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Emerging Markets Equity Research

02 December 2009

Emerging Equity Markets Year Ahead


Stock Ideas for 2010
Emerging Markets
Equity Research

Adrian MowatAC
(852) 2800-8599
adrian.mowat@jpmorgan.com

For a full list of authors please


refer to the sector and country
head list on the back page

% of global
consumption

The chart shows emerging economies and US consumption as a percentage of global consumption.
Source: J.P. Morgan Economics.

J.P. Morgan Securities (Asia Pacific) Limited

See page 396 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Emerging Market Year Ahead - Stocks for 2010


What to own What to avoid
• Banks: China, Korea, Taiwan, Thailand, Brazil, Mexico, • Telcos: China, India, Korea, Brazil, Mexico, Central
Turkey, Russia, South Africa, MENA Europe
• Consumer Discretionary: Brazil, Mexico • Utilities
• Technology: ex-PC ODMs • Cement: China, India
• Internet & Media: China, Turkey, South Africa, Russia • Consumer Staples: India, Indonesia, Brazil, Mexico
• Transportation: especially, airlines • Consumer Discretionary: South Africa
• Other Industrials: India capex and investment cycle • Smaller sectors in country: Taiwan Insurance, Dubai
Property
• Telecom capital management: Malaysia, Taiwan
• Energy: Brazil, Russia
• Smaller sectors in country: China internet, China gas, A detailed view on our country and sector recommendations
China food inflation, Indonesian interest rate sensitive, within EM is available on Page 11. For more detail please
Abu Dhabi Real Estate, South African Platinum see country and sector pages.
Focus on sectors within countries rather than country
recommendations
97 Top Picks 48 Stocks to Avoid
See pages 109 to 287 See pages 289 to 371
Examples of top picks Examples of stocks to avoid
Code Top Picks County To PT (%) Code Stocks to avoid County To PT (%)
VAKBN TI Vakifbank Turkey 73 TII US Telmex Internacional Mexico (34)
GAZP RU Gazprom Russia 71 2498 TT HTC Corp Taiwan (31)
CTCM US CTC Media Russia 69 TMX US Telmex Mexico (26)
006400 KS Samsung SDI South Korea 67 USIM5 BZ Usiminas Brazil (23)
ASYAB TI Bank Asya Turkey 66 762 HK China Unicom Hong Kong (22)
2610 TT China Airlines Taiwan 60 2338 HK Weichai Power China (22)
LH TB Land & Houses Thailand 60 857 HK PetroChina China (21)
TOP TB Thai Oil Public Company Thailand 56 MER PM Manila Electric Co Philippines (21)
QTEL QD Qtel Qatar 55 PCU US Southern Copper United States (21)
LSRG LI LSR Russia 54 HUVR IN Hindustan Unilever India (20)
Source: J.P. Morgan. Note: To PT = Returns to analyst price target from 27 Nov 2009. Source: J.P. Morgan. Note: To PT = Returns to analyst price target from 27 Nov 2009.

The Year Ahead Process Table of contents


The goal of this document is to present our key strategy Investment strategy ............................................................ 4
themes for 2010 using most and least favored stocks from
Surprises for 2010 ............................................................26
J.P. Morgan’s team of analysts.
Rates outlook....................................................................27
Both J.P. Morgan EM equity research analysts and our
Economic outlook ............................................................32
macroeconomic team have been involved in the production
of this document. The process started with the Strategy Team Economic forecasts ..........................................................42
briefing analysts on our key themes and macroeconomic
Country strategy ...............................................................47
forecasts for 2010. Analysts then reviewed their earnings
models and presented their top picks and stocks to avoid to Sector strategy ..................................................................77
both their sector and country strategists. The sector and
Summary tables of stock ideas .........................................93
country teams then produced their list of top long and short
ideas, which were then compiled by the regional strategy Top picks........................................................................109
teams. These ideas form the core of this document.
Stocks to avoid ...............................................................289
Strategy dashboards........................................................373

2
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Higher Markets with Higher Volatility


The drivers – three steps to heaven Potential returns
1. Compression in risk premiums MSCI EM end-2010 target 1300 (+30%)
• Implied end-2010 forward P/E of 14x (J.P. Morgan
2. Economic and earnings recovery
estimate)
3. Overshoot as risk-free rates remain low for long
• Currency, earnings estimate revisions, and low riskfree
(See page 4 for details) rates provide upside.
(See page 4 for details)

Investment themes Risks are high for year-one of recovery


1. Stay high beta for now – front-loaded returns • Investor driven correction in commodity prices
2. Economic growth surprises pessimistic expectations • G3 bond volatility
3. 2010 is the year of G3 monetary stimulus – no change in • Lack of G3 policy flexibility
G3 rates in 2010
• Rapid rise in EM inflation resulting in faster tightening
4. Earnings estimate revisions drive markets
• Risk appetite fades, driving investors back into low beta
5. Focus on sectors in countries defensive markets like SA, Israel and Malaysia
6. Policy normalization outside G3 – source of volatility • Dubai World debt moratorium impacts ability to raise EM
rather than a cap on returns corporate debt
7. Inflation ends the party in emerging markets before (For more risks please see page 12)
developed markets. Enjoy the party until inflation exceeds
central bank target zone
8. M&A
9. BRIC consumers
(See page 4)

Key issues for 2010 – briefing notes Market performance


1. A longer perspective on asset performance Figure 1: MSCI EM and MSCI World

2. The policy risk to the asset inflation trade 1400 MSCI EM MSCI World
1200
3. And now the monetary stimulus
1000
4. The rolling recovery trade of 2009: and settling the 800
decoupling debate
600
5. Potential bond market volatility 400
6. Now is the time for earnings estimate revisions 200
0
7. Falling inflation with growth
88 90 92 94 96 98 00 02 04 06 08
8. Fiscal outlook
Source: Bloomberg. Chart rebased to 100 in 1988
9. South Africa - 2010 Soccer World Cup Winners
(See page 15)

3
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Emerging Market Equity Strategy


For now we remain positive on EM equities. The factors Figure 3: Beta versus PE
supporting the powerful recovery from the October 2008 18.0 India
lows remain in place. These conditions are: compression Taiw an
in excessive risk premiums, economic and earnings 16.0 Malay sia China Poland
Phil
recovery trade, and overshoot as risk-free rates remain 14.0 Mex ico Indonesia
low. MSCI EM could retest its all-time high. Brazil
12.0 Hungary
Our end-2010 index target for MSCI EM is 1300, Thailand S Africa Czech
10.0 Korea
+30%. This implies an end-2010 forward PE of 14. The Turkey Russia
return is 10% in excess of consensus earnings forecasts. 8.0
In our view, the difference will be made up of currency 0.4 0.6 0.8 1.0 1.2 1.4
appreciation and earnings revisions.
Source: Bloomberg. Note: Two year weekly beta for MSCI indices vs. MSCI EM. Forward
PE on y-axis and Beta on the x-axis.
The low for EM was 454 on 27 October 2008. The index
has more than doubled since then. To retest its high the
Figure 4: EM consumption exceeded US consumption in 2008!
index would need to increase by 38%. The low in 40
developed markets was on 9 March. The MSCI World
36
index has rallied 70% from its 2009 low. EM
32
Stay high beta, for now – front-loaded returns 28
Early 2010 conditions should continue to be very US
24
favourable for EM equities in our view, with strong
growth, positive earnings estimate revisions, acceptable 20
inflation, and ongoing rally in credit markets. The stage 16
three of the bull market is an overshoot in valuations as 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
risk-free rates stay low for long. Source: J.P. Morgan economics. Note: Chart shows EM and US consumption as % of
global consumption.
A less favourable base effect for inflation plus a potential
slowing in earnings estimate revisions may make 2H10 A quick review
more challenging. P/Es could decline in this phase. EM survived ‘the big ugly experiment’: a combination of
a severe financial shock, the deepest developed consumer
Figure 2: Bungee jump or slingshot? recession since WWII, the lagged impact of anti-inflation
310 Gulf War policies, and a sharp drop in commodity prices. The main
Mex ican crisis
280 Asian crisis conclusion of the experiment is that the domestic
250 Tech bubble inflation/monetary cycles were more dominant than
Credit crisis
220 external demand. This economic decoupling during the
190 stress test supports a higher relative valuation of EM
160 equities versus developed world equities. But global
130 capital flows do link EM monetary policy to record low
100 G3 rates resulting in the risk of a boom bust cycle and
70 asset bubbles. Policymakers in EM are moving to restrict
-24m -18m -12m -6m Trough +6m +12m +18m +24m capital flows and non-conventional measures to control
asset prices. A combination of higher economic and asset
Source: Datastream, 27 October 2009. Note: Chart shows the performance of MSCI EM volatility, with policy risk, may be negative for equity
US$ index two years pre and post crisis lows. Note: MSCI EM (USD) is indexed to 100 at
the trough of each crisis. valuations.

4
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Risks are high for the first year of the global recovery although non-commodity sectors have also done well.
The bulk of the risks are global rather than EM centric. Within EM, the previously important markets of Korea,
Please see page 12 for risks. The three key risks or Malaysia, Mexico, Taiwan and South Africa
sources of volatility are: underperformed. This is consistent with the
underperformance of nominal GDP in these countries.
• G3 bond volatility BRIC nominal GDP is 60% of EM nominal GDP. Will
non-BRIC markets drop off the radar screen? Yes, unless
• Commodity volatility
they offer a premium growth rate or acceleration in trend
• Policy risks growth. There are strong arguments in favour of
Indonesia joining the BRIC grouping. But the country
Post the synchronized global recession and the credit
needs to demonstrate to long-term direct investors that
crunch, EM has earned a lower risk premium. Emerging
there is sufficient effective protection of their legal
economies led the global recovery. Decoupling proved?
interest in order to be permanently promoted to the BRIC
Decoupling in a global economy and capital markets was
league.
literally impossible. But EMs did prove they can generate
their own recovery rather than rely on the developed
An overweight BRIC consumer is consensus. This has
world consumer. EM consumption exceeded US
been a good trade with strong relative returns from BRIC
consumption in 2008.
financials and consumer discretionary. The valuations
relative to history and market are high; Brazil, Brazil
An overweight in EM equities vs DM is consensus; as
Materials, Brazil Energy, Brazil Financials, India
is an OW in BRICs vs EM. Both have been successful
Financials, Mexico Materials, SA Materials and
strategies. However, EM was led by sectors driven by
Indonesia are more than one standard deviation above
global growth, not local; note the performance of our
their long-term average relative to history and EM.
demand classification indices, global consumer +97% ,
However, the premium in these sectors is modest
global price taker +95%, ahead of domestic consumption
compared to the actual returns achieved (for more see
+58% (these indices are published in our weekly
page 9).
dashboards).
Figure 5: Performance of BRIC vs MSCI EM
Bungee jump or slingshot? EM equities have recovered 160
115% from their 2008 lows. EMBI spreads have
tightened from a peak of 865bp to 310bp. But the three-
year CAGR for EM equities is just 4% and EMBI 130
spreads averaged 195bp in 06/07.
100
The catalyst for the rally from March was the evidence of
stabilization in developed world end-demand. Cyclical
sectors outperformed: technology, materials, consumer 70
discretionary and energy. Jan-02 Jan-04 Jan-06 Jan-08
Source: Datastream, 24 November 2009.
Extreme volatility in equities, currencies, commodities
and bonds makes assessment of fair value very difficult.
Many investors struggled to join the rally this year as
they anchored on the lows and were reluctant to buy after
sharp gains. To provide a longer perspective please see
the briefing note, a longer perspective on asset
performance. This reviews three, five and eight year
CAGR.

The five-year CAGR for MSCI BRIC is 22%, ahead of


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

5
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Economic growth surprises low expectations Figure 6: Tracking inventory - Global IP and final sales proxy
In our view, the consensus is skeptical of sustainable 115

growth. This supports a cyclical bias even with the ISM 110
J.P.Morgan final
above 50. Our base case is: 105 sales proxy
100
• No change in G3 interest rates in 2010 Industrial
95
• Above-consensus US and European 2010 GDP production
growth of 3.3% and 2.6% respectively 90
85
The three drivers of economic growth in 2010 are:
00 01 02 03 04 05 06 07 08 09 10
• Industrial production/inventory cycle
Source: J.P. Morgan, September 2009.
• Exports
Figure 7: Sequential recovery in exports growth (% oya)
• Delayed monetary stimulus 40
The relationship between final sales and production 30
indicates substantial de-stocking in the past three 20
10 China
quarters. As end demand slowly recovers, production
needs to increase faster due to low inventories. The turn 0
in IP is typically durable and sustained for 13 months on -10 Korea
average. This is a normal feature of a recovery. -20
-30
Taiwan
Global growth of 3.5% in 2010 should support a recovery -40
in external demand for most economies. Sequential -50
trends are consistent with 2010 oya% export growth. Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09
Source: J.P. Morgan, October 2009.
2010 is the year of G3 monetary stimulus
Three conditions are required for a monetary stimulus: Figure 8: Emerging markets can rise with interest rates (%)
available credit; low market rates; and willing borrowers. 1500 10
MSCI EM Index (LHS)
If credit markets continue to rally and J.P. Morgan
1200 Fed Funds target rate (RHS) 8
economic growth numbers are correct, these conditions
will be met in 2010. Counter-intuitively exit strategies 900 6
signal that the monetary stimulus is building. Note, this is
primarily a developed market event. China monetary 600 4
stimulus fed through rapidly. Current account deficit
300 2
economies will benefit from this delayed stimulus into
2010, i.e., India, Turkey, South Africa, etc. (See page 17 0 0
for more on the delayed monetary stimulus.) 88 90 92 94 96 98 00 02 04 06 08
Source: Datastream, MSCI, IBES, J.P. Morgan economics
Earnings estimate revisions will now drive stocks
Stocks are driven primarily by earnings estimate Focus on sectors in countries
revisions rather than a compression in risk premiums. The rolling country-by-country growth recovery trade is
This argues for a cyclical bias. Potentially ‘scarred and done. Economic decoupling occurred with the global
overworked’ analysts are even slower to upgrade. In this recovery led by India, Indonesia and China. The balance
phase, markets trade expensive. Please see Steve Malin’s of EM Asia, Brazil, Russia and Turkey recovered a
briefing on page 19 for more on the power of earnings quarter before DM (see page 18 for more on the rolling
estimate revisions after the economic recovery. recovery). Country asset allocation needed to lead the
economic recovery by a quarter. Thus country relative
performance changed during the year. Sector strategy
was more stable with a bias towards cycles.

6
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Now that the rolling recovery trade is done, the leverage. We are also bullish the S+P 500, and the
confidence in country calls is lower. Focus on key sectors correlation with the Mexbol is very high. The market is
within countries that offer: (1) High probability of trading below its 5-year average multiple, and earnings
positive EPS revisions (2) High secular and/or defensive momentum is positive (Q3 index EPS +20% oya).
growth
Figure 9: Turkey – Structurally low policy rates and inflation
50
The Secular and Cyclical Trade
Overweight Turkey: We believe that Turkey could 40 CPI Policy Rate
outperform EM and CEEMEA as structurally lower
inflation and interest rates result in higher trend; India in 30
the mid-90s is good example of this trend. The IMF 20
standby program, if signed, should ease Turkey’s
reliance on external financing and reduce the crowding 10
out of the private sector. These improved fundamentals
0
are neither reflected in valuations nor relative
03 04 05 06 07 08 09
performance. Turkey’s forward PE of 9 is at a significant
discount to MSCI EM's 13. The index has marginally Source: J.P. Morgan economics, October 2009.

underperformed MSCI EM year to date. Since mid-


Figure 10: Mexico - second highest GDP swing (11pt) in 2010
March 2009, the local currency index is in line with 15%
MSCI EM.
12%

Higher trend growth and lower interest rates are positive 9%


for Turkish banks, a large part of the benchmark. We 6%
forecast an acceleration of earnings growth from 10-20% 3%
in 2010 to 20-30% in 2011.
0%

South Africa

India
Russia

Chile

Korea

China
Brazil
Mexico

Taiwan
Turkey

Deterioration in global credit markets and/or delays in


negotiating a deal with the IMF are a threat. J.P. Morgan
forecasts a 2010 current account deficit of 2% of GDP.
Source: J.P. Morgan economics. Note: Chart shows the difference between 2009 and
Overweight Mexico 2010 GDP growth forecast.
Catalysts are clear. A robust 3.3% - around 100bps above
consensus - US economic recovery, led by manufacturing Figure 11: Secular decline in interest rates
(+4.5% in 2010), which is the key linkage between the Turkey
Brazil
US and Mexico. IP is 30% of Mexico GDP, and 80% of Mex ico
exports go to the US. Mexico’s historical beta to global Philippines
Indonesia
GDP recovery is over 2.0x. This drives a forecast 11 India
point Mexico GDP swing into next year, the second Thailand
highest globally and arguably with upside risks. The Korea
South Africa
currency also offers short-term upside, as a clear EM Taiw an
underperformer YTD, and with oil prices (1/3 fiscal Malay sia
China
revenue) set to remain high. In this context, fiscal and Russia
rating concerns are overdone and likely well-priced short
term, though remain real long term, as fiscal -3 -1 2 5 7 10
revenue/GDP is low (22% GDP), and poorly structured Source: J.P. Morgan economics. Difference between 5 year average policy rate (2004-08)
(off falling oil production). and Average forecasted policy rate in 2009-10, ranked by greatest difference.

The market is under-owned by foreign investors; local


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

7
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Policy normalization outside G3 today’s situation unusual. At the simplest level


Not all countries will be subject to the same companies are returning capital to investors either via
disinflationary forces. A number of smaller economies, higher dividends or through capital reduction. EM
quasi peripheral to the G3, have suffered much less companies continue to expand regionally and globally.
during the recession, and are thus likely to normalize Private equity funds are far more developed and
monetary policy earlier. Israel and Australia have started disciplined compared to the past. Most of the large
increasing policy rates and are set to continue. Other private equity funds will continue to lead deals. This is
countries will likely follow suit in coming months— not a one-way trend, with EM companies now acquiring
Norway, Czech, Korea, and Brazil—by our forecast, an developed-world businesses.
earlier start of the rate normalization cycle should benefit
their currencies and hurt their bond markets. The impact Figure 12: MSCI EM PE and US interest rates (%)
on their equity markets is less obvious but will likely be a 40 MSCI EM Fw d PE (LHS) 10
small negative. 35
8
30 Fed Funds target rate (RHS)
Inflation ends the party in EM before DM 6
25
The inflation cycle could be desynchronized. EM
inflation models are unlikely to be accurate due to the 20 4
short history of post pegged exchange rate inflation. Asia 15
2
is more at risk due to limited currency appreciation 10
relative to LATAM and EMEA. All one can do is 5 0
monitor the data. The table below is published in both 88 90 92 94 96 98 00 02 04 06 08
Perspectives and Portfolios and Key Trades and Risks Source: Datastream, MSCI, IBES, J.P. Morgan economics
every two weeks. The table monitors inflation relative to
central bank target zones. Inflation today is benign but Figure 13: EM average policy rates (%)
base effects in 2010 will be less favorable. The message 25
from the previous inflation cycle was to sell equities 20
when the inflation rate breached the central banks’ target
15
zone. Nominal
10
Conditions supportive for M&A activity 5 Real
Low funding costs and generally healthy balance sheets
0
provide supportive financial conditions for corporate
activity. Improvement in the global economic situation is -5
increasing the confidence of business and financial 98 99 00 01 02 03 04 05 06 07 08 09
investors. The diversity of potential participants makes Source: J.P. Morgan economics, September 2009.

8
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Table 1: Monetary policy and inflation


Inflation Target Change in CPI in CPI Forecast 2009 J.P. Morgan
% (Central Bank) Current CPI Food CPI last 12 months end (J.P. Morgan) forecast 2009

US core PPI na 1.8 na (2.2) 2.7 On Hold


US core CPI na 1.5 na (1.0) 1.7 On Hold
US Unit Labor Costs na (1.4) na 0.0 na On Hold

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

Check the valuation signal


Expensive (more than 1sd above 10 year average PE) Cheap (At or less than 10 year average PE)
Relative to country/sector history Relative to country/sector history
• Brazil, Mexico, India and Indonesia • Turkey, Israel, Chile, Thailand
• Energy: Brazil and China • IT: Korea, Taiwan and India
• Materials: Mexico, SA, Brazil, Korea, Taiwan • Telecom: SA and China
• Financials: Brazil, Korea, India, SA, Taiwan • Russia energy, Israel Healthcare, Turkey financials
• China Industrials and Mexico CS
Relative to EM Relative to EM
• Brazil and Indonesia • Russia, Turkey, SA, Korea, Poland, China, Hungary Israel,
• Financials: Brazil and India Chile, Taiwan, Malaysia, Philippines, Thailand
• Materials: Mexico, Brazil, SA • IT: Korea, Taiwan, India
• Energy: Brazil • Telecom: SA, China, Mexico
• CD: Korea and SA
• Financials: Turkey, China
• Korea Industrials, Russia energy, Israel Healthcare

9
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Table 2: Hindsight sector valuations


Sector 12m Forward PE 12m Forward PE relative to EM
10yr 10yr
Current Average +1sd -1sd Current Average +1sd -1sd
Brazil Financials 13.2 9.4 11.4 7.4 1.0 0.9 1.0 0.7
Russia Energy 6.9 7.2 9.6 4.8 0.5 0.7 0.9 0.5
Brazil Energy 13.0 6.8 9.7 4.0 1.0 0.6 0.8 0.4
Russia 8.7 8.1 10.5 5.8 0.7 0.7 0.9 0.5
Brazil 13.6 7.8 10.1 5.5 1.0 0.7 0.8 0.6
Turkey Financials 8.1 9.5 13.2 5.8 0.6 0.9 1.2 0.5
South Africa Energy 9.6 8.3 10.1 6.5 0.7 0.7 0.9 0.5
Korea Financials 10.8 8.0 10.1 5.9 0.8 0.7 0.9 0.6
Mexico Materials 16.5 8.2 10.6 5.7 1.3 0.7 1.0 0.5
Korea Industrials 9.5 8.4 11.6 5.2 0.7 0.8 1.0 0.5
South Africa Materials 18.9 12.5 15.7 9.2 1.5 1.1 1.4 0.9
Mexico Telecommunication Services 12.7 12.4 14.8 10.1 1.0 1.1 1.3 1.0
India Energy 13.8 10.5 14.5 6.4 1.1 1.0 1.3 0.6
Turkey 9.0 9.6 12.4 6.9 0.7 0.9 1.1 0.7
Korea Consumer Staples 13.5 11.2 15.1 7.3 1.0 1.0 1.4 0.7
Mexico 14.6 12.0 13.7 10.3 1.1 1.1 1.2 1.0
India Financials 21.2 12.4 18.9 5.8 1.6 1.1 1.6 0.6
Brazil Materials 15.0 8.0 10.0 6.0 1.2 0.7 0.9 0.6
South Africa 11.9 10.0 11.4 8.6 0.9 0.9 1.0 0.8
Korea 10.0 9.1 11.0 7.2 0.8 0.8 1.0 0.7
India 17.7 14.1 17.5 10.8 1.4 1.3 1.5 1.1
Poland 15.1 12.9 16.0 9.8 1.2 1.2 1.4 1.0
Korea Information Technology 10.2 11.2 16.2 6.2 0.8 1.0 1.6 0.5
Israel Health Care 12.4 21.5 32.5 10.6 1.0 1.9 3.0 0.9
Mexico Consumer Staples 18.4 15.0 17.5 12.4 1.4 1.4 1.6 1.1
Korea Consumer Discretionary 8.7 7.9 10.0 5.9 0.7 0.7 0.9 0.6
India Information Technology 20.1 25.3 48.5 2.2 1.5 2.2 3.7 0.7
South Africa Consumer Discretionary 12.0 10.3 12.4 8.1 0.9 0.9 1.1 0.8
South Africa Telecommunication Services 10.4 14.7 25.7 3.7 0.8 1.3 2.0 0.6
China Telecommunication Services* 12.5 15.8 23.6 8.1 1.0 1.4 2.0 0.7
South Africa Financials 9.9 8.3 9.8 6.7 0.8 0.8 0.9 0.6
China Financials 14.4 14.1 19.0 9.3 1.1 1.3 1.7 0.9
China 14.8 13.5 18.2 8.7 1.1 1.2 1.6 0.9
Taiwan Information Technology 15.7 18.2 30.7 5.6 1.2 1.7 3.0 0.4
Hungary 10.9 9.9 11.9 8.0 0.8 0.9 1.0 0.8
Israel 11.7 15.9 19.6 12.1 0.9 1.5 1.8 1.1
Chile 15.2 15.6 17.7 13.4 1.2 1.4 1.6 1.2
Korea Materials 9.7 7.3 9.6 5.0 0.7 0.7 0.8 0.5
Indonesia 14.0 9.1 12.3 6.0 1.1 0.8 1.0 0.6
Taiwan 16.8 14.9 19.1 10.7 1.3 1.4 1.8 1.0
Thailand 10.9 13.9 34.6 -6.9 0.8 1.2 2.4 0.0
China Industrials 18.5 13.5 17.3 9.6 1.4 1.2 1.5 1.0
Taiwan Materials 17.1 11.6 14.7 8.5 1.3 1.1 1.3 0.8
Malaysia 15.6 14.4 16.4 12.4 1.2 1.3 1.5 1.2
Taiwan Financials 20.2 14.5 17.1 11.9 1.6 1.3 1.6 1.1
China Energy* 12.5 9.4 11.9 6.9 1.0 0.8 1.1 0.6
EM 13.0 11.1 13.0 9.1 - - - -
Philippines 14.9 14.0 16.3 11.7 1.1 1.3 1.5 1.1
Source: IBES, Datastream. Red (dark grey) denotes expensive ie more than 1sd, Green (light grey) denotes at or less than 10 year average. Note: * China Energy and China Telecom averages are
from June 2000.

10
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Focus on sectors within countries rather than country recommendations


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

Table 3: Key country and sector recommendations


PE EPS Growth DY ROE
US$ Return (%) 09E 10E 11E 09E 10E (%) 10E 03-08
Country/Sector Wts Reco 1 yr 3 yr 5 yr X X X (%) (%) CAGR 05 10E % 10E% Avg
EM 100 -- 106 22 119 15.8 12.7 10.8 (4) 24 7.2 2.2 13.0 15.6
Brazil 16.8 N 155 97 371 16.6 13.3 11.4 (11) 25 4.8 2.7 14.6 18.6
Brazil Materials 4.8 N 174 124 393 20.8 14.1 11.5 (40) 48 2.9 2.4 11.9 28.2
Brazil Energy 4.6 OW 199 150 581 15.1 13.0 12.3 (22) 16 3.2 2.3 37.3 27.1
Brazil Financials 3.7 OW 156 72 490 15.9 12.9 10.6 6 24 5.8 2.3 15.7 21.9
China 18.3 UW 103 53 191 17.5 14.3 12.2 9 22 13.5 2.2 14.2 15.5
China Financials 7.2 OW 120 67 270 17.4 13.6 11.1 18 29 29.3 2.4 15.6 10.8
China Energy 3.2 UW 131 50 201 15.4 13.1 11.6 (11) 17 6.6 2.7 14.7 21.0
China Telecommunication 2.4 UW 20 20 197 12.3 12.4 11.8 (14) (0) 14.8 3.5 14.9 18.1
China Industrials 1.6 n/a 97 37 86 22.2 17.1 13.9 56 29 3.9 1.4 8.0 11.7
Hungary 0.6 N 109 (6) 43 12.5 10.9 8.6 (41) 15 (1.5) 1.8 11.1 22.3
India 7.5 OW 124 25 184 20.7 17.0 13.9 3 22 14.0 1.0 15.0 20.9
India Financials 1.9 OW 145 30 219 25.1 20.7 17.1 (2) 21 13.3 0.9 11.3 15.9
India Energy 1.3 OW 105 60 367 17.4 12.7 11.4 7 37 18.3 1.1 15.6 20.7
India IT 1.2 N 114 (1) 117 21.5 18.5 15.6 2 16 17.9 1.3 27.0 30.0
Indonesia 1.8 N 209 57 207 15.8 14.5 12.2 7 10 14.2 2.7 23.7 24.8
Israel 2.7 UW 57 47 94 15.3 11.8 10.1 19 30 10.7 1.4 12.9 12.6
Israel Health Care 1.5 UW 32 68 103 15.9 11.9 NA 8 34 16.6 0.9 NA 16.1
Korea 12.6 N 128 (1) 84 13.7 11.2 9.3 44 22 4.6 1.2 10.3 13.7
Korea IT 3.5 OW 135 (6) 58 18.2 14.2 10.9 NM 28 3.9 0.2 10.4 17.2
Korea Financials 2.4 OW 172 (12) 101 16.0 11.6 9.3 (27) 38 0.2 1.0 7.8 10.9
Korea Industrials 1.9 n/a 108 (10) 174 11.2 9.7 8.5 55 15 15.4 1.3 12.8 10.7
Korea Materials 1.8 N 182 76 215 12.0 10.0 8.7 (12) 20 5.8 1.6 11.7 16.9
Korea CD 1.4 N 164 19 79 10.5 9.5 7.9 56 10 8.6 1.4 12.0 13.6
Korea Consumer Staples 0.7 N 52 (3) 101 13.9 13.6 12.0 9 2 11.9 1.7 16.9 14.9
Malaysia 2.7 UW 65 41 85 18.1 15.6 13.1 0 16 6.4 2.7 10.9 12.9
Mexico 4.4 OW 69 4 127 18.1 14.9 12.1 9 22 7.0 2.3 15.2 18.2
Mexico Telecommunication 1.8 UW 51 17 189 13.2 12.4 11.2 24 7 16.3 3.3 39.4 30.4
Mexico Consumer Staples 1.0 N 63 22 153 22.4 18.1 14.5 23 24 13.9 1.3 14.9 15.3
Mexico Materials 0.7 OW 199 (26) 59 48.4 20.5 10.1 (48) 136 (13.7) 2.0 2.6 14.4
Philippines 0.4 OW 86 23 125 16.8 15.1 13.2 24 11 5.5 3.8 14.3 13.2
Poland 1.3 N 55 (10) 76 16.8 14.6 11.3 (34) 15 (3.0) 3.3 9.6 15.6
Russia 6.6 OW 103 (26) 72 11.3 8.6 6.5 (33) 32 4.5 1.3 10.5 15.8
Russia Energy 4.0 OW 84 (34) 57 7.9 6.8 5.5 (24) 15 2.3 1.4 11.9 16.0
South Africa 6.9 N 91 19 89 14.9 11.6 9.4 (13) 29 11.8 2.8 14.7 18.4
South Africa Materials 1.9 UW 106 (1) 69 34.6 17.9 13.7 (45) 93 20.6 1.4 7.8 10.3
South Africa Financials 1.8 OW 80 18 70 11.7 9.7 7.8 (14) 21 7.4 4.1 13.3 19.2
SA Telecommunication 0.9 UW 63 44 116 11.9 10.3 9.0 2 16 13.8 2.4 19.2 26.7
SA Consumer Discretionary 0.8 N 150 38 125 14.8 12.1 9.8 11 22 12.0 2.0 16.5 20.9
South Africa Energy 0.7 UW 83 27 139 12.0 9.4 7.4 (18) 28 9.4 3.0 16.7 23.7
Taiwan 11.1 OW 92 5 37 30.5 19.1 13.4 8 60 (0.7) 3.0 6.4 12.4
Taiwan IT 6.6 OW 118 (3) 43 33.2 18.8 12.3 (13) 77 4.0 2.9 6.7 13.3
Taiwan Financials 1.7 OW 93 (8) (4) 29.2 19.5 15.2 NM 50 6.0 2.7 5.0 6.1
Taiwan Materials 1.4 UW 62 44 89 27.3 21.5 16.2 (17) 27 (13.0) 3.1 6.8 19.7
Thailand 1.2 OW 94 16 61 12.4 11.2 9.3 28 10 (2.4) 3.3 13.7 19.4
Turkey 1.3 OW 96 23 87 9.7 8.8 7.4 6 11 11.1 2.8 16.6 17.4
Turkey Financials 0.8 OW 127 35 128 8.3 7.9 6.6 23 5 16.4 2.0 18.3 17.1
Source: J.P. Morgan Asian strategy team, MSCI, Datastream. Table sorted by descending weight in index, countries first followed by country-sectors. 10 November 2009.

11
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Risks to our strategy


Bond market volatility The lack of a valuation cushion
The end of QE plus banks unwilling to add to duration Valuations in EM and DM are mid a wide and
risk is a dangerous technical situation for government statistically debatable valuation range. If news flow
bonds. Risks assets typically struggle as bond yields remains incrementally positive then it is not a challenge
rapidly increase to "normal" levels. Please see Mercury to performance, but there is no valuation cushion.
Rising on page 22 which highlights the relationship
between bond market volatility and EM corrections. Figure 14: Global Bond Supply ($tr)
$7 Gov ernment Agencies, Supra, Muni, etc
Corporates incl Gov t Guranteed Securitized
Dubai World debt moratorium
Our base case is that this is a Dubai-specific rather than $6

pan-EM issue. The risk is that we underestimate the


damage to investor confidence in the region. $5

Lack of G3 policy flexibility $4


High fiscal deficits and record low interest rates limit
policymakers’ ability to respond to a relapse in growth. A $3
growth relapse is not our base case. If it occurred it
would be a serious blow to risk assets. Credit spreads $2
could expand and equities fall. Please see page 23 for a
review of the impact of fiscal stimulus on growth and
$1
potential fiscal drag in 2011.
$0
Central banks target asset prices
2009 2010
We are in a post Greenspan world; central banks target
Source: J.P. Morgan. Global bond supply and demand 2009 in $tr, demand and supply
asset prices and the common wisdom is that the market
figures are annualized, supply is calculated by the change in bond out standings at face
cannot be trusted. Brazil "got away with" market value, demand is calculated by the change in bond out standings at market value. 2010
intervention. The Brazilian market outperformed last forecast $tr, demand and supply figures are annualized.
week despite implementing a 2% tax on speculative
inflows. This tax is politically appealing as it targets Figure 15: Global Bond Demand ($tr)
QE Banks FX Reserv es Retail Bond Funds Other
international "speculators" who are viewed to be behind
$7
the credit crunch and putting at risk Brazilian
manufacturing jobs (and they do not get a vote in the
$6
2010 Brazilian presidential election). China and India
already have capital controls. It is now open season for
$5
non-market policies as central banks attempt to manage
conflicting policy goals. Be careful in the consensus asset
$4
inflation trade.
$3
More rapid increase in Asian inflation
With the exception of Thailand, J.P. Morgan's inflation
$2
forecasts for 2010 are within the central bank target
zones. Modeling inflation in emerging economies is
$1
difficult due to the short history of floating exchange
rates and large weighting to food and other primary
$0
products. The base effect for commodities is notably
2009 2010
unfavourable in 1H10. There is a risk that inflation
increases faster than our forecast. This would be negative Source: J.P. Morgan. Global bond supply and demand 2009 in $tr, demand and supply
figures are annualized, supply is calculated by the change in bond out standings at face
for equities. value, demand is calculated by the change in bond out standings at market value. 2010
forecast $tr, demand and supply figures are annualized.

12
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Uncertain outlook for commodity Renminbi and Asian currencies


Financial investors’ influence on commodity prices is The RMB effectively re-pegged to the US dollar 15
now substantial .Commodities rallied prior to the months ago. With headline inflation and exports down
recovery rather than typically lagging the recovery. With year over year, we see no catalyst for Beijing to change
zero interest rates investor flows could remain strong, policy until mid 2010. The RMB is anchoring other
pushing up commodity prices which would be negative Asian currencies as they try to maximize export
for growth. It is also possible that flows reverse. competitiveness.
Upwardly sloping forward curves result in a negative roll
or high cost of carry for financial investors. Investors Election-induced volatility
may become discouraged by the low returns available Several emerging markets go into election in 2010. This
due to the negative carry. could be a source of volatility for the markets. Korea’s
regional election in June 2010 is going to be the last
Figure 16: Oil forward curve ($/bbl) nation-wide election before the presidential election in
100 Crude Oil, WTI : 11/24/2009 2012, meaning the current ruling party is likely to put
95
every effort to win the election. Brazil elects a new
president in October 2010. The base case is the current
90 PT-led centre-left coalition remains in power. With fewer
macro issues in play this time around, the potential
85
outcome is less dramatic, though pre-election volatility is
80 likely, and sectoral and micro risks are on the rise.
Colombia elects a new President in May 2010, with
75
uncertainty as to whether current President Uribe can run
10 11 12 13 14 15 16 17 again.
Source: Bloomberg.
Table 4: 2010 Election Calendar
Figure 17: The financial investor is also driving commodities
Jan Feb Mar Apr
Cumulative inflows into commodity fund by year (US$ billion)
Colombia Hungary
45 2004 2005 Legislative Parliamentary
40 2006 2007 39.9 election election
35 2008 2009
14 Mar
30 May Jun Jul Aug
25 Philippines Czech Republic
20.1
20 17.5 Legislative & Parliamentary,
15 13.0 Presidential First Round
12.1 election,
10
10 May Hungary
5 8.9
Presidential
0 Colombia election
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Presidential
election, Korea
Source: J.P. Morgan, up to October 2009. 30 May Regional election
Sep Oct Nov Dec
Carry trade volatility Poland
Presidential
The carry trade is a poorly defined term. We use it as election, First
shorthand for investors’ desire to generate a return when Round
cash returns are zero. This may simply be the switch Brazil
Presidential
from cash to higher risk asset. It will also include election, First
currency forwards as investors search for higher yielding Round 3
FX. Invariably momentum in risk assets will attract the Oct
leveraged investor. The correction in carry trades can be Source: IFES.
sharp.

13
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Managing Risks 35%. Since January 2009, on average, the VIX tended to
increase by 1.2 points for every 1% strengthening in the
Risks for the first year of recovery are high. Investors
Dollar and this was strongly negatively correlated with
should consider protecting their portfolios. Option
equity markets.
implied volatility has fallen from the highs in 2008, it is
reasonable to buy portfolio insurance by going long
Our base case assumes emerging market FX
index puts.
appreciation. Hedging the portfolio with a position in
USD is an inexpensive way to diversify sudden EM FX
Recent research from J.P. Morgan's Equity Derivatives
depreciation when risk aversion spikes.
and Delta one strategy team shows that investors who
want to protect their portfolios beyond a three-month Figure 18: Correlation between DXY and EM FX index - Very
period had to bear a 30% annualized cost of rolling the Negative
long VIX futures position. The research suggests that the 0.2
recent increase in correlation between the USD, VIX and 0.0
equity prices can be used as a more efficient way to
achieve diversification and portfolio insurance. While we -0.2
believe that investors should not overemphasize this -0.4
casual relationship between asset markets and the USD, -0.6
we recommend building a small USD long in portfolios
to protect against sharp market corrections. This tail risk -0.8
is particularly important for investors reporting -1.0
performance in USD terms; if equity markets were to 93 95 97 99 01 03 05 07 09
drop 20%, and the USD appreciates by 17%, a dollar- Source: Bloomberg.
denominated foreign portfolio would fall in value by

14
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

A longer perspective on asset performance


To avoid being drowned by an anchor and provide an Table 7: Major EM country index performance (% for US$ indices)
objective perspective of asset performance, we look back Country Weight 3yr CAGR 5yr CAGR 8yr CAGR
Colombia 0.6 17 27 40
at three, five and eight-year US$ returns. The three-year Egypt 0.5 0 25 34
CAGR for EM equities is just 4.3%. This is higher Peru 0.7 28 31 33
than -6.8% CAGR return from DM equities. MSCI EM Indonesia 1.8 11 21 32
Czech Republic 0.4 2 15 30
outperformed the DM world index over these years. Brazil 16.8 21 30 26
More recently, ‘BIC’ has driven returns as Russia India 7.5 6 21 22
underperformed by 16% over three years and 4% over BRIC 49.1 8 21 21
China 18.3 13 21 19
three years. Note the divergence in performance of oil Hungary 0.6 -7 3 17
and Russian equities and ruble. At a sector level, Russia 6.5 -13 8 17
Commodities have outperformed, along with consumer Thailand 1.2 1 6 17
South Africa 7.0 2 9 16
stocks. Financials managed to outperform only Chile 1.3 10 15 16
marginally. IT has been the worst performing sector. Turkey 1.3 2 9 16
EM 100 4 13 16
Currency returns are a meaningful part of the US$ Morocco 0.3 7 19 15
returns on equity indices. The currency bloc matters, as Mexico 4.4 -1 15 15
Korea 12.6 -3 11 13
shown in Table 6. CE3 currencies have appreciated the Poland 1.3 -8 7 12
most, along with the Euro. Interestingly, Asian currencies Philippines 0.4 3 14 12
ex the RMB and Thai Baht, have been laggards. The Malaysia 2.7 8 9 11
Israel 2.7 10 11 9
Mexican Peso is a notable underperformer in Latam. Taiwan 11.1 -4 2 4
Table 5: MSCI EM Sector performance (% for US$ indices) World - -7 0 2
MSCI EM Sector Weight 3yr CAGR 5yr CAGR 8yr CAGR Source: MSCI. Sorted descending 8 year CAGR. Grey line separates perf rel to EM
EM Energy 15.0 5 19 24
EM Materials 6.6 10 18 22
EM Cons Disc 5.4 5 11 18
EM Cons Staples 2.2 11 19 17
Table 8: Major EM country sector CAGR returns (%)
EM Utilities 0.0 7 17 17 3 year 5 year 8 year
EM Financials 12.9 5 15 16 Country Sector Weight CAGR CAGR CAGR
EM Industrials 5.3 0 11 16 Brazil Materials 4.8 27 32 38
EM Telecoms 3.5 2 13 12 India Energy 1.3 16 35 35
EM IT 8.9 -3 7 8 Brazil Energy 4.6 32 41 33
S Africa Cons Disc 0.8 9 13 31
Source: MSCI. Sorted descending 8 year CAGR. Grey line separates perf rel to EM
China Energy 3.3 12 21 30
India Financials 1.9 8 25 30
S Africa Telecoms 0.9 12 13 29
Table 6: Currency and commodity performance (%) Brazil Financials 3.7 17 37 28
Korea Materials 1.8 19 22 24
Currency 3yr CAGR 5yr CAGR 8yr CAGR
Korea Industrials 1.9 -5 20 21
WTI Crude 10 9 19 Korea Cons Discr 1.4 5 11 20
GSCI Industrial Metals -8 10 13 Mexico Telecoms 1.8 4 21 20
Czech Koruna 7 6 10 India IT 1.2 -2 15 18
GSCI Agricultural Index 9 14 10 Korea Cons Staples 0.7 -2 14 18
Euro 5 3 7 Turkey Financials 0.7 8 16 18
Hungarian Forint 4 1 6 China Financials 7.2 17 28 18
Polish Zloty 2 3 5 Israel Health Care 1.5 18 14 17
Brazilian Real 8 10 5 Russia Energy 3.9 -15 8 16
S African Rand -1 -5 4 Taiwan Materials 1.4 7 6 16
Thai Baht 3 4 4 Korea IT 3.5 -3 9 16
Chinese Yuan 5 4 2
Mexico Cons Staples 1.0 6 18 15
EM Currency Basket 0 1 2
China Industrials 1.6 9 11 15
Israeli Shekel 5 3 2
S Africa Financials 1.8 2 6 14
Malaysian Ringgit 2 2 1
China Telecoms 2.3 4 21 12
Philipine Peso 2 4 1
S Africa Materials 1.9 -2 8 12
Indonesian Rupiah -1 -1 1
Mexico Materials 0.7 -11 7 10
Korean Won -7 -2 1
Korea Financials 2.3 -6 13 8
Taiwanese Dollar 1 0 1
Taiwan Financials 1.7 -5 -3 4
Russian Ruble -3 0 0
South Africa Energy 0.7 6 16 3
Indian Rupee -1 -1 0
Taiwan IT 6.6 -4 5 1
Turkish Lira -1 -1 0
Mexican Peso -5 -3 -4 Source: MSCI. Sorted descending 8 year CAGR. Grey line separates perf rel to EM .
Dollar Index -4 -2 -6
Source: Bloomberg. Sorted descending 8 year CAGR. Grey line separates perf rel to EM .
J.P. Morgan. The EM Currency Basket is calculated using the difference in the returns in
the MSCI EM local and USD indices. All performance versus the US$ except Dollar Index

15
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

The Policy Risk to the Asset Inflation Trade


On 19 October 2009, the Brazil government announced a Figure 19: A muted response from Brazil
116
2% upfront charge for foreign investors making portfolio
MSCI Brazil
investments in local fixed income and equities (IOF).
112
The government was concerned about the pace of Real
(BRL) appreciation; +35% ytd. If BRL resumes its
108
appreciation trend further measures are possible.
104
Minister Mantega said that the “FX floating regime” BRL Currency
remains in place and he is supportive of capital markets,
100
but the intention is to avoid “excessive BRL
01-Oct 07-Oct 13-Oct 19-Oct 25-Oct
appreciation.” Brazilian authorities have voiced concern
Source: MSCI, Bloomberg, J.P. Morgan. The Brazilian Real index is inverted. Indices
about the exchange rate, and the more the BRL rebased to 100 on 1 October 2009. The red line shows the announcement of the IOF tax.
appreciates the greater the policy risks. We believe that Figure 20: Relative performance post knee-jerk reaction positive
with Brazil’s successful experiment last week, there is 108
the risk that other central banks attempt non-market 107 MSCI Brazil relativ e to MSCI EM
policies to manage conflicting policy goals. 106
105
The Brazil government's move was not a surprise as they 104
were vocal about their concerns with BRL appreciation. 103
The size and breadth of the move, however, was a 102
surprise. Between March and October 2008, Brazil 101
imposed a 1.5% IOF on fixed income investments by 100
foreigners. The currency continued to appreciate until 01-Oct 07-Oct 13-Oct 19-Oct 25-Oct
July 2008. Source: MSCI, Bloomberg, J.P. Morgan.
Figure 21: The Thai experience—Impact on currency
MSCI Brazil underperformed MSCI EM by only 1% in 37.5
the week post the imposition of IOF (19-23 October Thai Baht Onshore
2009). Brazil has ‘gotten away’ with the capital control. 36.5
This is in sharp contrast the Thai experience (see below) 35.5

Policy risks growing 34.5


The lack of a sustained negative response to Brazil’s
33.5
capital control measure may encourage other central Thai Baht Offshore
banks to implement non-conventional policies. This, we 32.5
believe, is a risk to the consensus asset inflation trade. 1-Dec-06 22-Dec-06 12-Jan-07 2-Feb-07 23-Feb-07
Source: Bloomberg.
Learning from the Thai experience Figure 22: The Thai experience – Impact on the stock market
In December 2006, the Thai government imposed FX 330
controls on all inbound portfolio capital. The initial rules
310
implied that foreigners would have to deposit 30% of the
funds brought into the country as a reserve with the 290
central bank and only the remaining 70% could be
invested. For withdrawing capital within one year, only 270
two-thirds of the amount would be refunded. 250

The stock market dropped 17% the following day. This 230
pushed the government to change their stance and limit 1-Dec-06 22-Dec-06 12-Jan-07 2-Feb-07 23-Feb-07
the controls to inflows in bonds and commercial paper. Source: MSCI, Bloomberg.

16
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

And now the monetary stimulus


Monetary stimulus requires three conditions: available investors. This combination results in further spread
credit, at an attractive interest rate, and willing reduction and absolute decline in yields. Higher risk
borrowers. An ongoing rally in the credit markets bonds are likely to follow this trend.
provides the first two conditions. By mid-2010 several
quarters of economic expansion should boost business The irony of the post-credit-crunch interest-rate dynamic
confidence. Initially the effect will be a reduction in is that the improvement in credit markets allows central
borrowers’ propensity to repay loans. This is a developed banks to move away from emergency interest rates.
world event. The monetary stimulus in EM, particularly Investors should view this as a bullish sign. As we
in China, fed through rapidly in 2009. highlighted in our guide to monetary policy in EM (26
August 2009, Mowat et al) the nominalization of interest
The technical position in investment-grade bonds may rates is concurrent with strong markets and economies. It
get more favorable. The negative carry between short- is only when higher inflation drives central bank policy
term working capital loans and long term interest rates action, that investors should sell equities. Please see our
should discourage further bond issuance. The momentum extended markers for a summary of inflation and central
of returns in credit markets is likely to continue to attract bank target ranges.

Figure 23: Compression in excessive risk premium – Yields for government and corporate bonds plus earnings yield for US and emerging
equity markets
22
High Low Avg 05-07 Spot Diff
20 US High Yield 21.0 7.5 8.4 9.8 1.4
CEMBI 14.3 5.7 6.4 7.0 0.6
US EARNINGS YIELD 11.4 6.1 6.6 6.9 0.3 US HY
18
EMBI 12.0 6.3 7.0 6.7 (0.3)
JULI 8.7 4.9 5.7 5.3 (0.4)
16 US 10 Yr 5.2 2.1 4.6 3.5 (1.1) US Earnings
EM EARNINGS YIELD 17.3 6.8 8.7 7.6 (1.2) EM Earnings y ield y ield
14 1 Month T-Bill 5.2 (0.1) 4.0 0.1 (4.0)
CEMBI

12
EMBI
10

6
Juli Av g : 6%
JULI
4
US 10 y r
2 1 month T-Bill
Negativ e Yields
0
Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09

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

17
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

The rolling recovery trade of 2009: And settling the decoupling debate
The debate on economic decoupling is settled. Emerging Brazil, Russia and Turkey in 2Q09. Developed
economies led the recovery out of the synchronized economies returned to growth in 3Q09. Finally Hungary
recession in 4Q08. Growth remains robust despite weak and South Africa return to growth in 4Q09. Markets
exports. Domestic inflation and monetary conditions typically outperformed in the three months prior to their
appear to be the dominant drivers of EM growth. The recovery. Within EM exporters started to outperform in
evidence of capital market decoupling is more limited. 2Q09.
Correlation between DM and EM is a function of
common investors. That said, the low in EM equities was The rolling recovery trade is now mature. For the past
on 27 October 2008, four months ahead of the developed two years, stock price movements have been dominated
equity markets. by macro factors. In 2010, we would expect a more
normal balance of stock specific factors and macro
China, India and Indonesia led the economic recovery in factors driving share prices.
1Q09. This recovery broadened to the balance of Asia,

Table 9: Rolling with the decoupled recovery – Real GDP growth (QoQ SAAR) in key Emerging markets; recession in red, recovery in green
Avg 2003-
QoQ saar 2007 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09E 4Q09E 1Q10E 2Q10E 3Q10E 4Q10E
EM Asia 8.4 7.6 4.9 3.8 -5.3 2.5 12.6 9.8 5.3 6.8 7.0 7.3 7.0
China 11.1 10.7 8.7 5.8 2.4 8.4 14.8 10.0* 9.1 9.0 9.5 9.3 8.7
India 9.3 6.9 5.9 7.7 1.6 8.2 6.7 9.0 -1.0 10.0 7.0 9.6 9.0
Indonesia 5.8 5.9 6.8 5.2 1.9 4.9 4.3 5.3 3.5 5.5 6.0 6.0 6.0
Korea 4.4 4.4 1.7 1.0 -18.8 0.5 11.0 12.3 4.0 2.0 3.5 3.5 3.5
Malaysia 6.1 7.2 2.3 0.6 -8.8 -17.7 12.8 6.1 4.5 1.6 4.9 4.9 4.9
Philippines 5.7 0.4 7.1 3.0 1.1 -8.1 10.0 4.0 4.0 5.0 5.0 5.0 5.0
Taiwan 5.1 3.6 -2.3 -2.9 -27.2 -10.2 20.7 11.5 4.2 3.8 4.0 3.8 3.8
Thailand 5.8 4.7 0.3 2.2 -21.5 -7.2 9.6 7.0 5.3 4.9 5.7 7.0 7.0
Lat Am 5.2 5.4 4.7 1.4 -8.5 -10.0 0.8 6.0 5.6 4.7 3.2 3.9 2.3
Brazil 4.1 7.5 6.2 5.5 -12.8 -3.8 7.8 7.2 6.7 4.3 5.0 4.0 4.0
Colombia 6.4 -1.4 2.9 0.0 -5.6 1.1 2.7 1.9 3.2 3.5 4.3 5.5 4.5
Mexico 3.5 4.5 1.1 -2.7 -9.2 -21.2 -4.4 10.1 7.5 3.7 -0.6 3.3 -0.9
EMEA 6.4 6.1 5.1 3.4 -9.3 -20.2 2.2 6.6 5.0 3.5 3.3 3.4 3.6
Czech 5.6 0.5 5.0 1.8 -5.0 -17.9 0.4 4.5 5.0 2.8 2.5 2.2 2.0
Hungary 3.4 3.5 -0.9 -3.8 -7.4 -10.0 -7.9 -2.0 2.5 2.0 2.0 2.5 2.5
Poland 5.5 6.1 4.1 1.6 -0.4 0.4 2.8 5.5 3.0 2.5 3.0 3.5 3.5
Russia 7.4 7.2 7.1 5.9 -14.2 -33.6 4.9 9.5 6.5 4.5 4.0 4.0 4.5
South Africa 4.7 1.7 5.0 0.2 -1.8 -6.4 -3.0 0.5 3.4 4.4 3.8 3.6 4.1
Turkey 6.8 7.7 -4.5 -5.6 -21.6 -14.4 19.1 11.7 4.5 0.0 3.6 8.2 8.2
USA 2.9 -0.7 1.5 -2.7 -5.4 -6.4 -0.7 3.5 3.5 3.0 4.0 4.0 3.5
Euro area 2.1 3.1 -1.3 -1.5 -7.1 -9.6 -0.7 3.0 2.5 3.0 3.0 3.0 2.5
Japan 2.1 3.5 -2.8 -5.1 -12.8 -12.4 2.3 3.0 2.5 2.5 1.5 1.5 2.0
Australia 3.4 3.0 1.4 1.3 -2.8 1.6 2.5 1.2 3.8 2.1 2.4 4.4 6.2
Hong Kong 6.8 4.1 -3.9 -3.2 -7.4 -16.1 13.9 9.0 5.0 4.2 4.0 3.8 3.5
Singapore 7.7 12.2 -7.7 -2.1 -16.4 -12.2 20.7 14.9 -2.0 4.1 7.4 8.2 8.2
Source: Actual data plus J.P. Morgan estimates, 11 November 2009. *Reported for China.

18
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Reiterating our overweight on earnings revisions


Steve MalinAC, Head of Quant Research

Those familiar with our research may detect a sense of Figure 24: The L/S return to Earnings Revisions in GEM
800
irony in our title because the reality is that there are very
700
few periods when we would not advocate being 600
overweight on earnings revisions—it is after all one of 500

the most consistent quant strategies for alpha delivery. 400


300

200
Occasionally earnings revisions do fail, as they did last
100
year and early this year. The severity of the 0

Nov-94

Nov-95

Nov-96

Nov-97

Nov-98

Nov-99

Nov-00

Nov-01

Nov-02

Nov-03

Nov-04

Nov-05

Nov-06

Nov-07

Nov-08
underperformance was dramatic and enough to make

Base
some ask the question “Is it broken for good?” We
believe not. Based on the strength of the recovery from
Source: Thomson, J.P. Morgan calcs.
prior failure periods we believe that now is exactly the
time to focus on changes in earnings estimates.
Why did they fail recently?
Why do earnings revisions work? During the crisis and subsequent recovery macro drivers,
Earnings revisions belong to the momentum family of not micro drivers such as earnings revisions were driving
alpha drivers. Research into momentum is extensive and markets. The rapid deterioration in the economic data
while the jury is still out as to why it works, even the took analysts by surprise and for most of 2008 and part
most ardent advocates of ‘efficient markets’ struggle to of 2009 analysts simply played catch-up. As far as the
deny that it exists. Whilst this isn’t the forum for a market was concerned EPS changes were at best not
detailed discussion, arguably the most convincing relevant and at worst behind the curve resulting in the
arguments for ‘why earnings revisions work’ stem from strategy generating negative returns.
behavioral finance.
Have they failed before?
In this field the behavior and reaction of analysts to The recent period was a record period of
events that make them acknowledge their under/over- underperformance but earnings revisions have failed
stated opinion about a company’s future have been before; notably in 97 and 01 (See below).
studied in depth. In a nutshell earnings revisions trend
and are serially correlated (i.e. when one analyst Remember, momentum relies on serial correlation.
upgrades others follow), the market typically under- That is, what has worked in the past is most likely to
reacts to these changes and this makes the signal continue to work in the future. Conditions of rapid
systematically exploitable. changes in risk appetite plus limited guidance from
companies have contributed to the underperformance of
Do they work in emerging markets? the strategy. The period 97/98 was the Asia financial
Using our extensive global back-testing infrastructure we crisis and 01/02 was the fallout from the Tech sell-off as
have investigated the performance of various forms of well as Sep 11th. This was followed by a slight recovery
earnings momentum in numerous universes. The before the Asia region lurched into SARS.
conclusion is invariably the same. Earnings revisions
have been a strong driver of returns over the long What happened next?
term in emerging markets – indeed it is one of the The point that we would most like to stress is that in both
strongest universes for observing the phenomena previous ‘failure cases’ when revisions started to work
globally. again they did extremely well. Whilst this is observable
on the 12-month rolling return chart above, for clarity we
also demonstrate this in the annotated draw-down chart
and success rate (i.e. the number of positive L/S return
months in the rolling year) chart below.

19
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

From March 1998 Earnings Revisions generated +32% Figure 25: The 12-month rolling return to Earnings Revisions in
of alpha on a long/short basis as it recovered very GEM
50%
quickly. Similarly Jan 02 to Aug 03 saw a +28% L/S
40%
return. 30%
20%
What has happened this time? (So far) 10%
The ‘drought’ in the performance of earnings revisions 0%
-10%
was finally broken at the end of May. Subsequently
-20%
investing in earnings revisions has been a winning
-30%
strategy five months in succession (and it is again up this

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08
month at the time of writing).
Source: Thomson, J.P. Morgan Calcs.
In summary we continue to be very optimistic about
the earnings revisions based strategies in the current Figure 26: Draw-down analysis – Recovery periods are strong
environment. The speed and magnitude of previous

Jun-94

Jun-95

Jun-96

Jun-97

Jun-98

Jun-99

Jun-00

Jun-01

Jun-02

Jun-03

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09
recoveries in performance are evident and we are already
0%
seeing effectiveness improve.
-5%

In addition the fundamental support for earnings -10%

revisions is strong. The correlation between stocks and -15% +28% Jan 02 to Aug 03

markets continues to drop back suggesting that ‘micro’ is


-20%
+32% March 98 to March 99
getting the better of ‘macro’ and hence stock picking +8% Since Jun 09
opportunities are likely to continue to improve. -25%

Source: Thomson, J.P. Morgan Calcs.


With the revisions environment having normalized and
all the ‘easy yards’ already accomplished for valuations it Figure 27: Strategy success rate (rolling year)
seems reasonable that attention will remain on earnings
120%
going forwards. With clarity returning as each reporting Average success rate > 70% of months in any rolling 12 month period
100%
period passes and the endorsement of most market
strategists (who are suggesting the economic picture will 80%

continue to improve), the stage appears set. 60%

40%
How do you find revisions for stocks? 20%
Sharp Recovery following Sharp fall in effectiveness
We calculate earnings revision rankings for stocks and
0%
sectors globally on a daily basis. Please contact Steve
Nov-94

Nov-95

Nov-96

Nov-97

Nov-98

Nov-99

Nov-00

Nov-01

Nov-02

Nov-03

Nov-04

Nov-05

Nov-06

Nov-07

Nov-08

Malin or Rob Smith at quant.research@jpmorgan.com


for more in formation on accessing the latest information
via our web portal or to receive latest changes direct to Source: Thomson, J.P. Morgan Calcs.
your inbox.
Figure 28: Recent returns… back on track
4%

2%

0%

-2%

-4%

-6%

-8%
Nov-08
Jun-08
Jul-08

Jan-09

Jun-09
Jul-09
Mar-08
Apr-08
May-08

Aug-08
Sep-08
Oct-08

Dec-08

Feb-09
Mar-09
Apr-09
May-09

Aug-09
Sep-09
Oct-09

Source: Thomson, J.P. Morgan Calcs.

20
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

The odd couple: Above-trend growth and falling core inflation


(David Hensley AC and Joseph LuptonAC extracts from ‘Global core inflation falling fast’, GDW 21 August 2009)
J.P. Morgan’s global economic outlook stands apart from Figure 29: Developed market core inflation (US core ex tobacco)
the consensus. The forecast is for a sustained return to %oya
above-trend growth beginning this quarter and a 1.9
continued slide in core inflation to near zero in the
developed economies (DM) by late next year (see Slack
Attack, Global Issues, May 29, 2009). This sounds 1.6

incongruous; however a resumption of above trend-


growth accompanied by falling core inflation is standard 1.3
operating procedure after deep economic downturns.
Developed market core inflation is now at 1.1% oya,
down from the peak at 1.9% oya in August last year. The 1.0
current level is equal to the previous low in 2003. This is 03 04 05 06 07 08 09 10
accompanied by depressed wage growth.
Source: J.P. Morgan.
The output gap and the death of the pricing power
Our core inflation forecast is underpinned by the huge Figure 30: Resource utilization and core CPI, developed
output gap in the economy. This large and growing economies
amount of resource slack is a reflection of the Std. dev . from 1990-2007 av g %-pt; 8 qtr chg in %oy a inflation rate
extraordinarily low levels of aggregate demand and 2 2
resource utilization. Global output gap is estimated to 1 1
reach -4.9% of GDP in 2Q09. The measure of resource 0
0
utilization, which is a weighted average of the rates of -1
-1
unemployment and manufacturing capacity utilization, -2
was 3.8 standard deviations below its norm. In the past, -2
-3
economic recessions and the accompanying buildup of Resource utilization Core CPI -3
-4
slack consistently have delivered a significant decline in -5 -4
core inflation and wage growth (see Slack Attack). 90 92 94 96 98 00 02 04 06 08 10
Core inflation tends to move slowly in the developed
Source: J.P. Morgan.
world, meaning that the full transmission of resource
slack to pricing tends to occur with a lag. The large Figure 31: EM consumer prices excluding food and energy
decline in core inflation to date was magnified by pass- % change over 12 months
through from energy prices in 2H08. The death of pricing
8 CEEMEA
power is apparent when looking at core inflation and
energy prices in 1H09 casually. This shows little a pass 6 Latam
through of the bounce in energy prices into core inflation.
Either businesses were unable to pass through higher 4
energy costs because of the weak economy, or this was EM
offset by disinflationary pressure elsewhere. Either way, 2
it appears that the surging output gap already is taking a EM Asia
0
toll on pricing power.
-2
EM decline limited to Asia
The shallower recession in EM suggests a smaller Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10
reduction in core inflation for the group. However, the
Source: J.P. Morgan.
actual reduction has been more dramatic with core
inflation falling 1.5% to 2.4% from last year’s peak. This
decline is entirely due to EM Asia, especially China.
Core inflation has plateaued in Latam and CEEMEA.

21
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Fear bond market volatility – Mercury may rise in 2010


EM equities typically correct when bond market purchasing programs, nor does it expect the Fed to alter
volatility rise. Statically this is when the 10-year UST the already announced amounts of purchases. The end of
yield exceeds two standard deviations versus its three quantitative easing could result in higher bond yields in
month moving average. Since 2004, the mercury rising 2010.
indicator has correctly signaled corrections in seven out
of 10 occasions. The mercury rising indicator
We define a rapid adjustment in 10-year UST yields as a
Yields are low but the curve is steep change in the yields that is greater than 2 standard
The current 10-year UST yield of 3.5% is low relative to deviations relative to the three-month moving average.
the long term history. But the yield is steep; the average
curve is 1.75%. The curve steepness rewards duration We emphasize that this indicator does not identify market
risk and banks have rapid accumulated USTs. The tops. Note that in March 2006 the indicator signaled a
appetite is finite. “sell”, and although three-month forward returns were
-5% in EM equities, the MSCI EMF rallied a further 15%
US fiscal deficit from March levels before peaking in May 2006. As a
The US Fiscal deficit is estimated at US$1.35 trillion in result, we interpret the signal as an early warning sign to
2010 following a deficit of US$1.6 trillion for 2009. The begin reducing risk.
net US treasury paper issuance in 2010 is estimated at
US$1.8 trillion; this is larger than the US$1.6 trillion We believe that emerging markets are susceptible to
estimated to be issued in 2009. Potentially, the market’s sharp corrections as volatility spikes in global markets.
inability to digest the large sustained fiscal deficits and Our work on quantifying the relationship between the
issuance of treasury papers may cause UST yields to rise direction of US Treasury yields and EM equity returns
rapidly in 2010. suggests that the probability of such a correction in 2010
is high if UST yields rise rapidly and increases the risk of
End of quantitative easing a rapid adjustment. We advise investors to monitor the
Reinforced by the FOMC statement in November, we pace of change in 10-year UST yields in 2010.
expect the Fed to continue with its already scheduled
purchases, concluding purchases in 1Q10. Our baseline
does not expect any further announcements of new

Figure 32: The mercury rising indicator – MSCI EM and UST # of standard deviations from three-month moving average
3 10 y r UST Yield # of SD relativ e to 3mma

-1
-2

-3
MSCI EM (Log scale RHS)
Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09

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

22
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

The manic-depressive's guide to the fiscal outlook


Originally from the GDW, 11 September 2009 Figure 33: Estimated contribution of fiscal policy to GDP growth
The fiscal impetus from the economic stimulus package 4
ramped up earlier this year. More recently, the overall 3
flow of spending is starting to level off and, looking
2
ahead a few quarters, spending will decline
1
incrementally. This prospect has raised fears of a
0
“double-dip” recession as the boost to growth from the
stimulus turns into a drag. Given the most likely path for -1
spending, these fears appear greatly overblown. The -2
reason is that spending ramped up much more quickly -3
than it will ramp down. As such, the drag from waning 2009 2010 2011
stimulus over the course of the next year should be
relatively modest: By our calculations the drag should be Source: J.P. Morgan. % saar. Includes
less than 1% point on average. A more significant hit After that, going into next year we expect that stimulus
could come in early 2011, when not only do most of the support will decline and subtract from GDP growth, on
stimulus measures come off, but some of the Bush-era average in the magnitude of about 0.5%-pt per quarter.
tax cuts are set to expire. While that prospect poses The growth rate drag in 2010 is expected to be smaller
downside risk to 2011, much political uncertainty than the growth rate boost in 2009 because the stimulus
remains regarding how much stimulus will roll off versus spending should decline at a slower pace than it
be renewed. increased. That holds true at least until the beginning of
2011, at which point things get interesting. Currently, not
While the likelihood of a stimulus-induced double-dip in only should much of the stimulus spending begin to dry
2010 looks comfortably low, the longer-term budget up in 2011, but the Making Work Pay tax credit for
outlook remains uncomfortably perilous. We project that lower-income households and the Bush-era tax cuts for
the federal budget deficit for FY2010 will come in at upper-income households are both scheduled to expire at
$1,350bn, an improvement from the $1,600bn projected the beginning of 2011.
for FY2009 but not a huge improvement given how
terrible the backdrop was for the last fiscal year. Looking Fiscal challenge for DM
further ahead, the stream of deficits in either the The deficit for the 2009 fiscal year is likely to come in a
administration’s or the CBO’s estimates looks very little under $1,600bn. We project a deficit for FY2010 of
worrying. As bad as that is, estimates that also $1,350bn. Considering how dire the economic and
realistically incorporate current policies look terrifying. financial situation was in the 2009 fiscal year, the
There have been episodes in the past when deficit improvement in 2010 does not look all that impressive.
projections looked awful—such as the early 1990s—but We do not have official deficit projections for years
the outcome turned out better. That said, the challenges further out, though it is safe to project an incredibly
look much greater this time around and will require even gloomy fiscal outlook. Our best guess for FY2011 is a
more political will to be resolved. deficit of around $1,100bn—that is, after incorporating
the expiration of the Bush tax cuts. (In the event, the
Stimulus so far expiration of upper-income Bush tax cuts should add
Through September 4, $96bn of stimulus funds have about $30bn to FY2011 revenue). For years beyond 2011
been paid out, which is about 19% of the $500B the improvement in the deficits is likely to be only
allocated to spending measures. modest and nowhere near enough to bring the deficit
anywhere close to balance. Over the next 10 years, even
The bar chart presents our estimates of how much the the administration’s assessment of the budget outlook
stimulus has contributed, and will contribute, to overall sees the deficit never falling below $700bn, and the
growth. According to our estimates, the stimulus has cumulative deficits over that period are projected to be
contributed, or will contribute, about 2-3%-pts to GDP $9tn. While the CBO has yet to update its estimate of the
growth, on average, in each of the last three quarters of administration’s budget, when it does it will likely add
the year. $1tn to the administration’s 10-year deficit total. A
similarly gloomy picture emerges from analysis
conducted by the Committee for a Responsible Federal

23
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Budget, which realistically extends current policies— Table 10: General Government Fiscal Deficit (% of GDP)
such as the AMT patch—to arrive at a $12.6tn 10-year Public debt (%
Fiscal Position Change 2008 to 2009 of GDP)
deficit estimate. 2008 2009 Cyclical Disc 2010 F
Global -2.6 -6.8 -2.5 -1.7 na
Another case in point is Japan. The latest OECD data Developed -3.1 -7.7 -2.9 -1.7 na
(June 2009) showed that gross financial liabilities (debt) US1 -3.2 -10.2 -5.0 -2.0
of Japan’s general government were 172% of GDP in Japan -6.0 -9.7 -1.7 -2.0 227
Euro area -2.0 -4.0 -1.0 -1.0 na
2008, and are expected to exceed 200% by 2010, by far UK -5.9 -9.1 -1.6 -1.6 82
the highest level among major countries Emerging -0.8 -3.5 -1.3 -1.5 na
Latam -0.6 -3.3 -1.7 -1.0 na
One grim point should be noted to connect the comments Brazil -1.3 -2.5 -0.9 -0.3 70
Chile 8.7 -4.5 -10.6 -2.6 9
earlier in this note to the immediately preceding Colombia -1.4 -3.0 -1.6 0.0 44
discussion. As we noted regarding early 2011, even Mexico -1.8 -3.9 -0.7 -1.4 36
modest fiscal “restraint”— coming from a starting point Peru 2.4 -1.6 -1.5 -2.5 25
Em Asia -1.4 -3.6 -0.1 -2.1 Na
of 11% of GDP deficits— will be a hit to economic China2 -0.5 -3.0 -0.4 -2.1 20
growth. If, at some point, the political establishment Hong Kong -5.0 -6.0 2.0 -3.0 Na
shows the will to return the deficit to a more reasonable India -6.5 -6.3 5.2 -5.0 46
Indonesia -1.3 -2.4 -1.1 0.0 35
2-3% of GDP, the cumulative drag of a fiscal rebalancing Korea 1.5 -2.0 -2.4 -1.1 44
of up to 8% of GDP poses a long run cyclical drag; the Malaysia -4.8 -7.0 -1.0 -1.2 44
implications of the political establishment not showing Philippines -1.3 -1.5 -0.2 0.0 62
Singapore 5.0 -2.0 -7.0 0.0 na
that will, however, is even more depressing. Taiwan -1.2 -3.6 -1.8 -0.6 na
Thailand -2.5 -5.0 -1.1 -1.4 39
Fiscal Cushion in EM CEEMEA 0.8 -3.6 -3.8 -0.5 na
Public sector debt to GDP ratios in Emerging markets are Czech Rep -2.0 -5.0 -3.0 0.0 38
Hungary -3.0 -2.6 0.4 0.0 80
much better developed markets. The public sector debt as Israel -0.3 -3.0 -2.7 0.0 na
a percent of GDP is the largest in Brazil and India among Poland -2.5 -3.2 -0.7 0.0 53
the emerging markets, and we expect it to be around 70% Russia 5.7 -4.0 -8.6 -1.1 7
South Africa 1.0 -3.8 -3.2 -1.6 38
for Brazil and 46% for India in 2010. This makes for Turkey -1.3 -2.3 -1.0 0.0 50
good comparison with the G3 countries where the public Source: J.P. Morgan economics 'Priming the Pump’, Lupton and Hensley, 13 February 09
debt is as much as the GDP itself or even more. 1: Discretionary stimulus for the US only includes spending and tax measures related to
boosting economic activity and not the measures being undertaken to support financial
markets. Consequently, roughly $400bn of financial support is included as cyclical.
For more, see Key Trades and Risks, Mowat et al, 2: China’s widely announced stimulus plan amounted to roughly 7% of GDP in 2009.
October 21, 2009, and JGB challenge: Exploding public However, we only show the 30% of this, that is expected to be financed by the public
debt amid falling domestic saving, October 21, 2009. sector.

24
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

South Africa - 2010 Soccer World Cup Winners


Figure 34 summarizes the average outperformance of is likely to be FirstRand given that it is an official
equity market sectors relative to MSCI World in the sponsor and via the Visa link benefits from tapping into
previous three World Cups (earlier historical analysis that customer base.
constrained by data availability). IT, Telcos and
Consumer Discretionary were the stand-out sector Construction was an early beneficiary of the World Cup
winners during previous World Cups. We expect similar spending given the capex on new soccer stadiums,
benefits for these sectors in SA with MTN, in particular, transport links etc, but much of this has largely occurred
appearing very well-placed given that it is the first and we believe for this sector to be rejuvenated it
African World Cup Sponsor, making it a direct requires new private sector capex to be forthcoming, in
beneficiary from increased sales and awareness. particular, new mining capex.

We expect accommodation, transportation, food, Our favourite SA Soccer World Cup strategy picks
beverage, and leisure sectors to benefit from soccer- include MTN, Vodacom, SABMiller, City Lodge, Sun
related consumption. SABMiller, City Lodge, Sun International, Naspers, FirstRand, Rainbow, Famous
International, Comair, 1Time, Naspers, Rainbow, Brands, Comair, 1Time, Imperial and Bidvest
Famous Brands and Imperial would be our top strategy
picks in these sectors. A beneficiary in the banking sector .
Figure 34: Hosting countries’ equity sector performance relative to MSCI World sectors
40
35
30
25
20
15
10
5
0
Health.Care
Utilities

Industrials

Cons.Stap.
IT

Cons. Disc

Materials
Telecoms

Financials

Energy

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

Table 11: SA Soccer World Cup strategy picks


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

25
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

None of these events reflect an


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

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

MSCI announces that it will include China A-shares in standard indices.


DXY strength…new carry trade Initially, a limited investibility factor is applied. Assuming a 35% free-float in the A-
unwinds share market, China moves from 18% to 37% of MSCI EM. This event is
destabilizing. Investors have the Hobson choice of needing to be ahead of large
capital inflows but recognizing they are buying expensive stocks.
Rmb stronger than 6.5/US$
Run on the Japanese yen and Japanese Government Bonds. International
China 37% of EM
investors would require a risk premium to fund a country where public sector debt to
GDP is 190% in 2009 (J.P. Morgan estimate) but for now, Japan’s excess savings are
sufficient. In JGB challenge: exploding public debt amid falling domestic savings,
Run on JPY and JGB Kanno et al, 21 October 2009, we estimate that assuming no major fiscal initiatives,
demographic demands should push this ratio to 300% by 2019. Current demographic
trend could push the savings rate to zero in five years. This, plus the strong yen
Momentum of flows in hollowing out Japanese manufacturing, could require foreign savings to fill the gap.
commodity funds pushes up
prices and chokes growth
Today’s 10-year JGB yield of 1.34% is too low to attract foreign capital.

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

In contrast to above, commodity investors become frustrated with low financial


Don’t be too keen to return to returns due to the cost of roll (upward sloping future curves). This results in 2009
property
record inflows into energy and commodity funds reversing. Although the sharp fall
in commodity and energy prices is unnerving, the resulting stimulus underpins the
EM FX momentum unstoppable recovery.

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

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

26
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Emerging Market Rates Outlook Joyce ChangAC


(1-212) 834-4203
joyce.chang@jpmorgan.com
J.P. Morgan Securities Inc., New York

Emerging Markets pass a stress test surpassing that of the US. Indeed, over the past four
years, EM contributed more to global GDP growth than
Investing in EM assets has been a one-way bet over
the whole of developed markets. In 2010, EM growth
the past year. Across all asset classes (e.g., equities,
will recover to 5.8%oya, with risks to the upside, while
sovereign credit, corporate credit and local markets), EM
G-3 growth will remain below par at only 2.7%. We
strongly outperformed (chart 1). Going into 2010, EM
recommend overweight positions in EM credit (both
fundamental and financial markets outlook remain
sovereign and corporate) versus developed fixed income
robust. EM is shedding its image as the most volatile
markets. We also expect EM local markets, as tracked in
asset class. The outperformance of EM fixed income in
J.P. Morgan’s GBI-EM index, to generate double-digit
the midst of market turbulence in 2008 and the
returns next year.
subsequent outperformance over the past year as the
market recovered have resulted in a re-rating of EM risk.
2009 will be remembered as the year that EM carried
Even frontier EM countries have outperformed. With EM
the global economy, with EM consumption well
growth and yields well above developed markets, EM
surpassing that of the US. Indeed, over the past four
will continue to move into the mainstream as an asset
years, EM contributed more to global GDP growth than
class in 2010. We expect a first quarter rally as both
the whole of developed markets. In 2010, EM growth
EMBIG cashflows and strategic inflows from non-
will recover to 5.8%oya, with risks to the upside, while
traditional investors are high. External demand for EM
G-3 growth will remain below par at only 2.7%. We
assets remains strong and we expect inflows into EM
recommend overweight positions in EM credit (both
fixed income to reach $30-35bn in 2010 compared to
sovereign and corporate) versus developed fixed income
only $18bn this year. Worldwide pension funds are
markets. We also expect EM local markets, as tracked in
starting from a position of close to zero allocation to
J.P. Morgan’s GBI-EM index, to generate double-digit
Emerging Markets, and yet assets are more than $17bn.
returns next year.
New and growing sources of inflows include high grade
crossover investors, US pension and endowment
allocations, sovereign wealth funds and Japanese retail EM valuations more compelling than US
allocations. High Grade markets
Yields for the EMBIG have fallen to 6.49% (close to
Figure 35: Asset class performance the record low of 6.34% reached in April 2007), but
remain much higher than US investment grade yields
(5.2%) and yields for the Barclay’s Global Aggregate
index (3%). Other US fixed income asset classes will
deliver near flat or negative returns for the full year 2010,
assuming our preliminary spread and yield forecasts for
2010 are accurate. We expect EMBIG returns in 2010 to
reach a maximum of 6.5% compared to 4.5% for US
investment grade. We have been overweight the EMBIG
for the past seven months and upgraded several smaller
weighted EM countries in the benchmark index last
week. In addition to our overweight recommendations in
Dominican Republic, Indonesia, Mexico, and Russia, we
upgraded Poland, Hungary, Jamaica, and Belize to
Source: J.P. Morgan, 1-J.P. Morgan commodity total return index, 2-Barclays capital global Overweight. We downgraded high beta Venezuela to
aggregate Marketweight from Overweight and maintained the
overweight in Argentina but switch assets for relative
2009 will be remembered as the year that EM carried value considerations.
the global economy, with EM consumption well

27
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

EM sovereigns have already prefinanced one-third of Figure 37: EM local yields remain attractive
the total $66bn EM sovereign financing needs. EM
sovereign issuance for the year reached $71 billion last
week. Note that five countries – Argentina, Poland,
Russia, Turkey and Venezuela – account for nearly 50%
of total EM sovereign issuance needs. Technicals for the
EMBIG remain favorable as coupons and amortizations
are also the highest in 1Q10, with cashflow of $21.5
billion to be put to work (chart 2). EM sovereign cash
flows will total $56.4bn in 2010 versus $66.5bn in
sovereign financing requirements.

Figure 36: EMBIG coupons and amortizations highest in 1Q10

Source: J.P. Morgan.

We favor the higher carry currencies going into 2010


and recommend TRY, RUB, PLN and HUF in
particular, as all are likely to deliver returns in excess
of 15%. While FX intervention is likely to intensify in
Asia and Latin America, CEEMEA countries are more
focused on FX reserve accumulation. Brazil was the
outperformer in 2009 (+25%), but the most attractive
opportunities for 2010 are concentrated in the CEEMEA
region. Appetite for local rates remains subdued due to
the growing uncertainty about the timing and pace of
monetary policy normalization. EM local markets debt
returns (USD unhedged) break down roughly into half
local rates returns and half FX returns. Our bottoms-up
Source: J.P. Morgan.
return forecast for the GBI-EM Global Diversified index,
which is the leading EM local markets benchmark, is
Shift the focus to local markets: GBI-EM 12% in 2010.
returns to reach 12% in 2010
After a brief dip during the credit crisis, international EM Corporates likely to outperform EM
demand for EM bond markets is growing again, sovereigns and US High Grade
particularly for high carry markets. The weak USD The resilience shown by EM Corporates throughout
trend will persist next year and J.P. Morgan forecasts the credit crisis has improved their profile amongst
EUR/USD bottoming at 1.62 in mid-2010 before investors, with the asset class likely to garner a
recovering to end the year at 1.50. The Fed is proving greater following as valuations in developed credit
more comfortable with a zero rate environment than markets look increasingly expensive. Although the
almost every other G-10 or EM central bank and the most pace of the market’s recovery has brought us back to pre-
recent balance of payments data indicate that the US is crisis levels, we believe that there is still room for
also suffering from a re-emergence of net FDI/M&A spreads to tighten and set a year-end 2010 target for the
outflows and weaker equity inflows than other countries, CEMBI Broad at 300bp versus 388bp at present. . There
highlighting that USD weakness is more than a simple were notable casualties in 2009, with combined defaults
carry trade. and debt exchanges rising to 10.8% of the EM corporate
high yield bond stock (compared with a par-weighted
default rate of 10.96% and 16.24% including distressed
exchanges in the US high yield market), many of the
concerns that shaped expectations for a more serious

28
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

collapse and prolonged period of market weakness at the We project a total of 14 countries across EM regions
end of 2008—such as rising capital flight and mounting tightening monetary policy next year, either by raising
external refinancing risks in Russia, unhedged corporate reserve requirements or interest rates.
derivative exposures in Brazil and Mexico, the downturn
in and overheated real estate markets in China and Dubai However, the still depressed size of the global pie is an
respectively, and short-term FX funding needs in obstacle to the relative adjustments that are needed
Korea—have come to pass without prompting broader and markets have arguably priced too much
systemic failures. tightening in. Even after three quarters of expansion,
EM export volumes stand about 10% below their
At the aggregate level, we move EM Corporates as an previous peak. For China, which provided an important
asset class (CEMBI Broad) to Overweight relative to part of demand stimulus to lift the global economy,
EM sovereigns (EMBIG) and US credit (JULI). At the export volumes are still 20% below their peaks. It is in
regional level, we expect credits from Asia and Europe to this context that Chinese authorities can justify their
contribute the lion’s share of the spread tightening dollar peg. Other Asian export-intensive countries, in
followed by Latin America, while at the country level we turn, maintain a tight leash on their currencies in order to
still expect some of the more significant spread limit the loss of competitiveness against China. A world
opportunities in higher beta countries such as Indonesia, in which US interest rates are likely to remain close to
India, Kazakhstan and Argentina, although note that zero and the renminbi is held artificially low may serve
these account for less than 6% of the corporate index. We domestic needs but is producing undesirable
believe that Russian corporate performance will be much consequences and finger-pointing on a global level.
more muted in 2010 despite the macro backdrop for
Russia and the CIS, which is likely to be significantly The reluctance to lean too heavily on rate hikes has
improved as commodity prices recover. We do not prompted EM policymakers to rely on other
believe that developments in Dubai will have a long-term measures. EM foreign exchange reserves have increased
impact on the EM quasi-sovereign sector outside of the by US$700 bn this year to reach US$4.2 trillion and
Middle East region. some countries are actively managing bank reserve
requirements. Brazil recently introduced a financial
Economic recovery to prompt earlier transactions tax (IOF) on portfolio inflows and other
tightening in EM during 2010 countries are shifting in a similar direction.

While the world needs accommodative policies, a one-


EM issuance to go further down the
size fits all policy stance is increasingly inappropriate
as utilization rates are widely divergent despite a credit curve
world generating synchronized above-trend growth. The issuance outlook for 2010 remains biased towards
The most severe decline in employment by far has taken investment grade bonds. In 2009, we estimate that 60%
place in the US where utilization rates stand at historic of issuance from EMBIG-eligible sovereign issuers came
lows. By contrast, our aggregate measure of EM from investment grade credits. In net terms, we estimate
utilization rates is close to its long-term norm (chart 3). that issuance year-to-date has been just below the full-
In addition to the relatively modest loss of jobs in year coupons and amortizations by $1.7bn. However, we
emerging market economies, this contrast reflects the estimate investment grade net issuance at $6.0bn,
very high EM utilization rates at the time the recession contributing towards the upward drift in index rating. For
began. With policymakers having moved uniformly into 2010, we estimate gross EMBIG sovereign issuance at
aggressive easing mode at this time last year, a quicker $66.5bn, with net issuance estimated at $14.4bn. Of this
move toward EM policy normalization is appropriate. net issuance figure, we estimate investment grade net
supply will reach $9.7bn, or 68% of the total, again
Asset price inflation is also become a greater concern, contributing to upward ratings momentum.
particularly for EM Asia central bankers. Easy
monetary conditions, high household savings rates, intact EM Corporates, mainly quasi-sovereigns, have issued
banking systems, and strong housing demand have led to $118bn this year—decisively breaking through our
sharp rebounds in residential real estate prices. The full year forecast of $103bn—concentrated in
dollar carry trade is fueled both by low US rates and the investment grade issuance. Rather than slowing down
understanding that Asian currencies are artificially low. as the end of year approaches, supply remains extremely

29
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

strong with a record of over $23bn sold in the month of inflows to Emerging Market dedicated funds have
October, and 60% of total supply for the year issued increased sharply from the end-April lows.
since July. Deal sizes have averaged $720mn,
substantially larger than previous averages of $380mn in Figure 38: Cumulative flows to US real money funds has reached
2008 and $371mn in 2007, as quasi-sovereign and $18bn year-to-date, excluding fund flows from Japan
investment grade corporates have dominated the new US$
issue space. Of the $118bn issued this year, roughly 61% 40b
has come from the quasi-sovereign segment (including
supranational banks), just under one-quarter from 30
investment grade corporates, and the balance of around
15% from high yield corporates. We estimate that the 20
EM corporate bond stock now stands at $589bn versus
$529bn at the start of the year. 10

Sovereign ratings downgrades were much lighter 0


during the recent down cycle and thus ratings
agencies have been less aggressive in upgrading -10
countries since the financial storm has passed. Rating
downgrades exceeded upgrades in 2008 and so far in -20
2009 for S&P and Moody’s, after eight years in a row in Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
which the up moves exceeded the down ones. However,
this will reverse again in 2010, when the number of 2005 2006 2007 2008 2009
upgrades is expected to be small but to exceed
Source: J.P. Morgan.
downgrades. Since 2008, the following sovereigns have
been downgraded: El Salvador, Estonia, Hungary,
Jamaica, Latvia, Lithuania, Mexico, Nigeria and Ukraine. Japanese demand for carry is strong and rising.
However, a handful of EM countries have actually been Cumulative inflows from Japan to Emerging Market
upgraded, including Belize, Bolivia, Chile, Ecuador, bonds over the past 5 years had reached $38bn, and has
Indonesia, Lebanon, Pakistan, Philippines, South Africa, also been far more stable than similar inflows to EM
Uruguay, and most notably Brazil. In contrast, the ratings bond funds in the US and Europe. The pattern of inflows
cycle point to more downgrades in the developed market from Japan has shifted significantly over the past few
countries in the coming years. Indeed, using current and years. Earlier inflows were to EM hard currency bond
projected debt/GDP levels, the analysis of our global funds, but these ceased in early 2008. Inflows to EM
fixed income analysts finds that Spain, Ireland and local currency bond funds started increasing more rapidly
Greece may suffer additional 1-2 notch downgrades by in mid-2007 and peaked in 3Q08, although they have
2011. started to grow again since mid-2009. Inflows to EM
hard currency funds have now resumed, but only in EM
FX overlay strategies in which the investor buys USD-
EM fixed income inflows will catch up in denominated credit assets but the coupon is paid out in
2010 currencies ranging from AUD, to ZAR, TRY and BRL.
We estimate cumulative inflows to EM debt real money
funds at $17.8 billion so far this year, the majority of
which has come from strategic allocations (chart 4).
Next year, inflows should rebound to the $30-35bn range
recorded in 2006-2008. Real money remains overweight
as asset allocations increase, while hedge funds have not
increased exposure. Indeed, in their 3Q09 update, Hedge
Fund Research (HFR) noted that Emerging Market hedge
fund assets increased to $86.5bn but only because of
performance, with net flows virtually flat at -$37mn,
bringing year-to-date net outflows to $8.9bn. By contrast,

30
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Trading themes The economic recovery will see monetary stimulus


removed across CEEMEA
Stay overweight the EMBIG versus US High Grade.
The central banks of Poland, South Africa, the Czech
EMBIG spreads to tighten to 250bp by end-2010,
Republic, Turkey and Israel are expected to tighten
implying a total return of maximum 6.5% compared to
policy in 2010. In Hungary and Russia currency
only 4.5% for US High Grade and flat returns in other
appreciation is expected to result in further easing.
US fixed income markets. Position for a rally in 1Q10,
However, the normalization of monetary policy should
when nearly 50% of EMBIG cashflows ($51.8bn) are
not prevent bond markets from delivering positive
generated. Strategic inflows into EM fixed income have
returns in 2010, as this unwind is already anticipated in
reached $18bn so far in 2009 and may more than double
bond prices. The divergence between fx-implied yields
next year with increased demand from non-traditional
and local t-bill yields and the lack of concerns over
investors. We stay overweight Argentina, Belize,
capital controls suggests carry trades are better expressed
Dominican Republic, Hungary, Indonesia, Jamaica,
in local instruments. Spreads are especially wide in 1-
Mexico, Poland and Russia sovereign debt.
year t-bills versus fx implied rates in Israel (195bp),
Hungary (150bp) and Poland (130bp).
Overweight EM Corporates vs. both EM sovereigns
and US High Grade
Linkers offer best value in Latin America rates
We forecast the CEMBI Broad at 325bp versus 403bp
While central banks have been focusing on current
currently, with the EM high yield corporate default rate
goldilocks (the 4Q09 rebound has taken place amid low
to fall to 2.2% from an estimated 12.3% this year. EM
inflation) and in some cases even protest the tightening
Corporate credits from Asia and Emerging Europe
priced in by local yield curves, market participants have
offering the most attractive opportunities, while new
been wary of policy rate levels and fiscal policies that are
issues continue to offer better liquidity than secondary
turning increasingly pro-cyclical. The “low for long”
market. While refinancing risk was clearly a concern last
message seems at odds with the fact that Latin countries
year, access to alternative sources of capital including
are coming out of this recession with much tighter slack
local markets, has reduced this risk in a number of key
than G3 and in some cases already buoyant credit
markets. In 2010, we expect the default rate for the asset
markets. We favor outright exposure through linkers
class to fall to 2.2% of the EM corporate high yield bond
across the region. They look especially cheap in Chile
stock or just under 1% of the total bond stock.
and Colombia. In Chile we recommend receiving 2Y UF
outright. On the breakeven side, Mexico stands-out. We
Shift the focus to local markets, with the GBI-EM
believe inflation is unlikely to move below 5% in 2010
return likely to reach 12% in 2010
due to the fiscal reform, and recommend buying 3Y B/E
EM FX appreciation will endure at least through 1H10
inflation through UDI-TIIE swaps
amid USD weakness. We favor the higher carry
currencies going into 2010 and recommend TRY, RUB,
PLN and HUF in particular, as all are likely to deliver
returns in excess of 15%.

EM Asia local yield curves likely to be higher and


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

31
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Emerging Asia Economic outlook David FernandezAC


(65) 6882-2461
david.g.fernandez@jpmorgan.com
J.P. Morgan Securities Singapore Private Limited

EM Asia growth set to return to trend in 2010, but Early policy normalization from India and Korea, but
watch for choppiness don’t get carried away
After a traumatic entrance into 2009 that set the stage for Policymakers in China and the rest of EM Asia are still
a full-year growth performance (4.2%) well below the unlikely to make major adjustments to monetary policy
region’s potential, EM Asia is set to turn in a solid, trend- in the near term. The Bank of Korea and the Reserve
like year of growth in 2010. Indeed, if the J.P. Morgan Bank of India have been leaders in signalling to the
forecast of US GDP growth reaching 3.5% is achieved, market that they will be willing to begin to normalize
then there is upside risk to our forecast of 7.3% GDP
monetary conditions relatively early, with policy rate
growth in EM Asia next year.
changes expected from both Korea and India in 1Q10.
At the same time, developed market growth still poses a
downside risk to EM Asian GDP as our region remains But the BoK MPC is also aware that the market has taken
full-coupled to the fortunes of the US and the Euro Area, that message to heart and is pricing in 100-150bp of
in particular. Domestic stimulus, including sizable tightening over the next six months. Indonesia is another
monetary support, has clearly helped China and other key case where we believe the market has gotten ahead of
countries in the region recover quickly in 2009. itself. For 2010, Bank Indonesia believes that inflation
However, it is exactly the concern over DM growth (with will return to “normal levels in the 5±1% range” and
no bravado of de-coupling heard from Asian importantly sees medium-term inflation declining toward
policymakers) that will ensure that stimulative policies 3% over time based on the strong commitment by BI and
are only gradually normalized in 2010. the government to fighting inflation. Clearly, this is not a
central bank that wants to feed expectations of early
A useful reminder of the volatility of the GDP growth in
tightening. Overall, be aware that the market can
EM Asia is playing out as we enter 2010 as the region
overshoot in its expectations of tightening, and we should
rolls down after achieving extremely high growth in the
middle of 2009. On the J.P. Morgan forecast, EM Asia is expect Asian policymakers to tread carefully in sending
on track to slow down to about a 5% growth pace in 4Q such signals too strongly, especially early in 2010.
after averaging over 11% in 2Q and 3Q. It is a clear
possibility that some high beta economies such as The market is also keenly focused on China, but we
Singapore actually contract in 4Q. So, while the growth similarly think expectations of policy changes there may
recovery in EM Asia has been undeniably impressive, be overdone. We think PBoC will move in stages, relying
markets should tighten their safety belts as choppiness more on open market operations to withdraw excess
looks like could be a continuing theme going into 2010. liquidity, and combine that with sector-specific actions,
like a partial withdrawal of the stimulus provided to real
Figure 39: EM Asia—GDP growth
Forecasts estate late last year, to contain the risk of an asset bubble
and inflation. As for policy adjustment through the Rmb,
5
China’s policymakers still view the 2010 economic
0 oya
recovery in developed markets, especially in the US, with
5 a high degree of uncertainty. Over time, possibly by 2Q,
they may take a view that global recovery is on a surer
0
footing, with a turn to positive oya export growth from
-5 %q/q, saar China being a concrete signal of such a turn. But, only
0 when such confidence is achieved will the Rmb begin to
2005 2006 2007 2008 2009 2010 resume a gradual appreciation trend. J.P. Morgan’s
Source: J.P. Morgan economics. forecast is for Rmb/US$ to reach 6.5 by end-10, with the
appreciation only taking on meaningful momentum by
2Q10.

32
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

After dropping in 2009, EM Asia’s external surpluses Table 12: Asia—Current account balance forecasts
stabilize 2007 2008 2009E 2010E
For two consecutive years, EM Asia’s CA surpluses have Japan 212.739 158.867 133.941 115.677
dropped significantly. However, the global growth Australia -50.279 -44.683 -41.780 -50.840
New Zealand -19.289 -11.706 -5.342 -9.591
recovery and an expectation that oil prices will stay in a Em Asia 518.596 489.034 460.478 468.875
range of $70-90, should make 2010 a year of stabilization ex China and India 164.643 114.292 165.449 141.090
in the region’s CA surplus. In total, EM Asia is expected China 371.833 404.905 326.213 368.346
Hong Kong 25.527 30.623 26.113 25.863
to run a CA surplus of 5.3% of GDP compared with India -18.668 -29.733 -31.195 -41.040
5.5% in 2009. Importantly, China’s surplus will stabilize Indonesia 10.155 0.312 6.094 5.173
as a share of GDP, meaning the absolute size of the Korea 7.335 -5.292 38.463 17.120
Malaysia 29.105 38.722 32.576 40.148
surplus will rise by over $40 billion versus 2009. On the Philippines 7.119 4.227 5.852 3.051
other side, Korea and Thailand are expected to see strong Singapore 39.167 22.878 14.105 17.521
domestic growth which will push import growth higher Thailand 14.049 -2.503 12.912 4.818
than exports, resulting still in CA surpluses, but of a Taiwan 32.975 24.894 29.345 27.875
Source: J.P Morgan economics. Figures in US$ billions.
smaller magnitude.
Except for south Asia, the rest of the region will again
run significant CA surpluses. Combined with capital
inflows from equity and fixed income, as well as FDI, we
forecast regional FX reserves to rise another $350 billion
in 2010. Global rebalancing certainly has a long way to
go.

33
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

CEEMEA Differentiated Rebound Michael MarreseAC


(1-212) 834-4876
michael.marrese@jpmorgan.com
J.P. Morgan Securities Inc

Energy Exporters to Shine countries. Current-account balances are moving into


J.P. Morgan forecasts that 2010 average CEEMEA surpluses for most energy exporters, except for
growth will be 4.5% (at potential) given that a comfortably financeable deficits in Nigeria and Egypt.
substantial amount of global de-leveraging has already Only in Romania do we forecast a rapidly widening
occurred, a significant part of the global economy current account deficit. There is fiscal consolidation
remains committed to fiscal stimulus, and global interest across all CEEMEA countries because revenue
rates are forecast to remain low. Yet for 2010 we foresee performance is set to improve and the size of fiscal
great differentiation across countries, with only Russia, stimulus packages is declining.
Qatar, and Nigeria predicted to grow faster than
potential. Our 2010 growth forecast for Russia (5%) is Table 13: CEEMEA GDP growth forecasts
well above consensus, and we see upside risks to that
Real GDP (%) 2009 2010 2011 Potential GDP Growth
forecast given buoyant oil prices, sound macro Czech Rep -4.0 2.5 4.0 4.0
management, declining interest rates, and an anticipated Egypt** 4.7 5.0 5.5 6.0
revival in consumption. For Turkey, our forecast of 5% Hungary -6.5 1.0 4.0 3.5
Israel 0.0 3.0 4.5 4.0
growth is based on our belief that an IMF agreement will
Kazakhstan 0.3 2.0 2.8 7.0
be reached by early 2010, allowing the authorities to Nigeria 2.8 9.6 8.0 8.0
avoid crowding out the private sector. Even though the Poland 1.7 3.2 4.0 4.5
South African consumer will remain under pressure until Qatar 10.0 22.0 14.6 4.6
Romania -6.0 2.0 5.0 5.0
well into 2010, better external conditions, an inventory Russia -8.5 5.0 5.0 4.0
rebound and the 2010 FIFA World Cup are likely to South Africa -2.0 3.0 3.5 3.2
produce 3% growth by our estimates. Turkey -5.3 5.0 5.5 5.5
UAE 0.3 2.9 4.2 3.5
Ukraine -15.2 3.0 5.0 4.5
Recent GDP data showed that countries with IMF- CEEMEA* -3.8 4.5 5.0 4.6
imposed fiscal restraints and a large share of fx Source: National statistics offices and J.P. Morgan estimates
borrowing - Hungary and Romania - remained in *Weighted average; **Fiscal year

recession in the past quarter, although the pace of their


output contraction eased. The magnitude of fiscal
tightening has been by far the greatest in Hungary - the Table 14: CEEMEA Macro 2010 Forecasts
main reason for its underperformance. The recovery in CA Balance Fiscal Balance Public debt CPI
the rest of Central Europe has been much more closely % of GDP % of GDP % of GDP %eop
Czech Rep -2.5 -4.0 37.8 3.2
aligned with the Euro area cycle as these countries have Egypt** -3.1 -8.5 78.0 15.3
been able to implement modest fiscal stimulus and were Hungary -2.0 -3.8 80.5 3.0
much less exposed to fx borrowing. Israel 2.0 -4.0 84.0 3.4
Kazakhstan 6.2 0.0 10.4 8.0
Nigeria -3.0 -0.3 12.0 8.1
We predict 2011 growth will be even stronger than in Poland -2.8 -5.5 53.5 2.5
2010 across most of the region, with even Hungary and Qatar*** 42.1 15.8 6.2 4.5
Romania -6.5 -7.0 24.5 6.0
Romania returning to an acceptable pace of expansion.
Russia 4.0 -5.6 7.4 7.5
Upside risks to our 2011 forecasts are related to interest South Africa -4.8 -6.2 37.9 4.9
rates remaining low for even longer than we forecast and Turkey -2.6 0.9 51.4 5.1
to potentially higher commodity prices than we are UAE 10.6 8.6 16.4 4.2
Ukraine -0.9 -6.2 43.0 15.8
incorporating (for example, we assume oil prices will be CEEMEA* 1.3 -3.1 33.7 6.2
11% higher than the 2009 average in 2010 and 21% Source: National statistics offices and J.P. Morgan estimates
higher in 2011). Downside risks include increasing *Weighted average; **Fiscal year; *** Inflation is average not eop
capital controls and protectionism.

Other 2010 CEEMEA indicators are mostly reassuring.


Inflation remains within acceptable limits in most

34
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Brazil: Monetary policy normalization in sight Fabio Akira HashizumeAC


(55-11) 3048-3634
Fabio.Akira@jpmorgan.com
Banco J.P. Morgan S.A.

• Reduced economic slack and expansionary fiscal tightening cycle of 200bp in 2010, with most of the hikes
policies to trigger early normalization in rates implemented in the first half of next year.
• New measures to lean against BRL strength are
The unbalanced policy mix is conducive to further
likely
appreciation—and further FX intervention. The likely
• Hold positive carry DVO1 neutral exposure combination of an expansionary fiscal policy, higher
interest rates, and global USD weakness supports a
Fundamentals and politics in 2010 stronger BRL. In turn, this is likely to trigger a new
Brazil enjoyed a non-inflationary economic recovery round of ad hoc measures to curb currency appreciation.
in 2009. After facing the sharpest recession of its recent Much like the 2% IOF tax on foreign capital inflows of
history, Brazil’s economy printed an impressive 7.8%q/q last month, we believe new measures will produce noise,
(saar) growth rate in 2Q09. Encouragingly, the economic but will not be able to contain BRL strength driven by a
data flow thereafter is indicating that the slowdown, if global trend of USD weakness. Thus, we could see the
any, in the second half of this year will be just marginal. USD/BRL as low as 1.60 during the first half of 2010.
Thus, Brazil stands out as one of the few countries However, in the second half, when our global FX
registering positive growth rates already this year (0.3%), strategists anticipate a reversion in the weak USD trend,
and the risk to our 5.0% forecast for 2010 is becoming and Brazil’s current account deficit will be heading to a
biased to the upside. The pillar of this year’s recovery level above 3.0% of GDP, we believe BRL could start to
has been household consumption—supported by a strong depreciate, ending the year at 1.75 against USD.
labor market, fiscal and quasi-fiscal stimuli, and an early
revival in credit markets. Although consumption will Presidential elections are important to clarify fiscal
remain upbeat next year, we think the main driver of next policy beyond 2010. In October, Brazilians will go to the
year’s GDP will be a rebound in capital formation. So polls to elect a new president, after eight years of the
far, huge economic slack at the beginning of the year Lula administration. We think a large shift in economic
along with the exchange rate appreciation has supported policy is unlikely, but the leading contenders have not yet
strong activity indicators without stoking inflation. IPCA unveiled their ideas on this front. What is becoming
inflation should end 2009 at 4.3%, down from 5.9% in increasingly necessary, is a fiscal adjustment at the
2008, but we see increasing inflation risks for 2010. beginning of the next administration, given the pace of
deterioration of fiscal accounts in recent months, and the
Emerging inflation risks will require early policy prospects for next year.
normalization in 2010. The side effect of a faster-than
anticipated recovery has been a tightening of all Market strategy
measures of economic slack: among others, the
In FX, buy (1x2) 2-month 1.734 USD put/BRL call
unemployment rate is close to historical lows, and the
spread (1.734;1.662): Entered October 23 at 190bp cost.
manufacturing utilization rate is already above its long-
term average. This suggests that some degree of
In rates, receive Jan’13 versus pay Jan’15 (DV01
normalization in the current stimulative stance of fiscal
neutral steepener): Entered November 20 at 43bp.
and monetary policies is necessary to reduce prospective
inflationary risks. However, 2010 is an election year and
Favor NTNF ’17 over BRL Global ’16: Entered June
thus fiscal policy is unlikely to adjust in the near term. In
26 at 207bp.
fact, fiscal authorities are signaling that next year’s 3.3%
of GDP target for the primary surplus will be
Receive Jan’13 versus pay Jan’12 and Jan’14 (1x2x1
downgraded to accommodate the generous expenditure
fly): Entered October 23 at 40bp. Target: 15bp; stop:
side of the 2010 budget in the face of underperforming
55bp.
tax revenues. This places the burden of anti-inflation
policy on monetary authorities, and we forecast a

35
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Russia: Recovering from deep recession Anatoliy ShalAC


7(495) 937-7321
anatoliy.a.shal@jpmorgan.com
J.P. Morgan Bank International LLC

• Russia’s GDP expected to grow 5% in 2010 capital inflows may well bring net flows closer to
breakeven.
• BoP to be supportive for ruble strengthening
Gradual fiscal consolidation and higher oil prices are
• Despite gradual fiscal consolidation, Russia is
unlikely to prevent Russia from issuing US$9 billion
likely to issue US$9 billion of Eurobonds next year
of Eurobonds in 2010 and a similar amount in 2011.
Fundamentals and politics in 2010 With Urals at US$68/bbl, we see Russia’s federal budget
deficit at 5.6% of GDP next year, a small improvement
We expect Russia’s economy to expand annually 5% from just above 6% expected in 2009. This reduction is
in 2010 and 2011, recovering from the deep recession likely to come from measures to contain spending and
of 2008-2009, when the peak to trough GDP decline higher tax collection from the non-oil sector. That said,
exceeded 12%. With the initial impulse received from despite higher oil prices, the budget’s oil revenues are
net exports and higher commodity prices, the economy likely to shrink as a percentage of GDP due to a stronger
will, however, need to find a stronger 2010 underpinning ruble. As a result, the non-oil fiscal gap, which better
for domestic demand (which in 2009 has been weak). describes the fiscal position of an oil economy, may
Both consumption and investment are likely to be shrink more than the headline deficit from -14.1% in
supported by spillover effects from higher oil revenues, 2009 to -12.8% in 2010 and -10.2% in 2011. Despite
improving confidence, and easing financial conditions. these improvements, we expect that Russia’s financing
The corporate sector is expected to enjoy better access to needs will remain high and will be only partially covered
external financing, while domestic banks, after a sharp by use of oil savings. In 2010, Russia may need to
phase of deleveraging (the loan to deposit ratio dropped borrow up to US$20 billion on domestic and US$9
from 1.13 to 1.00 during January – September 09), are billion on Eurobond markets, we estimate.
expected to restart lending from early 2010. The renewed
buildup of reserves by the CBR and external financing of Market strategy
fiscal deficits by MinFin are expected to keep domestic
Stay overweight in EMBIG: We expect Russia’s new
liquidity abundant.
Eurobonds to be SEC-registered, which may be followed
Disinflation is expected to continue through 1H10, by SEC registration of existing ’18s, ’28s, and ’30s notes.
despite increasing money supply and lower policy This should trigger inclusion of those bonds in the
rates. As the amount of slack in the economy remains Barclays Capital US Aggregate Index, and attract a new
high—the negative output gap of around 5% of potential client pool to purchase Russian SEC-registered issues.
GDP is expected to close slowly in coming years—while
We recommend short USD/RUB for 2010: The
the ruble is strengthening, core inflation will keep
prospect of further dollar weakness and higher
slowing.
commodity prices bodes well for RUB in 2010. Further,
Supported by higher commodity prices, the balance as growth recovers and reserves return to a more
of payments is expected to exhibit a large surplus next comfortable level, the CBR is expected to scale back its
year. The current account is projected to be 4% of GDP intervention and allow faster appreciation. We target
in 2010, down from an estimated 4.8% in 2009. Although USD/RUB 26.5 and 33 versus the basket by end-2010.
export revenues will rise on higher oil prices (Urals up
We recommend long 4-year OFZs: While supply is
from US$59 to US$68/bbl in 2010), this will be offset by
increasing, the CBR continues to provide liquidity to the
growing imports, which are expected to recover on the
banking system to support issuance, while encouraging
back of a strengthening ruble and domestic demand. We
banks to increase the quality of balance sheet assets,
also conservatively assume that net private capital
indicating a bias to support government debt supply.
outflows could moderate from around US$40 billion in
2009 to US$20 billion in 2010. However, should oil
prices surprise on the upside or the CBR be too rigid in
exchange rate and interest rate policies, speculative

36
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

India: RBI to focus on financial stability Jahangir AzizAC


(9122) 6157-3385
jahangir.x.aziz@jpmorgan.com
J.P. Morgan India Private Limited

• Industry derives strength from increased festive February this year. A muted pace of core inflation
demand; capital goods expansion is welcome (0.0%m/m, sa) suggests that demand-side pressures
remain weak. The upward pressure on food prices is
• Mixed external trade signals suggest the recovery
likely to ease as the heightened festive demand declines.
is still not secure
Expectations of an improved winter crop will also help
• RBI to be on guard against shift in inflation alleviate the pressure. However, a rise in global
expectations; tightening likely in 1Q10 commodity prices will be critical in determining the
impact on overall prices. On headline inflation, with the
Fundamentals and politics in 2010 high base effect expected to fade, the year-ago prints will
Industrial activity strengthened in September likely increase. We expect the year-ago print to be
supported by festive demand. But October Markit around 7.5% by end-March 2010.
manufacturing PMI declined to 55 due to destocking On policy, increased focus on financial stability would
after the festivals. In details, IP strengthened as total keep the RBI on guard against material shifts in
production grew a healthy 1.1%m/m (sa), to be up a inflation expectations. Even if core inflation remains
robust 9.1%oya. With this, the average for the first half benign, we expect that fears of easy liquidity spawning
of FY10 improved to 6.5%oya from 5.0% in the first half potential asset price bubbles could prompt the central
of FY09. September production derived support from bank to tighten. In October, RBI withdrew
capital goods (7.5%m/m, sa) and consumer durables unconventional measures that were deemed no longer
(4.3%). Continued strength in motor vehicle sales and necessary with improving domestic and financial
increased production of white goods to meet festival markets. We expect that the tightening will likely be
demand also likely boosted total output. On a year-ago initiated by a 50bp hike in the cash reserve ratio followed
basis, IP growth is expected to print relatively strong by 25bp hikes in the policy rates in 1Q10 and 2Q10.
numbers in the second half of FY10, largely supported by
a very low base from the abysmally weak growth last Market strategy
year.
In FX, we recommended holding on to USD/INR
Merchandise trade data continue to show mixed signs shorts, entered at 46.95, and target 45 by December:
of revival. The trade deficit narrowed to US$7.8 billion The push toward a stronger INR continues as risk
in September from US$8.3 billion in August. A modest sentiment improves and capital flows continue to be
gain in exports (1.6%m/m, sa) together with a contraction strong. Offshore parties have driven the INR rally so far.
in imports (-5.6%) helped narrow the trade gap. With Onshore exporters have yet to position and retain the key
this, the trade deficit for the first half of FY10 stood at to the next down move, which will depend on the timing
US$46.7 billion versus US$76.0 billion in first half of of the introduction of economic reform bills in
FY09. Sequentially, exports expanded for the sixth Parliament.
consecutive month. However, the year-ago comparison
In rates, we are bullish on 5-year bonds, but neutral
continued to contract (-13.8%oya), weighed down by last
on OIS swaps: Yields are at one-year highs, as the G-sec
year’s high base. Imports contracted for the ninth
calendar is coming to an end in January, and as loan
consecutive month (-31.3%oya). Still-weak exports
growth remains anemic. However, the 1-year swap has
together with sluggish nonoil imports suggest that the
dropped into the LAF corridor, so further downside is
pace of economic revival is not yet secure.
limited. Meanwhile, we are not keen to pay as negative
Upside pressure from food prices is likely to ease, but carry is extremely steep.
year-ago prints to rise on a fading favorable base
effect. October inflation declined 0.2%m/m (sa) to be up
1.34% on a year-ago basis. The fall in overall inflation
was largely driven by the dip in prices of primary
articles. Importantly, the food index, as well as the
overall index sequentially declined for the first time since

37
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

China: Recovery despite policy fine-tuning Grace NgAC


(852) 2800-7002
grace.h.ng@jpmorgan.com
JPMorgan Chase Bank, N.A., Hong Kong

• Exports, consumption, and housing should be key the PPI front picked up strongly during 3Q, it has eased
growth drivers in 2H09 and 2010 going into 4Q. If this trend continues, it should further
calm inflation concerns going into next year.
• CPI and PPI on recovering trend, but sequential
trend rose at a slower pace in October It will be important to monitor the authorities’ macro
policy tone, especially in the run-up to the annual
• Major near-term monetary policy shift unlikely;
central economic work summit to be held early next
central bank focus is on managing excess liquidity
month. On monetary policy, we expect the PBoC to
Fundamentals and politics in 2010 normalize overall monetary conditions in stages, relying
on open market operations to withdraw excess liquidity
China’s economy continued to record a solid pace of in the near term, combined with sector-specific actions
recovery in 3Q09, rising at 8.9%oya. In seasonally like a partial withdrawal of the stimulus provided to real
adjusted terms, we calculate that real GDP rose 10.0%q/q estate to contain the risk of an asset bubble and inflation.
(saar) in 3Q, easing modestly from the 14.8% spike in We expect the benchmark policy rates to start rising by
2Q. October data confirmed that the Chinese economy’s mid-2010, with a total of two 27bp hikes over the rest of
upbeat momentum continued into 4Q, adding to the next year. On the currency front, the PBoC’s latest tone
strong gain in activity seen in September. The latest data hints at greater flexibility in the exchange rate, which
also support our view that the major sources of growth in would likely begin sometime in 2Q10 in our view, when
the Chinese economy have been broadening from public over-year-ago export growth resumes and when officials
investment to include consumption, private investment, are convinced the global recovery is on a sure footing.
and the steady recovery in exports. Our forecast is for CNY/USD to reach 6.5 by end-2010.
We expect the economy to continue to grow solidly in
Market strategy
the coming quarters. On the back of the 3Q GDP report,
we have fine-tuned the 2009 full-year GDP growth In FX, we remain short USD/CNY via the longer-
forecast to 8.6% (previous forecast: 8.4%), while keeping dated 12-month NDFs: Policymakers should tighten
the 2010 GDP growth forecast at 9.5%. Continuing with into 2010 as growth and exports settle into a more
the theme of broadening sources of growth, we expect sustainable pattern. The NDF dollar discount and
the key growth drivers to include a solid recovery in negative carry to short USD/CNY widened during
exports. Our global team is looking for a sustained, President Obama’s recent official visit to China, but we
synchronized expansion of the global economy through view this pre-positioning as overdone, and would look to
2010. As such, net external trade, which had been a build short USD/CNY positions should the NDFs pull
significant drag on China’s overall growth since late last back.
year, would likely come back to contribute positively to
In interest rate markets, we stay with our
GDP growth again. On the domestic front, we look for a
recommendation of a 1s/5s steepening trade on the
broad-based pickup in private consumption, along with
ND-OIS swap curve: Liquidity will remain flush until
improving labor markets and hence household income,
the RRR is hiked (likely in 2Q) as ongoing open market
on top of further fiscal stimulus, and marked expansion
operation withdrawals are not strong enough to fully
in private housing investment as well as other private
sterilize FX inflows. Meanwhile, the long end of the
sector investment.
curve will suffer as upbeat growth is priced into the 5-
Encouragingly, the growth-inflation balance year sector.
improved somewhat in October, with notable easing
in the pace of the sequential gain in food prices and
PPI. October headline CPI fell 0.5%oya, translating into
a slower pace of monthly gain of 0.2%m/m, compared to
0.3%m/m and 0.4% in September and August,
respectively, which in turn reflects the slower pace of the
rise in food prices. While pipeline inflation pressure from

38
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

South Africa: A slow recovery is in store Graham StockAC


(44-20) 7777-3430
graham.stock@jpmorgan.com
JPMorgan Chase Bank N.A, London Branch

• The consumer will remain under pressure until The current account adjustment should fade steadily
well into 2010 as domestic demand recovers. The slowdown in
domestic activity and lower dividend outflows should
• Inflation pressures will continue to ease and the
bring the current account deficit down to 4.7% of GDP
output gap will allow rates to stay low
this year. We expect a similar level in 2010 as household
• The political outlook is settled, but pressures for consumption expenditure lags the recovery. Financing
higher spending will persist for the deficit remains comfortable, thanks to buoyant
portfolio, FDI, and public sector borrowing inflows.
Fundamentals and politics in 2010
President Zuma assumed office in April 2009 and the
The South African economy has suffered given the ANC’s dominance remains intact. Nevertheless, slow
global contraction. We estimate that domestic economic growth and heavy job losses are likely to fuel social
activity only just turned positive last quarter. Monthly pressures and criticism of the government from within
economic activity reports have revealed fewer signs of a the ANC and its alliance partners. The government has
recovery in consumer spending than in other countries. not engaged in active fiscal stimulus beyond allowing the
While the drags from sticky inflation and labor market deficit to widen due to the weak revenue performance
uncertainty should fade as 2010 progresses, the drop in and pushing ahead with existing infrastructure
household wealth and restricted access to credit will investment plans. The consolidated 2009/10 fiscal year
likely dampen expenditure growth relative to growth in budget deficit is expected to widen to around 7.5% of
disposable income until late in the year. GDP, taking the public sector borrowing requirement to
A bounce is on the way. Despite lackluster consumer 12% of GDP as the parastatals maintain their investment
spending, we think the improvement in external demand programs. We are encouraged by the expenditure
and easing in inventory reduction is set to boost GDP, discipline shown in the Medium-Term Budget Policy
helping to lift the economy out of recession. We believe Statement, and expect the government to be market-
that the inventory drawdown in the first half of 2009 has friendly.
created the scope for a bounce when the cycle finally
Market strategy
turns, and we expect economic growth of 3% in 2010.
The banking sector has weathered the crisis in better Marketweight external debt: Net 2010 issuance of
shape than its counterparts elsewhere, which will help to US$2 billion will be absorbed easily, but we think South
underpin the recovery. We estimate the 2010 FIFA Africa will remain vulnerable to any global downturn.
World Cup will add around 0.4%-pts to GDP next year.
In local rates, we recommend overweight positions for
The downward trend in inflation will likely be 2010. International and local investors are closing out
interrupted by base effects at the start of 2010. The their underweight positions. Bonds should benefit from
significant output gap, fading supply shocks in food lower inflation expectations and high local yields should
inflation, and pass-through from rand strength since be attractive for carry-focused investors. Supply from
March should all sustain the ongoing moderation in national government and parastatal issuers is a concern,
headline inflation, which fell to 6.1%oya in September. but the high yields compensate adequately for this factor.
Base effects from sharp declines in food and fuel prices
We are neutral USD/ZAR for 2010: The early
at end-2008 will delay re-entry into the 3-6% target band
resumption of equity portfolio flows and a narrowing of
until the first quarter of 2010, but headline inflation will
the current account deficit resulted in a strong ZAR
hold close to the midpoint through much of the year.
performance in 2009. At a grassroots level, opposition to
Although electricity tariff hikes of up to 45% pose the
ZAR appreciation has increased and, in our view, there is
main threat to the inflation outlook, we think the large
a risk that some controls are imposed on inflows.
output gap and moderate pace of recovery will encourage
Therefore, with the SARB once again accumulating
the SARB to keep rates on hold at 7% until late in 2010.
reserves, we project 7.40 in USD/ZAR at end-2010,
broadly unchanged.

39
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Emerging Markets Corporate Outlook - 2010 Warren MarAC


(1-212) 834-4274
warren.j.mar@jpmorgan.com
J.P. Morgan Securities Inc.

The resilience shown by EM corporates throughout Our strategy for 2010 recognizes that yields have
the credit crisis has improved their profile among retraced to historical lows and spreads to levels closer
investors, with the asset class likely to garner a to long-run averages, and that tighter valuations will
greater following as valuations in developed credit need to be driven much more by relative value
markets look increasingly expensive. Although there considerations. At the aggregate level, we move EM
were notable casualties in 2009, with combined defaults corporates as an asset class (CEMBI Broad) to
and debt exchanges rising to 12.3% of the EM corporate Overweight relative to EM sovereigns (EMBIG) and US
high yield bond stock (compared with a par-weighted credit (JULI). At the regional level, we expect credits
default rate of 16.24% including distressed exchanges in from Asia and Europe to contribute the lion’s share of the
the US high yield market), many of the concerns that spread tightening, followed by Latin America, while at
shaped expectations for a more serious collapse and the country level we still expect some of the more
prolonged period of market weakness at the end of significant spread opportunities to be in the higher-beta
2008—such as rising capital flight and mounting external countries such as Indonesia, India, Kazakhstan, and
refinancing risks in Russia, unhedged corporate Argentina, although note that these account for less than
derivative exposures in Brazil and Mexico, the downturn 6% of the corporate index. We believe that Russian
in China’s real estate market, and short-term FX funding corporate performance will be more muted in 2010
needs in Korea—have come to pass without prompting despite the improved macro backdrop as commodity
broader systemic failures. Of particular note was the prices recover.
generally proactive and targeted response of governments Looking into the first quarter of 2010, we are likely to
in respective markets to provide financial support continue to favor new issues for adding risk, with
packages to ease financial stress in the corporate sector. supply expected to reach around US$128bn. New
The one exception was of course Dubai, which decided issues in our view are most likely to offer investors the
recently to call a standstill on the debt of its largest state- best avenue for adding meaningful positions with
owned entity, Dubai World and its property subsidiary secondary market liquidity expected to remain
Nakheel. constrained. Looking out over the first half of 2010, we
Looking to 2010, we remain constructive on EM favor a more active approach to rotating out of lower-
corporates as an asset class despite this year’s stellar beta credits and into higher-beta opportunities in order to
performance. Although the pace of the market’s enhance overall returns (premised on credit fundamentals
recovery has brought us back to pre-crisis levels, we continuing to show sequential improvements) and
believe that there is still room for spreads to tighten selectively taking profits in names that were the first to
toward our 2010 year-end target of 325bp for the CEMBI benefit from the market’s recovery, and where technicals
Broad versus 403bp as of November 30, 2009. We do not have clearly contributed to pushing prices beyond fair
expect the recent Dubai event to have a long-lasting value.
impact on EM corporate valuations outside of the Middle Table 15: Key forecasts
East region and see this spread compression next year Current/year-to- 2010 Direction/mar
driven by stable yields and rising interest rates, based on date (as of targets ket impact
November 30, and
the core assumption that the shape of the global recovery 2009 forecasts)
will remain robust and technicals generally supportive. CEMBI Broad (SOT) 403 325 ↓; positive
We also note that the EM corporate indices have EM corporate supply (US$ 118,166 127,500 ↑; neutral
millions)
rebalanced toward higher-quality assets over the course Asia 41,693 45,000
of 2009, given the bias of new issuance this year. With Emerging Europe 20,283 30,000
over 80% of new issuance coming from investment grade Latin America 38,313 42,500
credits (versus an overall debt stock that is 69% Middle East and Africa 17,877 10,000
EM corporate defaults (%)1 12.3 2.2 ↓; positive
investment grade), there has been an associated Asia 11.0 2.4
tightening in index spreads. We caution that our year-end Emerging Europe 18.4 2.1
point target is unlikely to be reached in a straight line as Latin America 5.9 2.0
Middle East and Africa 4.4 2.9
market volatility returns in an intensifying debate over Source: J.P. Morgan 1. Current year-to-date and 2010 default rates calculated as a
the pace at which monetary policies are normalized percentage of Total Bond Stock as of December 31, 2008, and October 30, 2009,
globally. respectively and assumes that Nakheel defaults in 2009.

40
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

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

Table 16: High-Conviction Buy Recommendations


Issue Ticker, rating Region Z-spread/ price Rationale
Chinatrust UT2 5.625% call CHIFIN, Asia 600bp After raising US$1 billion of equity, concerns over asset quality drag should be
2015 Baa1/BBB/A- eased.
DBS FRN call 2016 DBSSP, Asia DM+261bp FRNs remain chronically cheap, but we like the prospects for longer-duration
Aa2/A+/A+ FRNs to trade up as and when US rates shift higher. High-quality bank is
defensive in downturns.
ICICI 6.375% call 2017 ICICI Baa3/BB/BB Asia 535bp One of the highest-yielding bonds in Asia, with reassurance from dated
structure. September earnings demonstrate bank is shifting to more defensive
franchise, which we believe spreads do not yet reflect.
Henderson Land 5.5% 2019 HENLND, Asia 260bp Offers best value in the HK property space, in our view. Currently trades 60-
NR/NR/NR 65bp wider than Swire, but we believe the fair value is just 20bp wider. Lack of
ratings has been a key overhang on performance.
Korea Hydro 6.25% 2014 KOHNPW, Asia 199bp Our top pick in the Korean quasi-sovereign corporate land. Though supply in
A2/A/A+ the space could continue to be an overhang in the near term, taking a medium-
term view, we see value in these bonds.
BUMA 11.75% 2014 PTBMMU, Asia 942bp We like this as a short- to medium-term play. BUMA is Indonesia’s second-
Ba3/NR/BB- largest coal mining contractor, with almost all the major miners as its
customers. In our view, one of the few better-quality HY corporates yielding in
double digits.
Ciliandra 10.75% 2011 CLPKIJ, Asia 736bp Short-dated bond with decent carry. Expect company to successfully
B2/NR/BB- refinance/ exchange with the capital markets now open. Also sitting on high
cash balance. Self-sustaining operations even at CPO prices of US$450/ton
(versus ytd average of around US$600/ton).
Lippo Karawaci 8.875% 2011 LIPPO, B1/B/B+ Asia 893bp Stable recurrent income from hotels and hospitals portfolio provides a cushion
in the current downturn. Has lower structural subordination risks compared to
China property counterparts.
Lai Fung 9.125% 2014 LAIFNG, Asia 857bp Benefits from a portfolio of investment properties that provides stable rental
B1/B+/NR income that helps to fund working capital needs.
Paiton 9.34% 2014 PAITON, B1/B/NR Asia 647bp Indonesian IPP with PLN as sole off-taker. Bonds have sinking fund provision,
which reduces average life to around 2.3 years. We believe there are sufficient
protective mechanisms in place for the existing lenders before the company
starts raising debt for the new plant.
Gazprom 10.5% 2014 GAZPRU, CEEMEA 436bp Among the cheapest Gazprom bonds on the curve, like 52bp pickup to 8.125%
Baa1/NR/NR ’14s. The negative basis of -195bp to 5-year GAZPRU CDS also looks
attractive.
Alrosa 8.875% 2014 ALROSA, CEEMEA 602bp The cheapest of Russian quasi-sovereigns; expect the company’s credit profile
Ba3/NR/B to improve further in 2010.
Alliance Bank 9.25% 2013 ALLIBK, C/SDRD CEEMEA US$29.5 We believe that Alliance offers the best upside potential amongst the
distressed Kazakh names. We see restructuring well advanced and deal risk
low.
ATF 9.25% 2012 ATFBP, Ba3/B/B- CEEMEA 731bp A full subsidiary of Italy’s Unicredito, ATF is well provisioned and well
capitalized and likely to further gain market share in 2010. Good outright value
and cheap to ’16s.
Pricing as of November 12, 2009.
Source: J.P. Morgan.

41
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

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

42
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Sources of GDP Growth


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

43
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Sources of GDP Growth (cont'd)


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

44
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Interest Rate Forecasts


Change from Forecast next
Official interest rate Current Aug '07 (bp) Last change Next meeting change Dec 09E Mar 10E Jun 10E Sep 10E Dec 10E
Global GDP-weighted average 1.31 -341 1.30 1.32 1.36 1.43 1.48
excluding US GDP-weighted average 1.86 -257 1.85 1.88 1.94 2.04 2.12
Developed GDP-weighted average 0.49 -365 0.50 0.51 0.52 0.54 0.57
Emerging GDP-weighted average 4.54 -246 4.47 4.56 4.71 4.94 5.13
Latin America GDP-weighted average 5.75 -306 5.75 6.13 6.66 6.94 7.03
CEEMEA GDP-weighted average 4.78 -222 4.44 4.29 4.23 4.58 4.87
EM Asia GDP-weighted average 4.00 -232 4.00 4.07 4.17 4.34 4.53

The Americas GDP-weighted average 0.75 -484 0.75 0.79 0.85 0.88 0.89
United States Federal funds rate 0.125 -512.5 16 Dec 08 (-87.5bp) 16 Dec 09 on hold 0.125 0.125 0.125 0.125 0.125
Canada Overnight funding rate 0.25 -425 21 Apr 09 (-25bp) 08 Dec 09 on hold 0.25 0.25 0.25 0.25 0.25
Brazil SELIC overnight rate 8.75 -275 22 Jul 09 (-50bp) 09 Dec 09 Jan 10 (+50bp) 8.75 9.75 10.75 10.75 10.75
Mexico Repo rate 4.50 -275 17 Jul 09 (-25bp) 27 Nov 09 Jun 10 (+25bp) 4.50 4.50 4.75 5.25 5.25
Chile Discount rate 0.50 -500 9 Jul 09 (-25bp) 10 Dec 09 2Q 10 (+50bp) 0.50 0.50 1.00 2.00 3.50
Colombia Repo rate 4.00 -525 25 Sep 09 (-50bp) 23 Nov 09 on hold 4.00 4.00 4.00 4.00 4.00
Peru Reference rate 1.25 -350 6 Aug 09 (-75bp) 10 Dec 09 on hold 1.25 1.25 1.25 1.25 1.25

Europe/Africa GDP-weighted average 1.36 -323 1.32 1.31 1.30 1.39 1.46
Euro area Refi rate 1.00 -300 7 May 09 (-25bp) 03 Dec 09 on hold 1.00 1.00 1.00 1.00 1.00
United Kingdom Repo rate 0.50 -525 5 Mar 09 (-50bp) 10 Dec 09 3Q 10 (+25bp) 0.50 0.50 0.50 0.75 1.00
Sweden Repo rate 0.25 -325 2 Jul 09 (-25bp) 16 Dec 09 on hold 0.25 0.25 0.25 0.25 0.25
Norway Deposit rate 1.50 -325 28 Oct 09 (+25bp) 16 Dec 09 3 Feb 10 (+25bp) 1.50 1.75 2.00 2.25 2.25
Czech Republic 2-week repo rate 1.25 -200 6 Aug 09 (-25bp) 16 Dec 09 2Q 10 (+25bp) 1.25 1.25 1.75 2.50 3.00
Hungary 2-week deposit rate 7.00 -75 19 Oct 09 (-50bp) 23 Nov 09 24 Nov 09 (-50bp) 6.00 5.50 5.50 5.50 5.50
Israel Base rate 0.75 -325 23 Aug 09 (+25bp) 23 Nov 09 1Q 10 (+25bp) 0.75 1.25 2.25 3.25 4.00
Poland 7-day intervention rate 3.50 -125 24 Jun 09 (-25bp) 25 Nov 09 3Q 10 (+25bp) 3.50 3.50 3.50 4.00 4.50
Romania Base rate 8.00 100 29 Sep 09 (-50bp) 05 Jan 09 1Q 10 (-25bp) 8.00 7.75 7.50 7.25 7.00
Russia 1-week deposit rate 4.75 150 29 Oct 09 (-50bp) 24 Nov 09 24 Nov 09 (-50bp) 4.00 3.50 3.00 3.00 3.00
South Africa Repo rate 7.00 -300 13 Aug 09 (-50bp) 17 Dec 09 4Q 10 (+50bp) 7.00 7.00 7.00 7.00 7.50
Switzerland 3-month Swiss Libor 0.25 -225 12 Mar 09 (-25bp) 10 Dec 09 on hold 0.25 0.25 0.25 0.25 0.25
Turkey Overnight borrowing rate 6.50 -1100 19 Nov 09 (-25bp) 17 Dec 09 3Q 10 (+50bp) 6.50 6.50 6.50 7.50 8.00

Asia/Pacific GDP-weighted average 2.08 -147 2.09 2.14 2.21 2.31 2.42
Australia Cash rate 3.50 -300 3 Nov 09 (+25bp) 01 Dec 09 1 Dec 09 (+25bp) 3.75 4.00 4.50 4.75 5.00
New Zealand Cash rate 2.50 -575 30 Apr 09 (-50bp) 09 Dec 09 8 Jul 10 (+50bp) 2.50 2.50 2.50 3.50 4.00
Japan Overnight call rate 0.10 -40 19 Dec 08 (-20bp) 18 Dec 09 on hold 0.10 0.10 0.10 0.10 0.10
Hong Kong Discount window base 0.50 -625 17 Dec 08 (-100bp) 17 Dec 09 on hold 0.50 0.50 0.50 0.50 0.50
China 1-year working capital 5.31 -171 22 Dec 08 (-27bp) 2Q 09 3Q 10 (+27bp) 5.31 5.31 5.31 5.58 5.85
Korea Base rate 2.00 -300 12 Feb 09 (-50bp) 09 Dec 09 1Q 10 (+25bp) 2.00 2.25 2.50 2.75 3.00
Indonesia BI rate 6.50 -175 5 Aug 09 (-25bp) 03 Dec 09 on hold 6.50 6.50 6.50 6.50 6.50
India Repo rate 4.75 -300 21 Apr 09 (-25bp) 1Q 10 1Q 10 (+25bp) 4.75 5.00 5.25 5.25 5.25
Malaysia Overnight policy rate 2.00 -150 24 Feb 09 (-50bp) 24 Nov 09 2Q 10 (+25bp) 2.00 2.00 2.25 2.50 3.00
Philippines Reverse repo rate 4.00 -200 9 Jul 09 (-25bp) 17 Dec 09 4Q 10 (+25bp) 4.00 4.00 4.00 4.00 4.25
Thailand 1-day repo rate 1.25 -200 8 Apr 09 (-25bp) 02 Dec 09 2Q 10 (+25bp) 1.25 1.25 1.50 1.75 2.00
Taiwan Official discount rate 1.25 -188 18 Feb 09 (-25bp) 4Q 09 4Q 10 (+12.5bp) 1.25 1.25 1.25 1.25 1.375
Source: J.P. Morgan economics, 20 November 2009.
Bold denotes move this week and forecast changes. Underline denotes policy meeting during upcoming week.

45
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Exchange rate Forecasts


FX rate vs US dollar annual average FX rate vs US dollar*** Quarter end forecasts
Country 2005 2006 2007 2008 2009E 2010E 1Q09 2Q09 3Q09 Current 1Q10E 2Q10E 3Q10E 4Q10E
Euro 1.22 1.27 1.39 1.48 1.42 1.56 1.32 1.40 1.46 1.49 1.55 1.62 1.55 1.50
Sterling 1.79 1.85 2.00 1.78 1.57 1.69 1.43 1.65 1.60 1.65 1.65 1.74 1.68 1.67
Yen 112 117 117 101 94 85 99 96 90 89 85 82 85 89

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

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

46
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

EM Markets’ Overviews

47
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Brazil
Stellar Growth amid Low Global Rates
Key country dynamics Emy Shayo ChermanAC
Brazilian growth at 5% (with upside potential) in 2010e is only behind China (55-11) 3048-6684
and India. A powerful infrastructure story related to the oil exploration in the emy.shayo@jpmorgan.com
presalt areas, the Soccer World Cup in 2014 and the Olympic Games in 2016 Banco J.P. Morgan S.A.
are key in attracting investment and enhancing the long-term growth
potential. On the downside, yet another hiking cycle is likely to start in 2009,
which could derail the attractive domestic demand story. Fiscal policy is lax,
leading to an increase in debt, and the reversal of this trend is unlikely in 2010 MSCI Brazil: Absolute and relative to MSCI
Asia Pacific ex-Japan
considering the general elections. The presidential race could be noise and
will determine policy direction as well as the continuation of enhanced role of 700
the public sector in key sectors (oil, mining, utilities, among others). 600
500
Implications of a global recovery 400
The global crisis presented Brazil with a stress test and it came through very
300
successfully. It is now that Brazil is really enjoying the status of an
200
investment grade country in terms of attracting global funds. Brazil remains
the gold medalist in terms of high interest rates and therefore, is also 100
attractive from the flow of funds point of view, leading the BRL to be the best 0
among the best-performing currencies in the world in 2009. Authorities 97 99 01 03 05 07 09
responded to that by imposing a 2% tax on foreign portfolio inflows, and Absolute Relativ e
exchange rate policy now remains an uncertainty. Source: MSCI, Datastream.

How much have valuations already discounted a recovery


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

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

Top picks and stocks to avoid


Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Petrobras 39.2 PETR4 OW 212,864 13.1 11.9 3.0 3.3 1.7 17.4
Santander Brazil 23.0 SANB11 OW 50,351 17.3 13.5 1.3 1.7 3.3 12.0

Stocks to avoid
Usiminas 50.3 USIM5 UW 14,452 37.8 14.6 1.3 3.5 2.1 10.9
CPFL Energia3 32.7 CPFE3 UW 9,040 13.0 11.2 2.5 2.9 8.5 27.2
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 25 November 2009.

48
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Brazil Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 19.5 13.4 22.6 2.3 3 Month 8.7 0.1 na
2008E -9.1 14.7 17.3 3.0 Long Bond 9.8 0.6 -1.0
2009E -11.4 16.6 14.5 2.7 Inflation 4.3 0.0 -0.1
2010E 24.9 13.3 17.4 2.9 Real 3 Month 4.3 0.1 na

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 5.1 -0.2 0.2 0.0 BAA 2.9 0.0 na
2009E 0.3 0.7 -0.3 0.7 EMBI 3.2 -0.7 0.8
2010E 5.0 0.5 -0.8 1.2 Country 2.2 -0.5 na
Country Relative -0.9 0.3 na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 6.7 4.3 5.0 4.0 EM Funds* 4,063 5,164 4,870
LatAm* 242 758 688
Brazil 651 895 754

MSCI Brazil Absolute and Relative to EMF Index MSCI Fair value Range
1200 Absolute Relative to MSCI EMF
FWD PER (96225) (172103)
1000
PER (104896) (241407)
800
PBR (66011) (212484)
600
DY (123402) (224148)
400
BY/EY (179326) (387224)
200
BY/DY (213292) (338028)
0
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 0 50000 100000 150000 200000 250000 300000 350000 400000

Currency Outlook (BRL/USD) EPS Integer over Time


2.8 Spot Forecast Consensus 130 2009 2010

2.6 J.P. Morgan forecast: 120


end Dec 09: 1.80
2.4 end Mar 10: 1.80 110
end Jun 10: 1.80
100
2.2
90
2.0 Consensus
80
1.8
70
1.6 J.P. Morgan 60

1.4 50
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

49
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

China
Focus on defensive growth in 2010
Key country dynamics Frank LiAC
We expect MSCI China to resume its rally from now to 1Q10, in light of (852) 2800-8511
positive fundamentals including: (1) the expected material improvements in frank.m.li@jpmorgan.com
the liquidity situation in early 2010 as banks tend to front-load their lending ; J.P. Morgan Securities (Asia Pacific) Limited
(2) our view that the government will not start serious tightening until at least
2QFY10; (3) China’s strong economic growth momentum; (4) the strong Flagship reports
4Q09 earnings results, to be released in 1QFY10; and (5) faster Rmb • Views from the Bund
appreciation expected in 2010. The key investment strategy for 2010 should • Where to find the next ten-baggers (September
be to focus on stocks as characterized by defensive growth, given: (1) the 07, 2009)
expected broad-based tightening to kick in as of 2Q10; and (2) a potential • Focus on defensive growth (October 21, 2009)
sharp slowdown in fixed asset investment growth in 2011 as the two-year • China Strategy Dashboards
(FY09/10) economic stimulus policies fade away.
Implications of a global recovery
We expect China’s economy to continue to grow solidly in 2010 (real FY10 MSCI China: Absolute and relative to MSCI Asia
GDP growth forecast at 9.5%). Continuing with the theme of a sustained and Pacific ex-Japan
synchronized expansion of the global economy through 2010, we expect net 150
external trade would likely come back to contribute positively to GDP growth
130
again. On the domestic front, we look for a broad-based pickup in private
consumption, along with improving labor markets and hence household 110
income, and marked expansion in private housing investment as well as other 90
private sector investment. Meanwhile, we believe the central government has 70
enough leeway to smooth growth should external demand or private activities 50
disappoint again. 30
How much have valuations already discounted a recovery 10
We believe there is still a decent upside for MSCI China, as the expected
solid earnings growth for corporate China should at least underpin its 97 99 01 03 05 07 09
valuations at above historical mean levels. Based on our EPS growth forecast Absolute Relativ e
of 20.1% for MSCI China for FY10, we have our end-FY10 MSCI China Source: MSCI, Datastream.
index target of 78, based on 17.2x FY10E P/E, or a 10% premium above the
long-term average trailing P/E. MSCI performance table
Recommendations 2wk 3mth YTD
MSCI China 2.7 12.2 61.3
We recommend to Overweight banks with good earnings visibility and the Weightings in Region 18.4%
potential for NIM expansion, upstream energy (coal and oil) as an inflation MSCI Total Mkt Cap. (US$B) 572.3
hedge, and defensive growth stocks, which include internet, gas, tissue and 2009 P/E Ratio (x) 17.6
diapers, and consumer staples. We Underweight property, the most-likely 2010 P/E Ratio (x) 14.4
2011 P/E Ratio (x) 12.2
target for the potential tightening by the government, telecom, downstream 2010 Yield (%) 2.6
commodities, shipping, and construction names. We introduce two pair 2010 ROE (%) 16.2
trades: (1) Long Netease/Short China Unicom on lower penetration rate, thus Source: Datastream, IBES, MSCI, JPMorgan estimates.
greater growth potential for internet sector than telecom sector; and (2) Long Prices and valuations are as of November 20, 2009
Xinao Gas/Short Datang International on better growth prospects for gas
sector than IPPs.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Xinao Gas 17.28 2688.HK OW 2,341 21.2 18.5 0.8 0.9 1.4 12.6
Baidu.com 386.37 BIDU US OW 13,374 63.0 42.2 6.1 9.2 0.0 29.6
Bank of China – H 4.53 3988.HK OW 153,822 12.3 8.7 0.3 0.5 5.2 20.5
China Mengniu Dairy 23.7 2319.HK OW 5,309 25.6 22.4 0.8 0.9 0.0 16.3
China Yurun Food 17.76 1068.HK OW 3,833 14.7 11.2 1.2 1.6 2.3 25.6
Stocks to avoid
China Unicom 10.42 0728.HK UW 31,679 23.9 34.6 0.4 0.3 1.3 3.0
Datang Intl 3.72 0991.HK N 5,596 25.6 15.6 0.1 0.2 3.1 9.4
Source: Bloomberg, J.P. Morgan estimates. Share prices and valuations are as of 5 November 2009. Note: Price and valuation for the US-Listed Baidu are updated as of 4 November 2009.

50
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

China Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 31.2 16.8 19.4 2.2 3 Month 2.0 0.0 -1.2
2008E -12.7 19.2 15.0 2.1 Long Bond 3.7 0.2 -0.3
2009E 9.1 17.6 15.0 2.2 Inflation -0.8 0.4 1.7
2010E 22.0 14.4 16.2 2.6 Real 3 Month 2.8 -0.4 -2.9

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 9.0 0.1 4.1 0.0 BAA 2.9 0.0 na
2009E 8.6 0.2 8.0 0.3 EMBI 3.2 -0.7 0.8
2010E 9.5 0.5 3.7 0.0 Country 0.8 -0.4 na
Country Relative -2.3 0.4 na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 9.1 9.0 9.5 9.3 EM Funds* 4,063 5,164 4,870
Asia ex Japan* 1,245 1,566 1,452
China -50 499 611

MSCI China Absolute and Relative to EMF Index MSCI Fair value Range
800 Absolute Relative to MSCI EMF
FWD PER (30) (61)
700
PER (41) (72)
600
500 PBR (27) (67)

400
DY (43) (77)
300
BY/EY (47) (123)
200
100 BY/DY (47) (132)

0
10 30 50 70 90 110 130 150
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09

Currency Outlook (CNY/USD) EPS Integer over Time


8.5 Spot Forecast Consensus 120 2009 2010

8.0 110

100
7.5
J.P. Morgan forecast:
end Dec 09: 6.75 Consensus
90
7.0 end Mar 10: 6.70
end Jun 10: 6.65 80

6.5
J.P. Morgan 70

6.0 60
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

51
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

India
Recovery to broaden; challenging policy environment

Key country dynamics Bharat IyerAC


We are constructive on economic growth and corporate earnings over 2010. (91-22) 6157-3600
A low base effect should help too, particularly over 1H. Financial markets bharat.x.iyer@jpmorgan.com
appear to have stabilized. The decisive mandate in the national elections J.P. Morgan Securities Indta Pvt. Ltd.
gives the government considerable policy flexibility to pursue reforms and
growth. Corporate and consumer sentiment have improved considerably due Flagship reports
to these positives. • Stratoscope
• Color of Money
The government and regulators face challenges on the policy front though. • Q-View
Given rising inflation, we expect a tightening in monetary policy over 1H.
The fiscal deficit remains at elevated levels, raising the specter of a MSCI India: Absolute and relative to MSCI Asia
Pacific ex-Japan
withdrawal of fiscal stimuli at some point over CY10. Any delayed impact of
the deficient monsoon on consumption remains a near-term cyclical risk. 700
600
Implications of a global recovery 500
The Indian economy is relatively less dependent on exports (c15%). A global 400
recovery is likely to have a positive impact on IT services, metals and 300
energy. More significant is the dependence on foreign capital. A sustained 200
improvement herein is imperative to fund local growth.
100
0
How much have valuations already discounted a recovery?
Indian equities have re-rated sharply since March on the back of an 97 99 01 03 05 07 09
improvement in global risk appetite and the decisive mandate in the national Absolute Relativ e
elections. Current valuations at 15x FY11E are at a marginal discount to Source: MSCI, Datastream.
historic comparatives and factor in healthy growth expectations (estimated at
21% over FY11E). Rising inflation and potential tightening in monetary MSCI performance table
policy imply that market returns over CY10 could be led more by forecast 2wk 3mth YTD
MSCI India 6.0 15.8 86.1
earnings growth as compared to re-rating. Weightings in Region 7.5%
MSCI Total Mkt Cap. (US$B) 232.6
Recommendations 2009 P/E Ratio (x) 21.1
We expect the government policy to focus on reviving the investment cycle. 2010 P/E Ratio (x) 17.3
2011 P/E Ratio (x) 14.1
We overweight capital goods and infrastructure. A pick up in credit growth 2010 Yield (%) 1.1
coupled with bottoming out of asset quality issues augurs well for financials. 2010 ROE (%) 17.0
We are selective on global sectors given volatility in data flow and an Source: Datastream, IBES, MSCI, JPMorgan estimates.
appreciating rupee. The lagged impact of a deficient monsoon and a potential Prices and valuations are as of November 20, 2009
withdrawal of fiscal stimuli are key risk factors for the consumption cycle.
Telecom and cement sectors will remain adversely impacted due to
competitive pressures.

Top picks and stocks to avoid


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

52
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

India Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 18.6 21.5 20.1 1.3 3 Month 3.7 -0.1 -0.7
2008E -1.1 21.8 16.3 1.0 Long Bond 7.3 -0.2 0.2
2009E 3.3 21.1 15.9 1.0 Inflation 11.7 0.0 0.5
2010E 21.7 17.3 17.0 1.1 Real 3 Month -8.1 -0.1 -1.1

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 6.1 -0.1 1.2 0.0 BAA 2.9 0.0 na
2009E 6.0 -0.2 5.4 -1.2 EMBI 3.2 -0.7 0.8
2010E 7.5 0.3 1.7 na Country na na na
Country Relative na na na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR -1.0 10.0 7.0 9.6 EM Funds* 4,063 5,164 4,870
Asia ex Japan* 1,245 1,566 1,452
India 1,153 1,405 1,310

MSCI India Absolute and Relative to EMF Index MSCI Fair value Range
800 Absolute Relative to MSCI EMF
FWD PER (322) (538)
700
PER (389) (698)
600
500 PBR (466) (783)

400
DY (361) (553)
300
BY/EY (416) (1015)
200
100 BY/DY (378) (833)

0
150 300 450 600 750 900 1050
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09

Currency Outlook (INR/USD) EPS Integer over Time


54 Spot Forecast Consensus 130 2009 2010
52
120
J.P. Morgan forecast:
50 end Dec 09: 45.0
end Mar 10: 43.5
110
Consensus
48 end Jun 10: 42.8
100
46
90
44

J.P. Morgan 80
42

40 70

38 60
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

53
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Indonesia
Opportunity knocking

Key country dynamics Aditya SrinathAC


A resilient economy, benign inflation, easy liquidity and favorable politics (62-21) 5291-8573
have aligned to drive Indonesian equities significantly higher in 2009. We aditya.srinath@jpmorgan.com
believe that the country is on the cusp of a substantial opportunity to raise its PT J.P. Morgan Securities Indonesia
growth trajectory in coming years. The newly-formed presidential delivery
unit offers a structure to deliver on high current expectations about Flagship reports
infrastructure development and reform, evidence of its success could be a • Currency + Commodity (March 20, 2009)
source of further upside. We see domestic cyclical momentum driving • An Agenda for the Next 5 years (May-09)
earnings in FY10E, and the credit cycle is also showing signs of life. • Notes of Caution (Sept-09)
Inflation risks could drive rates mildly higher, but see a case for lower real
rates, supported sovereign credit rating upgrades. The major risk is weak MSCI Indonesia: Absolute and relative to MSCI
Asia Pacific ex-Japan
execution on growth and governance reforms.
400
Implications of a global recovery
The resilience of growth and the stability of the fiscal, and BoP positions 300
through the crisis have raised Indonesia’s economic and political credibility.
As growth returns elsewhere, Indonesia’s allure as a pocket of growth, which 200
brought it attention in 2009, may diminish next year.
100
How much have valuations already discounted a recovery
In 2010 the emphasis may shift from recovery to growth. Market valuations 0
are over 1sigma higher than long-term valuations, and to some extent, 97 99 01 03 05 07 09
therefore, probably discount future earnings revisions. However, FY10E EPS Absolute Relativ e
forecasts have risen 11% over the past six months, but remain 27% below Source: MSCI, Datastream.
where they were a year back.
MSCI performance table
Recommendations 2wk 3mth YTD
MSCI Indonesia 5.0 9.5 88.6
Our main thematics to play in Indonesia remain—interest rate-sensitive Weightings in Region 1.8%
sectors, power sector supply chain/feedstock, and domestic consumption MSCI Total Mkt Cap. (US$B) 56.3
plays. We have Overweight rating on Astra International—as a high-quality 2009 P/E Ratio (x) 21.1
rate sensitive and consumption exposure. We also are incrementally positive 2010 P/E Ratio (x) 15.0
2011 P/E Ratio (x) 12.6
on banks, with BCA as our main Overweight. We recommend PTBA among 2010 Yield (%) 3.1
coal stocks—a beneficiary from any improved thrust on infrastructure 2010 ROE (%) 24.3
development. Finally, we recommend ANTM, where we think that a strong Source: Datastream, IBES, MSCI, JPMorgan estimates.
volume growth profile could be boosted if the company grows from being a Prices and valuations are as of November 20, 2009
preferred partner for mining MNCs seeking avenues to invest in Indonesia.
Our main Underweight recommendations are Unilever and BRI.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Astra International 29,800 ASII IJ OW 12,759 14.2 11.7 2,096 2,540 2.8% 24.9%
BCA 4,600 BBCA IJ OW 11,995 17.4 12.9 265 356 3.0% 29.2%
PTBA 14,450 PTBA IJ OW 3,494 10.5 23.6 1,371 612 2.4% 22.6%
ANTM 2,300 ANTM IJ OW 2,302 49.1 18.8 46.9 122.3 1.0% 13.6%
Stocks to avoid
Unilever 10,200 UNVR IJ UW 8,166 29.4 24.0 347 425 350 89.8%
Bank Rakyat 7,200 BBRI IJ UW 9,392 12.5 10.5 577 684 3.2% 28.4%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.

54
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Indonesia Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 61.4 17.3 27.4 3.2 3 Month 6.6 0.0 0.2
2008E -1.4 17.5 27.0 2.6 Long Bond 10.3 -0.4 0.2
2009E 6.8 16.4 25.3 2.6 Inflation 2.7 0.0 0.1
2010E 9.6 15.0 24.3 3.1 Real 3 Month 3.9 -0.1 0.1

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 6.1 0.0 1.2 0.0 BAA 2.9 0.0 na
2009E 4.3 0.2 3.7 0.0 EMBI 3.2 -0.7 0.8
2010E 5.3 0.3 -0.5 -0.3 Country na na na
Country Relative na na na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 3.5 5.5 6.0 6.0 EM Funds* 4,063 5,164 4,870
Asia ex Japan* 1,245 1,566 1,452
Indonesia 113 82 81

MSCI Indonesia Absolute and Relative to EMF Index MSCI Fair value Range
800 Absolute Relative to MSCI EMF
FWD PER (1341) (3544)
700
PER (2160) (4961)
600
500 PBR (1431) (3015)
400
DY (2395) (5684)
300
200 BY/EY (2591) (6218)

100 BY/DY (952)


0
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 0 1000 2000 3000 4000 5000 6000 7000 8000

Currency Outlook (IDR/USD) EPS Integer over Time


14,000 Spot Forecast Consensus 130 2009 2010

13,000 J.P. Morgan forecast:


120
end Dec 09: 9000
end Mar 10: 9000
110
12,000
end Jun 10: 9200
100
11,000
Consensus 90
10,000
80
9,000 70
J.P. Morgan

8,000 60
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

55
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Malaysia
Looking for deliverance

Key country dynamics Chris Oh, CFAAC


We expect PM Najib Razak’s administration to pick up pace in awarding (60-3) 2770-4728
many of the much-anticipated large-scale infrastructure projects and focusing chris.ch.oh@jpmorgan.com
on the implementation of earlier-announced policy reform measures in 2010. JPMorgan Securities (Malaysia) Sdn. Bhd. (18146-
With global economies recovering, private sector confidence is likely to X)

return, enabling the new policy measures to gain traction. Also, domestic
Flagship reports
liquidity conditions remain relatively flush with interest rates at an all-time
• Looking for Deliverance (11/05/2009)
low of 2% for the Overnight Policy Rate and LD ratios still at 78%. Bank
• 2010 Budget (10/23/2009)
Negara continues to mop up M$200B of excess liquidity as at end-September
• Introducing June 2010 KLCI of 1350 (08/20/2009)
2009. We expect inflationary conditions to remain benign with our current
• 2H09 market outlook (06/10/2009)
forecast for 2010 at 0.8%, although we do expect Malaysia to raise interest
• 2nd Stimulus Package (03/10/2009)
rates for 2010 by 100bp to 3% beginning 2Q10, in line with the region as the
• Shifting Sands Series (02/04/2009, 03/27/2009,
economic momentum gains strength.
04/09/2009, 04/23/2009, 07/16/2009)
Implications of a global recovery MSCI Malaysia: Absolute and relative to MSCI
The improvement in the external sector due to the global recovery will boost Asia Pacific ex-Japan
near-term growth as the new administration looks to stimulate domestic 120
growth with new liberalization policies design to spur private investment.
Public expenditure will gradually be reduced from peak deficit levels of 100
7.4% in 2009 as the government looks towards the private sector to stimulate 80
economic growth. Confidence in PM Najib’s administration is key as the
government has been prone to policy flip flops in the past. 60
How much have valuations already discounted a recovery 40
Current forward P/Es of 16x are between +1std and +2std dev. levels.
However, with some scope for further earnings upgrades as the economic 20
recovery flows through, we believe there is still scope for further upside to 97 99 01 03 05 07 09
the market over the next 12 months. Also, foreign investors are underweight Absolute Relativ e
on the Malaysian market. In our view, should the government execute on its Source: MSCI, Datastream.
reform measures, we expect to see foreign investors return, driving P/E MSCI performance table
multiples to 17-18x, similar to the past few market peaks. 2wk 3mth YTD
MSCI Malaysia 1.2 8.5 47.0
Recommendations Weightings in Region 2.7%
Incremental foreign portfolio flow will drive up valuations of key liquid MSCI Total Mkt Cap. (US$B) 83.8
stock names, especially those with a positive macro outlook in light of the 2009 P/E Ratio (x) 18.3
2010 P/E Ratio (x) 15.8
structural reform expected. Top picks are Public and AMMB on banks, 2011 P/E Ratio (x) 13.1
Tenaga for GLCs reform and Genting. Avoid stocks lacking growth or 2010 Yield (%) 3.1
catalyst, are YTL Power (yield plays to underperform) and MISC (lacks 2010 ROE (%) 12.3
near-term catalyst). Source: Datastream, IBES, MSCI, JPMorgan estimates.
Prices and valuations are as of November 20, 2009
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Public Bank 10.9 PBKF MK OW 11257 15.2 12.9 0.72 0.85 3.9 29.5
Tenaga 8.4 TNB MK OW 10655 15.6 14.3 0.53 0.62 2.8 9.3
Genting 7.15 GENT MK OW 7745 24.9 20.3 0.29 0.35 0.7 9.4
AMMB 4.7 AMM MK OW 4142 13.6 11.4 0.32 0.39 1.7 11.0
Stocks to avoid
MISC 8.9 MISF MK N 9680 25.9 20.2 0.34 0.44 3.9 5.9
YTL Power 2.15 YTLP MK N 3755 14.4 10.7 0.15 0.20 2.1 18.2
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.
MISC Berhad - F: We downgraded to UW with new PT of M$7.7 on November 24." and "YTL Power: We downgraded to UW on November 19.

56
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Malaysia Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 44.3 15.7 14.5 3.2 3 Month 2.1 0.0 0.0
2008E -14.1 18.3 11.5 2.9 Long Bond 4.3 0.2 0.0
2009E 0.0 18.3 11.0 2.7 Inflation -2.1 0.4 0.9
2010E 15.7 15.8 12.3 3.1 Real 3 Month 4.2 -0.4 -0.9

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 4.6 -0.5 -0.3 0.0 BAA 2.9 0.0 na
2009E -2.4 0.6 -3.0 1.4 EMBI 3.2 -0.7 0.8
2010E 5.0 0.6 -0.8 0.8 Country 1.6 -0.2 na
Country Relative -1.5 0.5 na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 4.5 1.6 4.9 4.9 EM Funds* 4,063 5,164 4,870
Asia ex Japan* 1,245 1,566 1,452
Malaysia 45 -18 -87

MSCI Malaysia Absolute and Relative to EMF Index MSCI Fair value Range
300 Absolute Relative to MSCI EMF
FWD PER (319) (521)
250
200 PER (391) (650)
150
PBR (342) (693)
100
50 DY (370) (715)
0
BY/EY (196) (1115)
-50
-100 BY/DY (323) (1301)
-150
0 300 600 900 1200 1500 1800 2100
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09

Currency Outlook (MYR/USD) EPS Integer over Time


4.0 Spot Forecast Consensus 110 2009 2010
3.9
3.8 100
3.7
3.6
Consensus 90
3.5
3.4
J.P. Morgan forecast: 80
3.3
end Dec 09: 3.35
3.2
end Mar 10: 3.30
3.1 J.P. Morgan 70
end Jun 10: 3.25
3.0
2.9 60
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

57
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Mexico
Cyclical Upside

Key country dynamics Ben LaidlerAC


Mexico suffered in 2009 from a cyclically weak economy, driven by the US (212) 622-5252
and H1N1 influenza. Fiscal and rating concerns were also high, as the ben.m.laidler@jpmorgan.com
government implemented a contentious and watered-down 1.0% GDP fiscal J.P. Morgan Securities Inc.
adjustment despite the macro weakness. Nevertheless, Mexico’s fiscal
revenue/GDP remains low (22% GDP) and poorly structured (1/3 oil). The
equity market performed better, helped by index composition (70%
defensives) and hence robust earnings (positive 2009, despite GDP plunge).

For 2010 we expect a 10.5-point swing of Mexico GDP (from -7.0% to MSCI Mexico: Absolute and relative to
MSCI Asia Pacific ex-Japan
+3.5%), the second highest we forecast globally, after Russia (13.5 points).
With the output gap to remain large and inflationary pressures likely ones of 800
supply-side shock, we see a rate hike only in June 2010, and +75bps for the 700
year. Risk/reward is high given strong US linkages and fiscal dynamics. 600
500
Implications of a global recovery 400
Mexico historical GDP beta to global recovery is over 2.0x, vs overall EM 300
1.3x. Main driver is the US (destination of 80% exports) and manufacturing. 200
We forecast 4.5% 2010 growth in US manufacturing after -11.4% in 2009e. 100
Oil remains important. US$59 bbl is the budgetary oil forecast, comfortably 0
below our $70 end-2010 forecast and spot closer to $80. The peso has lagged 97 99 01 03 05 07 09
the YTD rally in EM currencies, and there is arguably upside risk. Absolute Relativ e

Source: MSCI, Datastream.


How much have valuations already discounted a recovery?
MSCI Mexico 12m forward earnings fell 27% peak to trough and have
rebounded 13%. They remain 20% from their highs. This recovery should
continue (recent Q3 earnings +20% oya, with 60% of Mexbol reports beating
consensus). The market is trading around 14.6x 2010e earnings, below the 5-
year average (15.6x). We see room for earnings to surprise on the back of the
GDP recovery, as well as US$ gains on an appreciating peso.

Recommendations
Our portfolio is focused on the 1/3 of the index made up of cyclicals (banks,
homebuilders, steel, cement, mining), where we see greater earnings
recovery leverage and cheaper asset valuations, rather than on the more
defensive (staples and telecoms) 2/3s of the index.

Top picks and stocks to avoid


Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Ternium 32.5 TX OW 6,515 26.2 15.2 1.2 2.1 4.2 8.4
Urbi 26.2 URBI* OW 1,986 13.3 10.1 2.0 2.6 0.0 13.8

Stocks to avoid
Telmex Internacional 15.1 TII UW 13,561 22.4 20.4 0.7 0.7 2.5 9.7
Telmex 17.7 TMX UW 16,104 10.7 12.0 1.6 1.5 4.0 48.6
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 25 November 2009.

58
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Mexico Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 12.4 14.4 25.1 2.5 3 Month 4.8 0.1 na
2008E -27.2 19.7 8.3 2.0 Long Bond 5.2 0.1 na
2009E 8.9 18.1 8.7 2.3 Inflation 4.9 -0.2 -0.3
2010E 21.6 14.9 17.2 2.5 Real 3 Month -0.1 0.3 na

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 1.3 0.0 -3.6 0.0 BAA 2.9 0.0 na
2009E -7.0 -0.5 -7.6 0.0 EMBI 3.2 -0.7 0.8
2010E 3.5 -1.5 -2.3 0.7 Country 2.1 -0.6 na
Country Relative -1.0 0.2 na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 7.5 3.7 -0.6 3.3 EM Funds* 4,063 5,164 4,870
LatAm* 242 758 688
Mexico 98 52 -17

MSCI Mexico Absolute and Relative to EMF Index MSCI Fair value Range
500 Absolute Relative to MSCI EMF
FWD PER (19534) (26417)
450
400 PER (11984) (36263)
350
PBR (15042) (36774)
300
250 DY (27110) (41868)
200
BY/EY (9498)
150
100 BY/DY (30060)
50
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 0 10000 20000 30000 40000 50000 60000

Currency Outlook (MXN/USD) EPS Integer over Time


16.0 Spot Forecast Consensus 110 2009 2010

15.0
J.P. Morgan forecast: 100
14.0 end Dec 09: 13.00
end Mar 10: 12.50 Consensus
13.0 end Jun 10: 12.50 90

12.0
J.P. Morgan 80
11.0
70
10.0

9.0 60
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

59
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Philippines
Positioned for a consumption-led upturn

Key country dynamics Kelly Lim-BateAC


With nearly 80% of the country’s GDP driven by private consumption, (632) 878-1188
economic growth has proven to be resilient through the crisis. The main fuel kelly.s.lim-bate@jpmorgan.com
for domestic consumption is the strength in OFW remittances due to strong J.P. Morgan Securities Philippines Inc.
demand for Filipino workers abroad, who are increasingly higher-skilled and
higher-paid service workers. The sustained double-digit growth in the BPO Flagship reports
sector and its multiplier effect on the economy should likewise remain a • Philippine Strategy: Hitting a macro sweet spot
driver as these are relatively higher-paid employees. Main weaknesses in the (Sept 24, 2009)
Philippine dynamic remain weak foreign direct investments and the • Philippine Trendwatch: 3Q09 Turning the corner
government’s lack of fiscal flexibility that has crowded out the private sector (Oct 06, 2009)
and hampered the investment cycle in the country. • Philippine Real Estate: Buy on Dips (Jun 17, 2009)
• Metrobank: Upgrade to OW on PPOP/RoE
Implications of a global recovery
momentum (Nov 5, 2009)
Positioned for a consumption led upturn: We believe the Philippines
• Ayala Corp: More upside (Jul 10, 2009)
economy in 2010 will move to an above-trend and above-consensus growth
of 5%oya, driven by a revival in consumption and government spending.
MSCI Philippines: Absolute and relative to MSCI
Remittances should continue to positively surprise as the job order pipeline Asia Pacific ex-Japan
remains robust, equivalent to seven months worth of deployment with a bias
110
for service and professional workers. National elections are scheduled in
May, where it is estimated that the five presidential candidates alone will 90
spend at least Php25 billion, equivalent to 0.3% of GDP. As domestic
confidence recovers, there is also sizable pent-up demand in the economy to 70
boost growth, reflected by the all-time high spread between GNP and GDP. 50
Corporate balance sheets are robust to support expansion plans to capture
this consumption upturn. 30

How much have valuations already discounted a recovery 10


Valuations are still attractive: The PSEi now stands near its LT average P/E 97 99 01 03 05 07 09
of 15x. Valuations are still attractive, in our view, with previous rallies after Absolute Relativ e
a bear market low having reached a high of +1SD-2SD (18x-22x). Source: MSCI, Datastream.
Furthermore, we believe consensus estimates remain conservative with
MSCI performance table
plenty of room for upgrades. Following downgrades of as much as -30%, the 2wk 3mth YTD
Street has only upgraded EPS by 6%. MSCI Philippines 5.2 10.0 57.8
Weightings in Region 0.4%
Recommendations
MSCI Total Mkt Cap. (US$B) 13.4
Our favored sectors are property, banks, and utilities, which have compelling 2009 P/E Ratio (x) 17.0
valuations and attractive growth prospects. Our top picks are ALI, MBT, 2010 P/E Ratio (x) 15.4
EDC, and MWC. Our top avoid is Meralco. 2011 P/E Ratio (x) 13.5
2010 Yield (%) 4.0
2010 ROE (%) 15.5
Source: Datastream, IBES, MSCI, JPMorgan estimates.
Prices and valuations are as of November 20, 2009
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Ayala Land 12 ALI OW 3319 40.9 40.3 0.29 0.30 0.5 7.2
Metrobank 43.5 MBT OW 1677 16.5 11.2 2.63 3.88 2.3 10.9
Energy Dev. Corp 4.15 EDC OW 1328 10.9 11.0 0.38 0.38 3.2 24.2
Manila Water 16.25 MWC OW 700 9.0 8.1 1.80 2.01 3.2 24.2
Stock to avoid
Manila Electric 207 MER N 4883 30.0 18.0 6.90 11.51 2.8 21.6
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 12 November 2009.

60
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Philippines Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 8.3 17.9 14.1 4.0 3 Month 3.8 -0.1 0.3
2008E -16.0 21.3 12.3 3.4 Long Bond 7.9 0.0 0.6
2009E 25.1 17.0 14.9 3.8 Inflation 1.6 1.6 1.4
2010E 10.8 15.4 15.5 4.0 Real 3 Month 2.2 -1.7 -1.1

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 3.8 -0.8 -1.1 0.0 BAA 2.9 0.0 na
2009E 1.5 0.1 0.9 -0.6 EMBI 3.2 -0.7 0.8
2010E 5.0 0.0 -0.8 0.9 Country 2.4 -0.6 na
Country Relative -0.7 0.2 na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 4.0 5.0 5.0 5.0 EM Funds* 4,063 5,164 4,870
Asia ex Japan* 1,245 1,566 1,452
Philippines 98 9 -19

MSCI Philippines Absolute and Relative to EMF Index MSCI Fair value Range
500 Absolute Relative to MSCI EMF
FWD PER (282) (503)

400 PER (435) (901)

300 PBR (308) (761)

DY (741)
200
BY/EY (525) (1436)
100
BY/DY (896)
0
0 500 1000 1500 2000 2500 3000
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09

Currency Outlook (PHP/USD) EPS Integer over Time


58 Spot Forecast Consensus 110 2009 2010
56
54 100
52
50
Consensus 90
48
46
80
44 J.P. Morgan forecast: J.P. Morgan
42 end Dec 09: 46.0
40
end Mar 10: 45.5 70
end Jun 10: 45.5
38
36 60
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

61
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Russia
Leveraged play on cyclical recovery

Key country dynamics Alex Kantarovich AC


Russia has been a top performer among GEMs since the February trough (7-495) 967-3172
(MSCI RU +150%), but it is still a laggard from the start of the downturn in alex.kantarovich@jpmorgan.com
July 2008. The country has been hard hit by one of the worst GDP J.P. Morgan Bank International LLC
contractions (2009 JPMe -8.5%), with JPMe earnings falling -30% y/y.
Surging risks resulted, in addition to earnings declines, in a nasty multiples Flagship reports
contraction. Conversely, the recent rerating reflects a better outlook. • Russia-2010: well-positioned among GEMs
(11/06/2009)
Implications of a global recovery • Real winners of $100 oil (10/14/2009)
The oil price, Russia’s key external variable, has more than doubled since • Index targets upped, earnings to replace COE as
January; the main economic aggregates have picked up and the ruble has main driver (07/29/2009)
gained over 20% from its low. The MSCI Russia 12M forward P/E has risen • Earnings at trough, risk premiums contracting,
to 9.5x from 3x ytd. Forward EPS bottomed out in April, rising c.40% to international liquidity wanted (04/14/2009)
date. With 2010 JPMe real GDP growth at 5.0%, we expect a recovery in
earnings and a leaner cost base is a margin booster, in addition to rising MSCI Russia: Absolute and relative to MSCI Asia
Pacific ex-Japan
revenue. Banks should be able to cut provisioning expense, the main bottom
line spoiler, by over 50-75%, in our view. As the CBR reduced the 500
benchmark rate by 400bp this year and with liquidity improving, the
400
leveraged segments - like materials, telecoms and developers - should see big
relief from lower interest expenses. We estimate 2010 aggregate earnings 300
should rise 41% and the momentum should extend into 2011. The extensive
2009-2011 earnings swings reflect the dependence on cyclical commodities. 200

100
How much have valuations already discounted a recovery? At a 9.5x
MSCI Russia 12M forward P/E, the 30% discount to GEMs is abnormally 0
high (against the 3Y pre-crisis average of 15%). Moreover, Russia’s earnings 97 99 01 03 05 07 09
growth (>40% in 2010E and 2011E), is double the GEMs average, Absolute Relativ e
invalidating the main reason for the discount in our view.
Source: MSCI, Datastream.

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

Top picks and stocks to avoid


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

62
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Russia Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 30.8 7.3 16.5 1.8 3 Month 9.3 -2.0 na
2008E -3.6 7.6 15.9 0.7 Long Bond 9.3 -2.0 na
2009E -33.5 11.3 10.7 1.3 Inflation 9.7 -1.9 -0.2
2010E 32.3 8.6 13.1 1.7 Real 3 Month -0.4 -0.2 na

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 5.6 0.0 0.7 0.0 BAA 2.9 0.0 na
2009E -8.5 0.0 -9.1 -0.8 EMBI 3.2 -0.7 0.8
2010E 5.0 0.0 -0.8 2.0 Country 2.5 -1.4 na
Country Relative -0.7 -0.7 na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 6.5 4.5 4.0 4.0 EM Funds* 4,063 5,164 4,870
EM Europe* -157 171 102
Russia 187 173 -81

MSCI Russia Absolute and Relative to EMF Index MSCI Fair value Range
600 Absolute Relative to MSCI EMF
FWD PER (447) (932)
500
PER (345) (1378)
400
PBR (508) (1130)
300
DY (441) (1677)
200
BY/EY Not meaningful
100 Not meaningful
BY/DY
0
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 0 500 1000 1500 2000 2500

Currency Outlook (RUB/USD) EPS Integer over Time


43 Spot Forecast Consensus 140 2009 2010

39 J.P. Morgan forecast: 120


end Dec 09: 28.16
end Mar 10: 28.98
35 end Jun 10: 29.30
100
Consensus

31 80

27 60
J.P. Morgan

23 40
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

63
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

South Africa
Catch-up and carry trade in 2010
Key country dynamics Deanne GordonAC
We forecast a rebound in SA real GDP growth to 3% in 2010 from -2% in (+27) 21 712 0875
2009, driven by inventory restocking and a recovery in mining & deanne.gordon@jpmorgan.com

manufacturing production. While SA’s earnings recovery has lagged and J.P. Morgan Equities Ltd
been disappointing in 2009, we believe it could surprise on the upside in
2010. The fall in SA earnings growth in 2009 is the biggest on record versus
previous earnings recessionary periods (-28% vs ave EPS fall -9.3%). Flagship reports
Implications of a global recovery • South African Year Ahead: Team SA – stronger
The strongest beneficiary of the global recovery in SA is the high beta rand earnings kick in 2010 (26/11/2009)
exchange rate, which we expect to remain strong in 1H10. The rand has been • Investment in South Africa: Cyclical Recovery and
one of the best performing currencies in 2009 supported by the carry trade, rerating catch-up (01/10/2009)
high commodity prices and healthy risk appetite and we expect this to persist • Fund Managers’ Companion: Continue to favour
in 1H10 as the dollar is forecast to remain weak. Later in 2010 as the dollar cyclicals (07/08/2009)
regains its footing, we expect some rand weakness and hedge for this via
Platinum exposure. Our bottom-up earnings estimates for 2010 are similar
for Resources, Financials and Industrials at 20-25%. In 2011E, however, we MSCI South Africa: Absolute and relative to MSCI
see a stronger rebound in Resources earnings (+41% versus c20% for Asia Pacific ex-Japan
Financials & Industrials) on some rand weakness. This suggests a tilt to 400
Resources in 2H10. In 1H10, however, domestic cyclical stocks should
continue to be supported by an extended period of flat short rates. 300
How much have valuations already discounted a recovery
SA’s valuations are undemanding; forward P/E of 11.9 versus 13 for MSCI 200
EM. SA has underperformed MSCI EM year to date in local currency terms
(SA 39.6% vs 70% for EMF). In dollars SA performance has been 100
marginally lower than EMF (SA 99% vs 102% for EMF). While MSCI EMF
has rerated 125% in 2009 to date, MSCI SA has rerated only 47%. We 0
expect some rerating catch-up in 2010 as SA’s economic recovery gathers 97 99 01 03 05 07 09
momentum, having lagged the recovery in the rest of EM. Absolute Relativ e
Recommendations Source: MSCI, Datastream.
We recommend OW domestic SA, but include Platinum too as a rand hedge.
Our favourite sectors: Media, Banks, General Industrials, selected Retailers
and Platinum. Our top stock picks include Anglo Plat, Northam, Absa, JD
Group and Naspers. Our choice of stocks to avoid is Nedbank.

Top picks and stocks to avoid


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

64
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

South Africa Scorecard


Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 21.5 14.0 18.3 3.6 3 Month 7.0 0.0 na
2008E 8.3 12.9 17.6 3.5 Long Bond 9.0 1.6 na
2009E -13.4 14.9 14.9 2.8 Inflation 6.1 -0.6 0.0
2010E 28.7 11.6 17.4 3.4 Real 3 Month 0.9 0.6 na

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 3.1 0.0 -1.8 0.0 BAA 2.9 0.0 na
2009E -2.0 0.0 -2.6 0.0 EMBI 3.2 -0.7 0.8
2010E 3.0 0.5 -2.8 0.7 Country 1.7 -0.7 na
Country Relative -1.5 0.1 na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 3.4 4.4 3.8 3.6 EM Funds* 4,063 5,164 4,870
EM Europe* -157 171 102
South Africa 298 789 710

MSCI South Africa Absolute and Relative to EMF Index MSCI Fair value Range
400 Absolute Relative to MSCI EMF FWD PER (518) (725)
350
300 PER (546) (727)
250
PBR (560) (765)
200
150 DY (520) (706)
100
BY/EY (546) (1110)
50
0 BY/DY (508) (1098)
-50
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 300 600 900 1200 1500 1800

Currency Outlook (ZAR/USD) EPS Integer over Time


15.0 Spot Forecast Consensus 135 2009 2010

125
13.0 J.P. Morgan forecast:
end Dec 09: 7.30
115
end Mar 10: 7.80
11.0 end Jun 10: 8.00
105
Consensus
9.0
95

85
7.0
J.P. Morgan 75

5.0 65
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

65
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

South Korea
Won to be a big swing factor in 2010
Key country dynamics Scott Seo AC
Three key dynamics for the Korea market in 2010 are expected to be: (1) (822) 758-5759
Won’s movement; (2) an interest rate hike; and (3) regional election. First, scott.seo@jpmorgan.com
the market’s concern that Korean exporters would be sizably hampered by a J.P. Morgan Securities (Far East) Ltd, Seoul
strong Won in 2010 seems overdone, in our view. Market consensus for Branch

Won/US$ by end-10 has fallen near to 1,000 vs. J.P. Morgan’s forecast of
Flagship reports
1,150. We remain bullish on Korean auto makers in particular, expecting
• J.P. Morgan's Heart & Seoul - KRW fears likely to
strong sales volume growth would outweigh the adverse impact of FX move.
be short-lived (Feb/25/2009)
Second, monetary policy normalization is expected to begin in 1Q10, which
• J.P. Morgan's Heart & Seoul - 2Q09 earnings
is potential negative for the Korean consumer segment due to the household
preview (July/10/2009)
sector’s rising debt service burden. However, the funding cost of corporates
• J.P. Morgan's Heart & Seoul - 3Q09 earnings
with lower credit rating is not likely to rise significantly, as there is further
preview (Oct/13/2009)
room for credit spread contraction with credit spread of BBB-rated corporates
still remaining 400bp higher than the pre-crisis level. Last, upcoming regional
MSCI South Korea: Absolute and relative to MSCI
election in June 2010 is going to be the last nation-wide election before the Asia Pacific ex-Japan
presidential election in 2012, meaning the current ruling party is likely to put
500
every effort to win the election. Potentially, the current government might
extend some pro-growth policies and try to keep housing prices stable. If 400
property market prices move up to a worrisome level, however, it is a risk for
300
a more aggressive monetary tightening.
Implications of a global recovery 200
Korean economic indicators have surprised the market on the upside until 100
recently with further acceleration of 3Q09 real GDP growth. However, we
expect Korea’s economic growth to track relatively moderate and stable 0
contour in 2010. The market focus now seems to be moving to liquidity 97 99 01 03 05 07 09
flows. Korean equity funds invested in domestic market have been showing
Absolute Relativ e
large outflows in 2009 YTD despite more than the 40% rally. We expect fund
inflows into equity funds going into 2010, but the magnitude of fund inflows Source: MSCI, Datastream.

to equity funds is likely to be the key to how high KOSPI can reach from the
MSCI performance table
current level.
2wk 3mth YTD
How much have valuations already discounted a recovery MSCI South Korea 3.7 4.5 50.8
J.P. Morgan considers the current market has largely reflected the economic Weightings in Region 12.8%
recovery story and prices in some moderation down the road, expecting MSCI Total Mkt Cap. (US$B) 398.3
2009 P/E Ratio (x) 14.3
relatively moderate upside of KOSPI. Our KOSPI target is 1,850 by the end 2010 P/E Ratio (x) 11.7
of 2010, based on our price target for companies under our coverage universe 2011 P/E Ratio (x) 9.7
and a forward P/E multiple of 11.8x. 2010 Yield (%) 1.2
2010 ROE (%) 12.0
Recommendations
Source: Datastream, IBES, MSCI, JPMorgan estimates.
We remain bullish on export names and the financial sector for 2010, keeping Prices and valuations are as of November 20, 2009
Hyundai Motors and Shinhan Financial Group on our top picks list, while we
prefer low beta stocks in the consumer universe such as Amorepacific.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Hyundai Motor 104,000 005380 KS OW 19,419 9.6 9.1 10,798 11,486 0.96 14.2
Samsung SDI 147,000 006400 KS OW 5,658 22.2 16.8 6,627 8,758 1.30 7.3
Shinhan FG 45,750 055550 KS OW 18,410 14.7 10.5 3,122 4,365 1.97 11.8
Amorepacific 845,000 090430 KS OW 4,123 24.2 22.6 34,940 37,312 0.83 17.2
SK Energy 111,500 096770 KS OW 8,700 9.7 7.9 11,357 13,955 2.08 15.0
Stock to avoid
S-Oil Corp 57,900 010950 KS N 5,526 10.6 9.9 5,457 5,841 3.11 16.0
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009. Amorepacific upgraded to OW on November 7.

66
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Korea Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 9.8 13.1 13.5 1.6 3 Month 2.9 0.1 -0.5
2008E -36.7 20.7 8.0 1.1 Long Bond 5.4 0.0 -0.4
2009E 44.7 14.3 10.7 1.1 Inflation 2.0 0.4 0.5
2010E 22.0 11.7 12.0 1.2 Real 3 Month 1.0 -0.3 -1.1

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 2.2 -0.3 -2.7 0.0 BAA 2.9 0.0 na
2009E 0.2 1.0 -0.4 1.8 EMBI 3.2 -0.7 0.8
2010E 4.7 0.7 -1.1 1.0 Country na na na
Country Relative na na na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 4.0 2.0 3.5 3.5 EM Funds* 4,063 5,164 4,870
Asia ex Japan* 1,245 1,566 1,452
Korea 1,404 2,066 1,947

MSCI Korea Absolute and Relative to EMF Index MSCI Fair value Range
450 Absolute Relative to MSCI EMF
FWD PER (184) (379)
400
350 PER (319) (670)
300
PBR (282) (495)
250
200 DY (221) (370)
150
BY/EY (143)
100
50 BY/DY (176) (684)
0
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 0 300 600 900 1200

Currency Outlook (KRW/USD) EPS Integer over Time


1,650 Spot Forecast Consensus 120 2009 2010
1,550 110
1,450 J.P. Morgan forecast:
end Dec 09: 1130 100
1,350 end Mar 10: 1130
end Jun 10: 1110 Consensus 90
1,250
80
1,150
70
1,050 J.P. Morgan

950 60

850 50
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

67
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Taiwan
Year of sustainable growth
Key country dynamics Nick LaiAC
Potential positive catalysts for Taiwan include: (1) broader-based growth in (886-2) 2725-9864
global economy; (2) continued earnings upgrades; (3) recovered capex and nick.yc.lai@jpmorgan.com
capex cycle; (4) cross-strait development and achievement; and (5) J.P. Morgan Securities (Taiwan) Limited.
consensus underweight on Taiwan by EM PMs. Meanwhile, potential
negative risks include: (1) the end of monetary easing; (2) strong currency; Flagship reports
and (3) delay in free trade agreement negotiations. In 2009/10, Taiwan • Upgrade Taiwan to OW (03/30/2009)
experienced a structural change driven by the pro-growth China policy, fiscal • Another step forward on China policy (04/15/2009)
stimulus and tax reform. • Upgrade index target to 8,000 (04/28/2009)
• Circle of life: from recovery to growth (09/01/2009)
Implications of a global recovery • The weight on a strong NT$ (10/12/2009)
Taiwan as an export-driven economy is highly leveraged to the global • Seeking for growth in 2010 (10/23/2009)
economic cycle. We believe the strength of the recovery in 2010 will be
rather strong considering the degree of contraction in 2009 is the sharpest in MSCI Taiwan: Absolute and relative to MSCI Asia
history. Historical experience suggests that there is potential 10-15% upside Pacific ex-Japan
to our recently upgraded 2010 GDP growth estimate for Taiwan of 5.8%. 140
During the recession, Taiwan’s CBC has cut the discount rate seven times to
a historical low of 1.25%. Unprecedented monetary easing leads to a huge 110
increase in liquidity. Together with fiscal stimulus and capital repatriation,
liquidity will remain one of the drivers in the equity market next year, in our 80
view.
How much have valuations already discounted a recovery 50
Consensus earnings estimates have been consistently revising up since
March this year. MSCI-Taiwan forward P/E is now at around 21x, versus the 20
historical range of 12x-40x post tech bubble. While today’s valuation is 97 99 01 03 05 07 09
around the average of the historical range, we believe earnings upgrades will Absolute Relativ e
be a powerful driver for the equity market’s performance and stock re-rating Source: MSCI, Datastream.
in 2010. We recommend investors focus on sectors or stocks that will deliver MSCI performance table
above-peer or sector average growth in 2010. 2wk 3mth YTD
MSCI Taiwan 2.5 13.1 60.4
Recommendations Weightings in Region 11.1%
Taiwan remains an Overweight market in our regional portfolio. By sector, MSCI Total Mkt Cap. (US$B) 344.3
we are Overweight on tech and financial with funding sources from telecom 2009 P/E Ratio (x) 30.6
2010 P/E Ratio (x) 19.3
and consumer. Within tech, we prefer branded PC over ODM, and white-box 2011 P/E Ratio (x) 13.4
handset over smartphone. In financial, we prefer brokers and banks than 2010 Yield (%) 3.3
insurance. Our top picks are UMC, Acer, Hon Hai, Fubon and Nan Ya 2010 ROE (%) 10.0
Plastics, while we would avoid Quanta, HTC and Taishin FHC. Our Dec-10 Source: Datastream, IBES, MSCI, JPMorgan estimates.
Prices and valuations are as of November 20, 2009
index target is 8800, based on the analysis of the historical trend P/E and
2010 forward earnings.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
UMC 15.5 2303 TT OW 6,184 69.3 15.4 0.22 1.01 0.0 6.0
Acer 77.8 2353 TT OW 6,419 17.5 12.0 4.44 6.48 3.9 17.6
Hon Hai 132.0 2317 TT OW 34,788 16.4 13.0 8.05 10.12 1.9 18.2
Fubon FHC 38.8 2881 TT OW 9,673 14.7 11.6 2.63 3.33 5.2 14.0
Nan Ya Plastics 53.2 1303 TT OW 12,833 32.3 22.1 1.65 2.40 2.9 8.2
Stocks to avoid
Quanta 65.5 2382 TT UW 7,497 10.8 10.3 6.05 6.37 4.9 20.6
HTC 340.0 2498 TT UW 8,314 11.0 13.6 31.01 25.06 5.9 27.6
Taishin FHC 12.7 2887 TT UW 2,716 7.6 17.8 1.66 0.71 5.5 6.5
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.

68
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Taiwan Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 28.2 10.5 17.3 4.6 3 Month 0.9 0.0 -0.4
2008E -68.7 33.4 5.6 3.7 Long Bond 1.4 -0.1 0.3
2009E 9.2 30.6 6.5 3.0 Inflation -1.2 0.5 0.2
2010E 58.7 19.3 10.0 3.3 Real 3 Month 2.1 -0.5 -0.6

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 0.1 0.0 -4.8 0.0 BAA 2.9 0.0 na
2009E -3.8 0.0 -4.4 0.6 EMBI 3.2 -0.7 0.8
2010E 5.8 0.4 0.0 1.3 Country na na na
Country Relative na na na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 4.2 3.8 4.0 3.8 EM Funds* 4,063 5,164 4,870
Asia ex Japan* 1,245 1,566 1,452
Taiwan 1,668 1,059 1,012

MSCI Taiwan Absolute and Relative (vs EMF) Index MSCI Fair value Range
250 Absolute Relative to MSCI EMF
(120)
FWD PER (252)
200
150 PER(140) (311)
100
PBR (225) (421)
50
0 DY (267) (1152)
-50
-100 BY/EY (200) (1422)

-150
BY/DY (427)
-200
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 0 500 1000 1500 2000 2500 3000 3500

Currency Outlook (TWD/USD) EPS Integer over Time


38 Spot Forecast Consensus 120 2009 2010
37
J.P. Morgan forecast: 100
36
end Dec 09: 31.0
35 end Mar 10: 30.5 80
end Jun 10: 30.5
34
60
33 Consensus

32 40
31
20
30 J.P. Morgan

29 0
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

69
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Thailand
Strong outlook with implementation risk

Key country dynamics Sriyan PieterszAC


Key positives are: (1) a multi-year pro-cyclical fiscal stimulus that will (662) 684-2670
augment external demand; (2) sustained high excess liquidity that supports sriyan.pietersz@jpmorgan.com
risk assets; and (3) potential for earnings upgrades, particularly in JPMorgan Securities (Thailand) Limited
banks/property. Key negatives are: (1) propensity for renewed political
turbulence; (2) potential weak implementation on fiscal stimulus; and (3) Flagship reports
unpredictable policy/governance environment. • Thai banks: Increase in earnings estimates
(October 12, 2009)
Implications of a global recovery • Thai Investor Tour (September 23, 2009)
The primary impact of the downturn on Thailand has been operational, rather • Back to 2003? (August 20, 2009)
than on the balance sheet. With exports accounting for 70% of GDP, the • Revisiting valuations (June 8, 2009)
impact of the sharp fall in external demand drove what will likely be a -3.1%
GDP contraction in 2009. A moderate total external debt of US$65 billion or MSCI Thailand: Absolute and relative to MSCI Asia
Pacific ex-Japan
25% of GDP allowed balance sheets to remain solvent. However, the impact
of lower government revenue and increased stimulus expenditure has raised 140
public debt/GDP to 45% from 37% pre-crisis. Thailand is also very
leveraged into an external demand recovery, with strong second-order effects 110
on private consumption likely as employment ramps up. Thailand is also
distinguished by a policy initiative to deploy a large (US$43 billion) pro- 80
cyclical fiscal stimulus from 2010-12. The front-end of the stimulus is labor-
and rural-intensive and is targeted to deliver a large multiplier effect that 50
should allow Thailand to outperform regional peers in 2010.
20

How much have valuations already discounted a recovery 97 99 01 03 05 07 09


A modest recovery in 2010 has been discounted by the SET’s 60% rise YTD. Absolute Relativ e
However, expectations are low, in our view, and likely to see further Source: MSCI, Datastream.
upgrades in 2010. We note that although 2010 earnings forecasts fell 32% MSCI performance table
from the peak to trough, upgrades have been just 5%. SET and MSCI Thai 2wk 3mth YTD
MSCI Thailand -0.9 4.2 53.0
valuations have gone from bargain basement levels in early Mar-09 to above Weightings in Region 1.2%
LT averages and back again, with the 12-month forward P/E for MSCI Thai MSCI Total Mkt Cap. (US$B) 37.5
now at 11.5x (post-2000 mean of 10.9x). We anticipate earnings revisions 2009 P/E Ratio (x) 12.5
combined with multiple expansion back to the levels of 2003 (12x or +0.5 2010 P/E Ratio (x) 11.3
2011 P/E Ratio (x) 9.4
standard deviation above LT average P/E) could underpin the upside in the 2010 Yield (%) 3.8
SET well above 800 in 2010. Post-previous downturns in 2003 and 2006, 2010 ROE (%) 14.4
P/E ratings peaked at 12x and 15x, respectively. Source: Datastream, IBES, MSCI, JPMorgan estimates.
Prices and valuations are as of November 20, 2009
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (Bt) Div. yield ROE
Price (Bt) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Siam Commercial Bank 78.75 SCB.BK OW 8,002 12.6 10.7 6.3 7.4 2.8 17.0
Land & Houses (F) 6.30 LHf.BK OW 1,892 17.7 17.2 0.4 0.4 5.8 14.1
C P All 19.10 CPALL.BK OW 2,571 20.9 17.4 0.9 1.1 4.3 31.9
PTT 234.00 PTT.BK OW 19,852 11.3 9.2 20.7 25.5 3.6 16.0
Thai Oil 40.75 TOP.BK OW 2,490 6.1 5.8 6.7 7.1 7.4 19.8
Stocks to avoid
TMB Bank 1.12 TMB.BK N 1,394 23.1 14.7 0.0 0.1 0.0 6.8
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.

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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Thailand Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 -37.3 25.1 7.4 4.3 3 Month 1.4 0.0 -0.1
2008E 56.6 16.0 11.6 3.6 Long Bond 4.4 0.8 -0.4
2009E 28.7 12.5 14.3 3.3 Inflation 0.5 1.5 0.9
2010E 10.1 11.3 14.4 3.8 Real 3 Month 0.9 -1.5 -1.0

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 2.6 -0.8 -2.3 0.0 BAA 2.9 0.0 na
2009E -3.1 0.0 -3.7 0.7 EMBI 3.2 -0.7 0.8
2010E 6.1 0.0 0.3 3.1 Country 0.5 0.0 na
Country Relative -2.6 0.7 na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 5.3 4.9 5.7 7.0 EM Funds* 4,063 5,164 4,870
Asia ex Japan* 1,245 1,566 1,452
Thailand -254 129 90

MSCI Thailand Absolute and Relative to EMF Index MSCI Fair value Range
400 Absolute Relative to MSCI EMF FWD PER (115) (381)
350
PER (231) (500)
300
250 PBR (218) (466)
200
DY (184) (379)
150
100 BY/EY (127) (840)

50 BY/DY (127) (914)


0
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 0 300 600 900 1200 1500

Currency Outlook (THB/USD) EPS Integer over Time


43 Spot Forecast Consensus 120 2009 2010
41
110
39
100
37
Consensus
35 90
33
J.P. Morgan forecast: 80
31 end Dec 09: 33.00
end Mar 10: 32.50
J.P. Morgan 70
29 end Jun 10: 32.00

27 60
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

71
Adrian Mowat Emerging Markets Equity Research
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adrian.mowat@jpmorgan.com

Turkey
Inflection point in 2010
Key country dynamics Adrian MowatAC
J.P. Morgan forecast a GDP recovery in 2010 to 5% versus the 5.3% (852) 2800-8599
contraction in 2009. The conditions and timing of the IMF agreement outlook adrian.mowat@jpmorgan.com
will influence the economic outlook. We expect the IMF three-year stand by J.P. Morgan Securities (Asia Pacific) Limited
program with total funding of US$ 45 billion to be signed in 2010. The
program will ease Turkey’s reliance on external financing and reduce the
crowding out of the private sector. The government borrowing program will
dominate the financial markets in 1Q10. Banks should benefit from higher
credit growth in 2H10. The recession has created a substantial output gap, MSCI Turkey: Absolute and relative to MSCI
limiting the risk of inflation. EMEA

4000
Implications of a global recovery
Turkey’s current account deficit was less than forecast in 2009 due to modest 3000
import growth combined with resilient exports, notably ex EU. Turkish
exporters will benefit from a recovery in European and middle-east demand 2000
and an increase in tourism as discretionary spending recovers. A $1/bbl rise in
oil prices (assuming a similar rise in other energy prices) widens Turkey’s 1000
CAD about $500 million. For the 2010 outlook, our economist assumes a
13% increase in energy prices over the 2009 average. 0
97 99 01 03 05 07 09
How much have valuations already discounted a recovery
Absolute Relativ e
Turkey’s valuations are undemanding; forward PE of 9 versus 13 for MSCI
EM. The index has marginally underperformed MSCI EM year to date. Since Source: MSCI, Bloomberg, J.P. Morgan.
mid-March 2009, the local currency index is in line with MSCI EM while it
has outperformed by 30% in US$ terms. Turkish financials are flat relative to MSCI performance table
2wk 3mth YTD
EM financials YTD and have marginally outperformed by 13% since mid- MSCI Turkey -4.5 -5.6 58.9
March. Turkey valuations discount a recovery in line with the EM benchmark Weightings in Region 1.3%
MSCI Total Mkt Cap. (US$B) 40.8
2009 P/E Ratio (x) 9.7
Recommendations 2010 P/E Ratio (x) 8.8
We are neutral Turkey recognizing the importance of the agreement with the 2011 P/E Ratio (x) 7.4
IMF next year. We forecast a moderation in financials EPS growth from 30- 2010 Yield (%) 3.5
50% growth in 2009 to 10-20% in 2010. We forecast 2011 EPS growth to 2010 ROE (%) 17.3
Source: Datastream, IBES, MSCI.
accelerate towards 20-30%; which in our view will get gradually priced in
Prices and valuations are as of November 20, 2009
2H10. Current valuations (single digit PE 10E; P/NAV average of about 1.5)
are not pricing in medium-term growth prospects and earnings acceleration in
2H10 and 2011E. Media companies should benefit from a recovery in
business discretionary spending and auto companies focused on exports
should be leveraged to the Euro zone recovery. The key medium call on
Turkey is whether it has moved into a period of sustained single digit
inflation and interest rates. This should help Turkish trend growth accelerate.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Asya 3.1 ASYAB TI OW 1845.5 10 6.8 0.3 0.5 4.0% 22.1%
Vakifbank 3.2 VAKBN TI OW 5428 7.5 6.5 0.4 0.5 5.5% 17.8%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 20 November 2009.

72
Adrian Mowat Emerging Markets Equity Research
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adrian.mowat@jpmorgan.com

Turkey Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 56.9 9.2 18.5 4.7 3 Month 7.1 -1.3 na
2008E -11.2 10.3 16.7 3.9 Long Bond 8.2 -1.7 -1.7
2009E 6.4 9.7 17.7 2.8 Inflation 5.1 -0.2 -0.1
2010E 10.8 8.8 17.3 3.5 Real 3 Month 2.0 -1.1 na

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 0.9 -0.8 -4.0 0.0 BAA 2.9 0.0 na
2009E -5.3 -0.6 -5.9 0.5 EMBI 3.2 -0.7 0.8
2010E 5.0 2.0 -0.8 1.5 Country 2.5 -0.6 na
Country Relative -0.6 0.2 na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 4.5 0.0 3.6 8.2 EM Funds* 4,063 5,164 4,870
EM Europe* -157 171 102
Turkey 21 -1 -33

MSCI Turkey Absolute and Relative to EMF Index MSCI Fair value Range
800 Absolute Relative to MSCI EMF
FWD PER (376414) (850646)
700
PER (397670) (1349945)
600
500 PBR (464556) (1340990)
400
DY (348262) (1075084)
300
200 BY/EY (648389)
100
BY/DY (1194998)
0
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 0 500000 1000000 1500000 2000000

Currency Outlook (TRL/USD) EPS Integer over Time


2.20 Spot Forecast Consensus 120 2009 2010
2.10
J.P. Morgan forecast: 110
2.00
end Dec 09: 1.40
1.90
end Mar 10: 1.45 100
1.80 end Jun 10: 1.45
1.70
90
1.60 Consensus 80
1.50
1.40 70
1.30 60
J.P. Morgan
1.20
1.10 50
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

73
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

MENA
Geared play into a global economic recovery
Key country dynamics Christian KernAC
The economic backdrop for the MENA region is relatively resilient. (971-4) 428 1789
Benefiting from several years of high budget surpluses and the ~70% christian.a.kern@jpmorgan.com
recovery in the oil price since its lows in Feb-09, we expect the Gulf JPMorgan Chase Bank, N.A., Dubai Branch
countries to continue their growth path, mainly driven by sizeable
infrastructure projects (e.g. KSA, Qatar, UAE) budgeted at an estimated oil Flagship reports
price of around $40/bbl (vs JPME $69). Historical market valuations and • MENA Telecom Sector - Initiating coverage on
foreign ownership remain relatively low compared with other EMs. We GCC telecoms (Oct 8, 2009)
believe the reaction of the global equity markets to the recent Dubai World • MENA Property Sector - Initiating coverage on UAE
restructuring announcement has been overdone and feel going forward there property (Aug 10, 2009)
is an increasing need for differentiation between Dubai and the other MENA • MENA Financial Sector - Initiating coverage on
markets. Dubai accounts for 7% of the market weight of the GCC200 index. UAE banks (Jul 1, 2009)

Implications of a global recovery Figure 1: GCC200 vs EM


220
In our view the MENA region is a geared play into a global economic 200

recovery, mainly due to its natural resource wealth (e.g. ~2/3 of world oil 180

160
reserves and ~45% of world gas reserves) supporting sovereign flows and 140

regional investments. In the U.A.E., we believe the government’s intention is 120

100

to limit the restructuring to Dubai World (incl. property developer Nakheel) 80


Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09

and federal support is likely to be more selective going forward. We see the MXEF Index BGCC200 Index

USD5bn in bonds recently taken up by two Abu Dhabi banks for the DFSF Source: Bloomberg
and reaffirming statements from the U.A.E. Central Bank to support liquidity
of the U.A.E banking system as a clear sign of federal unity. Table 1: Market Weights of BGCC200
Saudi Arabia 52%
How much have valuations already discounted a recovery? Qatar 14%
With regional issues being addressed and worked out (e.g. restructuring of Kuwait 12%
Abu Dhabi 11%
Dubai World, Saad/Algosaibi debts), we believe the lagging performance of Dubai 7%
regional equity markets is likely to catch up with the recent strong EM Oman 2%
performance. While global risk appetite for equities continues to increase, Bahrain 2%
the GCC200 index is still around 50% below its high in Jan-08, whereas the Source: Bloomberg and J.P. Morgan.
MSCI EM is only around 25% below its high in Nov-07.

Recommendations
We accept that the restructuring of Dubai World could have been better
communicated to financial markets, but believe that the reaction of the
financial markets to this news creates attractive opportunities for investors in
our preferred MENA names with no or little exposure to Dubai: Aldar
Properties (Aldar) in the property sector, First Gulf Bank (FGB) in the
financial sector and Qatar Telecom (Qtel) in the telecom sector.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Aldar 5.46 ALDAR UH OW 3,835 7.98 6.42 0.68 0.85 0.0% 11.0%
FGB 18.75 FGB UH OW 7,025 8.59 7.81 2.18 2.40 1.9% 17.0%
Qtel 150.90 Qtel QD OW 6,093 5.75 5.83 20.39 20.42 7.3% 11.1%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of cob 23 November 2009.

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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

MENA Equity Research


Extended stock coverage into MENA region

Over the past few months, we have built our Dubai-based equity research MENA Equity Research:
team and have extended stock coverage into the MENA region. With Christian KernAC
financials, real estate and telecoms, we cover the three main sectors in the (Telecoms/Infrastructure)
MENA region. This already includes more than a dozen key stocks in our (971-4) 428-1789
christian.a.kern@jpmorgan.com
coverage universe which we will extend on an ongoing basis.
JPMorgan Chase Bank, N.A., Dubai Branch
Financials – Abu Dhabi banks attractively positioned vs CEEMEA peers Alex Comer
We believe Abu Dhabi banks are attractively placed to benefit from balance (Petrochemicals)
sheet growth, driven by economic flows arising out of a) the rising price of (44-20) 7325-1964
alex.r.comer@jpmorgan.com
crude oil supporting the Abu Dhabi's finances and b) Abu Dhabi's continuing
J.P. Morgan Securities Ltd.
infrastructure investments supported by strong capitalization and sovereign
backing within the shareholding structure. Notwithstanding the further Naresh Bilandani
(Financials)
expected asset quality deterioration, to some extent potentially arising out of (971-4) 428-1763
the Dubai World restructuring (where NBAD and FGB have limited naresh.n.bilandani@jpmorgan.com
exposure vs. their balance sheet size) and its secondary impacts, we believe JPMorgan Chase Bank, N.A., Dubai Branch
that strong coverage ratios and pre-provisioning profits provide an ample Muneeza Hasan
buffer for our OW Abu Dhabi names to suffer a rise in NPLs without making (Real Estate/Construction)
any losses on the bottom line. Rising investor risk appetite in GEMs and (971-4) 428-1766
muneeza.z.hasan@jpmorgan.com
attractive valuations of Abu Dhabi banks - trading at a more than 20% NAV JPMorgan Chase Bank, N.A., Dubai Branch
discount vs. their CEEMEA peers - is likely in our view to help close the
35%-45% upsides to Dec-10 PTs that we see in our OW Abu Dhabi stocks. Ranjan Sharma
(91-22) 6157-3305
Our key recommendation within MENA financials is First Gulf Bank. ranjan.x.sharma@jpmorgan.com

J.P. Morgan India Private Limited


Real estate – need for differentiation
As the local equity markets gradually absorb the impact of the announced For MENA Equity Sales advice, please
restructuring of Dubai World and the recent rise in Dubai and Abu Dhabi contact:
CDS spreads, we see an increasing need for differentiation between Dubai Stephen Daly
and Abu Dhabi fundamentals. We remain OW on Abu Dhabi property stocks (971-4) 428-1715
stephen.a.daly@jpmorgan.com
and highlight that while investor risk appetite may reduce in the near to
JPMorgan Chase Bank, N.A., Dubai Branch
medium term, broad sector dynamics remain unchanged and favourable for
Abu Dhabi-based property developers. As Dubai suffers from a housing Sadiq Hussain
(971-4) 428-1741
surplus with vacancy levels as high as 25% in certain areas, Abu Dhabi sadiq.s.hussain@jpmorgan.com
continues to face a housing shortage unlikely to be met until 2011-2012 due JPMorgan Chase Bank, N.A., Dubai Branch
to limited supply in the pipeline. While U.A.E. property prices are down 45-
50% from peak levels, we prefer exposure to Abu Dhabi-based developers, Flagship reports
as they enjoy stronger underlying fundamentals. Our key recommendation
• MENA Telecom Sector - Initiating coverage on
within MENA real estate is Abu Dhabi-focused Aldar Properties.
GCC telecoms (Oct 8, 2009)
• SABIC – A geared play on oil and cyclical
Telecoms – good time to add to GCC telecom positions
recovery: Initiate with OW (Sept 3, 2009)
While local equity markets digest the Dubai World restructuring news, we
• MENA Property Sector - Initiating coverage on
highlight four reasons why we believe it is a good time to add to GCC
UAE property (Aug 10, 2009)
telecom positions: 1) strong valuation support; 2) our expectations of good
• MENA Financial Sector - Initiating coverage on
4Q results; 3) room to catch up for GCC markets; and 4) risk appetite for
UAE banks (Jul 1, 2009)
emerging markets continues to improve. Our top pick within MENA telcos is
Qatar Telecom, rated Overweight with more than 50% prospective upside
and one of our key stock calls in our JPM CEEMEA telecom universe.

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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

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Adrian Mowat Emerging Markets Equity Research
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Sector Overviews

77
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Agribusiness, Pulp and Paper


Long Logistics, Short Sugar

Key sector dynamics Brazil


The agribusiness sector is more about supply than demand. Hence, the global Agribusiness
recovery is less of a factor than the outlook for supply, with some exceptions.
Debbie Bobovnikova, CFAAC
The three exceptions within our coverage are: (1) ethanol demand; (2) cotton (1-212) 622 3489
demand; and (3) freight prices. The pulp and paper sector is more leveraged debbie.bobovnikova@jpmorgan.com
to rising economic activity than the agribusiness sector.
J.P. Morgan Securities Inc.

Implications of a global recovery


Flagship reports
Because it is linked to higher economic activity and rising oil prices, ethanol
demand should benefit next year. However, demand is also tied to • Suzano : Inflection Point in Earnings -
government policies and, in Brazil, sales of flexfuel vehicles. In fact, demand Upgrade to OW (11/10/2009)
has continued to be strong throughout the downturn in Brazil due to • SLC Agricola : Lowering Est and Price
incentives for car purchases. Hence it is hard to see a significant acceleration Target on Lower 09/10 Growth Outlook
of the trend next year. Cotton demand, on the other hand, is tied to global (10/27/2009)
economic recovery, and we are starting to see signs of an improvement, • LatAm Agribusiness : Sector Guide: Key
which would benefit producers such as SLC Agricola (SLCE3/N). However, Discussions at 2nd Annual Conference
the global cotton stock-to-use ratio is still extremely high at 47%, so we (10/22/2009)
expect it will take some time to work this down to more “bullish” levels.
• SLC Agricola : Disappointing 2Q Results -
Finally, logistics prices will benefit as industrial activity picks up, tightening
the availability of transportation. Pulp and paper sector demand benefits from Adj. Est. and Downgrading to Neutral, Intro
economic recovery – due both to rising consumer demand and to rising 2010 Price Target (08/13/2009)
employment (printing and writing papers). While we expect employment to • ALL: CEO Call Highlights (4/19/2009)
be a laggard, rising consumer demand should benefit demand for consumer • LatAm Agribusiness: Sugar Logistics
packaging, such as boxboard. Agreement - LT Positive for ALL
(3/10/2009)
How much have valuations already discounted a recovery? MSCI EM Agribusiness: Absolute and
We think valuations for the sugar/ethanol sector are the most stretched, with relative to MSCI EM
the market valuing peak earnings (on peak sugar prices) as the new normal. 300
Grain markets seem to be factoring in some recovery in supply-demand in
250
both the grains and cotton. On the other hand, we think the pulp/paper and
logistics sectors are not giving full value to the recovery. 200

Recommendations 150
Our top pick in the LatAm agribusiness sector is railroad operator ALL 100
(ALLL11/OW). We also like the pulp/paper producer Suzano (SUZB5/BZ).
We would highlight sugar/ethanol stocks as ones to avoid, especially Acucar 50
Guarani (ACGU3/UW), which is the most levered and least profitable of the 97 99 01 03 05 07 09
three producers. Relativ e Absolute
Source: MSCI, Datastream.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (Ps) Div. yield ROE
Price Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
ALL 16.45 ALLL11 OW 6,185 24.1 18.1 0.74 0.87 1.7% 17.0%
Suzano 17.90 SUZB5 OW 3,059 6.2 14.8 2.79 1.18 0.7% 7.9%

Stocks to avoid
Guarani 4.94 ACGU3 UW 811 NM 45.2 -0.29 0.11 0 2.9%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 25 November 2009.

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Adrian Mowat Emerging Markets Equity Research
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adrian.mowat@jpmorgan.com

Autos & Industrials


Focus on sustainable growth names
Key sector dynamics Frank LiAC
Looking into 2010, we believe the regional auto sector should be supported by (852)-2800-8511
key positives including: (1) continued demand recovery, as driven by rising frank.m.li@jpmorgan.com
household disposable income, low penetration, and a relatively loose credit J.P. Morgan Securities (Asia Pacific) Limited
environment. Among others, China is riding the third auto boom on the breakout
of car demand in tier-three cities. In India, the acceleration in economic growth Flagship reports
could be conducive for sustained auto demand recovery entering 2010; and (2) • DongFeng Motor Co., Ltd.–Pole position (Jan
accommodative policies. We believe the chance for China to renew the 16, 2009)
preferential tax cut policies on expiration at the end of the year is at around 70% • China autos–Staging an earlier-than-
as the government wants to ensure policy continuity for promoting domestic expected recovery in FY09 (Mar 30, 2009)
consumption. In India, while some of the stimulus measures (such as excise duty • AutoWIN & Auto WINdata–Regional auto
cuts) may be partially rolled back next year, the overall policy environment sector views, sales trends, forecasts etc
remains favorable; and (3) relatively low cost of raw materials. On the other (Monthly)
hand, a possible sharp rebound in oil prices and potential monetary tightening • Brilliance China–A phoenix is China’s auto
sector(Oct 30, 2009)
could still weigh on the sector: a broad-based tightening in China is expected to
kick in as of 2Q10, while India’s central bank has signaled that it will end its • India Auto Manufacture: Stay invested, More
steam ahead (Aug 6, 2009)
stance of monetary easing in early 2010.
• Hyundai Mobis: Small step to holding co.,
Implications of a global recovery stronger recurring profit profile, battery
The synchronized global economic recovery and resultant rebound in auto venture in the works. Upgrade to OW (Aug
demand recovery in developed markets could benefit most export-oriented auto 30, 2009)
players such as Korean names. For China and India, whose auto markets are MSCI Autos and MSCI Autos relative to MSCI
generally domestic consumption-driven, a solid recovery in exports could help Emerging Markets Autos
improve their labor markets, their household disposable income growth and their 175
car consumption. Meanwhile, we expect more Chinese auto companies may seek
mergers and acquisitions in overseas markets in 2010 on the back of the 150
improved economic outlook in developed markets. 125
How much have valuations already discounted a recovery 100
Regional auto producers are generally trading at around mid-cycle valuations,
with leading auto names trading at above mid-cycle valuations. For instance, 75
DongFeng Motor is now trading at 11.2x FY10E P/E, about one-standard 50
deviation above the average historical prospective P/E of 8.3x. Meanwhile,
25
Maruti Suzuki is trading at 15.4x FY10E P/E, versus its trough prospective P/E
of 8.0x, and historical average prospective P/E of 14.0x. 97 99 01 03 05 07 09
Relativ e Absolute
Recommendations
We prefer domestic consumption-driven auto names such as China autos and Source: MSCI, Datastream.

India autos due to the low penetration rates in these markets to exports-driven
auto names such as Korean autos. Our top picks within the region include Maruti
Suzuki, Astra International, Hyundai Motor and Yulon Motor. Our stocks to
avoid list includes Weichai Power.

Top picks and stocks to avoid


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

79
Adrian Mowat Emerging Markets Equity Research
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adrian.mowat@jpmorgan.com

Consumer
Selective stock picking
Key sector dynamics Vineet Sharma, CFAAC
Discretionary consumption trends in Asia will continue to be influenced by (852) 2800-8523
wage growth and ‘wealth creation’ from the property market and local stock vineet.k.sharma@jpmorgan.com
J.P. Morgan Securities (Asia Pacific)
markets. The return of modest inflation in food prices augurs well for staples.
Limited
An end to aggressive discounting to clear inventories is near, which should
aid margin recovery. In LATAM, declining interest spreads, easing credit Andrea TeixeiraAC
supply, increasing consumer confidence, higher disposable income, increase (1-212) 622-6735
in employment, and declining food inflation have allowed for a better share andrea.f.teixeira@jpmorgan.com
of wallet for discretionary items. However, retail sales growth in Mexico still Alan AlanisAC
remains under pressure. In 2010 we believe earnings growth for Russian (1-212) 622-3697
alan.alanis@jpmorgan.comJ.P. Morgan
consumer names should be driven by recovery in consumption, business Securities Inc.
expansion and M&A activity, as well as a stronger ruble.
Implications of a global recovery Sean HolmesAC
(27-11) 507-0373
Export driven economies such as China and Korea should benefit the most sean.x.holmes@jpmorgan.com
from global recovery. Better economic fundamentals, stability in wages, J.P. Morgan Equities Ltd.
employment and improving confidence should propel consumer spending in
2010. We expect consolidation to continue for LATAM food and beverages Elena JouronovaAC
+7 495 967 3888
and Russian retail. However, all is not well for SA and Mexico. There is a
elena.jouronova@jpmorgan.com
risk that household credit growth could remain muted for long in SA, J.P. Morgan Bank International LLC
depressing household consumption. Mexico, which relies heavily on the US
through exports and workers' remittances, will take a while before it revives. Flagship reports
How much have valuations already discounted a recovery • Identifying potential short-term and long
We are positive on dominant staples in Asia and expect them to benefit from term winners (10/18/09)
benign inflation. Expectations are quite low for Chinese discretionary names. • China Discretionary: Time to take profit or
In LATAM, though current prices have started to reflect the strong recovery ride the momentum? (06/09/09)
in retail sales, they are still 20-35% below peak. In SA, furniture counters • SA Retail: In pursuit of value
still have scope to rerate. Our sector analysts in Russia are of the view that • Russian Retail: Growth outlook improving
expected recovery in consumer purchasing power is partially priced in. on faster expansion and stronger FX
MSCI EM Consumer: Absolute and relative
Recommendations
to MSCI EM
We like United Spirits in Asia as a play on the fastest growing spirits market 270
globally. Our top picks in CEEMEA are JD Group and Magnit in CEEMEA, 210
and FEMSA and LAME in LATAM. 150
90
30
97 99 01 03 05 07 09
Relativ e Absolute
Source: MSCI, Datastream.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
JD Group 4340 JDG SJ OW 937 37.3 7.3 116.5 597.1 0.0 18.8
Femsa 45.2 FMX US OW 16174 24.7 20.3 1.8 2.2 1.1 10.3
China Mengniu Dairy Co. 23.1 2319 HK OW 5165 28.2 24.8 0.8 0.9 0.0 17.5
United Spirits Limited 1228 UNSP IN OW 3309 44.0 34.8 27.9 35.3 0.3 12.6
LAME 13.9 LAME4 BZ OW 5519 58.8 34.9 0.2 0.4 1.1 62.9
Magnit OAO 59.5 MGNT RU OW 4953 91.5 58.9 0.7 1.0 0.0 29.3
Stocks to avoid
Massmart 8519.0 MSM SJ UW 2270 14.4 14.7 592 581 4.4 35.8
Soriana 31.8 SORIANAB MM UW 4376 20.6 18.5 1.5 1.7 0.5 9.3
Hindustan Unilever Ltd. 284.3 HUVR IN UW 13305 25.3 27.3 11.3 10.4 2.6 99.5
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

80
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Energy
Oil price recovery done
Key sector dynamics Brynjar Bustnes AC
Demand data does not support current oil prices, and inventories are high and (852) 2800-8578
OPEC’s compliance is fading. Weak demand and non-OPEC production brynjar.e.bustnes@jpmorgan.com
would put downward pressure on oil. We expect gasoline demand to stay J.P.Morgan Securities (Asia Pacific)
weak, due to weak US demand. Distillate demand is expected to return to Limited

growth as a dominating EM market product. Since 2009, Russian oils have Nadia KazakovaAC
had to pay lower royalties and have enjoyed extensive tax breaks on (7-495) 937 7329
Greenfield developments. We might see further tax initiatives to encourage nadia.kazakova@jpmorgan.com
output growth in Russia. In LATAM, active rigs have increased 2% since J.P Morgan Securities Ltd.
August ’07 while they have declined 44% in the US and 9% in the Middle
East, the largest producing region globally Sergio TorresAC
(212) 622-3378
sergio.torres@jpmorgan.com
Implications of a global recovery
J.P. Morgan Securities
Oil prices are at the high-end of the trading range (US$60- 80/bbl). High oil
prices have pushed oil companies’ earnings up. In Russia, we estimate Flagship reports
output might be up be over 1% in 2009E and could rise by 2.6% y/y in 2010E
(to 10.1MMbppd), driven by the launch of East Siberian greenfields projects. • One Minute on Oil (ad hoc)
In Asia, Petchem had a strong recovery but ME capacity is still missing. Next • Crude Reality (weekly)
year this capacity should have a major negative impact on margins, despite a • Russian Gas: Gazprom revisited
potential pick-up in demand. • Russia Integrated Oils: Oil shares hit year-
endPTs.
How much have valuations already discounted a recovery • Petrobras: More Oil Than Meets the Eye
Our sector analysts in Asia are positive on integrated and refining relative to MSCI EM Energy: Absolute and relative to
upstream/ petchem. Integrated/less oil leverage stocks are currently cheapest MSCI EM
with rerating or positive news being potential drivers. Russian integrated oils 700
are also trading at 12%-19% discounts to historical average PERs, and have 600
not yet discounted a recovery. 500
400
Recommendations
300
We like Rosneft and Gazprom in CEEMEA, and Sinopec and SK Energy in
200
Asia. In LATAM, we prefer stocks that can deliver production growth on top
of revenue enhancement driven by the value of crude. Our top picks reflect 100
our optimism for Brazilian offshore: OGX and Petrobras. Our stock to avoid 0
is Ecopetrol. 97 99 01 03 05 07 09
Relativ e Absolute
Source: MSCI, Datastream.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Gazprom 5.6 GAZP RU OW 133282 6.3 5.2 0.9 1.1 0.0 12.3
Rosneft 7.9 ROSN LI OW 83620 11.8 7.2 0.7 1.1 1.4 19.5
SK Energy Co Ltd 108000 096770 KS OW 8512 9.5 7.7 11357 13955 2.1 14.7
Sinopec Corp - H 6.4 386 HK OW 136013 8.6 8.3 0.7 0.8 3.0 16.6
Petrobras 38.5 PETR4 BZ OW 206917 12.9 11.7 3.0 3.3 1.7 17.4
OGX 1430 OGXP3 BZ OW 26309 nm nm 16.4 5.7 0.0 3.8
Stocks to avoid
Lukoil 55.6 LKOH RU N 47291 6.6 6.4 8 9 2.5 12.5
Ecopetrol 2600.0 ECOPETL CB UW 53189 16.8 13.2 154 197 4.6 27.1
PetroChina 9.4 857 HK UW 339259 15.4 13.8 0.6 0.7 3.2 14.0
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

81
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Financials
Credit trends improving
Key sector dynamics Sunil GargAC
We expect credit demand to recover cyclically in EM in sync with economic (852) 2800-8518
growth and backed by a continuation of monetary policy. Nominal interest sunil.garg@jpmorgan.com
rate increases are expected to drive modest NIM expansion. Credit trends are J.P. Morgan Securities (Asia Pacific)
improving in the region and this bodes well for the re-emergence of loan Limited
growth. Valuations are pretty cheap in CEEMEA and we believe P/NAV
Paul FormankoAC
above 3 could be the peak of the market by 2011. We fear non conventional (+44) 207-325-6028
intervention in credit markets in Asia. paul.formanko@jpmorgan.com

Implications of a global recovery J.P. Morgan Securities Ltd.


Bank earnings lag economic recoveries, and to that extent, 2010 promises to
be a seriously positive earnings recovery year in EM. We might however see Saul MartinezAC
(1-212) 622-3602
regulatory insistence on reducing leverage in the business over the next few Saul.martinez@jpmorgan.com
years. In LATAM, economic conditions differ throughout the region. We
J.P. Morgan Securities Inc.
expect an increase in loan origination and a fall in early stage delinquencies
in Brazil. The move from deflation to inflation would improve the NIMs in Flagship reports
Chilean banks. In CEEMEA, Turkish financials should do well in the
medium to long term. SA banks are likely to be a 2H story in our view and • From Fear to Growth (05-09)
could underperform in 1H vs some of their peers in CEE, Turkey, Russia and • The Empire Strikes Back (10 -09)
GCC because of a delayed earnings rebound, defensive balance sheets and • CEEMEA Financials: Beyond 2009
investor preference for higher beta banking stocks. • MENA Financials: Initiating coverage on
UAE banks
How much have valuations already discounted a recovery
• Santander Brasil: Closing the GAAP
Despite a substantial 121% rally in MSCI Asia financials from Mar-09 lows,
we see an c20% upside to consensus estimates in Asia. Similarly in LATAM, MSCI EM Financials: Absolute and relative
to MSCI EM
as profits improve we see meaningful multiple expansion still likely at 270
Bradesco, Santander Brasil and Bancolombia. In CEEMEA, valuations are
still cheap and have not completely discounted a recovery. 210
Recommendations
Our top picks in Asia include BOC (growth opportunity), Fubon (a play on 150
structural turnaround in Taiwan). In LATAM, we like Santander Brasil. Our
top picks from CEEMEA are Vakifbank (cheap valuation) and Sberbank. 90

30
97 99 01 03 05 07 09
Relativ e Absolute
Source: MSCI, Datastream.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Vakifbank 3.1 VAKBN TI OW 5059 6.8 5.8 0.5 0.5 6.1 18.9
Bank of China - H 4.1 3988 HK OW 145716 12.7 9.0 0.3 0.5 5.0 21.3
Shinhan Financial Group 44150 055550 KS OW 17845 16.2 10.6 2717 4165 2.0 11.8
Fubon Financial Holdings 36.0 2881 TT OW 9034 13.6 10.8 2.6 3.3 5.6 14.0
Santander Brazil 22.0 SANB11 BZ OW 47594 16.5 12.9 1.3 1.7 3.3 12.0
Sberbank 2.2 SBER RU OW 48139 111.5 14.9 0.0 0.2 0.9 12.6
Stocks to avoid
Nedbank Group Ltd 11120.0 NED SJ UW 7334 12.3 9.1 901 1216 4.9 13.2
Bank Rakyat Indonesia 7650.0 BBRI IJ UW 9896 13.3 11.2 577 684 3.0 28.4
Banorte 45.9 GFNORTEO MM N 7083 15.8 13.1 2.9 3.5 0.4 15.2
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

82
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

India IT services
Improving fundamentals but mostly reflected in share
prices; we see limited upside
Key sector dynamics Manoj SinglaAC
The IT services and software sector has seen a good rebound in terms of (91-22) 6157-3587
revenues, earnings and share prices along with greater confidence from CIOs manoj.singla@jpmorgan.com
to spend on technology. While the sector saw better resilience than global IT J.P. Morgan India Private Limited
even in 2008 due to the anti-cyclical nature of the sector (cost pressure in
downturns force CIOs to move work offshore due to significant cost Flagship reports
savings), improvement in outlook for the banking sector has been a key • Indian IT Services: (11/05/2009)
driver in the past three months. We note that the banking sector is the largest • Hexaware: Turnaround at mid-cycle (10/09/2009)
contributor of revenues for Indian IT companies. Moving forward, developed • Polaris Software: A leveraged play to the recovery
market economic recovery (primarily the US and the UK) and general CIO in financial services IT spending (10/09/2009)
sentiment remain key for the sustenance of growth in 2010. The other key • Infotech Enterprises: Engineered for growth
variable is currency—a strengthening rupee will be negative for the sector. (10/09/2009)
Implications of a global recovery
We believe that the global downturn has led to further polarization of MSCI Software Services and MSCI Software
Services relative to MSCI Emerging Markets
business towards large players. Further, Satyam’s debacle and expanding Software Service
service portfolio of large players are accelerating the move towards large
players. We believe that large players would be the first ones to benefit from 500
the recovery as technology spending improves. However, a sustained
400
recovery should eventually benefit mid-sized players as well. Further, we do
think that hardware and semiconductor has a higher leverage to economic 300
recovery and would benefit more than IT services (given that IT services is
slightly anti-cyclical). 200

How much have valuations already discounted a recovery 100


We believe that valuations for the sector are largely discounting a recovery
0
with most analysts already factoring in ~20% growth in 2010E and P/Es at
97 99 01 03 05 07 09
17-19x. We do not see a significant P/E re-rating from here with estimate
Relativ e Absolute
upgrades key for further share price upsides. Hence, we expect stocks to
Source: MSCI, Datastream.
have limited absolute upside (~10-15%), although downsides may be limited
as well given continued global recovery.
Recommendations
Infosys remains our top pick in the large-cap sector given its top-tier
execution and management quality. Among mid-caps, we believe Mindtree
has the best management and quality systems. Vanceinfo is our pick from the
Chinese IT services sector. Among stocks to avoid, we are negative on HCL
Infosystems.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS Div. yield ROE
Price Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
MindTree Ltd. 634.5 MTCL IN OW 537 80.8 12.6 7.9 50.4 0.8 33.8
Infosys Technologies 2327.9 INFO IN OW 28638 22.8 21.8 102 107 1.3 29.6
VanceInfo Technologies Inc. 17.6 VIT US OW 782 34.5 26.1 0.5 0.7 0.0 19.2
Stock to avoid
HCL Infosystems 146.8 HCLI IN N 687 10.5 10.1 14.0 14.6 4.1 18.7
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.

83
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Internet and Media


Expect reaccelerating ad spend growth
Key sector dynamics Jean-Charles LemardeleyAC
Advertising is going through a deep global recession that has hit previously (44-20) 7325 5763
fast growing emerging markets harder than developed markets, as some of jean-charles.lemardeley@jpmorgan.com
the price increases in recent years have unraveled. Most markets in Central J.P. Morgan Securities Ltd
and Eastern Europe are down 25-35% from 2008. While television is holding
up better than print and other media (except online), it is also shrinking in Dick WeiAC
(852) 2800-8535
excess of 20% in most markets. Many broadcasters report that they believe dick.x.wei@jpmorgan.com
they have reached the trough, although the recovery has yet to start. Online
J.P. Morgan Securities (Asia Pacific)
portals in Asia are likely to see a gradual recovery in earnings in FY10, Limited
mainly driven by the increased online ad spending. We expect internet ad
spending in China to see significant pick up in 2010, benefited by higher ad Manoj SinglaAC
rates, and events like World Expo and World Cup. The structural growth of (91-22) 6157-3587
manoj.singla@jpmorgan.com
Korean online market on the other hand is capped given Korea’s high
penetration of online ads. The online recruitment industry in India is a late J.P. Morgan India Private Limited

cycle-play on the economic recovery.


Flagship reports
Implications of a global recovery • CEEMEA Telecoms and Media: Key
Recovery in EM advertising markets post crisis and deep recessions usually Sector Views and Global Weekly
takes 2-3 years. This would point to stabilization in 2H09/1H10, followed by Perspective
a fairly rapid recovery. In our view, while the secular concerns that have been • NCsoft: Aion's flight to the US and Europe
in place since long before the crisis are still in place, this is more than offset MSCI EM Internet and Media: Absolute and
by the still strong growth potential in ad markets in the region. Chinese relative to MSCI EM
domestic spending growth will likely lead to a pick-up in financial services, 240
auto, real estate and general industries ad-spending next year. 200

How much have valuations already discounted a recovery 160


Most internet stocks have recovered YTD in 2009. 2010 recovery still has not 120
fully reflected in the share prices. Stocks of CEEMEA broadcasters,
particularly CTCM and CME, have only partially priced in the recovery. 80

40
Recommendations
97 99 01 03 05 07 09
Our top picks in the space are Russian broadcaster CTC Media and internet
Relativ e Absolute
companies Sohu.com, Info Edge India, Baidu & NCsoft.
Source: MSCI, Datastream.

Top picks and stocks to avoid


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

84
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Metals and Mining


Emerging Stronger in 2010
Key sector dynamics Steve ShepherdAC
(27-11) 507 0386
We are bullish on the real estate sector, driven by robust demand from China steve.a.shepherd@jpmorgan.com
and expected above trend growth in the developed economies in 2010.
However, what could contain external supply is a strengthening ruble and Yuriy VlasovAC
rand. This could force the exporters to shrink their export flow in exchange (7-495) 967-7033
yuriy.a.vlasov@jpmorgan.com
for the benefits of domestic supply. This especially holds true for Russia J.P. Morgan Bank International LLC
which expects a +16% y/y growth in steel demand (JPM e). In SA, platinum
supply is likely to be constrained by ongoing enforced safety-related Rodolfo R. De Angele, CFAAC
production stoppages, low rand PGM basket prices, an uncertain outlook for (55-11) 3048-3888
rodolfo.r.angele@jpmorgan.com
an inadequate electricity and water supply to fund new mining projects, and
uncertainty regarding BBBEE/nationalisation issues. Banco J.P. Morgan S.A.

Flagship reports
Implications of a global recovery
The demand for commodities is highly leveraged to a global recovery, and • Platinum Foresight: Recovery Ahead
the commodities sector should emerge much stronger in 2010. The demand • Russian Steel : Time to revisit investment
situation is improving across the world, driven earlier by restocking demand case
and later by recovery in real demand, mainly in China. The key risks remain • Russian Metals & Mining: Shifting the
in the form of stabilization of inventories at below-normal levels. goalpost to end of 2010
• Latin Steels: Expectations are just too high
How much have valuations already discounted a recovery
The market sees a steady recovery path for the sector in 2010. In SA, we MSCI EM Metals and Mining: Absolute and
believe the ingredients are coming together for another surge in PGM prices, relative to MSCI EM
possibly in 2010/11. On the other hand, valuations seem stretched in 800
LATAM. The stocks in the sector already seem to be discounting healthy 700
growth in volumes along with a robust pricing scenario. 600
500
Recommendations 400
We like MMK (strong domestic footprint) in Russia. In SA, the only “shop 300
for platinum” in the world our top pick is highly geared AngloPlat. In 200
LATAM, we continue to prefer stocks that are cheap, at least on a relative 100
basis. Our top picks are Ternium and Group Mexico. We recommend that 0
investors avoid Usiminas (UW), as we maintain our cautious view on 97 99 01 03 05 07 09
Brazilian flat-steel prices. Relativ e Absolute
Source: MSCI, Datastream.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Grupo Mexico 30.5 GMEXICOB MM OW 18135 19.5 13.7 0.1 0.2 3.4 23.2
Ternium 33.4 TX US OW 6686 26.9 15.6 1.2 2.1 4.1 8.4
MMK 0.7 MAGN RU OW 8269 74.0 18.5 0.01 0.04 1.4 4.9
Northam Platinum Ltd 3950.0 NHM SJ OW 1883 21.6 30.2 183 131 1.5 5.6
Anglo Platinum 73504.0 AMS SJ OW 23168 69.3 32.5 1060 2260 0.0 14.5
Stocks to avoid
Usiminas 50.5 USIM5 BZ UW 14367 38.0 14.6 1.3 3.5 2.1 10.9
Southern Copper 35.9 PCU US UW 30481 30.4 20.3 1.2 1.8 2.5 31.9
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

85
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Real estate
Away from manufacturers to landowners
Key sector dynamics Christopher GeeAC
EM homebuilders rebounded strongly in 2009, primarily on account of low (65) 6882-2345
interest rates and abundant liquidity. On the other hand, property prices in the christopher.ka.gee@jpmorgan.com
MENA region and Russia fell c. 35-50% from their 2008 peak. We expect J.P. Morgan Securities Singapore Private
Limited
property prices to stabilize next year as the macroeconomic landscape
improves and demand starts to recover. In LatAm, we prefer the Brazil HBs Elena JouronovaAC
over the Mexico HBs given a more favorable growth outlook in Brazil. +7 495 967 3888
elena.jouronova@jpmorgan.com
Implications of a global recovery JPMorgan Bank International LLC
With improving global dynamics and strengthening oil prices, the UAE and
Muneeza HasanAC
Russian economic fundamentals are stabilizing. The liquidity situation, which +971 4 428-1766
was very tight in 1H09, is easing, with banks opening up to mortgage muneeza.z.hasan@jpmorgan.com
lending. On the back of Dubai World restructuring, we see an increasing need JPMorgan Chase Bank N.A. Dubai Branch
for differentiation between Dubai and Abu Dhabi fundamentals; broad sector
Adrian E HuertaAC
dynamics continue to remain favorable for Abu Dhabi based property
(52 81) 8152-8720
developers. In Asia, homebuilders would face competition in markets like adrian.huerta@jpmorgan.com
China and India where strong debt and equity capital markets have restored J.P. Morgan Casa de Bolsa, S.A. de C.V.,
the balance sheets of second or third-tier homebuilders who may now J.P. Morgan Grupo Financiero

compete for land and with new launches. In LATAM, Brazil should grow
Flagship reports
stronger than Mexico; we see upside in both.
• MENA Property Sector-Initiating coverage
How much have valuations already discounted a recovery
on UAE property
Real estate prices have limited downside in Abu Dhabi and Russia from
• Russian Homebuilders
current levels with tough industry fundamentals gradually being priced in.
• The Bricks & Mortar Report
Property prices are down c. 45-50% from peaks in the UAE and 35% in
• Asian REITs Report: August 09
Russia. In LatAm, we believe that a recovery is more priced in for Mexico
• BZ-HB – Benefiting from the Crisis
HBs relative to Brazil HBs. Residential home pricing has rebounded in most
MSCI EM Real Estate: Absolute and
of Asia, and regulators are acting to stem exceptional price increases as we relative to MSCI EM
saw in Korea, Singapore. Asian property stocks are trading at a 17% discount 120
to NAVs, with some mild potential for discount narrowing in 2010. 90
60
Recommendations
30
Our top pick from MENA is Abu Dhabi focused Aldar Properties. We favour
0
homebuilder LSR in Russia. Our top picks among the LatAm HBs are PDG
97 99 01 03 05 07 09
and Urbi. In Asia, we like stocks with greater commercial real estate
Relativ e Absolute
exposure. We retain our UW on China HBs, and are OW on HK REITs.
Source: MSCI, Datastream.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Aldar Properties 5.5 ALDAR UH OW 3867 8.1 6.5 0.7 0.9 0.0 11.0
Urbi 25.3 URBI* MM OW 1889 12.8 9.7 2.0 2.6 0.0 13.8
PDG Realty 17.4 PDGR3 BZ OW 3647 21.2 14.7 0.8 1.2 1.2 19.7
LSR 6.5 LSRG LI OW 3044 50.0 17.6 0.1 0.4 0.0 11.8
Ayala Land 11.8 ALI PM OW 3231 40.1 39.4 0.3 0.3 0.5 7.1
Stocks to avoid
Homex 71.0 HOMEX* MM N 1824 9.7 8.2 7.3 8.7 0.0 19.2
Beijing Capital Land 4.0 2868 HK N 1063 19.2 12.0 0.2 0.3 2.8 14.1
New World China Land 2.9 917 HK UW 2146 10.1 20.2 0.3 0.1 2.4 2.1
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

86
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Semiconductor
The margin trends between upstream and
downstream would be the key factor to watch
Key sector dynamics JJ ParkAC
We went through a sudden and substantial inventory de-stocking to re- (822) 758-5717
stocking in a short period, mainly driven by macro issues. Now, the global jj.park@jpmorgan.com
market volatility has already been covered and overall situation is back to J.P.Morgan Securities (Far East) Limited,
normal. In 2009, downstream companies (especially assemblers) have Seuoul Branch

enjoyed decent margins due to low component prices and better expected
Flagship reports
end-demand, while component makers suffered from margin pressure due to
falling UT given high fixed costs. We expect the trend to reverse in 2010 • Semiconductor Migration (09/21/2009)
since semiconductor companies are likely see robust volume recovery with • Display Tracker (09/29/2009)
an end-demand recovery. • Korea Technology (10/14 /2009)
• TSMC: Looking for… (10/08/2009)
Implications of a global recovery • IC Assembly & Testing (10/18/2009)
We expect key end-demand to show double-digit growth in 2010, with
10.3% increase in PC shipments, 12.1% increase in handset market, and 20% MSCI Semiconductors and MSCI
growth in LCD TV. Due to the low base in 2009 and ongoing ASP decline, Semiconductors relative to MSCI Emerging
Markets Semiconductors
we expect overall market size to be still below recent peak level. Hence, we
forecast the tech space to experience more moderate growth rather than a 250
sharp recovery due to a combination of ASP decline and relatively high base
in 2H09. 200

How much have valuations already discounted a recovery 150


Most tech stocks are trading at mid-cycle valuations, except for some sub-
sectors such as TFT-LCD (close to trough value) and LED (close to peak 100
value). Hence, earnings momentum in sub-sectors would be key catalysts to
individual stocks since current share prices seem to be priced in a moderate 50
recovery in 2010. 01 02 03 04 05 06 07 08 09
Relativ e Absolute
Recommendations Source: MSCI, Datastream.
We prefer multi-year growth story such as rechargeable battery for EV
(SDI), LED TV theme (SEMCO), and solar supply chains (OCI). We
continue to believe foundry and back-end companies are likely to benefit
given robust volume growth and relatively moderate ASP decline. We
recommend a pair trading (Long Korea panels and Short Taiwan panels) in
the TFT-LCD space. For DRAMs, we expect DRAM price momentum to
start loosening by the year-end, so investors would find a good entry point
after a share price correction.

Top picks and stocks to avoid


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

87
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Technology Hardware
Content meeting hardware

Key sector dynamics Alvin KwockAC


Our three sector-wide themes are: (1) content becomes the key focus: cloud (852) 2800-8533
computing, smartphone app store, internet explorer TV—favoring companies alvin.yl.kwock@jpmorgan.com
involved in application store, input and network interface; (2) hardware J.P. Morgan Securities (Asia Pacific) Ltd.
commoditization leads up to a secular fall in hardware price point; (3)
accelerated outsourcing—LCD TV mega outsourcing trend and Nokia Flagship reports
moving away from Japanese vendors; (4) handset winners take it all—iPhone • Acer: More catalysts for margin upside in
ending exclusivity, Moto moving to whitebox model for EM; and (5) PC 2010/11, introduce Jun-10 TP at NT$83
pricing power shifting from ODMs to brands. (8/20/2009)
• Mediatek: Smartphone strategy: Low price
Implications of a global recovery
device, lots of contents (9/15/2009)
Downstream pricing power is falling. Consumers are trading down during
• PC forecasts: Unit resilient in 2009, raise
the downturn—this will likely continue as employment rate is still weak. A
2010/11 forecasts on corporate rebound
much faster-than-expected recovery in global manufacturing is causing
and rising EM penetration (9/21/2009)
supply bottlenecks, e.g., labor shortage is re-surfacing in Chinese coastal
• Notebook ODMs: 2003-04 Déjà vu: Win 7
areas, while upstream vendors are now running at high utilization rates.
Optimism, Calpella GM woes (9/25, 2009)
Corporate IT spending will likely pick up from 2010 onward, due to a • Hon Hai: Improving revenue outlook for
rebound in corporate profits and also an aging PC installation base. We 2010, raise PT to NT$155 (11/5/2009)
expect a gradual, rather than a sharp, rebound, due to the high unemployment • China IT Distribution Primer: A complex
rate. web (11/13/2009)

How much have valuations already discounted a recovery MSCI Technology Hardware and MSCI
Most PC stocks are now trading at three-year high in valuations, both on P/E Technology Hardware relative to MSCI
Emerging Markets Technology Hardware
and P/B terms; thus Windows 7 launch is already in the price, and partially
due to the corporate upgrade cycle as well. Handset stocks are still trading 370
towards the lower-end of the historical range, though probably justified 320
considering a much slower growth trajectory in the next decade.
270
Recommendations 220
Pricing power (Acer and AsusTek) and an addressable market expansion
170
(Hon Hai, AAC Acoustics and Mediatek) are the key criteria for our stock
picks. We would avoid areas with elevated competition (HTC, Quanta and 120
BYD Electronics). With the uncertainty in the timing of corporate upgrade 70
cycle, we prefer a pair trade strategy to LONG Catcher and AVOID Compal. 97 99 01 03 05 07 09
Relativ e Absolute
Source: MSCI, Datastream.
Top picks and stocks to avoid
Price Code Rating Mkt cap P/E (x) EPS (LC) Div. yield ROE
(LC) (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
MediaTek Inc. 504.0 2454 TT OW 16993 14.5 11.9 34.8 42.4 4.9 37.4
Acer Inc 79.5 2353 TT OW 6604 17.9 12.3 4.4 6.5 3.8 17.6
AAC Acoustic 10.1 2018 HK OW 1607 19.7 12.6 0.5 0.8 3.2 26.4
ASUSTek Computer 63.0 2357 TT OW 8275 22.0 13.1 2.9 4.8 2.5 11.6
Hon Hai Precision 135.0 2317 TT OW 35820 16.8 13.3 8.0 10.1 1.9 18.0
Stocks to avoid
Quanta Computer Inc. 63.1 2382 TT UW 7271 10.4 9.9 6.1 6.4 5.1 20.6
HTC Corp 362.5 2498 TT UW 8925 12.9 14.8 28.1 24.6 5.4 24.6
BYD Electronic 5.7 285 HK UW 1646 22.8 16.3 0.2 0.3 0.0 11.4
Pair Trade
Long Catcher 80.2 2474 TT OW 1,653 15.4 11.0 5.2 7.3 2.8 12.9
Avoid Compal 40.35 2324 TT UW 5,024 10.6 11.6 3.8 3.5 5.9 14.8
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.

88
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Telecom
Limited exposure in selective growth markets
Key sector dynamics Andre BaggioAC
As a non-cyclical sector, telecom stocks have been less sensitive to an (55-11) 3048-3427
improving macro economic environment in 2009; specific local market andre.baggio@jpmorgan.com
Banco J.P. Morgan S.A.
competition risks matter more. In CEEMEA, the crisis has had a visible
impact on revenue growth, resulting in significantly slower growth in Jean-Charles LemardeleyAC
previously fast expanding markets or even contraction in the more mature +44 (0) 20 7325 5763
ones. Within Asia, in 2009, the perceived growth markets of India and China jean-charles.lemardeley@jpmorgan.com
have been burdened with excess capacity and competition. J.P. Morgan Securities Ltd

Implications of a global recovery Tim StoreyAC


(852) 2800-8563
Although telecom revenues are closely correlated to GDP growth, the swings
tim.storey@jpmorgan.com
in telecom revenues above or below GDP tend to be small, indicating that
J.P. Morgan Securities (Asia Pacific)
telcos should be good defensive stocks. Select stocks in CEEMEA offer Limited
exposure to high growth markets in Africa. Growth in Asia remains sluggish
despite the recovery due to competition and overcapacity; we recommend Flagship reports
investors own ex-growth Taiwanese and Malay stocks with strong capital • CEEMEA Telecoms and Media: Key Sector
management ideas Views and Global Weekly Perspective
• CEEMEA Telecoms: Revisiting the secular
How much have valuations already discounted a recovery growth case (February 06, 2009)
Telecom sector share price underperformance YTD is not surprising. We • LatAm Mobile: Lessons on termination
expect this trend to last into 2010 and therefore we remain Underweight the rates from Europe (Jul-09)
sector for next year. The MSCI EM telecom index has lagged the broader • Br Mobile Key call: Quality Matters (Jul-09)
MSCI EM index by nearly 30% YTD. Valuations in the sector are not rich • AP Telecom Daily
but not cheap either. We think the sector is close to fairly valued, so a • Asia Telecom Outlook (April/7/2009)
selective exposure is better. • China: 3G too expensive (Oct/6/2009)
MSCI EM Telecom: Absolute and relative to
MSCI EM
Recommendations
280
Telecoms in emerging markets are largely going ex-growth. We recommend
exposure to stocks that are exposed to selective growth markets or are focused 240
on capital management. In CEEMEA, a number of reasonably priced growth 200
stocks are available. Our top picks are MTN, QTel and Turk Telekom.
160
Central European incumbents are unattractive. In Asia, we recommend
defensive Far East Tone. Telmex, in Latam, should be avoided as it faces 120
declining core voice trends, aggressive regulation and in 2010 negative 80
impact of new taxes and is richly valued. China suffers overcapacity and
40
China Unicom, is vulnerable to further downside.
97 99 01 03 05 07 09
Relativ e Absolute
Source: MSCI, Datastream.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Turk Telekom 4.4 TTKOM TI OW 9987 9.6 7.2 0.5 0.6 10.0 35.3
Qtel 148.7 QTEL QD OW 5989 7.5 7.3 20 20 7.4 19.3
MTN Group Limited 11465.0 MTN SJ OW 27920 11.3 9.7 1016 1180 2.5 21.6
Far EasTone Tele. 37.0 4904 TT OW 3729 13.3 11.9 2.8 3.1 7.3 14.0
Totvs 104.5 TOTS3 BZ OW 1853 20.2 15.8 5.2 6.6 1.1 34.1
Stocks to Avoid
Magyar Telekom 726.0 MTEL HB UW 4133 9.0 8.9 81 82 10.2 9.6
Telmex 17.9 TMX US UW 16224 11.0 12.3 1.6 1.5 4.0 48.6
China Unicom 10.3 762 HK UW 31314 26.8 38.8 0.4 0.3 1.2 3.0
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

89
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Transportation
Darkest before dawn
Key sector dynamics Corrine PngAC
We forecast a moderate 7% and 8% rebound in passenger and shipping (65) 6882-1514
volumes in 2010, respectively. However, upside surprises are possible as corrine.ht.png@jpmorgan.com
passenger and cargo demand has historically grown at 1.7x and 2.0x real J.P. Morgan Securities Singapore Private
GDP growth, respectively, and J.P. Morgan Economics team forecasts a 7.2% Limited
real GDP growth for Asia ex-Japan in 2010. We are more bullish on the
Adrian E HuertaAC
airline and land transport sectors’ earnings recovery than shipping as the (52 81) 8152-8720
former does not face structural overcapacity once demand normalizes. adrian.huerta@jpmorgan.com
Airport operators’ performance is strongly correlated to passenger traffic J.P. Morgan Casa de Bolsa, S.A. de C.V.,
volumes, and given Mexico’s exposure to tourism, we believe the sector J.P. Morgan Grupo Financiero
could benefit significantly from a synchronized economic recovery. A
smaller supply-demand gap could drive an earlier re-rating. Rebounding fuel Flagship reports
prices are less of a concern when demand recovers, as surcharges help to • Airline Traffic Monitor (Monthly)
offset this impact. Most transport stocks benefit from a weak US$ given their • Transportation: 2H09 Outlook and Beyond
large US$ capex and debt. This downturn will drive consolidation but cross- • MX-AP – Not ready to take off
border M&As are more difficult due to regulatory restrictions and political
sensitivity. MSCI EM Transportation: Absolute and
relative to MSCI EM
Implications of a global recovery 180
Transport stocks are early cyclicals and have begun to price in part of the
150
recovery. Most are near their historical average valuations. Although the
stocks could trade range-bound for the near-term or correct when they 120
announce weak 2H/4Q results, we see any weakness as a good opportunity to 90
accumulate airlines, select shipping and land transport companies as they
have historically provided large returns in a cyclical upturn. We expect traffic 60
to improve in 2010 mainly due to better comps. 30
0
How much have valuations already discounted a recovery
97 99 01 03 05 07 09
Looking at P/E 12 months forward, companies are trading on average at an Relativ e Absolute
8% premium to the last 24 months’ average. GAP is trading with the highest
Source: MSCI, Datastream.
premium, 19%, vs 6% for Asur and 1% for OMA.

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

Top picks and stocks to avoid


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

90
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Utilities
Still a defensive sector
Key sector dynamics Anderson Frey, CFAAC
The long term growth prospects of utilities in EM remains positive due to low (1-212) 622 6615
penetration. However, regulated prices and returns, raw material price anderson.frey@jpmorgan.com
inflation and competition in some markets make this sector unattractive. In J.P. Morgan Securities Inc.
Russia, a considerable portion of the wholesale electricity market has been
liberalized. In Asia, Hong Kong/Indian/Thailand power utilities have an Edmond LeeAC
(852) 2800-8575
automatic cost pass-through mechanism and are preferred as they are
edmond.ch.lee@jpmorgan.com
insulated to cost price inflation. Latam utilities face a lot of competition and
J.P. Morgan Securities (Asia Pacific)
tight government returns. Limited

Implications of a global recovery Sergey ArininAC


Utilities’ volumes are linked to the global recovery and the uptick in IP. (7-495) 967-7031
sergey.v.arinin@jpmorgan.com
However, they are likely to underperform the market and unlikely to re-rate
significantly as some utilities face margin pressures. We expect 2010 will be J.P. Morgan Bank International LLC

more supportive for power equipment manufacturers.


Flagship reports
• BRAZILIAN ELECTRIC UTILITIES : 2010
How much have valuations already discounted a recovery
Outlook (11/08/09)
Following the significant re-rating since Mar-09, most of the utilities in Asia
• ENERSIS: Long-Term Value, Recovery
are trading at close to our price targets, and hence we do believe recovery has
Upside, Upgrade to OW (11/09/09)
been well discounted by the market already. Russian utilities seem attractive
• China Infra-Strategy: From recovery
if earnings projections are based on continuing market liberalization.
potential to sustainable GARP (Aug09)
• China Power Checkers: Plenty of –VE
Recommendations
drivers but catch up potential intact (Oct09)
In Brazil, we recommend looking at the distribution companies and the
• RusHydro: Looking beyond the accident: do
Chilean utility ENERSIS (ENERSIS/ENI), due to its leverage to a recovery in
not overlook positive triggers, upgrading to
electricity demand in the Andean countries. In Russia, RusHydro is an
OW (09/30/2009)
interesting stock, as it is becoming attractive on a relative basis. RusHydro
trades at 5.6x 2011E EV/EBITDA vs. 9.7x for international peers. In Asia, we MSCI EM Utility: Absolute and relative to
MSCI EM
recommend Xinao and PGAS within the gas utilities sector on >20% core 190
EPS CAGR from FY08-11E on low penetration rates. We also like Tata
Power on 25% EPS CAGR from FY08-11E driven by continued capacity 150
addition protected by strong coal linkages.
110

70

30
97 99 01 03 05 07 09
Relativ e Absolute
Source: MSCI, Bloomberg, J.P. Morgan.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Enersis 182.8 ENERSIS CI OW 12070 8.4 9.1 22 20 4.5 18.6
RusHydro 0.04 HYDR RU OW 9898 13.8 14.5 0.003 0.003 0.000 6.0
Perusahaan Gas Negara 3575.0 PGAS IJ OW 9089 13.9 14.8 256 242 2.9 41.8
Tata Power 1321.0 TPWR IN OW 6723 24.0 18.4 55.0 71.6 1.1 12.8
Xinao Gas 18.2 2688 HK OW 2471 23.3 18.8 0.8 1.0 1.3 14.5
Stocks to Avoid
Sabesp 31.2 SBSP3 BZ UW 4040 5.5 5.8 5.7 5.4 4.7 10.0
CPFL Energia 32.4 CPFE3 BZ UW 8851 12.9 11.1 2.5 2.9 8.6 27.2
Datang International 3.3 991 HK N 12610 23.8 14.6 0.1 0.2 3.3 7.2
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

91
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

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92
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Stocks for 2010

93
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

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


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

94
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adrian.mowat@jpmorgan.com

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


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

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


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

95
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Mid-cap ideas: J.P. Morgan mid-cap top picks


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

Mid-cap ideas: J.P. Morgan mid-cap stocks to avoid


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

96
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Small-cap ideas: J.P. Morgan small-cap top picks


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

Small-cap ideas: J.P. Morgan small-cap stocks to avoid


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

97
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Top Picks by country strategists


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

98
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Top Picks by country strategists (cont'd)


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

99
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Stocks to avoid by country strategists


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

100
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Top Picks by Sector Heads


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

101
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Top Picks by Sector Heads (cont'd)


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

102
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Stocks to Avoid by Sector Heads


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

103
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Contrarian calls
2009 losers picked to be 2010 winners (Stocks with relative underperformance end
2008 to date and top pick)
Share Price % Performance
Name Price Target Change Bloomberg JPM Mkt Cap, P/E (X) Yield (%) ROE (%) end 08 to date (%)
(LC) (LC) to target Code Rating US$ MM 2009E 2010E 2010E 2010E Absolute Rel to Region
Top Picks
Gazprom 5.6 9.9 75.8 GAZP RU OW 133282 6.3 5.2 0.0 12.3 52.3 (16.6)
Aldar Properties 5.5 7.8 41.6 ALDAR UH OW 3867 8.1 6.5 0.0 11.0 38.8 (30.2)
Turk Telekom 4 6.0 36.4 TTKOM TI OW 10078 9.6 7.2 10.0 35.3 27.0 (41.9)
JD Group 4390.0 5253.0 19.7 JDG SJ OW 965 37.7 7.4 0.0 18.8 47.4 (21.6)
Qtel 148.7 230.0 54.7 QTEL QD OW 5989 7.5 7.3 7.4 19.3 35.8 (33.1)
SK Energy Co Ltd 108000.0 150000.0 38.9 096770 KS OW 8516 9.5 7.7 2.1 14.7 58.4 (10.6)
ABSA Group Ltd 12421.0 15371.0 23.8 ASA SJ OW 12012 10.9 8.1 5.2 18.4 42.0 (26.9)
Sinopec Corp - H 6 9 33.9 386 HK OW 136013 8.6 8.3 3.0 16.6 35.4 (33.6)
LG Display 30950.0 40000.0 29.2 034220 KS OW 9444 11.3 8.6 2.3 12.7 62.8 (6.2)
PTT Public Company 222 315 41.9 PTT TB OW 18910 10.7 8.7 3.8 16.0 32.5 (36.4)
Enersis 185.1 241.0 30.2 ENERSIS CI OW 12217 8.4 9.1 4.4 18.6 44.1 (24.8)
Manila Water Company Inc 16.0 19.0 18.8 MWC PM OW 680 10.7 9.5 3.2 22.1 21.8 (47.2)
MTN Group Limited 11540 15843.0 37.3 MTN SJ OW 28599 11.4 9.8 2.5 21.6 31.8 (37.1)
Urbi 25.5 34.0 33.4 URBI* MM OW 1923 12.8 9.7 0.0 13.8 42.6 (26.4)
Arca 37 44.0 17.6 ARCA* MM OW 2330 11.1 10.4 5.2 17.0 63.9 (5.0)
Fubon Financial Holdings 36.0 54.0 50.2 2881 TT OW 9037 13.6 10.8 5.6 14.0 52.7 (16.3)
Far EasTone Telecommunications 37.0 45.0 21.6 4904 TT OW 3730 13.3 11.9 7.3 14.0 0.7 (68.3)
Credicorp 71.7 88.0 22.7 BAP US N 5721 12.9 12.0 2.8 20.5 47.8 (21.1)
Public Bank (F) 10.9 13.8 26.6 PBKF MK OW 11289 15.2 12.9 3.9 29.5 30.7 (38.2)
Bank Central Asia (BCA) 4675 5500.0 17.6 BBCA IJ OW 12088 17.6 13.1 2.9 29.2 66.8 (2.2)
Sohu.Com 54.3 74.0 36.3 SOHU US OW 2087 14.8 12.8 0.0 24.5 18.3 (50.7)
Land & Houses 6 10 59.7 LH TB OW 1794 14.8 13.3 7.5 17.3 65.3 (3.6)
TSMC 60.0 72.0 20.0 2330 TT OW 48071 17.5 13.8 5.0 25.1 37.9 (31.1)
Tenaga 8.4 10.3 22.3 TNB MK OW 10716 39.9 14.0 1.6 9.7 37.5 (31.5)
Asur 61.6 53.0 (13.9) ASURB MM OW 1427 20.1 17.1 3.6 17.2 30.9 (38.1)
Femsa 45 50.0 12.3 FMX US OW 15937 24.7 20.3 1.1 10.3 50.0 (18.9)
Nan Ya Plastics Corp 54 61 12.8 1303 TT OW 13143 32.9 22.5 2.9 8.2 60.2 (8.7)
Amorepacific Corp 859000 998000 16.2 090430 KS OW 4282 24.6 23.0 0.0 18.5 45.0 (23.9)
United Spirits Limited 1228.0 1140.0 (7.2) UNSP IN OW 3304 44.0 34.8 0.3 12.6 42.5 (26.4)
China Airlines 10.0 16.0 60.5 2610 TT OW 1410 NM 80.0 0.0 1.3 -7.5 (76.5)
Source: Datastream, MSCI, IBES, J.P. Morgan estimates.
Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE.

104
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

2009 winners picked to be 2010 losers (Stocks with relative outperformance end 2008
to date and stocks to avoid)
Share Price Performance
Name Price Target % Change Bloomberg JPM Mkt Cap, P/E (X) Yield (%) ROE (%) end 08 to date (%)
(LC) (LC) to target Code Rating US$ MM 2009E 2010E 2010E 2010E Absolute Rel to Region
Stocks to Avoid
Lukoil 56.8 75 32.0 LKOH RU N 48312 6.7 6.6 2.4 12.5 73.8 4.8
Weichai Power 60.3 47.0 (22.0) 2338 HK N 6941 9.9 8.6 0.8 45.2 312.7 243.7
Quanta Computer Inc. 63.1 57 (9.7) 2382 TT UW 7273 10.4 9.9 5.1 20.6 87.0 18.0
HCL Infosystems 146.8 160.0 9.0 HCLI IN N 686 10.5 10.1 4.1 18.7 71.4 2.5
Bank Rakyat Indonesia 7650.0 6650.0 (13.1) BBRI IJ UW 9896 13.3 11.2 3.0 28.4 93.9 24.9
Beijing Capital Land 4.0 3.5 (12.5) 2868 HK N 1063 19.2 12.0 2.8 14.1 222.6 153.6
Banorte 46.5 49.0 5.4 GFNORTEO MM N 7253 15.8 13.1 0.4 15.2 97.6 28.7
Severstal 7.5 8 4.9 CHMF RU UW 7590 NM 13.7 0.8 6.4 130.8 61.8
TMB Bank Public Co. 1.1 1.0 (6.5) TMB TB N 1337 22.1 14.1 0.0 6.8 89.5 20.5
Cencosud 1490.0 1578.0 5.9 CENCOSUD CI UW 6586 17.4 14.4 2.1 9.8 111.3 42.4
Usiminas 50.0 38.5 (23.0) USIM5 BZ UW 14413 38.0 14.6 2.1 10.9 154.3 85.3
BYD Electronic 5.7 4 (36.4) 285 HK UW 1646 22.8 16.3 0.0 11.4 107.3 38.4
Taishin Financial Holdings 12.2 12.0 (1.2) 2887 TT UW 2146 7.3 17.1 5.9 6.5 113.4 44.4
Manila Electric Co. 209.0 165 (21.1) MER PM N 4997 30.3 18.2 3.5 20.1 253.6 184.6
Southern Copper 34.6 27.5 (20.6) PCU US UW 29444 30.4 20.3 2.5 31.9 123.3 54.3
Exito 17140.0 17800 3.9 EXITO CB N 2478 32.7 30.2 0.4 3.4 92.4 23.4
VTB 4.3 4.3 0.9 VTBR LI UW 22229 NM 38.6 0.5 3.5 89.9 20.9
Guarani 4.9 NA - ACGU3 BZ UW 800 nm 44.9 0.0 2.9 221.4 152.4
China Cosco Holdings 9.7 10 2.7 1919 HK N 18608 NM 49.2 0.4 4.2 80.7 11.8
China Southern Airlines 2.5 2.1 (16.7) 1055 HK N 5529 33.2 82.4 0.0 2.3 95.3 26.4
Source: Datastream, MSCI, IBES, J.P. Morgan estimates.
Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE.
Note: BYD Electronic - We revised PT to HK$4.8 on November 29.

105
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Running with 2009 winners (Stocks with relative outperformance end 2008 to date and
top picks)
Price % Yield ROE Performance end 08 to
Name Share Target Change Bloomberg JPM Mkt Cap, P/E (X) (%) (%) date (%)
Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2010E 2010E Absolute Rel to Region
Top Picks
Thai Oil Public Company 39.8 62.0 56.0 TOP TB OW 2439 6.0 5.6 7.5 19.8 76.0 7.0
Vakifbank 3.1 5.4 73.1 VAKBN TI OW 5104 6.8 5.8 6.1 18.9 168.0 99.0
Bank Asya 3.0 5.0 65.6 ASYAB TI OW 1779 9.4 6.7 3.6 22.0 161.6 92.7
Rosneft 8.1 10.3 27.3 ROSN LI OW 85739 12.1 7.4 1.4 19.5 111.2 42.3
First Gulf Bank 18.8 26.0 38.7 FGB UH OW 7019 8.6 7.8 1.9 16.9 104.9 36.0
Powertech Technology Inc 88.2 108.0 22.4 6239 TT OW 1827 11.0 8.2 5.1 27.6 72.2 3.2
Hyundai Motor Company 94600.0 140000.0 48.0 005380 KS OW 17769 8.8 8.2 1.6 10.1 164.0 95.1
Bank of China - H 4.1 5.7 38.0 3988 HK OW 145716 12.7 9.0 5.0 21.3 94.8 25.9
Shinhan Financial Group 44150.0 60000.0 35.9 055550 KS OW 17853 16.2 10.6 2.0 11.8 71.0 2.1
Siam Commercial Bank 78.5 110.0 40.1 SCB TB OW 8009 12.5 10.6 2.8 16.7 70.0 1.0
Energy Development Corp. 4.1 5.6 38.3 EDC PM OW 1610 10.6 10.7 9.3 24.2 168.7 99.7
Metropolitan Bank 45.5 50.0 9.9 MBT PM OW 1744 17.0 11.5 2.6 1012.7 99.5 30.6
Petrobras 38.5 46.0 19.6 PETR4 BZ OW 209104 12.9 11.7 1.7 17.4 124.8 55.9
All 15.5 21.0 35.5 ALLL11 BZ OW 6130 15.2 11.8 1.8 17.0 110.9 41.9
MediaTek Inc. 504.0 630.0 25.0 2454 TT OW 16998 14.5 11.9 4.9 37.4 132.5 63.5
Acer Inc 79.5 92.0 15.7 2353 TT OW 6606 17.9 12.3 3.8 17.6 91.3 22.4
Copel 33.9 38.0 12.2 CPLE6 BZ OW 5300 9.4 12.4 2.1 7.9 86.9 17.9
MindTree Ltd. 634.5 700.0 10.3 MTCL IN OW 536 80.8 12.6 0.8 33.8 178.0 109.0
AAC Acoustic 10.1 14.6 44.0 2018 HK OW 1607 19.7 12.6 3.2 26.4 191.4 122.4
Astra International 32000.0 37000.0 15.6 ASII IJ OW 13587 15.3 12.6 3.2 24.9 251.6 182.7
Bancolombia 42.8 50.0 16.9 CIB US OW 8426 15.3 12.9 2.7 19.2 86.8 17.9
ASUSTek Computer 63.0 70.0 11.1 2357 TT OW 8277 22.0 13.1 2.5 11.6 74.1 5.2
DongFeng Motor Co., Ltd. 11.0 13.0 18.4 489 HK OW 12207 15.0 13.2 1.3 23.6 339.2 270.2
Hon Hai Precision 135.0 155.0 14.8 2317 TT OW 35831 16.8 13.3 1.9 18.0 145.5 76.5
Grupo Mexico 30.5 31.5 3.3 GMEXICOB MM OW 18350 19.5 13.7 3.4 23.2 284.3 215.3
Unitech Ltd 79.3 120.0 51.3 UT IN OW 4055 10.8 13.7 0.1 17.2 87.0 18.0
Pacific Rubiales 15.0 18.0 20.2 PRE CN OW 3014 nm 14.0 0.0 21.6 691.7 622.7
Samsung SDI 125500.0 210000.0 67.3 006400 KS OW 4876 18.9 14.3 0.0 7.6 151.5 82.6
RusHydro 0.0 0.0 9.0 HYDR RU OW 9898 13.8 14.5 0.0 6.0 74.6 5.7
PDG Realty 17.2 19.0 10.3 PDGR3 BZ OW 3651 21.2 14.7 1.2 19.7 316.3 247.4
Perusahaan Gas Negara 3575.0 4700.0 31.5 PGAS IJ OW 9089 13.9 14.8 2.9 41.8 122.8 53.9
Sberbank 2.3 3.0 34.2 SBER RU OW 48571 112.5 15.0 0.9 12.6 201.4 132.4
Suzano 17.6 22.0 25.0 SUZB5 BZ OW 3145 6.3 14.9 0.7 7.5 94.2 25.2
AMMB Holdings 4.9 5.3 7.1 AMM MK OW 4331 15.5 15.4 1.6 11.0 102.4 33.5
UMC 15.6 19.0 21.8 2303 TT OW 6268 69.8 15.5 0.0 6.0 113.1 44.2
CTC Media 14.8 25.0 68.7 CTCM US OW 2255 17.6 15.4 0.0 19.7 211.7 142.7
Totvs 102.0 125.0 22.5 TOTS3 BZ OW 1828 20.2 15.8 1.1 34.1 277.2 208.2
China Yurun Food Group 18.0 21.0 16.9 1068 HK OW 3877 19.0 16.7 1.5 20.6 97.1 28.2
Container Corp. of India 1144.4 1260.0 10.1 CCRI IN OW 3187 18.1 16.7 1.2 21.5 93.0 24.0
LSR 6.5 10.0 53.8 LSRG LI OW 3044 50.0 17.6 0.0 11.8 755.3 686.3
PT Aneka Tambang Tbk 2250.0 2750.0 22.2 ANTM IJ OW 2251 48.0 18.4 1.0 13.6 139.3 70.4
Tata Power 1321.0 1450.0 9.8 TPWR IN OW 6713 24.0 18.4 1.1 12.8 75.8 6.9
MMK 0.7 1.1 52.7 MAGN RU OW 8269 74.0 18.5 1.4 4.9 174.1 105.1
Xinao Gas 18.2 22.2 21.7 2688 HK OW 2471 23.3 18.8 1.3 14.5 123.3 54.3
CP All Pcl 20.8 23.0 10.6 CPALL TB OW 2811 22.7 19.0 4.0 31.9 76.7 7.7
Naspers Ltd 27900.0 34108.7 22.3 NPN SJ OW 15161 23.7 19.0 1.0 12.0 110.3 41.4
Buenaventura 39.8 34.0 (14.7) BVN US N 10983 19.6 19.4 0.3 21.5 108.3 39.4
Genting 7.1 8.5 20.6 GENT MK OW 7659 24.5 19.7 0.7 9.6 94.4 25.5
Maruti Suzuki India Ltd 1567.2 1630.0 4.0 MSIL IN OW 9701 37.2 19.9 0.4 21.6 198.3 129.4
Tambang Batubara Bukit
Asam 15800.0 22500.0 42.4 PTBA IJ OW 3818 12.7 21.1 3.9 28.1 165.5 96.5
Infosys Technologies 2327.9 2550.0 9.5 INFO IN OW 28593 22.8 21.8 1.3 29.6 112.2 43.3

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Running with 2009 winners (Stocks with relative outperformance end 2008 to date and
top picks) (cont'd)
Price % Yield ROE Performance end 08 to
Name Share Target Change Bloomberg JPM Mkt Cap, P/E (X) P/E (X) (%) (%) date (%)
Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2010E 2010E Absolute Rel to Region
China Mengniu Dairy Co. 23.1 23.0 (0.2) 2319 HK OW 5165 28.2 24.8 0.0 17.5 128.7 59.7
VanceInfo Technologies 16.6 23.0 38.3 VIT US OW 741 32.7 24.7 0.0 19.2 269.5 200.5
ICICI Bank 850.9 NA - ICICIBC IN OW 20307 26.6 26.8 1.4 7.1 91.9 23.0
Larsen & Toubro 1589.5 1675.0 5.4 LT IN N 20441 31.0 27.6 0.0 19.2 102.5 33.5
Northam Platinum Ltd 3980.0 6100.0 53.3 NHM SJ OW 1930 21.7 30.4 1.5 5.6 140.7 71.7
Anglo Platinum 74900.0 91000.0 21.5 AMS SJ OW 24025 70.7 33.1 0.0 14.5 77.4 8.5
LAME 14.0 17.0 21.8 LAME4 BZ OW 5626 58.8 34.9 1.1 62.9 196.9 127.9
Info Edge India 806.4 900.0 11.6 INFOE IN OW 472 36.9 38.3 0.0 16.2 102.3 33.4
Ayala Land 11.8 13.9 18.3 ALI PM OW 3230 40.1 39.4 0.5 7.1 85.2 16.2
Baidu.com 434.2 460.0 5.9 BIDU US OW 15063 70.8 47.4 0.0 36.0 238.7 169.7
Yulon Motor Co., Ltd. 39.0 50.0 28.2 2201 TT OW 1895 41.5 56.6 0.5 1.8 180.8 111.8
Magnit OAO 59.5 80.0 34.5 MGNT RU OW 4953 91.5 58.9 0.0 29.3 270.7 201.8
NCsoft 145000.0 190000.0 31.0 036570 KS OW 2683 71.5 77.4 0.0 7.6 204.4 135.5
OGX 1416.0 2030.0 43.4 OGXP3 BZ OW 26325 nm nm 0.0 3.8 263.0 194.1
Source: Datastream, MSCI, IBES, J.P. Morgan estimates
Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE

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Non-consensus top picks and stocks to avoid


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

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Top Picks

109
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AAC Acoustics Overweight


HK$9.65
Price Target: HK$11
www.aacacoustic.com

Company description HK/China


AAC Acoustics is a manufacturer of miniature acoustic components, which Technology Hardware
are mainly used in mobile handsets. It manufactures speakers, receivers, Charles GuoAC
MFDs, microphones, vibrators, and other acoustic components for handsets. (852) 2800-8532
Its key customers include Nokia, Motorola, and leading smartphone players charles.x.guo@jpmorgan.com
such as Apple and RIM. The company is also diversifying into non-acoustic J.P. Morgan Securities (Asia Pacific)
components, which include phone camera lenses, ceramic components and Limited
antennae.
Price performance
12
Post mortem 9
AAC continues to gain share within Nokia in speaker and receiver, as well as 6
penetrating into new segments such as microphone and vibrator. Besides, 3
smartphone opportunities and non-acoustic forays provide AAC a strong 0
mid/long-term growth outlook, in our opinion. We expect its margins to No v-08 Feb-09 M ay-09 A ug-09 No v-09

continue to improve through 2010, mainly due to newer products and better A A C A co ustics (HK$ )
HSI (rebased)
mix (due to higher smartphone content). Source: Bloomberg.

Potential for earnings upgrades Performance


We estimate that a 1% upside in top line will lead to a 1.5% increase in net 1M 3M 12M
profit. We believe AAC is not sensitive to credit cost fluctuation as it is Absolute (%) 15.4 37.9 44.7
operating at minimal debt level. Relative (%) 9.8 31.5 66.7
Source: Bloomberg.
How much recovery is priced into the stock?
The stock has risen from nearly 4x forward P/E in Dec-08, when the handset Company data
industry was looking at a 10% decline in 2009, to about 12x forward P/E, 52-week range (HK$) 2.20-10.22
when we are looking at a 12% handset industry growth in 2010. Hence, any Mkt cap. (HK$MM) 11,850
improvement in handset outlook and better visibility should lead to a further Mkt cap. (US$MM) 1,529
re-rating of the stock. Avg daily value (US$MM) 1.9
Avg daily volume (MM) 2.0
Price target and key risks
Shares O/S (MM) 1,228
Our Dec-10 PT of HK$11 is based on our 10-year DCF valuation, assuming
Date of price 5-Nov-09
a WACC of 9%, a terminal growth rate of 0%, and a risk-free rate of 2.4%.
Index: Hang Seng 21,479
Our PT implies an FY10E P/E of 14x, the mid-point of its historical trading
Free float (%) 53
range of 4x-20x. A key risk to our PT is global handset demand volatility.
Exchange rate 7.8
Source: Bloomberg.
Bloomberg: 2018 HK; Reuters: 2018.HK
Rmb in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 2,256 2,239 3,093 3,809
Net profit 590 596 873 1,072
EPS (Rmb) 0.48 0.49 0.71 0.87
FD EPS (Rmb) 0.48 0.49 0.71 0.87
DPS (Rmb) 0.10 0.19 0.28 0.35
Sales growth (%) 15.6% (0.8%) 38.2% 23.1%
Net profit growth (%) 7.8% 0.2% 47.3% 22.8%
EPS growth (%) 8.2% 1.1% 46.5% 22.7%
ROE (%) 20.8% 18.2% 23.7% 25.1%
P/E (x) 17.7 17.5 12.0 9.7
FD P/E (x) 17.7 17.5 12.0 9.7
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009. We raised our PT to HK$14.6 on 10 Nov 2009.

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AAC Acoustics: Summary of financials


Profit and loss statement Cash flow statement
Rmb in millions, year-end December Rmb in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenues 2,256 2,239 3,093 3,809 Net Income 590 596 873 1,072
Cost of Goods Sold 1,316 1,259 1,713 2,122 Depr. & Amortisation 133 162 192 231
Gross Profit 940 980 1,380 1,688 Change in working capital 93 -389 99 -122
SGA &RD Expenses 272 275 327 396 Other 2 -5 -2 -2
Operating Profit (EBIT) 631 651 983 1,206 Cash flow from operations 818 364 1,163 1,178
EBITDA 764 813 1175 1437
Interest Income 0 0 0 0 Capex -438 -228 -400 -400
Interest Expense -10 -5 -4 -4 Disposal/(purchase) -113 -11 0 0
Investment Income (Exp.) 0 0 0 0 Cash flow from investing -551 -239 -400 -400
Non-Operating Income (Exp.) -5 8 0 0 Free cash flow 380 136 763 778
Earnings before tax 616 654 979 1,202
Tax -26 -62 -108 -132
Equity raised/ (repaid) -66 -38 0 0
Net Income (Reported) 590 596 873 1072
Debt raised/ (repaid) 37 38 -108 15
Other 0 -3 2 2
Rmb Dividends paid 0 -239 -349 -429
EPS (Reported) 0.48 0.49 0.71 0.87 Cash flow from financing -28 -241 -456 -412
BPS 2.53 2.79 3.22 3.74
DPS 0.10 0.19 0.28 0.35
Net change in cash 232 -115 307 366
Shares Outstanding (MM) 1,230 1,228 1,228 1,228
Beginning cash 1,051 1,283 1,167 1,474
Source: Company, J.P. Morgan estimates. Ending cash 1,283 1,167 1,474 1,840
Source: Company, J.P. Morgan estimates.

Balance sheet
Rmb in millions, year-end December Ratio analysis
FY08 FY09E FY10E FY11E %, year-end December
Cash and cash equivalents 1,283 1,167 1,474 1,840 FY08 FY09E FY10E FY11E
Accounts receivable 574 1,022 1,114 1,292 Gross Margin 41.7 43.8 44.6 44.3
Inventories 296 530 434 504 EBITDA margin 33.9 36.3 38.0 37.7
Others 102 104 104 104 Operating Margin 28.0 29.1 31.8 31.7
Current assets 2,254 2,824 3,125 3,741 Net Margin 26.2 26.6 28.2 28.1
SG&A/Sales 12.1 12.3 10.6 10.4
LT investments 0 0 0 0
Net fixed assets 1,359 1,425 1,633 1,803
Sales growth 15.6 -0.8 38.2 23.1
Others 91 102 102 102
Operating Profit Growth 5.5 3.2 50.9 22.7
Total assets 3,704 4,351 4,860 5,645
Net profit growth 7.8 0.2 47.3 22.8
EPS (Reported) growth 8.2 1.1 46.5 22.7
Liabilities
ST loans 200 239 130 145
Interest coverage (x) 62.9 134.3 243.6 298.9
Payables 366 632 719 836
Net debt to total capital Net Cash Net Cash Net Cash Net Cash
Others 23 53 59 69
Net debt to equity Net Cash Net Cash Net Cash Net Cash
Total current liabilities 589 923 908 1050
Long term debt 0 0 0 0
Other liabilities 0 0 0 0 Asset Turnover 60.9 51.5 63.6 67.5
Total liabilities 589 923 908 1050 Working Capital Turns (X) 1.4 1.3 1.5 1.6
Shareholders' equity 3,108 3,428 3,952 4,595 ROE 20.8 18.2 23.7 25.1
ROIC 19.8 17.1 22.6 24.3
Source: Company, J.P. Morgan estimates.
ROIC (net of cash) 32.0 26.3 34.3 39.0
Source: Company, J.P. Morgan estimates.

111
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ABSA Group Ltd Overweight


R126.00
23 November 2009
www.absa.co.za Price Target: R153.71
Jun 2010
Company description South Africa
Absa provides the most geared play on the domestic retail market and its Computer Hardware
investment banking division provides a more robust earnings base off which to Mervin NaidooAC
grow in our view. Growth opportunities in Africa are currently limited to (27-11) 507-0716
investment banking and bancassurance/wealth management. Absa is 58% held mervin.x.naidoo@jpmorgan.com
by Barclays. J.P. Morgan Equities Ltd.

Post mortem Absa relative price performance


Mortgage impairment unwind should support earnings growth during FY10E
and FY11E. We expect NIR growth to be a key earnings differentiator and ASA 3.0
is well positioned for NIR growth from its: (i) large and established retail 2.0
banking franchise, distribution and cross-sell ability; and (ii) established and
1.0
growing corporate franchises, enjoying flow, scale as well as strong client
relationships in our view. 0.0
02 03 04 05 06 07 08 09
Potential for earnings upgrades
Top line across the SA banks is set remain relatively sluggish and the negative Source: I-Net.
endowment should exacerbate margin pressure. We expect robust NIR growth
and the mortgage impairment unwind should support earnings growth during
FY10E and FY11E. A more expansionary stance introduces upside risk to
FY10E, whilst a healthy banking system provides downside protection.

How much recovery is priced into the stock?


Absa remains our top pick in the sector, with a cheap valuation not reflecting its
strong ROE franchise and robust earnings trajectory in our view. Management
instability however remains a key overhang.

Price target and key risks


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

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ABSA Group Ltd: Summary of Financials


Profit and Loss Statement Ratio Analysis
R mn millions, year end Dec FY08A FY09E FY10E FY11E R mn millions, year end Dec FY08A FY09E FY10E FY11E
Per Share Data
Net interest income 22,106 21,815 22,920 25,966 EPS Reported 1567.56 1143.53 1542.41 1987.04
% Change Y/Y 17.0% (1.3%) 5.1% 13.3% EPSAdjusted 1,412.10 1,216.48 1,581.38 2,039.56
Non-interest income 13,343 14,947 17,585 20,005 % Change Y/Y 7.3% (13.9%) 30.0% 29.0%
Fees & commissions - - - - DPS 595 500 642 828
% change Y/Y - - - - % Change Y/Y 6.2% -15.9% 28.4% 28.8%
Trading revenues - - - - Dividend yield 5.5% 4.3% 5.5% 7.0%
% change Y/Y - - - - Payout ratio 38.0% 43.8% 41.7% 41.6%
Other Income - - - - BV per share 6,950.10 7,892.95 8,878.82 10,125.50
Total operating revenues 35,449 36,763 40,504 45,971 NAV per share 6,950.10 7,892.95 8,878.82 10,125.50
% change Y/Y 16.3% 3.7% 10.2% 13.5% Shares outstanding 680.3 718.2 718.9 721.1
Admin expenses -21,193 -22,285 -24,029 -26,707
% change Y/Y 14.9% 5.2% 7.8% 11.1% Return ratios
Other expenses - - - - RoRWA - - - -
Pre-provision operating profit 21,048 21,482 23,658 26,760 Pre-tax ROE - - - -
% change Y/Y 27.5% 2.1% 10.1% 13.1% ROE 23.4% 16.4% 18.4% 20.9%
Loan loss provisions 8,858 14,513 14,147 14,933 RoNAV 23.7% 16.8% 18.7% 21.2%
Other provisions - - - -
Other nonrecurrent items - - - - Revenues
Earnings before tax 15,209 11,220 15,606 20,315 NIM (NII / RWA) - - - -
% change Y/Y 8.0% (26.2%) 39.1% 30.2% Non-IR / average assets 1.9% 1.9% 2.1% 2.2%
Tax (charge) 3,966 2,995 4,271 5,731 Total rev / average assets 5.2% 4.4% 4.9% 5.3%
% Tax rate 26.1% 25.0% 26.0% 27.0% NII / Total revenues 45.8% 35.5% 38.4% 42.3%
Minorities 194 229 252 277 Fees / Total revenues 54.2% 64.5% 61.6% 57.7%
Net Income (Reported) 10,592 7,996 11,083 14,307 Trading / Total revenues - - - -

Balance sheet
R mn millions, year end Dec FY08A FY09E FY10E FY11E R mn millions, year end Dec FY08A FY09E FY10E FY11E

ASSETS Cost ratios


Net customer loans 532,171 521,753 567,625 639,774 Cost / income 49.4% 50.1% 49.6% 49.2%
% change Y/Y 16.7% (2.0%) 8.8% 12.7% Cost / assets 3.0% 2.9% 2.9% 2.9%
Loan loss reserves 8,858 14,513 14,147 14,933 Staff numbers 37,828 35,558 35,558 35,914
Investments - - - -
Other interest earning assets - - - - Balance Sheet Gearing
% change Y/Y - - - - Loan / deposit 132.1% 120.2% 127.7% 132.6%
Average interest earnings assets 597,154 670,570 702,657 777,464 Investments / assets 4.2% 4.5% 4.5% 4.5%
Goodwill 957 957 957 957 Loan / assets 68.8% 66.4% 66.3% 67.0%
Other assets 62,228 67,206 72,583 78,389 Customer deposits / liabilities 60.6% 59.6% 58.3% 57.9%
Total assets 773,758 785,714 856,082 955,051 LT Debt / liabilities 24.7% 25.9% 26.6% 26.8%

LIABILITIES Asset Quality / Capital


Customer deposits 436,914 431,200 458,084 506,686 Loan loss reserves / loans 1.6% 2.7% 2.4% 2.3%
% change Y/Y 18.6% (1.3%) 6.2% 10.6% NPLs / loans 3.5% 7.3% 6.4% 5.6%
Long term funding 182,840 191,627 214,065 239,195 LLP / RWA - - - -
Interbank funding - - - - Loan loss reserves / NPLs 46.8% 36.9% 38.2% 40.5%
Average interest bearing liabs 402,730 434,057 444,642 482,385 Growth in NPLs 158.8% 107.8% (5.7%) (0.5%)
Other liabilities - - - - RWAs - - - -
Retirement benefit liabilities - - - - % YoY change - - - -
Shareholders' equity - - - - Core Tier 1 - - - -
Minorities 1,042 1,271 1,523 1,800 Total Tier 1 - - - -
Total liabilities 720,792 723,111 786,083 875,594

Source: Company reports and J.P. Morgan estimates.

113
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Acer Inc. Overweight


NT$77.8
Price Target: NT$92
www.acer.com
Company description Taiwan
Acer (TWSE: 2353) is the No #2 notebook PC brand globally and operates four Computer Hardware
sub brands—Acer, Gateway, Packard Bell and e-machines. It operates a purely Gokul HariharanAC
outsourced business model with what we believe to be a high degree of focus (852) 2800-8564
on channel management and branding. gokul.hariharan@jpmorgan.com

Alvin KwockAC
Post mortem (852) 2800-8533
We believe Acer has negotiated the downturn well, with a strong focus on alvin.yl.kwock@jpmorgan.com
J.P. Morgan Securities (Asia Pacific) Limited
inventory, receivables management, and lower price points (netbooks). Acer
has invested in the expansion of its China business. The company’s OP margins Price performance
have also been on an upswing as Acer has kept its OPEX under a tight control. 90

In 2009, Acer has benefited from the consolidation in the NB brand market NT$ 60

share, and emerged as the clear No #2 in PCs, surpassing Dell. 30


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

Potential for earnings upgrades 2353.TW share price (NT$)


TSE (rebased)
We believe the potential for upward earnings estimate revisions comes from OP Source: Bloomberg.
margin upside through: (1) better pricing vis-à-vis ODM vendors; and (2) a
focus on more profitable growth with disciplined pricing to distributors. Performance
Improvement in product mix towards emerging markets should also facilitate 1M 3M 12M
this process. Acer is trying to offer a broader SME product line and is also Absolute (%) -1.8 14.3 72.1
considering avenues to tap into the corporate market. If these come through, Relative (%) -0.8 5.6 13.1
then we see upside risk to revenue growth assumptions for 2010. Source: Bloomberg.

How much recovery is priced into the stock? Company data


Acer’s strong execution and market share gains appear to be priced into its 52-week range (NT$) 36.6-86.5
share price. What is not yet priced in, in our view, is the potential for margin Mkt cap. (NT$B) 208.94
Mkt cap. (US$B) 6.42
expansion, which leaves room for earnings upside in 2010E. The market Avg daily value (US$MM) 36.36
ascribes a zero value to Acer’s smartphone foray, which even if moderately Avg daily volume (MM) 36.36
successful, could trigger a re-rating. Shares O/S (MM) 2,686
Date of price 5-Nov-09
Index: TWSE 7.417
Price target and key risks Free float (%) 68
Our Jun-10 PT of NT$92 implies 15x 2010E core earnings, which we believe is Exchange rate 32.5
fair, supported by 36%/19% OP profit growth in 2010/2011E, largely driven by Source: Bloomberg.
OP margin expansion. A key risk to our PT is increase in competition.
Bloomberg: 2353.TT; Reuters: 2353.TW
NT$ in billions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Sales 546 574 668 766 ROE (%) 14.7 13.4 16.8 18.5
Operating profit 13.7 15.3 20.9 24.9 Core ROIC (%) 14.0 13.7 17.9 19.1
EBITDA 14.6 16.1 21.7 25.7 Core adjusted EPS 4.43 4.23 6.18 7.38
Pre-tax profit 14.8 15.3 21.7 26.3 Core OP growth (%) 55% 12% 36% 19%
Net profit 11.7 11.8 17.4 21.0 Core adjusted P/E (x) 17.7 17.7 12.1 10.1
MV of employee bonus 2.1 2.2 3.1 3.8 Quarterly EPS (NT$) 1Q 2Q 3Q 4Q
Adjusted net profit 11.7 11.8 17.4 21.0 EPS (FY08) 1.21 1.20 1.15 1.06
New Taiwan GAAP EPS (NT$)* 4.62 4.44 6.48 7.82 EPS (FY09E) 0.77 0.89 1.29 1.49
New Taiwan GAAP P/E (x) 16.8 17.5 12.0 9.9 EPS (FY10E) 1.36 1.38 1.76 1.96
NEW Taiwan GAAP EPS growth 4% -4% 46% 21% DPS (NT$) 3.60 2.00 3.15 4.10
YE BPS (NT$) 32.62 35.36 38.53 42.40
P/BV (x) 2.4 2.2 2.0 1.8 Jun-10 PT NT$ 92
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

114
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adrian.mowat@jpmorgan.com

Acer Inc.: Summary of financials


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

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

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

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

LT investments 6,774 9,174 9,125 8,844 Capex 1,673 1,019 0 0


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

Liabilities Equity raised/(repaid) 5,634 -1,160 0 0


ST Debt 9,337 1,360 1,578 1,626 Debt raised/(repaid) -8,709 8,589 3,530 779
Payables 72,116 107,737 125,626 138,330 Other -2,274 6,304 0 0
Others 67,862 67,437 71,897 79,149 Dividends -8,655 -5,286 -8,091 -10,610
Total current liabilities 149,315 176,535 199,101 219,105 Cash flow from financing -14,004 8,447 -4,560 -9,831
Long term debt 4,135 20,701 24,013 24,744
Other liabilities 7,115 7,517 7,517 7,517 Net change in cash -15,803 18,805 -420 8,259
Total liabilities 160,565 204,752 230,631 251,366 Beginning cash 37,945 22,142 40,946 40,527
Shareholder's equity 82,878 94,171 103,472 113,875 Ending cash 22,142 40,946 40,527 48,785
Source: Company reports and J.P. Morgan estimates.

115
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Aldar Properties Overweight


Price: AED5.46
Price Target: AED7.8
www.aldar.com
Company description MENA
Aldar Properties is Abu Dhabi’s largest property developer, with a UAE Property
diversified construction portfolio and 37% sovereign ownership. Tasked with Muneeza HasanAC
implementing Abu Dhabi’s Plan 2030, Aldar operates as a master developer, (Real Estate/Construction)
sourcing land for development, selling completed residential properties and (971-4) 428-1766
muneeza.z.hasan@jpmorgan.com
developing recurring income-generating assets. Aldar was listed on the Abu
JPMorgan Chase Bank N.A. Dubai Branch
Dhabi stock Exchange in April 2005, where the company has a foreign
ownership limit of 40%. Price Performance

Post mortem 6
Al Raha Beach and Yas Island are the company’s two most important
Dh
projects and account for over 70% of the total landbank under development. 4

With a total built-up area of 6.4Mn Sq M, Al Raha is a mixed-used


residential project with residential handovers starting from mid 2010. Yas 2

Island, which accounts for a sizable portion of Aldar’s investment property Nov-08 Feb-09 May-09 Aug-09 Nov-09

portfolio, is one of the two key tourist destinations being developed in Abu Source: Bloomberg
Dhabi, with a flagship Formula 1 race track, theme parks, retail and
hospitality. The two projects account for 54% of Aldar's SOTP-based NAV. Performance
1M 3M 12M
Absolute (%) -12.0 17.7 9.3
Potential for earnings upgrades
For future sales, we assume 30-35% lower residential and land sale prices Source: Bloomberg

from the peak in 2008. However, while there have not been any new
residential launches this year, the recent pick-up in land transactions is Company data
Price (Dh) 5.46
encouraging - 3Q09 land sales by Aldar were at prices that were 80-85% Date of price 23-Nov-09
above our forecasts. As the market stabilizes and retail investors’ confidence Price Target (Dh) 7.8
is restored, better then forecast prices for future residential and land sales 52-week range (Rs) 6.65 - 1.96
Market cap (AED Mn) 14,075
could serve as key triggers for profitability growth and stock performance. Market cap (US$ Mn) 3,835
Source: Bloomberg & J.P. Morgan
Price target and key risks
Aldar, our top pick and one of the preferred names in our EMEA property
universe, trades at attractive valuations (30% discount to our Dec 2010 SOTP-
based PT of AED7.8 – favourable compared to its regional peers at 20-25%
premiums). Key risks include Aldar’s high exposure to external debt, where an
extended property market downturn could restrict Aldar’s ability to meet its debt
obligation. Although we see this as unlikely as the company enjoys strong govt.
support and is critical to Abu Dhabi’s plan 2030.
Bloomberg: ALDAR UH; Reuters: ALDR.AD
AED Mn; year end December FY08 FY09E FY10E FY11E
Sales 4,978 2,574 7,189 6,901
Net profit 3,447 1,764 2,192 2,539
Headline EPS (AED) 1.34 0.68 0.85 0.98
Adjusted EPS (AED) 0.74 0.02 0.32 0.56
Sales growth (%) 306% -48% 179% -4%
Net profit growth (%) 53% -49% 24% 16%
P/E (x) 4.1 8.0 6.4 5.5
Net D/E 66% 124% 107% 94%
P/BV 0.88 0.79 0.70 0.63
ROE (%) 21% 10% 11% 11%
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

116
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adrian.mowat@jpmorgan.com

Aldar Properties: Summary of Financials


Profit and Loss statement FY08A FY09E FY10E FY11E Cash flow statement FY08A FY09E FY10E FY11E
Dh in millions, year-end Dec Dh in millions, year-end Dec
Sales 4,978 2,574 7,189 6,901 Net Income 3,447 1,764 2,192 2,539
% change Y/Y 305.8% (48.3%) 179.3% (4.0%) Depreciation & amortisation 14 163 203 211
Gross Profit 2,683 978 2,495 2,904 Change in working capital ex capex 2,335 (692) 525 5,164
% change Y/Y 379.2% (63.6%) 155.1% 16.4% Fair value gain on investment prop. -1,533 -1,700 -1,360 -1,088
EBITDA 2,310 306 1,630 2,287 Other - - - -
% change Y/Y (4.3%) (86.8%) 433.1% 40.3% Cash flow from operations 4,645 (386) 2,155 7,451
EBIT 3,818 1,843 2,788 3,164
% change Y/Y 59.4% (51.7%) 51.3% 13.5% Capex (16,341) (10,063) (904) (6,853)
Net Interest (371) (79) (596) (625) Other adjustments (4,523) (544) (253) 417
Earnings before tax 3,447 1,764 2,192 2,539 Free cash flow (9,060) (9,757) 1,015 318
% change Y/Y 77.5% (48.8%) 24.3% 15.8% Cashflow from Investments (20,864) (10,607) (1,157) (6,436)
Revaluation gain 1,533 1,700 1,360 1,088
Net Income (Reported) 3,447 1,764 2,192 2,539 Debt raised/(repaid) 17,361 10,614 0 0
% change Y/Y 77.5% (48.8%) 24.3% 15.8% Dividends paid (232) 0 0 (51)
Net Income (Adjusted) 1,914 64 832 1,451 Others (1,137) (457) 231 (65)
% change Y/Y 1494.2% (96.7%) 1206.9% 74.4% Cashflow from Financing 16,224 10,156 231 (65)
Shares Outstanding 2,577.9 2,577.9 2,577.9 2,577.9 Change in Cash (196) (916) 633 325
EPS (reported) 1.34 0.68 0.85 0.98 Beginning cash 3,358 3,163 2,246 2,879
% change Y/Y 53.1% (48.8%) 24.3% 15.8% Ending cash 3,163 2,246 2,879 3,204

Balance sheet FY08A FY09E FY10E FY11E Ratio Analysis FY08A FY09E FY10E FY11E
Dh in millions, year-end Dec Dh in millions, year-end Dec
Cash and cash equivalents 12,066 11,150 11,783 12,108 Gross Margin 53.9% 38.0% 34.7% 42.1%
Accounts receivable 5,651 6,176 5,751 5,866 EBITDA Margin 46.4% 11.9% 22.7% 33.1%
Trading property under development 7,130 11,471 10,502 12,806 EBIT margin 76.7% 71.6% 38.8% 45.9%
Other - - - - Adjusted net profit margin 38.4% 2.5% 11.6% 21.0%
Current assets 24,847 28,798 28,036 30,781 SG&A/Sales 3.1% 5.0% 4.5% 4.5%
Investment property 5,149 6,210 10,190 19,124
Investment property under development 15,804 21,394 20,287 16,645 Sales growth 305.8% (48.3%) 179.3% (4.0%)
Others 1,098 1,642 1,895 1,478 EBITDA growth (4.3%) (86.8%) 433.1% 40.3%
Total assets 49,767 61,520 64,042 71,795 Adjusted net profit growth 1494.2% (96.7%) 1206.9% 74.4%
ST loans 2,683 2,683 2,683 2,683 Adjusted EPS growth 1274.8% (96.7%) 1206.9% 74.4%
Payables 7,464 6,948 8,627 6,901
Others 2,136 1,878 299 7,303 Interest coverage (x) 10.3 23.3 4.7 5.1
Total current liabilities 12,283 11,509 11,609 16,887 Net debt to Total Capital 21.1% 35.8% 33.4% 29.4%
Long term debt 21,429 32,193 32,423 32,409 Net debt to Equity 75.1% 123.9% 107.2% 93.8%
Other liabilities 1,546 1,696 1,927 1,912
Total liabilities 33,735 43,724 44,054 49,319 Sales/assets 10.0% 4.2% 11.2% 9.6%
Minorities 0 0 0 0 ROE 21.5% 9.9% 11.0% 11.3%
Shareholders' equity 16,032 17,796 19,988 22,476 ROCE 6.1% 0.3% 2.7% 3.8%
Total Liabilities & Shareholders Equity 49,767 61,520 64,042 71,795

Source: Company reports and J.P. Morgan estimates.

117
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

América Latina Logística (ALL) Overweight


R$15.5
Price Target: R$21.0
www.all-logistica.com

Company description Brazil


América Latina Logística (ALL) is the largest independent provider of Agribusiness
logistics services in South America. It operates rail service on over 20,000
Debbie Bobovnikova, CFAAC
km of track in Brazil and Argentina and has an intermodal trucking business. (1-212) 622 3489
70% of its volumes (and a higher % of profits) come from shipping debbie.bobovnikova@jpmorgan.com
agricultural products, mainly soy, soy meal, corn, sugar, and fertilizer.
J.P. Morgan Securities Inc.

Post mortem Price performance


The company has continued to invest in efficiency and capacity expansion R$
throughout the downturn, which should allow it to benefit from higher
volumes and lower costs as well as from higher prices during the recovery. 20.0
In addition, the economic downturn has increased new industrial business as 15.0
clients focused again on cost control and decided to finally make the switch 10.0
to cheaper rail transport (vs. truck).
5.0
Potential for earnings upgrades 0.0
Economic recovery, as well as a significant recovery in agricultural Nov-08 M ar-09 Jul-09 Nov-09

production in Argentina and Brazil, will likely help ALL grow its front haul Source: Bloomberg.
and back haul (mostly fertilizer) traffic. It should also force truck rates up,
allowing ALL to increase its rates, which are referenced to truck rates. Performance
1M 3M 12M
How much recovery is priced into the stock? Absolute (%) 22% 17% 33 %
We think ALL valuations are not factoring in a significant recovery in Relative (%) 19% 1% -49 %
volumes and yields next year. ALL is trading at 7.9x ’10e EBITDA
Source: Bloomberg. As of Nov 17 09.
compared to hist. avg of 10.6x. It’s also trading at a 10% discount to US
peers, whereas historically it has traded at a significant premium.
Company data
52-week range (BRL) 7.49-16.57
Price target and key risks Mkt cap. (BRL) 10,808
We have a R$21/share price target for Dec ’09. It is based on a mix of DCF Mkt cap. (US$MM) 6,276
analysis and a 10.6x historical multiple on 2010e EBITDA. Key risk is Avg daily value (US$MM) 42.8
Avg daily volume (MM) 5.2
recovery in prices, diesel prices and operational problems (accidents). ALL Shares O/S (MM) 688
shares are much less volatile than those of the rest of our agribusiness Date of price 11/25/09
coverage. Index: iBovespa 67,917
Free float (%) 92%
Exchange rate 1.7221
Source: Bloomberg
Bloomberg: ALLL11 BZ; Reuters: ALLL11.SA
BRL in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 2,530 2,862 3,191 3,570
Net profit 293 448 598 772
EPS (LC) 0.51 0.78 1.04 1.34
FD EPS (LC) 0.05 0.07 0.09 0.11
DPS (LC) 0.13 0.19 0.26 0.34
Sales growth (%) 19% 13% 12% 12%
Net profit growth (%) 35% 53% 33% 29%
EPS growth (%) 35% 53% 33% 29%
ROE (%) 11% 15% 17% 19%
P/E (x) 30.3 19.8 14.8 11.5
FD P/E (x) 19.74 14.80 11.46 9.20
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

118
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

América Latina Logística: Summary of financials


Profit and loss statement Cash flow statement
BRL in millions, year-end December BRL in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 2,515 2,862 3,191 3,570 EBIT 933 1,043 1,140 1,293
% change Y/Y 18.7% 13% 12% 12% Depreciation & amortization (194) -256 -310 -350
Gross margin (%) 51.6% 41% 40% 40% Change in working capital -450 -22 125 51
EBITDA 1,182 1,477 1,689 1,924 Taxes (49) -143 -189 -244
% change Y/Y 29% 20% 14% 14% Cash flow from operations 461 1,079 1,331 1,396
EBITDA margin (%) 47% 52% 53% 54% Capex 790 -624 -644 -661
EBIT 933 1,043 1,140 1,293 Disposal/(purchase)
% change Y/Y 134% 17% 9% 13% Net interest (415) 222 198 159
EBIT margin (%) 37% 36% 36% 36% Free cash flow 363 -521 -333 -252
Net interest 206 -452 -354 -278 Equity raised/(repaid) 0 0 0
Earnings before tax 222 591 787 1,016 Debt raised/(repaid) 0 0 0
% change Y/Y -17% 62% 33% 29% Other -741 0 0 0
Tax (16) -143 -189 -244 Dividends - -112 -149 -193
as % of EBT -7% 24% 24% 24% Beginning cash 1,816 2,196 1,635 1,302
Net income (reported) 206 448 598 772 Ending cash 2,643 1,635 1,302 1,050
% change Y/Y -5% 53% 33% 29% DPS (LC) - 0.19 0.26 0.34
Shares O/S (MM) 576 576 576 576 Source: Company, J.P. Morgan estimates.
EPS (reported) (LC) 0.36 0.78 1.04 1.34
Source: Company, J.P. Morgan estimates.

Ratio analysis
%, year-end December
Balance sheet
FY08 FY09E FY10E FY11E
BRL in millions, year-end December EBITDA margin 47% 52% 53% 54%
FY08 FY09E FY10E FY11E Operating margin 37% 36% 36% 36%
Cash and cash equivalents 2,643 1,635 1,302 1,050 Net profit margin 8% 16% 19% 22%
Accounts receivable 154 212 237 265 SG&A/sales 0.03 4% 3% 3%
Inventories 94 101 108 118 Sales growth 19% 13% 12% 12%
Others 430 279 303 330 Net profit growth -5% 53% 33% 29%
Current assets 3,320 2,228 1,950 1,764 Sales per share growth -31% 13% 12% 12%
LT investments 3,721 652 652 652 EPS growth -5% 53% 33% 29%
Net fixed assets 4,724 4,331 4,665 4,975 Interest coverage (x) 1.08 1.77 2.24 3.28
Total assets 11,765 10,128 10,185 10,309 Net debt to total capital 0.27 92% 75% 58%
Liabilities Net debt to equity 1.27 0.92 0.75 0.58
ST loans 765 928 663 398 Sales/assets 0.21 0.28 0.31 0.35
Payables 987 EBIT margin 37% 36% 36% 36%
Others 547 425 546 582 ROCE 0.10 0.13 0.14 0.15
Total current liabilities 2,300 2,145 2,060 1,912 Assets/equity (x) 4.71 3.30 2.90 2.52
Long-term debt 5,049 3,530 3,278 3,026 ROI 1.8% 4.0% 6.0% 7.0%
Other liabilities 1,902 1,384 1,329 1,274 ROE 8.3% 15.0% 17.0% 19.0%
Total liabilities 9,251 7,059 6,667 6,212 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 2,496 3,070 3,518 4,097
BVPS (LC) 4.33 5.33 6.11 7.11
Source: Company, J.P. Morgan estimates.

119
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adrian.mowat@jpmorgan.com

AMMB Holdings Overweight


Price: M$4.70
Price Target: M$5.25
www.ambg.com.my

Company description Malaysia


AMMB Holdings is the holding company of the AmBank Group, one of Banks
Malaysia’s premier financial services group with leadership positions in the Chris Oh, CFAAC
commercial banking, investment banking and insurance sectors. The (60-3) 2770-4728
AmBank Group has total assets of M$86.5B, 186 branches nationwide and a chris.ch.oh@jpmorgan.com
staff strength close to 10,000. JPMorgan Securities (Malaysia) Sdn. Bhd.
(18146-X)
Post mortem
Price performance
With a leading wholesale investment banking franchise, we expect the bank
M$
to benefit from the capital market pick-up in tandem with the improvement
in the economy. Also, recent liberalization measures should create a more 5
4
vibrant capital market which we believe AMMB will benefit from. We also 3
expect ANZ management’s transformation efforts to pay off in the coming 2
18 months as the group has developed new income streams, namely treasury 1
whilst strengthening the consumer and SME banking business and enhanced

10-08

01-09

04-09

07-09

10-09
its risk management system.
Source: Bloomberg.

Potential for earnings upgrades Performance


We see scope for significant earnings upgrades as the wholesale banking is a 1M 3M 12M
flow business where earnings flow straight through the bottom-line. Also, Absolute (%) 7.6 10.8 88.8
earlier concerns on rising credit costs should dissipate in tandem with the Relative (%) 4.3 4.3 37.8
improving economy. Source: Bloomberg.

How much recovery is priced into the stock? Company data


52-wk range (M$) 1.94-4.83
The stock is trading at a P/B of 1.5x which we believe does not reflect the Mkt. cap (M$MM) 14,166.67
potential of the transformational changes that ANZ is putting through as well Mkt. cap (US$MM) 4,140.49
as the upside income potential for the wholesale banking business. Liquidity (US$MM) 9.1
Avg. daily volume (MM) 7.2
Shares O/S (MM) 3,014.2
Price target and key risks Date of price 5-Nov-09
Our Jun-10 PT of M$5.25 is based on a two-stage DDM model assuming KLCI Index 1254.0
sustainable ROEs of 16%. The key risk is that capital markets fail to recover Free float (%) 46.4
Exchange rate 3.42
and that the economic recovery stalls.
Source: Bloomberg.

Bloomberg: AMM MK; Reuters: AMMB.KL


M$ in millions, year-end March
FY09 FY10E FY11E FY11E
Net profit 861 935 1,262 1,569
Basic EPS (sen) 32.3 31.8 41.9 52.1
Cash adj. EPS (sen) 32.3 31.8 41.9 52.1
DPS (sen) 6.0 7.9 16.7 20.8
Basic EPS growth (%) 14.2 -1.5 31.7 24.4
ROE (%) 11.6 11.0 13.1 14.9
P/E (basic) (x) 14.6 14.8 11.2 9.0
BVPS (M$) 2.8 3.1 3.3 3.6
Tangible NAV 3.5 3.7 3.9 4.2
P/BV (x) 1.7 1.5 1.4 1.3
Div. yield (%) 1.3 1.7 3.6 4.4
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

120
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adrian.mowat@jpmorgan.com

AMMB Holdings: Summary of financials


Income statement - M$mn 2009 2010E 2011E 2012E 09/08 10E/09E 11E/10E 12E/11E Balance sheet gearing 2009 2010E 2011E 2012E

Margins (% of earning assets) 2.19% 2.11% 2.06% 2.08% 3% -4% -2% 1% Loan/deposit 89% 92% 92% 92%
Earning assets/assets 94% 94% 94% 94% 0% 1% 0% 0% Investment/assets 10% 10% 10% 9%
NIM (as % of avg. assets) 2.05% 1.99% 1.95% 1.97% 3% -3% -2% 1% Loan/assets 63% 65% 65% 65%
Customer deposits/liab. 78% 79% 79% 79%
Net interest income 1,776 1,814 1,885 2,081 10% 2% 4% 10% Long-term debt/liabilities 5% 4% 4% 3%

Total non-interest revenues 1,495 1,684 2,045 2,306 -14% 13% 21% 13%
Fee income 457 463 606 697 -14% 1% 31% 15% Asset quality/capital 2009 2010E 2011E 2012E
FX/trading gains (6) 132 178 222 -102% -2319% 35% 25% Loan loss reserves/loans 3.1% 3.5% 3.6% 3.6%
Other operating income 1,044 1,089 1,261 1,387 12% 4% 16% 10% NPLs/loans 4.1% 4.8% 4.7% 4.6%
Total operating revenues 3,271 3,498 3,929 4,387 -2% 7% 12% 12% Loan loss reserves/NPLs 75.1% 73.0% 76.7% 79.5%
Operating costs (1,612) (1,699) (1,807) (1,867) 5% 5% 6% 3% Growth in NPLs -32.6% 22.9% 6.9% 0.0%
Operating profit 1,659 1,799 2,123 2,520 -9% 8% 18% 19% Tier 1 Ratio 9.7% 11.8% 11.7% 12.1%
Loan loss provisions (344) (431) (365) (352) -33% 25% -15% -4% Total CAR 15.5% 17.4% 16.8% 16.8%
Other provisions (97) (80) (50) (50)
Exceptionals - - - - Per share data 2009 2010E 2011E 2012E
Disposals/ other income (0) (25) (25) (25) 0% 0% 0% 0% EPS (M$) 0.32 0.33 0.43 0.53
Pre-tax profit 1,218 1,263 1,683 2,093 2% 4% 33% 24% Dividend (M$) 0.06 0.08 0.17 0.21
Tax [rate] (339) (328) (421) (523) 28% 26% 25% 25% Payout ratio 0.19 0.24 0.39 0.39
Minorities/preference dividends (17) - - - 0% 0% 0% 0% NAV 2.84 3.08 3.33 3.64
Attributable net income 861 935 1,262 1,569 29% 9% 35% 24% Avg. Shares issued (MM) 2,723 2,941 3,014 3,014

Key balance sheet - M$mn 2009 2010E 2011E 2012E 09/08 10E/09E 11E/10E 12E/11E DuPont 2009 2010E 2011E 2012E

Net customer loans 56,948 60,118 66,078 71,316 8% 6% 10% 8% NIR/avg. assets 2.05% 1.99% 1.95% 1.97%
Loans loss reserves (1,821) (2,177) (2,447) (2,690) -25% 20% 12% 10% Non IR/avg. assets 1.73% 1.85% 2.11% 2.18%
Gross loans 58,769 62,295 68,525 74,007 7% 6% 10% 8% Non IR/total revenue 45.7% 48.1% 52.0% 52.6%
Investments 8,806 9,285 9,793 10,329 -9% 5% 5% 5% Total rev/avg. assets 3.78% 3.85% 4.06% 4.15%
Other earning assets 17,250 15,267 17,500 19,500 38% -11% 15% 11% Cost/income 49.3% 48.6% 46.0% 42.6%
Average earning assets = (A) 81,020 85,836 91,332 99,827 7% 6% 6% 9% Cost/assets 1.86% 1.87% 1.87% 1.77%
Goodwill 1,808 1,781 1,753 1,725 Goodwill amort.
Total assets 89,893 91,942 101,433 109,883 8% 2% 10% 8% Operating ROAA 1.92% 1.98% 2.20% 2.38%
- - - - LLP/loans -0.59% -0.69% -0.53% -0.48%
Interbank funding 6,135 6,239 6,881 7,446 0% 0% 0% 0% Loans/assets 67.9% 68.5% 70.9% 70.0%
Customer deposits 64,132 65,217 71,928 77,827 15% 2% 10% 8% Other inc: provs
Long-term bond funding 3,854 3,279 3,279 3,279 Pre-tax ROAA 1.41% 1.39% 1.74% 1.98%
Other interest-bearing liabilities 3,215 3,107 3,558 4,046 -26% -3% 15% 14% Tax 27.9% 26.0% 25.0% 25.0%
Average interest-bearing liab. = (B) 74,160 77,589 81,744 89,122 6% 5% 5% 9% MI -0.02% 0.00% 0.00% 0.00%
Average assets 86,542 90,918 96,688 105,658 7% 5% 6% 9% ROAA 0.99% 1.03% 1.31% 1.49%
Shareholders' equity 7,736 9,279 10,036 10,978 8% 20% 8% 9% RoRWA 1.34% 1.47% 1.86% 2.12%
Risk-weighted assets 62,954 64,389 71,036 76,954 Equity/assets 8.61% 9.36% 9.99% 9.94%
Average risk-weighted assets 64,414 63,672 67,713 73,995 2% -1% 6% 9% ROE 11.6% 11.0% 13.1% 14.9%

Source: Company, J.P. Morgan estimates

121
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Amorepacific Overweight
W837,000
Price Target: W998,000
www.amorepacific.com

Company description South Korea


Amorepacific is the leading cosmetic company in Korea with a 35% market Cosmetics
share in the domestic cosmetic market. It dominates in the premium channel, Jinah LeeAC
with over 60% of the door-to-door market and holds around a 16% share in (822) 758-5723
the department store channel. jinah.lee@jpmorgan.com

Post mortem J.P. Morgan Securities (Far East) Limited,


Seoul Branch
The company is the leader in the Korean cosmetic segment where market
leaders continue gaining pricing power and competitiveness. The company’s Price performance
future value would come largely from its growth prospects in China. While
W
the company has been expanding its stores over the past 4~5 years, its brand
building efforts have been less of a focus area, thus the same-store sales 850,000
growth has been 3~4%. Starting next year, Amorepacific will start to carry 650,000
out mass-marketing through TV and this is likely to start boosting brand 450,000
recognition. Together with its third brand introduction, Sul Hwa Soo, we Oct-08 Feb-09
HMC Jun-09 KOSPI
Oct-09
expect Amorepacific’s sales growth to take on a stronger growth momentum
going into 2011. Source: Bloomberg.
Performance
Potential for earnings upgrades
1M 3M 12M
In the near future, earnings surprise is likely to come from the domestic
Absolute (%) 2.1 17.9 41.1
premium side, in our view. We believe there is a good chance that
Relative (%) 3.8 17.3 (2.0)
Amorepacific will narrow the market share gain it lost in the department
Source: Bloomberg.
store channel this year as foreign brands aggressively raised their prices due
to currency movements. Company data
52-week range (W) 875,000~524,000
How much recovery is priced into the stock? Mkt cap. (WB) 4,892
We believe there is around a 22% upside potential from the current share Mkt cap. (US$MM) 4,188
price over the next one year. The share currently trades at 20tx 2011E Avg daily value
earnings. However, going into 2010, Amorepacific’s earnings growth could (US$MM) 11.2
outshine other consumer companies. While 2010 prospects are priced in, the Avg daily volume 22,100
likely growth continuity into 2011 is not priced in for now. Shares O/S (MM) 6.9
Price target and key risks Date of price 6-Nov-09
Our Dec-10 price target of W998,000 is based on 20x 2011E earnings. 20x is Index: KOSPI 1,572.46
the average P/E since 2006. A key risk to our price target is domestic macro Free float (%) 47
conditions. Exchange rate 1,168.0
Source: Bloomberg.

Bloomberg: 090430 KS; Reuters: 090430.KS


Won in billions, year-end December
FY08 FY09E FY10E FY11E
Sales 1,531 1,756 1,907 2,062 52-week range (W) 875,000~524,000
Operating profit 255 317 366 398 Market cap (WB) 4,892
Net profit 170 241 258 345 Market cap (US$MM) 4,188
EPS (W) 24,666 34,940 37,312 49,922 Shares issued (MM) 6.9
EPS growth (%) -4.3 41.7 6.8 33.8 Free Float (%) 47
P/E (x) 33.9 24.0 22.4 16.8 Avg daily value (US$MM) 11.2
Avg daily volume (Shares) 22,100
BVPS (W) 161,600 186,994 217,317 259,777 Index (KOSPI) 1,572.46
P/B (x) 5.2 4.5 3.9 3.2 Exchange rate (W/US$1) 1,168.0
DPS (W) 4,999 5,004 6,990 7,464
Dividend yield (%) 0.6 0.6 0.8 0.9
ROE (%) 15.3 18.7 17.2 19.2
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 6 November 2009.

122
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Amorepacific: Summary of financials


Won in billions, year-end December
P/L 2007 2008 2009E 2010E 2011E B/S 2007 2008 2009E 2010E 2011E
Net Sales 1,357 1,531 1,756 1,907 2,062 Total Assets 1,268 1,455 1,625 2,400 2,192
Cosmetics 1,108 1,269 1,469 1,605 1,738 Current Assets 414 445 481 561 878
Premium 754 816 891 930 965 Quick Assets 300 303 319 385 689
Mass 308 403 510 581 637 Inventory 114 142 161 176 190
Export 25 37 56 83 125
MB&S 249 261 287 303 324 Non-current Assets 854 1,010 1,145 1,276 1,314
Investment Assets 140 149 155 157 158
Operating Profit 249 255 317 366 398 Tangible Assets 651 779 912 1,041 1,078
Cosmetics 244 256 295 340 363 Intangible Assets 17 24 22 22 22
MB&S 4 0 22 27 35 Other Non-current Assets 46 58 56 56 56

OPM 72.3% 66.3% 71.7% 76.1% 76.4% Total Liabilities 315 340 372 400 429
Cosmetics 87.5% 80.1% 79.6% 83.8% 82.6% Current Liabilities 177 199 226 246 266
MB&S -2.6% -4.0% 27.7% 31.7% 39.7% Others 67 71 80 87 94

Non-opg Income 35 35 38 3 81 Non-current Liabilities 138 140 146 154 163


Interest Income 11 13 9 12 22
Gain on Equity Method 11 2 17 -13 34 Total Stockholders' Equity 953 1,115 1,291 1,500 1,793
Others 13 20 15 17 16 Paid-in Capital 35 35 35 35 35
Common Stock 29 29 29 29 29
Non-operating Expenses 35 46 35 28 23 Preferred Stock 5 5 5 5 5
Loss on Equity Method 28 35 19 14 8 Capital Surplus 713 713 713 713 713
Others 7 11 16 13 15 Capital Adjustment -1 -1 -2 -2 -2
Retained Earnings 203 339 545 754 1,047
Pre-tax profit 249 244 320 341 456
Income Taxes 71 74 79 84 112
Net Profit 178 170 241 258 345

C/F 2007 2008 2009E 2010E 2011E Ratio 2007 2008 2009E 2010E 2011E
Operating CF 227 238 326 310 464 Growth
Net profit 178 170 241 258 345 Sales growth 12.8% 14.6% 8.6% 8.1%
Additions 108 125 106 110 110 Cosmetics 14.5% 15.8% 9.2% 8.3%
Depreciation 50 57 64 78 83 Premium 8.2% 9.2% 4.3% 3.8%
Prov for Severance 22 22 18 18 19 Mass 30.8% 26.6% 13.8% 9.7%
Equity method loss 28 35 19 14 8 Export 48.0% 50.0% 50.0% 50.0%
MB&S 4.8% 10.1% 5.4% 7.0%
Deductions 14 8 11 24 -41
Operating profit growth 2.6% 24.2% 15.5% 8.7%
Working capital -45 -49 -9 -31 -31 Cosmetics 4.5% 15.3% 15.2% 7.0%
Receivablees 10 -18 -15 -11 -11 MB&S n.a. n.a. 18.5% 31.4%
Inventory -31 -29 -19 -14 -14
Payables 7 11 6 5 5 Net profit growth -4.3% 41.7% 6.8% 33.8%
Retirement pay -18 -20 -11 -11 -11
Equity method gain/oper profit 4.5% 0.9% 5.4% -3.6% 8.6%
Cash Flows from Investing -221 -172 -232 -207 -120 Equity method loss/oper profit 11.4% 13.8% 6.0% 3.9% 2.1%
Net contribution to operating profit -6.9% -12.9% -0.6% -7.5% 6.5%
Cash Flows from
Financing -31 -35 -35 -48 -52
EPS (Won) 25,770 24,666 34,940 37,312 49,922
Increase in Cash -25 32 60 55 293 P/E (times) 32.5 33.9 24.0 22.4 16.8
Cash at the Beginning 130 105 137 196 251
Cash at the End 105 137 196 251 441 Shares outstanding (MM) 6.9 6.9 6.9 6.9 6.9

BVPS (Won) 138,124 161,600 186,994 217,317 259,777


Price/Book 6.1 5.2 4.5 3.9 3.2

ROE (%) 18.7% 15.3% 18.7% 17.2% 19.2%


DPS (W) 4,503 4,999 5,004 6,990 7,464
Source: J.P. Morgan estimates, Company data.

123
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Anglo Platinum Overweight


Price: 73,384c

www.angloplatinum.com Price Target: 91,000c

Company description South Africa


AMS is the world’s largest PGM producer, operating multiple sites in SA Gold & Precious Metals
and Zimbabwe. Under Neville Nicolau (new CEO) the group is being Steve ShepherdAC
restructured. A 15% (at least) headcount cut and the redrawing of operations (27-11) 507 0386
management boundaries at problematical Rustenburg and at Amandelbult are steve.a.shepherd@jpmorgan.com
positives. Nicolau is the first mining engineer at the helm in decades - and Allan CookeAC
his experience should be key to “getting the mining right” after a decade of (27-11) 507 0384
poor performance in our view. The group’s entered into JVs with mid-tier allan.j.cooke@jpmorgan.com
and BEE miners and has developed a significant 3rd party concentrate J.P. Morgan Equities Ltd.
purchasing business. Moreover, by allowing some partners control of mines
improved focus and better costs control should result, in our view. Price Performance
75,000
Post mortem 65,000
AMS has been a perennial underperformer in the Pt sector over the past c 55,000
decade. We can see this reversing under the new regime. Moreover, our 45,000
analysis indicates that AMS is well positioned to move platinum production 35,000
from its mines up by around 10% (200-250koz) within 6 months in response Nov-08 Feb-09 May-09 Aug-09 Nov-09
to strong demand, if needed - no other producer can do this.
Source: Bloomberg
Potential for earnings upgrades
It is hard to accurately predict the impact of restructuring on costs. We think Performance
the market is likely to underestimate the potential benefits. AMS’ peers have 1M 3M 12M
Absolute (%) 9.7 8.9 76.7
little hope of matching it in terms of costs containment in our view. The
Source: Bloomberg
group’s profits and valuation are highly geared to a recovery in rand metal
prices.
Company data
How much recovery is priced into the stock? Price(c) 73,384
Date of Price 23-Nov-09
While the group is already factoring some price recovery, at mid-cycle Price Target (c) 91,000
prices, we estimate that it currently trades at around 80% of our fair value. Price Target End Date 31-Aug-10
52-week Range (c) 76,820 – 36,800
Price target and key risks Mkt Cap (Rbn) 174.80
Our Aug-10 DCF-based price target is R910/sh. The key risks are that the Shares O/S (mn) 238
rand PGM basket price fails to recover and/or the ops fail to turn as we Source: Bloomberg, J.P. Morgan
expect.
Bloomberg: AMS SJ; Reuters: AMSJ.J
Rand millions, year-end Dec
FY08 FY09E FY10E FY11E
Sales 50,765 36,735 44,351 55,196
Net profit 13,280 2,521 5,376 9,779
FD EPS (SAcps) 5,610 1,060 2,260 4,110
DPS (SAcps) 3,500 0 0 2,160
Sales growth (%) 8.9 -27.6 20.7 24.5
Net profit growth (%) 8.0 -81.0 113.2 81.9
EPS growth (%) 7.1 Nm 113.2 81.9
ROE (%) 45.6 7.9 14.5 23.3
FD P/E (x) 13.2 69.7 32.7 18.0
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

124
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Anglo Platinum: Summary of Financials


Production & Economic Assumptions Balance Sheet
Year end Dec FY07A FY08A FY09E FY10E FY11E R in millions, year end Dec FY07A FY08A FY09E FY10E FY11E
Platinum ($/oz) 1,302 1,570 1,183 1,338 1,469 Property, Plant & Equipment 20,697 28,435 34,761 41,296 47,668
Palladium ($/oz) 355 355 250 306 425 Net Fixed Assets 39,218 49,953 57,471 64,006 70,378
Rhodium ($/oz) 4,344 5,174 1,458 1,788 2,625 Cash and Cash equivalents 3,833 2,476 1,210 2,088 2,613
Nickel ($/ton) 37,567 21,583 14,831 15,875 15,000 Others 10,999 16,239 17,794 21,049 24,967
Avg exch. rate (R/$) 7.04 8.08 8.56 8.65 9.24 Current Assets 14,832 18,715 19,003 23,137 27,580
Total Assets 54,050 68,668 76,474 87,142 97,958
Cash Costs ($/oz Pt) 1,409 1,628 1,357 1,372 1,390
Current Liabilities 6,547 10,567 8,828 10,443 12,387
Sales Volumes Debt 7,465 15,820 21,056 24,556 26,056
Platinum (koz) 2,479 2,220 2,400 2,539 2,621 Other Liabilities 11,265 12,785 12,273 12,450 15,190
Palladium (koz) 1,390 1,319 1,292 1,518 1,561 Shareholder's Equity 28,773 29,496 34,317 39,693 44,325
Rhodium (koz) 307 311 326 344 345 Minorities 0 0 0 0 0
Nickel (t) 20,273 16,036 19,615 24,679 25,400 Total Liabilities & Shareholders Equity 54,050 68,668 76,474 87,142 97,958

Profit & Loss Statement Ratio Analysis


R in millions, year end Dec FY07A FY08A FY09E FY10E FY11E Year end Dec FY07A FY08A FY09E FY10E FY11E
Revenues 46,616 50,765 36,735 44,351 55,196 Gross Margin (%) 41.0% 33.7% 10.2% 17.1% 25.9%
% change Y/Y 19.1% 8.9% (27.6%) 20.7% 24.5% EBITDA Margin (%) 44.1% 32.6% 17.2% 26.1% 34.0%
EBITDA 20,573 16,540 6,302 11,566 18,778 EBIT Margin (%) 40.0% 34.8% 9.4% 16.8% 25.3%
% change Y/Y 14.0% (19.6%) (61.9%) 83.5% 62.4% Net Margin (%) 26.4% 26.2% 6.9% 12.1% 17.7%
EBIT 18,654 17,654 3,471 7,442 13,976 FCF Margin (%) 6.9% 5.8% (19.4%) (6.4%) 2.9%
% change Y/Y 14.7% (5.4%) (80.3%) 114.4% 87.8%
Net interest 221 118 (127) (57) (143) Interest Coverage (x) 84.4 149.6 27.4 130.2 97.9
Earnings before tax 19,323 17,988 3,397 7,405 13,870 Net debt to equity (%) 12.6% 45.2% 57.8% 56.6% 52.9%
% change Y/Y 15.6% (6.9%) (81.1%) 118.0% 87.3% Sales/Assets (x) 0.9 0.8 0.5 0.5 0.6
Tax (6,656) (4,470) (749) (1,888) (3,884)
Tax as % of EBT 34.4% 24.8% 22.1% 25.5% 28.0% ROE (%) 42.8% 45.6% 7.9% 14.5% 23.3%
Net income (reported) 12,294 13,280 2,521 5,376 9,779 ROIC (%) 42.7% 35.1% 5.5% 9.5% 15.5%
% change Y/Y 4.6% 8.0% (81.0%) 113.2% 81.9%
Shares Outstanding 234.70 236.80 238.15 238.20 238.20 P/E (x) 14.1 13.2 69.7 32.7 18.0
EPS (Adjusted) 5,240 5,610 1,060 2,260 4,110 EV/EBITDA (x) 8.8 11.0 28.8 15.7 9.7
% change Y/Y NM 7.1% NM 113.2% 81.9% EV/FCF (x) 56.5 61.8 (25.5) (64.2) 112.9
DPS (Gross) 5,200 3,500 0 0 2,160 Dividend Yield (%) 7.0% 4.7% 0.0% 0.0% 2.9%
% change Y/Y (1.9%) (32.7%) (100.0%) - - FCF Yield (%) 2.0% 1.8% (4.4%) (1.7%) 1.0%

Cash Flow Statement Valuation & Recommendation


R in millions, year end Dec FY07A FY08A FY09E FY10E FY11E NPV 86,200
EBIT 18,654 17,654 3,471 7,442 13,976 P/NPV 0.79
Depreciation & Amortization 2,757 3,313 3,899 4,384 4,937 PT 91,000
Change in working capital 110 2,555 (1,470) (1,640) (1,974) PT/NPV 1.1
Taxes (6,821) (1,799) (575) (123) (1,964) PT Date 31-Aug-10
Cash flow from Operations 13,862 17,296 4,256 9,803 14,840 Recommendation OW

Capex (10,653) (14,362) (11,368) (12,628) (13,234) Weekly Mkt Turnover ($ millions)
Disposals/(Purchase) 632 (194) 1,712 260 136 JSE 220
Net interest 5 (99) (78) (57) (143) LSE 0
Free Cash flow 3,209 2,934 (7,111) (2,824) 1,606 ADR 1
Free Cash flow per share 13.6 12.3 (29.9) (11.9) 6.7

Equity raised/ repaid 0 0 0 0 0


Debt raised/ repaid 7,575 10,501 4,445 3,500 1,500 Weekly Mkt Turnover/Mkt Cap (%)
Dividends paid (12,658) (14,237) (61) 0 (2,573) JSE 1.0%
Other 346 (262) (173) 0 0 LSE 0.0%
ADR 0.0%
Beginning Cash 4,724 3,833 2,476 1,210 2,088
Ending Cash 3,833 2,476 1,210 2,088 2,613

Source: Company reports and J.P. Morgan estimates.

125
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Astra International Overweight


Rp29,800
Price Target: Rp37,000
www.astra.co.id
Company description Indonesia
Astra International is part of the Jardine Matheson group. It is the Auto Parts
partner/distributor for Japanese majors including Toyota, Daihatsu, Honda Aditya Srinath, CFAAC
(two-wheelers) and Komatsu. Astra also holds majority stakes in United (62-21) 5291-8573
Tractors (59.5%) and Astra Agro Lestari (80%). aditya.srinath@jpmorgan.com
Post mortem PT J.P. Morgan Securities Indonesia
Astra’s solid balance sheet and reputation have resulted in market share gains
during the downturn. We see improved pricing power, resulting from a Price performance
stronger rupiah in core auto businesses, offsetting vulnerability from UNTR 35,000
and AALI, which are weak currency beneficiaries. As a result of proactive
Rp 20,000
management in the car and financial services business, supported by the
strong growth in United Tractors, Astra should be able to end 2009 without a 5,000
significant earnings decline, which we think is creditable. Nov-08 Feb-09 May-09 Aug-09 Nov-09

Potential for earnings upgrades ASII.JK share price (Rp)


JCI (rebased)
We think that the auto cycle is in early stages of recovery, and have been Source: Bloomberg.
surprised by two- and four-wheeler vehicle volumes in recent months. We Performance
think that the stronger-than-expected vehicle volumes could set the stage for
earnings upgrades going into 2010. If the recovery in two-wheeler 1M 3M 12M
profitability seen in 3Q proves sustainable, it could provide added impetus to Absolute (%) -7.6 -1.4 212.1
earnings. Relative (%) -4.6 -1.1 134.4
Source: Bloomberg.
How much recovery is priced into the stock?
Company data
We think that the emphasis on stock drivers is likely to shift from recovery to
growth. The fact that a recovery which is underway is probably priced in, but 52-week range (Rp) 7,800-35,300
the strength of the recovery is being underestimated. Mkt cap. (RpMM) 120,640,979
Price target and key risks Mkt cap. (US$MM) 12,814
We have an SOTP-based Dec-10 PT of Rp37,000 for Astra. Our PT uses J.P. Avg daily val (US$MM) 12.82
Morgan PTs (DCF-based) for listed subsidiaries UNTR and AALI. We use Avg daily volume (MM) 2.75
the market values of smaller quoted holdings (Bank Permata, Astra Auto Shares O/S (MM) 4,048
Parts and Astra Graphia) and DCF/DDM-based valuations for motor Date of price 5-Nov-09
businesses and financial services business. Our valuation assumes a 10.5% Index: JCI 2382
risk-free rate and a 5.5% equity risk premium, translating into a 16% cost of Free float (%) 49.9
equity. Using market values, as opposed to J.P. Morgan PTs, would imply a Exchange rate 9,415
share price of Rp36,000 for Astra. Risks to our PT are if higher rates hit the Source: Bloomberg.
recovery and the fact that the stock may be well owned. We see Astra as
being in the midst of a re-rating relative to the market which is yet
incomplete, and expect further outperformance.
Bloomberg: ASII IJ; Reuters: ASII.JK
Rp in mn, year-end Dec FY07A FY08E FY09E FY10E FY11E
Revenue (Rp bn) 70,183 97,064 90,236 108,131 125,185
Net Profit (Rp bn) 6,519 8,965 8,487 10,284 12,100
Asia EPS (Rp) 1,610.35 2,214.75 2,096.50 2,540.53
DPS (Rp) 644 910 839 1,016
Revenue growth (%) 26.0% 38.4% -7.1% 19.8% 15.8%
EPS growth (%) 75.6% 37.5% -5.3% 21.2%
ROCE 21.6% 26.1% 22.5% 23.9% 24.7%
ROE 26.4% 29.9% 23.8% 24.9% 25.2%
P/E 18.8 13.7 14.5 11.9
P/BV 4.5 3.6 3.2 2.3
EV/EBITDA 1.1 0.9 1.2 1.2 1.0
Dividend Yield 2.1% 3.0% 2.8% 3.3%
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

126
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Astra International: Summary of financials


Rp in billions, year end December
Income statement Cash flow statement
FY06 FY07 FY08E FY09E FY10E FY06 FY07 FY08E FY09E FY10E

Revenues 55,709 70,183 97,064 90,236 108,131 EBIT 6,256 9,997 13,490 13,301 15,843
% change Y/Y (9.7%) 26.0% 38.4% (7.1%) 19.8% Depr. & amortization 1,921 2,292 2,542 3,295 3,675
EBITDA 8,177 12,289 16,032 16,596 19,517 Change in working capital -128 737 -571 -3,011 -1,147
% change Y/Y -11.1% 50.3% 30.5% 3.5% 17.6% Taxes -1453 -2663 -3944 -3533 -3530
EBIT 6,256 9,997 13,490 13,301 15,843 Cash flow from operations 5,505 9,549 11,162 8,770 12,811
% change Y/Y NM 59.8% 34.9% NM 19.1%
EBIT Margin 11.2% 14.2% 13.8% 14.7% 14.6% Capex -3,455 -3,389 -9,094 -4,500 -3,500
Net Interest -336 -288 142 -583 -786 Disposal/(purchase) -652 -541 -318 0 0
Earnings before tax 5,944 10,634 14,960 14,183 15,950 Net Interest -336 -288 142 -583 -786
% change Y/Y -27.5% 78.9% 40.7% -5.2% 12.5% Other 4,333 -783 -4,076 -6,250 -9,414
Tax -1,453 -2,663 -3,944 -3,533 -3,530 Free cash flow 2,049 6,160 2,069 4,270 9,311
as % of EBT 24.4% 25.0% 26.4% 24.9% 22.1%
Net income (reported) 3,712 6,519 8,965 8,487 10,284 Equity raised/(repaid) 0 0 -0 0 0
% change Y/Y -31.9% 75.6% 37.5% -5.3% 21.2% Debt raised/(repaid) -3,341 -3,333 3,688 0 3,000
Shares outstanding 4 4 4 4 4 Other -531 1,848 4,425 630 630
EPS (reported) 916.94 1,610.35 2,214.75 2,096.50 2,540.53 Dividends paid -1,781 -2,607 -3,684 -3,395 -4,114
% change Y/Y (31.9%) 75.6% 37.5% (5.3%) 21.2% Beginning cash 4,510 5,239 6,523 8,944 4,199
Ending cash 5,239 6,523 8,944 4,199 3,613
DPS 440 644 910 839 1,016

Balance sheet Ratio Analysis


FY06 FY07 FY08E FY09E FY10E FY06 FY07 FY08E FY09E FY10E

Cash and cash equivalents 4,820 6,322 8,877 4,099 3,513 EBITDA margin 14.6% 17.4% 16.4% 18.3% 18.0%
Accounts receivable 4,558 6,018 6,474 8,139 9,433 Operating margin 11.19% 14.19% 13.84% 14.69% 14.60%
Inventories 4,001 4,582 8,666 7,226 8,284 Net margin 6.6% 9.3% 9.2% 9.4% 9.5%
Others 2,024 2,409 2,040 3,214 3,851
Current assets 15,822 19,532 26,124 22,778 25,181
Sales per share growth (9.7%) 26.0% 38.4% (7.1%) 19.8%
LT investments - - - - - Sales growth (9.7%) 26.0% 38.4% (7.1%) 19.8%
Net fixed assets 13,030 14,127 20,679 21,884 21,710 Net profit growth -31.9% 75.6% 37.5% -5.3% 21.2%
Total Assets 57,929 63,520 80,740 84,850 96,493 EPS growth (31.9%) 75.6% 37.5% (5.3%) 21.2%

Liabilities Interest coverage (x) 24.36 42.68 - 28.47 24.82


Short-term loans 12,963 10,998 12,979 12,800 12,800
Payables 3,390 4,434 6,815 5,713 6,554 Net debt to equity 83.8% 54.0% 48.6% 54.3% 55.6%
Others 7,073 10,236 13,837 12,225 14,067 Sales/assets 0.94 1.16 1.35 1.09 1.20
Total current liabilities 20,037 21,234 26,816 25,025 26,867 Assets/equity 2.59 2.36 2.44 2.23 2.20
Long-term debt 10,215 8,848 10,554 10,733 13,733 ROE 17.3% 26.4% 29.9% 23.8% 24.9%
Other liabilities 721 828 1,902 1,933 1,963 ROCE 13.5% 21.6% 26.1% 22.5% 23.9%
Total Liabilities 31,498 31,512 40,163 38,681 43,653
Shareholders' equity 22,376 26,963 33,080 38,172 44,342
BVPS 5,527 6,660 8,172 9,430 13,053
Source: Company reports, J.P. Morgan estimates.

127
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Asustek Computer Overweight


Price: NT$60.9
Price Target: NT$70
www.asus.com
Company description Taiwan
Asus (TWSE: 2357) is the largest motherboards maker in the world. Starting with Computer Hardware
its MB business, Asus has rapidly grown in the NB space, especially for netbook. Gokul HariharanAC
Currently, NB accounts for more than 70% of its revenue. The company’s (852) 2800-8564
products include MB, NB, Eee PC, GPS smartphone, and PC peripherals. gokul.hariharan@jpmorgan.com

Alvin KwockAC
Post mortem (852) 2800-8533
After facing serious inventory issues in 4Q08 and burdened by a heavy mix of alvin.yl.kwock@jpmorgan.com
high-end products, Asus was in a restructuring mode in 1H09. It has reoriented J.P. Morgan Securities (Asia Pacific) Limited
product its line-up towards the mainstream market, and instituted more cost
control measures, by adopting common platforms in NBs, and streamlining a Price performance
80
number of models. As a result, Asus posted a strong recovery in profitability in
3Q09, with its NB volume also recovering back to 2008 levels. NT$ 50

20
Potential for earnings upgrades Nov-08 Feb-09 May-09 Aug-09 Nov-09
With a stronger-than-expected operating margin recovery in 3Q09, we believe the
2357.TW share price (NT$
Street’s upward earning estimate revisions are still on. Our 2010 earnings TSE (rebased)
estimate is about 17% higher than current Bloomberg consensus estimate. We Source: Bloomberg.
expect revenue momentum to surprise on the upside in 2010, as Asus’ key
markets—Eastern Europe and China—are likely to post strong growth in NB. Performance
1M 3M 12M
How much recovery is priced into the stock? Absolute (%) 13.20 23.28 30.11
Volume recovery in 2H09 for Asus appears to be priced into the stock, but we Relative (%) 13.51 13.82 -12.68
believe margin expectations have stayed low. Going into 2010, there is still Source: Bloomberg.
investor skepticism regarding Asus’ ability to continue gaining market share and
Company data
keep OP margins stable, which should provide an upside opportunity for the 52-week range (NT$) 29.4-63.8
stock, in our view. Mkt cap. (NT$B) 259
Mkt cap. (US$B) 8
Price target and key risks Avg daily value (US$B) 40
Avg daily volume (MM) 26
Our Jun-10 PT of NT$70 implies 14x FY10E earnings, given the strong OP Shares O/S (MM) 4,247
margin improvement and sustainability of Asus’ cost-down measures in notebook Date of price 5-Nov-09
business. 14x P/E represents the mid-point of Asus’ historical trading range. A Index: TWSE 7,417.5
key risk to our PT is execution issues in the mainstream NB rollout. Free float (%) 95
Exchange rate 32.5
Source: Bloomberg.

Bloomberg: 2357.TT; Reuters: 2357.TW


NT$ in billions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Sales 266.9 236.6 277.3 316.1 YE BPS (NT$) 39.2 40.0 43.3 45.2
Operating profit 11.4 4.5 13.7 15.4 P/BV (x) 1.6 1.5 1.4 1.3
EBITDA 12.4 5.8 15.2 17.3 ROE 9.5 7.2 11.6 12.1
Pre-tax profit 20.6 14.0 24.3 27.0 Core ROIC (%) 16.6 3.6 0.8 6.0
Net profit 16.5 12.2 20.6 22.8 DPS (NT$) 4.3 2.0 1.5 2.9
MV of employee bonus 1.00 -0.15 2.27 2.55 Quarterly EPS (NT$) 1Q 2Q 3Q 4Q
Adjusted net profit 16.5 12.2 20.6 22.8 EPS (FY08) 1.56 1.23 1.54 -0.66
New Taiwan GAAP EPS (NT$)* 3.73 2.87 4.82 5.34 EPS (FY09E) 0.11 -0.03 1.53 1.26
New Taiwan GAAP P/E (x) 16.3 21.2 12.6 11.4 EPS (FY10E) 0.99 1.04 1.36 1.43
sales growth -65% -11% 17% 14%
New Taiwan GAAP EPS growth -26% -23% 68% 11%
Normalized OP growth -44% -56% 218% 13% Jun -10 PT NT$ 70
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

128
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Asustek Computer: Summary of financials


NT$ in billions, year-end December
Income statement Ratio analysis
FY08 FY09E FY10E FY11E % FY08 FY09E FY10E FY11E
Revenues 266.9 236.6 277.3 316.1 Gross Margin 14.8 12.1 15.1 14.9
Cost of Goods Sold 227.5 208.0 235.4 269.0 EBITDA margin 4.6 2.4 5.5 5.5
Gross Profit 39.4 28.6 41.9 47.0 Operating Margin 4.3 1.9 4.9 4.9
R&D Expenses 7.3 6.0 7.0 7.9 Net Margin 6.2 5.2 7.4 7.2
SG&A Expenses 19.7 16.2 18.9 21.2 R&D/sales 2.7 2.5 2.5 2.5
Operating Profit (EBIT) 11.4 4.5 13.7 15.4 SG&A/Sales 7.4 6.8 6.8 6.7
EBITDA 12.4 5.8 15.2 17.3
Interest Income 1.1 1.0 1.0 1.1 Sales growth -11.3 17.2 14.0
Interest Expense -1.0 -0.9 -1.0 -0.9 Operating Profit Growth -60.4 203.0 12.7
Investment Income (Exp.) 4.0 7.0 7.6 7.9 Net profit (Adjusted) growth -25.7 68.5 10.7
Non-Operating Income (Exp.) 5.1 2.4 3.0 3.5 EPS (Reported) growth -23.1 68.0 10.7
Earnings before tax 20.6 14.0 24.3 27.0 EPS (Adjusted) growth -23.1 68.0 10.7
Tax 4.1 1.7 3.7 4.2 Interest coverage (x) -11.8 -5.1 -13.4 -17.1
Net Income (Reported) 16.5 12.2 20.6 22.8 Net debt to total capital -6.1 -6.7 -6.6 -4.2
Net Income (Adjusted) 16.5 12.2 20.6 22.8 Net debt to equity -6.6 -7.3 -7.2 -4.5

EPS (Reported) (NT$) 3.73 2.87 4.82 5.34 Asset Turnover (%) 112.9 98.2 104.2 111.4
EPS (Adjusted) (NT$) 3.73 2.87 4.82 5.34 Working Capital Turns (X) 3.2 4.8 5.8 6.1
BPS (NT$) 39.21 40.00 43.31 45.23 ROE 9.5 7.2 11.6 12.1
DPS (NT$) 1.98 1.54 2.88 0.00 ROCE 8.1 5.3 9.8 10.9
Shares Outstanding (B) 4.4 4.3 4.3 4.3

Balance sheet Cash flow statement


FY08 FY09E FY10E FY11E FY09E FY10E FY11E
Cash and cash equivalents 23.7 27.0 29.1 25.7 Net Income 12.2 20.6 22.8
Accounts receivable 43.2 40.1 47.2 53.2 Depr. & Amortisation 1.2 1.5 1.8
Inventories 41.8 36.1 42.5 47.9 Change in working capital 9.3 -5.7 -4.9
Others 10.9 11.7 13.8 15.5 Other 0.0 0.0 0.0
Current assets 119.6 114.9 132.5 142.3 Cash flow from operations 22.8 16.4 19.8

LT investments 111.5 120.6 128.2 136.1 Capex -2.3 -1.5 -1.8


Net fixed assets 3.7 4.8 4.8 4.8 Disposal/ (purchase) -8.1 -7.6 -7.9
Others 1.6 0.6 0.6 0.6 Cash flow from investing -10.4 -9.1 -9.7
Total assets 236.5 240.9 266.1 283.8 Free cash flow 20.4 14.9 17.9

ST loans 12.7 14.5 15.7 16.9 Equity raised/ (repaid) 1.4 0.0 0.0
Payables 27.5 36.1 42.5 47.9 Debt raised/ (repaid) 1.8 1.2 1.2
Others 26.7 19.4 22.8 25.7 Other -1.1 0.2 -2.3
Total current liabilities 66.9 70.0 81.1 90.5 Dividends paid -8.4 -6.6 -12.3
Cash flow from financing -6.3 -5.2 -13.4
Long term debt 0.0 0.0 0.0 0.0
Other liabilities 0.0 0.0 0.0 0.0 Net change in cash 6.0 2.1 -3.4
Total liabilities 66.9 70.0 81.1 90.5 Beginning cash 23.7 27.0 29.1
Shareholders' equity 166.8 170.9 185.1 193.3 Ending cash 29.7 29.1 25.7
Source: Company reports and J.P. Morgan estimates.

129
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Ayala Land Overweight


Php12.00
Price Target: Php13.90
www.ayalaland.com.ph

Company description Philippines


Ayala Land is the largest and most diversified developer in the Philippines Real Estate
with interests in housing, retail, office, and hotel development. It is a major Kelly Lim-BateAC
landlord in the prime CBDs of Makati and Fort Bonifacio. While (632) 878-1188
traditionally known as a high-end property developer, Ayala Land has in kelly.s.lim-bate@jpmorgan.com
recent years leveraged on its brand equity to tap the lower-income markets. J.P. Morgan Securities Philippines Inc.

Post mortem Price performance


The company has over 4,000 ha of land bank that is good for at least 10 years 20

of development. Its pricing power is strong owing to the Ayala reputation for 18
16
14
quality products and services. Cost efficiency has been an ongoing issue for 12
10
the company, but this could change with the new President at the helm who 8
6
has a track record of reaping operational efficiency. We believe the 4
2
company’s conservative balance sheet has allowed it weather the crisis well, 0

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09
and seize opportunities in striking joint-venture/land lease deals to grow its
market share. Source: Bloomberg.

Potential for earnings upgrades Performance


Property volumes are highly leveraged to an economic upturn, fueled by 1M 3M 12M
growing overseas foreign remittances and low interest rates. The company’s Absolute (%) -12.8 6.8 65.3
move to aggressively launch more projects (in line with its target to double Relative (%) -15.9 6.1 20.1
earnings and ROE in five years) should further boost volume sales. Potential Source: Bloomberg.
margin increase from lower costs should lead to positive earnings estimate
revisions, in our view. Company data
52-week range (Php) 4.90-12.50
How much recovery is priced into the stock? Mkt cap. (PhpMM) 155,556
We believe the stock has priced in very little of a recovery as it is trading at a Mkt cap. (US$MM) 3,330
42% discount to NAV, equivalent to -1SD, and more than the 35% average Avg daily value (US$MM) 2
during the 2002-03 trough of the property market. Avg daily volume (MM) 12.1
Shares O/S (MM) 12,963
Price target and key risks Date of price 12-Nov-09
Our Dec-10 PT of Php13.9 is based on a 25% discount to NAV, equivalent Index: PSEi 3,074
to the historical average of the past 17 years. Key risks to our PT are a Free float (%) 46
decline in land values and a sharp rise in interest rates. Exchange rate 46.72
Source: Bloomberg.

Bloomberg: ALI PM.TT; Reuters: ALI.PS


P h p in m n , y e a r -e n d D e c FY08A FY09E FY10E FY11E
R e venu e 2 9 ,2 9 5 2 6 ,6 4 3 2 6 ,6 8 8 3 1 ,7 2 2
N e t P ro fit 4 ,8 1 2 .3 3 ,7 9 9 .7 3 ,8 6 9 .2 4 ,4 4 8 .4
E P S (P h p ) 0 .3 7 0 .2 9 0 .3 0 0 .3 4
D P S (P h p ) 0 .0 6 0 .0 6 0 .0 6 0 .0 6
R e v e n u e g ro w th (% ) 3 6 .3 % -9 .1 % 0 .2 % 1 8 .9 %
E P S g ro w th (% ) 1 0 .3 % -2 1 .0 % 1 .8 % 1 5 .0 %
ROCE 9 .9 % 7 .4 % 7 .6 % 8 .6 %
ROE 1 0 .2 % 7 .5 % 7 .1 % 7 .7 %
P /E ( x ) 3 2 .3 4 0 .9 4 0 .2 3 5 .0
P /B V (x ) 3 .2 2 .9 2 .8 2 .6
E V /E B IT D A ( x ) 2 6 .0 3 1 .4 2 9 .5 2 5 .1
D iv id e n d Y ie ld 0 .5 % 0 .5 % 0 .5 % 0 .5 %
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 12 November 2009.

130
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Ayala Land: Summary of financials


Php in millions, year-end December
Income statement Cash flow statement
FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E

Revenues 21,490 29,295 26,643 26,688 31,722 EBIT 4,989 6,042 5,013 5,369 6,370
% change Y/Y (4.5%) 36.3% (9.1%) 0.2% 18.9% Depr. & amortization - - - - -
EBITDA 4,989 6,042 5,013 5,369 6,370 Change in working capital 3,660 -1,223 1,992 1,989 1,371
% change Y/Y 3.6% 21.1% -17.0% 7.1% 18.6% Taxes -1556 -2065 -1575 -1698 -2079
EBIT 4,989 6,042 5,013 5,369 6,370 Cash flow from operations 8,530 3,616 7,256 7,387 7,578
% change Y/Y 3.6% 21.1% NM 7.1% 18.6%
EBIT Margin 23.2% 20.6% 18.8% 20.1% 20.1% Capex 1,390 -5,693 -5,340 -6,772 -8,694
Net Interest 277 522 356 106 134 Disposal/(purchase) -810 918 -1,689 -716 518
Earnings before tax 6,652 7,448 6,254 6,448 7,574 Net Interest 277 522 356 106 134
% change Y/Y 13.8% 12.0% -16.0% 3.1% 17.5% Other - - - - -
Tax -1,556 -2,065 -1,575 -1,698 -2,079 Free cash flow 9,920 -2,077 1,916 615 -1,116
as % of EBT 23.4% 27.7% 25.2% 26.3% 27.4%
Net income (reported) 4,386 4,812 3,800 3,869 4,448 Equity raised/(repaid) 1,361 -765 0 0 0
% change Y/Y 13.5% 9.7% -21.0% 1.8% 15.0% Debt raised/(repaid) -3,655 -2,710 -107 0 0
Shares outstanding 13,035 12,963 12,963 12,963 12,963 Other -47 995 0 0 0
EPS (reported) (Php) 0.34 0.37 0.29 0.30 0.34 Dividends paid -1,084 -951 -778 -778 -778
% change Y/Y 13.3% 10.3% (21.0%) 1.8% 15.0% Beginning cash 4,631 11,272 15,443 14,786 13,906
Ending cash 11,272 12,655 14,786 13,906 12,530
DPS (Php) 0.05 0.06 0.06 0.06 0.06

Balance sheet Ratio analysis


FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E

Cash and cash equivalents 13,626 15,443 14,786 13,906 12,530 EBITDA margin 23.2% 20.6% 18.8% 20.1% 20.1%
Accounts receivable 11,125 15,796 12,092 11,392 12,563 Operating margin 24.50% 22.40% 20.15% 20.52% 20.50%
Inventories 6,696 8,140 6,792 6,175 6,555 Net margin 20.4% 16.4% 14.3% 14.5% 14.0%
Others 2,533 4,556 4,556 4,556 4,556
Current assets 33,979 43,935 38,226 36,030 36,206
Sales per share growth (4.7%) 37.1% (9.1%) 0.2% 18.9%
LT investments 28,587 31,628 38,855 45,720 52,251 Sales growth (4.5%) 36.3% (9.1%) 0.2% 18.9%
Net fixed assets 20,415 24,890 22,842 22,166 23,209 Net profit growth 13.5% 9.7% -21.0% 1.8% 15.0%
Total Assets 82,981 100,453 99,923 103,916 111,665 EPS growth 13.3% 10.3% (21.0%) 1.8% 15.0%

Liabilities Interest coverage (x) - - - - -


Short-term loans 3,990 1,524 1,280 1,280 1,280
Payables 15,759 20,654 17,706 18,382 21,115 Net debt to equity -8.1% 2.8% 3.7% 5.0% 7.1%
Others 790 1,205 1,094 1,090 1,280 Sales/assets 0.27 0.32 0.27 0.26 0.29
Total current liabilities 20,539 23,383 20,079 20,752 23,675 Assets/equity 1.82 2.05 1.89 1.86 1.87
Long-term debt 6,150 15,228 15,365 15,365 15,365 ROE 10.2% 10.2% 7.5% 7.1% 7.7%
Other liabilities 5,547 6,799 5,536 4,884 4,992 ROCE 9.1% 9.9% 7.4% 7.6% 8.6%
Total Liabilities 32,235 45,410 40,980 41,000 44,032
Shareholders' equity 45,705 49,028 52,827 55,919 59,589
BVPS (Php) 3.51 3.78 4.08 4.31 4.60
Source: Company reports and J.P. Morgan estimates.

131
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Baidu Overweight
US$386.37
Price Target: US$460.00
www.baidu.com
Company description China
Baidu is a leading internet search provider in China with a focus on Chinese IT and Internet
web pages. The company generates majority of its revenue through pay-per- Dick WeiAC
click advertising and customized search solutions. It is the number 1 site in (852) 2800-8535
China in terms of traffic reach, according to Alexa. dick.x.wei@jpmorgan.com

Post mortem J.P. Morgan Securities (Asia Pacific)


Limited
Baidu remains the dominant player in China’s search market with ~63%
market share as of 3Q09 in China (according to Analysys). We expect Baidu Price performance
to maintain its leadership in China due to: (1) its good Chinese search US$
technology; (2) our view that Baidu’s products are tailored better to local
needs; (3) its strong local brand name; (4) good relationship with the Chinese 400

government; and (5) it has among the widest distribution networks in China $ 250

(a key to market development and driving sales), and is well ahead of other 100
competitors in search. Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

Potential for earnings upgrades BIDU share price ($)


NASDAQ Composite (rebased)
We believe there are earnings upside potential in 2010, with: (1) transition to Source: Bloomberg.
Phoenix Nest monetization system; (2) domestic economic growth to lead to
an upside in search ad spending; and (3) expect eCommerce growth to lead Performance
to search spending upside. We also expect some margin leverage in SG&A. 1M 3M 12M
How much recovery is priced into the stock? Absolute (%) 3.3 22.5 133.4
With a weak 4Q09 guidance, shares have recently seen some weakness. Relative (%) 2.8 15.0 90.1
Hence, we believe investors have given a big discount to the potential ad Source: Bloomberg.
recovery in 2010. We note that the softness is mainly due to the earlier-than-
expected transition from the classic bidding system in Phoenix Nest. We Company data
expect incremental positive datapoint on ad segment in early 2010 to be the 52-week range (US$) 100.5-439.9
driver of the stock. Mkt cap. (Rmb MM) 100,700
Price target and key risks Mkt cap. (US$ MM) 14,760
Our Dec-10 PT of US$460 is based on DCF valuation. Our nominal case Avg daily value (US$MM) 60.7
DCF valuation suggests a valuation of: US$459.8. (20% long-term growth Avg daily volume (MM) 1.8
from 2014–2018E, 15% growth from 2019E – 2025E). We use WACC of Shares O/S (MM) 35
12% and 0% terminal growth. Downside risks to our rating and price target Date of price 12-Nov-09
include: (1) slower-than-expected online search spending; (2) large Index: NASDAQ 2056
infrastructure-related expense; (3) unsuccessful Japan initiatives; and (4) and Free float (%) 74
potential margin decline due to TAC. Exchange rate 6.83
Source: Company, Bloomberg.
Bloomberg: BIDU US; Reuters: BIDU
US$ in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 465.5 644.7 916.7 1,321.7
Net profit 152.5 213.5 322.9 470.3
GAAP EPS (US$) 4.39 6.13 9.15 13.14
Adj. EPS (US$) 4.74 6.51 9.56 13.59
DPS (US$) 0 0 0 0
Sales growth (%) 100.9 38.5 42.2 44.2
Net profit growth (%) 82.6 40.0 51.2 45.7
EPS growth (%) 82.5 39.7 49.3 43.6
ROE (%) 44.3 39.3 37.6 35.7
GAAP P/E (x) 97.4 69.7 46.7 32.5
Adj. P/E (x) 90.1 65.6 44.7 31.4
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 12 November 2009.

132
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Baidu: Summary of financials


Profit and loss statement Cash flow statement
US$ in millions, year-end December US$ in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 465.5 644.7 916.7 1,321.7 Net Income 153 214 323 470
% change Y/Y 100.9 38.5 42.2 44.2 Depr. & Amortisation 40 48 64 82
Gross margin (%) 64.0 63.4 62.6 62.4 Change in working capital 24 36 76 85
EBITDA 211.4 293.8 431.4 614.0 Other 38 13 14 16
% change Y/Y 107.0 39.0 46.8 42.3 Cash flow from operations 254 311 477 653
EBITDA margin (%) 45.4 45.6 47.1 46.5 Capex / Investments -59 -81 -76 -94
EBIT 159.6 232.2 352.6 516.4 Others -34 0 0 0
% change Y/Y 119.7 45.46 51.87 46.45 Cash flow from investing -93 -81 -76 -94
EBIT margin (%) 34.3 36.0 38.5 39.1 Free cash flow 195 230 401 559
Net interest 6.9 5.6 15.7 26.0 Equity raised/ (repaid) -9 28 50 60
Earnings before tax 169.4 240.6 368.9 543.0 Debt raised/ (repaid) 0 0 0 0
% change Y/Y 107.1 42 53.34 47.19 Other 4 -3 0 0
Tax 16.9 27.1 46.0 72.7 Dividends paid 0 0 0 0
as % of EBT 9.97 11.25 12.47 13.38 Cash flow from financing -5 25 50 60
Net income (reported) 152.5 213.5 322.9 470.3 Net change in cash 176 257 451 618
% change Y/Y 82.6 40.0 51.2 45.7 Beginning cash 211 388 644 1,095
Shares O/S (MM) 34.8 34.8 35.3 35.8 Ending cash 388 644 1,095 1,713
EPS (reported) (US$) 4.39 6.13 9.15 13.14 Source: Company, J.P. Morgan estimates.
Source: Company, J.P. Morgan estimates.

Balance sheet
Ratio analysis
US$ in millions, year-end December
%, year-end December
FY08 FY09E FY10E FY11E
FY08 FY09E FY10E FY11E
Cash and cash equivalents 388 644 1,095 1,713
EBITDA margin 45.4 45.6 47.1 46.5
Accounts receivable 14 20 30 41
Operating Margin 34.3 36.0 38.5 39.1
Inventories 0 0 0 0
Net Margin 32.8 33.1 35.2 35.6
Others 14 24 36 50
R&D/sales 7.8 8.4 8.1 7.5
Current assets 415 688 1,161 1,805
SG&A/Sales 19.3 17.0 14.5 14.6
Sales growth 100.9 38.5 42.2 44.2
LT investments 2 2 2 2
Operating Profit Growth 119.7 45.5 51.9 46.4
Net fixed assets 129 160 173 187
Net profit growth 82.6 40.0 51.2 45.7
Other LT assets 28 30 29 28
Diluted EPS growth 82.5 39.7 49.3 43.6
Total assets 573 880 1,366 2,021
Net debt to total capital -86.2 -91.6 -100.4 -104.7
Liabilities
Net debt to equity -86.2 -91.6 -100.4 -104.7
ST loans 0 0 0 0
Asset Turnover 81.2 73.3 67.1 65.4
Payables 62 87 138 196
Working Capital Turns (X) 2.1 1.6 1.3 1.1
Others 62 89 137 189
ROE 44.3 39.3 37.6 35.7
Total current liabilities 124 176 275 385
ROIC 42.8 38.5 36.2 34.1
Long term debt 0 0 0 0
Other liabilities 0 1 1 1 Source: Company, J.P. Morgan estimates.
Total liabilities 124 177 275 386
Shareholders' equity 450 703 1,090 1,636
Source: Company, J.P. Morgan estimates.

133
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Bank Asya Overweight, AFL


Price: TRY3.06
Price Target: TRY5.00
www.bankasya.com
Company description CEEMEA Banks
The largest of four banks (and the only independent as the other 3 have been
Paul FormankoAC
acquired by GCC strategic partners) in a niche, fast growth participation (+44) 207-325-6028
sector (CAGR in assets 03-09 c.35-40%) in Turkey. Its footprint includes paul.formanko@jpmorgan.com
155 branches; it had some TRY11bn (US$7.3bn) in assets in Q3. Despite the
J.P. Morgan Securities Ltd.
severe 2008-09 recession, Asya delivered some 19% loan growth YTD to
September and has made profits in every one of the past 11 quarters with Price Performance
average ROE near 20% - it has historically achieved ROE of over 30%.
3.5

Post mortem 2.5


TL
We expect profits of TRY285mn (EPS of TRY0.32 in 09E), up 15% yoy;
1.5
despite the fact that due to its participation model Asya has been unable to
benefit either from securities gains or more aggressive liability re-pricing 0.5
enjoyed by its peers and cost of risk YTD has been running over 350bps in Nov-08 Feb-09 May-09 Aug-09 Nov-09
2009. However, we expect EPS growth to accelerate towards 40% levels
(net profits EPS of TRY0.45 in 10E and EPS TRY0.60 in 11E). Source: Company data, Bloomberg

Potential for earnings upgrades Performance


1M 3M 12M
At US$42bn market cap, the stock is still below the radar screen - we expect
Absolute (%) -13.6 3.4 163.8
more international research coverage; JPM expects earnings upgrades to
continue throughout 2010, supported by macro strengthening towards 5%
GDP growth, driving some 34% loan growth in 10E and 26% by 11E, well Company data
supported by core Tier 1 of 14.5% (09E) and improving capital generation 52-week range (LC) 3.68-0.94
into recovery. Mkt cap. (TLMM) 2,,754
Mkt cap. (US$MM) 1,842
Avg daily value (US$MM) 18.4
How much recovery is priced into the stock? Avg daily volume (MM) 9.3
From the February 09 trough, Asya shares have rallied over 200% from Shares O/S (MM) 900
TRY1 to over TRY3. Since August the shares have stagnated, despite Date of price 23 Nov 09
Index: ISE 45801
attractive valuation of <7 x PE (10E) and 1.4 P/NAV for what is essentially a Free float (%) 45.5%
mid 20s ROE franchise. JPM’s Gordon growth model suggests a TRY5 fair Exchange rate(USD/TRY) 1.5
value (YE10E) - some 65% upside from present levels. Source: Bloomberg

Price target and key risks


Our Dec-10 PT of TRY5 is based on our Gordon growth model using 23%
ROE, 15% COE & 5% LT growth rate. Key risks include further economic
deterioration and the oil price hitting >$110, negatively impacting CAR.

Bloomberg: ASYAB TI Reuters: ASYAB.IS


TRY million, year-end Dec
FY08 FY09E FY10E FY11E
Pre-provision op. profit 469 603 683 844
Net profit 247 285 404 537
EPS (TRY) 0.27 0.32 0.45 0.60
EPS growth (%) 11% 15% 42% 33%
Tier I ratio (%) 13.1% 14.5% 13.2% 12.9%
NPL ratio (%) 5.1% 7.5% 6.8% 5.8%
Dividend yield 0% 0% 4% 5%
RONAV (%) 22% 18% 22% 25%
P/E (x) 11.2 9.7 6.8 5.1
P/NAV 2.0 1.6 1.4 1.2
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

134
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Bank Asya: Summary of Financials


Profit and Loss Statement Ratio Analysis
TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E
Per Share Data
Net interest income 417 501 609 766 910 EPS Reported 0.25 0.27 0.32 0.45 0.60
% Change Y/Y 45.4% 20.2% 21.5% 25.8% 18.8% EPSAdjusted 0.25 0.27 0.32 0.45 0.60
Non-interest income 245 357 459 437 533 % Change Y/Y 51.2% 11.4% 15.5% 41.9% 33.0%
Fees & commissions 145 226 260 317 403 DPS 0.00 0.00 0.00 0.11 0.15
% change Y/Y 36.3% 56.3% 15.0% 22.0% 27.0% % Change Y/Y - - - - 33.0%
Trading revenues 15 59 93 48 50 Dividend yield 0.0% 0.0% 0.0% 3.7% 4.9%
% change Y/Y 180.1% 305.3% 56.5% (48.4%) 4.2% Payout ratio 0.0% 0.0% 0.0% 25.0% 25.0%
Other Income 85 72 106 72 80 BV per share 0.95 1.56 1.88 2.21 2.66
Total operating revenues 662 859 1,068 1,203 1,443 NAV per share 0.95 1.56 1.88 2.21 2.66
% change Y/Y 45.2% 29.7% 24.4% 12.6% 19.9% Shares outstanding 900.0 900.0 900.0 900.0 900.0
Admin expenses -147 -216 -259 -290 -334
% change Y/Y 39.1% 46.9% 20.0% 12.0% 15.0% Return ratios
Other expenses (119) (174) (206) (230) (265) RoRWA 4.8% 3.0% 2.5% 3.0% 3.2%
Pre-provision operating profit 396 469 603 683 844 Pre-tax ROE 36.7% 27.6% 23.0% 27.4% 30.6%
% change Y/Y 46.1% 18.3% 28.8% 13.1% 23.6% ROE 29.8% 21.8% 18.4% 22.0% 24.5%
Loan loss provisions -123 -157 -248 -178 -173 RoNAV 29.8% 21.8% 18.4% 22.0% 24.5%
Other provisions - - - - -
Earnings before tax 273 312 356 505 672 Revenues
% change Y/Y 39.1% 14.3% 14.1% 41.9% 33.0% NIM (NII / RWA) 8.2% 7.2% 6.6% 6.6% 6.5%
Tax (charge) (52) (65) (71) (101) (134) Non-IR / average assets 4.7% 5.0% 4.8% 3.7% 3.7%
% Tax rate 18.9% 21.0% 20.0% 20.0% 20.0% Total rev / average assets 12.7% 12.0% 11.2% 10.1% 10.1%
Minorities 0 0 0 0 0 NII / Total revenues 63.0% 58.4% 57.0% 63.7% 63.1%
Net Income (Reported) 221 247 285 404 537 Fees / Total revenues 21.9% 26.3% 24.4% 26.4% 27.9%
Trading / Total revenues 0.7% 1.8% 18.5% 1.7% 1.4%

Balance sheet
TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E

ASSETS Cost ratios


Net customer loans 4,610 6,381 7,617 9,979 12,558 Cost / income 40.2% 45.4% 43.5% 43.3% 41.5%
% change Y/Y 50.6% 38.4% 19.4% 31.0% 25.9% Cost / assets 4.2% 4.8% 4.2% 4.1% 3.8%
Loan loss reserves 145 197 347 436 522 Staff numbers 3,329 3,806 4,250 4,250 4,250
Investments 136 192 400 437 480
Other interest earning assets 0 0 0 0 0 Balance Sheet Gearing
% change Y/Y - - - - - Loan / deposit 91.9% 105.2% 86.2% 94.7% 97.8%
Average interest earnings assets 5,114 6,981 9,197 11,580 13,908 Investments / assets 2.2% 2.4% 3.7% 3.4% 3.1%
Goodwill - 0 - - - Loan / assets 71.3% 78.2% 69.6% 79.3% 82.2%
Other assets 132 288 425 514 706 Customer deposits / liabilities 92.7% 94.0% 96.8% 98.9% 99.6%
Total assets 6,260 8,109 10,937 12,845 15,612 LT Debt / liabilities 5.8% 6.8% 4.3% 4.3% 4.5%

LIABILITIES Asset Quality / Capital


Customer deposits 4,698 5,843 8,555 10,266 12,568 Loan loss reserves / loans 3.2% 3.1% 4.6% 4.3% 4.6%
% change Y/Y 46.8% 24.4% 46.4% 20.0% 22.4% NPLs / loans 5.3% 5.1% 7.5% 6.8% 5.8%
Long term funding 0 0 0 0 0 LLP / RWA 2.19% 1.46% 2.13% 1.18% 0.93%
Interbank funding 313 458 398 470 597 Loan loss reserves / NPLs 61.4% 60.5% 60.7% 62.9% 80.0%
Average interest bearing liabs 4,176 5,661 7,627 9,844 11,950 Growth in NPLs 82.7% 37.8% 75.7% 21.3% 7.5%
Other liabilities 385 405 296 118 54 RWAs 5,620 10,702 11,642 15,071 18,615
Retirement benefit liabilities - - - - - % YoY change 59.9% 90.4% 8.8% 29.4% 23.5%
Shareholders' equity 854 1,404 1,688 1,991 2,394 Core Tier 1 15.2% 13.1% 14.5% 13.2% 12.9%
Minorities 0 0 0 0 0 Total Tier 1 15.2% 13.1% 14.5% 13.2% 12.9%
Total liabilities & Shareholders Equity 6,260 8,109 10,937 12,845 15,612

Source: Company reports and J.P. Morgan estimates.

135
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Bank Central Asia Overweight


Rp4,600
Price Target: Rp5,500
www.klikbca.co.id

Company description Indonesia


BCA is Indonesia’s largest private sector bank. The major shareholder is the Banks
Hartono family (Djarum group). The bank has a pre-eminent position in Aditya Srinath, CFAAC
payment/transaction banking in Indonesia, and an exceptionally strong (62-21) 5291-8573
deposit franchise. The bank has a strong corporate lending business, and is aditya.srinath@jpmorgan.com
expanding its presence in various consumer lending segments. PT J.P. Morgan Securities Indonesia

Post mortem Price performance


BCA came through the crisis largely unscathed; its low LDR and high
capitalization protected it from risks on the liabilities side, while pricing 5,000

power in loans returned. Although non-performing loans rose starting in 4Q Rp 3,500


last year, they have started declining in 3QFY09.
2,000

Potential for earnings upgrades Nov-08 Feb-09 May-09 Aug-09 Nov-09

We think that the credit cycle in Indonesia is just starting to turn, while credit BBCA.JK share price (Rp)

quality is likely to have bottom out. Mildly higher rates in 2010 could result JCI (rebased)
Source: Bloomberg.
in margin compression being arrested. Combined with lower tax rates, these
Performance
add up to a positive picture for earnings. We think the consensus earnings
1M 3M 12M
growth of 15% for FY10E is too conservative; our forecasts are 13% higher
Absolute (%) 0.5 12.4 63.8
than consensus.
Relative (%) 3.5 12.7 -13.9
How much recovery is priced into the stock? Source: Bloomberg.
Among banks, BCA is strongly leveraged to a credit cycle recovery, with Company data
lending having outpaced industry growth in 6 out of last 7 years. We do not 52-week range (Rp) 2,275-5,500
think that a credit cycle recovery is priced into BCA, as the stock has Mkt cap. (RpMM) 113,413,046
underperformed the JCI by 33% YTD and in line with the sector since the Mkt cap. (US$MM) 11,995
end of 3QFY09. Avg daily value (US$MM) 4.5
Avg daily volume (MM) 16.2
Price target and key risks
Shares O/S (MM) 24,655
We have a DDM-based Dec-10 PT of Rp5,500 for BCA (10.5% Rf, β=1,
Date of price 5-Nov-09
15.8% cost of equity, normalized ROE: 29.44), in line with BCA’s 52-week
Index: JCI 2395
high. High multiples are a risk to our PT, although they have sustained over
Free float (%) 52
the recent past. Investor perception on management changes if any could also
Exchange rate 9,455.00
be a risk to our PT.
Source: Bloomberg.

Bloomberg: BBCA IJ; Reuters: BBCA JK


Year-end Dec (Rp in mn) FY06A FY07A FY08A FY09E FY10E
Operating Profit 6,577,242 6,520,046 9,422,056 11,258,657 12,425,255
Net Profit 4,242,926 4,489,369 5,776,139 6,537,782 8,766,378
Cash EPS (Rp) 172 182 234 265 356
Fully Diluted EPS (Rp) 172 182 234 265 356
DPS (Rp) 72 85 63 157 137
EPS growth (%) 17.8% 5.8% 28.7% 13.2% 34.1%
ROE 25.0% 23.3% 26.4% 25.8% 29.2%
P/E 27.4 25.9 20.2 17.8 13.3
BVPS (Rp) 733 829 944 1,109 1,328
P/BV 6.4 5.7 5.0 4.3 3.6
Div. Yield 1.5% 1.8% 1.3% 3.3% 2.9%

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 05 November 2009.

136
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Bank Central Asia: Summary of financials


Income Statement Growth Rates
Rp in millions, year end Dec FY06 FY07 FY08 FY09E FY10E FY06 FY07 FY08 FY09E FY10E

NIM (as % of avg. assets) 7.5% 6.7% 7.3% 7.6% 7.5% Loans 13.5% 34.1% 36.9% 7.7% 21.2%
Earning assets/assets 73.5% 67.9% 69.2% 73.6% 75.8% Deposits 17.9% 23.9% 10.8% 8.9% 15.1%
Margins (% of earning assets) 5.5% 4.6% 5.0% 5.6% 5.7% Assets 17.7% 23.3% 12.6% 8.7% 16.8%
Equity 14.0% 13.1% 13.9% 17.5% 19.7%
Net Interest Income 9,006,566 9,029,239 11,675,823 14,409,658 16,436,368 RWA 11.6% 34.5% 35.6% 9.4% 5.1%

Total Non-Interest Income 2,701,636 3,396,249 4,542,707 4,588,133 4,542,499 Net Interest Income 23.7% 0.3% 29.3% 23.4% 14.1%
Fee Income 2,701,636 3,396,249 4,542,707 4,588,133 4,542,499 Non-Interest Income 5.9% 25.7% 33.8% 1.0% -1.0%
Dealing Income - - - - - of which Fee Grth 5.9% 25.7% 33.8% 1.0% -1.0%
Other Operating Income - - - - - Revenues 1904.5% 612.6% 3052.6% 1713.6% 1042.8%
Total operating revenues 11,708,202 12,425,488 16,218,530 18,997,791 20,978,867 Costs 14.8% 15.1% 15.1% 13.9% 10.5%
Pre-Provision Profits 22.6% -0.9% 44.5% 19.5% 10.4%
Operating costs -5,130,960 -5,905,442 -6,796,474 -7,739,134 -8,553,612 Loan Loss Provisions 58.0% -66.8% 829.2% 77.3% -50.6%
Pre-Tax - - - - -
Pre-Prov. Profits 6,577,242 6,520,046 9,422,056 11,258,657 12,425,255 Attributable Income 17.9% 5.8% 28.7% 13.2% 34.1%
Provisions 568,564 188,786 1,754,149 3,110,979 1,535,400 EPS 17.8% 5.8% 28.7% 13.2% 34.1%
Other Inc/Exp. 57,925 70,370 52,136 224,349 68,118 DPS -19.6% 17.0% -25.8% 150.5% -12.9%
Exceptionals - - - - -
Disposals/ other income - - - - - Balance Sheet Gearing FY06 FY07 FY08 FY09E FY10E
Pre-tax 7,203,731 6,779,202 11,228,341 14,593,985 14,028,773 Loan/deposit 40.2% 43.6% 53.8% 53.2% 56.1%
Tax 1,823,794 1,912,378 1,943,904 1,834,245 2,191,595 Investment/assets 27.8% 21.5% 16.2% 17.4% 15.5%
Minorities -117 -117 0 0 0 Loan/Assets 33.8% 37.0% 44.8% 43.5% 45.3%
Other Distbn. - - - - - Customer deposits/liab. 86.4% 86.8% 85.3% 85.5% 84.3%
Attributable Income 4,242,926 4,489,369 5,776,139 6,537,782 8,766,378 LT debt/liabilities 1.3% 1.7% 2.1% 1.2% 1.1%

Per Share Data Rp FY06 FY07 FY08 FY09E FY10E Asset Quality/Capital FY06 FY07 FY08 FY09E FY10E
EPS 172.15 182.09 234.28 265.17 355.56 Loan loss reserves/loans 2.8% 2.0% 2.4% 4.4% 4.2%
DPS 72 85 63 157 137 NPLs/loans 1.3% 0.8% 0.6% 2.0% 1.4%
Payout 42.1% 46.5% 26.8% 59.3% 38.5% Loan loss reserves/NPLs 0.0% 0.0% 0.0% 0.0% 0.0%
Book value 733 829 944 1,066 1,301 Growth in NPLs -13.6% -16.1% 0.8% 260.0% -15.1%
Fully Diluted Shares - - - - - Tier 1 Ratio 20.0% 17.3% 14.9% 16.4% 19.1%
Total CAR 22.7% 19.6% 16.6% 17.9% 20.6%
Key Balance sheet Rp in millions FY06 FY07 FY08 FY09E FY10E Du-Pont Analysis FY06 FY07 FY08 FY09E FY10E
Net Loans 59,688,265 80,702,481 110,026,231 116,102,488 141,049,817 NIM (as % of avg. assets) 7.5% 6.7% 7.3% 7.6% 7.5%
LLR -1,734,043 -1,686,152 -2,757,475 -5,343,629 -6,183,812 Earning assets/assets 73.5% 67.9% 69.2% 73.6% 75.8%
Gross Loans 61,422,308 82,388,633 112,783,706 121,446,118 147,233,629 Margins (as % of Avg. Assets) 5.5% 4.6% 5.0% 5.6% 5.7%
NPLs 798,021 669,697 674,769 2,428,922 2,061,271 Non-Int. Rev./ Revenues 23.1% 27.3% 28.0% 24.2% 21.7%
Investments 49,139,082 46,777,950 39,810,702 46,558,992 48,261,992 Non IR/Avg. Assets 1.7% 1.7% 2.0% 1.8% 1.6%
Other earning assets 7,810,359 9,222,138 14,501,875 16,018,526 18,649,026 Revenue/Assets 6.6% 5.7% 6.6% 7.1% 6.7%
Avg. IEA 120,140,797 134,032,960 160,337,276 188,492,548 219,184,868 Cost/Income 43.8% 47.5% 41.9% 40.7% 40.8%
Goodwill - - - - - Cost/Assets 3.1% 3.0% 2.9% 3.0% 3.0%
Assets 176,798,726 218,005,008 245,569,856 266,872,414 311,630,335 Pre-Provision ROA 9.8% 8.7% 9.5% 10.1% 9.7%
LLP/Loans 1.0% 0.2% 1.6% 2.7% 1.1%
Deposits 152,736,195 189,172,191 209,528,921 228,154,034 262,571,409 Loan/Assets 35.3% 36.4% 42.1% 45.7% 46.4%
Long-term bond funding 2,330,275 3,680,719 5,082,101 3,286,094 3,286,094 Other Prov, Income/ Assets 0.0% 0.0% 0.0% 0.1% 0.0%
Other Borrowings 0 0 0 0 0 Operating ROA 4.0% 3.3% 4.1% 4.4% 4.3%
Avg. IBL 143,052,642 173,959,690 203,731,966 223,025,575 248,648,815 Pre-Tax ROA 10.1% 8.8% 10.2% 11.5% 10.2%
Avg. Assets 163,489,739 197,401,867 231,787,432 256,221,135 289,251,374 Tax rate - - - - -
Common Equity 18,067,360 20,441,731 23,279,310 27,349,615 32,738,090 Minorities & Outside Distbn. -0.0% -0.0% 0.0% 0.0% 0.0%
RWA 73,537,710 98,937,004 134,164,949 146,769,973 154,197,597 ROA 2.6% 2.3% 2.5% 2.6% 3.0%
Avg. RWA 69,721,059 86,237,357 116,550,976 140,467,461 150,483,785 RORWA 6.1% 5.2% 5.0% 4.7% 5.8%
Equity/Assets 10.4% 9.8% 9.4% 9.9% 10.4%
ROE 25.0% 23.3% 26.4% 25.8% 29.2%
Source: Company reports and J.P. Morgan estimates.

137
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Bank of China – H Overweight


HK$4.54
Price Target: HK$5.7
www.boc.cn

Company description China


One of the “big four” banks in China, BOC has the most extensive international Banks
branch network among all Chinese banks and a dominant over-40% market share
Samuel ChenAC
in China’s FX-related banking business. It has a strong universal banking
(852) 2800-8557
platform, with presence in investment banking, insurance, fund management, samuel.s.chen@jpmorgan.com
financial leasing.
J.P. MorganSecurities(Asia Pacific) Limited
Post mortem
Bank of China delivered stronger-than-sector average loan increase. In Rmb- 12M share price performance
denominated lending, market share increased by 1ppt. BoC is also a major 5.5
H-share A-share

beneficiary of stronger foreign-currency lending. The bank expects more market


4.5
share gain and still relatively solid loan growth despite a slowdown. Meanwhile,
asset quality further has been proven in the past one year, with significant 3.5

improvement in asset quality and NPL coverage. We expect more ROE 2.5

improvement going forward. A structural change in business mix may improve 1.5

underlying profitability and NIM, particularly driven by the 5ppt increase in the Nov-
08
Jan-
09
Mar- May-
09 09
Jul-
09
Sep-
09
Nov-
09
percentage of Rmb-denominated loans, and rising spread in both Rmb and
Source: Bloomberg.
foreign-currency assets. Also, discontinuation of overseas securities provisioning
will also contribute nearly 1ppt ROE improvement. Performance
Potential for earnings upgrades 1M 3M 12M
We believe NIM expansion could be bigger than its key peers and better than our H Absolute (%) 14.1 19.3 101.8
A Absolute (%) 6.4 (9.6) 36.5
expectation. The major potential upside surprise may come from the writeback of
Source: Bloomberg.
its overseas impairment reserves. With a provision ratio of 45% collectively on
US MBS securities, we believe at least over US$2 billion can be written back. Company data (H-shares)
How much recovery is priced into the stock 52-week range (HK$) 1.84 – 4.66
At 1.7x FY10E P/B and below 9x FY10E P/E, we believe the share price has not Mkt cap (US$MM) 44,336
priced in the expected significant ROE improvement in the next two years or its Mkt cap (A+H) (US$MM) 152,429
better-than-peers earnings trend. Avg daily val (US$MM) 173
Avg daily volume (MM) 325
Price target and key risks
Shares O/S (A+H MM) 253,839
Our current DDM-based Dec-09 price target is HK$5.7, implying a P/BV of 2.4x
Date of price 5-Nov-09
and P/E of 12x (FY10E). We assume a risk-free rate of 5.3%, cost of equity of
Index: I 21615
11.1% and terminal “g” of 5.8%. Key risks to PT are unexpected prolonged
Free float (%) 100
weakness in US credit market and drastic Rmb appreciation.
Exchange rate 7.75
Source: Bloomberg.

3988 HK; 601988 CH


RmbMM, Y/E Dec FY07 FY08 FY09E FY10E FY11E
Attributable earnings 56,248 64,360 82,529 117,024 151,011
EPS (Rmb) 0.22 0.25 0.33 0.46 0.59
DPS (Rmb 0.10 0.13 0.16 0.21 0.27
EPS growth (%) 22.1 14.4 28.2 41.8 29.0
ROE (%) 14.0 14.5 16.9 21.3 23.6
ROA (%) 0.99 0.99 1.03 1.21 1.35
P/E (x) – H share 18.2x 15.9x 12.4x 8.8x 6.8x
BVPS (Rmb) 1.66 1.83 2.01 2.32 2.72
P/BV (x) – H share 2.44x 2.21x 2.01x 1.74x 1.48x
Div. yield (%)- H 2.5 3.2 4.0 5.1 6.6
Source: Company data, Bloomberg, J.P. Morgan estimates. Share price is as of 5 November 2009.

138
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Bank of China – H: Summary of financials


Rmb million, year end December 31
Income statement - Rmb mn 2007 2008 2009E 2010E 2011E Growth Rates 2007 2008 2009E 2010E 2011E

Margins (% of Earning Assets) 2.76% 2.63% 2.05% 2.28% 2.44% Loans 17% 16% 44% 18% 14%
Earning Assets/Assets 98% 96% 99% 98% 99% Deposits 8% 16% 30% 16% 15%
NIM (as % of avg. Assets) 2.70% 2.52% 2.02% 2.24% 2.41% Assets 12% 16% 25% 17% 15%
Equity 10% 10% 10% 15% 17%
Net Interest Income 152,745 162,936 161,566 215,703 269,068
Net Interest Income 26% 7% -1% 34% 25%
Total Non-Interest Revenues 31,427 56,750 62,846 72,817 86,766 Non-Interest Income 74% 81% 11% 16% 19%
Fee income 35,535 39,947 47,140 58,735 71,285 of which Fee Grth 76% 12% 18% 25% 21%
Dealing income -11,972 7,054 5,328 2,807 2,763 Revenues 32% 19% 2% 29% 23%
Other operating income 7,864 9,749 10,378 11,275 12,718 Costs 23% 18% 2% 20% 21%
Total operating revenues 184,172 219,686 224,411 288,520 355,834 Pre-Provision Profits 39% 20% 2% 35% 25%
Operating costs -75,392 -89,078 -91,252 -109,398 -132,363 Loan Loss Provisions -33% 103% 1% 42% 8%
Operating profit 108,780 130,608 133,159 179,121 223,471 Pre-Tax 34% -4% 30% 41% 28%
Loan Loss Provisions -8,252 -16,792 -17,006 -24,182 -26,171 Attributable Income 31% 14% 28% 42% 29%
Other provisions -12,011 -28,239 -3,616 3,363 5,982 EPS 22% 14% 28% 42% 29%
Exceptionals 917 876 300 600 800 DPS 150% 30% 25% 28% 29%
Disposals/ Other income 1,263 726 800 880 1,000
Pre-tax profit 90,697 87,179 113,637 159,782 205,082 Balance Sheet Gearing 2007 2008 2009E 2010E 2011E
Tax -28,661 -21,285 -27,273 -38,348 -49,220
Minorities/preference dividends -5,788 -1,534 -3,835 -4,410 -4,851 Loan/Deposit 65% 65% 72% 73% 72%
Attributable net income 56,248 64,360 82,529 117,024 151,011 Investment/Assets 29% 24% 22% 21% 20%
Common dividends 25,384 32,999 41,265 52,661 67,955 Loan/Assets 48% 47% 55% 55% 55%
Customer deposits/Liab. 79% 79% 81% 80% 80%
LT Debt/Liabilities 1% 1% 1% 1% 1%

Per Share Data 2007 2008 2009E 2010E 2011E Asset Quality/Capital 2007 2008 2009E 2010E 2011E
restated EPS (Rmb/ share) 0.22 0.25 0.33 0.46 0.59 Loan loss reserves/Loans 3.5% 3.3% 2.4% 2.3% 2.2%
restated DPS (Rmb/ share) 0.10 0.13 0.16 0.21 0.27 Impaired loan ratio 3.17% 2.76% 1.54% 1.21% 1.00%
Payout 45% 51% 50% 45% 45% Impaired loan coverage 106% 117% 155% 187% 220%
restated BVPS (Rmb/ share) 1.66 1.83 2.01 2.32 2.72 Growth in NPLs -13% 1% -19% -8% -6%
Avg. Shares Issued 253,821 253,839 253,839 253,839 253,839
PPOP per share 0.43 0.51 0.52 0.71 0.88 Tier 1 Ratio 10.7% 10.8% 9.7% 9.5% 9.7%
Total CAR 13.3% 13.4% 12.2% 12.0% 12.1%

Key balance sheet - Rmb mn 2007 2008 2009E 2010E 2011E Du-Pont Analysis 2007 2008 2009E 2010E 2011E

Net Customer Loans 2,754,493 3,189,652 4,644,187 5,472,823 6,262,050 NIR/Avg. Assets 2.70% 2.52% 2.02% 2.24% 2.41%
Loans loss reserves (96,068) (106,494) (113,441) (126,603) (139,997) Non IR/Avg. Assets 0.56% 0.88% 0.79% 0.75% 0.78%
Gross Loans 2,850,561 3,296,146 4,757,627 5,599,426 6,402,047 Non IR/Total Rev 17.1% 25.8% 28.0% 25.2% 24.4%
Investments 1,712,927 1,646,208 1,877,456 2,138,132 2,381,082 Total Rev/Avg. Assets 3.25% 3.39% 2.81% 2.99% 3.18%
Other Earning Assets 1,209,213 1,768,611 1,812,180 2,155,239 2,615,753 Cost/Income 40.9% 40.5% 40.7% 37.9% 37.2%
Average Earning Assets 5,526,875 6,191,254 7,883,995 9,460,301 11,018,963 Cost/Assets 1.33% 1.38% 1.14% 1.13% 1.18%
Goodwill Goodwill Amort. 0.0% 0.0% 0.0% 0.0% 0.0%
Total assets 5,991,217 6,951,680 8,722,923 10,196,948 11,727,765 Pre-prov.g Op. ROAA 1.92% 2.02% 1.67% 1.86% 2.00%
LLP/Loans -0.31% -0.53% -0.40% -0.44% -0.40%
Interbank funding 663,815 859,343 1,074,179 1,342,723 1,597,841 Loan/Assets 47.1% 49.2% 52.8% 57.6% 57.8%
Customer deposits 4,400,111 5,102,111 6,614,742 7,687,214 8,838,238 Other inc:provs -0.17% -0.41% -0.03% 0.05% 0.07%
LT Sub-debt 60,000 60,000 74,000 94,000 94,000 Pre-tax ROAA 1.60% 1.35% 1.42% 1.66% 1.83%
Other Interest Bearing Liabilities 142,754 115,780 90,692 90,692 95,421 Tax 31.6% 24.4% 24.0% 24.0% 24.0%
Avg. Interest Bearing Liab. 5,075,454 5,686,870 7,284,272 8,518,481 9,904,776 MI -0.10% -0.02% -0.05% -0.05% -0.04%
Average Assets 5,659,435 6,471,449 7,994,048 9,649,134 11,181,603 ROAA 0.99% 0.99% 1.03% 1.21% 1.35%
Shareholders' equity 420,430 464,258 510,788 589,836 690,158 RoRWA 1.56% 1.67% 1.79% 2.06% 2.30%
Risk Weighted Assets 3,754,108 3,966,943 5,233,754 6,118,169 7,036,659 Equity/Assets 7.1% 6.8% 6.1% 5.7% 5.7%
Avg. Risk Weighted Assets 3,611,563 3,860,526 4,600,348 5,675,961 6,577,414 ROE 14.0% 14.5% 16.9% 21.3% 23.6%

Source: Company reports and J.P. Morgan estimates.

139
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Catcher Technology Overweight


Price: NT$80.2
Price Target: NT$112
www.catcher.com.tw

Company description Taiwan


Catcher (TWSE: 2474) is a leading aluminum and magnesium casing maker in Computer Hardware
Taiwan. The company is primarily engaged in manufacturing and sales of a wide Gokul HariharanAC
spectrum of light metal casing products in 3C area, but mainly in NB. (852) 2800-8564
gokul.hariharan@jpmorgan.com
Post mortem J.P. Morgan Securities (Asia Pacific) Limited
Catcher’s profitability is highly dependent on: (1) the utilization rate; and (2)
corporate demand. Given that PC brands prefer aluminum for their thin and light Price performance
models, we expect Catcher to be a key beneficiary of this trend in 2010. In 100
addition, a potential pick up in corporate demand from 2H10 should also help NT$
70
Catcher. While Foxconn Tech should benefit from rising metal adoption, Hon 40
Hai’s aggressive notebook ODM plans could limit the upside for Foxconn Tech, Nov-08 Feb-09 May-09 Aug-09 Nov-09
which benefits Catcher.
2474.TW share price (NT$
TSE (rebased)
Potential for earnings upgrades Source: Bloomberg.
We believe the potential for upward earnings estimate revisions comes from both
revenue and OP margin upside through: (1) an improvement in yield; and (2) a Performance
strong pick up in the utilization rate on favorable industry trend. 1M 3M 12M
Absolute (%) -3.6 3.0 17.7
How much recovery is priced into the stock? Relative (%) -2.6 -5.7 -41.3
The recovery in 2009 might be already in the price but we believe the strong Source: Bloomberg.
momentum in 2010 is not. We believe the market is overly concerned about the
impact on gross margins due to increasing competition and is not fully factoring Company data
in the extent of operating leverage in Catcher’s business model. 52-week range (NT$) 41.36-94.00
Mkt cap. (NT$MM) 53,326
Mkt cap. (US$MM) 1,639
Price target and key risks Avg daily value (US$MM) 34
Our Jun-10 PT of NT$112 is based on 15x FY10E earnings. 15x is the average Avg daily volume (MM) 13.48
Shares O/S (MM) 664.9
P/E multiple since 2002, which we believe is a fair valuation for Catcher. With
Date of price 5-Nov-09
40/12% potential earnings growth in 2010/11E and industry trends becoming in Index: TWSE 7,417
favor of light metal, we believe Catcher should merit a valuation re-rating as a Free float (%) 70
pure-play notebook light metal vendor. A key risk to our PT is execution issue in Exchange rate 32.5
the ramp up of new models in 2010. Source: Bloomberg.

Bloomberg: 2474.TT; Reuters: 2474.TW


NT$ in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Sales 19,049 18,422 24,610 29,215 ROE (%) 15.7% 10.5% 12.9% 13.4%
Operating profit 4,989 3,747 5,375 6,018 Core ROIC (%) 17.5% 10.5% 13.9% 14.1%
EBITDA 6,481 5,819 7,678 8,346 Cash div (NT$) 4.0 1.0 2.3 3.0
Pre-tax profit 4,932 4,073 5,715 6,407 Quarterly EPS (NT$) 1Q 2Q 3Q 4Q
Net profit (reported) 4,346 3,449 4,843 5,432 EPS (FY07) 2.60 1.78 2.98 3.26
MV of employee bonus 543 427 586 657 EPS (FY08) 1.31 1.38 2.14 1.81
Net profit (adjusted) 4,346 3,449 4,843 5,432 EPS (FY09E) 1.00 1.10 1.41 1.71
New Taiwan GAAP EPS (NT$) 6.63 5.22 7.28 8.17 Sales growth 5% -3% 34% 19%
New Taiwan GAAP P/E (x) 12.1 15.4 11.0 9.8 EPS growth -38% -21% 40% 12%
YE BPS (NT$) 44.8 54.4 58.8 63.1
P/BV (x) 1.8 1.5 1.4 1.3
Net debt (3.49) net cash net cash net cash Jun-10 PT NT$ 112
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

140
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Catcher Technology: Summary of financials


NT$ in millions, year-end December
Profit and loss statement Ratio analysis
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenues 19,049 18,422 24,610 29,215 EBITDA margin (%) 34.0% 31.6% 31.2% 28.6%
% change Y/Y 5.3% -3.3% 33.6% 18.7% Operating margin (%) 26.2% 20.3% 21.8% 20.6%
Gross margin (%) 40.2% 34.1% 35.7% 33.9% Net profit margin (%) 22.8% 18.7% 19.7% 18.6%
EBITDA 6,481 5,819 7,678 8,346 SG&A/sales (%) 6.9% 6.9% 7.0% 6.5%
% change Y/Y -19.4% -10.2% 31.9% 8.7%
EBITDA margin (%) 34.0% 31.6% 31.2% 28.6% Sales per share growth (%) 4.8% -4.1% 32.8% 18.7%
EBIT 4,989 3,747 5,375 6,018 Sales growth (%) 5.3% -3.3% 33.6% 18.7%
% change Y/Y -32.9% -24.9% 43.5% 12.0% Net profit growth (repo’d) (%) -39.7% -20.7% 40.4% 12.1%
EBIT margin (%) 26.2% 20.3% 21.8% 20.6% Net profit growth (adj) (%) -37.3% -20.7% 40.4% 12.1%
Net interest 83 -76 -8 -19 EPS growth (reported) (%) -40.0% -21.3% 39.6% 12.1%
Earnings before tax 4,932 4,073 5,715 6,407 EPS growth (adjusted) (%) -37.6% -21.3% 39.6% 12.1%
% change Y/Y -36.0% -17.4% 40.3% 12.1%
Tax 571 618 872 975 Interest Coverage (x) 19.7 19.8 37.2 37.9
as % of EBIT 11.4% 16.5% 16.2% 16.2% Net debt to total Capital (%) 9% -7% -1% -3%
Net income (reported) 4,346 3,449 4,843 5,432 Net debt to equity (%) 12% -8% -2% -4%
% change Y/Y -39.7% -20.7% 40.4% 12.1% Sales/Assets (%) 43% 37% 44% 49%
Net income (adjusted) 4,346 3,449 4,843 5,432 Assets/Equity (%) 151.0% 135.9% 142.2% 142.4%
% change Y/Y -37.3% -20.7% 40.4% 12.1% ROE (%) 15.7% 10.5% 12.9% 13.4%
Shares outstanding (MM) 655 661 665 665 ROCE (%) 12.1% 7.5% 9.8% 10.1%
EPS (reported) 6.63 5.22 7.28 8.17
EPS (adjusted) 6.63 5.22 7.28 8.17

Balance sheet Cash flow statement


FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Cash and Cash Equivalents 7,375 11,250 10,305 11,704 EBIT 4,989 3,747 5,375 6,018
Accounts receivable 8,206 8,017 11,173 12,133 Depreciation & amortisation 1,492 2,072 2,302 2,329
Inventories 2,964 2,898 4,039 4,387 Change in working capital -4,950 -1,017 -4,420 -1,225
Others 4,239 5,985 8,341 9,058 Taxes 571 618 872 975
Current assets 22,783 28,150 33,858 37,282 Cash flow from operations 2,102 5,419 4,129 8,097

LT investments 413 486 526 569 Capex -7,115 -2,202 -3,000 -3,000
Net fixed assets 19,894 20,024 20,721 21,393 Disposal/ (purchase) -853 921 -40 -43
Total Assets 44,627 49,202 55,647 59,787 Net Interest 83 -76 -8 -19
Free cash Flow -5,013 3,217 1,129 5,097
Liabilities
ST bank loans 6,785 5,003 5,777 6,068
Payables 2,242 2,204 3,494 4,007 Equity raised/(repaid) 581 652 0 0
Others 1,882 2,394 3,337 3,624 Debt raised/(repaid) 4,197 -2,531 1,289 485
Total current liabilities 10,910 9,602 12,607 13,699 Other -2,608 2,285 -1,820 -2,125
Long term debt 4,084 3,335 3,851 4,045 Dividends 15 -593 -1,496 -1,995
Other liabilities 80 69 69 69 Beginning cash 10,972 7,375 11,250 10,305
Total liabilities 15,074 13,006 16,528 17,813 Ending cash 7,375 11,250 10,305 11,704
Shareholder's equity 29,553 36,196 39,120 41,974 DPS (NT$) 4.00 1.00 2.25 3.00
BVPS (NT$) 44.80 54.44 58.83 63.13
Source: Company reports and J.P. Morgan estimates.

141
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

China Airlines Overweight


NT$9.99
Price Target: NT$16.00
www.china-airlines.com

Company description Taiwan


China Airlines (CAL) is Taiwan’s government-owned carrier with a well- Transportation, Airlines
balanced revenue mix, including 53% contribution from passenger revenue; Corrine PngAC
42% from cargo revenue; and 5% from other services. (65) 6882-1514
corrine.ht.png@jpmorgan.com
Post mortem J.P. Morgan Securities (Asia Pacific)
China Airlines has one of the youngest fleets versus Asian and global peers, Limited
implying better operating efficiency; its safety track record has improved
Price performance
significantly in the past five years. CAL also has easier access to credit and
16
relatively low funding costs despite its high financial leverage.
NT$ 12

Potential for earnings upgrades 8


Direct flights represent a structural change for the Taiwan airlines and will Nov-08 Feb-09 May-09 Aug-09 Nov-09

likely start to have a bigger impact on the airline’s earnings in 2010. We 2610.TW share price (NT$
expect, Contrary to the market’s common perception, CAL to be a bigger TSE (rebased)

beneficiary of the progressive liberalization of China-Taiwan direct flights Source: Bloomberg.

than EVA, with a c.17% boost to its 2010 revenue, helped by its 94% stake
Performance
in Mandarin Airlines.
1M 3M 12M
Absolute (%) -6.5% -22.1% -5.1%
How much recovery is priced into the stock?
Relative (%) -7.2% -29.4% -54.7%
Little of the recovery has been priced in as CAL has significantly lagged the
market and sector recovery, and management continues to sound bearish on Source: Bloomberg.

the outlook and it incurred substantial losses in 2009. However, we expect


Company data
CAL to provide substantial absolute and relative upside in 2010 as the cycle
52-week range (NT$) 8.67-14.58
and its earnings recover.
Mkt cap. (NT$MM) 45,677
Mkt cap. (US$MM) 1,403
Price target and key risks
Avg daily value (US$MM) 16.35
Our Dec-10 PT of NT$16 based on 1.7x P/BV, 1 std dev above CAL’s
Avg daily volume (MM) 39.65
average valuation, as we expect better-than-mid-cycle results in 2010 and
Shares O/S (MM) 4,572
near-peak-cycle earnings by 2011. Key risks to our PT include: (1) volatile
Date of price 5-Nov-09
fuel prices; (2) high gearing; (3) aircraft incidents; and (4) delays in cross-
Index: TWSE 7,417.46
straits flights liberalization.
Free float (%) 40
Exchange rate 33
Source: Bloomberg.
Bloomberg: 2610 TT; Reuters: 2610.TW
NT$ in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 125,221 95,738 122,660 141,301
Net profit -32,352 -8,969 495 3,562
EPS (NT$) (7.11) (2.26) (0.12) (0.90)
FD EPS (LC) (7.11) (2.26) (0.12) (0.90)
DPS (NT$) 0.00 0.00 0.00 0.00
Sales growth (%) -1.4 -23.5 28.1 15.2
Net profit growth (%) nm nm nm 619
EPS growth (%) 1.036.5 -68.2 105.5 618.8
ROE (%) -75.4 -25.7 1.3 8.6
P/E (x) -1.4 -4.5 80.6 11.2
FD P/E (x) -1.4 -4.5 80.6 11.2
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

142
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

China Airlines: Summary of financials


NT$ in millions, year end December
Income statement Cash flow statement
FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E
Revenue 126,993 125,221 95,738 122,660 141,301 EBIT 1,351 -10,206 -7,065 4,076 7,454
% change Y/Y 4.1% (1.4%) (23.5%) 28.1% 15.2% Depr. & amortization 10,863 10,310 10,388 10,837 11,286
EBITDA 12,213 104 3,323 14,913 18,740 Change in working capital 7,092 1,977 -920 1,296 898
% change Y/Y -10.1% -99.2% 3102.7% 348.8% 25.7% Taxes -119 -95 200 -66 -478
EBIT 1,351 -10,206 -7,065 4,076 7,454 Cash flow from operations 15,886 -2,252 -831 12,421 15,537
% change Y/Y NM NM NM NM 82.9%
EBIT margin 1.1% -8.2% -7.4% 3.3% 5.3% Capex 953 5,389 -10,000 -10,000 -10,000
Net interest -4,751 -4,097 -3,434 -3,723 -3,623 Disposal/(purchase) 15,456 10,894 0 0 0
Earnings before tax -3,138 -36,690 -9,169 562 4,039 Net Interest -4,751 -4,097 -3,434 -3,723 -3,623
% change Y/Y -2239.1% 1069.2% -75.0% -106.1% 618.8% Other -3,318 -631 0 0 0
Tax 619 4,339 200 -66 -478 Free cash flow 16,839 3,137 -10,831 2,421 5,537
As % of EBT 19.7% 11.8% 2.2% 11.8% 11.8%
Net income (reported) -2,519 -32,352 -8,969 495 3,562 Equity raised/(repaid) - - - - -
% change Y/Y -441.1% 1184.5% -72.3% -105.5% 618.8% Debt raised/(repaid) -14,383 -7,599 -4,000 -2,000 -5,000
Shares outstanding 4,026 4,551 3,972 3,972 3,972 Other - - - - -
EPS (reported) (NT$) (0.63) (7.11) (2.26) 0.12 0.90 Dividends paid -469 0 0 0 0
% change Y/Y (426.8%) 1036.5% (68.2%) (105.5%) 618.8% Beginning cash 5,245 6,088 7,282 11,251 11,671
Ending cash 6,088 7,282 11,251 11,671 12,208
DPS (NT$) 0.00 0.00 0.00 0.00 0.00

Balance sheet Ratio analysis


FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E
Cash and cash equivalents 6,088 7,282 11,251 11,671 12,208 EBITDA margin 9.6% 0.1% 3.5% 12.2% 13.3%
Accounts receivable 12,458 8,913 6,815 8,731 10,058 Operating margin 1.06% (8.15%) (7.38%) 3.32% 5.28%
Inventories 5,381 5,152 3,939 5,046 5,813 Net margin -2.0% -25.8% -9.4% 0.4% 2.5%
Others 3,429 930 886 926 954
Current assets 27,357 22,277 22,890 26,375 29,034
Sales per share growth (0.3%) (12.8%) (12.4%) 28.1% 15.2%
LT investments 15,687 20,443 20,443 20,443 20,443 Sales growth 4.1% (1.4%) (23.5%) 28.1% 15.2%
Net fixed assets 177,104 165,349 164,961 164,124 162,838 Net profit growth -441.1% 1184.5% -72.3% -105.5% 618.8%
Total assets 230,808 218,060 218,116 220,972 222,553 EPS growth (426.8%) 1036.5% (68.2%) (105.5%) 618.8%

Liabilities Interest coverage (x) 2.57 0.03 0.97 4.01 5.17


Short-term loans 30,204 30,692 21,692 17,692 12,692
Payables 13,808 11,878 9,082 11,635 13,404 Net debt to equity 236.5% 284.0% 326.9% 284.0% 256.6%
Others 10,918 32,436 30,957 32,764 34,015 Sales/assets 0.54 0.56 0.44 0.56 0.64
Total current liabilities 54,930 75,006 61,730 62,091 60,110 Assets/equity 4.18 7.11 7.02 6.76 6.11
Long-term debt 106,717 98,485 103,485 105,485 105,485 ROE (4.6%) (75.4%) (25.7%) 1.3% 8.6%
Other liabilities 13,991 13,085 13,085 13,085 13,085 ROCE 0.7% -5.8% -4.4% 2.5% 4.6%
Total liabilities 175,638 187,374 179,099 181,459 179,479
Shareholders' equity 55,170 30,686 39,017 39,513 43,075
BVPS (NT$) 13.70 6.74 9.82 9.95 10.84
Source: Company reports, J.P. Morgan estimates.

143
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

China Mengniu Dairy Overweight


HK$23.70
Price Target: HK$23.00
www.mengniu.com.cn

Company description Country


Mengjiu is a leading dairy producer in China. Its major products include Food & Food Manufacture
liquid milk products and ice cream. In 2008, it was ranked No.1 in the Jasmine BaiAC
sectors of liquid milk, yogurt and ice cream in China’s dairy industry. (852) 2800 8559
jasmine.d.bai@jpmorgan.com
Post mortem J.P. Morgan Securities (Asia Pacific)
Liquid milk gross margin and EBIT margin are at the low-end in the China Limited
F&B sector. We believe one reason for this is the aggressive pricing of sector
Price performance
majors, Mengniu and Yili. EBIT margins of both companies have declined
HK$
since 2002. Mengniu management indicated that after the melamine incident, 25

the company has been focusing more on high-end product mix and 20

profitability rather than on market share. We believe as dairy processors HK$


15

10
become more rational, EBIT margin would have more upside potential. 5

Meanwhile, we believe the melamine incident in China has resulted in 0


Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

consumers being more willing to pay for high-end products. 2319.HK Share Price (HK$

Source: Bloomberg.
Potential for earnings upgrades
Performance
We have factored in raw milk price increases in China and the EBIT margin
1M 3M 12M
assumption for FY09 and FY10 are 6.5% and 7.2%, respectively. Earnings
Absolute (%) 17.0 29.1 251.1
upgrades will come from margin expansion rather than from revenue
Relative (%) 11.9 24.3 206.4
surprises.
Source: Bloomberg.

How much recovery is priced into the stock? Company data


The share price is trading at 25x FY09E earnings and 21x FY10E earnings. 52-week range (HK$) 6.2 – 23.7
Mkt cap. (HK$ MM) 41,146
This is at the low end of big-cap China consumer staples.
Mkt cap. (US$MM) 5,309
Avg daily value (US$MM) 23.5
Price target and key risks
Our DCF-based Dec-09 price target is HK$23 (free cash flow = cash flow Avg daily volume (MM) 9.2
from operation – capex; WACC = 12%. We assume a terminal growth rate Shares O/S (MM) 1736
from 2018 of 2%). Key risks to our price target are: (1) if the selling expense Date of price 5-Nov-09
surges again; (2) an unexpected change in raw milk prices; and (3) any food Index: I 21479
safety issue in China. Free float (%) 43.8
Exchange rate 7.75
Source: Bloomberg.
Bloomberg: 2319 HK; Reuters: 2319.HK
Rmb in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 23,865 25,106 27,239 29,941
Net profit (952) 1,347 1,615 1,857
EPS (Rmb) (0.61) 0.78 0.93 1.07
DPS (Rmb) 0.15 0.16 0.19 0.21
Sales growth (%) 11.9 5.2 8.5 9.9
Net profit growth (%) -201.7 -241.5 19.9 15.0
EPS growth (%) -191.8 -227.3 19.9 15.0
ROE (%) -21.3 15.7 16.3 16.3
P/E (x) -34.3 23.3 19.5 16.9
P/BV (x) 7.3 3.7 3.2 2.8
EV/EBITDA (x) -69.7 10.5 8.3 0.0
Dividend yield (%) 0.7% 0.9% 1.0% 1.2%
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

144
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adrian.mowat@jpmorgan.com

China Mengniu Dairy: Summary of financials


Profit and loss statement Cash flow statement
Rmb in millions, year-end December Rmb in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenues 23,865 25,106 27,239 29,941 Earnings before tax (1,134) 1,640 1,950 2,276
% change yoy 11.9% 5.2% 8.5% 9.9% Depreciation & amortisation 640 707 787 850
Gross Profit 4,669 6,510 7,111 7,920 Change in working capital 927 (1,518) 637 (705)
EBITDA (504) 2,337 2,727 3,116 Others 155 (191) (222) (286)
% change yoy -130.8% -563.6% 16.7% 14.3% Cash flow from operations 587 638 3,152 2,135
EBITDA margin (%) -2.1% 9.3% 10.0% 10.4%
EBIT -1134 1640 1950 2276 Capex (828) (850) (1,100) (730)
% change yoy -201.6% -244.6% 18.9% 16.8% Others (422) (15) (16) (17)
EBIT margin (%) -4.8% 6.5% 7.2% 7.6% Cash flow from investing (1,250) (865) (1,116) (747)
Net interest 15 9 39 68 Free Cash Flow (663) (227) 2,036 1,389
Earnings before tax -1089 1664 2004 2361
% change yoy -196.4% -252.7% 20.4% 17.8%
Equity raised/(repaid) 0 3,058 - -
Tax 161 -200 -261 -354
Debt raised/(repaid) 1,302 (670) (404) (99)
% of EBT 14.8% 12.0% 13.0% 15.0%
Dividends paid (228) (269) (323) (371)
Net income -952 1347 1614 1854
Others 80 - - -
% change yoy -201.7% -241.5% 19.8% 14.9%
Cash flow from financing 1,155 2,119 (727) (470)
No. of shares 1562 1736 1736 1736
Net change in cash 492 1892 1309 919
outstanding
DPS (Rmb) 0.15 0.16 0.19 0.21
EPS (Rmb) -0.61 0.78 0.93 1.07
Source: Company, J.P. Morgan estimates.
Source: Company, J.P. Morgan estimates.

Balance sheet
Rmb in millions, year-end December Ratio analysis
FY08 FY09E FY10E FY11E %, year-end December
Cash and cash equivalents 3,042 4,934 6,243 7,162 FY08 FY09E FY10E FY11E
Accounts receivable 349 614 580 897 Gross margin 19.6% 25.9% 26.1% 26.5%
Inventories 824 1,213 992 1,662 EBITDA margin -2.1% 9.3% 10.0% 10.4%
Others 507 507 507 507 Operating margin -4.8% 6.5% 7.2% 7.6%
Current assets 4,723 7,269 8,323 10,228 Net profit margin -4.0% 5.4% 5.9% 6.2%
Net fixed assets 5,751 5,893 6,207 6,087
Other non current assets 559 574 590 606 Sales growth 11.9% 5.2% 8.5% 9.9%
Total assets 11,033 13,736 15,119 16,921 Net profit growth -201.7% -241.5% 19.8% 14.9%
Liabilities EPS growth -191.8% -227.3% 19.8% 14.9%
Short Term loans 1,282 132 228 129
Accounts payable 4,202 3,338 3,720 4,002 Net debt to equity -25.4% -43.0% -54.7% -56.5%
Others 0 0 0 0 Sales/assets (x) 2.2 1.8 1.8 1.8
Total current liabilities 5,483 3,470 3,948 4,131 Assets/equity (x) 2.5 1.6 1.5 1.5
Long term debt 628 1,108 608 608 ROE -21.3% 15.7% 16.3% 16.3%
Total liabilities 6,568 5,152 5,260 5,596 ROCE -20.4% 16.0% 17.5% 17.8%
Shareholder's equity 4,465 8,600 9,891 11,374
BVPS (Rmb) 2.86 4.96 5.70 6.55

Source: Company, J.P. Morgan estimates.


Source: Company, J.P. Morgan estimates.

145
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adrian.mowat@jpmorgan.com

China Yurun Food Group Overweight


HK$17.76

www.yurun.com.hk

Company description China


China Yurun Food is a leading meat processing company in China. Its Food & Food Manufacture
business includes upstream hog slaughtering and downstream meat Jasmine BaiAC
processing. China Yurun has been expanding capacity over years and we (852) 2800 8559
expect it to benefit from industry consolidation. Jasmine.d.bai@jpmorgan.com

Post mortem J.P. Morgan Securities (Asia Pacific)


Limited
With a one-year view, China Yurun should be a key beneficiary of hog price
inflation in China. We expect hog prices to start increasing in December due Price performance
to: (1) peak season of the Chinese New Year; and (2) potential hog supply HK$
reduction, if hog farmers sell more hogs now due to pig disease worry. China 19
17
Yurun’s 70% EBIT comes from its slaughtering business, which benefits 15
13
from hog price increases. Also, in case of a hog price upturn, we could see
HK$
11
9
less inventory risk. 7
5

Potential for earnings upgrades Nov-08 Feb-09 May-09 Aug-09


1068.HK Share Price (HK$
Nov-09

We have assumed hog prices at Rmb12.1/kg and Rmb13.8/kg for FY09 and Source: Bloomberg.
FY10, respectively. If hog prices go beyond our expectation next year, this
could be an upside risk to our earnings estimates. In 1H09, the company Performance
reported impressive product-mix improvement, which is likely to surprise 1M 3M 12M
margins on the upside. Absolute (%) 4.7% 39.0% 89.9%
Relative (%) -0.4% 34.2% 45.2%
How much recovery is priced into the stock?
China Yurun’s share price is trading at 23x of FY09E earnings and 17x Source: Bloomberg.
FY10E earnings. We believe the margin expansion backed by products mix
improvement has not priced in. Company data
52-week range (HK$) 8.18 – 17.76
Recommendation and key risks Mkt cap. (HK$ MM) 29,703
We see China Yurun as a half commodity, and a half branded consumer Mkt cap. (US$MM) 3,833
company. In our view, this is the best entry point in the cycle and we observe Avg daily value (US$MM) 17.17
Avg daily volume (MM) 8.9
impressive product-mix improvement. Key risks to our view include: (1)
Shares O/S (MM) 1673
outbreak of unexpected food safety issue in the pork processing sector; and Date of price Nov. 5, 2009
(2) unexpected government action. Index: HSI 21,479
Free float (%) 59.2%
Exchange rate 7.75
Source: Bloomberg.

Bloomberg: 1068HK; Reuters: 1068.HK


HK$ in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 13,024 14,047 20,246 25,092
Net profit 1138 1525 1717 2003
EPS (HK$) 0.74 0.91 1.03 1.20
Sales growth (%) 50.8% 7.9% 44.1% 23.9%
Net profit growth (%) 11.5% 49.9% 34.9% 16.6%
Recurring EPS growth(%) 11.2% 37.5% 34.9% 16.6%
EPS growth (%) 30.9% 24.0% 12.6% 16.6%
ROE (%) 21.7% 19.0% 18.4% 18.5%
P/E (x) 24.1 19.4 17.3 14.8
Recurring P/E (X) 32.0 23.3 17.3 14.8
P/BV (x) 5.2 3.7 3.2 2.7
EV/EBITDA (x) 23.5 15.6 13.2 10.7
Dividend yield (%) 1.1 1.3 1.5 1.7
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009. We revised PT to HK$21 on November 19.

146
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

China Yurun Food Group: Summary of financials


HK$ in millions, year-end December
Income statement Cash flow statement
2008 2009E 2010E 2011E 2008 2009E 2010E 2011E
Revenues 13,024 14,047 20,246 25,092 EBIT 1,175 1,729 1,981 2,355
% change yoy 50.8% 7.9% 44.1% 23.9% Depreciation & amortization 129 160 301 420
Gross Profit 1,690 2,193 2,950 3,589 Change in working capital 172 -499 -443 -346
EBITDA 1304 1889 2282 2776 Others -282 -152 -235 -327
% change yoy 36.7% 44.8% 20.8% 21.6% Cash flow from operations 1,195 1,239 1,604 2,103
EBITDA margin (%) 10.0% 13.4% 11.3% 11.1%
EBIT 1175 1729 1981 2355 Capex -1882 -1938 -1740 -1158
% change yoy 34.8% 47.1% 14.6% 18.9% Sale of assets 0 - - -
EBIT margin (%) 9.0% 12.3% 9.8% 9.4% Free Cash Flow -688 -699 -136 945
Recurring EBIT 982 1609 1981 2355
Interest Expense 64 -52 -29 -26 Cash flow from investing -2,022 -1,938 -1,740 -1,158
Earnings before tax 1238 1676 1951 2329
% change yoy 35.8% 35.3% 16.4% 19.3% Equity raised/(repaid) 31 1,675 - -
Recurring earrings before tax 950 1554 1951 2329
% change yoy 16.7% 63.5% 25.6% 19.3%
Tax -101 -151 -234 -326 Debt raised/(repaid) 250 -588 -81 -340
% of EBT -8.2% -9.0% -12.0% -14.0% Dividends paid -291 -390 -439 -512
Net income 1138 1525 1717 2003 Cash flow from financing -10 697 -520 -852
Recurring net income 849 1273 1717 2003
% change yoy 11.5% 49.9% 34.9% 16.6% Net change in cash -837 -2 -656 93
No. of shares outstanding 1531 1669 1669 1669
Recurring EPS (HK$) 0.55 0.76 1.03 1.20 DPS (HK$) 0.19 0.23 0.26 0.31
EPS (HK$) 0.74 0.91 1.03 1.20

Balance sheet Ratio analysis


2008 2009E 2010E 2011E 2008 2009E 2010E 2011E
Cash and cash equivalents 1,209 1,293 637 730 Gross margin 13.0% 15.6% 14.6% 14.3%
Trade & other receivables 704 1,003 1,446 1,792 EBITDA margin 10.0% 13.4% 11.3% 11.1%
Inventories 703 988 1,441 1,792 Operating margin 9.0% 12.3% 9.8% 9.4%
Others 640 71 71 71 Recuring operating margin 7.5% 11.5% 9.8% 9.4%
Total current assets 3,256 3,356 3,596 4,386 Net profit margin 8.7% 10.9% 8.5% 8.0%
Net fixed assets 2,588 4,372 5,817 6,561 Recurring net profit margin 6.5% 9.1% 8.5% 8.0%
Others 2,477 2,385 2,379 2,373
Total assets 8,321 10,112 11,792 13,319 Sales growth 50.8% 7.9% 44.1% 23.9%
Liabilities Net profit growth 11.5% 49.9% 34.9% 16.6%
Short Term loans 1,096 638 0 0 EPS growth 30.9% 24.0% 12.6% 16.6%
Trade & other payables 903 988 1,441 1,792
Others 20 20 20 20 Interest coverage (x) -18.4 33.1 68.2 92.1
Total current liabilities 2,018 1,646 1,462 1,812 Net debt to equity 17.1% Net cash 3.4% Net cash
Long term debt 1,011 364 950 636 Sales/assets (x) 1.6 1.4 1.7 1.9
Others 57 57 57 57 Assets/equity (x) 1.6 1.3 1.3 1.2
Total liabilities 3,086 2,067 2,469 2,505 ROE 21.7% 19.0% 18.4% 18.5%
Shareholder's equity 5,235 8,045 9,323 10,814 ROCE 16.5% 19.6% 17.8% 18.7%
Capital employeed 7112 8819 11154 12589 Recuring ROCE 13.8% 18.3% 17.8% 18.7%
BVPS (HK$) 3.42 4.82 5.59 6.48 Sales/non-current assets (x) 2.57 2.08 2.47 2.81
Source: Company, J.P. Morgan estimates.

147
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Container Corporation of India Ltd. Overweight


Rs1,138.7
Price Target: Rs1,260
www.concorindia.com

Company description India


Concor is India’s largest railway container transport operator with a market Logistics & Freight
share in excess of 90%. Concor has a dominant network of 60 ICDs and over
Aditya MakhariaAC
200 rakes. The company is reliant on India’s foreign trade segment, as it (91-22) 6157-3596
derives 80% of revenue from this segment. aditya.s.makharia@jpmchase.com

Post Mortem J.P. Morgan India Private Limited


Concor has longstanding tie-ups with shippers and has invested in port
infrastructure, which gives it a head-start over competition. We believe that Price performance
the company enjoys pricing power and is likely to sustain its profitability, (Rs)
given the inherent advantages that containerized rail transport enjoy over
1,300
other modes of transport. Further, in the current downturn, competition has 1,100
been impacted as cash flows were impacted adversely given that they were in 900
700
the midst of a capital intensive phase. 500

Feb-09

Aug-09
Nov-08

May-09

Nov-09
Potential for earnings upgrades
The potential upgrades would be driven by stronger-than-anticipated volume
growth in the export segments, which is leveraged to the global recovery. Source: Bloomberg.

Performance
How much recovery is priced into the stock?
1M 3M 12M
While container volumes have risen from trough levels, volumes remain
Absolute (%) -6 +1 +75
benign. Consequently, while valuations have risen from trough levels,
Relative (%) -1 0 +16
factoring in the recovery, we believe that as the growth momentum
Source: Company data, Bloomberg.
accelerates, valuations will likely re-rate further.
Company data
Price target and key risks 52-week range (Rs) 540-1,355
We expect Concor’s earnings to grow by 22% over FY11E, driven by rising Mkt cap. (RsMM) 148,007
sales and an improved margin outlook (given the revival in the EXIM Mkt cap. (US$MM) 3,147
segment).We have a Mar-10 PT of Rs1,260—which is at a 10% premium to Avg daily value (US$MM) 2.0
its DCF-based value. At this price, the stock is valued at one-year forward Avg daily volume (MM) 0.1
P/E of 15x on FY11E EPS, which is at a 10% premium to the company’s Shares O/S (MM) 130
historical five-year trading multiple. We believe that the valuations are Date of price 5-Nov-09
justified given that growth over the next 12-18 months will be driven by a Index: SENSEX 16064
revival in the EXIM segment (earnings growth of 22% in FY11E). Risks to Free float (%) 37
our price target include a delayed global recovery as well as an increase in Exchange rate 47.03
the competitive environment. Source: Bloomberg.
Bloomberg: CCRI.IN; Reuters: CCRI.BO
Rs n millions, year-end March
FY08 FY09E FY10E FY11E
Net sales 33,473 34,172 39,484 45,103
Net profit 7,505 7,915 8,909 10,902
EPS (Rs) 57.9 60.9 68.5 83.9
DPS (Rs) 13 14 14 17
Net sales growth (%) 10 2 16 14
Net profit growth (%) 8 5 13 22
EPS growth (%) 8 5 13 22
ROE (%) 23.6 21.0 20.1 20.7
BVPS (Rs) 245 289 342 405
P/E (x) 19.7 18.7 16.6 13.6
EV/EBITDA (%) 14.9 14.0 11.9 9.5
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

148
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Container Corporation of India Ltd.: Summary of financials


Profit and loss statement Cash flow statement
Rs in millions, year-end March
Rs in millions, year-end March
FY08 FY09 FY10E FY11E
Revenues 33,473 34,172 39,484 45,103 FY08 FY09 FY10E FY11E
% change Y/Y 10% 2% 16% 14%
EBIT 7,840 8,151 9,390 11,317
EBITDA 8,904 9,311 10,720 12,854
% change Y/Y 0% 5% 15% 20% Depreciation & amortization 1,063 1,159 1,330 1,537
EBITDA Margin (%) 26.6% 27.2% 27.2% 28.5% Dec/(Inc) in Working Capital (379) 336 (271) (207)
Depreciation 1,063 1,159 1,330 1,537 Taxes (1,856) (2,147) (2,393) (2,862)
Other Income 1,645 2,111 2,106 2,659 Cash flow from operations 6,668 7,500 8,056 9,785
Interest Expense 0 0 0 0 Extra ordinary Items 17 -3 0 0
Earnings before tax 9,485 10,262 11,496 13,977 Net Capex -1,892 -4,733 -5,000 -4,000
Tax 1,980 2,347 2,587 3,075 (Pur)/Sale of Invest. -237 -477 -500 -500
as % of EBT 20.9 22.9 22.5 22.0 Free cash flow 4,556 2,286 2,556 5,285
Net Income (Adjusted) 7,505 7,915 8,909 10,902 Equity raised/ (repaid) 40 0 0 0
Change (%) 8% 5% 13% 22% Debt raised/ (repaid) 0 0 0 0
Prior Period adjustments 17 (3) - - Dividends paid -1,652 -1,977 -2,129 -2,140
Net Income (Reported) 7,522 7,912 8,909 10,902 Net Interest (Paid)/ Recd 1,645 2,111 2,106 2,659
Shares Outstanding (in CF fron financing activity 33 134 -23 519
M) 65 130 130 130
EPS (Adjusted) 57.9 60.9 68.5 83.9 Cash generated 4,589 2,420 2,533 5,805
% change Y/Y 8% 5% 13% 22% Beginning cash 10,626 15,215 17,635 20,168
DPS (Rs) 13 14 14 17 Ending cash 15,215 17,635 20,168 25,973
Div Payout Ratio(%) 22% 23% 21% 21% Source: Company, J.P. Morgan estimates.
Source: Company, J.P. Morgan estimates.

Ratio analysis
Balance sheet %, year-end March
Rs in millions, year-end March FY08 FY09 FY10E FY11E
FY08 FY09 FY10E FY11E
Net fixed assets 16,652 19,490 23,160 25,623 EBITDA margin(%) 26.6 27.2 27.2 28.5
Capital WIP 1,721 2,457 2,457 2,457 Sales growth(%) 10 2 16 14
Trade investments 1,554 2,031 2,531 3,031 Net profit growth(%) 8 5 13 22
EPS growth(%) 8 5 13 22
Cash 15,215 17,635 20,168 25,973
Accounts receivable 137 157 182 207 Dividend Payout (%) 22 23 21 21
Inventories 48 51 108 124
Loans & Advances 3,621 3,936 4,253 4,601 P/E (x) 19.7 18.7 16.6 13.6
Current assets 19,021 21,780 24,711 30,905 Cash P/E (x) 17.2 16.3 14.5 11.9
EV/EBITDA (x) 14.9 14.0 11.9 9.5
Payables 4,144 4,802 5,106 5,560 EV/Sales (x) 4.0 3.8 3.2 2.7
Others 1,227 1,395 1,230 1,437 Price to Book Value (x) 4.6 3.9 3.3 2.8
Total current liabilities 5,371 6,197 6,336 6,997 Dividend Yield(%) 1.1 1.2 1.3 1.5
Net Current Assets 13,650 15,582 18,375 23,908
Total Assets 33,576 39,560 46,522 55,018 Debt to equity (x) 0.0 0.0 0.0 0.0

Debt - - - - Net profit margin(%) 22.4 23.2 22.6 24.2


Deferred Tax 1,737 1,938 2,131 2,344 Sales/assets (x) 1.0 0.9 0.8 0.8
Share Capital 650 1,300 1,300 1,300 Assets/equity (x) 1.1 1.1 1.0 1.0
Networth 31,839 37,622 44,391 52,674 ROE (%) 23.6 21.0 20.1 20.7
Liabilities 33,576 39,560 46,522 55,018 ROCE (%) 28.2 25.9 24.7 25.4
BVPS (Rs per share) 245 289 342 405 ROIC(%) 42.7 37.2 35.6 39.0
Source: Company, J.P. Morgan estimates.
Source: Company, J.P. Morgan estimates.

149
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adrian.mowat@jpmorgan.com

CP All Pcl Overweight


Price: Bt19.10
Price Target: Bt23.00
www.cpall.co.th

Company description Thailand


CPALL is the largest convenient store (CVS) operator in Thailand, managing Broadlines/Department Stores
4,912 stores countrywide. Anne JirajariyavechAC
(66-2) 684-2684
Post mortem anne.x.jirajariyavech@jpmorgan.com
CPALL has a quasi-monopoly position in the Thai convenience store space, JPMorgan Securities (Thailand) Limited
with more than 10x more stores than its closest competitor, Family Mart (525
stores). 1H09 same store sales grew at a 9.1% Y/Y pace, which far exceeded Price performance
its target of 3-5% despite aggressive store expansion, and was a major 20

achievement in a deflationary environment. Its gross margin improved to Bt 14


27.5% in 2Q09 from 27.2% in FY08, due to rising food product mix in
8
stores. Nov-08 Feb-09 May-09 Aug-09 Nov-09
CPALL.BK share price (Bt)
SET (rebased)
Potential for earnings upgrades
Source: Bloomberg.
CPALL should see sales accelerate in an inflationary environment, supported
by the end of the government’s subsidy on utilities, which should boost POS
Performance
bill payment fees. The SP fiscal stimulus should also drive higher sales via
1M 3M 12M
the consumption multiplier. CPALL paid Bt0.60 dividend per share for FY08
Absolute (%) -4.0 14.4 94.9
operations (72% payout), and with high cash balances, we believe the
Relative (%) 1.1 7.9 45.8
company will continue its high dividend payout policy.
Source: Bloomberg.

How much recovery is priced into the stock? Company data


CPALL has been a defensive outperformer, given its domestic orientation 52-week range (Bt) 9.65-20.30
and net cash balance sheet. Its current P/E of 17.4x is near top historical Mkt cap. (BtMM) 85,819
range, but its superior growth profile justifies further re-rating, in our view, Mkt cap. (US$MM) 2,571
as does valuation based on enterprise value, free cash flow, and ROE. Avg daily value (US$MM) 5.0
Avg daily volume (MM) 4.9
Shares O/S (MM) 4,493
Price target and key risks Date of price 5-Nov-09
Our Dec-10 PT of Bt23 is based on our dividend discount model with a Index: SET 682
terminal growth of 4% and a WACC of 11.2% (assuming a risk-free rate of Free float (%) 41
5%, a risk premium of 6.2%, and a beta of 1). Key risks to our PT include Exchange rate 33.38
higher-than-expected capex and operating expenses. Source: Bloomberg.

Bloomberg: CPALL TB; Reuters: CPALL.BK


Bt in millions, year-end December
FY08 FY09E FY10E FY11E
Revenue 92,959 105,044 115,548 127,103
Net profit 3,740 4,109 4,929 5,389
EPS (Bt) 0.83 0.91 1.10 1.20
DPS (Bt) 0.60 0.69 0.82 0.90
Revenue growth (%) 20.0 13.0 10.0 10.0
EPS growth (%) 48.6 9.9 20.0 9.3
ROE (%) 31.2 29.7 31.9 31.3
P/E (x) 22.9 20.9 17.4 15.9
P/BV (x) 6.5 5.9 5.2 4.8
Dividend Yield (%) 3.1 3.6 4.3 4.7
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

150
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

CP All Pcl: Summary of financials


Profit and Loss statement Cash flow statement
THB in millions, year-end Dec FY08A FY09E FY10E FY11E THB in millions, year-end Dec FY08A FY09E FY10E FY11E

Revenues 92,959 105,044 115,548 127,103 EBIT 4,107 5,179 6,303 6,933
% change Y/Y 20.0 13.0 10.0 10.0 Depreciation & amortisation 2,223 2,729 3,426 4,138
Gross Margin (% ) 26.7 27.0 27.2 26.9 Change in working capital -663 106 1,138 1,308
EBITDA 6,330 7,907 9,728 11,070 Taxes -862 -1,452 -1,756 -1,926
% change Y/Y 38.7 24.9 23.0 13.8 Cash flow from operations 4,805 6,562 9,110 10,453
EBITDA Margin (% ) 6.8 7.5 8.4 8.7
EBIT 4,107 5,179 6,303 6,933 Capex -2,868 -4,490 -4,805 -5,142
% change Y/Y 58.0 26.1 21.7 10.0 Disposal/ (purchase) 0 0 0 0
EBIT Margin (% ) 4.4 4.9 5.5 5.5 Net Interest 493 383 383 383
Net Interest 576 450 450 450 Free cash flow 2,430 2,454 4,688 5,694
Earnings before tax 4,684 5,629 6,753 7,383
% change Y/Y 50.2 20.2 20.0 9.3 Equity raised/ (repaid) 135 0 0 0
Tax 946 1,520 1,823 1,993 Debt raised/ (repaid) 0 0 0 0
as % of EBT 20.2 27.0 27.0 27.0 Other -1,353 0 0 0
Equity income and minorities 0.0 0.0 0.0 0.0 Dividends paid -1,565 -2,696 -3,082 -3,697
Extra items 2.6 0.0 0.0 0.0 Beginning cash 9,340 8,987 8,745 10,351
Net Income (Reported) 3,740 4,109 4,929 5,389 Ending cash 8,987 8,745 10,351 12,347
% change Y/Y 49.4 9.9 20.0 9.3
Shares Outstanding 4,493 4,493 4,493 4,493 DPS 0.60 0.69 0.82 0.90
EPS (reported) 0.83 0.91 1.10 1.20
% change Y/Y 49 10 20 9

Balance sheet Ratio Analysis


THB in millions, year-end Dec FY08A FY09E FY10E FY11E % , year-end Dec FY08A FY09E FY10E FY11E

Cash and cash equivalents 8,987 8,745 10,351 12,347 EBITDA margin 6.8 7.5 8.4 8.7
Accounts receivable 97 97 97 97 Operating margin 4.2 4.7 5.2 5.2
Inventories 4,940 5,533 6,044 6,648 Net profit margin 4.0 3.9 4.3 4.2
Others 2,322 2,624 2,886 3,175
Current assets 16,346 16,999 19,377 22,267
Sales per share growth 19.4 13.0 10.0 -100.0
LT investments 7,961 7,961 7,961 7,961 Sales growth 20.0 13.0 10.0 10.0
Net fixed assets 9,317 11,079 12,458 13,462 Net profit growth 49.4 9.9 20.0 9.3
Total assets 33,624 36,038 39,796 43,690 EPS growth 48.6 9.9 20.0 9.3

Liabilities
ST loans 0 0 0 0 Net debt to total capital 0 0 0 0
Payables 12,611 12,769 13,947 15,341 Net debt to equity n/a n/a n/a n/a
Others 6,487 7,330 8,063 8,870 Sales/ avg operating assets 5705 2744 2181 2184
Total current liabilities 19,098 20,100 22,010 24,211 Assets/equity 281 260 257 253
Long term debt 0 0 0 0 Net Debt/EBITDA -142 -111 -106 0
Other liabilities 1,396 1,396 1,396 1,396 ROE 31.2 29.7 31.9 31.3
Total liabilities 20,495 21,496 23,406 25,607
Shareholders' equity 13,129 14,542 16,390 18,082
BVPS 2.92 3.24 3.65 4.02
Source: Company reports and J.P. Morgan estimates.

151
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

CTC Media Overweight


Price: $15.59
Price Target: $25.00
www.ctcmedia.ru
Company description Russia
CTC Media is Russia’s leading independent broadcaster, operating three Media
nationwide networks: CTC, Domashny and DTV, with a combined audience Jean-Charles LemardeleyAC
share of 12.7% over 9M09. The network’s programming is entertainment- +44 (0) 20 7325 5763
focused, with almost all its revenue coming from the sale of television jean-charles.lemardeley@jpmorgan.com
advertising. Major shareholders are MTG (39.44%) and Alfa Group (26%). J.P. Morgan Securities Ltd.

Post mortem Price Performance


Considering the very difficult operating environment in 2009, CTCM has 20

fared relatively well, controlling costs better than its listed peers, gaining 15
audience share and significantly boosting its power ratio. While part of the $ 10
power ratio improvement may be reversed in 2010, we believe that it also in 5
part reflects the strength of the franchise, while the cost and audience share
0
performance underline the improvement in company management over the
Nov-08 Feb-09 May-09 Aug-09 Nov-09
past two years.
Source: Company data, Bloomberg
Potential for earnings upgrades
CTCM seems determined to keep advertising prices flat this year, as the Performance
average sell-out ratio for 2009 is likely to remain in the low 90% region. 1M 3M 12M
Encouragingly, CTC confirmed the reduction of long-term pricing contracts Absolute (%) -17% 17% 290%
with Video International to roughly 30-35% (vs. 60-70% previously). This Source: Company data, Bloomberg
implies that there may be scope for price increases in 2H10 in case there is a
more robust economic recovery in 2010. At this point, we see the scope for Company data
upgrades as moderate in 2010 but more significant in 2011 and beyond as we 52-week range ($) 20.07-2.37
expect rapid recovery in the ad market then. In the long run, we believe that Mkt cap. ($ bn) 2.5
Shares O/S (mn) 158
CTC Media offers investors exposure to strong secular growth prospects. Date of price 23-Nov-09
Price Target End Date 31-Dec-10
How much recovery is priced into the stock? Free float (%) 25%
Looking at implied valuations 3 to 4 years out, we believe that the recovery Avg daily volume (MM) 0.470
Avg daily value (US$MM) 7.1
is only partially priced in.
Source: Company data, Bloomberg, J.P Morgan estimates

Price target and key risks


Our PT of $25 for year-end 2010 is based on a discounted terminal value and
dividend analysis using an exit multiple of 13x P/E year end 2013E. Key
downside risks are potential market share and earnings volatility in a highly
fragmented Russian television market.

Bloomberg: CTCM US; Reuters: CTCM


$ in millions, year end Dec
FY08 FY09E FY10E FY11E
Sales 640 481 534 690
Net profit 22 128 147 197
EPS 0.15 0.84 0.96 1.29
DPS 0.04 0 0 0.93
Sales growth (%) 35.60% -24.90% 11.10% 29.10%
Net profit growth (%) -83.50% 470.60% 14.50% 34.20%
EPS growth (%) NM 470.60% 14.50% 34.20%
ROE (%) 4% 21% 21% 26%
P/E (x) n/a 19.2 16.8 12.5
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

152
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

CTC Media: Summary of Financials


Profit and Loss Statement Cash flow statement
$ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E

Revenues 640 481 534 690 859 Cash EBITDA 269 187 212 280 359
% Change Y/Y 35.6% -24.9% 11.1% 29.1% 24.5% Interest (3) (2) 4 8 10
EBITDA 280 195 221 292 374 Tax (20) (54) (64) (87) (112)
% Change Y/Y 27.1% -30.4% 13.0% 32.4% 28.1% Other 15 14 2 33 2
EBITDA Margin 43.8% 40.6% 41.3% 42.3% 43.5% Cash flow from operations 261 145 153 235 259
EBIT 34 184 209 280 362
% Change Y/Y -82.3% 439.1% 13.3% 34.1% 29.2% Capex PPE (5) (11) (8) (10) (13)
EBIT Margin 5.3% 38.3% 39.1% 40.6% 42.1% Net investments (414) (12) (17) 0 0
Net Interest (3) (2) 4 8 10 CF from investments (419) (23) (25) (10) (13)
PBT 4 184 214 290 373 Dividends (6) 0 0 (147) (236)
% change Y/Y -97.9% 4078.2% 16.5% 35.6% 28.7% Share (buybacks)/ issue - - - - -
Net Income (clean) 22 128 147 197 251
% change Y/Y -83.5% 470.6% 14.5% 34.2% 27.4% CF to Shareholders (6) 0 0 (147) (236)
Average Shares 152 152 152 152 152 FCF to debt (164) 123 128 78 10
Clean EPS 0.15 0.84 0.96 1.29 1.65
% change Y/Y NM 470.6% 14.5% 34.2% 27.4% OpFCF (EBITDA - PPE) 264 177 204 270 346
DPS 0.04 0.00 0.00 0.93 1.49 EFCF pre Div, PPE (158) 123 128 224 246

Balance sheet Ratio Analysis


$ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E

Cash and cash equivalents 98 199 321 414 473 EBITDA margin 43.8% 40.6% 41.3% 42.3% 43.5%
Accounts Receivables 34 30 16 21 26 EBIT Margin 5.3% 38.3% 39.1% 40.6% 42.1%
ST financial assets - - - - - Net profit margin 3.5% 26.6% 27.4% 28.5% 29.2%
Others 131 116 44 57 71 Capex/sales 0.8% 2.2% 1.5% 1.5% 1.5%
Current assets 263 344 381 491 569 Depreciation/Sales 2.1% 2.3% 2.2% 1.8% 1.5%
LT investments 521 519 524 547 575
Net fixed assets 23 27 24 23 24 Revenue growth 35.6% -24.9% 11.1% 29.1% 24.5%
Total assets 807 891 929 1,061 1,168 EBITDA Growth 27.1% -30.4% 13.0% 32.4% 28.1%
ST loans 62 55 52 67 83 EPS Growth NM 470.6% 14.5% 34.2% 27.4%
Payables 41 36 21 44 34
Others 89 86 74 96 120 Net debt/EBITDA (0.0) (0.7) (1.2) (1.2) (1.0)
Total current liabilities 192 177 148 207 238 CF to Shareholders (6) 0 0 (147) (236)
Long term debt 28 14 11 11 44 FCF to debt (164) 123 128 78 10
Other liabilities 39 39 39 39 39
Total liabilities 260 230 197 258 320 OpFCF (EBITDA - PPE) 264 177 204 270 346
Shareholders' equity 547 661 732 804 848 EFCF pre Div, PPE (158) 123 128 224 246

Source: Company reports and J.P. Morgan estimates.

153
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

DongFeng Motor Co., Ltd Overweight


HK$10.46
Price Target: HK$13.0
www.dfmc.com

Company description China


DongFeng Motor Co., Ltd. is China’s third-largest auto producer operating a Auto & Industrials
comprehensive auto-related business comprising passenger vehicles, Frank LiAC
commercial vehicles, auto engines and auto parts. Its market share in China’s 852-2800-8511
passenger vehicles and commercial vehicles was around 11.3% in FY08. frank.m.li@jpmorgan.com

Post mortem J.P. Morgan Securities (Asia Pacific)


Limited
DongFeng Motor is our top pick among large-cap names in China’s auto
sector, as: (1) DFM, which holds a leading position in most of its wide range Price performance
of auto businesses, is well positioned to ride China’s third auto boom due to 12.0

the break out of car demand in tier-three cities due to its multi-strategic- 10.0
8.0
partner business model (Honda, Nissan and PSA); and (2) it has been a 6.0
4.0
consistent outperformer since its listing, whether during the cyclical upturn 2.0
0.0
in FY06 and FY07, or during the cyclical downturn in FY05 and FY08. Nov -08 Feb-09 May -09 Aug-09 Nov -09

Potential for earnings upgrades Dongfeng Motor-H Share Price


HSCEI(rebased)
We see good potential for consensus earnings estimate upgrades, because:
Source: Bloomberg.
(1) we expect its commercial vehicle business to perform much better than Performance
expected as of 2H09 due to accelerating fixed asset investment growth in
1M 3M 12M
China. We expect its commercial vehicle business to contribute Rmb608
Absolute (%) 26 32 403
million profit in FY09 compared with only Rmb75 million in 1H09; (2) we
Relative (%) 19 25 326
expect its DongFeng PSA business to contribute a much stronger-than-
Source: Bloomberg.
expected profit of Rmb1,002 million in FY09 versus around Rmb114 million
Company data
in 1H09 because of the sharp rise in its PSA sales volume as of 2Q09. We
52-week range (HK$) 1.45-10.52
now expect its Dongfeng PSA to sell 260,000 cars in FY09 versus its target
Mkt cap. (HK$MM) 90,125
of 210,000 and its PSA business’ breakeven point of around 200,000.
Mkt cap. (US$MM) 11,629
How much recovery is priced into the stock? Avg daily value (US$MM) 19
While its 326% return this year has discounted a lot of good news about Avg daily volume (MM) 26
the current third auto boom, and Dongfeng’s strong earnings growth, Shares O/S (MM) 2,856
we still see 24% upside to our PT of HK$13, with an estimated over 20% Date of price 5-Nov-09
rise in consensus FY09/FY10 earnings estimates in coming months. HSCEI 12805
Price target and key risks Free float (%) 31
Our Jun-10 price target of HK$13.0 is based on 14x FY10E P/E, which is Exchange rate 7.75
two standard deviations above the average historical prospective P/E of 8.3x. Source: Company data, Bloomberg.
Key risks to our price target include the possible removal of the vehicle
purchase tax cut policy upon expiration at the end of the year.
Bloomberg: 489 HK; Reuters: 489.HK
Rmb in millions, year-end December
FY07 FY08 FY09E FY10E FY11E
Revenue 59,318 70,569 93,503 104,169 113,431
EBITDA 5,724 7,215 10,609 11,616 12,893
EBIT 3,941 5,190 8,127 9,080 10,236
Net profit 3,770 4,040 6,309 7,162 7,946
EPS (Rmb) 0.44 0.47 0.73 0.83 0.92
DPS (Rmb) 0.05 0.05 0.11 0.15 0.18
EV/EBITDA 13.5 10.2 5.6 4.7 3.8
EV/EBIT 19.6 14.2 7.3 6.1 4.8
Dividend yield (%) 0.5 0.5 1.3 1.8 2.2
P/E (x) 21.0 19.6 11.3 9.9 8.9
P/B (x) 4.5 3.7 2.6 2.1 1.8
ROE (%) 24 21 26 24 22
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

154
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

DongFeng Motor Co., Ltd: Summary of financials


Rmb in millions, year-end December
Profit and Loss statement Cash flow statement
FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E
Revenues 59,318 70,569 93,503 104,169 113,431 Profit before tax 3,835 4,892 7,892 9,177 10,437
% change Y/Y 22.9 19.0 32.5 11.4 8.9 Depreciation & amortization 2,026 2,318 2,834 2,960 3,140
Gross profit 9,815 11,881 16,783 18,510 20,090 Change in working capital -48 1,657 1,276 589 490
% change Y/Y 19.6 21.0 41.3 10.3 8.5 Others -711 -1,119 -1,445 -2,123 -2,613
Gross margin (%) 16.5 16.8 17.9 17.8 17.7 Cash flow from operations 5,102 7,748 10,556 10,602 11,454
Operating profit 3,941 5,190 8,127 9,080 10,236
% change Y/Y 37.5 31.7 56.6 11.7 12.7 Purchase of fixed assets -2,751 -4,080 -4,000 -4,800 -4,800
Operating Margin (%) 6.6 7.4 8.7 8.7 9.0 Others -529 -3,700 -204 -254 206
Net Interest -175 -393 -265 49 181 Cash flow from investment -3,280 -7,780 -4,204 -5,054 -4,594
Earnings before tax 3,835 4,892 7,892 9,177 10,437
% change Y/Y 43.2 27.6 61.3 16.3 13.7 Equity raised/ (repaid) 0 0 0 0 0
Tax 202 -647 -1263 -1652 -2087 Debt raised/ (repaid) 105 435 -700 -1,000 -1,000
Net Income (Reported) 3770 4040 6309 7162 7946 Other -138 76 0 0 0
% change Y/Y 81 7 56 14 11 Dividends paid -345 -388 -388 -946 -1,253
Net Margin (%) 6.4 5.7 6.7 6.9 7.0 Cash flow from financing -378 123 -1,088 -1,946 -2,253
Wt. avg. share number (MM) 8616 8616 8616 8616 8616 Beginning cash 5,659 7,103 12,416 17,681 21,283
Wt. avg. EPS (Rmb) 0.44 0.47 0.73 0.83 0.92 Ending cash 7,103 12,416 17,681 21,283 25,890

Balance sheet Ratio analysis


FY07 FY08 FY09E FY10E FY11E %, year-end December FY07 FY08 FY09E FY10E FY11E
Cash and cash equivalents 10,473 14,113 19,378 22,980 27,587 Gross margin 16.5 16.8 17.9 17.8 17.7
Accounts receivable 2,229 2,101 2,784 3,101 3,377 Operating margin 6.6 7.4 8.7 8.7 9.0
Inventories 7,573 9,356 12,231 13,656 14,880 Net profit margin 6.4 5.7 6.7 6.9 7.0
Others 11,070 10,378 13,163 14,620 15,886 SG&A/sales 8.7 8.4 8.2 7.8 7.4
Current assets 31,345 35,948 47,555 54,358 61,730
Sales growth 22.9 19.0 32.5 11.4 8.9
LT investments 677 787 787 787 787 Net profit growth 81.2 7.2 56.2 13.5 11.0
Net fixed assets 16,438 18,189 18,713 21,036 23,208 Gross profit growth 19.6 21.0 41.3 10.3 8.5
Other LT assets 35,082 40,789 52,562 59,608 66,787 Operating profit growth 37.5 31.7 56.6 11.7 12.7
Total assets 52,197 59,765 72,063 81,430 90,782
ROE 23.6 20.7 25.9 23.6 21.6
ST loans 5,751 6,919 6,500 5,900 5,300
Payables 9,650 10,259 13,411 14,974 16,317
Others 13,599 16,285 19,973 22,199 24,112
Total current liabilities 29000 33463 39884 43072 45728

Long term debt 2514 1781 1500 1100 700


Other LT liabilities 284 319 236 236 236
Total non-current liabilities 2798 2100 1736 1336 936
Total liabilities 31798 35563 41620 44408 46664
Shareholders' equity 17713 21365 27286 33501 40194
Minority interest 2686 2837 3157 3521 3924
Source: Company, J.P. Morgan estimates.

155
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Energy Development Corporation Overweight


Php4.05
Price Target: Php5.60
www.energy.com.ph

Company description Independent Power Producers


Energy Development Corporation owns 150MW of steam capacity and
Ajay MirchandaniAC
1050MW of power ‘plus’ steam capacity with take-or-pay contracts with (65) 6882-2419
NPC (for 695MW of total power capacity). EDC also owns a 60% stake in ajay.mirchandani@jpmorgan.com
112MW Pantabangan-Masiway hydro plant with the remaining stake being
J.P. Morgan Securities Singapore Private
held by its parent, First Gen. Limited

Post mortem Price performance (Php)


6
Although the financial crisis had limited impact on EDC’s core business, 4
given its take-or-pay contracts and US$ linked tariffs, it was negatively 2
affected due to its ¥-denominated debt and concerns about the financial 0
viability of its recent parent, First Gen, given its premium pricing on EDC’s

Jan-09

Mar-09

Jul-09

Sep-09
Nov-08

May-09

Nov-09
purchase undertaken by it in November 2007.
Source: Bloomberg.
Potential for earnings upgrades
We see potential earnings upgrades linked largely to the execution of its Performance
recently acquired 305MW Palipinon-Tonngonan. We could see upgrades in 1M 3M 12M
case of other efficiencies and rehabilitation of 49MW Northern Negros plant. Absolute (%) 8.9 12.5 58.2
Relative (%) 4.5 6.0 11.4
How much recovery is priced into the stock? Source: Bloomberg.
We see upside risks to its current valuation, primarily driven by potential
earnings upside from its recent plant acquisition and tax savings due to RE Company data
Law. 52-week range (Php) 2.7-4.1
Mkt cap. (PhpMM) 75,937
Price target and key risks Mkt cap. (US$MM) 1,602
Our DCF-based Dec-10 PT of Php5.6 implies FY10E P/E of 14.7x and 2.3% Avg daily value (US$MM) 2.5
yield. We arrive at our PT by discounting EDC’s FCF to 2031, when the Avg daily volume (MM) 30
Geothermal Service Contract would expire. We incorporate terminal value Shares O/S (MM) 18,750
but with a 0% ‘g’. Key risks to our PT include execution risk associated with Date of price 5-Nov-09
the Palinpinon-Tongonan plant rehabilitation. Index: PSEi 2,944
Free float (%) 60
Exchange rate 47.6
Source: Bloomberg.

Bloomberg: EDC PM; Reuters: EDC.PS


Php in millions, year-end December
FY08 FY09E FY10E FY11E
Recurring net profit 5,532 5,965 7,089 6,931
Recurring EPS (Php) 0.37 0.38 0.38 0.37
DPS (Php) 0.13 0.13 0.13 0.13
P/E (x) 13.7 12.7 10.7 11.0
P/BV (x) 2.2 2.3 2.4 2.1
EV/EBITDA (x) 8.7 8.8 7.7 7.2
Operating cash flow / EV (%) 8.2% 10.6% 12.0% 13.3%
Dividend yield (%) 3.1% 3.3% 3.3% 3.2%
RoE (%) 20.3% 22.1% 22.4% 19.2%
Net debt (%) 122.1% 114.0% 109.6% 77.8%
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

156
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Energy Development Corporation: Summary of financials


Php in millions, year-end December
Profit & loss statement Balance sheet

FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E


Electricity 12,518 13,544 16,344 17,161 Share capital 15,000 15,000 15,000 15,000
Steam 4,242 4,753 4,974 5,144 Reserves & Surplus 5,898 5,665 10,273 14,778
Others 726 784 823 0 Share holders equity 27,251 27,018 31,626 36,131
Consolidated Revenue 19,595 21,051 23,996 24,040 Minorities 1,484 1,688 1,912 2,156
Long term debt 23,557 30,924 36,529 36,133
BOT fees (394) (885) (1,400) (1,400) BOT lease obligations 0 0 0 0
Other purchased services &
utilities (1,130) (1,331) (1,562) (1,410) Royalty fee payable 0 0 0 0
Operations & maintenance
expenses (4,661) (5,434) (5,255) (5,384) Other non-current liabilities 1,339 1,339 1,339 1,339
Depreciation & Amortization (676) (775) (1,105) (1,234) Total Non-current Liabilities 24,896 32,263 37,868 37,473
Royalty fee (590) (214) (218) (222) Total Liabilities 53,632 60,969 71,406 75,759
Others (2,410) (3,072) (3,223) (3,326)
Proforma EBITDA 10,409 10,113 12,339 12,298 Property, plant and equipment 5,280 5,417 16,304 17,166
EBITDA 10,409 10,113 12,339 12,298 Production wells/Intangible assets 9,389 9,107 8,825 8,543
BOT power plants / concession
EBIT 9,734 9,338 11,233 11,064 receivable 32,647 30,536 28,306 25,950
Exploratory & development costs 1,000 1,000 1,000 1,000
Interest expenses (2,153) (2,958) (3,671) (3,305) Other Non-current assets 9,731 9,187 9,062 8,937
Interest Income 333 475 563 214 Current Assets 11,233 24,704 14,272 20,600
Cash and Bank Balances 957 13847 2248 8434
Profit before Tax 2,653 6,855 8,126 7,972 Account Receivables 5,412 5,814 6,628 6,640
taxation (1,308) (685) (813) (797) Other current assets 2,815 2,932 3,167 3,170
Profit after tax 1,308 5,965 7,089 6,931 Current Liabilities 15,648 18,982 6,363 6,437
Core Net Income 5,532 5,965 7,089 6,931 Accounts Payable 2,980 3,357 4,058 4,126
Current portion of debt & BOT
fees 10,785 13,733 395 395
Key ratios other current liabilities 1,884 1,891 1,910 1,915
Total Assets 53,632 60,969 71,406 75,759
FY08 FY09E FY10E FY11E
Gross Margins (%) 65.4% 62.6% 64.9% 65.0% Cash flow statement
EBITDA Margins (%) 53.1% 48.0% 51.4% 51.2%
Op Margin (%) 49.7% 44.4% 46.8% 46.0% FY08 FY09E FY10E FY11E
Sales growth (%) 3.7% 7.4% 14.0% 0.2% EBITDA 10,450 10,113 12,339 12,298
Core Net profit growth (%) -1.3% 7.8% 18.8% -2.2% Concession Receivable impact 0 2,048 2,111 2,230
less: Net Interest (1,602) (2,483) (3,108) (3,092)
No. of O/S shares (MM) 15,000 15,625 18,750 18,750 less: tax (1,731) (685) (813) (797)
EPS (Php) 0.37 0.38 0.38 0.37 less: changes in Working Capital 2189 (134) (329) 58
DPS (Php) 0.13 0.13 0.13 0.13 Others (134) 0 0 0
Dvd payout ratio (%) 34% 35% 35% 35% Operational Cash Flow 9,172 8,859 10,200 10,697
Capital Expenditure (6,119) (505) (11,585) (1,690)
Investment, dividend from
BVPS 1.8 1.7 1.7 1.9 associates 1,317 419 (0) (0)
Debt / Equity (%) 86.9% 114.5% 115.5% 100.0% Cash flow from investments (4,538) (86) (11,585) (1,690)
Net Debt / Equity (%) 122.1% 114.0% 109.6% 77.8% Free cash Flow 4,634 8,773 (1,385) 9,007
ROE (%) 4.8% 22.1% 22.4% 19.2% Repayment of Debt (528) 10,428 (7,733) (395)
ROCE (%) 12.7% 13.0% 14.9% 14.5% Payment of BOT Lease (245) (112) 0 0
EBITDA / Gross Interest 4.8 3.4 3.4 3.7 Dividends paid to shareholders (5,303) (2,088) (2,481) (2,426)
EBITDA / Net Interest 5.7 4.1 4.0 4.0 Equity raised / write-offs / (404) (4111) 0 0
Cashflow from financing (6,976) 4,117 (10,215) (2,821)
receivables (days) 156.2 157.8 156.7 148.0 Exchange rate 2 0 0 0
Movement in Net Debt/Net Cash (2,339) 12,890 (11,599) 6,186
Source: Company, J.P. Morgan estimates.

157
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Enersis Overweight
Ch$189
Price Target: Ch$241
www.enersis.cl

Company description Chile


Enersis is one of the main privately owned multinational electric power Latin American Utilities
corporations in Latin America. It currently holds direct and indirect Brian P. ChaseAC
participation in electric power generation, transmission, and distribution +562 425 5245
businesses in Argentina, Brazil, Chile, Colombia, and Peru. The Enersis brian.p.chase@jpmorgan.com
Group generating companies boast an installed capacity of 14,280 MW and Inversiones y Asesorias Chase Manhattan
through the distribution companies supply electricity to near 12.5 million Ltda.
customers, or approximately 45 million inhabitants. The controlling
Performance
shareholder of Enersis is Endesa, a Spanish multinational that holds 60.62%
1M 3M 12M
ownership.
Absolute (%) -4.5 -5.7 7.4
Relative (%) 0.4 -5.7 -20.4
Post mortem
Within a regional context, we believe the greatest recovery opportunities in Source: Bloomberg
the utilities space lie along the Andean corridor, where a combination of
strong market position (leaders in key cities) and supportive regulatory Company data
frameworks should allow the company to capture demand recovery. 52-week range (LC) 161.2-208.5
Mkt cap. (LCBN) 6,171
Potential for earnings upgrades Mkt cap. (US$MM) 12,379
Given the predictable cash flows of the company, we see modest upside risk Avg daily value (US$MM) 7.8
on greater-than-expected demand recovery. Avg daily volume (MM)
Shares O/S (MM) 32.7
How much recovery is priced into the stock? Date of price 11/25/2009
Since Enersis is a defensive company listed in a defensive market, the shares Index: IPSA
have underperformed significantly in the past six months at both the regional Free float (%) 196
and country level despite continued high cash generation and long-term Exchange rate R$493/US$
value. Therefore, we feel that recovery is generally not priced in. Source: Bloomberg

Price target and key risks


We derive our PT of Ch$241 from our DCF-based SOTP analysis. Risks to
our thesis include lower generation prices in Chile, upcoming distribution
tariff settings, and AFP overhang,

Bloomberg: ENERSIS CI, ENI; Reuters: ENE.SN, ENI.N


LC in /billions, year-end Dec 31
FY08 FY09E FY10E FY11E
Sales 6,595.0 6,280.4 5,936.6 5,914.2
Net profit 599.28 712.16 654.11 678.35
EPS (LC) 18.35 21.81 20.03 20.78
FD EPS (LC) 18.35 21.81 20.03 20.78
DPS (LC) 3.9 12.1 8.6 8.9
Sales growth (%) 44.0% (4.8%) (5.5%) (0.4%)
Net profit growth (%) 208.3% 9.7% (10.3%) 3.7%
EPS growth (%) 208.3% 9.7% (10.3%) 3.7%
ROE (%) 19.4% 18.9% 14.2% 12.4%
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

158
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Enersis: Summary of financials


Profit and loss statement Cash flow statement
LC in billions, year-end Dec 31 LC in billions, year-end Dec 31
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 6,595.0 6,280.4 5,936.6 5,914.2 Net income 565.3 402.1 412.3 440.5
% change Y/Y 44.0% (4.8%) (5.5%) (0.4%) Depreciation & amortization 609.2 575.1 575.2 582.6
Gross margin (%) 48.2% 51.7% 52.0% 52.4% Change in working capital 191.8 876.6 597.8 715.0
EBITDA 2,379.3 2,499.0 2,408.9 2,411.2 Cash flow from operations 1,366.4 1,853.9 1,585.3 1,738.1
% change Y/Y 53.9% 5.0% (3.6%) 0.1% Capex (826.8) (889.6) (781.4) (691.0)
EBITDA margin (%) 2,379.3 2,499.0 2,408.9 2,411.2 Disposal/(purchase) (382.2) 0.0 0.0 0.0
EBIT 1,930.0 2,049.7 1,917.3 1,907.9 Intangibles (5.3) 0.0 0.0 0.0
% change Y/Y 6.2% -6.5% -0.5% Investing Cash Flow (1,214.2) (889.6) (781.4) (691.0)
EBIT margin (%) 29.3% 32.6% 32.3% 32.3% Equity raised/(repaid) 0 0 0 0
Net interest (319.0) (301.8) (296.1) (226.5) Debt raised/(repaid) 366.2 0.0 0.0 0.0
Earnings before tax 1,651.3 1,754.6 1,623.9 1,684.1 Other 12.6 0.0 0.0 0.0
% change Y/Y 6.3% -7.4% 3.7% Dividends (128.4) (395.7) (281.5) (292.2)
Tax (396.6) (378.0) (389.7) (404.2) Beginning cash 498.4 900.8 1469.4 1991.8
as % of EBT -20.5% -18.4% -20.3% -21.2% Ending cash 900.9 1,469.4 1,991.8 2,746.7
Net income (reported) 599.28 712.16 654.11 678.35 DPS (LC) 3.9 12.1 8.6 8.9
% change Y/Y 208.3% 9.7% (10.3%) 3.7% Net income 565.3 402.1 412.3 440.5
Shares O/S (MM) 32.7 32.7 32.7 32.7 Source: Company, J.P. Morgan estimates.
EPS (reported) (LC) 18.35 21.81 20.03 20.78
Source: Company, J.P. Morgan estimates.

Ratio analysis
%, year-end Dec 31
Balance sheet
FY08 FY09E FY10E FY11E
LC in billions, year-end Dec 31 EBITDA margin 36.1% 39.8% 40.6% 40.8%
FY08 FY09E FY10E FY11E Operating margin 29.3% 32.6% 32.3% 32.3%
Cash and cash equivalents 1,318.1 1,540.7 2,317.4 2,964.9 Net profit margin 9.1% 11.3% 11.0% 11.5%
Accounts receivable 1,338.3 1,381.6 1,301.8 1,330.0 SG&A/sales -12.1% -11.9% -11.5% -11.6%
Inventories 99.4 96.4 91.9 92.6 Sales growth 44.0% (4.8%) (5.5%) (0.4%)
Others 171.0 177.5 167.2 170.9 Net profit growth 208.3% 9.7% (10.3%) 3.7%
Current assets 2,926.8 3,196.2 3,878.4 4,558.4 Sales per share growth 44.0% (4.8%) (5.5%) (0.4%)
LT investments 2430.4 2386.7 2373.0 2359.4 EPS growth 208.3% 9.7% (10.3%) 3.7%
Net fixed assets 8,577.3 8,748.9 8,855.2 9,075.7 Interest coverage (x) 7.46 8.28 8.13 10.64
Total assets 13,934.4 14,331.8 15,106.5 15,993.4 Net debt to total capital 0.46 0.36 0.24 0.15
Liabilities Net debt to equity 1.21 0.78 0.47 0.27
ST loans 1,247.3 767.7 767.7 767.7 Sales/assets 0.47 0.44 0.39 0.37
Payables 1,099.8 1,039.8 991.7 999.0 EBIT margin 0.29 0.33 0.32 0.32
Others 338.2 326.6 307.7 314.4 ROCE NA NA NA NA
Total current liabilities 2,685.3 2,134.1 2,067.1 2,081.1 Assets/equity (x) 4.51 3.80 3.27 2.91
Long-term debt 3,821.8 3,703.0 3,703.0 3,703.0 ROI NA NA NA NA
Other liabilities 1398.2 1558.4 1558.4 1558.4 ROE 19.4% 18.9% 14.2% 12.4%
Total liabilities 7,905.3 7,395.5 7,328.5 7,342.5 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 3,091.3 3,772.2 4,613.9 5,486.8
BVPS (LC) 94.5 115.4 141.1 167.8
Source: Company, J.P. Morgan estimates.

159
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Far Eastone Telecommunications Overweight


NT$37.00
Price Target: NT$45.00
www.fetnet.net

Company description Taiwan


Far Eastone (FET) is a wireless operator in Taiwan with licences to operate Telecommunications
both 2G and 3G networks. FET began 2G operations in January 1998 and Jimmy CheongAC
acquired KG Telecom from the Koo Group in 2004. FET owns a 24.5% (852) 2800-8566
stake in NCIC, a small fixed-line operator in Taiwan focused on the jimmy.j.cheong@jpmorgan.com
enterprise segment. Douglas Hsu’s Far Eastern Group is FET’s largest J.P. Morgan Securities (Asia Pacific) Ltd
shareholder with a 45.5% stake. Strategic partners, NTT DoCoMo and
SingTel, hold 4.5% and 4.0% stakes in the company, respectively. Price performance
NT$
55
Post mortem
FET has a strong position in the Taiwan mobile market with a 26% market
50

share, and has withstood the economic downturn very well, in our view. 45

With a net cash balance sheet, and NT$19.5 billion in capital surplus and 40

NT$9.0 billion in legal reserves, the pending changes in Taiwan corporate 35

law means FET will be able to tap into these accounts to maintain high 30

Jan-08

May-08

Jul-08

Jan-09

May-09

Jul-09
Nov-07

Sep-08

Nov-08

Sep-09
Mar-08

Mar-09
dividend levels if necessary. Capital management will be a key focus in
2010, in our view. Source: Bloomberg.
Potential for earnings upgrades Performance
Mobile fundamentals at FET remain weak but have shown signs of turning 1M 3M 12M
the corner in the 3Q09 results. We believe earnings are likely to find a trough Absolute (%) 0.1 -1.9 -10.5
in 2009 as mobile business turns around and investors focus on 2010 Relative (%) -0.6 -9.2 -39.1
numbers, which should be better than 2009. We believe the potential risk for Source: Bloomberg.
upward earning estimates is high. Non-operating loss items are likely to Company data
narrow as the operating performance of NCIC turns positive in 2010. 52-week range (NT$) 29.25-41.00
How much recovery is priced into the stock? Mkt cap. (NT$) 120,238
Taiwan telcos are not recovery plays but are more known for their stable Mkt cap. (US$MM) 3,695
earnings streams and high dividend yields. We believe FET offers a little Avg daily value (US$MM) 7.2
more excitement that that, although we expect an increase in positive news Avg daily volume (MM) 6.3
flow regarding China Mobile’s strategic stake. In our view, announcements Shares O/S (MM) 3,258.5
regarding the strategic partnership in 2010 should heighten investor interest Date of price 5-Nov-09
in the name and any JV investments with CM should be positive for FET in Index: Taiwan SE 7,417
the long run. Free float (%) 42.0
Price target and key risks Exchange rate (NT$/ US$) 32.54
Our DCF-based Dec-10 price target of HK$45 assumes a WACC of 9.4%, a Source: Bloomberg.
terminal growth rate of -2%, and a beta of 1.05. Key risks to our PT are
irrational mobile competition in Taiwan, and negative regulatory policies.
Bloomberg: 4904 TT; Reuters: 4904.TW
NT$ in millions, year-end December
FY08 FY09E FY10E FY11E
Revenue 62,518 58,658 59,463 59,495
EBITDA 25,252 23,162 23,422 23,375
Net profit 10,161 9,049 10,111 10,706
EPS (NT$) 3.12 2.78 3.10 3.29
DPS (NT$) 2.80 2.42 2.70 2.86
Sales growth (%) -2.4% -6.2% 1.4% 0.1%
Net profit growth (%) -12.6% -10.9% 11.7% 5.9%
Dividend yield (%) 7.6 6.6 7.3 7.7
ROE (%) 13.5 12.7 14.0 14.4
P/E (x) 11.9 13.3 11.9 11.3
EV/EBITDA (x) 4.3 4.6 4.3 4.1
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

160
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Far Eastone Telecommunications: Summary of financials


NT$ in millions, year-end December
Profit and loss Balance sheet
2006 2007 2008 2009E 2010E 2006 2007 2008 2009E 2010E
Revenue 67,227 64,037 62,518 58,658 59,463 Cash and equivalents 7,852 10,278 7,236 7,492 13,346
Accounts receivable 6,096 6,507 6,181 5,799 5,879
EBITDA 28,506 26,329 25,252 23,162 23,422 Inventories 973 671 853 800 811
Others 2,815 3,383 3,753 3,696 3,708
Depreciation (11,818) (11,213) (10,851) (10,988) (10,793) Total current assets 17,735 20,839 18,022 17,788 23,744
Amortization (111) (64) (61) (120) (120)
Operating profit 16,578 15,052 14,341 12,053 12,509 Net fixed assets 54,666 48,929 45,428 41,471 37,819
EBIT 16,150 14,419 13,167 11,653 12,209 Other long term assets 21,280 26,773 25,048 26,557 26,208
Interest income 82 186 180 147 188
Interest expense (104) (42) (23) (33) (8) Total assets 93,681 96,541 88,499 85,816 87,771
Associates (22) 144 157 114 179
Profit before tax 16,128 14,563 13,324 11,767 12,388 ST loans 3,168 3,018 1,936 400 400
Tax (3,111) (3,141) (3,302) (2,918) (2,478) Others 12,438 12,115 13,303 12,226 11,970
Net profit 13,156 11,619 10,161 9,049 10,111 Total current liabilities 15,605 15,133 15,239 12,625 12,370
-9.7% -9.7% -8.5% -11.7% 5.3%
Shares Out 3,873 3,873 3,259 3,259 3,259 Long term debt 2,822 74 27 27 27
EPS (NT$) 3.40 3.00 3.12 2.78 3.10 Other liabilities 463 919 991 991 991
Total liabilities 18,891 16,125 16,257 13,644 13,389
DPS (NT$) 3.10 3.10 2.80 2.42 2.70
DPS payout ratio 91% 103% 88% 87% 87% Shareholders' equity 74,790 80,415 72,241 72,172 74,383

Revenue growth -6.5% -4.7% -2.4% -6.2% 1.4% Total liabilities and equity 93,681 96,541 88,499 85,816 87,771
EBITDA growth -7.8% -7.6% -4.1% -8.3% 1.1%
Net profit growth -10.6% -11.7% -12.6% -10.9% 11.7% (Net debt)/cash 2,768 8,828 7,030 8,822 14,676
EPS growth -10.6% -11.7% 3.9% -10.9% 11.7% Book value/share (NT$) 19.31 20.76 22.17 22.15 22.83
DPS growth 0.0% 0.0% -9.7% -13.4% 11.4%

Ratios Cash flow


2006 2007 2008 2009E 2010E 2006 2007 2008 2009E 2010E

EBITDA margin 42.4% 41.1% 40.4% 39.5% 39.4% Cash flow from 25,968 24,947 23,410 20,040 21,048
operations
FCF margin 26.2% 25.5% 21.1% 21.7% 22.8% Capex (6,081) (5,786) (7,470) (7,031) (7,141)
ROE 17.9% 15.2% 13.5% 12.7% 14.0% Cash flow from other (454) (1,564) (154) (154) (154)
investing
ROC 20.4% 18.6% 18.4% 16.6% 17.2% Cash flow from financing (16,222) (15,170) (18,828) (12,600) (7,899)
ROA 17.2% 15.8% 15.5% 13.8% 14.4%
Change in cash for year 3,211 2,427 -3,042 255 5,854
Tax rate 19.3% 21.6% 24.8% 24.8% 20.0%
Capex/sales 9.0% 9.0% 12.0% 12.0% 12.0% Beginning cash 4,640 7,852 10,279 7,236 7,492
Debt/capital 7.4% 3.7% 2.7% 0.6% 0.6% Closing cash 7,852 10,279 7,236 7,492 13,346
Net (debt) or cash/equity -3.7% -11.1% -9.9% -12.4% -20.0%
Interest cover (x) -1,299 182 161 203 131
Source: Company and J.P. Morgan estimates.

161
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

FEMSA Overweight
Price: $45.20
Price Target: $50
www.femsa.com
Company description Latin America
FEMSA (FMX) is a leading beverage company and convenience store Food & Beverages
operator in Latin America, with $14bn in 2009E sales. The company Alan AlanisAC
operates through its 3 subsidiaries; Cerveza, which has beer operations in (1-212) 622 3697
Mexico and Brazil and exports to the US; KOF, the largest Coke bottler in alan.alanis@jpmorgan.com
LatAm and second largest in world by sales volume and Oxxo, which is the J.P. Morgan Securities Inc.
largest and fastest growing chain of convenience stores in Mexico, with
almost 7,000 locations and expanding at a pace of +800 stores per year. Price performance
US$
Post mortem
FMX used the crisis to capture the trade-down of consumers looking for 55
value. In our view, investors should pay special attention to such companies 45
because they (1) are operating in oligopolies with low competitive intensity; 35
25
(2) have strong brands and pricing power; (3) have high barriers to entry and
15
(4) generate significant free cash flow with returns above cost of capital.
Nov Feb May Aug Nov
Potential for earnings upgrades
FEMSA being a leader in soft drinks has pricing power. In beer, they are Source: Bloomberg
price followers; the leaders are already taking pricing and they are following. Performance
Oxxo should continue to expand regardless of the economic scenarios. 1M 3M 12M
How much recovery is priced into the stock? Absolute (%) -0.9% 14.1% 63.5%
FEMSA’s revenue and EBITDA will greatly benefit from a US economic Relative (%) -4.6% 3.0% 1.0%
recovery as in beer its stronghold territories are the North of Mexico. In our Source: Bloomberg
view, this not fully priced into the stock. Its current net debt/EBITDA ratio is Company data
0.7x. Even without further economic improvements it has FCF yield of 10% 52-week range (LC) 19.91-45.98
with ROIC of 13%. The stock is trading at 7.4x '10E EBITDA. We believe Mkt cap. (Ps MM) 207.53
there is upside risk to our estimates with the recovery and our Dec ‘10 $50 Mkt cap. (US$MM) 16.2
PT may be conservative. Avg daily value (US$MM) 73.8
Price target and key risks Avg daily volume (MM) 1.5
Our Dec ’10 PT of $50 for FMX is based on SOTP valuation where we Shares O/S (MM) 358
assign multiples to each of its business units. FMX has high correlation to Date of price 11/25/2009
Ps$ and so is expected to have more upside if the peso strengthens further. Index: Mexican Bolsa 31,364
Risks are mainly macro, devaluation of Ps$ and large dilutive acquisitions. Free float (%) 60%
Exchange rate 12.8
Source: Bloomberg.

Bloomberg: FMX US; Reuters: FMX.N


Ps in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 163,289 193,273 213,244 229,381
Net profit 8,964 12,968 15,594 17,352
EPS (LC) 2.51 3.62 4.36 4.85
FD EPS (LC) 2.51 3.62 4.36 4.85
DPS (LC) 0.45 0.45 0.54 0.65
Sales growth (%) 11% 18% 10% 8%
Net profit growth (%) -25% 45% 20% 11%
EPS growth (%) -25% 45% 20% 11%
ROE (%) 11% 12% 13% 13%
P/E (x) 32.5x 24.3x 20.0x 17.7x
FD P/E (x) 32.5x 24.3x 20.0x 17.7x
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

162
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

FEMSA: Summary of financials


Profit and loss statement Cash flow statement
Ps in millions/billions, year-end December Ps in millions/billions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 163,289 193,273 213,244 229,381 EBIT 22,216 26,317 28,684 30,759
% change Y/Y 11% 18% 10% 8% Depreciation & amortization 8,824 10,331 11,557 12,619
Gross margin (%) 46% 46% 44% 44% Change in working capital 1,187 3 1,497 240
EBITDA 31,040 36,648 40,241 43,378 Taxes 4,155 5,946 6,683 7,437
% change Y/Y 12% 18% 10% 8% Cash flow from operations 18,975 23,302 28,648 30,211
EBITDA margin (%) 19% 19% 19% 19% Capex 14,223 11,773 13,538 14,561
EBIT 22,216 26,317 28,684 30,759 Disposal/(purchase)
% change Y/Y 14% 18% 9% 7% Net interest 4,188 4,769 3,889 3,201
EBIT margin (%) 14% 14% 13% 13% Free cash flow 11,339 16,982 19,595 19,829
Net interest 4,188 4,769 3,889 3,201 Equity raised/(repaid) 0 0 0 0
Earnings before tax 13,119 18,914 22,277 24,789 Debt raised/(repaid) 610 1,404 (4,049) (2,440)
% change Y/Y -22% 44% 18% 11% Other 1,045 975 1,519 1,012
Tax 4,155 5,946 6,683 7,437 Dividends 1,620 1,620 1,945 2,339
as % of EBT 32% 31% 30% 30% Beginning cash 10,456 9,110 15,095 22,792
Net income (reported) 8,964 12,968 15,594 17,352 Ending cash 13,313 25,083 22,792 33,473
% change Y/Y -25% 45% 20% 11% DPS (LC) 0.45 0.45 0.54 0.65
Shares O/S (MM) 3,578 3,578 3,578 3,578 Source: Company, J.P. Morgan estimates.
EPS (reported) (LC) 2.51 3.62 4.36 4.85
Source: Company, J.P. Morgan estimates.

Ratio analysis
%, year-end December
Balance sheet
FY08 FY09E FY10E FY11E
Ps in millions/billions, year-end December EBITDA margin 19.0% 19.0% 18.9% 18.9%
FY08 FY09E FY10E FY11E Operating margin 13.6% 13.6% 13.5% 13.4%
Cash and cash equivalents 9,110 15,095 22,792 33,473 Net profit margin 5.5% 6.7% 7.3% 7.6%
Accounts receivable 10,759 12,179 10,971 11,682 SG&A/sales 33% 32% 31% 31%
Inventories 13,065 13,026 14,581 15,526 Sales growth 11% 18% 10% 8%
Others 6,083 5,451 6,770 7,209 Net profit growth -25% 45% 20% 11%
Current assets 39,017 45,751 55,114 67,890 Sales per share growth 11% 18% 10% 8%
LT investments 65,299 69,468 64,060 58,242 EPS growth -25% 45% 20% 11%
Net fixed assets 61,425 70,640 78,029 85,788 Interest coverage (x) 4.67 4.99 6.52 7.72
Total assets 146,023 155,722 160,641 163,785 Net debt to total capital 24% 17% 8% -1%
Liabilities Net debt to equity 35% 23% 10% -1%
ST loans 11,648 8,221 6,961 6,101 Sales/assets 0.88 0.96 0.99 0.99
Others 32,104 32,856 36,019 38,354 EBIT margin 14% 14% 13% 13%
Total current liabilities 43,752 41,077 42,981 44,455 ROCE 22% 23% 24% 26%
Long-term debt 31,275 32,679 28,630 26,190 Assets/equity (x) 1.91 1.77 1.68 1.60
Other liabilities 13,118 14,093 15,612 16,623 ROI 12% 13% 13% 13%
Total liabilities 44,393 46,772 44,242 42,814 ROE 11% 12% 13% 13%
Shareholders’ equity 96,895 113,625 128,533 144,406 Source: Company, J.P. Morgan estimates.
BVPS (LC) 27.08 31.75 35.92 40.36
Source: Company, J.P. Morgan estimates.

163
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

First Gulf Bank Overweight


Price: AED 18.75
Price Target: AED 26.00
www.fgb.ae

Company description United Arab Emirates


First Gulf Bank is the 4th largest bank in the UAE and among the Top-10 Banks
banks in the MENA region (by assets). Incorporated in 1979, the bank is Naresh BilandaniAC
c.65% owned by the Abu Dhabi ruling family and commands a franchise of (+971) 44 281763
18 branches in the UAE and presence in Libya, Singapore, Qatar, U.K. & naresh.n.bilandani@jpmorgan.com
India, c.1,000 full-time employees and c.$25bn in loans & c.$24bn in J.P. Morgan Chase Bank N.A., Dubai Branch
customer deposits.
Price Performance

Post mortem 18
FGB’s key strengths, which we see benefiting its stock vs. peers, are
14
i) robust capital (Tier I 17%, CAR 20% 09E) – among the best in CEEMEA Dh
space – backed by sovereign ownership giving comfort on b/s profile and ii) 10

est. asset quality deterioration lower vs. CEEMEA peers, with NPLs peaking 6
at just 3.5% 10E (incl. >100% coverage). FGB’s higher-than-peers exposure Nov-08 Feb-09 May-09 Aug-09 Nov-09
to Abu Dhabi retail / HNWI is reflected in its strong NIM of c.3.6% 09E,
Source: Bloomberg
3.4% 10E & fee income, >1% of avg. assets (peer Abu Dhabi banks lower)
while FGB’s <20% C/I ratio 09E-11E clearly reflects the efficiency of its Performance
business model. 1M 3M 12M
Absolute (%) -1.1% 17.6% 81.2%
Potential for earnings upgrades Source: Bloomberg
We have been more conservative vs. mgmt. guidance on asset quality
deterioration going into FY10E, expecting NPLs to peak at 3.5% 10E; lower Company data
than expected NPLs could provide material upside to JPM & consensus 52-week range (Dh) 19.75-6.55
Mkt cap. (DhBN) 25.8
earnings estimates. FGB currently trades at a 30% discount to NAV Mkt cap. (US$BN) 7.0
valuations of Turkish, Russian & CEE banks under JPM coverage, despite Avg daily value (US$MM) 3.15
being well poised to deliver comparable superior returns (RONAV 17%-19% Avg daily volume (MM) 0.65
10E-11E). We believe that this valuation gap should narrow, with the fair Shares O/S (MM) 1,375
Date of price 23-Nov-09
trading multiple of FGB being 1.6x10E book in our view vs. 1.3x10E book Index: ADSMI
currently, implying 34% upside from current price levels. Free float (%) 34.1%
Exchange rate (Dh/$) 3.7
Price target and key risks Source: Bloomberg
Our Dec-10 PT of AED26/sh is based on the Gordon growth model using
17% ROE, 12.5% COE & 6% LT growth rate. Key risks include worse than
expected loan/deposit growth or asset quality deterioration.
Bloomberg: FGB.UH; Reuters: FGB.AD
AED, year-end Dec
FY08 FY09E FY10E FY11E
Pre-provision op. profit, mn 3,407 4,447 5,315 6,219
Net profit, mn 3,005 3,000 3,299 4,276
EPS 2.19 2.18 2.40 2.85
EPS growth (%) 50% 0% 10% 19%
Tier I ratio (%) 14.6% 17.0% 16.1% 15.2%
NPL ratio (%) 0.6% 2.0% 3.5% 3.1%
Dividend yield 1.9% 1.7% 1.9% 2.3%
RONAV (%) 23% 17% 17% 19%
P/E (x) 8.6 8.6 7.8 6.6
P/NAV 1.6 1.4 1.2 1.1
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

164
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

First Gulf Bank: Summary of Financials


Profit and Loss Statement Ratio Analysis
Dh in millions, year end Dec FY07A FY08A FY09E FY10E FY11E Dh in millions, year end Dec FY07A FY08A FY09E FY10E FY11E
Per Share Data
Net interest income 1,331 2,580 3,871 4,340 4,850 EPSAdjusted 1.46 2.19 2.18 2.40 2.85
% Change Y/Y 10.2% 93.8% 50.0% 12.1% 11.7% % Change Y/Y 18.9% 49.7% (0.2%) 10.0% 18.8%
Non-interest income 1,422 1,961 1,653 2,138 2,676 DPS 0.18 0.35 0.33 0.36 0.43
Fees & commissions 462 1,114 1,305 1,631 1,956 % Change Y/Y (74.0%) 91.0% (5.7%) 10.0% 18.8%
% change Y/Y 63.9% 141.3% 17.1% 25.0% 19.9% Dividend yield 1.0% 1.9% 1.7% 1.9% 2.3%
Trading revenues 399 66 261 372 509 Payout ratio 12.4% 15.9% 15.0% 15.0% 15.0%
% change Y/Y 363.9% (83.5%) 295.0% 42.4% 37.0% BV per share 7.36 11.81 13.14 15.29 16.54
Other Income 561 781 87 135 211 NAV per share 7.36 11.81 13.14 15.29 16.54
Total operating revenues 2,753 4,542 5,524 6,478 7,526 Shares outstanding 1,375.0 1,375.0 1,375.0 1,375.0 1,500.0
% change Y/Y 33.8% 65.0% 21.6% 17.3% 16.2%
Core Operating Revenues - - - - - Return ratios
Admin expenses 585 1,096 1,040 1,123 1,263 RoRWA 4.0% 3.4% 2.5% 2.3% 2.4%
% change Y/Y 54.0% 87.3% (5.1%) 8.0% 12.4% Pre-tax ROE 21.0% 22.8% 17.5% 16.9% 18.7%
Other expenses 25 39 37 40 44 ROE 21.0% 22.8% 17.5% 16.9% 18.7%
Pre-provision operating profit 2,142 3,407 4,447 5,315 6,219 RoNAV 21.0% 22.8% 17.5% 16.9% 18.7%
% change Y/Y 29.3% 59.0% 30.5% 19.5% 17.0%
Loan loss provisions 207 566 1,478 2,066 2,011 Revenues
Earnings before tax 2,008 2,997 2,997 3,296 4,271 NIM (NII / RWA) 2.1% 2.3% 2.9% 2.7% 2.5%
% change Y/Y 30.8% 49.3% 0.0% 10.0% 29.6% Non-IR / average assets 2.4% 2.2% 1.4% 1.6% 1.7%
Tax (charge) 0 0 0 0 0 Total rev / average assets 4.6% 5.0% 4.7% 4.7% 4.6%
% Tax rate 0.0% 0.0% 0.0% 0.0% 0.0% NII / Total revenues 48.4% 56.8% 70.1% 67.0% 64.4%
Minorities 0 8 3 3 5 Fees / Total revenues 16.8% 24.5% 23.6% 25.2% 26.0%
Net Income (Reported) 2,008 3,005 3,000 3,299 4,276 Trading / Total revenues 14.5% 1.5% 4.7% 5.7% 6.8%

Balance sheet
Dh in millions, year end Dec FY07A FY08A FY09E FY10E FY11E Dh in millions, year end Dec FY07A FY08A FY09E FY10E FY11E

ASSETS Cost ratios


Net customer loans 44,409 79,363 93,543 112,511 138,412 Cost / income 22.2% 25.0% 19.5% 18.0% 17.4%
% change Y/Y 76.5% 78.7% 17.9% 20.3% 23.0% Cost / assets 0.8% 1.1% 0.9% 0.8% 0.7%
Loan loss reserves 654 1,141 2,442 4,030 4,936
Other interest earning assets 23,273 17,822 23,111 25,916 28,677
% change Y/Y 10.3% (23.4%) 29.7% 12.1% 10.7% Balance Sheet Gearing
Average interest earnings assets 56,974 82,434 106,920 127,541 152,758 Loan / deposit 85.0% 107.3% 106.3% 107.0% 109.7%
Goodwill - - - - - Investments / assets 13.8% 9.3% 9.7% 9.0% 8.0%
Other assets - - - - - Loan / assets 60.7% 73.8% 74.0% 76.1% 78.6%
Total assets 73,198 107,522 126,330 147,762 176,077 Customer deposits / liabilities 85.9% 85.0% 83.5% 84.7% 85.7%
LT Debt / liabilities 0.0% 0.0% 7.9% 6.7% 5.6%
LIABILITIES
Customer deposits 52,256 73,963 88,040 105,183 126,208 Asset Quality / Capital
% change Y/Y 51.8% 41.5% 19.0% 19.5% 20.0% Loan loss reserves / loans 1.8% 1.8% 2.8% 3.8% 3.8%
Long term funding 0 0 8,510 8,510 8,510 NPLs / loans 1.0% 0.6% 2.0% 3.5% 3.1%
Interbank funding 2,786 3,113 3,891 4,864 6,079 LLP / RWA 1.02% 1.03% 1.85% 2.55% 2.58%
Other Interest Bearing Liabilities 5,785 9,985 5,031 5,634 6,479 Loan loss reserves / NPLs 144.4% 232.9% 128.7% 99.7% 109.4%
Average interest bearing liabs 49,478 73,944 96,266 114,831 135,734 Tangible Equity/Assets - - - - -
Other liabilities - - - - - RWAs 64,149 110,350 131,797 158,142 191,348
Shareholders' equity 10,120 16,245 18,074 21,023 24,804 % YoY change 74.5% 72.0% 19.4% 20.0% 21.0%
Minorities 0 374 374 374 374 Core Tier 1 15.5% 14.1% 12.8% 12.6% 12.3%
Total liabilities & Shareholders Equity 73,198 107,522 126,330 147,762 176,077 Total Tier 1 15.0% 14.6% 17.0% 16.1% 15.2%
Capital Adequacy Ratio 15.0% 14.1% 20.0% 18.5% 17.3%

Source: Company reports and J.P. Morgan estimates.

165
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Fubon Financial Holdings Overwight


NT$39.35
Price Target: NT$54
www.fubon.com/financial
Company description Taiwan
Fubon is principally engaged in securities, banking, life insurance, and P&C Banks
sectors It recently expanded its life business through M&A. Its 19.9% stake Dexter HsuAC
in Xiamen City Bank, via 75%-owned Fubon Bank (HK), should provide a (886-2) 2725-9868
better entrance for a potential China opportunity, in our view. dexter.st.hsu@jpmorgan.com

Post mortem J.P. Morgan Securities (Taiwan) Limited

During the financial crisis, Fubon acquired one company. This acquisition
Price performance
has not only helped Fubon move up the rank to become the No #2 player in 2.0

the life insurance industry but also provided support to its ROE. 1.5

Potential for earnings upgrades 1.0

We believe Fubon is best positioned in the domestic reflation environment. 0.5


Nov -08 Feb-09 May -09 Aug-09 Nov -09
Our estimated breakeven point for Fubon Life (pro forma) is only 3.1% Taishin (2887.TW) Taiex

versus 3.8%-4.0% for Cathay and Shinkong; this means Fubon should be
Source: TEJ.
best positioned for reflation and deserves a higher valuation (if unrealized
gains on property gains are included). Meanwhile, Fubon has been Performance
redeploying capital to the property market and overseas bond market (i.e., 1M 3M 12M
carry trade) to improve its earnings. Absolute (%) 0.8 24.5 89.6
How much recovery is priced into the stock? Relative (%) -0.1 13.3 23.4
After the acquisition of the company, we expect the sustainable ROE of Source: TEJ.
Fubon to improve to 13%-14% from the historical level of 7%-8%. This
should be driven by: (1) strong profitability of life business; and (2) strong Company data
FYP growth, which should help lock-in low-cost liabilities. We do not think 52-week range (NT$) 16.65-40.45
this has been fully priced in as the improved ROE should deserve higher Mkt cap. (NTMM) 319,733
P/BV (versus the current level of 1.6x P/BV). Mkt cap. (US$MM) 9,901
Avg daily value (US$MM) 46.6
Price target and key risks Avg daily volume (MM) 42.3
We remain OW on Fubon with our PT of NT$54 (SOTP-based, Dec-10). Shares O/S (MM) 8,125
Key risks to our PT are: (1) a worse-than-expected recovery in exports, Date of price 12-Nov-09
which could lead to credit-quality deterioration; (2) worse-than-expected TSE 7,671
outcome of cross-straits negotiations; (3) unfavorable regulatory changes and Free float (%) 52
M&A terms. Exchange rate 32.29
Source: Bloomberg.

Bloomberg: 2881 TT; Reuters: 2881.TW


NT$ in millions, year-end December
FY08 FY09E FY10E FY11E
Operating profit 17,262 27,235 34,631 35,853
Net profit 10,875 21,404 27,060 26,905
EPS (NT$) 1.41 2.63 3.33 3.31
FD EPS (NT$) 1.41 2.63 3.33 3.31
DPS (NT$) 0.00 1.58 2.00 1.99
EPS growth (%) -24.6 87.0 26.4 -0.6
ROE (%) 7.0 13.0 14.0 12.9
P/E (x) 27.9 14.9 11.8 11.9
BVPS (NT$) 18.62 22.73 24.97 26.29
P/BV (x) 2.1 1.7 1.6 1.5
Dividend yield (%) 0.0 4.0 5.1 5.0
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 12 November 2009.

166
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Fubon Financial Holdings: Summary of financials


Income statement - NT$ mn 2007 2008 2009E 2010E 2011E Growth Rates 2007 2008 2009E 2010E 2011E

NIMs (as % of Avg. IEA) 1.43% 1.41% 2.01% 2.02% 2.13% Loans 6.3% 13.5% 7.8% 9.4% 10.4%
Avg. IEA/Avg. Assets 108.6% 108.8% 102.5% 98.2% 100.8% Deposits 4.2% 17.6% 6.3% 4.1% 3.8%
Margins (as % of Avg. Assets) 1.56% 1.54% 2.07% 1.99% 2.15% Assets 5.1% 10.7% 28.0% 8.2% 7.6%
Equity 1.3% -13.3% 28.5% 9.9% 5.3%
Interest Earned 47,844 49,421 56,905 60,271 70,067 RWA 17.0% 7.0% 2.8% 6.2% 7.3%
Interest Suspended 0 0 0 0 0
Interest Expense -20,298 -20,084 -9,648 -7,152 -8,176
Net Interest Income 27,547 29,336 47,257 53,119 61,891
Net Interest Income 3.1% 6.5% 61.1% 12.4% 16.5%
Non-Interest Income 28,616 18,171 21,028 26,326 21,283 Non-Interest Income 27.3% -36.5% 15.7% 25.2% -19.2%
Fees 15,294 10,467 14,017 16,767 17,546 of which Fee Grth 50.2% -31.6% 33.9% 19.6% 4.6%
Insurance 2,763 1,563 -5,836 -7,178 -9,298 Revenues 14.2% -15.4% 43.7% 16.3% 4.7%
Dealing 11,037 5,544 9,983 10,733 5,505 Costs 15.7% 3.7% 35.7% 9.2% 5.6%
Other Revenues -478 597 2,864 6,004 7,530 Pre-Provision Profits 12.5% -36.0% 57.8% 27.2% 3.5%
Total Revenues 56,162 47,507 68,285 79,445 83,174 Loan Loss Provisions -31.5% -46.5% -43.1% 30.1% 11.5%
Costs -29,173 -30,245 -41,050 -44,814 -47,321 Pre-Tax 86.4% -29.6% 105.1% 26.8% 2.5%
Pre-Prov. Profits 26,990 17,262 27,235 34,631 35,853 Attributable Income 71.8% -24.7% 96.9% 26.4% -0.6%
Provisions -10,303 -5,512 -3,137 -4,082 -4,553 EPS 79.5% -24.6% 87.0% 26.4% -0.6%
Other Inc/Exp. 0 0 0 0 0 DPS 50.0% -100.0% nm 26.4% -0.6%
Exceptionals 0 0 0 0 0
Disposals/ Other income 0 0 0 0 0 Balance Sheet Gearing 2007 2008 2009E 2010E 2011E
Pre-tax 16,687 11,751 24,098 30,549 31,300
Tax -2,257 -878 -2,694 -3,489 -4,395 Loan/Deposits 81.9% 79.0% 80.1% 84.2% 89.5%
Minorities 0 0 0 0 0 Investment/Assets 31.5% 33.7% 56.2% 56.0% 55.4%
Other Distbn. 0 0 0 0 0 Loan/Assets 37.8% 38.7% 32.6% 33.0% 33.8%
Attributable Income 14,430 10,873 21,404 27,060 26,905 Customer deposits/Liab. 49.7% 52.1% 43.3% 41.7% 40.2%
LT Debt/Liabilities 3.0% 3.1% 2.7% 2.5% 2.3%

Per Share Data (NT$/ share) 2007 2008 2009E 2010E 2011E Asset Quality/Capital 2007 2008 2009E 2010E 2011E
Loan loss reserves/Loans 0.90% 0.70% 0.56% 0.54% 0.53%
EPS 1.87 1.41 2.63 3.33 3.31 NPL/Loans 1.18% 0.98% 0.73% 0.67% 0.61%
DPS 1.50 0.00 1.58 2.00 1.99 Coverage 76.3% 71.4% 76.1% 80.9% 86.7%
Payout 0% 112% 76% 63% 0% Growth in NPLs -33.9% -6.3% -19.4% 0.0% 0.0%
Book Value 21.47 18.62 22.73 24.97 26.29
Fully Diluted Shares 7,719 7,719 8,125 8,125 8,125 Tier 1 Ratio 9.56% 9.46% 9.72% 9.51% 9.35%
Total CAR 9.6% 11.2% 11.1% 10.8% 10.6%

Key balance sheet - NT$ mn 2007 2008 2009E 2010E 2011E Du-Pont Analysis 2007 2008 2009E 2010E 2011E

Net Loans 685,183 777,352 837,734 916,335 1,011,274


LLR -6,245 -5,476 -4,698 -4,996 -5,357 Margins (as % of Avg. Assets) 1.56% 1.54% 2.07% 1.99% 2.15%
Gross Loans 691,428 782,828 842,432 921,331 1,016,631 Non IR/Avg. Assets 1.62% 0.95% 0.92% 0.98% 0.74%
NPLs 8,182 7,667 6,177 6,177 6,177 Non-Int. Rev./ Revenues 51.0% 38.2% 30.8% 33.1% 25.6%
Investments 570,580 675,562 1,443,530 1,555,773 1,655,469 Revenue/Assets 3.18% 2.49% 2.99% 2.97% 2.88%
Other Earning Assets 122,759 124,505 105,328 104,742 113,327 Cost/Income 51.9% 63.7% 60.1% 56.4% 56.9%
Avg. IEA 1,374,421 1,483,830 1,987,093 2,486,568 2,683,636 Cost/Assets 1.65% 1.58% 1.79% 1.68% 1.64%
Goodwill 497 497 0 0 0 of which Goodwill Amort. 0.00% 0.00% 0.00% 0.00% 0.00%
Assets 1,812,745 2,006,720 2,567,627 2,779,190 2,990,759 Operating ROA 1.53% 0.90% 1.19% 1.30% 1.24%
LLP/Loans -1.55% -0.75% -0.39% -0.47% -0.47%
Loan/Assets 37.6% 38.3% 35.3% 32.8% 33.4%
Deposits 836,544 984,101 1,046,233 1,088,878 1,130,351 Other Prov, Income/ Assets 0.00% 0.00% 0.00% 0.00% 0.00%
Long-term bond funding 49,760 57,596 64,436 64,436 64,436 Pre-Tax ROA 0.94% 0.62% 1.05% 1.14% 1.08%
Other Borrowings 132,306 64,587 103,584 104,291 78,784 Tax Rate -13.5% -7.5% -11.2% -11.4% -14.0%
Avg. IBL 1,011,351 1,062,448 1,160,269 1,235,929 1,265,588 Minorities & Outside Distbn. 0.00% 0.00% 0.00% 0.00% 0.00%
Avg. Assets 1,768,643 1,909,733 2,287,174 2,673,409 2,884,975 ROA 0.82% 0.57% 0.94% 1.01% 0.93%
Common Equity 165,728 143,715 184,681 202,899 213,567 RoRWA 2.14% 1.45% 2.72% 3.29% 3.06%
RWA 726,540 777,318 798,777 848,346 910,115 Equity/Assets 9.31% 8.10% 7.18% 7.25% 7.22%
Avg. RWA 673,762 751,929 788,048 823,561 879,230 ROE 8.76% 7.03% 13.04% 13.96% 12.92%

Source: Company data, J.P. Morgan estimates.

Fubon Financial: SOTP valuation


NT$MM Sh. Equity Implied P/BV Implied value % cont.
Taipei Fubon Bank 83,525 1.79 149,135 35%
Fubon Life 102,767 1.63 167,514 39%
Fubon Securities 30,812 1.60 49,299 12%
Fubon Insurance 19,278 1.70 32,772 8%
Fubon Bank (Hong Kong) 14,862 1.35 20,063 5%
Fubon Investment Trust 965 1.30 1,254 0%
Others & Liabilities -17,526 1.00 -17,526 -4%
Dividend 25,286 1.00 25,286 6%
Total 214,681 1.99 427,797 100%
Shares O/S 8,125
Fair Value 52.7
Source: J.P. Morgan estimates.

167
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Gazprom Overweight
Price: 6.30
Price Target: $9.90
www.gazprom.com

Company description Russia


Gazprom is the largest Russian gas producer. The company owns the Russian Oil & Gas
Russian gas transportation network and holds the Russian gas export
Nadia KazakovaAC
monopoly by law. We forecast the company’s gas output to decline 17% y/y (7-495) 937 7329
to 458 bcm this year due to weak demand and recover 6% y/y in 2010E. nadia.kazakova@jpmorgan.com
Gazprom owns a 95.7% stake in Gazprom Neft (approx. 1 mmbpd annual
J.P Morgan Securities Ltd.
crude output). Total proven hydrocarbon reserves amounted to 117 bn boe,
3P – 140 bn boe (end-2008). Gazprom owns power generating and other Price Performance
large non-core assets, including banking and real estate. The government is 7.0
the largest shareholder in Gazprom with a 50.1% stake.
6.0

Post mortem $ 5.0


The drop in domestic gas demand and output in 2009 proved deeper than 4.0
expected. High-margin export sales were further weakened by oversupply of 3.0
gas in Europe. We forecast gas price recovery in 2010 and improvement in Nov-08 Feb-09 May-09 Aug-09 Nov-09
export and domestic demand only from 2011. Short term, we believe
Gazprom might struggle to place minimum contract volumes in Europe in Source: Bloomberg
2009-2010, but it is unlikely to compromise on prices. Mid term, we see
Gazprom’s position in Europe as relatively secure. Performance
1M 3M 12M
Potential for earnings upgrades Absolute (%) -16.2 8.2 40.0
We see potential for an earnings upgrade if volume recovery in 2010-2011 is Source: Bloomberg
faster than expected and oil/gas prices are higher than estimated (JPMe
$70/bbl for 2010 and $87/bbl for 2011). Our EBITDA and net income Company data
estimates are a modest 5% above Bloomberg consensus for 2010-2011. 52-week range ($) 2.98-6.88
Mkt cap. (US$MM) 144,366
Avg daily value (US$MM) 934
How much recovery is priced into the stock? Avg daily volume (MM) 152
Gazprom shares are traded at a 5.7x 12M forward PER, which suggests a 35- Shares O/S (MM) 22,915
39% discount to 10-year and 5-year PER averages respectively, which might Date of price 23-11-09
be excessive given that the company is at the trough of the earnings cycle. Index: RTS 1466.77
Free float (%) 40%
Exchange rate 1
Price target and key risks
Our PT (Dec-10) for Gazprom is $9.9/share, based on a 50% DCF-based fair Source: Bloomberg, J.P. Morgan
value (WACC at 10.0% and terminal growth rate at 2.5%) and 50% multiple-
based PER (‘10E). The key risks: increasing competition, lower gas prices.

Bloomberg: GAZP RU; Reuters: GAZP.RTS


$ in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 141,520 96,011 112,363 134,672
Net profit 30,593 20,730 25,049 33,498
EPS (LC) 1.34 0.90 1.09 1.46
FD EPS (LC) 1.34 0.90 1.09 1.46
DPS (LC) 0.09 0.10 0.05 0.07
Sales growth (%) 52% -32% 17% 20%
Net profit growth (%) 31% -32% 21% 34%
EPS growth (%) 31% -32% 21% 34%
ROE (%) 20% 12% 12% 14%
P/E (x) 4.7 7.0 5.8 4.3
FD P/E (x) 4.7 7.0 5.8 4.3
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

168
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Gazprom: Summary of Financials


Profit and Loss Statement Cash flow statement
$ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E

Revenues 141,520 96,011 112,363 134,672 148,784 EBIT 51,112 28,483 33,841 42,244 50,894
% change Y/Y 52.2% (32.2%) 17.0% 19.9% 10.5% Depreciation & amortisation 7,861 8,071 8,858 10,840 11,411
Gross Margin (%) 40.1% 45.9% 45.9% 46.9% 48.9% Change in working capital/Other (7,285) 4,578 (3,712) (5,612) (4,993)
EBITDA 58,973 36,555 42,699 53,084 62,305 Taxes (10,853) (5,591) (6,880) (9,290) (11,374)
% change Y/Y 82.7% (38.0%) 16.8% 24.3% 17.4% Cash flow from operations 40,836 35,542 32,108 38,181 45,938
EBITDA Margin 41.7% 38.1% 38.0% 39.4% 41.9%
EBIT 51,112 28,483 33,841 42,244 50,894 Capex (28,743) (19,969) (25,695) (29,512) (26,930)
% change Y/Y 103.6% (44.3%) 18.8% 24.8% 20.5% Disposal/(Purchase)/Other (7,274) (15,883) (6,766) (5,456) (5,506)
EBIT Margin 36.1% 29.7% 30.1% 31.4% 34.2% Net Interest (514) (1,466) (1,875) (1,559) (744)
Net Interest (514) (1,466) (1,875) (1,559) (744) Free cash flow 4,350 258 590 6,175 19,029
Earnings before tax 42,726 27,463 33,381 44,780 54,884
% change Y/Y 26.3% (35.7%) 21.5% 34.2% 22.6% Equity raised/repaid (518) 0 0 0 0
Tax (10,853) (5,591) (6,880) (9,290) (11,374) Debt Raised/repaid 2,647 (1,008) 5,410 7,381 (5,701)
as a % of EBT 21.2% 19.6% 20.3% 22.0% 22.3% Other (2,735) 1,319 (1,282) (2,376) (2,514)
Net Income (Reported) 30,593 20,730 25,049 33,498 41,034 Dividends paid (2,463) (1,219) (1,585) (2,016) (2,764)
% change Y/Y 30.7% (32.2%) 20.8% 33.7% 22.5% Beginning cash 11,225 13,828 12,733 16,067 25,460
Shares Outstanding 22,915.31 22,915.31 22,915.31 22,915.31 22,915.31 Ending cash 13,828 12,733 16,067 25,460 33,614
EPS (reported) 1.34 0.90 1.09 1.46 1.79 DPS 0.10 0.05 0.07 0.09 0.12
% change Y/Y 30.7% (32.2%) 20.8% 33.7% 22.5%

Balance sheet Ratio Analysis


$ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E

Cash and cash equivalents 11,689 12,733 16,067 25,460 33,614 EBITDA margin 41.7% 38.1% 38.0% 39.4% 41.9%
Accounts receivable 22,980 25,118 29,518 35,285 39,284 Operating margin 36.1% 29.7% 30.1% 31.4% 34.2%
Inventories 9,416 9,403 11,049 13,239 14,637 Net profit margin 21.6% 21.6% 22.3% 24.9% 27.6%
Others 9,361 10,068 11,808 14,065 15,717 SG&A/Sales (1.6%) 7.8% 7.9% 7.5% 7.0%
Current assets 53,446 57,321 68,442 88,050 103,251
Sales per share growth 8.6% 11.0% 10.9% 10.4% 9.9%
LT investments 27,328 79,271 72,523 56,759 62,615 EPS growth 30.7% (32.2%) 20.8% 33.7% 22.5%
Net fixed assets 136,685 157,381 180,738 219,722 234,396
Total assets 243,709 283,967 316,960 359,884 395,730 ROE 19.5% 11.6% 12.3% 14.1% 14.7%
ROCE 19.4% 11.7% 11.7% 12.5% 13.9%
Liabilities
ST loans 14,982 16,733 10,053 12,313 13,295 Production (mboe/day) 10,076 8,553 9,032 9,285 9,366
Payables 17,820 20,123 23,661 27,420 29,316 Production oil (mbpd) 1,163 1,151 1,151 1,194 1,178
Others 0 699 740 798 799 Production gas (mboe/day) 8,914 7,403 7,881 8,091 8,188
Total current liabilities 32,802 37,555 34,453 40,531 43,410 Refining throughput (mbpd) 566 687 760 613 613
Long term debt 31,445 39,195 47,828 48,101 36,652
Other liabilities 12,432 14,859 15,822 16,872 17,747 Interest coverage (x) 99.5 19.4 18.1 27.1 68.4
Total liabilities 76,679 91,610 98,103 105,504 97,809 Net debt to equity 20.8% 22.5% 19.1% 13.7% 5.5%
Shareholders' equity 156,559 178,628 203,676 237,175 278,208 Net debt 34,738 43,196 41,814 34,954 16,334
BVPS 6.83 7.80 8.89 10.35 12.14 Net debt/EBITDA (ny) 0.9 1.0 0.8 0.6 0.2

Source: Company reports and J.P. Morgan estimates.

169
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Genting Overweight
Price M$7.15
Price Target: M$8.50
www.genting.com

Company description Malaysia


Genting Bhd is an investment holding company and its subsidiaries are Gaming
principally involved in leisure and hospitality, where Genting Malaysia owns Nicole GohAC
and operates the sole casino in Malaysia while Genting Singapore is set to (60-3) 2270-4702
open 1 of 2 casinos in Singapore next year. Other subsidiaries are involved in nicole.sy.goh@jpmorgan.com
power generation, oil palm plantation, property development and oil & gas. JPMorgan Securities (Malaysia) Sdn. Bhd.
(18146-X)
Post mortem
Its Malaysian resort has proven to be resilient in the crisis with visitor Price performance
arrivals in 1H09 remaining flat Y/Y at 9.5MM, while revenue is up 2% Y/Y. M$
Potential for earnings upgrades 8
For its Malaysian resort, we have factored in a 6% decline in casino revenue 6
and 5% decline in overall revenue in 2010 (vs. 2000 recovery of 7% post
4
crisis). Meanwhile, our EBITDA forecast for Genting Singapore is below
2
consensus estimates by 37% for FY10E and 24% for FY11E.

10-08

01-09

04-09

07-09

10-09
How much recovery is priced into the stock?
The stock has not fully priced in a recovery, in our view. Genting’s share Source: Bloomberg.
price is still trading at approximately 20-25% discount to its SOTP (based on Performance
current share prices of listed subsidiaries), which is below the three-year 1M 3M 12M
average of 18%. Meanwhile, its subsidiary, Genting Malaysia, is trading at Absolute (%) 2.3 11.7 45.3
Relative (%) -0.8 5.1 6.1
6.4x FY10E EV/EBITDA, which is 1 std deviation below the eight-year
Source: Bloomberg.
mean of 8.3x.
Company data
Price target and key risks 52-wk range (M$) M$3.08-7.87
Our Jun-10 PT is based upon a 15% discount to our SOTP value as we Mkt. cap (M$MM) 26488.61
believe that discount will narrow slightly from the three-year average of 18% Mkt. cap (US$MM) 7741.81
Liquidity (US$MM) 15.2
and current discount of 20-25% when Singapore opens next year. Genting Avg. daily volume (MM) 7.6
Bhd will then become a purer casino play. In the past, the discount has Shares O/S (MM) 3704.7
narrowed to 0 once in early 2007 post the winning of Singapore casino Date of price 5-Nov-09
KLCI Index 1254.0
license. In arriving at our SOTP value, Genting’s stakes in Genting Malaysia, Free float (%) 60.3
Genting Singapore and Genting Plantations are valued at our PT of M$3.50, Exchange rate 3.42
S$1.15 and M$6.70, respectively. Key risks to our PT are a slower-than- Source: Bloomberg.
expected recovery in casino markets and prolonged health scares.
Bloomberg: GENT MK; Reuters: GENT.KL
M$ millions, year-end December
FY07 FY08 FY09E FY10E FY11E
Sales 8,484 9,083 7,704 11,552 14,691
Core net profit 1,467 1,129 1,066 1,327 1,740
Core EPS (M$) 0.40 0.30 0.29 0.36 0.47
DPS (M$) 0.27 0.05 0.05 0.05 0.05
Sales growth (%) 22.2 7.1 -15.2 49.9 27.2
Net profit growth (%) 24.2 -23.0 -5.6 24.5 31.1
EPS growth (%) 23.9 -23.1 -5.6 24.5 31.1
ROE (%) 16.1 4.6 8.0 9.2 10.9
ROCE (%) 17.9 15.6 8.2 11.2 14.1
P/E (x) 18.1 23.5 24.9 20.0 15.2
P/BV (x) 2.1 2.1 1.99 1.8 1.7
EV/EBITDA (x) 8.3 9.1 12.5 9.9 7.0
Net div yield (%) 3.7 0.7 0.7 0.7 0.7
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

170
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Genting: Summary of financials


Profit and Loss statem ent Cash flow statem ent
M YR in m illions, year-end Dec FY07A FY08A FY09E FY10E FY11E M YR in m illions, year-end Dec FY07A FY08A FY09E FY10E FY11E

Revenues 8,484 9,083 7,704 11,552 14,691 EBIT 3,170 2,847 2,205 2,879 4,013
% change Y/Y 22.2 7.1 -15.2 49.9 27.2 Depreciation & am ortisation 615 658 558 837 1,065
Gross M argin (% ) 44.6 38.6 35.9 32.2 34.6 Change in working capital 89 128 9 221 52
EBITDA 3,785 3,505 2,763 3,716 5,078 Taxes (662) (751) (560) (772) (1,079)
% change Y/Y 11.1 -7.4 -21.2 34.5 36.6 Others (367) 216 302 371 465
EBITDA M argin (% ) 44.6 38.6 35.9 32.2 34.6 Cash flow from operations 2,844 2,518 2,514 3,536 4,516
EBIT 3,170 2,847 2,205 2,879 4,013
% change Y/Y 9.2 -10.2 -22.6 30.6 39.4 Capex (2,858) (5,539) (5,853) (4,361) (1,308)
EBIT M argin (% ) 37.4 31.3 28.6 24.9 27.3 Disposal/ (purchase) 870 2,650 0 0 0
Net Interest -109 -54 -2 170 263 Others 318 265 0 0 0
Earnings before tax 3,040 2,868 2,241 3,089 4,317 Free cash flow 1,175 (105) (3,340) (825) 3,208
% change Y/Y 10.6 -5.7 -21.9 37.9 39.8
Tax (662) (751) (560) (772) (1,079) Debt raised/ (repaid) 2,467 1,088 7,874 (2,406) 1,152
as % of EBT 21.8 26.2 25.0 25.0 25.0 Equity raised/ (repaid) 0 0 1,730 0 0
Net Incom e 1,989 569 1,066 1,327 1,740 Dividends paid (1,316) (524) (195) (195) (195)
% change Y/Y 32.2 -71.4 87.3 24.5 31.1 Other (871) (731) (293) (294) (293)
Shares Outstanding 3704 3708 3708 3708 3708 Beginning cash 8,078 9,590 9,467 15,242 11,523
Core EPS- M $ 0.396 0.304 0.287 0.358 0.469 Ending cash 9,590 9,467 15,242 11,523 15,395
% change Y/Y -2.7 -23.1 -5.6 24.5 31.1 Gross DPS - M $ 0.370 0.071 0.070 0.070 0.070
Balance sheet Ratio Analysis
M YR in m illions, year-end Dec FY07A FY08A FY09E FY10E FY11E % , year-end Dec FY07A FY08A FY09E FY10E FY11E

Cash and cash equivalents 9,590 9,467 15,242 11,523 15,395 EBITDA m argin 44.6 38.6 35.9 32.2 34.6
Accounts receivable 830 1,090 950 1,424 1,811 Operating m argin 44.6 38.6 35.9 32.2 34.6
Inventories 311 376 603 951 1,170 Net profit m argin 23.4 6.3 13.8 11.5 11.8
Others 268 201 1,005 2,088 3,676 SG&A/sales n.a. n.a. n.a. n.a. n.a.
Current assets 10,999 11,133 17,800 15,985 22,053
Sales per share growth 21.9 6.9 (15.2) 49.9 27.2
LT investm ents 10,277 8,626 8,663 8,704 8,745 Sales growth 22.2 7.1 (15.2) 49.9 27.2
Net fixed assets 8,903 10,692 15,987 19,511 19,754 Net profit growth 32.2 (71.4) 87.3 24.5 31.1
Total assets 30,179 30,451 42,450 44,200 50,551 EPS growth (2.7) (23.1) (5.6) 24.5 31.1

Liabilities Interest coverage (x) 9.5 13.0 9.4 18.4 25.2


Payables 1,369 1,512 1,808 2,852 3,511 Net debt to total capital (x) Net cash Net cash Net cash Net cash Net cash
ST loans 1,293 442 1,293 1,293 1,293 Net debt to equity (x) Net cash Net cash Net cash Net cash Net cash
Others 258 251 251 251 251 Sales/assets (x) 0.3 0.3 0.2 0.3 0.3
Total current liabilities 2,920 2,206 3,352 4,395 5,054 Assets/equity (x) 2.4 2.4 3.2 3.1 3.2
Long term debt 4,029 5,414 12,438 10,032 11,183 ROE 16.1 4.6 8.0 9.2 10.9
Other liabilities 1,692 1,417 2,032 3,022 4,520 ROCE 17.9 15.6 8.2 11.2 14.1
Total liabilities 8,642 9,037 17,821 17,449 20,757
Shareholders' equity 12,355 12,442 13,313 14,446 15,991
BVPS - M $ 3.34 3.36 3.59 3.90 4.31

Source: Company, J.P. Morgan estimates


Genting Bhd—PT derivation
Listed subsidiaries % No of Price Market value M$ / share Valuation method
owned shares (M$)
Genting Malaysia 48% 5,860 3.50 9,927 2.68 Based on JPM June-10 target price
Genting Plantations 55% 753 6.70 2,774 0.75 Based on JPM June-10 target price
Genting Singapore 54% 11,586 2.74 16,958 4.57 Based on JPM June-10 target price
Landmarks 30% 481 1.42 202 0.05 Based on current share price of M$0.95/ share
29,862 8.05
Unlisted subsidiaries
Power 100% 3,151 0.85 Based on 1.0X historical book
Property 55% 506 0.14 Based on 1.0X book
Management fees from Resorts 100% 5,328 1.44 Based on DCF
Oil & gas 95% 443 0.12 Based on 10X P/E
Wisma Genting 100% 97 0.03 Based on net BV
9,525 2.57
Company level cash / investments -2,118 -0.57
Total 37,268 -
No of shares 3,708 -
RNAV (M$/share) 10.05 10.05
% discount 15% 15%
June-10 price target 8.54 8.54
Source: J.P. Morgan estimates.

171
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Grupo Aeroportuario del Sureste Neutral


Ps63.04
Price Target: Ps53.00
www.asur.com.mx

Company description Mexico


ASUR has a 50-year concession to operate 9 airports in the southeast of Airport Operators
Mexico. Its airport in Cancun, the biggest tourist destination in Mexico, is Adrian E HuertaAC
the second largest in Mexico and accounts for 47% of ASUR’s volumes. The (52 81) 8152-8720
company’s EBITDA margin, at 64%, topped the industry average of 61%in adrian.huerta@jpmorgan.com
the 9M09. J.P. Morgan Casa de Bolsa, S.A. de C.V.,
J.P. Morgan Grupo Financiero
Post mortem
Performance
Mexican airports were severely impacted by the economic crisis that hit
1M 3M 12M
domestic and international traffic. The swine flu outbreak also had a
significant negative impact in the 2Q09. We expect a gradual recovery that Absolute (%) 11 11 84
already started in 3Q, and we believe that international traffic will recover Relative (%) 15 4 32
faster, especially on the back of a US economic recovery. In this case, we Source: Bloomberg.
believe that ASUR is better positioned relative to its peers as it depends more
on international traffic. Company data
52-week range (LC) 24.92-49.10
Potential for earnings upgrades Mkt cap. (LCMM) 18,585
The main upside risk to our estimates are related to a better-than-expected Mkt cap. (US$MM) 1,447
recovery in traffic volumes. We expect flat volumes in 4Q09 vs a 14% Avg daily value (US$MM) 3.8
decrease in 3Q09 yoy, and for the full year we expect volumes to be down Avg daily volume (MM) 0.2
9% and to recover 9% next year. Shares O/S (MM) 300.00
Date of price 11/25/2009
How much recovery is priced into the stock? Index: IBOV 31,364
Although ASUR’s share price has recover significantly over the last three Free float (%) 74%
months, YTD it is still underperforming, up 22% vs +40% for the Bolsa. We Exchange rate 12.84
believe that as volumes start to recover we could see this underperformance
Source: Bloomberg.
start to reverse over the next coming months.

Price target and key risks


We rate ASUR an OW relative to the other airport companies in Mexico.
Our Dec-09 price target of Ps53 (US$41 per ADR) is based on a DCF model
using a WACC of 10.5%. ASUR is the company most exposed to hurricanes,
given its airports’ locations.
Bloomberg: ASURB MM Reuters: ASURB MM.SA
LC in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 3,169 3,216 3,548 3,833
Net profit 1,049 941 1,107 1,223
EPS (LC) 3.50 3.14 3.69 4.08
FD EPS (LC) 3.50 3.14 3.69 4.08
DPS (LC) 2.00 6.28 2.19 2.58
Sales growth (%) 13.7% 1.5% 10.3% 8.0%
Net profit growth (%) 100.9% -10.4% 17.7% 10.4%
EPS growth (%) 100.9% -10.4% 17.7% 10.4%
ROE (%) 15.3% 15.7% 17.2% 17.8%
P/E (x) 18.0 20.1 17.1 15.5
FD P/E (x) 18.0 20.1 17.1 15.5
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25th November 2009.

172
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Asur: Summary of financials


Profit and loss statement Cash flow statement
LC in millions, year-end December LC in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 3,169 3,216 3,548 3,833 EBIT 1,384 1,320 1,505 1,671
% change Y/Y 13.7% 1.5% 10.3% 8.0% Depreciation & amortization 602 653 697 718
Gross margin (%) NA NA NA NA Change in working capital (90) (60) (42) (36)
EBITDA 1,985 1,972 2,202 2,389 Taxes (499) (445) (431) (476)
% change Y/Y 16.3% -0.6% 11.6% 8.5% Cash flow from operations 946 1,423 1,848 2,000
EBITDA margin (%) 62.7% 61.3% 62.1% 62.3% Capex (936) (670) (1,400) (900)
EBIT 1,384 1,320 1,505 1,671 Disposal/(purchase) 142 142 142 142
% change Y/Y 18.7% -4.6% 14.0% 11.0% Net interest 174 76 33 28
EBIT margin (%) 43.7% 41.0% 42.4% 43.6% Free cash flow 451 988 428 1,080
Net interest 174 76 33 28 Equity raised/(repaid) 0 0 0 0
Earnings before tax 1,548 1,386 1,538 1,698 Debt raised/(repaid) 0 0 0 0
% change Y/Y 31.1% -10.5% 11.0% 10.4% Other 0 0 0 0
Tax (499) (445) (431) (476) Dividends (600) (1,884) (658) (775)
as % of EBT 32.2% 32.1% 28.0% 28.0% Beginning cash 1,926 1,734 636 426
Net income (reported) 1,049 941 1,107 1,223 Ending cash 1,734 636 426 751
% change Y/Y 100.9% -10.4% 17.7% 10.4% DPS (LC) 2.00 6.28 2.19 2.58
Shares O/S (MM) 300 300 300 300
Source: Company, J.P. Morgan estimates.
EPS (reported) (LC) 3.50 3.14 3.69 4.08
Source: Company, J.P. Morgan estimates.

Ratio analysis
Balance sheet %, year-end December
FY08 FY09E FY10E FY11E
LC in millions, year-end December
EBITDA margin 62.7% 61.3% 62.1% 62.3%
FY08 FY09E FY10E FY11E Operating margin 43.7% 41.0% 42.4% 43.6%
Cash and cash equivalents 1,734 636 426 751 Net profit margin 33.1% 29.3% 31.2% 31.9%
Accounts receivable 361 444 489 529 SG&A/sales 25.6% 26.6% 25.9% 25.5%
Inventories 8 10 10 10 Sales growth 13.7% 1.5% 10.3% 8.0%
Others 747 683 683 683 Net profit growth 101% -10% 18% 10%
Current assets 2,849 1,773 1,608 1,972 Sales per share growth 13.7% 1.5% 10.3% 8.0%
LT investments 8,095 8,037 8,037 8,037 EPS growth 100.9% -10.4% 17.7% 10.4%
Net fixed assets 6,430 6,508 7,211 7,393 Interest coverage (x) 621.61 2,170.83 0.00 0.00
Total assets 17,375 16,318 16,857 17,403 Net debt to total capital -11.6% -4.5% -2.9% -5.0%
Liabilities Net debt to equity -11.6% -4.5% -2.9% -5.0%
ST loans 0 0 0 0 Sales/assets 0.18 0.20 0.21 0.22
Payables 10 35 39 42 EBIT margin 43.7% 41.0% 42.4% 43.6%
Others 585 279 279 279 ROCE 10.1% 13.4% 13.9% 14.4%
Total current liabilities 595 315 318 321 Assets/equity (x) 1.16 1.16 1.17 1.17
Long-term debt 0 0 0 0 ROI 10.1% 13.4% 13.9% 14.4%
Other liabilities 1,824 1,992 2,078 2,173 ROE 15.3% 15.7% 17.2% 17.8%
Total liabilities 2,420 2,306 2,396 2,494 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 14,955 14,012 14,460 14,908
BVPS (LC) 49.85 46.71 48.20 49.69
Source: Company, J.P. Morgan estimates.

173
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Hon Hai Precision Overweight


Price: NT$132
Price Target: NT$155
www.foxconn.com

Company description Taiwan


With strong execution and a unique business model, eCMMS, Hon Hai has Computer Hardware
become the largest electronics manufacturing services (EMS) provider globally. Gokul HariharanAC
Its product portfolio includes all the 3C products. (852) 2800-8564
gokul.hariharan@jpmorgan.com
Post mortem
We believe Hon Hai has demonstrated its strong execution capability by Alvin KwockAC
(852) 2800-8533
eliminating costs aggressively and carrying out its moves into inner China plants, alvin.yl.kwock@jpmorgan.com
although the benefits are still yet to accrue completely. Revenue momentum J.P. Morgan Securities (Asia Pacific) Limited
however, has been disappointing in 2009, weighed down by higher corporate
exposure and sharp revenue declines at the handset division, FIH. Apple iPhone Price performance
momentum, however, has been quite strong in 2009. 120
NT$ 80
Potential for earnings upgrades
We expect revenue growth to surprise on upside in 2010, as server and 40

networking should post significant rebound, once corporate demand recovers. Nov-08 Feb-09 May-09 Aug-09 Nov-09

Second, iPhone going non-exclusive in key markets should lift shipment outlook 2317.TW share price (NT$
TSE (rebased)
significantly, as Hon Hai remains the sole supplier. New initiatives like LCD TV Source: Bloomberg.
EMS should start coming through in 2010, while FIH also could see a turnaround
in revenue momentum as handset orders recover and smartphone ODM business Performance
model takes shape. We expect further improvements in OP margins as SG&A 1M 3M 12M
expenses and depreciation peak out in 2H09 and 1H10, respectively, while Hon Absolute (%) 5.60 20.55 100.00
Hai’s earnings power should be helped by much lower tax rates in new facilities. Relative (%) 5.89 11.30 34.23
How much recovery is priced into the stock? Source: Bloomberg.

The margin recovery is now getting priced in, but revenue momentum should Company data
52-week range (NT$) 45.7-138.5
continue to surprise in 2010, in our view. In addition, operating leverage from Mkt cap. (NT$B) 1,132
FIH has also been underestimated by the market. Mkt cap. (US$B) 34.8
Avg daily value (US$MM) 135.0
Price target and key risks Avg daily volume (MM) 39.4
Our Jun-10 PT of NT$155 is based on 14x FY10E earnings. Our current target Shares O/S (MM) 8,579
multiple is at the low end of the stock’s historical trading multiple, given top-line Date of price 5-Nov-09
growth is not likely to return to the 30+% level. Key risks to our PT include Index: TWSE 7,417.46
Free float (%) 78
execution issues in new projects; and a delayed corporate IT spending cycle. Exchange rate 32.5
Source: Bloomberg.
Bloomberg: 2317.TT; Reuters: 2317.TW
NT$ in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Sales 1,950 1,951 2,392 2,742 ROE (%) 15 17 17 17
Operating profit 73.3 83.9 111.4 126.9 Core ROIC (%) 14 15 18 19
EBITDA 106.0 124.9 156.7 174.9 DPS (cash, NT$) 2.3 1.0 2.5 3.2
Pre-tax profit 72.6 85.9 114.0 130.1 Quarterly EPS (NT$) 1Q 2Q 3Q 4Q
Reported net profit 55.1 68.6 86.8 99.7 EPS (FY08) 1.93 1.43 2.12 1.09
MV of employee bonus 3.4 5.6 7.4 8.6 EPS (FY09E) 1.58 1.76 2.16 2.54
Adjusted net profit 55.1 68.6 86.8 99.7 EPS (FY10E) 2.08 2.25 2.68 3.11
New Taiwan GAAP EPS (NT$)* 6.57 8.05 10.12 11.62 sales growth 15% 0% 23% 15%
New Taiwan GAAP P/E (x) 20 16 13 11 EPS growth -5% 22% 26% 15%
P/BV (x) 3.1 2.5 2.2 1.9 Norm. OP growth -18% 16% 34% 14%
YE BPS (NT$) 42 52 60 68
Net debt (11) net cash net cash net cash Jun-10 PT NT$ 155
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

174
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Hon Hai Precision: Summary of financials


NT$ in millions, year-end December
Income statement Ratio Analysis
FY08 FY09E FY10E FY11E % FY08 FY09E FY10E FY11E
Revenues 1,950.5 1,950.6 2,392.4 2,742.0 Gross Margin 8.8 9.2 9.0 8.7
Cost of Goods Sold 1,779.7 1,771.8 2,177.5 2,502.9 EBITDA margin 5.4 6.4 6.6 6.4
Gross Profit 170.8 178.8 214.9 239.2 Operating margin 3.8 4.3 4.7 4.6
R&D Expenses 23.7 23.6 24.4 26.3 Net profit margin 2.8 3.5 3.6 3.6
SG&A Expenses 71.2 67.4 73.2 79.0 R&D/sales 1.2 1.2 1.0 1.0
Operating Profit (EBIT) 73.3 83.9 111.4 126.9 SG&A/Sales 3.6 3.5 3.1 2.9
EBITDA 106.0 124.9 156.7 174.9
Interest Income 4.7 0.7 0.9 1.1 Sales growth 14.6 0.0 22.6 14.6
Interest Expense -6.7 -2.8 -2.9 -3.0 EBIT growth (21.6) 14.4 32.8 13.9
Investment Income (Exp.) 2.0 1.6 1.7 1.8 Net profit growth (29.0) 24.5 26.4 14.9
Other Non-Op Income (Exp.) -0.7 2.5 2.9 3.3 EPS (Reported) growth (30.3) 22.5 25.7 14.8
Earnings before tax 72.6 85.9 114.0 130.1 EPS (TW GAAP) growth (5.4) 22.5 25.7 14.8
Tax -15.9 -14.8 -21.1 -22.8 Interest coverage (x) 54 61 78 91
Net Income (Reported) 55.1 68.6 86.8 99.7 Net debt to total capital 2.2 -2.8 -6.6 -11.2
Net Income (Adjusted) 55.1 68.6 86.8 99.7 Net debt to equity 2.9 -3.6 -8.3 -13.6

EPS (Reported, NT$) 6.57 8.05 10.12 11.62 Asset Turnover 222 192 201 205
EPS (Adjusted, NT$) 6.57 8.05 10.12 11.62 Working Capital Turns (X) 14.3 11.1 9.7 8.9
BPS (NT$) 42.36 52.45 60.16 68.47 ROE 15.5 16.9 16.8 16.9
DPS (NT$) 2.27 0.96 2.52 3.19 ROIC 11.9 13.6 13.8 14.2
Shares Outstanding (B) 8.39 8.53 8.58 8.58 ROIC (net of cash) 14.2 16.0 17.3 18.3
Balance sheet Cash flow statement
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Cash and Cash Equivalents 100.0 129.6 168.1 206.8 Net Income 55.1 68.6 86.8 99.7
Account Receivables 267.3 332.0 400.2 451.6 Depr. & Amortisation 32.7 41.0 45.3 48.0
Inventory 166.7 179.3 216.1 243.9 Change in working capital -0.3 -32.7 -24.7 -18.4
Total Other Current Assets 24.7 40.4 48.7 54.9 Other 1.6 2.5 6.1 7.6
Total Current Assets 558.7 681.2 833.0 957.3 Cash flow from operations 89.1 79.4 113.5 136.9

LT investments 35.0 55.6 79.3 103.1 Capex -84.1 -32.3 -34.6 -40.5
Net fixed assets 253.9 245.3 234.5 227.0 Disposal/ (purchase) 18.9 -23.6 -31.7 -31.8
Others 30.9 33.9 41.9 49.9 Cash flow from investing -65.2 -55.9 -66.3 -72.2
Total assets 878.6 1,016.0 1,188.8 1,337.2 Free cash flow 5.0 47.1 78.9 96.5

ST Debt 59.9 43.9 43.9 43.9 Equity raised/ (repaid) -3.0 29.2 1.0 0.2
Accounts Payable 266.1 325.5 394.1 446.2 Debt raised/ (repaid) -22.7 3.0 11.9 1.3
Other Current Liabilities 96.1 96.9 116.8 131.9 Other -22.2 -15.5 6.1 7.5
Total Current Liabilities 422.1 466.3 554.9 622.0 Dividends paid -20.4 -10.6 -27.8 -35.0
Cash flow from financing -68.3 6.0 -8.7 -26.0
Long Term Debt 50.6 69.6 81.6 82.9
Other Long Term Liabilities 44.7 30.1 36.3 43.9 Net change in cash -44.4 29.6 38.6 38.7
Total liabilities 517.5 566.1 672.7 748.7 Beginning cash 144.4 100.0 129.6 168.1
Shareholders' equity 361.2 450.0 516.1 588.5 Ending cash 100.0 129.6 168.1 206.8
Source: Company reports and J.P. Morgan estimates.

175
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Hyundai Motor Company Overweight


W102,000
Price Target: W140,000
www.hyundai.com

Company description South Korea


Hyundai Motor Company (HMC) is the largest auto maker in Korea, with a Automobile Manufacture
50% domestic market share. HMC owns 38% in KIA Motors, the second-
Wansun ParkAC
largest auto maker in Korea, together dominating over 80% of the Korean (82-2) 758-5722
market. wansun.c.park@jpmorgan.com
Post mortem J.P. Morgan Securities (Far East) Limited,
We believe market share gains achieved during the downturn will work as Seoul Branch
substantial leverage when demand normalizes in the US and Europe. Given
geographical revenue exposure and product mix towards less luxury, HMC is Price performance
W
favorably positioned to enjoy continued emerging market growth, in our 110,000
view. On the cost side, reduction in COGS could be most substantial among 70,000
leading auto makers as platform integration gains momentum. 30,000
Potential for earnings upgrades Oct-08 Feb-09 Jun-09 Oct-09
Management guidance for 2010 global shipment is 3.3 million, implying a HMC KOSPI
10% Y/Y growth, versus our assumption of 3.2 million, implying a 7% Y/Y Source: Bloomberg.
growth. Given high operating leverage, we estimate every 5% change creates
+/- 15% swing in operating profit. We do not expect domestic plant volume Performance
to surprise on the upside. However, if (1) normalization of the US auto 1M 3M 12M
demand takes place faster than expected, and (2) China market’s growth is Absolute (%) -1.0 10.4 86.1
further fueled by extension of tax incentives, our assumption could prove to Relative (%) -3.4 0.5 31.4
be conservative. Source: Bloomberg.
How much recovery is priced into the stock?
After a strong 2009, we expect a 9% Y/Y decline in 2010. We believe this Company data
52-wk range (Won) 35,750-118,000
potential pay-back in early 2010 is well known and partially priced in. On
the other hand, we have increased shipment growth outlook for most of other Mkt cap. (WB) 22,468
global regions. Especially, we believe structural margin recovery in its US Mkt cap. (US$MM) 19,045
business is not priced in and will drive the share price in 2010. Avg daily val (US$MM) 187.6
Price target and key risks Avg daily volume (MM) 2.1
Our Jun-10 base-case price target is based on 12x is W140,000. We apply a Shares O/S (MM) 220.3
10% premium to the mid-cycle P/E of 11x to derive our target multiple of Date of price 5-Nov-09
12x, given continued RP improvement and long-term value creation from the Index: KOSPI 1,552.24
US market. Key downside risks to our PT include: (1) short-term volatility in Free float (%) 62.9
FX; and (2) pay back in the domestic market in 1Q10. Exchange rate 1,179.7
Source: Bloomberg.
Bloomberg: 005380. KS; Reuters: 005380 KS
Won in billions, year-end December
FY08 FY09E FY10E FY11E
Sales 32,190 31,058 32,349 33,917
Net profit 1,448 2,989 3,257 3,474
EPS (Won) 5,325 10,993 11,979 12,776
DPS (Won) 1,000 1,000 1,050 1,100
Sales growth (%) 5.6 -3.5 4.2 4.8
Net profit growth (%) -13.9 106.4 9.0 6.7
ROE (%) 8.5 15.6 14.7 13.8
P/E (x) 19.2 9.3 8.5 8.0
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

176
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Hyundai Motor Company: Summary of financials


Profit and loss statement Cash flow statement
Won in billions, year-end December Won in billions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenues 32,190 31,058 32,349 33,917 Operating profit 1,877 2,113 2,194 2,361
% change Y/Y 5.6 (3.5) 4.2 4.8 Depreciation & amortization 1,344 1,356 1,387 1,424
COGS 25,059 24,059 24,987 26,144 Change in working capital -1,059 11 354 75
Gross Profit 7,131 6,799 7,362 7,773 Taxes 347 821 844 923
Gross Margin (%) 22.2 21.9 22.8 22.9 Cash flow from operations 2,024 3,248 3,601 3,616
EBITDA 3,221 3,470 3,582 3,785
Operating Profit 1,877 2,113 2,194 2,361 Capex -1,495 -1,677 -1,845 -2,029
% change Y/Y 3.4 12.6 3.8 7.6 Disposal/ (purchase) -841 -1,161 -400 -390
Operating Margin (%) 5.8 6.8 6.8 7.0 Net Interest 203 57 109 152
Net Interest 203 57 109 152 Free cash flow -312 409 1,356 1,197
Net equity method gains 21 1,276 1,816 1,830
Recurring Profit 1,795 3,810 4,101 4,397 Equity raised/ (repaid) 0 0 0 0
Tax 347 821 844 923 Debt raised/ (repaid) 1,105 -304 -3 -3
as % of recurring profit 19.3 21.5 20.6 21.0
Net Income (Reported) 1,448 2,989 3,257 3,474 Dividends paid -276 -236 -292 -292
% change Y/Y (13.9) 106.4 9.0 6.7 Beginning cash 4,496 5,013 4,883 5,945
Shares Outstanding (MM) 285 285 285 285 Ending cash 5,013 4,883 5,945 6,847
EPS (reported) (Won) 5,325 10,993 11,979 12,776 DPS (Won) 1,000 1,000 1,050 1,100
Source: Company, J.P. Morgan estimates. Source: Company, J.P. Morgan estimates.

Balance sheet Ratio analysis


Won in billions, year-end December %, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Cash and cash equivalents 5,013 4,883 5,945 6,847 Gross margin (%) 22.2 21.9 22.8 22.9
Accounts receivable 2,513 2,334 2,330 2,465 Operating margin (%) 5.8 6.8 6.8 7.0
Inventories 1,809 1,729 1,771 1,873 Net profit margin (%) 4.5 9.6 10.1 10.2
Others 965 864 932 986 SG&A/sales (%) 16.3 15.1 16.0 16.0
Current assets 10,301 9,810 10,978 12,171
Sales growth (%) 5.6 (3.5) 4.2 4.8
LT investments 10,507 12,851 15,067 17,287 Operating profit growth (%) 3.4 12.6 3.8 7.6
Net fixed assets 11,360 11,548 11,627 11,799 Net profit growth (%) (13.9) 106.4 9.0 6.7
Total assets 32,168 34,209 37,672 41,257
Interest coverage (x) (9.3) (36.9) (20.1) (15.6)
ST loans 1,688 1,187 1,187 1,187 Net debt to total capital (%) (11.7) (11.1) (14.9) (17.2)
Payables 2,444 2,420 2,610 2,760 Net debt to equity (%) (10.5) (10.0) (13.0) (14.7)
Others 3,784 3,457 3,728 3,943 Sales/assets (x) 1.0 0.9 0.9 0.8
Total current liabilities 7,915 7,064 7,525 7,891 Assets/equity (x) 1.6 1.5 1.5 1.4
ROE (%) 8.5 15.6 14.7 13.8
Long term debt 1,263 1,460 1,457 1,454 ROCE (%) 12.8 12.4 11.4 11.0
Other liabilities 3,337 3,219 3,259 3,299 Source: Company, J.P. Morgan estimates.
Total liabilities 12,515 11,744 12,242 12,644
Shareholders' equity 19,652 22,465 25,430 28,613
BVPS (Won) 94,103 107,572 121,771 137,008
Source: Company, J.P. Morgan estimates.

177
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

ICICI Bank Overweight


Rs845

www.icicibank.com

Company description India


ICICI Bank is the second-largest bank in India with a market share of ~10%. Banks
It enjoys a leading market share in most retail loan segments. After the ~38%
Sunil GargAC
credit CAGR over FY04-08, ICICI is currently in a consolidation phase with (852) 2800-8518
a larger focus on profitability than growth. sunil.garg@jpmorgan.com
J.P. Morgan Securities (Asia Pacific)
Post mortem Limited
ICICI has rightly over the past six quarters slowed down on growth with
greater emphasis on profitability. ICICI has been able to show considerable Price performance
success in building a stronger liability franchise (~1,000bp increase in 300
CASA), bringing costs under control (down ~30%) and stabilize asset 250 ICICI Sensex
200
quality. With improving CASA, lower operating costs and a lesser riskier 150
asset portfolio, core ROAs are expected to show a significant improvement. 100
50
0
Potential for earnings upgrades

Feb-09

Aug-09
Nov-08

May-09

Nov-09
With ICICI continuing with its cautious approach on credit growth, we
believe stabilizing asset quality, lower slippages and credit costs could lead Source: Bloomberg.
to potential earnings upgrade. We expect profitability for its international
subsidiaries to improve as global economy recovers. Also, robust capital Performance
markets could provide upside potential through the listing of the insurance 1M 3M 12M
arm and strong earnings from the flow business. Absolute (%) -7 9 87
Relative (%) -3 8 29
How much recovery is priced into the stock?
Source: Bloomberg.
ICICI has recovered 3x from its March lows (0.5x one-year forward book-
distress case scenario) and is currently trading at ~1.7x 1-year forward book.
Company data
We believe the stock is currently pricing in an improving economic scenario
52-week range (Rs) 252-971
but a revival in credit demand and lower slippages earnings can surprise
Mkt cap. (RsMM) 904,710
positively.
Mkt cap. (US$MM) 19,249
Avg daily value (US$MM) 105.1
Recommendation and key risks
Avg daily volume (MM) 7,200
We have an Overweight recommendation on ICICI with significant
Shares O/S (MM) 1113.7
improvement expected in core ROAs. Key risks to our recommendation are
Date of price 5-Nov-09
slower-than-expected credit growth revival and higher-than-expected
Free float (%) 96
slippages.
Exchange rate Rs/US$ 47
Source: Bloomberg, J.P. Morgan estimates.

Bloomberg: ICICIBC IN; Reuters: ICB.BO


Rs in millions, year-end March
FY05 FY06 FY07 FY08 FY09
Net profit 20,052 25,401 31,100 41,581 37,581
Basic EPS (rep'd) (Rs) 29.6 31.2 34.8 41.3 33.8
Basic EPS growth (%) 11.3 5.4 11.3 18.9 -18.3
P/E (basic) (x) 27.7 26.3 23.6 19.8 24.3
BVPS (Rs) 170.3 249.6 270.4 417.5 444.9
P/BV (x) 4.8 3.3 3.0 2.0 1.8
ROE (%) 19.5 14.6 13.4 11.7 7.8
Tier 1 ratio (%) 7.6 9.2 7.4 11.8 11.8
DPS (Rs) 8.5 8.5 10.0 11.0 11.0
Dividend yield (%) 1 1 1 1 1
Source: Company, Bloomberg, J.P. Morgan estimates. Share price as of 5 November, 2009.

178
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

ICICI Bank: Summary of financials

Source: Company, J.P. Morgan estimates.

179
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Info Edge India Overweight


Rs703
Price Target: Rs900
www.infoedge.in

Company description India


Info Edge operates India’s leading online recruitment and classifieds portal Internet
(Naukri.com) launched in 1997 and forms the backbone of Info Edge’s Nishit JasaniAC
business. It also generates revenue through a matrimony portal (91-22) 6157-3578
(Jeevansathi.com) and a property portal (99acres.com)—which are still in the nsihit.x.jasani@jpmorgan.com
development phase. It also has recently launched an education portal, J.P. Morgan India Private Limited
Shiksha.com.
Post mortem Price performance
120 Info Edge Sensex (rebased)
Info Edge’s revenue growth is leveraged to the hiring cycle in Indian IT and 100

infrastructure sectors. The slowdown in the domestic economy impacted the 80


60
revenue growth over the past year as companies reduced hiring levels. 40
20
0
Potential for earnings upgrades

Oct-08

Dec-08

Oct-09
Jan-08
Feb-08
Mar-08
Apr-08

Jun-08
Jul-08
Aug-08
Sep-08

Jan-09
Feb-09
Mar-09
Apr-09

Jun-09
Jul-09
Aug-09
Sep-09
May-08

Nov-08

May-09

Nov-09
We believe Info Edge is a late-cycle play on the economic recovery in India.
We expect revenue growth to be driven by a recovery in domestic economy Source: Bloomberg.
and Indian IT companies looking at hiring significant number of people over
the next one-two years. With higher operating leverage and lower losses in Performance
other segments, earnings growth recovery should be sharper. Moreover, with 1M 3M 12M
competition potentially more impacted over the past two-three quarters, we Absolute (%) 3.4 13.1 74.2
believe Info Edge can gain market share as the recruitment segment recovers. Relative (%) 8.5 11.9 9.7
How much recovery is priced into the stock? Source: Bloomberg.
We estimate revenue/EPS CAGR of 27%/28% in FY10-12. We expect the
stock price to track the earnings recovery over the next 9-12 months, driving Company data
our positive view on the stock. 52-week range (Rs) 376-813
Price target and key risks Mkt cap. (RsB) 19.2
Our Jun-10 price target of Rs900 is based on 30x one-year forward Jun-10E Mkt cap. (US$MM) 408.0
EPS—in line with the historical trading range. While valuations are not Avg daily value (US$MM) 0.3
cheap, we note that global internet stocks trade at high valuations due to Avg daily volume (MM) 0.02
inherent operating leverage in the business model. Key downside risks to our Shares O/S (MM) 27
price target are a decline in the overall economic recovery leading to lower Date of price 5-11-09
recruitment than expected and a drop in market share due to increased Index: Sensex 16063.9
competition across sites. Free float (%) 46
Exchange rate Rs47.0/US$
Source: Bloomberg,

Bloomberg: INFOE IN; Reuters: INED.BO


Rs in millions, year-end March
FY09 FY10E FY11E FY12E
Sales 2,452 2,268 2,866 3,645
Net profit 597 575 749 944
EPS (Rs) 21.9 21.1 27.4 34.6
FD EPS (Rs) 21.9 21.1 27.4 34.6
DPS (Rs) 0.0 0.0 0.0 0.0
Sales growth (%) 12.0 -7.5 26.4 27.2
Net profit growth (%) 7.6 -3.7 30.3 26.0
EPS growth (%) 7.6 -3.7 30.3 26.0
ROE (%) 20.1 16.2 17.7 18.6
P/E (x) 32.2 33.4 25.6 20.3
FD P/E (x) 32.2 33.4 25.6 20.3
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

180
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Info Edge India: Summary of financials


Profit and loss statement Cash flow statement
Rs in millions, year-end March Rs in millions, year-end March
FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E
Revenue 2,452 2,268 2,866 3,645 EBIT 598 527 776 983
% change Y/Y 12.0 -7.5 26.4 27.2 Depreciation & amortization 71 70 91 111
Gross margin (%) n.m. n.m. n.m. n.m. Change in working capital -297 -102 84 255
EBITDA 669 597 867 1094 Taxes 270 271 329 414
% change Y/Y 5.5 -10.8 45.2 26.2 Cash flow from operations 371 543 924 1,309
EBITDA margin (%) 27.3 26.3 30.2 30.0 Capex -74 -67 -100 -100
EBIT 598 527 776 983 Disposal/(purchase) 371 543 924 1,309
% change Y/Y 3.3 -12.0 47.3 26.7 Net interest (17) 135 302 375
EBIT margin (%) 24.4 23.2 27.1 27.0 Free cash flow 297 476 824 1,209
Net interest (17) 135 302 375 Equity raised/(repaid) 0 0 0 0
Earnings before tax 867 845 1,078 1,358 Debt raised/(repaid) -1 2 0 0
% change Y/Y 10.3 -2.5 27.5 26.0 Other -11 4 0 0
Tax 270 271 329 414 Dividends 0 0 0 0
as % of EBT 31.2 32.0 30.5 30.5 Beginning cash 3,119 3,373 3,884 4,707
Net income (reported) 597 575 749 944 Ending cash 3,373 3,884 4,707 5,917
% change Y/Y 7.6 -3.7 30.3 26.0 DPS (Rs) 0.0 0.0 0.0 0.0
Shares O/S (MM) 27 27 27 27 Source: Company, J.P. Morgan estimates.
EPS (reported) (Rs) 21.9 21.1 27.4 34.6
Source: Company, J.P. Morgan estimates.

Ratio analysis
Rs in millions, year-end March
Balance sheet
FY09 FY10E FY11E FY12E
Rs in millions, year-end March EBITDA margin 27.3 26.3 30.2 30.0
FY09 FY10E FY11E FY12E Operating margin 24.4 23.2 27.1 27.0
Cash and cash equivalents 3,373 3,884 4,707 5,917 Net profit margin 24.3 25.3 26.1 25.9
Accounts receivable 38 40 53 65 SG&A/sales 17.7 17.9 17.3 17.0
Inventories 0 0 0 0 Sales growth 12.0 -7.5 26.4 27.2
Others 185 298 380 461 Net profit growth 7.6 -3.7 30.3 26.0
Current assets 3,596 4,222 5,140 6,442 Sales per share growth 12.0 -7.5 26.4 27.2
LT investments 57 16 16 16 EPS growth 7.6 -3.7 30.3 26.0
Net fixed assets 384 381 390 379 Interest coverage (x) 34.7 52.0 68.3 86.5
Total assets 4,037 4,620 5,547 6,837 Net debt to total capital n.m. n.m. n.m. n.m.
Liabilities Net debt to equity n.m. n.m. n.m. n.m.
ST loans 0 0 0 0 Sales/assets 61.0 49.4 52.0 53.5
Payables 61 61 80 98 EBIT margin 24.4 23.2 27.1 27.0
Others 705 708 867 1,195 ROCE 14.2 10.3 13.1 13.8
Total current liabilities 766 769 947 1,294 Assets/equity (x) 1.2 1.2 1.2 1.2
Long-term debt 3 5 5 5 ROI n.m. n.m. n.m. n.m.
Other liabilities 0 0 0 0 ROE 20.1 16.2 17.7 18.6
Total liabilities 769 773 952 1,298 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 3,267 3,846 4,595 5,539
BVPS (Rs) 119.7 140.9 168.4 202.9
Source: Company, J.P. Morgan estimates.

181
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Infosys Technologies Overweight


Rs2,222
Price Target: Rs2,550
www.infosys.com

Company description India


Infosys is the bellwether stock in the Indian IT Services space with a revenue IT Services
of US$4.7 billion in FY09. The company provides an array of services Manoj SinglaAC
including application development and maintenance, package (+91-22) 6157-3587
implementation, testing, BPO and consulting to 550+ clients. Infosys has manoj.singla@jpmorgan.com
100,000+ employees and provides services across several verticals including J.P. Morgan India Private Limited
the financial, manufacturing, telecom and retail sectors.
Price performance
Post mortem 150 Infosy s Sensex (rebased)
Infosys has shown the anti-cyclical nature of the offshore industry over the 100
past year with revenue still holding on despite the sharp fall in technology
50
spending globally. In fact, there has been an increased move towards
0
offshoring due to lower IT budgets and the pressure on CIOs to cut costs.

Oct-08

Dec-08

Oct-09
Jan-08
Feb-08
Mar-08
Apr-08

Jun-08
Jul-08
Aug-08
Sep-08

Jan-09
Feb-09
Mar-09
Apr-09

Jun-09
Jul-09
Aug-09
Sep-09
May-08

Nov-08

May-09

Nov-09
Stability in global economies combined with the improved outlook of the
financial sector has started to help Infosys and we expect growth to Source: Bloomberg.
accelerate in 2010.
Performance
Potential for earnings upgrades 1M 3M 12M
Consensus FY10/11 EPS estimates for Infosys have moved up from Absolute (%) -4.4 5.9 68.1
~Rs98/105 in the beginning of the year to ~Rs104/115 currently. While Relative (%) 0.4 4.8 5.9
FY10 estimates might not increase from here, we expect further ~5-10% Source: Bloomberg.
upgrades for FY11/12.
Company data
How much recovery is priced into the stock? 52-week range (Rs) 1,065-2,421
While consensus estimates would move up further, we think valuations at Mkt cap. (RsB) 1,272.1
FY11E P/E of 18x has already discounted most of the upside. Further, we Mkt cap. (US$B) 27.0
believe that it will be difficult for Infosys to grow in excess of 20% given the Avg daily value (US$MM) 72.35
huge base and our view that IT services spending growth will lag hardware Avg daily volume (MM) 1.8
and software in 2010. Shares O/S (MM) 573
Date of price 5-11-09
Price target and key risks Index: Sensex 16063.9
Our Jun-10 price target of Rs2,550 is based on a one-year forward P/E Free float (%) 84
multiple of 19x—in line with target P/E multiples for TCS/Wipro and higher Exchange rate Rs47.8/US$
than the historical average for the past four-five years. Key risks to our price Source: Bloomberg.
target are rupee/US$ appreciation and protectionism.
Bloomberg: INFO IN; Reuters: INFY.BO
Rs in millions, year-end March
FY09 FY10E FY11E FY12E
Sales 216,823 224,215 265,974 321,417
Net profit 58,411 61,256 71,188 83,844
EPS (Rs) 102.0 107.0 124.3 146.4
FD EPS (Rs) 102.0 107.0 124.3 146.4
DPS (Rs) 23.5 30.0 30.0 30.0
Sales growth (%) 29.9 3.4 18.6 20.8
Net profit growth (%) 30.1 4.9 16.2 17.8
EPS growth (%) 29.8 4.8 16.2 17.8
ROE (%) 32.6 29.9 28.7 27.4
P/E (x) 21.8 20.8 17.9 15.2
FD P/E (x) 21.8 20.8 17.9 15.2
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

182
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Infosys Technologies: Summary of financials


Profit and loss statement Cash flow statement
Rs in millions, year-end March Rs in millions, year-end March
FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E
Revenue 216,823 224,215 265,974 321,417 EBIT 63,853 66,440 78,308 91,257
% change Y/Y 29.9 3.4 18.6 20.8 Depreciation & amortization 7,610 8,911 9,723 11,710
Gross margin (%) 42.2 42.0 41.4 40.2 Change in working capital -3,050 -14,495 -14,040 -12,430
EBITDA 71463 75350 88031 102967 Taxes 10,183 15,533 20,079 23,648
% change Y/Y 37.6 5.4 16.8 17.0 Cash flow from operations 62,970 55,672 66,870 83,124
EBITDA margin (%) 33.0 33.6 33.1 32.0 Capex -13,372 -3,731 -11,040 -11,040
EBIT 63,853 66,440 78,308 91,257 Disposal/(purchase) 62,970 55,672 66,870 83,124
% change Y/Y 38.9 4.1 17.9 16.5 Net interest 4,791 9,156 9,368 10,457
EBIT margin (%) 29.4 29.6 29.4 28.4 Free cash flow 49,598 51,941 55,830 72,084
Net interest 4,791 9,156 9,368 10,457 Equity raised/(repaid) -9,817 -13,085 -2,920 -2,920
Earnings before tax 68,594 76,789 91,266 107,492 Debt raised/(repaid) 0 0 0 0
% change Y/Y 29.4 11.9 18.9 17.8 Other 2,349 -214 0 0
Tax 10,183 15,533 20,079 23,648 Dividends -13,147 -17,447 -17,178 -17,178
as % of EBT 14.8 20.2 22.0 22.0 Beginning cash 83,082 86,723 113,001 143,288
Net income (reported) 58,411 61,256 71,188 83,844 Ending cash 109,910 129,886 164,698 215,765
% change Y/Y 30.1 4.9 16.2 17.8 DPS (Rs) 23.5 30.0 30.0 30.0
Shares O/S (MM) 573 573 573 573 Source: Company, J.P. Morgan estimates.
EPS (reported) (INR) 102.0 107.0 124.3 146.4
Source: Company, J.P. Morgan estimates.

Ratio analysis
Rs in millions, year-end March
Balance sheet
FY09 FY10E FY11E FY12E
Rs in millions, year-end March EBITDA margin 33.0 33.6 33.1 32.0
FY09 FY10E FY11E FY12E Operating margin 29.4 29.6 29.4 28.4
Cash and cash equivalents 109,910 129,886 164,698 215,765 Net profit margin 26.9 27.3 26.8 26.1
Accounts receivable 36,721 36,505 45,949 54,313 SG&A/sales 12.8 12.4 12.0 11.8
Inventories 0 0 0 0 Sales growth 29.9 3.4 18.6 20.8
Others 11,615 22,973 28,916 34,179 Net profit growth 30.1 4.9 16.2 17.8
Current assets 158,246 189,363 239,564 304,257 Sales per share growth 29.7 3.4 18.6 20.8
LT investments 0 460 1,380 2,300 EPS growth 29.8 4.8 16.2 17.8
Net fixed assets 46,662 41,483 42,800 42,130 Interest coverage (x) n.m. n.m. n.m. n.m.
Total assets 221,951 249,108 301,546 366,489 Net debt to total capital n.m. n.m. n.m. n.m.
Liabilities Net debt to equity n.m. n.m. n.m. n.m.
ST loans 0 0 0 0 Sales/assets 97.7 90.0 88.2 87.7
Payables 254 102 129 157 EBIT margin 29.4 29.6 29.4 28.4
Others 26,983 23,781 25,102 26,271 ROCE 30.7 26.3 25.0 23.8
Total current liabilities 27,237 23,883 25,231 26,428 Assets/equity (x) 1.2 1.1 1.1 1.1
Long-term debt 0 0 0 0 ROI 54.4 49.2 49.5 50.4
Other liabilities 2,790 2,576 2,576 2,576 ROE 32.6 29.9 28.7 27.4
Total liabilities 30,026 26,459 27,807 29,004 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 191,924 222,649 273,738 337,485
BVPS (INR) 335.2 388.8 478.1 589.4
Source: Company, J.P. Morgan estimates.

183
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

JD Group Overweight
Price: 4,570c
Price Target: 5,253c
www.jdgroup.co.za
Company description South Africa
JD Group is a credit-based furniture retailer with eight chains in Southern Speciality Retailing
Africa and one in Poland. Sean HolmesAC
(27-11) 507 0373
Post mortem sean.x.holmes@jpmorgan.com
a) Sharp earnings recovery off a depressed base: We expect the retailer’s J.P. Morgan Equities Ltd.
core operating margin (traditional retail and financial services) to come in at
c7% FY09E. This is well below the long-run average (14 years) of c14% and Price Performance
well off peak levels (c21%). b) Significant value unlock potential: We see
opportunity for group RoE to improve from c10% FY08 to c30% over the 4,500

medium term, driven by: i) margin recovery through stronger sales and lower c
3,500
bad debts, and ii) improved capital management in financial services.
2,500
Potential for earnings upgrades
Nov-08 Feb-09 May-09 Aug-09 Nov-09
We see lower bad debts as a key earnings driver over the medium term –
normalising to a bad debt ratio of c12% (from c23 H1 09). Source: Bloomberg

How much recovery is priced into the stock? Performance


1M 3M 12M
The share is priced on a 12m fwd P/E of 6.9x (33% discount to its historical
Absolute (%) 3.3 6.3 51.8
rating), and at a 40% discount to the clothing retailers at 11.5x. In our view,
Source: Bloomberg
its 12-month P/NAV rating of 1.3x is also not demanding; trading well below
its historical average of 2.0x.
Company data
Price(c) 4,570
Price target and key risks Date of Price 23-Nov-09
Our May-10 PT of 5,253c is based on our SOTP P/E-based valuation. Risks Price Target (c) 5,253
Price Target End Date 31-May-10
include: sharper slowdown in volume growth and higher bad debts; stronger 52-week Range (c) 5,020 – 2,600
volume growth and better than expected control over costs; and corporate Mkt Cap (Rbn) 8.23
action which could potentially unlock significant value. Shares O/S (mn) 180
Source: Bloomberg, J.P. Morgan

Bloomberg: JDG SJ; Reuters: JDGJ.J


Rand millions, year-end Aug
FY08 FY09E FY10E FY11E
Sales 12,610 12,643 13,312 14,587
Net profit 514 192 986 1,283
FD EPS (SAcps) 298.27 116.47 597.06 776.84
DPS (SAcps) 152.00 67.67 302.40 393.45
Sales growth (%) -2.4 0.3 5.3 9.6
Net profit growth (%) -53.8 -62.6 412.6 30.1
EPS growth (%) -51.1 61.0 412.6 30.1
ROE (%) 10.4 4.0 18.8 21.8
FD P/E (x) 15.3 39.2 7.7 5.9
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

184
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

JD Group: Summary of Financials


Income Statement Cash Flow Statement
R in millions, year end Aug FY07 FY08 FY09E FY10E FY11E R in millions, year end Aug FY07 FY08 FY09E FY10E FY11E

Sales 12,914 12,610 12,643 13,312 14,587 Cash flow from operating activities 715 1,253 136 555 723
% YOY Change 8.2% (2.4%) 0.3% 5.3% 9.6% Cash flow from investing activities - - - - -
Revenue - - - - - Cash flow from financing activities - - - - -
% YOY Change - - - - - Net increase / (decrease) in cash - - - - -
Operating Costs - - - - - Foreign exchange differences - - - - -
% YOY Change - - - - - Cash at beginning of year - - - - -
Bad Debts - - - - - Cash at end of year - - - - -
% YOY Change - - - - -
Operating Profit 1,591 797 871 1,493 1,897 Ratio Analysis
% YOY Change -21.4% -49.9% 9.3% 71.4% 27.1%
Taxation (398) (215) (544) (442) (587) Per Share Data
Effective Tax rate 26.3% 29.5% 71.9% 30.5% 31.0% Diluted HEPS (cps) 609.80 298.27 116.47 597.06 776.84
Net Profit after tax 1,113 514 192 986 1,283 % YOY Change (24.0%) (51.1%) (61.0%) 412.6% 30.1%
% YOY Change (23.6%) (53.8%) (62.6%) 412.6% 30.1% DPS (cps) 303.00 152.00 67.69 302.40 393.45
Headline Earnings - - - - - % YOY Change - - - - -
% YOY Change - - - - - Dividend cover - - - - -
NAV per share (cps) 2,838.2 2,834.5 3,001.8 3,392.4 3,802.0
Balance sheet
R in millions, year end Aug FY07 FY08 FY09E FY10E FY11E Profitability
GP Margin - - - - -
ASSETS Operating Margin - - - - -
Total Non current assets - - - - - Operating costs/Revenue - - - - -
Inventory - - - - -
% YOY Change - - - - - Trading Densities
Trade Debtors - - - - - Revenue per sqm - - - - -
% YOY Change - - - - - Operating profit per sqm - - - - -
Other current assets - - - - -
Cash and Cash equivalents 975 1,135 1,095 1,349 1,472 Return Ratios
Total Current assets - - - - - ROE 20.9% 10.4% 4.0% 18.8% 21.8%
Total Assets 8,891 8,673 9,188 10,290 11,489 ROA 11.7% 5.9% 2.2% 10.1% 11.8%
ROIC 35.2% 18.9% 25.8% 29.8% 25.8%
EQUITY
Ordinary Shareholders Equity 5,048 4,813 4,913 5,553 6,223 Capital Management
Minority Interest - - 71 93 117 Net interest bearing debt/Equity - - - - -
Total Equity 5,048 4,813 4,984 5,646 6,340 Net interest bearing debt/EBIT - - - - -

Interest bearing liabilities - - - - - Credit Management


Other non current liabilities - - - - - Total bad debts/Avg gross debtors - - - - -
Total non current liabilities - - - - -
Liquidity
Trade accounts payable - - - - - Current Assets : Current Liabilities - - - - -
Other current liabilities - - - - - Current Assets less Inventory : Current Liabilities - - - - -
Total current liabilities - - - - -
Total Liabilities 3,843 3,860 4,204 4,645 5,149

Source: Company reports and J.P. Morgan estimates.

185
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Land & Houses Overweight


Price: Bt6.30
Price Target: Bt8.00
www.lh.co.th

Company description Thailand


Land & Houses (LH) is the largest residential developer in Thailand. LH has Property
a pre-built single detached housing (SDH) model, and a very broad product Anne JirajariyavechAC
range, from middle to upper end of the market. It has the largest share in the (66-2) 684-2684
single-detached housing market and a significant presence in the townhouse anne.x.jirajariyavech@jpmorgan.com
market. Revenue from developing condominiums is still small relative to its JPMorgan Securities (Thailand) Limited
peers, but is set to rise.
Price performance
8
Post mortem
Following the blow-out in global financial market in late FY08, consumer Bt
5
confidence slumped and access to bank credit tightened, causing a sharp cut-
back in new property supply and demand. Hence, leading developers, such as 2
Nov-08 Feb-09 May-09 Aug-09 Nov-09
LH, have gained market share. With improving demand, driven by low LHf.BK share price (Bt)
deposit returns, low mortgage rates, and improved availability of mortgages, SET (rebased)

pricing power has improved. Further, costs are falling as high priced Source: Bloomberg.

materials inventory is depleted, boosting profit margins. With large banks,


Performance
such as SCB, continuing to favor LH for both development and mortgage
1M 3M 12M
credits, market position is likely to strengthen in 2010.
Absolute (%) -12.5 -3.1 58.3
Potential for earnings upgrades Relative (%) -7.4 -9.6 9.2
Short lead time of the pre-built model and a lengthening launch pipeline Source: Bloomberg.

suggests that LH will be able to generate additional revenue upside in


Company data
2010/11, while a changing higher product mix should boost margin.
52-week range (Bt) 2.56-7.75
Financial leverage to higher interest costs is low given a 49% gearing ratio. Mkt cap. (BtMM) 63,163
Mkt cap. (US$MM) 1,892
How much recovery is priced into the stock? Avg daily value (US$MM) 8.1
LH trades on a mid-range P/E of 17.2x, with an understated E, in our view. Avg daily volume (MM) 46.9
Shares O/S (MM) 10,026
Historically, LH has traded up to 26x-30x in previous recoveries.
Date of price 5-Nov-09
Index: SET 682
Price target and key risks Free float (%) 51
Our Dec-10 PT of Bt8 is based on 21.7x FY10E EPS. The target P/E is based Exchange rate 33.38
on the historical P/E average of LH during the three-year period from FY06- Source: Bloomberg.
08. Key risks to our PT include consumer confidence, volatility in
construction cost, and the job market.
Bloomberg: LH TB; Reuters: LHf.BK
Bt in millions, year-end December
FY08 FY09E FY10E FY11E
Revenue 15,410 16,910 17,535 20,656
Net profit 3,428 3,567 3,671 4,383
EPS (Bt) 0.34 0.36 0.37 0.44
DPS (Bt) 0.34 0.36 0.37 0.44
Revenue growth (%) -14.0 7.8 3.8 16.8
EPS growth (%) -6.1 4.1 2.9 19.4
ROCE (%) 11.2 11.9 12.5 15.3
ROE (%) 13.7 13.7 14.1 16.9
P/E (x) 18.4 17.7 17.2 14.4
P/BV (x) 2.4 2.4 2.4 2.4
Dividend Yield (%) 5.4 5.6 5.8 6.9
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009. We raised our PT to Bt9.5 on 13 Nov 2009.

186
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Land & Houses: Summary of financials


Bt in millions, year-end December
Profit and Loss Statement Cash flow statement
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E

Revenues 15,410 16,910 17,535 20,656 EBIT 4,490 5,003 5,122 6,063
% change Y/Y (14.0%) 7.8% 3.8% 16.8% Depr. & amortization 316 316 316 316
EBIT 4,490 5,003 5,122 6,063 Change in working capital -1,954 1,260 533 -347
% change Y/Y 3.2% 11.4% 2.4% 18.4% Tax -927 -1229 -1266 -1516
EBIT margin (%) 26.4% 27.3% 27.0% 27.3% Cash flow from operations 153 5,229 4,590 4,616
Net Interest - - - -
Earnings before tax 4,366 4,529 4,669 5,631 Capex -169 -206 -125 -194
% change Y/Y 6.2% 3.7% 3.1% 20.6% Disposal/(purchase) - - - -
Tax -927 -1,229 -1,266 -1,516 Net Interest - - - -
as % of EBT 110.1% 117.5% 116.5% 113.3% Free cash flow -15 5,023 4,465 4,422
Net income (reported) 3,428 3,567 3,671 4,383
% change Y/Y 8.5% 4.1% 2.9% 19.4% Equity raised/(repaid) 2,720 -1 0 0
Core net profit 3,506 3,367 3,471 4,183 Debt raised/(repaid) 2,339 0 -2,500 0
% change Y/Y 12.9% -4.0% 3.1% 20.5% Other 0 0 0 0
Shares outstanding 10,026 10,026 10,026 10,026 Dividends paid -3,946 -3,567 -3,671 -4,383
EPS (reported) (Bt) 0.34 0.36 0.37 0.44 Beginning cash 1,027 1,233 2,687 907
% change Y/Y (6.1%) 4.1% 2.9% 19.4% Ending cash 1,233 2,687 907 747
Core EPS (Bt) 0.35 0.34 0.35 0.42 DPS (Bt) 0.34 0.36 0.37 0.44
% change Y/Y -2.3% -4.0% 3.1% 20.5%

Balance sheet Ratio analysis


FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E

Cash and cash equivalents 1,233 2,687 907 747 EBIT Margin 26.4% 27.3% 27.0% 27.3%
Accounts receivable 10 10 10 10 Operating margin 26.91% 26.23% 25.90% 26.41%
Inventories 24,303 23,166 22,762 23,238 Net margin 20.2% 19.5% 19.3% 19.7%
Others 384 384 384 384
Current assets 25,931 26,247 24,063 24,380
Sales per share growth (25.6%) 7.8% 3.8% 16.8%
LT investments 11,335 11,335 11,335 11,335 Sales growth (14.0%) 7.8% 3.8% 16.8%
Net fixed assets 8,891 8,574 8,258 7,942 Net profit growth 8.5% 4.1% 2.9% 19.4%
Total Assets 46,156 46,156 43,656 43,656 EPS growth (6.1%) 4.1% 2.9% 19.4%

Liabilities Interest coverage (x) - - - -


ST Loans 4,433 4,433 4,433 4,433 Net debt to total capital 37.3% 32.0% 31.2% 32.6%
Payables 1,353 1,353 1,353 1,353 Net debt to equity 59.7% 51.8% 49.1% 49.7%
Others 1,324 1,324 1,324 1,324 Sales/assets 0.39 0.40 0.42 0.51
Total current liabilities 7,111 7,111 7,111 7,111 Assets/equity 1.78 1.76 1.58 1.56
Long-term debt 11,709 11,709 9,209 9,209 ROE 13.7% 13.7% 14.1% 16.9%
Other liabilities 197 197 197 197 ROCE 11.2% 11.9% 12.5% 15.3%
Total Liabilities 19,017 19,017 16,517 16,517
Minorities 1,183 1,183 1,183 1,183
Shareholders' equity 25,957 25,957 25,957 25,957
BVPS (Bt) 2.59 2.59 2.59 2.59
Source: Company reports and J.P. Morgan estimates.

187
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Larsen & Toubro Neutral


Rs1,542.3
Price Target: Rs1,675
www.larsentoubro.com

Company description India


L&T is a well established E&C company with businesses across verticals- Engineering
infrastructure, metals, power, hydrocarbons etc. It has a heavy engineering Shilpa KrishnanAC
and electricals business as well, and is capable of doing large turnkey (91-22) 6157-3580
projects from design to fabrication, construction and installation. L&T has shilpa.x.krishnan@jpmorgan.com
forayed into finance, IT and infrastructure development, and now views J.P. Morgan India Private Limited
these as core areas as well. L&T is professionally managed, with employee
trust owning 12.7% of the shares, rest is held by institutions. Management is Price performance
ambitious and has rightly identified growth areas from time to time, the most Rs
recent being power plant equipment in direct competition to BHEL. 2000

1500

1000
Post mortem 500

L&T has reported weak execution in 1H, although order inflows picked up 0
Oct-08 Dec-08 Mar-09 Jun-09 Aug-09 Oct-09
substantially over the last 3 months mainly on the back of large power
Source: Bloomberg.
equipment and hydrocarbon orders. Post downturn, L&T has raised
US$600MM equity funds for growth plans through the QIP and FCCB route.
Performance
Potential for earnings upgrades 1M 3M 12M
The current OB is strong and supports our revenue estimates through 1Q Absolute (%) (9) (0) 75
FY12. We, however, believe potential for near-term upgrades is limited. Relative (%) (2) 1 20
Reasons: A) asking rate of top-line growth, at ~18% for balance FY10, Source: Bloomberg.
already implies a sharp pick-up in execution and growth, especially the
hitherto slow-moving projects. B) E&C margins are already close to their all- Company data
time high. However, we expect the markets to react positively to any 52-week range (Rs) 557-1800
substantial pick-up in order flows, which should make it positive on FY12. Mkt cap. (RsB) 903
How much recovery is priced into the stock? Mkt cap. (US$B) 19.0
Order flows were exceptionally strong in 2Q FY10. Management has Avg daily value (US$MM) 73.9
generated expectations of continuation of these order flows—markets Avg daily volume (MM) 2.2
currently not believing it. Any signs of these big orders should be a key Shares O/S (MM) 598.9
driver. Date of price 5-Nov-09
Index: BSE 16,064
Price target and key risks Free float (%) 78%
Our SOTP-based Sep-10 PT at Rs1,675 (parent business: Rs1,413/share; Exchange rate (Rs/US$) 47.4
balance contributed by subsidiaries: Rs172/share; and investments:
Source: Bloomberg.
Rs90/share) implies 24.8x FY11E EPS. Although expensive at 22.3x FY11E,
continued order flow momentum will likely provide valuation support. Weak
inflows and execution are key risks to our PT.
Bloomberg: LT.IN; Reuters: LART.BO
Rs in millions, year-end March
FY09 FY10E FY11E FY12E
Net sales 404,799 446,638 523,403 633,367
Net profit 30,004 33,755 39,576 47,655
Consolidated EPS (Rs) 51.2 57.6 67.6 81.4
Net sales growth (%) 37.4 10.3 17.2 21.0
Net profit growth (%) 31.0 12.5 17.2 20.4
ROE (%) 28.3 29.1 17.9 18.0
ROCE (%) 16.1 15.2 15.3 16.9
P/E (x) 29.4 26.2 22.3 18.5
P/BV (x) 5.9 4.4 3.7 3.1
EV/EBITDA (x) 21.6 17.5 15.1 12.7
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

188
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Larsen & Toubro: Summary of financials


Profit and loss statement Cash flow statement
Rs in millions, year-end March Rs in millions, year-end March
FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E
Revenues 404,799 446,638 523,403 633,367 EBIT 42,303 54,467 61,969 76,702
% change Y/Y 37% 10% 17% 21% Depreciation & amortisation 7,283 8,444 9,182 9,982
EBITDA 49,587 62,912 71,151 86,684 Change in working capital (31,386) (39,937) (6,339) (48,872)
% change Y/Y 34% 27% 13% 22% Taxes (14,257) (16,987) (19,932) (23,219)
EBITDA Margin (%) 12% 14% 14% 14% Others 8,204 2,386 (6,433) (9,589)
EBIT 42,303 54,467 61,969 76,702 Cash flow from operations 12,148 8,374 38,448 5,003
% change Y/Y 32% 29% 14% 24%
EBIT Margin (%) 10% 12% 12% 12% Capex (77,120) (16,434) (5,939) (17,011)
Net Interest 1,134 (3,725) (2,462) (5,828) Investments (12,531) (18,998) (10,609) (11,227)
Earnings before tax 43,437 50,742 59,507 70,874 Free cash flow (77,504) (27,058) 21,900 (23,235)
% change Y/Y 28% 17% 17% 19%
Tax (14,257) (16,987) (19,932) (23,219) Equity raised/ (repaid) 587 0 0 0
as % of EBT 33% 33% 33% 33% Debt raised/ (repaid) 80,632 20,606 (19,548) 21,223
Net Income (pre Dividends paid (5,556) 0 0 0
exceptionals) 30,004 33,755 39,576 47,655
% change Y/Y 31% 13% 17% 20% Beginning cash 15,608 14,590 8,139 10,490
Shares Outstanding 585.7 585.7 585.7 585.7 Ending cash 14,590 8,143 10,495 8,484
EPS (pre exceptionals) (Rs) 51.2 57.6 67.6 81.4 Source: Company, J.P. Morgan estimates.
% change Y/Y 31% 13% 17% 20%
Source: Company, J.P. Morgan estimates.

Ratio analysis
%, year-end March
Balance sheet
FY09 FY10E FY11E FY12E
Rs in millions, year-end March EBITDA margin 12% 14% 14% 14%
FY09 FY10E FY11E FY12E
Cash and cash equivalents 14,590 8,139 10,490 8,478 Net profit margin 7% 8% 8% 8%
Net Current assets 116,935 156,872 163,210 212,082
Investments 68055 87053 97662 108889 Sales growth 37% 10% 17% 21%
Gross Fixed assets 186,388 202,822 208,761 225,772 Net profit growth 31% 13% 17% 20%
Acc. Depreciation 30,497 27,596 32,807 39,028 EPS growth 31% 13% 17% 20%
Net Block 155,891 175,226 175,954 186,745
Total assets 355,472 427,289 447,316 516,194 Net debt to total capital (ex-
Inv) 53% 51% 44% 42%
Liabilities
Secured Loans 104,949 134,794 110,380 125,764 Sales/assets 1.1 1.0 1.2 1.2
Unsecured Loans 98,751 89,899 94,765 100,604 Assets/equity 2.4 2.1 1.9 1.8
Deferred Tax Liability 1,308 921 921 921 ROE 28% 29% 18% 18%
Share holder's Funds 150,463 201,674 241,249 288,904 ROCE 16% 15% 15% 17%
Capital 1,171 1,171 1,171 1,171 Source: Company, J.P. Morgan estimates.
Reserves and Surplus 149,291 200,502 240,078 287,733
BVPS (Rs) 257 344 412 493
Source: Company, J.P. Morgan estimates.

189
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

LG Display Overweight
W29,650

www.lgdisplay.com Price Target: W40,000

Company description South Korea


LG Display Co., Ltd. Develops and manufactures digital display products. The Semiconductors
company’s products include thin film transistor-liquid crystal displays (TFT- JJ ParkAC
LCD) for notebook and desktop computer monitors, TVs, mobile phones, and (822) 758 5717
medical equipment. LG display provides its products mainly to overseas markets. jj.park@jpmorgan.com
Post mortem J.P. Morgan Securities (Far East) Ltd, Seoul
Comparative advantage in LED TV panel production: According to management Branch
estimates, LGD will complete the full product line-ups for LED TV, and aims to Liang-Chun LinAC
achieve higher LED TV panel proportion than the industry average for 2010E. (886-2) 2725 9863
Given our expectation on LED TV penetration rate of 15-20% for the industry as liang.c.lin@jpmorgan.com
a whole, the future growth outlook for LGD in emerging LED TV market looks J.P. Morgan Securities (Taiwan) Ltd
bright.
Marcus ShinAC
Potential for earnings upgrades
(822) 758 5712
The magnitude of panel price decline would be rather moderate: Given the marcus.j.shin@jpmorgan.com
inventory adjustment from downstream customers, demand is likely to show a
J.P. Morgan Securities (Far East) Ltd, Seoul
continuous downward trend in 4Q09, which would result in panel price declines. Branch
However, we believe that the industry-wide inventory level will be maintained at Price performance
a healthy level due to solid sell-through, especially during the China Golden
W
Week. In addition, as the economy is recovering fast, the oversupply problem will 35,000
likely be less severe than in previous years. 25,000
15,000
how much recovery is priced into the stock?
Oct-08 Feb-09 Jun-09 Oct-09
LGD will continue to generate stable FCF with an upward ROE trend: We LGD KOSPI
believe LGD is likely to post strong FCF in FY10 and FY11, due to the increase
Source: Bloomberg, J.P. Morgan.
in EBITDA along with the stable capex trend. We also expect ROE to remain in Performance
double-digits in the next two years. Compared to its global peers, we forecast 1M 3M 12M
LGD to show the highest sales growth on the back of an increase in fab efficiency
Absolute (%) -8 -13 24
and stable margins due to the strong customer base. Also, despite efficient fab, its
Relative (%) -5 -12 -8
current market capitalization as a percentage of total capacity is undervalued Source: J.P. Morgan.
relative to its global peers. Company data
Price target and key risks 52-week range (W) 40,950-17,250
We recently upgraded LGD to Overweight from our long-standing Neutral rating Mkt cap. (WB) 10,609
with our revised P/BV-based Dec-10 price target of W40,000. Our price target Mkt cap. (US$MM) 8,993
implies 1.2x FY10E book and 1.0x FY11E book, Given the sustainable FCF Avg daily value (US$MM) 120.8
(W1.5 trillion/year) and double-digit ROE. Key risks to our PT are sudden and Avg daily volume (MM) 4.1
substantial changes in panel prices And a recovery in global consumption. Shares O/S (MM) 358
Date of price 5-Nov-09
Index: KOSPI 1552
Free float (%) 57.9
Exchange rate 1,178/1
Source: Bloomberg, J.P, Morgan.
Reuters: 034220.KS; Bloomberg: 034220 KS
WB, year-end Dec FY08 FY09E FY10E FY11E
Sales 16,264 20,088 21,188 22,682
Operating profit 1,735 1,103 1,478 1,910
Net profit 1,087 980 1,292 1,656
EPS (W) 3,037 2,738 3,612 4,627
Cash 3,423 2,051 1,707 2,311
ROE (%) 12.4 10.1 12.7 14.6
P/E (x) 9.8 10.8 8.2 6.4
BPS (W) 25,959 28,179 28,510 34,965
EV/EBITDA (x) 3.0 3.4 2.9 2.3
Div yield (%) 2 2 2 2
Source: Company reports, Bloomberg, J.P. Morgan estimates. Share price and valuations are as of 5 November, 2009. We upgraded to OW with PT of W40,000 on November 12.

190
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

LG Display: Summary of financials


Won in billions, year-end December
Income statement Balance sheet

FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E


Revenues 16,264 20,088 21,188 22,682 Cash and Cash Equivalents 3,423 2,051 1,707 2,311
COGS 13,617 17,906 18,543 19,500 Accounts receivable 2,005 3,084 2,782 3,387
Depreciation 2,541 2,850 3,035 3,109 Inventories 1,137 1,357 1,334 1,223
Gross Profit 2,647 2,182 2,645 3,182 Others current assets 454 635 573 697
EBIT 1,735 1,103 1,478 1,910 Current assets 7,018 7,127 6,396 7,617
Net Interest Income 56 -15 -33 -6
Pre-tax Profit 1,311 1,084 1,494 1,914 LT investments 900 1,092 1,098 1,144
Tax Expense/(Credit) 225 104 202 258 Net fixed assets 9,270 9,918 9,960 10,224
Net Income 1,087 980 1,292 1,656 Other long term assets 200 210 206 178
Shares outstanding (mil.) 358 358 358 358 Total Assets 17,388 18,346 17,660 19,164
EPS (Won) 3,037 2,738 3,612 4,627
Sequential Growth ST Debt and CPLTD 1,154 1,314 1,051 220
Revenues 13% 24% 5% 7% Account Payables 988 1,981 1,861 2,051
Gross Profit 18% -18% 21% 20% Other current liabilities 2,644 2,241 2,022 2,461
EBIT 15% -36% 34% 29% Total current liabilities 4,786 5,536 4,934 4,733
Pre-tax Profit -15% -17% 38% 28% Long term debt 1,243 0 0 0
EPS -19% -10% 32% 28% Other Long term liabilities 581 1,063 1,010 705
Total liabilities 8,100 8,263 7,458 6,653

Shareholder's equity 9,289 10,083 10,201 12,511


Total Liabilities and Equity 17,388 18,346 17,660 19,164
BVPS (Won) 25,959 28,179 28,510 34,965

Cash flow statement Ratio analysis


%, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E

Net Income 1,087 980 1,292 1,656 Gross Margin (%) 16.3% 10.9% 12.5% 14.0%
Depreciation & amortization 2,541 2,850 3,035 3,109 EBIT Margin (%) 10.7% 5.5% 7.0% 8.4%
Other non-cash items 0 0 0 0 Net profit margin (%) 6.7% 4.9% 6.1% 7.3%
Change in working capital 1,814 -890 48 12 COGS/sales (%) 83.7% 89.1% 87.5% 86.0%
Cash flow from operations 5,441 2,939 4,375 4,776 SG&A/sales (%) 3.2% 3.1% 3.2% 3.3%
Purchase of PP&E -4,283 -3,498 -3,077 -3,373
Disposal/ (purchase) -595 -202 -2 -19 Sales per share growth (%) 13.3% 23.5% 5.5% 7.1%
Cash flow from investing -4,878 -3,700 -3,079 -3,392 Sales growth (%) 13.3% 23.5% 5.5% 7.1%
Equity raised/(repaid) 0 0 0 0 EBIT growth (%) 15.4% -36.5% 34.0% 29.2%
Debt raised/(repaid) 965 -427 -466 -1,435 Net profit growth (%) -19.1% -9.9% 31.9% 28.1%
Other charges -88 -185 -914 914 EPS growth (%) -19.1% -9.9% 31.9% 28.1%
Cash dividends 0 0 -260 -260
Cash flow from Financing 878 0 0 -781 Interest Coverage (x) -11.3 -8.4 -17.2 -32.0
Net Changes in Cash 1,441 -1,372 -343 603 Inventory Turnover (x) 14.3 14.8 15.9 18.6
Beginning cash 1,981 3,423 2,051 1,707 Net Debt to total Capital (%) 3% 5% 5% -5%
Ending cash 3,423 2,051 1,707 2,311 Net debt to equity (%) 5% 9% 8% -7%
DPS (Won) 750 750 750 750 Sales/Assets (%) 94% 109% 120% 118%
Assets/Equity (%) 187% 182% 173% 153%
ROE (%) 12% 10% 13% 15%
ROIC (%) 14% 9% 11% 14%

Quarterly data
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
FY09E FY10E
Sales 3,666 4,891 5,974 5,557 Sales 5,013 5,243 5,398 5,534
Net income -255 302 559 374 Net income 118 263 426 485
EPS (Won) -713 844 1,562 1,044 EPS (Won) 331 735 1,191 1,354
Source: Company data, J.P. Morgan estimates.

191
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Lojas Americanas Overweight


R$13.42/R$11.54
Price Target: R$17.00 (PN/LAME4)/
www.americanas.com.br R$14.00 (ON/LAME3)
Company description Brazil
Americanas is one of the most traditional retail chains in Brazil, operating Retail
471 stores and three distribution centers. In addition, the company also has a Andrea TeixeiraAC
57% stake in B2W (N), the largest e-commerce platform in Brazil, and has a (1-212) 622-6735
JV with Itau Unibanco (FAI) that offers credit and financial products to andrea.f.teixeira@jpmorgan.com
clients. J.P. Morgan Securities Inc.

Post mortem Price performance (R$)


LAME’s unique business model taps the fastest-growing segments of the 15

12
population and has few competitors and resilient same store sales growth. In 9

addition, the company announced that it will double the number of stores (by 6

+400) in the next four years, which we believe is doable, given LAME’s 3

Dec-08

Oct-09
Jan-09

Feb-09

Mar-09

Apr-09

Jun-09

Jul-09

Aug-09

Sep-09
Nov-08

May-09

Nov-09
accretive ROE, leading to faster breakeven of the new stores (1.5-2.5 years),
Source: Bloomberg.
and the low average number of employees (about 25/store). Also, with the
decline in interest spreads, supported by strong economic recovery, the Performance
private label card penetration increased by 180bp yoy to 15.3% in 3Q. 1M 3M 12M
Absolute (%) 22.5% 25.1% 115.2%
Potential for earnings upgrades Relative (%) 18.2% 7.5% 29.0%
On the back of its aggressive store expansion plan, we expect LAME to post
Source: Bloomberg.
high-double-digit top-line growth for at least the next four years. In addition,
LAME should also benefit from strong top-line growth at B2W, in which it
Company data
has ~57% stake, supported by the greater availability of cheap financing.
52-week range (R$) 5.29 - 14.67
Mkt cap. (R$MM) 10,068
How much recovery is priced into the stock?
Mkt cap. (US$MM) 5,846
Although the stock has more than doubled year to date (like most retailers in
Avg daily value (US$MM) 18.7
Brazil), clearly reflecting the strong economic recovery; it is still ~ 29%
Avg daily volume (MM) 2.6
below its highest level. Current valuations still look unwarranted, with
Shares O/S (MM) 473
LAME trading at 31% discount to historical P/E average which will likely
Date of price 25/11
narrow, in our view, given the aggressive store layout and strong 3Q results.
Index: IBOV 67,917
Free float (%) 62.1%
Price target and key risks
Exchange rate 1.72
Our Dec 2010 price targets of R$17/R$14 for PN/ON shares is based on a
sum-of-the-parts DCF of the brick-and-mortar stores, financial, and internet Source: Bloomberg.

divisions. Main risks to our thesis are (1) delay in FAI maturation, (2)
economic slowdown, and (3) a potential hike in delinquency rates.
Bloomberg: LAME4 BZ / LAME3 BZ; Reuters: LAME4.SA / LAME3.SA
R$ in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 3,933 4,532 5,158 6,186
Net profit 117 177 290 379
EPS (R$) 0.16 0.24 0.40 0.52
FD EPS (R$) 0.16 0.24 0.40 0.52
DPS (R$) 0.05 0.19 0.15 0.12
Sales growth (%) 22.5% 15.2% 13.8% 19.9%
Net profit growth (%) 13.2% 51.9% 63.6% 30.7%
EPS growth (%) 13.4% 52.5% 63.6% 30.7%
ROE (%) 43.7% 51.3% 62.9% 54.3%
P/E (x) 78.7x 59.3x 36.3x 27.7x
FD P/E (x) 78.7x 59.3x 36.3x 27.7x
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009. * The estimates are for the parent company

192
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Lojas Americanas: Summary of financials


Profit and loss statement Cash flow statement
R$ in millions, year-end December R$ in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 3,933 4,532 5,158 6,186 EBIT 419 508 625 765
% change Y/Y 22.5% 15.2% 13.8% 19.9% Depreciation & amortization 122 116 132 152
Gross margin (%) 31.2% 30.1% 30.8% 31.0% Change in working capital 38 79 11 11
EBITDA 541 624 757 917 Taxes (48) (97) (106) (101)
% change Y/Y 37.5% 15.3% 21.4% 21.1% Cash flow from operations 51 345 146 519
EBITDA margin (%) 13.8% 13.8% 14.7% 14.8% Capex 274 84 232 300
EBIT 419 508 625 765 Disposal/(purchase) 0 0 0 0
% change Y/Y 38.3% 21.3% 23.0% 22.4% Net interest (208) (246) (302) (408)
EBIT margin (%) 10.6% 11.2% 12.1% 12.4% Free cash flow 86 288 302 346
Net interest (208) (246) (302) (408) Equity raised/(repaid) (26) (2) 0 0
Earnings before tax 142 262 322 356 Debt raised/(repaid) 607 (51) 0 0
% change Y/Y -8.0% 84.8% 23.1% 10.5% Other (114) 1 0 0
Tax (48) (97) (106) (101) Dividends (37) (136) (107) (89)
as % of EBT 33.6% 37.1% 32.8% 28.3% Beginning cash 776 1,097 1,161 888
Net income (reported) 117 177 290 379 Ending cash 1,097 1,161 888 882
% change Y/Y 13.2% 51.9% 63.6% 30.7% DPS (R$) 0.05 0.19 0.15 0.12
Shares O/S (MM) 0.16 0.24 0.40 0.52 Source: Company, J.P. Morgan estimates. * The estimates are for the parent company.
EPS (reported) (R$) 0.16 0.24 0.40 0.52
Source: Company, J.P. Morgan estimates. * The estimates are for the parent company.

Ratio analysis

Balance sheet %, year-end December


FY08 FY09E FY10E FY11E
R$ in millions, year-end December EBITDA margin 13.8% 13.8% 14.7% 14.8%
FY08 FY09E FY10E FY11E Operating margin 10.6% 11.2% 12.1% 12.4%
Cash and cash equivalents 1,097 1,161 888 882 Net profit margin 3.0% 3.9% 5.6% 6.1%
Accounts receivable 176 197 177 213 SG&A/sales 20.5% 18.8% 18.7% 18.6%
Inventories 655 767 873 1,076 Sales growth 22.5% 15.2% 13.8% 19.9%
Others 241 270 301 361 Net profit growth 13.2% 51.9% 63.6% 30.7%
Current assets 2,169 2,395 2,239 2,532 Sales per share growth 22.7% 15.7% 13.8% 19.9%
LT investments 492 511 591 727 EPS growth 13.4% 52.5% 63.6% 30.7%
Net fixed assets 913 917 1,098 1,382 Interest coverage (x) 1.20 (2.48) 1.93 1.62
Total assets 3,892 4,118 4,132 4,739 Net debt to total capital 0.44 0.40 0.47 0.43
Liabilities Net debt to equity 3.53 2.76 2.34 1.54
ST loans 790 429 429 429 Sales/assets 1.01 1.10 1.25 1.31
Payables 954 1,117 1,012 1,247 EBIT margin 10.6% 11.2% 12.1% 12.4%
Others 255 299 223 275 ROCE 22.1% 22.4% 25.3% 27.5%
Total current liabilities 1,999 1,846 1,664 1,952 Assets/equity (x) 12.1 11.2 7.5 5.6
Long-term debt 1,442 1,751 1,751 1,751 ROI 23.7% 34.7% 49.0% 52.1%
Other liabilities 74 83 88 105 ROE 43.7% 51.3% 62.9% 54.3%
Total liabilities 3,571 3,749 3,580 3,897 Source: Company, J.P. Morgan estimates. * The estimates are for the parent company.
Shareholders’ equity 321 369 553 842
BVPS (R$) 0.44 0.51 0.76 1.16
Source: Company, J.P. Morgan estimates. * The estimates are for the parent company.

193
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

LSR Group Overweight


Price:$7.10
Price Target: $10.00
www.lsrgroup.ru
Company description Russia
LSR Group is one of the leading vertically-integrated developers in St. Property
Petersburg, engaged in the high-end, upper-middle class and mass market Elena JouronovaAC
residential and commercial housing segments. It is also the number one (7 495 967 3888
building materials company in the St. Petersburg and Leningrad regions, elena.jouronova@jpmorgan.com
with the capacity to produce aggregates, various types of concrete and bricks. J.P. Morgan Bank International LLC

Post mortem
In 1H09 LSR suffered from a financing dry-up, a collapse in demand for Price Performance

building materials (the segment’s EBITDA fell 95% y/y) and weak housing 8

sales. Nevertheless, the company solved debt and cash flow problems 6

towards 2H09, emerging as one of the strongest players from the downturn: $ 4

bonds were refinanced with new bank loans, financing was secured for the 2

cement project, and several housing contracts were concluded with the 0

government. Nov-08 Feb-09 May-09 Aug-09 Nov-09

Source: Bloomberg
Potential for earnings upgrades
For LSR high financial leverage (total debt at $1.2 bn, debt-to-equity is Performance
110%) translates into high EPS sensitivity to cost of debt, implying that the 1M 3M 12M
company is a winner in the declining interest rate environment. Absolute (%) 1.4 94.5 680.2
Source: Bloomberg
How much recovery is priced into the stock?
LSR has been the darling of the market and one of the best performing Company data
52-week range ($) 0.53-7.49
Russian stocks in 2009 (+834% ytd vs. +135% for the RTS Index), driven by Mkt cap. (US$MM) 3,323
contracting risk premium. We believe the shares are likely to continue Avg daily value (US$MM) 2.8
performing better than the Russian real estate universe on a 6-12 month Avg daily volume (MM) 0.562
horizon as in our view company fundamentals are not fully priced in. Shares O/S (mn) 468
Date of price 23-Nov-09
Index: RTS 1466.77
Price target and key risks Free float (%) 18%
We assume 5% growth in ruble residential prices in St. Petersburg, a 25-50% Exchange rate 28.79
increase in LSR’s building materials sales volumes and 5-10% higher prices. Source: Bloomberg
Our end-10 DCF-based PT is $10.0. The key risk we highlight is a slower
than expected property market revival.
Bloomberg: LSRG LI; Reuters: LSRGq.L
$ mn, year-end Dec
FY08 FY09E FY10E FY11E
Sales 2,004 1,415 1,935 2,016
Net profit (329) 60 175 247
EPS ($) -0.70 0.13 0.37 0.53
FD EPS ($) -0.70 0.13 0.37 0.53
DPS ($) 0 0 0 0
Sales growth (%) 42.9% -29.4% 36.8% 4.2%
Net profit growth (%) n/a n/a 192% 41%
EPS growth (%) n/a n/a 192% 41%
ROE (%) 17.7% 9.9% 11.8% 14.3%
P/E (x) n/a 54.6 19.2 13.4
FD P/E (x) n/a 54.6 19.2 13.4
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

194
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

LSR Group: Summary of financials


Profit and Loss statement FY08A FY09E FY10E FY11E FY12E Cash flow statement FY08A FY09E FY10E FY11E FY12E
$ in millions $ in millions

Revenue 2,004 1,415 1,935 2,016 2,281 Net Income (329) 60 175 247 339
% change Y/Y 42.9% -29.4% 36.8% 4.2% 13.2% Depreciation & amortisation 82 57 60 75 86
Gross Profit 724 484 591 669 788 Revaluation gain 665 65 0 0 0
% change Y/Y 54.6% -33.2% 22.1% 13.2% 17.8% Change in working capital (131) (82) (47) (35) (39)
EBITDA 530 382 438 508 613 Other -112 24 5 8 10
% change Y/Y 71.4% -28.0% 14.9% 15.9% 20.8% Cash flow from operations 176 124 193 296 396
EBIT (217) 259 378 433 528
% change Y/Y -138.6% -219.3% 45.7% 14.4% 22.0% Capex (704) (308) (142) (42) (49)
Interest (108) (155) (153) (114) (91) Disposals/ (purchase) 0 0 0 0 -
Earnings before tax -413 83 225 319 437 Free cash flow (528) (184) 52 254 348
% change Y/Y -184.5% -120.1% 170.8% 41.7% 37.0%
Tax 91 (21) (45) (64) (87) Equity raised/(repaid) 0 0 0 0 0
as % of EBT (22.0%) (25.2%) (20.0%) (20.0%) (20.0%) Debt raised/(repaid) 364 228 -85 -169 -85
Net Income (Reported) (329) 60 175 247 339 Other (81) 0 0 0 0
% change Y/Y -194.6% -118.3% 189.7% 41.7% 37.0% Dividends paid 0 0 0 0 0
Shares Outstanding 468.3 468.3 468.3 468.3 468.3 Beginning cash 355 110 154 121 206
EPS (reported) -0.70 0.13 0.37 0.53 0.72 Ending cash 110 154 121 206 470
% change Y/Y (194.6%) (118.3%) 189.7% 41.7% 37.0% DPS - - - - -

Balance sheet FY08A FY09E FY10E FY11E FY12E Ratio Analysis FY08A FY09E FY10E FY11E FY12E
$ in millions $ in millions

Cash and cash equivalents 110 155 122 206 469 Gross Margin 36.1% 34.2% 30.5% 33.2% 34.5%
Accounts receivable 456 469 486 541 592 EBITDA Margin 26.5% 27.0% 22.7% 25.2% 26.9%
Inventories 1,710 1,472 1,385 1,365 1,353 EBIT margin -10.8% 18.3% 19.5% 21.5% 23.1%
Other 7 7 7 7 7 Adjusted net profit margin 10.3% 9.2% 9.0% 12.3% 14.9%
Current assets 2,283 2,102 2,000 2,119 2,421 SG&A/Sales -13.8% -11.3% -11.0% -11.7% -11.4%

LT investments 252 252 252 252 252 Sales growth 42.9% -29.4% 36.8% 4.2% 13.2%
Net fixed assets 1,593 1,756 1,837 1,804 1,767 EBITDA growth 71.4% -28.0% 14.9% 15.9% 20.8%
Total assets 3,877 3,858 3,837 3,923 4,187 Adjusted net profit growth 109.7% (37.0%) 34.7% 41.7% 37.0%
Adjusted EPS growth 109.7% NM 34.7% 41.7% 37.0%
ST loans 613 339 169 85 250
Payables 1,323 982 865 865 865 Interest coverage (x) 2.0 1.7 2.5 3.8 5.8
Others 30 30 30 30 30 Net debt to Total Capital 29.5% 33.1% 32.0% 24.8% 14.9%
Total current liabilities 1,967 1,351 1,065 980 1,146 Net debt to Equity 96.2% 95.8% 81.0% 55.0% 29.5%
Long term debt 642 1,095 1,179 1,095 845 Sales/assets 0.5 0.4 0.5 0.5 0.5
Other liabilities 78 78 78 78 78 Assets/equity 325.7% 289.1% 253.3% 221.7% 197.6%
Total liabilities 2,686 2,523 2,322 2,153 2,068 ROE 17.7% 9.9% 11.8% 14.3% 16.4%
Shareholders' equity 1,190 1,335 1,515 1,770 2,119 ROCE 23.4% 12.9% 13.6% 14.7% 17.3%

Source: Company reports and J.P. Morgan estimates.

195
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Magnit Overweight
Price: $14.30
Price Target: $17.50
www.tander.ru
Company description Russia
Magnit is Russia's largest retailer in terms of store network: the chain Consumer
operates 3,020 discounters and 22 hypermarkets with a net selling area of Elena JouronovaAC
988k sq m as of October 2009. The company is predominantly a regional (7 495 967 3888
player and focuses on small cities with fewer than 500k inhabitants. Magnit's elena.jouronova@jpmorgan.com
operations are supported by an efficient logistics system that comprises 9 J.P. Morgan Bank International LLC
distribution centers with 184k sq m capacity and a fleet of 1,345 trucks,
which allows the company to control 73% of its supplies. Price Performance

Post mortem 14

Magnit faces lower competition from modern retail as it operates in small $


10

regional towns. Coupled with increasing bargaining power with suppliers, 6


this could allow the company to preserve its lucrative operating margins.
2
Format-wise, diversification towards hypermarkets provides an opportunity to Nov-08 Feb-09 May-09 Aug-09 Nov-09
benefit in a recovery scenario. Armed with new capital, Magnit is likely to
continue rapid store roll-out and gain market share; we forecast 2009-13 Source: Bloomberg

EBITDA CAGR of 29%, the highest in our consumer universe.


Performance
Potential for earnings upgrades 1M 3M 12M
A strengthening ruble creates upside potential to consensus earnings Absolute (%) 10.0 31.2 308.6
estimates for Magnit, in our view. Source: Bloomberg

How much recovery is priced into the stock? Company data


Magnit trades in line with global retailers despite superior growth prospects. 52-week range ($) 2.76-15.40
In historical terms valuations are c. 20% above the average pre-crisis level, Mkt cap. (US$MM) 5,952
Avg daily value (US$MM) 8.1
but we expect consensus to move higher on faster store roll-out and better Fx. Avg daily volume (MM) 0.610
Shares O/S (MM) 445
Price target and key risks
Date of price 23-Nov-09
Our end-10 DCF-based PT is $17.5/GDR and $80/local share. We believe Index: RTS 1466.77
Magnit’s strong logistics backbone, recapitalized balance sheet (after the Free float (%) 46%
$370mn equity-raising in 3Q09) and experienced management team position Exchange rate 28.79
it well for rapid expansion and double-digit earnings growth. Key risks are Source: Bloomberg

ruble weakness, slowing LFL sales growth and execution of the hypermarket
strategy, in our view.

Bloomberg: MGNT LI; Reuters: MGNTq.L


$ in millions, year-end Dec
FY08 FY09E FY10E FY11E
Sales 5,348 5,326 7,751 9,927
Net profit 188 272 421 552
EPS ($) 0.45 0.65 1.01 1.33
FD EPS ($) 0.45 0.65 1.01 1.33
DPS (LC) n/a n/a n/a n/a
Sales growth (%) 45% 0% 46% 28%
Net profit growth (%) 94% 45% 55% 31%
EPS growth (%) 94% 45% 55% 31%
ROE (%) 30% 26% 29% 29%
P/E (x) 31.8 22.0 14.2 10.7
FD P/E (x) 31.8 22.0 14.2 10.7
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

196
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Magnit: Summary of Financials


Profit and Loss Statement Cash flow statement
$ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E

Revenues 5,348 5,326 7,751 9,927 12,454 EBT 260 348 540 708 880
Cost of goods sold -4,188 -4,104 -5,970 -7,648 -9,615 Depreciation & amortisation 89 91 132 169 212
Gross profit 1,160 1,222 1,781 2,279 2,839 Change In working capital 138 105 64 71 80
Operating costs -847 -824 -1,199 -1,536 -1,927 Other (66) (77) (119) (156) (194)
EBITDA 402 489 714 912 1,124 Cash flow from operations 420 467 617 792 978
EBIT 313 398 582 743 912
Net Interest (60) (50) (42) (35) (32) Capex (567) (500) (584) (795) (720)
Other 7 0 0 0 0 Other (9) 0 0 0 0
Earnings before tax 260 348 540 708 880 Free cash flow (155) (33) 33 (3) 258
Tax (72) (77) (119) (156) (194)
as % of EBT (27.6%) (22.0%) (22.0%) (22.0%) (22.0%) Financing cash flow 200 0 0 0 0
Net Income (reported) 188 272 421 552 686 Dividends paid 0 0 0 0 0
Net Income (adjusted) 188 272 421 552 686 Forex effect -51 0 0 0 0
EPS (adjusted) 0.45 0.65 1.01 1.33 1.65 Net change in cash (6) (33) 33 (3) 258

Balance sheet Ratio Analysis


$ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E

Cash & cash equivalents 115 82 115 112 370 EBITDA margin 7.5% 9.2% 9.2% 9.2% 9.0%
Accounts receivables 53 63 90 116 145 Operating margin 5.9% 7.5% 7.5% 7.5% 7.3%
Inventories 323 370 544 718 929 Net profit margin 3.5% 5.1% 5.4% 5.6% 5.5%
Other 2 2 2 2 2 SG&A/sales (15.8%) (15.5%) (15.5%) (15.5%) (15.5%)
Total current assets 493 517 752 948 1,446
PP&E 1,331 1,740 2,193 2,818 3,327 Sales growth 45.5% (0.4%) 45.5% 28.1% 25.5%
Other non-current assets 20 20 20 20 20 EBITDA growth 83.2% 21.7% 46.0% 27.7% 23.3%
EBIT growth 89.0% 27.3% 46.1% 27.7% 22.8%
Total assets 1,844 2,277 2,964 3,786 4,793 Net profit growth 94.3% 44.8% 55.1% 31.0% 24.4%

Short term debt 243 229 229 229 229 Gross Debt 406 384 384 384 384
Payables 583 642 924 1,194 1,515 Net Debt 291 301 269 272 14
Other 0 0 0 0 0 Net Debt/EBITDA 0.7 0.6 0.4 0.3 0.0
Total current liabilities 826 871 1,153 1,423 1,744 Interest coverage (x) 5.2 8.0 13.9 21.0 28.3
Long term debt 163 155 155 155 155 Net Debt to Equity 34.8% 24.4% 16.4% 12.4% 0.5%
Other 18 18 18 18 18 Sales/assets 2.9 2.3 2.6 2.6 2.6
Total non-current liabilities 181 173 173 173 173 Assets/equity 2.2 1.8 1.8 1.7 1.7
ROE 29.7% 26.2% 29.3% 28.8% 27.1%
Shareholders' equity 837 1,234 1,638 2,190 2,876 ROA 10.8% 13.2% 16.1% 16.4% 16.0%
Total equity & liabilities 1,844 2,277 2,964 3,786 4,793 ROIC 19.2% 21.7% 25.0% 25.2% 24.4%

Source: Company reports and J.P. Morgan estimates.

197
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Manila Water Overweight


Php16.00
Price Target: Php19.00
www.manilawater.com

Company description Water


Manila Water operates a water distribution network within East Zone of
Ajay MirchandaniAC
Metro Manila under a concession agreement, which will expire in 2022 (65) 6882-2419
(being extended to 2037), earning an allowed ‘real’ IRR of 9.3% on its ajay.mirchandani@jpmorgan.com
investments.
J.P. Morgan Securities Singapore Private
Limited
Post mortem
While free cash flow remains negative for Manila Water, with its low Price performance (Php)
20
gearing, tariff hike is the key driver for the company, in our view. While we 15
did not see any tariff hike at the start of the year, this was more than offset by 10
5
(a) inflation adjustment; and (b) concession extension of 15 years earlier in 0
the year.

Feb-09

Aug-09
Nov-08

May-09

Nov-09
Potential for earnings upgrades Source: Bloomberg.
While we see limited upside risk to our earning estimates, given the
relatively high visibility for annual tariff hikes, we should see earnings Performance
growth coming through due to the concession extension allowed earlier this 1M 3M 12M
year because of lower depreciation expenses. Absolute (%) 1.6 3.2 6.7
Relative (%) -2.8 -3.3 -40.1
How much recovery is priced into the stock? Source: Bloomberg.
We see upside risk to the current share price, as we believe the concession
extension has not been fully priced in. Moreover, we believe the upcoming Company data
annual tariff hike should act as a key catalyst. 52-week range (Php) 9.4-16.5
Mkt cap. (PhpMM) 32,317
Price target and key risks Mkt cap. (US$MM) 679
Our Dec-09 PT of Php19 implies 12.7x FY09E P/E, 7.6x EV/EBITDA, and Avg daily value (US$MM) 0.7
2.4% yield. We derive our PT by discounting Manila Water’s FCF until 2037 Avg daily volume (MM) 3.5
(when the ‘extended’ concession expires), and estimate cash flows will turn Shares O/S (MM) 2,020
positive only by 2015/16. In our DCF valuation, we assume a risk-free rate Date of price 5-Nov-09
of 8.5%, a terminal growth rate of 0%, and a beta of 1.0. Key risks to our PT Index: PSEi 2,944
include delays in the implementation of allowed tariff increases; and a Free float (%) 38
worse-than-expected delay in implementation of the extension. Exchange rate 47.6

Bloomberg: MWC PM; Reuters: MWC PS


Php in millions, year-end December
FY08 FY09E FY10E FY11E
Adjusted net profit 2,748 3,630 4,057 4,546
EPS (Php) 1.14 1.50 1.68 1.88
% growth Y/Y 4% 32% 12% 12%
DPS (Php) 0.35 0.46 0.52 0.58
P/E (x) 14.1 10.7 9.5 8.5
P/BV (x) 2.1 1.8 1.5 1.3
EV/EBITDA (x) 7.2 6.6 6.0 5.5
Dividend yield (%) 2.8% 3.7% 4.1% 4.6%
RoE (%) 21% 23% 22% 21%
Net debt 49% 54% 58% 58%
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

198
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Manila Water: Summary of financials


Php in millions, year-end December
Profit & loss statement Balance sheet

FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E


Core Revenue 8,914 10,529 11,858 13,286 Share capital 5368 5368 5368 5368
Others 82 85 87 90 Preferred Stock 900 900 900 900
Total Revenue 8,996 10,614 11,946 13,376 Reserves & Surplus 8776 11287 14094 17238
cost of preferred & treasury
stock& others (594) (594) (594) (594)
Operating Costs (1,930) (2,346) (2,573) (2,798) Share holders equity 14,458 16,961 19,768 22,913
SG&A expenses (576) (651) (686) (723) Long term debt 12897 12008 17328 16940
Depreciation & Amortization (1891) (1293) (1439) (1658) Other non-current liabilities 1,307 1,369 1,423 1,479
Foreign currency differential Service Concession
less FX gain (losses) (28) (300) (300) (300) Obligation 3475 3475 3475 3475
Total Liabilities 32,137 33,814 41,994 44,807
EBITDA 6,380 7,232 8,299 9,465
EBIT 4,490 5,940 6,861 7,807 Service Con. Assets / PPE 24637 29611 34372 39164

Interest Expense (689) (1,041) (1,320) (1,542) Non Current Assets 3137 3137 3137 3137
Interest Income 205 244 263 287
Current Assets 8595 6313 9947 7912
Profit before tax 4,256 5,243 5,854 6,552 Cash and Bank Balances 7357 4851 8300 6067
Income tax (1,469) (1,573) (1,756) (1,966) Account Receivables 593 701 789 884
Profit after tax 2,788 3,670 4,097 4,586 Other current assets 645 762 858 961
less Preferred Dividends (40) (40) (40) (40) Current Liabilities 4231 5247 5462 5405
Accounts Payable 2740 3277 3117 2886
Net Income 2,748 3,630 4,057 4,546 current portion of debt 455 907 1235 1358
Other current liabilities 110 110 110 110
Total Assets 32,137 33,814 41,994 44,807
Key ratios
Cash flow statement
FY08 FY09E FY10E FY11E
EBITDA Margins (%) 71.6% 68.7% 70.0% 71.2% FY08 FY09E FY10E FY11E
EBIT Margin (%) 50.4% 56.4% 57.9% 58.8% EBITDA 6380 7232 8299 9465
less: Net Interest (484) (797) (1057) (1255)
No. of O/S shares (Mils) 2019.8 2019.8 2019.8 2019.8 less: tax (951) (1547) (1710) (1913)
less: changes in Working
EPS (Php) 1.14 1.50 1.68 1.88 Capital 501 312 (344) (430)
DPS (Php) 0.35 0.46 0.52 0.58 Others 568 0 0 0
Dvd payout ratio (%) 31% 31% 31% 31% Operational Cash Flow 6014 5201 5188 5867

BVPS 6.0 7.0 8.2 9.5 Capital Expenditure (3826) (5950) (6200) (6450)
Debt / Equity (%) 92.4 76.2 93.9 79.9
Net Debt (%) 48.7 53.9 57.6 58.5 others (3929) (324) 0 0
ROE (%) 20.7% 23.4% 22.3% 21.5% Cash flow from investments (7755) (6274) (6200) (6450)
ROCE (%) 19.3% 20.6% 20.1% 19.6% Free cash flow (1741) 0 0 0
Dividends Paid (887) (1159) (1291) (1441)
EBITDA / Gross Interest
Expense 9.3 6.9 6.3 6.1 Debt paid 5429 (336) 5698 (265)
others (349) 62 54 56
Accounts receivables (days) 24.3 24.3 24.3 24.3 Cashflow from financing 4193 (1433) 4461 (1651)
Movement in Net Debt/Net
Cash 2,452 (2,506) 3,449 (2,233)
Source: Company, J.P. Morgan estimates.

199
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Maruti Suzuki India Ltd. Overweight


Rs1,485.7
Price Target: Rs1,630
www.marutisuzuki.com
Company description India
Maruti Suzuki India Ltd, a 54% subsidiary of Suzuki Motor Corporation of Automobiles
Japan, is India’s largest passenger car company with a market share of over Aditya MakhariaAC
50% in the domestic car market. Maruti is emerging as a manufacturing base (91-22) 6157-3596
for Suzuki globally, as the company has ramped up exports of the small car aditya.s.makharia@jpmchase.com
‘A Star’ to Europe. J.P. Morgan India Private Limited

Post mortem Price performance


Maruti’s broad-based portfolio in the mass market A2 segment along with its
2,000
widespread distribution network and strong brand equity have enabled the
1,500
company to sustain a 50% market share in the domestic market. Over the 1,000
year, the company has diversified revenues by ramping up its exports (c.15% 500
of sales). -

N-08

F-09

M-09

A-09

N-09
Potential for earnings upgrades
The potential upgrades would be driven by higher-than-expected domestic Source: Bloomberg.
economic growth which could result in volume growth surprising on the Performance
upside. 1M 3M 12M
How much recovery is priced into the stock? Absolute (%) -7 +3 +141
The growth in the Indian passenger car segment (+16% YTD) has been aided Relative (%) -2 +2 +80
by the stimulus measures as well as revival in economic growth. While stock Source: Bloomberg.
valuations have expanded to reflect a pick-up in growth, the share price Company data
should now be driven by sustained volume growth (given the improving 52-week range (Rs) 428-1,740
domestic growth outlook).
Mkt cap. (RsMM) 429,367
Price target and key risks Mkt cap. (US$MM) 9,130
We expect volume growth to come in at 15% CAGR over FY09-11E, driven Avg daily value (US$MM) 35.4
by a revival in domestic markets. We expect EBITDA margins to expand on Avg daily volume (MM) 1.1
improved utilization levels, given the revival in growth. As a result, we Shares O/S (MM) 289
expect earnings to grow at 50% CAGR over FY09-11E. We have a Mar-10 Date of price 5-Nov-09
PT of Rs1,630, based on 13x one-year forward cash earnings. We are Index: SENSEX 16064
valuing the company in line with growth cycle multiples, which is at the Free float (%) 46
upper end of the valuation band, i.e. +1 standard deviation above the mean. Exchange rate 47.03
Key risks to our PT include a slowdown in the economy and depreciation of Source: Bloomberg.
Rs vs. yen.
Bloomberg: MSIL.IN; Reuters: MRTI.BO
Rs in millions, year-end March
FY08 FY09 FY10E FY11E
Net sales 179,362 204,554 267,202 310,413
Net profit 17,308 12,186 22,771 27,426
EPS (Rs) 59.9 42.2 78.8 94.9
Cash EPS (Rs) 79.5 66.6 107.1 125.3
DPS (Rs) 5.0 3.5 6.3 7.1
Net sales growth (%) 22 14 31 16
EPS growth (%) 11 -30 87 20
Cash EPS growth (%) 25 -16 61 17
ROE (%) 20.6 13.0 19.9 19.6
P/E (x) 24.8 35.2 18.9 15.7
Cash P/E (x) 18.7 22.3 13.9 11.9
EV/EBITDA (x) 17.1 23.8 12.8 10.7
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

200
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Maruti Suzuki India Ltd: Summary of financials


Profit and loss statement Cash flow statement
Rs in millions, year–end March
Rs in millions, year–end March
FY08 FY09 FY10E FY11E
FY08 FY09 FY10E FY11E
Revenues 179,362 204,554 267,202 310,413
EBIT 16,750 7,282 20,865 25,165
% change Y/Y 22% 14% 31% 16%
Depreciation & amortization 5,682 7,065 8,178 8,794
Dec/(Inc) in Working Capital -266 -2,063 -2,503 -2,627
EBITDA 22,432 16,189 29,392 33,959
Taxes -7,696 -4,721 -9,184 -10,756
% change Y/Y 13% -28% 82% 16%
Cash flow from operations 14,470 7,563 17,355 20,576
EBITDA margin (%) 12.5% 7.9% 11.0% 10.9%
EBIT 16,750 9,124 21,215 25,165
Net Capex -17,024 -16,058 -18,000 -18,000
% change Y/Y -3% -46% 133% 19%
(Pur) / Sale of investments -17,715 20,074 -5,000 -10,000
Interest expense 596 510 217 193
Net Interest (Paid)/ Recd -596 -510 -217 -193
Other income 8,876 9,985 11,424 13,332
Cash flow from investing -35,335 3,506 -23,217 -28,193
Earnings before tax 25,030 16,757 32,072 38,304
% change Y/Y 10% -33% 91% 19%
Income from Investments 8,876 9,985 11,424 13,332
Tax 7,722 4,571 9,301 10,878
as % of EBT 30.9% 27.3% 29.0% 28.4%
Change in net worth -248 -1,880 0 0
Net income (Adjustedl) 17,308 12,186 22,771 27,426
Debt raised/ (repaid) 2,693 -2,013 500 500
% change Y/Y 11% -30% 87% 20%
Other
Shares outstanding 289 289 289 289
Dividends paid -1,445 -1,011 -1,822 -2,057
EPS (pre-exceptional) 59.9 42.2 78.8 94.9
Cash generated -10,989 16,150 4,241 4,158
% change Y/Y 11% -30% 87% 20%
Beginning cash 14,228 3,240 19,390 23,630
Dividend per share 5.0 3.5 6.3 7.1
Ending cash 3,239 19,390 23,631 27,788
Div payout (%) 8% 8% 8% 8%
Source: Company, J.P. Morgan estimates. Source: Company, J.P. Morgan estimates.

Ratio analysis
Balance sheet
%, year-end March
Rs in millions, year – end March
FY08 FY09 FY10E FY11E
FY08 FY09 FY10E FY11E EBITDA margin 12.5 7.9 11.0 10.9
Cash 3,240 19,390 23,630 27,788 Net profit margin 9.7 6.0 8.6 8.9
Cash equivalents 48,656 27,907 32,907 42,907
Accounts receivable 6,555 9,189 10,249 13,607 Sales growth 22 14 31 16
Inventories 10,380 9,023 13,909 17,009 Net profit growth 11 (30) 87 20
Others 10,734 17,309 18,942 20,738 EPS growth 11 (30) 87 20
Current assets 79,565 82,818 99,636 122,049 Cash EPS Growth 25 (16) 61 17
LT investments 3,151 3,826 3,826 3,826
Net fixed assets 40,328 49,321 59,143 68,350 P/E (x) 24.8 35.2 18.9 15.7
Total assets 123,044 135,965 162,606 194,225 Cash PE (x) 18.7 22.3 13.9 11.9
EV/EBITDA (x) 17.1 23.8 12.8 10.7
Liabilities EV/Sales (x) 2.1 1.9 1.4 1.2
Payables 24,492 30,169 34,291 39,527 Price to Book Value (x) 5.1 4.6 3.8 3.1
Others 3,695 3,807 4,761 5,152
Total current liabilities 28,187 33,976 39,052 44,679 Dividend Yield 0.3 0.2 0.4 0.5
Total debt 9,001 6,988 7,488 7,988 Debt to equity 0.1 0.1 0.1 0.1
Other liabilities 1,701 1,551 1,668 1,791
Total liabilities 38,889 42,515 48,208 54,457 ROE 20.6 13.0 19.9 19.6
Shareholders’ equity 1,445 1,445 1,445 1,445 ROCE 27.0 16.9 26.1 25.7
Shareholders’ net worth 84,154 93,449 114,398 139,767
Source: Company, J.P. Morgan estimates.
BVPS (Rs per share) 291 323 396 484
Source: Company, J.P. Morgan estimates.

201
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

MediaTek Inc. Overweight


Price: NT$480.0
Price Target: NT$630
www.mediatek.com
Company description Taiwan
Mediatek is a leading ٛ ables company across all applications it is present: Semiconductors
among the top 3 in handset baseband; #1 in HDTV controller; #1 in PC Alvin KwockAC
optical storage and DVD/Blu-ray; and among the top 3 in GPS. Its key (852) 2800-8533
customers are China handset brands, LGE, Sony, Samsung and Philips. alvin.yl.kwock@jpmorgan.com

Post mortem Charles Guo


In 2009, Mediatek has replicated its success in other emerging markets. We (852) 2800-8532
believe the past recession has helped the company, as the “cheaper good charles.x.guo@jpmorgan.com

effect” has turned consumers more receptive to whitebox products. J.P. Morgan Securities (Asia Pacific) Ltd.

Potential for earnings upgrades Price performance


Consensus expects about 10-15% revenue growth in 2010, which we believe 450

is too conservative considering a 15% EM unit growth. Mediatek has gained NT$
300
a 6-7%/year EM share since 2005. With a 33% of the global EM share in 150
2009, we believe Mediatek may not hit a ceiling until its reaches a 50-60% Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

share, based on the experiences in China handset market and mature markets 2454.TW share price (NT$
such as consumer DVD. We believe market is too bearish on the company’s TSE (rebased)
Source: Bloomberg.
ASP and margin outlook. As the China handset market is moving from
traditional feature phones to pseudo-smartphones, Mediatek may pull away Performance
from competition if it faces a lot more building blocks to get there (such as 1M 3M 12M
content/apps; improved graphics for better 3D UI; WiFi/touchpad Absolute (%) -9.1 1.3 71.8
Relative (%) -8.8 -6.5 15.3
controller); Mediatek has prepared for this trend for 2-3 years. Content is
Source: Bloomberg.
also another significant driver for the long term, in our view.
How much recovery is priced into the stock? Company data
52-week range (NT$) 176.65-540.00
Despite a strong run up YTD, we believe the stock only reflects a 93% EPS Mkt cap. (NT$B) 523.3
growth in 2009, but not future growth opportunities in non-China share Mkt cap. (US$B) 16.09
gains, global brand opportunities (LG/Moto) and its content story. The stock Avg daily val (US$MM) 128.81
Avg daily volume (MM) 9.42
is still trading near the low-end of its historical range and well below global Shares O/S (MM) 1,090
comps. Date of price 5-Nov-09
Index: TWSE 7,417.46
Price target and key risks Free float (%) 80.8
Our Jun-10 PT of NT$630 is based on 15x FY10E earnings (vs. the historical Exchange rate 32.5
P/E range of 14x-30x), or ~0.9x PEG in 2009-11E. We believe 15x is fair, Source: Bloomberg.
given our expectation of 22%/14% EPS growth in 2010/11. A key risk to our
PT is if Spreadtrum brings in a global chip vendor as a strategic shareholder;
this could promptly reduce the product breadth disadvantage vs. Mediatek.

Bloomberg: 2454 TT; Reuters: 2454.TW


NT$ in billions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Sales 90.2 115.8 142.2 164.8 ROE (%) 22.9 39.9 37.4 33.2
Operating profit 22.1 37.7 47.1 53.1 CORE ROIC (%) 60.3 130.5 152.7 160.2
Pre-tax profit 21.1 38.7 49.8 57.0 Quarterly EPS (NT$) 1Q 2Q 3Q 4Q
Net profit 19.2 37.6 46.4 53.0 EPS (FY09E) 3.83 4.84 6.70 2.68
MV of employee bonus 1.1 9.8 11.6 14.2 EPS (FY10E) 6.51 8.52 10.85 8.88
New Taiwan GAAP EPS 18.0 34.8 42.4 48.4 EPS (FY11E) 7.25 10.40 12.80 11.98
New Taiwan GAAP P/E (x) 26.6 13.8 11.3 9.9 Performance 1M 3M 6M 12M
Cash 38.7 68.6 105.4 142.6 Absolute (%) -9.1 1.3 22.1 71.8
Gross debt 0.0 0.0 0.0 0.0 Relative (%) -8.8 -6.5 5.0 15.3
Equity 81.6 107.0 140.8 178.2 TWSE index (%) -0.3 8.3 16.3 49.0
YE BPS (NT$) 75.9 98.1 128.2 162.3 DCF value (6/2010) NT$ 747
Cash div. (NT$/share) 18.6 13.9 24.7 30.4 Price target (6/2010) NT$ 630
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

202
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

MediaTek Inc.: Summary of financials


NT$ in billions, year-end December
Income statement Ratio analysis
FY07A FY08A FY09E FY10E FY11E % FY07A FY08A FY09E FY10E FY11E

Revenues 80.4 90.2 115.8 142.2 164.8 Gross Margin 57.4 53.7 58.8 58.6 57.9
Cost of Goods Sold 34.2 41.8 47.7 58.8 69.4 EBITDA margin 41.8 27.7 35.3 34.5 33.4
Gross Profit 46.2 48.4 68.1 83.3 95.3 Operating Margin 41.0 24.5 32.6 33.2 32.2
R&D Expenses 9.1 15.8 14.2 19.4 22.3 Net Margin 43.0 21.3 32.5 32.6 32.2
SG&A Expenses 4.1 4.0 4.5 5.2 5.7 R&D/sales 11.3 17.6 12.2 13.6 13.5
Operating Profit (EBIT) 33.0 22.1 37.7 47.1 53.1 SG&A/Sales 5.1 4.5 3.9 3.7 3.5
EBITDA 33.6 25.0 40.9 49.0 55.0
Interest Income 1.6 1.3 0.6 2.5 3.6 Sales growth 51.7 12.2 28.3 22.7 15.9
Interest Expense 0.0 0.0 0.0 0.0 0.0 Operating Profit Growth 45.0 -32.8 70.3 25.0 12.6
Investment Income (Exp.) 1.6 0.0 0.3 0.2 0.3 Net profit growth 53.1 -44.5 96.1 23.2 14.3
Non-Op Income (Exp.) -0.1 -2.3 0.2 0.0 0.0 EPS (Reported) growth 49.9 -45.8 92.8 22.0 14.0
Earnings before tax 36.0 21.1 38.7 49.8 57.0 EPS (New GAAP) growth 149.7 -27.9 92.8 22.0 14.0
Tax -1.5 -1.9 -1.1 -3.5 -4.0
Net Income (Reported) 34.6 19.2 37.6 46.4 53.0 Net debt to total capital -53.2 -47.4 -64.2 -74.8 -80.1
Net Income (New TW GAAP) 26.0 19.2 37.6 46.4 53.0 Net debt to equity -53.2 -47.4 -64.2 -74.8 -80.1
NT$
EPS (Reported) 33.3 18.0 34.8 42.4 48.4 Asset Turnover 82.6 93.4 80.9 74.8 70.7
EPS (New Taiwan GAAP) 25.0 18.0 34.8 42.4 48.4 Working Capital Turns (X) 1.8 2.2 2.7 2.0 1.6
BPS 81.6 75.9 98.1 128.2 162.3 ROE 45.0 29.9 52.0 46.1 41.5
DPS 14.0 18.6 13.9 24.7 30.4 ROIC 43.2 21.5 39.4 35.6 31.2
Shares Outstanding (MM) 1,039.0 1,063.4 1,082.0 1,092.1 1,095.2 ROIC (net of cash) 96.8 43.3 91.2 119.3 139.8

Balance sheet Cash flow statement


FY07A FY08A FY09E FY10E FY11E FY07A FY08A FY09E FY10E FY11E

Cash and cash equivalents 45.7 38.7 68.6 105.4 142.6 Net Income 34.6 19.2 37.6 46.4 53.0
Accounts receivable 5.5 2.5 12.9 17.3 19.2 Depr. & Amortisation 0.7 2.9 3.2 1.9 1.9
Inventories 9.5 3.4 4.0 5.6 6.4 Change in working capital -6.6 13.4 6.1 5.1 2.2
Others 1.9 1.2 5.3 7.2 8.0 Other 0.0 0.0 0.0 0.0 0.0
Current assets 62.6 45.8 90.9 135.5 176.2 Cash flow from ops. 28.7 35.5 46.9 53.3 57.1

LT investments 27.6 35.1 40.2 40.4 40.7 Capex -1.1 -2.9 -0.2 -3.9 -3.9
Net fixed assets 5.2 5.2 2.3 4.3 6.3 Disposal/ (purchase) -5.1 -16.1 -4.3 -0.2 -0.3
Others 1.9 10.5 9.7 9.7 9.7 Cash flow from investing -6.2 -19.0 -4.6 -4.1 -4.2
Total assets 97.3 96.6 143.1 190.0 233.0 Free cash flow 27.6 32.6 46.6 49.4 53.2

Liabilities Equity raised/ (repaid) 3.3 3.2 19.7 14.5 17.6


ST loans 0.0 0.0 0.0 0.0 0.0 Debt raised/ (repaid) 0.0 0.0 0.0 0.0 0.0
Payables 6.6 3.8 8.0 11.4 12.9 Other 0.0 0.0 0.0 0.0 0.0
Others 4.6 11.1 28.0 37.7 41.8 Dividends paid -14.5 -19.8 -15.0 -27.0 -33.3
Total current liabilities 11.3 14.9 36.1 49.1 54.7 Cash flow from financing -11.2 -16.5 4.7 -12.5 -15.7
Long term debt 0.0 0.0 0.0 0.0 0.0
Other liabilities 0.1 0.1 0.1 0.1 0.1 Net change in cash 11.3 -0.1 47.0 36.7 37.3
Total liabilities 11.4 15.0 36.1 49.1 54.8 Beginning cash 39.4 45.7 38.7 68.6 105.4
Shareholders' equity 85.9 81.6 107.0 140.8 178.2 Ending cash 50.7 45.6 85.6 105.4 142.6
Source: Company, J.P. Morgan estimates.

203
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Metropolitan Bank & Trust Co. Overweight


Php41.00
Price Target: Php50.00
www.metrobank.com.ph

Company description Philippines


Metrobank is one of the top three banks in the Philippines. MBT was Banks
established in 1962 and achieved progress in the 1980s after it obtained its
Harsh Wardhan ModiAC
universal banking license and acquired a controlling interest in PSBank. (65) 6882-2450
MBT offers a full range of banking products, including bancassurance, harsh.w.modi@jpmorgan.com
insurance, and investment management. With assets of nearly Php777
J.P. Morgan Securities Singapore Private
billion, the bank has over 700 domestic branches. Limited

Post mortem Price performance


MBT has made significant improvement in its credit risk management over 45

the past three years. Entire credit risk underwriting process was revamped, Php 30
while relationship-based lending and exceptions are being curtailed. Asset
15
quality has been stable in the past two years, with NPL ratio at 4.8% in June Oc t-08 Jan -09 Ap r-09 Ju l-09 Oc t-09
2009, versus the system NPL and NPA ratio of 3.79% and 4.38%, M BT. PS s hare pric e (Php
respectively. PS E (reba se d)

Source: Reuters.
Potential for earnings upgrades
Performance
MBT has a high operating leverage. We estimate that every 5% change in
1M 3M 12M
top line translates into a corresponding 14% change in PPOP and a 17%
Absolute (%) 12.0 31.2 50.0
change in EPS. Bottom-line impact of credit cost changes is also
substantial—every 10bp change corresponds to a 4% change in EPS. Relative (%) 7.9 10.6 21.4
Source: Reuters.
How much recovery is priced into the stock? Company data
RoE has been in single digits over the past 10 years, except in 2007 due to 43-19.50
52-week range (Php)
the exceptional boost from bond gains. This was primarily driven by higher
Mkt cap. (PhpMM) 74,098
credit costs. We expect improvement in credit risk management and the
Mkt cap. (US$MM) 1,555
charge-off of the remaining SPV debt of Php4.8 billion this year to be key
Avg daily value (US$MM) 2.2
catalysts for a re-rating.
Avg daily volume (MM) 2.3
Shares O/S (MM) 1,807
Price target and key risks
Date of price 5-Nov-09
Our Dec-10 PT of Php50 is based on a 2-stage DDM. We use a fair P/BV-
Index: PSEi 2,945
based multiple of 0.92x, with a normalized RoE of 13.4%, cost of capital of
Free float (%) 44
14%, and a growth rate of 7%. Key risks to our PT include a delay in clean-
Exchange rate 47.6
up of the book, and capital call.
Source: Bloomberg.
Bloomberg: MBT PM; Reuters: MBT.PS
Php in millions, year-end December
FY08 FY09E FY10E FY11E
Operating profit 10,361 13,475 14,619 17,354
Net profit 4,408 4,844 7,154 9,574
EPS (Php) 2.44 2.68 3.96 5.30
DPS (Php) 0.60 0.80 1.20 1.60
EPS growth (%) -39.9% 9.9% 47.7% 33.8%
ROE (%) 7.2% 8.0% 11.1% 13.7%
P/E (x) 16.8 15.3 10.4 7.7
BVPS (Php) 32.5 34.3 36.9 40.4
P/BV (x) 1.26 1.20 1.11 1.02
Div yield (%) 1.5% 2.0% 2.9% 3.9%
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

204
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Metropolitan Bank & Trust Co.: Summary of financials


Income statement - Php mn 2007 2008 2009E 2010E 2011E Growth Rates 2007 2008 2009E 2010E 2011E
Margins (% of Earning Ass 3.52% 3.46% 3.51% 3.58% 3.62% Loans 7% 17% 4% 12% 13%
Earning Assets/Assets 89% 90% 91% 91% 91% Deposits 8% 11% 5% 13% 10%
NIM (as % of avg. Assets) 3.15% 3.12% 3.18% 3.25% 3.30% Assets 10% 7% 8% 10% 8%
Equity 3% -7% 5% 7% 9%
Net Interest Income 21,466 23,069 25,256 28,186 31,249
Net Interest Incom 12% 7% 9% 12% 11%
Total Non-Interest Revenue 14,906 11,486 13,831 12,930 14,049 Non-Interest Income 2% -23% 20% -7% 9%
Fee income 5,507 6,783 6,444 7,088 7,797 of which Fee Grth 10% 23% -5% 10% 10%
FX/Trading gains 5,757 -504 3,482 1,741 1,741 Revenues 8% -5% 13% 5% 10%
Other operating income 3,642 5,208 3,906 4,101 4,511 Costs 6% 9% 6% 3% 5%
Total operating revenues 36,371 34,555 39,087 41,116 45,297 Pre-Provision Prof 11% -27% 30% 8% 19%
Operating costs -22,174 -24,194 -25,612 -26,497 -27,943 Loan Loss Provision -4% -58% -5% -44% -44%
Operating profit 14,198 10,361 13,475 14,619 17,354 Pre-Tax 47% 4% 4% 48% 34%
Loan Loss Provisions -7,787 -3,248 -3,087 -1,730 -975 Attributable Incom 27% -37% 10% 48% 34%
Other provisions 0 0 -3,000 -1,500 -800 EPS 21% -40% 10% 48% 34%
Exceptionals 0 0 0 0 0 DPS 20.0% -50.0% 33.3% 50.0% 33.3%
Disposals/ Other income 1,396 992 1,000 1,000 1,000
Pre-tax profit 7,807 8,104 8,388 12,389 16,579 Balance Sheet Gea 2007 2008 2009E 2010E 2011E
Tax -88 -3,027 -2,852 -4,212 -5,637
Minorities/preference dividen -675 -669 -692 -1,022 -1,368 Loan/Deposit 58% 61% 61% 61% 63%
Attributable net income 7,043 4,408 4,844 7,154 9,574 Investment/Assets 18% 19% 23% 22% 22%
Loan/Assets 43% 47% 45% 46% 48%
Customer deposits/ 74% 77% 74% 76% 77%
LT Debt/Liabilities 3% 2% 3% 3% 2%
Per Share Data 2007 2008 2009E 2010E 2011E Asset Quality/Cap 2007 2008 2009E 2010E 2011E
EPS (Php/ share) 4.1 2.4 2.7 4.0 5.3 Loan loss reserves/ -4.2% -3.8% -3.5% -3.2% -2.8%
DPS (Php/ share) 1.2 0.6 0.8 1.2 1.6 NPLs/loans 5.0% 4.2% 4.5% 4.2% 3.9%
Payout 29.6% 24.6% 29.8% 30.3% 30.2% Loan loss reserves/ 80% 86% 76% 73% 69%
NAV 35.5 32.5 34.3 36.9 40.4 Growth in NPLs -18% -2% 9% 7% 5%
Avg. Shares Issued 1,736 1,807 1,807 1,807 1,807
Tier 1 Ratio 9.1% 9.7% 10.1% 10.0% 10.4%
Total CAR 13.9% 13.4% 13.6% 13.1% 13.4%
Key balance sheet - Php m 2007 2008 2009E 2010E 2011E Du-Pont Analysis 2007 2008 2009E 2010E 2011E
Net Customer Loans 304,898 358,163 372,686 419,162 474,283 NIR/Avg. Assets 3.15% 3.12% 3.18% 3.25% 3.30%
Loans loss reserves 12,769 13,541 13,127 13,357 13,332 Non IR/Avg. Asset 2.18% 1.55% 1.74% 1.49% 1.48%
Gross Loans 317,667 371,704 385,813 432,520 487,615 Non IR/Total Rev 41.0% 33.2% 35.4% 31.4% 31.0%
Investments 127,359 147,501 185,815 198,822 212,739 Total Rev/Avg. As 5.33% 4.67% 4.92% 4.75% 4.79%
Other Earning Assets 200,994 191,118 194,465 217,223 220,848 Cost/Income 61.0% 70.0% 65.5% 64.4% 61.7%
Average Earning Assets = 610,626 666,068 719,101 787,553 863,723 Cost/Assets 3.25% 3.27% 3.23% 3.06% 2.95%
Total assets 716,068 764,809 823,336 908,712 984,058 Operating ROAA 0.9% 1.0% 1.3% 1.5% 1.7%
LLP/Loans -2.5% -0.9% -0.8% -0.4% -0.2%
Customer deposits 529,543 585,307 612,236 690,736 757,416 Other inc:provs 0.00% 0.00% 0.38% 0.17% 0.08%
Long-term bond funding 18,620 15,856 22,199 22,199 22,199 Pre-tax ROAA 1.1% 1.1% 1.1% 1.4% 1.8%
Other Interest Bearing Liabili 93,429 94,642 116,498 118,388 120,373 Tax -1.1% -37.4% -34.0% -34.0% -34.0%
Average Interest Bearing L 578,013 633,023 686,293 752,380 824,970 MI -0.1% -0.1% -0.1% -0.1% -0.1%
Average Assets 682,427 740,439 794,073 866,024 946,385 ROAA 1.0% 0.6% 0.6% 0.8% 1.0%
Shareholders' equity 74,476 69,005 72,403 77,388 84,071 RoRWA 1.7% 0.9% 0.9% 1.3% 1.5%
Risk Weighted Assets 452,295 501,085 543,402 599,750 639,638 Equity/Assets 9.2% 8.3% 7.6% 7.4% 7.4%
Average Risk Weighted As 418,974 476,690 522,243 571,576 619,694 ROE 11.2% 7.2% 8.0% 11.1% 13.7%

Source: Company data, J.P. Morgan estimates.

205
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

MindTree Overweight
Rs603
Price Target: Rs700
www.mindtree.com

Company description India


MindTree is a mid-sized Indian IT services company, founded in 1999. The IT Services
company is structured into two business units that focus on software Manoj SinglaAC
development (IT Services) and R&D services. The company has clients that (91-22) 6157-3587
range from Fortune 100 companies to enterprise software organizations. It manoj.singla@jpmorgan.com
had posted an industry-leading revenue growth of 42% over FY05-09. The J.P. Morgan India Private Limited
company has a marquee client base, systems/processes that are ahead of its
mid-cap peer group and higher offshore mix than peers. Price performance
150 MindTree Sensex (rebased)

Post mortem 100

MindTree saw a revenue slowdown from some of its customers impacted by 50

the slowdown. The company is now seeing increasing volumes from most of 0
its top-tier customers; this, we believe, led to 4% Q/Q volume growth in the

Oct-08

Dec-08

Oct-09
Jan-08
Feb-08
Mar-08
Apr-08

Jun-08
Jul-08
Aug-08
Sep-08

Jan-09
Feb-09
Mar-09
Apr-09

Jun-09
Jul-09
Aug-09
Sep-09
May-08

Nov-08

May-09

Nov-09
past quarter and expectation of a volume recovery going forward. Given the
good execution and increased deal signings, we believe MindTree is in a Source: Bloomberg.

position to post a 15-20% revenue growth over the next 1-2 years with stable
Performance
margins.
1M 3M 12M

Potential for earnings upgrades Absolute (%) 0.2 34.6 134.7


We expect a 10%-15% upside to consensus’ FY10/11 EPS estimates for Relative (%) 5.2 33.3 47.8
MindTree, and believe the stock will re-rate as consensus estimates increase Source: Bloomberg.
over the next 1-2 quarters.
Company data
How much recovery is priced into the stock? 52-week range (Rs) 181-650
We believe IT spend recovery will affect mid-cap Indian IT stocks with a lag Mkt cap. (Rs B) 22.76
compared to large-caps. Hence, we expect mid-caps to see more absolute Mkt cap. (US$MM) 483.8
upside than large caps and MindTree is our top pick in the mid-cap space. Avg daily value (US$MM) 4.2
Avg daily volume (MM) 0.41
Price target and key risks Shares O/S (MM) 38
Our Jun-10 price target of Rs700 is based on a one-year forward P/E multiple Date of price 5-Nov-09
of 12x—at a 30%-35% discount to the target P/E multiples of top-tier Indian Index: Sensex 16,063.9
IT companies (Infosys/TCS/Wipro). Key risks to our price target are Free float (%) 23
rupee/US$ appreciation and protectionism. Exchange rate (Rs/US$) 47.0
Source: Bloomberg.
Bloomberg: MTCL IN; Reuters: MINT.BO
Rs in millions, year-end March
FY09 FY10E FY11E FY12E
Sales 10,126 12,867 15,017 17,908
Net profit 300 1,965 2,079 2,512
EPS (Rs) 7.9 50.4 53.3 62.8
FD EPS (Rs) 7.9 50.4 53.3 62.8
DPS (Rs) 1.0 4.5 5.5 6.5
Sales growth (%) 36.9 27.1 16.7 19.2
Net profit growth (%) -71.0 554.9 5.8 20.8
EPS growth (%) -71.0 554.9 5.8 20.8
ROE (%) 5.6 33.8 28.7 27.1
P/E (x) 76.7 12.0 11.3 9.6
FD P/E (x) 76.7 12.0 11.3 9.6
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

206
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

MindTree: Summary of financials


Profit and loss statement Cash flow statement
Rs in millions, year-end March Rs in millions, year-end March
FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E
Revenue 10,126 12,867 15,017 17,908 EBIT 2,173 1,798 2,289 2,858
% change Y/Y 36.9 27.1 16.7 19.2 Depreciation & amortization 469 650 720 807
Gross margin (%) 39.1 33.4 33.0 33.0 Change in working capital 717 -1,425 -583 -513
EBITDA 2641 2449 3009 3665 Taxes 25 272 367 628
% change Y/Y 110.6 -7.3 22.9 21.8 Cash flow from operations 1,485 1,191 2,217 2,807
EBITDA margin (%) 26.1 19.0 20.0 20.5 Capex -317 -889 -600 -600
EBIT 2,173 1,798 2,289 2,858 Disposal/(purchase) 1,485 1,191 2,217 2,807
% change Y/Y 142.0 -17.2 27.3 24.8 Net interest (83) 50 157 283
EBIT margin (%) 21.5 14.0 15.2 16.0 Free cash flow 1,169 302 1,617 2,207
Net interest (83) 50 157 283 Equity raised/(repaid) -292 -740 2 2
Earnings before tax 325 2,237 2,446 3,140 Debt raised/(repaid) 476 -1,363 0 0
% change Y/Y -70.9 587.3 9.4 28.4 Other -58 206 0 0
Tax 25 272 367 628 Dividends -44 -205 -251 -304
as % of EBT 7.8 12.2 15.0 20.0 Beginning cash 1,942 477 1,533 2,901
Net income (reported) 300 1,965 2,079 2,512 Ending cash 477 1,533 2,901 4,806
% change Y/Y -71.0 554.9 5.8 20.8 DPS (Rs) 1.0 4.5 5.5 6.5
Shares O/S (MM) 39 39 40 41 Source: Company, J.P. Morgan estimates.
EPS (reported) (Rs) 7.9 50.4 53.3 62.8
Source: Company, J.P. Morgan estimates.

Ratio analysis
Rs in millions, year-end March
Balance sheet
FY09 FY10E FY11E FY12E
Rs in millions, year-end March EBITDA margin 26.1 19.0 20.0 20.5
FY09 FY10E FY11E FY12E Operating margin 21.5 14.0 15.2 16.0
Cash and cash equivalents 477 1,533 2,901 4,806 Net profit margin 3.0 15.3 13.8 14.0
Accounts receivable 2,150 2,586 3,068 3,639 SG&A/sales 17.7 19.4 17.7 17.0
Inventories 0 0 0 0 Sales growth 36.9 27.1 16.7 19.2
Others 1,231 1,995 2,542 3,015 Net profit growth -71.0 554.9 5.8 20.8
Current assets 3,858 6,114 8,511 11,461 Sales per share growth 33.1 27.1 13.8 16.3
LT investments 2,920 0 0 0 EPS growth -71.2 541.2 5.8 17.8
Net fixed assets 2,438 2,677 2,557 2,349 Interest coverage (x) 13.4 64.4 374.9 467.9
Total assets 9,360 8,998 11,275 14,017 Net debt to total capital 13.7 n.m. n.m. n.m.
Liabilities Net debt to equity 17.3 n.m. n.m. n.m.
ST loans 0 0 0 0 Sales/assets 108.2 143.0 133.2 127.8
Payables 2,499 2,274 2,720 3,252 EBIT margin 21.5 14.0 15.2 16.0
Others 0 0 0 0 ROCE 22.5 24.7 25.9 24.1
Total current liabilities 2,499 2,274 2,720 3,252 Assets/equity (x) 1.8 1.4 1.4 1.4
Long-term debt 1,394 31 31 31 ROI 33.5 32.2 29.0 31.2
Other liabilities 164 370 370 370 ROE 5.6 33.8 28.7 27.1
Total liabilities 4,057 2,674 3,121 3,653 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 5,304 6,323 8,154 10,364
BVPS (Rs) 136.1 162.2 203.9 252.9
Source: Company, J.P. Morgan estimates.

207
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

MMK Overweight
Price: $0.83
Price Target: $1.13
www.mmk.ru
Company description Russia
With 13.3mn t of crude steel production (2008), MMK is the leading Russian Metals & mining
flat steel producer and 23rd largest steelmaker in the world (2008). With Yuriy VlasovAC
exposure to the tubular and machine-building industries, MMK has (7-495) 967-7033
established the strongest footprint in the domestic market among the Russian yuriy.a.vlasov@jpmorgan.com
steelmakers. Export is traditionally focused on the Middle East and Turkey, J.P. Morgan Bank International LLC
where MMK is building 2 processing warehouses and a re-rolling plant. In
2H09 MMK acquired Russian coal miner Belon, improving its downstream
Price Performance
integration. In the short term, the company plans to install and commission 0.9
Mill 2000, aiming to produce high-quality automotive steel. 0.7

$ 0.5
Post mortem
0.3
With the domestic market on the recovery path, MMK is strengthening its
0.1
position in the domestic market. Acquisition of the coal business (Belon) Nov-08 Feb-09 May-09 Aug-09 Nov-09
should support MMK’s cost base. Prudent borrowing has paid off as the
company has emerged with a strong balance sheet after the downturn. Source: Bloomberg

Performance
Potential for earnings upgrades 1M 3M 12M
Operating at 85% utilisation in 4Q09, MMK has the potential for volume Absolute (%) 7% 32% 315%
growth, however, we believe the largest impact on EPS should come from a Relative (%) 5% -9% 117%
combination of improved product mix, strengthened domestic prices and Source: Bloomberg
ruble appreciation.
Company data
How much recovery is priced into the stock? 52-week range ($) 0.15- 0.83
Mkt cap. (US$MM) 9,263
We estimate that with an increase in domestic steel demand in 2010 (JPMe Avg daily value (US$MM) 3.5
+16% y/y), MMK should benefit from a higher operating margin due to a Avg daily volume (MM) 618
domestic price premium. Inclusion in MSCI Russia is an extra trigger, we Shares O/S (MM) 11,160
believe. Date of price 23-Nov-09
Index: RTS 1467
Free float (%) 12%
Price target and key risks Exchange rate 1.00
Our end-10, DCF-based PT is $1.13/sh. Key risks are a decline in domestic Source: Bloomberg
steel consumption (particularly in the tubular and machine-building
industries), weak flat-steel prices and a strong ruble.

Bloomberg: MAGN RU; Reuters: MAGN.MM


$ in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 10,550 4,512 5,919 8,406
Net profit 1,075 136 501 1,094
EPS ($) 0.096 0.012 0.045 0.098
FD EPS ($) 0.147 0.095 0.056 0.063
DPS ($) 0.05 0.03 0.00 0.01
Sales growth (%) 29% -57% 31% 42%
Net profit growth (%) -39% -87% 268% 118%
EPS growth (%) -39% -87% 268% 118%
ROE (%) 11% 1% 5% 10%
P/E (x) 8.6 68.1 14.5 8.5
FD P/E (x) 5.4 69.2 12.9 6.7
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as at cob 23 November 2009.

208
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

MMK: Summary of Financials


Profit and Loss Statement Cash flow statement
$ in millions, year end Dec FY08 FY09E FY10E FY11E $ in millions, year end Dec FY08 FY09E FY10E FY11E

Revenues 10,550 4,512 5,919 8,406 EBIT 1,259 175 688 1,558
% Change Y/Y 28.7% -57.2% 31.2% 42.0% Depreciation & amortization 945 638 670 704
Gross Margin (%) 25.7% 23.7% 33.0% 36.0% Change in working capital (269) 153 33 (202)
EBITDA 2,204 813 1,358 2,262 Taxes 25 0 0 0
% Change Y/Y -7.9% -63.1% 67.0% 66.6% Cash flow from operations 1,935 966 1,391 2,060
EBITDA Margin (%) 20.9% 18.0% 22.9% 26.9%
EBIT 1,259 175 688 1,558 Capex (2,112) (1,021) (1,200) (1,400)
% Change Y/Y -40.9% -86.1% 293.1% 126.6% Disposals/(purchase) 0 0 0 0
EBIT Margin 11.9% 3.9% 11.6% 18.5% Net Interest (18) (38) (28) (28)
Net Interest (18) (38) (28) (28) Free cash flow 946 (83) 67 366
Earnings before tax 1,106 193 705 1,580
% change Y/Y -51.8% -82.5% 264.5% 124.2% Equity raised/repaid - - - -
Tax (25) (46) (141) (316) Debt Raised/repaid 412 300 250 -125
as % of EBT 27.5% 24.0% 20.0% 20.0% Other - - - -
Net Income (Reported) 1,075 136 501 1,094 Dividends paid (314) 0 (75) (164)
% change Y/Y -39.3% -87.4% 268.4% 118.4% Beginning cash 256 1,106 1,287 1,493
Shares Outstanding 11,160.3 11,160.3 11,160.3 11,160.3 Ending cash 1,106 1,287 1,493 1,534
EPS (Reported) - - - - DPS 0.03 0.00 0.01 0.01
% Change Y/Y - - - -

Balance sheet Ratio Analysis


$ in millions, year end Dec FY08 FY09E FY10E FY11E $ in millions, year end Dec FY08 FY09E FY10E FY11E

Cash and cash equivalents 1,106 1,287 1,493 1,534 EBITDA margin 20.9% 18.0% 22.9% 26.9%
Accounts Receivable 991 524 555 787 Operating margin 10.2% 3.9% 11.6% 18.5%
Inventories 996 527 557 791 Net Profit margin 10.2% 3.0% 8.5% 13.0%
Others - - - - SG&A/Sales -4.9% -7.7% -6.9% -5.9%
Current assets 3,628 2,873 3,141 3,648
Sales per share growth 24.9% -57.2% 31.2% 42.0%
LT investments 358 358 358 358 Sales growth 28.7% -57.2% 31.2% 42.0%
Net fixed assets - - - - Net profit growth -39.3% -87.4% 268.4% 118.4%
Total assets 14,197 13,860 14,694 15,934 EPS growth - - - -

ST loans 1,276 1,276 1,276 1,276 Interest coverage (x) 69.9 4.6 24.6 55.7
Payables 1,321 537 632 897 Net debt to Total Capital - - - -
Others - - - - Net debt to equity 6.3% 7.4% 7.5% 5.3%
Total current liabilities 2,640 1,856 1,951 2,216 Sales/assets (x) 0.7 0.3 0.4 0.5
Long term debt 405 705 955 830 Assets/Equity 146.9% 141.4% 143.7% 142.8%
Other liabilities - - - - ROE 11.1% 1.4% 4.9% 9.8%
Total liabilities 4,345 3,861 4,206 4,346 ROCE 10.9% 1.5% 5.4% 11.4%
Shareholders' equity 9,663 9,799 10,225 11,155
BVPS 1 1 1 1

Source: Company reports and J.P. Morgan estimates.

209
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

MTN Overweight
Price: 11,940c
Price Target: 15,843c
www.mtn.com
Company description South Africa
MTN is a leading MNO on the African continent and the Middle East. The Wireless Services
group has a presence in 21 countries - key markets include Nigeria, South Jean-Charles LemardeleyC
Africa, Iran, Ghana, Cote d’Ivoire and Syria. We forecast MTN to report (44-20) 7325 5763
FY09E revenue of R122.8bn, and EBITDA of R50.3bn. jean-charles.lemardeley@jpmorgan.com
J.P. Morgan Securities Ltd.
Post mortem
Post the protracted and ultimately unsuccessful negotiations with Bharti, Price Performance
operationally sound H109A results and the strength in the rand exchange rate 14,000
against the US$ that renders MTN less attractive for rand-based investors,
we estimate that MTN is trading on a normalized free cash flow yield of 13- 12,000
c
14% on 2010E, placing it amongst the most attractively valued mobile stocks 10,000
in our EM universe, despite being one of the most promising growth stories
and one of the most respected names in the sector. Our FY09E headline EPS 8,000

of 1016c represents YoY growth of 18.6%, driven by an increase of 21.8% Nov-08 Feb-09 May-09 Aug-09 Nov-09

YoY in total subscribers (to 110.5m). In our view, the key drivers for the Source: Bloomberg
stock should be strong underlying growth and a stabilisation in the rand
exchange rate. A strong operating performance would likely help the market Performance
refocus on MTN's strong growth prospects. 1M 3M 12M
Absolute (%) -4.3 -5.6 18.9
How much recovery is priced into the stock? Source: Bloomberg
We believe that at these levels, the MTN does not fully price in the likely
growth recovery we expect in 2010, and neither do we think it prices in the Company data
strong growth potential we believe remains beyond then. Price(c) 11,940
Date of Price 23-Nov-09
Price target and key risks Price Target (c) 15,843
Price Target End Date 01-Sep-10
Our Sep-10 DCF and multiples-based TP is 15,843c, supported by higher 52-week Range (c) 13,600 – 8,181
relative multiples as potential M&A activity ceases to influence pricing and Mkt Cap (Rbn) 219.70
rand growth recovers. Key risks include: 1) increasing competitive pressures Shares O/S (mn) 1,840
and regulation, particularly if MTR cuts are followed by deep price Mkt Cap ($bn) 28.9
Source: Bloomberg, J.P. Morgan
discounting; 2) macro & political uncertainty; and 3) fluctuations in the rand.
JPM sees only limited further upside and scope for some reversal of the
recent strength in 2010.
Bloomberg: MTN SJ; Reuters: MTNJ.J
Rand millions, year-end Dec
FY08 FY09E FY10E FY11E
Sales 102,526 122,754 133,897 148,398
Net profit 16,675 18,896 21,806 -
FD EPS (SAcps) 893.93 1,016.48 1,179.95 -
DPS (SAcps) 181 205 285 355
Sales growth (%) 40.2 19.7 9.1 10.8
Net profit growth (%) 33.1 13.3 15.4 -
EPS growth (%) 32.9 13.7 16.1 -
ROE (%) 27.2 22.7 21.6 -
FD P/E (x) 13.4 11.7 10.1 -
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

210
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

MTN Group Limited: Summary of Financials


Profit and Loss Statement Cash flow statement
R in millions, year end Dec FY08 FY09E FY10E FY11E FY12E R in millions, year end Dec FY08 FY09E FY10E FY11E FY12E

Revenues 102,526 122,754 133,897 148,398 - Cash EBITDA - - - - -


% Change Y/Y 40.2% 19.7% 9.1% 10.8% - Interest (1,917) (3,265) (2,150) - -
EBITDA 43,166 50,272 55,173 61,220 - Tax (6,781) (8,270) (10,480) - -
% Change Y/Y 35.5% 16.5% 9.7% 11.0% - Other 0 0 0 - -
EBITDA Margin 42.1% 41.0% 41.2% 41.3% - Cash flow from operations 45,416 51,032 55,566 61,220 -
EBIT 30,212 35,931 40,663 45,055 -
% Change Y/Y 33.1% 18.9% 13.2% 10.8% - Capex PPE (28,263) (30,661) (22,475) - -
EBIT Margin 29.5% 29.3% 30.4% 30.4% - Net investments - - - - -
Net Interest (1,917) (3,265) (2,150) - - CF from investments - - - - -
PBT 28,295 32,666 38,513 - - Dividends (2,536) (3,381) (3,788) - -
% change Y/Y 44.9% 15.4% 17.9% - - Share (buybacks)/ issue - - - - -
Net Income (clean) 16,675 18,896 21,806 - -
% change Y/Y 33.1% 13.3% 15.4% - - CF to Shareholders - - - - -
Average Shares - - - - - FCF to debt - - - - -
Clean EPS 893.93 1,016.48 1,179.95 - -
% change Y/Y 32.9% 13.7% 16.1% - - OpFCF (EBITDA - PPE) - - - - -
DPS 181 205 285 355 - EFCF pre Div, PPE - - - - -

Balance sheet Ratio Analysis


R in millions, year end Dec FY08 FY09E FY10E FY11E FY12E R in millions, year end Dec FY08 FY09E FY10E FY11E FY12E

Cash and cash equivalents - - - - - EBITDA margin 42.1% 41.0% 41.2% 41.3% -
Accounts Receivables - - - - - EBIT Margin 29.5% 29.3% 30.4% 30.4% -
ST financial assets - - - - - Net profit margin 16.3% 15.4% 16.3% - -
Others - - - - - Capex/sales 21.0% 27.6% 25.0% - -
Current assets - - - - - Depreciation/Sales - - - - -
LT investments 5,340 5,340 5,183 5,183 -
Net fixed assets - - - - - Revenue growth 40.2% 19.7% 9.1% 10.8% -
Total assets 169,054 176,792 191,312 212,519 - EBITDA Growth 35.5% 16.5% 9.7% 11.0% -
ST loans - - - - - EPS Growth 32.9% 13.7% 16.1% - -
Payables - - - - -
Others - - - - - Net debt/EBITDA 0.6 0.3 0.2 - -
Total current liabilities - - - - - CF to Shareholders - - - - -
Long term debt - - - - - FCF to debt - - - - -
Other liabilities - - - - -
Total liabilities 89,202 81,566 75,510 71,984 - OpFCF (EBITDA - PPE) - - - - -
Shareholders' equity 75,696 90,676 110,803 135,035 - EFCF pre Div, PPE - - - - -

Source: Company reports and J.P. Morgan estimates.

211
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Nan Ya Plastics Corp Overweight


NT$53.20
Price Target: NT$61.00
www.npc.com.tw

Company description Taiwan


Nan Ya Plastics (NYP) is one of the largest polyester and MEG producers in Petrochemicals
Asia. The company started out as a PVC processor, taking PVC powder from Samuel Lee, CFAAC
Formosa Plastics and producing PVC pipes, film, leather, which they (852) 2800-8536
continue to do so today. Aside from MEG, they also produce other specialty samuel.sw.lee@jpmorgan.com
chemicals such as 1,4-Butanediol and TDI. In recent years, they have J.P. Morgan Securities (Asia Pacific)
expanded to the electronics sector with subsidiaries producing products such Limited
as DRAM and PCB, with NYP supplying raw materials to the latter.
Price performance
Post mortem 70
We expect NYP to post superior earnings growth in 2010 than other Formosa NT$ 50

Group members, as its electronics business continues to improve. This year 30


NYP has benefited from the unexpected turnaround in the petrochemicals Nov-08 Feb-09 May-09 Aug-09 Nov-09
industry and jump in DRAM prices from $0.85/Gb in January to $2.74/Gb 1303.TW share price (NT$
now, while the PCB business continues to grow on the back of strong TSE (rebased)

demand for electronics. Source: Bloomberg.

Potential for earnings downgrade Performance


The major downside risk to NYP earnings in 2010, in our view, is MEG 1M 3M 12M
spreads contracting further due to new capacities from the Middle East. Absolute (%) 3.8 28.1 35.7
However, with YTD MEG spreads hovering around $120/ton, we think the Relative (%) 2.9 16.9 -30.5
downside is limited, given it is already near cash costs. Source: Bloomberg.

How much upside is priced into the stock? Company data


As consensus earnings estimates for the DRAM business has continued to 52-week range (NT$) 30.49-57.20
lag the actual results, we believe there is room for further upside if DRAM Mkt cap. (NT$ MM) 417,726
prices stay at current levels and Nanya Tech completes its transition to the Mkt cap. (US$MM) 12,853
50nm technology in 1Q10 and potentially turn profitable in 2010. Avg daily value (US$MM) 378.25
Avg daily volume (MM) 8.73
Price target and key risks Shares O/S (MM) 7,852
Our Dec-10 PT of NT$61 is based on 2.0x 2010E BV, similar to levels we Date of price 5-Nov-09
have valued Formosa Plastics at. While contribution from FPCC is expected Index: TWSE 7,417
to decline, this will be offset by earnings from Nanya Tech and Nan Ya PCB. Free float (%) 74.3
A key downside risk to our PT is MEG overcapacity, which could negatively Exchange rate 32.5
affect NYP’s chemical earnings. Source: Bloomberg.

Bloomberg: 1303 TT; Reuters: 1303.TW


NT$ in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 208,179 159,970 188,196 224,757
Net profit 9,386 12,919 18,873 28,226
EPS (NT$) 1.23 1.65 2.40 3.59
DPS (NT$) 6.70 0.80 1.07 1.56
Sales growth (%) -8.7% -23.4% 17.6% 19.4%
Net profit growth (%) -84.1% 37.7% 46.1% 49.6%
EPS growth (%) -84.1% 33.6% 46.1% 49.6%
ROE (%) 3.7% 5.7% 8.2% 11.8%
P/E (x) 43.2 32.2 22.2 14.8
P/BV (x) 1.8 1.8 1.8 1.7
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

212
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Nan Ya Plastics Corp: Summary of financials


NT$ in millions, year-end December

Income statement Cash flow statement


FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E

Revenues 228,700 208,719 159,970 188,196 224,757 EBIT 36,744 11,962 9,381 13,663 17,036
% change Y/Y 25.9% (8.7%) (23.4%) 17.6% 19.4% Depr. & amortization 8,727 8,717 8,326 8,326 8,326
EBITDA 45,471 20,680 17,708 21,989 25,362 Change in working capital -8,341 -334 -14,713 8,339 10,710
% change Y/Y 78.6% -54.5% -14.4% 24.2% 15.3% Taxes -8263 -1 -1299 -1731 -2588
EBIT 36,744 11,962 9,381 13,663 17,036 Cash flow from operations 70,313 49,218 39,738 19,818 20,938
% change Y/Y 109.1% NM NM 45.6% 24.7%
EBIT Margin 16.1% 5.7% 5.9% 7.3% 7.6% Capex -5,595 -5,447 -5,827 -2,914 -1,457
Net Interest -2,042 -2,034 -1,567 -1,985 -1,887 Disposal/(purchase) 3,725 380 - - -
Earnings before tax 67,310 9,387 14,219 20,603 30,814 Net Interest -2,042 -2,034 -1,567 -1,985 -1,887
% change Y/Y 29.3% -86.1% 51.5% 44.9% 49.6% Other -19,648 -6,513 -3,149 -4,809 -4,638
Tax -8,263 -1 -1,299 -1,731 -2,588 Free cash flow 64,719 43,771 33,911 16,904 19,481
as % of EBT 12.3% 0.0% 9.1% 8.4% 8.4%
Net income (reported) 59,047 9,386 12,919 18,873 28,226 Equity raised/(repaid) - - - - -
% change Y/Y 23.9% -84.1% 37.6% 46.1% 49.6% Debt raised/(repaid) -7,287 13,705 -14,283 -11,574 -5,058
Shares outstanding 7,624 7,624 7,852 7,852 7,852 Other -260 -22 823 0 0
EPS (reported) 7.75 1.23 1.65 2.40 3.59 Dividends paid -38,026 -51,041 -6,099 -8,398 -12,267
% change Y/Y 23.9% (84.1%) 33.6% 46.1% 49.6% Beginning cash 2,852 2,432 2,159 12,339 4,262
Ending cash 2,432 2,159 12,339 4,262 1,581
DPS 6.70 0.80 1.07 1.56 2.34

Balance sheet Ratio analysis


FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E

Cash and cash equivalents 2,432 2,159 12,339 4,262


1,581 EBITDA margin 19.9% 9.9% 11.1% 11.7% 11.3%
Accounts receivable 55,320 42,623 32,668 38,432
45,898 Operating margin 16.07% 5.73% 5.86% 7.26% 7.58%
Inventories 26,219 20,843 15,975 18,793
22,444 Net margin 25.8% 4.5% 8.1% 10.0% 12.6%
Others 1,567 1,782 1,782 1,782
1,782
Current assets 120,655 84,250 81,291 83,650
92,085
Sales per share growth 25.9% (8.7%) (25.6%) 17.6% 19.4%
LT investments - - - - - Sales growth 25.9% (8.7%) (23.4%) 17.6% 19.4%
Net fixed assets 79,212 77,389 75,390 68,971 58,989 Net profit growth 23.9% -84.1% 37.6% 46.1% 49.6%
Total Assets 417,955 349,026 335,959 333,463 334,827 EPS growth 23.9% (84.1%) 33.6% 46.1% 49.6%

Liabilities Interest coverage (x) 22.27 10.17 11.30 11.08 13.44


Short-term loans 21,577 23,217 22,827 34,310 13,215
Payables 3,986 1,750 1,356 1,570 1,869 Net debt to equity 15.1% 29.9% 22.0% 19.2% 17.6%
Others 34,224 12,967 12,725 12,836 13,111 Sales/assets 0.58 0.54 0.47 0.56 0.67
Total current liabilities 55,801 36,183 35,552 47,146 26,326 Assets/equity 1.45 1.55 1.48 1.41 1.77
Long-term debt 56,454 72,544 57,746 34,688 50,725 ROE 22.0% 3.7% 5.7% 8.2% 11.8%
Other liabilities 17,193 15,090 15,913 15,913 15,913 ROCE 10.6% 3.5% 3.0% 4.5% 5.6%
Total Liabilities 129,447 123,818 109,210 97,747 92,965
Shareholders' equity 288,508 225,208 226,749 235,716 241,862
BVPS 37.84 29.54 28.88 30.02 30.80

Source: Company reports, J.P. Morgan estimates.

213
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Naspers Overweight
Price: 29,225c
Price Target: 34,109c
www.naspers.co.za

Company description South Africa


Naspers is a leading multinational media group. The group’s principal Entertainment
operations are in internet platforms, pay-television and the provision of Ziyad JoosubAC
related technologies and print media. Most of Naspers’ operations hold (27-11) 507 0456
leading positions in their relative markets. ziyad.x.joosub@jpmorgan.com
J.P. Morgan Equities Ltd.
Post mortem
The past year has been characterised by a distinct outperformance of Naspers Price Performance
relative to the industrial index - we believe the strong performance is 30,000

primarily driven by increased contributions from offshore equity-accounted


24,000
results (i.e. Tencent, Abril and Mail.ru), resilient subscriber growth, c
combined with strong free cash flow generation in the Pay TV segment and 18,000
an ongoing systematic decrease in global emerging market risk aversion.
12,000
How much recovery is priced into the stock? Nov-08 Feb-09 May-09 Aug-09 Nov-09
Both P/E and EV/EBITDA multiples for Naspers reflect steamy valuations
Source: Bloomberg
relative to historical averages. We attribute this to an evolving business mix,
with the group’s valuation and earnings contributions being increasingly Performance
weighted in high-growth emerging market internet assets. We believe 1) 1M 3M 12M
strong momentum in equity-accounted earnings, 2) increased earnings Absolute (%) 2.2 19.6 100.2
contribution from emerging market internet assets, and 3) a resilient margin Source: Bloomberg
and subscriber growth story in the Pay TV segment, are not fully discounted
in the current share price, and therefore are supportive of our thesis of further Company data
upside potential. Price(c) 29,225
Date of Price 23-Nov-09
Price target and key risks Price Target (c) 34,109
Price Target End Date 30-Nov-10
We maintain our Overweight rating on Naspers. Our revised SOTP-based 52-week Range (c) 29,484 – 13,692
Nov-10 TP is 34,109cps (fair value 30,267cps). We believe the key risks to Mkt Cap (Rbn) 118.31
our target price being achieved include 1) poor operational performance; 2) Shares O/S (mn) 405
regulatory and exchange rate risk being greater than anticipated; and 3) Free Float 100.0%
Source: Bloomberg, J.P. Morgan
increasing competitive pressures.

Bloomberg: NPN SJ; Reuters: NPNJ.J


Rand millions, year-end Dec
FY09A FY10E FY11E FY12E
Sales 26,690 31,200 36,029 4,0827
Net profit 5,761 4,226 5,636 7,315
FD EPS (SAcps) 1178.8 1469.11 1881.14 2370.63
DPS (SAcps) 207 269 356 458
Sales growth (%) 30.1 16.9 15.5 13.3
Net profit growth (%) 68.5 -26.6 33.4 29.8
EPS growth (%) - 24.6 28.1 26.0
ROE (%) 8.6 12.0 14.6 16.5
FD P/E (x) 24.9 19.9 15.6 12.4
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

214
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Naspers Ltd: Summary of Financials


Profit and Loss statement Cash flow statement
R in millions, year end Mar FY08 FY09 FY10E FY11E FY12E R in millions, year end Mar FY08 FY09 FY10E FY11E FY12E

Revenues 20,518 26,690 31,200 36,029 40,827 EBIT 3,878 3,783 4,625 5,826 6,872
% change Y/Y 19.2% 30.1% 16.9% 15.5% 13.3% Depreciation & amortisation 1,120 2,243 2,486 2,771 3,051
Gross Margin (%) 47.5% 49.3% 48.8% 48.9% 49.0% Change in working capital (97) (909) (97) (609) (625)
EBITDA 4,997 6,026 7,112 8,596 9,923 Cash flow from ops (pre tax) 3,307 2,722 1,735 1,369 1,112
% change Y/Y 17.3% 20.6% 18.0% 20.9% 15.4%
EBITDA Margin (%) 24.4% 22.6% 22.8% 23.9% 24.3% Taxes - - - - -
EBIT 3,878 3,783 4,625 5,826 6,872 Capex (1,113) (1,077) (1,185) (1,304) (1,434)
% change Y/Y 13.5% -2.4% 22.3% 26.0% 18.0% Acquisitions / divestments (17,218) 2,294 (3,142) 1,153 2,035
EBIT Margin (%) 18.9% 14.2% 14.8% 16.2% 16.8% Net interest - - - - -
Net Interest and associates 1,005 (303) (78) (182) (306)
Earnings before tax 4,899 3,516 4,573 5,673 6,599 Free cash flow (post interests) 2,116 2,082 3,664 4,166 5,206
% change Y/Y 59.0% -28.2% 30.1% 24.1% 16.3% Equity raised/(repaid) 96 17 339 0 0
Tax (1,378) (1,436) (1,610) (1,877) (1,983) Debt raised/(repaid) 9,625 -5,737 197 164 106
as % of EBT 28.1% 40.8% 35.2% 33.1% 30.0% Dividends received - - - - -
Net Income (Reported) 3,418 5,761 4,226 5,636 7,315
% change Y/Y 71.0% 68.5% -26.6% 33.4% 29.8% Beginning cash 11,481 6,690 5,724 4,150 6,049
Shares Outstanding 370.6 372.5 372.5 372.5 372.5 Ending cash 6,690 5,724 4,150 6,049 8,425
EPS (reported) - - - - -
% change Y/Y - - - - - DPS 180 207 269 356 458

Balance sheet Ratio Analysis


R in millions, year end Mar FY08 FY09 FY10E FY11E FY12E R in millions, year end Mar FY08 FY09 FY10E FY11E FY12E

Cash and cash equivalents 7,573 6,642 5,067 6,966 9,342 DTH subscribers - - - - -
Non-cash current assets 751 1,069 1,182 1,301 1,437 Broadband subsribers - - - - -
Current assets 14,970 13,687 12,133 15,016 18,387 DTH churn (%) - - - - -
DTH gross additions - - - - -
Tangible assets 19,889 22,905 28,517 30,462 33,151 DTH ARPU (R annualised) - - - - -
Investments 12,633 14,331 16,166 18,627 21,948 Broadband/telephony ARPU (R) - - - - -
Intangible assets 24,914 20,916 25,321 25,650 25,882
Revnue growth 19.2% 30.1% 16.9% 15.5% 13.3%
Total assets 57,524 54,560 59,828 66,185 73,749 EBIT growth 13.5% -2.4% 22.3% 26.0% 18.0%
Net profit growth 59.0% -28.2% 30.1% 24.1% 16.3%
Liabilities EPS growth - - - - -
ST loans 2,197 2,845 3,171 3,520 3,866
Other current liabilities 8,779 8,646 8,802 9,487 10,135 Net debt/EBITDA 1.3 0.5 0.8 0.5 0.3
Total current liabilities 10,592 10,352 11,096 12,135 13,130 Net debt to equity 18.5% 8.4% 13.2% 9.2% 5.0%

Long term debt 11,741 6,906 7,251 7,613 7,994 EV/EBITDA 15.2 12.0 10.5 8.6 7.2
Other liabilities 331 710 830 958 1,086 P/E - - - - -
Total liabilities 24,376 19,343 20,966 22,927 24,792 EV-FCF Yield (%) 3582.0% 3484.4% 2040.9% 1766.3% 1382.0%
Shareholders' equity 33,147 35,217 38,861 43,259 48,956 Equity-FCF Yield (%) 1.8% 1.8% 3.2% 3.6% 4.5%

Source: Company reports and J.P. Morgan estimates.

215
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Ncsoft Overweight
W124,500
www.ncsoft.com Price Target: W190,000

Company description South Korea


Ncsoft, established in 1997, is a global online gaming company specializing in Internet
the MMORPG genre. It develops and publishes global MMORPG hits, such as Angela HongAC
Lineage I & II, and commercialized another hit title, Aion, in Korea, China, (82-2) 758-5719
Japan, Taiwan, the US and Europe in 2009. The stock is a part of the KOSPI 200 Angela.s.hong@jpmorgan.com
index. Management holds a 30% stake in the company. J.P. Morgan Securities (Far East) Limited,
Seoul Branch
Post mortem
Price performance
Online gaming companies have been less affected by the economic turmoil, as
250,000
online games offer better entertainment value per dollar spent than other 200,000

entertainment objects, in our view. Hence, the impact of economic recovery W


150,000

100,000

would have limited impact on the Ncsoft’s sales and margin. However, we 50,000

estimate the successful launch of Aion in the US and Europe will improve Nov-08 Feb-09 May-09 Aug-09
036570.KS share price (W)
Nov-09

operating margin to 38% in FY10, up from 14.4% in FY08 and 33.6% in FY09E. KOSPI (rebased)

Source Bloomberg.

Potential for earnings upgrades


Performance
We estimate the company’s high operating leverage will drive its earnings to
1M 3M 12M
grow 33% in FY10. Typically, new games, once commercialized, require only a
Absolute (%) -16.5 -8.7 213.1
limited level of opex, while the required R&D would have already been spent
Relative (%) -14.1 -8.8 137.0
during the development period. Hence, we estimate Ncsoft’s free cash flow will
Source Bloomberg.
rapidly rise for the next 2-3 years and cash assets will accumulate briskly to a
60% level of total assets by 2011.
Company data
52-week range (Won) 36,000-201,500
How much recovery is priced into the stock?
Mkt cap (WB) 2,744
We think Ncsoft’s business is less relevant for the economic recovery. However,
Mkt cap. (US$MM) 2,325
we deem the stock attractive now at 14x FY10E earnings, given we estimate
Avg daily value (US$MM) 62.2
Ncsoft’s earnings will grow 33% in FY10 and 25% in FY11.
Avg daily volume (WB) 73.4
Shares O/S (MM) 22
Price target and key risks
Date of price 5-Nov-09
Our Dec-10 price target of W190,000 is based on a 10-year DCF valuation,
Index: KOSPI 1,552.24
assuming an OP margin of 37-40%, a terminal growth rate of 0%, and a WACC
Free float (%) 61.7
of 10.5%. Our price target implies 20x FY10E and 16x FY11E earnings. A key
Exchange rate 1,180
downside risk to our PT is weaker-than-expected traffic for Aion in the US and
Source: Bloomberg.
Europe.

Bloomberg: 036570.KS; Reuters: 036570.KS


Won in billions, year-end December
FY07 FY08 FY09E FY10E
Sales 347 602 693 890
Net profit 26 151 200 249
EPS (Won) 1,216 7,033 9,334 11,584
DPS (Won) 1,470 821 2,172 2,706
Sales growth (%) 5.2% 73.7% 15.0% 28.4%
Net profit growth (%) -43.1% 490.6% 32.2% 24.6%
EPS growth (%) -44.9% 478.5% 32.7% 24.1%
ROE (%) 6.0% 32.4% 33.9% 33.4%
P/E (x) 104.5 18.1 13.6 11.0
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

216
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Ncsoft: Summary of financials


Won in billions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
SALES 347 602 693 890 TOTAL ASSETS 519 632 797 983
Aion 10 234 314 320 Current assets 304 399 546 712
Lineage 113 107 105 102 Cash & equivalents 51 117 254 397
Lineage II 147 152 151 149 Marketable securities 188 188 188 188
City of Heroes / Villains 24 26 26 27 Accounts receivable 38 66 76 98
GuildWars 23 19 20 50 Inventory 2 4 4 5
Royalty 20 56 64 70 Others 24 24 24 24
Others 4 8 14 172 Non-current assets 215 233 251 271
Net PP&E 163 173 184 195
Operating expenses 343 400 430 563 Gross PP&E 252 282 316 359
Labor 65 85 92 101 Accumulated depreciation 89 109 132 164
Depreciation and amortization 22 26 33 44 Investment assets 16 22 28 35
Operating R&D 47 44 48 62 Intangible assets 17 18 19 20
Commissions 29 43 42 53 Other assets 19 20 21 22
Sales commissions 6 18 21 27
Advertising costs 12 17 14 22 TOTAL LIABILITIES 94 101 127 138
Others 163 166 180 254 Current liabilities 83 90 115 125
Accounts payable 1 1 1 1
OPERATING PROFIT 50 202 263 327 Other short-term liabilities 82 89 114 124
LT Liabilities 11 12 12 13
EBITDA 72 229 296 371 Bond 0 0 0 0
LT Loans 0 0 0 0
Non-operating income/(loss) (9) 6 11 14
Shareholders’ equity 424 530 670 845
Pretax profit 41 208 274 341 Paid-in capital 10 10 10 10
Effective tax rate (%) 32.5 25.0 25.0 25.0 Capital surplus 148 148 148 148
Net profit 28 156 205 256 Retained earnings 343 479 639 839
Minority Interest 2 5 5 6 Capital adjustments (88) (118) (138) (163)
CONSOLIDATED NET PROFIT 26 151 200 249 Total liabs/shrhdrs’ equity 519 632 797 983

Key ratios Consolidated cash flow statement


FY08 FY09E FY10E FY10E FY08 FY09E FY10E FY11E
Growth (%) Cash Flow from Operations 66 153 228 275
Sales 5.2 73.7 15.0 28.4 Net Profit 26 151 200 249
Operating profit 1.2 304.1 29.9 24.3 D&A 20 26 33 44
EBITDA 4.0 217.3 29.5 25.3 Other non-cash items 18 5 4 4
Pretax profit (34.0) 407.3 31.5 24.6 Increase in AR (2) 28 10 22
Net profit (39.8) 464.0 31.5 24.6
Cash Flow from Investments (3) (49) (56) (67)
Profitability (%) Capital expenditures (52) (30) (34) (43)
EBITDA margin 20.8 38.0 42.7 41.7 Increase in financial investment 10 40 (10) (10)
Operating margin 14.4 33.6 37.9 36.7 Increase in intangible assets (13) (8) (8) (11)
Pretax margin 11.8 34.5 39.5 38.3 Other changes in investing activities 52 (51) (4) (4)
Net profit margin 7.4 25.1 28.9 28.0
ROE 6.0 32.4 33.9 33.4 Cash Flow from Financing (74) (39) (35) (65)
ROA 4.8 26.3 28.0 28.0 Increase in paid-in capital 0 0 - -
Increase/(decrease) in capital adjustment (23) (37) (30) (20)
Ratio (%) Net increase/(decrease) in bond 0 0 0 0
Total liabilities to equity 22.2 19.1 18.9 16.3 Dividend paid 0 -19 -9 -15
Net debt(cash) to equity (56.5) (57.5) (65.9) (69.3)
Current ratio 322.8 393.7 430.5 517.4 Increase/(decrease) in cash 0 65 137 143
Source: Company data, J.P. Morgan estimates.

217
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Northam Platinum Overweight


Price: 4122c
Price Target: 6100c
www.northam.co.za
Company description South Africa
The group operates the deepest platinum mine in the world, and is planning Gold & Presious Metals
to begin to develop its recently acquired E Bushveld, shallow, Booysendal Steve ShepherdAC
property in a “modular” fashion starting in 2010. Northam is 63% owned by (27-11) 507 0386
BEE mining holding company Mvelaphanda Resources, which in terms of steve.a.shepherd@jpmorgan.com
new JSE rules must be dismantled as it’s deemed a pyramid company. MVL Allan CookeAC
has stated it intends unbundling in early 2010. NHM intends a rights issue to (27-11) 507 0384
assist funding Booysendal and MVL has said it will follow its rights. allan.j.cooke@jpmorgan.com

J.P. Morgan Equities Ltd.


Post mortem and potential
This well managed mid-tier platinum producer has a huge resource base in
excess of 110mozs PGMs relative to its current production rate of c334koz Price Performance
4,500
pa, and looks well placed to grow off a relatively low base over the long-
term in our view. It was to be acquired by Implats, but negotiations broke 3,500
down in response to turbulent market conditions last year. We think it c
2,500
possible there’ll be other M&A opportunities for the group to
consolidate/cooperate with other producers. We see compelling arguments 1,500

for southern Booysendal to be developed with AQP’s Everest mine for Nov-08 Feb-09 May-09 Aug-09 Nov-09

example. Source: Bloomberg

How much recovery is priced into the stock? Performance


Our DCF-based valuation model shows NHM trading at a 20% discount to 1M 3M 12M
the currently low PGM basket price of cR255,000/kg. It shows that at our Absolute (%) 8.0 4.4 89.1
calculated mid-cycle price the stock would be worth some R71/share. Source: Bloomberg

Price target and key risks Company data


Price(c) 4,122
Taking account of project and operational execution risk, we have a Sep-10 Date of Price 23-Nov-09
price target for Northam of R61/share – a 5% discount to our published Price Target (c) 6,100
DCF-based valuation. As with all the platinum producers, a lower than we Price Target End Date 01-Sep-10
52-week Range (c) 4,198 – 1,650
forecast rand PGM basket price is another key risk to our target. Mkt Cap (Rbn) 14.83
Shares O/S (mn) 360
Source: Bloomberg, J.P. Morgan

Bloomberg: NHM SJ; Reuters: NHMJ.J


Rand millions, year-end Jun
FY09A FY10E FY11E FY12E
Revenues 3,186 3,910 6,605 8,598
Net profit 630 471 774 1,335
FD EPS (SAcps) 183 131 215 377
DPS (SAcps) 78 60 100 150
Sales growth (%) -18.0 22.7 68.9 30.2
Net profit growth (%) -57.8 -25.3 64.2 75.1
EPS growth (%) nm nm 64.1 75.3
ROE (%) 11.2 5.6 8.8 14.5
FD P/E (x) 22.3 31.1 19.0 10.8
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

218
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Northam Platinum Ltd: Summary of Financials


Production & Economic Assumptions Balance Sheet
Year end Jun FY08A FY09A FY10E FY11E FY12E R in millions, year end Jun FY08A FY09A FY10E FY11E FY12E
Platinum ($/oz) 1,658 1,155 1,288 1,388 1,562 Property, Plant & Equipment 1,684 7,460 8,465 9,536 10,001
Palladium ($/oz) 396 240 291 338 544 Net Fixed Assets 1,756 7,737 8,761 9,853 10,340
Rhodium ($/oz) 7,569 2,760 1,656 2,131 2,968 Cash and Cash equivalents 1,500 921 227 302 431
Nickel ($/ton) 29,464 13,518 17,250 15,000 15,227 Others 864 695 853 1,441 1,876
Avg exch. rate (R/$) 7.29 9.02 8.16 9.02 9.47 Current Assets 2,364 1,616 1,080 1,743 2,307
Total Assets 4,120 9,353 9,841 11,596 12,647
Cash Costs ($/oz Pt) 1,364 1,171 1,454 1,558 1,723
Current Liabilities 772 538 660 1,115 1,452
Sales Volumes Debt 0 0 0 700 400
Platinum (koz) 170 202 258 368 388 Other Liabilities 444 483 610 820 1,075
Palladium (koz) 81 98 126 181 194 Shareholder's Equity 2,904 8,332 8,570 8,961 9,720
Rhodium (koz) 21 27 31 42 44 Minorities 0 0 0 0 0
Nickel (t) 1,110 1,529 2,374 4,027 4,231 Total Liabilities & Shareholders Equity 4,120 9,353 9,841 11,596 12,647

Profit & Loss Statement Ratio Analysis


R in millions, year end Jun FY08A FY09A FY10E FY11E FY12E Year end Jun FY08A FY09A FY10E FY11E FY12E
Revenues 3,886 3,186 3,910 6,605 8,598 Gross Margin (%) 62.9% 31.7% 21.8% 21.7% 26.3%
% change Y/Y 3.9% (18.0%) 22.7% 68.9% 30.2% EBITDA Margin (%) 62.9% 31.7% 21.8% 21.7% 26.3%
EBITDA 2,443 1,009 854 1,434 2,264 EBIT Margin (%) 59.0% 26.6% 15.9% 17.1% 22.4%
% change Y/Y 13.7% (58.7%) (15.3%) 67.9% 57.9% Net Margin (%) 38.4% 19.8% 12.0% 11.7% 15.8%
EBIT 2,294 848 623 1,128 1,928 FCF Margin (%) 30.6% 3.7% (13.1%) (4.5%) 11.2%
% change Y/Y 13.5% (63.0%) (26.6%) 81.1% 70.9%
Net interest 95 130 78 (16) (29) Interest Coverage (x) 24.0 6.5 8.0 71.7 65.8
Earnings before tax 2,359 1,015 647 1,062 1,860 Net debt to equity (%) (51.6%) (11.1%) (2.6%) 4.4% (0.3%)
% change Y/Y 12.3% (57.0%) (36.2%) 64.2% 75.1% Sales/Assets (x) 0.9 0.3 0.4 0.6 0.7
Tax (866) (384) (176) (289) (506)
Tax as % of EBT 36.7% 37.9% 27.2% 27.2% 27.2% ROE (%) 56.5% 11.2% 5.6% 8.8% 14.5%
Net income (reported) 1,493 630 471 774 1,355 ROIC (%) 110.7% 10.6% 5.5% 9.0% 14.4%
% change Y/Y 12.5% (57.8%) (25.3%) 64.2% 75.1%
Shares Outstanding 238.01 344.56 359.69 359.69 359.69 P/E (x) 6.6 22.5 31.5 19.2 10.9
EPS (Adjusted) 627 183 131 215 377 EV/EBITDA (x) 5.5 13.4 15.8 9.4 6.0
% change Y/Y 12.0% NM NM 64.1% 75.3% EV/FCF (x) 11.4 115.1 (26.4) (45.9) 14.1
DPS (Gross) 330 78 60 100 150 Dividend Yield (%) 8.0% 1.9% 1.5% 2.4% 3.6%
% change Y/Y (37.1%) (76.4%) (23.1%) 66.7% 50.0% FCF Yield (%) 8.2% 0.8% (3.5%) (2.0%) 6.6%

Cash Flow Statement Valuation & Recommendation


R in millions, year end Jun FY08A FY09A FY10E FY11E FY12E NPV 6,400
EBIT 2,294 848 623 1,128 1,928 P/NPV 0.63
Depreciation & Amortization 149 161 231 306 336 PT 6,100
Change in working capital (243) 259 (51) (141) (92) PT/NPV 1.0
Taxes (748) (792) (95) (219) (406) PT Date 01-Sep-10
Cash flow from Operations 1,451 476 709 1,074 1,766 Recommendation OW

Capex (262) (358) (1,221) (1,369) (807) Weekly Mkt Turnover ($ millions)
Disposals/(Purchase) (2) (22) - - - JSE 25
Net interest 95 130 78 (16) (29)
Free Cash flow 1,189 118 (512) (295) 959
Free Cash flow per share 5.0 0.3 (1.4) (0.8) 2.7

Equity raised/ repaid 22 4 0 0 0


Debt raised/ repaid 0 0 0 700 (300) Weekly Mkt Turnover/Mkt Cap (%)
Dividends paid (1,010) (802) (241) (283) (447) JSE 1.3%
Other (5) (6) (19) (31) (54)

Beginning Cash 1,210 1,500 921 227 302


Ending Cash 1,500 921 227 302 431

Source: Company reports and J.P. Morgan estimates.

219
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

OGX Petróleo S.A. Overweight


R$1,397
Price Target: R$2,030
www.ogx.com.br

Company description Brazil


OGX is our preferred stock to play the potential of Brazilian offshore. OGX Exploration & Production
is an E& P startup incorporated in Brazil with exploration rights for 7,000 Sergio TorresAC
km2 offshore and 21,470 km2 onshore. Of its resource base, 54% is in the (212) 622 3378
Campos basin; a highly productive area that accounts for 85% of Brazil’s oil sergio.torres@jpmorgan.com
production. According to independent appraiser DeGolyer & MacNaughton, J.P. Morgan Securities
OGX’s portfolio boasts net risked prospective resources of 6.8 billion boe as
of Sep ’09 (upgraded from 4.8 billion boe as of March ’08). Price performance
Price Performance
1,800

Post mortem 1,400

Its key competitive advantage, geological engineering know-how, allowed R$ 1,000

600

OGX to emerge from the downturn stronger and with plans for first oil in 200

2011 untarnished. Based on successful exploration and a new geological


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

assessment, OGX has increased its 4-year drilling program to 79 wells from Source: Bloomberg.
51 wells previously. OGX has made discoveries for 0.9-2.0 bn boe.
Performance
Potential for earnings upgrades 1M 3M 12M
We believe more drilling should translate into more discoveries and Absolute (%) -10.6 43.6 454.3
eventually into reserves which deserve a higher value. This should drive Relative (%) 1.7 29.0 152.4
NAV estimates, the main driver of price targets (over earnings) given that Source: Bloomberg.
OGX is not producing oil yet.
Company data
How much recovery is priced into the stock? 52-week range (LC) 258 - 1696
In our view, 2010 should be a transformational year for OGX: by year-end it Mkt cap. (LCMM) 47,509
should have booked some reserves, have more prospective resources and a Mkt cap. (US$MM) 27,588
more diversified portfolio. OGX is trading at $5.0/boe of resources. Global Avg daily value (US$MM) 43,866
E&P stocks trade at $7.4/boe of 1P reserves. Avg daily volume (MM) 82,205
Shares O/S (MM) 32.3
Price target and key risks Date of price 11/25/2009
We use an NAV model to derive our target based on $80/bbl long-term oil Index: IBOV IBOV
prices and a 12% discount rate. Risks to our target are: Sensitivity to oil Free float (%) 38.70%
prices, uncertainty over capital expenditures, unsuccessful wells. Exchange rate 1.7
Bloomberg: OGXP3 BZ; Reuters: OGXP3.SA
US$ in millions, year-end December 31
FY08 FY09E FY10E FY11E
Sales 0 0 0 69
Net profit 192 529 183 71
EPS (LC) 5.94 16.36 5.66 2.19
FD EPS (LC) 5.94 16.36 5.66 2.19
DPS (LC) - - - -
Sales growth (%) 0% 0% 0% NM
Net profit growth (%) 0% 175% -65% -61%
EPS growth (%) 0% 175% -65% -61%
ROE (%) 0% 0% 0% 0%
P/E (x) 247.3 89.9 259.6 671.0
FD P/E (x) 247.3 89.9 259.6 671.0
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

220
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

OGX: Summary of financials


Profit and loss statement Cash flow statement
USD in millions, year-end December 31 USD in millions, year-end December 31
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 0 0 0 69 EBIT (105.6) (33.0) (50.0) (63.1)
% change Y/Y - - - - Depreciation & amortization - - - 0.1
Gross margin (%) - - - 10% Change in working capital - - - -
EBITDA (106) (33) (50) (63) Taxes (104.9) (272.4) (94.3) (36.5)
% change Y/Y - -69% 52% 26% Cash flow from operations (210.5) (305.4) (144.3) (99.5)
EBITDA margin (%) - - - -91% Capex - (196.1) (717.5) (639.0)
EBIT (106) (33) (50) (63) Disposal/(purchase) - - - -
% change Y/Y - -69% 52% 26% Net interest 403 834 327 170
EBIT margin (%) - - - -91% Free cash flow 4,292 276 (585) (749)
Net interest 403 834 327 170 Equity raised/(repaid) - - - -
Earnings before tax 297 801 277 107 Debt raised/(repaid) - - - -
% change Y/Y - 170% -65% -61% Other - - - -
Tax (105) (272) (94) (36) Dividends - - - -
as % of EBT 35% 34% 34% 34% Beginning cash 500 3,334 3,611 3,025
Net income (reported) 192 529 183 71 Ending cash 3,334 3,611 3,025 2,276
% change Y/Y - 175% -65% -61% DPS (LC) - - -
Shares O/S (MM) 32.32 32.32 32.32 32.32 Source: Company, J.P. Morgan estimates.
EPS (reported) (LC) 5.94 16.36 5.66 2.19
Source: Company, J.P. Morgan estimates.

Ratio analysis
%, year-end December 31
Balance sheet
FY08 FY09E FY10E FY11E
USD in millions, year-end December 31 EBITDA margin - - - -91%
FY08 FY09E FY10E FY11E Operating margin - - - -
Cash and cash equivalents 3,334 3,611 3,025 2,276 Net profit margin - - - -
Accounts receivable 10 10 10 10 SG&A/sales - - - -
Inventories 0 0 0 0 Sales growth - - - -
Others 19 19 19 19 Net profit growth NM 175% -65% -61%
Current assets 3,363 3,639 3,054 2,305 Sales per share growth - - - -
LT investments 0 0 0 0 EPS growth NM 175% -65% -61%
Net fixed assets 5 59 162 1,628 Interest coverage (x) - - - -
Total assets 4,465 4,795 4,313 5,029 Net debt to total capital - - - -
Liabilities 0 0 0 0 Net debt to equity - - - -
ST loans 0 0 0 0 Sales/assets 0% 0% 0% 1%
Payables 12 12 12 12 EBIT margin - - - -91%
Others 300 300 300 300 ROCE 0% 0% 0% 0%
Total current liabilities 311 311 311 311 Assets/equity (x) 1.1 1.0 1.1 0.9
Long-term debt 0 0 0 0 ROI - - - -
Other liabilities 1 1 1 1 ROE 5% 4% 5% 4%
Total liabilities 313 313 313 313 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 4,049 4,482 4,000 4,717
BVPS (LC) 125.3 138.7 123.8 145.9
Source: Company, J.P. Morgan estimates.

221
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

PDG Realty Overweight


R$17.59
Price Target: R$19.00
www.pdgrealty.com.br

Company description Brazil


PDG, one of the largest developers in Brazil, is mainly focused on the lower- Brazilian Homebuilders
income segment through Goldfarb and on the middle- and high-income Adrian E HuertaAC
segments through CHL. The company’s business model is to co-develop real (52 81) 8152-8720
estate projects with other real estate developers and to make equity adrian.huerta@jpmorgan.com
investments in attractive companies. This unique model should allow PDG to J.P. Morgan Casa de Bolsa, S.A. de C.V.,
benefit and to participate in sector consolidation. J.P. Morgan Grupo Financiero

Post mortem Performance


The company has one of the best management teams in Brazil and manages 1M 3M 12M
its cash and balance sheet prudently by holding a low level of inventories Absolute (%) 11 21 286
and a low-cost operating platform. This should allow the company to benefit Relative (%) 9 6 204
from stronger housing demand in Brazil.
Source: Bloomeberg
Potential for earnings upgrades
We believe that the company could still surprise positively not only via Company data
organic growth but also by acquiring attractive undervalued companies. It 52-week range (LC) 5.78-17.59
should also benefit from a potential recovery of the middle- and high-income Mkt cap. (LCMM) 6,485
segments, which is not the case with MRV. Mkt cap. (US$MM) 3,765
Avg daily value (US$MM) 22.4
How much recovery is priced into the stock?
Avg daily volume (MM) 2.4
Pre-sales have already recovered considerably, up 70% qoq in 2Q and up
Shares O/S (MM) 366.40
another 11% in 3Q, but the stock price has also recovered significantly, up
240% from its lows in March and up 215% YTD (+81% for the Bovespa). Date of price 11/25/2009
While the performance is significant, we believe there is further room to Index: IBOV 67,917
rerate as the stock is trading at 2.5x P/BV and 14.9x times 10e P/E. The Free float (%) 56%
stock traded as high as 5.0x on P/BV back in 07. Exchange rate 1.72
Source: Bloomberg.
Price target and key risks
We rate PDG Overweight with a Dec-10 price target of R$19, which is the
average of our DCF-based valuation and GGM-based valuation. The COE of
12.4% is based on a beta of 1.25, country risk of 2.6%, and a risk-free rate of
3.5%, resulting in a WACC of 11.0%. Main risk is CEF execution of the
MCMV program given PDG’s dependency on the lower-income segments.

Bloomberg: PDGR3 BZ Reuters: PDGR3.SA


LC in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 1,231 2,292 2,814 3,349
Net profit 182 319 459 580
EPS (LC) 0.57 1.03 1.42 1.80
FD EPS (LC) 0.57 1.03 1.42 1.80
DPS (LC) - 0.15 0.25 0.36
Sales growth (%) 123.0% 86.2% 22.8% 19.0%
Net profit growth (%) 43.0% 75.0% 43.6% 26.5%
EPS growth (%) 43.0% 75.0% 43.6% 26.5%
ROE (%) 12.9% 18.2% 19.7% 20.3%
P/E (x) 30.9 17.0 12.4 9.8
FD P/E (x) 30.9 17.0 12.4 9.8
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

222
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adrian.mowat@jpmorgan.com

PDG: Summary of financials


Profit and loss statement Cash flow statement
LC in millions, year-end December LC in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 1,231 2,292 2,814 3,349 EBIT 209 387 538 703
% change Y/Y 123% 86% 23% 19% Depreciation & amortization 29 8 10 12
Gross margin (%) 35.2% 30.1% 31.2% 32.5% Change in working capital (963) (1,262) (498) (499)
EBITDA 257 510 674 832 Taxes (33) (74) (97) (115)
% change Y/Y 88.9% 98.1% 32.3% 23.4% Cash flow from operations (548) (879) (825) 220
EBITDA margin (%) 20.9% 22.2% 24.0% 24.8% Capex (96) (7) (28) (33)
EBIT 209 387 538 703 Disposal/(purchase) (288) (127) (28) (33)
% change Y/Y 89.3% 85.1% 38.9% 30.7% Net interest 13 (8) 3 (23)
EBIT margin (%) 17.0% 16.9% 19.1% 21.0% Free cash flow (831) (834) 51 184
Net interest 13 (8) 3 (23) Equity raised/(repaid) 0 0 214 0
Earnings before tax 231 397 560 701 Debt raised/(repaid) 376 750 500 200
% change Y/Y 91.2% 71.7% 41.2% 25.2% Other 0 0 0 0
Tax (33) (74) (97) (115) Dividends 0 46 80 115
as % of EBT 14.4% 18.7% 17.3% 16.4% Beginning cash 716 256 154 736
Net income (reported) 182 319 459 580 Ending cash 256 154 736 887
% change Y/Y 43.0% 75.0% 43.6% 26.5% DPS (LC) - 0.15 0.25 0.36
Shares O/S (MM) 292 309 322 322 Source: Company, J.P. Morgan estimates.
EPS (reported) (LC) 0.57 1.03 1.42 1.80
Source: Company, J.P. Morgan estimates.

Ratio analysis
%, year-end December
Balance sheet
FY08 FY09E FY10E FY11E
LC in millions, year-end December EBITDA margin 20.9% 22.2% 24.0% 24.8%
FY08 FY09E FY10E FY11E Operating margin 17.0% 16.9% 19.1% 21.0%
Cash and cash equivalents 256 154 736 887 Net profit margin 14.8% 13.9% 16.3% 17.3%
Accounts receivable 1,264 2,386 2,775 3,211 SG&A/sales 17.4% 12.4% 11.4% 10.9%
Inventories 1,056 1,463 1,559 1,654 Sales growth 123.0% 86.2% 22.8% 19.0%
Others 137 157 157 157 Net profit growth 43.0% 75.0% 43.6% 26.5%
Current assets 1,966 3,922 4,949 5,588 Sales per share growth 122.6% 75.7% 18.0% 19.0%
LT investments 63 53 53 53 EPS growth 43.0% 75.0% 43.6% 26.5%
Net fixed assets 76 78 97 118 Interest coverage (x) (2.02) (7.57) (10.80) (6.25)
Total assets 3,247 4,822 5,906 6,610 Net debt to total capital 28.1% 39.8% 28.9% 26.3%
Liabilities Net debt to equity 41.3% 72.1% 52.7% 46.3%
ST loans 219 485 635 695 Sales/assets 0.38 0.48 0.48 0.51
Payables 291 556 543 576 EBIT margin 17.0% 16.9% 19.1% 21.0%
Others 212 344 344 344 ROCE 9.6% 12.2% 12.3% 13.4%
Total current liabilities 722 1,385 1,521 1,614 Assets/equity (x) 2.20 2.38 2.25 2.14
Long-term debt 647 1,132 1,482 1,622 ROI 9.6% 12.2% 12.3% 13.4%
Other liabilities 232 249 249 249 ROE 12.9% 18.2% 19.7% 20.3%
Total liabilities 1,602 2,766 3,252 3,485 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 1,476 2,029 2,622 3,087
BVPS (LC) 5.06 6.56 8.14 9.59
Source: Company, J.P. Morgan estimates.

223
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Powertech Technology Inc. Overweight


NT$91.10
Price Target: NT$108
www.pti.com

Company description Taiwan


Powertech (TAIEX: 6239) (PTI) is the largest independent provider of Semiconductor Equipment
memory IC backend services, including IC chip probing, packaging and Patrick LiaoAC
testing. Its customer base includes tier-I IDM and ٛ ables companies such as (886-2) 2725-9874
Toshiba, Elpida, Kingston, Sandisk, SST, IM Flash, Powerchip and ProMos. patrick.kh.liao@jpmorgan.com
J.P. Morgan Securities (Taiwan) Limited
Post mortem
PTI stands to be the primary beneficiary of Toshiba’s NAND flash Price performance
outsourcing. We believe: (1) the growth perspective in NAND flash NT$
110
business; (2) the benefit from a meaningful increase in 2010E capex budget 90
of memory companies; and (3) GM back to 26% and above-26% ROE 70
estimates, should drive the company’s earnings in 2010. 50

30
Potential for earnings upgrades Nov -08 Feb-09 May -09 Aug-09 Nov -09

Powertech should benefit from a meaningful increase in memory capex. We 6239 TT Equity TWSE Index

have witnessed a series of capex increases in the memory industry across the Source: Bloomberg.

board and Powertech’s sales growth is correlated with supply growth in Performance
memory.
1M 3M 12M
Absolute (%) -2.3 12.5 86.8
How much recovery is priced into the stock?
Relative (%) -2.0 3.9 25.4
The market was once concerned about the technology migration progress of
Elpida’s DRAM and Toshiba’s NAND flash. However, we believe Elpida Source: Bloomberg.

has already caught up with 45nm DDR3 pilot production in 4Q09, and
Company data
Toshiba is also on the right track of moving on 32nm NAND flash in 1Q10.
52-week range (NT$) 35.0-99.4
Therefore, we believe this concern should ease as Powertech has seen
Mkt cap. (NT$B) 60.98
promising progress in the technology advancement by its major clients. We
Mkt cap. (US$B) 1.86
expect further share price upside once the market prices in the improvement
Avg daily value (US$MM) 18.4
in its 1H10 outlook.
Avg daily volume (MM) 7.8
Shares O/S (MM) 669
Price target and key risks
Date of price 5-Nov-09
Our Dec-10 PT of NT$108 is based on 9x FTM (Dec-10) earnings due to the
Index: TAIEX (TWSE) 7,417.5
higher earnings estimates. The 9x FTM earnings is the average of the FTM
Free float (%) 60
P/E multiple during the past three years. A key risk to our PT is another
Exchange rate 32.5
oversupply scenario followed by a sharp fall in ASP in the memory industry.
Source: Bloomberg.

Bloomberg: 6239 TT; Reuters: 6239.TW


NT$ in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 31,189 29,784 34,998 38,930
Net profit 6,545 4,914 6,866 7,535
EPS (NT$) 10.11 7.38 10.26 11.26
FD EPS (NT$) 10.11 7.38 10.26 11.26
DPS (NT$) 3.50 4.00 3.00 4.16
Sales growth (%) 28% -5% 18% 11%
Net profit growth (%) 6% -25% 40% 10%
EPS growth (%) 56% -27% 39% 10%
ROE (%) 33 22 25.8 26
P/E (x) 9.0 12.3 8.9 8.1
FD P/E (x) 9.0 12.3 8.9 8.1
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

224
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adrian.mowat@jpmorgan.com

Powertech Technology Inc.: Summary of financials


NT$ in millions, year-end December
Income statement Ratio analysis
FY08A FY09E FY10E FY11E % FY08A FY09E FY10E FY11E

Revenues 31,189 29,784 34,998 38,930 Gross Margin 27.4 23.6 26.1 25.9
Cost of Goods Sold 22,640 22,740 25,863 28,846 EBITDA margin 46.7 46.8 46.4 44.1
Gross Profit 8,549 7,044 9,134 10,085 Operating Margin 23.4 19.3 21.8 21.5
R&D Expenses 649 767 735 818 Net Margin 21.0 16.5 19.6 19.4
SG&A Expenses 159 209 315 389 R&D/sales 2.1 2.6 2.1 2.1
Operating Profit (EBIT) 7,299 5,738 7,632 8,381 SG&A/Sales 0.5 0.7 0.9 1.0
EBITDA 14,555 13,934 16,255 17,164
Interest Income 37 44 93 147 Sales growth 27.6 -4.5 17.5 11.2
Interest Expense 450 336 414 490 Operating Profit Growth 3.0 -21.4 33.0 9.8
Investment Income (Exp) 9 5 - - Net profit growth 59.9 -24.9 39.7 9.7
Non-Operating Income (Exp) (333) (104) 140 140 EPS (Reported) growth 3.7 -27.0 39.0 9.7
Earnings before tax 6,562 5,346 7,451 8,178 EPS (TW GAAP) growth 56.2 -27.0 39.0 9.7
Tax 17 433 585 643 Interest coverage (x) 16.2 17.1 18.4 17.1
Net Income (Reported) 6,545 4,914 6,866 7,535 Net debt to total capital 32.7 32.4 24.1 21.8
Net Income (new TW GAAP) 6,545 4,914 6,866 7,535 Net debt to equity 57.8 59.6 42.2 37.6

EPS (Reported, NT$) 10.11 7.38 10.26 11.26 Asset Turnover 71.4 63.0 66.5 67.7
EPS (New TW GAAP, NT$) 10.11 7.38 10.26 11.26 Working Capital Turns (X) 9.2 4.5 4.5 4.8
BPS (NT$) 32.48 34.60 39.74 43.66 ROE 33.3 22.0 25.8 25.8
DPS (NT$) 3.50 4.00 3.00 4.16 ROIC 21.8 14.4 17.8 18.4
Shares Outstanding (MM) 647 666 669 669 ROIC (net of cash) 22.8 15.0 18.7 19.3

Balance sheet Cash flow statement


FY08A FY09E FY10E FY11E FY08A FY09E FY10E FY11E

Cash and cash equivalents 4,095 5,687 8,727 10,215 Net Income 6,545 4,914 6,866 7,535
Accounts receivable 9,748 11,256 12,041 13,953 Depr. & Amortisation 7,256 8,196 8,623 8,782
Inventories 739 938 1,003 1,163 Change in working capital -3,758 -2,727 532 -1,181
Others 302 437 523 606 Other 0 0 0 0
Current assets 14,884 18,318 22,294 25,936 Cash flow from operations 10,043 10,383 16,022 15,136

LT investments 1,685 3,036 3,036 3,036 Capex -7,149 -6,435 -10,000 -10,000
Net fixed assets 25,524 23,763 25,140 26,358 Disposal/ (purchase) -197 -1,945 0 0
Others 1,569 2,163 2,163 2,163 Cash flow investment -7,346 -8,380 -10,000 -10,000
Total assets 43,662 47,281 52,634 57,493 Free cash flow 2,894 3,948 6,022 5,136

ST loans 3,203 9,513 9,730 10,347 Equity raised/ (repaid) 1,230 1,890 0 0
Payables 1,345 1,546 1,516 1,761 Debt raised/ (repaid) 2,637 2,957 445 1,265
Others 4,165 3,079 4,578 5,305 Other financing charges -1,576 -2,873 0 0
Total current liabilities 8,713 14,138 15,824 17,414 Dividends paid -2,675 -2,385 -3,427 -4,913
Cash flow financing -384 -410 -2,982 -3,648
Long term debt 13,334 9,982 10,210 10,857
Other liabilities 103 - - - Net Change in Cash 2,314 1,592 3,040 1,488
Total liabilities 22,150 24,119 26,033 28,271 Beginning cash 1,778 4,095 5,687 8,727
Shareholders' equity 21,512 23,161 26,600 29,222 Ending cash 4,092 5,687 8,727 10,215
Source: Company, J.P. Morgan estimates.

225
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

PT Aneka Tambang Tbk Overweight


Rp2,300
Price Target: Rp3,000
www.antam.com

Company description Indonesia


The state-owned PT Aneka Tambang (ANTM) is one of the largest nickel Mining
miners in Indonesia and it has an installed capacity of about 26,000 tons. Stevanus JuandaAC
Besides its ferronickel operation, ANTM is also involved in gold, silver, and (62-21) 5291-8574
bauxite mining. Although small, its precious metal business is growing and stevanus.x.juanda@jpmorgan.com
ANTM is likely to expand this operation via exploration and acquisitions. In PT J.P. Morgan Securities Indonesia
term of operation, nickel prices and costs will be the key profit drivers, in our
view. Given ANTM’s main fuel is oil, the company is one of the high cost Price performance
producers of nickel in the world. With its investments in coal-fired power Units
3,500.0
plant, ANTM expects to reduce costs to the industry average or slightly
below the industry average levels. 2,500.0

Post mortem
1,500.0
In FY10, J.P. Morgan expects nickel price to rise from US$15,567/ton to
US$17,125/ton. Gold should stay fairly steady, rising from US$948/t.oz to 500.0
US$1,006/t.oz. Nickel volume is likely to rise from 12,000 tons to 17,000 Nov-08 Feb-09 May-09 Aug-09 Nov-09
Source: Bloomberg.
tons, up 41.7%, as Ferronickel III resumes production. If ANTM is able to
secure Newmont Batu Hijau at favorable terms, it would bode well for its Performance
share price, in our view. 1M 3M 12M
Potential for earnings upgrades Absolute (%) -7.1 0.0 119.1
If nickel prices overshoot 10%, our FY10 EPS forecast would rise 20.1%. If Relative (%) -2.7 -2.4 41.4
volume swings 10%, our FY10 EPS forecast would rise 8.5%. A 10% Source: Bloomberg.
reduction in production cost should cause EPS to increase 17.5%.
How much recovery is priced into the stock? Company data
We believe Chinese restocking has been priced in, but the low level of 52-wk range (Rp) 900-2,725
inventory in western hemisphere may not have been priced in by the market. Mkt cap. (RpB) 21,938
Mkt cap. (US$MM) 2,302
Price target and key risks
Avg daily value (US$MM) 24
Given that we expect a brighter FY10, we maintain our OW rating and our
Avg daily volume (MM) 1,642
SOTP/DCF-based Jun-10 PT of Rp3,000, assuming a risk-free rate of 10.5%,
Shares O/S (MM) 10
an equity-risk premium of 5.5%, and a terminal growth rate of 5.5%. Key
Date of price 5-Nov-09
risks to our PT include: (1) an unexpected correction in nickel prices; and
Index: JCI 2,372
(2) smaller-than-expected dip in costs.
Free float (%) 35.0
Exchange rate 9,530
Source: Bloomberg.
Bloomberg: ANTM IJ; Reuters: ANTM.JK
Rp in billions, year-end December
FY08 FY09E FY10E FY11E
Sales 9,592.0 8,331.0 10,408.2 12,110.5
Net profit 1,368.1 544.0 1,339.9 1,597.9
EPS (Rp) 143.4 57.0 140.5 167.5
Core EPS (Rp) 197.3 76.2 134.3 169.9
DPS (Rp) 215.2 57.4 28.5 70.2
Sales growth (%) -20.1% -13.1% 24.9% 16.4%
Net profit growth (%) -73.3% -60.2% 146.3% 19.3%
EPS growth (%) -73.3% -60.2% 146.3% 19.3%
ROE (%) 16.3% 6.7% 15.3% 16.5%
P/E (x) 16.0 40.3 16.4 13.7
Core P/E (x) 11.7 30.2 17.1 13.5
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009. We revised PT to Rp2,750 on November 18.

226
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

PT Aneka Tambang Tbk: Summary of financials

ANTM – SOTP valuation


RpB, %, Rp
Value (Rp B) % ownership Value per share (Rp)
Nickel 25,694.6 100% 2,694
Gold mining 6,388.8 100% 670
Silver 1,572.4 100% 165
Gold Trading 1,253.9 100% 131
Bauxite -268.9 100% -28
HQ Allocation -7,178.5 100% -753
June-10 SOTP fair value 2,879
June-10 DCF fair value 3,049
June-10 PT 2,964
Source: J.P. Morgan estimates.

227
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

PT Perusahaan Gas Negara Tbk Overweight


Rp3,650
Price Target: Rp4,700
www.pgn.co.id

Company description Indonesia


PGAS enjoys a near monopolistic business model: it has more than 90% Natural Gas Pipeline and
market share in gas distribution market and more than 85% market share in Distribution
gas transmission market. The distribution division historically has Stevanus JuandaAC
contributed more than 95% of its annual operating profit. Historically, (62-21) 5291-8574
PGAS’ share price performance has been driven by net and core income stevanus.x.juanda@jpmorgan.com

growth. Earnings wise, the company will likely depend on volume, ASP, and PT J.P. Morgan Securities Indonesia
cost of gas. When Rp depreciates, its reported net income could be
Price performance
negatively affected by foreign translation (non-cash) losses, but operating
4,000.0
profit should benefit and visa versa.
3,000.0
Post mortem
We expect the power plant sector to be the driver of volume and profit 2,000.0
growth in the next three years as PLN converts its diesel power plants into
1,000.0
gas and coal. In FY09-10E, volume should increase significantly on the back Nov-08 Feb-09 May-09 Aug-09 Nov-09
of ramp up in volume at PLTU Muara Tawar and supply to additional three
Source: Bloomberg.
power plants. We expect PGAS to raise selling prices by 6.5% in FY10. The
increase in volume and selling price will cause core earnings to rise by Performance
24.4% Y/Y, by our estimates.
1M 3M 12M
Potential for earnings upgrade Absolute (%) -2.0 5.0 116.1
Upward earnings estimate revision is possible if the selling price is increased Relative (%) 2.4 2.7 38.4
or volume delivered (14% increase Y/Y) is more than expected. Source: Bloomberg.

How much recovery is priced into the stock? Company data


We believe the increased demand from PLGU Muara Tawar is already in the 52-week range (Rp) 1,580-3,775
price. However, the ultimate demand coming from other power plants is yet Mkt cap. (RpB) 88,482
to be known. Mkt cap. (US$MM) 9,285
Price target and key risks Avg daily value (US$MM) 12.4
Given that we expect strong results in the future, we maintain our OW rating Avg daily volume (MM) 34.0
and our Jun-10 DCF-based PT of Rp4,700 (assuming a risk-free rate of Shares O/S (MM) 24,242
0.5%, a risk premium of 5.5%, and a terminal growth rate of 7.0%). Key Date of price 5-Nov-09
risks to our view and PT include: (1) lower-than-expected distribution Index: JCI 2,367
volume, distribution margin, and transmission fee; and (2) higher-than- Free float (%) 31
expected cost of gas. Exchange rate 9,530
Source: Bloomberg.
Bloomberg: PGAS IJ; Reuters: PGAS.JK
Rp in billions, year-end December
FY08 FY09E FY10E FY11E
Sales 12,793.8 17,652.4 20,477.8 21,476.0
Net profit 633.9 6,148.4 5,801.2 6,764.7
EPS (Rp) 26.4 256.5 242.0 282.2
Core EPS (Rp) 102.1 208.8 259.7 282.5
DPS (Rp) 41.7 102.6 121.0 141.1
Sales growth (%) 45.4% 38.0% 16.0% 4.9%
Net profit growth (%) -45.6% 870.0% -5.6% 16.6%
EPS growth (%) -45.6% 870.0% -5.6% 16.6%
ROE (%) 9.7% 63.7% 41.8% 38.7%
P/E (x) 138.1 14.2 15.1 12.9
Core P/E (x) 35.7 17.5 14.1 12.9
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

228
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

PT Perusahaan Gas Negara Tbk: Summary of financials

Source: Company, J.P. Morgan estimates.

229
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

PTT Public Company Overweight


Bt234.00
Price Target: Bt315.00
www.pttplc.com
Company description Thailand
PTT is an integrated energy company with interests in upstream E&P Integrated oils
business, mid-stream gas transmission and treatment division and Sukit ChawalitakulAC
downstream oil refining, oil marketing and petrochemical interests. PTT is a (662) 684-2679
state enterprise entity with the Finance Ministry owning, directly and chawalitakul.sukit@jpmorgan.com
indirectly, 67% of the firm. JPMorgan Securities (Thailand) Limited

Post mortem Price performance


PTT has an effective monopoly over the gas business. Gas demand from 280

power generation dipped during late 2008-early 2009, but has since Bt 200

recovered slowly. PTT’s upstream earnings were hit badly by collapsing oil 120
prices during the same period but have also recovered strongly since 2Q09. Nov-08 Feb-09 May-09 Aug-09 Nov-09
PTT.BK share price (Bt)
SET (rebased)
Potential for earnings upgrades Source: Bloomberg.
PTT’s gas business (due to its high fixed costs) and E&P division both have
significant operating leverage. Hence, higher gas revenues and/or higher Performance
petroleum prices will likely have a magnified impact on its bottom line. 1M 3M 12M
Absolute (%) -9.3 -5.6 27.9
How much recovery is priced into the stock? Relative (%) -4.2 -12.1 -21.2
PTT shares have risen 66% from their lows in Mar-09; hence, the economic Source: Bloomberg.
recovery has been partially reflected. That said, we believe that the stock has
Company data
not fully priced all the improvements, given that investors’ sentiment
52-week range (Bt) 137-273
towards PTT has been weighed down by continued legal uncertainty over the
Mkt cap. (BtMM) 662,649
group’s petrochemical and energy projects in the Map Ta Phut industrial Mkt cap. (US$MM) 19,852
zone. Avg daily value (US$MM) 23.0
Avg daily volume (MM) 2.6
Price target and key risks Shares O/S (MM) 2,832
Our Jun-10 PT of Bt315 is based on our SOTP valuation that comprises Date of price 5-Nov-09
estimated values from PTT’s E&P, gas, petrochemical and refining Index: SET 682
businesses. The biggest part of PTT's value comes from its core gas Free float (%) 47
separation and transmission business. We value this business using DCF. Exchange rate 33.38
Our derived WACC of 8.5% is conservatively calculated using a risk-free Source: Bloomberg.

rate of 5%, a terminal growth rate of 1%, and a beta of 1.2. Key downside
risks to our PT are: (1) petroleum prices; (2) domestic gas demand; and (3)
regulatory risks.
Bloomberg: PTT TB; Reuters: PTT.BK
Bt in millions, year-end December
FY08 FY09E FY10E FY11E
Revenue 2,000,816 1,415,312 1,697,747 1,993,748
Net profit 51,705 58,389 71,787 89,675
EPS (Bt) 18.34 20.71 25.47 31.81
DPS (Bt) 8.00 8.00 8.50 9.00
Revenue growth (%) 32.7 -29.3 20.0 17.4
EPS growth (%) -47.2 12.9 22.9 24.9
ROCE (%) 16.9 14.8 17.4 21.0
ROE (%) 13.9 14.4 16.0 17.7
P/E (x) 12.8 11.3 9.2 7.4
P/BV (x) 1.7 1.6 1.4 1.2
Dividend yield (%) 3.4 3.4 3.6 3.8
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

230
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

PTT Public Company: Summary of financials


Bt in millions, year-end December
Income Statement Cash flow statement
FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E

Revenues 1,508,335 2,000,816 1,415,312 1,697,747 1,993,748 EBIT 139,095 103,114 97,725 125,309 160,042
% change Y/Y 22.9% 32.7% -29.3% 20.0% 17.4% Depr. & amortization 28,450 32,170 37,218 43,710 48,652
Gross Margin (%) 12.3% 10.2% 12.5% 12.4% 12.5% Change in working capital 12,009 12,953 2,051 14,210 11,836
EBITDA 167,545 135,284 134,944 169,019 208,695 Taxes -36,180 -43,884 -31,142 -41,064 -53,873
% change Y/Y 11.4% -19.3% -0.3% 25.3% 23.5% Cash flow from operations 112,685 119,892 88,958 122,185 142,611
EBITDA Margin (%) 11.1% 6.8% 9.5% 10.0% 10.5%
EBIT 139,095 103,114 97,725 125,309 160,042 Capex -13,984 -92,782 -145,509 -123,645 -94,142
% change Y/Y 12.2% NM NM 28.2% 27.7% Disposal/(purchase) 0 0 0 0 0
EBIT Margin (%) 9.2% 5.2% 6.9% 7.4% 8.0% Net Interest 1,888 8,555 3,044 3,166 4,737
Net Interest 1,888 8,555 3,044 3,166 4,737 Free cash flow 98,701 27,110 -56,551 -1,460 48,469
Earnings before tax 140,983 111,669 100,769 128,475 164,779
% change Y/Y 9.4% -20.8% -9.8% 27.5% 28.3% Equity raised/(repaid) 2,427 1,245 0 0 0
Tax -36,180 -43,884 -31,142 -41,064 -53,873 Debt raised/(repaid) 5,708 21,764 18,123 3,700 -27,000
as % of EBT 118.8% 121.1% 133.9% 131.6% 126.7% Other 20,022 12,132 -8,436 8,555 10,043
Core net income (reported) 89,050 52,956 58,651 71,787 89,675 Dividends paid -29,583 -35,238 -16,914 -23,257 -24,666
% change Y/Y 12.7% -40.5% 10.8% 22.4% 24.9% Beginning cash 88,219 81,190 92,037 31,453 20,000
Shares outstanding 2,817 2,819 2,819 2,819 2,819 Ending cash 81,190 92,037 31,453 20,000 27,418
Core EPS (reported) – (Bt) 31.61 18.79 20.81 25.47 31.81 DPS – (Bt) 11.50 8.00 8.00 8.50 9.00
% change Y/Y - - - - -

Balance sheet Ratio analysis


FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E

Cash and cash equivalents 81,190 92,037 31,453 20,000 27,418 EBITDA margin 11.1% 6.8% 9.5% 10.0% 10.5%
Accounts receivable 195,263 98,892 120,301 144,308 169,469 Operating margin 9.2% 5.2% 6.9% 7.4% 8.0%
Inventories 19,896 23,692 24,774 29,742 34,906 Net profit margin 6.5% 2.6% 4.1% 4.2% 4.5%
Others 18,469 28,576 22,861 18,289 14,631
Current assets 314,818 243,197 199,389 212,339 246,424

LT investments 193,122 187,072 198,097 210,670 226,061 Sales growth 22.9% 32.7% -29.3% 20.0% 17.4%
Net fixed assets 315,143 375,755 484,046 563,980 609,470 Net profit growth 2.3% -47.1% 12.9% 22.9% 24.9%
Total Assets 891,523 885,205 961,056 1,068,267 1,165,437 EPS growth 1.9% -47.2% 12.9% 22.9% 24.9%

Liabilities
ST loans 15,007 20,796 26,728 27,098 24,398 Interest coverage (x) - - - - -
Payables 163,158 88,133 113,958 136,813 160,568 Net debt to equity 44.9% 42.2% 58.3% 55.9% 42.8%
Others 65,608 71,118 64,119 79,878 94,625 Sales/assets (x) 1.83 2.25 1.53 1.67 1.79
Total current liabilities 243,773 180,047 204,806 243,789 279,591 Assets/equity (x) 2.47 2.31 2.20 2.19 2.09
Long-term debt 212,387 228,362 240,553 243,883 219,583 ROE 30.0% 13.9% 14.4% 16.0% 17.7%
Other liabilities 36,713 46,260 38,199 46,755 56,798 ROCE 25.3% 16.9% 14.8% 17.4% 21.0%
Total Liabilities 492,873 454,669 483,558 534,426 555,972
Shareholders' equity 361,497 383,578 425,053 473,583 538,593
BVPS – (Bt) 128.31 136.07 150.78 168.00 191.06
Source: Company reports and J.P. Morgan estimates.

231
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Public Bank (F) Overweight


Price: M$10.90
Price Target: M$13.80
www.pbebank.com.my

Company description Malaysia


Public Bank is the largest domestic bank in Malaysia by market cap and the Malaysian Banks
third largest by balance sheet. Public Bank also has operations in Hong Chris Oh, CFAAC
Kong, China, Cambodia, Vietnam, Laos and Sri Lanka. The bank has: (1) a (60-3) 2270-4728
strong deposit franchise; (2) a prime customer base; and (3) in our view, a chris.ch.oh@jpmorgan.com
best-in-class management team with proven track record. JPMorgan Securities (Malaysia) Sdn. Bhd.
(18146-X)
Post mortem
The bank continues to deliver robust growth through peak and trough cycles Price performance
with the bank set to hit an all time high NP of M$2.5 billion for 2009, which M$
is still +3% higher than 2008 (ex the one-off goodwill income of M$145
million). For FY10/11, we expect a EPS CAGR of 15.6% with the bank 11
9
maintaining the high octane loan growth (15%) while strengthening further
7
its revenue streams via its asset management and bancassurance business.
5
We expect the bank to hit ROE levels of 29% in 2010.

10-08

01-09

04-09

07-09

10-09
Potential for earnings upgrades
Source: Bloomberg.
Being best in class in a cyclical industry in our view, we see potential for
further upgrades, especially if there are also tailwinds from PM Najib’s Performance
1M 3M 12M
reform measures which hopefully gain positive momentum with the
Absolute (%) 6.9 9.3 26.7
Malaysian Chinese community. Relative (%) 3.7 2.8 -7.5
Source: Bloomberg.
How much recovery is priced into the stock?
Company data
The stock is trading at P/Es of 15.2x/12.9x for FY09E/FY10E, which is 52-wk range (M$) M$6.85-10.94
comparable with the Malaysian market. In our view, the stock could still see Mkt. cap (M$MM) 38497.99
further upside if earnings manages to surprise on the upside Mkt. cap (US$MM) 11251.79
Liquidity (US$MM) 6.5
Avg. daily volume (MM) 2.2
Price target and key risks Shares O/S (MM) 3531.9
Our Jun-10 PT of M$13.80 is based on our two-stage DDM model assuming Date of price 5-Nov-09
sustainable ROE of 28% and COE of 11%. The key risk to our PT is that the KLCI Index 1,254.0
Free float (%) 100.0
stock is priced for perfection where any slippage in expectations could result Exchange rate 3.42
in a sharp de-rating on valuations. Source: Bloomberg.

Bloomberg: PBKF MK; Reuters: PUBMe.KL


M$ in millions, year-end December
FY08 FY09E FY10E FY11E
Net profit 2,581 2,486 3,005 3,419
Basic EPS (sen) 76.9 71.8 84.7 96.1
Cash adj. EPS (sen) 76.9 71.8 84.7 96.1
DPS (sen) 41.3 39.5 42.4 48.1
Basic EPS growth (%) 21.5 -6.6 18.0 13.4
ROE (%) 27.3 25.7 29.5 29.8
P/E (basic) (x) 14.2 15.2 12.9 11.3
BVPS (M$) 2.70 2.76 2.98 3.46
Tangible NAV 2.11 2.18 2.40 2.88
P/BV (x) 4.04 3.95 3.65 3.15
Div. yield (%) 3.8 3.6 3.9 4.4
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

232
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adrian.mowat@jpmorgan.com

Public Bank (F): Summary of financials


Income statement - M$ MM 2008 2009E 2010E 2011E 08/07 09E/08E 10E/09E 11E/10E Balance sheet gearing 2008 2009E 2010E 2011E

Margins (% of earning assets) 2.09% 1.95% 1.87% 1.84% 0% -7% -4% -2% Loan/deposit 73% 74% 75% 75%
Earning assets/assets 96.5% 94.7% 93.8% 94.1% 0% -2% -1% 0% Investment/assets 13% 14% 16% 17%
NIM (as % of avg. assets) 2.01% 1.84% 1.75% 1.73% 0% -8% -5% -1% Loan/assets 60% 62% 63% 63%
Customer deposits/liab. 87% 87% 87% 87%
Net interest income 3,727 3,896 4,197 4,590 15% 5% 8% 9% Long-term debt/liabilities 3% 4% 4% 3%

Total non-interest revenues 2,012 1,948 2,286 2,512 8% -3% 17% 10%
Fee income 975 1,003 1,228 1,354 -5% 3% 22% 10% Asset quality/capital 2008 2009E 2010E 2011E
FX/trading gains 76 82 86 91 -65% 7% 6% 5% Loan loss reserves/loans 1.6% 1.8% 2.0% 2.1%
Other operating income 961 864 972 1,068 55% -10% 12% 10% NPLs/loans 1.0% 1.3% 1.6% 1.8%
Total operating revenues 5,739 5,844 6,483 7,102 12% 2% 11% 10% Loan loss reserves/NPLs 159.7% 137.3% 122.6% 114.5%
Operating costs -1791 -1843 -1949 -2031 6% 3% 6% 4% Growth in NPLs -13.8% 56.4% 36.3% 0.0%
Operating profit 3,948 4,001 4,534 5,071 16% 1% 13% 12% Tier 1 Ratio 8.6% 7.8% 7.6% 8.2%
Loan loss provisions -581 -689 -529 -514 39% 19% -23% -3% Total CAR 14.1% 14.7% 13.9% 14.0%
Other provisions 12 13 14 14
Exceptionals - - - - Per share data 2008 2009E 2010E 2011E
Disposals/ other income - - - - EPS (M$) 0.77 0.72 0.85 0.96
Pre-tax profit 3379 3325 4019 4572 13% -2% 21% 14% Dividend (M$) 0.43 0.40 0.42 0.48
Tax [rate] -757 -798 -965 -1097 22% 24% 24% 24% Payout ratio 0.56 0.56 0.50 0.50
Minorities/preference dividends -41 -41 -49 -56 NAV 2.70 2.76 2.98 3.46
Attributable net income 2,581 2,486 3,005 3,419 22% -4% 21% 14% Avg. Shares issued (MM) 3,356 3,463 3,549 3,560

Key balance sheet - M$ MM 2008 2009E 2010E 2010E 08/07 09E/08E 10E/09E 11E/10E DuPont 2008 2009E 2010E 2011E

Net customer loans 118,386 139,378 158,689 174,305 19% 18% 14% 10% NIR/avg. assets 2.01% 1.84% 1.75% 1.73%
Loans loss reserves (1,932) (2,598) (3,164) (3,733) 15% 34% 22% 18% Non IR/avg. assets 1.09% 0.92% 0.95% 0.95%
Gross loans 120,319 141,976 161,853 178,038 19% 18% 14% 10% Non IR/total revenue 35.1% 33.3% 35.3% 35.4%
Investments 25,263 31,284 39,977 47,974 58% 24% 28% 20% Total rev/avg. assets 3.10% 2.77% 2.71% 2.68%
Other earning assets 43,680 37,680 36,680 34,680 -14% -14% -3% -5% Cost/income 31.2% 31.5% 30.1% 28.6%
Average earning assets = (A) 178,619 200,101 224,725 249,601 15% 12% 12% 11% Cost/assets 0.97% 0.87% 0.81% 0.77%
Goodwill 2,072 2,072 2,072 2,072 0% 0% 0% 0% Goodwill amort.
Total assets 196,163 226,319 252,647 277,688 13% 15% 12% 10% Operating ROAA 2.13% 1.89% 1.89% 1.91%
LLP/loans -0.53% -0.53% -0.35% -0.30%
Interbank funding 5,590 6,037 6,943 7,637 -46% 8% 15% 10% Loans/assets 59.8% 62.1% 63.4% 64.1%
Customer deposits 162,280 188,244 210,834 231,917 17% 16% 12% 10% Other inc: provs
Long-term bond funding 6,303 8,803 8,803 8,803 46% 40% 0% 0% Pre-tax ROAA 1.83% 1.57% 1.68% 1.72%
Other interest-bearing liabilities 3,062 3,307 3,803 4,184 -11% 8% 15% 10% Tax 22.4% 24.0% 24.0% 24.0%
Average interest-bearing liab. = (B) 167,107 191,813 218,387 241,461 15% 15% 14% 11% MI -0.02% -0.02% -0.02% -0.02%
Average assets 185,159 211,241 239,483 265,167 15% 14% 13% 11% ROAA 1.39% 1.18% 1.25% 1.29%
Shareholders' equity 9,537 9,785 10,600 12,316 2% 3% 8% 16% RoRWA 2.45% 2.11% 2.27% 2.33%
Risk-weighted assets 111,623 124,144 140,235 153,113 Equity/assets 5.1% 4.6% 4.3% 4.3%
Average risk-weighted assets 105,358 117,884 132,189 146,674 16% 12% 12% 11% ROE 27.35% 25.73% 29.48% 29.84%

Source: Company, J.P. Morgan estimates.

233
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Qatar Telecom Overweight


Price: QR 150.9
Price Target: QR 230
www.qtel.com.qa
Company description Qatar
Qtel is the leading provider of telecom services in Qatar and only recently Telecommunications
lost its monopoly with the market entry of Vodafone Qatar. Qtel has Christian KernAC
followed an aggressive expansion strategy over the past few years and now (971-4) 428 1789
operates in 17 countries in the Middle East, Africa and South-East Asia. christian.a.kern@jpmorgan.com
Close to 75% of its revenues came from international operations in 2008. Of JPMorgan Chase Bank, N.A., Dubai Branch
these revenues its Indonesian subsidiary, Indosat, generated about 1/3.
Price Performance
170
Post mortem
We believe Qtel offers a balanced growth/return profile. In our view the 150

company stands out versus its MENA peers due to a well diversified and QR 130

controlled asset base dominated by i) the high value market in Qatar and ii) 110

the market repair in Indonesia. Its international assets account for 55% of our 90

SOTP value and contribute over 70% to our group EBITDA forecasts in Nov-08 Feb-09 May-09 Aug-09 Nov-09

2012E. Source: Bloomberg

Potential for earnings upgrades Performance


Our conservative approach reflects recent market liberalization by 1M 3M 12M
forecasting ARPU declines of around 30% and EBITDA margin erosion of Absolute (%) -0.1% 4.8% 18.7%
Relative (%) 0.3% -1.2% 30.1%
close to 5pp in the domestic market over the next three years.
Source: Bloomberg

How much recovery is priced into the stock?


Company data
Despite being up >30% ytd, we believe Qtel continues to offer a favourable 52-week range (LC) 163.9-90.3
risk/reward profile as GCC markets still have room to catch up with EM Mkt cap. (LCMM) 22,132
market performance and risk appetite for EM markets continues to improve. Mkt cap. (US$MM) 6,079
Avg daily value (US$MM) 1.55
Avg daily volume (MM) 0.39
Price target and key risks Shares O/S (MM) 147
Qtel has strong valuation support on most absolute and relative measures as Date of price 23-Nov-09
well as in the context of historical trading ranges. Our DCF-based SOTP Index: DSM20 7256
Free float (%) 22%
December 2010 price target for Qtel is QR230, implying more than 50% Exchange rate 3.64
upside to current trading levels. Key risks to our valuation include i) a worse
Source: Bloomberg
than expected macro economic environment, ii) start of irrational
competition, iii) M&A integration, and iv) foreign exchange risk.

Bloomberg: QTEL QD; Reuters: QTEL QA


QR in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 20,319 23,920 25,710 27,098
Net profit 2,781 2,990 2,994 3,200
EPS (QR) 21.3 20.4 20.4 21.8
DPS (QR) 10.0 10.5 11.0 11.5
Sales growth (%) 92.7% 17.7% 7.5% 5.4%
Net profit growth (%) 75.3% 7.5% 0.2% 6.9%
EPS growth (%) 53.7% -4.4% 0.2% 6.9%
ROE (%) 9.6% 11.8% 11.1% 11.2%
EV/EBITDA NM 5.4 4.7 4.1
P/E (x) NM 5.7 5.8 5.5
FCF Yield NM 17.8% 14.9% 16.0%
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

234
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Qatar Telecom: Summary of Financials


Profit and Loss Statement Cash flow statement
QR in millions, year end Dec FY08 FY09E FY10E FY11E FY12E QR in millions, year end Dec FY08 FY09E FY10E FY11E FY12E

Revenues 20,319 23,920 25,710 27,098 28,593 Cash EBITDA 9,825 11,408 12,035 12,501 13,036
% Change Y/Y 92.7% 17.7% 7.5% 5.4% 5.5% Interest (1,315) (1,553) (1,209) (1,031) (819)
EBITDA 9,825 11,408 12,035 12,501 13,036 Tax (1,082) (963) (1,037) (1,111) (1,204)
% Change Y/Y 90.0% 16.1% 5.5% 3.9% 4.3% Other (1,807) 3,146 473 (277) (613)
EBITDA Margin 48.4% 47.7% 46.8% 46.1% 45.6% Cash flow from operations 5,621 12,039 10,263 10,083 10,400
EBIT 5,612 5,731 6,149 6,458 6,906
% Change Y/Y 82.2% 2.1% 7.3% 5.0% 6.9% Capex PPE (6,834) (6,170) (4,593) (4,250) (4,223)
EBIT Margin 27.6% 24.0% 23.9% 23.8% 24.2% Net investments (2,368) 1,441 662 841 1,053
Net Interest (1,315) (1,553) (1,209) (1,031) (819) CF from investments (9,202) (4,729) (3,931) (3,409) (3,170)
PBT 3,099 4,620 4,928 5,351 5,917 Dividends (347) (1,793) (1,540) (1,613) (1,687)
% change Y/Y 69.9% 49.1% 6.7% 8.6% 10.6% Share (buybacks)/ issue 5,861 0 0 0 0
Net Income (clean) 2,781 2,990 2,994 3,200 3,496
% change Y/Y 75.3% 7.5% 0.2% 6.9% 9.3% CF to Shareholders 5,514 (1,793) (1,540) (1,613) (1,687)
Average Shares 130 147 147 147 147 FCF to debt 1,932 5,517 4,792 5,060 5,543
Clean EPS 21.32 20.39 20.42 21.82 23.84
% change Y/Y 53.7% NM 0.2% 6.9% 9.3% OpFCF (EBITDA - PPE) 2,991 5,238 7,441 8,252 8,813
DPS 10.00 10.50 11.00 11.50 12.57 EFCF pre Div, PPE (3,582) 7,310 6,332 6,673 7,230

Balance sheet Ratio Analysis


QR in millions, year end Dec FY08 FY09E FY10E FY11E FY12E QR in millions, year end Dec FY08 FY09E FY10E FY11E FY12E

Cash and cash equivalents 7,845 12,567 17,358 22,418 27,962 EBITDA margin 48.4% 47.7% 46.8% 46.1% 45.6%
Accounts Receivables 3,862 4,545 4,885 5,013 5,147 EBIT Margin 27.6% 24.0% 23.9% 23.8% 24.2%
ST financial assets - - - - - Net profit margin 11.2% 12.1% 11.6% 11.8% 12.2%
Others 272 287 309 325 343 Capex/sales 33.6% 25.8% 17.9% 15.7% 14.8%
Current assets 11,980 17,398 22,552 27,757 33,452 Depreciation/Sales 19.8% 22.2% 21.4% 20.6% 19.4%
LT investments 38,838 37,855 36,666 35,393 34,120
Net fixed assets 23,480 25,185 25,468 25,421 25,359 Revenue growth 92.7% 17.7% 7.5% 5.4% 5.5%
Total assets 74,298 80,439 84,685 88,570 92,930 EBITDA Growth 90.0% 16.1% 5.5% 3.9% 4.3%
ST loans 7,820 10,732 10,732 10,732 10,732 EPS Growth 53.7% NM 0.2% 6.9% 9.3%
Payables 9,709 11,960 12,855 13,549 14,297
Others 3,235 5,502 7,199 8,671 9,722 Net debt/EBITDA 2.2 1.6 1.1 0.7 0.2
Total current liabilities 20,765 28,194 30,786 32,953 34,751 CF to Shareholders 5,514 (1,793) (1,540) (1,613) (1,687)
Long term debt 20,155 19,706 19,706 19,706 19,706 FCF to debt 1,932 5,517 4,792 5,060 5,543
Other liabilities 4,416 7,116 7,316 7,448 8,200
Total liabilities 45,336 55,016 57,808 60,106 62,657 OpFCF (EBITDA - PPE) 2,991 5,238 7,441 8,252 8,813
Total Liabilities & Shareholders' Equity 74,297 80,439 84,685 88,570 92,930 EFCF pre Div, PPE (3,582) 7,310 6,332 6,673 7,230

Source: Company reports and J.P. Morgan estimates.

235
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Rosneft Overweight
Price: $9.01
Price Target: $10.3
www.rosneft.com
Company description Russia
Rosneft is the largest oil company in Russia. We expect crude output at 2.24 Russian Oil & Gas
mmbpd in 2009. Rosneft’s key upstream assets are: Yuganskneftegas in W.
Nadia KazakovaAC
Siberia (‘09E output – 1.33 mmbpd) and Vankorneft in E. Siberia (‘15E (7-495) 937 7329
output - around 600 mbpd). Proven hydrocarbon reserves (as of end-‘08) nadia.kazakova@jpmorgan.com
stood at 22.3 bn boe, 3P reserves at 48.9 bn boe. In 2009, we estimate the
J.P Morgan Securities Ltd.
refining coverage ratio at 47%. The government owns a 75.2% stake in
Rosneft, while 9.4% is in treasury shares held by the company. Price Performance

Post mortem 9

Rosneft is the fastest growing company in the Russian oil sector, as it ramps 7
$
up output at 500kbpd Vankor field in E. Siberia. We forecast Rosneft’s
output growth at over 2% in ‘09E and 6% y/y in ‘10E (vs. 1.0% and 2.6% for 5

the Russian oil sector). We expect Rosneft to generate cumulative FCF of 3


$25bn in ‘10E-‘12E thanks to low opex, ED tax holidays in E. Siberia and Nov-08 Feb-09 May-09 Aug-09 Nov-09
rising oil prices. This should in our view allow Rosneft to reduce financial
Source: Bloomberg
leverage (from net debt of $19.8bn as of end-09), might improve dividend
payments and boost investments into projects with superior return potential. Performance
1M 3M 12M
Potential for earnings upgrades Absolute (%) -3.2 25.7 109.5
Rosneft might show better than expected output growth and should benefit Source: Bloomberg
from tax holidays, which we believe is not entirely priced in. Our EBITDA
and net income forecasts for Rosneft are 23-25% and 19-24% above Company data
Bloomberg consensus respectively. 52-week range ($) 2.61-9.01
Mkt cap. (US$MM) 86,307
How much recovery is priced into the stock? Avg daily value (US$MM) 296
Avg daily volume (MM) 33.44
Based on our analysis, Rosneft trades at 9.8x 12M forward PER, or a 14% Shares O/S (MM) 9,579
discount to historical average PER (since IPO in 2006). In our view, Date of price 23-Nov-09
additional tax breaks are not fully priced in and we would expect the Index: RTS 1466.77
company to trade above its historical PER multiples. Free float (%) 11%
Exchange rate 1

Price target and key risks Source: Bloomberg, J.P. Morgan

Our PT (end-2010) is $10.3, based on 50% DCF (WACC at 11.7% and


terminal growth rate at 3.5%) and 50% target (normalized) EV/EBITDA
(‘10E). Key risks: oil price volatility, inflation and ruble appreciation.

Bloomberg: ROSN LI; Reuters: ROSNq.L


$ in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 68,991 46,793 59,041 78,898
Net profit 11,110 6,477 10,539 14,043
EPS (LC) 1.16 0.68 1.10 1.47
FD EPS (LC) 1.16 0.68 1.10 1.47
DPS (LC) 0.07 0.06 0.07 0.11
Sales growth (%) 40% -32% 26% 34%
Net profit growth (%) -14% -42% 63% 33%
EPS growth (%) -14% -42% 63% 33%
ROE (%) 33% 15% 21% 23%
P/E (x) 7.8 13.3 8.2 6.1
FD P/E (x) 7.8 13.3 8.2 6.1
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

236
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Rosneft: Summary of Financials


Profit and Loss Statement Cash flow statement
$ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E

Revenues 68,991 46,793 59,041 78,898 84,589 EBIT 12,995 8,755 14,348 18,511 19,653
% change Y/Y 40.2% (32.2%) 26.2% 33.6% 7.2% Depreciation & amortisation 3,983 4,724 4,991 5,532 5,782
Gross Margin (%) 22.2% 25.9% 30.1% 28.1% 27.7% Change in working capital/Other 1,617 1,626 (1,056) (2,037) (286)
EBITDA 16,978 13,478 19,339 24,043 25,435 Taxes 1,904 1,619 2,635 3,511 3,883
% change Y/Y 21.2% (20.6%) 43.5% 24.3% 5.8% Cash flow from operations 16,691 13,485 15,648 18,495 21,265
EBITDA Margin 24.6% 28.8% 32.8% 30.5% 30.1%
EBIT 12,995 8,755 14,348 18,511 19,653 Capex (8,732) (7,527) (8,825) (8,674) (8,190)
% change Y/Y 21.2% (32.6%) 63.9% 29.0% 6.2% Disposal/(Purchase)/Other (1,350) (1,319) 255 276 (169)
EBIT Margin 18.8% 18.7% 24.3% 23.5% 23.2% Net Interest (737) (684) (1,141) (689) (278)
Net Interest (737) (684) (1,141) (689) (278) Free cash flow 5,872 3,955 5,936 9,408 12,629
Earnings before tax 13,109 8,096 13,174 17,553 19,417
% change Y/Y (26.3%) (38.2%) 62.7% 33.2% 10.6% Equity raised/repaid 0 0 0 0 0
Tax (1,904) (1,619) (2,635) (3,511) (3,883) Debt Raised/repaid (2,536) (1,136) 788 (9,258) (8,230)
as a % of EBT 14.5% 20.0% 20.0% 20.0% 20.0% Other 126 0 0 0 (0)
Net Income (Reported) 11,110 6,477 10,539 14,043 15,534 Dividends paid (538) (695) (1,044) (1,714) (2,516)
% change Y/Y (13.6%) (41.7%) 62.7% 33.2% 10.6% Beginning cash 998 1,372 3,220 7,496 4,832
Shares Outstanding 9,597.87 9,597.87 9,597.87 9,598.87 9,599.87 Ending cash 1,372 3,220 7,496 4,832 6,290
EPS (reported) 1.16 0.67 1.10 1.46 1.62 DPS 0.06 0.07 0.11 0.18 0.26
% change Y/Y (13.6%) (41.7%) 62.7% 33.2% 10.6%

Balance sheet Ratio Analysis


$ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E

Cash and cash equivalents 1,369 3,220 7,496 4,832 6,290 EBITDA margin 24.6% 28.8% 32.8% 30.5% 30.1%
Accounts receivable 6,299 4,423 5,360 7,767 8,675 Operating margin 18.8% 18.7% 24.3% 23.5% 23.2%
Inventories 1,427 1,002 1,214 1,760 1,965 Net profit margin 16.1% 13.8% 17.9% 17.8% 18.4%
Others 3,712 3,395 3,670 3,622 3,045 SG&A/Sales 2.4% 2.9% 2.6% 2.4% 2.4%
Current assets 12,807 12,039 17,740 17,980 19,976
Sales per share growth 40.2% (32.2%) 26.2% 33.6% 7.2%
LT investments 22,309 21,123 27,052 27,663 29,764 EPS growth (13.6%) (41.7%) 62.7% 33.2% 10.6%
Net fixed assets 55,204 58,007 61,841 64,984 67,392
Total assets 77,513 79,130 88,893 92,647 97,156 ROE 28.6% 14.5% 19.5% 21.1% 19.5%
ROCE 20.7% 11.7% 17.8% 20.6% 20.8%
Liabilities
ST loans 14,084 7,964 6,765 5,917 4,416 Production (mboe/day) 2,257 2,375 2,502 2,706 2,817
Payables 3,096 2,103 2,471 3,339 3,590 Production oil (mbpd) 2,122 2,192 2,325 2,505 2,621
Others 1,517 1,517 1,517 1,517 1,517 Production gas (mboe/day) 135 183 177 201 196
Total current liabilities 18,697 11,584 10,753 10,773 9,523 Refining throughput (mbpd) 988 1,000 1,054 1,054 1,054
Long term debt 10,081 15,065 17,052 8,641 1,913
Other liabilities 9,137 7,549 6,430 5,642 5,088 Interest coverage (x) 23.0 19.7 16.9 34.9 91.7
Total liabilities 77,513 79,577 89,110 92,261 96,746 Net debt to equity 57.6% 43.7% 29.7% 14.5% 0.0%
Shareholders' equity 38,903 44,685 54,180 66,509 79,527 Net debt 22,796 19,809 16,321 9,727 39
BVPS 4.05 4.66 5.65 6.93 8.28 Net debt/EBITDA (ny) 1.2 1.3 0.8 0.3 (0.1)

Source: Company reports and J.P. Morgan estimates.

237
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

RusHydro Overweight
Price: $0.042
Price Target: $0.042
www.rushydro.ru
Company description Russia
RusHydro is the largest power generation company in Russia in terms of Electric Utilities
installed capacity (about 25GW including Sayano Shushensksya HPP after Sergey ArininAC
the recovery of the plant), controlling over half of the country’s hydro power (7-495) 967-7031
generation facilities and producing about 8% of the country’s electricity. sergey.v.arinin@jpmorgan.com
J.P. Morgan Bank International LLC
Post Mortem
RusHydro experienced a major accident at Sayano-Shushenskaya HPP (SS Price Performance
HPP) which will make the largest plant inoperable for the 2010 and part of 0.050

2011. Not surprisingly, the stock has underperformed the market since the 0.040
accident. However, we estimate the company is still likely to make a sound $ 0.030
profit in 2009 given the relatively good 1H09, and it should improve 0.020
profitability in 2011 when operations at the power plant are resumed.
0.010
Nov-08 Feb-09 May-09 Aug-09 Nov-09
Potential for earnings upgrades
We see little scope for earnings upgrades as the company bottom line is
likely to remain weak in 2009 and 2010 as a result of the SS HPP accident. Source: Bloomberg.
Moreover, we believe the market expectations on developments in the
electricity market already take into account improvements in electricity Performance
1M 3M 12M
demand and pricing. Absolute (%) 6% 14% 78%
Source: Bloomberg.
How much recovery is priced into the stock?
We believe renewed focus on risks may result in less vulnerability on the Company data
downside and greater sensitivity to positive surprises. At the same time, the 52-week range (RUB) 0.53-1.43
market may overlook its attractive relative valuation. For example, Mkt cap. (RUBMM) 327,859
RusHydro trades at 5.6x 2011E EV/EBITDA vs. 9.7x for international peers. Mkt cap. (US$MM) 11,387
Avg daily value (US$MM) 28
Low valuation compensates for some of the capex and stock overhang risks Avg daily volume (MM) 800
in our view. Shares O/S (MM) 284, 543
Date of price 23-Nov-09
Index: RTS 1466.77
Price target and key risks Free float (%) 37
Our DCF-based Dec-10 PT is $0.042. The key risks include 1) the risk of Exchange rate (RUB/$) 28.79
capex increase; and 2) new share issue overhang, with issuance already Source: Bloomberg.
approved.

Bloomberg: HYDR RU; Reuters: HYDR.RTS


RUB in billions, year-end December
FY08 FY09E FY10E FY11E
Revenue 107,669 105,048 109,768 139,956
Net income -19,955 24,180 23,143 43,968
EPS (RUB) -0.070 0.085 0.081 0.155
FD EPS (RUB) -0.070 0.085 0.081 0.155
DPS (RUB) 0 0 0 0
Revenue growth (%) 35% -2% 4% 28%
Net income growth (%) N.M. N.M. -4% 90%
EPS growth (%) N.M. N.M. -4% 90%
ROE (%) -6% 6% 5% 9%
P/E (x) -14.7 15.6 16.4 9.0
FD P/E (x) -14.7 15.6 16.4 9.0
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

238
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

RusHydro: Summary of Financials


Profit and Loss Statement Valuation ratios
$ in millions, year end Dec FY07 FY08E FY09E FY10E FY11E $ in millions, year end Dec FY07 FY08E FY09E FY10E FY11E
Sales 3,105 4,324 3,283 3,409 4,186 P/E (recurrent) - - - - -
Gross Operating Profit - - - - - P/E (reported) - - - - -
Depreciation & Amortisation 330 375 337 404 499 Price to book value 1.1 0.9 0.8 0.7 0.7
Operating Profit 412 924 1,079 1,132 1,883 EV/EBITDA 13.9 7.4 7.0 6.8 4.8
Associate Income - - - - - EV/EBIT 25.1 10.5 9.2 9.2 6.1
Net Interest 31 60 0 105 247 FCF yield (pre divs, post mins) (%) - - - - -
Profit before tax 372 864 1,079 1,027 1,636 Dividend yield (%) - - - - -
Income Tax 117 459 324 308 327
Minority Interests 0 19 0 0 0 Per share
Discontinued items - - - - - $
Group Net profit 255 409 864 821 1,309 FY07 FY08E FY09E FY10E FY11E
Recurrent EPS 0.00 (0.00) 0.00 0.00 0.00
Cashflow statement Reported EPS - - - - -
$ in millions, year end Dec Reported DPS - - - - -
FY07 FY08E FY09E FY10E FY11E Adjusted Free cash flow - - - - -
Funds from operations - - - - -
Working Capital 36 (223) (112) (29) (32) Performance, leverage and return ratios
Cash flow from operations 1,067 1,037 1,203 1,542 2,210 %
Capex & Acquisitions - - - - - FY07 FY08E FY09E FY10E FY11E
Other investing cash flows - - - - - Gross operating margin - - - - -
Cash from investing - - - - - Operating margin - - - - -
Dividends paid (80) 0 0 0 0 Operating profit growth y-o-y 137.4% 124.5% 16.8% 4.8% 66.4%
Cash from financing - - - - - Recurrent Income growth y-o-y - - - - -
Free Cash flow before dividends - - - - - Reported ROE 4.2% 3.9% 7.0% 6.0% 8.8%
Free cash flow, adjusted - - - - - ROCE (EBIT) - - - - -
Net debt/ (equity+minorities) (%) 6.5% -0.5% 1.3% 4.5% 10.9%
Balance Sheet Net debt /EBITDA (%) - - - - -
$ in millions, year end Dec EBITDA / net interest - - - - -
FY07 FY08E FY09E FY10E FY11E Reported net income / dividends - - - - -
Net fixed assets - - - - -
Current assets - - - - - Market valuation
Total assets 12,746 14,502 15,699 18,018 21,116 $ in millions
Total Debt - - - - - FY07 FY08E FY09E FY10E FY11E
Shareholders' equity 9,465 11,645 13,177 14,330 15,368 Share price (year-end / current) 0.03750
Other liabilities - - - - - Number of Shares (million) 284,543.0 284,543.0 284,543.0 284,543.0 284,543.0
Total liabilities 3,281 2,857 2,522 3,687 5,749 Market Capitalisation - - - - -
Net debt 615 -58 174 642 1,676 EV adjustment - - - - -
Capital Employed - - - - - EV 10,347 9,673 9,906 10,373 11,407

Source: Company reports and J.P. Morgan estimates.

239
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Samsung SDI Overweight


W142,500
Price Target: W210,000
www.samsungsdi.com
Company description South Korea
Samsung SDI Co., Ltd. Specializes in manufacturing cathode-ray tubes Electronics
(CRTs) for televisions and computer monitors. The company also produces JJ ParkAC
PDP panels. SDI is now moving its axis of business into rechargeable (822) 758-5717
batteries (RB) for mobile phones and NBPC, aiming further growth in the jj.park@jpmorgan.com
HEV/EV area. Marcus ShinAC
(822) 758-5712
Post mortem marcus.j.shin@jpmorgan.com
We believe the three-stage earnings drivers are intact: RB for CE in the near J.P. Morgan Securities (Far East) Ltd,
term; AM-OLED in the mid-term; and RB for EV in the long term. Also, Seoul Branch
SDI’s aggressive plan in ESS (energy storage system) will likely reinforce
Price performance
SDI’s multi-year growth story further.
Won
180,000 W
Potential for earnings upgrades
We still believe the company’s RB will generate sustainable earnings, owing 110,000
to product-mix change as well as ongoing growth in SMD. Hence, we expect 40,000
upward revisions to consensus earnings estimates and price target. Oct-08 Feb-09 Jun-09 Oct-09
SDI KOSPI
How much recovery is priced into the stock? Source: Bloomberg.
Our long-term view is potential upside will be largely driven by SB Performance
LiMotive, as the company starts shipping commercial samples in 4Q10, and 1M 3M 12M
meaningful volume shipments will likely to take place in 2012. We believe Absolute (%) 2% 33% 101%
the share price will continue to appreciate as the value of its JV offsets Relative (%) 6% 32% 64%
deficits in its existing businesses. Source: Bloomberg.
Company data
Price target and key risks 52-wk range (Won) 52,200-179,000
We believe Samsung SDI’s re-rating story is intact, given the potential Mkt cap. (WB) 6,492
strong earnings momentum in the next two years. As we expect SDI’s Mkt cap. (US$MM) 5,513
earnings to be driven by its three operations (RB for CE, AM-OLED, and RB Avg daily val (US$MM) 109.5
for EV), we use a SOTP approach to derive our Dec-10 PT of W210,000, Avg daily vol (MM) 0.9
estimating a value for each of its operations (CE RB: W4.3 trillion; SMD: Shares O/S (MM) 46
W3.0 trillion; and EV RB: W2.4 trillion). Our PT implies 47% upside Date of price 5-Nov-09
potential from the current price. SDI remains on our Asia Analysts’ Focus Index: KOSPI 1,552
List, and on the LONG side of our AP Tech Trading Portfolio. Free float (%) 57.1
Exchange rate 1,178
Source: Bloomberg.
Bloomberg: 006400 KS; Reuters: 006400.KS
Won in billions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Sales 6,250 4,842 4,592 4,663 ROE (%) 1% 6% 7% 9%
Sales growth 21% -23% -5% 2% ROIC (%) 3% 5% 13% 18%
Operating profit 69 129 312 401 BPS (Won) 99,141 107,205 115,780 127,158
OP growth n/a 88% 141% 29% P/BV (x) 1.4x 1.3x 1.2x 1.1x
Pre-tax profit 121 292 443 589 Div yield (%) 0.0% 2.7% 2.7% 2.7%
Net profit 39 308 407 542 EPS 1Q 2Q 3Q 4Q
EPS (Won) 807 6,405 8,463 11,262 FY08 -636 1,031 1,220 -809
P/E (x) 176.7x 22.2x 16.8x 12.7x FY09E 1,197 1,838 1,792 1,578
Cash 1,280 1,353 1,614 2,020 FY10E 1,683 1,746 2,446 2,588
Gross debt 1,033 659 441 274 Price target 210,000
Equity 4,769 5,157 5,570 6,117 Consensus 160,000
Debt-equity 22% 13% 8% 4% Difference 31.3%
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

240
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adrian.mowat@jpmorgan.com

Samsung SDI: Summary of financials


Won in billions, year-end December
Profit and loss statement Balance sheet
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenues 6,250 4,842 4,592 4,663 Cash and Cash Equivalents 1,280 1,353 1,614 2,020
COGS 5,435 4,103 3,734 3,719 Accounts receivable 684 542 494 503
Depreciation -591 -464 -455 -446 Inventories 420 426 389 395
Gross Profit 814 739 858 944 Others current assets 210 386 352 358
EBIT 69 129 312 401 Current assets 2,594 2,706 2,849 3,277
Net Interest Income -7 -2 7 26
Pre-tax Profit 121 292 443 589 Net fixed assets 2,156 2,076 1,958 1,840
Tax Expense/(Credit) 43 12 35 47 Investment assets 1,762 2,024 2,078 2,147
Net Income 39 308 407 542 Other long term assets 257 83 94 101
Shares outstanding (mil.) 46 46 46 46 Total Assets 6,769 6,889 6,980 7,366
EPS (Including pref., Won) 807 6,405 8,463 11,262
Sequential Growth ST Debt and CPLTD 327 243 168 123
Revenues 21% -23% -5% 2% Account Payables 280 321 281 284
Gross Profit 191% -9% 16% 10% Other current liabilities 485 656 599 609
EBIT n/a 88% 141% 29% Total current liabilities 1,093 1,220 1,048 1,016
Pre-tax Profit n/a 142% 52% 33% Long term debt 705 416 273 151
EPS (Won) n/a 694% 32% 33% Other Long term liabilities 201 96 89 82
Total liabilities 2,000 1,732 1,410 1,249

Shareholder's equity 4,769 5,157 5,570 6,117


Total Liabilities and Equity 6,769 6,889 6,980 7,366
BVPS (Won) 99,141 107,205 115,780 127,158

Cash flow statement Ratio analysis


FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Net Income 39 308 407 542 Gross Margin (%) 13.0% 15.3% 18.7% 20.3%
Depreciation & amortization 591 464 455 446 EBIT Margin (%) 1.1% 2.7% 6.8% 8.6%
Other non-cash items 0 0 0 0 Net profit margin (%) 1.2% 5.8% 8.9% 11.6%
Change in working capital -108 172 21 -9 COGS/sales (%) 87.0% 84.7% 81.3% 79.7%
Cash flow from operations 560 916 884 979 SG&A/sales (%) 11.9% 12.6% 11.9% 11.7%
Purchase of PP&E 151 -384 -338 -328
Disposal/ (purchase) -85 -88 -65 -77 Sales per share growth (%) 21.4% -22.5% -5.2% 1.6%
Cash flow from investing 66 -472 -403 -405 Sales growth (%) 21.4% -22.5% -5.2% 1.6%
Equity raised/(repaid) -5 117 0 0 EBIT growth (%) n/a 88.1% 140.9% 28.5%
Debt raised/(repaid) 7 -374 -218 -167 Net profit growth (%) n/a 259.5% 45.6% 33.1%
Other charges -43 -383 -212 -162 EPS growth (%) n/a 694.1% 32.1% 33.1%
Cash dividends 0 0 0 0
Cash flow from Financing -164 -371 -220 -169 Interest Coverage (x) 2.7 5.9 22.6 45.1
Net Changes in Cash 463 73 261 406 Inventory Turnover (x) 12.9 9.6 9.6 9.4
Beginning cash 818 1,280 1,353 1,614 Net Debt to total Capital (%) -3.7% -10.1% -16.8% -23.7%
Ending cash 1,280 1,353 1,614 2,020 Net debt to equity (%) -5.2% -13.5% -21.1% -28.6%
DPS (Won) 0 250 250 250 Sales/Assets (%) 92.3% 70.3% 65.8% 63.3%
Assets/Equity (%) 141.9% 133.6% 125.3% 120.4%
ROE (%) 0.8% 6.2% 7.3% 8.9%
ROIC (%) 2.7% 4.6% 13.1% 17.7%

Quarterly data
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2009E 2010E
Sales 1,023 1,187 1,347 1,286 Sales 1,103 1,124 1,191 1,173
Net income 58 88 86 76 Net income 81 84 118 124
EPS (Won) 1,197 1,838 1,792 1,578 EPS (Won) 1,683 1,746 2,446 2,588
Source: Company data, Bloomberg, J.P. Morgan estimates.

241
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Santander Brasil Overweight


SANB11.SA, R$22.71
BSBR, USA $13.34
http://www.santander.com.br Price Target: R$28/US$16

Company description Brazil


Banco Santander Brasil is the third-largest private bank in Brazil based on Financial Institutions
total assets, loans, and deposits. Since the late 1990s, the company has grown Saul MartinezAC
via various acquisitions, notably the purchases of Banco do Estado de São (1-212) 622-3602
Paulo (Banespa) in November 2000 and Banco Real from ABN Amro in saul.martinez@jpmorgan.com
2008. The company conducted its IPO on October 6, 2009. J.P. Morgan Securities Inc.

Post mortem Price performance


The third-largest private-sector bank in Brazil, Santander Brasil should R$
benefit from growth in financial services penetration. In addition, an 24
improving credit cycle should allow for solid 20%+ loan growth in 2010 and
23
2011, in our view, while provisioning levels should decline from relatively
high levels. With an estimated 24% BIS ratio, the company has the capital 22
strength to take advantage of growth opportunities while returning ample 21
levels of capital to shareholders (50% dividend payout ratio forecast). 20
out-09 out-09 nov-09 nov-09
Potential for earnings upgrades
Source: Bloomberg.
Difficult to forecast at this point given: 1) the stock is not yet well covered
since it only recently IPO’d; and 2) due to accounting differences with other Performance
Brazilian banks (its primary reporting framework is IFRS versus Brazilian 1M 3M 12M
GAAP for the other Brazilian banks we cover). On the latter point, we adjust Absolute (%) (6.3) NA NA
IFRS earnings to make earnings estimates more comparable to those of the Relative (%) (6.8) NA NA
other Brazilian banks in our coverage universe.
Source: Bloomberg.

How much recovery is priced into the stock?


Company data
Little, in our view. The stock trades at only 1.6x adjusted book value,
52-week range (LC) 23.70-20.15
compared to 3.5x at Itau Unibanco and 2.8x at Bradesco. We see adjusted
Mkt cap. (Local) 86,298
ROE expanding in the coming years to the high-teen range (we expect 12%
Mkt cap. (US$MM) 50,692
in 2010) and for Santander Brasil’s price-to-book value multiple to expand.
Avg daily value (US$MM) 475.3
Avg daily volume (MM) 21.3
Price target and key risks
Shares O/S (MM) 3,800
YE10 R$28/share, US$16/ADR (at JPM’s end-2010 FX of R$1.8/US$). We
Date of price 11/25/2009
use a residual income model and regression of risk-adjusted ROE to price to
Index: Bovespa 67917
book value using a cross-section of Latin American banks. Key risks include
Free float (%) 18%
execution risk related to integration with Banco Real, continued deterioration
Exchange rate 1.72
in asset quality, and the Brazilian tax authorities deciding to no longer allow
Source: Bloomberg and J.P. Morgan.
goodwill amortization expenses to be tax deductible.

242
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adrian.mowat@jpmorgan.com

243
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Sberbank Overweight
Price: $2.50
Price Target: $3.02
www.sbrf.ru
Company description Russia
Sberbank is Russia's largest bank, with near 50% of total retail deposits and Banks
by far the biggest retail network of c.20,000 branches. The bank holds the #1 Alex Kantarovich, CFAAC
market share in both corporate and retail loans (32% in each), with the (7-495) 967-3172
diversified loan book reflecting the Russian GDP structure. alex.kantarovich@jpmorgan.com
J.P. Morgan Bank International LLC
Post Mortem
Sberbank is well on track to emerge from the downturn in relatively good Price Performance
shape in our view: without a single loss, with a strong Total CAR of 18.4% 3.0
(not having raised any additional equity), strong NIM (a reflection of the
2.0
competitive positioning) and a C/I ratio below 40%. JPMe NPL coverage
$
should remain above 100%, and we expect pronounced provision releases on 1.0
a 2-3 year horizon, a potentially major boost to earnings.
0.0
Potential for earnings upgrades Nov-08 Feb-09 May-09 Aug-09 Nov-09
Both sector and company upgrades have intensified in recent months,
however, we argue that consensus still fails to recognize the scope of Source: Bloomberg.
provisioning normalization, and its impact on the bottom line and equity. We
believe that earnings upgrades should continue throughout 2010, with the Performance
macro-recovery strengthening and the likelihood of provision releases rising. 1M 3M 12M
Absolute (%) 3.7 58.5 182.5
How much recovery is priced into the stock? Source: Bloomberg.
From the February 09 trough Sberbank common shares have rallied roughly
400%, beating MSCI Russia Financials and MSCI EM Financials indices. Company data
Still, the shares trade on 1.5x 2011E P/B and 5.2 P/E, which in our view look 52-week range ($) 0.39-2.58
undemanding giving the bank's long-term potential. Mkt cap. (US$MM) 55,147
Avg daily value (US$MM) 812
Avg daily volume (MM) 395
Price target and key risks Shares O/S (MM) 22,587
Our Dec-10 PTs of $3.02 for common stock and $2.11 for preference shares Date of price 23-Nov-09
are based on the Gordon Growth valuation model. The key risks include the Index: RTS 1,466.77
Free float (%) 43
negatives on the macro front and potential weakening of the ruble; Exchange rate (RUB/$) 28.79
reacceleration of NPL growth; more pronounced than expected NIM
Source: Bloomberg.
contraction and inability to deliver on cost control. Launch of ADRs in 1H10
and accelerated reversal of LLRs are among the potential catalysts for the
shares, in our view.

Bloomberg: SBER RU; Reuters: SBER.RTS


RUB in billions, year-end December
FY08 FY09E FY10E FY11E
Revenue 458 620 612 647
Net income 98 18 102 338
EPS (RUB) 4.33 0.78 4.50 14.95
FD EPS (RUB) 4.33 0.78 4.50 14.95
DPS (RUB) 0.48 0.12 0.68 2.39
Revenue growth (%) 30 35 -1 6
Net income growth (%) -8 -82 480 232
EPS growth (%) -11 -82 480 232
ROE (%) 14.1 2.3 12.6 33.1
P/E (x) 14.4 103.8 17.2 5.2
FD P/E (x) 14.4 103.8 17.2 5.2
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

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adrian.mowat@jpmorgan.com

Sberbank: Summary of financials


Income statement Share and per share data and ratios
$ mn 2008A 2009E 2010E 2011E 2012E 2008A 2009E 2010E 2011E 2012E
Interest income 24,898 26,143 27,513 28,599 31,704 Share and per share data
Interest expense -9,711 -10,957 -12,338 -13,097 -14,682 Shares - common (mn) 21,587 21,587 21,587 21,587 21,587
Net interest income 15,187 15,186 15,175 15,502 17,023 Shares - preferred (mn) 1,000 1,000 1,000 1,000 1,000
YoY change 54% 0% 0% 2% 10% Total shares OS (mn) 22,587 22,587 22,587 22,587 22,587
Fees and commissions 3,462 3,162 3,896 4,643 5,648 EPS reported ($) 0.1738 0.0241 0.1451 0.4821 0.5260
Trading and other income -239 901 655 720 810 EPS adjusted ($) 0.1738 0.0241 0.1451 0.4821 0.5260
Non-interest income 3,223 4,063 4,551 5,363 6,459 YoY change -9% -86% 503% 232% 9%
Yoy change -18% 26% 12% 18% 20% BVPS ($) 1.1297 1.0824 1.2250 1.6854 2.0909
Revenue 18,410 19,249 19,726 20,865 23,482 Payout ratio 11% 10% 10% 15% 25%
YoY change 33% 5% 2% 6% 13% DPS - common ($) 0.0193 0.0036 0.0221 0.0771 0.0883
Provisions -3,931 -11,395 -7,712 1,155 0 DPS - preferred ($) 0.0253 0.0048 0.0290 0.1012 0.1159
Operating costs -8,905 -7,174 -7,917 -8,408 -8,631 Dividend yield - common 0.8% 0.1% 0.9% 3.1% 3.5%
Non-recurring items 0 0 0 0 0 Dividend yield - preferred 2.1% 0.4% 2.5% 0.0% 0.0%
Pre-tax income 5,218 680 4,097 13,612 14,851
YoY change -5% -87% 503% 232% 9% Valuation and return ratios
Minorities 0 0 0 1 2 P/E ratio 14.4 103.8 17.2 5.2 4.8
Net income (reported) 3,926 544 3,278 10,890 11,881 P/B ratio 2.2 2.3 2.0 1.5 1.2
Net income (adjusted) 3,926 544 3,278 10,890 11,881 ROE 14% 2% 13% 33% 28%
YoY change -6% -86% 503% 232% 9% ROA 1.7% 0.3% 1.4% 4.1% 3.9%

Balance sheet Income statement and balance sheet ratios


$ mn 2008A 2009E 2010E 2011E 2012E 2008A 2009E 2010E 2011E 2012E
ASSETS Revenue ratios
Cash and CBR deposits 27,598 14,349 16,374 18,974 22,528 NIM 7.6% 8.4% 7.4% 6.7% 6.3%
Corporate loans 136,711 156,234 176,154 198,173 223,936 Non-II/ave assets 1.4% 1.9% 2.0% 2.0% 2.1%
Retail loans 42,886 37,622 41,291 46,452 52,491 NII/revenues 82% 79% 77% 74% 72%
Loan-loss reserves -6,880 -18,361 -25,589 -18,997 -14,105 Fees/revenue 19% 16% 20% 22% 24%
Net customer loans 172,717 175,495 191,856 225,628 262,322 Trading income/revenue -7% 5% 3% 3% 3%
YoY change 8% 2% 9% 18% 16%
Other IEA 16,886 20,484 22,903 24,516 26,129 Cost ratios
Goodwill 0 0 0 1 2 Cost/income 48% 37% 40% 40% 37%
Other assets 11,931 11,780 12,210 12,684 13,335 Cost/assets 3.8% 3.4% 3.4% 3.2% 2.8%
Total assets 229,132 222,109 243,343 281,803 324,314
Balance sheet and capital ratios
LIABILITIES AND EQUITY Loans/deposits 106% 104% 104% 107% 108%
Customer deposits 163,103 167,951 185,157 211,606 243,346 Loans/assets 75% 79% 79% 80% 81%
YoY change 3% 3% 10% 14% 15% Deposits/liabilities 80% 85% 86% 87% 88%
Debt 10,135 8,871 9,677 11,290 12,903 Debt/liabilities 14% 13% 13% 12% 11%
Subordinated debt 18,239 17,297 17,297 17,297 17,297 LLR/loans 3.8% 9.5% 11.8% 7.8% 5.1%
Other liabilities 12,139 3,541 3,541 3,541 3,541 LLP/loans 2.1% 6.5% 3.8% -0.5% 0.0%
Shareholders' equity 25,516 24,448 27,670 38,068 47,226 RWA ($ mn) 198,560 199,89 219,00 253,62 291,88
8 9 2 3
Minorities 0 0 0 1 2 Tier 1 CAR 12.2% 11.6% 12.0% 14.3% 15.4%
Total liabilities and equity 229,132 222,109 243,343 281,803 324,314 Total CAR 18.9% 20.3% 19.9% 21.1% 21.3%
Source: Company reports and J.P. Morgan estimates.

245
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Shinhan Financial Group Overweight


W45,950
Price Target: W60,000
www.shinhanfg.com

Company description Korea


Shinhan Financial Group (SFG), transformed from Shinhan Bank in Banks/Bank-centric FHCs
September 2001, provides a wide range of financial services through its Scott SeoAC
banking and non-banking subsidiaries. Shinhan Bank and Shinhan Card are (82-2) 758 5759
its flagship subsidiaries. SFG serves more than 20 million customers, from scott.seo@jpmorgan.com
corporates to retail. J.P. Morgan Securities (Far East) Ltd,
Seoul Branch
Post mortem
Among Korean banks, SFG had been most committed into de-leveraging and Price performance
de-risking its balance sheet during the downturn cycle. Between end-FY08 70,000
55,000
and 3Q09, its loan to deposit ratio declined on the back of proactive deposit 40,000
gathering and slowdown of loan growth. The tier-1 capital ratio at the group 25,000
10,000
level improved to 8.2% as of 3Q09 (vs 6.8% in 1Q09) due to equity capital
Nov -08 Mar-09 Jul-09 Nov -09
increase and prudent management of risk-weighted assets.
SFG KOSPI
Potential for earnings upgrades
In our view, SFG’s de-leveraging/de-risking of its balance sheet will Source: Bloomberg.

continue to pay-off in the form of strong earnings recovery. Our positive


Performance
view on SFG’s upbeat profitability outlook is based on a higher magnitude of 1M 3M 12M
NIM expansion than the industry average, as well as lower normalized credit Absolute (%) 2.6 10.9 27.3
costs. Relative (%) 6.2 11.4 -3.1
Source: Bloomberg.
How much recovery is priced into the stock?
In our view, earnings recovery in 4Q09, as guided by the management of the Company data
52-week range (Won) 20,400-49,900
group, has largely been priced into SFG’s share price. However, we expect Mkt cap. (WB) 21,789
upward earnings estimate revisions to continue throughout 2010, led by Mkt cap. (US$MM) 18,469
higher NIM and increasing confidence on SFG’s credit quality. Avg daily value (US$MM) 107.6
Avg daily volume (MM) 2.4
Shares O/S (MM) 474
Price target and key risks Date of price 5-Nov-099
We derive our DDM-based Dec-10 PT of W60,000 by applying 1.6x P/BV, Index: KOSPI 1,552.24
which we arrive at by assuming a ROE of 14.8% and a CoE of 11.2%. A key Free float (%) 86.7
risk to our PT is unexpected bankruptcy cases at Korean companies. Exchange rate 1,179.8
Source: Bloomberg.
Bloomberg: 055550 KS; Reuters: 055550.KS
Won in billions, year-end December
FY08 FY09E FY10E FY11E
Reported net profit 2,019 1,482 2,211 2,647
*Attrib. net profit 1,741 1,239 1,975 2,418
FD EPS (attrib NP) (Won) 4,238 2,632 4,040 4,946
**Cash adj. EPS (Won) 4,990 3,122 4,365 5,236
Cash DPS (Won) 0 250 900 1,100
EPS (attrib NP) growth (%) (21.4) (37.9) 53.5 22.4
**Cash adj. EPS growth (%) (3.4) (37.4) 39.8 20.0
ROE (%) 13.0 8.5 11.8 13.1
**Cash adj. ROE (%) 15.3 10.1 12.8 13.9
P/E (x) 10.8 17.5 11.4 9.3
P/E (cash adj.) (x) 9.2 14.7 10.5 8.8
BVPS (Won) 32,187 32,587 35,298 39,180
P/BV (x) 1.4 1.4 1.3 1.2
Div. yield (%) 0.0 0.5 2.0 2.4
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

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Shinhan Financial Group: Summary of financials


Profit and loss statement Growth rates
Won in billions, year-end December %, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Margins 3.50% 2.95% 3.18% 3.26% Gross loans 15.1% -1.0% 6.0% 6.0%
(% of Earning Assets) Customer deposits 20.3% 24.7% 7.0% 6.0%
Earning Assets/Assets 87.9% 87.7% 89.5% 89.8% Total assets 1.7% 1.5% 1.7% 1.8%
NIM 3.08% 2.58% 2.84% 2.92% Shareholders' equity -1.1% 19.8% 9.4% 10.9%
(as % of avg. Assets)
Net Interest Income 7.4% -8.7% 13.1% 8.8%
Net Interest Income 7,464 6,816 7,706 8,385 Total Non-Interest Revenues -26.9% -0.1% 12.8% 6.9%
Total Operating Revenues -0.5% -7.2% 13.0% 8.5%
Total Non-Interest Rev. 1,514 1,512 1,706 1,823 Operating costs 6.8% -9.3% 9.0% 4.3%
Fee income 1,358 849 1,017 1,092 Pre-provisioning OP -8.0% -4.8% 17.6% 12.9%
FX/Trading gains 156 663 689 731 Loan loss provisions 40.7% 57.8% -19.0% -3.9%
Other operating income (0) 0 0 0 Attributable net income -18.5% -28.9% 59.4% 22.4%
Total Operating Rev. 8,977 8,328 9,412 10,208 EPS -21.4% -37.9% 53.5% 22.4%
Operating costs (4,894) (4,440) (4,841) (5,048) DPS -100.0% n.a 260.0% 22.2%
Operating Profit 4,083 3,888 4,571 5,160 Source: Company, J.P. Morgan estimates.
Loan loss provisions (1,051) (1,659) (1,344) (1,291)
Non operating profit (38) (0) 34 35
Exceptionals 0 0 0 0 Per share data
Disposals/ Other income (38) (0) 34 35 Won, year-end December
Pre-tax Profit 2,994 2,229 3,261 3,904
Tax (969) (725) (1,025) (1,227) FY08 FY09E FY10E FY11E
Minorities/preference (284) (265) (261) (258) FD EPS (attrib NP) 4,238 2,632 4,040 4,946
dividends Cash adj. EPS 4,990 3,122 4,365 5,236
Attributable net income 1,741 1,239 1,975 2,418 Payout ratio 0.0% 9.5% 22.3% 22.2%
NAV 32,187 32,587 35,298 39,180
Source: Company, J.P. Morgan estimates.
Avg. Shares issued (MM) 411 471 489 489
Source: Company, J.P. Morgan estimates.

Balance sheet Du-Pont analysis


Won in billions, year-end December Year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Net customer loans 170,345 168,197 177,960 188,717 NIR/Avg. Assets 3.08% 2.58% 2.84% 2.92%
Gross loans 173,662 171,935 182,251 193,187 Non IR/Total Rev 16.9% 18.2% 18.1% 17.9%
Other Earning Assets 15,261 19,046 20,379 21,601 Cost/Income 49.0% 48.2% 46.8% 45.2%
Average Earning Assets 213,195 231,363 242,526 257,394 Cost/Assets 1.82% 1.52% 1.62% 1.61%
Total assets 264,015 263,317 278,709 294,767 Operating ROAA 1.68% 1.47% 1.69% 1.80%

Customer deposits 105,338 131,319 140,511 148,942 Loan/Assets 66.9% 65.5% 65.3% 65.5%
Other int. bearing liabilities 64,724 52,411 55,030 57,757 Other inc:provs -0.02% 0.00% 0.01% 0.01%
Avg. int. bearing liabilities 192,657 209,675 218,814 231,332 Tax 32.3% 32.5% 31.4% 31.4%
Average Assets 242,446 263,666 271,013 286,738 MI -0.12% -0.10% -0.10% -0.09%
Shareholders' equity 13,581 16,273 17,802 19,751 ROAA 0.72% 0.47% 0.73% 0.84%
Risk-weighted assets 183,766 177,608 187,944 209,140 Equity/Assets 5.5% 5.5% 6.2% 6.4%
Average RWA 159,631 180,687 182,776 198,542 ROE 13.01% 8.49% 11.83% 13.13%
Source: Company, J.P. Morgan estimates. Source: Company, J.P. Morgan estimates.

247
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Siam Commercial Bank Overweight


Bt78.75
Price Target: Bt110.00
www.scb.co.th

Company description Thailand


Siam Commercial Bank (SCB) is the third-largest bank in Thailand with total Banks
assets worth Bt1.2 trillion. SCB has the most extensive retail network and Anne JirajariyavechAC
franchise with 960 branches and 6,798 ATMs operating countrywide. (66-2) 684-2684
Anne.x.jirajariyavech@jpmorgan.com
Post mortem JPMorgan Securities (Thailand) Limited
We believe SCB uses the opportunities (when its foreign competitors are
exiting the business due to financial difficulties at parent company level) to Price performance
100
quickly improve its business and enable the bank to compete with both
domestic and foreign peers. In our view, its already strong retail franchise Bt
70

and revamped business banking groups will open up avenues to grab broad-
40
based growth opportunities when economic momentum returns. Nov-08 Feb-09 May-09 Aug-09 Nov-09
SCB.BK share price (Bt)
SET (rebased)
Potential for earnings upgrades Source: Bloomberg.
General market expectations continue to be cautious and low. Earnings Performance
estimates have been revised up and the stock has rallied just to reflect the
1M 3M 12M
out-of-crisis situation, but it still does not reflect a potential economic
Absolute (%) -8.2 -2.2 34.6
recovery. We, therefore, see loan growth, NIM recovery, and lower credit
Relative (%) -3.1 -8.7 -14.5
costs as key drivers for upward earnings estimate revisions.
Source: Bloomberg.

How much recovery is priced into the stock? Company data


SCB’s share price has increased 92% from the trough level as the global 52-week range (Bt) 40.75-91.75
economy recovered from the crisis earlier than the market had expected. Mkt cap. (BtMM) 267,122
However, the stock price is still 21% below its pre-crisis level, suggesting Mkt cap. (US$MM) 8,002
that a full recovery is not yet priced in. The market is still concerned about Avg daily value (US$MM) 21.6
the loan growth recovery and competition-led NIM pressure. Avg daily volume (MM) 10.1
Shares O/S (MM) 3,392
Price target and key risks Date of price 5-Nov-09
We are Overweight on SCB with our Dec10 PT of Bt110. Our PT is based Index: SET 682
on a DDM approach, with an ROE of 17.2%, a COE of 11.8%, and a growth Free float (%) 72
rate of 8.0%. Key risks to our PT include weaker-than-expected loan growth Exchange rate 33.38
and non-NII. Source: Bloomberg.
Bloomberg: SCB TB; Reuters: SCB.BK
Bt in millions, year-end December
FY08 FY09E FY10E FY11E
Operating profit 36,042 34,854 40,414 46,489
Net profit 21,169 21,315 25,066 29,050
Cash EPS (Bt) 6.23 6.27 7.37 8.55
FD EPS (Bt) 6.23 6.27 7.37 8.55
DPS (Bt) 2.00 2.00 2.20 2.50
EPS growth (%) 22.0 0.7 17.6 15.9
ROE (%) 17.9 15.9 16.7 17.2
P/E (x) 12.6 12.6 10.7 9.2
BVPS (Bt) 37.42 41.69 46.87 52.91
P/BV (x) 2.1 1.9 1.7 1.5
Dividend yield (%) 2.5 2.5 2.8 3.2
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

248
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Siam Commercial Bank: Summary of financials


Income statement - Bt mn 2008 2009E 2010E 2011E Grow th Rates 2008 2009E 2010E 2011E

Margins (% of Earning Assets) 3.90% 3.56% 3.60% 3.69% Loans 6% 2% 10% 10%
Earning Assets/Assets 94% 95% 95% 96% Deposits 7% 12% 7% 7%
NIM (as % of avg. Assets) 3.68% 3.56% 3.60% 3.69% Assets 7% 9% 7% 7%
Equity 15% 11% 12% 13%
Net Interest Income 44,330 43,623 48,017 52,579
Net Interest Incom e 13% -2% 10% 10%
Total Non-Interest Revenues 21,686 22,075 25,386 29,194 Non-Interest Income 18% 2% 15% 15%
Fee income 14,923 16,266 18,706 21,512 of w hich Fee Grth 11% 9% 15% 15%
FX/Trading gains 4,514 4,684 5,387 6,195 Revenues 15% 0% 12% 11%
Other operating income 2,249 1,125 1,293 1,487 Costs 4% 3% 7% 7%
Total operating revenues 66,016 65,698 73,402 81,773 Pre-Provision Profits 25% -3% 16% 15%
Operating costs -29,973 -30,843 -32,988 -35,284 Loan Loss Provisions 23% 16% -6% 10%
Operating profit 36,042 34,854 40,414 46,489 Pre-Tax 21% -1% 17% 16%
Loan Loss Prov isions -4,954 -5,762 -5,426 -5,969 Attributable Incom e 22% 1% 18% 16%
Other prov isions 0 0 0 0 EPS 22% 1% 18% 16%
Ex ceptionals -909 685 0 0 DPS 0.0% 0.0% 10.0% 13.6%
Disposals/ Other income 0 0 0 0
Pre-tax profit 30,179 29,778 34,988 40,520 Balance Sheet Gearing 2008 2009E 2010E 2011E
Tax [rate] -8,888 -8,338 -9,797 -11,346
Minorities/preference div idends -123 -125 -125 -125 Loan/Deposit 101% 92% 95% 97%
Attributable net income 21,169 21,315 25,066 29,050 Investment/Assets 12% 11% 11% 10%
Loan/Assets 74% 69% 72% 74%
Customer deposits/Liab. 73% 75% 76% 76%
LT Debt/Liabilities 2% 2% 2% 2%

Per Share Data 2008 2009E 2010E 2011E Asset Quality/Capital 2008 2009E 2010E 2011E
EPS (Bt/ share) 6.2 6.3 7.4 8.5 Loan loss reserves/Loans 4.5% 4.8% 4.7% 4.6%
DPS (Bt/ share) 2.00 2.00 2.20 2.50 NPLs/loans 5.5% 5.5% 5.4% 5.2%
Payout 32.1% 31.9% 29.8% 29.3% Loan loss reserves/NPLs 83.2% 88.1% 87.3% 88.8%
NAV (Bt/ share) 37.4 41.7 46.9 52.9 Grow th in NPLs -7.8% 2.2% 8.2% 5.6%
Avg. Shares Issued (mn shares) 3,399 3,399 3,399 3,399
1.77 Tier 1 Ratio 11.0% 12.3% 13.2% 14.3%
Total CAR 15.2% 16.4% 17.1% 17.9%

Key balance sheet - Bt m n 2008 2009E 2010E 2011E Du-Pont Analysis 2008 2009E 2010E 2011E

Net Custom er Loans 877,480 894,213 985,346 1,084,833 NIR/Avg. Assets 3.68% 3.36% 3.44% 3.53%
Loans loss reserves 41,711 45,171 48,426 52,008 Non IR/Avg. Assets 1.80% 1.70% 1.82% 1.96%
Gross Loans 919,191 939,384 1,033,773 1,136,841 Non IR/Total Rev 32.8% 33.6% 34.6% 35.7%
Investments 155,197 155,197 155,197 155,197 Total Rev/Avg. Assets 5.48% 5.07% 5.25% 5.49%
Other Earning Assets 117,648 228,190 225,947 223,405 Cost/Income 45.4% 46.9% 44.9% 43.1%
Average Earning Assets = (A) 1,135,970 1,225,754 1,333,416 1,425,264 Cost/Assets 2.49% 2.38% 2.36% 2.37%
Goodw ill Goodw ill Amort.
Total assets 1,241,640 1,352,395 1,441,286 1,538,230 Operating ROAA 3.0% 2.7% 2.9% 3.1%
LLP/Loans -0.55% -0.62% -0.55% -0.55%
Interbank funding 28,878 32,344 32,344 32,344 Loan/Assets 74.3% 74.4% 74.4% 73.8%
Custom er deposits 911,482 1,019,921 1,091,128 1,167,409 Other inc:provs -0.1% 0.1% 0.0% 0.0%
Long-term bond funding 29,133 25,346 25,346 25,346 Pre-tax ROAA 2.5% 2.5% 1.9% 2.3%
Other Interest Bearing Liabilities 144,250 132,293 132,293 132,293 Tax -29.5% -28.0% -28.0% -28.0%
Average Interest Bearing Liab. = (B) 1,007,246 1,079,494 1,171,819 1,245,563 MI 0.0% 0.0% 0.0% 0.0%
Average Assets 1,203,604 1,297,017 1,396,840 1,489,758 ROAA 1.8% 1.6% 1.8% 1.9%
Shareholders' equity 127,205 141,721 159,309 179,861 RoRWA 2.5% 2.3% 2.6% 2.8%
Risk Weighted Assets 921,731 946,676 1,008,900 1,076,761 Equity/Assets 9.8% 10.3% 10.7% 11.3%
Average Risk Weighted Assets 855,714 934,204 977,788 1,042,830 ROE 17.9% 15.9% 16.7% 17.2%

Source: Company data, J.P. Morgan estimates.

249
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Sinopec Corp - H Overweight


Price: HK$6.73
Price Target: HK$8.50
www.sinopec.com

Company description China


Sinopec is the second-largest oil company in China, with 4.1 billion BOE of Oil & Gas
proven reserves (25% natural gas) and production of 339 million BOE (14% Brynjar BustnesAC
natural gas). It has a refining capacity of 3,700 BOPD. The company’s (852) 2800-8578
marketing operation is primarily through its 29,600 retail outlets nationwide. brynjar.e.bustnes@jpmorgan.com
Sinopec also has 6.2 million, 4.9 million and 2.8 million TPY of ethylene, J.P. Morgan Securities (Asia Pacific)
propylene and PX capacity, respectively. Limited

Post mortem Price performance


Sinopec got hurt the most among Chinese oil companies by high oil prices 10
and controlled product prices last year. This year and for the future, with oil 8
6
at or below US$80/bbl, the company should enjoy good refining and 4
2
marketing margins. Upstream appears to improve with crude production 0

growth coming through. Natural gas production is expected to go through a Nov -08 Feb-09 May -09 Aug-09 Nov -09

boost in 2010 due to Puguang start-up and further ramp-up to 8 BCM/y. China Petroleu-H Share Price
HSCEI(rebased)

Potential for earnings upgrades


Source: Bloomberg.
There is still some upside in terms of EPS upgrades for Sinopec, with
Performance
consensus at Rmb0.75 for 2010. Considering Sinopec has shown that it is
1M 3M 12M
capable of generating over Rmb0.20+ EPS in a couple of quarters, it may be
Absolute (%) 2 -5 34
capable of full-year EPS above Rmb0.80, depending on oil prices and
Relative (%) -5 -11 -43
petchem profitability in particular.
Source: Bloomberg.
How much recovery is priced into the stock?
Company data
Sinopec is neither fully pricing in the NDRC pricing scheme nor a full
economic recovery relative to many other oil companies in the region. 52-week range (HK$) 3.65-7..26
Hence, we still expect a rerating from current low levels as investors’ Adj. mkt cap (plug) (RmbMM) 592,174
confidence in the pricing scheme increases and profitability drives earnings Avg daily value ($MM) 142
multiples. Avg daily value (HK$MM) 1,098
Avg daily vol (MM) 205
Price target and key risks
Shares O/S (MM) 86,702
We have an Overweight rating and Dec-09 PT of HK$8.50 based on 6.2x
Date of price 5-Nov-09
2009 EV/EBITDA. This is in line with where PetroChina currently trades,
Index: HSCEI 12,805
and we believe it is fair for Sinopec to trade in line with PetroChina,
Free float (%) 19.6
considering the change in the product price regime in China. Risks to our PT
Exchange rate 7.75
are higher oil price and no follow-through by NDRC.
Source: Bloomberg.

Bloomberg: 386 HK;


( Reuters: 0386.HK g )
Rmb in , year-end Dec FY07A FY08A FY09E FY10E FY11E
Revenue (Rmb mn) 1,209,706 1,502,443 1,217,279 1,385,565 1,545,360
Net Profit (Rmb mn) 56,533 29,769 64,330 66,622 75,235
EPS (Rmb) 0.65 0.34 0.74 0.77 0.87
DPS (Rmb) 0.16 0.12 0.19 0.19 0.22
Revenue Growth (%) 13% 24% (19%) 14% 12%
EPS Growth (%) 5% (47%) 116% 4% 13%
ROCE 21% 6% 17% 15% 16%
ROE 20% 9% 18% 17% 17%
P/E 9.1 17.3 8.0 7.7 6.8
P/BV 1.7 1.6 1.4 1.2 1.1
EV/EBITDA 5.5 10.1 5.6 5.2 4.6
Dividend Yield 2.7% 2.0% 3.1% 3.2% 3.7%
Source: Company data, Bloomberg, J.P. Morgan estimates.

250
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Sinopec Corp - H: Summary of financials


Income Statement Cash flow statement
Rmb in millions, year end Dec FY07 FY08 FY09E FY10E FY11E Rmb in millions, year end Dec FY07 FY08 FY09E FY10E FY11E

Revenues 1,209,706 1,502,443 1,217,279 1,385,565 1,545,360 EBIT 85,864 28,123 90,216 94,018 105,065
% change Y/Y 13% 24% (19%) 14% 12% Depr. & amortization 43,315 45,823 49,806 55,728 60,411
EBITDA 129,179 73,946 140,022 149,746 165,477 Change in working capital 13,043 9,371 -23,696 1,760 -4,712
% change Y/Y 13% (43%) 89% 7% 11% Taxes -27674 -21072 -22347 -22992 -25989
EBIT 85,864 28,123 90,216 94,018 105,065 Cash flow from operations 94,873 67,712 93,655 127,949 134,794
% change Y/Y 6% (67%) 221% 4% 12%
EBIT Margin 4% 1% 4% 3% 3% Capex -109,446 -107,753 -108,000 -108,000 -99,042
Net Interest -6,909 -10,881 -6,141 -6,673 -6,394 Disposal/(purchase) 413 263 0 0 0
Earnings before tax 83,464 24,317 89,389 91,968 103,957 Net Interest -6,909 -10,881 -6,141 -6,673 -6,394
% change Y/Y 6% (71%) 268% 3% 13% Other - - - - -
Tax -24,721 1,883 -22,347 -22,992 -25,989 Free cash flow -14,573 -40,041 -14,345 19,949 35,751
as % of EBT 29.6% 7.7% 25.0% 25.0% 25.0%
Net income (reported) 56,533 29,769 64,330 66,622 75,235 Equity raised/(repaid) - - - - -
% change Y/Y 5% (47%) 116% 4% 13% Debt raised/(repaid) 13,614 56,796 45,000 5,000 5,000
Shares outstanding 86,702 86,702 86,702 86,702 86,702 Other - - - - -
EPS (reported) 0.65 0.34 0.74 0.77 0.87 Dividends paid -13,872 -12,572 -16,082 -16,656 -18,809
% change Y/Y 5% (47%) 116% 4% 13% Beginning cash 7,063 7,696 7,027 21,521 29,814
Ending cash -16,961 7,027 21,600 29,814 51,757
DPS 0.16 0.12 0.19 0.19 0.22

Balance sheet Ratio analysis


Rmb in millions, year end Dec FY07 FY08 FY09E FY10E FY11E Rmb in millions, year end Dec FY07 FY08 FY09E FY10E FY11E

Cash and cash equivalents 7,696 6,948 21,521 29,814 51,757 EBITDA margin 5% 2% 6% 5% 5%
Accounts receivable 22,947 12,989 10,524 11,979 13,360 Operating margin 4% 1% 4% 3% 3%
Inventories 116,032 95,255 77,176 87,845 97,976 Net margin 2% 1% 3% 2% 2%
Others 37,773 48,367 39,187 44,604 49,749
Current assets 185,116 164,311 149,159 174,994 213,593
Sales per share growth 13% 24% (19%) 14% 12%
LT investments - - - - - Sales growth 13% 24% (19%) 14% 12%
Net fixed assets 470,550 525,151 577,528 623,692 655,910 Net profit growth 5% (47%) 116% 4% 13%
Total Assets 732,725 767,827 810,366 886,988 963,092 EPS growth 5% (47%) 116% 4% 13%

Liabilities Interest coverage (x) 18.70 6.80 22.80 22.44 25.88


Short-term loans 44,654 74,896 74,896 74,896 74,896
Payables 93,049 56,667 37,574 44,472 48,741 Net debt to equity 42% 50% 53% 46% 37%
Others 127,652 142,974 108,647 121,050 128,725 Sales/assets 3.60 4.01 3.09 3.27 3.34
Total current liabilities 265,355 274,537 221,117 240,418 252,362 Assets/equity 2.38 2.34 2.22 2.23 1.99
Long-term debt 83,134 90,254 135,254 140,254 145,254 ROE 20% 9% 18% 17% 17%
Other liabilities 51,478 53,714 53,714 53,714 53,714 ROCE 21% 6% 17% 15% 16%
Total Liabilities 399,967 418,505 410,085 434,386 451,330
Shareholders' equity 307,433 328,669 376,916 426,883 483,309
BVPS 3.55 3.79 4.29 4.83 5.43
Source: Company reports, J.P. Morgan estimates.

251
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

SK Energy Co Ltd Overweight


W107,500
Price Target: W150,000
www.skenergy.com

Company description South Korea


SK Energy (SKE) is the largest Korean refining company with 1,115 BOPD Refining
of refining capacity. It also has an upstream segment, which currently Brynjar BustnesAC
produces 30,000 BOEPD with 520 million BOE of reserves. The company (852) 2800-8578
also owns 2.7 million TPY of BTX and 0.73 million TPY of ethylene brynjar.e.bustnes@jpmorgan.com
capacity. J.P. Morgan Securities (Asia Pacific)
Limited
Post mortem
SKE suffered through the crisis primarily on its refining profitability Price performance
plunging along with a weaker Won hurting its US$-denominated debt. A
weaker Won, however, actually helps at the operating line, which has now 120,000
90,000
reversed with the Won’s strengthening. 60,000
30,000
0
Potential for earnings upgrades Nov -08 Feb-09 May -09 Aug-09 Nov -09
There is not much room for EPS upgrades over the next 12 months as we SK Energy Co Ltd Share Price
don’t expect refining margins to go back to previous year’s levels. Decent KOSPI(rebased)

margins will, however, generate a base operating profit, along with Source: Bloomberg.
additional profits from growing upstream and lube returning into profits, in
Performance
our view. SKE’s main attraction is its exposure to two exploration blocks in
1M 3M 12M
Brazil (BMC30 - Anadarko and BMC32 - Devon operated) which in addition
Absolute (%) -13 4 51
to increasing reserve base will make SKE’s E&P segment sustainable and
Relative (%) -10 5 20
hence we believe bring about a rerating into an integrated company.
Source: Bloomberg.
How much recovery is priced into the stock?
Company data
SKE has doubled from market lows and is now pricing in the current market
environment of low refining margins and still relatively strong petchem 52-week range (W) 49,700-140,000
margins. Upstream is not getting much value at all due to lack of information Mkt cap. (WB) 9,940
and investor confidence in SKE’s execution capabilities. Mkt cap. (US$MM) 8,435
3M trd value ($MM) 56.0
Price target and key risks
3M trading vol (MM) 0.3
We have an Overweight rating and Dec-10 PT of W150,000 based on 7x
Shares O/S (MM) 92
EV/EBITDA, which is in line with regional refining peers (ex-FPCC). Our
Date of price 5-Nov-09
PT yields 10x 2010E P/E. Risks to our rating and PT are oil prices, GRMs,
Index: KOSPI 1,552.24
petchem margins and operational issues especially upstream.
Free float (%) 66.6
Exchange rate 1,178

Source: Bloomberg.
Bloomberg: 096770 KS; Reuters: 096770.KS
W in bn, year-end Dec FY07A FY08A FY09E FY10E FY11E
Revenue 27,788 45,737 34,227 38,305 41,382
Net Profit 1,205 884 1,038 1,275 1,538
EPS (W) 10,954 9,679 11,357 13,955 16,835
DPS (W) 2,100 2,100 2,200 2,300 2,400
Revenue Growth (%) 17% 65% (25%) 12% 8%
EPS growth (%) (6%) (12%) 17% 23% 21%
ROCE 15% 10% 11% 13% 14%
ROE 17% 13% 13% 15% 16%
P/E 9.8 11.1 9.5 7.7 6.4
P/BV 1.6 1.3 1.2 1.0 0.9
EV/EBITDA 6.4 8.9 6.6 5.8 5.0
Dividend Yield 2.0% 2.0% 2.0% 2.1% 2.2%
Adjusted EPS (W) 13,511 18,210 10,109 13,955 16,835
Adjusted P/E 8.0 5.9 10.6 7.7 6.4
Source: Company data, Bloomberg, J.P. Morgan estimates. Adj EPS for forex loss/gain.

252
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

SK Energy Co Ltd: Summary of financials


Income statement Cash flow statement
Won in billions, year-end Dec FY07 FY08 FY09E FY10E FY11E Won in billions, year-end Dec FY07 FY08 FY09E FY10E FY11E

Revenues 27,788 45,737 34,227 38,305 41,382 EBIT 1,921 1,358 1,770 2,045 2,377
% change Y/Y 17% 65% (25%) 12% 8% Depr. & amortization 443 552 752 832 886
EBITDA 2,364 1,910 2,522 2,876 3,263 Change in working capital -599 -553 867 -307 -232
% change Y/Y (7%) (19%) 32% 14% 13% Taxes - - - - -
EBIT 1,921 1,358 1,770 2,045 2,377 Cash flow from operations 680 1,530 2,586 1,730 2,123
% change Y/Y (10%) (29%) 30% 15% 16%
EBIT Margin 7% 3% 5% 5% 6% Capex -1,315 -1,610 -2,000 -1,500 -1,500
Net Interest -286 -400 -423 -385 -371 Disposal/(purchase) 321 0 0 0 0
Earnings before tax 1,636 958 1,347 1,660 2,006 Net Interest -286 -400 -423 -385 -371
% change Y/Y (10%) (41%) 41% 23% 21% Other -459 -485 0 0 0
Tax -427 -70 -306 -381 -464 Free cash flow -634 -80 586 230 623
as % of EBT 26.1% 7.3% 22.7% 22.9% 23.1%
Net income (reported) 1,205 884 1,038 1,275 1,538 Equity raised/(repaid) - - - - -
% change Y/Y (13%) (27%) 17% 23% 21% Debt raised/(repaid) -1,792 3,406 -2,000 -500 0
Shares outstanding 91 91 91 91 91 Other 2,062 7 0 0 0
EPS (reported) 10,954 9,679 11,357 13,955 16,835 Dividends paid -212 -194 -205 -214 -224
% change Y/Y (6%) (12%) 17% 23% 21% Beginning cash 1,313 597 3,606 1,987 1,503
Ending cash 597 3,606 1,987 1,503 1,902
DPS 2,100 2,100 2,200 2,300 2,400

Balance sheet Ratio analysis


Won in billions, year-end Dec FY07 FY08 FY09E FY10E FY11E Won in billions, year-end Dec FY07 FY08 FY09E FY10E FY11E

Cash and cash equivalents 597 3,606 1,987 1,503 1,902 EBITDA margin 9% 4% 7% 8% 8%
Accounts receivable 3,026 2,827 2,116 2,368 2,558 Operating margin 5% 4% 5% 5% 6%
Inventories 2,714 3,153 2,360 2,641 2,853 Net margin 4% 2% 3% 3% 4%
Others 320 1,100 1,100 1,100 1,100
Current assets 6,707 10,702 7,578 7,627 8,428
Sales per share growth 27% 98% (25%) 12% 8%
LT investments 4,057 3,291 3,365 3,438 3,512 Sales growth 17% 65% (25%) 12% 8%
Net fixed assets 4,825 8,332 9,580 10,249 10,863 Net profit growth (13%) (27%) 17% 23% 21%
Total Assets 15,699 22,456 20,654 21,445 22,934 EPS growth (6%) (12%) 17% 23% 21%

Liabilities Interest coverage (x) 8.27 4.78 5.96 7.48 8.79


Short-term loans 1,995 3,977 2,977 2,977 2,977
Payables 2,538 2,536 1,898 2,124 2,295 Net debt to equity 58% 91% 75% 66% 54%
Others 4,594 5,062 4,423 4,650 4,820 Sales/assets 1.57 2.40 1.59 1.82 1.86
Total current liabilities 6,590 9,039 7,400 7,627 7,797 Assets/equity 2.54 3.07 2.46 2.27 2.15
Long-term debt 2,765 5,811 4,811 4,311 4,311 ROE 17% 13% 13% 15% 16%
Other liabilities 160 290 290 290 290 ROCE 15% 10% 11% 13% 14%
Total Liabilities 9,514 15,140 12,502 12,228 12,399
Shareholders' equity 6,186 7,316 8,152 9,217 10,536
BVPS 67,702 80,070 90,098 102,596 117,680
Source: Company reports, J.P. Morgan estimates.

253
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Sohu Overweight
US$55.59
Price Target: US$74.00
www.sohu.com
Company description China
Sohu is a leading online media company in China. The Sohu matrix of IT and Internet
websites include: sohu.com (one of the top portals in China), 17173.com, Dick WeiAC
focus.cn and chainren.com. The company also operates two major multi- (852) 2800-8535
player online games named TLBB and Blade Online. The company also dick.x.wei@jpmorgan.com
launched its third game Blade Hero 2 in 3Q09. Sohu generates J.P. Morgan Securities (Asia Pacific)
approximately half of its revenues from online games and a third from its Limited
brand advertising business.
Price performance
Post mortem US$
Sohu remains one of the leading internet portals in China, and is likely to
remain among the key beneficiaries of the continued uptrend in online 70

advertising in China. We currently forecast brand advertising to register 23% $ 50

Y/Y growth in 2009. We expect next year’s brand ad growth to be strong, 30


driven by macro economic improvements, and better contributions from Nov-08 Feb-09 May-09 Aug-09 Nov-09
sectors such as automobiles, FMCG (fast-moving consumer goods), and SOHU share price ($)
financial services. NASDAQ Composite (rebased)
Source: Bloomberg.
Potential for earnings upgrades
We expect share price drivers for Sohu to come in 1H10, with more clarity
Performance
on the 2010 brand advertising budget and the launch of new games (2Q10 for
1M 3M 12M
Zhong Hua Ying Xiong and 3Q10 for Duke of Mountain Deer). We also
Absolute (%) -14.5 -12.1 -6.1
expect Sohu’s portal business should have good margin leverage on revenue
Relative (%) -14.9 -14.3 -21.6
pick-up, as content costs are mainly fixed costs. Sohu is debt-free.
Source: Bloomberg.
How much recovery is priced into the stock?
With muted 3Q09 results and 4Q09 guidance, we believe investors have
Company data
given a big discount to the potential ad recovery in 2010. We noted that the
52-week range (US$) 34.1-72.3
softness is mainly due to advertisers’ cautious stance on 2009 spending. We
Mkt cap. (RmbMM) 14,480
expect the good ad spend data point to continue to come in during early
Mkt cap. (US$MM) 2,120
2010.
Avg daily value (US$MM) 63.8
Price target and key risks
Avg daily volume (MM) 0.84
We maintain OW with our Dec-09 PT of US$74, which implies 18.5x
Shares O/S (MM) 38
FY09E, 16.3x FY10E, and 13.3x FY11E diluted non-GAAP EPS. Our price
Date of price 12-Nov-09
target is based on the midpoint of our sum-of-the-parts valuation of US$63-
Index: NASDAQ 2,149
US$84. Our Dec-09 DCF value for Sohu is US$75.7, based on a 10-year
Free float (%) 45
DCF forecast, WACC of 12%, and a terminal growth rate of 0%. Risks to
Exchange rate(Rmb/US$) 6.83
our price target include a further slowdown in online advertising revenue
Source: Company, Bloomberg.
growth, significant market share loss in online advertising to other websites,
delays in upgrades and new game launches, and regulatory changes.
Bloomberg: SOHU US; Reuters: SOHU
US$ in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 429.1 517.2 629.9 764.7
Net profit 158.6 152.3 182.4 230.5
GAAP EPS (US$) 4.04 3.68 4.25 5.28
Adj. EPS (US$) 4.30 4.01 4.54 5.56
DPS (US$) 0.00 0.00 0.00 0.00
Sales growth (%) 127.1 20.5 21.8 21.4
Net profit growth (%) 354.1 -4.0 19.8 26.4
EPS growth (%) 345.6 -9.0 15.4 24.4
ROE (%) 56.0 41.4 35.8 32.4
GAAP P/E (x) 13.7 15.1 13.1 10.5
Adj. P/E (x) 12.9 13.9 12.2 10.0
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 12 November 2009.

254
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Sohu: Summary of financials


Profit and loss statement Cash flow statement
US$ in millions, year-end December US$ in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 429.1 517.2 629.9 764.7 Net Income 159 152 182 230
% change Y/Y 127.1 20.5 21.8 21.4 Depr. & Amortisation 14 16 20 24
Gross margin (%) 66.6 75.3 76.0 75.5 Change in working capital 29 7 17 19
EBITDA 188.7 237.1 289.4 353.9 Other 11 46 61 69
% change Y/Y 260.3 25.6 22.0 22.3 Cash flow from operations 213 222 281 343
EBITDA margin (%) 27.7 44.0 45.8 45.9 Capex/investments -24 -19 -46 -55
EBIT 163.8 202.8 251.1 311.7 Others 0 0 0 0
% change Y/Y 400.9 23.8 23.8 24.1 Cash flow from investing -24 -19 -46 -55
EBIT margin (%) 17.3 38.2 39.2 39.9 Free cash flow 189 203 236 288
Net interest 4.3 6.1 9.4 12.8 Equity raised/ (repaid) -2 16 18 19
Earnings before tax 167.6 209.4 260.5 324.6 Debt raised/ (repaid) 0 0 0 0
% change Y/Y 360.8 25.0 24.4 24.6 Other 5 21 -43 -51
Tax -9.0 -28.9 -34.8 -42.8 Dividends paid 0 0 0 0
as % of EBT 5.4 13.8 13.4 13.2 Cash flow from financing 3 38 -26 -32
Net income (reported) 158.6 152.3 182.4 230.5 Net change in cash 192 241 210 256
% change Y/Y 354.1 -4.0 19.8 26.4 Beginning cash 123 314 555 765
Shares O/S (MM) 39.2 39.1 39.8 40.7 Ending cash 314 555 765 1,021
EPS (reported) (LC) 4.04 3.68 4.25 5.28 Source: Company, J.P. Morgan estimates.
Source: Company, J.P. Morgan estimates.

Balance sheet Ratio analysis


US$ in millions, year-end December %, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Cash and cash equivalents 314 555 765 1,021 Gross Margin 75.3 76.0 75.5 75.9
Accounts receivable 37 42 52 63 EBITDA margin 44.0 45.8 45.9 46.3
Deferred tax 0 0 0 0 Operating Margin 38.2 39.2 39.9 40.8
Others 28 34 43 52 Net Margin 37.0 29.4 29.0 30.1
Current assets 379 632 860 1,136 R&D/sales 10.0 9.4 9.1 9.1
LT investments 0 0 0 0 SG&A/Sales 26.9 27.3 26.5 26.0
Net fixed assets 76 82 107 138 Sales growth 127.1 20.5 21.8 21.4
Others 67 64 63 63 Operating Profit Growth 400.9 23.8 23.8 24.1
Total assets 522 777 1,031 1,338 Net profit growth 354.1 -4.0 19.8 26.4
Liabilities EPS (Reported) growth 345.6 -9.0 15.4 24.4
Provisions 0 0 0 0 Net debt to total capital -81.5 -97.0 -96.8 -96.5
Payables 4 5 6 7 Net debt to equity -81.5 -97.0 -96.8 -96.5
Others 126 145 180 217 Asset Turnover 82.2 66.5 61.1 57.2
Total current liabilities 131 150 186 224 Working Capital Turns (x) 2.6 1.4 1.1 1.0
Long term debt 0 0 0 0 ROE 56.0 41.4 35.8 32.4
Other liabilities 5 55 55 55 ROIC 54.8 40.4 34.7 31.3
Total liabilities 136 205 241 279
Source: Company, J.P. Morgan estimates.
Shareholders' equity 386 572 791 1,059
Source: Company, J.P. Morgan estimates.

255
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Tambang Batubara Bukit Asam Overweight


Rp14,450
Price Target: Rp19,300
www.ptba.co.id

Company description Indonesia


Government of Indonesia owns a 65% stake in PTBA. The company’s main Mining
coal mine is in Tanjung Enim, South Sumatra. In addition, PTBA owns Stevanus JuandaAC
several mines in South Sumatra, plus potentially acquiring several other (62-21) 5291-8574
mines in Kalimantan. Its total minable reserve stands at 2 billion tons. stevanus.x.juanda@jpmorgan.com

Post mortem PT J.P. Morgan Securities Indonesia


PTBA’s volume could rise from 10.8 million tons in FY08 to 73 million tons
by FY15 due to: (1) an expansion of the existing line with PT Kereta Api Price performance
(10.8 million to 20 million tons); (2) Kalimantan mine acquisitions (0.2 20,000

million to 22 million tons); (3) new railways line of Transpacific (additional 15,000

20 million tons); and (4) Banjarsari and Bangko Tengah power plants 10,000

(additional 11 million tons). In term of cost, the company is building a power 5,000

plant (3x10MW) to support its volume expansion. It is likely that production 0

cost would be reduced by US$32.5 cent/ton once the volume in Tanjung Nov-08 Feb-09 May-09 Aug-09 Nov-09

Enim reaches 40 million tons. Source: Bloomberg.

Potential for earnings upgrades Performance


Volume and coal price should be the two key factors that could create 1M 3M 12M
potential for earnings upgrade. For every 10% increase in volume and coal Absolute (%) 2.5 6.3 144.4
price, our FY10 EPS estimate would rise 14.1% and 16.1% Y/Y, Relative (%) 6.9 3.9 66.7
respectively. Source: Bloomberg.
How much recovery is priced into the stock?
Company data
The first stage of recovery is priced in, but the recovery in the developed
52-week range (Rp) 5,150-15,500
markets (such as the US and EU), and increased demand from China are not
Mkt cap. (RpB) 33,295
priced, in our view. There could be some re-rating in coal price that will
Mkt cap. (US$MM) 3,494
likely benefit PTBA.
Avg daily value (US$MM) 8.0
Price target and key risks Avg daily volume (MM) 8.1
With an increased likelihood of project realizations and our positive view on Shares O/S (MM) 2,304
coal price, we maintain our OW rating and our SOTP-based Jun-10 PT of Date of price 5-Nov-09
Rp19,300. Our SOTP valuation is the sum of all the DCF values of PTBA’s Index: JCI 2,367
projects (assuming a risk-free rate of 10.5%, an equity-risk premium of Free float (%) 35
5.5%, and a terminal growth rate of 5.5%). We apply a 20% discount to take Exchange rate 9,530
into account projects delays. Key risk to our PT: execution risks—delays in Source: Bloomberg.
project and mine acquisitions.
Bloomberg: PTBA IJ; Reuters: PTBA.JK
Rp in billions, year-end December
FY08 FY09E FY10E FY11E
Sales 7,216.2 10,628.4 9,605.7 13,789.0
Net profit 1,707.8 3,160.5 1,410.7 2,138.0
EPS (Rp) 741.0 1,371.3 612.1 927.6
Core EPS (Rp) 739.8 1,371.3 612.1 927.6
DPS (Rp) 370.5 738.9 347.0 531.1
Sales growth (%) 75.0% 47.3% -9.6% 43.6%
Net profit growth (%) 135.2% 85.1% -55.4% 51.5%
EPS growth (%) -335.2% -285.1% -144.6% -251.5%
ROE (%) 51.2% 61.4% 22.6% 30.7%
P/E (x) 19.5 10.5 23.6 15.6
Core P/E (x) 19.5 10.5 23.5 15.5
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009. We raised PT to Rp22,500 on November 22.

256
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Tambang Batubara Bukit Asam: Summary of financials


Year-end Dec
Profit and loss statement Cash flow statement
IDR in billions FY07A FY08A FY09E FY10E FY11E IDR in billions FY07A FY08E FY09E FY10E FY11E

Revenues 4,124 7,216 10,628 9,606 13,789 EBIT 897 2,494 4,340 2,089 3,216
% change Y/Y 16.7 75.0 47.3 -9.6 43.6 Depreciation & amortization 102 23 82 179 264
Gross margin (%) 39.4 48.9 55.8 40.5 43.2 Change in working capital 579 -434 219 559 -56
EBITDA 999 2,517 4,474 2,324 3,867 Taxes -214 -473 -1,193 -462 -727
% change Y/Y 38.8 152.0 77.8 -48.1 66.4 Cash flow from operations 1,364 1,610 3,448 2,366 2,696
EBITDA margin (%) 24.2 34.9 42.1 24.2 28.0
EBIT 897 2,494 4,393 2,145 3,603 Capex -52 -86 -220 -960 -781
% change Y/Y 36.6 178.0 76.1 -51.2 68.0 Disposal/ (purchase) -130 -343 -4,552 -1,328 -1,265
EBIT margin (%) 21.8 34.6 41.3 22.3 26.1 Net interest 62 100 57 -100 -173
Net interest 79 108 57 -100 -173 Free cash flow 1,182 1,180 -1,323 78 649
Earnings before tax 1,010 2,552 4,407 1,914 2,890
% change Y/Y 50.9 152.8 72.7 -56.6 51.0 Equity raised/ (repaid) 0 0 0 0 0
Tax 283 837 1,234 478 723 Debt raised/ (repaid) 0 0 3,000 1,000 0
as % of EBT 28.0 32.8 28.0 25.0 25.0 Other -10 0 -34 -63 -30
Net income (core) 720 1,705 3,161 1,411 2,138 Dividends paid -243 -380 -854 -1,575 -740
% change Y/Y 32.5 136.8 85.4 -55.4 51.5 Beginning cash 1,295 2,223 3,042 3,843 3,295
Shares outstanding (B) 2.305 2.305 2.305 2.305 2.305 Ending cash 2,223 3,042 3,843 3,295 3,185
EPS (fully diluted) (IDR) 315.1 741.0 1,371.3 612.1 927.6 DPS (IDR) 165 370 739 347 531
% change Y/Y 49.5 135.2 85.1 -55.4 51.5

Balance sheet Ratio analysis


IDR in billions FY07A FY08E FY09E FY10E FY11E % FY07A FY08E FY09E FY10E FY11E

Cash and cash equivalents 2,223 3,042 3,843 3,295 3,185 EBITDA margin 24.2 34.9 42.3 25.2 30.6
Accounts receivable 561 1,377 1,514 1,304 1,645 Operating margin 21.8 34.6 41.5 23.2 28.3
Inventories 271 420 525 604 716 Net profit margin 17.6 23.7 30.1 16.4 19.9
Others 26 112 162 139 176 SG&A/sales 17.6 14.4 14.4 18.2 17.1
Current assets 3,080 4,950 6,045 5,341 5,720
Sales per share growth 16.7 75.0 47.3 -9.6 43.6
Other non-current assets 538 773 5,601 7,014 8,373 Sales growth 16.7 75.0 47.3 -9.6 43.6
Net fixed assets 361 384 480 1,219 1,695 Net profit growth 32.5 136.8 85.4 -55.4 51.5
Total assets 3,979 6,107 12,126 13,575 15,788 EPS growth 49.5 135.2 85.1 -55.4 51.5

Liabilities Interest coverage (x) n/a n/a n/a n/a n/a


Short-term loans 0 0 0 0 0 Net debt to total capital -82.7 -74.6 -8.8 6.6 6.6
Payables 99 69 87 99 118 Net debt to equity -83.1 -76.1 -13.4 11.4 10.6
Others 645 1,284 1,606 1,846 2,188 Sales/assets 116.4 143.1 114.7 70.1 77.3
Total current liabilities 744 1,353 1,693 1,946 2,306 Assets/equity 148.7 152.7 192.7 219.0 204.4
Long-term debt 0 0 3,000 4,000 4,000 ROE 29.2 51.2 61.4 22.6 30.7
Other liabilities 547 676 857 1,003 1,192 ROCE 36.1 74.7 66.1 22.0 32.9
Total liabilities 1,292 2,029 5,550 6,948 7,498
Shareholders' equity 2,676 3,998 6,294 6,198 7,723
BVPS (IDR) 1,161 1,735 2,731 2,689 3,351
Source: Company, JPMorgan estimates

PTBA: Sum-of-the-parts valuation


SOTP US$MM RpB J.P. Morgan comment
NPV of existing coal operation (Rp billion) 2,864.30 29,359.1
Banko Tengah PP 608.72 6,239.4
Banjarsari PP 185.23 1,898.6
Railways (Transpacific) 3.17 32.5 Assign 80% discount as the further delay likely
Integrated transportation (10.91) (111.9)
Sale of coal to power plants 99.85 1,023.5
Sale of coal increase (Transpacific) 355.32 3,642.0 Assign 80% discount as the further delay likely
Kalimantan Mines 600.87 6,158.9
Total NPV (Rp in billion) 4,706.55 48,242.14
Debt (3,500.00)
Cash 3,568.85
20% discount to potential projects delay (368.4) (3,776.6)
Equity value per share (Rp) 19,323
Source: J.P. Morgan estimates.

257
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Tata Power Overweight


Price: Rs1,323.75
Price Target: Rs1,450
www.tatapower.com

Company description India


Tata Power (TPWR) is a well-established power utility with decades of Electric Utilities
experience as a power generator and bulk-power supplier. It has 2.8GW of Shilpa KrishnanAC
installed capacity, with a good mix of coal, gas, hydro, diesel and (91-22) 6157-3580
renewables. It also holds a 30% stake in Indonesian coal mines KPC and shilpa.x.krishnan@jpmorgan.com
Arutmin, along with Bumi. The company has an under-construction portfolio J.P. Morgan India Private Limited
of 5.29GW, including an Ultra Mega Power Plant at Mundra. It is also going
to distribute power in the city of Mumbai, pulling the plug on what it was Price performance
earlier supplying through Reliance Infrastructure (~500MW). Rs
2000

1500

Post mortem 1000

Post downturn, improved investor appetite for IPPs has allowed Tata Power
500

to arrange equity funds required over the next two years. The company has Oct-08 Dec-08 Mar-09 Jun-09 Aug-09 Oct-09

raised ~Rs16 billion through a GDR issue in July and Rs13.8 billion through Source: Bloomberg.
FCCB in November. Maithon (1050MW) and Mundra UMPP (4GW) are on
track. Performance
1M 3M 12M
Potential for earnings upgrades Absolute (%) (1) (2) 73
There is a possibility of upgrades in the near term on account of: (a) extra Relative (%) (8) (1) 18
power (around 150MW) for opportunistic merchant sales; and (b) Tata Source: Bloomberg.
Power may have more for merchant/own distribution once 500MW power to
RELI, being supplied at regulated return, is cut-off. Company data
52-week range (Rs) 596-1,487
How much recovery is priced into the stock? Mkt cap. (RsB) 306
We believe an established track record in power generation and execution Mkt cap. (US$B) 6.5
enhances the credibility of its development pipeline relative to peers. Tata Avg daily value (US$MM) 17.3
Power’s project pipeline is still undervalued, in our view. Avg daily volume (MM) 0.6
Shares O/S (MM) 237.1
Price target and key risks Date of price 5-Nov-09
Our Mar-10 SOTP-based PT of Rs1,450 includes 44% value from coal Index: BSE 16,064
mines; 33% from generation; 13% from telecom and financial investments; Free float (%) 69
and 8% from distribution business. At 2.3x P/BV and 12.5x EV/EBITDA, Exchange rate (Rs/US$) 47.4
the stock looks cheaper than peers. Key risk to PT is weak outlook for coal Source: Bloomberg.
prices.
Bloomberg: TPWR.IN; Reuters: TTPW.BO
Rs in millions, year-end March
FY09 FY10E FY11E FY12E
Revenue 175,875 181,651 192,794 220,472
Adjusted net profit 9,630 16,917 15,470 20,452
Adjusted EPS (Rs) 43.5 71.6 65.5 86.6
Adj. net profit growth (%) 30.0 75.7 (8.6) 32.2
ROE (%) 10.7 15.3 11.7 13.9
ROCE (%) 12.0 11.9 9.5 10.8
ROIC (%) 15.3 14.9 11.4 12.9
P/E (x) 30.4 18.5 20.2 15.3
P/B (x) 3.1 2.5 2.3 2.0
EV/EBITDA (x) 13.5 11.6 12.5 10.2
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

258
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Tata Power: Summary of financials


Profit and loss statement Cash flow statement
Rs in millions, year-end March Rs in millions, year-end March
FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E
Revenues 175,875 181,651 192,794 220,472 EBIT 26,086 34,091 33,517 45,183
% change Y/Y 61.5 3.3 6.1 14.4 Less: Tax (11,651) (11,186) (11,681) (15,536)
EBITDA 32,651 41,474 42,561 55,242 Add: Depreciation 6,565 7,383 9,044 10,058
% change Y/Y 56.3 27.0 2.6 29.8 Other income 3,082 2,215 3,001 2,928
EBITDA Margin (%) 18.6 22.8 22.1 25.1 Less: Increase in working
Net Interest (7,087) (7,529) (8,385) (11,041) capital 11,013 (13,504) 831 1,822
Earnings before tax 22,081 28,777 28,133 37,070 Operating Cash Flow 35,095 18,999 34,712 44,455
% change Y/Y 78.2 30.3 (2.2) 31.8
Tax (11,651) (11,186) (11,681) (15,536) Capital expenditure (71,095) (60,302) (72,292) (64,927)
as % of EBT 52.8 38.9 41.5 41.9 Investing cash flow (69,297) (65,150) (72,018) (62,674)
Net Income(adjusted) 9,630 16,917 15,470 20,452
% change Y/Y 30.0 75.7 (8.6) 32.2 Change in equity 0 16,171 0 0
Shares Outstanding 221.4 236.2 236.2 236.2 Net interest payment (7,087) (7,529) (8,385) (11,041)
EPS (adjusted) (Rs) 43.5 71.6 65.5 86.6 Dividend payment (2,852) (3,959) (3,620) (4,786)
% change Y/Y 29.6 64.6 (8.6) 32.2 Principal (payment)/
Source: Company, J.P. Morgan estimates. drawdown) 50,298 44,865 53,039 44,511
Financing cash flows 40,359 49,549 41,034 28,684

Opening cash 5,623 11,779 15,176 18,904


Balance sheet Closing cash 11,779 15,176 18,904 29,368
Source: Company, J.P. Morgan estimates.
Rs in millions, year-end March
FY09 FY10E FY11E FY12E
Cash 11,780 15,176 18,904 29,368
Net current assets ex-cash -5,126 8,378 7,548 5,726 Ratio analysis
%, year-end March
Investments 32,512 32,512 32,512 32,512
Net fixed assets 142,320 152,847 194,140 194,749 FY09 FY10E FY11E FY12E
Others 69,153 111,544 133,499 187,759 EBITDA margin 19% 23% 22% 25%
Total assets 250,639 320,458 386,602 450,114 EBIT margin 15% 19% 17% 20%
Net profit margin 5% 9% 8% 9%
Liabilities
Long Debt 141,434 186,300 239,339 283,849 Revenue growth 61% 3% 6% 14%
Other Liabilities 13,572 8,723 8,997 11,250 EBITDA growth 56% 27% 3% 30%
Net profit growth 30% 76% -9% 32%
Share Capital 2,214 2,362 2,362 2,362 EPS growth 30% 65% -9% 32%
Reserves 83,975 112,955 124,806 140,472
Shareholders' equity 95,633 125,436 138,267 155,015 Average ROE 10.7 15.3 11.7 13.9
BVPS (Rs) 432 531 585 656 Average ROCE 12.0 11.9 9.5 10.8
Average ROIC 15.3 14.9 11.4 12.9
Source: Company, J.P. Morgan estimates.
Asset Turnover 0.7 0.6 0.5 0.5
Leverage 2.6 2.6 2.8 2.9
Source: Company, J.P. Morgan estimates.

259
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Tenaga Nasional Overweight


M$8.40
Price Target: M$10.30
www.tenaga.com.my

Company description Malaysia


Tenaga is Malaysia’s national power utility for Peninsula Malaysia and Power Utilities
Sabah in East Malaysia. It holds the monopoly in distribution and Simone YeohAC
transmission, and a 50% market share of the grid’s generation capacity with (603)-2270 4710
the remaining controlled by the IPPs. simone.x.yeoh@jpmorgan.com
JPMorgan Securities (Malaysia) Sdn. Bhd.
Post mortem (18146-X)
Fuel cost (i.e. namely coal) is beyond the group’s control. There is no formal
Price performance
‘fuel-pass-through’ formula currently in place, but we believe this will be
M$
addressed under Najib’s new government which is focused on reforms. Until
then, the government has demonstrated its commitment on this issue via an 9
8
informal tariff review every six months for fuel adjustments (tariffs were
7
adjusted accordingly in two of the past three reviews when necessary).
6
5
Potential for earnings upgrades

10-08

01-09

04-09

07-09

10-09
We forecast power demand growth to recover from -2.6% in FY09 to +7% in
FY10E, but a 1% change impacts EPS by 5.3%. We forecast M$3.40:1US$, Source: Bloomberg.
but a further 1% strength in the Ringgit raises FY10E by 1.4%. Performance
1M 3M 12M
How much recovery is priced into the stock? Absolute (%) 2.4 3.2 35.5
Relative (%) -0.6 -2.9 -1.1
The stock has not fully priced-in a recovery, in our view, trading at 2010E
EV/EBITDA of over 6x (regional average: 10x), P/B of 1.3x and P/E of 14x Source: Bloomberg.

versus its historical mean of 1.9x and 16x/ respectively. Key to a sustainable
re-rating is tariff reforms via a ‘fuel-pass-through’ and/or a ‘base-revenue Company data
52-wk range (M$) 5.6-8.6
tariff hike’, which the government can more easily push through in an Mkt. cap (M$MM) 36,441.78
economic recovery. Mkt. cap (US$MM) 10650.82
Liquidity (US$MM) 8.3
Avg. daily volume (MM) 3.5
Price target and key risks Shares O/S (MM) 4,338.3
Our Jun-10 PT of M$10.30 is based on DCF, assuming a WACC of 8%, and Date of Price 5-Nov-09
terminal growth rate of 2.5%. Key risks to our PT are a slower-than-expected KLCI Index 1254.0
Free float (%) 37.2
recovery in power demand in FY10E, and a surge in coal cost above our in- Exchange rate 3.42
house assumption of US$90/t c.i.f.
Source: Bloomberg.
Bloomberg: TNB MK; Reuters: TENA.KL
M$ in millions, year-end August
FY08 FY09 FY10E FY11E FY12E
Sales 25,750.6 28,785.6 31,205.9 32,732.5 34,266.2
Reported net profit 2,594.0 917.9 2,611.8 2,879.0 3,290.9
Core net profit 2,559.9 2,157.1 2,611.8 2,879.0 3,290.9
Core FD EPS (M$) 0.59 0.50 0.60 0.66 0.76
Net DPS (M$) 0.15 0.13 0.20 0.22 0.28
Sales growth (%) 10.4 11.8 8.4 4.9 4.7
Net profit growth (%) -28.4 -15.7 21.1 10.2 14.3
EPS growth (%) -28.6 -15.7 21.1 10.2 14.3
ROE (%) 10.0 8.3 9.3 9.6 0.0
ROCE (%) 7.4 7.9 8.2 8.4 0.0
P/E (x) 14.3 17.0 14.0 12.7 11.1
P/BV (x) 1.4 1.4 1.3 1.2 1.1
EV/EBITDA (x) 7.5 7.3 6.4 5.9 0.1
Net Div yield (%) 1.8% 1.6% 2.4% 2.7% 3.3%
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

260
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Tenaga Nasional: Summary of financials


Profit and Loss statement Cash flow statement 7,157 7,406 8,190 8,685
M$ in millions, year-end Aug FY08A FY09 FY10E FY11E FY12E M$ in millions, year-end Aug FY08A FY09 FY10E FY11E FY12E
0 0 0 0
Revenues 25,751 28,786 31,206 32,732 34,266 Op profit before forex loss/(gain) 3,601 3,851 4,144 4,440 4,910
% change Y/Y 10.4 11.8 8.4 4.9 4.7 Depreciation & amortisation 3,555 3,555 4,046 4,246 4,456
Gross Margin (%) 27.8 25.7 26.2 26.5 27.3 Change in w/c (100) 364 (11) (7) (7)
EBITDA before forex gain/loss 7,157 7,406 8,190 8,685 9,365 Taxes (519) (690) (653) (720) (823)
% change Y/Y -12.4 3.5 10.6 6.0 7.8 Others 441 534 568 613 666
EBITDA Margin (%) 27.8 25.7 26.2 26.5 27.3 Operating Cash Flow 6,978 7,614 8,095 8,571 9,202
Op profit before forex gain/loss 3,601 3,851 4,144 4,440 4,910
% change Y/Y -35.0 6.9 7.6 7.1 10.6 Capex (4,607) (4,320) (4,750) (5,000) (5,000)
EBIT Margin (%) 14.0 13.4 13.3 13.6 14.3 Disposal/(purchase) 264 0 0 0 0
Net Interest (1,096) (1,127) (1,130) (1,136) (1,145) Net interest (1,225) (1,127) (1,130) (1,136) (1,145)
Earnings before tax 3,025 1,543 3,265 3,599 4,114 Free cash flow 1,410 2,168 2,215 2,435 3,057
% change Y/Y -36.5 -49.0 111.6 10.2 14.3
Tax (425) (690) (653) (720) (823) Equity raised/(repaid) 20 0 0 0 0
as % of EBT 14.0 44.7 20.0 20.0 20.0 Debt raised/(repaid) (1,152) (124) 0 0 0
Core Net Income 2,560 2,157 2,612 2,879 3,291 Others 722 (645) (169) (159) 32
% change Y/Y -28.4 -15.7 21.1 10.2 14.3 Dividends paid (843) (649) (585) (886) (974)
Shares Outstanding 4355 4355 4355 4355 4355 Beginning cash 5,323 5,480 6,229 7,690 9,080
FD EPS (core) - M$ 0.588 0.495 0.600 0.661 0.756 Ending cash 5,480 6,229 7,690 9,080 11,195
% change Y/Y -28.2 -15.7 21.1 10.2 14.3 Net DPS - M$ 0.15 0.13 0.20 0.22 0.28
Chg in cash 157 749 1,461 1,390 2,115
Balance sheet Ratio analysis 157 749 1,461 1,390 2,115
M$ in millions, year-end Aug FY08A FY09 FY10E FY11E FY12E %, year-end Aug FY08A FY09 FY10E FY11E FY12E

Cash and cash equivalents 5,480 6,229 7,690 9,080 11,195 EBITDA margin 27.8 25.7 26.2 26.5 27.3
Accounts receivable 3,447 3,774 4,091 4,292 4,493 Operating margin 27.8 25.7 26.2 26.5 27.3
Inventories 2,230 1,956 2,120 2,224 2,328 Net profit margin 9.9 7.5 8.4 8.8 9.6
Others 0 0 0 0 0 SG&A/sales n.a. n.a. n.a. n.a. n.a.
Current assets 11,157 11,959 13,901 15,595 18,015
Sales per share growth 10.7 11.8 8.4 4.9 4.7
LT investments 1,205 1,177 1,206 1,243 1,279 Sales growth 10.4 11.8 8.4 4.9 4.7
Net fixed assets 57,475 58,227 58,931 59,685 60,230 Net profit growth (28.4) (15.7) 21.1 10.2 14.3
Total assets 69,836 71,363 74,038 76,523 79,524 EPS growth (28.2) (15.7) 21.1 10.2 14.3

Liabilities Interest coverage (x) -6.5 -6.6 -7.2 -7.6 -8.2


ST loans 1,058 1,158 1,158 1,158 1,158 Net debt to total capital (x) 0.2 0.2 0.2 0.2 0.1
Payables 5,604 6,105 6,521 6,819 7,117 Net debt to equity (x) 0.67 0.63 0.53 0.45 0.35
Others 0 0 0 0 0 Sales/assets (x) 0.4 0.4 0.4 0.4 0.4
Total current liabilities 6,662 7,263 7,679 7,977 8,275 Assets/equity (x) 2.7 2.7 2.6 2.5 2.5
Long term debt 21,682 21,458 21,458 21,458 21,458 ROE 10.0 8.3 9.3 9.6 10.2
Other liabilities 15,835 16,636 16,868 17,063 17,449 ROCE 7.4 7.9 8.2 8.4 8.9
Total liabilities 44,179 45,357 46,006 46,498 47,182 ROA 4.5 3.7 4.4 4.8 5.5
Shareholders' equity 25,657 26,006 28,033 30,026 32,343
BVPS - M$ 5.89 5.97 6.44 6.90 7.43
Source: Company Reports and J.P. Morgan Estimates.
Note: Core net profit is derived from net profit ex forex translation losses

261
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Ternium S.A. Overweight


$33.35
Price Target: $31.00
www.ternium.com

Company description Luxembourg


Ternium, mainly through its subsidiaries TX Mexico and Siderar (Arg.), Metals & Mining
produces flat and long steel products, and has finished steel capacity of Rodolfo R. De Angele, CFAAC
9Mtpy. Owned by the Techint Group (61%) and listed on the NYSE under (55-11) 3048-3888
the symbol TX, it generates ~75% EBITDA from its Mexico operations. rodolfo.r.angele@jpmorgan.com

Post mortem Banco J.P. Morgan S.A.


TX is one of the leading suppliers of flat steel products in Mexico and
Argentina and has important access to other regional markets in South & Price Performance (US$)
Central America, in addition to NAFTA. Prices in Mexico (~75% of TX’s 40
sales) are closely linked but remain at a marginal premium to those in the 30
US. In addition, TX enjoys the benefits of the presence of high-value-added 20
products, integrated low-cost mills and low dependence on coal, putting it in 10
0
good stead vis-à-vis its competitors. Finally, management has worked
exceptionally well to deliver strong results and four consecutive quarters of Nov -08 Mar-09 Jul-09 Nov -09

positive cash flow and working capital reduction during the peak of crisis. Source: Bloomberg.
Potential for earnings upgrades Performance
After TX posted a 20% EBITDA margin in 3Q09, the Street estimate of 19% 1M 3M 12M
for 2010 seems conservative. We believe higher utilization levels (TX Absolute (%) 23% 32% 449%
guiding for 75% in 4Q09 vs. 70% in 3Q) should result in improved dilution Relative (%) 20% 11% 332%
of fixed costs, with potential for further improvement if prices stick to Source: Bloomberg.
present levels. Company data
How much recovery is priced into the stock? 52-week range (US$) 5.76 – 33.35
Trading at 6.7x ’10e EBITDA, TX remains the cheapest steel stock in our Mkt cap. (US$MM) 6,686.0
coverage and compares with the peer average of 9.7x. Further, we believe the Avg daily value (US$MM) 14.3
market is not yet fully discounting the future payments (~$1.0B) from Avg daily volume (‘000) 500.0
Venezuela for the nationalized asset of Sidor. Shares O/S (MM) 200
Price target and key risks Date of price 25-Nov-09
Our Dec-10 price target of $31.0 is based on a combination of DCF and Index: MSCI LatAm 4125.9
multiples analysis, with WACC of 12.0% and perpetuity growth of 3%. The Free float (%) 14%
key risks to our thesis are a weaker-than-expected steel price scenario, higher Exchange rate: USD/MXN 12.83
raw material costs and overpayment in an M&A. Source: Bloomberg.

Bloomberg: TX; Reuters: TX.N


US$ in millions, Year-end 31st Dec.
FY08 FY09E FY10E FY11E
Sales 8,496 4,739 5,775 6,158
Net profit (Recuring) 662 249 430 567
EPS (US$) 0.36 0.28 0.21 0.28
FD EPS (US$) 0.36 0.28 0.21 0.28
DPS (US$) 0.60 - 1.38 1.07
Sales growth (%) 50% -44% 22% 7%
Net profit growth (%) 224% -62% 73% 32%
EPS growth (%) -65% -23% -22% 32%
ROE (%) 14% 5% 8% 10%
P/E (x) 8.7x 26.8x 15.5x 11.8x
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

262
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Ternium S.A.: Summary of financials


Profit and loss statement Cash flow statement
US$ in millions, year-end 31-Dec. US$ in millions, year-end 31-Dec
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 8,496 4,739 5,775 6,158 Net income (Reported) 715 554 430 567
% change Y/Y 50% -44% 22% 7% Depreciation 419 380 387 383
Gross margin (%) 9% 17% 23% 24% Change in working capital 83 (710) 226 90
EBITDA 2,304 571 1,138 1,304 Cash flow from operations 1,052 1,644 591 860
% change Y/Y 90% -75% 99% 15% Capital expenditure 593 250 348 478
EBITDA margin (%) 27% 12% 20% 21% Other cash (uses)/sources 765 (185) (1,182) (9)
EBIT 1,885 190 751 921 Debt raised/(repaid) (818) (678) (254) (242)
% change Y/Y 122% -90% 295% 23% Dividends (120) - (277) (215)
EBIT margin (%) 22% 4% 13% 15% Increase in cash equivalent (425) 1,579 1,148 176
Net interest (64) (14) (5) 15 Ending cash 1,156 1,882 2,790 2,732
Earnings before tax 1,089 247 688 908 DPS($) 0.60 - 1.38 1.07
% change Y/Y 51% -77% 179% 32% Source: Company, J.P. Morgan estimates.
Tax (262) 11 (203) (267)
as % of EBT 24% -5% 29% 29%
Net income (recurring) 662 249 430 567
% change Y/Y 224% -62% 73% 32%
Shares O/S (MM) 200 200 200 200
EPS (recurring) (US$) 3.30 1.24 2.14 2.83
Source: Company, J.P. Morgan estimates.

Balance sheet Ratio analysis


US$ in millions, year-end 31-Dec %, year-end 31-Dec
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Cash and cash equivalents 1,156 1,882 2,790 2,732 EBITDA margin 27% 12% 20% 21%
Accounts receivable 872 704 857 914 Operating margin 22% 4% 13% 15%
Inventories 1,827 1,183 1,355 1,425 Net profit margin 8% 5% 7% 9%
Others 2 2 2 2 SG&A/sales 0 0 0 0
Current assets 3,856 3,771 5,005 5,074 Sales growth 50% -44% 22% 7%
LT investments 2,603 2,393 1,265 1,276 Net profit growth 224% -62% 73% 32%
Net fixed assets 4,212 4,030 3,991 4,086 Sales per share growth 50% -44% 22% 7%
Total assets 10,671 10,195 10,261 10,436 EPS growth 224% -62% 73% 32%
Liabilities Interest coverage (x) 29.5x 13.5x 139.7x -60.6x
ST loans 942 705 635 570 Net debt to total capital 24% 8% -5% -8%
Payables 439 399 457 481 Net debt to equity 46% 14% -9% -12%
Others 355 256 313 333 Sales/assets 80% 46% 56% 59%
Total current liabilities 1,735 1,360 1,405 1,384 EBIT margin 22% 4% 13% 15%
Long-term debt 2,326 1,885 1,700 1,524 ROCE 0 0 0 0
Other liabilities 1,049 1,062 1,116 1,136 Assets/equity (x) 2.3x 2.0x 2.0x 1.9x
Total liabilities 5,110 4,308 4,221 4,044 ROIC 9% 2% 6% 7%
Shareholders’ equity 4,597 4,976 5,129 5,481 ROE 16% 11% 8% 10%
BVPS (US$) 22.9 24.8 25.6 27.3 Source: Company, J.P. Morgan estimates.
Source: Company, J.P. Morgan estimates.

263
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Thai Oil Public Company Overweight


Price: Bt40.75
Price Target: Bt62.00
www.thaioil.co.th

Company description Thailand


Thai Oil (TOP) runs a 275,000bbl/day complex refinery in Sri Racha, 124km Independent refiners
southeast of Bangkok. The company also has downstream petrochemical Sukit ChawalitakulAC
interests (benzene and paraxylene), as well as related lube base, oil (662) 684-2679
transportation and utilities business. TOP is 49%-owned by PTT Public. chawalitakul.sukit@jpmorgan.com
JPMorgan Securities (Thailand) Limited
Post mortem
Oil refining is a commoditized industry, hence TOP’s performance is driven Price performance
by the regional oil refining dynamics (capacity vs. demand), rather than its 45

market’s positioning. That said, the company does have an advantage in Bt 30

running a highly complex refinery (that generally results in higher margins) 15


and downstream divisions (that help balance the refining performance), in Nov-08 Feb-09 May-09 Aug-09 Nov-09
our view. TOP.BK share price (Bt)
SET (rebased)
Source: Bloomberg.
Potential for earnings upgrades
TOP is highly sensitive to regional gross refining margin (GRM). YTD, Performance
GRM has been poor due to over-capacity and soft demand. As we move into 1M 3M 12M
2010, we are positive that a steady demand growth (due to recovering Absolute (%) -7.9 4.5 84.4
consumption and economic activities) will help to drive higher GRM next Relative (%) -2.8 -2.0 35.3
year, potentially leading to higher earnings for TOP. Source: Bloomberg.

Company data
How much recovery is priced into the stock?
52-week range (Bt) 18.20-47.25
TOP shares have risen 80% from their trough in Mar-09; hence, it appears
Mkt cap. (BtMM) 83,131
that some recovery has been discounted in the share price. However, we Mkt cap. (US$MM) 2,490
believe that the market remains skeptical of a strong GRM recovery. Hence, Avg daily value (US$MM) 29.6
should GRM move significantly higher, this could be viewed an upside Avg daily volume (MM) 6.9
surprise for the market. Shares O/S (MM) 2,040
Date of price 5-Nov-09
Price target and key risks Index: SET 682
Our Jun-10 PT of Bt62 is based on our DCF valuation (WACC=9%, g=0%, Free float (%) 50
LT GRM=US$5/bbl). We also incorporate a 20% risk discount to reflect Exchange rate 33.38
Thailand’s poor regulatory environment. Key risks to our PT include: (1) Source: Bloomberg.
GRM; (2) aromatics spread; and (3) regulatory risks.
Bloomberg: TOP TB; Reuters: TOP.BK
Bt in millions, year-end December
FY08 FY09E FY10E FY11E
Revenue 399,125 252,193 281,542 312,538
Net profit 224 13,618 14,391 15,438
EPS (Bt) 0.11 6.68 7.05 7.67
DPS (Bt) 2.75 2.30 3.00 3.50
Revenue growth (%) 52.9 -36.8 11.6 11.0
EPS growth (%) -98.8 5986.3 5.7 8.7
ROCE (%) 4.2 18.8 19.3 20.7
ROE (%) 0.4 21.4 19.8 18.2
P/E (x) 371.5 6.1 5.8 5.3
P/BV (x) 1.4 1.2 1.1 0.9
Dividend yield (%) 6.7 5.6 7.4 8.6
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

264
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Thai Oil Public Company: Summary of financials


Bt in millions, year-end December
Income statement Cash flow statement
FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E

Revenues 261,051 399,125 252,193 281,542 312,538 EBIT 24,676 4,339 20,474 20,790 22,081
% change Y/Y -6.5% 52.9% -36.8% 11.6% 11.0% Depr. & amortization 4,966 6,148 6,390 6,469 6,780
Gross Margin (%) 11.7% 2.9% 11.2% 10.2% 9.8% Change in working capital -1,972 -1,589 -752 -3,949 -16
EBITDA 29,642 10,487 26,863 27,259 28,861 Taxes -4,755 756 -4,764 -4,994 -6,159
% change Y/Y 24.4% -64.6% 156.2% 1.5% 5.9% Cash flow from operations 20,372 6,019 19,968 17,502 23,002
EBITDA Margin (%) 11.4% 2.6% 10.7% 9.7% 9.2%
EBIT 24,676 4,339 20,474 20,790 22,081 Capex -17,112 -6,924 -7,663 -3,300 -1,910
% change Y/Y 29.8% NM 371.9% 1.5% 6.2% Disposal/(purchase) 0 0 0 0 0
EBIT Margin (%) 9.5% 1.1% 8.1% 7.4% 7.1% Net Interest -1,100 -621 -1,397 -814 316
Net Interest -1,100 -621 -1,397 -814 316 Free cash flow 3,260 -905 12,305 14,202 21,092
Earnings before tax 22,668 -107 19,056 19,976 22,398
% change Y/Y 27.9% -100.5% -17909.1% 4.8% 12.1% Equity raised/(repaid) 0 0 0 0 0
Tax -4,755 756 -4,764 -4,994 -6,159 Debt raised/(repaid) 740 17,876 -10,000 -10,000 -10,000
as % of EBT 130.8% -9800.9% 141.0% 136.5% 128.9% Other 2,086 -861 346 75 81
Core net income (reported) 17,511 313 13,735 14,391 15,647 Dividends paid -7,650 -9,180 -4,182 -5,610 -6,885
% change Y/Y 19.2% -98.2% 4288.1% 4.8% 8.7% Beginning cash 6,982 4,760 8,555 4,077 6,015
Shares outstanding 2,040 2,040 2,040 2,040 2,040 Ending cash 4,760 8,555 4,077 5,713 10,007
Core EPS (reported) - (Bt) 8.58 0.15 6.73 7.05 7.67 DPS - (Bt) 4.50 2.75 2.30 3.00 3.50
% change Y/Y 19.2% -98.2% 4,288.1% 4.8% 8.7%

Balance sheet Ratio analysis


FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E

Cash and cash equivalents 4,760 8,555 4,077 5,713 10,007 EBITDA margin 11.4% 2.6% 10.7% 9.7% 9.2%
Accounts receivable 23,045 15,320 20,175 23,931 26,566 Operating margin 9.5% 1.1% 8.1% 7.4% 7.1%
Inventories 32,802 20,544 31,369 35,396 39,469 Net profit margin 7.3% 0.1% 5.4% 5.1% 5.0%
Others 1,992 10,179 2,000 2,000 2,000
Current assets 62,599 54,598 57,621 67,040 78,042

LT investments 162 1,144 1,200 1,200 1,200 Sales growth -6.5% 52.9% -36.8% 11.6% 11.0%
Net fixed assets 71,439 72,215 73,488 70,319 61,902 Net profit growth 8.3% -98.8% 5986.3% 5.7% 8.7%
Total Assets 136,570 132,840 139,805 142,790 145,144 EPS growth 8.3% -98.8% 5986.3% 5.7% 8.7%

Liabilities
ST loans 1,450 12,870 6,010 4,510 1,660 Interest coverage (x) 26.95 16.89 19.23 33.47 -
Payables 26,127 15,670 20,166 24,019 26,783 Net debt to equity 44.5% 65.7% 56.6% 33.5% 1.2%
Others 4,661 1,733 3,986 3,967 3,986 Sales/assets (x) 2.11 2.96 1.85 1.99 2.17
Total current liabilities 32,238 30,273 30,162 32,496 32,429 Assets/equity (x) 2.03 2.25 2.05 1.87 1.71
Long-term debt 30,741 37,197 34,057 25,557 9,407 ROE 31.0% 0.4% 21.4% 19.8% 18.2%
Other liabilities 1,754 1,791 2,293 2,368 2,527 ROCE 26.4% 4.2% 18.8% 19.3% 20.7%
Total Liabilities 64,733 69,261 66,512 60,420 44,363
Shareholders' equity 67,387 58,921 68,357 77,138 94,963
BVPS - (Bt) 33.03 28.88 33.51 37.81 46.55
Source: Company reports and J.P. Morgan estimates.

265
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

TOTVS Overweight
R$101.50
Price Target: R$125.00
www.totvs.com.br

Company description Brazil


Totvs is the leader in developing and marketing integrated enterprise Media and Telecom
management software and provision of related services in Brazil. It has a Andre BaggioAC
leading position in the SME market for ERP software, with nearly 38% (55-11) 3048-3427
market share. It trades with the ticker TOTS3, is listed in the Novo Mercado andre.baggio@jpmorgan.com
segment of the Bovespa exchange, and has an ADTV of US$3mn. Banco J.P. Morgan S.A.
Rajneesh Jhawar
Post mortem (1-212) 622-6480
Core license fee revenue growth reaccelerated in 3Q, partly offset by softer rajneesh.x.jhawar@jpmorgan.com
service & maintenance revenues. Net revenues were up 16% y/y. EBITDA J.P.Morgan Securities Inc.
grew significantly, up 50% y/y with a 26.3% margin, well above the Price performance
company’s LT margin guidance (22-25%). Gross license fee revenues, R$
which had been decelerating the last 3 quarters – during a tough economy –
120
improved in 3Q09, rising 10.9% y/y (vs -3% y/y in 2Q09). 100
80
60
Potential for earnings upgrades 40
We expect two sources of earning upside. (1) Likely revision of long-term 20
margin guidance by the company as 3Q margins are already well above this 0
Oct-08 Apr-09 Oct-09
guidance (JPMe: 27.4%), (2) Upgrades to revenue forecasts due to cyclical
Source: Bloomberg.
upswing in new license sales as IT demand recovers.
Performance
1M 3M 12M
How much recovery is priced into the stock?
Absolute% 14.4 24.4 184.6
A better license fee trend should help sustain growth in the coming quarters
Relative % 10.0 6.15 89.5
through better maintenance revenues. At 15x P/E 2010e, Totvs trades at no Source: Bloomberg, relative IBOV, USD prices.
premium to global peers despite its superior growth prospects. Company data
52-week range (BRL) 34.00-107.0
Price target and key risks Mkt cap. (R$ MM) 3,334
We rate Totvs OW, with an end-2010 PT of R$125 based on a DCF model Mkt cap. (US$ MM) 1,936
using a 10.6% WACC and 4% LT growth, in nominal US$ terms. Key risks Avg daily value (US$MM) 2.9
are 1) investor aversion to small caps, 2) another sharp macro slowdown, Avg daily volume (MM) .055
and 3) large competitors increasing focus on the SME market. Shares O/S (MM) 31.15
Date of price Nov 25
Index: MEXBOL MEXBOL
Source: Bloomberg.
Bloomberg: TOTS3; Reuters: TOTS3.SA
LC in millions, year-end Dec
FY08 FY09E FY10E FY11E
Sales 845 991 1,181 1,345
Net profit 129 161 206 241
EPS (LC) 4.51 5.17 6.60 7.74
FD EPS (LC)
DPS (LC)
Sales growth (%) 27.6% 17.3% 19.2% 13.9%
Net profit growth (%) 18.3% 24.6% 27.6% 17.3%
EPS growth (%) 16.6% 14.7% 27.6% 17.3%
ROE (%) 25.1% 32.0% 34.1% 37.6%
P/E (x) 25.8 20.7 16.2 13.8
FD P/E (x)
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

266
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

TOTVS: Summary of financials


Profit and loss statement Cash flow statement
MXN in millions, year-end Dec. LC in millions, year-end Dec.
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 845 991 1,181 1,345 EBIT 77 185 234 279
% change Y/Y 27.6% 17.3% 19.2% 13.9% Depreciation & amortization 95 70 74 75
Gross margin (%) 65.1% 68.4% 68.7% 68.8% Change in working capital -21 -57 -25 -22
EBITDA 179 255 308 354 Taxes
% change Y/Y 22.6% 42.5% 20.9% 14.9% Cash flow from operations 147 138 217 257
EBITDA margin (%) 21.2% 25.7% 26.1% 26.3% Capex -23 -20 -30 -34
EBIT 77 185 234 279 Disposal/(purchase)
% change Y/Y -9.4% 141.4% 26.3% 19.4% Net interest
EBIT margin (%) 9.1% 18.7% 19.8% 20.7% Free cash flow 124 118 187 223
Net interest 9 -31 -26 -23 Equity raised/(repaid)
Earnings before tax 86 154 207 256 Debt raised/(repaid)
% change Y/Y -14.5% 78.6% 34.8% 23.4% Other
Tax -12 -29 -40 -52 Dividends 0 -36 -61 -223
as % of EBT 14.4% 18.7% 19.1% 20.3% Beginning cash 276 147 204 330
Net income (reported) 129 161 206 241 Ending cash 147 204 330 330
% change Y/Y 18.3% 24.6% 27.6% 17.3% DPS (LC) 0.00 1.16 1.96 7.17
Shares O/S (MM) 31 31 31 31 Source: Company, J.P. Morgan estimates.
EPS (reported) (LC) 4.51 5.17 6.60 7.74
Source: Company, J.P. Morgan estimates. Ratio analysis

Balance sheet %, year-end Dec.


FY08 FY09E FY10E FY11E
LC in millions, year-end Dec. EBITDA margin 21.2% 25.7% 26.1% 26.3%
FY08 FY09E FY10E FY11E Operating margin 9.1% 18.7% 19.8% 20.7%
Cash and cash equivalents 147 204 330 330 Net profit margin 15.3% 16.3% 17.4% 17.9%
Accounts receivable 154 196 233 266 SG&A/sales 33.4% 30.3% 29.8% 29.6%
Inventories Sales growth 27.6% 17.3% 19.2% 13.9%
Others 44 82 98 112 Net profit growth 18.3% 24.6% 27.6% 17.3%
Current assets 346 483 662 708 Sales per share growth
LT investments EPS growth 16.6% 14.7% 27.6% 17.3%
Net fixed assets 32 40 58 80 Interest coverage (x)
Total assets 1,044 1,163 1,297 1,302 Net debt to total capital 27.5% 22.5% 8.6% 8.8%
Liabilities Net debt to equity 50.3% 39.8% 14.2% 14.8%
ST loans 11 4 4 4 Sales/assets 94.2% 89.8% 96.0% 103.5%
Payables 33 29 34 39 EBIT margin 9.1% 18.7% 19.8% 20.7%
Others 124 117 140 159 ROCE 10.3% 19.6% 21.9% 25.2%
Total current liabilities 168 150 178 203 Assets/equity (x) 2.3x 2.1x 2.0x 2.1x
Long-term debt 366 419 419 419 ROI
Other liabilities 48 37 37 37 ROE 25.1% 32.0% 34.1% 37.6%
Total liabilities 582 606 634 658 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 456 551 654 631
BVPS (LC) 14.7 17.7 21.0 20.2
Source: Company, J.P. Morgan estimates.

267
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

TSMC Overweight
NT$59.70
Price Target: NT$72
www.tsmc.com
Company description Taiwan
TSMC (TAIEX: 2330, NYSE: TSM) is the world’s largest dedicated Semiconductors
semiconductor foundry, with leading manufacturing capacity, process JJ ParkAC
technology, and the largest portfolio of process-proven libraries, IP, design (822) 758-5717
tools and reference flows in the industry. We expect its total managed jj.park@jpmorgan.com
capacity in FY10 to grow by 13%, exceeding 11 million of 8" equivalent J.P. Morgan Securities (Far East) Limited,
wafers. Seoul Branch

Patrick LiaoAC
Post mortem (886-2) 2725-9874
We believe TSMC will outperform the overall semiconductor industry in patrick.kh.liao@jpmorgan.com
2010, with its revenue growth exceeding the industry average as: (1) it has a
J.P. Morgan Securities (Taiwan) Limited
diversified product portfolio; and (2) the company is an early mover in
advanced technology, which could enjoy price premium. We expect it to Price performance
continue to see a downward trend in its fixed cost/wafer, given the increase NT$
80
in asset efficiency. Hence, TSMC is likely to post higher ROE and NP 70
margin versus its global peers. 60
50

Potential for earnings upgrades 40

Despite the high fixed cost structure, TSMC’s profitability has been quite 30
Nov -08 Feb-09 May -09 Aug-09 Nov -09
sustainable even in a downturn year such as 2009. Hence, any earnings
2330 TT Equity TWSE Index
upside for TSMC should still largely depend on the top-line growth, which Source: Bloomberg.
could be driven by: (1) better end-demand outlook; (2) an increase in
outsourcing orders; and (3) further market share gains. Performance
1M 3M 12M
How much recovery is priced into the stock? Absolute (%) -3.7 4.9 25.0
The stock has been moving sideways, largely due to concerns about price Relative (%) -3.4 -3.1 -16.1
war and a slowdown in end-demand. However, once the market realizes that Source: Bloomberg.
the company will continue to deliver Y/Y earnings growth from 4Q09 and
throughout 2010, the share price will gradually move up, in our view. Company data
52-week range (NT$) 36.2-65.2
Price target and key risks Mkt cap. (NT$B) 1,546
52-week range (NT$) 47.53
We maintain our Overweight rating; our Dec-10 PT of NT$72 is based on
Avg daily value (US$MM) 117
3.1x 12-month forward (FY11E) book value. This multiple is at the mid-to- Avg daily volume (MM) 65.4
high range of its recent trading level and well below the 2000-01 level Shares O/S (MM) 25,896
despite a higher ROE. A key risk to our PT is weakening end-demand in Date of price 5-Nov-09
1Q10. Index: TAIEX 7,417.5
Free float (%) 60
Exchange rate 32.5
Source: Bloomberg.
Bloomberg: 2330 TT; Reuters: 2330.TW
NT$ in billions, year-end December
FY08 FY09E FY10E FY11E
Sales 333.2 295.1 367.0 417.4
Net profit 99.9 87.4 119.9 141.5
EPS (NT$) 3.83 3.38 4.63 5.45
FD EPS (NT$) 3.83 3.38 4.63 5.45
DPS (NT$) 3.0 3.0 3.0 3.0
Sales growth (%) 3.3% (11.4%) 24.4% 13.7%
Net profit growth (%) (8.6%) (13.0%) 37.2% 18.0%
EPS growth (%) 17.3% (11.7%) 36.7% 17.8%
ROE (%) 20.6 17.9 23.1 24.6
P/E (x) 15.6 17.6 12.9 11.0
FD P/E (x) 15.6 17.6 12.9 11.0
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

268
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

TSMC: Summary of financials


NT$ in billions, year-end December
Income statement Ratio analysis
FY08A FY09E FY10E FY11E % FY08A FY09E FY10E FY11E

Revenues 333 295 367 417 Gross Margin 42.5 43.4 46.4 47.0
Cost of Goods Sold 191 167 197 221 EBITDA margin 55.8 58.5 58.9 57.4
Gross Profit 142 128 170 196 Operating Margin 31.3 31.0 34.8 36.0
R&D Expenses 21 21 25 28 Net Margin 30.0 29.6 32.7 33.9
SG&A Expenses 16 16 17 18 R&D/sales 6.4 7.2 6.9 6.7
Operating Profit (EBIT) 104 91 128 150 SG&A/Sales 4.8 5.3 4.8 4.3
EBITDA 186 173 216 240
Interest Income 5.4 2.6 2.9 4.8 Sales growth 3.3 -11.4 24.4 13.7
Interest Expense -1 0 0 0 Operating Profit Growth -6.5 -12.5 39.6 17.6
Investment Income (Exp.) 0.7 0.1 1.3 1.7 Net profit growth -8.5 -12.6 37.2 18.0
Non-Operating Income (Exp.) 1.6 0.3 0.8 0.8 EPS (Reported) growth -7.0 -11.7 36.7 17.8
Earnings before tax 111 94 132 157 EPS (Adjusted) growth 17.3 -11.7 36.7 17.8
Tax -11 -7 -13 -16 Interest coverage (x) 169.8 268.1 1009.5 1305.7
Net Income (Reported) 100 87 120 142 Net debt to total capital -36.7 -36.9 -37.9 -44.2
Net Income (Adjusted) 100 87 120 142 Net debt to equity -38.7 -37.2 -38.2 -44.4
NT$
EPS (Reported) 3.83 3.38 4.63 5.45 Asset Turnover 59.6 50.9 58.8 59.4
EPS (Adjusted) 3.83 3.38 4.63 5.45 Working Capital Turns (X) 1.7 1.5 1.7 1.6
BPS 18.65 19.21 20.90 23.44 ROE 20.6 17.9 23.1 24.6
DPS 3.0 3.0 3.0 3.0 ROIC 30.3 29.1 36.3 40.8
Shares Outstanding (bn) 26 26 26 26 CORE ROIC 35.2 33.6 42.1 47.3

Balance sheet Cash flow statement


FY08A FY09E FY10E FY11E FY08A FY09E FY10E FY11E

Cash and cash equivalents 211 190 211 273 Net Income 100 87 120 142
Accounts receivable 18 40 43 51 Depr. & Amortisation 82 81 89 89
Inventories 15 20 24 29 Change in working capital 37 -13 -7 -1
Others 8 9 13 15 Other 1 0 0 0
Current assets 253 259 290 369 Cash flow from operations 219 156 202 230

LT investments 40 39 40 42 Capex -59 -89 -93 -80


Net fixed assets 244 260 272 270 Disposal/ (purchase) -8 -7 -9 -10
Others 23 22 22 22 Cash flow from investing -67 -96 -102 -90
Total assets 559 580 625 703 Free cash flow 159 67 109 150

Liabilities Equity raised/ (repaid) -33 0 0 0


ST loans 9 0 0 0 Debt raised/ (repaid) -3 -21 -1 -1
Payables 6 11 11 14 Other -4 16 0 1
Others 41 52 55 66 Dividends paid -76 -77 -78 -78
Total current liabilities 57 63 67 81 Cash flow from financing -115 -82 -79 -78
Long term debt 16 4 3 2
Other liabilities 6 15 12 10 Net change in cash 37 -22 21 62
Total liabilities 79 83 82 93 Beginning cash 175 211 190 211
Shareholders' equity 480 497 542 610 Ending cash 211 190 211 273

Source: Company, J.P. Morgan estimates.

269
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Turk Telekom Overweight


Price: YTL4.44
Price Target: YTL6.8
www.turktelekom.com.tr
Company description Turkey
Within CEEMEA Turk Telekom is a structurally attractive Turkish integrated Wireline Services/Incumbents
telecom incumbent with relatively sustainable fixed voice revenues (although Jean-Charles LemardeleyC
these have come under more pressure recently), a dominant position in a (44-20) 7325 5763
growing broadband market with benign competition, and increasing market jean-charles.lemardeley@jpmorgan.com
share in the mobile market. Oger Telekomünikasyon is the controlling J.P. Morgan Securities Ltd.
shareholder with a 55% stake while 30% is owned by Turkey’s Treasury.
Price Performance
Post mortem
Turk Telekom’s key objective in mobile over the past year has been to take 4.5

advantage of Vodafone’s weakness to overtake it decisively and become the TL


3.5
number 2 operator in the market, which has yet to happen. However, we still
believe that Turk Telekom can pull ahead of Vodafone in terms of service
2.5
revenues in the 4Q09 and beyond, which the market would receive well in our
Nov-08 Feb-09 May-09 Aug-09 Nov-09
view. We also expect to see a recovery in the mobile margins.
Source: Company data, Bloomberg
Potential for earnings upgrades
We believe that while its key peer Turkcell will be the primary beneficiary Performance
given its greater exposure to the Turkish mobile market, Turk Telekom stands 1M 3M 12M
to benefit strongly as well from a combination of an improving economy and Absolute (%) -8% -6% 47%
market repair through solid mobile revenue growth, improved mobile margins Source: Company data, Bloomberg
and more stable fixed voice revenues.
Company data
52-week range (TL) 5.06-3.16
How much recovery is priced into the stock? We believe that the Mkt cap. (YTL bn) 15.5
aforementioned macro recovery/market repair is far from fully priced in. Shares O/S (mn) 3500
Date of price 23-Nov-09
Price Target End Date 31-Dec-10
Price target and key risks Avg daily value (US$MM) 26
Our recurring FCF yield-based end 2010 target price for Turk Telekom is Avg daily volume (MM) 8.38
TRY 6.8. At our TP the stock would trade on a 2010E recurring FCF yield of Free float (%) 15%
c.11%. We believe this multiple is justified by the stronger growth in Exchange rate 1.5
following years than initially estimated due to a slower than expected ramp- Source: Company data, Bloomberg, J.P Morgan
up in mobile margins. Key operating risk - regulatory intervention may lead
to greater than expected fixed line revenue erosion; MTR cuts may lead to
higher F2M substitution or competition being more aggressive than estimated.

Bloomberg: TTKOM TI; Reuters: TTKOM.IS


YTL in millions, year end Dec
FY08 FY09E FY10E FY11E
Sales 10,195 10,738 11,807 12,585
Net profit 1,627 1,605 2,120 2,479
EPS 0.46 0.46 0.61 0.71
DPS (LC) 0.78 0.43 0.44 0.54
Sales growth (%) 8.20% 5.30% 10.00% 6.60%
Net profit growth (%) -35.00% -1.40% 32.10% 16.90%
EPS growth (%) NM NM 32.10% 16.90%
ROE (%) 29% 30% 37% 39%
P/E (x) 9.5 9.7 7.3 6.3
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

270
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Turk Telekom: Summary of Financials


Profit and Loss Statement Cash flow statement
TL in millions, year end Dec FY08 FY09E FY10E FY11E FY12E TL in millions, year end Dec FY08 FY09E FY10E FY11E FY12E

Revenues 10,195 10,738 11,807 12,585 13,483 Cash EBITDA 4,342 4,296 4,872 5,322 5,839
% Change Y/Y 8.2% 5.3% 10.0% 6.6% 7.1% Interest (574) 1,454 (362) (300) (232)
EBITDA 4,342 4,296 4,872 5,322 5,839 Tax (509) (467) (465) (508) (667)
% Change Y/Y 1.6% -1.0% 13.4% 9.3% 9.7% Other 557 (2,193) 5 25 59
EBITDA Margin 42.6% 40.0% 41.3% 42.3% 43.3% Cash flow from operations 3,816 3,090 4,049 4,539 4,999
EBIT 2,710 2,519 2,947 3,287 3,860
% Change Y/Y 5.6% -7.0% 17.0% 11.5% 17.4% Capex PPE (1,330) (2,216) (1,898) (1,959) (1,979)
EBIT Margin 26.6% 23.5% 25.0% 26.1% 28.6% Net investments 426 (135) 0 0 0
Net Interest (574) 1,454 (362) (300) (232) CF from investments (1,330) (2,216) (1,898) (1,959) (1,979)
PBT 2,136 2,072 2,586 2,987 3,627 Dividends (2,744) (1,490) (1,539) (1,899) (2,202)
% change Y/Y -28.3% -3.0% 24.8% 15.5% 21.5% Share (buybacks)/ issue - - - - -
Net Income (clean) 1,627 1,605 2,120 2,479 2,960
% change Y/Y -35.0% -1.4% 32.1% 16.9% 19.4% CF to Shareholders 2,744 1,490 1,539 1,899 2,202
Average Shares 3,500 3,500 3,500 3,500 3,500 FCF to debt (258) (616) 612 681 817
Clean EPS 0.46 0.46 0.61 0.71 0.85
% change Y/Y NM NM 32.1% 16.9% 19.4% OpFCF (EBITDA - PPE) 2,586 2,215 2,974 3,363 3,860
DPS 0.78 0.43 0.44 0.54 0.63 EFCF pre Div, PPE 2,485 874 2,151 2,580 3,019

Balance sheet Ratio Analysis


TL in millions, year end Dec FY08 FY09E FY10E FY11E FY12E TL in millions, year end Dec FY08 FY09E FY10E FY11E FY12E

Cash and cash equivalents 1,042 1,124 945 1,007 1,079 EBITDA margin 42.6% 40.0% 41.3% 42.3% 43.3%
Accounts Receivables 1,485 1,756 1,907 2,020 2,151 EBIT Margin 26.6% 23.5% 25.0% 26.1% 28.6%
ST financial assets 0 25 25 25 25 Net profit margin 16.0% 14.9% 18.0% 19.7% 22.0%
Others 471 641 704 751 804 Capex/sales 13.1% 20.6% 16.1% 15.6% 14.7%
Current assets 2,998 3,545 3,581 3,803 4,059 Depreciation/Sales 16.0% 16.5% 16.3% 16.2% 14.7%
LT investments 3,384 3,736 3,736 3,736 3,736
Net fixed assets 6,277 6,202 6,176 6,100 6,100 Revenue growth 8.2% 5.3% 10.0% 6.6% 7.1%
Total assets 12,659 13,483 13,492 13,638 13,894 EBITDA Growth 1.6% -1.0% 13.4% 9.3% 9.7%
ST loans 1,291 1,545 1,653 1,762 1,888 EPS Growth NM NM 32.1% 16.9% 19.4%
Payables 932 604 664 708 758
Others 1,326 1,742 1,915 2,041 2,187 Net debt/EBITDA 0.6 0.7 0.5 0.3 0.2
Total current liabilities 3,549 3,891 4,232 4,511 4,833 CF to Shareholders 2,744 1,490 1,539 1,899 2,202
Long term debt 2,960 3,231 2,332 1,604 733 FCF to debt (258) (616) 612 681 817
Other liabilities 1,037 928 928 928 928
Total liabilities 7,546 8,050 7,492 7,043 6,494 OpFCF (EBITDA - PPE) 2,586 2,215 2,974 3,363 3,860
Shareholders' equity 5,114 5,433 6,000 6,595 7,400 EFCF pre Div, PPE 2,485 874 2,151 2,580 3,019

Source: Company reports and J.P. Morgan estimates.

271
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

UMC Overweight
NT$15.5
Price Target: NT$19
www.umc.com
Company description Taiwan
UMC (TAIEX: 2303) is the second-largest dedicated semiconductor foundry, Semiconductors
providing wafer manufacturing services. Its key customers include JJ ParkAC
MediaTek, TI, Xilinx, Novatek, Realtek, Broadcom and Infineon. (822) 758-5717
jj.park@jpmorgan.com
Post mortem J.P. Morgan Securities (Far East) Limited,
UMC’s structural changes undertaken since 3Q08 have led the company to a Seoul Branch
fundamental improvement, which includes: (1) improvement in operating
Patrick LiaoAC
efficiency; (2) focus on core business instead of largely depending on non-op
(886-2) 2725-9874
contribution; (3) more favorable margin outlook; (4) better recognition from patrick.kh.liao@jpmorgan.com
the top-tier clients in 65nm production; and (5) solid 2nd-source strategy
J.P. Morgan Securities (Taiwan) Limited
with a disciplined capacity expansion.
Price performance
Potential for earnings upgrades NT$
19
Given the high fixed cost nature of the foundry industry, we expect UMC to 17
15
enjoy an amplified growth in its bottom line. We believe UMC will post a 13

near-breakeven profit in 2009. Hence, any small upside to its 2010 revenue 11
9
could result in a big jump in earnings outlook. 7
5
Nov -08 Feb-09 May -09 Aug-09 Nov -09

How much recovery is priced into the stock? 2303 TT Equity TWSE Index

We expect UMC’s revenue to go back to the 2007 level in 2010, supported Source: Bloomberg.

by strong growth in contribution from advanced technology. We expect the


Performance
robust demand from emerging markets to be one of the major drivers for the
1M 3M 12M
2010 pick-up; however, this may have not been priced in so far.
Absolute (%) -1.9 16.1 74.2
Relative (%) -1.6 7.2 16.9
Price target and key risks
Our Dec-10 PT of NT$19 is based on 1.1x FTM (Dec-11E) book, as we Source: Bloomberg.

believe the company may no longer need to trade at a discount to book, given
Company data
further improvement in its operation efficiency and better outlook for 52-week range (NT$) 6.6-17.2
profitability. A key risk to our PT is a weakening end-demand in 4Q09. Mkt cap. (NT$ B) 201.3
Mkt cap. (US$ B) 6.19
Avg daily value (US$MM) 96.1
Avg daily volume (MM) 40.7
Shares O/S (MM) 12,988
Date of price 5-Nov-09
Index: TAIEX 7,417.5
Free float (%) 50
Exchange rate 32.5
Source: Bloomberg.
Bloomberg: 2330 TT; Reuters: 2303.TW
NT$ in billions, year-end December
FY08 FY09E FY10E FY11E
Sales 92.5 88.5 107.0 117.1
Net profit -22.3 2.8 12.8 16.9
EPS (NT$) -1.76 0.22 1.01 1.33
FD EPS (NT$) -1.76 0.22 1.01 1.33
DPS (NT$) 0.8 0.0 0.0 0.6
Sales growth (%) (13.3%) (4.3%) 20.8% 9.4%
Net profit growth (%) (231.6%) 112.8% 350.1% 32.1%
EPS growth (%) (242.2%) 112.7% 350.0% 31.9%
ROE (%) -10.6 1.5 6.0 7.5
P/E (x) NM 69.3 15.4 11.7
FD P/E (x) NM 69.3 15.4 11.7
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

272
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

UMC: Summary of financials


NT$ in billions, year-end December
Income statement Ratio analysis
FY08A FY09E FY10E FY11E % FY08A FY09E FY10E FY11E

Revenues 93 89 107 117 Gross Margin 14.0 18.1 25.8 27.4


Cost of Goods Sold 80 72 79 85 EBITDA margin 40.0 42.7 42.2 41.2
Gross Profit 13 16 28 32 Operating Margin -0.4 3.8 11.9 13.3
R&D Expenses 8 8 10 11 Net Margin -24.1 3.2 12.0 14.5
SG&A Expenses 5 4 5 6 R&D/sales 8.9 9.3 8.9 9.1
Operating Profit (EBIT) 0 3 13 16 SG&A/Sales 5.5 5.1 5.0 4.9
EBITDA 37 38 45 48
Interest Income 0.6 0.2 0.3 0.4 Sales growth -13.3 -4.3 20.8 9.4
Interest Expense 0.1 0.1 0.2 0.2 Operating Profit Growth -105.9 939.4 279.7 22.6
Investment Income (Exp.) -10.6 -1.3 0.6 1.8 Net profit growth -231.6 112.8 350.1 32.1
Non-Operating Income (Exp.) -10.8 1.5 0.8 1.2 EPS (Reported) growth -229.4 112.7 350.0 31.9
Earnings before tax -21 4 14 19 EPS (Adjusted) growth -242.2 112.7 350.0 31.9
Tax 1 1 1 2 Interest coverage (x) -6.5 28.5 71.9 84.1
Net Income (Reported) -22 3 13 17 Net debt to total capital -15.4 -18.6 -20.7 -19.9
Net Income (Adjusted) -22 3 13 17 Net debt to equity -16.1 -19.4 -21.5 -20.6
NT$
EPS (Reported) -1.76 0.22 1.01 1.33 Asset Turnover 44.5 37.6 42.7 44.5
EPS (Adjusted) -1.76 0.22 1.01 1.33 Working Capital Turns (X) 2.7 1.8 1.9 2.0
BPS 14.23 16.31 17.31 18.06 ROE -10.6 1.5 6.0 7.5
DPS 0.80 0.00 0.00 0.58 ROIC 2.1 2.3 10.0 11.2
Shares Outstanding (bn) 13 13 13 13 CORE ROIC 2.1 2.7 11.8 13.3

Balance sheet Cash flow statement


FY08A FY09E FY10E FY11E FY08A FY09E FY10E FY11E

Cash and cash equivalents 38 49 56 57 Net Income -22 3 13 17


Accounts receivable 8 16 17 18 Depr. & Amortisation 37 34 32 33
Inventories 8 9 9 10 Change in working capital 0 -7 2 -1
Others 1 3 3 3 Other 0 0 0 0
Current assets 55 76 84 88 Cash flow from operations 15 31 47 48

LT investments 47 69 69 71 Capex -11 -16 -35 -36


Net fixed assets 100 84 91 99 Disposal/ (purchase) 43 -24 -5 -6
Others 6 6 6 6 Cash flow from investing 32 -40 -40 -41
Total assets 208 235 250 263 Free cash flow 4 14 12 13

Liabilities Equity raised/ (repaid) -4 0 0 0


ST loans 0 8 8 8 Debt raised/ (repaid) -22 0 0 0
Payables 2 4 5 6 Other -16 20 0 1
Others 9 11 12 14 Dividends paid -9 0 0 -7
Total current liabilities 11 23 25 28 Cash flow from financing -52 20 0 -6
Long term debt 8 1 1 1
Other liabilities 4 4 4 4 Net change in cash -4 11 7 1
Total liabilities 23 27 30 32 Beginning cash 42 38 49 56
Shareholders' equity 185 208 221 231 Ending cash 38 49 56 57

Source: Company, J.P. Morgan estimates.

273
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Unitech Ltd Overweight


Rs85.2
Price Target: Rs120.00
www.unitechgroup.com

Company description India


Unitech is one of the largest real estate developers in the country with a track Property
record in real estate development of more than 30 years. Unitech has Saurabh KumarAC
developed 1,200 acres of land in five townships with over 12mqft of real (91-22) 6157-3590
estate development in the past three years. saurabh.s.kumar@jpmorgan.com
J.P. Morgan India Private Limited
Post mortem
Unitech is the best play on a pan-India affordable housing theme, given its Price performance
primary exposure to the housing segment (70% of NAV). UT’s sales 300
bookings in 1HFY10 have been impressive. It has pre-sold over Rs40 billion 200
of projects/10.1msf of area, placing it well on course to achieve the FY10 100
sales target of 20msf. Cash flow issues are now sorted out with UT cutting its 0
net debt by almost 40% from peak levels. Historically, 1/1/09 4/1/09 7/1/09 10/1/09
execution/transparency have been issues with the company. Incrementally,
we see these concerns abating as deliveries have started picking up pace (8-9 UT share price Sensex
msf expected in FY10) and most of the scale-up happening in Uni-homes
Source: Bloomberg.
(easier product to complete).
Performance
Potential for earnings upgrades
1M 3M 12M
UT’s contract sales in 1HFY10 are at Rs 40 billion (10.1 msf). This is 58%
Absolute (%) -22.1 -12.7 46.8
of our FY10 sales bookings estimate of Rs 72 billion, implying an upside
Relative (%) -15.0 -13.2 -2.9
risk to our and consensus EPS numbers if sales momentum in 2H sustains.
Further, UT’s aggressive Mumbai entry (Rs15 billion contracted sales till Source: Bloomberg.

Sep-09) via the SRA model looks to be under-appreciated and though these
sales add to cash flows immediately, they will most likely reflect in EPS Company data
numbers FY12 onwards. 52-week range (Rs) 21.7-118.4
Mkt cap. (Rs MM) 203,337
How much recovery is priced into the stock? Mkt cap. (US$MM) 4,326
UT is trading at 1.6x FY11E P/B and 13x FY11E P/E with an EPS growth of Avg daily value (US$MM) 151
56% over FY11E/12E. The risk reward on balance seems to be favorable Avg daily volume (MM) 73
with the market discounting a fair amount of concern on execution and Shares O/S (MM) 2,386
bookings cancellations in future. Valuation cushion and healthy ongoing Date of price 5-Nov-09
sales momentum should see the share price re-rating to Rs120 levels. Index: Sensex 16064
Price target and key risks Free float (%) 56
We have an Overweight recommendation on Unitech with an SOTP-based Exchange rate 47.0
Mar-10 price target of Rs120. Key risks to our price target include: (a) Source: Bloomberg.

approval risk in new market entry; (b) execution delays; and (c) de-rating of
the physical property market.
Bloomberg: UT IN; Reuters: UNTE.BO
Rs in millions, year-end March
FY08 FY09 FY10E FY11E FY12E
Sales 41,152 28,502 38,215 50,946 71,956
Net profit 16,613 12,010 13,261 15,476 24,445
EPS (Rs) 10.2 7.4 4.2 6.5 10.2
P/E (x) 8.3 11.5 20.4 13.1 8.3
ROE (%) 59 27 17 13 18
ROCE (%) 25 10 10 10 15
Net debt/Equity (%) 189 163 32 12 -7
P/B 3.8 2.7 1.9 1.6 1.4
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

274
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Unitech Ltd: Summary of financials


Rs in millions, year-end March
Income Statement Cash flow statement
FY08 FY09 FY10E FY11E FY12E FY08A FY09 FY10E FY11E FY12E

Revenues 41,152 28,502 38,215 50,946 71,956 EBIT 21,833 15,284 19,395 21,970 32,358
% change Y/Y 25% -31% 34% 33% 41% Depreciation 205 209 234 262 294
Change in working capital (33,118) (3,496) (900) 12,275 12,994
EBITDA 22,038 15,493 19,629 22,232 32,652 Taxes (3,986) (2,437) (4,180) (5,147) (8,574)
% change Y/Y 10% -30% 27% 13% 47% Others 2,716 4,119 1,246 1,753 2,162
EBITDA Margin (%) 54% 54% 51% 44% 45% Cash flow from operations (12,350) 13,680 15,796 31,113 39,233
EBIT 21,833 15,284 19,395 21,970 32,358 Capex (22,964) (2,157) (2,191) (3,206) (5,627)
% change Y/Y 10% -30% 27% 13% 47% Change in investments (8,614) (5,028) (2,972) - -
EBIT Margin (%) 53% 54% 51% 43% 45% Interest (2,804) (5,500) (3,200) (3,100) (1,500)
Net financial income (1,155) (846) (1,980) (1,380) 620 Free cash flow (46,731) 994 7,434 24,807 32,106
Earnings before tax 20,678 14,438 17,415 20,590 32,978
% change Y/Y 15% -30% 21% 18% 60% Equity raised/ (repaid) - 0 46,202 - -
Tax (3,986) (2,437) (4,180) (5,147) (8,574) Debt raised/ (repaid) 45,718 5,034 (40,558) (16,000) (19,000)
as % of EBT 19% 17% 24% 25% 26%
Net Income (adjusted) 16,613 12,010 9,978 15,476 24,445 Dividends paid (406) (162) (239) (263) (1,193)
% change Y/Y 27% -28% -17% 55% 58% Beginning cash 10,227 14,083 6,448 15,099 18,644
Shares Outstanding 1623 1623 2386 2386 2386 Ending cash 14,083 6,448 15,099 18,644 24,556
EPS (adjusted) 10.2 7.4 4.2 6.5 10.2
% change Y/Y 27% -28% -43% 55% 58%
Balance sheet Ratio Analysis
FY08 FY09 FY10E FY11E FY12E %, year-end Mar FY08A FY09 FY10E FY11E FY12E

Cash 14,083 6,448 15,099 18,644 24,556 EBITDA margin 54% 54% 51% 44% 45%
Accounts receivable 36,755 37,876 40,874 44,319 49,130 EBIT margin 53% 54% 51% 43% 45%
Inventories 136,076 157,756 169,510 178,710 188,331 Net profit margin 40% 42% 26% 30% 34%
Others 148.35 107.90 107.90 107.90 107.90
Current assets 187,062 202,189 225,591 241,780 262,125
Sales growth 25% -31% 34% 33% 41%
Total Investments 14,165 15,808 18,780 18,780 18,780 Net profit growth 27% -28% -17% 55% 58%
Net fixed assets 31,442 33,258 35,214 38,157 43,490
Liabilities 82,562 101,827 115,679 140,598 168,025
Provisions 9,350 297 297 297 297
Total current liabilities 91,912 102,124 115,976 140,895 168,322 Interest coverage (x) 7.8 2.8 6.1 7.1 21.6
Total assets 141,883 160,803 175,281 169,494 167,746 Net debt to total capital 48% 52% 20% 9% -6%
Net debt to equity 189% 163% 32% 12% -7%
Total debt 85,524 90,558 50,000 34,000 15,000 Sales/assets 0.3 0.2 0.2 0.3 0.4
Other liabilities 20,354 18,550 17,050 12,050 6,050 Assets/equity 3.9 3.1 1.6 1.4 1.1
Total liabilities 105,878 109,108 67,050 46,050 21,050 ROE 59% 27% 17% 13% 18%
Shareholders' equity 36,005 51,695 108,231 123,444 146,696 ROCE 25% 10% 10% 10% 15%
BVPS 22.2 31.8 45.4 51.7 61.5
Source: Company data, J.P. Morgan estimates.

Unitech: NAV assuming sale/lease till FY13 and remaining at market value of land
FY10 Per share
NPV of net bookings for 3 years 95,820 37
Rented projects NPV at 11.5% cap rate 12,115 5
Market value of land (assuming 30-40% margin) 215,289 82
Total GAV 323,224 124
UCP value of launched projects 5,472 2
Other UCP projects 2,800 1
Mumbai land 14,000 5
Telecom value at book value of investments 5,500 2
Unpaid land ex Dankuni
(16,422) (6)
Net debt
(35,504) (14)
Warrant issuance 11,603 4
Total Value 310,673 119
Source: J.P. Morgan estimates.

275
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

United Spirits Overweight


Rs1,091.10
www.unitedspirits.in Price Target: Rs1,140.00

Company description India


United Spirits is the leading spirits company in India with over 55% market Beverages
share. It strengthened its hold over the industry with the acquisition of Shaw
Latika Chopra, CFAAC
Wallace’s spirits business. Whisky accounts for over 60% of its sales (91-22) 6157-3584
volume. Other products include rum, brandy, vodka and wine. In 2007 it latika.chopra@jpmorgan.com
acquired bulk scotch manufacturer Whyte & Mackay based in Scotland.
J.P. Morgan India Private Limited
Post mortem
We see United Spirits as an attractive proxy to the steadily growing domestic Vineet Sharma, CFA
spirits market with high entry barriers, with a pan-India presence, popular (852) 2800-8523
brand portfolio across price points, and dominant market share of over 55%. vineet.k.sharma@jpmorgan.com
While we have always been bullish on the company’s long-term growth
J.P. Morgan Securities (Asia Pacific)
prospects, we now find cyclical concerns about high financial leverage and Limited
input cost concerns abating. With the recent fund-raising of US$350MM and
treasury stake sale proceeds of US$186MM, leverage concerns have been Price performance
alleviated to a large extent. Net debt/equity has decreased from 3x in FY09 Rs
to <1x for FY10E. 1400
1200

Potential for earnings upgrades 1000


800

Rs
While we don’t anticipate much upside risk to FY10 earnings, lower interest 600
400

costs and better margin profile could help push up FY11 and FY12 earnings.
200
0
Oct-08 Jan-09 Apr-09 Jul-09 Oct-09
How much recovery is priced into the stock? UNSP.BO Share Price

UNSP had been a significant underperformer in the Indian consumer space


YTD on account of three key concerns: (1) high financial leverage; (2) steep Source: Bloomberg.

raw material inflation; and (3) high group leverage overhang. Except for the Performance
third issue, other concerns appear to be abating. Financial leverage has 1M 3M 12M
reduced and input costs seem to have peaked out. Hence, we would expect Absolute (%) 19.6 6.4 26.5
the stock to outperform the consumer space over next 12-18 months. Relative (%) 24.3 5.3 -32.2
Source: Bloomberg.
Price target and key risks
Company data
We have sum-of-the-parts-based Sept-10 price target of Rs1,140. We use an
425.65 –
EV/EBITDA target multiple of 13x for the domestic business, which is at a 52-week range (Rs) 1,106
20% premium to global spirits companies, and an 8x EV/EBITDA target Mkt cap. (Rs MM) 137,036
multiple for the Whyte & Mackay business, which is at a 25% discount to Mkt cap. (US$ MM) 2914
global spirits valuations. Key risks to our PT and rating are: (1) a sharp rise Avg daily value (US$ MM) 19.5
in ENA prices if sugar cane crop this year comes in significantly lower; (2) a Avg daily volume (MM) 1.0
significant slowdown in domestic liquor consumption; and (3) high group Shares O/S (MM) 126
leverage and promoter’s pledged stake in UNSP. Date of price 05 Nov 09
Index: Sensex 16063.9
Free float (%) 63
Exchange rate 47.0
Source: Bloomberg.
Bloomberg: UNSP IN; Reuters: UNSP.BO
Rs MM, year-end March FY09 FY10E FY11E FY12E
Revenue 54,681 62,594 71,556 80,460
Net profit 1,872 3,691 5,860 7,643
EPS (Rs) 21.0 30.2 48.0 62.6
DPS (Rs) 2.4 3.0 4.8 6.3
Net sales growth (%) 18 14 14 12
Net profit growth (%) 14 97 59 30
EPS growth (%) 12 44 59 30
ROCE (%) 11 12 14 16
P/E (x) 50.5 35.1 22.1 16.9
P/BV (x) 4.0 2.5 2.2 2.0
EV/EBITDA (X) adjusted 16.6 14.5 12.0 10.2
Dividend yield (%) 0.2 0.3 0.5 0.6
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

276
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

United Spirits: Summary of financials


Rs in millions, year-end March
Profit and loss statement Cash flow statement
FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E

Revenue 54,681 62,594 71,556 80,460 EBIT 9,966 12,270 14,679 17,190
% change Y/Y 18% 14% 14% 12% Depreciation 926 957 1,037 1,117
EBITDA 10,892 13,227 15,716 18,307 Change in working capital -4,753 -3,930 -3,260 -3,350
% change Y/Y 1% 21% 19% 16% Taxes -2,314 -2,462 -3,908 -5,097
EBITDA Margin (%) 20% 21% 22% 23% Interest 7,176 6,115 4,909 4,449
EBIT 9,966 12,270 14,679 17,190 Others -8,646 -6,115 -4,909 -4,449
% change Y/Y -1% 23% 20% 17% Cash flow from operations 2,354 6,835 8,548 9,860
EBIT Margin (%) 18% 20% 21% 21%
Interest expense (Net) 7,176 6,115 4,909 4,449 Capex -952 -1,000 -2,000 -2,000

Earnings before tax 2,790 6,155 9,770 12,741 Free cash flow 1,402 5,835 6,548 7,860
% change Y/Y -39% 121% 59% 30% Equity raised/ (repaid) 50 25,109 0 0
Tax 916 2,462 3,908 5,097 Debt raised/ (repaid) -2,294 -22,163 -2,700 -2,700
Associates/Minority interest -3 -2 -2 -2 Other 37 -6,608 -5,401 -4,940
Net Income (Adjusted) 1,872 3,691 5,860 7,643 Dividends paid -143 -369 -586 -764
% change Y/Y 14% 97% 59% 30% Change in cash -948 1,805 -2,139 -544
Shares Outstanding 89 122 122 122 Beginning cash 5,437 4,489 6,294 4,155
EPS (Adjusted) 21.0 30.2 48.0 62.6 Ending cash 4,489 6,294 4,155 3,611
% change Y/Y 12% 44% 59% 30% DPS 2.4 3.0 4.8 6.3

Balance sheet Ratio analysis


FY09 FY10E FY11E FY12E % FY09 FY10E FY11E FY12E

Cash and cash equivalents 4,490 6,294 4,155 3,611 EBITDA margin 20% 21% 22% 23%
Accounts receivable 8,880 10,289 11,763 13,226 EBIT margin 18% 20% 21% 21%
Inventories 17,458 20,579 23,525 26,453 Net profit margin 3% 6% 8% 9%
Others 9,544 10,499 11,549 12,703
Current assets 40,372 47,662 50,992 55,993

Goodwill 44,738 44,738 44,738 44,738 Sales growth 18% 14% 14% 12%
Investments 9,501 9,501 9,501 9,501 Net profit growth 14% 97% 59% 30%
Net fixed assets 16,558 16,601 17,564 18,448 EPS growth 12% 44% 59% 30%
Others 7,249 7,249 7,249 7,249
Total assets 118,418 125,751 130,044 135,929
Interest coverage (x) 1.4 2.0 3.0 3.9
Liabilities Net debt to total capital 0.7 0.6 0.4 0.4
Payables 13,879 15,434 17,644 19,839 Net debt to equity 2.9 1.5 0.8 0.7
Others 2,584 2,584 2,584 2,584 Sales/assets 0.5 0.6 0.7 0.7
Total current liabilities 16,463 18,019 20,228 22,424 Assets/equity 4.6 2.8 2.0 1.9
Total Loans 73,605 51,442 48,742 46,042 ROE 8% 10% 11% 13%
Other liabilities 4,494 4,004 3,513 3,022 ROCE 11% 12% 14% 16%
Total liabilities 94,562 73,465 72,484 71,489
Shareholders' equity 23,856 52,287 57,561 64,440
BVPS 267.4 427.9 471.1 527.4
Source: Company, J.P. Morgan estimates.

Sum-of-the-parts valuation for UNSP


Target EV/EBITDA Multiple Value
UNSP - Domestic 13 145,416
Whyte & Mackay 8 37,650
Total EV 183,066
Net debt 43,510
Mcap 139,556
Target Price 1,142
Source: J.P. Morgan estimates.

277
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Urbi Overweight
Ps25.99
Price Target: Ps34.00
www.urbi.com

Company description Mexico


Urbi is one of the largest Mexican lower-income homebuilders, with more Mexican Homebuilders
than 40k units sold last year and over 300k units built during 28 years of Adrian E HuertaAC
operations. The company also has the highest margins among its peers, with (52 81) 8152-8720
EBITDA margin at 29.9% in 9M09. adrian.huerta@jpmorgan.com

Post mortem J.P. Morgan Casa de Bolsa, S.A. de C.V.,


J.P. Morgan Grupo Financiero
Despite the expected decrease of 13% in revenues this year, we expect Urbi
to growth more than its peers in 2010 given (1) its exposure to the northern Performance
states of Mexico, which are linked to a recovery in the US; (2) Urbi’s 1M 3M 12M
potential to add middle-income and high-income products if demand Absolute (%) -12 -9 27
improves; and (3) its clear expansion strategy. Relative (%) -13 -18 -25
Potential for earnings upgrades Source: Bloomberg.
We believe that Urbi has a business model that should lead to higher growth
vs its peers. Despite a more conservative growth outlook for this year, the Company data
company has not stopped its plans to open six new SBUs this year (it had 48 52-week range (LC) 18.00-29.56
SBUs last year), most of them toward the end of the year, and another 5-6 in Mkt cap. (LCMM) 25,406
2010. Mkt cap. (US$MM) 1,979
Avg daily value (US$MM) 4.1
How much recovery is priced into the stock?
Avg daily volume (MM) 2.0
Urbi is our top pick among the MX HB. The stock has been derated in the
Shares O/S (MM) 976.45
past 12 months and now is the cheapest stock on a P/BV basis despite its
strong FCF. We believe that the market has not yet given Urbi full Date of price 11/25/2009
recognition for its growth strategy, exposure to northern states and strong Index: Bolsa 31,364
free cash flow generation. Free float (%) 46%
Exchange rate 12.84
Price target and key risks Source: Bloomberg.
We rate Urbi Overweight with a Dec-10 price target of Ps34, which is the
average of our DCF-based valuation and GGM-based valuation. The COE of
11.9% is based on a beta of 1.20, country risk of 2.4%, and a risk-free rate of
3.5%, resulting in a WACC of 11.8%. As downside risks to our rating we
cite lower-than-expected ROEs and revenue growth, the result of slower-
than-expected expansion.

Bloomberg: Urbi* MM Reuters: Urbi* MM.SA


LC in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 15,003 13,114 15,738 18,125
Net profit 2,168 1,922 2,541 3,074
EPS (LC) 2.22 1.97 2.60 3.15
FD EPS (LC) 2.22 1.97 2.60 3.15
DPS (LC) - - - -
Sales growth (%) 17.4% -12.6% 20.0% 15.2%
Net profit growth (%) 18.3% -11.4% 32.2% 21.0%
EPS growth (%) 18.3% -11.4% 32.2% 21.0%
ROE (%) 15.1% 11.8% 13.8% 14.5%
P/E (x) 11.7 13.2 10.0 8.3
FD P/E (x) 11.7 13.2 10.0 8.3
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

278
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Urbi: Summary of financials


Profit and loss statement Cash flow statement
LC in millions, year-end December LC in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 15,003 13,114 15,738 18,125 EBIT 3,171 2,904 3,663 4,392
% change Y/Y 17% -13% 20% 15% Depreciation & amortization (212) (212) (235) (249)
Gross margin (%) 38.0% 39.2% 39.2% 39.2% Change in working capital (4,492) 851 (2,210) (1,834)
EBITDA 4,160 3,930 4,846 5,589 Taxes (917) (813) (1,075) (1,301)
% change Y/Y 19.4% -5.5% 23.3% 15.3% Cash flow from operations (2,904) 2,258 996 1,489
EBITDA margin (%) 27.7% 30.0% 30.8% 30.8% Capex (300) (328) (393) (453)
EBIT 3,171 2,904 3,663 4,392 Disposal/(purchase) 0 0 0 0
% change Y/Y 11.2% -8.4% 26.1% 19.9% Net interest (109) (193) (70) (40)
EBIT margin (%) 21.1% 22.1% 23.3% 24.2% Free cash flow (728) 3,834 1,585 1,996
Net interest (109) (193) (70) (40) Equity raised/(repaid) 0 0 0 0
Earnings before tax 3,085 2,735 3,616 4,375 Debt raised/(repaid) 1,808 1,200 0 0
% change Y/Y 17.4% -11.4% 32.2% 21.0% Other 0 0 0 0
Tax (917) (813) (1,075) (1,301) Dividends 0 0 0 0
as % of EBT 29.7% 29.7% 29.7% 29.7% Beginning cash 3,381 1,985 5,125 5,728
Net income (reported) 2,168 1,922 2,541 3,074 Ending cash 1,985 5,125 5,728 6,764
% change Y/Y 18.3% -11.4% 32.2% 21.0% DPS (LC) - - - -
Shares O/S (MM) 976 976 976 976 Source: Company, J.P. Morgan estimates.
EPS (reported) (LC) 2.22 1.97 2.60 3.15
Source: Company, J.P. Morgan estimates.

Ratio analysis
%, year-end December
Balance sheet
FY08 FY09E FY10E FY11E
LC in millions, year-end December EBITDA margin 27.7% 30.0% 30.8% 30.8%
FY08 FY09E FY10E FY11E Operating margin 21.1% 22.1% 23.3% 24.2%
Cash and cash equivalents 1,985 5,125 5,728 6,764 Net profit margin 14.5% 14.7% 16.1% 17.0%
Accounts receivable 11,883 10,240 11,857 13,159 SG&A/sales 10.3% 9.2% 8.4% 8.4%
Inventories 11,178 11,505 12,470 13,341 Sales growth 17.4% -12.6% 20.0% 15.2%
Others 963 1,166 1,166 1,166 Net profit growth 18.3% -11.4% 32.2% 21.0%
Current assets 28,666 30,491 33,677 36,886 Sales per share growth 17.4% -12.6% 20.0% 15.2%
LT investments 0 0 0 0 EPS growth 18.3% -11.4% 32.2% 21.0%
Net fixed assets 510 733 891 1,096 Interest coverage (x) 0.00 0.00 0.00 0.00
Total assets 30,114 31,889 35,233 38,647 Net debt to total capital 16.9% 6.6% 3.7% -0.2%
Liabilities Net debt to equity 22.9% 9.2% 5.0% -0.2%
ST loans 988 1,678 1,678 1,678 Sales/assets 0.50 0.41 0.45 0.47
Payables 2,663 2,199 2,572 2,911 EBIT margin 21.1% 22.1% 23.3% 24.2%
Others 1,014 621 621 621 ROCE 15.9% 11.6% 13.4% 12.4%
Total current liabilities 5,977 5,185 5,558 5,897 Assets/equity (x) 1.96 1.85 1.79 1.69
Long-term debt 4,525 5,035 5,035 5,035 ROI 15.9% 11.6% 13.4% 12.4%
Other liabilities 4,235 4,474 4,904 4,904 ROE 15.1% 11.8% 13.8% 14.5%
Total liabilities 14,737 14,695 15,498 15,837 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 15,377 17,194 19,736 22,810
BVPS (LC) 15.75 17.61 20.21 23.36
Source: Company, J.P. Morgan estimates.

279
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Vakifbank Overweight
Price: TRY 3.2
Price Target: TRY 5.4
www.vakifbank.com
Company description CEEMEA Banks
Vakifbank is the 6th largest bank (by total assets) in Turkey; the 2nd largest Paul FormankoAC
publicly traded state bank with over 500 branches, 9,000 employees and (+44) 207-325-6028
c.TRY35bn in loans & c. TRY43bn in customer deposits. The GDF (Turkish paul.formanko@jpmorgan.com
Prime Ministry’s General Directorate of Foundations) manages foundations J.P. Morgan Securities Ltd.
owning c.58% of Vakifbank shares. Vakifbank is primarily exposed to the
corporate sector (c. 55% of loan book), with increasing penetration into retail Price Performance
and consumer segments.
4.0

Post mortem 3.0


TL
Vakifbank’s key strengths include i) strong liquidity (L/D ratio of 82%, 2.0
mostly in TRY) ii) stable deposit base (YTD growth 15%, vs sector c.8%)
1.0
iii) solid capital base with 09E tier 1 of 14.5%, supporting dividends (09E
Nov-08 Feb-09 May-09 Aug-09 Nov-09
25% payout). In our view Vakifbank is adequately positioned for growth into
2010/11 and likely to outpace some of its peers (trend visible in Q3 with Source: Bloomberg
c.4% loan growth; capturing 25% of retail mortgage originations), due to its
strong local deposit base. We believe loan growth (especially in high margin Performance
segments), coupled with normalization of provisions, should drive 1M 3M 12M
Absolute (%) -19.2 -8.6 199.1
profitability into 2010 & 2011.
Source: Bloomberg

Potential for earnings upgrades


Company data
JPM expects consensus upgrades throughout 2010, supported by macro 52-week range (TL) 4.12-1.04
recovery, volume growth (2010-09E loan growth at 22%), capital generation Mkt cap. (YTL bn) 8
and asset quality stabilization (11E NPLs at 5% vs 6.2% in 2009E) Mkt cap. (US$BN) 5.4
Avg daily value (US$MM) 37.1
Avg daily volume (MM) 17.5
How much recovery is priced into the stock? Shares O/S (MM) 2,500
Despite its strong performance (YTD up 174% vs sector 86%), Vakif trades Date of price 23 Nov 09
at a material discount (10E P/NAV 1x vs sector at 1.5x). We believe rerating Index (ISE): 45801.4
Free float (%) 25.18%
into 2010 would drive further share price performance (c.70% upside). Exchange rate(USD/TRY) 1.5
Source: Bloomberg
Price target and key risks
Our Dec-10 PT of TRY5.4 is based on the Gordon growth model (19% ROE,
15% COE & 5% LT growth rate). Key risks include further economic
deterioration and the oil price hitting >$110, negatively impacting CAR.

Bloomberg: VAKBN TI; Reuters: VAKBN.IS


TRY in millions, year-end Dec
FY08 FY09E FY10E FY11E
Pre-provision op. profit, mn 1,550 2,443 2,460 2,912
Net profit, mn 753 1,140 1,362 1,811
EPS 0.30 0.46 0.54 0.72
EPS growth (%) -17% 51% 19% 33%
Tier I ratio (%) 14.6% 14.5% 13.2% 12.3%
NPL ratio (%) 4.6% 6.2% 6.1% 5.0%
Dividend yield 0.0% 3.6% 6.0% 9.1%
RONAV (%) 13.8% 18.4% 18.9% 22.1%
P/E (x) 10.6 7.0 5.9 4.4
P/NAV 1.4 1.2 1.0 0.9
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

280
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Vakifbank: Summary of Financials


Profit and Loss Statement Ratio Analysis
TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E
Per Share Data
Net interest income 1,676 1,975 3,067 3,062 3,444 EPS Reported 0.43 0.30 0.46 0.54 0.72
% Change Y/Y 5.7% 17.8% 55.3% (0.2%) 12.5% EPSAdjusted 0.36 0.30 0.46 0.54 0.72
Non-interest income 820 894 906 1,066 1,285 % Change Y/Y 7.1% (16.9%) 51.4% 19.5% 32.9%
Fees & commissions 360 466 476 571 713 DPS 0.00 0.00 0.11 0.19 0.29
% change Y/Y 25.0% 29.3% 2.0% 20.0% 25.0% % Change Y/Y (100.0%) - - 67.3% 51.9%
Trading revenues 48 51 140 144 167 Dividend yield 0.0% 0.0% 3.7% 6.1% 9.3%
% change Y/Y 4.5% 8.1% 172.6% 3.0% 16.0% Payout ratio 0.0% 0.0% 25.0% 35.0% 40.0%
Other Income 266 338 220 260 290 BV per share 2.09 2.27 2.69- 3.06 3.50
Total operating revenues 2,496 2,869 3,973 4,128 4,730 NAV per share 2.09 2.27 2.69- 3.06 3.50
% change Y/Y 4.5% 14.9% 38.5% 3.9% 14.6% Shares outstanding 2,500.0 2,500.0 2,500.0- 2,500.0 2,500.0
Admin expenses -537 -762 -884 -964 -1,050
% change Y/Y (8.4%) 41.9% 16.0% 9.0% 9.0% Return ratios
Other expenses (458) (557) (646) (704) (768) RoRWA 3.5% 2.2% 2.8% 2.8% 3.0%
Pre-provision operating profit 1,502 1,550 2,443 2,460 2,912 Pre-tax ROE 26.8% 17.0% 23.0% 23.7% 27.6%
% change Y/Y 4.3% 3.2% 57.6% 0.7% 18.3% ROE 18.7% 13.8% 18.4% 18.9% 22.1%
Loan loss provisions -368 -624 -1,017 -757 -648 RoNAV 18.7% 13.8% 18.4% 18.9% 22.1%
Other provisions - - - - -
Earnings before tax 1,299 925 1,425 1,703 2,264 Revenues
% change Y/Y 27.6% (28.8%) 54.0% 19.5% 32.9% NIM (NII / RWA) 4.3% 4.3% 5.5% 4.8% 4.7%
Tax (charge) (227) (172) (285) (341) (453) Non-IR / average assets 2.1% 1.9% 1.6% 1.7% 1.8%
% Tax rate 17.5% 18.6% 20.0% 20.0% 20.0% Total rev / average assets 6.3% 6.1% 7.0% 6.4% 6.5%
Minorities 0 0 0 0 0 NII / Total revenues 67.1% 68.8% 77.2% 74.2% 72.8%
Net Income (Reported) 1,072 753 1,140 1,362 1,811 Fees / Total revenues 14.4% 16.3% 12.0% 13.8% 15.1%
Trading / Total revenues 1.9% 1.8% 3.5% 3.5% 3.5%

Balance sheet
TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E

ASSETS Cost ratios


Net customer loans 23,470 30,502 34,414 41,494 50,878 Cost / income 39.8% 46.0% 38.5% 40.4% 38.4%
% change Y/Y 30.1% 30.0% 12.8% 20.6% 22.6% Cost / assets 2.3% 2.5% 2.5% 2.5% 2.3%
Loan loss reserves 1,143 1,371 1,879 2,238 2,521 Staff numbers 8,700 9,567 10,332 11,159 12,052
Investments 11,508 12,039 15,076 15,478 15,927
Other interest earning assets 6,302 7,910 9,303 8,511 9,368 Balance Sheet Gearing
% change Y/Y - - - - - Loan / deposit 85.3% 85.9% 83.2% 90.4% 97.5%
Average interest earnings assets 38,875 46,394 55,496 63,460 72,730 Investments / assets 27.1% 23.1% 24.9% 22.9% 20.4%
Goodwill - - - - - Loan / assets 58.0% 61.1% 59.3% 64.9% 68.5%
Other assets 1,479 1,788 1,865 2,018 2,130 Customer deposits / liabilities 77.6% 79.8% 80.2% 81.0% 79.2%
Total assets 42,408 52,193 60,609 67,449 78,241 LT Debt / liabilities 0.0% 0.0% 0.0% 0.0% 0.0%

LIABILITIES Asset Quality / Capital


Customer deposits 28,863 37,120 43,211 48,422 55,018 Loan loss reserves / loans 4.6% 4.3% 5.2% 5.1% 4.7%
% change Y/Y 16.2% 28.6% 16.4% 12.1% 13.6% NPLs / loans 4.6% 4.6% 6.2% 6.1% 5.0%
Long term funding - - - LLP / RWA 1.18% 1.66% 2.32% 1.38% 0.96%
Interbank funding 6,769 7,457 8,519 8,932 9,612 Loan loss reserves / NPLs 100.0% 94.2% 83.9% 84.5% 93.4%
Average interest bearing liabs 33,441 40,125 48,170 54,558 61,008 Growth in NPLs 14.1% 27.4% 53.9% 18.3% 1.9%
Other liabilities 1,526 1,928 2,127 2,418 4,846- RWAs 31,268 37,682 43,871 54,701 67,565
Retirement benefit liabilities - - - - - % YoY change 50.1% 20.5% 16.4% 24.7% 23.5%
Shareholders' equity 5,226 5,671 6,736 7,662 8,748 Core Tier 1 15.6% 14.6% 14.5% 13.2% 12.3%
Minorities 0 0 0 0 0 Total Tier 1 15.6% 14.6% 14.5% 13.2% 12.3%
Total liabilities & Shareholders Equity 42,408 52,193 60,609 67,449 78,241

Source: Company reports and J.P. Morgan estimates.

281
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

VanceInfo Technologies Overweight


US$17.0
Price Target: US$23.00
www.vanceinfo.com
Company description China
VanceInfo (VIT) is the largest China-based IT services vendor for the US IT and Internet
and European clients. It also earns a significant proportion of its revenue Dick WeiAC
from local clients based in China. The company provides research and (852) 2800-8535
development, application development and maintenance, and enterprise dick.x.wei@jpmorgan.com
services. J.P. Morgan Securities (Asia Pacific)
Limited
Post mortem
Price performance
The Chinese IT sector is still in its early growth phase. In 2008, VanceInfo’s
US$
revenue from entities headquartered in China grew 201% Y/Y. We expect Price Performance
VanceInfo to continue to benefit from IT spending growth in China. In
addition, we also expect VIT to benefit from the offshoring market in China 20
$
which is expected to grow at a CAGR of 23% from 2008 to 2013 versus the 10

6.2% growth for the offshore industry worldwide (according to IDC data). 0
Nov-08 Feb-09 May-09 Aug-09 Nov-09

Potential for earnings upgrades VIT share price ($

We expect gross margins to improve due to: (1) better billing rates; and (2) S&P500 (rebased)
Source: Bloomberg.
improved utilization rates, driven by higher spending from domestic and
global customers. Performance
1M 3M 12M
How much recovery is priced into the stock? Absolute (%) -5.6 2.1 107.5
The company may see an upside in its earnings as the global macros Relative (%) -7.7 -2.0 103.4
improve, from two drivers: (1) improvement in domestic demand as more Source: : Bloomberg.
MNCs increase IT spending in China to capture the higher growth of the
country; and (2) IT spending recovery in the US and Europe due to macro Company data
improvements. 52-week range (US$) 4.2-21.1
Mkt cap. (Rmb MM) 4,776
Price target and key risks Mkt cap. (US$ MM) 701
Our Dec-10 price target of US$23 is based on our DCF valuation with Avg daily value (US$MM) 7.61
WACC of 11% and 0% terminal growth rate. We assume a long-term sales Avg daily volume (MM) 0.52
growth rate of 15%. Our PT implies a PEG ratio of 1.0 on our FY11E Shares O/S (MM) 41
earnings and 09-12 EPS CAGR estimates. We believe VanceInfo should at Date of price 12-Nov-09
least trade at 1x PEG, given the positive secular growth outlook. Key Index: NYSE 7,063
downside risks to our price target are: (1) slower-than-expected growth in Free float (%) 37
macro and outsourcing activities; and (2) termination of a key account, such Exchange rate(Rmb/US$) 6.83
a Microsoft, TIBCO, or Huawei. Source: Company, Bloomberg.

Bloomberg: VIT US; Reuters: VIT


US$ in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 102.7 143.1 185.7 236.1
Net profit 16.2 20.1 27.0 35.1
GAAP EPS (US$) 0.40 0.49 0.65 0.83
Adj. EPS (US$) 0.4 0.5 0.7 0.9
DPS (US$) 0.0 0.0 0.0 0.0
Sales growth (%) 63.7 39.4 29.8 27.2
Net profit growth (%) 69.0 24.5 34.1 29.8
EPS growth (%) 79.8 23.1 31.7 28.0
ROE (%) 13.3 14.1 15.9 17.4
GAAP P/E (x) 42.6 34.6 26.2 20.5
Adj. P/E (x) 39.2 32.3 24.8 19.6
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 12 November 2009.

282
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

VanceInfo Technologies: Summary of financials


Profit and loss statement Cash flow statement
US$ in millions, year-end December US$ in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 102.7 143.1 185.7 236.1 Net Income 16.2 20.1 27.0 35.1
% change Y/Y 63.7 39.4 29.8 27.2 Depr. & Amortisation 3.7 5.4 6.6 8.0
Gross margin (%) 39.0 37.2 37.0 37.3 Change in working capital -4.7 -7.7 -5.8 -7.2
EBITDA 18.4 26.1 33.5 43.6 Other 0.2 1.4 1.5 1.6
% change Y/Y 61.8 41.6 28.5 30.0 Cash flow from operations 15.4 19.2 29.3 37.5
EBITDA margin (%) 17.9 18.2 18.1 18.5 Capex -6.2 -6.5 -9.7 -11.6
EBIT 14.7 20.7 27.0 35.6 Disposal/ (purchase) -3.9 0.2 0.0 0.0
% change Y/Y 66.2 40.9 30.1 32.1 Cash flow from investing -10.0 -6.2 -9.7 -11.6
EBIT margin (%) 14.3 14.5 14.5 15.1 Free cash flow 9.2 12.7 19.6 25.8
Net interest 2.0 1.2 2.1 2.5 Equity raised/ (repaid) 2.9 2.1 0.0 0.0
Earnings before tax 17.4 21.8 29.0 38.1 Debt raised/ (repaid) 0.0 0.0 0.0 0.0
% change Y/Y 77.3 25.7 33.0 31.3 Other -5.8 0.0 0.0 0.0
Tax -1.3 -1.7 -2.0 -3.0 Dividends paid 0.0 0.0 0.0 0.0
as % of EBT 7.5 7.8 7.0 8.0 Cash flow from financing -2.8 2.1 0.0 0.0
Net income (reported) 16.2 20.1 27.0 35.1 Net change in cash 2.5 15.1 19.6 25.8
% change Y/Y 69.0 24.5 34.1 29.8 F/X effects 0.7 0.0 0.0 0.0
Shares O/S (MM) 40.2 41.3 41.8 42.4 Beginning cash 78.2 81.4 96.5 116.2
EPS (reported) (US$) 0.40 0.49 0.65 0.83 Ending cash 81.4 96.5 116.2 142.0
Source: Company, J.P. Morgan estimates. Source: Company, J.P. Morgan estimates.

Balance sheet Ratio analysis


US$ in millions, year-end December %, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Cash and cash equivalents 81.4 96.5 116.2 142.0 Gross Margin 39.0 37.2 37.0 37.3
Accounts receivable 36.8 51.7 65.5 82.1 EBITDA margin 17.9 18.2 18.1 18.5
Deferred tax 0.0 0.0 0.0 0.0 Operating Margin 14.3 14.5 14.5 15.1
Others 3.4 4.3 4.3 4.3 Net Margin 15.8 14.1 14.5 14.8
Current assets 121.6 152.6 186.0 228.5 SG&A/Sales 4.0 3.1 3.0 3.0
LT investments 2.9 2.6 2.6 2.6 Sales growth 63.7 39.4 29.8 27.2
Net fixed assets 11.3 13.2 17.1 21.4 Operating Profit Growth 66.2 40.9 30.1 32.1
Others 19.7 18.9 18.1 17.4 Net profit growth 69.0 24.5 34.1 29.8
Total assets 155.5 187.2 223.8 269.9 EPS (Reported) growth 79.8 23.1 31.7 28.0
Liabilities Interest coverage (x) 213 518 n.m. n.m.
Provisions 0.0 0.0 0.0 0.0 Net debt to total capital n.m. n.m. n.m. n.m.
Payables 3.2 4.2 5.4 6.7 Net debt to equity n.m. n.m. n.m. n.m.
Others 18.9 26.0 32.8 40.9 Asset Turnover (%) 66.0 76.4 83.0 87.5
Total current liabilities 22.1 30.2 38.2 47.7 ROE (%) 13.3 14.1 15.9 17.4
Long term debt 0.0 0.0 0.0 0.0 ROIC (%) 32.2 31.2 34.1 37.2
Other liabilities 1.9 1.9 1.9 1.9 Source: Company, J.P. Morgan estimates.
Total liabilities 23.9 32.1 40.1 49.6
Shareholders' equity 131.5 155.1 183.6 220.3
Source: Company, J.P. Morgan estimates.

283
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Xinao Gas Overweight


17.28
Price Target: HK$22.2
www.xinaogas.com

Company description China


Xinao Gas distributes gas in China, with operations in over 70 cities and Natural Gas Pipeline and
districts, and covering a total urban population of over 40 million as of Distribution
December 2008. The group focuses on piped-gas project cities with strong Boris KanAC
industrial and commercial background. The company has one of the most
(852) 2800-8573
established track records in the China city gas sector amongst its listed peers. boris.cw.kan@jpmorgan.com

J.P. Morgan Securities (Asia Pacific)


Post mortem Limited
(1) Strong project execution track record as evidenced by the >15% ROE
Price performance
delivered over the past 3-5 years. (2) Focus on high-volume gas consumers, 18
such as industrial and commercial users, to foster further volume growth. HK$ 10

2
Potential for earnings upgrades
Oct-08 Jan-09 Apr-09 Jul-09 Oct-09
We expect gas supplies in China to improve over the next 1-2 years as more
long-distance pipelines (W-E Pipeline No.2 and Sichuan-to-East Pipeline). 2688.HK share price (HK$
R-CHIP (rebased)
Also, we expect the impending new gas pricing policy to introduce an Source: Bloomberg.
automatic cost-pass through mechanism. These measures will likely enhance
Xinao’s future gas sales and improve protection on its gas sales margins. Performance
1M 3M 12M
How much recovery is priced into the stock? Absolute (%) 13% 34% 152%
The recovery angle on Xinao comes from potential upside from higher-than- Relative (%) 13% 38% 120%
expected connection fee revenue due to a recovery in the property market. Source: Bloomberg.
Given management’s conservative guidance and the continued recovery in
the property market, we expect more positive surprises. Company data
52-week range (HK$) 6.0-19.0
Mkt cap. (HK$MM) 17,559
Price target and key risks Mkt cap. (US$MM) 2,266
Our Dec-10 price target of HK$22.2 is based on our DCF valuation, Avg daily value (US$MM) 1.4
assuming a WACC of 10.1%, and a terminal growth rate of 2%. Key risks to Avg daily volume (MM) 1.8
our PT include lower-than-expected gas sales, and new household Shares O/S (MM) 1,050
Date of price 5-Nov-09
connections.
Index (HSI Red Chip) 3,292
Free float (%) 64
Exchange rate 7.75
Source: Bloomberg.
Bloomberg: 2688 HK; Reuters: 2688.HK
Rmb in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 8,266 13,405 15,151 17,157
EBITDA 1,779 2,147 2,566 2,976
Net profit 632 822 1,021 1,237
EPS (Rmb cents) 0.62 0.78 0.97 1.18
Net profit growth (%) 24.3 30.3 24.1 21.1
EPS growth (%) 21.8 25.3 24.1 21.1
ROE (%) 15.8 17.9 19.2 19.9
P/E (x) 25.2 20.1 16.2 13.4
EV/EBITDA (%) 12.2 10.1 8.4 7.3
P/BV (x) 4.1 3.7 3.2 2.7
Dividend yield (%) 0.9 1.1 1.4 1.7
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

284
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Xinao Gas: Summary of financials


Rmb in millions, year-end December
Profit and loss statement Cash flow statement
FY08A FY09E FY10E FY11E FY08A FY09E FY10E FY11E

Revenues 8,266 13,405 15,151 17,157 EBIT 1,512 1,841 2,217 2,588
% change Y/Y 43.6 62.2 13.0 13.2 Depreciation & amortisation 276 306 349 388
Gross Margin (%) 27.2 25.1 25.2 25.1 Change in working capital 206 -46 -16 115
EBITDA 1,779 2,147 2,566 2,976 Taxes -186 -339 -470 -568
% change Y/Y 36.8 20.7 19.5 16.0 Cash flow from operations 1,450 1,694 2,093 2,667
EBITDA Margin (%) 21.5 16.0 16.9 17.3 Capex -1,186 -1,243 -1,164 -969
EBIT 1,512 1,841 2,217 2,588 Disposal/ (purchase) -229 0 -1 0
% change Y/Y 38.0 21.7 20.5 16.7 Net Interest -381 -367 -340 -314
EBIT Margin (%) 18.3 13.7 14.6 15.1 Free cash flow 34 395 713 1,366
Net Interest -381 -367 -340 -314 Equity raised/ (repaid) 0 0 0 0
Earnings before tax 1,131 1,473 1,877 2,274 Debt raised/ (repaid) 804 0 0 -811
% change Y/Y 38.9 30.2 27.4 21.2 Other -503 0 0 0
Tax (260) (339) (469) (568) Dividends paid -119 -158 -206 -255
as % of EBT 23.0 23.0 25.0 25.0 Beginning cash 1,693 1,725 1,680 1,933
Net Income (Reported) 632 822 1,021 1,237 Ending cash 1,725 1,680 1,933 1,997
% change Y/Y 24.3 30.3 24.1 21.1 DPS (Rmb) 0.16 0.20 0.24 0.29
Shares Outstanding 1010 1050 1050 1050
EPS (reported) (Rmb) 0.62 0.78 0.97 1.18
% change Y/Y 21.8 25.3 24.1 21.1
Balance sheet Ratio analysis
FY08A FY09E FY10E FY11E % FY08A FY09E FY10E FY11E

Cash 1,725 1,680 1,933 1,997 EBITDA margin 21.5 16.0 16.9 17.3
Accounts receivable 1,431 2,745 3,061 3,419 Operating margin 18.3 13.7 14.6 15.1
Inventories 254 412 466 527 Net profit margin 7.6 6.1 6.7 7.2
Others 944 1,290 1,421 1,572 SG&A/sales 14.0 14.0 13.0 12.3
Current assets 4,354 6,127 6,881 7,515 Sales per share growth 43.6 62.2 13.0 13.2
Sales growth 43.6 62.2 13.0 13.2
LT investments 1,829 2,017 2,206 2,394 Net profit growth 24.3 30.3 24.1 21.1
Net fixed assets 8,391 9,328 10,143 10,724 EPS growth 21.8 25.3 24.1 21.1
Total assets 14,574 17,472 19,230 20,633 Interest coverage (x) 4.0 5.0 6.5 8.2
Net debt to equity 86.4 75.7 60.5 38.6
Liabilities Sales/assets 56.7 76.7 78.8 83.2
ST loans 1,869 1,869 1,869 1,869 Assets/equity 342.4 355.1 335.3 307.3
Payables 2,752 4,464 4,921 5,572 ROE 15.8 17.9 19.2 19.9
Others 806 1,017 1,115 1,229
Total current liabilities 5427 7350 7905 8670
Long term debt 3534 3534 3534 2723
Other liabilities 1357 1670 2058 2528
Total liabilities 10318 12554 13497 13921
Shareholders' equity 4256 4920 5735 6715
BVPS (Rmb) 4.21 4.69 5.46 6.39
Source: Company, J.P. Morgan estimates.

285
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Yulon Motor Overweight


NT$40.0
Price Target: NT$50.0
www.yulon-motor.com.tw

Company description Taiwan


Yulon Motor was established in 1953 and listed on TAIEX in 1976. It is the Automobile Manufacture
No.3 auto maker in Taiwan with 11.9% market share year-to-October. The Nick LaiAC
company is now a pure OEM auto maker in Taiwan for Nissan and Buick,
(886-2) 2725-9864
while its subsidiary Yulon Nissan (2227 TT) is in charge of sales and R&D nick.yc.lai@jpmorgan.com
after it spun off from Yulon Motor in 2003. Yulon launched its own brand
J.P. Morgan Securities (Taiwan) Limited.
Luxgen MPV in the Taiwan market in 3Q09 and plans to launch in China in
2010. Price performance (rebased)
Post mortem 230% Yulon Motor TSE

Business outlook in 2010:We believe the Taiwan auto market will continue 180%

its recovery trend in 2010 with 5% growth to 300,000 units from around 130%

260,000 units in 2009. On a top-down view, we believe Yulon being one of 80%

the top three players will benefit from this trend. From a bottom-up 30%
perspective, the company’s strong product pipeline has and will continue to -20%
assist its market share gain next year. All these will translate into bottom-line Nov-08 Feb-09 May-09 Aug-09 Nov-09

growth, in our view. Source: Bloomberg.

Potential for earnings upgrades Performance


Potential benefit from appreciation of land price: On the asset angle, Yulon 1M 3M 12M
has exposure to land asset in Taipei County which is planned to be developed Absolute (%) 9 32 202
into commercial and residential projects in the next couple of years. For the Relative (%) 10 22 91
property market, we believe the strength of land price appreciation will be Source: Bloomberg.
stronger than that of housing prices. Yulon, as a result, could benefit from Company data
the appreciation in its land value and hence a rise in its NAV. 52-wk range (NT$) 11.7-42.6
How much recovery is priced into the stock? Mkt cap. (NT$B) 62.8
Risks to our investment theme: The launch of its own brand product in Mkt cap. (US$MM) 1,932
Taiwan and in the future in China could be a swing factor for Yulon’s Avg. daily value (US$MM) 21.89
Avg. daily volume (MM) 21
financial position and profitability. On land asset, its ability to unlock hidden Avg. daily value (NT$MM) 712
value could also be a key factor for its earnings growth in the next few years. Shares O/S (MM) 1,571
Date of price 5-Nov-09
Price target and key risks Index (TWSE) 7,417.5
We maintain our Overweight rating on Yulon and our Dec-10 PT of NT$50, Free float (%) 40
based on NAV analysis. Risks to our analysis are worse-than-expected sales Exchange rate (NT$/US$1) 32.5
growth and earnings in both Taiwan and China. Source: Bloomberg.

Bloomberg: 2201 TT; Reuters: 2201.TW


NT$ in millions, year-end December
2008 2009E 2010E 2011E
Sales 17,504 17,367 18,390 20,033
Net profit 401 1,465 1,075 1,494
EPS (adj.-NT$) 0.26 0.94 0.69 0.96
P/E (x) 155.6 42.6 61.2 44.1
P/B (x) 1.1 1.1 1.1 1.0
ROE 0.7% 2.5% 1.8% 2.5%
Div yield 1.5% 0.2% 0.7% 0.5%
Sales growth -27.1% -0.8% 5.9% 8.9%
EPS growth -87.7% 265.7% -26.6% 39.0%
Gross margin 10% 11% 11% 10%
Net margin 2% 8% 6% 7%
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

286
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Yulon Motor: Summary of financials


NT$ in millions, year-end December
Profit and loss statement Cash flow statement
2007 2008 2009E 2010E 2011E 2007 2008 2009E 2010E 2011E
Net Sales 24,025 17,504 17,367 18,390 20,033 Net Income 3,102 401 1,465 1,075 1,494
Gross Profit 2,422 1,825 1,834 1,949 2,050 Depreciation 520 555 420 317 288
Operating Income 999 313 808 862 878 Amortization 0 0 20 20 20
Interest Income 108 141 113 100 78 Dec(Inc)-A/R (232) 680 (399) (74) (67)
Investment Income 1,996 0 58 145 629 Dec(Inc)-Inventory 379 1,035 (543) (149) (254)
Total Non-Op.Income 2,649 3,412 915 395 866 Inc(Dec)-A/P 323 (1,433) 1,018 197 181
Interest Expenses 2 0 2 0 0 Other adj. (834) 453 (151) (446) 64
Total Non-Op. Exp. 60 3,012 20 7 8 Cash Flow-Operating 3,257 1,690 1,829 940 1,726
Pre-Tax Income 3,589 713 1,703 1,250 1,737 Sales (Purchase) LT Invest (1,364) (2,584) (2,360) (2,950) (1,950)
Net Income 3,102 401 1,465 1,075 1,494 Sales (Purchase) of FA 1,416 3,351 (435) (115) (105)
EPS (NT$- adj) 2.09 0.26 0.94 0.69 0.96 Others (42) 79 391 446 (164)
Cash Flow-Inv. 9 846 (2,404) (2,619) (2,219)
Margin (%) Free cash flow 3,267 2,536 (575) (1,679) (493)
Gross margin 10.1% 10.4% 10.6% 10.6% 10.2% Dividend Paid (1,228) (883) (126) (421) (309)
Operating margin 4.2% 1.8% 4.7% 4.7% 4.4% Inc(Dec)-S-T Debt 3 2 1 0 0
Net margin 12.9% 2.3% 8.4% 5.8% 7.5% Inc(Dec) L-T Debt 0 0 0 0 0
Others (286) (141) 0 0 0
Growth (%) Cash Flow-Financing (1,512) (1,022) (125) (421) (309)
Sales -11% -27.1% -0.8% 5.9% 8.9% Cash Equiv.-Begin 5,122 6,877 8,391 7,691 5,591
PAT 4% -87.1% 265.7% -26.6% 39.0% Cash Equiv.-End 6,877 8,391 7,691 5,591 4,790
EPS 3% -87.7% 265.7% -26.6% 39.0%
Balance sheet Ratio analysis
NT$mn 2007 2008 2009E 2010E 2011E Financial structure 2007 2008 2009E 2010E 2011E
Cash & Equivalent 6,877 8,391 7,691 5,591 4,790 Total debt / total asset 7% 0.2% 0.2% 0.2% 0.2%
MarketableSecurity 400 122 82 82 82 Net debt to equity -5% -14.6% -13.0% -9.3% -7.8%
A/R & N/R 947 267 666 740 808 Liquidity
Inventories 3,045 2,010 2,553 2,703 2,956 Current ratio 1.5 2.8 2.3 1.9 1.8
Total Current Assets 13,018 12,156 12,358 10,482 10,001 Quick ratio 0.9 2.0 1.6 1.2 1.0
Long-term Investment 38,126 36,785 39,145 42,095 44,045 Interest cover (x) 1,582.6 709.9 11,776.0 16,369.1
Total Fixed Assets 14,653 12,322 12,338 12,135 11,952 Margins
Total Other Assets 5,091 5,412 5,327 5,327 5,327 Gross margin 10% 10.4% 10.6% 10.6% 10.2%
Total Assets 70,888 66,675 69,168 70,039 71,325 Operating margin 4% 1.8% 4.7% 4.7% 4.4%
Short-term Borrow. 3 4 5 5 5 Net margin 13% 2.3% 8.4% 5.8% 7.5%
Bills Issued 0 0 0 0 0 Profitability
A/P & N/P 2,111 678 1,696 1,892 2,074 ROE 6% 0.7% 2.5% 1.8% 2.5%
Total Current Liab. 8,764 4,338 5,372 5,489 5,590 ROA 4% 0.6% 2.2% 1.5% 2.1%
L-T Liabilities 0 0 0 0 0 ROCE 16% 2.0% 7.6% 6.3% 9.1%
Total Other L-T Liab 5,907 4,921 5,041 5,141 5,141 Others
Total Liabilities 14,671 9,259 10,413 10,629 10,731 BV per share 38 37 37.4 37.8 38.6
Common Stocks 14,773 15,704 15,704 15,704 15,704 Cash dividend (NT$) 0.8 0.6 0.1 0.3 0.2
Total Equity 56,217 57,416 58,755 59,409 60,594 Dividend yield (%) 2% 1.5% 0.2% 0.7% 0.5%
Total Liab. & Equity 70,888 66,675 69,168 70,039 71,325

Source: Company, J.P. Morgan estimates.


Yulon Motor—NAV analysis
NT$ in millions Valuation method Owned by Yulon Estimated value NAV per share (NT$) Weighting
Auto core business (A) 10x core business P/E 100% 8,616 6 9%
Long-term investments
2227 Yulon Nissan Motor Market value 47.8% 10,446 7 11%
2204 China Motor JPMorgan price target NT$30 8.0% 3,379 2 4%
9941 Taiwan Acceptance Market value 53.3% 3,908 3 4%
Other LT investments 0.6x Book value 15,777 10 17%
Total Long-term investment (B) 33,510 22 37%
Land/Property Land size (ping)
NT$1mn/ping of land on
Sindian plant 25,310 27,628 18 30%
average
NT$0.02mn/ping of land on
Other properties and land 760,250 16,500 11 18%
average
Total land/property (C ) 785,560 44,128 28 48%
Sum-of-the-parts value (A) + (B) + (C ) 86,254 55 94%
Net (debt)/ cash in 10E 5,537 4 6%
Total value or NAV 91,792 59 100%
Fair value: 15% discount to NAV 78,023 50
Source: TEJ, Company, J.P. Morgan estimates.

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Stocks to Avoid

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Açúcar Guarani Underweight


R$5.10

www.acucarguarani.com.br

Company description Brazil


Guarani is the Brazilian subsidiary of Tereos Group, the fourth-largest sugar Agribusiness
and ethanol producer worldwide. On a local level, Guarani is the third- Debbie Bobovnikova, CFAAC
largest sugar producer and fifth-largest ethanol producer in Brazil. In the (1-212) 622 3489
2009 crop year (ending March ’09), Guarani crushed 14.2mt of sugarcane, of debbie.bobovnikova@jpmorgan.com
which 29% was owned (61% from third parties) and 63% was destined for J.P. Morgan Securities Inc.
sugar production (37% to ethanol). Guarani operates through 6 mills, 5 in the
northwestern region of Sao Paulo state and one in Mozambique. Guarani’s Price performance
shares are listed in Bovespa’s Novo Mercado. R$

8.0
Post mortem
6.0
Guarani has actually been experiencing strong earnings during the downturn
due to the unique fundamentals in the sugar market. Looking over the next 4.0
year, we expect the deficit in sugar to turn to a surplus, with sugar prices to 2.0
decline in 2H10. 0.0
Nov-08 M ar-09 Jul-09 Nov-09
Potential for earnings upgrades
We think lack of sugarcane integration has hurt Guarani, as its sugarcane Source: Bloomberg.

costs (80% of total production costs) are linked to movements in sugar and Performance
ethanol prices. Input costs should continue to stay high as ethanol price 1M 3M 12M
increases are likely to offset any softness in sugar prices. At the same time, Absolute (%) -7% -10% 153%
the company should benefit from lower interest costs as it is quite levered, at Relative (%) -9% -25% 71%
4x ND/EBITDA. Source: Bloomberg.
Company data
How much recovery is priced into the stock? 52-week range (BRL) 1.85-6.34
Mkt cap. (BRL) 1,419
We think the stock is pricing in spot sugar prices, disregarding the potential Mkt cap. (US$MM) 824
for sugar price declines. Guarani is trading at 6.5x consensus EBITDA, a Avg daily value (US$MM) 2.0
multiple that we would think are fair on normalized, not peak, earnings. Avg daily volume (MM) 0.7
Shares O/S (MM) 287
Date of price 11/25/09
Key risks to our rating Index: iBovespa 67,917
Key upside risks to our UW rating on Guarani are (1) higher-than-expected Free float (%) 30.7%
sugar prices; and (2) a weaker-than-expected BRL. Exchange rate 1.7221
Source:Bloomberg.
Bloomberg: ACGU3 BZ; Reuters: ACGU3.SA
R$ in millions, year-end March
FY08 FY09E FY10E FY11E
Sales 906 1,185 1,378 1,422
Net profit (80) (83) 31 25
EPS (R$) (0.48) (0.50) 0.19 0.15
FD EPS (R$) -0.10 0.02 0.02 0.01
DPS (LC) - - - -
Sales growth (%) 7% 28% 16% 3%
Net profit growth (%) -165% 30% -138% -21%
EPS growth (%) -165% 4% -138% -21%
ROE (%) -6.6% -7.6% 2.8% 2.2%
P/E (x) NM NM 46.5 NM
FD P/E (x) NM 46.09 NM NM
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

290
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adrian.mowat@jpmorgan.com

Açúcar Guarani: Summary of financials


Profit and loss statement Cash flow statement
R$ in millions, year-end March R$ in millions, year-end March
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 906 1,185 1,378 1,422 EBIT (34) 63 138 166
% change Y/Y 7.0% 30.7% 16.4% 3.1% Depreciation & amortization (48) (151) (187) (143)
Gross margin (%) 37.2% 41.1% 40.5% 39.2% Change in working capital 47 209 89 0
EBITDA 117 249 281 279 Taxes (9) 14 20 (11)
% change Y/Y -53% 56% 13% -1% Cash flow from operations -151 11 175 118
EBITDA margin (%) 13% 21% 20% 20% Capex 325 772 421 170
EBIT (34) 63 138 166 Disposal/(purchase)
% change Y/Y -23% -79% 395% 97% Net interest (12) (41) (47) 2
EBIT margin (%) -4% 5% 10% 12% Free cash flow (86) (1,064) (170) 201
Net interest (80) (83) 31 25 Equity raised/(repaid)
Earnings before tax (86) (11) 142 133 Debt raised/(repaid)
% change Y/Y -147% -87% -1389% -6% Other -45 327 0 0
Tax 14 20 (11) (9) Dividends - - - -
as % of EBT -16% -180% -8% -6% Beginning cash 6 96 467 419
Net income (reported) (80) (83) 31 25 Ending cash 96 467 419 263
% change Y/Y -165% 30% -138% -21% DPS (R$) - - - -
Shares O/S (MM) 167 167 167 167 Source: Company, J.P. Morgan estimates.
EPS (reported) (R$) (0.48) (0.50) 0.19 0.15
Source: Company, J.P. Morgan estimates.

Ratio analysis
%, year-end March
Balance sheet
FY08 FY09E FY10E FY11E
R$ in millions, year-end March EBITDA margin 13% 21% 20% 20%
FY08 FY09E FY10E FY11E Operating margin -4% 5% 10% 12%
Cash and cash equivalents 96 467 419 263 Net profit margin -9% -7% 2% 2%
Accounts receivable 84 120 139 144 SG&A/sales 0.15 0.24 0.20 0.20
Inventories 261 361 338 356 Sales growth 7% 28% 16% 3%
Others 86 68 68 68 Net profit growth -165% 30% -138% -21%
Current assets 528 1,017 964 831 Sales per share growth -65% 66% 16% -74%
LT investments 170 908 908 908 EPS growth -165% 4% -138% -21%
Net fixed assets 1,073 1,238 1,264 1,397 Interest coverage (x) (0.36) 0.64 3.17 4.00
Total assets 2,500 3,163 3,137 3,136 Net debt to total capital 0.26 0.33 0.32 0.37
Liabilities Net debt to equity 0.54 0.93 0.89 1.00
ST loans 512 1,135 1,084 1,069 Sales/assets 0.36 0.37 0.44 0.45
Payables 40 55 65 68 EBIT margin -4% 5% 10% 12%
Others 183 193 193 193 ROCE -0.02 0.04 0.08 0.09
Total current liabilities 735 1,383 1,342 1,330 Assets/equity (x) 2.07 2.87 2.77 2.73
Long-term debt 231 362 346 341 ROI -3.2% -2.6% 1.0% 0.8%
Other liabilities 320 311 311 311 ROE -6.6% -7.6% 2.8% 2.2%
Total liabilities 1,293 2,060 2,003 1,986 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 1,206 1,102 1,133 1,149
BVPS (R$) 7.21 6.58 6.77 6.87
Source: Company, J.P. Morgan estimates.

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AU Optronics Underweight
NT$29.8
Price Target: NT$27
www.auo.com
Company description Taiwan
AU Optronics (AUO) was formed in 2001 by the merger of Acer Display Semiconductors
and Unipac Opto; it then merged with QDI in 2006. AUO is one of the top
Liang-Chun Lin A C
LCD panel suppliers in the world with a 16% market share in 1H09. It
(886-2) 2725-9863
currently runs means of 3.5G, 4G, 5G, 6G, 7.5G, and 8.5G fabs. Its major Liang.c.lin@jpmorgan.com
products include small/medium-sized panels, NB panels, monitor panels, and J.P. Morgan Securities (Taiwan) Limited.
LCD TV panels.
JJ Park A C
(822) 758-5717
Post mortem jj.park@jpmorgan.com
AUO fared worse than Korean peers, given its more volatile earnings in the J.P. Morgan Securities (Far East) Limited,
down-cycle. Unlike Korean peers who were able to fill the capacity from Seoul Branch

own brands’ support, AUO ran at a lower UT rate and lost market share, Winnie Hong
given its widening gap with LGD. We believe the inferior position and (886-2) 2725-9899
smaller scale will cap its potential profit upside. Also, the industry’s cost winnie.wy.hong@jpmorgan.com
reduction slowing down due to limited room for component price squeeze J.P. Morgan Securities (Taiwan) Limited.

and marginal fab migration, compared to 4G/5G/6G migrations in the past.


Price performance
This should limit the margin improvement. 170

140

Potential for earnings upgrades 110

The company’s earnings are more sensitive to ASP changes. Margin upside 80

50
should come from better size mix that lifts the blended ASP. Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

AUO TWSE

How much recovery is priced into the stock? Source: Bloomberg.


We believe volume recovery from stronger pull-in demand in 2H09 has been Performance
priced in. We believe the sector lacks excitement and we do not expect any 1M 3M 12M
near-term catalysts to reverse the downward trend of panel prices. Also, with Absolute (%) -5.4 -12.1 37.3
more capacity ramp-up next year, oversupply may persist through 1H10. Relative (%) -3.9 -18.6 -13.1
AUO’s 2009 peak multiple of 1.1x book is lower than its historical trough Source: Bloomberg.
valuation, yet it is justified by its poor ROE, in our view. Looking ahead to
2010, unless the blended ASP substantially improves due to a product-mix Company data
52-week range (NT$) 17.3 - 38.2
shift, potential profit upside and re-rating are doubtful, in our view. Mkt cap. (NT$B) 236.0
Mkt cap. (US$B) 8.1
Price target and key risks Avg daily value (US$MM) 59.9
Avg daily volume (MM) 58.2
We maintain our Underweight rating; our Jun-10 price target of NT$27 is Shares O/S (MM) 8,827
based on 0.8x FY10E P/BV, implying a mid-to-trough valuation. A key Date of price 5-Nov 5, 09
upside risk to our PT is better mainstream size mix accelerating the margin Index: TWSE 7,417
Free float (%) 65%
improvement. Exchange rate NT$32.5/US$1
Source: Bloomberg.
Bloomberg: 2409 TT; Reuters: 2409.TW
NT$ in billions, year-end December
FY08 FY09E FY10E FY11E
Sales 423.9 348.2 388.4 384.5
Net profit 21.3 -17.1 6.7 10.1
EPS (NT$) 2.5 -2.0 0.8 1.1
BPS (NT$) 35.2 32.8 33.5 34.3
DPS (NT$) 2.5 0.3 0.0 0.3
Sales growth (%) -11.7 -17.9 11.6 -1.0
Net profit growth (%) -54.6 -180.5 138.9 51.6
EPS growth (%) -55.8 -176.8 138.7 51.5
ROE (%) 7.1 -5.8 2.3 3.4
P/E (x) 11.7 nm 39.5 26.1
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

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AU Optronics: Summary of financials


NT$ in billions, year-end December
Income statement Ratio analysis
FY08A FY09E FY10E FY11E % FY08A FY09E FY10E FY11E

Revenues 423.9 348.2 388.4 384.5 Gross Margin 13.1 2.0 8.6 10.0
Cost of Goods Sold 368.6 341.1 355.2 346.2 EBITDA margin 26.4 21.9 25.0 24.7
Gross Profit 55.3 7.1 33.3 38.3 Operating Margin 7.2 -3.9 2.5 3.4
R&D Expenses 5.3 6.1 6.3 6.4 Net Margin 5.0 -4.9 1.7 2.6
SG&A Expenses 17.9 14.6 16.7 17.5 R&D/sales 1.3 1.8 1.6 1.7
Operating Profit (EBIT) 30.6 -13.7 9.9 12.9 SG&A/Sales 4.2 4.2 4.3 4.6
EBITDA 111.8 76.3 97.0 94.9
Interest Income 1.8 0.3 0.2 1.2 Sales growth -11.7 -17.9 11.6 -1.0
Interest Expense -4.2 -3.4 -3.8 -3.0 Operating Profit Growth -51.7 -144.8 172.3 30.4
Investment Income (Exp.) -0.3 0.3 0.6 0.4 Net profit (reported) growth -62.3 -180.5 138.9 51.6
Net profit (New TWN GAAP)
-1.6 1.1 0.8 0.2 -54.6 -180.5 138.9 51.6
Non-Operating Income (Exp.) growth
Earnings before tax 26.3 -15.4 7.7 11.7 EPS (Reported) growth -63.3 -176.8 138.7 51.5
Tax -4.6 -1.3 -1.1 -1.6 EPS (New TWN GAAP) growth -55.8 -176.8 138.7 51.5
Net Income (Reported) 21.3 -17.1 6.7 10.1 Interest coverage (x) 7.3 -4.0 2.6 4.3
Net Income (New TWN GAAP) 21.3 -17.1 6.7 10.1 Net debt to total capital 16.8 21.7 17.0 13.4
TWD Net debt to equity 26.0 34.4 25.9 19.2
EPS (Reported) 2.5 -2.0 0.8 1.1 Asset Turnover 74.8 57.4 65.9 66.9
EPS (New TWN GAAP) 2.5 -2.0 0.8 1.1 Working Capital Turns (X) 22.8 42.5 0.6 0.7
BPS 35.2 32.8 33.5 34.3 ROE 7.1 -5.8 2.3 3.4
DPS 2.5 0.3 0.0 0.3 ROIC 6.7 -3.8 2.3 2.9
Weighted No. of Shares
8.4 8.8 8.8 8.8 Core ROIC 7.5 -3.8 2.4 3.7
Outstanding (bn)

Balance sheet Cash flow statement


FY08A FY09E FY10E FY11E FY08A FY09E FY10E FY11E

Cash and cash equivalents 85.0 69.8 78.1 73.3 Net Income 21.3 -17.1 6.7 10.1
Accounts receivable 23.9 59.1 52.3 55.8 Depr. & Amortization 81.2 90.0 87.1 82.0
Inventories 23.6 39.7 38.1 35.7 Change in working capital 30.4 -15.6 -0.3 -0.5
Others 13.8 7.9 7.6 7.8 Other 0.4 0.4 0.0 0.0
Current assets 146.3 176.6 176.1 172.6 Cash flow from operations 133.2 57.7 93.4 91.5

LT investments 7.8 11.4 12.0 12.4 Capex -98.4 -70.4 -70.0 -70.0
Net fixed assets 389.3 394.7 377.6 365.6 Disposal/ (purchase) -3.9 -29.2 -0.6 -0.4
Total assets 566.9 606.8 589.8 574.6 Free cash flow 34.9 -12.6 23.4 21.5

Liabilities Equity raised/ (repaid) 0.0 0.0 0.0 0.0


ST loans 48.4 20.2 19.3 18.8 Debt raised/ (repaid) -15.0 6.5 -14.5 -23.2
Payables 58.2 78.5 71.7 71.2 Other -2.8 22.7 0.0 -0.5
Others 45.9 55.3 53.0 54.3 Dividends paid -19.7 -2.6 0.0 -2.4
Total current liabilities 152.5 154.0 144.1 144.3 Cash flow from financing -37.4 26.7 -14.5 -26.1
Long term debt 114.3 149.1 135.4 112.7
Other liabilities 0.9 14.2 14.2 14.2 Net change in cash -6.4 -15.1 8.3 -4.9
Total liabilities 267.7 317.3 293.7 271.3 Beginning cash 91.4 85.0 69.8 78.1
Shareholders' equity 299.3 289.4 296.1 303.4 Ending cash 85.0 69.8 78.1 73.3

Source: Company reports, J.P. Morgan estimates.

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Bank Rakyat Indonesia Underweight


Rp7,200
Price Target: Rp6,650
www.bri.co.id

Company description Indonesia


Bank Rakyat has a long history dating back to the 1800s. Owned 57% by the Banks
government, BRI is a leading rural micro lender with over 6,000 points of Aditya Srinath, CFAAC
presence across Indonesia. The bank has more recently aggressively grown (62-21) 5291-8573
its corporate lending book, but overall has maintained corporate lending at aditya.srinath@jpmorgan.com
below 20% of loans. PT J.P. Morgan Securities Indonesia

Post mortem Price performance


BRI continued lending aggressively through the crisis. The bank was not
8,000
significantly affected by the crisis, although cost of funds went up. The
Rp 5,000
lagged impact of the slowing of the economy has become evident in
3QFY09, as NPLs have bucked the trend of other major banks and increased 2,000
further. Nov-08 Feb-09 May-09 Aug-09 Nov-09

Potential for earnings upgrades BBRI.JK share price (Rp)


JCI (rebased)
BRI’s operating profit fell 53% Q/Q in 3QFY09 and our concern is that high Source: Bloomberg.
NPLs could result in earnings revisions being biased lower. We are also
Performance
concerned that BRI’s high pace of lending could be unsustainable, and top-
1M 3M 12M
line growth may also decelerate. Our thesis on BRI is that the bank is seeing
Absolute (%) -8.0 3.5 112.9
growth pressure in its core micro business, which may subdue medium-term
Relative (%) -2.7 2.0 29.8
growth rates. Source: Bloomberg.

How much recovery is priced into the stock? Company data


We do not think that recovery expectations per se have driven the stock 52-week range (Rp) 8,700-2,400
recently. The stock has rallied by close to 100% since the beginning of the Mkt cap. (RpMM) 88,805,232
year to a peak in early October, before declining 16% since. Mkt cap. (US$MM) 9,392
Avg daily value (US$MM) 10.1
Price target and key risks Avg daily volume (MM) 24.5
We have a DDM-based Dec-10 PT of Rp6,650 for BRI and an Underweight Shares O/S (MM) 12,334
rating. We estimate that over the long-term sustainable ROE could trend Date of price 5-Nov-09
lower to 22.6% and peg long-term growth at 10.75%. We use a 10.5% risk- Index: JCI 2395
free rate for Indonesian equities, and value BRI with a 1.07 beta. Key risks to Free float (%) 43
our PT include a reversal in recent asset quality deterioration and a return to Exchange rate 9,455
growth of the core micro lending customer base. Source: Bloomberg.
Bloomberg: BBRIIJ; Reuters: BBRLJK
Year-end Dec (Rp in mn) FY06A FY07A FY08A FY09E FY10E
Operating Profit 7,628,701 9,473,095 11,176,603 14,464,582 14,887,397 52-wk range (Rp) 8,700 - 2,400
Net Profit 4,257,572 4,838,001 5,958,368 7,115,768 8,434,584 Market cap (Rp mn) 88,805,232
Cash EPS (Rp) 350 393 484 577 684 Market cap ($ mn) 9,392
Fully Diluted EPS (Rp) 350 393 484 577 684 Shares outstanding (mn) 12,334
DPS (Rp) 157 173 196 227 231 Fiscal Year End Dec
EPS growth (%) 9.8% 12.3% 23.0% 19.4% 18.5% Price (Rp) 7,200
ROE 28.2% 26.6% 28.5% 28.9% 28.4% Date Of Price 05 Nov 09
P/E 21.3 18.9 15.4 12.9 10.9 Avg daily value (Rp mn) 95,601.6
BVPS (Rp) 1,374 1,578 1,814 2,185 2,638 Avg daily value ($ mn) 10.1
P/BV 5.4 4.7 4.1 3.4 2.8 Avg daily vol (mn) 24.5
Div. Yield 2.1% 2.3% 2.6% 3.0% 3.1% JCI 2,395
Exchange Rate 9,455.00
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

294
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Bank Rakyat Indonesia: Summary of financials


Income Statement Growth Rates
Rp in millions, year end Dec FY06 FY07 FY08 FY09E FY10E FY06 FY07 FY08 FY09E FY10E

NIM (as % of avg. assets) 12.2% 12.0% 10.8% 9.9% 9.1% Loans 19.5% 26.2% 41.4% 20.0% 13.6%
Earning assets/assets 78.5% 74.3% 77.2% 84.2% 92.7% Deposits 28.3% 33.0% 21.7% 8.3% 15.1%
Margins (% of earning assets) 9.5% 8.9% 8.3% 8.3% 8.4% Assets 26.0% 31.7% 20.8% 10.3% 12.7%
Equity 26.4% 15.2% 15.0% 20.4% 20.8%
Net Interest Income 13,235,084 16,033,989 18,751,947 21,564,326 24,356,388 RWA -4.9% 37.1% 37.1% 23.4% 20.9%

Total Non-Interest Income 2,039,115 2,429,118 3,379,771 4,485,087 4,178,498 Net Interest Income 10.4% 21.1% 17.0% 15.0% 12.9%
Fee Income 2,039,115 2,429,118 3,379,771 4,485,087 4,178,498 Non-Interest Income 75.5% 19.1% 39.1% 32.7% -6.8%
Dealing Income - - - - - of which Fee Grth 75.5% 19.1% 39.1% 32.7% -6.8%
Other Operating Income - - - - - Revenues 1614.6% 2087.8% 1987.0% 1770.2% 954.1%
Total operating revenues 15,274,199 18,463,107 22,131,718 26,049,412 28,534,886 Costs 3.2% 17.6% 21.9% 5.7% 17.8%
Pre-Provision Profits 22.7% 18.4% 18.7% 21.0% 7.8%
Operating costs -7,645,498 -8,990,012 -10,955,115 -11,584,830 -13,647,489 Loan Loss Provisions 327.2% 4.0% 47.6% 119.8% -21.7%
Pre-Tax 5.3% 31.7% 13.4% 2.3% 16.9%
Pre-Prov. Profits 12,459,476 14,747,519 17,505,678 21,179,643 22,830,763 Attributable Income 11.8% 13.6% 23.2% 19.4% 18.5%
Provisions 1,844,082 1,917,092 2,830,490 6,220,398 4,868,601 EPS 9.8% 12.3% 23.0% 19.4% 18.5%
Other Inc/Exp. 122,102 224,071 475,899 776,943 524,434 DPS 2.9% 10.5% 13.5% 15.6% 1.8%
Exceptionals - - - - -
Disposals/ other income - - - - - Balance Sheet Gearing FY06 FY07 FY08 FY09E FY10E
Pre-tax 5,906,721 7,780,074 8,822,012 9,460,054 14,617,401 Loan/deposit 72.5% 68.8% 79.9% 88.6% 87.4%
Tax 1,649,149 2,942,073 2,863,644 1,905,360 2,108,646 Investment/assets 12.9% 11.4% 8.5% 7.1% 9.3%
Minorities 0 0 0 0 0 Loan/Assets 54.0% 52.5% 62.2% 66.4% 67.8%
Other Distbn. - - - - - Customer deposits/liab. 80.4% 81.3% 81.9% 80.5% 82.1%
Attributable Income 4,257,572 4,838,001 5,958,368 7,115,768 8,434,584 LT debt/liabilities 3.9% 3.1% 3.1% 7.1% 6.3%

Per Share Data Rp FY06 FY07 FY08 FY09E FY10E Asset Quality/Capital FY06 FY07 FY08 FY09E FY10E
EPS 350.10 393.27 483.57 577.33 684.33 Loan loss reserves/loans 7.4% 6.1% 5.0% 6.8% 7.7%
DPS 157 173 196 227 231 NPLs/loans 4.8% 3.4% 2.8% 3.9% 4.4%
Payout 44.7% 44.0% 40.6% 39.3% 33.7% Loan loss reserves/NPLs 0.0% 0.0% 0.0% 0.0% 0.0%
Book value 1,374 1,578 1,815 2,207 2,820 Growth in NPLs 22.9% -9.8% 15.2% 66.0% -2.2%
Fully Diluted Shares - - - - - Tier 1 Ratio 17.5% 15.1% 13.1% 13.2% 14.8%
Total CAR 20.1% 16.9% 13.4% 14.6% 16.0%
Key Balance sheet Rp in millions FY06 FY07 FY08 FY09E FY10E Du-Pont Analysis FY06 FY07 FY08 FY09E FY10E
Net Loans 83,564,704 107,014,778 153,102,630 180,162,593 207,305,804 NIM (as % of avg. assets) 12.2% 12.0% 10.8% 9.9% 9.1%
LLR -6,718,048 -6,958,175 -8,005,462 -13,118,735 -13,191,843 Earning assets/assets 78.5% 74.3% 77.2% 84.2% 92.7%
Gross Loans 90,282,752 113,972,953 161,108,092 193,281,329 220,497,647 Margins (as % of Avg. Assets) 9.5% 8.9% 8.3% 8.3% 8.4%
NPLs 4,343,061 3,918,902 4,515,129 7,496,420 7,328,802 Non-Int. Rev./ Revenues 13.4% 13.2% 15.3% 17.2% 14.6%
Investments 19,908,430 23,220,457 20,929,046 19,393,646 28,447,514 Non IR/Avg. Assets 1.5% 1.4% 1.5% 1.7% 1.4%
Other earning assets 10,456,418 11,920,588 16,904,315 22,614,563 24,598,466 Revenue/Assets 9.9% 9.1% 9.0% 9.6% 9.3%
Avg. IEA 108,862,861 133,214,660 173,708,402 217,757,640 267,401,970 Cost/Income 50.1% 48.7% 49.5% 44.5% 47.8%
Goodwill - - - - - Cost/Assets 5.5% 5.0% 4.9% 4.5% 4.7%
Assets 154,725,486 203,734,938 246,076,896 271,309,370 305,728,825 Pre-Provision ROA 15.4% 14.1% 13.9% 14.1% 14.1%
LLP/Loans 2.2% 1.8% 1.8% 3.5% 2.3%
Deposits 124,468,339 165,599,983 201,538,339 218,270,497 251,136,665 Loan/Assets 59.8% 57.0% 61.2% 68.5% 71.7%
Long-term bond funding 5,967,194 6,236,244 7,598,124 19,185,389 19,185,389 Other Prov, Income/ Assets 0.1% 0.1% 0.2% 0.3% 0.2%
Other Borrowings 2,231,431 2,140,253 710,634 2,698,370 2,698,370 Operating ROA 5.5% 5.3% 5.0% 5.6% 5.2%
Avg. IBL 114,167,296 148,950,038 189,060,902 221,591,672 251,190,600 Pre-Tax ROA 16.8% 15.2% 15.2% 16.7% 15.9%
Avg. Assets 138,750,532 179,230,212 224,905,917 258,693,133 288,519,098 Tax rate 27.9% 37.8% 32.5% 21.1% 20.0%
Common Equity 16,878,808 19,437,635 22,356,697 26,927,990 32,516,267 Minorities & Outside Distbn. 0.0% 0.0% 0.0% 0.0% 0.0%
RWA 74,686,680 102,393,199 140,363,380 173,228,489 209,486,303 ROA 3.1% 2.7% 2.6% 2.8% 2.9%
Avg. RWA 76,612,420 88,539,940 121,378,289 156,795,934 191,357,396 RORWA 5.6% 5.5% 4.9% 4.5% 4.6%
Equity/Assets 10.9% 10.1% 9.3% 9.5% 10.3%
ROE 28.2% 26.6% 28.5% 28.9% 28.4%
Source: Company reports and J.P. Morgan estimates.

295
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Beijing Capital Land Neutral


Price: HK$3.33
Price Target: HK$3.5
www.bjcapitalland.com.cn

Company description China


Established in 2002, Beijing Capital Land (BCL) is a quality property Real Estate
developer with a focus on the mid-to-high-end residential and office Lucia KwongAC
properties. The company has an attributable development land bank of 3.5 (852) 2800-8526
million sqm in seven cities, mainly in Shenyang, Tianjin and Xian. Beijing lucia.yk.kwong@jpmorgan.com
Capital Group and GIC have 45.6% and 8.1% stakes, respectively. J.P. Morgan Securities (Asia Pacific) Ltd

Post mortem Price performance


Due to aggressive land acquisitions during the peak of the market in FY07, HK$
BCL is still highly geared (80% as of 30 June 2009). A recent issue of Rmb1 8
7
billion domestic bonds should have extended the maturity profile of its debt; 6
however, at the same time, it reduces the amount of interest expense that 5
could be capitalized. This, in turn, hurts net margin. As of end-October, the 4
3
company recorded contracted sales of Rmb10 billion, up 295% Y/Y on a low 2
base. We believe this will be difficult to repeat in 2010 as Beijing projects 1
0
gradually get depleted.
03 04 05 06 07 08 09

Source: Bloomberg.
Potential for earnings upgrades
Performance
The key risk to the company’s earnings stems more from completion rather
1M 3M 12M
than sales. Completion slippage has been a common phenomenon for Beijing
Absolute (%) 10.4 2.1 173.4
Capital Land.
Relative (%) 3.5 -21.1 159.0
Source: Bloomberg.
How much recovery is priced into the stock?
YTD, the stock has risen 169%, outperforming most of its peers. We believe Company data
52-week range (HK$) 0.67-4.03
this has priced in the potential strong boost in earnings for the next year, Mkt cap (HK$MM) 6,857
when this year’s contracted sales get recognized. Mkt cap (US$MM) 885
Shares O/S (MM) 1,021
Price target and key risks Avg daily value (HK$MM) 26.34
Avg daily value (US$MM) 3.40
Our Dec-09 PT of HK$3.5 is based on 1.8x FY09E P/BV and 9x FY10E P/E, Avg daily volume (MM) 8.41
largely in line with BCL’s small cap peers. Key risks to our PT include a Date of price 5 Nov 09
slowdown in sales and completion slippage. Exchange rate 7.75
Index: HSI 21,479
Free float (%) 67
Source: Bloomberg.

Bloomberg: 2868.HK; Reuters: 2868.HK


Rmb$ millions, year-end December
FY07 FY08 FY09E FY10E
Sales 4,871 5,167 6,576 5,141
Net profit 525 383 422 677
Core net profit 458 342 422 677
EPS (Rmb) 0.259 0.189 0.208 0.334
Core EPS (Rmb) 0.226 0.169 0.208 0.334
DPS (Rmb) 0.120 0.080 0.090 0.110
Core net profit growth (%) 129 -25 23 61
Core EPS growth (%) 100 -25 23 61
ROE (%) 13 9 10 14
P/E (x) 14.0 17.8 14.1 8.8
NAV per share (HK$) 2.99
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

296
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Beijing Capital Land: Summary of financials


Rmb in millions, year-end December
Profit and loss statement Cash flow statement
FY07 FY08 FY09E FY10E FY07 FY08 FY09E FY10E

Revenues 4,871 5,167 6,576 5,141 EBIT 1,047 1,383 1,666 1,238
% change Y/Y 138.8 6.1 27.3 -21.8 Depreciation & amortisation 100 92 96 101
EBIT 1,047 1,383 1,666 1,238 Change in working capital -2,477 -1,830 1,613 -333
% change Y/Y 364.5 32.1 20.5 -25.7 Taxes -260 -560 -365 -315
EBIT Margin (%) 21.5 26.8 25.3 24.1 Other non-cash items -84 138 97 102
Net Interest -135 -178 -262 22 Cash flow from operations -1,591 -915 3,010 691
Associates/ JCE 58 21 21 26
Exceptionals 175 41 0 0 Capex -359 -852 0 0
Earnings before tax 983 983 983 983 Disposal/ (purchase) 940 -6 -150 -50
% change Y/Y 363.9 10.6 12.5 -9.7 Net Interest -493 -865 -652 -605
Tax 419 504 365 315 Free cash flow -1,154 -2,085 2,383 445
as % of EBT -40.0 -36.5 -21.9 -25.4
Net Income (Reported) 525 383 422 677 Equity raised/ (repaid) 0 0 0 0
% change Y/Y 97.4 -27.1 10.1 60.6 Debt raised/ (repaid) 233 1,086 1,800 0
Core Net Profit 458 342 422 677 Other 0 0 0 0
% change Y/Y 129.5 -25.3 23.3 60.6 Dividends paid -139 -168 -821 -517
Shares Outstanding 2028 2028 2028 2028 Beginning cash 3,707 2,614 2,157 5,519
EPS (reported) 0.259 0.189 0.208 0.334 Ending cash 2,614 2,157 5,519 5,447
% change Y/Y 72.1 -27.1 10.1 60.6 DPS (Rmb) 0.120 0.080 0.090 0.110
Core EPS (Rmb) 0.226 0.169 0.208 0.334
% change Y/Y 100.1 -25.3 23.3 60.6
Balance sheet Ratio analysis
FY07 FY08 FY09E FY10E % FY07 FY08 FY09E FY10E
EBIT margin 21.5 26.8 25.3 24.1
Cash and cash equivalents 2,721 2,184 5,567 5,484 Operating margin 21.5 26.8 25.3 24.1
Accounts receivable 1,222 2,515 915 415 Net profit margin 10.8 7.4 6.4 13.2
Inventories 6,758 7,749 7,775 8,644 SG&A/sales
Others 36 0 0 0
Current assets 10,737 12,448 14,257 14,543 Sales per share growth 139 6 27 -22
Sales growth 139 6 27 -22
LT investments 1,401 1,664 2,415 3,219 Net profit growth 97.4 -27.1 10.1 60.6
Net fixed assets 7,880 4,955 5,255 5,355 EPS growth 72.1 -27.1 10.1 60.6
Total assets 20,018 19,068 21,927 23,118
Interest coverage (x) 2.6 2.7 3.0 2.2
Liabilities Net debt to total capital 33.5 42.2 23.6 23.3
ST loans 2,534 1,223 723 723 Net debt to equity 80.4 110.7 68.9 63.2
Payables 7,560 5,881 6,661 7,316 Sales/assets 24.3 27.1 30.0 22.2
Others 6 0 0 0 Assets/equity 438.3 448.8 484.3 456.6
Total current liabilities 10,110 7,104 7,385 8,039 ROE 12.6 8.7 9.6 14.1
Long term debt 3,859 5,662 7,962 7,962 ROCE 10.1 12.6 12.8 9.2
Other liabilities 0 0 0 0
Total liabilities 14,260 12,908 15,488 16,143
Minority interest 1,191 1,911 1,911 1,911
Shareholders' equity 4,567 4,248 4,528 5,063
BVPS (Rmb) 2.3 2.1 2.2 2.5
Source: Company reports, J.P. Morgan estimates.

297
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

BYD Electronics Underweight


Price HK$7.48
Price Target: HK$3.6
www.byd-electronic.com

Company description HK/China


BYD Electronics (BYDE) provides mechanical components and EMS Technology Hardware
services to mobile handset OEMs such as Nokia, Motorola, Sony Ericsson Charles GuoAC
and Chinese brands. The company is the handset arm of BYD Co Ltd., which (852) 2800-8532
manufactures handset batteries, handset components and automobiles. charles.x.guo@jpmorgan.com

Post mortem J.P. Morgan Securities (Asia Pacific)


Limited
The handset EMS industry faces uncertain growth in the longer term as
existing customers continue to lose market share and value shifts away from Price performance
hardware to software. Besides, our recent checks suggest that FIH and Perlos 9
are taking share away from BYDE in low-end Nokia phones. The market has 6
been optimistic over TD-SCDMA handset/NBPC ODM prospects in 2010;
3
however, we believe TD take-off will be slow.
0
Potential for earnings upgrades No v-08 Feb-09 M ay-09 A ug-09 No v-09
There could be some upside for 2H09 earnings, but upside should be limited B YD Elec (HK$ )
for 2010, unless TD handset and NB really take off in a big way. HSI (rebased)
Source: Bloomberg.
How much recovery is priced into the stock?
The stock has substantially outperformed this year and is up nearly 173% Performance
YTD and has risen 80% in the past month. Although the handset outlook has 1M 3M 12M
improved over the past month, structural issues with the EMS industry Absolute (%) 79.8 55.8 173.0
remain and BYDE continues to lose market share to FIH and Perlos. At Relative (%) 71.0 48.7 88.6
nearly 19x FY10E P/E, the stock looks overvalued and we believe has priced Source: Bloomberg.
in any potential growth over the next two years; hence, we expect it to Company data
underperform going forward. 52-week range (HK$) 2.0-9.2
Mkt cap. (HK$MM) 16,860
Price target and key risks
Mkt cap. (US$MM) 2,167
Our Dec-10 PT of HK$3.6 is based on 9x 2010E P/E, which is slightly
Avg daily value (US$MM) 7.7
towards the lower end of the historical range and at a discount to its peers.
Avg daily volume (MM) 10.2
We believe the multiple is justified, given the poor growth visibility and its
Shares O/S (MM) 2,254
share loss at Nokia. Key risks to our PT include: (1) a much sharper-than-
Date of price 5-Nov-09
expected handset recovery; (2) Nokia going asset light, which could result in
Index: Hang Seng 21,479
higher outsourcing; and (3) asset infusion from its parent.
Free float (%) 34
Exchange rate 7.8
Source: Bloomberg.
Bloomberg: 285 HK; Reuters: 285.HK
Rmb in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 8,555 8,970 11,377 13,984
Net profit 766 562 790 797
EPS (Rmb) 0.34 0.25 0.35 0.35
FD EPS (Rmb) 0.34 0.25 0.35 0.35
DPS (Rmb) 0.0 0.0 0.0 0.0
Sales growth (%) 48.3% 4.9% 26.8% 22.9%
Net profit growth (%) (30.0%) (26.6%) 40.4% 0.9%
EPS growth (%) (42.0%) (26.3%) 39.9% 0.9%
ROE (%) 14.3% 9.1% 11.3% 10.3%
P/E (x) 19.5 26.4 18.9 18.7
FD P/E (x) 19.5 26.4 18.9 18.7
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009. We revised PT to HK$4.8 on November 29.

298
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

BYD Electronics: Summary of financials


Profit and loss statement Cash flow statement
Rmb in millions, year-end December Rmb in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenues 8,555 8,970 11,377 13,984 Net Income 766 562 790 797
Cost of Goods Sold 6,846 7,690 9,739 12,220 Depr. & Amortisation 364 481 601 730
Gross Profit 1,710 1,280 1,638 1,764 Change in working capital -603 -346 -572 -718
SGA &RD Expenses 717 689 726 860 Other 490 -1 237 306
Operating Profit (EBIT) 1,075 700 933 931 Cash flow from operations 1,017 697 1,056 1,115
EBITDA 1440 1181 1534 1661
Interest Income 70 16 16 17 Capex -1,719 -956 -1,000 -1,200
Interest Expense -40 0 0 0 Disposal/(purchase) -341 -235 103 0
Investment Income (Exp.) 0 0 0 0 Cash flow from investing -2,056 -853 -1,000 -1,200
Non-OP Income (Exp.) -303 -91 -96 -86 Free cash flow -702 -259 56 -85
Earnings before tax 803 625 854 862
Tax -38 -62 -64 -65
Equity raised/ (repaid) 634 0 0 0
Net Income (Reported) 766 562 790 797
Debt raised/ (repaid) -1,283 -14 0 0
Other 0 182 0 0
Rmb Dividends paid -341 0 0 0
EPS (Reported) 0.34 0.25 0.35 0.35 Cash flow from financing -990 168 0 0
BPS 2.57 2.90 3.24 3.59
DPS 0.00 0.00 0.00 0.00
Net change in cash -2,072 11 56 -85
Shares Outstanding (MM) 2,270 2,263 2,272 2,272
Beginning cash 3,217 1,145 1,156 1,212
Source: Company, J.P. Morgan estimates. Ending cash 1,145 1,156 1,212 1,127
Source: Company, J.P. Morgan estimates.

Balance sheet
Rmb in millions, year-end December Ratio analysis
FY08 FY09E FY10E FY11E %, year-end December
Cash and cash equivalents 1,145 1,156 1,212 1,127 FY08 FY09E FY10E FY11E
Accounts receivable 1,527 2,272 2,762 3,395 Gross Margin 20.0 14.3 14.4 12.6
Inventories 1,824 2,172 2,649 3,334 EBITDA margin 16.8 13.2 13.5 11.9
Others 338 329 419 515 Operating Margin 12.6 7.8 8.2 6.7
Current assets 4,833 5,930 7,041 8,371 Net Margin 9.0 6.3 6.9 5.7
SG&A/Sales 8.4 7.7 6.4 6.1
LT investments 0 0 0 0
Net fixed assets 3,031 3,506 3,906 4,375
Sales growth 48.3 4.9 26.8 22.9
Others 553 451 451 451
Operating Profit Growth -10.6 -34.9 33.4 -0.2
Total assets 8,418 9,887 11,397 13,196
Net profit growth -30.0 -26.6 40.4 0.9
EPS (Reported) growth -42.0 -26.3 39.9 0.9
Liabilities
ST loans 14 0 0 0
Interest coverage (x) 27.2 2058.0
Payables 1,468 2,207 2,691 3,387
Net debt to total capital Net Cash Net Cash Net Cash Net Cash
Others 1,099 1,098 1,335 1,641
Net debt to equity Net Cash Net Cash Net Cash Net Cash
Total current liabilities 2581 3305 4026 5028
Long term debt 0 0 0 0
Other liabilities 0 0 0 0 Asset Turnover 101.6 90.7 99.8 106.0
Total liabilities 2,581 3,305 4,026 5,028 Working Capital Turns (x) 1.0 1.0 1.1 1.1
Shareholders' equity 5,838 6,582 7,372 8,169 ROE 14.3 9.1 11.3 10.3
ROCE 17.2 10.3 12.5 11.1
Source: Company, J.P. Morgan estimates.
Source: Company, J.P. Morgan estimates.

299
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

China COSCO Neutral


Price: HK$9.83
Price Target: HK$10.00
www.chinacosco.com

Company description China


China COSCO is the largest dry bulk shipping operator in the world and its Conglomerates & Multi-industry
container shipping operation is ranked first in China and seventh-largest Corrine PngAC
globally. It also owns a 51% stake in Cosco Pacific and its 100%-owned (65) 6882-1514
logistics arm is the largest in China. corrine.ht.png@jpmorgan.com
J.P.Morgan Securities (Asia Pacific) Limited
Post mortem
China Cosco is highly leveraged to the BDI as 90% of its capacity is Price performance
14
deployed in the spot market. We believe, its market leadership is enhanced
10
by its integrated model and ability to offer one-stop services to its sizeable HK$
customer base. Further asset injections by the parentco are likely in the long 6

term. 2
Nov -08 Feb-09 May -09 Aug-09 Nov -09
1919.HK share price (HK$)
Potential for earnings upgrades SHAN.B (rebased)
Industry overcapacity will likely persist in 2010; this could cap freight rate Source: Bloomberg.
and earnings recovery for this large industry player. China COSCO has
sizeable total capital commitment amounting to Rmb32B in 2009-2013, plus Performance
a large operating lease commitment. We believe the company should have 1M 3M 12M
little problem accessing credit going forward; however, it gearing could rise Absolute (%) 8.1% -18.0% 129.4%
substantially and we do not rule out capital-raising risks. Relative (%) -4.2% -15.1% -17.1%
Source: Bloomberg.

How much recovery is priced into the stock?


Company data
China Cosco is trading at 1.7x P/BV (12M rolling forward), close to its
52-week range (HK$) 12.78-3.15
historical average valuation since listing, but at a substantial premium to
Mkt cap. (RmbMM) 22,346
regional peers. Although China Cosco should offer greater upside, given its
Mkt cap. (US$MM) 3,273
higher operating leverage, we view Pacific Basin Shipping and OOIL as a
Avg daily value (US$MM) 100.9
more defensive play on the recovery in the dry bulk and container shipping
Avg daily volume (MM) 81.4
sectors, given the continued industry overcapacity risks.
Shares O/S (MM) 2,581
Date of price 5-Nov-09
Price target and key risks
Index: SHAN.B 219
Our Jun-10 PT of HK$10 is based on 1.8x P/BV, China COSCO’s average
Free float (%) 99.47
valuation since listing. Key risks to our PT include: (1) further losses and
Exchange rate 7.75
book value erosion in 2010; (2) volatile fuel prices; and (3) policies
Source: Bloomberg.
dampening iron ore imports.
Bloomberg: 1919 HK; Reuters: 1919.HK
Rmb in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 130,872 70,215 73,594 79,685
Net profit 11,617 -3,111 2,023 3,867
EPS (Rmb) 1.14 -0.30 0.20 0.38
FD EPS (Rmb) -0.30 0.20 0.38
DPS (Rmb) 0.23 0.00 0.04 0.08
Sales growth (%) 16.6% -46.3% 4.8% 8.3%
Net profit growth (%) -40.4% nm nm 91.1%
EPS growth (%) -47.9% -126.8% -165.0% 91.1%
ROE (%) 23.4% -6.3% 4.2% 7.6%
P/E (x) 7.7 -28.7 44.1 23.1
FD P/E (x) -28.7 44.1 23.1
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

300
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

China Cosco: Summary of financials


Rmb in millions, year end December
Income statement Cash flow statement
FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E
Revenues 112,233 130,872 70,215 73,594 79,685 EBIT 26,668 15,794 -3,216 3,585 6,243
% change Y/Y 43.0% 16.6% (46.3%) 4.8% 8.3% Depr. & amortization 4,138 3,702 4,867 5,131 5,671
EBITDA 30,805 19,495 1,651 8,716 11,914 Change in working capital 19,141 -8,695 -9,203 152 274
% change Y/Y 89.1% -36.7% -91.5% 427.8% 36.7% Taxes - - - - -
EBIT 26,668 15,794 -3,216 3,585 6,243 Cash flow from operations 24,157 25,391 -7,551 8,868 12,188
% change Y/Y 119.6% NM NM NM 74.2%
EBIT Margin 23.8% 12.1% -4.6% 4.9% 7.8% Capex -12,940 -17,999 -14,406 -20,000 -20,000
Net Interest -555 -124 -472 -1,968 -2,713 Disposal/(purchase) - - - - -
Earnings before tax 26,113 15,670 -3,688 1,617 3,530 Net Interest -555 -124 -472 -1,968 -2,713
% change Y/Y 130.7% -40.0% -123.5% -143.8% 118.3% Other -7,528 -4,561 1,398 467 287
Tax -4,826 -2,963 0 0 0 Free cash flow 11,218 7,392 -21,957 -11,132 -7,812
as % of EBT 18.5% 18.9% 0.0% 0.0% 0.0%
Net income (reported) 19,482 11,617 -3,111 2,023 3,867 Equity raised/(repaid) 28,107 0 0 0 0
% change Y/Y 139.7% -40.4% -126.8% -165.0% 91.1% Debt raised/(repaid) 2,463 7,925 6,144 9,500 9,500
Shares outstanding 10,216 10,216 10,216 10,216 10,216 Other -2,812 13,520 -1,870 -2,435 -3,001
EPS (reported) (Rmb) 2.18 1.14 (0.30) 0.20 0.38 Dividends paid -4,050 -13,926 -2,323 0 -405
% change Y/Y 174.2% (47.9%) (126.8%) (165.0%) 91.1% Beginning cash 9,555 37,624 31,582 9,345 5,744
Ending cash 37,624 31,582 9,345 5,744 4,315
DPS (Rmb) 0.18 0.23 0.00 0.04 0.08

Balance sheet Ratio Analysis


FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E
Cash and cash equivalents 37,624 31,582 9,345 5,744 4,315 EBITDA margin 27.4% 14.9% 2.4% 11.8% 15.0%
Accounts receivable - - - - - Operating margin 17.60% 13.30% (10.52%) 1.55% 4.35%
Inventories - - - - - Net margin 17.4% 8.9% -4.4% 2.7% 4.9%
Others 0 0 0 0 0
Current assets 37,624 31,582 9,345 5,744 4,315
Sales per share growth 63.6% 1.9% (46.3%) 4.8% 8.3%
LT investments 16,800 18,594 18,594 18,594 18,594 Sales growth 43.0% 16.6% (46.3%) 4.8% 8.3%
Net fixed assets 46,003 55,663 65,202 80,071 94,400 Net profit growth 139.7% -40.4% -126.8% -165.0% 91.1%
Total Assets 100,427 105,839 93,141 104,409 117,309 EPS growth 174.2% (47.9%) (126.8%) (165.0%) 91.1%

Liabilities Interest coverage (x) 55.50 157.85 3.50 4.43 4.39


Short-term loans 5,188 3,629 0 0 0
Payables - - - - - Net debt to equity -45.0% -10.4% 39.3% 68.0% 85.8%
Others 21,057 12,362 3,160 3,312 3,586 Sales/assets 1.35 1.27 0.71 0.75 0.72
Total current liabilities 26,245 15,991 3,160 3,312 3,586 Assets/equity 3.69 2.97 4.09 4.98 6.13
Long-term debt 14,142 22,785 28,929 38,429 47,929 ROE 47.9% 23.4% (6.3%) 4.2% 7.6%
Other liabilities 2,883 4,817 4,817 4,817 4,817 ROCE 44.6% 21.8% -4.2% 4.4% 6.6%
Total Liabilities 43,270 43,593 36,905 46,557 56,331
Shareholders' equity 46,600 52,492 47,057 49,080 52,542
BVPS (Rmb) 4.56 5.14 4.61 4.80 5.14
Source: Company, J.P. Morgan estimates.

301
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

China Southern Airlines Neutral


Price: HK$2.30
Price Target: HK$2.10
www.csair.com

Company description Hong Kong


China Southern Airlines (CSA) is China’s largest airline in terms of Airlines
passenger traffic and asset base. It is an amalgamation of Southern, Northern, Corrine PngAC
Xinjiang, Xiamen and a number of other regional airlines as a result of the (65) 6882-1514
government-driven industry consolidation. corrine.ht.png@jpmorgan.com
J.P.Morgan Securities (Asia Pacific) Limited
Post mortem
CSA has the largest market share in the domestic market with 80% of its Price performance
3
business contributed by domestic routes and only 6% of its total revenue
exposed to cargo (versus c.15% for the sector). 2
HK$
1
Potential for earnings upgrades
0
We believe CSA has weaker long-term growth prospects versus its peers, Nov -08 Feb-09 May -09 Aug-09 Nov -09
given its hub’s close proximity to Hong Kong. In addition, a more developed 1055.HK share price (HK$)
and efficient railway system in the longer term will likely result in greater H-SHARE (rebased)
Source: Bloomberg.
competition for CSA and traffic diversion from air to sea for domestic
routes. Performance
1M 3M 12M
How much recovery is priced into the stock? Absolute (%) -7.1% -24.6% 85.1%
CSA has been the best performing Asian airline stock year-to-date and is Relative (%) -19.4% -352.7% -404.5%
trading at 1.6x P/BV, a 20% premium to its average valuation since listing Source: Bloomberg.
due to its large exposure to the rebounding domestic passenger demand.
Hence, we see limited upside from the current level and expect CSA to Company data
underperform its Chinese airline peers as well as the Asian sector average. 52-week range (HK$) 0.83-3.12
Mkt cap. (RmbMM) 5,029
Price target and key risks Mkt cap. (US$MM) 737
Our Jun-10 PT of HK$2.1 is based on 1.3x P/BV, CSA’s average valuation Avg daily value (US$MM) 14.24
since listing and 1 standard deviation above its average valuation, excluding Avg daily volume (MM) 187.39
the M&A speculation period. Key risks to our PT include: (1) excessive Shares O/S (MM) 2,482
domestic price competition; (2) volatile fuel prices; and (3) Influenza A. Date of price 5-Nov-09
Index: H-share 17,898
Free float (%) 41.0
Exchange rate 8
Source: Bloomberg.

Bloomberg: 1055 HK; Reuters: 1055.HK


Rmb in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 55,288 51,589 58,931 65,228
Net profit -4,823 607 245 633
EPS (Rmb) -0.74 0.08 0.03 0.08
FD EPS (Rmb) 0.08 0.03 0.08
DPS (Rmb) 0.00 0.00 0.00 0.00
Sales growth (%) 1.6% -6.7% 14.2% 10.7%
Net profit growth (%) nm nm -59.6% 158.4%
EPS growth (%) -274.8% -110.3% -59.7% 159.0%
ROE (%) -51.1% 6.9% 2.3% 5.7%
P/E (x) -2.8 26.7 66.3 25.6
FD P/E (x) 26.7 66.3 25.6
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

302
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

China Southern Airlines: Summary of financials


Rmb in millions, year-end December
Income statement Cash flow statement
FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E
Revenues 54,401 55,288 51,589 58,931 65,228 EBIT 1,575 -6,538 1,483 962 1,200
% change Y/Y 17.7% 1.6% (6.7%) 14.2% 10.7% Depr. & amortization 5,554 5,746 6,024 6,425 6,809
EBITDA 7,129 -792 7,507 7,387 8,009 Change in working capital 2,252 2,284 -500 993 852
% change Y/Y 26.9% -111.1% -1047.8% -1.6% 8.4% Taxes -88 -399 8 3 8
EBIT 1,575 -6,538 1,483 962 1,200 Cash flow from operations 6,869 1,155 5,086 6,527 7,096
% change Y/Y 144.2% NM NM NM 24.8%
EBIT Margin 2.9% -11.8% 2.9% 1.6% 1.8% Capex -5,214 -8,052 -6,000 -5,500 -5,500
Net Interest -2,218 -1,884 -1,928 -1,857 -1,773 Disposal/(purchase) 288 312 0 0 0
Earnings before tax 2,879 -4,724 595 240 620 Net Interest -2,218 -1,884 -1,928 -1,857 -1,773
% change Y/Y 706.4% -264.1% -112.6% -59.7% 159.0% Other 370 262 937 983 1,033
Tax -847 -62 8 3 8 Free cash flow 1,655 -6,897 -914 1,027 1,596
as % of EBT 29.4% 1.3% 1.3% 1.3% 1.3%
Net income (reported) 1,839 -4,823 607 245 633 Equity raised/(repaid) 0 0 0 0 0
% change Y/Y 878.2% -362.3% -112.6% -59.7% 159.0% Debt raised/(repaid) 493 4,788 0 -1,500 -2,500
Shares outstanding 4,374 6,561 8,004 8,004 8,004 Other -950 2,700 3,000 - -
EPS (reported) (Rmb) 0.42 (0.74) 0.08 0.03 0.08 Dividends paid -8 -28 0 0 0
% change Y/Y 878.2% (274.8%) (110.3%) (59.7%) 159.0% Beginning cash 2,264 3,824 4,649 7,671 8,181
Ending cash 3,824 4,649 7,671 8,181 8,310
DPS (Rmb) 0.00 0.00 0.00 0.00 0.00

Balance sheet Ratio analysis


FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E
Cash and cash equivalents 3,824 4,649 7,671 8,181 8,310 EBITDA margin 13.1% -1.4% 14.6% 12.5% 12.3%
Accounts receivable 3,633 3,308 3,087 3,526 3,903 Operating margin 2.90% (11.83%) 2.88% 1.63% 1.84%
Inventories 1,213 1,229 1,147 1,310 1,450 Net margin 3.4% -8.7% 1.2% 0.4% 1.0%
Others 120 62 62 62 62
Current assets 8,790 9,248 11,967 13,079 13,725
Sales per share growth 17.7% (32.2%) (23.5%) 14.2% 10.7%
LT investments 2,175 2,142 2,308 2,482 2,665 Sales growth 17.7% 1.6% (6.7%) 14.2% 10.7%
Net fixed assets 71,041 71,652 71,628 70,703 69,394 Net profit growth 878.2% -362.3% -112.6% -59.7% 159.0%
Total Assets 82,006 83,042 85,903 86,265 85,784 EPS growth 878.2% (274.8%) (110.3%) (59.7%) 159.0%

Liabilities Interest coverage (x) 3.21 0.42 3.89 3.98 4.52


Short-term loans 27,825 25,959 25,959 23,959 21,959
Payables 1,844 1,353 1,262 1,442 1,596 Net debt to equity 416.6% 528.4% 531.9% 418.1% 378.4%
Others 13,042 14,226 13,513 14,929 16,143 Sales/assets 0.69 0.67 0.61 0.68 0.76
Total current liabilities 42,711 41,538 40,734 40,330 39,699 Assets/equity 6.91 11.83 8.08 7.93 7.46
Long-term debt 21,932 28,586 28,649 29,172 28,694 ROE 16.7% (51.1%) 6.9% 2.3% 5.7%
Other liabilities 3,053 3,439 3,439 3,439 3,439 ROCE 2.6% -10.6% 2.3% 1.5% 1.9%
Total Liabilities 67,696 73,563 72,822 72,941 71,832
Shareholders' equity 11,863 7,021 10,628 10,873 11,506
BVPS (Rmb) 2.71 1.07 1.33 1.36 1.44
Source: Company, J.P. Morgan estimates.

303
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

China Unicom Underweight


HK$10.42
Price Target: HK$8.00
www.chinaunicom.com.hk

Company description China


China Unicom (CU) is a fixed line and mobile operator using the GSM and Telecommunications
WCDMA wireless technologies. In 2008, it acquired the fixed-line business
Jimmy CheongAC
of China Netcom in 10 northern Chinese provinces, and operates fixed-line (852) 2800-8566
local, long distance and broadband services in those regions. China Unicom jimmy.j.cheong@jpmorgan.com
operates its wireless services in all provinces in China, and has over 150
J.P. Morgan Securities (Asia Pacific) Ltd
million subscribers. It is the second-largest wireless operator in China by
subscribers with a 21% market share. The company was listed on the Hong Price performance
Kong Stock Exchange and the NYSE on June 22, 2000. HK$
21

Post mortem 19

We are concerned with CU’s competitive positioning and the divergence 17

between CU’s reputation as a discount mobile provider with inferior network 15

13

coverage versus China Mobile and its 3G ambitions to turn itself into a high- 11

end operator. Heavy reliance on the success of the iPhone is a flawed 9

7
strategy, in our view. Will CU’s Rmb41 ARPU customers sign up to 3G 5

Nov-07

Jul-08

Nov-08

Jul-09
Jan-08

Mar-08

May-08

Sep-08

Jan-09

Mar-09

May-09

Sep-09
plans which are north of Rmb100? Likely no, in our opinion.
Source: Bloomberg.
Potential for earnings upgrades
We expect EBITDA margins to continue to deteriorate due to the need to Performance
spend aggressively on sales and marketing to roll out 3G and revitalize the
1M 3M 12M
Unicom brand. Network maintenance and general and administration costs
Absolute (%) -7.9 -10.2 -4.2
could also increase. We do not see an earnings turnaround any time soon.
Relative (%) -13.7 -14.1 -54.5
How much recovery is priced into the stock? Source: Bloomberg.
In our view, high expectations are priced into the stock, particularly with
regard to 3G growth and ARPU expansion. We believe these operational Company data
metrics will disappoint. Although reasonable on EV/EBITDA, CU looks 52-week range (HK$) 6.60-12.44
expensive on P/E. At 26.4x FY10E P/E (for no growth but earnings Mkt cap. (HK$) 254,892
declines), high interest payments and high depreciation could crimp net Mkt cap. (US$MM) 32,889
income over the next few years. CU generates the lowest ROE in the sector Avg daily value (US$MM) 51.2
and will likely be FCF-negative for this year and next due to heavy capex. Avg daily volume (MM) 35.5
Price target and key risks Shares O/S (MM) 24,461.84
Our DCF-based Dec-10 PT of HK$8.00 implies a WACC 11.9%, a terminal Date of price 5-Nov-09
growth rate of 2%, and a beta of 1.25. We expect the next 18 months to be a Index: Hang Seng 21,479
transition period for CU, our least preferred Chinese telco stock. Key risks to Free float (%) 20.6
our PT are wireless competition and unprofitable customer acquisitions. Exchange rate (HK$/US$) 7.75
Source: Bloomberg.
Bloomberg: 762 HK; Reuters: 0762.HK
Rmb in millions, year-end December
FY08 FY09E FY10E FY11E
Revenue – adjusted 148,020 153,484 161,674 174,865
EBITDA – adjusted 66,949 64,647 63,440 67,328
Net profit – adjusted 14,332 11,289 8,115 9,563
EPS (HK$) – adjusted 0.67 0.53 0.38 0.45
DPS (HK$) 0.23 0.20 0.14 0.20
Sales growth (%) -0.8% 3.7% 5.3% 8.2%
Net profit growth (%) -5.8% -21.2% -28.1% 17.8%
Dividend yield (%) 2.2% 1.9% 1.3% 1.9%
ROE (%) 7.4% 5.4% 3.8% 4.4%
P/E (x) 15.5 19.7 27.4 23.2
EV/EBITDA (x) 3.4 4.6 5.2 4.9
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

304
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

China Unicom: Summary of financials


Rmb in millions, year-end December
P&L statement Balance sheet
FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E
Revenue - adjusted 149,170 148,020 153,484 161,674 174,865 Cash and cash equivalents 12,714 22,616 6,541 5,599 1,310
EBITDA - adjusted 71,618 66,949 64,647 63,440 67,328 Accounts receivable 11,014 8,587 9,065 8,884 8,647
Depreciation (47,369) (47,678) (50,439) (51,208) (51,859) Inventories 2,815 1,171 813 800 790
EBIT 24,249 19,271 14,208 12,232 15,468 Others 5,632 3,746 4,978 4,921 4,873
Other 4,990 1,994 2,000 2,000 2,000 Total current assets 32,175 36,120 21,398 20,205 15,620
Interest income 285 239 120 91 52
Interest expense (3,231) (2,411) (2,325) (4,069) (4,770) Net fixed assets 276,110 283,912 339,062 374,439 385,054
Exceptionals 711 15,736 (2,000) (1,700) 0 Other long term assets 25,802 24,892 40,822 40,822 40,822
Profit before tax 20,158 6,340 12,767 8,554 12,750
Tax (7,083) (1,801) (3,096) (2,138) (3,188) Total assets 334,087 344,924 401,282 435,466 441,496
Net profit - Reported 21,438 33,913 9,671 6,415 9,563
Net profit - Adjusted 15,209 14,332 11,289 8,115 9,563 ST loans 39,261 21,996 40,499 49,675 49,675
Others 84,785 103,223 105,840 104,775 103,878
FD shares outstanding 24,182 24,182 24,182 24,182 24,182 Total current liabilities 124,046 125,219 146,339 154,450 153,553
EPS (HK$) - Reported 0.95 1.59 0.45 0.30 0.45
EPS (HK$) - Adjusted 0.67 0.67 0.53 0.38 0.45 Long term debt 18,086 7,997 38,278 61,902 61,902
DPS (HK$) 0.21 0.23 0.20 0.14 0.20 Other liabilities 13,439 4,998 5,120 5,335 5,586
DPS payout ratio - on adj NP 0% 34% 37% 36% 45% Total liabilities 155,571 138,214 189,738 221,687 221,040

Adj Revenue growth NM -0.8% 3.7% 5.3% 8.2% Shareholders' equity 178,512 206,710 211,544 213,780 220,456
Adj EBITDA growth NM -6.5% -3.4% -1.9% 6.1%
Adj Net profit growth NM -5.8% -21.2% -28.1% 17.8% Total liabilities and equity 334,083 344,924 401,282 435,466 441,496
Adj EPS growth NM -5.8% -21.2% -28.1% 17.8%
DPS growth NM 5.4% -12.8% -30.9% 49.1% Net (debt)/cash (44,633) (7,377) (72,236) (105,978) (110,267)
BV per share (Rmb) 7.4 7.4% 5.4% 3.8% 4.4%

Ratio analysis Cash flow statement


% FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E
EBITDA margin (Adj) 48.0% 45.2% 42.1% 39.2% 38.5% Cash flow from operations 65,256 56,674 61,497 57,024 61,071
FCF margin -0.1% 10.2% -30.7% -17.1% -0.1% Capex (41,798) (47,747) (109,833) (86,586) (62,474)
ROE 11.8% 7.4% 5.4% 3.8% 4.4% Cash flow from other (2,765) 22,746 0 0 0
investing
ROC 17.7% 9.0% 5.5% 4.0% 4.7% Cash flow from financing (29,805) (35,070) 45,164 28,620 (2,887)
ROA 6.3% 4.2% 3.0% 1.9% 2.2%
Change in cash for year (7,887) (2,741) (3,173) (942) (4,289)
Tax rate - ex connection fees 35% 28% 25% 25% 25%
Capex / adjusted sales 28% 32% 72% 54% 36% Beginning cash 19,866 11,979 9,238 6,065 5,123
Debt / capital 24% 13% 27% 34% 34% Closing cash 11,979 9,238 6,065 5,123 834
Net debt (cash) / equity 25% 4% 34% 50% 50%
Interest cover (x) 24.2 30.8 29.3 15.9 14.3
Source: Company and J.P. Morgan estimates.

305
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Compal Electronics, Inc. Underweight


Price: NT$40.35
Price Target: NT$32
www.compal.com
Company description Taiwan
Compal manufactures and markets notebook computers, color monitors, Computer Hardware
LCD and other computer-related products. Its key customers include Alvin KwockAC
Toshiba, Acer, Dell, HP, Lenovo, and Fujitsu/Fujitsu Siemens. (852) 2800 8533
alvin.yl.kwock@jpmorgan.com
Post mortem
The sub-US$800 segment has increased from 15% to 50% of Notebook PC Gokul Hariharan
volume since the financial crisis broke out in 1Q08. Notebook ODMs have (852) 2800 8564
gokul.hariharan@jpmorgan.com
managed to keep margins flattish or even up due to falling component costs.
However, key components (DRAM, LCD panel) have since then seen sharp J.P. Morgan Securities (Asia Pacific) Ltd.

price increases; mechanical component costs are on the rise with labor Price performance
shortages re-surfacing, and oil and commodity prices are rising as well. 45

Potential for earnings upgrades NT$ 30

We see increasing evidence of eroding notebook ODM pricing power: (1)


15
rising component prices, yet consumers are paying less; (2) Quanta/Compal Nov-08 Feb-09 May-09 Aug-09 Nov-09
rivalry intensifying again, while newcomer Hon Hai enters the fray; (3) 2324.TW share price (NT$
HP/Acer guiding for strong 2010-11 margins after the ODM bidding— TSE (rebased)
Source: Bloomberg.
historically, there has been a strong inverse margin relationship between
brands and notebook ODMs; (4) HP’s unexpected order reshuffling as Performance
Inventec fights back with lower pricing; and (5) HP resuming E-bidding and 1M 3M 12M
starting in 2Q10 to adopt a dual-source, bi-monthly bidding strategy for Absolute (%) 3.2 36.1 62.5
mainstream projects to induce an ODM price war. Consensus expects flat Relative (%) 3.5 25.6 9.1
margins in 2010 and this we believe is a key downside risk. Source: Bloomberg.

How much recovery is priced into the stock? Company data


All ODMs have guided for market share gains in 2010—someone has to 52-week range (NT$) 14.58-43.00
miss, given the top three brands have already fully outsourced, while EMS Mkt cap. (NT$MM) 160,710
Mkt cap. (US$MM) 4,940
are entering the space as new competitors. Compal guided for its 2010 Avg daily value (US$MM) 26.38
notebook units to grow more than the industry growth of 20%. We believe Avg daily volume (MM) 25.78
this is 2002-04 déjà vu, when an ODM pricing war led Compal’s Shares O/S (MM) 3,982.9
Date of price 5-Nov-09
consolidated OPM to fall from 7.3% to 4.3%. The stock is trading at near 3- Index: TWSE 7,417
year high both in terms of P/E and P/BV. Free float (%) 83.7%
Exchange rate 32.5
Price target and key risks Source: Bloomberg.
Our Jun-10 PT is based on 9x FY10E earnings (vs historical P/E range of 4x-
28x). Our PT implies Dec-09 P/BV of 1.4x vs 2009E ROE of 18% and Dec-
10 P/BV of 1.3x vs 2010E ROE of 15%. A key risk to our view and PT is
better-than-expected progress in vertical/horizontal integration.
Bloomberg: 2324 TT; Reuters: 2324.TW
NT$ in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Sales 442,565 580,497 627,615 636,933 YE BPS (NT$) 19.9 22.7 23.9 24.9
Operating profit 16,650 19,567 17,410 15,685 New Taiwan GAAP ROE (%) 16.8 17.8 14.8 12.5
EBITDA 25,643 24,783 20,437 19,267 Cash div (NT$/share) 2.40 1.50 2.37 2.17
Net profit 12,640 14,944 13,814 12,360 New TW GAAP EPS growth (%) 3.4% 13.9% -8.9% -11.5%
MV of employee bonus - 2,205 2,110 1,888 P/BV (x) 2.01 2.02 1.77 1.69
New TW GAAP NI 13,091 14,944 13,814 12,360 Quarterly EPS (NT$) 1Q 2Q 3Q 4Q
New TW GAAP EPS (NT$) 3.35 3.81 3.47 3.07 EPS (FY08) 0.82 0.82 0.89 0.70
New Taiwan GAAP P/E (x) 12.1 10.6 11.6 13.1 EPS (FY09E) 0.72 0.83 1.12 1.14
Cash 38,535 44,031 41,656 35,375 EPS (FY10E) 0.81 0.82 0.91 0.93
Gross debt 18,260 20,010 23,133 27,452 Fair value (6/2010) NT$41
Equity 77,837 90,230 96,028 101,049 Price target (6/2010) NT$32
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

306
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Compal Electronics, Inc.: Summary of financials


NT$ in millions, year-end December
Income statement Ratio analysis
FY06 FY07 FY08 FY09E FY10E FY11E % FY06 FY07 FY08 FY09E FY10E FY11E

Revenues 310,733 449,580 442,565 580,497 627,615 636,933 Gross Margin 5.6 5.8 6.6 6.0 5.1 4.7
Cost of Goods Sold 293,248 423,430 413,235 545,710 595,719 606,799 EBITDA margin 4.0 4.6 5.8 4.3 3.3 3.0
Gross Profit 17,485 26,150 29,330 34,787 31,896 30,133 Operating Margin 3.4 3.8 3.8 3.4 2.8 2.5
R&D Expenses 2,989 3,448 4,113 5,165 4,757 4,828 Net Margin 2.8 3.0 2.9 2.9 2.5 2.2
SG&A Expenses 3,983 5,489 8,567 10,055 9,729 9,620 R&D/sales 1.0 0.8 0.9 0.9 0.8 0.8
Operating Profit (EBIT) 10,514 17,213 16,650 19,567 17,410 15,685 SG&A/Sales 1.3 1.2 1.9 1.7 1.6 1.5
EBITDA 12,518 20,794 25,643 24,783 20,437 19,267
Interest Income 992.6 1,548.0 1,357.5 376.4 438.9 404.1 Sales growth 37.1 44.7 -1.6 31.2 8.1 1.5
Interest Expense -581.7 -713.3 -455.7 -81.2 -72.3 -86.6 Operating Profit Growth 14.4 63.7 -3.3 17.5 -11.0 -9.9
Investment Income (Exp.) 154.7 -152.1 -1,941.8 -1,731.0 -930.0 -930.0 Old Taiwan GAAP NI growth 3.1 57.7 -7.6 32.8 -7.4 -10.5
Non-Operating Income
(Exp.) -836.9 -748.6 508.4 0.0 0.0 0.0 New Taiwan GAAP NI growth 2.2 86.0 4.1 14.2 -7.6 -10.5
Earnings before tax 10,243 17,147 16,119 18,131 16,847 15,073
Tax 1,947 3,252 3,253 3,171 3,032 2,713 Interest coverage (x) 18.1 24.1 36.5 240.8 240.7 181.1
Net Income (Old Taiwan
GAAP) 8,675 13,683 12,640 16,780 15,544 13,908 Net debt to total capital -27.1 -31.3 -24.2 -23.7 -17.2 -7.6
Net Income (New Taiwan
GAAP) 6,761 12,574 13,091 14,944 13,814 12,360 Net debt to equity -35.5 -39.8 -29.1 -28.5 -21.1 -9.5
NT$
EPS (Old Taiwan GAAP) 1.76 2.29 2.28 3.52 3.23 4.28 Asset Turnover 174.5 229.8 247.3 218.6 224.0 217.9
EPS (New Taiwan GAAP) 1.78 3.24 3.35 3.81 3.47 3.07 Working Capital Turns (x) 8.4 11.0 8.9 10.5 10.4 11.8
BPS 18.41 20.04 19.94 22.74 23.91 24.86 ROE 12.8 18.3 16.2 20.0 16.7 14.1
Cash Dividend PS 1.50 1.70 2.40 1.50 2.37 2.17 ROIC 9.1 13.3 12.1 16.3 13.4 11.1
Shares Outstanding (MM) 3805 3883 3910 3919 3979 4028 ROIC (net of cash) 16.8 27.1 22.1 26.6 21.1 15.9

Balance sheet Cash flow statement


FY06 FY07 FY08 FY09E FY10E FY11E FY06 FY07 FY08 FY09E FY10E FY11E

Cash and cash equivalents 47,449 52,405 38,535 44,031 41,656 35,375 Net income 8,675 13,683 12,640 16,780 15,544 13,908
Accounts receivable 64,929 72,455 68,034 126,899 130,425 132,390 Depr. & Amortisation 2,004 3,581 8,993 5,216 3,027 3,582
Inventories 23,502 28,693 28,958 51,321 52,747 53,542 Change in working capital 6,875 -4,152 -5,828 -9,253 617 69
Others 1,967 3,242 1,649 2,198 2,259 2,293 Cash flow from operations 17,554 13,112 15,805 12,743 19,188 17,559
Current assets 137,847 156,795 137,177 224,448 227,086 223,599
Capex -800 -4,206 -13,762 3,018 -5,056 -6,463
LT investments 28,861 26,656 24,313 31,607 41,089 53,415 Disposal/ (purchase) -1,983 2,034 1,857 -7,629 -9,885 -12,810
Net fixed assets 10,367 10,991 15,760 7,526 9,555 12,435 Cash flow from investment -2,782 -2,172 -11,905 -4,611 -14,940 -19,273
Others 1,020 1,192 1,678 2,014 2,416 2,900
Total assets 178,095 195,634 178,928 265,595 280,146 292,349 Free cash flow 16,754 8,907 2,043 15,761 14,133 11,096

Liabilities Equity raised/ (repaid) 2,350 545 179 832 493 480
ST loans 22,126 11,530 5,937 6,866 8,037 9,657 Debt raised/ (repaid) -1,025 -852 -5,378 2,411 3,123 4,319
Payables 77,935 85,530 69,929 132,109 137,093 139,596 Other 1,059 590 -3,518 -70 -825 -664
Others 6,634 8,878 12,903 23,246 23,892 24,252 Dividends paid -5,744 -6,267 -9,053 -5,810 -9,415 -8,703
Total current liabilities 106,695 105,938 88,769 162,221 169,022 173,506 Cash flow from financing -3,360 -5,984 -17,770 -2,637 -6,623 -4,568
Long term debt 0 9,744 9,959 11,441 13,393 16,092
Other liabilities 167 1,703 2,364 1,703 1,703 1,703 Beginning cash 36,038 47,449 52,405 38,535 44,031 41,656
Net change in cash and
Total liabilities 106,862 117,385 101,091 175,365 184,118 191,301 equivalents 11,411 4,957 -13,870 5,495 -2,375 -6,281
Shareholders' equity 71,233 78,249 77,837 90,230 96,028 101,049 Ending cash 47,449 52,405 38,535 44,031 41,656 35,375
Source: Company, J.P. Morgan estimates.

307
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Datang International Neutral


HK$3.72
Price Target: HK$4.30
www.dtpower.com
Company description China
Datang is the listed flagship IPP of the China Datang Group, one of the five Independent Power Producers
nationwide generation groups in China unbundled from the State Power Corp Edmond LeeAC
of China back in 2003. As of end-2008, Datang had total installed capacity of (852) 2800-8575
25,097MW. The group is the first listed IPP in China to have diversified edmond.ch.lee@jpmorgan.com
away from coal-fired power generation business into nuclear power J.P. Morgan Securities (Asia Pacific) Limited
generation (under development), coal mining and coal conversion projects. Price performance
5.5
Post mortem
Despite the stock market upturn, the China IPPs have remained the worst HK$ 4.0

performing sub-sector within our China infrastructure coverage over the past 2.5
12 months. We expect Datang to continue to lag behind CR-Power and Nov-08 Feb-09 May-09 Aug-09 Nov-09

Huaneng due to its higher gearing (80% debt/asset ratio) and coal conversion 0991.HK share price (HK$
HSCEI (rebased)
exposure (given the group’s already negative track record on its Duolun
Source: Bloomberg.
project). Other share price downside risks include: (A) higher coal costs; (B)
accelerating capacity addition; and (C) possible introduction of increased
Performance
competition leading to slight IPP tariff pressure. We believe IPP tariff
1M 3M 12M
pressure might persist into FY10-11 as the sector is deregulated further.
Absolute (%) -3.1 -29.0 23.6
Relative (%) -13.1 -36.0 -53.6
Potential for earnings upgrades
Source: Bloomberg.
Share price catalysts for Datang include: (A) a continued recovery in power
demand; (B) slower capacity addition; and (C) lower coal prices.
Company data
52-week range (HK$) 2.36-5.39
How much recovery is priced into the stock?
Mkt cap. (HK$MM) 43,650
China power demand has continued to pick up. According to data released by
Mkt cap. (US$MM) 5,596
China Electricity Council, power demand grew 10.24% Y/Y in Sep-09,
Avg daily value (US$MM) 17
supported by continued recovery in industrial demand 8.8% for the month.
Avg daily volume (MM) 33
Given this, we believe some of recovery may have been partially priced in.
Shares O/S (MM) 11,734
Date of price 5-Nov-2009
Price target and key risks
Index: HSCEI 12,805
We maintain our Neutral rating on Datang. Our Dec-10 DCF-based PT of
Free float (%) 25
HK$4.3 implies a risk-free rate of 5%, a terminal growth rate of 2%, and a
Exchange rate HK$7.8/ US$1
beta of 1.5x. Key upside risks to our view and PT include lower-than-
expected coal costs and capital expenditure, and stronger utilization. Source: Bloomberg.

Bloomberg: 0991HK; Reuters: 991.HK


Rmb in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 36,836 44,907 53,388 54,536
Net profit 761 1,749 3,025 3,571
EPS (Rmb) 0.06 0.14 0.23 0.27
FD EPS (Rmb) 0.06 0.14 0.23 0.27
DPS (Rmb) 0.11 0.11 0.11 0.13
Sales growth (%) 12.4 21.9 18.9 2.2
Net profit growth (%) -78.9 117.0 63.7 18.1
EPS growth (%) 11.3 11.3 11.3 11.3
ROE (%) 2.7 6.1 9.4 10.5
P/E (x) 54.6 23.4 14.3 12.2
FD P/E (x) 54.6 23.4 14.3 12.2
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

308
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Datang International: Summary of financials


Profit and loss statement Cash flow statement
Rmb in millions, year-end December Rmb in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 36,836 44,907 53,388 54,536 EBIT 2,929 7,462 10,216 10,931
% change Y/Y 12.4 21.9 18.9 2.2 Depreciation & amortization 6,159 7,595 8,691 8,710
Gross margin (%) 37.7 -9.4 -1.2 0.0 Change in working capital -2117 2642 492 -503
EBITDA 9,088 15,057 18,908 19,641 Taxes -734 392 -115 -874
% change Y/Y -29.2 65.7 25.6 3.9 Cash flow from operations 7,898 11,555 13,646 13,252
EBITDA margin (%) 24.7 33.5 35.4 36.0 Capex -36,010 -22,831 -20,000 -12,000
EBIT 2,929 7,462 10,216 10,931 Disposal/(purchase) 1,619 0 0 0
% change Y/Y -63.0 154.7 36.9 7.0 Net interest 166 (6,669) (6,374) (6,592)
EBIT margin (%) 8.0 16.6 19.1 20.0 Free cash flow -27,902 -6,196 -2,106 4,776
Net interest (3,637) (4,122) (4,138) (3,618) Equity raised/(repaid) 0 0 0 0
Earnings before tax 612 3,859 6,687 8,022 Debt raised/(repaid) 30,925 7,418 4,883 2,783
% change Y/Y -89.9 530.9 73.3 20.0 Other (2,448) 1,979 1,154 752
Tax (72) (579) (1,337) (1,845) Dividends (2,240) (1,296) (1,527) (1,450)
as % of EBT 11.7 15.0 20.0 23.0 Beginning cash 3,471 5,468 2,719 775
Net income (reported) 761 1,749 3,025 3,571 Ending cash 5,468 2,719 775 3,256
% change Y/Y -78.7 129.9 72.9 18.1 DPS (Rmb) 0.11 0.11 0.11 0.13
Shares O/S (MM) 11,780 12,480 13,180 13,180 Source: Company, J.P. Morgan estimates.
EPS (reported) (Rmb) 0.06 0.14 0.23 0.27
Source: Company, J.P. Morgan estimates.

Ratio analysis
%, year-end December
Balance sheet
FY08 FY09E FY10E FY11E
Rmb in millions, year-end December EBITDA margin 24.7 33.5 35.4 36.0
FY08 FY09E FY10E FY11E Operating margin 8.0 16.6 19.1 20.0
Cash and cash equivalents 5,468 2,719 775 3,256 Net profit margin 2.1 3.9 5.7 6.5
Accounts receivable 6,242 5,072 6,029 6,159 SG&A/sales 4.5 5.3 4.5 4.1
Inventories 2,143 1,455 1,730 1,768 Sales growth 12.4 21.9 18.9 2.2
Current assets 15,240 13,318 12,606 15,253 Net profit growth 12.4 21.9 18.9 2.2
LT investments 7,484 7,484 7,484 7,484 Sales per share growth -78.9 117.0 63.7 18.1
Net fixed assets 134,667 153,217 166,762 173,026 EPS growth 11.3 11.3 11.3 11.3
Total assets 157,392 174,019 186,852 195,763 Interest coverage (x) -54.8 2.3 3.0 3.0
Liabilities Net debt to total capital 79.8 77.4 77.7 76.6
ST loans 39,128 46,596 56,301 62,621 Net debt to equity 394.6 342.6 347.8 327.6
Payables 13,526 15,280 18,227 18,862 Sales/assets 23.4 25.8 28.6 27.9
Others 922 291 212 225 Assets/equity (x) 605.6 553.4 567.2 558.3
Total current liabilities 53,576 62,167 74,740 81,708 ROI 2.7 6.1 9.4 10.5
Long-term debt 72,776 68,399 63,682 60,145 ROE 2.1 4.6 5.6 0.0
Other liabilities 396 396 396 396 Source: Company, J.P. Morgan estimates.
Total liabilities 126,747 134,411 142,267 145,699
Shareholders’ equity 25,990 31,444 32,942 35,064
BVPS (Rmb) 2.21 2.52 2.50 2.66
Source: Company, J.P. Morgan estimates.

309
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Ecopetrol Underweight
US$27.12
Price Target: US$26.0
www.ecopetrol.com.co

Company description Colombia


Ecopetrol is Colombia’s national oil company and the largest integrated Integrated Oils
producer in the country, making it a close comparable with Petrobras. With a Sergio TorresAC
market cap north of US$50 billion, Ecopetrol is the second-largest oil stock (212) 622 3378
in Latin America. Originally founded in 1951 as a state-owned oil company, sergio.torres@jpmorgan.com
Ecopetrol is now a mixed-capital entity. With 447 kboed of production J.P. Morgan Securities
Ecopetrol is the fourth hydrocarbon producer in Latin America.
Price performance
Price Performance
Post mortem 30

26
Our main reservation about Ecopetrol’s portfolio is that it boasts the lowest $ 22

reserve life ratio among our global sample and has registered a low reserve 18

14

replacement ratio. While its ability to grow production has surprised us and Nov-08 Feb-09 May-09 Aug-09 Nov-09

the market, such success only underscores our concern that reserves may be
Source: Bloomberg.
depleting faster, raising questions of sustainability.
Performance
Potential for earnings upgrades
1M 3M 12M
Ecopetrol is highly leveraged to oil prices. While earnings have upside
Absolute (%) -2.2 -4.4 31.4
because of rapid production growth, we look at a full-cycle valuation that
Relative (%) 1.7 29.0 152.4
also considers finding and development costs, which are high for Ecopetrol
at $18-$20/boe. Source: Bloomberg.

How much recovery is priced into the stock? Company data


52-week range (LC) 1789 - 2825
Ecopetrol is one of the most expensive oil stocks in the world, trading at 8.1x
Mkt cap. (LCMM) 106,058
EV/EBITDA on 2010 estimates. We don’t think the quality of the portfolio Mkt cap. (US$MM) 53,715
deserves higher or similar multiples to those of Petrobras (8.6x). Avg daily value (US$MM) 12,537
Avg daily volume (MM) 11,820,410
Shares O/S (MM) 40,480.0
Price target and key risks
Date of price 11/25/2009
We use a sum-of-the parts model based on DCF, using long-term oil prices
Index: CB
of $80/bbl and a discount rate of 11%. Our YE10 price target is $26/ADR.
Free float (%) 10.1%
Risks include direction of oil prices, exploration risk, uncertainty of capital
Exchange rate 1,961.0
expenditures. Valuation has registered steady premiums to peers’ since
listing. Source: Bloomberg
Bloomberg: EC US; Reuters: EC.SA
US$ in millions, year-end December 31
FY08 FY09E FY10E FY11E
Sales 17,386 15,442 13,583 14,816
Net profit 5,965 2,906 3,761 5,382
EPS (LC) 287.36 154.34 197.47 292.19
FD EPS (LC) 287.36 154.34 197.47 292.19
DPS (LC) 114.99 219.90 119.01 142.93
Sales growth (%) 62% -11% -12% 9%
Net profit growth (%) 139% -51% 29% 43%
EPS growth (%) 139% -51% 29% 43%
ROE (%) 42% 20% 27% 34%
P/E (x) 9.1 17.0 13.3 9.0
FD P/E (x) 9.1 17.0 13.3 9.0
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

310
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Ecopetrol: Summary of financials


Profit and loss statement Cash flow statement
USD in millions, year-end December 31 USD in millions, year-end December 31
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 17,386 15,442 13,583 14,816 EBIT 6,369 3,354 5,676 7,997
% change Y/Y 62% -11% -12% 9% Depreciation & amortization 906.3 1,197.0 1,261.2 1,160.7
Gross margin (%) 44% 32% 50% 60% Change in working capital (1,161.5) 1,800.0 - -
EBITDA 7,275 4,551 6,937 9,157 Taxes (1,519) (1,245) (1,612) (2,306)
% change Y/Y 49% -37% 52% 32% Cash flow from operations 6,048.5 6,010.1 5,134.5 6,660.2
EBITDA margin (%) 42% 29% 51% 62% Capex (3,438.9) (4,260.0) (3,082.1) (3,202.1)
EBIT 6,369 3,354 5,676 7,997 Disposal/(purchase) - - - -
% change Y/Y 51% -47% 69% 41% Net interest 2,103 905 (191) (191)
EBIT margin (%) 37% 22% 42% 54% Free cash flow 2,610 1,750 2,052 3,458
Net interest 2,103 905 (191) (191) Equity raised/(repaid) 145 0 0 0
Earnings before tax 8,212 4,151 5,373 7,688 Debt raised/(repaid) 427 2,500 0 0
% change Y/Y 141% -49% 29% 43% Other - - - -
Tax (2,247) (1,245) (1,612) (2,306) Dividends (2,387) (4,342) (2,267) (2,633)
as % of EBT 27% 30% 30% 30% Beginning cash 1,859 940 529 314
Net income (reported) 5,965 2,906 3,761 5,382 Ending cash 940 529 314 1,140
% change Y/Y 139% -51% 29% 43% DPS (LC) 114.99 219.90 119.01 142.93
Shares O/S (MM) 2,024 2,024 2,024 2,024 Source: Company, J.P. Morgan estimates.
EPS (reported) (LC) 2.95 1.44 1.86 2.66
Source: Company, J.P. Morgan estimates.

Ratio analysis
%, year-end December 31
Balance sheet
FY08 FY09E FY10E FY11E
USD in millions, year-end December 31 EBITDA margin 42% 29% 51% 62%
FY08 FY09E FY10E FY11E Operating margin 37% 22% 42% 54%
Cash and cash equivalents 940 529 314 1,140 Net profit margin 34% 19% 28% 36%
Accounts receivable 2,613 813 813 813 SG&A/sales 7% 10% 8% 6%
Inventories 0 0 0 0 Sales growth 62% -11% -12% 9%
Others 3,430 3,430 3,430 3,430 Net profit growth 139% -51% 29% 43%
Current assets 6,983 4,772 4,557 5,383 Sales per share growth 162% 89% 88% 109%
LT investments 3,863 3,863 3,863 3,863 EPS growth 145% -51% 29% 43%
Net fixed assets 3,591 4,768 5,323 5,989 Interest coverage (x) - - - -
Total assets 21,655 22,096 23,192 25,549 Net debt to total capital 0% 16% 15% 13%
Liabilities 760 760 760 760 Net debt to equity 6% -15% -15% -8%
ST loans 0 0 0 0 Sales/assets 80% 70% 59% 58%
Payables 1,795 1,795 1,795 1,795 EBIT margin 37% 22% 42% 54%
Others 425 425 425 425 ROCE 25% 12% 25% 32%
Total current liabilities 2,979 2,979 2,979 2,979 Assets/equity (x) 1.4 1.7 1.6 1.5
Long-term debt 0 2,500 2,500 2,500 ROI - - - -
Other liabilities 3,282 3,282 3,282 3,282 ROE 20% 27% 34% 36%
Total liabilities 21,655 22,096 23,192 25,549 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 15,394 13,335 14,430 16,788
BVPS (LC) 741.6 708.2 757.7 911.4
Source: Company, J.P. Morgan estimates.

311
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Grupo Aeroportuario del Pacifico Neutral


Ps36.28
Price Target: Ps30.00
www.aeropuertosgap.com.mx

Company description Mexico


Grupo Aeroporturario del Pacifico (GAP) owns and operates 12 airports in Airport Operators
Mexico and its largest is the one in Guadalajara, which accounts for 35% of Adrian E HuertaAC
its total traffic, followed by Tijuana, Hermosillo and Puerto Vallarta. GAP (52 81) 8152-8720
benefited significantly in 2007 from the entrance of new LCCs in Mexico adrian.huerta@jpmorgan.com
but as most of the companies closed it was severely impacted last year. The J.P. Morgan Casa de Bolsa, S.A. de C.V.,
company generates more than 60% of its revenues from domestic traffic. J.P. Morgan Grupo Financiero

Post mortem Performance


Mexican airports were severely impacted by the economic crisis that hit 1M 3M 12M
domestic and international traffic figures. The swine flu outbreak also had a Absolute (%) -3 -4 34
significant negative impact in the 2Q09. We expect a gradual recovery that Relative (%) 4 -10 -18
already started in 3Q. We believe investors should avoid GAP as we see a
Source: Bloomberg.
better recovery outlook for international traffic, which represents 35% of
GAP’s traffic versus 57% for ASUR. Company data
Potential for earnings upgrades 52-week range (LC) 14.42-30.04
The main upside risk to our estimates are related to a better-than-expected Mkt cap. (LCMM) 20,427
recovery in traffic volumes; currently we expect a 3% recovery in 4Q09 vs a Mkt cap. (US$MM) 1,591
10% decrease in 3Q09 yoy. For the full year we expect volumes to be down Avg daily value (US$MM) 3.3
13% and to recover 10% next year. Avg daily volume (MM) 0.7
Shares O/S (MM) 561.00
How much recovery is priced into the stock?
GAP’s YTD performance of +15% below ASUR performance up 21%, and Date of price 11/25/2009
lower than the +40% for the Bolsa. Index: IBOV 31,364
Free float (%) 85%
Price target and key risks Exchange rate 12.84
We rate GAP Neutral relative to the other airport companies in Mexico. Our
Source: Bloomberg.
Dec-09 price target of Ps30 (US$23 per ADR) is based on a DCF model
using a WACC of 10.4% (3% risk free rate, 2.5% country risk, 5% equity
risk premium and 1.0 beta). Its high exposure to domestic traffic could result
in higher volumes if the Mexican economy recovers faster than expected. On
the negative side, higher-than-expected pressure on margins would reduce
our FCF expectations.

Bloomberg: GAPB MM BZ Reuters: GAPB MM.SA


LC in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 3,491 3,265 3,528 3,774
Net profit 1,541 1,016 1,061 1,157
EPS (LC) 2.75 1.81 1.89 2.06
FD EPS (LC) 2.75 1.81 1.89 2.06
DPS (LC) 2.00 2.14 1.78 1.78
Sales growth (%) 0.4% -6.5% 8.1% 7.0%
Net profit growth (%) 10.0% -34.1% 4.5% 9.1%
EPS growth (%) 10.0% -34.1% 4.5% 9.1%
ROE (%) 50.4% 33.5% 34.3% 35.6%
P/E (x) 13.2 20.0 19.2 17.6
FD P/E (x) 13.2 20.0 19.2 17.6
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

312
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

GAP: Summary of financials


Profit and loss statement Cash flow statement
LC in millions, year-end December LC in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 3,491 3,265 3,528 3,774 EBIT 1,448 1,227 1,423 1,535
% change Y/Y 0.4% -6.5% 8.1% 7.0% Depreciation & amortization 798 812 812 869
Gross margin (%) NA NA NA NA Change in working capital (237) (25) (47) (44)
EBITDA 2,246 2,039 2,235 2,404 Taxes (130) (282) (413) (450)
% change Y/Y -3.9% -9.2% 9.6% 7.5% Cash flow from operations 1,590 1,983 1,830 1,987
EBITDA margin (%) 64.3% 62.5% 63.4% 63.7% Capex (550) (642) (600) (600)
EBIT 1,448 1,227 1,423 1,535 Disposal/(purchase) 10 10 10 10
% change Y/Y -8.5% -15.3% 16.0% 7.8% Net interest 215 78 51 73
EBIT margin (%) 41.5% 37.6% 40.3% 40.7% Free cash flow 1,053 1,078 1,278 1,422
Net interest 215 78 51 73 Equity raised/(repaid) 0 0 0 0
Earnings before tax 1,670 1,298 1,474 1,607 Debt raised/(repaid) 221 236 0 0
% change Y/Y -0.5% -22.3% 13.5% 9.1% Other 0 0 0 0
Tax (130) (282) (413) (450) Dividends (1,122) (1,200) (1,000) (1,000)
as % of EBT 7.8% 21.7% 28.0% 28.0% Beginning cash 1,632 1,781 2,164 2,394
Net income (reported) 1,541 1,016 1,061 1,157 Ending cash 1,781 2,164 2,394 2,781
% change Y/Y 10.0% -34.1% 4.5% 9.1% DPS (LC) 2.00 2.14 1.78 1.78
Shares O/S (MM) 561 561 561 561 Source: Company, J.P. Morgan estimates.
EPS (reported) (LC) 2.75 1.81 1.89 2.06
Source: Company, J.P. Morgan estimates.

Ratio analysis
%, year-end December
Balance sheet
FY08 FY09E FY10E FY11E
LC in millions, year-end December EBITDA margin 64.3% 62.5% 63.4% 63.7%
FY08 FY09E FY10E FY11E Operating margin 41.5% 37.6% 40.3% 40.7%
Cash and cash equivalents 1,781 2,164 2,394 2,781 Net profit margin 44.1% 31.1% 30.1% 30.7%
Accounts receivable 938 787 851 910 SG&A/sales 27.3% 29.2% 28.4% 28.2%
Inventories 0 0 0 0 Sales growth 0.4% -6.5% 8.1% 7.0%
Others 0 0 0 0 Net profit growth 10% -34% 4% 9%
Current assets 2,719 2,951 3,245 3,691 Sales per share growth 0.4% -6.5% 8.1% 7.0%
LT investments 23,682 23,535 23,535 23,535 EPS growth 10.0% -34.1% 4.5% 9.1%
Net fixed assets 335 164 (48) (317) Interest coverage (x) 25.18 16.39 18.31 18.51
Total assets 28,142 28,091 28,173 28,351 Net debt to total capital -3.6% -4.1% -4.9% -6.3%
Liabilities Net debt to equity -3.7% -4.2% -5.1% -6.5%
ST loans 135 173 173 173 Sales/assets 0.12 0.12 0.13 0.13
Payables 381 206 222 238 EBIT margin 41.5% 37.6% 40.3% 40.7%
Others 158 220 220 220 ROCE 27.0% 22.9% 27.0% 27.9%
Total current liabilities 674 600 616 632 Assets/equity (x) 1.05 1.06 1.06 1.06
Long-term debt 665 863 863 863 ROI 27.0% 22.9% 27.0% 27.9%
Other liabilities 65 65 68 73 ROE 50.4% 33.5% 34.3% 35.6%
Total liabilities 1,404 1,527 1,547 1,568 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 26,738 26,564 26,625 26,783
BVPS (LC) 47.66 47.35 47.46 47.74
Source: Company, J.P. Morgan estimates.

313
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Grupo Modelo Neutral


Price: Ps 65.46
Price Target: Ps60
www.gmodelo.com.mx
Company description Latin America
Grupo Modelo is the leading brewer in Mexico. Its brands include Corona Food & Beverages
Extra, Corona Light, Modelo Especial, etc. They also import ABI products Alan AlanisAC
including Budweiser and Bud Light, Chinese brand Tsingtao and Danish (1-212) 622 3697
Carlsberg. Through its strategic partnership with Nestle, the company also alan.alanis@jpmorgan.com
produces and distributes bottled water brands. It also operates approx. 800 J.P. Morgan Securities Inc.
convenience stores under the name Extra. The Group exports 5 of its brands
and is present in +150 countries. Price performance
Ps
Post mortem
This year Modelo has been gaining share in Mexico from its lone competitor 70
FEMSA, mainly due to upsizing strategies implemented from early this year. 60
With rational pricing expected in 2010, we believe Modelo will maintain its 50
leadership position in the domestic industry. However, Modelo’s export 40
outlook looks challenging as we see ABI as a formidable competitor to 30
Corona in the US using the Stella Artois brand. Nov Feb May Aug Nov
Potential for earnings upgrades
Source: Bloomberg
Modelo’s domestic operations should grow in line with other brewers in the
industry owing to rational pricing and innovations. However, we remain Performance
concerned about their competitiveness in the US market. 1M 3M 12M
Absolute (%) 7.8% 29.8% 84.5%
How much recovery is priced into the stock?
Relative (%) 4.2% 17.8% 22.0%
The stock is trading at 8.5x '10E EBITDA and 18x '10E P/E, broadly in line
Source: Bloomberg
with the average of global peers. The stock has recovered significantly from
its lows given the company’s successful navigation through the tough Company data
economic environment. The current valuation looks fair and we believe there 52-week range (LC) 34.12-65.46
is limited upside to the stock absent a faster-than-expected recovery of the Mkt cap. (Ps MM) 211.66
domestic economy. Mkt cap. (US$MM) 16.5
Price target and key risks Avg daily value (US$MM) 10.3
Our Dec ’10 PT of Ps60 is derived using a target EV/EBITDA multiple of 8x Avg daily volume (MM) 2.7
in line with its historical average and average of global peers. Key risks are Shares O/S (MM) 3,232
macro. On the upside, a corporate event such as a change in control, or Date of price 11/25/2009
material devaluation of Ps to boost export profitability. Downside risks; if Index: Mexican Bolsa 31,364
Modelo’s US exports deteriorate further, or if there is negative news from the Free float (%) 20%
arbitration process with ABI. Exchange rate 12.8

Bloomberg: GMODELOC MM; Reuters: MODELO


Ps in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 75,364 82,196 88,771 94,602
Net profit 9,016 8,684 11,700 12,666
EPS (LC) 2.79 2.69 3.62 3.92
DPS (LC) 2.09 - 1.56 2.19
Sales growth (%) 3.4% 9.1% 8.0% 6.6%
Net profit growth (%) -4.8% -3.7% 34.7% 8.3%
EPS growth (%) -4.8% -3.7% 34.7% 8.3%
ROE (%) 15% 12% 15% 15%
P/E (x) 23.5x 24.4x 18.1x 16.7x
FD P/E (x) 23.5x 24.4x 18.1x 16.7x
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

314
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Modelo: Summary of financials


Profit and loss statement Cash flow statement
Ps in millions/billions, year-end December Ps in millions/billions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 75,364 82,196 88,771 94,602 EBIT 19,285 21,879 24,237 25,959
% change Y/Y 3.4% 9.1% 8.0% 6.6% Depreciation & amortization 2,934 3,266 3,344 3,381
Gross margin (%) 52.8% 53.8% 54.7% 54.8% Change in working capital (6,148) (23) (911) (944)
EBITDA 22,219 25,145 27,581 29,340 Taxes 4,397 4,520 5,711 4,397
% change Y/Y -4.9% 13.2% 9.7% 6.4% Cash flow from operations 7,834 12,646 21,110 22,837
EBITDA margin (%) 29.5% 30.6% 31.1% 31.0% Capex 6,586 5,864 4,439 4,730
EBIT 19,285 21,879 24,237 25,959 Disposal/(purchase)
% change Y/Y -6.3% 13.5% 10.8% 7.1% Free cash flow 4,646 13,683 16,003 16,961
EBIT margin (%) 25.6% 26.6% 27.3% 27.4% Equity raised/(repaid) 0 0 0 0
Other Income (expense) (75) (3,021) (413) (179) Debt raised/(repaid) 0 0 0 0
Earnings before tax 19,210 18,858 23,824 25,780 Other 0 0 0 0
% change Y/Y -7.6% -1.8% 26.3% 8.2% Dividends 8,820 - 6,549 9,227
Tax (4,397) (4,520) (5,711) (6,180) Beginning cash 20,717 13,145 19,927 30,049
as % of EBT 22.9% 24.0% 24.0% 24.0% Ending cash 13,145 19,927 30,049 38,929
Net income (reported) 9,016 8,684 11,700 12,666 DPS (LC) 2.09 - 1.56 2.19
% change Y/Y -4.8% -3.7% 34.7% 8.3% Source: Company, J.P. Morgan estimates.
Shares O/S (MM) 3,232 3,232 3,232 3,232
EPS (reported) (LC) 2.79 2.69 3.62 3.92
Source: Company, J.P. Morgan estimates.
Ratio analysis
%, year-end December
Balance sheet FY08 FY09E FY10E FY11E
EBITDA margin 29.5% 30.6% 31.1% 31.0%
Ps in millions/billions, year-end December Operating margin 25.6% 26.6% 27.3% 27.4%
FY08 FY09E FY10E FY11E Net profit margin 12.0% 10.6% 13.2% 13.4%
Cash and cash equivalents 13,145 19,927 30,049 38,929 SG&A/sales 27.2% 27.2% 27.4% 27.4%
Accounts receivable 9,352 10,885 9,543 10,074 Sales growth 3.4% 9.1% 8.0% 6.6%
Inventories 13,355 12,836 15,285 16,101 Net profit growth -4.8% -3.7% 34.7% 8.3%
Others 2,848 3,175 3,357 3,544 Sales per share growth 3.4% 9.1% 8.0% 6.6%
Current assets 38,699 46,822 58,234 68,649 EPS growth -4.8% -3.7% 34.7% 8.3%
LT investments 5,038 5,097 5,097 5,097 Interest coverage (x) - - - -
Net fixed assets 55,349 57,184 57,721 58,506 Net debt to total capital -21% -27% -38% -45%
Total assets 105,690 116,712 128,824 140,191 Net debt to equity -21% -27% -38% -45%
Liabilities Sales/assets 0.71 0.70 0.69 0.67
ST loans 0 0 0 0 EBIT margin 25.6% 26.6% 27.3% 27.4%
Payables 5,294 5,471 5,663 5,831 ROCE 24% 25% 24% 24%
Others 4,225 5,365 5,552 5,975 Assets/equity (x) 1.71 1.60 1.61 1.63
Total current liabilities 9,519 10,836 11,215 11,806 ROI 24% 25% 24% 24%
Long-term debt 0 0 0 0 ROE 15% 12% 15% 15%
Other liabilities 15,619 9,863 9,863 9,863 Source: Company, J.P. Morgan estimates.
Minorities 18,731 23,012 27,903 32,692
Shareholders’ equity 61,821 73,000 79,842 85,829
BVPS (Ps) 19.1 22.6 24.7 26.6
Source: Company, J.P. Morgan estimates.

315
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

HCL Infosystems Neutral


Rs150
Price Target: Rs160
www.hclinfosystems.in

Company description India


HCL offers information technology, office automation and communication IT Services
technology (ICT) products and services. The company has a large ICT Manoj SinglaAC
product and services network with a direct presence in over 350 locations (91-22) 6157-3587
across the country and a strong franchisee service network. Over the past manoj.singla@jpmorgan.com
one-two years, the company has entered the system integration (SI) space— J.P. Morgan India Private Limited
HCLI has focused on government and large Indian corporates, especially in
the telecom and power space for SI business. Price performance
120 HCL Infosy stems Sensex (rebased)
Post mortem 100
80
HCL Infosystems derives all its revenues from domestic corporates and 60
40
Indian government. The slowdown in the local economy and country-wide 20
0
elections led to lower PC market growth from enterprises and the

Oct-08

Dec-08

Oct-09
Jan-08
Feb-08
Mar-08
Apr-08

Jun-08
Jul-08
Aug-08
Sep-08

Jan-09
Feb-09
Mar-09
Apr-09

Jun-09
Jul-09
Aug-09
Sep-09
May-08

Nov-08

May-09

Nov-09
government. The PC business is gradually recovering with the pick-in local
economy. The high wireless subscriber growth did not translate to high Source: Bloomberg.
Nokia sales due to the high multiple-SIMs effect. The company is now
looking to win large contracts in the SI segment, mainly from the Performance
government and related entities in the power and telecom segment for 1M 3M 12M
revenue growth. Absolute (%) -1.1 17.3 72.5
Relative (%) 3.9 16.1 8.7
Potential for earnings upgrades
We expect the PC business to be weak, and limited growth in the telecom Source: Bloomberg.
(Nokia) business. We think current estimates already factor in the upside
from new SI deal wins and see limited potential for upgrades. Large equity Company data
dilution and warrant issue are an overhang on EPS estimates in the near- 52-week range (Rs) Rs63-189
term. Mkt cap. (Rs B) 25.7
Mkt cap. (US$MM) 547.0
How much recovery is priced into the stock? Avg daily value (US$MM) 1.3
We believe the stock is pricing in most of the recovery in the company’s Avg daily volume (MM) 0.4
traditional segments and potential upside from deal wins in its SI business. Shares O/S (MM) 171
Price target and key risks Date of price 5-Nov-09
Our Jun-10 price target of Rs160 is based on the one-year forward multiple Index: Sensex 16063.9
of 10x—largely in line with medium-term historical trading multiples. Key Free float (%) 39
downside risks to our price target are lower growth in the PC market, market Exchange rate Rs47.0/US$
share loss for Nokia and large equity dilution leading to lower ROE. Key Source: Bloomberg.

upside risks to our price target are large order wins in the SI segment.
Bloomberg: HCLI IN; Reuters: HCLI.BO
Rs in millions, year-end June
FY09 FY10E FY11E FY12E
Sales 123,829 131,096 145,707 163,237
Net profit 2,399 3,059 3,484 3,972
EPS (Rs) 14.0 14.5 15.6 17.8
FD EPS (Rs) 14.0 14.5 15.6 17.8
DPS (Rs) 6.5 6.0 6.0 6.0
Sales growth (%) -1.8 5.9 11.1 12.0
Net profit growth (%) -20.1 27.5 13.9 14.0
EPS growth (%) -20.3 3.7 7.6 14.0
ROE (%) 22.4 18.7 15.4 15.9
P/E (x) 10.7 10.4 9.6 8.4
FD P/E (x) 10.7 10.4 9.6 8.4
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

316
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

HCL Infosystems: Summary of financials


Profit and loss statement Cash flow statement
Rs in millions, year-end June Rs in millions, year-end June
FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E
Revenue 123,829 131,096 145,707 163,237 EBIT 3,853 4,078 4,677 5,411
% change Y/Y -1.8 5.9 11.1 12.0 Depreciation & amortization 213 243 255 266
Gross margin (%) 8.6 8.9 9.0 9.1 Change in working capital -272 -3,072 -686 -1,512
EBITDA 4065 4321 4932 5677 Taxes 1,114 1,247 1,493 1,702
% change Y/Y -7.9 6.3 14.1 15.1 Cash flow from operations 2,339 230 3,052 2,726
EBITDA margin (%) 3.3 3.3 3.4 3.5 Capex -367 -187 -128 -128
EBIT 3,853 4,078 4,677 5,411 Disposal/(purchase) 2,339 230 3,052 2,726
% change Y/Y -8.9 5.8 14.7 15.7 Net interest (407) (402) (456) (492)
EBIT margin (%) 3.1 3.1 3.2 3.3 Free cash flow 1,973 43 2,924 2,598
Net interest (407) (402) (456) (492) Equity raised/(repaid) -229 8,468 0 0
Earnings before tax 3,513 4,306 4,977 5,675 Debt raised/(repaid) -1,277 1,419 300 300
% change Y/Y -18.3 22.6 15.6 14.0 Other 0 0 0 0
Tax 1,114 1,247 1,493 1,702 Dividends -1,113 -1,260 -1,337 -1,337
as % of EBT 31.7 29.0 30.0 30.0 Beginning cash 5,348 4,701 13,372 15,259
Net income (reported) 2,399 3,059 3,484 3,972 Ending cash 4,702 13,371 15,259 16,821
% change Y/Y -20.1 27.5 13.9 14.0 DPS (Rs) 6.5 6.0 6.0 6.0
Shares O/S (MM) 171 223 223 223 Source: Company, J.P. Morgan estimates.
EPS (reported) (Rs) 14.0 14.5 15.6 17.8
Source: Company, J.P. Morgan estimates.

Ratio analysis
Rs in millions, year-end June
Balance sheet
FY09 FY10E FY11E FY12E
Rs in millions, year-end June EBITDA margin 3.3 3.3 3.4 3.5
FY09 FY10E FY11E FY12E Operating margin 3.1 3.1 3.2 3.3
Cash and cash equivalents 4,701 13,372 15,259 16,821 Net profit margin 1.9 2.3 2.4 2.4
Accounts receivable 15,063 18,694 19,978 22,759 SG&A/sales 5.5 5.7 5.8 5.8
Inventories 0 0 0 0 Sales growth -1.8 5.9 11.1 12.0
Others 11,952 13,403 14,323 16,318 Net profit growth -20.1 27.5 13.9 14.0
Current assets 31,716 45,469 49,560 55,898 Sales per share growth -1.8 -18.7 11.1 12.0
LT investments 0 0 0 1 EPS growth -20.3 3.7 7.6 14.0
Net fixed assets 1,852 1,796 1,669 1,531 Interest coverage (x) 9.5 10.1 10.3 11.0
Total assets 33,568 47,266 51,230 57,430 Net debt to total capital n.m. n.m. n.m. n.m.
Liabilities Net debt to equity n.m. n.m. n.m. n.m.
ST loans 0 0 0 0 Sales/assets 3.7 2.8 2.8 2.8
Payables 20,138 22,163 23,686 26,960 EBIT margin 3.1 3.1 3.2 3.3
Others -56 -71 -76 -87 ROCE 19.3 15.1 12.5 13.1
Total current liabilities 20,082 22,092 23,610 26,874 Assets/equity (x) 3.0 2.2 2.2 2.2
Long-term debt 2,268 3,687 3,987 4,287 ROI 19.3 15.2 12.7 13.3
Other liabilities 0 0 0 0 ROE 22.4 18.7 15.4 15.9
Total liabilities 22,350 25,779 27,597 31,161 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 11,219 21,486 23,633 26,269
BVPS (Rs) 65.5 96.4 106.1 117.9
Source: Company, J.P. Morgan estimates.

317
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Hindustan Unilever Underweight


Price: Rs278.15
www.hul.co.in Price Target: Rs225
Company description India
Hindustan Unilever is India’s leading consumer products company. It has Household Products
dominant shares in soaps, laundry, skin care, shampoos and tea. It also has
Vineet Sharma, CFAAC
extensive presence in toothpastes and processed foods segments. It is a 51%- (852) 2800-8523
owned subsidiary of Unilever Plc. vineet.k.sharma@jpmorgan.com
Post mortem J.P. Morgan Securities (Asia Pacific)
We think that a quick and meaningful turnaround is unlikely considering Limited
HUL’s limited pricing power and weak market share performance in core
categories. Despite considerable pricing actions and higher brand Latika Chopra, CFA
investments (A&P spends up 31% Y/Y during 1HFY10) being implemented (91-22) 6157-3584
to push up volumes, market share performance of HUL has been weak across latika.chopra@jpmorgan.com
most categories due to down-trading and intensified competition. We see
J.P. Morgan India Private Limited
three key risks for HUL’s growth going forward: (1) input costs are trending
up; (2) pricing gains are waning away; and (3) there is risk of the impact of a Price performance
weak monsoon and high food inflation on consumption patterns. Rs
350
Potential for earnings upgrades 300
We see limited room for earnings upgrades for the company considering the Rs 250

risks discussed above. So far the company has disappointed on top-line but 200

managed earnings aided by gross margin gains. Beyond personal care, HUL 150
Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

has been unable to build a significant presence in new categories. Although HLL.BO Share Price

areas such as food have huge earnings growth potential, visibility still
Source: Bloomberg.
remains poor considering product capabilities and the competitive landscape.
Performance
How much recovery is priced into the stock?
1M 3M 12M
The consumer staples sector was not affected by the credit downturn. There
Absolute (%) 4.5 -3.9 16.8
has been consumer down-trading on account of inflationary risks and
Relative (%) 9.2 -4.9 -41.9
increased competitive intensity which has impacted HUL’s performance in
Source: Bloomberg.
the mass laundry and soaps segment. We feel a likely recovery in volume
growth (off a low base last year) is factored in the stock valuations currently. Company data
52-week range (Rs) 210.7 - 306.7
Price target and key risks
Mkt cap. (Rs B) 608.5
Our Sept-10 price target of Rs225 is based on 20x one-year forward
Mkt cap. (US$ B) 12.9
earnings. With earnings growth dropping to 12% during FY09-11E vs. the
Avg daily val (US$ MM) 21.5
past three-year CAGR of 16% and lower-than-group average at 20% over
Avg daily volume (MM) 3.8
FY09-11E, HUL’s current valuations of 27x FY10E P/E appear demanding.
Shares O/S (MM) 2,81
Key risks to our PT are higher-than-expected savings from commodity
Date of price 5-ov-0
deflation and bearishness in the local market, which would necessitate
Index: Sensex 16063.9
further investments into a defensive name such as this one.
Free float (%) 49
Exchange rate 47.04
Source: Bloomberg.
Bloomberg: HUVR IN; Reuters: HLL.BO
RSMM, year-end March CY07 FY09 (15M Mar-09) FY10E FY11E
Net sales 137,178 202,393 180,829 201,949
Net profit 17,674 24,522 22,836 25,939
EPS (Rs) 8.1 11.3 10.5 11.9
DPS (Rs) 9.0 7.5 7.5 8.5
Net sales growth (%) 13% NM NM 12%
Net profit growth (%) 15% NM NM 14%
EPS growth (%) 16% NM NM 14%
ROE (%) 84.9 112.1 109.0 93.8
ROCE (%) 102.2 121.7 129.5 117.4
BVPS (Rs) 6.6 9.5 11.5 13.9
P/E (x) 33.5 30.2 25.9 22.8
P/BV (x) 41.1 35.9 23.6 19.6
EV/EBITDA (%) 24.6 22.2 18.0 15.7
Dividend yield (%) 3.3 2.8 2.8 3.1
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

318
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Hindustan Unilever: Summary of financials


Rs in millions, year-end March
Profit and loss Cash flow statement
statement
CY07 FY09E (15M) FY10E FY11E CY07 FY09E (15M) FY10E FY11E

Revenues 137,178 202,393 180,829 201,949 EBIT 22,100 30,504 29,857 33,888
% change Y/Y 13% NM NM 12% Depreciation 846 1,284 1,850 1,900
Gross Margin (%) 47% 46% 48% 48% Change in WC (2,762) 1,167 (1,342) (2,612)
EBITDA 23,484 32,457 31,707 35,788 Taxes (4,171) (5,729) (6,821) (7,748)
% change Y/Y 17% NM NM 13% Others
EBITDA Margin (%) Cash flow from
17% 16% 18% 18% 16,013 27,226 23,544 25,427
operations
EBIT 22,100 30,504 29,857 33,888 Capex (2,818) (4,991) (1,500) (1,500)
% change Y/Y 18% NM NM 14% Disposal/ (purchase) 597 (23) 0 0
EBIT Margin (%) 16% 15% 17% 17% Net Interest (255) (253) (200) (200)
Net Interest 255 253 200 200 Free cash flow 13,536 21,959 21,844 23,727
Earnings before tax 21,845 30,251 29,657 33,688
% change Y/Y 17% NM NM 14% Equity raised/ (repaid) (6,315) 0 (2) 0
Tax 4,171 5,729 6,821 7,748 Debt raised/ (repaid) 0 0 (3,000) 0
as % of EBT 19% 19% 23% 23% Other 6,062 1,048 0 0
Net Income (Adjusted) 17,674 24,522 22,836 25,939 Dividends paid (25,859) (14,360) (21,371) (20,818)
% change Y/Y 15% NM NM 14% Beginning cash 26,647 15,351 20,011 23,168
Shares Outstanding 2177 2178 2177 2177 Ending cash 15,351 20,011 23,168 31,302
EPS (Adjusted) 8.1 11.3 10.5 11.9 DPS 9.0 7.5 7.5 8.5
% change Y/Y 16% NM NM 14%
Balance sheet Ratio analysis
CY07 FY09E (15M) FY10E FY11E % CY07 FY09E (15M) FY10E FY11E

Cash and cash Operating Margin


15,351 20,011 23,168 31,302 15.2% 15.0% 16.6% 16.8%
equivalents
Accounts receivable 8,920 10,127 11,640 13,000 EBITDA margin 17.1% 16.0% 17.5% 17.7%
Inventories 19,536 25,289 25,739 28,754 EBIT margin 16.1% 15.1% 16.5% 16.8%
Others 4,434 5,369 5,945 6,639 Net profit margin 12.9% 12.1% 12.6% 12.8%
Current assets 48,241 60,796 66,492 79,696 SG&A/sales 15.6% 15.2% 14.1% 13.9%

Investments 1,065 1,088 1,088 1,088


Net fixed assets 17,081 20,789 20,439 20,039 Sales growth 13% NM NM 12%
Total assets 66,387 82,673 88,019 100,823 Net profit growth 15% NM NM 14%
EPS growth 16% NM NM 14%
Liabilities
Interest coverage (x) NM NM NM NM
Payables Net debt to total
38,371 42,558 44,927 50,648 NM NM NM NM
capital
Others 12,739 15,280 16,793 18,754 Net debt to equity NM NM NM NM
Total current liabilities 51,110 57,838 61,720 69,402 Sales/assets 2.1 2.0 2.1 2.0
Total Loans 885 4,219 1,219 1,219 Assets/equity 4.6 4.0 3.5 3.3
Other liabilities 0 - (0) (0) ROE 85% 112% 109% 94%
Total liabilities 51,995 62,057 62,939 70,621 ROCE 102% 122% 129% 117%
Shareholders' equity 14,392 20,615 25,080 30,202
BVPS 6.6 9.5 11.5 13.9
Source: Company reports, J.P. Morgan estimates.

319
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Homex Neutral
Ps74.75
Price Target: Ps102.00
www.homex.com.mx

Company description Mexico


Homex, the largest Mexican homebuilder in terms of units sold, is focused Mexican Homebuilders
mainly on the affordable entry level and middle-income segments, selling Adrian E HuertaAC
around 50k units last year. As of Dec-2008 Homex had operations in 20 (52 81) 8152-8720
states and 32 cities, with Mexico City representing 35% of total revenues adrian.huerta@jpmorgan.com
followed by Guadalajara with 8%. The company has also made recently J.P. Morgan Casa de Bolsa, S.A. de C.V.,
investments in Brazil, India and Egypt. J.P. Morgan Grupo Financiero

Post mortem Performance


Given the complexities involved to grow further in Mexico, Homex has 1M 3M 12M
made a couple of differentiated investments, such as in the tourist market in Absolute (%) -21 -8 96
Mexico, and, more recently, started operations in Brazil, India and Egypt. Relative (%) -22 -16 44
However, these investments are still small.
Source: Bloomberg.
Potential for earnings upgrades
We see limited growth going forward as Homex should start to consolidate Company data
its operations over the next years given the strong growth experienced in the 52-week range (LC) 40.01-95.59
past four years, with Homex expanding from 21k units sold in 2004 to 57k Mkt cap. (LCMM) 25,130
units last year. Also, margins have been a bit under pressure, which could Mkt cap. (US$MM) 1,957
result in lower-than-expected margins next year. Avg daily value (US$MM) 37.6
Avg daily volume (MM) 1.1
How much recovery is priced into the stock?
Shares O/S (MM) 335.87
Though we see Homex as a premium company in Mexico, we believe this is
already priced in as Homex is trading at a 30% premium to Urbi and a 10% Date of price 11/25/2009
premium to Geo. We don’t believe that a better-than-expected recovery in Index: Bolsa 31,364
the Mexican economy would bring upside risk to our estimates as growth is Free float (%) 65%
linked more to the company’s internal capabilities than to housing demand. Exchange rate 12.84
Source: Bloomberg.
Price target and key risks
We rate Homex Neutral with a Dec-10 price target of Ps102, which is the
average of our DCF-based valuation and GGM-based valuation. The COE of
11.9% is based on a beta of 1.20, country risk of 2.4%, and a risk-free rate of
3.5%, resulting in a WACC of 11.4%. Lower (higher)-than-expected cash
flow generation this year given the company’s guidance of an inflow of
Ps3bn could affect investors’ confidence in Homex execution capabilities.
Bloomberg: Homex* MM Reuters: Homex* MM.SA
LC in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 18,850 20,380 23,420 25,864
Net profit 1,759 2,456 2,920 3,374
EPS (LC) 5.24 7.31 8.69 10.05
FD EPS (LC) 5.24 7.31 8.69 10.05
DPS (LC) - - - -
Sales growth (%) 16.6% 8.1% 14.9% 10.4%
Net profit growth (%) -19.8% 39.7% 18.9% 15.6%
EPS growth (%) -19.8% 39.7% 18.9% 15.6%
ROE (%) 16.7% 19.5% 19.2% 18.4%
P/E (x) 14.3 10.2 8.6 7.4
FD P/E (x) 14.3 10.2 8.6 7.4
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

320
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adrian.mowat@jpmorgan.com

Homex: Summary of financials


Profit and loss statement Cash flow statement
LC in millions, year-end December LC in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 18,850 20,380 23,420 25,864 EBIT 3,604 3,546 4,155 4,814
% change Y/Y 17% 8% 15% 10% Depreciation & amortization 312 357 369 397
Gross margin (%) 35.6% 34.7% 34.5% 34.5% Change in working capital (7,879) (936) (2,300) (1,982)
EBITDA 4,430 4,728 5,368 6,039 Taxes (740) (1,038) (1,234) (1,426)
% change Y/Y 16.5% 6.7% 13.5% 12.5% Cash flow from operations (4,652) 2,003 1,697 1,894
EBITDA margin (%) 23.5% 23.2% 22.9% 23.4% Capex (582) (306) (468) (517)
EBIT 3,604 3,546 4,155 4,814 Disposal/(purchase) 0 0 0 0
% change Y/Y 2.6% -1.6% 17.2% 15.9% Net interest (1,100) 4 69 71
EBIT margin (%) 19.1% 17.4% 17.7% 18.6% Free cash flow (4,324) 2,736 2,007 2,139
Net interest (1,100) 4 69 71 Equity raised/(repaid) 0 0 0 0
Earnings before tax 2,546 3,570 4,244 4,905 Debt raised/(repaid) 4,134 850 0 0
% change Y/Y -22.8% 40.2% 18.9% 15.6% Other 0 0 0 0
Tax (740) (1,038) (1,234) (1,426) Dividends 0 0 0 0
as % of EBT 29.1% 29.1% 29.1% 29.1% Beginning cash 2,363 1,268 3,826 5,054
Net income (reported) 1,759 2,456 2,920 3,374 Ending cash 1,268 3,826 5,054 6,431
% change Y/Y -19.8% 39.7% 18.9% 15.6% DPS (LC) - - - -
Shares O/S (MM) 336 336 336 336 Source: Company, J.P. Morgan estimates.
EPS (reported) (LC) 5.24 7.31 8.69 10.05
Source: Company, J.P. Morgan estimates.

Ratio analysis
%, year-end December
Balance sheet
FY08 FY09E FY10E FY11E
LC in millions, year-end December EBITDA margin 23.5% 23.2% 22.9% 23.4%
FY08 FY09E FY10E FY11E Operating margin 19.1% 17.4% 17.7% 18.6%
Cash and cash equivalents 1,268 3,826 5,054 6,431 Net profit margin 9.3% 12.1% 12.5% 13.0%
Accounts receivable 11,946 12,284 14,116 15,589 SG&A/sales 12.1% 11.5% 11.1% 11.1%
Inventories 14,310 15,427 16,778 18,040 Sales growth 16.6% 8.1% 14.9% 10.4%
Others 239 665 665 665 Net profit growth -19.8% 39.7% 18.9% 15.6%
Current assets 27,763 32,202 36,614 40,725 Sales per share growth 16.6% 8.1% 14.9% 10.4%
LT investments 0 0 0 0 EPS growth -19.8% 39.7% 18.9% 15.6%
Net fixed assets 1,423 1,350 1,449 1,569 Interest coverage (x) 20.54 22.98 43.78 33.18
Total assets 30,533 34,806 39,317 43,547 Net debt to total capital 34.9% 21.7% 14.4% 8.0%
Liabilities Net debt to equity 58.3% 36.1% 22.4% 11.7%
ST loans 1,640 1,844 1,844 1,844 Sales/assets 0.62 0.59 0.60 0.59
Payables 6,883 7,402 8,286 9,038 EBIT margin 19.1% 17.4% 17.7% 18.6%
Others 405 532 532 532 ROCE 16.5% 13.5% 14.5% 12.5%
Total current liabilities 8,927 9,778 10,662 11,414 Assets/equity (x) 2.67 2.54 2.36 2.18
Long-term debt 6,290 6,936 6,936 6,936 ROI 16.5% 13.5% 14.5% 12.5%
Other liabilities 3,645 4,044 4,662 4,662 ROE 16.7% 19.5% 19.2% 18.4%
Total liabilities 18,862 20,758 22,259 23,011 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 11,425 13,726 16,645 20,019
BVPS (LC) 34.02 40.87 49.56 59.60
Source: Company, J.P. Morgan estimates.

321
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

HTC Corp Underweight


Price: NT$340.0
Price Target: NT$250
www.htc.com
Company description Taiwan
HTC is a leading brand of Windows Mobile and Google Android Computer Hardware
smartphones. Its key customers include Vodafone, Verizon, T-Mobile, Alvin KwockAC
Sprint, AT&T, Telefonica, and Orange. (852) 2800 8533
Post mortem alvin.yl.kwock@jpmorgan.com

In our view, in the past, HTC had commanded a sweet spot in offering the Charles Guo
best iPhone alternative in the high-end smartphone segment at a time when (852) 2800 8532
iPhone was constrained by operator availability in key countries. However, charles.x.guo@jpmorgan.com

such momentum was disrupted in 2009 as the high-end smartphone market J.P. Morgan Securities (Asia Pacific) Ltd.
saturated, and we believe it did not have the brand awareness to enter the
mainstream segment. Price performance
550
Potential for earnings upgrades
NT$ 400
We expect the smartphone market to have a unit CAGR of 35-40% in the
next five years; the growth is likely to come from the low-price segment in 250

which HTC is absent until it gets its product portfolio and brand recognition Nov-08 Feb-09 May-09 Aug-09 Nov-09

right. A key upside risk is that WinMo 7 launch in 3Q09 could help HTC 2498.TW share price (NT$
TSE (rebased)
penetrate into the corporate segment as a RIM alternative, but this will likely Source: Bloomberg.
be a late 2010 event at the earliest. There is a risk that margins may get re-set
to a much lower level in 1H10. Inventory risk appears to be on the rise on a Performance
sizeable number of Android models amid the end of exclusivity for iPhone, 1M 3M 12M
while HTC is also increasing brand promotion aggressively—which appears Absolute (%) -3.6 -3.7 -10.0
Relative (%) -3.3 -4.3 -39.6
to be a right move in the long term but could lead to near-term margin pains.
Source: Bloomberg.
How much recovery is priced into the stock?
After underperforming the TWSE by 34% YTD, some of the growth Company data
challenges now appear to be already in the price. However, margin risk is 52-week range (NT$) 243.8-517.1
Mkt cap. (NT$B) 257
not, and we believe it could manifest in the post-Christmas period as Mkt cap. (US$B) 7.9
inventory risk is rising due to a sizeable number of Android models amid the Avg daily value (US$MM) 264.3
end of exclusivity for iPhone. The stock is still far from its historical trough Avg daily volume (MM) 8.6
for P/E and P/BV, while cash dividends have not been able to provide a Shares O/S (MM) 755.737
Date of price 5-Nov-09
cushion, given concerns about earnings sustainability. Index: TWSE 7,417.46
Price target and key risks Free float (%) 80.7
Exchange rate 32.5
Our Jun-10 PT of NT$250 is based on a low-cycle multiple of 10x FY10E
Source: Bloomberg.
earnings, given the historical range of 8x-20x. Our PT implies an FY09E
P/BV multiple of 2.5x vs an FY09E ROE of 28% and FY10E P/BV of 2.5x
vs an FY10E ROE of 24%. A key risk to our price target is earlier-than-
expected entry into new markets such as the enterprise segment.
Bloomberg: 2498 TT; Reuters: 2498.TW
NT$ in billions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Sales 152.6 145.6 154.0 178.3 YE BPS (NT$) 81.1 90.5 92.6 99.0
Operating profit 30.3 24.5 20.1 20.4 P/BV (x) 4.2 3.8 3.7 3.4
Pretax profit 31.6 25.6 21.1 21.4 ROE (%) 47.2 34.3 27.1 25.5
MV of employee bonus 6.2 4.9 4.4 4.6 Cash div (NT$) 34.0 27.0 23.8 18.3
Adj. net profit (new TW GAAP) 28.7 23.2 19.0 19.3 Cash div yield 10.0% 7.9% 7.0% 5.4%
Old TW GAAP net profit 35.2 27.6 23.0 23.5 Quarterly EPS (NT$) 1Q 2Q 3Q 4Q
New Taiwan GAAP EPS (NT$) 38.3 31.0 25.1 25.2 EPS (FY08) 9.3 8.9 9.4 10.7
New Taiwan GAAP P/E (x) 8.9 11.0 13.6 13.5 EPS (FY09E) 6.5 8.7 7.6 8.1
Cash 61.8 65.0 69.6 77.7 DCF value (6/2010) NT$ 504
Equity 60.7 67.7 70.2 75.7 Price target (6/2010) NT$ 250
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

322
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

HTC Corp: Summary of financials


NT$ in millions, year-end December
P&L statement Cash flow statement
FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E

Revenues 118,581 152,562 145,604 154,039 178,326 Net Income 28,939 28,654 23,193 18,988 19,303
% change Y/Y 11.7 28.7 -4.6 5.8 15.8 Depreciation and Amortization 681 591 1,013 1,287 1,647
Gross Margin (%) 34.3 33.2 31.8 30.1 30.2 Change in working capital 10,256 8,849 -1,207 3,187 3,296
EBITDA 31,705 30,849 25,531 21,390 22,025 Net Cash from Operations 39,876 38,094 22,999 23,461 24,246
% change Y/Y 15.9 -2.7 -17.2 -16.2 3.0 Cash Flow from Investing - - - - -
Purchase of Property, Plant &
EBITDA Margin (%) 26.7 20.2 17.5 13.9 12.4 Equipment (1,488) (4,251) (3,321) (2,400) (2,400)
EBIT 31,024 30,258 24,518 20,103 20,378 Purchase/Sale of Other LT assets (208) (761) 38 - -
% change Y/Y 16.1 -2.5 -19.0 -18.0 1.4 Purchase/Sale of Investments (2,075) (2,262) (335) - -
EBIT Margin (%) 26.2 19.8 16.8 13.1 11.4 Net Cash from Investing Activities (3,770) (7,274) (3,619) (2,400) (2,400)
Net Interest 761 1,295 698 994 1,070 Cash Flow from Financing - - - - -
Earnings before tax 32,151 31,592 25,648 21,097 21,448 Issuance/Repayment of Debt - - - - -
% change Y/Y 18.5 -1.7 -18.8 -17.7 1.7 Change in other LT liabilities (0) 6 (4) - -
Tax 3,212 2,938 2,455 2,110 2,145 Change in Common Equity - net 4,097 4,710 (55) 72 64
as % of EBT 10.0 9.3 9.6 10.0 10.0 Payment of Cash Dividends (19,487) (20,126) (18,625) (15,075) (12,342)
Net Income (Reported) 28,939 28,654 23,193 18,988 19,303 Other Financing Charges, Net (46) (8,652) 2,516 (1,500) (1,500)
% change Y/Y 14.4 -1.0 -19.1 -18.1 1.7 Net Cash from Financing Activities (15,435) (24,062) (16,168) (16,503) (13,778)
Net Change in Cash and Cash
Net Income (Adjusted) 23,260 28,654 23,193 18,988 19,303 Equivalents 20,672 6,758 3,212 4,558 8,068
% change Y/Y 19.6 23.2 -19.1 -18.1 1.7 Cash at Beginning of Period 34,397 55,069 61,827 65,039 69,597
Shares Outstanding 739 748 748 758 765
EPS (reported) (NT$) 39.1 38.3 31.0 25.1 25.2
% change Y/Y 12.5 20.2 -21.6 -17.9 1.3
EPS (adjusted) (NT$) 31.5 38.3 31.0 25.1 25.2
% change Y/Y 17.7 21.8 -19.1 -19.2 0.7

Balance sheet Ratio analysis


FY07 FY08 FY09E FY10E FY11E % FY07 FY08 FY09E FY10E FY11E

Cash and cash


equivalents 55,069 61,827 65,039 69,597 77,665 EBITDA margin 26.7 20.2 17.5 13.9 12.4
Accounts receivable 19,484 29,799 31,728 34,932 40,515 Operating margin 26.2 19.8 16.8 13.1 11.4
Inventories 6,119 7,418 6,476 7,130 8,269 Net profit margin 19.6 18.8 15.9 12.3 10.8
Others 2,501 2,228 3,881 3,881 3,881 SG&A/sales 5.0 6.1 8.2 10.1 12.1
Current assets 83,173 101,272 107,124 115,540 130,330
Sales per share growth 9.9 27.2 (4.6) 4.5 14.7
LT investments 2,899 5,161 5,496 5,496 5,496 Sales growth 11.7 28.7 (4.6) 5.8 15.8
Net fixed assets 3,716 7,376 9,684 10,797 11,550 Net profit growth (adjusted) 19.6 23.2 -19.1 -18.1 1.7
Total assets 90,445 115,226 123,684 133,213 148,756 Net profit growth (reported) 14.4 -1.0 -19.1 -18.1 1.7
EPS growth (adjusted) 17.7 21.8 -19.1 -19.2 0.7
Liabilities EPS growth (reported) 12.5 20.2 -21.6 -17.9 1.3
ST loans - - - - -
Payables 22,020 27,907 21,254 24,791 28,697 Interest coverage (x) NM 220,352 555,023 NM NM
Net Net Net Net Net
Others 12,348 26,651 34,737 38,245 44,357 Net debt to total capital Cash Cash Cash Cash Cash
Net Net Net Net Net
Total current liabilities 34,368 54,558 55,991 63,036 73,054 Net debt to equity Cash Cash Cash Cash Cash
Long term debt - - - - - Sales/assets 131.1 132.4 117.7 115.6 119.9
Other liabilities 1 6 2 2 2 Assets/equity 161.3 189.9 182.7 189.8 196.5
Total liabilities 34,369 54,565 55,993 63,038 73,057 ROE 41.5 47.2 34.3 27.1 25.5
Shareholders' equity 56,076 60,661 67,691 70,175 75,700 ROCE 41.5 47.2 34.3 26.1 25.0
BVPS (NT$) 75.8 81.1 90.5 92.6 99.0
Source: Company, J.P. Morgan estimates.

323
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Idea Cellular Underweight


Rs53.5
Price Target: Rs45
www.ideacellular.com
Company description India
Idea Cellular is a pure play wireless GSM operator in India. The company Telecom
has a strong management team and is backed by the Aditya Birla group with Manoj SinglaAC
a 49% stake. AXIATA Group Berhad (previously TM International) has a (91-22) 6157-3587
14.99% shareholding in Idea Cellular. manoj.singla@jpmorgan.com
Post mortem J.P. Morgan India Private Limited
Last year has seen three-four new operators launch wireless services
(GSM/CDMA) across India. Idea itself has entered new circles and expanded Performance
120
presence in existing circles. This has led to significant tariff pressure on all 100
IDEA Sensex (rebased)
80
operators with ARPUs declining 20-25% over the past year as new operators 60
40
drop prices to gain market share. We expect tariff wars to continue in the 20
0
near term. Further 3G auctions are coming up in January 2010 that would

Oct-08

Dec-08

Oct-09
Jan-08
Feb-08
Mar-08
Apr-08

Jun-08
Jul-08
Aug-08
Sep-08

Jan-09
Feb-09
Mar-09
Apr-09

Jun-09
Jul-09
Aug-09
Sep-09
May-08

Nov-08

May-09

Nov-09
lead to cash outflow from operators.
Potential for earnings upgrades Source: Bloomberg.
We see tariff pressure to show up in sharp ARPU declines for Idea over the Performance
next two-three quarters which we believe are not fully reflected in consensus 1M 3M 12M
estimates. Hence, we see significant downside to consensus earnings Absolute (%) -30.9 -35 0.6
estimates and expect loss on EBITDA and net income level for FY11E vs. Relative (%) -23.8 -35.5 -49.1
consensus estimates of profit. Source: Bloomberg.
How much recovery is priced into the stock? Company data
We see further downside as competition is only likely to increase in the near- 52-week range (Rs) 37-92
term and hence earning estimates would continue to trend down. Overall Mkt cap. (Rs MM) 165,855
economic recovery will not have a positive impact on the sector and Idea as Mkt cap. (US$MM) 3,526
issues in the sector are driven by excess competition that will take time to be Avg daily value (US$MM) 19.27
sorted out. Avg daily volume (MM) 12.2
Price target and key risks Shares O/S (MM) 3,100
Our DCF-based Dec-10 price target of Rs45 includes Rs27/share coming Date of price 5-Nov-09
from the 16% stake in Indus, implying a core business value of Rs18/share. Index: Sensex 16063.9
Our DCF estimate assumes 10- year revenue CAGR (FY10-20E) of 8%, Free float (%) 33
long-term EBITDA margin of 27% and a terminal growth of 4%. We assume Exchange rate Rs47.8/US$
a beta of 1.15, risk-free rate of 6.5%, market risk premium of 7.5%, and cost Source: Bloomberg.
of debt of 9.0% to arrive at a WACC of 11%. Idea is currently trading at 10x
EV/EBTIDA. We believe consolidation/exit of players are required for
bottoming out of fundamentals. Consolidation is unlikely in the near-term
due to the regulatory structure and also the well-funded nature of some new
players (NTT DoCoMo and Etisalat). Key upside risks to our price target are
larger-than-expected market share gains due to new launches and better cost
control.
Bloomberg: IDEA IN; Reuters: IDEA.BO
Rs in millions, year-end March
FY09 FY10E FY11E FY12E
Sales 101,484 115,178 115,328 145,715
Net profit 9,009 2,302 -14,924 2,635
EPS (Rs) 3.0 0.7 -4.5 0.8
FD EPS (Rs) 3.0 0.7 -4.5 0.8
DPS (Rs) 0.0 0.0 0.0 0.0
Sales growth (%) 51.0 13.5 0.1 26.3
Net profit growth (%) -13.6 -74.4 -748.3 117.7
EPS growth (%) -23.7 -75.4 -709.0 117.7
ROE (%) 3.1 -9.0 -1.0 7.2
P/E (x) 17.8 72.0 NM 67.0
FD P/E (x) 17.8 72.0 NM 67.0
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

324
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Idea Cellular: Summary of financials


Profit and loss statement Cash flow statement
Rs in millions, year-end Mar Rs in millions, year-end Mar
FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E
Revenue 101,484 115,178 115,328 145,715 EBIT 14,306 6,079 -5,952 14,245
% change Y/Y 51.0 13.5 0.1 26.3 Depreciation & amortization 0 10,592 23,038 21,205
Gross margin (%) NM NM NM NM Change in working capital 1,652 -274 -5,157 2,274
EBITDA 28345 26671 17086 35449 Taxes 362 132 -2,634 540
% change Y/Y 25.9 -5.9 -35.9 107.5 Cash flow from operations 10,661 12,587 2,780 26,146
EBITDA margin (%) 27.9 23.2 14.8 24.3 Capex -70,866 -84,420 -31,320 -21,857
EBIT 14,306 6,079 -5,952 14,245 Disposal/(purchase) 10,661 12,587 2,780 26,146
% change Y/Y 4.0 -57.5 -197.9 -339.3 Net interest (4943) (3962) (11606) (11070)
EBIT margin (%) 14.1 5.3 -5.2 9.8 Free cash flow -60,205 -71,833 -28,540 4,289
Net interest (4943) (3962) (11606) (11070) Equity raised/(repaid) 98,887 0 0 0
Earnings before tax 9,371 2,434 -17,558 3,175 Debt raised/(repaid) 24,017 23,189 45,000 0
% change Y/Y -15.9 -74.0 -821.3 118.1 Other 0 0 0 0
Tax 362 132 -2,634 540 Dividends 0 0 0 0
as % of EBT 3.9 5.4 15.0 17.0 Beginning cash 4,971 51,168 2,524 18,984
Net income (reported) 9,009 2,302 -14,924 2,635 Ending cash 51,168 2,524 18,984 23,273
% change Y/Y -13.6 -74.4 -748.3 117.7 DPS (Rs) 0.0 0.0 0.0 0.0
Shares O/S (MM) 2984 3100 3300 3300 Source: Company, J.P. Morgan estimates.
EPS (reported) (INR) 3.0 0.7 -4.5 0.8
Source: Company, J.P. Morgan estimates.

Ratio analysis
Rs in millions, year-end Mar
Balance sheet
FY09 FY10E FY11E FY12E
Rs in millions, year-end Mar EBITDA margin 27.9 23.2 14.8 24.3
FY09 FY10E FY11E FY12E Operating margin 14.1 5.3 -5.2 9.8
Cash and cash equivalents 51,316 2,524 18,984 23,273 Net profit margin 8.9 2.0 -12.9 1.8
Accounts receivable 3,058 3,471 3,476 4,391 SG&A/sales 16.9 17.0 18.4 17.0
Inventories 417 473 474 599 Sales growth 51.0 13.5 0.1 26.3
Others 7,839 7,987 7,987 7,987 Net profit growth -13.6 -74.4 -748.3 117.7
Current assets 62,630 14,455 30,920 36,250 Sales per share growth 33.4 9.2 -5.9 26.3
LT investments 0 0 0 0 EPS growth -23.7 -75.4 -709.0 117.7
Net fixed assets 151,489 226,317 235,599 237,252 Interest coverage (x) 6.4 2.0 2.8 4.3
Total assets 262,038 287,691 312,438 318,421 Net debt to total capital 42.2 51.9 54.1 52.7
Liabilities Net debt to equity 62.9 97.1 101.3 89.5
ST loans 0 0 0 0 Sales/assets 38.7 40.0 36.9 45.8
Payables 0 0 0 0 EBIT margin 14.1 5.3 -5.2 9.8
Others 0 0 0 0 ROCE 3.6 -1.1 3.2 6.7
Total current liabilities 28,600 28,795 23,642 26,957 Assets/equity (x) 1.8 2.0 2.4 2.4
Long-term debt 89,165 112,354 157,354 157,354 ROI -0.1 2.2 6.1 7.8
Other liabilities 917 884 708 740 ROE 3.1 -9.0 -1.0 7.2
Total liabilities 118,682 142,033 181,705 185,051 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 143,356 145,658 130,734 133,369
BVPS (INR) 48.0 47.0 39.6 40.4
Source: Company, J.P. Morgan estimates.

325
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Lukoil Neutral
Price: $61.8
Price Target: $75.0
www.lukoil.com
Company description Russia
Lukoil is Russia’s second largest oil company. We expect its total Russian Oil & Gas
hydrocarbon production to reach 2.2 mm boe per day in 2009. Proven Andrey GromadinAC
hydrocarbon reserves under SPE rules stood at 19.3 billion boe at end-2008. (7-495) 937 1037
ConocoPhillips is Lukoil’s strategic partner and owns a 20% stake in the andrey.gromadin@jpmorgan.com
company. Top management controls about 35% of the company. J.P. Morgan Bank International LLC

Post mortem Price Performance


Lukoil has had the best output growth in the sector in '09, with an est. 3.2% 70

crude oil production growth, however, the medium- and long-term


55
production outlook has turned negative. We estimate CAGR (‘10E-‘13E) of $
-0.7% in Lukoil’s contracting output. The reasons are absence of output 40
growth in Timan-Pechora, the delayed launch of the Filanovskoye field in
25
the Caspian Area (until 2013) and a decline in output in Western Siberia. At
Nov-08 Feb-09 May-09 Aug-09 Nov-09
the same time, downstream exposure is rising, on acquisitions financed by
borrowing. We expect net debt to reach $11.4bn end 2009, or 61% higher Source: Bloomberg
y/y.
Performance
1M 3M 12M
Potential for earnings upgrades
Absolute (%) -13.7 14.5 83.2
Our earning forecasts for Lukoil are in line with Bloomberg consensus
Source: Bloomberg
for ’10E-‘11E. Earning upgrades are only possible on increases in oil prices,
while a worsening production outlook may indicate a downside risk.
Company data
52-week range (LC) 26.0-67.2
How much recovery is priced into the stock? Mkt cap. (US$MM) 52,561
Lukoil currently trades on 6.6x 12M forward PER, a 12% discount to Avg daily value (US$MM) 392
Avg daily volume (MM) 6.41
historical averages. It might indicate that oil price recovery and easy credit Shares O/S (MM) 851
market conditions are mostly priced in at this stage. Date of price 23-Nov-09
Index: RTS 1467
Price target and key risks Free float (%) 45%
Exchange rate 1
Our PT (end-2010) is $75, based on 50% DCF (WACC at 11.8%, terminal
Source: Bloomberg, J.P. Morgan
growth rate at 3%) and 50% target (normalized) EV/EBITDA (‘10E). Key
risks include oil price estimates and a possible output target downgrade.
Relatively expensive acquisitions could be also considered a risk.

Bloomberg: LKOH RU; Reuters: LKOH.RTS


$ in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 107,680 81,100 93,661 116,111
Net profit 9,144 7,180 7,371 8,912
EPS (LC) 10.75 8.44 8.67 10.48
FD EPS (LC) 10.75 8.44 8.67 10.48
DPS (LC) 1.48 1.79 1.61 1.35
Sales growth (%) 31% -25% 15% 24%
Net profit growth (%) -4% -21% 3% 21%
EPS growth (%) -6% -21% 3% 21%
ROE (%) 18% 13% 12% 13%
P/E (x) 5.7 7.3 7.1 5.9
FD P/E (x) 5.7 7.3 7.1 5.9
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

326
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Lukoil: Summary of Financials


Profit and Loss Statement Cash flow statement
$ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E

Revenues 107,680 81,100 93,661 116,111 119,355 EBIT 14,134 9,746 10,191 11,897 11,892
% change Y/Y 31.5% (24.7%) 15.5% 24.0% 2.8% Depreciation & amortisation 2,958 4,296 4,926 5,439 5,705
Gross Margin (%) 19.6% 20.7% 19.4% 18.1% 17.8% Change in working capital/Other 3,747 (4,464) (806) (1,378) (185)
EBITDA 17,092 14,042 15,117 17,336 17,597 Taxes (3,222) (2,100) (2,225) (2,691) (2,741)
% change Y/Y 11.2% (17.8%) 7.7% 14.7% 1.5% Cash flow from operations 17,617 7,478 12,085 13,267 14,671
EBITDA Margin 15.9% 17.3% 16.1% 14.9% 14.7%
EBIT 14,134 9,746 10,191 11,897 11,892 Capex (10,589) (7,041) (7,818) (8,828) (9,713)
% change Y/Y 7.1% (31.0%) 4.6% 16.7% (0.0%) Disposal/(Purchase)/Other (5,232) (2,375) 0 - -
EBIT Margin 13.1% 12.0% 10.9% 10.2% 10.0% Net Interest (228) (566) (567) (427) (192)
Net Interest (228) (566) (567) (427) (192) Free cash flow 1,568 (2,504) 3,701 4,012 4,767
Earnings before tax 12,366 9,280 9,596 11,602 11,819
% change Y/Y (5.0%) (25.0%) 3.4% 20.9% 1.9% Equity raised/repaid (946) 0 0 0 -
Tax (3,222) (2,100) (2,225) (2,691) (2,741) Debt Raised/repaid 2,766 1,032 (2,219) (4,196) (2,961)
as a % of EBT 26.1% 22.6% 23.2% 23.2% - Other - - - - -
Net Income (Reported) 9,144 7,180 7,371 8,912 9,078 Dividends paid (1,527) (1,373) (1,149) (1,179) (1,426)
% change Y/Y (3.9%) (21.5%) 2.7% 20.9% 1.9% Beginning cash 889 2,744 (558) (29) (922)
Shares Outstanding 850.50 850.50 850.50 850.50 - Ending cash 2,744 (558) (29) (922) (373)
EPS (reported) 10.75 8.44 8.67 10.48 10.67 DPS 1.57 1.35 1.39 1.68 1.71
% change Y/Y (6.3%) (21.5%) 2.7% 20.9% 1.9%

Balance sheet Ratio Analysis


$ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E $ in millions, year end Dec FY08 FY09E FY10E FY11E FY12E

Cash and cash equivalents 2,744 (558) (29) (922) (373) EBITDA margin 15.9% 17.3% 16.1% 14.9% 14.7%
Accounts receivable 5,069 7,552 8,120 9,066 9,189 Operating margin 13.1% 12.0% 10.9% 10.2% 10.0%
Inventories 3,735 5,206 5,742 6,655 6,778 Net profit margin 8.5% 8.9% 7.9% 7.7% 7.6%
Others 4,085 4,085 4,085 4,085 - SG&A/Sales 3.7% 3.4% 3.3% 3.2% 3.1%
Current assets 15,633 16,286 17,918 18,884 19,680
Sales per share growth - - - - -
LT investments 3,269 5,644 5,644 5,644 5,644 EPS growth (6.3%) (21.5%) 2.7% 20.9% 1.9%
Net fixed assets 50,088 52,833 55,725 59,114 63,122
Total assets 71,461 77,234 81,758 86,114 90,917 ROE 20.0% 13.5% 12.5% 13.5% 12.3%
ROCE 17.9% 12.4% 11.5% 12.8% 12.0%
Liabilities
ST loans 3,232 3,499 2,390 292 292 Production (mboe/day) 2,048 2,104 2,111 2,092 2,136
Payables 5,029 4,519 4,816 5,298 5,360 Production oil (mbpd) 1,920 1,982 1,983 1,963 -
Others 2,314 1,694 1,917 2,255 2,305 Production gas (mboe/day) 128 123 128 129 -
Total current liabilities 10,575 9,712 9,123 7,845 7,957 Refining throughput (mbpd) 1,138 1,438 1,571 1,623 -
Long term debt 6,577 7,342 6,233 4,135 1,174
Other liabilities 3,299 3,299 3,299 3,299 - Interest coverage (x) 75.0 24.8 26.7 40.6 91.9
Total liabilities 20,451 20,353 18,655 15,279 12,430 Net debt to equity 13.9% 20.1% 13.8% 7.6% 2.4%
Shareholders' equity 50,281 55,956 62,178 69,910 77,562 Net debt 7,065 11,399 8,651 5,348 1,838
BVPS 60.90 67.77 75.31 84.67 - Net debt/EBITDA (ny) 0.5 0.8 0.5 0.3 0.1

Source: Company reports and J.P. Morgan estimates.

327
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Magyar Telekom Underweight


Price: Ft759.00
Price Target: Ft685.8
www.telekom.hu
Company description Hungary
Magyar Telekom is a principal provider of telecommunication services in Telecom Services
Hungary, Macedonia and Montenegro. MT is also a leading IT service Jean-Charles LemardeleyC
provider in Hungary. Magyar's majority shareholder is Deutsche Telekom (44-20) 7325 5763
(59.2%). The company is actively seeking additional value-creating jean-charles.lemardeley@jpmorgan.com
acquisitions both in Hungary and SEE and has a stable dividend policy. J.P. Morgan Securities Ltd.

Post mortem Price Performance


The fixed line trend has not stabilized after the naked DSL launch in 2007. 900

Earnings remain under pressure and this makes the stock fundamentally
750
unattractive in our view. Ft
600
Potential for earnings upgrades
450
Magyar during the 3Q09 results presentation guided for yoy 2% FY09
Nov-08 Feb-09 May-09 Aug-09 Nov-09
revenue decline and 5% FY09 EBITDA decline. This implies modest upside
to our below-consensus estimates. Macro recovery could lead to stabilization Source: Company data, Bloomberg
in results, but it is hard to see the company achieve better than very modest
growth, so the potential for upgrades is low in our view. A positive Performance
regulatory decision on fibre regulation could be a positive catalyst for the 1M 3M 12M
stock. However, management anticipates two more MTR cuts in Jan and Dec Absolute (%) -8% 0.4% 35.3%
2010 that are likely to put pressure on margins for the next 2 years. Source: Company data, Bloomberg

How much recovery is priced into the stock? Company data


52-week range (Ft) 870-472
Little, but we think this is fair. We view valuation as relatively unattractive
Mkt cap. (Ft bn) 790.3
compared to CEEMEA and developed peers – 2010E FCF yield of 11.9% Shares O/S (mn) 1,041
which, despite the poor growth prospects, is more expensive than MTN and Date of price 23-Nov-09
TTKOM, (13-14% and 15.5% respectively). Price Target end Date 31-Dec-10
Avg daily value (US$MM) 8
Avg daily volume (MM) 1.84
Price target and key risks Exchange rate 177.5
We derive our PT of HUF685.8 via performing a 2010 year-end DCF Source: Company data, Bloomberg, J.P Morgan
valuation analysis in nominal currency using a WACC of 12.3%, then we
cross-check our DCF valuation with CE and WE peers. The key positive
risk to our view is a faster than expected recovery in the macro economic
environment in Hungary or surprising strength in the Hungarian Forint.

Bloomberg: MTEL HB; Reuters: MTEL.BU


Ft in millions, year end Dec
FY08 FY09E FY10E FY11E
Sales 673,056 640,987 627,344 623,036
Net profit 93,008 84,120 85,225 85,435
EPS 89.32 80.79 81.85 82.05
DPS (LC) 74.00 74.00 74.32 75.3
Sales growth (%) -0.50% -4.80% -2.10% -0.70%
Net profit growth (%) 54.60% -9.60% 1.30% 0.20%
EPS growth (%) 54.80% NM 1.30% 0.20%
ROE (%) 17.7% 16.6% 21% 20.5%
P/E (x) 8.5 9.4 9.2 9.2
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 23 November 2009.

328
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Magyar Telekom: Summary of Financials

Profit and Loss Statement Cash flow statement


Ft in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Ft in millions, year end Dec FY08 FY09E FY10E FY11E FY12E

Revenues 673,056 640,987 627,344 623,036 625,796 Cash EBITDA 268,378 251,038 243,759 241,322 241,121
% Change Y/Y -0.5% -4.8% -2.1% -0.7% 0.4% Interest (30,308) (33,493) (32,157) (30,096) (28,579)
EBITDA 268,378 251,038 243,759 241,322 241,121 Tax (27,698) (23,696) (24,007) (24,066) (24,252)
% Change Y/Y 10.0% -6.5% -2.9% -1.0% -0.1% Other 24,022 (768) 135 (130) 144
EBITDA Margin 39.9% 39.2% 38.9% 38.7% 38.5% Cash flow from operations 234,394 193,082 187,730 187,031 188,435
EBIT 162,258 150,093 149,657 147,867 147,252
(107,94 (100,94
% Change Y/Y 26.5% -7.5% -0.3% -1.2% -0.4% Capex PPE 9) 5) (94,102) (93,455) (93,869)
EBIT Margin 24.1% 23.4% 23.9% 23.7% 23.5% Net investments 0 0 0 0 0
(107,94 (100,94
Net Interest (30,308) (33,493) (32,157) (30,096) (28,579) CF from investments 9) 5) (94,102) (93,455) (93,869)
PBT 133,291 118,478 120,035 120,331 121,258 Dividends - - (77,390) (78,407) (78,600)
% change Y/Y 34.3% -11.1% 1.3% 0.2% 0.8% Share (buybacks)/ issue - - - - -
Net Income (clean) 93,008 84,120 85,225 85,435 86,094
% change Y/Y 54.6% -9.6% 1.3% 0.2% 0.8% CF to Shareholders (95,343) (77,052) (77,390) (78,407) (78,600)
Average Shares - - - - - FCF to debt 31,102 15,085 16,239 15,168 15,965
Clean EPS 89.32 80.79 81.85 82.05 82.68
% change Y/Y 54.8% NM 1.3% 0.2% 0.8% OpFCF (EBITDA - PPE) 160,429 150,093 149,657 147,867 147,252
DPS 74.00 74.00 74.32 75.30 75.49 EFCF pre Div, PPE 126,445 92,137 93,629 93,575 94,565

Balance sheet Ratio Analysis


Ft in millions, year end Dec FY08 FY09E FY10E FY11E FY12E Ft in millions, year end Dec FY08 FY09E FY10E FY11E FY12E

Cash and cash equivalents 66,680 65,497 65,605 65,419 67,273 EBITDA margin 39.9% 39.2% 38.9% 38.7% 38.5%
Accounts Receivables 101,895 99,882 98,455 98,284 98,719 EBIT Margin 24.1% 23.4% 23.9% 23.7% 23.5%
ST financial assets 68,498 66,657 66,559 66,102 66,395 Net profit margin 13.8% 13.1% 13.6% 13.7% 13.8%
Others 17,742 17,431 17,206 17,088 17,163 Capex/sales 16.0% 15.7% 15.0% 15.0% 15.0%
Current assets 254,815 249,467 247,824 246,892 249,550 Depreciation/Sales 15.8% 15.7% 15.0% 15.0% 15.0%
LT investments 370,352 365,305 360,600 355,927 351,233
Net fixed assets 543,689 548,736 553,441 558,114 562,808 Revenue growth -0.5% -4.8% -2.1% -0.7% 0.4%
Total assets 1,168,856 1,163,508 1,161,865 1,160,933 1,163,591 EBITDA Growth 10.0% -6.5% -2.9% -1.0% -0.1%
ST loans 132,954 116,685 100,555 85,200 71,089 EPS Growth 54.8% NM 1.3% 0.2% 0.8%
Payables 92,340 90,877 89,446 89,406 89,802
Others 56,142 54,633 54,553 54,204 54,444 Net debt/EBITDA 1.2 1.3 1.2 1.2 1.1
Total current liabilities 281,436 262,195 244,554 228,810 215,335 CF to Shareholders (95,343) (77,052) (77,390) (78,407) (78,600)
Long term debt 266,007 266,007 266,007 266,007 266,007 FCF to debt 31,102 15,085 16,239 15,168 15,965
Other liabilities 21,071 20,505 20,475 20,334 20,424
Total liabilities 568,514 548,707 531,035 515,151 501,766 OpFCF (EBITDA - PPE) 160,429 150,093 149,657 147,867 147,252
Shareholders' equity 600,342 614,801 630,830 645,782 661,825 EFCF pre Div, PPE 126,445 92,137 93,629 93,575 94,565

Source: Company reports and J.P. Morgan estimates.

329
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Manila Electric Neutral


Php194.00
Price Target: Php165.00
www.meralco.com.ph

Company description Electric Utilities


Manila Electric (also called Meralco) operates electricity distribution
Ajay MirchandaniAC
franchise in metro Manila with 5 million customers. Meralco operates under (65) 6882-2419
a Performance Based Ratemaking (PBR) methodology, wherein tariffs are ajay.mirchandani@jpmorgan.com
set on a 4-year interval with opex and capex forecast for next 4 years.
J.P. Morgan Securities Singapore Private
Meralco accounts for nearly 50% of volume sales in the country. Limited

Post mortem Price performance (Php)


400
With the transition to PBR in May-09, we have seen Meralco’s profitability, 300
cash flows and earnings profile significantly improve. Moreover, with PLDT 200
100
and San Miguel being the company’s key shareholders, we believe the 0
political risk associated with Meralco has reduced.

Feb-09

Aug-09
Nov-08

May-09

Nov-09
Potential for earnings upgrades Source: Bloomberg.
Implementation of tariff hikes proposed remain the key driver for upward Performance
earnings estimate revisions, in our view. Although we see limited upside risk 1M 3M 12M
to our earnings estimates, given the history of delays in tariff hike approvals, Absolute (%) 27.7 -8.3 253.6
we believe that pace of tariff delays should be low, compared to when Lopez Relative (%) 23.3 -14.8 206.8
group was primarily in control. Source: Bloomberg.

How much recovery is priced into the stock? Company data


The stock trades at rich multiples, primarily due to: (a) a continued 52-week range (Php) 48-295
ownership tussle between PLDT and San Miguel; and (b) a thin free float of Mkt cap. (PhpMM) 246,304
9%. While the stock has more than priced in upside from upcoming tariff Mkt cap. (US$MM) 5,171
hikes, we are unlikely to see the stock correct significantly from the current Avg daily value (US$MM) 4
levels. Avg daily volume (MM) 1
Shares O/S (MM) 1,115
Price target and key risks Date of price 5-Nov-09
Our DCF-based Dec-10 PT of Php165 implies 14x FY09E earnings. We Index: PSEi 2,944
believe this is a fair multiple, given the regulatory framework, and the steady Free float (%) 9
growth outlook. We derive our PT by discounting its FCF to 2015E, after Exchange rate 47.6
which we have incorporated a terminal value. We have also incorporated the Source: Bloomberg.
allowed tariff increases from 2010 to 2012 at an annual rate of 5% to
RY2013, and down to 3% for 2014-15. We have assumed a risk-free rate of
8.5%, a terminal growth rate of 3%, and a beta of 0.9. A key risk to our PT is
delays in implementation of allowed tariff increases.
Bloomberg: MWC PM; Reuters: MER.PS
Php in millions, year-end December
FY08 FY09E FY10E FY11E
Core net profit 2,800 7,685 12,826 14,490
EPS (Php) 2.53 6.90 11.51 13.00
DPS (Php) 1.00 3.45 5.75 6.50
Net debt to equity - % 38% 52% 42% 33%
ROE (%) 5.4% 14.1% 21.6% 21.8%
P/E (x) 87.3 32.1 19.2 17.0
P/BV (x) 4.7 4.5 4.1 3.7
EV/EBITDA (x) 16.9 16.1 11.2 10.2
Op cash flow / EV (%) 4% 5% 6% 7%
Dividend yield (%) 0.5% 1.6% 2.6% 2.9%
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

330
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Manila Electric: Summary of financials


Php in millions, year-end December
Profit & loss statement Balance sheet
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
186,99
Power distribution revenue 9 196,971 219,359 237,399 Share capital 11038 11038 11038 11038
Others 4,776 5,039 5,316 5,608 Reserves & Surplus 41569 45261 51694 58939
191,77
Consolidated revenue 5 202,010 224,675 243,007 Share holders equity 52,607 56,299 62,732 69,977
Minority interests 3,552 3,935 4,375 4,882
-
Purchased power costs 156872 -164716 -178213 -192869
Total Operations & (13,62
Maintenance 7) (14,675) (15,826) (17,089) Long-term debt 13228 18228 16228 14228
Other expenses (4,165) (4,155) (4,254) (4,129) customer deposits 23,443 20,989 23,375 25,297
Unrecoverable power costs 0 0 0 0 provisions 5743 5743 5743 5743
non current liabilities 19,905 18,565 17,225 17,225
EBITDA 17,111 18,464 26,382 28,920
Depreciation & Amortization (4,426) (4,936) (5,163) (5,415) Net Fixed Assets 100853 102417 104550 107090
EBIT 12,685 13,528 21,219 23,505 Investments 6883 7432 8150 8849
Non Current Assets 21,990 21,990 21,990 21,990
Net Interest Expense (1,216) (2,202) (2,465) (2,280) Current Assets 48658 46264 51548 57049
Equity income 199 199 199 199 Cash and Bank Balances 5402 920 1518 3243
Provisions (6,935) 0 0 0 Account Receivables 37509 39509 44000 47618
Profit before tax 5,200 11,525 18,953 21,424 Other current assets 5747 5835 6030 6187
Corporate income tax (2,067) (3,458) (5,686) (6,427)
Minorities (333) (383) (440) (506) Current Liabilities 59906 54344 56560 57626
PAT 2,800 7,685 12,826 14,490 Accounts Payable 25754 27042 29258 31664
current portion of debt 2265 2000 2000 2000
Other current liabilities 34152 27302 27302 25962
Total Assets 118478 123759 129678 137352
Key ratios
FY08 FY09E FY10E FY11E
Operating Income Margin (%) 6.6% 6.7% 9.4% 9.7% Cash flow statement
EBITDA margin (%) 8.9% 9.1% 11.7% 11.9%
FY08 FY09E FY10E FY11E
No. of O/S shares (Mils) 1105.7 1114.5 1114.5 1114.5 Attributable profit 2800 7685 12826 14490
Share of Associates &
EPS (Php) 2.53 6.90 11.51 13.00 Minorities 134 184 241 307
Dividend / share (Php) 1.0 3.4 5.8 6.5 Depreciation 4426 4936 5163 5415
Dividend payout ratio (%) 39% 50% 50% 50% Working Capital Movement (2944) (801) (2469) (1370)
Others 5934 0 0 0
Book Value per share 47.6 50.5 56.3 62.8 Operational Cash Flow 10350 12004 15762 18843
Total debt / Equity (%) 82% 89% 80% 69%
ROE (%) 5.4% 14.1% 21.6% 21.8% Capital Expenditure (9202) (6500) (7295) (7955)
ROCE (%) 14.1% 13.6% 19.2% 19.9% Investment & loans (48) (500) (500) (500)
RoRB (%) 11.4% 11.7% 19.0% 20.8% others 2068 0 0 0
Cash flow from investments (7182) (7000) (7795) (8455)
Fixed Assets Turnover (x) 1.9 2.0 2.1 2.3 Free Cash flow 3168 5004 7966 10388
Total Assets Turnover (x) 1.1 1.1 1.2 1.2 Dividends Paid (1960) (3842) (6413) (7245)
Debt paid (10892) 4735 (2000) (2000)
receivables (days) 73.2 73.2 73.2 73.2 others 10210 (10379) 1046 582
payable (days) 87.5 86.2 84.2 82.3 Cashflow from financing (2642) (9486) (7368) (8663)
Movement in Net Debt/Net
Cash 526 (4,482) 599 1,725
Source: Company, J.P. Morgan estimates.

331
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Massmart Underweight
Price: 8,672c
Price Target: 7390c
www.massmart.co.za
Company description South Africa
General retailer, with interests in food, liquor, general merchandise and General Retailing, Wholesaling
building materials. Sean HolmesAC
(27-11) 507 0373
Post mortem sean.x.holmes@jpmorgan.com
We foresee a slow earnings recovery and risk of market disappointment J.P. Morgan Equities Ltd.
should the retailer fail to achieve its medium-term profit targets. We caution
that the following could contribute to lacklustre earnings growth over the
next 12-24 months: i) slowing price inflation depressing sales growth, ii) loss Price Performance
of market share in its food business to the supermarkets, iii) slow recovery of
9,000
building materials business as household credit growth remains weak, iv)
limited scope to improve GP margin in its foods business, v) very lean cost 8,000
c
structure making it very difficult to cut costs to support earnings amidst top- 7,000
line pressure.
6,000
Nov-08 Feb-09 May-09 Aug-09 Nov-09
Potential for earnings upgrades
We see risk that the earnings recovery could be slow, mainly due to a Source: Bloomberg
slowing price inflation and weak volume growth (due to consumer pressure).
Performance
How much recovery is priced into the stock? 1M 3M 12M
Risk of significant de-rating, amidst a steamy valuation: the retailer is priced Absolute (%) -3.4 13.4 11.2
on a 12m fwd P/E of 14.7x (based on JPM estimates), much higher than its Source: Bloomberg
historical average of c10x. We calculate that the market is valuing its food
and liquor business at c21x (c55% premium to the major food retailers), Company data
Price(c) 8,672
assuming that its General Merchandise business is priced at 10.5x and Date of Price 23-Nov-09
Building materials at 8.5x. Price Target (c) 7,390
Price Target End Date 31-May-10
Price target and key risks 52-week Range (c) 9,257 – 6,120
Our SOTP P/E-based, May-10 PT is 7,390c. Risks include a sharper-than- Mkt Cap (Rbn) 17.44
expected slowdown in volume growth, which would have an adverse impact Shares O/S (mn) 201
Source: Bloomberg, J.P. Morgan
on our valuation and forecasts, while on the upside there is potential for
better capital management, a lower dividend cover and/or share buybacks.

Bloomberg: MSM SJ; Reuters: MSMJ.J


Rand millions, year-end Jun
FY09A FY10E FY11E FY12E
Sales 43,232 46,120 51,503 58,234
Net profit 1,211 1,185 1,406 1,678
FD EPS (SAcps) 593.47 580.91 689.15 822.38
DPS (SAcps) 386.00 370.62 439.68 524.68
Sales growth (%) 8.2 6.7 11.7 13.1
Net profit growth (%) -7.8 -2.1 18.6 19.3
EPS growth (%) -7.9 -2.1 18.6 19.3
ROE (%) 41.8 35.8 36.0 36.1
FD P/E (x) 14.6 14.9 12.6 10.5
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

332
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Massmart: Summary of Financials


Income Statement Cash Flow Statement
R in millions, year end Jun FY08 FY09 FY10E FY11E FY12E R in millions, year end Jun FY08 FY09 FY10E FY11E FY12E

Sales 39,945 43,232 46,120 51,503 58,234 Cash flow from operating activities 1,726 1,686 1,365 1,981 2,342
% YOY Change 14.3% 8.2% 6.7% 11.7% 13.1% Cash flow from investing activities (898) (697) (785) (891) (1,020)
Revenue 39,945 43,232 46,120 51,503 58,234 Cash flow from financing activities (223) (161) 90 90 91
% YOY Change 14.3% 8.2% 6.7% 11.7% 13.1% Net increase / (decrease) in cash - - - - -
Operating Costs -5,378 -5,930 -6,384 -7,145 -7,978 Foreign exchange differences - - - - -
% YOY Change 10.8% 10.3% 7.7% 11.9% 11.7% Cash at beginning of year 1,209 1,021 1,025 862 1,207
Bad Debts 0 0 0 0 0 Cash at end of year 1,022 1,025 862 1,207 1,634
% YOY Change - - - - -
Operating Profit 2,085 1,951 1,906 2,174 2,577 Ratio Analysis
% YOY Change 24.6% -6.4% -2.3% 14.1% 18.5%
Taxation (663) (620) (612) (700) (832) Per Share Data
Effective Tax rate 32.8% 32.6% 32.6% 32.6% 32.6% Diluted HEPS (cps) 644.59 593.47 580.91 689.15 822.38
Net Profit after tax 1,314 1,211 1,185 1,406 1,678 % YOY Change 25.3% (7.9%) (2.1%) 18.6% 19.3%
% YOY Change 25.2% (7.8%) (2.1%) 18.6% 19.3% DPS (cps) 386.00 386.00 370.62 439.68 524.68
Headline Earnings 1,319 1,207 1,185 1,406 1,678 % YOY Change 20.6% 0.0% (4.0%) 18.6% 19.3%
% YOY Change 21.8% (8.5%) (1.8%) 18.6% 19.3% Dividend cover 1.7 1.5 1.6 1.6 1.6
NAV per share (cps) 1,359.8 1,517.1 1,769.7 2,109.1 2,507.4
Balance sheet
R in millions, year end Jun FY08 FY09 FY10E FY11E FY12E Profitability
GP Margin - - - - -
ASSETS Operating Margin 5.2% 4.5% 4.1% 4.2% 4.4%
Total Non current assets 3,841 4,397 4,790 5,294 5,890 Operating costs/Revenue 13.5% 13.7% 13.8% 13.9% 13.7%
Inventory 4,759 4,893 5,164 5,759 6,509
% YOY Change - - - - - Trading Densities
Trade Debtors 1,764 1,851 1,928 2,153 2,435 Revenue per sqm 164.4 167.4 174.9 189.7 204.9
% YOY Change (6.0%) 4.9% 4.2% 11.7% 13.1% Operating profit per sqm 2.1 1.8 1.7 1.8 2.1
Other current assets 478 329 324 371 442
Cash and Cash equivalents 1,060 1,056 1,259 1,612 2,047 Return Ratios
Total Current assets 8,060 8,129 8,676 9,895 11,432 ROE 52.8% 41.8% 35.8% 36.0% 36.1%
Total Assets 11,901 12,526 13,466 15,190 17,322 ROA 11.0% 9.7% 8.8% 9.3% 9.7%
ROIC 60.4% 51.6% 46.6% 48.0% 51.1%
EQUITY
Ordinary Shareholders Equity 2,736 3,054 3,562 4,246 5,047 Capital Management
Minority Interest 31 42 44 46 49 Net interest bearing debt/Equity (22.0%) (16.7%) (20.0%) (25.0%) (29.5%)
Total Equity 2,766 3,096 3,606 4,292 5,096 Net interest bearing debt/EBIT (0.3) (0.3) (0.4) (0.5) (0.6)

Interest bearing liabilities - - - - - Credit Management


Other non current liabilities 748 709 718 751 794 Total bad debts/Avg gross debtors - - - - -
Total non current liabilities 1,016 859 861 886 923
Liquidity
Trade accounts payable 7,392 7,692 8,119 9,053 10,233 Current Assets : Current Liabilities 1.0 0.9 1.0 1.0 1.0
Other current liabilities - - - - - Current Assets less Inventory : Current Liabilities 0.4 0.4 0.4 0.4 0.4
Total current liabilities - - - - -
Total Liabilities 9,134 9,430 9,860 10,898 12,226

Source: Company reports and J.P. Morgan estimates.

333
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

MISC-F Neutral
M$8.90
Price Target: M$8.20
www.misc.com.my

Company description Malaysia


MISC is a leading international shipping company in Malaysia. Energy- Shipping
related shipping (i.e. LNG, petroleum and chemical tankers) accounts for Simone YeohAC
51% of its revenue, with integrated liner logistics making up 29%. The (603) 2270 4710
remaining 20% is derived from other energy-related businesses (i.e. heavy simone.x.yeoh@jpmorgan.com
engineering, ship repairs, and the offshore FPSO and FSO businesses). JPMorgan Securities (Malaysia) Sdn. Bhd.
(18146-X)
Post mortem
Existing and long-term charters in the LNG and offshore units should Price performance
continue to provide stable earnings (together accounted for 89% of FY09 M$
pre-tax). MISC has a captive customer in Petronas which accounts for about 10
50% of its business. Liner unit remains loss-making due to intense 9
competition, though current restructuring/scaling down of routes here should
8
help stem losses.
7

10-08

01-09

04-09

07-09

10-09
Potential for earnings upgrades
Our forecast has factored in a halving in FY09 EBITDA losses of M$1B
Source: Bloomberg.
from the liner unit by FY11 from the scaling down of Asia-Europe routes.
We have factored in VLCC and Aframax tanker rates recovering by 17-26% Performance
Y/Y in 2010E in line with our US team’s forecast with improved global 1M 3M 12M
Absolute (%) 0.6 0.8 4.7
demand. Every 5% rise in tanker rates will improve FY11E earnings by 3%.
Relative (%) -2.4 -5.2 -23.6
How much recovery is priced into the stock? Source: Bloomberg.

Valuations have largely priced in a recovery as the stock trades on 2010E Company data
P/E of 21x (historical mean: 17x, +1SD: 22x), and at a 9% discount to SOTP 52-wk range (M$) 7.85-9.3
Mkt. cap (M$MM) 33,106.46
versus historical mean discount of 19% and peak discount of 3%. Mkt. cap (US$MM) 9,676.01
Liquidity (US$MM) 1.4
Price target and key risks Avg. daily volume (MM) 0.6
Our Mar-10 PT of M$8.20 translates to a discount of 16% to SOTP, where Shares O/S (MM) 3,719.8
we value the LNG and offshore units on DCF, and the chemical and tanker Date of price 5-Nov-09
KLCI Index 1254.0
units based on replacement value of assets. A key risk to our PT is a stronger Free float (%) 100.0
and faster-than-expected pick-up in global demand, which will reduce risk Exchange rate 3.42
for the tanker and chemical units, and narrow the SOTP discount further. Source: Bloomberg.

Bloomberg: MISF MK; Reuters: MISCe.KL


M$ in millions, year-end March
FY08 FY09 FY10E FY11E FY12E
Sales 12,957 15,783 15,670 15,754 16,031
Core net profit 2,430 1,405 1,236 1,779 2,114
Core EPS (M$) 0.653 0.378 0.332 0.478 0.568
DPS (M$) 0.350 0.350 0.350 0.350 0.350
Sales growth (%) 15.7 21.8 -0.7 0.5 1.8
Net profit growth (%) 0.6 -42.2 -12.0 43.9 18.9
EPS growth (%) 0.6 -42.2 -12.0 43.9 18.9
ROE (%) 13.2 6.7 5.9 8.5 10.1
ROCE (%) 11.1 6.0 5.8 7.4 8.4
P/E (x) 13.6 23.6 26.8 18.6 15.7
P/BV (x) 1.8 1.6 1.6 1.1 0.9
EV/EBITDA (x) 8.7 10.5 11.1 0.0 0.0
Net div yield (%) 3.9 3.9 3.9 3.9 3.9
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009. We downgraded to UW with new PT of M$7.7 on November 24.

334
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

MISC-F: Summary of financials


Profit and Loss statement Cash flow statement
MYR in millions, year-end Mar FY08A FY09A FY10E FY11E FY12E MYR in millions, year-end Mar FY08A FY09A FY10E FY11E FY12E

Revenues 12,957 15,783 15,670 15,754 16,031 EBIT 2,872 1,961 1,898 2,466 2,850
% change Y/Y 15.7 21.8 -0.7 0.5 1.8 Depreciation & amortisation 1,465 1,923 1,889 1,955 1,955
EBITDA 4,337 3,884 3,786 4,421 4,804 Change in working capital (239) 59 1,213 7 22
% change Y/Y -6.5 -10.5 -2.5 16.8 8.7 Taxes (71) (68) (100) (83) (101)
EBITDA Margin (%) 33.5 24.6 24.2 28.1 30.0 Others 13 (466) (490) (486) (486)
EBIT 2,872 1,961 1,898 2,466 2,850 Cash flow from operations 4,039 3,409 4,408 3,859 4,239
% change Y/Y -11.6 -31.7 -3.2 30.0 15.5
EBIT Margin (%) 22.2 12.4 12.1 15.7 17.8 Capex (1,539) (7,022) (3,883) (1,927) (1,927)
Net Interest (345) (403) (490) (486) (486) Disposal/ (purchase) 0 0 0 0 0
Earnings before tax 2,609 1,595 1,444 2,017 2,400 Others (1,311) 0 0 0 0
% change Y/Y -11.0 -38.9 -9.5 39.7 19.0 Free cash flow 2,500 (3,613) 525 1,932 2,313
Tax (71) (68) (100) (83) (101)
as % of EBT 2.7 4.2 7.0 4.1 4.2 Equity raised/ (repaid) 0 0 0 0 0
Core Net Income 2,430 1,405 1,236 1,779 2,114 Debt raised/ (repaid) (457) 0 0 0 0
% change Y/Y 0.6 -42.2 -12.0 43.9 18.9 Other #REF! #REF! #REF! #REF! #REF!
Shares Outstanding 3720 3720 3720 3720 3720 Dividends paid (1,338) (1,317) (1,302) (1,302) (1,302)
EPS (reported) - M$ 0.653 0.378 0.332 0.478 0.568 Beginning cash 2,218 1,964 3,725 1,989 2,473
% change Y/Y 0.6 -42.2 -12.0 43.9 18.9 Ending cash 1,964 3,725 1,989 2,473 3,307

Balance sheet Ratio Analysis


MYR in millions, year-end Mar FY08A FY09A FY10E FY11E FY12E %, year-end Mar FY08A FY09A FY10E FY11E FY12E

Cash and cash equivalents 1,964 3,725 1,989 2,473 3,307 EBITDA margin 33.5 24.6 24.2 28.1 30.0
Accounts receivable 2,261 2,899 2,821 2,836 2,886 Operating margin 22.2 12.4 12.1 15.7 17.8
Inventories 400 442 627 630 641 Net profit margin 18.8 8.9 7.9 11.3 13.2
Others 161 318 318 318 318 SG&A/sales n.a. n.a. n.a. n.a. n.a.
Current assets 4,786 7,384 5,754 6,256 7,152
Sales per share growth 15.7 21.8 -0.7 0.5 1.8
LT investments Sales growth 15.7 21.8 -0.7 0.5 1.8
Net fixed assets 24,257 29,373 31,405 31,405 31,405 Net profit growth 0.6 -42.2 -12.0 43.9 18.9
Total assets 29,043 36,757 37,159 37,661 38,557 EPS growth 0.6 -42.2 -12.0 43.9 18.9

Liabilities Interest coverage (x) 12.6 9.6 7.7 9.1 9.9


ST loans 959 3,104 2,899 2,899 2,899 Net debt to total capital (%) 19% 22% 26% 25% 22%
Payables 2,642 3,381 4,701 4,726 4,809 Net debt to equity (%) 30% 39% 47% 43% 38%
Others 97 100 100 100 100 Sales/assets (x) 0.4 0.4 0.4 0.4 0.4
Total current liabilities 3,698 6,586 7,701 7,726 7,809 Assets/equity (x) 1.6 1.8 1.8 1.8 1.7
Long term debt 6,569 8,854 8,854 8,854 8,854 ROE 13.2 6.7 5.9 8.3 9.5
Other liabilities 322 364 472 472 472 ROCE 11.1 6.0 5.8 7.4 8.4
Total liabilities 10,589 15,804 17,027 17,052 17,135 ROA 8.4 3.8 3.3 4.7 5.5
Shareholders' equity 18,454 20,953 20,887 21,364 22,176
BVPS - M$ 5.0 5.6 5.6 5.7 6.0
Source: Company, J.P.Morgan estimates

PT assumptions
Business Value (M$ MM) M$/share
DCF of LNG business 29,312 7.80
Replacement value of Chemical (13 units) - US$45 mil / unit 2,106 0.50
Replacement value of Aframax (28 units) - US$60 mil / unit 6,048 1.60
Replacement value of VLCC (11 units) - US$110 mil / unit 4,356 1.10
NPV of FPSO business 922 0.20
MMHE on 8x PER 1,986 0.50
Total Value of Business (EV) 44,731 11.70

Less: Net Debt FY09E -8,233 -2.20


Total Equity Value 36,498 9.80
Number of shares 3,720
JPM Fair Value - 16% discount to SOTP 29,199 8.20
Source: J.P. Morgan estimates.

335
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Nedbank Underweight
Price: 11,499c
Price Target: 10,747c
www.nedbank.co.za
Company description South Africa
Nedbank is one of the four largest banking groups in South Africa, offering a Banks
range of wholesale and retail banking activities. It has the highest gearing to Mervin NaidooAC
the non-retail banking segment, with the highest business banking (27-11) 507 0716
contribution to its own earnings. mervin.x.naidoo@jpmorgan.com
J.P. Morgan Equities Ltd
Post mortem
We have been pleasantly surprised by the progress made in supporting NIR Price Performance
growth, which was supported by an expanding distribution network and net
customer acquisitions. Nedbank has recently announced the acquisition of 12,000

the remaining stake in Imperial Bank, which will support its VAF growth in 10,000
c
the medium term. In addition, the acquisition of previous JVs with Old
8,000
Mutual should also support NIR. That said, cost growth is likely to remain
elevated as a result. We do not view provisioning as conservative and believe 6,000

that its impairment unwind could be more muted as a result. Nov-08 Feb-09 May-09 Aug-09 Nov-09

Source: Bloomberg
Potential for earnings upgrades
We believe impairments will be a swing factor as to whether NED meets its Performance
own extremely wide guidance range for FY09E (18 – 38% down). Asset 1M 3M 12M
quality trends are a concern and in our view provisioning is relatively weak Absolute (%) -6.1 -0.6 28.9
as well as the near-term ROE recovery profile. Source: Bloomberg

How much recovery is priced into the stock? Company data


NED is our least preferred in the sector, with its share price discounting Price(c) 11,499
earnings further out than its peers. Date of Price 23-Nov-09
Price Target (c) 10,747
Price Target End Date 31-Aug-10
Price target and key risks 52-week Range (c) 12,900 – 6,492
Our Jun-10 price target of 10,747c is calculated at the lower of our SOTP Mkt Cap (Rbn) 54.72
and economic valuation methodology, rolled forward at COE. Key risks to Shares O/S (mn) 476
rating and PT include significant variation to our base case interest rate Source: Bloomberg, J.P. Morgan
assumptions, while a collapse in the property market could significantly
impact the value of realizations.

Bloomberg: NED SJ; Reuters: NEDJ.J


Rand millions, year-end Dec
FY08 FY09E FY10E FY11E
Operating revenues 26,899 28,445 30,757 34,741
Net profit 6,410 3,730 5,084 7,725
FD EPS (SAcps) 1,400.97 901.27 1,216.21 1,836.75
DPS (SAcps) 620 403 544 822
Sales growth (%) 9.4 5.7 8.1 13.0
Net profit growth (%) - 42 36 36
EPS growth (%) -1.9 -35.7 34.9 51.0
ROE (%) 17.7 10.4 13.2 18.0
FD P/E (x) 8.2 12.8 9.5 6.3
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

336
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Nedbank Group Ltd: Summary of Financials


Profit and Loss Statement Ratio Analysis
R mn millions, year end Dec FY08A FY09E FY10E FY11E R mn millions, year end Dec FY08A FY09E FY10E FY11E
Per Share Data
Net interest income 16,170 16,734 18,088 20,936 EPS Reported 1400.97 901.27 1216.21 1836.75
% Change Y/Y 14.3% 3.5% 8.1% 15.7% EPSAdjusted 1,400.97 901.27 1,216.21 1,836.75
Non-interest income 10,729 11,710 12,668 13,805 % Change Y/Y (1.9%) (35.7%) 34.9% 51.0%
Fees & commissions 10,729 11,710 12,668 13,805 DPS 620 403 544 822
% change Y/Y 2.7% 9.1% 8.2% 9.0% % Change Y/Y -6.1% -35.1% 35.2% 51.1%
Trading revenues - - - - Dividend yield 6.5% 3.7% 5.0% 7.5%
% change Y/Y - - - - Payout ratio 44.3% 44.7% 44.8% 44.8%
Other Income - - - - BV per share 7,445.72 7,717.04 8,432.82 9,510.51
Total operating revenues 26,899 28,445 30,757 34,741 NAV per share 7,445.72 7,717.04 8,432.82 9,510.51
% change Y/Y 9.4% 5.7% 8.1% 13.0% Shares outstanding 468.9 475.9 478.3 480.7
Admin expenses -13,741 -14,966 -16,545 -18,470
% change Y/Y 1.9% 8.9% 10.6% 11.6% Return ratios
Other expenses - - - - RoRWA - - - -
Pre-provision operating profit 12,938 13,251 13,958 15,985 Pre-tax ROE - - - -
% change Y/Y 17.2% 2.4% 5.3% 14.5% ROE 17.7% 10.4% 13.2% 18.0%
Loan loss provisions 7,859 12,709 12,757 11,034 RoNAV 19.5% 11.8% 14.4% 19.0%
Other provisions - - - -
Other nonrecurrent items - - - - Revenues
Earnings before tax 8,116 5,978 8,062 11,743 NIM (NII / RWA) - - - -
% change Y/Y (8.5%) (26.3%) 34.9% 45.7% Non-IR / average assets 2.1% 2.0% 2.1% 2.0%
Tax (charge) 1,868 1,594 2,295 3,303 Total rev / average assets 4.2% 3.7% 4.0% 4.5%
% Tax rate 21.6% 25.0% 27.0% 27.0% NII / Total revenues 51.4% 44.7% 49.0% 54.7%
Minorities 1,881 2,166 2,480 2,825 Fees / Total revenues 48.6% 55.3% 51.0% 45.3%
Net Income (Reported) 6,410 3,730 5,084 7,725 Trading / Total revenues - - - -

Balance sheet
R mn millions, year end Dec FY08A FY09E FY10E FY11E R mn millions, year end Dec FY08A FY09E FY10E FY11E

ASSETS Cost ratios


Net customer loans 434,233 449,766 489,468 560,387 Cost / income 51.1% 52.6% 53.8% 53.1%
% change Y/Y 16.1% 3.6% 8.8% 14.5% Cost / assets 2.6% 2.6% 2.7% 2.7%
Loan loss reserves 7,859 12,709 12,757 11,034 Staff numbers 27,570 27,570 27,570 28,121
Investments - - - -
Other interest earning assets - - - - Balance Sheet Gearing
% change Y/Y - - - - Loan / deposit 102.0% 94.5% 96.7% 99.6%
Average interest earnings assets 480,864 525,370 561,325 625,806 Investments / assets - - - -
Goodwill - - - - Loan / assets 76.6% 75.6% 75.5% 76.3%
Other assets - - - - Customer deposits / liabilities 88.6% 87.8% 87.5% 87.7%
Total assets 567,023 594,712 648,094 734,039 LT Debt / liabilities 2.7% 2.7% 2.6% 2.5%

LIABILITIES Asset Quality / Capital


Customer deposits 466,890 484,930 527,019 598,520 Loan loss reserves / loans 1.8% 2.8% 2.6% 2.0%
% change Y/Y 21.4% 3.9% 8.7% 13.6% NPLs / loans 4.1% 8.1% 6.6% 4.3%
Long term funding 14,061 15,186 15,945 16,742 LLP / RWA - - - -
Interbank funding - - - - Loan loss reserves / NPLs 43.4% 33.7% 38.3% 45.2%
Average interest bearing liabs 425,716 475,910 505,974 562,769 Growth in NPLs 77.1% 108.2% (11.5%) (26.8%)
Other liabilities - - - - RWAs - - - -
Retirement benefit liabilities - - - - % YoY change - - - -
Shareholders' equity - - - - Core Tier 1 - - - -
Minorities 1,881 2,166 2,480 2,825 Total Tier 1 33,458 35,849 38,690 42,889
Total liabilities 526,950 552,539 602,000 682,218

Source: Company reports and J.P. Morgan estimates.

337
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

New World China Land Underweight


Price: HK$2.93
Price Target: HK$3.15
www.nwcl.com.hk

Company description China


New World China Land (NWCL) is the Mainland China property flagship of Real Estate
New World Development. The company was listed in July 1999 and is one Raymond Ngai, CFAAC
of the largest national developers with 37 major projects spanning over 21 (852) 2800-8527
cities. Its businesses include developing projects for sale, managing raymond.ch.ngai@jpmorgan.com
investment property for rental, and operating resort and hotel projects. It has J.P. Morgan Securities (Asia Pacific) Ltd
land banks of 28 million sqm.
Price performance
Post mortem HK$
10
In October 2009, NWCL announced a rights issue of 1 for 2 shares at a price
8
of HK$2.55 to raise HK$4.9 billion. The proceeds were mainly used to
refinance the outstanding Rmb2.55 billion US$ settled convertible bonds 6

puttable in June 2010. After this fund raising, the group should be in a better 4
position to acquire land for future growth. However, the group's track record 2
has been poor so far with ROE hovering only 1-3% in the past 10 years. 0
03 04 05 06 07 08 09
Potential for earnings upgrades Source: Bloomberg.
In our view, investors would be disappointed if they think the fund raising
exercise can enhance the company’s earnings prospects in the medium to Performance
long term. NWCL has cumulatively raised HK$15.8 billion equity (including 1M 3M 12M
the latest one) since its listing in July 1999, but has never delivered more Absolute (%) -8.9 -29.8 95.2
than HK$1 billion core net profit in any single year in its 10-year listing Relative (%) -14.0 -34.6 50.5
history. Besides, the group’s long-term earnings outlook was dampened by Source: Bloomberg.
its disposal of a prime Luwan site in Shanghai to Vice Chairman Mr Doo at
the bottom of the market in March 2009. Company data
52-week range (HK$) 1.108 - 4.449
Mkt cap (HK$MM) 11,243
Price target and key risks Mkt cap (US$MM) 1,451
After the rights issue, NWCL’s book value per share will be diluted by 23% Shares O/S (MM) 3,837
Avg daily value (HK$MM) 26.81
to HK$6.3. Our Jun-10 PT of HK$3.15 is based on 0.5x P/BV, which is at Avg daily value (US$MM) 3.46
par with its past five-year average. We believe 0.5x P/BV is fair, given the Avg daily volume (MM) 8.04
group’s poor track record in realizing its large bank and delivering strong Date of price 5 Nov 09
profit growth so far. Key risks to our PT include a potential privatization by Exchange rate 7.75
Index: HSI 21,479
its parent NWD, and stronger-than-expected profit growth. Free float (%) 30
Source: Bloomberg.

Bloomberg: 917 HK; Reuters: 0917.HK


HK$ millions, year-end June
FY08 FY09 FY10E FY11E
Sales 3,524 2,039 4,339 5,396
Net profit 772 218 709 1,363
Core EPS (HK$) 0.20 0.06 0.14 0.24
DPS (HK$) 0.06 0.06 0.06 0.06
Net profit growth (%) 25% -72% 226% 92%
Core EPS growth (%) 25% -72% 152% 65%
ROE (%) 5.4% 3.6% 2.0% 0.0%
P/E (x) 14.5 51.6 20.5 12.4
NAV per share (HK$) 5.36 4.73
Dividend yield (%) 2.0% 2.0% 2.0% 2.0%
BVPS (HK$) 7.7 5.3 6.3 6.5
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

338
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

New World China Land: Summary of financials


Profit and loss statement Cash flow statement
HK$ in millions, year-end June HK$ in millions, year-end June
FY08 FY09 FY10E FY11E FY08 FY09E FY10E FY11E
Revenues 3,524 2,039 4,339 5,396 Operating profit 2,130 168 1,014 1,766
% change Y/Y 42.4 -42.1 112.8 24.4 Depreciation & amortisation 153 153 153 153
EBIT 1,726 161 1,006 1,757 Change in working capital -4,263 932 -3,000 -3,257
% change Y/Y 107.8 -90.7 526.5 74.7 Taxes -164 16 -107 -215
EBIT Margin (%) 49.0 7.9 23.2 32.6 Other non-cash items -1,684 -506 -506 -505
Net Interest -220 -267 -294 -323 Cash flow from operations -3,828 764 -2,445 -2,057
Earnings before tax 2,621 788 1,320 2,187
% change Y/Y 168.1 -69.9 67.4 65.7 Capex -971 -2,038 -1,357 -1,503
Tax 169 32 214 430 Disposal/ (purchase) 460 0 0 0
as % of EBT -9.8 -19.9 -21.2 -24.5 Net Interest 49 258 579 1,071
Net Income (Reported) 1,614 1,102 709 1,363 Free cash flow -4,289 -1,016 -3,223 -2,489
% change Y/Y 25 -72 226 92
Core Net Profit 772 218 709 1,363 Equity raised/ (repaid) 9 0 4,854 0
% change Y/Y 24.8 -71.8 225.7 92.2 Debt raised/ (repaid) 2,822 863 556 2,918
Shares Outstanding 3,835 5,756 5,756 5,756 Other 200 0 0 0
EPS (reported) (HK$) 0.39 0.26 0.17 0.33 Dividends paid -383 -345 -345 -345
% change Y/Y 24.6 -71.8 152.0 65.5 Source: Company, J.P. Morgan estimates.
Core EPS (HK$) 0.20 0.06 0.14 0.24
% change Y/Y 24.6 -71.8 152.0 65.5
Source: Company, J.P. Morgan estimates.
Ratio analysis
%, year-end June
Balance sheet FY08 FY09E FY10E FY11E
EBIT margin 49.0 7.9 23.2 32.6
HK$ in millions, year-end June Operating margin 74.4 38.7 30.4 40.5
FY08 FY09 FY10E FY11E Net profit margin 38.0 (3.7) 11.5 18.6
Cash and cash equivalents 4,825 3,901 1,195 1,066 SG&A/sales
Accounts receivable 6,761 7,021 7,232 7,448
Inventories 9,386 9,635 12,595 15,197 Sales per share growth 42.4 -42.1 112.8 24.4
Others 28 34 34 34 Sales growth 42.4 -42.1 112.8 24.4
Current assets 21,000 20,590 21,056 23,745 Net profit growth 24.8 -71.8 225.7 92.2
Core EPS growth 24.6 -71.8 152.0 65.5
LT investments 20,427 22,219 23,557 25,113
Net fixed assets 8,931 11,582 11,650 11,725 Interest coverage (x) 6.2 0.6 3.3 5.3
Total assets 50,358 54,392 56,262 60,583 Net debt to total capital 21.6 26.8 29.6 0.0
Net debt to equity 33.2 43.2 45.4 51.9
Liabilities Sales/assets 7.5 3.9 7.8 9.2
ST loans 4,426 5,971 5,971 5,971 Assets/equity 169.5 178.2 155.4 161.3
Payables 2,313 2,084 2,292 2,522 ROE 5.4 3.6 2.0 3.6
Others 1,777 2,383 2,549 2,105 ROCE 4.5 0.4 3.0 4.3
Total current liabilities 8,516 10,438 10,812 10,597 Source: Company, J.P. Morgan estimates.
Long term debt 10,254 11,117 11,673 14,591
Other liabilities 552 800 880 968
Total liabilities 19,321 22,355 23,365 26,156
Minority interest 1,332 1,514 1,665 1,832
Shareholders' equity 29,705 30,523 36,201 37,564
BVPS (HK$) 7.7 5.3 6.3 6.5
Source: Company, J.P. Morgan estimates.

339
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

PetroChina - H Underweight
Price: HK$9.68
Price Target: HK$7.40
www.petrochina.com.cn

Company description China


PetroChina is the largest oil company in China, with 21,000 million BOE of Oil & Gas
proven reserves (45% natural gas) and production of 1,060 million BOE Brynjar BustnesAC
(22% natural gas). It has refining capacity of 2,600 BOPD. PetroChina also (852) 2800-8578
has 2 million and 2.6 million TPY of ethylene and propylene capacity, brynjar.e.bustnes@jpmorgan.com
respectively. On the marketing side, PetroChina owns 18,000 retail stations. J.P. Morgan Securities (Asia Pacific) Limited
The natural gas, crude and petroleum products are tied together in a vast
nationwide pipeline network. Price performance
12.0
Post mortem 10.0
8.0
PetroChina got hurt by high oil prices and controlled product prices last year. 6.0
4.0
This year and for the future, with oil at or below US$80/bbl, it should enjoy 2.0
0.0
better refining and marketing margins. Lack of crude production growth and Nov -08 Feb-09 May -09 Aug-09 Nov -09

high investments to monetize natural gas reserves will, however, continue to Petrochina Co-H Share Price
HSCEI(rebased)

take down overall returns, in our view. We believe current market valuation
is too high in relation to this structural decline in returns. Source: Bloomberg.

Potential for earnings upgrades Performance


There is little upside in terms of EPS upgrades for PetroChina, with 1M 3M 12M
consensus at Rmb0.77 for 2010. Considering that PetroChina has struggled Absolute (%) 9% 3% 60%
to come close to Rmb0.20 EPS in a quarter this year, it may be difficult to Relative (%) 2% -3% -17%
meet these expectations, depending on oil prices and related production costs Source: Bloomberg.
in particular. Company data
How much recovery is priced into the stock? 52-week range (HK$) 5.04-10.56
PetroChina is fully pricing in the NDRC pricing scheme and a full economic Adj. mkt cap (plug)
recovery (i.e. US$80/bbl+ oil price) relative to many other oil companies in (RmbMM) 1,707,585.93
the region. Hence, we expect a derating from current high levels as investors Avg daily value ($MM) 182
realize the lower returns on higher cost and large capex requirements. Avg daily val (HK$MM) 1,411
Avg daily vol (MM) 126
Price target and key risks
Shares O/S (MM) 183,021
We have an Underweight rating and Dec-09 PT of HK$7.40, based on a 15%
Date of price 5-Nov-09
discount to the DCF value, which is due to our view that oil prices will fall in
Index: HSCEI 12805
the near-term. Our price target reflects 10x 2010E P/E, which is in line with
Free float (%) 13.3
global super majors’ valuations. Risks to our rating and PT are higher-than-
Exchange rate 7.75
expected oil prices and production.
Source: Bloomberg.

Bloomberg: (857 HK; Reuters: 0857.HK


, g )
Rmb in , year-end Dec FY07A FY08A FY09E FY10E FY11E
Revenue (Rmb mn) 836,353 1,071,146 761,584 864,296 936,076
Net Profit (Rmb mn) 146,750 114,431 111,530 123,971 131,924
EPS (Rmb) 0.82 0.63 0.61 0.68 0.72
DPS (Rmb) 0.39 0.31 0.27 0.30 0.32
Revenue Growth (%) 21% 28% (29%) 13% 8%
EPS Growth (%) 3% (23%) (3%) 11% 6%
ROCE 27% 18% 15% 15% 14%
ROE 22% 15% 14% 14% 14%
P/E 10.5 13.6 14.0 12.6 11.8
P/BV 2.1 2.0 1.8 1.7 1.6
EV/EBITDA 6.4 7.2 7.1 6.5 6.1
Dividend Yield 4.5% 3.6% 3.2% 3.6% 3.8%
Source: Company data, Bloomberg, J.P. Morgan estimates.

340
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

PetroChina –H: Summary of financials


Income statement Cash flow statement
Rmb in millions, year end Dec FY07 FY08 FY09E FY10E FY11E Rmb in millions, year end Dec FY07 FY08 FY09E FY10E FY11E

Revenues 836,353 1,071,146 761,584 864,296 936,076 EBIT 200,771 159,300 155,338 173,752 185,483
% change Y/Y 21% 28% (29%) 13% 8% Depr. & amortization 67,274 89,733 105,251 118,624 130,517
EBITDA 268,045 249,033 260,589 292,376 316,000 Change in working capital -7,207 -19,304 7,142 -2,370 -1,656
% change Y/Y 3% (7%) 5% 12% 8% Taxes -68942 -72093 -34849 -38814 -41400
EBIT 200,771 159,300 155,338 173,752 185,483 Cash flow from operations 205,243 170,506 229,063 246,196 267,460
% change Y/Y 1% (21%) (2%) 12% 7%
EBIT Margin 24% 15% 20% 20% 20% Capex -185,486 -213,947 -233,100 -233,100 -233,100
Net Interest -1,505 -689 -4,888 -6,172 -6,772 Disposal/(purchase) - - - - -
Earnings before tax 204,957 161,829 151,519 168,756 179,999 Net Interest -1,505 -689 -4,888 -6,172 -6,772
% change Y/Y 3% (21%) (6%) 11% 7% Other - - - - -
Tax -49,781 -35,178 -34,849 -38,814 -41,400 Free cash flow 19,757 -43,441 -4,037 13,096 34,360
as % of EBT 24.3% 21.7% 23.0% 23.0% 23.0%
Net income (reported) 146,750 114,431 111,530 123,971 131,924 Equity raised/(repaid) 65,798 0 0 0 0
% change Y/Y 3% (22%) (3%) 11% 6% Debt raised/(repaid) 4,003 -6,637 120,000 85,000 65,000
Shares outstanding - 183,021 183,021 183,021 183,021 Other 3,659 77,695 0 0 0
EPS (reported) 0.82 0.63 0.61 0.68 0.72 Dividends paid -69,346 -56,364 -50,188 -55,787 -59,366
% change Y/Y 3% (23%) (3%) 11% 6% Beginning cash 48,559 68,652 32,944 98,719 141,028
Ending cash 68,652 32,944 98,719 141,028 181,023
DPS 0.39 0.31 0.27 0.30 0.32

Balance sheet Ratio analysis


Rmb in millions, year end Dec FY07 FY08 FY09E FY10E FY11E Rmb in millions, year end Dec FY07 FY08 FY09E FY10E FY11E

Cash and cash equivalents 68,652 32,944 98,719 141,028181,023 EBITDA margin 32% 23% 34% 34% 34%
Accounts receivable 23,300 21,070 14,981 17,001 18,413 Operating margin 24% 15% 20% 20% 20%
Inventories 88,496 90,670 64,466 73,161 79,237 Net margin 18% 11% 15% 14% 14%
Others 55,101 79,789 59,743 66,394 71,042
Current assets 235,549 224,473 237,909 297,584349,715
Sales per share growth 21% 26% (29%) 13% 8%
LT investments - - - - - Sales growth 21% 28% (29%) 13% 8%
Net fixed assets 765,933 898,909 1,026,758 1,141,234 1,243,817 Net profit growth 3% (22%) (3%) 11% 6%
Total Assets 1,067,680 1,194,174 1,335,458 1,509,610 1,664,324 EPS growth 3% (23%) (3%) 11% 6%

Liabilities Interest coverage (x) 178.10 361.44 53.32 47.37 46.66


Short-term loans 30,934 92,761 92,761 92,761 92,761
Payables 145,393 156,390 111,193 126,189 136,669 Net debt to equity 0% 12% 18% 21% 22%
Others 22,895 15,186 15,186 15,186 15,186 Sales/assets 0.86 0.95 0.60 0.61 0.59
Total current liabilities 199,222 264,337 219,140 234,136 244,616 Assets/equity 1.45 1.51 1.56 1.66 1.72
Long-term debt 39,688 32,827 152,827 237,827 302,827 ROE 22% 15% 14% 14% 14%
Other liabilities 46,670 49,884 49,884 49,884 49,884 ROCE 27% 18% 15% 15% 14%
Total Liabilities 285,580 347,048 421,851 521,847 597,327
Shareholders' equity 738,204 790,838 852,179 920,363 992,921
BVPS 4.10 4.32 4.66 5.03 5.43
Source: Company reports and J.P. Morgan estimates.

341
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Quanta Computer Inc. Underweight


Price: NT$65.5
Price Target: NT$57
www.quanta.com.tw
Company description Taiwan
Quanta is the largest ODM manufacturer of notebook computers and related Computer Hardware
peripheral equipment. Its key customers include Apple, HP, and Dell. Alvin KwockAC
Post mortem (852) 2800 8533
The sub-US$800 segment has increased from 15% to 50% of notebook PC alvin.yl.kwock@jpmorgan.com

volume since the financial crisis broke out in 1Q08. Notebook ODMs have Gokul Hariharan
managed to keep margins flattish or even up due to falling component costs. (852) 2800 8564
However, key components (DRAM, LCD panel) have since then seen sharp gokul.hariharan@jpmorgan.com

price increases; mechanical component costs are on the rise with labor J.P. Morgan Securities (Asia Pacific) Ltd.
shortages re-surfacing, and oil and commodity prices are rising as well.
Price performance
Potential for earnings upgrades 80

We see increasing evidence of eroding notebook ODM pricing power: (1)


NT$ 50
Rising component prices, yet consumers are paying less; (2) Quanta/Compal
rivalry intensifying again, while newcomer Hon Hai enters the fray; (3) 20
Nov-08 Feb-09 May-09 Aug-09 Nov-09
HP/Acer guiding for strong 2010-11 margins post the ODM bidding—
historically, there is a strong inverse margin relationship between brands 2382.TW share price (NT$
TSE (rebased)
and notebook ODMs; (4) HP’s unexpected order reshuffling as Inventec Source: Bloomberg.
fights back with lower pricing; and (5) HP resuming E-bidding and starting
in 2Q10 to adopt a dual-source, bi-monthly bidding strategy for mainstream Performance
projects to induce ODM competition, which we believe will hurt Quanta the 1M 3M 12M
Absolute (%) 0.5 14.3 75.0
most among the ODMs. Consensus expects flat margin in 2010, which is a Relative (%) 0.7 5.5 17.5
key downside risk, in our view.
Source: Bloomberg.
How much recovery is priced into the stock?
Quanta’s Chairman Barry Lam guided for 50 million notebook units in 2010 Company data
(up 40% Y/Y vs. industry growth of 20%+). Meanwhile, other three ODMs 52-week range (NT$) 29.26-75.30
Mkt cap. (NT$MM) 244,029
also talked about share gains during their 3Q09 earnings results meetings, Mkt cap. (US$MM) 7,502
even with EMS players coming in—some, or maybe all, have to lose market Avg daily value (US$MM) 28.7
share. We think this is 2002-04 déjà vu—back then, ODM pricing war led to Avg daily volume (MM) 15.4
Shares O/S (MM) 3,725.6
Quanta’s consolidated OPM to fall from 6.8% to 3.3%. The stock is now Date of price 5-Nov-09
trading near 3-year highs on both P/E and P/BV terms. Index: TWSE 7,417
Free float (%) 52.2
Price target and key risks Exchange rate 32.5
Our Jun-10 PT of NT$57 is based on 9x FY10E earnings, vs. historical P/E Source: Bloomberg.
range of 5x-35x, to reflect single digit EPS growth prospects in the next 3
years. A key risk to our PT and view is better-than-expected progress in
vertical/horizontal integration.
Bloomberg: 2382 TT; Reuters: 2382.TW
NT$ in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Sales 795,234 790,991 970,282 1,097,999 YE BPS (NT$) 23.6 29.1 32.4 35.8
Operating profit 20,181 22,583 24,540 25,847 New TW GAAP ROE (%) 24.1 22.8 20.6 19.5
EBITDA 30,377 27,917 29,340 30,647 New TW GAAP Core ROIC (%) 24.7 27.6 26.5 22.6
Pre-tax profit 26,887 29,384 31,897 33,658 Cash div (NT$/Share) 3.50 3.50 3.24 3.45
Net profit 20,286 22,086 23,537 24,839 New TW GAAP EPS growth (%) 12.2% 4.7% 5.2% 4.5%
MV of employee bonus - 2,072 2,305 2,432 P/BV (x) 2.8 2.2 2 1.8
New Taiwan GAAP NI 20,861 22,086 23,537 24,839 Quarterly EPS (NT$) 1Q 2Q 3Q 4Q
New TW GAAP EPS (NT$) 5.78 6.05 6.37 6.65 EPS (FY07) 0.86 1.06 1.36 1.39
New Taiwan GAAP P/E (x) 11.3 10.8 10.3 9.8 EPS (FY08) 1.14 1.43 1.99 1.06
Cash 81,075 99,415 110,231 120,166 EPS (FY09E) 1.21 1.33 1.75 1.77
Gross debt 58,353 63,276 78,061 99,826 Fair value (6/2010) NT$78
Equity 86,075 107,460 120,801 134,454 Price target (6/2010) NT$57
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

342
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Quanta Computer Inc.: Summary of financials


NT$ in millions, year-end December
Income statement Ratio analysis
FY06 FY07 FY08 FY09E FY10E FY11E % FY06 FY07 FY08 FY09E FY10E FY11E

Revenues 487,890 758,475 795,234 790,991 970,2821,097,999 Gross Margin 6.1 5.0 5.3 5.7 5.1 4.9
Cost of Goods Sold 458,237 720,462 752,817 746,211 920,3901,044,733 EBITDA margin 3.3 3.0 3.8 3.5 3.0 2.8
Gross Profit 29,652 38,013 42,417 44,780 49,892 53,266 Operating Margin 2.7 2.4 2.5 2.9 2.5 2.4
R&D Expenses 3,998 5,016 5,411 6,077 7,473 8,452 Net Margin 2.7 2.4 2.6 3.0 2.6 2.4
SG&A Expenses 12,607 14,611 16,825 16,119 17,878 18,967 R&D/sales 0.8 0.7 0.7 0.8 0.8 0.8
Operating Profit (EBIT) 13,048 18,386 20,181 22,583 24,540 25,847 SG&A/Sales 2.6 1.9 2.1 2.0 1.8 1.7
EBITDA 15,886 22,949 30,377 27,917 29,340 30,647
Interest Income 799 1,117 1,440 591 657 722 Sales growth 20.2 55.5 4.8 -0.5 22.7 13.2
Interest Expense -1,953 -2,461 -2,124 -1,359 -1,494 -1,893 Operating Profit Growth -9.7 40.9 9.8 11.9 8.7 5.3
Old Taiwan GAAP NI
Investment Income (Exp.) 1,753 1,371 1,607 1,987 2,372 2,393 growth 19.0 42.1 10.0 18.5 5.0 5.5
Non-Operating Income New Taiwan GAAP NI
(Exp.) 2,356 4,622 5,783 5,583 5,822 6,588 growth 18.0 63.3 14.1 5.9 6.6 5.5
Earnings before tax 16,003 23,035 26,887 29,384 31,897 33,658
Tax 2,985 4,347 6,313 6,935 8,360 8,819 Interest coverage (x) 6.7 7.5 9.5 16.6 16.4 13.7
Net Income (Old Taiwan
GAAP) 12,983 18,447 20,286 24,032 25,237 26,634 Net debt to total capital -6.8 -12.4 -17.4 -22.9 -17.6 -9.8
Net Income (New Taiwan
GAAP) 11,203 18,288 20,861 22,086 23,537 24,839 Net debt to equity -11.3 -18.5 -28.7 -35.8 -28.6 -16.9
NT$
EPS (Old Taiwan GAAP) 3.68 5.19 5.62 6.05 6.37 6.65 Asset Turnover 224.7 242.0 272.3 202.4 212.5 206.9
EPS (New Taiwan GAAP) 3.20 5.15 5.78 6.05 6.37 6.65 Working Capital Turns (x) 15.8 19.4 16.9 16.5 22.4 29.9
BPS 20.49 24.41 23.59 29.15 32.44 35.76 ROE (New Taiwan GAAP) 15.8 22.9 24.1 22.8 20.6 19.5
Cash Dividend PS 2.50 2.50 3.50 3.50 3.24 3.45 ROIC (New Taiwan GAAP) 10.4 15.6 15.8 14.7 13.4 12.1
Shares Outstanding (MM) 3,500 3,551 3,609 3,648 3,696 3,733 ROIC (net of cash) 18.8 28.3 31.5 33.9 30.5 25.7

Balance sheet Cash flow statement


FY06 FY07 FY08 FY09E FY10E FY11E FY06 FY07 FY08 FY09E FY10E FY11E

Cash and cash equivalents 56,367 59,665 81,075 99,415 110,231 120,166 EBIT 13,048 18,386 20,181 22,583 24,540 25,847
Accounts receivable 70,918 124,450 99,883 139,810 163,142 187,163 Depr. & Amortisation 2,838 4,563 10,196 5,334 4,800 4,800
Inventories 41,710 74,223 48,815 71,117 82,985 95,205 Change in working capital -8,342 -1,930 15,287 8,406 1,229 1,273
Others 2,794 3,072 5,333 7,162 8,358 9,588 Taxes 2,985 4,347 6,313 6,935 8,360 8,819
Current assets 171,788 261,410 235,106 317,504 364,716 412,123 Cash flow from operations 10,530 25,366 51,977 43,258 38,929 40,739

LT investments 13,708 13,295 11,813 13,241 15,613 18,006 Capex -3,574 -11,619 -16,648 -19,472 -20,000 -28,000
Net fixed assets 27,628 34,684 41,136 55,274 70,474 93,674 Disposal/ (purchase) 10,471 428 1,415 -2,235 -3,339 -3,555
Others 3,981 3,967 4,033 4,840 5,808 6,969 Net Interest -1,155 -1,344 -685 -769 -837 -1,171
Total assets 217,105 313,355 292,089 390,859 456,610 530,772 Cash flow from investment 5,742 -12,536 -15,917 -22,475 -24,176 -32,726

Liabilities Free cash flow 6,955 13,747 35,329 23,786 18,929 12,739
ST loans 40,820 38,299 36,508 52,490 65,231 83,985
Payables 80,910 155,624 115,903 163,035 191,133 220,069 Equity raised/ (repaid) 1,237 1,123 1,743 371 372 357
Others 14,783 24,462 31,757 57,088 66,615 76,424 Debt raised/ (repaid) 136 -4,673 12,858 4,562 14,786 21,765
Total current liabilities 136,513 218,385 184,168 272,614 322,979 380,477 Other -4,313 2,185 -17,374 4,899 -7,168 -7,490
Long term debt 7,351 5,198 19,847 8,426 10,472 13,482 Dividends paid -8,063 -8,166 -11,876 -12,275 -11,927 -12,710
Other liabilities 844 2,382 1,998 2,359 2,359 2,359
Total liabilities 144,708 225,965 206,013 283,399 335,809 396,318 Beginning cash 51,099 56,367 59,665 81,075 99,415 110,231
Shareholders' equity 72,397 87,390 86,075 107,460 120,801 134,454 Ending cash 56,367 59,665 81,075 99,415 110,231 120,166
Source: Company, J.P. Morgan estimates.

343
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Redecard Neutral
RDCD3.SA, R$26.71
Price Target: R$32
www.redecard.com.br

Company description Brazil


Redecard is the second-largest merchant acquirer in Brazil, behind VisaNet, Financial Institutions
with 33% market share based on transaction value of R$125 billion in 2008. Saul MartinezAC
The company also has 922 POS terminals (as of September 30, 2009). The (1-212) 622-3602
company is currently the sole active acquirer for MasterCard, Diner’s Club saul.martinez@jpmorgan.com
International and Redeshop branded cards in Brazil. J.P. Morgan Securities Inc.

Price performance
Post mortem
R$
Notwithstanding better economic conditions and the secular trend toward
migration to electronic payments, we believe that the end of exclusive 35
relationships between merchant acquirers and payment networks will lead to
greater competition in the core merchant acquiring business and, perhaps 30
equally important, could lead to a meaningful slowdown in the POS leasing 25
business (25% of net revenue through the first nine months of 2009). We
also believe that the prepayments of receivables business will grow much 20
nov-08 fev-09 mai-09 ago-09
more slowly going forward (18% of net revenue through nine months 2009).
We prefer VisaNet to Redecard. Source: Bloomberg.

Potential for earnings upgrades Performance


While near-term earnings momentum remains mostly favorable, the end of 1M 3M 12M
exclusivity in the second half 2010 should help precipitate a sharp slowdown Absolute (%) (9.7) 7.7 5.7
in top- and bottom-line growth to the high-single-digit range beyond 2010. Relative (%) (10.3) (9.9) (89.8)
We also see some downside risk to our estimates after 2010. Source: Bloomberg.

How much recovery is priced into the stock? Company data


While the stock has meaningfully underperformed the market, we see 52-week range (LC) 23.70-20.15
Redecard as a broken growth story with a business mix (roughly 43% of Mkt cap. (Local) 17,975
revenues come from POS leasing and prepayments of receivables) that does Mkt cap. (US$MM) 10,438
not support a high multiple. We do not see the current valuation of 2.26x Avg daily value (US$MM) 45.8
2010e earnings as compelling. Avg daily volume (MM) 1.7
Shares O/S (MM) 673
Price target and key risks Date of price 11/25/2009
Year-end 2010 – R$32. We use a DCF and trading comparables when Index: Bovespa 67917
establishing our price target. Downside risks include greater-than-expected Free float (%) 36%
competition, a reduction in the settlement period for credit card transactions Exchange rate 1.72
(would hurt factoring business), and additional regulatory measures that hurt Source: Bloomberg and J.P. Morgan.
growth and/or increase competition. Upside risks include less-than-expected
competition and Redecard being able to compete more effectively than
expected.

344
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

345
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Reliance Power Underweight


Rs144.25
Price Target: Rs122
www.reliancepower.co.in

Company description India


Reliance Power is one of the flagship companies of the ADAG group. It Electric Utilities
aspires to build 32GW of power capacity by 2017, including 18.5GW of Shilpa KrishnanAC
coal, 10.28GW of gas, 3.3GW of hydro. 5GW of the targeted capacities are (91-22) 6157-3580
for merchant sale, while 26GW are at pre-determined PPA prices and shilpa.x.krishnan@jpmorgan.com
900MW at regulated returns. The company got listed in January 2008 with a J.P. Morgan India Private Limited
US$2.35 billion IPO, valuing the stock at US$23.3B then.
Price performance
Post mortem Rs
200
Reliance Power’s coal portfolio includes 3 UMPPs of 4GW each. Of this, 150

construction activity has begun in only 4GW. The under-construction 100

50
capacity is 5.5GW—funding, fuel and clearances are in place for these 0
Oct-08 Dec-08 Mar-09 Jun-09 Aug-09 Oct-09
projects. Gas projects are currently stuck due to a dispute on gas pricing with
the elder brother Mukesh Ambani. Post downturn, investor appetite for IPPs Source: Bloomberg.
has improved and markets are ready to ascribe value to the development
pipeline, although some of these are still nascent. Risk of delayed financial Performance
closure for pipeline projects has reduced to some extent, in our view. 1M 3M 12M
Absolute (%) (14) (18) 20
Potential for earnings upgrades Relative (%) (8) (17) (35)
Our estimates of project commissioning are broadly in line with management Source: Bloomberg.
guidance and are unlikely to be advanced. Earnings contribution over the
next three years is low (~Rs17B) due to high capital costs in the initial Company data
period. Potential for upgrades is low, in our view. 52-week range (Rs) 89.45-210
Mkt cap. (RsB) 326
How much recovery is priced into the stock? Mkt cap. (US$B) 6.9
Markets are already valuing the development pipeline, even though some of Avg daily value (US$MM) 4.3
these are relatively nascent. We believe the recovery is adequately priced in. Avg daily volume (MM) 1.2
Shares O/S (MM) 2,396.8
Price target and key risks Date of price 5-Nov-09
Our Mar-10 SOTP-based PT of Rs122 implies a 9% downside to CMP. The Index: BSE 16,064
stock is most expensive in the entire IPP space at 45x FY11E EPS, and 51x Free float (%) 15%
FY11E EV/EBITDA. Execution delays for ultra mega power projects are the Exchange rate (Rs/US$) 47.4
key risk to our PT. A recovery in funding environment, coupled with projects Source: Bloomberg.
actually getting off the ground, is an upside risk to our PT.
Bloomberg: RPWR.IN; Reuters: RPOL.BO
Rs in millions, year-end March
FY09 FY10E FY11E FY12E
Net revenues 0 1,180 22,826 39,347
EBITDA (1,034) 577 11,184 21,669
PAT 2,444 6,219 7,933 3,560
EPS 1.0 2.6 3.0 1.2
% Net profit growth 186% 154% 28% -55%
% EPS growth 186% 154% 17% -59%
ROE (%) 1.8% 4.5% 5.5% 2.4%
ROCE (%) -1% 0% 3% 3%
P/E 133.5 52.5 44.7 110.2
P/BV 2.4 2.3 1.3 1.1
EV/EBITDA 698.5 50.8 28.7
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

346
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Reliance Power: Summary of financials


Profit and loss statement Cash flow statement
Rs in millions, year-end March Rs in millions, year-end March
FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E
Revenues 0 1,180 22,826 39,347 EBITDA (1,034) 577 11,184 21,669
% change Y/Y 0% NA 1935% 172% Net tax paid (126) (237) (578) (1,983)
EBITDA -1,034 577 11,184 21,669 Operating profit after tax (1,160) 340 10,606 19,686
% change Y/Y -112% -56% 1940% 194% Change in working capital (5,996) 0 (6,519) (3,063)
EBITDA Margin (%) NA 49% 49% 55% Operating cash flow (7,156) 340 4,088 16,623
EBIT -1,034 505 9,394 16,451
% change Y/Y -112% -49% 1862% 175% Capital expenditure (83,785) (115,941) (167,129) (172,543)
EBIT Margin (%) NA 43% 41% 42% Investing cash flows (83,785) (115,941) (167,129) (172,543)
Other income 3,604 5,951 3,005 676
Net Interest 0 0 (3,888) (11,584) Interest expense 0 0 (3,888) (11,584)
Earnings before tax 2,570 6,456 8,512 5,543 Interest income 5,951 3,005 676 (826)
% change Y/Y 279% 251% 132% 65% Principal payment 53,758 80,087 114,252 146,754
Tax (126) (147) (840) (551) Equity issuance 0 0 0 0
as % of EBT 5% 2% 10% 10% Dividend payment 0 0 0 0
Net Income (adjusted) 2,444 6,219 7,933 3,560 Financing cash flows 59,709 83,092 111,040 134,344
% change Y/Y 286% 254% 128% 45%
Minority Interest - - 632 598 Change in Cash (31,232) (32,508) (52,001) (155,920)
Retained Profits 2,444 6,219 7,302 2,961 Opening cash 135,503 101,684 68,347 17,520
% change Y/Y 286% 254% 117% 41% Closing cash 101,684 68,347 17,520 1,787
Source: Company, J.P. Morgan estimates. Source: Company, J.P. Morgan estimates.

Balance sheet Ratio analysis


Rs in millions, year-end March %, year-end March
FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E
Assets EBITDA margin NA 49% 49% 55%
Cash and cash equivalents 101,684 68,347 17,520 1,787 EBIT margin NA 43% 41% 42%
Net current assets 0 0 6,519 9,581 Net profit margin NA NA 32% 8%
Investments 0 0 0 0
Gross Block 2,500 13,500 98,387 227,733
Accumulated Depreciation 0 -72 -1,790 -7,008 Sales growth 0% NA 1935% 172%
Net Block 2,500 13,428 96,596 220,725 Net profit growth 286% 254% 128% 45%
Capital WIP 91,612 196,552 278,794 321,991
Total Fixed assets 94,112 209,980 375,391 542,716
Total Assets 195,796 278,327 399,430 554,084 Debt to total capital 30% 50% 63% 72%
Net debt to equity 42% 99% 173% 260%
Liabilities Sales/assets 0.0% 0.4% 5.7% 7.1%
Total debt 58,240 138,328 252,579 399,333 Assets/equity 142.3% 198.8% 273.2% 360.9%
Deferred Tax - - - - ROE 2% 4% 6% 2%
Total liabilities 58,240 138,328 252,579 399,333 Source: Company, J.P. Morgan estimates.
Shareholder's equity 137,555 139,999 146,219 153,520
Source: Company, J.P. Morgan estimates.
Reliance Power: SOTP valuation
Size Project Debt Equity Equity CoE Equity value of SPV
(MW) Cost (Rs B) (Rs B) (RsB) IRR (%) (%) RsB US$B Rs/share
Grand total 28,160 1,125 862 264 266.8 5.9 122.2
Conventional 24,860 933 708 225 163 3.6 79.1
Coal-based 14,580 625 461 163 76 1.7 42.7
Sasan 3,960 194 146 49 14.6 14.0 9.2 0.2 3.9
Rosa-I 600 27 22 5 13.5 14.0 7.0 0.2 2.9
Rosa-II 600 25 19 6 44.9 15.0 15.3 0.3 6.4
Shahpur-I 1,200 48 36 12 39.6 18.0 - - -
Butibori 300 14 10 4.2 51.6 16.0 9.1 0.2 3.8
MP Power Co 3,960 158 111 48 49.9 17.5 8.4 0.2 3.5
Krishnapatnam 3,960 158 119 40 18.3 16.0 27.1 0.6 11.3
Tilaiya 3,960 190 133 57 24.3 15.0 26.2 0.6 10.9
Gas-based 10,280 308 247 62 87 1.9 36.4
Dadri 7,480 224 179 45 54.1 16.0 87.3 1.9 36.4
Shahpur-II 2,800 84 67 17 63.0 17.0 - - -
Non-conventional 3,300 192 154 38 - - -
Urthing Sobla 400 21 17 4 32.9 17.0 - - -
Tato-II 700 40 32 8 38.8 17.0 - - -
Siyom 1,000 58 46 12 23.7 17.0 - - -
Kalai 1,200 73 58 15 24.9 17.0 - - -
Cash 103 2.3 43.1
Source: Company data, J.P. Morgan estimates.

347
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

SABESP Underweight
R$31.9/share
Price Target: R$32/share
www.sabesp.com.br

Company description Brazil


Controlled by the state government of Sao Paulo, SABESP is the largest Utilities
water utility in Brazil with US$3.5bn in annual sales, serving 366 Anderson Frey, CFAAC
municipalities and a population of 26 million. Listed in Bovespa’s Novo (1-212) 622 6615
Mercado, the company also has ADRs trading in the NYSE. anderson.frey@jpmorgan.com

Post mortem J.P. Morgan Securities Inc.

SABESP currently lacks a stable and transparent regulatory framework that


Price performance
includes a market-based implied ROIC and regular tariff resets. We remain R$/share, last 12 months
concerned that a faster economic growth in Brazil could even increase the 40
capex needs in the company’s concession area (i.e. SABESP already has an 30
aggressive investment plan until 2013E at uncertain ROICs in our view) and 20
jeopardize profitability. Moreover, due to the current electoral cycle, we do 10

not expect the implementation of a new tariff framework in the medium 0


No v-08 A pr-09 Sep-09
term. Finally, SABESP has a high concession renewal risk for ~80% of its
revenues (i.e. concession contracts to be signed until 2010YE), which in our Source: Bloomberg.
view poses a risk of increases in operating expenses due to renewal costs. Performance
Potential for earnings upgrades 1M 3M 12M
We believe that the potential earnings upside for SABESP in 2010 is limited Absolute (%) -8.1 -2.8 37.8
as: 1) the company has relatively low exposure to economic recovery due to Relative (%) -12.4 -20.4 -48.4
the low elasticity of water demand to GDP; and 2) despite the fact that its Source: Company, Bloomberg.

leverage is higher compared to other utilities in the region, SABESP has Company data
US$1.1bn in un-hedged FX-denominated debt that could generate non-cash 52-week range (R$) 21.5-37.2
losses in 2010 should the R$ depreciate (as we expect). Mkt cap. (R$mn) 7,261
Price target and key risks Mkt cap. (US$mn) 4,173
We have an Underweight rating for SBSP3 and a 2010YE R$32/share price Avg daily value (US$MM) 6.1
target based on DCF valuation with 11.2% cost of equity and 2% perpetuity Shares O/S (mn) 228
growth rate. The main risks to our rating are: 1) higher than estimated water Date of price 11/25/2009
consumption; 2) sooner than later implementation of a new tariff framework Index: IBOVESPA
with market-based ROIC; 3) acquisition of sister company EMAE at a cheap Free float (%) 50
Exchange rate R$1.74/US$
valuation; and 4) operating expenses below estimates.
Source: Company, Bloomberg.
Bloomberg: SBSP3 BZ, SBS; Reuters: SBSP3.SA, SBS.US
R$ in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 6,352 6,718 7,159 7,639
EBITDA 2,732 2,669 3,102 3,036
Net profit 1,008 1,288 1,225 1,003
EPS (R$) 4.42 5.65 5.38 4.40
DPS (R$) 1.30 1.70 1.65 1.51
Sales growth (%) 6.4 5.8 6.6 6.7
EBITDA growth (%) 2.8 (2.3) 16.2 (2.1)
Net profit growth (%) (3.9) 27.7 (4.8) (18.1)
ROE (%) 9.6 11.3 10.0 7.7
EV/EBITDA (x) 5.0 5.1 4.4 4.5
P/E (x) 7.2 5.6 5.9 7.2
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

348
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

SABESP: Summary of financials


Profit and loss statement Cash flow statement
R$ in millions, year-end December R$ in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenues 6,352 6,718 7,159 7,639 EBIT 2,114 2,026 2,454 2,359
% change Y/Y 6.4 5.8 6.6 6.7 Depreciation & Amortization 618 643 648 677
EBITDA 2,732 2,669 3,102 3,036 Change in working capital 1 (64) (92) (100)
% change Y/Y 2.8 -2.3 16.2 -2.1 Taxes (398) (623) (527) (448)
EBITDA margin (%) 43.0 39.7 43.3 39.8 Cash flow from operations 2,334 1,982 2,483 2,488
EBIT 2,114 2,026 2,454 2,359 CAPEX (1,708) (1,651) (1,830) (1,914)
% change Y/Y 3.6 -4.2 21.1 -3.9 FCFF 626 331 654 574
EBIT margin (%) 33.3 30.2 34.3 30.9 Net Interest Expense (541) (565) (552) (719)
Net financial results (541) (565) (552) (719) FCFE 85 (234) 101 (145)
EBT 1,110 1,455 1,472 1,252 Equity raised/(repaid) 2,800 0 0 0
% change Y/Y -5.9 31.0 1.2 -14.9 Debt raised/(repaid) 1,180 181 1,326 255
Taxes (398) (623) (527) (448) Dividends 296 386 377 344
Net income 1,008 1,288 1,225 1,003 Other (3,442) (27) (21) 45
% change Y/Y -3.9 27.7 -4.8 -18.1 Beginning cash 465 626 393 1,321
Shares outstanding 228 228 228 228 Ending cash 626 393 1,321 1,277
EPS 4.42 5.65 5.38 4.40 DPS 1.30 1.70 1.65 1.51
Source: Company and J.P. Morgan estimates. Source: Company and J.P. Morgan estimates.

Balance sheet Ratio analysis


R$ in millions, year-end December R$, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Cash and cash equivalents 626 393 1,321 1,277 Sales (million m3) 3,211 3,283 3,383 3,469
Accounts receivable 1,130 1,195 1,273 1,359 Water 1,880 1,913 1,956 1,995
Others 483 486 502 518 Sewage 1,330 1,370 1,427 1,474
Current assets 2,238 2,073 3,096 3,154 Avg. tariff ($/MWh) 2.10 2.17 2.25 2.34
LT Assets 2,542 2,665 2,810 2,966 # Employees 16,649 16,649 16,649 16,649
Net fixed assets 15,742 16,750 17,932 19,169
Total Assets 20,523 21,490 23,839 25,290 Revenue / employee ('000) 382 403 430 459
ST Debt 1,449 1,157 724 812 EBIT/Net PP&E (%) 13% 12% 14% 12%
Payables 187 198 211 225 Current ratio (x) 0.7 0.7 1.3 1.2
Dividends 275 283 292 301 Interest coverage (x) 5.1 4.7 5.6 4.2
Others 1,106 1,139 1,173 1,208 Net debt to EBITDA (x) 2.4 2.6 2.4 2.6
Current liabilities 3,017 2,777 2,400 2,546 Net debt to equity (x) 0.6 0.6 0.6 0.6
LT Debt 5,416 5,674 7,470 7,923
Other LT Liabilities 1,597 1,645 1,695 1,746 Net margin (%) 15.9 19.2 17.1 13.1
Total liabilities 10,031 10,096 11,565 12,215 Revenues/assets (%) 30.9 31.3 30.0 30.2
Shareholder's equity 10,492 11,394 12,274 13,075 Assets/equity (x) 2.0 1.9 1.9 1.9
Liabilities and Equity 20,523 21,490 23,839 25,290 ROE (%) 9.6 11.3 10.0 7.7
Source: Company and J.P. Morgan estimates. Source: Company and J.P. Morgan estimates.

349
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Severstal Underweight
Price: $8.80
Price Target: $7.90
www.severstal.com
Company description Russia
Severstal is the world's 15th largest steel producer, focused mainly on flat Metals & mining
steel production. Russian-based iron ore and coal assets provide the Yuriy VlasovAC
advantage of vertical integration of its domestic steel operations. Severstal’s (7-495) 967-7033
international steel-making and coal interests are in Italy and the US. yuriy.a.vlasov@jpmorgan.com
J.P. Morgan Bank International LLC
Post mortem
Price Performance
As a result of the US expansion and burning cash at some of its unprofitable
businesses, the company has sizable debt. At the end of 1H09 Severstal 8
posted gross debt of $7.5 bn (net debt of $4.9 bn), something that resulted in
6
the company subscribing to a RUB 15 bn bond (3-year maturity) at 14%, $

well above the rate at which its Russian peers borrowed. Assuming the ruble 4

continues to strengthen, and this is the scenario we expect, Severstal will 2


have to bear the negative affect of FX, we believe. Nov-08 Feb-09 May-09 Aug-09 Nov-09

Source: Bloomberg
Potential for earnings upgrades
Although we acknowledge the quality of the integrated business of Severstal
Performance
in Russia, we see Vokrkutaugol as the weakest link within Severstal’s 1M 3M 12M
Russian operations, primarily due to prohibitively high cost. Its North Absolute (%) -3.5 9.3 272.7
American operation posted 3 consecutive quarters with negative EBITDA Source: Bloomberg
(4Q08-2Q09) and we do not envisage this division returning to profitability
on an operating level in 2009. Company data
52-week range ($) 8.80-2.40
How much recovery is priced into the stock? Mkt cap. (US$MM) 8,862
Avg daily value (US$MM) 8.5
The market is expecting the company to make a definitive decision about the Avg daily volume (MM) 1.6
future of its US assets. So far the company has produced no plans for the Shares O/S (MM) 1,007
future of its US assets. Meanwhile, we believe value in the Russian metals Date of price 23-Nov-09
Index: RTS 1466.77
and mining sector is to be found elsewhere. Free float (%) 0.10
Exchange rate (RUB/$) 28.79
Price target and key risks Source: Bloomberg
Our end-10, DCF-based PT is $7.90/GDR. Key risks include currency
fluctuations while factors such as improved US steel demand and prohibitive
steel import duties could boost the performance of the US assets.

Bloomberg: SVST LI; Reuters: CHMF.RTS


$ in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 22393 11433 12968 14191
Net profit 2034 (408) 556 788
EPS ($) 2.02 (0.4) 0.55 0.78
FD EPS ($) 2.02 (0.4) 0.55 0.78
DPS ($) 1.34 0.0 0.06 0.2
Sales growth (%) 46.9 (48.9) 13.4 9.4
Net profit growth (%) 501 NM NM 41.7
EPS growth (%) 502 NM Nm 41.8
ROE (%) 22.1 (4.7) 6.4 8.5
P/E (x) 4.4 NM 15.9 11.2
FD P/E (x) 4.4 NM 15.9 11.2
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

350
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Severstal: Summary of Financials


Profit and Loss Statement Cash flow statement
$ in millions, year end Dec FY08 FY09E FY10E FY11E $ in millions, year end Dec FY08 FY09E FY10E FY11E

Revenues 22,393 11,433 12,968 14,191 EBIT 3,218 (693) 555 847
% Change Y/Y 46.9% -48.9% 13.4% 9.4% Depreciation & amortization 1,086 1,161 1,294 1,400
Gross Margin (%) 26.4% 8.1% 13.6% 13.0% Change in working capital (1,026) 1,686 (241) (396)
EBITDA 5,356 734 1,849 2,247 Taxes (1,094) 131 (141) (200)
% Change Y/Y 48.6% -86.3% 151.8% 21.5% Cash flow from operations 4,330 2,420 1,608 1,851
EBITDA Margin (%) 23.9% 6.4% 14.3% 15.8%
EBIT 3,218 (693) 555 847 Capex (2,030) (1,000) (2,000) (2,100)
% Change Y/Y 16.3% -121.5% -180.2% 52.4% Disposals/(purchase) 43 - - -
EBIT Margin 14.4% -6.1% 4.3% 6.0% Net Interest (363) 147 151 155
Net Interest 155 147 151 155 Free cash flow (1,376) 1,852 (529) (441)
Earnings before tax 2,588 -545 707 1,002
% change Y/Y -2.5% -121.1% -229.6% 41.7% Equity raised/repaid (26) - - -
Tax (520) 131 (141) (200) Debt Raised/repaid 3,856 -922 -1,728 -1,409
as % of EBT 20.1% 24.0% 20.0% 20.0% Other - - - -
Net Income (Reported) 2,034 (408) 556 788 Dividends paid (1,346) 0 (57) (200)
% change Y/Y 5.1% -120.0% -236.4% 41.7% Beginning cash 1,622 2,654 3,583 1,270
Shares Outstanding 1,007.2 1,007.2 1,007.2 1,007.2 Ending cash 2,654 3,583 1,270 -780
EPS (Reported) 2.02 -0.40 0.55 0.78 DPS 1.34 0.00 0.06 0.20
% Change Y/Y 5.1% (120.0%) (236.4%) 41.7%

Balance sheet Ratio Analysis


$ in millions, year end Dec FY08 FY09E FY10E FY11E $ in millions, year end Dec FY08 FY09E FY10E FY11E

Cash and cash equivalents 2,654 3,583 1,270 (780) EBITDA margin 23.9% 6.4% 14.3% 15.8%
Accounts Receivable 1,942 1,486 1,584 1,746 Operating margin - - - -
Inventories 4,279 2,728 2,908 3,204 Net Profit margin 9.1% NM 4.3% 5.6%
Others - - - - SG&A/Sales -4.6% -7.7% -7.2% -6.6%
Current assets 10,692 9,383 7,375 5,827
Sales per share growth 46.9% -48.9% 13.4% 9.4%
LT investments 70 70 70 70 Sales growth 46.9% -48.9% 13.4% 9.4%
Net fixed assets - - - - Net profit growth 5.1% -120.0% -236.4% 41.7%
Total assets 22,480 20,594 19,292 18,444 EPS growth 5.1% (120.0%) (236.4%) 41.7%

ST loans 1,978 1,978 1,978 1,978 Interest coverage (x) 20.7 4.7 3.7 5.5
Payables 1,527 973 1,038 1,144 Net debt to Total Capital 24.9% 18.2% 22.3% 26.6%
Others - - - - Net debt to equity 58.6% 41.0% 44.9% 48.6%
Total current liabilities 4,769 4,215 4,280 4,385 Sales/assets (x) 1.0 0.6 0.7 0.8
Long term debt 6,278 5,356 3,628 2,219 Assets/Equity 248.4% 238.5% 211.0% 189.3%
Other liabilities - - - - ROE 22.1% -4.7% 6.4% 8.5%
Total liabilities 12,926 11,454 9,794 8,495 ROCE 11.7% -2.5% 3.8% 5.7%
Shareholders' equity 9,048 8,634 9,143 9,744 ROA 10.4% -1.9% 2.8% 4.2%
BVPS 9 9 9 10

Source: Company reports and J.P. Morgan estimates.

351
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

S-Oil Corp Neutral


Price: W57,500
Price Target: W64,000
www.s-oil.com
Company description South Korea
S-Oil is one of the largest oil refiners in Korea; it has refining, petrochems Refining
and lubricants segments. In 2008, refining throughput was 0.5 million Brynjar BustnesAC
BOPD, petrochemical sales 1.3 million tonnes and S-Oil sold 10 million bbls (852) 2800-8578
lubricants. S-Oil is owned by Saudi Aramco and a Hanjin consortium, and brynjar.e.bustnes@jpmorgan.com
gets most of its crude feedstock from Saudi. S-Oil has the highest complexity J.P. Morgan Securities (Asia Pacific)
in South Korea, primarily due to large-scale desulphurization equipment. Limited

Post mortem Price performance


S-Oil suffered through the crisis primarily on its refining profitability 150,000
plunging along with a weaker Won hurting its US$-denominated debt. A 100,000
weaker Won, however, actually helps at the operating line, which has now 50,000
reversed as the Won strengthened. 0
Nov -08 Feb-09 May -09 Aug-09 Nov -09
Potential for earnings upgrades
S-Oil Corp Share Price
There is not much room for EPS upgrades over the next 12 months as we do KOSPI(rebased)
not expect refining margins to go back to previous year’s levels. Decent
margins will, however, generate a base operating profit, but with its Source: Bloomberg.

investments into additional refining and aromatics capacity, we expect Performance


dividends to be cut significantly. 1M 3M 12M
Absolute (%) -10% -3% -15%
How much recovery is priced into the stock?
Relative (%) -7% -2% -47%
S-Oil didn’t correct as much in the market collapse, hence hasn’t performed
Source: Bloomberg.
well this year. We do, however, believe it is now pricing in the current
Company data
market environment of low refining margins and still relatively strong
petchem margins. Currently, relatively high valuation due to legacy high 52-week range (W) 50,000-69,800
dividends is at risk, in our view. Mkt cap. (WB) 6,474
Mkt cap. (US$MM) 5,493
Price target and key risks
3M trd value ($MM) 14.3
We have a Neutral rating and Dec-10 PT of W64,000, based on 7x 2010E
3M trd value (WB) 16.8
EV/EBITDA, which is in line with regional peers. We don’t see much upside
3M trd vol (MM) 0.1
in S-Oil and prefer SK Energy in the Korean refining space. A 47%
Shares O/S (MM) 113
underperformance YTD should also limit the downside. We now see S-Oil
Date of price 5-Nov-09
(without the dividend story) as a good short for the long SK Energy in order
Index: KOSPI 1552.24
to take away the refining exposure if desired. Main risks to our PT are
Free float (%) 37
GRMs, petrochemical margins and operational aspects primarily on
Exchange rate 1,178
execution of expansion program.
Source: Bloomberg.

Bloomberg:( 010950 KS; Reuters: 010950.KSg )


W in bn, year-end Dec FY07A FY08A FY09E FY10E FY11E
Revenue 15,229 23,000 15,880 18,104 22,278
Net Profit 695 427 614 658 779
EPS (W) 6,817 3,791 5,457 5,841 6,915
DPS (W) 13,425 5,000 1,750 1,800 1,850
Revenue Growth (%) 5% 51% (31%) 14% 23%
EPS growth (%) (26%) (44%) 44% 7% 18%
ROCE 20% 10% 14% 13% 14%
ROE 22% 12% 17% 16% 17%
P/E 8.4 15.2 10.5 9.8 8.3
P/BV 1.6 1.9 1.7 1.5 1.5
EV/EBITDA 4.5 9.2 7.1 6.5 5.6
Dividend Yield 23.3% 8.7% 3.0% 3.1% 3.2%
Adjusted EPS (W) 7,021 9,022 4,784 5,841 6,915
Adjusted P/E 8.2 6.4 12.0 9.8 8.3
Source: Company data, Bloomberg, J.P. Morgan estimates. Adjusted EPS for forex loss/gain.

352
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

S-Oil Corp: Summary of financials


Income statement Cash flow statement
Won in billions, year-end December FY07 FY08 FY09E FY10E FY11E Won in billions, year-end December FY07 FY08 FY09E FY10E FY11E

Revenues 15,229 23,000 15,880 18,104 22,278 EBIT 1,032 611 873 951 1,125
% change Y/Y 5% 51% (31%) 14% 23% Depr. & amortization 167 175 219 278 306
EBITDA 1,199 786 1,092 1,229 1,431 Change in working capital -456 -1,404 -223 -267 -501
% change Y/Y (5%) (34%) 39% 13% 16% Taxes - - - - -
EBIT 1,032 611 873 951 1,125 Cash flow from operations 518 -369 617 676 591
% change Y/Y (6%) (41%) 43% 9% 18%
EBIT Margin 7% 3% 5% 5% 5% Capex -166 -318 -900 -700 -400
Net Interest 0 12 -53 -74 -89 Disposal/(purchase) 7 11 0 0 0
Earnings before tax 1,032 623 820 877 1,037 Net Interest 0 12 -53 -74 -89
% change Y/Y (2%) (40%) 32% 7% 18% Other -1,632 2,501 0 0 0
Tax -285 -177 -198 -212 -251 Free cash flow 352 -687 -283 -24 191
as % of EBT 27.7% 28.4% 24.2% 24.2% 24.2%
Net income (reported) 695 427 614 658 779 Equity raised/(repaid) 2,138 0 0 0 0
% change Y/Y (6%) (39%) 44% 7% 18% Debt raised/(repaid) -69 623 500 0 500
Shares outstanding 102 113 113 113 113 Other 439 -563 7 7 7
EPS (reported) 6,817 3,791 5,457 5,841 6,915 Dividends paid -1,420 -582 -204 -210 -215
% change Y/Y (26%) (44%) 44% 7% 18% Beginning cash 1,989 3,406 2,133 2,153 1,926
Ending cash 3,406 2,133 2,153 1,926 2,408
DPS 13,425 5,000 1,750 1,800 1,850

Balance sheet Ratio analysis


Won in billions, year-end December FY07 FY08 FY09E FY10E FY11E Won in billions, year-end December FY07 FY08 FY09E FY10E FY11E

Cash and cash equivalents 578 1,871 1,891 1,664 2,146 EBITDA margin 8% 3% 7% 7% 6%
Accounts receivable 1,770 1,456 1,588 1,810 2,228 Operating margin 7% 6% 5% 5% 5%
Inventories 2,262 1,850 1,906 2,173 2,673 Net margin 5% 2% 4% 4% 3%
Others 160 191 191 191 191
Current assets 7,599 5,629 5,837 6,100 7,500
Sales per share growth (17%) 37% (31%) 14% 23%
LT investments - - - - - Sales growth 5% 51% (31%) 14% 23%
Net fixed assets 1,560 1,714 2,383 2,805 2,899 Net profit growth (6%) (39%) 44% 7% 18%
Total Assets 9,459 7,656 8,533 9,217 10,712 EPS growth (26%) (44%) 44% 7% 18%

Liabilities Interest coverage (x) - - 20.64 16.68 16.13


Short-term loans 1,884 2,509 3,009 3,009 3,509
Payables 3,499 1,624 1,588 1,810 2,228 Net debt to equity (48%) 10% 24% 27% 24%
Others 3,542 1,697 1,661 1,884 2,301 Sales/assets 1.89 2.69 1.96 2.04 2.24
Total current liabilities 5,426 4,206 4,670 4,893 5,810 Assets/equity 2.38 2.18 2.36 2.62 2.95
Long-term debt 7 5 5 5 5 ROE 22% 12% 17% 16% 17%
Other liabilities 60 50 50 50 50 ROCE 20% 10% 14% 13% 14%
Total Liabilities 5,493 4,262 4,726 4,949 5,866
Shareholders' equity 3,967 3,394 3,806 4,268 4,846
BVPS 35,229 30,141 33,804 37,907 37,490
Source: Company reports, J.P. Morgan estimates.

353
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Soriana Underweight
Ps32.5
Price Target: Ps31.00
www.soriana.com
Company description Mexico
Organización Soriana is a grocery and department store retail chain operating Retail
465 stores (as of 3Q09) across the country of Mexico. Andrea TeixeiraAC
Post mortem (1-212) 622-6735
andrea.f.teixeira@jpmorgan.com
There is pressure on cash flows and leverage due to heavy investments to
renovate Gigante stores and grow space. Soriana did not fully convert J.P. Morgan Securities Inc.

Gigante stores, and therefore will have to invest heavily to bring them to the
Price performance (Ps)
same level as the existing Soriana stores.
34

Potential for earnings upgrades 30

26

We expect limited room for positive earnings surprises as the new number of 22

stores announced in the 3Q release seems already priced into consensus. We 18

Dec-08

Oct-09
Jan-09

Feb-09

Mar-09

Apr-09

Jun-09

Jul-09

Aug-09

Sep-09
Nov-08

May-09

Nov-09
expect Soriana to continue to face headwinds from heavy competition as (1)
Source: Bloomberg.
Walmex is aggressively lowering prices and has greater bargaining power
with suppliers; (2) Comerci is getting more support from creditors for the Performance
restructuring. We believe there is limited room in the short term to recover 1M 3M 12M
top-line growth, which has been strongly affected by the economic downturn Absolute (%) -1.5% 6.3% 25.5%
(its stronghold is the North, where the maquiladora industry is suffering from Relative (%) -5.1% -4.8% -31.1%
reduced demand from the US) and has not signaled a clear recovery. Source: Bloomberg.

How much recovery is priced into the stock? Company data


We believe further recovery is already priced into the stock, as Soriana is 52-week range (Ps) 18.01 - 36.58
trading at par to peers and at a premium to its historical average, which does Mkt cap. (PsMM) 58,500
not reflect the risks, in our view. Soriana is trading at multiples similar to Mkt cap. (US$MM) 4,554
international peers’, despite its challenging market positioning and slower Avg daily value (US$MM) 2.4
growth. Soriana is trading at P/E10e of 22.0x and EV/EBITDA10e of 10.3x, Avg daily volume (MM) 0.9
+2% and -1%, respectively, to median LatAm peers’ (CBD, Walmex, Shares O/S (MM) 1,800
Cencosud and Exito). Against its own history, Soriana is also trading at an Date of price 25/11
unwarranted premium of 37% and 31% to historical forward EV/EBITDA Index: MEXBOL 31,364
and P/E, respectively. Free float (%) 14%
Price target and key risks Exchange rate 12.84
Our Ps31 December 2010 price target is based on an 8-year discounted cash Source: Bloomberg.
flow. Upside risks to our cautious view include: (1) faster-than-anticipated
recovery in the economy; and (2) better-than-anticipated execution, i.e., no
market share losses.
Bloomberg: SORIANAB MM; Reuters: SORIANAB.SA
Ps in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 91,304 91,304 93,422 101,463
Net profit 1,723 2,769 3,094 3,547
EPS (Ps) 0.96 1.54 1.72 1.97
FD EPS (Ps) 0.96 1.54 1.72 1.97
DPS (Ps) - - 0.12 0.14
Sales growth (%) -46.7% -4.5% 2.3% 8.6%
Net profit growth (%) -45.0% 60.7% 11.7% 14.7%
EPS growth (%) -45.0% 60.7% 11.7% 14.7%
ROE (%) 6.8% 9.3% 9.3% 9.7%
P/E (x) 28.5 22.0 20.4 18.0
FD P/E (x) 28.5 22.0 20.4 18.0
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009

354
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Soriana: Summary of financials


Profit and loss statement Cash flow statement
Ps in millions, year-end December Ps in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 91,304 91,304 93,422 101,463 EBIT 4,198 4,706 5,147 5,729
% change Y/Y -46.7% -4.5% 2.3% 8.6% Depreciation & amortization 1,885 1,936 1,937 2,000
Gross margin (%) 19.7% 20.4% 20.2% 20.2% Change in working capital (9,556) 1,614 115 (3,240)
EBITDA 6,083 6,642 7,084 7,729 Taxes (1,095) (1,326) (1,520) (1,095)
% change Y/Y 12% 9.2% 6.7% 9.1% Cash flow from operations (5,269) 4,444 4,947 3,709
EBITDA margin (%) 6.4% 7.3% 7.6% 7.6% Capex (7,189) (1,000) (3,000) (2,365)
EBIT 4,198 4,706 5,147 5,729 Disposal/(purchase) 0 0 0 0
% change Y/Y -2.4% 12.1% 9.4% 11.3% Net interest (1,010) (730) (613) (559)
EBIT margin (%) 4.4% 5.2% 5.5% 5.6% Free cash flow -18,036 9,644 7,013 4,179
Net interest (1,010) (730) (613) (559) Equity raised/(repaid) (26) (2) 0 0
Earnings before tax 1,710 3,863 4,420 5,068 Debt raised/(repaid) 9,633 (4,425) 1,500 --
% change Y/Y -62.6% 126.0% 14.4% 14.7% Other -5,604 6,034 5,282 3,083
Tax 14 (1,095) (1,326) (1,520) Dividends - - -217 -248
as % of EBT 0.8% -28.3% -30.0% -30.0% Beginning cash 4,571 1,746 928 4,159
Net income (reported) 1,723 2,769 3,094 3,547 Ending cash 1,746 928 4,159 5,255
% change Y/Y -45.0% 60.7% 11.7% 14.7% DPS (Ps) - - 0.12 0.14
Shares O/S (MM) 1,800 1,800 1,800 1,800 Source: Company, J.P. Morgan estimates.
EPS (reported) (Ps) 0.96 1.54 1.72 1.97
Source: Company, J.P. Morgan estimates.

Ratio analysis

Balance sheet %, year-end December


FY08 FY09E FY10E FY11E
Ps in millions, year-end December
EBITDA margin 6.4% 7.3% 7.6% 7.6%
FY08 FY09E FY10E FY11E Operating margin 4.4% 5.2% 5.5% 5.6%
Cash and cash equivalents 1,746 928 4,159 5,255 Net profit margin 1.8% 3.0% 3.3% 3.5%
Accounts receivable 3,527 3,332 3,446 3,352 SG&A/sales 15.3% 15.3% 14.7% 14.6%
Inventories 11,017 9,847 10,222 10,890 Sales growth -46.7% -4.5% 2.3% 8.6%
Others 218 206 213 278 Net profit growth -45.0% 60.7% 11.7% 14.7%
Current assets 16,508 14,314 18,040 19,774 Sales per share growth -46.7% -4.5% 2.3% 8.6%
LT investments - - - - EPS growth -45.0% 60.7% 11.7% 14.7%
Net fixed assets 38,239 37,141 38,204 38,569 Interest coverage (x) (3.3) (5.5) (7.3) (8.3)
Total assets 66,388 64,500 69,762 71,544 Net debt to total capital 0.3 0.2 0.1 0.1
Liabilities Net debt to equity 0.4 0.2 0.2 0.1
ST loans 5,313 4,537 4,537 4,537 Sales/assets 1.4 1.4 1.3 1.4
Payables 14,078 14,442 14,992 12,417 EBIT margin 4.4% 5.2% 5.5% 5.6%
Others 1,704 1,576 1,636 1,611 ROCE 7.6% 3.5% 3.6% 4.0%
Total current liabilities 21,094 20,556 21,166 18,565 Assets/equity (x) 2.3 2.0 2.0 1.9
Long-term debt 7,630 3,980 5,480 5,480 ROI 7.6% 3.5% 3.6% 4.0%
Other liabilities 8,750 8,676 8,719 8,818 ROE 6.8% 9.3% 9.3% 9.7%
Total liabilities 66,388 64,500 69,762 71,543 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 29,131 31,903 34,780 38,079
BVPS (Ps) 16.2 17.7 19.3 21.2
Source: Company, J.P. Morgan estimates.

355
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Taishin Financial Holdings Underweight


NT$13.45
Price Target: NT$12
www.taishinholdings.com.tw

Company description Taiwan


Taishin Financial Holdings (Taishin) is a bank-centric financial holding Banks
company with strong franchise in corporate banking, credit cards, and wealth Dexter HsuAC
management. The bank has a more balanced business mix between corporate (886-2) 2725-9868
banking and the consumer segment. Taishin FHC owns a 22.5% stake in dexter.st.hsu@jpmorgan.com
Changhwa Bank as the top private shareholder. Recently, Taishin sold its J.P. Morgan Securities (Taiwan) Limited
broker franchise, Taiwan Securities, to KGI.
Price performance
Post mortem 3.0

To resolve its capital issue, Taishin disposed of its most profitable business, 2.5

2.0
Taiwan Securities, to KGI Securities. We believe the disposal reflected that 1.5

potentially it may be difficult for Taishin to find another strategic investor 1.0

0.5
for recapitalization (including China investors). Nov -08 Feb-09 May -09 Aug-09 Nov -09

Taishin (2887.TW) Taiex


Potential for earnings upgrades
Source: TEJ.
The disposal of Taiwan Securities, which accounted for 30% of net profit in
1Q09, could hurt Taishin’s profitability in the future—we believe flow
Performance
business should be a major earnings driver for Taiwan financials in the near
1M 3M 12M
term. Meanwhile, due to declining customer deposits, its loan-to-deposit
Absolute (%) -3.6 20.6 188.0
ratio rose to above 80%, which could cap the future growth.
Relative (%) -4.5 9.4 121.8
How much recovery is priced into the stock Source: TEJ.
Its share price has risen 188% over the past year and we believe the removal
of capitalization is largely in the price. However, key challenges should Company data
come from potential impairments in its Changhwa Bank stake and weak 52-week range (NT$) 4.08-14.80
profitability. Although the stock is trading at the mid point of the historical Mkt cap. (NT$MM) 76,804
P/BV band (i.e., 1.2x), profitability issue should lead to a de-rating of the Mkt cap. (US$MM) 2,378
stock. Avg daily value (US$MM) 43.2
Avg daily volume (MM) 96.5
Price target and key risks Shares O/S (MM) 5,710
We stay UW on Taishin with our PT of NT$12 (DDM-based, Dec-10), Date of price 12-Nov-09
implying a COE of 8%, and a growth rate of 1.5%. Key risks to our PT, TSE 7,671
forecasts, and valuation include: (1) better credit quality; (2) favorable Free float (%) 60.2
regulatory changes (such as the removal of the interest rate cap); and (3) Exchange rate 32.29
favorable M&A terms (e.g., allowed by the government to sell stakes in Source: Bloomberg.
Changhwa Bank at favorable prices).
Bloomberg: 2887 TT; Reuters: 2887.TW
NT$ in millions, year-end December
FY08 FY09E FY10E FY11E
Operating profits 8,327 14,847 9,476 12,129
Net profit -5,753 9,472 4,067 6,024
EPS (NT$) -0.92 1.66 0.71 1.05
FD EPS (NT$) -0.61 1.53 0.74 1.03
DPS (NT$) 0.00 1.43 0.72 0.98
EPS growth (%) -174.4 nm -51.3 38.2
ROE (%) -8.7 15.8 6.5 9.8
P/E (X) -14.7 8.1 18.9 12.8
BVPS (NT$) 9.73 11.32 10.60 10.94
P/BV(x) 1.4 1.2 1.3 1.2
Dividend yield (%) 0.0 10.6 5.4 7.3
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 12 November 2009.

356
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Taishin Financial Holdings: Summary of financials


NT$ in millions, year-end Dec
Income statement - NT$ mn 2007 2008 2009E 2010E 2011E Growth Rates 2007 2008 2009E 2010E 2011E

NIMs (as % of Avg. IEA) 2.01% 1.72% 1.32% 1.41% 1.59% Loans 7.0% -6.8% 2.0% 4.5% 4.9%
Avg. IEA/Avg. Assets 82.1% 81.6% 82.8% 84.0% 83.4% Deposits 7.6% -5.1% 0.1% -1.3% 4.9%
Margins (as % of Avg. Assets) 1.65% 1.41% 1.09% 1.18% 1.33% Assets 4.9% -6.5% -1.6% -1.5% 3.5%
Equity 4.7% -13.7% 16.3% -6.3% 3.2%
Interest Earned 35,361 33,316 20,635 18,461 20,615 RWA 9.1% -8.3% -2.9% 2.5% 4.7%
Interest Suspended 0 0 0 0 0
Interest Expense -17,266 -18,058 -9,242 -6,357 -6,887
Net Interest Income 18,095 15,257 11,393 12,104 13,728
Net Interest Income -33.6% -15.7% -25.3% 6.2% 13.4%
Non-Interest Income 17,243 10,712 17,394 9,439 11,140 Non-Interest Income 20.8% -37.9% 62.4% -45.7% 18.0%
Fees 10,912 8,897 8,218 6,699 7,391 of which Fee Grth 27.0% -18.5% -7.6% -18.5% 10.3%
Investment Inc. from Changhwa 1,510 898 374 1,541 2,049 Revenues -14.9% -26.5% 10.8% -25.2% 15.4%
Dealing 3,773 -1,366 2,202 1,500 1,300 Costs -4.3% -4.0% -21.0% -13.4% 5.6%
Other Revenues 1,047 2,283 6,600 -300 400 Pre-Provision Profits -24.0% -50.9% 78.3% -36.2% 28.0%
Total Revenues 35,337 25,969 28,787 21,544 24,868 Loan Loss Provisions -74.5% 35.7% -99.9% 14667.7% 9.0%
Costs -18,380 -17,642 -13,940 -12,068 -12,738 Pre-Tax n.m. -233.5% n.m. -57.5% 37.6%
Pre-Prov. Profits 16,958 8,327 14,847 9,476 12,129 Attributable Income n.m. -284.5% n.m. -57.1% 48.1%
Provisions -11,504 -15,606 -22 -3,176 -3,461 EPS n.m. -174.4% n.m. -51.3% 38.2%
Other Inc/Exp. 0 0 0 0 0 DPS n.m. -100.0% n.m. -49.6% 35.7%
Exceptionals 0 0 0 0 0
Disposals/ Other income 0 0 0 0 0 Balance Sheet Gearing 2007 2008 2009E 2010E 2011E
Pre-tax 5,453 -7,279 14,826 6,300 8,668
Tax -910 2,038 -3,939 -817 -1,229 Loan/Deposits 87.0% 85.4% 87.0% 92.2% 92.2%
Minorities 0 0 0 0 0 Investment/Assets 23.6% 24.1% 24.9% 22.5% 22.7%
Other Distbn. -1,426 -512 -1,415 -1,415 -1,415 Loan/Assets 51.7% 51.6% 53.5% 56.7% 57.5%
Attributable Income 3,117 -5,753 9,472 4,067 6,024 Customer deposits/Liab. 62.5% 62.7% 64.8% 64.9% 66.1%
LT Debt/Liabilities 9.1% 8.4% 7.8% 7.9% 7.7%

Per Share Data (NT$/ share) 2007 2008 2009E 2010E 2011E Asset Quality/Capital 2007 2008 2009E 2010E 2011E
Loan loss reserves/Loans 1.11% 1.94% 1.00% 0.98% 0.97%
EPS 0.81 -0.61 1.53 0.74 1.03 NPL/Loans 2.01% 1.44% 1.37% 1.32% 1.25%
DPS 0.12 0.00 1.43 0.72 0.98 Coverage 55.0% 134.1% 72.4% 74.7% 77.0%
Payout 15% 0% 94% 97% 95% Growth in NPLs -4.2% -32.6% -3.8% 0.0% 0.0%
Book Value 11.27 9.73 11.32 10.60 10.94
Fully Diluted Shares 6,893 6,893 6,893 6,893 6,893 Tier 1 Ratio 6.79% 6.75% 9.32% 9.83% 10.36%
Total CAR 10.0% 9.8% 11.3% 11.8% 12.2%

Key balance sheet - NT$ mn 2007 2008 2009E 2010E 2011E Du-Pont Analysis 2007 2008 2009E 2010E 2011E

Net Loans 580,607 540,941 551,941 576,801 604,838


LLR -6,491 -10,686 -5,550 -5,723 -5,900 Margins (as % of Avg. Assets) 1.65% 1.41% 1.09% 1.18% 1.33%
Gross Loans 587,098 551,627 557,490 582,524 610,737 Non IR/Avg. Assets 1.57% 0.99% 1.67% 0.92% 1.08%
NPLs 11,812 7,967 7,661 7,661 7,661 Non-Int. Rev./ Revenues 48.8% 41.2% 60.4% 43.8% 44.8%
Investments 264,881 253,109 257,392 228,963 239,065 Revenue/Assets 3.22% 2.39% 2.77% 2.10% 2.40%
Other Earning Assets 78,123 72,664 72,226 64,581 59,244 Cost/Income 52.0% 67.9% 48.4% 56.0% 51.2%
Avg. IEA 910,999 903,751 882,254 881,588 892,557 Cost/Assets 1.68% 1.62% 1.34% 1.18% 1.23%
Goodwill 20,758 20,758 20,758 20,758 20,758 of which Goodwill Amort. 0.00% 0.00% 0.00% 0.00% 0.00%
Assets 1,122,324 1,049,239 1,032,531 1,017,035 1,052,378 Operating ROA 1.55% 0.77% 1.43% 0.92% 1.17%
LLP/Loans -2.48% -3.17% -0.50% -0.97% -0.92%
Loan/Assets 53.1% 53.0% 53.7% 56.0% 57.1%
Deposits 667,548 633,655 634,281 625,913 656,299 Other Prov, Income/ Assets 0.27% 0.24% 0.27% 0.23% 0.19%
Long-term bond funding 87,798 75,837 68,617 68,617 68,617 Pre-Tax ROA 0.50% -0.67% 1.42% 0.61% 0.84%
Other Borrowings 153,278 121,879 122,485 122,431 122,431 Tax Rate -16.7% -28.0% -26.6% -13.0% -14.2%
Avg. IBL 895,158 869,998 828,377 821,172 832,154 Minorities & Outside Distbn. -0.13% -0.05% -0.14% -0.14% -0.14%
Avg. Assets 1,096,365 1,085,782 1,040,885 1,024,783 1,034,706 ROA 0.28% -0.53% 0.91% 0.40% 0.58%
Common Equity 64,375 55,568 64,640 60,542 62,454 RoRWA 0.49% -0.91% 1.58% 0.68% 0.97%
RWA 661,626 606,658 588,904 603,862 631,992 Equity/Assets 5.74% 5.52% 5.77% 6.11% 5.94%
Avg. RWA 634,129 634,142 597,781 596,383 617,927 ROE 4.95% -9.59% 15.76% 6.50% 9.79%

Source: Company Data, J.P. Morgan estimates.

Taishin FHC: DDM valuation


Net income EPS P/E BVPS P/BV Dividend Net ROA ROE
(NT$ mn) (NT$) (x) (NT$) (x) (NT$) Yield (%) (%)
2007 3,117 0.81 17.0 11.3 1.22 0.12 0.9% 0.28% 7.2%
2008 -5,753 -0.61 n.m. 9.7 1.42 0.00 0.0% -0.53% -8.7%
2009E 9,472 1.53 9.0 11.3 1.22 1.43 10.4% 0.91% 15.8%
2010E 4,067 0.74 18.6 10.6 1.30 0.72 5.2% 0.40% 6.5%
2011E 6,024 1.03 13.4 10.9 1.26 0.98 7.1% 0.58% 9.8%

Price NTD 13.8 Shares Outstanding (mn): 5,711 Market cap (NT$ mn): 78,806

Normalised ROE P/BV-based Valuation P/E-based Valuation


NIM (on avg. assets) 1.54% Risk-free rate 2.0% Fair P/E 12.8x
Non-IR/revenues 47.6% Cost of equity 8.0% 12m Forward EPS (NT$) 0.74
Cost/income 51.8% Long-term growth 1.5% Fair value NTD 9.5
Operating ROA 1.18% Fair P/BV 1.13x Implied Value of Growth
LLP/loans -1.07% PV of Terminal Value 9.2 12m Forward EPS (NT$) 0.74
Net ROAA 0.53% PV of Dividends 1.9 Capitalised value (NT$) 9.3
Equity/assets 5.9% Fair value NTD 12.3 Value of growth (NT$) 4.5
Normalised ROE 8.8% Misvaluation -11% Attrib. to Growth 33%

Source: Company data, J.P. Morgan estimates.

357
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Telmex SA Underweight
$18.09
Price Target: $13.00
www.telmex.com.mx

Company description Mexico


Telmex is the leading fixed-line company in Mexico, controlling nearly 89% Media and Telecom
of the fixed-line voice market & 65% of the broadband market. It is Andre BaggioAC
controlled by the Carlos Slim family through Carso Global Telecom, which (55-11) 3048-3427
andre.baggio@jpmorgan.com
owns 58.6% of TMX shares. It trades locally as TELMEXL and as an ADR
on the NYSE with the ticker TMX. Its ADTV is US$25mn for the ADRs. Banco J.P. Morgan S.A.

Rajneesh Jhawar
Post mortem (1-212) 622-6480
TMX reported a weak 3Q09, with net revenues and EBITDA declining 5% rajneesh.x.jhawar@jpmorgan.com
& 9.7% y/y respectively, worse than the 1H09 pace. The bulk of the revenue J.P.Morgan Securities Inc.
shortfall was related to international long distance, which was again very Price performance
weak. Local call volume was down 6.4% y/y compared to 6.9% y/y in 2Q09. $
ILD traffic was very weak – down 16.3% y/y – similar to the 21% y/y
30
decline in 2Q09 and much worse than the full-year 2008 decline of 8.4%.
20
Potential for earnings downgrades 10
New taxes in Mexico (1% higher VAT, 3% telecom tax on gross revenues
0
and 2pp higher income tax) that will be applicable from 2010 will likely
Oct-08 Apr-09 Oct-09
result in TMX 2010e net income being 9% lower. This is not yet priced into
Street estimates and will likely lead earning estimates lower. Source: Bloomberg.
Performance
How much downside is priced into the stock? 1M 3M 12M
We find the stock expensive at 5.5x 2010e EV/EBITDA considering its Absolute% 4.3 -9.8 3.7
continued meaningful decline in EBITDA (10% lower y/y in 2Q and 3Q). Relative % -79.0 -26.2 -57.5
Source: Bloomberg, relative MEXBOL, USD prices.
Thus, we think the weaker trends are not fully reflected yet in the stock price. Company data
52-week range (USD) 12.66-22.34
Price target and key risks Mkt cap. (MXN MM) 212,370
We rate TMX Underweight in our coverage with a PT of US$13, based on an Mkt cap. (US$MM) 16,547
average of (1) DCF, which yields US$12.2 (using a WACC of 9.3% and LT Avg daily value (US$MM) 23.7
growth of -1%); and (2) multiples, which yield US$14.0 (using a 12.8% Avg daily volume (MM) 1.34
target FCFE yield). Upside risks: 1) Increase in cash returns, 2) better voice Shares O/S (MM) 485
trends, 3) entry into pay TV. Date of price Nov 25
Index: MEXBOL MEXBOL
Source: Bloomberg.

Bloomberg: TMX; Reuters: TMX.N


LC in millions, year-end Dec
FY08 FY09E FY10E FY11E
Sales 124,105 119,109 113,796 111,054
Net profit 20,177 20,483 17,589 16,922
EPS (LC) 1.85 1.57 1.46 1.46
FD EPS (LC)
DPS (LC) 0.41 0.44 0.47 0.52
Sales growth (%) -4.3% -4.0% -4.5% -2.4%
Net profit growth (%) -43.2% 1.5% -14.1% -3.8%
EPS growth (%) -44.7% -15.3% -6.9% 0.1%
ROE (%) 49.5% 53.2% 48.6% 49.0%
P/E (x) 11.2 10.7 11.9 12.0
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

358
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Telmex SA: Summary of financials


Profit and loss statement Cash flow statement
MXN in millions, year-end Dec. LC in millions, year-end Dec.
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 124,105 119,109 113,796 111,054 EBIT 39,743 35,210 33,898 33,001
% change Y/Y -4.3% -4.0% -4.5% -2.4% Depreciation & amortization 17,965 17,752 15,881 14,954
Gross margin (%) 73.6% 72.1% 71.3% 70.6% Change in working capital 1,856 -1,964 799 584
EBITDA 57,708 52,962 49,779 47,956 Taxes
% change Y/Y -7.4% -8.2% -6.0% -3.7% Cash flow from operations 41,794 35,131 34,269 32,603
EBITDA margin (%) 46.5% 44.5% 43.7% 43.2% Capex -10,094 -8,031 -11,380 -11,105
EBIT 39,743 35,210 33,898 33,001 Disposal/(purchase)
% change Y/Y -9.6% -11.4% -3.7% -2.6% Net interest
EBIT margin (%) 32.0% 29.6% 29.8% 29.7% Free cash flow 30,747 30,206 22,889 21,498
Net interest -6,739 -6,312 -6,704 -6,616 Equity raised/(repaid)
Earnings before tax 29,769 28,450 25,127 24,174 Debt raised/(repaid)
% change Y/Y -26.6% -4.4% -11.7% -3.8% Other
Tax -9,592 -7,966 -7,538 -7,252 Dividends -7,609 -8,101 -8,355 -8,980
as % of EBT 32.2% 28.0% 30.0% 30.0% Beginning cash 4,753 6,137 14,227 13,671
Net income (reported) 20,177 20,483 17,589 16,922 Ending cash 6,137 14,227 13,671 13,265
% change Y/Y -43.2% 1.5% -14.1% -3.8% DPS (LC) 0.41 0.45 0.47 0.52
Shares O/S (MM) 18,555 18,018 17,369 16,993 Source: Company, J.P. Morgan estimates.
EPS (reported) (LC) 1.02 1.08 0.96 0.96
Source: Company, J.P. Morgan estimates. Ratio analysis

Balance sheet %, year-end Dec.


FY08 FY09E FY10E FY11E
LC in millions, year-end Dec. EBITDA margin 46.5% 44.5% 43.7% 43.2%
FY08 FY09E FY10E FY11E Operating margin 32.0% 29.6% 29.8% 29.7%
Cash and cash equivalents 6,137 14,227 13,671 13,265 Net profit margin 16.3% 17.2% 15.5% 15.2%
Accounts receivable SG&A/sales 16.0% 17.3% 18.1% 18.8%
Inventories Sales growth -4.3% -4.0% -4.5% -2.4%
Others 46,043 40,867 39,270 38,103 Net profit growth -43.2% 1.5% -14.1% -3.8%
Current assets 52,180 55,094 52,942 51,368 Sales per share growth
LT investments EPS growth -44.2% 5.5% -10.6% -0.8%
Net fixed assets 112,865 103,420 98,918 95,069 Interest coverage (x)
Total assets 187,125 177,487 170,834 165,411 Net debt to total capital 68.9% 62.1% 63.1% 62.4%
Liabilities Net debt to equity 256.3% 226.0% 237.8% 230.1%
ST loans 22,883 37,018 35,572 34,515 Sales/assets 69.0% 65.3% 65.3% 66.1%
Payables EBIT margin 32.0% 29.6% 29.8% 29.7%
Others 18,482 20,446 19,647 19,064 ROCE 27.8% 26.5% 28.8% 29.0%
Total current liabilities 41,365 57,464 55,219 53,578 Assets/equity (x) 4.8x 4.7x 4.9x 4.8x
Long-term debt 84,172 62,310 60,793 57,536 ROI
Other liabilities 22,217 20,051 20,051 20,051 ROE 49.5% 53.2% 48.6% 49.0%
Total liabilities 147,754 139,825 136,064 131,165 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 39,371 37,663 34,770 34,246
BVPS (LC) 3.1 3.2 3.1 3.1
Source: Company, J.P. Morgan estimates.

359
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

The9 Neutral
US$7.56
Price Target: 6.70
www.the9.com/en
Company description China
The9 is an online game operator and developer in China. The company runs IT and Internet
games such as Granado Espada, SUN, FIFA Online2, and Atlantica through Dick WeiAC
its game portal. The company also used to operate Blizzard’s popular game (852) 2800-8535
World of Warcraft (WOW) in China, for which it lost the license to Netease dick.x.wei@jpmorgan.com
in June 2009. J.P. Morgan Securities (Asia Pacific)
Limited
Post mortem
Price performance
WOW used to contribute more than 90% of The9’s revenue. In addition,
US$
most of its previous games are also experiencing a revenue decline as of
18
2Q09. We believe the company will likely see operation loss for the next two
years, given the high fixed G&A cost as a listed company and R&D $ 12

investments for future games. Due to lack of visibility in future earnings 6


driver, we would avoid the stock. Nov-08 Feb-09 May-09 Aug-09 Nov-09

NCTY share price ($)


Potential for earnings upgrades NASDAQ Composite (rebased)

We expect macro upturn next year would not help The9 much, as the Source: Bloomberg.
company lacks strong products. Performance
1M 3M 12M
How much recovery is priced into the stock? Absolute (%) -0.1 -17.7 -37.2
The game market has not been very sensitive to macro downturn. We believe Relative (%) -0.6 -25.2 -80.5
online games are low-cost entertainment, and actually have been slightly Source: Bloomberg.
benefited by the macro downturn. For The9 earnings impact was mainly due Company data
to company-specific issue. 52-week range (US$) 7.1-16.6
Mkt cap. (RmbMM) 1,446
Price target and key risks Mkt cap. (US$MM) 212
Our Dec-10 price target of US$6.7 is based on DCF valuation with WACC Avg daily value (US$MM) 1.03
of 12.1% and 0% terminal growth rate. It is also supported by our expected Avg daily volume (MM) 0.1
2010 cash level of US$ 7.2. Risks to our price target and rating include: (1) Shares O/S (MM) 28
larger-than-expected investments in game titles and studios; and (2) new Date of price 12-Nov-09
game launches could disappoint on the down side. Upside risks include: Index: NASDAQ 2,149
The9 as an acquisition target given its high level of cash. Free float (%) 25
Exchange rate (Rmb/US$) 6.83
Source: Company, Bloomberg.

Bloomberg: NCTY US; Reuters: NCTY


Rmb in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 1,711.5 755.7 171.0 312.7
Net profit 96.8 -261.2 -248.4 -176.4
GAAP EPS (Rmb) 3.50 -10.21 -9.69 -6.83
Adj. EPS (Rmb) 5.38 -7.68 -7.35 -4.72
DPS (Rmb) 0.00 0.00 0.00 0.00
Sales growth (%) 33.8 -55.8 -77.4 82.8
Net profit growth (%) -59.8 -369.7 4.9 29.0
EPS growth (%) -60.2 -391.9 2.1 30.8
ROE (%) 6.3 -8.2 -9.0 -6.3
P/E (x) 14.8 nm nm nm
FD P/E (x) 9.7 nm nm nm
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 12 November 2009. We lowered our PT to $6.5 on November 25.

360
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

The9: Summary of financials


Profit and loss statement Cash flow statement
Rmb in millions, year-end December Rmb in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 1,711 756 171 313 Net Income 97 -261 -248 -176
% change Y/Y 34 -56 -77 83 Depr. & Amortisation 230 189 111 125
Gross margin (%) 42 15 1 25 Change in working capital 7 -192 30 19
EBITDA 365 -124 -186 -90 Other 77 60 60 55
% change Y/Y -19 nm nm nm Cash flow from operations 412 -204 -47 22
EBITDA margin (%) 21 -16 -109 -29 Capex/investments 55 -197 -146 -65
EBIT 135 -313 -298 -216 Others -223 -5 4 4
% change Y/Y -43 nm nm nm Cash flow from investing -168 -201 -142 -61
EBIT margin (%) 8 -41 -174 -69 Free cash flow 467 -401 -193 -43
Net interest 57 36 31 28 Equity raised/ (repaid) -138 -119 13 14
Earnings before tax 170 -280 -276 -200 Debt raised/ (repaid) 23 -129 0 0
% change Y/Y -32 nm nm nm Other -123 -230 0 0
Tax -48 14 28 24 Dividends paid 0 0 0 0
as % of EBT 28 nm nm nm Cash flow from financing -238 -478 13 14
Net income (reported) 97 -261 -248 -176 Net change in cash 5 -884 -176 -25
% change Y/Y -60 nm nm nm Beginning cash 2,215 2,221 1,337 1,161
Shares O/S (MM) 28 26 25 25 Ending cash 2,221 1,337 1,161 1,136
EPS (reported) (LC) 3 -10 -10 -7 Source: Company, J.P. Morgan estimates.
Source: Company, J.P. Morgan estimates.

Balance sheet
Ratio analysis
Rmb in millions, year-end December
%, year-end December
FY08 FY09E FY10E FY11E
Cash and cash equivalents 2,221 1,337 1,161 1,136 FY08 FY09E FY10E FY11E
Accounts receivable 9 2 5 7 Gross Margin 41.7 15.1 0.9 24.9
Inventories 126 5 14 19 EBITDA margin 21.3 -16.4 -109.0 -28.9
Others 139 67 67 67 Operating Margin 7.9 -41.4 -174.2 -69.0
Current assets 2,494 1,410 1,246 1,229 Net Margin 5.7 -34.6 -145.2 -56.4
R&D/sales 4.3 15.9 75.0 41.8
LT investments 403 407 404 400 SG&A/Sales 24.7 36.6 100.1 52.1
Net fixed assets 200 246 225 205 Sales growth 33.8 -55.8 -77.4 82.8
Others 166 128 184 143 Operating Profit Growth -43.0 -332.5 4.8 27.6
Total assets 3,263 2,192 2,058 1,977 Net profit growth -59.8 -369.7 4.9 29.0
Liabilities EPS (Reported) growth -60.2 -391.9 2.1 30.8
ST loans 129 0 0 0 Net debt to total capital -73.4 -61.6 -58.2 -60.2
Payables 345 19 54 76 Net debt to equity -76.9 -61.6 -58.2 -60.2
Others 69 4 11 15 Asset Turnover 52.5 34.5 8.3 15.8
Total current liabilities 544 23 65 91 Working Capital Turns (x) 0.9 0.5 0.1 0.3
Long term debt 0 0 0 0 ROE 6.3 -8.2 -9.0 -6.3
Other liabilities 0 -1 -1 -1 ROIC 4.5 -9.2 -10.2 -7.4
Total liabilities 544 21 64 89 Source: Company, J.P. Morgan estimates.
Shareholders' equity 2,719 2,170 1,995 1,887
Source: Company, J.P. Morgan estimates.

361
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

TMB Bank Neutral


Price: Bt1.12
Price Target: Bt1.00
www.tmbbank.co.th

Company description Thailand


ING Bank has a 30% ownership in TMB Bank. The second largest Banks
shareholder, Finance Ministry, has a 23% stake remaining to be sold. TMB is Anne JirajariyavechAC
a mid-sized bank, the sixth largest, with Bt551 billion in total assets. (66-2) 684-2684
anne.x.jirajariyavech@jpmorgan.com
Post mortem JPMorgan Securities (Thailand) Limited
TMB has not fully recovered from the last Thai financial crisis in 1997. With
many changes in shareholders and mergers with other banks, there have been Price performance
changes and shocks in culture that have affected the bank’s employees and 1.2

business. Blamed on internal business restructuring, TMB has lost 12-13% of Bt 0.8
its business (loans and deposits) during Jan-Aug 2009. Given that we expect
0.4
higher competition in both lending and deposit markets next year, we believe Nov-08 Feb-09 May-09 Aug-09 Nov-09
it will be very challenging for TMB to regain its customers or even to TMB.BK share price (Bt)
SET (rebased)
compete with other bigger banks for new customers.
Source: Bloomberg.

Potential for earnings upgrades Performance


We remain cautious on TMB’s outlook and believe the recovery is still far 1M 3M 12M
out. With an aim to recover its business and to rebuild its deposit franchise, Absolute (%) -6.7 36.6 89.8
TMB has recently offered various free services which will likely hurt the Relative (%) -1.6 30.1 40.7
bank’s profitability while the future growth is still unconfirmed. In our view, Source: Bloomberg.
earnings upgrade will be driven by the success of the bank’s retail business.
Company data
How much recovery is priced into the stock? 52-week range (Bt) 0.43-1.37
Mkt cap. (BtMM) 46,521
The stock price has risen 160% from its trough, suggesting the recovery has
Mkt cap. (US$MM) 1,394
been priced in. However, given our view that it will be challenging for TMB Avg daily value (US$MM) 8.0
to regain its business position and offering free services will hurt its Avg daily volume (MM) 247.3
profitability, we believe the market is being too optimistic on TMB’s Shares O/S (MM) 41,537
outlook. Date of price 5-Nov-09
Index: SET 682
Free float (%) 39
Price target and key risks Exchange rate 33.38
We maintain Neutral rating and our Dec-10 PT of Bt1.0. Our price target is Source: Bloomberg.
based on DDM. We use an adjusted fair P/BV-based multiple of 0.76x, with
a normalized ROE of 11.3%, a COE of 13.1%, and a growth rate of 6.0%.
Key risks to our PT are better-than-expected loan growth and NIM.

Bloomberg: TMB TB; Reuters: TMB.BK


Bt in millions, year-end December
FY08 FY09E FY10E FY11E
Operating profit 7,645 6,121 6,479 7,198
Net profit 424 2,110 3,310 3,812
Cash EPS (Bt) 0.01 0.05 0.08 0.09
FD EPS (Bt) 0.01 0.05 0.08 0.09
DPS (Bt) 0.00 0.00 0.00 0.00
EPS growth (%) 398.0 56.9 15.2
ROE (%) 1.0 4.6 6.8 7.3
P/E (x) 115.1 23.1 14.7 12.8
BVPS (Bt) 1.03 1.08 1.16 1.24
P/BV (x) 1.1 1.0 1.0 0.9
Dividend Yield (%) 0.0 0.0 0.0 0.0
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

362
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

TMB Bank: Summary of financials


Income statement - Bt mn 2008 2009E 2010E 2011E Grow th Rates 2008 2009E 2010E 2011E

Margins (% of Earning Assets) 2.64% 2.29% 2.42% 2.43% Loans -9% -13% 6% 8%
Earning Assets/Assets 98% 97% 97% 97% Deposits -3% -10% 8% 8%
NIM (as % of avg. Assets) 2.58% 2.22% 2.34% 2.35% Assets -3% -5% 6% 6%
Equity 2% 5% 7% 8%
Net Interest Income 15,793 13,031 13,835 14,774
Net Interest Incom e -4% -17% 6% 7%
Total Non-Interest Revenues 5,492 6,294 6,672 7,206 Non-Interest Income -11% 15% 6% 8%
Fee income 3,762 3,010 3,190 3,445 of w hich Fee Grth -10% -20% 6% 8%
FX/Trading gains 1,417 1,091 1,157 1,249 Revenues -6% -9% 6% 7%
Other operating income 313 2,194 2,325 2,511 Costs 0% -3% 6% 5%
Total operating revenues 21,285 19,325 20,507 21,980 Pre-Provision Profits -15% -20% 6% 11%
Operating costs -13,640 -13,204 -14,028 -14,782 Loan Loss Provisions -84% -19% -25% 7%
Operating profit 7,645 6,121 6,479 7,198 Pre-Tax -101% 257% 55% 15%
Loan Loss Prov isions -5,076 -4,126 -3,079 -3,295 Attributable Incom e -101% 398% 57% 15%
Other prov isions 0 0 0 0 EPS -101% 398% 57% 15%
Ex ceptionals -1,952 205 0 0 DPS NA NA NA NA
Disposals/ Other income 0 0 0 0
Pre-tax profit 616 2,200 3,400 3,902 Balance Sheet Gearing 2008 2009E 2010E 2011E
Tax [rate] -87 0 0 0
Minorities/preference div idends -106 -90 -90 -90 Loan/Deposit 95% 92% 91% 90%
Attributable net income 424 2,110 3,310 3,812 Investment/Assets 14% 20% 19% 17%
Loan/Assets 71% 65% 65% 66%
Customer deposits/Liab. 75% 71% 72% 73%
LT Debt/Liabilities 5% 4% 4% 4%

Per Share Data 2008 2009E 2010E 2011E Asset Quality/Capital 2008 2009E 2010E 2011E
EPS (Bt/ share) 0.01 0.05 0.08 0.09 Loan loss reserves/Loans 10.7% 11.6% 11.3% 10.7%
DPS (Bt/ share) 0.0 0.0 0.0 0.0 NPLs/loans 16.5% 17.5% 16.6% 15.4%
Payout 0.0% 0.0% 0.0% 0.0% Loan loss reserves/NPLs 65.1% 66.2% 67.8% 69.8%
NAV (Bt/ share) 1.03 1.1 1.2 1.2 Grow th in NPLs -9.6% -7.3% 0.6% 0.0%
Avg. Shares Issued (mn shares) 43,529 43,529 43,529 43,529
Tier 1 Ratio 12.3% 11.5% 11.6% 11.6%
Total CAR 16.8% 15.6% 15.4% 15.3%

Key balance sheet - USD m n 2008 2009E 2010E 2011E Du-Pont Analysis 2008 2009E 2010E 2011E

Net Custom er Loans 381,666 330,333 351,522 381,769 NIR/Avg. Assets 2.58% 2.22% 2.34% 2.35%
Loans loss reserves 45,916 43,316 44,593 45,942 Non IR/Avg. Assets 0.90% 1.07% 1.13% 1.15%
Gross Loans 427,582 373,649 396,116 427,711 Non IR/Total Rev 25.8% 32.6% 32.5% 32.8%
Investments 83,983 113,377 113,377 113,377 Total Rev/Avg. Assets 3.48% 3.29% 3.47% 3.49%
Other Earning Assets 83,904 78,195 92,744 101,333 Cost/Income 64.1% 68.3% 68.4% 67.3%
Average Earning Assets = (A) 598,989 568,762 571,464 609,167 Cost/Assets 2.23% 2.25% 2.37% 2.35%
Goodw ill Goodw ill Amort.
Total assets 601,985 573,931 609,669 648,504 Operating ROAA 1.2% 1.0% 1.1% 1.1%
LLP/Loans -1.1% -1.0% -0.8% -0.8%
Interbank funding 9,299 22,783 22,783 22,783 Loan/Assets 73.2% 68.1% 65.0% 65.5%
Custom er deposits 450,297 405,267 437,689 472,704 Other inc:provs -0.3% 0.0% 0.0% 0.0%
Long-term bond funding 31,387 24,890 24,890 24,890 Pre-tax ROAA 0.1% 0.4% 0.6% 0.6%
Other Interest Bearing Liabilities 65,956 73,830 73,830 73,830 Tax -14.1% 0.0% 0.0% 0.0%
Average Interest Bearing Liab. = (B) 537,275 508,114 506,526 540,244 MI 0.0% 0.0% 0.0% 0.0%
Average Assets 612,073 587,958 591,800 629,087 ROAA 0.1% 0.4% 0.6% 0.6%
Shareholders' equity 44,955 47,065 50,375 54,187 RoRWA 0.1% 0.5% 0.8% 0.8%
Risk Weighted Assets 375,396 418,970 445,058 473,408 Equity/Assets 7.2% 7.8% 8.2% 8.3%
Average Risk Weighted Assets 404,338 397,183 432,014 459,233 ROE 1.0% 4.6% 6.8% 7.3%

Source: Company data, J.P. Morgan estimates.

363
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Unilever Indonesia Tbk Underweight


Rp10,200
Price Target: Rp9,700
www.unilever.co.id

Company description Indonesia


Unilever Indonesia (UNVR) is a leading FMCG company in Indonesia. It Household Products
operates under three divisions: personal care, home care, and food. Personal Stevanus JuandaAC
care is its largest profit generator and UNVR is a leading player in this (62-21) 5291-8574
segment. In the home care segment, Unilever is second in the market in stevanus.x.juanda@jpmorgan.com
terms of market share after Wings. Its food business—although the smallest PT J.P. Morgan Securities Indonesia
of the three segments—generates the fastest growth. Going forward,
Unilever plans to focus its expansion in the food division. Investors should Price performance
consider acquisitions as part of UNVR’s strategy. If a company is acquired, Rp
13000
UNVR could push the products into its large distribution channel (2 million 12000
sales points) to generate growth. 11000
10000
9000
Post mortem
8000
Recently, Proctor & Gamble started a price war by reducing prices of its 7000
shampoo by 20%-30%. Subsequently, Unilever and other industry Nov-08 Feb-09 May-09 Aug-09 Nov-09
participants followed. The stiff competition still continues. Competition is Source: Bloomberg.
also intense in other products such as detergents and skin care.
Performance
1M 3M 12M
Potential for earnings downgrades
Absolute (%) -5.1 -9.3 33.1
Based on J.P. Morgan/consensus forecasts, UNVR’s earnings should grow
Relative (%) -0.7 -11.7 -44.6
22.6%/17.5% in FY10. Considering that the margin could be compressed by
Source: Bloomberg.
100-150bp due to the price war, we see downside risks to both our and
consensus’ earnings estimates. Company data
52-wk range (Rp) 7,100-12,100
How much recovery is priced into the stock? Mkt cap. (RpB) 77,826
We believe a domestic consumption recovery has somewhat been priced into Mkt cap. (US$MM) 8,166
the share price. However, it should lag the recovery in commodity. 3M avg daily val (US$MM) 2.76
3M avg daily volume (MM) 1.81
Price target and key risks Shares O/S (MM) 7,630
Given the price war, we believe margin could be under pressure in the next Date of price 5-Nov-09
few quarters. Our DCF-based Jun-10 PT of Rp9,700 implies a risk-free rate Index: JCI 2,367
of 10.5%, an equity-risk premium of 5.5%, and a terminal growth rate of Free float (%) 15.0
5.5%. Key risks to our PT are: (1) better-than-expected earnings; and (2) Exchange rate 9,530
defensive trade—continuation of the bear market. Source: Bloomberg.

Bloomberg: UNVR IJ Reuters: UNVR.JK


Rp in billions, year-end December
FY08 FY09E FY10E FY11E
Sales 15,577.80 18,032.90 20,342.00 24,105.30
Net profit 2,407.20 2,645.80 3,242.60 4,079.30
EPS (Rp) 315.5 346.8 425 534.6
Core EPS (Rp) 315.5 346.8 425 534.6
DPS (LC) 261.4 300 350 400
Sales growth (%) 24.20% 15.80% 12.80% 18.50%
Net profit growth (%) 22.50% 9.90% 22.60% 25.80%
EPS growth (%) 22.50% 9.90% 22.60% 25.80%
ROE (%) 83.10% 80.70% 86.60% 89.80%
P/E (x) 32.3 29.4 24.0 19.1
Core P/E (x) 32.3 29.4 24.0 19.1
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

364
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Unilever Indonesia Tbk: Summary of financials

Source: Company. J.P. Morgan estimates.

365
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Usiminas Underweight
R$51.50
Price Target: R$38.5
www.usiminas.com.br

Company description Brazil


Usiminas is the largest Brazilian flat steel producer, with ~9.5Mtpy of crude Metals& Mining
steel capacity. It has two plants – its original plant in Ipatinga and the plant Rodolfo R. De Angele, CFAAC
of former Cosipa in the state of São Paulo. The company produces a broad (55-11) 3048-3888
range of steel products and is the main domestic supplier for the automotive rodolfo.r.angele@jpmorgan.com
and auto parts industries in Brazil. Aside from this, USI also owns some iron Banco J.P. Morgan S.A.
ore mines and logistics and capital goods assets.
Price performance (R$)
Post mortem 55
Usiminas was by far the company that suffered most during the downturn. 45
EBITDA margins went from peak levels of 39% in 3Q08 to a low of 5% in 35
2Q09. This, we believe, highlights the high-cost nature of its business, 25
exacerbated by a relatively shy management reaction to the crisis, especially 15

related to working capital. We expect things to improve, but Usiminas should Nov -08 Mar-09 Jul-09 Nov -09

still lag its more agile peers such as CSN and GGB. Source: Bloomberg.
Potential for earnings upgrades Performance
While USI should benefit from a comeback in steel volumes, we see limited 1M 3M 12M
upside to current estimates. We are cautious on Brazilian flat steel prices in Absolute (%) 1.0% 10.4% 129.4%
light of the appreciating R$, especially when domestic prices are at a high Relative (%) -3.4% -7.9% 34.3%
premium to international prices. In addition, we believe expectations of a Source: Bloomberg.
potential recovery in ’10 are too optimistic, paving the way for downgrades. Company data
How much recovery is priced into the stock? 52-week range (R$) 22.2 – 54.2
Trading at 8.8x ’10e EV/EBITDA, Usiminas is at a 63% premium to its 5.4x Mkt cap. (R$MM) 25,208
historical average even in a rosy scenario of volumes coming back at full Mkt cap. (US$MM) 15,087
steam and steel prices going up. Thus, we believe stock prices fully Avg daily value (US$MM) 82.3
incorporate any potential recoveries to come. Avg daily volume (MM) 3.13
Price target and key risks Shares O/S (MM) 506
We rate Usiminas UW based on our Dec 10 price target of R$38.5/share, Date of price 25-Nov-09
which implies 24% downside from current levels. Our PT is derived from a Index: Ibovespa 67,917
combination of DCF (80%) and multiples (20%) with a WACC of 11.8% and Free float (%) 61%
target EV/EBITDA of 5.0x. The main upside risks to our PT and rating are Exchange rate(BRL/USD) 1.72
Source: Bloomberg.
related to higher-than-expected domestic demand.
Bloomberg: USIM5 BZ; Reuters: USIM5.SA
R$ in millions, year-end 31st Dec
FY08 FY09E FY10E FY11E
Sales 15,707 11,435 13,369 14,504
Net profit (recurring) 3,219 675 1,745 2,116
EPS (R$) 6.36 1.33 3.45 4.18
FD EPS (R$) 6.36 1.33 3.45 4.18
DPS (R$) 2.27 1.80 1.07 1.30
Sales growth (%) 14% -27% 17% 8%
Net profit growth (%) -3% -79% 159% 21%
EPS growth (%) -3% -79% 159% 21%
ROE (%) 22% 5% 11% 12%
P/E (x) 8.7x 45.0x 15.4x 13.0x
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25th November 2009.

366
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Usiminas: Summary of financials


Profit and loss statement Cash flow statement
R$ in millions, year-end 31st Dec R$ in millions, year-end 31st Dec
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 15,707 11,435 13,369 14,504 Net income (Reported) 3,332 675 1,745 2,116
% change Y/Y 14% -27% 17% 8% Depreciation 873 773 818 931
Gross margin (%) 38% 25% 30% 32% Change in working capital 2,718 620 (237) 172
EBITDA 6,012 1,579 3,450 4,383 Cash flow from operations 1,487 828 2,801 2,875
% change Y/Y 20% -74% 118% 27% Capital expenditure 3,502 2,300 2,412 4,010
EBITDA margin (%) 38% 14% 26% 30% Other cash (uses)/sources 1,828 (521) (370) 130
EBIT 5,139 806 2,631 3,452 Debt raised/(repaid) 5,339 (675) 1,383 405
% change Y/Y 20% -84% 226% 31% Dividends 1,151 911 541 656
EBIT margin (%) 33% 7% 20% 24% Increase in cash equivalent (4,995) (1,862) 217 (1,921)
Net interest (1,188) 328 (505) (605) Ending cash 4,008 1,911 3,512 2,019
Earnings before tax 4,242 1,061 2,122 2,861 DPS(R$) 2.27 1.80 1.07 1.30
% change Y/Y -8% -75% 100% 35% Net income (Reported) 3,332 675 1,745 2,116
Tax (1,008) (385) (374) (741) Depreciation 873 773 818 931
as % of EBT 24% 36% 18% 26% Change in working capital 2,718 620 (237) 172
Net income (recurring) 3,219 675 1,745 2,116 Cash flow from operations 1,487 828 2,801 2,875
% change Y/Y -3% -79% 159% 21% Capital expenditure 3,502 2,300 2,412 4,010
Shares O/S (MM) 506 506 506 506 Source: Company, J.P. Morgan estimates.
EPS (recurring) (R$) 6.36 1.33 3.45 4.18
Source: Company, J.P. Morgan estimates.

Ratio analysis
%, year-end 31st Dec
Balance sheet
FY08 FY09E FY10E FY11E
R$ in millions, year-end 31st Dec EBITDA margin 38% 14% 26% 30%
FY08 FY09E FY10E FY11E Operating margin 33% 7% 20% 24%
Cash and cash equivalents 4,008 1,911 3,512 2,019 Net profit margin 20% 6% 13% 15%
Accounts receivable 1,539 1,868 1,872 2,031 SG&A/sales 4% 6% 5% 5%
Inventories 5,082 3,814 3,586 3,585 Sales growth 14% -27% 17% 8%
Others 1,269 1,518 1,775 1,926 Net profit growth -3% -79% 159% 21%
Current assets 11,899 9,112 10,745 9,560 Sales per share growth 14% -27% 17% 8%
LT investments 5,342 5,173 5,046 5,318 EPS growth -3% -79% 159% 21%
Net fixed assets 10,340 11,626 13,219 16,298 Interest coverage (x) 4.3x -2.5x 5.2x 5.7x
Total assets 27,580 25,912 29,010 31,177 Net debt to total capital 18% 25% 22% 27%
Liabilities Net debt to equity 29% 39% 34% 42%
ST loans 1,205 909 1,074 1,122 Sales/assets 57% 44% 46% 47%
Payables 1,102 586 637 669 EBIT margin 33% 7% 20% 24%
Others 2,113 1,287 1,505 1,633 ROCE 14% 3% 7% 8%
Total current liabilities 4,420 2,783 3,216 3,423 Assets/equity (x) 1.8x 1.7x 1.8x 1.8x
Long-term debt 7,129 6,750 7,969 8,326 ROIC 16% 2% 8% 9%
Other liabilities 916 1,433 1,675 1,817 ROE 22% 5% 11% 12%
Total liabilities 12,465 10,965 12,859 13,566 Source: Company, J.P. Morgan estimates
Shareholders’ equity 15,029 14,865 16,070 17,530
BVPS (R$) 29.7 29.4 31.7 34.6
Source: Company, J.P. Morgan estimates.

367
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adrian.mowat@jpmorgan.com

Weichai Power Neutral


Price: HK$52.8
Price Target: HK$47
www.weichai.com
Company description Country
Weichai Power is a leading producer of diesel engines, which are used in Auto parts
heavy-duty vehicles, construction machines, vessels, and power generators. Frank LiAC
It also holds a 51% stake in Shaanxi Motor, which is among China’s top five
852-2800-8511
manufacturers of heavy duty trucks, and Fast Gear, one of the leading frank.m.li@jpmorgan.com
gearbox producers in China.
Jin Luo
852-2800-8516
Post mortem
Jin.j.luo@jpmorgan.com
Concerns over likely tightening measures as of 2Q FY10 and a fixed
J.P. Morgan Securities (Asia Pacific)
asset investment growth slowdown in FY11: (1) we expect fixed asset Limited
investment-related sectors including trucks to come under de-rating pressure
from the tightening measures expected to kick in as of 2Q FY10; and (2) we Price performance
worry about a potential sharp slowdown in fixed asset investment in 2011, Units
60

given the correlation between China’s fixed asset investment and heavy truck 50

demand. 40

30

20

Potential for earnings upgrades 10

We believe the company’s earnings will peak in FY10 with the expected Nov -08 Feb-09 May -09 Aug-09 Nov -09

sharp slowdown in China FAI growth in FY11, and see limited earnings Source: Bloomberg.

upgrade potential. Performance


1M 3M 12M
How much recovery is priced into the stock? Absolute (%) 30.3 42.7 387.2
We believe the recovery has largely been priced in, with the stock trading Relative (%) 20.3 35.7 310
above its average historical P/B ratio of 3x, the average historical P/B since Source: Bloomberg.

April 2007 when Weichai completed the merger with Torch to become a Company data
vertically integrated player in China’s heavy truck industry. 52-week range (HK$) 7.46 -29.5
Mkt cap. (HK$ MM) 43,984.8
Price target and key risks Mkt cap. (US$MM) 5,653.6
We prefer China’s passenger vehicle names to commercial vehicle names Avg daily value (US$MM) 14
such as Weichai. Our Jun-10 price target of HK$47 is based on 3x FY09E Avg daily value (HK$MM) 106
P/B, its average historical prospective P/B since April 2007 when Weichai Avg daily volume (MM) 2
completed the merger with Torch to become a vertically integrated player in Shares O/S (MM) 833.05
China’s heavy truck industry. Key risks to our price target include the likely Date of price 5-Nov-09
kicking in of broad-based tightening measure as of 2QFY10. HSCCI 12,805.3
Free float (%) 61
Exchange rate 7.78
Source: Bloomberg.
Bloomberg: 2338 HK; Reuters: 2338.HK
Rmb in millions, year-end December
FY08 FY09E FY10E FY11E
Revenue 32,567 36,430 40,968 42,060
EBITDA 3,747 6,214 7,197 7,274
Net profit 1,929 3,496 3,919 3,751
EPS (Rmb) 2.32 4.20 4.70 4.50
DPS (Rmb) 0.232 0.420 0.470 0.450
Revenue growth (%) 18.7 11.9 12.5 2.7
EBITDA growth (%) -8.3 65.8 15.8 0.0
Net profit growth (%) -4.3 81.2 12.1 -4.3
ROE (%) 26.8 36.5 30.4 22.9
P/E (x) 20.1 11.1 9.9 10.3
P/B (x) 4.8 3.5 2.6 2.1
Dividend yield (%) 0.5 0.9 1.0 1.0
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

368
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adrian.mowat@jpmorgan.com

Weichai Power: Summary of financials


Rmb in millions, year-end December
Profit and loss statement Cash flow statement
FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E

Revenues 27,425 32,567 36,430 40,968 42,060 EBIT 3,503 2,990 5,285 6,096 5,989
% change Y/Y 313.4 18.7 11.9 12.5 2.7 Depreciation & amortization 585 757 929 1,101 1,285
Gross Margin (%) 24.2 17.4 22.2 22.4 21.6 Change in working capital -785 683 -567 -171 60
EBITDA 4,088 3,747 6,214 7,197 7,274 Others -350 14 -904 -1,189 -1,292
% change Y/Y 270.6 -8.3 65.8 15.8 1.1 Cash flow from operations 2,954 4,444 4,742 5,837 6,042
EBITDA Margin (%) 14.9 11.5 17.1 17.6 17.3
-
EBIT 3,503 2,990 5,285 6,096 5,989 Capex -1,995 1,703 -1,750 -1,700 -2,000
% change Y/Y 285.2 -14.7 76.8 15.4 -1.8 Investment 0 0 0 0 0
EBIT Margin (%) 12.8 9.2 14.5 14.9 14.2
Net Interest -227 -249 -202 -264 -269 Free cash flow 959 2,741 2,992 4,137 4,042
Earnings before tax 3,273 2,741 5,083 5,833 5,720
% change Y/Y 268.1 -16.3 85.5 14.8 -1.9 Equity raised/ (repaid) 0 1,700 1,300 0 0
Tax -480 -329 -712 -934 -1030 Debt raised/ (repaid) -1,485 384 -386 0 -200
as % of EBIT 13.7 11.0 13.5 15.3 17.2 Other 1,155 -1,192 -253 -316 -323
Net Income (Reported) 2,015 1,929 3,496 3,919 3,751 Dividends paid -68 -229 -193 -350 -392
% change Y/Y 186.7 -4.3 81.2 12.1 -4.3 Beginning cash 1,674 1,820 3,352 7,312 11,283
Shares Outstanding 833 833 833 833 833 Ending cash 1,860 3,352 7,312 11,283 14,910
EPS (Rmb) 2.42 2.32 4.20 4.70 4.50 Pledged bank deposit 856 2,512 2,012 1,512 1,012
% change Y/Y 186.7 -4.3 81.2 12.1 -4.3
Balance sheet Ratio analysis
FY07 FY08 FY09E FY10E FY11E %, year-end December FY07 FY08 FY09E FY10E FY11E

Cash and cash equivalents 2,676 5,864 9,324 12,795 15,922 EBITDA margin 14.9 11.5 17.1 17.6 17.3
Accounts receivable 5,910 6,930 7,785 8,755 8,988 Operating margin 12.8 9.2 14.5 14.9 14.2
Inventories 4,200 5,851 6,135 6,882 7,136 Gross margin 24.2 17.4 22.2 22.4 21.6
Others 1,140 1,541 1,692 1,869 1,911
Current assets 13,925 20,185 24,935 30,300 33,957

LT investments 252 260 260 260 260 Sales growth 313.4 18.7 11.9 12.5 2.7
Net fixed assets 5,826 6,772 6,960 7,872 8,745 Net profit growth 186.7 -4.3 81.2 12.1 -4.3
Other LT assets 2,252 2,733 2,695 2,648 2,823 EPS growth 186.7 -4.3 81.2 12.1 -4.3
Total assets 22,256 29,950 34,850 41,080 45,785

Liabilities
ST loans 1,541 1,308 900 800 700
Payables 7,265 10,628 11,195 12,544 13,007
Others 3,826 5,862 5,306 5,680 5,807
Total current liabilities 12631 17799 17402 19025 19514
Long term debt 161 778 800 900 800
Other liabilities 65 47 0 0 0
Total liabilities 12857 18623 19502 21225 21614
Shareholders' equity 6383 7998 11144 14671 18047
Minority interest 3015 3329 4204 5184 6123
BVPS 7.66 9.60 13.38 17.61 21.66
Source: Company, J.P. Morgan estimates.

369
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adrian.mowat@jpmorgan.com

YTL Power Neutral


M$2.15
Price Target: M$2.10
www.ytlpower.com.my

Company description Malaysia


YTL Power (YTLP) is the third-largest IPP, owning and operating two plants Independent Power Producers
on a 21-year concession up to 2015. The group acquired 100% of Wessex Simone YeohAC
Water, UK, from Enron in 2002. In Mar-09, YTLP completed the acquisition (603)-2270-4710
of the Powerseraya power plant in Singapore for M$8.6 billion. simone.x.yeoh@jpmorgan.com

Post mortem JPMorgan Securities (Malaysia) Sdn. Bhd.


(18146-X)
YTLP has built a defensive/stable earnings profile given its investment focus
in regulated assets operated under long-term government concessions. Its Price performance
diversification into more regulated, developed markets has reduced its M$
exposure to Malaysia, where regulatory risk remains a concern. 2.5

Potential for earnings upgrades 2

Upside earnings surprise if any or value creation could come from potential 1.5

cut in O&M cost for Powerseraya, but this is much longer-term. A lower 1

10-08

01-09

04-09

07-09

10-09
proposed tariff hike of 0.1% over 2010-15E by the regulator for Wessex
should have little downside risk to our forecast, as we already assume no
Source: Bloomberg.
tariff increase over the same period. On the other hand, YTLP’s plans to
undertake WiMAX/broadband investments could pose a risk to earnings and Performance
dividends, if the capex (being finalized) is significant given the high upfront 1M 3M 12M
Absolute (%) -1.4 -1.4 23.6
cost here and long gestation period before earnings start to flow in. Relative (%) -4.3 -7.2 -9.8
Source: Bloomberg.
How much recovery is priced into the stock?
YTLP is trading above our PT and on higher P/E and EV/EBITDA multiples Company data
versus its domestic peers, and hence has priced-in potential from a recovery 52-wk range (M$) M$1.69-2.25
Mkt. cap (M$MM) 12842.38
in our view. Mkt. cap (US$MM) 3753.44
Liquidity (US$MM) 3.1
Price target and key risks Avg. daily volume (MM) 4.9
Our Jun-10 PT of M$2.10 is based on our sum-of-the-parts valuation—we Shares O/S (MM) 5973.2
value its power business using DCF, and for Wessex we take 1x regulatory Date of price 5-Nov-09
KLCI Index 1254.0
asset base value. YTLP’s net dividend yield of 7% over FY10-12E will Free float (%) 32.5
support its share price, in our view. A key risk to our PT is a scale back in Exchange rate 3.42
dividends from a much more aggressive roll-out/capex in Wimax. Source: Bloomberg.

Bloomberg: YTLP MK; Reuters: YTLP.KL


M$ in millions, year-end June
FY08 FY09 FY10E FY11E FY12E
Sales 4,242.5 6,102.0 10,783.2 11,081.9 11,387.2
Core net profit 1,038.8 1,068.3 1,129.8 1,228.7 1,330.2
Reported EPS 0.191 0.106 0.192 0.209 0.226
Core FD EPS (M$) 0.158 0.154 0.163 0.177 0.191
DPS (M$) 0.11 0.15 0.15 0.15 0.16
Sales growth (%) 4.3 43.8 76.7 2.8 2.8
Net profit growth (%) -11.6 2.8 5.8 8.8 8.3
EPS growth (%) -11.9 -2.3 5.6 8.6 8.1
ROE (%) 16.3 10.3 17.9 18.4 18.8
ROCE (%) 8.2 6.9 9.0 9.3 9.6
P/E (x) 13.6 14.0 13.1 12.1 11.2
P/BV (x) 1.8 2.1 2.0 1.9 1.8
EV/EBITDA (x) 7.4 10.6 8.0 7.7 7.3
Net div yield (%) 5.1 7.0 7.0 7.0 7.4
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009. We downgraded to UW on November 19.

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adrian.mowat@jpmorgan.com

YTL Power: Summary of financials


Profit and Loss statement Cash flow statem ent
M$ in millions, year-end June FY08A FY09 FY10E FY11E FY12E M$ in millions, year-end June FY08A FY09 FY10E FY11E FY12E

Revenues 4,243 6,102 10,783 11,082 11,387 EBIT 1,972 2,005 2,610 2,728 2,849
% change Y/Y 4.3 43.8 76.7 2.8 2.8 Depreciation & amortisation 605 601 785 792 800
Gross Margin (% ) 60.7 42.7 31.5 31.8 32.0 Change in working capital 87 267 447 29 29
EBITDA 2,576 2,606 3,395 3,520 3,649 Taxes -308 -315 -324 -352 -381
% change Y/Y 5.6 1.1 30.3 3.7 3.6 Cash flow from operations 2,355 2,558 3,518 3,197 3,297
EBITDA Margin (% ) 60.7 42.7 31.5 31.8 32.0
EBIT 1,972 2,005 2,610 2,728 2,849 Capex -1,646 -1,135 -1,156 -1,156 -1,156
% change Y/Y 6.5 1.7 30.2 4.5 4.4 Disposal/ (purchase) 0 -8,568 0 0 0
EBIT Margin (% ) 46.5 32.9 24.2 24.6 25.0 Net Interest -796 -878 -1,371 -1,364 -1,356
Net Interest (796) (878) (1,371) (1,364) (1,356) Free cash flow -86 -8,023 991 678 785
Earnings before tax 1,386 1,352 1,467 1,592 1,721
% change Y/Y 6.9 -2.4 8.4 8.6 8.1 Equity raised/ (repaid) -330 286 -222 -222 -222
Tax (347) (727) (337) (363) (390) Debt raised/ (repaid) -126 2,125 -126 -126 -126
as % of EBT 25.0 53.7 23.0 22.8 22.7 Other 4,495 3,066 379 378 373
Net Income (Reported) 1,039 626 1,130 1,229 1,330 Dividends paid -584 -884 -884 -884 -943
% change Y/Y -11.6 -39.8 80.5 8.8 8.3 Beginning cash 6,074 9,443 6,012 6,151 5,975
Shares Outstanding 5443 5894 5894 5894 5894 Ending cash 9,443 6,012 6,151 5,975 5,843
EPS (reported) - M$ 0.191 0.106 0.192 0.208 0.226 DPS - M$ 0.110 0.150 0.150 0.150 0.160
% change Y/Y -14.0 -44.4 80.5 8.8 8.3
Balance sheet Ratio Analysis
M$ in millions, year-end June FY08A FY09 FY10E FY11E FY12E % , year-end June FY08A FY09 FY10E FY11E FY12E

Cash and cash equivalents 9,443 6,012 6,151 5,975 5,843 EBITDA margin 60.7 42.7 31.5 31.8 32.0
Accounts receivable 1,011 2,353 4,158 4,274 4,391 Operating margin 60.7 42.7 31.5 31.8 32.0
Inventories 153 859 1,518 1,560 1,603 Net profit margin 24.5 10.3 10.5 11.1 11.7
Others 0 0 0 0 0 SG&A/sales n.a. n.a. n.a. n.a. n.a.
Current assets 10,607 9,224 11,827 11,808 11,837
Sales per share growth 1.5 32.8 76.7 2.8 2.8
LT investments Sales growth 4.3 43.8 76.7 2.8 2.8
Net fixed assets 17,176 25,491 26,089 26,681 27,265 Net profit growth (11.6) (39.8) 80.5 8.8 8.3
Total assets 27,783 34,715 37,916 38,489 39,101 EPS growth (14.0) (44.4) 80.5 8.8 8.3

Liabilities Interest coverage (x) -3.2 -3.0 -2.5 -2.6 -2.7


ST loans 3,706 2,527 2,527 2,527 2,527 Net debt to total capital (x) 0.3 0.5 0.4 0.4 0.4
Payables 1,065 2,300 4,065 4,178 4,293 Net debt to equity (x) 1.27 2.78 2.63 2.50 2.37
Others 144 175 1,447 1,644 1,835 Sales/assets (x) 0.2 0.2 0.3 0.3 0.3
Total current liabilities 4915 5002 8039 8349 8655 Assets/equity (x) 4.4 5.7 6.0 5.8 5.5
Long term debt 13827 20388 20262 20137 20011 ROE 16.3 10.3 17.9 18.4 18.8
Other liabilities 2659 3244 3288 3332 3376 ROCE 8.2 6.9 9.0 9.3 9.6
Total liabilities 21401 28634 31590 31818 32043 RO A 6.9 3.6 6.4 6.8 7.2
Shareholders' equity 6382 6081 6327 6671 7059
BVPS - M$ 1.173 1.032 1.073 1.132 1.198
Source: Company Reports and J.P.Morgan Estimates.
Sotp valuation
YTL Power
Sum-of-parts valuation M$MM Comments
Malaysian IPPs 4,720 Based on FY10E EV/EBITDA of 7.5x in line with fair value for Tanjong (4-10x for developing market peers).
Wessex 12,716 Based on RAB of M$2.2B pounds as at Mar-09 and based on current forex rate of M$5.80:1GBP
Associates & investments 2,025 Based on book value. Includes 33.5%-stake in Electra Net, Australia, and 35% stake in PT Jawa, Indonesia
Powerseraya 11,287 Assuming IRR of 10% versus WACC of 7% over concession period up to 2032.
Cash proceeds from full warrant conversion 2,601 Outstanding 846MM warrants at ex-price of M$1.17 due Jan-10 and 1331MM at ex-price of M$1.21 due Jun-18.
Net (debt)/cash (16,950) FY09E net debt post acquisition of Powerseraya
Reduction in debt from conversion of US$184MM exchangeable bonds into shares upon maturity in May-10 at
Reduction in debt 701 conversion price of M$2.01/share
Option value of cash proceeds from warrant conversion assuming reinvested at IRR of 12% versus WACC of 10%
Others $205 over 10-years.
Total value 17,305
FD no of shares 8,415 Upon full conversion of outstanding warrants and exchangeable bonds.
Value per share 2.10
Source: J.P. Morgan estimates.

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Emerging Markets Strategy Dashboards

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Emerging Markets Strategy Dashboards


Summary: Regional and Countries Valuations
P/E (x) Div. Yield (%) P/BV (x) Earnings growth (%) ROE (%)
30-Nov-09 Hist.^ P/ EPS Current 12m Prospective Hist.^ Current Prospective Hist.^ Current Prospective
MSCI Trough (Trend) Trailing Fwd 2008E 2009E 2010E Peak Trailing 2008E 2009E Trough Trailing 2008 2009E 2007 2008 2009E 2010E 2007 2008 2009E
Global* 308 9.7 13.4 16.0 13.8 13.5 16.3 13.6 4.2 2.6 3.0 2.6 1.3 1.8 1.8 1.8 6.1 -26.8 -17.3 19.8 18.0 13.2 11.2
USA 1,041 11.6 11.8 26.3 14.9 17.5 17.9 14.8 4.0 2.0 2.9 2.1 1.4 2.1 1.7 2.1 3.0 -18.3 -11.8 20.9 16.7 13.2 11.6
Europe* 1,073 7.0 12.2 17.4 12.7 12.6 15.5 12.5 6.1 3.5 5.4 3.5 1.1 1.7 1.3 1.6 5.6 -22.2 -22.2 22.5 22.0 16.9 13.1
Japan* 522 11.5 23.3 NM 19.7 12.0 NM 31.8 3.0 1.3 2.8 2.0 0.9 1.2 1.0 1.1 -1.5 -17.8 NM NM 9.9 8.2 0.0
Emerging Markets* 41,455 9.3 13.7 15.7 12.9 15.1 15.8 12.7 3.5 2.2 2.1 2.2 1.0 2.0 2.0 2.0 22.1 -17.8 -4.0 24.0 16.4 12.9 12.9
EMF Asia 587 10.3 16.8 17.1 13.9 18.6 17.0 13.7 3.3 2.0 1.9 2.0 1.0 2.2 2.4 2.2 21.7 -30.9 9.4 24.0 17.3 12.0 13.2
EMF LatAm* 7,258,665 8.6 15.0 17.0 14.1 15.7 17.1 13.8 5.4 2.6 3.5 2.6 0.6 2.4 1.3 2.5 18.1 -11.0 -7.9 23.5 16.9 9.8 9.9
EMF EMEA* 361 7.1 8.6 12.8 10.5 10.4 13.1 10.3 5.1 2.4 3.6 2.3 1.1 1.6 1.7 1.6 25.6 -0.2 -20.7 26.7 16.1 15.5 12.6
China 64 7.2 12.2 17.5 14.4 18.9 17.4 14.2 5.7 2.2 2.1 2.2 0.5 2.5 2.8 2.4 31.2 -12.7 9.0 22.1 19.2 15.0 14.9
Brazil* 239,832 6.5 8.5 16.4 13.5 14.7 16.6 13.3 7.6 2.7 3.0 2.7 0.4 2.4 2.4 2.4 19.5 -9.9 -11.4 24.9 22.9 17.4 14.5
Korea 443 7.7 10.8 14.4 11.7 20.3 14.0 11.5 2.9 1.1 1.1 1.1 0.5 1.5 1.6 1.4 9.8 -36.7 44.8 21.9 13.1 7.9 10.7
Taiwan 274 11.7 13.8 30.4 20.0 33.6 30.1 19.4 6.3 3.1 3.7 3.0 1.2 2.0 2.0 2.0 28.2 -68.7 11.5 55.4 17.0 5.5 6.6
South Africa* 680 9.1 10.4 14.7 11.8 12.9 14.9 11.6 4.7 2.8 3.5 2.8 1.4 2.2 2.2 2.2 21.5 8.2 -13.4 28.7 18.0 17.5 14.9
India 683 10.4 20.8 18.2 14.8 18.9 18.2 14.6 2.5 1.1 1.1 1.1 1.8 2.8 3.1 2.7 18.6 -1.1 3.7 24.7 23.1 17.5 16.0
Russia* 701 4.0 3.8 10.9 8.8 7.6 11.3 8.6 3.2 1.3 0.7 1.3 0.2 1.2 1.2 1.2 30.8 -3.6 -33.5 32.3 15.4 15.4 10.7
Mexico* 29,035 9.0 10.9 18.3 15.1 19.7 18.1 14.9 3.4 2.3 2.0 2.3 0.7 2.6 1.1 2.7 12.4 -27.2 8.9 21.6 25.0 8.3 8.7
Israel* 332 10.9 15.6 12.0 10.2 14.4 11.8 10.1 6.9 5.6 4.8 5.7 1.0 1.3 1.5 1.3 17.0 -6.1 22.0 16.9 12.4 10.6 11.4
Malaysia 465 12.0 16.8 18.0 15.8 18.0 18.0 15.7 5.1 2.8 3.0 2.7 0.6 2.0 2.0 2.0 44.3 -14.1 0.1 15.2 14.4 11.5 11.1
Chile* 4,057 11.4 21.4 16.6 15.1 14.6 16.8 14.9 8.9 1.7 2.3 1.6 0.9 1.5 1.5 1.5 15.4 44.0 -13.2 12.7 10.5 12.5 9.2
Indonesia 3,446 5.3 15.4 15.7 14.3 16.6 15.6 14.2 5.9 2.8 2.7 2.8 0.9 3.7 4.2 3.7 61.4 -1.4 6.8 9.6 27.8 27.1 25.3
Turkey* 662,862 5.1 5.3 9.8 8.8 10.3 9.7 8.8 4.0 2.9 3.9 2.8 1.4 1.6 1.8 1.6 56.9 -11.2 6.4 10.8 18.1 16.5 17.7
Thailand 280 8.2 5.6 12.5 11.2 15.7 12.2 11.1 6.0 3.4 3.6 3.4 0.6 1.7 1.8 1.7 -37.3 56.6 28.6 10.1 7.5 11.7 14.3
Poland* 1,624 6.9 12.0 16.0 14.8 11.0 16.8 14.6 7.2 3.5 5.1 3.3 1.0 1.6 1.7 1.6 16.4 -10.0 -34.4 14.6 16.4 14.6 9.8
Czech Republic* 358 7.3 7.4 10.5 10.6 10.4 10.5 10.6 10.0 6.4 6.0 6.4 0.5 2.2 2.5 2.2 37.4 19.7 -1.4 -1.2 17.3 21.5 22.0
Egypt* 1,179 5.9 5.4 12.0 9.6 9.1 12.4 9.4 30.8 5.1 22.3 3.5 1.0 2.0 2.5 2.0 21.2 4.9 -26.6 31.6 14.1 13.6 18.0
Philippines 595 7.9 21.1 17.2 15.4 21.1 17.0 15.3 5.4 3.8 3.4 3.8 0.9 2.5 2.6 2.4 8.3 -16.0 24.6 11.2 13.9 12.2 14.8
Hungary* 1,213 3.7 5.5 11.8 11.0 7.4 12.5 10.9 5.0 1.9 2.7 1.8 0.6 1.4 1.6 1.4 -13.4 14.9 -41.1 14.9 20.1 22.2 11.8
Source: I/B/E/S, MSCI, J.P. Morgan. Updated 30 November 2009.
* Market forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using I/B/E/S estimates. IBES Estimates are not available for Morocco, Jordan, Peru and Colombia.
For all other markets, forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using JPM estimates for covered stocks and I/B/E/S estimates for the rest.
Hist.^ refers to the historically lowest valuation of the MSCI indices since Jan 1991. Trough PE represents the lowest 12 month trailing PE. For dividend yield the highest values are taken to represent the best multiple.
P / EPS (Trend) uses the trend EPS for the indices calculated by the linear regression on the natural log of trailing EPS. For more, please refer to 'Mayday call for the shorts - Perspectives and Portfolios', 5 May 2009, Mowat et al.
P / EPE (Trend)' is NM for indices where the modeled relationship is weak with a less than 0.50 R-square. The start dates China and Singapore models are modified to make them more relevant. Sector indices inputs have not been altered.

374
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Market Performance: MSCI AC Performance by Regions, Countries and Sectors

North America

Philippines
EMF Latin

Indonesia
EMF Asia

EMF Asia

Malaysia

Thailand
America
Europe

Taiwan
Global

Japan

EMEA

Korea

China

India
EMF
2009 Year to Date

Consumer Discretionary 35.8% 34.3% 30.2% 21.0% 99.1% 111% 81.8% 25.5% 111.9% 86.7% 98.7% 139.1% 160.2% 42.0% 9.6% 206.6% 31.3%
Consumer Staples 19.8% 12.1% 28.5% -14.5% 58.3% 48.2% 75.2% 89.9% 48.2% 5.3% 28.0% 95.1% 32.7% 49.5% 69.1% 97.4%
Energy 28.4% 19.9% 29.5% -12.2% 80.3% 68.9% 122% 70.9% 68.9% 22.7% 23.7% 69.6% 72.0% 18.6% 43.2% 153.1%
Financials 34.3% 20.4% 43.8% -15.7% 73.1% 68.5% 108% 88.4% 68.5% 53.6% 41.1% 72.3% 79.1% 64.3% 77.9% 58.3% 49.3%
Healthcare 14.6% 15.6% 15.6% -11.5% 33.6% 46.1% 27.4% 46.1% 0.0% 63.4%
Industrials 23.6% 18.3% 33.8% 5.2% 48.2% 45.6% 73.3% 65.2% 45.6% 16.6% 36.4% 46.0% 105.3% 46.9% 239.8% 48.3%
Information Technology 47.2% 51.4% 15.1% 7.2% 85.8% 88.3% 35.5% 53.9% 88.3% 67.2% 74.7% 198.5% 110.3%
Materials 62.2% 47.4% 69.6% 9.7% 97.2% 85.3% 124% 126% 85.3% 65.2% 51.3% 81.7% 190.5% 56.1% 109.7% 98.7%
Telecoms 10.5% 1.6% 17.9% -16.1% 20.9% 1.3% 51.7% 43.3% 1.3% -14.6% 6.0% -3.3% -27.1% 18.3% -0.1% 29.2% 21.9%
Utilities 2.7% 1.0% 5.1% -21.3% 44.5% 33.0% 54.6% 52.4% 33.0% 4.5% 0.2% 48.8% 16.3% 1.1% 96.2% 226.0%
Region / Country 29.0% 23.8% 30.9% -1.4% 68.1% 62.9% 95.1% 66.5% 62.9% 44.4% 59.8% 58.1% 85.0% 44.7% 51.4% 81.4% 54.9%
Benchmark
Change vs dollar 4.6% 11.5% 1.9% 0.0% 5.4% 2.5% 4.8% 17.6% 1.4%

Czech Republic
South Africa
EMF Latin

Argentina

Colombia

Morocco
Hungary
America

Mexico

Poland
Russia

Turkey
EMEA

Egypt
Brazil

Israel
Chile

Peru
2009 Year to Date

Consumer Discretionary 81.8% 117.1% 22.9% 48.5% 25.5% 50.4% 66.7% 1.6%
Consumer Staples 75.2% 61.7% 39.4% 25.6% 89.9% 10.8% 188.5% 68.6%
Energy 122.8% 72.3% -5.2% 25.2% 70.9% 3.8% 66.2% 60.5% 22.5% 62.0%
Financials 108.5% 65.9% 56.8% 42.9% 157.9% 29.5% 61.6% 88.4% 13.9% 174.1% 93.9% 77.7% 32.2% 89.6% 27.9% 47.9% -13.6%
Healthcare 27.4% 73.5% 75.4% 25.3% 49.3%
Industrials 73.3% 33.0% 53.1% 43.0% 65.2% 11.5% 97.7% 65.7% 5.4% 42.0% -7.1%
Information Technology 35.5% 2.1% 53.9% 58.7% 21.3%
Materials 124.9% 79.7% 78.0% 59.1% 82.7% 77.0% 126.3% 21.3% 132.1% 92.5% 34.7% 283.4% 9.9%
Telecoms 51.7% 43.6% 31.0% -0.6% 121.5% 43.3% 7.9% 77.1% 31.1% 11.5% -16.0% 35.9% -1.1% -4.3% -12.5%
Utilities 54.6% 19.8% 11.3% 61.2% 52.4% 10.9%
Region / Country 95.1% 64.6% 39.1% 30.7% 70.8% 66.4% 52.7% 66.5% 17.5% 88.1% 43.2% 59.0% 31.5% 68.0% 13.6% 23.0% -12.7%
Benchmark
Change vs dollar 32.8% 8.0% 28.5% -9.4% 8.9% 12.3% 28.0% 4.9% 0.4% 1.8% 8.7% 5.4% 11.3% 0.7% 14.1%
Source: Bloomberg, MSCI. 30 November 2009.
Notes: Regional headings first sorted by regional weights in the MSCI EMF and then country headings from left to right by relative weights within the MSCI EMF
Indices: Regions in US$ and countries in local currency. Local currency movements against the dollar: appreciation / (depreciation).
Country and sector cross sections in italic blue have outperformed their indices by more than 2%; numbers in red have underperformed their indices by more than 2%.

375
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
Outlook: Market Drivers
Global and developed market drivers
Country Positive Negative
Global Compression in risk premiums, synchronized recovery trade (positive GDP and earnings revisions) and Fear of the Fade; risk of fiscal drag as governments attempt to reduce fiscal deficits (note global
record low interest rates weighted deficit is 7% in 2009), fragile consumer
US Three drivers of growth; inventory/IP cycle, profit cycle resulting in less business retrenchment and 2009 fiscal deficit of 10%, fragile consumer (high debt levels and unemployment)
delayed monetary stimulus
Europe Economic recovery ahead of expectations Strong Euro, fear of post stimulus fade in demand
UK Faster recovery in financial markets, firm commodity and energy prices Fiscal deficit, disappointing economic data
Japan Leveraged to global industrial production cycle, Strong Yen
Australia Avoided the recession, fiscal flexibility, leveraged to contracting credit spreads Strong currency, high household leverage
Hong Kong Record low mortgage rates, Leveraged to a recovery in global trade and financial services Asset inflation story is consensus
Singapore Leveraged to a recovery in global trade and financial servics Asset inflation story is consensus
Emerging Market Drivers
Country Positive Negative
China Pro-consumption policies to continue with low inflation Policy confusion or risk between pro-consumption yet anti-asset inflation policy

Brazil Macro recovery on track, Rates and currency supportive, Monetary Policy Flexibility, On/Off Balance Commodity Driven Market, Valuation less attractive, 2010 elections, risk that pre salt-oil development will
sheet fiscal expansion, Closed economy and large state, resilient consumption. dilute minority shareholders
Korea Global cyclical exposure, scope for further currency appreciation, large consensus underweight, low Structurally weak domestic economy, high private sector debt, high valuations of exporters
interest rates, front loaded fiscal spending in 1H09, tax cuts (including property, income and corporate
tax)
Taiwan Global cyclical exposure, Fiscal stimulus, corporate tax cuts, realizing closer cross-straits links, SME exposure of banks and legacy negative spread books of insurers
investment positioning (consensus UW position among FIs), low earnings expectations
South Africa SA under owned by foreigners, Huge domestic investor cash holdings, high beta rand exposure Low beta play
India Low interest rates and inflation positive for urban consumption and investment Below average monsoon forecast, rising fiscal deficit

Russia Oil price recovery, fixed investment growth, levergaed to contracting risk premium Political risk, cost and wage growth, valuation discount versus MSCI EM is narrowing

Mexico Fiscal reform, Leveraged to US Recovery, lagging MXN, Counter cyclical fiscal policy, poor investment Medium term fiscal financing, Foreign owned banking system.
sentiment, resilient corporate profitability.
Malaysia Political resolution, Strong domestic demand, GLC reforms, Government pump-priming under 9MP, Low beta play, high valuations
greater than expected fiscal stimulus package
Indonesia Recovering currency, declining inflation, improving liquidity, relatively resilient economy, improving terms Consensus OW, need to encourage long term investment
of trade
Turkey Robust banking sector, inexpensive valuations, lower political tensions, secular decline in interest rates, Delay in IMF agreement due to domestic politics
potential for stand by agreement with the IMF
Thailand Benefits from favorable terms of trade, fiscal stimulus and low interest rates Politics, uncertainty on macro economic policy, domestic demand lagging improvement elsewhere,
consensus OW market
Poland Domestic demand, market-friendly political setting Wage and margin pressures, loss of momentum in manufacturing, local mutual fund redemptions
Czech Republic Diversified growth, low interest rates, reformed banking sector CDS spread narrowing relatively less than other emerging markets

Philippines Fiscal consolidation, investment cycle upturn, lower food and oil prices, consensus UW Global risks to affect risk appetite on emerging economies, low liquidity

Hungary IMF support, low possibility of entering the Euro zone by 1 Jan 2012 target date High exposure to FX-denominated loans by households, poor growth prospects
Updated as of 30 November 2009.

376
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
Profit Outlook: Earnings Forecasts Matrix for Countries and Sectors
Weight EPS Growth Weight EPS Growth Weight EPS Growth
Emerging Markets (%) JPMorgan Consensus China (%) J.P. Morgan Consensus India (%) JPMorgan Consensus
Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010
Total Market 100.0 - - - 5.8 -4.0 24.0 Total Market 100.0 16.2 9.0 22.1 16.2 14.3 21.1 Total Market 100 11.9 3.7 24.7 12.2 8.6 21.6
Consumer Discretionary 5.2 - - - 14.2 35.3 15.5 Consumer Discretionary 4.7 17.0 12.3 15.7 17.2 16.0 16.6 Consumer Discretionary 4.8 39.9 42.4 24.0 56.0 46.7 19.7
Consumer Staples 5.4 - - - 21.4 26.5 17.4 Consumer Staples 4.2 28.5 51.8 18.2 21.5 45.0 17.7 Consumer Staples 5.8 15.3 8.5 15.7 16.3 9.0 15.9
Energy 15.6 - - - -4.0 -16.4 18.2 Energy 17.9 -8.7 -10.6 17.7 -6.8 -3.3 22.0 Energy 17.0 9.0 5.8 40.9 39.0 12.7 27.6
Financials 24.9 - - - 5.8 -0.1 26.5 Financials 39.2 17.6 18.4 28.8 17.2 21.3 22.3 Financials 25.1 4.7 -1.7 21.2 15.4 6.2 17.5
Health Care 2.1 - - - 17.6 11.4 32.6 Health Care 0.2 27.3 27.3 33.4 27.3 27.3 33.4 Health Care 3.6 8.4 41.1 17.3 -5.3 199.2 42.9
Industrials 6.6 - - - 6.0 -2.1 22.8 Industrials 8.5 8.9 55.5 29.3 4.7 43.7 36.3 Industrials 8.9 24.5 25.7 27.2 12.2 48.4 70.1
Information Technology 12.9 - - - 4.9 14.0 35.9 Information Technology 5.4 42.0 58.3 43.9 41.9 53.1 46.1 Information Technology 15.9 9.2 2.3 16.2 5.9 1.0 10.8
Materials 14.9 - - - -8.7 -29.9 42.3 Materials 5.6 18.6 47.4 64.7 23.9 50.6 69.3 Materials 11.3 6.5 -11.5 17.9 12.6 -4.9 25.1
Telecommunication Services 9.0 - - - -2.8 -0.7 10.0 Telecommunication Services 12.9 -12.2 -13.8 -0.3 -13.9 -4.4 1.4 Telecommunication Services 1.3 -0.8 -2.2 -0.6 -21.3 -23.8 -11.1
Utilities 3.5 - - - 6.0 15.1 10.9 Utilities 1.4 NM NM NM NM NM NM Utilities 6.4 11.2 9.1 7.6 6.9 9.5 12.3
Weight EPS Growth Weight EPS Growth Weight EPS Growth
Indonesia (%) JPMorgan Consensus Korea (%) JPMorgan Consensus Malaysia (%) JPMorgan Consensus
Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010
Total Market 100.0 1.7 6.8 9.6 14.9 3.3 14.3 Total Market 100.0 23.2 44.8 21.9 27.3 51.9 33.7 Total Market 100.0 0.1 0.1 15.2 -5.4 -17.8 18.7
Consumer Discretionary 12.8 -21.9 -21.9 22.3 -3.3 -3.3 17.7 Consumer Discretionary 11.1 20.5 56.3 10.0 28.5 103.6 5.1 Consumer Discretionary 12.7 12.0 43.6 11.5 -10.3 -17.2 21.6
Consumer Staples 7.7 9.9 12.5 22.9 19.0 7.4 21.1 Consumer Staples 5.3 2.6 10.8 1.2 30.8 11.4 6.9 Consumer Staples 15.4 -5.1 -7.2 9.4 -13.7 -10.5 7.8
Energy 10.7 43.1 9.4 -47.8 17.6 -27.5 -18.2 Energy 2.4 95.4 71.8 -4.8 9.8 38.4 8.2 Energy 0.8 16.0 16.0 8.7 16.0 16.0 8.7
Financials 29.4 1.7 2.5 49.9 14.9 16.2 22.0 Financials 18.1 3.4 -27.3 37.8 2.4 -16.2 54.1 Financials 31.6 -0.8 -5.7 7.4 -2.7 -14.5 15.0
Health Care 0.0 NA NA NA NA NA NA Health Care 0.5 85.0 12.0 23.9 85.0 12.0 23.9 Health Care 0.0 NA NA NA NA NA NA
Industrials 4.3 24.7 24.7 5.5 25.6 25.6 4.6 Industrials 14.6 23.9 55.4 13.6 35.3 13.6 49.0 Industrials 19.8 0.3 -10.4 30.6 -6.6 -28.6 27.6
Information Technology 0.0 NA NA NA NA NA NA Information Technology 28.2 250.1 NM 27.8 256.6 976.1 52.8 Information Technology 0.0 NA NA NA NA NA NA
Materials 8.0 -26.9 -30.4 23.1 -16.2 -13.6 33.5 Materials 14.4 31.5 -11.5 19.4 31.5 1.1 12.1 Materials 0.7 0.2 0.2 9.9 0.2 0.2 9.9
Telecommunication Services 18.7 -5.4 -5.3 8.9 3.1 10.5 13.5 Telecommunication Services 3.2 35.3 36.4 17.5 30.7 27.4 18.5 Telecommunication Services 6.6 90.4 48.5 2.7 -11.0 -9.2 8.1
Utilities 8.4 870.0 870.0 -5.6 44.2 44.2 22.8 Utilities 2.1 8.2 NM NM -1.7 NM NM Utilities 12.3 -0.4 -12.4 33.4 -4.3 -25.5 34.0

Weight EPS Growth Weight EPS Growth Weight EPS Growth


Philippines (%) JPMorgan Consensus Taiwan (%) JPMorgan Consensus Thailand (%) JPMorgan Consensus
Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010
Total Market 100.0 19.7 24.6 11.2 9.7 19.0 15.1 Total Market 100.0 -2.6 11.5 55.4 5.7 46.4 62.8 Total Market 100.0 -0.8 28.6 10.1 -3.2 19.8 14.8
Consumer Discretionary 3.6 22.3 22.3 10.9 8.8 8.8 24.2 Consumer Discretionary 2.6 122.2 -121.9 715.2 284.0 -247.3 NM Consumer Discretionary 1.7 -7.4 -7.4 1.1 -6.6 -6.6 10.7
Consumer Staples 0.0 NA NA NA NA NA NA Consumer Staples 1.5 48.5 55.5 14.2 51.2 59.7 12.2 Consumer Staples 3.8 9.9 9.9 20.0 40.8 40.8 15.4
Energy 0.0 NA NA NA NA NA NA Energy 0.9 86.0 86.0 -17.3 125.5 125.5 -11.5 Energy 41.2 27.1 104.4 9.1 34.9 88.8 14.7
Financials 42.9 6.7 12.1 13.3 7.1 3.9 13.7 Financials 15.6 20.6 1287.9 49.6 20.6 2163.8 41.0 Financials 36.2 -4.1 -3.5 10.2 -10.0 -10.7 17.6
Health Care 0.0 NA NA NA NA NA NA Health Care 0.0 NA NA NA NA NA NA Health Care 0.0 NA NA NA NA NA NA
Industrials 9.2 7.2 7.2 13.6 7.0 7.0 13.0 Industrials 3.4 -31.6 -292.9 154.1 -25.6 -96.5 -2141.1 Industrials 0.0 NA NA NA NA NA NA
Information Technology 0.0 NA NA NA NA NA NA Information Technology 59.6 -5.6 -9.4 72.3 2.6 20.4 80.2 Information Technology 0.0 NA NA NA NA NA NA
Materials 0.0 NA NA NA NA NA NA Materials 12.2 -9.4 -17.2 27.2 11.5 4.3 35.6 Materials 7.6 -15.3 -8.8 26.7 -16.1 -7.3 16.4
Telecommunication Services 24.3 20.5 18.7 2.7 11.6 11.1 5.4 Telecommunication Services 4.2 -11.0 -3.0 4.8 -7.2 -9.2 8.8 Telecommunication Services 7.1 -11.1 1.1 -1.1 -20.3 -13.5 2.6
Utilities 20.0 241.3 197.0 27.0 262.7 226.9 42.0 Utilities 0.0 NA NA NA NA NA NA Utilities 2.4 -3.0 -2.7 12.3 3.7 2.7 7.6

Weight EPS Growth Weight EPS Growth Weight EPS Growth


South Africa (%) JPMorgan Consensus Brazil (%) JPMorgan Consensus Mexico (%) JPMorgan Consensus
Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010
Total Market 100.0 - - - -6.6 -13.4 28.7 Total Market 100.0 - - - 3.0 -11.4 24.9 Total Market 100.0 - - - 5.2 8.9 21.6
Consumer Discretionary 11.8 - - - 6.5 10.7 22.4 Consumer Discretionary 2.4 - - - 29.7 111.0 43.4 Consumer Discretionary 11.2 - - - -2.7 -15.2 29.2
Consumer Staples 4.9 - - - 10.9 10.2 12.9 Consumer Staples 7.1 - - - 103.1 111.2 29.4 Consumer Staples 21.7 - - - 29.4 22.7 23.7
Energy 10.5 - - - -18.1 -18.1 27.6 Energy 27.0 - - - -22.5 -22.0 16.2 Energy 0.0 - - - NA NA NA
Financials 26.0 - - - -14.7 -13.7 20.8 Financials 22.0 - - - -3.1 6.5 23.9 Financials 5.3 - - - 21.3 -7.5 20.7
Health Care 1.6 - - - 41.1 41.2 24.6 Health Care 0.0 - - - NA NA NA Health Care 0.0 - - - NA NA NA
Industrials 4.8 - - - -2.4 -1.1 12.2 Industrials 2.0 - - - 55.7 41.8 -18.2 Industrials 4.7 - - - 3.8 61.8 31.2
Information Technology 0.0 - - - NA NA NA Information Technology 2.1 - - - 10.9 10.8 14.3 Information Technology 0.0 - - - NA NA NA
Materials 27.5 - - - -35.5 -45.1 93.0 Materials 28.2 - - - -55.4 -40.4 48.1 Materials 16.0 - - - -38.7 -47.7 136.2
Telecommunication Services 12.9 - - - -15.6 1.6 16.4 Telecommunication Services 4.0 - - - -2.2 -7.3 50.8 Telecommunication Services 41.0 - - - 8.4 23.5 6.6
Utilities 0.0 - - - NA NA NA Utilities 5.2 - - - -3.5 -6.3 1.0 Utilities 0.0 - - - NA NA NA
Weight EPS Growth Weight EPS Growth Weight EPS Growth
Russia (%) JPMorgan Consensus Poland (%) JPMorgan Consensus Turkey (%) JPMorgan Consensus
Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010 Median 2009 2010
Total Market 100.0 - - - -21.9 -33.5 32.3 Total Market 100.0 - - - -30.0 -34.4 14.6 Total Market 100.0 - - - 10.2 6.4 10.8
Consumer Discretionary 0.0 - - - NA NA NA Consumer Discretionary 2.6 - - - -20.8 -22.6 14.0 Consumer Discretionary 1.0 - - - 2.8 2.8 25.5
Consumer Staples 0.7 - - - -0.8 -0.8 48.6 Consumer Staples 0.0 - - - NA NA NA Consumer Staples 9.8 - - - 72.6 49.6 24.7
Energy 60.2 - - - -31.2 -23.7 15.5 Energy 14.1 - - - -21.3 -43.4 42.9 Energy 5.1 - - - 63.5 63.5 16.1
Financials 11.9 - - - -94.8 NM NM Financials 57.0 - - - -37.1 -41.2 17.8 Financials 57.4 - - - 10.4 23.0 5.3
Health Care 0.7 - - - NA NA NA Health Care 0.0 - - - NA NA NA Health Care 0.0 - - - NA NA NA
Industrials 0.0 - - - NA NA NA Industrials 1.8 - - - 26.6 26.6 13.7 Industrials 7.5 - - - -32.7 -34.3 25.7
Information Technology 0.0 - - - NA NA NA Information Technology 3.0 - - - -8.2 -8.2 -0.4 Information Technology 0.0 - - - NA NA NA
Materials 13.4 - - - 5.5 -82.6 206.8 Materials 11.7 - - - -14.2 -14.2 -4.7 Materials 3.6 - - - NA -89.4 498.6
Telecommunication Services 9.4 - - - 24.2 2.7 35.8 Telecommunication Services 9.8 - - - -36.9 -36.9 10.2 Telecommunication Services 15.6 - - - -13.7 -19.9 9.0
Utilities 3.7 - - - 50 NM NM Utilities 0.0 - - - NA NA NA Utilities 0.0 - - - NA NA NA

Source: I/B/E/S, MSCI, J.P. Morgan. Note: Average earnings growth calculated based on earnings aggregate of MSCI constituents. Consensus numbers are used for stocks not covered by J.P. Morgan under J.P. Morgan forecasts calculation. Median numbers are for
the year 2009. Updated as of 30 November 2009.

377
Adrian Mowat Emerging Markets Equity Research
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Profit Outlook: Changes in 2009 and 2010 EPS Forecasts
World Emerging Markets (EM) EM Asia EM Europe
120 120 120 130
2010
110 110 120 2010
110 2010
100 100 2010 110
100
90 90 100
2009 90
80 2009 90
80
70 80 80 2009
70 2009
60 70 70
60
50 60 60
50
40 50 50
40 40
30 40
Feb-08 Sep-08 Apr-09 Nov-09 Feb-08 Sep-08 Apr-09 Nov-09
Feb-08 Sep-08 Apr-09 Nov-09 Feb-08 Sep-08 Apr-09 Nov-09

EM Latin America Korea Taiwan China


130 130 110 120
120 120 2010 100
2010 110 2010
110 110 90 2010
100 100 80 100
2009
90 90 70 2009
60
90
80 80 2009
50 2009
70 70 80
60 60 40
30 70
50 50
20
40 40 60
10
Feb-08 Sep-08 Apr-09 Nov-09 Feb-08 Sep-08 Apr-09 Nov-09 Feb-08 Sep-08 Apr-09 Nov-09
Feb-08 Sep-08 Apr-09 Nov-09

Brazil Russia South Africa Mexico


130 140 130 110
2010 2010
120 2010 130 2010 120
120 100
110
110 110
100 90
100 100
90 2009 2009
90 2009
80 90 80
80 2009
70 70 80
70
60 60 70
50 50 60
60
40
Feb-08 Sep-08 Apr-09 Nov-09 Feb-08 Sep-08 Apr-09 Nov-09
Feb-08 Sep-08 Apr-09 Nov-09
Feb-08 Sep-08 Apr-09 Nov-09

Source: I/B/E/S
Notes: The dashboard aims to show changes in earnings expectations. All year ends are for December. EPS figures are normalized, starting at 100 on base date Feb 2008 for ease of comparison. These numbers are directly from IBES aggregate and may differ from
those in the growth expectations pages where adjustments are made for exceptional items. Countries earnings revisions are in local currencies term whereas APxJ regions earnings revisions is in US $ term. Updated 30 November 2009.

378
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Profit Outlook: Changes in 2009 and 2010 EPS Forecasts


India Malaysia Israel Poland
130 110 180 110
2010 160 2010 100
120 100
110 140 90 2010
2010 90
100 120 80
2009 2009
80 100 70
90
80 70 80 60
2009 2009
60 50
70 60
Feb-08 Sep-08 Apr-09 Nov-09 40
60 Feb-08 Sep-08 Apr-09 Nov-09
Feb-08 Sep-08 Apr-09 Nov-09
Feb-08 Sep-08 Apr-09 Nov-09

Chile Turkey Thailand Indonesia


130 120 120 130
2010
120 110 110 120
2010
110 100 2010 110
100 2010
100 90 100
90
90 80 90 2009
2009 2009
80 70 80 80
2009 70
70 60 70
60 50 60
60
Feb-08 Sep-08 Apr-09 Nov-09 Feb-08 Sep-08 Apr-09 Nov-09 Feb-08 Sep-08 Apr-09 Nov-09
Feb-08 Sep-08 Apr-09 Nov-09

Hungary Czech. Republic Philippines


120 130 110
2010 2010
110
120 2010 100
100

90 110 90
2009
80 80
100
2009
70
90 2009 70
60
50 80 60
Feb-08 Sep-08 Apr-09 Nov-09 Feb-08 Sep-08 Apr-09 Nov-09 Feb-08 Sep-08 Apr-09 Nov-09

Source:I/B/E/S Notes: The dashboard aims to show changes in earnings expectations. All year ends are for December. EPS figures are normalized, starting at 100 on base date Feb 2008 for ease of comparison. These numbers are directly from IBES aggregate and
may differ from those in the growth expectations pages where adjustments are made for exceptional items. Countries earnings revisions are in local currencies term whereas APxJ regions earnings revisions is in US $ term. Updated 30 November 2009

379
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Value: PE Matrix for Countries and Sectors

EMF LATAM

Philippines
EMF EMEA

Indonesia
Emerging

EMF Asia

Malaysia

Thailand
Markets

Taiwan
Korea

China

India
USA
12-month forward PE

Consumer Discretionary 15.9 12.9 12.3 16.3 12.7 9.7 NM 19.2 18.8 17.1 15.4 16.9 17.7
Consumer Staples 14.0 16.4 12.0 17.3 15.9 14.3 19.1 16.4 24.0 16.7 18.1 19.4 NA
Energy 13.7 10.1 7.4 13.3 11.8 8.2 32.4 13.3 7.6 11.8 14.9 9.9 NA
Financials 13.7 13.6 11.2 13.1 14.5 12.1 19.8 13.5 20.7 16.2 11.9 12.0 19.0
Health Care 11.7 13.3 12.4 NA 20.2 14.9 NA 29.6 21.0 NA NA NA NA
Industrials 15.9 13.8 10.0 18.2 13.9 10.0 29.3 17.3 24.8 16.5 12.9 NA 11.3
Information Technology 15.7 14.0 14.8 12.3 15.8 15.2 20.3 28.7 18.9 NA NA NA NA
Materials 18.3 14.4 16.2 16.0 12.8 10.8 22.1 17.4 13.0 13.1 21.0 11.8 NA
Telecommunication Services 13.3 11.9 10.6 12.7 12.6 8.6 12.4 12.5 7.1 13.3 15.7 12.7 10.9
Utilities 11.8 12.1 13.9 10.3 14.8 NM NA 12.6 18.5 14.2 14.7 9.5 20.5
Market Aggregate 14.9 12.9 10.5 14.1 13.9 11.7 20.0 14.4 14.8 15.8 14.3 11.2 15.4
Sector Neutral** 14.6 13.0 11.3 13.8 13.7 10.8 20.9 15.7 13.5 14.3 14.5 12.3 14.0
South Africa

EMF LATAM
EMF EMEA

Republic
Hungary

Mexico
Poland
Russia

Turkey

Czech

Brazil
Israel

Chile
12-month forward PE

Consumer Discretionary 12.3 NA 12.3 NA 14.0 8.6 NA NA 16.3 16.0 16.1 21.7
Consumer Staples 12.0 6.3 12.5 NA NA 15.4 NA NA 17.3 16.6 18.4 16.2
Energy 7.4 6.9 9.6 NA 12.7 7.9 10.1 NA 13.3 13.2 NA NA
Financials 11.2 NM 9.9 10.3 18.1 7.9 10.9 13.2 13.1 13.1 15.3 13.9
Health Care 12.4 NA 12.3 12.2 NA NA 15.4 NA NA NA NA NA
Industrials 10.0 NA 8.8 13.4 12.8 9.6 NA NA 18.2 22.4 13.5 19.5
Information Technology 14.8 NA NA 15.5 11.7 NA NA NA 12.3 12.3 NA NA
Materials 16.2 16.1 19.3 12.5 9.5 20.8 NA NA 16.0 14.6 22.8 17.3
Telecommunication Services 10.6 11.0 10.4 10.3 14.5 9.2 9.8 11.8 12.7 13.6 12.5 11.3
Utilities 13.9 26.1 NA NA NA NA NA 9.6 10.3 8.9 NA 12.4
Market Aggregate 10.5 8.8 11.8 10.2 14.8 8.8 11.0 10.6 14.1 13.5 15.1 15.1
Sector Neutral** 11.3 11.4 11.4 11.7 13.2 10.2 12.0 12.7 13.8 13.7 14.3 13.8
Source: IBES, MSCI, J.P. Morgan. Note: Market forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using I/B/E/S estimates. IBES Estimates are not available for Morocco, Jordan, Peru and Colombia.
**Sector neutral PE are calculated by using sector weights of MSCI EM and sector PE of respective markets (MSCI EM sector PE used where country sector does not exist) Updated 30 November 2009.

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Value: Distribution Tables for PE, PBR, DY and RoE


2009E: Price to Earnings Ratio (x) 2009E: Price to Book Value Ratio (x)
Weighted Quartiles Weighted Quartiles
Average Min Lower Median Higher Max Average Min Lower Median Higher Max
Global* 13.5 1.7 12.8 16.7 23.6 518 Global* 1.8 0.2 1.1 1.8 2.8 202
USA* 17.5 4.2 13.0 16.5 23.3 518 USA* 1.7 0.4 1.3 2.0 3.2 41.9
Europe* 12.6 3.7 12.0 15.2 20.0 223 Europe* 1.3 0.4 1.1 1.8 2.9 202
Japan* 12.0 4.4 17.0 23.5 34.4 450 Japan* 1.0 0.3 0.8 1.1 1.4 12.1
Emerging Markets* 15.1 1.7 12.0 16.5 23.0 319 Emerging Markets* 2.0 0.2 1.4 2.0 3.1 135.8
China 18.9 5.3 14.4 18.8 26.9 164.8 China 2.8 0.8 1.6 2.2 3.7 135.8
Brazil* 14.7 5.5 11.5 16.7 24.0 183.9 Brazil* 2.4 0.3 1.5 2.2 3.8 39.6
Korea 20.3 3.7 8.6 11.6 17.7 65 Korea 1.6 0.5 1.0 1.3 1.9 14.3
Taiwan 33.6 7.3 13.9 18.7 28.9 145.5 Taiwan 2.0 0.7 1.2 1.7 2.6 8.2
South Africa* 12.9 6.1 11.0 12.2 15.4 112 South Africa* 2.2 0.6 1.7 2.4 4.4 16.4
India 18.9 6.1 14.8 21.2 27.2 123.4 India 3.1 0.7 2.0 2.8 4.7 25.9
Russia* 7.6 1.7 8.6 13.4 22.4 318.7 Russia* 1.2 0.2 1.0 1.8 2.7 7.3
Mexico* 19.7 9.6 13.5 18.6 24.2 78 Mexico* 1.1 0.7 1.8 2.4 3.6 6.8
Israel* 14.4 5.3 11.8 15.1 18.5 31.1 Israel* 1.5 0.8 1.1 2.4 4.5 26.9
Malaysia 18.0 7.1 14.0 15.7 20.4 48.9 Malaysia 2.0 0.8 1.4 1.8 2.4 26.1
Chile* 14.6 9.8 12.5 19.0 28.2 37.6 Chile* 1.5 0.5 1.4 1.7 2.8 4.7
Indonesia 16.6 7.4 14.3 18.4 21.4 48.8 Indonesia 4.2 1.5 2.5 3.5 4.8 24.2
Turkey* 10.3 7.2 8.2 10.1 17.6 23.7 Turkey* 1.8 0.6 1.0 1.5 2.1 11.7
Thailand 15.7 7.0 10.7 13.3 17.0 23.0 Thailand 1.8 0.9 1.1 1.5 2.7 6.5
Poland* 11.0 9.1 15.3 18.5 21.0 59.6 Poland* 1.7 0.6 1.2 1.6 2.3 11.4
Czech Republic* 10.4 9.2 10.8 12.3 12.9 13.4 Czech Republic* 2.5 1.9 2.1 2.2 2.2 2.3
Egypt* 9.1 8.0 9.6 10.6 14.9 20.8 Egypt* 2.5 0.5 1.4 2.4 3.0 5.7
Philippines 21.1 8.9 12.6 17.5 20.4 42.1 Philippines 2.6 1.2 1.7 2.4 3.1 4.4
Hungary* 7.4 9.8 10.3 13.5 16.9 18.2 Hungary* 1.6 1.2 1.3 1.4 1.7 2.1

2009E: Dividend Yield (%) 2009E: Return on Equity (%)


Weighted Quartiles Weighted Quartiles
Average Min Lower Median Higher Max Average Min Lower Median Higher Max
Global* 3.0 0.0 0.9 1.9 3.3 15.0 Global* 13.2 -10.5 5.2 10.9 17.6 4461
USA* 2.9 0.0 0.1 1.5 3.0 15.0 USA* 13.2 0.4 7.2 12.3 19.2 288
Europe* 5.4 0.0 1.5 2.8 4.2 12.5 Europe* 16.9 0.3 6.7 11.3 18.2 1066
Japan* 2.8 0.0 1.2 1.7 2.5 5.4 Japan* 8.2 0.2 -0.6 3.4 6.6 26.8
Emerging Markets* 2.1 0.0 0.8 1.7 3.1 13.4 Emerging Markets* 12.9 -10.5 7.8 12.9 19.8 4461
China 2.1 0.0 0.7 1.5 2.1 7.1 China 15.0 1.4 8.5 12.8 18.2 525.3
Brazil* 3.0 0.0 1.4 2.6 4.5 13.4 Brazil* 17.4 1.5 8.3 13.5 23.1 271
Korea 1.1 0.0 0.5 1.1 2.0 11.6 Korea 7.9 1.2 8.0 12.4 17.4 40.2
Taiwan 3.7 0.0 0.9 2.5 3.7 12.0 Taiwan 5.5 1.3 2.3 7.7 14.6 45
South Africa* 3.5 0.0 2.2 3.6 4.6 9.0 South Africa* 17.5 -5.1 12.0 16.5 28.1 115
India 1.1 0.0 0.4 1.0 1.3 3.3 India 17.5 1.2 11.2 16.4 20.3 97
Russia* 0.7 0.0 0.3 0.9 2.3 4.8 Russia* 15.4 -10.5 5.6 11.2 18.1 36.3
Mexico* 2.0 0.0 0.7 1.2 2.9 7.4 Mexico* 8.3 1.3 10.5 13.2 17.3 50.0
Israel* 4.8 0.0 0.0 1.0 2.5 9.4 Israel* 10.6 4.1 6.7 13.8 26.1 256
Malaysia 3.0 0.0 1.7 2.3 3.9 8.2 Malaysia 11.5 4.7 8.9 11.1 16.2 166
Chile* 2.3 0.0 1.1 1.3 1.9 6.8 Chile* 12.5 2.8 5.1 6.9 12.6 20.6
Indonesia 2.7 0.0 1.5 2.3 3.1 4.7 Indonesia 27.1 4.7 13.1 21.8 30.2 76.5
Turkey* 3.9 0.0 0.2 1.5 2.6 10.3 Turkey* 16.5 -0.5 7.3 16.1 19.9 50.9
Thailand 3.6 0.0 2.7 3.3 4.8 7.8 Thailand 11.7 4.4 9.8 13.7 19.7 38.2
Poland* 5.1 0.0 0.0 1.3 3.3 9.2 Poland* 14.6 2.0 5.5 8.7 12.6 69
Czech Republic* 6.0 4.0 5.0 6.0 8.3 10.6 Czech Republic* 21.5 15.7 16.3 17.0 20.5 24.0
Egypt* 22.3 0.0 1.7 3.0 5.6 8.3 Egypt* 13.6 6.7 9.8 17.3 27.6 56.7
Philippines 3.4 0.5 1.5 2.2 3.1 11.3 Philippines 12.2 7.0 8.0 12.4 18.2 37.0
Hungary* 2.7 0.4 1.1 1.4 3.5 9.6 Hungary* 22.2 6.9 10.9 12.4 13.4 15.7
Source: Datastream, IBES, MSCI, J.P. Morgan. Updated 30 November 2009.
Note: Weighted average numbers based on aggregate of MSCI constituents. Consensus numbers are used for stocks not covered by J.P. Morgan. * only consensus numbers are used

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Value: Demand Classification: MSCI Emerging Markets Index Composition by Countries


MSCI Emerging Domestic Global Capex Global Global Price Total EM Domestic Demand Sector Absolute and relative (vs EMF) Index
Markets Free Index Demand Consumer Takers
400 100
China 13.6 0.4 0.2 4.1 18.3 350 Absolute (lhs) 90
India 4.0 1.2 0.0 2.3 7.5 300
80
Indonesia 1.5 0.0 0.0 0.2 1.8 250
200 70
Korea 5.6 2.1 2.9 2.1 12.6 Relative to EM (rhs)
150
Malaysia 2.1 0.0 0.0 0.6 2.7 60
100
Philippines 0.4 0.0 0.0 0.0 0.4 50
50
Taiwan 3.2 3.4 3.2 1.3 11.1 0 40
Thailand 0.8 0.0 0.0 0.4 1.2 Jan-90 Jul-92 Jan-95 Jul-97 Jan-00 Jul-02 Jan-05 Jul-07
Asia 31.1 7.1 6.4 11.1 55.7 EM
Czech Republic 0.4 0.0 0.0 0.0 0.4 Global Capex Sector Absolute and relative (vs EMF) Index
Egypt 0.5 0.0 0.0 0.0 0.5 1200 500
Hungary 0.3 0.0 0.0 0.2 0.6 1000
Absolute (lhs)
400
Israel 0.9 0.2 0.0 1.5 2.7 800
Morocco 0.3 0.0 0.0 0.0 0.3 300
600
Poland 1.0 0.0 0.0 0.2 1.3 200
400
Russia 1.7 0.0 0.0 4.8 6.5 100
200
South Africa 4.3 0.0 0.0 2.7 7.0 Relative to EM (rhs)

Turkey 1.3 0.0 0.0 0.0 1.3 0


Jan-90 Jul-92 Jan-95 Jul-97 Jan-00 Jul-02 Jan-05 Jul-07
0

EMEA 10.7 0.3 0.1 9.5 20.6


Brazil 7.6 0.0 0.0 9.0 16.7 EM Global Consumer Sector Absolute and relative (vs EMF) Index
Chile 1.3 0.0 0.0 0.1 1.3
Colombia 0.4 0.0 0.0 0.2 0.6 800 300
Absolute (lhs)
Mexico 3.8 0.3 0.0 0.4 4.5 700
250
600
Peru 0.2 0.0 0.0 0.5 0.7 200
500
LatAm 13.2 0.4 0.0 10.1 23.7
400 150
Total 55.1 7.8 6.5 30.7 100.0 300
100
200
Relative to EM (rhs) 50
100
0 0
Jan-90 Jul-92 Jan-95 Jul-97 Jan-00 Jul-02 Jan-05 Jul-07

EM Global Price Taker Sector Absolute and relative (vs EMF) Index
450 110
400 Absolute (lhs)
350 90
300
70
250 Relative to EM (rhs)
200
50
150
100 30
50
0 10
Jan-90 Jul-92 Jan-95 Jul-97 Jan-00 Jul-02 Jan-05 Jul-07

Source: Datastream, MSCI. J.P. Morgan. MSCI emerging markets companies have been classified in five categories. Of the five categories, Global Consumer/Capex (Tech-Hardware) weighting equally divided between Global consumer and Global Capex. The above
table contains MSCI free float market capitalization as a percentage of MSCI emerging markets. Charts show the relative absolute and relative performance of emerging markets sectors by demand classification. Updated 30 November 2009.

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Value: Equities relative to Bonds


Relative out performance of equities versus bonds by country (%)
36-month
1-month 3-month 6-month 12-month 36-month
Country annualized
Brazil 6.6 15.1 16.5 30.5 40.7 12.1
Chile -0.3 4.0 2.9 28.2 32.6 9.9
China 1.9 13.9 24.2 78.8 48.0 14.0
Colombia 0.3 -4.0 15.8 24.9 35.2 10.6
Czech -1.3 -7.1 5.1 13.9 -3.6 -1.2
Hungary 0.9 2.8 26.7 44.7 -23.8 -8.7
India 5.8 8.1 19.8 94.4 21.1 6.6
Indonesia 1.9 -0.9 27.2 64.9 46.6 13.6
Malaysia 0.0 5.5 20.1 48.4 23.5 7.3
Mexico 6.7 5.5 24.9 39.5 13.0 4.1
Peru 11.9 24.1 36.5 82.9 104.5 26.9
Poland 3.9 9.1 37.6 34.6 -21.9 -7.9
Russia 1.0 4.0 -2.7 46.9 -46.2 -18.7
South Africa 0.1 2.4 9.1 22.2 16.2 5.1
Thailand -0.8 4.6 20.7 73.6 -1.4 -0.5
Turkey -5.7 -8.3 13.5 35.4 -1.6 -0.5
Relative value of equities versus bonds by country
Bond DDM
Generic 10 Maturity Bond Yield Earnings Dividend Implied
Country years (years) To Maturity Yield Yield Growth
Brazil 12.3 12.0 10.0 7.4 2.8 13.3
Chile 5.3 6.0 3.1 6.6 2.3 7.0
China 3.7 7.2 3.3 6.9 2.6 5.5
Colombia 8.0 10.8 7.3 8.0 4.1 7.9
Czech 4.1 6.4 3.9 9.4 6.4 2.1
Hungary 7.5 5.2 7.2 9.1 2.6 8.7
India 7.6 8.8 7.5 6.7 1.2 10.5
Indonesia 10.2 11.2 10.3 7.0 3.2 11.5
Malaysia 4.2 5.5 3.9 6.3 3.1 5.2
Mexico 7.9 7.8 7.6 6.6 2.5 9.9
Peru 5.8 15.6 5.8 11.2 5.5 4.3
Poland 6.2 5.1 5.7 6.8 3.4 5.0
Russia 5.0 2.9 8.0 11.4 1.7 8.3
South Africa 9.2 10.1 8.9 8.5 3.3 9.7
Thailand 4.3 7.0 4.0 8.9 3.8 4.7
Turkey 9.8 2.1 9.0 11.3 3.5 9.9
Source: Bloomberg, J.P. Morgan, DataStream, MSCI, IBES Note: GBI-EM Bond Maturity and Yield to Maturity are used for each country. Updated 30 November 2009.

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Economic Forecasts: Changes in Real GDP Forecasts


Real GDP Growth (% Y/Y) Change in Forecasts Past 3 months (%) Economic Momentum Inflation
JPM Consensus JPM Consensus GDP SAAR (% Y/Y)
2009E 2010E 2009E 2010E 2009E 2010E 2009E 2010E 2Q 09E 3Q 09E 4Q 09E 1Q 10E 2009E 2010E
US -2.5 3.2 -2.4 2.6 -0.1 0.0 0.2 0.3 2.8 3.5 3.0 4.0 -0.4 1.7
Euro -3.9 2.5 -3.9 1.2 -0.3 -0.2 0.1 0.3 1.5 2.5 3.0 3.0 0.2 1.0
Japan -5.2 2.4 -5.7 1.2 0.0 0.2 0.3 0.4 4.8 2.5 2.5 1.5 -1.3 -1.6
China 8.6 9.5 8.3 9.5 0.2 0.5 0.0 0.1 10.0 9.1 9.0 9.5 -0.6 3.0
Brazil 0.3 5.0 -0.4 3.8 0.7 0.5 -0.3 0.1 7.2 6.7 4.3 5.0 5.1 4.5
S Korea 0.2 4.7 -1.6 3.7 1.0 0.7 0.0 0.0 12.3 4.0 2.0 3.5 2.8 3.1
Taiwan -3.0 5.8 -4.4 4.6 0.7 0.4 0.1 0.4 8.3 6.0 3.8 5.0 -0.8 1.6
South Africa -2.0 3.0 -2.0 2.3 0.0 0.5 -0.1 0.0 0.5 3.4 4.4 3.8 7.2 4.8
India 6.0 7.5 7.2 na -0.2 0.3 0.0 na 9.0 -1.0 10.0 7.0 10.8 6.5
Russia -8.5 5.0 -7.7 3.0 0.0 0.0 0.2 0.5 7.9 6.5 4.5 4.0 11.8 7.5
Mexico -7.0 3.5 -7.0 2.9 -0.5 -1.5 0.0 0.3 12.2 7.5 3.7 -0.6 5.4 4.8
Israel 0.0 3.0 5.5 5.5 na na 0.0 0.0 2.2 2.5 3.0 3.0 na na
Malaysia -2.4 5.0 -2.8 4.5 0.6 0.6 -0.7 1.5 9.4 4.5 1.6 4.9 0.2 0.8
Chile -1.5 5.0 -1.4 4.0 0.0 0.7 -0.3 0.2 4.6 10.0 6.0 4.0 2.0 2.0
Indonesia 4.3 5.3 4.4 5.6 0.2 0.3 0.4 0.3 5.3 3.5 5.5 6.0 4.9 5.2
Turkey -5.3 5.0 -5.7 3.6 -0.6 2.0 0.1 -0.2 - - - - 6.1 5.7
Thailand -3.1 6.1 -3.8 3.0 -0.1 0.1 -0.2 -0.3 5.5 5.3 4.9 5.7 -0.9 4.0
Poland 1.7 3.2 1.2 2.0 0.7 0.7 0.7 0.0 5.5 3.0 2.5 3.0 3.5 2.3
Czech Republic -4.0 2.5 -1.5 2.0 -1.0 0.5 1.0 0.0 3.2 5.0 2.8 2.5 1.1 2.6
Peru 1.0 5.4 1.1 4.2 0.0 0.0 -0.6 0.3 8.0 13.0 3.0 3.5 3.1 1.7
Egypt na na na na na na na na na na na na na na
Colombia -0.5 3.0 0.1 2.5 0.0 0.0 0.6 0.0 1.9 3.2 3.5 4.3 4.5 4.0
Philippines 1.5 5.0 2.1 4.1 0.1 0.0 0.0 0.0 4.1 4.0 5.0 5.0 2.0 3.5
Hungary -6.5 1.0 -6.3 0.0 -0.5 1.5 -0.1 0.5 -7.0 3.5 3.0 2.5 4.2 3.5
Morocco na na 4.4 na na na na na na na na na na na

2009E GDP growth: JPM minus Consensus Change in consensus forecasts for 2009E GDP over last 3 months (%)
2.0 1.0

0.0 -1.0

-3.0
-2.0

-5.0
-4.0

Brazil
C olom bia

Philippines
C zech
Poland

Indonesia
R ussia

T aiw an
C hina
India

S Korea

T hailand

C hile
Peru
SA
T urkey

H ungary
M exico

M alaysia
C olom bia
Brazil

Philippines
S Korea
T aiw an

T hailand
Poland

C hina

Indonesia
Peru
C hile

R ussia
India
C zech
SA
T urkey

H ungary
M alaysia

M exico

Source: Bloomberg, J.P. Morgan estimates. Updated 30 November 2009.


Note: Consensus estimates for Jordan, Egypt, Pakistan and Israel sourced from WES and Morocco from EIU.

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Economic Forecasts: Policy Rate Trend and Forecasts


Policy Rate
Country Official interest rate 1Q'09 2Q'09 3Q'09 Current 4Q'09F 1Q'10F 2Q'10F 3Q'10F Last Change Next Change
Developed Markets
United States Federal funds rate 0.13 0.13 0.13 0.125 0.125 0.125 0.125 0.125 16 Dec 08 (-87.5bp) on hold
Euro Area Refi Rate 1.50 1.00 1.00 1.00 1.00 1.00 1.00 1.00 7 May 09 (-25bp) on hold
Japan Overnight Call Rate 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 19 Dec 08 (-20bp) on hold
Latin America
Brazil SELIC overnight rate 11.25 9.25 8.75 8.75 8.75 9.75 10.75 10.75 22 Jul 09 (-50bp) Jan 10 (+50bp)
Mexico Repo rate 6.75 4.75 4.50 4.50 4.50 4.50 4.75 5.25 17 Jul 09 (-25bp) Jun 10 (+25bp)
Chile Discount rate 2.25 0.75 0.50 0.50 0.50 0.50 1.00 1.75 9 Jul 09 (-25bp) 2Q 10 (+50bp)
Europe, Middle East and Africa
Czech Republic 2-week repo rate 1.75 1.50 1.25 1.25 1.25 1.25 1.75 2.50 6 Aug 09 (-25bp) 2Q 10 (+25bp)
Hungary 2-week deposit rate 9.50 9.50 8.00 6.50 6.00 5.50 5.50 5.50 23 Nov 09 (-50bp) 21 Dec 09 (-50bp)
Poland 7-day intervention rate 3.75 3.50 3.50 3.50 3.50 3.50 3.50 4.00 24 Jun 09 (-25bp) 3Q 10 (+25bp)
Russia 1-week deposit rate 8.25 6.75 5.75 4.25 4.00 3.50 3.00 3.00 24 Nov 09 (-50bp) Dec 09 (-25bp)
South Africa Repo rate 9.50 7.50 7.00 7.00 7.00 7.00 7.00 7.00 13 Aug 09 (-50bp) 4Q 10 (+50bp)
Turkey O/n borrowing rate 10.50 8.75 7.25 6.50 6.50 6.50 6.50 7.50 19 Nov 09 (-25bp) 3Q 10 (+50bp)
EM Asia
China 1-year working capital 5.31 5.31 5.31 5.31 5.31 5.31 5.31 5.58 22 Dec 08 (-27bp) 3Q 10 (+27bp)
Korea Overnight call rate 2.00 2.00 2.00 2.00 2.00 2.25 2.50 2.75 12 Feb 09 (-50bp) 1Q 10 (+25bp)
Indonesia BI rate 7.75 7.00 6.50 6.50 6.50 6.50 6.50 6.50 5 Aug 09 (-25bp) on hold
India Repo rate 5.00 4.75 4.75 4.75 4.75 5.00 5.25 5.25 21 Apr 09 (-25bp) 1Q 10 (+25bp)
Malaysia Overnight policy rate 2.00 2.00 2.00 2.00 2.00 2.00 2.25 2.50 24 Feb 09 (-50bp) 2Q 10 (+25bp)
Philippines Reverse repo rate 4.75 4.25 4.00 4.00 4.00 4.00 4.00 4.00 9 Jul 09 (-25bp) 4Q 10 (+25bp)
Thailand 1-day repo rate 1.50 1.25 1.25 1.25 1.25 1.25 1.50 1.75 8 Apr 09 (-25bp) 2Q 10 (+25bp)
Taiwan Official discount rate 1.25 1.25 1.25 1.25 1.25 1.25 1.25 1.25 18 Feb 09 (-25bp) 4Q 10 (+12.5bp)

Change in policy rates Emerging Markets policy rate


Russia
Japan 22
Poland
Malaysia
China 18
Hungary Change from Aug 07
Indonesia
Taiwan 14
Thailand
Forecast change from now to Q4 09
Philippine Nominal Policy Rates
Czech 10
Mexico
Brazil
S Africa
6
Korea Real Rates
India
EU
Chile 2
USA
Turkey
-2
-1150 -1050 -950 -850 -750 -650 -550 -450 -350 -250 -150 -50 50 150 250 350 98 99 00 01 02 03 04 05 06 07 08 09

Source: J.P. Morgan Economics, Bloomberg. Bold figures on next column indicate tightening. Updated 30 November 2009.

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Economic Forecasts: Currency Movements and Forecasts
Euro (EUR) Japanese Yen (JPY) ) South Korean Won (KRW) Taiwan Dollar (TWD) Chinese Yuan Renminbi (CNY) Brazilian Real (BRL)
1.62 J.P. Morgan 124 1,600 J.P. Morgan forecast: 37 J.P.Morgan forecast: 2.9 J.P. Morgan forecast:
8.4
J.P.Morgan forecast: 120 end Dec 09: 31.0 Consensus end Dec 09: 1.80
1,500 end Dec 09: 1130 36 2.7
1.52 end Dec 09: 1.50 116 8.0
112 end Mar 10: 1130 35 end Mar 10: 31 end Mar 10: 1.65
Consensus 1,400 2.5
end Mar 10: 1.55 108 end Jun 10: 30.5 7.6 J.P. Morgan
1.42 end Jun 10: 1130 Consensus 34 end Jun 10: 1.60
end Jun 10: 1.62 Consensus 104 1,300 2.3
100 33 7.2
1,200 J.P.Morgan forecast: Consensus
1.32 96 J.P. Morgan forecast: 32 2.1
6.8 end Dec 09: 6.75 Consensus
92 end Dec 09: 89 1,100 31
1.22 88 end Mar 10: 6.75 1.9
end Mar 10: 85 1,000 J.P. Morgan 6.4
84 30 J.P. Morgan
J.P. Morgan J.P. Morgan end Jun 10: 6.70 1.7
1.12 80 end Jun 10: 82 900 29 6.0
1.5
Dec 04 Jun 06 Nov 07 Apr 09 Sep 10 Dec 04 Jun 06 Nov 07 Apr 09 Sep 10 Dec 04 Jun 06 Nov 07 Apr 09 Sep 10 Dec 04 Jun 06 Nov 07 Apr 09 Sep 10 Dec 04 Jun 06 Nov 07 Apr 09 Sep 10
Dec 04 Jun 06 Nov 07 Apr 09 Sep 10

Source:
Russian Rouble (RUB) South African Rand (ZAR) Mexican Peso (MXN) Indian Rupee (INR) Malaysian Ringgit (MYR) Israeli New Shekel (ILS)
43 14.0 J.P.Morgan forecast: 15.7 J.P.Morgan forecast: J.P.Morgan forecast: 4.0 J.P.Morgan forecast:
J.P.Morgan forecast: 52.5 4.7
13.0 end Dec 09: 7.30 15.1 end Dec 09: 13.00 Consensus end Dec 09: 45.0 3.9 end Dec 09: 3.35
39 end Dec 09: 28.16 Consensus Consensus J.P. Morgan 4.5
12.0 14.5 end Mar 10: 12.80 50.5 end Mar 10: 45.0 Consensus 3.8 end Mar 10: 3.35 Consensus
end Mar 10: 26.85 end Mar 10: 7.40
13.9 48.5 3.7 end Jun 10: 3.30 4.3
35
end Jun 10: 25.41
11.0 end Jun 10: 7.20 end Jun 10: 12.50 end Jun 10: 43.5
13.3 3.6 4.1
10.0 46.5
31 12.7 3.5 3.9
9.0 44.5
12.1 3.4
8.0 3.7 J.P.Morgan forecast:
27 11.5 42.5 3.3
J.P. Morgan 7.0 J.P. Morgan 3.5 end Dec 09: 3.60
10.9 40.5 J.P. Morgan 3.2
23 6.0 10.3 Consensus 3.3 end Mar 10: 3.65 J.P. Morgan
J.P.Morgan 38.5 3.1
Dec 04 Jun 06 Nov 07 Apr 09 Sep 10 5.0 9.7 3.1 end Jun 10: 3.60
Dec 04 Jun 06 Nov 07 Apr 09 Sep 10 Dec 04 Jun 06 Nov 07 Apr 09 Sep 10
Dec 04 Jun 06 Nov 07 Apr 09 Sep 10 Dec 04 Jun 06 Nov 07 Apr 09 Sep 10 Dec 04 Jun 06 Nov 07 Apr 09 Sep 10

Polish Zloty (PLN) Chilean Peso (CLP) Turkish Lira (TRL) Thai Baht (THB) Indonesian Rupiah (IDR) Hungarian Forint (HUF)
3.9 J.P.Morgan forecast: J.P.Morgan forecast: 2.0 J.P.Morgan forecast: 44 J.P.Morgan forecast: 13,500 J.P. Morgan forecast: J.P. Morgan forecast:
725 270
3.7 end Dec 09: 2.73 1.9 end Dec 09: 1.40 42 end Dec 09: 33.00 end Dec 09: 9000 257 end Dec 09: 173
Consensus end Dec 09: 550 Consensus
3.5 675 1.8 end Mar 10: 33.00 12,500 end Mar 10: 9000 244
end Mar 10: 2.65 end Mar 10: 475 end Mar 10: 1.45 40 end Mar 10: 168
3.3 Consensus 1.7 end Jun 10: 9000 231
625 end Jun 10: 1.40 38 end Jun 10: 32.50 end Jun 10: 157
end Jun 10: 2.47 end Jun 10: 490 11,500 218
3.1 1.6 J.P. Morgan 205 Consensus
575 36 Consensus
2.9 1.5 10,500 192
2.7 34
525 1.4 179
2.5 J.P. Morgan 1.3 32 9,500 166
J.P.Morgan Consensus
2.3 475 1.2 30 153
J.P. Morgan J.P. Morgan J.P. Morgan
2.1 8,500 140
425 1.1 28
1.9 Dec 04 Jun 06 Nov 07 Apr 09 Sep 10 Dec 04 Jun 06 Nov 07 Apr 09 Sep 10
Dec 04 Jun 06 Nov 07 Apr 09 Sep 10 Dec 04 Jun 06 Nov 07 Apr 09 Sep 10 Dec 04 Jun 06 Nov 07 Apr 09 Sep 10
Dec 04 Jun 06 Nov 07 Apr 09 Sep 10

Czech Koruna (CZK) Peruvian Nuevo Sol (PEN) Philippine Peso (PHP) Colombian Peso (COP)
26 3.8 J.P. Morgan forecast: 60 J.P. Morgan forecast: Consensus
end Dec 09: 2.95 2,600
end Dec 09: 46.0
24 3.5 56
end Mar 10: 2.80
end Mar 10: 46.0 2,400
22 3.3 end Jun 10: 2.75 52 Consensus
J.P. Morgan end Jun 10: 45.5 2,200
20 Consensus 48 J.P. Morgan forecast:
J.P. Morgan forecast: 3.0 2,000
18 44 end Dec 09: 2050
end Dec 09: 17.00 2.8 1,800 end Mar 10: 1925
end Mar 10: 16.26 Consensus 40 J.P. Morgan
16 J.P. Morgan
J.P. Morgan 2.5 1,600 end Jun 10: 1850
end Jun 10: 15.43 36
14
Dec 04 Jun 06 Nov 07 Apr 09 Sep 10 Dec 04 Jun 06 Nov 07 Apr 09 Sep 10
Dec 04 Jun 06 Nov 07 Apr 09 Sep 10 Dec 04 Jun 06 Nov 07 Apr 09 Sep 10

Expected % Gain vs USD till December 2009 (JPM) Expected % Loss vs USD till December 2009 (JPM)
10 0

8 -2

-4
6

4 -6

-8
2
-10
0
COP

JPY

ARS

CLP
EUR

MXN

BRL
IDR

TWD

KRW
ILS

PHP

THB
INR
HUF
RUB

CZK

CNY
TRL

ZAR

PLN

MYR

Source: Datastream, J.P. Morgan estimates Source: Datastream, J.P. Morgan estimates

Source: Bloomberg, Datastream, J.P. Morgan estimates. Updated 30 November 2009.

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Economic Forecasts: Credit Risk


External (2009E) Fiscal Position Sovereign Ratings (Long Term Foreign Debt)
Foreign Current Account External Debt Fiscal Deficit Public Sector Debt
Reserves 2009F** 2010F** 2009F** 2009F** 2009F** 2010F** 2009F** 2010F** Moody’s S&P
(US$bil) % GDP % GDP (US$bil) %GDP % GDP % GDP % GDP % GDP Rating Action Date Rating Action Date
China 2132 6.8 6.7 388 8.1 -3.3 -2.1 20.3 20.4 A1 Upgrade, O/L stable Jul-26-07 A+ Upgrade, O/L stable Jul-31-08
Baa3
Brazil 216 -1.6 -2.4 267 17.0 -2.7 -2.5 56.1 56.9 (+) Upgrade, O/L (+) Sep-22-09 BBB- Upgrade, O/L stable Apr-30-08
Korea 245 4.1 1.6 372 47.5 -2.7 -2.0 42.6 42.7 A2 Affirmed, O/L stable Oct-17-08 A Affirmed, O/L stable Oct-17-08
Taiwan 325 8.9 7.7 64 19.5 -3.6 -3.0 na na Aa3 Affirmed, O/L stable Jan-24-02 AA- O/L changed to (-), Affirmed Apr-14-09
Upgrade, O/L changed to
South Africa
34 -4.7 -4.8 73 25.9 -7.4 -6.4 30.9 32.8 A3 stable Jul-16-09 BBB+ O/L changed to (-), Affirmed Nov-11-08
India 261 -2.5 -2.6 224 18.0 -7.3 -6.8 57.0 58.3 Baa3 Upgrade, O/L stable Jan-22-04 BBB- O/L changed to (-), Affirmed Feb-24-09
O/L changed to stable,
Russia
392 4.5 4.9 442 35.7 -6.6 -4.8 6.2 7.3 Baa1 Affirmed Dec-12-08 BBB Downgrade, O/L (-) Dec-08-08
Mexico 76 -1.3 -0.9 196 22.2 -2.1 -2.5 34.8 33.4 Baa1 Upgrade, O/L stable Jan-06-05 BBB+ O/L (-), Affirmed May-11-09
Israel* 26 2.1 na na na na na na na A1 Upgrade, O/L stable Apr-17-08 A O/L changed to stable, Affirmed Oct-30-08
Malaysia 93 15.4 16.9 75 35.7 -7.1 -5.5 44.0 42.6 A3 Upgrade, O/L stable Dec-16-04 A- O/L changed to stable, Affirmed May-15-08
Chile 25 -1.1 -2.2 65 41.7 -4.5 -1.5 10.8 9.5 A1 Upgrade, O/L (+) Mar-23-09 A+ Affirmed, O/L stable Dec-17-08
Indonesia 58 1.1 0.9 133 24.3 -2.4 -1.5 42.9 39.0 Ba2 Upgrade, O/L stable Sep-16-09 BB- Affirmed, O/L stable Nov-07-08
Poland 76 0.3 -2.0 247 58.7 -5.6 -5.5 54.2 53.0 A2 Affirmed, O/L stable Sep-18-03 A- O/L changed to stable, Affirmed Oct-27-08
Turkey 66 -1.3 -2.0 265 43.3 -5.8 -2.2 49.3 47.4 Ba3 O/L changed to (+), Affirmed Sep-18-09 BB- O/L changed to stable, Affirmed Sep-17-09
Thailand 123 4.9 1.6 70 26.6 -3.9 -5.6 24.6 23.0 Baa1 O/L changed to (-), Affirmed Dec-04-08 BBB+ Affirmed, O/L (-) Apr-14-09
O/L changed to stable,
Czech Rep 39 -3.0 -2.5 78 39.1 -6.0 -4.0 34.9 36.5 A1 Affirmed Dec-08-08 A Affirmed, O/L stable Nov-27-08
Peru 32 -3.4 -3.4 32 24.4 -2.3 -1.5 25.9 23.8 Ba1 Review (+) Sep-29-09 BBB- Upgrade, O/L stable Jul-14-08
O/L changed to stable,
Egypt* 17 -0.4 na na na na na na na Ba1 Affirmed Aug-19-09 BB+ Affirmed, O/L stable Dec-10-07
Colombia 25 -2.7 -2.3 49 21.8 -2.5 -3.5 45.0 43.6 Ba1 Upgrade, O/L stable Jun-19-08 BB+ Affirmed, O/L stable Feb-25-08
Philippines 41 3.6 1.7 61 37.6 -3.2 -2.5 64.5 62.2 Ba3 Upgrade, O/L changed stable Jul-23-09 BB- Affirmed, O/L stable Apr-18-08
Hungary 43 -3.0 -3.0 173 135.2 -3.9 -3.8 86.6 82.1 Baa1 Downgrade, O/L (-) Mar-31-09 BBB- O/L changed to stable, Affirmed Oct-2-09
Morocco* 14 -0.9 na na na na na na na Ba1 O/L changed to stable Jun-18-03 BB+ O/L changed to stable, Affirmed Apr-11-08
EM Asia 3289 6.2 5.3 1385 17.0 - - 32.0 31.7 - - - - - -
EMEurope 679 -0.9 -0.8 1206 49.7 - - 30.2 31.2 - - - - - -
Lat Am 419 -1.7 -1.4 827 23.9 - - 42.1 41.7 - - - - - -
EMBI Global Spreads and Yields EMBI Asia Spreads and Yields EMBI Europe Spreads and Yields EMBI Latin America Spreads and Yields
1000 12.0 900 12 1000 12.0 1000 13.0
900 11.0 800 11 900 11.0 900 12.0
800 700 800 800
10.0 10 10.0 11.0
700 700 700
600
600 9.0 9 600 9.0 600 10.0
500
500 8.0 8 500 8.0 500 9.0
400 400 400 400
7.0 7 7.0 8.0
300 300 300 300
200 6.0 200 6 6.0 200 7.0
200
100 5.0 100 5 100 5.0 100 6.0
Nov -07 Jul-08 Apr-09 Nov -07 Jul-08 Apr-09 Nov -07 Jul-08 Apr-09 Nov -07 Jul-08 Apr-09

Spread (L) Yield Spread (L) Yield Spread (L) Yield Spread (L) Yield

Source: Bloomberg, J.P. Morgan. Source: CEIC, JP Morgan estimates, Moody's, Standard & Poor's, Bloomberg * Data from World Economic Outlook for April 2006 for Current Account data, ** F denotes forecast Note: Forex reserves as of 31 August 2009 or latest
available data. Updated 30 November 2009

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Perspective: Emerging Markets Balance Sheets
No. of Companies Debt/Equity Debt/Assets Debt/Market. Cap Asset Turnover Current Ratio Interest Coverage Altman Z Score
China 87 0.53 0.26 0.89 0.79 1.02 8.1 4.9
Brazil 61 0.61 0.28 0.92 0.55 1.57 7.3 2.8
Korea 80 0.40 0.20 0.36 0.89 1.12 6.6 3.3
Taiwan 83 0.29 0.18 0.21 0.97 1.49 12.5 4.9
South Africa 33 0.43 0.20 0.20 0.88 1.26 10.0 4.5
India 51 0.46 0.24 0.17 0.75 1.66 11.5 18.1
Russia 25 0.15 0.10 0.70 0.60 3.52 57.8 8.0
Mexico 22 0.68 0.29 0.62 0.66 1.08 6.4 3.7
Israel 17 1.31 0.41 0.27 0.47 1.20 2.0 3.1
Malaysia 32 0.72 0.34 0.51 0.46 1.72 4.8 4.1
Chile 13 0.59 0.32 0.38 0.53 1.29 4.2 2.8
Indonesia 15 0.58 0.28 0.22 0.88 1.65 13.0 5.6
Turkey 15 0.67 0.27 0.74 1.14 1.58 12.3 5.4
Thailand 16 0.67 0.33 0.51 1.47 1.41 7.1 4.3
Poland 13 0.45 0.23 0.67 1.05 1.67 13.2 5.7
Czech Rep 4 0.37 0.18 0.22 0.56 1.35 7.1 3.4
Peru 3 0.41 0.24 0.07 0.61 1.63 13.3 4.8
Egypt 9 0.73 0.31 0.27 0.64 1.07 5.2 2.9
Colombia 4 0.30 0.19 0.24 0.37 1.31 7.7 12.0
Philippines 9 0.65 0.27 0.30 0.61 1.14 6.9 2.5
Hungary 3 0.57 0.28 0.73 1.00 2.13 15.0 5.8
Morocco 4 0.55 0.24 0.12 0.71 1.26 20.8 5.0
Debt to Equity Ratios Quartile Distribution Chart (x)
8

0
South Africa

India

Indonesia

Argentina
Israel
Korea

China

Russia

Thailand

Chile

Poland

Peru

Morocco

Colombia
Brazil

Hungary

Czech Republic

Philippines

Egypt
Taiwan

Mexico

Malaysia

Turkey

Source: Datastream, Bloomberg, J.P. Morgan. Data as of 28 April 2009


Note: 1. All ratios are calculated from latest financial reports available ex Financial sector and calculations are based on weighted average of companies in the MSCI EMF universe. For Altman z-score, its application on company level is such that a score of less than
1.8 indicates bankruptcy likely, between 1.8-2.7 bankruptcy likely within 2 years and more than 3 most likely safe from bankruptcy. For market as a whole, the ratio is a weighted average of companies' z-score, thereby giving a general quality of companies in the
market.2. For the debt to equity distribution chart, each box indicates quartile levels and markets with values exceeding the scale are indicated by the open-ended top box. The diamond indicates weighted average for each market. 3. Quartile Distribution Charts: each
quartile is separated by a line, with the exception of the top quartile which is subdivided in order to show the top decile of companies, shaded in blue. Markets with values exceeding the scale are indicated by the open-ended top box. The diamond indicates the
weighted mean for each market.

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Perspective: Demographic and Key Economic Statistics


Population and demographics Nominal GDP Real GDP
Population## Age Gross 2009 10 year CAGR*** 10 year CAGR***
2009 Growth Dependency Ratio* Enrollment Ratio US$ Per capita Total Per capita Total Per capita
million %YoY Young Old Secondary** billion (US$) (%) (%) (%) (%)

USA 307 1.0 na na 98 14,272 46,426 4.4 3.4 2.1 1.2

China 1345 0.6 0.3 0.1 73 4770 3539 17.0 16.2 9.7 8.9
Brazil# 191 1.2 0.4 0.1 102 1537 8033 10.1 8.7 3.6 2.2
India 141 -0.3 0.2 0.2 93 1271 9018 20.6 21.1 6.9 7.4
Russia# 1169 1.3 0.5 0.1 54 1257 1075 10.9 9.2 7.8 6.1
Mexico 110 1.0 0.5 0.1 80 864 7877 6.0 4.7 2.8 1.7
Korea 48 0.0 0.3 0.1 91 828 16884 6.2 5.7 6.0 5.6
Turkey 75 1.2 0.4 0.1 79 623 8331 13.1 11.2 4.7 3.1
Indonesia 230 1.2 0.4 0.1 64 542 2323 14.3 12.9 5.0 3.7
Poland 38 -0.1 0.2 0.2 97 432 11362 9.9 10.1 4.1 4.3
Taiwan 23 0.3 0.3 0.1 na 365 15817 2.4 2.0 2.7 2.3
South Africa 49 0.7 0.5 0.1 90 301 6202 8.5 7.4 4.1 3.0
Thailand 68 0.5 0.3 0.1 77 262 3849 7.8 6.8 3.9 2.9
Colombia 46 1.5 0.5 0.1 75 228 4997 10.2 9.2 4.4 2.7
Malaysia 10 0.1 0.2 0.2 96 216 20944 13.6 13.5 4.3 4.2
Egypt 28 2.0 0.5 0.1 76 209 7536 10.1 8.0 10.6 8.5
Czech Rep. 77 2.0 0.5 0.1 87 203 2652 8.5 6.3 5.1 3.0
Israel 7 2.2 0.4 0.2 93 198 27301 6.3 4.2 3.7 1.7
Philippines 92 1.8 0.6 0.1 86 164 1769 7.9 5.9 4.9 2.9
Chile 17 1.2 0.4 0.1 89 160 9403 8.2 6.8 4.3 3.1
Hungary 10 -0.1 0.2 0.2 97 142 14215 11.5 11.7 3.6 3.8
Peru 29 1.2 0.5 0.1 92 130 4463 9.7 7.9 5.7 4.0
Morocco 32 1.4 0.5 0.1 48 98 3064 9.4 8.0 4.9 3.8
MSCI EM 3,840 0.9 15,108 3,851 12.5 11.9
Source: CEIC, Datastream, Bloomberg, US Consensus Bureau, World Bank, UNESCO, J.P. Morgan estimates
* Age dependency ratio defined as dependents to working-age population.
** Gross Enrollment Ratio is defined as pupils enrolled in a secondary level, regardless of age expressed as a percentage of the population in the relevant official age group
*** 10-year CAGR for period 1998-2009, in local currency. # CAGR for period 1998-2009 ## Population data based on IMF estimate as on July 2007
Data for Gross enrollment data for 2004 except for Malaysia, Brazil and Argentina which is for 2003. Updated 30 November 2009.

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Perspective: Global Emerging Capital Markets


MSCI EMF Index Markets Concentration JPM EMBI Global
% of
Stocks
Total Average Emerging Stocks constituting
Estimated Weighting in constituting
Market Companies Daily Market 75% of Country Market Cap Issues
Free Float MSCI EMF 75% of Country
Cap Turnover Trading Market Cap
Market Cap
Volume
US $ bn. (%) Number US $ mn. % (%) Number (%) US $ bn. Number
China 1215 47 109 3719 19.6 18.3 9 17 7.0 8
Brazil 888 60 64 2569 13.5 16.8 16 20 49.5 23
Korea 615 65 98 3886 20.4 12.6 28 18 na na
Taiwan 492 71 123 2196 11.5 11.1 31 24 na na
South Africa 699 34 60 519 2.7 7.5 22 33 na na
India 321 69 45 1024 5.4 7.0 17 40 4.3 4
Russia 630 32 28 2237 11.8 6.5 5 25 32.8 4
Mexico 239 59 23 334 1.8 4.4 7 26 49.5 29
Israel 118 72 17 271 1.4 2.7 10 59 na na
Malaysia 191 44 41 180 0.9 2.7 20 59 9.1 7
Indonesia 129 43 19 240 1.3 1.8 10 47 5.7 5
Turkey 114 37 16 87 0.5 1.3 9 69 4.9 8
Thailand 133 31 22 701 3.7 1.3 11 55 22.0 14
Chile 90 45 18 188 1.0 1.3 7 28 3.4 3
Poland 108 35 22 332 1.7 1.2 14 64 na na
Colombia 47 44 3 184 1.0 0.7 2 133 7.8 8
Peru 86 23 7 48 0.3 0.6 4 57 7.4 7
Hungary 27 69 4 120 0.6 0.6 2 75 1.4 1
Egypt 39 41 12 67 0.4 0.5 7 25 1.2 1
Czech Republic 43 33 3 78 0.4 0.4 3 100 na na
Philippines 41 32 12 27 0.1 0.4 7 67 19.0 14
Morocco 38 23 6 9 0.0 0.3 4 83 0.7 1
Total 6303 50 752 19015 100 100 232 141
AC World Index Market Capitalization MSCI Regional Market Capitalization Top 8 versus Rest of Emerging Markets
Russia
Emerging EM Latin India 6% Rest of EM
Markets America 8%
North America 16%
13% Mex ico
24%
46% 4% Korea
Japan 13%
8% EM Asia EM Europe and
Dev eloped 55% China Taiw an
Middle East
Asia 21%
18% 11%
5% South Africa
Dev eloped Brazil
7%
Europe 17%
28%

Source: MSCI, J.P. Morgan. Updated 30 November 2009.

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Perspective: MSCI Emerging Market Index Composition by Countries and Sectors


Number of Companies: 752 Total Market Capitalization (in billion US$): 6303 Estimated Free float : 50%

Consumer Staples

Telecom Services
Discretionary

Technology
Information
Health care

Industrials
Consumer

Financials

Materials

Utilities
Energy
MSCI Emerging

Total
Markets Free Index

China 0.8 0.7 3.3 7.2 0.0 1.6 1.0 1.0 2.3 0.3 18.3
Korea 1.4 0.7 0.3 2.3 0.1 1.9 3.5 1.8 0.4 0.3 12.6
Taiwan 0.3 0.2 0.1 1.7 0.4 6.6 1.4 0.5 11.1
India 0.4 0.4 1.3 1.9 0.3 0.7 1.2 0.8 0.1 0.5 7.5
Malaysia 0.3 0.4 0.0 0.8 0.5 0.0 0.2 0.3 2.7
Indonesia 0.2 0.1 0.2 0.5 0.1 0.1 0.3 0.2 1.8
Thailand 0.0 0.0 0.5 0.4 0.1 0.1 0.0 1.2
Philippines 0.0 0.2 0.0 0.1 0.1 0.4
Asia 3.5 2.6 5.7 15.2 0.4 5.1 12.3 5.3 4.0 1.6 55.6
South Africa 0.8 0.3 0.7 1.8 0.1 0.3 1.9 0.9 7.0
Russia 0.0 3.9 0.8 0.0 0.9 0.6 0.2 6.5
Israel 0.3 1.5 0.1 0.2 0.3 0.2 2.7
Poland 0.0 0.2 0.7 0.0 0.0 0.2 0.1 1.3
Turkey 0.0 0.1 0.1 0.7 0.1 0.0 0.2 1.3
Hungary 0.1 0.3 0.1 0.1 0.6
Egypt 0.2 0.1 0.0 0.1 0.5
Czech Republic 0.1 0.1 0.3 0.4
Morocco 0.1 0.0 0.1 0.3
EMEA 0.9 0.5 5.0 5.1 1.8 0.7 0.3 3.4 2.4 0.5 20.5
Brazil 0.4 1.2 4.6 3.7 0.3 0.3 4.8 0.7 0.9 16.8
Mexico 0.5 1.0 0.2 0.2 0.7 1.8 4.4
Chile 0.0 0.1 0.1 0.3 0.3 0.0 0.4 1.3
Peru 0.2 0.5 0.7
Colombia 0.2 0.3 0.1 0.1 0.6
LatAm 1.0 2.3 4.8 4.5 0.8 0.3 6.4 2.5 1.4 23.9
Total 5.3 5.4 15.5 24.7 2.2 6.6 12.9 15.0 8.9 3.5 100.0
Source: MSCI, J.P. Morgan. Updated as of 30 November 2009.

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Top Picks
AAC Acoustics ........................................................................................................110
ABSA Group Ltd .....................................................................................................112
Acer Inc. ..................................................................................................................114
Aldar Properties .......................................................................................................116
América Latina Logística (ALL) .............................................................................118
AMMB Holdings .....................................................................................................120
Amorepacific ...........................................................................................................122
Anglo Platinum ........................................................................................................124
Astra International ...................................................................................................126
Asustek Computer....................................................................................................128
Ayala Land...............................................................................................................130
Baidu........................................................................................................................132
Bank Asya................................................................................................................134
Bank Central Asia....................................................................................................136
Bank of China – H ...................................................................................................138
Catcher Technology .................................................................................................140
China Airlines ..........................................................................................................142
China Mengniu Dairy ..............................................................................................144
China Yurun Food Group ........................................................................................146
Container Corporation of India Ltd. ........................................................................148
CP All Pcl ................................................................................................................150
CTC Media ..............................................................................................................152
DongFeng Motor Co., Ltd .......................................................................................154
Energy Development Corporation ...........................................................................156
Enersis......................................................................................................................158
Far Eastone Telecommunications ............................................................................160
FEMSA ....................................................................................................................162
First Gulf Bank ........................................................................................................164
Fubon Financial Holdings........................................................................................166
Gazprom ..................................................................................................................168
Genting ....................................................................................................................170
Grupo Aeroportuario del Sureste .............................................................................172
Hon Hai Precision....................................................................................................174
Hyundai Motor Company ........................................................................................176
ICICI Bank...............................................................................................................178
Info Edge India ........................................................................................................180
Infosys Technologies ...............................................................................................182
JD Group..................................................................................................................184
Land & Houses ........................................................................................................186
Larsen & Toubro......................................................................................................188
LG Display...............................................................................................................190
Lojas Americanas ....................................................................................................192

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LSR Group...............................................................................................................194
Magnit......................................................................................................................196
Manila Water ...........................................................................................................198
Maruti Suzuki India Ltd...........................................................................................200
MediaTek Inc...........................................................................................................202
Metropolitan Bank & Trust Co. ...............................................................................204
MindTree .................................................................................................................206
MMK .......................................................................................................................208
MTN ........................................................................................................................210
Nan Ya Plastics Corp ...............................................................................................212
Naspers ....................................................................................................................214
Ncsoft.......................................................................................................................216
Northam Platinum....................................................................................................218
OGX Petróleo S.A. ..................................................................................................220
PDG Realty ..............................................................................................................222
Powertech Technology Inc. .....................................................................................224
PT Aneka Tambang Tbk..........................................................................................226
PT Perusahaan Gas Negara Tbk...............................................................................228
PTT Public Company...............................................................................................230
Public Bank (F)........................................................................................................232
Qatar Telecom..........................................................................................................234
Rosneft.....................................................................................................................236
RusHydro.................................................................................................................238
Samsung SDI ...........................................................................................................240
Santander Brasil.......................................................................................................242
Sberbank ..................................................................................................................244
Shinhan Financial Group .........................................................................................246
Siam Commercial Bank ...........................................................................................248
Sinopec Corp - H .....................................................................................................250
SK Energy Co Ltd....................................................................................................252
Sohu .........................................................................................................................254
Tambang Batubara Bukit Asam...............................................................................256
Tata Power ...............................................................................................................258
Tenaga Nasional ......................................................................................................260
Ternium S.A.............................................................................................................262
Thai Oil Public Company ........................................................................................264
TOTVS ....................................................................................................................266
TSMC ......................................................................................................................268
Turk Telekom ..........................................................................................................270
UMC ........................................................................................................................272
Unitech Ltd ..............................................................................................................274
United Spirits ...........................................................................................................276
Urbi ..........................................................................................................................278

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Vakifbank ................................................................................................................280
VanceInfo Technologies ..........................................................................................282
Xinao Gas ................................................................................................................284
Yulon Motor ............................................................................................................286

Stocks to Avoid
Açúcar Guarani ........................................................................................................290
AU Optronics...........................................................................................................292
Bank Rakyat Indonesia ............................................................................................294
Beijing Capital Land ................................................................................................296
BYD Electronics ......................................................................................................298
China COSCO..........................................................................................................300
China Southern Airlines...........................................................................................302
China Unicom ..........................................................................................................304
Compal Electronics, Inc...........................................................................................306
Datang International ................................................................................................308
Ecopetrol..................................................................................................................310
Grupo Aeroportuario del Pacifico............................................................................312
Grupo Modelo..........................................................................................................314
HCL Infosystems .....................................................................................................316
Hindustan Unilever ..................................................................................................318
Homex......................................................................................................................320
HTC Corp ................................................................................................................322
Idea Cellular.............................................................................................................324
Lukoil.......................................................................................................................326
Magyar Telekom......................................................................................................328
Manila Electric.........................................................................................................330
Massmart..................................................................................................................332
MISC-F ....................................................................................................................334
Nedbank...................................................................................................................336
New World China Land ...........................................................................................338
PetroChina - H .........................................................................................................340
Quanta Computer Inc...............................................................................................342
Redecard ..................................................................................................................344
Reliance Power ........................................................................................................346
SABESP...................................................................................................................348
Severstal...................................................................................................................350
S-Oil Corp................................................................................................................352
Soriana .....................................................................................................................354
Taishin Financial Holdings ......................................................................................356
Telmex SA ...............................................................................................................358
The9 .........................................................................................................................360

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TMB Bank ...............................................................................................................362


Unilever Indonesia Tbk............................................................................................364
Usiminas ..................................................................................................................366
Weichai Power.........................................................................................................368
YTL Power ..............................................................................................................370

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Companies Recommended in This Report (all prices in this report as of market close on 01 December 2009, unless
otherwise indicated)
AAC Acoustic (2018.HK/HK$11.78/Overweight), ABSA Group Ltd (ASAJ.J/12,770c/Overweight), Acer Inc
(2353.TW/NT$82.60/Overweight), Aldar Properties (ALDR.AD/Dh4.47/Overweight), ALL
(ALLL11.SA/R$15.45/Overweight), Almacenes Exito (IMI.CN/Col$18,400.00/Neutral), AMMB Holdings
(AMMB.KL/M$4.90/Overweight), Amorepacific Corp (090430.KS/W847,000/Overweight), Anglo Platinum
(AMSJ.J/75,700c/Overweight), Astra International (ASII.JK/Rp32,600/Overweight), ASUSTek Computer
(2357.TW/NT$64.20/Overweight), AU Optronics (2409.TW/NT$34.35/Underweight), Ayala Land
(ALI.PS/Php12.50/Overweight), Baidu.com (BIDU/$435.55/Overweight), Banco Santander (Brasil) S.A.
(SANB11.SA/R$24.24/Overweight), Bancolombia (CIB/$43.87/Overweight), Bank Asya
(ASYAB.IS/YTL3.14/Overweight), Bank Central Asia (BCA) (BBCA.JK/Rp4,925/Overweight), Bank of China - H
(3988.HK/HK$4.44/Overweight), Bank Rakyat Indonesia (BBRI.JK/Rp7,600/Underweight), Beijing Capital Land
(2868.HK/HK$3.98/Neutral), Braskem (BRKM5.SA/R$11.78/Neutral), BYD Electronic (0285.HK/HK$6.38/Underweight),
Catcher Technology (2474.TW/NT$90.90/Overweight), Cencosud (CEN.SN/Ch$1,560.00/Underweight), China Airlines
(2610.TW/NT$10.10/Overweight), China Cosco Holdings, Ltd. (1919.HK/HK$10.28/Neutral), China Mengniu Dairy Co.
Ltd. (2319.HK/HK$24.90/Overweight), China Resources Power Holdings (0836.HK/HK$15.80/Neutral), China Southern
Airlines (1055.HK/HK$2.78/Neutral), China Unicom (0762.HK/HK$10.42/Underweight), China Unicom
(CHU/$13.61/Underweight), China Yurun Food Group (1068.HK/HK$19.14/Overweight), Compal Electronics, Inc.
(2324.TW/NT$42.90/Underweight), Compania de Minas Buenaventura (BVN/$41.44/Neutral), Container Corporation of
India Ltd (CCRI.BO/Rs1,199.55/Overweight), COPEL (CPLE6.SA/R$34.08/Overweight), COPEL
(ELP/$20.14/Overweight), CP All Pcl (CPALL.BK/Bt21.60/Overweight), CPFL Energia
(CPFE3.SA/R$33.72/Underweight), CPFL Energia (CPL/$60.02/Underweight), Credicorp (BAP/$72.65/Neutral), CTC
Media (CTCM/$14.14/Overweight), Datang International (0991.HK/HK$3.44/Neutral), DongFeng Motor Co., Ltd.
(0489.HK/HK$12.26/Overweight), Ecopetrol ADR (EC/$25.58/Underweight), Ecopetrol S.A.
(ECO.CN/Col$2,545.00/Underweight), Embotelladoras Arca (ARCA.MX/Ps39.55/Overweight), Energy Development
(EDC) Corporation (EDC.PS/Php4.20/Overweight), ENERSIS S.A. (ENE.SN/Ch$195.00/Overweight), ENERSIS S.A.
(ENI/$19.83/Overweight), Far EasTone Telecommunications Co., Ltd (4904.TW/NT$37.40/Overweight), FEMSA
(FMX/$47.21/Overweight), First Gulf Bank (FGB.AD/Dh15.25/Overweight), Fubon Financial Holdings
(2881.TW/NT$37.30/Overweight), Gazprom (GAZP.RTS/$5.82/Overweight), Genting (GENT.KL/M$6.89/Overweight),
Grupo Aeroportuario del Pacifico SA (GAPB.MX/Ps37.08/Neutral), Grupo Aeroportuario del Sureste SA
(ASURB.MX/Ps67.12/Overweight), Grupo Financiero Banorte (GFNORTEO.MX/Ps47.04/Neutral), Grupo Mexico
(GMEXICOB.MX/Ps31.05/Overweight), Grupo Modelo (GMODELOC.MX/Ps68.57/Neutral), Guarani
(ACGU3.SA/R$5.06/Underweight), HCL Infosystems (HCLI.BO/Rs152.60/Neutral), Hindustan Unilever Limited
(HLL.BO/Rs278.65/Underweight), HOMEX (HOMEX.MX/Ps77.02/Neutral), Hon Hai Precision
(2317.TW/NT$137.50/Overweight), HTC Corp (2498.TW/NT$369.00/Underweight), Huaneng Power Int'l - H
(0902.HK/HK$4.89/Neutral), Hyundai Motor Company (005380.KS/W102,500/Overweight), ICICI Bank
(ICBK.BO/Rs887.20/Overweight), ICICI Bank (IBN/$38.20/Overweight), Idea Cellular Limited
(IDEA.BO/Rs52.00/Underweight), Info Edge India (INED.BO/Rs817.75/Overweight), Infosys Technologies
(INFY.BO/Rs2,395.75/Overweight), JD Group (JDGJ.J/4,436c/Overweight), Land & Houses (LHf.BK/Bt6.40/Overweight),
Larsen & Toubro (LART.BO/Rs1,629.20/Neutral), LG Display (034220.KS/W34,000/Overweight), Lojas Americanas
(Non-Voting) (LAME4.SA/R$15.05/Overweight), LSR (LSRGq.L/$7.25/Overweight), Lukoil
(LKOH.RTS/$59.60/Neutral), Magnit OAO (MGNT.RTS/$65.00/Overweight), Magyar Telekom
(MTEL.BU/Ft731.00/Underweight), Manila Electric Company (MER.PS/Php217.00/Neutral), Manila Water Company Inc
(MWC.PS/Php16.25/Overweight), Maruti Suzuki India Ltd (MRTI.BO/Rs1,587.20/Overweight), Massmart
(MSMJ.J/8,570c/Underweight), MediaTek Inc. (2454.TW/NT$510.00/Overweight), Metropolitan Bank
(MBT.PS/Php46.50/Overweight), MindTree Ltd. (MINT.BO/Rs649.80/Overweight), MISC Berhad - F
(MISCe.KL/M$8.84/Underweight), MISC Berhad - F (MISC.KL/M$8.93/Underweight), MMK (MAGN.RTS/$0.74 [27-
November-2009]/Overweight), MTN Group Limited (MTNJ.J/11,935c/Overweight), Nan Ya Plastics Corp
(1303.TW/NT$56.30/Overweight), Naspers Ltd (NPNJn.J/28,031c/Overweight), NCsoft
(036570.KS/W152,000/Overweight), Nedbank Group Ltd (NEDJ.J/11,535c/Underweight), Netease
(NTES/$39.76/Overweight), New World China Land (0917.HK/HK$3.06/Underweight), Northam Platinum Ltd
(NHMJ.J/4,017c/Overweight), OCI (010060.KS/W188,000/Overweight), OGX (OGXP3.SA/R$1,569.00/Overweight),
Organizacion Soriana (SORIANAB.MX/Ps33.51/Underweight), Orient Overseas Int'l Ltd
(0316.HK/HK$34.45/Overweight), Pacific Basin Shipping (2343.HK/HK$6.05/Overweight), Pacific Rubiales

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(PRE.TO/C$15.83/Overweight), PDG Realty (PDGR3.SA/R$18.39/Overweight), Perusahaan Gas Negara


(PGAS.JK/Rp3,725/Overweight), PETROBRAS PN (PETR4.SA/R$39.78/Overweight), PetroChina
(0857.HK/HK$9.76/Underweight), Powertech Technology Inc (6239.TW/NT$89.80/Overweight), PT Aneka Tambang Tbk
(ANTM.JK/Rp2,300/Overweight), PTT Public Company (PTT.BK/Bt237.00/Overweight), Public Bank (F)
(PUBMe.KL/M$10.86/Overweight), Qtel (QTEL.QA/QR134.70/Overweight), Quanta Computer Inc.
(2382.TW/NT$65.10/Underweight), Redecard (RDCD3.SA/R$27.82/Neutral), Reliance Power
(RPOL.BO/Rs146.65/Underweight), Rosneft (ROSNq.L/$8.50/Overweight), RusHydro (HYDR.RTS/$0.04/Overweight),
SABESP (SBSP3.SA/R$32.38/Underweight), SABESP (SBS/$38.32/Underweight), Samsung Electro-Mechanics
(009150.KS/W95,300/Overweight), Samsung SDI (006400.KS/W132,500/Overweight), Santander
(SAN.MC/€11.60/Overweight), Sberbank (SBER.RTS/$2.44/Overweight), Severstal (CHMF.RTS/$7.53 [27-November-
2009]/Underweight), Shinhan Financial Group (055550.KS/W45,950/Overweight), Siam Commercial Bank
(SCB.BK/Bt84.00/Overweight), Sinopec Corp - H (0386.HK/HK$6.50/Overweight), SK Energy Co Ltd
(096770.KS/W107,500/Overweight), Sohu.Com (SOHU/$56.27/Overweight), S-Oil Corp (010950.KS/W53,700/Neutral),
Southern Copper Corporation (PCU/$35.28/Underweight), SQM (SQM/$38.09/Underweight), Suzano
(SUZB5.SA/R$18.65/Overweight), Taishin Financial Holdings (2887.TW/NT$12.30/Underweight), Tambang Batubara
Bukit Asam (PTBA.JK/Rp16,800/Overweight), Tata Power (TTPW.BO/Rs1,359.65/Overweight), Telmex Internacional
(TII/$16.13/Underweight), Telmex SA (TMX/$18.41/Underweight), Tenaga (TENA.KL/M$8.45/Overweight), Ternium
(TX/$32.54/Overweight), Thai Oil Public Company (TOP.BK/Bt42.25/Overweight), The9 Limited (NCTY/$7.77/Neutral),
TMB Bank Public Company Limited (TMB.BK/Bt1.15/Neutral), Totvs (TOTS3.SA/R$108.00/Overweight), TSMC
(2330.TW/NT$60.70/Overweight), Turk Telekom (TTKOM.IS/YTL4.36/Overweight), UMC
(2303.TW/NT$15.90/Overweight), Unilever Indonesia Tbk (UNVR.JK/Rp11,700/Underweight), Unitech Ltd
(UNTE.BO/Rs88.80/Overweight), United Spirits Limited (UNSP.BO/Rs1,267.90/Overweight), Urbi
(URBI.MX/Ps26.85/Overweight), Usiminas (USIM5.SA/R$51.84/Underweight), Vakifbank
(VAKBN.IS/YTL3.30/Overweight), VanceInfo Technologies Inc. (VIT/$18.31/Overweight), VTB
(VTBRq.L/$4.50/Underweight), Weichai Power (2338.HK/HK$63.90/Neutral), Xinao Gas
(2688.HK/HK$19.62/Overweight), YTL Power (YTLP.KL/M$2.24/Underweight), Yulon Motor Co., Ltd.
(2201.TW/NT$38.75/Overweight)
Analyst Certification:
The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily
responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with
respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report
accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research
analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the
research analyst(s) in this report.
Important Disclosures

• Market Maker: JPMSI makes a market in the stock of Baidu.com, Banco Santander (Brasil) S.A., CTC Media, Netease, Perusahaan
Gas Negara, Sohu.Com, The9 Limited.
• Market Maker/ Liquidity Provider: JPMSL and/or an affiliate is a market maker and/or liquidity provider in ABSA Group Ltd,
Aldar Properties, Bank Asya, Bank Central Asia (BCA), Bank of China - H, Bank Rakyat Indonesia, BYD Electronic, China Cosco
Holdings, Ltd., CTC Media, First Gulf Bank, Gazprom, LSR, Lukoil, Magnit OAO, Magyar Telekom, MMK, Nedbank Group Ltd,
Orient Overseas Int'l Ltd, Qtel, Rosneft, RusHydro, Santander, Sberbank, Severstal, SK Energy Co Ltd, Sohu.Com, S-Oil Corp,
Ternium, Turk Telekom, Vakifbank, VTB.
• Lead or Co-manager: JPMSI or its affiliates acted as lead or co-manager in a public offering of equity and/or debt securities for
Credicorp, Ecopetrol S.A., Gazprom, Genting, Hyundai Motor Company, PETROBRAS PN, Qtel, Severstal, Shinhan Financial
Group, Tata Power, TSMC, Unilever Indonesia Tbk, Vakifbank, VanceInfo Technologies Inc. within the past 12 months.
• Director: A senior employee, executive officer or director of JPMorgan Chase & Co. , JPMSI, and/or its affiliates is a director
and/or officer of China Resources Power Holdings.
• Analyst Position: The following analysts (and/or their associates or household members) own a long position in the shares of Bank
of China - H: Adrian Mowat. The following analysts (and/or their associates or household members) own a long position in the
shares of China Cosco Holdings, Ltd.: Adrian Mowat. The following analysts (and/or their associates or household members) own a
long position in the shares of ICICI Bank: Sunil Garg, Bijay Kumar. The following analysts (and/or their associates or household
members) own a long position in the shares of Idea Cellular Limited: Bijay Kumar. The following analysts (and/or their associates or
household members) own a long position in the shares of Infosys Technologies: Bijay Kumar. The following analysts (and/or their
associates or household members) own a long position in the shares of Larsen & Toubro: Bijay Kumar. The following analysts

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(and/or their associates or household members) own a long position in the shares of Northam Platinum Ltd: Steve Shepherd. The
following analysts (and/or their associates or household members) own a long position in the shares of Orient Overseas Int'l Ltd:
Robert Smith. The following analysts (and/or their associates or household members) own a long position in the shares of Pacific
Basin Shipping: Robert Smith, Adrian Mowat. The following analysts (and/or their associates or household members) own a long
position in the shares of Tata Power: Bijay Kumar. The following analysts (and/or their associates or household members) own a
long position in the shares of UMC: Patrick Liao.
• Beneficial Ownership (1% or more): JPMSI or its affiliates beneficially own 1% or more of a class of common equity securities of
Aldar Properties, Banco Santander (Brasil) S.A., Bank of China - H, Datang International, DongFeng Motor Co., Ltd., HCL
Infosystems, Hindustan Unilever Limited, Hyundai Motor Company, Lojas Americanas (Non-Voting), Metropolitan Bank, Pacific
Basin Shipping, PDG Realty, PETROBRAS PN, PetroChina, Powertech Technology Inc, Reliance Power, Telmex Internacional,
Unilever Indonesia Tbk, Unitech Ltd.
• Client of the Firm: AAC Acoustic is or was in the past 12 months a client of JPMSI. ABSA Group Ltd is or was in the past 12
months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related
services. Acer Inc is or was in the past 12 months a client of JPMSI. Aldar Properties is or was in the past 12 months a client of
JPMSI. ALL is or was in the past 12 months a client of JPMSI. Almacenes Exito is or was in the past 12 months a client of JPMSI;
during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related
services and non-securities-related services. AMMB Holdings is or was in the past 12 months a client of JPMSI. Anglo Platinum is
or was in the past 12 months a client of JPMSI. Astra International is or was in the past 12 months a client of JPMSI. ASUSTek
Computer is or was in the past 12 months a client of JPMSI. Ayala Land is or was in the past 12 months a client of JPMSI; during
the past 12 months, JPMSI provided to the company non-investment banking securities-related services. Banco Santander (Brasil)
S.A. is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment
banking securities-related services. Bancolombia is or was in the past 12 months a client of JPMSI; during the past 12 months,
JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. Bank Asya is
or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking
securities-related services and non-securities-related services. Bank Central Asia (BCA) is or was in the past 12 months a client of
JPMSI. Bank of China - H is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the
company investment banking services, non-investment banking securities-related services and non-securities-related services. Bank
Rakyat Indonesia is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-
investment banking securities-related services and non-securities-related services. Beijing Capital Land is or was in the past 12
months a client of JPMSI. Braskem is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to
the company investment banking services, non-investment banking securities-related services and non-securities-related services.
Catcher Technology is or was in the past 12 months a client of JPMSI. Cencosud is or was in the past 12 months a client of JPMSI.
China Airlines is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-
investment banking securities-related services and non-securities-related services. China Cosco Holdings, Ltd. is or was in the past
12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. China
Resources Power Holdings is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the
company investment banking services. China Unicom is or was in the past 12 months a client of JPMSI; during the past 12 months,
JPMSI provided to the company investment banking services. China Yurun Food Group is or was in the past 12 months a client of
JPMSI. Compal Electronics, Inc. is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to
the company non-investment banking securities-related services and non-securities-related services. Compania de Minas
Buenaventura is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-
investment banking securities-related services. CPFL Energia is or was in the past 12 months a client of JPMSI. Credicorp is or was
in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services.
CTC Media is or was in the past 12 months a client of JPMSI. Datang International is or was in the past 12 months a client of JPMSI.
Ecopetrol ADR is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company
investment banking services, non-investment banking securities-related services and non-securities-related services. Ecopetrol S.A.
is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking
services, non-investment banking securities-related services and non-securities-related services. Embotelladoras Arca is or was in the
past 12 months a client of JPMSI. Energy Development (EDC) Corporation is or was in the past 12 months a client of JPMSI; during
the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related
services. ENERSIS S.A. is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the
company investment banking services. FEMSA is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI
provided to the company non-investment banking securities-related services and non-securities-related services. First Gulf Bank is or
was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking
securities-related services and non-securities-related services. Fubon Financial Holdings is or was in the past 12 months a client of
JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services. Gazprom is
or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking
services, non-investment banking securities-related services and non-securities-related services. Genting is or was in the past 12
months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. Grupo
Aeroportuario del Sureste SA is or was in the past 12 months a client of JPMSI. Grupo Financiero Banorte is or was in the past 12

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months a client of JPMSI. Grupo Mexico is or was in the past 12 months a client of JPMSI. Grupo Modelo is or was in the past 12
months a client of JPMSI. Hindustan Unilever Limited is or was in the past 12 months a client of JPMSI. HOMEX is or was in the
past 12 months a client of JPMSI. Hon Hai Precision is or was in the past 12 months a client of JPMSI; during the past 12 months,
JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. Huaneng
Power Int'l - H is or was in the past 12 months a client of JPMSI. Hyundai Motor Company is or was in the past 12 months a client
of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking
securities-related services and non-securities-related services. ICICI Bank is or was in the past 12 months a client of JPMSI; during
the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related
services. Idea Cellular Limited is or was in the past 12 months a client of JPMSI. Infosys Technologies is or was in the past 12
months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related
services and non-securities-related services. Larsen & Toubro is or was in the past 12 months a client of JPMSI; during the past 12
months, JPMSI provided to the company non-investment banking securities-related services and non-securities-related services. LG
Display is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment
banking services and non-investment banking securities-related services. Lojas Americanas (Non-Voting) is or was in the past 12
months a client of JPMSI. Lukoil is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to
the company investment banking services and non-securities-related services. Magyar Telekom is or was in the past 12 months a
client of JPMSI. Manila Electric Company is or was in the past 12 months a client of JPMSI. Manila Water Company Inc is or was
in the past 12 months a client of JPMSI. Maruti Suzuki India Ltd is or was in the past 12 months a client of JPMSI. Massmart is or
was in the past 12 months a client of JPMSI. MediaTek Inc. is or was in the past 12 months a client of JPMSI. Metropolitan Bank is
or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking
securities-related services and non-securities-related services. MindTree Ltd. is or was in the past 12 months a client of JPMSI.
MISC Berhad - F is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-
investment banking securities-related services. MMK is or was in the past 12 months a client of JPMSI. MTN Group Limited is or
was in the past 12 months a client of JPMSI. Naspers Ltd is or was in the past 12 months a client of JPMSI; during the past 12
months, JPMSI provided to the company investment banking services. NCsoft is or was in the past 12 months a client of JPMSI.
Nedbank Group Ltd is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company
investment banking services and non-investment banking securities-related services. Netease is or was in the past 12 months a client
of JPMSI. New World China Land is or was in the past 12 months a client of JPMSI. Northam Platinum Ltd is or was in the past 12
months a client of JPMSI. OCI is or was in the past 12 months a client of JPMSI. OGX is or was in the past 12 months a client of
JPMSI. Organizacion Soriana is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the
company investment banking services. Orient Overseas Int'l Ltd is or was in the past 12 months a client of JPMSI. Pacific Basin
Shipping is or was in the past 12 months a client of JPMSI. Pacific Rubiales is or was in the past 12 months a client of JPMSI;
during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-
related services. Perusahaan Gas Negara is or was in the past 12 months a client of JPMSI. PETROBRAS PN is or was in the past 12
months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment
banking securities-related services and non-securities-related services. PetroChina is or was in the past 12 months a client of JPMSI.
Powertech Technology Inc is or was in the past 12 months a client of JPMSI. PT Aneka Tambang Tbk is or was in the past 12
months a client of JPMSI. PTT Public Company is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI
provided to the company investment banking services, non-investment banking securities-related services and non-securities-related
services. Public Bank (F) is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the
company non-investment banking securities-related services and non-securities-related services. Qtel is or was in the past 12 months
a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking
securities-related services and non-securities-related services. Quanta Computer Inc. is or was in the past 12 months a client of
JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-
securities-related services. Reliance Power is or was in the past 12 months a client of JPMSI. Rosneft is or was in the past 12 months
a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services.
SABESP is or was in the past 12 months a client of JPMSI. Samsung Electro-Mechanics is or was in the past 12 months a client of
JPMSI. Samsung SDI is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company
non-investment banking securities-related services. Santander is or was in the past 12 months a client of JPMSI; during the past 12
months, JPMSI provided to the company investment banking services, non-investment banking securities-related services and non-
securities-related services. Sberbank is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to
the company investment banking services, non-investment banking securities-related services and non-securities-related services.
Severstal is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment
banking services. Shinhan Financial Group is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI
provided to the company investment banking services and non-investment banking securities-related services. Siam Commercial
Bank is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment
banking securities-related services and non-securities-related services. Sinopec Corp - H is or was in the past 12 months a client of
JPMSI. SK Energy Co Ltd is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the
company non-investment banking securities-related services and non-securities-related services. Sohu.Com is or was in the past 12
months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related

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services and non-securities-related services. S-Oil Corp is or was in the past 12 months a client of JPMSI. Southern Copper
Corporation is or was in the past 12 months a client of JPMSI. SQM is or was in the past 12 months a client of JPMSI; during the
past 12 months, JPMSI provided to the company non-securities-related services. Suzano is or was in the past 12 months a client of
JPMSI. Taishin Financial Holdings is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to
the company non-investment banking securities-related services. Tata Power is or was in the past 12 months a client of JPMSI;
during the past 12 months, JPMSI provided to the company investment banking services and non-investment banking securities-
related services. Telmex Internacional is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided
to the company non-investment banking securities-related services. Telmex SA is or was in the past 12 months a client of JPMSI;
during the past 12 months, JPMSI provided to the company non-investment banking securities-related services and non-securities-
related services. Tenaga is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the
company non-investment banking securities-related services. Ternium is or was in the past 12 months a client of JPMSI; during the
past 12 months, JPMSI provided to the company non-securities-related services. Thai Oil Public Company is or was in the past 12
months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related
services and non-securities-related services. TMB Bank Public Company Limited is or was in the past 12 months a client of JPMSI;
during the past 12 months, JPMSI provided to the company investment banking services and non-investment banking securities-
related services. Totvs is or was in the past 12 months a client of JPMSI. TSMC is or was in the past 12 months a client of JPMSI;
during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related
services and non-securities-related services. Turk Telekom is or was in the past 12 months a client of JPMSI. Unilever Indonesia Tbk
is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking
services. Unitech Ltd is or was in the past 12 months a client of JPMSI. Urbi is or was in the past 12 months a client of JPMSI.
Usiminas is or was in the past 12 months a client of JPMSI. Vakifbank is or was in the past 12 months a client of JPMSI; during the
past 12 months, JPMSI provided to the company investment banking services. VanceInfo Technologies Inc. is or was in the past 12
months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. VTB is or was
in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services,
non-investment banking securities-related services and non-securities-related services. YTL Power is or was in the past 12 months a
client of JPMSI. Yulon Motor Co., Ltd. is or was in the past 12 months a client of JPMSI.
• Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for investment banking
services from Almacenes Exito, Banco Santander (Brasil) S.A., Bank of China - H, Braskem, China Cosco Holdings, Ltd., China
Resources Power Holdings, China Unicom, Credicorp, Ecopetrol ADR, Ecopetrol S.A., ENERSIS S.A., Gazprom, Genting, Hyundai
Motor Company, LG Display, Lukoil, Naspers Ltd, Nedbank Group Ltd, Organizacion Soriana, PETROBRAS PN, PTT Public
Company, Qtel, Santander, Sberbank, Severstal, Shinhan Financial Group, Tata Power, TMB Bank Public Company Limited,
TSMC, Unilever Indonesia Tbk, Vakifbank, VanceInfo Technologies Inc., VTB.
• Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment
banking services in the next three months from AAC Acoustic, Almacenes Exito, Anglo Platinum, Banco Santander (Brasil) S.A.,
Bancolombia, Bank Central Asia (BCA), Bank of China - H, Bank Rakyat Indonesia, Beijing Capital Land, Braskem, China Cosco
Holdings, Ltd., China Resources Power Holdings, China Unicom, Compania de Minas Buenaventura, CPFL Energia, Credicorp,
CTC Media, Datang International, Ecopetrol ADR, Ecopetrol S.A., ENERSIS S.A., Gazprom, Genting, Grupo Modelo, Huaneng
Power Int'l - H, Hyundai Motor Company, ICICI Bank, Infosys Technologies, Larsen & Toubro, LG Display, Lukoil, Massmart,
MediaTek Inc., MindTree Ltd., MMK, MTN Group Limited, Naspers Ltd, Nedbank Group Ltd, Northam Platinum Ltd,
Organizacion Soriana, Pacific Basin Shipping, PETROBRAS PN, Powertech Technology Inc, PTT Public Company, Qtel, Reliance
Power, Santander, Sberbank, Severstal, Shinhan Financial Group, Siam Commercial Bank, Sinopec Corp - H, Tata Power, Telmex
SA, Tenaga, Thai Oil Public Company, TMB Bank Public Company Limited, Totvs, TSMC, Unilever Indonesia Tbk, Vakifbank,
VanceInfo Technologies Inc., VTB.
• Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other
than investment banking from ABSA Group Ltd, Almacenes Exito, Ayala Land, Banco Santander (Brasil) S.A., Bancolombia, Bank
Asya, Bank of China - H, Bank Rakyat Indonesia, Braskem, China Airlines, Compal Electronics, Inc., Compania de Minas
Buenaventura, Ecopetrol ADR, Ecopetrol S.A., Energy Development (EDC) Corporation, FEMSA, First Gulf Bank, Fubon Financial
Holdings, Gazprom, Hon Hai Precision, Hyundai Motor Company, ICICI Bank, Infosys Technologies, Larsen & Toubro, LG
Display, Metropolitan Bank, MISC Berhad - F, Nedbank Group Ltd, Pacific Rubiales, PETROBRAS PN, PTT Public Company,
Public Bank (F), Qtel, Quanta Computer Inc., Rosneft, Samsung SDI, Santander, Sberbank, Shinhan Financial Group, Siam
Commercial Bank, SK Energy Co Ltd, Sohu.Com, Taishin Financial Holdings, Tata Power, Telmex Internacional, Telmex SA,
Tenaga, Thai Oil Public Company, TMB Bank Public Company Limited, TSMC, VTB. An affiliate of JPMSI has received
compensation in the past 12 months for products or services other than investment banking from ABSA Group Ltd, Almacenes
Exito, Anglo Platinum, Ayala Land, Banco Santander (Brasil) S.A., Bancolombia, Bank Asya, Bank of China - H, Bank Rakyat
Indonesia, Braskem, Catcher Technology, Compal Electronics, Inc., Ecopetrol ADR, Ecopetrol S.A., Energy Development (EDC)
Corporation, First Gulf Bank, Fubon Financial Holdings, HOMEX, Hyundai Motor Company, ICICI Bank, LG Display, Magyar
Telekom, Manila Electric Company, MediaTek Inc., Metropolitan Bank, Nedbank Group Ltd, Pacific Rubiales, PETROBRAS PN,
Powertech Technology Inc, Public Bank (F), Qtel, Quanta Computer Inc., Rosneft, Santander, Sberbank, Shinhan Financial Group,
Siam Commercial Bank, SK Energy Co Ltd, Sohu.Com, Southern Copper Corporation, SQM, Suzano, Tata Power, Telmex
Internacional, Telmex SA, Ternium, Thai Oil Public Company, TMB Bank Public Company Limited, TSMC, Unilever Indonesia

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Tbk, Vakifbank, VanceInfo Technologies Inc., VTB.


• J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants
of Hyundai Motor Company and owns 3,599,000 as of 01-Dec-09.
• J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants
of LG Display and owns 3,600,000 as of 01-Dec-09.
• Beneficial Ownership (1% or more): JPMSI or its affiliates beneficially own 1% or more of a class of common equity securities or
similar instruments of OCI.
• J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants
of Samsung Electro-Mechanics Co. Ltd. and owns 3,200,900 as of 01-Dec-09.
• J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants
of Shinhan Financial Group and owns 3,563,430 as of 01-Dec-09.
• J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants
of SK Energy Co Ltd and owns 3,597,980 as of 01-Dec-09.
• MSCI: The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior
written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or
used to create any financial products, including any indices. This information is provided on an 'as is' basis. The user assumes the
entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or
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Important Disclosures for Equity Research Compendium Reports: Important disclosures, including price charts for all companies
under coverage for at least one year, are available through the search function on J.P. Morgan’s website
https://mm.jpmorgan.com/disclosures/company or by calling this U.S. toll-free number (1-800-477-0406)

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:


J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector
and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2009


Overweight Neutral Underweight
(buy) (hold) (sell)
JPM Global Equity Research Coverage 39% 46% 15%
IB clients* 56% 57% 42%
JPMSI Equity Research Coverage 38% 51% 10%
IB clients* 76% 72% 56%
*Percentage of investment banking clients in each rating category.
For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on
any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on
the front of this note or your J.P. Morgan representative.

Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon
various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which
include revenues from, among other business units, Institutional Equities and Investment Banking.

Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US
affiliates of JPMSI, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMSI,
and may not be subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public
appearances, and trading securities held by a research analyst account.

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Other Disclosures

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material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the
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“Other Disclosures” last revised October 26, 2009.

Copyright 2009 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or
redistributed without the written consent of J.P. Morgan.

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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

History of corrections in MSCI Emerging Markets: Last year's was the biggest
16 Feb 94, 563 10 Jul 97, 571 10 Feb 00, 531.0 10 May 06, 879
24 Aug 94, 454 5 Oct 98, 241 3 Oct 01, 247 13 Jun 06, 665
Decline 19% Decline 58% Decline 54% 12-April-04, 497 Decline 24%
Duration 59 day s Duration 323 day s Duration 430 day s 17-May -04, 396 Duration 25 day s
Fed tightening Asian Crisis 2000 Global Correction Decline 20% Fear of Fed ov ertightening
1 Aug 90, 257
Duration 26 day s
16 Jan 91, 175
Start of Fed tightening
Decline 32%
Duration 121 day s 26 Feb 07, 940
Iraq inv ades Kuw ait 5 Mar 07, 844
Decline 10%
Duration 8 day s
A-shares fall, US profit
22 Sep 94, 586
9 Mar 95, 396 f
Decline 33%
22 Apr 92, 353 Duration 121days 23 July 07, 1163
24 Aug 92, 286 Mexican Tequila Crisis 31 October 2007, 1338
19 Feb 90, 239 25%rally 16 August 07, 957
Decline 19% 27 October 2008, 454
9 Apr 90, 198 Decline 18%
Duration 89 day s Decline 66%
Decline 17% Duration 19 day s
Brazilian Fall 18-Apr-02, 364 Duration 268 day s
Duration 36 day s 10-Oct-02, 254 US sub-prime and
Credit Crisis and EM
Decline 30% global credit market
Inflation
concerns
4.4
Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

Source: Datastream, J.P. Morgan

J.P. Morgan Emerging Market Strategy Team

Chief Equity Strategists


Adrian Mowat Asia and Emerging Market (852) 2800 8599 adrian.mowat@jpmorgan.com
Ben Laidler Latin America (212) 622 5252 ben.m.laidler@jpmchase.com
Deanne Gordon CEEMEA, South Africa (27-21) 712 0875 deanne.gordon@jpmorgan.com
Sriyan Pietersz ASEAN and Frontier Markets (66-2) 684 2670 sriyan.pietersz@jpmorgan.com
Thomas J Lee US (1) 212 622 6505 thomas.lee@jpmorgan.com
Mislav Matejka Europe (44-20) 7325 5242 mislav.matejka@jpmorgan.com
Hajime Kitano Japan (81-3) 5545 8655 hajime.x.kitano@jpmorgan.com
Country Strategists
Frank Li China (852) 2800 8511 frank.m.lli@jpmorgan.com
Bharat Iyer India (91-22) 6157 3600 bharat.x.iyer@jpmorgan.com
Aditya Srinath Indonesia (62-21) 5291 8573 aditya.s.srinath@jpmchase.com
Nick Lai Taiwan (886-2) 27259864 nick.yc.lai@jpmorgan.com
Scott Seo Korea (82-2) 758 5759 scott.seo@jpmorgan.com
Chris Oh Malaysia (60-3) 2270 4728 chris.ch.oh@jpmorgan.com
Emy Shayo Brazil (55-11) 3048 6684 emy.shayo@jpmorgan.com
Ben Laidler Mexico (212) 622 5252 ben.m.laidler@jpmchase.com
Brian Chase Southern Cone & Andean (562) 425 5245 brian.p.chase@jpmorgan.com
Deanne Gordon South Africa (27-21) 712 0875 deanne.gordon@jpmorgan.com
Kelly Lim-Bate Philippines (63-2) 8781 188 kelly.s.lim@jpmorgan.com
Economic & Policy Research
Joyce Chang Global Head, Emerging Markets Research (1-212) 834 4203 joyce.chang@jpmorgan.com
David Fernandez Emerging Asia (65) 6882 2461 david.g.fernandez@jpmorgan.com
Jiwon Lim Korea (82-2) 758 5509 jiwon.c.lim@jpmorgan.com
Jahangir Aziz India (9122) 6157 3385 jahangir.x.aziz@jpmorgan.com
Qian Wang China, Taiwan and Hong Kong (852) 2800 7009 qian.li.wang@jpmorgan.com
Vladimir Werning Argentina, Chile (1-212) 834 4144 vladimir.werning@jpmorgan.com
Fabio Akira Brazil (55-11) 3048 3634 fabio.akira@jpmorgan.com
Gabriel Casilledas Mexico (52-55)-5540-9558 gabriel.casillas@jpmchase.com
Michael Marrese Regional Head, Emerging Europe (44-20) 7777 4627 michael.marrese@jpmorgan.com
Yarkin Cebeci Turkey (90-212) 326 5890 yarkin.cebeci@jpmorgan.com
Sonja Keller South Africa (27-11) 507 0376 sonja.c.keller@jpmorgan.com
Nina A Chebotareva Russia (7-095) 937 7321 nina.a.chebotareva@jpmorgan.com
Nora Szentivanyi Hungary, Poland & Czech Republic (44-20) 7777 3981 nora.szentivanyi@jpmorgan.com

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