Asia Pacific Equity Research

26 November 2010

Top Stories
Hon Hai Precision (N), Taiwan Sunil Garg
Price target reduced to NT$115 – too early to buy (852) 2800-8518
sunil.garg@jpmorgan.com
(Gokul Hariharan) Send me your feedback!
Although Hon Hai has underperformed PC stocks in the last three
months, we advise investors to wait until OP margins trough in AM perspective
1Q/2Q11, or below 10x FY11 earnings. While growth from Apple is Adrian Mowat, Chief Equity Strategist
likely to remain strong, we believe margins need to stabilize for the FDI in non-China Asia increases
stock to perform again. Buy closer to NT$100. $ bn China Indo Malaysia Phil Thail
2007 138.4 6.9 8.6 2.9 11.3
2008 147.8 9.3 7.2 1.5 8.6
Indika Energy (OW), Indonesia 2009 78.2 4.9 1.4 1.9 6.0
Initiate with OW and Rp5,000 PT – 35% upside Source: CEIC.
(Stevanus Juanda)
Higher labor costs, strengthening Renminbi and
We see Indika as one of the most attractively priced Indonesian coal tensions between Japan and China improve the
companies with a promising growth profile. Strong earnings growth in attractiveness of other emerging markets for FDI.
FY10E (50.4%) and FY11E (54.1%) and the planned spin-off of The main beneficiaries are ASEAN, Turkey and
Petrosea in FY11E will drive the share price’s outperformance vs. the Mexico. A small change in China's share of FDI
JCI in the next 6-12 months, in our view. could lead to a large increase in FDI in ASEAN as
shown in the table. We are overweight on ASEAN
and Turkey. For more please see Asian Year Ahead
Sinopac Financial Holdings (OW), Taiwan 2011- Stock Ideas for the Year of the Rabbit, Mowat
Trading gains boost 3Q results, but business could slow down et al, 15 November 2010
(Dexter Hsu) Click below for the:
3Q10 net income beat consensus and our full-year forecast due to
strong stock trading gains. We expect the strong outlook for the broker J.P. Morgan Daily Valuations
business to provide upside potential; however, from historical Latest Weekly AP Banks Analyzer (.xls)
experience, the recent management re-shuffle could lead to slow Daily Global Economic Briefing
business growth which might not offset rising costs
Link to Other FTMs page
Construction, Malaysia Link to Morgan Markets page
Major infrastructure project awards in sight
(Mak Hoy Kit)
The stocks within our construction sector universe have an attractive
estimated two-year EPS CAGR of 22.3% on average. IJM (OW, PT:
M$6.44) is our top large-cap construction pick, while WCT (OW, PT:
M$3.80) is our top mid-cap pick. We are Neutral on Gamuda as MRT
tunneling works are largely priced in, in our view.

Shipbuilding, South Korea

Signs of a cyclical recovery
(Jinmook Kim)
According to Korea Economic Daily, DSME was selected as the
preferred bidder of Maersk’s 20-container-ship order, worth $4B.
Although this order is positive for DSME’s order book, we see more
meaningful implications for the recovery cycle of the sector in 2011. We
prefer Hyundai Heavy as a proxy to a cyclical recovery.

See the end pages of each individual note 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.
Recommendation and Forecast Changes
• Genting Plantations (Neutral), Malaysia (Simone Yeoh)
3Q10 results in line; prefer Sime and KLK
• Hite Brewery (Underweight), South Korea (Jinah Lee)
Imported beer penetration to accelerate
• Hon Hai Precision (Neutral), Taiwan (Gokul Hariharan)
Stuck in transition; too early to buy
• Indika Energy (Overweight),
TIP Markets (Stevanus Juanda)
Share price re-rating, attractive valuation and Petrosea spin-
off - Initiating with OW
• Lee & Man Paper Manufacturing (Overweight),
Hong Kong (Leon Chik, CFA)
Near term margin recovery and more aggressive expansion
• Vanguard International Semiconductor Corporation
(Underweight), Taiwan (Rick Hsu)
Inventory correction could take longer
Strategy
• Market Strategy, Asia Pacific (Adrian Mowat)
Consensus Asset Allocation: Emerging Markets Equity
Strategy
• Market Strategy, Asia Pacific (Adrian Mowat)
Emerging Markets Strategy Dashboards
Economics
• Economy, Hong Kong (Lu Jiang)
Exports slide further in October
• Economy, South Korea (James DH Lee)
consumer sentiment advanced in November
• Economy, TIP Markets (Matt Hildebrandt)
Philippines: another weak Asian GDP report
• Economy, TIPV Markets (Matt Hildebrandt)
Vietnam: another disappointing trade report
Results and Company Views
• Genting (Overweight), Malaysia (Hoy Kit Mak)
Genting Singapore drives 3Q10 earnings - ALERT
• Genting Malaysia (Overweight),
Malaysia (Hoy Kit Mak)
3Q10 results reveal weakness in operating trends - ALERT
• JSW Energy Ltd. (Neutral), India (Shilpa Krishnan)
Benefits of African coal mine acquisition will take awhile to
play out - ALERT
• MISC Berhad (Neutral), Malaysia (Simone Yeoh)
1HFY11 results and analyst briefing - ALERT
• Nestlé India Limited (Neutral),
India (Latika Chopra, CFA)
Analyst Meet Takeaways : On a high capex trajectory
• Siemens India (Neutral), India (Sumit Kishore)
Healthy execution and margin improvement in the Sep-q
Sector Research
• Integrated Oils, Exploration & Production, China
(Brynjar Eirik Bustnes)
China oil and gas demand: Expected drop in Chinese diesel
exports not yet materialized
• Mining, India (Pinakin Parekh, CFA)
India Iron ore: Oct exports decline 30% y/y; Export ban in
Karnataka- While appeal likely in SC, Feb-11 next important
date
 Asia Analyst Focus List
Mkt. Cap Mkt. Cap Focus List Focus List Close Target Date Target
Company Name Ticker Analyst Rating (MM) (US$ MM) Add Date Add Price 11/25/10 Price Price Set
Australia
Aristocrat Leisure Limited (A$) ALL AU Stuart Jackson, CFA OW 1778 1744 30-Oct-09 4.52 3.33 4.60 11-Nov-10
Campbell Brothers Limited (A$) CPB AU Alexander Mees, ACA OW 2367 2322 9-Sep-09 24.33 35.35 38.87 18-Nov-10
iiNet (A$) IIN AU Laurent Horrut OW 415 407 2-Aug-10 2.78 2.73 3.33 2-Aug-10
China
Baoshan Iron & Steel – A (Rmb) 600019 CH Nathan M. Zibilich, CFA OW 113478 17063 12-Oct-10 7.11 6.48 10.00 12-Oct-10
China Merchants Bank Co., Ltd - A (HK$) 600036 CH Samuel Chen OW 307690 46266 29-Apr-10 13.82 13.48 19.10 8-Aug-10
Industrial and Commercial Bank of China - A (Rmb) 601398 CH Samuel Chen OW 1599768 240549 30-Oct-09 4.95 4.39 7.0 11-Nov-10
Hong Kong
AAC Acoustic (HK$) 2018 HK Charles Guo OW 24806 3197 8-Sep-09 6.91 20.20 22.00 2-Nov-10
Bank of China 'H' (HK$) 3988 HK Samuel Chen OW 1105200 142443 4-Mar-09 2.16 4.16 5.4 27-Aug-10
Brilliance China Automotive (HK$) 1114 HK Frank Li OW 35807 4615 15-Oct-10 6.42 7.17 9.60 15-Oct-10
China Citic Bank - H Share (HK$) 998 HK Samuel Chen OW 244001 31448 23-Nov-09 6.73 5.62 8.80 10-Nov-10
China High Speed Transmission (HK$) 658 HK Boris Kan OW 20626 2658 6-May-10 18.42 15.00 24.30 6-May-10
China Unicom (Hong Kong) Limited (HK$) 762 HK Lucy Liu OW 250702 32311 2-Aug-10 10.22 10.64 12.90 1-Nov-10
Cosco Pacific (HK$) 1199 HK Karen Li OW 33623 4333 26-Aug-08 10.64 12.40 16.10 10-Nov-10
Geely Automobile Holdings Ltd. (HK$) 175 HK Frank Li OW 32702 4215 15-Oct-10 3.79 4.40 6.20 15-Oct-10
HSBC Holdings plc (HK$) 5 HK Sunil Garg OW 1415722 182464 24-May-10 71.65 80.05 115.00 22-Apr-10
K Wah International Holdings (HK$) 173 HK Amy Luk, CFA OW 7371 950 13-Apr-10 2.98 2.89 3.8 25-Aug-10
Longfor Properties Co. Ltd. (HK$) 960 HK Ryan Li OW 51344 6617 18-Nov-10 9.44 9.96 13.5 18-Nov-10
Mongolian Mining Corporation (HK$) 975 HK Nathan M. Zibilich, CFA OW 31493 4059 15-Nov-10 8.68 8.50 11.0 15-Nov-10
Shenzhen Expressway H Share (HK$) 548 HK Karen Li, CFA OW 12099 1559 8-Sep-10 3.90 4.42 8.1 8-Sep-10
The United Laboratories (HK$) 3933 HK Leon Chik, CFA OW 20876 2691 5-Nov-10 15.52 16.04 25.0 5-Nov-10
Wheelock & Company Ltd (HK$) 20 HK Benjamin Lo, CFA OW 57501 7411 19-Nov-10 28.85 28.30 38.1 19-Nov-10
Zhejiang Expressway (HK$) 576 HK Karen Li, CFA OW 32182 4148 20-Apr-10 6.83 7.41 9.10 21-Nov-10
India
Apollo Hospitals Enterprise Ltd. (Rs) APHS IN Princy Singh OW 58819 1292 5-Oct-10 463.15 476.00 575.0 5-Oct-10
Ballarpur Industries Ltd (Rs) BILT IN Princy Singh OW 23032 506 20-Oct-10 35.30 35.05 50.0 20-Oct-10
Dish TV (Rs) DITV IN Princy Singh OW 71900 1580 13-Sep-10 56.30 67.60 70.0 13-Sep-10
IndusInd Bank (Rs) IIB IN Seshadri K Sen, CFA OW 133405 2931 19-Nov-10 265.15 287.10 350 11-Oct-10
Japan
Dainippon Screen Mfg. (¥) 7735 JT Hisashi Moriyama OW 136384 1632 22-Jun-10 478 537.00 720.00 11-Aug-10
FUJIFILM Holdings (¥) 4901 JT Hisashi Moriyama OW 1461023 17486 26-Jan-10 2,942 2839.00 4,500.00 28-May-10
Hitachi (¥) 6501 JT Yoshiharu Izumi OW 1816298 21739 29-Jul-09 293 402.00 590.00 23-Apr-10
Honda Motor (¥) 7267 JT Kohei Takahashi OW 5588257 66884 19-Jan-10 3,370 3085.00 3,600.00 22-Oct-10
Inpex Corporation (¥) 1605 JT Brynjar Eirik Bustnes OW 1604900 19209 1-Sep-10 389,000 439000.00 630,000.00 31-Aug-10
Malaysia
RHB Capital (M$) RHBC MK Harsh Wardhan Modi OW 17249 5497 18-Nov-10 7.8 8.01 10.60 16-Nov-10
Philippines
International Container Terminal Services, Inc. (Php) ICT PM Jeanette Yutan OW 77239 1751 8-Sep-10 39.9 39.90 49.00 20-Oct-10
Philippine Stock Exchange Inc (Php) PSE PM Harsh Wardhan Modi OW 11471 260 9-Oct-07 820 374.00 605.00 4-Oct-10
Singapore
CapitaLand (S$) CAPL SP Christopher Gee OW 15898 12160 29-Sep-08 3.26 3.73 5.30 18-Jan-10
DBS Group (S$) DBS SP Harsh Wardhan Modi OW 31949 24436 8-Aug-08 14.36 13.84 18.00 1-Aug-10
Global Logistic Properties Ltd (S$) GLP SP Christopher Gee OW 9960 7618 18-Nov-10 2.18 2.21 2.90 18-Nov-10
Noble Group Ltd (S$) NOBL SP Ajay Mirchandani OW 12292 9401 12-Nov-09 2.83 2.04 2.50 10-Nov-10
Olam International (S$) OLAM SP Ajay Mirchandani OW 6566 5022 2-Oct-08 1.80 3.09 3.70 10-Aug-09
Singapore Airlines (S$) SIA SP Corrine Png OW 18460 14119 23-May-10 14.60 15.42 20.00 10-Nov-10
South Korea
LG Chem Ltd (W) 051910 KS Samuel Lee, CFA OW 26143950 22839 14-Oct-10 327000 394500.00 430,000 14-Oct-10
LG Display (W) 034220 KS JJ Park OW 14956700 13066 15-Mar-10 35900.00 41800.00 55,000.00 16-Sep-10
LG Innotek (W) 011070 KS JJ Park OW 2736028 2390 23-Mar-10 115000.00 136000.00 240,000.00 15-Jul-10
Samsung SDI (W) 006400 KS JJ Park OW 7790477 6806 23-Jun-09 96100.00 171000.00 220,000.00 28-Oct-10
SK Energy Co Ltd (W) 096770 KS Brynjar Eirik Bustnes OW 15441750 13490 5-Oct-07 147,500 167000.00 165,000.00 13-Sep-10
Taiwan
Chimei Innolux Corporation (NT$) 3481 TT JJ Park OW 329381 10842 10-Jan-10 54.1 40.95 48.00 21-Oct-10
E Ink Holdings Inc (NT$) 8069 TT Narci Chang OW 62786 2067 4-Mar-10 63.6 58.40 85.00 28-Nov-09
First Financial Holding Co Ltd (NT$) 2892 TT Dexter Hsu OW 131803 4338 3-Sep-10 18.45 20.35 24.00 Aug-10
Pegatron Corp (NT$) 4938 TT Gokul Hariharan OW 95219 3134 24-Aug-10 40.15 42.20 52.00 24-Aug-10
Powertech Technology Inc (NT$) 6239 TT Cynthia Chou OW 69677 2294 2-Aug-10 101.5 97.40 130.00 3-Aug-10
Quanta Computer Inc. (NT$) 2382 TT Alvin Kwock OW 230332 7582 13-Oct-10 48.05 60.10 68.00 29-Oct-10
Unimicron Technology Corp. (NT$) 3037 TT Christopher Ma OW 80156 2638 18-Apr-10 40.75 51.80 60.00 18-Apr-10
Thailand
Banpu Public (Bt) BANPU TB Sukit Chawalitakul OW 209789 6979 15-Oct-10 724.00 772.00 900.00 18-Nov-10
PTT Public Company (Bt) PTT TB Sukit Chawalitakul OW 859437 28591 23-Mar-10 256.00 302.00 395.00 15-Sep-10
United States
 Focus Media (US$) FMCN Dick Wei OW 3496 3496 3-Jun-10 15.44 24.42 28.00 29-Sep-10
Source: Bloomberg, J.P. Morgan estimates. *Under applicable law and/or JPMorgan Chase & Co policy, all J.P. Morgan ratings and estimates for this company have been removed.
For details on the AFL methodology, please see the Asia Cash Equities page on mm.jpmorgan.com or contact your J.P.
Morgan salesperson/the covering analyst.

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 Asia Pacific Equity Research
25 November 2010

Neutral
Hon Hai Precision 2317.TW, 2317 TT
Price: NT$112.00
Stuck in transition; too early to buy
▼ Price Target: NT$115.00
Previous: NT$119.00

• Buy closer to NT$ 100 or in 2Q11 once OP margins trough: Taiwan

Although Hon Hai has underperformed PC stocks in the last 3 months, Electronic Manufacturing Services
we advise investors to wait for the better entry points once OP margins Gokul Hariharan
AC

trough in 1Q/2Q11 or below 10x FY11 earnings. While growth from (852) 2800-8564
Apple is likely to remain strong, we feel margins need to stabilize for the gokul.hariharan@jpmorgan.com
stock to perform again. We lower our Jun-11 PT to NT$ 115 (12x FY11 J.P. Morgan Securities (Asia Pacific) Limited
earnings) and cut our FY11 earnings estimates by 4%. Key upside risk is William Chen
a faster recovery in margins, while downside risk is abrupt slowdown in (886-2) 2725-9871
the corporate demand. william.chen@jpmorgan.com

• Cut margin ests. as relocation woes not going away until 2H11: Hon J.P. Morgan Securities (Taiwan) Limited.
Hai’s margins are likely to remain depressed until 2Q11 (with maximum Charles Guo
impact in 1Q11) due to (1) wage hikes and increased hiring to overcome (852) 2800-8532
stricter regulations regarding Overtime hours (2) slower relocation due charles.x.guo@jpmorgan.com

to middle management turnover and (3) Continued losses at FIH. J.P. Morgan Securities (Asia Pacific) Limited

• No recovery in sight yet for FIH: We expect FIH to continue to lose

Price Performance
money in 2H10 due to the lack of scale in component businesses and 160
ongoing relocation costs. We do not see a recovery in revenue
momentum in the near term, nor do we expect FIH's heavy investments NT$ 130

in Smartphone ODM to bear fruit in the next 6-9 months. 100

• Price hikes appear to be an Apple-centric phenomenon: Outside of Nov-09 Feb-10 May-10 Aug-10 Nov-10

Apple, price hikes (to reflect wage increases) have been difficult to push 2317.TW share price (NT$
through, in our view. While Hon Hai has apparently turned down some TSE (rebased)

lower margin HPQ notebook orders, the company is not likely to remain YTD 1m 3m 12m
passive on Notebook ODM pricing for too long, in our view. Abs -26.1% -5.5% -6.3% -18.2%
Rel -27.8% -6.0% -14.2% -25.9%
• Capex surge substantially reducing free cashflow: After significant
positive FCF in 2009, Hon Hai's FCF has shrunk again despite strong
revenue growth due to the CAPEX associated with relocation. We expect
this to continue until 2H11, since Hon Hai has to build up significant
capacity for the Apple and other customers in the new locations in inner
China.
Bloomberg: 2317 TT, Reuters: 2317.TW (NT$ in billions, Year-end December)
FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E
Sales 1,959 2,927 3,555 3,967 ROE (%) 19 14 15 16 52-Week range NT$98.2-138.8
Operating Profit 83.5 85.2 107.9 134.0 CORE ROIC (%) 16 13 14 10 Shares Outstg (Com) 9,661Mn
EBITDA 121.9 126.0 156.3 185.2 DPS (cash, NT$) 0.9 0.0 1.8 2.6 Avg daily volume 32.0Mn
Pre-Tax Profit 88.0 92.1 110.3 135.8 Quarterly EPS (NT$) 1Q 2Q 3Q 4Q Free float 78%
Reported Net profit 75.7 77.0 92.0 114.0 EPS (FY10) E 1.87 1.74 2.18 2.21 Market Cap (US$) 35.6B
MV of Employee Bonus 6.0 6.0 7.4 7.4 EPS (FY11) E 1.76 2.13 2.53 3.10 2008E Div yield (%) 1.8%
Adjusted Net Profit 75.7 77.0 92.0 114.0 Exchange rate NT$30.4/US$1
New Taiwan GAAP EPS (NT$)* 7.92 8.00 9.52 11.78 Sales growth 0% 49% 21% 12% Market Cap (NT$) 1,082B
New Taiwan GAAP P/E (x) 14.1 14.0 12 10 EPS growth 35% 1% 19% 24% QFII Holding % 55%
P/B (x) 2.4 2.0 1.8 1.5 Norm. OP growth 15% 5% 24% 24% Index 8,349.99
Y/E BPS (NT$) 46 56 64 73 Avg daily value (US$) 117.9Mn
Net Debt net cash (37.7) (96.1) (150.5) Jun-11 PT NT$ 115
Retroactive adjustment for employee bonus expense is done for like-to-like comparison; Source: Company reports, and J.P. Morgan estimates
 Asia Pacific Equity Research
26 November 2010

Initiation
Overweight
Indika Energy INDY.JK, INDY IJ
Price: Rp3,825
Share price re-rating, attractive valuation and
Price Target: Rp5,000
Petrosea spin-off - Initiating with OW

• We initiate on INDY with an OW rating and a Jun-11 PT of Indonesia

Rp5,000, which implies 31% potential upside: We see Indika as one Mining
of the most attractively priced Indonesian coal companies (at 11.8x Stevanus Juanda
AC

FY11E P/E, vs. peers’ 16.5x) with a promising growth profile. Strong (62-21) 5291 8574
earnings growth in FY10E (50.4%) and FY11E (54.1%) and the planned stevanus.x.juanda@jpmorgan.com
spin-off of Petrosea in FY11E will drive the share price’s PT J.P. Morgan Securities Indonesia
outperformance vs. the JCI in the next 6-12 months, in our view.
• Investment drivers: (1) Rising global coal prices and coal volumes at Price Performance

Kideco (Indonesia’s third-largest coal miner, in which INDY holds a 5,500

46% state). (2) Increased liquidity in the shares could cause multiple re- Rp 4,500

rating. (3) Reliability in achieving its production targets. (4) Petrosea –

3,500
new contracts, strong operations growth, and possible re-listing. (5) Nov-09 Feb-10 May-10 Aug-10 Nov-10
Attractive valuations compared to peers. Potential catalysts: INDY has INDY.JK share price (Rp)
announced its plans to spin off at least 18.6% of Petrosea in order to JCI (rebased)

fulfill the Bapepam’s 20% listing requirement. The signing of new YTD 1m 3m 12m
contracts at Petrosea and Tripatra in FY11E could be additional Abs -1.9% -1.9% -1.9% -1.9%
catalysts. Rel -45.6% -3.5% -19.8% -52.3%
• Reliable supplier: INDY/Kideco has a track record and reputation of Segmental income contribution FY11E
meeting its production targets. Since FY05, Kideco has achieved its Pow er Plant
@20%, 4 ,
annual production target every single year. We believe that Tripatra, 171 ,
10.2%
0.3%

INDY/Kideco stands out among the major coal companies, and will
Petrosea
achieve its FY10 production targets, in an environment in which most @98.55%,
237 , 14.1%
major companies risk missing production guidance due to heavy rains.
• Valuation, price target, key risks: Our price target is derived using a
combination of SOTP, DCF, average P/E, and average EV/EBITDA Kideco @46%,
1,269 , 75.5%
multiples. We assume an average coal price of $101/ton in FY11, and
our DCF valuation is based on a real coal price of $90/ton (WACC of
14%, g of 5.5%). Key risks to our view include: (1) lack of a controlling Kideco @46% Petrosea @98.55% Tripatra Pow er Plant @20%

interest in Kideco, which raises possible business control risks; (2)

Source: J.P. Morgan estimates
operating risks at Tripatra and Petrosea; and (3) risk to consensus
earnings forecasts.
Indika Energy (Reuters: INDY.JK, Bloomberg: INDY IJ)
Rp in bn, year-end Dec FY08A FY09A FY10E FY11E FY12E FY13E
Revenue 2,314 2,487 3,793 4,419 4,657 5,106 Shares O/S (mn) 5,207
Net Profit 1,084.7 725.7 1,091.5 1,681.7 1,534.0 1,529.9 Market cap (Rp mn) 19,917,318
EPS (Rp) 208.32 139.36 210.21 323.87 295.43 294.63 Market cap ($ mn) 2,222
DPS (Rp) 24 84 70 105 162 148 Price (Rp) 3,825
Revenue growth (%) -1.0% 7.4% 52.5% 16.5% 5.4% 9.6% Date Of Price 25 Nov 10
EPS growth (%) 309.4% -33.1% 50.8% 54.1% -8.8% -0.3% Free float (%) 30.0%
ROCE 3.5% 3.5% 0.8% 1.5% 1.2% 1.9% 3mth Avg daily volume 19,732,550.00
ROE 31.4% 13.8% 19.2% 25.4% 20.3% 18.5% 3M - Average daily Value (Rp mn) 68,432.90
P/E (x) 18.4 27.4 18.2 11.8 12.9 13.0 Average 3m Daily Turnover ($ mn) 7.64
P/BV (x) 3.8 3.7 3.3 2.8 2.5 2.3 JCI 3,702
EV/EBITDA (x) 127.2 14.6 67.0 45.0 37.8 27.4 Exchange Rate 8,963.00
Dividend Yield 0.6% 2.2% 1.8% 2.7% 4.2% 3.9% Fiscal Year End Dec
Source: Company data, Bloomberg, J.P. Morgan estimates.
 Asia Pacific Equity Research
25 November 2010

Overweight
Sinopac Financial Holdings 2890.TW, 2890 TT
Price: NT$11.00
Trading gains boost 3Q10 results, but business could
Price Target: NT$14.00
slow down

• 3Q10 net income was NT$2.2B (vs. NT$810MM in 2Q10). YTD Taiwan
earnings are NT$4B (or NT$0.57/share), beating consensus and our full- Banks
year forecast due to strong stock trading gains. We expect the strong Dexter Hsu
AC

outlook for the broker business to provide upside potential; however, (886-2) 2725-9868
from historical experience, the recent management re-shuffle could lead dexter.st.hsu@jpmorgan.com
to slow business growth which might not offset rising costs (+12% Q/Q). J.P. Morgan Securities (Taiwan) Limited.
• Management guidance: The provision for the US subsidiary (FENB) Penny Lin
was US$49.2MM in 9M10, while the NPL ratio declined to 13.9% in 3Q (886-2) 2725-9870
from 16.5% in 2Q with the coverage ratio rising to 56.9% from 34.7%. penny.pn.lin@jpmorgan.com

Management guided to a net loss of US$50MM by FENB in 2010 and J.P. Morgan Securities (Taiwan) Limited.

the loss to narrow in 2011. Sinopac has set aside 51% reserves against Sunil Garg
the PEM exposure (or NT$4.8B) and further losses should be within the (852) 2800-8518
sunil.garg@jpmorgan.com
NT$300MM-500MM range.
• Group PPOP increases by +27% Q/Q and +5% Y/Y, driven by NII J.P. Morgan Securities (Asia Pacific) Limited

growth (+4% Q/Q, +26% Y/Y) and trading gains. NIM contraction Price Performance
(down to 1.25% in 3Q from 1.27% in 2Q) was offset by the growth of
interest-bearing assets. Fee income growth (+4% Q/Q, -2% Y/Y) was 13

slow in 3Q10, while brokerage fees (+18% Q/Q, -4% Y/Y) and credit NT$ 11

card fees (+11% Q/Q, +11% Y/Y) offset the weakness in corporate fees 9
(-10% Q/Q, -16% Y/Y) and WM (-2% Q/Q, +13% Y/Y) fees. Nov-09 Feb-10 May-10 Aug-10 Nov-10

• Loan book contracted across-the-board (-3% Q/Q; +11% Y/Y). 2890.TW share price (NT$
TSE (rebased)
Unsecured personal loans were down 11% Q/Q, followed by corporates
YTD 1m 3m 12m
(-4% Q/Q), credit cards (-3% Q/Q) and mortgages (-1% Q/Q). As a
Abs -13.4% -5.6% -3.9% -10.2%
result, LDR fell to 77% in 3Q from 80% in 2Q. Management targets
Rel -15.1% -6.1% -11.8% -17.9%
SME loan growth, instead of pursuing volume. Overall, asset quality
remains good—the bank NPL ratio declined to 0.60% in 3Q from 0.63%
in 2Q with the coverage ratio up to 116% in 3Q from 103% in 2Q10.
• We remain OW with a Dec-11 PT of NT$14 (DDM-based): Risks to
our PT are: (1) weaker domestic demand; (2) worse credit quality; and
(3) unfavorable regulatory changes and M&A terms.

Sinopac Financial Holdings (Reuters: 2890.TW, Bloomberg: 2890 TT)

Year-end Dec (NT$ in mn) FY09A FY10E FY11E FY12E FY13E
Operating Profit 4,966 6,740 9,398 11,318 12,176 52-wk range (NT$) 12.95 - 9.24
Net Profit 908 3,864 7,386 8,777 9,164 Market cap (NT$ mn) 77,789
Cash EPS (NT$) 0.13 0.53 1.02 1.21 1.27 Market cap ($ mn) 2,555
Fully Diluted EPS (NT$) 0.13 0.53 1.02 1.21 1.27 Shares outstanding (mn) 7,072
DPS (NT$) 0.00 0.12 0.41 0.74 0.82 Fiscal Year End Dec
EPS growth (%) (124.4%) 325.3% 91.2% 18.8% 4.4% Price (NT$) 11.00
ROE 1.1% 4.6% 8.4% 9.5% 9.6% Date Of Price 25 Nov 10
P/E 87.6 20.6 10.8 9.1 8.7 Avg daily value (NT$ mn) 776.1
BVPS (NT$) 11.84 12.25 12.89 13.41 13.90 Avg daily value ($ mn) 25.5
P/BV 0.9 0.9 0.9 0.8 0.8 Avg daily vol (mn) 51.3
Div. Yield 0.0% 1.1% 3.8% 6.7% 7.4% TSE 8,350
Exchange Rate 30.45
Source: Company data, Bloomberg, J.P. Morgan estimates.
 Asia Pacific Equity Research
25 November 2010

Malaysia Construction
Major infrastructure project awards in sight

• Two recent positive developments: 1) Detailed study for the proposed Malaysia
M$47B MRT project is completed; 2) 95% of detailed design for the Mak Hoy Kit
M$7B Kelana Jaya and Ampang light rail transit (LRT) extension line is AC
Hoy Kit Mak
completed, with land acquisitions concurrently being carried out. (60-3) 2270-4728
hoykit.mak@jpmorgan.com
• Positive Malaysia construction sector outlook. Budget 2011, 10th
JPMorgan Securities (Malaysia) Sdn. Bhd.
Malaysia Plan (10MP) and the recently launched M$1.4T Economic (18146-X)
Transformation Programme (ETP) have one thing in common – they will
provide a big boost to the construction sector. While there may be Figure 1: Relative performance
potential delays in implementation, rolling out infrastructure projects, 4.0 Gamuda
mainly public funded, will be the government's top priority to kick start the 3.5
ETP. Two largest infrastructure projects under the ETP are the M$47B 3.0
MRT and M$16.5B High Speed Rail (HSR), targeted to commence in 2Q 2.5 WCT
IJM
2011 and 1Q 2012, respectively. 2.0

• WCT: Highest leverage effect; leads YTD on new construction order Jan-10 Apr-10 Jul-10 Oct-10
wins. WCT secured M$2.1B worth of new jobs YTD, surpassing IJM’s
Source: Bloomberg
M$1.9B, and nil for Gamuda. WCT has the highest leverage to new
construction order wins, mainly due to it being a smaller company.
However, it is also a purer construction play, with construction earnings
contributing 66% of group earnings, against Gamuda’s 19% and IJM’s
17.4%, based on one-year forward estimates. For every M$1B incremental
construction orders in FY11E, we estimate WCT’s FY11E EPS will rise
9.1%. This compares favourably against Gamuda’s 3.6% and IJM’s 4.3%.

• Recommendation and valuation. We are positive on the Malaysian

construction sector, given the expected flows of infrastructure projects that
can drive a re-rating for the sector. The stocks within our construction
sector universe have attractive estimated 2-year EPS CAGR of 22.3% on
average. IJM (OW, PT: M$6.44) is our top large-cap construction pick,
while WCT (OW, PT: M$3.80) is our top mid-cap pick. We are Neutral on
Gamuda as MRT tunneling works is largely priced in, in our view. WCT’s
share price has underperformed Gamuda and IJM YTD by 13.8% and
4.1%, respectively, on fears of new order book delivery, but which has met
expectations in October. WCT is the cheapest among our construction
universe, trading at 2011E P/E of 13.7x, against Gamuda’s CY11E P/E of
18.8x and IJM’s 17.6x.
Table 1: Peer comparison
Ticker Mkt Cap Rating Price CY P/E Net yield P/NTA ROE (%) Price Upside (%)
M$MM 2011E 2012E FY11E FY11E FY11E target
WCT WCT MK Equity 2,324 OW 2.96 13.7 12.1 2.4 0.8 13.6 3.8 28.4%
IJM IJM MK Equity 7,728 OW 5.72 17.6 13.8 2.1 1.4 8.4 6.44 12.6%
Gamuda GAM MK Equity 7,420 N 3.63 18.8 14.6 2.2 2.2 10.7 3.8 4.7%
Hock Seng Lee HSL MK Equity 1,049 NR 1.80 11.0 10.1 1.7 2.5 23.9 2.2 22.8%
Source: J.P. Morgan estimates, Bloomberg estimates for non rated stock. Prices as at 24 November 2010.
 Asia Pacific Equity Research
25 November 2010

Korea Shipbuilding Monthly

Maersk placed 20-vessel order for 18,000 TEU
containerships with DSME; evidence of cycle recovery

• What’s new: According to Korea Economic Daily (Nov 25th), Daewoo South Korea
Shipbuilding & Marine Engineering (DSME) was selected as the Ship Building & Repairs
preferred bidder of Maersk’s 20-container-ship order, worth $4B in total. Jinmook Kim
AC
Each vessel is 18,000 TEU in size ($200MM building price), the largest (82-2) 758-5729
container-ship order ever awarded. The report added that the contract jinmook.kim@jpmchase.com
consists of 10 vessels, while an additional 10 will follow as an option. J.P. Morgan Securities (Far East) Ltd, Seoul
Branch
• Implications: We see this as clear evidence of improving demand for
container shipbuilding beyond 2012 delivery when we expect excessive One-year share price performance
supply to normalize (fleet growth of 8% in 2012E) and depressed 200
demand to recover (US GDP growth back to 4% level by 4Q11E). In 180
particular, this order supports our bullish stance on super-size container 160
140
ship demand (+8,000 TEU), with Korean yards capturing 100% market 120
share (please see our featured analysis #1, #2 on pages 2-3 for details). 100
80
• What’s next: The new-building demand for larger container ships may 60
spread to other owners. According to J.P. Morgan’s regional shipping N-09 F-10 M-10 A-10 N-10
analyst, Corrine Png, liner companies are considering whether to order
large vessels for the future because of their lower unit costs, although the HHI SHI
DSME KOSPI
main constraints are port limitations. Of note, the main engine’s
operating cost for a 16,000 TEU container ship is approximately 40% Source: Bloomberg.
lower than for a 5,500 TEU container ship, on a savings-per-TEU box
basis, according to Man Diesel. Bloomberg JPMA KIM <GO>

• Reasons to be positive on Korean yards: (1) Competitive advantage of

container ships for which new-order recovery is expected to be the
highest in 2011. (2) Early-mover advantage in deepwater offshore where
we have identified over 178 offshore projects underway for the next 24
months, including floating production and storage systems. (3)
Availability of multiple ways to save cost. The big-3 yards in Korea are
the largest buyers of heavy plates and ship-engines in Asia. Also, we
assume that an increase in new orders will lead to further improvement in
utilization rate, which is currently below 100%.
• We prefer HHI as a sector proxy: This order is in line with our 5MM
CGT new-order assumption for container ships in 2011 (roughly $8.4B
in value). Although this order is positive for DSME’s order book, we see
more meaningful implications for the recovery cycle of the sector in
2011. We prefer Hyundai Heavy as a proxy to a cyclical recovery.
Korean shipbuilders: Valuation comparison
Price as of Mkt Cap P/E (x) P/BV (x) EV/EBITDA (x) RoE (%)
Company Currency Rating
25-Nov-10 (B) 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E
HHI KRW 372,500 OW 28,310 8.2 7.8 2.1 1.7 8.0 7.1 29.6 23.8
SHI KRW 33,600 OW 7,757 9.3 8.9 2.2 1.8 7.4 7.1 26.0 22.0
DSME KRW 28,200 OW 5,397 6.4 7.6 1.4 1.2 5.3 5.9 23.4 17.0
Source: Bloomberg, J.P. Morgan estimates. Prices as of close on November 25.
 Asia Pacific Equity Research
25 November 2010

Neutral
Genting Plantations GENP.KL, GENP MK
Price: M$8.77
3Q10 results in line; prefer Sime and KLK
▲ Price Target: M$8.70
Previous: M$7.70

• 3Q10 results in line, maintain N. Genting Plantations (GP) reported a 34% Malaysia
Y/Y rise in net profit for 9M10 (up 31% Y/Y in 3Q10). This was driven by Plantations
a 9% Y/Y rise in FFB output from the low base last year due to adverse AC
Simone Yeoh
weather, and 16% Y/Y rise in CPO prices to M$2,581/t (M$2,638/t in (60-3) 2270-4710
3Q10). Core net profit for 9M10 was at 68% of our full year forecast (67% simone.x.yeoh@jpmorgan.com
of consensus). This is within expectations as we expect a stronger 4Q10 JPMorgan Securities (Malaysia) Sdn. Bhd.
helped by stronger CPO prices (spot: M$3,286/t). (18146-X)

• Plantation prospects. Management is guiding for a moderation in CPO Price Performance

crop growth to 5-6% for FY10E due to signs of declines/poor growth in 9.0

4Q10 with impact of adverse weather (i.e. includes La Nina) to continue to

M$ 7.5
early-2011, and hence will likely help keep CPO prices high up to 1Q11.
Beyond this, management expects an upturn in the yield cycle to contribute 6.0

to stronger output growth mainly by 2H11, in line with our view. Total Nov-09 Feb-10 May-10 Aug-10 Nov-10

planted land-bank for its Indonesian estates has risen to 27,147ha as at end- GENP.KL share price (M$)
FBMKLCI (rebased)
9M10 (40% of Indonesian land-bank) from 6,455ha in 2008. Management
is guiding for the Indonesian estates to contribute materially by 2013. YTD 1m 3m 12m
Abs 40.4% 2.7% 21.3% 41.3%
• Biotech investments, property & Chelsea premium outlets. Biotech Rel 23.7% 2.9% 15.4% 24.2%
losses stood at M$12MM for 9M10 with guidance for total loss at M$15- Company data
20MM pa going forward. Property accounted for just 3% of profits for
52-wk range (M$) 5.98 - 9
9M10. The planned sale of 93 acres of industrial land in Johor to a single Market cap (M$ mil) 6655.1
prospective buyer if completely sold we estimate will generate additional Market cap (US$ mil) 2124.2
property profits of M$12-20MM over 30 months from FY11E on, and will Shares outstanding (mil) 758.8
Free float (%) 28.7
help drive growth. Construction of the Chelsea premium outlets has started Avg daily volume (mil) 0.8
and will be completed by end-2011, with contributions expected to flow in Liquidity (M$ mil) 6.6
by 2012. If we assume a conservative 6-8% rental yield on total investments Liquidity (US$ mil) 2.1
Exchange rate 3.13
of M$158MM for Chelsea, this could lift earnings by 2% pa from FY12E. KLCI Index 1496.5
Year-end 12/2009
• PT raised to M$8.70. We roll forward our PT from Jun-11 to Dec-11 and Source: Blooomberg
raise it to M$8.70 based on 16x FY11E earnings (from 14x previously). The
PE of 16x is close to +1SD to historical mean of 14x. This is fair we Earnings and valuations
believe as we foresee limited downside risk to our CPO forecast of 2010E 2011E
M$2,800/t for 2011-12E, which has greater risk of upside instead from Old EPS (M$) 0.45 0.55
any prolonged impact of adverse weather or further weakening of the US New EPS (M$) 0.41 0.53
% change -8.9% -3.6%
dollar. We maintain Neutral on GP, and prefer KLK and Sime. P/E (x) 21.2 16.5
P/B (x) 2.4 2.1
Genting Plantations (Bloomberg: GENP MK; Reuters: GENP.KL) Div Yield (%) 1.1% 1.5%
Dec 10 Fair Value 7.70
M$ mil, year end Dec 3Q10 3Q09 %Y/Y 2Q10 %Q/Q
Revenue 249.1 195.7 27% 231.2 8% Source: J.P. Morgan estimates
EBIT 108.9 79.9 36% 94.5 15%
EBIT Margins 44% 41% 41%
PBT 109.8 81.1 35% 95.6 15%
Net Profit 80.8 61.4 32% 71.4 13%
Core Net profit 80.6 61.4 31% 63.1 28%
EPS (Sen) 10.7 8.1 31% 9.4 13%
Source: Company
 Asia Pacific Equity Research
26 November 2010

Underweight
Hite Brewery 103150.KS, 103150 KS
Price: W125,000
Imported beer penetration to accelerate
Price Target: W120,000

• Imported beer likely to gain market share: We believe imported beer South Korea
will continue to gain market share from domestic beer players. Between Food, Beverage & Tobacco
1999 and 2009, imported beer volume rose by 19x, with a CAGR of Jinah Lee
AC

28% over the past four years, compared to a domestic beer market (82-2) 758-5723
CAGR of 3.8%. However, imported beer penetration is still low at 4% of jinah.lee@jpmorgan.com
the Korean market. J.P. Morgan Securities (Far East) Ltd, Seoul
Branch
• Main obstacles for beer importers are being overcome: These are
better distribution and pricing, faster growth in off-premises and direct Price Performance
distribution through hypermarkets, distribution partnerships moving
from domestic beer manufacturers to stand-alone or non-beer 180,000
W
manufacturer partners, and rising possibility of lower import tax rate of 150,000

30% due to FTA. 120,000

Nov-09 Feb-10 May-10 Aug-10 Nov-10
• A number of Japanese breweries are either partnering with non-
103150.KS share price (W
beer manufacturers or waiting to switch partners: Maeil Dairy will KOSPI (rebased)
partner with Sapporo Brewery, while Kirin Brewery is expected to YTD 1m 3m 12m
change its partner from Hite Brewery when its contract ends in 2012. Abs -26.5% -2.7% -5.3% -22.8%
Asahi Brewery has already set up a partnership with Lotte Asahi and Rel -40.2% -3.3% -16.4% -42.4%
now holds 20% of the imported beer market. New partners have
significantly higher incentives to push products over domestic beer
manufacturers.
• Import tax affects shipment prices: Korea levies a higher import tax of
30% on beer vs. 15% for wine and 20% for whiskey. As a result,
shipment prices are at least 72% higher for imported beer than domestic
beer. If the import tax is removed, the shipment price difference will
significantly narrow to around 30%.
• Estimate revisions: We lower our 2010 and 2011 EPS estimates by
4.0% and 3.7%, respectively, to reflect the lower domestic industry
growth rate. We maintain our Underweight rating and Jun-11 price target
of W120,000, which is based on 10x 2011E earnings.
Bloomberg: 103150 KS; Reuters: 103150.KS
Won in billions, year-end December
2009A 2010E 2011E 2012E
Sales 1,018 1,051 1,117 1,109 52-week range W171,500-121,500
Operating Profit 183 161 186 191 Market cap W1,195B
Net Income 99 87 110 118 Market cap US$1,051MM
EPS (W) 10,376 9,105 11,531 12,317 Shares issued 9.6MM
P/E (x) 12.0 13.7 10.8 10.1 Free float 51%
ROE (%) 11.8% 11.4% 13.2% 12.9% Price (W) 125,000
BPS (Won) 84,693 76,970 84,263 83,184 Date of Price 25-Nov-10
P/B (x) 1.5 1.6 1.5 1.5 Avg daily value W2.9B
EV/EBITDA 10.6 10.8 9.5 9.1 Avg daily value US$2.5MM
DPS 3,500 3,900 3,900 3,900 Avg daily volume 0.02MM shares
KOSPI 1,927.68
Exchange Rate W1,137.65/US$
Source: Company data, J.P. Morgan estimates.
 Asia Pacific Equity Research
25 November 2010

Overweight
Lee & Man Paper Manufacturing 2314.HK, 2314 HK
Price: HK$6.16
Near term margin recovery and more aggressive
Price Target: HK$10.20
expansion

• Key takeaways from 1HFY11 roadshow . Lee & man Paper is the Hong Kong
second largest producer of containerbaords in China with a market share Packaging & Glass
of approximately 10%. The shares are down 12% following the release of AC
Leon Chik, CFA
selected interim results on 8th Nov (Hang Seng Index fell 7% over this (852) 2800-8590
period). We note that the 1HFY11 performance was impacted by a sharp leon.hk.chik@jpmorgan.com
correction in containerboard and OCC prices in the month of May and Andrew Hsu
June which depressed margins as well as the closure of one production (852) 2800-8572
line for repairs during this period. We maintain our Overweight andrew.tj.hsu@jpmorgan.com
recommendation and target price of HK$10.2. J.P. Morgan Securities (Asia Pacific) Limited

• Poor interim margins but rising prices in 2H. 1HFY11 gross profit Price Performance
margin (GPM) of 18.0% which compares with a GPM of 25.5% in
7.0
2HFY11 and a GPM of 24.6% in 1H10. In our view, the issues that
depressed 1HFY11 GPM is not significant in 4Q10 (no major closure of HK$ 5.5

production plants and a recovery of containerboard prices from HK$3,665 4.0

per ton in 1HFY11 to nearly HK$4,000 per ton now). We estimate that Nov-09 Feb-10 May-10 Aug-10 Nov-10
the GPM in 2HFY11 too have recovered to approximately 23.9%. In the 2314.HK share price (HK$
long term, we expect LMP to follow an aggressive capacity expansion HSI (rebased)

plan of 15-20% a year for the foreseeable future. YTD 1m 3m 12m

Abs 15.1% -9.0% 14.3% 20.2%
• Minor adjustments to earnings and maintaining our share price Rel 9.7% -6.6% 2.6% 18.2%
target of HK$10.2. We are lowering our FY11E and FY12E sales by
1.2% and 0.8% respectively to reflect slightly higher prices offset by lower
production volumes. We have lowered FY11E and FY12E net profit
estimates by 1.2% and 4.8% respectively. We are maintaining our DCF
based Dec 11 target price of HK$10.2 after factoring in slightly lower
earnings but offset by higher growth in the capacity in long term.

• LMP trades at a 12.1x CY 11E P/E, 25% higher than the 11E P/E of
industrial SMID-Caps in HK/China. Our DCF-based price target (Dec-
11) of HK$10.2 implies a CY12E P/E of 16x. The key risk to our PT is the
surge in the cost of OCC which in the short term may not be passed on as
higher prices to the customers.

Lee & Man Paper Manufacturing (Reuters: 2314.HK, Bloomberg: 2314 HK)
HK$ in mn, year-end Mar FY08A FY09A FY10A FY11E FY12E
Revenue 8,996 9,649 11,098 13,896 18,048 Shares O/S (mn) 4,690
Net Profit 1,441.5 299.9 1,832.8 1,875.0 2,566.5 Market cap (HK$ mn) 28,888
EPS (HK$) 0.32 0.06 0.39 0.40 0.54 Market cap ($ mn) 3,723
DPS (HK$) 0.09 0.04 0.13 0.12 0.16 Price (HK$) 6.16
Revenue growth (%) 74.3% 7.3% 15.0% 25.2% 29.9% Date Of Price 25 Nov 10
EPS growth (%) 29.7% -80.0% 511.2% 2.3% 36.9% Free float (%) 27.6%
ROCE 13.4% 3.5% 13.1% 12.6% 15.6% 3-mth trading volume (mn) 14
ROE 19.7% 3.6% 19.7% 17.3% 20.7% 3-mth trading value (HK$ mn) 109
P/E (x) 19.4 96.8 15.8 15.5 11.3 3-mth trading value (US$) ($ mn) 14
P/BV (x) 3.5 3.3 2.8 2.4 2.1 HSI 23,055
EV/EBITDA (x) 17.1 34.0 10.9 10.1 7.4 Exchange Rate 7.76
Dividend Yield 1.5% 0.6% 2.1% 1.9% 2.6% Fiscal Year End Mar
Source: Company data, Bloomberg, J.P. Morgan estimates.
 Asia Pacific Equity Research
25 November 2010

Vanguard International Initiation

Underweight
Semiconductor Corporation 5347.TWO, 5347 TT
Price: NT$12.75
Inventory correction could take longer
Price Target: NT$10.00

We initiate coverage with UW and a June-11 price target of NT$10. Taiwan

History of inventory correction repeats, but we believe this time it will Semiconductors
likely take longer for Vanguard to normalize production due to an Rick Hsu
AC

asymmetric sales move against its customers in the LCD driver business. (886-2) 2725-9874
We expect another muted 1Q11 could disappoint the market and weigh rick.ic.hsu@jpmorgan.com
on the shares. Vanguard is keen to reduce its single-product risk, but J.P. Morgan Securities (Taiwan) Limited.
diversification takes time, in our opinion. JJ Park
(822) 758-5717
• High LCD driver exposure a double-sided sword. And it is the jj.park@jpmorgan.com
negative side of the sword that is at work, in our opinion. Key customers J.P. Morgan Securities (Far East) Ltd, Seoul
are busy working down inventory, which should harm Vanguard given Branch
its over 60% sales exposure in LCD driver foundries. Although Cynthia Chou
management expects some 30% Q/Q sales drop for 4Q10, we think it (886-2) 2725-9898
may not be enough to normalize production; another muted 1Q11 likely. cynthia.hy.chou@jpmorgan.com

J.P. Morgan Securities (Taiwan) Limited.

• Diversification takes time. Vanguard has been keen in diversifying into Rahul Chadha
power analog and CIS foundry works to reduce the single-product risk (91-22) 6157-3261
on LCD drivers, but the road looks bumpy. While CIS ramp may be rahul.z.chadha@jpmorgan.com
capped at 5% sales range due to capacity constraint, we believe any J.P. Morgan India Private Limited
significant ramp in power analog may need to wait until 2H11.
Price Performance
• Valuation, price target. Our PT is based on 0.8x ROE-adjusted P/BV – 15.5

a method we apply to our SCM coverage, implying 22% downside. NT$ 14.0
Catalysts to push the stock lower are: 1) another muted 1Q11, and 2)
possible consensus earnings cut toward our more conservative forecast 12.5

for FY11E. In the display semi space, our preference is Novatek. Nov-09 Feb-10 May-10 Aug-10 Nov-10

5347.TWO share price (NT$

TSE (rebased)
• Risk to our call. We would see upside potential to our bearish call on:
YTD 1m 3m 12m
1) stronger-than-expected end-demand, 2) faster-than-expected power
Abs -7.6% -1.2% -4.9% -7.6%
analog diversification, and 3) TSMC’s order overflow potential. We see
Rel -8.9% -1.1% -9.4% -15.2%
late 1Q11/early 2Q11 as possible timing to review our bearish call.
Vanguard - share price: NT$12.75 (24 Nov 10) (Reuters: 5347.TW, Bloomberg: 5347 TT)
NT$M (Yr-end Dec) FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E 52-wk range NT$10.8-17.5
Sales 12.6 15.9 14.5 16.3 P/E (x) nm 12.0 17.7 15.0 Shares outs'g 1,662M
Operating profit 0.0 1.9 1.2 1.4 P/B (x) 1.1 1.0 1.0 1.0 Avg daily volume 3.6M
EBITDA 3.5 4.9 4.5 4.9 EV/EBITDA (x) 4.0 3.1 2.7 2.9 Avg daily value US$1.6M
MV of employee bonus 0.4 0.5 0.4 0.5 FCF/Mkt cap (%) 14.4 -0.8 19.5 -6.4 Free float 45%
Adjusted net profit 0.1 1.8 1.2 1.4 Price target Local Exchange rate NT$30.4/US$1
Profit growth (%) -91.4 nm -32.1 17.8 DCF value (6/2011) NT$10.7 Market Cap (US$) 696M
EPS (NT$) 0.05 1.06 0.72 0.85 PT (6/2011) NT$10.0 Index (TWSE) 8,338
BPS (NT$, yr-end) 11.92 12.49 12.51 12.86 Difference from consensus -30%
Cash dividend yield (%) 3.1 3.1 5.5 3.9 Quarterly EPS (NT$) 1Q 2Q 3Q 4Q
ROE (%) 0.4 8.5 5.8 6.6 FY09 -0.50 0.09 0.41 0.05
ROIC (net of cash, %) 0.4 13.3 7.8 11.6 FY10E 0.13 0.34 0.51 0.08
Net debt/equity (%) net cash net cash net cash net cash FY11E 0.04 0.19 0.28 0.21
Source: Bloomberg, Company, JP Morgan estimates
 Emerging Markets
Equity Research
25 November 2010

Consensus Asset Allocation

Emerging Markets Equity Strategy

• In this report we review the asset allocation of major emerging market Emerging Markets Equity Strategy
funds as at the end of October. We define a consensus OW market as Adrian Mowat
AC

one in which there are more funds meaningfully overweight relative to (852) 2800-8599
those that are meaningfully underweight (>2% below index weight). adrian.mowat@jpmorgan.com
J.P. Morgan Securities (Asia Pacific) Limited
• Russia and Indonesia retained the highest net overweights. However,
Ben Laidler
net overweights in Russia reduced from eight to six and those in (1-212) 622-5252
Indonesia reduced from seven to six. The net overweights in Brazil ben.m.laidler@jpmchase.com
increased to two. We are neutral on all three markets. J.P. Morgan Securities LLC

• The net overweights in India increased from two to five. Fund David Aserkoff, CFA
(44-20) 7325-1775
managers reduced their net underweights in China from three to zero. david.aserkoff@jpmorgan.com
We are overweight on India and neutral on China. See pages 7 and 8
J.P. Morgan Securities Ltd.
for charts on the fund manager survey history.
Deanne Gordon
• Managers remain underweight the Asian export economies of Taiwan, (27-21) 712-0875
deanne.gordon@jpmorgan.com
Korea and Malaysia. The net overweights in Mexico reduced from five
J.P. Morgan Equities Ltd.
to two.
Rajiv Batra
• Among the smaller markets, consensus retained its highest overweight (91-22) 6157-3568
rajiv.j.batra@jpmorgan.com
in Turkish equities. The net overweights in Thailand reduced from
three to one. We remain overweight Turkey and Thailand. J.P. Morgan India Private Limited

Sanaya Tavaria
• Emerging Markets net fund flows: (91-22) 6157-3312
sanaya.x.tavaria@jpmorgan.com
o 2009 CY: Net inflows US$64.4 billion J.P. Morgan India Private Limited

o 2010 YTD: Net inflows US$75.6 billion Figure 1: Emerging Equity Markets
relative to the US and World
Table 1: Survey of key EM managers positioning relative to MSCI EM – For major EMs
Country > 2% OW < 2% UW OW-UW < 0.1% EM % JPM reco 160
Russia 15 (16) 9 (8) 6 (8) 4 (3) 6.1 N
Indonesia 10 (11) 4 (4) 6 (7) 3 (4) 2.4 N 140
India 12 (12) 7 (10) 5 (2) 1 (1) 8.1 OW 120 vs World
Mexico 7 (10) 5 (5) 2 (5) 2 (3) 4.4 UW
Brazil 11 (11) 9 (10) 2 (1) 0 (0) 16.2 N 100
China+HK 13 (11) 13 (14) 0 (-3) 0 (0) 18.3 N 80
South Africa 5 (6) 20 (19) -15 (-13) 2 (2) 7.3 N
Malaysia 1 (2) 16 (18) -15 (-16) 12 (12) 2.9 OW 60 vs USA
China 6 (4) 21 (20) -15 (-16) 0 (0) 18.3 N
Korea 4 (5) 23 (23) -19 (-18) 1 (1) 13.3 UW 40
Taiwan 1 (1) 30 (28) -29 (-27) 1 (1) 10.6 N 20
Source: EPFR Global, MSCI, J.P. Morgan calculations. The survey covers 46 fund managers. The calculation of OW is greater
than 2% overweight versus the MSCI benchmark. UW is less than -2% of benchmark weighting. Fund weightings are as of 31 96 98 00 02 04 06 08 10
October 2010 and MSCI weightings as of 1 November 2010. Numbers in brackets are the previous month values. Potentially China
stocks have been misclassified as Hong Kong, hence the combined weight for Hong Kong and China. Hong Kong investment may
Source: MSCI, Bloomberg.
be providing non-China exposure
 Emerging Markets Equity Research
25 November 2010

Emerging Markets Strategy Dashboards

Emerging Markets Equity Strategy Team Country Recommendation
Adrian MowatAC Emerging Markets adrian.mowat@jpmorgan.com (852) 2800 - 8599 J.P.Morgan Securities (Asia Pacific) Limited OW: India, ASEAN, Turkey
Ben Laidler Latin America ben.m.laidler@jpmchase.com (212) 622 - 5252 J.P. Morgan Securities LLC
David Aserkoff CEEMEA david.aserkoff@jpmorgan.com (44-20) 7325-1775 J.P. Morgan Securities Ltd. UW: Korea, Mexico, Energy, Commodities
Deanne Gordon South Africa deanne.gordon@jpmorgan.com (27-21) 712 0875 J.P.Morgan Equities Ltd.
Rajiv Batra Emerging Markets rajiv.j.batra@jpmorgan.com (91-22) 6157-3568 J.P. Morgan India Private Limited KEY TRADES: CEMBI Surfers; OW India and Turkey
ABC of Real Estate - Anything but China, China economic
Sanaya Tavaria Emerging Markets sanaya.x.tavaria@jpmorgan.com (91-22) 6157-3312 J.P. Morgan India Private Limited rebalancing: UW SOEs and OW consumer,
Global Emerging Markets Research Advantage ASEAN, Brazilian Consumer
Joyce Chang Global Emerging Markets joyce.chang@jpmorgan.com (1-212) 834-4203 J.P. Morgan Securities LLC

Key Changes
Market performance to 24 November 2010 J.P. Morgan's revisions to 2010 Real GDP growth forecasts Table of Contents Page #
• Year to date: MSCI Emerging Markets 10.5% outperforming MSCI World by 5.8% • Positive: Global 3.7% [3.6%], Asia ex Japan 8.9% [8.8%], Regional Summary 2
Taiwan 10.1% [9.9%], Peru 8.5% [8.2%] Market Performance 3
• Year to date: MSCI EM Asia 10.8% outperforming MSCI Emerging Markets by 0.3% Liquidity Monitor 4
• Top three markets YTD in US$ terms: Argentina, Thailand and Colombia Monitoring Inflation 5
J.P. Morgan's revisions to 2011 Real GDP growth forecasts Market Drivers 6
• Bottom three markets YTD in US$ terms: Czech Republic, Hungary and Brazil Cross-section Earnings Growth 7
• Positive: Poland 4.0% [3.8%] Earnings Revisions 8,9,10
Sector-Country PE Matrix 11
• Negative: Taiwan 4.0% [4.1%]
Sector performance Valuation Distribution 12
Demand Classification 13
• Year to date: MSCI EM Consumer Discretionary 27.3% outperforming MSCI Emerging Equities relative to Bonds 14
Markets by 16.8% J.P. Morgan's revisions to Central bank Policy rate forecasts Economic Momentum 15
• Korea: Last change 16 Nov 10 +25bp, Next change 1Q11
Policy Rates Forecast 16
• Year to date: MSCI EM Energy -1.3% underperforming MSCI Emerging Markets by
11.8% +25bp, Current 2.5% [2.25%], Dec 10 2.5%, Mar 11 2.75%, Jun Currency Forecasts 17,18
11 3.0% [2.75%] Credit Risk 19
• Top three key market sectors YTD in US$ terms: Korea Consumer Discretionary, Emerging Market Balance Sheets 20
Turkey Financials and South Africa Consumer Discretionary • Taiwan: Last change 30 Sep 10 +12.5bp, Next change 23 Dec Emerging Market in Perspective 21
10 +12.5bp [3Q11 +12.5bp], Current 1.5%, Dec 10 1.625% Emerging Capital Market 22
• Bottom three key market sectors YTD in US$ terms: Brazil Energy, Russia Energy and [1.5%], Mar 11 1.75% [1.5%], Jun 11 1.875% [1.5%] Index Weightings 23
Korea Financials
• Chile: Last change 16 Nov 10 +25bp, Next change 16 Dec Dec
10 +25bp, Current 3.0% [2.75%], Dec 10 3.25%, Mar 11 4.0%, Please see Emerging Equity Markets Year Ahead:
Jun 11 4.25% Stock Ideas for 2011, Mowat, Laidler, Gordon, et
Demand classification sector performance al, 16 November 2010, for our latest emerging
• South Africa: Last change 18 Nov 10 -50bp, Next change on markets equity strategy.
• YTD: Global Consumer 14.7%, Domestic Demand 14.3%, Global Capex 10.7% and
hold, Current 5.5% [6.0%], Dec 10 5.5%, Mar 11 5.5%, Jun 11
Global Price Takers 6.9%
5.5%
 Asia Pacific Equity Research
26 November 2010

Overweight
Genting GENT.KL, GENT MK
Price: M$10.36
Genting Singapore drives 3Q10 earnings - ALERT
25 November 2010

• Core net profit rose 19% Y/Y: Genting reported 3Q10 net profit of Gaming
M$1,223MM (+229% Y/Y) on revenues of M$3,909MM (+63%). AC
Hoy Kit Mak
Stripping out exceptionals, core net profit of M$2,390MM (+152% Y/Y) (60-3) 2270-4728
in 9M10 has surpassed our FY10 estimate of M$2,137.4MM. There was a hoykit.mak@jpmorgan.com
net gain of M$413.6MM on deferred consideration, as Genting has JPMorgan Securities (Malaysia) Sdn. Bhd.
attained cash upfront of US$136.5MM for a stream of income for its gas (18146-X)
field, so long as the production of gas continues. Kenneth Fong , CFA
(852) 2800-8597
• 3Q10 core net profit of M$584.8MM rose 19% Y/Y on the back of the kenneth.kc.fong@jpmorgan.com
commencement of operations of GENS in 1Q10, and higher plantations J.P. Morgan Securities (Asia Pacific) Limited
earnings (+29% Y/Y) on the back of higher CPO prices. However, this
was offset by a lower Resorts World Genting contribution due to lower Table 1: Company data
casino spend, weaker luck factor in the VIP segment, and M$39MM in
52-wk Range M$6.2-10.82
expenses due to start-up costs for the development and operation of a Mkt Cap (M$MM) 38466.0
video lottery facility at the Aqueduck Racetrack in New York City. Mkt Cap (US$MM) 12277.7
Share Outstanding(MM) 3712.9
• GENS 3Q10 slightly disappointed on lower margin and a normalized Free Float (%) 60.0
Avg. daily volume(MM) 7.3
VIP hold: In our report dated 12 November Genting Singapore: Liquidity(MM) 60.8
Valuations fair, market growth expectations too high, GENS’ 3Q EBITDA Exchange rate 3.1
came in at S$347MM (vs consensus of S$375MM), down 32% Q/Q on Index 1495.5
Year-end 12/2009
normalized VIP hold rate and thinner margin - down 6% Q/Q to 46%.
Source: Bloomberg
Market share dipped to 53% from 60% in 2Q as a result of a normalized
hold. The management outlook is positive, citing strong performance so
far in 4Q. On the junket front, management believes the government will
start to gradually approve junkets in early 2011.

• Power earnings slightly lower: EBITDA for the power division fell 2%
Y/Y in 3Q10 to M$146.9MM. Genting is still in negotiations with Chinese
authorities for a tariff increase for its Meizhou Wan power plant given
higher coal costs.
Table 2: Genting Bhd (Bloomberg: GENT MK; Reuters: GENT.KL)
M$MM, YE Dec 3Q10 3Q09 Y/Y % 2Q10 Q/Q % 9M10 9M09 Y/Y
Turnover 3,909 2,402 63% 4085 -4.3% 11108.0 6573.5 69%
Gross profit 1,485 1,012 47% 1984 25.1% 4797.6 2605.1 84%
Gross margin (%) 38.0% 42.1% 49% 43.2% 39.6%
EBITDA 1,910 1,026 86% 2049 -6.8% 4456.3 2653.9 68%
EBITDA margin (%) 48.8% 42.7% 50% 40.1% 40.4%
Associates 11 10 13% 19 42.9% 56.1 -12.2 -561%
Net profit 1,223 371 229% 739 65.4% 1737.5 798.9 117%
Core Net Profit 585 493 19% 774 24.5% 2390.0 949.7 152%
FD Core EPS (M$sen) 20.62 9.99 106% 19.96 3.3% 46.8 21.5 118%
Source: Company.
 Asia Pacific Equity Research
26 November 2010

Overweight
Genting Malaysia GENM.KL, GENM MK
Price: M$3.38
3Q10 results reveal weakness in operating trends -
25 November 2010
ALERT

• 3Q10 net profit 6% Y/Y lower: Genting Malaysia reported 3Q10 net Gaming
profit of M$336.4M/M, down 6% Y/Y and down 10% Q/Q, due to lower AC
Hoy Kit Mak
casino spend, weaker luck factor in the VIP segment, and M$39MM in (60-3) 2270-4728
expenses due to start-up costs for the development and operation of a hoykit.mak@jpmorgan.com
video lottery facility at the Aqueduck Racetrack in New York City. 9M10 JPMorgan Securities (Malaysia) Sdn. Bhd.
net profit of M$914.2MM represented 70.6% of our FY10 forecast, and is (18146-X)
likely to disappoint the market. Kenneth Fong , CFA
(852) 2800-8597
• Lower casino revenues: Casino revenues fell by a double-digit rate Y/Y kenneth.kc.fong@jpmorgan.com
in 3Q10 due to lower business from both VIPs and the grind segment. J.P. Morgan Securities (Asia Pacific) Limited
Note that the VIP mix was lower during this period. In 9M10, casino
revenues rose by single digits, with a slight drop in business from VIPs, Table 1: Company data
suggesting the slack was supported by the grind segment. 9M10 VIP mix
52-wk Range M$2.46-3.72
was slightly higher Y/Y. Management reiterated that, traditionally, 4Q is Mkt Cap (M$MM) 19992.2
the strongest quarter, and the trend in 4Q10 was within expectations. Mkt Cap (US$MM) 6381.2
Share Outstanding(MM) 5914.9
• Visitor arrivals improved by 1% Y/Y in 3Q10 to 4.9MM visitors, up 3% Free Float (%) 49.2
Avg. daily volume(MM) 8.5
Y/Y in 9M10 to 14.8MM visitors. Day-trippers represented 73% of total Liquidity(MM) 25.5
visitors, with a 5% Q/Q increase in local visitors. Hotel room inventory Exchange rate 3.1
fell by 400 rooms due to renovations, resulting in a 6% Y/Y decline in Index 1495.5
Year-end 12/2009
rooms sold in 3Q10.
Source: Bloomberg

• Higher average hotel rates: For hotels, revenue rose by a single-digit rate
Y/Y in 3Q10, despite the lower number of rooms, due to a 13% higher
average room rate of M$76, compared to M$67 in 3Q09. The occupancy
rate stood at 90%. Foreign guest arrivals fell 28%, mainly from Taiwan,
Hong Kong, China, Thailand, and Singapore. Genting Highland members
accounted for 62% of the rooms taken up, where Malaysians accounted for
63% of total rooms sold.

• Expect some share price weakness: Due to the negative operating trend
in 3Q, we might see some share price weakness.
Table 2: Genting Malaysia (Bloomberg: GENM MK; Reuters: GENM.KL)
M$ MM 3Q10 3Q09 Y/Y % 2Q10 Q/Q % 9M10 9M09 Y/Y
Leisure turnover 1,185 1,324 -11% 1,202 -1% 3,716 3,664 1%
Group turnover 1,203 1,336 -10% 1,226 -2% 3,775 3,716 2%
Gross profit 426 561 -24% 471 -9% 1,440 1,486 -3%
EBITDA 479 540 -11% 479 0% 1,421 1,498 -5%
EBITDA margin 39.9% 40.4% 0 37.6% 40.3%
Net profit 336 359 -6% 306 10% 914 965 -5%
Core net profit 301 355 -15% 306 -2% 895 941 -5%
Core EPS (sen) 5.3 6.2 -15% 5 -2% 16 17 -5%
Source: Company
 Asia Pacific Equity Research
25 November 2010

Neutral
JSW Energy Ltd. JSWE.BO, JSW IN
Price: Rs111.10
Benefits of African coal mine acquisition will take
23 November 2010
awhile to play out - ALERT

• JSW has agreed to purchase 100% of CIC Energy, a coal mining Electric Utilities
company with assets in Africa, in an all cash deal of CAD422M AC
Shilpa Krishnan
(US$414M). We expect the acquisition to be funded out of debt, as the (91-22) 6157-3580
company has outstanding unutilized IPO proceeds of Rs.12B which would shilpa.x.krishnan@jpmorgan.com
be required for the equity commitments of pipeline projects. We calculate a
Sumit Kishore
100% debt funded acquisition would lead to the DER inching up to 2x from (91-22) 6157-3581
1.64x as of Sep-10. sumit.x.kishore@jpmorgan.com

• Acquisition details from JSWE mgt: 1) Botswana coal mines have Deepika Belani
(91-22) 6157-3582
estimated reserves of 2.6B tons, of which 935mn tons will be exportable. 2) deepika.x.belani@jpmorgan.com
annual production to commence 3-5 years hence, peak production target of
J.P. Morgan India Private Limited
20mtpa (our view: production would take 5 years) b) production cost
estimate of $29/ton, c) India landed cost estimate of ~$70-75/ton FOB
(implying est. CIF cost of ~$100/ton) , d) est. GCV of 5,600Kcal/Kg.
• JSWE is short of coal; this deal would improve long term coal security:
As against FY11 imports of ~3.9mtpa at market prices (excl. Barmer since
it’s on imported coal on a temporary basis), we estimate JSWE would need
~15.2mtpa of imported coal in FY16 (incl. Ratnagiri II). However any
shortage in supply of linkage coal and/or coal from captive mines would
lead to incremental dependence on imports. Thus long term fuel security is a
positive development for the company, but given the time to development of
this asset JSW is still exposed to near term fuel price risks. ~50% of its 5GW
pipeline in our SOP valuation has no fuel cost pass thru.
• Valuation of this deal: EV of US$0.22/ton of mineable reserves. No
earnings based multiples available. Optimum Coal (OPT SJ), covered by
JPM, produces 6.5mtpa of saleable coal and trades at $2.94/ton of reserves
and at $0.96/ton of reserves and resources. Homeland Energy (HEG CN),
recently acquired by GMRI, trades at US$0.2/ton.
• Concerns: We do not have clarity about: a) location and infrastructure
availability around the mine to transport and export the coal, b) further capex
for mining and infra development, c) challenges to get mining license.

• About CIC Energy: CIC is developing the Mmamabula coal mine in

Botswana with est. reserves of 2.6B tons of which 1.9B tons are run of the
mine. After beneficiation, the mine is expected to produce 757Mt of thermal
coal, 432Mt of 6,500kcal/kg thermal coal for exports and 182Mt for its coal
to hydrocarbons project. CIC has 1.5GW of power projects under
development in Africa to be fueled from this mine (5mtpa). However these
projects are still at a nascent stage with various environmental and
regulatory clearances pending.
Please see table overleaf for JSW Energy’s fuel requirements and costing.
 Asia Pacific Equity Research
25 November 2010

Neutral
MISC Berhad MISC.KL, MISC MK
Price: M$8.62
1HFY11 results and analyst briefing - ALERT
25 November 2010

• MISC's 1HFY11 net profit rose 153% to M$797MM (+350% in Shipping

2QFY11). This came in at 54% of our full year forecast (47% of Simone Yeoh
AC

consensus), within expectations. Net DPS of 15sen declared in 1HFY11 (60-3) 2270-4710
(similar to last year), within our full year forecast of 30sen, or an simone.x.yeoh@jpmorgan.com
annualised yield of 3.5%. We maintain Neutral. Our SoTP for the stock JPMorgan Securities (Malaysia) Sdn. Bhd.
remains unchanged after accounting for the recent sell-down and listing (18146-X)

of MMHE (66.5% equity stake currently).

• Key growth drivers were significantly lower container losses and jump
in profits from heavy engineering (HE). Losses from the container unit
fell 57% to M$244MM for 1HFY11 following the cessation of the Asia-
Europe liner trade early this year. Management guides for continued
strong recovery for the container division through FY12E. In our
forecast, we are already projecting the container division losses to halve
in FY11E and to breakeven by FY12E. HE profits more than doubled to
M$197MM in 1HFY11 due to improvement in the margin life cycle of
contracts (from the low margin procurement cycle previously) and higher
margins from Gumusut-Kakap (fabrication phase).

• The tanker and chemicals divisions however dragged down overall

performance due to overcapacity. Losses for the chemical division
expanded, while profits from the tanker division fell 88% Y/Y in
1HFY11. Management indicated that the conditions will remain
challenging in both segments, though the tanker division is likely to
benefit from a seasonal pick-up in late-2010/early 2011 from the winter
season.

• VTTI tank terminal acquisition completed. The acquisition of VTTI

for US$839MM was completed on 7 Sept-10. Based on 2013-2015E
profit guidance of US$100-160MM (100%-stake) from VTTI, we
estimate an increase in MISC's profits by M$100-196MM pa, after
taking into account its 50% stake and loss of interest income from cash
outflow for the acquisition. This accounts for 4-8% of our current net
profit forecast of M$2,342MM for MISC for FY12E.
MISC Bhd 1HFY11 results summary
Yr to Mar-31 (M$MM) 2QFY11 2QFY10 % yoy 1QFY11 % qoq 1HFY11 1HFY10 % yoy
Turnover 3,085 3,527 -13% 3,271 -6% 6,356 7,421 -14%
EBIT 500 256 95% 558 -10% 1,015 611 66%
EBIT margin 16% 7% 9 pps 17% -1 pps 16% 8% 8 pps
PBT 416 161 159% 471 -12% 888 434 104%
PBT margin 13% 5% 9 pps 14% -1 pps 14% 6% 8 pps
Core Net profit 369 82 350% 428 -14% 797 316 153%
Core EPS (M$ sen) 9.9 2.2 350% 11.5 -14% 21.4 8.5 153%
Source: Company
• See segmental breakdown in the table on the following page.
 Asia Pacific Equity Research
25 November 2010

Neutral
Nestlé India Limited NEST.BO, NEST IN
Price: Rs3,792.80
Analyst Meet Takeaways : On a high capex trajectory
Price Target: Rs3,470.00

• Underlying volume growth trends remain healthy in the domestic India

market registering 18% growth during 9MCY10. Prepared dishes, Food & Food Manufacture
beverages and chocolate & confectionery saw healthy double digit growth AC
Latika Chopra, CFA
(22-24%). However, volume growth for milk products was affected by (91-22) 6157-3584
phasing out of non-strategic products and channels (defence forces). latika.chopra@jpmorgan.com

• Stepping up capex investments. Nestle India is looking to invest J.P. Morgan India Private Limited
considerably in brownfield and greenfield expansion over the next 2-3
Price Performance
years. Robust demand trends for its product portfolio and current high
capacity utilization rates for existing plants are driving this aggressive 4,000
expansion at their end. Over the last three years the company has made Rs 3,000
capital investments of Rs6.5bn and will have invested over Rs4.5bn in
2,000
CY2010, and they see further acceleration in 2011 and beyond.
Nov-09 Feb-10 May-10 Aug-10 Nov-10
Management noted that they will deploy a mix of internal accruals (which
could be a potential risk to dividend payout) and debt to finance these NEST.BO share price (Rs)
NIFTY (rebased)
investments. Given that income tax benefits for certain Northern states are
YTD 1m 3m 12m
valid for greenfield investments till Mar’12, we would expect a significant
Abs 48.9% 11.4% 28.7% 49.3%
part of capex to be deployed before this sunset date.
Rel 36.1% 14.7% 22.1% 34.1%
• Raw material inflation remains a significant challenge particularly for
milk prices which have remained sticky at higher levels and contrary to
initial expectations have not softened much. Coffee and palm oil prices
have also seen a sharp uptick recently. YTD2010 Nestle India's
commodity cost index has risen 12% over 2009. Nestle has resorted to
aggressive price hikes in recent quarters (2.3% in Q110, 5.3% in Q210
and 6.6% in Q310) to mitigate cost pressures and appears confident about
maintaining operating margins in the current range of 19-20%.
• Focus on premium portfolio. Nestle is actively looking to augment its
premium product portfolio and although management refrained from
sharing its plans on new product launches, they did highlight that they
could leverage on the wide product offerings of its parent for the same.
• We remain positive on the company's growth outlook and believe it is
amongst the best plays on fast-growing high potential processed foods
segment in India. However, we think the current valuation of 35x CY11E
P/E could constrain stock performance in the near term.
Bloomberg: NEST IN, Reuters: NEST.BO
Rs mn, year end Dec FY08 FY09 FY10E FY11E FY12E
Net sales 43,242 51,294 61,935 74,916 89,636 52-week range (Rs) 2295-3780
Net profit 5,649 6,976 8,378 10,447 12,865 Market cap (Rs mn) 363,970
EPS (Rs) 58.6 72.4 86.9 108.4 133.4 Market cap (US$ mn) 7,973
DPS (Rs) 42.5 52.5 65.2 81.3 100.1 Shrs outsting (MM) 96.4
Net sales growth 23% 19% 21% 21% 20% Avg daily value (Rs MM) 125
Net profit growth 31% 24% 20% 25% 23% Avg daily value (US$ MM) 2.7
EPS growth (%) 31% 24% 20% 25% 23% Avg dly volume (MM shs) 0.04
ROE 119% 120% 119% 122% 136% Exchange rate (Rs/US$) 46
P/E (x) 64.4 52.2 43.4 34.8 28.3 Sensex 19392
EV/EBITDA (x) 41.9 34.8 29.0 23.3 19.0
Dividend yield 1.1% 1.4% 1.7% 2.2% 2.7%
Source: Bloomberg, Company reports and J.P. Morgan estimates.
 Asia Pacific Equity Research
25 November 2010

Neutral
Siemens India SIEM.BO, SIEM IN
Price: Rs789.55
Healthy execution and margin improvement in the
Price Target: Rs695.00
Sep-q

• Sep-q results in-line. Siemens reported PAT of Rs.2.5B (up 66% yoy) a tad India
ahead of our Rs2.4B est. and the street's Rs2.1B. The results came on the Engineering
back of a ~340bps yoy improvement in margins particularly in the industry AC
Sumit Kishore
and healthcare segments led by cost rationalization. As anticipated top line (91-22) 6157-3581
growth was healthy at 21% yoy in the Sep-q led by the power segment. sumit.x.kishore@jpmorgan.com
FY10 top line growth aggregated to 11%. Shilpa Krishnan
• Industry recovery interrupted: Following a 9M recovery in industrial (91-22) 6157-3580
short cycle products, top line declined by 8.7%yoy in the Sep-q spread shilpa.x.krishnan@jpmorgan.com

across almost all sub-segments; however FY10 growth of 10% yoy meets Deepika Belani
company guidance set at the beginning of the year. The mobility segment (91-22) 6157-3582
deepika.x.belani@jpmorgan.com
continued the down trend (15% yoy) despite management expecting a
recovery this year. J.P. Morgan India Private Limited

• Sharp recovery in the power segment: As expected, the power segment Price Performance
recovered sharply in the 2H, with Sep-q with revenues up 40% yoy (up 23%
800
in Jun-q post de-growth in 1H; up 8.4% in FY10). Margins improved
significantly to 13.6%, up 740bps yoy. The distribution segment continues Rs 650

to see pricing pressure as evidenced by low margins. 500

• Subsidiaries continue to report a loss: Siemens reported standalone PAT Nov-09 Feb-10 May-10 Aug-10 Nov-10

of Rs8.3B vs. consolidated profit of Rs.7.6B. The Rs.706M gap (Rs725M in SIEM.BO share price (Rs
BSE30 (rebased)
FY09) is explained by losses in its two of its key subsidiaries Siemens
YTD 1m 3m 12m
Building Technologies (86%) and Siemens Rolling Stock (100%).
Abs 35.6% -5.7% 10.5% 40.2%
• Order flows: OB of Rs135.8B (up 32% YoY) provides visibility for Rel 24.2% -2.2% 4.2% 26.6%
slightly more than 1 year; to which two large cycle orders contribute 27%.
In the Sep-q Siemens won Rs.30.2B (up 15% yoy) of new orders.
• Siemens has underperformed CG, our preferred play in the Indian
T&D space, by 7% over the last 1 year. Our Mar-11 DCF based PT of
Rs695 implies 22.7x FY12E (fiscalized) EPS, vs. 18x for CG, factoring in
upside for higher intermediate growth driven by higher domestic exposure.
Upside risk stems from stronger than expected order inflows, downside from
weak top line growth/margin performance. We would await a lower price
point to buy into CG and Siemens.
Table 1: Siemens India: Sep-q results summary
Rs. in million, year end September
4QFY10 JPMe 4QFY09 % YoY 3QFY10 %QoQ
Net Sales 30,253 31,138 25,180 20.1 22,464 34.7
Total Expenditure 26,281 27,392 22,726 15.6 20,044 31.1
EBITDA 3,972 3,746 2,454 61.9 2,420 64.2
EBITDA Margin 13.1 12.0 9.7 338.6 10.8 235.9
PBT 3,886 3,634 2,327 67.0 2,351 65.3
Tax 1,371 1,249 810 69.3 790 73.4
Adjusted PAT 2,515 2,385 1,517 65.8 1,561 61.2
Net Margin 8.3 7.7 6.0 228.8 6.9 136.7
Source: Company reports and J.P. Morgan estimates.
 Asia Pacific Equity Research
25 November 2010

China oil and gas demand

Expected drop in Chinese diesel exports not yet
materialized

• Apparent demand at high levels – up 11% YTD but still stays on Integrated Oils, Exploration &
6.5% growth path: October 2010 apparent demand was 37.6 mn tones Production
for the month. This is equivalent to 9.0 mn BOPD, up 0.9 mn BOPD on Brynjar Eirik Bustnes
AC

October last year and up 0.2 mn BOPD on September 2010. YTD demand (852) 2800-8578
is up 11.1% on 2009 and it is up around 6.5-7% CAGR relative to 2006, brynjar.e.bustnes@jpmorgan.com
2007 and 2008 (0.65x GDP). We expect November to show similar J.P. Morgan Securities (Asia Pacific) Limited
numbers, as refinery capacity is back on stream to satisfy diesel demand.
Diesel demand is indicative of product inventory draws, while less (3.1
mn tones) available crude vs refinery throughput also indicates crude draw
in October. For November we expect crude imports to increase on Oct 10 apparent demand at Jun 10 peak
October’s very low base with again more refineries online. level (mn BOPD)
• IP dislocating from diesel and power demand as China tries to "ramp 9.0
up" power efficiency: Most recent IP number showed stability above 8.5
13%, while lower power and apparent diesel demand did not support this.
8.0
In the last three months, diesel demand growth has been only 3-8% y/y,
while power demand growth has dropped from 13% to 7% y/y (for the 7.5
months). We believe there has been 0.6-0.7 mn tons/month of inventory 7.0
draws on diesel in this period, which going into power gensets makes up
6.5
for some of the discrepancy but not all. Gasoline has actually picked up to

Jan-07

Sep-07
Jan-08

Sep-08
Jan-09

Sep-09
Jan-10

Sep-10
May-07

May-08

May-09

May-10
above 10% y/y growth in Aug-Oct vs much lower in earlier part of the
year. China LNG imports came down to 1.1 BCM in Oct, with average
price at US$6.8/mmBTU. Qatar, Yemen and Russia contributed 26% to Source: Bloomberg
LNG imports priced at US$13.0/mmBTU. Import of piped natural gas
from Turkmenistan was stable at 0.36 BCM in Oct priced at
US$8.30/mmBTU. China imported 13% of available natgas.
• Chinese crude import cost and related theoretical china GRM: China
appears to be paying more now relative to Brent, as the discount of
US$$4.5/bbl we had in 2007/08 has come down to only US$1.5/bbl
recently, although improved a bit on last two months at US$2/bbl discount.
Sinopec is the major importer of this crude. GRMs have picked up in
recent months on price hike matching oil price increases. Our industry
sources indicate that diesel wholesale is now done closer to retail prices.
• Product imports staying below 200 kBOPD level (vs 0.5 mn BOPD
historically), with October at around 150 kBOPD: Chinese refineries
brought back on stream refineries from maintenance. This alleviates diesel
tightness but we still expect China to be net diesel importer in November
as imports increase significantly, although it may be short lived.
Chinese total apparent demand looks strong y/y, but compared to previous YTD levels we are on 6.5% growth trajectory (CAGR)
2010 Oct YTD – CAGR on YTD: Product import Ref t’put Apparent demand Gasoline demand Diesel demand Kerosene demand
2006 -29% 8.5% 6.5% 7.9% 7.2% 7.4%
2007 -30% 8.6% 6.9% 8.5% 7.5% 10%
2008 -44% 10% 7.3% 5.6% 3.7% 11%
2009 -52% 14% 11% 5.1% 12% 8.8%
Source: J.P. Morgan estimates, Bloomberg.
 Asia Pacific Equity Research
25 November 2010

India Iron ore

Oct exports decline 30% y/y; Export ban in Karnataka-
While appeal likely in SC, Feb-11 next important date

• Oct-10 iron ore exports down 30% y/y, with Goa accounting for 63%: India
The Oct-10 export data have been released, and while as expected there has India Mining
been a sharp recovery m/m (given the monsoons in July-Sept period) of AC
Pinakin Parekh, CFA
113% (6.44MT in Oct compared to 3.03MT in Sept), this has come on the (91-22) 6157-3588
back of a sharp increase in Goan iron ore exports as all the other ports’ pinakin.m.parekh@jpmorgan.com
exports were flat m/m. April-Oct total iron ore exports stood at 46.7MT v/s Neha Manpuria
53.2MT y/y (-12%). While exports from Karnataka (South India) are off (91-22) 6157-3589
market as of now, exports from the Eastern India imports have also not neha.x.manpuria@jpmorgan.com
moved up m/m, implying that Eastern India also remains a problem. We J.P. Morgan India Private Limited
estimate last year’s Nov-DecFY10 iron ore exports stood at ~61MT, a
number which is likely to be severely down this year

• Going through the High Court order-Next critical timeline is Feb-11:

The High Court has ruled in favor of the State Government’s order banning
iron ore exports. However going through the court order we would
highlight that the original state government orders (order issued on 26th
July, 2010 prohibiting iron ore exports 10 minor ports in the state of
Karnataka, and the second order issued on 28th July, 2010 ‘prohibiting the
issue of mineral dispatch permits for transportation of iron ore for the
purpose of exporting of the same’) seem to be a ‘temporary measure’. As
per the Court order’s text, ‘the submissions of the Advocate General, the
operation of the impugned orders would ordinarily not extend beyond the
period of six months (from the date of their issue), as by then everything
would be in place and the State government would have implemented the
recommendations made by the Karnataka Lokayukta’. This in our view
essentially implies that the next critical date is Feb-11, as six months
would have passed post the original state Government order. In the
meantime, we do not rule out the miners appealing the High Court's
judgment in the Supreme Court. As per details available in the court order,
iron ore production in the state of Karnataka stood at 49MT in FY10 with
exports of 18MT.

• What it means for iron ore exports out of India? - We do not see any
increase in volumes from Eastern and Southern India at least over the
next 3 months. We would keep a close eye on developments in the key
Western India state of Goa, which is now the sole large supplier out of India,
and where the new mineral policy has not yet been finalized.

• Fortescue indicates interest from Indian steel makers to import iron

ore: Media reports (Mint) have highlighted that Fortescue (Australian iron
ore producer) is in preliminary talks with Indian steelmakers for supplying
iron ore. We do not find this surprising given the large steel capacity coming
up in India over the next 18 months, some of which is with steel makers with
no access to captive iron ore (for example Essar Steel, Not Rated).
Sunil Garg Asia Pacific Equity Research
(852) 2800-8518 26 November 2010
sunil.garg@jpmorgan.com

Companies Recommended in This Report (all prices in this report as of market close on 25 November 2010, unless
otherwise indicated)
Indika Energy (INDY.JK/Rp3,825/Not Covered)
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23
Sunil Garg Asia Pacific Equity Research
(852) 2800-8518 26 November 2010
sunil.garg@jpmorgan.com

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24
Sunil Garg Asia Pacific Equity Research
(852) 2800-8518 26 November 2010
sunil.garg@jpmorgan.com

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Sunil Garg Asia Pacific Equity Research
(852) 2800-8518 26 November 2010
sunil.garg@jpmorgan.com

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26