JP Morgan EMEA 2010

Europe Equity Research
07 December 2009
EMEA Year Ahead 2010

Staying the course: Top Picks for the next leg of the
recovery
AC
Mislav Matejka, CFA
(44-20) 7325-5242
mislav.matejka@jpmorgan.com
J.P. Morgan Securities Ltd.
See page 209 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.
Mislav Matejka, CFA Europe Equity Research
(44-20) 7325-5242 07 December 2009
2
(44-20) 7325-5242 07 December 2009
Investment Summary
JPM index target forecasts Given that developed world equity markets have rebounded almost 60% over the past
Target Current* % few quarters, it might be tempting to project lackluster equity performance for 2010.
MSCI Europe 1300 1085 20%
MSCI EMU 185 153 21%
After all, the pushbacks remain numerous. The equity valuation cushion has eroded
FTSE 100 6150 5246 17% with stocks trading at mid-cycle multiples, analyst EPS growth expectations appear
Source: Datastream, JPMorgan; Equity targets punchy at face value, the consumer backdrop remains challenging, credit crunch
are based on 2011 EPS integer, and forecasted
aftershocks linger, there is likelihood of EM policy normalization ahead of the DM
end 2010 12M forward P/E multiple * as at
27/11/2009 and the possibility of a more dramatic bond sell-off, capping equity performance,
along the lines of the 1994 experience.
Risk-Reward remains positive Despite this, we believe equities will deliver significant further gains in 2010,
for stocks and look for 20% upside. We find investors to be skeptical regarding the durability
of the unfolding economic recovery, but our view is that it will have legs, with an
improvement in labour markets confirming its sustainability. In addition, the
stabilization in the credit markets, signs of house prices troughing, steep yield curve
and the rebound in corporate profitability are the positives.
Expect 20% EPS growth in 2010 The consensus European EPS growth expectations for the next two years call for 40-
and 15% in 2011 50% cumulative growth, which we think is achievable looking at the patterns of past
Potential for further P/E re-rating rebounds and the relatively high profit margins at the trough. Equity valuations have
Yield compression to support
recovered back to long-term averages, but we think there is a potential for further
rotation into equities in 2010 multiple expansion if the positive growth–inflation tradeoff prevails, where developed
world central banks remain accommodative for longer, and inflation remains subdued.
In terms of trajectory, we think the 1st half of the year offers the better risk-reward,
while the interest rate uncertainty might start hurting equity performance in the 2nd
half.
Cyclicals outperformance to Last December we advocated a rotation into Cyclicals out of Defensives, with top
continue, albeit smaller than in pick Basic Resources (see YA 2009). We continue to expect the outperformance of
’09
Cyclicals in 2010, but to a much lower extent than over the past few quarters. We
believe relative earnings momentum will again become an important driver of
performance, as well as the outlook on pricing margins, spreads between output
prices and input costs. In addition, we think the yield compression theme will favour
selected high yielding parts of the market. We prefer continental to UK stocks.
The Year Ahead process

77 Analysts The goal of this document is to present our key strategy themes for 2010 using our
analysts’ most and least favoured stocks.
11 Macro teams
The process started with the Strategy Team briefing analysts on the key themes for
2010 and macro-economic forecasts. Working within this established framework,
22 Sector teams analysts then presented their top picks and stocks to avoid to their sector heads.
The sector heads then filtered out key long and short ideas, which were presented to
the Strategy Team. These stock ideas form the heart of this report.
3
(44-20) 7325-5242 07 December 2009
Table of Contents
Investment Summary ...............................................................3
The Year Ahead process..........................................................3
Top Picks and Stocks to Avoid ...............................................6
Equity Strategy Outlook...........................................................8
Staying the course – Remain OW equities...................................................................8
Pan-European Small/Mid-Cap Strategy Outlook..................18
Higher highs near term with stockpicking taking over the macro..............................18
Quantitative Strategy Outlook ...............................................25
2009: the Value year ..................................................................................................25
CEEMEA Strategy Outlook ....................................................35
Economic Outlook..................................................................38
A recovery, but only a slow return to normality ........................................................38
Global Commodities Strategy Outlook.................................42
Rates Outlook .........................................................................44
2010: carry is the name of the game ..........................................................................44
European Equity Derivatives Strategy Outlook ...................46
Credit Strategy Outlook .........................................................49
Adapting to Change ...................................................................................................49
Global FX Outlook ..................................................................51
2010: New year, new lows.........................................................................................51
European Accounting Outlook..............................................60
Crunch time for convergence of standards.................................................................60
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(44-20) 7325-5242 07 December 2009
Sector Overviews ...................................................................63

Autos .....................................................................................64
Banks ....................................................................................65
Beverages .............................................................................66
Building Materials ................................................................67
Capital Goods .......................................................................68
Chemicals .............................................................................69
Communications Equipment...............................................70
Food & Food Manufacture ...................................................71
Food Retailing ......................................................................72
Home and Personal Care .....................................................73
Insurance ..............................................................................74
Luxury & Sporting Goods....................................................75
Media .....................................................................................76
Oil Services & Equipment....................................................77
Pharmaceuticals...................................................................78
Property.................................................................................79
Semiconductors ...................................................................80
Steel.......................................................................................81
Telecom Services .................................................................82
Tobacco.................................................................................83
Transport and Logistics.......................................................84
Utilities ..................................................................................85
Top Picks ................................................................................87

Stocks to Avoid ....................................................................143
Strategy Dashboard .............................................................191
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(44-20) 7325-5242 07 December 2009
Top Picks and Stocks to Avoid

We list the top picks and stocks to avoid as chosen by J.P. Morgan’s sector heads for Europe.
Table 1: Top picks by sector heads

Mkt cap P/E (x) EPS (lc) Div yield ROE
Name Price Currency Rating Bn (lc) 09E 10E 09E 10E 09E % 09E %
Autos
Daimler AG 33.78 € OW 34.7 NM 25.5 -1.63 1.33 1.8 -4.7
Banks
BBVA 12.5 € OW 47.0 8.7 9.4 1.44 1.33 3.5 26.4
HSBC 7.1 £ OW €124.1 14.2 10.0 0.50 0.71 3.6 12.7
Société Générale 46.5 € OW 34.4 53.2 11.6 0.87 4.00 3.0 10.2
UniCredito 2.3 € OW 38.2 22.2 11.8 0.10 0.19 3.8 10.4
Beverages
Anheuser Busch InBev 33.2 EUR OW $80.61 19.9 13.6 2.50 3.66 0.9 N/A
Building Materials
Saint-Gobain 36.23 € OW 28.0 32.9 16.4 1.16 2.31 2.6 3.0
Capital Goods
SKF 115.5 SEK OW 52.6 29.8 14.8 3.87 7.83 2.6 16.5
Chemicals
Syngenta 266.4 CHF OW 26.2 15.1 13.2 17.5 20.2 2.9 18.3
Communications Equipment
Alcatel-Lucent 2.25 € OW 5.1 NM 23.0 -0.04 0.10 0.0 1.0
Food & Food Manufacture
Danone 40.00 Euro OW 24.5 17.1 15.3 2.34 2.61 1.4 11.1
Food Retailing
Carrefour 32.32 Eur OW 22.7 16.3 14.2 1.98 2.30 3.4 10.1
Home and Personal Care
Unilever NV €20.41 € OW 60.7 16.5 15.3 1.23 1.34 3.8 28.0
Insurance
Swiss Re 47.8 SF OW 17.7 105.0 7.4 0.46 6.42 1.0 0.8
Fortis 2.8 € OW 6.6 6.9 16.1 0.41 0.17 0.0 13.4
Luxury & Sporting Goods
LVMH 69.76 € OW 33.4 18.5 16.3 3.77 4.28 2 13
Media
JCDecaux 15.15 € OW 3.35 170.8 37.8 0.09 0.40 5.1 2.3
Oil Services & Equipment
Wood Group 307.8 p OW 1.62 12.7 13.6 $0.39 $0.36 2.1 15.4
Pharmaceuticals
Roche 164.38 SFr OW 141 13.9 12.7 11.80 12.97 3.6 27
Ipsen 36.38 € OW 3 19.3 18.4 1.63 1.73 2.0 15
Property
Big Yellow 370 p OW £483m NM NM 11.9* 11.3 0 2.7
Semiconductors
ASML €20.55 EUR OW 8.9 NM 14.8 -0.36 1.39 1 -9.0
Steel
ArcelorMittal €25.95 € OW 40.6 NM 11.1 -$0.70 $3.40 1.9 -0.7
Telecom Services
KPN 11.83 € OW 19.1 8.8 7.8 0.91 1.11 5.8 7.7
Tobacco
BAT 1847 GBP OW $60.4 11.6 10.6 153.2 168.0 5.4 38
Transport & Logistics
Deutsche Post 12.5 EUR OW 15.1 14.5 10.3 0.86 1.21 4.8 7.5
Utilities
Iberdrola Renov. 3.195 € OW 13.5 34.2 26.7 0.09 0.12 1.0 1.5
Source: Bloomberg, MSCI, J.P. Morgan estimates, Prices and Valuations as of November 30, 2009. * reported
6
(44-20) 7325-5242 07 December 2009
Table 2: Stocks to avoid as chosen by sector heads

Mkt cap P/E (x) EPS (lc) Div yield ROE
Name Price Currency Rating Bn (lc) 09E 10E 09E 10E 09E % 09E %
Autos
Fiat S.p.A 9.83 € N 10.4 NM 22.4 -0.02 0.44 0.0 -5.2
Banks
Nordea 72.3 Skr UW €27.8 11.4 14.8 0.61 0.47 3.1 9.4
RBS 33.2 £ UW €32.6 NM NM -3.09 -2.58 0.0 -12.8
Beverages
Diageo 1025 £p N $35.20 14.3 13.5 71.52* 72.28 3.6 N/A
Building Materials
Italcementi 8.91 € UW 3.1 20.1 26.7 0.44 0.33 1.0 7.4
Capital Goods
Husqvarna 48.6 SEK UW 27.9 25.8 19.5 1.88 2.50 2.0 17.5
Chemicals
Clariant 10.6 CHF UW 2.4 16.8 11.4 0.63 0.93 0.0 4.5
Ericsson 66.90 SEK UW 213 19.8 14.0 3.38 4.79 2.8 7.8
Barry Callebaut 658 CHF UW 3.40 15.0 14.8 43.85 44.34 1.9 15.7
Food Retailing
Sainsbury 321.9 GBP N 5.9 13.4 12.2 23.33 25.52 2.7 9.1
Home and Personal Care
Oriflame SKr 411 € UW 2.15 23.5 18.9 1.67 2.07 2.7 54.4
Insurance
Unipol 0.91 € UW 1.9 45.4 13.0 0.02 0.07 1.1 1.1
Hermès International 94.85 € UW 10.1 35.8 31.2 2.65 3.04 1 25
Media
Lagardère 28.37 € UW 3.75 8.5 8.3 3.33 3.44 0.0 7.1
Acergy 83.55 Nkr UW 16.3 17.3 26.0 $0.85 $0.57 1.6 15.0
Pharmaceuticals
AstraZeneca 27.17 £ UW 39 6.7 6.8 $6.44 $6.39 5.8 45
Property
IVG 6.2 € UW €724m NM NM -0.61 -0.60 0 0
Semiconductors
STMicroelectronics €5.39 USD N €4.7 NM 20.9 -0.78 0.39 2 -9.4
Steel
Acerinox €13.79 € UW 3.5 NM 20.7 -0.92 0.67 3.3 -13.8
Telecom Services
Telecom Italia 1.07 € N 18.8 10.3 8.7 0.10 0.12 4.7 7.2
Tobacco
Swedish Match 150 SEK UW $5.3 15.3 13.5 9.80 11.12 3.1 70
Transport & Logistics
Panalpina 64.2 CHF N 1.6 19.4 22.3 3.32 2.88 0.8 5.0
Utilities
Drax 410.4 GBP p UW 1.5 7.8 5.9 50.91 66.84 3.6 8.1
Source: Bloomberg, MSCI, J.P. Morgan estimates, Prices and Valuations as of November 30, 2009. *reported.
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(44-20) 7325-5242 07 December 2009
On a number of valuation metrics equities are back to

Equity Strategy Outlook long-term averages, but there is a potential for rerating
above mid-cycle multiples. The catalysts for this could
Mislav Matejka, CFA AC
be the pickup in growth without the accompanying move
(44-20) 7325-5242
up in inflation, and without a change in central bank
stance. Equity yield still appears attractive vs other asset
Emmanuel Cau, CFA
classes, and asset allocators’ drive for yield compression
(44-20) 7325-1684
emmanuel.b.cau@jpmorgan.com could underpin further rerating.
Figure 1: MSCI Europe in 2009
1150
Staying the course – Remain OW equities 1100
With developed equity markets rebounding almost 60% 1050
over the past few quarters it might be tempting to project 1000
950
lacklustre equity performance for 2010, perhaps
900
something along the lines of 1994, or 2004.
850
800
After all, equity valuations are back to historical
750
averages, consensus EPS growth expectations for ’10 and
700
’11 at face value appear punchy, consumer backdrop Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
remains poor, the withdrawal of a number of policy
MSCI Europe
stimuli in 2010 will be a drag, the aftershocks of credit
Source: Datastream, MSCI
crunch linger and there is risk of a significant move up in
bond yields, perhaps even a violent one, to name just a Trajectory for 2010? Having been bullish on stocks this
few potential negatives. year, we took risk off the table on 1st Oct, looking for a
consolidation, broadening and a rangebound market over
We find the majority of clients we speak to are highly the past few months.
skeptical of the sustainability of economic rebound. They
see most of this year’s stabilization in activity to be We are closing this tactical “de-risking” call now and
artificial in nature and are struggling to find the driver of believe the market is ready to break out of the recent
the next leg of recovery, beyond restocking. trading range and make new highs in this upcycle over
the next 6-9 months. The near term catalysts are strong
While cognizant of the above highlighted headwinds, we earnings reporting season, positive payrolls, rebound in
believe markets will extend their ’09 gains over the course leading indicators and increasing risk allocation into new
of the next year, and we are looking for 20% upside. year.
JPM forecasts real GDP growth to be above trend in Following the potentially strong 1H, we think increased
2010 in most parts of the world. We believe a clear turn interest rate volatility might weigh on stocks in the 2nd
in labour markets might be a catalyst to persuade half of 2010.
investors to step in.
J.P. Morgan base case – economic recovery has legs
What will the drivers of the upside be? We think both the
robust EPS growth as well as some further multiple The macro data flow remains mixed, but our economists
expansion could support equity performance next year. believe the foundations for the next leg of economic
recovery are in place, and forecast most regions to
European consensus EPS growth forecasts for the next 2 deliver relatively high rates of growth in 2010.
years project 40-50% cumulative growth. We think these
numbers are achievable, looking at the patterns of the
past recoveries. Also, margins are troughing at a
relatively high level due to a strong cost cutting drive, so
the operational leverage to any kind of topline pickup
could be substantial.
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(44-20) 7325-5242 07 December 2009
Table 3: J.P. Morgan Real GDP growth expectations Figure 2: US temporary jobs vs payrolls
600 60
%q/q, saar % oya
09Q4 10Q1 10Q2 10Q3 10Q4 2009 2010 400 40
US 3.5 3.0 4.0 4.0 3.5 -2.5 3.2 200

20
Eurozone 2.5 3.0 3.0 3.0 2.5 -3.9 2.5 0
UK 2.0 2.0 2.5 2.8 3.5 -4.6 1.6 0

-20
Japan 2.5 2.5 1.5 1.5 2.0 -5.2 2.4 -200
China 9.1 9.0 9.5 9.3 8.7 8.6 9.5 -40
-400
-60
Global 3.4 3.4 3.6 3.7 3.4 -2.5 3.3 -600 -80
DM 2.9 2.8 3.1 3.2 3.0 -3.4 2.7 -800 -100

EM 5.3 5.6 5.3 5.7 5.0 0.7 5.8 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: J.P. Morgan forecasts, as at 13/11/2009 Nonfarm employ ment Temporary employ ment
Source: Datastream
The US real GDP growth is expected to be 3.2% in 2010,
vs the Blue Chip consensus forecast of 2.7%, and
First, historically the increase in temporary hiring would
Eurozone 2.5% vs 1.2% respectively. EM are projected
call for a more benign payroll outlook going forward.
to deliver robust rates of growth as well, at 5.8% in 2010.
Figure 3: Global manufacturing employment vs IP
Table 4: US and Euro area GDP growth breakdown 20 5
%q/q, saar 09Q4 10Q1 10Q2 10Q3 10Q4

10
US
0
Fixed Investment 1.8 4.1 4.8 7.8 8.4
Private Consumption 1.7 1.5 2.5 2.5 3.0 0
Net Trade* -0.2 0.1 0.1 0.2 0.1

Inventories* 1.8 1.1 1.3 1.0 0.3 -10 -5
Euro Area
Fixed Investment 3.0 4.0 4.0 4.0 4.0 -20
Private Consumption 1.0 1.5 1.5 2.0 2.0 -10

Net Trade* 0.4 0.3 0.3 0.3 0.3 -30
Inventories* 0.4 0.7 0.7 0.4 -0.1
Source: J.P. Morgan estimates, *contribution -40 -15
92 94 96 98 00 02 04 06 08
Global IP (%3m, saar) Global manufacturing employ ment (%3m saar, rhs)
Decomposing the overall growth rate, JPM forecast is Source: J.P. Morgan, H2 forecasts in dots
that both the rebound in corporate spend as well as some
pickup in consumer will contribute to growth, in addition In addition, the move down in jobless claims, the pickup
to the inventory tailwind. in the employment part of ISM, stabilisation in corporate
profitability and the surge in productivity all suggest
The investors are doubtful about the ability of these two labour markets will start to turn positive in the not too
areas to drive final demand, seeing consumers to be in distant future.
continued deleveraging mode and not finding a need for
capex rebound. Don’t bet against Capex rebound
Labour market at the inflection point Figure 4: Capex as a share of GDP

20% 23%
Starting with the consumer, we think that the key catalyst 19% 23%
which will change the cautious investor outlook is better 18%

22%
17%
labour market data. 22%
16%
21%
15%
In particular, US payrolls, the key sentiment setter, 21%
14%
should move into positive territory early next year. We 20%
13%
see 5 reasons for this: 20%
12%
11% 19%
47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
US Priv ate fix ed inv estment % of GDP Eurozone Nominal gross fix ed inv estment % of GDP (rhs)
Source: Eurostat, BEA
9
(44-20) 7325-5242 07 December 2009
With regard to capex, the key pushback lies with the very One of the drags to the growth recovery next year will
low utilisation rates. The consensus view is that there is clearly be the reversal of fiscal support, but our
no need for new capex with all the spare capacity in the economists expect this effect to be initially gradual, and
system, and because corporates have a low visibility of the largest impact not to start before Q1 2011.
final demand.
Conditions in place for the upcycle
However, we point out that the actual capex spend as a
share of GDP is also at a record low, and the extreme Thinking back to the beginning of this year, most
readings of both the utilization rates and capex spend are investors identified two conditions that needed to be met
just the reflection of the current stage of the cycle => the in order to turn more positive: 1) credit stabilization, 2)
trough. house prices troughing. Both of these are tracking.
Figure 5: Lending standards vs non-residential capex Table 5: Selected credit indicators, current vs peak levels
-40 15%
Back
10%
-20 chang to
0
5% Peak Current e level
0%
level level (bps) of
20 TED spread 464 22 -442 Feb-07
-5%
40
3m Libor-OIS spread 366 12 -354 Jul-07
-10% 30-year Mortgage rate 6.63% 4.78% -185 Apr-09
60
-15% US High grade spread 558 160 -398 Nov-07
80
US high yield spread 1929 748 -1181 Jul-08
-20%
European high grade spread 326 109 -218 Dec-07
100 -25% European high yield spread 1727 498 -1228 Jul-08
91 93 95 97 99 01 03 05 07 09 US Credit Cards Fixed AAA ABS* 575 45 -530 Dec-07
US Auto (Prime) Fixed AAA ABS* 625 55 -570 Nov-07
US tightening in lending standards (adv 3q, rs) US non residential capex (%y oy , rhs)
CMBX NA.5 AAA Mid-Spread 848 359 -489 Nov-08
Source: Datastream, Federal Reserve iTraxx Europe 5Y Crossover 1153 512 -641 Jun-08
Source: Datastream, J.P. Morgan, Bloomberg, *3-year spread to swap
The key drivers of capex, bank lending standards,
corporate profitability and the momentum in utilization The liquidity in credit markets is being steadily restored
rates are all suggesting an improvement ahead. with most credit spreads back to the levels of 2007.
These levels were consistent with much higher equity
Already a number of corporates, among other Cisco, Rio values than current. We acknowledge that confidence
Tinto and TSMC are indicating rising capex budgets. remains fragile, and aftershocks from credit crisis could
shortcircuit the improvement we witnessed to date, but
Figure 6: Estimated contribution of fiscal policy to US GDP this should not be seen as a base case.
growth
4 3.5 Figure 7: US and UK house prices
2.9 50%
3
40%
1.9
2 30%
20%
1
0.3 10%
0.0
0 0%
-10%
-1 -0.6 -0.5
-0.7
-0.9 -20%
-1.1
-2 -30%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
-3 -2.5
-2.7 S&P/Case-Shiller Home Price Index - 10-city , sa (%3mom, saar)
2009E 2010E 2011E
UK Nationw ide house price index , sa (%3mom, saar)
Source: J.P. Morgan estimates, %ch, includes expiration of Bush tax cuts
Source: S&P/Case-Shiller, Nationwide
10
(44-20) 7325-5242 07 December 2009
The aggressive policy stimulus is producing the desired Figure 8: S&P500 EPS fall and rebound around past recessions
2001 100%
effect, driving asset reflation. The house prices in key
Y +24m S&P500 operating EPS growth from the trough

markets appear to be stabilizing. While the volume of 80%
transactions remains low, the key impact from house
price stabilization is on the consumer sentiment, and on 60%
2009
the balance sheets. One way to deleverage in relative 1953
1991 1975 40%
terms is for the asset prices to move up, which leaves 1983
1961
debt levels appearing manageable. 1970
20%
1958
1949
Drivers of the upside – Corporate profits to grow 0%
20% in 2010 and 15% in 2011 1981

-20%
-60% -50% -40% -30% -20% -10% 0%
Table 6: Consensus EPS growth estimates for MSCI US, UK and X S&P500 operating EPS fall Peak to Trough
Eurozone Source: Datastream, IBES, Thomson Financial
EPS %yoy 2010/09e 2011/10e
US 21.5% 19.0% Second, analyzing the past earnings cycles, the size of
UK 20.0% 20.0%
Eurozone 24.3% 21.1%
the eventual EPS rebound tended to be positively
Source: IBES
correlated with the size of the initial EPS fall.
Figure 9: MSCI Europe EPS fall and rebound around past

The consensus is already projecting relatively punchy
recessions
EPS growth rates for the next two years, for Europe at 100%
Y +24m MSCI Europe EPS growth from the trough

24% and 20% in 2010 and 2011 respectively. Our own 2003 90%
80%
forecasts are somewhat lower than these, but earnings 70%
delivery should continue to be seen as a source of support 60%
1993
for the markets next year. 1976 50%
2009 40%
30%
Table 7: 2011e Consensus EPS estimates vs peak level of 2007,
1982 20%
MSCI indices 10%
2007 EPS 2011e EPS 11e vs '07 0%
-46% -44% -42% -40% -38% -36% -34% -32% -30%
US ($) 75 85 13%
X MSCI Europe EPS fall Peak to Trough
UK (£) 174 155 -11%
Eurozone (€) 18 16 -12% Source: Datastream, IBES
Source: IBES
In the two charts above we plotted the US and European
We put forward 3 reasons why strong EPS growth rates EPS movements in the past cycles. On the horizontal axis
over the next 2 years should be expected. First, the we put the magnitude of EPS fall from peak to trough in
growth rates are elevated partly because of base effects the past downturns, while on the vertical axis we have
from ’09 lows. The level of European earnings that the corresponding size of the EPS rebound in the first
consensus is projecting for 2011 is still expected to be two years of recovery. Adding the current (2009)
below previous peaks. consensus projections to the chart shows that these
forecasts are not inconsistent with historical patterns.
11
(44-20) 7325-5242 07 December 2009
Figure 10: Europe EBIT margins Drivers of further P/E rerating

14%
13%
Figure 12: MSCI Europe 12m Fwd P/E
12%
25
11% 23
21
10%
19
9%
17
8% 15
7%
13
11
6%
9
99 00 01 02 03 04 05 06 07 08 09E
7
Europe ex -Financials EBIT/Sales
5
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Datastream, MSCI, IBES, bottom-up aggregated
MSCI Europe 12m Fw d P/E median
Third, one should expect relatively robust EPS rebound Source: IBES
due to the high operational leverage that companies
possess. They have aggressively cut costs in this European equities have already rerated from 8x forward
downturn, with margins stabilizing at much higher levels P/E at the low to 13x currently, to trade in line with
than last time around. Any potential rebound in top line historical averages. The question is whether they will
could lead to significant EPS growth delivery. stop there, or overshoot.
Figure 11: Eurozone EPS growth vs J.P. Morgan model forecast Figure 13: European dividend yield gap
40% 5.0%
Equities expensive
30%
4.0%
20%
10% 3.0%
0% 2.0%
-10%
1.0%
-20%
-30% 0.0%
-40%
-1.0%
-50%
-60% -2.0%
-70% -3.0%
83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
Equities cheap
-4.0%
99 00 01 02 03 04 05 06 07 08 09
EMU trailing earnings (%y oy ) Earnings model forecast (%y oy )
Div idend Yield Gap 24mma DY Gap +1.5 Stdev -1.5 Stdev
Source: Datastream
Our model for earnings which uses global activity proxy, Looking at the equity dividend yield vs government bond
margin proxy and currency impact is projecting 20% EPS yield, equities still appear attractive. Despite the rally
growth in 2010 and 15% in 2011. The headwind from over the past few quarters, the yield gap is as positive as
further Euro strength is shaving off some of the EPS it was at any point since March 2003.
growth.
We acknowledge that this type of comparison is
theoretically flawed, and the Japanese experience in 90-
ies is an example of a market where low bond yields did
not drive sustainable P/E expansion.
However, we think there is a potential for equities to

overshoot their historical average valuation multiples
next year, in the same way that they undershoot them in
2009. The catalyst for this would be the favourable
growth – inflation/rates tradeoff.
12
(44-20) 7325-5242 07 December 2009
Figure 14: US headline CPI vs oil price Figure 16: European P/E multiple and J.P. Morgan forecast
9% 200%
40%
8%
30%
7% 150%
6% 20%
100%
5% 10%
4% 0%
50%
3%
-10%
2%
0%
-20%
1%
0% -30%
-50%
-1% -40%
-2% -100% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Actual Europe 12m fw d P/E (%y oy ) Forecast Europe 12m fw d P/E (%y oy )
WTI forecasts US headline CPI (%y oy ) WTI (%y oy ,rhs) Source: Datastream
Source: Datastream, J.P. Morgan
Our regression model suggests there could be some P/E
JPM view is that the inflation will remain subdued for a multiple rerating into next year due to low interest rates
long time. True, we think there will be some pickup in and subdued inflation, while Euro strength is a negative.
headline CPI in the 1H of 2010, to a range of 2-3% yoy
rate due to WTI base effects, but beyond this, we do not Market trajectory in 2010
expect any inflationary pressure. Inflation is a lagging
indicator of growth, and lack of pricing power, weak Table 8: Non-farm payrolls at times of first Fed hike
labour markets, weak credit generation, dramatic size of # mths
output gaps are just some arguments in favour of low End of 1st Fed positive
core inflation rates. recession Payrolls Hike Payrolls payrolls
Apr-58 -274 Jul-58 125 1
Feb-61 -127 Nov-61 222 7
If this forecast materializes, then the case for central Nov-70 -110 Jul-71 63 5
banks to remain accommodative for longer could Mar-75 -270 Aug-77 238 26
Jul-80 -263 Oct-80 280 3
strengthen. Nov-82 -124 Mar-84 275 7
Mar-91 -160 Feb-94 201 24
Figure 15: Shape of the US yield curve and recessions Nov-01 -292 Jun-04 81 10
6 Average -203 186 10
Median -212 212 7
4 Source: Datastream
2
We note that Fed has historically not started normalizing
0
policy stance before 7-10 months of positive payrolls.
Assuming payrolls turn positive in Q1 of next year, the
-2 earliest the Fed would start withdrawing policy support
would be 2H of 2010.
-4
-6 This creates a window of opportunity, a 6-9 month period

54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 where the macro data flow should be broadly supportive,
NBER dated recessions Yield curv e (10y r - Fed funds) with an improvement in labour markets persuading
Source: Datastream, NBER investors that recovery is becoming sustainable, and
before there is clear need for liquidity withdrawal by
With yield curve near record steep, this could drive central banks.
further yield compression in various asset classes, and
facilitate further equity multiple expansion.
13
(44-20) 7325-5242 07 December 2009
Figure 17: Standardized S&P500 performance around the 1st hike Figure 19: MSCI China and European Metals & Mining
in the aftermath of recessions performance in May 2006
40 MSCI China dow n 20% 0.28
105
Met&Mining dow n 23%, 13%
39 v s MSCI Europe
103 0.27
38
101
37 0.26
99
36
97 0.25
35
95
34 0.24
93
33
0.23
91
32
89
31 0.22
Mar-06 Apr-06 May -06 Jun-06 Jul-06 Aug-06
87
85 MSCI China Metals & Mining rel to Europe (rhs)

1st hike
-12M
-10M
-8M
-6M
-4M
-2M
+2M
+4M
+6M
+8M
+10M
+12M
1st hike Av erage S&P500* Median S&P500*

In addition, the EM central banks could start hiking
Source: Datastream, *re-based to 100 on the day before the 1st hike, since 1971 ahead of DM to tackle perceived asset bubbles, hurting
the market sentiment, similar to the summer of ’06.
We note that historically equities tended to fall every
single time post the start of Fed tightening. However, this But the key risk in our view is to do with growth, a
would not be a game changer. double dip, where the consumer remains in de-leveraging
mode. If there is no topline growth next year, margins
Therefore, in terms of trajectory we think 1H could be will fall further and equities could crash again.
stronger, with a potential equity weakness discounting
the start of Fed rate increases in 2H. Scenario analysis
The risks Table 9: Base Case, Upside and Downside

Scenario Prob. Mkt.prf Assumptions
Clearly, there are significant risks around the base case Strong growth recovery without policy
“Goldilocks”
forecast, given that to some extent we are in unchartered tightening. Earnings surprise on the
Upside
waters, and the aftershocks of the credit crunch are upside.

30% 40% Equities rerate significantly.
lingering. Cyclical and Financial sectors continue to
outperform strongly.
Figure 18: S&P500 vs US 10Y bond yield in 1994 Recovery proves sustainable, markets
continuing
“Recovery
Base case
8.5 650 start to discount hikes in 2H.

Earnings grow 20% at market level.
”
50% 20%
8.0 Modest multiple expansion.
600
Beta outperforms, but marginally.
7.5
Final demand rebound fails to follow
7.0
550 restocking.
World falls into deflationary trap,
“Double- dip”
Downside
consumers undergo a significant and

6.5
500 20% -40%
protracted process of balance sheet
6.0 repair.
450 Cash is king, only the defensive sectors
5.5 outperform, but even they fall significantly
in absolute terms.
5.0 400
Jan-93 Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Source: J.P. Morgan
US 10y Bdy S&P500 (rhs)
Source: Datastream
Perhaps our outlook on G4 central banks remaining

accommodative for longer is too benign. There is a risk
of significant bond market sell-off, along the lines of
1994, which could hurt equity performance.
14
(44-20) 7325-5242 07 December 2009
Positioning and themes 2. OW Cyclicals vs Defensives, but expect much

smaller outperformance than in 2009
1. OW Europe vs. US …
We think Cyclicals will continue to outperform
Table 10: Regional Sector Neutral valuations
Defensives in 2010, but the likely size of their
Sector Neutral outperformance will be much smaller, because of 2
12m fwd Premium / Premium / LT avg
P/E Discount P/E Discount discount issues among others.
US 14.9
Europe 12.7 -14.7% 13.3 -10.9% -6.1% Figure 21: Cyclicals relative to Defensives vs ISM
EMU 12.4 -16.6% 13.1 -12.0% -4.5% 30% 50%
UK 12.5 -16.3% 13.2 -11.4% -11.0% 40%
Japan 19.7 31.8% 21.3 42.6% 39.3% 20%
30%
Source: Datastream, IBES, J.P. Morgan 10%
20%
10%
0% 0%
We find European equities attractively valued vs their US -10%
counterparts, while at the same time European profit -10%
-20%
margins have closed the gap with the US. -20%
-30%
-40%
-30% -50%
Investors are skeptical, they see Europe as the “last in - 96 97 98 99 00 01 02 03 04 05 06 07 08 09
last out”, but European corporates are as leveraged to Europe Cy clicals rel to Defensiv es (%6mom) ISM (%6mom, rhs)
global growth recovery as US ones. In addition, our
Source: Datastream, J.P. Morgan
economists project larger growth surprise in Eurozone vs
the consensus, than in the US, at 1.3%, vs 0.6%.
As the relationship above shows, the relative
performance of Cyclical and Defensive sectors is
… and Germany within Europe
correlated to macro momentum. The bulk of the
Figure 20: Dax vs Europe, since March '09 and March '03 acceleration in macro momentum has happened, which
130
means a less significant relative outperformance of
Cyclicals vs Defensives going forward.
125
Figure 22: Relative P/E - Cyclicals vs Defensives

120
1.5
115 1.4
1.3
110
1.2
105 1.1
1.0
100
0.9
95 0.8
trough +1m +2m +3m +4m +5m +6m +7m +8m +9m +10m +11m +12m
0.7
Dax rel to Europe in 2003 Dax rel to Europe in 2009 0.6

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Datastream, re-based to 100 on 12 March '03 and 09 March '09
Europe Cy clicals 12m Fw d P/E rel to Defensiv es av erage +1stdev -1stdev
German equities have performed only in line with the Source: Datastream, IBES, J.P. Morgan
rest of Europe this year, despite Germany being joint
largest global exporter, neck to neck with China at 1.7trn Second, Cyclicals could derate vs Defensives, from
USD exports. In 2003 German stocks were significant current stretched relative multiples. If our 2010 economic
outperformers, and we think at some point in the current outlook proves to be correct, the earnings of Cyclical
recovery they should outperform again. sectors will significantly beat Defensive earnings, but we
also think that they will undergo relative P/E derating,
capping the size of their outperformance.
15
(44-20) 7325-5242 07 December 2009
3. Relative EPS momentum to work in 2010 A number of sectors benefited this year from a collapse
in input costs, while at the same time their pricing
Table 11: European sectors relative EPS momentum and remained relatively robust, lagging the downturn in
performance volumes. This created a positive pricing effect on
% time rel perf and rel EPS margins.
momentum 2010e rel EPS
are positively correlated %yoy
Energy 87% 8% We think this tailwind will reverse next year, where input
Healthcare 80% -17% cost pressure will reappear, but corporates will be unable
Staples 73% -13% to pass it on due to significant spare capacity. Sectors
Financials 67% 11%
Utilities 67% -21%
such as Chemicals and Food producers might be at a
Telecoms 60% -18% disadvantage here.
Materials 53% 20%
Discretionary 53% 52%
5. Yield compression
IT 47% 34%
Industrials 40% -5%
Source: Datastream, MSCI, IBES, * since 1995
Table 12: Dividend vs corporate bond yield (%)
Dividend High grade LT
Three European level 1 sectors have historically yield yield Difference average
Utilities 6.0 3.8 2.2 -1.0
exhibited a strong correlation between their relative Telecom 5.7 3.7 1.9 -2.1
performance and relative EPS momentum: Energy, Energy 5.1 3.8 1.3 -1.7
Pharma and Staples. Real Estate 4.7 4.0 0.7 -2.0
Chemicals 3.4 3.1 0.3 -1.7
Staples 2.9 3.4 -0.6 -2.3
Energy stocks tended to outperform the market when Capital Goods 3.0 3.9 -0.9 -2.1
their EPS growth was stronger than the market and vice Transport 2.7 3.9 -1.2 -2.1
versa 87% of the time, Pharma 80% and Staples 73%. Technology 2.5 4.0 -1.5 -3.5
Autos 1.5 3.1 -1.6 -1.7
Building Materials 2.1 3.9 -1.9 -2.3
Next year Energy earnings are likely to deliver stronger Source: Datastream, J.P. Morgan
growth than the broader market, supporting OW on the
sector. For Staples and Pharma, it is the opposite. We believe a theme for 2010 will be the asset allocation
switch into equities, following the initial move out of cash,
4. Pricing margin squeeze first into bonds and then into credit. The yield compression
might drive the better performance from some selected high
Figure 23: Euro-area Food CPI - PPI differential yielding parts of the market, see our report “Search for
8%
yield could drive further P/E rerating in 2010”, dated 11
6% November 2009 for more details on this.
4%
6. Return of M&A
2%
Figure 24: M&A volumes and equity performance
0% 200% 50%
40%
-2% 150%
30%
20%
-4% 100%
10%
-6% 50% 0%
96 97 98 99 00 01 02 03 04 05 06 07 08 09
-10%
0%
Eurozone Food CPI - PPI (%y oy ) -20%
-30%
Source: Eurostat -50%
-40%
-100% -50%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
European Deal Value ($m) %y oy 6mma MSCI Europe %y oy 6mma (rhs)
Source: Datastream, Dealogic
16
(44-20) 7325-5242 07 December 2009
Corporate balance sheets are in a relatively good 8. Own selected DM growth exposure, don’t focus just
condition and profit margins are stabilizing at high on EM growth
levels. With reopening of credit markets, we believe it is
reasonable to expect the pickup in M&A volumes. As the Bullishness on EM vs DM is widespread. We feel a
chart above shows, the key driver of M&A activity, after greater positive surprise will be Eurozone growing 2%
all, is the improvement in equity market itself. next year, rather than China 10%.
7. “Quality” to perform in 2010 EM have significantly outperformed DM over the past

year, and their valuations have rerated.
Table 13: Factors that have worked for outperformers* in 2Q, 3Q
and 4Q 09 to date Table 14: Central Bank rates outlook for key developed and
4Q09 to date emerging countries
Peak to
MV trough ND Forecast
Quintile Rel Perf weight rel perf /Equity %ch EPS RoE P/E P/Book Div Yield
Dec Mar Jun Sep Dec
Q1 10% 24% 1% 0.3 7% 13% 14.4 1.9 2.8%
Q2 3% 27% 3% 0.5 3% 14% 14.1 2.0 3.1%
Current 09 10 10 10 10
Q3 -3% 23% 4% 0.6 3% 13% 13.2 1.9 3.2% Developed
Q4 -7% 16% 6% 0.5 1% 12% 14.1 1.5 3.4% US 0.125 0.125 0.125 0.125 0.125 0.125
Q5 -14% 9% -1% 0.3 0% 9% 13.1 1.2 2.3%
Euro Area 1.00 1.00 1.00 1.00 1.00 1.00
3Q09 UK 0.50 0.50 0.50 0.50 0.75 1.00
Peak to Japan 0.10 0.10 0.10 0.10 0.10 0.10
MV trough ND Emerging
Quintile Rel Perf weight rel perf /Equity %ch EPS RoE P/E P/Book Div Yield
Q1 22% 14% -7% 0.4 2% 8% 10.9 0.9 3.0%
Brazil 8.75 8.75 9.75 10.75 10.75 10.75
Q2 7% 17% 0% 0.3 1% 10% 12.1 1.2 3.1% Chile 0.50 0.50 0.50 1.00 2.00 3.50
Q3 0% 22% 3% 0.7 3% 13% 12.6 1.7 3.5% China 5.31 5.31 5.31 5.31 5.58 5.85
Q4 -7% 24% 8% 0.5 0% 14% 12.8 1.9 3.6% India 4.75 4.75 5.00 5.25 5.25 5.25
Q5 -17% 22% 13% 0.4 -3% 16% 11.8 1.8 4.0%
Korea 2.00 2.00 2.25 2.50 2.75 3.00
2Q09 Turkey 6.50 6.50 6.50 6.50 7.50 8.00
Peak to Poland 3.50 3.50 3.50 3.50 4.00 4.50
Quintile Rel Perf
MV
weight
trough ND
rel perf /Equity %ch EPS RoE P/E P/Book Div Yield
Czech Republic 1.25 1.25 1.25 1.75 2.50 3.00
Q1 34% 13% -8% 0.5 -9% 9% 7.1 0.6 4.5% Source: J.P. Morgan estimates
Q2 14% 13% -2% 0.3 -4% 11% 9.8 1.0 4.2%
Q3 4% 24% 4% 0.6 -4% 14% 10.6 1.5 4.4%
Q4 -4% 22% 8% 0.4 -2% 14% 10.1 1.5 4.4% In addition, EM central banks are more likely to start
Q5 -13% 29% 11% 0.4 0% 14% 10.5 1.4 5.1%
normalizing policy rates ahead of DM, potentially
Source: J.P. Morgan, MSCI, 12m Fwd IBES estimates, *Q1 is the top quintile which
includes the top 20% performing stock during the quarter negatively impacting the sentiment.
In 2009 our focus was on the beta, Value and the biggest Therefore, while growth will continue to be stronger in
fallers in the downturn. While “low quality” was the EM than in the DM, it is a consensus trade and EM
outperformer this year, into 2010 we think that the policy tightening could happen ahead of DM. We think it
drivers of stock selection will become positive EPS is worthwhile looking for companies exposed to
momentum, higher ROE, Growth, etc. US/Europe demand which are not pricing in much
recovery, and not purely searching for EM leverage.
The table above breaks the European stocks in 5 groups,
with Q1 being the best performers in the quarter, and Q5
the worst. During the second and third quarter, the best
performing stocks (Q1) were small caps, low ROE,
Value, biggest fallers in downturn, and the ones with the
most negative EPS momentum.
This is starting to change in the 4th quarter, where larger

caps, Growth, higher ROE and positive EPS momentum
are outperforming.
17
(44-20) 7325-5242 07 December 2009
Small/Mid-Cap Strategy
Eduardo Lecubarri AC
Pan-European Small/Mid-Cap Strategy
(44-20) 7325-1213
eduardo.lecubarri@jpmorgan.com
Outlook
Anders Bergman
(44-20) 7325-5346
Higher highs near term with stockpicking taking over the macro
anders.x.bergman@jpmorgan.com The last 3 yrs has put SMid investors to the test. When we turned UW on SMid-
J.P. Morgan Securities Ltd. Caps back in Jul ’07, we never imagined that the correction that would follow would
take the MSCI Small Cap Index down 63% — we found ourselves particularly
questioning our UW stance during 2008, a yr in which the index experienced five
>10% rallies. In our opinion, it is much easier to maintain conviction at present and
We reiterate the OW stance we we reiterate the OW stance we have maintained since Feb ’09, for even after this 9
have maintained since Feb and mth 67% rally, most signals point to a mkt that will reach higher highs near term:
believe 1H10 could be strong,
driven more by stockpicking • The Macro Remains Supportive (most data points still show seasonal
than the macro
improvement, the yield curve is steep and steepening, and interest rates are likely
to remain low for most of 2010).
Figure 25: # of Pan-European SMid- • Fundamentals Are Weak but Improving (IBES calls for 5.7% avg sales grw,
Caps trading at: 23.6% avg EPS Grw), SMid-Caps have seen 6 consecutive mths of upward
P/E 09E upgrades and 3 of upward revisions, and 4Q09 is likely to be a better than
460
<10x
expected reporting season).
P/B <1x 589
• Valuations Continue to Strongly Indicate BUY. P/E 09E IBES of 17.5x is a
1.4x discount to its 20-yr avg, despite 09E earnings being cycle trough. P/B
valuations of 1.9x imply a 23% discount to the 2.5x hist avg.
P/3-Yr High
367
• Technicals Suggests Opportunity Still Exists. As a % of pre-recession highs,
<30%
this is still the second worst sell-off in equities since 1940, and seasonality
P/3-Yr High
1018
suggests Jan and Feb have historically been the strongest mths of the yr for SMid-
<50%
Caps (up 2.9% and 2.6% on avg and 79.2% and 70.8% of the time respectively).
P/3-Yr High
<70%
1634 • Buy-side Sentiment Is Another Significant Positive Driver. Expectations of a
sustained rally + inflows + 2009 underperformance + more risk appetite (new yr
0 500 1000 1500 2000 = 12-mth horizon) = Investment.
Source: Bloomberg, Datastream, Factset and
J.P. Morgan Calculations Below we provide a brief summary of our top down views on European SMid-Caps.
In short, we see two areas where ’10 may differ from ’09: a) our belief that the strong
half in the equity mkt during ’10 is likely to be 1H10; and b) our belief that ’10 will
be a yr where performance will be more driven by stock picking than the macro.
How to position?
• OW SMid (on an absolute return basis)
• N SMid (relative to Large)
• OW Value (vs Grw) (our Halibut Screen — see our SMid Trilogy)
• OW Quality Balance Sheets (our Golden Geese Screen — see our SMid Trilogy)
• OW Cyclicals (vs Defensives)
• Expect stockpicking to take over the macro — two stocks we highlight from our
Radar (included in our Monday weekly publication titled “The SMid Week
Ahead”): Deutsche Lufthansa (LHA GR/Not Covered/€10.65) and Rhön
Klinikum (RHK GR/OW/€16.42).
18
(44-20) 7325-5242 07 December 2009
The macro remains supportive

Most data points still show seasonal improvement. We believe there is a gap
between perception and the macro-economic reality today. Perception seems more
bearish than the data would suggest. While in recent mths we have started to get
some weaker macro economic data points here and there, the majority of them
continue to point to seasonal improvements on a mthly basis. In fact, last mth, for
every data point that showed a sequential decline, there were 2 that showed
improvement (see Figure 9 on Pg 11 of The SMid Trilogy report we published on
Nov 6th).
And interest rates help. There is ongoing concern about a macro-economic double-
dip taking place in 2010. Such a situation could not only take the equity market
down significantly from current levels, but it could potentially bring us all the way
back to the financial unrest of early Mar or even worse, as governments no longer
have the liquidity needed to help get us out of such a crisis. With this in mind, we
find it highly unlikely that governments will choose to raise rates in the absence of a
strong economic recovery. In our opinion, there is a strong likelihood that economic
grw and inflation will remain anemic during much of 2010, keeping interest rates low
(a belief shared by our economics team – see Figure 26 below). This would
undoubtedly continue to push the flow of funds from gold and cash into higher
yielding asset classes (with equities being the winner).
JPM Economists expect rates Figure 26: Interest Rate Forecast — J.P. Morgan's Economics Team
to remain largely unchanged in US UK Euro
1.2%
2010 — something that would 1.00% 1.00% 1.00% 1.00% 1.00%
keep funds flowing into 1.0%
equities
JPM Est. Base Interest Rates
0.75%
0.8%
0.6% 0.50% 0.50% 0.50%
0.4%
0.125% 0.125% 0.125% 0.125% 0.125%

0.2%
0.0%
4Q09 1Q10 2Q10 3Q10 4Q10
Source: J.P. Morgan
Moreover, and as we see in Figure 27 below, not only the short end, but the overall
shape of the yield curve remains highly supportive for equities. Historically, steeper
yield curves have coincided with stronger 12-mth fw returns for Pan-European
SMid-Caps. At present, the yield curve is not only steep but steepening.
19
(44-20) 7325-5242 07 December 2009
Figure 27: Price perf analysis of MSCI Small Cap Europe vs the Yield Curve (10-yr less 5-yr EMU Gov. Bond Index) — 1995-Present
MSCI Europe Small-Cap Perf. vs Yield Curve (10-Yr less 5-Yr EMU Bond Index Yield)
I nterest Rate Delta between 10-Yr & 5-Yr EMU Bonds (Mthly) Frequency (% of Total Periods) % Periods Up MS CI S C Avg Perf
1.87
Delta betw een 10 Yr & 5 Yr Bond Ylds % of Total Periods % Periods U p 12-month return
1 M th ago
1.82 1.86 Latest
8% 73% 23.6%
1.64
12% 94% 24.1%
Yield Curve (10-Yr - 5-Yr EMU Bonds)
1.46
9% 92% 23.2%
1.28
17% 70% 11.9%
1.10
10% 69% 2.6%
0.92
16% 14% -13.1%
0.74
10% 57% 0.1%
0.56
7% 20% -19.8%
0.38
10% 21% -13.9%
0.20
1 15 29 43 57 71 85 99 113 127 141 0% 5% 10% 15% 20% 0% 50% 100% 150% -40.0% -20.0% 0.0% 20.0% 40.0%
Nu m ber of m onths (cum u lative) Frequ en cy % Periods Up 12-m th avg return (%)
Source: Bloomberg, Factset, Datastream, and J.P. Morgan Calculations
Fundamentals are weak, but improving

The overall shape of the yld Fundamentals could be turning the corner in 2010 (although we are still not out of
curve is steep and steepening the woods). IBES expectations call for Pan-European SMid-Caps to deliver sales
— something that historically grw of 5.7% on avg next yr, compared to 23.6% avg EPS Grw. While expectations
related to strong SMid returns may be starting to be somewhat demanding, we remind investors that 4Q09 EPS
estimates remain modest — YoY EPS grw is expected to decline sequentially in 7 of
10 sectors within the S&P 500, something that seems hardly possible given that
4Q08 was dismal. We therefore view 4Q09 expectations as undemanding, and
believe that a better than expected reporting season, together with the ongoing reality
of upgrades and upward revisions could help to push Pan-European SMid-Caps
Undemanding 4Q09 higher during the first months of the yr.
expectations and the positive
momentum in sell-side Figure 28 below shows the % of Pan-European SMid-Caps upgraded vs those
revisions and upgrades could downgraded on a mthly basis (while Figure 29 shows those with upward revisions vs
help take SMid-Caps higher downward revisions). As we can see in the charts, November was the 6th mth in a
during the start of 2010 row with more companies upgraded than downgraded, and the 3rd mth in a row, and
in more than a yr, with more experiencing upward revisions than downward revisions
to their IBES 09E EPS.
Figure 28: % of Companies with Revised IBES Consensus Recommendations — Pan-European SMid-Cap Universe (~2K Stocks)
% of Cos Upgraded % of Cos Downgraded
53.5%
55%
% of covered Co's upgraded / downgraded (IBES)
50.4%
47.1%
45% 42.0% 40.9%

38.5% 40.0% 40.0%
37.9% 37.7% 37.5%
37.8% 38.1% 37.1% 39.5%
36.2%
35.0% 34.2%
35% 34.9%
30.7% 35.7% 35.4%
34.0% 33.8%
29.7% 29.4% 33.0%
27.1% 27.3% 31.6% 31.6% 30.6% 31.3%
25.5% 30.2% 30.5% 30.5%
25.0% 25.3% 29.9% 29.4% 29.0% 28.8% 28.5%
24.2% 24.2% 25.9%
25% 20.2%
23.3% 23.6% 23.5% 23.3%
21.9% 23.0%
21.7% 22.0% 22.5%
19.5%
17.7% 18.9%
15%
Jun 07 Jul 07 Aug 07 Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09
20
(44-20) 7325-5242 07 December 2009
Figure 29: % of Companies with Revised IBES Consensus 09E EPS — Pan-European SMid-Cap Universe (~2K Stocks)
% of Cos Revised Up % of Cos Revised Down
78.1%
75% 72.1% 71.0% 68.8%
% of Co's with revisions to 09E EPS (IBES)
70.7%
64.1%
65% 63.8%
56.7% 57.4%
57.1% 57.3%
55% 49.6% 48.9%
44.2% 47.9% 49.5% 45.0% 43.5%
45% 41.7% 43.7% 40.5%
39.0% 40.0% 40.4% 46.5%
34.4% 44.1% 38.5% 38.1% 41.5%
35% 31.4%
35.2% 39.4% 31.3% 29.2% 29.5% 36.6% 36.1% 33.2%
27.1% 27.4% 34.2%
31.5% 30.8% 32.8% 27.6% 24.5%
25% 30.2% 27.1% 20.0% 22.8% 20.5%
26.9% 25.8% 19.1% 17.3%
24.0% 23.3% 15.4%
18.6%
15%
Jun 07 Jul 07 Aug Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09
07
Valuations continue to strongly indicate BUY

We see valuations as the main driver of further gains among Pan-European SMid-
Cap stocks. At present, the SMid universe trades at a P/E 09E IBES of 17.5x, a 1.4x
discount to its 20-yr avg, despite 09E earnings being cycle trough. P/B valuations
tell a similar story, with a current avg valuation of 1.9x which implies a 23%
discount to the 2.5x hist avg (see Figure 30 below).
Figure 30: Pan-European Equity Valuations

20-Yr Avg July 13th, 2007 Current
Rel to Rel to
Shaded = Attractive 20-Yr 20-Yr 20-Yr
Valuations remain the key
Avg Abs Avg Abs Avg
driver of upside for SMid-
Caps, which currently trade at Valuation (SMid-Caps)
EV/ Sales LTM 1.35x 2.15x 0.79x 1.20x -0.02x
a 7% and 23% discount to their
P/E LTM 18.87x 25.32x 6.45x 17.50x -1.37x
hist avg valuations on a P/E P/E Yr+1 15.41x 20.08x 4.67x 14.80x -0.61x
LTM and P/B basis PEG (P/E LTM / Yr+1 Grw) 1.13x 1.82x 0.68x 1.16x 0.03x
P/BV 2.47x 2.88x 0.41x 1.91x -0.56x
Valuation (Large-Caps)
EV/ Sales LTM 1.75x 2.50x 0.74x 1.56x 0.10x
P/E LTM 19.40x 20.61x 1.21x 16.63x -2.77x
P/E Yr+1 16.28x 18.29x 2.01x 14.63x -1.65x
PEG (P/E LTM / Yr+1 Grw) 1.44x 2.26x 0.82x 1.44x 0.01x
P/BV 2.68x 2.99x 0.31x 2.18x -0.50x
* Current LTM deno tes 2009E and Yr+1deno tes 2010E
Technicals suggests opportunity still exists

The technical picture also remains favorable. Despite the significant rally
experienced by most indices since Mar 9th, as a % of their pre-recession highs, this is
still the second worst sell-off in equities since 1940 (see Figure 31 below).
21
(44-20) 7325-5242 07 December 2009
Figure 31: Performance from pre-recession highs during first 12 mth of equity mkt recovery following recessions
S&P 500 MSCI Europe
30% 30%
20% '53 20%

'60
Perf from Pre-Recession High (MSCI Europe)

Perf from Pre-Recession High (S&P 500)
'49
10% '82 10%
'90
0% '57 0% '81
Average
'70 '91
-10% -10%
Average
'75
-20% '42 -20%
-30% '09 '74 -30% '09

'02
-40% -40% '03
-50% -50%
-60% -60%
0 1 2 3 4 5 6 7 8 9 10 11 12 0 1 2 3 4 5 6 7 8 9 10 11 12
Mths following Equity mkt trough Mths following Equity mkt trough
Similarly, the seasonal headwinds we encountered in June and Oct now become
tailwinds. As we can see in Figure 32 below, Jan and Feb have historically been the
strongest months of the year since 1985, with Pan-European SMid-Caps delivering
As a % of pre-recession highs,
this is still the worst equity an avg return of 2.9% and 2.6% and ending in positive territory 79.2% and 70.8% of
sell-off witnessed since 1940 the time respectively.
Figure 32: Mthly Performance of Pan-European SMid-Caps — 1985 to 2008

4%
2.9%
2.6%
SMid-Caps — Mthly Avg Price Perf
3%
Jan and Feb have historically 2.1%
2%
been the best mths for SMid- 1.3%
0.8%
1.2%
Caps (up 79% and 71% of the 1% 0.3%
0.0%
time respective and by 2.9% 0%
and 2.6% on avg) -0.1%
-1%
-0.9% -0.8%
-2%
-3% -2.6%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
90%
79.2%
80% 75.0% 75.0%
70.8%
SMid-Caps — % of Periods up
70% 62.5% 62.5%

58.3% 58.3%
60% 54.2%
50.0%
50% 41.7%
37.5%
40%
30%
20%
10%
0%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
22
(44-20) 7325-5242 07 December 2009
And buy-side sentiment suggests SMid PMs are buyers

In addition to the reasons we have outlined above, we believe buy-side sentiment
could be a significant positive driver this time around. Everything else being equal,
we prefer to go against consensus views. But this time is different. In our latest
survey of SMid-Cap PMs (published Nov 5th), 94% of respondents told us they were
experiencing inflows. With funds coming in, PMs are likely to act on their beliefs
and thus the consensus view is likely to be materialized. Interestingly, 79% of
respondents told us they expected the equity mkt to reach higher highs through year
end, with close to half of respondents already believing the rally will continue into
1H10.
Moreover, most investors have an incentive to seek further returns. 2009 will likely
be remembered as a yr of unusual opportunity for investors (maybe a once-in-a-
lifetime chance). With 71% of equity funds in Europe underwater vs their
benchmark (and 38% of all equity funds up <20%), we believe investors are likely to
seek performance in the early stages of 2010 (as a new yr and a 12-mth horizon on its
own could increase their risk appetite).
Figure 33: YTD Returns of European Equity Funds

% of European Equity Funds
35%
30.0%
30%
24.6%
25%
% of Funds
20%
15.1%
15%
9.6% 8.8%
10%
3.4% 3.8%
5% 2.1% 1.3% 1.4%
0%
<0% +0% — +10% +10% — +20% +20% — +30% +30% — +40% +40% — +50% +50% — +60% +60% — +70% +70% — +80% > +80%
YTD Abs Perf
Source: Bloomberg and J.P. Morgan Calculations
23
(44-20) 7325-5242 07 December 2009
How to position
While we believe SMid-Caps will reach higher highs in the near term, we believe the
next leg up in the market could likely be driven by those areas that a) have
underperformed during this sell-off, b) offer attractive valuations, c) and are
experiencing improving fundamentals (i.e. sell-side upgrades and upward revisions).
With this in mind, we recommend:
• OW SMid (on an absolute return basis)

• N SMid (relative to Large)
• OW Value (vs Grw) (our Halibut Screen — see our SMid Trilogy)
• OW Quality Balance Sheets (our Golden Geese Screen — see our SMid Trilogy)
• OW Cyclicals (vs Defensives)
• At the stock level, we expect stockpicking to take over the macro as the key
driver of performance in 2010. For stock specific ideas, please refer to the
following (available in our Monday weekly publication titled “The SMid Week
Ahead”):
¾ The Radar (our short list of high conviction long and short ideas). The Radar
has delivered a performance of +52.0% since launch, outperforming the MSCI
Small Cap Index by 7,030 bps. Among the stocks in the Radar we highlight
Deutsche Lufthansa (LHA GR/Not Covered/€10.65) and Rhön Klinikum
(RHK GR/OW/€16.42).
¾ The Compass (contrarian calls from our sectors analysts that are generating
alpha). The Compass is up 58.9% since launch, outperforming the MSCI
Small Cap Index by 7,650 bps.
24
(44-20) 7325-5242 07 December 2009
Equity Quant Europe

Marco Dion AC
Quantitative Strategy Outlook
(44-20) 7325-8647
marco.x.dion@jpmorgan.com 2009: the Value year
Matthew Burgess 2009 has been a bumpy ride for Quant funds: they started the year well above
(44-20) 7325-1496 water, then all seemed to fail during the March/April “trash rally” and finally they
matthew.j.burgess@jpmorgan.com
have turned out to be quite efficient into year end, recuperating most of the
J.P. Morgan Securities Ltd. previously generated losses1.
While this bumpy ride will be remembered by many, we will probably all agree that
2009 will be remembered as “the” Value year.
After extremely poor performances in 2007 and 2008, followed by a weak start of the
year, Value came back “with a vengeance”.
Figure 34: VALUE (as defined by Book Value) – Returns (SECTOR NEUTRAL)
35%
VALUE - Returns
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
2003 2004 2005 2006 2007 2008 Jan & Feb 2009
2009
Source: MSCI, Factset, J.P. Morgan
The stock market rally taking place in March and April indeed witnessed a strong
bounce in the price of companies trading at depressed (bankruptcy?) levels and Value
is heading into the close of the year generating slightly south of 30%.
1
For more information, see “Quant Factors – A Global Analysis of Recent Performance”,
May 2009.
25
(44-20) 7325-5242 07 December 2009
While this Value rally was in no way predicted or foreseen by us, it is quite
interesting to note that it has coincided – as historically expected – with the
Valuation spread narrowing significantly (ie contraction in the dispersion of
valuations in the market)2.
Figure 35: Dispersion of valuations in the markets

0.35
Dispersion of Valuations
0.3
Value
0.25
Growth Growth
0.2
Value Value
0.15
0.1
0.05
0
94
95
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02
03
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During this period of strong outperformance of Value Factors, others Factors

encountered extreme volatility.
As mentioned in our note covering the March/April rally (“Quant Factors – A

Global Analysis of Recent Performance”, May 2009), some Factors even suffered
losses not witnessed over 15 years of backtests.
As the chart below displays, Price Momentum was the biggest loser in 2009.
While we expect Price Momentum to indeed fail at inflection points, we were

extremely surprised by the magnitude of the move: regardless of the region and
sector analysed, we find that Price Momentum lost an average of 40% over the 2-
month period (March and April).
2
See “Value/ Growth: Introducing our Style Switching Model” (April 08) for more info on
the systematic approach to Value or Growth selection using the change in dispersion of
valuations.
26
(44-20) 7325-5242 07 December 2009
Figure 36: Factor Performances in 20093

160
140
120
100
80
60
Value
40 Price Momentum
Earnings Momentum
Quality
20 Risk
Beta
0
Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May -09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09
As the chart above and table below show, the returns achieved by Quant Factors
during this time were of gigantic proportions.
The dispersion of these returns also turned out to be a problem for most Quant funds.
As most funds use a mix of the different Factors presented, they found these
“extreme” performances difficult to manage as the returns tended to cancel
each other out without trimming the volatility of the funds.
Table 15: Factor Performances in 2009 (SECTOR NEUTRAL)

Factor 2009 Returns
Value 27.4%
Price Momentum -49.4%
Earnings Momentum -26.2%
Quality -16.2%
Risk 32.0%
Beta 37.4%
Source: MSCI, Factset, Bloomberg, J.P. Morgan
3
Most commonly used Factors in Europe, market and sector neutral; rebalanced every month
and focusing on the top/bottom 10% of the European universe (positions being equally
weighted)
27
(44-20) 7325-5242 07 December 2009
2010: a Stock-Picking year

As the above table illustrates, Factor selection and weights turned out to be a
question of “survival” in 2009 for Quant funds.
In 2010, we do not expect a recurrence of the same issues and instead we strongly
expect (bottom-up) stock-picking to be the main characteristic of equity
markets.
Rationale for a “2010 = stock-picking year”

As stated, we strongly believe that company fundamentals are going to be relevant
and primordial again to investors.
The reasons behind our opinion are:
1. Macro themes should be less dominant in 2010.
The Quant community often uses the dispersion between sector returns as a proxy for
defining macro/micro regimes taking place in the market.
It is indeed well-acknowledged that if the markets focus on macro ideas and themes,
the difference in sector returns will be vast whilst the dispersion of stocks within
sectors will be quite small (people will play top/down sectors and not care much
about the bottom/up characteristics of stocks they invest in).
On the other hand, if investors focus on micro/fundamentals, the dispersion of stock

performances within sectors should be broad while the dispersion of sector returns
will be relatively small (people will care about stock fundamentals and probably try
to be “sector neutral”).
As shown by the chart below, the dispersion between sector returns has decreased
significantly since the end of April.
28
(44-20) 7325-5242 07 December 2009
Figure 37: Dispersion of Performances between Sectors

40%
30%
20%
10%
0%
95
96
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00
01
02
03
04
05
06
07
08
09
n-
n-
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Ja
Ja
Ja
Ja
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Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Monthly Sector Returns Dispersion 12 per. Mov . Av g. (Monthly Sector Returns Dispersion)
This change in market “interest” and perception (from macro to micro) was also
translated into a (small) pick-up4 in the dispersion of stock returns within sectors.
Figure 38: Dispersion of stock Returns within sectors

100%
90%
80%
70%
60%
Dispersion of returns w ithin sectors
50%
40%
3
8
c-9
c-9
c-9
c-9
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c-9
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c-0
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De
De
De
De
4
The small increase is due to using 2 years of weekly returns in the calculations. We see this
dispersion as increasing more dramatically in 2010.
29
(44-20) 7325-5242 07 December 2009
We think that the dispersion in sector performances should continue to decrease

over the course of next year and that the dispersion of stock performances within
sectors should increase in a more significant manner.
2. Consensus data is again usable by investors.
We argued last year that one of the reasons for the failure of Quant strategies was
their high reliance on consensus forecast data and the fact that consensus numbers
were – as agreed by most market participants – completely erroneous.
As the chart below shows, it took close to 6 months (early 2009) for consensus data
to reflect the sharp fall in prices translating the economic slowdown.
With consensus data being completely wrong (for the last 4 quarters), we can easily
understand why investors were unable and unwilling to rely on consensus data
and preferred therefore instead to focus on macro themes5.
Figure 39: Net Revisions6

40%
Analy st Rev isions
20%
0%
-20%
-40%
-60%
-80%
3
8
c-9
c-9
c-9
c-9
c-9
c-9
c-9
c-0
c-0
c-0
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De
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De
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De
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De
De
De
While it took a long time for analysts to cut their forecasts to realistic levels, we have
however noticed that since the end of March 09, analysts finally seem confident and
comfortable enough with their numbers to start upgrading their growth prospects.
5
Almost as a choice “by default”.
6 ie (Nbr of upgrades – Nbr of downgrades) / (Nbr of upgrades + Nbr of downgrades)
30
(44-20) 7325-5242 07 December 2009
This return to “normality” and realization of growth expectations gives us more

confidence going forward that consensus data can be trusted.
As a result, we strongly believe that investors have found, and should keep on
finding, self-belief in consensus data for their stock selection process and that stock-
picking should therefore keep on providing superior returns to investors using the
data correctly.
3. The dispersion of valuations in the market remains high, favouring a

bottom-up Value approach.
As previously mentioned, the dispersion of valuations in the market is still fairly

high. This means that extremely cheap as well as extremely expensive stocks can be
found simultaneously in the market.
Figure 40: Dispersion of valuations in the markets

0.35
Dispersion of Valuations
0.3
Value
0.25
Growth Growth
0.2
Value Value
0.15
0.1
0.05
0
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01
02
03
04
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06
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This translates into significant opportunities being present from a relative value
perspective.
With those cheap/expensive arbitrage opportunities in the market, we again strongly

believe that stock-pickers will get “naturally” attracted to the markets and try to take
advantage of anomalies.
31
(44-20) 7325-5242 07 December 2009
Similarities with 2003 and 2004

To justify our opinion and bring some historical analysis into perspective we
compare the recent Factor returns with those generated during the bear market of
2002 and trough of 2003.
While we agree that a single data point analysis is not statistically significant, this
“anecdotal” analysis could at least help us understand how close or far from reality
our opinion stands.
Table 16: Factor Performances (annualised) during bear markets and troughs
2002 2008 2003 2009 2004 2010
Value 28.7% -25.1% 10.2% 17.6% 14.2% ?
Price Momentum 46.1% 33.9% -29.6% -49.4% 10.0% ?
Earnings Momentum 24.8% -3.6% -6.6% -26.2% 4.2% ?
Quality 13.9% 11.3% -16.6% -16.2% 2.6% ?
Risk -20.3% -28.4% 16.6% 32.0% -6.4% ?
Beta -35.8% -14.5% 16.6% 37.4% -10.0% ?
Leverage -7.7% -26.8% -0.4% 3.8% 2.1% ?
From this very quick analysis it transpires that a lot of Factor behaviors from the past
2 years have many similarities with their performance around the previous trough7.
It seems indeed that except for the magnitude of the returns (and consensus data
failing more than historically conceived) the comparisons are pretty staggering.
7
While the analysis of the behaviours exposed around the troughs does not exhibit
“surprising” results, it is of course obvious that they were in no way expected and managers
would have only been able to take advantage if they had timed “perfectly” the market bottom.
32
(44-20) 7325-5242 07 December 2009
What does it mean for Quant Managers?

If we had to make conclusions from this very simple historical comparison – keeping
practicality at the back of our mind – we would therefore argue that:
1. Stock-picking should indeed be back in favour in 2010 with Beta and (High)
Risk Factors failing (matching their historical expected performances).
2. Value should work best, followed by Price Momentum, Earnings Momentum,
Quality and Leverage.
3. The average stock to buy should therefore (again) be a cheap stock with a good
price trend, a robust balance sheet and on which analysts are becoming more and
more bullish8.
4. Most commonly used Factors should be working pretty well for Quant
managers, making us believe that multi-Factor Models should work in an
efficient manner next year.
If we had to ‘pick’ Factors, what would we overweight?

As point 4 above states, we strongly believe that Quant managers should have a
successful 2010.
While our job is not to give opinions on which Factors should/shouldn’t work9, we
thought that a “Factor picking” exercise would be interesting at this stage of the
cycle:
1. Value
As per Figure 40, it seems that while the dispersion of valuations in the market has
narrowed down significantly since the Feb 09 top, there are still considerable
opportunities in the market from a valuations perspective.
As historically it seems that Value cycles last a decent amount of time, we do not
expect the valuation dispersion spread to close back to levels where we would
consider opportunities have been “arbitraged away” before the end of next year.
In this current environment, we would therefore gladly stay overweight Value10.
8
The opposite holds for the average stock to short.
9
We indeed consider our job to be to develop empirically tested systematic investment ideas.
10
Amongst Value metrics, we would favour earnings based Factors: Earnings Yield, Earnings
Yield Forecasts etc
33
(44-20) 7325-5242 07 December 2009
2. Earnings Momentum
Unless the world economy encounters a “double dip” (scenario which seems unlikely
according to our economists), we think analysts should be in a position to receive a
clear message from companies they cover regarding their growth, margins and
upcoming earnings.
With the environment being more predictable, companies should also be more easily
“modelable” and translated into more reliable investment recommendations.
While we have proven in a previous report11 that the change in earnings forecasts is
key for alpha generation, we intuitively think that this should get translated into
more value being added onto Earnings Momentum based signals.
3. Price Momentum
As explained in our October paper (“Price Gaining Momentum - Reasons to be

bullish on Price Momentum”), we think that going forward Price Momentum
should start ‘behaving’ again as an Alpha signal and not like a mere Beta play.
Investigating the recent performance of Price Momentum, we found that the Beta
exposure and various other Factor exposures that our Long and Short Price
Momentum portfolios exhibited were extreme (high level of Beta, high level of
operating leverage etc).
We also explained that as we use 12 months as our widow for the computation of our
Price Momentum Factors, the (severe) market action over the previous 12 months
window can be crucial.
We find that with the market having generated positive returns over a 12 months
basis for the first time since December 2007, the stock selections produced by our
Factor was less “financial crisis” dependant and was actually made of stocks chosen
for their idiosyncratic Alpha characteristics.
We were pleased to see this argument translate into profits for October (+5.3%) and
November (+3%) and strongly believe Price Momentum will be an efficient source
of Alpha in Multi-Factor Quant Models going forward.
11
“How to Improve Earnings Momentum Strategies – Investigating Factor Timing,
“Analyst True Calls” and “Real Activity Index””, June 2009.
34
(44-20) 7325-5242 07 December 2009
In our view the government’s intention is to limit the

CEEMEA Strategy Outlook issue to Dubai World (incl. property developer Nakheel)
and federal support is likely to be more selective going
Deanne Gordon AC
forward. Federal unity is evident from the USD5bn in
(27-21) 712-0875
deanne.gordon@jpmorgan.com
bonds recently taken up by two Abu Dhabi banks for the
Dubai Financial Support Fund (‘DFSF’) and reaffirming
J.P. Morgan Equities Ltd.
statements from the U.A.E. Central Bank to support
We are positive on CEEMEA equities. Within our global liquidity of the U.A.E banking system.
EM portfolio we are overweight Russia and Turkey.
We accept that the issue could have been communicated
Overweight Turkey - Secular and cyclical to financial markets in a better way but believe that the
We believe that Turkey could outperform EM and reaction of the financial markets to this news creates
CEEMEA as structurally lower inflation and interest attractive opportunities for investors in our preferred
rates result in a higher trend; India in the mid-90s is good MENA names with no or little exposure to Dubai.
example of this. The IMF standby program, if signed,
Figure 41: Turkey – Structurally low policy rates and inflation
should ease Turkey’s reliance on external financing and
50
reduce the crowding out of the private sector. These
improved fundamentals are neither reflected in valuations 40 CPI Policy Rate
or relative performance. Turkey’s forward PE of 9 is at a
30
significant discount to MSCI EM's 13. The index has
marginally underperformed MSCI EM year to date. Since 20
mid-March 2009, the local currency index is in line with
MSCI EM. 10
0
Higher trend growth and lower interest rates are positive
03 04 05 06 07 08 09
for Turkish banks, a large part of the benchmark. We
Source: J.P. Morgan economics, October 2009.
forecast an acceleration of earnings growth from 10-20%
in 2010E to 20-30% in 2011E. Figure 42: Mexico - second highest GDP swing (11pt) in 2010
15%
The risks to this call are: deterioration in global credit
12%
markets and/or delays in negotiating a deal with the IMF
9%
are a threat. J.P. Morgan forecast a 2010 current account
deficit of 2% of GDP. 6%
3%
Overweight Russia – Beta fueled by oil 0%
Our Russian overweight is driven by a combination of
South Africa
India
Russia
Chile
Korea
China
Brazil
Mexico
Taiwan
Turkey
the rise in oil prices and the wish to remain high beta for
now. This is a high risk strategy. It is a momentum
strategy with a rising 50 and 200 MVA for oil. We will
cut the overweight if the oil price breaks below its Source: J.P. Morgan economics. Note: Chart shows the difference between 2009 and
2010 GDP growth forecast.
MVAs.
Dubai World restructuring – global market reaction

overdone
We believe the reaction of the global equity markets to
the recent Dubai World restructuring announcement [1]
has been overdone and feel going forward there is an
increasing need for differentiation between Dubai and the [1] According to a press release of the Government of Dubai, Department of Finance, on
25 Nov-09, the Dubai Financial Support Fund (‘DFSF’) is spearheading the restructuring of
other MENA markets. Dubai World and Dubai World intends to ask all providers of financing to Dubai World and
Nakheel to ‘standstill’ and extend maturities until at least 30 May 2010.
35
(44-20) 7325-5242 07 December 2009
Better economies in 2010 positive terms of trade effect should reverse given rising
commodity prices, our economists still forecast the oil
We forecast a strong growth rebound in CEEMEA in
deficit will be below 2008 levels. A recovery in Germany
2010 as these countries leverage off the Euro area
to average growth of 3.5%oya should boost CE-3 exports
recovery. J.P. Morgan’s Economics team forecasts real
GDP convergence to regain momentum by 2011. Central
Overall, J.P. Morgan’s FX Strategy team remains
European economies are leveraging the Euro area
bullish on CEEMEA forex in 2010.
recovery, helped by more competitive currencies. The
driver of the recovery in markets will rotate from a
TRY and RUB should benefit from lower fiscal deficits
compression of risk premium to earnings revisions in our
and US dollar weakness. The CBR has fought RUB
view.
appreciation by cutting interest rates and shifting the
currency’s corridor by just 5 kopeck for each US$700M
Growth recovery to trend
intervention. In addition, it has hinted at intra-corridor
J.P. Morgan’s developed world growth forecast for 2010
intervention and the imposition of controls to curb inflows.
is for a sharp recovery to 2.7%oya from -3.4% in 2009.
The CBRT also intervened through daily auctions but, for
More dramatically, we forecast a bounce in EM growth
TRY, retail buying of US dollars has been the force
to 5.8% in 2010 from 0.6% in 2009. CEEMEA real GDP
preventing appreciation. We believe that the forecast strong
growth is forecast to jump to 4.5%oya in 2010 from
recovery will reduce the switch from TRY to USD plus
-5.3% in 2009 – in line with trend GDP growth. Yet for
persuade the CBR that a stronger currency is sustainable.
2010 our economists foresee great differentiation across
Further USD weakness – seen at EUR/USD 1.62 by mid-
countries, with only Russia and Nigeria predicted to
2010 – should push down USD/RUB, both directly and via
grow faster than potential, while Turkey should come
higher commodity prices.
close to trend growth.
For Poland, J.P. Morgan’s above-consensus growth
In Russia, we forecast a sharp jump in GDP growth to
expectation should lead to a reduction in perceived fiscal
5%oya in 2010 versus trend growth of 4% driven by
risks and support a reversal of PLN’s large
strong oil prices, falling interest rates and an expected
undervaluation.
recovery in consumption spending.
For HUF and RON, positions are just too underweight
In Turkey we forecast real GDP growth of 5%oya in
in relation to their recent transformations. Our FX
2010 versus trend growth of 5.5%. We believe an IMF
strategy team believes that, according to our monthly
agreement will be reached in early 2010 and ease the
surveys, investors are not positioned for the improvement
fiscal crowding out of private sector borrowing and boost
in Hungarian and Romanian fundamentals. Hungary and
consumer and business sentiment. We believe an IMF
Romania, both under IMF/EU programs, recorded two of
deal will lead to better growth prospects for the business
the region’s most improved external imbalances in 2009.
community, which could lead to more investment and
Romania’s current account deficit is forecast to narrow to
employment. We believe with an IMF loan, corporate
4% of GDP in 2009 from 12.3% in 2008. Hungary’s
loan growth will reach 17.5% in 2010, while fixed capital
current account deficit is forecast to have narrowed to
formation could expand 10.6% (from an estimated
c1% of GDP in 2009 from 8.4% in 2008.
-16.5% in 2009).
For CZK, our FX team sees no clear growth, valuation,
In South Africa we forecast a recovery in real GDP
and positioning or yield argument for a directional view
growth to 3.0%oya in 2010 from -2.0% in 2009, driven
on the currency. Meanwhile, the unpredictability of the
by better external conditions, an inventory rebound and
BoI has suppressed interest in ILS, despite positions
the "halo effect" of the 2010 FIFA World Cup.
being underweight and the currency being undervalued.
In CE-3 we forecast a recovery to trend in 2011. With
Our FX team forecasts a rangebound ZAR in 2010,
global trade flows picking up and Germany set to
ending both 2009 and 2010 at 7.40 versus the USD,
outperform, the scene is set for a continued recovery in
being underpinned by carry trade and commodity
CE-3 industrial output and exports in our view. In CE-3
currency appeal. But being high beta, the rand is
trade balances have improved rapidly thanks to better
vulnerable to a reversal as the dollar moves to a stronger
terms of trade and falling import volumes. While the
footing in 2H10.
36
(44-20) 7325-5242 07 December 2009
Relatively accommodative monetary policy Table 17: CEEMEA Consumer Prices

Inflation remains within acceptable limits in most (% oya, average)
CEEMEA countries and currency strength should further 2009E 2010F
Russia 11.8 7.5
underpin a relatively easy monetary policy stance in the South Africa 7.2 4.8
region. With the exception of Israel (off a very low base) Turkey 6.1 5.7
and Czech, we forecast largely flat short rates in the Poland 3.5 2.3
Hungary 4.2 3.5
region until late 2010. In fact, standouts are the rate Czech Republic 1.1 2.6
easing we forecast in Russia, Hungary and Romania. We United States -0.4 1.7
see Russia cutting rates by 175bp by the end of 2010 and Euro area 0.2 1.0
Romania cutting rates by 100bp by end 2010. We Source: J.P. Morgan estimates.
forecast Hungary rate cuts of 150bp in 2010.
Table 18: Rate Outlook for CEEMEA (%)
Current End-09E End-10E Policy Stance 09
Risks to our CEEMEA view CEEMEA 4.78 4.44 4.87 Flat
Russia 4.75 4.00 3.00 Easing
1. Dubai World debt moratorium impacts investors
South Africa 7.00 7.00 7.50 Largely flat
confidence in MENA Poland 3.50 3.50 4.50 Largely flat
Turkey 6.50 6.50 8.00 Largely flat
2. Risk appetite fades, driving investors back into low- Czech Rep 1.25 1.25 3.00 Tightening
beta defensive markets like SA and Israel. Hungary 7.00 6.00 5.50 Easing
Romania 8.00 8.00 7.00 Easing
3. Falling commodity prices weigh on Russia and SA. Israel 0.75 0.75 4.00 Tightening
Source: J.P. Morgan estimates.
4. Rapid rise in inflation across CEEMEA resulting in
more rapid tightening
5. Delay in IMF package negotiation for Turkey.
37
(44-20) 7325-5242 07 December 2009
Economic Outlook A solid cyclical expansion lies ahead

The recession just ending was a very deep one. From
David Mackie AC peak to trough, the level of GDP fell by 5.1% in the Euro
(44-20) 7325-5040 area and by 5.9% in the UK. Normally after a deep
david.mackie@jpmorgan.com recession, we would expect a strong upswing, as
Malcolm Barr inventory adjustments end and as households and
(44-20) 7777-1080 corporates discover that they have cut their spending on
malcolm.barr@jpmorgan.com durables by too much. The muted cyclical upswing in
JPMorgan Chase Bank N.A, London Branch demand that we anticipate—relative to the depth of the
recession and the magnitude of the policy support—
A recovery, but only a slow return to reflects the secular headwinds from a more cautious
normality attitude toward debt accumulation, deleveraging in the
banking sector, fiscal tightening, and sliding growth
The worst recession that Western Europe has
potential. These headwinds will influence the growth
experienced since 1950 is now over. After contracting at
dynamic in two ways: first, the underlying trend in
an average annualised pace of 5.8% from the autumn of
income growth over the medium term will be lower than
last year to the summer of this year, the Euro area
in the past; and second, the cyclical dynamic of demand
economy expanded at a 1.5%ar pace in the third quarter.
around growth potential is likely to be more muted than
And, although the UK continued to contract through to
usual.
September, we are confident that the economy started to
expand again in the fourth quarter. This expansion in
The business cycle upswing typically has two stages.
economic activity is likely to be sustained for the
First, a bounce in output as inventory adjustments end
foreseeable future.
and a rebound in spending on durables from depressed
levels in response to an improvement in permanent
However, an end to the recession does not mark a return
income expectations, lower interest rates and an easing of
to normality. The recovery in demand will be held back
credit availability. These changes require some
by a reduced appetite for debt accumulation by
accumulation of debt, reduced debt repayment, or
households and nonfinancial corporates, and tighter
reduced accumulation of financial assets. Second, there is
lending standards imposed by banks. Even though
a shift to expansion where households and corporates
interest rates will be held at an unusually low level for an
push spending to new levels by stretching beyond their
extended period, there is unlikely to be a powerful credit
current incomes in response to developments in
cycle. An additional headwind will come from the fiscal
confidence, asset prices and financial conditions. This
side; the need for public sector deleveraging will ensure a
generally involves a solid credit cycle.
significant and sustained fiscal tightening which will last
for several years. Meanwhile, the supply side of the
In the current environment, both of these stages are likely
economy has been severely damaged by the financial
to be affected by secular headwinds. On the one hand,
crisis and the deep recession. A significant part of the
there is likely to be a more restrained attitude toward debt
decline in actual GDP over the past year looks likely to
accumulation, reflecting a decline in permanent income
be a permanent loss in the level of potential. In addition,
expectations, reduced expectations of rates of return on
the ongoing growth rates of potential GDP are likely to
assets, and an appreciation of the greater volatility of
have declined by around half a percentage point relative
both incomes and asset prices. On the other hand, even
to what prevailed before the crisis.
though the environment for banks is improving, bank
lending standards are likely to remain on the tight side
This all adds up to our theme, bouncing towards malaise.
for an extended period. The financial accelerator
Although we expect GDP to increase in the coming
mechanism whereby banks are inclined to ease lending
couple of years by more than the consensus, the upswing
standards in response to higher asset prices will be
will feel very muted relative to the depth of the recession
dampened by a renewed appreciation of the volatility of
and the magnitude of the policy support. Economies are
both incomes and asset prices. Also, banks will be
bouncing, but a sense of malaise will persist for a while.
restrained over time by a move to a tighter regulatory
environment, which will likely force them to hold
significantly more liquid assets and equity capital.
38
(44-20) 7325-5242 07 December 2009
Figure 43: Global trade recovering from depressed levels The shock to potential GDP
Index, Global PMI export orders
60 One critical feature of the outlook is the impact of the
55 banking crisis and recession on both the level of potential
50
GDP and its ongoing growth rate. It is widely recognised
that banking crises and deep recessions have lasting
45
implications for the supply side of the economy. Deep
40
recessions cause premature scrapping of the capital stock,
35 an erosion of existing labour skills and the
30 discouragement of new entrants into the labour force.
98 00 02 04 06 08
When dysfunction in the financial system is also part of
Source: Markit Group
the recession dynamic, potential GDP can be damaged by
less efficient redeployment of resources from contracting
Even though the upswing in demand is expected to feel
to expanding sectors, and less availability of finance for
very muted relative to the depth of the recession and the
productivity-enhancing research and business start-ups.
magnitude of the policy support, we nevertheless have a
Decomposing the decline in actual GDP that has been
growth forecast that is somewhat ahead of the consensus.
experienced over the past year into cyclical and structural
There are a number of reasons for this. First, we are
components, and calibrating how the growth of potential
putting more emphasis on the powerful cyclical
GDP has changed, are challenging exercises, but they
dynamics that are at work after a deep recession. For the
have enormous implications for the outlook for demand,
Euro area, this involves a strong bounce back in global
inflation and monetary policy.
trade from very depressed levels and a recovery in
corporate spending after severe cutbacks. Second, we
Our approach has been to examine the data on the
believe that saving rates have moved up by enough to
evolution of actual GDP, various direct measures of
create sufficient free cash flow for households and
resource utilization and the behaviour of inflation to form
corporates to delever should they feel the need to. It is
a view of how the output gap has evolved. By definition,
also important to recognise that the easy policy stance,
the fall in GDP that is not reflected in a wider output gap
low interest rates and the expansion of central bank
represents a permanent loss of potential GDP. For the
balance sheets, has eased the pressure to delever in a
Euro area, we estimate that over the past year the level of
disruptive way. This is particularly important for the UK
potential GDP has declined by around 0.2%; in the UK,
and Spain. Third, we would emphasise that it is the flow
we estimate that the level of potential GDP has declined
of new credit that matters for demand, rather than the
by around 2.4%. This means that the output gap is
level of bank lending standards. It is still early days, but
smaller than it would otherwise have been had all of the
access to credit does seem to be improving at the margin.
decline in GDP over the past year been cyclical.
And fourth, we would stress that the lesson from history
is that the malaise from a financial banking crisis shows
Table 19: GDP, potential output, and the output gap over the last
up more often than not in a depressed level of GDP year
relative to what it would otherwise have been, rather than
Output gap Output gap
a depressed growth rate of GDP once the cyclical trough in 2Q08 GDP since in 2Q09 (% Change in Change in
has been reached. (%of GDP) 2Q08 (%) of GDP) output gap potential
Euro area 1.65 -4.78 -2.88 -4.53 -0.22
Figure 44: Euro area bank lending starting to turn the corner UK -0.25 -5.65 -3.46 -3.22 -2.35
%3m saar Source: J.P. Morgan
20 Nonfinancial corporate loans
Nevertheless, there is a significant amount of slack in the
15
Euro area and the UK. In the Euro area, we would put the
10 output gap at around 3% of GDP, a little wider than what
5 was seen as a consequence of the recessions of the mid
Household loans
0
1970s, the early 1980s and the early 1990s. Meanwhile,
in the UK, we estimate the output gap at around 3.5% of
-5 GDP. This is wider than what was seen in the mid 1970s
2004 2005 2006 2007 2008 2009
and early 1990s recessions, but not as wide as what was
Source: European Central Bank
seen in the early 1980s recession. In addition to a
39
(44-20) 7325-5242 07 December 2009
permanent drop in the level of GDP, our analysis Table 20: Recession damage to the level of potential output by
suggests that growth potential has also fallen in the Euro end-2011
area and the UK, by around half a percentage point %q/q, saar
relative to the pace that prevailed before the crisis. This % of GDP
suggests that the output gap will close more quickly than Euro area -3.4
UK -6.3
it would have done previously.
Source: J.P. Morgan
Core inflation set to fall

A gradual monetary and fiscal
The sizeable output gaps suggest that there will be a tightening
significant amount of disinflation in the coming twelve to
eighteen months. For the Euro area, the disinflation The outlook for demand and supply are significantly
should be a reasonably steady process and our forecast different to anything we have seen before. This is also
anticipates core CPI inflation reaching 0.6%oya by the true for monetary and fiscal policy. Fiscal deficits have
end of 2010. Since the current recession began, core CPI got to very extreme levels. In the Euro area this year we
inflation has fallen from 2.7%oya to 1.1%oya. While expect a fiscal deficit of 6% of GDP, while in the UK we
perhaps around half of this move reflects the impact of expect a deficit of 12% of GDP. Deficits of this level are
sharply lower energy prices, there has also been a clearly not sustainable. While some portion of these
significant amount of underlying disinflation. Even deficits is clearly cyclical, and will unwind as the output
though growth has started to recover, this underlying gap closes, there is a large structural component which
disinflation will continue; in general, the disinflationary can only be eliminated by outright fiscal tightening. We
process continues for quite a while after recessions have expect this to begin in the UK in 2010, and in the Euro
ended. area a year later. Fiscal tightening is likely to be sizeable
and to extend over several years, which will act as a
For the UK, the inflation outlook is a lot more headwind on demand growth.
complicated. In the near term, higher indirect taxes,
higher energy prices and the pass through from a lower Meanwhile, monetary policy has been driven deep into
currency will push CPI inflation above 3% from early uncharted waters as a consequence of this crisis. Policy
next year. Given the transitory forces at work, this move rates are close to zero and central bank balance sheets
will likely be discounted, even though it will probably have expanded dramatically. At some point, both of these
elicit an open letter from the central bank governor to the dimensions of monetary policy will need to be
chancellor explaining why inflation is more than 1%pt normalised, although the timing is likely still some way
above the target. Given these dynamics, inflation will not off.
fall to a level below the central bank’s objective until the
middle of next year. Assuming no further indirect tax The ECB has tried to keep a separation in its mind
increases, inflation would then likely slide to just below between conventional monetary policy (aimed at the
1% during 2011. However, given the fiscal pressures, we inflation objective) and unconventional monetary policy
expect further indirect tax increases in 2011, which will (aimed at the dysfunctionality in the credit intermediation
keep inflation around 1.5-2% until 2012. process). This gives a clear road map for the exit
strategy, with the central bank’s balance sheet shrinking,
Although sizeable output gaps exist at the moment, the and operations returning to normal, before the main
combination of a solid recovery in demand and a slower policy rate is hiked. Before the crisis, the ECB tried to
growth rate of potential suggests that the current output keep the overnight rate in line with its target policy rate
gaps will close relatively quickly. For the Euro area, the by offering fixed amounts of liquidity at variable rate
output gap looks likely to have closed by the first half of auctions. The auctions were for one-week and three
2011; for the UK, it will take until 2012. This suggests months, with roughly two thirds of the liquidity provision
that extremely subdued inflation will not last indefinitely. at one week and one third at three months. As a response
For the Euro area, core inflation is likely to start rising to the crisis, the ECB now offers unlimited liquidity out
again from the second half of 2011; this will happen a bit to one-year at the policy rate of 1% (against a broader
later in the UK. collateral pool). As a consequence, the actual overnight
rate is well below the ECB’s target policy rate, and the
money market term structure is flatter than it would
40
(44-20) 7325-5242 07 December 2009
otherwise have been. Our expectation is that by early sheet is much larger than normal; and second, whether to
2011, the ECB will want to have returned the operating sterilise some of the excess reserves by liquidity
procedure to the situation that prevailed before the crisis. absorbing operations. Again, because fiscal policy is
likely to be tightening in 2011, we expect the Bank of
The first of the non-standard measures to go will be the England to move its policy rate up only gradually; by the
twelve month tender. Around the middle of next year, we end of 2011, we expect the bank rate to be 2.25%, an
expect the ECB to cancel the six month tender and move increase of 175 basis points.
the three month tender back to fixed amounts at a
variable rate. We expect it to continue to offer unlimited The pace of this policy normalisation process will not
amounts of liquidity at the one week and one month only be determined by growth and inflation surprises, but
tenders at the policy rate of 1%, but nevertheless the also by developments in asset prices, money and credit
actual overnight rate is likely to rise towards the policy and by the pace of fiscal consolidation. Inflation
target and the money market yield curve is likely to developments next year are particularly important in
steepen. In early 2011, we expect the ECB to stop keeping policy rates low. Our judgement is that, based on
providing unlimited liquidity at the one week and one a traditional Taylor rule, the appropriate policy rate is
month tenders and to go back to offering fixed amounts still positive in both the Euro area and the UK. In an
at variable rates. This would take the ECB back to its environment of growth improvement, a decline in
normal operating procedures, with the one change that inflation is necessary to prevent the appropriate rate from
the one month tender is likely to be kept. Thus, from rising. Inflation developments will be easy to read in the
early 2011, the ECB will have realigned the actual Euro area, but somewhat harder in the UK given the
overnight rate with the policy target, and will be ready to transitory forces at work. Developments in asset prices in
change the policy target as the inflation outlook evolves. particular will likely be viewed as a signal about whether
We would expect some tightening of the policy rate the excess liquidity that has been created is fuelling
during 2011, perhaps by around 150 basis points. The pronounced portfolio reallocations across the private
amount of tightening will be influenced by the degree of sector. To the extent that this happens, both the ECB and
fiscal consolidation that is undertaken across the region. the BoE will want to remove or sterilise the excess
Regarding the outright purchases of covered bonds, the liquidity earlier than otherwise. This would affect the exit
amounts involved are small enough for the ECB to offset from the unconventional aspects of monetary policy, but
the additional liquidity provided during its regular we would not expect asset prices to drive the actual
operations. policy rate.
In contrast, the Bank of England has viewed quantitative Table 21: Simple Taylor rule exercise for the Euro area:
easing as a natural extension of conventional monetary appropriate policy rate, end 2010
policy, motivated and calibrated by the objective of Potential GDP growth, annualised
hitting the inflation target. Although presented somewhat 1.0 1.5 2.0
1.0 -0.5, 1.1 -0.8, 0.7 -1.2, 0.3
differently, this would suggest an exit strategy similar to Actual GDP
1.5 -0.1, 1.4 -0.5, 1.1 -0.8, 0.7
the ECB’s: shrinking the balance sheet and then hiking growth,
2.0 0.3, 1.8 -0.1, 1.4 -0.5, 1.1
annualised
the policy rate. In actual fact, we believe that the Bank of 2.5 0.7, 2.2 0.3, 1.8 -0.1, 1.4
England will move on both dimensions simultaneously, Source: J.P. Morgan
and somewhat earlier than the ECB. We expect the first The two numbers in the boxes refer to two inflation scenarios: 0.0% and 1.0% (oya)
rate hike to occur in the autumn of 2010 along with the

start of outright gilt sales. The reason why the Bank of
England is likely to move on both fronts at the same time
is that it will be difficult to sell the gilts it has acquired
quickly. When QE ends, the Bank of England will likely
own around a third of the conventional gilt market: thus,
its holdings will be large relative to the underlying
liquidity in the market. While the Bank of England will
be able to raise its policy rate, due to the ability to pay
interest on excess reserves, it will nevertheless face two
challenges: first, how to calibrate the appropriate policy
rate in an environment where the size of the balance
41
(44-20) 7325-5242 07 December 2009
Figure 45: 2010 JPMCCI Price Forecast

Global Commodities JPMCCI Index
Strategy Outlook Energy :
Lawrence Eagles AC Precious Metals:

(1-212) 834-8107
lawrence.e.eagles@jpmorgan.com
Industrial Metals:
Jennie Y Byun
(44-20) 7777-0070 Agriculture:
jennie.y.byun@jpmorgan.com
-3.00% -2.00% -1.00% 0.00% 1.00% 2.00% 3.00% 4.00%
J.P. Morgan Chase Bank, NA
Source: J.P. Morgan
A conviction that strong growth in developing countries

will in short-order return the commodity market to the The crude oil market remains contained within narrow
state of tightness seen over the past five years remains confines. Saudi Arabia is calling the tune, releasing
the primary driver behind the dramatic recovery in more oil to the market at $80 bbl when inventories are
commodity prices in 2009 and seems set to continue into already high, and without a change in official OPEC
2010. High levels of global liquidity and low nominal policy. That places a natural cap to prices. The $80 bbl
and real interest rates are not only stimulating a demand cap is being reinforced by Chinese refiners, who receive
recovery, but are contributing to dollar weakness and a lower retail price adjustment from the government if
inflationary fears and are creating a low opportunity cost the price goes above this level. While high global
environment in which to invest in commodities. As such, liquidity should prevent prices from falling too far near-
many commodities are seeing fresh physical “demand” term, there are some concerning supply side
from corporates, government entities or investors developments that could over-awe the demand side
(predominantly the latter two). However the impact of growth in the coming year. Demand is seen contracting
such inventory building is significantly scaled according around 1.6 mbd in 2009, but should rebound by around
to the ease with which commodities can be stored – 1.3 mbd in 2010, led by developing world
precious metals are clearly one of the easiest in terms of growth. However, the prospect for a rapid rebound in
cost per unit of weight, followed by the base Nigerian output, following an improved security
metals. Agricultural commodities, crude oil and natural situation, together with new field additions in Angola and
gas are however much harder for the non-professional to the possibility of a political deal to allow Iraqi
access, with natural gas probably at the lower end of the investment to proceed raises the prospect of much higher
scale. OPEC output to balances that already show a broad
balance in 2010.
Inventories are a great leveler, essentially carrying
surplus spot supply from the present to the future. As US Natural gas has been severely impacted by both the
such, the outlook for 2010 for commodities encompasses economic downturn and a competitive surge in
not just supply and demand over this period, but also productivity, supplies and inventories. 2010 is expected
medium term balances, and the outlook for the dollar and to be a rebalancing year (production should bottom some
real interest rates. time in the first quarter of 2010 and then rise in the
second half of 2010) but despite our economists’
However, these inventories have to be financed by a predictions of a cold winter in the East, we still expect to
forward premium (contango), which decreases the spot come out of winter with another record high level of
returns. As such, commodity selection and positioning inventories. Add to that increasing LNG output, and it
along the curve will be extremely important in remains hard to be bullish on natural gas next year.
determining the overall return to commodity
investments. Given the inventory dynamics and the Industrial metal demand in OECD countries remains
weaker dollar trend it is also extremely difficult to get too weak. A strong surge in China and emerging Asia is now
bearish of commodities which are in surplus. As such, losing momentum but remains strong in absolute
we will be re-examining our price forecasts in our 2010 terms. Heading into 2010, we expect OECD countries to
outlook in the next week. embark upon a restocking process given extremely low
working inventories, but that process is only likely to
42
(44-20) 7325-5242 07 December 2009
gain momentum in Q2. Until then we expect to see Agri-commodities also have a mixed set of
physical demand for industrial metals remain soft - with fundamentals. Typically, the link between the business
markets in surplus - and inventories on the LME to rise, cycle and agricultural prices is looser than other
across the board. commodity sectors. However, the relatively stronger
position of many key emerging markets economies
Supply continues to respond to the high price levels; should serve to support the agricultural demand base.
mine output is growing and refined metals production is
now moving back to pre-crisis levels (is actually at The grains and oilseeds have a more comfortable
record levels in China). This means that even with a inventory position than they have had for a while, but
modest demand recovery in OECD countries in 2010 the there are still price risks. Wheat is probably most
markets will remain in a modest surplus. However most comfortable but corn (and feed in general) inventory
of this surplus will move into private sector marketing would not remain comfortable with major supply
channels (that is, LME stocks are likely to fall in the Q2- shocks. Vegetable oils, like palm oil and soybean oil,
Q3 period in the least, and stabilise in Q4). All base have greater potential for outperformance. The inventory
metals have upside risk in Q2 but likely to remain robust cushion is modest and even gradual growth in biofuels
in the meantime. and edible demand would leave the market untenably
tight should production decline.
The low level of global interest rates and significant
global liquidity is allowing the market to carry the high The softs – sugar, coffee and cocoa – each have supply
level of inventory (record in aluminium, nickel and issues that have, or can, boost prices. Sugar’s supply
reasonable in copper, zinc and lead) with relative ease squeeze is the most mature but has potential for large
and equilibrate that timing mismatch. price spikes in early 2010. Beyond that the default case
is that we’ll see a substantial production response later in
When the process of interest rate normalisation the year and prices will ease. Still, that easing is likely to
commences during 2010 the market will be less willing result in less backwardation rather than full swing back
(perhaps able) to carry so much inventory levels and that to contango. Coffee has a quality issue as the current and
material will be released into spot markets as physical prospective supply of high quality Arabica beans (the
demand is improving. The net will cap, or even reverse ICE contract grades) looks limited and will at least keep
prices, in our opinion beginning in the Q3 or Q4 period supply taut. Cocoa is enjoying a re-stocking rally now
in 2010. but there are more fundamental medium-term concerns
about supply. Markets are sceptical that the current
Gold currently (and all precious metals) are being driven global plantation could quickly re-fill inventory from any
by significant global liquidity, low US interest rates and a further crop problems and the lead-times on new supply
weak USD. We expect that dynamic to remain in play are long. That leaves the market with significant risk
until mid 2010 as the market will likely continue to trade skew to higher prices.
the "policy mistake" thesis: the Fed and other central
banks will be too slow to raise rates and reduce liquidity
levels, entrenching inflation risks and further supporting
asset prices. Although gold is at a record in nominal
USD terms we see little to no reason (other than
positioning) as to why the rally cannot continue. Central
bank communication is making the long gold (and asset
reflation argument) compelling.
Fundamentally the gold price appears "over valued" but

with the current demand from consumers
(jewelery/industrial) and investors this is unlikely to be
binding. Investor concern with inflation risks is the
overwhelming flow. We target a move in gold towards
$1250 - $1300 in the coming months.
43
(44-20) 7325-5242 07 December 2009
Table 22: Interest rate forecast

Rates Outlook JPMorgan interest rate forecast and spread vs. forwards; % unless
otherwise stated
Gianluca Salford AC Q2 vs. Q4 vs.
(44-20) 7325-4334
26-Nov Q1 Q2 Q3 Q4 fwd (bp) fwd (bp)
gianluca.salford@jpmorgan.com
Refi 1.00 1.00 1.00 1.00 1.00 n/a n/a
EONIA 0.35 0.35 0.35 0.60 0.85 -51 -45
2Y 1.25 1.45 1.55 1.85 2.05 -24 -24
2010: carry is the name of the game 5Y 2.25 2.45 2.53 2.78 2.95 -13 -2
An out-of-consensus macro view shapes our trading 10Y 3.17 3.30 3.35 3.50 3.65 -5 3
themes: our economists expect a string of 3% GDP 30Y 3.94 4.00 4.00 4.10 4.15 -5 0
growth from 09Q3 to 10Q3, to be accompanied by very 2s/10s (bp) 192 185 180 165 160 19 27
low inflationary pressures courtesy of the spare capacity 10s/30s (bp) 77 70 65 60 50 0 -3
created by the recession. We recommend investors to
stay long the market as long as the constant maturity 2Y Table 23: Bond indigestion is unlikely in 2010
rate is above 1.3%, to benefit from the very attractive Change in net supply and net demand vs. 2009; JPMorgan forecast; €bn
carry protection in a low for long environment, whilst Net supply vs. 2009 Net demand vs. 2009
minimizing exposure to capital losses due to mean EMU govts 75 Foreign investors 20
reversion when interest rates are too low. SSA 26 Commercial banks -135
Gov. guaranteed -221
Total -120 Total -115
Our working assumption is that the ECB will not increase Net supply - net demand -5
the refi rate in 2010, and extra liquidity in the system will As % of total gross issuance -0.4%
remain abundant until at least midyear. We therefore expect
EONIA and repo rates to remain close to 0.40% in the first Table 24: Key trades under different economic scenarios
part of the year and to rise only gradually in the second half Recommended trades based on expected performance given the macro
outlook; central scenario in bold; ++ = strong conviction trade
of the year. We project the 2Y Schatz at 1.55% by the end
high growth low growth
of June, below the current forwards (Table 22) and within
the range of the past six months. Our forecast in H2 is low inflation duration long long ++
curve neutral flattener
driven by rising EONIA expectations at a 1Y forward
intra-EMU spreads tightening ++ neutral
horizon as we approach ECB tightening (our economists
high inflation duration short neutral
expect 75bp of tightening by mid-2011).
curve flattener steepener
intra-EMU spreads tightening widening
The low-for-long period between mid-2003 and end-
2005 sets the template for trading the short end of the Figure 46: Intra-EMU spreads have moved in line with risky asset
curve. Over that period, 2Y rates traded in a broad range performance since the beginning of the crisis
as the market swung between more easing and Average* 10Y cash spread to Germany vs. Stoxx350 index of European
tightening, driven by volatile economic data and stable financial stocks; bp and points
Average 10Y cash spread
inflation. Playing the range was crucial: quartile analysis
160 European financial stocks index rhs inv. 0
is very telling: long duration trades initiated when the 2Y
yield was in the bottom quartile performed very poorly 140 200
on a 3M horizon, with just a 7% success ratio, but the 120
400
success ratio was close to 50% in the second quartile and 100
above 80% for the remaining quartiles with a sharp 600
80
increase in the realised P&L. 800
60
1000
We find little value in strategic curve trades as the 40
traditional drivers are suggesting only mild flattening, not 20 1200
enough to beat the forwards: 0 1400
Nov07 Feb08 May08 Aug08 Nov08 Feb09 May09 Aug09 Nov09
1) The 2s/10s curve is directional to the level of short term * Average of Austria, Belgium, Finland, France, Greece, Ireland, Italy,
interest rates, we expect the ECB to stay on hold and 2Y Netherlands, Portugal and Spain.
rates to rise only modestly, with a small flattening bias.
44
(44-20) 7325-5242 07 December 2009
2) Despite renewed fears of supply/demand imbalances In the UK, 2009 was a year of unconventional policy
developing next year, we expect, the technical picture for measures, with the Bank of England embarking on a
€-denominated high quality bonds to show a balance £200bn asset purchase programme to support the
(Table 23) with a neutral impact on 2s/10s. On the supply beleaguered economy. Looking ahead into 2010, we
side, we forecast net issuance of high quality bonds to expect the BoE to end its policy of extraordinary
decline by €120bn compared to 2009. On the demand monetary stimulus as signs of a global recovery in output
side, we estimate aggregate demand for high-quality €- take hold. In the words of one MPC member, the massive
denominated bonds to decline by roughly €115bn in 2010 monetary stimulus provided by the BoE has partly
vs. 2009. Foreign investors and banks hold roughly 30% provided “insurance against catastrophe risk” and with
each of Euor area government bonds. We expect foreign financial market disaster seemingly averted it is unlikely
net buying of government bonds to increase by around that such a large insurance policy will be needed over the
€20bn in 2010 to €120bn, the main driver being the coming year. We expect modest policy tightening of
improvement in the EM current account surplus and the 50bp in the later half of the year and 2Y gilt yields will
ongoing resistance to significant FX appreciation. likely drift higher.
However, we expect net buying from banks to decline by
€135bn due to much better growth in 2010 vs. 2009 The end of Bank of England gilt purchases will remove a
(bank holdings of government bonds are correlated with large source of demand from the gilt market, which
the economic cycle). combined with heavy expected gilt issuance could result
in a supply/demand imbalance (Table 25). Other gilt
3) We expect inflation expectations to remain constant as market participants are unlikely to step in to fill the gap
has been the case for the past few years, with neutral at current market levels and we expect 10Y yields to
impact on 2s/10s. move higher over the year - we target the 4.40% level by
the end of 2010. Throwing fiscal concerns and election
4) The Euro curve typically shows sensitivity to the US risk into the mix could result in increased market
curve, with the historical beta around 1/3. Our US volatility around the middle of the year.
strategists are forecasting an unchanged spot curve, with
a neutral impact on Euro 2s/10s. Table 25: Mind the gap
Expected level of gilt holdings by investor type in 2010*; JPMorgan
We therefore forecast 10Y German rates at 3.35% by the projections
middle of 2010 and 3.65% by the end of the year. 2010
Amt, £bn Proportion
Intra-EMU cash spreads to Germany have been broadly Banks + building soc 49 5%
driven by the perception of systemic risk over the past
BoE 195 20%
two years (Figure 46). In our central forecast, 2010 will
be characterized by above trend (and well above PF + Incos 235 25%
consensus) growth, yet the ECB will be on hold due to Foreign CB 50 5%
low inflationary pressures. In other words, it should be Foreign other 58 6%
the best macro environment for a reduction in systemic Other Financial 173 18%
risk, thus favouring a general compression in spreads. If Total 761 79%
this macro view pans out, we expect a compression of the
Gilt market end 2010 960 100%
average 10Y spread to Germany to 50bp by mid-2010,
Gap** 199 21%
roughly 25bp tighter than current levels.
* based on projection that size of gilt market by end of 2010 is £960bn
** Gap = Estimated gilt market size – projected demand
Source for all tables and charts: J.P. Morgan
45
(44-20) 7325-5242 07 December 2009
A key risk to our base case is posed by an increase in

European Equity Derivatives volatility related to an abrupt end of quantitative easing
Strategy Outlook* and a potential increase of interest rates. These changes
could cause a volatile adjustment of prices for assets that
Global Head Equity Derivatives And Delta One Strategy have been supported by central banks’ programs or by
speculators taking advantage of record-low dollar
Marko Kolanovic (44-20) 7325-6935
marko.kolanovic@jpmorgan.com
financing rates.
J.P. Morgan Securities Inc.
A lesser risk, in our view, is a complete relapse of growth
European Equity Derivatives Strategy and a double dip recession scenario. This scenario would
Adam Rudd, CFA AC (44-20) 7325-6935 materialize if governments and central banks fail to
adam.ch.rudd@jpmorgan.com provide adequate support despite the signs of a
Bram Kaplan (44-20) 7325-8183 weakening economy. A double dip recession would
bram.kaplan@jpmorgan.com likely cause large sell-offs of equities and cause realized
J.P. Morgan Securities Ltd. volatility to increase to a 30-40% range.
In 2009 we witnessed the largest decline of market The market price of volatility (implied volatility) is
volatility since the end of the Great Depression. This usually different from actual market realized volatility.
decline was the mirror image of an equally large increase Therefore one needs to forecast not merely realised
in volatility in 2008 (Figure 47). volatility, but also the spread of implied to realised
volatility that is determined by supply and demand for
Figure 47: Market Volatility and US Recessions options. Figure 48 shows the price of 3-month S&P 500
6-M Realized S&P 500 volatility since 1870 volatility, as well as its spread over its ‘fair value’
80%
(subsequent realised volatility) over the past 25 years. It
70% is apparent that implied volatility has typically traded at a
60%
premium (3-month volatility traded at a premium 79% of
the time over this period). While selling index options
50%
would have been profitable most of the time, losses
40% incurred during the crash of ’87 and the 2008/2009 credit
30% crisis would have caused significant and potentially
devastating losses to naked sellers of volatility. Given
20%
that events of this magnitude occur relatively
10% infrequently, the current high levels of risk aversion
0% continue to favour systematic sellers of volatility.
1872 1891 1911 1930 1950 1970 1989 2009
Figure 48: In Addition to Realised Volatility, Investors Need to
Source: J.P. Morgan Equity Derivatives Strategy. Predict Supply/Demand that Contributes to the Cost of Insurance
80% 50%
Our base case forecast is that the volatility of global
equity indices in 2010 will marginally decline relative to
Implied Volatility -Sub. Realized Spread
the volatility realised in the second half of 2009. Our 40% 30%
expectation is that the average realised volatility of the

S&P 500 in 2010 will stay in a ~15-20% range, with 0% 10%
Volatility
similar levels expected for major European indices.

Jan 83 Oct 86 Jul 90 Apr 94 Jan 98 Oct 01 Jul 05 Apr 09
-40% -10%
* In the United States, this information is available
only to persons who have received the proper option
-80% -30%
risk disclosure documents.
3M V 3M SR 3M V-SR
Please contact your J.P. Morgan representative or
visit the Option Clearing Corporation’s website: -120% -50%
http://www.optionsclearing.com/publications/risks/ris Source: J.P. Morgan Equity Derivatives Strategy.

kstoc.pdf
46
(44-20) 7325-5242 07 December 2009
Dividend Futures have presented excellent opportunities Figure 50: We see 23% upside potential for 2011 dividends, and
for investors in 2009. Implied dividends fell to distressed suggest that investors roll long 2010 dividends
levels during late 2008 and early 2009, as hedge funds Euro Stoxx Implied / Estimated Dividend
and investment banks delevered. The arrival of 150
fundamental investors in the dividend futures market 140 JPM Estimate
happened just as equity markets began to stabilise and Div idend Future
130
companies delivered earnings that were better than had
originally been feared. The “pull-to-realised” effect for 120
short-dated dividends means that a dividend futures
110
contract is increasingly driven by fundamentals, as
opposed to technicals, as it approaches expiry, and this 100
has driven short-dated dividend futures to converge 90
toward our fair value estimates (Figure 50). Since we
2009 2010 2011 2012
published our comprehensive analysis on dividend
maturity (calendar year)
investing (“Dividend Swaps”, 18 May 2009), Euro Stoxx
2010 dividends have rallied by 42%, compared to the 2009 2010 2011 2012
JPM Estimate 115.8 111.8 125.3 141.7
Euro Stoxx itself which has rallied by 18%. Dividend Future 115.8 106.7 102.5 101.9
Upside Potential 5.2% 23.0% 39.1%
Figure 49: 2010 dividend futures have converged towards our fair Source: J.P. Morgan Equity Derivatives Strategy. Correct at close of business 27 Nov 09.
value estimates, just as 2009 dividend futures had done by
around March
Stock Option Strategies. Our “Rangebound”
Euro Stoxx implied / estimated dividend (index points)
methodology has proven to be successful for selecting
210
stocks on which to sell options in 2009. Figure 51 shows
190
the relationship between the rangebound ranking of a
170
stock and the subsequent profit / loss from a short 1-
150 month at-the-money straddle (short put plus short call)
130 position. We believe this methodology provides a useful
110 2009 Div idend Future tool for those investors call overwriting single stock
2009 Div idend Estimate
90 2010 Div idend Future positions, and complements our recommendation to own
70 2010 Div idend Estimate and call overwrite high (and steady) dividend yielding
50 companies. For further details on our recommended
Nov-06 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09
strategies for 2010, see “Global Equity Derivatives
Outlook”, 3rd December 2009.
Source: J.P. Morgan Equity Derivatives Strategy.
Figure 51: Rangebound methodology has been effective in 2009

We see substantial upside potential for 2011 dividend Average P/L of short 1-month straddle (as % of notional)
futures, and suggest that investors roll their long 2010 4%
positions to the 2011 expiry. Based on J.P.Morgan 3%
analyst dividend-per-share estimates for the Euro Stoxx 2%
50 constituents, the aggregated dividend expected to be 1%
paid by the index is 125 index points in 2011, offering 0%
around 23% upside from the current dividend future level -1%
(Figure 50). -2%
-3% y = -0.0006x + 0.0225
-4% 2
-5% R = 0.3711
0 10 20 30 40 50
rangebound rank
Source: J.P. Morgan Equity Derivatives Strategy.
Data through 23-Nov-09
47
(44-20) 7325-5242 07 December 2009
Risks of common option strategies

Not all option strategies are suitable for investors; certain
strategies may expose investors to significant potential
losses. We have summarized the risks of selected
derivative strategies. For additional risk information,
please call your sales representative for a copy of
"Characteristics and Risks of Standardized Options". We
advise investors to consult their tax advisors and legal
counsel about the tax implications of these strategies.
Please also refer to option risk disclosure documents
Put Sale. Investors who sell put options will own the
underlying stock if the stock price falls below the strike
price of the put option. Investors, therefore, will be
exposed to any decline in the stock price below the strike
potentially to zero, and they will not participate in any
stock appreciation if the option expires unexercised.
Call Sale. Investors who sell uncovered call options have

exposure on the upside that is theoretically unlimited.
Call Overwrite or Buywrite. Investors who sell call

options against a long position in the underlying stock
give up any appreciation in the stock price above the
strike price of the call option, and they remain exposed to
the downside of the underlying stock in the return for the
receipt of the option premium.
Call Purchase. Options are a decaying asset, and

investors risk losing 100% of the premium paid if the
stock is below the strike price of the call option.
Put Purchase. Options are a decaying asset, and

investors risk losing 100% of the premium paid if the
stock is above the strike price of the put option.
Straddle or Strangle. The seller of a straddle or strangle

is exposed to stock increases above the call strike and
stock price declines below the put strike. Since exposure
on the upside is theoretically unlimited, investors who
also own the stock would have limited losses should the
stock rally. Covered writers are exposed to declines in
the long stock position as well as any additional shares
put to them should the stock decline below the strike
price of the put option. Having sold a covered call
option, the investor gives up all appreciation in the stock
above the strike price of the call option.
Pricing Is Illustrative Only: Prices quoted in the

above trade ideas are our estimate of current market
levels, and are not indicative trading levels.
48
(44-20) 7325-5242 07 December 2009
We examine the future of credit derivatives and see a

Credit Strategy Outlook resumption of synthetic structured credit activity as one
of the ‘wildcards’ for 2010. From a market structure
Stephen Dulake AC
perspective, we believe that most of the document and
(44-20) 7325-5454
stephen.dulake@jpmorgan.com
trading standards changes we have seen over the past
year are done. The market is now likely to focus on
J.P. Morgan Securities Ltd
further reducing systemic risk through the use of central
Adapting to Change clearing. We do not believe that clearing is the answer to
all ills nor that take-up by clients will be a foregone
This year, we have taken a somewhat more thematic conclusion.
approach to writing the outlook for the year ahead.
Specifically, we believe that a number of trends have From the perspective of investing in credit markets over
begun to emerge over the past 12 months which are the next 12 months, we see ourselves transitioning into a
permanent or quasi-permanent in nature. In a sense then, low-return environment after the exceptional gains of this
while we have written with the market outlook for the year. Spreads are fairly valued and our Rates Strategy
next 12 months foremost in our minds, we believe that colleagues see market rates rising modestly over the
some of the themes we discuss will likely have a longer coming year. We forecast high grade returns of around
shelf life which extends beyond 2010. 3% and high yield returns of 7-8%. 2010 is, we think, an
alpha year rather than a beta year for credit markets.
In terms of these trends: David Mackie, J.P. Morgan’s However, low return doesn’t necessarily mean low
Head of Western European Economics, discusses how an volatility, in our view. We see the potential for risk
end to the recession does not mark a return to normality; markets to swing from pillar to post next year as market
rather, that a significant portion of the loss in GDP seems participants oscillate from fearing inflation to fearing
to represent a permanent loss in the level of potential. deflation, for example. Against this backdrop, we think
Roberto Henriques writes how the regulatory capital there’s a continued case for implementing tail hedges.
reform process is likely to be the major transformational
event and represents part of a wider strategy by
governments in terms of creating mechanisms whereby
they ultimately may no longer be forced providers of
capital of last resort. This is a major structural change
which will impact risk pricing across the entire bank
liability structure. Gareth Davies looks at the new bank
regulatory landscape from the perspective of the secured
lending markets; covered bonds are set to move into the
ascendancy relative to classic securitisation, where we
see the costs of issuing and investing rising.
From a credit strategy perspective, we look at the impact

of all of these changes on companies and what this means
in terms of funding and liability management, for both
large-cap investment grade businesses and the leveraged
credit universe. The bottom-line is a lot more bond
issuance, and on a multi-year basis. We forecast gross
euro-dominated high grade Non-Financial issuance to be
€200bn in 2010 and €180bn in 2011. This is about
double the average run over the past decade. For euro
high yield, we forecast €35bn of issuance in 2010. This
would represent a record year.
49
(44-20) 7325-5242 07 December 2009
High Conviction Trades for a Low TMT

Return World • Long risk KPN versus short TI
We highlight the top trades from the European Credit • Long risk ITV; short risk Bertelsmann
Research team. We group the trades under three banners:
Macro and Index Trades; Industry and Single Name Structured Credit Trades
Trades; Tranche and Structured Credit Trades. • Long cash CLO AAA/first-priority tranches
Macro and Index Trades • Short correlation trade: sell 10y S12 super senior
• iTraxx payer spread portfolio hedge protection delta-hedged
• Long US versus Short Europe: Buy iTraxx payer sell

CDX payer
Industry and Single Name Trades

Industrials
• Saint Gobain versus CRH relative value switch
• Sappi versus Stora relative value switch
• Lafarge versus Saint Gobain relative value trade
• Top European Chemicals shorts as M&A momentum
looks set to accelerate
• Glencore versus ArcelorMittal relative value trade
Autos
• Long risk Selective “280bp+” Auto Credits versus
Single-Name Underweights
• FCE versus FMCC relative value switch
Property and Pubs

• Long PEPR risk
• Buy subordinated bonds of Greene King, Marston’s,
M&B
Financials
• HSH Nordbank: Ship it in
• Buy Hypo Real Estate Tier 1
• Long RBSG Convertible Preference Shares and UT2
Consumers
• Long risk Brewers Basket Trade
• Long-short Consumer versus Non-Food Retail Basket
Trade
50
(44-20) 7325-5242 07 December 2009
At its current pace of decline, the dollar will end this

Global FX Outlook decade down 12% trade-weighted, its worst performance
John Normand AC since Bretton Woods collapsed in the 1970s. As cold
(44-20) 7325-5222 comfort, at least the 2009 bear market has been
john.normand@jpmorgan.com comparatively mild. The dollar has fallen only 5% trade-
J.P. Morgan Securities Ltd. weighted this year and against 75% of currencies
globally, compared to proper routs in the early 1970s,
2010: New year, new lows late 1980s and early 2000s when the dollar fell at least
• The dollar will end this decade with its worst 8% and sometimes versus all currencies (Figure 52).
performance since the 1970s. 2010 will mark a
turning point, but not before the dollar Figure 52: Ranking USD bear markets: annual change in trade-
approaches new lows versus the euro (1.62), the weighted USD vs percentage of currencies against which USD rose
Swiss franc (0.91) and possibly the yen (82). Based on annual spot movements of G-10 and emerging market currencies vs USD
100% 25%
• Fed policy is partly to blame, since extreme rate
% of currencies against which USD depreciated, lhs
environments have driven the dollar’s largest
15%
over/undershoots of the past three decades. Even 75% change in USD trade-weighted, rhs
though recovery is discounted and the dollar slightly
cheap, cash stockpiles are enormous for this rate 5%
environment. Another $300bn in drawdown could 50%
occur, with the dollar still the chief casualty. -5%
• This move is more than a carry trade, however.
25%
Other components of the US capital account are -15%
weak too (M&A/FDI, equity portfolio flows).
• The dollar is not yet in bubble trouble. Currency 0% -25%
markets do not meet the usual criteria for bubbles – 71 74 77 80 83 86 89 92 95 98 01 04 07
extreme valuation, momentum and leverage. Q1-Q2 Source: J.P. Morgan
also lacks the trigger for a reversal, namely a major
downside shock to growth or upside shock to rates. Naturally some think that the new year brings an
• If the Bank of Japan’s exit from QE in 2006 is any inflection point, particularly since the dollar has become
guide, this apparent stability could change in Q3 slightly cheap (4% trade-weighted on J.P.Morgan’s fair
2010 as the Fed initiates its exit strategy. This policy value model12). The dollar will turn in 2010, but not
shift should be worth a 5-10% dollar rally in H2. before nearing all-time lows trade-weighted and
• Until then, implied volatility should range between surpassing old lows versus the euro, Swiss franc and
10% and 14% (basis VXY for 3-mo implied), with possibly the yen. The Fed’s rate stance drives part of this
spikes more likely in Q3 – Q4. move, but reducing the dollar to a carry trade ignores
• Alpha strategies: This vol environment implies much of the story. The US’s capital account leaks on
returns of 8% on carry, which is less than 2009 but several sides (direct investment, portfolio equity) such
still decent. Forward Carry returns will moderate that Fed policy may not drive a sustained reversal unless
from 2009’s 10%. Simple price momentum will the FOMC proves uncharacteristically aggressive – or
struggle in Q3/Q4 when the dollar turns. disruptive – with its exit strategy.
• Risks to the view: Corporates fail to spend; USD
decline turns volatile, prompting intervention; We extend the trough in USD weakness from Q1 2010 to
China revalues +10%; inflation resurfaces; US Q2 and move targets to 1.62 on EUR/USD, 82 on
mid-term elections impose fiscal discipline. USD/JPY, 0.91 on USD/CHF and 1.02 on AUD/USD.
• Five global macro themes and top trades: USD GBP/USD will benefit from EUR/USD’s rise (peak at
will undershoot (worst-of basket on CHF, AUD, 1.74 in June), but underperform due to EUR/GBP
JPY); recovery is discounted but exit strategies rally to 0.94. These projections are more bearish than the
are mispriced (GBP/CHF, AUD/NZD); the end of USD lows we published this summer when we expected
inflation targeting? (NZD/NOK); a CNY EUR/USD to peak at 1.50 and USD/JPY to trough at 89,
revaluation’s impact on G-10 FX is overstated
(EUR/JPY); and long-term valuation gaps to close 12
J.P.Morgan’s fair value framework is detailed in A new fair-value
(EUR/SEK). model for G-10 currencies, de Kock, September 6, 2008 and updated
quarterly in World Financial Markets.
51
(44-20) 7325-5242 07 December 2009
but three issues have arisen since then. The Fed is The bearish case: it’s more than carry
proving more comfortable with a zero rate environment
Judging from market patter over the past several months,
than almost every other G-10 or emerging market central
the dollar’s decline simply reflects a burgeoning, even
bank but the Bank of England; cash positions (domestic
bubble-like, carry trade. This statement is a half-truth.
and cross-border) remain too high for the 2010 interest
Shorts in low-yield currencies have revived as they
rate environment; and reserve diversification has
always do post-recession, but exposure has climbed to
accelerated to a record pace. Although the structural
only half its pre- Lehman size when measured across the
arguments for a dollar collapse (even crisis) are less
range of investor-types such as dedicated currency
credible than the alarmists claim, cyclical dynamics are
managers, global macro hedge funds, CTAs, Japanese
powerful enough to drive this overshoot of fair value,
retail and US retail (see Global FX Carry Trade Tracker
much like the late 1980s and in 2007/early 2008.
on pages 12-13).14 Balance of payments data on short-
term capital flows (US T-bills, deposits and commercial
Since this move will occur within a low-inflation
paper) also suggests that dollar selling this year has been
expansion, implied volatility should range between 10%
substantial but has not fully unwound crisis-related dollar
and 14% (basis J.P.Morgan’s VXY13 for 3-mo implied vol).
buying. As markets turned in Q2, the US posted $90bn of
Spike risk centers on late Q2/early Q3 when the Fed begins
net short-term capital outflows, an amount equivalent to
implementing policy to reduce extraordinary liquidity, such
a quarter of the $360bn of inflows from January 2008 to
as altering the FOMC statement or undertaking repo
March 2009 as the credit crisis unfolded (Figure 53).
operations, even though rates are on hold until 2011. The
More recent data are unavailable, but judging from other
Bank of Japan’s experience in 2006 highlights that exits
cash indicators which correlate well with balance of
from quantitative easing inject considerable uncertainty,
payments data (see Figure 59), it is unlikely that more
even when rate hikes are small or distant. This volatility
than half of 2008’s inflows have been reversed.
environment implies that alpha strategies such as carry
will perform worse than in 2009 (predicted returns of 7% in
Figure 53: Short-term capital flows: Most USD buying from the
2010 vs 20% in 2009) but still benefit from the rise in cash credit crisis has not been reversed
rates in the current high-yielders. Forward carry (trading on Net short-term capital flows (T-bills, CDs and commercial paper) on a quarterly
rate momentum) also should perform worse in 2010(returns basis and as a four quarter rolling sum
400
of 10%) but still gain. Price momentum will struggle in H2 four quarter rolling sum quarterly flow
when the dollar turns again. 300
226
200
The 2010 Outlook details these issues in six sections:
100
• global FX outlook outlining the case for a dollar
0
overshoot, five global investment themes and the five
most compelling strategic trades; -100 -91
• measures of the global FX carry trade based on -200

public and proprietary data; 98 99 00 01 02 03 04 05 06 07 08 09 10
• a macro model for implied volatility and Source: J.P. Morgan, BEA
projections for 2010 based on growth surprises,

central bank surprises and investor leverage.
• long-term technical outlook for G-10 and emerging
markets currencies;
• research notes on the major currencies and
recommended strategic (12-month) trades/hedges; and
• hedging strategies for three tail risks over the next
year–inflation surprise, a US funding crisis and US
mid-term elections.
14
Several weekly and daily indicators for tracking the carry trade’s size
13
See Introducing J.P.Morgan’s VXYTM & EM-VXYTM, Normand and and ownership are detailed in Keeping up with the Watanabes: Who
Sandilya, December 2006. drives the carry trade post-crisis?, Normand, May 15, 2009.
52
(44-20) 7325-5242 07 December 2009
Figure 54: Foreign direct investment: Stronger US corporate Central banks remain significant buyers of dollars but
profits have revived net FDI outflows there is mounting circumstantial evidence that they are
S&P500 corporate profits growth year-on-year versus US net FDI flows. FDI
shown as four quarter rolling sum. Dotted line shows J.P.Morgan projections hedging their bets. Net official purchases of US securities
based on JPM earnings forecasts and the historical relationship between profits run at roughly $50bn per month, which is high relative to
and net FDI. the US’s trade deficit (roughly $30bn per month) but low
200 -40%
compared to the nearly $100bn of forex reserves that
150 -30%
emerging market central banks have been accruing
100 -20% monthly since June due to intervention (Figure 56).15 The
50 -10% difference suggests reserve diversification, which now
0 0% runs at a record pace (see Reserve diversification is back,
-50 10% FX Markets Weekly, Sept 18, 2009).
-100 20%
net FDI flows, $bn, 4 quarter sum, lhs If this story sounds familiar, it should. Similar capital
-150 30%
Corporate profits growth, % oya, rhs
account strains appeared after the 2001 recession when
-200 40%
the dollar was cyclically weak due to low rates and
90 93 96 99 02 05 08
structurally weak due to the current account’s size and its
Source: J.P. Morgan
financing mix. Since little has changed since 2001 –
except that the US current account deficit has dropped by
Other components of the US capital account are
half – dollar bearish during a recovery was the obvious
outright negative, or less dollar-positive than headline
view. Expensive, low-yield assets of debtor countries
figures suggest. For example net FDI flows, which have
should typically fall in that environment either through
been negative for most of the past decade, are
carry trades or the hedging of long-term capital inflows.
deteriorating again. This development is cyclical: US
The greater challenge in 2009 was pegging the timing
corporates become more acquisitive internationally as
and strength of the recovery.
profit growth improves, and this recovery is proving no
different from previous ones (Figure 54). Indeed, the
pipeline of pending cross-border M&A deals (announced
2010 dilemma: recovery discounted,
but not completed) now stands at -$40bn for the US USD cheap but cash piles enormous
compared to net inflows for the Euro area ($60bn), The 2010 outlook is more challenging for two reasons:
Australia ($20bn) and UK ($10bn) recovery is mostly discounted, and the dollar is
already slightly cheap. The average investor expects US
One hopeful spot is net equity inflows, but foreign growth of 2.8% over the next four quarters, up
buying is less dollar-bullish than it appears. Unlike the significantly from the 0.5% expected six months ago.
drain in equity capital that accompanied much of the Forecasts for other economies have risen significantly
2002-2007 expansion, the US is now attracting equity too and now stand at 1.2% for the Euro area, 1.4% for
portfolio flows on a net basis. Net purchases are high Japan, 5% for Emerging Asia and 3.5% for Latin
outright ($9bn per month) and relative to Japan (¥300bn America. In theory a further dollar decline should require
or $3.3bn per month), but only a third of the €20bn another few quarters of upside growth surprises, since
($30bn) per month which the Euro area gathers. Hence changes to growth expectations have been positively
the negative correlation between equity movement and correlated with stock prices and negatively correlated
the dollar: the US attracts less global capital than other with the dollar this decade (Figure 57 and Figure 58).
countries, even though flows are positive.
15
This figure controls for the valuation effect on reserve from a
weaker dollar. We assume that central banks hold a roughly 25%
allocation to euros, per the IMF’s COFER estimates.
53
(44-20) 7325-5242 07 December 2009
Figure 55: The US’s net equity flows are weaker than Euro area’s positive wealth effects. Many investors characterise the
but stronger than Japan switch more cynically as the wall of money, as if the
Net equity inflows, 3-month moving average
40 3
move is inexorable but also irrational. It is neither. The
30
flow continues as long as the growth and policy
EUR20bn 2 environment are stable, but not if they worsen. And the
20
1 move is rational because investors tend to seek assets
10 USD9bn
offering the highest risk-adjusted return. During a
0 0
recovery, this asset is not cash, nor a low-yield currency
-10 JPY0.3trn -1 of a debtor country.
-20
-2
-30 Euro area US Japan The critical issues for 2010 are (1) what is the
-40 -3 appropriate cash allocation, and (2) can benign asset
06 07 08 09 10
reflation become a destabilising bubble. Figure 59
Source: J.P.Morgan, US Treasury (TIC), ECB and Ministry of Finance plots the two concepts of cash relevant for the dollar –
one cross-border and one domestic. The cross-border
Figure 56: Global reserve accumulation vs foreign official series tracks US net short-term capital flows from the
purchases of US securities, $bn, 3-month moving average basis balance of payments, comprising T-bills, certificates of
Global reserves calculated as sum for 15 emerging markets with reserves
greater than $50bn, plus G-10 central banks which intervene (Japan, Australia, deposit and commercial paper (same series as Figure 53).
Norway and Switzerland). Foreign official purchases is sum of weekly Fed Short-term capital inflows should rise if central banks are
custody holdings of Treasuries, bills and Agencies plus TIC-reported holdings buying US assets for reserve accumulation, if investors
of corporate bonds, equities and short-term USD deposits.
150
buy dollars during a rising rate environment or if
gap between reserve accumlation and US
purchases is near record wide
investors accumulate dollars during a financial crisis due
100 to short-covering or flight to liquidity. The domestic
series represents US household balances in retail money
50 market funds, demand deposits or checkable deposits.
0 The two series ran counter to one another after the 2001
recession because recovery pushed funds from money
Foreign official purchases of US securities
-50 markets into stocks (particularly international ones) and
Monthly reserve accumulation in EM credit, while central banks purchased short-term USD
-100 assets as part of their intervention policy. The two cash
00 01 02 03 04 05 06 07 08 09 10 measures converged during the crisis, reflecting the
Source: J.P.Morgan, Federal Reserve and national central banks
domestic switch from stocks and credit into US cash, US
investor repatriation of non-US investments and foreign
That move could occur next year because consensus demand for dollars as flight to liquidity. Short-term
forecasts are still low relative to the growth economies capital inflows totalled $360bn from 2008 Q1 through
typically achieve in the first year of a recovery.16 2009 Q1 while US household cash holdings rose by
roughly $250bn over the same period. Note that the
In practice, the bar for dollar depreciation isn’t so figures are not additive, since some of the household cash
high that it requires a growth upgrade. The reason is increase probably reflected repatriation of foreign equity
evidence of a still-sizable cash overweight. By now the investments.
market impact of excess liquidity is well accepted; the
only disagreement centres on whether this process is
natural and positive, or engineered and sinister. Central
bankers call the move from cash to financial assets a
“transmission mechanism” or “asset reflation” that
stimulates growth through lower borrowing costs and
16
The first year of recovery brings growth twice the pace of the
decline, implying that the US should be expanding by at least 6% in
2010. So while J.P.Morgan’s projections are more bullish than the
consensus, they are more bearish than the historical norm.
54
(44-20) 7325-5242 07 December 2009
Figure 57: Each percentage point increase in the consensus view Nine months into the dollar’s decline, cash
on US growth generates a 10% move in stocks… liquidations are very advanced relative to their pre-
Monthly change in consensus forecasts on US growth vs monthly returns on
the S&P500. Consensus projections based on monthly Blue Chip survey Lehman levels, but balances are still too high for a
10% zero-rate environment. US household cash has fallen by
y = 11.36x + 0.01
$250bn this year, mostly to fund bond purchases. (US
monthly change in S&P500
R2 = 0.54
5%
retail has purchased $160bn of bonds, $65bn of credit but
0% sold $21bn of equities year-to-date). This is the fastest
-5%
pace of cash liquidations post-recession in the past forty
years (Figure 60), and more than reverses the cash
-10% hoarding which Lehman’s bankruptcy inspired. But
-15%
Lehman is the wrong anchor. Because household cash
-1.2% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% balances track money market rates with a lag, and since
monthly change in consensus US growth forecast the funds rate is 200bp lower than it was in September
Source: J.P.Morgan
2008, cash balances should fall well below pre-Lehman
levels. If the historical beta between cash balances and
Figure 58: …and -2.5% on USD trade-weighted money market rates holds, another $300bn could flow
Monthly change in consensus forecasts on US growth vs monthly returns on into asset markets over the next year (Figure 61). Flows
USD. into US stocks would be dollar-neutral, but those into
5% international equities, higher-yielding government bond
monthly change in USD trade-wtd
4%
markets (particularly emerging markets) or pure currency
3%
allocations (ETFs) obviously would be USD negative.
2%
1%
0%
The path of cross-border short-term capital flows is
-1% harder to predict because they do not track the funds rate
y = -2.79x - 0.00 -2% nor US vs rest-of-the-world spreads tightly. This
2
R = 0.26 -3% disconnect reflects the offsetting sources of dollar
-4% demand in a low-rate environment: private investors sell
-1.2% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% USD to fund non-US investments, but official investors
monthly change in consensus US growth forecast recycle some of these flows into US T-bills and deposits
Source: J.P.Morgan as part of their intervention practices. As a baseline we
assume that the full amount which entered post-Lehman
Figure 59: Cross-border and domestic cash holdings of dollar ($360bn) will be unwound. Only $90 was liquidated in
still look too high relative to the rate environment Q2. Q3 data are not yet available but the correlation
USD billion, cumulative figures since January 1999 (starting point chosen by between US household cash and balance of payments
data availability). Short-term capital flow data from US balance of payments
data. US money market and demand deposit data from Federal Reserve. flows (Figure 59) suggests that the process has another
600 two quarters and tens of billions left to run.
500 short-term capital flows (US balance of payments)
400 US household cash

300
200
100
-100
-200
01 02 03 04 05 06 07 08 09 10
Source: J.P.Morgan, BEA, Federal Reserve
55
(44-20) 7325-5242 07 December 2009
Calibrating an undershoot Figure 61: US household cash tracks Fed funds with a lag
US household cash calculated as sum of retail money market funds, demand
Projecting how far the dollar could fall in this deposits and other checkable deposits (USD bn) plotted against Fed funds rate
lagged one year.
environment requires calibrating an undershoot, since the
2000 7%
dollar’s long-term drivers have not worsened materially. US household cash, $bn, lhs
Short-term cyclicals drive this move. Our long-term fair 1900 6%
Fed funds rate lagged 1yr, rhs
value model based on some of the standard, quarterly 1800
5%
variables – current account, net investment income, debt-to- 1700
GDP levels and inflation – suggests that the dollar is only 3% 4%
1600
cheap in trade-weighted terms (Figure 62), even though it has 3%
fallen 15 % trade weighted since March.17. This aggregate 1500
2%
valuation reflects offsets from an expensive euro (+6%) and 1400
yen (+10%) versus cheap sterling (-14%) and fairly-valued 1300 1%
commodity currencies. Purchasing power parity approaches 1200 0%
suggest that the dollar is much cheaper (7% below its long- 00 01 02 03 04 05 06 07 08 09 10
term average) but pure price-based approaches to valuing
Source: J.P.Morgan
currencies are flawed for reasons which are well-known: if an
economy’s structure evolves over time, the real exchange rate Deviations around fair value occur in every asset market. In FX
will trend rather than mean-revert. they resurface each decade. Their duration is quite variable and
they sometime bear no link the US business cycle. But they do
Figure 60: US retail cash positions have dropped this year more share one commonality: overshoots tend to occur as a lagged
rapidly than after any recession of the past three decades
x-axis shows number of months before and after the recession ends, with zero
response to an extreme policy environment (Figure 63). In
marking the last month of NBER-dated recessions. Y-axis shows US retail the mid-1980s the dollar’s overvaluation reached 20% due to
holdings of demand deposits, other checking accounts and money market record interest rates under Volcker and record fiscal deficits
funds indexed to 100 at t=0 (end of recession). Current series assume the under Reagan. In the late 1980s, the dollar’s undervaluation
2008-09 recession ended Jun 2009.
110 reached 7% following the three–year easing cycle which
average of 1980-2001 recessions accompanied Plaza Accord intervention. In 2001 the dollar’s
105 overvaluation reached 10% as a lagged response to the US rate
current advantage that persisted until that year. In 2004 the dollar
100 undershot fair value by some 5% as the funds rate hit 1%. The
extension of that move to 12% cheapness in 2008 occurred
95 alongside unilateral Fed easing.
90
Given the historical experience, 2010 looks like a year of
unfinished business as the dollar contends with the lagged
85
-12 -9 -6 -3 0 3 6 9 12 effects of an extreme rate environment. True, the dollar’s
current yield deficit versus the rest of the world (-1% as a
Source: J.P.Morgan
weighted average) has closed from the -3% extreme of late
2008. But with two central banks having tightened in 2009
(RBA, Norges Bank), others to follow in 2010 (most
emerging markets) and some to simply turn more hawkish
(ECB), the rate deficit will widen over the next year. This
environment could produce an overshoot as large as the
typical ones, which delivered a dollar 10% cheap to fair value
in trade-weighted terms, some 7% weaker than current levels.
17
The same argument applies to credit and equities: markets are not Normally such a move should be spread equally across the
expensive because they have experienced an unprecedented rally from US’s major trading partners, but emerging market
their lows. Valuation must be judged relative to a market’s long-term
drivers. For example, high-yield credit has rallied 1100bp from its intervention and subsequent reserve diversification shifts
wides in December 2008 but is still cheap since current spreads (750bp) more of the adjustment to G-10 currencies. For simplicity we
overcompensate for the 4% default rate like this year. Equities are fairly assume G-10 currencies will appreciate roughly 8% by Q2 to
valued despite a 65% rally from their March lows, since 2009 delivered
earnings of $62 on an end-recession P/E of 16.5 implies an S&P target 1.62 on EUR/USD, 82 for USD/JPY, 1.74 on GBP/USD,
of 1010. 1.02 on AUD/USD and 0.99 on USD/CAD.
56
(44-20) 7325-5242 07 December 2009
USD reversal in Q3: The Fed’s graceless Figure 63: USD deviations from fair value have corresponded to
policy extremes of very tight or very loose Fed policy vs the rest
exit from QE may mirror the Bank of of the world
Japan’s in 2006 USD deviations from fair value (positive indicates overvaluation) versus spread
between Fed funds rate and policy rates in the rest of the G-10 (weighted
If extreme rate environments drive overshoots around average).
fair value, then normalisation should drive a reversal. 25% USD deviation from fair value model 8%
That normalisation could come in late Q2/early Q3 as the 6%
15% Fed funds spread to G-10 cash rates,
Fed begins to exit from exceptionally low levels of 4%
lagged 1 year
policy through some combination of FOMC statement 2%
5%
changes and repo operations to reduce excess reserves.
0%
Rate hikes should wait in 2010, but that patience does not -5% -2%
guarantee tranquil markets or a trend dollar decline
through end-2010. The resulting rise in volatility against -4%
-15%
a backdrop of much larger dollar shorts could easily -6%
drive the dollar some 5-10% higher in Q3 and Q4. -25% -8%
Indeed, the experience of Japan set the precedent for a 80 84 88 92 96 00 04 08
messy, albeit brief, QE exit. Ahead of its first interest Source: J.P.Morgan
rate hike in mid-2006, the Bank of Japan began reducing
commercial banks’ target for current account balances Three misconceptions about the dollar
(excess reserves) from a record ¥35trillion. Although the
BoJ had been explicit in stating that QE would end when Dollar bulls will counter that an undershoot is unlikely
Japan emerged from deflation – a notable contrast to the due to three constraints: most investors are extremely
Fed and Bank of England’s vagueness – the liquidity bearish, and therefore short; currency markets are
withdrawal nonetheless sparked a 9% drop in USD/JPY experiencing an unsustainable bubble which will soon be
and a 2 point rise in implied volatility in 2006 Q2 as punctured; and new lows on the dollar will motivate G-3
short yen positions were covered (Figure 64 and Figure intervention. Each is a misconception. We address each
65). Those moves reversed within three months, but the in turn.
analogy to dollar-funded carry by the time the Fed begins
to withdraw liquidity next year should be obvious. 1. Everyone is bearish and therefore short. By the
Despite the best efforts at transparency and signaling, the usual cover story test – a trend reverses once it becomes
Fed’s exit is unlikely to be entirely graceful. a cover story in the popular press – the dollar’s decline
should have ended this fall. But despite the bearish dollar
Figure 62: USD real effective exchange rate: Actual vs predicted patter, there is little evidence that views are so extreme or
Predicted value based on J.P.Morgan estimates as outlined in A new fair-value positions so short that they should impede the current
model for G-10 currencies, de Kock, September 6, 2008. bear trend. Consensus expectations are, in fact, dollar-
160 bullish, with end-2010 forecasts of 1.45 on EUR/USD,
150
actual fair value
98 on USD/JPY, 1.64 on GBP/USD, 0.88 on AUD/USD
140
and 1.06 on USD/CAD. Even amongst the emerging
market currencies, the only consensus bearish USD call
130
comes against Emerging Asia (Figure 66). Being non-
120 consensus in this instance is no great shame, since the
110
average forecaster has been too conservative in
anticipating USD weakness, even when they correctly
100
predicted the dollar decline (Figure 67). This
90 conservatism usually corresponds to positions, which is
80 84 88 92 96 00 04 08 why many of the indicators tracked continue to evidence
Source: J.P.Morgan modest carry – and by extension short USD – exposure.
57
(44-20) 7325-5242 07 December 2009
2. Currencies are in bubble trouble. Related to the fear Figure 64: The end of Japanese QE in Q1 2006 prompted a spike
of excessive USD bearishness and USD shorts is the in USD/JPY volatility…
Commercial banks current account balances with Bank of Japan versus
characterisation that currency markets are experiencing a USD/JPY 3-mo implied vol
speculative bubble. The label has been applied to almost 35 13%
BoJ reduces reserve balance
every asset market this year except housing, since 30 targets 12%
equities, credit, some commodities and most high-yield 11%
currencies have posted unprecedented gains since March. 25
10%
Identifying asset bubbles ex ante is, of course, 20
9%
impossible. Many marketsexhibit tremendous price rises, 15
but the only ones which earn the label of a bubble are 8%
10
those which crashed (Japanese real estate in the last bank reserves, JPY trillion, lhs 7%
1980s, internet stocks in the late 1990s, housing in the 5 USD/JPY 3-mo implied vol, rhs 6%
2000s). Thus we can only distinguish bubbles from more 0 5%
ordinary bull markets ex post. 01 02 03 04 05 06 07
Source: J.P. Morgan

Markets that crashed shared three characteristics, however:
extreme valuation, extraordinary momentum and high
Figure 65: …and a liquidation of yen-funded carry
leverage. 18 Applying this scratch test to currencies, the IMM net speculative positions in JPY vs USD/JPY spot
dollar flunks all sections. As noted earlier, the dollar is 50 BoJ reduces reserve 124
cheap, but far from the extremes of 10% - 15% balance targets
undervaluation (Figure 62 and Figure 63). Short dollar/long 0 120
carry positions have risen quickly but only to about half 116
their pre-Lehman levels. And price momentum, measured -50
as rolling 12-month returns, are far from the -10%to -15% 112
-100
annual moves which have marked turning points in the past 108
(Figure 68). By Q2 2009 this scratch test could yield a IMM positions in JPY, thou contract, lhs
-150 104
different judgment, but for now, the currencies look like
most other asset markets – heady but hardly bubble-like. USD/JPY spot, rhs
-200 100
Jan-05 Jun-05 Nov-05 Apr-06 Sep-06
3. G-3 central banks would intervene at new lows for Source: J.P. Morgan
the dollar. Intervention is standard practice for many
emerging markets central banks and some G-10 banks Figure 66: Consensus expectations for currency movements
(SNB, RBA). The intervention which drives the USD versus USD over the next 12 months
trend, however, requires the Treasury, Bank of Japan and %, positive (negative) indicates that the consensus expects foreign
currency to appreciate (depreciate) versus the dollar by end-2010.
ECB. Our view on intervention during this dollar decline
12%
is the same as our view during the dollar’s 2008 rise: G-3
central banks will not intervene in currency markets 9%
unless FX moves raise volatility and drive other asset 6%
markets lower. The rationale is simple: G-3 policymakers 3%
know that intervention’s impact is fleeting without a sea
0%
change in monetary policy, such as Fed hikes. Japan also
faces considerable domestic opposition to further USD -3%
accumulation. -6%
-9%
JPY
CHF
KRW
SEK
NOK
GBP
CNY
TRY
CAD
EUR
AUD
NZD
IDR
TWD
INR
MXN
BRL
ZAR
Source: J.P. Morgan, Bloomberg
18
See Are alternatives the next bubble?, Loeys, September 2006.
58
(44-20) 7325-5242 07 December 2009
Where are we wrong? Figure 67: Forecast errors: the consensus has been too
conservative in forecasting USD weakness this decade
The most significant risks to the bearish view are the Consensus error on G-10 and emerging market FX forecasts vs USD,
following: where error is calculated as difference between actual rate and forecast r
ate over horizons of one quarter to two years. A positive (negative) value
indicates that the consensus underestimated (overestimated) foreign
1. Corporates fail to spend bumper profits, leading to currency strength vs USD.
a growth slowdown in early 2010. The dollar would 12%
appreciate as carry/cyclical trades are unwound.
10%
2. The dollar’s decline becomes volatile, possibly due to 8% G-10 FX EM FX

a US financing issue next year. The dollar would rise
6%
versus the high-yield currencies and commodity currencies
given the increase in volatility. The dollar would probably 4%
fall versus the euro and Swiss franc since the underlying
2%
cause of the move is a US sovereign risk issue. Eventually
such a move could prompt G-3 intervention, but not before 0%
the dollar posts a sizable H1 fall. Current qtr 1 qtr ahead 2 qtrs ahead 1 yr ahead 2 yrs ahead
Source: J.P. Morgan

3. A significant upturn in inflation. The consensus expect
global inflation to turn higher in 2010, but to only 1.9% in Figure 68: Bubble test for excess momentum: USD’s move this
the US and 1% in Europe. Dollar weakness and resulting year has not been excessive by historical measure
commodity price strength render that projection a moving Annual returns on trade-weighted dollar and 2-sigma bands
30%
target, however, while the long-standing anxieties around
fiscal policy and exit strategies raise questions about how 20% average plus 2 sigmas
much inflation expectations can or should decline. Whether
inflation rises gradually (a low-volatility event) or abruptly 10%
(a high-volatility event) drives the feedback to currencies as
the CPI trend evolves. 0%
4. China surprises with a +10% one-off revaluation of -10%

average minus 2 sigmas
the yuan. The immediate reaction would be a lower
-20%
euro, since a stronger yuan would reduce China’s buying
70 75 80 85 90 95 00 05
of non-USD assets as part of its reserve diversification.
We suspect that such a policy move would be a low- Source: J.P. Morgan
probability event given China’s skepticism about the
global recovery and its lack of meaningful inflation. We We are not worried about premature tightening, or a
continue to expect the yuan to appreciate next year more meaningful shift to asset price targeting in the
(forecast: USD/CNY at 6.58 by December 2010), but that G-3 central banks that control global liquidity. Many
baseline move is too modest and gradual to impact the smaller central banks already have cited asset price
euro. Only a significant- step-wise appreciation (10% or inflation as motivations for recent tightening, and the
more) would impact EUR/USD. ECB has always expressed more concern about excess
liquidity than the Fed. Even the most hawkish central
5. A divided USD government after mid-term banks, however, will avoid setting policy next year with
elections. Politics is rarely a consistent G-10 FX asset prices in mind because few markets exhibit extreme
influence, but when fiscal policy is a central issue, overvaluation. Their comfort level may change in 2011 if
elections assume greater importance. US mid-term price trends continue at the 2009 pace.
elections in November could result in a divided
Congress, which may then result in more conservative
fiscal policy in 2011. Coming at a time when
expectations of Fed tightening are building, this electoral
outcome could aid the dollar’s rebound late in the year.
See Risk scenario 3 .
59
(44-20) 7325-5242 07 December 2009
Accounting & Valuation -

Europe European Accounting Outlook
AC
Sarah Deans
(44-20) 7325-1775 Crunch time for convergence of standards
sarah.deans@jpmorgan.com
During 2010, both the International Accounting Standards Board (IASB) and US
Financial Accounting Standards Board (FASB) are committed to producing complete
sets of new rules on accounting for financial instruments. This will be an important
Accounting & Valuation - US test of the effort to converge IFRS and US GAAP, prior to the proposed US adoption
Dane Mott of IFRS. The SEC's "roadmap" for adopting IFRS requires a decision in 2011, but we
(1-212) 622 1443 think the likely direction may become clear during 2010. If the SEC decides to go
dane.mott@jpmorgan.com ahead, large US listed companies may be required to adopt IFRS as early as 2014.
J.P. Morgan Securities Inc.
The IASB issued the first part of its new standard on financial instrument accounting
(IFRS 9) in November 2009, which covered the classification and measurement of
Flagship reports financial instruments. At present, EU listed companies are not permitted to adopt
• Accounting Issues: An updated Q&A
Guide to Financial Instrument
these rules as the EU has not yet endorsed the new standard. However, if the EU
Accounting After the Credit Crunch, 12 endorses IFRS 9 in 2010, companies will have a choice between the existing IAS 39
Aug 09 rules or the new IFRS 9 rules until 2013, when IFRS 9 becomes mandatory. If the
• Replacement of IAS 39: New rules on EU proceeds with endorsement and European companies elect to early adopt IFRS 9,
financial asset classification and comparability of company results in the banks and insurance sectors may be reduced.
measurement issued, 12 Nov 09
• Deferred tax and tax losses: A short
The new rules abolish the "available for sale" category of financial instruments and
guide and bank sector case study, 04 in our opinion will probably result in greater use of amortised cost accounting
Nov 09 (giving more stable, but arguably less relevant, balance sheet values). IFRS 9 also
• Banks' Fair Values: Review of Financial changes the accounting for some equity investments, such that only dividend income
Instrument Disclosures, 29 May 09 will be reported in the P&L and all other gains and losses (including realised
gains/losses on sale) will be excluded from net income. This may influence company
behaviour, for example it may encourage some companies to purchase higher-
yielding equities or hold them over dividend payment dates.
IASB work plan

The IASB also has a packed work plan of other projects which need to be
substantially progressed during 2010 prior to publication of new standards in H1
2011. We expect more press and analyst comments about the potential impact of
these accounting changes as the projects develop. These include:
• Lease accounting: The IASB is likely to require all leases to be reported on balance
sheet, whereas current accounting rules treat operating leases as off-balance sheet
liabilities. Impacted sectors may include hotels/leisure, retail, property, and airlines.
• Revenue recognition: New guidance may affect the way that long-term contracts
or bundled goods and services are accounted for. Impacted sectors may include
construction, industrials, oil services, and technology.
• Insurance accounting: The IASB is considering many changes to insurance
accounting as the proposed new standard would, for the first time, provide
comprehensive guidance on how IFRS reporting companies should account for
insurance liabilities. One significant proposal is that deferred acquisition costs
(DAC) would have to be immediately expensed rather than capitalised.
• Pensions: The IASB is expected to abolish the “corridor rule” which allows
companies to smooth pension deficit recognition, often resulting in off-balance
sheet liabilities. Impacted sectors may include airlines, autos, industrials, and
banks, although pension deficits affect specific companies in many sectors.
60
(44-20) 7325-5242 07 December 2009
New standards in 2010

The IASB will issue a new finalised rule on Joint Venture accounting, expected in
Q1 2010, which will require companies to use equity method (associate) accounting
for joint venture entities, rather than the current choice of equity accounting or
proportionate consolidation. Although the new rule is unlikely to be mandatory until
2011 or 2012, we expect companies which currently use proportionate consolidation
to start to switch over to the equity method once the new rule is published. This will
affect sales, EBITDA, operating margins, net debt, and reported cash flow of
companies which currently use proportionate consolidation (eg in the telecoms
sector).
Finally, new rules on M&A accounting (IFRS 3 revised) become mandatory in

2010. These rules affect the accounting for deal-related costs, contingent
consideration, step acquisitions, and purchase or sale of minority interests.
Other issues
We also expect that corporate pension exposure will remain in the headlines during
2010, particularly in the UK. Although asset values have recovered during 2009,
many companies are likely to report higher pension deficits at the end of 2009
compared to the end of 2008, mainly due to lower (AA bond yield) discount rates.
We expect companies to continue to cut back pension benefits and address pension
deficits through various methods.
61
(44-20) 7325-5242 07 December 2009
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62
(44-20) 7325-5242 07 December 2009
Sector Overviews
Autos .....................................................................64
Banks.....................................................................65
Beverages .............................................................66
Building Materials.................................................67
Capital Goods .......................................................68
Chemicals..............................................................69
Communications Equipment ...............................70
Food & Food Manufacture ...................................71
Food Retailing.......................................................72
Home and Personal Care .....................................73
Insurance...............................................................74
Luxury & Sporting Goods ....................................75
Media .....................................................................76
Oil Services & Equipment ....................................77
Pharmaceuticals ...................................................78
Property.................................................................79
Semiconductors ...................................................80
Sector Overviews
Steel .......................................................................81
Telecom Services .................................................82
Tobacco.................................................................83
Transport and Logistics.......................................84
Utilities...................................................................85
Unless otherwise stated, legal entity for all authors is

63
(44-20) 7325-5242 07 December 2009
Autos
Ranjit A Unnithan
AC Autos
(44-20) 7325-8106
ranjit.a.unnithan@jpmorgan.com Prefer Luxury, US mass market exposure
What is different now?
Flagship reports • Liquidity is no longer a concern for European autos, but structurally little has
• European Autos: Probing 2010 street changed (i.e. no M&A, no significant capacity reductions in Europe); the situation
expectations, 16 Oct 09 is very different in the US, where we expect Detroit 3 capacity to decline by 1/3 by
• European Autos: Capacity Utilisation- 2011, significantly improving medium-term profitability prospects in that market.
Structural Shift in NA; VW, Fiat to
benefit, 28 Sep 09 • After a year of relative strength (WE SAAR of ~13.5MM), we estimate WE
volumes are poised to decline 8-10%, following the expiry/reduction of
scrappage incentives; it could be difficult for mass market stocks to outperform
YTD price performance vs MSCI when volumes decline; there is less noise in the US (payback from scrappage
Europe over); global luxury demand (which has not benefited from scrappage schemes)
140
130
120 has shown signs of modest recovery in 2H09.
110
100
90
80
• Strong mass market retail volumes in 2009 supported prices in Europe; it is
70
60 unclear if this will continue in 2010 as volumes decline; we think mass market
50
40
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009
OEMs (Fiat, PSA) are most at risk if pricing weakens.
Autos MSCI Europe
Source: Datastream, MSCI 2010 Roadmap

• Volume outlook: we expect US SAAR to continue to increase gradually through
MSCI Performance table 2010 (2009E: 10.5MM), Europe SAAR could experience strong declines in 1H10
2wk 3mth YTD (2009E: 13.5MM) before potentially recovering in 2H10.
MSCI Autos -8.6% -2.5% 10.3%
Weight in Europe 1.9%

• Any resilience in consumer demand (post scrappage schemes) could be a positive
driver for stocks (expect visibility on this in 2Q10).
MSCI total market cap (US$bn) 129
• We expect a bumpy earnings trend in 2010 – strong 1Q, weak 2Q (as production
Consensus 2009 P/E ratio -
Consensus 2010 P/E ratio 22.0 curtailed on scrappage demand payback) before a potential recovery in 2H10.
Consensus 2011 P/E ratio 10.2 2010 earnings are still likely to be depressed; hence investors are likely to remain
Fwd D/Y 1.5% focused on 2010 EV/Sales multiples.
Source: Datastream, IBES, MSCI
• 2009 Auto stock performance has been dictated by the rebound from trough
Prices and valuations as at 30 November 2009
multiples, improving cash flows/liquidity (thus lowering chances for equity
dilution); 2010 stock performance is likely to depend on underlying consumer
demand (post scrappage schemes).
How to position for 2010 and beyond

We think, with the exception of the US, most geographies could see mass market
volumes weaken near-term (esp. in 1H10) and therefore we continue to prefer luxury
during this period, and prefer US exposure over other geographies (RNO (€32.2)
over other mass market names). In our view, Daimler offers the best investment case
on valuation, near-term earnings momentum and recovery in truck end-markets. We
see the greatest potential downside in Fiat, given the lack of near-term positive
catalysts (weak volumes post scrappage schemes, weak end-markets for CNH/Iveco,
Chrysler recovery already priced in at US SAAR of 15MM, EBIT margins of 5-6%).
Top pick and stock to avoid
Mkt cap P/E (x) EPS (LC) Div yield ROE
Price Currency Rating bn 09E 10E 09E 10E 09E % 09E %
Top pick
Daimler AG 33.78 € OW 34.7 NM 25.5 -1.63 1.33 1.8 -4.7
Stock to avoid
Fiat S.p.A 9.83 € N 10.4 NM 22.4 -0.02 0.44 0.0 -5.2
Source: Bloomberg prices as on COB 30th November, 2009, J.P. Morgan estimates.
64
(44-20) 7325-5242 07 December 2009
Banks
Kian Abouhossein
AC Banks
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com Preference for Credit Banks over IBs retained
Flagship reports The credit crisis is over with the perfect banking environment created by central banks –
• Global Investment Banks: Regulatory pumping in liquidity at close to zero interest rates leading to cheap financing for banks
Proposal Analysis: Structural IB and dampening corporate bankruptcy volumes. The top-down backdrop has lead to the
Profitability Decline, 09 Sep 09 conclusion of phase I of the crisis – no more systemic banking risk: hence, valuation has
• Global Investment Banks: Switching
preference from IBs to Credit banks on
moved from 0.6x to 1x tangible BV as the new ‘floor value’ for even the most distressed
regulatory changes, 09 Sep 09 banks. Currently the focus is on phase II of the crisis – capital deficiencies: new expected
• Spanish Retail Banks: Recovery still capital requirements and shareholder demands of higher ‘core’ capital ratios estimated at
long way off but coffers look sufficient 8% by 2011E in our view lead us to expect an additional $65bn of capital raisings plus
to avoid losses; upgrading POP, SAB, RBS to replace government B shares and exit APS would require $50bn alone. Despite
BTO to N, 07 Sep 09
• UK Banks: The Return of UK
the headwind of capital supply coming into the market, we expect banks to perform well
Investment Banking - A Review of in 1H2010 with the backdrop of a perfect interest rate environment.
Capital Requirements and Profitability
Outlook, 21 Jul 09 2010 Roadmap
• Italian Banks: Gearing to the interest With our constructive top-down outlook for banks, within the banks we continue to
rate cycle – OW for 2010, 10 Nov 09
retain our preference for credit geared banks over IBs. The rationale is our focus on
moving from mark-to-market credit asset (i.e. IB exposure) to accrual exposures.
YTD price performance vs MSCI We believe the trigger for a re-rating of credit banks is US money centre banks
Europe leading the way in asset quality improvement by the latest 1Q10E, which will also be
170
150
discounted by European credit banks in terms of normalised provision PE multiples
130
110
in our view. Our portfolio is highly exposed to this improving credit scenario
90 through all 4 top picks. In terms of regulatory curve balls, we see more headwinds
70
50
within the IB sector, expecting regulators to finalize proposals in 1H2010E. Credit
30
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009
geared exposed banks will see more limited impact from new regulations.
Banks MSCI Europe
Source: Datastream, MSCI How to position for 2010 and beyond

We see the quantitative easing strategy by central banks as a ‘window’ for banks to
MSCI Performance table rebuild capital, but this is not a long-term investment case for the banking sector with
2wk 3mth YTD
MSCI Banks -7.3% -3.5% 41.0% the risk of i) higher cost of equity as we expect Treasury rates to increase and ii)
tightening of liquidity as central banks will likely increase rates in 2011E. We position
ourselves with stocks of i) high cashflow generation with material credit exposure
MSCI total market cap (US$bn) 961 gearing and at the same time low P/tangible BV to limit downside risk (SocGen, UCI)
Consensus 2009 P/E ratio 19.8 and ii) high growth emerging market exposure where banks will be more immune to the
Consensus 2010 P/E ratio 14.4 long-term structural de-gearing within G7 countries (BBVA and HSBC).
Consensus 2011 P/E ratio 9.6
Fwd D/Y 2.7%


Mkt cap P/E (x) EPS (LC) Div yield RONAV
Price Currency Rating € bn 09E 10E 09E 10E 09E % 09E %
Top pick
BBVA 12.5 € OW 47.0 8.7 9.4 1.44 1.33 3.5% 26.4%
HSBC 7.1 £ OW 124.1 14.2 10.0 0.50 0.71 3.6% 12.7%
Société Générale 46.5 € OW 34.4 53.2 11.6 0.87 4.00 3.0% 10.2%
UniCredito 2.3 € OW 38.2 22.2 11.8 0.10 0.19 3.8% 10.4%
Stock to avoid
Nordea 72.3 Skr UW 27.8 11.4 14.8 0.61 0.47 3.1% 9.4%
RBS 33.2 £ UW 32.6 NM NM -3.09 -2.58 0.0% -12.8%
Source: Bloomberg, J.P. Morgan estimates. Note: Nordea EPS in €
65
(44-20) 7325-5242 07 December 2009
Beverages
Mike Gibbs
AC Beverages
(44-20) 7325-1205
mike.j.gibbs@jpmorgan.com Still better growth and more visibility in brewing cashflows
Vanessa Lai Min What is different now?
(44-20) 7325-4240
Following large-scale transactions in 2008, ABI, Carlsberg, Heineken and Pernod
vanessa.laimin@jpmorgan.com
Ricard all have high levels of financial leverage and are focussed on generating
cashflow to pay down debt before any further distribution to equity shareholders.
Flagship reports However we think large-scale M&A will continue with FEMSA Cerveza potentially
• Break for the border: Scenario analysis for sale (unconfirmed press reports have suggested SABMiller and Heineken could
of a potential acquisition of Femsa be potential acquirers) and Diageo indicating that it would be prepared to raise debt
Cerveza by SABMiller or Heineken, 13 and equity capital to acquire assets.
Oct 09
• Brewers: Time for another round, 16
Sep 09 In the brewing sub-sector volumes are declining in most mature and some emerging
markets although the pace of decline is easing. Pricing momentum continues even as
input cost pressures ease and we expect a positive “inflation differential” in 2010E.
YTD price performance vs MSCI Cost savings programmes and synergy capture are fuelling double-digit EBIT growth
Europe and even faster earnings growth compounded by financial de-gearing. ABI and
150
140
130 SABMiller are now the dominant players in key beer profit pools globally. In the
120
110
100
spirits sub-sector the worst of the de-stocking impacts on volume seen in mature and
90
80
emerging markets are now behind us but pricing is still very muted and mix, except
70
60 in now recovering emerging markets, is still negative. Cost cutting is a relatively
50
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009 limited driver of margin expansion leaving organic EBIT growth for the major
Bev erages MSCI Europe
players Diageo and Pernod Ricard in low single digits to FY10E.
2010 Roadmap
MSCI Performance table
2wk 3mth YTD In brewing we are looking to see whether a more positive “inflation differential” can
MSCI Beverages -0.3% 9.8% 34.9% drive further margin upside. We also think investors are continuing to underestimate
Weight in Europe 2.2% the strength and longevity of brewer cashflows with costs being driven down,
improving working capital management and lower sustainable capex. In spirits, given
relatively low operational gearing to volume, the key driver will be how quickly
Consensus 2009 P/E ratio 16.5 pricing power (after above inflation pricing over the last 2 years) and mix
Consensus 2011 P/E ratio 13.0 improvement returns, especially in mature markets.
Fwd D/Y 2.1%
Source: Datastream, IBES, MSCI How to position for 2010 and beyond
Prices and valuations as at 30 November 2009 We see ABI (OW) as by far the most attractive stock in our universe both for 2010E
and beyond with superior growth driven by synergy capture from AB, falling input
costs, robust pricing in key markets (US, Brazil), rapid de-gearing and falling interest
costs and volume growth in emerging markets (Brazil and China). A CY10E FCF
yield of 9.4% is well ahead of comparable staples peers in Europe and US despite
faster growth and less risk in our view. We see Diageo as the least attractive large
cap stock with limited top line growth and tough pricing comps and cost savings only
just about recovering gross margin pressures.

Top pick
Anheuser Busch InBev 33.2 EUR OW $80.608 19.9 13.6 2.50 3.66 0.9 N/A
Stock to avoid
Diageo 1025 £p N $35.203 14.3 13.5 71.52* 72.28 3.6 N/A
Source: Bloomberg, J.P. Morgan estimates. * reported number for 2009A
66
(44-20) 7325-5242 07 December 2009
Building Materials
Mike Betts
AC Building Materials
(44-20) 7325-8976
mike.f.betts@jpmorgan.com Expecting 2H10 recovery – European housing exposure key
Flagship reports With the balance sheets repaired, the credit markets beginning to open up, and most
lead indicators moving in the right direction, the improvement in the economic
• Building Materials: Improving outlook.
Increasing sector EPS estimates by 5-
outlook is feeding through to the outlook for the building materials sector. Recent
12%. Raising Ciment Francais and updates from the companies we cover suggest a weak trading outlook for the
Eagle from UW to N. Lowering Holcim remaining part of 2009, with recovery expected in the second half of 2010. 12-month
from OW to N, 08 Sep 09 trailing P/E for the building materials sector in Europe fell from 17.9 in July 2007 to
5.3 in March 2009, but has since partially recovered to 15.3 currently.
YTD price performance vs MSCI
2010 Roadmap
Europe
150
Starting in 2006, the downturn in the US housing market spread within the developed
130
110
world and also to the non-housing sector. In the emerging markets, any weakness has
90 been comparatively small and short-lived, with the exception of Eastern Europe.
70
Even in Eastern Europe there are early signs of recovery in Poland and Russia. Lead
50
30
indicators on housing, though choppy, suggest improvement. We don’t expect
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009
Construction Materials MSCI Europe

recovery in the non-residential sector to occur soon. In our view, the issue with the
Source: Datastream, MSCI non-residential sector is not as serious as it was in the previous downturn, as the
excess of supply was less than in housing, as the sector had earlier this decade been
MSCI Performance table hit by the dot-com bubble bursting. The majority of the infrastructure spending due
2wk 3mth YTD to stimulus programmes is expected to take place in 2010, but we remain cautious
MSCI Construction
Materials -5.7% -3.2% 24.6% due to the possibility that it will just be used as a substitute for other sources of
funding. In the longer term we expect cut-backs in public spending on construction
due to the growing size of public sector funding deficits.
Consensus 2009 P/E ratio 15.6 How to position for 2010 and beyond
Consensus 2010 P/E ratio 13.9 Our top pick for 2010 is Saint Gobain, with almost two-thirds of the company’s sales
being driven by the European housing market. We believe the company will be the
Fwd D/Y 4.0% major beneficiary when the European housing market recovers, which does not seem
Source: Datastream, IBES, MSCI far away, given the improving outlook for the US housing market.
Italcementi is our key Underweight recommendation. France and Italy account for
38% of its mid-cycle EBITDA and we are forecasting that cement consumption in
these markets will decline further in 2010. Also, Italcementi’s exposure to high-
growth emerging markets is 43%, 15 percentage points less than the average for the 7
cement companies researched by the author.

Price Currency Rating $ bn 09E 10E 09E 10E 09E % 09E %
Top pick
Saint-Gobain 36.23 € OW 28.0 32.9 16.4 1.16 2.31 2.6% 3.0%
Stock to avoid
Italcementi 8.91 € UW 3.1 20.1 26.7 0.44 0.33 1.0% 7.4%
Source: Bloomberg, J.P. Morgan estimates
Prices as at 30 November 2009
67
(44-20) 7325-5242 07 December 2009
Capital Goods
Andreas Willi AC
Capital Goods
( 44-20) 7325-4853
andreas.p.willi@jpmorgan.com 2010 is about top-line growth, pricing power and quality
Nico Dil What is different now?
(44-20) 7325-4292
Sector is emerging strongly from this recession… with strong balance sheets, high
nico.dil@jpmorgan.com
profitability and generally well managed, limiting the number of recovery stories but
allowing investors to benefit from global growth themes in Emerging Markets,
Flagship reports Infrastructure and Energy through quality investments.
• European Capital Goods, Framework
for Investing into the next Cycle, 03
…with Emerging Markets as a key driver... as utilization rates in the US and Europe
Aug 09 stand at historic lows. By contrast, EM utilization rates are close to their long-term
• MAN, Fundamental Improvement in the norm. Combined with healthier government finances this sets the stage for
Business Model, 09 Sep 09 outperformance of EM capex early in a recovery.
• Siemens, Crisis as Opportunity, 12 Nov
09 … but with a changing competitive landscape…as EM companies reduce the
• Philips, CEO for a Day – Finishing the technology gap and often supported by increased protectionism take a larger share of
Job, 17 Sep 09 the pie at home and grow their export businesses. Western companies with strong local
• Global Power Market Review, 24 Feb footprint in EM look better positioned to protect their margins.
09
• European Trucks, Trucks for the long … and with pricing risks increasing… as input costs will rise in 2010 and holding on
haul, 20 Mar 09 to price will be a challenge. 2009 has been characterized by relatively resilient pricing, a
• Atlas Copco, Sandvik and SKF, Steep positive, but pricing tends to turn only with a 1-2 year time lag to volumes. This is a
recovery in IP likely, 22 Jun 09 normal development at this stage of the cycle.

… and a focus on secular growth themes which we could see in markets such as Oil &
Europe Gas or Mining where increased capex is required to generate the same output. We also
150
like the Energy space as the focus on renewables and CO2 requires much higher
130
110
investments per Kwh generated or used.
90
70
2010 Roadmap
50 Top-line growth: 75% of the sector beat on margins in Q3 but almost none beat on top-
30
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009
line. Upside in 2010 needs to come from top-line where consensus ests. are still more
Capital Goods MSCI Europe
modest when compared to margins. An IP recovery should start to feed through in
Source: Datastream, MSCI Q4’09 while capex orders should start growing in Q1’10.
MSCI Performance table Initial re-rating completed: We do not expect a further multiple expansion for the
2wk 3mth YTD sector as leading indictors such as the order/inventory index in the PMIs have peaked.
MSCI Capital The sector trades on 2010E/2011E EV/EBIT of 13x/10x. A further re-rating would
Goods -4.8% 3.3% 22.8%
require a material pick up in top-line growth.
MSCI total market cap (US$bn) 497 Buy quality: Upside in 2010 needs to come from growth, not margins in our view. This
Consensus 2009 P/E ratio 17.0 favours quality names in the sector that are well positioned in terms of secular or
Consensus 2010 P/E ratio 15.2 geographic trends. The key drivers in 2009 were re-rating and margin surprises, which
disproportionably benefit lower quality/lower margin names.
Fwd D/Y 3.4%
Source: Datastream, IBES, MSCI Our OWs for 2010 are: SKF, Siemens (€65), Alfa Laval (€93).
Top pick
SKF 115.5 SEK OW 52.6 29.8 14.8 3.87 7.83 2.6% 16.5%
Stock to avoid
Husqvarna 48.6 SEK UW 27.9 25.8 19.5 1.88 2.50 2.0% 17.5%
Source: Bloomberg, J.P. Morgan estimates.
68
(44-20) 7325-5242 07 December 2009
Chemicals
Neil Tyler
AC Chemicals
(44-20) 7325-9935
neil.c.tyler@jpmorgan.com See 2010E operating rates 10% below l-t average leading to
Heidi Vesterinen weaker prices. Demand rebound in ag more sustainable
(44-20) 7325-4537
heidi.m.vesterinen@jpmorgan.com
• Chemicals sector margins have rebounded farther and faster than we had
anticipated given the extent of the demand decline. However it remains too early,
Flagship reports in our view, to state categorically whether or not the events of the past 12 months
• European Chemicals, Value-hunting; have fundamentally altered the structure of the Chemicals industry, either in
estimate revisions and 5 rating terms of competitive landscape and therefore pricing power, or in terms of
changes, 12 May 09
operating capacity and therefore cost structure.
• European Chemicals, Upgrade cycle to
gather momentum in H2, 19 Aug 09 • The resilience of selling prices in the face of falling input costs has been the most
• European Chemicals, 3Q results
notable feature of 2009. However, despite the recent improvement in demand,
preview. Valuation better reflects risk-
reward balance. 26 Oct 09 operating rates remain well below the historic average across many segments. We
• European Chemicals; 2010 may estimate sales volumes across the diversified industrial chemical companies are
contain obstacles to continue earnings still on average 17% below the peak and 10% below the 2003 to mid-‘08 average.
development, 25 Nov 09
2010 Roadmap
• We see the first half of the year as harbouring ingredients for potential margin
Europe disappointment at the diversified industrial chemicals companies. We forecast
160
140
raw material costs to begin to inflate from 1Q 2010, expect some ’09 fixed costs
120 savings to have been temporary, and see prices on a downward trajectory.
100
80 • With operating rates at a 13 year low, two things need to happen to prevent prices
60
(and margins) from declining in 2010. Firstly, developed economies (W Europe
40
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009 & N America) need to post substantial economic growth. Secondly, companies
Chemicals MSCI Europe
need to aggressively reduce production capacities in order to rebalance the
supply/demand equation. However, expensive strategic decisions relating to the
MSCI Performance table latter issue will likely be postponed until the level of demand becomes clearer.
2wk 3mth YTD
MSCI Chemicals -0.7% 11.0% 34.6% How to position for 2010 and beyond
Weight in Europe 3.0% • Top Pick Syngenta. We see agrochemicals as offering a healthy mix of demand
recovery and resilient pricing. For Syngenta, this should combine with an FX
tailwind and lower input costs to offer substantial (JPMe 17%) earnings growth
Consensus 2009 P/E ratio 19.6 that has yet to be discounted by the current share price (15.1x earnings multiple).
• We would continue to avoid Clariant, where fragmented end markets and low
Fwd D/Y 3.6% operating rates will lead to increasing price pressure, severely hampering the
Source: Datastream, IBES, MSCI achievement of a positive return on the huge restructuring investment.
• Should economic growth in Europe and the US continue to exceed our
expectations, we would look to build positions in BASF (€40.16), which offers a
robust balance sheet, and portfolio of businesses that should benefit significantly
from above-trend industrial growth.
Top pick
Syngenta 266.4 CHF OW 26.2 15.1 13.2 17.5 20.2 2.9% 18.3%
Stock to avoid
Clariant 10.6 CHF UW 2.4 16.8 11.4 0.63 0.93 0.0% 4.5%
69
(44-20) 7325-5242 07 December 2009
Rod Hall, CFA
AC Communications Equipment
(44-20) 7325-7437
rod.b.hall@jpmorgan.com Year of the cheap smartphone; lukewarm on infrastructure
Malvika Gupta What is different now?
(44-20) 7742-0939
In infrastructure, Nokia Siemens Networks has taken a turn for the worse with
malvika.x.gupta@jpmorgan.com
Chinese vendor Huawei making strong inroads in the wireless networks market. This
has potentially been exacerbated by the marked slowdown in carrier capex through
Flagship reports 2009, which we began highlighting as an issue in our research in January 2009. For
• Infrastructure review: The day of capex handsets the only change to the smartphone revolution is the number of viable
reckoning draws nearer, 02 Apr 09 iPhone competitors on the scene as we exit 2009. Motorola’s Droid is perhaps the
• Location, location, location: Analyzing most visible example of this but there are many others. We count 54 new smartphone
Location Based Service opportunities,
launches in H2 2009 compared to 19 in H2 2008, offering consumers a wider choice
19 Jun 09
• Global Handsets: And Then There Was but increasing competitive pressure. The focus in smartphones has shifted strongly to
One, Rolling Out a Global JPMorgan the software and services platforms that go along with them. Exclusive handset deals
Handset Model, 06 Oct 09 have also begun to wane in importance as devices proliferate and regulators
scrutinize these relationships more closely. We believe this is positive for market
volumes but could prove to be negative for vendors with less competitive products.
Europe
130
2010 Roadmap
120
110
For infrastructure, we expect 2010 to be characterized by slower than expected growth,
100
90
corporate action, and alternative wireless access investments. Mobile data growth is
80
70
expected to accelerate further, but we continue to believe that telcos have sufficient
60
50
network capacity to absorb most of this growth. Recent data from Vodafone leads us to
40
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009
believe that our assumptions for capacity utilization are likely to be too conservative,
Tech Hardw are MSCI Europe
implying later spend than anticipated. One off-set could be in H2 2010 when we could see
Source: Datastream, MSCI a pickup in capacity spending post spectrum auctions in the UK and Germany. Another
emerging trend we expect is an increased deployment of alternative access technologies
2wk 3mth YTD
like WiFi and femtocells, negative for equipment vendors. For smartphones, we expect
MSCI Tech Hardware -6.8% -7.6% -7.9% low cost platforms and heightened competition to reduce pricing to US$100-150 levels,
negatively impacting vendor ASPs and margins. We believe that the high-end focus in
2010 will shift toward low cost production. In the low-end handset segment, we expect
MSCI total market cap (US$bn) 91 MediaTek to become a bigger threat as MediaTek-based handsets quickly proliferate into
Consensus 2009 P/E ratio 20.4 emerging markets like India, which are core for Nokia and also to the developed world
Consensus 2010 P/E ratio 13.2 post the MediaTek-Qualcomm royalty licensing agreement.
Fwd D/Y 3.4% How to position for 2010 and beyond

Source: Datastream, IBES, MSCI Alcatel-Lucent is our top-pick as we continue to view it as a restructuring play. We
Prices and valuations as at 30 November 2009 believe expectations remain low given North American growth, continued cost
reductions, and strong cashflow management. Ericsson is our stock to avoid. We
expect the negative carrier capex story to spill into early 2010 and expect more
competition from Chinese vendors. There is hope for capacity spending late in 2010
but we are increasingly concerned that pricing pressure could partly offset this.

Top pick
Alcatel-Lucent 2.25 € OW 5.1 NM 23.0 -0.04 0.10 0.0% 1.0%
Stock to avoid
Ericsson 66.90 SEK UW 213 19.8 14.0 3.38 4.79 2.8% 7.8%
70
(44-20) 7325-5242 07 December 2009

Pablo Zuanic
AC Food & Food Manufacture
(44-20) 7325-4664
pablo.zuanic@jpmorgan.com Growing volumes through exposure to price elastic
categories key
Flagship reports What is different now?
• The True Adjusted Food Valuation Volume weighted growth: A weak consumer and lower commodity costs should make
Average vs. Staples, 06 Nov 09 it difficult for food companies to drive top line on the back of price hikes. Compared to
• State of Our Thoughts in Our Dear
Food Space, 16 Oct 09
the pricing driven growth in the consumer space in recent years, we expect to begin to
• Milk Formula Market Trends in China, observe volume driven growth in 2010. This stands to benefit companies with presence
14 Oct 09 in more price elastic categories in this cycle such as Danone, which derives more than
75% of sales from such categories, vs. one third for peers like Nestle.
YTD price performance vs MSCI Commodity deflation: The decline in commodity costs in the latter half of the year has led
Europe to significant benefits for most food companies. Most companies have invested the benefits
130
120
110
of the deflation into promotions, higher advertising spend, and/or innovation. Companies
100 like Danone have passed through a good part of the benefits to the consumer in the form of
90
80 pricing cuts. However commodity prices have already bottomed and are moving up in some
70
60 cases (grain costs are up 20% in the last 2 months, and oil while still well off its peak is up
50
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009 30% from its trough). While we do not doubt the group’s pricing power, the less favorable
Food Producers MSCI Europe
commodity climate will likely lead to minimal margin expansion.
Waning PL growth: Private Label (PL) growth has started to wane in the current
MSCI Performance table environment after a surge in late 2007 and early 2008. Growth in market share of PL
2wk 3mth YTD
MSCI Food has started to decelerate, something echoed by most food companies.
Producers -2.5% 8.0% 14.5%
2010 Roadmap
Top line driven sentiment: Nielsen data for 2,000 food categories in the EU shows the
MSCI total market cap (US$bn) 334 industry sales growth pace bottomed in 2Q09 and has been gradually accelerating since
Consensus 2009 P/E ratio 17.3 then. Total food industry revenues should accelerate in 2010 vs. 2009 even though we
Consensus 2010 P/E ratio 15.9 argue pricing should be less of a contributor to growth. Food companies remain
cautious about the consumer environment but in general sound more upbeat about
Fwd D/Y 3.1% trends in 2010. M&A: Significant M&A scenarios and opportunities for growth are
Source: Datastream, IBES, MSCI possible for the food companies. Consolidation in the Chocolate industry through the
Prices and valuations as at 30 November 2009 possible acquisition of Cadbury is an example. We expect to see our companies take
more and more interest in consolidation opportunities to drive growth.

Creation of “value” and “innovation”: We prefer Danone because a) value (i.e. price
elasticity) is a more direct driver of sales performance for its more “elastic” portfolio (i.e.
yoghurt vs. say, coffee or ambient milk), and, b) because its market share track record,
based on Nielsen data, implies consumers are responding favorably to its recent innovation
(Danone is gaining share in key categories as per Nielsen, while Nestle is losing).

Top pick
Danone 40.00 Euro OW 24.5 17.1 15.3 2.34 2.61 1.4% 11.1%
Stock to avoid
Barry Callebaut 658 CHF UW 3.40 15.0 14.8 43.85 44.34 1.9% 15.7%
71
(44-20) 7325-5242 07 December 2009
Food Retailing
Jaime Vazquez
AC Food Retailing
(44-20) 7325-0993
jaime.vazquez@jpmorgan.com Inflection in food inflation
Rickin Thakrar What is different now?
(44-20) 7325-4523
After 12 months of food deflation, we believe we have passed the inflection point in
rickin.thakrar@jpmorgan.com
the food inflation cycle in the US and Continental Europe. We expect food
Shashank Savla, CFA inflation to become positive again by 2Q10. As food inflation rises, top line growth
(44-20) 7325-9972
will accelerate and potentially gross margins could recover lost ground.
shashank.d.savla@jpmorgan.com
The currency effect that boosted food inflation in the UK has been cycled. Food
inflation in the UK is set to normalise at low levels. After a strong reading in
Flagship reports
• Carrefour, Right assets, right
October, it now seems unlikely the UK will move into deflation as we predicted a
management, right time, 24 Nov 09 few months ago.
• Casino, Worst behind in France, Brazil
shines, 24 Nov 09
Not only earnings have been under pressure by the deflationary environment but
• Metro, Shape 2012 kicking in, 15 Oct multiples have also compressed. The PE multiple of the sector relative to the market
09 is at one standard deviation below the average.
• European Food Retailing, Deflationary
times – UK not an exception, 23 Sep 09 2010 Roadmap
With low interest rates, sound balance sheets and limited organic growth prospects
YTD price performance vs MSCI for some companies, M&A in the sector should pick up in 2010, in our view. We
Europe have seen some activity in the Netherlands with a bidding war for Super de Boer.
130
120 Ahold has publicly stated it wants to make acquisitions. Carrefour could sell some
110
100
peripheral assets.
90
80
70
60
50
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009
Carrefour is our top pick for 2010. We believe that underperforming companies
Food & Drug Retail MSCI Europe with good assets and good management do get turned around. We assign 80%
probability to a successful turnaround which we value at €40 per share, and 20%
MSCI Performance table probability to a partial break up, which would lead to €52 per share. We estimate a
2wk 3mth YTD
MSCI Food & Drug
full break up value of €68, but this option is unlikely to materialize, in our view.
Retail -1.6% 6.9% 14.4%
Our stock to avoid for 2010 is Sainsbury. We continue to see downside to the UK
Weight in Europe 2.2% food retail sector as a result of tough inflation comparatives, a limited volume
MSCI total market cap (US$bn) 145 response as well as increased promotional activity. We think Sainsbury will
particularly suffer as a result because of its limited historical price perception,
Consensus 2010 P/E ratio 13.2 increased aggressive promotional tactics by Tesco and Asda, as well as a resurgent
Consensus 2011 P/E ratio 11.7 Waitrose. We believe Sainsbury suffers most in a falling inflationary environment
Fwd D/Y 3.5% and expect continued pressure on its top-line and earnings as a result of this shift in
Source: Datastream, IBES, MSCI the competitive landscape.

Top pick
Carrefour 32.32 Eur OW 22.7 16.3 14.2 1.98 2.30 3.4 10.1
Stock to avoid
Sainsbury 321.9 GBP N 5.9 13.4 12.2 23.33 25.52 2.7 9.1
72
(44-20) 7325-5242 07 December 2009
Home & Personal Care

Celine Pannuti
AC Home and Personal Care
(44-20) 7325-9276
celine.pannuti@jpmorgan.com A tough year ahead as consumer outlook remains weak
Flagship reports Despite better macro-economics, we expect consumer spending to remain restrained
• European HPC: Earnings upside ST, at a time of high unemployment (above 10% levels in US and Western Europe) and
but MT concerns of weaker growth in a low consumer confidence. In developed economies, we expect demand in volumes in
value driven world remain, 24 Sep 09 the sector to continue to recover (from a depressed based) but to remain weak. We
• European HPC: Relief near term from
better volumes but concerns remain
expect emerging market growth to remain solid, albeit with differences between the
medium term, 11 May 09 main countries. However we remain concerned that lower price/mix driven by
• European HPC: Earnings have more to consumers’ desire for ‘value for money’ will hamper total growth and see weakening
fall, 10 Feb 09 price/mix as the key risk to profit growth in 2010. This could be compounded by
pressure from increasing input costs in the face of limited pricing power. With strong
balance sheet and good cashflow generation, the sector growth could benefit from
potential M&A as companies continue to focus on bolt-on acquisitions.
Europe
130
120
110
100
2010 Roadmap
90
80
While the market has been focused on volume recovery in 2009, we expect the
70
60
market to become increasingly sensitive to the value equation in 2010 i.e. Price/Mix
50
40
growth, levels of promotional activities and potential flare up in competitive levels.
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009
Household & Personal Products MSCI Europe

We expect 2010 to be a two-halves story: most companies should face a rather
Source: Datastream, MSCI benign environment of easy comparatives in H1 (especially in Q1), weaker input
costs (though not as beneficial as in H209) and continued benefits from cost savings
MSCI Performance table initiatives. As the market will be focused on signs of top line recovery, good top line
2wk 3mth YTD growth in H1 (even on the back of easy comps) will likely be seen favorably, though
MSCI Household &
Personal Products 0.0% 10.7% 21.7% it will be hard to gauge underlying volume demand trends before H2. We expect H2
to prove to be harder given tough comps and increasing input costs.
MSCI total market cap (US$bn) 77 How to position for 2010 and beyond
Consensus 2009 P/E ratio 18.8 We believe the companies that are best positioned to win within this environment are
Consensus 2010 P/E ratio 17.7 those that can mitigate the effect of P/M in developed economies and can also rely on
a good emerging market exposure. We believe Unilever (OW) and Givaudan (OW,
Fwd D/Y 2.7% SFr 795) are well placed to benefit. On Unilever, the combination of 1) portfolio
Prices and valuations as at 30 November 2009 tuned to ‘value-for-money’, 2) good exposure to emerging market, 3) sustainable
cost savings and 4) continued reinvestments in the market should provide fuel to
sustain growth and improve margins in 2010 and beyond. Givaudan should benefit
from continued growth revival in FMCG categories, and increased margins while
lower P/M has no incidence on the company growth and profit. On the other hand,
we remain skeptical on Oriflame’s (UW) ability to drive margins given its low
quality of sales performance (negative productivity and lower mix) at a time of
continued pressure from negative FX impact (both translation and transaction).

Top pick
Unilever NV €20.41 € OW 60.7 16.5 15.3 1.23 1.34 3.8% 28.0%
Stock to avoid
Oriflame SKr 411 € UW 2.15 23.5 18.9 1.67 2.07 2.7% 54.4%
Source: Bloomberg, J.P. Morgan estimates. Unilever Adjusted EPS includes a 1% recurring charge for restructuring.
73
(44-20) 7325-5242 07 December 2009
Insurance
Duncan Russell, CFA
AC Insurance
(44-20) 7325-4831
duncan.x.russell@jpmorgan.com We like the restructuring potential. Our main issue is the
Michael Huttner, CFA bond market
(44-20) 7325-9175
michael.huttner@jpmorgan.com
Last year our theme was reinsurance and leveraged bond funds. Leveraged bond
Vinit Malhotra, CFA
funds (Aegon, Swiss Re) worked, reinsurance did for a bit and then fell off as capital
(44 20) 7325-5321
vinit.malhotra@jpmorgan.com
came back into the market too quickly.
This year our theme is restructuring, and we see great potential here. We think that
Flagship reports the operating trends for the sector are poor and that capital structures are still unfavorable.
• Swiss Re : Strong capital at 3Q 09 We therefore like companies who can help themselves – Swiss Re and Fortis being
gives us confidence Swiss Re is on examples. We also expect more M&A – the # of insurance assets for sale is in our view at
track to repay Berkshire; new PT SF57 a high and this will allow the sector’s management teams to portfolio manage.
(53), 04 Nov 09
• Lots of capital = lots of options, taking We have one main uncertainty – the bond market. Insurance companies de-
target price to €4, 03 Sept 09 risked in 2009, selling equities and buying Government bonds and corporate bonds
• Unipol : Earnings headwinds greater and reducing interest rate mismatches. Near term we see potential for corporate bond
than earlier thought, Remain UW with
€0.81 PT (€1.04), 13 Nov 09
spreads to narrow even further as insurance companies continue to favor this asset
class. However, the bigger question for us is the level of the risk free – specifically,
are we in Japan or will we get a bond market correction? A prolonged low interest
Europe
rate environment would in our view lead to a further de-rating, just as it did in Japan.
130
120
A bond market correction would be negative near term because of mark-to-market
110
100
losses, but positive longer-term because earnings power would increase with higher
90
80
investment income, and risk would be reduced (less pressure on guarantees). A bond
70
60
market correction may therefore be a necessary, albeit initially painful, adjustment.
50
40
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009 2010 Roadmap
Insurance MSCI Europe
Solvency II likely to dominate headlines, but may ultimately prove a damp
squib. The reason is we believe regulators will not want to see a reduction in capital
MSCI Performance table requirements for the financial system, so no release from diversification benefits as
2wk 3mth YTD previously hoped. We see the potential for more equity capital for the sector as the
MSCI Insurance -5.2% -0.4% 5.5%
sector is currently too reliant on debt, but whether this comes through a “big bang” or
Weight in Europe 5.2% through years of retained earnings is an open question.
Consensus 2010 P/E ratio 8.7 Top picks are Swiss Re and Fortis. One to avoid is Unipol. We are positive on the
Consensus 2011 P/E ratio 7.7 restructuring stories as we think that management teams will deliver the necessary
Fwd D/Y 3.8% medicine, and the stocks are cheap with too high an implied CoE. We are negative on
Source: Datastream, IBES, MSCI Unipol as we think the share price is factoring in too high an over-the-cycle
combined ratio: clear evidence of a change in Italian P&C dynamics would be a
positive here.

Top pick
Swiss Re 47.8 SF OW 17.7 105.0 7.4 0.46 6.42 1.0 0.8
Fortis 2.8 € OW 6.6 6.9 16.1 0.41 0.17 0.0 13.4
Stock to avoid
Unipol 0.91 € UW 1.9 45.4 13.0 0.02 0.07 1.1 1.1
Source: Bloomberg, J.P. Morgan estimates, Priced as on 30th Nov 09. Market Cap differences due to share count definitions
74
(44-20) 7325-5242 07 December 2009

Melanie A Flouquet
AC Luxury & Sporting Goods
(33-1) 4015-4485
melanie.a.flouquet@jpmorgan.com
The slow road to recovery
Corinna Beckmann What is different now?
(44-20) 7325-3938 In FY09 the luxury goods sector saw its worst topline hit ever (8% organic sales
corinna.x.beckmann@jpmorgan.com decline vs +1% in 01-03). All product categories, price points, wholesale channels
and markets (except China) were hit. The most severe downfalls were in watches &
jewellery and wholesale-led product categories. More than ever before, the consumer
Flagship reports turned its back on luxury. This raises key questions as to whether and when he/she
• Luxury Uncovered : Four key themes
for 2010 Sales growth, 10 Nov 09
will come back and whether distribution rollout and price increases have gone too far.
• LVMH : Quality top line, 20 Oct 09
• Richemont : Hard core cost control – In this tough top line context, luxury goods companies have focused on costs cuts
Changes to estimates, 13 Nov 09 and cash flow generation. The costs cuts are not general expenses-led though,
Advertising & Promotion, personnel and Selling & Distribution costs, i.e. top line
driving costs, are being curtailed significantly. These costs cuts limit the damage on
YTD price performance vs MSCI EBIT margins in the short term but may endanger medium-term sales growth.
Europe
180
160 In Sporting Goods, FY09 saw no major sports event and u/l weakness. Companies
140
120
have restructuring plans in place to minimise opex deleverage and improve working
100
capital esp. following the creation of the FY08 inventory bubble in China.
80
60
40
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009
2010 Roadmap
Consumer Durables MSCI Europe We expect the luxury goods sector to post 4% reported Sales growth in 2010E incl
Source: Datastream, MSCI 2% negative forex and 5.7% organic growth – achievable in the face of easy comps
but not undemanding when looking at the embedded growth per geography. The
MSCI Performance table sustained weakness in the Japanese consumer base (-8%) puts pressure on ML China
2wk 3mth YTD
MSCI Consumer to sustain momentum (+25%) and other EM/developed markets to recover. We
Durables -4.7% 6.9% 47.7% expect similar sales growth in hard and soft luxury despite the former having easier
Weight in Europe 1.4% comps as we remain prudent on restocking at watch retailers.
MSCI total market cap (US$bn) 96 Cost cuts started in FY09 should continue in FY10 and, after limiting operating
Consensus 2009 P/E ratio 20.7 deleverage in 09E, should deliver some positive leverage in 10E albeit limited by
Consensus 2010 P/E ratio 17.6 forex pressure (no companies are fully hedged).
Fwd D/Y 1.8% In Sporting Goods, FY10 will be boosted by the Football World Cup, easy comps,
Source: Datastream, IBES, MSCI inventory levels normalising (China and US), and cost savings continuing to bear
fruit. This will likely be tempered by forex and LatAm increased trade restrictions.

LVMH offers the most compelling risk-reward proposition in our view. The stock has
unduly derated vs peers. We like its exposure to LV (its resilience and favourable brand
mix effect on Group EBIT), China (LV and MH), and scope for positive surprises in
underperforming divisions incl cognac. CDior shares (€67.5) are also an interesting way
of playing LVMH. In Sporting Goods, we see potential catalysts in FY10 for adidas
(€38.1) regarding Football World Cup, leaner inventories, Reebok progress.
Top pick
LVMH 69.76 € OW 33.4 18.5 16.3 3.77 4.28 2% 13%
Stock to Avoid
Hermès International 94.85 € UW 10.1 35.8 31.2 2.65 3.04 1% 25%
75
(44-20) 7325-5242 07 December 2009
Media
Filippo Pietro Lo Franco
AC Media
(44-20) 7325-9779
filippo.p.lofranco@jpmorgan.com Media cyclicals should continue to benefit from the
Mark O’Donnell expected positive advertising momentum
(44-20) 7325-7149
mark.x.odonnell@jpmorgan.com
Media cyclicals (i.e. media stocks with a high proportion of revenues generated by
advertising or consumer discretionary goods) have outperformed MSCI EU by 17%
Flagship reports YTD, whereas media defensives have underperformed by 21%. This is the first time
• European Media Strategy and Data in the last five years that media cyclicals have outperformed MSCI EU, and their
watch, 21 Sep 09. Easy gains are over. weight by market cap in the sector has grown to 41% currently compared to 35% at
We switch from top-down to bottom-up. the end of 2008. The balance sheet of media companies has improved significantly in
Top picks JCD, SKyD, MTG, WKL, VIV
• European Media Strategy and Data
the last 12 months: 6 out of the 30 European media stocks under JPM coverage made
watch, 13 May 09. Quality cyclical a capital increase, others have extended the debt maturity, but not one has gone out
media stocks have more to go; revising of business. M&A started only recently with noticeable acquisitions by Vivendi
estimates & TPs; 8 rating changes (GVT in Brazil) and Publicis (Razorfish). No listed European media has been a
M&A target in ’09, however this could change in ’10 as we expect some
consolidation in the publishing and broadcasting arena. Private Equity owns large
YTD price performance vs MSCI stakes in several European markets and if the market improves they could seek to
Europe
130 exit via private sale or public equity transaction.
120
110
100
90
2010 Roadmap
80
70
We expect the improving advertising cycle (trough summer 09) to be the main driver
60
50
for the sector and to positively impact FTA TVs, Advertising Agencies, Directories
31/12/2008 28/02/2009 30/04/2009
Media
30/06/2009
MSCI Europe
31/08/2009 31/10/2009
and only partially Consumer Publishers (magazines and newspapers), which we
expect to be penalized by structural issues (continuing circulation declines).
Advertising growth is recovering faster than expected in Q409, with positive y/y
MSCI Performance table growth expected in December for some FTA TVs (ITV, Mediaset). We expect
2wk 3mth YTD positive growth to continue in ’10 and forecast the European advertising market to
MSCI Media -3.0% 1.9% 4.1% grow by 3.5% at constant price, higher than market consensus which we estimate in
Weight in Europe 1.8% the 0% to +2% range. Defensive media are likely to underperform, if as we expect
the advertising momentum picks up in ’10.
Consensus 2011 P/E ratio 10.7 Our preferred pick for 2010 is JCDecaux (OW). JCDecaux is in our view a long-term
Fwd D/Y 6.3%
growth story which should benefit from an improved advertising environment in ’10.
Lagardère underperformed MSCI EU by 23% YTD and is again this year our stock
to avoid owing to structural issues at the magazine division and a difficult
comparable basis (with potential structural issues from ebooks) in the publishing
division.
Top picks and stock to avoid

Top pick
JCDecaux 15.15 € OW 3.354 170.8 37.8 0.09 0.40 5.1% 2.3%
Stock to avoid
Lagardère 28.37 € UW 3.745 8.5 8.3 3.33 3.44 0.0% 7.1%
76
(44-20) 7325-5242 07 December 2009

Amy Wong
AC Oil Services & Equipment
(44-20) 7325-9460
amy.wong@jpmorgan.com Position for the early cyclicals
Flagship reports Sentiment completely turned around: In late 2008, investors were concerned about
• CGG Veritas, Well-capitalized but a weak oil and gas price environment and the impact on oil company spending
oversold, 24 Mar 09 behavior. We believe that investor sentiment towards oil service stocks has turned
• European Oil Services & Equipment: 180 degrees. During 2009, the oilfield service sector19 was one of the best
Share Prices Discounting High Long-
term Growth, 27 May 09
performing sectors, up 93% YTD. The late cycle E&C companies produced some
• European Oil Services: Latest Backlog sizable margins from contracts signed in the order book during more favourable
Coverage & Vessel Utilization data, conditions. Going into 2010, as the high margin contracts in the order book wind
22 Sep 09 down, we expect a more acute compression in operating margins.
• Aker Solutions, Three Opportunities for
upwards rerating, 27 Aug 09 Expect more contract awards in 2010 and watch Brazil. In 2009, contract awards
• Vallourec, It’s a Drilling Case, 23 Oct were few and far between. However, as decline rates for producing fields creep up
09 and prices for oilfield services begin to bottom out, these factors remove an incentive
for oil companies to delay projects. However, we believe this initial recovery in new
orders is mostly priced-in.
Europe
130
120
2010 Roadmap
110
100
We expect early cycle oilfield services such as seismic and front-end engineering &
90
80 design (FEED) to be the first to show a pick up in activity. Furthermore, because of
70
60 the short-term nature of their orderbook, their top-line should begin to reflect this
50
40 recovery sooner than the late cycle construction companies.
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009
Energy MSCI Europe

Events to watch: Schlumberger, generally considered a bellwether for the industry,
is scheduled to report FY09 results on Jan 22, 2010 and will be watched for
MSCI Performance table developing trends for the mid-long term. The IOC’s strategy updates, taking place
2wk 3mth YTD between Jan and Feb 2010 should provide insight into their near- and long-term
MSCI Energy -3.9% 5.7% 10.9% capex plans.
We expect the sector to be volatile because the nature of the sector produces lumpy
Consensus 2009 P/E ratio 13.7 earnings and is affected by the oil price. We would prefer to hold companies with
Consensus 2011 P/E ratio 8.9 high quality management with exposure to segments and regions where we expect to
see good momentum in contract awards and earnings. Our top pick is Wood Group
Fwd D/Y 5.6%
because we see it as a well-managed, low risk investment. We remain cautious on
Acergy because of its exposure to West Africa. Although global upstream investment
is expected to pick up, we believe geopolitical risks in West Africa could continue to
cause delays for large projects.

Top pick
Wood Group 307.8 p OW 1.62 12.7 13.6 $0.39 $0.36 2.1% 15.4%
Stock to avoid
Acergy 83.55 Nkr UW 16.3 17.3 26.0 $0.85 $0.57 1.6% 15.0%
19
Bloomberg index BEUOILS
77
(44-20) 7325-5242 07 December 2009
Pharmaceuticals
Alexandra Hauber
AC Pharmaceuticals
(44-20) 7742-6655 / (1-312) 325-3694
alexandra.m.hauber@jpmorgan.com Short-term deceleration, long-term a potential re-rating
Richard Vosser What is different now?
(44-20) 7742-6652 We expect a re-rating based on the improving long-term outlook sometime in the
richard.vosser@jpmorgan.com
next 2 years: The 2010-2012 industry patent cliff has been in an overhang for many
James D Gordon years, but during 2009, Pharma companies started to address the issue of sustainability,
(44-20) 7742-6654
james.d.gordon@jpmorgan.com highlighting increasing diversification, emerging market exposure and placing (even)
more emphasis on productivity gains, all of which remains underappreciated by
David P Evans
(44-20) 7742-6654
consensus in our view. Several positive pipeline surprises (Benlysta for GSK, Onglyza
david.p.evans@jpmorgan.com and Brilinta for AZN) also boosted the sector’s long-term prospects. Forward multiples
for the Large caps remain low (9.2x ’11E), hence we expect a sector re-rating in the
Flagship reports next 2 years, as growth beyond 2012 becomes more visible.
• European Pharmaceuticals : New 2010
Year-end Price Targets for EU Mid But not in 1H 2010: Despite an improving 2012-2015 outlook for most companies,
Caps, 15 Nov 09 we expect earnings growth deceleration in the coming 3 years, from 12% in 2009E to
• European Pharmaceuticals : New 2010 6% in 2010E, amid intensifying generic erosion. Other factors contributing to the
Year-end Price Targets for EU Large deceleration include (1) H1N1 boost in ’09 creating a base effect, (2) 2010E FX
Caps, 08 Nov 09
headwind, and (3) HC reform potentially shaving a further 2% off earnings growth.
• The Diagnosis: EU Large Cap Pharma
- The 2009 Outlook, 19 Feb 09
Positive earnings surprises in 2010 are still possible based on (1) further
productivity gains (although likely to be harder to achieve in view of a gross profit
YTD price performance vs. MSCI squeeze from the exclusivity losses), (2) better than expected US pricing power (in
Europe the non-Medicaid/Medicare segment). However, these may be perceived as short-
130
120
110
lived if not accompanied by sales growth and pipeline surprises.
100
90
80 2010 Roadmap
70
60 1) Midcaps should continue to outperform large caps names, on better growth

50
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009 prospects (2009-2013E CAGR of 14% vs. 5%) and investors’ focus on pipeline
Pharmaceuticals MSCI Europe
events. Large caps we prefer: Roche, Novartis (SFr55.75), and Bayer (€51.09).
2) Focus should return to pipelines with potential blockbusters awaiting approval
MSCI Performance table from Roche (Actemra), Novo (Victoza), GSK (Benlysta), AZN (Brilinta) and
2wk 3mth YTD important phase III data for Novartis (FTY 720 & Lucentis in DME), Roche
MSCI Pharmaceuticals 0.0% 5.2% 5.0%
(Avastin), Ipsen (taspoglutide) and Bayer (Xarelto).
Weight in Europe 8.9% 3) Quarterly earnings. Those companies with top-line growth are best positioned to
MSCI total market cap (US$bn) 601 benefit from a leaner industry, as long as they maintain good cost discipline.
4) JP Morgan Healthcare conference on Jan 11, 10 (Roche, Sanofi, GSK, Bayer,
Consensus 2010 P/E ratio 10.7 Ipsen, Actelion, Shire, Merck KGaA and UCB will be presenting) will give an initial
Consensus 2011 P/E ratio 10.1 look at key themes for 2010 (cost cutting, pricing, healthcare utilisation, pipelines).
Fwd D/Y 4.5%
Our top picks are Roche (numerous pipeline catalysts, significant margin upside) and
Ipsen (strong near-term growth, 2010 full of catalysts, including taspoglutide).We
would avoid AZN, the only EU Large Cap that hasn’t addressed its sustainability.
Top pick
Roche 164.38 SFr OW 141 13.9 12.7 11.80 12.97 3.6% 27%
Ipsen 36.38 € OW 3 19.3 18.4 1.63 1.73 2.0% 15%
Stock to avoid
AstraZeneca 27.17 £ UW 39 6.7 6.8 $6.44 $6.39 5.8% 45%
78
(44-20) 7325-5242 07 December 2009
Property
Harm Meijer
AC Property
(44-20) 7325-9248
harm.m.meijer@jpmorgan.com Looking for action heroes
Osmaan Malik, CFA What is different now?
(44-20) 7325-6084
The current stimuli are powerful and could result in a jump in commercial property
osmaan.malik@jpmorgan.com
prices in the UK of around 15% from Jun-09 to Jun-10 we estimate, while they are
Pradeep Kumar currently bottoming on the continent. We call this the Carpe Diem feeling, as we
(91-22) 6157 3298
foresee a rather sluggish property market thereafter.
pradeep.z.kumar@jpmorgan.com
J.P. Morgan India Private Limited A bounce in property prices is already largely priced in by the equity market, but
some stocks still offer good value in our view. However, we do not believe that
investors need to chase stocks in case of a strong rally, as 2010 should give plenty of
Flagship reports opportunities to invest.
• The Property Ticker (daily)
• European Property Handbook: Castles
The listed sector is in much better shape than its non-listed counterpart, as balance
Made of Sand, 01 Sep 09 sheets are much stronger (Loan-To-Value of around 50% vs. >80% non-listed),
• Quarterly sector overview transparency is better and the investment is more liquid.
• Theme / company notes
As such, we expect the listed sector to (continue to) act as the engine of the de-
leveraging process in property: we see a step up in JVs with banks, IPOs and M&A
YTD price performance vs MSCI activity. If the listed market is proactive enough, it should grow significantly (at least
Europe 50%) over 2010E and 2011E.
140
130
120
110
We believe there are currently too many (continental) companies with acquisition
100
90 capacity focused on shopping centres, while we see (distressed) sales mainly in other
80
70
60
property sectors, like offices. As there will likely be a limited number of retail
50
40
properties for sale, we expect a step up in M&A among retail focused companies.
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009
Real Estate MSCI Europe

Over the coming 6 months we expect continued positive news flow for the property
MSCI Performance table sector: rising property prices, stimuli remaining in place, hiring in the City, property
2wk 3mth YTD investment markets opening up, stabilising / rising rents in London office markets,
MSCI Real Estate -8.9% 1.4% 17.7%
prelets on developments coming through, sizeable acquisitions by REITs and
Weight in Europe 0.9% positive results.
However, the further we go into 2010 the more the positive share price drivers are
Consensus 2009 P/E ratio 18.5 likely to lose strength, as the likely jump in valuations should trigger more sellers to
come to the market and a large process of change in ownership could follow. In
addition, (talk of) reducing stimuli is likely to dampen share price performance.
Fwd D/Y 5.3%
Source: Datastream, IBES, MSCI How to position for 2010 and beyond
Prices and valuations as at 30 November 2009 As we believe that the (expected) bounce in property prices is largely priced in now,
we are looking for action heroes for outperformance, i.e. active management, access
to (new) product, vacancy to fill, developments to start etc.
Top Pick: Big Yellow, Stock to Avoid: IVG.
NAV prem (disc) Adj EPS (LC) Div yield ROE
Price Currency Rating Mkt cap 09E 10E 09E 10E 09E % 09E %
Top Pick
Big Yellow 370 p OW £483m -8.2% -7.0% 11.9 11.3 0% 2.7%
Stock to avoid
IVG 6.2 € UW €724m -23.1% -25.3% -0.61 -0.60 0% 0%
Source: Bloomberg, J.P. Morgan estimates. Note 2009 numbers for Big Yellow are reported (YE March).
79
(44-20) 7325-5242 07 December 2009
Semiconductors
Sandeep Deshpande
AC Semiconductors
(44-20) 7325 0456
sandeep.s.deshpande@jpmorgan.com Re-stocking priced in, second leg depends on ’10 demand
Flagship reports Semi stocks have rallied from the Nov-08 lows on the back of improving fundamentals.
• European Semiconductors: Inventory The graph below shows unit growth has rebounded from Mar-09. Though initially due
declines again; ISM signals semis rally to re-stocking, there are now signs of growth in multiple end markets.
close to end but sector specific
indicators still positive, 13 Nov 09 Figure 69: Year on year change in semiconductor units
• European Semiconductors: Focus on
20%
stocks with most EPS upside vis-a-vis
consensus. Upgrading Aixtron to OW, 0%
11 Sep 09 -20%
• European Semiconductors : Time to
-40%
pick stocks not the cycle, 13 Jul 09
Aug-02
Feb-03
Aug-03
Feb-04
Aug-04
Feb-05
Aug-05
Feb-06
Aug-06
Feb-07
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
YTD price performance vs MSCI Source: SIA/WSTS
Europe
160
Bar a collapse in end demand due to a double dip in the economy, ’10 demand for
140
120
semis should be up ~15% YoY we estimate. However, as seen in the past, the semi
100 cycle in a strong demand environment is based on inventory. Based on semis ex
80
memory data, semi inventory is down by a substantial 26 days from 4Q08 and in
60
40
absolute terms by US$3.3bn. Thus risk of the sector going into an immediate
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009
Semiconductors MSCI Europe

downturn is low in our view and we believe the market is waiting to see confirmation
Source: Datastream, MSCI of ’10 growth before stocks have another leg up.
2010 Roadmap
Industrial and automotive markets are late cyclical and have recently shown re-
2wk 3mth YTD
stocking trends. These sectors should continue to improve if the economy continues
MSCI to improve. We see Infineon as a key beneficiary due to its 60%+ exposure to these
Semiconductors -5.2% -2.5% 33.1% markets. At the same time despite an upturn in orders ASML has still not started
Weight in Europe 0.4% shipping “capacity” tools to memory clients. Substantial removal of capacity in
DRAM in the downturn means that as they become profitable DRAM companies
will continue upgrading existing fabs. NAND with its potential for capacity build is
Consensus 2009 P/E ratio - an even more important driver. ASML should remain a major beneficiary of memory
Consensus 2011 P/E ratio 14.2 technology and capacity orders in 2010. Inventory remains a key semi metric and
that will be an indicator of the beginning of the end. In our view, investors would do
Fwd D/Y 1.9%
well to focus on that metric to call the peak.
With peak EPS likely only in ’11/’12 and DRAM upgrade demand and potential for
NAND capacity build, ASML is our top 2010 pick. We would avoid STMicro. While
the company is restructuring, albeit very slowly, the stock is unlikely to interest
investors till the turnaround of ST-Ericsson, which depends on ’11 3G shipments to
Nokia. We think underperformance will continue till Nokia’s schedule is known.
Top pick
ASML €20.55 EUR OW €8.9bn NM 14.8 -0.36 1.39 1% -9.0%
Stock to avoid
STMicroelectronics €5.39 USD N €4.7bn NM 20.9 -0.78 0.39 2% -9.4%
80
(44-20) 7325-5242 07 December 2009
Steel
Jeffrey Largey
AC Steel
(44-20) 7325 9744
largey_jeffrey@jpmorgan.com The recovery story plays on
Ben Defay What is different now?
(44-20) 7325 9231
One year ago the European steel industry was heading into crisis mode. A sharp
ben.defay@jpmorgan.com
contraction in demand was looming but it was unclear as to when the demand trough
would be reached and for how long that trough would persist. Today, we believe
Flagship reports European steel companies have moved past the demand trough and the industry is on
• European Steels; Top Threats to the path to recovery (along with the macro-economic recovery). Since reaching a low
Sustainable Recovery, 14 Sep 09 in 2Q 2009, steel prices have started to recover, demand has stabilized (albeit ~25%
• European Steels; Seeking leverage to lower compared to peak reached in 1H 2008), capacity utilization rates are on the rise
the cycle, Adding MT to AFL &
(likely approaching 70% for 4Q versus a low of ~50% in 2Q) and balance sheets
Upgrading SZG to OW, 25 Jun 09
• European Steels; Visibility zilch, Steels have been repaired from a combination of working capital release, capital raises and
waiting for a sign, 15 Jan 09 asset divestments.
2010 Roadmap
YTD price performance vs MSCI We expect a steel recovery to pick up steam in 1H 2010 as the global GDP and IP
Europe continue to recover and steel demand improves. Inventories through the entire value
210
190
170 chain remain lean and as customer confidence and credit conditions improve, we
150
130 would anticipate a tightening of the supply chain, leading to higher shipment
110
90 volumes and higher steel prices. Unlike 2008, steel inventories are at very low levels
70
50 and when demand begins to recover, we believe the lean supply situation could help
30
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009 shift pricing power back towards the steelmakers. We believe another factor to
Metals & Mining MSCI Europe
underpin higher steel prices next year will be higher steelmaking raw material costs.
J.P. Morgan forecasts a 10% y/y increase in the benchmark iron ore contract price for
MSCI Performance table next year, which will raise the marginal cost of production (i.e. China) and allow for
2wk 3mth YTD higher prices around the world. Indeed, the China steel price is on the rise (+13%
MSCI Metals & Mining -2.7% 18.4% 78.5% since mid October) and this not only reduces the risk of higher import volumes but
Weight in Europe 4.9% should create more headroom for steel prices to rise globally. We anticipate steel
prices and shipments moving higher next year but we maintain that 2010 will still be
a "recovery" year as capacity utilization rates should only return to 80% to 85%.
While we selected voestalpine (VOE AV/N/€23.64) as our top pick in 2009 due to its
Fwd D/Y 2.1%
long-term contracts exposure and defensive business model, our top pick for 2010 is
ArcelorMittal (MT NA/OW) given its operational leverage to the steel cycle and its
attractive geographical footprint (which includes substantial exposure to faster
growing emerging markets). We also highlight ThyssenKrupp (TKA
GR/OW/€24.25) as an attractive corporate restructuring story that should continue to
play out over 2010. We would avoid shares of Acerinox (ACX SM/UW) as it
continues to price in a more robust profit recovery than we foresee for 2010.

Top picks
ArcelorMittal €25.95 € OW 40.6 NM 11.1 -$0.70 $3.40 1.9% -0.7%
Stock to avoid
Acerinox €13.79 € UW 3.5 NM 20.7 -€0.92 €0.67 3.3% -13.8%
81
(44-20) 7325-5242 07 December 2009
Telecom Services
Hannes Wittig
AC Telecom Services
(44-20) 7325-8310
hannes.c.wittig@jpmorgan.com Modest gearing, but strong cash generation
AC
Jerry Dellis What is different now?
(44-20) 7325-5534
• While telcos may not be the first port of call in a macro recovery scenario, Q3
jeremy.a.dellis@jpmorgan.com
2009 confirmed the trend towards improving mobile revenue trends. These had
AC
Torsten Achtmann tracked GDP on the way down but 2010 consensus forecasts essentially decouple
(44-20) 7325-9025 underlying mobile revenues from the expected GDP recovery which could prove
torsten.x.achtmann@jpmorgan.com
too pessimistic and lead to positive revenue and margin surprises.
AC
Akhil Dattani
(44-20) 7325-6337 • In a primarily fixed-cost industry operators in 2009 have been able to cut costs to
akhil.dattani@jpmorgan.com maintain margins despite negative top line momentum. As top line declines
moderate operators able to maintain cost cutting momentum should see margin
expansion. Hence we do see some scope for operational gearing but depending on
Flagship reports the market environment some of this will be reinvested in the top line.
• Post Q2 visibility should allow sector to
outperform, 22 Sep 09 • Further on the positive side we expect >6% dividend yields, well supported by c.
• Wireless review – reassuringly 11% free cash flow yields, offering scope for dividend growth even with a flat or
defensive, 22 Sep 09
declining top line.
• UK mobile consolidation: First steps
towards a more rational mkt, 09 Sep 09
2010 Roadmap
• We expect the first half of 2010 to confirm the picture of wireless revenue stabilization
YTD price performance vs MSCI while fixed line momentum will be delayed. However cost cutting momentum should
Europe remain strong so we would expect to see continued margin expansion.
130
120
110
100
• Spectrum auctions have been scheduled for a number of major markets including
90
80
India, Germany, the UK, and Mexico. Negatively spectrum spend could be seen
70 as a drag on cash flows, however we believe most operators have no problem
60
50 funding what promises to be a sensible (but long duration) investment. German

31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009
Telecoms MSCI Europe spectrum auctions could provide a trigger for KPN and Telefonica to join forces.
MSCI Performance table • Despite a number of structural concerns (eg, mobile VoIP) and the absence of
2wk 3mth YTD
MSCI Telecoms -1.4% 4.8% 5.3%
growth, at free cash flow yield levels around 11%, we find the market somewhat
too negative regarding the longer-term sustainability of telco cash flows, mainly
based on our positive views on operator capital spending requirements, hence we
MSCI total market cap (US$bn) 483 believe the sector can be bought on longer-term cash returns.
Consensus 2009 P/E ratio 10.8 • Our top pick is KPN which has operating leverage, exposure to the expected
Consensus 2011 P/E ratio 9.7 cyclical recovery in wireless and domestic business telephony, strong
management and a shareholder-friendly track record.
Fwd D/Y 4.9%
Source: Source: Datastream, IBES, MSCI • Our top avoid is Telecom Italia where we believe that 2010 consensus is overly
Prices and valuations as at 30 November 2009 optimistic and the valuation is not attractive enough to accommodate this.

Top pick
KPN 11.83 € OW 19.1 8.8 7.8 0.91 1.11 5.8 7.7
Stock to avoid
Telecom Italia 1.07 € N 18.8 10.3 8.7 0.10 0.12 4.7 7.2
82
(44-20) 7325-5242 07 December 2009
Tobacco
Erik Bloomquist, CFA
AC Tobacco
(44-20) 7325-9917
erik.a.bloomquist@jpmorgan.com The pricing king
Flagship reports We see a volume weakness hangover from Q3 09 combined with some downtrading,
• Global Tobacco, Safely through the and unemployment could persist through H1 2010 until economic recovery takes
Storm, Emerging Market Leverage hold, particularly in key EMs like Russia. In our view this weakness could hold back
Favours BAT & PMI , 07 Oct 09 Tobacco stock performance in the first part of 2010.
• Global Tobacco, M&A Risk Returning,
19 Jun 09 Dividends should remain the primary avenue to return cash to shareholders for BAT
• Global Tobacco, Still Smoking; Upside and Imperial, with Swedish Match buying back stock in addition.
Risk to Estimates, 11 Jun 09
Though volume weakness could persist, we expect the industry to take pricing in
both Mature and Emerging Markets. We expect average price increases to be lower
YTD price performance vs MSCI than in 2009, since the FX environment is more stable and does not require increases
Europe
130 to offset higher transaction costs.
120
110
100
European Tobacco underperformed in 2009, but looks well positioned in 2010 given
90
80
the combination of dividend yields (3-5%) above returns available in cash or bonds,
70
60
lower valuation than Consumer Staples peers and potential for share price
50
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009
appreciation driven by approximate low double digit 2010 EPS growth.
Tobacco MSCI Europe

We expect modest volume weakness to persist in H1 2010, but with slowing
MSCI Performance table downtrading. We look for market volume declines to ease in H2 as unemployment
2wk 3mth YTD
MSCI Tobacco -6.6% 0.2% 1.5% rates decline and GDP recovers as per JPM Economics forecasts.
Weight in Europe 1.4% The annual February CAGNY conference in the United States will have both Altria
and Philip Morris International presenting their strategic outlook for the year. In our
view, the takeaways from this conference could set the tone for year.
Fwd D/Y 4.7%
Our top European Tobacco pick is BAT, as we believe its combination of favourable
geographic exposure, pricing power, a benign tax environment, continued brand
reinvestment supported by ongoing cost savings program and dividend yield above
5% make it an attractive play on Emerging Market recovery with a safe, higher
yielding alternative to bonds or cash.
Our stock to avoid is Swedish Match, as we see competition in the high growth US
smokeless business rising substantially in 2010 due to Altria and Reynolds American’s
more aggressive actions and ongoing price segment convergence. FX headwinds from USD
weakness relative to SEK affecting 40% of the business could in our view offset the
continued positive Nordic smokeless growth. We view M&A speculation as premature,
with a potential bid from Philip Morris International predicated on success of the
SWMA/PM JV to commercialise snus outside of the US and Scandinavia.

Price Currency Rating $ bn 09E 10E 09E 10E 09E % 09E %
Top pick
BAT 1847 GBP OW 60.4 11.6 10.6 153.2 168.0 5.4% 38%
Stock to avoid
Swedish Match 150 SEK UW 5.3 15.3 13.5 9.80 11.12 3.1% 70%
83
(44-20) 7325-5242 07 December 2009
Transport and Logistics

Damian Brewer
AC Transport and Logistics
(44-20) 7325-7310
damian.brewer@jpmorgan.com Delivering profit growth from GDP expansion ahead
Andy Jones What is different now?
(44-20) 7325-1622
JPM macro forecasts for 10E-11E see accelerating GDP growth in developed
andrew.r.jones@jpmorgan.com
markets, a weak US$ and benign fuel costs. We thus prefer well-positioned
companies with already strong diverse positions and robust balance sheets capable of
Flagship reports supporting higher capex or M&A spend that new growth demands. Companies with a
• Deutsche Post DHL and TNT: Calmer higher European focus (e.g. TNT) should benefit more (than in 09) from consumer
conditions for Q3 - upgrading PTs and recovery. To us, companies with exposure to both developed ‘recovery’ and
EPS, but TNT needs change from emerging markets long-term higher growth exposure is our preferred positioning.
within to be OW, 15 Oct 09 Pricing is key to our view: We think pricing will remain fragile as volumes grow –
• Deutsche Post DHL and TNT: Less
recovery upside priced-in at Deutsche
and see a chance of; either (1) growth encouraging share gains by discounting (in lieu
Post, 01 Oct 09 of acquisition goodwill for M&A-led growth); or (2) lack of price increases (i.e. real
• Revisiting UK Bus and Rail: Still upside cuts) to fill surplus infrastructure capacity; or, (3) that in some areas so much
left - but now more events dependent, capacity has been cut in 09 (e.g. air freight) that capacity brokers see their profits
25 Sep 09 squeezed (e.g. Forwarders). Thus, we look for companies with operating gearing
• Mail and Logistics: Forward-looking
PMI lift contrasts to Q2-09 'earnings
from volume growth and price stability in either; (1) rational industry structures
doldrums', 17 Jul 09 (Deutsche Post, TNT); (2) hard to substitute assets that have not been overbuilt (e.g.
HHLA); or, (3) hard to replicate networks (DHL, TNT) with limited competitor
duplication. In our view, as liquidity improves we see companies in more fragmented
YTD price performance vs MSCI sectors moving back to acquisition (e.g. Forwarders) and we think the bulge of debt
Europe refinancing due in 11-12 (e.g. Bus companies) might accelerate this process.
130
120
110
100
2010 Roadmap
90
80
Our 10E roadmap is heavily dependent on the JPM benign fuel price and strong GDP
70
60
growth forecast playing out. On this basis, we think volume recovery is likely to look
50
40 strongest in Q1-Q3 10E. However, we think that by end Q3-10 the ‘easy comp’
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009
Transport MSCI Europe

effects should have played out, thereafter leaving real ‘growth’ companies back in
Source: Datastream, MSCI the spotlight. We think this differentiation will be amplified as the yoy benefits of
cost saving from 2009 wash out for most companies by end Q2-10E, and variable
MSCI Performance table (volume-driven) costs creep back into businesses. Thus, as we hit peak trade season
2wk 3mth YTD
MSCI Transport -3.4% 3.6% 18.2%
in Q3-10E, we think the distinction for companies with solid pricing and good
operating gearing will emerge.
We see the combination of price strength and operating gearing from recovery
Consensus 2009 P/E ratio 41.9 strongest in Deutsche Post DHL, HHLA and TNT. However, with its more
Consensus 2011 P/E ratio 12.3 developed networks and market positions, we see less need for accelerated M&A (as
well as capex) into recovery at D Post, which could allow D Post to offer the
Fwd D/Y 3.0%
strongest dividend yield prospect, and given ‘yield compression’ risks in general it is
thus our preferred pick. Although well run, we see Panalpina’s high Air Freight
forwarding exposure leaving it most exposed to further profit contribution squeezes.
Mkt cap P/E (x) EPS (Underlying) Div yield ROE
Top pick
Deutsche Post 12.5 EUR OW 15.1 14.5 10.3 0.86 1.21 4.8% 7.5%
Stock to avoid
Panalpina 64.2 CHF N 1.6 19.4 22.3 3.32 2.88 0.8% 5.0%
84
(44-20) 7325-5242 07 December 2009
Utilities
Javier Garrido
AC Utilities
(34 91) 516 1557
javier.x.garrido@jpmorgan.com Demand recovery in Central Europe key
Nathalie Casali What is different now?
(44-20) 7325 9023
nathalie.x.casali@jpmorgan.com
The days when European utilities were seen as the best way to invest in a rising oil
price are gone. However, we believe that most investors are too harsh in their
Sarah Laitung judgment of the competitive positioning of European utilities. In peripheral markets
(44-20) 7325-6826
sarah.l.laitung@jpmorgan.com
(UK, Spain, Italy in a couple of years) gas oversupply is a near and also a long-term
concern in our view; however, in Central Europe a sustainable demand recovery
should show that these markets are not structurally oversupplied.
Flagship reports Most European utilities are highly geared, but we believe that the bulk of the rights
• Southern European Utilities: Not the
space to play the recovery. OW EDP
issues have been done and that the sector will continue to concentrate on capex
(defensive) and IBR (US wind growth), control, asset disposals and optimization of existing operations. This should provide
07 Oct 09 confidence about the sustainability of dividends, despite trough earnings in 2010-11E,
• European Utilities Basics 3.0- Electricity which should revive the sector’s traditional yield attraction.
& Gas Industry Overview,
27 Oct 09 2010 Roadmap
We believe that the sentiment towards the sector is so negative that positive headline
demand readings (and not just underlying) will be required for Central European
Europe utilities to outperform. German electricity demand in October is likely to be rather
130
120
negatively affected by the mild weather and hence we will need to wait till
110
100
November or, more likely, December demand figures to be released (first fortnight of
90 January and February respectively).
80
70
60
FY2009 results releases in February should confirm managements’ focus on cash
50
31/12/2008 28/02/2009 30/04/2009 30/06/2009 31/08/2009 31/10/2009
flow preservation and commitment to maintain dividends by most Continental
Utilities MSCI Europe
European utilities.
A UN-sponsored agreement to extend Kyoto Protocol’s commitments to curb carbon
MSCI Performance table emissions could be approved in the 2010 Climate Change Conference in Mexico.
2wk 3mth YTD Such agreement should boost long-term growth prospects for renewables and the
MSCI Utilities -2.3% -3.3% -5.1%
outlook for power prices. If an agreement could be reached by mid-year a special
Weight in Europe 6.3% conference could be called around June, according to UN representatives.
Consensus 2009 P/E ratio 11.2 We continue to believe that investors should position in electricity markets where
Consensus 2011 P/E ratio 10.2 prices are coal-driven (Germany and Central Europe) rather than gas-driven, as gas
oversupply in the latter should continue to put downside pressure on earnings. In this
Fwd D/Y 6.1%
context we highlight Drax as our stock to avoid in the sector.
Prices and valuations as at 30 November 2009 However, the absolute upside in many generators might be hindered during a good
portion of 2010 by the lack of visibility about demand growth. While investors wait
for such visibility we recommend exposure to either stocks with organic growth
irrespective of the recovery of power prices (IBR, Int’l Power, 277p, Red Electrica,
€36.72) or truly defensive, income stocks (Terna, €2.78).
Top pick
Iberdrola Renov. 3.195 € OW 13.5 34.2 26.7 0.09 0.12 1.0% 1.5%
Stock to avoid
Drax 410.4 GBP p UW 1.5 7.8 5.9 50.91 66.84 3.6% 8.1%
Source: Bloomberg at 30/11/2009, J.P. Morgan estimates
85
(44-20) 7325-5242 07 December 2009
86
(44-20) 7325-5242 07 December 2009
Top Picks
Alcatel-Lucent.......................................................88
Anheuser Busch InBev ........................................90
ArcelorMittal..........................................................92
ASML .....................................................................94
BBVA .....................................................................96
Big Yellow .............................................................98
British American Tobacco ...................................100
Carrefour ...............................................................102
Daimler AG ............................................................104
Danone ..................................................................106
Deutsche Post DHL ..............................................108
Fortis .....................................................................110
HSBC .....................................................................112
Iberdrola Renovables ...........................................114
Ipsen ......................................................................116
JCDecaux ..............................................................118
KPN ........................................................................120
LVMH .....................................................................122
Roche ....................................................................124
Saint-Gobain .........................................................126
SKF ........................................................................128
Société Générale ..................................................130
Swiss Re................................................................132
Syngenta ...............................................................134
Unicredit ................................................................136
Top Picks
Unilever NV/Plc .....................................................138

Wood Group..........................................................140

87
(44-20) 7325-5242 07 December 2009
Overweight Alcatel-Lucent
€2.25
30 November 2009 Return to profitability
Price Target: €3.50 The opportunity in the next cycle
We believe that a significant re-rating of Alcatel-Lucent is likely as the company
Communucations Equipment returns toward an assumption that normalized margins of c. 5-6% can be achieved.
Rod Hall, CFA
AC We see ALU as well placed to benefit from higher margin North American business
(44-20) 7325-7437 post the integration of its three WCDMA platforms and there is also potential to save
rod.b.hall@jpmorgan.com on R&D spend as AT&T moves toward LTE. With ALU expected to only break-
Malvika Gupta even at the EBIT level in 2009, we believe that market estimates are pessimistic
(44-20) 7742-0939 going into 2010 even with anticipated continuing weakness in carrier spending. We
malvika.x.gupta@jpmorgan.com also highlight the potential for possible M&A in the sector and with ALU being the
#4 global wireless infrastructure provider, we believe that it or part of its business are
possible acquisition targets.
Flagship reports
• Q309 Wrap - Capex headwinds Flexing upside
worsening but restructuring on track, 02
Nov 09
Our price target of €3.50 implies a long-term EBIT margin of 4.0% which we believe
• Q209 Wrap - Unexpected shelter from is attainable – our 2011E EBIT margin expectation is 3.8% and historical operating
the capex storm, 31 Jul 09 margins have been 6%. At €2.24 we calculate that the stock discounts 2.4% EBIT
• Q1'09 Wrap - Q1 not so good but margins to perpetuity while an assumption of 6% perpetual margins yields a DCF
things looking up for Q2, Reiterate OW, value of €5.10 holding all other assumptions constant. The upside to our target price
06 May 09
vs. current share price levels is over 56%. We also highlight an increasing potential
for industry consolidation given widespread LTE buildouts anticipated in 2010/11.
Price Performance
3.5
Catalysts – 2010 and beyond
Alcatel-Lucent is a top optical equipment vendor with 21% market share. We expect
€ 2.0
the optical transmission market to perform well in 2010 driven by continuing
0.5 wireless backhaul upgrades and core and aggregation network capacity
Dec-08 Mar-09 Jun-09 Sep-09
enhancements driven by the growth of cloud/virtualized computing environments
ALUA.PA share price (€)
MSCI-Eu (rebased)
and mobile data. We expect ALU to exit from non-core assets/businesses to focus its
resources on LTE development.
Performance (%) Valuation, target price, key risks

YTD 1M 3M 12M Our December 2010 price target is €3.50. We assume a perpetual normalized EBIT
Abs (%) 46.8% -12.4% -15.3% 45.0% margin of 4% in our DCF. Accelerating wireless decline and DSL line losses would
Rel (%) 27.0% -13.2% -16.0% 22.6% present risks to our OW rating. CDMA, a technology that ALU has high exposure to,
is slowly dying in our opinion.
Alcatel-Lucent SA (ALUA.PA;ALU FP)

FYE Dec 2008A 2009E 2010E Company Data
Adj. EPS (€) Price (€) 2.25
FY 0.20 A (0.04)A 0.10 Date Of Price 30 Nov 09
Q1 (Mar) 0.01 -0.12A -0.06 Price Target (€) 3.50
Q2 (Jun) 0.05 0.02A 0.04 Price Target End Date 31 Dec 10
Q3 (Sep) 0.06 A -0.02A 0.02 52-week Range (€) 3.39 - 0.87
Q4 (Dec) 0.07 A 0.08A 0.10 Mkt Cap (€ bn) 5.1
Revenue FY (€ mn) 16,9501 A 15,628A1 15,796 Shares O/S (mn) 2,259
EBIT FY (€ mn) 4821 A (68)A1 405
EV/Operating Profit FY 18.23 A -121.56A 22.44
1-FAS123 Compliant
Source: Company data, Bloomberg, J.P. Morgan estimates.
88
(44-20) 7325-5242 07 December 2009
Alcatel-Lucent: Summary of Financials

Profit and Loss Statement Cash flow statement
€ in millions, year end Dec FY08 FY09E FY10E € in millions, year end Dec FY08 FY09E FY10E
Revenues 16,950 15,628 15,796 EBIT 482 (68) 405

% Change Y/Y (4.5%) (7.8%) 1.1% Depreciation & amortization 978 819 779
Gross Margin (%) 34.1% 33.1% 34.0% Change in working capital (30) 57 (365)
EBITDA 1,460 751 1,183 Taxes (123) (87) (100)
% Change Y/Y 1.2% (48.5%) 57.5% Other (1,100) (1,429) (886)
EBITDA Margin (%) 8.6% 4.8% 7.5% Cash flow from operations 207 (707) (167)
EBIT 482 (68) 405
% Change Y/Y 131.7% (114.1%) (697.1%) Capex (901) (686) (673)
EBIT Margin 2.8% -0.4% 2.6% Disposal / (Purchase) 137 1,631 0
Net Interest 154 40 51 Net interest (192) (220) (238)
Earnings before tax 732 -30 463 Free cash flow to firm - (165) (264)
% change Y/Y 6.7% (104.0%) (1666.4%)
Tax (charge) (237) (79) (232) Equity raised/repaid 0 0 0
Tax as a % of BT (32.4%) 268.4% (50.0%) Debt Raised/repaid (250) (138) (600)
Net Income (Reported) 486 46 220 Other - - -
% change Y/Y (64.2%) (90.5%) 376.7% Dividends paid (7) (6) 0
Shares OS 2,259.10 2,259.10 2,259.10 Beginning cash 4,377 3,687 2,854
EPS (Reported) 0.20 -0.04 0.10 Ending cash 3,687 2,854 1,414
% Change Y/Y (39.4%) (118.3%) (364.7%) OpFCF 559 65 511
Balance sheet Ratio Analysis

€ in millions, year end Dec FY08 FY09E FY10E € in millions, year end Dec FY08 FY09E FY10E
Cash and cash equivalents 4,593 4,755 3,315 Sales growth (4.5%) (7.8%) 1.1%
Accounts Receivable 4,330 3,611 4,079 Gross Margin (%) 34.1% 33.1% 34.0%
Inventories 2,196 1,824 1,877 EBITDA Margin (%) 8.6% 4.8% 7.5%
Others 650 331 331 Operating Margin 2.8% NM 2.6%
Current assets 14,569 12,459 11,540 Net profit margin (%) 2.9% 0.3% 1.4%
LT investments 809 506 506 Net profit growth (64.2%) (90.5%) 376.7%
Net fixed assets 1,351 1,218 1,112 EPS growth (39.4%) (118.3%) (364.7%)
Total assets 27,311 24,333 23,308
Net debt (Cash) to Total Capital 3.2% 0.1% 6.2%
Liabilities Net debt (Cash) to equity 9.6% 0.2% 25.1%
ST loans 1,097 622 622 EV/Revenue 0.5 0.5 0.6
Payables 4,571 4,031 4,188 EV/EBITDA 6.0 11.0 7.7
Others 443 229 229 EV/EBIT 18.2 -121.6 22.4
Total current liabilities 11,687 9,431 9,588 ROA 1.6% -0.3% 1.7%
Long term debt 3,998 4,141 3,541 ROE 5.7% 1.0% 6.0%
Total liabilities 22,087 20,372 19,929 ROCE 2.5% -0.4% 2.8%
Shareholders Equity 4,633 3,424 2,842 FCF Yield 24.5% (24.6%) (17.3%)
Total liabilities and Shareholders' equity 27,311 24,333 23,308 P/E 11.2 NM 23.2
Source: Company reports and J.P. Morgan estimates.
89
(44-20) 7325-5242 07 December 2009
Anheuser Busch InBev

Class is permanent
Overweight
The opportunity in the next cycle
€33.2 A year ago investors were concerned about the risk of ABI breaching covenants –
30 November 2009 this is no longer a concern. Since then ABI has sold assets totaling $7.5bn for cash,
Price Target: €42
issued $19.2bn in Bonds which have significantly lengthened the maturity profile
and with limited impact on long-term cost of debt, listed the ADR in the US, visibly
delivered $875mn of cost synergies from the AB deal in 9M09 and we think
Beverages generated near $5bn of free cashflow. We have free cashflow of $7.5bn in FY10E
Mike Gibbs
AC and $8.5bn in FY11E. We estimate ABI will fall below 2x net debt/EBITDA by end
(44-20) 7325-1205 FY11E. In a nutshell ABI will have effectively bought and paid for Anheuser Busch
mike.j.gibbs@jpmorgan.com inside 4 years having financed this with a slug of equity right at the trough of the
Vanessa Lai Min cycle, through the disposal of assets and through a medium-term sustainable cash
(44-20) 7325-4240 cost of debt of 6%. Over 80% of EBIT post synergies comes from the Americas
vanessa.laimin@jpmorgan.com where it is a dominant player in stable profit pools. The synergy capture is being
delivered against a benign US competitive and pricing environment.
Flagship reports Flexing upside
• Hail to the chief, 12 Nov 09 We cap the leverage in our DCF model at 30% debt/market cap. If we use the actual
• Time for a top up, 24 Jun 09
• They’ve delivered before … they will
leverage (at 48%), the WACC falls to 7.8% and adds another €7 per share to our
deliver again, 25 Jan 09 DCF valuation. Putting the perpetuity growth rate at 1.5%, in line with SABMiller
and the major spirits stocks, adds another €2 per share to our DCF valuation.
Price Performance Catalysts – 2010 and beyond

35
We think there are still multiple longer-term pots of value to be unlocked at ABI.
These include further margin upside in the US from sustained rational pricing and
€ 20
ongoing fixed cost savings, extracting value from the capital tied up in the US beer
5 wholesaler tier, acquiring the remaining economic interest in Grupo Modelo, the
Dec-08 Mar-09 Jun-09 Sep-09 emergence of a top line “marketing story”, margin expansion in China and potential
ABI.BR share price (€) distribution of future excess cashflow.
MSCI-Eu (rebased)
Valuation, target price, key risks

Our Nov 10E DCF derived PT is €42 (terminal growth 1.25%, WACC 8.5%). ABI
Performance (%)
trades on 13.7x CY10E PE, slightly below the sector on 13.8x and with 46% EPS
YTD 1m 3m 12m growth and on a FCF yield of 10.0% by FY11E. By then we think this yield will
Abs 100.5% 3.9% 12.3% 171.1% either be paid out or reinvested by the controlling shareholders into a higher return
Rel 80.7% 3.1% 11.6% 148.7% project. We cannot think of any reason why investors would not want to retain their
sector exposure in this stock. Key downside risks to our rating and PT include a
failure to secure $2.25bn of synergies from the AB transaction, increasing cost of
debt, sustained volume declines in key US or Brazil markets, and a weaker Real.
Anheuser Busch InBev (ABI.BR;ABI BB)
FYE Dec 2008A 2009E 2010E 2011E Company Data
Adj. EPS FY ($) 2.50 3.66 4.23 Price (€) 33.24
Revenue FY ($ mn) 39,157 36,990 36,863 38,701 Date Of Price 30 Nov 09
EBITDA FY ($ mn) 12,068 13,066 14,464 15,348 Price Target (€) 42.00
Pretax Profit Adjusted FY ($ mn) 6,326 8,958 10,256 Price Target End Date 01 Nov 10
Adj P/E FY 19.9 13.6 11.8 52-week Range (€) 34.88 - 11.14
EBIT FY ($ mn) 9,125 10,292 11,775 12,488 Mkt Cap (€ bn) 53.3
EBITDA margin FY 30.8% 35.3% 39.2% 39.7% Shares O/S (mn) 1,603
EBIT margin FY 23.3% 27.8% 31.9% 32.3%
90
(44-20) 7325-5242 07 December 2009
Anheuser Busch InBev: Income Statement

USD m 2008PF 2009E 2010E 2011E
Volume 416,112 407,594 393,296 402,391
Revenue 39,157 36,990 36,863 38,701

Cost of sales - 19,443 - 17,585 - 16,415 - 17,232
Gross profit 19,714 19,404 20,448 21,469
SG&A incl synergies benefit - 10,589 - 10,212 - 10,474 - 10,981

Synergies benefit 1100 1800 2000
EBITDA incl synergies 12,068 13,066 14,464 15,348

EBITDA margin 30.8% 35.3% 39.2% 39.7%
DD&A 2,943 2,773 2,689 2,860

EBIT incl synergies 9,125 10,292 11,775 12,488
EBIT margin 23.3% 27.8% 31.9% 32.3%
- - - -
Non recurring items - 595 186 - 250 -
Interest costs - 1,177 - 3,291 - 2,665 - 2,114

coupon 6.3% 6.3% 6.3%
Finance income 195 - - -
Non recurring finance costs - other - 203 - 675 - 152 - 117
Net financing costs - 1,185 - 3,966 - 2,817 - 2,231
Reported PBT 7,345 6,512 8,708 10,256

PBT ex non recurring ops items 7,940 6,326 8,958 10,256
Tax on recurring - 1,413 - 1,708 - 2,419 - 2,769

Tax on non recurring 142 132 109 32
Total tax costs (1,307) (1,758) (2,351) (2,769)
Effective tax rate 18% 27% 27% 27%
PAT 6,037 4,754 6,357 7,487

Minorities -1192 -1154 -1380 -1458
Income from associates 69 533 683 732
Reported net income 4,914 4,133 5,660 6,761

Net income clean 5,404 3,997 5,842 6,761
Clean adjusted EPS 2.50 3.66 4.23

EPS growth 46% 16%
Dividend 744 849 879

Dividend per share 0.47 0.53 0.55
Dividend Payout 18% 15% 13%
Source: Company data, J.P. Morgan estimates.
91
(44-20) 7325-5242 07 December 2009
ArcelorMittal
Operational leverage to the cycle
Overweight
€25.95 We believe MT remains the most attractive European steelmaker for investors
30 November 2009 seeking leverage to a global recovery in steel demand. MT ships ~80% of its steel on
Price Target: €33
a short-term price basis so MT is best positioned relative to steel competitors in a
rising steel price environment. MT also has the largest exposure to emerging markets
in our coverage universe (~30% of 2010e shipments) where growth rates should
Steel exceed developed markets on average going forward. We calculate 27% upside from
Jeffrey Largey
AC 30 November close price of €25.95.
(44-20) 7325-9744
largey_jeffrey@jpmorgan.com Flexing upside
Ben Defay As we forecast that 2010 is still technically a recovery year, we believe upside to our
(44-20) 7325-9231 Jun-2010 PT of €33 for MT rests upon higher than expected steel prices and/or
ben.defay@jpmorgan.com higher shipment volumes. For example, if MT were to return to more normalized
levels of profitability in 2010 (EBITDA of $150/tonne vs. our forecast of
Flagship reports $133/tonne) and capacity utilization were to approximate 90% versus our 2010
• ArcelorMittal, Maintain OW rating & forecast of ~80%, then our PT would increase to €44, implying 70% upside.
EBITDA forecasts, 29 Oct 09
• ArcelorMittal, Earnings inflection point Catalysts – 2010 and beyond
reached, Remain OW, 29 Jul 09
Steel pricing will remain the key catalyst for MT’s share price performance in 2010.
• ArcelorMittal, Capital raise sufficient;
Upgrade to OW, 13 May 09 We believe European steel prices will re-commence moving higher in early 1H 2010
• ArcelorMittal, 1Q Preview & Accounting and given the likely positive read-through for MT’s share price, we believe investors
Review; 23 Apr 09 should be positioned ahead of the actual steel price move. Recently, several US steel
producers have announced spot price hikes and while this has a positive read-through
Price Performance for MT’s North American operations, we believe a move in European steel prices
28
could have a more meaningful impact on investor sentiment and MT’s share price. In
€ 20 contrast to early 2009, MT’s balance sheet should help underpin MT’s share price as
12
it continues to strengthen in 2010 from an improvement in underlying earnings.
ISPA.AS share price (€) Valuation, target price, key risks

MSCI-Eu (rebased)
Our Jun-10 PT of €33 is based on a historical average EV/EBITDA multiple of 7.5x
our 2010 EBITDA forecast of $12.7 billion. We estimate that MT currently trades at
Performance (%) an attractive 2010 EV/EBITDA multiple of 6.0x and a P/E of 11.1x vs. the sector at
YTD 1m 3m 12m 8.4x EBITDA and 19.5x earnings. From a risk perspective, falling steel prices would
Abs 53.5% 13.5% 1.5% 58.4% impact our 2010 earnings forecast and MT would likely underperform. A slower than
Rel 32.0% 13.5% -1.6% 34.3% expected recovery in demand would also lead to weaker than expected earnings.
ArcelorMittal (ISPA.AS;MT NA)

FYE Dec 2008A 2009E 2010E 2011E 2012E Company Data
Adj. EPS FY ($) 6.72 (0.70) 3.40 4.80 5.05 Price (€) 25.95
Adj P/E FY 5.8 NM 11.4 8.1 7.7 Date Of Price 30 Nov 09
Revenue FY ($ mn) 124,936 65,799 83,533 89,112 92,946 Price Target (€) 33.00
EBITDA FY ($ mn) 22,779 5,831 12,673 15,001 15,369 Price Target End Date 30 Jun 10
EBITDA margin FY 18.2% 8.9% 15.2% 16.8% 16.5% 52-week Range (€) 28.82 - 12.57
EBIT FY ($ mn) 12,236 (1,687) 7,651 9,978 10,347 Mkt Cap (€ bn) 41.4
EBIT margin FY 9.8% -2.6% 9.2% 11.2% 11.1% Shares O/S (mn) 1,597
ROA FY 7.1% -0.3% 3.9% 5.4% 5.4%
ROE FY 22.2% -3.0% 12.4% 14.7% 13.9%
92
(44-20) 7325-5242 07 December 2009
ArcelorMittal: Summary of Financials

$ in millions, year end Dec FY07 FY08 FY09E FY10E FY11E $ in millions, year end Dec FY07 FY08 FY09E FY10E FY11E
Revenues 105,216 124,936 65,799 83,533 89,112 EBIT 14,830 12,236 (1,687) 7,651 9,978
% Change Y/Y 18.8% 18.7% -47.3% 27.0% 6.7% Depreciation & amortization (4,460) (9,486) (7,407) (4,822) (4,822)
Gross Margin (%) - - - - - Change in working capital & Other (3,264) (11,174) 4,697 (1,502) (881)
EBITDA 19,290 22,779 5,831 12,673 15,001 Taxes (1,018) (1,098) 3,184 (1,181) (1,662)
% Change Y/Y 30.5% 18.1% -74.4% 117.3% 18.4% Cash flow from operations 23,972 26,992 5,393 7,090 9,886
EBITDA Margin (%) 18.3% 18.2% 8.9% 15.2% 16.8%
EBIT 14,830 12,236 (1,687) 7,651 9,978 Capex (5,448) (5,531) (2,581) (3,800) (4,675)
% Change Y/Y 25.4% -17.5% -113.8% -553.4% 30.4% Disposals/(purchase) (205) - 0 0 0
EBIT Margin 14.1% 9.8% -2.6% 9.2% 11.2% Net Interest (383) (2,019) (1,964) (1,572) (1,347)
Net Interest 383 2,019 1,964 1,572 1,347 Free cash flow 4,623 2,224 2,872 3,222 5,143
Earnings before tax 9,375 11,537 -3,659 6,614 9,329
% change Y/Y -15.7% 23.1% -131.7% -280.8% 41.1% Equity raised/repaid (2,498) (4,372) 0 (343) (976)
Tax 1,018 1,098 (3,184) 1,181 1,662 Debt Raised/repaid 1,435 4,873 -6,401 -2,500 -3,400
Tax as a % of BT 10.9% 9.5% 87.0% 17.8% 17.8% Dividends paid (1,820) (2,079) (1,117) (1,198) (1,198)
Net Income (Reported) 7,302 9,399 (403) 5,135 7,245 Other (1,949) (4,805) (45) (343) (976)
% change Y/Y -8.4% 28.7% -104.3% -1375.2% 41.1%
Shares Outstanding (m) 1,386.0 1,386.0 1,489.2 1,597.0 1,597.0 Beginning cash 6,020 7,860 7,576 6,038 5,220
EPS (Reported) - $ 7.41 6.72 -0.73 3.22 4.54 Ending cash 7,860 7,576 6,038 5,220 4,789
% Change Y/Y 28.6% (9.2%) (110.8%) (541.7%) 41.1% DPS - - - - -

Cash and cash equivalents 7,860 7,576 6,038 5,220 4,789 EBITDA margin (%) 18.3% 18.2% 8.9% 15.2% 16.8%
Accounts Receivable 9,533 6,737 7,082 6,591 6,631 Operating margin (%) 14.1% 9.8% NM 9.2% 11.2%
Inventories 21,750 24,741 20,354 23,584 23,988 Net margin (%) 6.9% 7.5% NM 6.1% 8.1%
Others 5,385 3,288 328 2,573 5,003 SG&A/Sales - - - - -
Current assets 45,328 44,414 38,397 40,318 40,331
Sales per share growth 18.7% 18.7% -51.0% 18.4% 6.7%
LT investments 5,887 8,512 16,588 16,588 16,588 Sales growth (%) 18.8% 18.7% -47.3% 27.0% 6.7%
Net fixed assets 61,994 60,755 55,929 54,975 54,896 Attributable net profit growth (%) -8.4% 28.7% -104.3% -1375.2% 41.1%
Total assets 133,625 133,088 128,247 131,458 133,823 EPS growth (%) 28.6% (9.2%) (110.8%) (541.7%) 41.1%
Liabilities
ST loans 8,542 8,409 5,874 5,874 5,874 Interest coverage (x) 38.7 6.1 0.9 4.9 7.4
Payables 13,991 10,501 8,063 9,300 8,863 Net debt to Total Capital 28.9% 32.4% 27.5% 24.4% 20.0%
Others 1,169 1,582 16,767 17,478 17,247 Net debt to equity 37.4% 44.8% 35.7% 30.5% 23.7%
Total current liabilities 32,209 30,760 23,280 23,488 23,877 Sales/assets (x) 0.8 0.9 0.5 0.6 0.7
Long term debt 22,085 25,667 21,787 19,287 15,887 Total Assets/Equity 235.7% 241.1% 225.5% 213.2% 197.0%
Other liabilities 15,340 15,088 22,685 23,396 22,502 ROE 26.2% 22.2% -3.0% 12.4% 14.7%
Total liabilities 72,090 73,858 67,752 66,171 62,266 ROCE 14.6% 12.0% -1.6% 7.1% 9.1%
Shareholders' equity 56,685 55,198 56,878 61,670 67,940
BVPS - $ 41 40 38 39 43
93
(44-20) 7325-5242 07 December 2009
Overweight ASML
€20.55
30 November 2009 Key beneficiary of memory cycle
Price Target:€24.0 The opportunity in the next cycle
Just as NAND flash has become the storage of choice in music players, we believe it
Semiconductors will begin to replace hard disk drives in notebooks and servers in the next cycle.
Sandeep Deshpande
AC According to our bottom up calculations, if notebooks and servers have 50% SSD
(44-20) 7325-0456 penetration by 2014 and desktops 5% with 256GB notebook capacity, 512GB server
sandeep.s.deshpande@jpmorgan.com and desktop capacity, capex requirements over the 2010-2014 will be US$85-139bn
with an average spend of US$112bn. To put it into context, this spend would be 35%
more than the capex associated with the ’95-’01 DRAM cycle and 11% less than the
Flagship reports DRAM+NAND cycle of ’03-’08.
• ASML: The blue sky case offers
considerable upside potential, 05 Aug
09
Flexing upside
• ASML : The case for ASML, 10 Jun 09 Based on foundry, DRAM and NAND trends; ASML’s market share of 70%+ in the
next cycle; higher leading edge share coupled with intention to return excess cash to
shareholders, if ASML does return cash in ’11/’12 to investors per its stated
Price Performance intention; we estimate ASML EPS in ’13 could be as high as €2.56 incorporating a
20 potential buy-back (€2.27 without). Given that historically ASML has traded at 14-
€ 14 17x EPS, it could trade at as much as €40.
8
Though ASML’s orders showed a strong recovery in 3Q09 increasing 97% QoQ to
ASML.AS share price (€)
MSCI-Eu (rebased) €777m, there were virtually no orders from NAND flash companies for capacity. A
look at ASML’s order book reveals that 76% of orders through 3Q09 have been
Performance (%)
immersion, thus virtually no capacity has been added at all and in fact even these
YTD 1m 3m 12m technology upgrade tools are for DRAM and foundry. NAND capacity related orders
Abs 61.1% 11.8% 4.9% 85.3% is the next key catalyst for the stock and we expect these orders to come in over the
Rel 39.6% 11.8% 1.8% 61.2% next 6 months, which will likely result in another upward revision to estimates.

We have a Dec 10 PT of €24.0, based on ~15x our ’11E EPS, which is near the lower
end of the stock’s historical mid-cycle trading range of 15-18x. With substantial
growth in orders already in 2H09 and revenue growth of over 120% likely in ’10
(JPMe), we believe that as the market starts to focus on 2011 estimates, there will be
a P/E de-rating and the stock will trade near the lower end of the historical mid-cycle
multiple range. However through 2010 and 2011 as the market gets more
comfortable with 2011 estimates and they rise the stock will likely move to the next
level. Key risks are an economic double dip and market share loss to Nikon.
ASML (ASML.AS;ASML NA)

FYE Dec 2006A 2007A 2008A 2009E 2010E 2011E Company Data
Adj. EPS FY (€) 1.25 1.42 0.81 (0.36) 1.39 1.58 Price (€) 20.55
Adj P/E FY 16.4 14.4 25.4 NM 14.8 13.0 Date Of Price 30 Nov 09
Revenue FY (€ mn) 3,597 3,809 2,954 1,572 3,493 3,694 Price Target (€) 24.00
EBIT FY (€ mn) 871 849 287 (179) 751 854 Price Target End Date 31 Dec 10
EBIT margin FY 24.2% 22.3% 9.7% -11.4% 21.5% 23.1% 52-week Range (€) 22.43 - 10.43
EV/Revenue FY 2.4 2.3 2.9 5.5 2.5 2.3 Mkt Cap (€ bn) 8.9
EV/EBITDA FY 8.8 8.7 21.0 -225.7 9.8 8.7 Shares O/S (mn) 435
DPS (Net) FY (€) 0.00 0.00 0.25 0.20 0.20 0.20 DPS (Net) (€) 0.20
94
(44-20) 7325-5242 07 December 2009
ASML: Summary of Financials

€ in millions, year end Dec FY07 FY08 FY09E FY10E FY11E € in millions, year end Dec FY07 FY08 FY09E FY10E FY11E
Revenues 3,809 2,954 1,572 3,492 3,694 Net Income (Reported) 688 322 (157) 604 687
% Change Y/Y 5.9% (22.4%) (46.8%) 122.1% 5.8% Depreciation & amortization 136 123 141 128 130
Gross Profit 1,560 1,016 444 1,393 1,514 Other items -183 -122 -2 -147 -168
Gross Margin (%) 41.0% 34.4% 28.2% 39.9% 41.0% Cash flow from operations 802 287 122 638 688
EBIT 849 287 (179) 751 854
% Change Y/Y (2.5%) (66.2%) (162.3%) (519.8%) 13.8% Capex (173) (259) (140) (160) (175)
EBIT Margin 22.3% 9.7% -11.4% 21.5% 23.1% Other 17 0 0 0 0
Net Interest 33 23 (3) 4 4 Free cash flow 502 17 (18) 478 513
Earnings before tax 894 380 -182 755 858
% change Y/Y 2.8% (57.5%) (147.8%) (515.9%) 13.7% Equity raised/repaid (1,279) (67) 6 0 0
Tax (charge) 206 57 (24) 151 172 Debt Raised/repaid 584 (2) 0 0 0
Tax as a % of BT 23.0% 15.1% 13.3% 20.0% 20.0% Dividends paid 0 (112) (86) (87) (87)
Net Income (Reported) 688 322 (157) 604 687 Other 1 - - - -
% change Y/Y 10.1% (53.1%) (148.8%) (483.6%) 13.7% Beginning cash 1,656 1,272 1,109 1,012 1,403
EPS (Adj.) - € 1.42 0.81 (0.36) 1.39 1.58 Ending cash 1,272 1,109 1,012 1,403 1,829
% Change Y/Y 13.5% (43.2%) (144.9%) (482.4%) 13.7% DPS 0.00 0.25 0.20 0.20 0.20

Cash and cash equivalents 1,272 1,109 1,012 1,403 1,829 EBITDA margin (%) 25.8% 13.9% -2.4% 25.2% 26.7%
Accounts Receivable 638 469 367 587 607 Net margin (%) 18.1% 10.9% NM 17.3% 18.6%
Inventories 1,102 999 1,040 1,247 1,211 SG&A/Sales 5.9% 7.2% 10.0% 4.9% 4.9%
Others 308 395 446 535 554
Current assets 3,319 2,973 2,864 3,772 4,201 Sales per share growth 15.8% -14.0% -46.6% 121.4% 5.8%
Sales growth (%) 5.9% (22.4%) (46.8%) 122.1% 5.8%
LT investments - - - - - Attributable net profit growth (%) 10.1% (53.1%) (148.8%) (483.6%) 13.7%
Net fixed assets - - - - - EPS growth (%) 16.4% (49.0%) (148.9%) (482.4%) 13.7%
Total assets 4,068 3,939 3,843 4,783 5,256
Liabilities Net debt to Total Capital (27.9%) (30.3%) (25.1%) (48.7%) (68.8%)
ST loans 0 0 0 0 - Net debt to equity (21.8%) (23.2%) (20.1%) (32.8%) (40.8%)
Payables - - - - - Sales/assets (x) 0.9 0.7 0.4 0.7 0.7
Others 1,305 1,008 1,181 1,604 1,477 Total Assets/Equity 213.2% 198.1% 219.6% 211.0% 183.3%
Total current liabilities - - - - - ROE 35.4% 13.2% -9.0% 26.6% 24.0%
Long term debt 855 647 660 660 660 ROCE 30.7% 9.8% -6.7% 23.6% 22.6%
Other liabilities 0 0 0 0 0
Total liabilities 2,160 1,951 2,093 2,516 2,390
BVPS 4 5 4 5 7
95
(44-20) 7325-5242 07 December 2009
BBVA
High quality play, benefiting from Mexican recovery in 2010
Overweight
€12.55 Despite a seemingly risky geographical mix, we see BBVA offering an attractive
30 November 2009 entry point to what we see as a gradual rerating of the stock in the next months. With
Price Target: €15.6
the bank’s earnings stability (20% RoTBV in 2010E) likely to fare well vs. other
European banks, we expect steady TBV/share increases (12% CAGR) and gradually
recovering profitability levels (12E RoTBVs of 22%). With the stock providing
Banks shareholders with double digit TBV growth, a bottom out RoTBV of 20% and a 5-
Ignacio Cerezo
AC 6% dividend yield by 10E, we see further upside arising from a faster than expected
(44-20) 7325-4425 recovery in Mexico/Latam. Capital wise, and following the issuance of €2bn of
ignacio.cerezo@jpmorgan.com convertibles, we see the bank comfortably reaching a core Tier 1 ratio of 8.7% by
Andrea Unzueta 2011E, which could be strengthened further through the disposal of TEF’s stake
(44-20) 7325-7454 (c.50-60bps of core capital).
andrea.e.unzueta@jpmorgan.com
Flexing upside
On our estimates, if Mexican provisions go down to 2007 levels (from current
Flagship reports
393bps to 273bps), we see 5% upside to Group EPS, a RoNAV of 21% (vs. current
• Santander and BBVA – Increased TBV
growth visibility, 24 Aug 09 20%) and a PT of c.€16.3 (vs. current €15.6).
• BBVA: Q3 underpins OW – Spain’s
buffer enlarged, Mexican NPLs Catalysts – 2010 and beyond
showing stabilization signs, 28 Oct 09 BBVA’s Mexican operations remain the main catalyst for the stock. We see
evidence of Mexican losses entering a gradually downward trend as we go into 10E
and the full clean up of the bank’s consumer portfolio loses momentum.
Price Performance
12
€ 8
Our Dec 10 SOTP-based PT of €15.6 offers 24% upside to current levels and we
4
remain comfortable about book value multiples staying around the c.2.0x mark
(currently at 1.8x PTBV 10E and 9.4x PE 10E). Key risks to our rating and price
BBVA.MC share price (€)
MSCI-Eu (rebased)
target include: (i) material deterioration of the economic situation and property
market in Spain; (ii) economic slowdown in Mexico or larger-than expected interest
Performance (%)
rate declines, which could depress margins; (iii) additional rate declines in Europe,
YTD 1m 3m 12m which could affect volumes and asset quality indicators; (iv) slower recovery of
Abs 44.9% 2.7% -0.2% 64.6% credit markets, which could increase the bank’s funding costs; (v) volatility of Latam
Rel 25.1% 1.9% -0.9% 42.2% currencies, which could have a negative impact on the region’s earnings and capital
base; and (vi) a value destructive acquisition.
BBVA (BBVA.MC;BBVA SM)
Adj. EPS FY (€) 1.46 1.44 1.33 1.48 1.79 Price (€) 12.55
Adj P/E FY 8.6 8.7 9.4 8.5 7.0 Date Of Price 30 Nov 09
Dividend (Net) FY (€) 0.61 0.44 0.63 0.69 0.84 Price Target (€) 15.60
NAV/Sh FY (€) 5.1 5.8 6.5 7.7 9.1 Price Target End Date 31 Dec 10
P/BV FY 1.8 1.5 1.4 1.3 1.2 52-week Range (€) 13.27 - 4.45
P/NAV FY 2.5 2.2 1.9 1.6 1.4 Mkt Cap (€ bn) 47.0
ROE FY 19.1% 18.9% 15.5% 15.7% 17.4% Shares O/S (mn) 3,748
Tier One Ratio FY 7.9% 9.5% 9.8% 9.8% 10.1%
96
(44-20) 7325-5242 07 December 2009
BBVA: Summary of Financials

Profit and Loss Statement Ratio Analysis
€ in millions, year end Dec FY07A FY08A FY09E FY10E FY11E € in millions, year end Dec FY07A FY08A FY09E FY10E FY11E
Per Share Data
Net interest income 9,628 11,686 13,620 13,689 14,402 EPS Reported 1.49 1.44 1.44 1.33 1.48
% Change Y/Y - 21.4% 16.6% 0.5% 5.2% EPSAdjusted 1.51 1.46 1.44 1.33 1.48
Non-interest income 7,644 7,291 6,797 6,975 7,237 % Change Y/Y - (3.3%) (0.9%) (7.6%) 11.0%
Fees & commissions 4,559 4,527 4,332 4,466 4,670 DPS 0.73 0.61 0.44 0.63 0.69
% change Y/Y - (0.7%) (4.3%) 3.1% 4.6% % Change Y/Y - (16.2%) (28.7%) 43.0% 11.0%
Trading revenues 1,956 1,558 1,478 1,455 1,461 Dividend yield 4.5% 8.4% 3.5% 5.0% 5.5%
% change Y/Y - (20.3%) (5.2%) (1.6%) 0.4% Payout ratio 49.1% 42.5% 30.3% 46.9% 46.9%
Other Income 1,128 1,206 988 1,054 1,106 BV per share 7.22 6.84 8.26 8.99 9.81
Total operating revenues 17,271 18,977 20,418 20,664 21,639 NAV per share 5.45 5.09 5.78 6.48 7.70
% change Y/Y - 9.9% 7.6% 1.2% 4.7% Shares outstanding 3,748.0 3,748.0 3,907.4 3,907.4 3,907.4
Admin expenses -7,830 -8,455 -8,099 -8,286 -8,567
% change Y/Y - 8.0% (4.2%) 2.3% 3.4% Return ratios
Other expenses - - - - - RoRWA 2.3% 1.8% 1.9% 1.6% 1.7%
Pre-provision operating profit 9,441 10,522 12,318 12,377 13,072 Pre-tax ROE 34.2% 26.9% 27.2% 23.4% 23.6%
% change Y/Y - 11.4% 17.1% 0.5% 5.6% ROE 22.6% 19.1% 18.9% 15.5% 15.7%
Loan loss provisions 1,904 2,941 4,802 4,453 4,383 RoNAV 26.7% 28.6% 24.2% 20.6% 19.2%
Other provisions 957 -656 247 -461 -461
Earnings before tax 8,495 6,926 7,763 7,463 8,228 Revenues
% change Y/Y - (18.5%) 12.1% (3.9%) 10.3% NIM (NII / RWA) 3.6% 4.1% 4.6% 4.3% 4.2%
Tax (charge) (2,080) (1,541) (1,842) (1,786) (1,944) Non-IR / average assets 1.7% 1.4% 1.2% 1.2% 1.2%
% Tax rate 24.5% 22.3% 23.7% 23.9% 23.6% Total rev / average assets 3.8% 3.6% 3.7% 3.7% 3.7%
Minorities (289) (365) (454) (467) (498) NII / Total revenues 55.7% 61.6% 66.7% 66.2% 66.6%
Net Income (Reported) 5,402 5,415 5,467 5,210 5,786 Fees / Total revenues 26.4% 23.9% 21.2% 21.6% 21.6%
Trading / Total revenues 11.3% 8.2% 7.2% 7.0% 6.8%
Balance sheet
ASSETS Cost ratios

Net customer loans 310,882 333,029 326,825 334,757 349,845 Cost / income 45.3% 44.6% 39.7% 40.1% 39.6%
% change Y/Y 21.2% 7.1% (1.9%) 2.4% 4.5% Cost / assets 1.6% 1.6% 1.5% 1.5% 1.4%
Loan loss reserves 7,662 7,829 8,959 10,633 12,580 Staff numbers - - - - -
Investments 63,878 74,766 78,724 82,925 87,388
Other interest earning assets 105,375 107,111 113,585 118,917 126,753 Balance Sheet Gearing
% change Y/Y 24.0% 1.6% 6.0% 4.7% 6.6% Loan / deposit 131.6% 124.7% 128.8% 128.1% 126.3%
Average interest earnings assets 418,426 477,396 497,083 501,743 518,944 Investments / assets 23.7% 23.8% 26.2% 26.1% 25.9%
Goodwill 8,244 8,440 8,129 8,129 8,129 Loan / assets 67.4% 68.2% 64.2% 63.7% 63.4%
Other assets 13,826 20,169 22,959 23,259 23,564 Customer deposits / liabilities 47.0% 49.2% 46.1% 46.0% 46.5%
Total assets 502,205 543,515 550,223 567,987 595,678 LT Debt / liabilities 19.6% 19.7% 19.8% 19.4% 18.8%
LIABILITIES Asset Quality / Capital

Customer deposits 236,183 267,140 253,783 261,396 277,080 Loan loss reserves / loans 2.5% 2.4% 2.7% 3.2% 3.6%
% change Y/Y 22.8% 13.1% (5.0%) 3.0% 6.0% NPLs / loans 1.1% 2.6% 4.3% 4.9% 4.7%
Long term funding 98,661 107,167 108,801 110,472 112,182 LLP / RWA 1.27% 3.02% 4.78% 5.18% 4.71%
Interbank funding - - - - - Loan loss reserves / NPLs 224.8% 91.4% 63.7% 64.7% 77.2%
Average interest bearing liabs 309,244 354,576 368,445 367,226 380,566 Growth in NPLs 34.7% 151.4% 64.0% 16.9% (0.8%)
Other liabilities 141,669 141,571 156,007 161,621 168,736 RWAs 268,491 283,320 293,908 317,075 346,201
Retirement benefit liabilities - - - - - % YoY change - 5.5% 3.7% 7.9% 9.2%
Shareholders' equity 24,811 26,586 30,413 33,279 36,461 Core Tier 1 6.3% 6.2% 8.2% 8.5% 8.7%
Minorities 880 1,049 1,219 1,219 1,219 Total Tier 1 7.7% 7.9% 9.5% 9.8% 9.8%
Total liabilities & Shareholders Equity 502,204 543,513 550,223 567,987 595,678
97
(44-20) 7325-5242 07 December 2009
Overweight Big Yellow

370p
30 November 2009 Recovery play at a discount
Price Target: 485p The opportunity in the next cycle
Big Yellow is a REIT focused on storage in the UK. We believe the stock is
Property attractively priced on conservative estimates, while the risk is clearly to the upside if
Harm Meijer
AC the recovery continues:
(44-20) 7325-9248
harm.m.meijer@jpmorgan.com • Big Yellow trades at a 9% discount to our trough Adj NAV estimate of 408p.
Osmaan Malik, CFA • The stores are currently only 55% occupied, which management believe should
(44-20) 7325-6084
increase to 75% over coming years under a slow recovery scenario and 85% if
osmaan.malik@jpmorgan.com
economic growth picks up more strongly. We consider 55% occupancy the low
J.P. Morgan Securities Ltd. in this downturn. An increase to 85% in occupancy, which is the long-term
average, would enhance net earnings by at least £25m or 20p per share.
Pradeep Kumar
(91-22) 6157 3298 • The EBITDA margin is currently only 58% versus the long-term average of
pradeep.z.kumar@jpmorgan.com 65%.
J.P. Morgan India Private Limited • We estimate around £75m fire power, after the anticipated land sales, which
should enable the company to benefit from any (distressed) sales. Big Yellow
has currently a conservative loan-to-value ratio of 34%.
Flagship reports • 51 (wholly owned) and 8 (in partnership) stores are open, while there are 7
• The Property Ticker (daily) (wholly owned) and 4 (in partnership) under development. More than 60% of the
• European Property Handbook: Castles
Made of Sand, 01 Sep 09
stores are based in the London area where self-storage awareness is highest.
Flexing upside
If occupancy rises back to its long-term average of 85%, our price target could rise to
Price Performance 600p, instead of 485p currently.
450
350
p We see the following catalysts for the stock: Results (IMS expected in Jan), better
250
than expected economic growth (or just time passing by), pick up in mortgage
150 approvals, which would indicate more housing transactions and could therefore
Dec-08 Mar-09 Jun-09 Sep-09 translate in more users for storage.

Performance (%) Our Sep-2010 EVM-based price target of 485p indicates 31% share price upside from
YTD 1m 3m 12m current levels, which is based on forecasts of only 1% increase in occupancy pa after
Abs 54.8% -5.5% -4.0% 82.0% Mar-2010. Big Yellow aims to resume dividend payments next year. Risks to our OW
rating and price target include a fall in housing transactions and a jump in interest rates.
Big Yellow Group Plc (BYG.L;BYG LN)

FYE Mar 2009A 2010E 2011E 2012E Company Data
Adj. EPS FY (p) 11.98 11.26 15.51 16.75 Price (p) 370
Adj P/E FY 29.9 31.8 23.1 21.4 Date Of Price 30 Nov 09
DPS FY (p) 0 0 13 14 Price Target (p) 485
ROIC FY -6.6% 2.5% 9.3% 12.2% Price Target End Date 30 Sep 10
Adjusted NAV ps FY (p) 424.29 418.66 471.29 538.42 52-week Range (p) 444 - 148
NAV premium (discount) FY (8.2%) (7.0%) (17.4%) (27.7%) Mkt Cap (£ bn) 0.47
Property investments FY (£ mn) 735 749 831 964 Shares O/S (mn) 126
LTV (Loan-to-value) FY 36.8% 32.9% 31.3% 31.6%
98
(44-20) 7325-5242 07 December 2009
Big Yellow Group Plc: Summary of Financials

Profit and Loss Statement Per share data
£ in millions, year end Mar FY09 FY10E FY11E FY12E £ in millions, year end Mar FY09 FY10E FY11E FY12E
Property income 59 56 65 75 Adjusted EPS 11.98 11.26 15.51 16.75

% Change Y/Y - (4.5%) 15.7% 15.3% % change Y/Y - - - -
Rental income 47 45 53 61 Indirect result -75.39 -4.63 37.18 63.47
Other income 12 11 12 14 % change Y/Y - (93.9%) (902.7%) 70.7%
EBITDA 31 27 33 38 EPS (IFRS) -62.78 6.67 52.41 79.74
% Change Y/Y - (14.9%) 25.5% 14.1% % change Y/Y - (110.6%) 686.2% 52.2%
Net interest (17) (12) (13) (17) DPS 0.00 0.00 12.56 13.57
Earnings before tax 14 14 20 21 % change Y/Y - - - 8.0%
% change Y/Y - 4.0% 39.1% 8.0% Gross cash flow 0.12 0.11 0.16 0.17
Tax 0 (0) (0) (0) % change Y/Y - (6.0%) 37.7% 8.0%
as % of EBT 1.1% (0.7%) (0.5%) (0.5%) NNNAV (IFRS) 424.29 418.66 471.29 538.42
Minorities (0) (0) (0) (0) % change Y/Y - (1.3%) 12.6% 14.2%
Adjusted net income 14 14 20 21 Adjusted NAV 424.29 418.66 471.29 538.42
% change Y/Y - 2.2% 39.3% 8.0% % change Y/Y - (1.3%) 12.6% 14.2%
Revaluation (64) (6) 47 80
Capital gain tax (1) 0 0 0 Cash flow statement
Other (21) 0 0 0 EBITDA 31 27 33 38
Minorities 0 0 0 0 Gross cash flow 14 14 20 21
Indirect profit (86) (6) 47 80 Net cash flow (31) 11 17 2
Total profit (IFRS) (73) 8 67 102 Total cash flow requirement (24) 28 (13) (45)
Balance Sheet Ratio Analysis

£ in millions, year end Mar FY09 FY10E FY11E FY12E £ in millions, year end Mar FY09 FY10E FY11E FY12E
Cash and cash equivalents 3 19 41 49 Operating return 3.8% 3.2% 3.8% 3.9%
Accounts receivable 8 8 8 8 Capital return (10.4%) (0.7%) 5.4% 8.3%
Others 17 17 17 17 ROIC (6.6%) 2.5% 9.3% 12.2%
Current assets 29 45 67 74 WACC 9.1% 9.1% 9.1% 9.1%
EVA spread (15.7%) (6.6%) 0.2% 3.1%
Property investments 735 749 831 964
Property not in operation 74 74 74 74 ROE (recurring) 2.6% 2.7% 3.4% 3.2%
Total assets 859 891 995 1,136 ROE (total) (13.4%) 1.6% 11.5% 15.5%
Short term debt 0 0 0 0 Net debt / total assets 35.5% 31.2% 29.2% 29.6%
Others 48 50 51 51 Net debt/ equity 60.8% 51.1% 47.4% 48.0%
Total current liabilities 48 50 51 51 Equity / assets 58.4% 61.1% 61.6% 61.6%
Long term debt 309 297 332 384 Property income / assets 6.8% 6.3% 6.5% 6.6%
Other liabilities 0 0 0 0 Rental income / assets 5.5% 5.1% 5.3% 5.3%
Shareholders' equity 502 544 613 700 EBITDA / assets 3.6% 3.0% 3.3% 3.3%
Group equity 502 544 613 700 % change Y/Y - (17.9%) 12.4% (0.1%)
Total liabilities and equity 859 891 995 1,136
99
(44-20) 7325-5242 07 December 2009
British American Tobacco

Getting paid to wait for EM leverage payoff
Overweight
1847p We believe BAT is most attractive in European Tobacco due to its highest in Global
30 November 2009 Tobacco Emerging Mkt volume (77%) and profit (60%) exposure, balanced brand
Price Target: 2350p
portfolio driven by innovation and significant cost savings that support continued
margin expansion. While waiting for the recovery, BAT’s 5% dividend yield
provides a superior return to cash.
Tobacco
AC
Cost savings provide reliable flexibility. A key factor in the BAT story is its
Erik Bloomquist, CFA significant cost saving program. In our view, the 5-year £800mn cost savings
(44-20) 7325-9917
program (delivering £245mn in 2008) could add 1-2% to EBIT growth in 2010E,
erik.a.bloomquist@jpmorgan.com
providing visibility to approximately 9-10% EPS growth.
Volume growth supported by innovation. We expect volume momentum,
Flagship reports especially in Premium (2008 +7% y/y) to continue though at a reduced level driven
• Global Tobacco, Safely through the
Storm, Emerging Market Leverage
by further innovation and marketing support funded by cost savings, with additional
Favours BAT & PMI , 07 Oct 09 benefits from mix improvement possible on end market consumer recovery.
• Global Tobacco, M&A Risk Returning,
19 Jun 09 Flexing upside
• Global Tobacco, Still Smoking; Upside Leveraged to EM recovery. BAT on our estimates has the most leverage to the key
Tobacco EMs such as Brazil, Russia and S. Africa, markets that J.P. Morgan Economics
forecasts to recover most substantially in 2010. We estimate 24% to 31% of BAT EBIT
Price Performance from these markets and as a result could see 3-5% upside risk to EBIT.
1,900
p
1,600
The 2010 outlook provided at 2009 results on 25 February 2010 is likely to be
1,300
Nov-08 Feb-09 May-09 Aug-09 Nov-09
cautious on volumes but confident pricing, supporting 5-6% organic EBIT growth.
BATS.L share price (p)
H1 results late July could support an improved outlook for volume and mix.
MSCI-Eu (rebased)

We rate BAT as Overweight with Aug 2010 price target of 2350p based on comparative
Performance (%) multiple and DCF analysis. Our 2350p price target implies a 14x 2010E P/E, similar to
YTD 1m 3m 12m current valuations among Lg Cap Consumer Staples peers. Our 2350p PT using our
Abs 2.8% -7.1% -1.7% 9.3% DCF with 7.5% WACC implies a -0.1% LT cash flow growth rate, which we view as
Rel -18.7% -7.1% -4.8% -8.9% undemanding. Risks to our rating and price target include: 1) adverse FX movements; 2)
regulatory changes such as large excise tax increases; 3) litigation risk from US and
Canada; and 4) increased competitive pressure including non-duty paid.
British American Tobacco (BATS.L;BATS LN)

Adj. EPS FY (p) 128.80 153.20 168.00 184.00 Price (p) 1,847
Bloomberg EPS FY (p) 127.90 151.70 163.90 177.20 Date Of Price 30 Nov 09
Adj P/E FY 13.9 11.6 10.6 9.7 Price Target (p) 2,350
EBIT FY (£ mn) 3,717 4,336 4,695 5,011 Price Target End Date 01 Aug 10
EBITDA FY (£ mn) 4,147 4,783 5,160 5,495 52-week Range (p) 2,012 - 1,481
EV/EBITDA FY 11.4 9.8 9.1 8.6 Mkt Cap (£ bn) 36.81
Gross Yield FY 4.5% 5.4% 5.9% 6.5% Shares O/S (mn) 1,993
FCF Yield FY 7.4% 7.9% 8.6% 9.3%
100
(44-20) 7325-5242 07 December 2009
British American Tobacco: Summary of Financials

Profit and Loss Statement FY08 FY09E FY10E FY11E FY12E Segment Analysis FY08 FY09E FY10E FY11E FY12E
£ in millions, year end Dec £ in millions, year end Dec
Revenues 12,122 14,226 15,185 15,900 16,638 Revenue

% change Y/Y 21.0% 17.4% 6.7% 4.7% 4.6% Eastern Europe 1,594 1,703 1,876 2,066 2,255
EBITDA 4,147 4,783 5,160 5,495 5,836 % Change y/y - 6.8% 10.2% 10.2% 9.1%
% change Y/Y 24.2% 15.3% 7.9% 6.5% 6.2% Western Europe 3,218 4,022 4,178 4,258 4,340
EBITDA Margin (%) 34.2% 33.6% 34.0% 34.6% 35.1% % Change y/y - 25.0% 3.9% 1.9% 1.9%
EBIT 3,717 4,336 4,695 5,011 5,333 Asia Pacific 2,717 3,009 3,280 3,478 3,688
% change Y/Y 23.8% 16.7% 8.3% 6.7% 6.4% % Change y/y - 10.7% 9.0% 6.0% 6.0%
EBIT Margin (%) 30.7% 30.5% 30.9% 31.5% 32.1% Americas 2,863 3,085 3,272 3,388 3,508
Net Interest (391) (460) (450) (442) (396) % Change y/y - 7.7% 6.1% 3.5% 3.5%
Earnings before tax 3,803 4,408 4,803 5,155 5,547 Africa & Middle East 1,730 2,408 2,579 2,710 2,847
% change Y/Y 19.5% 15.9% 9.0% 7.3% 7.6% % Change y/y - 39.2% 7.1% 5.1% 5.1%
Tax (1,019) (1,124) (1,274) (1,371) (1,481) Total Revenue 12,122 14,226 15,185 15,900 16,638
as % of EBT 26.8% 25.5% 26.5% 26.6% 26.7% % change Y/Y 21.0% 17.4% 6.7% 4.7% 4.6%
Net Income (Adjusted) 2,582 3,054 3,279 3,514 3,773
% change Y/Y 16.7% 18.3% 7.4% 7.2% 7.4% EBITA
Shares Outstanding 2,005 1,993 1,951 1,910 1,868 Eastern Europe 468 447 515 577 641
EPS (Adjusted) 128.80 153.20 168.00 184.00 202.00 % Change y/y - (4.5%) 15.4% 12.0% 11.0%
% change Y/Y 18.7% 18.9% 9.7% 9.5% 9.8% Western Europe 760 1,001 1,066 1,123 1,168
% Change y/y - 31.7% 6.5% 5.4% 4.0%
Cash flow statement FY08 FY09E FY10E FY11E FY12E Asia Pacific 924 1,072 1,190 1,273 1,362
£ in millions, year end Dec % Change y/y - 16.0% 11.0% 7.0% 7.0%
Americas 1,052 1,159 1,217 1,278 1,342
EBIT 3,717 4,336 4,695 5,011 5,333 % Change y/y - 10.2% 5.0% 5.0% 5.0%
Depreciation 430 447 465 484 503 Africa & Middle East 513 658 707 760 821
Other items (restructuring) -286 -50 -50 -50 -50 % Change y/y - 28.2% 7.5% 7.4% 8.0%
Dividends from associates 326 359 394 434 477 Toal Operating Income 3,717 4,336 4,695 5,011 5,333
Changes in working capital 295 7 9 11 14 % change Y/Y 23.8% 16.7% 8.3% 6.7% 6.4%
Cash Flow from Operations 4,482 5,099 5,514 5,890 6,278 Operating Margin
Eastern Europe 29.4% 26.2% 27.5% 27.9% 28.4%
Net Capital Expenditure (386) (405) (426) (447) (469) Western Europe 23.6% 24.9% 25.5% 26.4% 26.9%
Net Interest Paid (273) (460) (450) (442) (396) Asia Pacific 34.0% 35.6% 36.3% 36.6% 36.9%
Taxation Paid (943) (1,124) (1,274) (1,371) (1,481) Americas 36.7% 37.6% 37.2% 37.7% 38.2%
Dividends Paid (1,566) (1,985) (2,131) (2,284) (2,452) Africa & Middle East 29.7% 27.3% 27.4% 28.0% 28.8%
Total Operating Margin 30.7% 30.5% 30.9% 31.5% 32.1%
FCF (Pre dividend) 2,880 3,109 3,364 3,630 3,931
Shares Issued (bought back) (506) 0 (750) (750) (750)
Net Borrowings 2,131 0 - - -
Cash Infow/(outflow) 839 1,124 483 597 729
Balance sheet FY08 FY09E FY10E FY11E FY12E Ratio Analysis FY08 FY09E FY10E FY11E FY12E
£ in millions, year end Dec £ in millions, year end Dec
Intangible assets 12,318 12,273 12,228 12,183 12,138 EBITDA Margin 34.2% 33.6% 34.0% 34.6% 35.1%
Other Fixed Assets 6,523 6,653 6,787 6,922 7,061 EBIT Margin (%) 30.7% 30.5% 30.9% 31.5% 32.1%
Stock 3,177 3,272 3,370 3,472 3,576 Net Profit Margin 21.3% 21.5% 21.6% 22.1% 22.7%
Debtors 3,145 3,302 3,467 3,641 3,823
Cash 2,388 3,512 3,996 4,592 5,321 Sales growth 21.0% 17.4% 6.7% 4.7% 4.6%
EBITDA Growth 24.2% 15.3% 7.9% 6.5% 6.2%
Creditors 5,184 5,443 5,715 6,001 6,301 EBIT Growth 23.8% 16.7% 8.3% 6.7% 6.4%
Net Profit Growth 16.7% 18.3% 7.4% 7.2% 7.4%
Capital employed 22,367 23,570 24,133 24,809 25,617 EPS growth 18.7% 18.9% 9.7% 9.5% 9.8%
Shareholders' Funds 6,944 8,134 8,682 9,343 10,136 Net Interest Coverage 9.5 9.4 10.4 11.3 13.5
Minority interests 271 285 299 314 329 Net Debt/EBITDA 2.4 1.8 1.6 1.4 1.2
Provisions 2,991 2,991 2,991 2,991 2,991 Net Debt/Equity 1.4 1.0 0.9 0.8 0.7
Debt 12,161 12,161 12,161 12,161 12,161 Assets/Equity 4.0 3.6 3.4 3.3 3.1
Capital employed 22,367 23,570 24,133 24,809 25,617 ROE 37.2% 37.5% 37.8% 37.6% 37.2%
ROCE 16.6% 18.4% 19.5% 20.2% 20.8%
Net Debt 9,773 8,649 8,165 7,569 6,840
101
(44-20) 7325-5242 07 December 2009
Carrefour
Right assets, right management, right time
Overweight The opportunity in the next cycle
€32.32 We believe that Carrefour has good assets, a good franchise and a sound
management in place to turnaround its operations, and we have confidence that
30 November 2009 management will succeed. In our scenario analysis, we assign 80% probability to a
Price Target: €40 successful turnaround. After 30 years at Nestlé, we believe CEO Lars Olofsson has
the appropriate credentials for the task, given his strong understanding of the
customer, the product and the supplier. We believe that the deep category and
Food Retailing
supplier review the company is undertaking together with the unification of the IT
AC
Jaime Vazquez systems into a common platform are fundamental changes that will bear fruit in
(44-20) 7325-0993 terms of market share from mid 2010.
jaime.vazquez@jpmorgan.com
Flexing upside
Rickin Thakrar
(44-20) 7325-4523
In our scenario analysis, we assign 20% probability to a partial break-up, which
rickin.thakrar@jpmorgan.com
would lead to €52 per share. We estimate that Carrefour could raise proceeds
equivalent to its entire current market cap from the sale of all ex-G4 countries.
Shashank Savla, CFA
(44-20) 7325-9972
Leaving tax considerations aside, we estimate Carrefour could pay shareholders a
shashank.d.savla@jpmorgan.com €34 dividend per share, keeping the current average net debt of c€10.6bn. It would
still own the G4 countries with estimated sales of €55bn, 2009 EBITDA of €2.8bn
and an estimated property value of €14.6bn. We estimate the full break up value at
Flagship reports €68 – we disregard this as a possibility for the moment but it is not unthinkable that
• Right assets, right management, right after selling all the operations mentioned, Italy and Belgium would follow.
time, 24 Nov 09
We believe that we have passed the worst of the deflationary cycle while the base of
Price Performance
comparison is set to get much easier (290bp in the French hypers, 590bp in the
34
€
Spanish hypers, 410bp for the Group overall in 4Q09). We believe that by mid 2010
28
market share trends will improve. Having said all this, should management fail to
22 turn the business around, we believe that Carrefour has sufficient intrinsic value to
protect the share price on the downside.
CARR.PA share price (€)
MSCI-Eu (rebased) Valuation, target price, key risks
Performance (%) Our Dec-10 target price of €40 is based on probability weighted scenarios (€40
successful turnaround (80%), €52 partial break-up (20%)). Our €40 valuation per share
YTD 1M 3M 12M
Abs (%) 17.4% 10.4% -2.4% 14.1% under this scenario for Dec-10 is based on 14.0x 2011E PE and 7.2x EV/ EBITDA. It
Rel (%) -2.4% 9.6% -3.1% -8.3% assumes that the current 14x one year forward multiple is maintained, ie that the stock
goes up in line with 2011 expected EPS growth. The one-year-forward adjusted EV/
EBITDA multiple of 7.5x would still be below the current sector average one year
forward multiple of 8.1x. We believe the key risk is that management fails to execute
the Transformation Plan. We could see more margin pressure than expected as the
company is forced to reduce prices further as the competitive environment sharpens in
its key markets and cost savings do not come through as expected.
Carrefour (CARR.PA;CA FP)
Adj. EPS FY (€) 2.70 1.98 2.30 2.86 Price (€) 32.32
Revenue FY (€ mn) 86,967 85,983 89,584 93,016 Date Of Price 30 Nov 09
EBITDA FY (€ mn) 5,161 4,526 4,909 5,500 Price Target (€) 40.00
EBITA (Calc) FY (€ mn) 3,300 2,681 2,979 3,489 Price Target End Date 01 Dec 10
EV/Revenue FY 0.4 0.4 0.4 0.4 52-week Range (€) 33.67 - 22.06
EV/EBITDA FY 6.7 7.6 7.0 6.2 Mkt Cap (€ bn) 22.2
DPS (Net) FY (€) 1.08 1.08 1.08 1.14 Shares O/S (mn) 687
Adj P/E FY 12.0 16.4 14.0 11.3
102
(44-20) 7325-5242 07 December 2009
Carrefour: Summary of Financials

Sales 82,148 86,967 85,983 89,584 93,016 Net cashflow 3,771 3,400 2,875 3,691 4,160
Growth 5.5% 5.9% (1.1%) 4.2% 3.8% Capex (3,069) (2,918) (2,283) (2,699) (2,742)
EBITDAR 5,980 6,210 5,563 5,989 6,622 Acquisitions (408) 945 0 0 0
% of sales 7.3% 7.1% 6.5% 6.7% 7.1% Working capital change 233 964 (38) 263 300
EBITDA 5,014 5,161 4,526 4,909 5,500 Capital increase/ treasury (614) (939) 0 0 0
% of sales 6.1% 5.9% 5.3% 5.5% 5.9% Dividends (736) (757) (741) (741) (741)
Depreciation (1,723) (1,861) (1,845) (1,930) (2,011) Other (102) 0 0 (370) (400)
EBITA 3,291 3,300 2,681 2,979 3,489
% of sales 4.0% 3.8% 3.1% 3.3% 3.8% Net debt (increase)/ decrease (926) 706 (267) 144 577
Net Interest (526) (562) (303) (582) (551)
Pre-tax profit 2,812 2,214 1,577 2,397 2,937 Net (debt)/ cash (7,359) (6,653) (6,920) (6,776) (6,199)
Tax (807) (743) (602) (695) (852)
Associates 43 52 56 60 64
Minority interests (180) (267) (174) (181) (188)
Reported Net Att. Profit 1,868 1,272 857 1,580 1,961
Adjusted Net Att. Profit 1,821 1,856 1,357 1,580 1,961
No of shares (diluted) 700.1 686.5 686.5 686.5 686.5

EPS (diluted) 2.60 2.70 1.98 2.30 2.86

Total fixed assets 30,597 29,985 30,423 31,193 31,923 EBITA by region
France (mn) 1,624 1,581 1,191 1,375 1,570
Inventories 6,867 6,891 6,214 6,193 6,162 Rest of Europe (mn) 1,216 1,153 937 1,003 1,070
Debtors 3,424 2,919 2,910 3,056 3,198 Latin America (mn) 301 395 431 468 503
Short term investments 0 245 245 245 245 Asia (mn) 218 242 231 294 331
Cash and banks 4,164 5,317 5,317 5,317 5,317
Current assets 16,662 17,292 16,686 17,181 17,693 EBITA margin by region
TOTAL ASSETS 51,931 52,082 51,914 53,179 54,421 France (mn) 4.4% 4.2% 3.1% 3.7% 4.1%
Rest of Europe (mn) 3.9% 3.6% 2.9% 3.0% 3.0%
Total Shareholders' funds 10,663 10,161 10,276 11,115 12,335 Latin America (mn) 3.7% 3.8% 3.8% 3.8% 3.9%
Asia (mn) 4.0% 4.0% 3.3% 3.8% 3.8%
Minority interests 1,107 791 965 1,146 1,334
Provisions 2,147 2,320 2,320 2,320 2,320 Payment period (days) 96.5 91.8 88.5 86.0 84.0
Debt 11,523 12,215 12,482 12,338 11,761 Inventory turnover (days) 38.8 36.6 33.2 31.7 30.4
Trade creditors 17,077 17,276 16,574 16,780 17,018
Other short term creditors 9,414 9,319 9,297 9,479 9,653 Net debt/ shareholders funds 97.9% 111.5% 111.0% 100.6% 86.0%
TOTAL LIABILITIES 51,931 52,082 51,914 53,179 54,421 Net debt/ EV 20.7% 19.4% 20.0% 19.7% -
Interest cover (x) 6.3 5.9 4.4 5.1 6.3
EBITDAR/(interest + rent) 4.0 3.9 4.2 3.6 4.0
103
(44-20) 7325-5242 07 December 2009
Overweight Daimler AG
€33.78
Upside to come from trucks
30 November 2009
In our view, Daimler provides the best investment case in European autos in 2010 on
valuation (trading at a discount of 17% to historic EV/Sales vs. BMW trading near its
Autos
historic EV/Sales multiple), near-term earnings momentum (recovery in US, better
AC
Ranjit A Unnithan price/mix should support the improvement in car division) and recovery in truck end-
(44-20) 7325-8106 markets (consensus is factoring in breakeven truck profits, we believe it is possible to
ranjit.a.unnithan@jpmorgan.com
see truck margins near 2% in 2010, given expected incremental restructuring savings,
in which case there may be 15% of upside to consensus estimates).
Flagship reports
• Daimler AG: See Upside to 2010 Street Flexing upside
Ests on Trucks, 28 Oct 09 We see the biggest upside potential in DAI trucks, which appears to be trading at a
• Daimler AG: Restructuring continues, discount to peers – applying a Volvo-like EV/Sales multiple of 70% would yield a
Europe next?, 14 May 09
fair value of €45 – or about 11% upside to our €40 target price. Further upside in cars
could come from better than expected improvement in US and Europe end markets.
Price Performance An improvement of 1MM SAAR in US/Europe could add another 6% to our €40
target price.
35
€
25 Catalysts – 2010 and beyond
15 For a turnaround of the truck division, we need to see an improvement in the truck
Dec-08 Mar-09 Jun-09 Sep-09 cycle as well as evidence of improved truck margins at DAI (post restructuring at
DAIGn.DE share price (€) NA/Fuso truck divisions). Higher margins in the car division could come from
MSCI-Eu (rebased)
continuing stabilization of luxury market share in developed markets (US/Europe)
and better Price/Mix (vs. peers due to younger product portfolio). Sustainability of
Performance (%) current personnel related savings (worth €1.6B) should provide further upside – the
company is to provide details with FY results.
YTD 1m 3m 12m
Abs 26.6% 2.7% 5.7% 47.9%
Rel 6.8% 1.9% 5.0% 25.5%
Daimler currently trades at 38% EV/Sales vs. historic average of 46%. Our SOTP
based Jul-10 price target of €40.00 uses a target EV/Sales of 45% for Mercedes-Benz
Cars (in-line with BMW’s historical average) and EV/Sales of 54% for trucks (25%
discount to Volvo) and Vans/Buses. Risks to rating and target price include: a delay
in the US recovery could hurt Mercedes volumes; lower than expected
demand/pricing for the E-Class could also provide downside to our estimates.
Weaker than expected truck demand, particularly pricing, could provide downside to
our estimates. Upside risk could come from larger than expected volume recovery in
W Europe (cars, trucks) and a successful implementation of the cost-cutting program.
Daimler AG (DAIGn.DE;DAI GR)

Adj. EPS FY (€) 0.99 (1.63) 1.33 2.39 Price (€) 33.78
EBIT FY (€ mn) 2,730 (1,553) 2,984 4,681 Price Target (€) 40.00
EBIT margin FY 2.8% -2.0% 3.6% 5.2% Price Target End Date 31 Jul 10
EBITDA FY (€ mn) 5,004 3,743 8,775 10,937 52-week Range (€) 37.90 - 17.13
EBITDA margin FY 5.2% 4.9% 10.5% 12.1% Mkt Cap (€ bn) 34.7
Net Attributable Income FY (€ 1,348 (1,647) 1,725 2,913 Shares O/S (mn) 1,027
mn)
DPS (Net) FY (€) 0.60 0.60 0.60 0.60
104
(44-20) 7325-5242 07 December 2009
Daimler AG: Summary of Financials

Profit and Loss Statement Divisional Reporting
Revenues 99,399 95,873 76,797 83,754 90,490 Revenue by division

% change Y/Y -35.0% -3.5% -19.9% 9.1% 8.0% M-B Cars & Smart 52,430 47,772 40,458 45,799 48,234
Gross Margin (%) 24.1% 22.5% 17.0% 21.1% 22.8% Trucks 28,466 28,572 17,897 18,846 22,735
EBITDA (industrial) 11,204 6,933 1,192 4,582 6,151 Services 8,711 9,282 11,078 11,078 10,745
IndustrialEBITDA Margin (%) 12.4% 8.0% 1.8% 6.3% 7.7% Vans 9,341 9,479 5,972 6,569 7,226
OP - pre-restructuring 7,885 5,956 -492 3,020 4,719 Buses 4,350 4,808 4,423 4,423 4,866
OP margin 8.8% 2.8% NM 3.6% 5.2% Other 432 683 -3,032 -2,962 -3,315
% change Y/Y 58.7% -68.7% -156.9% -292.1% 56.9% Inter-segment -4,331 -4,723 - - -
Restructuring 981 -3,481 - - - Operating profit by division

Net interest 471 65 (844) (544) (544) M-B Cars & Smart 4,835 2,498 -633 2,108 2,259
Associate Income 1,053 248 256 288 - Trucks 1,957 1,811 -1,003 177 1,440
Tax (4,326) (1,091) 750 (714) (1,224) Services 630 677 127 404 404
Tax rate % 47.1% 39.0% 31.3% 29.3% 29.6% Vans 571 818 -92 27 224
Net Income (Reported) 3,979 1,348 (1,647) 1,725 2,913 Buses 308 406 219 219 308
Other 1,077 -2,463 -172 48 46
Shares Outstanding 1,037.80 957.70 1,005.64 1,027.40 1,027.40
EPS (reported) 3.88 1.41 -1.64 1.68 2.84 % Operating margin
EPS (adjusted) 4.93 0.99 (1.63) 1.33 2.39 M-B Cars & Smart 9.2% 5.2% -1.6% 4.6% 4.7%
% change Y/Y 30.0% (79.9%) (264.9%) (181.3%) 79.9% Trucks 6.9% 6.3% -5.6% 0.9% 6.3%
Services 7.2% 7.3% 1.1% 3.6% 3.8%
Vans 6.1% 8.6% -1.5% 0.4% 3.1%
Buses 7.1% 8.4% 5.0% 5.0% 6.3%
Other 249.3% -360.6% 5.7% -1.6% -1.4%
Balance Sheet (Industrial Operations) Industrial Cash Flow & Ratio Analysis
Intangibles 5,128 5,964 4,526 5,006 5,492 EBT 8,562 2,129 (2,514) 2,046 3,743
PP&E 14,600 16,022 14,111 12,149 9,078 Tax (4,101) (882) 782 (599) (1,109)
Investments 4,845 4,258 4,258 4,258 4,258 Depreciation & amortization 4,220 3,123 3,298 3,300 3,300
Inventories 13,604 16,244 12,895 13,642 13,265 Change in working capital -3,058 -5,886 3,723 -603 -84
Trade receivables 6,135 6,793 5,942 6,328 6,991 Operating cash flow 5,588 (1,865) 5,096 4,235 6,098
Cash equivalents & marketable sec 14,894 4,664 7,104 6,496 6,808 Net capex -4,270 -3,551 -4,159 -4,086 -5,015
Other Assets 5,700 3,381 3,311 3,332 3,353 FCFe 1,318 -5,416 937 149 1,083
Total Industrial assets 73,092 64,511 59,332 58,395 56,432 Change in net liquidity -3,051 9,806 -2,813 608 -1,583
(+) Financial Services Net Assets 4,390 4,847 4,932 5,210 5,489 Net industrial liquidity (12,912) (3,106) (5,919) (5,310) (6,893)
Total Assets 77,482 69,358 64,264 63,605 61,921 DPS 2.00 0.60 0.60 0.60 0.60
Equity 33,840 28,092 20,318 17,007 15,179 Sales/assets 0.7 0.7 0.6 0.7 0.7
Total Debt 5,019 4,448 4,448 4,448 4,448 Net debt to equity 38.2% 11.1% 29.1% 31.2% 45.4%
Pension 2,656 2,656 2,656 2,656 2,656 Working capital as a % of revenue 14.3% 19.4% 20.2% 19.1% 17.5%
Trade payables 6,730 6,268 5,568 6,099 6,301 ROCE (industrial, 35% tax) 10.6% 9.6% -5.9% 4.4% 8.6%
Other liabilities 29,237 27,894 31,274 33,395 33,337 ROE 10.8% 4.3% -5.4% 5.5% 8.6%
Total Liabilities and Equity 77,482 69,358 64,264 63,605 61,921
105
(44-20) 7325-5242 07 December 2009
Overweight Danone
€40.00
30 November 2009 Potential for re-rating
Price Target: €48 The opportunity in the next cycle
We argue within the Food space Danone is well placed to benefit from deflation
Food & Food Manufacture (lower costs; volume recovery on elasticity), is priced attractively vs. the equity cycle
Pablo Zuanic
AC (both in absolute terms and vs. Nestle), and has stronger volume (boost from lower
(44-20) 7325-4664 prices) and EBIT momentum (lower dairy costs) than direct peers. There are also
pablo.zuanic@jpmorgan.com valid structural reasons to like the stock i.e. its focus on growth categories, global
franchise strength, and the competitive advantage resulting from its range of unique
functional yogurt brands. Dairy volumes, which are a key sentiment driver for the
Flagship reports stock, have shown a solid recovery, accelerating to 7% growth in 3Q09 (+2.7% in 2Q
• Cut Dec’10 Target price to €48 from
and -1.0% in 1Q). Nielsen data for early 4Q has indicated further acceleration in
€52; Keep OW, 19 Nov 09
• Key Issues We Will Track at The volumes and we walked away from the investor seminar with positive sentiments
Investor Day, 17 Nov 09 regarding the potential growth in volumes pinned on higher A&P spend on Activia,
• Keeping OW post rights issue, 06 Jul geographical expansion of Activia and other key brands, and strategy of passing
09 through higher benefits of lower dairy costs to customers vs. competition.
Flexing upside
Price Performance We believe the company should re-rate to 12-13x FV/EBITDA range (post Numico
50 levels) from 10.5x now, once investors are convinced that the company can go back
€ 40 to its LT growth algorithm of high single-digit top line growth, margin expansion,
and EPS growth in the mid to high teens. Our current target price of €48 is based on
30
10.5x our 2011 FV/EBITDA estimates, which is in line with the 5-year average
DANO.PA share price (€)
multiple, but this could be €57 at 12x (€62 at 13x).
MSCI-Eu (rebased)
Besides quarterly results and issue of 2010 guidance (likely in mid February at the time
Performance (%) 4Q results are announced), other catalysts should include: a) moves in dairy costs, b)
YTD 1m 3m 12m retail trends as measured by the monthly Nielsen scanner data in the US and WE, c)
Abs -1.8% -2.3% 4.9% -3.2% commentary from direct read across companies like Mead Johnson, Wimm-Bill-Dann,
Rel -23.3% -2.3% 1.8% -27.3% and Yakult, d) industry news flow around yoghurt, water, and baby nutrition sales trends.

Conservatively, we value the stock by December 2010 at 10.5x 2011E FV/EBITDA
for now, inline with 5 yr average multiples and factoring a 15% premium to Nestle,
which we think is justified given its more focused portfolio, quality growth and
higher emerging market exposure. We rate Danone OW and our Dec 2010 TP is €48.
Risks to our rating and price target include: 1) lackluster dairy volume; 2) steep rise
in dairy costs; and 3) a large dilutive acquisition with questionable strategic rationale.
Groupe Danone (DANO.PA;BN FP)

Adj. EPS FY (€) 2.23 2.34 2.61 2.92 Price (€) 40.00
EBITDA FY (€ mn) 2,782 2,760 2,971 3,263 Date Of Price 30 Nov 09
Revenue FY (€ mn) 15,220 14,986 15,848 16,943 Price Target (€) 48.00
FCF FY (€ mn) 1,048 1,333 1,486 1,684 Price Target End Date 01 Dec 10
Net Debt FY (€ mn) 7,397 6,412 5,331 4,352 52-week Range (€) 44.10 - 31.21
Adj P/E FY 18.0 17.1 15.3 13.7 Mkt Cap (€ bn) 24.5
EV/EBITDA FY 12.0 11.8 10.6 9.3 Shares O/S (mn) 613
EV/Revenue FY 2.2 2.2 2.0 1.8
FCF Yield FY 4.0% 5.1% 5.7% 6.5%
Source: Company data, Bloomberg, J.P. Morgan estimates. Share Count of 613mn shares includes 479mn
pre-rights, 123mn from rights issue and 11mn from dividends paid in shares.
106
(44-20) 7325-5242 07 December 2009
Danone: Summary of Financials

€ in millions, year end Dec FY08 FY09E FY10E FY11E € in millions, year end Dec FY08 FY09E FY10E FY11E
Revenues 15,220 14,986 15,848 16,943 EBIT 2,270 2,310 2,477 2,688
% change Y/Y 5.2% -1.5% 5.8% 6.9% Change In Working Capital 55 - - -
Gross Margin (%) - - - - Depreciation & Amortisation 525 - - -
EBIT 2,270 2,310 2,477 2,688 Interest 439 309 252 207
EBIT Margin (%) 14.9% 15.4% 15.6% 15.9%
% change Y/Y 7.7% 1.8% 7.2% 8.5% Cash Flow From Operations 2,864 123 104 104
EBITDA 2,782 2,760 2,971 3,263 Capex 706 0 0 0
EBITDA Margin (%) 18.3% 18.4% 18.7% 19.3% Free Cash Flow 1,048 1,333 1,486 1,684
% change Y/Y 10.0% -0.8% 7.6% 9.8% Acquisitons/ Divestments 259 0 0 0
Net Interest 439 309 252 207
Profit before tax 1,895 2,002 2,225 2,481 Cash Flow From investing - - - -
Tax 445 480 534 595 Dividends Paid 705 0 0 0
Tax Rate 27.6% 24.0% 24.0% 24.0% Share Repurchase - - - -
Net Profit (Reported) 1,312 1,434 1,601 1,791
% change Y/Y 14.8% 9.3% 11.6% 11.9% Cash flow from financing - - - -
Adjusted Earnings 1,312 1,434 1,601 1,791
Diluted Shares Outstanding 479 613 613 613 Net cash/(debt) at start of year -11,261 -11,055 -6,412 -5,331
EPS (Reported) - - - - Decrease/(Increase) in Net debt 206 4,643 1,081 979
% change y/y - - - - Net cash/(debt) at end of year -11,055 -6,412 -5,331 -4,352
EPS (Adjusted) 2.23 2.34 2.61 2.92
% change Y/Y NM 5.1% 11.6% 11.9%

Assets Per Share Amounts

Cash & Cash Equivalents 591 600 600 600 Basic Earnings per share - - - -
Accounts Receivables 1,534 739 782 836 Diluted Earnings per share 2.74 2.62 - -
Inventories 795 739 782 836 Dividend per share 1.20 0.95 0.95 0.95
Current Assets 4,883 4,967 6,230 7,439
Tangible Assets - - - -
Net Fixed Assets - - - - Adj P/E Multiple 18.0 17.1 15.3 13.7
Total assets 26,775 27,188 28,369 29,766 EV/EBITDA Mutiple 12.0 11.8 10.6 9.3
P/CEPS 10.4 54.5 49.6 49.6
Liabilities
ST Loans 652 450 450 450 Net Debt/Equity 85.3% 49.2% 38.2% 29.0%
Current liabilities 4,898 4,660 4,946 5,256 Net Debt/EBITDA 2.7 2.3 1.8 1.3
Long-term liabilities 11,435 7,777 7,777 7,777
Provisions 0 0 0 0
Total liabilities 18,221 14,201 14,487 14,797
Minority interests 56 56 56 56
Shareholders Equity 8,614 12,987 13,882 14,969
107
(44-20) 7325-5242 07 December 2009
Overweight Deutsche Post DHL

€12.5
30 November 2009 Already well-positioned for wherever recovery and longer-
Price Target: €16.2 term growth come from
Mail and Express Recovery driven operating gearing, internal cost control and a sharper focus on
Damian Brewer
AC profitable business (and shedding unprofitable work) remain key to our view. For
(44-20) 7325-7310 instance, as the Express division returns to historical average margins outside the US,
damian.brewer@jpmorgan.com and US Express losses diminish (due to exit) this could add ~52c to EPS. Meanwhile,
Andy Jones we see scope for the company’s debt strain (including pensions) to fall to just 0.4x
(44-20) 7325-1622 ND/EBITDA by 12E, with prospects for dividend at a 50% payout to reach at least 74c
andrew.r.jones@jpmorgan.com by 11E (5.9% yield). We thus think D Post offers yield and growth. Beyond imminent
recovery, our view on D Post is shaped by its leading positions in Express (top 2
Europe, largest Asia, largest EEMEA), Forwarding (largest in Air, top 3 in Ocean, one
Flagship reports of the three largest in European road), and Contract Logistics (largest in Europe, US and
• DP-DHL and TNT: Calmer conditions
for Q3 - upgrading PTs and EPS, but
globally). We see the company’s possessing platforms primed to exploit new growth
TNT needs change from within to be without requiring large M&A spend.
OW, 15 Oct 09
Flexing upside
• DP-DHL and TNT: Less recovery
upside priced-in at Deutsche Post, 01 Our research on D Post has looked at profit and re-rating upside scenarios, e.g.
Oct 09 Deutsche Post DHL and TNT, 15 Oct 09. Under scenarios of strong Express profit
• Mid-cycle Express suggests 30% recovery to peak EBIT margins of 8% (or more vs. 09E 2.4%) and re-rating (to 8.4x
upside before re-rating, 02 Jun 09 EV/EBITDA) we think D Post could be a €20+ share.
Price Performance Key events for 10E (and beyond) and risks include: (1) the March-10 announcement on
12
capital structure strategy – which we think could create certainty over dividend income;
€
9
(2) progression of peak trade season and profits in Q3-10E (with Q3 results due
6
9/11/2010) and signs for Q4-10E (which should be known by the Q3 results); and (3)
Nov-08 Feb-09 May-09 Aug-09 Nov-09 Bulk domestic German Mail VAT treatment has still be decided by the new
DPWGn.DE share price (€) government. A decision not to impose VAT on the USO operators, as an EU court
MSCI-Eu (rebased)
ruling appears to allow, could see ~14c EPS upgrades.
YTD 1m 3m 12m
We rate D Post OW, and our scenarios based 12-month PT is €16.2. We see both
Abs 5.9% 6.4% 5.4% 14.1%
(dividend) income stronger than sector, and also room for capital growth – with the
Rel -15.6% 6.4% 2.3% -4.1%
latter driven by expanding earnings and also scope for the company to re-rate up (to
closer to TNT’s historical PER of ~13.8x vs. D Post's 12.4x ex PostBank). This
could happen if D Post avoids value-destructive M&A risks that we find
shareholders have historically discounted the rating for. We see this, macro factors,
and the factors outlined above as the key company risk to our PT and rating.
Deutsche Post World Net (DPWGn.DE;DPW GR)

FYE Dec 2007A 2008A 2009E 2010E 2011E 2012E Company Data
Adj. EPS FY (€) 1.57 0.57 0.86 1.21 1.48 1.56 Price (€) 12.45
Revenue FY (€ mn) 56,386 57,210 48,134 50,635 53,117 56,104 Date Of Price 30 Nov 09
EBITDA FY (€ mn) 4,488 1,178 2,196 3,629 3,889 4,124 Price Target (€) 16.20
EBITDA margin FY 8.0% 2.1% 4.6% 7.2% 7.3% 7.4% Price Target End Date 30 Nov 10
EBIT FY (€ mn) 2,133 (966) 541 2,048 2,257 2,481 52-week Range (€) 13.34 - 6.60
Pretax Profit Reported 1,188 -1,066 711 1,656 2,092 2,322 Mkt Cap (€ bn) 15.1
FY (€ mn) Shares O/S (mn) 1,209
Headline EPS FY (€) 1.15 (1.40) 0.80 1.05 1.33 3.05
Headline P/E FY 10.9 NM 15.6 11.9 9.4 4.1
FCF FY (€ mn) 3,884 1,502 (334) 957 1,338 1,554
108
(44-20) 7325-5242 07 December 2009
Deutsche Post: Summary of Financials

Revenues 56,386 57,210 48,134 50,635 53,117 EBIT 2,133 (966) 541 2,048 2,257
% Change Y/Y -11.0% 1.5% -15.9% 5.2% 4.9% Depreciation & amortization 2,196 2,662 1,654 1,581 1,631
Gross Margin (%) - - - - - Change in working capital & Other 5,588 1,746 1,199 2,591 3,487
EBITDA (basic) 4,488 1,178 2,196 3,629 3,889 Cash flow from operations 10,076 2,924 3,395 6,220 7,376
% Change Y/Y -20.5% -73.8% 86.4% 65.3% 7.1%
EBITDA Margin (%) 8.0% 2.1% 4.6% 7.2% 7.3% Taxes (278) (325) (252) (331) (418)
EBIT 2,133 (966) 541 2,048 2,257 Capex (1,174) (77) (1,034) (1,058) (1,493)
% Change Y/Y -44.9% -145.3% -156.0% 278.3% 10.2% Net Interest (252) 158 (247) (245) (238)
EBIT Margin (%) 3.8% -1.7% 1.1% 4.0% 4.3% Free cash flow 3,884 1,502 (334) 957 1,338
Net Interest income/(expense) (945) (100) 169 (392) (166)
Earnings before tax 1,188 -1,066 711 1,656 2,092 Disposals/(purchase) (94) (1,036) (1,307) (31) 0
% change Y/Y -58.2% -189.8% -166.7% 133.0% 26.3% Equity raised/repaid 73 21 21 21 21
Tax (charge) (173) (200) (142) (331) (418) Dividends paid (903) (1,087) (735) (736) (740)
Tax as a % of PBT 14.6% (18.8%) 20.0% 20.0% 20.0% Other (490) 112 6,303 0 0
Net Income (Reported) 1,383 (1,688) 966 1,270 1,608
% change Y/Y -27.8% -222.1% -157.3% 31.4% 26.7% Beginning debt 3,083 2,858 2,412 -1,251 -1,462
Shares Outstanding (Av.m) 1,205.1 1,208.6 1,209.4 1,210.2 1,211.0 Ending debt 2,858 2,412 -1,251 -1,462 -2,081
EPS (Reported, basic, €) 1.15 -1.40 0.80 1.05 1.33 DPS (€, declared, gross) 0.90 0.60 0.60 0.60 0.74
% Change Y/Y (28.4%) (221.7%) (157.2%) 31.3% 26.6%

Cash and cash equivalent 4,683 1,350 5,591 5,802 6,421 EBITDA margin (%) 8.0% 2.1% 4.6% 7.2% 7.3%
Accounts Receivables 6,377 5,591 4,714 4,959 5,203 Operating margin (%) 3.8% NM 1.1% 4.0% 4.3%
Inventories 248 269 226 238 250 Net margin (%) 2.5% NM 2.0% 2.5% 3.0%
Others 198,348 235,237 4,735 4,890 5,043 EBIT margin on Incremental Sales (%) 24.9% -376.1% -16.6% 60.3% 8.4%
Current assets 209,656 242,447 15,267 15,889 16,916 FCF margin (%) 6.9% 2.6% (0.7%) 1.9% 2.5%
LT investments 1,557 1,149 3,451 3,461 3,482 Sales growth (%) -11.0% 1.5% -15.9% 5.2% 4.9%
Net fixed assets 24,207 19,368 18,049 17,229 16,798 Attributable net profit growth (%) -27.8% -222.1% -157.3% 31.4% 26.7%
Total assets 235,420 262,964 36,767 36,579 37,196 EPS growth (%) (28.4%) (221.7%) (157.2%) 31.3% 26.6%
Liabilities Interest coverage (x) (2.3) (9.7) (3.2) (5.2) (13.6)

ST loans 193,293 232,848 8,140 7,906 8,014 Effective Interest Rate (IS) (%) 31.8% 3.8% -29.2% -28.9% -9.4%
Payables 5,384 4,980 4,238 4,326 4,529 Net debt /EBITDA (x) 1.2 0.8 0.7 0.6 0.4
Others 473 351 389 908 1,146 Sales/assets (x) 0.2 0.2 1.3 1.4 1.4
Total current liabilities 199,150 238,179 12,767 13,140 13,688 Assets/Equity (%) 1704.3% 2669.1% 416.3% 389.7% 367.8%
Long term debt 10,181 4,097 6,097 6,097 6,097 ROE (%) 9.1% -29.0% 7.5% 14.1% 16.7%
Other liabilities 12,276 10,836 9,072 7,957 7,299 ROCE (%) 8.8% -7.5% 4.3% 21.1% 22.6%
Total liabilities 221,607 253,112 27,936 27,194 27,084 ROIC (%) 5.2% 8.3% 6.3% 9.9% 12.9%
Shareholders' equity 13,813 9,852 8,831 9,386 10,112 ROIC/WACC 0.5 0.9 0.7 1.0 1.3
BVPS (€) 11 8 7 8 8
109
(44-20) 7325-5242 07 December 2009
Overweight Fortis
€2.8
30 November 2009 Becoming a normal company again
Fortis is set to once again become a “normal” company in 2010, as it unwinds legacy
Insurance issues associated with the break-up of the old Fortis. As this happens, we believe the
Duncan Russell, CFA
AC large discount in the share price versus our fair value of €4 should gradually
(44-20) 7325-4831 disappear and this makes it one of our top picks.
duncan.x.russell@jpmorgan.com
Flexing upside
We have valued the insurance operations on 1x FY08e embedded value, compared to
Flagship reports a historical P/EV of 1.45x for the insurance sector. Taking the P/EV to 1.45x would
• Lots of capital = lots of options, taking
add another €0.9 to our price target.
target price to €4, 03 Sep 09
• Fortis: Initiate with OW. Underpinned,
Overlooked, 07 May 09 Catalysts – 2010 and beyond
The catalysts are associated with becoming a normal company. These include: (a)
clarity on the legal risk associated with the expected publication of the report by the
Price Performance Dutch experts in 1Q10; (b) the resolution of debt agreements with BNP expected in
3.5
2010; (c) the ability to monetize the BNP call option in 2H10.
€ 2.0
0.5
Dec-08 Mar-09 Jun-09 Sep-09 Our Dec-10 SOTP target price is €4.0 per share. We break this valuation down into
FOR.BR share price (€) that for the operations (including the surplus cash) at €3 per share and that for the
MSCI-Eu (rebased)
options at €1 per share. The main risk that could prevent our rating and price target
from being achieved is litigation, particularly from former disgruntled Fortis
shareholders.
Performance (%)
YTD 1m 3m 12m
Abs 201.9% -5.0% -11.2% 325.6%
Rel 182.1% -5.8% -11.9% 303.2%
Fortis (FOR.BR;FORB BB)

Adj. EPS FY (€) (0.25) 0.41 0.17 0.20 Price (€) 2.81
Adj P/E FY NM 6.9 16.1 13.8 Date Of Price 30 Nov 09
BV/Sh FY (€) 3 3 3 3 Price Target (€) 4.00
Headline EPS FY (€) (11.40) 0.41 0.17 0.20 Price Target End Date 31 Dec 10
Embedded value FY (€ mn) 4,922 8,021 8,422 8,843 52-week Range (€) 3.42 - 0.60
NAV FY (€ mn) 6,029 7,134 7,358 7,621 Mkt Cap (€ bn) 7.2
NAV/Sh FY (€) 2.4 2.8 2.8 3.0 Shares O/S (mn) 2,582
Net Attributable Income FY (€ (585) 1,057 449 526
mn)
110
(44-20) 7325-5242 07 December 2009
Fortis: Summary of Financials

Profit and Loss Statement (IFRS) Ratio Analysis (IFRS)
Premiums 8,448 11,337 12,557 13,299 Shares Outstanding 2,457.05 2,582.36 2,582.36 2,582.36
% change Y/Y (8.4%) 34.2% 10.8% 5.9%
Life 5,796 8,658 9,279 9,897 EPS -11.40 0.41 0.17 0.20
% change Y/Y (11.9%) 49.4% 7.2% 6.7% % change Y/Y (595.7%) (103.6%) (57.5%) 17.2%
Non Life 2,680 2,679 3,278 3,402 DPS - - - -
% change Y/Y 0.2% (0.0%) 22.4% 3.8% % change Y/Y - - - -
Investment income (3,128) 1,241 1,408 1,533
Other income 3,902 1,562 610 369 Payout Ratio - - - -
Total revenues 9,222 14,140 14,576 15,200
% change Y/Y (34.3%) 53.3% 3.1% 4.3% NAV/Share 2.4 2.8 2.8 3.0
Insurance related expenses (5,199) (9,451) (9,843) (10,310) EV/share - - - -
Admin expenses (644) (618) (608) (598)
Acquisition expenses (912) (885) (922) (963) ROE -8.6% 13.4% 5.5% 6.3%
Other expenses (2,944) (2,726) (2,425) (2,445) RONAV -9.7% 14.8% 6.1% 6.9%
Earning before tax -477 460 778 885 ROEV -11.9% 13.2% 5.3% 5.9%
% change Y/Y -494.2% -196.3% 69.3% 13.7%
Tax (108) (115) (188) (215)
Tax Rate 22.6% (24.9%) (24.2%) (24.3%)
Minorities 25 100 132 150
Net income (Reported) (585) 1,057 449 526
% change Y/Y -512.0% -280.7% -57.5% 17.2%
Balance sheet (IFRS) Ratio Analysis

ASSETS 92,870 100,429 107,022 114,230 Key ratios:

Cash 5,933 7,699 7,853 8,010 Combined ratio - - - -
Investments 64,656 70,424 76,838 83,863 Life op'g margin on assets - - - -
Loans 2,511 2,536 2,561 2,587 Banking cost to income - - - -
Deferred tax 117 117 117 117 AM Cost income ratio - - - -
Other 17,133 17,133 17,133 17,133
Intangibles including goodwill 1,366 1,366 1,366 1,366 PBT Break up
Belgium Life (3.4%) - - -
LIABILITIES 85,560 91,314 97,683 104,628 Belgium Non Life (27.7%) - - -
Policyholder liabilities 65,829 72,184 79,130 86,726 Belgium Total (31.0%) 58.0% 56.6% 60.3%
Bank loans 8,759 9,149 8,571 7,920 International Life 11.7% - - -
Debt 4,670 3,680 3,680 3,680 International Non Life (22.4%) - - -
Other 6,231 6,231 6,231 6,231 International Total -10.7% 40.6% 26.6% 24.9%
Shareholder's equity 6,795 7,900 8,124 8,387 General & Others 141.7% 1.4% 16.9% 14.8%
Minorities 515 1,215 1,215 1,215
Total Equity and Liabilities 92,870 100,429 107,022 114,230 Mix of Total revenue
Belgium Life 51.6% - - -
Belgium Non Life 19.0% - - -
Belgium Total 70.5% 59.0% 59.8% 59.3%
International Life 6.6% - - -
International Non Life 16.3% - - -
International Total 22.9% 30.2% 30.9% 31.6%
General & Others 6.6% 6.8% 5.4% 5.2%
111
(44-20) 7325-5242 07 December 2009
Overweight HSBC
707p
30 November 2009 Life beyond Household
We see a return to the ‘old HSBC’, but with an increased emerging markets
Banks
contribution and with less US (c.1% Group PBT from North America by 2012E vs.
AC
Carla Antunes da Silva 13% in 2002). The run off of the HFC loan portfolio is happening more rapidly than
(44-20) 7325-8215 anticipated, and whilst delinquency rates are still elevated, the provisioning charge
carla.antunes-silva@jpmorgan.com
for the group is declining rapidly. We estimate PFS North America will account for
Sunil Garg 44% of 2011E group provisions compared to c.70% at the peak in H1 08. This we
(852) 2800-8518
believe will greatly aid the Group returning to a 15-20% RoE compared to a RoE of
sunil.garg@jpmorgan.com
5% in 2008.
Amit Goel, CFA
(44-20) 7325-6924
Strong cash flow generation – We see cash flow generation of $5-10bn per annum
amit.x.goel@jpmorgan.com
for the next few years, depending on scrip dividend take up. We expect the core tier
Joseph Leung 1 ratio to go above 10% in 2011E, which is the level recently targeted by the
(852) 2800-8517
company. Whilst there will be questions on how the group will deploy this excess
joseph.mj.leung@jpmorgan.com
capital, we expect it will be used to grow the emerging markets franchises, and we
see upside risk to dividend expectations – we estimate a dividend yield of 3.5% in
Flagship reports 2011E alongside a free cashflow generation of $10bn that same year.
• Upgrading Estimates and PT –
Remains our top pick in the UK and
Flexing upside
one of our preferred in Europe, 10 Nov
09 If we roll our estimates forward to 2012E, we can see group provisioning declining to
• Upgrading to Overweight – Life Beyond 90bps from c.220bps 2010E and c.150bps 2011E. This leads to EPS increasing 30% to
Household, 04 Aug 09 $1.27 per share. Furthermore AFS reserve reversals could add c.10-14% to NAV.
• UK Banks – The Return of UK
Investment Banking – A Review of
Capital Requirements and Profitability
Outlook, 21 Jul 09 At the results presentations throughout the year we will see the rate at which the HFC
portfolio is being run-off, and the associated losses. There is further potential for
surprise versus our expectations if loss experience is less severe. At the end of Q3
Price Performance
09, the run off portfolio was $85.6bn, and the total $124.8bn.
700
p 500
300 Our PT of 900p for Dec 10 is based on our SoP analysis. Risks to our rating and
Dec-08 Mar-09 Jun-09 Sep-09 price target include: (i) HSBC is exposed to general macro variables such as a
HSBA.L share price (p) slowdown or rebound in world GDP growth, higher or lower interest rates in all of
MSCI-Eu (rebased)
the economic regions, and changes in FX rates; (ii) credit exposure is predominantly
Performance (%) to the US consumer (both mortgages and unsecured) in terms of loan losses so any
YTD 1m 3m 12m
changes in asset quality could impact group earnings.
Abs 22.6% 4.9% 5.2% 15.9%
Rel 2.8% 4.1% 4.5% -6.5%
HSBC Holdings plc (HSBA.L;HSBA LN)

FYE Dec 2007A 2008A 2009E 2010E Company Data
Adj. EPS FY ($) 1.48 1.16 0.50 0.71 Price (p) 707
Operating profit FY ($ mn) 22,709 5,201 10,512 15,401 Date Of Price 30 Nov 09
Net Attributable Income FY ($ 19,133 5,728 8,185 12,653 Price Target (p) 900
mn) Price Target End Date 31 Dec 10
Headline EPS FY ($) 1.65 0.47 0.50 0.71 52-week Range (p) 767 - 270
ROE FY 16.1% 5.0% 7.4% 9.7% Mkt Cap (£ bn) 113.42
Headline P/E FY 6.8 24.0 22.4 15.8 Shares O/S (mn) 16,043
BV/Sh FY ($) 3 2 2 2
P/BV FY 3.4 5.0 6.7 6.8
112
(44-20) 7325-5242 07 December 2009
HSBC: Summary of Financials

Income Statement Ratio Analysis
$ in millions,year-end Dec FY08 FY09E FY10E FY11E FY12E FY08 FY09E FY10E FY11E FY12E
Per Share Data
Net interest income 42,563 38,710 38,225 38,305 39,778 EPS reported($) 0.47 0.50 0.71 0.98 1.27
% YoY change 12.6% -9.1% -1.3% 0.2% 3.8% EPS Adjusted(p) 1.16 0.50 0.71 0.97 1.26
Non-interest income 43,563 33,483 32,487 36,677 39,282 % YoY change -21.8% -56.9% 42.3% 37.3% 29.7%
Fees & commissions 20,024 23,684 21,767 22,948 24,112 DPS($) 0.64 0.34 0.38 0.42 0.46
% YoY change -9.0% 18.3% -8.1% 5.4% 5.1% % YoY change -28.9% -46.9% 11.8% 10.5% 9.5%
% YoY change -33.3% 7.9% 4.4% 3.8% 2.1% Payout ratio 136.3% 67.7% 53.2% 42.9% 36.2%
Other income 16,979 2,720 3,327 6,057 7,338 BV per share($) 7.73 7.18 7.56 8.18 9.07
Total operating revenues 86,126 72,194 70,713 74,981 79,061 NAV per share($) 5.47 5.49 5.91 6.57 7.48
% YoY change -0.4% -16.2% -2.1% 6.0% 5.4% Shares outstanding 12,105 17,288 17,638 17,988 18,338
Admin expenses -36,052 -27,995 -27,159 -29,795 -31,191
% YoY change -1.6% -22.3% -3.0% 9.7% 4.7% Return ratios FY08E FY09E FY10E FY11E FY12E
Other expenses -9,372 -7,520 -8,682 -9,800 -10,558 RoRWA 0.50% 0.69% 1.03% 1.39% 1.79%
Pre-provision operating profit 40,702 36,678 34,871 35,387 37,311 Pre-tax RoE 8.4% 11.4% 13.8% 17.5% 20.2%
% YoY change 4.7% -9.9% -4.9% 1.5% 5.4% RoE 5.2% 7.5% 9.8% 12.6% 14.8%
Loan loss provisions -24,937 -26,166 -19,471 -13,329 -8,119 RoNAV 7.4% 10.2% 12.7% 15.9% 18.2%
Other provisions
Other non recurrent items -6,458 1,893 2,377 2,456 2,538 Revenues FY08E FY09E FY10E FY11E FY12E
Pretax profit 9,307 12,405 17,778 24,514 31,730 NIM (NII / AIEA) 3.51% 3.42% 3.48% 3.43% 3.37%
% YoY change -59.7% 33.3% 43.3% 37.9% 29.4% Non-IR / average assets 2.5% 1.4% 1.4% 1.6% 1.7%
Tax -2,809 -2,940 -3,644 -5,393 -6,981 Total rev / average assets 4.3% 3.7% 3.6% 3.7% 3.7%
% Tax rate 30.2% 23.7% 20.5% 22.0% 22.0% NII / Tot revenues 49.4% 53.6% 54.1% 51.1% 50.3%
Minorities -770 -1,280 -1,480 -1,480 -1,480 Fees / tot revenues 23.2% 32.8% 30.8% 30.6% 30.5%
Net Income (Reported) 5,728 8,185 12,653 17,641 23,270 Trading / Tot revenues 7.6% 9.8% 10.5% 10.2% 9.9%
Balance sheet
$ in millions, year-end Dec FY08 FY09E FY10E FY11E FY12E FY08 FY09E FY10E FY11E FY12E
ASSETS Cost ratios

% YoY change -5.0% -8.0% -1.5% 4.4% 7.6% Cost / assets 1.80% 1.37% 1.40% 1.47% 1.46%
Loan loss reserves 26,166 0 0 0 0 Staff numbers -- -- -- -- --
Investments 311,772 339,198 337,019 355,233 375,789
Other interest earning assets 227,523 247,538 245,948 259,240 274,241 Balance Sheet Gearing FY08E FY09E FY10E FY11E FY12E
% YoY change -19.5% 8.8% -0.6% 5.4% 5.8% Loan / deposit 84% 76% 76% 76% 77%
Average interest earning assets 1,160,391 1,105,722 1,090,877 1,140,941 1,223,104 Investment / assets 12% 13% 13% 13% 13%
Goodwill 27,357 29,105 29,105 29,105 29,105 Loan / assets 37% 33% 33% 33% 33%
Other assets 1,029,136 1,147,476 1,140,292 1,200,345 1,268,119 Customer deposits / liabilities 44% 44% 43% 43% 43%
Total assets 2,527,465 2,592,396 2,568,188 2,696,520 2,867,012 LT Debt / liabilities 8% 8% 8% 8% 8%
LIABILITIES Asset Quality / Capital FY08E FY08E FY10E FY11E FY12E

Customer deposits 1,115,327 1,130,529 1,115,058 1,167,661 1,237,335 Loan loss reserves / loans 2.73% 0.00% 0.00% 0.00% 0.00%
% YoY change 1.8% 1.4% -1.4% 4.7% 6.0% NPLs / loans 2.6% 4.1% 4.4% 3.3% 5.4%
Interbank funding 145,442 148,566 146,654 153,687 162,826 Loan loss reserves / NPLs 103.2% 0.0% 0.0% 0.0% 0.0%
Average interest bearing liabs 1,469,895 1,491,072 1,470,788 1,540,287 1,632,164 Growth in NPLs 38.3% -100.0% -100.0% -100.0% -100.0%
Other liabilities 953,453 966,449 953,223 998,192 1,057,754 RWAs 1,147,974 1,212,007 1,242,551 1,293,323 1,306,023
Retirement benefit liabilities 3,888 3,889 3,889 3,889 3,889 % YoY change -1.4% 5.6% 2.5% 4.1% 1.0%
Shareholders' equity 93,591 124,043 133,346 147,209 166,262 Core Tier 1 72,872 101,881 111,184 125,047 144,100
Minorities 6,638 6,943 6,943 6,943 6,943 Total Tier 1 95,336 119,041 128,344 142,207 161,260
Total liabilities 2,527,465 2,592,396 2,568,188 2,696,520 2,867,012
Source: Company data, J.P. Morgan estimates.
113
(44-20) 7325-5242 07 December 2009
Overweight Iberdrola Renovables

€3.2
30 November 2009 Global leader in wind energy
Global wind installed capacity grew from 39.4GW in 2003 to 120.8GW in 2008. The
Utilities Global Wind Energy Council estimates that the market should grow again to c. 3x its
Javier Garrido
AC current size in 5 years, to 332GW in 2013.Iberdrola Renovables, as global leader in
(34 91) 516-1557 wind energy, is ideally placed to benefit from such growth. It has the local presence
javier.x.garrido@jpmorgan.com in the biggest wind markets (37% of the global wind capacity is in the US, Spain and
Nathalie Casali UK, countries where IBR is a top 2 player), its parent company Iberdrola provides
(44-20) 7325-9023 financing (unlike for competitors whose capex plans rely on hard to come by bank
nathalie.x.casali@jpmorgan.com finance) and the agreement with Gamesa announced in October 2009 provides
Sarah Laitung geographical diversification in the pipeline to secure long-term growth opportunities.
(44-20) 7325-6826
sarah.l.laitung@jpmorgan.com Flexing upside
We estimate 5-yr EPS CAGR in 09-14E of 19.9% and this results in our €4.0 PT. If
we were to incorporate IBR’s 10-year growth outlook, we would get to a €4.7 PT.
Flagship reports
• Southern European Utilities: Not the
space to play the recovery. OW EDP Catalysts – 2010 and beyond
(defensive) and IBR (US wind growth), Q4 09 results release in early February should finally show strong y-o-y growth as
07 Oct 09 comparables are easier to beat and the Spanish PPA provides stable pricing.
• Iberdrola Renovables: And IBR finally
gets access to the (higher) forward
In H1 2010 we expect IBR to announce the signing of PPAs for the remainder of the
price and not just the spot price, 22 Jul
09 US capacity currently under construction. Investors should get comfort that IBR is
capable of beating its WACC recurrently by 200bp+ once the benefit of the Spanish
PPA is seen in the P&L and the signing of PPAs with US utilities shows the value of
Price Performance (€) IBR’s geographic diversification and market knowledge. Such comfort should trigger
in our view a re-rating of the stock to incorporate longer term value creation.
3.2
€
2.6
During 2010 we expect the US legislative bodies to discuss again the implementation
2.0
of nationwide incentives for the development of renewable energies. A positive
surprise would come from the approval of new legislation before end-2010.
IBR.MC share price (€)
MSCI-Eu (rebased)
Our end-10 DCF-based PT of €4.0 includes the value of the assets in operation and
Performance (%) under construction, the pipeline to be developed by end-15 and just 7.5% of the
YTD 1m 3m 12m residual pipeline. We discount FCFs at WACCs of 5.75% to 7.2%, depending on the
Abs 5.1% 5.8% -0.5% 25.7% geography and the financing. Downside risks to our rating and PT include a potential
Rel -16.4% 5.8% -3.6% 1.6% reduction in available funds from Iberdrola and delays in the signing of US PPAs.
Investors should be mindful that wind output can be very volatile on a quarterly
basis, with a direct influence on quarterly earnings momentum.
Iberdrola Renovables (IBR.MC;IBR SM)

EBITDA FY (€ mn) 1,186 1,344 1,636 1,947 2,409 Price (€) 3.20
EV/EBITDA FY 14.8 13.9 12.4 11.4 9.9 Date Of Price 30 Nov 09
Net Attributable Income FY 390 394 505 572 714 Price Target (€) 4.00
(€ mn) Price Target End Date 31 Dec 10
Adj. EPS FY (€) 0.09 0.09 0.12 0.14 0.17 52-week Range (€) 3.59 - 2.41
Adj P/E FY 34.6 34.3 26.7 23.6 18.9 Mkt Cap (€ bn) 13.5
Gross Yield FY 0.8% 1.0% 1.5% 1.9% 2.6% Shares O/S (mn) 4,224
Source: Company data, Reuters, J.P. Morgan estimates.
114
(44-20) 7325-5242 07 December 2009
Iberdrola Renovables: Summary of Financials

Profit and Loss Statement Valuation ratios
€ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E € in millions, year end Dec FY08 FY09E FY10E FY11E FY12E
Sales 2,030 2,300 2,774 3,323 4,131 P/E (recurrent) 34.5 34.2 26.7 23.6 18.9
Gross Operating Profit 1,186 1,344 1,636 1,947 2,409 P/E (reported) 34.7 34.4 26.8 23.7 19.0
Depreciation & Amortisation (476) (619) (720) (847) (1,008) Price to book value 1.2 1.3 1.2 1.2 1.1
Operating Profit 710 724 916 1,100 1,400 EV/EBITDA 14.8 13.9 12.4 11.4 9.9
Associate Income - - - - - EV/EBIT 24.8 25.7 22.1 20.2 17.0
Net Interest (127) (153) (185) (269) (364) FCF yield (pre divs, post mins) (%) -18.0% -6.7% -11.5% -13.6% -10.6%
Profit before tax 582 571 732 831 1,037 Dividend yield (%) 0.8% 1.0% 1.5% 1.9% 2.6%
Income Tax 185 171 220 251 315
Minority Interests 7 6 7 8 8 Per share
Discontinued items - - - - - €
Group Net profit 390 394 505 572 714 FY08 FY09E FY10E FY11E FY12E
Recurrent EPS 0.09 0.09 0.12 0.14 0.17
Cashflow statement Reported EPS 0.09 0.09 0.12 0.14 0.17
€ in millions, year end Dec Reported DPS 0.02 0.03 0.05 0.06 0.08
FY08 FY09E FY10E FY11E FY12E Adjusted Free cash flow -0.6 -0.2 -0.4 -0.4 -0.3
Funds from operations - - - - -
Working Capital (854) (473) 39 (286) (316) Performance, leverage and return ratios
Cash flow from operations 2,515 1,788 2,783 3,043 3,757 %
Capex & Acquisitions -3,087 -3,415 -3,306 -3,478 -3,296 FY08 FY09E FY10E FY11E FY12E
Other investing cash flows - - - - - Gross operating margin 73.1% 73.2% 73.9% 73.4% 73.0%
Cash from investing -4,161 -1,750 -3,216 -3,515 -3,500 Operating margin 43.8% 39.4% 41.4% 41.5% 42.4%
Dividends paid - - - - - Operating profit growth y-o-y 104.6% 2.1% 26.5% 20.1% 27.2%
Cash from financing 2,507 800 1,557 1,839 1,430 Recurrent Income growth y-o-y 232.4% 0.9% 28.2% 13.4% 24.8%
Free Cash flow before dividends -2,434 -906 -1,557 -1,839 -1,430 Reported ROE 3.5% 3.7% 4.6% 5.0% 6.0%
Free cash flow, adjusted -2,434 -906 -1,557 -1,839 -1,430 ROCE (EBIT) 4.7% 4.6% 5.2% 5.5% 6.3%
Net debt/ (equity+minorities) (%) 36.1% 46.6% 61.0% 76.0% 85.3%
Balance Sheet Net debt /EBITDA (%) 3.4 3.8 4.1 4.5 4.3
€ in millions, year end Dec EBITDA / net interest -9.3 -8.8 -8.9 -7.2 -6.6
FY08 FY09E FY10E FY11E FY12E Reported net income / dividends 3.7 3.0 2.6 2.2 2.0
Net fixed assets 18,073 19,204 21,700 24,368 26,860
Current assets 2,144 2,135 1,625 1,848 2,176 Market valuation
Total assets 20,216 21,339 23,325 26,216 29,036 € in millions
Total Debt - - - - - FY08 FY09E FY10E FY11E FY12E
Shareholders' equity 11,115 10,758 10,932 11,346 11,945 Share price (year-end / current) 3.20
Other liabilities - - - - - Number of Shares (million) 4,224.1 4,224.1 4,224.1 4,224.1 4,224.1
Total liabilities 9,028 10,507 12,319 14,797 17,018 Market Capitalisation 13,496 13,496 13,496 13,496 13,496
Net debt 4,035 5,050 6,709 8,678 10,255 EV adjustment 4,108 5,124 6,783 8,752 10,329
Capital Employed - - - - - EV 17,604 18,620 20,279 22,248 23,825
115
(44-20) 7325-5242 07 December 2009
Ipsen
A winning combination: strong growth & a pipeline
€36.38 Ipsen remains our favourite Mid-Cap stock, offering the largest potential upside of
37% to our price target of €50 with significant near-term growth (16% 2 yr CAGR)
30 November 2009
and 2010 full of key catalysts which should substantially increase the value attributed
Price Target: €50 to the transformation asset taspoglutide and could take the stock above €50.
Pharmaceuticals Significant near-term EPS growth driven by margin expansion: We expect

Richard Vosser
AC margins to expand from 14.0% in 2009 to 20.4% in 2011 driven by operational
(44-20) 7742-6652 leverage from 2008 US expansion, even excluding any taspoglutide royalty income.
richard.vosser@jpmorgan.com This leads to a substantial 16% EPS CAGR for these two years. We estimate the
Alexandra Hauber existing business more than underpins current levels, being worth €39.5 per share.
(44-20) 7742-6655 / (1-312) 325-3694
alexandra.m.hauber@jpmorgan.com
Flexing upside
James D Gordon Near-term growth supplemented by a large highly profitable pipeline asset:
(44-20) 7742-6654 Taspoglutide, a potential best in class GLP-1 for diabetes, should drive substantial
james.d.gordon@jpmorgan.com
future growth. Not only should the drug easily reach blockbuster status (we expect
multiple billions) but Ipsen incurs no costs to develop or sell it, instead receiving a
Flagship reports 15% royalty from Roche. Thus every €100m of taspo sales yields 120bp of margin
• Ipsen: Compelling Opportunity even
expansion and adds €0.14 to EPS. We estimate that taspo could add €20 to Ipsen’s
with More Conservative Growth Driver
Assumptions, 13 Mar 09 value of which only €7 is included in our €50 TP (€13 for US taspo is excluded).
• Ipsen: PT increased to €49. More than
Taspoglutide: Next Pipeline Assets, 17 Catalysts – 2010 and beyond
Sep 09 2010 will significantly improve the visibility of taspoglutide: Continued positive
• Ipsen: 2010 a key year for taspoglutide,
Phase III data culminating in presentation at the ADA in June should confirm the
16 Nov 09
best in class potential, which together with clarity over the US path to market for the
GLP-1 class from liraglutide or exenatide LAR approval (potentially in the next 4
Price Performance months) should substantially increase the value reflected in the Ipsen shares.
40
€ 30
20 Our 2010 year-end price target of €50 is based on our Embedded Value for Ipsen
Dec-08 Mar-09 Jun-09 Sep-09 minus US forecasts of taspoglutide. Our target price implies 13.9x 2012E earnings, a
IPN.PA share price (€) 19% premium to the Mid-Cap sector on 2012E P/E (11.7x), which is more than
MSCI-Eu (rebased)
justified by a substantially better long-term growth rate versus the sector (26% vs.
Performance (%) 14% 2009-2013E EPS CAGR). Key risks to our rating and price target: (1)
YTD 1M 3M 12M Underwhelming execution of new product launches, (2) Underwhelming Phase III
Abs (%) 30.0% 4.9% 4.9% 38.1% data for taspoglutide could impact the product’s commercial potential, (3) FDA's
Rel (%) 10.2% 4.1% 4.2% 15.7% safety concerns over the GLP-1 class could remain an overhang for US taspoglutide.
Ipsen (IPN.PA;IPN FP)

Adj. EPS FY (€) 1.92 1.88 1.97 2.52 Price (€) 36.38
EBIT FY (€ mn) 208 136 183 241 Price Target (€) 50.00
EBIT margin FY 20.0% 12.1% 15.6% 18.8% Price Target End Date 31 Dec 10
Net Income FY (€ mn) 147 137 145 191 52-week Range (€) 39.25 - 24.10
Headline EPS FY (€) 1.75 1.63 1.73 2.28 Mkt Cap (€ bn) 3.1
Headline P/E FY 20.7 22.4 21.1 16.0 Shares O/S (mn) 84
Adj P/E FY 19.0 19.3 18.4 14.4
116
(44-20) 7325-5242 07 December 2009
Ipsen: Summary of Financials

Profit and Loss statement Cash flow statement
€ in millions FY07A FY08A FY09E FY10E FY11E € in millions FY07A FY08A FY09E FY10E FY11E
Revenue 994 1,038 1,120 1,172 1,281 EBIT 209 208 136 183 241
% change Y/Y 5.1% 4.5% 7.9% 4.6% 9.3% Depreciation & amortisation 41 51 67 72 77
Gross Margin (%) 80.0% 78.8% 79.2% 78.5% 78.4% Change in working capital (38) 7 (11) (10) (11)
EBITDA 256 260 203 255 318 Taxes (54) (33) (30) (34) (48)
% change Y/Y 12.9% 1.4% -22.0% 25.7% 24.9% Cash flow from operations 236 261 163 213 274
EBITDA Margin (%) 25.8% 25.0% 18.1% 21.7% 24.8% Capex (59) (61) (70) (72) (74)
EBIT 209 208 136 183 241 Disposals/ (purchase) (27) (10) 88 70 40
% change Y/Y 11.6% -0.6% -34.7% 34.8% 31.9% Net Interest 7 12 (4) (3) (1)
EBIT Margin (%) 21.0% 20.0% 12.1% 15.6% 18.8% Free cash flow 115 138 94 104 150
Interest 7 12 (4) (3) (1) Equity raised/(repaid) (25) (9) 0 0 0
Earnings before tax 216 192 167 180 240 Other 122 86 77 63 92
% change Y/Y 15.1% -11.0% -12.9% 7.5% 33.5% Dividends paid (50) (55) (59) (62) (58)
Tax (54) (33) (30) (34) (48) Beginning cash 284 241 237 360 473
as % of EBT 25.3% 17.4% 18.0% 19.0% 20.0% Ending cash 241 237 360 473 588
Net Income (Reported) 151 147 137 145 191 DPS 0.61 0.70 0.73 0.69 0.91
% change Y/Y 4.6% -2.3% -6.8% 5.8% 32.0%
Shares Outstanding 84.0 84.0 84.0 84.0 84.0
EPS (reported) 1.79 1.75 1.63 1.73 2.28
% change Y/Y 4.5% (2.2%) (7.3%) 6.2% 32.0%
€ in millions FY07A FY08A FY09E FY10E FY11E € in millions FY07A FY08A FY09E FY10E FY11E
Cash and cash equivalents 247 240 360 473 588 EBITDA Margin (%) 25.8% 25.0% 18.1% 21.7% 24.8%
Accounts receivable 216 218 234 249 266 Operating margin 21.0% 20.0% 12.1% 15.6% 18.8%
Inventories 87 116 124 133 142 Net profit margin 15.2% 14.2% 12.2% 12.4% 15.0%
Others 86 116 124 132 141 SG&A/Sales -40.4% -42.8% -44.5% -43.2% -40.2%
Current assets 637 689 843 988 1,137 R&D/Sales -18.6% -17.6% -18.1% -18.9% -18.6%
LT investments 124 14 14 14 14 Sales growth 5.1% 4.5% 7.9% 4.6% 9.3%

Net fixed assets 311 402 505 505 502 Net profit growth 15.1% -11.0% -12.9% 7.5% 33.5%
Total assets 1,323 1,570 1,825 1,970 2,117 EPS growth 5.6% (1.0%) (1.9%) 4.9% 27.8%
Liabilities Interest coverage 31.0 17.4 30.4 58.7 195.8

ST loans 15 11 11 11 11 Dividend Coverage 3.0 2.5 2.2 2.5 2.5
Payables 104 104 111 119 127 Net debt/equity -28.3% -9.2% -15.3% -25.6% -33.2%
Others 171 212 227 242 257 Sales/assets 1.3 1.5 1.6 1.7 1.7
Total current liabilities 275 316 338 360 384 Assets/equity 1.7 1.8 1.8 1.8 1.8
Long term debt 4 149 198 186 181 ROCE 19.6% 16.2% 12.5% 11.9% 14.6%
Other liabilities 243 236 301 349 362 ROE 19.7% 17.7% 14.8% 14.1% 16.9%
Total liabilities 522 701 837 895 927
Shareholders' equity 801 868 988 1,075 1,190
BVPS 9.5 10.3 11.8 12.8 14.2
117
(44-20) 7325-5242 07 December 2009
Overweight JCDecaux
€15.15
30 November 2009 A long-term growth story, set to benefit from ad pick up in '10
JCDecaux remains one of our top picks in the sector for three main reasons. First, we do not
Media – Outdoor Advertising expect the outdoor industry to face the structural issues that have impacted the traditional
Filippo Pietro Lo Franco
AC media. Second, with CCO still suffering from its intercompany debt exposure to its high
(44-20) 7325-9779 leveraged holding company CCMO (expected to approach its covenant limit of 9.5x by late
filippo.p.lofranco@jpmorgan.com ’09/early ’10) and CBS Outdoor recording an operating income loss of US$-98m in 9M09,
Julie Duval we see two possible scenarios: i) consolidation of the global outdoor market with the
(44-20) 7325-9414 acquisition by JCDecaux of CCO/CBS Outdoor (we estimate JCD would need to pay a
julie.e.duval@jpmorgan.com maximum of US$3.4bn for CBS Outdoor to make a deal at least EPS neutral on a 2 year
basis); ii) a more rational behavior of CCO/CBS outdoor outside the US. Finally, we expect
a recovery in organic revenue growth which would boost profitability owing to the high
Flagship reports operating leverage of the business. We expect organic revenue CAGR in the next three
• JCDecaux. Things are moving in the
years (’09-’11E) of 5.5% following an expected 12.3% decline in FY09 (in line with
right direction, 12 Nov 09
• JCDecaux. Higher than expected H109 management’s guidance of -12.5%) and 7.6% CAGR in the ’06-’08 period.
results. Lower than expected capex
Flexing upside
guidance, 03 Aug 09
Our scenario analysis points to at least €1.9 achievable upside to our base case forecasts.
The improving competitive environment could result in: i) Street Furniture EBITDA
Price Performance margins returning to mid-cycle margin of 43% (vs JPMe of 39%). This would add €1.9 to
18 our PT; ii) Capex returning to historical average level of c€170m (vs JPMe of €225m).
This would add €3.7 to our PT; iii) Organic revenue growth is the key driver of EPS in
€ 12
’10 and ’11 – higher than expected organic revenue growth in ’10 (e.g. +6.3% vs +4.3%)
6 and ’11 (e.g. 9.3% vs 7.4%) would increase EPS by 30% and add €4.7 to our PT.
JCDX.PA share price (€)
MSCI-Eu (rebased) The acquisition of a major competitor would be one clear catalyst and we expect the
market to respond positively for the reasons highlighted previously. A second
important driver would be a pick up the organic revenue growth in ’10 which we
Performance (%) expect to grow by 4.3%. Finally the market will monitor JCDecaux capex and we
YTD 1m 3m 12m think a decline below €200m would be a very good catalyst.
Abs 22.7% 9.6% -3.7% 41.1%
Rel 1.2% 9.6% -6.8% 17.0%
With EV/EBITDA10E of 8.6x JCD trades at a 9% discount to its historical average
(9.5x), 23% discount to peak (11.0x in ’06) and 17% discount to its US peer CCO.
We have a DCF-based Dec-10 PT of €18.30 (8.4% WACC, 3.0% terminal growth).
Key risks to our rating and price target are: 1) higher than expected maintenance
capex in ’09 and ’10; 2) lower than expected revenue in ’09 and no rebound in ’10;
3) a major acquisition at a price perceived too high by the market; 4) a smaller than
expected contribution from recent contracts.
JCDecaux (JCDX.PA;DEC FP)
FYE Dec 2007A 2008A 2009E 2010E 2011E Company Data
Adj. EPS FY (€) 0.99 0.83 0.09 0.40 0.80 Price (€) 15.15
EV/EBITDA FY 7.4 7.4 11.1 8.6 6.2 Price Target (€) 18.30
EV/Revenue FY 2.0 1.9 2.0 1.9 1.6 Price Target End Date 31 Dec 10
EV/Operating Profit FY 11.74 17.29 40.63 24.20 12.90 52-week Range (€) 16.50 - 7.32
EBITDA margin FY 26.4% 25.4% 18.1% 21.7% 26.2% Mkt Cap (€ bn) 3.4
Revenue FY (€ mn) 2,107 2,169 1,890 1,970 2,115 Shares O/S (mn) 223
EBITDA FY (€ mn) 555 550 343 427 555
EBIT FY (€ mn) 350 236 94 152 267
118
(44-20) 7325-5242 07 December 2009
JCDecaux: Summary of Financials

Revenue 2,107 2,169 1,890 1,970 2,115 EBITA 379 311 135 194 309
% change Y/Y 8.2% 2.9% -12.9% 4.3% 7.4% Depreciation & amortisation 174 267 207 233 245
EBITDA 555 550 343 427 555 Change in working capital (21) 68 (16) (4) (8)
% change Y/Y 4.0% -1.0% -37.7% 24.7% 29.8% Other -161 -165 -84 -98 -125
EBITDA Margin (%) 26.4% 25.4% 18.1% 21.7% 26.2% Cash flow from operating activities 373 452 243 325 422
EBITA 379 311 135 194 309
% change Y/Y 4.2% -18.0% -56.4% 43.3% 59.4% Net Capex (306) (304) (225) (202) (197)
EBITA Margin 18.0% 14.3% 7.2% 9.9% 14.6% Disposals/ (purchase) 16 7 7 7 7
Interest (51) (28) (43) (38) (27) Other investing cash flow 272 300 218 195 190
Earnings before tax 299 208 51 114 240 Cash flow from investing activities -19 2 0 0 0
% change Y/Y 5.7% -30.2% -75.5% 123.7% 110.3%
Tax (92) (63) (15) (34) (72) Equity raised/(repaid) 23 (31) 0 0 0
as % of EBT 30.9% 30.2% 30.2% 30.2% 30.2% Debt raised/(repaid) - - - - -
Minorities (4) (19) (4) (4) (4) Dividends paid (98) (105) 0 0 0
Net Income 221 184 20 89 176 Other financing cash flow - - - - -
% change Y/Y 7.8% -16.7% -89.3% 351.9% 98.6% Change in cash -25 13 28 134 236
Reported EPS 0.99 0.49 0.03 0.36 0.80 Net debt/(cash) 720 707 678 544 308
Adjusted EPS 0.99 0.83 0.09 0.40 0.80 EV FCF 104 190 61 161 252
DPS 0.44 0.00 0.00 0.00 0.00 Equity FCF 67 148 18 123 225

Accounts receivable 658 672 614 640 687 Operating margin 16.6% 10.9% 5.0% 7.7% 12.6%
Other current assets 26 31 31 31 31 Personnel costs % sales 19.8% 19.9% 21.9% 20.7% 19.6%
Net Current assets 973 943 870 901 957
Organic sales growth 8.8% 6.3% -12.3% 4.3% 7.4%
LT investments 347 318 318 318 318 Sales growth 8.2% 2.9% -12.9% 4.3% 7.4%
Net fixed assets 1,028 1,057 1,105 1,075 1,031 Net profit growth 7.8% -16.7% -89.3% 351.9% 98.6%
Other LT assets 109 99 91 91 91 Adj EPS growth 7.3% NM NM 351.9% 98.6%
Intangible Assets 1,519 1,469 1,395 1,385 1,383 FCF growth -63.4% 121.2% -87.8% 582.7% 82.8%
Total assets 3,976 3,885 3,780 3,772 3,780
Interest coverage (x) 6.8 8.5 2.2 4.0 9.9
Liabilities Net debt/EBITDA 1.3 1.3 2.0 1.3 0.6
ST loans 107 52 52 52 52 Net debt to equity 36.9% 36.3% 34.6% 26.6% 13.8%
Payables 662 712 624 650 698 Sales/assets 0.5 0.6 0.5 0.5 0.6
Other current liabilities 51 53 53 53 53 Capex/sales 14.5% 14.0% 11.9% 10.3% 9.3%
Total current liabilities 820 817 729 755 803 FCF conversion 29.7% 80.2% 64.8% 105.9% 94.4%
Long term debt 749 749 721 587 351 ROCE 8.6% 6.4% 2.3% 3.8% 6.7%
Total LT liabilities 1,164 1,098 1,070 952 733
119
(44-20) 7325-5242 07 December 2009
KPN
Best in class cost-cutting, confident in bullish 2010 targets
Overweight
€11.83 KPN’s revenue growth has deteriorated from +0.8% (Q1) to -5.2% (Q3) as macro
30 November 2009 pressures have intensified. Nevertheless with mgmt aggressively cutting costs, the
Price Target: €15
company has successfully grown its EBITDA by 4% y/y over the last two quarters.
With savings structural (FTE reductions, improved supplier terms etc) we believe
this should prove sustainable, thereby offering scope for operational leverage through
Telecom Services the next cycle. KPN also has greater than average revenue sensitivity to a macro
Akhil Dattani
AC recovery given its high corporate sector exposure (1/3 of revs) and its focus on the
(44-20) 7325-6337 low-end (more economically vulnerable) segment in Germany (24% of revs).
akhil.dattani@jpmorgan.com
We also see two structural attractions to KPN’s portfolio. Firstly, we continue to
Hannes Wittig believe German mobile consolidation remains feasible, and positions E-Plus as a buy-
(44-20) 7325-8310 out candidate. Such expectations seem well supported by recent UK and Swiss
hannes.c.wittig@jpmorgan.com
consolidation. Historic transaction multiples (c.6.5x EBITDA) suggest meaningful
upside potential to our E-Plus valn (4.7x). Secondly, with the Dutch mobile market
Flagship reports having consolidated from 5 to 3 players, we may start to see meaningful market repair.
• Q3 results likely to trigger consensus Flexing upside
earnings and FCF upgrades, 28 Oct 09
We currently model 09-15E group rev growth of 0.3%. Assuming a 2% CAGR
• Confident in 2010 guidance. Dutch
mobile & E+ could offer upside, 01 Oct (macro recovery and Dutch market repair) would raise EBITDA by c.3.5% pa and
09 our TP from €15 to €16.5. If we assume E-Plus is sold for 6.5x EBITDA this would
• Increased confidence in 2010 further increase our TP to €18 (tax implications are not considered), 53% upside.
guidance, 29 Jul 09
1. FY09 results (26 Jan): Expect mgmt to deliver €5.2bn+ EBITDA and reiterate 2010
Price Performance guidance of >€5.5bn. Confirmation of a €1bn buyback would be well received given
14
concerns that this may be reduced by German spectrum auction costs.
€ 11
2. German spectrum auction (Q2 2010): We believe the cost of spectrum will be less
8
than feared and believe there is some chance that O2 and E-Plus decide to jointly bid
for spectrum therefore offering KPN access to valuable 800Mhz spectrum.
KPN.AS share price (€)
MSCI-Eu (rebased)
3. E-Plus revenue recovery (Q2 2010). Expect management to deliver on its
“rationalization” plans. Expect E-Plus to once again begin to take market share.
Performance (%)
4. Q3 results: Should confirm that management is on track to achieve (or beat) its
YTD 1m 3m 12m FY10 EBITDA guidance of >€5.5bn (cons €5.35bn, JPMe €5.5bn).
Abs 13.9% -4.3% 8.8% 12.1%
Rel -7.6% -4.3% 5.7% -12.0% Valuation, target price, key risks
Our Dec-10 SoTP DCF based TP is €15/share (27% upside). KPN trades on a 2010E
EFCF yield of 12% (sector 11%). The key risk to our rating and price target is that
mgmt are unable to continue to offset revenue pressures through cost cutting.
KPN (KPN.AS;KPN NA)
FYE Dec 2008A 2009E 2010E 2011E 2012E 2013E Company Data
Adj. EPS FY (€) 0.77 0.91 1.11 1.14 1.19 1.24 Price (€) 11.83
Revenue FY (€ mn) 14,602 13,629 13,657 13,720 13,800 13,784 Date Of Price 30 Nov 09
EBITDA FY (€ mn) 5,058 5,199 5,472 5,445 5,434 5,416 Price Target (€) 15.00
EBITDA margin FY 34.6% 38.1% 40.1% 39.7% 39.4% 39.3% Price Target End Date 31 Dec 10
EBIT FY (€ mn) 2,597 2,822 3,104 3,084 3,090 3,103 52-week Range (€) 12.59 - 9.00
EBIT margin FY 17.8% 20.7% 22.7% 22.5% 22.4% 22.5% Mkt Cap (€ bn) 19.1
Tax rate FY (29.1%) (26.5%) (25.5%) (25.5%) (25.5%) (25.5%) Shares O/S (mn) 1,615
DPS (Gross) FY (€) 0.60 0.69 0.80 0.84 0.87 0.91
120
(44-20) 7325-5242 07 December 2009
KPN: Summary of Financials

Revenues 14,602 13,629 13,657 13,720 13,800 Cash EBITDA 5,058 5,199 5,472 5,445 5,434
% Change Y/Y 15.6% -6.7% 0.2% 0.5% 0.6% Interest (597) (674) (599) (661) (700)
EBITDA 5,058 5,199 5,472 5,445 5,434 Tax (522) (570) (700) (789) (798)
% Change Y/Y 3.2% 2.8% 5.3% -0.5% -0.2% Other - - - - -
EBITDA Margin 34.6% 38.1% 40.1% 39.7% 39.4% Cash flow from operations 4,066 3,807 4,010 3,832 3,849
EBIT 2,597 2,822 3,104 3,084 3,090
% Change Y/Y 3.9% 8.6% 10.0% -0.6% 0.2% Capex PPE (1,925) (1,784) (1,913) (1,952) (1,790)
EBIT Margin 17.8% 20.7% 22.7% 22.5% 22.4% Net investments 226 50 150 150 50
Net Interest 704 763 749 761 750 CF from investments (1,699) (1,734) (1,763) (1,802) (1,740)
PBT 1,887 2,053 2,348 2,317 2,334 Dividends (981) (1,039) (1,146) (1,225) (1,245)
% change Y/Y -2.6% 8.8% 14.4% -1.3% 0.7% Share (buybacks)/ issue (1,153) (889) (1,000) (500) (500)
Net Income (clean) 1,344 1,515 1,740 1,716 1,729
% change Y/Y -49.2% 12.7% 14.8% -1.3% 0.7% CF to Shareholders (2,134) (1,928) (2,146) (1,725) (1,745)
Average Shares 1,753 1,660 1,568 1,499 1,456 FCF to debt 233 145 102 305 364
Clean EPS 0.77 0.91 1.11 1.14 1.19
% change Y/Y NM 19.0% 21.5% 3.2% 3.8% OpFCF (EBITDA - PPE) 3,133 3,414 3,559 3,492 3,645
DPS 0.60 0.69 0.80 0.84 0.87 EFCF pre Div, PPE 2,454 2,350 2,429 2,209 2,386

Cash and cash equivalents 1,199 2,430 2,532 2,837 3,200 EBITDA margin 34.6% 38.1% 40.1% 39.7% 39.4%
Accounts Receivables 2,397 2,227 2,257 2,287 2,317 EBIT Margin 17.8% 20.7% 22.7% 22.5% 22.4%
ST financial assets - - - - - Net profit margin 9.2% 11.1% 12.7% 12.5% 12.5%
Others 121 (98) (98) (98) (98) Capex/sales 14.6% 15.4% 13.3% 12.0% 11.6%
Current assets 3,854 4,686 4,813 5,143 5,531 Depreciation/Sales 13.0% 11.5% 11.1% 11.0% 10.7%
LT investments - - - - -
Net fixed assets 20,059 19,813 19,707 19,342 18,825 Revenue growth 15.6% -6.7% 0.2% 0.5% 0.6%
Total assets 23,913 24,499 24,520 24,484 24,357 EBITDA Growth 3.2% 2.8% 5.3% -0.5% -0.2%
ST loans 1,165 420 320 220 120 EPS Growth NM 19.0% 21.5% 3.2% 3.8%
Payables 4,113 2,350 2,375 2,400 2,425
Others 3,999 3,309 3,700 3,639 3,492 Net debt/EBITDA 2.1 2.1 1.9 1.9 1.8
Total current liabilities 5,796 3,032 4,352 4,602 4,764 CF to Shareholders (2,134) (1,928) (2,146) (1,725) (1,745)
Long term debt 10,876 15,124 15,224 15,324 15,424 FCF to debt 233 145 102 305 364
Other liabilities - - - - -
Total liabilities 20,153 21,203 21,619 21,583 21,461 OpFCF (EBITDA - PPE) 3,133 3,414 3,559 3,492 3,645
Shareholders' equity 3,759 3,296 2,900 2,901 2,895 EFCF pre Div, PPE 2,454 2,350 2,429 2,209 2,386
121
(44-20) 7325-5242 07 December 2009
Overweight LVMH
€69.76
Best in class
30 November 2009
Price Target: €77.0 1) Sustained rush to established brands in the early stages of the upcycle
The brands that fared best in the downturn usually are the ones that continue to do
Luxury & Sporting Goods well at the early stages of the upcycle and this despite tougher comps. This is because
Melanie A Flouquet
AC consumers continue to chase quality/established brands and because retail leads
(33-1) 4015-4485 wholesale. LVMH’s leading position in leather goods (LV), wines & spirits (possible
melanie.a.flouquet@jpmorgan.com recovery in cognac, less evident in champagne) and selective distribution (Sephora)
Corinna Beckmann should put it in a strong position in the early stages of the upturn.
(44-20) 7325-3938 2) A strong China story
corinna.x.beckmann@jpmorgan.com
We often hear investors pointing out that they own Swatch for its Omega brand
exposure to China. Omega certainly has a strong footing in China but so does LV (18%
Flagship reports
of LV’s Sales are to the ML Chinese consumer, equivalent to Omega in relative terms
• Luxury Uncovered : Four key themes and bigger in absolute terms) and Hennessy. What was long perceived as a male
for 2010 Sales growth, 10 Nov 09 dominated watch and suits market has fast hooked up to leather goods and LV.
• LVMH : Quality top line, 20 Oct 09 Flexing upside
Our FY10E LVMH forecasts, albeit already slightly higher than consensus (2%
Price Performance higher on EBIT), include relatively conservative Sales and EBIT estimates at
70
LVMH’s key divisions. In a more optimistic case scenario and more specifically
€ 50
assuming that Wines & Spirits delivers 7% organic sales growth (vs JPME 5% on -
12% comp), that Fashion & Leather Goods reaches 9% organic sales growth (vs
30
JPME 7%), and Selective distribution 5% (vs JPME 2%), this would raise our Group
10E EBIT forecast by an additional 6%. The market has focused on LVMH as an
LVMH.PA share price (€)
MSCI-Eu (rebased) acquirer but we believe the Group may consider selling some of its smaller brands,
which are earnings dilutive and a drain on management attention.
Performance (%)
The next newsflow is FY09 Results in Feb. As highlighted above, strong brands
YTD 1m 3m 12m (LV) tend to sustain outperformance in the early stages of the upcycle despite tough
Abs 46.0% -1.3% 3.5% 61.1% comps, LV should sustain good momentum in Q4 09 and FY10 vs peers.
Rel 24.5% -1.3% 0.4% 37.0%
LVMH, in our view, offers the best risk-reward proposition in the sector. While our
Dec 10 DCF-based price target implies limited upside (+10%), it is the highest in our
neutral sector stance, and our SOP implies more upside (+25%). It is unwarranted in
our view that LVMH has derated vs its peers despite a higher earnings visibility in 09
and 10. CDior is back on a 15% discount to its NAV, at the peak of its historical
range, and although we are not positively surprised by CDior Couture, CDior holding
is back to being an interesting way to play LVMH. Key risks include: 1) factors
impacting traveling flows incl the Swine flu and forex, 2) a W dip but not expected
by our economists, 3) large expensive acquisition, although unlikely for now.
LVMH (LVMH.PA;MC FP)
Adj. EPS FY (€) 4.22 3.77 4.28 5.00 Price (€) 69.76
EBIT FY (€ mn) 3,628 3,237 3,435 3,915 Price Target (€) 77.00
Net Attributable Income FY (€ 2,026 1,785 2,025 2,366 52-week Range (€) 76.80 - 39.08
mn) Mkt Cap (€ bn) 33.4
Adj P/E FY 16.5 18.5 16.3 14.0 Shares O/S (mn) 479
EV/Revenue FY 2.3 2.3 2.3 2.1
EV/EBITDA FY 9.5 10.3 9.8 8.7
122
(44-20) 7325-5242 07 December 2009
LVMH: Summary of Financials

Revenues 16,481 17,193 16,948 17,389 18,598 EBIT 3,555 3,628 3,237 3,435 3,915
% Change Y/Y 7.7% 4.3% (1.4%) 2.6% 7.0% Depreciation & amortization 470 514 563 556 577
Gross margin (%) 64.9% 65.0% 64.2% 64.7% 65.1% Change in working capital (474) (730) (95) 159 47
EBITDA 4,025 4,142 3,800 3,991 4,492 Other items - net (1,093) (1,121) (1,266) (1,223) (1,322)
% Change Y/Y 11.0% 2.9% (8.3%) 5.0% 12.6% Cash flow from operations 2,458 2,291 2,440 2,927 3,217
EBIT 3,555 3,628 3,237 3,435 3,915
% Change Y/Y 12.1% 2.1% (10.8%) 6.1% 14.0% Capex (1,293) (1,560) (805) (837) (904)
Net Interest (207) (257) (232) (173) (131) Other investing cashflow 0 0 0 0 0
Other, net (171) (167) (167) (80) (80) Cashflow from investing (1,293) (1,560) (805) (837) (904)
Reported PBT 3,177 3,204 2,838 3,182 3,705 Dividend received (827) (946) (950) (954) (1,035)
% Change Y/Y 5.9% 0.9% (11.4%) 12.1% 16.4% Equity 0 (134) 0 0 0
Tax (853) (893) (867) (970) (1,111) Debt 28 (94) 0 0 0
% of PBT 26.8% 27.9% 30.5% 30.5% 30.0% Other financing cashflow - - - - -
Minorities (299) (285) (186) (186) (228) Cashflow from financing (799) (1,174) (950) (954) (1,035)
Net Income (Reported) 2,025 2,026 1,785 2,025 2,366
% Change Y/Y 7.8% 0.0% (11.9%) 13.4% 16.8% Exchange rate differences (44) 87 0 0 0
Shares Outstanding (diluted) 478.8 475.6 475.6 475.6 475.6 Increase/(decrease) in cash 322 (356) 685 1,137 1,278
Adj EPS 4.19 4.22 3.77 4.28 5.00
% change Y/Y 12.3% 0.7% (10.6%) 13.4% 16.8%
Fully diluted EPS 4.15 4.20 3.75 4.26 4.97
% change Y/Y 12.6% 1.2% (10.6%) 13.4% 16.8%

Cash and cash equivalent 1,559 1,013 1,698 2,834 4,113 EBITDA margin 24.4% 24.1% 22.4% 23.0% 24.2%
Accounts Receivables 4,104 3,694 3,754 3,655 3,763 EBIT margin 21.6% 21.1% 19.1% 19.8% 21.1%
Inventories 4,812 5,767 5,728 5,721 5,859 Net profit margin 12.3% 11.8% 10.5% 11.6% 12.7%
Others - - - - - SG&A/Sales (43.3%) (43.9%) (45.1%) (44.9%) (44.0%)
Current assets 10,475 10,474 11,180 12,210 13,734
Net fixed assets 20,266 21,103 21,345 21,626 21,953 Interest Cover 17.2 14.1 14.0 19.9 30.0
Total assets 30,741 31,577 32,525 33,836 35,687 Net debt to Total Capital 25.9% 26.2% 21.8% 15.3% 8.1%
Net debt to equity 24.7% 27.9% 23.7% 14.8% 6.3%
ST Borrowings 3,138 1,847 1,847 1,847 1,847 Sales/assets 53.6% 54.4% 52.1% 51.4% 52.1%
Payables 2,095 2,292 2,254 2,243 2,362 Assets/Equity 2.7 2.4 2.3 2.2 2.1
Others 2,537 2,476 2,441 2,504 2,678 ROE 18.2% 16.5% 13.3% 13.9% 14.8%
Total current liabilities 7,770 6,615 6,542 6,594 6,887 ROCE 16.2% 15.3% 12.9% 13.4% 15.0%
Provisions 5,123 4,224 4,224 4,224 4,224
Long term debt 2,477 3,738 3,738 3,738 3,738 DPS 1.60 1.60 1.60 1.62 1.86
Other liabilities 2,843 3,113 3,113 3,113 3,113 Dividend payout ratio 37.5% 37.4% 42.4% 37.8% 37.2%
Minorities 938 990 984 975 933
Total Liabilities & SH Equity 30,741 31,577 32,525 33,836 35,687
BVPS 24 27 29 32 35
123
(44-20) 7325-5242 07 December 2009
Roche
2010: critical to raise appreciation of the pipeline potential
SFr164.30 We expect 2010 to be the critical year to reset market expectations in terms of
Roche’s pipeline potential. Consensus currently views Roche as a 10% Core EPS
30 November 2009
grower, whereas we have high conviction the company can grow Core EPS at mid-
Price Target: SFr 237 teens, at least until 2013, and possibly beyond. If consensus is right, the current 10%
premium to the mid caps on 2011E Core EPS offers only limited upside, however if
Pharmaceuticals our mid-teens scenario plays out, this valuation dramatically undervalues Roche.
AC
Alexandra Hauber The difference comes from 3 factors: Actemra, taspoglutide and margin
(44-20) 7742-6655 / (1-312) 325-3694
alexandra.m.hauber@jpmorgan.com improvement. Consensus sees Actemra and taspoglutide as just about reaching
blockbuster sales. In contrast, we expect both to become $3bn+ opportunities.
Richard Vosser
Resolution of regulatory uncertainty for both should result in significant uplifts to
(44-20) 7742-6652
richard.vosser@jpmorgan.com consensus EPS. Further pipeline newsflow in 2010 could result in additional upside.
James D Gordon
Consensus projects margin improvement just below 500bps from 2009 to 2013, in
(44-20) 7742-6654 contrast we model a 790bp margin improvement. Consensus estimates suggest the
james.d.gordon@jpmorgan.com market doesn’t believe in profitability improvements at Roche beyond “low hanging
fruit” of the Genentech synergies, despite significant scope from operating leverage.
Flagship reports
• 2nd Phase of Margin Expansion - In Flexing upside
Depth Model Review, 06 May 09 Consensus earnings for 2013 could be 30-40% too low. In 2010, we see several
• What Roche needs to offer on July 23 triggers for consensus expectations for Roche’s medium-term earnings to increase,
to transform this undervalued growth with the R&D day showcasing the pipeline. Such an “upgrade” of consensus 2013
opportunity, 17 Jun 09 forecasts has the potential to also expand the multiple: valuing Roche in-line with the
• Price target increased to SFr195 on
increased visibility or Roche’s superior
2013 mid-cap multiple (10.7x) on upgraded consensus forecasts (by 40%) would
growth profile, 31 Jul 09 result in a share price of SFr 259.
Price Performance 2010 will offer rich pipeline newsflow: Actemra PDUFA (Jan 8), FDA decision on
200 competitor liraglutide and phase III data for: taspoglutide, Avastin in 3 further
SwF 160
metastatic indications, and potentially triple negative adjuvant BC, pertuzumab,
120 Lucentis in DME, all with a positive risk reward and little downside in our view.
Dec-08 Mar-09 Jun-09 Sep-09 R&D day on March 18 offers Roche the chance to showcase its pipeline, with the
ROG.VX share price (SwF opportunity to focus on the commercial potential of the late stage pipeline.
MSCI-Eu (rebased)
Performance (%)
Our SFr 237 2010YE price target is based on our EmV of SFr 215, with a 10%
YTD 1M 3M 12M
Abs (%) 1.1% -0.2% -2.5% 0.3% premium. Our PT implies 15.6x 2011E Core EPS, 11% premium to the mid cap
Rel (%) -18.7% -1.0% -3.2% -22.1% sector. Key risks to our rating and price target include further delays to US Actemra
approval or an underwhelming launch.
Roche (ROG.VX;ROG VX)

Price (SF) 164.30
Adj. EPS FY (SF) 11.04 11.80 12.97 15.20
Date Of Price 30 Nov 09
Revenue FY (SF mn) 45,617 49,061 50,006 54,038
Price Target (SF) 237.00
EBIT FY (SF mn) 13,924 13,139 16,261 18,658
Price Target End Date 30 Dec 10
EBITDA FY (SF mn) 16,569 16,886 21,193 21,288
52-week Range (SwF) 174.70 - 122.80
Net Income FY (SF mn) 8,969 7,853 10,740 12,705
Mkt Cap (SF bn) 113.7
Adj P/E FY 14.9 13.9 12.7 10.8
Shares O/S (mn) 692
Headline EPS FY (SF) 10.24 9.10 12.50 14.79
Headline P/E FY 16.0 18.1 13.1 11.1
124
(44-20) 7325-5242 07 December 2009
Roche: Summary of Financials

SwF in millions FY07A FY08A FY09E FY10E FY11E SwF in millions FY07A FY08A FY09E FY10E FY11E
Revenue 46,133 45,617 49,061 50,006 54,038 EBIT 14,468 13,896 15,502 16,261 18,658
% change Y/Y 9.7% -1.1% 7.5% 1.9% 8.1% Depreciation & amortisation 2,594 2,645 3,590 2,568 2,630
Gross Margin (%) 134.7% 135.0% 134.0% 131.5% 129.6% Change in working capital (1,207) (524) (1,380) (288) (1,229)
EBITDA 17,062 16,569 16,886 21,193 21,288 Taxes (4,494) (3,514) (2,512) (3,259) (3,680)
% change Y/Y 18.8% -2.9% 1.9% 25.5% 0.4% Cash flow from operations 18,816 18,364 17,523 23,700 22,986
EBITDA Margin (%) 37.0% 36.3% 34.4% 42.4% 39.4% Capex (3,403) (2,598) (3,187) (3,187) (3,283)
EBIT 14,468 13,924 13,139 16,261 18,658 Disposals/ (purchase) (3,256) (3,422) 0 0 0
% change Y/Y 23.3% -3.8% -5.6% 23.8% 14.7% Net Interest 782 395 3 (15) (36)
EBIT Margin (%) 31.4% 30.5% 26.8% 32.5% 34.5% Free cash flow 10,919 12,252 11,824 17,254 16,023
Interest 834 236 (2,219) (2,053) (2,017) Equity raised/(repaid) 1,085 (98) 0 0 0
Earnings before tax 15,304 14,161 10,922 14,230 16,683 Other 6,310 7,003 6,200 3,398 6,312
% change Y/Y 21.6% -7.5% -22.9% 30.3% 17.2% Dividends paid (3,027) (4,051) (4,400) (5,127) (5,624)
Tax (3,867) (3,317) (2,512) (3,259) (3,680) Beginning cash 3,210 3,755 4,915 7,404 10,863
as % of EBT 25.3% 23.4% 23.0% 22.9% 22.1% Ending cash 3,755 4,915 7,404 10,863 17,679
Net Income (Reported) 9,761 8,969 7,853 10,740 12,705 DPS 4.60 4.72 4.53 6.20 7.33
% change Y/Y 24.2% -8.1% -12.4% 36.8% 18.3%
EPS (reported) 11.16 10.24 9.10 12.50 14.79
% change Y/Y 23.6% (8.3%) (11.1%) 37.4% 18.3%
SwF in millions FY07A FY08A FY09E FY10E FY11E SwF in millions FY07A FY08A FY09E FY10E FY11E
Cash and cash equivalents 3,755 4,915 7,404 10,863 17,679 EBITDA Margin (%) 37.0% 36.3% 34.4% 42.4% 39.4%
Accounts receivable 2,452 1,980 2,608 2,658 2,872 Operating margin 31.4% 30.5% 31.6% 32.5% 34.5%
Inventories 6,113 5,830 6,501 6,626 7,160 Net profit margin 21.2% 19.7% 16.0% 21.5% 23.5%
Others 263 268 268 268 268 SG&A/Sales -25.5% -25.2% -23.0% -22.9% -22.4%
Current assets 42,834 38,604 34,518 36,853 45,275 R&D/Sales -18.2% -19.4% -19.6% -20.7% -20.1%
LT investments 3,019 1,992 1,992 1,992 1,992 Sales growth 9.7% -1.1% 7.5% 1.9% 8.1%
Net fixed assets 24,178 25,311 22,693 21,277 19,894 Net profit growth 21.6% -7.5% -22.9% 30.3% 17.2%
Total assets 78,183 76,089 69,385 70,304 77,343 EPS growth 20.1% (6.9%) 6.9% 9.9% 17.2%

ST loans (3,032) (1,117) (1,117) (1,117) (1,117) Dividend Coverage 2.4 2.2 2.0 2.0 2.0
Payables (1,861) (2,017) (1,979) (2,017) (2,180) Net debt/equity -25.0% -23.0% -110.7% -77.0% -79.3%
Others -15,461 -15,507 -16,682 -16,977 -17,768 Sales/assets 0.6 0.6 0.7 0.7 0.7
Total current liabilities (14,454) (12,104) (13,101) (13,290) (14,095) Assets/equity 1.3 1.2 9.8 5.2 3.6
Long term debt (3,834) (2,972) (2,972) (2,972) (2,972) ROCE 22.7% 21.8% 23.3% 28.5% 29.5%
Other liabilities 6,588 7,191 7,331 7,475 7,624 ROE 19.5% 16.7% 26.9% 139.0% 86.8%
BVPS 62.1 62.6 5.3 12.7 21.4
125
(44-20) 7325-5242 07 December 2009
Overweight Saint-Gobain
€36.23
30 November 2009 Major beneficiary when European housing recovers
We believe Saint-Gobain to be the best investable idea in our sector as we expect the
Building Materials housing market to recover earlier than the other sub-sectors. Saint-Gobain’s share
Mike Betts
AC price would therefore be a significant beneficiary as around two-thirds of its sales are
(44-20) 7325-8976 to the housing market, mainly in Europe. The improvement in the outlook for the US
mike.f.betts@jpmorgan.com housing market is the first indication of this, in our view. Also, our 12-month mid-
cycle EPS-based price target for Saint-Gobain (€45) suggests 24% upside to the
current share price, which is third highest amongst the 8 European companies
Flagship reports covered by the author.
• Building Materials: Improving outlook.
Increasing sector EPS estimates by 5- Flexing upside
12%. Raising Ciment Francais and On applying our assumptions at the peak of the business cycle in Aug-07 and
Eagle from UW to N. Lowering Holcim
adjusting for the rights issue in Feb-09, our estimate of Saint-Gobain’s mid-cycle
from OW to N, 08 Sep 09
EPS comes out at €6.79, which values the company at €74.7. Our current valuation
of Saint-Gobain (€45) is 40% less than our estimate of its peak valuation.
Price Performance
35
In our view there are three potential major catalysts that could cause the shares to
€ 25
outperform: 1) an improvement in the economic outlook, particularly in Europe; 2)
15 an increase in the magnitude of the cost cutting program; 3) the announcement of one
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09
or more major divestments could, we believe, result in significant share price
SGOB.PA share price (€)
MSCI-Eu (rebased)
outperformance, as investors may then become less skeptical about the previously
announced plans for the company to become a more focussed building products and
Performance (%) distribution business.
YTD 1m 3m 12m
Abs 24.5% 10.8% 26.6% 40.9% Valuation, target price, key risks
Rel 1.5% 7.6% 20.6% 15.2% We value the shares by multiplying our estimate of Saint-Gobain’s mid-cycle EPS by
our estimate of its long-term average P/E ratio. Over the last 10 years Saint-Gobain
has traded on an average one year forward P/E multiple of 12.0 times. This average
was increased by a spike in the share price in 2007 and 2008. We therefore expect
this ratio to average around 11.0 in the future. Multiplying our estimate of Saint-
Gobain’s mid-cycle EPS (€4.08) by this multiple (11.0) values the shares at €45. We
believe the key risks on our call are 1) deteriorating volume outlook after a 15.7
percentage-point decline in sales volumes on a like-for-like basis in 9m-09; 2) lack of
pricing power; and 3) a poor record on recent acquisitions.
Saint-Gobain (SGOB.PA;SGO FP)

Adj. EPS FY (€) 5.14 4.62 1.16 2.31 3.47 Price (€) 36.23
EBITDA FY (€ mn) 4,999 4,620 3,149 4,033 4,875 Date Of Price 30 Nov 09
EBITDA margin FY 11.5% 10.5% 8.2% 10.3% 11.5% Price Target (€) 45.00
EBIT FY (€ mn) 4,108 3,649 2,110 2,542 3,431 Price Target End Date 31 Dec 10
EBIT margin FY 9.5% 8.3% 5.5% 6.5% 8.1% 52-week Range (€) 39.68 - 16.65
Tax rate FY 37.7% 30.9% 28.0% 28.0% 28.5% Mkt Cap (€ bn) 18.4
Adj P/E FY 7.1 7.8 31.3 15.7 10.4 Shares O/S (mn) 508
EV/EBITDA FY 5.2 5.7 9.8 7.2 5.9
DPS (Net) FY (€) 2.05 1.00 1.00 1.00 1.00
Cash EPS FY (€) 10.94 9.34 5.76 5.89 6.56
126
(44-20) 7325-5242 07 December 2009
Saint-Gobain: Summary of Financials

€ in mn, year-end FY07A FY08A FY09E FY10E € in mn, year-end FY07A FY08A FY09E FY10E
Revenue 43,421 43,800 37,046 36,695 EBITA 3,124 2,939 1,326 1,785
% change Y/Y 4.4% 0.9% (15.4%) (0.9%) Depreciation & amortisation 1,875 1,681 1,658 1,690
EBITDA 4,999 4,620 2,984 3,475 Change in working capital (27) 272 461 35
% change Y/Y (1.3%) (7.6%) (35.4%) 16.4% Exceptional items - - - -
EBITDA Margin (%) 11.5% 10.5% 8.1% 9.5% Interest and other financial items (521) (603) (619) (550)
Depreciation & amortization 1,875 1,681 1,658 1,690 Other non-cash items - - - -
EBIT 4,108 3,649 1,945 1,999 Taxes (809) (734) (138) (304)
% change Y/Y 10.6% (11.2%) (46.7%) 2.8%
EBIT Margin (%) 9.5% 8.3% 5.3% 5.4% Cash flow from operations 4,415 3,852 2,745 2,707
Asset Sales - - - - Capex (2,305) (2,298) (1,575) (1,605)
Interest (701) (750) (769) (700) Dividends paid (684) (832) (506) (528)
Earnings before tax 2,455 2,065 492 1,085
% change Y/Y (4.6%) (15.9%) (76.2%) 120.6% Free cash flow 1,426 722 664 573
Tax (926) (638) (138) (304) Acquisitions / divestments (35) (2,698) 330 142
as % of EBT 37.7% 30.9% 28.0% 28.0%
Associates 14 11 12 13 Cash (needed)/available 1,391 (1,976) 993 715
Goodwill - - - - Change in equity 413 353 1,677 (100)
Minority interests (56) (59) (40) (40) Exchange adjustments - - - -
Net Income (Reported) 1,487 1,378 326 754 Other (105) (17) - -
% change Y/Y (9.2%) (7.3%) (76.3%) 131.2%
Shares Outstanding 403.7 412.4 473.3 508.3 Decrease/(increase) in net debt 1,671 (1,751) 2,670 615
EPS (reported) 3.68 3.34 0.69 1.48 Net debt at year-end 9,928 11,679 9,009 8,394
EPS Adjusted 5.14 4.62 0.91 1.57
% change Y/Y 19.7% (10.1%) (80.3%) 72.9%
€ in mn, year-end FY07A FY08A FY09E FY10E € in mn, year-end FY07A FY08A FY09E FY10E
Cash and cash equivalents 1,294 1,937 1,949 1,962 Per share amounts
Accounts receivable 7,970 7,319 7,523 7,503 Normalised EPS 5.14 4.62 0.91 1.57
Inventories 5,833 6,113 5,448 5,433 Normalised EPS pre-goodwill 5.14 4.62 0.91 1.57
Investments - - - - Dividend per share 2.05 1.00 1.00 1.00
Others - - - - Cash flow per share 10.94 9.34 5.80 5.33
Current assets 15,097 15,369 14,920 14,898 Net tangible assets per share 37.1 34.6 34.2 32.8
Tangible Assets 12,753 13,374 13,082 12,975 Multiples (No.)

Intangible assets 12,365 13,539 13,539 13,539 P/E multiple 6.0 6.7 33.9 19.6
Investments 923 1,113 1,113 1,113 Price to book value 1.0 1.1 1.1 1.1
Net fixed assets 26,041 28,026 27,734 27,627 EBITDA multiple 4.6 5.0 9.3 7.3
Total assets 41,138 43,395 42,653 42,525 EBIT multiple 5.5 6.3 14.3 12.7
Liabilities Leverage (No.)

ST loans (2,475) (3,251) (3,251) (3,251) Net debt/equity 65.0% 80.4% 54.7% 49.5%
Payables (10,642) (9,726) (9,726) (9,726) Interest cover (x) 5.9 4.9 2.5 2.9
Total current liabilities (13,117) (12,977) (12,977) (12,977) Payout ratio 55.7% 29.9% 145.1% 67.4%
Long term debt (8,747) (10,365) (7,695) (7,080)
Provisions and tax (4,007) (5,523) (5,523) (5,523)
Total liabilities (25,871) (28,865) (26,195) (25,580)
Total equity 14,977 14,274 16,203 16,689
Minority interests (290) (256) (256) (256)
Shareholders' equity 15,267 14,530 16,459 16,945
Y/E shares outstanding 407 416 508 508
BVPS 37.1 34.6 34.2 32.8
127
(44-20) 7325-5242 07 December 2009
Overweight SKF
Skr115.5
30 November 2009 Highly geared to the IP recovery
Price Target: Skr130 The opportunity in the next cycle
SKF has performed well in the downturn. Its low operating leverage is evidence of
Capital Goods its flexible business model and excellent management – op lev of ~35% vs. ~60% for
Nico Dil
AC Sandvik (09E). The company has proven it can now execute well in a downturn, in
(44-20) 7325-4292 contrast to previous downturns (e.g. early 90s) when the company suffered from the
nico.dil@jpmorgan.com highly cyclical nature of its end-markets and rigid cost structure. We believe a higher
Andreas Willi multiple is justified given concerns around its cyclicality have eased.
(44-20) 7325-4853 Flexing upside
andreas.p.willi@jpmorgan.com J.P. Morgan currently forecasts some 9% YoY growth in IP in 2010, primarily from
Bramen Singanayagam production moving back in line with final demand trends. We forecast a similar
(44-20) 7325-6810 volume growth for SKF (8.9%). A 1% increase in volumes would increase ’10E and
bramen.x.singanayagam@jpmorgan.com ’11E EPS by 3% and add Skr10 to our TP.
Joseph Peter Catalysts – 2010 and beyond
(44-20) 7325-7144
1) Structural savings implemented, improving the through-cycle margin. We
joseph.x.peter@jpmorgan.com
expect three key elements from savings going forward: 1) a structural saving of some
SKr800m from the announced restructuring programs excluding potential future
Flagship reports programs; 2) a structural shift focusing production on lower cost countries; 3) a roll-
• Atlas Copco, Sandvik and SKF: Steep over of fixed cost under-absorption providing savings of some SKr500m.
Recovery in Industrial Production likely,
22 Jun 09 2) An end to de-stocking generating strong volume growth. Some 60% of SKF’s
• J.P. Morgan Winning Franchises: business is opex related and hence geared towards the expected IP recovery (JPMe
Names to own through the cycle, 26 +9% in 2010). Auto production is forecast to grow some 10% in Europe and 40% in
Jun 09 the US in 1H’10 (CSM), following the strong demand from scrappage incentives.
• SKF: Solid Q3’09 Results -
Restructuring Savings to Provide the
This should benefit SKF, with 30% of its revenue generated by its Auto division.
Upside , 21 Oct 09 3) Restructured Automotive division drives earnings recovery. The company
generated a profit in Q3’09, despite a strong decline in volumes (14% YoY). It
Price Performance illustrates a strong benefit from the restructuring program put in place and bodes well
for upside to consensus ’10 estimates (3.5% Automotive margin).
120
Skr 80
SKF trades on 7.9x ’11E EV/EBITA and 11x ’11E P/E vs. the Capital Goods sector
40
on 9.7x EV/EBITA and 13.4x P/E. We assume 9% org volume growth and set our
June 2010 TP of Skr130 on 9.0x ’11E EV/EBIT. A multiple of 9.0x is above
SKFb.ST share price (Skr)
MSCI-Eu (rebased) previous mid-cycle valuations, but we believe the higher multiple is justified given
SKF’s solid execution in the downturn, which has alleviated concerns around its
Performance (%)
cyclicality and is more in line with the valuations of Sandvik and Atlas Copco. Using
YTD 1M 3M 12M a multiple of 10x, in line with the sector average, would imply a TP of some Skr 150.
Abs (%) 49.5% 0.9% 3.2% 93.3% Key risks to our OW position are pricing pressure and further declines in Automotive
Rel (%) 29.7% 0.1% 2.5% 70.9%
demand as a pay-back to strong incentives seen in ’09.
SKF (SKFb.ST;SKFB SS)
Adj. EPS FY (Skr) 10.04 10.14 3.87 7.83 10.91 Price (Skr) 115.50
Revenue FY (Skr mn) 58,559 63,361 56,078 58,130 63,335 Date Of Price 30 Nov 09
EBIT FY (Skr mn) 7,539 7,710 3,273 5,868 7,843 Price Target (Skr) 130.00
EBIT margin FY 12.9% 12.2% 5.8% 10.1% 12.4% Price Target End Date 30 Jun 10
EV/Revenue FY 1.0 0.7 0.9 0.8 1.0 52-week Range (Skr) 123.40 - 57.75
EV/Operating Profit FY 7.49 5.95 15.10 7.89 7.77 Mkt Cap (Skr bn) 52.6
EBITDA FY (Skr mn) 9,315 9,659 5,214 7,796 9,687 Shares O/S (mn) 455
EBITDA margin FY 15.9% 15.2% 9.3% 13.4% 15.3%
128
(44-20) 7325-5242 07 December 2009
SKF: Summary of Financials

Profit and Loss Statement (IFRS) Cash flow statement (IFRS)
Skr in millions, year end Dec FY07 FY08 FY09E FY10E FY11E Skr in millions, year end Dec FY07 FY08 FY09E FY10E FY11E
Revenues 58,559 63,361 56,078 58,130 63,335 Net income 4,595 4,616 1,761 3,563 4,968
% change Y/Y 10.3% 8.2% (11.5%) 3.7% 9.0% Depreciation & amortisation 1,776 1,949 1,940 1,929 1,844
% Change like for like 10.3% 5.7% (19.5%) 8.9% - Other non-cash items (2,560) (3,765) (1,759) (2,149) (2,598)
Gross profit 15,387 16,286 11,714 15,199 17,376 Change in net working Capital (1,826) (2,208) 2,295 946 (206)
EBITDA (Ind Ops) 9,279 9,659 5,214 7,796 9,687 Cash flow from operattions 4,929 3,686 5,749 6,593 6,883
EBIT (Ind Ops) 7,539 7,710 3,273 5,868 7,843
Net Interest (401) (842) (800) (515) (380) Capex (1,957) (3,855) (1,852) (1,295) (3,210)
Earning before tax 7,138 6,868 2,406 5,353 7,463 Investment in intangibles - - - - -
Tax 2,371 2,127 594 1,686 2,351 Free cash flow from operations 2,972 -169 3,897 5,298 3,673
as % EBT 33.2% 31.0% 24.7% - 31.5% Free cash flow per share 6.5 (0.4) 8.6 11.6 -
Minorities (172) (125) (51) (103) (144)
Net Income (Reported) 4,595 4,616 1,761 3,563 4,968 Disposal/(purchase) 1,256 718 0 - 0
% Change Y/Y 6.4% 0.5% (61.9%) 102.4% 39.4% Equity raised/(repaid) (4,554) (2,277) 0 0 0
Shares outstanding 455.35 455.35 455.35 455.35 - Dividend paid (2,103) (2,338) (1,594) (1,366) (1,821)
DPS 5.00 3.50 3.00 4.00 4.00 Other (2,186) (1,269) 178 206 522
EPS (reported) 10.09 10.14 3.87 7.83 10.91 Free cash flow (4,615) (5,245) 2,482 4,137 2,374
% Change Y/Y 6.4% 0.5% (61.9%) 102.4% 39.4%
EPS (adjusted) 10.04 10.14 3.87 7.83 10.91 Beginning net debt cash (779) 3,836 9,081 6,599 2,462
% Change Y/Y 15.3% 1.0% (61.9%) 102.4% 39.4% Ending net debt cash 3,836 9,081 6,599 2,462 88
Balance sheet (IFRS) Ratio Analysis (IFRS)

Cash and cash equivalents 4,275 4,627 7,109 11,246 13,620

Gross Margin 26.3% 25.7% 20.9% 26.1% 27.4%
Accounts receivable 9,894 11,041 9,814 10,173 11,084
EBITDA margin 15.9% 15.2% 9.3% 13.4% 15.3%
Inventories 11,563 15,204 12,337 11,626 11,717
EBIT margin 12.9% 12.2% 5.8% 10.1% 12.4%
Other 2,365 3,310 2,930 3,037 3,309
Adj EBIT margin 12.9% 12.2% 5.8% 10.1% 0.0%
Current Assets 28,097 34,182 32,189 36,082 39,729
ROE 25.1% 24.8% 8.9% 17.0% 21.1%
ROCE 28.8% 23.9% 9.3% 17.9% 24.1%
Intangibles and Other 6,274 7,362 7,363 7,364 7,365 Intrest coverage (x) 18.8 9.2 4.1 11.4 20.6
Net Fixed assets 11,960 14,556 14,468 13,835 15,200 Net debt to equity 20.9% 44.1% 31.7% 10.6% 0.3%
Total Assets 46,331 56,100 54,020 57,281 62,295 Net debt/ EBITDA 0.0 0.0 0.0 0.0 0.0
ST Loans 810 899 899 899 899 EV/Sales 1.0 0.7 0.9 0.8 1.0
Payables 4,904 4,841 3,645 4,069 4,433 EV/EBITDA 6.0 4.8 9.5 5.9 6.3
Others 7,118 8,558 7,574 7,851 8,555 EV/EBIT 7.5 6.0 15.1 7.9 7.8
Total current Liabilities 12,832 14,298 12,118 12,820 13,887 EV/adj EBIT 7.5 6.0 15.1 7.9 -
Long Term Debt 7,301 12,809 12,809 12,809 12,809
Other Liabilities 8,611 10,243 9,267 9,628 10,428 P/E 11.4 11.4 29.9 14.8 10.6
Shareholder's equity 17,587 19,659 19,826 22,024 25,170 Adj. P/E 11.5 11.4 29.9 14.8 10.6
BVPS 102 125 119 - 137 FCF yield in % 6.6% (0.6%) 10.7% 14.5% 7.0%
Total Equity and liabilities 46,331 57,009 54,020 57,281 62,295 EV/CE 2.0 1.3 1.5 1.5 -
129
(44-20) 7325-5242 07 December 2009
Overweight Société Générale

€46.5
30 November 2009 Attractive business mix geared to Equities and Emerging
Price Target: €60 Markets
We continue to prefer Société Générale for its very attractive valuation, trading close
Banks
AC
to tangible book value at RoNAV of 15% in 2011E. In our view, current valuations
Kian Abouhossein underestimate the strong cashflow generation with 43% of group profits from
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
segments geared to the recovery. The group benefits from strong Core Tier I
estimated at 8.5% end 2011E, including the higher market risk requirements under
Delphine Lee new Basel II rules. Key strength is SG’s high cashflow generation with combined
(44-20) 7325-3971
delphine.x.lee@jpmorgan.com
€5bn of retained earnings in 2010E-011E equivalent to c.150bp of RWAs end 09E.
Cormac Leech • Société Générale is highly geared to an improvement in the credit cycle,
(44-20) 7325-1772 generating €6.50 EPS in 2011E we estimate with lower loan losses of €3.3bn or
cormac.x.leech@jpmorgan.com 95bp on RWAs. This compares to trough levels of €0.4bn or 19bp in 2005 and a
peak of €5.9bn or 175bp in 2009E.
Flagship reports • Société Générale is geared to CEE/Emerging Markets (13% of group profits
• Regulatory Proposal Analysis: 2011E) and equities activities within CIB (21%), which have high betas in
Structural IB profitability decline, 09 improving economic conditions. We expect pre-provision profits to grow 18%
Sep 09
• Global investment banks: Switching
CAGR 09E-011E. Underlying cash flow generation is intact in our view, with
preference from IBs to Credit Banks on one of the cheapest P/Pre-prov profits at 3.2x 2011E.
regulatory changes, 09 Sep 09
• French banks: preference for credit
Flexing upside
exposed BNP Paribas & Société In a normalised provision environment, we estimate loan losses of €2.4bn vs. €3.3bn
Générale over pure IBs, 09 Nov 09 in our current 2011E estimates, which would add €0.90/share to our 2011E EPS to
€7.40 implying PE of 6.3x, and €9/share to our TP to €69 implying 47% upside. This
Price Performance would result from group cost of risk at 69bp vs. 95bp on RWAs in our base case
55 2011E with International Retail and SFS declining to 100bp from 160-200bp.
€ 35 Catalysts – 2010 and beyond
15
Further impairments on the €25.7bn of reclassified assets could weigh on the share
Dec-08 Mar-09 Jun-09 Sep-09 price performance in the short term. Shadow P&L related to ABS CDOs stood at
SOGN.PA share price (€ €0.6bn end Sept 09, and we have accounted for additional €0.8bn of provisions. Risk
MSCI-Eu (rebased) reward is attractive with SG trading close to NAV and we expect investor sentiment
Performance (%) to improve with the expected decline in loan loss provisions mid-2010.
YTD 1m 3m 12m Valuation, target price, key risks
Abs 30.2% 3.3% -17.4% 48.9% Société Générale trades at 7.1x PE and 1.1x P/NAV for an RoNAV of 15.2% in
Rel 10.4% 2.5% -18.1% 26.5% 2011E. Our TP of €60 (Dec-10, SoP-based) implies 28% upside. Key risks include:
i) asset quality trends and macro risks in emerging markets, ii) performance of the
capital markets, in particular structured credit prices hence further markdowns, iii)
interest rate environment and changes to the shape of the yield curve.
Société Générale (SOGN.PA;GLE FP)
Adj. EPS FY (€) 8.07 4.19 0.87 4.00 6.50 Price (€) 46.46
Headline EPS FY (€) 2.13 3.67 1.63 4.00 6.50 Price Target (€) 60.00
BV/Sh FY (€) 60 65 70 61 65 Price Target End Date 31 Dec 10
NAV/Sh FY (€) 39.2 40.1 45.4 40.6 44.9 52-week Range (€) 54.27 - 17.29
P/NAV FY 1.2 1.2 1.0 1.1 1.0 Mkt Cap (€ bn) 34.4
ROE FY 18.7% 10.7% 2.3% 10.2% 15.2% Shares O/S (mn) 740
Tier One Ratio FY 6.6% 8.8% 10.8% 11.1% 10.6%
130
(44-20) 7325-5242 07 December 2009
Société Générale: Summary of Financials

Per Share Data
% Change Y/Y (19.6%) 217.7% 37.5% (1.4%) (0.6%) EPSAdjusted 8.07 4.19 0.87 4.00 6.50
Non-interest income 14,510 13,918 12,540 14,636 16,410 % Change Y/Y (28.9%) (48.0%) (79.2%) 357.7% 62.5%
% change Y/Y 9.8% (1.5%) (12.0%) 30.0% 10.0% % Change Y/Y (82.7%) 33.3% (50.0%) 133.3% 60.7%
% change Y/Y (6.7%) (56.4%) (60.0%) 80.0% 20.0% Payout ratio 42.2% 32.7% 36.8% 35.0% 34.6%
Other Income -3,270 2,033 4,227 2,934 3,216 BV per share 60.23 64.57 70.02 60.53 64.78
% change Y/Y (23.6%) 28.5% 7.3% 8.3% 6.7% Shares outstanding 444.4 548.4 604.7 730.8 730.8
Admin expenses -6,133 -6,912 -6,755 -6,702 -6,905
% change Y/Y 17.5% 12.7% (2.3%) (0.8%) 3.0% Return ratios
Other expenses (8,172) (8,616) (9,133) (9,042) (9,584) RoRWA 0.6% 1.3% 0.5% 1.4% 2.0%
% change Y/Y (68.9%) 134.1% 19.6% 27.5% 10.0% ROE 18.7% 10.7% 2.3% 10.2% 15.2%
Loan loss provisions -905 -2,655 -5,884 -5,120 -3,289 RoNAV 18.7% 10.7% 2.3% 10.2% 15.2%
Other provisions - - - - -
% change Y/Y (77.1%) 99.1% (53.8%) 169.6% 61.6% NIM (NII / RWA) 0.8% 2.3% 3.3% 3.2% 2.8%
Tax (charge) (282) (1,235) (332) (1,272) (2,056) Non-IR / average assets 1.4% 1.3% 1.1% 1.4% 1.5%
Minorities 657 763 378 383 591 NII / Total revenues 14.7% 36.3% 46.6% 42.4% 39.5%
Net Income (Reported) 947 2,010 985 2,923 4,749 Fees / Total revenues 44.3% 33.9% 27.8% 33.4% 34.4%
Balance sheet
ASSETS Cost ratios

% change Y/Y 15.8% 16.2% (7.0%) 3.0% 5.0% Cost / assets 1.3% 1.4% 1.5% 1.5% 1.5%
Loan loss reserves 7,057 8,880 11,774 16,894 20,184 Staff numbers - - - - -
Investments - - - - -
% change Y/Y 8.8% 0.7% (7.0%) 3.0% 5.0% Loan / deposit 120.6% 122.3% 124.4% 124.2% 133.1%
Other assets 81,622 92,199 85,745 88,317 92,733 Customer deposits / liabilities 25.3% 25.0% 25.0% 25.0% 25.0%
Total assets 1,071,762 1,130,003 1,050,903 1,082,430 1,136,551 LT Debt / liabilities 12.9% 10.7% 10.7% 10.7% 10.7%

Average interest bearing liabs 483,232 513,224 511,165 508,270 496,865 Growth in NPLs 7.5% 30.8% 34.1% 25.0% 0.0%
Other liabilities 416,488 483,389 449,552 463,038 486,190 RWAs 285,525 326,468 345,518 326,867 336,039
Retirement benefit liabilities - - - - - % YoY change 12.1% 14.3% 5.8% (5.4%) 2.8%
Minorities 4,034 4,802 4,466 4,600 4,830 Total Tier 1 6.6% 8.8% 10.8% 11.1% 10.6%
Total liabilities & Shareholders Equity 1,071,762 1,130,003 1,050,903 1,082,430 1,136,551
131
(44-20) 7325-5242 07 December 2009
Overweight Swiss Re
SF47.8
30 November 2009 Improving capital and legacy derisking should help rating
Price Target: SF57 The opportunity in the next cycle
We believe Swiss Re’s derisking of its legacy unit and improving capital position
should boost the potential for a 2010 rating upgrade (current S&P A+/stable, was cut
Insurance
18 Feb 09 from AA-/stable). We believe the key in the capital equation is that Swiss
AC
Michael Huttner, CFA Re should already be in a position to repay the Berkshire SF3.6bn by June 2010.
(44-20) 7325-9175
Swiss Re has over SF6bn September 2009 excess capital over an S&P AA level and
Vinit Malhotra, CFA we believe it needs around SF4bn (Swiss Re have said SF3-5bn). Swiss Re said it
(44 20) 7325-5321
would cut SF500m required capital June 2010 and so needs only SF1.1bn more from
earnings (SF3.6bn – SF2.0bn – SF500m) through Mar 11 to repay Berkshire.

• Swiss Re: Strong capital at 3Q 09 gives We conservatively forecast 94% 2011e combined ratio, worse than 90.6% 09e. And
us confidence Swiss Re is on track to every 1% better combined ratio 2011e adds SF3 to our price target. We highlight this
repay Berkshire; new PT SF57 (53), 04 as Swiss Re had better than peers combined ratios since 2006 and we believe will set
Nov 09
a 92% target combined when it next reviews its target ROE (Feb10 JPMe); 92%
• Swiss Re: Reiterate Overweight: likely
no stock issue needed until after 2011 would raise our price target to SF63. And we still deduct SF2.7bn from our valuation
to refund the SF3bn Berkshire for potential legacy losses; absent this our price target rises an extra SF8 to SF71.
convertible, 25 Aug 09
• Swiss Re: Upgrading to Overweight: Catalysts – 2010 and beyond
SF48 TP Dec09 SOP due to better
Historically insurers outperform in the 9months before their S&P rerating: on
reinsurance trends and tighter credit
spreads, 13 May 09 average Zurich, SCOR and Munich (the 3 downgrades which then rerated) beat the
SXIP index 17%. Swiss Re unlike peers has said it would sharply cut volumes at Jan
2010 renewals to avoid rate cuts: it said it will cut credit re (98.3% combined ratio at
Price Performance
3Q09) and also liability (121.6%), if rates fall more.
50
SwF Valuation, target price, risks
30
10
Our SF57 Dec 10 price target is based on a sum-of-parts model: we value our
Dec-08 Mar-09 Jun-09 Sep-09 forecast 2011E earnings on 8.3x (1/12% cost of capital) P/E valuation ratio for non-
RUKN.VX share price (SwF) life and life reinsurance and asset management. We deduct from our valuation
MSCI-Eu (rebased)
SF2.7bn potential loss for the legacy run off and -SF600m Berkshire redemption
Performance (%) penalty. Key risk is S&P delays any ratings review to beyond 2010. Another
downside risk is continued pressure on reinsurance rates over next few years due to
YTD 1m 3m 12m
primary capacity rebuilding.
Abs -5.0% 13.7% -3.0% 5.9%
Rel -24.8% 12.9% -3.7% -16.5%
Swiss Re (RUKN.VX;RUKN VX)

Adj. EPS FY (SF) (2.61) 0.46 6.42 7.85 Price (SF) 47.77
P/NAV FY 1.4 1.4 1.0 0.9 Date Of Price 30 Nov 09
Combined Ratio FY 97.9% 90.6% 93.0% 94.0% Price Target (SF) 57.00
Dividend (Net) FY (SF) 0.10 0.50 0.50 0.50 Price Target End Date 31 Dec 10
Gross Yield FY 0.2% 1.0% 1.0% 1.0% 52-week Range (SwF) 54.95 - 11.88
Net Attributable Income FY (SF (864) 169 2,395 2,727 Mkt Cap (SF bn) 17.0
mn) Shares O/S (mn) 355
Headline EPS FY (SF) (2.61) 0.46 6.42 7.85
Operating profit FY (SF mn) (1,350) 590 3,478 3,636
132
(44-20) 7325-5242 07 December 2009
Swiss Re: Summary of Financials

SwF in millions, year end Dec FY07 FY08 FY09E FY10E FY11E SwF in millions, year end Dec FY07 FY08 FY09E FY10E FY11E
Premiums 31,664 25,501 24,357 24,250 25,010 Shares Outstanding 348.21 331.02 370.70 373.00 373.00
% change Y/Y 7.3% (19.5%) (4.5%) (0.4%) 3.1%
Life 12,665 11,090 10,436 9,000 9,000 EPS 11.95 -2.61 0.46 6.42 7.85
% change Y/Y 15.4% (12.4%) (5.9%) (13.8%) 0.0% % change Y/Y (11.4%) (121.8%) (117.4%) 1310.7% 22.3%
Non Life 18,977 14,379 13,871 15,200 15,960 DPS 4.00 0.10 0.50 0.50 0.50
% change Y/Y 8.8% (24.2%) (3.5%) 9.6% 5.0% % change Y/Y 17.6% -97.5% 400.0% 0.0% 0.0%
Investment income 10,692 7,881 6,578 6,261 5,705
Other income 518 -8,404 1,911 384 684 Payout Ratio 33.5% -3.8% 109.9% 7.8% 6.4%
Total revenues 42,874 24,978 32,846 30,895 31,399
% change Y/Y - (41.7%) 31.5% (5.9%) 1.6% NAV/Share 55.2 33.1 34.6 45.8 52.4
Insurance related expenses (31,797) (16,250) (23,440) (17,751) (18,391) EV/share 88.13 55.12 55.68 69.02 77.79
Admin expenses - - - - -
Acquisition expenses - - - - - ROE 13.9% -3.4% 0.8% 10.0% 10.6%
Other expenses (5,891) (4,712) (3,974) (4,649) (4,212) RONAV 21.7% -4.7% 1.4% 18.6% 17.2%
Earning before tax 5,186 -1,350 590 3,478 3,636 ROEV 14.2% -2.8% 0.9% 12.5% 11.5%
% change Y/Y -11.4% -126.0% -143.7% 489.8% 4.5%
Tax (1,025) 486 (205) (870) (909)
EBT (19.8%) (36.0%) (34.8%) (25.0%) (25.0%)
Minorities - - - - -
Net income (Reported) 4,161 (864) 169 2,395 2,727
% change Y/Y -8.8% -120.8% -119.5% 1319.4% 13.9%

ASSETS 307,287 239,877 252,873 266,702 281,423 Key ratios:

Cash 11,531 17,268 17,613 17,966 18,325 Combined ratio 90.2% 97.9% 90.6% 93.0% 94.0%
Investments 227,812 163,965 175,443 187,724 200,864 Life op'g margin on assets - - - - -
Loans - - - - - Banking cost to income - - - - -
Deferred tax - 0 0 0 0 AM Cost income ratio - - - - -
Other 63,047 54,379 55,467 56,576 57,707
Intangible 4,897 4,265 4,350 4,437 4,526 PBT Break up
Non Life 86.2% (203.4%) 643.9% 104.0% 92.2%
LIABILITIES 275,420 219,424 229,436 242,342 254,107 Life & Health 25.5% (51.6%) 141.3% 34.5% 33.0%
Policyholder liabilities 187,616 157,741 160,896 164,114 167,396 Financial Markets 133.9% (1.6%) 560.3% 138.0% 121.1%
Bank loans - - - - - Group Items (40.0%) 10.7% (475.0%) (58.7%) (41.8%)
Debt 16,517 12,423 12,671 12,925 13,183 Allocation (105.6%) 345.9% (770.4%) (117.9%) (104.5%)
Other 39,420 28,807 32,431 40,943 46,212
Shareholder's equity 29,869 20,453 23,437 24,360 27,315 Mix of Total revenue
Minorities - - - - - Non Life 51.3% 67.6% 49.8% 57.5% 58.5%
Total Equity 307,287 239,877 252,873 266,702 281,423 Life & Health 43.2% 42.1% 55.5% 40.3% 39.6%
Financial Markets 16.2% 0.7% 11.6% 15.5% 14.0%
Group Items 0.9% 7.7% (3.4%) 0.0% 0.0%
Allocation (11.6%) (18.2%) (13.6%) (13.3%) (12.1%)
133
(44-20) 7325-5242 07 December 2009
Overweight Syngenta
SFr 266.4
30 November 2009 Long-term structural growth and improving returns
Price Target: SFr290 The opportunity in the next cycle
We see the volume pressures experienced by Syngenta in 2009 to ease over the next
Chemicals 12 months. Our (+3%) ’10E volume growth forecast remains conservative versus
Neil Tyler
AC recent history (+5.2% avg. ’03-08 and +8% avg. in years following a volume
(44-20) 7325-9935 decline), but is still sufficient to combine with lower input costs and more favorable
neil.c.tyler@jpmorgan.com exchange rates to deliver 15% EPS growth. Our long-term 2.5% sales growth
Heidi Vesterinen assumption also appears conservative in this context. Syngenta has consistently and
(44-20) 7325-4537 progressively gained market share over the past two years, which should enhance
heidi.m.vesterinen@jpmorgan.com returns as volumes recover. We forecast 2010E margins 25% above the 10 year
average, and calculate the 2010E ROIC of 16.1%, 65% above l-t avg. 9.7%.

• Syngenta – Headwinds easing, If we were to assume a more ‘normal’ 6% volume rebound in 2010, take on board
upgrade to OW – 7 Oct 09
the company’s guidance of flat prices (vs our current -1% estimate), this would likely
allow the company to deliver c30% EPS growth in FY2010. Long term, should
Price Performance Syngenta succeed in maintaining 2010 Crop Protection margins and also reach its
15% EBITDA margin target in seeds as well as deliver 3.5% l-t growth, the result of
260
this scenario on our DCF would be a Dec 2010E DCF target of SFr360 (vs current
SwF 200
SFr290).
140
SYNN.VX share price (SwF) Historically, the period between the FY results and the 1H results has offered the best
MSCI-Eu (rebased)
share price performance. Furthermore, FY results have tended to offer a good entry
point as despite often raised expectations, the company is unable to provide any
Performance (%) meaningful colour over demand trends for the forthcoming N. Hemisphere planting
season. A further catalyst could be the 31 March USDA prospective plantings report.
YTD 1m 3m 12m
Abs 32.9% 9.3% 5.4% 35.5%
Rel 13.1% 8.5% 4.7% 13.1%
Syngenta is currently trading on 13.2x 2010E EPS estimates, versus its historic
average of 12.2x, however, the 65% improvement in ROIC vs. the l-t average, with
potentially further progress to come justifies a multiple between 14.5x-15.0x in our
view. Consequently, we would look for entry points that imply 12.0x earnings less
than 2.0x invested capital. We have a Dec-10 DCF-based price target of SFr290
(WACC 8.1%, Terminal growth rate 2.1%). Key risks to our rating and price target
are weather (unpredictable), agricultural subsidies (negative, should these be
withdrawn to any significant degree), and biotechnology (negative, if the EU
authorities decided to open up this market for biotech planting, as such a move would
likely lead to a loss of market share for traditional agrochemicals).
Syngenta AG (SYNN.VX;SYNN VX)

Adj. EPS FY ($) 13.51 18.62 17.50 20.15 20.63 Price (SF) 266.40
Revenue FY ($ mn) 9,240 11,624 10,727 11,711 12,088 Date Of Price 30 Nov 09
EBITDA FY ($ mn) 1,894 2,494 2,324 2,740 2,797 Price Target (SF) 290.00
EBIT FY ($ mn) 1,494 2,066 1,866 2,249 2,294 Price Target End Date 31 Dec 10
EV/Revenue FY 2.3 1.7 2.2 2.0 1.8 52-week Range (SwF) 279.00 - 185.60
EV/EBITDA FY 11.1 7.9 10.0 8.4 8.0 Mkt Cap (SF bn) 26.2
FCF Yield FY 5.2% 6.8% 7.3% 5.6% 7.1%
134
(44-20) 7325-5242 07 December 2009
Syngenta: Summary of Financials

Revenues 9,240 11,624 10,727 11,711 12,088 EBIT - - - - -

% Change Y/Y 14.8% 25.8% -7.7% 9.2% 3.2% Depreciation & amortization 400 428 457 491 503
Gross Margin (%) 49.5% 50.9% 50.9% 52.7% 52.7%
EBITDA (pre - restructuring) 1,902 2,494 2,324 2,740 2,797 Change in working capital (191) (604) 508 (276) (171)
% Change Y/Y 23.9% 31.1% -6.8% 17.9% 2.1% Taxes (308) (307) (335) (475) (486)
EBITDA Margin (%) 20.5% 21.5% 21.7% 23.4% 23.1% Cash flow from operations 3,062 3,960 4,514 4,526 4,754
EBIT (pre - restructuring) 1,494 2,066 1,866 2,249 2,294 Capex (317) (444) (750) (650) (510)
% Change Y/Y 30.6% 38.3% -9.7% 20.5% 2.0% Acquisitions/disposals 113 24 (130) 0 0
EBIT Margin 16.2% 17.8% 17.4% 19.2% 19.0% Net Interest 42 169 101 92 80
Net Interest 42 169 101 92 80 Free cash flow 1,107 1,331 1,693 1,286 1,577
Earnings before tax (reported) 1,419 1,692 1,590 2,057 2,139 FCF (pre - exceptionals) 851 1,022 1,440 1,136 1,447
% change Y/Y 77.8% 19.2% -6.0% 29.4% 4.0% Equity raised/repaid (662) (613) 0 0 0
Tax (308) (307) (335) (475) (486) Debt Raised/repaid 182 608 0 0 0
Reported tax rate (%) 21.7% 18.1% 21.1% 23.1% 22.7% Other 39 (101) 0 0 0
Net Income Rep 1,109 1,385 1,252 1,580 1,650 Dividends paid (301) (452) (595) (609) (659)
% change Y/Y 74.9% 24.9% -9.6% 26.2% 4.4% Beginning cash 445 503 803 1,318 1,769
Shares Outstanding 95.97 93.92 93.80 94.53 94.53 Ending cash 593 849 1,318 1,769 2,482
Reported EPS 11.71 14.99 13.23 16.70 17.44 DPS 4.80 6.62 6.62 7.16 7.33
Adjusted EPS 13.51 18.62 17.50 20.15 20.63

Cash and cash equivalent 593 849 1,318 1,769 2,482 Market Cap 19,215 17,441 17,441 17,441 17,441
Accounts Receivables 2,386 2,311 1,883 2,055 2,121 Net debt 1,532 1,886 1,417 966 253
Inventories 2,647 3,456 2,986 3,140 3,245 EV 21,107 19,674 23,344 23,063 22,350
Others 1,057 1,050 1,478 1,306 1,240
Current assets 6,683 7,666 7,665 8,271 9,088 EV/Sales 2.3 1.7 2.2 2.0 1.8
LT investments 4,459 4,776 4,632 4,463 4,294 EV/EBITDA 11.1 7.9 10.0 8.4 8.0
Net fixed assets 2,138 2,188 2,650 2,978 3,154 EV/EBIT 14.1 9.5 12.5 10.3 9.7
Total assets 13,280 14,630 14,947 15,712 16,536 P/E (adjusted EPS) 19.6 14.2 15.1 13.2 12.8
Liabilities FCF yield 5.2% 6.8% 7.3% 5.6% 7.1%

ST loans 399 211 211 211 211 Dividend per share 4.80 6.62 6.62 7.16 7.33
Payables 1,895 2,240 1,850 1,900 1,900 Dividend Yield 2.4% 3.6% 2.9% 3.1% 3.2%
Others 1,811 2,095 2,095 2,095 2,095 EPS growth 27.9% 37.8% NM 15.1% 2.4%
Total current liabilities 3,702 4,064 3,674 3,724 3,724
Long term debt 1,726 2,524 2,524 2,524 2,524 Net debt /EBITDA 0.8 0.8 0.6 0.4 0.1
Other liabilities - - - - - Interest coverage (x) 35.6 12.2 18.4 24.4 28.5
Total liabilities 7,239 8,683 8,293 8,343 8,343 Net debt to Total Capital 20.2% 24.1% 17.6% 11.6% 3.0%
Shareholders' equity 6,041 5,947 6,654 7,369 8,193 Net debt to equity 25.3% 31.6% 21.2% 13.1% 3.1%
ROIC 12.9% 18.3% 14.8% 16.1% 15.4%
135
(44-20) 7325-5242 07 December 2009
Overweight Unicredit
€2.28
30 November 2009 One of the most attractive franchises in Europe
We like UCG for its franchise with exposure to CEE. It has the largest franchise in
CEE with c. 3700 branches (mostly represented by Poland, Turkey, Russia, Croatia,
Banks
Czech Republic-c. 60% of CEE assets) representing 33% of group earnings by 11E;
AC
Francesca Tondi this gives UCG exposure to an early pick up in global economic growth.
(44-20) 7325-1579 Furthermore, 36% of group earnings are represented by Italy, a cash generative
francesca.tondi@jpmorgan.com
business with high RoNAV (>20% 2011E), which gives the group exposure to IR
Andrea Unzueta normalisation (14% EPS 11E upside to 200bp rate increase) and longer-term
(44-20) 7325-7454
structural growth in Italy. With 8.4% core Tier 1 ratio after the planned €4bln rights
andrea.e.unzueta@jpmorgan.com
issue, we think UCG will be well positioned to capture such growth.

• Italian banks – Gearing to the interest If interest rates increase by c. 200bps, and provisions go down to 2005-06 levels
rate cycle – OW for 2010, 10 Nov 09 (45bp vs 65bp JPME 11E), we see EPS upside potential of c.14% to our current
• Unicredit Q3 09 Results – Broadly in 2011E EPS of €0.38 to €0.43, and RoNAV 2011E would move from current 19% to
line, better capital, 12 Nov 09
c.21%. Note that our TP could increase up to 14% to €3.70 offering 62% upside.

We see two main catalysts for UCG: 1) emerging markets growth recovery above the
2.5 9% asset growth we forecast for 2011-12; and 2) IR increases which as indicated
€
1.5 should benefit the domestic business. In the near term we expect the stock to benefit
0.5 from relief once the rights issue is completed in Q110.
CRDI.MI share price (€) Valuation, target price, key risks

MSCI-Eu (rebased)
We assign UCG a Dec-10 SOP-based TP of €3.25 using divisional multiples and capital
allocation in line with its banking peers (note our SOP does not yet include the proposed
Performance (%) rights issue); this offers 43% upside from current levels. Note that UCG’s subsidiaries
in Poland (Pekao) and Turkey (Yapi Kredi) are listed and trade on 2.4x and 1.3x P/NAV
YTD 1m 3m 12m
10E, well above group (1.2x). Indeed, if we exclude CEE, UCG trades on a P/E 10E of
Abs 46.9% -0.7% -12.1% 53.1%
6.4x vs. 10.3x for the European sector, a very attractive valuation. Risks to our rating
Rel 27.1% -1.5% -12.8% 30.7%
price target and forecasts include: 1) UCG could still be impacted by deteriorating
trends in Ukraine and Kazakhstan although the impact should be limited (<2% of group
assets), 2) more importantly UCG remains exposed to asset quality deterioration in the
Italian SME sector, which we believe has not yet peaked.
UniCredit (CRDI.MI;UCG IM)

Adj. EPS FY (€) 0.37 0.10 0.19 0.39 0.45 Price (€) 2.28
NAV/Sh FY (€) 2.0 1.8 1.9 2.1 2.4 Price Target (€) 3.25
P/BV FY 0.6 0.7 0.7 0.6 0.6 Price Target End Date 31 Dec 10
P/NAV FY 1.1 1.3 1.2 1.1 1.0 52-week Range (€) 2.80 - 0.56
Dividend (Net) FY (€) 0.00 0.04 0.09 0.15 0.15 Mkt Cap (€ bn) 38.2
ROE FY 9.1% 2.9% 5.7% 11.2% 11.9% Shares O/S (mn) 16,778
Tier One Ratio FY 7.3% 8.1% 8.1% 8.4% 8.8%
136
(44-20) 7325-5242 07 December 2009
UniCredit: Summary of Financials

Per Share Data
% Change Y/Y 9.6% 13.2% (8.4%) (3.2%) 4.4% EPSAdjusted 0.50 0.37 0.10 0.19 0.39
Non-interest income 12,536 7,481 10,579 11,555 12,140 % Change Y/Y 13.1% (25.1%) (72.5%) 87.6% 105.4%
% change Y/Y 6.2% (15.0%) (14.9%) 8.8% 6.9% % Change Y/Y 8.3% (100.0%) - 142.5% 74.8%
Trading revenues 1,280 -1,980 2,428 2,696 2,696 Dividend yield 5.8% 0.0% 0.8% 1.9% 3.3%
% change Y/Y (41.6%) (254.7%) (222.6%) 11.0% 0.0% Payout ratio 52.2% 0.0% 40.0% 50.0% 40.0%
Other Income 562 368 413 438 438 BV per share 4.37 3.84 3.33 3.42 3.64
% change Y/Y 5.1% (9.4%) 5.5% 1.4% 4.7% Shares outstanding 13,194.6 14,340.8 16,778.4 16,778.4 16,778.4
Admin expenses -16,309 -16,692 -15,581 -15,414 -15,696
% change Y/Y 0.4% 2.3% (6.7%) (1.1%) 1.8% Return ratios
Other expenses 1,694 218 114 0 0 RoRWA 1.2% 0.7% 0.3% 0.6% 1.3%
% change Y/Y 11.4% (23.8%) 25.3% 4.5% 7.9% ROE 11.7% 9.1% 2.9% 5.7% 11.2%
Loan loss provisions -2,468 -3,700 -8,880 -7,784 -4,010 RoNAV 19.9% 17.5% 5.9% 10.4% 19.7%
Other provisions -2,062 -1,234 -918 -396 -394
% change Y/Y 5.0% (48.1%) (43.8%) 67.6% 94.0% NIM (NII / RWA) 3.2% 3.6% 3.6% 3.6% 3.6%
Tax (charge) (3,164) (627) (1,024) (1,705) (2,996) Non-IR / average assets 1.3% 0.7% 1.0% 1.2% 1.2%
Minorities (718) (518) (299) (308) (449) NII / Total revenues 57.7% 72.2% 62.7% 59.8% 59.6%
Trading / Total revenues 4.3% (7.4%) 8.6% 9.4% 9.0%
Balance sheet
ASSETS Cost ratios

% change Y/Y 7.3% 6.3% (4.7%) 3.3% 4.9% Cost / assets (1.6%) (1.6%) (1.6%) (1.6%) (1.6%)
Loan loss reserves 22,895 24,616 33,242 41,134 44,951 Staff numbers 169,817 174,519 173,019 171,019 169,019
Investments 202,343 204,890 145,519 130,519 130,519
% change Y/Y 5.3% (19.2%) 20.4% 0.0% 0.0% Loan / deposit 91.4% 103.6% 98.7% 102.0% 106.9%
Other assets - - - - - Customer deposits / liabilities 161.3% 130.1% 153.7% 152.0% 141.4%
Total assets 1,021,052 1,045,612 975,916 980,257 1,009,510 LT Debt / liabilities 82.1% 77.6% 77.8% 76.6% 74.6%

% change Y/Y 6.5% (6.2%) 0.0% 0.0% 0.0% NPLs / loans 2.5% 2.8% 4.1% 5.2% 5.5%
Long term funding 790,902 768,967 715,402 705,402 705,402 LLP / RWA (0.46%) (0.69%) (1.80%) (1.62%) (0.80%)
Average interest bearing liabs 904,559 934,302 844,071 834,071 834,071 Growth in NPLs (27.9%) 19.9% 38.6% 32.3% 10.9%
Other liabilities - - - - - RWAs 558,639 512,532 473,795 489,607 515,116
Retirement benefit liabilities - - - - - % YoY change 6.5% (8.3%) (7.6%) 3.3% 5.2%
Minorities 4,740 3,242 3,108 3,108 3,108 Total Tier 1 6.5% 7.3% 8.1% 8.1% 8.4%
Total liabilities & Shareholders Equity 1,021,052 1,045,612 975,916 980,257 1,009,510
137
(44-20) 7325-5242 07 December 2009
Overweight Unilever NV/Plc

€20.41/£17.84
30 November 2009 Growth revival in motion
Price Target: €25.00/£22.00 The opportunity in the next cycle
While Unilever delivered a noticeable acceleration in volume along with margin
Consumer Staples stabilization in 2009, we believe the equity has yet much to run as Unilever offers a
Celine Pannuti
AC unique opportunity to invest in a turnaround story in European FMCG. Under the
(44-20) 7325-9276 right execution, market share gains and improved operating margin towards high
celine.pannuti@jpmorgan.com teens should lead to 10-11% EPS growth pa over the cycle, in line with best-in-class.
While Unilever has much organic growth potential, we also expect small to mid-size
bolt-on deals to fill up ‘gaps’ in its portfolio. In our view, management is taking the
Flagship reports appropriate steps to pursue LT sustainable profitable growth: focus on innovation,
• Strong and sound Q309 reinforces LT
reinvestment in A&P and strong execution. Besides, we see anecdotal evidence that
case, 06 Nov 09
• Strong Q2 volume adds evidence that the culture is changing towards one of accountability and performance.
Unilever can generate quality growth,
07 Aug 09 Flexing upside
• On a path to growth and higher We value Unilever at €25/£22 on a DCF, with our industry-wide assumptions of 9%
valuation; upgrading to Overweight, 14
WACC and 2% LT growth and our expectations of an acceleration in MT10-19e
Jul 09
FCF growth to 9% (on MT LFL of 5% and annual margin expansion of 40bps). At
current share price of €20.4/£17.8, the market is discounting c7% MT growth, i.e. not
Price Performance yet discounting a step up in MT earnings. Stretching our assumptions around WACC
24
(down 8%) and MT growth (up to 10%), we see upside to €31/£27.
€ 18
12 We expect the market to focus on the continued acceleration in volumes and margin
Dec-08 Mar-09 Jun-09 Sep-09 performance in 2010. As Unilever faces the easiest comps in the coming quarters we
UNIA.AS share price (€) believe the story could gather further momentum in H110. We expect market focus
MSCI-Eu (rebased)
in H2 to be in the early results from Polman’s initiatives (incl early impact from new
R&D focus, delivery from top management assigned to new positions during 2009).
Performance (%)
YTD 1m 3m 12m
While Unilever has historically traded at a discount to food peers given its lower
Abs 16.1% -2.3% 6.7% 18.7%
growth profile, we think the stock should be valued at least in line with a broad peer
Rel -3.7% -3.1% 6.0% -3.7%
group of food and HPC given the potential for an increase in earnings profile to 10-
11%. Unilever trades at an adjusted PE10E of 14.2x and 9.6x EV/EBITDA10E (ex-
RDIs) and at a discount to both European HPC (17.8x) and European Food (16.0x).
We have a DCF-based Dec-10 target price of €25/£22. Downside risks to our thesis
include a sharp deterioration in pricing, heightened competition and a patchy
recovery in emerging markets.
Unilever NV (UNIA.AS;UNA NA)

FYE Dec 2006A 2007A 2008A 2009E 2010E Company Data
Adj. EPS FY (€) 1.11 1.26 1.28 1.23 1.34 Price (€) 20.41
EV/EBITDA FY 10.5 11.5 8.8 10.4 9.8 Price Target (€) 25.00
FCF Yield FY 2.1% 4.1% 0.8% 5.6% 6.0% Price Target End Date 01 Dec 10
Gross Yield FY 4.7% 3.7% 3.8% 3.8% 3.8% 52-week Range (€) 21.75 - 13.45
Revenue FY (€ mn) 39,642 40,187 40,523 40,315 41,237 Mkt Cap (€ bn) 60.7
EBIT FY (€ mn) 5,408 5,245 7,167 4,987 5,863 Shares O/S (mn) 2,976
DPS (Net) FY (€) 0.96 0.75 0.77 0.77 0.79
Source: Company data, Bloomberg, J.P. Morgan estimates. Adjusted EPS includes a 1% recurring charge for
restructuring
138
(44-20) 7325-5242 07 December 2009
Unilever NV: Summary of Financials

€ in millions, year end Dec FY07 FY08 FY09E FY10E € in millions, year end Dec FY07 FY08 FY09E FY10E
Revenues 40,187 40,523 40,315 41,237 EBIT 5,814 5,898 5,959 6,275
% change Y/Y 1.4% 0.8% -0.5% 2.3% Change In Working Capital 27 (161) 27 27
Gross Margin (%) 48.8% 47.3% 47.7% 48.2% Depreciation & Amortisation 943 1,003 951 1,031
EBIT 5,245 7,167 4,987 5,863 Interest (406) (382) (402) (344)
EBIT Margin (%) 13.1% 17.7% 12.4% 14.2%
% change Y/Y -3.0% 36.6% -30.4% 17.6% Cash Flow From Operations 6,496 6,549 6,170 6,761
EBITDA 6,758 6,854 6,910 7,306 Capex (1,046) (1,099) (1,129) (1,237)
EBITDA Margin (%) 16.8% 16.9% 17.1% 17.7% Free Cash Flow 2,551 471 3,099 3,325
% change Y/Y 2.5% 1.4% 0.8% 5.7% Acquisitions/ Divestments 113 2,265 (400) 0
Net Interest (403) (400) (402) (344)
Profit before tax 5,184 7,129 4,579 5,597 Cash Flow From investing - - - -
Tax (1,128) (1,844) (1,191) (1,455) Dividends Paid (2,182) (2,086) (2,186) (2,254)
Tax Rate (22.4%) (26.7%) (26.0%) (26.0%) Share Repurchase (1,058) (1,400) 0 0
Net Profit (Reported) 3,888 5,027 3,131 3,871
% change Y/Y -18.1% 29.3% -37.7% 23.6% Cash flow from financing - - - -
Adjusted Earnings 3,762 3,712 3,552 3,871
Diluted Shares Outstanding 2,976 2,906 2,879 2,899 Net cash/(debt) at start of year 1,312 1,314 3,193 1,193
EPS (Reported) - - - - Decrease/(Increase) in Net debt - - - -
% change y/y - - - - Net cash/(debt) at end of year 1,314 3,193 1,193 1,193
EPS (Adjusted) 1.26 1.28 1.23 1.34
% change Y/Y 13.9% 1.1% NM 8.2%

€ in millions, year end Dec FY07 FY08 FY09E FY10E € in millions, year end Dec FY07 FY08 FY09E FY10E

Cash & Cash Equivalents 1,314 3,193 1,193 1,193 Basic Earnings per share - - - -
Accounts Receivables 4,194 3,823 3,803 3,890 Diluted Earnings per share 1.26 1.28 1.23 1.34
Inventories 3,894 3,889 3,869 3,958 Dividend per share 0.75 0.77 0.77 0.79
Current Assets 9,928 11,175 9,135 9,311
Tangible Assets 6,284 5,957 8,470 8,676
Net Fixed Assets - - - - Adj P/E Multiple 16.1 16.0 16.5 15.3
Total assets 37,302 36,142 37,279 37,667 EV/EBITDA Multiple 11.5 8.8 10.4 9.8
P/CEPS 17.1 34.5 15.8 14.4
Liabilities
ST Loans 4,166 4,842 2,330 1,259 Net Debt/Equity 62.9% 74.2% 51.8% 40.8%
Long-term liabilities 5,483 6,363 6,363 6,363
Provisions 1,662 1,403 1,403 1,403
Source: Company reports and J.P. Morgan estimates. Adjusted EPS includes a 1% recurring charge for restructuring
139
(44-20) 7325-5242 07 December 2009
Overweight Wood Group

308p
30 November 2009 Engineering and design should lead the way up
Early industry estimates forecast global oil & gas industry capex will remain flattish
Oil Services & Equipment in 2010 relative to 2009 but return to growth in 2011. Within the oil & gas supply
Amy Wong
AC chain, we expect early cycle services such as engineering and design to rebound first.
(44-20) 7325-9460 WG’s Engineering division has the number one market share in the Gulf of Mexico
amy.wong@jpmorgan.com (GoM), having worked on over 75% of the deepwater projects in the region.
Recently, we have seen several small-scale construction projects awarded in the area
and service companies have commented that the GoM is one basin where they are
Flagship reports seeing more activity. These factors lead us to believe WG is well positioned to be
• Wood Group; Resilient business mix on
one of the first beneficiaries of the next up-cycle. In the North Sea, WG's Production
attractive valuation, 09 Sep 09
• European Oil Services, Latest backlog Facilities business is a market leader in providing maintenance services. We believe
coverage & vessel utilization data, this business will remain resilient through the cycle.
22 Sep 09
Flexing upside
Currently, we estimate that revenues and margins return to peak 2008 levels in 2012.
Price Performance If the recovery in oil and gas expenditure occurs faster than expected, we could see
350 12% upside to our 2011 estimates, which would result in a price target of 460p.
p
250
150 We expect an increase in the US gas rig count to drive performance in the Well
Nov-08 Feb-09 May-09 Aug-09 Nov-09 Support division and efficiency improvements in Gas Turbines to lift margins to
double digit by 2011E (2009E margin 8.1%).

YTD 1m 3m 12m While we believe the engineering and construction companies will face a challenging
Abs 64.2% -10.1% 4.0% 46.3% 2010, we believe Wood Group is a relative outperformer given its more resilient
business model (55% of revenues are from oil company opex.) The key risk to our
call is if there continues to be downward pricing pressure in engineering, a slower
than expected recovery for US onshore gas drilling and rising competition for the
production facilities business. Our June-2010 price target of 365p is based on an
evenly-weighted multiple of EV/Sales and EV/Capital Employed. Based on 2011E
EBIT margin forecast of 7.5%, we apply 0.7x 2011 EV/Sales, 7% discount due to the
cyclicality of Well Support and Engineering. Based on 2011E pre-tax ROACE of
22.5%, we apply 2.0x 2011 EV/CE, also a 7% discount.
John Wood Group (WG.L;WG/ LN)

Adj. EPS FY ($) 0.36 0.48 0.39 0.36 0.44 Price (p) 308
EBITDA FY ($ mn) 379 511 425 402 462 Price Target (p) 365
EBITDA margin FY 8.5% 9.8% 9.0% 8.7% 9.3% Price Target End Date 30 Jun 10
EBIT FY ($ mn) 285 416 336 313 372 52-week Range (p) 355 - 152
EBIT margin FY 6.4% 7.9% 7.1% 6.8% 7.5% Mkt Cap (£ bn) 1.62
Net Attributable Income FY 192 252 201 188 229 Shares O/S (mn) 528
($ mn)
EV/Revenue FY 0.7 0.6 0.6 0.6 0.6
Adj P/E FY 13.4 10.2 12.7 13.6 11.1
140
(44-20) 7325-5242 07 December 2009
John Wood Group: Summary of Financials

Revenues 4,433 5,243 4,726 4,634 4,983 Shares in issue (mn) 526 523 521 521 521
Growth % 27.8% 18.3% (9.9%) (2.0%) 7.5% DPS (cents) 7 9 10 11 12
EBITDA 379 511 425 402 462 Dividend payout ratio 21.2% 18.2% 25.2% 29.7% 26.7%
Y/Y Growth (%) 42.1% 35.0% (16.8%) (5.6%) 15.0%
EBITA 318 441 358 333 390 Valuation
% Change Y/Y 48.0% 38.5% -18.7% -7.1% 17.2% Market Cap ($ bn) 1.62
E&PF 214 316 275 244 267 P/E adjusted 13.4 10.2 12.7 13.6 11.1
Well Support 87 105 65 64 80 P/BV 2.6 2.2 2.0 1.8 1.6
Gas Turbines 64 73 65 71 89 P/CF 8.4 6.0 7.7 8.1 7.2
EBITA Margin (%) 7.2% 8.4% 7.6% 7.2% 7.8% EV/CE 3.0 2.6 2.3 2.1 1.9
E&PF 8.3% 9.7% 8.9% 8.1% 8.5% EV/DACF (Static EV) 10.1 7.2 10.3 10.8 9.4
Well Support 10.1% 10.4% 8.2% 8.1% 8.8% EV/Sales 0.7 0.6 0.6 0.6 0.6
Gas Turbines 6.7% 7.6% 8.1% 8.8% 10.0% EV/EBITDA 7.9 5.9 7.1 7.5 6.5
Amortisation 33 25 22 20 18 CF Yield 10.8% 15.2% 11.8% 11.1% 12.6%
Net interest (+) expense (-) 25 32 32 28 27 FCF yield (before WC) 3.7% 9.8% 7.9% 8.1% 10.7%
FCF Yield 1.1% 2.5% 4.2% 4.0% 7.4%
Profit before Tax 260 384 305 285 346 Dividend Yield 1.5% 1.9% 2.1% 2.3% 2.6%
Tax 91 129 103 96 115 Buyback Yield 0.0% 0.0% -0.0% 0.0% 0.0%
as a % of EBT 35.0% 33.5% 32.5% 32.5% 32.5% Combined Yield 1.5% 1.9% 2.1% 2.3% 2.6%
Minorities 4 4 1 1 1
Net Income (Adjusted) 192 252 201 188 229 Ratios
% change Y/Y 59.2% 31.2% (20.1%) (6.6%) 22.1% Net Debt/EBITDA 0.7 0.5 0.5 0.5 0.2
EPS (basic) ($c) 32.96 49.57 39.67 37.07 45.24 Net Debt/Equity 28.3% 22.5% 16.9% 13.6% 5.1%
EPS (diluted) ($c) 0.36 0.48 0.39 0.36 0.44 ROE 19.5% 21.9% 15.4% 13.1% 14.3%
Adjusted EPS (diluted) ($c) 0.36 0.48 0.39 0.36 0.44 ROACE pre-tax 26.4% 32.8% 23.0% 19.9% 22.5%
Growth (%) 55.7% 31.7% (19.7%) (6.6%) 22.1% ROACE post-tax 17.6% 20.1% 15.1% 13.1% 14.9%
Balance sheet Cash flow statement

Total Non current assets 903 958 994 1,009 998 EBITA 318 441 358 333 390
Goodwill 576 632 660 664 646 Income Tax Paid (106) (112) (103) (96) (115)
PPE 272 263 271 282 289 Depreciation 71 96 89 89 89
Other Non current assets 55 63 63 63 63 Others 22 18 0 0 0
Total Current assets 1,567 1,844 1,892 1,972 2,088 Cash Earnings 297 418 323 306 346
Cash and cash equivalent 117 176 153 89 142 Increase/(Decrease) in WC (64) (176) (82) (91) (66)
Other current assets 52 53 53 53 53 Cash flow from operations 233 241 241 215 280
Total assets 2,470 2,802 2,886 2,981 3,086 Capex (81) (84) (80) (80) (78)
Other CFI (123) (88) (45) (23) 0
Total Current Liabilities 985 1,062 1,051 1,104 1,101 Cash flow from Investing activities (204) (172) (125) (103) (78)
Capital Increase / (Share Buyback) 0 0 (1) 0 0
Total non-current liabilities 500 593 533 443 383 Debt raised / (Debt repaid) (18) 106 (60) (90) (60)
Dividends paid (26) (29) (32) (28) (27)
Total liabilities 2,470 2,802 2,886 2,981 3,086 Other CFF (13) (66) (47) (57) (62)
Shareholders Equity 975 1,134 1,289 1,421 1,589 Cash flow from Financing Activities (57) 11 (139) (175) (149)
Minority Interests 11 13 13 13 13 Net Change in Cash (23) 59 (23) (64) 53
Total liabilities & SE 2,470 2,802 2,886 2,981 3,086 DACF 297 418 291 277 320
FCF (ex-WK) 216 334 243 226 268
Net debt 279 258 220 194 82 CFPS (based on DACF) 0.56 0.80 0.56 0.53 0.61
Capital Employed 986 1,147 1,302 1,434 1,602 CFPS (based on Cash Earnings) 0.56 0.80 0.62 0.59 0.66
CFPS (based on FCF) 0.20 0.48 0.37 0.43 0.51
141
(44-20) 7325-5242 07 December 2009
142
(44-20) 7325-5242 07 December 2009
Stocks to Avoid
Acergy ...................................................................144
Acerinox ................................................................146
AstraZeneca ..........................................................148
Barry Callebaut .....................................................150
Clariant ..................................................................152
Diageo ...................................................................154
Drax .......................................................................156
Ericsson ................................................................158
Fiat .........................................................................160
Hermès ..................................................................162
Husqvarna .............................................................164
Italcementi.............................................................166
IVG .........................................................................168
Lagardère ..............................................................170
Nordea ...................................................................172
Oriflame .................................................................174
Panalpina...............................................................176
RBS ........................................................................178
Stocks to Avoid
Sainsbury ..............................................................180
STMicroelectronics ..............................................182
Swedish Match......................................................184
Telecom Italia........................................................186
Unipol ....................................................................188

143
(44-20) 7325-5242 07 December 2009
Underweight Acergy
NKR 83.55
30 November 2009 West Africa – an opportunity and a hindrance
Price Target: Nkr 67 Concerns about the next cycle
Acergy is one of the global leaders in subsea construction and offshore inspection,
Oil Services & Equipment maintenance and repair (IMR). We believe the longer-term outlook for subsea
Amy Wong
AC construction remains good and there is currently limited expertise to supply
(44-20) 7325-9460 technically challenging subsea construction services. Although we expect global oil
amy.wong@jpmorgan.com & gas capex to begin recovering in 2010, we believe that West Africa, particularly
Nigeria, could face more delays due to political risks. With over 40% of Acergy’s
revenues (2009E) from West Africa and the prospect of SURF awards in the region
Flagship reports unclear, we remain cautious. We prefer to gain exposure to the deepwater
• Acergy: Focus on Offshore Installation,
construction theme through diversified E&C firm Technip (€45.44).
19 Feb 09
• European Oil Services & Equipment:
Share Prices Discounting High Long- Flexing downside
term Growth, 27 May 09 Because of the long-term nature of construction contracts, we believe the uptick in
• European Oil Services: Latest Backlog revenues over 2011 and 2012 could be quite limited because of the void in contract
Coverage & Vessel Utilization data, 22
awards in H208 and in 2009. We currently estimate y/y revenue growth of -5% and
Sep 09
+6% in 2011 and 2012, respectively. However, if 2011 revenues and margins are flat
on 2010, then our price target would decrease to NKr60/share.
Price Performance
90 Catalysts – 2010 and beyond
We recognize that there are numerous deepwater projects in pre-FID phase,
70
NKr
especially in West Africa. If Acergy were to win a large share of these awards or
50 these projects were sanctioned sooner than expected, Acergy’s backlog and
30
consequently earnings could improve significantly.
Performance (%)
Acergy trades on 26.0x 2010 P/E, which is a hefty 56% premium to the sector and
YTD 1m 3m 12m 45% premium to SURF peers20. Our June-2010 price target of Nkr 67/share is based
Abs 119.1% 12.5% 37.0% 135.7% on an evenly-weighted multiple of EV/Sales and EV/Capital Employed. Based on
2011 EBIT margin forecast of 11.6%, we apply 1.0x 2011 EV/Sales, 10% discount
due to the higher risk nature and cyclicality of the business. Based on 2011 pre-tax
ROACE of 22.4%, we apply 2.0x 2011 EV/CE, also a 10% discount. The main risk
to our call is if Acergy wins a larger than expected share of awards in the near term.
Acergy SA (ACY.OL;ACY NO)

FYE Nov 2007A 2008A 2009E 2010E 2011E Company Data
Adj P/E FY 14.5 10.9 17.3 26.0 20.0 Price (Nkr) 83.55
EBITDA FY ($ mn) 450 569 406 331 386 Price Target (Nkr) 67.00
EBITDA margin FY 16.9% 22.5% 18.9% 16.2% 17.9% Price Target End Date 30 Jun 10
EBIT FY ($ mn) 357 461 278 196 250 52-week Range (NKr) 86.25 - 31.50
EBIT margin FY 13.4% 18.3% 12.9% 9.6% 11.6% Mkt Cap (Nkr bn) 16.3
Net Attributable Income FY 161 308 200 117 152 Shares O/S (mn) 195
($ mn)
EV/Revenue FY 0.9 1.0 1.1 1.2 1.1
Adj. EPS FY ($) 1.01 1.35 0.85 0.57 0.74
20
Saipem, Technip and Subsea 7
144
(44-20) 7325-5242 07 December 2009
Acergy: Summary of Financials

$ in millions, year end Nov FY07 FY08 FY09E FY10E FY11E $ in millions, year end Nov FY07 FY08 FY09E FY10E FY11E
Revenues 2,663 2,522 2,153 2,035 2,157 Shares in issue (mn) 188 184 183 183 183
% Change Y/Y 25.4% (5.3%) (14.7%) (5.5%) 6.0% DPS (cents) 0.21 0.22 0.22 0.22 0.22
EBITDA (adjusted) 450 569 406 331 386 Dividend payout ratio 24.6% 13.2% 20.1% 34.5% 26.5%
Africa & Mediterranean (mn) 257 215 177 135 150 Valuation
Northern Europe & Canada 139 202 30 47 60 Market Cap (Nkr bn) 16.3
SA, Asia, JV & Associates (mn) 39 152 143 138 144 P/E adjusted 14.5 10.9 17.3 26.0 20.0
EBIDA Margin (%) 16.9% 22.5% 18.9% 16.2% 17.9% P/BV 3.8 3.4 2.3 2.2 2.0
Africa & Mediterranean (mn) 18.4% 18.3% 19.1% 14.1% 15.0% P/CF 9.3 6.2 9.7 11.8 10.2
Northern Europe & Canada 15.4% 24.0% 5.0% 8.4% 10.2% EV/CE 2.9 2.6 2.7 2.6 2.5
SA, Asia, JV & Associates (mn) 10.8% 30.1% 24.2% 25.6% 23.9% EV/DACF 8.2 5.4 8.4 10.2 9.0
Depreciation 93 108 128 135 136 EV/Sales 0.9 1.0 1.1 1.2 1.1
EBIT (reported) 357 461 278 196 250 EV/EBITDA 5.5 4.3 6.1 7.5 6.4
EBIT (adjusted) 357 428 278 196 250 CF Yield 10.8% 16.2% 10.3% 8.5% 9.8%
Adjusted EBIT margin (%) 13.4% 17.0% 12.9% 9.6% 11.6% FCF Yield 3.0% 6.2% 5.8% 3.3% 4.5%
Net financial items 8 (13) (24) (22) (24) FCF yield ex-w/c 0.8% 6.3% 6.1% 3.4% 4.4%
Other gains and losses (Fx) (10) 45 12 0 - Dividend Yield 1.6% 1.6% 1.6% 1.6% 1.6%
Earnings before tax 355 493 266 174 226 Buyback Yield 5.9% 5.6% - - -
Tax (200) (163) (90) (57) (75) Combined Yield 7.5% 7.2% 1.6% 1.6% 1.6%
as a % of EBT 56.3% 35.5% 34.0% 33.0% 33.0%
Net Income (Reported) 161 308 200 117 152 Ratios
Net Income (Adjusted) 216 280 175 117 152 Net Debt (Cash) / Equity 15.9% 19.3% (22.2%) (23.9%) (26.6%)
% change Y/Y (5.2%) 29.4% (37.4%) (33.5%) 30.2% Net Debt / EBITDA 0.3 0.3 - - -
EPS (reported), basic($) 0.86 1.67 1.10 0.64 0.83 ROE 29.0% 34.9% 15.0% 9.3% 11.2%
EPS (adjusted, diluted) ($) 1.01 1.35 0.85 0.57 0.74 ROACE pre-tax 44.5% 50.8% 29.7% 21.0% 25.6%
% change Y/Y (14.1%) 33.3% (36.9%) (33.5%) 30.2% ROACE post-tax 27.1% 32.6% 20.7% 14.3% 16.9%
Balance sheet Cash flow statement

$ in millions, year end Nov FY07 FY08 FY09E FY10E FY11E $ in millions, year end Nov FY07 FY08 FY09E FY10E FY11E
Total Non current assets 986 1,139 1,151 1,166 1,186 EBIT 357 461 278 196 250
Goodwill 0 4 4 4 4 Income Tax Paid (200) (163) (90) (57) (75)
PPE 788 908 919 935 955 Depreciation & impairment 78 108 128 135 136
Other Non current assets 199 232 232 232 232 Cash Earnings 306 448 284 233 268
Total Current assets 1,435 1,332 1,584 1,610 1,727 Increase/(Decrease) in WC 6 3 7 2 (2)
Cash and cash equivalent 592 573 666 700 756 Cash flow from operations 468 632 393 315 364
Other current assets 844 759 917 910 971 Capex (246) (294) (140) (150) (156)
Total assets 2,422 2,471 2,735 2,777 2,914 Other CFI 16 0 0 0 0
Cash flow from Investing activities (230) (294) (140) (150) (156)
Total Current Liabilities 1,082 1,114 1,019 988 1,020 Capital Increase / (Share Buyback) (147) (138) 0 0 0
Debt raised / (Debt repaid) 0 0 (10) (4) (6)
Total non-current liabilities 593 556 545 541 535 Dividends paid (46) (46) (48) (47) (47)
Other CFF 14 0 0 0 0
Total liabilities 1,675 1,670 1,564 1,530 1,555 Cash flow from Financing Activities (179) (185) (58) (51) (53)
Shareholders Equity 729 787 1,157 1,233 1,345 Net Change in Cash (135) (28) 93 34 56
Minority interests 18 14 14 14 14 DACF 302 456 293 242 274
Total liabilities & SE 2,422 2,471 2,735 2,777 2,914 FCF (ex-WK) 60 154 144 83 112
CFPS (based on DACF) 1.42 2.20 1.43 1.17 1.33
Net debt 116 152 (257) (295) (357) CFPS (based on Cash Earnings) 1.43 2.16 1.38 1.13 1.30
Capital Employed 862 953 914 952 1,001 CFPS (based on FCF) 0.28 0.74 0.70 0.40 0.54
145
(44-20) 7325-5242 07 December 2009
Underweight Acerinox
€13.79
30 November 2009 2010 return to profitability appears already priced in
Price Target: €14 Concerns about the next cycle
While we believe ACX has reached an earnings inflection point and the company
Steel should return to profitability in 2010, we think ACX shares price in a stronger than
Jeffrey Largey
AC anticipated profit recovery (JPM forecasts 2010 EBIT of €314 million vs. Bloomberg
(44-20) 7325-9744 consensus of €320 million as of November 30). We are generally constructive on the
largey_jeffrey@jpmorgan.com overall steel sector but we are relatively more cautious on stainless steel given its high
Ben Defay exposure to consumer end markets (~33% of stainless demand) and the unpredictable
(44-20) 7325-9231 purchasing behavior of its substantial distribution customer base (~50% in Europe).
ben.defay@jpmorgan.com
Flexing downside
Our 2010 earnings forecasts for ACX assume a modest €20/tonne increase in base
Flagship reports prices compared to November 2009 levels of €1,350/tonne. While we note that ACX
• Acerinox; Lowering 2009 forecast;
expects base prices to continue to increase in 1Q 2010 (potentially by €50-100/tonne),
Remain UW, 04 Nov 09
• European Stainless Steel; Outlook we cannot rule out that base prices will experience a correction as end market demand
improves, upgrading Outokumpu to remains relatively weak and a fall in the nickel price could further exacerbate volatile
OW, 13 Jul 09 purchasing activity from distribution customers. Moreover, the European stainless steel
• European stainless steel; Reducing ’09 industry continues to struggle with structural over capacity and a further price move to
estimates for ACX and Outokumpu,
the upside is likely to bring more supply back into the market as EAF based stainless
2010 return to profitability priced in, 20
Apr 09 steel production capacity is easily ramped up (our 2010 forecasts assume 75-80%
capacity utilization rate compared to 70-75% in 4Q 2009).

14 While we do not believe ACX is a likely M&A target, consolidation and
€ rationalization of the European stainless industry could have an indirect benefit in
11
8
terms of bringing about a better European supply/demand balance. We think
Dec-08 Mar-09 Jun-09 Sep-09 investors looking to play the stainless space from an opportunistic or special
ACX.MC share price (€) situations point of view would likely have more success via the stainless steel pure
MSCI-Eu (rebased) play––Outokumpu (€11.5). We also expect investor attention to increasingly shift
towards the 2011 ramp up of the greenfield project in Malaysia (Bahru Stainless).
Performance (%)
YTD 1m 3m 12m ACX trades at 9.7x 2010E EBITDA and 20.7x 2010E P/E, which we believe already
Abs 21.2% 1.6% -7.3% 34.0% incorporates a swing from a substantial EBIT loss in 2009 to meaningful profitability
Rel -0.3% 1.6% -10.4% 9.9% in 2010. We derive our June 2010 PT of €14 using a historical forward EV/EBITDA
multiple of 9.5x. Positive risks include higher than expected stainless base prices
which could underpin 2010 earnings, and if ACX chooses to enter into a merger
agreement with another stainless steel producer.
Acerinox S.A. (ACX.MC;ACX SM)

Adj. EPS FY (€) (0.05) (0.93) 0.67 1.05 1.20 Price (€) 13.79
Revenue FY (€ mn) 5,051 3,151 4,634 5,185 5,402 Date Of Price 30 Nov 09
EBITDA FY (€ mn) 300 (174) 452 607 662 Price Target (€) 14.00
EBITDA margin FY 5.9% -5.5% 9.8% 11.7% 12.3% Price Target End Date 30 Jun 10
EBIT FY (€ mn) 48 (326) 314 470 524 52-week Range (€) 15.44 - 7.94
EBIT margin FY 0.9% -10.3% 6.8% 9.1% 9.7% Mkt Cap (€ bn) 3.4
Adj P/E FY NM NM 20.7 13.1 11.5 Shares O/S (mn) 249
ROE FY -0.5% -13.8% 7.7% 11.3% 12.4%
146
(44-20) 7325-5242 07 December 2009
Acerinox: Summary of Financials

Revenues 6,901 5,051 3,151 4,634 5,185 EBIT 526 48 (326) 314 470
% Change Y/Y 22.4% -26.8% -37.6% 47.1% 11.9% Depreciation & amortization 129 252 152 138 137
Gross Margin (%) - - - - - Change in working capital & Other - 453 492 (394) 49
EBITDA 655 300 (174) 452 607 Taxes - - - - -
% Change Y/Y -33.9% -54.2% -158.1% -359.5% 34.3% Cash flow from operations 655 753 318 58 657
EBITDA Margin (%) 9.5% 5.9% -5.5% 9.8% 11.7%
EBIT 526 48 (326) 314 470 Capex (210) (328) (192) (200) (200)
% Change Y/Y -38.7% -90.9% -779.6% -196.5% 49.5% Disposals/(purchase) - - - - -
EBIT Margin 7.6% 0.9% -10.3% 6.8% 9.1% Net Interest - - - - -
Net Interest (68) (65) (59) (61) (72) Free cash flow 409 168 218 (287) 253
Earnings before tax 459 -17 -359 253 398
% change Y/Y -42.7% -103.7% 2044.2% -170.5% 57.2% Equity raised/repaid - - - - -
Tax (144) 8 115 (84) (131) Debt Raised/repaid - - - - -
Tax as a % of BT - - - - - Dividends paid (93) (115) (88) (88) (88)
Net Income (Reported) 312 (10) (233) 168 264 Other - - - - -
% change Y/Y -37.9% -103.3% 2130.5% -171.9% 57.6%
Shares Outstanding (m) 259.2 256.9 251.8 251.8 251.8 Beginning cash 44 167 80 209 -166
EPS (Reported) - $ 1.20 -0.05 -0.93 0.67 1.05 Ending cash 167 80 209 -166 -1
% Change Y/Y (37.8%) (104.4%) 1640.9% (171.8%) 57.6% DPS 0.35 0.35 0.35 0.35 0.35

Cash and cash equivalents 167 80 209 (166) (1) EBITDA margin (%) 9.5% 5.9% -5.5% 9.8% 11.7%
Accounts Receivable 813 388 402 492 518 Operating margin (%) 7.6% 0.9% NM 6.8% 9.1%
Inventories 1,856 1,388 964 1,291 1,222 Net margin (%) 4.5% NM NM 3.6% 5.1%
Others 20 8 12 12 12 SG&A/Sales - - - - -
Current assets 2,884 1,882 1,597 1,640 1,762
Sales per share growth 22.6% -26.2% -36.4% 47.1% 11.9%
LT investments - - - - - Sales growth (%) 22.4% -26.8% -37.6% 47.1% 11.9%
Net fixed assets - - - - - Attributable net profit growth (%) -37.9% -103.3% 2130.5% -171.9% 57.6%
Total assets 4,446 3,727 3,940 4,342 4,492 EPS growth (%) (37.8%) (104.4%) 1640.9% (171.8%) 57.6%
Liabilities
ST loans 685 407 468 468 468 Interest coverage (x) 7.8 0.7 5.6 5.1 6.5
Payables 762 341 422 445 451 Net debt to Total Capital - - - - -
Others 699 453 597 476 473 Net debt to equity 38.4% 47.2% 49.1% 54.7% 44.7%
Total current liabilities 1,461 794 1,020 922 925 Sales/assets (x) - - - - -
Long term debt 405 616 622 622 622 Total Assets/Equity 192.7% 184.4% 233.4% 198.3% 192.3%
Other liabilities 273 297 610 610 610 ROE 13.5% -0.5% -13.8% 7.7% 11.3%
Total liabilities 2,139 1,706 2,251 2,153 2,156 ROCE 17.6% 1.6% -11.2% 9.2% 13.2%
BVPS - $ 9 8 7 9 9
147
(44-20) 7325-5242 07 December 2009
Underweight AstraZeneca
£27.17
30 November 2009 Sustainability question remains unaddressed
Price Target: £29.60 Concerns about the next cycle
AZN is the only company that hasn’t addressed the issue of sustainability: After
Pharmaceuticals strong earnings growth in 2009, we now expect 3 years of flat earnings up to 2012,
Alexandra Hauber
AC followed by steady decline thereafter, despite the positive pipeline developments in
(44-20) 7742-6655 / (1-312) 325-3694 2009 (Onglyza, Brilinta) due to exclusivity losses for the majority of key products.
alexandra.m.hauber@jpmorgan.com Consequently, AZN’s multiple should remain low when the sector eventually re-
Richard Vosser rates, which we expect to result in significant underperformance vs. peers.
(44-20) 7742-6652
richard.vosser@jpmorgan.com
While AZN has an impressive record of trimming fat from the business, we expect
further cost savings to only mitigate an EPS decline, rather than add growth.
David P Evans
(44-20) 7742-6654 With limited late stage pipeline assets beyond Brilinta, AZN needs to find growth
david.p.evans@jpmorgan.com externally. Given the narrow focus on the core pharma business, we are concerned
about a paucity of targets and intense competition from players with deep pockets.
Flagship reports Flexing downside
• AstraZeneca: 3Q'09 Results Review - Our forecasts include a best case scenario for Brilinta including US sales despite
Downgrade to Underweight, 08 Nov 09 uncertainty over a US approval, due to unconvincing data in US patients. Excluding
• AstraZeneca: 2Q Results Update,
these sales would reduce 2015 EPS by 3%. Further risks to forecasts could arise if
Looking Ahead to ESC, 20 Aug 09
AZN is unable to cut the underlying SG&A by $1.6bn from ’09 to 2015 or keep
annual R&D spend flat over these six years at around $4.4bn.
Price Performance
3,000 Catalysts – 2010 and beyond
p 2,400 1) ACCORD study presentation at the ACC ’10 (Mar 14-16, 2010, Atlanta) may
1,800
highlight a benefit of fenofibrate if added to statin therapy in diabetes patients. This would
give Certriad a head start (PDUFA April 4th ‘10) and could turn it into a blockbuster.
AZN.L share price (p) 2) Brilinta advisory panel in mid ’10 should result in significant volatility for AZN, with
MSCI-Eu (rebased)
the risk skewed to the downside from a potential non-approval in the US.
Performance (%) 3) Crestor patent ruling should be decided in AZN’s favour removing the overhang.
YTD 1M 3M 12M
Abs (%) -3.2% -0.9% -4.3% 12.3%
Rel (%) -23.0% -1.7% -5.0% -10.1% Our £29.60 YE 2010 price target is inline with our EmV of £29.60, implying 7.7x our
2010E core EPS of $6.44, a 22% discount to the European large cap sector. While
undemanding, we see this multiple as appropriate in view of negative EPS growth 09-
13E (-2%), and a relatively uncertain longer-term outlook for AZN beyond 2011. Key
upside risks to our rating and price target are: 1) Brilinta US approval, 2) Crestor US
court case victory or even favourable settlement, 3) Positive impact from the ACCORD
study, with substantial upside to Certriad, 4) Better margins than we model through the
upcoming expiries of Seroquel, Nexium and Crestor.
AstraZeneca (AZN.L;AZN LN)

Adj. EPS FY ($) 5.10 6.44 6.39 6.53 Price (p) 2,717
Headline EPS FY ($) 4.20 5.54 5.87 6.15 Price Target (p) 2,960
Revenue FY ($ mn) 31,601 32,633 32,490 32,695 Price Target End Date 30 Dec 10
EBIT FY ($ mn) 9,144 12,272 12,333 12,752 52-week Range (p) 2,966 - 2,126
EBIT margin FY 28.9% 37.6% 38.0% 39.0% Mkt Cap (£ bn) 39.59
Net Income FY ($ mn) 6,101 8,025 8,516 8,936 Shares O/S (mn) 1,457
DPS (Net) FY (p) 128 163 172 175
148
(44-20) 7325-5242 07 December 2009
AstraZeneca: Summary of Financials

$ in millions FY07A FY08A FY09E FY10E FY11E $ in millions FY07A FY08A FY09E FY10E FY11E
Revenue 29,559 31,601 32,633 32,490 32,695 EBIT 8,094 9,144 12,272 12,333 12,752
% change Y/Y 11.6% 6.9% 3.3% -0.4% 0.6% Depreciation & amortisation - 2,620 1,798 1,928 1,962
Gross Margin (%) 78.3% 79.1% 82.1% 82.3% 82.6% Change in working capital (443) (210) (140) 20 (28)
EBITDA 9,324 10,604 13,667 13,813 14,251 Taxes (2,563) (2,209) (3,167) (3,218) (3,376)
% change Y/Y -1.8% 13.7% 28.9% 1.1% 3.2% Cash flow from operations 7,510 8,742 9,900 10,372 10,620
EBITDA Margin (%) 31.5% 33.6% 41.9% 42.5% 43.6% Capex (1,076) (1,057) (1,105) (1,144) (1,152)
EBIT 8,094 9,144 12,272 12,333 12,752 Disposals/ (purchase) (15,054) (2,952) (93) (647) -
% change Y/Y -1.5% 13.0% 34.2% 0.5% 3.4% Net Interest 23 (541) (1,390) (902) (726)
EBIT Margin (%) 27.4% 28.9% 37.6% 38.0% 39.0% Free cash flow 6,434 7,685 8,795 9,228 9,468
Interest (111) (463) (700) (212) (36) Equity raised/(repaid) - (451) 100 100 100
Earnings before tax 7,983 8,681 11,572 12,121 12,716 Other 12,475 (760) (543) 1,008 1,166
% change Y/Y -6.6% 8.7% 33.3% 4.7% 4.9% Dividends paid (2,641) (2,739) (3,242) (3,838) (4,007)
Tax (2,356) (2,551) (3,519) (3,576) (3,751) Beginning cash - 5,727 4,123 4,157 5,461
as % of EBT 29.5% 29.4% 30.4% 29.5% 29.5% Ending cash - 4,123 4,483 5,787 7,986
Net Income (Reported) 5,595 6,101 8,025 8,516 8,936 DPS 93 128 163 172 175
% change Y/Y -7.4% 9.0% 31.5% 6.1% 4.9%
Shares Outstanding 1,457.0 1,447.1 1,449.4 1,451.4 1,453.2
EPS (reported) 3.74 4.20 5.54 5.87 6.15
% change Y/Y (3.1%) 12.2% 31.9% 6.0% 4.8%
$ in millions FY07A FY08A FY09E FY10E FY11E $ in millions FY07A FY08A FY09E FY10E FY11E
Cash and cash equivalents - 4,286 4,320 5,624 7,823 EBITDA Margin (%) 31.5% 33.6% 41.9% 42.5% 43.6%
Accounts receivable - 9,842 10,163 10,119 10,183 Operating margin 32.4% 34.7% 42.6% 41.1% 41.2%
Inventories - 1,636 1,689 1,682 1,693 Net profit margin 18.9% 19.3% 24.6% 26.2% 27.3%
Others - - - - - SG&A/Sales - -35.5% -33.4% -32.1% -31.1%
Current assets 17,082 16,152 16,560 17,813 20,087 R&D/Sales -17.5% -16.4% -13.5% -14.1% -14.3%
LT investments 182 156 187 225 270 Sales growth 11.6% 6.9% 3.3% -0.4% 0.6%
Net fixed assets 30,875 30,632 30,016 29,917 29,151 Net profit growth -6.6% 8.7% 33.3% 4.7% 4.9%
Total assets 47,957 46,784 46,576 47,729 49,238 EPS growth (38.7%) 16.3% 26.4% (0.8%) 2.2%

ST loans - 993 993 993 993 Dividend Coverage 0.0 0.0 0.0 0.0 0.0
Payables - 12,327 12,730 12,674 12,754 Net debt/equity 60.5% 44.3% 13.2% -6.9% -24.2%
Others 4,280 993 993 993 993 Sales/assets 0.6 0.7 0.7 0.7 0.7
Total current liabilities - 13,320 13,723 13,667 13,747 Assets/equity 3.2 2.9 2.4 2.0 1.7
Long term debt - 10,855 6,355 3,355 355 ROCE 24.7% 27.3% 37.4% 36.2% 35.9%
Other liabilities 6,979 6,549 6,680 6,816 6,958 ROE 37.2% 39.8% 45.1% 39.2% 34.5%
BVPS 10.2 11.1 13.7 16.5 19.4
149
(44-20) 7325-5242 07 December 2009
Underweight Barry Callebaut

CHF658
30 November 2009 Weak chocolate demand potentially leads to another miss
Price Target: CHF 525 Concerns about the next cycle
Sluggish global chocolate demand owing to high prices, further pressure from cocoa
costs, lower cocoa/butter ratio hurting grinding economics, and lower operating
leverages (lower volume growth), will all likely hurt the business in 2010. Sustained
AC
Pablo Zuanic double-digit pricing by most players in the industry has hurt chocolate demand and
(44-20) 7325-4664 the cocoa butter ratio has reached historically low levels impacting profitability.
pablo.zuanic@jpmorgan.com
Flexing downside
Despite the lower margins and volatility inherent to the company’s core B-to-B
Flagship reports model (ex retail/foodservice piece), the company has continued to trade in the 8-9x
• Updating Estimates, But Keep UW,
1yF FV/EBITDA range in part because of its above group average long-term growth
12 Nov 09
• Downgrade to UW From Neutral, targets. However, we believe several factors could lead to a structural derating: 1)
16 Oct 09 although now reduced to 6-8% pa (from 9-11% before), we believe the company’s
• Downgrading to Neutral from OW, new volume growth guidance may still be lofty in the current economic environment
27 Jan 09 (especially given continued price hikes at the retail level); 2) EBIT growth is tied to
volume growth by the most part and we see headwinds from higher cocoa costs (risk
of lack of full pass through) and the lower cocoa butter powder ratio, so actually
Price Performance
750 EBIT could even lag volume growth in 2010. We believe a lower valuation multiple
is justified. Even our 7x multiple used for the target price is above the peer group
650
SwF average of 5.5-6.0x. At 6x on our 2011E the stock would trade at CHF 420.
550
450
Volume growth data for fiscal 1Q10 (ending Nov) out on January 13th may provide a
sense of global chocolate demand. We will also track end retail chocolate sales based
on Nielsen data in the US and WE. Shifts in cocoa costs should have an effect on
Performance (%) Barry Callebaut shares both because of the potential profit margin impact but also
because of the impact on end consumer demand (as the higher costs are passed on).
YTD 1m 3m 12m
Commentary from large outsourcing clients like Hershey and Nestle should also have
Abs -2.3% 14.6% 18.0% -1.7%
an effect on Barry Callebaut sentiment.
The stock (down 11% YTD compared with +13% for Lindt and +9% for the Swiss
market) at CHF 658 currently trades at 7.8x our below consensus FY10 FV/EBITDA
estimates. We find this expensive for mostly a B-to-B model with single-digit EBIT
margins and increasing questions about LT volume growth potential. Our CHF 525
target price is based on 7x our FY11 FV/EBITDA estimate, which we think is more
appropriate given the earnings volatility and SMID cap peers. Key upside risks to our
rating and price target include: 1) global volume trends recover in a meaningful way,
2) new outsourcing contracts compensate for weaker global demand, 3) cocoa falls.
Barry Callebaut (BARN.S;BARN SW)
FYE Aug 2008A 2009A 2010E 2011E Company Data
Adj. EPS FY (SF) 40.23 43.85 44.34 48.47 Price (SF) 658.0
EBITDA FY (SF mn) 444 453 471 500 Date Of Price 30 Nov 09
Revenue FY (SF mn) 4,815 4,880 4,943 5,274 Price Target (SF) 525.00
FCF FY (SF mn) (85) 96 92 159 Price Target End Date 01 Sep 10
Net Debt FY (SF mn) 1,044 947 919 828 52-week Range (SwF) 735.45 - 466.00
Adj P/E FY 16.4 15.0 14.8 13.6 Mkt Cap (SF bn) 3.4
EV/EBITDA FY 8.5 8.1 7.8 7.1 Shares O/S (mn) 5
EV/Revenue FY 0.8 0.8 0.7 0.7
Net Debt/EBITDA FY 2.4 2.1 1.9 1.7
150
(44-20) 7325-5242 07 December 2009
Barry Callebaut: Summary of Financials

SwF in millions, year end Aug FY08 FY09 FY10E FY11E SwF in millions, year end Aug FY08 FY09 FY10E FY11E
Revenues 4,815 4,880 4,943 5,274 EBIT 341 351 371 397
% change Y/Y 17.3% 1.3% 1.3% 6.7% Change In Working Capital - - - -
Gross Margin (%) 14.6% 14.5% 0.2% 0.2% Depreciation & Amortisation 103 102 100 103
EBIT 341 351 371 397 Interest 91 82 0 0
EBIT Margin (%) 7.1% 7.2% 7.5% 7.5%
% change Y/Y 5.3% 2.8% 5.7% 7.0% Cash Flow From Operations 444 453 471 500
EBITDA 444 453 471 500 Capex (227) (113) - -
EBITDA Margin (%) 9.2% 9.3% 9.5% 9.5% Free Cash Flow (85) 96 92 159
% change Y/Y 3.9% 2.2% 4.0% 6.1% Acquisitons/ Divestments 16 2 - -
Net Interest (100) (92) (100) (93)
Profit before tax 242 260 271 303 Cash Flow From investing -181 -139 - -
Tax (33) (33) (41) (52) Dividends Paid - - - -
Tax Rate - - - - Share Repurchase - - - -
Net Profit (Reported) 208 227 229 251
% change Y/Y 0.6% 9.0% 1.1% 9.3% Cash flow from financing 16 -78 - -
Adjusted Earnings 208 227 229 251
Diluted Shares Outstanding 5 5 5 5 Net cash/(debt) at start of year -939 -1,044 -947 -919
EPS (Reported) 40.23 43.85 44.34 48.47 Decrease/(Increase) in Net debt (105) 98 28 90
% change y/y 0.6% 9.0% 1.1% 9.3% Net cash/(debt) at end of year -1,044 -947 -919 -828
EPS (Adjusted) 40.23 43.85 44.34 48.47
% change Y/Y 0.6% 9.0% 1.1% 9.3%

SwF in millions, year end Aug FY08 FY09 FY10E FY11E SwF in millions, year end Aug FY08 FY09 FY10E FY11E

Cash & Cash Equivalents 35 34 30 30 Basic Earnings per share 40.23 43.85 44.34 48.47
Accounts Receivables 331 525 532 567 Diluted Earnings per share 40.23 43.85 44.34 48.47
Inventories 1,415 1,295 1,411 1,506 Dividend per share - - - -
Current Assets 2,306 2,083 2,204 2,349
Tangible Assets 2,233 2,199 2,324 2,444
Net Fixed Assets 2,233 2,199 2,324 2,444 Adj P/E Multiple 16.4 15.0 14.8 13.6
Total assets 3,729 3,515 3,661 3,824 EV/EBITDA Mutiple 8.5 8.1 7.8 7.1
P/CEPS 11.0 11.0 11.0 11.0
Liabilities
ST Loans 398 223 191 101 Net Debt/Equity 88.7% 75.3% 64.6% 51.7%
Long-term liabilities 622 728 728 728
Provisions - - - -
151
(44-20) 7325-5242 07 December 2009
Underweight Clariant
SFr10.61
30 November 2009 End-market fragmentation and trough operating rates to
Price Target: SFr9.3 continue to pressure prices
Concerns about the next cycle
Chemicals We see an ongoing risk that significant industry overcapacity will lead to price
Neil Tyler
AC pressure in a number of Clariant’s businesses. We calculate that Clariant’s 2010 sales
(44-20) 7325-9935 volumes will still be 17% below the early ’08 peak, and 10% below the 5 year
neil.c.tyler@jpmorgan.com average. The asset utilisation situation likely to be similar (or worse) at its
Heidi Vesterinen competitors and with Clariant’s main industries yet to see meaningful asset
(44-20) 7325-4537 retirement or consolidation, we expect this backdrop to translate into price pressure.
heidi.m.vesterinen@jpmorgan.com
Flexing downside
Our current 2010 estimates assume a 3.9% (SFr260m) YoY price decline. However,
Flagship reports Clariant’s prices are only 5% from their all time highs, and have fallen almost 3%
• European Chemicals; 2010 may sequentially in 3Q2009. Consequently, we view a further 4% price decline in 2010
contain obstacles to continue earnings
under the current operating environment as at the lower end of the potential range. In
development, 25 Nov 09
addition, we expect raw material costs to increase again in 2010, with a 5% increase
equivalent to SFr170m of cost inflation.
Price Performance
12
We expect the early part of 2010 to see a combination of pressures on margins. As
9 well as offering the most challenging comparatives from a pricing standpoint,
SwF
6 1H2010 will likely house the majority of the raw material and energy cost inflation
that we anticipate for 2010.
3
At best, should Clariant achieve its ROIC targets, it would remain below average in
Performance (%) terms of both returns and growth in the context of the European Chemicals sector.
Consequently we see little reason for the shares to trade at anything other than a
YTD 1m 3m 12m significant discount to the sector average earnings multiple (12.4x 2011E). Given its
Abs 48.8% 7.8% 11.7% 53.8% track record on restructuring costs, it is appropriate in our view that these ongoing costs
should be reflected in valuation. Assuming an additional SFr150m of restructuring costs
within our forecasts implies the shares are currently trading at 19x our 2011E estimates.
We have a Dec-10 DCF-based price target of SFr9.3 (WACC 9.1%, terminal growth
rate 2.0%). Key risks to our rating and price target are i) change of ownership –
although we believe the structural pressures facing Clariant’s business, the lack of cash
flow, as well as the potential difficulties (costs) of an exit would deter a takeover bid,
we would not dismiss the possibility out of hand; ii) further raw material cost inflation.
Clariant International Ltd (CLN.VX;CLN VX)

Adj. EPS FY (SF) 1.06 1.14 0.63 0.93 1.11 Price (SF) 10.61
Revenue FY (SF mn) 8,533 8,071 6,606 6,797 6,840 Date Of Price 30 Nov 09
EBITDA FY (SF mn) 812 783 492 555 613 Price Target (SF) 9.30
EBIT FY (SF mn) 539 530 269 329 379 Price Target End Date 31 Dec 10
EV/Revenue FY 0.6 0.4 0.5 0.5 0.5 52-week Range (SwF) 11.37 - 3.61
EV/EBITDA FY 6.3 4.4 6.5 5.8 5.2 Mkt Cap (SF bn) 2.4
FCF Yield FY 6.3% 6.8% 19.8% 10.0% 10.5%
152
(44-20) 7325-5242 07 December 2009
Clariant: Summary of Financials

Revenues 8,533 8,071 6,606 6,797 6,840 EBIT - - - - -

% Change Y/Y 1.8% -5.4% -18.1% 2.9% 0.6% Depreciation & amortization (273) (253) (223) (226) (234)
Gross Margin (%) 29.2% 28.7% 28.2% 28.7% 29.4%
EBITDA (pre - restructuring) 812 783 492 555 613 Change in working capital 57 (89) 280 (35) (8)
% Change Y/Y -5.0% -3.6% -37.2% 12.9% 10.5% Taxes (99) (119) 9 (12) (52)
EBITDA Margin (%) 9.5% 9.7% 7.4% 8.2% 9.0% Cash flow from operations 1,352 1,174 1,058 814 970
EBIT (pre - restructuring) 539 530 269 329 379 Capex (312) (270) (140) (180) (210)
% Change Y/Y -9.0% -1.7% -49.3% 22.4% 15.2% Acquisitions/disposals 58 (8) (40) - (23)
EBIT Margin 6.3% 6.6% 4.1% 4.8% 5.5% Net Interest 48 86 55 42 40
Net Interest 48 86 55 42 40 Free cash flow 325 236 632 321 337
Earnings before tax (reported) 207 91 -37 38 191 FCF (pre - exceptionals) 277 150 577 279 297
% change Y/Y -28.1% -56.0% -140.2% -203.9% 403.7% Equity raised/repaid (65) (63) 0 - 0
Tax (99) (119) 9 (12) (52) Debt Raised/repaid -9 -263 0 - 0
Reported tax rate (%) 45.8% 119.0% 32.0% 26.0% 26.0% Other 0 (32) 0 - 0
Net Income Rep (2) (45) (36) 18 131 Dividends paid (9) (5) 0 0 (37)
% change Y/Y -97.2% 2150.0% -20.6% -149.7% 638.7% Beginning cash 485 676 356 803 893
Shares Outstanding 227.15 226.53 226.53 226.53 226.53 Ending cash 676 356 803 893 1,017
Reported EPS -0.01 -0.20 -0.16 0.08 0.58 DPS 0.25 0.00 0.00 0.16 0.18
Adjusted EPS 1.06 1.14 0.63 0.93 1.11

Cash and cash equivalent 676 356 803 893 1,017 Market Cap 3,890 2,122 2,122 2,122 2,122
Accounts Receivables 1,449 1,110 1,196 1,231 1,239 Net debt 1,361 1,209 762 672 548
Inventories 1,477 1,373 1,026 1,056 1,063 EV 5,120 3,467 3,196 3,196 3,196
Others - - - - -
Current assets 3,999 3,171 3,357 3,512 3,650 EV/Sales 0.6 0.4 0.5 0.5 0.5
LT investments 650 579 570 561 552 EV/EBITDA 6.3 4.4 6.5 5.8 5.2
Net fixed assets 2,636 2,196 2,122 2,085 2,070 EV/EBIT 9.5 6.5 11.9 9.7 8.4
Total assets 7,285 5,946 6,049 6,158 6,272 P/E (adjusted EPS) 10.0 9.3 16.8 11.4 9.6
Liabilities FCF yield 6.3% 6.8% 19.8% 10.0% 10.5%

ST loans 728 268 268 268 268 Dividend per share 0.25 0.00 0.00 0.16 0.18
Payables 1,321 1,011 1,030 1,060 1,067 Dividend Yield 1.5% 0.0% 0.0% 1.6% 1.8%
Others 925 803 963 968 973 EPS growth NM 7.3% NM 47.8% 18.6%
Total current liabilities 2,721 1,859 2,079 2,122 2,144
Long term debt 1,267 1,297 1,297 1,297 1,297 Net debt /EBITDA 1.7 1.5 1.6 1.2 0.9
Other liabilities - - - - - Interest coverage (x) 11.2 6.2 4.9 7.9 9.6
Total liabilities 4,913 3,959 4,338 4,387 4,414 Net debt to Total Capital 36.5% 37.8% 30.8% 27.5% 22.8%
Shareholders' equity 2,372 1,987 1,711 1,771 1,858 Net debt to equity 56.0% 59.4% 43.3% 36.9% 28.7%
ROIC 0.1% -0.0% 0.0% 0.1% 0.1%
153
(44-20) 7325-5242 07 December 2009
Neutral Diageo
1025p
30 November 2009 Growth lagging the peers
Price Target: 933p Concerns about the next cycle
Diageo lagged its peer group in terms of growth through the last cycle and is set to
do this again in the absence of any dramatic M&A activity in our view. Whilst we
Beverages
would expect revenue growth to eventually return to mid single-digit growth, in the
AC
Mike Gibbs absence of recovery in price and mix this will not translate into any meaningful uplift
(44-20) 7325-1205 in margin. Diageo’s category and geographical mix acted as a drag on gross margin
mike.j.gibbs@jpmorgan.com
in the good years: right now gross margins are falling. Profit growth is coming from
Vanessa Lai Min cost savings in an industry where capacity for such savings is limited and from
(44-20) 7325-4240
pulling back on marketing investment. This cannot continue. Diageo has
vanessa.laimin@jpmorgan.com
disproportionate exposure to the problematic markets in W Europe (GB, Spain and
Ireland) and to the US where we think industry pricing power will be constrained
Flagship reports until the back end of the economic cycle. Price not volume drives margin in spirits.
• It’s all in the mix, 28 Aug 09 In emerging markets it lacks an “owned”, scale platform in some Asia growth
• An affordable luxury, 28 Apr 09 markets like India and China and the very rapid profit growth from the African beer
• What’s that coming over the hill.., 09 business is set to slow. The risk for investors is that Diageo seeks to “gear up” its
Dec 08
growth algorithm through an expensive M&A transaction.
Price Performance Flexing downside

We already have downside from our DCF model. If we assume an uplift to low rather
1,100 than mid single-digit sales growth in FY11E and FY12E off the flat margin we
p 900 expect (and which has been delivered historically) this could reduce our DCF
700 valuation by a further 110p.
DGE.L share price (p) Catalysts – 2010 and beyond

MSCI-Eu (rebased)
Cost savings of £120mn are on track for FY10E and Diageo is still benefiting from
media rate deflation. So despite current organic sales decline, guidance for FY10E at
Performance (%) low single-digit operating profit growth is realistic but not conservative we think.
The risk, in our view, is that we see further pressure on pricing through the value
YTD 1m 3m 12m
chain in the US and other mature markets to shift volume in this current crucial
Abs 6.7% 2.9% 7.4% 15.8%
fourth calendar quarter and that this further encourages consumer down-trading.
Rel -13.1% 2.1% 6.7% -6.6%

Our Sep 10E DCF-derived PT is 933p (terminal growth 1.25%, WACC 8.3%).
Diageo trades on a CY10E P/E of 13.5x, v/s the sector on 13.8x but with only mid
single-digit earnings growth compared to robust double-digit growth from
comparable brewers. Key upside risks to our view and PT include acceleration of
volume growth in Americas and Asia, sustained price rises, and a significant change
to the capital structure through M&A activity.
Diageo (DGE.L;DGE LN)

FYE Jun 2008A 2009A 2010E 2011E Company Data
Adj. EPS FY (p) 60.57 71.52 72.28 80.08 Price (p) 1,025
Revenue FY (£ mn) 8,090 9,311 9,275 9,746 Date Of Price 30 Nov 09
EBITDA FY (£ mn) 2,537 2,889 3,059 3,263 Price Target (p) 933
EBIT FY (£ mn) 2,304 2,613 2,778 2,967 Price Target End Date 01 Sep 10
Pretax Profit Adjusted FY (£ mn) 2,162 2,185 2,447 2,713 52-week Range (p) 1,079 - 727
DPS (Net) FY (p) 34 36 38 40 Mkt Cap (£ bn) 26.30
Adj P/E FY 16.4 13.9 13.7 12.4 Shares O/S (mn) 2,566
FCF Yield FY 5.2% 4.8% 5.2% 8.7%
154
(44-20) 7325-5242 07 December 2009
Diageo: Summary of Financials

£ in millions, year end Jun FY08 FY09 FY10E FY11E £ in millions, year end Jun FY08 FY09 FY10E FY11E
Revenues 8,090 9,311 9,275 9,746 - EBIT 2,304 2,613 2,778 2,967 -
% change Y/Y 8.1% 15.1% -0.4% 5.1% - Depreciation & amortization 233 276 282 296 -
Change in working capital (282) (282) (150) (120) -
EBITDA 2,537 2,889 3,059 3,263 - Taxes (369) (522) (640) (597) -
% change Y/Y 8.9% 13.9% 5.9% 6.6% - Other operating cash flows 139 154 -156 140 -
EBITDA Margin (%) 31.4% 31.0% 33.0% 33.5% - Cash Flow from Operations 2,394 2,761 2,753 3,283 -
EBIT 2,304 2,613 2,778 2,967 -
% change Y/Y 8.7% 13.4% 6.3% 6.8% - Capex (324) (453) (362) (373) -
EBIT Margin (%) 28.5% 28.1% 30.0% 30.4% - Net Interest (387) (478) (486) (426) -
Net Interest (319) (592) (486) (426) - Free Cash Flow 1,302 1,153 1,265 1,887 -
Earnings before tax 2,093 2,015 2,162 2,713 - Disposal/(purchase) (505) 15 0 0 -
% change Y/Y -0.1% -3.7% 7.3% 25.5% -
Tax (522) (292) (538) (597) - Equity raised/ (repaid) (1,085) (392) 0 0 -
as % of EBT (26.3%) 14.5% (22.0%) (22.0%) - Debt raised/ (repaid) -1,200 -43 309 852 -
Net Income (Analyst) 1,564 1,789 1,802 1,996 - Other - - - - -
% change Y/Y 19.3% 14.4% 0.7% 10.8% - Dividends Paid (857) (870) (939) (986) -
Shares Outstanding 2,566 2,485 2,476 2,476 -
EPS (Analyst) - 71.52 72.28 80.08 - DPS 34 36 38 40 -
% change Y/Y - - 1.1% 10.8% -

£ in millions, year end Jun FY08 FY09 FY10E FY11E £ in millions, year end Jun FY08 FY09 FY10E FY11E
Cash and cash equivalent 818 1,012 1,012 1,012 - EBITDA Margin (%) 31.4% 31.0% 33.0% 33.5% -
Others - - - - - EBIT Margin (%) 28.5% 28.1% 30.0% 30.4% -
Current Assets 1,636 2,024 2,024 2,024 - Net Profit Margin (%) 19.3% 19.2% 19.4% 20.5% -
LT investments & Intangibles 7,590 8,965 8,891 8,809 - Dividend payout - 50.5% 52.4% 49.7% -
Net Fixed Assets 2,153 2,305 2,386 2,463 -
Total Assets 11,379 13,294 13,300 13,296 - Capex/sales 4.0% 4.9% 3.9% 3.8% -
Capex/Depreciation 1.4 1.6 1.3 1.3 -
Liabilities Net Working Capital/Sales 32% 31% 32% --
ST Loans 1,663 890 890 890 -
Others 1,753 2,619 2,569 2,519 -
Total Current Liabilities 3,326 1,780 1,780 1,780 - Interest Coverage (x) 7.2 4.4 5.7 7.0 -
Net Debt/EBITDA 2.5 2.6 2.4 2.0 -
Long Term Debt 5,545 7,685 5,352 4,500 - Net Debt to Equity 153.0% 192.1% 162.9% 117.1% -
Other Liabilities - - - --
Total Liabilities 7,298 10,304 7,921 7,019 - Sales/Total Assets 0.7 0.7 0.7 0.7 -
Shareholders' Equity 3,499 3,222 3,738 4,757 - ROCE 18.1% 17.3% 17.5% 21.7% -
155
(44-20) 7325-5242 07 December 2009
Underweight Drax
410p
30 November 2009 Oversupply in UK gas market still a concern
Drax is a single 3.6GW coal fired plant and as such the key driver of profits is UK clean
Utilities dark spreads (i.e., gross margin per unit of electricity produced for a coal plant). Our UW
Nathalie Casali
AC is based on the continuing oversupply in the UK gas market, which keeps electricity
(44-20) 7325-9023 prices weak. We see Drax as the stock to avoid in 2010 as (1) continued UK gas
nathalie.x.casali@jpmorgan.com weakness coupled with a more healthy global coal market are likely to continue eroding
Javier Garrido margins and volumes, (2) the planned investment into biomass erodes the stock’s yield
(34 91) 516-1557 attraction whilst value creation remains unclear, (3) it has the highest carbon risk in the
javier.x.garrido@jpmorgan.com sector with a global agreement on emission reductions likely in 2010 or 2011.
Sarah Laitung Flexing downside
(44-20) 7325-6826
sarah.l.laitung@jpmorgan.com
We continue to see downside to the current contango on the UK gas forward curve, due to
the oversupply situation in global gas markets which is unlikely to resolve before 2011-12
in our view. We estimate that each £1/MWh decrease in our long term assumption of
Flagship reports £12.9/MWh (average phase 3) would decrease our valuation by 38p/share (9.3% current
• UK generators: IPR remains a more share price). Thematically we continue to prefer generators that are exposed to coal-
attractive play on power demand driven rather than gas-driven markets.
recovery than Drax as refinancing
concerns dissipate, 20 Jul 09 Catalysts – 2010 and beyond
• Drax: The road ahead: upgrading mid Copenhagen and after – Though a firm global agreement on carbon emission looks
term forecasts for lower carbon,
unlikely at the Copenhagen conference, such an agreement only presents downside risk for
downside risks remain, 08 Apr 09
• Drax: Short-term gain, long-term pain - Drax, as this would likely push up the EU's own targets and permit prices beyond 2013.
initiating coverage with Neutral, 16 Jul
Consensus downgrades – We see c10% and c25% downside to Bloomberg consensus
08
2010-11 EBITDA respectively on a mark to market of commodities.
Tax decision from HM Revenues and customs – Drax highlighted the potential to
Price Performance (GBP p) claim back £220m of tax from the Inland Revenue at the FY 08 results in March 09;
700
this could take up to 24 months according to the company but we do not see it as
p 550
likely that Inland Revenue would agree to such a move.
400
Biomass investment due by the end of 2010 – There is still very limited visibility on
DRX.L share price (p)
potential value creation, which we estimate at 7p/share for a 30% stake in the project.
MSCI-Eu (rebased)
Our 450p Dec-10 PT is based on the average of our DDM and DCF valuations, with
Performance (%) a post-tax nominal WACC of 8.6%. We do not include the value for an equity
investment into biomass, which we estimate at 9p/share for a 30% stake. Upside risks
YTD 1m 3m 12m
include (1) an increase in clean dark spreads due to potential weakness in coal and/or
Abs -25.1% -11.0% -12.4% -29.6%
carbon prices and (2) a positive decision from the inland revenue to allow utilisation
Rel -46.6% -11.0% -15.5% -47.8%
of tax losses that would amount to £220m to Drax shareholders (42p/share NPV).
Drax Group Plc (DRX.L;DRX LN)
Adj. EPS FY (p) 99.57 98.05 50.91 66.84 58.93 Price (p) 410
EBITDA FY (£ mn) 516 510 303 390 348 Price Target (p) 450
EV/FCF FY 11.83 8.76 NM 8.71 17.24 Price Target End Date 31 Dec 10
EV/EBITDA FY 3.5 3.2 5.4 3.9 4.4 52-week Range (p) 644 - 394
Gross Yield FY 11.2% 12.9% 3.6% 8.1% 7.2% Mkt Cap (£ bn) 1.50
DPS (Gross) FY (p) 46 53 15 33 29 Shares O/S (mn) 365
Revenue FY (£ mn) 1,247 1,753 1,351 1,436 1,516
156
(44-20) 7325-5242 07 December 2009
Drax: Summary of Financials

Profit and Loss Statement Valuation ratios
£ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E £ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E
Sales 1,753 1,351 1,436 1,516 1,639
Depreciation & Amortisation 46 42 44 45 46 P/E (reported) 4.0 7.8 5.9 6.7 5.2
Operating Profit 464 261 346 303 386 EV/EBITDA 3.2 5.4 3.9 4.4 3.5
Associate Income - - - - - EV/EBIT 3.6 6.3 4.4 5.1 3.9
Net Interest (22) (11) (7) (4) (3) FCF yield (pre divs, post mins) (%) 14.6% 7.9% 15.9% 10.4% 17.1%
Profit before tax 442 249 339 299 383 Dividend yield (%) 12.9% 3.6% 8.1% 7.2% 9.2%
Income Tax 110 70 95 84 107
Minority Interests 0 0 0 - - Per share
Group Net profit 333 179 244 215 276 £
FY08 FY09E FY10E FY11E FY12E
Cashflow statement Recurrent EPS 98.05 50.91 66.84 58.93 75.59
£ in millions, year end Dec Diluted EPS 98.05 50.91 66.84 58.93 75.59
FY08 FY09E FY10E FY11E FY12E Reported DPS 53 15 33 29 38
Working Capital (31) 30 (8) (7) (11)
Cash flow from operations 479 332 383 340 421 Performance, leverage and return ratios
Capex & Acquisitions -91 -122 -55 -157 -188 %
Cash from investing (91) (122) (55) (157) (188) FY08 FY09E FY10E FY11E FY12E
Dividends paid (110) (145) (64) (114) (125) Gross operating margin 38.8% 38.5% 42.3% 39.1% 41.8%
Cash from financing (143) (202) (129) (181) (193) Operating margin 26.5% 19.3% 24.1% 20.0% 23.5%
Free Cash flow before dividends 188 -35 173 89 189 Operating profit growth y-o-y -1.6% -43.9% 32.8% -12.5% 27.4%
Recurrent Income growth y-o-y -5.8% -46.1% 36.0% -11.8% 28.3%
Balance Sheet ROCE (EBIT) 32.9% 19.1% 23.2% 19.9% 23.6%

£ in millions, year end Dec Net debt/ (equity+minorities) (%) 33.9% 19.4% -1.1% 1.2% 0.3%
FY08 FY09E FY10E FY11E FY12E Net debt /EBITDA 0.5 0.5 (0.0) 0.0 0.0
Net fixed assets 524 793 857 1,042 1,220
Current assets 866 557 680 602 623 Market valuation
Total assets 2,107 1,877 2,011 2,046 2,209 £ in millions
Total Debt 365 200 135 68 58 FY08 FY09E FY10E FY11E FY12E
Shareholders' equity 693 835 1,015 1,116 1,267 Share price (year-end / current) 410
Number of Shares (million) 339.5 364.9 365.0 365.0 365.0
Total liabilities 2,107 1,878 2,012 2,046 2,209 Diluted Number of Shares (million) 339.52 352.27 365.02 365.02 365.02
Net debt 235 162 -11 13 3 Market Capitalisation 1,498.05 1,498.05 1,498.05 1,498.05 1,498.05
Capital Employed 1,410 1,363 1,490 1,519 1,634 EV adjustment - - - - -
EV 1,649 1,629 1,508 1,532 1,522
157
(44-20) 7325-5242 07 December 2009
Underweight Ericsson
Sek 66.90
30 November 2009 Not the bottom of the capex cycle yet
Price Target: Sek 62 Concerns about the next cycle
Though broader macroeconomic conditions appear to be stabilizing after the freefall
Communucations Equipment that began in late 2008, we do not expect the infrastructure market or Ericsson to
Rod Hall, CFA
AC benefit from this in the next two quarters. We expect continued cautious capex
(44-20) 7325-7437 spending from operators through Q4 and then normal seasonally depressed patterns
rod.b.hall@jpmorgan.com of spending in H1. Through the cycle positives are still not obvious for Ericsson as
Malvika Gupta natural technology price deflation is exacerbated by competitive pricing pressure. It
(44-20) 7742-0939 could be the case that the inexorable mobile data tidal wave that is coming has little
malvika.x.gupta@jpmorgan.com benefit on Ericsson’s bottom line as price declines keep margins depressed and
technology becomes ever more efficient.

• Fundamentals deteriorating but Q1 We forecast a near doubling of EBIT margins by 2011 from the 7.5% we forecast for
expected strong due to FX, 20 Apr 09
• CMD 2009, Not much new in
2009E. We believe that current share price levels imply long-term EBIT margins of
beantown, 08 May 09 12.7% yet recent evidence from Huawei's wins with European telecom operators
• Q209 Wrap, Capex reckoning day imply long term pricing pressures. If the wireless infrastructure industry does finally
begins, 27 Jul 09 repair itself we could then see a re-rating of Ericsson driven by increasing margins as
• California Dreamin' - San Jose Investor mobile data capacity spending drives sales.
Forum 2009, 17 Aug 09
• Q309 Wrap, Capex reckoning
intensifies. Reiterate UW, 23 Oct 09 Catalysts – 2010 and beyond
Early in the year, we will be watching for further LTE and other deal announcements
at the Mobile World Congress in Barcelona (scheduled for February 15-18). At the
Price Performance 2009 event, Verizon announced that it had chosen ALU and Ericsson for its initial
LTE deployments in North America. Another catalyst to watch for are further
70
Skr
Services contract wins which are negative for margins initially but positive in the
55
long run. Spectrum auctions in Europe in mid 2010 will be important to watch too.
40
ERICb.ST share price (Skr
MSCI-Eu (rebased) Our relative earnings based price target for Dec-2010 is SEK 62. Our 2010 EPS of 4.79
SEK is at a 10.5% discount to consensus. So we set our price target at a 10.5% discount
to CoB price as of Oct 22, 09 of 69.4 SEK. In multiple terms, our target price puts
Performance (%) Ericsson at 12.9x 2010E P/E. Our DCF value for Ericsson is SEK 70. Our Underweight
YTD 1M 3M 12M rating and price target would be at risk if evidence materializes of substantial wireless
Abs (%) 13.8% -12.1% -2.8% 25.0% capacity expansion in the developed world in early 2010. Weakness in the SEK vs. the
Rel (%) -6.0% -12.9% -3.5% 2.6% USD or a turn in SonyEricsson’s fortunes, are also risks to our UW rating.
Ericsson (ERICb.ST;ERICB SS)

FYE Dec 2008A 2009E 2010E Company Data
Adj. EPS (Skr) Price (Skr) 66.90
FY 4.72 A 3.38A 4.79 Date Of Price 30 Nov 09
Q1 (Mar) 0.77 0.70A 0.91 Price Target (Skr) 62.00
Q2 (Jun) 0.93 0.87A 1.10 Price Target End Date 31 Dec 10
Q3 (Sep) 1.33 0.87A 1.28 52-week Range (Skr) 79.60 - 52.10
Q4 (Dec) 1.69 A 0.93A 1.51 Mkt Cap (Skr bn) 213.0
Revenue FY (Skr mn) 207,698 A 200,373A 199,881 Shares O/S (mn) 3,183
EBIT margin FY 10.4% A 7.5%A 11.3%
EV/Operating Profit FY 7.95 A 12.52A 7.54
158
(44-20) 7325-5242 07 December 2009
Ericsson: Summary of Financials

Skr in millions, year end Dec FY08 FY09E FY10E Skr in millions, year end Dec FY08 FY09E FY10E
Revenues 207,698 200,373 199,881 EBIT 21,678 15,054 22,581

% Change Y/Y 10.6% (3.5%) (0.2%) Depreciation & amortization 8,674 9,545 8,634
Gross Margin (%) 36.4% 35.7% 35.6% Change in working capital (14,813) 2,160 19,367
EBITDA 30,352 24,599 31,216 Taxes (1,033) (1,006) (1,320)
% Change Y/Y (22.2%) (19.0%) 26.9% Other 9,494 (17,570) (27,994)
EBITDA Margin (%) 14.6% 12.3% 15.6% Cash flow from operations 24,000 8,184 21,268
EBIT 21,678 15,054 22,581
% Change Y/Y (29.3%) (30.6%) 50.0% Capex (4,133) (3,673) (2,970)
EBIT Margin 10.4% 7.5% 11.3% Disposal / (Purchase) (4,411) (25,105) (993)
Net Interest 974 679 (349) Net interest - - -
Earnings before tax 17,216 7,052 16,562 Free cash flow to firm 661 16,149 37,339
% change Y/Y (44.0%) (59.0%) 134.9%
Tax (charge) 7,158 4,663 6,599 Equity raised/repaid 0 0 0
Tax as a % of BT 31.6% 29.6% 29.7% Debt Raised/repaid 0 0 0
Net Income (Reported) 15,494 11,070 15,634 Other 1,032 10,421 0
% change Y/Y (30.0%) (28.6%) 41.2% Dividends paid (8,240) (5,976) (6,008)
Shares OS 3,196.75 3,207.00 3,207.00 Beginning cash 31,584 41,087 24,168
EPS (Reported) 4.72 3.38 4.79 Ending cash 41,087 24,168 35,466
% Change Y/Y (31.1%) (28.4%) 41.7% OpFCF 26,219 20,926 28,245

Skr in millions, year end Dec FY08 FY09E FY10E Skr in millions, year end Dec FY08 FY09E FY10E
Cash and cash equivalents 75,005 74,998 86,296 Sales growth 10.6% (3.5%) (0.2%)
Accounts Receivable 75,891 75,441 57,332 Gross Margin (%) 36.4% 35.7% 35.6%
Inventories 27,836 22,109 20,852 EBITDA Margin (%) 14.6% 12.3% 15.6%
Others - - - Operating Margin 10.4% 7.5% 11.3%
Current assets 198,525 191,180 183,560 Net profit margin (%) 7.5% 5.5% 7.8%
LT investments 14,060 15,087 13,957 Net profit growth (30.0%) (28.6%) 41.2%
Net fixed assets 9,995 8,788 5,680 EPS growth (31.1%) (28.4%) 41.7%
Total assets 285,684 265,927 251,186
Net debt (Cash) to Total Capital (24.5%) (20.6%) (29.5%)
Liabilities Net debt (Cash) to equity (31.1%) (27.3%) (39.1%)
ST loans 5,542 3,152 3,152 EV/Revenue 0.8 0.9 0.9
Payables 23,504 19,661 18,543 EV/EBITDA 5.7 7.7 5.5
Others - - - EV/EBIT 8.0 12.5 7.5
Total current liabilities 104,117 82,048 77,677 ROA 8.2% 5.5% 8.7%
Long term debt 24,939 34,017 32,043 ROE 10.9% 7.8% 11.5%
Total liabilities 143,600 128,481 122,110 ROCE 12.4% 8.2% 12.6%
Shareholders Equity 142,084 137,445 129,076 FCF Yield 4.4% 1.5% 5.7%
Total liabilities and Shareholders' equity 285,684 265,927 251,186 P/E 14.2 19.8 14.0
159
(44-20) 7325-5242 07 December 2009
Neutral Fiat
€9.90
Few near-term positive catalysts, too much value assigned
30 November 2009
to Chrysler
We believe Fiat has few near-term positive catalysts to warrant upside and remain convinced
Autos
AC
that the stock could see downside from current levels to €8-9 range. With the scrappage
Ranjit A Unnithan scheme expiring in Germany and the impact of schemes in Italy/France diminishing, volume
(44-20) 7325-8106
ranjit.a.unnithan@jpmorgan.com
outlook for Fiat Auto looks poor going into 2010 in our view. Fiat sees 25% downside to
trading profit levels in 2010 if the Italian incentive scheme is not renewed. Further, the
company outlook assumes flat Brazil volumes in 2010, which we believe remains a risk (as
Flagship reports the company assumes continuation of tax incentives, which were removed on Oct 1). Upside
• Fiat: Initial thoughts on Chrysler from CNH/Iveco is unlikely given weak fundamentals in end markets. Current EV/Sales
Business Plan, 05 Nov 09 implies Chrysler value near €3/share, which we can justify only at a US SAAR of 15MM and
• Fiat: Little upside, but material
EV/Sales multiple of ~50% (assumptions that we believe are premature at this stage with US
downside risks, 22 Oct 09
SAAR near 10MM and market share uncertainties at Chrysler).
Flexing downside
Price Performance We see the market pricing in €2-3/share in value for Chrysler already in Fiat shares,
11
which we think is too much, too early. If Chrysler hits all targets (EBIT margins of
€ 7
5-6%, volume of 2.4MM in 2012), we estimate Chrysler value to Fiat may be worth
3 €4.5/share (assuming EV/Sales of 40%), which suggests another €2.5 (20%) of
Dec-08 Mar-09 Jun-09 Sep-09 upside by 2011. We think this is insufficient for a medium-term recovery story that
FIA.MI share price (€) may well stutter. The downside (which we think is more likely) could result in
MSCI-Eu (rebased)
Chrysler value falling to €0/share pushing Fiat from current levels to €8-9/share.
Performance (%) We expect deterioration in auto volumes (WE SAAR to decline 8% in 2010E to
YTD 1m 3m 12m
12.5MM vs. 13.6MM in 2009), once the impact of scrappage schemes diminishes in
Abs 115.7% -2.6% 18.8% 80.0%
key end markets. Estimates on Chrysler should come down, if Chrysler US market
Rel 95.9% -3.4% 18.1% 57.6%
share losses continue, suggesting 15-20% downside to Fiat shares from current levels.
Fiat is currently trading at 34% EV/Sales vs. historic average of 31%. Our SOTP based
Jul-10 target price of €8.00 uses an EV/Sales of 25% for the Auto division (20% discount
to hist. mass market EV/sales multiple) and EV/Sales of 44% for Iveco (20% discount to
Volvo). Upside risks could come from i) faster recovery of car sales in Europe (or other
Fiat key end markets through continuing government incentives) or if Fiat chooses to
unlock value by selling some assets, and achieve better than expected cost savings; ii)
better than expected US volumes and market share for Chrysler. Downside risks could
come from i) further weakening Ag equipment sales at CNH; ii) any weakness in Italian
car market that is significantly greater than other European car markets.
Fiat S.P.a (FIA.MI;F IM)
Adj. EPS FY (€) 1.23 (0.02) 0.44 0.76 Price (€) 9.90
EBIT FY (€ mn) 3,362 962 1,519 2,088 Price Target (€) 8.00
EBIT margin FY 5.7% 2.0% 3.1% 4.0% Price Target End Date 31 Jul 10
EBITDA FY (€ mn) 5,901 3,611 4,168 4,713 52-week Range (€) 11.47 - 3.32
EBITDA margin FY 9.9% 7.6% 8.5% 9.1% Mkt Cap (€ bn) 10.4
Net Attributable Income FY (€ 1,612 (538) 613 1,053 Shares O/S (mn) 1,054
mn)
DPS (Net) FY (€) 0.00 0.00 0.00 0.00
160
(44-20) 7325-5242 07 December 2009
Fiat: Summary of Financials

Profit and Loss Statement Divisional Reporting
Revenues 58,529 59,380 47,746 48,867 51,684 Revenue by division

% change Y/Y 12.9% 1.5% -19.6% 2.3% 5.8% Fiat Auto 26,812 26,937 25,177 25,601 26,761
Ferrari 1,660 1,907 1,680 1,856 2,040
EBITDA (industrial) 5,314 5,843 3,664 4,107 4,674 Maserati 694 825 432 475 571
Industrial EBITDA Margin (%) 9.2% 10.0% 7.8% 8.6% 9.2% CNH 11,843 12,723 10,044 10,074 10,578
OP - pre-restructuring 3,233 3,362 962 1,519 2,088 Iveco 11,196 10,768 6,585 7,290 8,019
OP margin 5.5% 5.7% 2.0% 3.1% 4.0% Powertrain 7,075 7,000 4,655 4,816 5,035
% change Y/Y 65.7% 4.0% -71.4% 57.9% 37.4% Components 6,300 6,793 5,001 5,146 5,487
Other 1,378 1,394 1,066 1,055 1,065
Restructuring -105 -165 -305 0 0 Eliminations -8,278 -8,678 -6,760 -7,302 -7,723
Net interest (564) (947) (704) (706) (697)
Pretax Profit Reported 2,773 2,187 -212 853 1,467 Operating profit by division
Tax (719) (466) (329) (244) (417) Fiat Auto 803 691 379 518 707
Tax rate % 25.9% 21.3% 155.1% 28.6% 28.5% Ferrari 266 337 234 297 363
Net Income (Reported) 1,953 1,612 (538) 613 1,053 Maserati 24 72 9 15 30
CNH 990 1,122 348 458 628
Shares Outstanding 1,079.18 1,056.68 1,056.68 1,056.68 1,056.68 Iveco 813 838 104` 159 252
EPS (reported) 1.54 1.29 -0.43 0.49 0.85 Powertrain 271 166 -33 4 36
EPS (adjusted) 1.44 1.23 (0.02) 0.44 0.76 Components 238 236 -51 68 73
% change Y/Y 126.5% (14.5%) (102.0%) (1,872.8%) 73.4% Other -172 -102 -32 0 0
% Operating margin
Fiat Auto 3.0% 2.6% 1.5% 2.0% 2.6%
Ferrari 16.0% 17.7% 13.9% 16.0% 17.8%
Maserati 3.5% 8.7% 2.0% 3.2% 5.2%
CNH 8.4% 8.8% 3.5% 4.5% 5.9%
Iveco 7.3% 7.8% 1.6% 2.2% 3.1%
Powertrain 3.8% 2.4% -0.7% 0.1% 0.7%
Components 3.8% 3.5% -1.0% 1.3% 1.3%
Other -12.5% -7.3% -3.0% 0.0% 0.0%
Balance Sheet (Industrial Operations) Industrial Cash Flow & Ratio Analysis
Intangibles 6,420 6,950 217 313 465 EBT 2,420 1,789 (385) 671 1,251
PP&E 11,239 12,509 12,699 13,317 13,923 Tax (84) (98) (49) (47) (57)
Investments 4,349 3,756 3,756 3,756 3,756 Depreciation & amortization 2,667 2,805 2,866 2,745 2,776
Inventories 9,929 11,341 8,324 9,005 9,501 Provisions/other (40) (149) (165) - -
Trade receivables 4,444 4,301 3,620 3,943 4,022 Change in working capital 1,675 -3,604 1,938 -110 -9
Cash equivalents & marketable sec 5,546 2,604 7,915 7,853 8,290 Operating cash flow 5,756 156 3,820 3,398 3,971
Other Assets 10,555 12,942 8,206 10,087 10,268 Net capex -2,986 -4,776 -3,201 -3,459 -3,533
Total Industrial assets 52,482 54,403 44,737 48,275 50,225 FCFe 2,770 -4,620 619 -62 437
(+) Financial Services Net Assets 2,486 2,565 2,708 2,842 3,001 Change in net liquidity 2,128 -6,304 924 -72 744
Total Assets 60,053 61,735 58,281 59,100 61,169 Net industrial liquidity 355 (5,949) (5,025) (5,097) (4,353)
DPS 0.40 0.00 0.00 0.00 0.00
Equity 11,279 11,101 10,578 11,188 12,237
Total Debt 10,859 15,600 19,294 19,294 19,488 Sales/assets 1.0 1.0 0.8 0.8 0.8
Pension 2,597 2,584 2,584 2,584 2,584 Net debt to equity 3.1% -53.6% -47.5% -45.6% -35.6%
Trade payables 14,751 13,216 10,926 11,819 12,385 Working capital as a % of revenue -0.7% 4.2% 0.5% 0.6% 0.6%
Other liabilities 15,482 14,467 4,063 6,232 6,532 ROCE (industrial, 35% tax) 17.0% 13.0% -0.5% 6.3% 8.3%
Total liabilities 43,689 45,867 36,866 39,929 40,989 ROE 17.3% 14.5% -5.1% 5.5% 8.6%
Total Liabilities and Equity 54,968 56,968 47,445 51,117 53,226
161
(44-20) 7325-5242 07 December 2009
Underweight Hermès
€94.85
Simply too expensive
30 November 2009
We have no major concerns over Hermès’ fundamentals. Its high exposure to Japan
and relative low exposure to China are negative. The fact that Hermès is considering
Luxury & Sporting Goods lowering prices in Japan in the near future highlights how tough and price sensitive
AC
Melanie A Flouquet this market is to all luxury players and even to the highly desirable Hermès brand.
(33-1) 4015-4485 But, despite these negatives, Hermès undoubtedly does some critical things right. Its
melanie.a.flouquet@jpmorgan.com
large and high margin Leather Goods division continues to post stellar growth (+16%
Corinna Beckmann in 9m 09) pulled by its iconic Kelly and Birkin bags. Lengthy waiting lists (owing to
(44-20) 7325-3938 desired exclusivity management but also owing to capacity constraints) help to buffer
corinna.x.beckmann@jpmorgan.com
the downturn in this category. The very strong performance of its Leather Goods
division should enable Hermès to post a slight growth at Group level despite declines
Flagship reports at other divisions in 09E and better performance than peers in 10E. Contrary to peers
• Luxury Uncovered : Four key themes that are cutting opex costs, Hermès has sustained investments in the downturn (store
for 2010 Sales growth, 10 Nov 09 roll outs in emerging markets and US). This is the right decision in the longer term in
• Hermès International: Long live our view but puts pressure on EBIT Margin in the short term (-260bp in FY09E).
Hermès' iconic bags, 6 Nov 09
Flexing downside
Divisions other than Leather Goods could remain under pressure in 2010 (in
Price Performance particular wholesale exposed Tablewear and Watches), and the leather goods
120 division could also be limited somewhat in its future growth by capacity constraints
€ 90 (c50 more artisans in 09 vs 100 in previous years) and Japan exposure. Assuming
that Hermès Group organic Sales growth in FY10E is at par with our sector average
60
expectation of 5.7% vs a beat at 7.7%, this would cut our 2010E Group EBIT by 4%.
But the key downside risk to valuation lies in Hermès family’s reiterated
HRMS.PA share price (€)
MSCI-Eu (rebased) commitment to its holding (73%).
Performance (%) The next newsflow is FY09 Sales in Feb 10. The Hermes family could reiterate its
commitment to its holdings at its AGM in May and at each yearly release.
YTD 1m 3m 12m
Abs -5.2% 0.1% -7.9% -1.6% Valuation, target price, key risks
Rel -26.7% 0.1% -11.0% -25.7% Hermès offers high margins and returns, resists better operationally in downturns and
is a pure play – as such it does warrant a premium to the sector average in our view
but not as much as the current 68% on FY10E PE (31x). The stock defies gravity vs
our Dec-10 DCF based PT €66. The key risk to our stance on the company is that the
family might decide to sell and Hermès falls prey to a larger group. Hermès is a
coveted asset and would not be lacking in potential bidders/interest but some
restrictions remain in place acting as a deterrent notably 3 poison pills (Société en
commandite, Loi Breton, Fiscal Pacts) and the family has repeatedly reiterated its
commitment to the company (incl family appointments at the Board).
Hermès International SCA (HRMS.PA;RMS FP)
Adj. EPS FY (€) 2.76 2.65 3.04 3.35 Price (€) 94.85
EBIT FY (€ mn) 449 430 475 522 Price Target (€) 66.00
Net Attributable Income FY (€ 290 277 318 351 52-week Range (€) 111.66 - 64.84
mn) Mkt Cap (€ bn) 10.1
Adj P/E FY 34.4 35.8 31.2 28.3 Shares O/S (mn) 106
EV/Revenue FY 5.8 5.4 5.1 4.7
EV/EBITDA FY 19.9 20.1 18.4 17.0
162
(44-20) 7325-5242 07 December 2009
Hermès International: Summary of Financials

Revenues 1,625 1,765 1,884 1,989 2,148 EBIT 414 449 430 475 522
% Change Y/Y 7.3% 8.6% 6.8% 5.6% 8.0% Depreciation & amortization 56 64 76 78 77
EBITDA 470 513 506 553 599 Change in working capital (32) (80) (67) 27 (5)
% Change Y/Y 4.8% 9.1% (1.3%) 9.2% 8.4% Others (114) (134) (153) (158) (171)
EBIT 414 449 430 475 522 Cash flow from operations 325 298 286 422 423
% Change Y/Y 3.3% 8.3% (4.2%) 10.5% 9.8% Capex (120) (156) (140) (147) (154)
Net Interest 12 18 (0) 7 10 Disposal/(Purchase) 19 1 0 0 0
Extraordinary items 9 0 0 0 0 Others (42) (12) (83) 0 0
Reported PBT 436 467 430 482 532 Cash flow from investing (143) (166) (223) (147) (154)
% Change Y/Y 5.1% 7.1% (7.9%) 12.2% 10.3% Dividends paid (107) (111) (105) (118) (130)
Tax (144) (160) (142) (159) (176) Others (99) (45) (50) 0 0
Results of subsidiaries 2 (11) (5) 0 0 Cash flow from financing (205) (156) (155) (118) (130)
Minorities (6) (5) (6) (6) (6) Forex (10) (1) 0 0 0
Net Income (Reported) 288 290 277 318 351 Consolidation (21) 0 0 0 0
% Change Y/Y 7.3% 0.8% (4.4%) 14.6% 10.5% Change in net cash (54) (25) (92) 157 139
Shares Outstanding 106.1 105.3 104.6 104.6 104.6 Beginning cash 502 448 423 331 488
EPS - adjusted 2.63 2.76 2.65 3.04 3.35 Ending cash 448 423 331 488 627
% Change Y/Y 10.6% 4.8% (3.8%) 14.6% 10.5%
EPS (reported) 2.71 2.76 2.65 3.04 3.35
% Change Y/Y 8.2% 1.5% (3.8%) 14.6% 10.5%
Cash and cash equivalent 156 120 28 185 324 EBITDA margin 29.0% 29.1% 26.9% 27.8% 27.9%
Accounts Receivables 135 153 181 180 177 EBIT margin 25.5% 25.5% 22.8% 23.9% 24.3%
Others 497 533 533 533 533 Tax rate (33.0%) (34.3%) (33.0%) (33.0%) (33.0%)
Current assets 1,221 1,330 1,320 1,454 1,604 SG&A/Sales (35.1%) (34.7%) (35.9%) (36.0%) (35.8%)
Net fixed assets 844 998 1,145 1,214 1,291
Total assets 2,065 2,328 2,464 2,668 2,895 Net debt to Total Capital (62.6%) (20.2%) 56.4% (36.2%) (43.6%)
Net debt to equity (32.1%) (27.4%) (20.2%) (26.2%) (29.9%)
ST Borrowings 61 71 71 71 71 Sales/assets 0.8 0.8 0.8 0.7 0.7
Payables 205 211 225 229 235 Assets/Equity 1.4 1.5 1.4 1.4 1.3
Others 206 316 316 316 316 ROE 28.3% 28.2% 25.1% 24.9% 24.5%
Total current liabilities 471 597 612 615 622 ROCE 25.8% 24.1% 20.1% 21.5% 22.4%
LT borrowings 25 24 24 24 24
Other liabilities 93 101 101 101 101 DPS 1.00 1.03 1.00 1.13 1.24
Total liabilities 590 723 737 741 748 Dividend payout ratio 36.8% 37.4% 37.9% 37.1% 37.0%
Minorities 13 14 14 14 14
Total Liabilities & SH Equity 2,065 2,328 2,464 2,668 2,895
BVPS 14 15 16 18 20
163
(44-20) 7325-5242 07 December 2009
Underweight Husqvarna
Skr49
30 November 2009 2010 could be a difficult year
Price Target: Skr42 Concerns about the next cycle
Top-line growth depends on the Western Consumer: Emerging Markets account for
only ~10% of group revenues. We expect only a modest recovery in spending as
Capital Goods
unemployment remains high. We are concerned that the negative mix may continue
AC
Andreas Willi with a lower share of Husqvarna branded products being sold.
(44-20) 7325-4853
andreas.p.willi @jpmorgan.com Competition may come back: In 2008 and 2009, as competitors struggled due to lack
Nico Dil of financing, HUSQ gained market share and benefited from relatively stable pricing.
(44-20) 7325-4292 We expect the competitive environment to be tougher in 2010.
nico.dil@jpmorgan.com
Limited savings in 2010 – risk of disruption from footprint restructuring:
Joseph Peter Husqvarna has reaped most of the benefits from the 2008 restructuring plan. The new
(44-20) 7325-7144
restructuring initiatives launched this Fall will only provide full level of savings by
joseph.x.peter@jpmorgan.com
2012. Husqvarna’s multi-year footprint migration program may result in disruptions.
Bramen Singanayagam
(44-20) 7325-6810 Professional likely to remain weak: The Professional division (one 1/3 of sales) sells
bramen.x.singanayagam@jpmorgan.com into forestry (~45%), professional garden (~30%) and construction (~25%). We
expect areas related to direct or indirect government spending (parts of forestry,
municipal gardeners) and construction to remain weak in developed countries.
Flagship reports
• Husqvarna : Deteriorating mix in Large task ahead on footprint migration to LCC: We believe that HUSQ’s program
Consumer impacts Q3 results; Remain to move production capacities to low cost countries is only the beginning of a long
UW, 23 Oct 09 process. Husqvarna currently has one of the lowest proportions of employees in low
cost countries at around 15% vs. sector average of 35% and Electrolux at 45%.
Price Performance
Flexing downside
55
Our EBIT ests for Husqvarna are 18%/11% lower than current Bloomberg consensus
Skr 40 for 2010/2011. Thus, at current trading multiples our ests imply c15% downside.
25
HUSQb.ST share price (Skr
2010 consensus EBIT estimates are too high, in our view. Longer term, we expect
MSCI-Eu (rebased) restructuring to provide some upside but the low cost manufacturing initiative may
have to be expanded and it will take time for the benefits to materialize.
YTD 1M 3M 12M Our TP for June 2010 is set at Skr42, based on 9.5x 2012E EV/EBIT (5% discount to
Abs (%) 39.5% 7.0% -5.2% 28.0% sector avg. of 10x due to lack of EM growth potential) on a mid cycle margin of 10%
Rel (%) 19.7% 6.2% -5.9% 5.6%
and discounted back to June 2010. The key risk is a sharper than expected top line
recovery driven by the Western Consumer or a weather related good spring season.
Husqvarna AB (HUSQb.ST;HUSQB SS)

Adj. EPS FY (Skr) 5.44 3.34 1.88 2.50 3.42 Price (Skr) 48.60
Revenue FY (Skr mn) 33,284 32,342 34,233 33,453 35,187 Price Target (Skr) 42.00
EBIT FY (Skr mn) 3,564 2,361 1,744 2,289 3,078 Price Target End Date 30 Jun 10
EBIT margin FY 10.7% 7.3% 5.1% 6.8% 8.7% 52-week Range (Skr) 54.00 - 24.89
Net Attributable Income FY 2,029 1,278 1,034 1,433 1,962 Mkt Cap (Skr bn) 27.9
(Skr mn) Shares O/S (mn) 574
Headline EPS FY (Skr) 5.28 3.34 1.88 2.50 3.42
Headline P/E FY 9.2 14.6 25.8 19.5 14.2
164
(44-20) 7325-5242 07 December 2009
Husqvarna: Summary of Financials

Profit and Loss Statement (IFRS) Cash flow statement (IFRS)
Revenues 33,284 32,342 34,233 33,453 35,187 Net income 2,029 1,278 1,034 1,433 1,962
% change Y/Y 13.2% (2.8%) 5.8% (2.3%) 5.2% Depreciation & amortisation 1,081 1,163 1,358 1,384 1,324
% Change like for like 3.0% (5.8%) (7.6%) 3.3% 5.2% Other non-cash items (1,168) (821) (613) (1,048) (1,107)
Gross profit 9,775 9,377 8,900 9,367 9,852 Change in net working Capital (576) 441 500 (371) (512)
EBITDA (Ind Ops) 4,754 3,519 3,102 3,673 4,402 Cash flow from operattions 2,901 3,144 2,988 2,254 2,784
EBIT (Ind Ops) 3,564 2,361 1,744 2,289 3,078
Net Interest (675) (594) (500) (512) (555) Capex (698) (909) (753) (836) (880)
Earning before tax 2,889 1,767 1,244 1,777 2,522 Investment in intangibles (159) (254) (250) (255) (260)
Tax (853) (479) (203) (335) (551) Free cash flow from operations 2,044 1,981 1,985 1,163 1,644
as % EBT (29.5%) (27.1%) (16.4%) (18.9%) (21.9%) Free cash flow per share 5.3 5.2 3.6 2.0 2.9
Minorities (7) (10) (7) (8) (8)
Net Income (Reported) 2,029 1,278 1,034 1,433 1,962 Disposal/(purchase) (8,876) (845) (432) 0 0
% Change Y/Y 9.0% (37.0%) (19.1%) 38.7% 36.9% Equity raised/(repaid) (166) (48) 2,988 0 0
Shares outstanding 384.60 383.20 548.72 573.80 573.80 Dividend paid (667) (873) (4) (689) (687)
DPS 2.25 0.00 1.00 1.20 1.20 Other 84 (447) (9) 0 (0)
EPS (reported) 5.28 3.34 1.88 2.50 3.42 Free cash flow (7,537) (200) (4,538) 474 957
% Change Y/Y (16.0%) (36.8%) (43.5%) 32.6% 36.9%
EPS (adjusted) 5.44 3.34 1.88 2.50 3.42 Beginning net debt cash 4,288 11,825 12,025 8,041 7,567
% Change Y/Y (13.4%) (38.7%) (43.5%) 32.6% 36.9% Ending net debt cash 11,825 12,025 8,041 7,567 6,609
Balance sheet (IFRS) Ratio Analysis (IFRS)

Cash and cash equivalents 1,216 1,828 1,911 2,385 3,343 Gross Margin 29.4% 29.0% 26.0% 28.0% 28.0%
Accounts receivable 3,912 4,184 4,435 4,349 4,574 EBITDA margin 14.0% 10.9% 9.1% 11.0% 12.5%
Inventories 7,758 8,556 8,539 8,865 9,325 EBIT margin 10.7% 7.3% 5.1% 6.8% 8.7%
Other - - - - - Adj EBIT margin 11.0% 7.3% 5.1% 6.8% 8.7%
Current Assets 12,976 15,475 15,606 16,319 17,962 ROE 27.6% 14.6% 7.5% 9.9% 12.4%
ROCE 24.3% 10.9% 7.7% 10.4% 13.8%
Intangibles and Other 11,515 13,827 13,543 13,543 13,543 Intrest coverage (x) 5.3 4.0 3.5 4.5 5.5
Net Fixed assets 4,312 5,035 5,130 4,838 4,653 Net debt to equity 160.0% 136.4% 58.2% 51.9% 41.7%
Total Assets 28,803 34,337 34,279 34,701 36,158 Net debt/ EBITDA 2.5 3.4 2.6 2.1 1.5
ST Loans - - - - - EV/Sales 1.4 1.1 1.1 1.1 1.0

Payables 2,731 3,280 3,477 3,345 3,519 EV/EBITDA 10.1 10.3 11.6 10.0 8.1
Others 1,120 1,482 1,987 1,787 1,787 EV/EBIT 13.2 15.4 20.6 16.0 11.6
Total current Liabilities 3,851 4,762 5,464 5,132 5,306 EV/adj EBIT 12.8 15.4 20.6 16.0 11.6
Long Term Debt 13,041 13,853 9,952 9,952 9,952
Other Liabilities 4,285 4,516 4,769 4,777 4,785 P/E 9.2 14.6 25.8 19.5 14.2
Shareholder's equity 7,349 8,772 13,770 14,515 15,791 Adj. P/E 8.9 14.6 25.8 19.5 14.2
BVPS 19 23 25 25 28 FCF yield in % 6.2% 9.0% 7.7% 4.3% 6.1%
Total Equity and liabilities 28,803 34,337 34,279 34,701 36,158 EV/CE 2.3 1.6 1.6 1.7 1.6
165
(44-20) 7325-5242 07 December 2009
Underweight Italcementi
€8.91
30 November 2009 Too dependent on mature markets
Price Target: €10.30 Concerns in the next cycle
In our opinion, the key negatives for Italcementi are 1) less exposure to high growth
Building Materials emerging markets; 2) dependence on Italy and France, where we expect cement
Mike Betts
AC consumption to decline further in 2010. Our 12-month mid-cycle EPS-based price
(44-20) 7325-8976 target for Italcementi (€10.3) suggests 16% upside to its current price, which is the
mike.f.betts@jpmorgan.com lowest upside amongst the 8 European companies covered by the author. Hence,
Italcementi is our key Underweight recommendation.

• Building Materials: Improving outlook. Our current valuation of Italcementi’s valuation (€10.3) is 32% above our estimate of
Increasing sector EPS estimates by 5- its trough valuation in Jan-09 of €7.8. Furthermore, adverse trading in Italcementi’s
12%. Raising Ciment Francais and growing markets in Middle East & Africa would negatively affect the company’s
Eagle from UW to N. Lowering Holcim
valuation.
from OW to N., 08 Sep 09

Price Performance Italy and France together account for 36% of our estimate of Italcementi’s mid-cycle
12 EBITDA. Therefore, changes in cement demand and pricing in either country could
significantly impact the share prices. The Pesenti family controls Italcementi. If at
€ 9
some point in the future they chose to exit the business, we estimate that their
6 controlling shareholding could be worth a significant premium to the current share
Dec-08 Mar-09 Jun-09 Sep-09 price.
ITAI.MI share price (€)
MSCI-Eu (rebased)
Our 12-month price target of €10.30 is based on our mid-cycle P/E-based valuation
Performance (%) of the shares. We value the shares by multiplying our estimate of Italcementi’s mid-
cycle EPS (€1.03) by our estimate of its long-term average P/E ratio. We assume that
YTD 1m 3m 12m
the one year forward P/E multiple averages in the future around 10.0x. Italcementi
Abs -0.9% -9.3% -15.4% 12.8% has historically traded on a higher multiple. However, these averages have been
Rel -20.7% -10.1% -16.1% -9.6% increased significantly by particularly high multiples in 1998 and 2007. The key risks
that could keep our Underweight rating and target price from being achieved include
the following: France and Italy together account for a major proportion of our
estimate of Italcementi’s EBITDA, if cement volumes and prices in these two
countries differed from our forecasts, our rating on the shares would probably be
incorrect. Italcementi continues to grow by acquisition, which has both upside and
downside risks.
Italcementi (ITAI.MI;IT IM)

Adj. EPS FY (€) 1.52 0.93 0.44 0.33 0.44 Price (€) 8.91
EBITDA FY (€ mn) 1,405 1,103 958 951 997 Date Of Price 30 Nov 09
EBITDA margin FY 23.4% 19.1% 19.1% 19.0% 18.9% Price Target (€) 10.30
EBIT FY (€ mn) 958 607 472 465 505 Price Target End Date 30 Nov 10
EBIT margin FY 16.0% 10.5% 9.4% 9.3% 9.6% 52-week Range (€) 11.30 - 6.43
Tax rate FY 28.1% 35.3% 29.0% 30.0% 29.0% Mkt Cap (€ bn) 2.5
Cash EPS FY (€) 3.31 2.61 3.28 2.51 2.45 Shares O/S (mn) 279
Adj P/E FY 5.8 9.6 20.1 26.7 20.3
EV/EBITDA FY 3.9 5.7 7.0 7.6 6.9
DPS (Net) FY (€) 0.36 0.18 0.10 0.10 0.10
166
(44-20) 7325-5242 07 December 2009
Italcementi: Summary of Financials

€ in millions, year-end Dec FY07 FY08 FY09E FY10E € in millions, year-end Dec FY07 FY08 FY09E FY10E
Revenue 6,001 5,776 5,009 5,013 EBIT 958 607 472 465
% change Y/Y 2.5% (3.8%) (13.3%) 0.1% Change in working capital 17 (154) 192 (1)
EBITDA 1,405 1,103 958 951 Depreciation & amortisation 447 496 487 486
% change Y/Y (2.1%) (21.5%) (13.1%) (0.8%) Interest (128) (148) (132) (154)
EBITDA Margin (%) 23.4% 19.1% 19.1% 19.0% Other items (61) 11 - -
Depreciation & amortization (447) (496) (487) (486) Taxes (311) (206) (103) (98)
EBIT 958 607 472 465 Cash flow from operations 2,328 1,832 1,874 1,649
% change Y/Y (5.4%) (36.6%) (22.3%) (1.4%) Capex (530) (698) (750) (534)
EBIT Margin (%) 16.0% 10.5% 9.4% 9.3% Dividends paid (163) (154) (129) (85)
Interest (119) (87) (132) (154)
Other financials 13 25 15 15 Free cash flow 230 (124) 36 79
Earnings before tax 852 421 355 327 Acquisitions / divestments (297) (341) 72 (141)
% change Y/Y (7.2%) (50.6%) (15.7%) (7.9%)
Tax (239) (149) (103) (98) Cash (needed)/available (67) (465) 108 (62)
as % of EBT 28.1% 35.3% 29.0% 30.0% Change in equity (6) 13 - -
Minorities interest (189) (133) (129) (136) Exchange adjustments - - - -
Net Income (Reported) 424 139 123 93 Other - - - -
% change Y/Y (5.7%) (67.3%) (11.2%) (24.5%)
Shares Outstanding 279.1 278.7 278.7 278.7 Decrease/(increase) in net debt (73) (452) 108 (62)
EPS (reported) 1.52 0.50 0.44 0.33 Other (135) 191 - -
% change Y/Y (5.8%) (67.2%) (11.2%) (24.5%)
EPS Adjusted 1.52 0.93 0.44 0.33 Net debt at year-end 2,418 2,679 2,691 2,753
% change Y/Y (5.1%) (39.0%) (52.4%) (24.5%)

€ in millions, year-end Dec FY07 FY08 FY09E FY10E € in millions, year-end Dec FY07 FY08 FY09E FY10E
Cash and cash equivalents 450 575 575 575 Per share amounts
Accounts receivable 1,645 1,470 1,465 1,465 Normalised EPS 1.52 0.93 0.44 0.33
Inventories 843 941 754 755 Normalised EPS pre-goodwill 1.52 0.93 0.44 0.33
Current assets 2,938 2,985 2,794 2,795 Dividend per share 0.36 0.18 0.10 0.10
Cash flow per share 8.34 6.57 6.72 5.92
Tangible Assets 4,144 4,282 4,498 4,687 Net tangible assets per share 12.5 11.9 11.8 12.1
Intangible assets 1,995 2,079 2,079 2,079
Financial assets 698 640 640 640 Multiples (No.)
Net fixed assets 6,838 7,001 7,216 7,406 P/E multiple 5.4 8.8 18.4 24.4
Total assets 9,776 9,986 10,010 10,200 Price to book value 0.7 0.7 0.8 -
Price to cash flow 1.1 1.4 1.3 1.5
Liabilities EBITDA multiple 3.9 5.7 7.0 7.6
ST loans (641) (601) (601) (601) EBIT multiple 5.7 10.4 14.2 15.6
Payables (1,351) (1,332) (1,332) (1,332)
Total current liabilities (1,992) (1,933) (1,933) (1,933) Leverage (No.)
Long term debt (2,213) (2,684) (2,696) (2,758) Net debt/equity 50.8% 58.1% 58.2% 57.9%
Others (810) (754) (754) (754) Interest cover (x) 8.0 7.0 3.6 3.0
Total liabilities (5,016) (5,371) (5,383) (5,445) Payout ratio 23.7% 36.1% 22.6% 30.0%
Total equity 4,761 4,615 4,627 4,756
Minority interests (1,281) (1,290) (1,329) (1,397)
Shareholders' equity 3,479 3,325 3,297 3,358
Y/E shares outstanding 279 279 279 279
BVPS 12.5 11.9 11.8 -
167
(44-20) 7325-5242 07 December 2009
Underweight IVG
€6.2
30 November 2009 Refinancing done, but fundamentals remain tough
Price Target: €3 Concerns about the next cycle
IVG is the largest list property company in Germany, with assets across Europe. Having
Property fallen 75% in calendar year 2008, the stock is up 8% 2009 ytd, underperforming the
Harm Meijer
AC market by 14%, on concerns over leverage and refinancing. However, the stock has
(44-20) 7325-9248 rallied by 85% since its low in Mar-09, as the company’s new management team did
harm.m.meijer@jpmorgan.com well in refinancing €1.3bn of debt, against the market’s expectations, while further
Osmaan Malik, CFA progress has been made in €1bn of sales from the portfolio, and a recent equity issue
(44-20) 7325-6084 raising €72m. Although the rally is to some extent justified, we think it has gone far
osmaan.malik@jpmorgan.com enough, and the fundamentals remain tough: IVG remains a stock to avoid because of
its low portfolio yield (NOI yield 5.1%), extremely high leverage (we estimate pro-
forma LTV 87% including the hybrid as debt), low recurring cash flow (3Q annualized
Pradeep Kumar
FFO was only €0.10, a 1.6% yield), while the rental market looks tough (like-for-like
(91-22) 6157 3298 rents were down 3.1% yoy at 30-Sep, with a 1.4% decline qoq).
pradeep.z.kumar@jpmorgan.com
Flexing downside
J.P. Morgan India Private Limited Due to the high leverage of 87% LTV (highest of our coverage among the investment
companies), just a 1% decline in the portfolio value will hit NAV (and likely our
price target) by -7.7%, and a 5% decline by -38.5%. The leverage works to the
Flagship reports
upside too, but we think the already low portfolio yield of 5.1% will limit potential
• European Property Handbook: Castles yield compression in the future.
Made of Sand, 01 Sep 09
• The Property Ticker (daily)
IVG still needs to degear, and will likely continue to sell assets in 2010. We think
further asset sales will be a good test of the portfolio yields. Although a recent
Price Performance €470m portfolio was sold in-line with the book value, the majority of the assets were
8
in Italy, and not Germany, IVG’s core market.
€ 5 IVG has made multiple public statements saying that it would consider a “large”
2 capital increase, if investment opportunities arise.
IVGG.DE share price (€
MSCI-Eu (rebased) Our Sep-10 price target of €3 indicates 50% downside from current levels, and is
Performance (%) based on our European Valuation model where we calculate a value creation spread
of -2.1% between our forecast total return and our WACC estimate of 7.5%. The
YTD 1m 3m 12m stock trades at a 15% discount to its Sep-09 balance sheet NAV of €7.16 vs. an
Abs 8.6% 2.0% 13.7% 82.6% average discount of 24% for our European coverage on 2009E NAV estimates.
Rel -11.2% 1.2% 13/0% 60.2%
As noted above, any increase in portfolio valuation will lead to a highly geared uplift
on NAV. Strong rental growth or unexpected yield compression would lead to this.
IVG Immobilien (IVGG.DE;IVG GR)

Adj. EPS FY (€) (0.71) (0.61) (0.60) (0.54) Price (€) 6.21
DPS FY (€) 0.00 0.00 0.00 0.00 Date Of Price 30 Nov 09
ROIC FY -1.5% -1.3% 3.6% 6.4% Price Target (€) 3.00
Adjusted NAV ps FY (€) 10.2 7.4 7.6 9.2 Price Target End Date 30 Sep 10
NAV premium (discount) FY (43.8%) (23.1%) (25.3%) (38.2%) 52-week Range (€) 9.96 - 3.20
Property investments FY (€ mn) 5,172 4,427 4,313 4,363 Mkt Cap (€ bn) 0.8
LTV (Loan-to-value) FY 89.5% 94.5% 94.1% 91.2% Shares O/S (mn) 126
EVA spread FY -9.0% -8.8% -3.9% -1.1%
168
(44-20) 7325-5242 07 December 2009
IVG Immobilien: Summary of Financials

Profit and Loss Statement Per share data
Property income 609 534 543 556 Adjusted EPS (0.71) (0.61) (0.60) (0.54)
% Change Y/Y - (12.3%) 1.8% 2.3% % change Y/Y - - - -
Rental income 400 373 383 393 Indirect result (3.14) (1.75) 0.46 1.71
Other income 209 161 160 163 % change Y/Y - (44.1%) (126.3%) 271.4%
EBITDA 207 214 220 226 EPS (IFRS) (3.85) (2.37) (0.14) 1.18
% Change Y/Y - 3.0% 2.8% 2.8% % change Y/Y - (38.6%) (94.0%) (924.6%)
Net interest (275) (269) (274) (272) DPS 0.00 0.00 0.00 0.00
Earnings before tax (67) (55) (54) (46) % change Y/Y - - - -
% change Y/Y - (18.4%) (1.6%) (15.4%) Gross cash flow -0.66 -0.60 -0.59 -0.52
Tax 0 0 0 0 % change Y/Y - (10.0%) (1.2%) (11.5%)
as % of EBT 0.0% 0.0% 0.0% 0.0% NNNAV (IFRS) 8.2 5.7 6.0 7.4
Minorities 0 0 0 0 % change Y/Y - (29.6%) 3.8% 23.6%
Adjusted net income (99) (87) (86) (77) Adjusted NAV 10.2 7.4 7.6 9.2
% change Y/Y - (12.5%) (1.0%) (9.7%) % change Y/Y - (27.0%) 2.9% 21.0%
Revaluation (583) (428) (114) 50
Capital gain tax 45 40 (0) (25) Cash flow statement
Other 0 0 0 0 EBITDA 207 214 220 226
Minorities 0 0 0 0 Gross cash flow 354 30 98 137
Indirect profit (384) (215) 57 210 Net cash flow 344 (209) (9) 97
Total profit (IFRS) (483) (302) (29) 132 Total cash flow requirement 344 (209) (9) 97
Balance Sheet Ratio Analysis

Cash and cash equivalents 44 44 44 44 Operating return 3.0% 4.6% 5.2% 5.8%
Accounts receivable 249 249 249 249 Capital return (4.5%) (5.9%) (1.7%) 0.5%
Others 1,002 1,621 1,770 1,820 ROIC (1.5%) (1.3%) 3.6% 6.4%
Current assets 1,295 1,914 2,063 2,113 WACC 7.5% 7.5% 7.5% 7.5%
EVA spread (9.0%) (8.8%) (3.9%) (1.1%)
Property investments 5,172 4,427 4,313 4,363
Property not in operation 368 368 368 368 ROE (recurring) (10.0%) (10.3%) (12.1%) (9.6%)
Total assets 7,876 7,749 7,784 7,884 ROE (total) (48.8%) (35.8%) (4.1%) 16.4%
Short term debt 1,349 1,349 1,349 1,349 Net debt / total assets 75.6% 79.6% 79.3% 77.1%
Others 502 502 502 502 Net debt/ equity 599.2% 883.8% 852.8% 678.2%
Total current liabilities 1,852 1,852 1,852 1,852 Equity / assets 12.6% 9.0% 9.3% 11.3%
Long term debt 4,250 4,459 4,468 4,371 Property income / assets 7.7% 6.9% 7.0% 7.1%
Other liabilities 935 889 889 914 Rental income / assets 5.1% 4.8% 4.9% 5.0%
Shareholders' equity 987 692 718 890 EBITDA / assets 2.6% 2.8% 2.8% 2.9%
Group equity 990 695 721 893 % change Y/Y - 4.7% 2.4% 1.5%
Total liabilities and equity 7,876 7,749 7,784 7,884
169
(44-20) 7325-5242 07 December 2009
Underweight Lagardère
€28.37
30 November 2009 Magazines under structural threat and little growth
Price Target: €30.70 expected in the publishing division
We see little organic revenue growth for Lagardère in the medium term (1.9% 2010-12E) and
Media Conglomerate
AC
following the expected -1.3% decline in ’09, we expect organic revenue growth of 2.1% in
Filippo Pietro Lo Franco ’10 and 1.7% in ’11. We see the company as a “hybrid investment case” with approximately
(44-20) 7325-9779
filippo.p.lofranco@jpmorgan.com
half of revenues cyclical and half defensive. The defensive part will not benefit from the
expected advertising recovery in ’10 and we think it will be difficult for the consumer book
Julie Duval division (organic revenue growth +6.5% FY09E, +1.5% FY10E) to find another strong
(44-20) 7325-9414
julie.e.duval@jpmorgan.com
success in ’10. In addition, the development of e-books devices could become a serious threat
to the consumer book business model in the future. We also expect the magazines division
(17% of FY09E revenues) to be penalized by structural issues as circulation continues to
Flagship reports decline, and we believe that our +3.8% FY10 revenue growth estimate already assumes an
• Lagardère. 9M09 revenues below optimistic scenario following the expected -11% decline in FY09.
JPMe driven structural issues in Active.
Consumer publishing outlook is Flexing downside
tarnished by difficult comp and ebook, We expect Lagardère Media recurring EBIT to grow by 4.2% y/y in FY10 following
05 Nov 09 an expected -7.6% decline in ’09. Magazines is the area facing higher risks and if we
• European Media Strategy and Data assume flat advertising revenues in ’10 (vs our current expectations of +3.8%) and an
watch, 21 Sep 09
operating margin of 5% (vs our current expectation of 7.1%) we would reduce
Lagardère Media recurring EBIT by -5%. The Sport division is also an area of
Price Performance concern: assuming in FY10 the same EBIT recorded in FY08 (€75m vs our current
FY10 estimate of €84m) and adding the negative scenario for magazines, we would
35
reduce Lagardère Media recurring EBIT 10E by 7%.
€
25
15
A take off of ebooks outside the US in ’10 – not yet a market in Europe, only 3% of
LGD’s sales in the US – could hamper growth expectations for the consumer publishing
LAGA.PA share price (€)
MSCI-Eu (rebased) division, which we expect to contribute 42% to ’10 Lagardère Media recurring EBIT.
Positive catalysts would be: continued growth at the publishing division, growth in the
circulation of magazines and improving sales in the airport retailers.
Performance (%)
YTD 1m 3m 12m Our DCF/SoP based Dec-10 price target of €30.7 implies no upside to the current share
Abs -1.9% -7.6% -6.6% 7.3% price. With an EV/EBITDA10E of 5.4x the stock trades in line with Vivendi, which has,
Rel -23.4% -7.6% -9.7% -16.8% in our view, better assets and higher dividend yield (7.4% vs 5.0%). Risks to our rating
and price target are: 1) the improving economic environment and impacts positively
(more than expected) the cyclical businesses of Lagardère; 2) Lagardère continues to
rationalize its assets by selling the distribution business, the audiovisual business or the
EADS stake, or undertakes a major (more than 10%) share buy back plan.
Lagardère (Lagardère SCA) (LAGA.PA;MMB FP)

Adj. EPS FY (€) 2.37 4.11 3.33 3.44 3.66 Price (€) 28.37
EBITDA FY (€ mn) 839 848 791 823 824 Price Target (€) 30.70
EBIT FY (€ mn) 636 647 599 632 637 Price Target End Date 30 Dec 10
Net Attributable Income FY 534 593 647 371 413 52-week Range (€) 35.65 - 19.11
(€ mn) Mkt Cap (€ bn) 3.7
DPS (Net) FY (€) 1.30 1.30 1.45 1.49 1.50 Shares O/S (mn) 132
FCF FY (€ mn) 438 201 499 447 444
EBIT margin FY 7.0% 7.5% 7.1% 7.4% 7.3%
170
(44-20) 7325-5242 07 December 2009
Lagardère: Summary of Financials

Revenue 9,075 8,620 8,480 8,593 8,687 EBITA 675 697 628 659 659
% change Y/Y 8.3% -5.0% -1.6% 1.3% 1.1% Depreciation & amortisation 203 201 192 190 187
EBITDA 839 848 791 823 824 Change in working capital (23) (141) 99 (3) (3)
% change Y/Y 29.3% 1.1% -6.7% 4.0% 0.2% Other -387 -509 -272 -203 -199
EBITDA Margin (%) 9.2% 9.8% 9.3% 9.6% 9.5% Cash flow from operating activities 429 198 618 617 622
EBITA 675 697 628 659 659
% change Y/Y 29.6% 3.3% -9.9% 5.0% -0.1% Net Capex (194) (191) (220) (223) (226)
EBITA Margin 7.4% 8.1% 7.4% 7.7% 7.6% Disposals/ (purchase) (302) 269 694 0 0
Interest (204) (176) (101) (54) (48) Other investing cash flow 11 -1 0 0 0
Earnings before tax 663 649 834 631 693 Cash flow from investing activities -485 77 474 -223 -226
% change Y/Y 61.3% -2.1% 28.5% -24.3% 9.7%
Tax (99) (22) (131) (154) (164) Equity raised/(repaid) (330) (102) 0 0 0
as % of EBT 14.9% 3.4% 23.2% 22.0% 22.0% Debt raised/(repaid) -137 131 -892 -167 -168
Minorities (30) (34) (56) (106) (116) Dividends paid (181) (202) (199) (227) (228)
Net Income 534 593 647 371 413 Other financing cash flow 5 2 0 0 0
% change Y/Y 83.5% 11.0% 9.0% -42.6% 11.1% Change in cash -699 104 0 0 0
Reported EPS 4.02 4.60 4.90 2.76 3.12 Net debt/(cash) 2,570 2,619 1,727 1,560 1,392
Adjusted EPS 2.37 4.11 3.33 3.44 3.66 EV FCF 438 201 499 447 444
DPS 1.30 1.30 1.45 1.49 1.50 Equity FCF 235 7 398 393 396

Accounts receivable 1,585 1,647 1,484 1,504 1,520 Operating margin 7.4% 8.0% 7.4% 7.6% 7.5%
Other current assets 1,442 1,494 800 800 800 Personnel costs % sales - - - - -
Net Current assets 4,289 4,527 3,628 3,654 3,677
Organic sales growth 3.3% 3.1% -1.3% 2.1% 1.7%
LT investments 2,847 2,443 2,565 2,697 2,853 Sales growth 8.3% -5.0% -1.6% 1.3% 1.1%
Net fixed assets 640 636 670 704 739 Net profit growth 83.5% 11.0% 9.0% -42.6% 11.1%
Other LT assets 600 405 405 405 405 Adj EPS growth NM 73.6% NM 3.3% 6.4%
Intangible Assets 4,403 4,320 3,812 3,736 3,684 FCF growth 53.1% -54.1% 148.1% -10.3% -0.8%
Total assets 12,779 12,331 11,080 11,197 11,358
Interest coverage (x) 3.1 3.7 5.9 11.8 13.3
Liabilities Net debt/EBITDA 3.1 3.1 2.2 1.9 1.7
ST loans 1,479 1,191 499 499 499 Net debt to equity 54.2% 57.7% 34.1% 28.9% 24.1%
Payables 1,849 1,845 1,738 1,762 1,781 Sales/assets 0.7 0.7 0.8 0.8 0.8
Other current liabilities 1,837 1,691 1,691 1,691 1,691 Capex/sales 2.1% 2.2% 2.6% 2.6% 2.6%
Total current liabilities 5,165 4,727 3,928 3,952 3,971 FCF conversion 64.9% 28.8% 79.4% 67.8% 67.3%
Long term debt 1,960 2,380 1,488 1,321 1,153 ROCE 6.9% 8.5% 7.1% 7.4% 7.3%
Total LT liabilities 2,955 3,158 2,266 2,099 1,931
171
(44-20) 7325-5242 07 December 2009
Underweight Nordea
72.3 SEK
Expensive with risk of disappointment
30 November 2009
Price Target: 67 SEK
We see more limited opportunities in the next economic cycle compared to peers in
terms of gearing to interest rate increases and credit normalization. With regards to
Banks credit we see more negative than positive risk here, as expectations for low
AC
Nana A Francois, CFA normalized loan losses are more than fully priced in whilst Nordea retains some
(44-20) 7325-6424 higher risk exposures (1/3 of the book in Baltics, Shipping, Property Management,
nana.a.francois@jpmorgan.com
Private Equity, Poland). We also see more limited franchise opportunities to drive
Kian Abouhossein growth for Nordea, as competition is already limiting scope for corporate market
(44-20) 7325-1532 share gains, and international expansion (with Poland as the current focus) is unlikely
kian.abouhossein@jpmorgan.com to be a significant group contributor in the medium term.
Flexing downside
Flagship reports We already see 8% downside to our 31st December 2010E PT, on estimates that are
• DnB NOR: Upgrade to OW, 01 Jun 09 largely in line with consensus. Further downside could come from more limited NIM
• Swedbank and SEB: Rough Baltics
expansion (we see NII up 7% and 12% in 2010E and 2011E) and less cost control
Seas, 13 Oct 09
(where we have Nordea maintaining the current underlying cost growth into 2010E
and 2011E). Sensitivity to the upside is limited especially on the interest rate side,
Price Performance with the 12 month effect of a 100bp rise in interest rates equivalent to only 1.5% of
annualised Q309 revenues. In terms of provisioning, reducing our 48bp 2011E
70
estimate to 35bp normalised would add 13% to net profit, taking 2011E EPS up to
Skr 50
€0.66 per share, still leaving the stock trading at 11x 2011E earnings.
30
NDA.ST share price (Skr)
Other than the interest rate cycle (where we expect rate to be low for long), and news
MSCI-Eu (rebased) flow on problem areas (the Baltics, shipping), in our view the key driver will be
speculation over material M&A activity. We would expect Nordea to be the acquirer
if this were to occur, which we view negatively, as we expect it will be harder to find
Performance (%) value creating opportunities in an environment where the sector has already
YTD 1m 3m 12m recapitalised and re-rated, and so risk of overpaying has increased
Abs 69.6% -7.1% -4.6% 70.5%
Rel 49.8% -7.9% -5.3% 48.1%
Our end-Dec 2010 SOTP price target for Nordea is 67 SEK, equivalent to 1.2x
2011E NAV, which we feel is a fair multiple for the bank considering its low 13%
normalized RoE. Nordea’s RoE peaked in 2006 with a 19% RoE on loan loss
recoveries amounting to 12bp and almost 10% to group pretax profit.
In our view the key risks to our UW rating and price target are i) stronger than
expected loan volume recovery driving stronger revenues, ii) better costs control, iii)
lower normalized loan (below 35bp including the impact of dynamic provisioning)
losses, iv) a 2010/2011 earnings accretive acquisition.
Nordea Bank AB (NDA.ST;NDA SS)
Adj. EPS FY (€) 1.05 0.61 0.47 0.58 Price (Skr) 72.30
NAV/Sh FY (€) 5.9 4.8 5.1 5.4 Price Target (Skr) 67.00
P/NAV FY 1.2 1.4 1.4 1.3 Price Target End Date 31 Dec 10
ROE FY 15.6% 12.2% 8.3% 9.8% 52-week Range (Skr) 79.10 - 30.81
ROA FY 0.6% 0.5% 0.4% 0.5% Mkt Cap (Skr bn) 291.9
Dividend (Net) FY (Skr) 0.20 0.21 0.22 0.26 Shares O/S (mn) 4,037
Net Attributable Income FY 2,722 2,443 1,889 2,356 Mkt Cap ($ bn) 41.8
(€ mn)
172
(44-20) 7325-5242 07 December 2009
Nordea Bank AB: Summary of Financials

Per Share Data
% Change Y/Y 10.7% 19.7% 3.2% 6.6% 12.1% EPS Adjusted 1.12 1.05 0.61 0.47 0.58
Non-interest income 3,484 3,097 3,940 3,289 3,386 % Change Y/Y 8.8% (6.6%) (42.4%) (22.7%) 24.7%
% change Y/Y 3.2% (13.3%) (8.2%) 11.4% 7.9% % Change Y/Y 2.0% (59.9%) 5.7% 1.6% 22.0%
% change Y/Y 14.6% (13.4%) 101.4% (41.5%) (5.4%) Payout ratio 42.7% 19.1% 35.0% 46.0% 45.0%
Other Income 116 172 114 110 120 BV per share 6.59 6.84 5.50 5.75 6.12
% change Y/Y 5.4% 5.9% 12.3% (3.3%) 8.7% Shares outstanding 2,593.0 2,590.0 4,037.0 4,037.0 4,037.0
Admin expenses 2,388 2,574 2,681 2,770 2,896
% change Y/Y 6.1% 7.8% 4.1% 3.3% 4.5% Return ratios
Other expenses 1,678 1,780 1,756 1,989 2,175 RoRWA - 1.6% 1.4% 1.1% 1.2%
% change Y/Y 4.4% 4.5% 23.9% (13.1%) 11.2% ROE 18.0% 15.6% 12.2% 8.3% 9.8%
Loan loss provisions 60 -452 -1,535 -1,648 -1,490 RoNAV 20.8% 18.0% 14.1% 9.4% 11.1%
Other provisions - - - - -
% change Y/Y (1.2%) (9.2%) (4.6%) (22.7%) 24.7% NIM (NII / RWA) 1.5% 1.6% 1.5% 1.6% 1.7%
Tax (charge) (721) (723) (814) (630) (785) Non-IR / average assets 0.9% 0.7% 0.8% 0.7% 0.7%
Minorities - - 0 0 0 NII / Total revenues 55.1% 62.3% 57.3% 63.1% 65.1%
Balance sheet
ASSETS Cost ratios

% change Y/Y 14.3% 8.3% 7.7% 3.4% 7.2% Cost / assets 1.0% 0.9% 0.9% 0.9% 1.0%
Loan loss reserves 957 1,170 2,187 2,778 3,115 Staff numbers 21,006 - - - -
Investments - - - - -
% change Y/Y 1.3% (7.6%) (32.6%) 0.5% 0.6% Loan / deposit 171.9% 178.4% 190.2% 187.7% 191.7%
Total assets 389,054 474,074 493,160 503,023 515,599 LT Debt / liabilities 25.6% 23.0% 22.8% 22.3% 21.8%

% change Y/Y 12.6% 4.4% 1.0% 4.7% 5.0% NPLs / loans 0.5% 0.8% 1.5% 1.6% 1.6%
Long term funding 99,792 108,989 112,198 112,198 112,198 LLP / RWA (0.03%) 0.27% 0.90% 0.90% 0.76%
Average interest bearing liabs 265,044 298,738 320,759 327,358 334,851 Growth in NPLs (11.7%) 68.4% 90.1% 9.0% 7.3%
Retirement benefit liabilities - - - - - % YoY change - (1.7%) 1.0% 7.5% 7.2%
Minorities 78 78 83 83 83 Total Tier 1 6.2% 7.4% 10.6% 10.4% 9.9%
Total liabilities & Shareholders Equity 389,054 474,074 493,160 503,023 515,599
173
(44-20) 7325-5242 07 December 2009
Underweight Oriflame
SKr 411.00
30 November 2009 See margin ambitions stretched given likely growth
Price Target: Skr 350.00 Concerns about the next cycle
We continue to believe that Oriflame will benefit from underlying growth in Eastern
Cosmetics & Personal Care Europe markets. The growth prospects of its direct selling model should continue to play
Celine Pannuti
AC out in tough times, though the beauty market in Eastern Europe should remain soft with
(44-20) 7325-9276 stronger growth opportunities in the value segments, hence our forecasts of lower
celine.pannuti@jpmorgan.com productivity and negative ‘Mix’. Consequently we have turned increasingly cautious that
this growth will fail to foster margin expansion. We struggle to see how management
will bridge the margin gap of 4% between its FY09 guidance of 11% vs its MT guidance
Flagship reports of 15%. Despite a strong top line growth profile a pedestrian margin since 2004 has
• Ahead of Q309 - Why a weak Q3
shown the lack of operating leverage in the business model. Without a rebound of the
should trigger earnings downgrade, 19
Oct 09 Rouble and other Eastern European currencies vs the Euro, we believe margin increase
• European HPC: Earnings upside ST, will be hard to get. While Oriflame is planning to source more of its sales locally (50%
but MT concerns of weaker growth in a is now Euro sourced) there is little visibility on timeline and the scope of benefits.
value driven world remain; downgrade
Oriflame to UW, 24 Sep 09 Flexing downside
We expect LC growth of 11.4% and margins of 11.4% (after a -50bps impact from
FX) in 2010. As earnings growth relies heavily on top line, any weakness in volume or
Price Performance difficulties to pass on price increases would jeopardise our 24% 2010E EPS growth
450 recovery. Furthering weakening of Russian Rouble and other EE currencies by 0.1%
would impact the margins by c10-15bps (see our Oct 19 note, “Ahead of Q309”)
350
Skr leading to 1.0%-1.5% cut in our EPS estimates.
250
150 While Oriflame’s quarterly performance in 2009 has been mixed, we see risks of further
evidence of poor quality top line growth in 2010. With FY09 results due on February 10,
we are also cautious that margin performance could disappoint consensus expectations.
Finally the macro-economic drivers in Eastern Europe and FX developments versus the
Performance (%)
Euro could be positive or negative catalysts throughout 2010 and could impact the stock
YTD 1m 3m 12m in a more substantial manner than company specific fundamentals.
Abs 83.6% 3.5% 22.1% 102.0%
While our DCF (WACC 11.5%, LT growth 3.0%) points to a price target of
SEK400, we value Oriflame at SEK350, Dec-10 based, on a 16.0x PE2010E, a 10%
discount (due to Oriflame’s emerging market exposure) to the sector (at 17.8x).
Oriflame trades at 18.9x PE10E, 12.9x EV/EBITDA – at a premium to the European
HPC sector (17.8x PE, 11.9x EV/EBITDA) and ahead of its biggest peer Avon at
16.4x PE10E. In the light of downside risk to margin, we believe the stock is too
expensive. We point out that the upside risks to our thesis are a sharp strengthening
of the Rouble vs the Euro and potential M&A speculation should an FMCG/Beauty
player look to acquire a direct selling company.
Oriflame Cosmetics SA (ORIsdb.ST;ORI SS)

FYE Dec 2006A 2007A 2008A 2009E 2010E Company Data
Adj. EPS FY (€) 1.63 2.05 2.31 1.67 2.07 Price (Skr) 411.00
EV/EBITDA FY 12.3 13.4 7.1 14.8 13.1 Price Target (Skr) 350.00
Revenue FY (€ mn) 918 1,109 1,320 1,309 1,434 Price Target End Date 31 Dec 10
EBIT margin FY 13.8% 14.0% 14.2% 10.9% 11.4% 52-week Range (Skr) 420.50 - 176.00
Cash EPS FY (€) 1.49 1.11 0.76 0.94 1.53 Mkt Cap (Skr bn) 23.2
DPS (Net) FY (Skr) 1.01 1.25 1.25 1.05 1.25 Shares O/S (mn) 57
FCF Yield FY 5.5% 4.1% 4.1% 2.7% 4.4%
174
(44-20) 7325-5242 07 December 2009
Oriflame: Summary of Financials

Revenues 1,109 1,320 1,309 1,434 1,552 EBIT 155 187 143 163 200
% change Y/Y 20.8% 19.0% -0.8% 9.6% 8.2% Depreciation & Amortization 18 22 22 24 26
Gross Margin (%) 70.1% 68.9% 65.5% 65.2% 66.2% Change in working capital (16) (67) (28) (16) 11
EBITDA 174 209 165 187 226 Taxes (15) (17) (17) (21) (28)
% change Y/Y 22.6% 20.2% -20.8% 13.3% 20.7% Cash Flow from Operations 132 134 138 171 238
EBITDA Margin (%) 15.7% 15.8% 12.6% 13.1% 14.6%
EBIT 155 187 143 163 200 Capex (34) (36) (36) (39) (42)
% change Y/Y 22.3% 20.5% -23.5% 13.8% 22.6% Disposal/ (purchase) 0 3 0 0 0
EBIT Margin (%) 14.0% 14.2% 10.9% 11.4% 12.9% Net Interest (19) (26) (32) (24) (15)
Net Interest (20) (25) (22) (19) (15) Free Cash Flow 63 43 53 87 153
Earnings before tax 106 142 112 139 185
% change Y/Y -2.3% 33.6% -21.2% 24.2% 33.7% Equity raised/ (repaid) 3 3 0 0 0
Tax 14 17 17 21 28 Debt raised/ (repaid) -11 20 0 0 0
as % of EBT 13.2% 12.1% 15.0% 15.0% 15.0% Other - - - - -
Net Income (Reported) 116 132 95 118 157 Dividends Paid (56) (70) (60) (71) (95)
% change Y/Y 22.2% 13.8% -28.1% 24.2% 33.7% Beginning Cash 62 63 68 68 68
Shares Outstanding 57 57 57 57 57 Ending Cash 63 68 68 68 68
EPS (reported) 1.63 2.17 1.67 2.07 2.77 DPS 1.25 1.25 1.05 1.25 1.67
% change Y/Y 1.0% 33.7% (23.2%) 24.2% 33.7%

Cash and cash equivalent - - - - - EBITDA Margin 15.7% 15.8% 12.6% 13.1% 14.6%
Accounts receivables 92 105 104 114 123 Operating Margin 14.0% 14.2% 10.9% 11.4% 12.9%
Inventories 186 238 265 287 280 Net Profit Margin 10.5% 10.0% 7.2% 8.2% 10.1%
Other Current Assets 84 86 86 86 86 SG&A/sales 56.1% 58.1% 58.0% 57.2% 56.9%
Current Assets 341 411 438 469 472
Sales per share growth 24.1% 17.6% -0.1% 9.6% 8.2%
LT Investments - - - - - Sales growth 20.8% 19.0% -0.8% 9.6% 8.2%
Net Fixed Assets 141 139 155 172 191 Net Profit Growth 22.2% 13.8% -28.1% 24.2% 33.7%
Total Assets 516 580 623 671 693 EPS growth 1.0% 33.7% (23.2%) 24.2% 33.7%
Liabilities
Short Term Loans 22 26 26 26 26 Net Interest Coverage (x) 7.8 7.6 6.6 8.4 13.6
Payables 134 155 154 169 183 Net Debt to total capital 35.3% 33.8% 32.5% 27.8% 18.6%
Others 10 11 11 11 11 Net Debt to Equity 196.1% 152.3% 121.4% 86.2% 45.6%
Total Current Liabilities 194 207 206 221 235 Sales/Assets 2.1 2.3 2.1 2.1 2.2
Long Term Debt 223 238 245 229 171 Assets/Equity 556.0% 450.1% 373.6% 310.3% 245.7%
Other Liabilities - - - - - ROE 99.1% 96.5% 56.9% 54.4% 55.8%
Total Liabilities 423 451 456 455 411 ROCE 48.4% 51.4% 34.0% 35.2% 42.0%
Shareholders' Equity 93 129 167 216 282
BVPS 2 2 3 4 5
175
(44-20) 7325-5242 07 December 2009
Neutral Panalpina
CHF64.2
30 November 2009 2010 could see profit growth stuck on ‘pause’
Price Target: CHF79.0 Concerns about the next cycle
In our view, Panalpina remains a long-term growth stock: In a strong GDP growth
Freight Forwarding environment, we would expect to see trade volumes grow at least at 1.5-2.5x GDP.
Damian Brewer
AC Beyond 10E we think this is positive for Panalpina’s top line and potential profit –
(44-20) 7325-7310 once gross profit contribution levels normalize. However, for 10E we see challenges
damian.brewer@jpmorgan.com to its short-term profit prospects. Firstly, its greater than peers focus on (already
Andy Jones more outsourced) Air Freight means we see risk that gross profit contribution
(44-20) 7325-1622 margins are eroded due to share driven competitive price pressures; and, secondly,
andrew.r.jones@jpmorgan.com the risk 10E turns into a year spent playing ‘catch-up’ on rising air freight cargo costs
(on a yoy) basis. While Panalpina has a good track record of eventually passing
through transport price increases, we think that if 10E turns into a year of persistently
Flagship reports rising pricing (due to strong GDP growth and robust consumer activity), and airline
• Panalpina: Cutting EPS 09E 58% to discipline on new capacity stays intact, then Panalpina could see continued
CHF2.30, but 11E just 6.4% to
CHF4.73 on transitional GP/Unit
(downward) GP pressure – at its strongest in Q3-Q4-10E peak season.
squeeze, 21 Oct 09 Flexing downside
• Mail and Logistics: Forward-looking
PMI lift contrasts to Q2-09 'earnings
In its Air division Panalpina made a CHF813/tonne average gross profit over 05-08.
doldrums', 17 Jul 09 Each CHF50 drop in GP/tonne (vs. 08) would cut gross profit by CHF34m based on
• Freight Forwarders: Once PMI is on the 09E tonnage. With little else to flex, then each CHF50/tonne swing could swing
turn, there's money to earn, 29 Jan 09 BBG consensus 10E EBIT of CHF144m by 23%.
Price Performance The price (gross profit per unit) outlook is critical to Panalpina: Volumes are
90 generally a function of the macro outlook, it is asset light (so there is little gearing to
70 asset related costs), and its SG&A cost requirements are driven by activity (and
SwF
50
internal efficiency). Signs of GP risk are likely to be strongest as the 10E peak season
builds into Q3-10E.
30
Dec-08 Mar-09 Jun-09 Sep-09 Valuation, target price, key risks
We are N with a 12-month 50 year DCF based PT of CHF79.0 (terminal growth
Performance (%)
2.5%, WACC 7.3%). We see Panalpina shares retaining their longer-term growth
YTD 1m 3m 12m credentials. If 10E GDP growth is as strong as J.P. Morgan economists forecast, we
Abs 8.7% -10.9% -25.4% 14.6% see demand strength, and the effect of (JPM forecast) benign fuel costs eventually
enticing new supply into the air market. (Ocean freight already seems to be
oversupplied.) These are also key risks to our rating and PT. Once the succession of
10E cost increases have been recovered, we think Panalpina might then be capable of
resuming its earnings growth. As a ‘growth’ stock rated at 22.3x JPMe EPS 10E, we
see other better prospects in the sector.
Panalpina Welttransport (Holding) AG (PWTN.S;PWTN SW)

Adj. EPS FY (SF) 9.90 9.26 3.32 2.88 3.96 Price (SF) 64.15
Revenue FY (SF mn) 8,641 8,878 6,161 6,988 7,721 Date Of Price 30 Nov 09
EBITDA FY (SF mn) 361 241 96 154 196 Price Target (SF) 79.00
EBITDA margin FY 4.2% 2.7% 1.6% 2.2% 2.5% Price Target End Date 18 Nov 10
EBIT FY (SF mn) 299 193 51 106 145 52-week Range (SwF) 90.95 - 37.20
EBIT margin FY 3.5% 2.2% 0.8% 1.5% 1.9% Mkt Cap (SF bn) 1.6
Pretax Profit Reported FY 277 165 42 93 129 Shares O/S (mn) 24
(SF mn)
Headline EPS FY (SF) 8.58 4.72 1.30 2.88 3.96
FCF FY (SF mn) 161 163 91 (28) 64
176
(44-20) 7325-5242 07 December 2009
Panalpina: Summary of Financials

Revenues 8,641 8,878 6,161 6,988 7,721 EBIT 299 193 51 106 145
% Change Y/Y 11.7% 2.7% -30.6% 13.4% 10.5% Depreciation & amortization 39 36 32 36 40
Gross Margin (%) 20.9% 19.6% 22.8% 20.6% 20.2% Change in working capital & Other (82) 39 92 (104) (35)
EBITDA (basic) 361 241 96 154 196 Cash flow from operations 279 280 188 49 161
% Change Y/Y 15.4% -33.1% -60.1% 60.0% 27.4%
EBITDA Margin (%) 4.2% 2.7% 1.6% 2.2% 2.5% Taxes (62) (59) (45) (10) (22)
EBIT 299 193 51 106 145 Capex (49) (47) (43) (54) (58)
% Change Y/Y 14.7% -35.4% -73.4% 107.4% 36.3% Net Interest (8) (11) (9) (13) (17)
EBIT Margin (%) 3.5% 2.2% 0.8% 1.5% 1.9% Free cash flow 161 163 91 (28) 64
Net Interest income/(expense) (22) (29) (9) (13) (17)
Earnings before tax 277 165 42 93 129 Disposals/(purchase) 0 0 0 0 0
% change Y/Y 15.6% -40.6% -74.4% 120.9% 37.8% Equity raised/repaid (88) (96) 0 0 0
Tax (charge) (66) (51) (11) (25) (34) Dividends paid (74) (76) (44) (26) (37)
Tax as a % of PBT 23.9% 30.7% 26.5% 26.5% 26.5% Other (18) 21 (0) 0 (0)
Net Income (Reported) 212 113 31 68 94
% change Y/Y 17.1% -46.8% -72.8% 120.9% 37.8% Beginning debt -346 -325 -381 -391 -337
Shares Outstanding (Av.m) 24.5 23.6 23.6 23.6 23.6 Ending debt -325 -381 -391 -337 -364
EPS (Reported, basic, SwF) 8.58 4.72 1.30 2.88 3.96 DPS (SwF, declared, gross) 3.20 1.90 0.52 1.15 1.59
% Change Y/Y 17.1% (45.0%) (72.4%) 120.9% 37.8%

Cash and cash equivalent 352 362 410 355 383 EBITDA margin (%) 4.2% 2.7% 1.6% 2.2% 2.5%
Accounts Receivables 1,337 1,078 746 946 1,045 Operating margin (%) 3.5% 2.2% 0.8% 1.5% 1.9%
Inventories 144 116 80 102 113 Net margin (%) 2.5% 1.3% 0.5% 1.0% 1.2%
Others 90 123 60 76 83 EBIT margin on Incremental Sales (%) 4.2% -44.6% 5.2% 6.7% 5.3%
Current assets 1,922 1,679 1,296 1,480 1,623 FCF margin (%) 1.9% 1.8% 1.5% (0.4%) 0.8%
LT investments 78 38 38 38 38 Sales growth (%) 11.7% 2.7% -30.6% 13.4% 10.5%

Net fixed assets 278 254 250 261 273 Attributable net profit growth (%) 17.1% -46.8% -72.8% 120.9% 37.8%
Total assets 2,278 1,971 1,584 1,778 1,934 EPS growth (%) 17.1% (45.0%) (72.4%) 120.9% 37.8%
Liabilities Interest coverage (x) (13.6) (6.8) (5.6) (8.1) (8.8)

ST loans 30 18 18 18 18 Effective Interest Rate (IS) (%) 6.5% 8.1% 2.4% 3.6% 4.7%
Payables 633 501 355 420 458 Net debt /EBITDA (x) (0.9) (1.6) (4.1) (2.2) (1.9)
Others 25 19 19 19 19 Sales/assets (x) 4.6 5.4 4.8 4.9 5.0
Total current liabilities 1,112 959 658 791 873 Assets/Equity (%) 222.1% 226.2% 178.0% 190.9% 195.7%
Long term debt 3 3 3 3 3 ROE (%) 23.6% 13.3% 5.0% 8.8% 11.0%
Other liabilities - - - - - ROCE (%) 34.2% 22.5% 7.6% 14.3% 17.5%
Total liabilities 1,252 1,100 694 847 946 ROIC (%) 29.2% 22.6% 8.9% 13.4% 16.5%
Shareholders' equity 1,026 871 890 931 988 ROIC/WACC 4.2 2.7 1.1 2.0 2.3
BVPS (SwF) 42 37 38 39 42
177
(44-20) 7325-5242 07 December 2009
Underweight RBS
33.18p
30 November 2009 Tough decisions ahead
In August the group presented a detailed and comprehensive 4 year plan with 45
divisional and group performance targets. Nevertheless, as a result of the harsh EU
Banks
restructuring sanctions this will have to be revised significantly as 3 out of the 8 core
AC
Carla Antunes da Silva businesses identified may not be around at all or substantially reduced in scope.
(44-20) 7325-8215
carla.antunes-silva@jpmorgan.com As a result of EU measures the group has to make several disposals: (i) the insurance
Amit Goel, CFA businesses; (ii) Sempra Commodities JV which sits within GBM; (iii) Global
(44-20) 7325-6924 Merchant Services; (iv) parts of the core UK retail and commercial banking
amit.x.goel@jpmorgan.com businesses. There are also several competition and compensation restrictions,
particularly in GBM, that could limit the franchise’s competitive position. We
estimate the cumulative impact of these changes could reduce earnings potential by
Flagship reports c.15% going forwards and Group RoE by c.10%.
• UK Banks – The Return of UK
Investment Banking – A Review of Flexing downside
Capital Requirements and Profitability There is risk that GBM will lose significant market share, and will be unable to attract or
Outlook, 21 Jul 09
retain talent going forwards – in 2010E we expect GBM to contribute 54% of group core
• RBS – Agreement on APS and EU
Sanctions, 04 Nov 09 PBT, down from 69% in 2009E. Note there may be pressure to reduce this further and some
• RBS – Revewing the Strategic Plan hard decisions will have to be made about the future shape of the Group – for instance if
and the APS – Remain UW, 21 Sep 09 GBM’s contribution were to halve then core Group PBT would reduce by one-third.
Price Performance 1) The new strategic plan is due in February 2010, alongside the FY 09 results. Whilst
70 this may give more clarity going forwards, we believe the market will want to see
p 40 tangible evidence of independence of execution in terms of no further EU measures and
more limited government intervention before rewarding the company. Furthermore, we
10
are likely to hear news flow on how the sale processes of the disposal assets are
proceeding. Note the EC has given the bank 4-5 years for execution.
RBS.L share price (p)
MSCI-Eu (rebased)
2) RBS is now the only bank participating in the Asset Protection Scheme (APS) - to
remove the government B shares and exit the APS we estimate RBS would require
Performance (%) c.£30bn new capital and this would still leave the government with a 70% stake.
Exiting the APS has been made less compelling now that the EU sanctions are in
YTD 1m 3m 12m
place and so we are more likely to see RBS exit later in the process.
Abs -32.8% -20.8% -42.4% -39.5%
Rel -52.6% -21.6% -43.1% -61.9% Valuation, target price, key risks
Our Dec-10 TP is 38p, based on our sum-of-the-parts analysis. Key risks to our rating
and price target include the recovery in the macro environment stalling, or accelerating
more rapidly than anticipated, and changing regulatory capital requirements.
Royal Bank of Scotland Group Plc (RBS.L;RBS LN)

Adj. EPS FY (p) -45.75 -3.09 -2.58 -1.07 Price (p) 33
Adj P/E FY NM NM NM NM Date Of Price 30 Nov 09
Headline EPS FY (p) -60.99 -6.71 -4.57 -2.01 Price Target (p) 38
NAV/Sh FY (p) 107.8 59.1 54.8 53.1 Price Target End Date 31 Dec 10
P/NAV FY 0.3 0.5 0.6 0.6 52-week Range (p) 71 - 10
Net Attributable Income FY (£ (24,051) (5,394) (4,852) (2,135) Mkt Cap (£ bn) 29.75
mn) Shares O/S (mn) 89,661
Operating profit FY (£ mn) (8,127) (8,728) (4,585) (784)
Tier One Ratio FY 9.9% 13.2% 11.1% 11.1%
178
(44-20) 7325-5242 07 December 2009
Royal Bank of Scotland: Summary of Financials

£ in millions, year end Dec FY07A FY08A FY09E FY10E FY11E £ in millions, year end Dec FY07A FY08A FY09E FY10E FY11E
Per Share Data
Net interest income 12,382 15,939 13,228 13,522 13,278 EPS Reported 40.85 -60.99 -6.71 -4.57 -2.01
% Change Y/Y 16.9% 28.7% (17.0%) 2.2% (1.8%) EPSAdjusted 79.47 -45.75 -3.09 -2.58 -1.07
Non-interest income 15,200 5,227 10,388 13,135 12,385 % Change Y/Y 20.2% (157.6%) (93.2%) (16.6%) (58.7%)
Fees & commissions 12,160 -437 5,194 7,881 8,670 DPS 32 23 0 0 0
% change Y/Y 137.5% (103.6%) (1,288.5%) 51.7% 10.0% % Change Y/Y (64.5%) (27.6%) (100.0%) - -
Trading revenues 3,040 -437 5,194 5,254 3,716 Dividend yield 7.3% 145.7% 0.0% 0.0% 0.0%
% change Y/Y 13.6% (114.4%) (1,288.5%) 1.2% (29.3%) Payout ratio 78.8% -38.2% -0.0% -0.0% -0.0%
Other Income - - - - - BV per share 361.88 135.33 63.23 58.95 57.22
% change Y/Y 23.3% (42.5%) 47.4% 12.7% (3.0%) Shares outstanding 10,006.2 39,434.2 106,182.3 106,182.3 106,182.3
Admin expenses -16,618 -15,916 -17,123 -16,887 -16,217
% change Y/Y 35.6% (4.2%) 7.6% (1.4%) (4.0%) Return ratios
Other expenses - - - - - RoRWA - (4.6%) (1.0%) (1.0%) (0.4%)
Pre-provision operating profit 12,418 7,042 7,466 10,825 10,660 Pre-tax ROE 22.1% (51.0%) (11.0%) (8.9%) (4.1%)
% change Y/Y 10.0% (43.3%) 6.0% 45.0% (1.5%) ROE 18.0% (43.0%) (7.9%) (6.4%) (2.9%)
Loan loss provisions 2,104 7,428 13,778 12,460 10,044 RoNAV 41.2% (104.1%) (12.8%) (9.2%) (4.3%)
Other provisions 22 0 0 0 0
Earnings before tax 8,962 -8,127 -8,728 -4,585 -784 Revenues
% change Y/Y (2.4%) (190.7%) 7.4% (47.5%) (82.9%) NIM (NII / RWA) 1.3% 1.1% 1.3% 1.4% 1.4%
Tax (charge) 1,709 (1,280) (1,808) (1,307) (223) Non-IR / average assets 1.2% (0.0%) 0.5% 0.8% 0.8%
Minorities 184 412 749 390 390 NII / Total revenues 42.6% 94.5% 53.8% 48.8% 49.4%
Net Income (Reported) 6,823 (24,051) (5,394) (4,852) (2,135) Fees / Total revenues 41.9% (2.6%) 21.1% 28.4% 32.3%
Trading / Total revenues 10.5% (2.6%) 21.1% 19.0% 13.8%
Balance sheet
£ in millions, year end Dec FY07A FY08A FY09E FY10E FY11E £ in millions, year end Dec FY07A FY08A FY09E FY10E FY11E
ASSETS Cost ratios

% change Y/Y 18.5% 24.0% (15.7%) (3.8%) (6.1%) Cost / assets 1.2% 0.0% 0.8% 0.9% 0.9%
Loan loss reserves 4,953 9,324 14,868 12,253 10,224 Staff numbers 203,500 199,500 189,525 180,049 171,046
Investments 291,597 335,565 355,269 785,359 748,715
Other interest earning assets 638,410 1,111,647 663,544 627,423 602,001 Balance Sheet Gearing
% change Y/Y 624.7% 74.1% (40.3%) (5.4%) (4.1%) Loan / deposit 127.7% 150.3% 136.1% 129.3% 120.2%
Average interest earnings assets 930,007 1,447,212 1,018,813 960,604 919,636 Investments / assets 18.3% 15.1% 20.9% 20.7% 20.7%
Total assets 1,595,066 2,218,693 1,697,964 1,612,428 1,533,647 LT Debt / liabilities 13.8% 12.1% 15.4% 14.9% 14.4%

Long term funding 220,577 269,188 261,693 240,573 220,756 LLP / RWA (0.43%) (1.29%) (2.91%) (2.39%) (1.94%)
Average interest bearing liabs 799,274 907,774 826,508 799,749 773,694 Growth in NPLs 69.3% 251.9% (59.0%) (7.2%) (26.5%)
Retirement benefit liabilities 496 1,547 1,386 1,274 1,169 % YoY change - 18.9% (18.1%) 10.3% (0.7%)
Shareholders' equity - - - - - Core Tier 1 - 5.9% 10.1% 8.3% 8.3%
Minorities 5,391 5,436 2,185 2,185 2,185 Total Tier 1 - 9.9% 13.2% 11.1% 11.1%
Total liabilities & Shareholders Equity - - - - -
179
(44-20) 7325-5242 07 December 2009
Neutral Sainsbury
322p
30 November 2009 Limited operational leverage
We continue to see downside to the UK food retail sector as a result of tough
Food Retailing inflation comparatives, a limited volume response as well as increased promotional
Rickin Thakrar
AC activity. We think Sainsbury will particularly suffer as a result because of its limited
(44-20) 7325-4523 historical price perception, increased aggressive promotional tactics by Tesco and
rickin.thakrar@jpmorgan.com Asda, as well as a resurgent Waitrose. We believe Sainsbury suffers most in a falling
Jaime Vazquez inflationary environment and expect continued pressure on its top-line and earnings
(44-20) 7325-0993 as a result of this shift in the competitive landscape.
jaime.vazquez@jpmorgan.com
Shashank Savla, CFA Flexing downside

(44-20) 7325-9972 We argue that while shares should be supported by the prospect of a bid, we could
shashank.d.savla@jpmorgan.com see further downgrades to earnings due to this increased competitive framework. If
we flex our downside assumption, we could see the stock de-rate to 300p (7%
downside) whereas in the rest of the sector we see little to no downside. The stock
Flagship reports trades on 7.8x lease-adjusted FY11E EV/EBITDAR, a c5% premium to the sector.
• Limited volume response and
operational leverage, 23 Nov 09
The catalysts we see for Sainsbury will be when it reports H1 results next year,
Price Performance which we believe will show the pressure on earnings as a result of the incrementally
340
competitive environment in the UK. We also expect a continued strong performance
p 280
by Waitrose as well as the potential for a turnaround at Marks & Spencer to
220 potentially negatively impact Sainsbury in 2010.
SBRY.L share price (p)

MSCI-Eu (rebased)
Sainsbury trades on 7.8x lease-adjusted FY11E EV/EBITDAR. We have a May-10
Performance (%) target price of 350p based on a PER multiples valuation metric (vs. its European
YTD 1M 3M 12M peers), however this price target assumes continued speculation of a bid for the
Abs (%) -2.0% -2.4% -1.2% 15.3% company. In the absence of this speculation as well as flexing our downside, we
Rel (%) -21.8% -3.2% -1.9% -7.1% could expect greater scope for fundamental earnings downgrades. Further bid
speculation represents the key risk to further downside at Sainsbury. Another upside
risk is the return of food price inflation faster than expected, as well as a return to
more rational pricing.
Sainsbury (SBRY.L;SBRY LN)

FYE Mar 2009A 2010E 2011E Company Data
Adj. EPS FY (p) 20.88 23.33 25.52 Price (p) 322
Adj P/E FY 14.9 13.4 12.2 Date Of Price 30 Nov 09
EBITDA FY (£ mn) 1,084 1,143 1,214 Price Target (p) 350
EBIT FY (£ mn) 616 663 729 Price Target End Date 01 May 10
EBIT margin FY 3.3% 3.3% 3.4% 52-week Range (p) 373 - 269
EBITDA margin FY 5.7% 5.8% 5.7% Mkt Cap (£ bn) 5.87
Pretax Profit Adjusted FY (£ mn) 519 596 671 Shares O/S (mn) 1,824
DPS (Gross) FY (p) 14 16 17
180
(44-20) 7325-5242 07 December 2009
Sainsbury: Summary of Financials

£ in millions, year-end FY06/7 FY07/8 FY08/9 FY09/10E FY10/11E £ in millions, year-end FY06/7 FY07/8 FY08/9 FY09/10E FY10/11E
Sales 17,151 17,837 18,911 19,868 21,212 EBITDA 901 1,035 1,097 1,131 1,209
Growth 6.8% 4.0% 6.0% 5.1% 6.8% Working capital 197 -35 167 181 45
EBITDA 931 1,016 1,084 1,143 1,214 Other -354 -189 -346 -229 -249
% of sales 5.4% 5.7% 5.7% 5.8% 5.7% Operating cash flow 744 811 918 1,083 1,005
Capex and financial
Depreciation 500 481 468 480 485 investment -785 -979 -976 -950 -950
Underlying EBIT 431 535 616 663 729 Other 105 188 97 0 0
% of sales 2.5% 3.0% 3.3% 3.3% 3.4% Investing cash flow -680 -791 -879 -950 -950
Net interest -51 -99 -113 -86 -83 Dividends paid -140 -178 -218 -255 -289
Adjusted PBT 339 434 519 596 671 Other -1 -6 177 0 0
Growth 39% 28% 20% 15% 12% Financing cash flow -141 -184 -41 -255 -289
Tax -118 -134 -151 -173 -195
Net profit 222 300 368 423 476 Movement in cash -77 -164 -2 -122 -234
Growth 36% 35% 23% 15% 12%
EPS 12.9 17.0 20.9 23.3 25.5 Net debt 1380 1503 1671 1831 2065
Growth 34% 31% 23% 12% 9%

£ in millions, year-end FY06/7 FY07/8 FY08/9 FY09/10E FY10/11E £ in millions, year-end FY07/8 FY08/9 FY09/10E FY09/10E FY10/11E
Fixed Assets 7,636 8,393 8,442 8,912 9,377 Interest cover 8.4 5.4 5.5 7.7 8.8
Stocks 590 681 689 690 729 Payout ratio 0.81 0.75 0.61 0.60 0.60
Trade debtors 30 32 9 27 28
Other assets 192 286 207 207 207 Inventory days 16.5 17.3 17.6 17.0 17.0
Cash and Short Term Invests 1,128 723 686 686 686 Debtor days 0.9 0.8 0.8 0.5 0.5
Current assets 1,940 1,722 1,591 1,610 1,650 Creditor days 44.3 46.5 44.1 46.5 46.0
Trade creditors -1,706 -1,703 -1,851 -1,887 -1,973 EBITDAR 7.16% 7.49% 7.62% 7.59% 7.51%
Short term debt & other
creditors -1,015 -949 -1,068 -1,068 -1,068 EBITDA 5.43% 5.70% 5.73% 5.75% 5.72%
Short term liabilities -2,721 -2,652 -2,919 -2,955 -3,041 EBIT 2.51% 3.00% 3.26% 3.34% 3.44%
Long term liabilities -2,506 -2,528 -2,738 -3,042 -3,300
Shareholders funds 4,349 4,935 4,376 4,543 4,730
181
(44-20) 7325-5242 07 December 2009
Neutral STMicroelectronics
€5.39
30 November 2009 Waiting on Nokia 3G and more substantial cost cutting
Price Target: €6.0 Concerns about the next cycle
STMicro is a play on the economic cycle however with its cost structure substantially
Semiconductors higher than peers its profitability is well below peers. Its opex to sales is still ~39%
Sandeep Deshpande
AC vs. ~24% at both Texas Instruments and Infineon. Thus the key opportunity is to
(44-20) 7325-0456 reduce this; however with, in our view, poor cost cutting execution in 09, investors
sandeep.s.deshpande@jpmorgan.com are unlikely to believe it until they see it.
Associated with cost cutting is the turnaround of ST-Ericsson. However in this case
Flagship reports even more important is the timing of Nokia 3G revenue. Once the market has some
• STMicroelectronics : Despite looking
understanding of timing of U8500 revenue, the stock may have upside, but given
cheap on historical multiples, lack of
improvement in profitability prevents re- shipments will likely start in 2011, we believe STMicro will under-perform through
rating, 30 Jul 09 2010.
• STMicroelectronics: Though recent run
could continue, company faces Flexing downside
substantial top line & cost challenges. On the back of improving revenue STMicro margin should improve in ‘10,’11. We
Remain Neutral, 31 Mar 09
• STMicroelectronics: Cutting estimates
are looking at 6.4% clean op. margin in ’11 vs. peak margin of 8.7% in ’04. However
to factor demand collapse. Needs to cut avg. €/$ rate in ’04 was 1.24 vs. 1.48 today. Thus unless there are more substantial
costs to interest bottom fishing cost cuts and/or more substantial revenue growth, our ’11 estimate reflects the
investors, 22 Jan 09 stock’s full potential. In fact if the $ continues to weaken as our currency team
expects till 2Q10, there should be continuing pressure on STMicro's margin with
potential for the company to miss our and market expectations.
Price Performance
6.0 Catalysts – 2010 and beyond

€
4.5
The major issue facing STMicro is that opex is well ahead of competitors. If
3.0
STMicro does show clear resolve to cut costs, unlike the unseen 09 cost cuts,
Dec-08 Mar-09 Jun-09 Sep-09 investor interest may revive. A second potential catalyst is the timing of 3G revenues
STM.PA share price (€) from Nokia, which could result in revenue upside of as much as US$1bn we
MSCI-Eu (rebased) estimate. If chip is to ship in high volume in '11 and all software is ready, the stock
Performance (%) may perform by end ‘10, or else this may be delayed till sales begin to pick up.
YTD 1m 3m 12m
Abs 12.7% -1.9% -12.7% 10.6%
STMicro has historically traded at 1.5x-2.0x P/B compared to current multiple of
Rel -8.8% -1.9% -15.8% -13.5%
~1.0x. For company to start trading at historical P/B multiple of 1.5x and higher, we
believe it will have to cuts costs much more aggressively and deliver much higher
margin. We have a Jun '10 PT of €6.0 based on 1x '10E book value. Risks to our
rating & target include an economic double dip; if cost cuts by the company are
much more aggressive than in our estimates, there could be upside to our estimates.
STMicroelectronics (STM.PA;STM FP)

FYE Dec 2006A 2007A 2008A 2009E 2010E 2011E Company Data
Adj. EPS FY ($) 0.88 0.81 0.18 (0.78) 0.39 0.64 Price (€) 5.39
Revenue FY ($ mn) 9,855 10,001 9,841 8,397 9,927 10,720 Date Of Price 30 Nov 09
EBIT FY ($ mn) 753 684 416 (796) 333 684 Price Target (€) 6.00
EBIT margin FY 7.6% 6.8% 4.2% -9.5% 3.4% 6.4% Price Target End Date 30 Jun 10
EBITDA FY ($ mn) 2,537 2,115 1,800 574 1,603 1,954 52-week Range (€) 7.02 - 2.97
EV/EBITDA FY 3.6 4.3 5.1 16.0 5.7 4.7 Mkt Cap (€ bn) 4.7
P/BV FY 0.8 0.8 0.9 1.0 1.0 0.9 Shares O/S (mn) 877
Adj P/E FY 9.2 9.9 45.6 NM 20.9 12.7 DPS (Net) (€) 0.18
182
(44-20) 7325-5242 07 December 2009
STMicroelectronics: Summary of Financials

Revenues 10,001 9,841 8,397 9,927 10,720 Net Income (Reported) (477) (786) (1,070) 209 478
% Change Y/Y 1.5% (1.6%) (14.7%) 18.2% 8.0% Depreciation & amortization 1,413 1,366 1,354 1,254 1,254
Gross Profit 3,536 3,648 2,571 3,638 4,090 Other items - - - - -
Gross Margin (%) 35.4% 37.1% 30.6% 36.7% 38.2% Cash flow from operations 2,188 1,722 577 1,598 1,858
EBIT 684 416 (796) 333 684
% Change Y/Y (9.2%) (39.2%) (291.3%) (141.9%) 105.1% Capex (1,140) (983) (361) (450) (450)
EBIT Margin 6.8% 4.2% -9.5% 3.4% 6.4% Other -1,567 -2,417 371 -450 -450
Net Interest 36 (87) 10 16 5 Free cash flow 1,048 739 216 1,148 1,408
Earnings before tax -493 -823 -1,438 244 634
% change Y/Y (164.6%) 66.9% 74.7% (117.0%) 159.3% Equity raised/repaid 2 0 0 0 0
Tax (charge) 22 43 145 (31) (79) Debt Raised/repaid (23) 496 (91) (25) (25)
Tax as a % of BT 4.5% 5.2% 10.1% 12.5% 12.5% Dividends paid 269 240 158 158 158
Net Income (Reported) (477) (786) (1,070) 209 478 Other (234) (647) (219) (158) (158)
% change Y/Y (160.9%) 64.8% 36.1% (119.5%) 129.0% Beginning cash 1,659 1,855 1,009 1,676 2,642
EPS (Reported) - $ -0.54 -0.88 -1.22 0.24 0.54 Ending cash 1,854 1,009 1,676 2,642 3,867
% Change Y/Y (166.1%) 62.8% 38.5% (119.5%) 129.0% DPS 0.30 0.27 0.18 0.18 0.18

Cash and cash equivalents 2,869 1,660 2,631 3,597 4,822 EBITDA margin (%) 21.1% 18.3% 6.8% 16.2% 18.2%
Accounts Receivable 1,605 1,064 1,543 1,551 1,675 Net margin (%) NM NM NM 2.1% 4.5%
Inventories 1,354 1,840 1,382 1,390 1,501 SG&A/Sales 11.0% 12.1% 13.7% 11.0% 10.5%
Others 1,834 937 1,382 1,291 1,179
Current assets 7,662 5,501 6,939 7,828 9,177 Sales per share growth 5.6% -0.3% -13.2% 18.0% 8.0%
Sales growth (%) 1.5% (1.6%) (14.7%) 18.2% 8.0%
LT investments 1,038 1,852 1,501 1,501 1,501 Attributable net profit growth (%) (160.9%) 64.8% 36.1% (119.5%) 129.0%
Net fixed assets 6,610 8,412 7,359 6,580 5,801 EPS growth (%) (166.1%) 62.8% 38.5% (119.5%) 129.0%
Total assets 14,272 13,913 14,298 14,408 14,978
Liabilities Net debt to Total Capital (4.5%) 7.5% 0.3% (6.5%) (14.5%)
ST loans 103 123 230 230 230 Net debt to equity (6.7%) 12.3% 0.5% (10.9%) (24.1%)
Payables 1,065 847 1,035 1,092 1,179 Sales/assets (x) 0.7 0.7 0.6 0.7 0.7
Others - - - - - Total Assets/Equity 149.1% 170.6% 196.9% 197.1% 196.3%
Total current liabilities 2,077 2,218 2,594 2,657 2,840 ROE 7.8% 1.9% -9.4% 4.6% 7.3%
Long term debt 2,117 2,554 2,444 2,435 2,426 ROCE 5.6% 3.6% -6.8% 2.8% 5.6%
BVPS 11 9 8 8 9
183
(44-20) 7325-5242 07 December 2009
Underweight Swedish Match

SEK150
30 November 2009 US exposure drives uncertainty
Price Target: SEK156 Concerns about the next cycle
1) US Smokeless uncertainty from competitive pressure. SWMA brands Red Man
Tobacco and Timber Wolf could be squeezed by competitive pressure from Grizzly (no. 1)
Erik Bloomquist, CFA
AC and Copenhagen (no. 2) competing at price points close to the SWMA brands, and
(44-20) 7325-9917 reluctance by either leading brand to take price will limit Swedish Match’s pricing.
erik.a.bloomquist@jpmorgan.com
2) But Scandinavian Snuff growth on track. After large tax increases in 2007 and
2008 and aided by consumers staying at home due to the economic crisis, Swedish
Flagship reports smokeless market volume growth is about 4% in 2009 with 4% price increases at
• Global Tobacco, Safely through the retail in mid 2009. We expect approximately 2% Swedish volume growth in 2010E
Storm, Emerging Market Leverage as we expect Swedes to resume travel abroad, combined with 2-4% pricing.
Favours BAT & PMI , 07 Oct 09
• Global Tobacco, M&A Risk Returning, 3) M&A speculation premature. We view market speculation that SWMA is a near
19 Jun 09 term M&A target by Philip Morris International as premature. We believe the JV
• Global Tobacco, Still Smoking; Upside between the companies to commercialise Snus ex Scandinavia and the US must first
demonstrate commercial viability. Lifting the EU snus ban could accelerate a deal in
our view, though neither company has publicly discussed specific M&A possibilities.
Price Performance
Flexing downside
150
Current rates imply an approximate 3% FX EBIT headwinds in 2010E on USD
Skr 120
weakness (40% of group EBIT USD). Using JPM FX USD/SEK forecasts, this
90 headwind could be as much as 7%, implying our current 5% EBIT growth estimate
Dec-08 Mar-09 Jun-09 Sep-09 could be reduced to flat or down y/y.
SWMA.ST share price (Skr)
MSCI-Eu (rebased)
2009 results on 25 February 2010 could provide a clearer outlook for the US market
Performance (%) with the AGM on 27 April 2010 to confirm the size of the SWMA buyback program
for the rest of 2010. Discussions on the EU Snus ban will continue through 2010
YTD 1m 3m 12m
with the EU science committee to issue a report and recommendation by end 2010.
Abs 34.3% 1.8% 9.6% 28.3%
Rel 12.8% 1.8% 6.5% 4.2%
SWMA stock trades at 2010E P/E 13.5x, a 14% premium to the International
Tobacco average, with 2010E dividend yield 3.3%, 1.4ppt below the group average.
Our Jul 2010 DCF and comparative multiple based price target of Skr156 implies
14.0x 2010E P/E and 10.7x EV/EBITDA with 0.6% LT cash flow growth at WACC
of 7.5%. Risks to our rating and PT include: 1) A bid for SWMA by a competitor; 2)
significant improvements in Snuff or Cigar fundamentals; 3) changes in tobacco
regulation; 4) changes in competitor activity; 5) FX rates, particularly USD/SEK.
Swedish Match (SWMA.ST;SWMA SS)

Adj. EPS FY (Skr) 8.00 9.80 11.12 12.05 Price (Skr) 150.10
Bloomberg EPS FY (Skr) 8.73 9.98 10.81 11.78 Date Of Price 30 Nov 09
Adj P/E FY 18.8 15.3 13.5 12.5 Price Target (Skr) 156.00
EBIT FY (Skr mn) 2,802 3,531 3,720 3,888 Price Target End Date 21 Jul 10
EBITDA FY (Skr mn) 3,222 3,972 4,183 4,374 52-week Range (Skr) 159.00 - 105.50
EV/EBITDA FY 12.2 9.9 9.4 9.0 Mkt Cap (Skr bn) 37.9
Gross Yield FY 2.7% 3.1% 3.3% 3.5% Shares O/S (mn) 252
FCF Yield FY 5.5% 7.2% 8.1% 8.5%
184
(44-20) 7325-5242 07 December 2009
Swedish Match: Summary of Financials

Profit and Loss Statement FY08 FY09E FY10E FY11E FY12E Segment Analysis FY08 FY09E FY10E FY11E FY12E
Skr in millions, year end Dec Skr in millions, year end Dec
Revenues 12,611 14,893 14,861 15,207 15,566 Net Revenues

% change Y/Y 0.5% 18.1% -0.2% 2.3% 2.4% Snuff 3,725 4,358 4,533 4,714 4,902
EBITDA 3,222 3,972 4,183 4,374 4,554 % Change y/y - 17.0% 4.0% 4.0% 4.0%
% change Y/Y 1.8% 23.3% 5.3% 4.6% 4.1% Cigars 3,644 4,591 4,821 4,966 5,115
EBITDA Margin (%) 25.5% 26.7% 28.1% 28.8% 29.3% % Change y/y - 26.0% 5.0% 3.0% 3.0%
EBIT 2,802 3,531 3,720 3,888 4,044 Chewing tobacco 934 1,196 1,172 1,148 1,125
% change Y/Y 2.6% 26.0% 5.4% 4.5% 4.0% % Change y/y - 28.0% -2.0% -2.0% -2.0%
EBIT Margin (%) 22.2% 23.7% 25.0% 25.6% 26.0% Lights 1,525 1,449 1,463 1,478 1,493
Net Interest (442) (436) (410) (405) (400) % Change y/y - -5.0% 1.0% 1.0% 1.0%
Earnings before tax 2,360 3,095 3,310 3,483 3,644 Other Operations 2,783 2,813 2,873 2,902 2,931
% change Y/Y -1.5% 31.1% 7.0% 5.2% 4.6% % Change y/y - 1.1% 2.1% 1.0% 1.0%
Tax (342) (681) (745) (784) (820) Group Turnover 12,611 14,893 14,861 15,207 15,566
as % of EBT 14.5% 22.0% 22.5% 22.5% 22.5% % change Y/Y 0.5% 18.1% -0.2% 2.3% 2.4%
Net Income (Adjusted) 2,017 2,413 2,564 2,698 2,823
% change Y/Y 12.7% 19.6% 6.3% 5.2% 4.6% EBITA
Shares Outstanding 252 246 231 224 219 Snuff 1,658 1,973 2,091 2,217 2,328
Adjusted EPS 8.00 9.80 11.12 12.05 12.88 % Change y/y - 19.0% 6.0% 6.0% 5.0%
% Change y/y 17.8% 22.6% 13.5% 8.3% 6.9% Cigars 686 1,043 1,105 1,149 1,195
% Change y/y - 52.0% 6.0% 4.0% 4.0%
Cash flow statement FY08 FY09E FY10E FY11E FY12E Chewing tobacco 329 431 427 422 418
Skr in millions, year end Dec % Change y/y - 31.0% (1.0%) (1.0%) (1.0%)
Lights 275 261 264 267 269
EBIT 2,802 3,531 3,720 3,888 4,044 % Change y/y - (5.0%) 1.0% 1.0% 1.0%
Depreciation & amortization 420 441 463 486 511 Other Operations -146 -177 -167 -167 -167
Change in working capital (362) (64) (66) (68) (70) % Change y/y - 21.2% (5.6%) 0.0% 0.0%
Interest expense (442) (436) (410) (405) (400) Group EBITA 2,802 3,531 3,720 3,888 4,044
Taxes (523) (681) (745) (784) (820) % change Y/Y 2.6% 26.0% 5.4% 4.5% 4.0%
Net Capex (196) (500) (400) (412) (424)
EBIT Margin
Dividend (886) (1,133) (1,130) (1,178) (1,236) Snuff 44.5% 45.3% 46.1% 47.0% 47.5%
Cigars 18.8% 22.7% 22.9% 23.1% 23.4%
FCF (Pre dividend) 1,734 2,291 2,563 2,706 2,840 Chewing tobacco 35.2% 36.1% 36.4% 36.8% 37.2%
Lights 18.0% 18.0% 18.0% 18.0% 18.0%
Acquisitions -7 - - - - Group EBIT Margin 22.2% 23.7% 25.0% 25.6% 26.0%
Disposals 155 1,651 - - -
Buy back cost -934 -1,279 -2,150 -1,000 -800
Loans -441 -662 - - -
Cash Infow -379 869 -717 528 804
Balance sheet FY08 FY09E FY10E FY11E FY12E Ratio Analysis FY08 FY09E FY10E FY11E FY12E
Skr in millions, year end Dec Skr in millions, year end Dec
Fixed Assets EBITDA Margin 25.5% 26.7% 28.1% 28.8% 29.3%

Tangible 2,458 2,507 2,557 2,608 2,661 Operating Margin 22.2% 23.7% 25.0% 25.6% 26.0%
Intangible 4,702 4,627 4,552 4,477 4,402 Net Profit Margin 16.0% 16.2% 17.3% 17.7% 18.1%
Financial 2,284 2,284 2,284 2,284 2,284
Current Assets 8,911 9,952 9,412 10,123 11,115 Sales growth 0.5% 18.1% -0.2% 2.3% 2.4%
Cash 3,179 4,048 3,331 3,859 4,663 EBITDA Growth 1.8% 23.3% 5.3% 4.6% 4.1%
Current Trade Liabilities 3,609 3,717 3,829 3,944 4,062 EBIT Growth 2.6% 26.0% 5.4% 4.5% 4.0%
Net Profit Growth 12.7% 19.6% 6.3% 5.2% 4.6%
Capital employed 14,746 15,653 14,976 15,548 16,399 EPS growth 17.8% 22.6% 13.5% 8.3% 6.9%
Shareholders' Funds 1,377 3,445 4,916 5,488 6,338 Net Interest Coverage 6.3 8.1 9.1 9.6 10.1
Minority interests 4 4 4 5 5 Net Debt/EBITDA 2.3 1.5 1.6 1.4 1.2
Provisions 2,647 2,147 0 0 0 Net Debt/Equity 5.5 1.7 1.4 1.1 0.9
Long Term Debt 9,975 9,313 9,313 9,313 9,313 Assets/Equity 13.3 5.6 3.8 3.6 3.2
Short Term Debt 743 743 743 743 743
ROCE 19.0% 22.6% 24.8% 25.0% 24.7%
Capital employed 14,746 15,653 14,976 15,548 16,399 ROE 146.5% 70.0% 52.2% 49.2% 44.5%
Net Debt 7,539 6,008 6,725 6,197 5,393

185
(44-20) 7325-5242 07 December 2009
Neutral Telecom Italia

€1.07
30 November 2009 Numbers too high in 2010
As the macroeconomic environment improves TI’s competitors are likely to try to
Telecom Services win market share again, increasing the pressure on Telecom Italia to invest more in
Torsten Achtmann
AC its revenue outlook. TI’s weakness in 2009 has been driven mainly by market share
(44-20) 7325-9025 losses following its price increases 1 year ago and the sizeable cost cutting. Domestic
torsten.x.achtmann@jpmorgan.com margins increased from 43% in 2008 to 47.2% in the 3Q 2009, while revenues fell by
mid single digits. Management guidance is to stabilize revenues in 2010, while
keeping costs under control and return to growth in 2011. We argue that this outlook
Flagship reports is challenging and believe consensus numbers for 2010 are too high. In addition,
• Post Q2 visibility should allow sector to
Telecom Italia is highly levered at net debt/EBITDA of 3 and the main focus of the
outperform, 22 Sep 09
• Wireless review – reassuringly company is to reduce debt and further cash distribution to shareholders is less likely.
defensive, 22 Sep 09
Flexing downside
If we assume that management achieves a stable revenue trend and a stable margin
Price Performance compared to declining EBITDA our target price would increase to €1.4 per share.
However, we highlight that the domestic margins of 47.2% in the 3Q 09 are at peak
€ 1.0
levels. If the mobile market remains competitive and Telecom Italia cannot keep up
0.7 with its current rate of cost cutting EBITDA could decline by mid single digits. Our
Dec-08 Mar-09 Jun-09 Sep-09 fair value would decrease to €0.9 per share.
TLIT.MI share price (€)
MSCI-Eu (rebased) Catalysts – 2010 and beyond
We think that consensus expectations will be disappointed as we progress through
Performance (%) next year when the market will realize that it is not possible to turn around revenue
trends without spending more. Telecom Italia typically holds its investor day in
YTD 1m 3m 12m
March where we expect the company to give new 3 year guidance, which we think
Abs -7.3% -1.6% -6.0% 5.8%
will incorporate some of our more negative view. We believe keeping EBITDA
Rel -27.1% -2.4% -6.7% -16.6%
stable while the company invests in market share is unlikely and we would expect
that EBITDA will decline before it can grow. Consensus expects a stable revenue
and EBITDA trend excluding the Hansenet sale.
Our Dec-10 SOP value for Telecom Italia is €1.20 per share, which implies a P/E
multiple of 10 times given our earnings estimate of 12 cents per share. This is a slight
discount to the 3 year average P/E of 10.7 and a slight premium versus sector average
of 9.2. The main risks to our rating and price target are changes in the regulatory
environment, which would support the profitability of Telecom Italia. Consolidation
in the Italian mobile market would improve the market structure and Telecom Italia
could achieve stabilizing revenue trends while keeping the margin.
Telecom Italia (TLIT.MI;TIT IM)

Adj. EPS FY (€) 0.12 0.10 0.12 0.14 0.15 Price (€) 1.07
EBITDA FY (€ mn) 11,363 11,383 11,544 11,587 11,530 Price Target (€) 1.23
1.20
EBITDA margin FY 37.3% 39.3% 40.0% 40.2% 39.6% Price Target End Date 31 Dec 10
EBIT FY (€ mn) 5,424 5,727 6,206 6,561 6,898 52-week Range (€) 1.26 - 0.76
EBIT margin FY 17.8% 19.8% 21.5% 22.8% 23.7% Mkt Cap (€ bn) 14.3
OpFCF FY (€ mn) 5,523 6,707 7,216 7,462 7,452 Shares O/S (mn) 13,369
Net Attributable Income FY 2,282 2,006 2,389 2,702 2,969
(€ mn)
186
(44-20) 7325-5242 07 December 2009
Telecom Italia: Summary of Financials

Revenues 30,472 28,960 28,860 28,836 29,112 Cash EBITDA 11,328 11,383 11,544 11,587 11,530
% Change Y/Y -3.0% -5.0% -0.3% -0.1% 1.0% Interest (2,173) (2,465) (2,247) (2,106) (2,025)
EBITDA 11,363 11,383 11,544 11,587 11,530 Tax (633) (2,067) (1,568) (1,753) (1,927)
% Change Y/Y -2.7% 0.2% 1.4% 0.4% -0.5% Other (156) (1,114) (170) (170) (170)
EBITDA Margin 37.3% 39.3% 40.0% 40.2% 39.6% Cash flow from operations 8,401 5,736 7,559 7,557 7,408
EBIT 5,424 5,727 6,206 6,561 6,898
% Change Y/Y -9.1% 5.6% 8.4% 5.7% 5.1% Capex PPE (5,805) (4,676) (4,328) (4,124) (4,077)
EBIT Margin 17.8% 19.8% 21.5% 22.8% 23.7% Net investments (1,069) (262) - - -
Net Interest 2,630 2,470 2,247 2,106 2,025 CF from investments (6,874) (4,938) (4,328) (4,124) (4,077)
PBT 2,858 3,323 4,029 4,528 4,950 Dividends (1,665) (1,118) (1,163) (2,252) (2,362)
% change Y/Y -34.1% 16.3% 21.2% 12.4% 9.3% Share (buybacks)/ issue (26) (7) - - -
Net Income (clean) 2,282 2,006 2,389 2,702 2,969
% change Y/Y -5.4% -12.1% 19.1% 13.1% 9.9% CF to Shareholders (1,691) (1,125) (1,163) (2,252) (2,362)
Average Shares 19,395 19,395 - - - FCF to debt (199) (327) 2,068 1,181 969
Clean EPS 0.12 0.10 0.12 0.14 0.15
% change Y/Y NM NM 19.1% 13.1% 9.9% OpFCF (EBITDA - PPE) 5,523 6,707 7,216 7,462 7,452
DPS 0.05 0.05 0.11 0.11 0.12 EFCF pre Div, PPE 2,553 1,785 3,171 3,356 3,257

Cash and cash equivalents 5,416 3,869 3,937 3,117 3,086 EBITDA margin 37.3% 39.3% 40.0% 40.2% 39.6%
Accounts Receivables 8,101 7,833 7,883 7,933 7,983 EBIT Margin 17.8% 19.8% 21.5% 22.8% 23.7%
ST financial assets - - - - - Net profit margin 7.5% 6.9% 8.3% 9.4% 10.2%
Others - - - - - Capex/sales 17.6% 15.4% 15.0% 14.3% 14.0%
Current assets 14,684 12,723 12,910 12,211 12,300 Depreciation/Sales 19.4% 19.5% 18.5% 17.4% 15.9%
LT investments 1,247 1,197 1,185 1,174 1,162
Net fixed assets 15,657 14,804 13,935 13,137 12,640 Revenue growth -3.0% -5.0% -0.3% -0.1% 1.0%
Total assets 85,630 82,397 81,563 79,950 79,473 EBITDA Growth -2.7% 0.2% 1.4% 0.4% -0.5%
ST loans 6,267 7,082 6,982 6,882 6,782 EPS Growth NM NM 19.1% 13.1% 9.9%
Payables 12,156 10,693 10,643 10,593 10,543
Others 3,829 5,712 6,750 6,775 6,702 Net debt/EBITDA 3.0 3.0 2.8 2.7 2.6
Total current liabilities 18,423 17,775 17,625 17,475 17,325 CF to Shareholders (1,691) (1,125) (1,163) (2,252) (2,362)
Long term debt 36,527 31,361 29,361 27,386 26,486 FCF to debt (199) (327) 2,068 1,181 969
Total liabilities 58,779 54,848 53,736 51,636 50,513 OpFCF (EBITDA - PPE) 5,523 6,707 7,216 7,462 7,452
Shareholders' equity - - - - - EFCF pre Div, PPE 2,553 1,785 3,171 3,356 3,257
187
(44-20) 7325-5242 07 December 2009
Underweight Unipol
€0.91
30 November 2009 Earnings headwinds not going away in 2010
We believe Unipol’s combined ratio will improve from tariff increases but we remain
UW on the stock with -11% downside to €0.81 Dec 10 as we believe improvement in
Insurance
the combined ratio will be slower than what the market is implying. We forecast the
Vinit Malhotra, CFA AC combined ratio to improve to 98.3% by 2011E (from 104.5% 2009E) but we believe
(44 20) 7325-5321
the market is looking for a more aggressive 97.3% 2011E COR.
Michael Huttner, CFA We remain comfortable with our forecast as we saw that despite rate increases earlier
(44-20) 7325-9175
this year, Unipol still reported a 9m 09 combined ratio of 104.7% at the 9m 09 stage
due to higher motor frequency and nat cats. We note that Unipol did give evidence of
this trend improving in 4Q 09E (we forecast 4Q 09E COR of 104.9% vs. 113.9% 3Q
Flagship reports 09) but we believe a 1% improvement per annum should capture the impending rate
• Unipol : Earnings headwinds greater increases (5% rate increases in Jan 10 targeted by Unipol in Italian motor).
than earlier thought, Remain UW with
€0.81 PT (€1.04), 13 Nov 09 Flexing downside
• Unipol : Continue to see downwards
earnings momentum due to Italian non
If Unipol's combined ratio continues to remain under pressure then we could see more
life; cutting 09e -15%, 10e - 6%, new downside on the stock. Every 1% worsening of 2011e COR impacts our TP of €0.81
PT €0.79 (€0.85), 3 August 09 by €0.11 or 13.5%. We currently forecast 98.3% 2011e COR vs. 104.5% 2009e.

Price Performance Unipol is raising tariffs for motor by 5% on 1st January 2010. The positive impact of
1.2 this should show up towards the 2H 10 (so around 3Q 10 reporting). We forecast
€ 0.8 2010e COR of 99.3%, 5.2% better than 2009e. If the price increases do not show up
in better COR then we would need to factor in worse 2011e COR.
0.4
UNPI.MI share price (€)

MSCI-Eu (rebased) Our SOTP based Dec 10 PT is €0.81. We apply a P/E multiple of 8.7x for the non
Performance (%) life, and 8.7x for the life and 8.3x for the bank. Our non life and life multiple is based
on cost of capital of 11.5% (8.7x=1/11.5%). The banking multiple is based on the
YTD 1m 3m 12m
cost of capital of 12% and a zero long-term growth assumption (8.3x= 1/12%). This
Abs -16.3% -8.1% -3.7% -15.4%
methodology is in line with the other European insurers we follow. Key upside risk
Rel -36.1% -8.9% -4.4% -37.8%
to our UW stance and price target is that Unipol’s combined ratio improves faster
than we forecast. Another upside risk is that Unipol’s life earnings grow with better
markets (JPMe life pre tax 11e €142m vs. 08: €148m).
Unipol Gruppo Finanziario S.p.A. (UNPI.MI;UNI IM)

Adj. EPS FY (€) 0.04 0.02 0.07 0.09 Price (€) 0.91
BV/Sh FY (€) 1 2 2 2 Date Of Price 30 Nov 09
Gross Yield FY 0.0% 0.7% 3.2% 4.0% Price Target (€) 0.81
NAV/Sh FY (€) 0.7 0.9 0.9 1.0 Price Target End Date 31 Dec 10
P/NAV FY 1.3 1.0 1.0 0.9 52-week Range (€) 1.26 - 0.56
ROE FY 1.9% 1.1% 4.4% 5.3% Mkt Cap (€ bn) 2.2
Combined Ratio FY 98.7% 104.5% 99.3% 98.3% Shares O/S (mn) 2,391
Net Attributable Income FY (€ 93 39 171 217
mn)
Pretax Profit Reported FY (€ 135 68 258 329
mn)
188
(44-20) 7325-5242 07 December 2009
Unipol: Summary of Financials

Premiums 7,591 9,144 9,311 9,484 Shares Outstanding 2,379.49 2,379.49 2,379.49 2,379.49
% change Y/Y 1.7% 20.5% 1.8% 1.9%
Life 3,486 4,975 4,975 4,975 EPS 0.04 0.02 0.07 0.09
% change Y/Y (1.2%) 42.7% 0.0% 0.0% % change Y/Y (75.5%) (57.8%) 334.3% 27.2%
Non Life 4,105 4,169 4,336 4,509 DPS 0.00 0.01 0.03 0.04
% change Y/Y 4.3% 1.6% 4.0% 4.0% % change Y/Y -100.0% - 334.3% 27.2%
Investment income 1,296 1,122 1,036 1,071
Other income 124 76 79 81 Payout Ratio 0.0% 40.0% 40.0% 40.0%
Total revenues 9,139 10,410 10,499 10,714
% change Y/Y (1.9%) 13.9% 0.8% 2.0% NAV/Share 0.7 0.9 0.9 1.0
Insurance related expenses (6,558) (8,648) (8,511) (8,600) EV/share 0.85 0.89 0.94 0.98
Admin expenses (443) (499) (502) (515)
Acquisition expenses (847) (953) (958) (986) ROE 1.9% 1.1% 4.4% 5.3%
Other expenses (222) 66 45 41 RONAV 2.9% 2.4% 8.3% 9.6%
Earning before tax 135 68 258 329 ROEV 4.9% 1.9% 8.0% 9.7%
% change Y/Y -77.8% -49.3% 277.6% 27.2%
Tax (27) (27) (80) (102)
Tax Rate - - - -
Minorities (15) (2) (7) (10)
Net income (Reported) 93 39 171 217
% change Y/Y -76.0% -57.8% 334.3% 27.2%

ASSETS 41,501 44,382 45,575 46,811 Key ratios:

Cash 345 369 369 369 Combined ratio 98.7% 104.5% 99.3% 98.3%
Investments 35,422 38,235 39,429 40,664 Life op'g margin on assets - - - -
Loans 1,663 1,696 1,696 1,696 Banking cost to income 69.3% 76.0% 74.0% 72.0%
Deferred tax - - - - AM Cost income ratio - - - -
Other 4,072 4,082 4,082 4,082
Intangibles including goodwill 1,819 1,818 1,818 1,818 PBT Break up
Non Life 199.9% 61.9% 71.7% -
LIABILITIES 37,796 40,186 41,191 42,224 Life 109.3% 54.1% 33.2% -
Policyholder liabilities 25,298 27,322 27,322 27,322 Banking (82.9%) 8.6% 10.9% -
Bank loans - - - - Consolidation (0.0%) (0.0%) (0.0%) -
Debt 11,306 11,545 11,545 11,545
Other 1,191 1,319 2,324 3,357
Shareholder's equity 3,706 4,195 4,384 4,587 Mix of Total revenue
Minorities 273 278 278 278 Non Life 0.0% 0.0% 0.0% -
Total Equity and Liabilities 41,501 44,382 45,575 46,811 Life 0.0% 0.0% 0.0% -
Banking 0.0% 0.0% 0.0% -
Consolidation (0.0%) (0.0%) (0.0%) -
189
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190
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Strategy Dashboard
Performance..........................................................192
Earnings ................................................................195
Valuations .............................................................199
Profit Margins .......................................................203
MSCI Europe Index Sector Composition ............204
Macro-economic Forecasts .................................205
Strategy Dashboard
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Performance
Table 26: Main Country and Regions Index Performance
Local Currency (%change) US$ (%change)
Country Index 09YTD 2008 3years 09YTD 2008 3years
Austria ATX 44.5 (61.2) (39.0) 56.9 (63.1) (30.9)
Belgium BEL 20 30.5 (53.8) (39.5) 41.7 (56.0) (31.5)
Denmark KFX 34.3 (46.6) (21.0) 45.9 (49.2) (10.4)
Finland HEX 20 15.2 (53.4) (32.3) 25.1 (55.7) (23.4)
France CAC 40 17.3 (42.7) (28.1) 27.4 (45.5) (18.7)
Germany DAX 20.1 (40.4) (7.4) 30.4 (43.3) 4.8
Greece ASE General 35.7 (65.5) (42.8) 47.4 (67.2) (35.3)
Ireland ISEQ 21.6 (66.2) (67.0) 32.0 (67.9) (62.6)
Italy FTSE MIB 15.9 (49.5) (43.5) 25.9 (52.0) (36.1)
100 % Topix (0.2) (41.8) (46.6) 4.4 (28.2) (28.9)
Netherlands AEX 28.3 (52.3) (33.4) 39.3 (54.7) (24.6)
Norway OBX 56.8 (54.5) (15.8) 95.2 (64.7) (8.1)
Portugal BVL GEN 38.0 (49.7) (13.6) 49.8 (52.2) (2.2)
Spain IBEX 35 29.0 (39.4) (13.2) 40.1 (42.4) (1.7)
Sweden OMX 44.0 (38.8) (10.0) 64.7 (49.9) (11.9)
Switzerland SMI 15.1 (34.8) (24.3) 22.7 (30.6) (9.7)
United States S&P 500 22.8 (38.5) (20.6) 22.8 (38.5) (20.6)
United States NASDAQ 38.0 (40.5) (9.8) 38.0 (40.5) (9.8)
United Kingdom FTSE 100 19.8 (31.3) (11.8) 38.5 (50.4) (25.9)
EMU MSCI EMU 19.7 (46.6) (29.2) 29.9 (49.2) (19.9)
Europe MSCI Europe 20.6 (40.9) (23.0) 33.6 (48.2) (20.6)
Emerging Market MSCI EM 55.0 (47.2) 10.6 71.6 (54.5) 11.1
Global MSCI AC World 20.6 (40.1) (23.5) 27.4 (42.1) (19.3)
Source: MSCI, Datastream, as at 1 December 2009
Figure 70: Ytd local currency performance

60
50
40
30
20
10
0
MSCI AC World
NASDAQ
IBEX 35
MSCI Europe
HEX 20
FTSE MIB
DAX
ISEQ
MSCI EMU
MSCI EM
SMI
OBX
ATX
KFX
AEX
BEL 20
FTSE 100
CAC 40
S&P 500
OMX
ASE General
BVL GEN
Topix
Ytd performance (lc)

Source: Datastream, MSCI, as at 1 December 2009
192
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Table 27: Sector Index Performance – MSCI Europe

Local currency (%change) US$ (%change)
09YTD 2008 3years 09YTD 2008 3years
Europe 20.6 -40.9 -23.0 33.6 -48.2 -20.6
Energy 13.5 -25.8 -4.6 28.6 -40.7 -9.7
Materials 56.7 -51.3 3.0 74.2 -58.0 4.2
Chemicals 38.3 -40.4 11.8 50.5 -43.2 25.8
Construction Materials 29.3 -50.1 -31.6 39.8 -51.0 -21.2
Metals & Mining 85.5 -58.1 17.0 110.9 -67.4 6.5
Industrials 25.6 -46.1 -20.1 38.7 -51.3 -14.8
Capital Goods 26.6 -48.0 -18.1 39.7 -52.8 -12.1
Transport 21.0 -47.6 -34.9 32.1 -51.4 -28.8
Discretionary 21.9 -41.8 -25.3 34.5 -48.1 -21.7
Automobile 14.0 -47.0 -15.5 23.9 -49.8 -4.7
Consumer Durables 50.5 -49.7 -24.5 63.9 -51.8 -15.6
Hotels, Restaurants & Leisure 7.1 -34.0 -29.8 18.9 -43.3 -29.4
Media 52.9 -39.3 -16.7 73.0 -50.9 -20.9
Retailing 10.0 -34.1 -34.2 22.7 -45.5 -36.8
Staples 18.9 -25.7 8.2 31.9 -35.3 9.7
Food & Drug Retailing 15.6 -30.9 -3.8 29.3 -42.3 -5.7
Food Beverage & Tobacco 19.0 -23.9 10.8 31.7 -32.7 13.5
Household Products 24.9 -27.2 15.2 39.1 -38.1 15.5
Healthcare 7.7 -15.7 -14.6 18.1 -22.7 -10.0
Financials 33.1 -57.1 -47.7 47.0 -62.0 -45.5
Banks 44.6 -59.8 -46.8 61.4 -65.6 -46.1
Diversified Financials 36.1 -66.5 -58.7 47.5 -67.7 -54.0
Insurance 8.1 -41.0 -38.0 18.6 -46.3 -33.9
Real Estate 21.8 -50.3 -55.1 36.2 -58.4 -55.9
IT 7.1 -48.2 -42.1 17.5 -52.2 -36.5
Software and Services 24.2 -30.9 -20.1 35.6 -36.2 -12.8
Technology Hardware -6.5 -52.5 -50.1 3.1 -56.4 -45.2
Semicon & Semicon Equip 37.9 -58.5 -48.1 49.7 -60.7 -42.4
Telecoms 7.6 -30.9 -7.5 19.7 -40.2 -5.4
Utilities -3.3 -33.8 -20.5 6.4 -40.8 -16.1
Figure 71: Ytd local currency performance, %

60
50
40
30
20
10
-10
Healthcare
Industrials
Utilities
Materials
Discretionary
Staples
IT
Europe
Financials
Telecoms
Energy
193
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Table 28: Sector Index Performance – MSCI EMU and UK

EMU (Local currency %change) UK (Local currency %change)
09YTD 2008 3years 09YTD 2008 3years
Market 19.7 -46.6 -29.2 20.1 -31.6 -12.5
Energy 15.2 -37.3 -24.3 10.8 -15.7 10.4
Materials 35.8 -49.7 -13.1 95.6 -55.0 38.0
Chemicals 39.6 -41.7 11.4 38.0 -41.8 28.4
Construction Materials 28.8 -49.8 -37.5 - - -
Metals & Mining 44.6 -62.7 -22.3 100.4 -56.0 39.8
Industrials 26.5 -49.9 -25.9 10.8 -26.7 -13.7
Capital Goods 27.3 -51.0 -23.6 9.4 -28.7 -15.8
Transport 19.8 -47.0 -36.5 -4.2 -48.3 -45.4
Discretionary 12.8 -42.2 -24.9 36.1 -39.5 -29.6
Automobile 14.0 -46.8 -14.0 - -65.6 -
Consumer Durables 36.1 -42.9 -19.0 88.1 -66.1 -60.9
Hotels,Restaurants&Leisure 0.0 -35.6 -37.5 27.6 -34.8 -29.1
Media 50.2 -44.0 -14.0 20.5 -29.6 -13.8
Retailing -7.4 -32.6 -37.2 78.0 -48.5 -31.1
Staples 26.0 -36.6 -5.5 13.7 -16.2 20.8
Food & Drug Retailing 17.6 -37.3 -13.1 13.3 -23.1 7.6
Food Beverage & Tobacco 30.2 -36.4 -3.1 12.5 -14.3 23.2
Household Products 26.4 -36.6 -1.2 23.0 -11.5 41.0
Healthcare 16.0 -33.4 -23.4 1.2 7.3 -3.8
Financials 35.5 -59.3 -46.7 27.3 -53.5 -49.6
Banks 50.2 -61.9 -43.9 30.1 -56.6 -54.1
Diversified Financials 36.3 -71.4 -63.6 45.6 -60.3 -33.5
Insurance 5.9 -41.7 -38.7 19.8 -40.9 -32.5
Real Estate 44.2 -54.7 -48.3 -2.8 -44.2 -62.5
IT 5.5 -51.5 -39.8 19.9 -36.5 -35.6
Software and Services 25.2 -30.5 -17.2 19.9 -32.5 -34.2
Technology Hardware -14.3 -58.3 -50.6 - - -
Semicon & Semicon Equip 37.9 -57.1 -47.2 - - -
Telecoms 7.3 -28.4 -6.5 0.9 -29.8 -8.3
Utilities -2.8 -37.8 -22.5 -5.1 -17.7 -12.4
Figure 72: Ytd local currency performance, %

120
100
80
60
40
20
-20
EMU Healthcare
UK Healthcare
EMU Industrials
UK Industrials
UK Utilities
EMU Utilities
MSCI UK
MSCI EMU
UK Materials
UK Discretionary
EMU Materials
UK IT
EMU IT
EMU Staples
UK Staples
EMU Discretionary
UK Telecoms
EMU Financials
UK Financials
EMU Telecoms
EMU Energy
UK Energy
194
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Earnings
Table 29: IBES Consensus EPS Forecasts – Main Countries
EPS Growth (%change)
Country Index 2008 2009E 2010E 2011E
Austria ATX (21.9) (41.2) 35.3 38.8
Belgium BEL 20 (95.0) 718.1 22.0 14.0
Denmark Denmark KFX (18.2) (37.8) 12.1 49.2
Finland MSCI Finland (29.2) (48.4) 25.0 23.3
France CAC 40 (12.6) (30.0) 27.5 20.9
Germany DAX (49.8) 7.4 32.2 21.5
Greece MSCI Greece (13.4) (17.9) 6.2 24.1
Ireland MSCI Ireland (1.4) (50.4) 27.3 31.1
Italy MSCI Italy (8.2) (41.8) 21.6 27.0
Netherlands AEX (33.9) (46.3) 68.5 28.2
Norway MSCI Norway 0.3 (38.7) 32.4 23.4
Portugal MSCI Portugal (20.4) 1.9 5.5 12.8
Spain IBEX 35 5.1 (31.3) 10.5 17.3
Sweden OMX (6.5) (42.4) 25.2 27.7
Switzerland SMI (85.7) 536.1 26.9 12.9
United Kingdom FTSE 100 (26.5) (31.3) 26.1 24.0
EMU MSCI EMU (25.7) (21.2) 24.2 21.1
Europe ex UK MSCI Europe ex UK (30.7) (11.0) 25.5 20.5
Europe MSCI Europe (23.6) (18.3) 23.6 20.2
United States S&P 500 (27.9) (1.5) 24.6 21.6
Japan Topix (119.6) - 89.7 27.5
Emerging Market MSCI EM (24.3) 16.6 11.1 27.3
Global MSCI AC World (22.4) (8.5) 20.8 20.2
Source: IBES, MSCI, Datastream, as at 1 December 2009
** Japan refers to the period from March in the year stated to March in the following year
Figure 73: 2010 Consensus EPS growth expectations, %

100
90
80
70
60
50
40
30
20
10
0
United States
Ireland
Austria
Portugal
Netherlands
Italy
Denmark
United Kingdom
Emerging Market
Japan
France
Finland
Spain
Greece
Switzerland
Europe
Global
EMU
Belgium
Europe ex UK
Sweden
Germany
Norway
Source: Datastream, MSCI, IBES as at 1 December 2009
195
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Table 30: IBES Consensus EPS Forecasts - MSCI Europe

EPS (%change)
2008 2009E 2010E 2011E
Europe (23.6) (18.3) 23.6 20.2
Energy 19.0 (44.5) 31.4 17.3
Materials 3.5 (58.6) 43.2 31.2
Chemicals 14.7 (37.5) 26.4 18.1
Construction Materials (24.3) (44.1) 13.0 25.4
Metals & Mining 10.6 (73.5) 67.1 40.0
Industrials (9.4) (28.9) 19.2 23.6
Capital Goods (3.6) (26.7) 12.2 21.4
Transport (43.9) (58.9) 141.2 44.3
Discretionary (25.3) (51.9) 67.4 32.0
Automobile (53.3) (157.8) - 115.3
Consumer Durables (15.5) (21.8) 17.5 16.2
Media 3.4 (13.6) 4.2 9.3
Retailing (11.4) (0.0) 11.5 13.8
Hotels, Restaurants & Leisure 9.3 (29.7) 1.8 12.2
Staples 7.7 (1.9) 10.1 10.7
Food & Drug Retailing 4.8 (3.3) 12.1 12.8
Food Beverage & Tobacco 7.3 (0.7) 10.0 10.2
Household Products 19.9 (6.7) 6.1 10.5
Healthcare 10.8 11.4 6.7 6.7
Financials (69.7) 34.2 34.5 32.5
Banks (42.1) (42.2) 37.2 48.5
Diversified Financials (211.7) - 65.9 22.7
Insurance (63.1) 38.4 19.0 13.5
Real Estate (2.2) (19.3) (0.3) 7.8
IT (3.1) (47.5) 85.2 25.4
Software and Services 13.8 (5.9) 12.4 13.3
Technology Hardware (5.6) (52.8) 53.7 24.6
Semicon & Semicon Equip (40.2) (194.3) - 87.5
Telecoms 11.7 (8.1) 5.4 6.3
Utilities 3.3 (10.6) 3.1 6.0

90
80
70
60
50
40
30
20
10
0
Healthcare
Industrials
Utilities
IT
Discretionary
Materials
Staples
Europe
Financials
Telecoms
Energy
Source: Datastream, MSCI, IBES, as at 1 December 2009
196
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Table 31: IBES Consensus EPS Forecasts - MSCI EMU

EPS (%change)
2008 2009E 2010E 2011E
EMU (25.7) (21.2) 24.2 21.1
Energy 12.6 (44.5) 26.5 16.7
Materials 2.0 (66.9) 67.2 35.0
Chemicals 5.7 (39.5) 27.7 19.5
Construction Materials (10.7) (48.8) 14.9 27.3
Metals & Mining 16.0 (105.8) - 77.3
Industrials (12.9) (21.6) 11.0 22.9
Capital Goods (4.6) (20.2) 4.9 20.5
Transport (50.6) (28.9) 68.3 36.1
Discretionary (30.6) (72.3) 165.4 44.0
Automobile (53.3) (157.8) - 115.3
Consumer Durables 2.3 (24.2) 21.1 16.9
Media 1.2 (15.6) 4.5 8.1
Retailing (9.1) (11.3) 14.0 14.4
Hotels, Restaurants & Leisure 17.3 (43.2) 5.3 14.0
Staples 6.4 (11.9) 12.0 12.8
Food & Drug Retailing 4.7 (12.7) 13.5 15.1
Food Beverage & Tobacco 4.7 (8.2) 10.9 11.6
Household Products 17.5 (23.2) 14.1 12.7
Healthcare 5.8 5.9 6.7 6.3
Financials (62.6) 25.5 23.7 28.0
Banks (38.8) (15.6) 25.2 36.9
Insurance (72.7) 58.4 20.8 14.0
Real Estate 6.6 8.3 (1.7) 7.1
IT 1.0 (53.6) 108.3 28.0
Software and Services 13.2 (10.0) 12.3 13.7
Technology Hardware 0.7 (60.0) 56.8 27.4
Semicon & Semicon Equip (40.2) - - 87.5
Telecoms 4.6 (4.4) 7.3 6.7
Utilities 5.3 (13.1) 4.0 6.1

200
180
160
140
120
100
80
60
40
20
0
Healthcare
Industrials
Utilities
Discretionary
Materials
Staples
IT
EMU
Financials
Telecoms
Energy
197
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Table 32: IBES Consensus EPS Forecasts - MSCI UK

EPS (%change)
2008 2009E 2010E 2011E
UK (8.8) (30.3) 19.9 19.7
Energy 23.0 (45.8) 35.2 17.6
Materials 10.1 (52.0) 28.6 30.7
Chemicals (1.6) (7.4) 15.5 13.0
Construction Materials - - - -
Metals & Mining 10.0 (53.3) 29.5 31.4
Industrials (8.6) 5.8 7.4 12.2
Capital Goods (0.1) 4.0 (0.5) 9.8
Transport (91.4) (176.0) - 57.6
Discretionary (4.9) (5.7) 4.0 12.4
Automobile - - - -
Consumer Durables (20.2) (8.6) 10.7 16.2
Media 9.8 (7.5) 3.5 12.2
Retailing (23.2) 6.2 8.1 13.1
Hotels, Restaurants & Leisure 2.1 (16.4) (0.1) 11.2
Staples 11.8 9.1 9.2 9.9
Food & Drug Retailing 4.8 8.4 10.7 10.5
Food Beverage & Tobacco 13.0 6.9 10.2 9.9
Household Products 24.5 23.4 (2.9) 7.5
Healthcare 18.9 16.2 (0.3) 3.1
Financials (48.6) (51.2) 50.7 48.2
Banks (50.3) (75.5) 122.2 74.1
Insurance 3.3 (7.7) 1.3 12.6
Real Estate (8.2) (41.4) 1.7 8.9
IT 19.5 28.6 13.2 11.2
Software and Services 19.5 28.6 13.2 11.2
Technology Hardware - - - -
Semicon & Semicon Equip - - - -
Telecoms 27.2 (15.2) 3.5 5.4
Utilities (4.1) 0.3 (0.2) 5.5

60
50
40
30
20
10
0
-10
Healthcare
Industrials
Utilities
Materials
Staples
IT
Discretionary
UK
Telecoms
Financials
Energy
198
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Valuations
Table 33: IBES Consensus P/E and Dividend Yield Country Forecasts
P/E Dividend Yield
Country Index 12mth Fwd 2009E 2010E 2011E 12mth Fwd
Austria ATX 13.4 17.9 13.2 9.5 3.0%
Belgium BEL 20 12.6 15.1 12.4 10.9 2.9%
Denmark Denmark KFX 17.4 19.2 17.1 11.5 2.7%
Finland MSCI Finland 14.0 17.3 13.9 11.2 4.4%
France CAC 40 12.0 15.0 11.8 9.7 5.3%
Germany DAX 12.6 16.2 12.4 10.2 3.7%
Greece MSCI Greece 9.9 10.5 9.9 8.0 2.3%
Ireland MSCI Ireland 17.7 22.2 17.4 13.3 4.2%
Italy MSCI Italy 1.0 14.4 11.9 9.3 3.6%
Netherlands AEX 13.1 21.2 12.6 9.8 3.3%
Norway MSCI Norway 11.8 15.4 11.6 9.4 1.7%
Portugal MSCI Portugal 13.9 14.7 14.0 12.4 4.2%
Spain IBEX 35 12.3 13.5 12.2 10.4 4.3%
Sweden OMX 16.0 20.0 16.0 12.5 3.5%
Switzerland SMI 12.7 15.9 12.5 11.1 2.6%
United Kingdom FTSE 100 12.9 16.0 12.7 10.3 3.8%
EMU MSCI EMU 6.9 15.1 12.1 10.0 4.1%
Europe ex UK MSCI Europe ex UK 12.8 15.7 12.5 10.4 3.7%
Europe MSCI Europe 12.6 15.3 12.4 10.3 3.8%
United States S&P 500 14.6 18.0 14.5 11.9 2.3%
Japan Topix 19.7 31.0 16.5 13.0 1.9%
Emerging Market MSCI EM 12.9 16.1 12.7 10.7 2.1%
Global MSCI AC World 55.9 17.4 13.9 11.6 2.8%
Source: IBES, MSCI, Datastream, As at 1 December 2009
* Japan refers to the period from March in the year stated to March in the following year
Figure 77: 2010 Consensus P/E multiples expectations

18
17
16
15
14
13
12
11
10
United States
Portugal
Ireland
Austria
Emerging Market
United Kingdom
Denmark
Netherlands
Italy
Global
Japan
Finland
Europe
Spain
France
Greece
Switzerland
Belgium
EMU
Sweden
Europe ex UK
Germany
Norway
199
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Table 34: Consensus European sector valuations

P/E Dividend Yield EV/EBITDA Price to Book
2009E 2010E 2011E 2009E 2010E 2011E 2009E 2010E 2011E 2009E 2010E 2011E
Europe 15.3 12.4 10.3 3.3% 3.7% 4.2% 7.3 6.5 5.9 1.6 1.5 1.4
Energy 13.5 10.3 8.8 4.7% 4.9% 5.2% 5.2 4.3 3.7 1.7 1.6 1.5
Materials 21.3 15.0 11.4 1.8% 2.2% 2.6% 9.5 7.5 6.0 1.7 1.7 1.5
Chemicals 19.9 15.7 13.3 2.7% 3.0% 3.3% 8.7 7.4 6.5 2.2 2.0 1.9
Construction Materials 15.4 13.7 10.9 2.4% 2.6% 3.2% 8.4 7.6 6.6 1.1 1.1 1.0
Metals & Mining 24.5 14.9 10.6 1.2% 1.6% 2.1% 11.1 7.6 5.7 1.8 1.8 1.6
Industrials 18.3 15.4 12.4 2.8% 2.9% 3.3% 8.5 7.7 8.2 2.0 1.9 1.7
Capital Goods 16.9 15.0 12.4 2.8% 2.9% 3.3% 8.5 7.8 9.0 1.9 1.8 1.7
Transport 42.9 17.8 12.3 2.8% 3.0% 3.4% 8.0 7.3 6.1 1.9 1.8 1.7
Discretionary 26.0 15.4 11.7 2.7% 3.1% 3.5% 7.2 6.3 5.3 1.7 1.6 1.5
Automobile - 21.1 9.8 0.9% 1.7% 2.7% 5.1 3.6 2.9 0.9 0.9 0.8
Consumer Durables 20.3 17.3 14.9 1.8% 2.0% 2.2% 10.4 9.1 8.0 2.5 2.3 2.1
Media 12.0 11.5 10.5 4.5% 4.8% 5.1% 7.2 7.1 6.6 1.9 1.8 1.7
Retailing 17.4 15.6 13.7 3.3% 3.5% 3.9% 10.4 9.1 8.1 3.0 2.7 2.6
Hotels, Restaurants & Leisure 14.0 13.8 12.3 3.6% 3.8% 4.2% 7.7 7.4 6.5 2.2 2.0 1.9
Staples 16.0 14.5 13.1 2.8% 3.0% 3.3% 9.5 8.9 8.1 2.9 2.6 2.3
Food & Drug Retailing 14.6 13.0 11.6 2.9% 3.1% 3.4% 6.5 6.8 6.1 2.0 1.9 1.7
Food Beverage & Tobacco 16.0 14.5 13.2 2.9% 3.1% 3.4% 9.9 9.3 8.5 3.1 2.8 2.5
Household Products 19.2 18.1 16.4 2.2% 2.3% 2.5% 11.9 10.8 9.7 3.8 3.4 3.1
Healthcare 12.0 11.3 10.5 3.4% 3.7% 4.0% 8.1 7.6 6.9 3.0 2.7 2.4
Financials 15.8 11.8 8.9 2.8% 3.4% 4.4% - - - 1.1 1.0 0.9
Banks 19.2 14.0 9.4 2.3% 3.0% 4.1% - - - 1.0 1.0 0.9
Diversified Financials 16.3 9.8 8.0 2.5% 3.4% 4.5% - - - 1.1 1.0 0.9
Insurance 10.3 8.7 7.6 3.9% 4.5% 5.1% - - - 1.1 1.0 0.9
Real Estate 18.0 18.1 16.8 5.5% 5.1% 5.3% - - - 1.1 1.1 1.1
IT 27.0 14.6 11.6 2.1% 2.5% 2.7% 10.2 7.3 6.0 2.3 2.1 2.0
Software and Services 17.3 15.4 13.6 1.7% 1.9% 2.2% 10.0 8.6 7.3 3.2 2.8 2.5
Technology Hardware 19.6 12.7 10.2 2.9% 3.4% 3.7% 8.6 6.3 5.1 2.0 1.8 1.7
Semicon & Semicon Equip - 25.4 13.5 0.9% 1.0% 1.3% 55.1 7.9 5.9 1.9 1.8 1.7
Telecoms 10.7 10.2 9.6 5.9% 6.4% 6.7% 5.2 5.2 5.0 1.7 1.6 1.5
Utilities 11.2 10.9 10.3 4.9% 5.1% 5.4% 7.8 7.3 6.9 1.6 1.5 1.4
Source: Datastream, MSCI, IBES; Dividend yield, EV / EBITDA and Price / Book are bottom-up aggregated, as at 1 December 2009
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Table 35: Consensus EMU sector valuations

2009E 2010E 2011E 2009E 2010E 2011E 2009E 2010E 2011E 2009E 2010E 2011E
EMU 15.1 12.1 10.0 3.5% 3.9% 4.4% 6.9 6.2 5.7 1.5 1.4 1.3
Energy 12.6 10.0 8.6 4.8% 4.9% 5.3% 5.1 4.2 3.6 1.6 1.5 1.4
Materials 25.7 15.7 11.6 2.6% 2.8% 3.3% 9.3 7.3 6.0 1.4 1.3 1.2
Chemicals 20.2 15.8 13.2 2.9% 3.2% 3.6% 8.1 6.9 6.1 2.0 1.9 1.8
Construction Materials 15.3 13.4 10.5 2.5% 2.7% 3.3% 8.4 7.6 6.6 1.0 1.0 1.0
Metals & Mining - 16.6 9.3 2.0% 2.1% 2.8% 15.1 7.7 5.5 1.1 1.1 1.0
Industrials 16.7 15.0 12.2 3.0% 3.1% 3.5% 8.2 7.8 6.8 1.8 1.7 1.6
Capital Goods 15.3 14.6 12.1 3.0% 3.1% 3.4% 7.8 7.4 6.5 1.7 1.6 1.5
Transport 29.0 17.2 12.7 3.2% 3.3% 3.9% 9.2 8.7 7.5 1.9 1.9 1.8
Discretionary 42.5 15.8 11.0 2.6% 3.0% 3.5% 6.7 5.7 4.8 1.5 1.4 1.3
Automobile - 21.1 9.8 0.9% 1.7% 2.7% 5.1 3.6 2.9 0.9 0.9 0.8
Consumer Durables 21.7 17.9 15.3 1.9% 2.0% 2.2% 10.5 9.3 8.1 2.5 2.3 2.2
Media 11.2 10.7 9.9 5.0% 5.2% 5.6% 6.9 6.7 6.3 1.7 1.6 1.5
Retailing 18.1 15.8 13.9 2.8% 2.9% 3.3% 8.7 9.1 8.0 2.6 2.4 2.2
Staples 16.7 14.9 13.2 2.3% 2.5% 2.7% 9.1 8.4 7.6 2.5 2.3 2.1
Food & Drug Retailing 14.8 13.1 11.4 2.9% 3.1% 3.5% 6.5 6.0 5.4 1.9 1.8 1.7
Healthcare 11.9 11.1 10.5 3.2% 3.4% 3.6% 7.8 7.1 6.5 1.8 1.7 1.6
Financials 13.2 10.6 8.3 3.0% 3.8% 4.9% - - - 1.0 0.9 0.9
Banks 14.4 11.5 8.4 2.6% 3.5% 4.8% - - - 1.0 0.9 0.9
Insurance 10.9 9.0 7.9 3.7% 4.5% 5.0% - - - 1.0 1.0 0.9
Real Estate 16.3 16.6 15.5 5.5% 5.5% 5.8% - - - 1.1 1.2 1.1
IT 31.3 15.0 11.7 2.1% 2.4% 2.7% 10.8 7.4 6.1 2.5 2.3 2.1
Technology Hardware 19.9 12.7 10.0 3.1% 3.7% 4.1% 9.2 6.3 5.1 2.2 2.0 2.0
Semicon & Semicon Equip - 25.4 13.5 0.9% 1.0% 1.3% 55.1 7.9 5.9 1.9 1.8 1.7
Telecoms 11.5 10.7 10.0 6.6% 7.0% 7.4% 5.2 5.0 4.8 2.1 2.1 2.0
Utilities 11.3 10.9 10.3 4.8% 5.1% 5.4% 7.9 7.3 6.8 1.5 1.4 1.4
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Table 36: Consensus UK sector valuations

2009E 2010E 2011E 2009E 2010E 2011E 2009E 2010E 2011E 2009E 2010E 2011E
UK 14.6 12.1 10.1 3.4% 3.7% 4.0% 7.7 6.9 6.1 1.8 1.7 1.6
Energy 14.2 10.5 8.9 4.8% 4.9% 5.0% 5.9 4.8 4.1 1.7 1.6 1.5
Materials 18.5 14.4 11.0 1.0% 1.5% 1.8% 9.6 7.6 5.9 2.1 2.2 2.0
Chemicals 19.8 17.1 15.2 2.5% 2.5% 2.6% - 9.9 9.2 2.8 2.5 2.3
Construction Materials - - - - - - - - - - - -
Metals & Mining 18.6 14.4 10.9 1.0% 1.4% 1.8% 9.7 7.6 5.8 2.2 2.3 2.0
Industrials 12.9 12.1 10.7 2.8% 3.1% 3.3% 7.3 7.7 22.4 2.3 2.1 1.9
Capital Goods 11.0 11.1 10.1 3.2% 3.4% 3.7% 6.5 6.7 31.1 2.0 1.8 1.7
Transport - 15.0 9.5 2.2% 2.4% 2.6% - 10.4 6.6 1.7 2.0 2.0
Discretionary 13.8 13.3 11.8 3.2% 3.3% 3.6% 8.3 7.9 7.0 2.2 2.0 1.8
Automobile - - - - - - - - - - - -
Consumer Durables 17.4 15.7 13.6 1.4% 1.9% 2.0% - 9.5 8.3 2.7 2.5 2.3
Media 13.9 13.4 12.0 3.5% 3.7% 3.9% 8.4 8.4 7.4 2.5 2.4 2.1
Retailing 14.2 13.1 11.6 3.4% 3.2% 3.4% 3.5 7.1 6.5 1.9 1.7 1.6
Staples 14.7 13.5 12.3 3.4% 3.7% 4.0% 10.2 9.4 8.6 3.3 3.0 2.7
Food & Drug Retailing 14.4 13.0 11.8 2.8% 3.2% 3.4% - 8.2 7.6 2.1 2.0 1.8
Healthcare 9.5 9.5 9.2 4.6% 4.8% 5.0% 6.4 6.1 5.6 4.8 3.9 3.3
Financials 22.9 15.2 10.3 2.7% 2.9% 3.6% - - - 1.2 1.2 1.1
Banks 42.7 19.2 11.0 2.0% 2.3% 3.1% - - - 1.2 1.2 1.1
Europe Insurance 8.4 8.3 7.4 4.4% 4.9% 5.2% - - - 1.3 1.2 1.1
Europe Real Estate 20.5 20.1 18.5 5.5% 4.3% 4.5% - - - 1.1 1.1 1.0
IT 17.5 15.4 13.9 1.5% 1.7% 1.9% 11.4 9.9 8.4 2.5 2.3 2.1
Technology Hardware - - - - - - - - - - - -
Semicon & Semicon Equip - - - - - - - - - - - -
Telecoms 9.4 9.1 8.6 5.7% 5.8% 5.9% 4.9 5.6 5.4 1.0 1.0 0.9
Utilities 10.8 10.8 10.2 5.3% 5.8% 6.0% 6.1 7.6 7.5 2.6 2.3 2.1
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Profit Margins
Table 37: Consensus EBIT Margins* Forecasts
EUROPE EMU UK
2009E 2010E 2011E 2009E 2010E 2011E 2009E 2010E 2011E
Market ex Financials 10.6% 12.0% 12.9% 9.0% 10.4% 11.2% 12.3% 13.2% 14.1%
Energy 10.4% 12.1% 12.8% 11.7% 13.0% 13.5% 7.9% 9.9% 10.5%
Materials 10.5% 13.8% 16.1% 5.4% 8.7% 10.3% 24.2% 27.9% 31.7%
Chemicals 8.5% 10.2% 11.1% 8.4% 9.9% 10.9% 3.7% 3.8% 4.0%
Construction Materials 11.9% 13.1% 14.3% 11.3% 12.5% 13.8% - - -
Metals & Mining 12.3% 17.3% 20.7% -1.1% 6.0% 8.7% 26.8% 30.4% 34.5%
Industrials 6.3% 7.2% 8.4% 6.5% 7.0% 7.9% 6.6% 6.7% 7.5%
Capital Goods 6.6% 7.3% 8.4% 6.8% 7.2% 8.0% 7.2% 7.3% 7.6%
Transportation 5.6% 7.1% 8.8% 5.5% 6.5% 7.9% 1.8% 0.4% 4.3%
Discretionary 6.0% 8.2% 9.5% 4.3% 6.6% 8.1% 9.4% 9.6% 10.2%
Autos -0.7% 2.8% 4.9% 0.0% 2.7% 4.7% - - -
Consumer Durables 13.3% 14.3% 15.4% 15.0% 16.3% 17.3% 16.1% 15.7% 16.8%
Media 15.7% 16.4% 17.3% 16.3% 16.8% 17.6% 14.5% 15.3% 16.4%
Retailing 10.4% 10.7% 11.2% 10.4% 10.6% 11.1% 7.2% 7.3% 7.5%
Hotels, Restaurants & Leisure 7.5% 7.3% 7.8% 6.7% 6.8% 7.2% 7.8% 7.8% 8.4%
Staples 10.3% 10.7% 10.8% 8.3% 8.7% 8.5% 13.0% 13.2% 13.5%
Food Retail 4.0% 4.2% 4.4% 3.5% 3.8% 4.0% 5.1% 5.3% 5.5%
Food Beverage & Tobacco 16.7% 17.1% 18.1% 16.0% 16.7% 18.3% 19.5% 20.0% 20.5%
Household & Personal Products 14.0% 14.6% 15.1% 11.7% 12.7% 13.3% 24.0% 23.0% 23.1%
Healthcare 23.2% 23.9% 24.4% 16.5% 17.1% 17.5% 33.6% 33.3% 34.3%
IT 7.0% 10.6% 12.3% 6.3% 10.1% 12.0% 27.0% 29.6% 30.4%
Software 15.8% 17.6% 18.6% 15.0% 16.7% 17.8% 27.0% 29.6% 30.4%
Hardware 5.5% 8.3% 10.0% 4.6% 7.4% 9.2% - - -
Semiconductors -9.2% 6.7% 10.8% -9.2% 6.7% 10.8% - - -
Telecoms 19.4% 18.7% 19.1% 18.4% 19.1% 19.5% 22.5% 17.2% 17.6%
Utilities 13.6% 14.2% 14.5% 13.9% 14.2% 14.6% 12.2% 14.1% 14.1%
Source: Datastream, MSCI, IBES, JPMorgan, bottom-up aggregated, as at 1 December 2009 *EBIT/SALES
Figure 78: 2010 Consensus European EBIT/Sales expectations

30%
25%
20%
15%
10%
5%
0%
Healthcare
Utilities
Industrials
Materials
Staples
Discretionary
IT
Europe
Telecoms
Energy
Source: Datastream, MSCI, IBES, JPMorgan, bottom-up aggregated, as at 1 December 2009
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MSCI Europe Index Sector Composition

Table 38: MSCI Europe Sector Composition
Sector Weight Industry Group Weight Industry Level Weight
Financials 24.7% Banks 58.9% Commercial Banks 100.0%
Insurance 20.7% Insurance 100.0%
Diversified Financials 16.5% Diversified Financials 29.2%
Capital Markets 70.8%
Real Estate 3.8% Real Estate 100.0%
Staples 11.7% Food&Drug Retailing 18.2% Food&Staples Retailing 100.0%
Food Beverage&Tobacco 72.0% Beverages 26.2%
Food Products 56.9%
Tobacco 16.9%
Household & Personal Products 9.8% Household Products 59.3%
Personal Products 40.7%
Energy 11.3% Energy 100.0% Energy Equipment & Services 6.6%
Oil&Gas 93.4%
Health care 10.2% Health Care Equipment & Services 9.8% Health Care Equipment & Supplies 81.8%
Health CareProviders & Services 18.2%
Pharmaceuticals & Biotechnology 90.2% Biotechnology 1.3%
Pharmaceuticals 97.4%
Industrials 9.5% Capital Goods 78.3% Aerospace&Defence 11.8%
Building Products 6.7%
Construction&Engineering 13.2%
Electrical Equipment 21.3%
Industrial Conglomerates 24.8%
Machinery 20.4%
Trading Companies &Distributors 1.8%
Commercial Services&Supplies 8.0% Commercial Services&Supplies 100.0%
Transportation 13.7% Air Freight&Couriers 30.4%
Airlines 12.0%
Marine 21.0%
Road&Rail 7.7%
Transportation Infrastructure 29.0%
Materials 9.3% Materials 100.0% Chemicals 31.5%
Construction Materials 10.8%
Containers&Packaging 0.6%
Metals&Mining 53.7%
Paper&Forest Products 3.2%
Discretionary 7.1% Automobiles&Components 26.1% Auto Components 12.3%
Automobiles 87.7%
Consumer Durables&Apparel 19.6% Household Durables 9.1%
Textiles & Apparel 90.9%
Hotels Restaurants&Leisure 10.8% Hotels Restaurants&Leisure 100.0%
Media 26.2% Media 100.0%
Retailing 17.4% Internet&Catalog Retail 5.3%
Multiline Retail 30.7%
Speciality Retail 64.0%
Telecoms 7.2% Telecommunication Services 100.0% Diversified Telecommunication Services 74.0%
Wireless Telecommunication Services 26.0%
Utilities 6.3% Utilities 100.0% Electric Utilities 51.9%
Gas Utilities 3.7%
Multi-Utilities 39.8%
Water-Utilities 0.9%
IT 2.7% Software&Services 36.5% Internet Software&Services 2.5%
IT Consulting & Services 16.5%
Software 80.9%
Technology Hardware & Equipment 50.1% Communications Equipment 93.8%
Computers&Peripherals 3.3%
Office Electronics 2.9%
Semiconductor&Semiconductor Equipment 13.4% Semiconductor Equipment & Products 100.0%
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Macro-economic Forecasts
Table 39: Growth forecasts
Real GDP Real GDP
% oya % oqa, saar
Country 2008 2009 E 2010 E 2Q 09 3Q 09 4Q 09 E 1Q 10 E 2Q 10 E 3Q 10 E 4Q 10 E
Global 1.3 -2.5 3.3 1.4 3.4 3.4 3.4 3.6 3.7 3.4
United States 0.4 -2.5 3.2 -0.7 2.8 3.5 3.0 4.0 4.0 3.5
Japan -0.7 -5.2 2.4 2.7 4.8 2.5 2.5 1.5 1.5 2.0
United Kingdom 0.6 -4.6 1.6 -2.3 -1.2 2.0 2.0 2.5 2.8 3.5
Euro area 0.6 -3.9 2.5 -0.7 1.5 2.5 3.0 3.0 3.0 2.5
Germany 1.0 -4.7 3.4 1.8 2.9 4.0 3.5 3.5 3.5 2.5
France 0.3 -2.3 2.5 1.1 1.1 2.5 3.0 3.0 3.0 2.5
Italy -1.0 -4.8 1.7 -1.9 2.4 1.0 2.0 2.0 2.0 2.5
Norway 2.1 -1.1 2.8 1.3 2.0 3.0 3.0 3.0 3.0 3.0
Sweden -0.5 -4.2 3.2 1.2 0.7 4.0 4.0 3.5 3.5 3.0
Switzerland 1.8 -1.3 2.2 -1.0 1.8 2.3 2.5 2.5 3.0 3.0
Emerging Europe 4.1 -5.3 4.0 2.1 4.7 4.9 3.4 3.2 3.3 3.6
China 9.0 8.6 9.5 14.8 10.0 9.1 9.0 9.5 9.3 8.7
India 6.1 6.0 7.5 6.7 9.0 -1.0 10.0 7.0 9.6 9.0
Emerging markets 5.0 0.7 5.8 7.6 7.3 5.4 5.6 5.3 5.7 5.0
Source: J.P. Morgan, as at 27 November 2009
Table 40: Interest rate forecasts

Forecast Forecast for
Official interest rate Current Last change next change Dec 09 Mar 10 Jun 10 Sep 10 Dec 10
Global GDP-weighted average 1.30 1.30 1.32 1.36 1.43 1.48
United States Federal funds rate 0.125 16 Dec 08 (-87.5 bp) On hold 0.125 0.125 0.125 0.125 0.125
Japan Overnight call rate 0.10 19 Dec 08 (-20 bp) On hold 0.10 0.10 0.10 0.10 0.10
United Kingdom Repo rate 0.50 5 Mar 09 (-50 bp) 3Q 10 (+25 bp) 0.50 0.50 0.50 0.75 1.00
Euro area Refi rate 1.00 7 May 09 (-25 bp) On hold 1.00 1.00 1.00 1.00 1.00
Norway Deposit rate 1.50 28 Oct 09 (+25 bp) 3 Feb 10 (+25 bp) 1.50 1.75 2.00 2.25 2.25
Sweden Repo rate 0.25 2 Jul 09 (-25 bp) On hold 0.25 0.25 0.25 0.25 0.25
Switzerland 3-month Swiss Libor 0.25 12 Mar 09 (-25 bp) On hold 0.25 0.25 0.25 0.25 0.25
China 1-year working capital 5.31 22 Dec 08 (-27 bp) 3Q 10 (+27 bp) 5.31 5.31 5.31 5.58 5.85
India Repo rate 4.75 21 Apr 09 (-25 bp) 1Q 10 (+25 bp) 4.75 5.00 5.25 5.25 5.25
Table 41: 10 year government bond yield forecasts

Forecast for end of
Current Dec 09 Mar 10 Jun 10 Sep 10
United States 3.34 3.50 3.75 4.00 4.25
Japan 1.31 1.40 1.30 1.40 1.50
United Kingdom 3.63 3.75 3.95 4.10 4.30
Euro area 3.26 3.45 3.50 3.55 3.60
Table 42: Exchange rate forecasts

Forecast for end of
vs US Dollar Current Mar 10 Jun 10 Sep 10 Dec 10
EUR 1.49 1.55 1.62 1.55 1.50
GBP 1.64 1.65 1.74 1.68 1.67
CHF 1.01 0.96 0.91 0.95 0.97
SEK 7.02 6.45 6.05 6.26 6.40
NOK 5.71 5.16 4.88 5.03 5.00
JPY 86.5 85 82 85 89
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Table 43: US economic forecasts

%q/q, saar %q4/q4 %y/y
3Q 09E 4Q 09E 1Q 10E 2Q 10E 3Q 10E 4Q 10E 2008 2009E 2010E 2008 2009E 2010E
Gross domestic product
Real GDP (%ch saar) 2.8 3.5 3.0 4.0 4.0 3.5 -1.9 -0.3 3.6 0.4 -2.5 3.2
Final sales 1.9 1.7 1.9 2.7 3.0 3.2 -1.4 0.0 2.7 0.8 -1.7 2.2
Domestic 2.7 1.9 1.8 2.7 2.7 3.1 -2.1 -0.7 2.6 -0.4 -2.6 2.1
Consumer spending 2.9 1.7 1.5 2.5 2.5 3.0 -1.8 1.1 2.4 -0.2 -0.6 2.0
Business investment -4.1 -0.4 1.1 1.8 4.2 4.9 -6.0 -14.9 3.0 1.6 -17.8 0.2
Equipment 2.3 5.0 6.0 6.0 8.0 8.0 -10.7 -10.2 7.0 -2.6 -17.2 5.0
Structures -15.2 -12.0 -10.0 -8.0 -5.0 -3.0 3.2 -23.2 -6.5 10.3 -19.1 -10.2
Residential investment 19.5 10.0 15.0 15.0 20.0 20.0 -21.0 -11.1 17.5 -22.9 -20.1 12.7
Government 3.1 2.6 1.7 1.9 0.5 0.2 3.1 2.4 1.1 3.1 2.2 2.1
Net exports (bil, chained $2000) -358.0 -367.0 -365.0 -365.0 -361.0 -360.0 - - - - - -
Exports (%ch saar) 17.0 15.0 13.0 11.0 11.0 9.0 -3.4 -2.5 11.0 5.4 -10.1 11.8
Imports (%ch saar) 20.8 14.0 10.0 9.0 8.0 7.0 -6.8 -7.0 8.5 -3.2 -14.0 9.6
Inventories (ch $bil, chained $2000) -133.4 -76.0 -42.5 -1.5 32.4 41.1 - - - - - -
Contribution to GDP growth (in pct pts):
Domestic final sales 2.8 1.9 1.8 2.7 2.7 3.1 -2.2 -0.7 2.6 -0.4 -2.7 2.1
Net exports -0.8 -0.2 0.1 0.1 0.2 0.1 0.7 0.7 0.1 1.2 0.9 0.0
Inventories 0.9 1.8 1.1 1.3 1.0 0.3 -0.4 -0.3 0.9 -0.3 -0.7 1.0
Income and profits (NIPA basis)
Adjusted corp profits (%ch saar) 49.6 20.0 12.0 15.0 12.0 9.0 0.0 26.4 12.0 -11.8 -4.7 18.0
Real disp personal income (%ch saar) -1.5 0.0 2.5 3.0 3.0 3.5 0.0 1.2 3.0 0.5 1.1 2.0
Saving rate (*) 4.5 4.1 4.3 4.5 4.6 4.7 - - - 2.7 4.4 4.5
Prices and labor cost
Consumer price index (%ch saar) 3.6 2.4 1.8 1.0 0.8 0.8 1.5 1.2 1.1 3.8 -0.4 1.7
Core 1.5 1.2 0.8 0.6 0.3 0.3 2.0 1.7 0.5 2.3 1.7 0.9
Producer price index (%ch saar) 4.8 3.0 1.0 0.5 0.5 0.5 1.4 0.7 0.6 6.4 -2.7 1.7
Core 1.2 1.0 0.8 0.5 0.0 0.0 4.4 1.4 0.3 3.4 2.7 0.7
GDP chain-type price index (%ch saar) 0.5 0.9 0.8 0.6 0.4 0.3 1.9 0.8 0.5 2.1 1.2 0.6
Core PCE deflator 1.3 1.0 0.7 0.5 0.2 0.0 2.0 1.4 0.3 2.4 1.5 0.8
S&P/C-S house price index (%oya) -9.2 -7.0 -6.0 -5.0 -4.0 -2.0 -18.4 -7.0 -2.0 -15.8 -12.8 -4.2
Productivity (%ch saar) 9.5 3.5 1.5 2.5 2.5 2.5 0.9 5.0 2.2 1.8 3.1 3.5
Other indicators
Housing starts (mil units saar, *) 0.6 0.7 0.7 0.8 0.8 0.8 - - - 0.9 0.6 0.8
Industrial production, mfg. (%ch saar) 7.7 6.0 5.0 5.0 5.0 4.0 0.0 -5.1 4.7 -3.2 -11.3 4.5
Capacity utilization, mfg. (%, *) 66.9 67.8 68.7 69.3 70.0 70.5 - - - 75.1 66.7 69.6
Light vehicle sales (mil units saar, *) 11.5 10.0 10.5 11.2 11.5 12.2 - - - 13.2 10.1 11.4
Unemployment rate (*) 9.6 10.3 10.5 10.3 10.1 9.8 - - - 5.8 9.3 10.2
Nominal GDP (%ch saar) 3.3 4.4 3.8 4.6 4.4 3.8 0.1 0.5 4.2 2.6 -1.3 3.8
Current account balance ($bil,*) -104.9 -106.7 -109.0 -111.8 -113.6 -115.7 - - - -706.1 -414.9 -450.1
%of GDP -2.9 -3.0 -3.0 -3.0 -3.1 -3.1 - - - -4.9 -2.9 -3.0
Federal budget balance ($bil,*) - - - - - - - - - -454.8 -1,417.1 -1,300.0
% of GDP - - - - - - - - - -3.1 -9.9 -8.8
Source: J.P. Morgan, as at 25 November 2009 * indicates that entries for years are average level, Federal balance figures are for fiscal years
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Table 44: Euro area economic forecasts

2009 2010
2009E 2010E Q2 Q3 Q4E Q1E Q2E Q3E Q4E
Real GDP (1995 prices) -3.9 2.5 -0.7 1.5 2.5 3.0 3.0 3.0 2.5
Private consumption -0.9 1.2 0.3 -0.5 1.0 1.5 1.5 2.0 2.0
Capital investment -9.6 2.8 -6.0 1.0 3.0 4.0 4.0 4.0 4.0
Government consumption 2.5 1.7 3.0 2.0 2.0 1.5 1.5 1.5 1.5
Exports of goods & services -13.3 9.0 -6.0 17.0 10.0 10.0 8.0 8.0 8.0
Imports of goods & services -11.2 7.8 -11.3 14.0 9.0 9.5 7.5 7.5 7.5
Contributions to GDP growth:
Domestic final sales -2.1 1.6 -0.5 0.3 1.6 2.0 2.0 2.3 2.3
Inventories -0.6 0.3 -2.5 0.0 0.4 0.7 0.7 0.4 -0.1
Net trade -1.1 0.5 2.3 1.1 0.4 0.3 0.3 0.3 0.3
Consumer prices (HICP, %oya, n.s.a.) 0.2 1.0 0.2 -0.4 0.3 0.8 0.9 1.0 1.2
ex unprocessed food and energy 1.3 0.8 1.5 1.2 1.0 1.0 0.8 0.7 0.6
Producer prices (%oya, n.s.a.) -5.0 1.9 -5.7 -7.9 -4.2 0.0 2.0 2.9 2.6
Current account (euro bil, sa) -50.8 -6.9 -11.8 -0.3 --2.0 -1.9 -1.8 -1.7 -1.5
as % of GDP -0.6 -0.1 -0.5 0.0 -0.1 -0.1 -0.1 -0.1 -0.1
3m LIBOR (%)* 0.75 0.80 1.00 1.30
Euro Area 10 Yr Bond Yield (%)* 3.45 3.50 3.55 3.60
US$/euro* 1.50 1.47 1.45 1.43
General govt. budget balance (bil euro) -540.0 -655.0
as % of GDP -6.0 -7.0
Unemployment rate 9.4 9.9 9.3 9.6 9.8 10.0 10.0 9.9 9.8
Industrial production (%q/q, saar) -14.7 3.9 -4.1 8.9 4.0 4.0 4.0 3.0 3.0
Source: J.P. Morgan, as at 27 November 2009, all financial variables are period averages, % change over previous period, saar, unless stated
Table 45: UK economic forecasts

2009 2010
2009E 2010E Q2 Q3 Q4E Q1E Q2E Q3E Q4E
Real GDP -4.7 1.6 -2.3 -1.6 2.0 2.0 2.5 2.8 3.5
Private consumption -3.0 0.8 -2.6 2.0 2.5 0.0 1.0 1.5 3.0
General government investment 19.2 2.8 21.7 5.0 2.0 1.0 1.0 1.0 1.0
Business investment -18.5 -1.6 -34.9 -10.0 0.0 4.0 5.0 5.0 5.0
Other investment -22.3 1.9 6.2 -2.0 0.0 2.0 3.0 4.0 4.0
Government consumption 2.0 1.3 2.4 2.0 2.0 1.0 1.0 1.0 1.0
Exports of goods & Services -10.4 5.7 -5.5 7.0 10.0 7.0 6.0 6.0 5.0
Imports of goods & services -12.1 4.5 -8.4 5.0 9.0 5.0 4.0 4.0 4.0
Contributions to GDP growth:
Domestic final sales -4.1 0.9 -4.6 1.1 2.2 0.8 1.5 1.8 2.8
Inventories -1.3 0.5 1.3 -3.0 -0.2 0.8 0.6 0.5 0.5
Net trade 0.8 0.2 1.0 0.4 0.1 0.4 0.4 0.5 0.2
GDP deflator (%oya) 1.4 2.2 1.1 0.9 0.1 1.1 1.6 1.9 2.2
Consumer prices (%oya) 2.2 2.1 2.1 1.5 2.2 3.1 2.3 1.6 1.4
Producer prices (%oya) 1.2 1.9 0.0 -0.4 2.3 2.0 1.1 2.3 2.3
Trade balance (£ bil, sa) -80.0 -77.2 -19.9 -19.6 -19.3 -19.4 -19.4 -19.3 -19.2
Current account (£ bil, sa) -34.9 -37.2 -11.4 -9.6 -9.3 -9.4 -9.4 -9.3 -9.2
as % of GDP -2.5 -2.6 -3.3 -2.8 -2.7 -2.6 -2.6 -2.5 -2.5
PSBR (FY, £ bil) 184.0 190.0
as % of GDP 13.1 13.1
Unemployment rate 7.7 8.8 7.5 7.9 8.5 8.7 8.8 8.9 8.8
Industrial production (%q/q, saar) -10.1 1.1 -1.8 -2.9 3.3 2.5 1.5 0.6 0.5
Source: J.P. Morgan, as at 27 November 2009, all financial variables are period averages, % change over previous period, saar, unless stated
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Europe Equity Research

EMEA Year Ahead 2010

The Year Ahead process

Sector Overviews ...................................................................63

Top Picks ................................................................................87

Top Picks and Stocks to Avoid

Table 1: Top picks by sector heads

Table 2: Stocks to avoid as chosen by sector heads

On a number of valuation metrics equities are back to

With developed equity markets rebounding almost 60% 1050

over the past few quarters it might be tempting to project 1000

US 3.5 3.0 4.0 4.0 3.5 -2.5 3.2 200

Eurozone 2.5 3.0 3.0 3.0 2.5 -3.9 2.5 0

UK 2.0 2.0 2.5 2.8 3.5 -4.6 1.6 0

China 9.1 9.0 9.5 9.3 8.7 8.6 9.5 -40

DM 2.9 2.8 3.1 3.2 3.0 -3.4 2.7 -800 -100

%q/q, saar 09Q4 10Q1 10Q2 10Q3 10Q4

Net Trade* -0.2 0.1 0.1 0.2 0.1

Private Consumption 1.0 1.5 1.5 2.0 2.0 -10

Labour market at the inflection point Figure 4: Capex as a share of GDP

which will change the cautious investor outlook is better 18%

Source: Eurostat, BEA

Y +24m S&P500 operating EPS growth from the trough

20% in 2010 and 15% in 2011 1981

Figure 9: MSCI Europe EPS fall and rebound around past

Y +24m MSCI Europe EPS growth from the trough

Figure 10: Europe EBIT margins Drivers of further P/E rerating

However, we think there is a potential for equities to

-6 This creates a window of opportunity, a 6-9 month period

85 MSCI China Metals & Mining rel to Europe (rhs)

1st hike Av erage S&P500* Median S&P500*

The risks Table 9: Base Case, Upside and Downside

waters, and the aftershocks of the credit crunch are upside.

8.5 650 start to discount hikes in 2H.

consumers undergo a significant and

US 10y Bdy S&P500 (rhs)

Perhaps our outlook on G4 central banks remaining

Positioning and themes 2. OW Cyclicals vs Defensives, but expect much

Figure 22: Relative P/E - Cyclicals vs Defensives

Dax rel to Europe in 2003 Dax rel to Europe in 2009 0.6

European Deal Value ($m) %y oy 6mma MSCI Europe %y oy 6mma (rhs)

Source: Datastream, Dealogic

7. “Quality” to perform in 2010 EM have significantly outperformed DM over the past

This is starting to change in the 4th quarter, where larger

The macro remains supportive

0.6% 0.50% 0.50% 0.50%

0.125% 0.125% 0.125% 0.125% 0.125%

Source: J.P. Morgan

Source: Bloomberg, Factset, Datastream, and J.P. Morgan Calculations

Fundamentals are weak, but improving

45% 42.0% 40.9%

Source: Bloomberg, Factset, Datastream, and J.P. Morgan Calculations

Source: Bloomberg, Factset, Datastream, and J.P. Morgan Calculations

Valuations continue to strongly indicate BUY

Figure 30: Pan-European Equity Valuations

Source: Bloomberg, Factset, Datastream, and J.P. Morgan Calculations

Technicals suggests opportunity still exists

20% '53 20%

Perf from Pre-Recession High (MSCI Europe)

-30% '09 '74 -30% '09

Source: Bloomberg, Factset, Datastream, and J.P. Morgan Calculations

Figure 32: Mthly Performance of Pan-European SMid-Caps — 1985 to 2008

70% 62.5% 62.5%