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Morgan Stanley MS.

N MS US

AMERICAS BROKERS & ASSET MANAGERS EQUITY RESEARCH


AMERICAS

November 2, 2010
MS: No Quick Fix for FICC
Relative rating
Neutral
Senior Management Meeting Remains

Target price USD 28.00


Remains

Closing price USD 24.68


November 1, 2010

Potential upside +13.5%

Management Sees the Biggest Gaps in Rates and FX Research analysts


The biggest gaps versus peers are in the rates (mostly a
footprint issue) and FX (mostly a platform issue) businesses, Brokers & Asset Managers

which likely stem from the fact that resources were allocated Glenn Schorr, CFA
glenn.schorr@nomura.com
away from the client flow franchises and toward structured credit +1 212 298 4074
and structured rate products (as well as prop trading) in the Keith Murray
middle of the last decade. keith.murray@nomura.com
+1 212 298 4257

Closing Gaps via Key Relationship Hires, Which Takes Time Deborah Altman, CFA
deborah.altman@nomura.com
Management thinks they are about 9 months into a revamp that +1 212 298 4259

could take about two years (all in). To be clear, they are not
trying to be in all FICC businesses and not trying to completely
close the revenue gap, but are taking a logical approach of
regaining client wallet share through the addition of key
relationship hires (~65% of new hires have been sales people).

200 bps in FICC Market Share = $3 Billion in Revenues


MS is shooting for a 200 bps improvement in FICC market share
over time (+$3bn in annual revenues). To put this in context, we
estimate that MS has averaged about $2bn in clean FICC
revenues over the past 7 quarters, so adding ~$750 million per
quarter would be a 37% increase & would add close to 12 cents
See Appendix A-1 for
in quarterly EPS and about 150 bps to the firm’s ROE.
analyst certification and
Staying Neutral on the Stock important disclosures.
Analysts employed by
We think management has a credible plan to rebuild the trading
non-US affiliates are not
franchise, which should lead to market share and revenue registered or qualified as
improvement over time; however, given that we think ROEs will research analysts with
likely remain sluggish in the near term, as the rebuild will take FINRA in the US.
time, we remain Neutral.
Year end:12-2009 2009a 2010e 2011e 2012e Company data: See page 2 for full company
data and two-year price/index chart
Currency USD Actual Old New Old New Old New

Net Income (m) (907) 3,083 4,269 5,492


EPS (stated) (0.77) 2.36 2.50 3.00
EPS (adj.) (0.93) 2.28 2.50 3.00
PE (adj.) 9.1 10.8 9.9 8.2
ROE stated (%) NM 7.3 8.7 10.5 Relative rating: For details of Nomura’s
relative rating system see text at the end
ROE adj. (%) NM 7.3 8.7 10.5 of this publication

Price/Book Value 1.1 0.8 0.7 0.7

Source: Company data, Nomura estimates Nomura Securities International, Inc.


Nomura | AMERICAS Morgan Stanley November 2, 2010

Key data on Morgan Stanley


Rating
Stock Neutral
Sector Bullish

Price and price relative chart (two year)


29/10/10
40 0.24

0.22
35
0.20
30
0.18
25 0.16

20 0.14

0.12
15
0.10
10
0.08

5 0.06
OND J FMAMJ J ASOND J FMAMJ J A SO
MORGAN STANLEY
U:MS/SP5EFIN(R.H.SCALE)
Source: DATASTREAM
Source: Datastream

Performance
Year end:12-2009 1m 3m 12m
Absolute % 2 -8 -26
Rel. Market % -2 -14 -33
Rel. Sector % -3 -12 -23

Market data
Market Cap (m) 34477
Units Outstanding (m) 1397.0
Float (%) 89
Dividend Yield (current year) 0.00

Source: Datastream, Nomura estimates

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Nomura | AMERICAS Morgan Stanley November 2, 2010

No Quick Fix for FICC


We recently met with Co-President, Institutional Securities, Colm Kelleher and Global
Head of Rates, Credit, and Currency, Jack Di Maio.
After taking a step back and looking at some of the key strengths in Morgan Stanley’s
Institutional Securities segment (like its strong investment banking franchise and
improved equities franchise), management made it clear that the FICC franchise remains
a work in progress. The biggest gaps versus peers are in the rates (mostly a footprint
issue) and FX (mostly a platform issue) businesses, which likely stem from the fact that
resources were allocated away from the client flow franchises and toward structured
credit and structured rate products (as well as prop trading) in the middle of the last
decade.
Unfortunately, management made it clear that there are no quick fixes for closing the
gaps and they think they are about 9 months into a revamp that could take about two
years (all in). To be clear, they are not trying to be in all FICC businesses and not trying
to completely close the revenue gap (MS generated ~$6 billion in clean FICC revenues
so far this year, about half that of Citi, JPM, and BAC). Instead, they are taking a logical
approach of regaining client wallet share through the addition of key relationship hires
(roughly 65% of new hires have been sales people), which should lead to improved
market share and higher revenues over time.
A 200 bps Improvement in FICC Market Share = $3 Billion in Revenues
Management thinks there has been some positive traction (they think the market reacted
too positively to the firm’s 2Q10 results and too negatively to their 3Q10 results) and they
think their FICC market share has improved to 6% from a low of 5%. Gains in market
share can make a meaningful difference to the bottom line. For example, assuming that
next year’s FICC revenue pool is in the $150 billion range, if Morgan can pick up another
2% in market share (they are not trying to be among the leaders, with 15% share, any
time soon), it would add about $3 billion in annual FICC revenues, or $750 million per
quarter, we estimate. To put this in context, we estimate that Morgan has averaged
about $2 billion in clean FICC revenues (ex DVA, CVA, and asset marks) over the past 7
quarters, so adding $750 million would be a 37% increase. This would add close to 12
cents to Morgan’s quarterly EPS run rate and about 150 bps to the firm’s ROE.
Other Opportunities to Leverage the Franchise
In addition to enhancing distribution capabilities via the Morgan Stanley Smith Barney
retail platform and leveraging off the strength of key investment banking relationships,
management sees opportunities in equity derivatives, where it thinks revenues should
account for a larger piece of the pie than they currently do. They are adding the right
people, we believe, but this will take time, as the business is not a simple plug-and-play
model. We would expect to see a focused build in the emerging markets, convertibles,
and in covering key corporate clients.
Some Color on Capital Flexibility Related to the Smith Barney Deal
Finally, management answered the question about the potential for a longer buy-in
timeline for the remaining 49% of Morgan Stanley Smith Barney, which would allow for
better capital flexibility to deal with Basel III (the next option to purchase 14% is at the
end of May 2012). We don’t think this more staggered approach would impact the
business or financial advisors much, as the entity has been operating as a JV since the
middle of 2009. Management definitely wants to own 100% of Morgan Stanley Smith
Barney eventually, but they are not boxed in on the timing, which is a positive in the
context of more-stringent capital rules under Basel III.
Staying Neutral on the Stock
We think management has a credible plan to rebuild Morgan’s trading franchise, which
should lead to market share and revenue improvement over time. Still, with the firm only
a little more than one-third of the way through a two-year improvement process (though
they have completed about 70% of hiring plans), we think ROEs will likely remain

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Nomura | AMERICAS Morgan Stanley November 2, 2010

sluggish in the near term. Despite the stock’s low valuation (~1.0x tangible book value),
we remain Neutral.

Putting Morgan’s Institutional Securities Group in Context


While investors have been focusing on where Morgan Stanley’s capital markets
businesses are coming up short versus peers, we think it’s important to take a step back
and look at the different pieces of the business. On the investment banking front, Morgan
Stanley’s franchise remains a top player, as it ranks #3 in year-to-date Equity Capital
Markets (according to Dealogic) and #1 in IPOs, and is also #3 in M&A. We think this
part of the capital markets business held up well, even through the downturn.

In equities, the franchise definitely took some lumps (especially prime brokerage) during
the downturn, but we think the business has mostly recovered and its revenue profile is
in line with most of its global peers (see Figure 1). Specifically, in prime brokerage,
management is confident that Morgan is back to being a top-3 player, though it is
unlikely that Morgan will ever go back to being a duopoly with Goldman, we think, as the
business has changed and client balances are less concentrated post the Lehman
bankruptcy. The soft spot in equities is in the derivatives space, where management
thinks revenues should account for a larger piece of the pie than they currently do. They
are adding the right people, but this will take time, as the business is not a simple plug-
and-play model. We would expect to see a focused build in the emerging markets,
convertibles, and in covering key corporate clients.

Fig. 1: 2010 YTD Adjusted Equity Trading Revenues ($ in billions)

$8
$7

$6

$4
$4 $4
$3
$3

$2

$0
GS MS JPM BAC C

Adjusted Equity Trading Revenues - 2010 YTD ($ bn)

Note: Equity revenues have been adjusted for DVA, CVA, and asset marks, where disclosed. GS equity revenues include
equities trading, equities commissions, and securities services revenues.
Source: Company data and Nomura estimates

Largest Gaps vs. Peers are in FICC


Given Morgan’s strengths in investment banking and equities, that leaves FICC as the
relative weak link, and management made it clear that it is definitely a work in progress.
First, management pointed out that Morgan’s long-established commodities franchise
remains very healthy, and essentially set it aside from the discussion. On the positive
side, Morgan has a solid credit trading franchise, especially in investment grade, and
also a decent and disciplined leveraged finance business. On the flip side, management
sees meaningful gaps in the rates and FX businesses, which it is focused on closing.
Management thinks that the issues currently facing Morgan’s FICC franchise stem from
the fact that resources were allocated away from the client flow franchises and toward
structured credit and interest rate products (as well as prop trading) in the middle of the
last decade. As a result, when the structured products market came to a halt in the
downturn, Morgan did not have the resources to capitalize on activity in the flow
businesses. As a result, management thinks the firm’s FICC revenue market share fell to
as low as 5%. On a positive note, management feels they have past the low point in

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Nomura | AMERICAS Morgan Stanley November 2, 2010

share and are back to about 6% (with the top global players at about 15% of the pie),
though revenues remain a fraction of most global peers (see Figure 2).

Fig. 2: 2010 YTD Adjusted FICC Trading Revenues ($ in billions)

$18

$16 $15

$14
$12 $12
$12 $11

$10

$8
$6
$6

$4

$2
GS C JPM BAC MS

Adjusted FICC Trading Revenues - 2010 YTD ($ bn)

Note: FICC revenues have been adjusted for DVA, CVA, and asset marks, where disclosed.
Source: Company data and Nomura estimates

Rates, FX, Equity Derivatives, and Emerging Markets Are Key Initiatives
In addition to enhancing distribution capabilities via the Morgan Stanley Smith Barney
retail platform and leveraging off the strength of key investment banking relationships,
management has identified rates, FX, equity derivatives, and emerging markets as key
areas to build. In general, the focus is on hiring the right people and rebuilding
relationships with clients one at a time. Along these lines, management has restructured
its relationship management effort (senior management is spending a good chunk of its
time on actively managing important relationships) and roughly 65% of new hires have
been sales people, as proper client coverage is key. Management feels like Morgan is
definitely getting traction with the biggest accounts (as noted above, FICC market share
has improved ~100 bps), but Colm and Jack highlighted that the firm is only about 9
months into a rebuild that could take around two years to reach fruition.

An Additional 2% Market Share in FICC Could Be $3 Billion in Revenues


Specifically in FICC, management thinks that the total revenue pie was about $175
billion last year. Assuming that next year’s pool is a smaller $150 billion, if Morgan can
pick up another 2% in market share, it would equate to about $3 billion in annual FICC
revenues, or $750 million per quarter, we estimate. To put this in context, we estimate
that Morgan has averaged about $2 billion in clean FICC revenues (ex DVA, CVA, and
asset marks) over the past 7 quarters, so adding $750 million would be a 37% increase.
This would add close to 12 cents to Morgan’s quarterly EPS run rate and about 150 bps
to the firm’s ROE.

To achieve the gains in share, management thinks rates and FX are the key spots within
FICC. Management feels like the gap versus peers in the rates business is due to a
footprint issue, so getting boots on the ground is key, while the gap in FX is more of a
platform issue. Management does not think the FICC franchise faces any profound
issues, but suffered more from a misallocation of resources in the past and the need to
scale-up client relationships. They are convinced that more clients want to spread
business across more counterparties. In addition, management is confident that they
have developed a much better risk discipline than in the past and you won’t see them
swinging for the fences (they are fine not being in every business, just the ones they can
be good at). With Colm’s background in rates and Jack‘s background in credit (including

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Nomura | AMERICAS Morgan Stanley November 2, 2010

high yield), we think they can get the franchise to produce at a high level over time, but
the improvement won’t necessarily be linear.

So Why Did 3Q10 Appear to Be So Soft?


If Morgan is making progress on its build out and picking up some market share, why
were 3Q trading results seem so disappointing (FICC revenues –24% q/q, ex DVA, and
equity trading -13%, while the US peers were +7% in FICC and +43% in equities)?
Management made the point that 3Q10 was a difficult trading backdrop (equity trading
volumes were down 20-25%) and that firm’s with low market share will post lackluster
results in low-activity environments. In addition, Morgan has less exposure to some of
the businesses that fared well in 3Q10 (like rates and high yield), which also made
results appear weak. Management also thinks that investors were a little too bullish on
Morgan’s 2Q10 results and a little too bearish on 3Q10 results. Results need to be
thought of in the context of a slow and deliberate rebuild that is only a little more than
one-third of the way through. As markets normalize (and management indicated that
activity levels have normalized a bit so far in 4Q10), Morgan could get a kicker if it can
continue to add some market share.

Given the Build Out, Does Morgan Stanley Have a Comp Issue This Year?
Given the significant hiring in the trading franchises and the sluggish capital markets
revenue market environment, many investors are wondering whether Morgan is facing a
bit of a comp issue this year. Management feels like they are in the same position as
other firms this year and are not boxed in by the build out. They attribute this to the fact
that a good portion of hiring has been below the MD level and they have slowed the pace
of hiring as industry revenues softened. Looking at Figure 3, it appears that on a y/y
change in comp per average headcount basis, Morgan Stanley’s Institutional Securities
Group stacks up well versus the peer group. However, we would note that through 3Q10,
Morgan’s Institutional Securities Group had accrued the equivalent of 69% of 2009 full-
year comp (ex the UK bonus tax) versus 81% at Goldman. This just means that Morgan
will have less comp flexibility in 4Q10 than Goldman. Also, the trend is a tough one for
any broker, especially one that was actively hiring earlier in the year.

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Nomura | AMERICAS Morgan Stanley November 2, 2010

Fig. 3: Comp and Headcount Changes for the First 9 Months of 2010 vs. the First 9
Months of 2009

MS JPM BAC GS C
0%

-5%

-10%

-12%
-14% -15%
-16%
-17%
-17% -17%
-19% -20%
-20%
-22% -21%
-22%
-25%
-24%
-26%

-29% -30%

-33%
-35%

Y/Y Ch an ge in Total Cap ital Markets


Revenues*
Y/Y Ch an ge in Comp Exp ense**

Note: Total capital markets revenues includes investment banking, equity trading, and FICC trading revenues adjusted for
CVA, DVA, and asset marks, where disclosed. Comp expense for GS is based on the total firm. Comp expense for MS is
based on Institutional Securities Group. Comp expense for JPM is based on its Investment Bank. Comp expense for C and
BAC is a Nomura estimate using a comp ratio of 38% in 2009 and 37% in 2010 based on Securities Banking and Global
Banking and Markets revenues, respectively. We excluded the UK bonus tax from 2010 comp expense. Headcount for GS
is based on the whole firm. Headcount for JPM is based on its Investment Bank. Headcount for C, MS, and BAC are
Nomura estimates.
Source: Company data and Nomura estimates

The Structure of the Smith Barney Deal Allows for Flexibility


With investors very focused on the impact of Basel III on capital ratios and parsing out
which firms might have excess capital, some (including us) have questioned whether the
purchase of the remaining 49% of Smith Barney starting in mid-2012 would limit
Morgan’s flexibility. Management gave some color around how the deal is structured,
which makes us think Morgan is less limited than many believe. Under the deal terms,
Citi has the right to put the remaining stake in the JV to Morgan Stanley in 2015.
However, if Morgan just buys in the additional 14% (and they might also choose to buy in
the deposits they don’t own) that is available in 2012, the put is then off the table. This
would allow Morgan to then take its time buying the remaining 35% if it needed to
preserve capital for other reasons. We don’t think this more staggered approach would
impact the business or financial advisors much, as the entity has been operating as a JV
since the middle of 2009. Management definitely wants to own 100% of Morgan Stanley
Smith Barney eventually, but they are not boxed in on the timing.

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Nomura | AMERICAS Morgan Stanley November 2, 2010

Appendix A-1
Analyst certification
I, Glenn Schorr, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about
any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be
directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my
compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,
Nomura International plc or any other Nomura Group company.

Important Disclosures
Morgan Stanley (MS US) USD 24.68 (01-Nov-2010) Neutral (Sector rating: Bullish)

Nomura International plc or an affiliate in the global Nomura group is a market maker or liquidity provider in the securities /
related derivatives of the issuer.
Nomura International plc or its affiliates in the global Nomura group has a significant financial interest in the issuer.
Nomura Securities International, Inc has received compensation for non-investment banking products or services from the
company in the past 12 months.
Nomura Securities International, Inc had a non-investment banking securities-related services client relationship with the
company during the last 12 months.
Nomura Securities International Inc. makes a market in securities of the company.
Valuation Methodology Our $28 price target for Morgan Stanley is based on 1.0x our forward four-quarter tangible book value
estimate of $28.00, which reflects our expectations for high single-digit ROEs in the near term. The benchmark for this stock is
the S&P 500 Financials Index.
Risks which may impede the achievement of the target price Risks to our $28 price target for Morgan Stanley include
regulatory risk, general economic conditions, asset prices, availability of funding, credit spreads, capital markets activity levels,
and wealth management flows.

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Nomura | AMERICAS Morgan Stanley November 2, 2010

ISSUER SPECIFIC REGULATORY DISCLOSURES


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Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research or
requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email grpsupport-
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The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a
portion of which is generated by Investment Banking activities.

Industry Specialists identified in some Nomura research reports are senior employees within the Firm who are responsible for the sales and
trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research report in
which their names appear.

Distribution of ratings (US)


Nomura US Equity Research has 0 companies under coverage.
0% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 0% of companies with this
rating are investment banking clients of the Nomura Group*.
0% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 0% of companies with this
rating are investment banking clients of the Nomura Group*.
0% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 0% of companies with this
rating are investment banking clients of the Nomura Group*.
As at 30 September 2010.
*The Nomura Group as defined in the Disclaimer section at the end of this report.

Distribution of ratings (Global)


Nomura Global Equity Research has 1878 companies under coverage.
48% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with this
rating are investment banking clients of the Nomura Group*.
37% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 54% of companies with
this rating are investment banking clients of the Nomura Group*.
13% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 16% of companies with
this rating are investment banking clients of the Nomura Group*.
As at 30 September 2010.
*The Nomura Group as defined in the Disclaimer section at the end of this report.

Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for
ratings published from 27 October 2008
The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock.
Analysts may also indicate absolute upside to price target defined as (fair value - current price)/current price, subject to limited management
discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate
valuation methodology such as discounted cash flow or multiple analysis, etc.

STOCKS
A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months.
A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months.
A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months.
A rating of 'RS-Rating Suspended', indicates that the rating and target price have been suspended temporarily to comply with applicable
regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic
transaction involving the company.
Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks
(accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research);Global Emerging Markets (ex-
Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology.

SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months.
A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months.
A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months.
Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging
Markets ex-Asia.

Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from
30 October 2008 and in Japan from 6 January 2009
STOCKS
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Price Target - Current Price) / Current Price,
subject to limited management discretion. In most cases, the Price Target will equal the analyst's 12-month intrinsic valuation of the stock,
based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc.
A 'Buy' recommendation indicates that potential upside is 15% or more.
A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%.
A 'Reduce' recommendation indicates that potential downside is 5% or more.
A rating of 'RS' or 'Rating Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable
regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic
transaction involving the subject company.

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Nomura | AMERICAS Morgan Stanley November 2, 2010

Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity
identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or
companies.

SECTORS
A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
absolute recommendation.
A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral
absolute recommendation.
A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative
absolute recommendation.

Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in
Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008)
STOCKS
A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six
months.
A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next
six months.
A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over
the next six months.
A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over
the next six months.
A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months.
Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional
research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other
information contained herein.

SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months.
A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months.
A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months.
Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector -
Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe;
Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg
World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.

Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior
to 30 October 2008
STOCKS
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price,
subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of
the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't
think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the
intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our
estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this
horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside
implied by the recommendation.
A 'Strong buy' recommendation indicates that upside is more than 20%.
A 'Buy' recommendation indicates that upside is between 10% and 20%.
A 'Neutral' recommendation indicates that upside or downside is less than 10%.
A 'Reduce' recommendation indicates that downside is between 10% and 20%.
A 'Sell' recommendation indicates that downside is more than 20%.

SECTORS
A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
absolute recommendation.
A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral
absolute recommendation.
A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative
absolute recommendation.

Price targets
Price targets, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any price target may be
impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the
company's earnings differ from estimates.

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Nomura | AMERICAS Morgan Stanley November 2, 2010

Disclaimers
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