.0Sales growth 36.9 27.1 16.7 19.2Net profit growth -71.0 554.9 5.8 20.8Sales per share growth 33.1 27.1 13.8 16.3EPS growth -71.2 541.2 5.8 17.8Interest coverage (x) 13.4 64.4 374.9 467.9Net debt to total capital 13.7 n.m. n.m. n.m.Net debt to equity 17.3 n.m. n.m. n.m.Sales/assets 108.2 143.0 133.2 127.8EBIT margin 21.5 14.0 15.2 16.0ROCE 22.5 24.7 25.9 24.1Assets/equity (x) 1.8 1.4 1.4 1.4ROI 33.5 32.2 29.0 31.2ROE 5.6 33.8 28.7 27.1Source: Company, J.P. Morgan estimates.

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MMK www.mmk.ru


Price Target: $1.13

Company description With 13.3mn t of crude steel production (2008), MMK is the leading Russian flat steel producer and 23rd largest steelmaker in the world (2008). With exposure to the tubular and machine-building industries, MMK has established the strongest footprint in the domestic market among the Russian steelmakers. Export is traditionally focused on the Middle East and Turkey, where MMK is building 2 processing warehouses and a re-rolling plant. In 2H09 MMK acquired Russian coal miner Belon, improving its downstream integration. In the short term, the company plans to install and commission Mill 2000, aiming to produce high-quality automotive steel.

Post mortem With the domestic market on the recovery path, MMK is strengthening its position in the domestic market. Acquisition of the coal business (Belon) should support MMK’s cost base. Prudent borrowing has paid off as the company has emerged with a strong balance sheet after the downturn.

Potential for earnings upgrades Operating at 85% utilisation in 4Q09, MMK has the potential for volume growth, however, we believe the largest impact on EPS should come from a combination of improved product mix, strengthened domestic prices and ruble appreciation.

How much recovery is priced into the stock? We estimate that with an increase in domestic steel demand in 2010 (JPMe +16% y/y), MMK should benefit from a higher operating margin due to a domestic price premium. Inclusion in MSCI Russia is an extra trigger, we believe.

Price target and key risks Our end-10, DCF-based PT is $1.13/sh. Key risks are a decline in domestic steel consumption (particularly in the tubular and machine-building industries), weak flat-steel prices and a strong ruble.

Russia Metals & mining Yuriy VlasovAC (7-495) 967-7033 [email protected] J.P. Morgan Bank International LLC

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Source: Bloomberg


Absolute (%) 7% 32% 315% Relative (%) 5% -9% 117%

Source: Bloomberg

Company data 52-week range ($) 0.15- 0.83 Mkt cap. (US$MM) 9,263 Avg daily value (US$MM) 3.5 Avg daily volume (MM) 618 Shares O/S (MM) 11,160 Date of price 23-Nov-09 Index: RTS 1467 Free float (%) 12% Exchange rate 1.00

Source: Bloomberg

Bloomberg: MAGN RU; Reuters: MAGN.MM $ in millions, year-end December FY08 FY09E FY10E FY11E Sales 10,550 4,512 5,919 8,406 Net profit 1,075 136 501 1,094 EPS ($) 0.096 0.012 0.045 0.098 FD EPS ($) 0.147 0.095 0.056 0.063 DPS ($) 0.05 0.03 0.00 0.01 Sales growth (%) 29% -57% 31% 42% Net profit growth (%) -39% -87% 268% 118% EPS growth (%) -39% -87% 268% 118% ROE (%) 11% 1% 5% 10% P/E (x) 8.6 68.1 14.5 8.5 FD P/E (x) 5.4 69.2 12.9 6.7 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as at cob 23 November 2009.

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MMK: Summary of Financials Profit and Loss Statement Cash flow statement $ in millions, year end Dec FY08 FY09E FY10E FY11E $ in millions, year end Dec FY08 FY09E FY10E FY11E Revenues 10,550 4,512 5,919 8,406 EBIT 1,259 175 688 1,558

% Change Y/Y 28.7% -57.2% 31.2% 42.0% Depreciation & amortization 945 638 670 704Gross Margin (%) 25.7% 23.7% 33.0% 36.0% Change in working capital (269) 153 33 (202)EBITDA 2,204 813 1,358 2,262 Taxes 25 0 0 0

% Change Y/Y -7.9% -63.1% 67.0% 66.6% Cash flow from operations 1,935 966 1,391 2,060EBITDA Margin (%) 20.9% 18.0% 22.9% 26.9%

EBIT 1,259 175 688 1,558 Capex (2,112) (1,021) (1,200) (1,400)% Change Y/Y -40.9% -86.1% 293.1% 126.6% Disposals/(purchase) 0 0 0 0EBIT Margin 11.9% 3.9% 11.6% 18.5% Net Interest (18) (38) (28) (28)

Net Interest (18) (38) (28) (28) Free cash flow 946 (83) 67 366Earnings before tax 1,106 193 705 1,580

% change Y/Y -51.8% -82.5% 264.5% 124.2% Equity raised/repaid - - - -Tax (25) (46) (141) (316) Debt Raised/repaid 412 300 250 -125

as % of EBT 27.5% 24.0% 20.0% 20.0% Other - - - -Net Income (Reported) 1,075 136 501 1,094 Dividends paid (314) 0 (75) (164)

% change Y/Y -39.3% -87.4% 268.4% 118.4% Beginning cash 256 1,106 1,287 1,493Shares Outstanding 11,160.3 11,160.3 11,160.3 11,160.3 Ending cash 1,106 1,287 1,493 1,534EPS (Reported) - - - - DPS 0.03 0.00 0.01 0.01

% Change Y/Y - - - - Balance sheet Ratio Analysis $ in millions, year end Dec FY08 FY09E FY10E FY11E $ in millions, year end Dec FY08 FY09E FY10E FY11E Cash and cash equivalents 1,106 1,287 1,493 1,534 EBITDA margin 20.9% 18.0% 22.9% 26.9%Accounts Receivable 991 524 555 787 Operating margin 10.2% 3.9% 11.6% 18.5%Inventories 996 527 557 791 Net Profit margin 10.2% 3.0% 8.5% 13.0%Others - - - - SG&A/Sales -4.9% -7.7% -6.9% -5.9%Current assets 3,628 2,873 3,141 3,648 Sales per share growth 24.9% -57.2% 31.2% 42.0%LT investments 358 358 358 358 Sales growth 28.7% -57.2% 31.2% 42.0%Net fixed assets - - - - Net profit growth -39.3% -87.4% 268.4% 118.4%Total assets 14,197 13,860 14,694 15,934 EPS growth - - - - ST loans 1,276 1,276 1,276 1,276 Interest coverage (x) 69.9 4.6 24.6 55.7Payables 1,321 537 632 897 Net debt to Total Capital - - - -Others - - - - Net debt to equity 6.3% 7.4% 7.5% 5.3%Total current liabilities 2,640 1,856 1,951 2,216 Sales/assets (x) 0.7 0.3 0.4 0.5Long term debt 405 705 955 830 Assets/Equity 146.9% 141.4% 143.7% 142.8%Other liabilities - - - - ROE 11.1% 1.4% 4.9% 9.8%Total liabilities 4,345 3,861 4,206 4,346 ROCE 10.9% 1.5% 5.4% 11.4%Shareholders' equity 9,663 9,799 10,225 11,155 BVPS 1 1 1 1 Source: Company reports and J.P. Morgan estimates.

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MTN www.mtn.com



Company description MTN is a leading MNO on the African continent and the Middle East. The group has a presence in 21 countries - key markets include Nigeria, South Africa, Iran, Ghana, Cote d’Ivoire and Syria. We forecast MTN to report FY09E revenue of R122.8bn, and EBITDA of R50.3bn.

Post mortem Post the protracted and ultimately unsuccessful negotiations with Bharti, operationally sound H109A results and the strength in the rand exchange rate against the US$ that renders MTN less attractive for rand-based investors, we estimate that MTN is trading on a normalized free cash flow yield of 13-14% on 2010E, placing it amongst the most attractively valued mobile stocks in our EM universe, despite being one of the most promising growth stories and one of the most respected names in the sector. Our FY09E headline EPS of 1016c represents YoY growth of 18.6%, driven by an increase of 21.8% YoY in total subscribers (to 110.5m). In our view, the key drivers for the stock should be strong underlying growth and a stabilisation in the rand exchange rate. A strong operating performance would likely help the market refocus on MTN's strong growth prospects.

How much recovery is priced into the stock? We believe that at these levels, the MTN does not fully price in the likely growth recovery we expect in 2010, and neither do we think it prices in the strong growth potential we believe remains beyond then.

Price target and key risks Our Sep-10 DCF and multiples-based TP is 15,843c, supported by higher relative multiples as potential M&A activity ceases to influence pricing and rand growth recovers. Key risks include: 1) increasing competitive pressures and regulation, particularly if MTR cuts are followed by deep price discounting; 2) macro & political uncertainty; and 3) fluctuations in the rand. JPM sees only limited further upside and scope for some reversal of the recent strength in 2010.

South Africa Wireless Services Jean-Charles LemardeleyC (44-20) 7325 5763 [email protected]


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Source: Bloomberg


Absolute (%) -4.3 -5.6 18.9 Source: Bloomberg

Company data Price(c) 11,940 Date of Price 23-Nov-09 Price Target (c) 15,843 Price Target End Date 01-Sep-10 52-week Range (c) 13,600 – 8,181 Mkt Cap (Rbn) 219.70 Shares O/S (mn) 1,840 Mkt Cap ($bn) 28.9


Bloomberg: MTN SJ; Reuters: MTNJ.J Rand millions, year-end Dec

FY08 FY09E FY10E FY11E Sales 102,526 122,754 133,897 148,398 Net profit 16,675 18,896 21,806 - FD EPS (SAcps) 893.93 1,016.48 1,179.95 - DPS (SAcps) 181 205 285 355 Sales growth (%) 40.2 19.7 9.1 10.8 Net profit growth (%) 33.1 13.3 15.4 - EPS growth (%) 32.9 13.7 16.1 - ROE (%) 27.2 22.7 21.6 - FD P/E (x) 13.4 11.7 10.1 -


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MTN Group Limited: Summary of Financials Profit and Loss Statement Cash flow statement R in millions, year end Dec FY08 FY09E FY10E FY11E FY12E R in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Revenues 102,526 122,754 133,897 148,398 - Cash EBITDA - - - - -

% Change Y/Y 40.2% 19.7% 9.1% 10.8% - Interest (1,917) (3,265) (2,150) - -EBITDA 43,166 50,272 55,173 61,220 - Tax (6,781) (8,270) (10,480) - -

% Change Y/Y 35.5% 16.5% 9.7% 11.0% - Other 0 0 0 - -EBITDA Margin 42.1% 41.0% 41.2% 41.3% - Cash flow from operations 45,416 51,032 55,566 61,220 -

EBIT 30,212 35,931 40,663 45,055 - % Change Y/Y 33.1% 18.9% 13.2% 10.8% - Capex PPE (28,263) (30,661) (22,475) - -EBIT Margin 29.5% 29.3% 30.4% 30.4% - Net investments - - - - -

Net Interest (1,917) (3,265) (2,150) - - CF from investments - - - - -PBT 28,295 32,666 38,513 - - Dividends (2,536) (3,381) (3,788) - -

% change Y/Y 44.9% 15.4% 17.9% - - Share (buybacks)/ issue - - - - -Net Income (clean) 16,675 18,896 21,806 - -

% change Y/Y 33.1% 13.3% 15.4% - - CF to Shareholders - - - - -Average Shares - - - - - FCF to debt - - - - -Clean EPS 893.93 1,016.48 1,179.95 - -

% change Y/Y 32.9% 13.7% 16.1% - - OpFCF (EBITDA - PPE) - - - - -DPS 181 205 285 355 - EFCF pre Div, PPE - - - - - Balance sheet Ratio Analysis R in millions, year end Dec FY08 FY09E FY10E FY11E FY12E R in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Cash and cash equivalents - - - - - EBITDA margin 42.1% 41.0% 41.2% 41.3% -Accounts Receivables - - - - - EBIT Margin 29.5% 29.3% 30.4% 30.4% -ST financial assets - - - - - Net profit margin 16.3% 15.4% 16.3% - -Others - - - - - Capex/sales 21.0% 27.6% 25.0% - -Current assets - - - - - Depreciation/Sales - - - - -LT investments 5,340 5,340 5,183 5,183 - Net fixed assets - - - - - Revenue growth 40.2% 19.7% 9.1% 10.8% -Total assets 169,054 176,792 191,312 212,519 - EBITDA Growth 35.5% 16.5% 9.7% 11.0% -ST loans - - - - - EPS Growth 32.9% 13.7% 16.1% - -Payables - - - - - Others - - - - - Net debt/EBITDA 0.6 0.3 0.2 - -Total current liabilities - - - - - CF to Shareholders - - - - -Long term debt - - - - - FCF to debt - - - - -Other liabilities - - - - - Total liabilities 89,202 81,566 75,510 71,984 - OpFCF (EBITDA - PPE) - - - - -Shareholders' equity 75,696 90,676 110,803 135,035 - EFCF pre Div, PPE - - - - - Source: Company reports and J.P. Morgan estimates.

212



Nan Ya Plastics Corp www.npc.com.tw

Overweight NT$53.20


Company description Nan Ya Plastics (NYP) is one of the largest polyester and MEG producers in Asia. The company started out as a PVC processor, taking PVC powder from Formosa Plastics and producing PVC pipes, film, leather, which they continue to do so today. Aside from MEG, they also produce other specialty chemicals such as 1,4-Butanediol and TDI. In recent years, they have expanded to the electronics sector with subsidiaries producing products such as DRAM and PCB, with NYP supplying raw materials to the latter.

Post mortem We expect NYP to post superior earnings growth in 2010 than other Formosa Group members, as its electronics business continues to improve. This year NYP has benefited from the unexpected turnaround in the petrochemicals industry and jump in DRAM prices from $0.85/Gb in January to $2.74/Gb now, while the PCB business continues to grow on the back of strong demand for electronics.

Potential for earnings downgrade The major downside risk to NYP earnings in 2010, in our view, is MEG spreads contracting further due to new capacities from the Middle East. However, with YTD MEG spreads hovering around $120/ton, we think the downside is limited, given it is already near cash costs.

How much upside is priced into the stock? As consensus earnings estimates for the DRAM business has continued to lag the actual results, we believe there is room for further upside if DRAM prices stay at current levels and Nanya Tech completes its transition to the 50nm technology in 1Q10 and potentially turn profitable in 2010.

Price target and key risks Our Dec-10 PT of NT$61 is based on 2.0x 2010E BV, similar to levels we have valued Formosa Plastics at. While contribution from FPCC is expected to decline, this will be offset by earnings from Nanya Tech and Nan Ya PCB. A key downside risk to our PT is MEG overcapacity, which could negatively affect NYP’s chemical earnings.

Taiwan Petrochemicals Samuel Lee, CFAAC (852) 2800-8536 [email protected]


Price performance

30

50

70

NT$






52-week range (NT$) 30.49-57.20 Mkt cap. (NT$ MM) 417,726 Mkt cap. (US$MM) 12,853 Avg daily value (US$MM) 378.25 Avg daily volume (MM) 8.73 Shares O/S (MM) 7,852 Date of price 5-Nov-09 Index: TWSE 7,417 Free float (%) 74.3 Exchange rate 32.5

Source: Bloomberg.

Bloomberg: 1303 TT; Reuters: 1303.TW NT$ in millions, year-end December FY08 FY09E FY10E FY11E Sales 208,179 159,970 188,196 224,757 Net profit 9,386 12,919 18,873 28,226 EPS (NT$) 1.23 1.65 2.40 3.59 DPS (NT$) 6.70 0.80 1.07 1.56 Sales growth (%) -8.7% -23.4% 17.6% 19.4% Net profit growth (%) -84.1% 37.7% 46.1% 49.6% EPS growth (%) -84.1% 33.6% 46.1% 49.6% ROE (%) 3.7% 5.7% 8.2% 11.8% P/E (x) 43.2 32.2 22.2 14.8 P/BV (x) 1.8 1.8 1.8 1.7 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

213



Nan Ya Plastics Corp: Summary of financials NT$ in millions, year-end December Income statement Cash flow statement FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E Revenues 228,700 208,719 159,970 188,196 224,757 EBIT 36,744 11,962 9,381 13,663 17,036

% change Y/Y 25.9% (8.7%) (23.4%) 17.6% 19.4% Depr. & amortization 8,727 8,717 8,326 8,326 8,326EBITDA 45,471 20,680 17,708 21,989 25,362 Change in working capital -8,341 -334 -14,713 8,339 10,710

% change Y/Y 78.6% -54.5% -14.4% 24.2% 15.3% Taxes -8263 -1 -1299 -1731 -2588EBIT 36,744 11,962 9,381 13,663 17,036 Cash flow from operations 70,313 49,218 39,738 19,818 20,938

% change Y/Y 109.1% NM NM 45.6% 24.7% EBIT Margin 16.1% 5.7% 5.9% 7.3% 7.6% Capex -5,595 -5,447 -5,827 -2,914 -1,457Net Interest -2,042 -2,034 -1,567 -1,985 -1,887 Disposal/(purchase) 3,725 380 - - -Earnings before tax 67,310 9,387 14,219 20,603 30,814 Net Interest -2,042 -2,034 -1,567 -1,985 -1,887

% change Y/Y 29.3% -86.1% 51.5% 44.9% 49.6% Other -19,648 -6,513 -3,149 -4,809 -4,638Tax -8,263 -1 -1,299 -1,731 -2,588 Free cash flow 64,719 43,771 33,911 16,904 19,481

as % of EBT 12.3% 0.0% 9.1% 8.4% 8.4% Net income (reported) 59,047 9,386 12,919 18,873 28,226 Equity raised/(repaid) - - - - -

% change Y/Y 23.9% -84.1% 37.6% 46.1% 49.6% Debt raised/(repaid) -7,287 13,705 -14,283 -11,574 -5,058Shares outstanding 7,624 7,624 7,852 7,852 7,852 Other -260 -22 823 0 0EPS (reported) 7.75 1.23 1.65 2.40 3.59 Dividends paid -38,026 -51,041 -6,099 -8,398 -12,267

% change Y/Y 23.9% (84.1%) 33.6% 46.1% 49.6% Beginning cash 2,852 2,432 2,159 12,339 4,262 Ending cash 2,432 2,159 12,339 4,262 1,581 DPS 6.70 0.80 1.07 1.56 2.34 Balance sheet Ratio analysis FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E Cash and cash equivalents 2,432 2,159 12,339 4,262 1,581 EBITDA margin 19.9% 9.9% 11.1% 11.7% 11.3%Accounts receivable 55,320 42,623 32,668 38,432 45,898 Operating margin 16.07% 5.73% 5.86% 7.26% 7.58%Inventories 26,219 20,843 15,975 18,793 22,444 Net margin 25.8% 4.5% 8.1% 10.0% 12.6%Others 1,567 1,782 1,782 1,782 1,782 Current assets 120,655 84,250 81,291 83,650 92,085 Sales per share growth 25.9% (8.7%) (25.6%) 17.6% 19.4%LT investments - - - - - Sales growth 25.9% (8.7%) (23.4%) 17.6% 19.4%Net fixed assets 79,212 77,389 75,390 68,971 58,989 Net profit growth 23.9% -84.1% 37.6% 46.1% 49.6%Total Assets 417,955 349,026 335,959 333,463 334,827 EPS growth 23.9% (84.1%) 33.6% 46.1% 49.6% Liabilities Interest coverage (x) 22.27 10.17 11.30 11.08 13.44Short-term loans 21,577 23,217 22,827 34,310 13,215 Payables 3,986 1,750 1,356 1,570 1,869 Net debt to equity 15.1% 29.9% 22.0% 19.2% 17.6%Others 34,224 12,967 12,725 12,836 13,111 Sales/assets 0.58 0.54 0.47 0.56 0.67Total current liabilities 55,801 36,183 35,552 47,146 26,326 Assets/equity 1.45 1.55 1.48 1.41 1.77Long-term debt 56,454 72,544 57,746 34,688 50,725 ROE 22.0% 3.7% 5.7% 8.2% 11.8%Other liabilities 17,193 15,090 15,913 15,913 15,913 ROCE 10.6% 3.5% 3.0% 4.5% 5.6%Total Liabilities 129,447 123,818 109,210 97,747 92,965 Shareholders' equity 288,508 225,208 226,749 235,716 241,862 BVPS 37.84 29.54 28.88 30.02 30.80 Source: Company reports, J.P. Morgan estimates.

214



Naspers www.naspers.co.za



Company description Naspers is a leading multinational media group. The group’s principal operations are in internet platforms, pay-television and the provision of related technologies and print media. Most of Naspers’ operations hold leading positions in their relative markets.

Post mortem The past year has been characterised by a distinct outperformance of Naspers relative to the industrial index - we believe the strong performance is primarily driven by increased contributions from offshore equity-accounted results (i.e. Tencent, Abril and Mail.ru), resilient subscriber growth, combined with strong free cash flow generation in the Pay TV segment and an ongoing systematic decrease in global emerging market risk aversion.

How much recovery is priced into the stock? Both P/E and EV/EBITDA multiples for Naspers reflect steamy valuations relative to historical averages. We attribute this to an evolving business mix, with the group’s valuation and earnings contributions being increasingly weighted in high-growth emerging market internet assets. We believe 1) strong momentum in equity-accounted earnings, 2) increased earnings contribution from emerging market internet assets, and 3) a resilient margin and subscriber growth story in the Pay TV segment, are not fully discounted in the current share price, and therefore are supportive of our thesis of further upside potential.

Price target and key risks We maintain our Overweight rating on Naspers. Our revised SOTP-based Nov-10 TP is 34,109cps (fair value 30,267cps). We believe the key risks to our target price being achieved include 1) poor operational performance; 2) regulatory and exchange rate risk being greater than anticipated; and 3) increasing competitive pressures.

South Africa Entertainment Ziyad JoosubAC (27-11) 507 0456 [email protected]


12,000

18,000

24,000

30,000

c


Price Performance

Source: Bloomberg


Absolute (%) 2.2 19.6 100.2

Source: Bloomberg

Company data Price(c) 29,225 Date of Price 23-Nov-09 Price Target (c) 34,109 Price Target End Date 30-Nov-10

52-week Range (c) 29,484 – 13,692 Mkt Cap (Rbn) 118.31 Shares O/S (mn) 405 Free Float 100.0%


Bloomberg: NPN SJ; Reuters: NPNJ.J Rand millions, year-end Dec

FY09A FY10E FY11E FY12E Sales 26,690 31,200 36,029 4,0827 Net profit 5,761 4,226 5,636 7,315 FD EPS (SAcps) 1178.8 1469.11 1881.14 2370.63 DPS (SAcps) 207 269 356 458 Sales growth (%) 30.1 16.9 15.5 13.3 Net profit growth (%) 68.5 -26.6 33.4 29.8 EPS growth (%) - 24.6 28.1 26.0 ROE (%) 8.6 12.0 14.6 16.5 FD P/E (x) 24.9 19.9 15.6 12.4


215



Naspers Ltd: Summary of Financials Profit and Loss statement Cash flow statement R in millions, year end Mar FY08 FY09 FY10E FY11E FY12E R in millions, year end Mar FY08 FY09 FY10E FY11E FY12E Revenues 20,518 26,690 31,200 36,029 40,827 EBIT 3,878 3,783 4,625 5,826 6,872

% change Y/Y 19.2% 30.1% 16.9% 15.5% 13.3% Depreciation & amortisation 1,120 2,243 2,486 2,771 3,051Gross Margin (%) 47.5% 49.3% 48.8% 48.9% 49.0% Change in working capital (97) (909) (97) (609) (625)EBITDA 4,997 6,026 7,112 8,596 9,923 Cash flow from ops (pre tax) 3,307 2,722 1,735 1,369 1,112

% change Y/Y 17.3% 20.6% 18.0% 20.9% 15.4% EBITDA Margin (%) 24.4% 22.6% 22.8% 23.9% 24.3% Taxes - - - - -

EBIT 3,878 3,783 4,625 5,826 6,872 Capex (1,113) (1,077) (1,185) (1,304) (1,434)% change Y/Y 13.5% -2.4% 22.3% 26.0% 18.0% Acquisitions / divestments (17,218) 2,294 (3,142) 1,153 2,035EBIT Margin (%) 18.9% 14.2% 14.8% 16.2% 16.8% Net interest - - - - -

Net Interest and associates 1,005 (303) (78) (182) (306) Earnings before tax 4,899 3,516 4,573 5,673 6,599 Free cash flow (post interests) 2,116 2,082 3,664 4,166 5,206

% change Y/Y 59.0% -28.2% 30.1% 24.1% 16.3% Equity raised/(repaid) 96 17 339 0 0Tax (1,378) (1,436) (1,610) (1,877) (1,983) Debt raised/(repaid) 9,625 -5,737 197 164 106

as % of EBT 28.1% 40.8% 35.2% 33.1% 30.0% Dividends received - - - - -Net Income (Reported) 3,418 5,761 4,226 5,636 7,315

% change Y/Y 71.0% 68.5% -26.6% 33.4% 29.8% Beginning cash 11,481 6,690 5,724 4,150 6,049Shares Outstanding 370.6 372.5 372.5 372.5 372.5 Ending cash 6,690 5,724 4,150 6,049 8,425EPS (reported) - - - - -

% change Y/Y - - - - - DPS 180 207 269 356 458

Balance sheet Ratio Analysis R in millions, year end Mar FY08 FY09 FY10E FY11E FY12E R in millions, year end Mar FY08 FY09 FY10E FY11E FY12E Cash and cash equivalents 7,573 6,642 5,067 6,966 9,342 DTH subscribers - - - - -Non-cash current assets 751 1,069 1,182 1,301 1,437 Broadband subsribers - - - - -Current assets 14,970 13,687 12,133 15,016 18,387 DTH churn (%) - - - - - DTH gross additions - - - - -Tangible assets 19,889 22,905 28,517 30,462 33,151 DTH ARPU (R annualised) - - - - -Investments 12,633 14,331 16,166 18,627 21,948 Broadband/telephony ARPU (R) - - - - -Intangible assets 24,914 20,916 25,321 25,650 25,882 Revnue growth 19.2% 30.1% 16.9% 15.5% 13.3%Total assets 57,524 54,560 59,828 66,185 73,749 EBIT growth 13.5% -2.4% 22.3% 26.0% 18.0% Net profit growth 59.0% -28.2% 30.1% 24.1% 16.3%Liabilities EPS growth - - - - -ST loans 2,197 2,845 3,171 3,520 3,866 Other current liabilities 8,779 8,646 8,802 9,487 10,135 Net debt/EBITDA 1.3 0.5 0.8 0.5 0.3Total current liabilities 10,592 10,352 11,096 12,135 13,130 Net debt to equity 18.5% 8.4% 13.2% 9.2% 5.0% Long term debt 11,741 6,906 7,251 7,613 7,994 EV/EBITDA 15.2 12.0 10.5 8.6 7.2Other liabilities 331 710 830 958 1,086 P/E - - - - -Total liabilities 24,376 19,343 20,966 22,927 24,792 EV-FCF Yield (%) 3582.0% 3484.4% 2040.9% 1766.3% 1382.0%Shareholders' equity 33,147 35,217 38,861 43,259 48,956 Equity-FCF Yield (%) 1.8% 1.8% 3.2% 3.6% 4.5% Source: Company reports and J.P. Morgan estimates.

216



Ncsoft www.ncsoft.com

Overweight W124,500


Company description Ncsoft, established in 1997, is a global online gaming company specializing in the MMORPG genre. It develops and publishes global MMORPG hits, such as Lineage I & II, and commercialized another hit title, Aion, in Korea, China, Japan, Taiwan, the US and Europe in 2009. The stock is a part of the KOSPI 200 index. Management holds a 30% stake in the company.

Post mortem Online gaming companies have been less affected by the economic turmoil, as online games offer better entertainment value per dollar spent than other entertainment objects, in our view. Hence, the impact of economic recovery would have limited impact on the Ncsoft’s sales and margin. However, we estimate the successful launch of Aion in the US and Europe will improve operating margin to 38% in FY10, up from 14.4% in FY08 and 33.6% in FY09E.

Potential for earnings upgrades We estimate the company’s high operating leverage will drive its earnings to grow 33% in FY10. Typically, new games, once commercialized, require only a limited level of opex, while the required R&D would have already been spent during the development period. Hence, we estimate Ncsoft’s free cash flow will rapidly rise for the next 2-3 years and cash assets will accumulate briskly to a 60% level of total assets by 2011.

How much recovery is priced into the stock? We think Ncsoft’s business is less relevant for the economic recovery. However, we deem the stock attractive now at 14x FY10E earnings, given we estimate Ncsoft’s earnings will grow 33% in FY10 and 25% in FY11.

Price target and key risks Our Dec-10 price target of W190,000 is based on a 10-year DCF valuation, assuming an OP margin of 37-40%, a terminal growth rate of 0%, and a WACC of 10.5%. Our price target implies 20x FY10E and 16x FY11E earnings. A key downside risk to our PT is weaker-than-expected traffic for Aion in the US and Europe.

South Korea Internet Angela HongAC (82-2) 758-5719 [email protected]


Price performance

0

50,000

100,000

150,000

200,000

250,000


W

036570.KS share price (W)KOSPI (rebased)

Source Bloomberg.

Performance 1M 3M 12M Absolute (%) -16.5 -8.7 213.1 Relative (%) -14.1 -8.8 137.0

Source Bloomberg.

Company data 52-week range (Won) 36,000-201,500 Mkt cap (WB) 2,744 Mkt cap. (US$MM) 2,325 Avg daily value (US$MM) 62.2 Avg daily volume (WB) 73.4 Shares O/S (MM) 22 Date of price 5-Nov-09 Index: KOSPI 1,552.24 Free float (%) 61.7 Exchange rate 1,180

Source: Bloomberg.

Bloomberg: 036570.KS; Reuters: 036570.KS Won in billions, year-end December FY07 FY08 FY09E FY10E Sales 347 602 693 890 Net profit 26 151 200 249 EPS (Won) 1,216 7,033 9,334 11,584 DPS (Won) 1,470 821 2,172 2,706 Sales growth (%) 5.2% 73.7% 15.0% 28.4% Net profit growth (%) -43.1% 490.6% 32.2% 24.6% EPS growth (%) -44.9% 478.5% 32.7% 24.1% ROE (%) 6.0% 32.4% 33.9% 33.4% P/E (x) 104.5 18.1 13.6 11.0 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

217



Ncsoft: Summary of financials Won in billions, year-end December

FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E SALES 347 602 693 890 TOTAL ASSETS 519 632 797 983 Aion 10 234 314 320 Current assets 304 399 546 712 Lineage 113 107 105 102 Cash & equivalents 51 117 254 397 Lineage II 147 152 151 149 Marketable securities 188 188 188 188 City of Heroes / Villains 24 26 26 27 Accounts receivable 38 66 76 98 GuildWars 23 19 20 50 Inventory 2 4 4 5 Royalty 20 56 64 70 Others 24 24 24 24 Others 4 8 14 172 Non-current assets 215 233 251 271 Net PP&E 163 173 184 195 Operating expenses 343 400 430 563 Gross PP&E 252 282 316 359 Labor 65 85 92 101 Accumulated depreciation 89 109 132 164 Depreciation and amortization 22 26 33 44 Investment assets 16 22 28 35 Operating R&D 47 44 48 62 Intangible assets 17 18 19 20 Commissions 29 43 42 53 Other assets 19 20 21 22 Sales commissions 6 18 21 27 Advertising costs 12 17 14 22 TOTAL LIABILITIES 94 101 127 138 Others 163 166 180 254 Current liabilities 83 90 115 125 Accounts payable 1 1 1 1 OPERATING PROFIT 50 202 263 327 Other short-term liabilities 82 89 114 124 LT Liabilities 11 12 12 13 EBITDA 72 229 296 371 Bond 0 0 0 0

LT Loans 0 0 0 0 Non-operating income/(loss) (9) 6 11 14

Shareholders’ equity 424 530 670 845 Pretax profit 41 208 274 341 Paid-in capital 10 10 10 10 Effective tax rate (%) 32.5 25.0 25.0 25.0 Capital surplus 148 148 148 148 Net profit 28 156 205 256 Retained earnings 343 479 639 839 Minority Interest 2 5 5 6 Capital adjustments (88) (118) (138) (163) CONSOLIDATED NET PROFIT 26 151 200 249 Total liabs/shrhdrs’ equity 519 632 797 983

Key ratios Consolidated cash flow statement

FY08 FY09E FY10E FY10E FY08 FY09E FY10E FY11E Growth (%) Cash Flow from Operations 66 153 228 275 Sales 5.2 73.7 15.0 28.4 Net Profit 26 151 200 249 Operating profit 1.2 304.1 29.9 24.3 D&A 20 26 33 44 EBITDA 4.0 217.3 29.5 25.3 Other non-cash items 18 5 4 4 Pretax profit (34.0) 407.3 31.5 24.6 Increase in AR (2) 28 10 22 Net profit (39.8) 464.0 31.5 24.6

Cash Flow from Investments (3) (49) (56) (67) Profitability (%) Capital expenditures (52) (30) (34) (43) EBITDA margin 20.8 38.0 42.7 41.7 Increase in financial investment 10 40 (10) (10) Operating margin 14.4 33.6 37.9 36.7 Increase in intangible assets (13) (8) (8) (11) Pretax margin 11.8 34.5 39.5 38.3 Other changes in investing activities 52 (51) (4) (4) Net profit margin 7.4 25.1 28.9 28.0 ROE 6.0 32.4 33.9 33.4 Cash Flow from Financing (74) (39) (35) (65) ROA 4.8 26.3 28.0 28.0 Increase in paid-in capital 0 0 - -

Increase/(decrease) in capital adjustment (23) (37) (30) (20) Ratio (%) Net increase/(decrease) in bond 0 0 0 0 Total liabilities to equity 22.2 19.1 18.9 16.3 Dividend paid 0 -19 -9 -15 Net debt(cash) to equity (56.5) (57.5) (65.9) (69.3) Current ratio 322.8 393.7 430.5 517.4 Increase/(decrease) in cash 0 65 137 143 Source: Company data, J.P. Morgan estimates.

218



Northam Platinum www.northam.co.za

Overweight Price: 4122c

Price Target: 6100c

Company description The group operates the deepest platinum mine in the world, and is planning to begin to develop its recently acquired E Bushveld, shallow, Booysendal property in a “modular” fashion starting in 2010. Northam is 63% owned by BEE mining holding company Mvelaphanda Resources, which in terms of new JSE rules must be dismantled as it’s deemed a pyramid company. MVL has stated it intends unbundling in early 2010. NHM intends a rights issue to assist funding Booysendal and MVL has said it will follow its rights.

Post mortem and potential This well managed mid-tier platinum producer has a huge resource base in excess of 110mozs PGMs relative to its current production rate of c334koz pa, and looks well placed to grow off a relatively low base over the long-term in our view. It was to be acquired by Implats, but negotiations broke down in response to turbulent market conditions last year. We think it possible there’ll be other M&A opportunities for the group to consolidate/cooperate with other producers. We see compelling arguments for southern Booysendal to be developed with AQP’s Everest mine for example.

How much recovery is priced into the stock? Our DCF-based valuation model shows NHM trading at a 20% discount to the currently low PGM basket price of cR255,000/kg. It shows that at our calculated mid-cycle price the stock would be worth some R71/share.

Price target and key risks Taking account of project and operational execution risk, we have a Sep-10 price target for Northam of R61/share – a 5% discount to our published DCF-based valuation. As with all the platinum producers, a lower than we forecast rand PGM basket price is another key risk to our target.

South Africa Gold & Presious Metals Steve ShepherdAC (27-11) 507 0386 [email protected]

Allan CookeAC (27-11) 507 0384 [email protected]


1,500

2,500

3,500

4,500

c


Price Performance

Source: Bloomberg


Absolute (%) 8.0 4.4 89.1

Source: Bloomberg

Company data Price(c) 4,122 Date of Price 23-Nov-09 Price Target (c) 6,100 Price Target End Date 01-Sep-10 52-week Range (c) 4,198 – 1,650 Mkt Cap (Rbn) 14.83 Shares O/S (mn) 360


Bloomberg: NHM SJ; Reuters: NHMJ.J Rand millions, year-end Jun

FY09A FY10E FY11E FY12E Revenues 3,186 3,910 6,605 8,598 Net profit 630 471 774 1,335 FD EPS (SAcps) 183 131 215 377 DPS (SAcps) 78 60 100 150 Sales growth (%) -18.0 22.7 68.9 30.2 Net profit growth (%) -57.8 -25.3 64.2 75.1 EPS growth (%) nm nm 64.1 75.3 ROE (%) 11.2 5.6 8.8 14.5 FD P/E (x) 22.3 31.1 19.0 10.8


219



Northam Platinum Ltd: Summary of Financials Production & Economic Assumptions Balance Sheet Year end Jun FY08A FY09A FY10E FY11E FY12E R in millions, year end Jun FY08A FY09A FY10E FY11E FY12EPlatinum ($/oz) 1,658 1,155 1,288 1,388 1,562 Property, Plant & Equipment 1,684 7,460 8,465 9,536 10,001Palladium ($/oz) 396 240 291 338 544 Net Fixed Assets 1,756 7,737 8,761 9,853 10,340Rhodium ($/oz) 7,569 2,760 1,656 2,131 2,968 Cash and Cash equivalents 1,500 921 227 302 431Nickel ($/ton) 29,464 13,518 17,250 15,000 15,227 Others 864 695 853 1,441 1,876Avg exch. rate (R/$) 7.29 9.02 8.16 9.02 9.47 Current Assets 2,364 1,616 1,080 1,743 2,307 Total Assets 4,120 9,353 9,841 11,596 12,647Cash Costs ($/oz Pt) 1,364 1,171 1,454 1,558 1,723 Current Liabilities 772 538 660 1,115 1,452Sales Volumes Debt 0 0 0 700 400Platinum (koz) 170 202 258 368 388 Other Liabilities 444 483 610 820 1,075Palladium (koz) 81 98 126 181 194 Shareholder's Equity 2,904 8,332 8,570 8,961 9,720Rhodium (koz) 21 27 31 42 44 Minorities 0 0 0 0 0Nickel (t) 1,110 1,529 2,374 4,027 4,231 Total Liabilities & Shareholders Equity 4,120 9,353 9,841 11,596 12,647 Profit & Loss Statement Ratio Analysis R in millions, year end Jun FY08A FY09A FY10E FY11E FY12E Year end Jun FY08A FY09A FY10E FY11E FY12ERevenues 3,886 3,186 3,910 6,605 8,598 Gross Margin (%) 62.9% 31.7% 21.8% 21.7% 26.3%

% change Y/Y 3.9% (18.0%) 22.7% 68.9% 30.2% EBITDA Margin (%) 62.9% 31.7% 21.8% 21.7% 26.3%EBITDA 2,443 1,009 854 1,434 2,264 EBIT Margin (%) 59.0% 26.6% 15.9% 17.1% 22.4%

% change Y/Y 13.7% (58.7%) (15.3%) 67.9% 57.9% Net Margin (%) 38.4% 19.8% 12.0% 11.7% 15.8%EBIT 2,294 848 623 1,128 1,928 FCF Margin (%) 30.6% 3.7% (13.1%) (4.5%) 11.2%

% change Y/Y 13.5% (63.0%) (26.6%) 81.1% 70.9% Net interest 95 130 78 (16) (29) Interest Coverage (x) 24.0 6.5 8.0 71.7 65.8Earnings before tax 2,359 1,015 647 1,062 1,860 Net debt to equity (%) (51.6%) (11.1%) (2.6%) 4.4% (0.3%)

% change Y/Y 12.3% (57.0%) (36.2%) 64.2% 75.1% Sales/Assets (x) 0.9 0.3 0.4 0.6 0.7Tax (866) (384) (176) (289) (506)

Tax as % of EBT 36.7% 37.9% 27.2% 27.2% 27.2% ROE (%) 56.5% 11.2% 5.6% 8.8% 14.5%Net income (reported) 1,493 630 471 774 1,355 ROIC (%) 110.7% 10.6% 5.5% 9.0% 14.4%

% change Y/Y 12.5% (57.8%) (25.3%) 64.2% 75.1% Shares Outstanding 238.01 344.56 359.69 359.69 359.69 P/E (x) 6.6 22.5 31.5 19.2 10.9EPS (Adjusted) 627 183 131 215 377 EV/EBITDA (x) 5.5 13.4 15.8 9.4 6.0

% change Y/Y 12.0% NM NM 64.1% 75.3% EV/FCF (x) 11.4 115.1 (26.4) (45.9) 14.1DPS (Gross) 330 78 60 100 150 Dividend Yield (%) 8.0% 1.9% 1.5% 2.4% 3.6%

% change Y/Y (37.1%) (76.4%) (23.1%) 66.7% 50.0% FCF Yield (%) 8.2% 0.8% (3.5%) (2.0%) 6.6% Cash Flow Statement Valuation & Recommendation R in millions, year end Jun FY08A FY09A FY10E FY11E FY12E NPV 6,400 EBIT 2,294 848 623 1,128 1,928 P/NPV 0.63 Depreciation & Amortization 149 161 231 306 336 PT 6,100 Change in working capital (243) 259 (51) (141) (92) PT/NPV 1.0 Taxes (748) (792) (95) (219) (406) PT Date 01-Sep-10 Cash flow from Operations 1,451 476 709 1,074 1,766 Recommendation OW Capex (262) (358) (1,221) (1,369) (807) Weekly Mkt Turnover ($ millions) Disposals/(Purchase) (2) (22) - - - JSE 25 Net interest 95 130 78 (16) (29) Free Cash flow 1,189 118 (512) (295) 959 Free Cash flow per share 5.0 0.3 (1.4) (0.8) 2.7 Equity raised/ repaid 22 4 0 0 0 Debt raised/ repaid 0 0 0 700 (300) Weekly Mkt Turnover/Mkt Cap (%) Dividends paid (1,010) (802) (241) (283) (447) JSE 1.3% Other (5) (6) (19) (31) (54) Beginning Cash 1,210 1,500 921 227 302 Ending Cash 1,500 921 227 302 431 Source: Company reports and J.P. Morgan estimates.

220



OGX Petróleo S.A. www.ogx.com.br

Overweight R$1,397

Price Target: R$2,030

Company description OGX is our preferred stock to play the potential of Brazilian offshore. OGX is an E& P startup incorporated in Brazil with exploration rights for 7,000 km2 offshore and 21,470 km2 onshore. Of its resource base, 54% is in the Campos basin; a highly productive area that accounts for 85% of Brazil’s oil production. According to independent appraiser DeGolyer & MacNaughton, OGX’s portfolio boasts net risked prospective resources of 6.8 billion boe as of Sep ’09 (upgraded from 4.8 billion boe as of March ’08).

Post mortem Its key competitive advantage, geological engineering know-how, allowed OGX to emerge from the downturn stronger and with plans for first oil in 2011 untarnished. Based on successful exploration and a new geological assessment, OGX has increased its 4-year drilling program to 79 wells from 51 wells previously. OGX has made discoveries for 0.9-2.0 bn boe.

Potential for earnings upgrades We believe more drilling should translate into more discoveries and eventually into reserves which deserve a higher value. This should drive NAV estimates, the main driver of price targets (over earnings) given that OGX is not producing oil yet.

How much recovery is priced into the stock? In our view, 2010 should be a transformational year for OGX: by year-end it should have booked some reserves, have more prospective resources and a more diversified portfolio. OGX is trading at $5.0/boe of resources. Global E&P stocks trade at $7.4/boe of 1P reserves.

Price target and key risks We use an NAV model to derive our target based on $80/bbl long-term oil prices and a 12% discount rate. Risks to our target are: Sensitivity to oil prices, uncertainty over capital expenditures, unsuccessful wells.

Brazil Exploration & Production Sergio TorresAC (212) 622 3378 [email protected]


Price performance

200

600

1,000

1,400

1,800

R$


Price Performance

Source: Bloomberg.



Source: Bloomberg.

Company data 52-week range (LC) 258 - 1696 Mkt cap. (LCMM) 47,509 Mkt cap. (US$MM) 27,588 Avg daily value (US$MM) 43,866 Avg daily volume (MM) 82,205 Shares O/S (MM) 32.3 Date of price 11/25/2009 Index: IBOV IBOV Free float (%) 38.70% Exchange rate 1.7

Bloomberg: OGXP3 BZ; Reuters: OGXP3.SA US$ in millions, year-end December 31 FY08 FY09E FY10E FY11E Sales 0 0 0 69 Net profit 192 529 183 71 EPS (LC) 5.94 16.36 5.66 2.19 FD EPS (LC) 5.94 16.36 5.66 2.19 DPS (LC) - - - - Sales growth (%) 0% 0% 0% NM Net profit growth (%) 0% 175% -65% -61% EPS growth (%) 0% 175% -65% -61% ROE (%) 0% 0% 0% 0% P/E (x) 247.3 89.9 259.6 671.0 FD P/E (x) 247.3 89.9 259.6 671.0 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

221



OGX: Summary of financials Profit and loss statement USD in millions, year-end December 31

FY08 FY09E FY10E FY11ERevenue 0 0 0 69 % change Y/Y - - - -Gross margin (%) - - - 10%EBITDA (106) (33) (50) (63)% change Y/Y - -69% 52% 26%EBITDA margin (%) - - - -91%EBIT (106) (33) (50) (63)% change Y/Y - -69% 52% 26%EBIT margin (%) - - - -91%Net interest 403 834 327 170 Earnings before tax 297 801 277 107 % change Y/Y - 170% -65% -61%Tax (105) (272) (94) (36)as % of EBT 35% 34% 34% 34%Net income (reported) 192 529 183 71 % change Y/Y - 175% -65% -61%Shares O/S (MM) 32.32 32.32 32.32 32.32 EPS (reported) (LC) 5.94 16.36 5.66 2.19 Source: Company, J.P. Morgan estimates.

Balance sheet USD in millions, year-end December 31

FY08 FY09E FY10E FY11ECash and cash equivalents 3,334 3,611 3,025 2,276 Accounts receivable 10 10 10 10 Inventories 0 0 0 0Others 19 19 19 19 Current assets 3,363 3,639 3,054 2,305 LT investments 0 0 0 0Net fixed assets 5 59 162 1,628 Total assets 4,465 4,795 4,313 5,029 Liabilities 0 0 0 0ST loans 0 0 0 0Payables 12 12 12 12 Others 300 300 300 300 Total current liabilities 311 311 311 311 Long-term debt 0 0 0 0 Other liabilities 1 1 1 1 Total liabilities 313 313 313 313 Shareholders’ equity 4,049 4,482 4,000 4,717 BVPS (LC) 125.3 138.7 123.8 145.9 Source: Company, J.P. Morgan estimates.

Cash flow statement USD in millions, year-end December 31

FY08 FY09E FY10E FY11EEBIT (105.6) (33.0) (50.0) (63.1)Depreciation & amortization - - - 0.1 Change in working capital - - - - Taxes (104.9) (272.4) (94.3) (36.5)Cash flow from operations (210.5) (305.4) (144.3) (99.5)Capex - (196.1) (717.5) (639.0)Disposal/(purchase) - - - - Net interest 403 834 327 170 Free cash flow 4,292 276 (585) (749)Equity raised/(repaid) - - - - Debt raised/(repaid) - - - - Other - - - - Dividends - - - - Beginning cash 500 3,334 3,611 3,025 Ending cash 3,334 3,611 3,025 2,276 DPS (LC) - - - Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December 31 FY08 FY09E FY10E FY11EEBITDA margin - - - -91%Operating margin - - - -Net profit margin - - - -SG&A/sales - - - -Sales growth - - - -Net profit growth NM 175% -65% -61%Sales per share growth - - - -EPS growth NM 175% -65% -61%Interest coverage (x) - - - -Net debt to total capital - - - -Net debt to equity - - - -Sales/assets 0% 0% 0% 1%EBIT margin - - - -91%ROCE 0% 0% 0% 0%Assets/equity (x) 1.1 1.0 1.1 0.9 ROI - - - -ROE 5% 4% 5% 4%Source: Company, J.P. Morgan estimates.

222



PDG Realty www.pdgrealty.com.br

Overweight R$17.59


Company description PDG, one of the largest developers in Brazil, is mainly focused on the lower-income segment through Goldfarb and on the middle- and high-income segments through CHL. The company’s business model is to co-develop real estate projects with other real estate developers and to make equity investments in attractive companies. This unique model should allow PDG to benefit and to participate in sector consolidation.

Post mortem The company has one of the best management teams in Brazil and manages its cash and balance sheet prudently by holding a low level of inventories and a low-cost operating platform. This should allow the company to benefit from stronger housing demand in Brazil.

Potential for earnings upgrades We believe that the company could still surprise positively not only via organic growth but also by acquiring attractive undervalued companies. It should also benefit from a potential recovery of the middle- and high-income segments, which is not the case with MRV.

How much recovery is priced into the stock? Pre-sales have already recovered considerably, up 70% qoq in 2Q and up another 11% in 3Q, but the stock price has also recovered significantly, up 240% from its lows in March and up 215% YTD (+81% for the Bovespa). While the performance is significant, we believe there is further room to rerate as the stock is trading at 2.5x P/BV and 14.9x times 10e P/E. The stock traded as high as 5.0x on P/BV back in 07.

Price target and key risks We rate PDG Overweight with a Dec-10 price target of R$19, which is the average of our DCF-based valuation and GGM-based valuation. The COE of 12.4% is based on a beta of 1.25, country risk of 2.6%, and a risk-free rate of 3.5%, resulting in a WACC of 11.0%. Main risk is CEF execution of the MCMV program given PDG’s dependency on the lower-income segments.

Brazil Brazilian Homebuilders Adrian E HuertaAC (52 81) 8152-8720 [email protected]




Source: Bloomeberg


Source: Bloomberg.

Bloomberg: PDGR3 BZ Reuters: PDGR3.SA LC in millions, year-end December FY08 FY09E FY10E FY11E Sales 1,231 2,292 2,814 3,349 Net profit 182 319 459 580 EPS (LC) 0.57 1.03 1.42 1.80 FD EPS (LC) 0.57 1.03 1.42 1.80 DPS (LC) - 0.15 0.25 0.36 Sales growth (%) 123.0% 86.2% 22.8% 19.0% Net profit growth (%) 43.0% 75.0% 43.6% 26.5% EPS growth (%) 43.0% 75.0% 43.6% 26.5% ROE (%) 12.9% 18.2% 19.7% 20.3% P/E (x) 30.9 17.0 12.4 9.8 FD P/E (x) 30.9 17.0 12.4 9.8 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

223



PDG: Summary of financials Profit and loss statement LC in millions, year-end December

FY08 FY09E FY10E FY11ERevenue 1,231 2,292 2,814 3,349% change Y/Y 123% 86% 23% 19%Gross margin (%) 35.2% 30.1% 31.2% 32.5%EBITDA 257 510 674 832% change Y/Y 88.9% 98.1% 32.3% 23.4%EBITDA margin (%) 20.9% 22.2% 24.0% 24.8%EBIT 209 387 538 703% change Y/Y 89.3% 85.1% 38.9% 30.7%EBIT margin (%) 17.0% 16.9% 19.1% 21.0%Net interest 13 (8) 3 (23)Earnings before tax 231 397 560 701% change Y/Y 91.2% 71.7% 41.2% 25.2%Tax (33) (74) (97) (115)as % of EBT 14.4% 18.7% 17.3% 16.4%Net income (reported) 182 319 459 580% change Y/Y 43.0% 75.0% 43.6% 26.5%Shares O/S (MM) 292 309 322 322EPS (reported) (LC) 0.57 1.03 1.42 1.80Source: Company, J.P. Morgan estimates.


FY08 FY09E FY10E FY11ECash and cash equivalents 256 154 736 887Accounts receivable 1,264 2,386 2,775 3,211Inventories 1,056 1,463 1,559 1,654Others 137 157 157 157Current assets 1,966 3,922 4,949 5,588LT investments 63 53 53 53Net fixed assets 76 78 97 118Total assets 3,247 4,822 5,906 6,610Liabilities ST loans 219 485 635 695Payables 291 556 543 576Others 212 344 344 344Total current liabilities 722 1,385 1,521 1,614Long-term debt 647 1,132 1,482 1,622Other liabilities 232 249 249 249Total liabilities 1,602 2,766 3,252 3,485Shareholders’ equity 1,476 2,029 2,622 3,087BVPS (LC) 5.06 6.56 8.14 9.59Source: Company, J.P. Morgan estimates.


FY08 FY09E FY10E FY11EEBIT 209 387 538 703Depreciation & amortization 29 8 10 12Change in working capital (963) (1,262) (498) (499)Taxes (33) (74) (97) (115)Cash flow from operations (548) (879) (825) 220Capex (96) (7) (28) (33)Disposal/(purchase) (288) (127) (28) (33)Net interest 13 (8) 3 (23)Free cash flow (831) (834) 51 184Equity raised/(repaid) 0 0 214 0Debt raised/(repaid) 376 750 500 200Other 0 0 0 0Dividends 0 46 80 115Beginning cash 716 256 154 736Ending cash 256 154 736 887DPS (LC) - 0.15 0.25 0.36Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December FY08 FY09E FY10E FY11EEBITDA margin 20.9% 22.2% 24.0% 24.8%Operating margin 17.0% 16.9% 19.1% 21.0%Net profit margin 14.8% 13.9% 16.3% 17.3%SG&A/sales 17.4% 12.4% 11.4% 10.9%Sales growth 123.0% 86.2% 22.8% 19.0%Net profit growth 43.0% 75.0% 43.6% 26.5%Sales per share growth 122.6% 75.7% 18.0% 19.0%EPS growth 43.0% 75.0% 43.6% 26.5%Interest coverage (x) (2.02) (7.57) (10.80) (6.25)Net debt to total capital 28.1% 39.8% 28.9% 26.3%Net debt to equity 41.3% 72.1% 52.7% 46.3%Sales/assets 0.38 0.48 0.48 0.51 EBIT margin 17.0% 16.9% 19.1% 21.0%ROCE 9.6% 12.2% 12.3% 13.4%Assets/equity (x) 2.20 2.38 2.25 2.14 ROI 9.6% 12.2% 12.3% 13.4%ROE 12.9% 18.2% 19.7% 20.3%Source: Company, J.P. Morgan estimates.

224



Powertech Technology Inc. www.pti.com

Overweight NT$91.10


Company description Powertech (TAIEX: 6239) (PTI) is the largest independent provider of memory IC backend services, including IC chip probing, packaging and testing. Its customer base includes tier-I IDM and ables companies such as Toshiba, Elpida, Kingston, Sandisk, SST, IM Flash, Powerchip and ProMos.

Post mortem PTI stands to be the primary beneficiary of Toshiba’s NAND flash outsourcing. We believe: (1) the growth perspective in NAND flash business; (2) the benefit from a meaningful increase in 2010E capex budget of memory companies; and (3) GM back to 26% and above-26% ROE estimates, should drive the company’s earnings in 2010.

Potential for earnings upgrades Powertech should benefit from a meaningful increase in memory capex. We have witnessed a series of capex increases in the memory industry across the board and Powertech’s sales growth is correlated with supply growth in memory.

How much recovery is priced into the stock? The market was once concerned about the technology migration progress of Elpida’s DRAM and Toshiba’s NAND flash. However, we believe Elpida has already caught up with 45nm DDR3 pilot production in 4Q09, and Toshiba is also on the right track of moving on 32nm NAND flash in 1Q10. Therefore, we believe this concern should ease as Powertech has seen promising progress in the technology advancement by its major clients. We expect further share price upside once the market prices in the improvement in its 1H10 outlook.

Price target and key risks Our Dec-10 PT of NT$108 is based on 9x FTM (Dec-10) earnings due to the higher earnings estimates. The 9x FTM earnings is the average of the FTM P/E multiple during the past three years. A key risk to our PT is another oversupply scenario followed by a sharp fall in ASP in the memory industry.

Taiwan Semiconductor Equipment Patrick LiaoAC (886-2) 2725-9874 [email protected]


Price performance NT$

30

50

70

90

110


6239 TT Equity TWSE Index




52-week range (NT$) 35.0-99.4 Mkt cap. (NT$B) 60.98 Mkt cap. (US$B) 1.86 Avg daily value (US$MM) 18.4 Avg daily volume (MM) 7.8 Shares O/S (MM) 669 Date of price 5-Nov-09 Index: TAIEX (TWSE) 7,417.5 Free float (%) 60 Exchange rate 32.5

Source: Bloomberg.

Bloomberg: 6239 TT; Reuters: 6239.TW NT$ in millions, year-end December FY08 FY09E FY10E FY11E Sales 31,189 29,784 34,998 38,930 Net profit 6,545 4,914 6,866 7,535 EPS (NT$) 10.11 7.38 10.26 11.26 FD EPS (NT$) 10.11 7.38 10.26 11.26 DPS (NT$) 3.50 4.00 3.00 4.16 Sales growth (%) 28% -5% 18% 11% Net profit growth (%) 6% -25% 40% 10% EPS growth (%) 56% -27% 39% 10% ROE (%) 33 22 25.8 26 P/E (x) 9.0 12.3 8.9 8.1 FD P/E (x) 9.0 12.3 8.9 8.1 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

225



Powertech Technology Inc.: Summary of financials NT$ in millions, year-end December Income statement Ratio analysis FY08A FY09E FY10E FY11E % FY08A FY09E FY10E FY11E Revenues 31,189 29,784 34,998 38,930 Gross Margin 27.4 23.6 26.1 25.9 Cost of Goods Sold 22,640 22,740 25,863 28,846 EBITDA margin 46.7 46.8 46.4 44.1 Gross Profit 8,549 7,044 9,134 10,085 Operating Margin 23.4 19.3 21.8 21.5 R&D Expenses 649 767 735 818 Net Margin 21.0 16.5 19.6 19.4 SG&A Expenses 159 209 315 389 R&D/sales 2.1 2.6 2.1 2.1 Operating Profit (EBIT) 7,299 5,738 7,632 8,381 SG&A/Sales 0.5 0.7 0.9 1.0 EBITDA 14,555 13,934 16,255 17,164 Interest Income 37 44 93 147 Sales growth 27.6 -4.5 17.5 11.2 Interest Expense 450 336 414 490 Operating Profit Growth 3.0 -21.4 33.0 9.8 Investment Income (Exp) 9 5 - - Net profit growth 59.9 -24.9 39.7 9.7 Non-Operating Income (Exp) (333) (104) 140 140 EPS (Reported) growth 3.7 -27.0 39.0 9.7 Earnings before tax 6,562 5,346 7,451 8,178 EPS (TW GAAP) growth 56.2 -27.0 39.0 9.7 Tax 17 433 585 643 Interest coverage (x) 16.2 17.1 18.4 17.1 Net Income (Reported) 6,545 4,914 6,866 7,535 Net debt to total capital 32.7 32.4 24.1 21.8 Net Income (new TW GAAP) 6,545 4,914 6,866 7,535 Net debt to equity 57.8 59.6 42.2 37.6 EPS (Reported, NT$) 10.11 7.38 10.26 11.26 Asset Turnover 71.4 63.0 66.5 67.7 EPS (New TW GAAP, NT$) 10.11 7.38 10.26 11.26 Working Capital Turns (X) 9.2 4.5 4.5 4.8 BPS (NT$) 32.48 34.60 39.74 43.66 ROE 33.3 22.0 25.8 25.8 DPS (NT$) 3.50 4.00 3.00 4.16 ROIC 21.8 14.4 17.8 18.4 Shares Outstanding (MM) 647 666 669 669 ROIC (net of cash) 22.8 15.0 18.7 19.3

Balance sheet Cash flow statement FY08A FY09E FY10E FY11E FY08A FY09E FY10E FY11E Cash and cash equivalents 4,095 5,687 8,727 10,215 Net Income 6,545 4,914 6,866 7,535 Accounts receivable 9,748 11,256 12,041 13,953 Depr. & Amortisation 7,256 8,196 8,623 8,782 Inventories 739 938 1,003 1,163 Change in working capital -3,758 -2,727 532 -1,181 Others 302 437 523 606 Other 0 0 0 0 Current assets 14,884 18,318 22,294 25,936 Cash flow from operations 10,043 10,383 16,022 15,136 LT investments 1,685 3,036 3,036 3,036 Capex -7,149 -6,435 -10,000 -10,000 Net fixed assets 25,524 23,763 25,140 26,358 Disposal/ (purchase) -197 -1,945 0 0 Others 1,569 2,163 2,163 2,163 Cash flow investment -7,346 -8,380 -10,000 -10,000 Total assets 43,662 47,281 52,634 57,493 Free cash flow 2,894 3,948 6,022 5,136 ST loans 3,203 9,513 9,730 10,347 Equity raised/ (repaid) 1,230 1,890 0 0 Payables 1,345 1,546 1,516 1,761 Debt raised/ (repaid) 2,637 2,957 445 1,265 Others 4,165 3,079 4,578 5,305 Other financing charges -1,576 -2,873 0 0 Total current liabilities 8,713 14,138 15,824 17,414 Dividends paid -2,675 -2,385 -3,427 -4,913 Cash flow financing -384 -410 -2,982 -3,648 Long term debt 13,334 9,982 10,210 10,857 Other liabilities 103 - - - Net Change in Cash 2,314 1,592 3,040 1,488 Total liabilities 22,150 24,119 26,033 28,271 Beginning cash 1,778 4,095 5,687 8,727 Shareholders' equity 21,512 23,161 26,600 29,222 Ending cash 4,092 5,687 8,727 10,215 Source: Company, J.P. Morgan estimates.

226



PT Aneka Tambang Tbk www.antam.com

Overweight Rp2,300


Company description The state-owned PT Aneka Tambang (ANTM) is one of the largest nickel miners in Indonesia and it has an installed capacity of about 26,000 tons. Besides its ferronickel operation, ANTM is also involved in gold, silver, and bauxite mining. Although small, its precious metal business is growing and ANTM is likely to expand this operation via exploration and acquisitions. In term of operation, nickel prices and costs will be the key profit drivers, in our view. Given ANTM’s main fuel is oil, the company is one of the high cost producers of nickel in the world. With its investments in coal-fired power plant, ANTM expects to reduce costs to the industry average or slightly below the industry average levels. Post mortem In FY10, J.P. Morgan expects nickel price to rise from US$15,567/ton to US$17,125/ton. Gold should stay fairly steady, rising from US$948/t.oz to US$1,006/t.oz. Nickel volume is likely to rise from 12,000 tons to 17,000 tons, up 41.7%, as Ferronickel III resumes production. If ANTM is able to secure Newmont Batu Hijau at favorable terms, it would bode well for its share price, in our view. Potential for earnings upgrades If nickel prices overshoot 10%, our FY10 EPS forecast would rise 20.1%. If volume swings 10%, our FY10 EPS forecast would rise 8.5%. A 10% reduction in production cost should cause EPS to increase 17.5%. How much recovery is priced into the stock? We believe Chinese restocking has been priced in, but the low level of inventory in western hemisphere may not have been priced in by the market. Price target and key risks Given that we expect a brighter FY10, we maintain our OW rating and our SOTP/DCF-based Jun-10 PT of Rp3,000, assuming a risk-free rate of 10.5%, an equity-risk premium of 5.5%, and a terminal growth rate of 5.5%. Key risks to our PT include: (1) an unexpected correction in nickel prices; and (2) smaller-than-expected dip in costs.

Indonesia Mining Stevanus JuandaAC (62-21) 5291-8574 [email protected]


Price performance Units

500.0

1,500.0

2,500.0

3,500.0

Nov-08 Feb-09 May-09 Aug-09 Nov-09Source: Bloomberg. Performance



52-wk range (Rp) 900-2,725 Mkt cap. (RpB) 21,938 Mkt cap. (US$MM) 2,302 Avg daily value (US$MM) 24 Avg daily volume (MM) 1,642 Shares O/S (MM) 10 Date of price 5-Nov-09 Index: JCI 2,372 Free float (%) 35.0 Exchange rate 9,530

Source: Bloomberg. Bloomberg: ANTM IJ; Reuters: ANTM.JK Rp in billions, year-end December FY08 FY09E FY10E FY11E Sales 9,592.0 8,331.0 10,408.2 12,110.5 Net profit 1,368.1 544.0 1,339.9 1,597.9 EPS (Rp) 143.4 57.0 140.5 167.5 Core EPS (Rp) 197.3 76.2 134.3 169.9 DPS (Rp) 215.2 57.4 28.5 70.2 Sales growth (%) -20.1% -13.1% 24.9% 16.4% Net profit growth (%) -73.3% -60.2% 146.3% 19.3% EPS growth (%) -73.3% -60.2% 146.3% 19.3% ROE (%) 16.3% 6.7% 15.3% 16.5% P/E (x) 16.0 40.3 16.4 13.7 Core P/E (x) 11.7 30.2 17.1 13.5 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009. We revised PT to Rp2,750 on November 18.

227



PT Aneka Tambang Tbk: Summary of financials

ANTM – SOTP valuation RpB, %, Rp

Value (Rp B) % ownership Value per share (Rp) Nickel 25,694.6 100% 2,694 Gold mining 6,388.8 100% 670 Silver 1,572.4 100% 165 Gold Trading 1,253.9 100% 131 Bauxite -268.9 100% -28 HQ Allocation -7,178.5 100% -753 June-10 SOTP fair value 2,879 June-10 DCF fair value 3,049 June-10 PT 2,964 Source: J.P. Morgan estimates.

228



PT Perusahaan Gas Negara Tbk www.pgn.co.id

Overweight Rp3,650


Company description PGAS enjoys a near monopolistic business model: it has more than 90% market share in gas distribution market and more than 85% market share in gas transmission market. The distribution division historically has contributed more than 95% of its annual operating profit. Historically, PGAS’ share price performance has been driven by net and core income growth. Earnings wise, the company will likely depend on volume, ASP, and cost of gas. When Rp depreciates, its reported net income could be negatively affected by foreign translation (non-cash) losses, but operating profit should benefit and visa versa.

Post mortem We expect the power plant sector to be the driver of volume and profit growth in the next three years as PLN converts its diesel power plants into gas and coal. In FY09-10E, volume should increase significantly on the back of ramp up in volume at PLTU Muara Tawar and supply to additional three power plants. We expect PGAS to raise selling prices by 6.5% in FY10. The increase in volume and selling price will cause core earnings to rise by 24.4% Y/Y, by our estimates.

Potential for earnings upgrade Upward earnings estimate revision is possible if the selling price is increased or volume delivered (14% increase Y/Y) is more than expected.

How much recovery is priced into the stock? We believe the increased demand from PLGU Muara Tawar is already in the price. However, the ultimate demand coming from other power plants is yet to be known. Price target and key risks Given that we expect strong results in the future, we maintain our OW rating and our Jun-10 DCF-based PT of Rp4,700 (assuming a risk-free rate of 0.5%, a risk premium of 5.5%, and a terminal growth rate of 7.0%). Key risks to our view and PT include: (1) lower-than-expected distribution volume, distribution margin, and transmission fee; and (2) higher-than-expected cost of gas.

Indonesia Natural Gas Pipeline and Distribution Stevanus JuandaAC (62-21) 5291-8574 [email protected]


Price performance

1,000.0

2,000.0

3,000.0

4,000.0


Source: Bloomberg.



Source: Bloomberg.

Company data 52-week range (Rp) 1,580-3,775 Mkt cap. (RpB) 88,482 Mkt cap. (US$MM) 9,285 Avg daily value (US$MM) 12.4 Avg daily volume (MM) 34.0 Shares O/S (MM) 24,242 Date of price 5-Nov-09 Index: JCI 2,367 Free float (%) 31 Exchange rate 9,530

Source: Bloomberg. Bloomberg: PGAS IJ; Reuters: PGAS.JK Rp in billions, year-end December FY08 FY09E FY10E FY11E Sales 12,793.8 17,652.4 20,477.8 21,476.0 Net profit 633.9 6,148.4 5,801.2 6,764.7 EPS (Rp) 26.4 256.5 242.0 282.2 Core EPS (Rp) 102.1 208.8 259.7 282.5 DPS (Rp) 41.7 102.6 121.0 141.1 Sales growth (%) 45.4% 38.0% 16.0% 4.9% Net profit growth (%) -45.6% 870.0% -5.6% 16.6% EPS growth (%) -45.6% 870.0% -5.6% 16.6% ROE (%) 9.7% 63.7% 41.8% 38.7% P/E (x) 138.1 14.2 15.1 12.9 Core P/E (x) 35.7 17.5 14.1 12.9 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

229



PT Perusahaan Gas Negara Tbk: Summary of financials


230



PTT Public Company www.pttplc.com

Overweight Bt234.00


Company description PTT is an integrated energy company with interests in upstream E&P business, mid-stream gas transmission and treatment division and downstream oil refining, oil marketing and petrochemical interests. PTT is a state enterprise entity with the Finance Ministry owning, directly and indirectly, 67% of the firm.

Post mortem PTT has an effective monopoly over the gas business. Gas demand from power generation dipped during late 2008-early 2009, but has since recovered slowly. PTT’s upstream earnings were hit badly by collapsing oil prices during the same period but have also recovered strongly since 2Q09.

Potential for earnings upgrades PTT’s gas business (due to its high fixed costs) and E&P division both have significant operating leverage. Hence, higher gas revenues and/or higher petroleum prices will likely have a magnified impact on its bottom line.

How much recovery is priced into the stock? PTT shares have risen 66% from their lows in Mar-09; hence, the economic recovery has been partially reflected. That said, we believe that the stock has not fully priced all the improvements, given that investors’ sentiment towards PTT has been weighed down by continued legal uncertainty over the group’s petrochemical and energy projects in the Map Ta Phut industrial zone.

Price target and key risks Our Jun-10 PT of Bt315 is based on our SOTP valuation that comprises estimated values from PTT’s E&P, gas, petrochemical and refining businesses. The biggest part of PTT's value comes from its core gas separation and transmission business. We value this business using DCF. Our derived WACC of 8.5% is conservatively calculated using a risk-free rate of 5%, a terminal growth rate of 1%, and a beta of 1.2. Key downside risks to our PT are: (1) petroleum prices; (2) domestic gas demand; and (3) regulatory risks.

Thailand Integrated oils Sukit ChawalitakulAC (662) 684-2679 [email protected]


Price performance

120

200

280


PTT.BK share price (Bt)SET (rebased)

Bt


1M 3M 12M Absolute (%) -9.3 -5.6 27.9 Relative (%) -4.2 -12.1 -21.2


52-week range (Bt) 137-273 Mkt cap. (BtMM) 662,649 Mkt cap. (US$MM) 19,852 Avg daily value (US$MM) 23.0 Avg daily volume (MM) 2.6 Shares O/S (MM) 2,832 Date of price 5-Nov-09 Index: SET 682 Free float (%) 47 Exchange rate 33.38

Source: Bloomberg.

Bloomberg: PTT TB; Reuters: PTT.BK Bt in millions, year-end December FY08 FY09E FY10E FY11E Revenue 2,000,816 1,415,312 1,697,747 1,993,748 Net profit 51,705 58,389 71,787 89,675 EPS (Bt) 18.34 20.71 25.47 31.81 DPS (Bt) 8.00 8.00 8.50 9.00 Revenue growth (%) 32.7 -29.3 20.0 17.4 EPS growth (%) -47.2 12.9 22.9 24.9 ROCE (%) 16.9 14.8 17.4 21.0 ROE (%) 13.9 14.4 16.0 17.7 P/E (x) 12.8 11.3 9.2 7.4 P/BV (x) 1.7 1.6 1.4 1.2 Dividend yield (%) 3.4 3.4 3.6 3.8 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

231



PTT Public Company: Summary of financials Bt in millions, year-end December

Income Statement Cash flow statement FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E Revenues 1,508,335 2,000,816 1,415,312 1,697,747 1,993,748 EBIT 139,095 103,114 97,725 125,309 160,042

% change Y/Y 22.9% 32.7% -29.3% 20.0% 17.4% Depr. & amortization 28,450 32,170 37,218 43,710 48,652Gross Margin (%) 12.3% 10.2% 12.5% 12.4% 12.5% Change in working capital 12,009 12,953 2,051 14,210 11,836

EBITDA 167,545 135,284 134,944 169,019 208,695 Taxes -36,180 -43,884 -31,142 -41,064 -53,873% change Y/Y 11.4% -19.3% -0.3% 25.3% 23.5% Cash flow from operations 112,685 119,892 88,958 122,185 142,611

EBITDA Margin (%) 11.1% 6.8% 9.5% 10.0% 10.5% EBIT 139,095 103,114 97,725 125,309 160,042 Capex -13,984 -92,782 -145,509 -123,645 -94,142

% change Y/Y 12.2% NM NM 28.2% 27.7% Disposal/(purchase) 0 0 0 0 0EBIT Margin (%) 9.2% 5.2% 6.9% 7.4% 8.0% Net Interest 1,888 8,555 3,044 3,166 4,737Net Interest 1,888 8,555 3,044 3,166 4,737 Free cash flow 98,701 27,110 -56,551 -1,460 48,469Earnings before tax 140,983 111,669 100,769 128,475 164,779

% change Y/Y 9.4% -20.8% -9.8% 27.5% 28.3% Equity raised/(repaid) 2,427 1,245 0 0 0Tax -36,180 -43,884 -31,142 -41,064 -53,873 Debt raised/(repaid) 5,708 21,764 18,123 3,700 -27,000

as % of EBT 118.8% 121.1% 133.9% 131.6% 126.7% Other 20,022 12,132 -8,436 8,555 10,043Core net income (reported) 89,050 52,956 58,651 71,787 89,675 Dividends paid -29,583 -35,238 -16,914 -23,257 -24,666

% change Y/Y 12.7% -40.5% 10.8% 22.4% 24.9% Beginning cash 88,219 81,190 92,037 31,453 20,000Shares outstanding 2,817 2,819 2,819 2,819 2,819 Ending cash 81,190 92,037 31,453 20,000 27,418Core EPS (reported) – (Bt) 31.61 18.79 20.81 25.47 31.81 DPS – (Bt) 11.50 8.00 8.00 8.50 9.00

% change Y/Y - - - - - Balance sheet Ratio analysis FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E Cash and cash equivalents 81,190 92,037 31,453 20,000 27,418 EBITDA margin 11.1% 6.8% 9.5% 10.0% 10.5%Accounts receivable 195,263 98,892 120,301 144,308 169,469 Operating margin 9.2% 5.2% 6.9% 7.4% 8.0%Inventories 19,896 23,692 24,774 29,742 34,906 Net profit margin 6.5% 2.6% 4.1% 4.2% 4.5%Others 18,469 28,576 22,861 18,289 14,631 Current assets 314,818 243,197 199,389 212,339 246,424 LT investments 193,122 187,072 198,097 210,670 226,061 Sales growth 22.9% 32.7% -29.3% 20.0% 17.4%Net fixed assets 315,143 375,755 484,046 563,980 609,470 Net profit growth 2.3% -47.1% 12.9% 22.9% 24.9%Total Assets 891,523 885,205 961,056 1,068,267 1,165,437 EPS growth 1.9% -47.2% 12.9% 22.9% 24.9% Liabilities ST loans 15,007 20,796 26,728 27,098 24,398 Interest coverage (x) - - - - -Payables 163,158 88,133 113,958 136,813 160,568 Net debt to equity 44.9% 42.2% 58.3% 55.9% 42.8%Others 65,608 71,118 64,119 79,878 94,625 Sales/assets (x) 1.83 2.25 1.53 1.67 1.79Total current liabilities 243,773 180,047 204,806 243,789 279,591 Assets/equity (x) 2.47 2.31 2.20 2.19 2.09Long-term debt 212,387 228,362 240,553 243,883 219,583 ROE 30.0% 13.9% 14.4% 16.0% 17.7%Other liabilities 36,713 46,260 38,199 46,755 56,798 ROCE 25.3% 16.9% 14.8% 17.4% 21.0%Total Liabilities 492,873 454,669 483,558 534,426 555,972 Shareholders' equity 361,497 383,578 425,053 473,583 538,593 BVPS – (Bt) 128.31 136.07 150.78 168.00 191.06 Source: Company reports and J.P. Morgan estimates.

232



Public Bank (F) www.pbebank.com.my

Overweight Price: M$10.90


Company description Public Bank is the largest domestic bank in Malaysia by market cap and the third largest by balance sheet. Public Bank also has operations in Hong Kong, China, Cambodia, Vietnam, Laos and Sri Lanka. The bank has: (1) a strong deposit franchise; (2) a prime customer base; and (3) in our view, a best-in-class management team with proven track record.

Post mortem The bank continues to deliver robust growth through peak and trough cycles with the bank set to hit an all time high NP of M$2.5 billion for 2009, which is still +3% higher than 2008 (ex the one-off goodwill income of M$145 million). For FY10/11, we expect a EPS CAGR of 15.6% with the bank maintaining the high octane loan growth (15%) while strengthening further its revenue streams via its asset management and bancassurance business. We expect the bank to hit ROE levels of 29% in 2010.

Potential for earnings upgrades Being best in class in a cyclical industry in our view, we see potential for further upgrades, especially if there are also tailwinds from PM Najib’s reform measures which hopefully gain positive momentum with the Malaysian Chinese community.

How much recovery is priced into the stock? The stock is trading at P/Es of 15.2x/12.9x for FY09E/FY10E, which is comparable with the Malaysian market. In our view, the stock could still see further upside if earnings manages to surprise on the upside

Price target and key risks Our Jun-10 PT of M$13.80 is based on our two-stage DDM model assuming sustainable ROE of 28% and COE of 11%. The key risk to our PT is that the stock is priced for perfection where any slippage in expectations could result in a sharp de-rating on valuations.

Malaysia Malaysian Banks Chris Oh, CFAAC (60-3) 2270-4728 [email protected]



579

11

10-0

8

01-0

9

04-0

9

07-0

9

10-0

9

Source: Bloomberg.

Performance 1M 3M 12M Absolute (%) 6.9 9.3 26.7 Relative (%) 3.7 2.8 -7.5

Source: Bloomberg.

Company data 52-wk range (M$) M$6.85-10.94 Mkt. cap (M$MM) 38497.99 Mkt. cap (US$MM) 11251.79 Liquidity (US$MM) 6.5 Avg. daily volume (MM) 2.2 Shares O/S (MM) 3531.9 Date of price 5-Nov-09 KLCI Index 1,254.0 Free float (%) 100.0 Exchange rate 3.42

Source: Bloomberg.

Bloomberg: PBKF MK; Reuters: PUBMe.KL M$ in millions, year-end December FY08 FY09E FY10E FY11E Net profit 2,581 2,486 3,005 3,419 Basic EPS (sen) 76.9 71.8 84.7 96.1 Cash adj. EPS (sen) 76.9 71.8 84.7 96.1 DPS (sen) 41.3 39.5 42.4 48.1 Basic EPS growth (%) 21.5 -6.6 18.0 13.4 ROE (%) 27.3 25.7 29.5 29.8 P/E (basic) (x) 14.2 15.2 12.9 11.3 BVPS (M$) 2.70 2.76 2.98 3.46 Tangible NAV 2.11 2.18 2.40 2.88 P/BV (x) 4.04 3.95 3.65 3.15 Div. yield (%) 3.8 3.6 3.9 4.4 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

233



Income statement - M$ MM 2008 2009E 2010E 2011E 08/07 09E/08E 10E/09E 11E/10E Balance sheet gearing 2008 2009E 2010E 2011E

Margins (% of earning assets) 2.09% 1.95% 1.87% 1.84% 0% -7% -4% -2% Loan/deposit 73% 74% 75% 75%Earning assets/assets 96.5% 94.7% 93.8% 94.1% 0% -2% -1% 0% Investment/assets 13% 14% 16% 17%NIM (as % of avg. assets) 2.01% 1.84% 1.75% 1.73% 0% -8% -5% -1% Loan/assets 60% 62% 63% 63%

Customer deposits/liab. 87% 87% 87% 87%Net interest income 3,727 3,896 4,197 4,590 15% 5% 8% 9% Long-term debt/liabilities 3% 4% 4% 3%

Total non-interest revenues 2,012 1,948 2,286 2,512 8% -3% 17% 10%Fee income 975 1,003 1,228 1,354 -5% 3% 22% 10% Asset quality/capital 2008 2009E 2010E 2011EFX/trading gains 76 82 86 91 -65% 7% 6% 5% Loan loss reserves/loans 1.6% 1.8% 2.0% 2.1%Other operating income 961 864 972 1,068 55% -10% 12% 10% NPLs/loans 1.0% 1.3% 1.6% 1.8%Total operating revenues 5,739 5,844 6,483 7,102 12% 2% 11% 10% Loan loss reserves/NPLs 159.7% 137.3% 122.6% 114.5%Operating costs -1791 -1843 -1949 -2031 6% 3% 6% 4% Growth in NPLs -13.8% 56.4% 36.3% 0.0%Operating profit 3,948 4,001 4,534 5,071 16% 1% 13% 12% Tier 1 Ratio 8.6% 7.8% 7.6% 8.2%Loan loss provisions -581 -689 -529 -514 39% 19% -23% -3% Total CAR 14.1% 14.7% 13.9% 14.0%Other provisions 12 13 14 14Exceptionals - - - - Per share data 2008 2009E 2010E 2011EDisposals/ other income - - - - EPS (M$) 0.77 0.72 0.85 0.96Pre-tax profit 3379 3325 4019 4572 13% -2% 21% 14% Dividend (M$) 0.43 0.40 0.42 0.48Tax [rate] -757 -798 -965 -1097 22% 24% 24% 24% Payout ratio 0.56 0.56 0.50 0.50Minorities/preference dividends -41 -41 -49 -56 NAV 2.70 2.76 2.98 3.46Attributable net income 2,581 2,486 3,005 3,419 22% -4% 21% 14% Avg. Shares issued (MM) 3,356 3,463 3,549 3,560

Key balance sheet - M$ MM 2008 2009E 2010E 2010E 08/07 09E/08E 10E/09E 11E/10E DuPont 2008 2009E 2010E 2011E

Net customer loans 118,386 139,378 158,689 174,305 19% 18% 14% 10% NIR/avg. assets 2.01% 1.84% 1.75% 1.73%Loans loss reserves (1,932) (2,598) (3,164) (3,733) 15% 34% 22% 18% Non IR/avg. assets 1.09% 0.92% 0.95% 0.95%Gross loans 120,319 141,976 161,853 178,038 19% 18% 14% 10% Non IR/total revenue 35.1% 33.3% 35.3% 35.4%Investments 25,263 31,284 39,977 47,974 58% 24% 28% 20% Total rev/avg. assets 3.10% 2.77% 2.71% 2.68%Other earning assets 43,680 37,680 36,680 34,680 -14% -14% -3% -5% Cost/income 31.2% 31.5% 30.1% 28.6%Average earning assets = (A) 178,619 200,101 224,725 249,601 15% 12% 12% 11% Cost/assets 0.97% 0.87% 0.81% 0.77%Goodwill 2,072 2,072 2,072 2,072 0% 0% 0% 0% Goodwill amort.Total assets 196,163 226,319 252,647 277,688 13% 15% 12% 10% Operating ROAA 2.13% 1.89% 1.89% 1.91%

LLP/loans -0.53% -0.53% -0.35% -0.30%Interbank funding 5,590 6,037 6,943 7,637 -46% 8% 15% 10% Loans/assets 59.8% 62.1% 63.4% 64.1%Customer deposits 162,280 188,244 210,834 231,917 17% 16% 12% 10% Other inc: provsLong-term bond funding 6,303 8,803 8,803 8,803 46% 40% 0% 0% Pre-tax ROAA 1.83% 1.57% 1.68% 1.72%Other interest-bearing liabilities 3,062 3,307 3,803 4,184 -11% 8% 15% 10% Tax 22.4% 24.0% 24.0% 24.0%Average interest-bearing liab. = (B) 167,107 191,813 218,387 241,461 15% 15% 14% 11% MI -0.02% -0.02% -0.02% -0.02%Average assets 185,159 211,241 239,483 265,167 15% 14% 13% 11% ROAA 1.39% 1.18% 1.25% 1.29%Shareholders' equity 9,537 9,785 10,600 12,316 2% 3% 8% 16% RoRWA 2.45% 2.11% 2.27% 2.33%Risk-weighted assets 111,623 124,144 140,235 153,113 Equity/assets 5.1% 4.6% 4.3% 4.3%Average risk-weighted assets 105,358 117,884 132,189 146,674 16% 12% 12% 11% ROE 27.35% 25.73% 29.48% 29.84%

Public Bank (F): Summary of financials


234



Qatar Telecom www.qtel.com.qa

Overweight Price: QR 150.9

Price Target: QR 230

Company description Qtel is the leading provider of telecom services in Qatar and only recently lost its monopoly with the market entry of Vodafone Qatar. Qtel has followed an aggressive expansion strategy over the past few years and now operates in 17 countries in the Middle East, Africa and South-East Asia. Close to 75% of its revenues came from international operations in 2008. Of these revenues its Indonesian subsidiary, Indosat, generated about 1/3.

Post mortem We believe Qtel offers a balanced growth/return profile. In our view the company stands out versus its MENA peers due to a well diversified and controlled asset base dominated by i) the high value market in Qatar and ii) the market repair in Indonesia. Its international assets account for 55% of our SOTP value and contribute over 70% to our group EBITDA forecasts in 2012E.

Potential for earnings upgrades Our conservative approach reflects recent market liberalization by forecasting ARPU declines of around 30% and EBITDA margin erosion of close to 5pp in the domestic market over the next three years.

How much recovery is priced into the stock? Despite being up >30% ytd, we believe Qtel continues to offer a favourable risk/reward profile as GCC markets still have room to catch up with EM market performance and risk appetite for EM markets continues to improve.

Price target and key risks Qtel has strong valuation support on most absolute and relative measures as well as in the context of historical trading ranges. Our DCF-based SOTP December 2010 price target for Qtel is QR230, implying more than 50% upside to current trading levels. Key risks to our valuation include i) a worse than expected macro economic environment, ii) start of irrational competition, iii) M&A integration, and iv) foreign exchange risk.

Qatar Telecommunications Christian KernAC (971-4) 428 1789 [email protected]

JPMorgan Chase Bank, N.A., Dubai Branch

90

110

130

150

170

QR


Price Performance

Source: Bloomberg


Absolute (%) -0.1% 4.8% 18.7% Relative (%) 0.3% -1.2% 30.1%

Source: Bloomberg

Company data 52-week range (LC) 163.9-90.3 Mkt cap. (LCMM) 22,132 Mkt cap. (US$MM) 6,079 Avg daily value (US$MM) 1.55 Avg daily volume (MM) 0.39 Shares O/S (MM) 147 Date of price 23-Nov-09 Index: DSM20 7256 Free float (%) 22% Exchange rate 3.64

Source: Bloomberg

Bloomberg: QTEL QD; Reuters: QTEL QA QR in millions, year-end December FY08 FY09E FY10E FY11E Sales 20,319 23,920 25,710 27,098 Net profit 2,781 2,990 2,994 3,200 EPS (QR) 21.3 20.4 20.4 21.8 DPS (QR) 10.0 10.5 11.0 11.5 Sales growth (%) 92.7% 17.7% 7.5% 5.4% Net profit growth (%) 75.3% 7.5% 0.2% 6.9% EPS growth (%) 53.7% -4.4% 0.2% 6.9% ROE (%) 9.6% 11.8% 11.1% 11.2% EV/EBITDA NM 5.4 4.7 4.1 P/E (x) NM 5.7 5.8 5.5 FCF Yield NM 17.8% 14.9% 16.0% Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

235



Qatar Telecom: Summary of Financials Profit and Loss Statement Cash flow statement QR in millions, year end Dec FY08 FY09E FY10E FY11E FY12E QR in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Revenues 20,319 23,920 25,710 27,098 28,593 Cash EBITDA 9,825 11,408 12,035 12,501 13,036

% Change Y/Y 92.7% 17.7% 7.5% 5.4% 5.5% Interest (1,315) (1,553) (1,209) (1,031) (819)EBITDA 9,825 11,408 12,035 12,501 13,036 Tax (1,082) (963) (1,037) (1,111) (1,204)

% Change Y/Y 90.0% 16.1% 5.5% 3.9% 4.3% Other (1,807) 3,146 473 (277) (613)EBITDA Margin 48.4% 47.7% 46.8% 46.1% 45.6% Cash flow from operations 5,621 12,039 10,263 10,083 10,400

EBIT 5,612 5,731 6,149 6,458 6,906 % Change Y/Y 82.2% 2.1% 7.3% 5.0% 6.9% Capex PPE (6,834) (6,170) (4,593) (4,250) (4,223)EBIT Margin 27.6% 24.0% 23.9% 23.8% 24.2% Net investments (2,368) 1,441 662 841 1,053

Net Interest (1,315) (1,553) (1,209) (1,031) (819) CF from investments (9,202) (4,729) (3,931) (3,409) (3,170)PBT 3,099 4,620 4,928 5,351 5,917 Dividends (347) (1,793) (1,540) (1,613) (1,687)

% change Y/Y 69.9% 49.1% 6.7% 8.6% 10.6% Share (buybacks)/ issue 5,861 0 0 0 0Net Income (clean) 2,781 2,990 2,994 3,200 3,496

% change Y/Y 75.3% 7.5% 0.2% 6.9% 9.3% CF to Shareholders 5,514 (1,793) (1,540) (1,613) (1,687)Average Shares 130 147 147 147 147 FCF to debt 1,932 5,517 4,792 5,060 5,543Clean EPS 21.32 20.39 20.42 21.82 23.84

% change Y/Y 53.7% NM 0.2% 6.9% 9.3% OpFCF (EBITDA - PPE) 2,991 5,238 7,441 8,252 8,813DPS 10.00 10.50 11.00 11.50 12.57 EFCF pre Div, PPE (3,582) 7,310 6,332 6,673 7,230 Balance sheet Ratio Analysis QR in millions, year end Dec FY08 FY09E FY10E FY11E FY12E QR in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Cash and cash equivalents 7,845 12,567 17,358 22,418 27,962 EBITDA margin 48.4% 47.7% 46.8% 46.1% 45.6%Accounts Receivables 3,862 4,545 4,885 5,013 5,147 EBIT Margin 27.6% 24.0% 23.9% 23.8% 24.2%ST financial assets - - - - - Net profit margin 11.2% 12.1% 11.6% 11.8% 12.2%Others 272 287 309 325 343 Capex/sales 33.6% 25.8% 17.9% 15.7% 14.8%Current assets 11,980 17,398 22,552 27,757 33,452 Depreciation/Sales 19.8% 22.2% 21.4% 20.6% 19.4%LT investments 38,838 37,855 36,666 35,393 34,120 Net fixed assets 23,480 25,185 25,468 25,421 25,359 Revenue growth 92.7% 17.7% 7.5% 5.4% 5.5%Total assets 74,298 80,439 84,685 88,570 92,930 EBITDA Growth 90.0% 16.1% 5.5% 3.9% 4.3%ST loans 7,820 10,732 10,732 10,732 10,732 EPS Growth 53.7% NM 0.2% 6.9% 9.3%Payables 9,709 11,960 12,855 13,549 14,297 Others 3,235 5,502 7,199 8,671 9,722 Net debt/EBITDA 2.2 1.6 1.1 0.7 0.2Total current liabilities 20,765 28,194 30,786 32,953 34,751 CF to Shareholders 5,514 (1,793) (1,540) (1,613) (1,687)Long term debt 20,155 19,706 19,706 19,706 19,706 FCF to debt 1,932 5,517 4,792 5,060 5,543Other liabilities 4,416 7,116 7,316 7,448 8,200 Total liabilities 45,336 55,016 57,808 60,106 62,657 OpFCF (EBITDA - PPE) 2,991 5,238 7,441 8,252 8,813Total Liabilities & Shareholders' Equity 74,297 80,439 84,685 88,570 92,930 EFCF pre Div, PPE (3,582) 7,310 6,332 6,673 7,230 Source: Company reports and J.P. Morgan estimates.

236



Rosneft www.rosneft.com


Price Target: $10.3

Company description Rosneft is the largest oil company in Russia. We expect crude output at 2.24 mmbpd in 2009. Rosneft’s key upstream assets are: Yuganskneftegas in W. Siberia (‘09E output – 1.33 mmbpd) and Vankorneft in E. Siberia (‘15E output - around 600 mbpd). Proven hydrocarbon reserves (as of end-‘08) stood at 22.3 bn boe, 3P reserves at 48.9 bn boe. In 2009, we estimate the refining coverage ratio at 47%. The government owns a 75.2% stake in Rosneft, while 9.4% is in treasury shares held by the company.

Post mortem Rosneft is the fastest growing company in the Russian oil sector, as it ramps up output at 500kbpd Vankor field in E. Siberia. We forecast Rosneft’s output growth at over 2% in ‘09E and 6% y/y in ‘10E (vs. 1.0% and 2.6% for the Russian oil sector). We expect Rosneft to generate cumulative FCF of $25bn in ‘10E-‘12E thanks to low opex, ED tax holidays in E. Siberia and rising oil prices. This should in our view allow Rosneft to reduce financial leverage (from net debt of $19.8bn as of end-09), might improve dividend payments and boost investments into projects with superior return potential.

Potential for earnings upgrades Rosneft might show better than expected output growth and should benefit from tax holidays, which we believe is not entirely priced in. Our EBITDA and net income forecasts for Rosneft are 23-25% and 19-24% above Bloomberg consensus respectively.

How much recovery is priced into the stock? Based on our analysis, Rosneft trades at 9.8x 12M forward PER, or a 14% discount to historical average PER (since IPO in 2006). In our view, additional tax breaks are not fully priced in and we would expect the company to trade above its historical PER multiples.

Price target and key risks Our PT (end-2010) is $10.3, based on 50% DCF (WACC at 11.7% and terminal growth rate at 3.5%) and 50% target (normalized) EV/EBITDA (‘10E). Key risks: oil price volatility, inflation and ruble appreciation.

Russia Russian Oil & Gas Nadia KazakovaAC (7-495) 937 7329 [email protected]


3

5

7

9

$


Price Performance

Source: Bloomberg


Absolute (%) -3.2 25.7 109.5

Source: Bloomberg

Company data 52-week range ($) 2.61-9.01 Mkt cap. (US$MM) 86,307 Avg daily value (US$MM) 296 Avg daily volume (MM) 33.44 Shares O/S (MM) 9,579 Date of price 23-Nov-09 Index: RTS 1466.77 Free float (%) 11% Exchange rate 1


Bloomberg: ROSN LI; Reuters: ROSNq.L $ in millions, year-end December FY08 FY09E FY10E FY11E Sales 68,991 46,793 59,041 78,898 Net profit 11,110 6,477 10,539 14,043 EPS (LC) 1.16 0.68 1.10 1.47 FD EPS (LC) 1.16 0.68 1.10 1.47 DPS (LC) 0.07 0.06 0.07 0.11 Sales growth (%) 40% -32% 26% 34% Net profit growth (%) -14% -42% 63% 33% EPS growth (%) -14% -42% 63% 33% ROE (%) 33% 15% 21% 23% P/E (x) 7.8 13.3 8.2 6.1 FD P/E (x) 7.8 13.3 8.2 6.1 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

237



Rosneft: Summary of Financials Profit and Loss Statement Cash flow statement $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Revenues 68,991 46,793 59,041 78,898 84,589 EBIT 12,995 8,755 14,348 18,511 19,653

% change Y/Y 40.2% (32.2%) 26.2% 33.6% 7.2% Depreciation & amortisation 3,983 4,724 4,991 5,532 5,782Gross Margin (%) 22.2% 25.9% 30.1% 28.1% 27.7% Change in working capital/Other 1,617 1,626 (1,056) (2,037) (286)EBITDA 16,978 13,478 19,339 24,043 25,435 Taxes 1,904 1,619 2,635 3,511 3,883


EBIT 12,995 8,755 14,348 18,511 19,653 Capex (8,732) (7,527) (8,825) (8,674) (8,190)% change Y/Y 21.2% (32.6%) 63.9% 29.0% 6.2% Disposal/(Purchase)/Other (1,350) (1,319) 255 276 (169)EBIT Margin 18.8% 18.7% 24.3% 23.5% 23.2% Net Interest (737) (684) (1,141) (689) (278)

Net Interest (737) (684) (1,141) (689) (278) Free cash flow 5,872 3,955 5,936 9,408 12,629Earnings before tax 13,109 8,096 13,174 17,553 19,417

% change Y/Y (26.3%) (38.2%) 62.7% 33.2% 10.6% Equity raised/repaid 0 0 0 0 0Tax (1,904) (1,619) (2,635) (3,511) (3,883) Debt Raised/repaid (2,536) (1,136) 788 (9,258) (8,230)

as a % of EBT 14.5% 20.0% 20.0% 20.0% 20.0% Other 126 0 0 0 (0)Net Income (Reported) 11,110 6,477 10,539 14,043 15,534 Dividends paid (538) (695) (1,044) (1,714) (2,516)

% change Y/Y (13.6%) (41.7%) 62.7% 33.2% 10.6% Beginning cash 998 1,372 3,220 7,496 4,832Shares Outstanding 9,597.87 9,597.87 9,597.87 9,598.87 9,599.87 Ending cash 1,372 3,220 7,496 4,832 6,290EPS (reported) 1.16 0.67 1.10 1.46 1.62 DPS 0.06 0.07 0.11 0.18 0.26

% change Y/Y (13.6%) (41.7%) 62.7% 33.2% 10.6% Balance sheet Ratio Analysis $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Cash and cash equivalents 1,369 3,220 7,496 4,832 6,290 EBITDA margin 24.6% 28.8% 32.8% 30.5% 30.1%Accounts receivable 6,299 4,423 5,360 7,767 8,675 Operating margin 18.8% 18.7% 24.3% 23.5% 23.2%Inventories 1,427 1,002 1,214 1,760 1,965 Net profit margin 16.1% 13.8% 17.9% 17.8% 18.4%Others 3,712 3,395 3,670 3,622 3,045 SG&A/Sales 2.4% 2.9% 2.6% 2.4% 2.4%Current assets 12,807 12,039 17,740 17,980 19,976 Sales per share growth 40.2% (32.2%) 26.2% 33.6% 7.2%LT investments 22,309 21,123 27,052 27,663 29,764 EPS growth (13.6%) (41.7%) 62.7% 33.2% 10.6%Net fixed assets 55,204 58,007 61,841 64,984 67,392 Total assets 77,513 79,130 88,893 92,647 97,156 ROE 28.6% 14.5% 19.5% 21.1% 19.5% ROCE 20.7% 11.7% 17.8% 20.6% 20.8%Liabilities ST loans 14,084 7,964 6,765 5,917 4,416 Production (mboe/day) 2,257 2,375 2,502 2,706 2,817Payables 3,096 2,103 2,471 3,339 3,590 Production oil (mbpd) 2,122 2,192 2,325 2,505 2,621Others 1,517 1,517 1,517 1,517 1,517 Production gas (mboe/day) 135 183 177 201 196Total current liabilities 18,697 11,584 10,753 10,773 9,523 Refining throughput (mbpd) 988 1,000 1,054 1,054 1,054Long term debt 10,081 15,065 17,052 8,641 1,913 Other liabilities 9,137 7,549 6,430 5,642 5,088 Interest coverage (x) 23.0 19.7 16.9 34.9 91.7Total liabilities 77,513 79,577 89,110 92,261 96,746 Net debt to equity 57.6% 43.7% 29.7% 14.5% 0.0%Shareholders' equity 38,903 44,685 54,180 66,509 79,527 Net debt 22,796 19,809 16,321 9,727 39BVPS 4.05 4.66 5.65 6.93 8.28 Net debt/EBITDA (ny) 1.2 1.3 0.8 0.3 (0.1) Source: Company reports and J.P. Morgan estimates.

238



RusHydro www.rushydro.ru



Company description RusHydro is the largest power generation company in Russia in terms of installed capacity (about 25GW including Sayano Shushensksya HPP after the recovery of the plant), controlling over half of the country’s hydro power generation facilities and producing about 8% of the country’s electricity.

Post Mortem RusHydro experienced a major accident at Sayano-Shushenskaya HPP (SS HPP) which will make the largest plant inoperable for the 2010 and part of 2011. Not surprisingly, the stock has underperformed the market since the accident. However, we estimate the company is still likely to make a sound profit in 2009 given the relatively good 1H09, and it should improve profitability in 2011 when operations at the power plant are resumed.

Potential for earnings upgrades We see little scope for earnings upgrades as the company bottom line is likely to remain weak in 2009 and 2010 as a result of the SS HPP accident. Moreover, we believe the market expectations on developments in the electricity market already take into account improvements in electricity demand and pricing.

How much recovery is priced into the stock? We believe renewed focus on risks may result in less vulnerability on the downside and greater sensitivity to positive surprises. At the same time, the market may overlook its attractive relative valuation. For example, RusHydro trades at 5.6x 2011E EV/EBITDA vs. 9.7x for international peers. Low valuation compensates for some of the capex and stock overhang risks in our view.

Price target and key risks Our DCF-based Dec-10 PT is $0.042. The key risks include 1) the risk of capex increase; and 2) new share issue overhang, with issuance already approved.

Russia Electric Utilities Sergey ArininAC (7-495) 967-7031 [email protected]


0.010

0.020

0.030

0.040

0.050

$


Price Performance

Source: Bloomberg.


Absolute (%) 6% 14% 78%

Source: Bloomberg.

Company data 52-week range (RUB) 0.53-1.43 Mkt cap. (RUBMM) 327,859 Mkt cap. (US$MM) 11,387 Avg daily value (US$MM) 28 Avg daily volume (MM) 800 Shares O/S (MM) 284, 543 Date of price 23-Nov-09 Index: RTS 1466.77 Free float (%) 37 Exchange rate (RUB/$) 28.79

Source: Bloomberg.

Bloomberg: HYDR RU; Reuters: HYDR.RTS RUB in billions, year-end December FY08 FY09E FY10E FY11E Revenue 107,669 105,048 109,768 139,956 Net income -19,955 24,180 23,143 43,968 EPS (RUB) -0.070 0.085 0.081 0.155 FD EPS (RUB) -0.070 0.085 0.081 0.155 DPS (RUB) 0 0 0 0 Revenue growth (%) 35% -2% 4% 28% Net income growth (%) N.M. N.M. -4% 90% EPS growth (%) N.M. N.M. -4% 90% ROE (%) -6% 6% 5% 9% P/E (x) -14.7 15.6 16.4 9.0 FD P/E (x) -14.7 15.6 16.4 9.0 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

239



RusHydro: Summary of Financials Profit and Loss Statement Valuation ratios $ in millions, year end Dec FY07 FY08E FY09E FY10E FY11E $ in millions, year end Dec FY07 FY08E FY09E FY10E FY11ESales 3,105 4,324 3,283 3,409 4,186 P/E (recurrent) - - - - -Gross Operating Profit - - - - - P/E (reported) - - - - -Depreciation & Amortisation 330 375 337 404 499 Price to book value 1.1 0.9 0.8 0.7 0.7Operating Profit 412 924 1,079 1,132 1,883 EV/EBITDA 13.9 7.4 7.0 6.8 4.8Associate Income - - - - - EV/EBIT 25.1 10.5 9.2 9.2 6.1Net Interest 31 60 0 105 247 FCF yield (pre divs, post mins) (%) - - - - -Profit before tax 372 864 1,079 1,027 1,636 Dividend yield (%) - - - - -Income Tax 117 459 324 308 327 Minority Interests 0 19 0 0 0 Per share Discontinued items - - - - - $ Group Net profit 255 409 864 821 1,309 FY07 FY08E FY09E FY10E FY11E Recurrent EPS 0.00 (0.00) 0.00 0.00 0.00Cashflow statement Reported EPS - - - - -$ in millions, year end Dec Reported DPS - - - - - FY07 FY08E FY09E FY10E FY11E Adjusted Free cash flow - - - - -Funds from operations - - - - - Working Capital 36 (223) (112) (29) (32) Performance, leverage and return ratios Cash flow from operations 1,067 1,037 1,203 1,542 2,210 % Capex & Acquisitions - - - - - FY07 FY08E FY09E FY10E FY11EOther investing cash flows - - - - - Gross operating margin - - - - -Cash from investing - - - - - Operating margin - - - - -Dividends paid (80) 0 0 0 0 Operating profit growth y-o-y 137.4% 124.5% 16.8% 4.8% 66.4%Cash from financing - - - - - Recurrent Income growth y-o-y - - - - -Free Cash flow before dividends - - - - - Reported ROE 4.2% 3.9% 7.0% 6.0% 8.8%Free cash flow, adjusted - - - - - ROCE (EBIT) - - - - - Net debt/ (equity+minorities) (%) 6.5% -0.5% 1.3% 4.5% 10.9%Balance Sheet Net debt /EBITDA (%) - - - - -$ in millions, year end Dec EBITDA / net interest - - - - - FY07 FY08E FY09E FY10E FY11E Reported net income / dividends - - - - -Net fixed assets - - - - - Current assets - - - - - Market valuation Total assets 12,746 14,502 15,699 18,018 21,116 $ in millions Total Debt - - - - - FY07 FY08E FY09E FY10E FY11EShareholders' equity 9,465 11,645 13,177 14,330 15,368 Share price (year-end / current) 0.03750 Other liabilities - - - - - Number of Shares (million) 284,543.0 284,543.0 284,543.0 284,543.0 284,543.0Total liabilities 3,281 2,857 2,522 3,687 5,749 Market Capitalisation - - - - -Net debt 615 -58 174 642 1,676 EV adjustment - - - - -Capital Employed - - - - - EV 10,347 9,673 9,906 10,373 11,407 Source: Company reports and J.P. Morgan estimates.

240



Samsung SDI www.samsungsdi.com

Overweight W142,500


Company description Samsung SDI Co., Ltd. Specializes in manufacturing cathode-ray tubes (CRTs) for televisions and computer monitors. The company also produces PDP panels. SDI is now moving its axis of business into rechargeable batteries (RB) for mobile phones and NBPC, aiming further growth in the HEV/EV area.

Post mortem We believe the three-stage earnings drivers are intact: RB for CE in the near term; AM-OLED in the mid-term; and RB for EV in the long term. Also, SDI’s aggressive plan in ESS (energy storage system) will likely reinforce SDI’s multi-year growth story further.

Potential for earnings upgrades We still believe the company’s RB will generate sustainable earnings, owing to product-mix change as well as ongoing growth in SMD. Hence, we expect upward revisions to consensus earnings estimates and price target.

How much recovery is priced into the stock? Our long-term view is potential upside will be largely driven by SB LiMotive, as the company starts shipping commercial samples in 4Q10, and meaningful volume shipments will likely to take place in 2012. We believe the share price will continue to appreciate as the value of its JV offsets deficits in its existing businesses.

Price target and key risks We believe Samsung SDI’s re-rating story is intact, given the potential strong earnings momentum in the next two years. As we expect SDI’s earnings to be driven by its three operations (RB for CE, AM-OLED, and RB for EV), we use a SOTP approach to derive our Dec-10 PT of W210,000, estimating a value for each of its operations (CE RB: W4.3 trillion; SMD: W3.0 trillion; and EV RB: W2.4 trillion). Our PT implies 47% upside potential from the current price. SDI remains on our Asia Analysts’ Focus List, and on the LONG side of our AP Tech Trading Portfolio.

South Korea Electronics JJ ParkAC (822) 758-5717 [email protected]

Marcus ShinAC (822) 758-5712 [email protected]


Price performance Won

40,000

110,000

180,000

Oct-08 Feb-09 Jun-09 Oct-09SDI KOSPI

W


1M 3M 12M Absolute (%) 2% 33% 101% Relative (%) 6% 32% 64%


52-wk range (Won) 52,200-179,000 Mkt cap. (WB) 6,492 Mkt cap. (US$MM) 5,513 Avg daily val (US$MM) 109.5 Avg daily vol (MM) 0.9 Shares O/S (MM) 46 Date of price 5-Nov-09 Index: KOSPI 1,552 Free float (%) 57.1 Exchange rate 1,178

Source: Bloomberg. Bloomberg: 006400 KS; Reuters: 006400.KS Won in billions, year-end December

FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E Sales 6,250 4,842 4,592 4,663 ROE (%) 1% 6% 7% 9% Sales growth 21% -23% -5% 2% ROIC (%) 3% 5% 13% 18% Operating profit 69 129 312 401 BPS (Won) 99,141 107,205 115,780 127,158 OP growth n/a 88% 141% 29% P/BV (x) 1.4x 1.3x 1.2x 1.1x Pre-tax profit 121 292 443 589 Div yield (%) 0.0% 2.7% 2.7% 2.7% Net profit 39 308 407 542 EPS 1Q 2Q 3Q 4Q EPS (Won) 807 6,405 8,463 11,262 FY08 -636 1,031 1,220 -809 P/E (x) 176.7x 22.2x 16.8x 12.7x FY09E 1,197 1,838 1,792 1,578 Cash 1,280 1,353 1,614 2,020 FY10E 1,683 1,746 2,446 2,588 Gross debt 1,033 659 441 274 Price target 210,000 Equity 4,769 5,157 5,570 6,117 Consensus 160,000 Debt-equity 22% 13% 8% 4% Difference 31.3% Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

241



Samsung SDI: Summary of financials Won in billions, year-end December Profit and loss statement Balance sheet

FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E Revenues 6,250 4,842 4,592 4,663 Cash and Cash Equivalents 1,280 1,353 1,614 2,020 COGS 5,435 4,103 3,734 3,719 Accounts receivable 684 542 494 503 Depreciation -591 -464 -455 -446 Inventories 420 426 389 395 Gross Profit 814 739 858 944 Others current assets 210 386 352 358 EBIT 69 129 312 401 Current assets 2,594 2,706 2,849 3,277 Net Interest Income -7 -2 7 26 Pre-tax Profit 121 292 443 589 Net fixed assets 2,156 2,076 1,958 1,840 Tax Expense/(Credit) 43 12 35 47 Investment assets 1,762 2,024 2,078 2,147 Net Income 39 308 407 542 Other long term assets 257 83 94 101 Shares outstanding (mil.) 46 46 46 46 Total Assets 6,769 6,889 6,980 7,366 EPS (Including pref., Won) 807 6,405 8,463 11,262 Sequential Growth ST Debt and CPLTD 327 243 168 123 Revenues 21% -23% -5% 2% Account Payables 280 321 281 284 Gross Profit 191% -9% 16% 10% Other current liabilities 485 656 599 609 EBIT n/a 88% 141% 29% Total current liabilities 1,093 1,220 1,048 1,016 Pre-tax Profit n/a 142% 52% 33% Long term debt 705 416 273 151 EPS (Won) n/a 694% 32% 33% Other Long term liabilities 201 96 89 82

Total liabilities 2,000 1,732 1,410 1,249 Shareholder's equity 4,769 5,157 5,570 6,117 Total Liabilities and Equity 6,769 6,889 6,980 7,366 BVPS (Won) 99,141 107,205 115,780 127,158

Cash flow statement Ratio analysis FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E

Net Income 39 308 407 542 Gross Margin (%) 13.0% 15.3% 18.7% 20.3% Depreciation & amortization 591 464 455 446 EBIT Margin (%) 1.1% 2.7% 6.8% 8.6% Other non-cash items 0 0 0 0 Net profit margin (%) 1.2% 5.8% 8.9% 11.6% Change in working capital -108 172 21 -9 COGS/sales (%) 87.0% 84.7% 81.3% 79.7% Cash flow from operations 560 916 884 979 SG&A/sales (%) 11.9% 12.6% 11.9% 11.7% Purchase of PP&E 151 -384 -338 -328 Disposal/ (purchase) -85 -88 -65 -77 Sales per share growth (%) 21.4% -22.5% -5.2% 1.6% Cash flow from investing 66 -472 -403 -405 Sales growth (%) 21.4% -22.5% -5.2% 1.6% Equity raised/(repaid) -5 117 0 0 EBIT growth (%) n/a 88.1% 140.9% 28.5% Debt raised/(repaid) 7 -374 -218 -167 Net profit growth (%) n/a 259.5% 45.6% 33.1% Other charges -43 -383 -212 -162 EPS growth (%) n/a 694.1% 32.1% 33.1% Cash dividends 0 0 0 0 Cash flow from Financing -164 -371 -220 -169 Interest Coverage (x) 2.7 5.9 22.6 45.1 Net Changes in Cash 463 73 261 406 Inventory Turnover (x) 12.9 9.6 9.6 9.4 Beginning cash 818 1,280 1,353 1,614 Net Debt to total Capital (%) -3.7% -10.1% -16.8% -23.7% Ending cash 1,280 1,353 1,614 2,020 Net debt to equity (%) -5.2% -13.5% -21.1% -28.6% DPS (Won) 0 250 250 250 Sales/Assets (%) 92.3% 70.3% 65.8% 63.3%

Assets/Equity (%) 141.9% 133.6% 125.3% 120.4% ROE (%) 0.8% 6.2% 7.3% 8.9% ROIC (%) 2.7% 4.6% 13.1% 17.7%

Quarterly data Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2009E 2010E Sales 1,023 1,187 1,347 1,286 Sales 1,103 1,124 1,191 1,173 Net income 58 88 86 76 Net income 81 84 118 124 EPS (Won) 1,197 1,838 1,792 1,578 EPS (Won) 1,683 1,746 2,446 2,588 Source: Company data, Bloomberg, J.P. Morgan estimates.

242



Santander Brasil http://www.santander.com.br

Overweight SANB11.SA, R$22.71 BSBR, USA $13.34

Price Target: R$28/US$16

Company description Banco Santander Brasil is the third-largest private bank in Brazil based on total assets, loans, and deposits. Since the late 1990s, the company has grown via various acquisitions, notably the purchases of Banco do Estado de São Paulo (Banespa) in November 2000 and Banco Real from ABN Amro in 2008. The company conducted its IPO on October 6, 2009.

Post mortem The third-largest private-sector bank in Brazil, Santander Brasil should benefit from growth in financial services penetration. In addition, an improving credit cycle should allow for solid 20%+ loan growth in 2010 and 2011, in our view, while provisioning levels should decline from relatively high levels. With an estimated 24% BIS ratio, the company has the capital strength to take advantage of growth opportunities while returning ample levels of capital to shareholders (50% dividend payout ratio forecast).

Potential for earnings upgrades Difficult to forecast at this point given: 1) the stock is not yet well covered since it only recently IPO’d; and 2) due to accounting differences with other Brazilian banks (its primary reporting framework is IFRS versus Brazilian GAAP for the other Brazilian banks we cover). On the latter point, we adjust IFRS earnings to make earnings estimates more comparable to those of the other Brazilian banks in our coverage universe.

How much recovery is priced into the stock? Little, in our view. The stock trades at only 1.6x adjusted book value, compared to 3.5x at Itau Unibanco and 2.8x at Bradesco. We see adjusted ROE expanding in the coming years to the high-teen range (we expect 12% in 2010) and for Santander Brasil’s price-to-book value multiple to expand.

Price target and key risks YE10 R$28/share, US$16/ADR (at JPM’s end-2010 FX of R$1.8/US$). We use a residual income model and regression of risk-adjusted ROE to price to book value using a cross-section of Latin American banks. Key risks include execution risk related to integration with Banco Real, continued deterioration in asset quality, and the Brazilian tax authorities deciding to no longer allow goodwill amortization expenses to be tax deductible.

Brazil Financial Institutions Saul MartinezAC (1-212) 622-3602 [email protected]



20

21

22

23

24

out-09 out-09 nov-09 nov-09

Source: Bloomberg.


Absolute (%) (6.3) NA NA Relative (%) (6.8) NA NA

Source: Bloomberg.

Company data 52-week range (LC) 23.70-20.15 Mkt cap. (Local) 86,298 Mkt cap. (US$MM) 50,692 Avg daily value (US$MM) 475.3 Avg daily volume (MM) 21.3 Shares O/S (MM) 3,800 Date of price 11/25/2009 Index: Bovespa 67917 Free float (%) 18% Exchange rate 1.72


243



244



Sberbank www.sbrf.ru


Price Target: $3.02

Company description Sberbank is Russia's largest bank, with near 50% of total retail deposits and by far the biggest retail network of c.20,000 branches. The bank holds the #1 market share in both corporate and retail loans (32% in each), with the diversified loan book reflecting the Russian GDP structure.

Post Mortem Sberbank is well on track to emerge from the downturn in relatively good shape in our view: without a single loss, with a strong Total CAR of 18.4% (not having raised any additional equity), strong NIM (a reflection of the competitive positioning) and a C/I ratio below 40%. JPMe NPL coverage should remain above 100%, and we expect pronounced provision releases on a 2-3 year horizon, a potentially major boost to earnings.

Potential for earnings upgrades Both sector and company upgrades have intensified in recent months, however, we argue that consensus still fails to recognize the scope of provisioning normalization, and its impact on the bottom line and equity. We believe that earnings upgrades should continue throughout 2010, with the macro-recovery strengthening and the likelihood of provision releases rising.

How much recovery is priced into the stock? From the February 09 trough Sberbank common shares have rallied roughly 400%, beating MSCI Russia Financials and MSCI EM Financials indices. Still, the shares trade on 1.5x 2011E P/B and 5.2 P/E, which in our view look undemanding giving the bank's long-term potential.

Price target and key risks Our Dec-10 PTs of $3.02 for common stock and $2.11 for preference shares are based on the Gordon Growth valuation model. The key risks include the negatives on the macro front and potential weakening of the ruble; reacceleration of NPL growth; more pronounced than expected NIM contraction and inability to deliver on cost control. Launch of ADRs in 1H10 and accelerated reversal of LLRs are among the potential catalysts for the shares, in our view.

Russia Banks Alex Kantarovich, CFAAC (7-495) 967-3172 [email protected]


0.0

1.0

2.0

3.0

$


Price Performance

Source: Bloomberg.


Absolute (%) 3.7 58.5 182.5

Source: Bloomberg.

Company data 52-week range ($) 0.39-2.58 Mkt cap. (US$MM) 55,147 Avg daily value (US$MM) 812 Avg daily volume (MM) 395 Shares O/S (MM) 22,587 Date of price 23-Nov-09 Index: RTS 1,466.77 Free float (%) 43 Exchange rate (RUB/$) 28.79

Source: Bloomberg.

Bloomberg: SBER RU; Reuters: SBER.RTS RUB in billions, year-end December FY08 FY09E FY10E FY11E Revenue 458 620 612 647 Net income 98 18 102 338 EPS (RUB) 4.33 0.78 4.50 14.95 FD EPS (RUB) 4.33 0.78 4.50 14.95 DPS (RUB) 0.48 0.12 0.68 2.39 Revenue growth (%) 30 35 -1 6 Net income growth (%) -8 -82 480 232 EPS growth (%) -11 -82 480 232 ROE (%) 14.1 2.3 12.6 33.1 P/E (x) 14.4 103.8 17.2 5.2 FD P/E (x) 14.4 103.8 17.2 5.2 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

245



Sberbank: Summary of financials Income statement Share and per share data and ratios $ mn 2008A 2009E 2010E 2011E 2012E 2008A 2009E 2010E 2011E 2012E Interest income 24,898 26,143 27,513 28,599 31,704 Share and per share data Interest expense -9,711 -10,957 -12,338 -13,097 -14,682 Shares - common (mn) 21,587 21,587 21,587 21,587 21,587 Net interest income 15,187 15,186 15,175 15,502 17,023 Shares - preferred (mn) 1,000 1,000 1,000 1,000 1,000 YoY change 54% 0% 0% 2% 10% Total shares OS (mn) 22,587 22,587 22,587 22,587 22,587 Fees and commissions 3,462 3,162 3,896 4,643 5,648 EPS reported ($) 0.1738 0.0241 0.1451 0.4821 0.5260 Trading and other income -239 901 655 720 810 EPS adjusted ($) 0.1738 0.0241 0.1451 0.4821 0.5260 Non-interest income 3,223 4,063 4,551 5,363 6,459 YoY change -9% -86% 503% 232% 9% Yoy change -18% 26% 12% 18% 20% BVPS ($) 1.1297 1.0824 1.2250 1.6854 2.0909 Revenue 18,410 19,249 19,726 20,865 23,482 Payout ratio 11% 10% 10% 15% 25% YoY change 33% 5% 2% 6% 13% DPS - common ($) 0.0193 0.0036 0.0221 0.0771 0.0883 Provisions -3,931 -11,395 -7,712 1,155 0 DPS - preferred ($) 0.0253 0.0048 0.0290 0.1012 0.1159 Operating costs -8,905 -7,174 -7,917 -8,408 -8,631 Dividend yield - common 0.8% 0.1% 0.9% 3.1% 3.5% Non-recurring items 0 0 0 0 0 Dividend yield - preferred 2.1% 0.4% 2.5% 0.0% 0.0% Pre-tax income 5,218 680 4,097 13,612 14,851 YoY change -5% -87% 503% 232% 9% Valuation and return ratios Minorities 0 0 0 1 2 P/E ratio 14.4 103.8 17.2 5.2 4.8 Net income (reported) 3,926 544 3,278 10,890 11,881 P/B ratio 2.2 2.3 2.0 1.5 1.2 Net income (adjusted) 3,926 544 3,278 10,890 11,881 ROE 14% 2% 13% 33% 28% YoY change -6% -86% 503% 232% 9% ROA 1.7% 0.3% 1.4% 4.1% 3.9%

Balance sheet Income statement and balance sheet ratios $ mn 2008A 2009E 2010E 2011E 2012E 2008A 2009E 2010E 2011E 2012E ASSETS Revenue ratios Cash and CBR deposits 27,598 14,349 16,374 18,974 22,528 NIM 7.6% 8.4% 7.4% 6.7% 6.3% Corporate loans 136,711 156,234 176,154 198,173 223,936 Non-II/ave assets 1.4% 1.9% 2.0% 2.0% 2.1% Retail loans 42,886 37,622 41,291 46,452 52,491 NII/revenues 82% 79% 77% 74% 72% Loan-loss reserves -6,880 -18,361 -25,589 -18,997 -14,105 Fees/revenue 19% 16% 20% 22% 24% Net customer loans 172,717 175,495 191,856 225,628 262,322 Trading income/revenue -7% 5% 3% 3% 3% YoY change 8% 2% 9% 18% 16% Other IEA 16,886 20,484 22,903 24,516 26,129 Cost ratios Goodwill 0 0 0 1 2 Cost/income 48% 37% 40% 40% 37% Other assets 11,931 11,780 12,210 12,684 13,335 Cost/assets 3.8% 3.4% 3.4% 3.2% 2.8% Total assets 229,132 222,109 243,343 281,803 324,314

Balance sheet and capital ratios LIABILITIES AND EQUITY Loans/deposits 106% 104% 104% 107% 108% Customer deposits 163,103 167,951 185,157 211,606 243,346 Loans/assets 75% 79% 79% 80% 81% YoY change 3% 3% 10% 14% 15% Deposits/liabilities 80% 85% 86% 87% 88% Debt 10,135 8,871 9,677 11,290 12,903 Debt/liabilities 14% 13% 13% 12% 11% Subordinated debt 18,239 17,297 17,297 17,297 17,297 LLR/loans 3.8% 9.5% 11.8% 7.8% 5.1% Other liabilities 12,139 3,541 3,541 3,541 3,541 LLP/loans 2.1% 6.5% 3.8% -0.5% 0.0% Shareholders' equity 25,516 24,448 27,670 38,068 47,226 RWA ($ mn) 198,560 199,89

8 219,00

9 253,62

2 291,88

3 Minorities 0 0 0 1 2 Tier 1 CAR 12.2% 11.6% 12.0% 14.3% 15.4% Total liabilities and equity 229,132 222,109 243,343 281,803 324,314 Total CAR 18.9% 20.3% 19.9% 21.1% 21.3% Source: Company reports and J.P. Morgan estimates.

246



Shinhan Financial Group www.shinhanfg.com

Overweight W45,950


Company description Shinhan Financial Group (SFG), transformed from Shinhan Bank in September 2001, provides a wide range of financial services through its banking and non-banking subsidiaries. Shinhan Bank and Shinhan Card are its flagship subsidiaries. SFG serves more than 20 million customers, from corporates to retail.

Post mortem Among Korean banks, SFG had been most committed into de-leveraging and de-risking its balance sheet during the downturn cycle. Between end-FY08 and 3Q09, its loan to deposit ratio declined on the back of proactive deposit gathering and slowdown of loan growth. The tier-1 capital ratio at the group level improved to 8.2% as of 3Q09 (vs 6.8% in 1Q09) due to equity capital increase and prudent management of risk-weighted assets.

Potential for earnings upgrades In our view, SFG’s de-leveraging/de-risking of its balance sheet will continue to pay-off in the form of strong earnings recovery. Our positive view on SFG’s upbeat profitability outlook is based on a higher magnitude of NIM expansion than the industry average, as well as lower normalized credit costs.

How much recovery is priced into the stock? In our view, earnings recovery in 4Q09, as guided by the management of the group, has largely been priced into SFG’s share price. However, we expect upward earnings estimate revisions to continue throughout 2010, led by higher NIM and increasing confidence on SFG’s credit quality.

Price target and key risks We derive our DDM-based Dec-10 PT of W60,000 by applying 1.6x P/BV, which we arrive at by assuming a ROE of 14.8% and a CoE of 11.2%. A key risk to our PT is unexpected bankruptcy cases at Korean companies.

Korea Banks/Bank-centric FHCs Scott SeoAC (82-2) 758 5759 [email protected]


Price performance

10,00025,00040,00055,00070,000

Nov -08 Mar-09 Jul-09 Nov -09

SFG KOSPI




52-week range (Won) 20,400-49,900 Mkt cap. (WB) 21,789 Mkt cap. (US$MM) 18,469 Avg daily value (US$MM) 107.6 Avg daily volume (MM) 2.4 Shares O/S (MM) 474 Date of price 5-Nov-099 Index: KOSPI 1,552.24 Free float (%) 86.7 Exchange rate 1,179.8

Source: Bloomberg.

Bloomberg: 055550 KS; Reuters: 055550.KS Won in billions, year-end December FY08 FY09E FY10E FY11E Reported net profit 2,019 1,482 2,211 2,647 *Attrib. net profit 1,741 1,239 1,975 2,418 FD EPS (attrib NP) (Won) 4,238 2,632 4,040 4,946 **Cash adj. EPS (Won) 4,990 3,122 4,365 5,236 Cash DPS (Won) 0 250 900 1,100 EPS (attrib NP) growth (%) (21.4) (37.9) 53.5 22.4 **Cash adj. EPS growth (%) (3.4) (37.4) 39.8 20.0 ROE (%) 13.0 8.5 11.8 13.1 **Cash adj. ROE (%) 15.3 10.1 12.8 13.9 P/E (x) 10.8 17.5 11.4 9.3 P/E (cash adj.) (x) 9.2 14.7 10.5 8.8 BVPS (Won) 32,187 32,587 35,298 39,180 P/BV (x) 1.4 1.4 1.3 1.2 Div. yield (%) 0.0 0.5 2.0 2.4 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

247



Shinhan Financial Group: Summary of financials Profit and loss statement Won in billions, year-end December FY08 FY09E FY10E FY11EMargins (% of Earning Assets)

3.50% 2.95% 3.18% 3.26%

Earning Assets/Assets 87.9% 87.7% 89.5% 89.8%NIM (as % of avg. Assets)

3.08% 2.58% 2.84% 2.92%

Net Interest Income 7,464 6,816 7,706 8,385 Total Non-Interest Rev. 1,514 1,512 1,706 1,823 Fee income 1,358 849 1,017 1,092 FX/Trading gains 156 663 689 731 Other operating income (0) 0 0 0 Total Operating Rev. 8,977 8,328 9,412 10,208 Operating costs (4,894) (4,440) (4,841) (5,048)Operating Profit 4,083 3,888 4,571 5,160 Loan loss provisions (1,051) (1,659) (1,344) (1,291)Non operating profit (38) (0) 34 35 Exceptionals 0 0 0 0 Disposals/ Other income (38) (0) 34 35 Pre-tax Profit 2,994 2,229 3,261 3,904 Tax (969) (725) (1,025) (1,227)Minorities/preference dividends

(284) (265) (261) (258)

Attributable net income 1,741 1,239 1,975 2,418 Source: Company, J.P. Morgan estimates.

Balance sheet Won in billions, year-end December

FY08 FY09E FY10E FY11ENet customer loans 170,345 168,197 177,960 188,717Gross loans 173,662 171,935 182,251 193,187Other Earning Assets 15,261 19,046 20,379 21,601Average Earning Assets 213,195 231,363 242,526 257,394Total assets 264,015 263,317 278,709 294,767 Customer deposits 105,338 131,319 140,511 148,942Other int. bearing liabilities 64,724 52,411 55,030 57,757Avg. int. bearing liabilities 192,657 209,675 218,814 231,332Average Assets 242,446 263,666 271,013 286,738Shareholders' equity 13,581 16,273 17,802 19,751 Risk-weighted assets 183,766 177,608 187,944 209,140 Average RWA 159,631 180,687 182,776 198,542 Source: Company, J.P. Morgan estimates.

Growth rates %, year-end December

FY08 FY09E FY10E FY11EGross loans 15.1% -1.0% 6.0% 6.0%Customer deposits 20.3% 24.7% 7.0% 6.0%Total assets 1.7% 1.5% 1.7% 1.8%Shareholders' equity -1.1% 19.8% 9.4% 10.9% Net Interest Income 7.4% -8.7% 13.1% 8.8%Total Non-Interest Revenues -26.9% -0.1% 12.8% 6.9%Total Operating Revenues -0.5% -7.2% 13.0% 8.5%Operating costs 6.8% -9.3% 9.0% 4.3%Pre-provisioning OP -8.0% -4.8% 17.6% 12.9%Loan loss provisions 40.7% 57.8% -19.0% -3.9%Attributable net income -18.5% -28.9% 59.4% 22.4%EPS -21.4% -37.9% 53.5% 22.4%DPS -100.0% n.a 260.0% 22.2%Source: Company, J.P. Morgan estimates.

Per share data Won, year-end December

FY08 FY09E FY10E FY11EFD EPS (attrib NP) 4,238 2,632 4,040 4,946Cash adj. EPS 4,990 3,122 4,365 5,236Payout ratio 0.0% 9.5% 22.3% 22.2%NAV 32,187 32,587 35,298 39,180Avg. Shares issued (MM) 411 471 489 489Source: Company, J.P. Morgan estimates.

Du-Pont analysis Year-end December FY08 FY09E FY10E FY11ENIR/Avg. Assets 3.08% 2.58% 2.84% 2.92%Non IR/Total Rev 16.9% 18.2% 18.1% 17.9%Cost/Income 49.0% 48.2% 46.8% 45.2%Cost/Assets 1.82% 1.52% 1.62% 1.61%Operating ROAA 1.68% 1.47% 1.69% 1.80% Loan/Assets 66.9% 65.5% 65.3% 65.5%Other inc:provs -0.02% 0.00% 0.01% 0.01%Tax 32.3% 32.5% 31.4% 31.4%MI -0.12% -0.10% -0.10% -0.09%ROAA 0.72% 0.47% 0.73% 0.84%Equity/Assets 5.5% 5.5% 6.2% 6.4%ROE 13.01% 8.49% 11.83% 13.13%Source: Company, J.P. Morgan estimates.

248



Siam Commercial Bank www.scb.co.th

Overweight Bt78.75


Company description Siam Commercial Bank (SCB) is the third-largest bank in Thailand with total assets worth Bt1.2 trillion. SCB has the most extensive retail network and franchise with 960 branches and 6,798 ATMs operating countrywide.

Post mortem We believe SCB uses the opportunities (when its foreign competitors are exiting the business due to financial difficulties at parent company level) to quickly improve its business and enable the bank to compete with both domestic and foreign peers. In our view, its already strong retail franchise and revamped business banking groups will open up avenues to grab broad-based growth opportunities when economic momentum returns.

Potential for earnings upgrades General market expectations continue to be cautious and low. Earnings estimates have been revised up and the stock has rallied just to reflect the out-of-crisis situation, but it still does not reflect a potential economic recovery. We, therefore, see loan growth, NIM recovery, and lower credit costs as key drivers for upward earnings estimate revisions.

How much recovery is priced into the stock? SCB’s share price has increased 92% from the trough level as the global economy recovered from the crisis earlier than the market had expected. However, the stock price is still 21% below its pre-crisis level, suggesting that a full recovery is not yet priced in. The market is still concerned about the loan growth recovery and competition-led NIM pressure.

Price target and key risks We are Overweight on SCB with our Dec10 PT of Bt110. Our PT is based on a DDM approach, with an ROE of 17.2%, a COE of 11.8%, and a growth rate of 8.0%. Key risks to our PT include weaker-than-expected loan growth and non-NII.

Thailand Banks Anne JirajariyavechAC (66-2) 684-2684 [email protected]


Price performance

40

70

100


SCB.BK share price (Bt)SET (rebased)

Bt




52-week range (Bt) 40.75-91.75 Mkt cap. (BtMM) 267,122 Mkt cap. (US$MM) 8,002 Avg daily value (US$MM) 21.6 Avg daily volume (MM) 10.1 Shares O/S (MM) 3,392 Date of price 5-Nov-09 Index: SET 682 Free float (%) 72 Exchange rate 33.38

Source: Bloomberg. Bloomberg: SCB TB; Reuters: SCB.BK Bt in millions, year-end December FY08 FY09E FY10E FY11E Operating profit 36,042 34,854 40,414 46,489 Net profit 21,169 21,315 25,066 29,050 Cash EPS (Bt) 6.23 6.27 7.37 8.55 FD EPS (Bt) 6.23 6.27 7.37 8.55 DPS (Bt) 2.00 2.00 2.20 2.50 EPS growth (%) 22.0 0.7 17.6 15.9 ROE (%) 17.9 15.9 16.7 17.2 P/E (x) 12.6 12.6 10.7 9.2 BVPS (Bt) 37.42 41.69 46.87 52.91 P/BV (x) 2.1 1.9 1.7 1.5 Dividend yield (%) 2.5 2.5 2.8 3.2 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

249



Siam Commercial Bank: Summary of financials Income statement - Bt mn 2008 2009E 2010E 2011E Growth Rates 2008 2009E 2010E 2011E

Margins (% of Earning Assets) 3.90% 3.56% 3.60% 3.69% Loans 6% 2% 10% 10%Earning Assets/Assets 94% 95% 95% 96% Deposits 7% 12% 7% 7%NIM (as % of avg. Assets) 3.68% 3.56% 3.60% 3.69% Assets 7% 9% 7% 7%

Equity 15% 11% 12% 13%Net Interest Income 44,330 43,623 48,017 52,579

Net Interest Income 13% -2% 10% 10%Total Non-Interest Revenues 21,686 22,075 25,386 29,194 Non-Interest Income 18% 2% 15% 15%Fee income 14,923 16,266 18,706 21,512 of w hich Fee Grth 11% 9% 15% 15%FX/Trading gains 4,514 4,684 5,387 6,195 Revenues 15% 0% 12% 11%Other operating income 2,249 1,125 1,293 1,487 Costs 4% 3% 7% 7%Total operating revenues 66,016 65,698 73,402 81,773 Pre-Provision Profits 25% -3% 16% 15%Operating costs -29,973 -30,843 -32,988 -35,284 Loan Loss Provisions 23% 16% -6% 10%Operating profit 36,042 34,854 40,414 46,489 Pre-Tax 21% -1% 17% 16%Loan Loss Prov isions -4,954 -5,762 -5,426 -5,969 Attributable Income 22% 1% 18% 16%Other prov isions 0 0 0 0 EPS 22% 1% 18% 16%Ex ceptionals -909 685 0 0 DPS 0.0% 0.0% 10.0% 13.6%Disposals/ Other income 0 0 0 0Pre-tax profit 30,179 29,778 34,988 40,520 Balance Sheet Gearing 2008 2009E 2010E 2011ETax [rate] -8,888 -8,338 -9,797 -11,346Minorities/preference div idends -123 -125 -125 -125 Loan/Deposit 101% 92% 95% 97%Attributable net income 21,169 21,315 25,066 29,050 Investment/Assets 12% 11% 11% 10%

Loan/Assets 74% 69% 72% 74%Customer deposits/Liab. 73% 75% 76% 76%LT Debt/Liabilities 2% 2% 2% 2%

Per Share Data 2008 2009E 2010E 2011E Asset Quality/Capital 2008 2009E 2010E 2011EEPS (Bt/ share) 6.2 6.3 7.4 8.5 Loan loss reserves/Loans 4.5% 4.8% 4.7% 4.6%DPS (Bt/ share) 2.00 2.00 2.20 2.50 NPLs/loans 5.5% 5.5% 5.4% 5.2%Payout 32.1% 31.9% 29.8% 29.3% Loan loss reserves/NPLs 83.2% 88.1% 87.3% 88.8%NAV (Bt/ share) 37.4 41.7 46.9 52.9 Grow th in NPLs -7.8% 2.2% 8.2% 5.6%Avg. Shares Issued (mn shares) 3,399 3,399 3,399 3,399

1.77 Tier 1 Ratio 11.0% 12.3% 13.2% 14.3%Total CAR 15.2% 16.4% 17.1% 17.9%

Key balance sheet - Bt mn 2008 2009E 2010E 2011E Du-Pont Analysis 2008 2009E 2010E 2011E

Net Customer Loans 877,480 894,213 985,346 1,084,833 NIR/Avg. Assets 3.68% 3.36% 3.44% 3.53%Loans loss reserves 41,711 45,171 48,426 52,008 Non IR/Avg. Assets 1.80% 1.70% 1.82% 1.96%Gross Loans 919,191 939,384 1,033,773 1,136,841 Non IR/Total Rev 32.8% 33.6% 34.6% 35.7%Investments 155,197 155,197 155,197 155,197 Total Rev/Avg. Assets 5.48% 5.07% 5.25% 5.49%Other Earning Assets 117,648 228,190 225,947 223,405 Cost/Income 45.4% 46.9% 44.9% 43.1%Average Earning Assets = (A) 1,135,970 1,225,754 1,333,416 1,425,264 Cost/Assets 2.49% 2.38% 2.36% 2.37%Goodw ill Goodw ill Amort. Total assets 1,241,640 1,352,395 1,441,286 1,538,230 Operating ROAA 3.0% 2.7% 2.9% 3.1%

LLP/Loans -0.55% -0.62% -0.55% -0.55%Interbank funding 28,878 32,344 32,344 32,344 Loan/Assets 74.3% 74.4% 74.4% 73.8%Customer deposits 911,482 1,019,921 1,091,128 1,167,409 Other inc:provs -0.1% 0.1% 0.0% 0.0%Long-term bond funding 29,133 25,346 25,346 25,346 Pre-tax ROAA 2.5% 2.5% 1.9% 2.3%Other Interest Bearing Liabilities 144,250 132,293 132,293 132,293 Tax -29.5% -28.0% -28.0% -28.0%Average Interest Bearing Liab. = (B) 1,007,246 1,079,494 1,171,819 1,245,563 MI 0.0% 0.0% 0.0% 0.0%Average Assets 1,203,604 1,297,017 1,396,840 1,489,758 ROAA 1.8% 1.6% 1.8% 1.9%Shareholders' equity 127,205 141,721 159,309 179,861 RoRWA 2.5% 2.3% 2.6% 2.8%Risk Weighted Assets 921,731 946,676 1,008,900 1,076,761 Equity/Assets 9.8% 10.3% 10.7% 11.3%Average Risk Weighted Assets 855,714 934,204 977,788 1,042,830 ROE 17.9% 15.9% 16.7% 17.2%


250



Sinopec Corp - H www.sinopec.com

Overweight Price: HK$6.73


Company description Sinopec is the second-largest oil company in China, with 4.1 billion BOE of proven reserves (25% natural gas) and production of 339 million BOE (14% natural gas). It has a refining capacity of 3,700 BOPD. The company’s marketing operation is primarily through its 29,600 retail outlets nationwide. Sinopec also has 6.2 million, 4.9 million and 2.8 million TPY of ethylene, propylene and PX capacity, respectively. Post mortem Sinopec got hurt the most among Chinese oil companies by high oil prices and controlled product prices last year. This year and for the future, with oil at or below US$80/bbl, the company should enjoy good refining and marketing margins. Upstream appears to improve with crude production growth coming through. Natural gas production is expected to go through a boost in 2010 due to Puguang start-up and further ramp-up to 8 BCM/y. Potential for earnings upgrades There is still some upside in terms of EPS upgrades for Sinopec, with consensus at Rmb0.75 for 2010. Considering Sinopec has shown that it is capable of generating over Rmb0.20+ EPS in a couple of quarters, it may be capable of full-year EPS above Rmb0.80, depending on oil prices and petchem profitability in particular. How much recovery is priced into the stock? Sinopec is neither fully pricing in the NDRC pricing scheme nor a full economic recovery relative to many other oil companies in the region. Hence, we still expect a rerating from current low levels as investors’ confidence in the pricing scheme increases and profitability drives earnings multiples. Price target and key risks We have an Overweight rating and Dec-09 PT of HK$8.50 based on 6.2x 2009 EV/EBITDA. This is in line with where PetroChina currently trades, and we believe it is fair for Sinopec to trade in line with PetroChina, considering the change in the product price regime in China. Risks to our PT are higher oil price and no follow-through by NDRC.

China Oil & Gas Brynjar BustnesAC (852) 2800-8578 [email protected]


Price performance

02468

10


China Petroleu-H Share PriceHSCEI(rebased)


1M 3M 12M Absolute (%) 2 -5 34 Relative (%) -5 -11 -43

Source: Bloomberg.

Company data 52-week range (HK$) 3.65-7..26 Adj. mkt cap (plug) (RmbMM) 592,174 Avg daily value ($MM) 142 Avg daily value (HK$MM) 1,098 Avg daily vol (MM) 205 Shares O/S (MM) 86,702 Date of price 5-Nov-09 Index: HSCEI 12,805 Free float (%) 19.6 Exchange rate 7.75

Source: Bloomberg.

Bloomberg: 386 HK; Reuters: 0386.HK ( g )Rmb in , year-end Dec FY07A FY08A FY09E FY10E FY11ERevenue (Rmb mn) 1,209,706 1,502,443 1,217,279 1,385,565 1,545,360Net Profit (Rmb mn) 56,533 29,769 64,330 66,622 75,235EPS (Rmb) 0.65 0.34 0.74 0.77 0.87DPS (Rmb) 0.16 0.12 0.19 0.19 0.22Revenue Growth (%) 13% 24% (19%) 14% 12%EPS Growth (%) 5% (47%) 116% 4% 13%ROCE 21% 6% 17% 15% 16%ROE 20% 9% 18% 17% 17%P/E 9.1 17.3 8.0 7.7 6.8P/BV 1.7 1.6 1.4 1.2 1.1EV/EBITDA 5.5 10.1 5.6 5.2 4.6Dividend Yield 2.7% 2.0% 3.1% 3.2% 3.7%

Source: Company data, Bloomberg, J.P. Morgan estimates.

251



Sinopec Corp - H: Summary of financials Income Statement Cash flow statement Rmb in millions, year end Dec FY07 FY08 FY09E FY10E FY11E Rmb in millions, year end Dec FY07 FY08 FY09E FY10E FY11E Revenues 1,209,706 1,502,443 1,217,279 1,385,565 1,545,360 EBIT 85,864 28,123 90,216 94,018 105,065

% change Y/Y 13% 24% (19%) 14% 12% Depr. & amortization 43,315 45,823 49,806 55,728 60,411EBITDA 129,179 73,946 140,022 149,746 165,477 Change in working capital 13,043 9,371 -23,696 1,760 -4,712

% change Y/Y 13% (43%) 89% 7% 11% Taxes -27674 -21072 -22347 -22992 -25989EBIT 85,864 28,123 90,216 94,018 105,065 Cash flow from operations 94,873 67,712 93,655 127,949 134,794

% change Y/Y 6% (67%) 221% 4% 12% EBIT Margin 4% 1% 4% 3% 3% Capex -109,446 -107,753 -108,000 -108,000 -99,042Net Interest -6,909 -10,881 -6,141 -6,673 -6,394 Disposal/(purchase) 413 263 0 0 0Earnings before tax 83,464 24,317 89,389 91,968 103,957 Net Interest -6,909 -10,881 -6,141 -6,673 -6,394

% change Y/Y 6% (71%) 268% 3% 13% Other - - - - -Tax -24,721 1,883 -22,347 -22,992 -25,989 Free cash flow -14,573 -40,041 -14,345 19,949 35,751

as % of EBT 29.6% 7.7% 25.0% 25.0% 25.0% Net income (reported) 56,533 29,769 64,330 66,622 75,235 Equity raised/(repaid) - - - - -

% change Y/Y 5% (47%) 116% 4% 13% Debt raised/(repaid) 13,614 56,796 45,000 5,000 5,000Shares outstanding 86,702 86,702 86,702 86,702 86,702 Other - - - - -EPS (reported) 0.65 0.34 0.74 0.77 0.87 Dividends paid -13,872 -12,572 -16,082 -16,656 -18,809

% change Y/Y 5% (47%) 116% 4% 13% Beginning cash 7,063 7,696 7,027 21,521 29,814 Ending cash -16,961 7,027 21,600 29,814 51,757 DPS 0.16 0.12 0.19 0.19 0.22 Balance sheet Ratio analysis Rmb in millions, year end Dec FY07 FY08 FY09E FY10E FY11E Rmb in millions, year end Dec FY07 FY08 FY09E FY10E FY11E Cash and cash equivalents 7,696 6,948 21,521 29,814 51,757 EBITDA margin 5% 2% 6% 5% 5%Accounts receivable 22,947 12,989 10,524 11,979 13,360 Operating margin 4% 1% 4% 3% 3%Inventories 116,032 95,255 77,176 87,845 97,976 Net margin 2% 1% 3% 2% 2%Others 37,773 48,367 39,187 44,604 49,749 Current assets 185,116 164,311 149,159 174,994 213,593 Sales per share growth 13% 24% (19%) 14% 12%LT investments - - - - - Sales growth 13% 24% (19%) 14% 12%Net fixed assets 470,550 525,151 577,528 623,692 655,910 Net profit growth 5% (47%) 116% 4% 13%Total Assets 732,725 767,827 810,366 886,988 963,092 EPS growth 5% (47%) 116% 4% 13% Liabilities Interest coverage (x) 18.70 6.80 22.80 22.44 25.88Short-term loans 44,654 74,896 74,896 74,896 74,896 Payables 93,049 56,667 37,574 44,472 48,741 Net debt to equity 42% 50% 53% 46% 37%Others 127,652 142,974 108,647 121,050 128,725 Sales/assets 3.60 4.01 3.09 3.27 3.34Total current liabilities 265,355 274,537 221,117 240,418 252,362 Assets/equity 2.38 2.34 2.22 2.23 1.99Long-term debt 83,134 90,254 135,254 140,254 145,254 ROE 20% 9% 18% 17% 17%Other liabilities 51,478 53,714 53,714 53,714 53,714 ROCE 21% 6% 17% 15% 16%Total Liabilities 399,967 418,505 410,085 434,386 451,330 Shareholders' equity 307,433 328,669 376,916 426,883 483,309 BVPS 3.55 3.79 4.29 4.83 5.43 Source: Company reports, J.P. Morgan estimates.

252



SK Energy Co Ltd www.skenergy.com

Overweight W107,500


Company description SK Energy (SKE) is the largest Korean refining company with 1,115 BOPD of refining capacity. It also has an upstream segment, which currently produces 30,000 BOEPD with 520 million BOE of reserves. The company also owns 2.7 million TPY of BTX and 0.73 million TPY of ethylene capacity. Post mortem SKE suffered through the crisis primarily on its refining profitability plunging along with a weaker Won hurting its US$-denominated debt. A weaker Won, however, actually helps at the operating line, which has now reversed with the Won’s strengthening. Potential for earnings upgrades There is not much room for EPS upgrades over the next 12 months as we don’t expect refining margins to go back to previous year’s levels. Decent margins will, however, generate a base operating profit, along with additional profits from growing upstream and lube returning into profits, in our view. SKE’s main attraction is its exposure to two exploration blocks in Brazil (BMC30 - Anadarko and BMC32 - Devon operated) which in addition to increasing reserve base will make SKE’s E&P segment sustainable and hence we believe bring about a rerating into an integrated company. How much recovery is priced into the stock? SKE has doubled from market lows and is now pricing in the current market environment of low refining margins and still relatively strong petchem margins. Upstream is not getting much value at all due to lack of information and investor confidence in SKE’s execution capabilities. Price target and key risks We have an Overweight rating and Dec-10 PT of W150,000 based on 7x EV/EBITDA, which is in line with regional refining peers (ex-FPCC). Our PT yields 10x 2010E P/E. Risks to our rating and PT are oil prices, GRMs, petchem margins and operational issues especially upstream.

South Korea Refining Brynjar BustnesAC (852) 2800-8578 [email protected]


Price performance

030,00060,00090,000

120,000


SK Energy Co Ltd Share PriceKOSPI(rebased)

Source: Bloomberg.


Absolute (%) -13 4 51 Relative (%) -10 5 20

Source: Bloomberg.

Company data 52-week range (W) 49,700-140,000 Mkt cap. (WB) 9,940 Mkt cap. (US$MM) 8,435 3M trd value ($MM) 56.0 3M trading vol (MM) 0.3 Shares O/S (MM) 92 Date of price 5-Nov-09 Index: KOSPI 1,552.24 Free float (%) 66.6 Exchange rate 1,178

Source: Bloomberg.

Bloomberg: 096770 KS; Reuters: 096770.KS W in bn, year-end Dec FY07A FY08A FY09E FY10E FY11ERevenue 27,788 45,737 34,227 38,305 41,382Net Profit 1,205 884 1,038 1,275 1,538EPS (W) 10,954 9,679 11,357 13,955 16,835DPS (W) 2,100 2,100 2,200 2,300 2,400Revenue Growth (%) 17% 65% (25%) 12% 8%EPS growth (%) (6%) (12%) 17% 23% 21%ROCE 15% 10% 11% 13% 14%ROE 17% 13% 13% 15% 16%P/E 9.8 11.1 9.5 7.7 6.4P/BV 1.6 1.3 1.2 1.0 0.9EV/EBITDA 6.4 8.9 6.6 5.8 5.0Dividend Yield 2.0% 2.0% 2.0% 2.1% 2.2%Adjusted EPS (W) 13,511 18,210 10,109 13,955 16,835Adjusted P/E 8.0 5.9 10.6 7.7 6.4

Source: Company data, Bloomberg, J.P. Morgan estimates. Adj EPS for forex loss/gain.

253



SK Energy Co Ltd: Summary of financials Income statement Cash flow statement Won in billions, year-end Dec FY07 FY08 FY09E FY10E FY11E Won in billions, year-end Dec FY07 FY08 FY09E FY10E FY11E Revenues 27,788 45,737 34,227 38,305 41,382 EBIT 1,921 1,358 1,770 2,045 2,377

% change Y/Y 17% 65% (25%) 12% 8% Depr. & amortization 443 552 752 832 886EBITDA 2,364 1,910 2,522 2,876 3,263 Change in working capital -599 -553 867 -307 -232

% change Y/Y (7%) (19%) 32% 14% 13% Taxes - - - - -EBIT 1,921 1,358 1,770 2,045 2,377 Cash flow from operations 680 1,530 2,586 1,730 2,123

% change Y/Y (10%) (29%) 30% 15% 16% EBIT Margin 7% 3% 5% 5% 6% Capex -1,315 -1,610 -2,000 -1,500 -1,500Net Interest -286 -400 -423 -385 -371 Disposal/(purchase) 321 0 0 0 0Earnings before tax 1,636 958 1,347 1,660 2,006 Net Interest -286 -400 -423 -385 -371

% change Y/Y (10%) (41%) 41% 23% 21% Other -459 -485 0 0 0Tax -427 -70 -306 -381 -464 Free cash flow -634 -80 586 230 623

as % of EBT 26.1% 7.3% 22.7% 22.9% 23.1% Net income (reported) 1,205 884 1,038 1,275 1,538 Equity raised/(repaid) - - - - -

% change Y/Y (13%) (27%) 17% 23% 21% Debt raised/(repaid) -1,792 3,406 -2,000 -500 0Shares outstanding 91 91 91 91 91 Other 2,062 7 0 0 0EPS (reported) 10,954 9,679 11,357 13,955 16,835 Dividends paid -212 -194 -205 -214 -224

% change Y/Y (6%) (12%) 17% 23% 21% Beginning cash 1,313 597 3,606 1,987 1,503 Ending cash 597 3,606 1,987 1,503 1,902 DPS 2,100 2,100 2,200 2,300 2,400 Balance sheet Ratio analysis Won in billions, year-end Dec FY07 FY08 FY09E FY10E FY11E Won in billions, year-end Dec FY07 FY08 FY09E FY10E FY11E Cash and cash equivalents 597 3,606 1,987 1,503 1,902 EBITDA margin 9% 4% 7% 8% 8%Accounts receivable 3,026 2,827 2,116 2,368 2,558 Operating margin 5% 4% 5% 5% 6%Inventories 2,714 3,153 2,360 2,641 2,853 Net margin 4% 2% 3% 3% 4%Others 320 1,100 1,100 1,100 1,100 Current assets 6,707 10,702 7,578 7,627 8,428 Sales per share growth 27% 98% (25%) 12% 8%LT investments 4,057 3,291 3,365 3,438 3,512 Sales growth 17% 65% (25%) 12% 8%Net fixed assets 4,825 8,332 9,580 10,249 10,863 Net profit growth (13%) (27%) 17% 23% 21%Total Assets 15,699 22,456 20,654 21,445 22,934 EPS growth (6%) (12%) 17% 23% 21% Liabilities Interest coverage (x) 8.27 4.78 5.96 7.48 8.79Short-term loans 1,995 3,977 2,977 2,977 2,977 Payables 2,538 2,536 1,898 2,124 2,295 Net debt to equity 58% 91% 75% 66% 54%Others 4,594 5,062 4,423 4,650 4,820 Sales/assets 1.57 2.40 1.59 1.82 1.86Total current liabilities 6,590 9,039 7,400 7,627 7,797 Assets/equity 2.54 3.07 2.46 2.27 2.15Long-term debt 2,765 5,811 4,811 4,311 4,311 ROE 17% 13% 13% 15% 16%Other liabilities 160 290 290 290 290 ROCE 15% 10% 11% 13% 14%Total Liabilities 9,514 15,140 12,502 12,228 12,399 Shareholders' equity 6,186 7,316 8,152 9,217 10,536 BVPS 67,702 80,070 90,098 102,596 117,680 Source: Company reports, J.P. Morgan estimates.

254



Sohu www.sohu.com

Overweight US$55.59


Company description Sohu is a leading online media company in China. The Sohu matrix of websites include: sohu.com (one of the top portals in China), 17173.com, focus.cn and chainren.com. The company also operates two major multi-player online games named TLBB and Blade Online. The company also launched its third game Blade Hero 2 in 3Q09. Sohu generates approximately half of its revenues from online games and a third from its brand advertising business. Post mortem Sohu remains one of the leading internet portals in China, and is likely to remain among the key beneficiaries of the continued uptrend in online advertising in China. We currently forecast brand advertising to register 23% Y/Y growth in 2009. We expect next year’s brand ad growth to be strong, driven by macro economic improvements, and better contributions from sectors such as automobiles, FMCG (fast-moving consumer goods), and financial services. Potential for earnings upgrades We expect share price drivers for Sohu to come in 1H10, with more clarity on the 2010 brand advertising budget and the launch of new games (2Q10 for Zhong Hua Ying Xiong and 3Q10 for Duke of Mountain Deer). We also expect Sohu’s portal business should have good margin leverage on revenue pick-up, as content costs are mainly fixed costs. Sohu is debt-free. How much recovery is priced into the stock? With muted 3Q09 results and 4Q09 guidance, we believe investors have given a big discount to the potential ad recovery in 2010. We noted that the softness is mainly due to advertisers’ cautious stance on 2009 spending. We expect the good ad spend data point to continue to come in during early 2010. Price target and key risks We maintain OW with our Dec-09 PT of US$74, which implies 18.5x FY09E, 16.3x FY10E, and 13.3x FY11E diluted non-GAAP EPS. Our price target is based on the midpoint of our sum-of-the-parts valuation of US$63-US$84. Our Dec-09 DCF value for Sohu is US$75.7, based on a 10-year DCF forecast, WACC of 12%, and a terminal growth rate of 0%. Risks to our price target include a further slowdown in online advertising revenue growth, significant market share loss in online advertising to other websites, delays in upgrades and new game launches, and regulatory changes.




30

50

70

$


SOHU share price ($)NASDAQ Composite (rebased)

Source: Bloomberg.


Absolute (%) -14.5 -12.1 -6.1 Relative (%) -14.9 -14.3 -21.6

Source: Bloomberg.

Company data 52-week range (US$) 34.1-72.3 Mkt cap. (RmbMM) 14,480 Mkt cap. (US$MM) 2,120 Avg daily value (US$MM) 63.8 Avg daily volume (MM) 0.84 Shares O/S (MM) 38 Date of price 12-Nov-09 Index: NASDAQ 2,149 Free float (%) 45 Exchange rate(Rmb/US$) 6.83

Source: Company, Bloomberg.

Bloomberg: SOHU US; Reuters: SOHU US$ in millions, year-end December

FY08 FY09E FY10E FY11E Sales 429.1 517.2 629.9 764.7 Net profit 158.6 152.3 182.4 230.5 GAAP EPS (US$) 4.04 3.68 4.25 5.28 Adj. EPS (US$) 4.30 4.01 4.54 5.56 DPS (US$) 0.00 0.00 0.00 0.00 Sales growth (%) 127.1 20.5 21.8 21.4 Net profit growth (%) 354.1 -4.0 19.8 26.4 EPS growth (%) 345.6 -9.0 15.4 24.4 ROE (%) 56.0 41.4 35.8 32.4 GAAP P/E (x) 13.7 15.1 13.1 10.5 Adj. P/E (x) 12.9 13.9 12.2 10.0 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 12 November 2009.

255



Sohu: Summary of financials Profit and loss statement US$ in millions, year-end December FY08 FY09E FY10E FY11ERevenue 429.1 517.2 629.9 764.7% change Y/Y 127.1 20.5 21.8 21.4Gross margin (%) 66.6 75.3 76.0 75.5EBITDA 188.7 237.1 289.4 353.9% change Y/Y 260.3 25.6 22.0 22.3EBITDA margin (%) 27.7 44.0 45.8 45.9EBIT 163.8 202.8 251.1 311.7% change Y/Y 400.9 23.8 23.8 24.1EBIT margin (%) 17.3 38.2 39.2 39.9Net interest 4.3 6.1 9.4 12.8Earnings before tax 167.6 209.4 260.5 324.6% change Y/Y 360.8 25.0 24.4 24.6Tax -9.0 -28.9 -34.8 -42.8as % of EBT 5.4 13.8 13.4 13.2Net income (reported) 158.6 152.3 182.4 230.5% change Y/Y 354.1 -4.0 19.8 26.4Shares O/S (MM) 39.2 39.1 39.8 40.7EPS (reported) (LC) 4.04 3.68 4.25 5.28Source: Company, J.P. Morgan estimates.


FY08 FY09E FY10E FY11ECash and cash equivalents 314 555 765 1,021Accounts receivable 37 42 52 63Deferred tax 0 0 0 0Others 28 34 43 52Current assets 379 632 860 1,136LT investments 0 0 0 0Net fixed assets 76 82 107 138Others 67 64 63 63Total assets 522 777 1,031 1,338Liabilities Provisions 0 0 0 0Payables 4 5 6 7Others 126 145 180 217Total current liabilities 131 150 186 224Long term debt 0 0 0 0Other liabilities 5 55 55 55Total liabilities 136 205 241 279Shareholders' equity 386 572 791 1,059Source: Company, J.P. Morgan estimates.


FY08 FY09E FY10E FY11ENet Income 159 152 182 230Depr. & Amortisation 14 16 20 24Change in working capital 29 7 17 19Other 11 46 61 69Cash flow from operations 213 222 281 343Capex/investments -24 -19 -46 -55Others 0 0 0 0Cash flow from investing -24 -19 -46 -55Free cash flow 189 203 236 288Equity raised/ (repaid) -2 16 18 19Debt raised/ (repaid) 0 0 0 0Other 5 21 -43 -51Dividends paid 0 0 0 0Cash flow from financing 3 38 -26 -32Net change in cash 192 241 210 256Beginning cash 123 314 555 765Ending cash 314 555 765 1,021Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December FY08 FY09E FY10E FY11EGross Margin 75.3 76.0 75.5 75.9EBITDA margin 44.0 45.8 45.9 46.3Operating Margin 38.2 39.2 39.9 40.8Net Margin 37.0 29.4 29.0 30.1R&D/sales 10.0 9.4 9.1 9.1SG&A/Sales 26.9 27.3 26.5 26.0Sales growth 127.1 20.5 21.8 21.4Operating Profit Growth 400.9 23.8 23.8 24.1Net profit growth 354.1 -4.0 19.8 26.4EPS (Reported) growth 345.6 -9.0 15.4 24.4Net debt to total capital -81.5 -97.0 -96.8 -96.5Net debt to equity -81.5 -97.0 -96.8 -96.5Asset Turnover 82.2 66.5 61.1 57.2Working Capital Turns (x) 2.6 1.4 1.1 1.0ROE 56.0 41.4 35.8 32.4ROIC 54.8 40.4 34.7 31.3Source: Company, J.P. Morgan estimates.

256



Tambang Batubara Bukit Asam www.ptba.co.id

Overweight Rp14,450


Company description Government of Indonesia owns a 65% stake in PTBA. The company’s main coal mine is in Tanjung Enim, South Sumatra. In addition, PTBA owns several mines in South Sumatra, plus potentially acquiring several other mines in Kalimantan. Its total minable reserve stands at 2 billion tons. Post mortem PTBA’s volume could rise from 10.8 million tons in FY08 to 73 million tons by FY15 due to: (1) an expansion of the existing line with PT Kereta Api (10.8 million to 20 million tons); (2) Kalimantan mine acquisitions (0.2 million to 22 million tons); (3) new railways line of Transpacific (additional 20 million tons); and (4) Banjarsari and Bangko Tengah power plants (additional 11 million tons). In term of cost, the company is building a power plant (3x10MW) to support its volume expansion. It is likely that production cost would be reduced by US$32.5 cent/ton once the volume in Tanjung Enim reaches 40 million tons. Potential for earnings upgrades Volume and coal price should be the two key factors that could create potential for earnings upgrade. For every 10% increase in volume and coal price, our FY10 EPS estimate would rise 14.1% and 16.1% Y/Y, respectively. How much recovery is priced into the stock? The first stage of recovery is priced in, but the recovery in the developed markets (such as the US and EU), and increased demand from China are not priced, in our view. There could be some re-rating in coal price that will likely benefit PTBA. Price target and key risks With an increased likelihood of project realizations and our positive view on coal price, we maintain our OW rating and our SOTP-based Jun-10 PT of Rp19,300. Our SOTP valuation is the sum of all the DCF values of PTBA’s projects (assuming a risk-free rate of 10.5%, an equity-risk premium of 5.5%, and a terminal growth rate of 5.5%). We apply a 20% discount to take into account projects delays. Key risk to our PT: execution risks—delays in project and mine acquisitions.

Indonesia Mining Stevanus JuandaAC (62-21) 5291-8574 [email protected]


Price performance

0

5,000

10,000

15,000

20,000


Source: Bloomberg.


Source: Bloomberg.

Company data 52-week range (Rp) 5,150-15,500 Mkt cap. (RpB) 33,295 Mkt cap. (US$MM) 3,494 Avg daily value (US$MM) 8.0 Avg daily volume (MM) 8.1 Shares O/S (MM) 2,304 Date of price 5-Nov-09 Index: JCI 2,367 Free float (%) 35 Exchange rate 9,530

Source: Bloomberg.

Bloomberg: PTBA IJ; Reuters: PTBA.JK Rp in billions, year-end December FY08 FY09E FY10E FY11E Sales 7,216.2 10,628.4 9,605.7 13,789.0 Net profit 1,707.8 3,160.5 1,410.7 2,138.0 EPS (Rp) 741.0 1,371.3 612.1 927.6 Core EPS (Rp) 739.8 1,371.3 612.1 927.6 DPS (Rp) 370.5 738.9 347.0 531.1 Sales growth (%) 75.0% 47.3% -9.6% 43.6% Net profit growth (%) 135.2% 85.1% -55.4% 51.5% EPS growth (%) -335.2% -285.1% -144.6% -251.5% ROE (%) 51.2% 61.4% 22.6% 30.7% P/E (x) 19.5 10.5 23.6 15.6 Core P/E (x) 19.5 10.5 23.5 15.5 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009. We raised PT to Rp22,500 on November 22.

257



Tambang Batubara Bukit Asam: Summary of financials Year-end DecProfit and loss statement Cash flow statementIDR in billions FY07A FY08A FY09E FY10E FY11E IDR in billions FY07A FY08E FY09E FY10E FY11E

Revenues 4,124 7,216 10,628 9,606 13,789 EBIT 897 2,494 4,340 2,089 3,216% change Y/Y 16.7 75.0 47.3 -9.6 43.6 Depreciation & amortization 102 23 82 179 264

Gross margin (%) 39.4 48.9 55.8 40.5 43.2 Change in working capital 579 -434 219 559 -56EBITDA 999 2,517 4,474 2,324 3,867 Taxes -214 -473 -1,193 -462 -727

% change Y/Y 38.8 152.0 77.8 -48.1 66.4 Cash flow from operations 1,364 1,610 3,448 2,366 2,696EBITDA margin (%) 24.2 34.9 42.1 24.2 28.0

EBIT 897 2,494 4,393 2,145 3,603 Capex -52 -86 -220 -960 -781% change Y/Y 36.6 178.0 76.1 -51.2 68.0 Disposal/ (purchase) -130 -343 -4,552 -1,328 -1,265EBIT margin (%) 21.8 34.6 41.3 22.3 26.1 Net interest 62 100 57 -100 -173

Net interest 79 108 57 -100 -173 Free cash flow 1,182 1,180 -1,323 78 649Earnings before tax 1,010 2,552 4,407 1,914 2,890

% change Y/Y 50.9 152.8 72.7 -56.6 51.0 Equity raised/ (repaid) 0 0 0 0 0Tax 283 837 1,234 478 723 Debt raised/ (repaid) 0 0 3,000 1,000 0

as % of EBT 28.0 32.8 28.0 25.0 25.0 Other -10 0 -34 -63 -30Net income (core) 720 1,705 3,161 1,411 2,138 Dividends paid -243 -380 -854 -1,575 -740

% change Y/Y 32.5 136.8 85.4 -55.4 51.5 Beginning cash 1,295 2,223 3,042 3,843 3,295Shares outstanding (B) 2.305 2.305 2.305 2.305 2.305 Ending cash 2,223 3,042 3,843 3,295 3,185EPS (fully diluted) (IDR) 315.1 741.0 1,371.3 612.1 927.6 DPS (IDR) 165 370 739 347 531

% change Y/Y 49.5 135.2 85.1 -55.4 51.5

Balance sheet Ratio analysisIDR in billions FY07A FY08E FY09E FY10E FY11E % FY07A FY08E FY09E FY10E FY11E

Cash and cash equivalents 2,223 3,042 3,843 3,295 3,185 EBITDA margin 24.2 34.9 42.3 25.2 30.6Accounts receivable 561 1,377 1,514 1,304 1,645 Operating margin 21.8 34.6 41.5 23.2 28.3Inventories 271 420 525 604 716 Net profit margin 17.6 23.7 30.1 16.4 19.9Others 26 112 162 139 176 SG&A/sales 17.6 14.4 14.4 18.2 17.1Current assets 3,080 4,950 6,045 5,341 5,720

Sales per share growth 16.7 75.0 47.3 -9.6 43.6Other non-current assets 538 773 5,601 7,014 8,373 Sales growth 16.7 75.0 47.3 -9.6 43.6Net fixed assets 361 384 480 1,219 1,695 Net profit growth 32.5 136.8 85.4 -55.4 51.5Total assets 3,979 6,107 12,126 13,575 15,788 EPS growth 49.5 135.2 85.1 -55.4 51.5

Liabilities Interest coverage (x) n/a n/a n/a n/a n/aShort-term loans 0 0 0 0 0 Net debt to total capital -82.7 -74.6 -8.8 6.6 6.6Payables 99 69 87 99 118 Net debt to equity -83.1 -76.1 -13.4 11.4 10.6Others 645 1,284 1,606 1,846 2,188 Sales/assets 116.4 143.1 114.7 70.1 77.3Total current liabilities 744 1,353 1,693 1,946 2,306 Assets/equity 148.7 152.7 192.7 219.0 204.4Long-term debt 0 0 3,000 4,000 4,000 ROE 29.2 51.2 61.4 22.6 30.7Other liabilities 547 676 857 1,003 1,192 ROCE 36.1 74.7 66.1 22.0 32.9Total liabilities 1,292 2,029 5,550 6,948 7,498Shareholders' equity 2,676 3,998 6,294 6,198 7,723BVPS (IDR) 1,161 1,735 2,731 2,689 3,351Source: Company, JPMorgan estimates

PTBA: Sum-of-the-parts valuation SOTP US$MM RpB J.P. Morgan comment NPV of existing coal operation (Rp billion) 2,864.30 29,359.1 Banko Tengah PP 608.72 6,239.4 Banjarsari PP 185.23 1,898.6 Railways (Transpacific) 3.17 32.5 Assign 80% discount as the further delay likely Integrated transportation (10.91) (111.9) Sale of coal to power plants 99.85 1,023.5 Sale of coal increase (Transpacific) 355.32 3,642.0 Assign 80% discount as the further delay likely Kalimantan Mines 600.87 6,158.9 Total NPV (Rp in billion) 4,706.55 48,242.14 Debt (3,500.00) Cash 3,568.85 20% discount to potential projects delay (368.4) (3,776.6) Equity value per share (Rp) 19,323 Source: J.P. Morgan estimates.

258



Tata Power www.tatapower.com

Overweight Price: Rs1,323.75


Company description Tata Power (TPWR) is a well-established power utility with decades of experience as a power generator and bulk-power supplier. It has 2.8GW of installed capacity, with a good mix of coal, gas, hydro, diesel and renewables. It also holds a 30% stake in Indonesian coal mines KPC and Arutmin, along with Bumi. The company has an under-construction portfolio of 5.29GW, including an Ultra Mega Power Plant at Mundra. It is also going to distribute power in the city of Mumbai, pulling the plug on what it was earlier supplying through Reliance Infrastructure (~500MW). Post mortem Post downturn, improved investor appetite for IPPs has allowed Tata Power to arrange equity funds required over the next two years. The company has raised ~Rs16 billion through a GDR issue in July and Rs13.8 billion through FCCB in November. Maithon (1050MW) and Mundra UMPP (4GW) are on track.

Potential for earnings upgrades There is a possibility of upgrades in the near term on account of: (a) extra power (around 150MW) for opportunistic merchant sales; and (b) Tata Power may have more for merchant/own distribution once 500MW power to RELI, being supplied at regulated return, is cut-off.

How much recovery is priced into the stock? We believe an established track record in power generation and execution enhances the credibility of its development pipeline relative to peers. Tata Power’s project pipeline is still undervalued, in our view.

Price target and key risks Our Mar-10 SOTP-based PT of Rs1,450 includes 44% value from coal mines; 33% from generation; 13% from telecom and financial investments; and 8% from distribution business. At 2.3x P/BV and 12.5x EV/EBITDA, the stock looks cheaper than peers. Key risk to PT is weak outlook for coal prices.

India Electric Utilities Shilpa KrishnanAC (91-22) 6157-3580 [email protected]



0

500

1000

1500

2000


Source: Bloomberg.


Absolute (%) (1) (2) 73 Relative (%) (8) (1) 18

Source: Bloomberg.

Company data 52-week range (Rs) 596-1,487 Mkt cap. (RsB) 306 Mkt cap. (US$B) 6.5 Avg daily value (US$MM) 17.3 Avg daily volume (MM) 0.6 Shares O/S (MM) 237.1 Date of price 5-Nov-09 Index: BSE 16,064 Free float (%) 69 Exchange rate (Rs/US$) 47.4

Source: Bloomberg.

Bloomberg: TPWR.IN; Reuters: TTPW.BO Rs in millions, year-end March FY09 FY10E FY11E FY12E Revenue 175,875 181,651 192,794 220,472 Adjusted net profit 9,630 16,917 15,470 20,452 Adjusted EPS (Rs) 43.5 71.6 65.5 86.6 Adj. net profit growth (%) 30.0 75.7 (8.6) 32.2 ROE (%) 10.7 15.3 11.7 13.9 ROCE (%) 12.0 11.9 9.5 10.8 ROIC (%) 15.3 14.9 11.4 12.9 P/E (x) 30.4 18.5 20.2 15.3 P/B (x) 3.1 2.5 2.3 2.0 EV/EBITDA (x) 13.5 11.6 12.5 10.2 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

259



Tata Power: Summary of financials Profit and loss statement Rs in millions, year-end March

FY09 FY10E FY11E FY12ERevenues 175,875 181,651 192,794 220,472

% change Y/Y 61.5 3.3 6.1 14.4EBITDA 32,651 41,474 42,561 55,242

% change Y/Y 56.3 27.0 2.6 29.8EBITDA Margin (%) 18.6 22.8 22.1 25.1

Net Interest (7,087) (7,529) (8,385) (11,041)Earnings before tax 22,081 28,777 28,133 37,070

% change Y/Y 78.2 30.3 (2.2) 31.8 Tax (11,651) (11,186) (11,681) (15,536)

as % of EBT 52.8 38.9 41.5 41.9Net Income(adjusted) 9,630 16,917 15,470 20,452

% change Y/Y 30.0 75.7 (8.6) 32.2 Shares Outstanding 221.4 236.2 236.2 236.2EPS (adjusted) (Rs) 43.5 71.6 65.5 86.6

% change Y/Y 29.6 64.6 (8.6) 32.2 Source: Company, J.P. Morgan estimates.


FY09 FY10E FY11E FY12ECash 11,780 15,176 18,904 29,368 Net current assets ex-cash -5,126 8,378 7,548 5,726 Investments 32,512 32,512 32,512 32,512Net fixed assets 142,320 152,847 194,140 194,749Others 69,153 111,544 133,499 187,759Total assets 250,639 320,458 386,602 450,114 Liabilities Long Debt 141,434 186,300 239,339 283,849Other Liabilities 13,572 8,723 8,997 11,250 Share Capital 2,214 2,362 2,362 2,362 Reserves 83,975 112,955 124,806 140,472Shareholders' equity 95,633 125,436 138,267 155,015BVPS (Rs) 432 531 585 656Source: Company, J.P. Morgan estimates.


FY09 FY10E FY11E FY12EEBIT 26,086 34,091 33,517 45,183 Less: Tax (11,651) (11,186) (11,681) (15,536)Add: Depreciation 6,565 7,383 9,044 10,058 Other income 3,082 2,215 3,001 2,928 Less: Increase in working capital 11,013 (13,504) 831 1,822 Operating Cash Flow 35,095 18,999 34,712 44,455 Capital expenditure (71,095) (60,302) (72,292) (64,927)Investing cash flow (69,297) (65,150) (72,018) (62,674) Change in equity 0 16,171 0 0 Net interest payment (7,087) (7,529) (8,385) (11,041)Dividend payment (2,852) (3,959) (3,620) (4,786)Principal (payment)/ drawdown) 50,298 44,865 53,039 44,511 Financing cash flows 40,359 49,549 41,034 28,684 Opening cash 5,623 11,779 15,176 18,904 Closing cash 11,779 15,176 18,904 29,368 Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end March FY09 FY10E FY11E FY12EEBITDA margin 19% 23% 22% 25%EBIT margin 15% 19% 17% 20%Net profit margin 5% 9% 8% 9% Revenue growth 61% 3% 6% 14%EBITDA growth 56% 27% 3% 30%Net profit growth 30% 76% -9% 32%EPS growth 30% 65% -9% 32% Average ROE 10.7 15.3 11.7 13.9Average ROCE 12.0 11.9 9.5 10.8Average ROIC 15.3 14.9 11.4 12.9 Asset Turnover 0.7 0.6 0.5 0.5Leverage 2.6 2.6 2.8 2.9Source: Company, J.P. Morgan estimates.

260



Tenaga Nasional www.tenaga.com.my

Overweight M$8.40


Company description Tenaga is Malaysia’s national power utility for Peninsula Malaysia and Sabah in East Malaysia. It holds the monopoly in distribution and transmission, and a 50% market share of the grid’s generation capacity with the remaining controlled by the IPPs.

Post mortem Fuel cost (i.e. namely coal) is beyond the group’s control. There is no formal ‘fuel-pass-through’ formula currently in place, but we believe this will be addressed under Najib’s new government which is focused on reforms. Until then, the government has demonstrated its commitment on this issue via an informal tariff review every six months for fuel adjustments (tariffs were adjusted accordingly in two of the past three reviews when necessary).

Potential for earnings upgrades We forecast power demand growth to recover from -2.6% in FY09 to +7% in FY10E, but a 1% change impacts EPS by 5.3%. We forecast M$3.40:1US$, but a further 1% strength in the Ringgit raises FY10E by 1.4%.

How much recovery is priced into the stock? The stock has not fully priced-in a recovery, in our view, trading at 2010E EV/EBITDA of over 6x (regional average: 10x), P/B of 1.3x and P/E of 14x versus its historical mean of 1.9x and 16x/ respectively. Key to a sustainable re-rating is tariff reforms via a ‘fuel-pass-through’ and/or a ‘base-revenue tariff hike’, which the government can more easily push through in an economic recovery.

Price target and key risks Our Jun-10 PT of M$10.30 is based on DCF, assuming a WACC of 8%, and terminal growth rate of 2.5%. Key risks to our PT are a slower-than-expected recovery in power demand in FY10E, and a surge in coal cost above our in-house assumption of US$90/t c.i.f.

Malaysia Power Utilities Simone YeohAC (603)-2270 4710 [email protected]



56789

10-0

8

01-0

9

04-0

9

07-0

9

10-0

9


1M 3M 12M Absolute (%) 2.4 3.2 35.5 Relative (%) -0.6 -2.9 -1.1

Source: Bloomberg.

Company data 52-wk range (M$) 5.6-8.6 Mkt. cap (M$MM) 36,441.78 Mkt. cap (US$MM) 10650.82 Liquidity (US$MM) 8.3 Avg. daily volume (MM) 3.5 Shares O/S (MM) 4,338.3 Date of Price 5-Nov-09 KLCI Index 1254.0 Free float (%) 37.2 Exchange rate 3.42

Source: Bloomberg.

Bloomberg: TNB MK; Reuters: TENA.KL M$ in millions, year-end August FY08 FY09 FY10E FY11E FY12E Sales 25,750.6 28,785.6 31,205.9 32,732.5 34,266.2 Reported net profit 2,594.0 917.9 2,611.8 2,879.0 3,290.9 Core net profit 2,559.9 2,157.1 2,611.8 2,879.0 3,290.9 Core FD EPS (M$) 0.59 0.50 0.60 0.66 0.76 Net DPS (M$) 0.15 0.13 0.20 0.22 0.28 Sales growth (%) 10.4 11.8 8.4 4.9 4.7 Net profit growth (%) -28.4 -15.7 21.1 10.2 14.3 EPS growth (%) -28.6 -15.7 21.1 10.2 14.3 ROE (%) 10.0 8.3 9.3 9.6 0.0 ROCE (%) 7.4 7.9 8.2 8.4 0.0 P/E (x) 14.3 17.0 14.0 12.7 11.1 P/BV (x) 1.4 1.4 1.3 1.2 1.1 EV/EBITDA (x) 7.5 7.3 6.4 5.9 0.1 Net Div yield (%) 1.8% 1.6% 2.4% 2.7% 3.3% Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

261



Tenaga Nasional: Summary of financials

Profit and Loss statement Cash flow statement 7,157 7,406 8,190 8,685 M$ in millions, year-end Aug FY08A FY09 FY10E FY11E FY12E M$ in millions, year-end Aug FY08A FY09 FY10E FY11E FY12E

0 0 0 0Revenues 25,751 28,786 31,206 32,732 34,266 Op profit before forex loss/(gain) 3,601 3,851 4,144 4,440 4,910

% change Y/Y 10.4 11.8 8.4 4.9 4.7 Depreciation & amortisation 3,555 3,555 4,046 4,246 4,456Gross Margin (%) 27.8 25.7 26.2 26.5 27.3 Change in w/c (100) 364 (11) (7) (7)EBITDA before forex gain/loss 7,157 7,406 8,190 8,685 9,365 Taxes (519) (690) (653) (720) (823)

% change Y/Y -12.4 3.5 10.6 6.0 7.8 Others 441 534 568 613 666 EBITDA Margin (%) 27.8 25.7 26.2 26.5 27.3 Operating Cash Flow 6,978 7,614 8,095 8,571 9,202

Op profit before forex gain/loss 3,601 3,851 4,144 4,440 4,910% change Y/Y -35.0 6.9 7.6 7.1 10.6 Capex (4,607) (4,320) (4,750) (5,000) (5,000)EBIT Margin (%) 14.0 13.4 13.3 13.6 14.3 Disposal/(purchase) 264 0 0 0 0

Net Interest (1,096) (1,127) (1,130) (1,136) (1,145) Net interest (1,225) (1,127) (1,130) (1,136) (1,145)Earnings before tax 3,025 1,543 3,265 3,599 4,114 Free cash flow 1,410 2,168 2,215 2,435 3,057

% change Y/Y -36.5 -49.0 111.6 10.2 14.3Tax (425) (690) (653) (720) (823) Equity raised/(repaid) 20 0 0 0 0

as % of EBT 14.0 44.7 20.0 20.0 20.0 Debt raised/(repaid) (1,152) (124) 0 0 0Core Net Income 2,560 2,157 2,612 2,879 3,291 Others 722 (645) (169) (159) 32

% change Y/Y -28.4 -15.7 21.1 10.2 14.3 Dividends paid (843) (649) (585) (886) (974)Shares Outstanding 4355 4355 4355 4355 4355 Beginning cash 5,323 5,480 6,229 7,690 9,080FD EPS (core) - M$ 0.588 0.495 0.600 0.661 0.756 Ending cash 5,480 6,229 7,690 9,080 11,195

% change Y/Y -28.2 -15.7 21.1 10.2 14.3 Net DPS - M$ 0.15 0.13 0.20 0.22 0.28Chg in cash 157 749 1,461 1,390 2,115

Balance sheet Ratio analysis 157 749 1,461 1,390 2,115M$ in millions, year-end Aug FY08A FY09 FY10E FY11E FY12E %, year-end Aug FY08A FY09 FY10E FY11E FY12E

Cash and cash equivalents 5,480 6,229 7,690 9,080 11,195 EBITDA margin 27.8 25.7 26.2 26.5 27.3 Accounts receivable 3,447 3,774 4,091 4,292 4,493 Operating margin 27.8 25.7 26.2 26.5 27.3 Inventories 2,230 1,956 2,120 2,224 2,328 Net profit margin 9.9 7.5 8.4 8.8 9.6 Others 0 0 0 0 0 SG&A/sales n.a. n.a. n.a. n.a. n.a.Current assets 11,157 11,959 13,901 15,595 18,015

Sales per share growth 10.7 11.8 8.4 4.9 4.7 LT investments 1,205 1,177 1,206 1,243 1,279 Sales growth 10.4 11.8 8.4 4.9 4.7 Net fixed assets 57,475 58,227 58,931 59,685 60,230 Net profit growth (28.4) (15.7) 21.1 10.2 14.3 Total assets 69,836 71,363 74,038 76,523 79,524 EPS growth (28.2) (15.7) 21.1 10.2 14.3

Liabilities Interest coverage (x) -6.5 -6.6 -7.2 -7.6 -8.2ST loans 1,058 1,158 1,158 1,158 1,158 Net debt to total capital (x) 0.2 0.2 0.2 0.2 0.1Payables 5,604 6,105 6,521 6,819 7,117 Net debt to equity (x) 0.67 0.63 0.53 0.45 0.35Others 0 0 0 0 0 Sales/assets (x) 0.4 0.4 0.4 0.4 0.4Total current liabilities 6,662 7,263 7,679 7,977 8,275 Assets/equity (x) 2.7 2.7 2.6 2.5 2.5Long term debt 21,682 21,458 21,458 21,458 21,458 ROE 10.0 8.3 9.3 9.6 10.2Other liabilities 15,835 16,636 16,868 17,063 17,449 ROCE 7.4 7.9 8.2 8.4 8.9Total liabilities 44,179 45,357 46,006 46,498 47,182 ROA 4.5 3.7 4.4 4.8 5.5 Shareholders' equity 25,657 26,006 28,033 30,026 32,343BVPS - M$ 5.89 5.97 6.44 6.90 7.43Source: Company Reports and J.P. Morgan Estimates.Note: Core net profit is derived from net profit ex forex translation losses

262



Ternium S.A. www.ternium.com

Overweight $33.35


Company description Ternium, mainly through its subsidiaries TX Mexico and Siderar (Arg.), produces flat and long steel products, and has finished steel capacity of 9Mtpy. Owned by the Techint Group (61%) and listed on the NYSE under the symbol TX, it generates ~75% EBITDA from its Mexico operations. Post mortem TX is one of the leading suppliers of flat steel products in Mexico and Argentina and has important access to other regional markets in South & Central America, in addition to NAFTA. Prices in Mexico (~75% of TX’s sales) are closely linked but remain at a marginal premium to those in the US. In addition, TX enjoys the benefits of the presence of high-value-added products, integrated low-cost mills and low dependence on coal, putting it in good stead vis-à-vis its competitors. Finally, management has worked exceptionally well to deliver strong results and four consecutive quarters of positive cash flow and working capital reduction during the peak of crisis. Potential for earnings upgrades After TX posted a 20% EBITDA margin in 3Q09, the Street estimate of 19% for 2010 seems conservative. We believe higher utilization levels (TX guiding for 75% in 4Q09 vs. 70% in 3Q) should result in improved dilution of fixed costs, with potential for further improvement if prices stick to present levels. How much recovery is priced into the stock? Trading at 6.7x ’10e EBITDA, TX remains the cheapest steel stock in our coverage and compares with the peer average of 9.7x. Further, we believe the market is not yet fully discounting the future payments (~$1.0B) from Venezuela for the nationalized asset of Sidor. Price target and key risks Our Dec-10 price target of $31.0 is based on a combination of DCF and multiples analysis, with WACC of 12.0% and perpetuity growth of 3%. The key risks to our thesis are a weaker-than-expected steel price scenario, higher raw material costs and overpayment in an M&A.

Luxembourg Metals & Mining Rodolfo R. De Angele, CFAAC (55-11) 3048-3888 [email protected]


Price Performance (US$)

010203040


Source: Bloomberg.


Absolute (%) 23% 32% 449% Relative (%) 20% 11% 332%

Source: Bloomberg.

Company data 52-week range (US$) 5.76 – 33.35 Mkt cap. (US$MM) 6,686.0 Avg daily value (US$MM) 14.3 Avg daily volume (‘000) 500.0 Shares O/S (MM) 200 Date of price 25-Nov-09 Index: MSCI LatAm 4125.9 Free float (%) 14% Exchange rate: USD/MXN 12.83

Source: Bloomberg.

Bloomberg: TX; Reuters: TX.N US$ in millions, Year-end 31st Dec. FY08 FY09E FY10E FY11E Sales 8,496 4,739 5,775 6,158 Net profit (Recuring) 662 249 430 567 EPS (US$) 0.36 0.28 0.21 0.28 FD EPS (US$) 0.36 0.28 0.21 0.28 DPS (US$) 0.60 - 1.38 1.07 Sales growth (%) 50% -44% 22% 7% Net profit growth (%) 224% -62% 73% 32% EPS growth (%) -65% -23% -22% 32% ROE (%) 14% 5% 8% 10% P/E (x) 8.7x 26.8x 15.5x 11.8x Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

263



Ternium S.A.: Summary of financials Profit and loss statement US$ in millions, year-end 31-Dec. FY08 FY09E FY10E FY11ERevenue 8,496 4,739 5,775 6,158% change Y/Y 50% -44% 22% 7%Gross margin (%) 9% 17% 23% 24%EBITDA 2,304 571 1,138 1,304% change Y/Y 90% -75% 99% 15%EBITDA margin (%) 27% 12% 20% 21%EBIT 1,885 190 751 921% change Y/Y 122% -90% 295% 23%EBIT margin (%) 22% 4% 13% 15%Net interest (64) (14) (5) 15Earnings before tax 1,089 247 688 908% change Y/Y 51% -77% 179% 32%Tax (262) 11 (203) (267)as % of EBT 24% -5% 29% 29%Net income (recurring) 662 249 430 567% change Y/Y 224% -62% 73% 32%Shares O/S (MM) 200 200 200 200EPS (recurring) (US$) 3.30 1.24 2.14 2.83Source: Company, J.P. Morgan estimates.

Balance sheet US$ in millions, year-end 31-Dec

FY08 FY09E FY10E FY11ECash and cash equivalents 1,156 1,882 2,790 2,732Accounts receivable 872 704 857 914Inventories 1,827 1,183 1,355 1,425Others 2 2 2 2Current assets 3,856 3,771 5,005 5,074LT investments 2,603 2,393 1,265 1,276Net fixed assets 4,212 4,030 3,991 4,086Total assets 10,671 10,195 10,261 10,436Liabilities ST loans 942 705 635 570Payables 439 399 457 481Others 355 256 313 333Total current liabilities 1,735 1,360 1,405 1,384Long-term debt 2,326 1,885 1,700 1,524Other liabilities 1,049 1,062 1,116 1,136Total liabilities 5,110 4,308 4,221 4,044Shareholders’ equity 4,597 4,976 5,129 5,481BVPS (US$) 22.9 24.8 25.6 27.3Source: Company, J.P. Morgan estimates.

Cash flow statement US$ in millions, year-end 31-Dec

FY08 FY09E FY10E FY11ENet income (Reported) 715 554 430 567Depreciation 419 380 387 383Change in working capital 83 (710) 226 90Cash flow from operations 1,052 1,644 591 860Capital expenditure 593 250 348 478Other cash (uses)/sources 765 (185) (1,182) (9)Debt raised/(repaid) (818) (678) (254) (242)Dividends (120) - (277) (215)Increase in cash equivalent (425) 1,579 1,148 176Ending cash 1,156 1,882 2,790 2,732DPS($) 0.60 - 1.38 1.07Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end 31-Dec FY08 FY09E FY10E FY11EEBITDA margin 27% 12% 20% 21%Operating margin 22% 4% 13% 15%Net profit margin 8% 5% 7% 9%SG&A/sales 0 0 0 0Sales growth 50% -44% 22% 7%Net profit growth 224% -62% 73% 32%Sales per share growth 50% -44% 22% 7%EPS growth 224% -62% 73% 32%Interest coverage (x) 29.5x 13.5x 139.7x -60.6xNet debt to total capital 24% 8% -5% -8%Net debt to equity 46% 14% -9% -12%Sales/assets 80% 46% 56% 59%EBIT margin 22% 4% 13% 15%ROCE 0 0 0 0Assets/equity (x) 2.3x 2.0x 2.0x 1.9xROIC 9% 2% 6% 7%ROE 16% 11% 8% 10%Source: Company, J.P. Morgan estimates.

264



Thai Oil Public Company www.thaioil.co.th



Company description Thai Oil (TOP) runs a 275,000bbl/day complex refinery in Sri Racha, 124km southeast of Bangkok. The company also has downstream petrochemical interests (benzene and paraxylene), as well as related lube base, oil transportation and utilities business. TOP is 49%-owned by PTT Public.

Post mortem Oil refining is a commoditized industry, hence TOP’s performance is driven by the regional oil refining dynamics (capacity vs. demand), rather than its market’s positioning. That said, the company does have an advantage in running a highly complex refinery (that generally results in higher margins) and downstream divisions (that help balance the refining performance), in our view.

Potential for earnings upgrades TOP is highly sensitive to regional gross refining margin (GRM). YTD, GRM has been poor due to over-capacity and soft demand. As we move into 2010, we are positive that a steady demand growth (due to recovering consumption and economic activities) will help to drive higher GRM next year, potentially leading to higher earnings for TOP.

How much recovery is priced into the stock? TOP shares have risen 80% from their trough in Mar-09; hence, it appears that some recovery has been discounted in the share price. However, we believe that the market remains skeptical of a strong GRM recovery. Hence, should GRM move significantly higher, this could be viewed an upside surprise for the market.

Price target and key risks Our Jun-10 PT of Bt62 is based on our DCF valuation (WACC=9%, g=0%, LT GRM=US$5/bbl). We also incorporate a 20% risk discount to reflect Thailand’s poor regulatory environment. Key risks to our PT include: (1) GRM; (2) aromatics spread; and (3) regulatory risks.

Thailand Independent refiners Sukit ChawalitakulAC (662) 684-2679 [email protected]


Price performance

15

30

45


TOP.BK share price (Bt)SET (rebased)

Bt





Source: Bloomberg.

Bloomberg: TOP TB; Reuters: TOP.BK Bt in millions, year-end December FY08 FY09E FY10E FY11E Revenue 399,125 252,193 281,542 312,538 Net profit 224 13,618 14,391 15,438 EPS (Bt) 0.11 6.68 7.05 7.67 DPS (Bt) 2.75 2.30 3.00 3.50 Revenue growth (%) 52.9 -36.8 11.6 11.0 EPS growth (%) -98.8 5986.3 5.7 8.7 ROCE (%) 4.2 18.8 19.3 20.7 ROE (%) 0.4 21.4 19.8 18.2 P/E (x) 371.5 6.1 5.8 5.3 P/BV (x) 1.4 1.2 1.1 0.9 Dividend yield (%) 6.7 5.6 7.4 8.6 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

265



Thai Oil Public Company: Summary of financials Bt in millions, year-end December Income statement Cash flow statement FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E Revenues 261,051 399,125 252,193 281,542 312,538 EBIT 24,676 4,339 20,474 20,790 22,081

% change Y/Y -6.5% 52.9% -36.8% 11.6% 11.0% Depr. & amortization 4,966 6,148 6,390 6,469 6,780Gross Margin (%) 11.7% 2.9% 11.2% 10.2% 9.8% Change in working capital -1,972 -1,589 -752 -3,949 -16

EBITDA 29,642 10,487 26,863 27,259 28,861 Taxes -4,755 756 -4,764 -4,994 -6,159% change Y/Y 24.4% -64.6% 156.2% 1.5% 5.9% Cash flow from operations 20,372 6,019 19,968 17,502 23,002

EBITDA Margin (%) 11.4% 2.6% 10.7% 9.7% 9.2% EBIT 24,676 4,339 20,474 20,790 22,081 Capex -17,112 -6,924 -7,663 -3,300 -1,910

% change Y/Y 29.8% NM 371.9% 1.5% 6.2% Disposal/(purchase) 0 0 0 0 0EBIT Margin (%) 9.5% 1.1% 8.1% 7.4% 7.1% Net Interest -1,100 -621 -1,397 -814 316Net Interest -1,100 -621 -1,397 -814 316 Free cash flow 3,260 -905 12,305 14,202 21,092Earnings before tax 22,668 -107 19,056 19,976 22,398

% change Y/Y 27.9% -100.5% -17909.1% 4.8% 12.1% Equity raised/(repaid) 0 0 0 0 0Tax -4,755 756 -4,764 -4,994 -6,159 Debt raised/(repaid) 740 17,876 -10,000 -10,000 -10,000

as % of EBT 130.8% -9800.9% 141.0% 136.5% 128.9% Other 2,086 -861 346 75 81Core net income (reported) 17,511 313 13,735 14,391 15,647 Dividends paid -7,650 -9,180 -4,182 -5,610 -6,885

% change Y/Y 19.2% -98.2% 4288.1% 4.8% 8.7% Beginning cash 6,982 4,760 8,555 4,077 6,015Shares outstanding 2,040 2,040 2,040 2,040 2,040 Ending cash 4,760 8,555 4,077 5,713 10,007Core EPS (reported) - (Bt) 8.58 0.15 6.73 7.05 7.67 DPS - (Bt) 4.50 2.75 2.30 3.00 3.50

% change Y/Y 19.2% -98.2% 4,288.1% 4.8% 8.7% Balance sheet Ratio analysis FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E Cash and cash equivalents 4,760 8,555 4,077 5,713 10,007 EBITDA margin 11.4% 2.6% 10.7% 9.7% 9.2%Accounts receivable 23,045 15,320 20,175 23,931 26,566 Operating margin 9.5% 1.1% 8.1% 7.4% 7.1%Inventories 32,802 20,544 31,369 35,396 39,469 Net profit margin 7.3% 0.1% 5.4% 5.1% 5.0%Others 1,992 10,179 2,000 2,000 2,000 Current assets 62,599 54,598 57,621 67,040 78,042 LT investments 162 1,144 1,200 1,200 1,200 Sales growth -6.5% 52.9% -36.8% 11.6% 11.0%Net fixed assets 71,439 72,215 73,488 70,319 61,902 Net profit growth 8.3% -98.8% 5986.3% 5.7% 8.7%Total Assets 136,570 132,840 139,805 142,790 145,144 EPS growth 8.3% -98.8% 5986.3% 5.7% 8.7% Liabilities ST loans 1,450 12,870 6,010 4,510 1,660 Interest coverage (x) 26.95 16.89 19.23 33.47 -Payables 26,127 15,670 20,166 24,019 26,783 Net debt to equity 44.5% 65.7% 56.6% 33.5% 1.2%Others 4,661 1,733 3,986 3,967 3,986 Sales/assets (x) 2.11 2.96 1.85 1.99 2.17Total current liabilities 32,238 30,273 30,162 32,496 32,429 Assets/equity (x) 2.03 2.25 2.05 1.87 1.71Long-term debt 30,741 37,197 34,057 25,557 9,407 ROE 31.0% 0.4% 21.4% 19.8% 18.2%Other liabilities 1,754 1,791 2,293 2,368 2,527 ROCE 26.4% 4.2% 18.8% 19.3% 20.7%Total Liabilities 64,733 69,261 66,512 60,420 44,363 Shareholders' equity 67,387 58,921 68,357 77,138 94,963 BVPS - (Bt) 33.03 28.88 33.51 37.81 46.55 Source: Company reports and J.P. Morgan estimates.

266



TOTVS www.totvs.com.br

Overweight R$101.50


Company description Totvs is the leader in developing and marketing integrated enterprise management software and provision of related services in Brazil. It has a leading position in the SME market for ERP software, with nearly 38% market share. It trades with the ticker TOTS3, is listed in the Novo Mercado segment of the Bovespa exchange, and has an ADTV of US$3mn. Post mortem Core license fee revenue growth reaccelerated in 3Q, partly offset by softer service & maintenance revenues. Net revenues were up 16% y/y. EBITDA grew significantly, up 50% y/y with a 26.3% margin, well above the company’s LT margin guidance (22-25%). Gross license fee revenues, which had been decelerating the last 3 quarters – during a tough economy – improved in 3Q09, rising 10.9% y/y (vs -3% y/y in 2Q09). Potential for earnings upgrades We expect two sources of earning upside. (1) Likely revision of long-term margin guidance by the company as 3Q margins are already well above this guidance (JPMe: 27.4%), (2) Upgrades to revenue forecasts due to cyclical upswing in new license sales as IT demand recovers. How much recovery is priced into the stock? A better license fee trend should help sustain growth in the coming quarters through better maintenance revenues. At 15x P/E 2010e, Totvs trades at no premium to global peers despite its superior growth prospects. Price target and key risks We rate Totvs OW, with an end-2010 PT of R$125 based on a DCF model using a 10.6% WACC and 4% LT growth, in nominal US$ terms. Key risks are 1) investor aversion to small caps, 2) another sharp macro slowdown, and 3) large competitors increasing focus on the SME market.

Brazil Media and Telecom Andre BaggioAC (55-11) 3048-3427 [email protected]


Rajneesh Jhawar (1-212) 622-6480 [email protected]

J.P.Morgan Securities Inc.


020406080

100120

Oct-08 Apr-09 Oct-09


1M 3M 12M Absolute% 14.4 24.4 184.6 Relative % 10.0 6.15 89.5

Source: Bloomberg, relative IBOV, USD prices. Company data

52-week range (BRL) 34.00-107.0 Mkt cap. (R$ MM) 3,334 Mkt cap. (US$ MM) 1,936 Avg daily value (US$MM) 2.9 Avg daily volume (MM) .055 Shares O/S (MM) 31.15 Date of price Nov 25 Index: MEXBOL MEXBOL

Source: Bloomberg. Bloomberg: TOTS3; Reuters: TOTS3.SA LC in millions, year-end Dec FY08 FY09E FY10E FY11E Sales 845 991 1,181 1,345 Net profit 129 161 206 241 EPS (LC) 4.51 5.17 6.60 7.74 FD EPS (LC) DPS (LC) Sales growth (%) 27.6% 17.3% 19.2% 13.9% Net profit growth (%) 18.3% 24.6% 27.6% 17.3% EPS growth (%) 16.6% 14.7% 27.6% 17.3% ROE (%) 25.1% 32.0% 34.1% 37.6% P/E (x) 25.8 20.7 16.2 13.8 FD P/E (x) Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

267



TOTVS: Summary of financials Profit and loss statement MXN in millions, year-end Dec. FY08 FY09E FY10E FY11ERevenue 845 991 1,181 1,345% change Y/Y 27.6% 17.3% 19.2% 13.9%Gross margin (%) 65.1% 68.4% 68.7% 68.8%EBITDA 179 255 308 354% change Y/Y 22.6% 42.5% 20.9% 14.9%EBITDA margin (%) 21.2% 25.7% 26.1% 26.3%EBIT 77 185 234 279% change Y/Y -9.4% 141.4% 26.3% 19.4%EBIT margin (%) 9.1% 18.7% 19.8% 20.7%Net interest 9 -31 -26 -23Earnings before tax 86 154 207 256% change Y/Y -14.5% 78.6% 34.8% 23.4%Tax -12 -29 -40 -52as % of EBT 14.4% 18.7% 19.1% 20.3%Net income (reported) 129 161 206 241% change Y/Y 18.3% 24.6% 27.6% 17.3%Shares O/S (MM) 31 31 31 31EPS (reported) (LC) 4.51 5.17 6.60 7.74Source: Company, J.P. Morgan estimates.

Balance sheet LC in millions, year-end Dec.

FY08 FY09E FY10E FY11ECash and cash equivalents 147 204 330 330Accounts receivable 154 196 233 266Inventories Others 44 82 98 112Current assets 346 483 662 708LT investments Net fixed assets 32 40 58 80Total assets 1,044 1,163 1,297 1,302Liabilities ST loans 11 4 4 4Payables 33 29 34 39Others 124 117 140 159Total current liabilities 168 150 178 203Long-term debt 366 419 419 419Other liabilities 48 37 37 37Total liabilities 582 606 634 658Shareholders’ equity 456 551 654 631BVPS (LC) 14.7 17.7 21.0 20.2Source: Company, J.P. Morgan estimates.

Cash flow statement LC in millions, year-end Dec.

FY08 FY09E FY10E FY11EEBIT 77 185 234 279Depreciation & amortization 95 70 74 75Change in working capital -21 -57 -25 -22Taxes Cash flow from operations 147 138 217 257Capex -23 -20 -30 -34Disposal/(purchase) Net interest Free cash flow 124 118 187 223Equity raised/(repaid) Debt raised/(repaid) Other Dividends 0 -36 -61 -223Beginning cash 276 147 204 330Ending cash 147 204 330 330DPS (LC) 0.00 1.16 1.96 7.17Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end Dec. FY08 FY09E FY10E FY11EEBITDA margin 21.2% 25.7% 26.1% 26.3%Operating margin 9.1% 18.7% 19.8% 20.7%Net profit margin 15.3% 16.3% 17.4% 17.9%SG&A/sales 33.4% 30.3% 29.8% 29.6%Sales growth 27.6% 17.3% 19.2% 13.9%Net profit growth 18.3% 24.6% 27.6% 17.3%Sales per share growth EPS growth 16.6% 14.7% 27.6% 17.3%Interest coverage (x) Net debt to total capital 27.5% 22.5% 8.6% 8.8%Net debt to equity 50.3% 39.8% 14.2% 14.8%Sales/assets 94.2% 89.8% 96.0% 103.5%EBIT margin 9.1% 18.7% 19.8% 20.7%ROCE 10.3% 19.6% 21.9% 25.2%Assets/equity (x) 2.3x 2.1x 2.0x 2.1xROI ROE 25.1% 32.0% 34.1% 37.6%Source: Company, J.P. Morgan estimates.

268



TSMC www.tsmc.com

Overweight NT$59.70

Price Target: NT$72

Company description TSMC (TAIEX: 2330, NYSE: TSM) is the world’s largest dedicated semiconductor foundry, with leading manufacturing capacity, process technology, and the largest portfolio of process-proven libraries, IP, design tools and reference flows in the industry. We expect its total managed capacity in FY10 to grow by 13%, exceeding 11 million of 8" equivalent wafers.

Post mortem We believe TSMC will outperform the overall semiconductor industry in 2010, with its revenue growth exceeding the industry average as: (1) it has a diversified product portfolio; and (2) the company is an early mover in advanced technology, which could enjoy price premium. We expect it to continue to see a downward trend in its fixed cost/wafer, given the increase in asset efficiency. Hence, TSMC is likely to post higher ROE and NP margin versus its global peers.

Potential for earnings upgrades Despite the high fixed cost structure, TSMC’s profitability has been quite sustainable even in a downturn year such as 2009. Hence, any earnings upside for TSMC should still largely depend on the top-line growth, which could be driven by: (1) better end-demand outlook; (2) an increase in outsourcing orders; and (3) further market share gains.

How much recovery is priced into the stock? The stock has been moving sideways, largely due to concerns about price war and a slowdown in end-demand. However, once the market realizes that the company will continue to deliver Y/Y earnings growth from 4Q09 and throughout 2010, the share price will gradually move up, in our view.

Price target and key risks We maintain our Overweight rating; our Dec-10 PT of NT$72 is based on 3.1x 12-month forward (FY11E) book value. This multiple is at the mid-to-high range of its recent trading level and well below the 2000-01 level despite a higher ROE. A key risk to our PT is weakening end-demand in 1Q10.

Taiwan Semiconductors JJ ParkAC (822) 758-5717 [email protected]


Patrick LiaoAC (886-2) 2725-9874 [email protected]



30

40

50

60

70

80


2330 TT Equity TWSE Index Source: Bloomberg. Performance

1M 3M 12M Absolute (%) -3.7 4.9 25.0 Relative (%) -3.4 -3.1 -16.1


52-week range (NT$) 36.2-65.2 Mkt cap. (NT$B) 1,546 52-week range (NT$) 47.53 Avg daily value (US$MM) 117 Avg daily volume (MM) 65.4 Shares O/S (MM) 25,896 Date of price 5-Nov-09 Index: TAIEX 7,417.5 Free float (%) 60 Exchange rate 32.5

Source: Bloomberg. Bloomberg: 2330 TT; Reuters: 2330.TW NT$ in billions, year-end December FY08 FY09E FY10E FY11E Sales 333.2 295.1 367.0 417.4 Net profit 99.9 87.4 119.9 141.5 EPS (NT$) 3.83 3.38 4.63 5.45 FD EPS (NT$) 3.83 3.38 4.63 5.45 DPS (NT$) 3.0 3.0 3.0 3.0 Sales growth (%) 3.3% (11.4%) 24.4% 13.7% Net profit growth (%) (8.6%) (13.0%) 37.2% 18.0% EPS growth (%) 17.3% (11.7%) 36.7% 17.8% ROE (%) 20.6 17.9 23.1 24.6 P/E (x) 15.6 17.6 12.9 11.0 FD P/E (x) 15.6 17.6 12.9 11.0 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

269



TSMC: Summary of financials NT$ in billions, year-end December Income statement Ratio analysis FY08A FY09E FY10E FY11E % FY08A FY09E FY10E FY11E Revenues 333 295 367 417 Gross Margin 42.5 43.4 46.4 47.0 Cost of Goods Sold 191 167 197 221 EBITDA margin 55.8 58.5 58.9 57.4 Gross Profit 142 128 170 196 Operating Margin 31.3 31.0 34.8 36.0 R&D Expenses 21 21 25 28 Net Margin 30.0 29.6 32.7 33.9 SG&A Expenses 16 16 17 18 R&D/sales 6.4 7.2 6.9 6.7 Operating Profit (EBIT) 104 91 128 150 SG&A/Sales 4.8 5.3 4.8 4.3 EBITDA 186 173 216 240 Interest Income 5.4 2.6 2.9 4.8 Sales growth 3.3 -11.4 24.4 13.7 Interest Expense -1 0 0 0 Operating Profit Growth -6.5 -12.5 39.6 17.6 Investment Income (Exp.) 0.7 0.1 1.3 1.7 Net profit growth -8.5 -12.6 37.2 18.0 Non-Operating Income (Exp.) 1.6 0.3 0.8 0.8 EPS (Reported) growth -7.0 -11.7 36.7 17.8 Earnings before tax 111 94 132 157 EPS (Adjusted) growth 17.3 -11.7 36.7 17.8 Tax -11 -7 -13 -16 Interest coverage (x) 169.8 268.1 1009.5 1305.7 Net Income (Reported) 100 87 120 142 Net debt to total capital -36.7 -36.9 -37.9 -44.2 Net Income (Adjusted) 100 87 120 142 Net debt to equity -38.7 -37.2 -38.2 -44.4 NT$ EPS (Reported) 3.83 3.38 4.63 5.45 Asset Turnover 59.6 50.9 58.8 59.4 EPS (Adjusted) 3.83 3.38 4.63 5.45 Working Capital Turns (X) 1.7 1.5 1.7 1.6 BPS 18.65 19.21 20.90 23.44 ROE 20.6 17.9 23.1 24.6 DPS 3.0 3.0 3.0 3.0 ROIC 30.3 29.1 36.3 40.8 Shares Outstanding (bn) 26 26 26 26 CORE ROIC 35.2 33.6 42.1 47.3 Balance sheet Cash flow statement FY08A FY09E FY10E FY11E FY08A FY09E FY10E FY11E Cash and cash equivalents 211 190 211 273 Net Income 100 87 120 142 Accounts receivable 18 40 43 51 Depr. & Amortisation 82 81 89 89 Inventories 15 20 24 29 Change in working capital 37 -13 -7 -1 Others 8 9 13 15 Other 1 0 0 0 Current assets 253 259 290 369 Cash flow from operations 219 156 202 230 LT investments 40 39 40 42 Capex -59 -89 -93 -80 Net fixed assets 244 260 272 270 Disposal/ (purchase) -8 -7 -9 -10 Others 23 22 22 22 Cash flow from investing -67 -96 -102 -90 Total assets 559 580 625 703 Free cash flow 159 67 109 150 Liabilities Equity raised/ (repaid) -33 0 0 0 ST loans 9 0 0 0 Debt raised/ (repaid) -3 -21 -1 -1 Payables 6 11 11 14 Other -4 16 0 1 Others 41 52 55 66 Dividends paid -76 -77 -78 -78 Total current liabilities 57 63 67 81 Cash flow from financing -115 -82 -79 -78 Long term debt 16 4 3 2 Other liabilities 6 15 12 10 Net change in cash 37 -22 21 62 Total liabilities 79 83 82 93 Beginning cash 175 211 190 211 Shareholders' equity 480 497 542 610 Ending cash 211 190 211 273 Source: Company, J.P. Morgan estimates.

270



Turk Telekom www.turktelekom.com.tr

Overweight Price: YTL4.44

Price Target: YTL6.8

Company description Within CEEMEA Turk Telekom is a structurally attractive Turkish integrated telecom incumbent with relatively sustainable fixed voice revenues (although these have come under more pressure recently), a dominant position in a growing broadband market with benign competition, and increasing market share in the mobile market. Oger Telekomünikasyon is the controlling shareholder with a 55% stake while 30% is owned by Turkey’s Treasury.

Post mortem Turk Telekom’s key objective in mobile over the past year has been to take advantage of Vodafone’s weakness to overtake it decisively and become the number 2 operator in the market, which has yet to happen. However, we still believe that Turk Telekom can pull ahead of Vodafone in terms of service revenues in the 4Q09 and beyond, which the market would receive well in our view. We also expect to see a recovery in the mobile margins.

Potential for earnings upgrades We believe that while its key peer Turkcell will be the primary beneficiary given its greater exposure to the Turkish mobile market, Turk Telekom stands to benefit strongly as well from a combination of an improving economy and market repair through solid mobile revenue growth, improved mobile margins and more stable fixed voice revenues.

How much recovery is priced into the stock? We believe that the aforementioned macro recovery/market repair is far from fully priced in.

Price target and key risks Our recurring FCF yield-based end 2010 target price for Turk Telekom is TRY 6.8. At our TP the stock would trade on a 2010E recurring FCF yield of c.11%. We believe this multiple is justified by the stronger growth in following years than initially estimated due to a slower than expected ramp-up in mobile margins. Key operating risk - regulatory intervention may lead to greater than expected fixed line revenue erosion; MTR cuts may lead to higher F2M substitution or competition being more aggressive than estimated.

Turkey Wireline Services/Incumbents Jean-Charles LemardeleyC (44-20) 7325 5763 [email protected]


2.5

3.5

4.5

TL


Price Performance



Absolute (%) -8% -6% 47% Source: Company data, Bloomberg

Company data 52-week range (TL) 5.06-3.16 Mkt cap. (YTL bn) 15.5 Shares O/S (mn) 3500 Date of price 23-Nov-09 Price Target End Date 31-Dec-10 Avg daily value (US$MM) 26 Avg daily volume (MM) 8.38 Free float (%) 15% Exchange rate 1.5

Source: Company data, Bloomberg, J.P Morgan

Bloomberg: TTKOM TI; Reuters: TTKOM.IS YTL in millions, year end Dec FY08 FY09E FY10E FY11E Sales 10,195 10,738 11,807 12,585 Net profit 1,627 1,605 2,120 2,479 EPS 0.46 0.46 0.61 0.71 DPS (LC) 0.78 0.43 0.44 0.54 Sales growth (%) 8.20% 5.30% 10.00% 6.60% Net profit growth (%) -35.00% -1.40% 32.10% 16.90% EPS growth (%) NM NM 32.10% 16.90% ROE (%) 29% 30% 37% 39% P/E (x) 9.5 9.7 7.3 6.3 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

271



Turk Telekom: Summary of Financials Profit and Loss Statement Cash flow statement TL in millions, year end Dec FY08 FY09E FY10E FY11E FY12E TL in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Revenues 10,195 10,738 11,807 12,585 13,483 Cash EBITDA 4,342 4,296 4,872 5,322 5,839

% Change Y/Y 8.2% 5.3% 10.0% 6.6% 7.1% Interest (574) 1,454 (362) (300) (232)EBITDA 4,342 4,296 4,872 5,322 5,839 Tax (509) (467) (465) (508) (667)

% Change Y/Y 1.6% -1.0% 13.4% 9.3% 9.7% Other 557 (2,193) 5 25 59EBITDA Margin 42.6% 40.0% 41.3% 42.3% 43.3% Cash flow from operations 3,816 3,090 4,049 4,539 4,999

EBIT 2,710 2,519 2,947 3,287 3,860 % Change Y/Y 5.6% -7.0% 17.0% 11.5% 17.4% Capex PPE (1,330) (2,216) (1,898) (1,959) (1,979)EBIT Margin 26.6% 23.5% 25.0% 26.1% 28.6% Net investments 426 (135) 0 0 0

Net Interest (574) 1,454 (362) (300) (232) CF from investments (1,330) (2,216) (1,898) (1,959) (1,979)PBT 2,136 2,072 2,586 2,987 3,627 Dividends (2,744) (1,490) (1,539) (1,899) (2,202)

% change Y/Y -28.3% -3.0% 24.8% 15.5% 21.5% Share (buybacks)/ issue - - - - -Net Income (clean) 1,627 1,605 2,120 2,479 2,960

% change Y/Y -35.0% -1.4% 32.1% 16.9% 19.4% CF to Shareholders 2,744 1,490 1,539 1,899 2,202Average Shares 3,500 3,500 3,500 3,500 3,500 FCF to debt (258) (616) 612 681 817Clean EPS 0.46 0.46 0.61 0.71 0.85

% change Y/Y NM NM 32.1% 16.9% 19.4% OpFCF (EBITDA - PPE) 2,586 2,215 2,974 3,363 3,860DPS 0.78 0.43 0.44 0.54 0.63 EFCF pre Div, PPE 2,485 874 2,151 2,580 3,019 Balance sheet Ratio Analysis TL in millions, year end Dec FY08 FY09E FY10E FY11E FY12E TL in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Cash and cash equivalents 1,042 1,124 945 1,007 1,079 EBITDA margin 42.6% 40.0% 41.3% 42.3% 43.3%Accounts Receivables 1,485 1,756 1,907 2,020 2,151 EBIT Margin 26.6% 23.5% 25.0% 26.1% 28.6%ST financial assets 0 25 25 25 25 Net profit margin 16.0% 14.9% 18.0% 19.7% 22.0%Others 471 641 704 751 804 Capex/sales 13.1% 20.6% 16.1% 15.6% 14.7%Current assets 2,998 3,545 3,581 3,803 4,059 Depreciation/Sales 16.0% 16.5% 16.3% 16.2% 14.7%LT investments 3,384 3,736 3,736 3,736 3,736 Net fixed assets 6,277 6,202 6,176 6,100 6,100 Revenue growth 8.2% 5.3% 10.0% 6.6% 7.1%Total assets 12,659 13,483 13,492 13,638 13,894 EBITDA Growth 1.6% -1.0% 13.4% 9.3% 9.7%ST loans 1,291 1,545 1,653 1,762 1,888 EPS Growth NM NM 32.1% 16.9% 19.4%Payables 932 604 664 708 758 Others 1,326 1,742 1,915 2,041 2,187 Net debt/EBITDA 0.6 0.7 0.5 0.3 0.2Total current liabilities 3,549 3,891 4,232 4,511 4,833 CF to Shareholders 2,744 1,490 1,539 1,899 2,202Long term debt 2,960 3,231 2,332 1,604 733 FCF to debt (258) (616) 612 681 817Other liabilities 1,037 928 928 928 928 Total liabilities 7,546 8,050 7,492 7,043 6,494 OpFCF (EBITDA - PPE) 2,586 2,215 2,974 3,363 3,860Shareholders' equity 5,114 5,433 6,000 6,595 7,400 EFCF pre Div, PPE 2,485 874 2,151 2,580 3,019 Source: Company reports and J.P. Morgan estimates.

272



UMC www.umc.com

Overweight NT$15.5

Price Target: NT$19

Company description UMC (TAIEX: 2303) is the second-largest dedicated semiconductor foundry, providing wafer manufacturing services. Its key customers include MediaTek, TI, Xilinx, Novatek, Realtek, Broadcom and Infineon.

Post mortem UMC’s structural changes undertaken since 3Q08 have led the company to a fundamental improvement, which includes: (1) improvement in operating efficiency; (2) focus on core business instead of largely depending on non-op contribution; (3) more favorable margin outlook; (4) better recognition from the top-tier clients in 65nm production; and (5) solid 2nd-source strategy with a disciplined capacity expansion.

Potential for earnings upgrades Given the high fixed cost nature of the foundry industry, we expect UMC to enjoy an amplified growth in its bottom line. We believe UMC will post a near-breakeven profit in 2009. Hence, any small upside to its 2010 revenue could result in a big jump in earnings outlook.

How much recovery is priced into the stock? We expect UMC’s revenue to go back to the 2007 level in 2010, supported by strong growth in contribution from advanced technology. We expect the robust demand from emerging markets to be one of the major drivers for the 2010 pick-up; however, this may have not been priced in so far.

Price target and key risks Our Dec-10 PT of NT$19 is based on 1.1x FTM (Dec-11E) book, as we believe the company may no longer need to trade at a discount to book, given further improvement in its operation efficiency and better outlook for profitability. A key risk to our PT is a weakening end-demand in 4Q09.

Taiwan Semiconductors JJ ParkAC (822) 758-5717 [email protected]


Patrick LiaoAC (886-2) 2725-9874 [email protected]



579

1113151719


2303 TT Equity TWSE Index




52-week range (NT$) 6.6-17.2 Mkt cap. (NT$ B) 201.3 Mkt cap. (US$ B) 6.19 Avg daily value (US$MM) 96.1 Avg daily volume (MM) 40.7 Shares O/S (MM) 12,988 Date of price 5-Nov-09 Index: TAIEX 7,417.5 Free float (%) 50 Exchange rate 32.5

Source: Bloomberg. Bloomberg: 2330 TT; Reuters: 2303.TW NT$ in billions, year-end December FY08 FY09E FY10E FY11E Sales 92.5 88.5 107.0 117.1 Net profit -22.3 2.8 12.8 16.9 EPS (NT$) -1.76 0.22 1.01 1.33 FD EPS (NT$) -1.76 0.22 1.01 1.33 DPS (NT$) 0.8 0.0 0.0 0.6 Sales growth (%) (13.3%) (4.3%) 20.8% 9.4% Net profit growth (%) (231.6%) 112.8% 350.1% 32.1% EPS growth (%) (242.2%) 112.7% 350.0% 31.9% ROE (%) -10.6 1.5 6.0 7.5 P/E (x) NM 69.3 15.4 11.7 FD P/E (x) NM 69.3 15.4 11.7 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

273



UMC: Summary of financials NT$ in billions, year-end December

Income statement Ratio analysis FY08A FY09E FY10E FY11E % FY08A FY09E FY10E FY11E Revenues 93 89 107 117 Gross Margin 14.0 18.1 25.8 27.4 Cost of Goods Sold 80 72 79 85 EBITDA margin 40.0 42.7 42.2 41.2 Gross Profit 13 16 28 32 Operating Margin -0.4 3.8 11.9 13.3 R&D Expenses 8 8 10 11 Net Margin -24.1 3.2 12.0 14.5 SG&A Expenses 5 4 5 6 R&D/sales 8.9 9.3 8.9 9.1 Operating Profit (EBIT) 0 3 13 16 SG&A/Sales 5.5 5.1 5.0 4.9 EBITDA 37 38 45 48 Interest Income 0.6 0.2 0.3 0.4 Sales growth -13.3 -4.3 20.8 9.4 Interest Expense 0.1 0.1 0.2 0.2 Operating Profit Growth -105.9 939.4 279.7 22.6 Investment Income (Exp.) -10.6 -1.3 0.6 1.8 Net profit growth -231.6 112.8 350.1 32.1 Non-Operating Income (Exp.) -10.8 1.5 0.8 1.2 EPS (Reported) growth -229.4 112.7 350.0 31.9 Earnings before tax -21 4 14 19 EPS (Adjusted) growth -242.2 112.7 350.0 31.9 Tax 1 1 1 2 Interest coverage (x) -6.5 28.5 71.9 84.1 Net Income (Reported) -22 3 13 17 Net debt to total capital -15.4 -18.6 -20.7 -19.9 Net Income (Adjusted) -22 3 13 17 Net debt to equity -16.1 -19.4 -21.5 -20.6 NT$ EPS (Reported) -1.76 0.22 1.01 1.33 Asset Turnover 44.5 37.6 42.7 44.5 EPS (Adjusted) -1.76 0.22 1.01 1.33 Working Capital Turns (X) 2.7 1.8 1.9 2.0 BPS 14.23 16.31 17.31 18.06 ROE -10.6 1.5 6.0 7.5 DPS 0.80 0.00 0.00 0.58 ROIC 2.1 2.3 10.0 11.2 Shares Outstanding (bn) 13 13 13 13 CORE ROIC 2.1 2.7 11.8 13.3 Balance sheet Cash flow statement FY08A FY09E FY10E FY11E FY08A FY09E FY10E FY11E Cash and cash equivalents 38 49 56 57 Net Income -22 3 13 17 Accounts receivable 8 16 17 18 Depr. & Amortisation 37 34 32 33 Inventories 8 9 9 10 Change in working capital 0 -7 2 -1 Others 1 3 3 3 Other 0 0 0 0 Current assets 55 76 84 88 Cash flow from operations 15 31 47 48 LT investments 47 69 69 71 Capex -11 -16 -35 -36 Net fixed assets 100 84 91 99 Disposal/ (purchase) 43 -24 -5 -6 Others 6 6 6 6 Cash flow from investing 32 -40 -40 -41 Total assets 208 235 250 263 Free cash flow 4 14 12 13 Liabilities Equity raised/ (repaid) -4 0 0 0 ST loans 0 8 8 8 Debt raised/ (repaid) -22 0 0 0 Payables 2 4 5 6 Other -16 20 0 1 Others 9 11 12 14 Dividends paid -9 0 0 -7 Total current liabilities 11 23 25 28 Cash flow from financing -52 20 0 -6 Long term debt 8 1 1 1 Other liabilities 4 4 4 4 Net change in cash -4 11 7 1 Total liabilities 23 27 30 32 Beginning cash 42 38 49 56 Shareholders' equity 185 208 221 231 Ending cash 38 49 56 57 Source: Company, J.P. Morgan estimates.

274



Unitech Ltd www.unitechgroup.com

Overweight Rs85.2

Price Target: Rs120.00

Company description Unitech is one of the largest real estate developers in the country with a track record in real estate development of more than 30 years. Unitech has developed 1,200 acres of land in five townships with over 12mqft of real estate development in the past three years.

Post mortem Unitech is the best play on a pan-India affordable housing theme, given its primary exposure to the housing segment (70% of NAV). UT’s sales bookings in 1HFY10 have been impressive. It has pre-sold over Rs40 billion of projects/10.1msf of area, placing it well on course to achieve the FY10 sales target of 20msf. Cash flow issues are now sorted out with UT cutting its net debt by almost 40% from peak levels. Historically, execution/transparency have been issues with the company. Incrementally, we see these concerns abating as deliveries have started picking up pace (8-9 msf expected in FY10) and most of the scale-up happening in Uni-homes (easier product to complete).

Potential for earnings upgrades UT’s contract sales in 1HFY10 are at Rs 40 billion (10.1 msf). This is 58% of our FY10 sales bookings estimate of Rs 72 billion, implying an upside risk to our and consensus EPS numbers if sales momentum in 2H sustains. Further, UT’s aggressive Mumbai entry (Rs15 billion contracted sales till Sep-09) via the SRA model looks to be under-appreciated and though these sales add to cash flows immediately, they will most likely reflect in EPS numbers FY12 onwards.

How much recovery is priced into the stock? UT is trading at 1.6x FY11E P/B and 13x FY11E P/E with an EPS growth of 56% over FY11E/12E. The risk reward on balance seems to be favorable with the market discounting a fair amount of concern on execution and bookings cancellations in future. Valuation cushion and healthy ongoing sales momentum should see the share price re-rating to Rs120 levels. Price target and key risks We have an Overweight recommendation on Unitech with an SOTP-based Mar-10 price target of Rs120. Key risks to our price target include: (a) approval risk in new market entry; (b) execution delays; and (c) de-rating of the physical property market.

India Property Saurabh KumarAC (91-22) 6157-3590 [email protected]


Price performance

0100200300

1/1/09 4/1/09 7/1/09 10/1/09

UT share price Sensex

Source: Bloomberg.


Absolute (%) -22.1 -12.7 46.8 Relative (%) -15.0 -13.2 -2.9

Source: Bloomberg.

Company data 52-week range (Rs) 21.7-118.4 Mkt cap. (Rs MM) 203,337 Mkt cap. (US$MM) 4,326 Avg daily value (US$MM) 151 Avg daily volume (MM) 73 Shares O/S (MM) 2,386 Date of price 5-Nov-09 Index: Sensex 16064 Free float (%) 56 Exchange rate 47.0

Source: Bloomberg.

Bloomberg: UT IN; Reuters: UNTE.BO Rs in millions, year-end March FY08 FY09 FY10E FY11E FY12E Sales 41,152 28,502 38,215 50,946 71,956 Net profit 16,613 12,010 13,261 15,476 24,445 EPS (Rs) 10.2 7.4 4.2 6.5 10.2 P/E (x) 8.3 11.5 20.4 13.1 8.3 ROE (%) 59 27 17 13 18 ROCE (%) 25 10 10 10 15 Net debt/Equity (%) 189 163 32 12 -7 P/B 3.8 2.7 1.9 1.6 1.4 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

275



Unitech Ltd: Summary of financials Rs in millions, year-end March Income Statement Cash flow statement FY08 FY09 FY10E FY11E FY12E FY08A FY09 FY10E FY11E FY12E Revenues 41,152 28,502 38,215 50,946 71,956 EBIT 21,833 15,284 19,395 21,970 32,358

% change Y/Y 25% -31% 34% 33% 41% Depreciation 205 209 234 262 294 Change in working capital (33,118) (3,496) (900) 12,275 12,994 EBITDA 22,038 15,493 19,629 22,232 32,652 Taxes (3,986) (2,437) (4,180) (5,147) (8,574)

% change Y/Y 10% -30% 27% 13% 47% Others 2,716 4,119 1,246 1,753 2,162 EBITDA Margin (%) 54% 54% 51% 44% 45% Cash flow from operations (12,350) 13,680 15,796 31,113 39,233

EBIT 21,833 15,284 19,395 21,970 32,358 Capex (22,964) (2,157) (2,191) (3,206) (5,627) % change Y/Y 10% -30% 27% 13% 47% Change in investments (8,614) (5,028) (2,972) - - EBIT Margin (%) 53% 54% 51% 43% 45% Interest (2,804) (5,500) (3,200) (3,100) (1,500)

Net financial income (1,155) (846) (1,980) (1,380) 620 Free cash flow (46,731) 994 7,434 24,807 32,106 Earnings before tax 20,678 14,438 17,415 20,590 32,978

% change Y/Y 15% -30% 21% 18% 60% Equity raised/ (repaid) - 0 46,202 - - Tax (3,986) (2,437) (4,180) (5,147) (8,574) Debt raised/ (repaid) 45,718 5,034 (40,558) (16,000) (19,000)

as % of EBT 19% 17% 24% 25% 26% Net Income (adjusted) 16,613 12,010 9,978 15,476 24,445 Dividends paid (406) (162) (239) (263) (1,193)

% change Y/Y 27% -28% -17% 55% 58% Beginning cash 10,227 14,083 6,448 15,099 18,644 Shares Outstanding 1623 1623 2386 2386 2386 Ending cash 14,083 6,448 15,099 18,644 24,556 EPS (adjusted) 10.2 7.4 4.2 6.5 10.2

% change Y/Y 27% -28% -43% 55% 58% Balance sheet Ratio Analysis FY08 FY09 FY10E FY11E FY12E %, year-end Mar FY08A FY09 FY10E FY11E FY12E Cash 14,083 6,448 15,099 18,644 24,556 EBITDA margin 54% 54% 51% 44% 45% Accounts receivable 36,755 37,876 40,874 44,319 49,130 EBIT margin 53% 54% 51% 43% 45% Inventories 136,076 157,756 169,510 178,710 188,331 Net profit margin 40% 42% 26% 30% 34% Others 148.35 107.90 107.90 107.90 107.90 Current assets 187,062 202,189 225,591 241,780 262,125 Sales growth 25% -31% 34% 33% 41% Total Investments 14,165 15,808 18,780 18,780 18,780 Net profit growth 27% -28% -17% 55% 58% Net fixed assets 31,442 33,258 35,214 38,157 43,490 Liabilities 82,562 101,827 115,679 140,598 168,025 Provisions 9,350 297 297 297 297 Total current liabilities 91,912 102,124 115,976 140,895 168,322 Interest coverage (x) 7.8 2.8 6.1 7.1 21.6 Total assets 141,883 160,803 175,281 169,494 167,746 Net debt to total capital 48% 52% 20% 9% -6% Net debt to equity 189% 163% 32% 12% -7% Total debt 85,524 90,558 50,000 34,000 15,000 Sales/assets 0.3 0.2 0.2 0.3 0.4 Other liabilities 20,354 18,550 17,050 12,050 6,050 Assets/equity 3.9 3.1 1.6 1.4 1.1 Total liabilities 105,878 109,108 67,050 46,050 21,050 ROE 59% 27% 17% 13% 18% Shareholders' equity 36,005 51,695 108,231 123,444 146,696 ROCE 25% 10% 10% 10% 15% BVPS 22.2 31.8 45.4 51.7 61.5 Source: Company data, J.P. Morgan estimates.

Unitech: NAV assuming sale/lease till FY13 and remaining at market value of land FY10 Per share

NPV of net bookings for 3 years 95,820 37 Rented projects NPV at 11.5% cap rate 12,115 5 Market value of land (assuming 30-40% margin) 215,289 82 Total GAV 323,224 124 UCP value of launched projects 5,472 2 Other UCP projects 2,800 1 Mumbai land 14,000 5 Telecom value at book value of investments 5,500 2 Unpaid land ex Dankuni

(16,422)

(6) Net debt

(35,504)

(14) Warrant issuance 11,603 4 Total Value 310,673 119

Source: J.P. Morgan estimates.

276



United Spirits www.unitedspirits.in


Price Target: Rs1,140.00

Company description United Spirits is the leading spirits company in India with over 55% market share. It strengthened its hold over the industry with the acquisition of Shaw Wallace’s spirits business. Whisky accounts for over 60% of its sales volume. Other products include rum, brandy, vodka and wine. In 2007 it acquired bulk scotch manufacturer Whyte & Mackay based in Scotland. Post mortem We see United Spirits as an attractive proxy to the steadily growing domestic spirits market with high entry barriers, with a pan-India presence, popular brand portfolio across price points, and dominant market share of over 55%. While we have always been bullish on the company’s long-term growth prospects, we now find cyclical concerns about high financial leverage and input cost concerns abating. With the recent fund-raising of US$350MM and treasury stake sale proceeds of US$186MM, leverage concerns have been alleviated to a large extent. Net debt/equity has decreased from 3x in FY09 to <1x for FY10E. Potential for earnings upgrades While we don’t anticipate much upside risk to FY10 earnings, lower interest costs and better margin profile could help push up FY11 and FY12 earnings. How much recovery is priced into the stock? UNSP had been a significant underperformer in the Indian consumer space YTD on account of three key concerns: (1) high financial leverage; (2) steep raw material inflation; and (3) high group leverage overhang. Except for the third issue, other concerns appear to be abating. Financial leverage has reduced and input costs seem to have peaked out. Hence, we would expect the stock to outperform the consumer space over next 12-18 months. Price target and key risks We have sum-of-the-parts-based Sept-10 price target of Rs1,140. We use an EV/EBITDA target multiple of 13x for the domestic business, which is at a 20% premium to global spirits companies, and an 8x EV/EBITDA target multiple for the Whyte & Mackay business, which is at a 25% discount to global spirits valuations. Key risks to our PT and rating are: (1) a sharp rise in ENA prices if sugar cane crop this year comes in significantly lower; (2) a significant slowdown in domestic liquor consumption; and (3) high group leverage and promoter’s pledged stake in UNSP.

India Beverages Latika Chopra, CFAAC (91-22) 6157-3584 [email protected]


Vineet Sharma, CFA (852) 2800-8523

[email protected]



0200400600800

100012001400


Rs

UNSP.BO Share Price




52-week range (Rs) 425.65 –

1,106 Mkt cap. (Rs MM) 137,036 Mkt cap. (US$ MM) 2914 Avg daily value (US$ MM) 19.5 Avg daily volume (MM) 1.0 Shares O/S (MM) 126 Date of price 05 Nov 09 Index: Sensex 16063.9 Free float (%) 63 Exchange rate 47.0

Source: Bloomberg. Bloomberg: UNSP IN; Reuters: UNSP.BO Rs MM, year-end March FY09 FY10E FY11E FY12E Revenue 54,681 62,594 71,556 80,460 Net profit 1,872 3,691 5,860 7,643 EPS (Rs) 21.0 30.2 48.0 62.6 DPS (Rs) 2.4 3.0 4.8 6.3 Net sales growth (%) 18 14 14 12 Net profit growth (%) 14 97 59 30 EPS growth (%) 12 44 59 30 ROCE (%) 11 12 14 16 P/E (x) 50.5 35.1 22.1 16.9 P/BV (x) 4.0 2.5 2.2 2.0 EV/EBITDA (X) adjusted 16.6 14.5 12.0 10.2 Dividend yield (%) 0.2 0.3 0.5 0.6 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

277



United Spirits: Summary of financials Rs in millions, year-end MarchProfit and loss statement Cash flow statement

FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E Revenue 54,681 62,594 71,556 80,460 EBIT 9,966 12,270 14,679 17,190 % change Y/Y 18% 14% 14% 12% Depreciation 926 957 1,037 1,117 EBITDA 10,892 13,227 15,716 18,307 Change in working capital -4,753 -3,930 -3,260 -3,350 % change Y/Y 1% 21% 19% 16% Taxes -2,314 -2,462 -3,908 -5,097 EBITDA Margin (%) 20% 21% 22% 23% Interest 7,176 6,115 4,909 4,449 EBIT 9,966 12,270 14,679 17,190 Others -8,646 -6,115 -4,909 -4,449 % change Y/Y -1% 23% 20% 17% Cash flow from operations 2,354 6,835 8,548 9,860 EBIT Margin (%) 18% 20% 21% 21% Interest expense (Net) 7,176 6,115 4,909 4,449 Capex -952 -1,000 -2,000 -2,000 Earnings before tax 2,790 6,155 9,770 12,741 Free cash flow 1,402 5,835 6,548 7,860 % change Y/Y -39% 121% 59% 30% Equity raised/ (repaid) 50 25,109 0 0 Tax 916 2,462 3,908 5,097 Debt raised/ (repaid) -2,294 -22,163 -2,700 -2,700 Associates/Minority interest -3 -2 -2 -2 Other 37 -6,608 -5,401 -4,940 Net Income (Adjusted) 1,872 3,691 5,860 7,643 Dividends paid -143 -369 -586 -764 % change Y/Y 14% 97% 59% 30% Change in cash -948 1,805 -2,139 -544 Shares Outstanding 89 122 122 122 Beginning cash 5,437 4,489 6,294 4,155 EPS (Adjusted) 21.0 30.2 48.0 62.6 Ending cash 4,489 6,294 4,155 3,611 % change Y/Y 12% 44% 59% 30% DPS 2.4 3.0 4.8 6.3 Balance sheet Ratio analysis

FY09 FY10E FY11E FY12E % FY09 FY10E FY11E FY12E Cash and cash equivalents 4,490 6,294 4,155 3,611 EBITDA margin 20% 21% 22% 23% Accounts receivable 8,880 10,289 11,763 13,226 EBIT margin 18% 20% 21% 21% Inventories 17,458 20,579 23,525 26,453 Net profit margin 3% 6% 8% 9% Others 9,544 10,499 11,549 12,703 Current assets 40,372 47,662 50,992 55,993 Goodwill 44,738 44,738 44,738 44,738 Sales growth 18% 14% 14% 12% Investments 9,501 9,501 9,501 9,501 Net profit growth 14% 97% 59% 30% Net fixed assets 16,558 16,601 17,564 18,448 EPS growth 12% 44% 59% 30% Others 7,249 7,249 7,249 7,249 Total assets 118,418 125,751 130,044 135,929 Interest coverage (x) 1.4 2.0 3.0 3.9 Liabilities Net debt to total capital 0.7 0.6 0.4 0.4 Payables 13,879 15,434 17,644 19,839 Net debt to equity 2.9 1.5 0.8 0.7 Others 2,584 2,584 2,584 2,584 Sales/assets 0.5 0.6 0.7 0.7 Total current liabilities 16,463 18,019 20,228 22,424 Assets/equity 4.6 2.8 2.0 1.9 Total Loans 73,605 51,442 48,742 46,042 ROE 8% 10% 11% 13% Other liabilities 4,494 4,004 3,513 3,022 ROCE 11% 12% 14% 16% Total liabilities 94,562 73,465 72,484 71,489 Shareholders' equity 23,856 52,287 57,561 64,440 BVPS 267.4 427.9 471.1 527.4 Source: Company, J.P. Morgan estimates.

Sum-of-the-parts valuation for UNSP Target EV/EBITDA Multiple Value UNSP - Domestic 13 145,416 Whyte & Mackay 8 37,650 Total EV 183,066 Net debt 43,510 Mcap 139,556 Target Price 1,142 Source: J.P. Morgan estimates.

278



Urbi www.urbi.com

Overweight Ps25.99


Company description Urbi is one of the largest Mexican lower-income homebuilders, with more than 40k units sold last year and over 300k units built during 28 years of operations. The company also has the highest margins among its peers, with EBITDA margin at 29.9% in 9M09.

Post mortem Despite the expected decrease of 13% in revenues this year, we expect Urbi to growth more than its peers in 2010 given (1) its exposure to the northern states of Mexico, which are linked to a recovery in the US; (2) Urbi’s potential to add middle-income and high-income products if demand improves; and (3) its clear expansion strategy.

Potential for earnings upgrades We believe that Urbi has a business model that should lead to higher growth vs its peers. Despite a more conservative growth outlook for this year, the company has not stopped its plans to open six new SBUs this year (it had 48 SBUs last year), most of them toward the end of the year, and another 5-6 in 2010.

How much recovery is priced into the stock? Urbi is our top pick among the MX HB. The stock has been derated in the past 12 months and now is the cheapest stock on a P/BV basis despite its strong FCF. We believe that the market has not yet given Urbi full recognition for its growth strategy, exposure to northern states and strong free cash flow generation.

Price target and key risks We rate Urbi Overweight with a Dec-10 price target of Ps34, which is the average of our DCF-based valuation and GGM-based valuation. The COE of 11.9% is based on a beta of 1.20, country risk of 2.4%, and a risk-free rate of 3.5%, resulting in a WACC of 11.8%. As downside risks to our rating we cite lower-than-expected ROEs and revenue growth, the result of slower-than-expected expansion.

Mexico Mexican Homebuilders Adrian E HuertaAC (52 81) 8152-8720 [email protected]



Absolute (%) -12 -9 27 Relative (%) -13 -18 -25

Source: Bloomberg.

Company data 52-week range (LC) 18.00-29.56 Mkt cap. (LCMM) 25,406 Mkt cap. (US$MM) 1,979 Avg daily value (US$MM) 4.1 Avg daily volume (MM) 2.0 Shares O/S (MM) 976.45 Date of price 11/25/2009 Index: Bolsa 31,364 Free float (%) 46% Exchange rate 12.84

Source: Bloomberg.

Bloomberg: Urbi* MM Reuters: Urbi* MM.SA LC in millions, year-end December FY08 FY09E FY10E FY11E Sales 15,003 13,114 15,738 18,125 Net profit 2,168 1,922 2,541 3,074 EPS (LC) 2.22 1.97 2.60 3.15 FD EPS (LC) 2.22 1.97 2.60 3.15 DPS (LC) - - - - Sales growth (%) 17.4% -12.6% 20.0% 15.2% Net profit growth (%) 18.3% -11.4% 32.2% 21.0% EPS growth (%) 18.3% -11.4% 32.2% 21.0% ROE (%) 15.1% 11.8% 13.8% 14.5% P/E (x) 11.7 13.2 10.0 8.3 FD P/E (x) 11.7 13.2 10.0 8.3 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

279



Urbi: Summary of financials Profit and loss statement LC in millions, year-end December

FY08 FY09E FY10E FY11ERevenue 15,003 13,114 15,738 18,125 % change Y/Y 17% -13% 20% 15%Gross margin (%) 38.0% 39.2% 39.2% 39.2%EBITDA 4,160 3,930 4,846 5,589 % change Y/Y 19.4% -5.5% 23.3% 15.3%EBITDA margin (%) 27.7% 30.0% 30.8% 30.8%EBIT 3,171 2,904 3,663 4,392 % change Y/Y 11.2% -8.4% 26.1% 19.9%EBIT margin (%) 21.1% 22.1% 23.3% 24.2%Net interest (109) (193) (70) (40)Earnings before tax 3,085 2,735 3,616 4,375 % change Y/Y 17.4% -11.4% 32.2% 21.0%Tax (917) (813) (1,075) (1,301)as % of EBT 29.7% 29.7% 29.7% 29.7%Net income (reported) 2,168 1,922 2,541 3,074 % change Y/Y 18.3% -11.4% 32.2% 21.0%Shares O/S (MM) 976 976 976 976EPS (reported) (LC) 2.22 1.97 2.60 3.15Source: Company, J.P. Morgan estimates.


FY08 FY09E FY10E FY11ECash and cash equivalents 1,985 5,125 5,728 6,764Accounts receivable 11,883 10,240 11,857 13,159Inventories 11,178 11,505 12,470 13,341Others 963 1,166 1,166 1,166Current assets 28,666 30,491 33,677 36,886LT investments 0 0 0 0Net fixed assets 510 733 891 1,096Total assets 30,114 31,889 35,233 38,647Liabilities ST loans 988 1,678 1,678 1,678Payables 2,663 2,199 2,572 2,911Others 1,014 621 621 621Total current liabilities 5,977 5,185 5,558 5,897Long-term debt 4,525 5,035 5,035 5,035Other liabilities 4,235 4,474 4,904 4,904Total liabilities 14,737 14,695 15,498 15,837Shareholders’ equity 15,377 17,194 19,736 22,810BVPS (LC) 15.75 17.61 20.21 23.36Source: Company, J.P. Morgan estimates.


FY08 FY09E FY10E FY11EEBIT 3,171 2,904 3,663 4,392Depreciation & amortization (212) (212) (235) (249)Change in working capital (4,492) 851 (2,210) (1,834)Taxes (917) (813) (1,075) (1,301)Cash flow from operations (2,904) 2,258 996 1,489Capex (300) (328) (393) (453)Disposal/(purchase) 0 0 0 0Net interest (109) (193) (70) (40)Free cash flow (728) 3,834 1,585 1,996Equity raised/(repaid) 0 0 0 0Debt raised/(repaid) 1,808 1,200 0 0Other 0 0 0 0Dividends 0 0 0 0Beginning cash 3,381 1,985 5,125 5,728Ending cash 1,985 5,125 5,728 6,764DPS (LC) - - - -Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December FY08 FY09E FY10E FY11EEBITDA margin 27.7% 30.0% 30.8% 30.8%Operating margin 21.1% 22.1% 23.3% 24.2%Net profit margin 14.5% 14.7% 16.1% 17.0%SG&A/sales 10.3% 9.2% 8.4% 8.4%Sales growth 17.4% -12.6% 20.0% 15.2%Net profit growth 18.3% -11.4% 32.2% 21.0%Sales per share growth 17.4% -12.6% 20.0% 15.2%EPS growth 18.3% -11.4% 32.2% 21.0%Interest coverage (x) 0.00 0.00 0.00 0.00 Net debt to total capital 16.9% 6.6% 3.7% -0.2%Net debt to equity 22.9% 9.2% 5.0% -0.2%Sales/assets 0.50 0.41 0.45 0.47 EBIT margin 21.1% 22.1% 23.3% 24.2%ROCE 15.9% 11.6% 13.4% 12.4%Assets/equity (x) 1.96 1.85 1.79 1.69 ROI 15.9% 11.6% 13.4% 12.4%ROE 15.1% 11.8% 13.8% 14.5%Source: Company, J.P. Morgan estimates.

280



Vakifbank www.vakifbank.com

Overweight Price: TRY 3.2

Price Target: TRY 5.4

Company description Vakifbank is the 6th largest bank (by total assets) in Turkey; the 2nd largest publicly traded state bank with over 500 branches, 9,000 employees and c.TRY35bn in loans & c. TRY43bn in customer deposits. The GDF (Turkish Prime Ministry’s General Directorate of Foundations) manages foundations owning c.58% of Vakifbank shares. Vakifbank is primarily exposed to the corporate sector (c. 55% of loan book), with increasing penetration into retail and consumer segments.

Post mortem Vakifbank’s key strengths include i) strong liquidity (L/D ratio of 82%, mostly in TRY) ii) stable deposit base (YTD growth 15%, vs sector c.8%) iii) solid capital base with 09E tier 1 of 14.5%, supporting dividends (09E 25% payout). In our view Vakifbank is adequately positioned for growth into 2010/11 and likely to outpace some of its peers (trend visible in Q3 with c.4% loan growth; capturing 25% of retail mortgage originations), due to its strong local deposit base. We believe loan growth (especially in high margin segments), coupled with normalization of provisions, should drive profitability into 2010 & 2011.

Potential for earnings upgrades JPM expects consensus upgrades throughout 2010, supported by macro recovery, volume growth (2010-09E loan growth at 22%), capital generation and asset quality stabilization (11E NPLs at 5% vs 6.2% in 2009E)

How much recovery is priced into the stock? Despite its strong performance (YTD up 174% vs sector 86%), Vakif trades at a material discount (10E P/NAV 1x vs sector at 1.5x). We believe rerating into 2010 would drive further share price performance (c.70% upside).

Price target and key risks Our Dec-10 PT of TRY5.4 is based on the Gordon growth model (19% ROE, 15% COE & 5% LT growth rate). Key risks include further economic deterioration and the oil price hitting >$110, negatively impacting CAR.

CEEMEA Banks Paul FormankoAC (+44) 207-325-6028 [email protected]


1.0

2.0

3.0

4.0

TL


Price Performance

Source: Bloomberg


Absolute (%) -19.2 -8.6 199.1 Source: Bloomberg

Company data 52-week range (TL) 4.12-1.04 Mkt cap. (YTL bn) 8 Mkt cap. (US$BN) 5.4 Avg daily value (US$MM) 37.1 Avg daily volume (MM) 17.5 Shares O/S (MM) 2,500 Date of price 23 Nov 09 Index (ISE): 45801.4 Free float (%) 25.18% Exchange rate(USD/TRY) 1.5

Source: Bloomberg

Bloomberg: VAKBN TI; Reuters: VAKBN.IS TRY in millions, year-end Dec FY08 FY09E FY10E FY11E Pre-provision op. profit, mn 1,550 2,443 2,460 2,912 Net profit, mn 753 1,140 1,362 1,811 EPS 0.30 0.46 0.54 0.72 EPS growth (%) -17% 51% 19% 33% Tier I ratio (%) 14.6% 14.5% 13.2% 12.3% NPL ratio (%) 4.6% 6.2% 6.1% 5.0% Dividend yield 0.0% 3.6% 6.0% 9.1% RONAV (%) 13.8% 18.4% 18.9% 22.1% P/E (x) 10.6 7.0 5.9 4.4 P/NAV 1.4 1.2 1.0 0.9 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

281



Vakifbank: Summary of Financials Profit and Loss Statement Ratio Analysis TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E Per Share Data Net interest income 1,676 1,975 3,067 3,062 3,444 EPS Reported 0.43 0.30 0.46 0.54 0.72

% Change Y/Y 5.7% 17.8% 55.3% (0.2%) 12.5% EPSAdjusted 0.36 0.30 0.46 0.54 0.72Non-interest income 820 894 906 1,066 1,285 % Change Y/Y 7.1% (16.9%) 51.4% 19.5% 32.9%Fees & commissions 360 466 476 571 713 DPS 0.00 0.00 0.11 0.19 0.29

% change Y/Y 25.0% 29.3% 2.0% 20.0% 25.0% % Change Y/Y (100.0%) - - 67.3% 51.9%Trading revenues 48 51 140 144 167 Dividend yield 0.0% 0.0% 3.7% 6.1% 9.3%

% change Y/Y 4.5% 8.1% 172.6% 3.0% 16.0% Payout ratio 0.0% 0.0% 25.0% 35.0% 40.0%Other Income 266 338 220 260 290 BV per share 2.09 2.27 2.69- 3.06 3.50Total operating revenues 2,496 2,869 3,973 4,128 4,730 NAV per share 2.09 2.27 2.69- 3.06 3.50

% change Y/Y 4.5% 14.9% 38.5% 3.9% 14.6% Shares outstanding 2,500.0 2,500.0 2,500.0- 2,500.0 2,500.0Admin expenses -537 -762 -884 -964 -1,050

% change Y/Y (8.4%) 41.9% 16.0% 9.0% 9.0% Return ratios Other expenses (458) (557) (646) (704) (768) RoRWA 3.5% 2.2% 2.8% 2.8% 3.0%Pre-provision operating profit 1,502 1,550 2,443 2,460 2,912 Pre-tax ROE 26.8% 17.0% 23.0% 23.7% 27.6%

% change Y/Y 4.3% 3.2% 57.6% 0.7% 18.3% ROE 18.7% 13.8% 18.4% 18.9% 22.1%Loan loss provisions -368 -624 -1,017 -757 -648 RoNAV 18.7% 13.8% 18.4% 18.9% 22.1%Other provisions - - - - - Earnings before tax 1,299 925 1,425 1,703 2,264 Revenues

% change Y/Y 27.6% (28.8%) 54.0% 19.5% 32.9% NIM (NII / RWA) 4.3% 4.3% 5.5% 4.8% 4.7%Tax (charge) (227) (172) (285) (341) (453) Non-IR / average assets 2.1% 1.9% 1.6% 1.7% 1.8%

% Tax rate 17.5% 18.6% 20.0% 20.0% 20.0% Total rev / average assets 6.3% 6.1% 7.0% 6.4% 6.5%Minorities 0 0 0 0 0 NII / Total revenues 67.1% 68.8% 77.2% 74.2% 72.8%Net Income (Reported) 1,072 753 1,140 1,362 1,811 Fees / Total revenues 14.4% 16.3% 12.0% 13.8% 15.1% Trading / Total revenues 1.9% 1.8% 3.5% 3.5% 3.5% Balance sheet TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E ASSETS Cost ratios Net customer loans 23,470 30,502 34,414 41,494 50,878 Cost / income 39.8% 46.0% 38.5% 40.4% 38.4%

% change Y/Y 30.1% 30.0% 12.8% 20.6% 22.6% Cost / assets 2.3% 2.5% 2.5% 2.5% 2.3%Loan loss reserves 1,143 1,371 1,879 2,238 2,521 Staff numbers 8,700 9,567 10,332 11,159 12,052Investments 11,508 12,039 15,076 15,478 15,927 Other interest earning assets 6,302 7,910 9,303 8,511 9,368 Balance Sheet Gearing

% change Y/Y - - - - - Loan / deposit 85.3% 85.9% 83.2% 90.4% 97.5%Average interest earnings assets 38,875 46,394 55,496 63,460 72,730 Investments / assets 27.1% 23.1% 24.9% 22.9% 20.4%Goodwill - - - - - Loan / assets 58.0% 61.1% 59.3% 64.9% 68.5%Other assets 1,479 1,788 1,865 2,018 2,130 Customer deposits / liabilities 77.6% 79.8% 80.2% 81.0% 79.2%Total assets 42,408 52,193 60,609 67,449 78,241 LT Debt / liabilities 0.0% 0.0% 0.0% 0.0% 0.0% LIABILITIES Asset Quality / Capital Customer deposits 28,863 37,120 43,211 48,422 55,018 Loan loss reserves / loans 4.6% 4.3% 5.2% 5.1% 4.7%

% change Y/Y 16.2% 28.6% 16.4% 12.1% 13.6% NPLs / loans 4.6% 4.6% 6.2% 6.1% 5.0%Long term funding - - - LLP / RWA 1.18% 1.66% 2.32% 1.38% 0.96%Interbank funding 6,769 7,457 8,519 8,932 9,612 Loan loss reserves / NPLs 100.0% 94.2% 83.9% 84.5% 93.4%Average interest bearing liabs 33,441 40,125 48,170 54,558 61,008 Growth in NPLs 14.1% 27.4% 53.9% 18.3% 1.9%Other liabilities 1,526 1,928 2,127 2,418 4,846- RWAs 31,268 37,682 43,871 54,701 67,565Retirement benefit liabilities - - - - - % YoY change 50.1% 20.5% 16.4% 24.7% 23.5%Shareholders' equity 5,226 5,671 6,736 7,662 8,748 Core Tier 1 15.6% 14.6% 14.5% 13.2% 12.3%Minorities 0 0 0 0 0 Total Tier 1 15.6% 14.6% 14.5% 13.2% 12.3%Total liabilities & Shareholders Equity 42,408 52,193 60,609 67,449 78,241 Source: Company reports and J.P. Morgan estimates.

282



VanceInfo Technologies www.vanceinfo.com

Overweight US$17.0


Company description VanceInfo (VIT) is the largest China-based IT services vendor for the US and European clients. It also earns a significant proportion of its revenue from local clients based in China. The company provides research and development, application development and maintenance, and enterprise services.

Post mortem The Chinese IT sector is still in its early growth phase. In 2008, VanceInfo’s revenue from entities headquartered in China grew 201% Y/Y. We expect VanceInfo to continue to benefit from IT spending growth in China. In addition, we also expect VIT to benefit from the offshoring market in China which is expected to grow at a CAGR of 23% from 2008 to 2013 versus the 6.2% growth for the offshore industry worldwide (according to IDC data).

Potential for earnings upgrades We expect gross margins to improve due to: (1) better billing rates; and (2) improved utilization rates, driven by higher spending from domestic and global customers.

How much recovery is priced into the stock? The company may see an upside in its earnings as the global macros improve, from two drivers: (1) improvement in domestic demand as more MNCs increase IT spending in China to capture the higher growth of the country; and (2) IT spending recovery in the US and Europe due to macro improvements.

Price target and key risks Our Dec-10 price target of US$23 is based on our DCF valuation with WACC of 11% and 0% terminal growth rate. We assume a long-term sales growth rate of 15%. Our PT implies a PEG ratio of 1.0 on our FY11E earnings and 09-12 EPS CAGR estimates. We believe VanceInfo should at least trade at 1x PEG, given the positive secular growth outlook. Key downside risks to our price target are: (1) slower-than-expected growth in macro and outsourcing activities; and (2) termination of a key account, such a Microsoft, TIBCO, or Huawei.




0

10

20

$


Price Performance

VIT share price ($S&P500 (rebased)

Source: Bloomberg.


Absolute (%) -5.6 2.1 107.5 Relative (%) -7.7 -2.0 103.4

Source: : Bloomberg.

Company data 52-week range (US$) 4.2-21.1 Mkt cap. (Rmb MM) 4,776 Mkt cap. (US$ MM) 701 Avg daily value (US$MM) 7.61 Avg daily volume (MM) 0.52 Shares O/S (MM) 41 Date of price 12-Nov-09 Index: NYSE 7,063 Free float (%) 37 Exchange rate(Rmb/US$) 6.83


Bloomberg: VIT US; Reuters: VIT US$ in millions, year-end December FY08 FY09E FY10E FY11E Sales 102.7 143.1 185.7 236.1 Net profit 16.2 20.1 27.0 35.1 GAAP EPS (US$) 0.40 0.49 0.65 0.83 Adj. EPS (US$) 0.4 0.5 0.7 0.9 DPS (US$) 0.0 0.0 0.0 0.0 Sales growth (%) 63.7 39.4 29.8 27.2 Net profit growth (%) 69.0 24.5 34.1 29.8 EPS growth (%) 79.8 23.1 31.7 28.0 ROE (%) 13.3 14.1 15.9 17.4 GAAP P/E (x) 42.6 34.6 26.2 20.5 Adj. P/E (x) 39.2 32.3 24.8 19.6 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 12 November 2009.

283



VanceInfo Technologies: Summary of financials Profit and loss statement US$ in millions, year-end December

FY08 FY09E FY10E FY11ERevenue 102.7 143.1 185.7 236.1% change Y/Y 63.7 39.4 29.8 27.2 Gross margin (%) 39.0 37.2 37.0 37.3EBITDA 18.4 26.1 33.5 43.6% change Y/Y 61.8 41.6 28.5 30.0 EBITDA margin (%) 17.9 18.2 18.1 18.5EBIT 14.7 20.7 27.0 35.6% change Y/Y 66.2 40.9 30.1 32.1 EBIT margin (%) 14.3 14.5 14.5 15.1Net interest 2.0 1.2 2.1 2.5Earnings before tax 17.4 21.8 29.0 38.1% change Y/Y 77.3 25.7 33.0 31.3 Tax -1.3 -1.7 -2.0 -3.0as % of EBT 7.5 7.8 7.0 8.0Net income (reported) 16.2 20.1 27.0 35.1% change Y/Y 69.0 24.5 34.1 29.8Shares O/S (MM) 40.2 41.3 41.8 42.4EPS (reported) (US$) 0.40 0.49 0.65 0.83Source: Company, J.P. Morgan estimates.


FY08 FY09E FY10E FY11ECash and cash equivalents 81.4 96.5 116.2 142.0Accounts receivable 36.8 51.7 65.5 82.1Deferred tax 0.0 0.0 0.0 0.0Others 3.4 4.3 4.3 4.3Current assets 121.6 152.6 186.0 228.5LT investments 2.9 2.6 2.6 2.6Net fixed assets 11.3 13.2 17.1 21.4Others 19.7 18.9 18.1 17.4Total assets 155.5 187.2 223.8 269.9Liabilities Provisions 0.0 0.0 0.0 0.0Payables 3.2 4.2 5.4 6.7Others 18.9 26.0 32.8 40.9Total current liabilities 22.1 30.2 38.2 47.7Long term debt 0.0 0.0 0.0 0.0Other liabilities 1.9 1.9 1.9 1.9Total liabilities 23.9 32.1 40.1 49.6Shareholders' equity 131.5 155.1 183.6 220.3Source: Company, J.P. Morgan estimates.


FY08 FY09E FY10E FY11ENet Income 16.2 20.1 27.0 35.1Depr. & Amortisation 3.7 5.4 6.6 8.0Change in working capital -4.7 -7.7 -5.8 -7.2Other 0.2 1.4 1.5 1.6Cash flow from operations 15.4 19.2 29.3 37.5Capex -6.2 -6.5 -9.7 -11.6Disposal/ (purchase) -3.9 0.2 0.0 0.0Cash flow from investing -10.0 -6.2 -9.7 -11.6Free cash flow 9.2 12.7 19.6 25.8Equity raised/ (repaid) 2.9 2.1 0.0 0.0Debt raised/ (repaid) 0.0 0.0 0.0 0.0Other -5.8 0.0 0.0 0.0Dividends paid 0.0 0.0 0.0 0.0Cash flow from financing -2.8 2.1 0.0 0.0Net change in cash 2.5 15.1 19.6 25.8F/X effects 0.7 0.0 0.0 0.0Beginning cash 78.2 81.4 96.5 116.2Ending cash 81.4 96.5 116.2 142.0Source: Company, J.P. Morgan estimates.


FY08 FY09E FY10E FY11EGross Margin 39.0 37.2 37.0 37.3EBITDA margin 17.9 18.2 18.1 18.5Operating Margin 14.3 14.5 14.5 15.1Net Margin 15.8 14.1 14.5 14.8SG&A/Sales 4.0 3.1 3.0 3.0Sales growth 63.7 39.4 29.8 27.2Operating Profit Growth 66.2 40.9 30.1 32.1Net profit growth 69.0 24.5 34.1 29.8EPS (Reported) growth 79.8 23.1 31.7 28.0Interest coverage (x) 213 518 n.m. n.m.Net debt to total capital n.m. n.m. n.m. n.m.Net debt to equity n.m. n.m. n.m. n.m.Asset Turnover (%) 66.0 76.4 83.0 87.5ROE (%) 13.3 14.1 15.9 17.4ROIC (%) 32.2 31.2 34.1 37.2Source: Company, J.P. Morgan estimates.

284



Xinao Gas www.xinaogas.com

Overweight 17.28


Company description Xinao Gas distributes gas in China, with operations in over 70 cities and districts, and covering a total urban population of over 40 million as of December 2008. The group focuses on piped-gas project cities with strong industrial and commercial background. The company has one of the most established track records in the China city gas sector amongst its listed peers. Post mortem (1) Strong project execution track record as evidenced by the >15% ROE delivered over the past 3-5 years. (2) Focus on high-volume gas consumers, such as industrial and commercial users, to foster further volume growth.

Potential for earnings upgrades We expect gas supplies in China to improve over the next 1-2 years as more long-distance pipelines (W-E Pipeline No.2 and Sichuan-to-East Pipeline). Also, we expect the impending new gas pricing policy to introduce an automatic cost-pass through mechanism. These measures will likely enhance Xinao’s future gas sales and improve protection on its gas sales margins.

How much recovery is priced into the stock? The recovery angle on Xinao comes from potential upside from higher-than-expected connection fee revenue due to a recovery in the property market. Given management’s conservative guidance and the continued recovery in the property market, we expect more positive surprises.

Price target and key risks Our Dec-10 price target of HK$22.2 is based on our DCF valuation, assuming a WACC of 10.1%, and a terminal growth rate of 2%. Key risks to our PT include lower-than-expected gas sales, and new household connections.

China Natural Gas Pipeline and Distribution Boris KanAC (852) 2800-8573 [email protected]


Price performance

2

10

18

HK$


2688.HK share price (HK$R-CHIP (rebased)


1M 3M 12M Absolute (%) 13% 34% 152% Relative (%) 13% 38% 120%


52-week range (HK$) 6.0-19.0 Mkt cap. (HK$MM) 17,559 Mkt cap. (US$MM) 2,266 Avg daily value (US$MM) 1.4 Avg daily volume (MM) 1.8 Shares O/S (MM) 1,050 Date of price 5-Nov-09 Index (HSI Red Chip) 3,292 Free float (%) 64 Exchange rate 7.75

Source: Bloomberg. Bloomberg: 2688 HK; Reuters: 2688.HK Rmb in millions, year-end December FY08 FY09E FY10E FY11E Sales 8,266 13,405 15,151 17,157 EBITDA 1,779 2,147 2,566 2,976 Net profit 632 822 1,021 1,237 EPS (Rmb cents) 0.62 0.78 0.97 1.18 Net profit growth (%) 24.3 30.3 24.1 21.1 EPS growth (%) 21.8 25.3 24.1 21.1 ROE (%) 15.8 17.9 19.2 19.9 P/E (x) 25.2 20.1 16.2 13.4 EV/EBITDA (%) 12.2 10.1 8.4 7.3 P/BV (x) 4.1 3.7 3.2 2.7 Dividend yield (%) 0.9 1.1 1.4 1.7 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

285



Xinao Gas: Summary of financials Rmb in millions, year-end December Profit and loss statement Cash flow statement FY08A FY09E FY10E FY11E FY08A FY09E FY10E FY11E

Revenues 8,266 13,405 15,151 17,157 EBIT 1,512 1,841 2,217 2,588 % change Y/Y 43.6 62.2 13.0 13.2 Depreciation & amortisation 276 306 349 388 Gross Margin (%) 27.2 25.1 25.2 25.1 Change in working capital 206 -46 -16 115 EBITDA 1,779 2,147 2,566 2,976 Taxes -186 -339 -470 -568 % change Y/Y 36.8 20.7 19.5 16.0 Cash flow from operations 1,450 1,694 2,093 2,667 EBITDA Margin (%) 21.5 16.0 16.9 17.3 Capex -1,186 -1,243 -1,164 -969 EBIT 1,512 1,841 2,217 2,588 Disposal/ (purchase) -229 0 -1 0 % change Y/Y 38.0 21.7 20.5 16.7 Net Interest -381 -367 -340 -314 EBIT Margin (%) 18.3 13.7 14.6 15.1 Free cash flow 34 395 713 1,366 Net Interest -381 -367 -340 -314 Equity raised/ (repaid) 0 0 0 0 Earnings before tax 1,131 1,473 1,877 2,274 Debt raised/ (repaid) 804 0 0 -811 % change Y/Y 38.9 30.2 27.4 21.2 Other -503 0 0 0 Tax (260) (339) (469) (568) Dividends paid -119 -158 -206 -255 as % of EBT 23.0 23.0 25.0 25.0 Beginning cash 1,693 1,725 1,680 1,933 Net Income (Reported) 632 822 1,021 1,237 Ending cash 1,725 1,680 1,933 1,997 % change Y/Y 24.3 30.3 24.1 21.1 DPS (Rmb) 0.16 0.20 0.24 0.29 Shares Outstanding 1010 1050 1050 1050 EPS (reported) (Rmb) 0.62 0.78 0.97 1.18 % change Y/Y 21.8 25.3 24.1 21.1 Balance sheet Ratio analysis FY08A FY09E FY10E FY11E % FY08A FY09E FY10E FY11E

Cash 1,725 1,680 1,933 1,997 EBITDA margin 21.5 16.0 16.9 17.3 Accounts receivable 1,431 2,745 3,061 3,419 Operating margin 18.3 13.7 14.6 15.1 Inventories 254 412 466 527 Net profit margin 7.6 6.1 6.7 7.2 Others 944 1,290 1,421 1,572 SG&A/sales 14.0 14.0 13.0 12.3 Current assets 4,354 6,127 6,881 7,515 Sales per share growth 43.6 62.2 13.0 13.2

Sales growth 43.6 62.2 13.0 13.2 LT investments 1,829 2,017 2,206 2,394 Net profit growth 24.3 30.3 24.1 21.1 Net fixed assets 8,391 9,328 10,143 10,724 EPS growth 21.8 25.3 24.1 21.1 Total assets 14,574 17,472 19,230 20,633 Interest coverage (x) 4.0 5.0 6.5 8.2

Net debt to equity 86.4 75.7 60.5 38.6 Liabilities Sales/assets 56.7 76.7 78.8 83.2 ST loans 1,869 1,869 1,869 1,869 Assets/equity 342.4 355.1 335.3 307.3 Payables 2,752 4,464 4,921 5,572 ROE 15.8 17.9 19.2 19.9 Others 806 1,017 1,115 1,229 Total current liabilities 5427 7350 7905 8670 Long term debt 3534 3534 3534 2723 Other liabilities 1357 1670 2058 2528 Total liabilities 10318 12554 13497 13921 Shareholders' equity 4256 4920 5735 6715 BVPS (Rmb) 4.21 4.69 5.46 6.39 Source: Company, J.P. Morgan estimates.

286



Yulon Motor www.yulon-motor.com.tw

Overweight NT$40.0


Company description Yulon Motor was established in 1953 and listed on TAIEX in 1976. It is the No.3 auto maker in Taiwan with 11.9% market share year-to-October. The company is now a pure OEM auto maker in Taiwan for Nissan and Buick, while its subsidiary Yulon Nissan (2227 TT) is in charge of sales and R&D after it spun off from Yulon Motor in 2003. Yulon launched its own brand Luxgen MPV in the Taiwan market in 3Q09 and plans to launch in China in 2010. Post mortem Business outlook in 2010:We believe the Taiwan auto market will continue its recovery trend in 2010 with 5% growth to 300,000 units from around 260,000 units in 2009. On a top-down view, we believe Yulon being one of the top three players will benefit from this trend. From a bottom-up perspective, the company’s strong product pipeline has and will continue to assist its market share gain next year. All these will translate into bottom-line growth, in our view. Potential for earnings upgrades Potential benefit from appreciation of land price: On the asset angle, Yulon has exposure to land asset in Taipei County which is planned to be developed into commercial and residential projects in the next couple of years. For the property market, we believe the strength of land price appreciation will be stronger than that of housing prices. Yulon, as a result, could benefit from the appreciation in its land value and hence a rise in its NAV. How much recovery is priced into the stock? Risks to our investment theme: The launch of its own brand product in Taiwan and in the future in China could be a swing factor for Yulon’s financial position and profitability. On land asset, its ability to unlock hidden value could also be a key factor for its earnings growth in the next few years. Price target and key risks We maintain our Overweight rating on Yulon and our Dec-10 PT of NT$50, based on NAV analysis. Risks to our analysis are worse-than-expected sales growth and earnings in both Taiwan and China.

Taiwan Automobile Manufacture Nick LaiAC (886-2) 2725-9864 [email protected]

J.P. Morgan Securities (Taiwan) Limited.

Price performance (rebased)

-20%

30%

80%

130%

180%

230%


Yulon Motor TSE

Source: Bloomberg.



Source: Bloomberg.

Company data 52-wk range (NT$) 11.7-42.6 Mkt cap. (NT$B) 62.8 Mkt cap. (US$MM) 1,932 Avg. daily value (US$MM) 21.89 Avg. daily volume (MM) 21 Avg. daily value (NT$MM) 712 Shares O/S (MM) 1,571 Date of price 5-Nov-09 Index (TWSE) 7,417.5 Free float (%) 40 Exchange rate (NT$/US$1) 32.5

Source: Bloomberg.

Bloomberg: 2201 TT; Reuters: 2201.TW NT$ in millions, year-end December 2008 2009E 2010E 2011E Sales 17,504 17,367 18,390 20,033 Net profit 401 1,465 1,075 1,494 EPS (adj.-NT$) 0.26 0.94 0.69 0.96 P/E (x) 155.6 42.6 61.2 44.1 P/B (x) 1.1 1.1 1.1 1.0 ROE 0.7% 2.5% 1.8% 2.5% Div yield 1.5% 0.2% 0.7% 0.5% Sales growth -27.1% -0.8% 5.9% 8.9% EPS growth -87.7% 265.7% -26.6% 39.0% Gross margin 10% 11% 11% 10% Net margin 2% 8% 6% 7% Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

287



Yulon Motor: Summary of financials NT$ in millions, year-end December Profit and loss statement Cash flow statement 2007 2008 2009E 2010E 2011E 2007 2008 2009E 2010E 2011E Net Sales 24,025 17,504 17,367 18,390 20,033 Net Income 3,102 401 1,465 1,075 1,494 Gross Profit 2,422 1,825 1,834 1,949 2,050 Depreciation 520 555 420 317 288 Operating Income 999 313 808 862 878 Amortization 0 0 20 20 20 Interest Income 108 141 113 100 78 Dec(Inc)-A/R (232) 680 (399) (74) (67) Investment Income 1,996 0 58 145 629 Dec(Inc)-Inventory 379 1,035 (543) (149) (254) Total Non-Op.Income 2,649 3,412 915 395 866 Inc(Dec)-A/P 323 (1,433) 1,018 197 181 Interest Expenses 2 0 2 0 0 Other adj. (834) 453 (151) (446) 64 Total Non-Op. Exp. 60 3,012 20 7 8 Cash Flow-Operating 3,257 1,690 1,829 940 1,726 Pre-Tax Income 3,589 713 1,703 1,250 1,737 Sales (Purchase) LT Invest (1,364) (2,584) (2,360) (2,950) (1,950) Net Income 3,102 401 1,465 1,075 1,494 Sales (Purchase) of FA 1,416 3,351 (435) (115) (105) EPS (NT$- adj) 2.09 0.26 0.94 0.69 0.96 Others (42) 79 391 446 (164) Cash Flow-Inv. 9 846 (2,404) (2,619) (2,219) Margin (%) Free cash flow 3,267 2,536 (575) (1,679) (493) Gross margin 10.1% 10.4% 10.6% 10.6% 10.2% Dividend Paid (1,228) (883) (126) (421) (309) Operating margin 4.2% 1.8% 4.7% 4.7% 4.4% Inc(Dec)-S-T Debt 3 2 1 0 0 Net margin 12.9% 2.3% 8.4% 5.8% 7.5% Inc(Dec) L-T Debt 0 0 0 0 0 Others (286) (141) 0 0 0 Growth (%) Cash Flow-Financing (1,512) (1,022) (125) (421) (309) Sales -11% -27.1% -0.8% 5.9% 8.9% Cash Equiv.-Begin 5,122 6,877 8,391 7,691 5,591 PAT 4% -87.1% 265.7% -26.6% 39.0% Cash Equiv.-End 6,877 8,391 7,691 5,591 4,790 EPS 3% -87.7% 265.7% -26.6% 39.0% Balance sheet Ratio analysis NT$mn 2007 2008 2009E 2010E 2011E Financial structure 2007 2008 2009E 2010E 2011E Cash & Equivalent 6,877 8,391 7,691 5,591 4,790 Total debt / total asset 7% 0.2% 0.2% 0.2% 0.2% MarketableSecurity 400 122 82 82 82 Net debt to equity -5% -14.6% -13.0% -9.3% -7.8% A/R & N/R 947 267 666 740 808 Liquidity Inventories 3,045 2,010 2,553 2,703 2,956 Current ratio 1.5 2.8 2.3 1.9 1.8 Total Current Assets 13,018 12,156 12,358 10,482 10,001 Quick ratio 0.9 2.0 1.6 1.2 1.0 Long-term Investment 38,126 36,785 39,145 42,095 44,045 Interest cover (x) 1,582.6 709.9 11,776.0 16,369.1 Total Fixed Assets 14,653 12,322 12,338 12,135 11,952 Margins Total Other Assets 5,091 5,412 5,327 5,327 5,327 Gross margin 10% 10.4% 10.6% 10.6% 10.2% Total Assets 70,888 66,675 69,168 70,039 71,325 Operating margin 4% 1.8% 4.7% 4.7% 4.4% Short-term Borrow. 3 4 5 5 5 Net margin 13% 2.3% 8.4% 5.8% 7.5% Bills Issued 0 0 0 0 0 Profitability A/P & N/P 2,111 678 1,696 1,892 2,074 ROE 6% 0.7% 2.5% 1.8% 2.5% Total Current Liab. 8,764 4,338 5,372 5,489 5,590 ROA 4% 0.6% 2.2% 1.5% 2.1% L-T Liabilities 0 0 0 0 0 ROCE 16% 2.0% 7.6% 6.3% 9.1% Total Other L-T Liab 5,907 4,921 5,041 5,141 5,141 Others Total Liabilities 14,671 9,259 10,413 10,629 10,731 BV per share 38 37 37.4 37.8 38.6 Common Stocks 14,773 15,704 15,704 15,704 15,704 Cash dividend (NT$) 0.8 0.6 0.1 0.3 0.2 Total Equity 56,217 57,416 58,755 59,409 60,594 Dividend yield (%) 2% 1.5% 0.2% 0.7% 0.5% Total Liab. & Equity 70,888 66,675 69,168 70,039 71,325 Source: Company, J.P. Morgan estimates.

Yulon Motor—NAV analysis NT$ in millions Valuation method Owned by Yulon Estimated value NAV per share (NT$) Weighting Auto core business (A) 10x core business P/E 100% 8,616 6 9% Long-term investments 2227 Yulon Nissan Motor Market value 47.8% 10,446 7 11% 2204 China Motor JPMorgan price target NT$30 8.0% 3,379 2 4% 9941 Taiwan Acceptance Market value 53.3% 3,908 3 4% Other LT investments 0.6x Book value 15,777 10 17% Total Long-term investment (B) 33,510 22 37% Land/Property Land size (ping) Sindian plant NT$1mn/ping of land on

average 25,310 27,628 18 30%

Other properties and land NT$0.02mn/ping of land on average 760,250 16,500 11 18%

Total land/property (C ) 785,560 44,128 28 48% Sum-of-the-parts value (A) + (B) + (C ) 86,254 55 94% Net (debt)/ cash in 10E 5,537 4 6% Total value or NAV 91,792 59 100% Fair value: 15% discount to NAV 78,023 50 Source: TEJ, Company, J.P. Morgan estimates.

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Açúcar Guarani www.acucarguarani.com.br

Underweight R$5.10

Company description Guarani is the Brazilian subsidiary of Tereos Group, the fourth-largest sugar and ethanol producer worldwide. On a local level, Guarani is the third-largest sugar producer and fifth-largest ethanol producer in Brazil. In the 2009 crop year (ending March ’09), Guarani crushed 14.2mt of sugarcane, of which 29% was owned (61% from third parties) and 63% was destined for sugar production (37% to ethanol). Guarani operates through 6 mills, 5 in the northwestern region of Sao Paulo state and one in Mozambique. Guarani’s shares are listed in Bovespa’s Novo Mercado.

Post mortem Guarani has actually been experiencing strong earnings during the downturn due to the unique fundamentals in the sugar market. Looking over the next year, we expect the deficit in sugar to turn to a surplus, with sugar prices to decline in 2H10.

Potential for earnings upgrades We think lack of sugarcane integration has hurt Guarani, as its sugarcane costs (80% of total production costs) are linked to movements in sugar and ethanol prices. Input costs should continue to stay high as ethanol price increases are likely to offset any softness in sugar prices. At the same time, the company should benefit from lower interest costs as it is quite levered, at 4x ND/EBITDA.

How much recovery is priced into the stock? We think the stock is pricing in spot sugar prices, disregarding the potential for sugar price declines. Guarani is trading at 6.5x consensus EBITDA, a multiple that we would think are fair on normalized, not peak, earnings.

Key risks to our rating Key upside risks to our UW rating on Guarani are (1) higher-than-expected sugar prices; and (2) a weaker-than-expected BRL.




0.0

2.0

4.0

6.0

8.0

Nov-08 M ar-09 Jul-09 Nov-09


1M 3M 12M Absolute (%) -7% -10% 153% Relative (%) -9% -25% 71%


52-week range (BRL) 1.85-6.34 Mkt cap. (BRL) 1,419 Mkt cap. (US$MM) 824 Avg daily value (US$MM) 2.0 Avg daily volume (MM) 0.7 Shares O/S (MM) 287 Date of price 11/25/09 Index: iBovespa 67,917 Free float (%) 30.7% Exchange rate 1.7221

Source:Bloomberg.

Bloomberg: ACGU3 BZ; Reuters: ACGU3.SA R$ in millions, year-end March FY08 FY09E FY10E FY11E Sales 906 1,185 1,378 1,422 Net profit (80) (83) 31 25 EPS (R$) (0.48) (0.50) 0.19 0.15 FD EPS (R$) -0.10 0.02 0.02 0.01 DPS (LC) - - - - Sales growth (%) 7% 28% 16% 3% Net profit growth (%) -165% 30% -138% -21% EPS growth (%) -165% 4% -138% -21% ROE (%) -6.6% -7.6% 2.8% 2.2% P/E (x) NM NM 46.5 NM FD P/E (x) NM 46.09 NM NM Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

291



Açúcar Guarani: Summary of financials Profit and loss statement R$ in millions, year-end March

FY08 FY09E FY10E FY11ERevenue 906 1,185 1,378 1,422 % change Y/Y 7.0% 30.7% 16.4% 3.1%Gross margin (%) 37.2% 41.1% 40.5% 39.2%EBITDA 117 249 281 279 % change Y/Y -53% 56% 13% -1%EBITDA margin (%) 13% 21% 20% 20%EBIT (34) 63 138 166 % change Y/Y -23% -79% 395% 97%EBIT margin (%) -4% 5% 10% 12%Net interest (80) (83) 31 25 Earnings before tax (86) (11) 142 133 % change Y/Y -147% -87% -1389% -6%Tax 14 20 (11) (9)as % of EBT -16% -180% -8% -6%Net income (reported) (80) (83) 31 25 % change Y/Y -165% 30% -138% -21%Shares O/S (MM) 167 167 167 167 EPS (reported) (R$) (0.48) (0.50) 0.19 0.15 Source: Company, J.P. Morgan estimates.

Balance sheet R$ in millions, year-end March

FY08 FY09E FY10E FY11ECash and cash equivalents 96 467 419 263 Accounts receivable 84 120 139 144 Inventories 261 361 338 356 Others 86 68 68 68 Current assets 528 1,017 964 831 LT investments 170 908 908 908 Net fixed assets 1,073 1,238 1,264 1,397 Total assets 2,500 3,163 3,137 3,136 Liabilities ST loans 512 1,135 1,084 1,069 Payables 40 55 65 68 Others 183 193 193 193 Total current liabilities 735 1,383 1,342 1,330 Long-term debt 231 362 346 341 Other liabilities 320 311 311 311 Total liabilities 1,293 2,060 2,003 1,986 Shareholders’ equity 1,206 1,102 1,133 1,149 BVPS (R$) 7.21 6.58 6.77 6.87 Source: Company, J.P. Morgan estimates.

Cash flow statement R$ in millions, year-end March

FY08 FY09E FY10E FY11EEBIT (34) 63 138 166 Depreciation & amortization (48) (151) (187) (143)Change in working capital 47 209 89 0Taxes (9) 14 20 (11)Cash flow from operations -151 11 175 118Capex 325 772 421 170 Disposal/(purchase) Net interest (12) (41) (47) 2 Free cash flow (86) (1,064) (170) 201 Equity raised/(repaid) Debt raised/(repaid) Other -45 327 0 0Dividends - - - - Beginning cash 6 96 467 419 Ending cash 96 467 419 263 DPS (R$) - - - - Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end March FY08 FY09E FY10E FY11EEBITDA margin 13% 21% 20% 20%Operating margin -4% 5% 10% 12%Net profit margin -9% -7% 2% 2%SG&A/sales 0.15 0.24 0.20 0.20 Sales growth 7% 28% 16% 3%Net profit growth -165% 30% -138% -21%Sales per share growth -65% 66% 16% -74%EPS growth -165% 4% -138% -21%Interest coverage (x) (0.36) 0.64 3.17 4.00 Net debt to total capital 0.26 0.33 0.32 0.37Net debt to equity 0.54 0.93 0.89 1.00Sales/assets 0.36 0.37 0.44 0.45 EBIT margin -4% 5% 10% 12%ROCE -0.02 0.04 0.08 0.09Assets/equity (x) 2.07 2.87 2.77 2.73ROI -3.2% -2.6% 1.0% 0.8%ROE -6.6% -7.6% 2.8% 2.2%Source: Company, J.P. Morgan estimates.

292



AU Optronics www.auo.com

Underweight NT$29.8

Price Target: NT$27

Company description AU Optronics (AUO) was formed in 2001 by the merger of Acer Display and Unipac Opto; it then merged with QDI in 2006. AUO is one of the top LCD panel suppliers in the world with a 16% market share in 1H09. It currently runs means of 3.5G, 4G, 5G, 6G, 7.5G, and 8.5G fabs. Its major products include small/medium-sized panels, NB panels, monitor panels, and LCD TV panels.

Post mortem AUO fared worse than Korean peers, given its more volatile earnings in the down-cycle. Unlike Korean peers who were able to fill the capacity from own brands’ support, AUO ran at a lower UT rate and lost market share, given its widening gap with LGD. We believe the inferior position and smaller scale will cap its potential profit upside. Also, the industry’s cost reduction slowing down due to limited room for component price squeeze and marginal fab migration, compared to 4G/5G/6G migrations in the past. This should limit the margin improvement.

Potential for earnings upgrades The company’s earnings are more sensitive to ASP changes. Margin upside should come from better size mix that lifts the blended ASP.

How much recovery is priced into the stock? We believe volume recovery from stronger pull-in demand in 2H09 has been priced in. We believe the sector lacks excitement and we do not expect any near-term catalysts to reverse the downward trend of panel prices. Also, with more capacity ramp-up next year, oversupply may persist through 1H10. AUO’s 2009 peak multiple of 1.1x book is lower than its historical trough valuation, yet it is justified by its poor ROE, in our view. Looking ahead to 2010, unless the blended ASP substantially improves due to a product-mix shift, potential profit upside and re-rating are doubtful, in our view.

Price target and key risks We maintain our Underweight rating; our Jun-10 price target of NT$27 is based on 0.8x FY10E P/BV, implying a mid-to-trough valuation. A key upside risk to our PT is better mainstream size mix accelerating the margin improvement.

Taiwan Semiconductors

Liang-Chun LinAC (886-2) 2725-9863 [email protected] J.P. Morgan Securities (Taiwan) Limited.

JJ ParkAC (822) 758-5717 [email protected] J.P. Morgan Securities (Far East) Limited, Seoul Branch

Winnie Hong (886-2) 2725-9899 [email protected] J.P. Morgan Securities (Taiwan) Limited.

Price performance

50

80

110

140

170


AUO TWSE Source: Bloomberg. Performance



52-week range (NT$) 17.3 - 38.2 Mkt cap. (NT$B) 236.0 Mkt cap. (US$B) 8.1 Avg daily value (US$MM) 59.9 Avg daily volume (MM) 58.2 Shares O/S (MM) 8,827 Date of price 5-Nov 5, 09 Index: TWSE 7,417 Free float (%) 65% Exchange rate NT$32.5/US$1

Source: Bloomberg. Bloomberg: 2409 TT; Reuters: 2409.TW NT$ in billions, year-end December FY08 FY09E FY10E FY11E Sales 423.9 348.2 388.4 384.5 Net profit 21.3 -17.1 6.7 10.1 EPS (NT$) 2.5 -2.0 0.8 1.1 BPS (NT$) 35.2 32.8 33.5 34.3 DPS (NT$) 2.5 0.3 0.0 0.3 Sales growth (%) -11.7 -17.9 11.6 -1.0 Net profit growth (%) -54.6 -180.5 138.9 51.6 EPS growth (%) -55.8 -176.8 138.7 51.5 ROE (%) 7.1 -5.8 2.3 3.4 P/E (x) 11.7 nm 39.5 26.1 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

293



AU Optronics: Summary of financials NT$ in billions, year-end December

Income statement Ratio analysis FY08A FY09E FY10E FY11E % FY08A FY09E FY10E FY11E Revenues 423.9 348.2 388.4 384.5 Gross Margin 13.1 2.0 8.6 10.0 Cost of Goods Sold 368.6 341.1 355.2 346.2 EBITDA margin 26.4 21.9 25.0 24.7 Gross Profit 55.3 7.1 33.3 38.3 Operating Margin 7.2 -3.9 2.5 3.4 R&D Expenses 5.3 6.1 6.3 6.4 Net Margin 5.0 -4.9 1.7 2.6 SG&A Expenses 17.9 14.6 16.7 17.5 R&D/sales 1.3 1.8 1.6 1.7 Operating Profit (EBIT) 30.6 -13.7 9.9 12.9 SG&A/Sales 4.2 4.2 4.3 4.6 EBITDA 111.8 76.3 97.0 94.9 Interest Income 1.8 0.3 0.2 1.2 Sales growth -11.7 -17.9 11.6 -1.0 Interest Expense -4.2 -3.4 -3.8 -3.0 Operating Profit Growth -51.7 -144.8 172.3 30.4 Investment Income (Exp.) -0.3 0.3 0.6 0.4 Net profit (reported) growth -62.3 -180.5 138.9 51.6

Non-Operating Income (Exp.) -1.6 1.1 0.8 0.2 Net profit (New TWN GAAP) growth -54.6 -180.5 138.9 51.6

Earnings before tax 26.3 -15.4 7.7 11.7 EPS (Reported) growth -63.3 -176.8 138.7 51.5 Tax -4.6 -1.3 -1.1 -1.6 EPS (New TWN GAAP) growth -55.8 -176.8 138.7 51.5 Net Income (Reported) 21.3 -17.1 6.7 10.1 Interest coverage (x) 7.3 -4.0 2.6 4.3 Net Income (New TWN GAAP) 21.3 -17.1 6.7 10.1 Net debt to total capital 16.8 21.7 17.0 13.4 TWD Net debt to equity 26.0 34.4 25.9 19.2 EPS (Reported) 2.5 -2.0 0.8 1.1 Asset Turnover 74.8 57.4 65.9 66.9 EPS (New TWN GAAP) 2.5 -2.0 0.8 1.1 Working Capital Turns (X) 22.8 42.5 0.6 0.7 BPS 35.2 32.8 33.5 34.3 ROE 7.1 -5.8 2.3 3.4 DPS 2.5 0.3 0.0 0.3 ROIC 6.7 -3.8 2.3 2.9 Weighted No. of Shares Outstanding (bn) 8.4 8.8 8.8 8.8 Core ROIC 7.5 -3.8 2.4 3.7 Balance sheet Cash flow statement FY08A FY09E FY10E FY11E FY08A FY09E FY10E FY11E Cash and cash equivalents 85.0 69.8 78.1 73.3 Net Income 21.3 -17.1 6.7 10.1 Accounts receivable 23.9 59.1 52.3 55.8 Depr. & Amortization 81.2 90.0 87.1 82.0 Inventories 23.6 39.7 38.1 35.7 Change in working capital 30.4 -15.6 -0.3 -0.5 Others 13.8 7.9 7.6 7.8 Other 0.4 0.4 0.0 0.0 Current assets 146.3 176.6 176.1 172.6 Cash flow from operations 133.2 57.7 93.4 91.5 LT investments 7.8 11.4 12.0 12.4 Capex -98.4 -70.4 -70.0 -70.0 Net fixed assets 389.3 394.7 377.6 365.6 Disposal/ (purchase) -3.9 -29.2 -0.6 -0.4 Total assets 566.9 606.8 589.8 574.6 Free cash flow 34.9 -12.6 23.4 21.5 Liabilities Equity raised/ (repaid) 0.0 0.0 0.0 0.0 ST loans 48.4 20.2 19.3 18.8 Debt raised/ (repaid) -15.0 6.5 -14.5 -23.2 Payables 58.2 78.5 71.7 71.2 Other -2.8 22.7 0.0 -0.5 Others 45.9 55.3 53.0 54.3 Dividends paid -19.7 -2.6 0.0 -2.4 Total current liabilities 152.5 154.0 144.1 144.3 Cash flow from financing -37.4 26.7 -14.5 -26.1 Long term debt 114.3 149.1 135.4 112.7 Other liabilities 0.9 14.2 14.2 14.2 Net change in cash -6.4 -15.1 8.3 -4.9 Total liabilities 267.7 317.3 293.7 271.3 Beginning cash 91.4 85.0 69.8 78.1 Shareholders' equity 299.3 289.4 296.1 303.4 Ending cash 85.0 69.8 78.1 73.3 Source: Company reports, J.P. Morgan estimates.

294



Bank Rakyat Indonesia www.bri.co.id

Underweight Rp7,200


Company description Bank Rakyat has a long history dating back to the 1800s. Owned 57% by the government, BRI is a leading rural micro lender with over 6,000 points of presence across Indonesia. The bank has more recently aggressively grown its corporate lending book, but overall has maintained corporate lending at below 20% of loans.

Post mortem BRI continued lending aggressively through the crisis. The bank was not significantly affected by the crisis, although cost of funds went up. The lagged impact of the slowing of the economy has become evident in 3QFY09, as NPLs have bucked the trend of other major banks and increased further.

Potential for earnings upgrades BRI’s operating profit fell 53% Q/Q in 3QFY09 and our concern is that high NPLs could result in earnings revisions being biased lower. We are also concerned that BRI’s high pace of lending could be unsustainable, and top-line growth may also decelerate. Our thesis on BRI is that the bank is seeing growth pressure in its core micro business, which may subdue medium-term growth rates.

How much recovery is priced into the stock? We do not think that recovery expectations per se have driven the stock recently. The stock has rallied by close to 100% since the beginning of the year to a peak in early October, before declining 16% since.

Price target and key risks We have a DDM-based Dec-10 PT of Rp6,650 for BRI and an Underweight rating. We estimate that over the long-term sustainable ROE could trend lower to 22.6% and peg long-term growth at 10.75%. We use a 10.5% risk-free rate for Indonesian equities, and value BRI with a 1.07 beta. Key risks to our PT include a reversal in recent asset quality deterioration and a return to growth of the core micro lending customer base.

Indonesia Banks Aditya Srinath, CFAAC (62-21) 5291-8573 [email protected]


Price performance

2,000

5,000

8,000

Rp


BBRI.JK share price (Rp)JCI (rebased)

Source: Bloomberg.


Absolute (%) -8.0 3.5 112.9Relative (%) -2.7 2.0 29.8Source: Bloomberg.

Company data 52-week range (Rp) 8,700-2,400 Mkt cap. (RpMM) 88,805,232 Mkt cap. (US$MM) 9,392 Avg daily value (US$MM) 10.1 Avg daily volume (MM) 24.5 Shares O/S (MM) 12,334 Date of price 5-Nov-09 Index: JCI 2395 Free float (%) 43 Exchange rate 9,455

Source: Bloomberg.

Bloomberg: BBRIIJ; Reuters: BBRLJK Year-end Dec (Rp in mn) FY06A FY07A FY08A FY09E FY10EOperating Profit 7,628,701 9,473,095 11,176,603 14,464,582 14,887,397Net Profit 4,257,572 4,838,001 5,958,368 7,115,768 8,434,584Cash EPS (Rp) 350 393 484 577 684Fully Diluted EPS (Rp) 350 393 484 577 684DPS (Rp) 157 173 196 227 231EPS growth (%) 9.8% 12.3% 23.0% 19.4% 18.5%ROE 28.2% 26.6% 28.5% 28.9% 28.4%P/E 21.3 18.9 15.4 12.9 10.9BVPS (Rp) 1,374 1,578 1,814 2,185 2,638P/BV 5.4 4.7 4.1 3.4 2.8Div. Yield 2.1% 2.3% 2.6% 3.0% 3.1%

52-wk range (Rp) 8,700 - 2,400Market cap (Rp mn) 88,805,232Market cap ($ mn) 9,392Shares outstanding (mn) 12,334Fiscal Year End DecPrice (Rp) 7,200Date Of Price 05 Nov 09Avg daily value (Rp mn) 95,601.6Avg daily value ($ mn) 10.1Avg daily vol (mn) 24.5JCI 2,395Exchange Rate 9,455.00


295



Bank Rakyat Indonesia: Summary of financials Income Statement Growth Rates Rp in millions, year end Dec FY06 FY07 FY08 FY09E FY10E FY06 FY07 FY08 FY09E FY10E

NIM (as % of avg. assets) 12.2% 12.0% 10.8% 9.9% 9.1% Loans 19.5% 26.2% 41.4% 20.0% 13.6%Earning assets/assets 78.5% 74.3% 77.2% 84.2% 92.7% Deposits 28.3% 33.0% 21.7% 8.3% 15.1%Margins (% of earning assets) 9.5% 8.9% 8.3% 8.3% 8.4% Assets 26.0% 31.7% 20.8% 10.3% 12.7% Equity 26.4% 15.2% 15.0% 20.4% 20.8%Net Interest Income 13,235,084 16,033,989 18,751,947 21,564,326 24,356,388 RWA -4.9% 37.1% 37.1% 23.4% 20.9% Total Non-Interest Income 2,039,115 2,429,118 3,379,771 4,485,087 4,178,498 Net Interest Income 10.4% 21.1% 17.0% 15.0% 12.9%Fee Income 2,039,115 2,429,118 3,379,771 4,485,087 4,178,498 Non-Interest Income 75.5% 19.1% 39.1% 32.7% -6.8%Dealing Income - - - - - of which Fee Grth 75.5% 19.1% 39.1% 32.7% -6.8%Other Operating Income - - - - - Revenues 1614.6% 2087.8% 1987.0% 1770.2% 954.1%Total operating revenues 15,274,199 18,463,107 22,131,718 26,049,412 28,534,886 Costs 3.2% 17.6% 21.9% 5.7% 17.8% Pre-Provision Profits 22.7% 18.4% 18.7% 21.0% 7.8%Operating costs -7,645,498 -8,990,012 -10,955,115 -11,584,830 -13,647,489 Loan Loss Provisions 327.2% 4.0% 47.6% 119.8% -21.7% Pre-Tax 5.3% 31.7% 13.4% 2.3% 16.9%Pre-Prov. Profits 12,459,476 14,747,519 17,505,678 21,179,643 22,830,763 Attributable Income 11.8% 13.6% 23.2% 19.4% 18.5%Provisions 1,844,082 1,917,092 2,830,490 6,220,398 4,868,601 EPS 9.8% 12.3% 23.0% 19.4% 18.5%Other Inc/Exp. 122,102 224,071 475,899 776,943 524,434 DPS 2.9% 10.5% 13.5% 15.6% 1.8%Exceptionals - - - - - Disposals/ other income - - - - - Balance Sheet Gearing FY06 FY07 FY08 FY09E FY10EPre-tax 5,906,721 7,780,074 8,822,012 9,460,054 14,617,401 Loan/deposit 72.5% 68.8% 79.9% 88.6% 87.4%Tax 1,649,149 2,942,073 2,863,644 1,905,360 2,108,646 Investment/assets 12.9% 11.4% 8.5% 7.1% 9.3%Minorities 0 0 0 0 0 Loan/Assets 54.0% 52.5% 62.2% 66.4% 67.8%Other Distbn. - - - - - Customer deposits/liab. 80.4% 81.3% 81.9% 80.5% 82.1%Attributable Income 4,257,572 4,838,001 5,958,368 7,115,768 8,434,584 LT debt/liabilities 3.9% 3.1% 3.1% 7.1% 6.3%

Per Share Data Rp FY06 FY07 FY08 FY09E FY10E Asset Quality/Capital FY06 FY07 FY08 FY09E FY10EEPS 350.10 393.27 483.57 577.33 684.33 Loan loss reserves/loans 7.4% 6.1% 5.0% 6.8% 7.7%DPS 157 173 196 227 231 NPLs/loans 4.8% 3.4% 2.8% 3.9% 4.4%Payout 44.7% 44.0% 40.6% 39.3% 33.7% Loan loss reserves/NPLs 0.0% 0.0% 0.0% 0.0% 0.0%Book value 1,374 1,578 1,815 2,207 2,820 Growth in NPLs 22.9% -9.8% 15.2% 66.0% -2.2%Fully Diluted Shares - - - - - Tier 1 Ratio 17.5% 15.1% 13.1% 13.2% 14.8% Total CAR 20.1% 16.9% 13.4% 14.6% 16.0%Key Balance sheet Rp in millions FY06 FY07 FY08 FY09E FY10E Du-Pont Analysis FY06 FY07 FY08 FY09E FY10ENet Loans 83,564,704 107,014,778 153,102,630 180,162,593 207,305,804 NIM (as % of avg. assets) 12.2% 12.0% 10.8% 9.9% 9.1%LLR -6,718,048 -6,958,175 -8,005,462 -13,118,735 -13,191,843 Earning assets/assets 78.5% 74.3% 77.2% 84.2% 92.7%Gross Loans 90,282,752 113,972,953 161,108,092 193,281,329 220,497,647 Margins (as % of Avg. Assets) 9.5% 8.9% 8.3% 8.3% 8.4%NPLs 4,343,061 3,918,902 4,515,129 7,496,420 7,328,802 Non-Int. Rev./ Revenues 13.4% 13.2% 15.3% 17.2% 14.6%Investments 19,908,430 23,220,457 20,929,046 19,393,646 28,447,514 Non IR/Avg. Assets 1.5% 1.4% 1.5% 1.7% 1.4%Other earning assets 10,456,418 11,920,588 16,904,315 22,614,563 24,598,466 Revenue/Assets 9.9% 9.1% 9.0% 9.6% 9.3%Avg. IEA 108,862,861 133,214,660 173,708,402 217,757,640 267,401,970 Cost/Income 50.1% 48.7% 49.5% 44.5% 47.8%Goodwill - - - - - Cost/Assets 5.5% 5.0% 4.9% 4.5% 4.7%Assets 154,725,486 203,734,938 246,076,896 271,309,370 305,728,825 Pre-Provision ROA 15.4% 14.1% 13.9% 14.1% 14.1% LLP/Loans 2.2% 1.8% 1.8% 3.5% 2.3%Deposits 124,468,339 165,599,983 201,538,339 218,270,497 251,136,665 Loan/Assets 59.8% 57.0% 61.2% 68.5% 71.7%Long-term bond funding 5,967,194 6,236,244 7,598,124 19,185,389 19,185,389 Other Prov, Income/ Assets 0.1% 0.1% 0.2% 0.3% 0.2%Other Borrowings 2,231,431 2,140,253 710,634 2,698,370 2,698,370 Operating ROA 5.5% 5.3% 5.0% 5.6% 5.2%Avg. IBL 114,167,296 148,950,038 189,060,902 221,591,672 251,190,600 Pre-Tax ROA 16.8% 15.2% 15.2% 16.7% 15.9%Avg. Assets 138,750,532 179,230,212 224,905,917 258,693,133 288,519,098 Tax rate 27.9% 37.8% 32.5% 21.1% 20.0%Common Equity 16,878,808 19,437,635 22,356,697 26,927,990 32,516,267 Minorities & Outside Distbn. 0.0% 0.0% 0.0% 0.0% 0.0%RWA 74,686,680 102,393,199 140,363,380 173,228,489 209,486,303 ROA 3.1% 2.7% 2.6% 2.8% 2.9%Avg. RWA 76,612,420 88,539,940 121,378,289 156,795,934 191,357,396 RORWA 5.6% 5.5% 4.9% 4.5% 4.6% Equity/Assets 10.9% 10.1% 9.3% 9.5% 10.3% ROE 28.2% 26.6% 28.5% 28.9% 28.4%Source: Company reports and J.P. Morgan estimates.

296



Beijing Capital Land www.bjcapitalland.com.cn

Neutral Price: HK$3.33


Company description Established in 2002, Beijing Capital Land (BCL) is a quality property developer with a focus on the mid-to-high-end residential and office properties. The company has an attributable development land bank of 3.5 million sqm in seven cities, mainly in Shenyang, Tianjin and Xian. Beijing Capital Group and GIC have 45.6% and 8.1% stakes, respectively. Post mortem Due to aggressive land acquisitions during the peak of the market in FY07, BCL is still highly geared (80% as of 30 June 2009). A recent issue of Rmb1 billion domestic bonds should have extended the maturity profile of its debt; however, at the same time, it reduces the amount of interest expense that could be capitalized. This, in turn, hurts net margin. As of end-October, the company recorded contracted sales of Rmb10 billion, up 295% Y/Y on a low base. We believe this will be difficult to repeat in 2010 as Beijing projects gradually get depleted.

Potential for earnings upgrades The key risk to the company’s earnings stems more from completion rather than sales. Completion slippage has been a common phenomenon for Beijing Capital Land.

How much recovery is priced into the stock? YTD, the stock has risen 169%, outperforming most of its peers. We believe this has priced in the potential strong boost in earnings for the next year, when this year’s contracted sales get recognized.

Price target and key risks Our Dec-09 PT of HK$3.5 is based on 1.8x FY09E P/BV and 9x FY10E P/E, largely in line with BCL’s small cap peers. Key risks to our PT include a slowdown in sales and completion slippage.

China Real Estate Lucia KwongAC (852) 2800-8526 [email protected]



012345678

03 04 05 06 07 08 09 Source: Bloomberg.

Performance 1M 3M 12M Absolute (%) 10.4 2.1 173.4 Relative (%) 3.5 -21.1 159.0

Source: Bloomberg.

Company data 52-week range (HK$) 0.67-4.03 Mkt cap (HK$MM) 6,857 Mkt cap (US$MM) 885 Shares O/S (MM) 1,021 Avg daily value (HK$MM) 26.34 Avg daily value (US$MM) 3.40 Avg daily volume (MM) 8.41 Date of price 5 Nov 09 Exchange rate 7.75 Index: HSI 21,479 Free float (%) 67

Source: Bloomberg.

Bloomberg: 2868.HK; Reuters: 2868.HK Rmb$ millions, year-end December

FY07 FY08 FY09E FY10E Sales 4,871 5,167 6,576 5,141 Net profit 525 383 422 677 Core net profit 458 342 422 677 EPS (Rmb) 0.259 0.189 0.208 0.334 Core EPS (Rmb) 0.226 0.169 0.208 0.334 DPS (Rmb) 0.120 0.080 0.090 0.110 Core net profit growth (%) 129 -25 23 61 Core EPS growth (%) 100 -25 23 61 ROE (%) 13 9 10 14 P/E (x) 14.0 17.8 14.1 8.8 NAV per share (HK$) 2.99 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

297



Beijing Capital Land: Summary of financials Rmb in millions, year-end December

Profit and loss statement Cash flow statement FY07 FY08 FY09E FY10E FY07 FY08 FY09E FY10E Revenues 4,871 5,167 6,576 5,141 EBIT 1,047 1,383 1,666 1,238

% change Y/Y 138.8 6.1 27.3 -21.8 Depreciation & amortisation 100 92 96 101 EBIT 1,047 1,383 1,666 1,238 Change in working capital -2,477 -1,830 1,613 -333

% change Y/Y 364.5 32.1 20.5 -25.7 Taxes -260 -560 -365 -315 EBIT Margin (%) 21.5 26.8 25.3 24.1 Other non-cash items -84 138 97 102

Net Interest -135 -178 -262 22 Cash flow from operations -1,591 -915 3,010 691 Associates/ JCE 58 21 21 26 Exceptionals 175 41 0 0 Capex -359 -852 0 0 Earnings before tax 983 983 983 983 Disposal/ (purchase) 940 -6 -150 -50

% change Y/Y 363.9 10.6 12.5 -9.7 Net Interest -493 -865 -652 -605 Tax 419 504 365 315 Free cash flow -1,154 -2,085 2,383 445

as % of EBT -40.0 -36.5 -21.9 -25.4 Net Income (Reported) 525 383 422 677 Equity raised/ (repaid) 0 0 0 0

% change Y/Y 97.4 -27.1 10.1 60.6 Debt raised/ (repaid) 233 1,086 1,800 0 Core Net Profit 458 342 422 677 Other 0 0 0 0

% change Y/Y 129.5 -25.3 23.3 60.6 Dividends paid -139 -168 -821 -517 Shares Outstanding 2028 2028 2028 2028 Beginning cash 3,707 2,614 2,157 5,519 EPS (reported) 0.259 0.189 0.208 0.334 Ending cash 2,614 2,157 5,519 5,447

% change Y/Y 72.1 -27.1 10.1 60.6 DPS (Rmb) 0.120 0.080 0.090 0.110 Core EPS (Rmb) 0.226 0.169 0.208 0.334

% change Y/Y 100.1 -25.3 23.3 60.6 Balance sheet Ratio analysis FY07 FY08 FY09E FY10E % FY07 FY08 FY09E FY10E EBIT margin 21.5 26.8 25.3 24.1 Cash and cash equivalents 2,721 2,184 5,567 5,484 Operating margin 21.5 26.8 25.3 24.1 Accounts receivable 1,222 2,515 915 415 Net profit margin 10.8 7.4 6.4 13.2 Inventories 6,758 7,749 7,775 8,644 SG&A/sales Others 36 0 0 0 Current assets 10,737 12,448 14,257 14,543 Sales per share growth 139 6 27 -22 Sales growth 139 6 27 -22 LT investments 1,401 1,664 2,415 3,219 Net profit growth 97.4 -27.1 10.1 60.6 Net fixed assets 7,880 4,955 5,255 5,355 EPS growth 72.1 -27.1 10.1 60.6 Total assets 20,018 19,068 21,927 23,118 Interest coverage (x) 2.6 2.7 3.0 2.2 Liabilities Net debt to total capital 33.5 42.2 23.6 23.3 ST loans 2,534 1,223 723 723 Net debt to equity 80.4 110.7 68.9 63.2 Payables 7,560 5,881 6,661 7,316 Sales/assets 24.3 27.1 30.0 22.2 Others 6 0 0 0 Assets/equity 438.3 448.8 484.3 456.6 Total current liabilities 10,110 7,104 7,385 8,039 ROE 12.6 8.7 9.6 14.1 Long term debt 3,859 5,662 7,962 7,962 ROCE 10.1 12.6 12.8 9.2 Other liabilities 0 0 0 0 Total liabilities 14,260 12,908 15,488 16,143 Minority interest 1,191 1,911 1,911 1,911 Shareholders' equity 4,567 4,248 4,528 5,063 BVPS (Rmb) 2.3 2.1 2.2 2.5

Source: Company reports, J.P. Morgan estimates.

298



BYD Electronics www.byd-electronic.com

Underweight Price HK$7.48


Company description BYD Electronics (BYDE) provides mechanical components and EMS services to mobile handset OEMs such as Nokia, Motorola, Sony Ericsson and Chinese brands. The company is the handset arm of BYD Co Ltd., which manufactures handset batteries, handset components and automobiles. Post mortem The handset EMS industry faces uncertain growth in the longer term as existing customers continue to lose market share and value shifts away from hardware to software. Besides, our recent checks suggest that FIH and Perlos are taking share away from BYDE in low-end Nokia phones. The market has been optimistic over TD-SCDMA handset/NBPC ODM prospects in 2010; however, we believe TD take-off will be slow. Potential for earnings upgrades There could be some upside for 2H09 earnings, but upside should be limited for 2010, unless TD handset and NB really take off in a big way. How much recovery is priced into the stock? The stock has substantially outperformed this year and is up nearly 173% YTD and has risen 80% in the past month. Although the handset outlook has improved over the past month, structural issues with the EMS industry remain and BYDE continues to lose market share to FIH and Perlos. At nearly 19x FY10E P/E, the stock looks overvalued and we believe has priced in any potential growth over the next two years; hence, we expect it to underperform going forward. Price target and key risks Our Dec-10 PT of HK$3.6 is based on 9x 2010E P/E, which is slightly towards the lower end of the historical range and at a discount to its peers. We believe the multiple is justified, given the poor growth visibility and its share loss at Nokia. Key risks to our PT include: (1) a much sharper-than-expected handset recovery; (2) Nokia going asset light, which could result in higher outsourcing; and (3) asset infusion from its parent.

HK/China Technology Hardware Charles GuoAC (852) 2800-8532 [email protected]


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BYD Elec (HK$)HSI (rebased)




52-week range (HK$) 2.0-9.2 Mkt cap. (HK$MM) 16,860 Mkt cap. (US$MM) 2,167 Avg daily value (US$MM) 7.7 Avg daily volume (MM) 10.2 Shares O/S (MM) 2,254 Date of price 5-Nov-09 Index: Hang Seng 21,479 Free float (%) 34 Exchange rate 7.8

Source: Bloomberg. Bloomberg: 285 HK; Reuters: 285.HK Rmb in millions, year-end December FY08 FY09E FY10E FY11E Sales 8,555 8,970 11,377 13,984 Net profit 766 562 790 797 EPS (Rmb) 0.34 0.25 0.35 0.35 FD EPS (Rmb) 0.34 0.25 0.35 0.35 DPS (Rmb) 0.0 0.0 0.0 0.0 Sales growth (%) 48.3% 4.9% 26.8% 22.9% Net profit growth (%) (30.0%) (26.6%) 40.4% 0.9% EPS growth (%) (42.0%) (26.3%) 39.9% 0.9% ROE (%) 14.3% 9.1% 11.3% 10.3% P/E (x) 19.5 26.4 18.9 18.7 FD P/E (x) 19.5 26.4 18.9 18.7 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009. We revised PT to HK$4.8 on November 29.

299



BYD Electronics: Summary of financials Profit and loss statement Rmb in millions, year-end December FY08 FY09E FY10E FY11ERevenues 8,555 8,970 11,377 13,984 Cost of Goods Sold 6,846 7,690 9,739 12,220Gross Profit 1,710 1,280 1,638 1,764 SGA &RD Expenses 717 689 726 860Operating Profit (EBIT) 1,075 700 933 931EBITDA 1440 1181 1534 1661 Interest Income 70 16 16 17 Interest Expense -40 0 0 0 Investment Income (Exp.) 0 0 0 0 Non-OP Income (Exp.) -303 -91 -96 -86Earnings before tax 803 625 854 862 Tax -38 -62 -64 -65Net Income (Reported) 766 562 790 797 Rmb EPS (Reported) 0.34 0.25 0.35 0.35BPS 2.57 2.90 3.24 3.59DPS 0.00 0.00 0.00 0.00Shares Outstanding (MM) 2,270 2,263 2,272 2,272Source: Company, J.P. Morgan estimates.


FY08 FY09E FY10E FY11ECash and cash equivalents 1,145 1,156 1,212 1,127Accounts receivable 1,527 2,272 2,762 3,395Inventories 1,824 2,172 2,649 3,334Others 338 329 419 515Current assets 4,833 5,930 7,041 8,371 LT investments 0 0 0 0Net fixed assets 3,031 3,506 3,906 4,375Others 553 451 451 451Total assets 8,418 9,887 11,397 13,196 Liabilities ST loans 14 0 0 0Payables 1,468 2,207 2,691 3,387Others 1,099 1,098 1,335 1,641Total current liabilities 2581 3305 4026 5028Long term debt 0 0 0 0Other liabilities 0 0 0 0Total liabilities 2,581 3,305 4,026 5,028Shareholders' equity 5,838 6,582 7,372 8,169Source: Company, J.P. Morgan estimates.


FY08 FY09E FY10E FY11ENet Income 766 562 790 797Depr. & Amortisation 364 481 601 730Change in working capital -603 -346 -572 -718Other 490 -1 237 306Cash flow from operations 1,017 697 1,056 1,115 Capex -1,719 -956 -1,000 -1,200Disposal/(purchase) -341 -235 103 0Cash flow from investing -2,056 -853 -1,000 -1,200Free cash flow -702 -259 56 -85 Equity raised/ (repaid) 634 0 0 0Debt raised/ (repaid) -1,283 -14 0 0Other 0 182 0 0Dividends paid -341 0 0 0Cash flow from financing -990 168 0 0 Net change in cash -2,072 11 56 -85Beginning cash 3,217 1,145 1,156 1,212Ending cash 1,145 1,156 1,212 1,127Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December FY08 FY09E FY10E FY11EGross Margin 20.0 14.3 14.4 12.6EBITDA margin 16.8 13.2 13.5 11.9Operating Margin 12.6 7.8 8.2 6.7Net Margin 9.0 6.3 6.9 5.7SG&A/Sales 8.4 7.7 6.4 6.1 Sales growth 48.3 4.9 26.8 22.9Operating Profit Growth -10.6 -34.9 33.4 -0.2Net profit growth -30.0 -26.6 40.4 0.9EPS (Reported) growth -42.0 -26.3 39.9 0.9 Interest coverage (x) 27.2 2058.0 Net debt to total capital Net Cash Net Cash Net Cash Net CashNet debt to equity Net Cash Net Cash Net Cash Net Cash Asset Turnover 101.6 90.7 99.8 106.0Working Capital Turns (x) 1.0 1.0 1.1 1.1ROE 14.3 9.1 11.3 10.3ROCE 17.2 10.3 12.5 11.1Source: Company, J.P. Morgan estimates.

300



China COSCO www.chinacosco.com



Company description China COSCO is the largest dry bulk shipping operator in the world and its container shipping operation is ranked first in China and seventh-largest globally. It also owns a 51% stake in Cosco Pacific and its 100%-owned logistics arm is the largest in China.

Post mortem China Cosco is highly leveraged to the BDI as 90% of its capacity is deployed in the spot market. We believe, its market leadership is enhanced by its integrated model and ability to offer one-stop services to its sizeable customer base. Further asset injections by the parentco are likely in the long term.

Potential for earnings upgrades Industry overcapacity will likely persist in 2010; this could cap freight rate and earnings recovery for this large industry player. China COSCO has sizeable total capital commitment amounting to Rmb32B in 2009-2013, plus a large operating lease commitment. We believe the company should have little problem accessing credit going forward; however, it gearing could rise substantially and we do not rule out capital-raising risks.

How much recovery is priced into the stock? China Cosco is trading at 1.7x P/BV (12M rolling forward), close to its historical average valuation since listing, but at a substantial premium to regional peers. Although China Cosco should offer greater upside, given its higher operating leverage, we view Pacific Basin Shipping and OOIL as a more defensive play on the recovery in the dry bulk and container shipping sectors, given the continued industry overcapacity risks.

Price target and key risks Our Jun-10 PT of HK$10 is based on 1.8x P/BV, China COSCO’s average valuation since listing. Key risks to our PT include: (1) further losses and book value erosion in 2010; (2) volatile fuel prices; and (3) policies dampening iron ore imports.

China Conglomerates & Multi-industry Corrine PngAC (65) 6882-1514 [email protected]


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1919.HK share price (HK$)SHAN.B (rebased)


1M 3M 12M Absolute (%) 8.1% -18.0% 129.4% Relative (%) -4.2% -15.1% -17.1%


52-week range (HK$) 12.78-3.15 Mkt cap. (RmbMM) 22,346 Mkt cap. (US$MM) 3,273 Avg daily value (US$MM) 100.9 Avg daily volume (MM) 81.4 Shares O/S (MM) 2,581 Date of price 5-Nov-09 Index: SHAN.B 219 Free float (%) 99.47 Exchange rate 7.75

Source: Bloomberg.

Bloomberg: 1919 HK; Reuters: 1919.HK Rmb in millions, year-end December FY08 FY09E FY10E FY11E Sales 130,872 70,215 73,594 79,685 Net profit 11,617 -3,111 2,023 3,867 EPS (Rmb) 1.14 -0.30 0.20 0.38 FD EPS (Rmb) -0.30 0.20 0.38 DPS (Rmb) 0.23 0.00 0.04 0.08 Sales growth (%) 16.6% -46.3% 4.8% 8.3% Net profit growth (%) -40.4% nm nm 91.1% EPS growth (%) -47.9% -126.8% -165.0% 91.1% ROE (%) 23.4% -6.3% 4.2% 7.6% P/E (x) 7.7 -28.7 44.1 23.1 FD P/E (x) -28.7 44.1 23.1 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

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China Cosco: Summary of financials Rmb in millions, year end December Income statement Cash flow statement FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11ERevenues 112,233 130,872 70,215 73,594 79,685 EBIT 26,668 15,794 -3,216 3,585 6,243

% change Y/Y 43.0% 16.6% (46.3%) 4.8% 8.3% Depr. & amortization 4,138 3,702 4,867 5,131 5,671EBITDA 30,805 19,495 1,651 8,716 11,914 Change in working capital 19,141 -8,695 -9,203 152 274

% change Y/Y 89.1% -36.7% -91.5% 427.8% 36.7% Taxes - - - - -EBIT 26,668 15,794 -3,216 3,585 6,243 Cash flow from operations 24,157 25,391 -7,551 8,868 12,188

% change Y/Y 119.6% NM NM NM 74.2% EBIT Margin 23.8% 12.1% -4.6% 4.9% 7.8% Capex -12,940 -17,999 -14,406 -20,000 -20,000Net Interest -555 -124 -472 -1,968 -2,713 Disposal/(purchase) - - - - -Earnings before tax 26,113 15,670 -3,688 1,617 3,530 Net Interest -555 -124 -472 -1,968 -2,713

% change Y/Y 130.7% -40.0% -123.5% -143.8% 118.3% Other -7,528 -4,561 1,398 467 287Tax -4,826 -2,963 0 0 0 Free cash flow 11,218 7,392 -21,957 -11,132 -7,812

as % of EBT 18.5% 18.9% 0.0% 0.0% 0.0% Net income (reported) 19,482 11,617 -3,111 2,023 3,867 Equity raised/(repaid) 28,107 0 0 0 0

% change Y/Y 139.7% -40.4% -126.8% -165.0% 91.1% Debt raised/(repaid) 2,463 7,925 6,144 9,500 9,500Shares outstanding 10,216 10,216 10,216 10,216 10,216 Other -2,812 13,520 -1,870 -2,435 -3,001EPS (reported) (Rmb) 2.18 1.14 (0.30) 0.20 0.38 Dividends paid -4,050 -13,926 -2,323 0 -405

% change Y/Y 174.2% (47.9%) (126.8%) (165.0%) 91.1% Beginning cash 9,555 37,624 31,582 9,345 5,744 Ending cash 37,624 31,582 9,345 5,744 4,315 DPS (Rmb) 0.18 0.23 0.00 0.04 0.08 Balance sheet Ratio Analysis FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11ECash and cash equivalents 37,624 31,582 9,345 5,744 4,315 EBITDA margin 27.4% 14.9% 2.4% 11.8% 15.0%Accounts receivable - - - - - Operating margin 17.60% 13.30% (10.52%) 1.55% 4.35%Inventories - - - - - Net margin 17.4% 8.9% -4.4% 2.7% 4.9%Others 0 0 0 0 0 Current assets 37,624 31,582 9,345 5,744 4,315 Sales per share growth 63.6% 1.9% (46.3%) 4.8% 8.3%LT investments 16,800 18,594 18,594 18,594 18,594 Sales growth 43.0% 16.6% (46.3%) 4.8% 8.3%Net fixed assets 46,003 55,663 65,202 80,071 94,400 Net profit growth 139.7% -40.4% -126.8% -165.0% 91.1%Total Assets 100,427 105,839 93,141 104,409 117,309 EPS growth 174.2% (47.9%) (126.8%) (165.0%) 91.1% Liabilities Interest coverage (x) 55.50 157.85 3.50 4.43 4.39Short-term loans 5,188 3,629 0 0 0 Payables - - - - - Net debt to equity -45.0% -10.4% 39.3% 68.0% 85.8%Others 21,057 12,362 3,160 3,312 3,586 Sales/assets 1.35 1.27 0.71 0.75 0.72Total current liabilities 26,245 15,991 3,160 3,312 3,586 Assets/equity 3.69 2.97 4.09 4.98 6.13Long-term debt 14,142 22,785 28,929 38,429 47,929 ROE 47.9% 23.4% (6.3%) 4.2% 7.6%Other liabilities 2,883 4,817 4,817 4,817 4,817 ROCE 44.6% 21.8% -4.2% 4.4% 6.6%Total Liabilities 43,270 43,593 36,905 46,557 56,331 Shareholders' equity 46,600 52,492 47,057 49,080 52,542 BVPS (Rmb) 4.56 5.14 4.61 4.80 5.14 Source: Company, J.P. Morgan estimates.

302



China Southern Airlines www.csair.com



Company description China Southern Airlines (CSA) is China’s largest airline in terms of passenger traffic and asset base. It is an amalgamation of Southern, Northern, Xinjiang, Xiamen and a number of other regional airlines as a result of the government-driven industry consolidation.

Post mortem CSA has the largest market share in the domestic market with 80% of its business contributed by domestic routes and only 6% of its total revenue exposed to cargo (versus c.15% for the sector).

Potential for earnings upgrades We believe CSA has weaker long-term growth prospects versus its peers, given its hub’s close proximity to Hong Kong. In addition, a more developed and efficient railway system in the longer term will likely result in greater competition for CSA and traffic diversion from air to sea for domestic routes.

How much recovery is priced into the stock? CSA has been the best performing Asian airline stock year-to-date and is trading at 1.6x P/BV, a 20% premium to its average valuation since listing due to its large exposure to the rebounding domestic passenger demand. Hence, we see limited upside from the current level and expect CSA to underperform its Chinese airline peers as well as the Asian sector average.

Price target and key risks Our Jun-10 PT of HK$2.1 is based on 1.3x P/BV, CSA’s average valuation since listing and 1 standard deviation above its average valuation, excluding the M&A speculation period. Key risks to our PT include: (1) excessive domestic price competition; (2) volatile fuel prices; and (3) Influenza A.

Hong Kong Airlines Corrine PngAC (65) 6882-1514 [email protected]


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1055.HK share price (HK$)H-SHARE (rebased)


1M 3M 12M Absolute (%) -7.1% -24.6% 85.1% Relative (%) -19.4% -352.7% -404.5%


52-week range (HK$) 0.83-3.12 Mkt cap. (RmbMM) 5,029 Mkt cap. (US$MM) 737 Avg daily value (US$MM) 14.24 Avg daily volume (MM) 187.39 Shares O/S (MM) 2,482 Date of price 5-Nov-09 Index: H-share 17,898 Free float (%) 41.0 Exchange rate 8

Source: Bloomberg.

Bloomberg: 1055 HK; Reuters: 1055.HK Rmb in millions, year-end December FY08 FY09E FY10E FY11E Sales 55,288 51,589 58,931 65,228 Net profit -4,823 607 245 633 EPS (Rmb) -0.74 0.08 0.03 0.08 FD EPS (Rmb) 0.08 0.03 0.08 DPS (Rmb) 0.00 0.00 0.00 0.00 Sales growth (%) 1.6% -6.7% 14.2% 10.7% Net profit growth (%) nm nm -59.6% 158.4% EPS growth (%) -274.8% -110.3% -59.7% 159.0% ROE (%) -51.1% 6.9% 2.3% 5.7% P/E (x) -2.8 26.7 66.3 25.6 FD P/E (x) 26.7 66.3 25.6 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

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China Southern Airlines: Summary of financials Rmb in millions, year-end December Income statement Cash flow statement FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11ERevenues 54,401 55,288 51,589 58,931 65,228 EBIT 1,575 -6,538 1,483 962 1,200

% change Y/Y 17.7% 1.6% (6.7%) 14.2% 10.7% Depr. & amortization 5,554 5,746 6,024 6,425 6,809EBITDA 7,129 -792 7,507 7,387 8,009 Change in working capital 2,252 2,284 -500 993 852

% change Y/Y 26.9% -111.1% -1047.8% -1.6% 8.4% Taxes -88 -399 8 3 8EBIT 1,575 -6,538 1,483 962 1,200 Cash flow from operations 6,869 1,155 5,086 6,527 7,096

% change Y/Y 144.2% NM NM NM 24.8% EBIT Margin 2.9% -11.8% 2.9% 1.6% 1.8% Capex -5,214 -8,052 -6,000 -5,500 -5,500Net Interest -2,218 -1,884 -1,928 -1,857 -1,773 Disposal/(purchase) 288 312 0 0 0Earnings before tax 2,879 -4,724 595 240 620 Net Interest -2,218 -1,884 -1,928 -1,857 -1,773

% change Y/Y 706.4% -264.1% -112.6% -59.7% 159.0% Other 370 262 937 983 1,033Tax -847 -62 8 3 8 Free cash flow 1,655 -6,897 -914 1,027 1,596

as % of EBT 29.4% 1.3% 1.3% 1.3% 1.3% Net income (reported) 1,839 -4,823 607 245 633 Equity raised/(repaid) 0 0 0 0 0

% change Y/Y 878.2% -362.3% -112.6% -59.7% 159.0% Debt raised/(repaid) 493 4,788 0 -1,500 -2,500Shares outstanding 4,374 6,561 8,004 8,004 8,004 Other -950 2,700 3,000 - -EPS (reported) (Rmb) 0.42 (0.74) 0.08 0.03 0.08 Dividends paid -8 -28 0 0 0

% change Y/Y 878.2% (274.8%) (110.3%) (59.7%) 159.0% Beginning cash 2,264 3,824 4,649 7,671 8,181 Ending cash 3,824 4,649 7,671 8,181 8,310 DPS (Rmb) 0.00 0.00 0.00 0.00 0.00 Balance sheet Ratio analysis FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11ECash and cash equivalents 3,824 4,649 7,671 8,181 8,310 EBITDA margin 13.1% -1.4% 14.6% 12.5% 12.3%Accounts receivable 3,633 3,308 3,087 3,526 3,903 Operating margin 2.90% (11.83%) 2.88% 1.63% 1.84%Inventories 1,213 1,229 1,147 1,310 1,450 Net margin 3.4% -8.7% 1.2% 0.4% 1.0%Others 120 62 62 62 62 Current assets 8,790 9,248 11,967 13,079 13,725 Sales per share growth 17.7% (32.2%) (23.5%) 14.2% 10.7%LT investments 2,175 2,142 2,308 2,482 2,665 Sales growth 17.7% 1.6% (6.7%) 14.2% 10.7%Net fixed assets 71,041 71,652 71,628 70,703 69,394 Net profit growth 878.2% -362.3% -112.6% -59.7% 159.0%Total Assets 82,006 83,042 85,903 86,265 85,784 EPS growth 878.2% (274.8%) (110.3%) (59.7%) 159.0% Liabilities Interest coverage (x) 3.21 0.42 3.89 3.98 4.52Short-term loans 27,825 25,959 25,959 23,959 21,959 Payables 1,844 1,353 1,262 1,442 1,596 Net debt to equity 416.6% 528.4% 531.9% 418.1% 378.4%Others 13,042 14,226 13,513 14,929 16,143 Sales/assets 0.69 0.67 0.61 0.68 0.76Total current liabilities 42,711 41,538 40,734 40,330 39,699 Assets/equity 6.91 11.83 8.08 7.93 7.46Long-term debt 21,932 28,586 28,649 29,172 28,694 ROE 16.7% (51.1%) 6.9% 2.3% 5.7%Other liabilities 3,053 3,439 3,439 3,439 3,439 ROCE 2.6% -10.6% 2.3% 1.5% 1.9%Total Liabilities 67,696 73,563 72,822 72,941 71,832 Shareholders' equity 11,863 7,021 10,628 10,873 11,506 BVPS (Rmb) 2.71 1.07 1.33 1.36 1.44 Source: Company, J.P. Morgan estimates.

304



China Unicom www.chinaunicom.com.hk

Underweight HK$10.42


Company description China Unicom (CU) is a fixed line and mobile operator using the GSM and WCDMA wireless technologies. In 2008, it acquired the fixed-line business of China Netcom in 10 northern Chinese provinces, and operates fixed-line local, long distance and broadband services in those regions. China Unicom operates its wireless services in all provinces in China, and has over 150 million subscribers. It is the second-largest wireless operator in China by subscribers with a 21% market share. The company was listed on the Hong Kong Stock Exchange and the NYSE on June 22, 2000. Post mortem We are concerned with CU’s competitive positioning and the divergence between CU’s reputation as a discount mobile provider with inferior network coverage versus China Mobile and its 3G ambitions to turn itself into a high-end operator. Heavy reliance on the success of the iPhone is a flawed strategy, in our view. Will CU’s Rmb41 ARPU customers sign up to 3G plans which are north of Rmb100? Likely no, in our opinion. Potential for earnings upgrades We expect EBITDA margins to continue to deteriorate due to the need to spend aggressively on sales and marketing to roll out 3G and revitalize the Unicom brand. Network maintenance and general and administration costs could also increase. We do not see an earnings turnaround any time soon. How much recovery is priced into the stock? In our view, high expectations are priced into the stock, particularly with regard to 3G growth and ARPU expansion. We believe these operational metrics will disappoint. Although reasonable on EV/EBITDA, CU looks expensive on P/E. At 26.4x FY10E P/E (for no growth but earnings declines), high interest payments and high depreciation could crimp net income over the next few years. CU generates the lowest ROE in the sector and will likely be FCF-negative for this year and next due to heavy capex. Price target and key risks Our DCF-based Dec-10 PT of HK$8.00 implies a WACC 11.9%, a terminal growth rate of 2%, and a beta of 1.25. We expect the next 18 months to be a transition period for CU, our least preferred Chinese telco stock. Key risks to our PT are wireless competition and unprofitable customer acquisitions.

China Telecommunications Jimmy CheongAC (852) 2800-8566 [email protected]



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52-week range (HK$) 6.60-12.44 Mkt cap. (HK$) 254,892 Mkt cap. (US$MM) 32,889 Avg daily value (US$MM) 51.2 Avg daily volume (MM) 35.5 Shares O/S (MM) 24,461.84 Date of price 5-Nov-09 Index: Hang Seng 21,479 Free float (%) 20.6 Exchange rate (HK$/US$) 7.75

Source: Bloomberg. Bloomberg: 762 HK; Reuters: 0762.HK Rmb in millions, year-end December FY08 FY09E FY10E FY11E Revenue – adjusted 148,020 153,484 161,674 174,865 EBITDA – adjusted 66,949 64,647 63,440 67,328 Net profit – adjusted 14,332 11,289 8,115 9,563 EPS (HK$) – adjusted 0.67 0.53 0.38 0.45 DPS (HK$) 0.23 0.20 0.14 0.20 Sales growth (%) -0.8% 3.7% 5.3% 8.2% Net profit growth (%) -5.8% -21.2% -28.1% 17.8% Dividend yield (%) 2.2% 1.9% 1.3% 1.9% ROE (%) 7.4% 5.4% 3.8% 4.4% P/E (x) 15.5 19.7 27.4 23.2 EV/EBITDA (x) 3.4 4.6 5.2 4.9 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

305



China Unicom: Summary of financials Rmb in millions, year-end December P&L statement Balance sheet FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11ERevenue - adjusted 149,170 148,020 153,484 161,674 174,865 Cash and cash equivalents 12,714 22,616 6,541 5,599 1,310EBITDA - adjusted 71,618 66,949 64,647 63,440 67,328 Accounts receivable 11,014 8,587 9,065 8,884 8,647Depreciation (47,369) (47,678) (50,439) (51,208) (51,859) Inventories 2,815 1,171 813 800 790EBIT 24,249 19,271 14,208 12,232 15,468 Others 5,632 3,746 4,978 4,921 4,873Other 4,990 1,994 2,000 2,000 2,000 Total current assets 32,175 36,120 21,398 20,205 15,620 Interest income 285 239 120 91 52 Interest expense (3,231) (2,411) (2,325) (4,069) (4,770) Net fixed assets 276,110 283,912 339,062 374,439 385,054Exceptionals 711 15,736 (2,000) (1,700) 0 Other long term assets 25,802 24,892 40,822 40,822 40,822Profit before tax 20,158 6,340 12,767 8,554 12,750 Tax (7,083) (1,801) (3,096) (2,138) (3,188) Total assets 334,087 344,924 401,282 435,466 441,496Net profit - Reported 21,438 33,913 9,671 6,415 9,563 Net profit - Adjusted 15,209 14,332 11,289 8,115 9,563 ST loans 39,261 21,996 40,499 49,675 49,675 Others 84,785 103,223 105,840 104,775 103,878FD shares outstanding 24,182 24,182 24,182 24,182 24,182 Total current liabilities 124,046 125,219 146,339 154,450 153,553EPS (HK$) - Reported 0.95 1.59 0.45 0.30 0.45 EPS (HK$) - Adjusted 0.67 0.67 0.53 0.38 0.45 Long term debt 18,086 7,997 38,278 61,902 61,902DPS (HK$) 0.21 0.23 0.20 0.14 0.20 Other liabilities 13,439 4,998 5,120 5,335 5,586DPS payout ratio - on adj NP 0% 34% 37% 36% 45% Total liabilities 155,571 138,214 189,738 221,687 221,040

Adj Revenue growth NM -0.8% 3.7% 5.3% 8.2% Shareholders' equity 178,512 206,710 211,544 213,780 220,456Adj EBITDA growth NM -6.5% -3.4% -1.9% 6.1% Adj Net profit growth NM -5.8% -21.2% -28.1% 17.8% Total liabilities and equity 334,083 344,924 401,282 435,466 441,496Adj EPS growth NM -5.8% -21.2% -28.1% 17.8% DPS growth NM 5.4% -12.8% -30.9% 49.1% Net (debt)/cash (44,633) (7,377) (72,236) (105,978) (110,267) BV per share (Rmb) 7.4 7.4% 5.4% 3.8% 4.4% Ratio analysis Cash flow statement % FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11EEBITDA margin (Adj) 48.0% 45.2% 42.1% 39.2% 38.5% Cash flow from operations 65,256 56,674 61,497 57,024 61,071FCF margin -0.1% 10.2% -30.7% -17.1% -0.1% Capex (41,798) (47,747) (109,833) (86,586) (62,474)ROE 11.8% 7.4% 5.4% 3.8% 4.4% Cash flow from other

investing (2,765) 22,746 0 0 0

ROC 17.7% 9.0% 5.5% 4.0% 4.7% Cash flow from financing (29,805) (35,070) 45,164 28,620 (2,887)ROA 6.3% 4.2% 3.0% 1.9% 2.2%

Change in cash for year (7,887) (2,741) (3,173) (942) (4,289)Tax rate - ex connection fees 35% 28% 25% 25% 25% Capex / adjusted sales 28% 32% 72% 54% 36% Beginning cash 19,866 11,979 9,238 6,065 5,123Debt / capital 24% 13% 27% 34% 34% Closing cash 11,979 9,238 6,065 5,123 834Net debt (cash) / equity 25% 4% 34% 50% 50% Interest cover (x) 24.2 30.8 29.3 15.9 14.3 Source: Company and J.P. Morgan estimates.

306



Compal Electronics, Inc. www.compal.com

Underweight Price: NT$40.35

Price Target: NT$32

Company description Compal manufactures and markets notebook computers, color monitors, LCD and other computer-related products. Its key customers include Toshiba, Acer, Dell, HP, Lenovo, and Fujitsu/Fujitsu Siemens.

Post mortem The sub-US$800 segment has increased from 15% to 50% of Notebook PC volume since the financial crisis broke out in 1Q08. Notebook ODMs have managed to keep margins flattish or even up due to falling component costs. However, key components (DRAM, LCD panel) have since then seen sharp price increases; mechanical component costs are on the rise with labor shortages re-surfacing, and oil and commodity prices are rising as well.

Potential for earnings upgrades We see increasing evidence of eroding notebook ODM pricing power: (1) rising component prices, yet consumers are paying less; (2) Quanta/Compal rivalry intensifying again, while newcomer Hon Hai enters the fray; (3) HP/Acer guiding for strong 2010-11 margins after the ODM bidding—historically, there has been a strong inverse margin relationship between brands and notebook ODMs; (4) HP’s unexpected order reshuffling as Inventec fights back with lower pricing; and (5) HP resuming E-bidding and starting in 2Q10 to adopt a dual-source, bi-monthly bidding strategy for mainstream projects to induce an ODM price war. Consensus expects flat margins in 2010 and this we believe is a key downside risk.

How much recovery is priced into the stock? All ODMs have guided for market share gains in 2010—someone has to miss, given the top three brands have already fully outsourced, while EMS are entering the space as new competitors. Compal guided for its 2010 notebook units to grow more than the industry growth of 20%. We believe this is 2002-04 déjà vu, when an ODM pricing war led Compal’s consolidated OPM to fall from 7.3% to 4.3%. The stock is trading at near 3-year high both in terms of P/E and P/BV.

Price target and key risks Our Jun-10 PT is based on 9x FY10E earnings (vs historical P/E range of 4x-28x). Our PT implies Dec-09 P/BV of 1.4x vs 2009E ROE of 18% and Dec-10 P/BV of 1.3x vs 2010E ROE of 15%. A key risk to our view and PT is better-than-expected progress in vertical/horizontal integration.

Taiwan Computer Hardware Alvin KwockAC (852) 2800 8533 [email protected]

Gokul Hariharan (852) 2800 8564 [email protected]


Price performance

15

30

45

NT$






52-week range (NT$) 14.58-43.00 Mkt cap. (NT$MM) 160,710 Mkt cap. (US$MM) 4,940 Avg daily value (US$MM) 26.38 Avg daily volume (MM) 25.78 Shares O/S (MM) 3,982.9 Date of price 5-Nov-09 Index: TWSE 7,417 Free float (%) 83.7% Exchange rate 32.5

Source: Bloomberg.

Bloomberg: 2324 TT; Reuters: 2324.TW NT$ in millions, year-end December FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E Sales 442,565 580,497 627,615 636,933 YE BPS (NT$) 19.9 22.7 23.9 24.9 Operating profit 16,650 19,567 17,410 15,685 New Taiwan GAAP ROE (%) 16.8 17.8 14.8 12.5 EBITDA 25,643 24,783 20,437 19,267 Cash div (NT$/share) 2.40 1.50 2.37 2.17 Net profit 12,640 14,944 13,814 12,360 New TW GAAP EPS growth (%) 3.4% 13.9% -8.9% -11.5% MV of employee bonus - 2,205 2,110 1,888 P/BV (x) 2.01 2.02 1.77 1.69 New TW GAAP NI 13,091 14,944 13,814 12,360 Quarterly EPS (NT$) 1Q 2Q 3Q 4Q New TW GAAP EPS (NT$) 3.35 3.81 3.47 3.07 EPS (FY08) 0.82 0.82 0.89 0.70 New Taiwan GAAP P/E (x) 12.1 10.6 11.6 13.1 EPS (FY09E) 0.72 0.83 1.12 1.14 Cash 38,535 44,031 41,656 35,375 EPS (FY10E) 0.81 0.82 0.91 0.93 Gross debt 18,260 20,010 23,133 27,452 Fair value (6/2010) NT$41 Equity 77,837 90,230 96,028 101,049 Price target (6/2010) NT$32 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

307



Compal Electronics, Inc.: Summary of financials NT$ in millions, year-end December Income statement Ratio analysis FY06 FY07 FY08 FY09E FY10E FY11E % FY06 FY07 FY08 FY09E FY10E FY11E Revenues 310,733 449,580 442,565 580,497 627,615 636,933 Gross Margin 5.6 5.8 6.6 6.0 5.1 4.7 Cost of Goods Sold 293,248 423,430 413,235 545,710 595,719 606,799 EBITDA margin 4.0 4.6 5.8 4.3 3.3 3.0Gross Profit 17,485 26,150 29,330 34,787 31,896 30,133 Operating Margin 3.4 3.8 3.8 3.4 2.8 2.5 R&D Expenses 2,989 3,448 4,113 5,165 4,757 4,828 Net Margin 2.8 3.0 2.9 2.9 2.5 2.2 SG&A Expenses 3,983 5,489 8,567 10,055 9,729 9,620 R&D/sales 1.0 0.8 0.9 0.9 0.8 0.8Operating Profit (EBIT) 10,514 17,213 16,650 19,567 17,410 15,685 SG&A/Sales 1.3 1.2 1.9 1.7 1.6 1.5EBITDA 12,518 20,794 25,643 24,783 20,437 19,267 Interest Income 992.6 1,548.0 1,357.5 376.4 438.9 404.1 Sales growth 37.1 44.7 -1.6 31.2 8.1 1.5 Interest Expense -581.7 -713.3 -455.7 -81.2 -72.3 -86.6 Operating Profit Growth 14.4 63.7 -3.3 17.5 -11.0 -9.9 Investment Income (Exp.) 154.7 -152.1 -1,941.8 -1,731.0 -930.0 -930.0 Old Taiwan GAAP NI growth 3.1 57.7 -7.6 32.8 -7.4 -10.5 Non-Operating Income (Exp.) -836.9 -748.6 508.4 0.0 0.0 0.0 New Taiwan GAAP NI growth 2.2 86.0 4.1 14.2 -7.6 -10.5Earnings before tax 10,243 17,147 16,119 18,131 16,847 15,073 Tax 1,947 3,252 3,253 3,171 3,032 2,713 Interest coverage (x) 18.1 24.1 36.5 240.8 240.7 181.1Net Income (Old Taiwan GAAP) 8,675 13,683 12,640 16,780 15,544 13,908 Net debt to total capital -27.1 -31.3 -24.2 -23.7 -17.2 -7.6Net Income (New Taiwan GAAP) 6,761 12,574 13,091 14,944 13,814 12,360 Net debt to equity -35.5 -39.8 -29.1 -28.5 -21.1 -9.5NT$ EPS (Old Taiwan GAAP) 1.76 2.29 2.28 3.52 3.23 4.28 Asset Turnover 174.5 229.8 247.3 218.6 224.0 217.9EPS (New Taiwan GAAP) 1.78 3.24 3.35 3.81 3.47 3.07 Working Capital Turns (x) 8.4 11.0 8.9 10.5 10.4 11.8BPS 18.41 20.04 19.94 22.74 23.91 24.86 ROE 12.8 18.3 16.2 20.0 16.7 14.1Cash Dividend PS 1.50 1.70 2.40 1.50 2.37 2.17 ROIC 9.1 13.3 12.1 16.3 13.4 11.1Shares Outstanding (MM) 3805 3883 3910 3919 3979 4028 ROIC (net of cash) 16.8 27.1 22.1 26.6 21.1 15.9 Balance sheet Cash flow statement FY06 FY07 FY08 FY09E FY10E FY11E FY06 FY07 FY08 FY09E FY10E FY11E Cash and cash equivalents 47,449 52,405 38,535 44,031 41,656 35,375 Net income 8,675 13,683 12,640 16,780 15,544 13,908Accounts receivable 64,929 72,455 68,034 126,899 130,425 132,390 Depr. & Amortisation 2,004 3,581 8,993 5,216 3,027 3,582Inventories 23,502 28,693 28,958 51,321 52,747 53,542 Change in working capital 6,875 -4,152 -5,828 -9,253 617 69Others 1,967 3,242 1,649 2,198 2,259 2,293 Cash flow from operations 17,554 13,112 15,805 12,743 19,188 17,559Current assets 137,847 156,795 137,177 224,448 227,086 223,599 Capex -800 -4,206 -13,762 3,018 -5,056 -6,463LT investments 28,861 26,656 24,313 31,607 41,089 53,415 Disposal/ (purchase) -1,983 2,034 1,857 -7,629 -9,885 -12,810Net fixed assets 10,367 10,991 15,760 7,526 9,555 12,435 Cash flow from investment -2,782 -2,172 -11,905 -4,611 -14,940 -19,273Others 1,020 1,192 1,678 2,014 2,416 2,900 Total assets 178,095 195,634 178,928 265,595 280,146 292,349 Free cash flow 16,754 8,907 2,043 15,761 14,133 11,096 Liabilities Equity raised/ (repaid) 2,350 545 179 832 493 480ST loans 22,126 11,530 5,937 6,866 8,037 9,657 Debt raised/ (repaid) -1,025 -852 -5,378 2,411 3,123 4,319Payables 77,935 85,530 69,929 132,109 137,093 139,596 Other 1,059 590 -3,518 -70 -825 -664Others 6,634 8,878 12,903 23,246 23,892 24,252 Dividends paid -5,744 -6,267 -9,053 -5,810 -9,415 -8,703Total current liabilities 106,695 105,938 88,769 162,221 169,022 173,506 Cash flow from financing -3,360 -5,984 -17,770 -2,637 -6,623 -4,568Long term debt 0 9,744 9,959 11,441 13,393 16,092 Other liabilities 167 1,703 2,364 1,703 1,703 1,703 Beginning cash 36,038 47,449 52,405 38,535 44,031 41,656

Total liabilities 106,862 117,385 101,091 175,365 184,118 191,301 Net change in cash and equivalents 11,411 4,957 -13,870 5,495 -2,375 -6,281

Shareholders' equity 71,233 78,249 77,837 90,230 96,028 101,049 Ending cash 47,449 52,405 38,535 44,031 41,656 35,375Source: Company, J.P. Morgan estimates.

308



Datang International www.dtpower.com

Neutral HK$3.72


Company description Datang is the listed flagship IPP of the China Datang Group, one of the five nationwide generation groups in China unbundled from the State Power Corp of China back in 2003. As of end-2008, Datang had total installed capacity of 25,097MW. The group is the first listed IPP in China to have diversified away from coal-fired power generation business into nuclear power generation (under development), coal mining and coal conversion projects. Post mortem Despite the stock market upturn, the China IPPs have remained the worst performing sub-sector within our China infrastructure coverage over the past 12 months. We expect Datang to continue to lag behind CR-Power and Huaneng due to its higher gearing (80% debt/asset ratio) and coal conversion exposure (given the group’s already negative track record on its Duolun project). Other share price downside risks include: (A) higher coal costs; (B) accelerating capacity addition; and (C) possible introduction of increased competition leading to slight IPP tariff pressure. We believe IPP tariff pressure might persist into FY10-11 as the sector is deregulated further.

Potential for earnings upgrades Share price catalysts for Datang include: (A) a continued recovery in power demand; (B) slower capacity addition; and (C) lower coal prices.

How much recovery is priced into the stock? China power demand has continued to pick up. According to data released by China Electricity Council, power demand grew 10.24% Y/Y in Sep-09, supported by continued recovery in industrial demand 8.8% for the month. Given this, we believe some of recovery may have been partially priced in.

Price target and key risks We maintain our Neutral rating on Datang. Our Dec-10 DCF-based PT of HK$4.3 implies a risk-free rate of 5%, a terminal growth rate of 2%, and a beta of 1.5x. Key upside risks to our view and PT include lower-than-expected coal costs and capital expenditure, and stronger utilization.

China Independent Power Producers Edmond LeeAC (852) 2800-8575 [email protected]


Price performance

2.5

4.0

5.5

HK$


0991.HK share price (HK$HSCEI (rebased)

Source: Bloomberg.



Source: Bloomberg.

Company data 52-week range (HK$) 2.36-5.39 Mkt cap. (HK$MM) 43,650 Mkt cap. (US$MM) 5,596 Avg daily value (US$MM) 17 Avg daily volume (MM) 33 Shares O/S (MM) 11,734 Date of price 5-Nov-2009 Index: HSCEI 12,805 Free float (%) 25 Exchange rate HK$7.8/ US$1

Source: Bloomberg.

Bloomberg: 0991HK; Reuters: 991.HK Rmb in millions, year-end December FY08 FY09E FY10E FY11E Sales 36,836 44,907 53,388 54,536 Net profit 761 1,749 3,025 3,571 EPS (Rmb) 0.06 0.14 0.23 0.27 FD EPS (Rmb) 0.06 0.14 0.23 0.27 DPS (Rmb) 0.11 0.11 0.11 0.13 Sales growth (%) 12.4 21.9 18.9 2.2 Net profit growth (%) -78.9 117.0 63.7 18.1 EPS growth (%) 11.3 11.3 11.3 11.3 ROE (%) 2.7 6.1 9.4 10.5 P/E (x) 54.6 23.4 14.3 12.2 FD P/E (x) 54.6 23.4 14.3 12.2 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

309



Datang International: Summary of financials Profit and loss statement Rmb in millions, year-end December FY08 FY09E FY10E FY11ERevenue 36,836 44,907 53,388 54,536% change Y/Y 12.4 21.9 18.9 2.2Gross margin (%) 37.7 -9.4 -1.2 0.0EBITDA 9,088 15,057 18,908 19,641% change Y/Y -29.2 65.7 25.6 3.9EBITDA margin (%) 24.7 33.5 35.4 36.0EBIT 2,929 7,462 10,216 10,931% change Y/Y -63.0 154.7 36.9 7.0EBIT margin (%) 8.0 16.6 19.1 20.0Net interest (3,637) (4,122) (4,138) (3,618)Earnings before tax 612 3,859 6,687 8,022% change Y/Y -89.9 530.9 73.3 20.0Tax (72) (579) (1,337) (1,845)as % of EBT 11.7 15.0 20.0 23.0Net income (reported) 761 1,749 3,025 3,571% change Y/Y -78.7 129.9 72.9 18.1Shares O/S (MM) 11,780 12,480 13,180 13,180 EPS (reported) (Rmb) 0.06 0.14 0.23 0.27Source: Company, J.P. Morgan estimates.

Balance sheet Rmb in millions, year-end December FY08 FY09E FY10E FY11ECash and cash equivalents 5,468 2,719 775 3,256Accounts receivable 6,242 5,072 6,029 6,159Inventories 2,143 1,455 1,730 1,768Current assets 15,240 13,318 12,606 15,253LT investments 7,484 7,484 7,484 7,484Net fixed assets 134,667 153,217 166,762 173,026Total assets 157,392 174,019 186,852 195,763Liabilities ST loans 39,128 46,596 56,301 62,621Payables 13,526 15,280 18,227 18,862Others 922 291 212 225Total current liabilities 53,576 62,167 74,740 81,708Long-term debt 72,776 68,399 63,682 60,145Other liabilities 396 396 396 396Total liabilities 126,747 134,411 142,267 145,699Shareholders’ equity 25,990 31,444 32,942 35,064BVPS (Rmb) 2.21 2.52 2.50 2.66Source: Company, J.P. Morgan estimates.

Cash flow statement Rmb in millions, year-end December FY08 FY09E FY10E FY11EEBIT 2,929 7,462 10,216 10,931Depreciation & amortization 6,159 7,595 8,691 8,710Change in working capital -2117 2642 492 -503Taxes -734 392 -115 -874Cash flow from operations 7,898 11,555 13,646 13,252Capex -36,010 -22,831 -20,000 -12,000Disposal/(purchase) 1,619 0 0 0 Net interest 166 (6,669) (6,374) (6,592)Free cash flow -27,902 -6,196 -2,106 4,776Equity raised/(repaid) 0 0 0 0 Debt raised/(repaid) 30,925 7,418 4,883 2,783Other (2,448) 1,979 1,154 752 Dividends (2,240) (1,296) (1,527) (1,450)Beginning cash 3,471 5,468 2,719 775Ending cash 5,468 2,719 775 3,256DPS (Rmb) 0.11 0.11 0.11 0.13Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December FY08 FY09E FY10E FY11EEBITDA margin 24.7 33.5 35.4 36.0Operating margin 8.0 16.6 19.1 20.0Net profit margin 2.1 3.9 5.7 6.5SG&A/sales 4.5 5.3 4.5 4.1Sales growth 12.4 21.9 18.9 2.2Net profit growth 12.4 21.9 18.9 2.2Sales per share growth -78.9 117.0 63.7 18.1EPS growth 11.3 11.3 11.3 11.3Interest coverage (x) -54.8 2.3 3.0 3.0Net debt to total capital 79.8 77.4 77.7 76.6Net debt to equity 394.6 342.6 347.8 327.6Sales/assets 23.4 25.8 28.6 27.9Assets/equity (x) 605.6 553.4 567.2 558.3ROI 2.7 6.1 9.4 10.5ROE 2.1 4.6 5.6 0.0Source: Company, J.P. Morgan estimates.

310



Ecopetrol www.ecopetrol.com.co

Underweight US$27.12


Company description Ecopetrol is Colombia’s national oil company and the largest integrated producer in the country, making it a close comparable with Petrobras. With a market cap north of US$50 billion, Ecopetrol is the second-largest oil stock in Latin America. Originally founded in 1951 as a state-owned oil company, Ecopetrol is now a mixed-capital entity. With 447 kboed of production Ecopetrol is the fourth hydrocarbon producer in Latin America.

Post mortem Our main reservation about Ecopetrol’s portfolio is that it boasts the lowest reserve life ratio among our global sample and has registered a low reserve replacement ratio. While its ability to grow production has surprised us and the market, such success only underscores our concern that reserves may be depleting faster, raising questions of sustainability.

Potential for earnings upgrades Ecopetrol is highly leveraged to oil prices. While earnings have upside because of rapid production growth, we look at a full-cycle valuation that also considers finding and development costs, which are high for Ecopetrol at $18-$20/boe.

How much recovery is priced into the stock? Ecopetrol is one of the most expensive oil stocks in the world, trading at 8.1x EV/EBITDA on 2010 estimates. We don’t think the quality of the portfolio deserves higher or similar multiples to those of Petrobras (8.6x).

Price target and key risks We use a sum-of-the parts model based on DCF, using long-term oil prices of $80/bbl and a discount rate of 11%. Our YE10 price target is $26/ADR. Risks include direction of oil prices, exploration risk, uncertainty of capital expenditures. Valuation has registered steady premiums to peers’ since listing.

Colombia Integrated Oils Sergio TorresAC (212) 622 3378 [email protected]


Price performance

14

18

22

26

30

$


Price Performance

Source: Bloomberg.


Absolute (%) -2.2 -4.4 31.4 Relative (%) 1.7 29.0 152.4

Source: Bloomberg.

Company data 52-week range (LC) 1789 - 2825 Mkt cap. (LCMM) 106,058 Mkt cap. (US$MM) 53,715 Avg daily value (US$MM) 12,537 Avg daily volume (MM) 11,820,410 Shares O/S (MM) 40,480.0

Date of price 11/25/2009

Index: CB

Free float (%) 10.1%

Exchange rate 1,961.0

Source: Bloomberg

Bloomberg: EC US; Reuters: EC.SA US$ in millions, year-end December 31 FY08 FY09E FY10E FY11E Sales 17,386 15,442 13,583 14,816 Net profit 5,965 2,906 3,761 5,382 EPS (LC) 287.36 154.34 197.47 292.19 FD EPS (LC) 287.36 154.34 197.47 292.19 DPS (LC) 114.99 219.90 119.01 142.93 Sales growth (%) 62% -11% -12% 9% Net profit growth (%) 139% -51% 29% 43% EPS growth (%) 139% -51% 29% 43% ROE (%) 42% 20% 27% 34% P/E (x) 9.1 17.0 13.3 9.0 FD P/E (x) 9.1 17.0 13.3 9.0 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

311



Ecopetrol: Summary of financials Profit and loss statement USD in millions, year-end December 31

FY08 FY09E FY10E FY11ERevenue 17,386 15,442 13,583 14,816 % change Y/Y 62% -11% -12% 9%Gross margin (%) 44% 32% 50% 60%EBITDA 7,275 4,551 6,937 9,157 % change Y/Y 49% -37% 52% 32%EBITDA margin (%) 42% 29% 51% 62%EBIT 6,369 3,354 5,676 7,997 % change Y/Y 51% -47% 69% 41%EBIT margin (%) 37% 22% 42% 54%Net interest 2,103 905 (191) (191)Earnings before tax 8,212 4,151 5,373 7,688 % change Y/Y 141% -49% 29% 43%Tax (2,247) (1,245) (1,612) (2,306)as % of EBT 27% 30% 30% 30%Net income (reported) 5,965 2,906 3,761 5,382 % change Y/Y 139% -51% 29% 43%Shares O/S (MM) 2,024 2,024 2,024 2,024 EPS (reported) (LC) 2.95 1.44 1.86 2.66 Source: Company, J.P. Morgan estimates.

Balance sheet USD in millions, year-end December 31

FY08 FY09E FY10E FY11ECash and cash equivalents 940 529 314 1,140 Accounts receivable 2,613 813 813 813 Inventories 0 0 0 0 Others 3,430 3,430 3,430 3,430 Current assets 6,983 4,772 4,557 5,383 LT investments 3,863 3,863 3,863 3,863 Net fixed assets 3,591 4,768 5,323 5,989 Total assets 21,655 22,096 23,192 25,549 Liabilities 760 760 760 760 ST loans 0 0 0 0Payables 1,795 1,795 1,795 1,795 Others 425 425 425 425 Total current liabilities 2,979 2,979 2,979 2,979 Long-term debt 0 2,500 2,500 2,500 Other liabilities 3,282 3,282 3,282 3,282 Total liabilities 21,655 22,096 23,192 25,549 Shareholders’ equity 15,394 13,335 14,430 16,788 BVPS (LC) 741.6 708.2 757.7 911.4 Source: Company, J.P. Morgan estimates.

Cash flow statement USD in millions, year-end December 31

FY08 FY09E FY10E FY11EEBIT 6,369 3,354 5,676 7,997 Depreciation & amortization 906.3 1,197.0 1,261.2 1,160.7 Change in working capital (1,161.5) 1,800.0 - - Taxes (1,519) (1,245) (1,612) (2,306)Cash flow from operations 6,048.5 6,010.1 5,134.5 6,660.2 Capex (3,438.9) (4,260.0) (3,082.1) (3,202.1)Disposal/(purchase) - - - - Net interest 2,103 905 (191) (191)Free cash flow 2,610 1,750 2,052 3,458 Equity raised/(repaid) 145 0 0 0 Debt raised/(repaid) 427 2,500 0 0 Other - - - - Dividends (2,387) (4,342) (2,267) (2,633)Beginning cash 1,859 940 529 314 Ending cash 940 529 314 1,140 DPS (LC) 114.99 219.90 119.01 142.93 Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December 31 FY08 FY09E FY10E FY11EEBITDA margin 42% 29% 51% 62%Operating margin 37% 22% 42% 54%Net profit margin 34% 19% 28% 36%SG&A/sales 7% 10% 8% 6%Sales growth 62% -11% -12% 9%Net profit growth 139% -51% 29% 43%Sales per share growth 162% 89% 88% 109%EPS growth 145% -51% 29% 43%Interest coverage (x) - - - - Net debt to total capital 0% 16% 15% 13%Net debt to equity 6% -15% -15% -8%Sales/assets 80% 70% 59% 58%EBIT margin 37% 22% 42% 54%ROCE 25% 12% 25% 32%Assets/equity (x) 1.4 1.7 1.6 1.5 ROI - - - -ROE 20% 27% 34% 36%Source: Company, J.P. Morgan estimates.

312



Grupo Aeroportuario del Pacifico www.aeropuertosgap.com.mx

Neutral Ps36.28


Company description Grupo Aeroporturario del Pacifico (GAP) owns and operates 12 airports in Mexico and its largest is the one in Guadalajara, which accounts for 35% of its total traffic, followed by Tijuana, Hermosillo and Puerto Vallarta. GAP benefited significantly in 2007 from the entrance of new LCCs in Mexico but as most of the companies closed it was severely impacted last year. The company generates more than 60% of its revenues from domestic traffic.

Post mortem Mexican airports were severely impacted by the economic crisis that hit domestic and international traffic figures. The swine flu outbreak also had a significant negative impact in the 2Q09. We expect a gradual recovery that already started in 3Q. We believe investors should avoid GAP as we see a better recovery outlook for international traffic, which represents 35% of GAP’s traffic versus 57% for ASUR.

Potential for earnings upgrades The main upside risk to our estimates are related to a better-than-expected recovery in traffic volumes; currently we expect a 3% recovery in 4Q09 vs a 10% decrease in 3Q09 yoy. For the full year we expect volumes to be down 13% and to recover 10% next year.

How much recovery is priced into the stock? GAP’s YTD performance of +15% below ASUR performance up 21%, and lower than the +40% for the Bolsa.

Price target and key risks We rate GAP Neutral relative to the other airport companies in Mexico. Our Dec-09 price target of Ps30 (US$23 per ADR) is based on a DCF model using a WACC of 10.4% (3% risk free rate, 2.5% country risk, 5% equity risk premium and 1.0 beta). Its high exposure to domestic traffic could result in higher volumes if the Mexican economy recovers faster than expected. On the negative side, higher-than-expected pressure on margins would reduce our FCF expectations.

Mexico Airport Operators Adrian E HuertaAC (52 81) 8152-8720 [email protected]



Absolute (%) -3 -4 34 Relative (%) 4 -10 -18

Source: Bloomberg.


Source: Bloomberg.

Bloomberg: GAPB MM BZ Reuters: GAPB MM.SA LC in millions, year-end December FY08 FY09E FY10E FY11E Sales 3,491 3,265 3,528 3,774 Net profit 1,541 1,016 1,061 1,157 EPS (LC) 2.75 1.81 1.89 2.06 FD EPS (LC) 2.75 1.81 1.89 2.06 DPS (LC) 2.00 2.14 1.78 1.78 Sales growth (%) 0.4% -6.5% 8.1% 7.0% Net profit growth (%) 10.0% -34.1% 4.5% 9.1% EPS growth (%) 10.0% -34.1% 4.5% 9.1% ROE (%) 50.4% 33.5% 34.3% 35.6% P/E (x) 13.2 20.0 19.2 17.6 FD P/E (x) 13.2 20.0 19.2 17.6 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

313



GAP: Summary of financials Profit and loss statement LC in millions, year-end December FY08 FY09E FY10E FY11ERevenue 3,491 3,265 3,528 3,774 % change Y/Y 0.4% -6.5% 8.1% 7.0%Gross margin (%) NA NA NA NAEBITDA 2,246 2,039 2,235 2,404 % change Y/Y -3.9% -9.2% 9.6% 7.5%EBITDA margin (%) 64.3% 62.5% 63.4% 63.7%EBIT 1,448 1,227 1,423 1,535 % change Y/Y -8.5% -15.3% 16.0% 7.8%EBIT margin (%) 41.5% 37.6% 40.3% 40.7%Net interest 215 78 51 73 Earnings before tax 1,670 1,298 1,474 1,607 % change Y/Y -0.5% -22.3% 13.5% 9.1%Tax (130) (282) (413) (450)as % of EBT 7.8% 21.7% 28.0% 28.0%Net income (reported) 1,541 1,016 1,061 1,157% change Y/Y 10.0% -34.1% 4.5% 9.1%Shares O/S (MM) 561 561 561 561EPS (reported) (LC) 2.75 1.81 1.89 2.06Source: Company, J.P. Morgan estimates.

Balance sheet LC in millions, year-end December FY08 FY09E FY10E FY11ECash and cash equivalents 1,781 2,164 2,394 2,781Accounts receivable 938 787 851 910Inventories 0 0 0 0Others 0 0 0 0Current assets 2,719 2,951 3,245 3,691LT investments 23,682 23,535 23,535 23,535Net fixed assets 335 164 (48) (317)Total assets 28,142 28,091 28,173 28,351Liabilities ST loans 135 173 173 173Payables 381 206 222 238Others 158 220 220 220Total current liabilities 674 600 616 632Long-term debt 665 863 863 863Other liabilities 65 65 68 73Total liabilities 1,404 1,527 1,547 1,568Shareholders’ equity 26,738 26,564 26,625 26,783BVPS (LC) 47.66 47.35 47.46 47.74Source: Company, J.P. Morgan estimates.


FY08 FY09E FY10E FY11EEBIT 1,448 1,227 1,423 1,535 Depreciation & amortization 798 812 812 869 Change in working capital (237) (25) (47) (44)Taxes (130) (282) (413) (450)Cash flow from operations 1,590 1,983 1,830 1,987 Capex (550) (642) (600) (600)Disposal/(purchase) 10 10 10 10 Net interest 215 78 51 73 Free cash flow 1,053 1,078 1,278 1,422 Equity raised/(repaid) 0 0 0 0 Debt raised/(repaid) 221 236 0 0 Other 0 0 0 0 Dividends (1,122) (1,200) (1,000) (1,000)Beginning cash 1,632 1,781 2,164 2,394 Ending cash 1,781 2,164 2,394 2,781 DPS (LC) 2.00 2.14 1.78 1.78Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December FY08 FY09E FY10E FY11EEBITDA margin 64.3% 62.5% 63.4% 63.7%Operating margin 41.5% 37.6% 40.3% 40.7%Net profit margin 44.1% 31.1% 30.1% 30.7%SG&A/sales 27.3% 29.2% 28.4% 28.2%Sales growth 0.4% -6.5% 8.1% 7.0%Net profit growth 10% -34% 4% 9%Sales per share growth 0.4% -6.5% 8.1% 7.0%EPS growth 10.0% -34.1% 4.5% 9.1%Interest coverage (x) 25.18 16.39 18.31 18.51 Net debt to total capital -3.6% -4.1% -4.9% -6.3%Net debt to equity -3.7% -4.2% -5.1% -6.5%Sales/assets 0.12 0.12 0.13 0.13 EBIT margin 41.5% 37.6% 40.3% 40.7%ROCE 27.0% 22.9% 27.0% 27.9%Assets/equity (x) 1.05 1.06 1.06 1.06 ROI 27.0% 22.9% 27.0% 27.9%ROE 50.4% 33.5% 34.3% 35.6%Source: Company, J.P. Morgan estimates.

314



Grupo Modelo www.gmodelo.com.mx

Neutral Price: Ps 65.46

Price Target: Ps60

Company description Grupo Modelo is the leading brewer in Mexico. Its brands include Corona Extra, Corona Light, Modelo Especial, etc. They also import ABI products including Budweiser and Bud Light, Chinese brand Tsingtao and Danish Carlsberg. Through its strategic partnership with Nestle, the company also produces and distributes bottled water brands. It also operates approx. 800 convenience stores under the name Extra. The Group exports 5 of its brands and is present in +150 countries. Post mortem This year Modelo has been gaining share in Mexico from its lone competitor FEMSA, mainly due to upsizing strategies implemented from early this year. With rational pricing expected in 2010, we believe Modelo will maintain its leadership position in the domestic industry. However, Modelo’s export outlook looks challenging as we see ABI as a formidable competitor to Corona in the US using the Stella Artois brand.

Potential for earnings upgrades Modelo’s domestic operations should grow in line with other brewers in the industry owing to rational pricing and innovations. However, we remain concerned about their competitiveness in the US market. How much recovery is priced into the stock? The stock is trading at 8.5x '10E EBITDA and 18x '10E P/E, broadly in line with the average of global peers. The stock has recovered significantly from its lows given the company’s successful navigation through the tough economic environment. The current valuation looks fair and we believe there is limited upside to the stock absent a faster-than-expected recovery of the domestic economy. Price target and key risks Our Dec ’10 PT of Ps60 is derived using a target EV/EBITDA multiple of 8x in line with its historical average and average of global peers. Key risks are macro. On the upside, a corporate event such as a change in control, or material devaluation of Ps to boost export profitability. Downside risks; if Modelo’s US exports deteriorate further, or if there is negative news from the arbitration process with ABI.

Latin America Food & Beverages Alan AlanisAC (1-212) 622 3697 [email protected]


Price performance Ps

3040506070

Nov Feb May Aug Nov

Source: Bloomberg


Absolute (%) 7.8% 29.8% 84.5% Relative (%) 4.2% 17.8% 22.0%

Source: Bloomberg

Company data 52-week range (LC) 34.12-65.46 Mkt cap. (Ps MM) 211.66 Mkt cap. (US$MM) 16.5 Avg daily value (US$MM) 10.3 Avg daily volume (MM) 2.7 Shares O/S (MM) 3,232 Date of price 11/25/2009 Index: Mexican Bolsa 31,364 Free float (%) 20% Exchange rate 12.8

Bloomberg: GMODELOC MM; Reuters: MODELO Ps in millions, year-end December FY08 FY09E FY10E FY11E Sales 75,364 82,196 88,771 94,602 Net profit 9,016 8,684 11,700 12,666 EPS (LC) 2.79 2.69 3.62 3.92 DPS (LC) 2.09 - 1.56 2.19 Sales growth (%) 3.4% 9.1% 8.0% 6.6% Net profit growth (%) -4.8% -3.7% 34.7% 8.3% EPS growth (%) -4.8% -3.7% 34.7% 8.3% ROE (%) 15% 12% 15% 15% P/E (x) 23.5x 24.4x 18.1x 16.7x FD P/E (x) 23.5x 24.4x 18.1x 16.7x Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

315



Modelo: Summary of financials Profit and loss statement Ps in millions/billions, year-end December FY08 FY09E FY10E FY11E Revenue 75,364 82,196 88,771 94,602 % change Y/Y 3.4% 9.1% 8.0% 6.6% Gross margin (%) 52.8% 53.8% 54.7% 54.8% EBITDA 22,219 25,145 27,581 29,340 % change Y/Y -4.9% 13.2% 9.7% 6.4% EBITDA margin (%) 29.5% 30.6% 31.1% 31.0% EBIT 19,285 21,879 24,237 25,959 % change Y/Y -6.3% 13.5% 10.8% 7.1% EBIT margin (%) 25.6% 26.6% 27.3% 27.4% Other Income (expense) (75) (3,021) (413) (179) Earnings before tax 19,210 18,858 23,824 25,780 % change Y/Y -7.6% -1.8% 26.3% 8.2% Tax (4,397) (4,520) (5,711) (6,180) as % of EBT 22.9% 24.0% 24.0% 24.0% Net income (reported) 9,016 8,684 11,700 12,666 % change Y/Y -4.8% -3.7% 34.7% 8.3% Shares O/S (MM) 3,232 3,232 3,232 3,232 EPS (reported) (LC) 2.79 2.69 3.62 3.92 Source: Company, J.P. Morgan estimates.

Balance sheet Ps in millions/billions, year-end December

FY08 FY09E FY10E FY11E Cash and cash equivalents 13,145 19,927 30,049 38,929 Accounts receivable 9,352 10,885 9,543 10,074 Inventories 13,355 12,836 15,285 16,101 Others 2,848 3,175 3,357 3,544 Current assets 38,699 46,822 58,234 68,649 LT investments 5,038 5,097 5,097 5,097 Net fixed assets 55,349 57,184 57,721 58,506 Total assets 105,690 116,712 128,824 140,191 Liabilities ST loans 0 0 0 0 Payables 5,294 5,471 5,663 5,831 Others 4,225 5,365 5,552 5,975 Total current liabilities 9,519 10,836 11,215 11,806 Long-term debt 0 0 0 0 Other liabilities 15,619 9,863 9,863 9,863 Minorities 18,731 23,012 27,903 32,692 Shareholders’ equity 61,821 73,000 79,842 85,829 BVPS (Ps) 19.1 22.6 24.7 26.6 Source: Company, J.P. Morgan estimates.

Cash flow statement Ps in millions/billions, year-end December

FY08 FY09E FY10E FY11E EBIT 19,285 21,879 24,237 25,959 Depreciation & amortization 2,934 3,266 3,344 3,381 Change in working capital (6,148) (23) (911) (944) Taxes 4,397 4,520 5,711 4,397 Cash flow from operations 7,834 12,646 21,110 22,837 Capex 6,586 5,864 4,439 4,730 Disposal/(purchase) Free cash flow 4,646 13,683 16,003 16,961 Equity raised/(repaid) 0 0 0 0 Debt raised/(repaid) 0 0 0 0 Other 0 0 0 0 Dividends 8,820 - 6,549 9,227 Beginning cash 20,717 13,145 19,927 30,049 Ending cash 13,145 19,927 30,049 38,929 DPS (LC) 2.09 - 1.56 2.19 Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December FY08 FY09E FY10E FY11E EBITDA margin 29.5% 30.6% 31.1% 31.0% Operating margin 25.6% 26.6% 27.3% 27.4% Net profit margin 12.0% 10.6% 13.2% 13.4% SG&A/sales 27.2% 27.2% 27.4% 27.4% Sales growth 3.4% 9.1% 8.0% 6.6% Net profit growth -4.8% -3.7% 34.7% 8.3% Sales per share growth 3.4% 9.1% 8.0% 6.6% EPS growth -4.8% -3.7% 34.7% 8.3% Interest coverage (x) - - - - Net debt to total capital -21% -27% -38% -45% Net debt to equity -21% -27% -38% -45% Sales/assets 0.71 0.70 0.69 0.67 EBIT margin 25.6% 26.6% 27.3% 27.4% ROCE 24% 25% 24% 24% Assets/equity (x) 1.71 1.60 1.61 1.63 ROI 24% 25% 24% 24% ROE 15% 12% 15% 15% Source: Company, J.P. Morgan estimates.

316



HCL Infosystems www.hclinfosystems.in

Neutral Rs150

Price Target: Rs160

Company description HCL offers information technology, office automation and communication technology (ICT) products and services. The company has a large ICT product and services network with a direct presence in over 350 locations across the country and a strong franchisee service network. Over the past one-two years, the company has entered the system integration (SI) space— HCLI has focused on government and large Indian corporates, especially in the telecom and power space for SI business.

Post mortem HCL Infosystems derives all its revenues from domestic corporates and Indian government. The slowdown in the local economy and country-wide elections led to lower PC market growth from enterprises and the government. The PC business is gradually recovering with the pick-in local economy. The high wireless subscriber growth did not translate to high Nokia sales due to the high multiple-SIMs effect. The company is now looking to win large contracts in the SI segment, mainly from the government and related entities in the power and telecom segment for revenue growth.

Potential for earnings upgrades We expect the PC business to be weak, and limited growth in the telecom (Nokia) business. We think current estimates already factor in the upside from new SI deal wins and see limited potential for upgrades. Large equity dilution and warrant issue are an overhang on EPS estimates in the near-term.

How much recovery is priced into the stock? We believe the stock is pricing in most of the recovery in the company’s traditional segments and potential upside from deal wins in its SI business.

Price target and key risks Our Jun-10 price target of Rs160 is based on the one-year forward multiple of 10x—largely in line with medium-term historical trading multiples. Key downside risks to our price target are lower growth in the PC market, market share loss for Nokia and large equity dilution leading to lower ROE. Key upside risks to our price target are large order wins in the SI segment.

India IT Services Manoj SinglaAC (91-22) 6157-3587 [email protected]


Price performance

020406080

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HCL Infosy stems Sensex (rebased)

Source: Bloomberg.



Source: Bloomberg.

Company data 52-week range (Rs) Rs63-189 Mkt cap. (Rs B) 25.7 Mkt cap. (US$MM) 547.0 Avg daily value (US$MM) 1.3 Avg daily volume (MM) 0.4 Shares O/S (MM) 171 Date of price 5-Nov-09 Index: Sensex 16063.9 Free float (%) 39 Exchange rate Rs47.0/US$

Source: Bloomberg.

Bloomberg: HCLI IN; Reuters: HCLI.BO Rs in millions, year-end June FY09 FY10E FY11E FY12E Sales 123,829 131,096 145,707 163,237 Net profit 2,399 3,059 3,484 3,972 EPS (Rs) 14.0 14.5 15.6 17.8 FD EPS (Rs) 14.0 14.5 15.6 17.8 DPS (Rs) 6.5 6.0 6.0 6.0 Sales growth (%) -1.8 5.9 11.1 12.0 Net profit growth (%) -20.1 27.5 13.9 14.0 EPS growth (%) -20.3 3.7 7.6 14.0 ROE (%) 22.4 18.7 15.4 15.9 P/E (x) 10.7 10.4 9.6 8.4 FD P/E (x) 10.7 10.4 9.6 8.4 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

317



HCL Infosystems: Summary of financials Profit and loss statement Rs in millions, year-end June

FY09 FY10E FY11E FY12ERevenue 123,829 131,096 145,707 163,237% change Y/Y -1.8 5.9 11.1 12.0Gross margin (%) 8.6 8.9 9.0 9.1EBITDA 4065 4321 4932 5677% change Y/Y -7.9 6.3 14.1 15.1EBITDA margin (%) 3.3 3.3 3.4 3.5EBIT 3,853 4,078 4,677 5,411% change Y/Y -8.9 5.8 14.7 15.7EBIT margin (%) 3.1 3.1 3.2 3.3Net interest (407) (402) (456) (492)Earnings before tax 3,513 4,306 4,977 5,675% change Y/Y -18.3 22.6 15.6 14.0Tax 1,114 1,247 1,493 1,702as % of EBT 31.7 29.0 30.0 30.0Net income (reported) 2,399 3,059 3,484 3,972% change Y/Y -20.1 27.5 13.9 14.0Shares O/S (MM) 171 223 223 223EPS (reported) (Rs) 14.0 14.5 15.6 17.8Source: Company, J.P. Morgan estimates.

Balance sheet Rs in millions, year-end June

FY09 FY10E FY11E FY12ECash and cash equivalents 4,701 13,372 15,259 16,821Accounts receivable 15,063 18,694 19,978 22,759Inventories 0 0 0 0Others 11,952 13,403 14,323 16,318Current assets 31,716 45,469 49,560 55,898LT investments 0 0 0 1Net fixed assets 1,852 1,796 1,669 1,531Total assets 33,568 47,266 51,230 57,430Liabilities ST loans 0 0 0 0Payables 20,138 22,163 23,686 26,960Others -56 -71 -76 -87Total current liabilities 20,082 22,092 23,610 26,874Long-term debt 2,268 3,687 3,987 4,287Other liabilities 0 0 0 0Total liabilities 22,350 25,779 27,597 31,161Shareholders’ equity 11,219 21,486 23,633 26,269BVPS (Rs) 65.5 96.4 106.1 117.9Source: Company, J.P. Morgan estimates.

Cash flow statement Rs in millions, year-end June

FY09 FY10E FY11E FY12EEBIT 3,853 4,078 4,677 5,411Depreciation & amortization 213 243 255 266Change in working capital -272 -3,072 -686 -1,512Taxes 1,114 1,247 1,493 1,702Cash flow from operations 2,339 230 3,052 2,726Capex -367 -187 -128 -128Disposal/(purchase) 2,339 230 3,052 2,726Net interest (407) (402) (456) (492)Free cash flow 1,973 43 2,924 2,598Equity raised/(repaid) -229 8,468 0 0Debt raised/(repaid) -1,277 1,419 300 300Other 0 0 0 0Dividends -1,113 -1,260 -1,337 -1,337Beginning cash 5,348 4,701 13,372 15,259Ending cash 4,702 13,371 15,259 16,821DPS (Rs) 6.5 6.0 6.0 6.0Source: Company, J.P. Morgan estimates.

Ratio analysis Rs in millions, year-end June

FY09 FY10E FY11E FY12EEBITDA margin 3.3 3.3 3.4 3.5Operating margin 3.1 3.1 3.2 3.3Net profit margin 1.9 2.3 2.4 2.4SG&A/sales 5.5 5.7 5.8 5.8Sales growth -1.8 5.9 11.1 12.0Net profit growth -20.1 27.5 13.9 14.0Sales per share growth -1.8 -18.7 11.1 12.0EPS growth -20.3 3.7 7.6 14.0Interest coverage (x) 9.5 10.1 10.3 11.0Net debt to total capital n.m. n.m. n.m. n.m.Net debt to equity n.m. n.m. n.m. n.m.Sales/assets 3.7 2.8 2.8 2.8EBIT margin 3.1 3.1 3.2 3.3ROCE 19.3 15.1 12.5 13.1Assets/equity (x) 3.0 2.2 2.2 2.2ROI 19.3 15.2 12.7 13.3ROE 22.4 18.7 15.4 15.9Source: Company, J.P. Morgan estimates.

318



Hindustan Unilever www.hul.co.in

Underweight Price: Rs278.15

Price Target: Rs225

Company description Hindustan Unilever is India’s leading consumer products company. It has dominant shares in soaps, laundry, skin care, shampoos and tea. It also has extensive presence in toothpastes and processed foods segments. It is a 51%-owned subsidiary of Unilever Plc. Post mortem We think that a quick and meaningful turnaround is unlikely considering HUL’s limited pricing power and weak market share performance in core categories. Despite considerable pricing actions and higher brand investments (A&P spends up 31% Y/Y during 1HFY10) being implemented to push up volumes, market share performance of HUL has been weak across most categories due to down-trading and intensified competition. We see three key risks for HUL’s growth going forward: (1) input costs are trending up; (2) pricing gains are waning away; and (3) there is risk of the impact of a weak monsoon and high food inflation on consumption patterns. Potential for earnings upgrades We see limited room for earnings upgrades for the company considering the risks discussed above. So far the company has disappointed on top-line but managed earnings aided by gross margin gains. Beyond personal care, HUL has been unable to build a significant presence in new categories. Although areas such as food have huge earnings growth potential, visibility still remains poor considering product capabilities and the competitive landscape. How much recovery is priced into the stock? The consumer staples sector was not affected by the credit downturn. There has been consumer down-trading on account of inflationary risks and increased competitive intensity which has impacted HUL’s performance in the mass laundry and soaps segment. We feel a likely recovery in volume growth (off a low base last year) is factored in the stock valuations currently. Price target and key risks Our Sept-10 price target of Rs225 is based on 20x one-year forward earnings. With earnings growth dropping to 12% during FY09-11E vs. the past three-year CAGR of 16% and lower-than-group average at 20% over FY09-11E, HUL’s current valuations of 27x FY10E P/E appear demanding. Key risks to our PT are higher-than-expected savings from commodity deflation and bearishness in the local market, which would necessitate further investments into a defensive name such as this one.

India Household Products Vineet Sharma, CFAAC (852) 2800-8523 [email protected]


Latika Chopra, CFA (91-22) 6157-3584

[email protected]



150

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Rs

HLL.BO Share Price


1M 3M 12M Absolute (%) 4.5 -3.9 16.8 Relative (%) 9.2 -4.9 -41.9


52-week range (Rs) 210.7 - 306.7 Mkt cap. (Rs B) 608.5 Mkt cap. (US$ B) 12.9 Avg daily val (US$ MM) 21.5 Avg daily volume (MM) 3.8 Shares O/S (MM) 2,81 Date of price 5-ov-0 Index: Sensex 16063.9 Free float (%) 49 Exchange rate 47.04

Source: Bloomberg. Bloomberg: HUVR IN; Reuters: HLL.BO RSMM, year-end March CY07 FY09 (15M Mar-09) FY10E FY11E Net sales 137,178 202,393 180,829 201,949 Net profit 17,674 24,522 22,836 25,939 EPS (Rs) 8.1 11.3 10.5 11.9 DPS (Rs) 9.0 7.5 7.5 8.5 Net sales growth (%) 13% NM NM 12% Net profit growth (%) 15% NM NM 14% EPS growth (%) 16% NM NM 14% ROE (%) 84.9 112.1 109.0 93.8 ROCE (%) 102.2 121.7 129.5 117.4 BVPS (Rs) 6.6 9.5 11.5 13.9 P/E (x) 33.5 30.2 25.9 22.8 P/BV (x) 41.1 35.9 23.6 19.6 EV/EBITDA (%) 24.6 22.2 18.0 15.7 Dividend yield (%) 3.3 2.8 2.8 3.1 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

319



Hindustan Unilever: Summary of financials Rs in millions, year-end March Profit and loss statement

Cash flow statement

CY07 FY09E (15M) FY10E FY11E CY07 FY09E (15M) FY10E FY11E Revenues 137,178 202,393 180,829 201,949 EBIT 22,100 30,504 29,857 33,888 % change Y/Y 13% NM NM 12% Depreciation 846 1,284 1,850 1,900 Gross Margin (%) 47% 46% 48% 48% Change in WC (2,762) 1,167 (1,342) (2,612) EBITDA 23,484 32,457 31,707 35,788 Taxes (4,171) (5,729) (6,821) (7,748) % change Y/Y 17% NM NM 13% Others EBITDA Margin (%) 17% 16% 18% 18% Cash flow from

operations 16,013 27,226 23,544 25,427 EBIT 22,100 30,504 29,857 33,888 Capex (2,818) (4,991) (1,500) (1,500) % change Y/Y 18% NM NM 14% Disposal/ (purchase) 597 (23) 0 0 EBIT Margin (%) 16% 15% 17% 17% Net Interest (255) (253) (200) (200) Net Interest 255 253 200 200 Free cash flow 13,536 21,959 21,844 23,727 Earnings before tax 21,845 30,251 29,657 33,688 % change Y/Y 17% NM NM 14% Equity raised/ (repaid) (6,315) 0 (2) 0 Tax 4,171 5,729 6,821 7,748 Debt raised/ (repaid) 0 0 (3,000) 0 as % of EBT 19% 19% 23% 23% Other 6,062 1,048 0 0 Net Income (Adjusted) 17,674 24,522 22,836 25,939 Dividends paid (25,859) (14,360) (21,371) (20,818) % change Y/Y 15% NM NM 14% Beginning cash 26,647 15,351 20,011 23,168 Shares Outstanding 2177 2178 2177 2177 Ending cash 15,351 20,011 23,168 31,302 EPS (Adjusted) 8.1 11.3 10.5 11.9 DPS 9.0 7.5 7.5 8.5 % change Y/Y 16% NM NM 14% Balance sheet Ratio analysis CY07 FY09E (15M) FY10E FY11E % CY07 FY09E (15M) FY10E FY11E Cash and cash equivalents 15,351 20,011 23,168 31,302 Operating Margin 15.2% 15.0% 16.6% 16.8% Accounts receivable 8,920 10,127 11,640 13,000 EBITDA margin 17.1% 16.0% 17.5% 17.7% Inventories 19,536 25,289 25,739 28,754 EBIT margin 16.1% 15.1% 16.5% 16.8% Others 4,434 5,369 5,945 6,639 Net profit margin 12.9% 12.1% 12.6% 12.8% Current assets 48,241 60,796 66,492 79,696 SG&A/sales 15.6% 15.2% 14.1% 13.9% Investments 1,065 1,088 1,088 1,088 Net fixed assets 17,081 20,789 20,439 20,039 Sales growth 13% NM NM 12% Total assets 66,387 82,673 88,019 100,823 Net profit growth 15% NM NM 14% EPS growth 16% NM NM 14% Liabilities Interest coverage (x) NM NM NM NM Payables 38,371 42,558 44,927 50,648 Net debt to total

capital NM NM NM NM Others 12,739 15,280 16,793 18,754 Net debt to equity NM NM NM NM Total current liabilities 51,110 57,838 61,720 69,402 Sales/assets 2.1 2.0 2.1 2.0 Total Loans 885 4,219 1,219 1,219 Assets/equity 4.6 4.0 3.5 3.3 Other liabilities 0 - (0) (0) ROE 85% 112% 109% 94% Total liabilities 51,995 62,057 62,939 70,621 ROCE 102% 122% 129% 117% Shareholders' equity 14,392 20,615 25,080 30,202 BVPS 6.6 9.5 11.5 13.9 Source: Company reports, J.P. Morgan estimates.

320



Homex www.homex.com.mx

Neutral Ps74.75


Company description Homex, the largest Mexican homebuilder in terms of units sold, is focused mainly on the affordable entry level and middle-income segments, selling around 50k units last year. As of Dec-2008 Homex had operations in 20 states and 32 cities, with Mexico City representing 35% of total revenues followed by Guadalajara with 8%. The company has also made recently investments in Brazil, India and Egypt.

Post mortem Given the complexities involved to grow further in Mexico, Homex has made a couple of differentiated investments, such as in the tourist market in Mexico, and, more recently, started operations in Brazil, India and Egypt. However, these investments are still small.

Potential for earnings upgrades We see limited growth going forward as Homex should start to consolidate its operations over the next years given the strong growth experienced in the past four years, with Homex expanding from 21k units sold in 2004 to 57k units last year. Also, margins have been a bit under pressure, which could result in lower-than-expected margins next year.

How much recovery is priced into the stock? Though we see Homex as a premium company in Mexico, we believe this is already priced in as Homex is trading at a 30% premium to Urbi and a 10% premium to Geo. We don’t believe that a better-than-expected recovery in the Mexican economy would bring upside risk to our estimates as growth is linked more to the company’s internal capabilities than to housing demand.

Price target and key risks We rate Homex Neutral with a Dec-10 price target of Ps102, which is the average of our DCF-based valuation and GGM-based valuation. The COE of 11.9% is based on a beta of 1.20, country risk of 2.4%, and a risk-free rate of 3.5%, resulting in a WACC of 11.4%. Lower (higher)-than-expected cash flow generation this year given the company’s guidance of an inflow of Ps3bn could affect investors’ confidence in Homex execution capabilities.

Mexico Mexican Homebuilders Adrian E HuertaAC (52 81) 8152-8720 [email protected]



Absolute (%) -21 -8 96 Relative (%) -22 -16 44

Source: Bloomberg.

Company data 52-week range (LC) 40.01-95.59 Mkt cap. (LCMM) 25,130 Mkt cap. (US$MM) 1,957 Avg daily value (US$MM) 37.6 Avg daily volume (MM) 1.1 Shares O/S (MM) 335.87 Date of price 11/25/2009 Index: Bolsa 31,364 Free float (%) 65% Exchange rate 12.84

Source: Bloomberg.

Bloomberg: Homex* MM Reuters: Homex* MM.SA LC in millions, year-end December FY08 FY09E FY10E FY11E Sales 18,850 20,380 23,420 25,864 Net profit 1,759 2,456 2,920 3,374 EPS (LC) 5.24 7.31 8.69 10.05 FD EPS (LC) 5.24 7.31 8.69 10.05 DPS (LC) - - - - Sales growth (%) 16.6% 8.1% 14.9% 10.4% Net profit growth (%) -19.8% 39.7% 18.9% 15.6% EPS growth (%) -19.8% 39.7% 18.9% 15.6% ROE (%) 16.7% 19.5% 19.2% 18.4% P/E (x) 14.3 10.2 8.6 7.4 FD P/E (x) 14.3 10.2 8.6 7.4 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

321



Homex: Summary of financials Profit and loss statement LC in millions, year-end December FY08 FY09E FY10E FY11ERevenue 18,850 20,380 23,420 25,864% change Y/Y 17% 8% 15% 10%Gross margin (%) 35.6% 34.7% 34.5% 34.5%EBITDA 4,430 4,728 5,368 6,039% change Y/Y 16.5% 6.7% 13.5% 12.5%EBITDA margin (%) 23.5% 23.2% 22.9% 23.4%EBIT 3,604 3,546 4,155 4,814% change Y/Y 2.6% -1.6% 17.2% 15.9%EBIT margin (%) 19.1% 17.4% 17.7% 18.6%Net interest (1,100) 4 69 71Earnings before tax 2,546 3,570 4,244 4,905% change Y/Y -22.8% 40.2% 18.9% 15.6%Tax (740) (1,038) (1,234) (1,426)as % of EBT 29.1% 29.1% 29.1% 29.1%Net income (reported) 1,759 2,456 2,920 3,374% change Y/Y -19.8% 39.7% 18.9% 15.6%Shares O/S (MM) 336 336 336 336EPS (reported) (LC) 5.24 7.31 8.69 10.05Source: Company, J.P. Morgan estimates.

Balance sheet LC in millions, year-end December FY08 FY09E FY10E FY11ECash and cash equivalents 1,268 3,826 5,054 6,431Accounts receivable 11,946 12,284 14,116 15,589Inventories 14,310 15,427 16,778 18,040Others 239 665 665 665Current assets 27,763 32,202 36,614 40,725LT investments 0 0 0 0Net fixed assets 1,423 1,350 1,449 1,569Total assets 30,533 34,806 39,317 43,547Liabilities ST loans 1,640 1,844 1,844 1,844Payables 6,883 7,402 8,286 9,038Others 405 532 532 532Total current liabilities 8,927 9,778 10,662 11,414Long-term debt 6,290 6,936 6,936 6,936Other liabilities 3,645 4,044 4,662 4,662Total liabilities 18,862 20,758 22,259 23,011Shareholders’ equity 11,425 13,726 16,645 20,019BVPS (LC) 34.02 40.87 49.56 59.60Source: Company, J.P. Morgan estimates.

Cash flow statement LC in millions, year-end December FY08 FY09E FY10E FY11EEBIT 3,604 3,546 4,155 4,814Depreciation & amortization 312 357 369 397Change in working capital (7,879) (936) (2,300) (1,982)Taxes (740) (1,038) (1,234) (1,426)Cash flow from operations (4,652) 2,003 1,697 1,894Capex (582) (306) (468) (517)Disposal/(purchase) 0 0 0 0Net interest (1,100) 4 69 71Free cash flow (4,324) 2,736 2,007 2,139Equity raised/(repaid) 0 0 0 0Debt raised/(repaid) 4,134 850 0 0Other 0 0 0 0Dividends 0 0 0 0Beginning cash 2,363 1,268 3,826 5,054Ending cash 1,268 3,826 5,054 6,431DPS (LC) - - - -Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December FY08 FY09E FY10E FY11EEBITDA margin 23.5% 23.2% 22.9% 23.4%Operating margin 19.1% 17.4% 17.7% 18.6%Net profit margin 9.3% 12.1% 12.5% 13.0%SG&A/sales 12.1% 11.5% 11.1% 11.1%Sales growth 16.6% 8.1% 14.9% 10.4%Net profit growth -19.8% 39.7% 18.9% 15.6%Sales per share growth 16.6% 8.1% 14.9% 10.4%EPS growth -19.8% 39.7% 18.9% 15.6%Interest coverage (x) 20.54 22.98 43.78 33.18 Net debt to total capital 34.9% 21.7% 14.4% 8.0%Net debt to equity 58.3% 36.1% 22.4% 11.7%Sales/assets 0.62 0.59 0.60 0.59 EBIT margin 19.1% 17.4% 17.7% 18.6%ROCE 16.5% 13.5% 14.5% 12.5%Assets/equity (x) 2.67 2.54 2.36 2.18 ROI 16.5% 13.5% 14.5% 12.5%ROE 16.7% 19.5% 19.2% 18.4%Source: Company, J.P. Morgan estimates.

322



HTC Corp www.htc.com



Company description HTC is a leading brand of Windows Mobile and Google Android smartphones. Its key customers include Vodafone, Verizon, T-Mobile, Sprint, AT&T, Telefonica, and Orange. Post mortem In our view, in the past, HTC had commanded a sweet spot in offering the best iPhone alternative in the high-end smartphone segment at a time when iPhone was constrained by operator availability in key countries. However, such momentum was disrupted in 2009 as the high-end smartphone market saturated, and we believe it did not have the brand awareness to enter the mainstream segment. Potential for earnings upgrades We expect the smartphone market to have a unit CAGR of 35-40% in the next five years; the growth is likely to come from the low-price segment in which HTC is absent until it gets its product portfolio and brand recognition right. A key upside risk is that WinMo 7 launch in 3Q09 could help HTC penetrate into the corporate segment as a RIM alternative, but this will likely be a late 2010 event at the earliest. There is a risk that margins may get re-set to a much lower level in 1H10. Inventory risk appears to be on the rise on a sizeable number of Android models amid the end of exclusivity for iPhone, while HTC is also increasing brand promotion aggressively—which appears to be a right move in the long term but could lead to near-term margin pains. How much recovery is priced into the stock? After underperforming the TWSE by 34% YTD, some of the growth challenges now appear to be already in the price. However, margin risk is not, and we believe it could manifest in the post-Christmas period as inventory risk is rising due to a sizeable number of Android models amid the end of exclusivity for iPhone. The stock is still far from its historical trough for P/E and P/BV, while cash dividends have not been able to provide a cushion, given concerns about earnings sustainability. Price target and key risks Our Jun-10 PT of NT$250 is based on a low-cycle multiple of 10x FY10E earnings, given the historical range of 8x-20x. Our PT implies an FY09E P/BV multiple of 2.5x vs an FY09E ROE of 28% and FY10E P/BV of 2.5x vs an FY10E ROE of 24%. A key risk to our price target is earlier-than-expected entry into new markets such as the enterprise segment.


Charles Guo (852) 2800 8532 [email protected]


Price performance

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1M 3M 12M Absolute (%) -3.6 -3.7 -10.0 Relative (%) -3.3 -4.3 -39.6


52-week range (NT$) 243.8-517.1 Mkt cap. (NT$B) 257 Mkt cap. (US$B) 7.9 Avg daily value (US$MM) 264.3 Avg daily volume (MM) 8.6 Shares O/S (MM) 755.737 Date of price 5-Nov-09 Index: TWSE 7,417.46 Free float (%) 80.7 Exchange rate 32.5

Source: Bloomberg.

Bloomberg: 2498 TT; Reuters: 2498.TW NT$ in billions, year-end December FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11ESales 152.6 145.6 154.0 178.3 YE BPS (NT$) 81.1 90.5 92.6 99.0Operating profit 30.3 24.5 20.1 20.4 P/BV (x) 4.2 3.8 3.7 3.4Pretax profit 31.6 25.6 21.1 21.4 ROE (%) 47.2 34.3 27.1 25.5MV of employee bonus 6.2 4.9 4.4 4.6 Cash div (NT$) 34.0 27.0 23.8 18.3Adj. net profit (new TW GAAP) 28.7 23.2 19.0 19.3 Cash div yield 10.0% 7.9% 7.0% 5.4%Old TW GAAP net profit 35.2 27.6 23.0 23.5 Quarterly EPS (NT$) 1Q 2Q 3Q 4QNew Taiwan GAAP EPS (NT$) 38.3 31.0 25.1 25.2 EPS (FY08) 9.3 8.9 9.4 10.7New Taiwan GAAP P/E (x) 8.9 11.0 13.6 13.5 EPS (FY09E) 6.5 8.7 7.6 8.1Cash 61.8 65.0 69.6 77.7 DCF value (6/2010) NT$ 504Equity 60.7 67.7 70.2 75.7 Price target (6/2010) NT$ 250Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

323



HTC Corp: Summary of financials NT$ in millions, year-end DecemberP&L statement Cash flow statement FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E Revenues 118,581 152,562 145,604 154,039 178,326 Net Income 28,939 28,654 23,193 18,988 19,303

% change Y/Y 11.7 28.7 -4.6 5.8 15.8 Depreciation and Amortization 681 591 1,013 1,287 1,647Gross Margin (%) 34.3 33.2 31.8 30.1 30.2 Change in working capital 10,256 8,849 -1,207 3,187 3,296EBITDA 31,705 30,849 25,531 21,390 22,025 Net Cash from Operations 39,876 38,094 22,999 23,461 24,246

% change Y/Y 15.9 -2.7 -17.2 -16.2 3.0 Cash Flow from Investing - - - - -

EBITDA Margin (%) 26.7 20.2 17.5 13.9 12.4Purchase of Property, Plant & Equipment (1,488) (4,251) (3,321) (2,400) (2,400)

EBIT 31,024 30,258 24,518 20,103 20,378 Purchase/Sale of Other LT assets (208) (761) 38 - - % change Y/Y 16.1 -2.5 -19.0 -18.0 1.4 Purchase/Sale of Investments (2,075) (2,262) (335) - - EBIT Margin (%) 26.2 19.8 16.8 13.1 11.4 Net Cash from Investing Activities (3,770) (7,274) (3,619) (2,400) (2,400)

Net Interest 761 1,295 698 994 1,070 Cash Flow from Financing - - - - - Earnings before tax 32,151 31,592 25,648 21,097 21,448 Issuance/Repayment of Debt - - - - -

% change Y/Y 18.5 -1.7 -18.8 -17.7 1.7 Change in other LT liabilities (0) 6 (4) - - Tax 3,212 2,938 2,455 2,110 2,145 Change in Common Equity - net 4,097 4,710 (55) 72 64

as % of EBT 10.0 9.3 9.6 10.0 10.0 Payment of Cash Dividends (19,487) (20,126) (18,625) (15,075) (12,342)Net Income (Reported) 28,939 28,654 23,193 18,988 19,303 Other Financing Charges, Net (46) (8,652) 2,516 (1,500) (1,500)

% change Y/Y 14.4 -1.0 -19.1 -18.1 1.7 Net Cash from Financing Activities (15,435) (24,062) (16,168) (16,503) (13,778)

Net Income (Adjusted) 23,260 28,654 23,193 18,988 19,303 Net Change in Cash and Cash Equivalents 20,672 6,758 3,212 4,558 8,068

% change Y/Y 19.6 23.2 -19.1 -18.1 1.7 Cash at Beginning of Period 34,397 55,069 61,827 65,039 69,597 Shares Outstanding 739 748 748 758 765 EPS (reported) (NT$) 39.1 38.3 31.0 25.1 25.2

% change Y/Y 12.5 20.2 -21.6 -17.9 1.3 EPS (adjusted) (NT$) 31.5 38.3 31.0 25.1 25.2

% change Y/Y 17.7 21.8 -19.1 -19.2 0.7 Balance sheet Ratio analysis FY07 FY08 FY09E FY10E FY11E % FY07 FY08 FY09E FY10E FY11E Cash and cash equivalents 55,069 61,827 65,039 69,597 77,665 EBITDA margin 26.7 20.2 17.5 13.9 12.4 Accounts receivable 19,484 29,799 31,728 34,932 40,515 Operating margin 26.2 19.8 16.8 13.1 11.4 Inventories 6,119 7,418 6,476 7,130 8,269 Net profit margin 19.6 18.8 15.9 12.3 10.8 Others 2,501 2,228 3,881 3,881 3,881 SG&A/sales 5.0 6.1 8.2 10.1 12.1 Current assets 83,173 101,272 107,124 115,540 130,330 Sales per share growth 9.9 27.2 (4.6) 4.5 14.7 LT investments 2,899 5,161 5,496 5,496 5,496 Sales growth 11.7 28.7 (4.6) 5.8 15.8 Net fixed assets 3,716 7,376 9,684 10,797 11,550 Net profit growth (adjusted) 19.6 23.2 -19.1 -18.1 1.7Total assets 90,445 115,226 123,684 133,213 148,756 Net profit growth (reported) 14.4 -1.0 -19.1 -18.1 1.7 EPS growth (adjusted) 17.7 21.8 -19.1 -19.2 0.7Liabilities EPS growth (reported) 12.5 20.2 -21.6 -17.9 1.3ST loans - - - - - Payables 22,020 27,907 21,254 24,791 28,697 Interest coverage (x) NM 220,352 555,023 NM NM

Others 12,348 26,651 34,737 38,245 44,357 Net debt to total capital Net

Cash Net

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Total current liabilities 34,368 54,558 55,991 63,036 73,054 Net debt to equity Net

Cash Net

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CashNet

CashLong term debt - - - - - Sales/assets 131.1 132.4 117.7 115.6 119.9Other liabilities 1 6 2 2 2 Assets/equity 161.3 189.9 182.7 189.8 196.5Total liabilities 34,369 54,565 55,993 63,038 73,057 ROE 41.5 47.2 34.3 27.1 25.5Shareholders' equity 56,076 60,661 67,691 70,175 75,700 ROCE 41.5 47.2 34.3 26.1 25.0 BVPS (NT$) 75.8 81.1 90.5 92.6 99.0 Source: Company, J.P. Morgan estimates.

324



Idea Cellular www.ideacellular.com

Underweight Rs53.5

Price Target: Rs45

Company description Idea Cellular is a pure play wireless GSM operator in India. The company has a strong management team and is backed by the Aditya Birla group with a 49% stake. AXIATA Group Berhad (previously TM International) has a 14.99% shareholding in Idea Cellular. Post mortem Last year has seen three-four new operators launch wireless services (GSM/CDMA) across India. Idea itself has entered new circles and expanded presence in existing circles. This has led to significant tariff pressure on all operators with ARPUs declining 20-25% over the past year as new operators drop prices to gain market share. We expect tariff wars to continue in the near term. Further 3G auctions are coming up in January 2010 that would lead to cash outflow from operators. Potential for earnings upgrades We see tariff pressure to show up in sharp ARPU declines for Idea over the next two-three quarters which we believe are not fully reflected in consensus estimates. Hence, we see significant downside to consensus earnings estimates and expect loss on EBITDA and net income level for FY11E vs. consensus estimates of profit. How much recovery is priced into the stock? We see further downside as competition is only likely to increase in the near-term and hence earning estimates would continue to trend down. Overall economic recovery will not have a positive impact on the sector and Idea as issues in the sector are driven by excess competition that will take time to be sorted out. Price target and key risks Our DCF-based Dec-10 price target of Rs45 includes Rs27/share coming from the 16% stake in Indus, implying a core business value of Rs18/share. Our DCF estimate assumes 10- year revenue CAGR (FY10-20E) of 8%, long-term EBITDA margin of 27% and a terminal growth of 4%. We assume a beta of 1.15, risk-free rate of 6.5%, market risk premium of 7.5%, and cost of debt of 9.0% to arrive at a WACC of 11%. Idea is currently trading at 10x EV/EBTIDA. We believe consolidation/exit of players are required for bottoming out of fundamentals. Consolidation is unlikely in the near-term due to the regulatory structure and also the well-funded nature of some new players (NTT DoCoMo and Etisalat). Key upside risks to our price target are larger-than-expected market share gains due to new launches and better cost control.

India Telecom Manoj SinglaAC (91-22) 6157-3587 [email protected]


Performance

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IDEA Sensex (rebased)

Source: Bloomberg.

Performance 1M 3M 12M Absolute (%) -30.9 -35 0.6 Relative (%) -23.8 -35.5 -49.1

Source: Bloomberg.

Company data 52-week range (Rs) 37-92 Mkt cap. (Rs MM) 165,855 Mkt cap. (US$MM) 3,526 Avg daily value (US$MM) 19.27 Avg daily volume (MM) 12.2 Shares O/S (MM) 3,100 Date of price 5-Nov-09 Index: Sensex 16063.9 Free float (%) 33 Exchange rate Rs47.8/US$

Source: Bloomberg.

Bloomberg: IDEA IN; Reuters: IDEA.BO Rs in millions, year-end March FY09 FY10E FY11E FY12E Sales 101,484 115,178 115,328 145,715 Net profit 9,009 2,302 -14,924 2,635 EPS (Rs) 3.0 0.7 -4.5 0.8 FD EPS (Rs) 3.0 0.7 -4.5 0.8 DPS (Rs) 0.0 0.0 0.0 0.0 Sales growth (%) 51.0 13.5 0.1 26.3 Net profit growth (%) -13.6 -74.4 -748.3 117.7 EPS growth (%) -23.7 -75.4 -709.0 117.7 ROE (%) 3.1 -9.0 -1.0 7.2 P/E (x) 17.8 72.0 NM 67.0 FD P/E (x) 17.8 72.0 NM 67.0 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

325



Idea Cellular: Summary of financials Profit and loss statement Rs in millions, year-end Mar FY09 FY10E FY11E FY12ERevenue 101,484 115,178 115,328 145,715% change Y/Y 51.0 13.5 0.1 26.3Gross margin (%) NM NM NM NMEBITDA 28345 26671 17086 35449% change Y/Y 25.9 -5.9 -35.9 107.5EBITDA margin (%) 27.9 23.2 14.8 24.3EBIT 14,306 6,079 -5,952 14,245% change Y/Y 4.0 -57.5 -197.9 -339.3EBIT margin (%) 14.1 5.3 -5.2 9.8Net interest (4943) (3962) (11606) (11070)Earnings before tax 9,371 2,434 -17,558 3,175% change Y/Y -15.9 -74.0 -821.3 118.1Tax 362 132 -2,634 540as % of EBT 3.9 5.4 15.0 17.0Net income (reported) 9,009 2,302 -14,924 2,635% change Y/Y -13.6 -74.4 -748.3 117.7Shares O/S (MM) 2984 3100 3300 3300EPS (reported) (INR) 3.0 0.7 -4.5 0.8Source: Company, J.P. Morgan estimates.

Balance sheet Rs in millions, year-end Mar

FY09 FY10E FY11E FY12ECash and cash equivalents 51,316 2,524 18,984 23,273Accounts receivable 3,058 3,471 3,476 4,391Inventories 417 473 474 599Others 7,839 7,987 7,987 7,987Current assets 62,630 14,455 30,920 36,250LT investments 0 0 0 0Net fixed assets 151,489 226,317 235,599 237,252Total assets 262,038 287,691 312,438 318,421Liabilities ST loans 0 0 0 0Payables 0 0 0 0Others 0 0 0 0Total current liabilities 28,600 28,795 23,642 26,957Long-term debt 89,165 112,354 157,354 157,354Other liabilities 917 884 708 740Total liabilities 118,682 142,033 181,705 185,051Shareholders’ equity 143,356 145,658 130,734 133,369BVPS (INR) 48.0 47.0 39.6 40.4Source: Company, J.P. Morgan estimates.

Cash flow statement Rs in millions, year-end Mar

FY09 FY10E FY11E FY12EEBIT 14,306 6,079 -5,952 14,245Depreciation & amortization 0 10,592 23,038 21,205Change in working capital 1,652 -274 -5,157 2,274Taxes 362 132 -2,634 540Cash flow from operations 10,661 12,587 2,780 26,146Capex -70,866 -84,420 -31,320 -21,857Disposal/(purchase) 10,661 12,587 2,780 26,146Net interest (4943) (3962) (11606) (11070)Free cash flow -60,205 -71,833 -28,540 4,289Equity raised/(repaid) 98,887 0 0 0Debt raised/(repaid) 24,017 23,189 45,000 0Other 0 0 0 0Dividends 0 0 0 0Beginning cash 4,971 51,168 2,524 18,984Ending cash 51,168 2,524 18,984 23,273DPS (Rs) 0.0 0.0 0.0 0.0Source: Company, J.P. Morgan estimates.

Ratio analysis Rs in millions, year-end Mar FY09 FY10E FY11E FY12EEBITDA margin 27.9 23.2 14.8 24.3Operating margin 14.1 5.3 -5.2 9.8Net profit margin 8.9 2.0 -12.9 1.8SG&A/sales 16.9 17.0 18.4 17.0Sales growth 51.0 13.5 0.1 26.3Net profit growth -13.6 -74.4 -748.3 117.7Sales per share growth 33.4 9.2 -5.9 26.3EPS growth -23.7 -75.4 -709.0 117.7Interest coverage (x) 6.4 2.0 2.8 4.3Net debt to total capital 42.2 51.9 54.1 52.7Net debt to equity 62.9 97.1 101.3 89.5Sales/assets 38.7 40.0 36.9 45.8EBIT margin 14.1 5.3 -5.2 9.8ROCE 3.6 -1.1 3.2 6.7Assets/equity (x) 1.8 2.0 2.4 2.4ROI -0.1 2.2 6.1 7.8ROE 3.1 -9.0 -1.0 7.2Source: Company, J.P. Morgan estimates.

326



Lukoil www.lukoil.com

Neutral Price: $61.8

Price Target: $75.0

Company description Lukoil is Russia’s second largest oil company. We expect its total hydrocarbon production to reach 2.2 mm boe per day in 2009. Proven hydrocarbon reserves under SPE rules stood at 19.3 billion boe at end-2008. ConocoPhillips is Lukoil’s strategic partner and owns a 20% stake in the company. Top management controls about 35% of the company.

Post mortem Lukoil has had the best output growth in the sector in '09, with an est. 3.2% crude oil production growth, however, the medium- and long-term production outlook has turned negative. We estimate CAGR (‘10E-‘13E) of -0.7% in Lukoil’s contracting output. The reasons are absence of output growth in Timan-Pechora, the delayed launch of the Filanovskoye field in the Caspian Area (until 2013) and a decline in output in Western Siberia. At the same time, downstream exposure is rising, on acquisitions financed by borrowing. We expect net debt to reach $11.4bn end 2009, or 61% higher y/y.

Potential for earnings upgrades Our earning forecasts for Lukoil are in line with Bloomberg consensus for ’10E-‘11E. Earning upgrades are only possible on increases in oil prices, while a worsening production outlook may indicate a downside risk.

How much recovery is priced into the stock? Lukoil currently trades on 6.6x 12M forward PER, a 12% discount to historical averages. It might indicate that oil price recovery and easy credit market conditions are mostly priced in at this stage.

Price target and key risks Our PT (end-2010) is $75, based on 50% DCF (WACC at 11.8%, terminal growth rate at 3%) and 50% target (normalized) EV/EBITDA (‘10E). Key risks include oil price estimates and a possible output target downgrade. Relatively expensive acquisitions could be also considered a risk.

Russia Russian Oil & Gas Andrey GromadinAC (7-495) 937 1037 [email protected]


25

40

55

70

$


Price Performance

Source: Bloomberg


Absolute (%) -13.7 14.5 83.2

Source: Bloomberg

Company data 52-week range (LC) 26.0-67.2 Mkt cap. (US$MM) 52,561 Avg daily value (US$MM) 392 Avg daily volume (MM) 6.41 Shares O/S (MM) 851 Date of price 23-Nov-09 Index: RTS 1467 Free float (%) 45% Exchange rate 1


Bloomberg: LKOH RU; Reuters: LKOH.RTS $ in millions, year-end December FY08 FY09E FY10E FY11E Sales 107,680 81,100 93,661 116,111 Net profit 9,144 7,180 7,371 8,912 EPS (LC) 10.75 8.44 8.67 10.48 FD EPS (LC) 10.75 8.44 8.67 10.48 DPS (LC) 1.48 1.79 1.61 1.35 Sales growth (%) 31% -25% 15% 24% Net profit growth (%) -4% -21% 3% 21% EPS growth (%) -6% -21% 3% 21% ROE (%) 18% 13% 12% 13% P/E (x) 5.7 7.3 7.1 5.9 FD P/E (x) 5.7 7.3 7.1 5.9 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

327



Lukoil: Summary of Financials Profit and Loss Statement Cash flow statement $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Revenues 107,680 81,100 93,661 116,111 119,355 EBIT 14,134 9,746 10,191 11,897 11,892

% change Y/Y 31.5% (24.7%) 15.5% 24.0% 2.8% Depreciation & amortisation 2,958 4,296 4,926 5,439 5,705Gross Margin (%) 19.6% 20.7% 19.4% 18.1% 17.8% Change in working capital/Other 3,747 (4,464) (806) (1,378) (185)EBITDA 17,092 14,042 15,117 17,336 17,597 Taxes (3,222) (2,100) (2,225) (2,691) (2,741)


EBIT 14,134 9,746 10,191 11,897 11,892 Capex (10,589) (7,041) (7,818) (8,828) (9,713)% change Y/Y 7.1% (31.0%) 4.6% 16.7% (0.0%) Disposal/(Purchase)/Other (5,232) (2,375) 0 - -EBIT Margin 13.1% 12.0% 10.9% 10.2% 10.0% Net Interest (228) (566) (567) (427) (192)

Net Interest (228) (566) (567) (427) (192) Free cash flow 1,568 (2,504) 3,701 4,012 4,767Earnings before tax 12,366 9,280 9,596 11,602 11,819

% change Y/Y (5.0%) (25.0%) 3.4% 20.9% 1.9% Equity raised/repaid (946) 0 0 0 -Tax (3,222) (2,100) (2,225) (2,691) (2,741) Debt Raised/repaid 2,766 1,032 (2,219) (4,196) (2,961)

as a % of EBT 26.1% 22.6% 23.2% 23.2% - Other - - - - -Net Income (Reported) 9,144 7,180 7,371 8,912 9,078 Dividends paid (1,527) (1,373) (1,149) (1,179) (1,426)

% change Y/Y (3.9%) (21.5%) 2.7% 20.9% 1.9% Beginning cash 889 2,744 (558) (29) (922)Shares Outstanding 850.50 850.50 850.50 850.50 - Ending cash 2,744 (558) (29) (922) (373)EPS (reported) 10.75 8.44 8.67 10.48 10.67 DPS 1.57 1.35 1.39 1.68 1.71

% change Y/Y (6.3%) (21.5%) 2.7% 20.9% 1.9% Balance sheet Ratio Analysis $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Cash and cash equivalents 2,744 (558) (29) (922) (373) EBITDA margin 15.9% 17.3% 16.1% 14.9% 14.7%Accounts receivable 5,069 7,552 8,120 9,066 9,189 Operating margin 13.1% 12.0% 10.9% 10.2% 10.0%Inventories 3,735 5,206 5,742 6,655 6,778 Net profit margin 8.5% 8.9% 7.9% 7.7% 7.6%Others 4,085 4,085 4,085 4,085 - SG&A/Sales 3.7% 3.4% 3.3% 3.2% 3.1%Current assets 15,633 16,286 17,918 18,884 19,680 Sales per share growth - - - - -LT investments 3,269 5,644 5,644 5,644 5,644 EPS growth (6.3%) (21.5%) 2.7% 20.9% 1.9%Net fixed assets 50,088 52,833 55,725 59,114 63,122 Total assets 71,461 77,234 81,758 86,114 90,917 ROE 20.0% 13.5% 12.5% 13.5% 12.3% ROCE 17.9% 12.4% 11.5% 12.8% 12.0%Liabilities ST loans 3,232 3,499 2,390 292 292 Production (mboe/day) 2,048 2,104 2,111 2,092 2,136Payables 5,029 4,519 4,816 5,298 5,360 Production oil (mbpd) 1,920 1,982 1,983 1,963 -Others 2,314 1,694 1,917 2,255 2,305 Production gas (mboe/day) 128 123 128 129 -Total current liabilities 10,575 9,712 9,123 7,845 7,957 Refining throughput (mbpd) 1,138 1,438 1,571 1,623 -Long term debt 6,577 7,342 6,233 4,135 1,174 Other liabilities 3,299 3,299 3,299 3,299 - Interest coverage (x) 75.0 24.8 26.7 40.6 91.9Total liabilities 20,451 20,353 18,655 15,279 12,430 Net debt to equity 13.9% 20.1% 13.8% 7.6% 2.4%Shareholders' equity 50,281 55,956 62,178 69,910 77,562 Net debt 7,065 11,399 8,651 5,348 1,838BVPS 60.90 67.77 75.31 84.67 - Net debt/EBITDA (ny) 0.5 0.8 0.5 0.3 0.1 Source: Company reports and J.P. Morgan estimates.

328



Magyar Telekom www.telekom.hu

Underweight Price: Ft759.00

Price Target: Ft685.8

Company description Magyar Telekom is a principal provider of telecommunication services in Hungary, Macedonia and Montenegro. MT is also a leading IT service provider in Hungary. Magyar's majority shareholder is Deutsche Telekom (59.2%). The company is actively seeking additional value-creating acquisitions both in Hungary and SEE and has a stable dividend policy.

Post mortem The fixed line trend has not stabilized after the naked DSL launch in 2007. Earnings remain under pressure and this makes the stock fundamentally unattractive in our view.

Potential for earnings upgrades Magyar during the 3Q09 results presentation guided for yoy 2% FY09 revenue decline and 5% FY09 EBITDA decline. This implies modest upside to our below-consensus estimates. Macro recovery could lead to stabilization in results, but it is hard to see the company achieve better than very modest growth, so the potential for upgrades is low in our view. A positive regulatory decision on fibre regulation could be a positive catalyst for the stock. However, management anticipates two more MTR cuts in Jan and Dec 2010 that are likely to put pressure on margins for the next 2 years.

How much recovery is priced into the stock? Little, but we think this is fair. We view valuation as relatively unattractive compared to CEEMEA and developed peers – 2010E FCF yield of 11.9% which, despite the poor growth prospects, is more expensive than MTN and TTKOM, (13-14% and 15.5% respectively).

Price target and key risks We derive our PT of HUF685.8 via performing a 2010 year-end DCF valuation analysis in nominal currency using a WACC of 12.3%, then we cross-check our DCF valuation with CE and WE peers. The key positive risk to our view is a faster than expected recovery in the macro economic environment in Hungary or surprising strength in the Hungarian Forint.

Hungary Telecom Services Jean-Charles LemardeleyC (44-20) 7325 5763 [email protected]


450

600

750

900

Ft


Price Performance



Absolute (%) -8% 0.4% 35.3%


Company data 52-week range (Ft) 870-472 Mkt cap. (Ft bn) 790.3 Shares O/S (mn) 1,041 Date of price 23-Nov-09 Price Target end Date 31-Dec-10 Avg daily value (US$MM) 8 Avg daily volume (MM) 1.84 Exchange rate 177.5

Source: Company data, Bloomberg, J.P Morgan

Bloomberg: MTEL HB; Reuters: MTEL.BU Ft in millions, year end Dec FY08 FY09E FY10E FY11E Sales 673,056 640,987 627,344 623,036 Net profit 93,008 84,120 85,225 85,435 EPS 89.32 80.79 81.85 82.05 DPS (LC) 74.00 74.00 74.32 75.3 Sales growth (%) -0.50% -4.80% -2.10% -0.70% Net profit growth (%) 54.60% -9.60% 1.30% 0.20% EPS growth (%) 54.80% NM 1.30% 0.20% ROE (%) 17.7% 16.6% 21% 20.5% P/E (x) 8.5 9.4 9.2 9.2 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 23 November 2009.

329



Magyar Telekom: Summary of Financials Profit and Loss Statement Cash flow statement Ft in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Ft in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Revenues 673,056 640,987 627,344 623,036 625,796 Cash EBITDA 268,378 251,038 243,759 241,322 241,121

% Change Y/Y -0.5% -4.8% -2.1% -0.7% 0.4% Interest (30,308) (33,493) (32,157) (30,096) (28,579)EBITDA 268,378 251,038 243,759 241,322 241,121 Tax (27,698) (23,696) (24,007) (24,066) (24,252)

% Change Y/Y 10.0% -6.5% -2.9% -1.0% -0.1% Other 24,022 (768) 135 (130) 144EBITDA Margin 39.9% 39.2% 38.9% 38.7% 38.5% Cash flow from operations 234,394 193,082 187,730 187,031 188,435

EBIT 162,258 150,093 149,657 147,867 147,252

% Change Y/Y 26.5% -7.5% -0.3% -1.2% -0.4% Capex PPE (107,94

9) (100,94

5) (94,102) (93,455) (93,869)EBIT Margin 24.1% 23.4% 23.9% 23.7% 23.5% Net investments 0 0 0 0 0

Net Interest (30,308) (33,493) (32,157) (30,096) (28,579) CF from investments (107,94

9) (100,94

5) (94,102) (93,455) (93,869)PBT 133,291 118,478 120,035 120,331 121,258 Dividends - - (77,390) (78,407) (78,600)

% change Y/Y 34.3% -11.1% 1.3% 0.2% 0.8% Share (buybacks)/ issue - - - - -Net Income (clean) 93,008 84,120 85,225 85,435 86,094

% change Y/Y 54.6% -9.6% 1.3% 0.2% 0.8% CF to Shareholders (95,343) (77,052) (77,390) (78,407) (78,600)Average Shares - - - - - FCF to debt 31,102 15,085 16,239 15,168 15,965Clean EPS 89.32 80.79 81.85 82.05 82.68

% change Y/Y 54.8% NM 1.3% 0.2% 0.8% OpFCF (EBITDA - PPE) 160,429 150,093 149,657 147,867 147,252DPS 74.00 74.00 74.32 75.30 75.49 EFCF pre Div, PPE 126,445 92,137 93,629 93,575 94,565 Balance sheet Ratio Analysis Ft in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Ft in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Cash and cash equivalents 66,680 65,497 65,605 65,419 67,273 EBITDA margin 39.9% 39.2% 38.9% 38.7% 38.5%Accounts Receivables 101,895 99,882 98,455 98,284 98,719 EBIT Margin 24.1% 23.4% 23.9% 23.7% 23.5%ST financial assets 68,498 66,657 66,559 66,102 66,395 Net profit margin 13.8% 13.1% 13.6% 13.7% 13.8%Others 17,742 17,431 17,206 17,088 17,163 Capex/sales 16.0% 15.7% 15.0% 15.0% 15.0%Current assets 254,815 249,467 247,824 246,892 249,550 Depreciation/Sales 15.8% 15.7% 15.0% 15.0% 15.0%LT investments 370,352 365,305 360,600 355,927 351,233 Net fixed assets 543,689 548,736 553,441 558,114 562,808 Revenue growth -0.5% -4.8% -2.1% -0.7% 0.4%Total assets 1,168,856 1,163,508 1,161,865 1,160,933 1,163,591 EBITDA Growth 10.0% -6.5% -2.9% -1.0% -0.1%ST loans 132,954 116,685 100,555 85,200 71,089 EPS Growth 54.8% NM 1.3% 0.2% 0.8%Payables 92,340 90,877 89,446 89,406 89,802 Others 56,142 54,633 54,553 54,204 54,444 Net debt/EBITDA 1.2 1.3 1.2 1.2 1.1Total current liabilities 281,436 262,195 244,554 228,810 215,335 CF to Shareholders (95,343) (77,052) (77,390) (78,407) (78,600)Long term debt 266,007 266,007 266,007 266,007 266,007 FCF to debt 31,102 15,085 16,239 15,168 15,965Other liabilities 21,071 20,505 20,475 20,334 20,424 Total liabilities 568,514 548,707 531,035 515,151 501,766 OpFCF (EBITDA - PPE) 160,429 150,093 149,657 147,867 147,252Shareholders' equity 600,342 614,801 630,830 645,782 661,825 EFCF pre Div, PPE 126,445 92,137 93,629 93,575 94,565 Source: Company reports and J.P. Morgan estimates.

330



Manila Electric www.meralco.com.ph

Neutral Php194.00


Company description Manila Electric (also called Meralco) operates electricity distribution franchise in metro Manila with 5 million customers. Meralco operates under a Performance Based Ratemaking (PBR) methodology, wherein tariffs are set on a 4-year interval with opex and capex forecast for next 4 years. Meralco accounts for nearly 50% of volume sales in the country. Post mortem With the transition to PBR in May-09, we have seen Meralco’s profitability, cash flows and earnings profile significantly improve. Moreover, with PLDT and San Miguel being the company’s key shareholders, we believe the political risk associated with Meralco has reduced.

Potential for earnings upgrades Implementation of tariff hikes proposed remain the key driver for upward earnings estimate revisions, in our view. Although we see limited upside risk to our earnings estimates, given the history of delays in tariff hike approvals, we believe that pace of tariff delays should be low, compared to when Lopez group was primarily in control.

How much recovery is priced into the stock? The stock trades at rich multiples, primarily due to: (a) a continued ownership tussle between PLDT and San Miguel; and (b) a thin free float of 9%. While the stock has more than priced in upside from upcoming tariff hikes, we are unlikely to see the stock correct significantly from the current levels.

Price target and key risks Our DCF-based Dec-10 PT of Php165 implies 14x FY09E earnings. We believe this is a fair multiple, given the regulatory framework, and the steady growth outlook. We derive our PT by discounting its FCF to 2015E, after which we have incorporated a terminal value. We have also incorporated the allowed tariff increases from 2010 to 2012 at an annual rate of 5% to RY2013, and down to 3% for 2014-15. We have assumed a risk-free rate of 8.5%, a terminal growth rate of 3%, and a beta of 0.9. A key risk to our PT is delays in implementation of allowed tariff increases.

Electric Utilities Ajay MirchandaniAC (65) 6882-2419 [email protected]



0100200300400

Nov-

08

Feb-

09

May

-09

Aug-

09

Nov-

09

Source: Bloomberg.

Performance 1M 3M 12M Absolute (%) 27.7 -8.3 253.6 Relative (%) 23.3 -14.8 206.8

Source: Bloomberg.

Company data 52-week range (Php) 48-295 Mkt cap. (PhpMM) 246,304 Mkt cap. (US$MM) 5,171 Avg daily value (US$MM) 4 Avg daily volume (MM) 1 Shares O/S (MM) 1,115 Date of price 5-Nov-09 Index: PSEi 2,944 Free float (%) 9 Exchange rate 47.6

Source: Bloomberg.

Bloomberg: MWC PM; Reuters: MER.PS Php in millions, year-end December FY08 FY09E FY10E FY11E Core net profit 2,800 7,685 12,826 14,490 EPS (Php) 2.53 6.90 11.51 13.00 DPS (Php) 1.00 3.45 5.75 6.50 Net debt to equity - % 38% 52% 42% 33% ROE (%) 5.4% 14.1% 21.6% 21.8% P/E (x) 87.3 32.1 19.2 17.0 P/BV (x) 4.7 4.5 4.1 3.7 EV/EBITDA (x) 16.9 16.1 11.2 10.2 Op cash flow / EV (%) 4% 5% 6% 7% Dividend yield (%) 0.5% 1.6% 2.6% 2.9% Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

331



Manila Electric: Summary of financials Php in millions, year-end December Profit & loss statement Balance sheet FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E

Power distribution revenue 186,99

9 196,971 219,359 237,399 Share capital 11038 11038 11038 11038 Others 4,776 5,039 5,316 5,608 Reserves & Surplus 41569 45261 51694 58939

Consolidated revenue 191,77

5 202,010 224,675 243,007 Share holders equity 52,607 56,299 62,732 69,977 Minority interests 3,552 3,935 4,375 4,882

Purchased power costs -

156872 -164716 -178213 -192869 Total Operations & Maintenance

(13,627) (14,675) (15,826) (17,089) Long-term debt 13228 18228 16228 14228

Other expenses (4,165) (4,155) (4,254) (4,129) customer deposits 23,443 20,989 23,375 25,297 Unrecoverable power costs 0 0 0 0 provisions 5743 5743 5743 5743 non current liabilities 19,905 18,565 17,225 17,225 EBITDA 17,111 18,464 26,382 28,920 Depreciation & Amortization (4,426) (4,936) (5,163) (5,415) Net Fixed Assets 100853 102417 104550 107090 EBIT 12,685 13,528 21,219 23,505 Investments 6883 7432 8150 8849 Non Current Assets 21,990 21,990 21,990 21,990 Net Interest Expense (1,216) (2,202) (2,465) (2,280) Current Assets 48658 46264 51548 57049 Equity income 199 199 199 199 Cash and Bank Balances 5402 920 1518 3243 Provisions (6,935) 0 0 0 Account Receivables 37509 39509 44000 47618 Profit before tax 5,200 11,525 18,953 21,424 Other current assets 5747 5835 6030 6187 Corporate income tax (2,067) (3,458) (5,686) (6,427) Minorities (333) (383) (440) (506) Current Liabilities 59906 54344 56560 57626 PAT 2,800 7,685 12,826 14,490 Accounts Payable 25754 27042 29258 31664 current portion of debt 2265 2000 2000 2000 Other current liabilities 34152 27302 27302 25962 Total Assets 118478 123759 129678 137352 Key ratios FY08 FY09E FY10E FY11E Operating Income Margin (%) 6.6% 6.7% 9.4% 9.7% Cash flow statement EBITDA margin (%) 8.9% 9.1% 11.7% 11.9% FY08 FY09E FY10E FY11E No. of O/S shares (Mils) 1105.7 1114.5 1114.5 1114.5 Attributable profit 2800 7685 12826 14490

EPS (Php) 2.53 6.90 11.51 13.00 Share of Associates & Minorities 134 184 241 307

Dividend / share (Php) 1.0 3.4 5.8 6.5 Depreciation 4426 4936 5163 5415 Dividend payout ratio (%) 39% 50% 50% 50% Working Capital Movement (2944) (801) (2469) (1370) Others 5934 0 0 0 Book Value per share 47.6 50.5 56.3 62.8 Operational Cash Flow 10350 12004 15762 18843 Total debt / Equity (%) 82% 89% 80% 69% ROE (%) 5.4% 14.1% 21.6% 21.8% Capital Expenditure (9202) (6500) (7295) (7955) ROCE (%) 14.1% 13.6% 19.2% 19.9% Investment & loans (48) (500) (500) (500) RoRB (%) 11.4% 11.7% 19.0% 20.8% others 2068 0 0 0 Cash flow from investments (7182) (7000) (7795) (8455) Fixed Assets Turnover (x) 1.9 2.0 2.1 2.3 Free Cash flow 3168 5004 7966 10388 Total Assets Turnover (x) 1.1 1.1 1.2 1.2 Dividends Paid (1960) (3842) (6413) (7245) Debt paid (10892) 4735 (2000) (2000) receivables (days) 73.2 73.2 73.2 73.2 others 10210 (10379) 1046 582 payable (days) 87.5 86.2 84.2 82.3 Cashflow from financing (2642) (9486) (7368) (8663)

Movement in Net Debt/Net Cash 526 (4,482) 599 1,725


332



Massmart www.massmart.co.za

Underweight Price: 8,672c

Price Target: 7390c

Company description General retailer, with interests in food, liquor, general merchandise and building materials.

Post mortem We foresee a slow earnings recovery and risk of market disappointment should the retailer fail to achieve its medium-term profit targets. We caution that the following could contribute to lacklustre earnings growth over the next 12-24 months: i) slowing price inflation depressing sales growth, ii) loss of market share in its food business to the supermarkets, iii) slow recovery of building materials business as household credit growth remains weak, iv) limited scope to improve GP margin in its foods business, v) very lean cost structure making it very difficult to cut costs to support earnings amidst top-line pressure.

Potential for earnings upgrades We see risk that the earnings recovery could be slow, mainly due to a slowing price inflation and weak volume growth (due to consumer pressure).

How much recovery is priced into the stock? Risk of significant de-rating, amidst a steamy valuation: the retailer is priced on a 12m fwd P/E of 14.7x (based on JPM estimates), much higher than its historical average of c10x. We calculate that the market is valuing its food and liquor business at c21x (c55% premium to the major food retailers), assuming that its General Merchandise business is priced at 10.5x and Building materials at 8.5x.

Price target and key risks Our SOTP P/E-based, May-10 PT is 7,390c. Risks include a sharper-than-expected slowdown in volume growth, which would have an adverse impact on our valuation and forecasts, while on the upside there is potential for better capital management, a lower dividend cover and/or share buybacks.

South Africa General Retailing, Wholesaling Sean HolmesAC (27-11) 507 0373 [email protected]


6,000

7,000

8,000

9,000

c


Price Performance

Source: Bloomberg


Absolute (%) -3.4 13.4 11.2

Source: Bloomberg

Company data Price(c) 8,672 Date of Price 23-Nov-09 Price Target (c) 7,390 Price Target End Date 31-May-10 52-week Range (c) 9,257 – 6,120 Mkt Cap (Rbn) 17.44 Shares O/S (mn) 201


Bloomberg: MSM SJ; Reuters: MSMJ.J Rand millions, year-end Jun

FY09A FY10E FY11E FY12E Sales 43,232 46,120 51,503 58,234 Net profit 1,211 1,185 1,406 1,678 FD EPS (SAcps) 593.47 580.91 689.15 822.38 DPS (SAcps) 386.00 370.62 439.68 524.68 Sales growth (%) 8.2 6.7 11.7 13.1 Net profit growth (%) -7.8 -2.1 18.6 19.3 EPS growth (%) -7.9 -2.1 18.6 19.3 ROE (%) 41.8 35.8 36.0 36.1 FD P/E (x) 14.6 14.9 12.6 10.5


333



Massmart: Summary of Financials Income Statement Cash Flow Statement R in millions, year end Jun FY08 FY09 FY10E FY11E FY12E R in millions, year end Jun FY08 FY09 FY10E FY11E FY12E Sales 39,945 43,232 46,120 51,503 58,234 Cash flow from operating activities 1,726 1,686 1,365 1,981 2,342% YOY Change 14.3% 8.2% 6.7% 11.7% 13.1% Cash flow from investing activities (898) (697) (785) (891) (1,020)Revenue 39,945 43,232 46,120 51,503 58,234 Cash flow from financing activities (223) (161) 90 90 91% YOY Change 14.3% 8.2% 6.7% 11.7% 13.1% Net increase / (decrease) in cash - - - - -Operating Costs -5,378 -5,930 -6,384 -7,145 -7,978 Foreign exchange differences - - - - -% YOY Change 10.8% 10.3% 7.7% 11.9% 11.7% Cash at beginning of year 1,209 1,021 1,025 862 1,207Bad Debts 0 0 0 0 0 Cash at end of year 1,022 1,025 862 1,207 1,634% YOY Change - - - - - Operating Profit 2,085 1,951 1,906 2,174 2,577 Ratio Analysis % YOY Change 24.6% -6.4% -2.3% 14.1% 18.5% Taxation (663) (620) (612) (700) (832) Per Share Data Effective Tax rate 32.8% 32.6% 32.6% 32.6% 32.6% Diluted HEPS (cps) 644.59 593.47 580.91 689.15 822.38Net Profit after tax 1,314 1,211 1,185 1,406 1,678 % YOY Change 25.3% (7.9%) (2.1%) 18.6% 19.3%% YOY Change 25.2% (7.8%) (2.1%) 18.6% 19.3% DPS (cps) 386.00 386.00 370.62 439.68 524.68Headline Earnings 1,319 1,207 1,185 1,406 1,678 % YOY Change 20.6% 0.0% (4.0%) 18.6% 19.3%% YOY Change 21.8% (8.5%) (1.8%) 18.6% 19.3% Dividend cover 1.7 1.5 1.6 1.6 1.6 NAV per share (cps) 1,359.8 1,517.1 1,769.7 2,109.1 2,507.4Balance sheet R in millions, year end Jun FY08 FY09 FY10E FY11E FY12E Profitability GP Margin - - - - -ASSETS Operating Margin 5.2% 4.5% 4.1% 4.2% 4.4%Total Non current assets 3,841 4,397 4,790 5,294 5,890 Operating costs/Revenue 13.5% 13.7% 13.8% 13.9% 13.7%Inventory 4,759 4,893 5,164 5,759 6,509 % YOY Change - - - - - Trading Densities Trade Debtors 1,764 1,851 1,928 2,153 2,435 Revenue per sqm 164.4 167.4 174.9 189.7 204.9% YOY Change (6.0%) 4.9% 4.2% 11.7% 13.1% Operating profit per sqm 2.1 1.8 1.7 1.8 2.1Other current assets 478 329 324 371 442 Cash and Cash equivalents 1,060 1,056 1,259 1,612 2,047 Return Ratios Total Current assets 8,060 8,129 8,676 9,895 11,432 ROE 52.8% 41.8% 35.8% 36.0% 36.1%Total Assets 11,901 12,526 13,466 15,190 17,322 ROA 11.0% 9.7% 8.8% 9.3% 9.7% ROIC 60.4% 51.6% 46.6% 48.0% 51.1%EQUITY Ordinary Shareholders Equity 2,736 3,054 3,562 4,246 5,047 Capital Management Minority Interest 31 42 44 46 49 Net interest bearing debt/Equity (22.0%) (16.7%) (20.0%) (25.0%) (29.5%)Total Equity 2,766 3,096 3,606 4,292 5,096 Net interest bearing debt/EBIT (0.3) (0.3) (0.4) (0.5) (0.6) Interest bearing liabilities - - - - - Credit Management Other non current liabilities 748 709 718 751 794 Total bad debts/Avg gross debtors - - - - -Total non current liabilities 1,016 859 861 886 923 Liquidity Trade accounts payable 7,392 7,692 8,119 9,053 10,233 Current Assets : Current Liabilities 1.0 0.9 1.0 1.0 1.0Other current liabilities - - - - - Current Assets less Inventory : Current Liabilities 0.4 0.4 0.4 0.4 0.4Total current liabilities - - - - - Total Liabilities 9,134 9,430 9,860 10,898 12,226 Source: Company reports and J.P. Morgan estimates.

334



MISC-F www.misc.com.my

Neutral M$8.90


Company description MISC is a leading international shipping company in Malaysia. Energy-related shipping (i.e. LNG, petroleum and chemical tankers) accounts for 51% of its revenue, with integrated liner logistics making up 29%. The remaining 20% is derived from other energy-related businesses (i.e. heavy engineering, ship repairs, and the offshore FPSO and FSO businesses).

Post mortem Existing and long-term charters in the LNG and offshore units should continue to provide stable earnings (together accounted for 89% of FY09 pre-tax). MISC has a captive customer in Petronas which accounts for about 50% of its business. Liner unit remains loss-making due to intense competition, though current restructuring/scaling down of routes here should help stem losses.

Potential for earnings upgrades Our forecast has factored in a halving in FY09 EBITDA losses of M$1B from the liner unit by FY11 from the scaling down of Asia-Europe routes. We have factored in VLCC and Aframax tanker rates recovering by 17-26% Y/Y in 2010E in line with our US team’s forecast with improved global demand. Every 5% rise in tanker rates will improve FY11E earnings by 3%.

How much recovery is priced into the stock? Valuations have largely priced in a recovery as the stock trades on 2010E P/E of 21x (historical mean: 17x, +1SD: 22x), and at a 9% discount to SOTP versus historical mean discount of 19% and peak discount of 3%.

Price target and key risks Our Mar-10 PT of M$8.20 translates to a discount of 16% to SOTP, where we value the LNG and offshore units on DCF, and the chemical and tanker units based on replacement value of assets. A key risk to our PT is a stronger and faster-than-expected pick-up in global demand, which will reduce risk for the tanker and chemical units, and narrow the SOTP discount further.

Malaysia Shipping Simone YeohAC (603) 2270 4710 [email protected]



7

8

9

10

10-0

8

01-0

9

04-0

9

07-0

9

10-0

9

Source: Bloomberg.

Performance 1M 3M 12M Absolute (%) 0.6 0.8 4.7 Relative (%) -2.4 -5.2 -23.6

Source: Bloomberg.

Company data 52-wk range (M$) 7.85-9.3 Mkt. cap (M$MM) 33,106.46 Mkt. cap (US$MM) 9,676.01 Liquidity (US$MM) 1.4 Avg. daily volume (MM) 0.6 Shares O/S (MM) 3,719.8 Date of price 5-Nov-09 KLCI Index 1254.0 Free float (%) 100.0 Exchange rate 3.42

Source: Bloomberg.

Bloomberg: MISF MK; Reuters: MISCe.KL M$ in millions, year-end March FY08 FY09 FY10E FY11E FY12E Sales 12,957 15,783 15,670 15,754 16,031 Core net profit 2,430 1,405 1,236 1,779 2,114 Core EPS (M$) 0.653 0.378 0.332 0.478 0.568 DPS (M$) 0.350 0.350 0.350 0.350 0.350 Sales growth (%) 15.7 21.8 -0.7 0.5 1.8 Net profit growth (%) 0.6 -42.2 -12.0 43.9 18.9 EPS growth (%) 0.6 -42.2 -12.0 43.9 18.9 ROE (%) 13.2 6.7 5.9 8.5 10.1 ROCE (%) 11.1 6.0 5.8 7.4 8.4 P/E (x) 13.6 23.6 26.8 18.6 15.7 P/BV (x) 1.8 1.6 1.6 1.1 0.9 EV/EBITDA (x) 8.7 10.5 11.1 0.0 0.0 Net div yield (%) 3.9 3.9 3.9 3.9 3.9 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009. We downgraded to UW with new PT of M$7.7 on November 24.

335



MISC-F: Summary of financials Profit and Loss statement Cash flow statementMYR in millions, year-end Mar FY08A FY09A FY10E FY11E FY12E MYR in millions, year-end Mar FY08A FY09A FY10E FY11E FY12E

Revenues 12,957 15,783 15,670 15,754 16,031 EBIT 2,872 1,961 1,898 2,466 2,850% change Y/Y 15.7 21.8 -0.7 0.5 1.8 Depreciation & amortisation 1,465 1,923 1,889 1,955 1,955

EBITDA 4,337 3,884 3,786 4,421 4,804 Change in working capital (239) 59 1,213 7 22% change Y/Y -6.5 -10.5 -2.5 16.8 8.7 Taxes (71) (68) (100) (83) (101)EBITDA Margin (%) 33.5 24.6 24.2 28.1 30.0 Others 13 (466) (490) (486) (486)

EBIT 2,872 1,961 1,898 2,466 2,850 Cash flow from operations 4,039 3,409 4,408 3,859 4,239% change Y/Y -11.6 -31.7 -3.2 30.0 15.5EBIT Margin (%) 22.2 12.4 12.1 15.7 17.8 Capex (1,539) (7,022) (3,883) (1,927) (1,927)

Net Interest (345) (403) (490) (486) (486) Disposal/ (purchase) 0 0 0 0 0Earnings before tax 2,609 1,595 1,444 2,017 2,400 Others (1,311) 0 0 0 0

% change Y/Y -11.0 -38.9 -9.5 39.7 19.0 Free cash flow 2,500 (3,613) 525 1,932 2,313Tax (71) (68) (100) (83) (101)

as % of EBT 2.7 4.2 7.0 4.1 4.2 Equity raised/ (repaid) 0 0 0 0 0Core Net Income 2,430 1,405 1,236 1,779 2,114 Debt raised/ (repaid) (457) 0 0 0 0

% change Y/Y 0.6 -42.2 -12.0 43.9 18.9 Other #REF! #REF! #REF! #REF! #REF!Shares Outstanding 3720 3720 3720 3720 3720 Dividends paid (1,338) (1,317) (1,302) (1,302) (1,302)EPS (reported) - M$ 0.653 0.378 0.332 0.478 0.568 Beginning cash 2,218 1,964 3,725 1,989 2,473

% change Y/Y 0.6 -42.2 -12.0 43.9 18.9 Ending cash 1,964 3,725 1,989 2,473 3,307

Balance sheet Ratio AnalysisMYR in millions, year-end Mar FY08A FY09A FY10E FY11E FY12E %, year-end Mar FY08A FY09A FY10E FY11E FY12E

Cash and cash equivalents 1,964 3,725 1,989 2,473 3,307 EBITDA margin 33.5 24.6 24.2 28.1 30.0Accounts receivable 2,261 2,899 2,821 2,836 2,886 Operating margin 22.2 12.4 12.1 15.7 17.8Inventories 400 442 627 630 641 Net profit margin 18.8 8.9 7.9 11.3 13.2Others 161 318 318 318 318 SG&A/sales n.a. n.a. n.a. n.a. n.a.Current assets 4,786 7,384 5,754 6,256 7,152

Sales per share growth 15.7 21.8 -0.7 0.5 1.8LT investments Sales growth 15.7 21.8 -0.7 0.5 1.8Net fixed assets 24,257 29,373 31,405 31,405 31,405 Net profit growth 0.6 -42.2 -12.0 43.9 18.9Total assets 29,043 36,757 37,159 37,661 38,557 EPS growth 0.6 -42.2 -12.0 43.9 18.9

Liabilities Interest coverage (x) 12.6 9.6 7.7 9.1 9.9ST loans 959 3,104 2,899 2,899 2,899 Net debt to total capital (%) 19% 22% 26% 25% 22%Payables 2,642 3,381 4,701 4,726 4,809 Net debt to equity (%) 30% 39% 47% 43% 38%Others 97 100 100 100 100 Sales/assets (x) 0.4 0.4 0.4 0.4 0.4Total current liabilities 3,698 6,586 7,701 7,726 7,809 Assets/equity (x) 1.6 1.8 1.8 1.8 1.7Long term debt 6,569 8,854 8,854 8,854 8,854 ROE 13.2 6.7 5.9 8.3 9.5Other liabilities 322 364 472 472 472 ROCE 11.1 6.0 5.8 7.4 8.4Total liabilities 10,589 15,804 17,027 17,052 17,135 ROA 8.4 3.8 3.3 4.7 5.5Shareholders' equity 18,454 20,953 20,887 21,364 22,176BVPS - M$ 5.0 5.6 5.6 5.7 6.0Source: Company, J.P.Morgan estimates PT assumptions Business Value (M$ MM) M$/share DCF of LNG business 29,312 7.80 Replacement value of Chemical (13 units) - US$45 mil / unit 2,106 0.50 Replacement value of Aframax (28 units) - US$60 mil / unit 6,048 1.60 Replacement value of VLCC (11 units) - US$110 mil / unit 4,356 1.10 NPV of FPSO business 922 0.20 MMHE on 8x PER 1,986 0.50 Total Value of Business (EV) 44,731 11.70 Less: Net Debt FY09E -8,233 -2.20 Total Equity Value 36,498 9.80 Number of shares 3,720 JPM Fair Value - 16% discount to SOTP 29,199 8.20 Source: J.P. Morgan estimates.

336



Nedbank www.nedbank.co.za

Underweight Price: 11,499c


Company description Nedbank is one of the four largest banking groups in South Africa, offering a range of wholesale and retail banking activities. It has the highest gearing to the non-retail banking segment, with the highest business banking contribution to its own earnings.

Post mortem We have been pleasantly surprised by the progress made in supporting NIR growth, which was supported by an expanding distribution network and net customer acquisitions. Nedbank has recently announced the acquisition of the remaining stake in Imperial Bank, which will support its VAF growth in the medium term. In addition, the acquisition of previous JVs with Old Mutual should also support NIR. That said, cost growth is likely to remain elevated as a result. We do not view provisioning as conservative and believe that its impairment unwind could be more muted as a result.

Potential for earnings upgrades We believe impairments will be a swing factor as to whether NED meets its own extremely wide guidance range for FY09E (18 – 38% down). Asset quality trends are a concern and in our view provisioning is relatively weak as well as the near-term ROE recovery profile.

How much recovery is priced into the stock? NED is our least preferred in the sector, with its share price discounting earnings further out than its peers.

Price target and key risks Our Jun-10 price target of 10,747c is calculated at the lower of our SOTP and economic valuation methodology, rolled forward at COE. Key risks to rating and PT include significant variation to our base case interest rate assumptions, while a collapse in the property market could significantly impact the value of realizations.

South Africa Banks Mervin NaidooAC (27-11) 507 0716 [email protected]

J.P. Morgan Equities Ltd

6,000

8,000

10,000

12,000

c


Price Performance

Source: Bloomberg


Absolute (%) -6.1 -0.6 28.9

Source: Bloomberg

Company data Price(c) 11,499 Date of Price 23-Nov-09 Price Target (c) 10,747 Price Target End Date 31-Aug-10 52-week Range (c) 12,900 – 6,492 Mkt Cap (Rbn) 54.72 Shares O/S (mn) 476


Bloomberg: NED SJ; Reuters: NEDJ.J Rand millions, year-end Dec

FY08 FY09E FY10E FY11E Operating revenues 26,899 28,445 30,757 34,741 Net profit 6,410 3,730 5,084 7,725 FD EPS (SAcps) 1,400.97 901.27 1,216.21 1,836.75 DPS (SAcps) 620 403 544 822 Sales growth (%) 9.4 5.7 8.1 13.0 Net profit growth (%) - 42 36 36 EPS growth (%) -1.9 -35.7 34.9 51.0 ROE (%) 17.7 10.4 13.2 18.0 FD P/E (x) 8.2 12.8 9.5 6.3


337



Nedbank Group Ltd: Summary of Financials Profit and Loss Statement Ratio Analysis R mn millions, year end Dec FY08A FY09E FY10E FY11E R mn millions, year end Dec FY08A FY09E FY10E FY11E Per Share Data Net interest income 16,170 16,734 18,088 20,936 EPS Reported 1400.97 901.27 1216.21 1836.75

% Change Y/Y 14.3% 3.5% 8.1% 15.7% EPSAdjusted 1,400.97 901.27 1,216.21 1,836.75Non-interest income 10,729 11,710 12,668 13,805 % Change Y/Y (1.9%) (35.7%) 34.9% 51.0%

Fees & commissions 10,729 11,710 12,668 13,805 DPS 620 403 544 822% change Y/Y 2.7% 9.1% 8.2% 9.0% % Change Y/Y -6.1% -35.1% 35.2% 51.1%Trading revenues - - - - Dividend yield 6.5% 3.7% 5.0% 7.5%% change Y/Y - - - - Payout ratio 44.3% 44.7% 44.8% 44.8%

Other Income - - - - BV per share 7,445.72 7,717.04 8,432.82 9,510.51Total operating revenues 26,899 28,445 30,757 34,741 NAV per share 7,445.72 7,717.04 8,432.82 9,510.51

% change Y/Y 9.4% 5.7% 8.1% 13.0% Shares outstanding 468.9 475.9 478.3 480.7Admin expenses -13,741 -14,966 -16,545 -18,470 % change Y/Y 1.9% 8.9% 10.6% 11.6% Return ratios Other expenses - - - - RoRWA - - - -

Pre-provision operating profit 12,938 13,251 13,958 15,985 Pre-tax ROE - - - -% change Y/Y 17.2% 2.4% 5.3% 14.5% ROE 17.7% 10.4% 13.2% 18.0%

Loan loss provisions 7,859 12,709 12,757 11,034 RoNAV 19.5% 11.8% 14.4% 19.0%Other provisions - - - - Other nonrecurrent items - - - - Revenues Earnings before tax 8,116 5,978 8,062 11,743 NIM (NII / RWA) - - - -

% change Y/Y (8.5%) (26.3%) 34.9% 45.7% Non-IR / average assets 2.1% 2.0% 2.1% 2.0%Tax (charge) 1,868 1,594 2,295 3,303 Total rev / average assets 4.2% 3.7% 4.0% 4.5%

% Tax rate 21.6% 25.0% 27.0% 27.0% NII / Total revenues 51.4% 44.7% 49.0% 54.7%Minorities 1,881 2,166 2,480 2,825 Fees / Total revenues 48.6% 55.3% 51.0% 45.3%Net Income (Reported) 6,410 3,730 5,084 7,725 Trading / Total revenues - - - - Balance sheet R mn millions, year end Dec FY08A FY09E FY10E FY11E R mn millions, year end Dec FY08A FY09E FY10E FY11E ASSETS Cost ratios Net customer loans 434,233 449,766 489,468 560,387 Cost / income 51.1% 52.6% 53.8% 53.1%

% change Y/Y 16.1% 3.6% 8.8% 14.5% Cost / assets 2.6% 2.6% 2.7% 2.7%Loan loss reserves 7,859 12,709 12,757 11,034 Staff numbers 27,570 27,570 27,570 28,121Investments - - - - Other interest earning assets - - - - Balance Sheet Gearing

% change Y/Y - - - - Loan / deposit 102.0% 94.5% 96.7% 99.6%Average interest earnings assets 480,864 525,370 561,325 625,806 Investments / assets - - - -Goodwill - - - - Loan / assets 76.6% 75.6% 75.5% 76.3%Other assets - - - - Customer deposits / liabilities 88.6% 87.8% 87.5% 87.7%Total assets 567,023 594,712 648,094 734,039 LT Debt / liabilities 2.7% 2.7% 2.6% 2.5% LIABILITIES Asset Quality / Capital Customer deposits 466,890 484,930 527,019 598,520 Loan loss reserves / loans 1.8% 2.8% 2.6% 2.0%

% change Y/Y 21.4% 3.9% 8.7% 13.6% NPLs / loans 4.1% 8.1% 6.6% 4.3%Long term funding 14,061 15,186 15,945 16,742 LLP / RWA - - - -Interbank funding - - - - Loan loss reserves / NPLs 43.4% 33.7% 38.3% 45.2%Average interest bearing liabs 425,716 475,910 505,974 562,769 Growth in NPLs 77.1% 108.2% (11.5%) (26.8%)Other liabilities - - - - RWAs - - - -Retirement benefit liabilities - - - - % YoY change - - - -Shareholders' equity - - - - Core Tier 1 - - - -Minorities 1,881 2,166 2,480 2,825 Total Tier 1 33,458 35,849 38,690 42,889Total liabilities 526,950 552,539 602,000 682,218 Source: Company reports and J.P. Morgan estimates.

338



New World China Land www.nwcl.com.hk

Underweight Price: HK$2.93


Company description New World China Land (NWCL) is the Mainland China property flagship of New World Development. The company was listed in July 1999 and is one of the largest national developers with 37 major projects spanning over 21 cities. Its businesses include developing projects for sale, managing investment property for rental, and operating resort and hotel projects. It has land banks of 28 million sqm.

Post mortem In October 2009, NWCL announced a rights issue of 1 for 2 shares at a price of HK$2.55 to raise HK$4.9 billion. The proceeds were mainly used to refinance the outstanding Rmb2.55 billion US$ settled convertible bonds puttable in June 2010. After this fund raising, the group should be in a better position to acquire land for future growth. However, the group's track record has been poor so far with ROE hovering only 1-3% in the past 10 years.

Potential for earnings upgrades In our view, investors would be disappointed if they think the fund raising exercise can enhance the company’s earnings prospects in the medium to long term. NWCL has cumulatively raised HK$15.8 billion equity (including the latest one) since its listing in July 1999, but has never delivered more than HK$1 billion core net profit in any single year in its 10-year listing history. Besides, the group’s long-term earnings outlook was dampened by its disposal of a prime Luwan site in Shanghai to Vice Chairman Mr Doo at the bottom of the market in March 2009.

Price target and key risks After the rights issue, NWCL’s book value per share will be diluted by 23% to HK$6.3. Our Jun-10 PT of HK$3.15 is based on 0.5x P/BV, which is at par with its past five-year average. We believe 0.5x P/BV is fair, given the group’s poor track record in realizing its large bank and delivering strong profit growth so far. Key risks to our PT include a potential privatization by its parent NWD, and stronger-than-expected profit growth.

China Real Estate Raymond Ngai, CFAAC (852) 2800-8527 [email protected]



0

2

4

6

8

10

03 04 05 06 07 08 09 Source: Bloomberg. Performance

1M 3M 12M Absolute (%) -8.9 -29.8 95.2 Relative (%) -14.0 -34.6 50.5

Source: Bloomberg.

Company data 52-week range (HK$) 1.108 - 4.449 Mkt cap (HK$MM) 11,243 Mkt cap (US$MM) 1,451 Shares O/S (MM) 3,837 Avg daily value (HK$MM) 26.81 Avg daily value (US$MM) 3.46 Avg daily volume (MM) 8.04 Date of price 5 Nov 09 Exchange rate 7.75 Index: HSI 21,479 Free float (%) 30

Source: Bloomberg.

Bloomberg: 917 HK; Reuters: 0917.HK HK$ millions, year-end June FY08 FY09 FY10E FY11E Sales 3,524 2,039 4,339 5,396 Net profit 772 218 709 1,363 Core EPS (HK$) 0.20 0.06 0.14 0.24 DPS (HK$) 0.06 0.06 0.06 0.06 Net profit growth (%) 25% -72% 226% 92% Core EPS growth (%) 25% -72% 152% 65% ROE (%) 5.4% 3.6% 2.0% 0.0% P/E (x) 14.5 51.6 20.5 12.4 NAV per share (HK$) 5.36 4.73 Dividend yield (%) 2.0% 2.0% 2.0% 2.0% BVPS (HK$) 7.7 5.3 6.3 6.5 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

339



New World China Land: Summary of financials Profit and loss statement HK$ in millions, year-end June

FY08 FY09 FY10E FY11ERevenues 3,524 2,039 4,339 5,396

% change Y/Y 42.4 -42.1 112.8 24.4EBIT 1,726 161 1,006 1,757

% change Y/Y 107.8 -90.7 526.5 74.7EBIT Margin (%) 49.0 7.9 23.2 32.6

Net Interest -220 -267 -294 -323Earnings before tax 2,621 788 1,320 2,187

% change Y/Y 168.1 -69.9 67.4 65.7Tax 169 32 214 430

as % of EBT -9.8 -19.9 -21.2 -24.5Net Income (Reported) 1,614 1,102 709 1,363

% change Y/Y 25 -72 226 92Core Net Profit 772 218 709 1,363

% change Y/Y 24.8 -71.8 225.7 92.2Shares Outstanding 3,835 5,756 5,756 5,756EPS (reported) (HK$) 0.39 0.26 0.17 0.33

% change Y/Y 24.6 -71.8 152.0 65.5Core EPS (HK$) 0.20 0.06 0.14 0.24

% change Y/Y 24.6 -71.8 152.0 65.5Source: Company, J.P. Morgan estimates.

Balance sheet HK$ in millions, year-end June

FY08 FY09 FY10E FY11ECash and cash equivalents 4,825 3,901 1,195 1,066Accounts receivable 6,761 7,021 7,232 7,448Inventories 9,386 9,635 12,595 15,197Others 28 34 34 34Current assets 21,000 20,590 21,056 23,745 LT investments 20,427 22,219 23,557 25,113Net fixed assets 8,931 11,582 11,650 11,725Total assets 50,358 54,392 56,262 60,583 Liabilities ST loans 4,426 5,971 5,971 5,971 Payables 2,313 2,084 2,292 2,522 Others 1,777 2,383 2,549 2,105 Total current liabilities 8,516 10,438 10,812 10,597 Long term debt 10,254 11,117 11,673 14,591 Other liabilities 552 800 880 968 Total liabilities 19,321 22,355 23,365 26,156 Minority interest 1,332 1,514 1,665 1,832 Shareholders' equity 29,705 30,523 36,201 37,564 BVPS (HK$) 7.7 5.3 6.3 6.5Source: Company, J.P. Morgan estimates.

Cash flow statement HK$ in millions, year-end June

FY08 FY09E FY10E FY11EOperating profit 2,130 168 1,014 1,766Depreciation & amortisation 153 153 153 153Change in working capital -4,263 932 -3,000 -3,257Taxes -164 16 -107 -215Other non-cash items -1,684 -506 -506 -505Cash flow from operations -3,828 764 -2,445 -2,057 Capex -971 -2,038 -1,357 -1,503Disposal/ (purchase) 460 0 0 0Net Interest 49 258 579 1,071Free cash flow -4,289 -1,016 -3,223 -2,489 Equity raised/ (repaid) 9 0 4,854 0Debt raised/ (repaid) 2,822 863 556 2,918Other 200 0 0 0Dividends paid -383 -345 -345 -345Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end June FY08 FY09E FY10E FY11EEBIT margin 49.0 7.9 23.2 32.6 Operating margin 74.4 38.7 30.4 40.5 Net profit margin 38.0 (3.7) 11.5 18.6 SG&A/sales Sales per share growth 42.4 -42.1 112.8 24.4Sales growth 42.4 -42.1 112.8 24.4Net profit growth 24.8 -71.8 225.7 92.2Core EPS growth 24.6 -71.8 152.0 65.5 Interest coverage (x) 6.2 0.6 3.3 5.3Net debt to total capital 21.6 26.8 29.6 0.0Net debt to equity 33.2 43.2 45.4 51.9Sales/assets 7.5 3.9 7.8 9.2Assets/equity 169.5 178.2 155.4 161.3ROE 5.4 3.6 2.0 3.6ROCE 4.5 0.4 3.0 4.3 Source: Company, J.P. Morgan estimates.

340



PetroChina - H www.petrochina.com.cn

Underweight Price: HK$9.68


Company description PetroChina is the largest oil company in China, with 21,000 million BOE of proven reserves (45% natural gas) and production of 1,060 million BOE (22% natural gas). It has refining capacity of 2,600 BOPD. PetroChina also has 2 million and 2.6 million TPY of ethylene and propylene capacity, respectively. On the marketing side, PetroChina owns 18,000 retail stations. The natural gas, crude and petroleum products are tied together in a vast nationwide pipeline network. Post mortem PetroChina got hurt by high oil prices and controlled product prices last year. This year and for the future, with oil at or below US$80/bbl, it should enjoy better refining and marketing margins. Lack of crude production growth and high investments to monetize natural gas reserves will, however, continue to take down overall returns, in our view. We believe current market valuation is too high in relation to this structural decline in returns. Potential for earnings upgrades There is little upside in terms of EPS upgrades for PetroChina, with consensus at Rmb0.77 for 2010. Considering that PetroChina has struggled to come close to Rmb0.20 EPS in a quarter this year, it may be difficult to meet these expectations, depending on oil prices and related production costs in particular. How much recovery is priced into the stock? PetroChina is fully pricing in the NDRC pricing scheme and a full economic recovery (i.e. US$80/bbl+ oil price) relative to many other oil companies in the region. Hence, we expect a derating from current high levels as investors realize the lower returns on higher cost and large capex requirements. Price target and key risks We have an Underweight rating and Dec-09 PT of HK$7.40, based on a 15% discount to the DCF value, which is due to our view that oil prices will fall in the near-term. Our price target reflects 10x 2010E P/E, which is in line with global super majors’ valuations. Risks to our rating and PT are higher-than-expected oil prices and production.

China Oil & Gas Brynjar BustnesAC (852) 2800-8578 [email protected]


Price performance

0.02.04.06.08.0

10.012.0


Petrochina Co-H Share PriceHSCEI(rebased)

Source: Bloomberg.


Absolute (%) 9% 3% 60% Relative (%) 2% -3% -17%

Source: Bloomberg.

Company data 52-week range (HK$) 5.04-10.56 Adj. mkt cap (plug) (RmbMM) 1,707,585.93 Avg daily value ($MM) 182 Avg daily val (HK$MM) 1,411 Avg daily vol (MM) 126 Shares O/S (MM) 183,021 Date of price 5-Nov-09 Index: HSCEI 12805 Free float (%) 13.3 Exchange rate 7.75

Source: Bloomberg.

Bloomberg: 857 HK; Reuters: 0857.HK ( , g )Rmb in , year-end Dec FY07A FY08A FY09E FY10E FY11ERevenue (Rmb mn) 836,353 1,071,146 761,584 864,296 936,076Net Profit (Rmb mn) 146,750 114,431 111,530 123,971 131,924EPS (Rmb) 0.82 0.63 0.61 0.68 0.72DPS (Rmb) 0.39 0.31 0.27 0.30 0.32Revenue Growth (%) 21% 28% (29%) 13% 8%EPS Growth (%) 3% (23%) (3%) 11% 6%ROCE 27% 18% 15% 15% 14%ROE 22% 15% 14% 14% 14%P/E 10.5 13.6 14.0 12.6 11.8P/BV 2.1 2.0 1.8 1.7 1.6EV/EBITDA 6.4 7.2 7.1 6.5 6.1Dividend Yield 4.5% 3.6% 3.2% 3.6% 3.8%

Source: Company data, Bloomberg, J.P. Morgan estimates.

341



PetroChina –H: Summary of financials Income statement Cash flow statement Rmb in millions, year end Dec FY07 FY08 FY09E FY10E FY11E Rmb in millions, year end Dec FY07 FY08 FY09E FY10E FY11E Revenues 836,353 1,071,146 761,584 864,296 936,076 EBIT 200,771 159,300 155,338 173,752 185,483

% change Y/Y 21% 28% (29%) 13% 8% Depr. & amortization 67,274 89,733 105,251 118,624 130,517EBITDA 268,045 249,033 260,589 292,376 316,000 Change in working capital -7,207 -19,304 7,142 -2,370 -1,656

% change Y/Y 3% (7%) 5% 12% 8% Taxes -68942 -72093 -34849 -38814 -41400EBIT 200,771 159,300 155,338 173,752 185,483 Cash flow from operations 205,243 170,506 229,063 246,196 267,460

% change Y/Y 1% (21%) (2%) 12% 7% EBIT Margin 24% 15% 20% 20% 20% Capex -185,486 -213,947 -233,100 -233,100 -233,100Net Interest -1,505 -689 -4,888 -6,172 -6,772 Disposal/(purchase) - - - - -Earnings before tax 204,957 161,829 151,519 168,756 179,999 Net Interest -1,505 -689 -4,888 -6,172 -6,772

% change Y/Y 3% (21%) (6%) 11% 7% Other - - - - -Tax -49,781 -35,178 -34,849 -38,814 -41,400 Free cash flow 19,757 -43,441 -4,037 13,096 34,360

as % of EBT 24.3% 21.7% 23.0% 23.0% 23.0% Net income (reported) 146,750 114,431 111,530 123,971 131,924 Equity raised/(repaid) 65,798 0 0 0 0

% change Y/Y 3% (22%) (3%) 11% 6% Debt raised/(repaid) 4,003 -6,637 120,000 85,000 65,000Shares outstanding - 183,021 183,021 183,021 183,021 Other 3,659 77,695 0 0 0EPS (reported) 0.82 0.63 0.61 0.68 0.72 Dividends paid -69,346 -56,364 -50,188 -55,787 -59,366

% change Y/Y 3% (23%) (3%) 11% 6% Beginning cash 48,559 68,652 32,944 98,719 141,028 Ending cash 68,652 32,944 98,719 141,028 181,023 DPS 0.39 0.31 0.27 0.30 0.32 Balance sheet Ratio analysis Rmb in millions, year end Dec FY07 FY08 FY09E FY10E FY11E Rmb in millions, year end Dec FY07 FY08 FY09E FY10E FY11E Cash and cash equivalents 68,652 32,944 98,719 141,028 181,023 EBITDA margin 32% 23% 34% 34% 34%Accounts receivable 23,300 21,070 14,981 17,001 18,413 Operating margin 24% 15% 20% 20% 20%Inventories 88,496 90,670 64,466 73,161 79,237 Net margin 18% 11% 15% 14% 14%Others 55,101 79,789 59,743 66,394 71,042 Current assets 235,549 224,473 237,909 297,584 349,715 Sales per share growth 21% 26% (29%) 13% 8%LT investments - - - - - Sales growth 21% 28% (29%) 13% 8%Net fixed assets 765,933 898,909 1,026,758 1,141,234 1,243,817 Net profit growth 3% (22%) (3%) 11% 6%Total Assets 1,067,680 1,194,174 1,335,458 1,509,610 1,664,324 EPS growth 3% (23%) (3%) 11% 6% Liabilities Interest coverage (x) 178.10 361.44 53.32 47.37 46.66Short-term loans 30,934 92,761 92,761 92,761 92,761 Payables 145,393 156,390 111,193 126,189 136,669 Net debt to equity 0% 12% 18% 21% 22%Others 22,895 15,186 15,186 15,186 15,186 Sales/assets 0.86 0.95 0.60 0.61 0.59Total current liabilities 199,222 264,337 219,140 234,136 244,616 Assets/equity 1.45 1.51 1.56 1.66 1.72Long-term debt 39,688 32,827 152,827 237,827 302,827 ROE 22% 15% 14% 14% 14%Other liabilities 46,670 49,884 49,884 49,884 49,884 ROCE 27% 18% 15% 15% 14%Total Liabilities 285,580 347,048 421,851 521,847 597,327 Shareholders' equity 738,204 790,838 852,179 920,363 992,921 BVPS 4.10 4.32 4.66 5.03 5.43 Source: Company reports and J.P. Morgan estimates.

342



Quanta Computer Inc. www.quanta.com.tw


Price Target: NT$57

Company description Quanta is the largest ODM manufacturer of notebook computers and related peripheral equipment. Its key customers include Apple, HP, and Dell. Post mortem The sub-US$800 segment has increased from 15% to 50% of notebook PC volume since the financial crisis broke out in 1Q08. Notebook ODMs have managed to keep margins flattish or even up due to falling component costs. However, key components (DRAM, LCD panel) have since then seen sharp price increases; mechanical component costs are on the rise with labor shortages re-surfacing, and oil and commodity prices are rising as well. Potential for earnings upgrades We see increasing evidence of eroding notebook ODM pricing power: (1) Rising component prices, yet consumers are paying less; (2) Quanta/Compal rivalry intensifying again, while newcomer Hon Hai enters the fray; (3) HP/Acer guiding for strong 2010-11 margins post the ODM bidding—historically, there is a strong inverse margin relationship between brands and notebook ODMs; (4) HP’s unexpected order reshuffling as Inventec fights back with lower pricing; and (5) HP resuming E-bidding and starting in 2Q10 to adopt a dual-source, bi-monthly bidding strategy for mainstream projects to induce ODM competition, which we believe will hurt Quanta the most among the ODMs. Consensus expects flat margin in 2010, which is a key downside risk, in our view. How much recovery is priced into the stock? Quanta’s Chairman Barry Lam guided for 50 million notebook units in 2010 (up 40% Y/Y vs. industry growth of 20%+). Meanwhile, other three ODMs also talked about share gains during their 3Q09 earnings results meetings, even with EMS players coming in—some, or maybe all, have to lose market share. We think this is 2002-04 déjà vu—back then, ODM pricing war led to Quanta’s consolidated OPM to fall from 6.8% to 3.3%. The stock is now trading near 3-year highs on both P/E and P/BV terms. Price target and key risks Our Jun-10 PT of NT$57 is based on 9x FY10E earnings, vs. historical P/E range of 5x-35x, to reflect single digit EPS growth prospects in the next 3 years. A key risk to our PT and view is better-than-expected progress in vertical/horizontal integration.


Gokul Hariharan (852) 2800 8564 [email protected]


Price performance

20

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80

NT$






52-week range (NT$) 29.26-75.30 Mkt cap. (NT$MM) 244,029 Mkt cap. (US$MM) 7,502 Avg daily value (US$MM) 28.7 Avg daily volume (MM) 15.4 Shares O/S (MM) 3,725.6 Date of price 5-Nov-09 Index: TWSE 7,417 Free float (%) 52.2 Exchange rate 32.5

Source: Bloomberg.

Bloomberg: 2382 TT; Reuters: 2382.TW NT$ in millions, year-end December FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E Sales 795,234 790,991 970,282 1,097,999 YE BPS (NT$) 23.6 29.1 32.4 35.8 Operating profit 20,181 22,583 24,540 25,847 New TW GAAP ROE (%) 24.1 22.8 20.6 19.5 EBITDA 30,377 27,917 29,340 30,647 New TW GAAP Core ROIC (%) 24.7 27.6 26.5 22.6 Pre-tax profit 26,887 29,384 31,897 33,658 Cash div (NT$/Share) 3.50 3.50 3.24 3.45 Net profit 20,286 22,086 23,537 24,839 New TW GAAP EPS growth (%) 12.2% 4.7% 5.2% 4.5% MV of employee bonus - 2,072 2,305 2,432 P/BV (x) 2.8 2.2 2 1.8 New Taiwan GAAP NI 20,861 22,086 23,537 24,839 Quarterly EPS (NT$) 1Q 2Q 3Q 4Q New TW GAAP EPS (NT$) 5.78 6.05 6.37 6.65 EPS (FY07) 0.86 1.06 1.36 1.39 New Taiwan GAAP P/E (x) 11.3 10.8 10.3 9.8 EPS (FY08) 1.14 1.43 1.99 1.06 Cash 81,075 99,415 110,231 120,166 EPS (FY09E) 1.21 1.33 1.75 1.77 Gross debt 58,353 63,276 78,061 99,826 Fair value (6/2010) NT$78 Equity 86,075 107,460 120,801 134,454 Price target (6/2010) NT$57 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

343



Quanta Computer Inc.: Summary of financials NT$ in millions, year-end December Income statement Ratio analysis FY06 FY07 FY08 FY09E FY10E FY11E % FY06 FY07 FY08 FY09E FY10E FY11E Revenues 487,890 758,475 795,234 790,991 970,2821,097,999 Gross Margin 6.1 5.0 5.3 5.7 5.1 4.9 Cost of Goods Sold 458,237 720,462 752,817 746,211 920,3901,044,733 EBITDA margin 3.3 3.0 3.8 3.5 3.0 2.8Gross Profit 29,652 38,013 42,417 44,780 49,892 53,266 Operating Margin 2.7 2.4 2.5 2.9 2.5 2.4 R&D Expenses 3,998 5,016 5,411 6,077 7,473 8,452 Net Margin 2.7 2.4 2.6 3.0 2.6 2.4 SG&A Expenses 12,607 14,611 16,825 16,119 17,878 18,967 R&D/sales 0.8 0.7 0.7 0.8 0.8 0.8Operating Profit (EBIT) 13,048 18,386 20,181 22,583 24,540 25,847 SG&A/Sales 2.6 1.9 2.1 2.0 1.8 1.7EBITDA 15,886 22,949 30,377 27,917 29,340 30,647 Interest Income 799 1,117 1,440 591 657 722 Sales growth 20.2 55.5 4.8 -0.5 22.7 13.2 Interest Expense -1,953 -2,461 -2,124 -1,359 -1,494 -1,893 Operating Profit Growth -9.7 40.9 9.8 11.9 8.7 5.3

Investment Income (Exp.) 1,753 1,371 1,607 1,987 2,372 2,393 Old Taiwan GAAP NI growth 19.0 42.1 10.0 18.5 5.0 5.5

Non-Operating Income (Exp.) 2,356 4,622 5,783 5,583 5,822 6,588

New Taiwan GAAP NI growth 18.0 63.3 14.1 5.9 6.6 5.5

Earnings before tax 16,003 23,035 26,887 29,384 31,897 33,658 Tax 2,985 4,347 6,313 6,935 8,360 8,819 Interest coverage (x) 6.7 7.5 9.5 16.6 16.4 13.7Net Income (Old Taiwan GAAP) 12,983 18,447 20,286 24,032 25,237 26,634 Net debt to total capital -6.8 -12.4 -17.4 -22.9 -17.6 -9.8Net Income (New Taiwan GAAP) 11,203 18,288 20,861 22,086 23,537 24,839 Net debt to equity -11.3 -18.5 -28.7 -35.8 -28.6 -16.9NT$ EPS (Old Taiwan GAAP) 3.68 5.19 5.62 6.05 6.37 6.65 Asset Turnover 224.7 242.0 272.3 202.4 212.5 206.9EPS (New Taiwan GAAP) 3.20 5.15 5.78 6.05 6.37 6.65 Working Capital Turns (x) 15.8 19.4 16.9 16.5 22.4 29.9BPS 20.49 24.41 23.59 29.15 32.44 35.76 ROE (New Taiwan GAAP) 15.8 22.9 24.1 22.8 20.6 19.5Cash Dividend PS 2.50 2.50 3.50 3.50 3.24 3.45 ROIC (New Taiwan GAAP) 10.4 15.6 15.8 14.7 13.4 12.1Shares Outstanding (MM) 3,500 3,551 3,609 3,648 3,696 3,733 ROIC (net of cash) 18.8 28.3 31.5 33.9 30.5 25.7 Balance sheet Cash flow statement FY06 FY07 FY08 FY09E FY10E FY11E FY06 FY07 FY08 FY09E FY10E FY11E Cash and cash equivalents 56,367 59,665 81,075 99,415 110,231 120,166 EBIT 13,048 18,386 20,181 22,583 24,540 25,847Accounts receivable 70,918 124,450 99,883 139,810 163,142 187,163 Depr. & Amortisation 2,838 4,563 10,196 5,334 4,800 4,800Inventories 41,710 74,223 48,815 71,117 82,985 95,205 Change in working capital -8,342 -1,930 15,287 8,406 1,229 1,273Others 2,794 3,072 5,333 7,162 8,358 9,588 Taxes 2,985 4,347 6,313 6,935 8,360 8,819Current assets 171,788 261,410 235,106 317,504 364,716 412,123 Cash flow from operations 10,530 25,366 51,977 43,258 38,929 40,739 LT investments 13,708 13,295 11,813 13,241 15,613 18,006 Capex -3,574 -11,619 -16,648 -19,472 -20,000 -28,000Net fixed assets 27,628 34,684 41,136 55,274 70,474 93,674 Disposal/ (purchase) 10,471 428 1,415 -2,235 -3,339 -3,555Others 3,981 3,967 4,033 4,840 5,808 6,969 Net Interest -1,155 -1,344 -685 -769 -837 -1,171Total assets 217,105 313,355 292,089 390,859 456,610 530,772 Cash flow from investment 5,742 -12,536 -15,917 -22,475 -24,176 -32,726 Liabilities Free cash flow 6,955 13,747 35,329 23,786 18,929 12,739ST loans 40,820 38,299 36,508 52,490 65,231 83,985 Payables 80,910 155,624 115,903 163,035 191,133 220,069 Equity raised/ (repaid) 1,237 1,123 1,743 371 372 357Others 14,783 24,462 31,757 57,088 66,615 76,424 Debt raised/ (repaid) 136 -4,673 12,858 4,562 14,786 21,765Total current liabilities 136,513 218,385 184,168 272,614 322,979 380,477 Other -4,313 2,185 -17,374 4,899 -7,168 -7,490Long term debt 7,351 5,198 19,847 8,426 10,472 13,482 Dividends paid -8,063 -8,166 -11,876 -12,275 -11,927 -12,710Other liabilities 844 2,382 1,998 2,359 2,359 2,359 Total liabilities 144,708 225,965 206,013 283,399 335,809 396,318 Beginning cash 51,099 56,367 59,665 81,075 99,415 110,231Shareholders' equity 72,397 87,390 86,075 107,460 120,801 134,454 Ending cash 56,367 59,665 81,075 99,415 110,231 120,166Source: Company, J.P. Morgan estimates.

344



Redecard www.redecard.com.br

Neutral RDCD3.SA, R$26.71

Price Target: R$32

Company description Redecard is the second-largest merchant acquirer in Brazil, behind VisaNet, with 33% market share based on transaction value of R$125 billion in 2008. The company also has 922 POS terminals (as of September 30, 2009). The company is currently the sole active acquirer for MasterCard, Diner’s Club International and Redeshop branded cards in Brazil.

Post mortem Notwithstanding better economic conditions and the secular trend toward migration to electronic payments, we believe that the end of exclusive relationships between merchant acquirers and payment networks will lead to greater competition in the core merchant acquiring business and, perhaps equally important, could lead to a meaningful slowdown in the POS leasing business (25% of net revenue through the first nine months of 2009). We also believe that the prepayments of receivables business will grow much more slowly going forward (18% of net revenue through nine months 2009). We prefer VisaNet to Redecard.

Potential for earnings upgrades While near-term earnings momentum remains mostly favorable, the end of exclusivity in the second half 2010 should help precipitate a sharp slowdown in top- and bottom-line growth to the high-single-digit range beyond 2010. We also see some downside risk to our estimates after 2010.

How much recovery is priced into the stock? While the stock has meaningfully underperformed the market, we see Redecard as a broken growth story with a business mix (roughly 43% of revenues come from POS leasing and prepayments of receivables) that does not support a high multiple. We do not see the current valuation of 2.26x 2010e earnings as compelling.

Price target and key risks Year-end 2010 – R$32. We use a DCF and trading comparables when establishing our price target. Downside risks include greater-than-expected competition, a reduction in the settlement period for credit card transactions (would hurt factoring business), and additional regulatory measures that hurt growth and/or increase competition. Upside risks include less-than-expected competition and Redecard being able to compete more effectively than expected.

Brazil Financial Institutions Saul MartinezAC (1-212) 622-3602 [email protected] J.P. Morgan Securities Inc.


20

25

30

35

nov-08 fev-09 mai-09 ago-09

Source: Bloomberg.


Absolute (%) (9.7) 7.7 5.7 Relative (%) (10.3) (9.9) (89.8)

Source: Bloomberg.

Company data 52-week range (LC) 23.70-20.15 Mkt cap. (Local) 17,975 Mkt cap. (US$MM) 10,438 Avg daily value (US$MM) 45.8 Avg daily volume (MM) 1.7 Shares O/S (MM) 673 Date of price 11/25/2009 Index: Bovespa 67917 Free float (%) 36% Exchange rate 1.72


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346



Reliance Power www.reliancepower.co.in

Underweight Rs144.25

Price Target: Rs122

Company description Reliance Power is one of the flagship companies of the ADAG group. It aspires to build 32GW of power capacity by 2017, including 18.5GW of coal, 10.28GW of gas, 3.3GW of hydro. 5GW of the targeted capacities are for merchant sale, while 26GW are at pre-determined PPA prices and 900MW at regulated returns. The company got listed in January 2008 with a US$2.35 billion IPO, valuing the stock at US$23.3B then.

Post mortem Reliance Power’s coal portfolio includes 3 UMPPs of 4GW each. Of this, construction activity has begun in only 4GW. The under-construction capacity is 5.5GW—funding, fuel and clearances are in place for these projects. Gas projects are currently stuck due to a dispute on gas pricing with the elder brother Mukesh Ambani. Post downturn, investor appetite for IPPs has improved and markets are ready to ascribe value to the development pipeline, although some of these are still nascent. Risk of delayed financial closure for pipeline projects has reduced to some extent, in our view. Potential for earnings upgrades Our estimates of project commissioning are broadly in line with management guidance and are unlikely to be advanced. Earnings contribution over the next three years is low (~Rs17B) due to high capital costs in the initial period. Potential for upgrades is low, in our view.

How much recovery is priced into the stock? Markets are already valuing the development pipeline, even though some of these are relatively nascent. We believe the recovery is adequately priced in. Price target and key risks Our Mar-10 SOTP-based PT of Rs122 implies a 9% downside to CMP. The stock is most expensive in the entire IPP space at 45x FY11E EPS, and 51x FY11E EV/EBITDA. Execution delays for ultra mega power projects are the key risk to our PT. A recovery in funding environment, coupled with projects actually getting off the ground, is an upside risk to our PT.

India Electric Utilities Shilpa KrishnanAC (91-22) 6157-3580 [email protected]



0

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100

150

200


Source: Bloomberg.


Absolute (%) (14) (18) 20 Relative (%) (8) (17) (35)

Source: Bloomberg.

Company data 52-week range (Rs) 89.45-210 Mkt cap. (RsB) 326 Mkt cap. (US$B) 6.9 Avg daily value (US$MM) 4.3 Avg daily volume (MM) 1.2 Shares O/S (MM) 2,396.8 Date of price 5-Nov-09 Index: BSE 16,064 Free float (%) 15% Exchange rate (Rs/US$) 47.4

Source: Bloomberg.

Bloomberg: RPWR.IN; Reuters: RPOL.BO Rs in millions, year-end March FY09 FY10E FY11E FY12E Net revenues 0 1,180 22,826 39,347 EBITDA (1,034) 577 11,184 21,669 PAT 2,444 6,219 7,933 3,560 EPS 1.0 2.6 3.0 1.2 % Net profit growth 186% 154% 28% -55% % EPS growth 186% 154% 17% -59% ROE (%) 1.8% 4.5% 5.5% 2.4% ROCE (%) -1% 0% 3% 3% P/E 133.5 52.5 44.7 110.2 P/BV 2.4 2.3 1.3 1.1 EV/EBITDA 698.5 50.8 28.7 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

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Reliance Power: Summary of financials Profit and loss statement Rs in millions, year-end March

FY09 FY10E FY11E FY12ERevenues 0 1,180 22,826 39,347

% change Y/Y 0% NA 1935% 172%EBITDA -1,034 577 11,184 21,669

% change Y/Y -112% -56% 1940% 194%EBITDA Margin (%) NA 49% 49% 55%

EBIT -1,034 505 9,394 16,451% change Y/Y -112% -49% 1862% 175%EBIT Margin (%) NA 43% 41% 42%

Other income 3,604 5,951 3,005 676 Net Interest 0 0 (3,888) (11,584)Earnings before tax 2,570 6,456 8,512 5,543

% change Y/Y 279% 251% 132% 65%Tax (126) (147) (840) (551)

as % of EBT 5% 2% 10% 10%Net Income (adjusted) 2,444 6,219 7,933 3,560

% change Y/Y 286% 254% 128% 45%Minority Interest - - 632 598 Retained Profits 2,444 6,219 7,302 2,961

% change Y/Y 286% 254% 117% 41%Source: Company, J.P. Morgan estimates.


FY09 FY10E FY11E FY12EAssets Cash and cash equivalents 101,684 68,347 17,520 1,787Net current assets 0 0 6,519 9,581Investments 0 0 0 0Gross Block 2,500 13,500 98,387 227,733Accumulated Depreciation 0 -72 -1,790 -7,008Net Block 2,500 13,428 96,596 220,725Capital WIP 91,612 196,552 278,794 321,991Total Fixed assets 94,112 209,980 375,391 542,716Total Assets 195,796 278,327 399,430 554,084 Liabilities Total debt 58,240 138,328 252,579 399,333Deferred Tax - - - - Total liabilities 58,240 138,328 252,579 399,333 Shareholder's equity 137,555 139,999 146,219 153,520Source: Company, J.P. Morgan estimates.


FY09 FY10E FY11E FY12EEBITDA (1,034) 577 11,184 21,669 Net tax paid (126) (237) (578) (1,983)Operating profit after tax (1,160) 340 10,606 19,686 Change in working capital (5,996) 0 (6,519) (3,063)Operating cash flow (7,156) 340 4,088 16,623 Capital expenditure (83,785) (115,941) (167,129) (172,543)Investing cash flows (83,785) (115,941) (167,129) (172,543) Interest expense 0 0 (3,888) (11,584)Interest income 5,951 3,005 676 (826)Principal payment 53,758 80,087 114,252 146,754 Equity issuance 0 0 0 0 Dividend payment 0 0 0 0 Financing cash flows 59,709 83,092 111,040 134,344 Change in Cash (31,232) (32,508) (52,001) (155,920)Opening cash 135,503 101,684 68,347 17,520 Closing cash 101,684 68,347 17,520 1,787 Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end March FY09 FY10E FY11E FY12EEBITDA margin NA 49% 49% 55%EBIT margin NA 43% 41% 42%Net profit margin NA NA 32% 8% Sales growth 0% NA 1935% 172%Net profit growth 286% 254% 128% 45% Debt to total capital 30% 50% 63% 72%Net debt to equity 42% 99% 173% 260%Sales/assets 0.0% 0.4% 5.7% 7.1%Assets/equity 142.3% 198.8% 273.2% 360.9%ROE 2% 4% 6% 2%Source: Company, J.P. Morgan estimates.

Reliance Power: SOTP valuation Size Project Debt Equity Equity CoE Equity value of SPV (MW) Cost (Rs B) (Rs B) (RsB) IRR (%) (%) RsB US$B Rs/share

Grand total 28,160 1,125 862 264 266.8 5.9 122.2 Conventional 24,860 933 708 225 163 3.6 79.1 Coal-based 14,580 625 461 163 76 1.7 42.7 Sasan 3,960 194 146 49 14.6 14.0 9.2 0.2 3.9 Rosa-I 600 27 22 5 13.5 14.0 7.0 0.2 2.9 Rosa-II 600 25 19 6 44.9 15.0 15.3 0.3 6.4 Shahpur-I 1,200 48 36 12 39.6 18.0 - - - Butibori 300 14 10 4.2 51.6 16.0 9.1 0.2 3.8 MP Power Co 3,960 158 111 48 49.9 17.5 8.4 0.2 3.5 Krishnapatnam 3,960 158 119 40 18.3 16.0 27.1 0.6 11.3 Tilaiya 3,960 190 133 57 24.3 15.0 26.2 0.6 10.9 Gas-based 10,280 308 247 62 87 1.9 36.4 Dadri 7,480 224 179 45 54.1 16.0 87.3 1.9 36.4 Shahpur-II 2,800 84 67 17 63.0 17.0 - - - Non-conventional 3,300 192 154 38 - - - Urthing Sobla 400 21 17 4 32.9 17.0 - - - Tato-II 700 40 32 8 38.8 17.0 - - - Siyom 1,000 58 46 12 23.7 17.0 - - - Kalai 1,200 73 58 15 24.9 17.0 - - - Cash 103 2.3 43.1 Source: Company data, J.P. Morgan estimates.

348



SABESP www.sabesp.com.br

Underweight R$31.9/share

Price Target: R$32/share

Company description Controlled by the state government of Sao Paulo, SABESP is the largest water utility in Brazil with US$3.5bn in annual sales, serving 366 municipalities and a population of 26 million. Listed in Bovespa’s Novo Mercado, the company also has ADRs trading in the NYSE.

Post mortem SABESP currently lacks a stable and transparent regulatory framework that includes a market-based implied ROIC and regular tariff resets. We remain concerned that a faster economic growth in Brazil could even increase the capex needs in the company’s concession area (i.e. SABESP already has an aggressive investment plan until 2013E at uncertain ROICs in our view) and jeopardize profitability. Moreover, due to the current electoral cycle, we do not expect the implementation of a new tariff framework in the medium term. Finally, SABESP has a high concession renewal risk for ~80% of its revenues (i.e. concession contracts to be signed until 2010YE), which in our view poses a risk of increases in operating expenses due to renewal costs.

Potential for earnings upgrades We believe that the potential earnings upside for SABESP in 2010 is limited as: 1) the company has relatively low exposure to economic recovery due to the low elasticity of water demand to GDP; and 2) despite the fact that its leverage is higher compared to other utilities in the region, SABESP has US$1.1bn in un-hedged FX-denominated debt that could generate non-cash losses in 2010 should the R$ depreciate (as we expect).

Price target and key risks We have an Underweight rating for SBSP3 and a 2010YE R$32/share price target based on DCF valuation with 11.2% cost of equity and 2% perpetuity growth rate. The main risks to our rating are: 1) higher than estimated water consumption; 2) sooner than later implementation of a new tariff framework with market-based ROIC; 3) acquisition of sister company EMAE at a cheap valuation; and 4) operating expenses below estimates.

Brazil Utilities Anderson Frey, CFAAC (1-212) 622 6615 [email protected]


Price performance R$/share, last 12 months

0

10

20

30

40

Nov-08 Apr-09 Sep-09

Source: Bloomberg.




Company data 52-week range (R$) 21.5-37.2 Mkt cap. (R$mn) 7,261 Mkt cap. (US$mn) 4,173 Avg daily value (US$MM) 6.1 Shares O/S (mn) 228 Date of price 11/25/2009 Index: IBOVESPA Free float (%) 50 Exchange rate R$1.74/US$

Source: Company, Bloomberg. Bloomberg: SBSP3 BZ, SBS; Reuters: SBSP3.SA, SBS.US R$ in millions, year-end December FY08 FY09E FY10E FY11E Sales 6,352 6,718 7,159 7,639 EBITDA 2,732 2,669 3,102 3,036 Net profit 1,008 1,288 1,225 1,003 EPS (R$) 4.42 5.65 5.38 4.40 DPS (R$) 1.30 1.70 1.65 1.51 Sales growth (%) 6.4 5.8 6.6 6.7 EBITDA growth (%) 2.8 (2.3) 16.2 (2.1) Net profit growth (%) (3.9) 27.7 (4.8) (18.1) ROE (%) 9.6 11.3 10.0 7.7 EV/EBITDA (x) 5.0 5.1 4.4 4.5 P/E (x) 7.2 5.6 5.9 7.2 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

349



SABESP: Summary of financials

Profit and loss statement Cash flow statement R$ in millions, year-end December R$ in millions, year-end December

FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E Revenues 6,352 6,718 7,159 7,639 EBIT 2,114 2,026 2,454 2,359% change Y/Y 6.4 5.8 6.6 6.7 Depreciation & Amortization 618 643 648 677EBITDA 2,732 2,669 3,102 3,036 Change in working capital 1 (64) (92) (100)% change Y/Y 2.8 -2.3 16.2 -2.1 Taxes (398) (623) (527) (448)EBITDA margin (%) 43.0 39.7 43.3 39.8 Cash flow from operations 2,334 1,982 2,483 2,488EBIT 2,114 2,026 2,454 2,359 CAPEX (1,708) (1,651) (1,830) (1,914)% change Y/Y 3.6 -4.2 21.1 -3.9 FCFF 626 331 654 574EBIT margin (%) 33.3 30.2 34.3 30.9 Net Interest Expense (541) (565) (552) (719)Net financial results (541) (565) (552) (719) FCFE 85 (234) 101 (145)EBT 1,110 1,455 1,472 1,252 Equity raised/(repaid) 2,800 0 0 0% change Y/Y -5.9 31.0 1.2 -14.9 Debt raised/(repaid) 1,180 181 1,326 255Taxes (398) (623) (527) (448) Dividends 296 386 377 344Net income 1,008 1,288 1,225 1,003 Other (3,442) (27) (21) 45% change Y/Y -3.9 27.7 -4.8 -18.1 Beginning cash 465 626 393 1,321Shares outstanding 228 228 228 228 Ending cash 626 393 1,321 1,277EPS 4.42 5.65 5.38 4.40 DPS 1.30 1.70 1.65 1.51Source: Company and J.P. Morgan estimates. Source: Company and J.P. Morgan estimates.

Balance sheet Ratio analysis R$ in millions, year-end December R$, year-end December

FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11ECash and cash equivalents 626 393 1,321 1,277 Sales (million m3) 3,211 3,283 3,383 3,469 Accounts receivable 1,130 1,195 1,273 1,359 Water 1,880 1,913 1,956 1,995 Others 483 486 502 518 Sewage 1,330 1,370 1,427 1,474 Current assets 2,238 2,073 3,096 3,154 Avg. tariff ($/MWh) 2.10 2.17 2.25 2.34 LT Assets 2,542 2,665 2,810 2,966 # Employees 16,649 16,649 16,649 16,649 Net fixed assets 15,742 16,750 17,932 19,169 Total Assets 20,523 21,490 23,839 25,290 Revenue / employee ('000) 382 403 430 459 ST Debt 1,449 1,157 724 812 EBIT/Net PP&E (%) 13% 12% 14% 12%Payables 187 198 211 225 Current ratio (x) 0.7 0.7 1.3 1.2Dividends 275 283 292 301 Interest coverage (x) 5.1 4.7 5.6 4.2Others 1,106 1,139 1,173 1,208 Net debt to EBITDA (x) 2.4 2.6 2.4 2.6Current liabilities 3,017 2,777 2,400 2,546 Net debt to equity (x) 0.6 0.6 0.6 0.6LT Debt 5,416 5,674 7,470 7,923 Other LT Liabilities 1,597 1,645 1,695 1,746 Net margin (%) 15.9 19.2 17.1 13.1Total liabilities 10,031 10,096 11,565 12,215 Revenues/assets (%) 30.9 31.3 30.0 30.2Shareholder's equity 10,492 11,394 12,274 13,075 Assets/equity (x) 2.0 1.9 1.9 1.9Liabilities and Equity 20,523 21,490 23,839 25,290 ROE (%) 9.6 11.3 10.0 7.7Source: Company and J.P. Morgan estimates. Source: Company and J.P. Morgan estimates.

350



Severstal www.severstal.com

Underweight Price: $8.80

Price Target: $7.90

Company description Severstal is the world's 15th largest steel producer, focused mainly on flat steel production. Russian-based iron ore and coal assets provide the advantage of vertical integration of its domestic steel operations. Severstal’s international steel-making and coal interests are in Italy and the US.

Post mortem As a result of the US expansion and burning cash at some of its unprofitable businesses, the company has sizable debt. At the end of 1H09 Severstal posted gross debt of $7.5 bn (net debt of $4.9 bn), something that resulted in the company subscribing to a RUB 15 bn bond (3-year maturity) at 14%, well above the rate at which its Russian peers borrowed. Assuming the ruble continues to strengthen, and this is the scenario we expect, Severstal will have to bear the negative affect of FX, we believe.

Potential for earnings upgrades Although we acknowledge the quality of the integrated business of Severstal in Russia, we see Vokrkutaugol as the weakest link within Severstal’s Russian operations, primarily due to prohibitively high cost. Its North American operation posted 3 consecutive quarters with negative EBITDA (4Q08-2Q09) and we do not envisage this division returning to profitability on an operating level in 2009.

How much recovery is priced into the stock? The market is expecting the company to make a definitive decision about the future of its US assets. So far the company has produced no plans for the future of its US assets. Meanwhile, we believe value in the Russian metals and mining sector is to be found elsewhere.

Price target and key risks Our end-10, DCF-based PT is $7.90/GDR. Key risks include currency fluctuations while factors such as improved US steel demand and prohibitive steel import duties could boost the performance of the US assets.

Russia Metals & mining Yuriy VlasovAC (7-495) 967-7033 [email protected] J.P. Morgan Bank International LLC

2

4

6

8

$


Price Performance

Source: Bloomberg


Absolute (%) -3.5 9.3 272.7

Source: Bloomberg

Company data 52-week range ($) 8.80-2.40 Mkt cap. (US$MM) 8,862 Avg daily value (US$MM) 8.5 Avg daily volume (MM) 1.6 Shares O/S (MM) 1,007 Date of price 23-Nov-09 Index: RTS 1466.77 Free float (%) 0.10 Exchange rate (RUB/$) 28.79

Source: Bloomberg

Bloomberg: SVST LI; Reuters: CHMF.RTS $ in millions, year-end December FY08 FY09E FY10E FY11E Sales 22393 11433 12968 14191 Net profit 2034 (408) 556 788 EPS ($) 2.02 (0.4) 0.55 0.78 FD EPS ($) 2.02 (0.4) 0.55 0.78 DPS ($) 1.34 0.0 0.06 0.2 Sales growth (%) 46.9 (48.9) 13.4 9.4 Net profit growth (%) 501 NM NM 41.7 EPS growth (%) 502 NM Nm 41.8 ROE (%) 22.1 (4.7) 6.4 8.5 P/E (x) 4.4 NM 15.9 11.2 FD P/E (x) 4.4 NM 15.9 11.2 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

351



Severstal: Summary of Financials Profit and Loss Statement Cash flow statement $ in millions, year end Dec FY08 FY09E FY10E FY11E $ in millions, year end Dec FY08 FY09E FY10E FY11E Revenues 22,393 11,433 12,968 14,191 EBIT 3,218 (693) 555 847

% Change Y/Y 46.9% -48.9% 13.4% 9.4% Depreciation & amortization 1,086 1,161 1,294 1,400Gross Margin (%) 26.4% 8.1% 13.6% 13.0% Change in working capital (1,026) 1,686 (241) (396)EBITDA 5,356 734 1,849 2,247 Taxes (1,094) 131 (141) (200)

% Change Y/Y 48.6% -86.3% 151.8% 21.5% Cash flow from operations 4,330 2,420 1,608 1,851EBITDA Margin (%) 23.9% 6.4% 14.3% 15.8%

EBIT 3,218 (693) 555 847 Capex (2,030) (1,000) (2,000) (2,100)% Change Y/Y 16.3% -121.5% -180.2% 52.4% Disposals/(purchase) 43 - - -EBIT Margin 14.4% -6.1% 4.3% 6.0% Net Interest (363) 147 151 155

Net Interest 155 147 151 155 Free cash flow (1,376) 1,852 (529) (441)Earnings before tax 2,588 -545 707 1,002

% change Y/Y -2.5% -121.1% -229.6% 41.7% Equity raised/repaid (26) - - -Tax (520) 131 (141) (200) Debt Raised/repaid 3,856 -922 -1,728 -1,409

as % of EBT 20.1% 24.0% 20.0% 20.0% Other - - - -Net Income (Reported) 2,034 (408) 556 788 Dividends paid (1,346) 0 (57) (200)

% change Y/Y 5.1% -120.0% -236.4% 41.7% Beginning cash 1,622 2,654 3,583 1,270Shares Outstanding 1,007.2 1,007.2 1,007.2 1,007.2 Ending cash 2,654 3,583 1,270 -780EPS (Reported) 2.02 -0.40 0.55 0.78 DPS 1.34 0.00 0.06 0.20

% Change Y/Y 5.1% (120.0%) (236.4%) 41.7% Balance sheet Ratio Analysis $ in millions, year end Dec FY08 FY09E FY10E FY11E $ in millions, year end Dec FY08 FY09E FY10E FY11E Cash and cash equivalents 2,654 3,583 1,270 (780) EBITDA margin 23.9% 6.4% 14.3% 15.8%Accounts Receivable 1,942 1,486 1,584 1,746 Operating margin - - - -Inventories 4,279 2,728 2,908 3,204 Net Profit margin 9.1% NM 4.3% 5.6%Others - - - - SG&A/Sales -4.6% -7.7% -7.2% -6.6%Current assets 10,692 9,383 7,375 5,827 Sales per share growth 46.9% -48.9% 13.4% 9.4%LT investments 70 70 70 70 Sales growth 46.9% -48.9% 13.4% 9.4%Net fixed assets - - - - Net profit growth 5.1% -120.0% -236.4% 41.7%Total assets 22,480 20,594 19,292 18,444 EPS growth 5.1% (120.0%) (236.4%) 41.7% ST loans 1,978 1,978 1,978 1,978 Interest coverage (x) 20.7 4.7 3.7 5.5Payables 1,527 973 1,038 1,144 Net debt to Total Capital 24.9% 18.2% 22.3% 26.6%Others - - - - Net debt to equity 58.6% 41.0% 44.9% 48.6%Total current liabilities 4,769 4,215 4,280 4,385 Sales/assets (x) 1.0 0.6 0.7 0.8Long term debt 6,278 5,356 3,628 2,219 Assets/Equity 248.4% 238.5% 211.0% 189.3%Other liabilities - - - - ROE 22.1% -4.7% 6.4% 8.5%Total liabilities 12,926 11,454 9,794 8,495 ROCE 11.7% -2.5% 3.8% 5.7%Shareholders' equity 9,048 8,634 9,143 9,744 ROA 10.4% -1.9% 2.8% 4.2%BVPS 9 9 9 10 Source: Company reports and J.P. Morgan estimates.

352



S-Oil Corp www.s-oil.com

Neutral Price: W57,500


Company description S-Oil is one of the largest oil refiners in Korea; it has refining, petrochems and lubricants segments. In 2008, refining throughput was 0.5 million BOPD, petrochemical sales 1.3 million tonnes and S-Oil sold 10 million bbls lubricants. S-Oil is owned by Saudi Aramco and a Hanjin consortium, and gets most of its crude feedstock from Saudi. S-Oil has the highest complexity in South Korea, primarily due to large-scale desulphurization equipment. Post mortem S-Oil suffered through the crisis primarily on its refining profitability plunging along with a weaker Won hurting its US$-denominated debt. A weaker Won, however, actually helps at the operating line, which has now reversed as the Won strengthened. Potential for earnings upgrades There is not much room for EPS upgrades over the next 12 months as we do not expect refining margins to go back to previous year’s levels. Decent margins will, however, generate a base operating profit, but with its investments into additional refining and aromatics capacity, we expect dividends to be cut significantly. How much recovery is priced into the stock? S-Oil didn’t correct as much in the market collapse, hence hasn’t performed well this year. We do, however, believe it is now pricing in the current market environment of low refining margins and still relatively strong petchem margins. Currently, relatively high valuation due to legacy high dividends is at risk, in our view. Price target and key risks We have a Neutral rating and Dec-10 PT of W64,000, based on 7x 2010E EV/EBITDA, which is in line with regional peers. We don’t see much upside in S-Oil and prefer SK Energy in the Korean refining space. A 47% underperformance YTD should also limit the downside. We now see S-Oil (without the dividend story) as a good short for the long SK Energy in order to take away the refining exposure if desired. Main risks to our PT are GRMs, petrochemical margins and operational aspects primarily on execution of expansion program.

South Korea Refining Brynjar BustnesAC (852) 2800-8578 [email protected]


Price performance

0

50,000

100,000

150,000


S-Oil Corp Share PriceKOSPI(rebased)


1M 3M 12M Absolute (%) -10% -3% -15% Relative (%) -7% -2% -47%


52-week range (W) 50,000-69,800 Mkt cap. (WB) 6,474 Mkt cap. (US$MM) 5,493 3M trd value ($MM) 14.3 3M trd value (WB) 16.8 3M trd vol (MM) 0.1 Shares O/S (MM) 113 Date of price 5-Nov-09 Index: KOSPI 1552.24 Free float (%) 37 Exchange rate 1,178

Source: Bloomberg.

Bloomberg: 010950 KS; Reuters: 010950.KS ( g )W in bn, year-end Dec FY07A FY08A FY09E FY10E FY11ERevenue 15,229 23,000 15,880 18,104 22,278Net Profit 695 427 614 658 779EPS (W) 6,817 3,791 5,457 5,841 6,915DPS (W) 13,425 5,000 1,750 1,800 1,850Revenue Growth (%) 5% 51% (31%) 14% 23%EPS growth (%) (26%) (44%) 44% 7% 18%ROCE 20% 10% 14% 13% 14%ROE 22% 12% 17% 16% 17%P/E 8.4 15.2 10.5 9.8 8.3P/BV 1.6 1.9 1.7 1.5 1.5EV/EBITDA 4.5 9.2 7.1 6.5 5.6Dividend Yield 23.3% 8.7% 3.0% 3.1% 3.2%Adjusted EPS (W) 7,021 9,022 4,784 5,841 6,915Adjusted P/E 8.2 6.4 12.0 9.8 8.3

Source: Company data, Bloomberg, J.P. Morgan estimates. Adjusted EPS for forex loss/gain.

353



S-Oil Corp: Summary of financials Income statement Cash flow statement Won in billions, year-end December FY07 FY08 FY09E FY10E FY11E Won in billions, year-end December FY07 FY08 FY09E FY10E FY11E Revenues 15,229 23,000 15,880 18,104 22,278 EBIT 1,032 611 873 951 1,125

% change Y/Y 5% 51% (31%) 14% 23% Depr. & amortization 167 175 219 278 306EBITDA 1,199 786 1,092 1,229 1,431 Change in working capital -456 -1,404 -223 -267 -501

% change Y/Y (5%) (34%) 39% 13% 16% Taxes - - - - -EBIT 1,032 611 873 951 1,125 Cash flow from operations 518 -369 617 676 591

% change Y/Y (6%) (41%) 43% 9% 18% EBIT Margin 7% 3% 5% 5% 5% Capex -166 -318 -900 -700 -400Net Interest 0 12 -53 -74 -89 Disposal/(purchase) 7 11 0 0 0Earnings before tax 1,032 623 820 877 1,037 Net Interest 0 12 -53 -74 -89

% change Y/Y (2%) (40%) 32% 7% 18% Other -1,632 2,501 0 0 0Tax -285 -177 -198 -212 -251 Free cash flow 352 -687 -283 -24 191

as % of EBT 27.7% 28.4% 24.2% 24.2% 24.2% Net income (reported) 695 427 614 658 779 Equity raised/(repaid) 2,138 0 0 0 0

% change Y/Y (6%) (39%) 44% 7% 18% Debt raised/(repaid) -69 623 500 0 500Shares outstanding 102 113 113 113 113 Other 439 -563 7 7 7EPS (reported) 6,817 3,791 5,457 5,841 6,915 Dividends paid -1,420 -582 -204 -210 -215

% change Y/Y (26%) (44%) 44% 7% 18% Beginning cash 1,989 3,406 2,133 2,153 1,926 Ending cash 3,406 2,133 2,153 1,926 2,408 DPS 13,425 5,000 1,750 1,800 1,850 Balance sheet Ratio analysis Won in billions, year-end December FY07 FY08 FY09E FY10E FY11E Won in billions, year-end December FY07 FY08 FY09E FY10E FY11E Cash and cash equivalents 578 1,871 1,891 1,664 2,146 EBITDA margin 8% 3% 7% 7% 6%Accounts receivable 1,770 1,456 1,588 1,810 2,228 Operating margin 7% 6% 5% 5% 5%Inventories 2,262 1,850 1,906 2,173 2,673 Net margin 5% 2% 4% 4% 3%Others 160 191 191 191 191 Current assets 7,599 5,629 5,837 6,100 7,500 Sales per share growth (17%) 37% (31%) 14% 23%LT investments - - - - - Sales growth 5% 51% (31%) 14% 23%Net fixed assets 1,560 1,714 2,383 2,805 2,899 Net profit growth (6%) (39%) 44% 7% 18%Total Assets 9,459 7,656 8,533 9,217 10,712 EPS growth (26%) (44%) 44% 7% 18% Liabilities Interest coverage (x) - - 20.64 16.68 16.13Short-term loans 1,884 2,509 3,009 3,009 3,509 Payables 3,499 1,624 1,588 1,810 2,228 Net debt to equity (48%) 10% 24% 27% 24%Others 3,542 1,697 1,661 1,884 2,301 Sales/assets 1.89 2.69 1.96 2.04 2.24Total current liabilities 5,426 4,206 4,670 4,893 5,810 Assets/equity 2.38 2.18 2.36 2.62 2.95Long-term debt 7 5 5 5 5 ROE 22% 12% 17% 16% 17%Other liabilities 60 50 50 50 50 ROCE 20% 10% 14% 13% 14%Total Liabilities 5,493 4,262 4,726 4,949 5,866 Shareholders' equity 3,967 3,394 3,806 4,268 4,846 BVPS 35,229 30,141 33,804 37,907 37,490 Source: Company reports, J.P. Morgan estimates.

354



Soriana www.soriana.com

Underweight Ps32.5


Company description Organización Soriana is a grocery and department store retail chain operating 465 stores (as of 3Q09) across the country of Mexico.

Post mortem There is pressure on cash flows and leverage due to heavy investments to renovate Gigante stores and grow space. Soriana did not fully convert Gigante stores, and therefore will have to invest heavily to bring them to the same level as the existing Soriana stores.

Potential for earnings upgrades We expect limited room for positive earnings surprises as the new number of stores announced in the 3Q release seems already priced into consensus. We expect Soriana to continue to face headwinds from heavy competition as (1) Walmex is aggressively lowering prices and has greater bargaining power with suppliers; (2) Comerci is getting more support from creditors for the restructuring. We believe there is limited room in the short term to recover top-line growth, which has been strongly affected by the economic downturn (its stronghold is the North, where the maquiladora industry is suffering from reduced demand from the US) and has not signaled a clear recovery.

How much recovery is priced into the stock? We believe further recovery is already priced into the stock, as Soriana is trading at par to peers and at a premium to its historical average, which does not reflect the risks, in our view. Soriana is trading at multiples similar to international peers’, despite its challenging market positioning and slower growth. Soriana is trading at P/E10e of 22.0x and EV/EBITDA10e of 10.3x, +2% and -1%, respectively, to median LatAm peers’ (CBD, Walmex, Cencosud and Exito). Against its own history, Soriana is also trading at an unwarranted premium of 37% and 31% to historical forward EV/EBITDA and P/E, respectively.

Price target and key risks Our Ps31 December 2010 price target is based on an 8-year discounted cash flow. Upside risks to our cautious view include: (1) faster-than-anticipated recovery in the economy; and (2) better-than-anticipated execution, i.e., no market share losses.

Mexico Retail Andrea TeixeiraAC (1-212) 622-6735 [email protected]


Price performance (Ps)

18

22

26

30

34

Nov-

08

Dec-

08

Jan-

09

Feb-

09

Mar

-09

Apr-0

9

May

-09

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct-0

9

Nov-

09

Source: Bloomberg.

Performance 1M 3M 12M Absolute (%) -1.5% 6.3% 25.5% Relative (%) -5.1% -4.8% -31.1%

Source: Bloomberg.

Company data 52-week range (Ps) 18.01 - 36.58 Mkt cap. (PsMM) 58,500 Mkt cap. (US$MM) 4,554 Avg daily value (US$MM) 2.4 Avg daily volume (MM) 0.9 Shares O/S (MM) 1,800 Date of price 25/11 Index: MEXBOL 31,364 Free float (%) 14% Exchange rate 12.84

Source: Bloomberg.

Bloomberg: SORIANAB MM; Reuters: SORIANAB.SA Ps in millions, year-end December FY08 FY09E FY10E FY11E Sales 91,304 91,304 93,422 101,463 Net profit 1,723 2,769 3,094 3,547 EPS (Ps) 0.96 1.54 1.72 1.97 FD EPS (Ps) 0.96 1.54 1.72 1.97 DPS (Ps) - - 0.12 0.14 Sales growth (%) -46.7% -4.5% 2.3% 8.6% Net profit growth (%) -45.0% 60.7% 11.7% 14.7% EPS growth (%) -45.0% 60.7% 11.7% 14.7% ROE (%) 6.8% 9.3% 9.3% 9.7% P/E (x) 28.5 22.0 20.4 18.0 FD P/E (x) 28.5 22.0 20.4 18.0 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009

355



Soriana: Summary of financials Profit and loss statement Ps in millions, year-end December FY08 FY09E FY10E FY11E Revenue 91,304 91,304 93,422 101,463 % change Y/Y -46.7% -4.5% 2.3% 8.6% Gross margin (%) 19.7% 20.4% 20.2% 20.2% EBITDA 6,083 6,642 7,084 7,729 % change Y/Y 12% 9.2% 6.7% 9.1% EBITDA margin (%) 6.4% 7.3% 7.6% 7.6% EBIT 4,198 4,706 5,147 5,729 % change Y/Y -2.4% 12.1% 9.4% 11.3% EBIT margin (%) 4.4% 5.2% 5.5% 5.6% Net interest (1,010) (730) (613) (559) Earnings before tax 1,710 3,863 4,420 5,068 % change Y/Y -62.6% 126.0% 14.4% 14.7% Tax 14 (1,095) (1,326) (1,520) as % of EBT 0.8% -28.3% -30.0% -30.0% Net income (reported) 1,723 2,769 3,094 3,547 % change Y/Y -45.0% 60.7% 11.7% 14.7% Shares O/S (MM) 1,800 1,800 1,800 1,800 EPS (reported) (Ps) 0.96 1.54 1.72 1.97 Source: Company, J.P. Morgan estimates.

Balance sheet Ps in millions, year-end December FY08 FY09E FY10E FY11E Cash and cash equivalents 1,746 928 4,159 5,255 Accounts receivable 3,527 3,332 3,446 3,352 Inventories 11,017 9,847 10,222 10,890 Others 218 206 213 278 Current assets 16,508 14,314 18,040 19,774 LT investments - - - - Net fixed assets 38,239 37,141 38,204 38,569 Total assets 66,388 64,500 69,762 71,544 Liabilities ST loans 5,313 4,537 4,537 4,537 Payables 14,078 14,442 14,992 12,417 Others 1,704 1,576 1,636 1,611 Total current liabilities 21,094 20,556 21,166 18,565 Long-term debt 7,630 3,980 5,480 5,480 Other liabilities 8,750 8,676 8,719 8,818 Total liabilities 66,388 64,500 69,762 71,543 Shareholders’ equity 29,131 31,903 34,780 38,079 BVPS (Ps) 16.2 17.7 19.3 21.2 Source: Company, J.P. Morgan estimates.

Cash flow statement Ps in millions, year-end December FY08 FY09E FY10E FY11E EBIT 4,198 4,706 5,147 5,729 Depreciation & amortization 1,885 1,936 1,937 2,000 Change in working capital (9,556) 1,614 115 (3,240) Taxes (1,095) (1,326) (1,520) (1,095) Cash flow from operations (5,269) 4,444 4,947 3,709 Capex (7,189) (1,000) (3,000) (2,365) Disposal/(purchase) 0 0 0 0 Net interest (1,010) (730) (613) (559) Free cash flow -18,036 9,644 7,013 4,179 Equity raised/(repaid) (26) (2) 0 0 Debt raised/(repaid) 9,633 (4,425) 1,500 -- Other -5,604 6,034 5,282 3,083 Dividends - - -217 -248 Beginning cash 4,571 1,746 928 4,159 Ending cash 1,746 928 4,159 5,255 DPS (Ps) - - 0.12 0.14 Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December FY08 FY09E FY10E FY11E EBITDA margin 6.4% 7.3% 7.6% 7.6% Operating margin 4.4% 5.2% 5.5% 5.6% Net profit margin 1.8% 3.0% 3.3% 3.5% SG&A/sales 15.3% 15.3% 14.7% 14.6% Sales growth -46.7% -4.5% 2.3% 8.6% Net profit growth -45.0% 60.7% 11.7% 14.7% Sales per share growth -46.7% -4.5% 2.3% 8.6% EPS growth -45.0% 60.7% 11.7% 14.7% Interest coverage (x) (3.3) (5.5) (7.3) (8.3) Net debt to total capital 0.3 0.2 0.1 0.1 Net debt to equity 0.4 0.2 0.2 0.1 Sales/assets 1.4 1.4 1.3 1.4 EBIT margin 4.4% 5.2% 5.5% 5.6% ROCE 7.6% 3.5% 3.6% 4.0% Assets/equity (x) 2.3 2.0 2.0 1.9 ROI 7.6% 3.5% 3.6% 4.0% ROE 6.8% 9.3% 9.3% 9.7% Source: Company, J.P. Morgan estimates.

356



Taishin Financial Holdings www.taishinholdings.com.tw

Underweight NT$13.45

Price Target: NT$12

Company description Taishin Financial Holdings (Taishin) is a bank-centric financial holding company with strong franchise in corporate banking, credit cards, and wealth management. The bank has a more balanced business mix between corporate banking and the consumer segment. Taishin FHC owns a 22.5% stake in Changhwa Bank as the top private shareholder. Recently, Taishin sold its broker franchise, Taiwan Securities, to KGI.

Post mortem To resolve its capital issue, Taishin disposed of its most profitable business, Taiwan Securities, to KGI Securities. We believe the disposal reflected that potentially it may be difficult for Taishin to find another strategic investor for recapitalization (including China investors).

Potential for earnings upgrades The disposal of Taiwan Securities, which accounted for 30% of net profit in 1Q09, could hurt Taishin’s profitability in the future—we believe flow business should be a major earnings driver for Taiwan financials in the near term. Meanwhile, due to declining customer deposits, its loan-to-deposit ratio rose to above 80%, which could cap the future growth.

How much recovery is priced into the stock Its share price has risen 188% over the past year and we believe the removal of capitalization is largely in the price. However, key challenges should come from potential impairments in its Changhwa Bank stake and weak profitability. Although the stock is trading at the mid point of the historical P/BV band (i.e., 1.2x), profitability issue should lead to a de-rating of the stock.

Price target and key risks We stay UW on Taishin with our PT of NT$12 (DDM-based, Dec-10), implying a COE of 8%, and a growth rate of 1.5%. Key risks to our PT, forecasts, and valuation include: (1) better credit quality; (2) favorable regulatory changes (such as the removal of the interest rate cap); and (3) favorable M&A terms (e.g., allowed by the government to sell stakes in Changhwa Bank at favorable prices).

Taiwan Banks Dexter HsuAC (886-2) 2725-9868 [email protected]


Price performance

0.5

1.0

1.5

2.0

2.5

3.0


Taishin (2887.TW) Taiex Source: TEJ.


Absolute (%) -3.6 20.6 188.0 Relative (%) -4.5 9.4 121.8

Source: TEJ.

Company data 52-week range (NT$) 4.08-14.80 Mkt cap. (NT$MM) 76,804 Mkt cap. (US$MM) 2,378 Avg daily value (US$MM) 43.2 Avg daily volume (MM) 96.5 Shares O/S (MM) 5,710 Date of price 12-Nov-09 TSE 7,671 Free float (%) 60.2 Exchange rate 32.29

Source: Bloomberg.

Bloomberg: 2887 TT; Reuters: 2887.TW NT$ in millions, year-end December FY08 FY09E FY10E FY11E Operating profits 8,327 14,847 9,476 12,129 Net profit -5,753 9,472 4,067 6,024 EPS (NT$) -0.92 1.66 0.71 1.05 FD EPS (NT$) -0.61 1.53 0.74 1.03 DPS (NT$) 0.00 1.43 0.72 0.98 EPS growth (%) -174.4 nm -51.3 38.2 ROE (%) -8.7 15.8 6.5 9.8 P/E (X) -14.7 8.1 18.9 12.8 BVPS (NT$) 9.73 11.32 10.60 10.94 P/BV(x) 1.4 1.2 1.3 1.2 Dividend yield (%) 0.0 10.6 5.4 7.3 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 12 November 2009.

357



Taishin Financial Holdings: Summary of financials NT$ in millions, year-end DecIncome statement - NT$ mn 2007 2008 2009E 2010E 2011E Growth Rates 2007 2008 2009E 2010E 2011E

NIMs (as % of Avg. IEA) 2.01% 1.72% 1.32% 1.41% 1.59% Loans 7.0% -6.8% 2.0% 4.5% 4.9%Avg. IEA/Avg. Assets 82.1% 81.6% 82.8% 84.0% 83.4% Deposits 7.6% -5.1% 0.1% -1.3% 4.9%Margins (as % of Avg. Assets) 1.65% 1.41% 1.09% 1.18% 1.33% Assets 4.9% -6.5% -1.6% -1.5% 3.5%

Equity 4.7% -13.7% 16.3% -6.3% 3.2%Interest Earned 35,361 33,316 20,635 18,461 20,615 RWA 9.1% -8.3% -2.9% 2.5% 4.7%Interest Suspended 0 0 0 0 0Interest Expense -17,266 -18,058 -9,242 -6,357 -6,887Net Interest Income 18,095 15,257 11,393 12,104 13,728

Net Interest Income -33.6% -15.7% -25.3% 6.2% 13.4%Non-Interest Income 17,243 10,712 17,394 9,439 11,140 Non-Interest Income 20.8% -37.9% 62.4% -45.7% 18.0%Fees 10,912 8,897 8,218 6,699 7,391 of which Fee Grth 27.0% -18.5% -7.6% -18.5% 10.3%Investment Inc. from Changhwa 1,510 898 374 1,541 2,049 Revenues -14.9% -26.5% 10.8% -25.2% 15.4%Dealing 3,773 -1,366 2,202 1,500 1,300 Costs -4.3% -4.0% -21.0% -13.4% 5.6%Other Revenues 1,047 2,283 6,600 -300 400 Pre-Provision Profits -24.0% -50.9% 78.3% -36.2% 28.0%Total Revenues 35,337 25,969 28,787 21,544 24,868 Loan Loss Provisions -74.5% 35.7% -99.9% 14667.7% 9.0%Costs -18,380 -17,642 -13,940 -12,068 -12,738 Pre-Tax n.m. -233.5% n.m. -57.5% 37.6%Pre-Prov. Profits 16,958 8,327 14,847 9,476 12,129 Attributable Income n.m. -284.5% n.m. -57.1% 48.1%Provisions -11,504 -15,606 -22 -3,176 -3,461 EPS n.m. -174.4% n.m. -51.3% 38.2%Other Inc/Exp. 0 0 0 0 0 DPS n.m. -100.0% n.m. -49.6% 35.7%Exceptionals 0 0 0 0 0Disposals/ Other income 0 0 0 0 0 Balance Sheet Gearing 2007 2008 2009E 2010E 2011EPre-tax 5,453 -7,279 14,826 6,300 8,668Tax -910 2,038 -3,939 -817 -1,229 Loan/Deposits 87.0% 85.4% 87.0% 92.2% 92.2%Minorities 0 0 0 0 0 Investment/Assets 23.6% 24.1% 24.9% 22.5% 22.7%Other Distbn. -1,426 -512 -1,415 -1,415 -1,415 Loan/Assets 51.7% 51.6% 53.5% 56.7% 57.5%Attributable Income 3,117 -5,753 9,472 4,067 6,024 Customer deposits/Liab. 62.5% 62.7% 64.8% 64.9% 66.1%

LT Debt/Liabilities 9.1% 8.4% 7.8% 7.9% 7.7%

Per Share Data (NT$/ share) 2007 2008 2009E 2010E 2011E Asset Quality/Capital 2007 2008 2009E 2010E 2011ELoan loss reserves/Loans 1.11% 1.94% 1.00% 0.98% 0.97%

EPS 0.81 -0.61 1.53 0.74 1.03 NPL/Loans 2.01% 1.44% 1.37% 1.32% 1.25%DPS 0.12 0.00 1.43 0.72 0.98 Coverage 55.0% 134.1% 72.4% 74.7% 77.0%Payout 15% 0% 94% 97% 95% Growth in NPLs -4.2% -32.6% -3.8% 0.0% 0.0%Book Value 11.27 9.73 11.32 10.60 10.94Fully Diluted Shares 6,893 6,893 6,893 6,893 6,893 Tier 1 Ratio 6.79% 6.75% 9.32% 9.83% 10.36%

Total CAR 10.0% 9.8% 11.3% 11.8% 12.2%

Key balance sheet - NT$ mn 2007 2008 2009E 2010E 2011E Du-Pont Analysis 2007 2008 2009E 2010E 2011E

Net Loans 580,607 540,941 551,941 576,801 604,838LLR -6,491 -10,686 -5,550 -5,723 -5,900 Margins (as % of Avg. Assets) 1.65% 1.41% 1.09% 1.18% 1.33%Gross Loans 587,098 551,627 557,490 582,524 610,737 Non IR/Avg. Assets 1.57% 0.99% 1.67% 0.92% 1.08%NPLs 11,812 7,967 7,661 7,661 7,661 Non-Int. Rev./ Revenues 48.8% 41.2% 60.4% 43.8% 44.8%Investments 264,881 253,109 257,392 228,963 239,065 Revenue/Assets 3.22% 2.39% 2.77% 2.10% 2.40%Other Earning Assets 78,123 72,664 72,226 64,581 59,244 Cost/Income 52.0% 67.9% 48.4% 56.0% 51.2%Avg. IEA 910,999 903,751 882,254 881,588 892,557 Cost/Assets 1.68% 1.62% 1.34% 1.18% 1.23%Goodwill 20,758 20,758 20,758 20,758 20,758 of which Goodwill Amort. 0.00% 0.00% 0.00% 0.00% 0.00%Assets 1,122,324 1,049,239 1,032,531 1,017,035 1,052,378 Operating ROA 1.55% 0.77% 1.43% 0.92% 1.17%

LLP/Loans -2.48% -3.17% -0.50% -0.97% -0.92%Loan/Assets 53.1% 53.0% 53.7% 56.0% 57.1%

Deposits 667,548 633,655 634,281 625,913 656,299 Other Prov, Income/ Assets 0.27% 0.24% 0.27% 0.23% 0.19%Long-term bond funding 87,798 75,837 68,617 68,617 68,617 Pre-Tax ROA 0.50% -0.67% 1.42% 0.61% 0.84%Other Borrowings 153,278 121,879 122,485 122,431 122,431 Tax Rate -16.7% -28.0% -26.6% -13.0% -14.2%Avg. IBL 895,158 869,998 828,377 821,172 832,154 Minorities & Outside Distbn. -0.13% -0.05% -0.14% -0.14% -0.14%Avg. Assets 1,096,365 1,085,782 1,040,885 1,024,783 1,034,706 ROA 0.28% -0.53% 0.91% 0.40% 0.58%Common Equity 64,375 55,568 64,640 60,542 62,454 RoRWA 0.49% -0.91% 1.58% 0.68% 0.97%RWA 661,626 606,658 588,904 603,862 631,992 Equity/Assets 5.74% 5.52% 5.77% 6.11% 5.94%Avg. RWA 634,129 634,142 597,781 596,383 617,927 ROE 4.95% -9.59% 15.76% 6.50% 9.79% Source: Company Data, J.P. Morgan estimates. Taishin FHC: DDM valuation

Net income EPS P/E BVPS P/BV Dividend Net ROA ROE(NT$ mn) (NT$) (x) (NT$) (x) (NT$) Yield (%) (%)

2007 3,117 0.81 17.0 11.3 1.22 0.12 0.9% 0.28% 7.2%2008 -5,753 -0.61 n.m. 9.7 1.42 0.00 0.0% -0.53% -8.7%2009E 9,472 1.53 9.0 11.3 1.22 1.43 10.4% 0.91% 15.8%2010E 4,067 0.74 18.6 10.6 1.30 0.72 5.2% 0.40% 6.5%2011E 6,024 1.03 13.4 10.9 1.26 0.98 7.1% 0.58% 9.8%

Price NTD 13.8 Shares Outstanding (mn): 5,711 Market cap (NT$ mn): 78,806

Normalised ROE P/BV-based Valuation P/E-based ValuationNIM (on avg. assets) 1.54% Risk-free rate 2.0% Fair P/E 12.8xNon-IR/revenues 47.6% Cost of equity 8.0% 12m Forward EPS (NT$) 0.74Cost/income 51.8% Long-term growth 1.5% Fair value NTD 9.5Operating ROA 1.18% Fair P/BV 1.13x Implied Value of GrowthLLP/loans -1.07% PV of Terminal Value 9.2 12m Forward EPS (NT$) 0.74Net ROAA 0.53% PV of Dividends 1.9 Capitalised value (NT$) 9.3Equity/assets 5.9% Fair value NTD 12.3 Value of growth (NT$) 4.5Normalised ROE 8.8% Misvaluation -11% Attrib. to Growth 33%


358



Telmex SA www.telmex.com.mx

Underweight $18.09


Company description Telmex is the leading fixed-line company in Mexico, controlling nearly 89% of the fixed-line voice market & 65% of the broadband market. It is controlled by the Carlos Slim family through Carso Global Telecom, which owns 58.6% of TMX shares. It trades locally as TELMEXL and as an ADR on the NYSE with the ticker TMX. Its ADTV is US$25mn for the ADRs. Post mortem TMX reported a weak 3Q09, with net revenues and EBITDA declining 5% & 9.7% y/y respectively, worse than the 1H09 pace. The bulk of the revenue shortfall was related to international long distance, which was again very weak. Local call volume was down 6.4% y/y compared to 6.9% y/y in 2Q09. ILD traffic was very weak – down 16.3% y/y – similar to the 21% y/y decline in 2Q09 and much worse than the full-year 2008 decline of 8.4%. Potential for earnings downgrades New taxes in Mexico (1% higher VAT, 3% telecom tax on gross revenues and 2pp higher income tax) that will be applicable from 2010 will likely result in TMX 2010e net income being 9% lower. This is not yet priced into Street estimates and will likely lead earning estimates lower.

How much downside is priced into the stock? We find the stock expensive at 5.5x 2010e EV/EBITDA considering its continued meaningful decline in EBITDA (10% lower y/y in 2Q and 3Q). Thus, we think the weaker trends are not fully reflected yet in the stock price.

Price target and key risks We rate TMX Underweight in our coverage with a PT of US$13, based on an average of (1) DCF, which yields US$12.2 (using a WACC of 9.3% and LT growth of -1%); and (2) multiples, which yield US$14.0 (using a 12.8% target FCFE yield). Upside risks: 1) Increase in cash returns, 2) better voice trends, 3) entry into pay TV.

Mexico Media and Telecom Andre BaggioAC (55-11) 3048-3427 [email protected]


Rajneesh Jhawar (1-212) 622-6480 [email protected]

J.P.Morgan Securities Inc.

Price performance $

0

10

20

30

Oct-08 Apr-09 Oct-09


1M 3M 12M Absolute% 4.3 -9.8 3.7 Relative % -79.0 -26.2 -57.5

Source: Bloomberg, relative MEXBOL, USD prices. Company data

52-week range (USD) 12.66-22.34 Mkt cap. (MXN MM) 212,370 Mkt cap. (US$MM) 16,547 Avg daily value (US$MM) 23.7 Avg daily volume (MM) 1.34 Shares O/S (MM) 485 Date of price Nov 25 Index: MEXBOL MEXBOL

Source: Bloomberg.

Bloomberg: TMX; Reuters: TMX.N LC in millions, year-end Dec FY08 FY09E FY10E FY11E Sales 124,105 119,109 113,796 111,054 Net profit 20,177 20,483 17,589 16,922 EPS (LC) 1.85 1.57 1.46 1.46 FD EPS (LC) DPS (LC) 0.41 0.44 0.47 0.52 Sales growth (%) -4.3% -4.0% -4.5% -2.4% Net profit growth (%) -43.2% 1.5% -14.1% -3.8% EPS growth (%) -44.7% -15.3% -6.9% 0.1% ROE (%) 49.5% 53.2% 48.6% 49.0% P/E (x) 11.2 10.7 11.9 12.0 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

359



Telmex SA: Summary of financials Profit and loss statement MXN in millions, year-end Dec. FY08 FY09E FY10E FY11ERevenue 124,105 119,109 113,796 111,054% change Y/Y -4.3% -4.0% -4.5% -2.4%Gross margin (%) 73.6% 72.1% 71.3% 70.6%EBITDA 57,708 52,962 49,779 47,956% change Y/Y -7.4% -8.2% -6.0% -3.7%EBITDA margin (%) 46.5% 44.5% 43.7% 43.2%EBIT 39,743 35,210 33,898 33,001% change Y/Y -9.6% -11.4% -3.7% -2.6%EBIT margin (%) 32.0% 29.6% 29.8% 29.7%Net interest -6,739 -6,312 -6,704 -6,616Earnings before tax 29,769 28,450 25,127 24,174% change Y/Y -26.6% -4.4% -11.7% -3.8%Tax -9,592 -7,966 -7,538 -7,252as % of EBT 32.2% 28.0% 30.0% 30.0%Net income (reported) 20,177 20,483 17,589 16,922% change Y/Y -43.2% 1.5% -14.1% -3.8%Shares O/S (MM) 18,555 18,018 17,369 16,993EPS (reported) (LC) 1.02 1.08 0.96 0.96Source: Company, J.P. Morgan estimates.

Balance sheet LC in millions, year-end Dec.

FY08 FY09E FY10E FY11ECash and cash equivalents 6,137 14,227 13,671 13,265Accounts receivable Inventories Others 46,043 40,867 39,270 38,103Current assets 52,180 55,094 52,942 51,368LT investments Net fixed assets 112,865 103,420 98,918 95,069Total assets 187,125 177,487 170,834 165,411Liabilities ST loans 22,883 37,018 35,572 34,515Payables Others 18,482 20,446 19,647 19,064Total current liabilities 41,365 57,464 55,219 53,578Long-term debt 84,172 62,310 60,793 57,536Other liabilities 22,217 20,051 20,051 20,051Total liabilities 147,754 139,825 136,064 131,165Shareholders’ equity 39,371 37,663 34,770 34,246BVPS (LC) 3.1 3.2 3.1 3.1Source: Company, J.P. Morgan estimates.

Cash flow statement LC in millions, year-end Dec.

FY08 FY09E FY10E FY11EEBIT 39,743 35,210 33,898 33,001Depreciation & amortization 17,965 17,752 15,881 14,954Change in working capital 1,856 -1,964 799 584Taxes Cash flow from operations 41,794 35,131 34,269 32,603Capex -10,094 -8,031 -11,380 -11,105Disposal/(purchase) Net interest Free cash flow 30,747 30,206 22,889 21,498Equity raised/(repaid) Debt raised/(repaid) Other Dividends -7,609 -8,101 -8,355 -8,980Beginning cash 4,753 6,137 14,227 13,671Ending cash 6,137 14,227 13,671 13,265DPS (LC) 0.41 0.45 0.47 0.52Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end Dec. FY08 FY09E FY10E FY11EEBITDA margin 46.5% 44.5% 43.7% 43.2%Operating margin 32.0% 29.6% 29.8% 29.7%Net profit margin 16.3% 17.2% 15.5% 15.2%SG&A/sales 16.0% 17.3% 18.1% 18.8%Sales growth -4.3% -4.0% -4.5% -2.4%Net profit growth -43.2% 1.5% -14.1% -3.8%Sales per share growth EPS growth -44.2% 5.5% -10.6% -0.8%Interest coverage (x) Net debt to total capital 68.9% 62.1% 63.1% 62.4%Net debt to equity 256.3% 226.0% 237.8% 230.1%Sales/assets 69.0% 65.3% 65.3% 66.1%EBIT margin 32.0% 29.6% 29.8% 29.7%ROCE 27.8% 26.5% 28.8% 29.0%Assets/equity (x) 4.8x 4.7x 4.9x 4.8xROI ROE 49.5% 53.2% 48.6% 49.0%Source: Company, J.P. Morgan estimates.

360



The9 www.the9.com/en

Neutral US$7.56

Price Target: 6.70

Company description The9 is an online game operator and developer in China. The company runs games such as Granado Espada, SUN, FIFA Online2, and Atlantica through its game portal. The company also used to operate Blizzard’s popular game World of Warcraft (WOW) in China, for which it lost the license to Netease in June 2009.

Post mortem WOW used to contribute more than 90% of The9’s revenue. In addition, most of its previous games are also experiencing a revenue decline as of 2Q09. We believe the company will likely see operation loss for the next two years, given the high fixed G&A cost as a listed company and R&D investments for future games. Due to lack of visibility in future earnings driver, we would avoid the stock.

Potential for earnings upgrades We expect macro upturn next year would not help The9 much, as the company lacks strong products. How much recovery is priced into the stock? The game market has not been very sensitive to macro downturn. We believe online games are low-cost entertainment, and actually have been slightly benefited by the macro downturn. For The9 earnings impact was mainly due to company-specific issue.

Price target and key risks Our Dec-10 price target of US$6.7 is based on DCF valuation with WACC of 12.1% and 0% terminal growth rate. It is also supported by our expected 2010 cash level of US$ 7.2. Risks to our price target and rating include: (1) larger-than-expected investments in game titles and studios; and (2) new game launches could disappoint on the down side. Upside risks include: The9 as an acquisition target given its high level of cash.




6

12

18

$


NCTY share price ($)NASDAQ Composite (rebased)

Source: Bloomberg.


Absolute (%) -0.1 -17.7 -37.2 Relative (%) -0.6 -25.2 -80.5

Source: Bloomberg.

Company data 52-week range (US$) 7.1-16.6 Mkt cap. (RmbMM) 1,446 Mkt cap. (US$MM) 212 Avg daily value (US$MM) 1.03 Avg daily volume (MM) 0.1 Shares O/S (MM) 28 Date of price 12-Nov-09 Index: NASDAQ 2,149 Free float (%) 25 Exchange rate (Rmb/US$) 6.83


Bloomberg: NCTY US; Reuters: NCTY Rmb in millions, year-end December FY08 FY09E FY10E FY11E Sales 1,711.5 755.7 171.0 312.7 Net profit 96.8 -261.2 -248.4 -176.4 GAAP EPS (Rmb) 3.50 -10.21 -9.69 -6.83 Adj. EPS (Rmb) 5.38 -7.68 -7.35 -4.72 DPS (Rmb) 0.00 0.00 0.00 0.00 Sales growth (%) 33.8 -55.8 -77.4 82.8 Net profit growth (%) -59.8 -369.7 4.9 29.0 EPS growth (%) -60.2 -391.9 2.1 30.8 ROE (%) 6.3 -8.2 -9.0 -6.3 P/E (x) 14.8 nm nm nm FD P/E (x) 9.7 nm nm nm Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 12 November 2009. We lowered our PT to $6.5 on November 25.

361



The9: Summary of financials Profit and loss statement Rmb in millions, year-end December

FY08 FY09E FY10E FY11ERevenue 1,711 756 171 313% change Y/Y 34 -56 -77 83Gross margin (%) 42 15 1 25EBITDA 365 -124 -186 -90% change Y/Y -19 nm nm nmEBITDA margin (%) 21 -16 -109 -29EBIT 135 -313 -298 -216% change Y/Y -43 nm nm nmEBIT margin (%) 8 -41 -174 -69Net interest 57 36 31 28Earnings before tax 170 -280 -276 -200% change Y/Y -32 nm nm nmTax -48 14 28 24as % of EBT 28 nm nm nmNet income (reported) 97 -261 -248 -176% change Y/Y -60 nm nm nmShares O/S (MM) 28 26 25 25EPS (reported) (LC) 3 -10 -10 -7Source: Company, J.P. Morgan estimates.


FY08 FY09E FY10E FY11ECash and cash equivalents 2,221 1,337 1,161 1,136Accounts receivable 9 2 5 7Inventories 126 5 14 19Others 139 67 67 67Current assets 2,494 1,410 1,246 1,229 LT investments 403 407 404 400Net fixed assets 200 246 225 205Others 166 128 184 143Total assets 3,263 2,192 2,058 1,977Liabilities ST loans 129 0 0 0Payables 345 19 54 76Others 69 4 11 15Total current liabilities 544 23 65 91Long term debt 0 0 0 0Other liabilities 0 -1 -1 -1Total liabilities 544 21 64 89Shareholders' equity 2,719 2,170 1,995 1,887Source: Company, J.P. Morgan estimates.


FY08 FY09E FY10E FY11ENet Income 97 -261 -248 -176Depr. & Amortisation 230 189 111 125Change in working capital 7 -192 30 19Other 77 60 60 55Cash flow from operations 412 -204 -47 22Capex/investments 55 -197 -146 -65Others -223 -5 4 4Cash flow from investing -168 -201 -142 -61Free cash flow 467 -401 -193 -43Equity raised/ (repaid) -138 -119 13 14Debt raised/ (repaid) 23 -129 0 0Other -123 -230 0 0Dividends paid 0 0 0 0Cash flow from financing -238 -478 13 14Net change in cash 5 -884 -176 -25Beginning cash 2,215 2,221 1,337 1,161Ending cash 2,221 1,337 1,161 1,136Source: Company, J.P. Morgan estimates.


FY08 FY09E FY10E FY11EGross Margin 41.7 15.1 0.9 24.9EBITDA margin 21.3 -16.4 -109.0 -28.9Operating Margin 7.9 -41.4 -174.2 -69.0Net Margin 5.7 -34.6 -145.2 -56.4R&D/sales 4.3 15.9 75.0 41.8SG&A/Sales 24.7 36.6 100.1 52.1Sales growth 33.8 -55.8 -77.4 82.8Operating Profit Growth -43.0 -332.5 4.8 27.6Net profit growth -59.8 -369.7 4.9 29.0EPS (Reported) growth -60.2 -391.9 2.1 30.8Net debt to total capital -73.4 -61.6 -58.2 -60.2Net debt to equity -76.9 -61.6 -58.2 -60.2Asset Turnover 52.5 34.5 8.3 15.8Working Capital Turns (x) 0.9 0.5 0.1 0.3ROE 6.3 -8.2 -9.0 -6.3ROIC 4.5 -9.2 -10.2 -7.4Source: Company, J.P. Morgan estimates.

362



TMB Bank www.tmbbank.co.th

Neutral Price: Bt1.12


Company description ING Bank has a 30% ownership in TMB Bank. The second largest shareholder, Finance Ministry, has a 23% stake remaining to be sold. TMB is a mid-sized bank, the sixth largest, with Bt551 billion in total assets.

Post mortem TMB has not fully recovered from the last Thai financial crisis in 1997. With many changes in shareholders and mergers with other banks, there have been changes and shocks in culture that have affected the bank’s employees and business. Blamed on internal business restructuring, TMB has lost 12-13% of its business (loans and deposits) during Jan-Aug 2009. Given that we expect higher competition in both lending and deposit markets next year, we believe it will be very challenging for TMB to regain its customers or even to compete with other bigger banks for new customers.

Potential for earnings upgrades We remain cautious on TMB’s outlook and believe the recovery is still far out. With an aim to recover its business and to rebuild its deposit franchise, TMB has recently offered various free services which will likely hurt the bank’s profitability while the future growth is still unconfirmed. In our view, earnings upgrade will be driven by the success of the bank’s retail business.

How much recovery is priced into the stock? The stock price has risen 160% from its trough, suggesting the recovery has been priced in. However, given our view that it will be challenging for TMB to regain its business position and offering free services will hurt its profitability, we believe the market is being too optimistic on TMB’s outlook.

Price target and key risks We maintain Neutral rating and our Dec-10 PT of Bt1.0. Our price target is based on DDM. We use an adjusted fair P/BV-based multiple of 0.76x, with a normalized ROE of 11.3%, a COE of 13.1%, and a growth rate of 6.0%. Key risks to our PT are better-than-expected loan growth and NIM.

Thailand Banks Anne JirajariyavechAC (66-2) 684-2684 [email protected]


Price performance

0.4

0.8

1.2


TMB.BK share price (Bt)SET (rebased)

Bt





Source: Bloomberg.

Bloomberg: TMB TB; Reuters: TMB.BK Bt in millions, year-end December FY08 FY09E FY10E FY11E Operating profit 7,645 6,121 6,479 7,198 Net profit 424 2,110 3,310 3,812 Cash EPS (Bt) 0.01 0.05 0.08 0.09 FD EPS (Bt) 0.01 0.05 0.08 0.09 DPS (Bt) 0.00 0.00 0.00 0.00 EPS growth (%) 398.0 56.9 15.2 ROE (%) 1.0 4.6 6.8 7.3 P/E (x) 115.1 23.1 14.7 12.8 BVPS (Bt) 1.03 1.08 1.16 1.24 P/BV (x) 1.1 1.0 1.0 0.9 Dividend Yield (%) 0.0 0.0 0.0 0.0 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

363



TMB Bank: Summary of financials Income statement - Bt mn 2008 2009E 2010E 2011E Growth Rates 2008 2009E 2010E 2011E

Margins (% of Earning Assets) 2.64% 2.29% 2.42% 2.43% Loans -9% -13% 6% 8%Earning Assets/Assets 98% 97% 97% 97% Deposits -3% -10% 8% 8%NIM (as % of avg. Assets) 2.58% 2.22% 2.34% 2.35% Assets -3% -5% 6% 6%

Equity 2% 5% 7% 8%Net Interest Income 15,793 13,031 13,835 14,774

Net Interest Income -4% -17% 6% 7%Total Non-Interest Revenues 5,492 6,294 6,672 7,206 Non-Interest Income -11% 15% 6% 8%Fee income 3,762 3,010 3,190 3,445 of w hich Fee Grth -10% -20% 6% 8%FX/Trading gains 1,417 1,091 1,157 1,249 Revenues -6% -9% 6% 7%Other operating income 313 2,194 2,325 2,511 Costs 0% -3% 6% 5%Total operating revenues 21,285 19,325 20,507 21,980 Pre-Provision Profits -15% -20% 6% 11%Operating costs -13,640 -13,204 -14,028 -14,782 Loan Loss Provisions -84% -19% -25% 7%Operating profit 7,645 6,121 6,479 7,198 Pre-Tax -101% 257% 55% 15%Loan Loss Prov isions -5,076 -4,126 -3,079 -3,295 Attributable Income -101% 398% 57% 15%Other prov isions 0 0 0 0 EPS -101% 398% 57% 15%Ex ceptionals -1,952 205 0 0 DPS NA NA NA NADisposals/ Other income 0 0 0 0Pre-tax profit 616 2,200 3,400 3,902 Balance Sheet Gearing 2008 2009E 2010E 2011ETax [rate] -87 0 0 0Minorities/preference div idends -106 -90 -90 -90 Loan/Deposit 95% 92% 91% 90%Attributable net income 424 2,110 3,310 3,812 Investment/Assets 14% 20% 19% 17%

Loan/Assets 71% 65% 65% 66%Customer deposits/Liab. 75% 71% 72% 73%LT Debt/Liabilities 5% 4% 4% 4%

Per Share Data 2008 2009E 2010E 2011E Asset Quality/Capital 2008 2009E 2010E 2011EEPS (Bt/ share) 0.01 0.05 0.08 0.09 Loan loss reserves/Loans 10.7% 11.6% 11.3% 10.7%DPS (Bt/ share) 0.0 0.0 0.0 0.0 NPLs/loans 16.5% 17.5% 16.6% 15.4%Payout 0.0% 0.0% 0.0% 0.0% Loan loss reserves/NPLs 65.1% 66.2% 67.8% 69.8%NAV (Bt/ share) 1.03 1.1 1.2 1.2 Grow th in NPLs -9.6% -7.3% 0.6% 0.0%Avg. Shares Issued (mn shares) 43,529 43,529 43,529 43,529

Tier 1 Ratio 12.3% 11.5% 11.6% 11.6%Total CAR 16.8% 15.6% 15.4% 15.3%

Key balance sheet - USD mn 2008 2009E 2010E 2011E Du-Pont Analysis 2008 2009E 2010E 2011E

Net Customer Loans 381,666 330,333 351,522 381,769 NIR/Avg. Assets 2.58% 2.22% 2.34% 2.35%Loans loss reserves 45,916 43,316 44,593 45,942 Non IR/Avg. Assets 0.90% 1.07% 1.13% 1.15%Gross Loans 427,582 373,649 396,116 427,711 Non IR/Total Rev 25.8% 32.6% 32.5% 32.8%Investments 83,983 113,377 113,377 113,377 Total Rev/Avg. Assets 3.48% 3.29% 3.47% 3.49%Other Earning Assets 83,904 78,195 92,744 101,333 Cost/Income 64.1% 68.3% 68.4% 67.3%Average Earning Assets = (A) 598,989 568,762 571,464 609,167 Cost/Assets 2.23% 2.25% 2.37% 2.35%Goodw ill Goodw ill Amort. Total assets 601,985 573,931 609,669 648,504 Operating ROAA 1.2% 1.0% 1.1% 1.1%

LLP/Loans -1.1% -1.0% -0.8% -0.8%Interbank funding 9,299 22,783 22,783 22,783 Loan/Assets 73.2% 68.1% 65.0% 65.5%Customer deposits 450,297 405,267 437,689 472,704 Other inc:provs -0.3% 0.0% 0.0% 0.0%Long-term bond funding 31,387 24,890 24,890 24,890 Pre-tax ROAA 0.1% 0.4% 0.6% 0.6%Other Interest Bearing Liabilities 65,956 73,830 73,830 73,830 Tax -14.1% 0.0% 0.0% 0.0%Average Interest Bearing Liab. = (B) 537,275 508,114 506,526 540,244 MI 0.0% 0.0% 0.0% 0.0%Average Assets 612,073 587,958 591,800 629,087 ROAA 0.1% 0.4% 0.6% 0.6%Shareholders' equity 44,955 47,065 50,375 54,187 RoRWA 0.1% 0.5% 0.8% 0.8%Risk Weighted Assets 375,396 418,970 445,058 473,408 Equity/Assets 7.2% 7.8% 8.2% 8.3%Average Risk Weighted Assets 404,338 397,183 432,014 459,233 ROE 1.0% 4.6% 6.8% 7.3%


364



Unilever Indonesia Tbk www.unilever.co.id

Underweight Rp10,200


Company description Unilever Indonesia (UNVR) is a leading FMCG company in Indonesia. It operates under three divisions: personal care, home care, and food. Personal care is its largest profit generator and UNVR is a leading player in this segment. In the home care segment, Unilever is second in the market in terms of market share after Wings. Its food business—although the smallest of the three segments—generates the fastest growth. Going forward, Unilever plans to focus its expansion in the food division. Investors should consider acquisitions as part of UNVR’s strategy. If a company is acquired, UNVR could push the products into its large distribution channel (2 million sales points) to generate growth.

Post mortem Recently, Proctor & Gamble started a price war by reducing prices of its shampoo by 20%-30%. Subsequently, Unilever and other industry participants followed. The stiff competition still continues. Competition is also intense in other products such as detergents and skin care.

Potential for earnings downgrades Based on J.P. Morgan/consensus forecasts, UNVR’s earnings should grow 22.6%/17.5% in FY10. Considering that the margin could be compressed by 100-150bp due to the price war, we see downside risks to both our and consensus’ earnings estimates.

How much recovery is priced into the stock? We believe a domestic consumption recovery has somewhat been priced into the share price. However, it should lag the recovery in commodity.

Price target and key risks Given the price war, we believe margin could be under pressure in the next few quarters. Our DCF-based Jun-10 PT of Rp9,700 implies a risk-free rate of 10.5%, an equity-risk premium of 5.5%, and a terminal growth rate of 5.5%. Key risks to our PT are: (1) better-than-expected earnings; and (2) defensive trade—continuation of the bear market.

Indonesia Household Products Stevanus JuandaAC (62-21) 5291-8574 [email protected]


Price performance Rp

7000

8000

9000

10000

11000

12000

13000

Nov-08 Feb-09 May-09 Aug-09 Nov-09 Source: Bloomberg.

Performance 1M 3M 12M Absolute (%) -5.1 -9.3 33.1 Relative (%) -0.7 -11.7 -44.6

Source: Bloomberg.

Company data 52-wk range (Rp) 7,100-12,100 Mkt cap. (RpB) 77,826 Mkt cap. (US$MM) 8,166 3M avg daily val (US$MM) 2.76 3M avg daily volume (MM) 1.81 Shares O/S (MM) 7,630 Date of price 5-Nov-09 Index: JCI 2,367 Free float (%) 15.0 Exchange rate 9,530

Source: Bloomberg.

Bloomberg: UNVR IJ Reuters: UNVR.JK Rp in billions, year-end December FY08 FY09E FY10E FY11E Sales 15,577.80 18,032.90 20,342.00 24,105.30 Net profit 2,407.20 2,645.80 3,242.60 4,079.30 EPS (Rp) 315.5 346.8 425 534.6 Core EPS (Rp) 315.5 346.8 425 534.6 DPS (LC) 261.4 300 350 400 Sales growth (%) 24.20% 15.80% 12.80% 18.50% Net profit growth (%) 22.50% 9.90% 22.60% 25.80% EPS growth (%) 22.50% 9.90% 22.60% 25.80% ROE (%) 83.10% 80.70% 86.60% 89.80% P/E (x) 32.3 29.4 24.0 19.1 Core P/E (x) 32.3 29.4 24.0 19.1 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

365



Unilever Indonesia Tbk: Summary of financials

Source: Company. J.P. Morgan estimates.

366



Usiminas www.usiminas.com.br

Underweight R$51.50


Company description Usiminas is the largest Brazilian flat steel producer, with ~9.5Mtpy of crude steel capacity. It has two plants – its original plant in Ipatinga and the plant of former Cosipa in the state of São Paulo. The company produces a broad range of steel products and is the main domestic supplier for the automotive and auto parts industries in Brazil. Aside from this, USI also owns some iron ore mines and logistics and capital goods assets. Post mortem Usiminas was by far the company that suffered most during the downturn. EBITDA margins went from peak levels of 39% in 3Q08 to a low of 5% in 2Q09. This, we believe, highlights the high-cost nature of its business, exacerbated by a relatively shy management reaction to the crisis, especially related to working capital. We expect things to improve, but Usiminas should still lag its more agile peers such as CSN and GGB. Potential for earnings upgrades While USI should benefit from a comeback in steel volumes, we see limited upside to current estimates. We are cautious on Brazilian flat steel prices in light of the appreciating R$, especially when domestic prices are at a high premium to international prices. In addition, we believe expectations of a potential recovery in ’10 are too optimistic, paving the way for downgrades. How much recovery is priced into the stock? Trading at 8.8x ’10e EV/EBITDA, Usiminas is at a 63% premium to its 5.4x historical average even in a rosy scenario of volumes coming back at full steam and steel prices going up. Thus, we believe stock prices fully incorporate any potential recoveries to come. Price target and key risks We rate Usiminas UW based on our Dec 10 price target of R$38.5/share, which implies 24% downside from current levels. Our PT is derived from a combination of DCF (80%) and multiples (20%) with a WACC of 11.8% and target EV/EBITDA of 5.0x. The main upside risks to our PT and rating are related to higher-than-expected domestic demand.

Brazil Metals& Mining Rodolfo R. De Angele, CFAAC (55-11) 3048-3888 [email protected]


Price performance (R$)

1525354555


Source: Bloomberg.


Absolute (%) 1.0% 10.4% 129.4%Relative (%) -3.4% -7.9% 34.3%Source: Bloomberg.

Company data 52-week range (R$) 22.2 – 54.2 Mkt cap. (R$MM) 25,208 Mkt cap. (US$MM) 15,087 Avg daily value (US$MM) 82.3 Avg daily volume (MM) 3.13 Shares O/S (MM) 506 Date of price 25-Nov-09 Index: Ibovespa 67,917 Free float (%) 61% Exchange rate(BRL/USD) 1.72

Source: Bloomberg.

Bloomberg: USIM5 BZ; Reuters: USIM5.SA R$ in millions, year-end 31st Dec FY08 FY09E FY10E FY11E Sales 15,707 11,435 13,369 14,504 Net profit (recurring) 3,219 675 1,745 2,116 EPS (R$) 6.36 1.33 3.45 4.18 FD EPS (R$) 6.36 1.33 3.45 4.18 DPS (R$) 2.27 1.80 1.07 1.30 Sales growth (%) 14% -27% 17% 8% Net profit growth (%) -3% -79% 159% 21% EPS growth (%) -3% -79% 159% 21% ROE (%) 22% 5% 11% 12% P/E (x) 8.7x 45.0x 15.4x 13.0x Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25th November 2009.

367



Usiminas: Summary of financials Profit and loss statement R$ in millions, year-end 31st Dec

FY08 FY09E FY10E FY11ERevenue 15,707 11,435 13,369 14,504% change Y/Y 14% -27% 17% 8%Gross margin (%) 38% 25% 30% 32%EBITDA 6,012 1,579 3,450 4,383% change Y/Y 20% -74% 118% 27%EBITDA margin (%) 38% 14% 26% 30%EBIT 5,139 806 2,631 3,452% change Y/Y 20% -84% 226% 31%EBIT margin (%) 33% 7% 20% 24%Net interest (1,188) 328 (505) (605)Earnings before tax 4,242 1,061 2,122 2,861% change Y/Y -8% -75% 100% 35%Tax (1,008) (385) (374) (741)as % of EBT 24% 36% 18% 26%Net income (recurring) 3,219 675 1,745 2,116% change Y/Y -3% -79% 159% 21%Shares O/S (MM) 506 506 506 506EPS (recurring) (R$) 6.36 1.33 3.45 4.18Source: Company, J.P. Morgan estimates.

Balance sheet R$ in millions, year-end 31st Dec

FY08 FY09E FY10E FY11ECash and cash equivalents 4,008 1,911 3,512 2,019Accounts receivable 1,539 1,868 1,872 2,031Inventories 5,082 3,814 3,586 3,585Others 1,269 1,518 1,775 1,926Current assets 11,899 9,112 10,745 9,560LT investments 5,342 5,173 5,046 5,318Net fixed assets 10,340 11,626 13,219 16,298Total assets 27,580 25,912 29,010 31,177Liabilities ST loans 1,205 909 1,074 1,122Payables 1,102 586 637 669Others 2,113 1,287 1,505 1,633Total current liabilities 4,420 2,783 3,216 3,423Long-term debt 7,129 6,750 7,969 8,326Other liabilities 916 1,433 1,675 1,817Total liabilities 12,465 10,965 12,859 13,566Shareholders’ equity 15,029 14,865 16,070 17,530BVPS (R$) 29.7 29.4 31.7 34.6Source: Company, J.P. Morgan estimates.

Cash flow statement R$ in millions, year-end 31st Dec

FY08 FY09E FY10E FY11ENet income (Reported) 3,332 675 1,745 2,116Depreciation 873 773 818 931Change in working capital 2,718 620 (237) 172Cash flow from operations 1,487 828 2,801 2,875Capital expenditure 3,502 2,300 2,412 4,010Other cash (uses)/sources 1,828 (521) (370) 130Debt raised/(repaid) 5,339 (675) 1,383 405Dividends 1,151 911 541 656Increase in cash equivalent (4,995) (1,862) 217 (1,921)Ending cash 4,008 1,911 3,512 2,019DPS(R$) 2.27 1.80 1.07 1.30Net income (Reported) 3,332 675 1,745 2,116Depreciation 873 773 818 931Change in working capital 2,718 620 (237) 172Cash flow from operations 1,487 828 2,801 2,875Capital expenditure 3,502 2,300 2,412 4,010Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end 31st Dec FY08 FY09E FY10E FY11EEBITDA margin 38% 14% 26% 30%Operating margin 33% 7% 20% 24%Net profit margin 20% 6% 13% 15%SG&A/sales 4% 6% 5% 5%Sales growth 14% -27% 17% 8%Net profit growth -3% -79% 159% 21%Sales per share growth 14% -27% 17% 8%EPS growth -3% -79% 159% 21%Interest coverage (x) 4.3x -2.5x 5.2x 5.7xNet debt to total capital 18% 25% 22% 27%Net debt to equity 29% 39% 34% 42%Sales/assets 57% 44% 46% 47%EBIT margin 33% 7% 20% 24%ROCE 14% 3% 7% 8%Assets/equity (x) 1.8x 1.7x 1.8x 1.8xROIC 16% 2% 8% 9%ROE 22% 5% 11% 12%Source: Company, J.P. Morgan estimates

368



Weichai Power www.weichai.com


Price Target: HK$47

Company description Weichai Power is a leading producer of diesel engines, which are used in heavy-duty vehicles, construction machines, vessels, and power generators. It also holds a 51% stake in Shaanxi Motor, which is among China’s top five manufacturers of heavy duty trucks, and Fast Gear, one of the leading gearbox producers in China.

Post mortem Concerns over likely tightening measures as of 2Q FY10 and a fixed asset investment growth slowdown in FY11: (1) we expect fixed asset investment-related sectors including trucks to come under de-rating pressure from the tightening measures expected to kick in as of 2Q FY10; and (2) we worry about a potential sharp slowdown in fixed asset investment in 2011, given the correlation between China’s fixed asset investment and heavy truck demand.

Potential for earnings upgrades We believe the company’s earnings will peak in FY10 with the expected sharp slowdown in China FAI growth in FY11, and see limited earnings upgrade potential.

How much recovery is priced into the stock? We believe the recovery has largely been priced in, with the stock trading above its average historical P/B ratio of 3x, the average historical P/B since April 2007 when Weichai completed the merger with Torch to become a vertically integrated player in China’s heavy truck industry.

Price target and key risks We prefer China’s passenger vehicle names to commercial vehicle names such as Weichai. Our Jun-10 price target of HK$47 is based on 3x FY09E P/B, its average historical prospective P/B since April 2007 when Weichai completed the merger with Torch to become a vertically integrated player in China’s heavy truck industry. Key risks to our price target include the likely kicking in of broad-based tightening measure as of 2QFY10.

Country Auto parts Frank LiAC 852-2800-8511 [email protected]

Jin Luo 852-2800-8516 [email protected]


Price performance Units

0

10

20

30

40

50

60

Nov -08 Feb-09 May -09 Aug-09 Nov -09 Source: Bloomberg. Performance

1M 3M 12M Absolute (%) 30.3 42.7 387.2 Relative (%) 20.3 35.7 310


52-week range (HK$) 7.46 -29.5 Mkt cap. (HK$ MM) 43,984.8 Mkt cap. (US$MM) 5,653.6 Avg daily value (US$MM) 14 Avg daily value (HK$MM) 106 Avg daily volume (MM) 2 Shares O/S (MM) 833.05 Date of price 5-Nov-09 HSCCI 12,805.3 Free float (%) 61 Exchange rate 7.78

Source: Bloomberg. Bloomberg: 2338 HK; Reuters: 2338.HK Rmb in millions, year-end December

FY08 FY09E FY10E FY11E Revenue 32,567 36,430 40,968 42,060 EBITDA 3,747 6,214 7,197 7,274 Net profit 1,929 3,496 3,919 3,751 EPS (Rmb) 2.32 4.20 4.70 4.50 DPS (Rmb) 0.232 0.420 0.470 0.450 Revenue growth (%) 18.7 11.9 12.5 2.7 EBITDA growth (%) -8.3 65.8 15.8 0.0 Net profit growth (%) -4.3 81.2 12.1 -4.3 ROE (%) 26.8 36.5 30.4 22.9 P/E (x) 20.1 11.1 9.9 10.3 P/B (x) 4.8 3.5 2.6 2.1 Dividend yield (%) 0.5 0.9 1.0 1.0 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

369



Weichai Power: Summary of financials Rmb in millions, year-end December Profit and loss statement Cash flow statement FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E Revenues 27,425 32,567 36,430 40,968 42,060 EBIT 3,503 2,990 5,285 6,096 5,989

% change Y/Y 313.4 18.7 11.9 12.5 2.7 Depreciation & amortization 585 757 929 1,101 1,285 Gross Margin (%) 24.2 17.4 22.2 22.4 21.6 Change in working capital -785 683 -567 -171 60 EBITDA 4,088 3,747 6,214 7,197 7,274 Others -350 14 -904 -1,189 -1,292

% change Y/Y 270.6 -8.3 65.8 15.8 1.1 Cash flow from operations 2,954 4,444 4,742 5,837 6,042 EBITDA Margin (%) 14.9 11.5 17.1 17.6 17.3

EBIT 3,503 2,990 5,285 6,096 5,989 Capex -1,995 -

1,703 -1,750 -1,700 -2,000 % change Y/Y 285.2 -14.7 76.8 15.4 -1.8 Investment 0 0 0 0 0 EBIT Margin (%) 12.8 9.2 14.5 14.9 14.2

Net Interest -227 -249 -202 -264 -269 Free cash flow 959 2,741 2,992 4,137 4,042 Earnings before tax 3,273 2,741 5,083 5,833 5,720

% change Y/Y 268.1 -16.3 85.5 14.8 -1.9 Equity raised/ (repaid) 0 1,700 1,300 0 0 Tax -480 -329 -712 -934 -1030 Debt raised/ (repaid) -1,485 384 -386 0 -200

as % of EBIT 13.7 11.0 13.5 15.3 17.2 Other 1,155 -1,192 -253 -316 -323 Net Income (Reported) 2,015 1,929 3,496 3,919 3,751 Dividends paid -68 -229 -193 -350 -392

% change Y/Y 186.7 -4.3 81.2 12.1 -4.3 Beginning cash 1,674 1,820 3,352 7,312 11,283 Shares Outstanding 833 833 833 833 833 Ending cash 1,860 3,352 7,312 11,283 14,910 EPS (Rmb) 2.42 2.32 4.20 4.70 4.50 Pledged bank deposit 856 2,512 2,012 1,512 1,012

% change Y/Y 186.7 -4.3 81.2 12.1 -4.3 Balance sheet Ratio analysis FY07 FY08 FY09E FY10E FY11E %, year-end December FY07 FY08 FY09E FY10E FY11E Cash and cash equivalents 2,676 5,864 9,324 12,795 15,922 EBITDA margin 14.9 11.5 17.1 17.6 17.3 Accounts receivable 5,910 6,930 7,785 8,755 8,988 Operating margin 12.8 9.2 14.5 14.9 14.2 Inventories 4,200 5,851 6,135 6,882 7,136 Gross margin 24.2 17.4 22.2 22.4 21.6 Others 1,140 1,541 1,692 1,869 1,911 Current assets 13,925 20,185 24,935 30,300 33,957 LT investments 252 260 260 260 260 Sales growth 313.4 18.7 11.9 12.5 2.7 Net fixed assets 5,826 6,772 6,960 7,872 8,745 Net profit growth 186.7 -4.3 81.2 12.1 -4.3 Other LT assets 2,252 2,733 2,695 2,648 2,823 EPS growth 186.7 -4.3 81.2 12.1 -4.3 Total assets 22,256 29,950 34,850 41,080 45,785 Liabilities ST loans 1,541 1,308 900 800 700 Payables 7,265 10,628 11,195 12,544 13,007 Others 3,826 5,862 5,306 5,680 5,807 Total current liabilities 12631 17799 17402 19025 19514 Long term debt 161 778 800 900 800 Other liabilities 65 47 0 0 0 Total liabilities 12857 18623 19502 21225 21614 Shareholders' equity 6383 7998 11144 14671 18047 Minority interest 3015 3329 4204 5184 6123 BVPS 7.66 9.60 13.38 17.61 21.66 Source: Company, J.P. Morgan estimates.

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YTL Power www.ytlpower.com.my

Neutral M$2.15


Company description YTL Power (YTLP) is the third-largest IPP, owning and operating two plants on a 21-year concession up to 2015. The group acquired 100% of Wessex Water, UK, from Enron in 2002. In Mar-09, YTLP completed the acquisition of the Powerseraya power plant in Singapore for M$8.6 billion.

Post mortem YTLP has built a defensive/stable earnings profile given its investment focus in regulated assets operated under long-term government concessions. Its diversification into more regulated, developed markets has reduced its exposure to Malaysia, where regulatory risk remains a concern.

Potential for earnings upgrades Upside earnings surprise if any or value creation could come from potential cut in O&M cost for Powerseraya, but this is much longer-term. A lower proposed tariff hike of 0.1% over 2010-15E by the regulator for Wessex should have little downside risk to our forecast, as we already assume no tariff increase over the same period. On the other hand, YTLP’s plans to undertake WiMAX/broadband investments could pose a risk to earnings and dividends, if the capex (being finalized) is significant given the high upfront cost here and long gestation period before earnings start to flow in.

How much recovery is priced into the stock? YTLP is trading above our PT and on higher P/E and EV/EBITDA multiples versus its domestic peers, and hence has priced-in potential from a recovery in our view.

Price target and key risks Our Jun-10 PT of M$2.10 is based on our sum-of-the-parts valuation—we value its power business using DCF, and for Wessex we take 1x regulatory asset base value. YTLP’s net dividend yield of 7% over FY10-12E will support its share price, in our view. A key risk to our PT is a scale back in dividends from a much more aggressive roll-out/capex in Wimax.

Malaysia Independent Power Producers Simone YeohAC (603)-2270-4710 [email protected]



1

1.5

2

2.5

10-0

8

01-0

9

04-0

9

07-0

9

10-0

9

Source: Bloomberg.

Performance 1M 3M 12M Absolute (%) -1.4 -1.4 23.6 Relative (%) -4.3 -7.2 -9.8

Source: Bloomberg.

Company data 52-wk range (M$) M$1.69-2.25 Mkt. cap (M$MM) 12842.38 Mkt. cap (US$MM) 3753.44 Liquidity (US$MM) 3.1 Avg. daily volume (MM) 4.9 Shares O/S (MM) 5973.2 Date of price 5-Nov-09 KLCI Index 1254.0 Free float (%) 32.5 Exchange rate 3.42

Source: Bloomberg.

Bloomberg: YTLP MK; Reuters: YTLP.KL M$ in millions, year-end June FY08 FY09 FY10E FY11E FY12E Sales 4,242.5 6,102.0 10,783.2 11,081.9 11,387.2 Core net profit 1,038.8 1,068.3 1,129.8 1,228.7 1,330.2 Reported EPS 0.191 0.106 0.192 0.209 0.226 Core FD EPS (M$) 0.158 0.154 0.163 0.177 0.191 DPS (M$) 0.11 0.15 0.15 0.15 0.16 Sales growth (%) 4.3 43.8 76.7 2.8 2.8 Net profit growth (%) -11.6 2.8 5.8 8.8 8.3 EPS growth (%) -11.9 -2.3 5.6 8.6 8.1 ROE (%) 16.3 10.3 17.9 18.4 18.8 ROCE (%) 8.2 6.9 9.0 9.3 9.6 P/E (x) 13.6 14.0 13.1 12.1 11.2 P/BV (x) 1.8 2.1 2.0 1.9 1.8 EV/EBITDA (x) 7.4 10.6 8.0 7.7 7.3 Net div yield (%) 5.1 7.0 7.0 7.0 7.4 Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009. We downgraded to UW on November 19.

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YTL Power: Summary of financials Profit and Loss statement Cash flow statementM$ in millions, year-end June FY08A FY09 FY10E FY11E FY12E M$ in millions, year-end June FY08A FY09 FY10E FY11E FY12E

Revenues 4,243 6,102 10,783 11,082 11,387 EBIT 1,972 2,005 2,610 2,728 2,849% change Y/Y 4.3 43.8 76.7 2.8 2.8 Depreciation & amortisation 605 601 785 792 800

Gross Margin (% ) 60.7 42.7 31.5 31.8 32.0 Change in working capital 87 267 447 29 29EBITDA 2,576 2,606 3,395 3,520 3,649 Taxes -308 -315 -324 -352 -381

% change Y/Y 5.6 1.1 30.3 3.7 3.6 Cash flow from operations 2,355 2,558 3,518 3,197 3,297EBITDA Margin (% ) 60.7 42.7 31.5 31.8 32.0

EBIT 1,972 2,005 2,610 2,728 2,849 Capex -1,646 -1,135 -1,156 -1,156 -1,156% change Y/Y 6.5 1.7 30.2 4.5 4.4 Disposal/ (purchase) 0 -8,568 0 0 0EBIT Margin (% ) 46.5 32.9 24.2 24.6 25.0 Net Interest -796 -878 -1,371 -1,364 -1,356

Net Interest (796) (878) (1,371) (1,364) (1,356) Free cash flow -86 -8,023 991 678 785Earnings before tax 1,386 1,352 1,467 1,592 1,721

% change Y/Y 6.9 -2.4 8.4 8.6 8.1 Equity raised/ (repaid) -330 286 -222 -222 -222Tax (347) (727) (337) (363) (390) Debt raised/ (repaid) -126 2,125 -126 -126 -126

as % of EBT 25.0 53.7 23.0 22.8 22.7 Other 4,495 3,066 379 378 373Net Income (Reported) 1,039 626 1,130 1,229 1,330 Dividends paid -584 -884 -884 -884 -943

% change Y/Y -11.6 -39.8 80.5 8.8 8.3 Beginning cash 6,074 9,443 6,012 6,151 5,975Shares Outstanding 5443 5894 5894 5894 5894 Ending cash 9,443 6,012 6,151 5,975 5,843EPS (reported) - M$ 0.191 0.106 0.192 0.208 0.226 DPS - M$ 0.110 0.150 0.150 0.150 0.160

% change Y/Y -14.0 -44.4 80.5 8.8 8.3Balance sheet Ratio AnalysisM$ in millions, year-end June FY08A FY09 FY10E FY11E FY12E % , year-end June FY08A FY09 FY10E FY11E FY12E

Cash and cash equivalents 9,443 6,012 6,151 5,975 5,843 EBITDA margin 60.7 42.7 31.5 31.8 32.0 Accounts receivable 1,011 2,353 4,158 4,274 4,391 Operating margin 60.7 42.7 31.5 31.8 32.0 Inventories 153 859 1,518 1,560 1,603 Net profit margin 24.5 10.3 10.5 11.1 11.7 Others 0 0 0 0 0 SG&A/sales n.a. n.a. n.a. n.a. n.a.Current assets 10,607 9,224 11,827 11,808 11,837

Sales per share growth 1.5 32.8 76.7 2.8 2.8 LT investments Sales growth 4.3 43.8 76.7 2.8 2.8 Net fixed assets 17,176 25,491 26,089 26,681 27,265 Net profit growth (11.6) (39.8) 80.5 8.8 8.3 Total assets 27,783 34,715 37,916 38,489 39,101 EPS growth (14.0) (44.4) 80.5 8.8 8.3

Liabilities Interest coverage (x) -3.2 -3.0 -2.5 -2.6 -2.7ST loans 3,706 2,527 2,527 2,527 2,527 Net debt to total capital (x) 0.3 0.5 0.4 0.4 0.4Payables 1,065 2,300 4,065 4,178 4,293 Net debt to equity (x) 1.27 2.78 2.63 2.50 2.37Others 144 175 1,447 1,644 1,835 Sales/assets (x) 0.2 0.2 0.3 0.3 0.3Total current liabilities 4915 5002 8039 8349 8655 Assets/equity (x) 4.4 5.7 6.0 5.8 5.5Long term debt 13827 20388 20262 20137 20011 ROE 16.3 10.3 17.9 18.4 18.8Other liabilities 2659 3244 3288 3332 3376 ROCE 8.2 6.9 9.0 9.3 9.6 Total liabilities 21401 28634 31590 31818 32043 ROA 6.9 3.6 6.4 6.8 7.2 Shareholders' equity 6382 6081 6327 6671 7059BVPS - M$ 1.173 1.032 1.073 1.132 1.198Source: Company Reports and J.P.Morgan Estimates. Sotp valuation YTL Power Sum-of-parts valuation M$MM Comments Malaysian IPPs 4,720 Based on FY10E EV/EBITDA of 7.5x in line with fair value for Tanjong (4-10x for developing market peers). Wessex 12,716 Based on RAB of M$2.2B pounds as at Mar-09 and based on current forex rate of M$5.80:1GBP Associates & investments 2,025 Based on book value. Includes 33.5%-stake in Electra Net, Australia, and 35% stake in PT Jawa, Indonesia Powerseraya 11,287 Assuming IRR of 10% versus WACC of 7% over concession period up to 2032. Cash proceeds from full warrant conversion 2,601 Outstanding 846MM warrants at ex-price of M$1.17 due Jan-10 and 1331MM at ex-price of M$1.21 due Jun-18. Net (debt)/cash (16,950) FY09E net debt post acquisition of Powerseraya

Reduction in debt 701 Reduction in debt from conversion of US$184MM exchangeable bonds into shares upon maturity in May-10 at conversion price of M$2.01/share

Others $205 Option value of cash proceeds from warrant conversion assuming reinvested at IRR of 12% versus WACC of 10% over 10-years.

Total value 17,305 FD no of shares 8,415 Upon full conversion of outstanding warrants and exchangeable bonds. Value per share 2.10 Source: J.P. Morgan estimates.

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Emerging Markets Strategy Dashboards Summary: Regional and Countries Valuations

P/E (x) Div. Yield (%) P/BV (x) Earnings growth (%) ROE (%) 30-Nov-09 Hist.^ P/ EPS Current 12m Prospective Hist.^ Current Prospective Hist.^ Current Prospective MSCI Trough (Trend) Trailing Fwd 2008E 2009E 2010E Peak Trailing 2008E 2009E Trough Trailing 2008 2009E 2007 2008 2009E 2010E 2007 2008 2009E Global* 308 9.7 13.4 16.0 13.8 13.5 16.3 13.6 4.2 2.6 3.0 2.6 1.3 1.8 1.8 1.8 6.1 -26.8 -17.3 19.8 18.0 13.2 11.2 USA 1,041 11.6 11.8 26.3 14.9 17.5 17.9 14.8 4.0 2.0 2.9 2.1 1.4 2.1 1.7 2.1 3.0 -18.3 -11.8 20.9 16.7 13.2 11.6 Europe* 1,073 7.0 12.2 17.4 12.7 12.6 15.5 12.5 6.1 3.5 5.4 3.5 1.1 1.7 1.3 1.6 5.6 -22.2 -22.2 22.5 22.0 16.9 13.1 Japan* 522 11.5 23.3 NM 19.7 12.0 NM 31.8 3.0 1.3 2.8 2.0 0.9 1.2 1.0 1.1 -1.5 -17.8 NM NM 9.9 8.2 0.0 Emerging Markets* 41,455 9.3 13.7 15.7 12.9 15.1 15.8 12.7 3.5 2.2 2.1 2.2 1.0 2.0 2.0 2.0 22.1 -17.8 -4.0 24.0 16.4 12.9 12.9 EMF Asia 587 10.3 16.8 17.1 13.9 18.6 17.0 13.7 3.3 2.0 1.9 2.0 1.0 2.2 2.4 2.2 21.7 -30.9 9.4 24.0 17.3 12.0 13.2 EMF LatAm* 7,258,665 8.6 15.0 17.0 14.1 15.7 17.1 13.8 5.4 2.6 3.5 2.6 0.6 2.4 1.3 2.5 18.1 -11.0 -7.9 23.5 16.9 9.8 9.9 EMF EMEA* 361 7.1 8.6 12.8 10.5 10.4 13.1 10.3 5.1 2.4 3.6 2.3 1.1 1.6 1.7 1.6 25.6 -0.2 -20.7 26.7 16.1 15.5 12.6 China 64 7.2 12.2 17.5 14.4 18.9 17.4 14.2 5.7 2.2 2.1 2.2 0.5 2.5 2.8 2.4 31.2 -12.7 9.0 22.1 19.2 15.0 14.9 Brazil* 239,832 6.5 8.5 16.4 13.5 14.7 16.6 13.3 7.6 2.7 3.0 2.7 0.4 2.4 2.4 2.4 19.5 -9.9 -11.4 24.9 22.9 17.4 14.5 Korea 443 7.7 10.8 14.4 11.7 20.3 14.0 11.5 2.9 1.1 1.1 1.1 0.5 1.5 1.6 1.4 9.8 -36.7 44.8 21.9 13.1 7.9 10.7 Taiwan 274 11.7 13.8 30.4 20.0 33.6 30.1 19.4 6.3 3.1 3.7 3.0 1.2 2.0 2.0 2.0 28.2 -68.7 11.5 55.4 17.0 5.5 6.6 South Africa* 680 9.1 10.4 14.7 11.8 12.9 14.9 11.6 4.7 2.8 3.5 2.8 1.4 2.2 2.2 2.2 21.5 8.2 -13.4 28.7 18.0 17.5 14.9 India 683 10.4 20.8 18.2 14.8 18.9 18.2 14.6 2.5 1.1 1.1 1.1 1.8 2.8 3.1 2.7 18.6 -1.1 3.7 24.7 23.1 17.5 16.0 Russia* 701 4.0 3.8 10.9 8.8 7.6 11.3 8.6 3.2 1.3 0.7 1.3 0.2 1.2 1.2 1.2 30.8 -3.6 -33.5 32.3 15.4 15.4 10.7 Mexico* 29,035 9.0 10.9 18.3 15.1 19.7 18.1 14.9 3.4 2.3 2.0 2.3 0.7 2.6 1.1 2.7 12.4 -27.2 8.9 21.6 25.0 8.3 8.7 Israel* 332 10.9 15.6 12.0 10.2 14.4 11.8 10.1 6.9 5.6 4.8 5.7 1.0 1.3 1.5 1.3 17.0 -6.1 22.0 16.9 12.4 10.6 11.4 Malaysia 465 12.0 16.8 18.0 15.8 18.0 18.0 15.7 5.1 2.8 3.0 2.7 0.6 2.0 2.0 2.0 44.3 -14.1 0.1 15.2 14.4 11.5 11.1 Chile* 4,057 11.4 21.4 16.6 15.1 14.6 16.8 14.9 8.9 1.7 2.3 1.6 0.9 1.5 1.5 1.5 15.4 44.0 -13.2 12.7 10.5 12.5 9.2 Indonesia 3,446 5.3 15.4 15.7 14.3 16.6 15.6 14.2 5.9 2.8 2.7 2.8 0.9 3.7 4.2 3.7 61.4 -1.4 6.8 9.6 27.8 27.1 25.3 Turkey* 662,862 5.1 5.3 9.8 8.8 10.3 9.7 8.8 4.0 2.9 3.9 2.8 1.4 1.6 1.8 1.6 56.9 -11.2 6.4 10.8 18.1 16.5 17.7 Thailand 280 8.2 5.6 12.5 11.2 15.7 12.2 11.1 6.0 3.4 3.6 3.4 0.6 1.7 1.8 1.7 -37.3 56.6 28.6 10.1 7.5 11.7 14.3 Poland* 1,624 6.9 12.0 16.0 14.8 11.0 16.8 14.6 7.2 3.5 5.1 3.3 1.0 1.6 1.7 1.6 16.4 -10.0 -34.4 14.6 16.4 14.6 9.8 Czech Republic* 358 7.3 7.4 10.5 10.6 10.4 10.5 10.6 10.0 6.4 6.0 6.4 0.5 2.2 2.5 2.2 37.4 19.7 -1.4 -1.2 17.3 21.5 22.0 Egypt* 1,179 5.9 5.4 12.0 9.6 9.1 12.4 9.4 30.8 5.1 22.3 3.5 1.0 2.0 2.5 2.0 21.2 4.9 -26.6 31.6 14.1 13.6 18.0 Philippines 595 7.9 21.1 17.2 15.4 21.1 17.0 15.3 5.4 3.8 3.4 3.8 0.9 2.5 2.6 2.4 8.3 -16.0 24.6 11.2 13.9 12.2 14.8 Hungary* 1,213 3.7 5.5 11.8 11.0 7.4 12.5 10.9 5.0 1.9 2.7 1.8 0.6 1.4 1.6 1.4 -13.4 14.9 -41.1 14.9 20.1 22.2 11.8

Source: I/B/E/S, MSCI, J.P. Morgan. Updated 30 November 2009. * Market forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using I/B/E/S estimates. IBES Estimates are not available for Morocco, Jordan, Peru and Colombia. For all other markets, forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using JPM estimates for covered stocks and I/B/E/S estimates for the rest. Hist.^ refers to the historically lowest valuation of the MSCI indices since Jan 1991. Trough PE represents the lowest 12 month trailing PE. For dividend yield the highest values are taken to represent the best multiple. P / EPS (Trend) uses the trend EPS for the indices calculated by the linear regression on the natural log of trailing EPS. For more, please refer to 'Mayday call for the shorts - Perspectives and Portfolios', 5 May 2009, Mowat et al. P / EPE (Trend)' is NM for indices where the modeled relationship is weak with a less than 0.50 R-square. The start dates China and Singapore models are modified to make them more relevant. Sector indices inputs have not been altered.

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Market Performance: MSCI AC Performance by Regions, Countries and Sectors

2009 Year to Date

Glob

al

North

Am

erica

Euro

pe

Japa

n

EMF

EMF

Asia

EMF

Latin

Am

erica

EMEA

EMF

Asia

Kore

a

Taiw

an

Chin

a

Indi

a

Malay

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Thail

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Consumer Discretionary 35.8% 34.3% 30.2% 21.0% 99.1% 111% 81.8% 25.5% 111.9% 86.7% 98.7% 139.1% 160.2% 42.0% 9.6% 206.6% 31.3% Consumer Staples 19.8% 12.1% 28.5% -14.5% 58.3% 48.2% 75.2% 89.9% 48.2% 5.3% 28.0% 95.1% 32.7% 49.5% 69.1% 97.4% Energy 28.4% 19.9% 29.5% -12.2% 80.3% 68.9% 122% 70.9% 68.9% 22.7% 23.7% 69.6% 72.0% 18.6% 43.2% 153.1% Financials 34.3% 20.4% 43.8% -15.7% 73.1% 68.5% 108% 88.4% 68.5% 53.6% 41.1% 72.3% 79.1% 64.3% 77.9% 58.3% 49.3% Healthcare 14.6% 15.6% 15.6% -11.5% 33.6% 46.1% 27.4% 46.1% 0.0% 63.4% Industrials 23.6% 18.3% 33.8% 5.2% 48.2% 45.6% 73.3% 65.2% 45.6% 16.6% 36.4% 46.0% 105.3% 46.9% 239.8% 48.3% Information Technology 47.2% 51.4% 15.1% 7.2% 85.8% 88.3% 35.5% 53.9% 88.3% 67.2% 74.7% 198.5% 110.3% Materials 62.2% 47.4% 69.6% 9.7% 97.2% 85.3% 124% 126% 85.3% 65.2% 51.3% 81.7% 190.5% 56.1% 109.7% 98.7% Telecoms 10.5% 1.6% 17.9% -16.1% 20.9% 1.3% 51.7% 43.3% 1.3% -14.6% 6.0% -3.3% -27.1% 18.3% -0.1% 29.2% 21.9% Utilities 2.7% 1.0% 5.1% -21.3% 44.5% 33.0% 54.6% 52.4% 33.0% 4.5% 0.2% 48.8% 16.3% 1.1% 96.2% 226.0% Region / Country Benchmark

29.0% 23.8% 30.9% -1.4% 68.1% 62.9% 95.1% 66.5% 62.9% 44.4% 59.8% 58.1% 85.0% 44.7% 51.4% 81.4% 54.9%

Change vs dollar 4.6% 11.5% 1.9% 0.0% 5.4% 2.5% 4.8% 17.6% 1.4%

2009 Year to Date

EMF

Latin

Am

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Braz

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Mexic

o

Chile

Arge

ntin

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Peru

Colo

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Polan

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Egyp

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Moro

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Consumer Discretionary 81.8% 117.1% 22.9% 48.5% 25.5% 50.4% 66.7% 1.6% Consumer Staples 75.2% 61.7% 39.4% 25.6% 89.9% 10.8% 188.5% 68.6% Energy 122.8% 72.3% -5.2% 25.2% 70.9% 3.8% 66.2% 60.5% 22.5% 62.0% Financials 108.5% 65.9% 56.8% 42.9% 157.9% 29.5% 61.6% 88.4% 13.9% 174.1% 93.9% 77.7% 32.2% 89.6% 27.9% 47.9% -13.6% Healthcare 27.4% 73.5% 75.4% 25.3% 49.3% Industrials 73.3% 33.0% 53.1% 43.0% 65.2% 11.5% 97.7% 65.7% 5.4% 42.0% -7.1% Information Technology 35.5% 2.1% 53.9% 58.7% 21.3% Materials 124.9% 79.7% 78.0% 59.1% 82.7% 77.0% 126.3% 21.3% 132.1% 92.5% 34.7% 283.4% 9.9% Telecoms 51.7% 43.6% 31.0% -0.6% 121.5% 43.3% 7.9% 77.1% 31.1% 11.5% -16.0% 35.9% -1.1% -4.3% -12.5% Utilities 54.6% 19.8% 11.3% 61.2% 52.4% 10.9% Region / Country Benchmark

95.1% 64.6% 39.1% 30.7% 70.8% 66.4% 52.7% 66.5% 17.5% 88.1% 43.2% 59.0% 31.5% 68.0% 13.6% 23.0% -12.7%

Change vs dollar 32.8% 8.0% 28.5% -9.4% 8.9% 12.3% 28.0% 4.9% 0.4% 1.8% 8.7% 5.4% 11.3% 0.7% 14.1% Source: Bloomberg, MSCI. 30 November 2009. Notes: Regional headings first sorted by regional weights in the MSCI EMF and then country headings from left to right by relative weights within the MSCI EMF Indices: Regions in US$ and countries in local currency. Local currency movements against the dollar: appreciation / (depreciation). Country and sector cross sections in italic blue have outperformed their indices by more than 2%; numbers in red have underperformed their indices by more than 2%.

376



Outlook: Market Drivers Global and developed market drivers Country Positive Negative Global Compression in risk premiums, synchronized recovery trade (positive GDP and earnings revisions) and

record low interest rates Fear of the Fade; risk of fiscal drag as governments attempt to reduce fiscal deficits (note global weighted deficit is 7% in 2009), fragile consumer

US Three drivers of growth; inventory/IP cycle, profit cycle resulting in less business retrenchment and delayed monetary stimulus

2009 fiscal deficit of 10%, fragile consumer (high debt levels and unemployment)

Europe Economic recovery ahead of expectations Strong Euro, fear of post stimulus fade in demand UK Faster recovery in financial markets, firm commodity and energy prices Fiscal deficit, disappointing economic data Japan Leveraged to global industrial production cycle, Strong Yen Australia Avoided the recession, fiscal flexibility, leveraged to contracting credit spreads Strong currency, high household leverage Hong Kong Record low mortgage rates, Leveraged to a recovery in global trade and financial services Asset inflation story is consensus Singapore Leveraged to a recovery in global trade and financial servics Asset inflation story is consensus Emerging Market Drivers

Country Positive Negative China Pro-consumption policies to continue with low inflation Policy confusion or risk between pro-consumption yet anti-asset inflation policy

Brazil Macro recovery on track, Rates and currency supportive, Monetary Policy Flexibility, On/Off Balance sheet fiscal expansion, Closed economy and large state, resilient consumption.

Commodity Driven Market, Valuation less attractive, 2010 elections, risk that pre salt-oil development will dilute minority shareholders

Korea Global cyclical exposure, scope for further currency appreciation, large consensus underweight, low interest rates, front loaded fiscal spending in 1H09, tax cuts (including property, income and corporate tax)

Structurally weak domestic economy, high private sector debt, high valuations of exporters

Taiwan Global cyclical exposure, Fiscal stimulus, corporate tax cuts, realizing closer cross-straits links, investment positioning (consensus UW position among FIs), low earnings expectations

SME exposure of banks and legacy negative spread books of insurers

South Africa SA under owned by foreigners, Huge domestic investor cash holdings, high beta rand exposure Low beta play India Low interest rates and inflation positive for urban consumption and investment Below average monsoon forecast, rising fiscal deficit

Russia Oil price recovery, fixed investment growth, levergaed to contracting risk premium Political risk, cost and wage growth, valuation discount versus MSCI EM is narrowing

Mexico Fiscal reform, Leveraged to US Recovery, lagging MXN, Counter cyclical fiscal policy, poor investment sentiment, resilient corporate profitability.

Medium term fiscal financing, Foreign owned banking system.

Malaysia Political resolution, Strong domestic demand, GLC reforms, Government pump-priming under 9MP, greater than expected fiscal stimulus package

Low beta play, high valuations

Indonesia Recovering currency, declining inflation, improving liquidity, relatively resilient economy, improving terms of trade

Consensus OW, need to encourage long term investment

Turkey Robust banking sector, inexpensive valuations, lower political tensions, secular decline in interest rates, potential for stand by agreement with the IMF

Delay in IMF agreement due to domestic politics

Thailand Benefits from favorable terms of trade, fiscal stimulus and low interest rates Politics, uncertainty on macro economic policy, domestic demand lagging improvement elsewhere, consensus OW market

Poland Domestic demand, market-friendly political setting Wage and margin pressures, loss of momentum in manufacturing, local mutual fund redemptions Czech Republic Diversified growth, low interest rates, reformed banking sector CDS spread narrowing relatively less than other emerging markets

Philippines Fiscal consolidation, investment cycle upturn, lower food and oil prices, consensus UW Global risks to affect risk appetite on emerging economies, low liquidity

Hungary IMF support, low possibility of entering the Euro zone by 1 Jan 2012 target date High exposure to FX-denominated loans by households, poor growth prospects Updated as of 30 November 2009.

377



Profit Outlook: Earnings Forecasts Matrix for Countries and Sectors Weight EPS Growth Weight EPS Growth Weight EPS Growth

Emerging Markets (%) JPMorgan Consensus China (%) J.P. Morgan Consensus India (%) JPMorgan Consensus Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Total Market 100.0 - - - 5.8 -4.0 24.0 Total Market 100.0 16.2 9.0 22.1 16.2 14.3 21.1 Total Market 100 11.9 3.7 24.7 12.2 8.6 21.6 Consumer Discretionary 5.2 - - - 14.2 35.3 15.5 Consumer Discretionary 4.7 17.0 12.3 15.7 17.2 16.0 16.6 Consumer Discretionary 4.8 39.9 42.4 24.0 56.0 46.7 19.7 Consumer Staples 5.4 - - - 21.4 26.5 17.4 Consumer Staples 4.2 28.5 51.8 18.2 21.5 45.0 17.7 Consumer Staples 5.8 15.3 8.5 15.7 16.3 9.0 15.9 Energy 15.6 - - - -4.0 -16.4 18.2 Energy 17.9 -8.7 -10.6 17.7 -6.8 -3.3 22.0 Energy 17.0 9.0 5.8 40.9 39.0 12.7 27.6 Financials 24.9 - - - 5.8 -0.1 26.5 Financials 39.2 17.6 18.4 28.8 17.2 21.3 22.3 Financials 25.1 4.7 -1.7 21.2 15.4 6.2 17.5 Health Care 2.1 - - - 17.6 11.4 32.6 Health Care 0.2 27.3 27.3 33.4 27.3 27.3 33.4 Health Care 3.6 8.4 41.1 17.3 -5.3 199.2 42.9 Industrials 6.6 - - - 6.0 -2.1 22.8 Industrials 8.5 8.9 55.5 29.3 4.7 43.7 36.3 Industrials 8.9 24.5 25.7 27.2 12.2 48.4 70.1 Information Technology 12.9 - - - 4.9 14.0 35.9 Information Technology 5.4 42.0 58.3 43.9 41.9 53.1 46.1 Information Technology 15.9 9.2 2.3 16.2 5.9 1.0 10.8 Materials 14.9 - - - -8.7 -29.9 42.3 Materials 5.6 18.6 47.4 64.7 23.9 50.6 69.3 Materials 11.3 6.5 -11.5 17.9 12.6 -4.9 25.1 Telecommunication Services 9.0 - - - -2.8 -0.7 10.0 Telecommunication Services 12.9 -12.2 -13.8 -0.3 -13.9 -4.4 1.4 Telecommunication Services 1.3 -0.8 -2.2 -0.6 -21.3 -23.8 -11.1 Utilities 3.5 - - - 6.0 15.1 10.9 Utilities 1.4 NM NM NM NM NM NM Utilities 6.4 11.2 9.1 7.6 6.9 9.5 12.3

Weight EPS Growth Weight EPS Growth Weight EPS Growth Indonesia (%) JPMorgan Consensus Korea (%) JPMorgan Consensus Malaysia (%) JPMorgan Consensus

Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Total Market 100.0 1.7 6.8 9.6 14.9 3.3 14.3 Total Market 100.0 23.2 44.8 21.9 27.3 51.9 33.7 Total Market 100.0 0.1 0.1 15.2 -5.4 -17.8 18.7 Consumer Discretionary 12.8 -21.9 -21.9 22.3 -3.3 -3.3 17.7 Consumer Discretionary 11.1 20.5 56.3 10.0 28.5 103.6 5.1 Consumer Discretionary 12.7 12.0 43.6 11.5 -10.3 -17.2 21.6 Consumer Staples 7.7 9.9 12.5 22.9 19.0 7.4 21.1 Consumer Staples 5.3 2.6 10.8 1.2 30.8 11.4 6.9 Consumer Staples 15.4 -5.1 -7.2 9.4 -13.7 -10.5 7.8 Energy 10.7 43.1 9.4 -47.8 17.6 -27.5 -18.2 Energy 2.4 95.4 71.8 -4.8 9.8 38.4 8.2 Energy 0.8 16.0 16.0 8.7 16.0 16.0 8.7 Financials 29.4 1.7 2.5 49.9 14.9 16.2 22.0 Financials 18.1 3.4 -27.3 37.8 2.4 -16.2 54.1 Financials 31.6 -0.8 -5.7 7.4 -2.7 -14.5 15.0 Health Care 0.0 NA NA NA NA NA NA Health Care 0.5 85.0 12.0 23.9 85.0 12.0 23.9 Health Care 0.0 NA NA NA NA NA NA Industrials 4.3 24.7 24.7 5.5 25.6 25.6 4.6 Industrials 14.6 23.9 55.4 13.6 35.3 13.6 49.0 Industrials 19.8 0.3 -10.4 30.6 -6.6 -28.6 27.6 Information Technology 0.0 NA NA NA NA NA NA Information Technology 28.2 250.1 NM 27.8 256.6 976.1 52.8 Information Technology 0.0 NA NA NA NA NA NA Materials 8.0 -26.9 -30.4 23.1 -16.2 -13.6 33.5 Materials 14.4 31.5 -11.5 19.4 31.5 1.1 12.1 Materials 0.7 0.2 0.2 9.9 0.2 0.2 9.9 Telecommunication Services 18.7 -5.4 -5.3 8.9 3.1 10.5 13.5 Telecommunication Services 3.2 35.3 36.4 17.5 30.7 27.4 18.5 Telecommunication Services 6.6 90.4 48.5 2.7 -11.0 -9.2 8.1 Utilities 8.4 870.0 870.0 -5.6 44.2 44.2 22.8 Utilities 2.1 8.2 NM NM -1.7 NM NM Utilities 12.3 -0.4 -12.4 33.4 -4.3 -25.5 34.0

Weight EPS Growth Weight EPS Growth Weight EPS Growth Philippines (%) JPMorgan Consensus Taiwan (%) JPMorgan Consensus Thailand (%) JPMorgan Consensus

Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Total Market 100.0 19.7 24.6 11.2 9.7 19.0 15.1 Total Market 100.0 -2.6 11.5 55.4 5.7 46.4 62.8 Total Market 100.0 -0.8 28.6 10.1 -3.2 19.8 14.8 Consumer Discretionary 3.6 22.3 22.3 10.9 8.8 8.8 24.2 Consumer Discretionary 2.6 122.2 -121.9 715.2 284.0 -247.3 NM Consumer Discretionary 1.7 -7.4 -7.4 1.1 -6.6 -6.6 10.7 Consumer Staples 0.0 NA NA NA NA NA NA Consumer Staples 1.5 48.5 55.5 14.2 51.2 59.7 12.2 Consumer Staples 3.8 9.9 9.9 20.0 40.8 40.8 15.4 Energy 0.0 NA NA NA NA NA NA Energy 0.9 86.0 86.0 -17.3 125.5 125.5 -11.5 Energy 41.2 27.1 104.4 9.1 34.9 88.8 14.7 Financials 42.9 6.7 12.1 13.3 7.1 3.9 13.7 Financials 15.6 20.6 1287.9 49.6 20.6 2163.8 41.0 Financials 36.2 -4.1 -3.5 10.2 -10.0 -10.7 17.6 Health Care 0.0 NA NA NA NA NA NA Health Care 0.0 NA NA NA NA NA NA Health Care 0.0 NA NA NA NA NA NA Industrials 9.2 7.2 7.2 13.6 7.0 7.0 13.0 Industrials 3.4 -31.6 -292.9 154.1 -25.6 -96.5 -2141.1 Industrials 0.0 NA NA NA NA NA NA Information Technology 0.0 NA NA NA NA NA NA Information Technology 59.6 -5.6 -9.4 72.3 2.6 20.4 80.2 Information Technology 0.0 NA NA NA NA NA NA Materials 0.0 NA NA NA NA NA NA Materials 12.2 -9.4 -17.2 27.2 11.5 4.3 35.6 Materials 7.6 -15.3 -8.8 26.7 -16.1 -7.3 16.4 Telecommunication Services 24.3 20.5 18.7 2.7 11.6 11.1 5.4 Telecommunication Services 4.2 -11.0 -3.0 4.8 -7.2 -9.2 8.8 Telecommunication Services 7.1 -11.1 1.1 -1.1 -20.3 -13.5 2.6 Utilities 20.0 241.3 197.0 27.0 262.7 226.9 42.0 Utilities 0.0 NA NA NA NA NA NA Utilities 2.4 -3.0 -2.7 12.3 3.7 2.7 7.6

Weight EPS Growth Weight EPS Growth Weight EPS Growth South Africa (%) JPMorgan Consensus Brazil (%) JPMorgan Consensus Mexico (%) JPMorgan Consensus Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Total Market 100.0 - - - -6.6 -13.4 28.7 Total Market 100.0 - - - 3.0 -11.4 24.9 Total Market 100.0 - - - 5.2 8.9 21.6 Consumer Discretionary 11.8 - - - 6.5 10.7 22.4 Consumer Discretionary 2.4 - - - 29.7 111.0 43.4 Consumer Discretionary 11.2 - - - -2.7 -15.2 29.2 Consumer Staples 4.9 - - - 10.9 10.2 12.9 Consumer Staples 7.1 - - - 103.1 111.2 29.4 Consumer Staples 21.7 - - - 29.4 22.7 23.7 Energy 10.5 - - - -18.1 -18.1 27.6 Energy 27.0 - - - -22.5 -22.0 16.2 Energy 0.0 - - - NA NA NA Financials 26.0 - - - -14.7 -13.7 20.8 Financials 22.0 - - - -3.1 6.5 23.9 Financials 5.3 - - - 21.3 -7.5 20.7 Health Care 1.6 - - - 41.1 41.2 24.6 Health Care 0.0 - - - NA NA NA Health Care 0.0 - - - NA NA NA Industrials 4.8 - - - -2.4 -1.1 12.2 Industrials 2.0 - - - 55.7 41.8 -18.2 Industrials 4.7 - - - 3.8 61.8 31.2 Information Technology 0.0 - - - NA NA NA Information Technology 2.1 - - - 10.9 10.8 14.3 Information Technology 0.0 - - - NA NA NA Materials 27.5 - - - -35.5 -45.1 93.0 Materials 28.2 - - - -55.4 -40.4 48.1 Materials 16.0 - - - -38.7 -47.7 136.2 Telecommunication Services 12.9 - - - -15.6 1.6 16.4 Telecommunication Services 4.0 - - - -2.2 -7.3 50.8 Telecommunication Services 41.0 - - - 8.4 23.5 6.6 Utilities 0.0 - - - NA NA NA Utilities 5.2 - - - -3.5 -6.3 1.0 Utilities 0.0 - - - NA NA NA

Weight EPS Growth Weight EPS Growth Weight EPS Growth Russia (%) JPMorgan Consensus Poland (%) JPMorgan Consensus Turkey (%) JPMorgan Consensus

Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Total Market 100.0 - - - -21.9 -33.5 32.3 Total Market 100.0 - - - -30.0 -34.4 14.6 Total Market 100.0 - - - 10.2 6.4 10.8 Consumer Discretionary 0.0 - - - NA NA NA Consumer Discretionary 2.6 - - - -20.8 -22.6 14.0 Consumer Discretionary 1.0 - - - 2.8 2.8 25.5 Consumer Staples 0.7 - - - -0.8 -0.8 48.6 Consumer Staples 0.0 - - - NA NA NA Consumer Staples 9.8 - - - 72.6 49.6 24.7 Energy 60.2 - - - -31.2 -23.7 15.5 Energy 14.1 - - - -21.3 -43.4 42.9 Energy 5.1 - - - 63.5 63.5 16.1 Financials 11.9 - - - -94.8 NM NM Financials 57.0 - - - -37.1 -41.2 17.8 Financials 57.4 - - - 10.4 23.0 5.3 Health Care 0.7 - - - NA NA NA Health Care 0.0 - - - NA NA NA Health Care 0.0 - - - NA NA NA Industrials 0.0 - - - NA NA NA Industrials 1.8 - - - 26.6 26.6 13.7 Industrials 7.5 - - - -32.7 -34.3 25.7 Information Technology 0.0 - - - NA NA NA Information Technology 3.0 - - - -8.2 -8.2 -0.4 Information Technology 0.0 - - - NA NA NA Materials 13.4 - - - 5.5 -82.6 206.8 Materials 11.7 - - - -14.2 -14.2 -4.7 Materials 3.6 - - - NA -89.4 498.6 Telecommunication Services 9.4 - - - 24.2 2.7 35.8 Telecommunication Services 9.8 - - - -36.9 -36.9 10.2 Telecommunication Services 15.6 - - - -13.7 -19.9 9.0 Utilities 3.7 - - - 50 NM NM Utilities 0.0 - - - NA NA NA Utilities 0.0 - - - NA NA NA

Source: I/B/E/S, MSCI, J.P. Morgan. Note: Average earnings growth calculated based on earnings aggregate of MSCI constituents. Consensus numbers are used for stocks not covered by J.P. Morgan under J.P. Morgan forecasts calculation. Median numbers are for the year 2009. Updated as of 30 November 2009.

378



Profit Outlook: Changes in 2009 and 2010 EPS Forecasts World Emerging Markets (EM) EM Asia EM Europe

30405060708090

100110120

Feb-08 Sep-08 Apr-09 Nov-09

2009

2010

405060708090

100110120


2009

2010

405060708090

100110120


2009

2010

405060708090

100110120130


2009

2010

EM Latin America Korea Taiwan China

405060708090

100110120130


2009

2010

405060708090

100110120130


2009

2010

102030405060708090

100110


2009

2010

60

70

80

90

100

110

120


2009

2010

Brazil Russia South Africa Mexico

5060708090

100110120130


2009

2010

405060708090

100110120130140


2009

2010

60

70

80

90

100

110

120

130


2009

2010

60

70

80

90

100

110


2009

2010

Source: I/B/E/S Notes: The dashboard aims to show changes in earnings expectations. All year ends are for December. EPS figures are normalized, starting at 100 on base date Feb 2008 for ease of comparison. These numbers are directly from IBES aggregate and may differ from those in the growth expectations pages where adjustments are made for exceptional items. Countries earnings revisions are in local currencies term whereas APxJ regions earnings revisions is in US $ term. Updated 30 November 2009.

379



Profit Outlook: Changes in 2009 and 2010 EPS Forecasts India Malaysia Israel Poland

60

70

80

90

100

110

120

130


2009

2010

60

70

80

90

100

110


2009

2010

60

80

100

120

140

160

180


2009

2010

40

50

60

70

80

90

100

110


2010

2009

Chile Turkey Thailand Indonesia

60

70

80

90100

110

120

130


2009

2010

50

60

70

80

90

100

110

120


2009

2010

60

70

80

90

100

110

120


2009

2010

60

7080

90

100

110120

130


2009

2010

Hungary Czech. Republic Philippines

50

60

70

80

90

100

110

120


2009

2010

80

90

100

110

120

130


2009

2010

60

70

80

90

100

110


2009

2010

Source:I/B/E/S Notes: The dashboard aims to show changes in earnings expectations. All year ends are for December. EPS figures are normalized, starting at 100 on base date Feb 2008 for ease of comparison. These numbers are directly from IBES aggregate and may differ from those in the growth expectations pages where adjustments are made for exceptional items. Countries earnings revisions are in local currencies term whereas APxJ regions earnings revisions is in US $ term. Updated 30 November 2009

380



Value: PE Matrix for Countries and Sectors

12-month forward PE USA

Emer

ging

Ma

rket

s

EMF

EMEA

EMF

LATA

M

EMF

Asia

Kore

a

Taiw

an

Chin

a

Indi

a

Malay

sia

Indo

nesia

Thail

and

Philip

pine

s

Consumer Discretionary 15.9 12.9 12.3 16.3 12.7 9.7 NM 19.2 18.8 17.1 15.4 16.9 17.7 Consumer Staples 14.0 16.4 12.0 17.3 15.9 14.3 19.1 16.4 24.0 16.7 18.1 19.4 NA Energy 13.7 10.1 7.4 13.3 11.8 8.2 32.4 13.3 7.6 11.8 14.9 9.9 NA Financials 13.7 13.6 11.2 13.1 14.5 12.1 19.8 13.5 20.7 16.2 11.9 12.0 19.0 Health Care 11.7 13.3 12.4 NA 20.2 14.9 NA 29.6 21.0 NA NA NA NA Industrials 15.9 13.8 10.0 18.2 13.9 10.0 29.3 17.3 24.8 16.5 12.9 NA 11.3 Information Technology 15.7 14.0 14.8 12.3 15.8 15.2 20.3 28.7 18.9 NA NA NA NA Materials 18.3 14.4 16.2 16.0 12.8 10.8 22.1 17.4 13.0 13.1 21.0 11.8 NA Telecommunication Services 13.3 11.9 10.6 12.7 12.6 8.6 12.4 12.5 7.1 13.3 15.7 12.7 10.9 Utilities 11.8 12.1 13.9 10.3 14.8 NM NA 12.6 18.5 14.2 14.7 9.5 20.5 Market Aggregate 14.9 12.9 10.5 14.1 13.9 11.7 20.0 14.4 14.8 15.8 14.3 11.2 15.4 Sector Neutral** 14.6 13.0 11.3 13.8 13.7 10.8 20.9 15.7 13.5 14.3 14.5 12.3 14.0

12-month forward PE

EMF

EMEA

Russ

ia

Sout

h Af

rica

Israe

l

Polan

d

Turk

ey

Hung

ary

Czec

h Re

publ

ic

EMF

LATA

M

Braz

il

Mexic

o

Chile

Consumer Discretionary 12.3 NA 12.3 NA 14.0 8.6 NA NA 16.3 16.0 16.1 21.7 Consumer Staples 12.0 6.3 12.5 NA NA 15.4 NA NA 17.3 16.6 18.4 16.2 Energy 7.4 6.9 9.6 NA 12.7 7.9 10.1 NA 13.3 13.2 NA NA Financials 11.2 NM 9.9 10.3 18.1 7.9 10.9 13.2 13.1 13.1 15.3 13.9 Health Care 12.4 NA 12.3 12.2 NA NA 15.4 NA NA NA NA NA Industrials 10.0 NA 8.8 13.4 12.8 9.6 NA NA 18.2 22.4 13.5 19.5 Information Technology 14.8 NA NA 15.5 11.7 NA NA NA 12.3 12.3 NA NA Materials 16.2 16.1 19.3 12.5 9.5 20.8 NA NA 16.0 14.6 22.8 17.3 Telecommunication Services 10.6 11.0 10.4 10.3 14.5 9.2 9.8 11.8 12.7 13.6 12.5 11.3 Utilities 13.9 26.1 NA NA NA NA NA 9.6 10.3 8.9 NA 12.4 Market Aggregate 10.5 8.8 11.8 10.2 14.8 8.8 11.0 10.6 14.1 13.5 15.1 15.1 Sector Neutral** 11.3 11.4 11.4 11.7 13.2 10.2 12.0 12.7 13.8 13.7 14.3 13.8 Source: IBES, MSCI, J.P. Morgan. Note: Market forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using I/B/E/S estimates. IBES Estimates are not available for Morocco, Jordan, Peru and Colombia. **Sector neutral PE are calculated by using sector weights of MSCI EM and sector PE of respective markets (MSCI EM sector PE used where country sector does not exist) Updated 30 November 2009.

381



Value: Distribution Tables for PE, PBR, DY and RoE 2009E: Price to Earnings Ratio (x) 2009E: Price to Book Value Ratio (x)

Weighted Quartiles Weighted Quartiles Average Min Lower Median Higher Max Average Min Lower Median Higher Max Global* 13.5 1.7 12.8 16.7 23.6 518 Global* 1.8 0.2 1.1 1.8 2.8 202 USA* 17.5 4.2 13.0 16.5 23.3 518 USA* 1.7 0.4 1.3 2.0 3.2 41.9 Europe* 12.6 3.7 12.0 15.2 20.0 223 Europe* 1.3 0.4 1.1 1.8 2.9 202 Japan* 12.0 4.4 17.0 23.5 34.4 450 Japan* 1.0 0.3 0.8 1.1 1.4 12.1 Emerging Markets* 15.1 1.7 12.0 16.5 23.0 319 Emerging Markets* 2.0 0.2 1.4 2.0 3.1 135.8 China 18.9 5.3 14.4 18.8 26.9 164.8 China 2.8 0.8 1.6 2.2 3.7 135.8 Brazil* 14.7 5.5 11.5 16.7 24.0 183.9 Brazil* 2.4 0.3 1.5 2.2 3.8 39.6 Korea 20.3 3.7 8.6 11.6 17.7 65 Korea 1.6 0.5 1.0 1.3 1.9 14.3 Taiwan 33.6 7.3 13.9 18.7 28.9 145.5 Taiwan 2.0 0.7 1.2 1.7 2.6 8.2 South Africa* 12.9 6.1 11.0 12.2 15.4 112 South Africa* 2.2 0.6 1.7 2.4 4.4 16.4 India 18.9 6.1 14.8 21.2 27.2 123.4 India 3.1 0.7 2.0 2.8 4.7 25.9 Russia* 7.6 1.7 8.6 13.4 22.4 318.7 Russia* 1.2 0.2 1.0 1.8 2.7 7.3 Mexico* 19.7 9.6 13.5 18.6 24.2 78 Mexico* 1.1 0.7 1.8 2.4 3.6 6.8 Israel* 14.4 5.3 11.8 15.1 18.5 31.1 Israel* 1.5 0.8 1.1 2.4 4.5 26.9 Malaysia 18.0 7.1 14.0 15.7 20.4 48.9 Malaysia 2.0 0.8 1.4 1.8 2.4 26.1 Chile* 14.6 9.8 12.5 19.0 28.2 37.6 Chile* 1.5 0.5 1.4 1.7 2.8 4.7 Indonesia 16.6 7.4 14.3 18.4 21.4 48.8 Indonesia 4.2 1.5 2.5 3.5 4.8 24.2 Turkey* 10.3 7.2 8.2 10.1 17.6 23.7 Turkey* 1.8 0.6 1.0 1.5 2.1 11.7 Thailand 15.7 7.0 10.7 13.3 17.0 23.0 Thailand 1.8 0.9 1.1 1.5 2.7 6.5 Poland* 11.0 9.1 15.3 18.5 21.0 59.6 Poland* 1.7 0.6 1.2 1.6 2.3 11.4 Czech Republic* 10.4 9.2 10.8 12.3 12.9 13.4 Czech Republic* 2.5 1.9 2.1 2.2 2.2 2.3 Egypt* 9.1 8.0 9.6 10.6 14.9 20.8 Egypt* 2.5 0.5 1.4 2.4 3.0 5.7 Philippines 21.1 8.9 12.6 17.5 20.4 42.1 Philippines 2.6 1.2 1.7 2.4 3.1 4.4 Hungary* 7.4 9.8 10.3 13.5 16.9 18.2 Hungary* 1.6 1.2 1.3 1.4 1.7 2.1

2009E: Dividend Yield (%) 2009E: Return on Equity (%) Weighted Quartiles Weighted Quartiles

Average Min Lower Median Higher Max Average Min Lower Median Higher Max Global* 3.0 0.0 0.9 1.9 3.3 15.0 Global* 13.2 -10.5 5.2 10.9 17.6 4461 USA* 2.9 0.0 0.1 1.5 3.0 15.0 USA* 13.2 0.4 7.2 12.3 19.2 288 Europe* 5.4 0.0 1.5 2.8 4.2 12.5 Europe* 16.9 0.3 6.7 11.3 18.2 1066 Japan* 2.8 0.0 1.2 1.7 2.5 5.4 Japan* 8.2 0.2 -0.6 3.4 6.6 26.8 Emerging Markets* 2.1 0.0 0.8 1.7 3.1 13.4 Emerging Markets* 12.9 -10.5 7.8 12.9 19.8 4461 China 2.1 0.0 0.7 1.5 2.1 7.1 China 15.0 1.4 8.5 12.8 18.2 525.3 Brazil* 3.0 0.0 1.4 2.6 4.5 13.4 Brazil* 17.4 1.5 8.3 13.5 23.1 271 Korea 1.1 0.0 0.5 1.1 2.0 11.6 Korea 7.9 1.2 8.0 12.4 17.4 40.2 Taiwan 3.7 0.0 0.9 2.5 3.7 12.0 Taiwan 5.5 1.3 2.3 7.7 14.6 45 South Africa* 3.5 0.0 2.2 3.6 4.6 9.0 South Africa* 17.5 -5.1 12.0 16.5 28.1 115 India 1.1 0.0 0.4 1.0 1.3 3.3 India 17.5 1.2 11.2 16.4 20.3 97 Russia* 0.7 0.0 0.3 0.9 2.3 4.8 Russia* 15.4 -10.5 5.6 11.2 18.1 36.3 Mexico* 2.0 0.0 0.7 1.2 2.9 7.4 Mexico* 8.3 1.3 10.5 13.2 17.3 50.0 Israel* 4.8 0.0 0.0 1.0 2.5 9.4 Israel* 10.6 4.1 6.7 13.8 26.1 256 Malaysia 3.0 0.0 1.7 2.3 3.9 8.2 Malaysia 11.5 4.7 8.9 11.1 16.2 166 Chile* 2.3 0.0 1.1 1.3 1.9 6.8 Chile* 12.5 2.8 5.1 6.9 12.6 20.6 Indonesia 2.7 0.0 1.5 2.3 3.1 4.7 Indonesia 27.1 4.7 13.1 21.8 30.2 76.5 Turkey* 3.9 0.0 0.2 1.5 2.6 10.3 Turkey* 16.5 -0.5 7.3 16.1 19.9 50.9 Thailand 3.6 0.0 2.7 3.3 4.8 7.8 Thailand 11.7 4.4 9.8 13.7 19.7 38.2 Poland* 5.1 0.0 0.0 1.3 3.3 9.2 Poland* 14.6 2.0 5.5 8.7 12.6 69 Czech Republic* 6.0 4.0 5.0 6.0 8.3 10.6 Czech Republic* 21.5 15.7 16.3 17.0 20.5 24.0 Egypt* 22.3 0.0 1.7 3.0 5.6 8.3 Egypt* 13.6 6.7 9.8 17.3 27.6 56.7 Philippines 3.4 0.5 1.5 2.2 3.1 11.3 Philippines 12.2 7.0 8.0 12.4 18.2 37.0 Hungary* 2.7 0.4 1.1 1.4 3.5 9.6 Hungary* 22.2 6.9 10.9 12.4 13.4 15.7

Source: Datastream, IBES, MSCI, J.P. Morgan. Updated 30 November 2009. Note: Weighted average numbers based on aggregate of MSCI constituents. Consensus numbers are used for stocks not covered by J.P. Morgan. * only consensus numbers are used

382



Value: Demand Classification: MSCI Emerging Markets Index Composition by Countries MSCI Emerging

Markets Free Index Domestic Demand

Global Capex Global Consumer

Global Price Takers

Total

China 13.6 0.4 0.2 4.1 18.3 India 4.0 1.2 0.0 2.3 7.5 Indonesia 1.5 0.0 0.0 0.2 1.8 Korea 5.6 2.1 2.9 2.1 12.6 Malaysia 2.1 0.0 0.0 0.6 2.7 Philippines 0.4 0.0 0.0 0.0 0.4 Taiwan 3.2 3.4 3.2 1.3 11.1 Thailand 0.8 0.0 0.0 0.4 1.2 Asia 31.1 7.1 6.4 11.1 55.7 Czech Republic 0.4 0.0 0.0 0.0 0.4 Egypt 0.5 0.0 0.0 0.0 0.5 Hungary 0.3 0.0 0.0 0.2 0.6 Israel 0.9 0.2 0.0 1.5 2.7 Morocco 0.3 0.0 0.0 0.0 0.3 Poland 1.0 0.0 0.0 0.2 1.3 Russia 1.7 0.0 0.0 4.8 6.5 South Africa 4.3 0.0 0.0 2.7 7.0 Turkey 1.3 0.0 0.0 0.0 1.3 EMEA 10.7 0.3 0.1 9.5 20.6 Brazil 7.6 0.0 0.0 9.0 16.7 Chile 1.3 0.0 0.0 0.1 1.3 Colombia 0.4 0.0 0.0 0.2 0.6 Mexico 3.8 0.3 0.0 0.4 4.5 Peru 0.2 0.0 0.0 0.5 0.7 LatAm 13.2 0.4 0.0 10.1 23.7 Total 55.1 7.8 6.5 30.7 100.0

EM Domestic Demand Sector Absolute and relative (vs EMF) Index

050

100150200250300350400

Jan-90 Jul-92 Jan-95 Jul-97 Jan-00 Jul-02 Jan-05 Jul-0740

50

60

70

80

90

100

Absolute (lhs)

Relative to EM (rhs)

EM Global Capex Sector Absolute and relative (vs EMF) Index

0

200

400

600

800

1000

1200


100

200

300

400

500Absolute (lhs)


EM Global Consumer Sector Absolute and relative (vs EMF) Index

0100200300400500600700800


50

100

150

200

250

300Absolute (lhs)


EM Global Price Taker Sector Absolute and relative (vs EMF) Index

050

100150200250300350400450


30

50

70

90

110Absolute (lhs)


Source: Datastream, MSCI. J.P. Morgan. MSCI emerging markets companies have been classified in five categories. Of the five categories, Global Consumer/Capex (Tech-Hardware) weighting equally divided between Global consumer and Global Capex. The above table contains MSCI free float market capitalization as a percentage of MSCI emerging markets. Charts show the relative absolute and relative performance of emerging markets sectors by demand classification. Updated 30 November 2009.

383



Value: Equities relative to Bonds Relative out performance of equities versus bonds by country (%)

Country 1-month 3-month 6-month 12-month 36-month 36-month annualized

Brazil 6.6 15.1 16.5 30.5 40.7 12.1 Chile -0.3 4.0 2.9 28.2 32.6 9.9 China 1.9 13.9 24.2 78.8 48.0 14.0 Colombia 0.3 -4.0 15.8 24.9 35.2 10.6 Czech -1.3 -7.1 5.1 13.9 -3.6 -1.2 Hungary 0.9 2.8 26.7 44.7 -23.8 -8.7 India 5.8 8.1 19.8 94.4 21.1 6.6 Indonesia 1.9 -0.9 27.2 64.9 46.6 13.6 Malaysia 0.0 5.5 20.1 48.4 23.5 7.3 Mexico 6.7 5.5 24.9 39.5 13.0 4.1 Peru 11.9 24.1 36.5 82.9 104.5 26.9 Poland 3.9 9.1 37.6 34.6 -21.9 -7.9 Russia 1.0 4.0 -2.7 46.9 -46.2 -18.7 South Africa 0.1 2.4 9.1 22.2 16.2 5.1 Thailand -0.8 4.6 20.7 73.6 -1.4 -0.5 Turkey -5.7 -8.3 13.5 35.4 -1.6 -0.5

Relative value of equities versus bonds by country

Country Generic 10

years

Bond Maturity (years)

Bond Yield To Maturity

Earnings Yield

Dividend Yield

DDM Implied Growth

Brazil 12.3 12.0 10.0 7.4 2.8 13.3 Chile 5.3 6.0 3.1 6.6 2.3 7.0 China 3.7 7.2 3.3 6.9 2.6 5.5 Colombia 8.0 10.8 7.3 8.0 4.1 7.9 Czech 4.1 6.4 3.9 9.4 6.4 2.1 Hungary 7.5 5.2 7.2 9.1 2.6 8.7 India 7.6 8.8 7.5 6.7 1.2 10.5 Indonesia 10.2 11.2 10.3 7.0 3.2 11.5 Malaysia 4.2 5.5 3.9 6.3 3.1 5.2 Mexico 7.9 7.8 7.6 6.6 2.5 9.9 Peru 5.8 15.6 5.8 11.2 5.5 4.3 Poland 6.2 5.1 5.7 6.8 3.4 5.0 Russia 5.0 2.9 8.0 11.4 1.7 8.3 South Africa 9.2 10.1 8.9 8.5 3.3 9.7 Thailand 4.3 7.0 4.0 8.9 3.8 4.7 Turkey 9.8 2.1 9.0 11.3 3.5 9.9

Source: Bloomberg, J.P. Morgan, DataStream, MSCI, IBES Note: GBI-EM Bond Maturity and Yield to Maturity are used for each country. Updated 30 November 2009.

384



Economic Forecasts: Changes in Real GDP Forecasts Real GDP Growth (% Y/Y) Change in Forecasts Past 3 months (%) Economic Momentum Inflation

JPM Consensus JPM Consensus GDP SAAR (% Y/Y) 2009E 2010E 2009E 2010E 2009E 2010E 2009E 2010E 2Q 09E 3Q 09E 4Q 09E 1Q 10E 2009E 2010E US -2.5 3.2 -2.4 2.6 -0.1 0.0 0.2 0.3 2.8 3.5 3.0 4.0 -0.4 1.7 Euro -3.9 2.5 -3.9 1.2 -0.3 -0.2 0.1 0.3 1.5 2.5 3.0 3.0 0.2 1.0 Japan -5.2 2.4 -5.7 1.2 0.0 0.2 0.3 0.4 4.8 2.5 2.5 1.5 -1.3 -1.6 China 8.6 9.5 8.3 9.5 0.2 0.5 0.0 0.1 10.0 9.1 9.0 9.5 -0.6 3.0 Brazil 0.3 5.0 -0.4 3.8 0.7 0.5 -0.3 0.1 7.2 6.7 4.3 5.0 5.1 4.5 S Korea 0.2 4.7 -1.6 3.7 1.0 0.7 0.0 0.0 12.3 4.0 2.0 3.5 2.8 3.1 Taiwan -3.0 5.8 -4.4 4.6 0.7 0.4 0.1 0.4 8.3 6.0 3.8 5.0 -0.8 1.6 South Africa -2.0 3.0 -2.0 2.3 0.0 0.5 -0.1 0.0 0.5 3.4 4.4 3.8 7.2 4.8 India 6.0 7.5 7.2 na -0.2 0.3 0.0 na 9.0 -1.0 10.0 7.0 10.8 6.5 Russia -8.5 5.0 -7.7 3.0 0.0 0.0 0.2 0.5 7.9 6.5 4.5 4.0 11.8 7.5 Mexico -7.0 3.5 -7.0 2.9 -0.5 -1.5 0.0 0.3 12.2 7.5 3.7 -0.6 5.4 4.8 Israel 0.0 3.0 5.5 5.5 na na 0.0 0.0 2.2 2.5 3.0 3.0 na na Malaysia -2.4 5.0 -2.8 4.5 0.6 0.6 -0.7 1.5 9.4 4.5 1.6 4.9 0.2 0.8 Chile -1.5 5.0 -1.4 4.0 0.0 0.7 -0.3 0.2 4.6 10.0 6.0 4.0 2.0 2.0 Indonesia 4.3 5.3 4.4 5.6 0.2 0.3 0.4 0.3 5.3 3.5 5.5 6.0 4.9 5.2 Turkey -5.3 5.0 -5.7 3.6 -0.6 2.0 0.1 -0.2 - - - - 6.1 5.7 Thailand -3.1 6.1 -3.8 3.0 -0.1 0.1 -0.2 -0.3 5.5 5.3 4.9 5.7 -0.9 4.0 Poland 1.7 3.2 1.2 2.0 0.7 0.7 0.7 0.0 5.5 3.0 2.5 3.0 3.5 2.3 Czech Republic -4.0 2.5 -1.5 2.0 -1.0 0.5 1.0 0.0 3.2 5.0 2.8 2.5 1.1 2.6 Peru 1.0 5.4 1.1 4.2 0.0 0.0 -0.6 0.3 8.0 13.0 3.0 3.5 3.1 1.7 Egypt na na na na na na na na na na na na na na Colombia -0.5 3.0 0.1 2.5 0.0 0.0 0.6 0.0 1.9 3.2 3.5 4.3 4.5 4.0 Philippines 1.5 5.0 2.1 4.1 0.1 0.0 0.0 0.0 4.1 4.0 5.0 5.0 2.0 3.5 Hungary -6.5 1.0 -6.3 0.0 -0.5 1.5 -0.1 0.5 -7.0 3.5 3.0 2.5 4.2 3.5 Morocco na na 4.4 na na na na na na na na na na na

2009E GDP growth: JPM minus Consensus Change in consensus forecasts for 2009E GDP over last 3 months (%)

-4.0

-2.0

0.0

2.0

S Ko

rea

Taiw

an

Braz

il

Thail

and

Polan

d

Malay

sia

Turke

y

China

Mexic

o SA

Indon

esia

Peru

Chile

Hung

ary

Philip

pines

Colom

bia

Russ

ia

India

Czec

h

-5.0

-3.0

-1.0

1.0

Czec

h

Polan

d

Colom

bia

Indon

esia

Russ

ia

Turke

y

Taiw

an

China Ind

ia

Philip

pines

S Ko

rea

Mexic

o

Hung

ary SA

Thail

and

Braz

il

Chile

Peru

Malay

sia

Source: Bloomberg, J.P. Morgan estimates. Updated 30 November 2009. Note: Consensus estimates for Jordan, Egypt, Pakistan and Israel sourced from WES and Morocco from EIU.

385



Economic Forecasts: Policy Rate Trend and Forecasts Policy Rate Country Official interest rate 1Q'09 2Q'09 3Q'09 Current 4Q'09F 1Q'10F 2Q'10F 3Q'10F Last Change Next Change Developed Markets United States Federal funds rate 0.13 0.13 0.13 0.125 0.125 0.125 0.125 0.125 16 Dec 08 (-87.5bp) on hold Euro Area Refi Rate 1.50 1.00 1.00 1.00 1.00 1.00 1.00 1.00 7 May 09 (-25bp) on hold Japan Overnight Call Rate 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 19 Dec 08 (-20bp) on hold Latin America Brazil SELIC overnight rate 11.25 9.25 8.75 8.75 8.75 9.75 10.75 10.75 22 Jul 09 (-50bp) Jan 10 (+50bp) Mexico Repo rate 6.75 4.75 4.50 4.50 4.50 4.50 4.75 5.25 17 Jul 09 (-25bp) Jun 10 (+25bp) Chile Discount rate 2.25 0.75 0.50 0.50 0.50 0.50 1.00 1.75 9 Jul 09 (-25bp) 2Q 10 (+50bp) Europe, Middle East and Africa Czech Republic 2-week repo rate 1.75 1.50 1.25 1.25 1.25 1.25 1.75 2.50 6 Aug 09 (-25bp) 2Q 10 (+25bp) Hungary 2-week deposit rate 9.50 9.50 8.00 6.50 6.00 5.50 5.50 5.50 23 Nov 09 (-50bp) 21 Dec 09 (-50bp) Poland 7-day intervention rate 3.75 3.50 3.50 3.50 3.50 3.50 3.50 4.00 24 Jun 09 (-25bp) 3Q 10 (+25bp) Russia 1-week deposit rate 8.25 6.75 5.75 4.25 4.00 3.50 3.00 3.00 24 Nov 09 (-50bp) Dec 09 (-25bp) South Africa Repo rate 9.50 7.50 7.00 7.00 7.00 7.00 7.00 7.00 13 Aug 09 (-50bp) 4Q 10 (+50bp) Turkey O/n borrowing rate 10.50 8.75 7.25 6.50 6.50 6.50 6.50 7.50 19 Nov 09 (-25bp) 3Q 10 (+50bp) EM Asia China 1-year working capital 5.31 5.31 5.31 5.31 5.31 5.31 5.31 5.58 22 Dec 08 (-27bp) 3Q 10 (+27bp) Korea Overnight call rate 2.00 2.00 2.00 2.00 2.00 2.25 2.50 2.75 12 Feb 09 (-50bp) 1Q 10 (+25bp) Indonesia BI rate 7.75 7.00 6.50 6.50 6.50 6.50 6.50 6.50 5 Aug 09 (-25bp) on hold India Repo rate 5.00 4.75 4.75 4.75 4.75 5.00 5.25 5.25 21 Apr 09 (-25bp) 1Q 10 (+25bp) Malaysia Overnight policy rate 2.00 2.00 2.00 2.00 2.00 2.00 2.25 2.50 24 Feb 09 (-50bp) 2Q 10 (+25bp) Philippines Reverse repo rate 4.75 4.25 4.00 4.00 4.00 4.00 4.00 4.00 9 Jul 09 (-25bp) 4Q 10 (+25bp) Thailand 1-day repo rate 1.50 1.25 1.25 1.25 1.25 1.25 1.50 1.75 8 Apr 09 (-25bp) 2Q 10 (+25bp) Taiwan Official discount rate 1.25 1.25 1.25 1.25 1.25 1.25 1.25 1.25 18 Feb 09 (-25bp) 4Q 10 (+12.5bp)

Change in policy rates

-1150 -1050 -950 -850 -750 -650 -550 -450 -350 -250 -150 -50 50 150 250 350

RussiaJapan

PolandMalaysia

ChinaHungary

IndonesiaTaiwan

ThailandPhilippine

CzechMexico

BrazilS Africa

KoreaIndiaEU

ChileUSA

Turkey

Change from Aug 07

Forecast change from now to Q4 09

Emerging Markets policy rate

-2

2

6

10

14

18

22

98 99 00 01 02 03 04 05 06 07 08 09

Nominal Policy Rates

Real Rates

Source: J.P. Morgan Economics, Bloomberg. Bold figures on next column indicate tightening. Updated 30 November 2009.

386



Economic Forecasts: Currency Movements and Forecasts Euro (EUR) Japanese Yen (JPY) ) South Korean Won (KRW) Taiwan Dollar (TWD) Chinese Yuan Renminbi (CNY) Brazilian Real (BRL)

1.12

1.22

1.32

1.42

1.52

1.62

Dec 04 Jun 06 Nov 07 Apr 09 Sep 10

J.P.Morgan forecast:end Dec 09: 1.50end Mar 10: 1.55end Jun 10: 1.62 Consensus

J.P. Morgan

8084889296

100104108112116120124


J.P. Morgan

Consensus

J.P. Morgan forecast:end Dec 09: 89end Mar 10: 85end Jun 10: 82 900

1,000

1,100

1,200

1,300

1,400

1,500

1,600


Consensus


J.P. Morgan

Source:

293031323334353637


Consensus

J.P. Morgan

J.P.Morgan forecast:end Dec 09: 31.0end Mar 10: 31end Jun 10: 30.5

6.0

6.4

6.8

7.2

7.6

8.0

8.4


J.P. Morgan

ConsensusJ.P.Morgan forecast:end Dec 09: 6.75end Mar 10: 6.75end Jun 10: 6.70

1.5

1.71.9

2.1

2.3

2.52.7

2.9


Consensus

J.P. Morgan


Russian Rouble (RUB) South African Rand (ZAR) Mexican Peso (MXN) Indian Rupee (INR) Malaysian Ringgit (MYR) Israeli New Shekel (ILS)

23

27

31

35

39

43


Consensus

J.P.Morgan forecast:end Dec 09: 28.16end Mar 10: 26.85end Jun 10: 25.41

J.P. Morgan

5.06.07.08.09.0

10.011.012.013.014.0


Consensus

J.P.Morgan


9.710.310.911.512.112.713.313.914.515.115.7


J.P. Morgan

ConsensusJ.P.Morgan forecast:end Dec 09: 13.00end Mar 10: 12.80end Jun 10: 12.50

38.540.542.544.546.548.550.552.5



Consensus

J.P. Morgan3.13.23.33.43.53.63.73.83.94.0


J.P. Morgan

Consensus


3.13.33.53.73.94.14.34.54.7


Consensus

J.P. Morgan


Polish Zloty (PLN) Chilean Peso (CLP) Turkish Lira (TRL) Thai Baht (THB) Indonesian Rupiah (IDR) Hungarian Forint (HUF)

1.92.12.32.52.72.93.13.33.53.73.9


J.P. Morgan


Consensus

425

475

525

575

625

675

725


J.P. Morgan

Consensus

J.P.Morgan forecast:end Dec 09: 550end Mar 10: 475end Jun 10: 490

1.11.21.31.41.51.61.71.81.92.0



Consensus

J.P.Morgan

283032343638404244


Consensus

J.P. Morgan


8,500

9,500

10,500

11,500

12,500

13,500


Consensus

J.P. Morgan


140153166179192205218231244257270



J.P. Morgan

Consensus

Czech Koruna (CZK) Peruvian Nuevo Sol (PEN) Philippine Peso (PHP) Colombian Peso (COP)

14

16

18

20

22

24

26


Consensus

J.P. Morgan


2.5

2.8

3.0

3.3

3.5

3.8


J.P. Morgan

Consensus


36

40

44

48

52

56

60


Consensus

J.P. Morgan


1,600

1,800

2,000

2,200

2,400

2,600


J.P. Morgan


Consensus

Expected % Gain vs USD till December 2009 (JPM) Expected % Loss vs USD till December 2009 (JPM)

0

2

4

6

8

10

TRL

RUB

HUF

ILS

IDR

TWD

INR

KRW

PHP

CZK

ZAR

PLN

MYR CN

Y

THB

Source: Datastream, J.P. Morgan estimates

-10

-8

-6

-4

-2

0

EUR

MXN COP

BRL

JPY

ARS

CLP

Source: Datastream, J.P. Morgan estimates

Source: Bloomberg, Datastream, J.P. Morgan estimates. Updated 30 November 2009.

387



Economic Forecasts: Credit Risk External (2009E) Fiscal Position Sovereign Ratings (Long Term Foreign Debt) Foreign Current Account External Debt Fiscal Deficit Public Sector Debt Reserves 2009F** 2010F** 2009F** 2009F** 2009F** 2010F** 2009F** 2010F** Moody’s S & P (US$bil) % GDP % GDP (US$bil) %GDP % GDP % GDP % GDP % GDP Rating Action Date Rating Action Date China 2132 6.8 6.7 388 8.1 -3.3 -2.1 20.3 20.4 A1 Upgrade, O/L stable Jul-26-07 A+ Upgrade, O/L stable Jul-31-08

Brazil 216 -1.6 -2.4 267 17.0 -2.7 -2.5 56.1 56.9 Baa3 (+) Upgrade, O/L (+) Sep-22-09 BBB- Upgrade, O/L stable Apr-30-08

Korea 245 4.1 1.6 372 47.5 -2.7 -2.0 42.6 42.7 A2 Affirmed, O/L stable Oct-17-08 A Affirmed, O/L stable Oct-17-08 Taiwan 325 8.9 7.7 64 19.5 -3.6 -3.0 na na Aa3 Affirmed, O/L stable Jan-24-02 AA- O/L changed to (-), Affirmed Apr-14-09 South Africa 34 -4.7 -4.8 73 25.9 -7.4 -6.4 30.9 32.8 A3

Upgrade, O/L changed to stable Jul-16-09 BBB+ O/L changed to (-), Affirmed Nov-11-08

India 261 -2.5 -2.6 224 18.0 -7.3 -6.8 57.0 58.3 Baa3 Upgrade, O/L stable Jan-22-04 BBB- O/L changed to (-), Affirmed Feb-24-09 Russia 392 4.5 4.9 442 35.7 -6.6 -4.8 6.2 7.3 Baa1

O/L changed to stable, Affirmed Dec-12-08 BBB Downgrade, O/L (-) Dec-08-08

Mexico 76 -1.3 -0.9 196 22.2 -2.1 -2.5 34.8 33.4 Baa1 Upgrade, O/L stable Jan-06-05 BBB+ O/L (-), Affirmed May-11-09 Israel* 26 2.1 na na na na na na na A1 Upgrade, O/L stable Apr-17-08 A O/L changed to stable, Affirmed Oct-30-08 Malaysia 93 15.4 16.9 75 35.7 -7.1 -5.5 44.0 42.6 A3 Upgrade, O/L stable Dec-16-04 A- O/L changed to stable, Affirmed May-15-08 Chile 25 -1.1 -2.2 65 41.7 -4.5 -1.5 10.8 9.5 A1 Upgrade, O/L (+) Mar-23-09 A+ Affirmed, O/L stable Dec-17-08 Indonesia 58 1.1 0.9 133 24.3 -2.4 -1.5 42.9 39.0 Ba2 Upgrade, O/L stable Sep-16-09 BB- Affirmed, O/L stable Nov-07-08 Poland 76 0.3 -2.0 247 58.7 -5.6 -5.5 54.2 53.0 A2 Affirmed, O/L stable Sep-18-03 A- O/L changed to stable, Affirmed Oct-27-08 Turkey 66 -1.3 -2.0 265 43.3 -5.8 -2.2 49.3 47.4 Ba3 O/L changed to (+), Affirmed Sep-18-09 BB- O/L changed to stable, Affirmed Sep-17-09 Thailand 123 4.9 1.6 70 26.6 -3.9 -5.6 24.6 23.0 Baa1 O/L changed to (-), Affirmed Dec-04-08 BBB+ Affirmed, O/L (-) Apr-14-09

Czech Rep 39 -3.0 -2.5 78 39.1 -6.0 -4.0 34.9 36.5 A1 O/L changed to stable, Affirmed Dec-08-08 A Affirmed, O/L stable Nov-27-08

Peru 32 -3.4 -3.4 32 24.4 -2.3 -1.5 25.9 23.8 Ba1 Review (+) Sep-29-09 BBB- Upgrade, O/L stable Jul-14-08

Egypt* 17 -0.4 na na na na na na na Ba1 O/L changed to stable, Affirmed Aug-19-09 BB+ Affirmed, O/L stable Dec-10-07

Colombia 25 -2.7 -2.3 49 21.8 -2.5 -3.5 45.0 43.6 Ba1 Upgrade, O/L stable Jun-19-08 BB+ Affirmed, O/L stable Feb-25-08 Philippines 41 3.6 1.7 61 37.6 -3.2 -2.5 64.5 62.2 Ba3 Upgrade, O/L changed stable Jul-23-09 BB- Affirmed, O/L stable Apr-18-08 Hungary 43 -3.0 -3.0 173 135.2 -3.9 -3.8 86.6 82.1 Baa1 Downgrade, O/L (-) Mar-31-09 BBB- O/L changed to stable, Affirmed Oct-2-09 Morocco* 14 -0.9 na na na na na na na Ba1 O/L changed to stable Jun-18-03 BB+ O/L changed to stable, Affirmed Apr-11-08 EM Asia 3289 6.2 5.3 1385 17.0 - - 32.0 31.7 - - - - - - EMEurope 679 -0.9 -0.8 1206 49.7 - - 30.2 31.2 - - - - - - Lat Am 419 -1.7 -1.4 827 23.9 - - 42.1 41.7 - - - - - -

EMBI Global Spreads and Yields EMBI Asia Spreads and Yields EMBI Europe Spreads and Yields EMBI Latin America Spreads and Yields

100200300400500600700800900

1000

Nov -07 Jul-08 Apr-095.0

6.07.0

8.0

9.0

10.011.0

12.0

Spread (L) Yield

100200300400500600700800900

Nov -07 Jul-08 Apr-095

6

7

8

9

10

11

12

Spread (L) Yield

100200300400500600700800900

1000

Nov -07 Jul-08 Apr-095.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

Spread (L) Yield

100200300400500600700800900

1000

Nov -07 Jul-08 Apr-096.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

Spread (L) Yield

Source: Bloomberg, J.P. Morgan. Source: CEIC, JP Morgan estimates, Moody's, Standard & Poor's, Bloomberg * Data from World Economic Outlook for April 2006 for Current Account data, ** F denotes forecast Note: Forex reserves as of 31 August 2009 or latest available data. Updated 30 November 2009

388



Perspective: Emerging Markets Balance Sheets

No. of Companies Debt/Equity Debt/Assets Debt/Market. Cap Asset Turnover Current Ratio Interest Coverage Altman Z Score China 87 0.53 0.26 0.89 0.79 1.02 8.1 4.9 Brazil 61 0.61 0.28 0.92 0.55 1.57 7.3 2.8 Korea 80 0.40 0.20 0.36 0.89 1.12 6.6 3.3 Taiwan 83 0.29 0.18 0.21 0.97 1.49 12.5 4.9 South Africa 33 0.43 0.20 0.20 0.88 1.26 10.0 4.5 India 51 0.46 0.24 0.17 0.75 1.66 11.5 18.1 Russia 25 0.15 0.10 0.70 0.60 3.52 57.8 8.0 Mexico 22 0.68 0.29 0.62 0.66 1.08 6.4 3.7 Israel 17 1.31 0.41 0.27 0.47 1.20 2.0 3.1 Malaysia 32 0.72 0.34 0.51 0.46 1.72 4.8 4.1 Chile 13 0.59 0.32 0.38 0.53 1.29 4.2 2.8 Indonesia 15 0.58 0.28 0.22 0.88 1.65 13.0 5.6 Turkey 15 0.67 0.27 0.74 1.14 1.58 12.3 5.4 Thailand 16 0.67 0.33 0.51 1.47 1.41 7.1 4.3 Poland 13 0.45 0.23 0.67 1.05 1.67 13.2 5.7 Czech Rep 4 0.37 0.18 0.22 0.56 1.35 7.1 3.4 Peru 3 0.41 0.24 0.07 0.61 1.63 13.3 4.8 Egypt 9 0.73 0.31 0.27 0.64 1.07 5.2 2.9 Colombia 4 0.30 0.19 0.24 0.37 1.31 7.7 12.0 Philippines 9 0.65 0.27 0.30 0.61 1.14 6.9 2.5 Hungary 3 0.57 0.28 0.73 1.00 2.13 15.0 5.8 Morocco 4 0.55 0.24 0.12 0.71 1.26 20.8 5.0Debt to Equity Ratios Quartile Distribution Chart (x)

0

2

4

6

8

Kore

a

Sout

h Af

rica

Taiw

an

Braz

il

China

Mex

ico

Russ

ia

India

Mala

ysia

Isra

el

Thail

and

Chile

Turk

ey

Indo

nesia

Polan

d

Hung

ary

Czec

h Re

publi

c

Arge

ntina

Peru

Philip

pines

Egyp

t

Mor

occo

Colom

bia

Source: Datastream, Bloomberg, J.P. Morgan. Data as of 28 April 2009 Note: 1. All ratios are calculated from latest financial reports available ex Financial sector and calculations are based on weighted average of companies in the MSCI EMF universe. For Altman z-score, its application on company level is such that a score of less than 1.8 indicates bankruptcy likely, between 1.8-2.7 bankruptcy likely within 2 years and more than 3 most likely safe from bankruptcy. For market as a whole, the ratio is a weighted average of companies' z-score, thereby giving a general quality of companies in the market.2. For the debt to equity distribution chart, each box indicates quartile levels and markets with values exceeding the scale are indicated by the open-ended top box. The diamond indicates weighted average for each market. 3. Quartile Distribution Charts: each quartile is separated by a line, with the exception of the top quartile which is subdivided in order to show the top decile of companies, shaded in blue. Markets with values exceeding the scale are indicated by the open-ended top box. The diamond indicates the weighted mean for each market.

389



Perspective: Demographic and Key Economic Statistics Population and demographics Nominal GDP Real GDP Population## Age Gross 2009 10 year CAGR*** 10 year CAGR*** 2009 Growth Dependency Ratio* Enrollment Ratio US$ Per capita Total Per capita Total Per capita million %YoY Young Old Secondary** billion (US$) (%) (%) (%) (%) USA 307 1.0 na na 98 14,272 46,426 4.4 3.4 2.1 1.2 China 1345 0.6 0.3 0.1 73 4770 3539 17.0 16.2 9.7 8.9 Brazil# 191 1.2 0.4 0.1 102 1537 8033 10.1 8.7 3.6 2.2 India 141 -0.3 0.2 0.2 93 1271 9018 20.6 21.1 6.9 7.4 Russia# 1169 1.3 0.5 0.1 54 1257 1075 10.9 9.2 7.8 6.1 Mexico 110 1.0 0.5 0.1 80 864 7877 6.0 4.7 2.8 1.7 Korea 48 0.0 0.3 0.1 91 828 16884 6.2 5.7 6.0 5.6 Turkey 75 1.2 0.4 0.1 79 623 8331 13.1 11.2 4.7 3.1 Indonesia 230 1.2 0.4 0.1 64 542 2323 14.3 12.9 5.0 3.7 Poland 38 -0.1 0.2 0.2 97 432 11362 9.9 10.1 4.1 4.3 Taiwan 23 0.3 0.3 0.1 na 365 15817 2.4 2.0 2.7 2.3 South Africa 49 0.7 0.5 0.1 90 301 6202 8.5 7.4 4.1 3.0 Thailand 68 0.5 0.3 0.1 77 262 3849 7.8 6.8 3.9 2.9 Colombia 46 1.5 0.5 0.1 75 228 4997 10.2 9.2 4.4 2.7 Malaysia 10 0.1 0.2 0.2 96 216 20944 13.6 13.5 4.3 4.2 Egypt 28 2.0 0.5 0.1 76 209 7536 10.1 8.0 10.6 8.5 Czech Rep. 77 2.0 0.5 0.1 87 203 2652 8.5 6.3 5.1 3.0 Israel 7 2.2 0.4 0.2 93 198 27301 6.3 4.2 3.7 1.7 Philippines 92 1.8 0.6 0.1 86 164 1769 7.9 5.9 4.9 2.9 Chile 17 1.2 0.4 0.1 89 160 9403 8.2 6.8 4.3 3.1 Hungary 10 -0.1 0.2 0.2 97 142 14215 11.5 11.7 3.6 3.8 Peru 29 1.2 0.5 0.1 92 130 4463 9.7 7.9 5.7 4.0 Morocco 32 1.4 0.5 0.1 48 98 3064 9.4 8.0 4.9 3.8 MSCI EM 3,840 0.9 15,108 3,851 12.5 11.9

Source: CEIC, Datastream, Bloomberg, US Consensus Bureau, World Bank, UNESCO, J.P. Morgan estimates * Age dependency ratio defined as dependents to working-age population. ** Gross Enrollment Ratio is defined as pupils enrolled in a secondary level, regardless of age expressed as a percentage of the population in the relevant official age group *** 10-year CAGR for period 1998-2009, in local currency. # CAGR for period 1998-2009 ## Population data based on IMF estimate as on July 2007 Data for Gross enrollment data for 2004 except for Malaysia, Brazil and Argentina which is for 2003. Updated 30 November 2009.

390



Perspective: Global Emerging Capital Markets MSCI EMF Index Markets Concentration JPM EMBI Global

Total Market

Cap Estimated Free Float Companies

Average Daily

Turnover

% of Emerging

Market Trading Volume

Weighting in MSCI EMF

Stocks constituting

75% of Country Market Cap

Stocks constituting 75% of Country

Market Cap Market Cap Issues

US $ bn. (%) Number US $ mn. % (%) Number (%) US $ bn. Number China 1215 47 109 3719 19.6 18.3 9 17 7.0 8 Brazil 888 60 64 2569 13.5 16.8 16 20 49.5 23 Korea 615 65 98 3886 20.4 12.6 28 18 na na Taiwan 492 71 123 2196 11.5 11.1 31 24 na na South Africa 699 34 60 519 2.7 7.5 22 33 na na India 321 69 45 1024 5.4 7.0 17 40 4.3 4 Russia 630 32 28 2237 11.8 6.5 5 25 32.8 4 Mexico 239 59 23 334 1.8 4.4 7 26 49.5 29 Israel 118 72 17 271 1.4 2.7 10 59 na na Malaysia 191 44 41 180 0.9 2.7 20 59 9.1 7 Indonesia 129 43 19 240 1.3 1.8 10 47 5.7 5 Turkey 114 37 16 87 0.5 1.3 9 69 4.9 8 Thailand 133 31 22 701 3.7 1.3 11 55 22.0 14 Chile 90 45 18 188 1.0 1.3 7 28 3.4 3 Poland 108 35 22 332 1.7 1.2 14 64 na na Colombia 47 44 3 184 1.0 0.7 2 133 7.8 8 Peru 86 23 7 48 0.3 0.6 4 57 7.4 7 Hungary 27 69 4 120 0.6 0.6 2 75 1.4 1 Egypt 39 41 12 67 0.4 0.5 7 25 1.2 1 Czech Republic 43 33 3 78 0.4 0.4 3 100 na na Philippines 41 32 12 27 0.1 0.4 7 67 19.0 14 Morocco 38 23 6 9 0.0 0.3 4 83 0.7 1 Total 6303 50 752 19015 100 100 232 141

AC World Index Market Capitalization MSCI Regional Market Capitalization Top 8 versus Rest of Emerging Markets

North America46%

Japan8%

Emerging Markets

13%

Dev eloped Asia5% Dev eloped

Europe28%

EM Asia55%

EM Latin America

24%

EM Europe and Middle East

21%

Korea13%

Taiw an11%

South Africa7%

Russia6%India

8%Mex ico

4%

China18%

Brazil17%

Rest of EM16%

Source: MSCI, J.P. Morgan. Updated 30 November 2009.

391



Perspective: MSCI Emerging Market Index Composition by Countries and Sectors Number of Companies: 752 Total Market Capitalization (in billion US$): 6303 Estimated Free float : 50%

MSCI Emerging Markets Free Index

Cons

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China 0.8 0.7 3.3 7.2 0.0 1.6 1.0 1.0 2.3 0.3 18.3 Korea 1.4 0.7 0.3 2.3 0.1 1.9 3.5 1.8 0.4 0.3 12.6 Taiwan 0.3 0.2 0.1 1.7 0.4 6.6 1.4 0.5 11.1 India 0.4 0.4 1.3 1.9 0.3 0.7 1.2 0.8 0.1 0.5 7.5 Malaysia 0.3 0.4 0.0 0.8 0.5 0.0 0.2 0.3 2.7 Indonesia 0.2 0.1 0.2 0.5 0.1 0.1 0.3 0.2 1.8 Thailand 0.0 0.0 0.5 0.4 0.1 0.1 0.0 1.2 Philippines 0.0 0.2 0.0 0.1 0.1 0.4 Asia 3.5 2.6 5.7 15.2 0.4 5.1 12.3 5.3 4.0 1.6 55.6 South Africa 0.8 0.3 0.7 1.8 0.1 0.3 1.9 0.9 7.0 Russia 0.0 3.9 0.8 0.0 0.9 0.6 0.2 6.5 Israel 0.3 1.5 0.1 0.2 0.3 0.2 2.7 Poland 0.0 0.2 0.7 0.0 0.0 0.2 0.1 1.3 Turkey 0.0 0.1 0.1 0.7 0.1 0.0 0.2 1.3 Hungary 0.1 0.3 0.1 0.1 0.6 Egypt 0.2 0.1 0.0 0.1 0.5 Czech Republic 0.1 0.1 0.3 0.4 Morocco 0.1 0.0 0.1 0.3 EMEA 0.9 0.5 5.0 5.1 1.8 0.7 0.3 3.4 2.4 0.5 20.5 Brazil 0.4 1.2 4.6 3.7 0.3 0.3 4.8 0.7 0.9 16.8 Mexico 0.5 1.0 0.2 0.2 0.7 1.8 4.4 Chile 0.0 0.1 0.1 0.3 0.3 0.0 0.4 1.3 Peru 0.2 0.5 0.7 Colombia 0.2 0.3 0.1 0.1 0.6 LatAm 1.0 2.3 4.8 4.5 0.8 0.3 6.4 2.5 1.4 23.9 Total 5.3 5.4 15.5 24.7 2.2 6.6 12.9 15.0 8.9 3.5 100.0 Source: MSCI, J.P. Morgan. Updated as of 30 November 2009.

392



Top Picks AAC Acoustics ........................................................................................................110 ABSA Group Ltd .....................................................................................................112 Acer Inc. ..................................................................................................................114 Aldar Properties .......................................................................................................116 América Latina Logística (ALL) .............................................................................118 AMMB Holdings .....................................................................................................120 Amorepacific ...........................................................................................................122 Anglo Platinum........................................................................................................124 Astra International ...................................................................................................126 Asustek Computer....................................................................................................128 Ayala Land...............................................................................................................130 Baidu........................................................................................................................132 Bank Asya................................................................................................................134 Bank Central Asia....................................................................................................136 Bank of China – H ...................................................................................................138 Catcher Technology.................................................................................................140 China Airlines ..........................................................................................................142 China Mengniu Dairy ..............................................................................................144 China Yurun Food Group ........................................................................................146 Container Corporation of India Ltd. ........................................................................148 CP All Pcl ................................................................................................................150 CTC Media ..............................................................................................................152 DongFeng Motor Co., Ltd .......................................................................................154 Energy Development Corporation ...........................................................................156 Enersis......................................................................................................................158 Far Eastone Telecommunications ............................................................................160 FEMSA....................................................................................................................162 First Gulf Bank ........................................................................................................164 Fubon Financial Holdings........................................................................................166 Gazprom ..................................................................................................................168 Genting ....................................................................................................................170 Grupo Aeroportuario del Sureste .............................................................................172 Hon Hai Precision....................................................................................................174 Hyundai Motor Company ........................................................................................176 ICICI Bank...............................................................................................................178 Info Edge India ........................................................................................................180 Infosys Technologies ...............................................................................................182 JD Group..................................................................................................................184 Land & Houses ........................................................................................................186 Larsen & Toubro......................................................................................................188 LG Display...............................................................................................................190 Lojas Americanas ....................................................................................................192

393



LSR Group...............................................................................................................194 Magnit......................................................................................................................196 Manila Water ...........................................................................................................198 Maruti Suzuki India Ltd...........................................................................................200 MediaTek Inc...........................................................................................................202 Metropolitan Bank & Trust Co. ...............................................................................204 MindTree .................................................................................................................206 MMK .......................................................................................................................208 MTN ........................................................................................................................210 Nan Ya Plastics Corp...............................................................................................212 Naspers ....................................................................................................................214 Ncsoft.......................................................................................................................216 Northam Platinum....................................................................................................218 OGX Petróleo S.A. ..................................................................................................220 PDG Realty ..............................................................................................................222 Powertech Technology Inc. .....................................................................................224 PT Aneka Tambang Tbk..........................................................................................226 PT Perusahaan Gas Negara Tbk...............................................................................228 PTT Public Company...............................................................................................230 Public Bank (F)........................................................................................................232 Qatar Telecom..........................................................................................................234 Rosneft.....................................................................................................................236 RusHydro.................................................................................................................238 Samsung SDI ...........................................................................................................240 Santander Brasil .......................................................................................................242 Sberbank ..................................................................................................................244 Shinhan Financial Group .........................................................................................246 Siam Commercial Bank ...........................................................................................248 Sinopec Corp - H .....................................................................................................250 SK Energy Co Ltd....................................................................................................252 Sohu .........................................................................................................................254 Tambang Batubara Bukit Asam...............................................................................256 Tata Power ...............................................................................................................258 Tenaga Nasional ......................................................................................................260 Ternium S.A.............................................................................................................262 Thai Oil Public Company ........................................................................................264 TOTVS ....................................................................................................................266 TSMC ......................................................................................................................268 Turk Telekom ..........................................................................................................270 UMC ........................................................................................................................272 Unitech Ltd ..............................................................................................................274 United Spirits ...........................................................................................................276 Urbi ..........................................................................................................................278

394



Vakifbank ................................................................................................................280 VanceInfo Technologies ..........................................................................................282 Xinao Gas ................................................................................................................284 Yulon Motor ............................................................................................................286

Stocks to Avoid Açúcar Guarani ........................................................................................................290 AU Optronics...........................................................................................................292 Bank Rakyat Indonesia ............................................................................................294 Beijing Capital Land................................................................................................296 BYD Electronics ......................................................................................................298 China COSCO..........................................................................................................300 China Southern Airlines...........................................................................................302 China Unicom..........................................................................................................304 Compal Electronics, Inc...........................................................................................306 Datang International ................................................................................................308 Ecopetrol..................................................................................................................310 Grupo Aeroportuario del Pacifico............................................................................312 Grupo Modelo..........................................................................................................314 HCL Infosystems .....................................................................................................316 Hindustan Unilever ..................................................................................................318 Homex......................................................................................................................320 HTC Corp ................................................................................................................322 Idea Cellular.............................................................................................................324 Lukoil.......................................................................................................................326 Magyar Telekom......................................................................................................328 Manila Electric.........................................................................................................330 Massmart..................................................................................................................332 MISC-F ....................................................................................................................334 Nedbank...................................................................................................................336 New World China Land ...........................................................................................338 PetroChina - H .........................................................................................................340 Quanta Computer Inc...............................................................................................342 Redecard ..................................................................................................................344 Reliance Power ........................................................................................................346 SABESP...................................................................................................................348 Severstal...................................................................................................................350 S-Oil Corp................................................................................................................352 Soriana .....................................................................................................................354 Taishin Financial Holdings ......................................................................................356 Telmex SA ...............................................................................................................358 The9 .........................................................................................................................360

395



TMB Bank ...............................................................................................................362 Unilever Indonesia Tbk............................................................................................364 Usiminas ..................................................................................................................366 Weichai Power.........................................................................................................368 YTL Power ..............................................................................................................370

396



Companies Recommended in This Report (all prices in this report as of market close on 01 December 2009, unless otherwise indicated) AAC Acoustic (2018.HK/HK$11.78/Overweight), ABSA Group Ltd (ASAJ.J/12,770c/Overweight), Acer Inc (2353.TW/NT$82.60/Overweight), Aldar Properties (ALDR.AD/Dh4.47/Overweight), ALL (ALLL11.SA/R$15.45/Overweight), Almacenes Exito (IMI.CN/Col$18,400.00/Neutral), AMMB Holdings (AMMB.KL/M$4.90/Overweight), Amorepacific Corp (090430.KS/W847,000/Overweight), Anglo Platinum (AMSJ.J/75,700c/Overweight), Astra International (ASII.JK/Rp32,600/Overweight), ASUSTek Computer (2357.TW/NT$64.20/Overweight), AU Optronics (2409.TW/NT$34.35/Underweight), Ayala Land (ALI.PS/Php12.50/Overweight), Baidu.com (BIDU/$435.55/Overweight), Banco Santander (Brasil) S.A. (SANB11.SA/R$24.24/Overweight), Bancolombia (CIB/$43.87/Overweight), Bank Asya (ASYAB.IS/YTL3.14/Overweight), Bank Central Asia (BCA) (BBCA.JK/Rp4,925/Overweight), Bank of China - H (3988.HK/HK$4.44/Overweight), Bank Rakyat Indonesia (BBRI.JK/Rp7,600/Underweight), Beijing Capital Land (2868.HK/HK$3.98/Neutral), Braskem (BRKM5.SA/R$11.78/Neutral), BYD Electronic (0285.HK/HK$6.38/Underweight), Catcher Technology (2474.TW/NT$90.90/Overweight), Cencosud (CEN.SN/Ch$1,560.00/Underweight), China Airlines (2610.TW/NT$10.10/Overweight), China Cosco Holdings, Ltd. (1919.HK/HK$10.28/Neutral), China Mengniu Dairy Co. Ltd. (2319.HK/HK$24.90/Overweight), China Resources Power Holdings (0836.HK/HK$15.80/Neutral), China Southern Airlines (1055.HK/HK$2.78/Neutral), China Unicom (0762.HK/HK$10.42/Underweight), China Unicom (CHU/$13.61/Underweight), China Yurun Food Group (1068.HK/HK$19.14/Overweight), Compal Electronics, Inc. (2324.TW/NT$42.90/Underweight), Compania de Minas Buenaventura (BVN/$41.44/Neutral), Container Corporation of India Ltd (CCRI.BO/Rs1,199.55/Overweight), COPEL (CPLE6.SA/R$34.08/Overweight), COPEL (ELP/$20.14/Overweight), CP All Pcl (CPALL.BK/Bt21.60/Overweight), CPFL Energia (CPFE3.SA/R$33.72/Underweight), CPFL Energia (CPL/$60.02/Underweight), Credicorp (BAP/$72.65/Neutral), CTC Media (CTCM/$14.14/Overweight), Datang International (0991.HK/HK$3.44/Neutral), DongFeng Motor Co., Ltd. (0489.HK/HK$12.26/Overweight), Ecopetrol ADR (EC/$25.58/Underweight), Ecopetrol S.A. (ECO.CN/Col$2,545.00/Underweight), Embotelladoras Arca (ARCA.MX/Ps39.55/Overweight), Energy Development (EDC) Corporation (EDC.PS/Php4.20/Overweight), ENERSIS S.A. (ENE.SN/Ch$195.00/Overweight), ENERSIS S.A. (ENI/$19.83/Overweight), Far EasTone Telecommunications Co., Ltd (4904.TW/NT$37.40/Overweight), FEMSA (FMX/$47.21/Overweight), First Gulf Bank (FGB.AD/Dh15.25/Overweight), Fubon Financial Holdings (2881.TW/NT$37.30/Overweight), Gazprom (GAZP.RTS/$5.82/Overweight), Genting (GENT.KL/M$6.89/Overweight), Grupo Aeroportuario del Pacifico SA (GAPB.MX/Ps37.08/Neutral), Grupo Aeroportuario del Sureste SA (ASURB.MX/Ps67.12/Overweight), Grupo Financiero Banorte (GFNORTEO.MX/Ps47.04/Neutral), Grupo Mexico (GMEXICOB.MX/Ps31.05/Overweight), Grupo Modelo (GMODELOC.MX/Ps68.57/Neutral), Guarani (ACGU3.SA/R$5.06/Underweight), HCL Infosystems (HCLI.BO/Rs152.60/Neutral), Hindustan Unilever Limited (HLL.BO/Rs278.65/Underweight), HOMEX (HOMEX.MX/Ps77.02/Neutral), Hon Hai Precision (2317.TW/NT$137.50/Overweight), HTC Corp (2498.TW/NT$369.00/Underweight), Huaneng Power Int'l - H (0902.HK/HK$4.89/Neutral), Hyundai Motor Company (005380.KS/W102,500/Overweight), ICICI Bank (ICBK.BO/Rs887.20/Overweight), ICICI Bank (IBN/$38.20/Overweight), Idea Cellular Limited (IDEA.BO/Rs52.00/Underweight), Info Edge India (INED.BO/Rs817.75/Overweight), Infosys Technologies (INFY.BO/Rs2,395.75/Overweight), JD Group (JDGJ.J/4,436c/Overweight), Land & Houses (LHf.BK/Bt6.40/Overweight), Larsen & Toubro (LART.BO/Rs1,629.20/Neutral), LG Display (034220.KS/W34,000/Overweight), Lojas Americanas (Non-Voting) (LAME4.SA/R$15.05/Overweight), LSR (LSRGq.L/$7.25/Overweight), Lukoil (LKOH.RTS/$59.60/Neutral), Magnit OAO (MGNT.RTS/$65.00/Overweight), Magyar Telekom (MTEL.BU/Ft731.00/Underweight), Manila Electric Company (MER.PS/Php217.00/Neutral), Manila Water Company Inc (MWC.PS/Php16.25/Overweight), Maruti Suzuki India Ltd (MRTI.BO/Rs1,587.20/Overweight), Massmart (MSMJ.J/8,570c/Underweight), MediaTek Inc. (2454.TW/NT$510.00/Overweight), Metropolitan Bank (MBT.PS/Php46.50/Overweight), MindTree Ltd. (MINT.BO/Rs649.80/Overweight), MISC Berhad - F (MISCe.KL/M$8.84/Underweight), MISC Berhad - F (MISC.KL/M$8.93/Underweight), MMK (MAGN.RTS/$0.74 [27-November-2009]/Overweight), MTN Group Limited (MTNJ.J/11,935c/Overweight), Nan Ya Plastics Corp (1303.TW/NT$56.30/Overweight), Naspers Ltd (NPNJn.J/28,031c/Overweight), NCsoft (036570.KS/W152,000/Overweight), Nedbank Group Ltd (NEDJ.J/11,535c/Underweight), Netease (NTES/$39.76/Overweight), New World China Land (0917.HK/HK$3.06/Underweight), Northam Platinum Ltd (NHMJ.J/4,017c/Overweight), OCI (010060.KS/W188,000/Overweight), OGX (OGXP3.SA/R$1,569.00/Overweight), Organizacion Soriana (SORIANAB.MX/Ps33.51/Underweight), Orient Overseas Int'l Ltd (0316.HK/HK$34.45/Overweight), Pacific Basin Shipping (2343.HK/HK$6.05/Overweight), Pacific Rubiales

397



(PRE.TO/C$15.83/Overweight), PDG Realty (PDGR3.SA/R$18.39/Overweight), Perusahaan Gas Negara (PGAS.JK/Rp3,725/Overweight), PETROBRAS PN (PETR4.SA/R$39.78/Overweight), PetroChina (0857.HK/HK$9.76/Underweight), Powertech Technology Inc (6239.TW/NT$89.80/Overweight), PT Aneka Tambang Tbk (ANTM.JK/Rp2,300/Overweight), PTT Public Company (PTT.BK/Bt237.00/Overweight), Public Bank (F) (PUBMe.KL/M$10.86/Overweight), Qtel (QTEL.QA/QR134.70/Overweight), Quanta Computer Inc. (2382.TW/NT$65.10/Underweight), Redecard (RDCD3.SA/R$27.82/Neutral), Reliance Power (RPOL.BO/Rs146.65/Underweight), Rosneft (ROSNq.L/$8.50/Overweight), RusHydro (HYDR.RTS/$0.04/Overweight), SABESP (SBSP3.SA/R$32.38/Underweight), SABESP (SBS/$38.32/Underweight), Samsung Electro-Mechanics (009150.KS/W95,300/Overweight), Samsung SDI (006400.KS/W132,500/Overweight), Santander (SAN.MC/€11.60/Overweight), Sberbank (SBER.RTS/$2.44/Overweight), Severstal (CHMF.RTS/$7.53 [27-November-2009]/Underweight), Shinhan Financial Group (055550.KS/W45,950/Overweight), Siam Commercial Bank (SCB.BK/Bt84.00/Overweight), Sinopec Corp - H (0386.HK/HK$6.50/Overweight), SK Energy Co Ltd (096770.KS/W107,500/Overweight), Sohu.Com (SOHU/$56.27/Overweight), S-Oil Corp (010950.KS/W53,700/Neutral), Southern Copper Corporation (PCU/$35.28/Underweight), SQM (SQM/$38.09/Underweight), Suzano (SUZB5.SA/R$18.65/Overweight), Taishin Financial Holdings (2887.TW/NT$12.30/Underweight), Tambang Batubara Bukit Asam (PTBA.JK/Rp16,800/Overweight), Tata Power (TTPW.BO/Rs1,359.65/Overweight), Telmex Internacional (TII/$16.13/Underweight), Telmex SA (TMX/$18.41/Underweight), Tenaga (TENA.KL/M$8.45/Overweight), Ternium (TX/$32.54/Overweight), Thai Oil Public Company (TOP.BK/Bt42.25/Overweight), The9 Limited (NCTY/$7.77/Neutral), TMB Bank Public Company Limited (TMB.BK/Bt1.15/Neutral), Totvs (TOTS3.SA/R$108.00/Overweight), TSMC (2330.TW/NT$60.70/Overweight), Turk Telekom (TTKOM.IS/YTL4.36/Overweight), UMC (2303.TW/NT$15.90/Overweight), Unilever Indonesia Tbk (UNVR.JK/Rp11,700/Underweight), Unitech Ltd (UNTE.BO/Rs88.80/Overweight), United Spirits Limited (UNSP.BO/Rs1,267.90/Overweight), Urbi (URBI.MX/Ps26.85/Overweight), Usiminas (USIM5.SA/R$51.84/Underweight), Vakifbank (VAKBN.IS/YTL3.30/Overweight), VanceInfo Technologies Inc. (VIT/$18.31/Overweight), VTB (VTBRq.L/$4.50/Underweight), Weichai Power (2338.HK/HK$63.90/Neutral), Xinao Gas (2688.HK/HK$19.62/Overweight), YTL Power (YTLP.KL/M$2.24/Underweight), Yulon Motor Co., Ltd. (2201.TW/NT$38.75/Overweight)

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

• Market Maker: JPMSI makes a market in the stock of Baidu.com, Banco Santander (Brasil) S.A., CTC Media, Netease, Perusahaan Gas Negara, Sohu.Com, The9 Limited.

• Market Maker/ Liquidity Provider: JPMSL and/or an affiliate is a market maker and/or liquidity provider in ABSA Group Ltd, Aldar Properties, Bank Asya, Bank Central Asia (BCA), Bank of China - H, Bank Rakyat Indonesia, BYD Electronic, China Cosco Holdings, Ltd., CTC Media, First Gulf Bank, Gazprom, LSR, Lukoil, Magnit OAO, Magyar Telekom, MMK, Nedbank Group Ltd, Orient Overseas Int'l Ltd, Qtel, Rosneft, RusHydro, Santander, Sberbank, Severstal, SK Energy Co Ltd, Sohu.Com, S-Oil Corp, Ternium, Turk Telekom, Vakifbank, VTB.

• Lead or Co-manager: JPMSI or its affiliates acted as lead or co-manager in a public offering of equity and/or debt securities for Credicorp, Ecopetrol S.A., Gazprom, Genting, Hyundai Motor Company, PETROBRAS PN, Qtel, Severstal, Shinhan Financial Group, Tata Power, TSMC, Unilever Indonesia Tbk, Vakifbank, VanceInfo Technologies Inc. within the past 12 months.

• Director: A senior employee, executive officer or director of JPMorgan Chase & Co. , JPMSI, and/or its affiliates is a director and/or officer of China Resources Power Holdings.

• Analyst Position: The following analysts (and/or their associates or household members) own a long position in the shares of Bank of China - H: Adrian Mowat. The following analysts (and/or their associates or household members) own a long position in the shares of China Cosco Holdings, Ltd.: Adrian Mowat. The following analysts (and/or their associates or household members) own a long position in the shares of ICICI Bank: Sunil Garg, Bijay Kumar. The following analysts (and/or their associates or household members) own a long position in the shares of Idea Cellular Limited: Bijay Kumar. The following analysts (and/or their associates or household members) own a long position in the shares of Infosys Technologies: Bijay Kumar. The following analysts (and/or their associates or household members) own a long position in the shares of Larsen & Toubro: Bijay Kumar. The following analysts

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(and/or their associates or household members) own a long position in the shares of Northam Platinum Ltd: Steve Shepherd. The following analysts (and/or their associates or household members) own a long position in the shares of Orient Overseas Int'l Ltd: Robert Smith. The following analysts (and/or their associates or household members) own a long position in the shares of Pacific Basin Shipping: Robert Smith, Adrian Mowat. The following analysts (and/or their associates or household members) own a long position in the shares of Tata Power: Bijay Kumar. The following analysts (and/or their associates or household members) own a long position in the shares of UMC: Patrick Liao.

• Beneficial Ownership (1% or more): JPMSI or its affiliates beneficially own 1% or more of a class of common equity securities of Aldar Properties, Banco Santander (Brasil) S.A., Bank of China - H, Datang International, DongFeng Motor Co., Ltd., HCL Infosystems, Hindustan Unilever Limited, Hyundai Motor Company, Lojas Americanas (Non-Voting), Metropolitan Bank, Pacific Basin Shipping, PDG Realty, PETROBRAS PN, PetroChina, Powertech Technology Inc, Reliance Power, Telmex Internacional, Unilever Indonesia Tbk, Unitech Ltd.

• Client of the Firm: AAC Acoustic is or was in the past 12 months a client of JPMSI. ABSA Group Ltd is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services. Acer Inc is or was in the past 12 months a client of JPMSI. Aldar Properties is or was in the past 12 months a client of JPMSI. ALL is or was in the past 12 months a client of JPMSI. Almacenes Exito is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services and non-securities-related services. AMMB Holdings is or was in the past 12 months a client of JPMSI. Anglo Platinum is or was in the past 12 months a client of JPMSI. Astra International is or was in the past 12 months a client of JPMSI. ASUSTek Computer is or was in the past 12 months a client of JPMSI. Ayala Land is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services. Banco Santander (Brasil) S.A. is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services. Bancolombia is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. Bank Asya is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. Bank Central Asia (BCA) is or was in the past 12 months a client of JPMSI. Bank of China - H is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services and non-securities-related services. Bank Rakyat Indonesia is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. Beijing Capital Land is or was in the past 12 months a client of JPMSI. Braskem is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services and non-securities-related services. Catcher Technology is or was in the past 12 months a client of JPMSI. Cencosud is or was in the past 12 months a client of JPMSI. China Airlines is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. China Cosco Holdings, Ltd. is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. China Resources Power Holdings is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. China Unicom is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. China Yurun Food Group is or was in the past 12 months a client of JPMSI. Compal Electronics, Inc. is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. Compania de Minas Buenaventura is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services. CPFL Energia is or was in the past 12 months a client of JPMSI. Credicorp is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. CTC Media is or was in the past 12 months a client of JPMSI. Datang International is or was in the past 12 months a client of JPMSI. Ecopetrol ADR is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services and non-securities-related services. Ecopetrol S.A. is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services and non-securities-related services. Embotelladoras Arca is or was in the past 12 months a client of JPMSI. Energy Development (EDC) Corporation is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. ENERSIS S.A. is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. FEMSA is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. First Gulf Bank is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. Fubon Financial Holdings is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services. Gazprom is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services and non-securities-related services. Genting is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. Grupo Aeroportuario del Sureste SA is or was in the past 12 months a client of JPMSI. Grupo Financiero Banorte is or was in the past 12

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months a client of JPMSI. Grupo Mexico is or was in the past 12 months a client of JPMSI. Grupo Modelo is or was in the past 12 months a client of JPMSI. Hindustan Unilever Limited is or was in the past 12 months a client of JPMSI. HOMEX is or was in the past 12 months a client of JPMSI. Hon Hai Precision is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. Huaneng Power Int'l - H is or was in the past 12 months a client of JPMSI. Hyundai Motor Company is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services and non-securities-related services. ICICI Bank is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. Idea Cellular Limited is or was in the past 12 months a client of JPMSI. Infosys Technologies is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. Larsen & Toubro is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. LG Display is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services and non-investment banking securities-related services. Lojas Americanas (Non-Voting) is or was in the past 12 months a client of JPMSI. Lukoil is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services and non-securities-related services. Magyar Telekom is or was in the past 12 months a client of JPMSI. Manila Electric Company is or was in the past 12 months a client of JPMSI. Manila Water Company Inc is or was in the past 12 months a client of JPMSI. Maruti Suzuki India Ltd is or was in the past 12 months a client of JPMSI. Massmart is or was in the past 12 months a client of JPMSI. MediaTek Inc. is or was in the past 12 months a client of JPMSI. Metropolitan Bank is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. MindTree Ltd. is or was in the past 12 months a client of JPMSI. MISC Berhad - F is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services. MMK is or was in the past 12 months a client of JPMSI. MTN Group Limited is or was in the past 12 months a client of JPMSI. Naspers Ltd is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. NCsoft is or was in the past 12 months a client of JPMSI. Nedbank Group Ltd is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services and non-investment banking securities-related services. Netease is or was in the past 12 months a client of JPMSI. New World China Land is or was in the past 12 months a client of JPMSI. Northam Platinum Ltd is or was in the past 12 months a client of JPMSI. OCI is or was in the past 12 months a client of JPMSI. OGX is or was in the past 12 months a client of JPMSI. Organizacion Soriana is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. Orient Overseas Int'l Ltd is or was in the past 12 months a client of JPMSI. Pacific Basin Shipping is or was in the past 12 months a client of JPMSI. Pacific Rubiales is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. Perusahaan Gas Negara is or was in the past 12 months a client of JPMSI. PETROBRAS PN is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services and non-securities-related services. PetroChina is or was in the past 12 months a client of JPMSI. Powertech Technology Inc is or was in the past 12 months a client of JPMSI. PT Aneka Tambang Tbk is or was in the past 12 months a client of JPMSI. PTT Public Company is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services and non-securities-related services. Public Bank (F) is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. Qtel is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services and non-securities-related services. Quanta Computer Inc. is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. Reliance Power is or was in the past 12 months a client of JPMSI. Rosneft is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services. SABESP is or was in the past 12 months a client of JPMSI. Samsung Electro-Mechanics is or was in the past 12 months a client of JPMSI. Samsung SDI is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services. Santander is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services and non-securities-related services. Sberbank is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services and non-securities-related services. Severstal is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. Shinhan Financial Group is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services and non-investment banking securities-related services. Siam Commercial Bank is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. Sinopec Corp - H is or was in the past 12 months a client of JPMSI. SK Energy Co Ltd is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. Sohu.Com is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related

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services and non-securities-related services. S-Oil Corp is or was in the past 12 months a client of JPMSI. Southern Copper Corporation is or was in the past 12 months a client of JPMSI. SQM is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-securities-related services. Suzano is or was in the past 12 months a client of JPMSI. Taishin Financial Holdings is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services. Tata Power is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services and non-investment banking securities-related services. Telmex Internacional is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services. Telmex SA is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. Tenaga is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services. Ternium is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-securities-related services. Thai Oil Public Company is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. TMB Bank Public Company Limited is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services and non-investment banking securities-related services. Totvs is or was in the past 12 months a client of JPMSI. TSMC is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services and non-securities-related services. Turk Telekom is or was in the past 12 months a client of JPMSI. Unilever Indonesia Tbk is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. Unitech Ltd is or was in the past 12 months a client of JPMSI. Urbi is or was in the past 12 months a client of JPMSI. Usiminas is or was in the past 12 months a client of JPMSI. Vakifbank is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. VanceInfo Technologies Inc. is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. VTB is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services and non-securities-related services. YTL Power is or was in the past 12 months a client of JPMSI. Yulon Motor Co., Ltd. is or was in the past 12 months a client of JPMSI.

• Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for investment banking services from Almacenes Exito, Banco Santander (Brasil) S.A., Bank of China - H, Braskem, China Cosco Holdings, Ltd., China Resources Power Holdings, China Unicom, Credicorp, Ecopetrol ADR, Ecopetrol S.A., ENERSIS S.A., Gazprom, Genting, Hyundai Motor Company, LG Display, Lukoil, Naspers Ltd, Nedbank Group Ltd, Organizacion Soriana, PETROBRAS PN, PTT Public Company, Qtel, Santander, Sberbank, Severstal, Shinhan Financial Group, Tata Power, TMB Bank Public Company Limited, TSMC, Unilever Indonesia Tbk, Vakifbank, VanceInfo Technologies Inc., VTB.

• Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next three months from AAC Acoustic, Almacenes Exito, Anglo Platinum, Banco Santander (Brasil) S.A., Bancolombia, Bank Central Asia (BCA), Bank of China - H, Bank Rakyat Indonesia, Beijing Capital Land, Braskem, China Cosco Holdings, Ltd., China Resources Power Holdings, China Unicom, Compania de Minas Buenaventura, CPFL Energia, Credicorp, CTC Media, Datang International, Ecopetrol ADR, Ecopetrol S.A., ENERSIS S.A., Gazprom, Genting, Grupo Modelo, Huaneng Power Int'l - H, Hyundai Motor Company, ICICI Bank, Infosys Technologies, Larsen & Toubro, LG Display, Lukoil, Massmart, MediaTek Inc., MindTree Ltd., MMK, MTN Group Limited, Naspers Ltd, Nedbank Group Ltd, Northam Platinum Ltd, Organizacion Soriana, Pacific Basin Shipping, PETROBRAS PN, Powertech Technology Inc, PTT Public Company, Qtel, Reliance Power, Santander, Sberbank, Severstal, Shinhan Financial Group, Siam Commercial Bank, Sinopec Corp - H, Tata Power, Telmex SA, Tenaga, Thai Oil Public Company, TMB Bank Public Company Limited, Totvs, TSMC, Unilever Indonesia Tbk, Vakifbank, VanceInfo Technologies Inc., VTB.

• Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other than investment banking from ABSA Group Ltd, Almacenes Exito, Ayala Land, Banco Santander (Brasil) S.A., Bancolombia, Bank Asya, Bank of China - H, Bank Rakyat Indonesia, Braskem, China Airlines, Compal Electronics, Inc., Compania de Minas Buenaventura, Ecopetrol ADR, Ecopetrol S.A., Energy Development (EDC) Corporation, FEMSA, First Gulf Bank, Fubon Financial Holdings, Gazprom, Hon Hai Precision, Hyundai Motor Company, ICICI Bank, Infosys Technologies, Larsen & Toubro, LG Display, Metropolitan Bank, MISC Berhad - F, Nedbank Group Ltd, Pacific Rubiales, PETROBRAS PN, PTT Public Company, Public Bank (F), Qtel, Quanta Computer Inc., Rosneft, Samsung SDI, Santander, Sberbank, Shinhan Financial Group, Siam Commercial Bank, SK Energy Co Ltd, Sohu.Com, Taishin Financial Holdings, Tata Power, Telmex Internacional, Telmex SA, Tenaga, Thai Oil Public Company, TMB Bank Public Company Limited, TSMC, VTB. An affiliate of JPMSI has received compensation in the past 12 months for products or services other than investment banking from ABSA Group Ltd, Almacenes Exito, Anglo Platinum, Ayala Land, Banco Santander (Brasil) S.A., Bancolombia, Bank Asya, Bank of China - H, Bank Rakyat Indonesia, Braskem, Catcher Technology, Compal Electronics, Inc., Ecopetrol ADR, Ecopetrol S.A., Energy Development (EDC) Corporation, First Gulf Bank, Fubon Financial Holdings, HOMEX, Hyundai Motor Company, ICICI Bank, LG Display, Magyar Telekom, Manila Electric Company, MediaTek Inc., Metropolitan Bank, Nedbank Group Ltd, Pacific Rubiales, PETROBRAS PN, Powertech Technology Inc, Public Bank (F), Qtel, Quanta Computer Inc., Rosneft, Santander, Sberbank, Shinhan Financial Group, Siam Commercial Bank, SK Energy Co Ltd, Sohu.Com, Southern Copper Corporation, SQM, Suzano, Tata Power, Telmex Internacional, Telmex SA, Ternium, Thai Oil Public Company, TMB Bank Public Company Limited, TSMC, Unilever Indonesia

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Tbk, Vakifbank, VanceInfo Technologies Inc., VTB. • J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants

of Hyundai Motor Company and owns 3,599,000 as of 01-Dec-09. • J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants

of LG Display and owns 3,600,000 as of 01-Dec-09. • Beneficial Ownership (1% or more): JPMSI or its affiliates beneficially own 1% or more of a class of common equity securities or

similar instruments of OCI. • J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants

of Samsung Electro-Mechanics Co. Ltd. and owns 3,200,900 as of 01-Dec-09. • J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants

of Shinhan Financial Group and owns 3,563,430 as of 01-Dec-09. • J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants

of SK Energy Co Ltd and owns 3,597,980 as of 01-Dec-09. • MSCI: The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior

written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an 'as is' basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates.

Important Disclosures for Equity Research Compendium Reports: Important disclosures, including price charts for all companies under coverage for at least one year, are available through the search function on J.P. Morgan’s website https://mm.jpmorgan.com/disclosures/company or by calling this U.S. toll-free number (1-800-477-0406)

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2009

Overweight (buy)

Neutral (hold)

Underweight (sell)

JPM Global Equity Research Coverage 39% 46% 15% IB clients* 56% 57% 42% JPMSI Equity Research Coverage 38% 51% 10% IB clients* 76% 72% 56%

*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative.

Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMSI, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMSI, and may not be subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

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Other Disclosures

J.P. Morgan is the global brand name for J.P. Morgan Securities Inc. (JPMSI) and its non-US affiliates worldwide.

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History of corrections in MSCI Emerging Markets: Last year's was the biggest

4.4Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

10 May 06, 87913 Jun 06, 665Decline 24%Duration 25 day sFear of Fed ov ertightening

12-April-04, 49717-May -04, 396Decline 20%Duration 26 day sStart of Fed tightening

19 Feb 90, 2399 Apr 90, 198Decline 17%Duration 36 day s

1 Aug 90, 25716 Jan 91, 175Decline 32%Duration 121 day sIraq inv ades Kuw ait

22 Sep 94, 5869 Mar 95, 396Decline 33%Duration 121 daysMexican Tequila Crisis

10 Jul 97, 5715 Oct 98, 241Decline 58%Duration 323 day sAsian Crisis

18-Apr-02, 36410-Oct-02, 254Decline 30%

10 Feb 00, 531.03 Oct 01, 247Decline 54%Duration 430 day s2000 Global Correction

22 Apr 92, 35324 Aug 92, 286Decline 19%Duration 89 day sBrazilian Fall

16 Feb 94, 56324 Aug 94, 454Decline 19%Duration 59 day sFed tightening

25% rally

26 Feb 07, 9405 Mar 07, 844

Decline 10%Duration 8 day s

A-shares fall, US profitf

23 July 07, 116316 August 07, 957


US sub-prime and global credit market

concerns

31 October 2007, 1338 27 October 2008, 454


Credit Crisis and EM Inflation

Source: Datastream, J.P. Morgan

J.P. Morgan Emerging Market Strategy Team

Chief Equity Strategists Adrian Mowat Asia and Emerging Market (852) 2800 8599 [email protected] Ben Laidler Latin America (212) 622 5252 [email protected] Deanne Gordon CEEMEA, South Africa (27-21) 712 0875 [email protected] Sriyan Pietersz ASEAN and Frontier Markets (66-2) 684 2670 [email protected] Thomas J Lee US (1) 212 622 6505 [email protected] Mislav Matejka Europe (44-20) 7325 5242 [email protected] Hajime Kitano Japan (81-3) 5545 8655 [email protected] Country Strategists Frank Li China (852) 2800 8511 [email protected] Bharat Iyer India (91-22) 6157 3600 [email protected] Aditya Srinath Indonesia (62-21) 5291 8573 [email protected] Nick Lai Taiwan (886-2) 27259864 [email protected] Scott Seo Korea (82-2) 758 5759 [email protected] Chris Oh Malaysia (60-3) 2270 4728 [email protected] Emy Shayo Brazil (55-11) 3048 6684 [email protected] Ben Laidler Mexico (212) 622 5252 [email protected] Brian Chase Southern Cone & Andean (562) 425 5245 [email protected] Deanne Gordon South Africa (27-21) 712 0875 [email protected] Kelly Lim-Bate Philippines (63-2) 8781 188 [email protected] Economic & Policy Research Joyce Chang Global Head, Emerging Markets Research (1-212) 834 4203 [email protected] David Fernandez Emerging Asia (65) 6882 2461 [email protected] Jiwon Lim Korea (82-2) 758 5509 [email protected] Jahangir Aziz India (9122) 6157 3385 [email protected] Qian Wang China, Taiwan and Hong Kong (852) 2800 7009 [email protected] Vladimir Werning Argentina, Chile (1-212) 834 4144 [email protected] Fabio Akira Brazil (55-11) 3048 3634 [email protected] Gabriel Casilledas Mexico (52-55)-5540-9558 [email protected] Michael Marrese Regional Head, Emerging Europe (44-20) 7777 4627 [email protected] Yarkin Cebeci Turkey (90-212) 326 5890 [email protected] Sonja Keller South Africa (27-11) 507 0376 [email protected] Nina A Chebotareva Russia (7-095) 937 7321 [email protected] Nora Szentivanyi Hungary, Poland & Czech Republic (44-20) 7777 3981 [email protected]

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