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02 December 2009
Adrian MowatAC
(852) 2800-8599
adrian.mowat@jpmorgan.com
% of global
consumption
The chart shows emerging economies and US consumption as a percentage of global consumption.
Source: J.P. Morgan Economics.
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
2
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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)
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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.
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.
South Africa
India
Russia
Chile
Korea
China
Brazil
Mexico
Taiwan
Turkey
7
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
8
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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.
9
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
10
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
11
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
12
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
15
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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
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
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
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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
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Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
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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
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Jun-99
Jun-00
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Jun-05
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Jun-09
recoveries in performance are evident and we are already
0%
seeing effectiveness improve.
-5%
revisions is strong. The correlation between stocks and -15% +28% Jan 02 to Aug 03
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
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2%
0%
-2%
-4%
-6%
-8%
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Aug-09
Sep-09
Oct-09
20
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
21
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
22
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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
25
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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.
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.
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 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.
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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.
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
30
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
31
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
34
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
• 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’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
• 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
• 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
• 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
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.
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
43
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
44
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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.
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.
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
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
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
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
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
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
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
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
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
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)
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
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
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
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
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
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.
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
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
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
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
MSCI Philippines Absolute and Relative to EMF Index MSCI Fair value Range
500 Absolute Relative to MSCI EMF
FWD PER (282) (503)
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
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
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.
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
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
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.
64
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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
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
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
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
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
70
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
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)
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
(852) 2800-8599 02 December 2009
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.
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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
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
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.
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Adrian Mowat Emerging Markets Equity Research
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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)
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
100
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
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
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Adrian Mowat Emerging Markets Equity Research
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adrian.mowat@jpmorgan.com
76
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
Sector Overviews
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
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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
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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.
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
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.
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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.
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Adrian Mowat Emerging Markets Equity Research
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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
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.
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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
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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.
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
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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.
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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.
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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
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
Technology Hardware
Content meeting hardware
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.
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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
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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.
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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
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.
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Adrian Mowat Emerging Markets Equity Research
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adrian.mowat@jpmorgan.com
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Adrian Mowat Emerging Markets Equity Research
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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Adrian Mowat Emerging Markets Equity Research
(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.
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Adrian Mowat Emerging Markets Equity Research
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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$4.8 on November 29.
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Adrian Mowat Emerging Markets Equity Research
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adrian.mowat@jpmorgan.com
Running with 2009 winners (Stocks with relative outperformance end 2008 to date and
top picks)
Price % Yield ROE Performance end 08 to
Name Share Target Change Bloomberg JPM Mkt Cap, P/E (X) (%) (%) date (%)
Price (LC) (LC) to target Code Rating US$ 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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Top Picks
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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.
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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.
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Balance sheet
R mn millions, year end Dec FY08A FY09E FY10E FY11E R mn millions, year end Dec FY08A FY09E FY10E FY11E
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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
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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
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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
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.
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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
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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.
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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.
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10-08
01-09
04-09
07-09
10-09
its risk management system.
Source: Bloomberg.
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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%
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Amorepacific Overweight
W837,000
Price Target: W998,000
www.amorepacific.com
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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
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
123
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
124
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
125
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
126
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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%
127
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@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$70 implies 14x FY10E earnings, given the strong OP Shares O/S (MM) 4,247
margin improvement and sustainability of Asus’ cost-down measures in notebook Date of price 5-Nov-09
business. 14x P/E represents the mid-point of Asus’ historical trading range. A Index: TWSE 7,417.5
key risk to our PT is execution issues in the mainstream NB rollout. Free float (%) 95
Exchange rate 32.5
Source: Bloomberg.
128
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
EPS (Reported) (NT$) 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
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.
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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.
130
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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%
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
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
132
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
134
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
Balance sheet
TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E
135
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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.
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
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
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.
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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%
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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$) 44.80 54.44 58.83 63.13
Source: Company reports and J.P. Morgan estimates.
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likely start to have a bigger impact on the airline’s earnings in 2010. We 2610.TW share price (NT$
expect, Contrary to the market’s common perception, CAL to be a bigger TSE (rebased)
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.
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the company has been focusing more on high-end product mix and 20
10
become more rational, EBIT margin would have more upside potential. 5
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.
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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
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www.yurun.com.hk
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.
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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.
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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
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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
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.
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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
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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
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
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
154
Adrian Mowat Emerging Markets Equity Research
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155
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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.
156
Adrian Mowat Emerging Markets Equity Research
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adrian.mowat@jpmorgan.com
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
158
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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.
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adrian.mowat@jpmorgan.com
share, and has withstood the economic downturn very well, in our view. 45
With a net cash balance sheet, and NT$19.5 billion in capital surplus and 40
law means FET will be able to tap into these accounts to maintain high 30
Jan-08
May-08
Jul-08
Jan-09
May-09
Jul-09
Nov-07
Sep-08
Nov-08
Sep-09
Mar-08
Mar-09
dividend levels if necessary. Capital management will be a key focus in
2010, in our view. Source: Bloomberg.
Potential for earnings upgrades Performance
Mobile fundamentals at FET remain weak but have shown signs of turning 1M 3M 12M
the corner in the 3Q09 results. We believe earnings are likely to find a trough Absolute (%) 0.1 -1.9 -10.5
in 2009 as mobile business turns around and investors focus on 2010 Relative (%) -0.6 -9.2 -39.1
numbers, which should be better than 2009. We believe the potential risk for Source: Bloomberg.
upward earning estimates is high. Non-operating loss items are likely to Company data
narrow as the operating performance of NCIC turns positive in 2010. 52-week range (NT$) 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.
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adrian.mowat@jpmorgan.com
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%
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.
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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
Balance sheet
Dh in millions, year end Dec FY07A FY08A FY09E FY10E FY11E Dh in millions, year end Dec FY07A FY08A FY09E FY10E FY11E
165
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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.
166
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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
168
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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%
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
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Genting Overweight
Price M$7.15
Price Target: M$8.50
www.genting.com
10-08
01-09
04-09
07-09
10-09
How much recovery is priced into the stock?
The stock has not fully priced in a recovery, in our view. Genting’s share Source: Bloomberg.
price is still trading at approximately 20-25% discount to its SOTP (based on Performance
current share prices of listed subsidiaries), which is below the three-year 1M 3M 12M
average of 18%. Meanwhile, its subsidiary, Genting Malaysia, is trading at Absolute (%) 2.3 11.7 45.3
Relative (%) -0.8 5.1 6.1
6.4x FY10E EV/EBITDA, which is 1 std deviation below the eight-year
Source: Bloomberg.
mean of 8.3x.
Company data
Price target and key risks 52-wk range (M$) 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.
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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
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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.
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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.
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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.
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
www.icicibank.com
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.
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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,
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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
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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.
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
Adrian Mowat Emerging Markets Equity Research
(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
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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 - - - - -
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
pricing power has improved. Further, costs are falling as high priced Source: Bloomberg.
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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%
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%
187
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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
190
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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.
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Adrian Mowat Emerging Markets Equity Research
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adrian.mowat@jpmorgan.com
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
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
Ratio analysis
193
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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.
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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%
195
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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
ruble weakness, slowing LFL sales growth and execution of the hypermarket
strategy, in our view.
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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
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%
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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
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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.
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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.
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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.
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effect” has turned consumers more receptive to whitebox products. J.P. Morgan Securities (Asia Pacific) Ltd.
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$630 is based on 15x FY10E earnings (vs. the historical Exchange rate 32.5
P/E range of 14x-30x), or ~0.9x PEG in 2009-11E. We believe 15x is fair, Source: Bloomberg.
given our expectation of 22%/14% EPS growth in 2010/11. A key risk to our
PT is if Spreadtrum brings in a global chip vendor as a strategic shareholder;
this could promptly reduce the product breadth disadvantage vs. Mediatek.
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Revenues 80.4 90.2 115.8 142.2 164.8 Gross Margin 57.4 53.7 58.8 58.6 57.9
Cost of Goods Sold 34.2 41.8 47.7 58.8 69.4 EBITDA margin 41.8 27.7 35.3 34.5 33.4
Gross Profit 46.2 48.4 68.1 83.3 95.3 Operating Margin 41.0 24.5 32.6 33.2 32.2
R&D Expenses 9.1 15.8 14.2 19.4 22.3 Net Margin 43.0 21.3 32.5 32.6 32.2
SG&A Expenses 4.1 4.0 4.5 5.2 5.7 R&D/sales 11.3 17.6 12.2 13.6 13.5
Operating Profit (EBIT) 33.0 22.1 37.7 47.1 53.1 SG&A/Sales 5.1 4.5 3.9 3.7 3.5
EBITDA 33.6 25.0 40.9 49.0 55.0
Interest Income 1.6 1.3 0.6 2.5 3.6 Sales growth 51.7 12.2 28.3 22.7 15.9
Interest Expense 0.0 0.0 0.0 0.0 0.0 Operating Profit Growth 45.0 -32.8 70.3 25.0 12.6
Investment Income (Exp.) 1.6 0.0 0.3 0.2 0.3 Net profit growth 53.1 -44.5 96.1 23.2 14.3
Non-Op Income (Exp.) -0.1 -2.3 0.2 0.0 0.0 EPS (Reported) growth 49.9 -45.8 92.8 22.0 14.0
Earnings before tax 36.0 21.1 38.7 49.8 57.0 EPS (New GAAP) growth 149.7 -27.9 92.8 22.0 14.0
Tax -1.5 -1.9 -1.1 -3.5 -4.0
Net Income (Reported) 34.6 19.2 37.6 46.4 53.0 Net debt to total capital -53.2 -47.4 -64.2 -74.8 -80.1
Net Income (New TW GAAP) 26.0 19.2 37.6 46.4 53.0 Net debt to equity -53.2 -47.4 -64.2 -74.8 -80.1
NT$
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
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
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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.
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MindTree Overweight
Rs603
Price Target: Rs700
www.mindtree.com
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
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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.
208
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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 - - - -
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
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
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 - - - - -
211
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
212
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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
214
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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%
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
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.
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
217
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
for southern Booysendal to be developed with AQP’s Everest mine for Nov-08 Feb-09 May-09 Aug-09 Nov-09
218
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
219
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
600
OGX to emerge from the downturn stronger and with plans for first oil in 200
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.
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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.
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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.
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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$108 is based on 9x FTM (Dec-10) earnings due to the
Index: TAIEX (TWSE) 7,417.5
higher earnings estimates. The 9x FTM earnings is the average of the FTM
Free float (%) 60
P/E multiple during the past three years. A key risk to our PT is another
Exchange rate 32.5
oversupply scenario followed by a sharp fall in ASP in the memory industry.
Source: Bloomberg.
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adrian.mowat@jpmorgan.com
Revenues 31,189 29,784 34,998 38,930 Gross Margin 27.4 23.6 26.1 25.9
Cost of Goods Sold 22,640 22,740 25,863 28,846 EBITDA margin 46.7 46.8 46.4 44.1
Gross Profit 8,549 7,044 9,134 10,085 Operating Margin 23.4 19.3 21.8 21.5
R&D Expenses 649 767 735 818 Net Margin 21.0 16.5 19.6 19.4
SG&A Expenses 159 209 315 389 R&D/sales 2.1 2.6 2.1 2.1
Operating Profit (EBIT) 7,299 5,738 7,632 8,381 SG&A/Sales 0.5 0.7 0.9 1.0
EBITDA 14,555 13,934 16,255 17,164
Interest Income 37 44 93 147 Sales growth 27.6 -4.5 17.5 11.2
Interest Expense 450 336 414 490 Operating Profit Growth 3.0 -21.4 33.0 9.8
Investment Income (Exp) 9 5 - - Net profit growth 59.9 -24.9 39.7 9.7
Non-Operating Income (Exp) (333) (104) 140 140 EPS (Reported) growth 3.7 -27.0 39.0 9.7
Earnings before tax 6,562 5,346 7,451 8,178 EPS (TW GAAP) growth 56.2 -27.0 39.0 9.7
Tax 17 433 585 643 Interest coverage (x) 16.2 17.1 18.4 17.1
Net Income (Reported) 6,545 4,914 6,866 7,535 Net debt to total capital 32.7 32.4 24.1 21.8
Net Income (new TW GAAP) 6,545 4,914 6,866 7,535 Net debt to equity 57.8 59.6 42.2 37.6
EPS (Reported, NT$) 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
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.
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adrian.mowat@jpmorgan.com
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.
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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.
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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.
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adrian.mowat@jpmorgan.com
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 - - - - -
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.
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adrian.mowat@jpmorgan.com
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$13.80 is based on our two-stage DDM model assuming Date of price 5-Nov-09
sustainable ROE of 28% and COE of 11%. The key risk to our PT is that the KLCI Index 1,254.0
Free float (%) 100.0
stock is priced for perfection where any slippage in expectations could result Exchange rate 3.42
in a sharp de-rating on valuations. Source: Bloomberg.
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Margins (% of earning assets) 2.09% 1.95% 1.87% 1.84% 0% -7% -4% -2% Loan/deposit 73% 74% 75% 75%
Earning assets/assets 96.5% 94.7% 93.8% 94.1% 0% -2% -1% 0% Investment/assets 13% 14% 16% 17%
NIM (as % of avg. assets) 2.01% 1.84% 1.75% 1.73% 0% -8% -5% -1% Loan/assets 60% 62% 63% 63%
Customer deposits/liab. 87% 87% 87% 87%
Net interest income 3,727 3,896 4,197 4,590 15% 5% 8% 9% Long-term debt/liabilities 3% 4% 4% 3%
Total non-interest revenues 2,012 1,948 2,286 2,512 8% -3% 17% 10%
Fee income 975 1,003 1,228 1,354 -5% 3% 22% 10% Asset quality/capital 2008 2009E 2010E 2011E
FX/trading gains 76 82 86 91 -65% 7% 6% 5% Loan loss reserves/loans 1.6% 1.8% 2.0% 2.1%
Other operating income 961 864 972 1,068 55% -10% 12% 10% NPLs/loans 1.0% 1.3% 1.6% 1.8%
Total operating revenues 5,739 5,844 6,483 7,102 12% 2% 11% 10% Loan loss reserves/NPLs 159.7% 137.3% 122.6% 114.5%
Operating costs -1791 -1843 -1949 -2031 6% 3% 6% 4% Growth in NPLs -13.8% 56.4% 36.3% 0.0%
Operating profit 3,948 4,001 4,534 5,071 16% 1% 13% 12% Tier 1 Ratio 8.6% 7.8% 7.6% 8.2%
Loan loss provisions -581 -689 -529 -514 39% 19% -23% -3% Total CAR 14.1% 14.7% 13.9% 14.0%
Other provisions 12 13 14 14
Exceptionals - - - - Per share data 2008 2009E 2010E 2011E
Disposals/ other income - - - - EPS (M$) 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%
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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
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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
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
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
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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%
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)
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.
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
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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.
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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.
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Adrian Mowat Emerging Markets Equity Research
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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.
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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.
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Adrian Mowat Emerging Markets Equity Research
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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%
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adrian.mowat@jpmorgan.com
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)
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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%
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adrian.mowat@jpmorgan.com
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.
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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
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%
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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
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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
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
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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
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
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1500
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.
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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.
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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
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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 $31.0 is based on a combination of DCF and Index: MSCI LatAm 4125.9
multiples analysis, with WACC of 12.0% and perpetuity growth of 3%. The Free float (%) 14%
key risks to our thesis are a weaker-than-expected steel price scenario, higher Exchange rate: USD/MXN 12.83
raw material costs and overpayment in an M&A. Source: Bloomberg.
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Company data
How much recovery is priced into the stock?
52-week range (Bt) 18.20-47.25
TOP shares have risen 80% from their trough in Mar-09; hence, it appears
Mkt cap. (BtMM) 83,131
that some recovery has been discounted in the share price. However, we Mkt cap. (US$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.
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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%
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.
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TOTVS Overweight
R$101.50
Price Target: R$125.00
www.totvs.com.br
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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
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$) 3.0 3.0 3.0 3.0
Sales growth (%) 3.3% (11.4%) 24.4% 13.7%
Net profit growth (%) (8.6%) (13.0%) 37.2% 18.0%
EPS growth (%) 17.3% (11.7%) 36.7% 17.8%
ROE (%) 20.6 17.9 23.1 24.6
P/E (x) 15.6 17.6 12.9 11.0
FD P/E (x) 15.6 17.6 12.9 11.0
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.
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Revenues 333 295 367 417 Gross Margin 42.5 43.4 46.4 47.0
Cost of Goods Sold 191 167 197 221 EBITDA margin 55.8 58.5 58.9 57.4
Gross Profit 142 128 170 196 Operating Margin 31.3 31.0 34.8 36.0
R&D Expenses 21 21 25 28 Net Margin 30.0 29.6 32.7 33.9
SG&A Expenses 16 16 17 18 R&D/sales 6.4 7.2 6.9 6.7
Operating Profit (EBIT) 104 91 128 150 SG&A/Sales 4.8 5.3 4.8 4.3
EBITDA 186 173 216 240
Interest Income 5.4 2.6 2.9 4.8 Sales growth 3.3 -11.4 24.4 13.7
Interest Expense -1 0 0 0 Operating Profit Growth -6.5 -12.5 39.6 17.6
Investment Income (Exp.) 0.7 0.1 1.3 1.7 Net profit growth -8.5 -12.6 37.2 18.0
Non-Operating Income (Exp.) 1.6 0.3 0.8 0.8 EPS (Reported) growth -7.0 -11.7 36.7 17.8
Earnings before tax 111 94 132 157 EPS (Adjusted) growth 17.3 -11.7 36.7 17.8
Tax -11 -7 -13 -16 Interest coverage (x) 169.8 268.1 1009.5 1305.7
Net Income (Reported) 100 87 120 142 Net debt to total capital -36.7 -36.9 -37.9 -44.2
Net Income (Adjusted) 100 87 120 142 Net debt to equity -38.7 -37.2 -38.2 -44.4
NT$
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
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
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270
Adrian Mowat Emerging Markets Equity Research
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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
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
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.
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$) 0.8 0.0 0.0 0.6
Sales growth (%) (13.3%) (4.3%) 20.8% 9.4%
Net profit growth (%) (231.6%) 112.8% 350.1% 32.1%
EPS growth (%) (242.2%) 112.7% 350.0% 31.9%
ROE (%) -10.6 1.5 6.0 7.5
P/E (x) NM 69.3 15.4 11.7
FD P/E (x) NM 69.3 15.4 11.7
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.
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Adrian Mowat Emerging Markets Equity Research
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273
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
Sep-09) via the SRA model looks to be under-appreciated and though these
sales add to cash flows immediately, they will most likely reflect in EPS Company data
numbers FY12 onwards. 52-week range (Rs) 21.7-118.4
Mkt cap. (Rs MM) 203,337
How much recovery is priced into the stock? Mkt cap. (US$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
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
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
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.
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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.
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
278
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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Balance sheet
TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E TL in millions, year end Dec FY07A FY08A FY09E FY10E FY11E
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Adrian Mowat Emerging Markets Equity Research
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6.2% growth for the offshore industry worldwide (according to IDC data). 0
Nov-08 Feb-09 May-09 Aug-09 Nov-09
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$) 6.83
a Microsoft, TIBCO, or Huawei. Source: Company, Bloomberg.
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
2
Potential for earnings upgrades
Oct-08 Jan-09 Apr-09 Jul-09 Oct-09
We expect gas supplies in China to improve over the next 1-2 years as more
long-distance pipelines (W-E Pipeline No.2 and Sichuan-to-East Pipeline). 2688.HK share price (HK$
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.
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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.
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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(852) 2800-8599 02 December 2009
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287
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
Stocks to Avoid
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
www.acucarguarani.com.br
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.
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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.
291
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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.
140
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
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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)
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
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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.
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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.
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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.
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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.
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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.
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Post mortem 19
13
coverage versus China Mobile and its 3G ambitions to turn itself into a high- 11
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.
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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%
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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
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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
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.
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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.
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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.
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
Ecopetrol Underweight
US$27.12
Price Target: US$26.0
www.ecopetrol.com.co
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.
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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.
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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.
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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.
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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.
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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.
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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
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Homex Neutral
Ps74.75
Price Target: Ps102.00
www.homex.com.mx
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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.
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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.
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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
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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
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
326
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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%
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
327
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
328
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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
329
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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.
330
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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.
332
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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)
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
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$8.20 translates to a discount of 16% to SOTP, where Shares O/S (MM) 3,719.8
we value the LNG and offshore units on DCF, and the chemical and tanker Date of price 5-Nov-09
KLCI Index 1254.0
units based on replacement value of assets. A key risk to our PT is a stronger Free float (%) 100.0
and faster-than-expected pick-up in global demand, which will reduce risk Exchange rate 3.42
for the tanker and chemical units, and narrow the SOTP discount further. Source: Bloomberg.
334
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
Revenues 12,957 15,783 15,670 15,754 16,031 EBIT 2,872 1,961 1,898 2,466 2,850
% change Y/Y 15.7 21.8 -0.7 0.5 1.8 Depreciation & amortisation 1,465 1,923 1,889 1,955 1,955
EBITDA 4,337 3,884 3,786 4,421 4,804 Change in working capital (239) 59 1,213 7 22
% change Y/Y -6.5 -10.5 -2.5 16.8 8.7 Taxes (71) (68) (100) (83) (101)
EBITDA Margin (%) 33.5 24.6 24.2 28.1 30.0 Others 13 (466) (490) (486) (486)
EBIT 2,872 1,961 1,898 2,466 2,850 Cash flow from operations 4,039 3,409 4,408 3,859 4,239
% change Y/Y -11.6 -31.7 -3.2 30.0 15.5
EBIT Margin (%) 22.2 12.4 12.1 15.7 17.8 Capex (1,539) (7,022) (3,883) (1,927) (1,927)
Net Interest (345) (403) (490) (486) (486) Disposal/ (purchase) 0 0 0 0 0
Earnings before tax 2,609 1,595 1,444 2,017 2,400 Others (1,311) 0 0 0 0
% change Y/Y -11.0 -38.9 -9.5 39.7 19.0 Free cash flow 2,500 (3,613) 525 1,932 2,313
Tax (71) (68) (100) (83) (101)
as % of EBT 2.7 4.2 7.0 4.1 4.2 Equity raised/ (repaid) 0 0 0 0 0
Core Net Income 2,430 1,405 1,236 1,779 2,114 Debt raised/ (repaid) (457) 0 0 0 0
% change Y/Y 0.6 -42.2 -12.0 43.9 18.9 Other #REF! #REF! #REF! #REF! #REF!
Shares Outstanding 3720 3720 3720 3720 3720 Dividends paid (1,338) (1,317) (1,302) (1,302) (1,302)
EPS (reported) - M$ 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
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
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
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
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Balance sheet
R mn millions, year end Dec FY08A FY09E FY10E FY11E R mn millions, year end Dec FY08A FY09E FY10E FY11E
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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.
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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
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.
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
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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
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%
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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
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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
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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
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.
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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$32
www.redecard.com.br
Price performance
Post mortem
R$
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.
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Adrian Mowat Emerging Markets Equity Research
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Adrian Mowat Emerging Markets Equity Research
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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.
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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
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.
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Adrian Mowat Emerging Markets Equity Research
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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
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.
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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%
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
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(852) 2800-8599 02 December 2009
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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
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%
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
26
We expect limited room for positive earnings surprises as the new number of 22
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.
354
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
Ratio analysis
355
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
356
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
Price NTD 13.8 Shares Outstanding (mn): 5,711 Market cap (NT$ mn): 78,806
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
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.
358
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
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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
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.
360
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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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.
362
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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%
363
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
364
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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$38.5
www.usiminas.com.br
related to working capital. We expect things to improve, but Usiminas should Nov -08 Mar-09 Jul-09 Nov -09
still lag its more agile peers such as CSN and GGB. Source: Bloomberg.
Potential for earnings upgrades Performance
While USI should benefit from a comeback in steel volumes, we see limited 1M 3M 12M
upside to current estimates. We are cautious on Brazilian flat steel prices in Absolute (%) 1.0% 10.4% 129.4%
light of the appreciating R$, 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$) 2.27 1.80 1.07 1.30
Sales growth (%) 14% -27% 17% 8%
Net profit growth (%) -3% -79% 159% 21%
EPS growth (%) -3% -79% 159% 21%
ROE (%) 22% 5% 11% 12%
P/E (x) 8.7x 45.0x 15.4x 13.0x
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25th November 2009.
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Adrian Mowat Emerging Markets Equity Research
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adrian.mowat@jpmorgan.com
Ratio analysis
%, year-end 31st Dec
Balance sheet
FY08 FY09E FY10E FY11E
R$ 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$) 29.7 29.4 31.7 34.6
Source: Company, J.P. Morgan estimates.
367
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
given the correlation between China’s fixed asset investment and heavy truck 50
demand. 40
30
20
We believe the company’s earnings will peak in FY10 with the expected Nov -08 Feb-09 May -09 Aug-09 Nov -09
sharp slowdown in China FAI growth in FY11, and see limited earnings Source: Bloomberg.
April 2007 when Weichai completed the merger with Torch to become a Company data
vertically integrated player in China’s heavy truck industry. 52-week range (HK$) 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
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
Adrian Mowat Emerging Markets Equity Research
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adrian.mowat@jpmorgan.com
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$2.10 is based on our sum-of-the-parts valuation—we Shares O/S (MM) 5973.2
value its power business using DCF, and for Wessex we take 1x regulatory Date of price 5-Nov-09
KLCI Index 1254.0
asset base value. YTLP’s net dividend yield of 7% over FY10-12E will Free float (%) 32.5
support its share price, in our view. A key risk to our PT is a scale back in Exchange rate 3.42
dividends from a much more aggressive roll-out/capex in Wimax. Source: Bloomberg.
370
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Revenues 4,243 6,102 10,783 11,082 11,387 EBIT 1,972 2,005 2,610 2,728 2,849
% change Y/Y 4.3 43.8 76.7 2.8 2.8 Depreciation & amortisation 605 601 785 792 800
Gross Margin (% ) 60.7 42.7 31.5 31.8 32.0 Change in working capital 87 267 447 29 29
EBITDA 2,576 2,606 3,395 3,520 3,649 Taxes -308 -315 -324 -352 -381
% change Y/Y 5.6 1.1 30.3 3.7 3.6 Cash flow from operations 2,355 2,558 3,518 3,197 3,297
EBITDA Margin (% ) 60.7 42.7 31.5 31.8 32.0
EBIT 1,972 2,005 2,610 2,728 2,849 Capex -1,646 -1,135 -1,156 -1,156 -1,156
% change Y/Y 6.5 1.7 30.2 4.5 4.4 Disposal/ (purchase) 0 -8,568 0 0 0
EBIT Margin (% ) 46.5 32.9 24.2 24.6 25.0 Net Interest -796 -878 -1,371 -1,364 -1,356
Net Interest (796) (878) (1,371) (1,364) (1,356) Free cash flow -86 -8,023 991 678 785
Earnings before tax 1,386 1,352 1,467 1,592 1,721
% change Y/Y 6.9 -2.4 8.4 8.6 8.1 Equity raised/ (repaid) -330 286 -222 -222 -222
Tax (347) (727) (337) (363) (390) Debt raised/ (repaid) -126 2,125 -126 -126 -126
as % of EBT 25.0 53.7 23.0 22.8 22.7 Other 4,495 3,066 379 378 373
Net Income (Reported) 1,039 626 1,130 1,229 1,330 Dividends paid -584 -884 -884 -884 -943
% change Y/Y -11.6 -39.8 80.5 8.8 8.3 Beginning cash 6,074 9,443 6,012 6,151 5,975
Shares Outstanding 5443 5894 5894 5894 5894 Ending cash 9,443 6,012 6,151 5,975 5,843
EPS (reported) - M$ 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
371
Adrian Mowat Emerging Markets Equity Research
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372
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
373
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
374
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com
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
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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
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
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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
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.
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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
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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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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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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
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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
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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
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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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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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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
396
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• 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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Adrian Mowat Emerging Markets Equity Research
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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;
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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
404