JP Morgan Emerging markets

Emerging Markets Equity Research 02 December 2009

Emerging Equity Markets Year Ahead Stock Ideas for 2010

Emerging Markets Equity Research Adrian MowatAC

(852) 2800-8599 [email protected] For a full list of authors please refer to the sector and country head list on the back page

% of global consumption

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

J.P. Morgan Securities (Asia Pacific) Limited

See page 396 for analyst certification and important disclosures, including non-US analyst disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Emerging Market Year Ahead - Stocks for 2010 What to own

What to avoid

• Banks: China, Korea, Taiwan, Thailand, Brazil, Mexico, • Telcos: China, India, Korea, Brazil, Mexico, Central Europe Turkey, Russia, South Africa, MENA • Consumer Discretionary: Brazil, Mexico

• Utilities

• Technology: ex-PC ODMs

• Cement: China, India

• Internet & Media: China, Turkey, South Africa, Russia • Consumer Staples: India, Indonesia, Brazil, Mexico • Transportation: especially, airlines

• Consumer Discretionary: South Africa

• Other Industrials: India capex and investment cycle

• Smaller sectors in country: Taiwan Insurance, Dubai Property

• Telecom capital management: Malaysia, Taiwan • Energy: Brazil, Russia • Smaller sectors in country: China internet, China gas, China food inflation, Indonesian interest rate sensitive, Abu Dhabi Real Estate, South African Platinum

A detailed view on our country and sector recommendations within EM is available on Page 11. For more detail please see country and sector pages.

Focus on sectors within countries rather than country recommendations

97 Top Picks

48 Stocks to Avoid

See pages 109 to 287

See pages 289 to 371

Examples of top picks Code VAKBN TI GAZP RU CTCM US 006400 KS ASYAB TI 2610 TT LH TB TOP TB QTEL QD LSRG LI

Top Picks Vakifbank Gazprom CTC Media Samsung SDI Bank Asya China Airlines Land & Houses Thai Oil Public Company Qtel LSR

Examples of stocks to avoid County Turkey Russia Russia South Korea Turkey Taiwan Thailand Thailand Qatar Russia

To PT (%) 73 71 69 67 66 60 60 56 55 54

Code TII US 2498 TT TMX US USIM5 BZ 762 HK 2338 HK 857 HK MER PM PCU US HUVR IN

Stocks to avoid Telmex Internacional HTC Corp Telmex Usiminas China Unicom Weichai Power PetroChina Manila Electric Co Southern Copper Hindustan Unilever

County Mexico Taiwan Mexico Brazil Hong Kong China China Philippines United States India

To PT (%) (34) (31) (26) (23) (22) (22) (21) (21) (21) (20)

Source: J.P. Morgan. Note: To PT = Returns to analyst price target from 27 Nov 2009.

Source: J.P. Morgan. Note: To PT = Returns to analyst price target from 27 Nov 2009.

The Year Ahead Process

Table of contents

The goal of this document is to present our key strategy themes for 2010 using most and least favored stocks from J.P. Morgan’s team of analysts.

Investment strategy ............................................................ 4 Surprises for 2010 ............................................................26 Rates outlook....................................................................27

Both J.P. Morgan EM equity research analysts and our macroeconomic team have been involved in the production of this document. The process started with the Strategy Team briefing analysts on our key themes and macroeconomic forecasts for 2010. Analysts then reviewed their earnings models and presented their top picks and stocks to avoid to both their sector and country strategists. The sector and country teams then produced their list of top long and short ideas, which were then compiled by the regional strategy teams. These ideas form the core of this document.

Economic outlook ............................................................32 Economic forecasts ..........................................................42 Country strategy ...............................................................47 Sector strategy ..................................................................77 Summary tables of stock ideas .........................................93 Top picks........................................................................109 Stocks to avoid ...............................................................289 Strategy dashboards........................................................373

2

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Higher Markets with Higher Volatility The drivers – three steps to heaven

Potential returns

1. Compression in risk premiums

MSCI EM end-2010 target 1300 (+30%) • Implied end-2010 forward P/E of 14x (J.P. Morgan estimate)

2. Economic and earnings recovery 3. Overshoot as risk-free rates remain low for long (See page 4 for details)

• Currency, earnings estimate revisions, and low riskfree rates provide upside. (See page 4 for details)

Investment themes

Risks are high for year-one of recovery

1. Stay high beta for now – front-loaded returns

• Investor driven correction in commodity prices

2. Economic growth surprises pessimistic expectations

• G3 bond volatility

3. 2010 is the year of G3 monetary stimulus – no change in • G3 rates in 2010 • 4. Earnings estimate revisions drive markets • 5. Focus on sectors in countries 6. Policy normalization outside G3 – source of volatility rather than a cap on returns

Lack of G3 policy flexibility Rapid rise in EM inflation resulting in faster tightening Risk appetite fades, driving investors back into low beta defensive markets like SA, Israel and Malaysia

• Dubai World debt moratorium impacts ability to raise EM corporate debt

7. Inflation ends the party in emerging markets before developed markets. Enjoy the party until inflation exceeds central bank target zone

(For more risks please see page 12)

8. M&A 9. BRIC consumers (See page 4)

Key issues for 2010 – briefing notes

Market performance

1. A longer perspective on asset performance

Figure 1: MSCI EM and MSCI World

2. The policy risk to the asset inflation trade 3. And now the monetary stimulus

1400

800

5. Potential bond market volatility

400

6. Now is the time for earnings estimate revisions

200

8. Fiscal outlook 9. South Africa - 2010 Soccer World Cup Winners

MSCI World

1000

4. The rolling recovery trade of 2009: and settling the decoupling debate

7. Falling inflation with growth

MSCI EM

1200

600

0 88

90

92

94

96

98

00

02

04

06

08

Source: Bloomberg. Chart rebased to 100 in 1988

(See page 15)

3

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Emerging Market Equity Strategy For now we remain positive on EM equities. The factors supporting the powerful recovery from the October 2008 lows remain in place. These conditions are: compression in excessive risk premiums, economic and earnings recovery trade, and overshoot as risk-free rates remain low. MSCI EM could retest its all-time high.

Figure 3: Beta versus PE 18.0

India Taiw an

16.0

Malay sia

14.0 12.0

Our end-2010 index target for MSCI EM is 1300, +30%. This implies an end-2010 forward PE of 14. The return is 10% in excess of consensus earnings forecasts. In our view, the difference will be made up of currency appreciation and earnings revisions. The low for EM was 454 on 27 October 2008. The index has more than doubled since then. To retest its high the index would need to increase by 38%. The low in developed markets was on 9 March. The MSCI World index has rallied 70% from its 2009 low.

China

Phil

Mex ico

Thailand S Africa

10.0

Poland Indonesia Brazil

Hungary Czech Korea Turkey

Russia

8.0 0.4

0.6

0.8

1.0

1.2

1.4

Source: Bloomberg. Note: Two year weekly beta for MSCI indices vs. MSCI EM. Forward PE on y-axis and Beta on the x-axis.

Figure 4: EM consumption exceeded US consumption in 2008! 40 36

EM

32

Stay high beta, for now – front-loaded returns Early 2010 conditions should continue to be very favourable for EM equities in our view, with strong growth, positive earnings estimate revisions, acceptable inflation, and ongoing rally in credit markets. The stage three of the bull market is an overshoot in valuations as risk-free rates stay low for long. A less favourable base effect for inflation plus a potential slowing in earnings estimate revisions may make 2H10 more challenging. P/Es could decline in this phase. Figure 2: Bungee jump or slingshot? Gulf War Mex ican crisis Asian crisis Tech bubble Credit crisis

310 280 250 220 190 160 130 100 70 -24m

-18m

-12m

-6m

Trough +6m

+12m

+18m

+24m

Source: Datastream, 27 October 2009. Note: Chart shows the performance of MSCI EM US$ index two years pre and post crisis lows. Note: MSCI EM (USD) is indexed to 100 at the trough of each crisis.

4

28

US

24 20 16 1990 1992

1994

1996

1998 2000

2002

2004

2006 2008

Source: J.P. Morgan economics. Note: Chart shows EM and US consumption as % of global consumption.

A quick review EM survived ‘the big ugly experiment’: a combination of a severe financial shock, the deepest developed consumer recession since WWII, the lagged impact of anti-inflation policies, and a sharp drop in commodity prices. The main conclusion of the experiment is that the domestic inflation/monetary cycles were more dominant than external demand. This economic decoupling during the stress test supports a higher relative valuation of EM equities versus developed world equities. But global capital flows do link EM monetary policy to record low G3 rates resulting in the risk of a boom bust cycle and asset bubbles. Policymakers in EM are moving to restrict capital flows and non-conventional measures to control asset prices. A combination of higher economic and asset volatility, with policy risk, may be negative for equity valuations.

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Risks are high for the first year of the global recovery The bulk of the risks are global rather than EM centric. Please see page 12 for risks. The three key risks or sources of volatility are: • G3 bond volatility • Commodity volatility • Policy risks Post the synchronized global recession and the credit crunch, EM has earned a lower risk premium. Emerging economies led the global recovery. Decoupling proved? Decoupling in a global economy and capital markets was literally impossible. But EMs did prove they can generate their own recovery rather than rely on the developed world consumer. EM consumption exceeded US consumption in 2008. An overweight in EM equities vs DM is consensus; as is an OW in BRICs vs EM. Both have been successful strategies. However, EM was led by sectors driven by global growth, not local; note the performance of our demand classification indices, global consumer +97% , global price taker +95%, ahead of domestic consumption +58% (these indices are published in our weekly dashboards). Bungee jump or slingshot? EM equities have recovered 115% from their 2008 lows. EMBI spreads have tightened from a peak of 865bp to 310bp. But the threeyear CAGR for EM equities is just 4% and EMBI spreads averaged 195bp in 06/07. The catalyst for the rally from March was the evidence of stabilization in developed world end-demand. Cyclical sectors outperformed: technology, materials, consumer discretionary and energy.

although non-commodity sectors have also done well. Within EM, the previously important markets of Korea, Malaysia, Mexico, Taiwan and South Africa underperformed. This is consistent with the underperformance of nominal GDP in these countries. BRIC nominal GDP is 60% of EM nominal GDP. Will non-BRIC markets drop off the radar screen? Yes, unless they offer a premium growth rate or acceleration in trend growth. There are strong arguments in favour of Indonesia joining the BRIC grouping. But the country needs to demonstrate to long-term direct investors that there is sufficient effective protection of their legal interest in order to be permanently promoted to the BRIC league. An overweight BRIC consumer is consensus. This has been a good trade with strong relative returns from BRIC financials and consumer discretionary. The valuations relative to history and market are high; Brazil, Brazil Materials, Brazil Energy, Brazil Financials, India Financials, Mexico Materials, SA Materials and Indonesia are more than one standard deviation above their long-term average relative to history and EM. However, the premium in these sectors is modest compared to the actual returns achieved (for more see page 9). Figure 5: Performance of BRIC vs MSCI EM 160

130

100

70 Jan-02

Jan-04

Jan-06

Jan-08

Source: Datastream, 24 November 2009.

Extreme volatility in equities, currencies, commodities and bonds makes assessment of fair value very difficult. Many investors struggled to join the rally this year as they anchored on the lows and were reluctant to buy after sharp gains. To provide a longer perspective please see the briefing note, a longer perspective on asset performance. This reviews three, five and eight year CAGR. The five-year CAGR for MSCI BRIC is 22%, ahead of MSCI EM CAGR of 14% and significantly ahead of MSCI World’s +1%. The material and energy bull market partly explains the outperformance of BRIC, 5

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Economic growth surprises low expectations In our view, the consensus is skeptical of sustainable growth. This supports a cyclical bias even with the ISM above 50. Our base case is: • No change in G3 interest rates in 2010 • Above-consensus US and European 2010 GDP growth of 3.3% and 2.6% respectively The three drivers of economic growth in 2010 are: • Industrial production/inventory cycle • Exports • Delayed monetary stimulus The relationship between final sales and production indicates substantial de-stocking in the past three quarters. As end demand slowly recovers, production needs to increase faster due to low inventories. The turn in IP is typically durable and sustained for 13 months on average. This is a normal feature of a recovery.

Figure 6: Tracking inventory - Global IP and final sales proxy 115 110

J.P.Morgan final

105

sales proxy

100

Industrial

95

production

90 85 00

01

02

03

04

06

07

08

09

10

Figure 7: Sequential recovery in exports growth (% oya) 40 30 20

China

10 0

Korea

-10 -20 -30

Global growth of 3.5% in 2010 should support a recovery in external demand for most economies. Sequential trends are consistent with 2010 oya% export growth.

05

Source: J.P. Morgan, September 2009.

Taiwan

-40 -50 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: available credit; low market rates; and willing borrowers. If credit markets continue to rally and J.P. Morgan economic growth numbers are correct, these conditions will be met in 2010. Counter-intuitively exit strategies signal that the monetary stimulus is building. Note, this is primarily a developed market event. China monetary stimulus fed through rapidly. Current account deficit economies will benefit from this delayed stimulus into 2010, i.e., India, Turkey, South Africa, etc. (See page 17 for more on the delayed monetary stimulus.)

Figure 8: Emerging markets can rise with interest rates (%) 1500

10

MSCI EM Index (LHS)

1200

8

Fed Funds target rate (RHS)

900

6

600

4

300

2

0

0 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 revisions rather than a compression in risk premiums. This argues for a cyclical bias. Potentially ‘scarred and overworked’ analysts are even slower to upgrade. In this phase, markets trade expensive. Please see Steve Malin’s briefing on page 19 for more on the power of earnings estimate revisions after the economic recovery.

6

Focus on sectors in countries The rolling country-by-country growth recovery trade is done. Economic decoupling occurred with the global recovery led by India, Indonesia and China. The balance of EM Asia, Brazil, Russia and Turkey recovered a quarter before DM (see page 18 for more on the rolling 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.

Emerging Markets Equity Research 02 December 2009

Overweight Mexico Catalysts are clear. A robust 3.3% - around 100bps above consensus - US economic recovery, led by manufacturing (+4.5% in 2010), which is the key linkage between the US and Mexico. IP is 30% of Mexico GDP, and 80% of exports go to the US. Mexico’s historical beta to global GDP recovery is over 2.0x. This drives a forecast 11 point Mexico GDP swing into next year, the second highest globally and arguably with upside risks. The currency also offers short-term upside, as a clear EM underperformer YTD, and with oil prices (1/3 fiscal revenue) set to remain high. In this context, fiscal and rating concerns are overdone and likely well-priced short term, though remain real long term, as fiscal revenue/GDP is low (22% GDP), and poorly structured (off falling oil production).

CPI

40

Policy Rate

30 20 10 0 03

04

05

06

07

08

09

Source: J.P. Morgan economics, October 2009.

Figure 10: Mexico - second highest GDP swing (11pt) in 2010 15% 12% 9% 6% 3% China

India

Korea

Brazil

South Africa

0% Chile

Deterioration in global credit markets and/or delays in negotiating a deal with the IMF are a threat. J.P. Morgan forecasts a 2010 current account deficit of 2% of GDP.

50

Taiwan

Higher trend growth and lower interest rates are positive for Turkish banks, a large part of the benchmark. We forecast an acceleration of earnings growth from 10-20% in 2010 to 20-30% in 2011.

Figure 9: Turkey – Structurally low policy rates and inflation

Turkey

The Secular and Cyclical Trade Overweight Turkey: We believe that Turkey could outperform EM and CEEMEA as structurally lower inflation and interest rates result in higher trend; India in the mid-90s is good example of this trend. The IMF standby program, if signed, should ease Turkey’s reliance on external financing and reduce the crowding out of the private sector. These improved fundamentals are neither reflected in valuations nor relative performance. Turkey’s forward PE of 9 is at a significant discount to MSCI EM's 13. The index has marginally underperformed MSCI EM year to date. Since midMarch 2009, the local currency index is in line with MSCI EM.

leverage. We are also bullish the S+P 500, and the correlation with the Mexbol is very high. The market is trading below its 5-year average multiple, and earnings momentum is positive (Q3 index EPS +20% oya).

Mexico

Now that the rolling recovery trade is done, the confidence in country calls is lower. Focus on key sectors within countries that offer: (1) High probability of positive EPS revisions (2) High secular and/or defensive growth

Russia

Adrian Mowat (852) 2800-8599 [email protected]

Source: J.P. Morgan economics. Note: Chart shows the difference between 2009 and 2010 GDP growth forecast.

Figure 11: Secular decline in interest rates Turkey Brazil Mex ico Philippines Indonesia India Thailand Korea South Africa Taiw an Malay sia China Russia -3

-1

2

5

7

10

Source: J.P. Morgan economics. Difference between 5 year average policy rate (2004-08) and Average forecasted policy rate in 2009-10, ranked by greatest difference.

The market is under-owned by foreign investors; local pension funds only have 8% in domestic equities, and EM investors are OW, but focused on the defensive 2/3 of the market. We focus on the 1/3 cyclical portion of the market for cheaper asset values, and stronger earnings 7

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Policy normalization outside G3 Not all countries will be subject to the same disinflationary forces. A number of smaller economies, quasi peripheral to the G3, have suffered much less during the recession, and are thus likely to normalize monetary policy earlier. Israel and Australia have started increasing policy rates and are set to continue. Other countries will likely follow suit in coming months— Norway, Czech, Korea, and Brazil—by our forecast, an earlier start of the rate normalization cycle should benefit their currencies and hurt their bond markets. The impact on their equity markets is less obvious but will likely be a small negative. Inflation ends the party in EM before DM The inflation cycle could be desynchronized. EM inflation models are unlikely to be accurate due to the short history of post pegged exchange rate inflation. Asia is more at risk due to limited currency appreciation relative to LATAM and EMEA. All one can do is monitor the data. The table below is published in both Perspectives and Portfolios and Key Trades and Risks every two weeks. The table monitors inflation relative to central bank target zones. Inflation today is benign but base effects in 2010 will be less favorable. The message from the previous inflation cycle was to sell equities when the inflation rate breached the central banks’ target zone.

today’s situation unusual. At the simplest level companies are returning capital to investors either via higher dividends or through capital reduction. EM companies continue to expand regionally and globally. Private equity funds are far more developed and disciplined compared to the past. Most of the large private equity funds will continue to lead deals. This is not a one-way trend, with EM companies now acquiring developed-world businesses. Figure 12: MSCI EM PE and US interest rates (%) 40

10

MSCI EM Fw d PE (LHS)

35 Fed Funds target rate (RHS)

30 25

6

20

4

15

2

10

0

5 88

90

92

94

96

98

00

02

04

06

08

Source: Datastream, MSCI, IBES, J.P. Morgan economics

Figure 13: EM average policy rates (%) 25 20 15

Nominal

10

Conditions supportive for M&A activity Low funding costs and generally healthy balance sheets provide supportive financial conditions for corporate activity. Improvement in the global economic situation is increasing the confidence of business and financial investors. The diversity of potential participants makes

8

8

5

Real

0 -5 98

99

00

01

02

03

04

Source: J.P. Morgan economics, September 2009.

05

06

07

08

09

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Table 1: Monetary policy and inflation %

Inflation Target (Central Bank)

Current CPI

Food CPI

Change in CPI in last 12 months

CPI Forecast 2009 end (J.P. Morgan)

J.P. Morgan forecast 2009

na na na

1.8 1.5 (1.4)

na na na

(2.2) (1.0) 0.0

2.7 1.7 na

On Hold On Hold On Hold

2.5 - 3.0 2.0 4.8 2.0-4.0 3.0 (±1.0) 0-3.5 3.0-5.0 5.5 2.5 - 3.5 4.0-6.0 3.5 - 4.5 1.5 - 3.5 1.0 - 3.0 4.5 (±2) 3 (±1) 2.0-4.0 7.5(±2) 3.0 - 6.0 10.5 19.5

-2.2 -2.0 -0.9 -0.8 -0.3 0.2 0.4 0.7 1.5 2.0 2.6 3.2 3.4 3.8 4.3 4.9 4.9 5.1 6.1 15.1 28.9

-0.5 -19.5 1.4 1.5 -5.8 1.0 1.6 2.2 15.7 4.6 4.8 2.2 4.5 1.6 3.5 7.0 3.0 5.8 4.9 8.4 na

-4.3 -10.2 -4.0 -5.4 -6.7 -8.6 -3.5 -11.1 -9.3 -2.8 -9.2 -4.4 -1.1 0.5 -1.9 -0.6 -0.8 -6.9 -7.0 6.6 -7.1

-1.3 0.2 -0.8 -0.6 1.2 1.5 -0.9 2.0 8.2 2.8 4.7 4.5 3.5 na 5.1 5.4 4.2 6.1 7.2 12.0 na

On Hold On Hold On Hold On Hold On Hold On Hold On Hold On Hold On Hold On Hold On Hold On Hold On Hold On Hold On Hold On Hold Easing Easing On Hold On Hold Accommodating

US core PPI US core CPI US Unit Labor Costs Inflation Data Japan CPI Malaysia CPI Taiwan CPI China CPI Czech CPI Chile CPI Thailand CPI Philippines CPI India Wholesale Price Index South Korea CPI Indonesia CPI Colombia CPI Poland CPI Israel CPI Brazil CPI Mexico CPI Hungary CPI Turkey CPI South Africa CPI Russia CPI Venezuela CPI

Source: Bloomberg, J.P. Morgan Economics. 4 November 2009. Inflation targets are extracted from ‘EM Inflation: Trouble Beyond the Headlines’, Hensley et al, 7 July 2008.

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

Relative to EM • Russia, Turkey, SA, Korea, Poland, China, Hungary Israel, Chile, Taiwan, Malaysia, Philippines, Thailand • IT: Korea, Taiwan, India • Telecom: SA, China, Mexico • CD: Korea and SA • Financials: Turkey, China • Korea Industrials, Russia energy, Israel Healthcare

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Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Table 2: Hindsight sector valuations Sector

Brazil Financials Russia Energy Brazil Energy Russia Brazil Turkey Financials South Africa Energy Korea Financials Mexico Materials Korea Industrials South Africa Materials Mexico Telecommunication Services India Energy Turkey Korea Consumer Staples Mexico India Financials Brazil Materials South Africa Korea India Poland Korea Information Technology Israel Health Care Mexico Consumer Staples Korea Consumer Discretionary India Information Technology South Africa Consumer Discretionary South Africa Telecommunication Services China Telecommunication Services* South Africa Financials China Financials China Taiwan Information Technology Hungary Israel Chile Korea Materials Indonesia Taiwan Thailand China Industrials Taiwan Materials Malaysia Taiwan Financials China Energy* EM Philippines

Current 13.2 6.9 13.0 8.7 13.6 8.1 9.6 10.8 16.5 9.5 18.9 12.7 13.8 9.0 13.5 14.6 21.2 15.0 11.9 10.0 17.7 15.1 10.2 12.4 18.4 8.7 20.1 12.0 10.4 12.5 9.9 14.4 14.8 15.7 10.9 11.7 15.2 9.7 14.0 16.8 10.9 18.5 17.1 15.6 20.2 12.5 13.0 14.9

12m Forward PE 10yr Average +1sd 9.4 11.4 7.2 9.6 6.8 9.7 8.1 10.5 7.8 10.1 9.5 13.2 8.3 10.1 8.0 10.1 8.2 10.6 8.4 11.6 12.5 15.7 12.4 14.8 10.5 14.5 9.6 12.4 11.2 15.1 12.0 13.7 12.4 18.9 8.0 10.0 10.0 11.4 9.1 11.0 14.1 17.5 12.9 16.0 11.2 16.2 21.5 32.5 15.0 17.5 7.9 10.0 25.3 48.5 10.3 12.4 14.7 25.7 15.8 23.6 8.3 9.8 14.1 19.0 13.5 18.2 18.2 30.7 9.9 11.9 15.9 19.6 15.6 17.7 7.3 9.6 9.1 12.3 14.9 19.1 13.9 34.6 13.5 17.3 11.6 14.7 14.4 16.4 14.5 17.1 9.4 11.9 11.1 13.0 14.0 16.3

-1sd 7.4 4.8 4.0 5.8 5.5 5.8 6.5 5.9 5.7 5.2 9.2 10.1 6.4 6.9 7.3 10.3 5.8 6.0 8.6 7.2 10.8 9.8 6.2 10.6 12.4 5.9 2.2 8.1 3.7 8.1 6.7 9.3 8.7 5.6 8.0 12.1 13.4 5.0 6.0 10.7 -6.9 9.6 8.5 12.4 11.9 6.9 9.1 11.7

Current 1.0 0.5 1.0 0.7 1.0 0.6 0.7 0.8 1.3 0.7 1.5 1.0 1.1 0.7 1.0 1.1 1.6 1.2 0.9 0.8 1.4 1.2 0.8 1.0 1.4 0.7 1.5 0.9 0.8 1.0 0.8 1.1 1.1 1.2 0.8 0.9 1.2 0.7 1.1 1.3 0.8 1.4 1.3 1.2 1.6 1.0 1.1

12m Forward PE relative to EM 10yr Average +1sd 0.9 1.0 0.7 0.9 0.6 0.8 0.7 0.9 0.7 0.8 0.9 1.2 0.7 0.9 0.7 0.9 0.7 1.0 0.8 1.0 1.1 1.4 1.1 1.3 1.0 1.3 0.9 1.1 1.0 1.4 1.1 1.2 1.1 1.6 0.7 0.9 0.9 1.0 0.8 1.0 1.3 1.5 1.2 1.4 1.0 1.6 1.9 3.0 1.4 1.6 0.7 0.9 2.2 3.7 0.9 1.1 1.3 2.0 1.4 2.0 0.8 0.9 1.3 1.7 1.2 1.6 1.7 3.0 0.9 1.0 1.5 1.8 1.4 1.6 0.7 0.8 0.8 1.0 1.4 1.8 1.2 2.4 1.2 1.5 1.1 1.3 1.3 1.5 1.3 1.6 0.8 1.1 1.3 1.5

-1sd 0.7 0.5 0.4 0.5 0.6 0.5 0.5 0.6 0.5 0.5 0.9 1.0 0.6 0.7 0.7 1.0 0.6 0.6 0.8 0.7 1.1 1.0 0.5 0.9 1.1 0.6 0.7 0.8 0.6 0.7 0.6 0.9 0.9 0.4 0.8 1.1 1.2 0.5 0.6 1.0 0.0 1.0 0.8 1.2 1.1 0.6 1.1

Source: IBES, Datastream. Red (dark grey) denotes expensive ie more than 1sd, Green (light grey) denotes at or less than 10 year average. Note: * China Energy and China Telecom averages are from June 2000.

10

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Focus on sectors within countries rather than country recommendations The table below provides a level summary of our views on sectors within countries. Financials are 25%, Materials is 15% and Energy is 16% of EM. All recommendations are relative to EM. The Industrials sector consists of an eclectic group of stocks. We do not rate the sector. We are overweight early cyclicals and transportation sub-sectors. Table 3: Key country and sector recommendations Country/Sector EM Brazil Brazil Materials Brazil Energy Brazil Financials China China Financials China Energy China Telecommunication China Industrials Hungary India India Financials India Energy India IT Indonesia Israel Israel Health Care Korea Korea IT Korea Financials Korea Industrials Korea Materials Korea CD Korea Consumer Staples Malaysia Mexico Mexico Telecommunication Mexico Consumer Staples Mexico Materials Philippines Poland Russia Russia Energy South Africa South Africa Materials South Africa Financials SA Telecommunication SA Consumer Discretionary South Africa Energy Taiwan Taiwan IT Taiwan Financials Taiwan Materials Thailand Turkey Turkey Financials

Wts 100 16.8 4.8 4.6 3.7 18.3 7.2 3.2 2.4 1.6 0.6 7.5 1.9 1.3 1.2 1.8 2.7 1.5 12.6 3.5 2.4 1.9 1.8 1.4 0.7 2.7 4.4 1.8 1.0 0.7 0.4 1.3 6.6 4.0 6.9 1.9 1.8 0.9 0.8 0.7 11.1 6.6 1.7 1.4 1.2 1.3 0.8

Reco -N N OW OW UW OW UW UW n/a N OW OW OW N N UW UW N OW OW n/a N N N UW OW UW N OW OW N OW OW N UW OW UW N UW OW OW OW UW OW OW OW

US$ Return (%) 1 yr 3 yr 106 22 155 97 174 124 199 150 156 72 103 53 120 67 131 50 20 20 97 37 109 (6) 124 25 145 30 105 60 114 (1) 209 57 57 47 32 68 128 (1) 135 (6) 172 (12) 108 (10) 182 76 164 19 52 (3) 65 41 69 4 51 17 63 22 199 (26) 86 23 55 (10) 103 (26) 84 (34) 91 19 106 (1) 80 18 63 44 150 38 83 27 92 5 118 (3) 93 (8) 62 44 94 16 96 23 127 35

09E 5 yr 119 371 393 581 490 191 270 201 197 86 43 184 219 367 117 207 94 103 84 58 101 174 215 79 101 85 127 189 153 59 125 76 72 57 89 69 70 116 125 139 37 43 (4) 89 61 87 128

X 15.8 16.6 20.8 15.1 15.9 17.5 17.4 15.4 12.3 22.2 12.5 20.7 25.1 17.4 21.5 15.8 15.3 15.9 13.7 18.2 16.0 11.2 12.0 10.5 13.9 18.1 18.1 13.2 22.4 48.4 16.8 16.8 11.3 7.9 14.9 34.6 11.7 11.9 14.8 12.0 30.5 33.2 29.2 27.3 12.4 9.7 8.3

PE 10E X 12.7 13.3 14.1 13.0 12.9 14.3 13.6 13.1 12.4 17.1 10.9 17.0 20.7 12.7 18.5 14.5 11.8 11.9 11.2 14.2 11.6 9.7 10.0 9.5 13.6 15.6 14.9 12.4 18.1 20.5 15.1 14.6 8.6 6.8 11.6 17.9 9.7 10.3 12.1 9.4 19.1 18.8 19.5 21.5 11.2 8.8 7.9

EPS Growth 11E 09E 10E (%) X (%) (%) CAGR 05 10E 10.8 (4) 24 7.2 11.4 (11) 25 4.8 11.5 (40) 48 2.9 12.3 (22) 16 3.2 10.6 6 24 5.8 12.2 9 22 13.5 11.1 18 29 29.3 11.6 (11) 17 6.6 11.8 (14) (0) 14.8 13.9 56 29 3.9 8.6 (41) 15 (1.5) 13.9 3 22 14.0 17.1 (2) 21 13.3 11.4 7 37 18.3 15.6 2 16 17.9 12.2 7 10 14.2 10.1 19 30 10.7 NA 8 34 16.6 9.3 44 22 4.6 10.9 NM 28 3.9 9.3 (27) 38 0.2 8.5 55 15 15.4 8.7 (12) 20 5.8 7.9 56 10 8.6 12.0 9 2 11.9 13.1 0 16 6.4 12.1 9 22 7.0 11.2 24 7 16.3 14.5 23 24 13.9 10.1 (48) 136 (13.7) 13.2 24 11 5.5 11.3 (34) 15 (3.0) 6.5 (33) 32 4.5 5.5 (24) 15 2.3 9.4 (13) 29 11.8 13.7 (45) 93 20.6 7.8 (14) 21 7.4 9.0 2 16 13.8 9.8 11 22 12.0 7.4 (18) 28 9.4 13.4 8 60 (0.7) 12.3 (13) 77 4.0 15.2 NM 50 6.0 16.2 (17) 27 (13.0) 9.3 28 10 (2.4) 7.4 6 11 11.1 6.6 23 5 16.4

ROE DY 10E % 10E% 2.2 13.0 2.7 14.6 2.4 11.9 2.3 37.3 2.3 15.7 2.2 14.2 2.4 15.6 2.7 14.7 3.5 14.9 1.4 8.0 1.8 11.1 1.0 15.0 0.9 11.3 1.1 15.6 1.3 27.0 2.7 23.7 1.4 12.9 0.9 NA 1.2 10.3 0.2 10.4 1.0 7.8 1.3 12.8 1.6 11.7 1.4 12.0 1.7 16.9 2.7 10.9 2.3 15.2 3.3 39.4 1.3 14.9 2.0 2.6 3.8 14.3 3.3 9.6 1.3 10.5 1.4 11.9 2.8 14.7 1.4 7.8 4.1 13.3 2.4 19.2 2.0 16.5 3.0 16.7 3.0 6.4 2.9 6.7 2.7 5.0 3.1 6.8 3.3 13.7 2.8 16.6 2.0 18.3

03-08 Avg 15.6 18.6 28.2 27.1 21.9 15.5 10.8 21.0 18.1 11.7 22.3 20.9 15.9 20.7 30.0 24.8 12.6 16.1 13.7 17.2 10.9 10.7 16.9 13.6 14.9 12.9 18.2 30.4 15.3 14.4 13.2 15.6 15.8 16.0 18.4 10.3 19.2 26.7 20.9 23.7 12.4 13.3 6.1 19.7 19.4 17.4 17.1

Source: J.P. Morgan Asian strategy team, MSCI, Datastream. Table sorted by descending weight in index, countries first followed by country-sectors. 10 November 2009.

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Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Risks to our strategy Bond market volatility The end of QE plus banks unwilling to add to duration risk is a dangerous technical situation for government bonds. Risks assets typically struggle as bond yields rapidly increase to "normal" levels. Please see Mercury Rising on page 22 which highlights the relationship between bond market volatility and EM corrections. Dubai World debt moratorium Our base case is that this is a Dubai-specific rather than pan-EM issue. The risk is that we underestimate the damage to investor confidence in the region. Lack of G3 policy flexibility High fiscal deficits and record low interest rates limit policymakers’ ability to respond to a relapse in growth. A growth relapse is not our base case. If it occurred it would be a serious blow to risk assets. Credit spreads could expand and equities fall. Please see page 23 for a review of the impact of fiscal stimulus on growth and potential fiscal drag in 2011. Central banks target asset prices We are in a post Greenspan world; central banks target asset prices and the common wisdom is that the market cannot be trusted. Brazil "got away with" market intervention. The Brazilian market outperformed last week despite implementing a 2% tax on speculative inflows. This tax is politically appealing as it targets international "speculators" who are viewed to be behind the credit crunch and putting at risk Brazilian manufacturing jobs (and they do not get a vote in the 2010 Brazilian presidential election). China and India already have capital controls. It is now open season for non-market policies as central banks attempt to manage conflicting policy goals. Be careful in the consensus asset inflation trade. More rapid increase in Asian inflation With the exception of Thailand, J.P. Morgan's inflation forecasts for 2010 are within the central bank target zones. Modeling inflation in emerging economies is difficult due to the short history of floating exchange rates and large weighting to food and other primary products. The base effect for commodities is notably unfavourable in 1H10. There is a risk that inflation increases faster than our forecast. This would be negative for equities.

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The lack of a valuation cushion Valuations in EM and DM are mid a wide and statistically debatable valuation range. If news flow remains incrementally positive then it is not a challenge to performance, but there is no valuation cushion. Figure 14: Global Bond Supply ($tr) $7

Gov ernment

Agencies, Supra, Muni, etc

Corporates incl Gov t Guranteed

Securitized

$6 $5

$4

$3

$2 $1

$0 2009

2010

Source: J.P. Morgan. Global bond supply and demand 2009 in $tr, demand and supply figures are annualized, supply is calculated by the change in bond out standings at face value, demand is calculated by the change in bond out standings at market value. 2010 forecast $tr, demand and supply figures are annualized.

Figure 15: Global Bond Demand ($tr) QE

Banks

FX Reserv es

Retail Bond Funds

Other

$7 $6 $5 $4

$3 $2 $1 $0 2009

2010

Source: J.P. Morgan. Global bond supply and demand 2009 in $tr, demand and supply figures are annualized, supply is calculated by the change in bond out standings at face value, demand is calculated by the change in bond out standings at market value. 2010 forecast $tr, demand and supply figures are annualized.

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Uncertain outlook for commodity Financial investors’ influence on commodity prices is now substantial .Commodities rallied prior to the recovery rather than typically lagging the recovery. With zero interest rates investor flows could remain strong, pushing up commodity prices which would be negative for growth. It is also possible that flows reverse. Upwardly sloping forward curves result in a negative roll or high cost of carry for financial investors. Investors may become discouraged by the low returns available due to the negative carry. Figure 16: Oil forward curve ($/bbl) Crude Oil, WTI : 11/24/2009

100 95 90 85 80 75 10

11

12

13

14

15

16

17

Renminbi and Asian currencies The RMB effectively re-pegged to the US dollar 15 months ago. With headline inflation and exports down year over year, we see no catalyst for Beijing to change policy until mid 2010. The RMB is anchoring other Asian currencies as they try to maximize export competitiveness. Election-induced volatility Several emerging markets go into election in 2010. This could be a source of volatility for the markets. Korea’s regional election in June 2010 is going to be the last nation-wide election before the presidential election in 2012, meaning the current ruling party is likely to put every effort to win the election. Brazil elects a new president in October 2010. The base case is the current PT-led centre-left coalition remains in power. With fewer macro issues in play this time around, the potential outcome is less dramatic, though pre-election volatility is likely, and sectoral and micro risks are on the rise. Colombia elects a new President in May 2010, with uncertainty as to whether current President Uribe can run again.

Source: Bloomberg.

Figure 17: The financial investor is also driving commodities Cumulative inflows into commodity fund by year (US$ billion) 45 40 35 30 25 20 15 10 5 0

2004 2006 2008

2005 2007 2009

Table 4: 2010 Election Calendar Jan

Feb

May Philippines Legislative & Presidential election, 10 May

Jun Czech Republic Parliamentary, First Round

39.9

20.1 17.5 13.0 12.1 8.9 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: J.P. Morgan, up to October 2009.

Carry trade volatility The carry trade is a poorly defined term. We use it as shorthand for investors’ desire to generate a return when cash returns are zero. This may simply be the switch from cash to higher risk asset. It will also include currency forwards as investors search for higher yielding FX. Invariably momentum in risk assets will attract the leveraged investor. The correction in carry trades can be sharp.

Colombia Presidential election, 30 May Sep

Mar Colombia Legislative election 14 Mar Jul

Apr Hungary Parliamentary election Aug

Hungary Presidential election Korea Regional election Oct Nov Poland Presidential election, First Round Brazil Presidential election, First Round 3 Oct

Dec

Source: IFES.

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Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Managing Risks Risks for the first year of recovery are high. Investors should consider protecting their portfolios. Option implied volatility has fallen from the highs in 2008, it is reasonable to buy portfolio insurance by going long index puts. Recent research from J.P. Morgan's Equity Derivatives and Delta one strategy team shows that investors who want to protect their portfolios beyond a three-month period had to bear a 30% annualized cost of rolling the long VIX futures position. The research suggests that the recent increase in correlation between the USD, VIX and equity prices can be used as a more efficient way to achieve diversification and portfolio insurance. While we believe that investors should not overemphasize this casual relationship between asset markets and the USD, we recommend building a small USD long in portfolios to protect against sharp market corrections. This tail risk is particularly important for investors reporting performance in USD terms; if equity markets were to drop 20%, and the USD appreciates by 17%, a dollardenominated foreign portfolio would fall in value by

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35%. Since January 2009, on average, the VIX tended to increase by 1.2 points for every 1% strengthening in the Dollar and this was strongly negatively correlated with equity markets. Our base case assumes emerging market FX appreciation. Hedging the portfolio with a position in USD is an inexpensive way to diversify sudden EM FX depreciation when risk aversion spikes. Figure 18: Correlation between DXY and EM FX index - Very Negative 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 93

95

Source: Bloomberg.

97

99

01

03

05

07

09

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

A longer perspective on asset performance To avoid being drowned by an anchor and provide an objective perspective of asset performance, we look back at three, five and eight-year US$ returns. The three-year CAGR for EM equities is just 4.3%. This is higher than -6.8% CAGR return from DM equities. MSCI EM outperformed the DM world index over these years. More recently, ‘BIC’ has driven returns as Russia underperformed by 16% over three years and 4% over three years. Note the divergence in performance of oil and Russian equities and ruble. At a sector level, Commodities have outperformed, along with consumer stocks. Financials managed to outperform only marginally. IT has been the worst performing sector. Currency returns are a meaningful part of the US$ returns on equity indices. The currency bloc matters, as shown in Table 6. CE3 currencies have appreciated the most, along with the Euro. Interestingly, Asian currencies ex the RMB and Thai Baht, have been laggards. The Mexican Peso is a notable underperformer in Latam. Table 5: MSCI EM Sector performance (% for US$ indices) MSCI EM Sector EM Energy EM Materials EM Cons Disc EM Cons Staples EM Utilities EM Financials EM Industrials EM Telecoms EM IT

Weight 15.0 6.6 5.4 2.2 0.0 12.9 5.3 3.5 8.9

3yr CAGR 5 10 5 11 7 5 0 2 -3

5yr CAGR 19 18 11 19 17 15 11 13 7

8yr CAGR 24 22 18 17 17 16 16 12 8

Source: MSCI. Sorted descending 8 year CAGR. Grey line separates perf rel to EM

Table 6: Currency and commodity performance (%) Currency WTI Crude GSCI Industrial Metals Czech Koruna GSCI Agricultural Index Euro Hungarian Forint Polish Zloty Brazilian Real S African Rand Thai Baht Chinese Yuan EM Currency Basket Israeli Shekel Malaysian Ringgit Philipine Peso Indonesian Rupiah Korean Won Taiwanese Dollar Russian Ruble Indian Rupee Turkish Lira Mexican Peso Dollar Index

3yr CAGR 10 -8 7 9 5 4 2 8 -1 3 5 0 5 2 2 -1 -7 1 -3 -1 -1 -5 -4

5yr CAGR 9 10 6 14 3 1 3 10 -5 4 4 1 3 2 4 -1 -2 0 0 -1 -1 -3 -2

8yr CAGR 19 13 10 10 7 6 5 5 4 4 2 2 2 1 1 1 1 1 0 0 0 -4 -6

Table 7: Major EM country index performance (% for US$ indices) Country Colombia Egypt Peru Indonesia Czech Republic Brazil India BRIC China Hungary Russia Thailand South Africa Chile Turkey EM Morocco Mexico Korea Poland Philippines Malaysia Israel Taiwan World

Weight 0.6 0.5 0.7 1.8 0.4 16.8 7.5 49.1 18.3 0.6 6.5 1.2 7.0 1.3 1.3 100 0.3 4.4 12.6 1.3 0.4 2.7 2.7 11.1 -

3yr CAGR 17 0 28 11 2 21 6 8 13 -7 -13 1 2 10 2 4 7 -1 -3 -8 3 8 10 -4 -7

5yr CAGR 27 25 31 21 15 30 21 21 21 3 8 6 9 15 9 13 19 15 11 7 14 9 11 2 0

8yr CAGR 40 34 33 32 30 26 22 21 19 17 17 17 16 16 16 16 15 15 13 12 12 11 9 4 2

Source: MSCI. Sorted descending 8 year CAGR. Grey line separates perf rel to EM

Table 8: Major EM country sector CAGR returns (%) Country Sector Brazil Materials India Energy Brazil Energy S Africa Cons Disc China Energy India Financials S Africa Telecoms Brazil Financials Korea Materials Korea Industrials Korea Cons Discr Mexico Telecoms India IT Korea Cons Staples Turkey Financials China Financials Israel Health Care Russia Energy Taiwan Materials Korea IT Mexico Cons Staples China Industrials S Africa Financials China Telecoms S Africa Materials Mexico Materials Korea Financials Taiwan Financials South Africa Energy Taiwan IT

Weight 4.8 1.3 4.6 0.8 3.3 1.9 0.9 3.7 1.8 1.9 1.4 1.8 1.2 0.7 0.7 7.2 1.5 3.9 1.4 3.5 1.0 1.6 1.8 2.3 1.9 0.7 2.3 1.7 0.7 6.6

3 year CAGR 27 16 32 9 12 8 12 17 19 -5 5 4 -2 -2 8 17 18 -15 7 -3 6 9 2 4 -2 -11 -6 -5 6 -4

5 year CAGR 32 35 41 13 21 25 13 37 22 20 11 21 15 14 16 28 14 8 6 9 18 11 6 21 8 7 13 -3 16 5

8 year CAGR 38 35 33 31 30 30 29 28 24 21 20 20 18 18 18 18 17 16 16 16 15 15 14 12 12 10 8 4 3 1

Source: MSCI. Sorted descending 8 year CAGR. Grey line separates perf rel to EM .

Source: Bloomberg. Sorted descending 8 year CAGR. Grey line separates perf rel to EM . J.P. Morgan. The EM Currency Basket is calculated using the difference in the returns in the MSCI EM local and USD indices. All performance versus the US$ except Dollar Index

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Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

The Policy Risk to the Asset Inflation Trade On 19 October 2009, the Brazil government announced a 2% upfront charge for foreign investors making portfolio investments in local fixed income and equities (IOF). The government was concerned about the pace of Real (BRL) appreciation; +35% ytd. If BRL resumes its appreciation trend further measures are possible. Minister Mantega said that the “FX floating regime” remains in place and he is supportive of capital markets, but the intention is to avoid “excessive BRL appreciation.” Brazilian authorities have voiced concern about the exchange rate, and the more the BRL appreciates the greater the policy risks. We believe that with Brazil’s successful experiment last week, there is the risk that other central banks attempt non-market policies to manage conflicting policy goals.

Figure 19: A muted response from Brazil 116

MSCI Brazil 112 108 104

BRL Currency

100 01-Oct

07-Oct

13-Oct

19-Oct

25-Oct

Source: MSCI, Bloomberg, J.P. Morgan. The Brazilian Real index is inverted. Indices rebased to 100 on 1 October 2009. The red line shows the announcement of the IOF tax.

Figure 20: Relative performance post knee-jerk reaction positive 108 MSCI Brazil relativ e to MSCI EM

107 106 105

The Brazil government's move was not a surprise as they were vocal about their concerns with BRL appreciation. The size and breadth of the move, however, was a surprise. Between March and October 2008, Brazil imposed a 1.5% IOF on fixed income investments by foreigners. The currency continued to appreciate until July 2008. MSCI Brazil underperformed MSCI EM by only 1% in the week post the imposition of IOF (19-23 October 2009). Brazil has ‘gotten away’ with the capital control. This is in sharp contrast the Thai experience (see below) Policy risks growing The lack of a sustained negative response to Brazil’s capital control measure may encourage other central banks to implement non-conventional policies. This, we believe, is a risk to the consensus asset inflation trade.

104 103 102 101 100 01-Oct

07-Oct

13-Oct

19-Oct

25-Oct

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

Figure 21: The Thai experience—Impact on currency 37.5 Thai Baht Onshore

36.5 35.5 34.5 33.5

Thai Baht Offshore

32.5 1-Dec-06

22-Dec-06

12-Jan-07

2-Feb-07

23-Feb-07

Source: Bloomberg.

Learning from the Thai experience In December 2006, the Thai government imposed FX controls on all inbound portfolio capital. The initial rules implied that foreigners would have to deposit 30% of the funds brought into the country as a reserve with the central bank and only the remaining 70% could be invested. For withdrawing capital within one year, only two-thirds of the amount would be refunded. The stock market dropped 17% the following day. This pushed the government to change their stance and limit the controls to inflows in bonds and commercial paper.

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Figure 22: The Thai experience – Impact on the stock market 330 310 290 270 250 230 1-Dec-06

22-Dec-06

Source: MSCI, Bloomberg.

12-Jan-07

2-Feb-07

23-Feb-07

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

And now the monetary stimulus Monetary stimulus requires three conditions: available credit, at an attractive interest rate, and willing borrowers. An ongoing rally in the credit markets provides the first two conditions. By mid-2010 several quarters of economic expansion should boost business confidence. Initially the effect will be a reduction in borrowers’ propensity to repay loans. This is a developed world event. The monetary stimulus in EM, particularly in China, fed through rapidly in 2009. The technical position in investment-grade bonds may get more favorable. The negative carry between shortterm working capital loans and long term interest rates should discourage further bond issuance. The momentum of returns in credit markets is likely to continue to attract

investors. This combination results in further spread reduction and absolute decline in yields. Higher risk bonds are likely to follow this trend. The irony of the post-credit-crunch interest-rate dynamic is that the improvement in credit markets allows central banks to move away from emergency interest rates. Investors should view this as a bullish sign. As we highlighted in our guide to monetary policy in EM (26 August 2009, Mowat et al) the nominalization of interest rates is concurrent with strong markets and economies. It is only when higher inflation drives central bank policy action, that investors should sell equities. Please see our extended markers for a summary of inflation and central bank target ranges.

Figure 23: Compression in excessive risk premium – Yields for government and corporate bonds plus earnings yield for US and emerging equity markets 22 20 18 16 14

US High Yield CEMBI US EARNINGS YIELD EMBI JULI US 10 Yr EM EARNINGS YIELD 1 Month T-Bill

High 21.0 14.3 11.4 12.0 8.7 5.2 17.3 5.2

Low 7.5 5.7 6.1 6.3 4.9 2.1 6.8 (0.1)

Avg 05-07 8.4 6.4 6.6 7.0 5.7 4.6 8.7 4.0

Spot 9.8 7.0 6.9 6.7 5.3 3.5 7.6 0.1

Diff 1.4 0.6 0.3 (0.3) (0.4) (1.1) (1.2) (4.0)

US HY US Earnings y ield

EM Earnings y ield

CEMBI

12 EMBI 10 8 6 Juli Av g : 6%

4

JULI

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

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Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

The rolling recovery trade of 2009: And settling the decoupling debate Brazil, Russia and Turkey in 2Q09. Developed economies returned to growth in 3Q09. Finally Hungary and South Africa return to growth in 4Q09. Markets typically outperformed in the three months prior to their recovery. Within EM exporters started to outperform in 2Q09.

The debate on economic decoupling is settled. Emerging economies led the recovery out of the synchronized recession in 4Q08. Growth remains robust despite weak exports. Domestic inflation and monetary conditions appear to be the dominant drivers of EM growth. The evidence of capital market decoupling is more limited. Correlation between DM and EM is a function of common investors. That said, the low in EM equities was on 27 October 2008, four months ahead of the developed equity markets.

The rolling recovery trade is now mature. For the past two years, stock price movements have been dominated by macro factors. In 2010, we would expect a more normal balance of stock specific factors and macro factors driving share prices.

China, India and Indonesia led the economic recovery in 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 QoQ saar EM Asia China India Indonesia Korea Malaysia Philippines Taiwan Thailand Lat Am Brazil Colombia Mexico EMEA Czech Hungary Poland Russia South Africa Turkey USA Euro area Japan Australia Hong Kong Singapore

Avg 20032007 8.4 11.1 9.3 5.8 4.4 6.1 5.7 5.1 5.8 5.2 4.1 6.4 3.5 6.4 5.6 3.4 5.5 7.4 4.7 6.8 2.9 2.1 2.1 3.4 6.8 7.7

1Q08 7.6 10.7 6.9 5.9 4.4 7.2 0.4 3.6 4.7 5.4 7.5 -1.4 4.5 6.1 0.5 3.5 6.1 7.2 1.7 7.7 -0.7 3.1 3.5 3.0 4.1 12.2

2Q08 4.9 8.7 5.9 6.8 1.7 2.3 7.1 -2.3 0.3 4.7 6.2 2.9 1.1 5.1 5.0 -0.9 4.1 7.1 5.0 -4.5 1.5 -1.3 -2.8 1.4 -3.9 -7.7

3Q08 3.8 5.8 7.7 5.2 1.0 0.6 3.0 -2.9 2.2 1.4 5.5 0.0 -2.7 3.4 1.8 -3.8 1.6 5.9 0.2 -5.6 -2.7 -1.5 -5.1 1.3 -3.2 -2.1

4Q08 -5.3 2.4 1.6 1.9 -18.8 -8.8 1.1 -27.2 -21.5 -8.5 -12.8 -5.6 -9.2 -9.3 -5.0 -7.4 -0.4 -14.2 -1.8 -21.6 -5.4 -7.1 -12.8 -2.8 -7.4 -16.4

Source: Actual data plus J.P. Morgan estimates, 11 November 2009. *Reported for China.

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1Q09 2.5 8.4 8.2 4.9 0.5 -17.7 -8.1 -10.2 -7.2 -10.0 -3.8 1.1 -21.2 -20.2 -17.9 -10.0 0.4 -33.6 -6.4 -14.4 -6.4 -9.6 -12.4 1.6 -16.1 -12.2

2Q09 12.6 14.8 6.7 4.3 11.0 12.8 10.0 20.7 9.6 0.8 7.8 2.7 -4.4 2.2 0.4 -7.9 2.8 4.9 -3.0 19.1 -0.7 -0.7 2.3 2.5 13.9 20.7

3Q09E 9.8 10.0* 9.0 5.3 12.3 6.1 4.0 11.5 7.0 6.0 7.2 1.9 10.1 6.6 4.5 -2.0 5.5 9.5 0.5 11.7 3.5 3.0 3.0 1.2 9.0 14.9

4Q09E 5.3 9.1 -1.0 3.5 4.0 4.5 4.0 4.2 5.3 5.6 6.7 3.2 7.5 5.0 5.0 2.5 3.0 6.5 3.4 4.5 3.5 2.5 2.5 3.8 5.0 -2.0

1Q10E 6.8 9.0 10.0 5.5 2.0 1.6 5.0 3.8 4.9 4.7 4.3 3.5 3.7 3.5 2.8 2.0 2.5 4.5 4.4 0.0 3.0 3.0 2.5 2.1 4.2 4.1

2Q10E 7.0 9.5 7.0 6.0 3.5 4.9 5.0 4.0 5.7 3.2 5.0 4.3 -0.6 3.3 2.5 2.0 3.0 4.0 3.8 3.6 4.0 3.0 1.5 2.4 4.0 7.4

3Q10E 7.3 9.3 9.6 6.0 3.5 4.9 5.0 3.8 7.0 3.9 4.0 5.5 3.3 3.4 2.2 2.5 3.5 4.0 3.6 8.2 4.0 3.0 1.5 4.4 3.8 8.2

4Q10E 7.0 8.7 9.0 6.0 3.5 4.9 5.0 3.8 7.0 2.3 4.0 4.5 -0.9 3.6 2.0 2.5 3.5 4.5 4.1 8.2 3.5 2.5 2.0 6.2 3.5 8.2

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Reiterating our overweight on earnings revisions Steve MalinAC, Head of Quant Research Those familiar with our research may detect a sense of irony in our title because the reality is that there are very few periods when we would not advocate being overweight on earnings revisions—it is after all one of the most consistent quant strategies for alpha delivery.

Figure 24: The L/S return to Earnings Revisions in GEM 800 700 600 500 400 300

Why do earnings revisions work? Earnings revisions belong to the momentum family of alpha drivers. Research into momentum is extensive and while the jury is still out as to why it works, even the most ardent advocates of ‘efficient markets’ struggle to deny that it exists. Whilst this isn’t the forum for a detailed discussion, arguably the most convincing arguments for ‘why earnings revisions work’ stem from behavioral finance. In this field the behavior and reaction of analysts to events that make them acknowledge their under/overstated opinion about a company’s future have been studied in depth. In a nutshell earnings revisions trend and are serially correlated (i.e. when one analyst upgrades others follow), the market typically underreacts to these changes and this makes the signal systematically exploitable. Do they work in emerging markets? Using our extensive global back-testing infrastructure we have investigated the performance of various forms of earnings momentum in numerous universes. The conclusion is invariably the same. Earnings revisions have been a strong driver of returns over the long term in emerging markets – indeed it is one of the strongest universes for observing the phenomena globally.

200 100 Nov-08

Nov-07

Nov-06

Nov-05

Nov-04

Nov-03

Nov-02

Nov-01

Nov-00

Nov-99

Nov-98

Nov-97

Nov-96

Nov-95

Base

0 Nov-94

Occasionally earnings revisions do fail, as they did last year and early this year. The severity of the underperformance was dramatic and enough to make some ask the question “Is it broken for good?” We believe not. Based on the strength of the recovery from prior failure periods we believe that now is exactly the time to focus on changes in earnings estimates.

Source: Thomson, J.P. Morgan calcs.

Why did they fail recently? During the crisis and subsequent recovery macro drivers, not micro drivers such as earnings revisions were driving markets. The rapid deterioration in the economic data took analysts by surprise and for most of 2008 and part of 2009 analysts simply played catch-up. As far as the market was concerned EPS changes were at best not relevant and at worst behind the curve resulting in the strategy generating negative returns. Have they failed before? The recent period was a record period of underperformance but earnings revisions have failed before; notably in 97 and 01 (See below). Remember, momentum relies on serial correlation. That is, what has worked in the past is most likely to continue to work in the future. Conditions of rapid changes in risk appetite plus limited guidance from companies have contributed to the underperformance of the strategy. The period 97/98 was the Asia financial crisis and 01/02 was the fallout from the Tech sell-off as well as Sep 11th. This was followed by a slight recovery before the Asia region lurched into SARS. What happened next? The point that we would most like to stress is that in both previous ‘failure cases’ when revisions started to work 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 (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

From March 1998 Earnings Revisions generated +32% of alpha on a long/short basis as it recovered very quickly. Similarly Jan 02 to Aug 03 saw a +28% L/S return.

Figure 25: The 12-month rolling return to Earnings Revisions in GEM 50% 40% 30% 20%

0% -10% -20% Dec-08

Dec-07

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Dec-04

Dec-03

Dec-02

Dec-01

Dec-00

Dec-99

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-30%

Source: Thomson, J.P. Morgan Calcs.

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Jun-99

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Figure 26: Draw-down analysis – Recovery periods are strong Jun-95

In summary we continue to be very optimistic about the earnings revisions based strategies in the current environment. The speed and magnitude of previous recoveries in performance are evident and we are already seeing effectiveness improve.

10%

Jun-94

What has happened this time? (So far) The ‘drought’ in the performance of earnings revisions was finally broken at the end of May. Subsequently investing in earnings revisions has been a winning strategy five months in succession (and it is again up this month at the time of writing).

0% -5%

In addition the fundamental support for earnings revisions is strong. The correlation between stocks and markets continues to drop back suggesting that ‘micro’ is getting the better of ‘macro’ and hence stock picking opportunities are likely to continue to improve. With the revisions environment having normalized and all the ‘easy yards’ already accomplished for valuations it seems reasonable that attention will remain on earnings going forwards. With clarity returning as each reporting period passes and the endorsement of most market strategists (who are suggesting the economic picture will continue to improve), the stage appears set.

-10%

+28% Jan 02 to Aug 03

-15% -20%

+32% March 98 to March 99 +8% Since Jun 09

-25%

Source: Thomson, J.P. Morgan Calcs.

Figure 27: Strategy success rate (rolling year) 120%

Average success rate > 70% of months in any rolling 12 month period

100% 80% 60% 40% 20%

Sharp Recovery following Sharp fall in effectiveness Nov-08

Nov-07

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0% Nov-94

How do you find revisions for stocks? We calculate earnings revision rankings for stocks and sectors globally on a daily basis. Please contact Steve Malin or Rob Smith at [email protected] for more in formation on accessing the latest information via our web portal or to receive latest changes direct to your inbox.

Source: Thomson, J.P. Morgan Calcs.

Figure 28: Recent returns… back on track 4% 2% 0% -2% -4% -6%

Source: Thomson, J.P. Morgan Calcs.

20

Oct-09

Sep-09

Aug-09

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-8%

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

The odd couple: Above-trend growth and falling core inflation (David Hensley AC and Joseph LuptonAC extracts from ‘Global core inflation falling fast’, GDW 21 August 2009) J.P. Morgan’s global economic outlook stands apart from the consensus. The forecast is for a sustained return to above-trend growth beginning this quarter and a continued slide in core inflation to near zero in the developed economies (DM) by late next year (see Slack Attack, Global Issues, May 29, 2009). This sounds incongruous; however a resumption of above trendgrowth accompanied by falling core inflation is standard operating procedure after deep economic downturns. Developed market core inflation is now at 1.1% oya, down from the peak at 1.9% oya in August last year. The current level is equal to the previous low in 2003. This is accompanied by depressed wage growth. The output gap and the death of the pricing power Our core inflation forecast is underpinned by the huge output gap in the economy. This large and growing amount of resource slack is a reflection of the extraordinarily low levels of aggregate demand and resource utilization. Global output gap is estimated to reach -4.9% of GDP in 2Q09. The measure of resource utilization, which is a weighted average of the rates of unemployment and manufacturing capacity utilization, was 3.8 standard deviations below its norm. In the past, economic recessions and the accompanying buildup of slack consistently have delivered a significant decline in core inflation and wage growth (see Slack Attack). Core inflation tends to move slowly in the developed world, meaning that the full transmission of resource slack to pricing tends to occur with a lag. The large decline in core inflation to date was magnified by passthrough from energy prices in 2H08. The death of pricing power is apparent when looking at core inflation and energy prices in 1H09 casually. This shows little a pass through of the bounce in energy prices into core inflation. Either businesses were unable to pass through higher energy costs because of the weak economy, or this was offset by disinflationary pressure elsewhere. Either way, it appears that the surging output gap already is taking a toll on pricing power. EM decline limited to Asia The shallower recession in EM suggests a smaller reduction in core inflation for the group. However, the actual reduction has been more dramatic with core inflation falling 1.5% to 2.4% from last year’s peak. This decline is entirely due to EM Asia, especially China. Core inflation has plateaued in Latam and CEEMEA.

Figure 29: Developed market core inflation (US core ex tobacco) %oya

1.9

1.6

1.3

1.0 03

04

05

06

07

08

09

10

Source: J.P. Morgan.

Figure 30: Resource utilization and core CPI, developed economies 2

%-pt; 8 qtr chg in %oy a inflation rate 2

Std. dev . from 1990-2007 av g

1

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00

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Source: J.P. Morgan.

Figure 31: EM consumer prices excluding food and energy % change over 12 months

8

CEEMEA

6

Latam

4 EM

2

EM Asia

0 -2 Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jan 08

Jan 09

Jan 10

Source: J.P. Morgan.

21

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Fear bond market volatility – Mercury may rise in 2010 purchasing programs, nor does it expect the Fed to alter the already announced amounts of purchases. The end of quantitative easing could result in higher bond yields in 2010.

EM equities typically correct when bond market volatility rise. Statically this is when the 10-year UST yield exceeds two standard deviations versus its three month moving average. Since 2004, the mercury rising indicator has correctly signaled corrections in seven out of 10 occasions.

The mercury rising indicator We define a rapid adjustment in 10-year UST yields as a change in the yields that is greater than 2 standard deviations relative to the three-month moving average.

Yields are low but the curve is steep The current 10-year UST yield of 3.5% is low relative to the long term history. But the yield is steep; the average curve is 1.75%. The curve steepness rewards duration risk and banks have rapid accumulated USTs. The appetite is finite.

We emphasize that this indicator does not identify market tops. Note that in March 2006 the indicator signaled a “sell”, and although three-month forward returns were -5% in EM equities, the MSCI EMF rallied a further 15% from March levels before peaking in May 2006. As a result, we interpret the signal as an early warning sign to begin reducing risk.

US fiscal deficit The US Fiscal deficit is estimated at US$1.35 trillion in 2010 following a deficit of US$1.6 trillion for 2009. The net US treasury paper issuance in 2010 is estimated at US$1.8 trillion; this is larger than the US$1.6 trillion estimated to be issued in 2009. Potentially, the market’s inability to digest the large sustained fiscal deficits and issuance of treasury papers may cause UST yields to rise rapidly in 2010.

We believe that emerging markets are susceptible to sharp corrections as volatility spikes in global markets. Our work on quantifying the relationship between the direction of US Treasury yields and EM equity returns suggests that the probability of such a correction in 2010 is high if UST yields rise rapidly and increases the risk of a rapid adjustment. We advise investors to monitor the pace of change in 10-year UST yields in 2010.

End of quantitative easing Reinforced by the FOMC statement in November, we expect the Fed to continue with its already scheduled purchases, concluding purchases in 1Q10. Our baseline does not expect any further announcements of new

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

3 2 1 0 -1 -2 -3 Jan-04

MSCI EM (Log scale RHS) Jul-04 Jan-05 Jul-05

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

22

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Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

The manic-depressive's guide to the fiscal outlook Originally from the GDW, 11 September 2009 The fiscal impetus from the economic stimulus package ramped up earlier this year. More recently, the overall flow of spending is starting to level off and, looking ahead a few quarters, spending will decline incrementally. This prospect has raised fears of a “double-dip” recession as the boost to growth from the stimulus turns into a drag. Given the most likely path for spending, these fears appear greatly overblown. The reason is that spending ramped up much more quickly than it will ramp down. As such, the drag from waning stimulus over the course of the next year should be relatively modest: By our calculations the drag should be less than 1% point on average. A more significant hit could come in early 2011, when not only do most of the stimulus measures come off, but some of the Bush-era tax cuts are set to expire. While that prospect poses downside risk to 2011, much political uncertainty remains regarding how much stimulus will roll off versus be renewed. While the likelihood of a stimulus-induced double-dip in 2010 looks comfortably low, the longer-term budget outlook remains uncomfortably perilous. We project that the federal budget deficit for FY2010 will come in at $1,350bn, an improvement from the $1,600bn projected for FY2009 but not a huge improvement given how terrible the backdrop was for the last fiscal year. Looking further ahead, the stream of deficits in either the administration’s or the CBO’s estimates looks very worrying. As bad as that is, estimates that also realistically incorporate current policies look terrifying. There have been episodes in the past when deficit projections looked awful—such as the early 1990s—but the outcome turned out better. That said, the challenges look much greater this time around and will require even more political will to be resolved. Stimulus so far Through September 4, $96bn of stimulus funds have been paid out, which is about 19% of the $500B allocated to spending measures. The bar chart presents our estimates of how much the stimulus has contributed, and will contribute, to overall growth. According to our estimates, the stimulus has contributed, or will contribute, about 2-3%-pts to GDP growth, on average, in each of the last three quarters of the year.

Figure 33: Estimated contribution of fiscal policy to GDP growth 4 3 2 1 0 -1 -2 -3 2009

2010

2011

Source: J.P. Morgan. % saar. Includes

After that, going into next year we expect that stimulus support will decline and subtract from GDP growth, on average in the magnitude of about 0.5%-pt per quarter. The growth rate drag in 2010 is expected to be smaller than the growth rate boost in 2009 because the stimulus spending should decline at a slower pace than it increased. That holds true at least until the beginning of 2011, at which point things get interesting. Currently, not only should much of the stimulus spending begin to dry up in 2011, but the Making Work Pay tax credit for lower-income households and the Bush-era tax cuts for upper-income households are both scheduled to expire at the beginning of 2011. Fiscal challenge for DM The deficit for the 2009 fiscal year is likely to come in a little under $1,600bn. We project a deficit for FY2010 of $1,350bn. Considering how dire the economic and financial situation was in the 2009 fiscal year, the improvement in 2010 does not look all that impressive. We do not have official deficit projections for years further out, though it is safe to project an incredibly gloomy fiscal outlook. Our best guess for FY2011 is a deficit of around $1,100bn—that is, after incorporating the expiration of the Bush tax cuts. (In the event, the expiration of upper-income Bush tax cuts should add about $30bn to FY2011 revenue). For years beyond 2011 the improvement in the deficits is likely to be only modest and nowhere near enough to bring the deficit anywhere close to balance. Over the next 10 years, even the administration’s assessment of the budget outlook sees the deficit never falling below $700bn, and the cumulative deficits over that period are projected to be $9tn. While the CBO has yet to update its estimate of the administration’s budget, when it does it will likely add $1tn to the administration’s 10-year deficit total. A similarly gloomy picture emerges from analysis conducted by the Committee for a Responsible Federal 23

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Budget, which realistically extends current policies— such as the AMT patch—to arrive at a $12.6tn 10-year deficit estimate. Another case in point is Japan. The latest OECD data (June 2009) showed that gross financial liabilities (debt) of Japan’s general government were 172% of GDP in 2008, and are expected to exceed 200% by 2010, by far the highest level among major countries One grim point should be noted to connect the comments earlier in this note to the immediately preceding discussion. As we noted regarding early 2011, even modest fiscal “restraint”— coming from a starting point of 11% of GDP deficits— will be a hit to economic growth. If, at some point, the political establishment shows the will to return the deficit to a more reasonable 2-3% of GDP, the cumulative drag of a fiscal rebalancing of up to 8% of GDP poses a long run cyclical drag; the implications of the political establishment not showing that will, however, is even more depressing. Fiscal Cushion in EM Public sector debt to GDP ratios in Emerging markets are much better developed markets. The public sector debt as a percent of GDP is the largest in Brazil and India among the emerging markets, and we expect it to be around 70% for Brazil and 46% for India in 2010. This makes for good comparison with the G3 countries where the public debt is as much as the GDP itself or even more. For more, see Key Trades and Risks, Mowat et al, October 21, 2009, and JGB challenge: Exploding public debt amid falling domestic saving, October 21, 2009.

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Table 10: General Government Fiscal Deficit (% of GDP)

Global Developed US1 Japan Euro area UK Emerging Latam Brazil Chile Colombia Mexico Peru Em Asia China2 Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand CEEMEA Czech Rep Hungary Israel Poland Russia South Africa Turkey

Fiscal Position 2008 2009 -2.6 -6.8 -3.1 -7.7 -3.2 -10.2 -6.0 -9.7 -2.0 -4.0 -5.9 -9.1 -0.8 -3.5 -0.6 -3.3 -1.3 -2.5 8.7 -4.5 -1.4 -3.0 -1.8 -3.9 2.4 -1.6 -1.4 -3.6 -0.5 -3.0 -5.0 -6.0 -6.5 -6.3 -1.3 -2.4 1.5 -2.0 -4.8 -7.0 -1.3 -1.5 5.0 -2.0 -1.2 -3.6 -2.5 -5.0 0.8 -3.6 -2.0 -5.0 -3.0 -2.6 -0.3 -3.0 -2.5 -3.2 5.7 -4.0 1.0 -3.8 -1.3 -2.3

Change 2008 to 2009 Cyclical Disc -2.5 -1.7 -2.9 -1.7 -5.0 -2.0 -1.7 -2.0 -1.0 -1.0 -1.6 -1.6 -1.3 -1.5 -1.7 -1.0 -0.9 -0.3 -10.6 -2.6 -1.6 0.0 -0.7 -1.4 -1.5 -2.5 -0.1 -2.1 -0.4 -2.1 2.0 -3.0 5.2 -5.0 -1.1 0.0 -2.4 -1.1 -1.0 -1.2 -0.2 0.0 -7.0 0.0 -1.8 -0.6 -1.1 -1.4 -3.8 -0.5 -3.0 0.0 0.4 0.0 -2.7 0.0 -0.7 0.0 -8.6 -1.1 -3.2 -1.6 -1.0 0.0

Public debt (% of GDP) 2010 F na na

Source: J.P. Morgan economics 'Priming the Pump’, Lupton and Hensley, 13 February 09 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. 2: China’s widely announced stimulus plan amounted to roughly 7% of GDP in 2009. However, we only show the 30% of this, that is expected to be financed by the public sector.

227 na 82 na na 70 9 44 36 25 Na 20 Na 46 35 44 44 62 na na 39 na 38 80 na 53 7 38 50

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

South Africa - 2010 Soccer World Cup Winners Figure 34 summarizes the average outperformance of equity market sectors relative to MSCI World in the previous three World Cups (earlier historical analysis constrained by data availability). IT, Telcos and Consumer Discretionary were the stand-out sector winners during previous World Cups. We expect similar benefits for these sectors in SA with MTN, in particular, appearing very well-placed given that it is the first African World Cup Sponsor, making it a direct beneficiary from increased sales and awareness.

is likely to be FirstRand given that it is an official sponsor and via the Visa link benefits from tapping into that customer base.

We expect accommodation, transportation, food, beverage, and leisure sectors to benefit from soccerrelated consumption. SABMiller, City Lodge, Sun International, Comair, 1Time, Naspers, Rainbow, Famous Brands and Imperial would be our top strategy picks in these sectors. A beneficiary in the banking sector

Our favourite SA Soccer World Cup strategy picks include MTN, Vodacom, SABMiller, City Lodge, Sun International, Naspers, FirstRand, Rainbow, Famous Brands, Comair, 1Time, Imperial and Bidvest

Construction was an early beneficiary of the World Cup spending given the capex on new soccer stadiums, transport links etc, but much of this has largely occurred and we believe for this sector to be rejuvenated it requires new private sector capex to be forthcoming, in particular, new mining capex.

.

Figure 34: Hosting countries’ equity sector performance relative to MSCI World sectors

Energy

Cons.Stap.

Materials

Industrials

Financials

Health.Care

Utilities

Cons. Disc

Telecoms

IT

40 35 30 25 20 15 10 5 0

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

Table 11: SA Soccer World Cup strategy picks MTN Vodacom SABMiller City Lodge Sun International Naspers FirstRand Rainbow Famous Brands Comair 1Time Imperial Bidvest

Bloomberg Ticker MTN SJ VOD SJ SAB SJ CLH SJ SUI SJ NPN SJ FSR SJ RBW SJ FBR SJ COM SJ 1TM SJ IPL SJ BVT SJ

Price 119.8 55.9 209.9 78.2 93.9 282.9 17.4 15.9 20.0 2.2 0.8 82.1 121.7

JPM Rec. OW Neutral Neutral NR NR OW OW Neutral NR NR NR NR NR

Analyst Jean-Charles Lemardeley Jean-Charles Lemardeley Mike J. Gibbs Ziyad Joosub Mervin Naidoo Vikhyat Sharma -

Source: J.P. Morgan estimates. Note: JPMorgan does not have coverage of certain of the stocks in the leisure, air transport and industrial sectors as shown above. City Lodge, Sun International, Famous Brands, Comair, 1 Time, Imperial and Bidvest have been included in our list of top picks purely to reflect our positive stance on Soccer World Cup-related stocks. J.P. Morgan has no fundamental opinion on these companies.

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Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

None of these events reflect an official J.P. Morgan view; they are intended to stimulate discussion

Surprises for 2010 The US dollar strengthens. This is driven by the better-than-expected US growth. Initially, emerging equity markets and commodities decline as traders assume that the casual inverse relationship between EM equities and the DXY will dominate. The “new dollar funded” carry trade unwinds, adding to the sell-off. Eventually, as investors recognize that healthy US growth is good for equities, markets recover. And of course, the “old yen funded” carry trade is reinstated. The renminbi appreciates by more than 10%. Our base case is a very modest appreciation from Rmb/US$6.82 to 6.5 by end-10. A recovery in exports plus the move to positive inflation encourages Beijing to allow faster appreciation. Other Asian currencies rally more than the Rmb. This move combined with the increased use of Rmb in trade settlement is the start of the Asian renminbi block.

DXY strength…new carry trade unwinds

MSCI announces that it will include China A-shares in standard indices. Initially, a limited investibility factor is applied. Assuming a 35% free-float in the Ashare market, China moves from 18% to 37% of MSCI EM. This event is destabilizing. Investors have the Hobson choice of needing to be ahead of large capital inflows but recognizing they are buying expensive stocks.

Rmb stronger than 6.5/US$

Momentum of flows in commodity funds pushes up prices and chokes growth

Run on the Japanese yen and Japanese Government Bonds. International investors would require a risk premium to fund a country where public sector debt to GDP is 190% in 2009 (J.P. Morgan estimate) but for now, Japan’s excess savings are sufficient. In JGB challenge: exploding public debt amid falling domestic savings, Kanno et al, 21 October 2009, we estimate that assuming no major fiscal initiatives, demographic demands should push this ratio to 300% by 2019. Current demographic trend could push the savings rate to zero in five years. This, plus the strong yen hollowing out Japanese manufacturing, could require foreign savings to fill the gap. Today’s 10-year JGB yield of 1.34% is too low to attract foreign capital.

Run on commodity funds

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

China 37% of EM

Run on JPY and JGB

Don’t be too keen to return to property

EM FX momentum unstoppable

In contrast to above, commodity investors become frustrated with low financial returns due to the cost of roll (upward sloping future curves). This results in 2009 record inflows into energy and commodity funds reversing. Although the sharp fall in commodity and energy prices is unnerving, the resulting stimulus underpins the 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 (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Emerging Market Rates Outlook Emerging Markets pass a stress test Investing in EM assets has been a one-way bet over the past year. Across all asset classes (e.g., equities, sovereign credit, corporate credit and local markets), EM strongly outperformed (chart 1). Going into 2010, EM fundamental and financial markets outlook remain robust. EM is shedding its image as the most volatile asset class. The outperformance of EM fixed income in the midst of market turbulence in 2008 and the subsequent outperformance over the past year as the market recovered have resulted in a re-rating of EM risk. Even frontier EM countries have outperformed. With EM growth and yields well above developed markets, EM will continue to move into the mainstream as an asset class in 2010. We expect a first quarter rally as both EMBIG cashflows and strategic inflows from nontraditional investors are high. External demand for EM assets remains strong and we expect inflows into EM fixed income to reach $30-35bn in 2010 compared to only $18bn this year. Worldwide pension funds are starting from a position of close to zero allocation to Emerging Markets, and yet assets are more than $17bn. New and growing sources of inflows include high grade crossover investors, US pension and endowment allocations, sovereign wealth funds and Japanese retail allocations. Figure 35: Asset class performance

Source: J.P. Morgan, 1-J.P. Morgan commodity total return index, 2-Barclays capital global aggregate

2009 will be remembered as the year that EM carried the global economy, with EM consumption well

Joyce ChangAC (1-212) 834-4203 [email protected] J.P. Morgan Securities Inc., New York

surpassing that of the US. Indeed, over the past four years, EM contributed more to global GDP growth than the whole of developed markets. In 2010, EM growth will recover to 5.8%oya, with risks to the upside, while G-3 growth will remain below par at only 2.7%. We recommend overweight positions in EM credit (both sovereign and corporate) versus developed fixed income markets. We also expect EM local markets, as tracked in J.P. Morgan’s GBI-EM index, to generate double-digit returns next year. 2009 will be remembered as the year that EM carried the global economy, with EM consumption well surpassing that of the US. Indeed, over the past four years, EM contributed more to global GDP growth than the whole of developed markets. In 2010, EM growth will recover to 5.8%oya, with risks to the upside, while G-3 growth will remain below par at only 2.7%. We recommend overweight positions in EM credit (both sovereign and corporate) versus developed fixed income markets. We also expect EM local markets, as tracked in J.P. Morgan’s GBI-EM index, to generate double-digit returns next year.

EM valuations more compelling than US High Grade markets Yields for the EMBIG have fallen to 6.49% (close to 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 Overweight. We downgraded high beta Venezuela to Marketweight from Overweight and maintained the overweight in Argentina but switch assets for relative value considerations.

27

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

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

Figure 37: EM local yields remain attractive

Figure 36: EMBIG coupons and amortizations highest in 1Q10

Source: J.P. Morgan.

Source: J.P. Morgan.

Shift the focus to local markets: GBI-EM returns to reach 12% in 2010 After a brief dip during the credit crisis, international demand for EM bond markets is growing again, particularly for high carry markets. The weak USD trend will persist next year and J.P. Morgan forecasts EUR/USD bottoming at 1.62 in mid-2010 before recovering to end the year at 1.50. The Fed is proving more comfortable with a zero rate environment than almost every other G-10 or EM central bank and the most recent balance of payments data indicate that the US is also suffering from a re-emergence of net FDI/M&A outflows and weaker equity inflows than other countries, highlighting that USD weakness is more than a simple carry trade.

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We favor the higher carry currencies going into 2010 and recommend TRY, RUB, PLN and HUF in particular, as all are likely to deliver returns in excess of 15%. While FX intervention is likely to intensify in Asia and Latin America, CEEMEA countries are more focused on FX reserve accumulation. Brazil was the outperformer in 2009 (+25%), but the most attractive opportunities for 2010 are concentrated in the CEEMEA region. Appetite for local rates remains subdued due to the growing uncertainty about the timing and pace of monetary policy normalization. EM local markets debt returns (USD unhedged) break down roughly into half local rates returns and half FX returns. Our bottoms-up return forecast for the GBI-EM Global Diversified index, which is the leading EM local markets benchmark, is 12% in 2010.

EM Corporates likely to outperform EM sovereigns and US High Grade The resilience shown by EM Corporates throughout the credit crisis has improved their profile amongst investors, with the asset class likely to garner a greater following as valuations in developed credit markets look increasingly expensive. Although the pace of the market’s recovery has brought us back to precrisis levels, we believe that there is still room for spreads to tighten and set a year-end 2010 target for the CEMBI Broad at 300bp versus 388bp at present. . There were notable casualties in 2009, with combined defaults and debt exchanges rising to 10.8% of the EM corporate high yield bond stock (compared with a par-weighted default rate of 10.96% and 16.24% including distressed exchanges in the US high yield market), many of the concerns that shaped expectations for a more serious

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

collapse and prolonged period of market weakness at the end of 2008—such as rising capital flight and mounting external refinancing risks in Russia, unhedged corporate derivative exposures in Brazil and Mexico, the downturn in and overheated real estate markets in China and Dubai respectively, and short-term FX funding needs in Korea—have come to pass without prompting broader systemic failures. At the aggregate level, we move EM Corporates as an asset class (CEMBI Broad) to Overweight relative to EM sovereigns (EMBIG) and US credit (JULI). At the regional level, we expect credits from Asia and Europe to contribute the lion’s share of the spread tightening followed by Latin America, while at the country level we still expect some of the more significant spread opportunities in higher beta countries such as Indonesia, India, Kazakhstan and Argentina, although note that these account for less than 6% of the corporate index. We believe that Russian corporate performance will be much more muted in 2010 despite the macro backdrop for Russia and the CIS, which is likely to be significantly improved as commodity prices recover. We do not believe that developments in Dubai will have a long-term impact on the EM quasi-sovereign sector outside of the Middle East region.

Economic recovery to prompt earlier tightening in EM during 2010 While the world needs accommodative policies, a onesize fits all policy stance is increasingly inappropriate as utilization rates are widely divergent despite a world generating synchronized above-trend growth. The most severe decline in employment by far has taken place in the US where utilization rates stand at historic lows. By contrast, our aggregate measure of EM utilization rates is close to its long-term norm (chart 3). In addition to the relatively modest loss of jobs in emerging market economies, this contrast reflects the very high EM utilization rates at the time the recession began. With policymakers having moved uniformly into aggressive easing mode at this time last year, a quicker move toward EM policy normalization is appropriate. Asset price inflation is also become a greater concern, particularly for EM Asia central bankers. Easy monetary conditions, high household savings rates, intact banking systems, and strong housing demand have led to sharp rebounds in residential real estate prices. The dollar carry trade is fueled both by low US rates and the understanding that Asian currencies are artificially low.

We project a total of 14 countries across EM regions tightening monetary policy next year, either by raising reserve requirements or interest rates. However, the still depressed size of the global pie is an obstacle to the relative adjustments that are needed and markets have arguably priced too much tightening in. Even after three quarters of expansion, EM export volumes stand about 10% below their previous peak. For China, which provided an important part of demand stimulus to lift the global economy, export volumes are still 20% below their peaks. It is in this context that Chinese authorities can justify their dollar peg. Other Asian export-intensive countries, in turn, maintain a tight leash on their currencies in order to limit the loss of competitiveness against China. A world in which US interest rates are likely to remain close to zero and the renminbi is held artificially low may serve domestic needs but is producing undesirable consequences and finger-pointing on a global level. The reluctance to lean too heavily on rate hikes has prompted EM policymakers to rely on other measures. EM foreign exchange reserves have increased by US$700 bn this year to reach US$4.2 trillion and some countries are actively managing bank reserve requirements. Brazil recently introduced a financial transactions tax (IOF) on portfolio inflows and other countries are shifting in a similar direction.

EM issuance to go further down the credit curve The issuance outlook for 2010 remains biased towards investment grade bonds. In 2009, we estimate that 60% of issuance from EMBIG-eligible sovereign issuers came from investment grade credits. In net terms, we estimate that issuance year-to-date has been just below the fullyear coupons and amortizations by $1.7bn. However, we estimate investment grade net issuance at $6.0bn, contributing towards the upward drift in index rating. For 2010, we estimate gross EMBIG sovereign issuance at $66.5bn, with net issuance estimated at $14.4bn. Of this net issuance figure, we estimate investment grade net supply will reach $9.7bn, or 68% of the total, again contributing to upward ratings momentum. EM Corporates, mainly quasi-sovereigns, have issued $118bn this year—decisively breaking through our full year forecast of $103bn—concentrated in investment grade issuance. Rather than slowing down as the end of year approaches, supply remains extremely 29

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

strong with a record of over $23bn sold in the month of October, and 60% of total supply for the year issued since July. Deal sizes have averaged $720mn, substantially larger than previous averages of $380mn in 2008 and $371mn in 2007, as quasi-sovereign and investment grade corporates have dominated the new issue space. Of the $118bn issued this year, roughly 61% has come from the quasi-sovereign segment (including supranational banks), just under one-quarter from investment grade corporates, and the balance of around 15% from high yield corporates. We estimate that the EM corporate bond stock now stands at $589bn versus $529bn at the start of the year. Sovereign ratings downgrades were much lighter during the recent down cycle and thus ratings agencies have been less aggressive in upgrading countries since the financial storm has passed. Rating downgrades exceeded upgrades in 2008 and so far in 2009 for S&P and Moody’s, after eight years in a row in which the up moves exceeded the down ones. However, this will reverse again in 2010, when the number of upgrades is expected to be small but to exceed downgrades. Since 2008, the following sovereigns have been downgraded: El Salvador, Estonia, Hungary, Jamaica, Latvia, Lithuania, Mexico, Nigeria and Ukraine. However, a handful of EM countries have actually been upgraded, including Belize, Bolivia, Chile, Ecuador, Indonesia, Lebanon, Pakistan, Philippines, South Africa, Uruguay, and most notably Brazil. In contrast, the ratings cycle point to more downgrades in the developed market countries in the coming years. Indeed, using current and projected debt/GDP levels, the analysis of our global fixed income analysts finds that Spain, Ireland and Greece may suffer additional 1-2 notch downgrades by 2011.

EM fixed income inflows will catch up in 2010 We estimate cumulative inflows to EM debt real money funds at $17.8 billion so far this year, the majority of which has come from strategic allocations (chart 4). Next year, inflows should rebound to the $30-35bn range recorded in 2006-2008. Real money remains overweight as asset allocations increase, while hedge funds have not increased exposure. Indeed, in their 3Q09 update, Hedge Fund Research (HFR) noted that Emerging Market hedge fund assets increased to $86.5bn but only because of performance, with net flows virtually flat at -$37mn, bringing year-to-date net outflows to $8.9bn. By contrast,

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inflows to Emerging Market dedicated funds have increased sharply from the end-April lows. Figure 38: Cumulative flows to US real money funds has reached $18bn year-to-date, excluding fund flows from Japan US$ 40b 30 20 10 0 -10 -20 Jan Feb Mar Apr May Jun

Jul

2005

2007

2006

Aug Sep Oct Nov Dec 2008

2009

Source: J.P. Morgan.

Japanese demand for carry is strong and rising. Cumulative inflows from Japan to Emerging Market bonds over the past 5 years had reached $38bn, and has also been far more stable than similar inflows to EM bond funds in the US and Europe. The pattern of inflows from Japan has shifted significantly over the past few years. Earlier inflows were to EM hard currency bond funds, but these ceased in early 2008. Inflows to EM local currency bond funds started increasing more rapidly in mid-2007 and peaked in 3Q08, although they have started to grow again since mid-2009. Inflows to EM hard currency funds have now resumed, but only in EM FX overlay strategies in which the investor buys USDdenominated credit assets but the coupon is paid out in currencies ranging from AUD, to ZAR, TRY and BRL.

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Trading themes Stay overweight the EMBIG versus US High Grade. EMBIG spreads to tighten to 250bp by end-2010, implying a total return of maximum 6.5% compared to only 4.5% for US High Grade and flat returns in other US fixed income markets. Position for a rally in 1Q10, when nearly 50% of EMBIG cashflows ($51.8bn) are generated. Strategic inflows into EM fixed income have reached $18bn so far in 2009 and may more than double next year with increased demand from non-traditional investors. We stay overweight Argentina, Belize, Dominican Republic, Hungary, Indonesia, Jamaica, Mexico, Poland and Russia sovereign debt. Overweight EM Corporates vs. both EM sovereigns and US High Grade We forecast the CEMBI Broad at 325bp versus 403bp currently, with the EM high yield corporate default rate to fall to 2.2% from an estimated 12.3% this year. EM Corporate credits from Asia and Emerging Europe offering the most attractive opportunities, while new issues continue to offer better liquidity than secondary market. While refinancing risk was clearly a concern last year, access to alternative sources of capital including local markets, has reduced this risk in a number of key markets. In 2010, we expect the default rate for the asset class to fall to 2.2% of the EM corporate high yield bond stock or just under 1% of the total bond stock. Shift the focus to local markets, with the GBI-EM return likely to reach 12% in 2010 EM FX appreciation will endure at least through 1H10 amid USD weakness. We favor the higher carry currencies going into 2010 and recommend TRY, RUB, PLN and HUF in particular, as all are likely to deliver returns in excess of 15%.

The economic recovery will see monetary stimulus removed across CEEMEA The central banks of Poland, South Africa, the Czech Republic, Turkey and Israel are expected to tighten policy in 2010. In Hungary and Russia currency appreciation is expected to result in further easing. However, the normalization of monetary policy should not prevent bond markets from delivering positive returns in 2010, as this unwind is already anticipated in bond prices. The divergence between fx-implied yields and local t-bill yields and the lack of concerns over capital controls suggests carry trades are better expressed in local instruments. Spreads are especially wide in 1year t-bills versus fx implied rates in Israel (195bp), Hungary (150bp) and Poland (130bp). Linkers offer best value in Latin America rates While central banks have been focusing on current goldilocks (the 4Q09 rebound has taken place amid low inflation) and in some cases even protest the tightening priced in by local yield curves, market participants have been wary of policy rate levels and fiscal policies that are turning increasingly pro-cyclical. The “low for long” message seems at odds with the fact that Latin countries are coming out of this recession with much tighter slack than G3 and in some cases already buoyant credit markets. We favor outright exposure through linkers across the region. They look especially cheap in Chile and Colombia. In Chile we recommend receiving 2Y UF outright. On the breakeven side, Mexico stands-out. We believe inflation is unlikely to move below 5% in 2010 due to the fiscal reform, and recommend buying 3Y B/E inflation through UDI-TIIE swaps

EM Asia local yield curves likely to be higher and flatter by end-2010 Inflation and monetary policy are the big questions for Asia, not growth. It will be difficult to bring interest rates up as long as central banks resist fx appreciation. In addition, continued capital inflows are likely into Asian bonds as the growth differential between Asia and developed market economies expands further. Since some of these flows will be parked in local bonds, it is not clear that yield curves will immediately rise from here—at least not in 1H10. Only in 2Q10, when we expect it will become clear that Chinese tightening and/or fx appreciation is near, will we see curves meaningfully flatten across the region. 31

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Emerging Asia Economic outlook EM Asia growth set to return to trend in 2010, but watch for choppiness After a traumatic entrance into 2009 that set the stage for a full-year growth performance (4.2%) well below the region’s potential, EM Asia is set to turn in a solid, trendlike year of growth in 2010. Indeed, if the J.P. Morgan forecast of US GDP growth reaching 3.5% is achieved, then there is upside risk to our forecast of 7.3% GDP growth in EM Asia next year. At the same time, developed market growth still poses a downside risk to EM Asian GDP as our region remains full-coupled to the fortunes of the US and the Euro Area, in particular. Domestic stimulus, including sizable monetary support, has clearly helped China and other key countries in the region recover quickly in 2009. However, it is exactly the concern over DM growth (with no bravado of de-coupling heard from Asian policymakers) that will ensure that stimulative policies are only gradually normalized in 2010. A useful reminder of the volatility of the GDP growth in EM Asia is playing out as we enter 2010 as the region rolls down after achieving extremely high growth in the middle of 2009. On the J.P. Morgan forecast, EM Asia is on track to slow down to about a 5% growth pace in 4Q after averaging over 11% in 2Q and 3Q. It is a clear possibility that some high beta economies such as Singapore actually contract in 4Q. So, while the growth recovery in EM Asia has been undeniably impressive, markets should tighten their safety belts as choppiness looks like could be a continuing theme going into 2010. Figure 39: EM Asia—GDP growth

Forecasts

5 oya

0 5 0 -5 0

%q/q, saar 2005

2006

Source: J.P. Morgan economics.

32

2007

2008

2009

2010

David FernandezAC (65) 6882-2461 [email protected] J.P. Morgan Securities Singapore Private Limited

Early policy normalization from India and Korea, but don’t get carried away Policymakers in China and the rest of EM Asia are still unlikely to make major adjustments to monetary policy in the near term. The Bank of Korea and the Reserve Bank of India have been leaders in signalling to the market that they will be willing to begin to normalize monetary conditions relatively early, with policy rate changes expected from both Korea and India in 1Q10. But the BoK MPC is also aware that the market has taken that message to heart and is pricing in 100-150bp of tightening over the next six months. Indonesia is another case where we believe the market has gotten ahead of itself. For 2010, Bank Indonesia believes that inflation will return to “normal levels in the 5±1% range” and importantly sees medium-term inflation declining toward 3% over time based on the strong commitment by BI and the government to fighting inflation. Clearly, this is not a central bank that wants to feed expectations of early tightening. Overall, be aware that the market can overshoot in its expectations of tightening, and we should expect Asian policymakers to tread carefully in sending such signals too strongly, especially early in 2010. The market is also keenly focused on China, but we similarly think expectations of policy changes there may be overdone. We think PBoC will move in stages, relying more on open market operations to withdraw excess liquidity, and combine that with sector-specific actions, like a partial withdrawal of the stimulus provided to real estate late last year, to contain the risk of an asset bubble and inflation. As for policy adjustment through the Rmb, China’s policymakers still view the 2010 economic recovery in developed markets, especially in the US, with a high degree of uncertainty. Over time, possibly by 2Q, they may take a view that global recovery is on a surer footing, with a turn to positive oya export growth from China being a concrete signal of such a turn. But, only when such confidence is achieved will the Rmb begin to resume a gradual appreciation trend. J.P. Morgan’s forecast is for Rmb/US$ to reach 6.5 by end-10, with the appreciation only taking on meaningful momentum by 2Q10.

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

After dropping in 2009, EM Asia’s external surpluses stabilize For two consecutive years, EM Asia’s CA surpluses have dropped significantly. However, the global growth recovery and an expectation that oil prices will stay in a range of $70-90, should make 2010 a year of stabilization in the region’s CA surplus. In total, EM Asia is expected to run a CA surplus of 5.3% of GDP compared with 5.5% in 2009. Importantly, China’s surplus will stabilize as a share of GDP, meaning the absolute size of the surplus will rise by over $40 billion versus 2009. On the other side, Korea and Thailand are expected to see strong domestic growth which will push import growth higher than exports, resulting still in CA surpluses, but of a smaller magnitude.

Table 12: Asia—Current account balance forecasts Japan Australia New Zealand Em Asia ex China and India China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Thailand Taiwan

2007 212.739 -50.279 -19.289 518.596 164.643 371.833 25.527 -18.668 10.155 7.335 29.105 7.119 39.167 14.049 32.975

2008 158.867 -44.683 -11.706 489.034 114.292 404.905 30.623 -29.733 0.312 -5.292 38.722 4.227 22.878 -2.503 24.894

2009E 133.941 -41.780 -5.342 460.478 165.449 326.213 26.113 -31.195 6.094 38.463 32.576 5.852 14.105 12.912 29.345

2010E 115.677 -50.840 -9.591 468.875 141.090 368.346 25.863 -41.040 5.173 17.120 40.148 3.051 17.521 4.818 27.875

Source: J.P Morgan economics. Figures in US$ billions.

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.

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Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

CEEMEA Differentiated Rebound Energy Exporters to Shine J.P. Morgan forecasts that 2010 average CEEMEA growth will be 4.5% (at potential) given that a substantial amount of global de-leveraging has already occurred, a significant part of the global economy remains committed to fiscal stimulus, and global interest rates are forecast to remain low. Yet for 2010 we foresee great differentiation across countries, with only Russia, Qatar, and Nigeria predicted to grow faster than potential. Our 2010 growth forecast for Russia (5%) is well above consensus, and we see upside risks to that forecast given buoyant oil prices, sound macro management, declining interest rates, and an anticipated revival in consumption. For Turkey, our forecast of 5% growth is based on our belief that an IMF agreement will be reached by early 2010, allowing the authorities to avoid crowding out the private sector. Even though the South African consumer will remain under pressure until well into 2010, better external conditions, an inventory rebound and the 2010 FIFA World Cup are likely to produce 3% growth by our estimates. Recent GDP data showed that countries with IMFimposed fiscal restraints and a large share of fx borrowing - Hungary and Romania - remained in recession in the past quarter, although the pace of their output contraction eased. The magnitude of fiscal tightening has been by far the greatest in Hungary - the main reason for its underperformance. The recovery in the rest of Central Europe has been much more closely aligned with the Euro area cycle as these countries have been able to implement modest fiscal stimulus and were much less exposed to fx borrowing. We predict 2011 growth will be even stronger than in 2010 across most of the region, with even Hungary and Romania returning to an acceptable pace of expansion. Upside risks to our 2011 forecasts are related to interest rates remaining low for even longer than we forecast and to potentially higher commodity prices than we are incorporating (for example, we assume oil prices will be 11% higher than the 2009 average in 2010 and 21% higher in 2011). Downside risks include increasing capital controls and protectionism. Other 2010 CEEMEA indicators are mostly reassuring. Inflation remains within acceptable limits in most 34

Michael MarreseAC (1-212) 834-4876 [email protected] J.P. Morgan Securities Inc

countries. Current-account balances are moving into surpluses for most energy exporters, except for comfortably financeable deficits in Nigeria and Egypt. Only in Romania do we forecast a rapidly widening current account deficit. There is fiscal consolidation across all CEEMEA countries because revenue performance is set to improve and the size of fiscal stimulus packages is declining. Table 13: CEEMEA GDP growth forecasts Real GDP (%) Czech Rep Egypt** Hungary Israel Kazakhstan Nigeria Poland Qatar Romania Russia South Africa Turkey UAE Ukraine CEEMEA*

2009 -4.0 4.7 -6.5 0.0 0.3 2.8 1.7 10.0 -6.0 -8.5 -2.0 -5.3 0.3 -15.2 -3.8

2010 2.5 5.0 1.0 3.0 2.0 9.6 3.2 22.0 2.0 5.0 3.0 5.0 2.9 3.0 4.5

2011 4.0 5.5 4.0 4.5 2.8 8.0 4.0 14.6 5.0 5.0 3.5 5.5 4.2 5.0 5.0

Potential GDP Growth 4.0 6.0 3.5 4.0 7.0 8.0 4.5 4.6 5.0 4.0 3.2 5.5 3.5 4.5 4.6

Source: National statistics offices and J.P. Morgan estimates *Weighted average; **Fiscal year

Table 14: CEEMEA Macro 2010 Forecasts

Czech Rep Egypt** Hungary Israel Kazakhstan Nigeria Poland Qatar*** Romania Russia South Africa Turkey UAE Ukraine CEEMEA*

CA Balance Fiscal Balance Public debt % of GDP % of GDP % of GDP -2.5 -4.0 37.8 -3.1 -8.5 78.0 -2.0 -3.8 80.5 2.0 -4.0 84.0 6.2 0.0 10.4 -3.0 -0.3 12.0 -2.8 -5.5 53.5 42.1 15.8 6.2 -6.5 -7.0 24.5 4.0 -5.6 7.4 -4.8 -6.2 37.9 -2.6 0.9 51.4 10.6 8.6 16.4 -0.9 -6.2 43.0 1.3 -3.1 33.7

Source: National statistics offices and J.P. Morgan estimates *Weighted average; **Fiscal year; *** Inflation is average not eop

CPI %eop 3.2 15.3 3.0 3.4 8.0 8.1 2.5 4.5 6.0 7.5 4.9 5.1 4.2 15.8 6.2

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Brazil: Monetary policy normalization in sight • Reduced economic slack and expansionary fiscal policies to trigger early normalization in rates • New measures to lean against BRL strength are likely • Hold positive carry DVO1 neutral exposure

Fundamentals and politics in 2010 Brazil enjoyed a non-inflationary economic recovery in 2009. After facing the sharpest recession of its recent history, Brazil’s economy printed an impressive 7.8%q/q (saar) growth rate in 2Q09. Encouragingly, the economic data flow thereafter is indicating that the slowdown, if any, in the second half of this year will be just marginal. Thus, Brazil stands out as one of the few countries registering positive growth rates already this year (0.3%), and the risk to our 5.0% forecast for 2010 is becoming biased to the upside. The pillar of this year’s recovery has been household consumption—supported by a strong labor market, fiscal and quasi-fiscal stimuli, and an early revival in credit markets. Although consumption will remain upbeat next year, we think the main driver of next year’s GDP will be a rebound in capital formation. So far, huge economic slack at the beginning of the year along with the exchange rate appreciation has supported strong activity indicators without stoking inflation. IPCA inflation should end 2009 at 4.3%, down from 5.9% in 2008, but we see increasing inflation risks for 2010. Emerging inflation risks will require early policy normalization in 2010. The side effect of a faster-than anticipated recovery has been a tightening of all measures of economic slack: among others, the unemployment rate is close to historical lows, and the manufacturing utilization rate is already above its longterm average. This suggests that some degree of normalization in the current stimulative stance of fiscal and monetary policies is necessary to reduce prospective inflationary risks. However, 2010 is an election year and thus fiscal policy is unlikely to adjust in the near term. In fact, fiscal authorities are signaling that next year’s 3.3% of GDP target for the primary surplus will be downgraded to accommodate the generous expenditure side of the 2010 budget in the face of underperforming tax revenues. This places the burden of anti-inflation policy on monetary authorities, and we forecast a

Fabio Akira HashizumeAC (55-11) 3048-3634 [email protected] Banco J.P. Morgan S.A.

tightening cycle of 200bp in 2010, with most of the hikes implemented in the first half of next year. The unbalanced policy mix is conducive to further appreciation—and further FX intervention. The likely combination of an expansionary fiscal policy, higher interest rates, and global USD weakness supports a stronger BRL. In turn, this is likely to trigger a new round of ad hoc measures to curb currency appreciation. Much like the 2% IOF tax on foreign capital inflows of last month, we believe new measures will produce noise, but will not be able to contain BRL strength driven by a global trend of USD weakness. Thus, we could see the USD/BRL as low as 1.60 during the first half of 2010. However, in the second half, when our global FX strategists anticipate a reversion in the weak USD trend, and Brazil’s current account deficit will be heading to a level above 3.0% of GDP, we believe BRL could start to depreciate, ending the year at 1.75 against USD. Presidential elections are important to clarify fiscal policy beyond 2010. In October, Brazilians will go to the polls to elect a new president, after eight years of the Lula administration. We think a large shift in economic policy is unlikely, but the leading contenders have not yet unveiled their ideas on this front. What is becoming increasingly necessary, is a fiscal adjustment at the beginning of the next administration, given the pace of deterioration of fiscal accounts in recent months, and the prospects for next year.

Market strategy In FX, buy (1x2) 2-month 1.734 USD put/BRL call spread (1.734;1.662): Entered October 23 at 190bp cost. In rates, receive Jan’13 versus pay Jan’15 (DV01 neutral steepener): Entered November 20 at 43bp. Favor NTNF ’17 over BRL Global ’16: Entered June 26 at 207bp. Receive Jan’13 versus pay Jan’12 and Jan’14 (1x2x1 fly): Entered October 23 at 40bp. Target: 15bp; stop: 55bp.

35

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Russia: Recovering from deep recession • Russia’s GDP expected to grow 5% in 2010 • BoP to be supportive for ruble strengthening • Despite gradual fiscal consolidation, Russia is likely to issue US$9 billion of Eurobonds next year

Fundamentals and politics in 2010 We expect Russia’s economy to expand annually 5% in 2010 and 2011, recovering from the deep recession of 2008-2009, when the peak to trough GDP decline exceeded 12%. With the initial impulse received from net exports and higher commodity prices, the economy will, however, need to find a stronger 2010 underpinning for domestic demand (which in 2009 has been weak). Both consumption and investment are likely to be supported by spillover effects from higher oil revenues, improving confidence, and easing financial conditions. The corporate sector is expected to enjoy better access to external financing, while domestic banks, after a sharp phase of deleveraging (the loan to deposit ratio dropped from 1.13 to 1.00 during January – September 09), are expected to restart lending from early 2010. The renewed buildup of reserves by the CBR and external financing of fiscal deficits by MinFin are expected to keep domestic liquidity abundant. Disinflation is expected to continue through 1H10, despite increasing money supply and lower policy rates. As the amount of slack in the economy remains high—the negative output gap of around 5% of potential GDP is expected to close slowly in coming years—while the ruble is strengthening, core inflation will keep slowing. Supported by higher commodity prices, the balance of payments is expected to exhibit a large surplus next year. The current account is projected to be 4% of GDP in 2010, down from an estimated 4.8% in 2009. Although export revenues will rise on higher oil prices (Urals up from US$59 to US$68/bbl in 2010), this will be offset by growing imports, which are expected to recover on the back of a strengthening ruble and domestic demand. We also conservatively assume that net private capital 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

Anatoliy ShalAC 7(495) 937-7321 [email protected] J.P. Morgan Bank International LLC

capital inflows may well bring net flows closer to breakeven. Gradual fiscal consolidation and higher oil prices are unlikely to prevent Russia from issuing US$9 billion of Eurobonds in 2010 and a similar amount in 2011. With Urals at US$68/bbl, we see Russia’s federal budget deficit at 5.6% of GDP next year, a small improvement from just above 6% expected in 2009. This reduction is likely to come from measures to contain spending and higher tax collection from the non-oil sector. That said, despite higher oil prices, the budget’s oil revenues are likely to shrink as a percentage of GDP due to a stronger ruble. As a result, the non-oil fiscal gap, which better describes the fiscal position of an oil economy, may shrink more than the headline deficit from -14.1% in 2009 to -12.8% in 2010 and -10.2% in 2011. Despite these improvements, we expect that Russia’s financing needs will remain high and will be only partially covered by use of oil savings. In 2010, Russia may need to borrow up to US$20 billion on domestic and US$9 billion on Eurobond markets, we estimate.

Market strategy Stay overweight in EMBIG: We expect Russia’s new Eurobonds to be SEC-registered, which may be followed by SEC registration of existing ’18s, ’28s, and ’30s notes. This should trigger inclusion of those bonds in the Barclays Capital US Aggregate Index, and attract a new client pool to purchase Russian SEC-registered issues. We recommend short USD/RUB for 2010: The prospect of further dollar weakness and higher commodity prices bodes well for RUB in 2010. Further, as growth recovers and reserves return to a more comfortable level, the CBR is expected to scale back its intervention and allow faster appreciation. We target USD/RUB 26.5 and 33 versus the basket by end-2010. We recommend long 4-year OFZs: While supply is increasing, the CBR continues to provide liquidity to the banking system to support issuance, while encouraging banks to increase the quality of balance sheet assets, indicating a bias to support government debt supply.

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

India: RBI to focus on financial stability • Industry derives strength from increased festive demand; capital goods expansion is welcome • Mixed external trade signals suggest the recovery is still not secure • RBI to be on guard against shift in inflation expectations; tightening likely in 1Q10

Fundamentals and politics in 2010 Industrial activity strengthened in September supported by festive demand. But October Markit manufacturing PMI declined to 55 due to destocking after the festivals. In details, IP strengthened as total production grew a healthy 1.1%m/m (sa), to be up a robust 9.1%oya. With this, the average for the first half of FY10 improved to 6.5%oya from 5.0% in the first half of FY09. September production derived support from capital goods (7.5%m/m, sa) and consumer durables (4.3%). Continued strength in motor vehicle sales and increased production of white goods to meet festival demand also likely boosted total output. On a year-ago basis, IP growth is expected to print relatively strong numbers in the second half of FY10, largely supported by a very low base from the abysmally weak growth last year. Merchandise trade data continue to show mixed signs of revival. The trade deficit narrowed to US$7.8 billion in September from US$8.3 billion in August. A modest gain in exports (1.6%m/m, sa) together with a contraction in imports (-5.6%) helped narrow the trade gap. With this, the trade deficit for the first half of FY10 stood at US$46.7 billion versus US$76.0 billion in first half of FY09. Sequentially, exports expanded for the sixth consecutive month. However, the year-ago comparison continued to contract (-13.8%oya), weighed down by last year’s high base. Imports contracted for the ninth consecutive month (-31.3%oya). Still-weak exports together with sluggish nonoil imports suggest that the pace of economic revival is not yet secure. Upside pressure from food prices is likely to ease, but 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

Jahangir AzizAC (9122) 6157-3385 [email protected] J.P. Morgan India Private Limited

February this year. A muted pace of core inflation (0.0%m/m, sa) suggests that demand-side pressures remain weak. The upward pressure on food prices is likely to ease as the heightened festive demand declines. Expectations of an improved winter crop will also help alleviate the pressure. However, a rise in global commodity prices will be critical in determining the impact on overall prices. On headline inflation, with the high base effect expected to fade, the year-ago prints will likely increase. We expect the year-ago print to be around 7.5% by end-March 2010. On policy, increased focus on financial stability would keep the RBI on guard against material shifts in inflation expectations. Even if core inflation remains benign, we expect that fears of easy liquidity spawning potential asset price bubbles could prompt the central bank to tighten. In October, RBI withdrew unconventional measures that were deemed no longer necessary with improving domestic and financial markets. We expect that the tightening will likely be initiated by a 50bp hike in the cash reserve ratio followed by 25bp hikes in the policy rates in 1Q10 and 2Q10.

Market strategy In FX, we recommended holding on to USD/INR shorts, entered at 46.95, and target 45 by December: The push toward a stronger INR continues as risk sentiment improves and capital flows continue to be strong. Offshore parties have driven the INR rally so far. Onshore exporters have yet to position and retain the key to the next down move, which will depend on the timing of the introduction of economic reform bills in Parliament. In rates, we are bullish on 5-year bonds, but neutral on OIS swaps: Yields are at one-year highs, as the G-sec calendar is coming to an end in January, and as loan growth remains anemic. However, the 1-year swap has dropped into the LAF corridor, so further downside is limited. Meanwhile, we are not keen to pay as negative carry is extremely steep.

37

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

China: Recovery despite policy fine-tuning • Exports, consumption, and housing should be key growth drivers in 2H09 and 2010 • CPI and PPI on recovering trend, but sequential trend rose at a slower pace in October • Major near-term monetary policy shift unlikely; central bank focus is on managing excess liquidity

Fundamentals and politics in 2010 China’s economy continued to record a solid pace of recovery in 3Q09, rising at 8.9%oya. In seasonally adjusted terms, we calculate that real GDP rose 10.0%q/q (saar) in 3Q, easing modestly from the 14.8% spike in 2Q. October data confirmed that the Chinese economy’s upbeat momentum continued into 4Q, adding to the strong gain in activity seen in September. The latest data also support our view that the major sources of growth in the Chinese economy have been broadening from public investment to include consumption, private investment, and the steady recovery in exports. We expect the economy to continue to grow solidly in the coming quarters. On the back of the 3Q GDP report, we have fine-tuned the 2009 full-year GDP growth forecast to 8.6% (previous forecast: 8.4%), while keeping the 2010 GDP growth forecast at 9.5%. Continuing with the theme of broadening sources of growth, we expect the key growth drivers to include a solid recovery in exports. Our global team is looking for a sustained, synchronized expansion of the global economy through 2010. As such, net external trade, which had been a significant drag on China’s overall growth since late last year, would likely come back to contribute positively to GDP growth again. On the domestic front, we look for a broad-based pickup in private consumption, along with improving labor markets and hence household income, on top of further fiscal stimulus, and marked expansion in private housing investment as well as other private sector investment. Encouragingly, the growth-inflation balance 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

Grace NgAC (852) 2800-7002 [email protected] JPMorgan Chase Bank, N.A., Hong Kong

the PPI front picked up strongly during 3Q, it has eased going into 4Q. If this trend continues, it should further calm inflation concerns going into next year. It will be important to monitor the authorities’ macro policy tone, especially in the run-up to the annual central economic work summit to be held early next month. On monetary policy, we expect the PBoC to normalize overall monetary conditions in stages, relying on open market operations to withdraw excess liquidity in the near term, combined with sector-specific actions like a partial withdrawal of the stimulus provided to real estate to contain the risk of an asset bubble and inflation. We expect the benchmark policy rates to start rising by mid-2010, with a total of two 27bp hikes over the rest of next year. On the currency front, the PBoC’s latest tone hints at greater flexibility in the exchange rate, which would likely begin sometime in 2Q10 in our view, when over-year-ago export growth resumes and when officials are convinced the global recovery is on a sure footing. Our forecast is for CNY/USD to reach 6.5 by end-2010.

Market strategy In FX, we remain short USD/CNY via the longerdated 12-month NDFs: Policymakers should tighten into 2010 as growth and exports settle into a more sustainable pattern. The NDF dollar discount and negative carry to short USD/CNY widened during President Obama’s recent official visit to China, but we view this pre-positioning as overdone, and would look to build short USD/CNY positions should the NDFs pull back. In interest rate markets, we stay with our recommendation of a 1s/5s steepening trade on the ND-OIS swap curve: Liquidity will remain flush until the RRR is hiked (likely in 2Q) as ongoing open market operation withdrawals are not strong enough to fully sterilize FX inflows. Meanwhile, the long end of the curve will suffer as upbeat growth is priced into the 5year sector.

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

South Africa: A slow recovery is in store • The consumer will remain under pressure until well into 2010 • Inflation pressures will continue to ease and the output gap will allow rates to stay low • The political outlook is settled, but pressures for higher spending will persist

Fundamentals and politics in 2010 The South African economy has suffered given the global contraction. We estimate that domestic economic activity only just turned positive last quarter. Monthly economic activity reports have revealed fewer signs of a recovery in consumer spending than in other countries. While the drags from sticky inflation and labor market uncertainty should fade as 2010 progresses, the drop in household wealth and restricted access to credit will likely dampen expenditure growth relative to growth in disposable income until late in the year. A bounce is on the way. Despite lackluster consumer spending, we think the improvement in external demand and easing in inventory reduction is set to boost GDP, helping to lift the economy out of recession. We believe that the inventory drawdown in the first half of 2009 has created the scope for a bounce when the cycle finally turns, and we expect economic growth of 3% in 2010. The banking sector has weathered the crisis in better shape than its counterparts elsewhere, which will help to underpin the recovery. We estimate the 2010 FIFA World Cup will add around 0.4%-pts to GDP next year. The downward trend in inflation will likely be interrupted by base effects at the start of 2010. The significant output gap, fading supply shocks in food inflation, and pass-through from rand strength since March should all sustain the ongoing moderation in headline inflation, which fell to 6.1%oya in September. Base effects from sharp declines in food and fuel prices at end-2008 will delay re-entry into the 3-6% target band until the first quarter of 2010, but headline inflation will hold close to the midpoint through much of the year. Although electricity tariff hikes of up to 45% pose the main threat to the inflation outlook, we think the large output gap and moderate pace of recovery will encourage the SARB to keep rates on hold at 7% until late in 2010.

Graham StockAC (44-20) 7777-3430 [email protected] JPMorgan Chase Bank N.A, London Branch

The current account adjustment should fade steadily as domestic demand recovers. The slowdown in domestic activity and lower dividend outflows should bring the current account deficit down to 4.7% of GDP this year. We expect a similar level in 2010 as household consumption expenditure lags the recovery. Financing for the deficit remains comfortable, thanks to buoyant portfolio, FDI, and public sector borrowing inflows. President Zuma assumed office in April 2009 and the ANC’s dominance remains intact. Nevertheless, slow growth and heavy job losses are likely to fuel social pressures and criticism of the government from within the ANC and its alliance partners. The government has not engaged in active fiscal stimulus beyond allowing the deficit to widen due to the weak revenue performance and pushing ahead with existing infrastructure investment plans. The consolidated 2009/10 fiscal year budget deficit is expected to widen to around 7.5% of GDP, taking the public sector borrowing requirement to 12% of GDP as the parastatals maintain their investment programs. We are encouraged by the expenditure discipline shown in the Medium-Term Budget Policy Statement, and expect the government to be marketfriendly.

Market strategy Marketweight external debt: Net 2010 issuance of US$2 billion will be absorbed easily, but we think South Africa will remain vulnerable to any global downturn. In local rates, we recommend overweight positions for 2010. International and local investors are closing out their underweight positions. Bonds should benefit from lower inflation expectations and high local yields should be attractive for carry-focused investors. Supply from national government and parastatal issuers is a concern, but the high yields compensate adequately for this factor. We are neutral USD/ZAR for 2010: The early resumption of equity portfolio flows and a narrowing of the current account deficit resulted in a strong ZAR performance in 2009. At a grassroots level, opposition to ZAR appreciation has increased and, in our view, there is a risk that some controls are imposed on inflows. Therefore, with the SARB once again accumulating reserves, we project 7.40 in USD/ZAR at end-2010, broadly unchanged. 39

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Emerging Markets Corporate Outlook - 2010 The resilience shown by EM corporates throughout the credit crisis has improved their profile among investors, with the asset class likely to garner a greater following as valuations in developed credit markets look increasingly expensive. Although there were notable casualties in 2009, with combined defaults and debt exchanges rising to 12.3% of the EM corporate high yield bond stock (compared with a par-weighted default rate of 16.24% including distressed exchanges in the US high yield market), many of the concerns that shaped expectations for a more serious collapse and prolonged period of market weakness at the end of 2008—such as rising capital flight and mounting external refinancing risks in Russia, unhedged corporate derivative exposures in Brazil and Mexico, the downturn in China’s real estate market, and short-term FX funding needs in Korea—have come to pass without prompting broader systemic failures. Of particular note was the generally proactive and targeted response of governments in respective markets to provide financial support packages to ease financial stress in the corporate sector. The one exception was of course Dubai, which decided recently to call a standstill on the debt of its largest stateowned entity, Dubai World and its property subsidiary Nakheel. Looking to 2010, we remain constructive on EM corporates as an asset class despite this year’s stellar performance. Although the pace of the market’s recovery has brought us back to pre-crisis levels, we believe that there is still room for spreads to tighten toward our 2010 year-end target of 325bp for the CEMBI Broad versus 403bp as of November 30, 2009. We do not expect the recent Dubai event to have a long-lasting impact on EM corporate valuations outside of the Middle East region and see this spread compression next year driven by stable yields and rising interest rates, based on the core assumption that the shape of the global recovery will remain robust and technicals generally supportive. We also note that the EM corporate indices have rebalanced toward higher-quality assets over the course of 2009, given the bias of new issuance this year. With over 80% of new issuance coming from investment grade credits (versus an overall debt stock that is 69% investment grade), there has been an associated tightening in index spreads. We caution that our year-end point target is unlikely to be reached in a straight line as market volatility returns in an intensifying debate over the pace at which monetary policies are normalized globally. 40

Warren MarAC (1-212) 834-4274 [email protected] J.P. Morgan Securities Inc.

Our strategy for 2010 recognizes that yields have retraced to historical lows and spreads to levels closer to long-run averages, and that tighter valuations will need to be driven much more by relative value considerations. At the aggregate level, we move EM corporates as an asset class (CEMBI Broad) to Overweight relative to EM sovereigns (EMBIG) and US credit (JULI). At the regional level, we expect credits from Asia and Europe to contribute the lion’s share of the spread tightening, followed by Latin America, while at the country level we still expect some of the more significant spread opportunities to be in the higher-beta countries such as Indonesia, India, Kazakhstan, and Argentina, although note that these account for less than 6% of the corporate index. We believe that Russian corporate performance will be more muted in 2010 despite the improved macro backdrop as commodity prices recover. Looking into the first quarter of 2010, we are likely to continue to favor new issues for adding risk, with supply expected to reach around US$128bn. New issues in our view are most likely to offer investors the best avenue for adding meaningful positions with secondary market liquidity expected to remain constrained. Looking out over the first half of 2010, we favor a more active approach to rotating out of lowerbeta credits and into higher-beta opportunities in order to enhance overall returns (premised on credit fundamentals continuing to show sequential improvements) and selectively taking profits in names that were the first to benefit from the market’s recovery, and where technicals have clearly contributed to pushing prices beyond fair value. Table 15: Key forecasts

CEMBI Broad (SOT) EM corporate supply (US$ millions) Asia Emerging Europe Latin America Middle East and Africa EM corporate defaults (%)1 Asia Emerging Europe Latin America Middle East and Africa

Current/year-todate (as of November 30, 2009 403 118,166 41,693 20,283 38,313 17,877 12.3 11.0 18.4 5.9 4.4

2010 Direction/mar targets ket impact and forecasts) 325 ↓; positive 127,500 ↑; neutral 45,000 30,000 42,500 10,000 2.2 2.4 2.1 2.0 2.9

↓; positive

Source: J.P. Morgan 1. Current year-to-date and 2010 default rates calculated as a percentage of Total Bond Stock as of December 31, 2008, and October 30, 2009, respectively and assumes that Nakheel defaults in 2009.

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Given the foregoing, we have identified three different sets of recommendations: High-conviction trades: driven by a particular event or expectations for an individual credit; High-beta recommendations: based on an assumption that market fundamentals and technicals remain supportive of an aggressive strategy; and Low-beta recommendations: based on an assumption that market conditions deteriorate, suggesting more defensive positioning. The high conviction trades are summarized in the table below, but for the extended table of high and low beta recommendations please see our detailed report ‘Emerging Markets Corporate Strategy and Outlook for 2010’ dated November 23rd. Table 16: High-Conviction Buy Recommendations Issue Chinatrust UT2 5.625% call 2015 DBS FRN call 2016

Ticker, rating CHIFIN, Baa1/BBB/ADBSSP, Aa2/A+/A+

Region Asia

Z-spread/ price 600bp

Asia

DM+261bp

ICICI Baa3/BB/BB

Asia

535bp

Henderson Land 5.5% 2019

HENLND, NR/NR/NR

Asia

260bp

Korea Hydro 6.25% 2014

KOHNPW, A2/A/A+

Asia

199bp

BUMA 11.75% 2014

PTBMMU, Ba3/NR/BB-

Asia

942bp

Ciliandra 10.75% 2011

CLPKIJ, B2/NR/BB-

Asia

736bp

LIPPO, B1/B/B+

Asia

893bp

LAIFNG, B1/B+/NR PAITON, B1/B/NR

Asia

857bp

Asia

647bp

Gazprom 10.5% 2014

GAZPRU, Baa1/NR/NR

CEEMEA

436bp

Alrosa 8.875% 2014

CEEMEA

602bp

Alliance Bank 9.25% 2013

ALROSA, Ba3/NR/B ALLIBK, C/SDRD

CEEMEA

US$29.5

ATF 9.25% 2012

ATFBP, Ba3/B/B-

CEEMEA

731bp

ICICI 6.375% call 2017

Lippo Karawaci 8.875% 2011 Lai Fung 9.125% 2014 Paiton 9.34% 2014

Rationale After raising US$1 billion of equity, concerns over asset quality drag should be eased. FRNs remain chronically cheap, but we like the prospects for longer-duration FRNs to trade up as and when US rates shift higher. High-quality bank is defensive in downturns. One of the highest-yielding bonds in Asia, with reassurance from dated structure. September earnings demonstrate bank is shifting to more defensive franchise, which we believe spreads do not yet reflect. Offers best value in the HK property space, in our view. Currently trades 6065bp wider than Swire, but we believe the fair value is just 20bp wider. Lack of ratings has been a key overhang on performance. Our top pick in the Korean quasi-sovereign corporate land. Though supply in the space could continue to be an overhang in the near term, taking a mediumterm view, we see value in these bonds. We like this as a short- to medium-term play. BUMA is Indonesia’s secondlargest coal mining contractor, with almost all the major miners as its customers. In our view, one of the few better-quality HY corporates yielding in double digits. Short-dated bond with decent carry. Expect company to successfully refinance/ exchange with the capital markets now open. Also sitting on high cash balance. Self-sustaining operations even at CPO prices of US$450/ton (versus ytd average of around US$600/ton). Stable recurrent income from hotels and hospitals portfolio provides a cushion in the current downturn. Has lower structural subordination risks compared to China property counterparts. Benefits from a portfolio of investment properties that provides stable rental income that helps to fund working capital needs. Indonesian IPP with PLN as sole off-taker. Bonds have sinking fund provision, which reduces average life to around 2.3 years. We believe there are sufficient protective mechanisms in place for the existing lenders before the company starts raising debt for the new plant. Among the cheapest Gazprom bonds on the curve, like 52bp pickup to 8.125% ’14s. The negative basis of -195bp to 5-year GAZPRU CDS also looks attractive. The cheapest of Russian quasi-sovereigns; expect the company’s credit profile to improve further in 2010. We believe that Alliance offers the best upside potential amongst the distressed Kazakh names. We see restructuring well advanced and deal risk low. A full subsidiary of Italy’s Unicredito, ATF is well provisioned and well capitalized and likely to further gain market share in 2010. Good outright value and cheap to ’16s.

Pricing as of November 12, 2009. Source: J.P. Morgan.

41

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Economics Forecasts GDP and CPI growth forecasts Real GDP % over a year ago 2008 2009E 2010E The Americas United States Canada Latin America Argentina Brazil Chile Colombia Ecuador Mexico Peru Venezuela Asia/Pacific Japan Australia New Zealand Asia ex Japan China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Africa/Middle East Israel South Africa Europe Euro area Germany France Italy Norway Sweden Switzerland United Kingdom Emerging Europe Czech Republic Hungary Poland Romania Russia Turkey Global Developed markets Emerging markets

Real GDP % over previous period, saar 3Q09 4Q09E 1Q10E 2Q10E 3Q10E

4Q10E

Consumer Prices % over a year ago 2Q09 4Q09E 2Q10E 4Q10E

0.4 0.4 3.8 6.8 5.1 3.2 2.4 6.5 1.3 9.8 4.8

-2.5 -2.6 -3.1 -4.0 0.3 -1.5 -0.5 -1.0 -7.0 1.0 -2.5

3.2 2.4 4.0 4.0 5.0 5.0 3.0 1.5 3.5 5.4 1.5

-0.7 -3.4 2.0 1.1 7.8 -1.2 2.7 -1.0 -1.1 -1.6 -4.1

2.8 0.5 5.7 -14.0 7.2 4.6 1.9 -2.0 12.2 8.0 -7.8

3.5 3.0 6.0 -4.0 6.7 10.0 3.2 0.0 7.5 13.0 5.0

3.0 3.0 4.7 12.0 4.3 6.0 3.5 2.0 3.7 3.0 3.0

4.0 3.0 3.1 10.0 5.0 4.0 4.3 2.5 -0.6 3.5 3.0

4.0 3.5 4.0 6.0 4.0 2.0 5.5 4.0 3.3 3.5 5.0

3.5 4.0 1.9 4.0 4.0 3.0 4.5 4.0 -0.9 4.0 0.0

-1.6 -0.9 5.9 5.9 4.4 -0.6 3.2 3.5 5.1 1.9 28.7

1.2 0.8 5.6 6.0 4.2 -0.8 3.3 3.5 4.6 1.1 29.0

2.2 1.4 6.8 10.0 4.5 2.0 3.9 2.4 5.3 1.5 34.2

1.1 2.3 7.2 10.2 4.7 2.6 4.3 4.0 5.2 2.0 37.9

-0.7 2.4 0.1 5.8 9.0 2.4 6.1 6.1 2.2 4.6 3.8 1.1 0.7 2.6

-5.2 1.0 -1.3 4.2 8.6 -3.3 6.0 4.3 0.2 -2.4 1.5 -2.1 -3.0 -3.1

2.4 2.9 2.8 7.3 9.5 4.5 7.5 5.3 4.7 5.0 5.0 6.5 5.8 6.1

2.7 2.5 0.3 12.4 14.8 14.8 6.7 4.3 11.0 10.1 7.0 21.7 18.8 9.0

4.8 1.2 2.5 9.3 10.0 1.6 9.0 5.3 12.3 9.4 4.1 14.2 8.3 5.5

2.5 3.8 2.1 5.4 9.1 5.0 -1.0 3.5 4.0 4.5 4.0 -3.6 6.0 5.3

2.5 2.1 2.6 6.9 9.0 4.2 10.0 5.5 2.0 1.6 5.0 8.2 3.8 4.9

1.5 2.4 4.3 7.1 9.5 4.0 7.0 6.0 3.5 4.9 5.0 7.0 5.0 5.7

1.5 4.4 3.4 7.3 9.3 3.8 9.6 6.0 3.5 4.9 5.0 4.9 4.6 7.0

2.0 6.2 2.8 6.9 8.7 3.5 9.0 6.0 3.5 4.9 5.0 4.9 3.5 7.0

-2.2 1.3 1.7 1.4 -1.3 -0.9 11.8 2.8 2.0 -2.4 0.3 -0.4 -1.3 -2.2

-1.8 2.1 2.6 2.7 0.9 -0.4 12.2 2.8 2.5 -1.2 3.0 -0.8 -1.0 1.4

-1.8 2.5 2.4 4.3 3.2 0.6 11.9 4.9 3.0 0.5 3.6 1.9 1.8 4.6

-1.3 2.6 1.7 3.4 2.7 2.1 6.2 6.0 3.3 1.5 3.7 1.8 2.1 4.0

4.0 3.1

0.0 -2.0

3.0 3.0

1.0 -3.0

2.2 0.5

2.5 3.4

3.0 4.4

3.0 3.8

3.0 3.6

3.0 4.1

3.2 6.4

3.3 6.2

3.4 4.3

3.3 4.8

0.6 1.0 0.3 -1.0 2.1 -0.5 1.8 0.6 4.1 2.7 0.6 5.0 7.1 5.6 0.9 1.3 0.4 5.0

-3.9 -4.7 -2.3 -4.8 -1.1 -4.2 -1.3 -4.6 -5.3 -4.0 -6.5 1.7 -6.0 -8.5 -5.3 -2.5 -3.4 0.7

2.5 3.4 2.5 1.7 2.8 3.2 2.2 1.6 4.0 2.5 1.0 3.2 2.0 5.0 5.0 3.3 2.7 5.8

-0.7 1.8 1.1 -1.9 1.3 1.2 -1.0 -2.3 2.1 1.2 -7.9 2.8 … 4.5 … 1.4 -0.3 7.6

1.5 2.9 1.1 2.4 2.0 0.7 1.8 -1.2 4.7 3.2 -7.0 5.5 … 7.9 … 3.4 2.3 7.3

2.5 4.0 2.5 1.0 3.0 4.0 2.3 2.0 4.9 5.0 3.5 3.0 … 6.5 … 3.4 2.9 5.4

3.0 3.5 3.0 2.0 3.0 4.0 2.5 2.0 3.4 2.8 3.0 2.5 … 4.5 … 3.4 2.8 5.6

3.0 3.5 3.0 2.0 3.0 3.5 2.5 2.5 3.2 2.5 2.5 3.0 … 4.0 … 3.6 3.1 5.3

3.0 3.5 3.0 2.0 3.0 3.5 3.0 2.8 3.3 2.2 2.5 3.5 … 4.0 … 3.7 3.2 5.7

2.5 2.5 2.5 2.5 3.0 3.0 3.0 3.5 3.6 2.0 3.5 3.5 … 4.5 … 3.4 3.0 5.0

-0.4 -0.4 -0.5 0.1 1.8 -1.1 -1.0 1.5 7.0 0.1 5.0 3.5 5.0 11.4 5.3 -0.1 -1.0 3.5

0.3 0.3 0.6 1.0 1.3 -0.3 -0.4 2.2 6.2 0.6 5.1 3.4 4.7 9.5 5.0 1.2 0.5 4.0

0.9 0.5 1.0 1.4 1.0 0.8 0.6 2.3 5.2 1.9 3.7 2.1 5.5 7.0 6.3 1.9 1.1 5.0

1.2 0.3 0.7 1.0 0.4 0.5 0.7 1.4 5.3 3.6 2.8 2.3 6.5 7.4 5.2 1.6 0.8 4.6

Source: J.P. Morgan economics, 27 November 2009.

42

2Q09

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Sources of GDP Growth Country USA Real GDP Consumption Fixed investment Net external demand UK Real GDP Consumption Fixed investment Net external demand Euro Real GDP Consumption Fixed investment Net external demand Japan Real GDP Consumption Fixed investment Net external demand Australia Real GDP Consumption Fixed investment Net external demand Brazil Real GDP Consumption Fixed investment Net external demand China Real GDP Consumption Fixed investment Net external demand Czech Republic Real GDP Consumption Fixed investment Net external demand Hong Kong Real GDP Consumption Fixed investment Net external demand Hungary Real GDP Consumption Fixed investment Net external demand India Real GDP Consumption Fixed Investment Net external demand Indonesia Real GDP Consumption Fixed investment Net external demand Korea Real GDP Consumption Fixed investment Net external demand Malaysia Real GDP Consumption Fixed investment Net external demand Mexico Real GDP Consumption Fixed investment Net external demand

2007

Share of Real GDP 2008 2009

2010

88.7 16.2 -4.9

88.7 15.0 -3.7

90.9 11.8 -2.7

89.8 12.8 -2.6

84.7 18.7 -3.4

85.4 17.6 -2.9

88.2 13.9 -2.1

87.9 13.8 -1.6

76.3 22.2 1.5

76.5 22.0 1.6

79.5 20.0 0.4

78.6 20.4 1.0

72.1 23.2 4.7

73.1 22.0 4.9

76.9 20.4 2.7

76.2 20.0 3.9

73.7 28.6 -2.3

74.1 29.9 -4.0

74.3 27.8 -2.1

73.6 28.0 -1.6

78.4 19.3 2.3

78.6 21.2 0.2

81.0 18.6 0.4

81.3 19.7 -1.1

48.9 41.7 9.4

48.7 42.4 8.8

48.9 45.4 5.7

48.9 45.7 5.4

68.2 31.0 0.8

68.3 29.3 2.4

71.9 25.8 2.3

71.1 27.8 1.1

68.2 20.9 10.8

67.7 20.2 12.2

69.6 19.8 10.6

69.8 19.8 10.4

74.1 22.5 3.5

73.4 22.8 3.8

74.0 15.6 10.4

72.1 15.1 12.9

66.9 37.4 -4.3

66.5 39.3 -5.8

64.7 41.7 -6.3

63.2 45.8 -9.0

65.4 25.1 9.5

65.3 25.1 9.6

66.3 23.8 9.9

66.1 24.1 9.8

67.6 28.9 3.4

67.2 28.4 4.4

68.2 23.9 7.9

67.6 25.8 6.6

63.4 22.4 14.2

66.1 20.8 13.1

65.0 19.8 15.2

63.8 23.3 12.9

80.0 22.9 -2.9

80.1 23.8 -3.9

80.9 21.7 -2.6

80.3 22.3 -2.6

Contribution to Real GDP growth 2007 2008 2009 2010 2.1 0.4 -2.4 3.3 2.2 0.4 0.0 1.8 -0.6 -1.2 -3.5 1.4 0.6 1.2 1.0 0.0 2.6 0.6 -4.7 1.6 1.6 1.1 -1.3 1.0 1.5 -1.0 -4.3 0.1 -0.5 0.5 0.9 0.4 2.7 0.6 -3.9 2.5 1.8 0.6 0.0 1.1 0.5 0.0 -2.7 0.9 0.4 0.0 -1.1 0.5 2.3 -0.7 -5.2 2.4 0.9 0.6 -0.1 1.3 0.2 -1.4 -2.6 0.0 1.2 0.1 -2.5 1.1 4.0 2.4 1.0 2.9 2.9 2.2 0.9 1.5 3.1 2.0 -1.9 1.0 -2.0 -1.8 1.9 0.4 5.7 5.1 0.3 5.0 4.6 4.3 2.6 4.3 2.2 2.9 -2.6 2.1 -1.1 -2.1 0.2 -1.5 13.0 9.0 8.6 9.5 4.7 4.2 4.4 4.5 5.6 4.6 6.8 4.7 2.7 0.2 -2.6 0.2 6.1 2.7 -4.0 2.5 2.6 2.0 0.7 1.0 2.8 -0.9 -4.5 2.6 0.7 1.6 -0.2 -1.2 6.4 2.4 -3.3 4.5 5.3 1.0 -0.3 3.3 1.6 -0.3 -1.0 0.9 -0.6 1.6 -2.0 0.3 1.2 0.6 -6.5 1.0 -1.2 -0.2 -4.3 -1.2 -0.7 0.5 -8.2 -0.4 3.1 0.3 6.0 2.6 9.1 6.1 6.0 7.5 5.2 3.6 2.1 3.2 5.2 4.3 4.9 7.5 -1.3 -1.8 -0.9 -3.3 6.3 6.1 4.3 5.3 3.2 3.9 3.8 3.3 2.4 1.5 -0.2 1.5 0.6 0.7 0.8 0.5 5.1 2.2 0.2 4.7 3.5 1.1 1.1 2.5 0.9 0.1 -4.5 3.1 0.7 1.1 3.5 -1.0 6.3 4.6 -2.4 5.0 6.1 5.7 -2.6 2.0 1.2 -0.5 -1.5 4.7 -1.0 -0.5 1.8 -1.7 3.6 1.3 -7.0 3.5 2.9 1.1 -4.8 2.2 1.3 1.2 -3.6 1.4 -0.6 -1.0 1.5 -0.1

GDP Deflator Y/Y 2008 2009 2010 2.4 1.5 0.8

3.0

0.8

1.7

2.3

1.2

1.3

-0.9

0.0

-2.0

6.7

0.3

1.1

5.9

4.0

4.5

7.6

-0.5

2.5

14.2

8.0

12.2

1.4

-0.5

0.8

3.5

4.0

3.0

8.5

4.5

5.8

18.3

6.0

6.5

2.7

0.2

2.0

10.3

2.0

5.0

6.6

3.1

3.7

43

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Sources of GDP Growth (cont'd) Country Philippine Real GDP Consumption Fixed investment Net external demand Poland Real GDP Consumption Fixed investment Net external demand Russia Real GDP Consumption Fixed investment Net external demand Singapore Real GDP Consumption Fixed investment Net external demand South Africa Real GDP Consumption Fixed investment Net external demand Taiwan Real GDP Consumption Fixed Investment Net external demand Thailand Real GDP Consumption Fixed investment Net external demand Turkey Real GDP Consumption Fixed investment Net external demand Source: J.P. Morgan economics.

44

2007

Share of Real GDP 2008 2009

2010

84.2 12.1 3.7

84.7 13.9 1.4

85.0 14.9 0.1

84.6 17.5 -2.1

78.4 26.0 -4.4

79.4 25.5 -4.9

79.8 22.5 -2.4

79.5 21.9 -1.3

73.6 30.0 -3.6

76.3 32.5 -8.9

80.8 18.1 1.1

79.5 19.3 1.1

48.5 20.3 31.2

49.7 29.9 20.4

50.0 28.5 21.5

48.6 28.1 23.3

87.5 20.3 -7.8

87.4 20.5 -7.9

87.7 19.9 -7.5

86.6 21.4 -8.1

65.8 19.0 15.2

65.7 17.0 17.3

68.9 13.9 17.1

67.4 14.6 18.0

60.9 23.1 16.0

60.7 24.0 15.4

62.3 20.0 17.8

60.8 23.5 15.7

79.0 25.6 -4.6

79.0 23.9 -2.9

79.4 20.4 0.2

78.5 21.3 0.2

Contribution to Real GDP growth 2007 2008 2009 2010 7.1 3.8 1.5 5.0 5.2 3.7 1.7 3.8 -3.2 2.4 1.2 3.5 5.1 -2.3 -1.3 -2.2 6.8 5.0 1.7 3.2 3.7 4.9 1.8 2.2 5.3 0.8 -2.6 0.0 -2.2 -0.7 2.5 1.0 8.1 5.6 -8.5 5.0 8.2 7.0 -2.4 2.7 6.5 4.3 -16.0 2.2 -6.7 -5.8 9.9 0.1 7.8 1.1 -2.1 6.5 2.3 1.7 -0.7 1.7 1.9 10.0 -2.0 1.4 3.6 -10.6 0.7 3.3 5.1 3.1 -2.0 3.0 5.4 2.6 -1.4 1.5 1.1 0.8 -1.0 2.2 -1.4 -0.3 0.5 -0.8 5.7 0.1 -3.8 5.8 1.4 0.0 0.7 2.4 0.5 -2.0 -3.6 1.5 3.8 2.1 -0.8 1.9 4.9 2.6 -3.1 6.1 1.7 1.3 -0.3 2.2 0.3 1.5 -4.6 5.0 3.0 -0.2 1.8 -1.1 4.7 0.9 -5.3 5.0 3.8 0.7 -3.8 3.0 2.1 -1.5 -4.5 1.9 -1.2 1.7 3.0 0.1

GDP Deflator Y/Y 2008 2009 2010 7.5 3.0 4.0

5.0

1.7

3.2

19.2

3.0

6.5

1.1

-0.5

2.5

10.8

8.0

6.0

-2.4

-0.2

1.0

2.3

2.5

5.0

11.7

5.5

5.3

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Interest Rate Forecasts Global excluding US Developed Emerging Latin America CEEMEA EM Asia

Change from Official interest rate Current Aug '07 (bp) Last change GDP-weighted average 1.31 -341 GDP-weighted average 1.86 -257 GDP-weighted average 0.49 -365 GDP-weighted average 4.54 -246 GDP-weighted average 5.75 -306 GDP-weighted average 4.78 -222 GDP-weighted average 4.00 -232

Forecast next Next meeting change

The Americas United States Canada Brazil Mexico Chile Colombia Peru

GDP-weighted average Federal funds rate Overnight funding rate SELIC overnight rate Repo rate Discount rate Repo rate Reference rate

0.75 0.125 0.25 8.75 4.50 0.50 4.00 1.25

-484 -512.5 -425 -275 -275 -500 -525 -350

16 Dec 08 (-87.5bp) 21 Apr 09 (-25bp) 22 Jul 09 (-50bp) 17 Jul 09 (-25bp) 9 Jul 09 (-25bp) 25 Sep 09 (-50bp) 6 Aug 09 (-75bp)

16 Dec 09 08 Dec 09 09 Dec 09 27 Nov 09 10 Dec 09 23 Nov 09 10 Dec 09

on hold on hold Jan 10 (+50bp) Jun 10 (+25bp) 2Q 10 (+50bp) on hold on hold

Europe/Africa Euro area United Kingdom Sweden Norway Czech Republic Hungary Israel Poland Romania Russia South Africa Switzerland Turkey

GDP-weighted average Refi rate Repo rate Repo rate Deposit rate 2-week repo rate 2-week deposit rate Base rate 7-day intervention rate Base rate 1-week deposit rate Repo rate 3-month Swiss Libor Overnight borrowing rate

1.36 1.00 0.50 0.25 1.50 1.25 7.00 0.75 3.50 8.00 4.75 7.00 0.25 6.50

-323 -300 -525 -325 -325 -200 -75 -325 -125 100 150 -300 -225 -1100

7 May 09 (-25bp) 5 Mar 09 (-50bp) 2 Jul 09 (-25bp) 28 Oct 09 (+25bp) 6 Aug 09 (-25bp) 19 Oct 09 (-50bp) 23 Aug 09 (+25bp) 24 Jun 09 (-25bp) 29 Sep 09 (-50bp) 29 Oct 09 (-50bp) 13 Aug 09 (-50bp) 12 Mar 09 (-25bp) 19 Nov 09 (-25bp)

03 Dec 09 10 Dec 09 16 Dec 09 16 Dec 09 16 Dec 09 23 Nov 09 23 Nov 09 25 Nov 09 05 Jan 09 24 Nov 09 17 Dec 09 10 Dec 09 17 Dec 09

Asia/Pacific Australia New Zealand Japan Hong Kong China Korea Indonesia India Malaysia Philippines Thailand Taiwan

GDP-weighted average Cash rate Cash rate Overnight call rate Discount window base 1-year working capital Base rate BI rate Repo rate Overnight policy rate Reverse repo rate 1-day repo rate Official discount rate

2.08 3.50 2.50 0.10 0.50 5.31 2.00 6.50 4.75 2.00 4.00 1.25 1.25

-147 -300 -575 -40 -625 -171 -300 -175 -300 -150 -200 -200 -188

3 Nov 09 (+25bp) 30 Apr 09 (-50bp) 19 Dec 08 (-20bp) 17 Dec 08 (-100bp) 22 Dec 08 (-27bp) 12 Feb 09 (-50bp) 5 Aug 09 (-25bp) 21 Apr 09 (-25bp) 24 Feb 09 (-50bp) 9 Jul 09 (-25bp) 8 Apr 09 (-25bp) 18 Feb 09 (-25bp)

01 Dec 09 09 Dec 09 18 Dec 09 17 Dec 09 2Q 09 09 Dec 09 03 Dec 09 1Q 10 24 Nov 09 17 Dec 09 02 Dec 09 4Q 09

Dec 09E Mar 10E Jun 10E Sep 10E Dec 10E 1.30 1.32 1.36 1.43 1.48 1.85 1.88 1.94 2.04 2.12 0.50 0.51 0.52 0.54 0.57 4.47 4.56 4.71 4.94 5.13 5.75 6.13 6.66 6.94 7.03 4.44 4.29 4.23 4.58 4.87 4.00 4.07 4.17 4.34 4.53 0.75 0.125 0.25 8.75 4.50 0.50 4.00 1.25

0.79 0.125 0.25 9.75 4.50 0.50 4.00 1.25

0.85 0.125 0.25 10.75 4.75 1.00 4.00 1.25

0.88 0.125 0.25 10.75 5.25 2.00 4.00 1.25

0.89 0.125 0.25 10.75 5.25 3.50 4.00 1.25

on hold 3Q 10 (+25bp) on hold 3 Feb 10 (+25bp) 2Q 10 (+25bp) 24 Nov 09 (-50bp) 1Q 10 (+25bp) 3Q 10 (+25bp) 1Q 10 (-25bp) 24 Nov 09 (-50bp) 4Q 10 (+50bp) on hold 3Q 10 (+50bp)

1.32 1.00 0.50 0.25 1.50 1.25 6.00 0.75 3.50 8.00 4.00 7.00 0.25 6.50

1.31 1.00 0.50 0.25 1.75 1.25 5.50 1.25 3.50 7.75 3.50 7.00 0.25 6.50

1.30 1.00 0.50 0.25 2.00 1.75 5.50 2.25 3.50 7.50 3.00 7.00 0.25 6.50

1.39 1.00 0.75 0.25 2.25 2.50 5.50 3.25 4.00 7.25 3.00 7.00 0.25 7.50

1.46 1.00 1.00 0.25 2.25 3.00 5.50 4.00 4.50 7.00 3.00 7.50 0.25 8.00

1 Dec 09 (+25bp) 8 Jul 10 (+50bp) on hold on hold 3Q 10 (+27bp) 1Q 10 (+25bp) on hold 1Q 10 (+25bp) 2Q 10 (+25bp) 4Q 10 (+25bp) 2Q 10 (+25bp) 4Q 10 (+12.5bp)

2.09 3.75 2.50 0.10 0.50 5.31 2.00 6.50 4.75 2.00 4.00 1.25 1.25

2.14 4.00 2.50 0.10 0.50 5.31 2.25 6.50 5.00 2.00 4.00 1.25 1.25

2.21 4.50 2.50 0.10 0.50 5.31 2.50 6.50 5.25 2.25 4.00 1.50 1.25

2.31 4.75 3.50 0.10 0.50 5.58 2.75 6.50 5.25 2.50 4.00 1.75 1.25

2.42 5.00 4.00 0.10 0.50 5.85 3.00 6.50 5.25 3.00 4.25 2.00 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 (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Exchange rate Forecasts Country Euro Sterling Yen

2005 1.22 1.79 112

FX rate vs US dollar annual average 2006 2007 2008 2009E 1.27 1.39 1.48 1.42 1.85 2.00 1.78 1.57 117 117 101 94

Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Argentina Brazil Chile Colombia Mexico Peru Venezuela South Africa Czech Republic Hungary Poland Russia Turkey

0.76 8.18 7.79 44.0 9840 1026 3.78 54.98 1.67 32.30 40.63 2.94 2.39 552 2319 10.83 3.32 2.148 6.40 24.32 204 3.25 28.42 1.35

0.75 7.93 7.77 45.1 9135 950 3.64 50.85 1.58 32.65 37.70 3.08 2.16 534 2379 11.00 3.27 2.147 7.01 22.24 211 3.11 26.92 1.47

0.85 7.54 7.80 40.7 9176 929 3.41 45.24 1.49 32.79 34.37 3.12 1.90 519 2053 10.93 3.11 2.148 7.00 19.92 179 2.69 25.29 1.27

0.83 6.88 7.77 44.6 9730 1127 3.34 45.26 1.40 31.44 33.39 3.19 1.90 538 2045 11.42 2.97 2.147 8.41 16.94 169 2.43 25.53 1.34

0.81 6.81 7.76 47.8 10101 1239 3.49 47.5 1.43 32.44 33.99 3.86 1.96 554 2170 13.46 3.00 2.148 8.02 18.36 196 3.07 30.83 1.52

2010E 1.56 1.69 85

1Q09 1.32 1.43 99

2Q09 1.40 1.65 96

1.00 6.67 7.79 43.3 9175 1120 3.29 45.50 1.35 30.50 32.38 4.08 1.66 491 1931 12.78 2.78 2.363 7.35 16.01 165 2.55 26.41 1.40

0.69 6.83 7.75 50.6 11550 1375 3.65 48.26 1.52 33.92 35.47 3.71 2.32 584 2556 14.17 3.17 2.147 9.54 20.67 233 3.50 33.96 1.66

0.81 6.83 7.75 47.8 10208 1275 3.52 48.16 1.45 32.86 34.07 3.80 1.95 533 2143 13.19 3.01 2.147 7.73 18.53 194 3.17 31.16 1.54

FX rate vs US dollar*** Quarter end forecasts 3Q09 Current 1Q10E 2Q10E 3Q10E 1.46 1.49 1.55 1.62 1.55 1.60 1.65 1.65 1.74 1.68 90 89 85 82 85 0.88 6.83 7.75 47.7 9645 1177 3.46 47.60 1.41 32.00 33.41 3.84 1.77 550 1931 13.50 2.88 2.147 7.52 17.25 184 2.87 30.03 1.48

0.92 6.83 7.75 46.6 9465 1159 3.39 46.90 1.39 32.39 33.25 3.80 1.73 502 1969 13.08 2.88 2.147 7.60 17.44 181 2.79 28.99 1.50

0.95 6.75 7.77 45.0 9000 1130 3.35 46.00 1.36 31.00 33.00 4.00 1.65 475 1925 12.80 2.80 2.150 7.40 16.26 168 2.65 26.85 1.45

1.02 6.70 7.78 43.5 9000 1130 3.30 45.50 1.35 30.50 32.50 3.95 1.60 490 1850 12.50 2.75 2.150 7.20 15.43 157 2.47 25.41 1.40

1.01 6.65 7.80 42.8 9200 1100 3.25 45.50 1.34 30.50 32.00 4.10 1.65 500 1950 12.80 2.78 2.150 7.40 16.00 165 2.55 26.45 1.40

4Q10E 1.50 1.67 89 1.00 6.58 7.80 42.0 9500 1120 3.25 45.00 1.33 30.00 32.00 4.25 1.75 500 2000 13.00 2.80 3.000 7.40 16.33 170 2.53 26.94 1.35

Source: Datastream, J.P. Morgan estimates, current as of 24 November 2009

Commodities Forecast Commodity Forecast WTI oil $/bbl Natural gas $/mmbtu Gold ($/oz) Silver ($/oz) Platinum ($/oz) Palladium ($/oz) Copper ($/metric ton) Aluminium ($/metric ton) Zinc ($/metric ton) Nickel ($/metric ton) Corn ($/bushel) Wheat ($/bushel) Soybeans ($/bushel) Source: J.P. Morgan, 20 November 2009.

46

Current 76.7 3.2 1142 18.2 1435 360 6731 1720 2196 16658 3.6 4.0 10.2

4Q09E 70.0 5.0 1000 16.1 1275 290 5950 1825 1850 18000 3.7 5.0 9.6

1Q10E 70.0 6.0 1050 16.7 1300 300 6250 1900 1950 19000 4.0 5.4 9.8

2Q10E 65.0 5.5 1000 15.6 1325 300 6000 1850 1900 17000 4.2 5.4 9.6

3Q10E 70.0 5.8 1000 15.6 1350 300 5750 1825 1875 16500 4.1 5.2 9.4

4Q10E 70.0 6.5 975 15.2 1375 325 5800 1800 1850 16000 4.1 5.1 9.1

Emerging Markets Equity Research 02 December 2009

EM Markets’ Overviews

Adrian Mowat (852) 2800-8599 [email protected]

47

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Brazil Stellar Growth amid Low Global Rates Key country dynamics Brazilian growth at 5% (with upside potential) in 2010e is only behind China and India. A powerful infrastructure story related to the oil exploration in the presalt areas, the Soccer World Cup in 2014 and the Olympic Games in 2016 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 considering the general elections. The presidential race could be noise and will determine policy direction as well as the continuation of enhanced role of the public sector in key sectors (oil, mining, utilities, among others).

Emy Shayo ChermanAC (55-11) 3048-6684 [email protected] Banco J.P. Morgan S.A.

MSCI Brazil: Absolute and relative to MSCI Asia Pacific ex-Japan

700 600 500

Implications of a global recovery The global crisis presented Brazil with a stress test and it came through very successfully. It is now that Brazil is really enjoying the status of an investment grade country in terms of attracting global funds. Brazil remains the gold medalist in terms of high interest rates and therefore, is also attractive from the flow of funds point of view, leading the BRL to be the best among the best-performing currencies in the world in 2009. Authorities responded to that by imposing a 2% tax on foreign portfolio inflows, and exchange rate policy now remains an uncertainty.

400 300 200 100 0 97 99 01 03 05 07 09 Absolute Relativ e Source: MSCI, Datastream.

How much have valuations already discounted a recovery We think that the key metric to watch is consensus EPS. They have increased by only 11% from the trough of the crisis until the present, a far cry from the average 36% rise in past cycles. As EPS rise, valuations which today are pretty much at record highs should abate. Still, we think Brazil deserves a premium to its historical values. The question now is how much of a premium is deserved on a relative basis. Recommendations We have exposure to domestic cyclical names that benefit from a stronger consumer and are also upbeat on energy. On the domestic side we like homebuilder PDG, financial Santander, and CBD, which is repricing from a staple name to a discretionary. We like growth names NET and ALL. We remain OW Petrobras on higher oil prices and the growth coming from the new offshore wells. We avoid defensives utilities, telecom and staples. Top picks and stocks to avoid EPS (LC)

P/E (x)

Price (LC)

Code

Rating

Mkt cap (US$MM)

09E

10E

09E

10E

Div. yield 10E (%)

ROE 10E (%)

Top picks Petrobras Santander Brazil

39.2 23.0

PETR4 SANB11

OW OW

212,864 50,351

13.1 17.3

11.9 13.5

3.0 1.3

3.3 1.7

1.7 3.3

17.4 12.0

Stocks to avoid Usiminas CPFL Energia3

50.3 32.7

USIM5 CPFE3

UW UW

14,452 9,040

37.8 13.0

14.6 11.2

1.3 2.5

3.5 2.9

2.1 8.5

10.9 27.2

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 25 November 2009.

48

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Brazil Scorecard Key Financial Data Summary

Local Interest Rates and Inflation Trend

EPS Growth

P/E

ROE

Yield

Spot

-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

- EMF

- Cons

US$ Spread

Spot

-3M ∆

Economic Forecasts -3M ∆

GDP (YoY)

+3M ∆

Risk Appetite

Forecast

+3M ∆

2008

5.1

-0.2

0.2

0.0

BAA

2.9

0.0

na

2009E

0.3

0.7

-0.3

0.7

EMBI

3.2

-0.7

0.8

2010E

5.0

0.5

-0.8

1.2

Country

2.2

-0.5

na

Country Relative

-0.9

0.3

na

Economic Momentum GDP

Foreign Fund Flows (US$ mils)

Q4 09E

Q1 10E

Q2 10E

Q3 10E

6.7

4.3

5.0

4.0

GDP SAAR

Month

09 YTD Avg

12-Mo Avg

4,063

5,164

4,870

LatAm*

242

758

688

Brazil

651

895

754

EM Funds*

MSCI Brazil Absolute and Relative to EMF Index Absolute

1200

Relative to MSCI EMF

MSCI Fair value Range (96225)

FWD PER

1000

(104896)

PER

800

(241407)

(66011)

PBR

600

(172103)

(212484) (123402)

DY

(224148)

400 (179326)

BY/EY

(387224)

200 (213292)

BY/DY 0 Jan-03

Dec-03

Nov-04

Oct-05

Sep-06

Aug-07

Jul-08

Jun-09

0

50000 100000 150000 200000 250000 300000 350000 400000

Currency Outlook (BRL/USD) 2.8

Spot

Forecast

EPS Integer over Time

2.4

2009

130

Consensus

2010

120

J.P. Morgan forecast: end Dec 09: 1.80 end Mar 10: 1.80 end Jun 10: 1.80

2.6

(338028)

110 100

2.2

90 Consensus

2.0 1.8

70

1.6 1.4 Dec 04

80

J.P. Morgan

Apr 06

Aug 07

Dec 08

Mar 10

60 50 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 (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

China Focus on defensive growth in 2010 Key country dynamics We expect MSCI China to resume its rally from now to 1Q10, in light of positive fundamentals including: (1) the expected material improvements in the liquidity situation in early 2010 as banks tend to front-load their lending ; (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 4Q09 earnings results, to be released in 1QFY10; and (5) faster Rmb appreciation expected in 2010. The key investment strategy for 2010 should be to focus on stocks as characterized by defensive growth, given: (1) the expected broad-based tightening to kick in as of 2Q10; and (2) a potential sharp slowdown in fixed asset investment growth in 2011 as the two-year (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 GDP growth forecast at 9.5%). Continuing with the theme of a sustained and synchronized expansion of the global economy through 2010, we expect net external trade would likely come back to contribute positively to GDP growth again. On the domestic front, we look for a broad-based pickup in private consumption, along with improving labor markets and hence household income, and marked expansion in private housing investment as well as other private sector investment. Meanwhile, we believe the central government has enough leeway to smooth growth should external demand or private activities disappoint again. How much have valuations already discounted a recovery 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 valuations at above historical mean levels. Based on our EPS growth forecast of 20.1% for MSCI China for FY10, we have our end-FY10 MSCI China index target of 78, based on 17.2x FY10E P/E, or a 10% premium above the long-term average trailing P/E. Recommendations We recommend to Overweight banks with good earnings visibility and the potential for NIM expansion, upstream energy (coal and oil) as an inflation hedge, and defensive growth stocks, which include internet, gas, tissue and diapers, and consumer staples. We Underweight property, the most-likely target for the potential tightening by the government, telecom, downstream commodities, shipping, and construction names. We introduce two pair trades: (1) Long Netease/Short China Unicom on lower penetration rate, thus greater growth potential for internet sector than telecom sector; and (2) Long Xinao Gas/Short Datang International on better growth prospects for gas sector than IPPs.

Frank LiAC (852) 2800-8511 [email protected] J.P. Morgan Securities (Asia Pacific) Limited

Flagship reports • Views from the Bund • Where to find the next ten-baggers (September 07, 2009) • Focus on defensive growth (October 21, 2009) • China Strategy Dashboards

MSCI China: Absolute and relative to MSCI Asia Pacific ex-Japan

150 130 110 90 70 50 30 10 97 99 01 03 05 07 09 Absolute Relativ e Source: MSCI, Datastream.

MSCI performance table MSCI China Weightings in Region MSCI Total Mkt Cap. (US$B) 2009 P/E Ratio (x) 2010 P/E Ratio (x) 2011 P/E Ratio (x) 2010 Yield (%) 2010 ROE (%)

2wk 3mth YTD 2.7 12.2 61.3 18.4% 572.3 17.6 14.4 12.2 2.6 16.2

Source: Datastream, IBES, MSCI, JPMorgan estimates. Prices and valuations are as of November 20, 2009

Top picks and stocks to avoid Top picks Xinao Gas Baidu.com Bank of China – H China Mengniu Dairy China Yurun Food Stocks to avoid China Unicom Datang Intl

P/E (x) 09E

10E

2,341 13,374 153,822 5,309 3,833

21.2 63.0 12.3 25.6 14.7

18.5 42.2 8.7 22.4 11.2

31,679 5,596

23.9 25.6

34.6 15.6

Price (LC)

Code

Rating

Mkt cap (US$MM)

17.28 386.37 4.53 23.7 17.76

2688.HK BIDU US 3988.HK 2319.HK 1068.HK

OW OW OW OW OW

10.42 3.72

0728.HK 0991.HK

UW N

EPS (LC) 09E

10E

Div. yield 10E (%)

ROE 10E (%)

0.8 6.1 0.3 0.8 1.2

0.9 9.2 0.5 0.9 1.6

1.4 0.0 5.2 0.0 2.3

12.6 29.6 20.5 16.3 25.6

0.4 0.1

0.3 0.2

1.3 3.1

3.0 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 (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

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

- EMF

- Cons

US$ Spread

Spot

-3M ∆

Economic Forecasts -3M ∆

GDP (YoY)

Risk Appetite

Forecast

+3M ∆

2008

9.0

0.1

4.1

0.0

BAA

2.9

0.0

na

2009E

8.6

0.2

8.0

0.3

EMBI

3.2

-0.7

0.8

2010E

9.5

0.5

3.7

0.0

Country

0.8

-0.4

na

Country Relative

-2.3

0.4

na

Economic Momentum GDP

Foreign Fund Flows (US$ mils)

Q4 09E

Q1 10E

Q2 10E

Q3 10E

9.1

9.0

9.5

9.3

GDP SAAR

Month

09 YTD Avg

12-Mo Avg

EM Funds*

4,063

5,164

4,870

Asia ex Japan*

1,245

1,566

1,452

-50

499

611

China

MSCI China Absolute and Relative to EMF Index 800

Absolute

Relative to MSCI EMF

MSCI Fair value Range (30)

FWD PER

(61)

700 PER

600

400

(67)

(27)

PBR

500

(72)

(41)

DY

(43)

(77)

300 200 100 0 Jan-03

Dec-03

Nov-04

Oct-05

Sep-06

Aug-07

Jul-08

BY/EY

(47)

BY/DY

(47) 10

Jun-09

30

Currency Outlook (CNY/USD) 8.5

Spot

Forecast

(123) (132) 50

70

90

110

130

150

Aug 09

Nov 09

EPS Integer over Time Consensus

2009

120

2010

110

8.0

100 7.5

7.0

J.P. Morgan forecast: end Dec 09: 6.75 end Mar 10: 6.70 end Jun 10: 6.65

Consensus

80

6.5

6.0 Dec 04

J.P. Morgan

Apr 06

90

Aug 07

Dec 08

Mar 10

70 60 Feb 08

May 08

Aug 08

Nov 08

Feb 09

May 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 (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

India Recovery to broaden; challenging policy environment Key country dynamics We are constructive on economic growth and corporate earnings over 2010. A low base effect should help too, particularly over 1H. Financial markets appear to have stabilized. The decisive mandate in the national elections gives the government considerable policy flexibility to pursue reforms and growth. Corporate and consumer sentiment have improved considerably due to these positives. The government and regulators face challenges on the policy front though. Given rising inflation, we expect a tightening in monetary policy over 1H. The fiscal deficit remains at elevated levels, raising the specter of a withdrawal of fiscal stimuli at some point over CY10. Any delayed impact of the deficient monsoon on consumption remains a near-term cyclical risk.

Bharat IyerAC (91-22) 6157-3600 [email protected] J.P. Morgan Securities Indta Pvt. Ltd.

Flagship reports • Stratoscope • Color of Money • Q-View MSCI India: Absolute and relative to MSCI Asia Pacific ex-Japan

700 600

Implications of a global recovery The Indian economy is relatively less dependent on exports (c15%). A global recovery is likely to have a positive impact on IT services, metals and energy. More significant is the dependence on foreign capital. A sustained improvement herein is imperative to fund local growth. How much have valuations already discounted a recovery? Indian equities have re-rated sharply since March on the back of an improvement in global risk appetite and the decisive mandate in the national elections. Current valuations at 15x FY11E are at a marginal discount to historic comparatives and factor in healthy growth expectations (estimated at 21% over FY11E). Rising inflation and potential tightening in monetary policy imply that market returns over CY10 could be led more by forecast earnings growth as compared to re-rating. Recommendations We expect the government policy to focus on reviving the investment cycle. We overweight capital goods and infrastructure. A pick up in credit growth coupled with bottoming out of asset quality issues augurs well for financials. We are selective on global sectors given volatility in data flow and an appreciating rupee. The lagged impact of a deficient monsoon and a potential withdrawal of fiscal stimuli are key risk factors for the consumption cycle. Telecom and cement sectors will remain adversely impacted due to competitive pressures.

500 400 300 200 100 0 97 99 01 03 05 07 09 Absolute Relativ e Source: MSCI, Datastream.

MSCI performance table MSCI India Weightings in Region MSCI Total Mkt Cap. (US$B) 2009 P/E Ratio (x) 2010 P/E Ratio (x) 2011 P/E Ratio (x) 2010 Yield (%) 2010 ROE (%)

2wk 3mth YTD 6.0 15.8 86.1 7.5% 232.6 21.1 17.3 14.1 1.1 17.0

Source: Datastream, IBES, MSCI, JPMorgan estimates. Prices and valuations are as of November 20, 2009

Top picks and stocks to avoid Price (LC) Top picks Infosys Technologies ICICI Bank Unitech Larsen & Toubro Stocks to avoid Hindustan Unilever Reliance Power Idea Cellular

Code

Rating

Mkt cap (US$MM)

P/E (x) FY 10E FY11E

Div. yield FY10E (%)

ROE FY10E (%)

2,218 849 86 1,576

INFY.BO ICBK.BO UNTE.BO LART.BO

OW OW OW N

27,166 20,197 4,431 20,208

21 27 15 27

18 NA 13 23

107 32 6 58

124 NA 7 68

1.2 1.4 0.2 0.7

29 8 12 22

265 144 50

HLL.BO RPOL.BO IDEA.BO

UW UW UW

12,414 7,417 3,320

25 55 46

22 43 NA

10 3 1

12 3 (4)

3.0 0.0 0.0

106 4 6

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 10 November 2009. 52

EPS (LC) FY 10E FY11E

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

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

- EMF

- Cons

US$ Spread

Spot

-3M ∆

Economic Forecasts -3M ∆

GDP (YoY)

Risk Appetite

Forecast

+3M ∆

2008

6.1

-0.1

1.2

0.0

BAA

2.9

0.0

na

2009E

6.0

-0.2

5.4

-1.2

EMBI

3.2

-0.7

0.8

2010E

7.5

0.3

1.7

na

Country

na

na

na

Country Relative

na

na

na

Economic Momentum GDP

Foreign Fund Flows (US$ mils)

Q4 09E

Q1 10E

Q2 10E

Q3 10E

-1.0

10.0

7.0

9.6

GDP SAAR

Month

09 YTD Avg

EM Funds*

4,063

5,164

4,870

Asia ex Japan*

1,245

1,566

1,452

India

1,153

1,405

1,310

MSCI India Absolute and Relative to EMF Index 800

Absolute

Relative to MSCI EMF

12-Mo Avg

MSCI Fair value Range (322)

FWD PER

(538)

700 PER

600

400

(783)

(466)

PBR

500

(698)

(389)

DY

(361)

(553)

300

BY/DY

100 0 Jan-03

(416)

BY/EY

200

Dec-03

Nov-04

Oct-05

Sep-06

Aug-07

Jul-08

(378) 150

Jun-09

Currency Outlook (INR/USD) Spot

54

Forecast

48

300

(833) 450

600

750

900

1050

EPS Integer over Time 2009

130

Consensus

52 50

(1015)

2010

120

J.P. Morgan forecast: end Dec 09: 45.0 end Mar 10: 43.5 end Jun 10: 42.8

Consensus

110 100

46

90

44 J.P. Morgan

42

70

40 38 Dec 04

80

Apr 06

Aug 07

Dec 08

Mar 10

60 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 (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Indonesia Opportunity knocking Key country dynamics A resilient economy, benign inflation, easy liquidity and favorable politics have aligned to drive Indonesian equities significantly higher in 2009. We believe that the country is on the cusp of a substantial opportunity to raise its growth trajectory in coming years. The newly-formed presidential delivery unit offers a structure to deliver on high current expectations about infrastructure development and reform, evidence of its success could be a source of further upside. We see domestic cyclical momentum driving earnings in FY10E, and the credit cycle is also showing signs of life. Inflation risks could drive rates mildly higher, but see a case for lower real rates, supported sovereign credit rating upgrades. The major risk is weak execution on growth and governance reforms. Implications of a global recovery The resilience of growth and the stability of the fiscal, and BoP positions through the crisis have raised Indonesia’s economic and political credibility. As growth returns elsewhere, Indonesia’s allure as a pocket of growth, which brought it attention in 2009, may diminish next year. How much have valuations already discounted a recovery In 2010 the emphasis may shift from recovery to growth. Market valuations are over 1sigma higher than long-term valuations, and to some extent, therefore, probably discount future earnings revisions. However, FY10E EPS forecasts have risen 11% over the past six months, but remain 27% below where they were a year back.

Aditya SrinathAC (62-21) 5291-8573 [email protected] PT J.P. Morgan Securities Indonesia

Flagship reports • Currency + Commodity (March 20, 2009) • An Agenda for the Next 5 years (May-09) • Notes of Caution (Sept-09) MSCI Indonesia: Absolute and relative to MSCI Asia Pacific ex-Japan

400 300 200 100 0 97 99 01 03 05 07 09 Absolute Relativ e Source: MSCI, Datastream.

MSCI performance table

Recommendations Our main thematics to play in Indonesia remain—interest rate-sensitive sectors, power sector supply chain/feedstock, and domestic consumption plays. We have Overweight rating on Astra International—as a high-quality rate sensitive and consumption exposure. We also are incrementally positive on banks, with BCA as our main Overweight. We recommend PTBA among coal stocks—a beneficiary from any improved thrust on infrastructure development. Finally, we recommend ANTM, where we think that a strong volume growth profile could be boosted if the company grows from being a preferred partner for mining MNCs seeking avenues to invest in Indonesia. Our main Underweight recommendations are Unilever and BRI.

MSCI Indonesia Weightings in Region MSCI Total Mkt Cap. (US$B) 2009 P/E Ratio (x) 2010 P/E Ratio (x) 2011 P/E Ratio (x) 2010 Yield (%) 2010 ROE (%)

2wk 3mth YTD 5.0 9.5 88.6 1.8% 56.3 21.1 15.0 12.6 3.1 24.3

Source: Datastream, IBES, MSCI, JPMorgan estimates. Prices and valuations are as of November 20, 2009

Top picks and stocks to avoid Price (LC) Top picks Astra International BCA PTBA ANTM Stocks to avoid Unilever Bank Rakyat

Code

Rating

Mkt cap (US$MM)

P/E (x) 09E

10E

10E

Div. yield 10E (%)

ROE 10E (%)

29,800 4,600 14,450 2,300

ASII IJ BBCA IJ PTBA IJ ANTM IJ

OW OW OW OW

12,759 11,995 3,494 2,302

14.2 17.4 10.5 49.1

11.7 12.9 23.6 18.8

2,096 265 1,371 46.9

2,540 356 612 122.3

2.8% 3.0% 2.4% 1.0%

24.9% 29.2% 22.6% 13.6%

10,200 7,200

UNVR IJ BBRI IJ

UW UW

8,166 9,392

29.4 12.5

24.0 10.5

347 577

425 684

350 3.2%

89.8% 28.4%

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.

54

EPS (LC) 09E

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

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

- EMF

- Cons

US$ Spread

Spot

-3M ∆

Economic Forecasts -3M ∆

GDP (YoY)

Risk Appetite

Forecast

+3M ∆

2008

6.1

0.0

1.2

0.0

BAA

2.9

0.0

na

2009E

4.3

0.2

3.7

0.0

EMBI

3.2

-0.7

0.8

2010E

5.3

0.3

-0.5

-0.3

Country

na

na

na

Country Relative

na

na

na

Foreign Fund Flows (US$ mils)

Economic Momentum GDP

Q4 09E

Q1 10E

Q2 10E

Q3 10E

3.5

5.5

6.0

6.0

GDP SAAR

Month

09 YTD Avg

EM Funds*

4,063

5,164

4,870

Asia ex Japan*

1,245

1,566

1,452

113

82

81

Indonesia

MSCI Indonesia Absolute and Relative to EMF Index Absolute

800

Relative to MSCI EMF

12-Mo Avg

MSCI Fair value Range FWD PER

(1341)

(3544)

700 PER

600 500

(2160)

PBR

400

(4961)

(1431)

DY

(3015) (2395)

(5684)

300 200

BY/EY

100

BY/DY

0 Jan-03

Dec-03

Nov-04

Oct-05

Sep-06

Aug-07

Jul-08

(2591) (952) 0

Jun-09

1000

Currency Outlook (IDR/USD) 14,000

Spot

13,000

Forecast

3000

4000

5000

6000

7000

8000

EPS Integer over Time 2009

2010

120 110 100

11,000 Consensus 10,000

90 80

9,000 J.P. Morgan 8,000 Dec 04

2000

130

Consensus

J.P. Morgan forecast: end Dec 09: 9000 end Mar 10: 9000 end Jun 10: 9200

12,000

(6218)

Apr 06

Aug 07

Dec 08

Mar 10

70 60 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 (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Malaysia Looking for deliverance Key country dynamics We expect PM Najib Razak’s administration to pick up pace in awarding many of the much-anticipated large-scale infrastructure projects and focusing on the implementation of earlier-announced policy reform measures in 2010. With global economies recovering, private sector confidence is likely to return, enabling the new policy measures to gain traction. Also, domestic liquidity conditions remain relatively flush with interest rates at an all-time low of 2% for the Overnight Policy Rate and LD ratios still at 78%. Bank Negara continues to mop up M$200B of excess liquidity as at end-September 2009. We expect inflationary conditions to remain benign with our current forecast for 2010 at 0.8%, although we do expect Malaysia to raise interest rates for 2010 by 100bp to 3% beginning 2Q10, in line with the region as the economic momentum gains strength. Implications of a global recovery The improvement in the external sector due to the global recovery will boost near-term growth as the new administration looks to stimulate domestic growth with new liberalization policies design to spur private investment. Public expenditure will gradually be reduced from peak deficit levels of 7.4% in 2009 as the government looks towards the private sector to stimulate economic growth. Confidence in PM Najib’s administration is key as the government has been prone to policy flip flops in the past. How much have valuations already discounted a recovery Current forward P/Es of 16x are between +1std and +2std dev. levels. However, with some scope for further earnings upgrades as the economic recovery flows through, we believe there is still scope for further upside to the market over the next 12 months. Also, foreign investors are underweight on the Malaysian market. In our view, should the government execute on its reform measures, we expect to see foreign investors return, driving P/E multiples to 17-18x, similar to the past few market peaks. Recommendations Incremental foreign portfolio flow will drive up valuations of key liquid stock names, especially those with a positive macro outlook in light of the structural reform expected. Top picks are Public and AMMB on banks, Tenaga for GLCs reform and Genting. Avoid stocks lacking growth or catalyst, are YTL Power (yield plays to underperform) and MISC (lacks near-term catalyst).

Chris Oh, CFAAC (60-3) 2770-4728 [email protected] JPMorgan Securities (Malaysia) Sdn. Bhd. (18146X)

Flagship reports • Looking for Deliverance (11/05/2009) • 2010 Budget (10/23/2009) • Introducing June 2010 KLCI of 1350 (08/20/2009) • 2H09 market outlook (06/10/2009) • 2nd Stimulus Package (03/10/2009) • Shifting Sands Series (02/04/2009, 03/27/2009, 04/09/2009, 04/23/2009, 07/16/2009) MSCI Malaysia: Absolute and relative to MSCI Asia Pacific ex-Japan

120 100 80 60 40 20 97 99 01 03 05 07 09 Absolute Relativ e Source: MSCI, Datastream.

MSCI performance table 2wk 3mth YTD 1.2 8.5 47.0 2.7% 83.8 18.3 15.8 13.1 3.1 12.3

MSCI Malaysia Weightings in Region MSCI Total Mkt Cap. (US$B) 2009 P/E Ratio (x) 2010 P/E Ratio (x) 2011 P/E Ratio (x) 2010 Yield (%) 2010 ROE (%)

Source: Datastream, IBES, MSCI, JPMorgan estimates. Prices and valuations are as of November 20, 2009

Top picks and stocks to avoid Price (LC) Top picks Public Bank 10.9 Tenaga 8.4 Genting 7.15 AMMB 4.7 Stocks to avoid MISC 8.9 YTL Power 2.15

P/E (x)

EPS (LC)

Code

Rating

Mkt cap (US$MM)

09E

10E

09E

10E

Div. yield 10E (%)

ROE 10E (%)

PBKF MK TNB MK GENT MK AMM MK

OW OW OW OW

11257 10655 7745 4142

15.2 15.6 24.9 13.6

12.9 14.3 20.3 11.4

0.72 0.53 0.29 0.32

0.85 0.62 0.35 0.39

3.9 2.8 0.7 1.7

29.5 9.3 9.4 11.0

MISF MK YTLP MK

N N

9680 3755

25.9 14.4

20.2 10.7

0.34 0.15

0.44 0.20

3.9 2.1

5.9 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 (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

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

- EMF

- Cons

US$ Spread

Spot

-3M ∆

Economic Forecasts -3M ∆

GDP (YoY)

Risk Appetite

Forecast

+3M ∆

2008

4.6

-0.5

-0.3

0.0

BAA

2.9

0.0

na

2009E

-2.4

0.6

-3.0

1.4

EMBI

3.2

-0.7

0.8

2010E

5.0

0.6

-0.8

0.8

Country

1.6

-0.2

na

Country Relative

-1.5

0.5

na

Economic Momentum GDP

Foreign Fund Flows (US$ mils)

Q4 09E

Q1 10E

Q2 10E

Q3 10E

4.5

1.6

4.9

4.9

GDP SAAR

Month

09 YTD Avg

EM Funds*

4,063

5,164

4,870

Asia ex Japan*

1,245

1,566

1,452

45

-18

-87

Malaysia

MSCI Malaysia Absolute and Relative to EMF Index 300

Absolute

Relative to MSCI EMF

MSCI Fair value Range (319)

FWD PER

250

PER

200 150

-150 Jan-03

Dec-03

Nov-04

Oct-05

Sep-06

Aug-07

Jul-08

(1115)

(323) 0

Jun-09

300

Currency Outlook (MYR/USD) 4.0

Spot

Forecast

(715)

(196)

BY/DY

-100

(693)

(370)

BY/EY

-50

(650)

(342)

DY

50

(521)

(391)

PBR

100 0

12-Mo Avg

(1301) 600

900

1200

1500

1800

May 09

Aug 09

2100

EPS Integer over Time

Consensus

2009

110

2010

3.9 3.8

100

3.7 3.6

Consensus

3.5 3.4 3.3 3.2 3.1

90 80

J.P. Morgan forecast: end Dec 09: 3.35 end Mar 10: 3.30 end Jun 10: 3.25

J.P. Morgan

70

3.0 2.9 Dec 04

Apr 06

Aug 07

Dec 08

Mar 10

60 Feb 08

May 08

Aug 08

Nov 08

Feb 09

Nov 09

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

57

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Mexico Cyclical Upside Key country dynamics Mexico suffered in 2009 from a cyclically weak economy, driven by the US and H1N1 influenza. Fiscal and rating concerns were also high, as the government implemented a contentious and watered-down 1.0% GDP fiscal adjustment despite the macro weakness. Nevertheless, Mexico’s fiscal revenue/GDP remains low (22% GDP) and poorly structured (1/3 oil). The equity market performed better, helped by index composition (70% defensives) and hence robust earnings (positive 2009, despite GDP plunge).

Ben LaidlerAC (212) 622-5252 [email protected] J.P. Morgan Securities Inc.

For 2010 we expect a 10.5-point swing of Mexico GDP (from -7.0% to +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 supply-side shock, we see a rate hike only in June 2010, and +75bps for the year. Risk/reward is high given strong US linkages and fiscal dynamics. Implications of a global recovery Mexico historical GDP beta to global recovery is over 2.0x, vs overall EM 1.3x. Main driver is the US (destination of 80% exports) and manufacturing. We forecast 4.5% 2010 growth in US manufacturing after -11.4% in 2009e. Oil remains important. US$59 bbl is the budgetary oil forecast, comfortably below our $70 end-2010 forecast and spot closer to $80. The peso has lagged the YTD rally in EM currencies, and there is arguably upside risk.

MSCI Mexico: Absolute and relative to MSCI Asia Pacific ex-Japan

800 700 600 500 400 300 200 100 0 97 99 01 03 05 07 09 Absolute Relativ e Source: MSCI, Datastream.

How much have valuations already discounted a recovery? MSCI Mexico 12m forward earnings fell 27% peak to trough and have rebounded 13%. They remain 20% from their highs. This recovery should continue (recent Q3 earnings +20% oya, with 60% of Mexbol reports beating consensus). The market is trading around 14.6x 2010e earnings, below the 5year average (15.6x). We see room for earnings to surprise on the back of the GDP recovery, as well as US$ gains on an appreciating peso. Recommendations Our portfolio is focused on the 1/3 of the index made up of cyclicals (banks, homebuilders, steel, cement, mining), where we see greater earnings recovery leverage and cheaper asset valuations, rather than on the more defensive (staples and telecoms) 2/3s of the index. Top picks and stocks to avoid EPS (LC)

P/E (x)

Price (LC)

Code

Rating

Mkt cap (US$MM)

09E

10E

09E

10E

Div. yield 10E (%)

ROE 10E (%)

Top picks Ternium Urbi

32.5 26.2

TX URBI*

OW OW

6,515 1,986

26.2 13.3

15.2 10.1

1.2 2.0

2.1 2.6

4.2 0.0

8.4 13.8

Stocks to avoid Telmex Internacional Telmex

15.1 17.7

TII TMX

UW UW

13,561 16,104

22.4 10.7

20.4 12.0

0.7 1.6

0.7 1.5

2.5 4.0

9.7 48.6

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 25 November 2009.

58

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

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

- EMF

- Cons

US$ Spread

Spot

-3M ∆

Economic Forecasts -3M ∆

GDP (YoY)

Risk Appetite

Forecast

+3M ∆

2008

1.3

0.0

-3.6

0.0

BAA

2.9

0.0

na

2009E

-7.0

-0.5

-7.6

0.0

EMBI

3.2

-0.7

0.8

2010E

3.5

-1.5

-2.3

0.7

Country

2.1

-0.6

na

Country Relative

-1.0

0.2

na

Economic Momentum GDP

Foreign Fund Flows (US$ mils)

Q4 09E

Q1 10E

Q2 10E

Q3 10E

7.5

3.7

-0.6

3.3

GDP SAAR

Month

09 YTD Avg

12-Mo Avg

4,063

5,164

4,870

LatAm*

242

758

688

Mexico

98

52

-17

EM Funds*

MSCI Mexico Absolute and Relative to EMF Index Absolute

500

Relative to MSCI EMF

MSCI Fair value Range

350 250

DY

200 100

(30060)

BY/DY Dec-03

Nov-04

Oct-05

Sep-06

Aug-07

Jul-08

0

Jun-09

Spot

Forecast

10000

13.0

20000

30000

40000

50000

60000

EPS Integer over Time 2009

110

Consensus

15.0 14.0

(41868)

(9498)

Currency Outlook (MXN/USD) 16.0

(36774) (27110)

BY/EY

150 50 Jan-03

(15042)

PBR

300

(36263)

(11984)

PER

400

(26417)

(19534)

FWD PER

450

2010

100

J.P. Morgan forecast: end Dec 09: 13.00 end Mar 10: 12.50 end Jun 10: 12.50

Consensus

90

12.0

J.P. Morgan

80

11.0

70 10.0 9.0 Dec 04

Apr 06

Aug 07

Dec 08

Mar 10

60 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 (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Philippines Positioned for a consumption-led upturn Key country dynamics With nearly 80% of the country’s GDP driven by private consumption, economic growth has proven to be resilient through the crisis. The main fuel for domestic consumption is the strength in OFW remittances due to strong demand for Filipino workers abroad, who are increasingly higher-skilled and higher-paid service workers. The sustained double-digit growth in the BPO sector and its multiplier effect on the economy should likewise remain a driver as these are relatively higher-paid employees. Main weaknesses in the Philippine dynamic remain weak foreign direct investments and the government’s lack of fiscal flexibility that has crowded out the private sector and hampered the investment cycle in the country. Implications of a global recovery Positioned for a consumption led upturn: We believe the Philippines economy in 2010 will move to an above-trend and above-consensus growth of 5%oya, driven by a revival in consumption and government spending. Remittances should continue to positively surprise as the job order pipeline remains robust, equivalent to seven months worth of deployment with a bias for service and professional workers. National elections are scheduled in May, where it is estimated that the five presidential candidates alone will spend at least Php25 billion, equivalent to 0.3% of GDP. As domestic confidence recovers, there is also sizable pent-up demand in the economy to boost growth, reflected by the all-time high spread between GNP and GDP. Corporate balance sheets are robust to support expansion plans to capture this consumption upturn. How much have valuations already discounted a recovery Valuations are still attractive: The PSEi now stands near its LT average P/E of 15x. Valuations are still attractive, in our view, with previous rallies after a bear market low having reached a high of +1SD-2SD (18x-22x). Furthermore, we believe consensus estimates remain conservative with plenty of room for upgrades. Following downgrades of as much as -30%, the Street has only upgraded EPS by 6%. Recommendations Our favored sectors are property, banks, and utilities, which have compelling valuations and attractive growth prospects. Our top picks are ALI, MBT, EDC, and MWC. Our top avoid is Meralco.

Kelly Lim-BateAC (632) 878-1188 [email protected] J.P. Morgan Securities Philippines Inc.

Flagship reports • Philippine Strategy: Hitting a macro sweet spot (Sept 24, 2009) • Philippine Trendwatch: 3Q09 Turning the corner (Oct 06, 2009) • Philippine Real Estate: Buy on Dips (Jun 17, 2009) • Metrobank: Upgrade to OW on PPOP/RoE momentum (Nov 5, 2009) • Ayala Corp: More upside (Jul 10, 2009) MSCI Philippines: Absolute and relative to MSCI Asia Pacific ex-Japan

110 90 70 50 30 10 97 99 01 03 05 07 09 Absolute Relativ e Source: MSCI, Datastream.

MSCI performance table MSCI Philippines Weightings in Region MSCI Total Mkt Cap. (US$B) 2009 P/E Ratio (x) 2010 P/E Ratio (x) 2011 P/E Ratio (x) 2010 Yield (%) 2010 ROE (%)

2wk 3mth YTD 5.2 10.0 57.8 0.4% 13.4 17.0 15.4 13.5 4.0 15.5

Source: Datastream, IBES, MSCI, JPMorgan estimates. Prices and valuations are as of November 20, 2009

Top picks and stocks to avoid

Top picks Ayala Land Metrobank Energy Dev. Corp Manila Water Stock to avoid Manila Electric

P/E (x) 09E

10E

EPS (LC) 09E

10E

Div. yield 10E (%)

ROE 10E (%)

3319 1677 1328 700

40.9 16.5 10.9 9.0

40.3 11.2 11.0 8.1

0.29 2.63 0.38 1.80

0.30 3.88 0.38 2.01

0.5 2.3 3.2 3.2

7.2 10.9 24.2 24.2

4883

30.0

18.0

6.90

11.51

2.8

21.6

Price (LC)

Code

Rating

Mkt cap (US$MM)

12 43.5 4.15 16.25

ALI MBT EDC MWC

OW OW OW OW

207

MER

N

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 12 November 2009.

60

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Philippines Scorecard Key Financial Data Summary

Local Interest Rates and Inflation Trend

EPS Growth

P/E

ROE

Yield

Spot

-3M ∆

2007

8.3

17.9

14.1

4.0

3 Month

3.8

-0.1

+3M ∆ 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

- EMF

- Cons

US$ Spread

Spot

-3M ∆

Economic Forecasts -3M ∆

GDP (YoY)

Risk Appetite

Forecast

+3M ∆

2008

3.8

-0.8

-1.1

0.0

BAA

2.9

0.0

na

2009E

1.5

0.1

0.9

-0.6

EMBI

3.2

-0.7

0.8

2010E

5.0

0.0

-0.8

0.9

Country

2.4

-0.6

na

Country Relative

-0.7

0.2

na

Economic Momentum GDP

Foreign Fund Flows (US$ mils)

Q4 09E

Q1 10E

Q2 10E

Q3 10E

4.0

5.0

5.0

5.0

GDP SAAR

Month

09 YTD Avg

EM Funds*

4,063

5,164

4,870

Asia ex Japan*

1,245

1,566

1,452

98

9

-19

Philippines

MSCI Philippines Absolute and Relative to EMF Index Absolute

500

Relative to MSCI EMF

12-Mo Avg

MSCI Fair value Range

400

PER

300

PBR

(503)

(282)

FWD PER

(435)

(901)

(308)

(761) (741)

DY

200

(525)

BY/EY

(1436)

100 (896)

BY/DY 0 Jan-03

Dec-03

Nov-04

Oct-05

Sep-06

Aug-07

Jul-08

0

Jun-09

500

Currency Outlook (PHP/USD) 58

Spot

Forecast

1000

1500

2000

2500

3000

EPS Integer over Time 110

Consensus

2009

2010

56 54

100

52 50 Consensus

48 46 44 42 40 38 36 Dec 04

J.P. Morgan

J.P. Morgan forecast: end Dec 09: 46.0 end Mar 10: 45.5 end Jun 10: 45.5

Apr 06

90 80 70

Aug 07

Dec 08

Mar 10

60 Feb 08

May 08

Aug 08

Nov 08

Feb 09

May 09

Aug 09

Nov 09

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

61

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Russia Leveraged play on cyclical recovery Key country dynamics Russia has been a top performer among GEMs since the February trough (MSCI RU +150%), but it is still a laggard from the start of the downturn in July 2008. The country has been hard hit by one of the worst GDP contractions (2009 JPMe -8.5%), with JPMe earnings falling -30% y/y. Surging risks resulted, in addition to earnings declines, in a nasty multiples contraction. Conversely, the recent rerating reflects a better outlook.

Alex Kantarovich AC (7-495) 967-3172 [email protected] J.P. Morgan Bank International LLC

Flagship reports • Russia-2010: well-positioned among GEMs (11/06/2009) • Real winners of $100 oil (10/14/2009)

Implications of a global recovery The oil price, Russia’s key external variable, has more than doubled since January; the main economic aggregates have picked up and the ruble has gained over 20% from its low. The MSCI Russia 12M forward P/E has risen to 9.5x from 3x ytd. Forward EPS bottomed out in April, rising c.40% to date. With 2010 JPMe real GDP growth at 5.0%, we expect a recovery in earnings and a leaner cost base is a margin booster, in addition to rising revenue. Banks should be able to cut provisioning expense, the main bottom line spoiler, by over 50-75%, in our view. As the CBR reduced the benchmark rate by 400bp this year and with liquidity improving, the leveraged segments - like materials, telecoms and developers - should see big relief from lower interest expenses. We estimate 2010 aggregate earnings should rise 41% and the momentum should extend into 2011. The extensive 2009-2011 earnings swings reflect the dependence on cyclical commodities.

• Index targets upped, earnings to replace COE as main driver (07/29/2009) • Earnings at trough, risk premiums contracting, international liquidity wanted (04/14/2009) MSCI Russia: Absolute and relative to MSCI Asia Pacific ex-Japan

500 400 300 200 100

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

0 97 99 01 03 05 07 09 Absolute Relativ e Source: MSCI, Datastream.

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

Code

Rating

Mkt cap (US$MM)

P/E (x) 09E

EPS ($) 09E

10E

Div. yield 10E (%)

ROE 10E (%)

6.30 2.50

GAZP RU SBER RU

OW OW

144,366 55,147

6.96 103.8

5.76 17.2

0.90 0.02

1.09 0.15

0.8% 0.9%

12.3% 12.6%

8.80

CHMF RU

UW

8,868

n/a

15.9

-0.40

0.55

0.7%

6.4%

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of cob 23 November 2009.

62

10E

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

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

- EMF

- Cons

US$ Spread

Spot

-3M ∆

Economic Forecasts -3M ∆

GDP (YoY)

Risk Appetite

Forecast

+3M ∆

2008

5.6

0.0

0.7

0.0

BAA

2.9

0.0

na

2009E

-8.5

0.0

-9.1

-0.8

EMBI

3.2

-0.7

0.8

2010E

5.0

0.0

-0.8

2.0

Country

2.5

-1.4

na

Country Relative

-0.7

-0.7

na

Economic Momentum GDP

Foreign Fund Flows (US$ mils)

Q4 09E

Q1 10E

Q2 10E

Q3 10E

6.5

4.5

4.0

4.0

GDP SAAR

Month

09 YTD Avg

12-Mo Avg

EM Funds*

4,063

5,164

4,870

EM Europe*

-157

171

102

Russia

187

173

-81

MSCI Russia Absolute and Relative to EMF Index Absolute

600

Relative to MSCI EMF

MSCI Fair value Range FWD PER

500

(447)

PER

400

(345)

PBR

300

(1378)

(508)

(1130)

(441)

DY

200

(932)

(1677) Not meaningful

BY/EY

100

Not meaningful

BY/DY 0 Jan-03

Dec-03

Nov-04

Oct-05

Sep-06

Aug-07

Jul-08

0

Jun-09

500

Currency Outlook (RUB/USD) 43

Spot

39

J.P. Morgan forecast: end Dec 09: 28.16 end Mar 10: 28.98 end Jun 10: 29.30

35

Forecast

1500

2000

2500

EPS Integer over Time 2009

140

Consensus

2010

120 100 Consensus

80

31

60

27

23 Dec 04

1000

J.P. Morgan

Apr 06

Aug 07

Dec 08

Mar 10

40 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 (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

South Africa Catch-up and carry trade in 2010 Key country dynamics We forecast a rebound in SA real GDP growth to 3% in 2010 from -2% in 2009, driven by inventory restocking and a recovery in mining & manufacturing production. While SA’s earnings recovery has lagged and 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%). Implications of a global recovery The strongest beneficiary of the global recovery in SA is the high beta rand exchange rate, which we expect to remain strong in 1H10. The rand has been one of the best performing currencies in 2009 supported by the carry trade, high commodity prices and healthy risk appetite and we expect this to persist in 1H10 as the dollar is forecast to remain weak. Later in 2010 as the dollar 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 see a stronger rebound in Resources earnings (+41% versus c20% for Financials & Industrials) on some rand weakness. This suggests a tilt to Resources in 2H10. In 1H10, however, domestic cyclical stocks should continue to be supported by an extended period of flat short rates. How much have valuations already discounted a recovery SA’s valuations are undemanding; forward P/E of 11.9 versus 13 for MSCI 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 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 expect some rerating catch-up in 2010 as SA’s economic recovery gathers momentum, having lagged the recovery in the rest of EM. Recommendations 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.

Deanne GordonAC (+27) 21 712 0875 [email protected] J.P. Morgan Equities Ltd

Flagship reports • South African Year Ahead: Team SA – stronger earnings kick in 2010 (26/11/2009) • Investment in South Africa: Cyclical Recovery and rerating catch-up (01/10/2009) • Fund Managers’ Companion: Continue to favour cyclicals (07/08/2009)

MSCI South Africa: Absolute and relative to MSCI Asia Pacific ex-Japan

400 300 200 100 0 97 99 01 03 05 07 09 Absolute Relativ e Source: MSCI, Datastream.

Top picks and stocks to avoid Price (ZAR) Top picks Anglo Plat ABSA Northam JD Group Naspers

70500 12600 4100 4370 28200

Code AMS SJ ASA SJ NHM SJ JDG SJ NPN SJ

Rating OW OW OW OW OW

Mkt cap (US$MM) 22067 11617 1938 1034 15002

P/E (x) 09E

10E

66.5 11.0 22.4 37.5 23.9

31.2 8.2 31.3 7.3 19.2

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of cob 23 November 2009.

64

EPS (TKY) 09E 1060.0 1216.5 183.0 116.5 1178.8

10E

Div. yield 10E (%)

ROE 10E (%)

2260.0 1581.4 131.0 597.1 1469.1

NM 5.5% 1.5% 0.1 NM

14.5% 18.4% 5.6% 18.8% 12.0%

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

South Africa Scorecard Key Financial Data Summary

Local Interest Rates and Inflation Trend

EPS Growth

P/E

ROE

Yield

Spot

-3M ∆

+3M ∆

2007

21.5

14.0

18.3

3.6

3 Month

7.0

0.0

na

2008E

8.3

12.9

17.6

3.5

Long Bond

9.0

1.6

na

2009E

-13.4

14.9

14.9

2.8

Inflation

6.1

-0.6

0.0

2010E

28.7

11.6

17.4

3.4

Real 3 Month

0.9

0.6

na

- EMF

- Cons

US$ Spread

Spot

-3M ∆

Economic Forecasts -3M ∆

GDP (YoY)

Risk Appetite

Forecast

+3M ∆

2008

3.1

0.0

-1.8

0.0

BAA

2.9

0.0

na

2009E

-2.0

0.0

-2.6

0.0

EMBI

3.2

-0.7

0.8

2010E

3.0

0.5

-2.8

0.7

Country

1.7

-0.7

na

Country Relative

-1.5

0.1

na

Economic Momentum GDP

Foreign Fund Flows (US$ mils)

Q4 09E

Q1 10E

Q2 10E

Q3 10E

3.4

4.4

3.8

3.6

GDP SAAR

Month

09 YTD Avg

12-Mo Avg

EM Funds*

4,063

5,164

4,870

EM Europe*

-157

171

102

South Africa

298

789

710

MSCI Fair value Range

MSCI South Africa Absolute and Relative to EMF Index 400

Absolute

Relative to MSCI EMF

FWD PER

350 300 250 200 150

(518)

PER

(546)

PBR

(560)

DY

(725) (727) (765)

(520)

(706)

100 0 -50 Jan-03

(546)

BY/EY

50

(508)

BY/DY Dec-03

Nov-04

Oct-05

Sep-06

Aug-07

Jul-08

Jun-09

300

Currency Outlook (ZAR/USD) 15.0

13.0

11.0

Spot

Forecast

(1110) (1098) 600

900

1200

1500

1800

EPS Integer over Time Consensus

2009

135

2010

125

J.P. Morgan forecast: end Dec 09: 7.30 end Mar 10: 7.80 end Jun 10: 8.00

115 105 Consensus

9.0

95 85

7.0

5.0 Dec 04

J.P. Morgan

Apr 06

Aug 07

Dec 08

Mar 10

75 65 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 (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

South Korea Won to be a big swing factor in 2010 Key country dynamics Three key dynamics for the Korea market in 2010 are expected to be: (1) Won’s movement; (2) an interest rate hike; and (3) regional election. First, the market’s concern that Korean exporters would be sizably hampered by a strong Won in 2010 seems overdone, in our view. Market consensus for Won/US$ by end-10 has fallen near to 1,000 vs. J.P. Morgan’s forecast of 1,150. We remain bullish on Korean auto makers in particular, expecting strong sales volume growth would outweigh the adverse impact of FX move. Second, monetary policy normalization is expected to begin in 1Q10, which is potential negative for the Korean consumer segment due to the household sector’s rising debt service burden. However, the funding cost of corporates with lower credit rating is not likely to rise significantly, as there is further room for credit spread contraction with credit spread of BBB-rated corporates still remaining 400bp higher than the pre-crisis level. Last, upcoming regional election in June 2010 is going to be the last nation-wide election before the presidential election in 2012, meaning the current ruling party is likely to put every effort to win the election. Potentially, the current government might extend some pro-growth policies and try to keep housing prices stable. If property market prices move up to a worrisome level, however, it is a risk for a more aggressive monetary tightening. Implications of a global recovery Korean economic indicators have surprised the market on the upside until recently with further acceleration of 3Q09 real GDP growth. However, we expect Korea’s economic growth to track relatively moderate and stable contour in 2010. The market focus now seems to be moving to liquidity flows. Korean equity funds invested in domestic market have been showing 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 to equity funds is likely to be the key to how high KOSPI can reach from the current level. How much have valuations already discounted a recovery J.P. Morgan considers the current market has largely reflected the economic recovery story and prices in some moderation down the road, expecting relatively moderate upside of KOSPI. Our KOSPI target is 1,850 by the end of 2010, based on our price target for companies under our coverage universe and a forward P/E multiple of 11.8x. Recommendations We remain bullish on export names and the financial sector for 2010, keeping Hyundai Motors and Shinhan Financial Group on our top picks list, while we prefer low beta stocks in the consumer universe such as Amorepacific.

Scott Seo AC (822) 758-5759 [email protected] J.P. Morgan Securities (Far East) Ltd, Seoul Branch

Flagship reports • J.P. Morgan's Heart & Seoul - KRW fears likely to be short-lived (Feb/25/2009) • J.P. Morgan's Heart & Seoul - 2Q09 earnings preview (July/10/2009) • J.P. Morgan's Heart & Seoul - 3Q09 earnings preview (Oct/13/2009) MSCI South Korea: Absolute and relative to MSCI Asia Pacific ex-Japan

500 400 300 200 100 0 97 99 01 03 05 07 09 Absolute

Relativ e

Source: MSCI, Datastream.

MSCI performance table MSCI South Korea Weightings in Region MSCI Total Mkt Cap. (US$B) 2009 P/E Ratio (x) 2010 P/E Ratio (x) 2011 P/E Ratio (x) 2010 Yield (%) 2010 ROE (%)

2wk 3mth YTD 3.7 4.5 50.8 12.8% 398.3 14.3 11.7 9.7 1.2 12.0

Source: Datastream, IBES, MSCI, JPMorgan estimates. Prices and valuations are as of November 20, 2009

Top picks and stocks to avoid Price (LC) Top picks Hyundai Motor Samsung SDI Shinhan FG Amorepacific SK Energy Stock to avoid S-Oil Corp

Code

Rating

Mkt cap (US$MM)

P/E (x) 09E

10E

EPS (LC) 09E

10E

Div. yield 10E (%)

ROE 10E (%)

104,000 147,000 45,750 845,000 111,500

005380 KS 006400 KS 055550 KS 090430 KS 096770 KS

OW OW OW OW OW

19,419 5,658 18,410 4,123 8,700

9.6 22.2 14.7 24.2 9.7

9.1 16.8 10.5 22.6 7.9

10,798 6,627 3,122 34,940 11,357

11,486 8,758 4,365 37,312 13,955

0.96 1.30 1.97 0.83 2.08

14.2 7.3 11.8 17.2 15.0

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 (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

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

- EMF

- Cons

US$ Spread

Spot

-3M ∆

Economic Forecasts -3M ∆

GDP (YoY)

Risk Appetite

Forecast

+3M ∆

2008

2.2

-0.3

-2.7

0.0

BAA

2.9

0.0

na

2009E

0.2

1.0

-0.4

1.8

EMBI

3.2

-0.7

0.8

2010E

4.7

0.7

-1.1

1.0

Country

na

na

na

Country Relative

na

na

na

Economic Momentum GDP

Foreign Fund Flows (US$ mils)

Q4 09E

Q1 10E

Q2 10E

Q3 10E

4.0

2.0

3.5

3.5

GDP SAAR

Month

09 YTD Avg

EM Funds*

4,063

5,164

4,870

Asia ex Japan*

1,245

1,566

1,452

Korea

1,404

2,066

1,947

MSCI Korea Absolute and Relative to EMF Index 450

Absolute

Relative to MSCI EMF

12-Mo Avg

MSCI Fair value Range (379)

(184)

FWD PER

400 300 200

50 0 Jan-03

(143)

BY/EY

100

Nov-04

Oct-05

Sep-06

Aug-07

Jul-08

0

Jun-09

300

Currency Outlook (KRW/USD) 1,650

Spot

Forecast

1,350

600

900

1200

EPS Integer over Time Consensus

1,550 1,450

(684)

(176)

BY/DY Dec-03

(370)

(221)

DY

150

(495)

(282)

PBR

250

(670)

(319)

PER

350

2009

120

2010

110 J.P. Morgan forecast: end Dec 09: 1130 end Mar 10: 1130 end Jun 10: 1110

100 Consensus

90

1,250

80 1,150 1,050

J.P. Morgan

60

950 850 Dec 04

70

Apr 06

Aug 07

Dec 08

Mar 10

50 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 (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Taiwan Year of sustainable growth Key country dynamics Potential positive catalysts for Taiwan include: (1) broader-based growth in global economy; (2) continued earnings upgrades; (3) recovered capex and capex cycle; (4) cross-strait development and achievement; and (5) consensus underweight on Taiwan by EM PMs. Meanwhile, potential negative risks include: (1) the end of monetary easing; (2) strong currency; and (3) delay in free trade agreement negotiations. In 2009/10, Taiwan experienced a structural change driven by the pro-growth China policy, fiscal stimulus and tax reform. Implications of a global recovery Taiwan as an export-driven economy is highly leveraged to the global 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 history. Historical experience suggests that there is potential 10-15% upside to our recently upgraded 2010 GDP growth estimate for Taiwan of 5.8%. 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 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 view. How much have valuations already discounted a recovery Consensus earnings estimates have been consistently revising up since March this year. MSCI-Taiwan forward P/E is now at around 21x, versus the historical range of 12x-40x post tech bubble. While today’s valuation is around the average of the historical range, we believe earnings upgrades will be a powerful driver for the equity market’s performance and stock re-rating in 2010. We recommend investors focus on sectors or stocks that will deliver above-peer or sector average growth in 2010. Recommendations Taiwan remains an Overweight market in our regional portfolio. By sector, we are Overweight on tech and financial with funding sources from telecom and consumer. Within tech, we prefer branded PC over ODM, and white-box handset over smartphone. In financial, we prefer brokers and banks than insurance. Our top picks are UMC, Acer, Hon Hai, Fubon and Nan Ya Plastics, while we would avoid Quanta, HTC and Taishin FHC. Our Dec-10 index target is 8800, based on the analysis of the historical trend P/E and 2010 forward earnings.

Nick LaiAC (886-2) 2725-9864 [email protected] J.P. Morgan Securities (Taiwan) Limited.

Flagship reports • Upgrade Taiwan to OW (03/30/2009) • Another step forward on China policy (04/15/2009) • Upgrade index target to 8,000 (04/28/2009) • Circle of life: from recovery to growth (09/01/2009) • The weight on a strong NT$ (10/12/2009) • Seeking for growth in 2010 (10/23/2009) MSCI Taiwan: Absolute and relative to MSCI Asia Pacific ex-Japan

140 110 80 50 20 97 99 01 03 05 07 09 Absolute Relativ e Source: MSCI, Datastream.

MSCI performance table MSCI Taiwan Weightings in Region MSCI Total Mkt Cap. (US$B) 2009 P/E Ratio (x) 2010 P/E Ratio (x) 2011 P/E Ratio (x) 2010 Yield (%) 2010 ROE (%)

2wk 3mth YTD 2.5 13.1 60.4 11.1% 344.3 30.6 19.3 13.4 3.3 10.0

Source: Datastream, IBES, MSCI, JPMorgan estimates. Prices and valuations are as of November 20, 2009

Top picks and stocks to avoid

Top picks UMC Acer Hon Hai Fubon FHC Nan Ya Plastics Stocks to avoid Quanta HTC Taishin FHC

P/E (x) 09E

10E

EPS (LC) 09E

6,184 6,419 34,788 9,673 12,833

69.3 17.5 16.4 14.7 32.3

15.4 12.0 13.0 11.6 22.1

7,497 8,314 2,716

10.8 11.0 7.6

10.3 13.6 17.8

Price (LC)

Code

Rating

Mkt cap (US$MM)

15.5 77.8 132.0 38.8 53.2

2303 TT 2353 TT 2317 TT 2881 TT 1303 TT

OW OW OW OW OW

65.5 340.0 12.7

2382 TT 2498 TT 2887 TT

UW UW UW

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009. 68

10E

Div. yield 10E (%)

ROE 10E (%)

0.22 4.44 8.05 2.63 1.65

1.01 6.48 10.12 3.33 2.40

0.0 3.9 1.9 5.2 2.9

6.0 17.6 18.2 14.0 8.2

6.05 31.01 1.66

6.37 25.06 0.71

4.9 5.9 5.5

20.6 27.6 6.5

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

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

- EMF

- Cons

US$ Spread

Spot

-3M ∆

Economic Forecasts -3M ∆

GDP (YoY)

Risk Appetite

Forecast

+3M ∆

2008

0.1

0.0

-4.8

0.0

BAA

2.9

0.0

na

2009E

-3.8

0.0

-4.4

0.6

EMBI

3.2

-0.7

0.8

2010E

5.8

0.4

0.0

1.3

Country

na

na

na

Country Relative

na

na

na

Economic Momentum GDP

Foreign Fund Flows (US$ mils)

Q4 09E

Q1 10E

Q2 10E

Q3 10E

4.2

3.8

4.0

3.8

GDP SAAR

Month

09 YTD Avg

EM Funds*

4,063

5,164

4,870

Asia ex Japan*

1,245

1,566

1,452

Taiwan

1,668

1,059

1,012

MSCI Taiwan Absolute and Relative (vs EMF) Index 250

Absolute

Relative to MSCI EMF

MSCI Fair value Range (120) FWD PER

200

12-Mo Avg

(252)

PER(140)

150 100

(311) (421)

PBR (225)

50 0

DY (267)

(1152)

-50 BY/EY (200)

-100 -150 -200 Jan-03

(427)

BY/DY Dec-03

Nov-04

Oct-05

Sep-06

Aug-07

Jul-08

Jun-09

(1422)

0

500

Currency Outlook (TWD/USD) 38

Spot

Forecast

35 34

2000

2500

3000

3500

2009

120

2010

100

J.P. Morgan forecast: end Dec 09: 31.0 end Mar 10: 30.5 end Jun 10: 30.5

80 60 Consensus

33

40

32 31

20 J.P. Morgan

30 29 Dec 04

1500

EPS Integer over Time

Consensus

37 36

1000

Apr 06

Aug 07

Dec 08

Mar 10

0 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 (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Thailand Strong outlook with implementation risk Key country dynamics Key positives are: (1) a multi-year pro-cyclical fiscal stimulus that will augment external demand; (2) sustained high excess liquidity that supports risk assets; and (3) potential for earnings upgrades, particularly in banks/property. Key negatives are: (1) propensity for renewed political turbulence; (2) potential weak implementation on fiscal stimulus; and (3) unpredictable policy/governance environment. Implications of a global recovery The primary impact of the downturn on Thailand has been operational, rather than on the balance sheet. With exports accounting for 70% of GDP, the impact of the sharp fall in external demand drove what will likely be a -3.1% GDP contraction in 2009. A moderate total external debt of US$65 billion or 25% of GDP allowed balance sheets to remain solvent. However, the impact of lower government revenue and increased stimulus expenditure has raised public debt/GDP to 45% from 37% pre-crisis. Thailand is also very leveraged into an external demand recovery, with strong second-order effects on private consumption likely as employment ramps up. Thailand is also distinguished by a policy initiative to deploy a large (US$43 billion) procyclical fiscal stimulus from 2010-12. The front-end of the stimulus is laborand rural-intensive and is targeted to deliver a large multiplier effect that should allow Thailand to outperform regional peers in 2010. How much have valuations already discounted a recovery A modest recovery in 2010 has been discounted by the SET’s 60% rise YTD. However, expectations are low, in our view, and likely to see further upgrades in 2010. We note that although 2010 earnings forecasts fell 32% from the peak to trough, upgrades have been just 5%. SET and MSCI Thai valuations have gone from bargain basement levels in early Mar-09 to above LT averages and back again, with the 12-month forward P/E for MSCI Thai now at 11.5x (post-2000 mean of 10.9x). We anticipate earnings revisions combined with multiple expansion back to the levels of 2003 (12x or +0.5 standard deviation above LT average P/E) could underpin the upside in the SET well above 800 in 2010. Post-previous downturns in 2003 and 2006, P/E ratings peaked at 12x and 15x, respectively.

Sriyan PieterszAC (662) 684-2670 [email protected] JPMorgan Securities (Thailand) Limited

Flagship reports • Thai banks: Increase in earnings estimates (October 12, 2009) • Thai Investor Tour (September 23, 2009) • Back to 2003? (August 20, 2009) • Revisiting valuations (June 8, 2009) MSCI Thailand: Absolute and relative to MSCI Asia Pacific ex-Japan

140 110 80 50 20 97 99 01 03 05 07 09 Absolute Relativ e Source: MSCI, Datastream.

MSCI performance table MSCI Thailand Weightings in Region MSCI Total Mkt Cap. (US$B) 2009 P/E Ratio (x) 2010 P/E Ratio (x) 2011 P/E Ratio (x) 2010 Yield (%) 2010 ROE (%)

2wk 3mth YTD -0.9 4.2 53.0 1.2% 37.5 12.5 11.3 9.4 3.8 14.4

Source: Datastream, IBES, MSCI, JPMorgan estimates. Prices and valuations are as of November 20, 2009

Top picks and stocks to avoid Price (Bt) Top picks Siam Commercial Bank Land & Houses (F) C P All PTT Thai Oil Stocks to avoid TMB Bank

Code

Rating

Mkt cap (US$MM)

P/E (x) 09E

10E

EPS (Bt) 09E 10E

ROE 10E (%)

78.75 6.30 19.10 234.00 40.75

SCB.BK LHf.BK CPALL.BK PTT.BK TOP.BK

OW OW OW OW OW

8,002 1,892 2,571 19,852 2,490

12.6 17.7 20.9 11.3 6.1

10.7 17.2 17.4 9.2 5.8

6.3 0.4 0.9 20.7 6.7

7.4 0.4 1.1 25.5 7.1

2.8 5.8 4.3 3.6 7.4

17.0 14.1 31.9 16.0 19.8

1.12

TMB.BK

N

1,394

23.1

14.7

0.0

0.1

0.0

6.8

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.

70

Div. yield 10E (%)

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

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

- EMF

- Cons

US$ Spread

Spot

-3M ∆

Economic Forecasts -3M ∆

GDP (YoY)

Risk Appetite

Forecast

+3M ∆

2008

2.6

-0.8

-2.3

0.0

BAA

2.9

0.0

na

2009E

-3.1

0.0

-3.7

0.7

EMBI

3.2

-0.7

0.8

2010E

6.1

0.0

0.3

3.1

Country

0.5

0.0

na

Country Relative

-2.6

0.7

na

Economic Momentum GDP

Foreign Fund Flows (US$ mils)

Q4 09E

Q1 10E

Q2 10E

Q3 10E

5.3

4.9

5.7

7.0

GDP SAAR

Month

09 YTD Avg

12-Mo Avg

EM Funds*

4,063

5,164

4,870

Asia ex Japan*

1,245

1,566

1,452

Thailand

-254

129

90

MSCI Thailand Absolute and Relative to EMF Index 400

Absolute

Relative to MSCI EMF

MSCI Fair value Range FWD PER (115)

(381)

350 300 250 200

PER

(231)

PBR

(218)

100

BY/EY (127)

50

BY/DY (127)

0 Jan-03

Dec-03

Nov-04

Oct-05

Sep-06

Aug-07

Jul-08

0

Jun-09

Spot

Forecast

(379) (840) (914) 300

Currency Outlook (THB/USD) 43

(466)

(184)

DY

150

(500)

600

900

1200

1500

EPS Integer over Time 120

Consensus

41

2009

2010

110

39

100

37 Consensus

35 33 31 29

80

J.P. Morgan forecast: end Dec 09: 33.00 end Mar 10: 32.50 end Jun 10: 32.00

27 Dec 04

Apr 06

90

J.P. Morgan

Aug 07

Dec 08

Mar 10

70 60 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 (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Turkey Inflection point in 2010 Key country dynamics J.P. Morgan forecast a GDP recovery in 2010 to 5% versus the 5.3% contraction in 2009. The conditions and timing of the IMF agreement outlook will influence the economic outlook. We expect the IMF three-year stand by 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, limiting the risk of inflation.

Adrian MowatAC (852) 2800-8599 [email protected] J.P. Morgan Securities (Asia Pacific) Limited

MSCI Turkey: Absolute and relative to MSCI EMEA

4000

Implications of a global recovery Turkey’s current account deficit was less than forecast in 2009 due to modest import growth combined with resilient exports, notably ex EU. Turkish exporters will benefit from a recovery in European and middle-east demand 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 CAD about $500 million. For the 2010 outlook, our economist assumes a 13% increase in energy prices over the 2009 average.

3000 2000 1000 0 97 99 01 03 05 07 09 Absolute Relativ e

How much have valuations already discounted a recovery 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 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 EM financials YTD and have marginally outperformed by 13% since midMarch. Turkey valuations discount a recovery in line with the EM benchmark

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

MSCI performance table 2wk 3mth YTD -4.5 -5.6 58.9 1.3% 40.8 9.7 8.8 7.4 3.5 17.3

MSCI Turkey Weightings in Region MSCI Total Mkt Cap. (US$B) 2009 P/E Ratio (x) 2010 P/E Ratio (x) 2011 P/E Ratio (x) 2010 Yield (%) 2010 ROE (%)

Recommendations We are neutral Turkey recognizing the importance of the agreement with the IMF next year. We forecast a moderation in financials EPS growth from 3050% growth in 2009 to 10-20% in 2010. We forecast 2011 EPS growth to accelerate towards 20-30%; which in our view will get gradually priced in 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.

Source: Datastream, IBES, MSCI. Prices and valuations are as of November 20, 2009

Top picks and stocks to avoid Price (LC) Top picks Asya Vakifbank

3.1 3.2

Code ASYAB TI VAKBN TI

Rating OW OW

Mkt cap (US$MM) 1845.5 5428

P/E (x) 09E 10 7.5

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 20 November 2009.

72

10E 6.8 6.5

EPS (LC) 09E 0.3 0.4

10E

Div. yield 10E (%)

0.5 0.5

4.0% 5.5%

ROE 10E (%) 22.1% 17.8%

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Turkey Scorecard Key Financial Data Summary

Local Interest Rates and Inflation Trend

EPS Growth

P/E

ROE

Yield

Spot

-3M ∆

2007

56.9

9.2

18.5

4.7

3 Month

7.1

-1.3

+3M ∆ 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

- EMF

- Cons

US$ Spread

Spot

-3M ∆

Economic Forecasts -3M ∆

GDP (YoY)

Risk Appetite

Forecast

+3M ∆

2008

0.9

-0.8

-4.0

0.0

BAA

2.9

0.0

na

2009E

-5.3

-0.6

-5.9

0.5

EMBI

3.2

-0.7

0.8

2010E

5.0

2.0

-0.8

1.5

Country

2.5

-0.6

na

Country Relative

-0.6

0.2

na

Economic Momentum GDP

Foreign Fund Flows (US$ mils)

Q4 09E

Q1 10E

Q2 10E

Q3 10E

4.5

0.0

3.6

8.2

GDP SAAR

Month

09 YTD Avg

12-Mo Avg

EM Funds*

4,063

5,164

4,870

EM Europe*

-157

171

102

21

-1

-33

Turkey

MSCI Turkey Absolute and Relative to EMF Index 800

Absolute

Relative to MSCI EMF

MSCI Fair value Range FWD PER

(376414)

(850646)

PER

(397670)

700 600 500

(1349945)

(464556)

PBR

(1340990)

400 DY

300 200

(1194998)

BY/DY Dec-03

Nov-04

Oct-05

Sep-06

Aug-07

Jul-08

Jun-09

0

500000

Currency Outlook (TRL/USD) 2.20

Spot

Forecast

1.90 1.80

1500000

2000000

2010

110 100 90

1.70 1.60

2009

120

Consensus

J.P. Morgan forecast: end Dec 09: 1.40 end Mar 10: 1.45 end Jun 10: 1.45

2.00

1000000

EPS Integer over Time

2.10

Consensus

1.50

80 70

1.40 1.30 J.P. Morgan

1.20 1.10 Dec 04

(1075084) (648389)

BY/EY

100 0 Jan-03

(348262)

Apr 06

Aug 07

Dec 08

Mar 10

60 50 Feb 08

May 08

Aug 08

Nov 08

Feb 09

May 09

Aug 09

Nov 09

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

73

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

MENA Geared play into a global economic recovery Key country dynamics The economic backdrop for the MENA region is relatively resilient. Benefiting from several years of high budget surpluses and the ~70% recovery in the oil price since its lows in Feb-09, we expect the Gulf countries to continue their growth path, mainly driven by sizeable infrastructure projects (e.g. KSA, Qatar, UAE) budgeted at an estimated oil price of around $40/bbl (vs JPME $69). Historical market valuations and foreign ownership remain relatively low compared with other EMs. We believe the reaction of the global equity markets to the recent Dubai World restructuring announcement has been overdone and feel going forward there is an increasing need for differentiation between Dubai and the other MENA markets. Dubai accounts for 7% of the market weight of the GCC200 index. Implications of a global recovery In our view the MENA region is a geared play into a global economic recovery, mainly due to its natural resource wealth (e.g. ~2/3 of world oil reserves and ~45% of world gas reserves) supporting sovereign flows and regional investments. In the U.A.E., we believe the government’s intention is to limit the restructuring to Dubai World (incl. property developer Nakheel) and federal support is likely to be more selective going forward. We see the USD5bn in bonds recently taken up by two Abu Dhabi banks for the DFSF 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. How much have valuations already discounted a recovery? With regional issues being addressed and worked out (e.g. restructuring of Dubai World, Saad/Algosaibi debts), we believe the lagging performance of regional equity markets is likely to catch up with the recent strong EM performance. While global risk appetite for equities continues to increase, the GCC200 index is still around 50% below its high in Jan-08, whereas the MSCI EM is only around 25% below its high in Nov-07.

Christian KernAC (971-4) 428 1789 [email protected] JPMorgan Chase Bank, N.A., Dubai Branch

Flagship reports • MENA Telecom Sector - Initiating coverage on GCC telecoms (Oct 8, 2009) • MENA Property Sector - Initiating coverage on UAE property (Aug 10, 2009) • MENA Financial Sector - Initiating coverage on UAE banks (Jul 1, 2009)

Figure 1: GCC200 vs EM 220 200 180 160 140 120 100 80 Mar-09

Apr-09

May-09

Jun-09

Jul-09 MXEF Index

Aug-09

Sep-09

Oct-09

Nov-09

BGCC200 Index

Source: Bloomberg

Table 1: Market Weights of BGCC200 Saudi Arabia Qatar Kuwait Abu Dhabi Dubai Oman Bahrain

52% 14% 12% 11% 7% 2% 2%

Source: Bloomberg and J.P. Morgan.

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 Price (LC) Top picks Aldar FGB Qtel

5.46 18.75 150.90

Code

Rating

ALDAR UH FGB UH Qtel QD

OW OW OW

Mkt cap (US$MM) 3,835 7,025 6,093

P/E (x) 09E

10E

7.98 8.59 5.75

6.42 7.81 5.83

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of cob 23 November 2009.

74

EPS (LC) 09E 0.68 2.18 20.39

10E

Div. yield 10E (%)

ROE 10E (%)

0.85 2.40 20.42

0.0% 1.9% 7.3%

11.0% 17.0% 11.1%

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

MENA Equity Research Extended stock coverage into MENA region Over the past few months, we have built our Dubai-based equity research team and have extended stock coverage into the MENA region. With financials, real estate and telecoms, we cover the three main sectors in the MENA region. This already includes more than a dozen key stocks in our coverage universe which we will extend on an ongoing basis.

MENA Equity Research: Christian KernAC (Telecoms/Infrastructure)

Financials – Abu Dhabi banks attractively positioned vs CEEMEA peers We believe Abu Dhabi banks are attractively placed to benefit from balance sheet growth, driven by economic flows arising out of a) the rising price of crude oil supporting the Abu Dhabi's finances and b) Abu Dhabi's continuing infrastructure investments supported by strong capitalization and sovereign backing within the shareholding structure. Notwithstanding the further expected asset quality deterioration, to some extent potentially arising out of the Dubai World restructuring (where NBAD and FGB have limited exposure vs. their balance sheet size) and its secondary impacts, we believe that strong coverage ratios and pre-provisioning profits provide an ample buffer for our OW Abu Dhabi names to suffer a rise in NPLs without making any losses on the bottom line. Rising investor risk appetite in GEMs and attractive valuations of Abu Dhabi banks - trading at a more than 20% NAV 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. Our key recommendation within MENA financials is First Gulf Bank.

Alex Comer (Petrochemicals)

Real estate – need for differentiation As the local equity markets gradually absorb the impact of the announced restructuring of Dubai World and the recent rise in Dubai and Abu Dhabi CDS spreads, we see an increasing need for differentiation between Dubai and Abu Dhabi fundamentals. We remain OW on Abu Dhabi property stocks and highlight that while investor risk appetite may reduce in the near to medium term, broad sector dynamics remain unchanged and favourable for Abu Dhabi-based property developers. As Dubai suffers from a housing surplus with vacancy levels as high as 25% in certain areas, Abu Dhabi continues to face a housing shortage unlikely to be met until 2011-2012 due to limited supply in the pipeline. While U.A.E. property prices are down 4550% from peak levels, we prefer exposure to Abu Dhabi-based developers, as they enjoy stronger underlying fundamentals. Our key recommendation within MENA real estate is Abu Dhabi-focused Aldar Properties.

J.P. Morgan India Private Limited

Telecoms – good time to add to GCC telecom positions While local equity markets digest the Dubai World restructuring news, we highlight four reasons why we believe it is a good time to add to GCC telecom positions: 1) strong valuation support; 2) our expectations of good 4Q results; 3) room to catch up for GCC markets; and 4) risk appetite for emerging markets continues to improve. Our top pick within MENA telcos is Qatar Telecom, rated Overweight with more than 50% prospective upside and one of our key stock calls in our JPM CEEMEA telecom universe.

(971-4) 428-1789 [email protected] JPMorgan Chase Bank, N.A., Dubai Branch

(44-20) 7325-1964 [email protected] J.P. Morgan Securities Ltd.

Naresh Bilandani (Financials) (971-4) 428-1763 [email protected] JPMorgan Chase Bank, N.A., Dubai Branch

Muneeza Hasan (Real Estate/Construction) (971-4) 428-1766 [email protected] JPMorgan Chase Bank, N.A., Dubai Branch

Ranjan Sharma (91-22) 6157-3305 [email protected]

For MENA Equity Sales advice, please contact: Stephen Daly (971-4) 428-1715 [email protected] JPMorgan Chase Bank, N.A., Dubai Branch

Sadiq Hussain (971-4) 428-1741 [email protected] JPMorgan Chase Bank, N.A., Dubai Branch

Flagship reports • MENA Telecom Sector - Initiating coverage on GCC telecoms (Oct 8, 2009) • SABIC – A geared play on oil and cyclical recovery: Initiate with OW (Sept 3, 2009) • MENA Property Sector - Initiating coverage on UAE property (Aug 10, 2009) • MENA Financial Sector - Initiating coverage on

UAE banks (Jul 1, 2009)

75

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

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76

Emerging Markets Equity Research 02 December 2009

Sector Overviews

Adrian Mowat (852) 2800-8599 [email protected]

77

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Agribusiness, Pulp and Paper Long Logistics, Short Sugar Key sector dynamics The agribusiness sector is more about supply than demand. Hence, the global recovery is less of a factor than the outlook for supply, with some exceptions. The three exceptions within our coverage are: (1) ethanol demand; (2) cotton demand; and (3) freight prices. The pulp and paper sector is more leveraged to rising economic activity than the agribusiness sector. Implications of a global recovery Because it is linked to higher economic activity and rising oil prices, ethanol demand should benefit next year. However, demand is also tied to government policies and, in Brazil, sales of flexfuel vehicles. In fact, demand has continued to be strong throughout the downturn in Brazil due to incentives for car purchases. Hence it is hard to see a significant acceleration of the trend next year. Cotton demand, on the other hand, is tied to global economic recovery, and we are starting to see signs of an improvement, which would benefit producers such as SLC Agricola (SLCE3/N). However, the global cotton stock-to-use ratio is still extremely high at 47%, so we expect it will take some time to work this down to more “bullish” levels. Finally, logistics prices will benefit as industrial activity picks up, tightening the availability of transportation. Pulp and paper sector demand benefits from economic recovery – due both to rising consumer demand and to rising employment (printing and writing papers). While we expect employment to be a laggard, rising consumer demand should benefit demand for consumer packaging, such as boxboard. How much have valuations already discounted a recovery? We think valuations for the sugar/ethanol sector are the most stretched, with the market valuing peak earnings (on peak sugar prices) as the new normal. Grain markets seem to be factoring in some recovery in supply-demand in both the grains and cotton. On the other hand, we think the pulp/paper and logistics sectors are not giving full value to the recovery. Recommendations Our top pick in the LatAm agribusiness sector is railroad operator ALL (ALLL11/OW). We also like the pulp/paper producer Suzano (SUZB5/BZ). We would highlight sugar/ethanol stocks as ones to avoid, especially Acucar Guarani (ACGU3/UW), which is the most levered and least profitable of the three producers.

Brazil Agribusiness Debbie Bobovnikova, CFAAC (1-212) 622 3489 [email protected] J.P. Morgan Securities Inc.

Flagship reports • Suzano : Inflection Point in Earnings Upgrade to OW (11/10/2009) • SLC Agricola : Lowering Est and Price Target on Lower 09/10 Growth Outlook (10/27/2009) • LatAm Agribusiness : Sector Guide: Key Discussions at 2nd Annual Conference (10/22/2009) • SLC Agricola : Disappointing 2Q Results Adj. Est. and Downgrading to Neutral, Intro 2010 Price Target (08/13/2009) • ALL: CEO Call Highlights (4/19/2009) • LatAm Agribusiness: Sugar Logistics Agreement - LT Positive for ALL (3/10/2009) MSCI EM Agribusiness: Absolute and relative to MSCI EM

300 250 200 150 100 50 97 99 01 03 05 07 09 Relativ e

Absolute

Source: MSCI, Datastream.

Top picks and stocks to avoid Price Top picks ALL Suzano Stocks to avoid Guarani

Mkt cap (US$MM)

P/E (x) 09E

Rating

16.45 17.90

ALLL11 SUZB5

OW OW

6,185 3,059

24.1 6.2

18.1 14.8

0.74 2.79

4.94

ACGU3

UW

811

NM

45.2

-0.29

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 25 November 2009.

78

EPS (Ps) 09E

Code

10E

Div. yield 10E (%)

ROE 10E (%)

0.87 1.18

1.7% 0.7%

17.0% 7.9%

0.11

0

2.9%

10E

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Autos & Industrials Focus on sustainable growth names Key sector dynamics Looking into 2010, we believe the regional auto sector should be supported by key positives including: (1) continued demand recovery, as driven by rising household disposable income, low penetration, and a relatively loose credit environment. Among others, China is riding the third auto boom on the breakout of car demand in tier-three cities. In India, the acceleration in economic growth could be conducive for sustained auto demand recovery entering 2010; and (2) accommodative policies. We believe the chance for China to renew the preferential tax cut policies on expiration at the end of the year is at around 70% as the government wants to ensure policy continuity for promoting domestic consumption. In India, while some of the stimulus measures (such as excise duty cuts) may be partially rolled back next year, the overall policy environment remains favorable; and (3) relatively low cost of raw materials. On the other hand, a possible sharp rebound in oil prices and potential monetary tightening could still weigh on the sector: a broad-based tightening in China is expected to kick in as of 2Q10, while India’s central bank has signaled that it will end its stance of monetary easing in early 2010. Implications of a global recovery The synchronized global economic recovery and resultant rebound in auto demand recovery in developed markets could benefit most export-oriented auto players such as Korean names. For China and India, whose auto markets are generally domestic consumption-driven, a solid recovery in exports could help improve their labor markets, their household disposable income growth and their car consumption. Meanwhile, we expect more Chinese auto companies may seek mergers and acquisitions in overseas markets in 2010 on the back of the improved economic outlook in developed markets. How much have valuations already discounted a recovery Regional auto producers are generally trading at around mid-cycle valuations, with leading auto names trading at above mid-cycle valuations. For instance, DongFeng Motor is now trading at 11.2x FY10E P/E, about one-standard deviation above the average historical prospective P/E of 8.3x. Meanwhile, Maruti Suzuki is trading at 15.4x FY10E P/E, versus its trough prospective P/E of 8.0x, and historical average prospective P/E of 14.0x. Recommendations We prefer domestic consumption-driven auto names such as China autos and 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.

Frank LiAC (852)-2800-8511 [email protected] J.P. Morgan Securities (Asia Pacific) Limited

Flagship reports • DongFeng Motor Co., Ltd.–Pole position (Jan 16, 2009) • China autos–Staging an earlier-thanexpected recovery in FY09 (Mar 30, 2009) • AutoWIN & Auto WINdata–Regional auto sector views, sales trends, forecasts etc (Monthly) • Brilliance China–A phoenix is China’s auto sector(Oct 30, 2009) • India Auto Manufacture: Stay invested, More steam ahead (Aug 6, 2009) • Hyundai Mobis: Small step to holding co., stronger recurring profit profile, battery venture in the works. Upgrade to OW (Aug 30, 2009) MSCI Autos and MSCI Autos relative to MSCI Emerging Markets Autos

175 150 125 100 75 50 25 97 99 01 03 05 07 09 Relativ e Absolute Source: MSCI, Datastream.

Top picks and stocks to avoid

Top picks Hyundai Motor Company Astra International DongFeng Motor Co., Ltd. Maruti Suzuki India Ltd Yulon Motor Co., Ltd. Stock to avoid Weichai Power

P/E (x) 09E

EPS (LC) 09E 10E

Code

Rating

Mkt cap (US$MM)

94600 32000 11.0 1567 39.0

005380 KS ASII IJ 489 HK MSIL IN 2201 TT

OW OW OW OW OW

17762 13587 12207 9716 1895

8.8 15.3 15.0 37.2 41.5

8.2 12.6 13.2 19.9 56.6

10798 2097 0.7 42.2 0.9

60.3

2338 HK

N

6941

9.9

8.6

6.1

Price (LC)

10E

Div. yield 10E (%)

ROE 10E (%)

11486 2541 0.8 78.8 0.7

1.6 3.2 1.3 0.4 0.5

10.1 24.9 23.6 21.6 1.8

7.0

0.8

45.2

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009. *Indian companies have March year-end.

79

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Consumer Selective stock picking Key sector dynamics

Vineet Sharma, CFAAC

Discretionary consumption trends in Asia will continue to be influenced by wage growth and ‘wealth creation’ from the property market and local stock markets. The return of modest inflation in food prices augurs well for staples. An end to aggressive discounting to clear inventories is near, which should aid margin recovery. In LATAM, declining interest spreads, easing credit supply, increasing consumer confidence, higher disposable income, increase in employment, and declining food inflation have allowed for a better share of wallet for discretionary items. However, retail sales growth in Mexico still remains under pressure. In 2010 we believe earnings growth for Russian consumer names should be driven by recovery in consumption, business expansion and M&A activity, as well as a stronger ruble.

(852) 2800-8523 [email protected] J.P. Morgan Securities (Asia Pacific) Limited

Andrea TeixeiraAC (1-212) 622-6735 [email protected]

Alan AlanisAC (1-212) 622-3697 [email protected]. Morgan Securities Inc.

Sean HolmesAC

Implications of a global recovery Export driven economies such as China and Korea should benefit the most from global recovery. Better economic fundamentals, stability in wages, employment and improving confidence should propel consumer spending in 2010. We expect consolidation to continue for LATAM food and beverages and Russian retail. However, all is not well for SA and Mexico. There is a risk that household credit growth could remain muted for long in SA, depressing household consumption. Mexico, which relies heavily on the US through exports and workers' remittances, will take a while before it revives.

(27-11) 507-0373 [email protected] J.P. Morgan Equities Ltd.

Elena JouronovaAC +7 495 967 3888 [email protected] J.P. Morgan Bank International LLC

Flagship reports • Identifying potential short-term and long

How much have valuations already discounted a recovery We are positive on dominant staples in Asia and expect them to benefit from benign inflation. Expectations are quite low for Chinese discretionary names. In LATAM, though current prices have started to reflect the strong recovery in retail sales, they are still 20-35% below peak. In SA, furniture counters still have scope to rerate. Our sector analysts in Russia are of the view that expected recovery in consumer purchasing power is partially priced in.

term winners (10/18/09) • China Discretionary: Time to take profit or ride the momentum? (06/09/09) • SA Retail: In pursuit of value • Russian Retail: Growth outlook improving on faster expansion and stronger FX MSCI EM Consumer: Absolute and relative to MSCI EM 270 210 150 90 30

Recommendations

We like United Spirits in Asia as a play on the fastest growing spirits market globally. Our top picks in CEEMEA are JD Group and Magnit in CEEMEA, and FEMSA and LAME in LATAM.

97 99 01 03 05 07 09 Relativ e

Absolute

Source: MSCI, Datastream.

Top picks and stocks to avoid Top picks JD Group Femsa China Mengniu Dairy Co. United Spirits Limited LAME Magnit OAO Stocks to avoid Massmart Soriana Hindustan Unilever Ltd.

P/E (x) 09E

10E

937 16174 5165 3309 5519 4953

37.3 24.7 28.2 44.0 58.8 91.5

7.3 20.3 24.8 34.8 34.9 58.9

2270 4376 13305

14.4 20.6 25.3

14.7 18.5 27.3

Price (LC)

Code

Rtg

Mkt cap (US$MM)

4340 45.2 23.1 1228 13.9 59.5

JDG SJ FMX US 2319 HK UNSP IN LAME4 BZ MGNT RU

OW OW OW OW OW OW

8519.0 31.8 284.3

MSM SJ SORIANAB MM HUVR IN

UW UW UW

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

80

EPS (LC) 09E

10E

Div. yield 10E (%)

ROE 10E (%)

116.5 1.8 0.8 27.9 0.2 0.7

597.1 2.2 0.9 35.3 0.4 1.0

0.0 1.1 0.0 0.3 1.1 0.0

18.8 10.3 17.5 12.6 62.9 29.3

592 1.5 11.3

581 1.7 10.4

4.4 0.5 2.6

35.8 9.3 99.5

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Energy Oil price recovery done Key sector dynamics

Brynjar Bustnes AC

Demand data does not support current oil prices, and inventories are high and OPEC’s compliance is fading. Weak demand and non-OPEC production would put downward pressure on oil. We expect gasoline demand to stay weak, due to weak US demand. Distillate demand is expected to return to growth as a dominating EM market product. Since 2009, Russian oils have had to pay lower royalties and have enjoyed extensive tax breaks on Greenfield developments. We might see further tax initiatives to encourage output growth in Russia. In LATAM, active rigs have increased 2% since August ’07 while they have declined 44% in the US and 9% in the Middle East, the largest producing region globally

(852) 2800-8578 [email protected] J.P.Morgan Securities (Asia Pacific) Limited

Nadia KazakovaAC (7-495) 937 7329 [email protected] J.P Morgan Securities Ltd.

Sergio TorresAC (212) 622-3378 [email protected]

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 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. In Asia, Petchem had a strong recovery but ME capacity is still missing. Next year this capacity should have a major negative impact on margins, despite a potential pick-up in demand.

Flagship reports • One Minute on Oil (ad hoc) • Crude Reality (weekly) • Russian Gas: Gazprom revisited • 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 upstream/ petchem. Integrated/less oil leverage stocks are currently cheapest with rerating or positive news being potential drivers. Russian integrated oils are also trading at 12%-19% discounts to historical average PERs, and have not yet discounted a recovery.

MSCI EM Energy: Absolute and relative to MSCI EM

700 600 500 400

Recommendations

300

We like Rosneft and Gazprom in CEEMEA, and Sinopec and SK Energy in 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 our optimism for Brazilian offshore: OGX and Petrobras. Our stock to avoid is Ecopetrol.

200 100 0 97 99 01 03 05 07 09 Relativ e

Absolute

Source: MSCI, Datastream.

Top picks and stocks to avoid Price (LC) Code Top picks Gazprom Rosneft SK Energy Co Ltd Sinopec Corp - H Petrobras OGX Stocks to avoid Lukoil Ecopetrol PetroChina

5.6 7.9 108000 6.4 38.5 1430

GAZP RU ROSN LI 096770 KS 386 HK PETR4 BZ OGXP3 BZ

55.6 LKOH RU 2600.0 ECOPETL CB 9.4 857 HK

P/E (x) 09E

10E

133282 83620 8512 136013 206917 26309

6.3 11.8 9.5 8.6 12.9 nm

5.2 7.2 7.7 8.3 11.7 nm

47291 53189 339259

6.6 16.8 15.4

6.4 13.2 13.8

Rtg

Mkt cap (US$MM)

OW OW OW OW OW OW N UW UW

EPS (LC) 09E

10E

Div. yield 10E (%)

ROE 10E (%)

0.9 0.7 11357 0.7 3.0 16.4

1.1 1.1 13955 0.8 3.3 5.7

0.0 1.4 2.1 3.0 1.7 0.0

12.3 19.5 14.7 16.6 17.4 3.8

8 154 0.6

9 197 0.7

2.5 4.6 3.2

12.5 27.1 14.0

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

81

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Financials Credit trends improving Key sector dynamics

Sunil GargAC

We expect credit demand to recover cyclically in EM in sync with economic growth and backed by a continuation of monetary policy. Nominal interest rate increases are expected to drive modest NIM expansion. Credit trends are improving in the region and this bodes well for the re-emergence of loan growth. Valuations are pretty cheap in CEEMEA and we believe P/NAV above 3 could be the peak of the market by 2011. We fear non conventional intervention in credit markets in Asia.

(852) 2800-8518 [email protected]

Implications of a global recovery

J.P. Morgan Securities Ltd.

J.P. Morgan Securities (Asia Pacific) Limited

Paul FormankoAC (+44) 207-325-6028 [email protected]

Bank earnings lag economic recoveries, and to that extent, 2010 promises to be a seriously positive earnings recovery year in EM. We might however see regulatory insistence on reducing leverage in the business over the next few years. In LATAM, economic conditions differ throughout the region. We expect an increase in loan origination and a fall in early stage delinquencies in Brazil. The move from deflation to inflation would improve the NIMs in Chilean banks. In CEEMEA, Turkish financials should do well in the medium to long term. SA banks are likely to be a 2H story in our view and could underperform in 1H vs some of their peers in CEE, Turkey, Russia and GCC because of a delayed earnings rebound, defensive balance sheets and investor preference for higher beta banking stocks.

Saul MartinezAC (1-212) 622-3602 [email protected] J.P. Morgan Securities Inc.

Flagship reports • From Fear to Growth (05-09) • The Empire Strikes Back (10 -09) • CEEMEA Financials: Beyond 2009 • MENA Financials: Initiating coverage on UAE banks

How much have valuations already discounted a recovery

• Santander Brasil: Closing the GAAP

Despite a substantial 121% rally in MSCI Asia financials from Mar-09 lows, we see an c20% upside to consensus estimates in Asia. Similarly in LATAM, as profits improve we see meaningful multiple expansion still likely at Bradesco, Santander Brasil and Bancolombia. In CEEMEA, valuations are still cheap and have not completely discounted a recovery.

MSCI EM Financials: Absolute and relative to MSCI EM 270

210

Recommendations Our top picks in Asia include BOC (growth opportunity), Fubon (a play on structural turnaround in Taiwan). In LATAM, we like Santander Brasil. Our top picks from CEEMEA are Vakifbank (cheap valuation) and Sberbank.

150 90 30 97 99 01 03 05 07 09 Relativ e Absolute Source: MSCI, Datastream.

Top picks and stocks to avoid Rtg

Mkt cap (US$MM)

OW OW OW OW OW OW

5059 145716 17845 9034 47594 48139

11120.0 NED SJ UW 7650.0 BBRI IJ UW 45.9 GFNORTEO MM N

7334 9896 7083

Price (LC) Code Top picks Vakifbank Bank of China - H Shinhan Financial Group Fubon Financial Holdings Santander Brazil Sberbank Stocks to avoid Nedbank Group Ltd Bank Rakyat Indonesia Banorte

3.1 4.1 44150 36.0 22.0 2.2

VAKBN TI 3988 HK 055550 KS 2881 TT SANB11 BZ SBER RU

10E

EPS (LC) 09E

6.8 12.7 16.2 13.6 16.5 111.5

5.8 9.0 10.6 10.8 12.9 14.9

12.3 13.3 15.8

9.1 11.2 13.1

P/E (x) 09E

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

82

10E

Div. yield 10E (%)

ROE 10E (%)

0.5 0.3 2717 2.6 1.3 0.0

0.5 0.5 4165 3.3 1.7 0.2

6.1 5.0 2.0 5.6 3.3 0.9

18.9 21.3 11.8 14.0 12.0 12.6

901 577 2.9

1216 684 3.5

4.9 3.0 0.4

13.2 28.4 15.2

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

India IT services Improving fundamentals but mostly reflected in share prices; we see limited upside Key sector dynamics The IT services and software sector has seen a good rebound in terms of revenues, earnings and share prices along with greater confidence from CIOs to spend on technology. While the sector saw better resilience than global IT 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 savings), improvement in outlook for the banking sector has been a key driver in the past three months. We note that the banking sector is the largest contributor of revenues for Indian IT companies. Moving forward, developed market economic recovery (primarily the US and the UK) and general CIO sentiment remain key for the sustenance of growth in 2010. The other key variable is currency—a strengthening rupee will be negative for the sector. Implications of a global recovery We believe that the global downturn has led to further polarization of business towards large players. Further, Satyam’s debacle and expanding 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 the recovery as technology spending improves. However, a sustained recovery should eventually benefit mid-sized players as well. Further, we do think that hardware and semiconductor has a higher leverage to economic recovery and would benefit more than IT services (given that IT services is slightly anti-cyclical).

Manoj SinglaAC (91-22) 6157-3587 [email protected] J.P. Morgan India Private Limited

Flagship reports • Indian IT Services: (11/05/2009) • Hexaware: Turnaround at mid-cycle (10/09/2009) • Polaris Software: A leveraged play to the recovery in financial services IT spending (10/09/2009) • Infotech Enterprises: Engineered for growth (10/09/2009) MSCI Software Services and MSCI Software Services relative to MSCI Emerging Markets Software Service

500 400 300 200

How much have valuations already discounted a recovery We believe that valuations for the sector are largely discounting a recovery with most analysts already factoring in ~20% growth in 2010E and P/Es at 17-19x. We do not see a significant P/E re-rating from here with estimate upgrades key for further share price upsides. Hence, we expect stocks to have limited absolute upside (~10-15%), although downsides may be limited as well given continued global recovery.

100 0 97 99 01 03 05 07 09 Relativ e Absolute Source: MSCI, Datastream.

Recommendations Infosys remains our top pick in the large-cap sector given its top-tier execution and management quality. Among mid-caps, we believe Mindtree has the best management and quality systems. Vanceinfo is our pick from the Chinese IT services sector. Among stocks to avoid, we are negative on HCL Infosystems. Top picks and stocks to avoid Top picks MindTree Ltd. Infosys Technologies VanceInfo Technologies Inc. Stock to avoid HCL Infosystems

P/E (x)

EPS

Price

Code

Rating

Mkt cap (US$MM)

09E

10E

09E

10E

Div. yield 10E (%)

ROE 10E (%)

634.5 2327.9 17.6

MTCL IN INFO IN VIT US

OW OW OW

537 28638 782

80.8 22.8 34.5

12.6 21.8 26.1

7.9 102 0.5

50.4 107 0.7

0.8 1.3 0.0

33.8 29.6 19.2

146.8

HCLI IN

N

687

10.5

10.1

14.0

14.6

4.1

18.7

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.

83

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Internet and Media Expect reaccelerating ad spend growth Key sector dynamics

Jean-Charles LemardeleyAC

Advertising is going through a deep global recession that has hit previously fast growing emerging markets harder than developed markets, as some of the price increases in recent years have unraveled. Most markets in Central and Eastern Europe are down 25-35% from 2008. While television is holding up better than print and other media (except online), it is also shrinking in excess of 20% in most markets. Many broadcasters report that they believe they have reached the trough, although the recovery has yet to start. Online portals in Asia are likely to see a gradual recovery in earnings in FY10, mainly driven by the increased online ad spending. We expect internet ad spending in China to see significant pick up in 2010, benefited by higher ad rates, and events like World Expo and World Cup. The structural growth of Korean online market on the other hand is capped given Korea’s high penetration of online ads. The online recruitment industry in India is a late cycle-play on the economic recovery.

(44-20) 7325 5763 [email protected]

Implications of a global recovery

• CEEMEA Telecoms and Media: Key

J.P. Morgan Securities Ltd

Dick WeiAC (852) 2800-8535 [email protected] J.P. Morgan Securities (Asia Pacific) Limited

Manoj SinglaAC (91-22) 6157-3587 [email protected] J.P. Morgan India Private Limited

Flagship reports Sector Views and Global Weekly

Recovery in EM advertising markets post crisis and deep recessions usually takes 2-3 years. This would point to stabilization in 2H09/1H10, followed by a fairly rapid recovery. In our view, while the secular concerns that have been in place since long before the crisis are still in place, this is more than offset by the still strong growth potential in ad markets in the region. Chinese domestic spending growth will likely lead to a pick-up in financial services, auto, real estate and general industries ad-spending next year.

Perspective • NCsoft: Aion's flight to the US and Europe MSCI EM Internet and Media: Absolute and relative to MSCI EM 240

200 160

How much have valuations already discounted a recovery

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

120 80 40

Recommendations Our top picks in the space are Russian broadcaster CTC Media and internet companies Sohu.com, Info Edge India, Baidu & NCsoft.

97 99 01 03 05 07 09 Relativ e

Absolute

Source: MSCI, Datastream.

Top picks and stocks to avoid Price (LC) Code Top picks Sohu.Com CTC Media Info Edge India Baidu.com NCsoft Stocks to avoid The9 Limited

56.0 15.0 806.4 442.2 145000.0

SOHU US CTCM US INFOE IN BIDU US 036570 KS

7.6 NCTY US

P/E (x) 09E

10E

EPS (LC) 09E

2154 2276 472 15338 2682

15.2 17.8 36.9 72.1 71.5

13.2 15.6 38.3 48.3 77.4

214

NM

NM

Rtg

Mkt cap (US$MM)

OW OW OW OW OW N

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

84

10E

Div. yield 10E (%)

ROE 10E (%)

3.7 0.8 21.9 6.1 2029

4.2 1.0 21.1 9.2 1874

0.0 0.0 0.0 0.0 0.0

24.5 19.7 16.2 36.0 7.6

-1.7

-2.1

0.0

-18.1

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Metals and Mining Emerging Stronger in 2010 Steve ShepherdAC

Key sector dynamics

(27-11) 507 0386 [email protected]

We are bullish on the real estate sector, driven by robust demand from China and expected above trend growth in the developed economies in 2010. However, what could contain external supply is a strengthening ruble and rand. This could force the exporters to shrink their export flow in exchange for the benefits of domestic supply. This especially holds true for Russia which expects a +16% y/y growth in steel demand (JPM e). In SA, platinum supply is likely to be constrained by ongoing enforced safety-related production stoppages, low rand PGM basket prices, an uncertain outlook for an inadequate electricity and water supply to fund new mining projects, and uncertainty regarding BBBEE/nationalisation issues.

Yuriy VlasovAC (7-495) 967-7033 [email protected] J.P. Morgan Bank International LLC

Rodolfo R. De Angele, CFAAC (55-11) 3048-3888 [email protected] Banco J.P. Morgan S.A.

Flagship reports

Implications of a global recovery

• Platinum Foresight: Recovery Ahead

The demand for commodities is highly leveraged to a global recovery, and the commodities sector should emerge much stronger in 2010. The demand situation is improving across the world, driven earlier by restocking demand and later by recovery in real demand, mainly in China. The key risks remain in the form of stabilization of inventories at below-normal levels.

• Russian Steel : Time to revisit investment case • Russian Metals & Mining: Shifting the 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 believe the ingredients are coming together for another surge in PGM prices, possibly in 2010/11. On the other hand, valuations seem stretched in LATAM. The stocks in the sector already seem to be discounting healthy growth in volumes along with a robust pricing scenario.

MSCI EM Metals and Mining: Absolute and relative to MSCI EM 800

700 600 500 400 300

Recommendations

We like MMK (strong domestic footprint) in Russia. In SA, the only “shop for platinum” in the world our top pick is highly geared AngloPlat. In LATAM, we continue to prefer stocks that are cheap, at least on a relative basis. Our top picks are Ternium and Group Mexico. We recommend that investors avoid Usiminas (UW), as we maintain our cautious view on Brazilian flat-steel prices.

200 100 0 97 99 01 03 05 07 09 Relativ e Absolute Source: MSCI, Datastream.

Top picks and stocks to avoid Price (LC) Code Top picks Grupo Mexico Ternium MMK Northam Platinum Ltd Anglo Platinum Stocks to avoid Usiminas Southern Copper

30.5 33.4 0.7 3950.0 73504.0

GMEXICOB MM TX US MAGN RU NHM SJ AMS SJ

50.5 USIM5 BZ 35.9 PCU US

P/E (x) 09E

10E

EPS (LC) 09E

18135 6686 8269 1883 23168

19.5 26.9 74.0 21.6 69.3

13.7 15.6 18.5 30.2 32.5

14367 30481

38.0 30.4

14.6 20.3

Rtg

Mkt cap (US$MM)

OW OW OW OW OW UW UW

10E

Div. yield 10E (%)

ROE 10E (%)

0.1 1.2 0.01 183 1060

0.2 2.1 0.04 131 2260

3.4 4.1 1.4 1.5 0.0

23.2 8.4 4.9 5.6 14.5

1.3 1.2

3.5 1.8

2.1 2.5

10.9 31.9

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

85

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Real estate Away from manufacturers to landowners Key sector dynamics

Christopher GeeAC

EM homebuilders rebounded strongly in 2009, primarily on account of low interest rates and abundant liquidity. On the other hand, property prices in the MENA region and Russia fell c. 35-50% from their 2008 peak. We expect property prices to stabilize next year as the macroeconomic landscape improves and demand starts to recover. In LatAm, we prefer the Brazil HBs over the Mexico HBs given a more favorable growth outlook in Brazil.

(65) 6882-2345 [email protected] J.P. Morgan Securities Singapore Private Limited

Elena JouronovaAC +7 495 967 3888 [email protected] JPMorgan Bank International LLC

Implications of a global recovery

With improving global dynamics and strengthening oil prices, the UAE and Russian economic fundamentals are stabilizing. The liquidity situation, which was very tight in 1H09, is easing, with banks opening up to mortgage lending. On the back of Dubai World restructuring, we see an increasing need for differentiation between Dubai and Abu Dhabi fundamentals; broad sector dynamics continue to remain favorable for Abu Dhabi based property developers. In Asia, homebuilders would face competition in markets like China and India where strong debt and equity capital markets have restored the balance sheets of second or third-tier homebuilders who may now compete for land and with new launches. In LATAM, Brazil should grow stronger than Mexico; we see upside in both.

Muneeza HasanAC +971 4 428-1766 [email protected] JPMorgan Chase Bank N.A. Dubai Branch

Adrian E HuertaAC (52 81) 8152-8720 [email protected] J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero

Flagship reports • 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 current levels with tough industry fundamentals gradually being priced in. Property prices are down c. 45-50% from peaks in the UAE and 35% in Russia. In LatAm, we believe that a recovery is more priced in for Mexico HBs relative to Brazil HBs. Residential home pricing has rebounded in most of Asia, and regulators are acting to stem exceptional price increases as we saw in Korea, Singapore. Asian property stocks are trading at a 17% discount to NAVs, with some mild potential for discount narrowing in 2010.

• Russian Homebuilders • The Bricks & Mortar Report • Asian REITs Report: August 09 • BZ-HB – Benefiting from the Crisis MSCI EM Real Estate: Absolute and relative to MSCI EM 120

90 60 30 0

Recommendations

Our top pick from MENA is Abu Dhabi focused Aldar Properties. We favour homebuilder LSR in Russia. Our top picks among the LatAm HBs are PDG and Urbi. In Asia, we like stocks with greater commercial real estate exposure. We retain our UW on China HBs, and are OW on HK REITs.

97 99 01 03 05 07 09 Relativ e

Absolute

Source: MSCI, Datastream.

Top picks and stocks to avoid Top picks Aldar Properties Urbi PDG Realty LSR Ayala Land Stocks to avoid Homex Beijing Capital Land New World China Land

P/E (x) 09E

10E

3867 1889 3647 3044 3231

8.1 12.8 21.2 50.0 40.1

6.5 9.7 14.7 17.6 39.4

1824 1063 2146

9.7 19.2 10.1

8.2 12.0 20.2

Price (LC) Code

Rtg

Mkt cap (US$MM)

5.5 25.3 17.4 6.5 11.8

OW OW OW OW OW N N UW

ALDAR UH URBI* MM PDGR3 BZ LSRG LI ALI PM

71.0 HOMEX* MM 4.0 2868 HK 2.9 917 HK

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

86

EPS (LC) 09E

10E

Div. yield 10E (%)

ROE 10E (%)

0.7 2.0 0.8 0.1 0.3

0.9 2.6 1.2 0.4 0.3

0.0 0.0 1.2 0.0 0.5

11.0 13.8 19.7 11.8 7.1

7.3 0.2 0.3

8.7 0.3 0.1

0.0 2.8 2.4

19.2 14.1 2.1

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Semiconductor The margin trends between upstream and downstream would be the key factor to watch Key sector dynamics We went through a sudden and substantial inventory de-stocking to restocking in a short period, mainly driven by macro issues. Now, the global market volatility has already been covered and overall situation is back to normal. In 2009, downstream companies (especially assemblers) have enjoyed decent margins due to low component prices and better expected 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 since semiconductor companies are likely see robust volume recovery with an end-demand recovery.

JJ ParkAC (822) 758-5717 [email protected] J.P.Morgan Securities (Far East) Limited, Seuoul Branch

Flagship reports • Semiconductor Migration (09/21/2009) • Display Tracker (09/29/2009) • Korea Technology (10/14 /2009) • TSMC: Looking for… (10/08/2009)

Implications of a global recovery 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% growth in LCD TV. Due to the low base in 2009 and ongoing ASP decline, 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 sharp recovery due to a combination of ASP decline and relatively high base in 2H09. How much have valuations already discounted a recovery Most tech stocks are trading at mid-cycle valuations, except for some subsectors such as TFT-LCD (close to trough value) and LED (close to peak value). Hence, earnings momentum in sub-sectors would be key catalysts to individual stocks since current share prices seem to be priced in a moderate recovery in 2010. Recommendations We prefer multi-year growth story such as rechargeable battery for EV (SDI), LED TV theme (SEMCO), and solar supply chains (OCI). We continue to believe foundry and back-end companies are likely to benefit given robust volume growth and relatively moderate ASP decline. We recommend a pair trading (Long Korea panels and Short Taiwan panels) in the TFT-LCD space. For DRAMs, we expect DRAM price momentum to start loosening by the year-end, so investors would find a good entry point after a share price correction.

• IC Assembly & Testing (10/18/2009) MSCI Semiconductors and MSCI Semiconductors relative to MSCI Emerging Markets Semiconductors

250 200 150 100 50 01 02 03 04 05 06 07 08 09 Relativ e

Absolute

Source: MSCI, Datastream.

Top picks and stocks to avoid Price (LC) Top picks Powertech Technology Inc LG Display TSMC UMC Stock to avoid AU Optronics

88.2 30950 60.0 15.6 32.9

P/E (x) 09E 10E

EPS (LC) 09E 10E

Div. yield 10E (%)

ROE 10E (%)

Rating

Mkt cap (US$MM)

6239 TT 034220 KS 2330 TT 2303 TT

OW OW OW OW

1826 9439 48056 6266

11.0 11.3 17.5 69.8

8.2 8.6 13.8 15.5

8.0 2738 3.4 0.2

10.8 3612 4.4 1.0

5.1 2.3 5.0 0.0

27.6 12.7 25.1 6.0

2409 TT

UW

8982

NM

43.6

-2.0

0.8

0.0

2.3

Code

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009. LG Display upgraded to OW on November 12. 87

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Technology Hardware Content meeting hardware Key sector dynamics Our three sector-wide themes are: (1) content becomes the key focus: cloud computing, smartphone app store, internet explorer TV—favoring companies involved in application store, input and network interface; (2) hardware commoditization leads up to a secular fall in hardware price point; (3) accelerated outsourcing—LCD TV mega outsourcing trend and Nokia moving away from Japanese vendors; (4) handset winners take it all—iPhone ending exclusivity, Moto moving to whitebox model for EM; and (5) PC pricing power shifting from ODMs to brands.

Alvin KwockAC (852) 2800-8533 [email protected] J.P. Morgan Securities (Asia Pacific) Ltd.

Flagship reports • Acer: More catalysts for margin upside in 2010/11, introduce Jun-10 TP at NT$83 (8/20/2009) • Mediatek: Smartphone strategy: Low price

Implications of a global recovery Downstream pricing power is falling. Consumers are trading down during the downturn—this will likely continue as employment rate is still weak. A much faster-than-expected recovery in global manufacturing is causing supply bottlenecks, e.g., labor shortage is re-surfacing in Chinese coastal areas, while upstream vendors are now running at high utilization rates.

device, lots of contents (9/15/2009) • PC forecasts: Unit resilient in 2009, raise 2010/11 forecasts on corporate rebound and rising EM penetration (9/21/2009) • Notebook ODMs: 2003-04 Déjà vu: Win 7 Optimism, Calpella GM woes (9/25, 2009)

Corporate IT spending will likely pick up from 2010 onward, due to a rebound in corporate profits and also an aging PC installation base. We expect a gradual, rather than a sharp, rebound, due to the high unemployment rate. How much have valuations already discounted a recovery Most PC stocks are now trading at three-year high in valuations, both on P/E 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 towards the lower-end of the historical range, though probably justified considering a much slower growth trajectory in the next decade. Recommendations Pricing power (Acer and AsusTek) and an addressable market expansion (Hon Hai, AAC Acoustics and Mediatek) are the key criteria for our stock picks. We would avoid areas with elevated competition (HTC, Quanta and BYD Electronics). With the uncertainty in the timing of corporate upgrade cycle, we prefer a pair trade strategy to LONG Catcher and AVOID Compal.

• Hon Hai: Improving revenue outlook for 2010, raise PT to NT$155 (11/5/2009) • China IT Distribution Primer: A complex web (11/13/2009) MSCI Technology Hardware and MSCI Technology Hardware relative to MSCI Emerging Markets Technology Hardware

370 320 270 220 170 120 70 97 99 01 03 05 07 09 Relativ e Absolute Source: MSCI, Datastream.

Top picks and stocks to avoid Price (LC) Top picks MediaTek Inc. Acer Inc AAC Acoustic ASUSTek Computer Hon Hai Precision Stocks to avoid Quanta Computer Inc. HTC Corp BYD Electronic Pair Trade Long Catcher Avoid Compal

Code

Rating

Mkt cap (US$MM)

P/E (x) 09E

EPS (LC) 09E

10E

Div. yield 10E (%)

ROE 10E (%)

504.0 79.5 10.1 63.0 135.0

2454 TT 2353 TT 2018 HK 2357 TT 2317 TT

OW OW OW OW OW

16993 6604 1607 8275 35820

14.5 17.9 19.7 22.0 16.8

11.9 12.3 12.6 13.1 13.3

34.8 4.4 0.5 2.9 8.0

42.4 6.5 0.8 4.8 10.1

4.9 3.8 3.2 2.5 1.9

37.4 17.6 26.4 11.6 18.0

63.1 362.5 5.7

2382 TT 2498 TT 285 HK

UW UW UW

7271 8925 1646

10.4 12.9 22.8

9.9 14.8 16.3

6.1 28.1 0.2

6.4 24.6 0.3

5.1 5.4 0.0

20.6 24.6 11.4

OW UW

1,653 5,024

80.2 40.35

2474 TT 2324 TT

15.4 10.6

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009. 88

10E

11.0 11.6

5.2 3.8

7.3 3.5

2.8 5.9

12.9 14.8

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Telecom Limited exposure in selective growth markets Key sector dynamics As a non-cyclical sector, telecom stocks have been less sensitive to an improving macro economic environment in 2009; specific local market competition risks matter more. In CEEMEA, the crisis has had a visible impact on revenue growth, resulting in significantly slower growth in previously fast expanding markets or even contraction in the more mature ones. Within Asia, in 2009, the perceived growth markets of India and China have been burdened with excess capacity and competition.

Andre BaggioAC

Implications of a global recovery Although telecom revenues are closely correlated to GDP growth, the swings in telecom revenues above or below GDP tend to be small, indicating that telcos should be good defensive stocks. Select stocks in CEEMEA offer exposure to high growth markets in Africa. Growth in Asia remains sluggish despite the recovery due to competition and overcapacity; we recommend investors own ex-growth Taiwanese and Malay stocks with strong capital management ideas

Tim StoreyAC

(55-11) 3048-3427 [email protected] Banco J.P. Morgan S.A.

Jean-Charles LemardeleyAC +44 (0) 20 7325 5763 [email protected] J.P. Morgan Securities Ltd

(852) 2800-8563 [email protected] J.P. Morgan Securities (Asia Pacific) Limited

Flagship reports • CEEMEA Telecoms and Media: Key Sector Views and Global Weekly Perspective • CEEMEA Telecoms: Revisiting the secular growth case (February 06, 2009)

How much have valuations already discounted a recovery Telecom sector share price underperformance YTD is not surprising. We expect this trend to last into 2010 and therefore we remain Underweight the sector for next year. The MSCI EM telecom index has lagged the broader MSCI EM index by nearly 30% YTD. Valuations in the sector are not rich but not cheap either. We think the sector is close to fairly valued, so a selective exposure is better.

• LatAm Mobile: Lessons on termination rates from Europe (Jul-09) • Br Mobile Key call: Quality Matters (Jul-09) • AP Telecom Daily • Asia Telecom Outlook (April/7/2009) • China: 3G too expensive (Oct/6/2009) MSCI EM Telecom: Absolute and relative to MSCI EM 280

Recommendations Telecoms in emerging markets are largely going ex-growth. We recommend exposure to stocks that are exposed to selective growth markets or are focused on capital management. In CEEMEA, a number of reasonably priced growth stocks are available. Our top picks are MTN, QTel and Turk Telekom. Central European incumbents are unattractive. In Asia, we recommend defensive Far East Tone. Telmex, in Latam, should be avoided as it faces declining core voice trends, aggressive regulation and in 2010 negative impact of new taxes and is richly valued. China suffers overcapacity and China Unicom, is vulnerable to further downside.

240 200 160 120 80 40 97 99 01 03 05 07 09 Relativ e Absolute Source: MSCI, Datastream.

Top picks and stocks to avoid Price (LC) Code Top picks Turk Telekom Qtel MTN Group Limited Far EasTone Tele. Totvs Stocks to Avoid Magyar Telekom Telmex China Unicom

4.4 148.7 11465.0 37.0 104.5

TTKOM TI QTEL QD MTN SJ 4904 TT TOTS3 BZ

726.0 MTEL HB 17.9 TMX US 10.3 762 HK

Rating

Mkt cap (US$MM)

P/E (x) 09E

10E

EPS (LC) 09E

10E

Div. yield 10E (%)

ROE 10E (%)

OW OW OW OW OW

9987 5989 27920 3729 1853

9.6 7.5 11.3 13.3 20.2

7.2 7.3 9.7 11.9 15.8

0.5 20 1016 2.8 5.2

0.6 20 1180 3.1 6.6

10.0 7.4 2.5 7.3 1.1

35.3 19.3 21.6 14.0 34.1

UW UW UW

4133 16224 31314

9.0 11.0 26.8

8.9 12.3 38.8

81 1.6 0.4

82 1.5 0.3

10.2 4.0 1.2

9.6 48.6 3.0

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

89

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Transportation Darkest before dawn Key sector dynamics

Corrine PngAC

We forecast a moderate 7% and 8% rebound in passenger and shipping volumes in 2010, respectively. However, upside surprises are possible as passenger and cargo demand has historically grown at 1.7x and 2.0x real GDP growth, respectively, and J.P. Morgan Economics team forecasts a 7.2% real GDP growth for Asia ex-Japan in 2010. We are more bullish on the airline and land transport sectors’ earnings recovery than shipping as the former does not face structural overcapacity once demand normalizes. Airport operators’ performance is strongly correlated to passenger traffic volumes, and given Mexico’s exposure to tourism, we believe the sector could benefit significantly from a synchronized economic recovery. A smaller supply-demand gap could drive an earlier re-rating. Rebounding fuel prices are less of a concern when demand recovers, as surcharges help to offset this impact. Most transport stocks benefit from a weak US$ given their large US$ capex and debt. This downturn will drive consolidation but crossborder M&As are more difficult due to regulatory restrictions and political sensitivity.

(65) 6882-1514 [email protected] J.P. Morgan Securities Singapore Private Limited

Adrian E HuertaAC (52 81) 8152-8720 [email protected] J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero

Flagship reports • Airline Traffic Monitor (Monthly) • Transportation: 2H09 Outlook and Beyond • MX-AP – Not ready to take off 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 recovery. Most are near their historical average valuations. Although the stocks could trade range-bound for the near-term or correct when they announce weak 2H/4Q results, we see any weakness as a good opportunity to accumulate airlines, select shipping and land transport companies as they have historically provided large returns in a cyclical upturn. We expect traffic to improve in 2010 mainly due to better comps.

150 120 90 60 30 0

How much have valuations already discounted a recovery

97 99 01 03 05 07 09 Relativ e Absolute

Looking at P/E 12 months forward, companies are trading on average at an 8% premium to the last 24 months’ average. GAP is trading with the highest premium, 19%, vs 6% for Asur and 1% for OMA.

Source: MSCI, Datastream.

Recommendations Our top picks are Asur, Container Corp of India and China Airlines. Top picks and stocks to avoid Top picks Asur Container Corporation of India China Airlines Stocks to avoid GAP China Cosco Holdings China Southern Airlines

P/E (x) 09E

10E

1445

20.1

17.1

3221 1410

18.3 NM

1520 18608 5529

19.6 NM 33.2

Rtg

Mkt cap (US$MM)

63.0 ASURB MM OW

Price (LC) Code

1155.0 CCRI IN 10.0 2610 TT 35.4 GAPB MM 9.7 1919 HK 2.5 1055 HK

OW OW N N N

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

90

EPS (LC) 09E

10E

Div. yield 10E (%)

ROE 10E (%)

3.1

3.7

3.5

17.2

16.9 80.0

63.1 -2.3

68.4 0.1

1.2 0.0

21.5 1.3

18.7 49.2 82.4

1.8 -0.3 0.1

1.9 0.2 0.0

5.0 0.4 0.0

34.3 4.2 2.3

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Utilities Still a defensive sector Key sector dynamics The long term growth prospects of utilities in EM remains positive due to low penetration. However, regulated prices and returns, raw material price inflation and competition in some markets make this sector unattractive. In Russia, a considerable portion of the wholesale electricity market has been liberalized. In Asia, Hong Kong/Indian/Thailand power utilities have an automatic cost pass-through mechanism and are preferred as they are insulated to cost price inflation. Latam utilities face a lot of competition and tight government returns.

Anderson Frey, CFAAC

Implications of a global recovery Utilities’ volumes are linked to the global recovery and the uptick in IP. However, they are likely to underperform the market and unlikely to re-rate significantly as some utilities face margin pressures. We expect 2010 will be more supportive for power equipment manufacturers.

Sergey ArininAC

(1-212) 622 6615 [email protected] J.P. Morgan Securities Inc.

Edmond LeeAC (852) 2800-8575 [email protected] J.P. Morgan Securities (Asia Pacific) Limited

(7-495) 967-7031 [email protected] J.P. Morgan Bank International LLC

Flagship reports • BRAZILIAN ELECTRIC UTILITIES : 2010

How much have valuations already discounted a recovery Following the significant re-rating since Mar-09, most of the utilities in Asia are trading at close to our price targets, and hence we do believe recovery has been well discounted by the market already. Russian utilities seem attractive if earnings projections are based on continuing market liberalization.

Outlook (11/08/09) • ENERSIS: Long-Term Value, Recovery Upside, Upgrade to OW (11/09/09) • China Infra-Strategy: From recovery potential to sustainable GARP (Aug09) • China Power Checkers: Plenty of –VE

Recommendations In Brazil, we recommend looking at the distribution companies and the Chilean utility ENERSIS (ENERSIS/ENI), due to its leverage to a recovery in electricity demand in the Andean countries. In Russia, RusHydro is an interesting stock, as it is becoming attractive on a relative basis. RusHydro trades at 5.6x 2011E EV/EBITDA vs. 9.7x for international peers. In Asia, we recommend Xinao and PGAS within the gas utilities sector on >20% core EPS CAGR from FY08-11E on low penetration rates. We also like Tata Power on 25% EPS CAGR from FY08-11E driven by continued capacity addition protected by strong coal linkages.

drivers but catch up potential intact (Oct09) • RusHydro: Looking beyond the accident: do not overlook positive triggers, upgrading to OW (09/30/2009) MSCI EM Utility: Absolute and relative to MSCI EM 190

150 110 70 30 97 99 01 03 05 07 09 Relativ e Absolute Source: MSCI, Bloomberg, J.P. Morgan.

Top picks and stocks to avoid Price (LC) Code Top picks Enersis RusHydro Perusahaan Gas Negara Tata Power Xinao Gas Stocks to Avoid Sabesp CPFL Energia Datang International

182.8 0.04 3575.0 1321.0 18.2

ENERSIS CI HYDR RU PGAS IJ TPWR IN 2688 HK

31.2 SBSP3 BZ 32.4 CPFE3 BZ 3.3 991 HK

Rating

Mkt cap (US$MM)

P/E (x) 09E

10E

EPS (LC) 09E

10E

Div. yield 10E (%)

ROE 10E (%)

OW OW OW OW OW

12070 9898 9089 6723 2471

8.4 13.8 13.9 24.0 23.3

9.1 14.5 14.8 18.4 18.8

22 0.003 256 55.0 0.8

20 0.003 242 71.6 1.0

4.5 0.000 2.9 1.1 1.3

18.6 6.0 41.8 12.8 14.5

UW UW N

4040 8851 12610

5.5 12.9 23.8

5.8 11.1 14.6

5.7 2.5 0.1

5.4 2.9 0.2

4.7 8.6 3.3

10.0 27.2 7.2

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

91

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

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Emerging Markets Equity Research 02 December 2009

Stocks for 2010

Adrian Mowat (852) 2800-8599 [email protected]

93

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Large-cap ideas: J.P. Morgan’s large-cap top picks Share Name Price (LC) Gazprom 6 Vakifbank 3 Aldar Properties 5.5 Rosneft 8.1 Turk Telekom 4 Qtel 148.7 SK Energy Co Ltd 108000 First Gulf Bank 18.8 ABSA Group Ltd 12421 Hyundai Motor Company 94600 Sinopec Corp - H 6.4 LG Display 30950 PTT Public Company 222 Bank of China - H 4 Enersis 185 MTN Group Limited 11540 Shinhan Financial Group 44150 Siam Commercial Bank 78.5 Fubon Financial Holdings 36 Petrobras 38.5 All 16 MediaTek Inc. 504.0 Far EasTone Tele 37.0 Credicorp 72 Acer Inc 79.5 Copel 34 Astra International 32000.0 Public Bank (F) 10.9 Santander Brazil 22 Bancolombia 42.8 ASUSTek Computer 63.0 Bank Central Asia (BCA) 4675 DongFeng Motor Co., Ltd. 11.0 Hon Hai Precision 135.0 Grupo Mexico 30.5 Unitech Ltd 79.3 TSMC 60.0 Pacific Rubiales 15.0 Tenaga 8.4 Samsung SDI 125500 RusHydro 0.0 PDG Realty 17 Perusahaan Gas Negara 3575 Sberbank 2.3 Suzano 17.6 AMMB Holdings 5 UMC 15.6 Ternium 31.8 China Yurun Food Group 18 Container Corporation of India 1144 LSR 6.5 Tata Power 1321.0 MMK 0.7 Naspers Ltd 27900.0 Buenaventura 39.8 Genting 7.1 Maruti Suzuki India Ltd 1567 Femsa 44.5 Tambang Batubara Bukit 15800

94

Price Target (LC) 10 5 8 10.3 6 230.0 150000 26.0 15371 140000 8.5 40000 315 6 241 15843 60000 110.0 54 46.0 21 630 45.0 88 92.0 38 37000.0 14 28 50.0 70.0 5500 13.0 155.0 31.5 120 72.0 18.0 10.3 210000 0 19 4700 3.0 22 5.3 19.0 31.0 21 1260 10.0 1450 1.1 34108.7 34.0 8.5 1630 50.0 22500

% Change to target 75.8 73.1 41.6 27.3 36.4 54.7 38.9 38.7 23.8 48.0 33.9 29.2 41.9 38.0 30.2 37.3 35.9 40.1 50.2 19.6 35.5 25.0 21.6 22.7 15.7 12.2 15.6 26.6 26.2 16.9 11.1 17.6 18.4 14.8 3.3 51.3 20.0 20.2 22.3 67.3 9.0 10.3 31.5 34.2 25.0 7.1 21.8 (2.5) 16.9 10.1 53.8 9.8 52.7 22.3 (14.7) 20.6 4.0 12.3 42.4

Bloomberg Code GAZP RU VAKBN TI ALDAR UH ROSN LI TTKOM TI QTEL QD 096770 KS FGB UH ASA SJ 005380 KS 386 HK 034220 KS PTT TB 3988 HK ENERSIS CI MTN SJ 055550 KS SCB TB 2881 TT PETR4 BZ ALLL11 BZ 2454 TT 4904 TT BAP US 2353 TT CPLE6 BZ ASII IJ PBKF MK SANB11 BZ CIB US 2357 TT BBCA IJ 489 HK 2317 TT GMEXICOB MM UT IN 2330 TT PRE CN TNB MK 006400 KS HYDR RU PDGR3 BZ PGAS IJ SBER RU SUZB5 BZ AMM MK 2303 TT TX US 1068 HK CCRI IN LSRG LI TPWR IN MAGN RU NPN SJ BVN US GENT MK MSIL IN FMX US PTBA IJ

JPM Rating OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW N OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW N OW OW OW OW

Mkt Cap, US$ MM 133282 5104 3867 85739 10078 5989 8516 7019 12012 17769 136013 9444 18910 145716 12217 28599 17853 8009 9037 209104 6130 16998 3730 5721 6606 5300 13587 11289 48486 8426 8277 12088 12207 35831 18350 4055 48071 3014 10716 4876 9898 3651 9089 48571 3145 4331 6268 6373 3877 3187 3044 6713 8269 15161 10983 7659 9701 15937 3818

P/E (X) 2009E 2010E 6.3 5.2 6.8 5.8 8.1 6.5 12.1 7.4 9.6 7.2 7.5 7.3 9.5 7.7 8.6 7.8 10.9 8.1 8.8 8.2 8.6 8.3 11.3 8.6 10.7 8.7 12.7 9.0 8.4 9.1 11.4 9.8 16.2 10.6 12.5 10.6 13.6 10.8 12.9 11.7 15.2 11.8 14.5 11.9 13.3 11.9 12.9 12.0 17.9 12.3 9.4 12.4 15.3 12.6 15.2 12.9 16.5 12.9 15.3 12.9 22.0 13.1 17.6 13.1 15.0 13.2 16.8 13.3 19.5 13.7 10.8 13.7 17.5 13.8 nm 14.0 39.9 14.0 18.9 14.3 13.8 14.5 21.2 14.7 13.9 14.8 112.5 15.0 6.3 14.9 15.5 15.4 69.8 15.5 26.9 15.6 19.0 16.7 18.1 16.7 50.0 17.6 24.0 18.4 74.0 18.5 23.7 19.0 19.6 19.4 24.5 19.7 37.2 19.9 24.7 20.3 12.7 21.1

EPS (LC) Yield (%) 2009E 2010E 2010E 0.9 1.1 0.0 0.5 0.5 6.1 0.7 0.9 0.0 0.7 1.1 1.4 0.5 0.6 10.0 19.7 20.4 7.4 11357 13955 2.1 2.2 2.4 1.9 1144 1542 5.2 10798 11486 1.6 0.7 0.8 3.0 2738 3612 2.3 20.7 25.5 3.8 0 0 5.0 21.8 20.0 4.4 1016 1180 2.5 2717 4165 2.0 6.3 7.4 2.8 3 3 5.6 3.0 3.3 1.7 1.0 1.3 1.8 34.8 42.4 4.9 2.8 3.1 7.3 5.7 6.2 2.8 4.4 6.5 3.8 3.6 2.7 2.1 2097 2541 3.2 0.7 0.8 3.9 1 2 3.3 2.9 3.4 2.7 2.9 4.8 2.5 265 356 2.9 0.7 0.8 1.3 8.0 10.1 1.9 0.1 0.2 3.4 7 6 0.1 3.4 4.4 5.0 -0.6 1.1 0.0 0.2 0.6 1.6 6627 8758 0.0 0 0 0.0 1 1 1.2 256 242 2.9 0.0 0.2 0.9 2.8 1.2 0.7 0.3 0.3 1.6 0.2 1.0 0.0 1.2 2.1 4.3 1 1 1.5 63.1 68.4 1.2 0.1 0.4 0.0 55.0 71.6 1.1 0.0 0.0 1.4 1179 1469 1.0 2.1 2.1 0.3 0.3 0.4 0.7 42.2 78.8 0.4 1.8 2.2 1.1 1241 750 3.9

ROE (%) 2010E 12.3 18.9 11.0 19.5 35.3 19.3 14.7 16.9 18.4 10.1 16.6 12.7 16.0 21.3 18.6 21.6 11.8 16.7 14.0 17.4 17.0 37.4 14.0 20.5 17.6 7.9 24.9 29.5 12.0 19.2 11.6 29.2 23.6 18.0 23.2 17.2 25.1 21.6 9.7 7.6 6.0 19.7 41.8 12.6 7.5 11.0 6.0 8.4 20.6 21.5 11.8 12.8 4.9 12.0 21.5 9.6 21.6 10.3 28.1

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Large-cap ideas: J.P. Morgan’s large-cap top picks (cont'd) Name Infosys Technologies Nan Ya Plastics Corp Amorepacific Corp China Mengniu Dairy Co. Ltd. ICICI Bank Larsen & Toubro Anglo Platinum United Spirits Limited LAME Ayala Land Baidu.com Magnit OAO OGX

Share Price (LC) 2327.9 54.1 859000 23 851 1589.5 74900.0 1228.0 14.0 11.8 434.2 59.5 1416.0

Price Target (LC) 2550.0 61.0 998000 23 NA 1675.0 91000.0 1140.0 17.0 13.9 460.0 80 2030.0

% Change to target 9.5 12.8 16.2 (0.2) 5.4 21.5 (7.2) 21.8 18.3 5.9 34.5 43.4

Bloomberg Code INFO IN 1303 TT 090430 KS 2319 HK ICICIBC IN LT IN AMS SJ UNSP IN LAME4 BZ ALI PM BIDU US MGNT RU OGXP3 BZ

JPM Rating OW OW OW OW OW N OW OW OW OW OW OW OW

Mkt Cap, US$ MM 28593 13143 4282 5165 20307 20441 24025 3304 5626 3230 15063 4953 26325

P/E (X) 2009E 2010E 22.8 21.8 32.9 22.5 24.6 23.0 28.2 24.8 26.6 26.8 31.0 27.6 70.7 33.1 44.0 34.8 58.8 34.9 40.1 39.4 70.8 47.4 91.5 58.9 nm nm

EPS (LC) Yield (%) 2009E 2010E 2010E 102.0 107.0 1.3 1.6 2.4 2.9 34940 37312 0.0 1 1 0.0 32 32 1.4 51.2 57.6 0.0 1060 2260 0.0 27.9 35.3 0.3 0.2 0.4 1.1 0.3 0.3 0.5 6.1 9.2 0.0 0.7 1.0 0.0 16.4 5.7 0.0

ROE (%) 2010E 29.6 8.2 18.5 17.5 7.1 19.2 14.5 12.6 62.9 7.1 36.0 29.3 3.8

Source: Datastream, MSCI, IBES, J.P. Morgan estimates Note: Prices and valuations as of November 27, 2009. Large cap are stocks with market cap over US$ 3 billion. Sorted in ascending order of 2010E PE

Large-cap ideas: J.P. Morgan’s large-cap stocks to avoid Share Name Price (LC) Sabesp 32 Lukoil 56.8 Weichai Power 60.3 Magyar Telekom 727.0 Nedbank Group Ltd 11250.0 S-Oil Corp 54500 Quanta Computer Inc. 63 CPFL Energia 32.7 Bank Rakyat Indonesia 7650.0 Redecard 26.4 YTL Power 2.3 Telmex 17.6 Banorte 47 Ecopetrol 2585.0 Severstal 8 PetroChina 9.4 Cencosud 1490 Datang International 3.3 Usiminas 50.0 HTC Corp 362.5 Grupo Modelo 65.3 Manila Electric Company 209 Soriana 31.8 Southern Copper 34.6 Telmex Internacional 15 SQM 38.0 Unilever Indonesia Tbk 10950.0 Hindustan Unilever Limited 284.3 VTB 4.3 China Unicom 10.3 MISC Berhad - F 8.9 AU Optronics 32.9 China Cosco Holdings, Ltd. 10 Reliance Power 141.1 Idea Cellular Limited 49.0 China Southern Airlines 3

Price Target (LC) 32 75.0 47.0 685.8 10747.0 64000 57.0 34.0 6650.0 32.0 2.1 13.0 49 2795.0 8 7.4 1578 4.3 38.5 250.0 60.0 165 31.0 28 10 33.0 9700.0 225.0 4 8.0 7.7 27.0 10.0 122.0 45.0 2

% Change to target 1.2 32.0 (22.0) (5.7) (4.5) 17.4 (9.7) 4.0 (13.1) 21.4 (7.5) (26.3) 5.4 8.1 4.9 (21.1) 5.9 28.7 (23.0) (31.0) (8.1) (21.1) (2.5) (20.6) (33.6) (13.1) (11.4) (20.9) 0.9 (22.3) (13.0) (17.9) 2.7 (13.5) (8.1) (16.7)

Bloomberg Code SBSP3 BZ LKOH RU 2338 HK MTEL HB NED SJ 010950 KS 2382 TT CPFE3 BZ BBRI IJ RDCD3 BZ YTLP MK TMX US GFNORTEO MM ECOPETL CB CHMF RU 857 HK CENCOSUD CI 991 HK USIM5 BZ 2498 TT GMODELOC MM MER PM SORIANAB MM PCU US TII US SQM US UNVR IJ HUVR IN VTBR LI 762 HK MISF MK 2409 TT 1919 HK RPWR IN IDEA IN 1055 HK

JPM Rating UW N N UW UW N UW UW UW N UW UW N UW UW UW UW N UW UW N N UW UW UW UW UW UW UW UW UW UW N UW UW N

Mkt Cap, US$ MM 4143 48312 6941 4148 7551 5232 7273 9027 9896 10208 3987 16052 7253 52376 7590 339259 6586 12610 14413 8927 16314 4997 4423 29444 13512 9995 8762 13284 22229 31314 9654 8985 18608 7246 3251 5529

P/E (X) 2009E 2010E 5.5 5.8 6.7 6.6 9.9 8.6 9.0 8.9 12.5 9.3 10.0 9.3 10.4 9.9 12.9 11.1 13.3 11.2 12.7 11.6 21.4 11.8 11.0 12.3 15.8 13.1 16.8 13.2 NM 13.7 15.4 13.8 17.4 14.4 23.8 14.6 38.0 14.6 12.9 14.8 24.2 18.0 30.3 18.2 20.6 18.5 30.4 20.3 23.4 21.3 30.9 25.5 31.6 25.8 25.3 27.3 NM 38.6 26.8 38.8 23.4 41.0 NM 43.6 NM 49.2 138.3 54.4 16.2 65.3 33.2 82.4

EPS (LC) Yield (%) ROE (%) 2009E 2010E 2010E 2010E 5.7 5.4 4.6 10.0 8.4 8.7 2.4 12.5 6.1 7.0 0.8 45.2 80.8 81.9 10.2 9.6 901 1216 4.8 13.2 5457 5841 3.3 16.3 6.1 6.4 5.1 20.6 2.5 2.9 8.5 27.2 577 684 3.0 28.4 2.1 2.3 7.4 97.9 0.1 0.2 6.6 18.2 1.6 1.5 4.1 48.6 2.9 3.5 0.4 15.2 154 197 4.6 27.1 -0.4 0.6 0.8 6.4 0.6 0.7 3.2 14.0 84.5 102.0 2.1 9.8 0.1 0.2 3.3 7.2 1.3 3.5 2.1 10.9 28.1 24.6 5.4 24.6 2.7 3.6 2.3 14.7 7 12 3.5 20.1 1.5 1.7 0.5 9.3 1.2 1.8 2.5 31.9 1 1 2.4 9.7 1.3 1.5 0.0 28.2 347 425 3.2 86.6 11.3 10.4 2.6 99.5 -0.3 0.1 0.5 3.5 0.4 0.3 1.2 3.0 0.4 0.2 4.0 3.9 -2.0 0.8 0.0 2.3 -0.3 0.2 0.4 4.2 1.0 2.6 0.0 4.4 3.0 0.7 0.0 1.6 0 0 0.0 2.3

Source: Datastream, MSCI, IBES, J.P. Morgan estimates Note: Prices and valuations as of November 27, 2009. Large cap are stocks with market cap over US$ 3 billion. Sorted in ascending order of 2010E PE

95

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Mid-cap ideas: J.P. Morgan mid-cap top picks Name Thai Oil Public Company Bank Asya Powertech Technology Inc Urbi Arca Energy Development (EDC) Metropolitan Bank AAC Acoustic Sohu.Com Land & Houses CTC Media Totvs Asur PT Aneka Tambang Tbk Xinao Gas CP All Pcl Northam Platinum Ltd Yulon Motor Co., Ltd. NCsoft China Airlines

Share Price Target % Change Bloomberg Price (LC) (LC) to target Code 39.8 62.0 56.0 TOP TB 3.0 5.0 65.6 ASYAB TI 88.2 108.0 22.4 6239 TT 25.5 34.0 33.4 URBI* MM 37.4 44.0 17.6 ARCA* MM 4.1 5.6 38.3 EDC PM 45.5 50.0 9.9 MBT PM 10.1 14.6 44.0 2018 HK 54 74 36.3 SOHU US 6.0 9.5 59.7 LH TB 14.8 25.0 68.7 CTCM US 102.0 125.0 22.5 TOTS3 BZ 61.6 53.0 (13.9) ASURB MM 2250.0 2750.0 22.2 ANTM IJ 18 22 21.7 2688 HK 20.8 23.0 10.6 CPALL TB 3980.0 6100.0 53.3 NHM SJ 39.0 50.0 28.2 2201 TT 145000.0 190000.0 31.0 036570 KS 10.0 16.0 60.5 2610 TT

JPM Rating OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW

Mkt Cap, US$ MM 2439 1779 1827 1923 2330 1610 1744 1607 2087 1794 2255 1828 1427 2251 2471 2811 1930 1895 2683 1410

P/E (X) EPS (LC) 2009E 2010E 2009E 2010E 6.0 5.6 6.7 7.1 9.4 6.7 0.3 0.5 11.0 8.2 8.0 10.8 12.8 9.7 2.0 2.6 11.1 10.4 3.4 3.6 10.6 10.7 0.4 0.4 17.0 11.5 2.7 4.0 19.7 12.6 0.5 0.8 14.8 12.8 4 4 14.8 13.3 0.4 0.4 17.6 15.4 0.8 1.0 20.2 15.8 5.2 6.6 20.1 17.1 3.1 3.7 48.0 18.4 46.9 122.3 23.3 18.8 0.8 1 22.7 19.0 0.9 1.1 21.7 30.4 183.0 131.0 41.5 56.6 0.9 0.7 71.5 77.4 2029.0 1873.6 NM 80.0 -2.3 0.1

Yield (%) 2010E 7.5 3.6 5.1 0.0 5.2 9.3 2.6 3.2 0.0 7.5 0.0 1.1 3.6 1.0 1.3 4.0 1.5 0.5 0.0 0.0

ROE (%) 2010E 19.8 22.0 27.6 13.8 17.0 24.2 1012.7 26.4 24.5 17.3 19.7 34.1 17.2 13.6 14.5 31.9 5.6 1.8 7.6 1.3

Yield (%) 2010E 0.0 2.8 0.0 4.4 0.0 5.9 5.0 2.4 0.4

ROE (%) 2010E 19.2 14.1 6.8 35.8 11.4 6.5 34.3 2.1 3.4

Source: Datastream, MSCI, IBES, J.P. Morgan estimates Note: Prices and valuations as of November 27, 2009. Mid cap are stocks with market cap between US$1billion & US$3billion. Sorted in ascending order of 2010E PE

Mid-cap ideas: J.P. Morgan mid-cap stocks to avoid Name Homex Beijing Capital Land TMB Bank Public Company Massmart BYD Electronic Taishin Financial Holdings GAP New World China Land Exito

Share Price Target % Change Bloomberg Price (LC) (LC) to target Code 73.4 102.0 39.0 HOMEX* MM 4 4 (12.5) 2868 HK 1.1 1.0 (6.5) TMB TB 8440.0 7390.0 (12.4) MSM SJ 5.7 3.6 (36.4) 285 HK 12.2 12.0 (1.2) 2887 TT 35.6 30.0 (15.8) GAPB MM 2.9 3.2 9.0 917 HK 17140.0 17800.0 3.9 EXITO CB

JPM Rating N N N UW UW UW N UW N

Mkt Cap, US$ MM 1904 1063 1337 2288 1646 2146 1545 2146 2478

P/E (X) 2009E 2010E 9.7 8.2 19.2 12.0 22.1 14.1 14.3 14.5 22.8 16.3 7.3 17.1 19.6 18.7 10.1 20.2 32.7 30.2

EPS (LC) 2009E 2010E 7.3 8.7 0.2 0.3 0.0 0.1 592.0 580.9 0.2 0.3 1.7 0.7 1.8 1.9 0.3 0.1 526.0 570.3

Source: Datastream, MSCI, IBES, J.P. Morgan estimates. Note: Prices and valuations as of November 27, 2009. Mid cap are stocks with market cap between US$1billion & US$3billion. Sorted in ascending order of 2010E PE. Note: BYD Electronic - We revised PT to HK$4.8 on November 29.

96

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Small-cap ideas: J.P. Morgan small-cap top picks Name JD Group Manila Water Company MindTree Ltd. VanceInfo Technologies Info Edge India

Share Price (LC) 4390.0 16.0 634.5 16.6 806.4

Price Target % Change Bloomberg (LC) to target Code 5253 19.7 JDG SJ 19.0 18.8 MWC PM 700.0 10.3 MTCL IN 23 38.3 VIT US 900 11.6 INFOE IN

JPM Rating OW OW OW OW OW

P/E (X) Mkt Cap, US$ MM 2009E 2010E 965 37.7 7.4 680 10.7 9.5 536 80.8 12.6 741 32.7 24.7 472 36.9 38.3

EPS (LC) Yield (%) 2009E 2010E 2010E 116.5 597.1 0.0 1.5 1.7 3.2 7.9 50.4 0.8 0.5 0.7 0.0 21.9 21.1 0.0

ROE (%) 2010E 18.8 22.1 33.8 19.2 16.2

Source: Datastream, MSCI, IBES, J.P. Morgan estimates Note: Prices and valuations as of November 27, 2009. Small cap are stocks with market cap less than US$1billion. Sorted in ascending order of 2010E PE

Small-cap ideas: J.P. Morgan small-cap stocks to avoid Name HCL Infosystems Guarani The9 Limited

Share Price (LC) 146.8 4.9 7.5

Price Target (LC) 160.0 NA 6.5

% Change to target 9.0 (12.8)

Bloomberg Code HCLI IN ACGU3 BZ NCTY US

JPM Rating N UW N

Mkt Cap, US$ MM 686 800 209

P/E (X) 2009E 2010E 10.5 10.1 nm 44.9 NM NM

EPS (LC) 2009E 2010E 14.0 14.6 -0.3 0.1 -1.7 -2.1

Yield (%) 2010E 4.1 0.0 0.0

ROE (%) 2010E 18.7 2.9 -18.1

Source: Datastream, MSCI, IBES, J.P. Morgan estimates Note: Prices and valuations as of November 27, 2009. Small cap are stocks with market cap less than US$1billion. Sorted in ascending order of 2010E PE

97

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Top Picks by country strategists Name Brazil Petrobras All Copel Santander Brazil PDG Realty Suzano Totvs LAME OGX China Bank of China - H China Yurun Food Group Xinao Gas China Mengniu Dairy Co. Ltd. Baidu.com India Unitech Ltd Infosys Technologies ICICI Bank Larsen & Toubro Indonesia Astra International Bank Central Asia (BCA) PT Aneka Tambang Tbk Tambang Batubara Bukit Asam Korea SK Energy Co Ltd Hyundai Motor Company Shinhan Financial Group Samsung SDI Amorepacific Corp Malaysia Public Bank (F) Tenaga AMMB Holdings Genting Mexico Urbi Arca Grupo Mexico Ternium Asur Femsa Philippines Manila Water Company Inc Energy Development (EDC) Metropolitan Bank Ayala Land Russia Gazprom Sberbank South Africa JD Group ABSA Group Ltd Naspers Ltd Northam Platinum Ltd Anglo Platinum

98

Share Price Target % Change Bloomberg Price (LC) (LC) to target Code

JPM Rating

P/E (X) EPS (LC) Mkt Cap, Yield (%) ROE (%) US$ MM 2009E 2010E 20099E 2010E 2010E 2010E

38.5 15.5 33.9 22.2 17.2 17.6 102.0 14.0 1416.0

46.0 21.0 38.0 28.0 19.0 22.0 125.0 17.0 2030.0

19.6 35.5 12.2 26.2 10.3 25.0 22.5 21.8 43.4

PETR4 BZ ALLL11 BZ CPLE6 BZ SANB11 BZ PDGR3 BZ SUZB5 BZ TOTS3 BZ LAME4 BZ OGXP3 BZ

OW OW OW OW OW OW OW OW OW

209104 6130 5300 48486 3651 3145 1828 5626 26325

12.9 15.2 9.4 16.5 21.2 6.3 20.2 58.8 nm

11.7 11.8 12.4 12.9 14.7 14.9 15.8 34.9 nm

3.0 1.0 3.6 1.3 0.8 2.8 5.2 0.2 16.4

3.3 1.3 2.7 1.7 1.2 1.2 6.6 0.4 5.7

1.7 1.8 2.1 3.3 1.2 0.7 1.1 1.1 0.0

17.4 17.0 7.9 12.0 19.7 7.5 34.1 62.9 3.8

4.1 18.0 18.2 23.1 434.2

5.7 21.0 22.2 23.0 460

38.0 16.9 21.7 (0.2) 5.9

3988 HK 1068 HK 2688 HK 2319 HK BIDU US

OW OW OW OW OW

145716 3877 2471 5165 15063

12.7 19.0 23.3 28.2 70.8

9.0 16.7 18.8 24.8 47.4

0.3 0.9 0.8 0.8 6.1

0.5 1.1 1.0 0.9 9.2

5.0 1.5 1.3 0.0 0.0

21.3 20.6 14.5 17.5 36.0

79.3 2327.9 850.9 1589.5

120.0 2550.0 NA 1675.0

51.3 9.5 5.4

UT IN INFO IN ICICIBC IN LT IN

OW OW OW N

4055 28593 20307 20441

10.8 22.8 26.6 31.0

13.7 21.8 26.8 27.6

7.4 102.0 32.0 51.2

5.8 107.0 31.8 57.6

0.1 1.3 1.4 0.0

17.2 29.6 7.1 19.2

32000.0 4675.0 2250.0 15800.0

37000 5500 2750 22500

15.6 17.6 22.2 42.4

ASII IJ BBCA IJ ANTM IJ PTBA IJ

OW OW OW OW

13587 12088 2251 3818

15.3 17.6 48.0 12.7

12.6 13.1 18.4 21.1

2097 265 47 1241

2541 356 122 750

3.2 2.9 1.0 3.9

24.9 29.2 13.6 28.1

108000 94600 44150 125500 859000

150000 140000 60000 210000 998000

38.9 48.0 35.9 67.3 16.2

096770 KS 005380 KS 055550 KS 006400 KS 090430 KS

OW OW OW OW OW

8516 17769 17853 4876 4282

9.5 8.8 16.2 18.9 24.6

7.7 8.2 10.6 14.3 23.0

11357 10798 2717 6627 34940

13955 11486 4165 8758 37312

2.1 1.6 2.0 0.0 0.0

14.7 10.1 11.8 7.6 18.5

10.9 8.4 4.9 7.1

13.8 10.3 5.3 8.5

26.6 22.3 7.1 20.6

PBKF MK TNB MK AMM MK GENT MK

OW OW OW OW

11289 10716 4331 7659

15.2 39.9 15.5 24.5

12.9 14.0 15.4 19.7

0.7 0.2 0.3 0.3

0.8 0.6 0.3 0.4

3.9 1.6 1.6 0.7

29.5 9.7 11.0 9.6

25.5 37.4 30.5 31.8 61.6 44.5

34.0 44.0 31.5 31.0 53.0 50.0

33.4 17.6 3.3 (2.5) (13.9) 12.3

URBI* MM ARCA* MM GMEXICOB MM TX US ASURB MM FMX US

OW OW OW OW OW OW

1923 2330 18350 6373 1427 15937

12.8 11.1 19.5 26.9 20.1 24.7

9.7 10.4 13.7 15.6 17.1 20.3

2.0 3.4 0.1 1.2 3.1 1.8

2.6 3.6 0.2 2.1 3.7 2.2

0.0 5.2 3.4 4.3 3.6 1.1

13.8 17.0 23.2 8.4 17.2 10.3

16.0 4.1 45.5 11.8

19.0 5.6 50.0 13.9

18.8 38.3 9.9 18.3

MWC PM EDC PM MBT PM ALI PM

OW OW OW OW

680 1610 1744 3230

10.7 10.6 17.0 40.1

9.5 10.7 11.5 39.4

1.5 0.4 2.7 0.3

1.7 0.4 4.0 0.3

3.2 9.3 2.6 0.5

22.1 24.2 1012.7 7.1

5.6 2.3

9.9 3.0

75.8 GAZP RU 34.2 SBER RU

OW OW

133282 48571

6.3 112.5

5.2 15.0

0.9 0.0

1.1 0.2

0.0 0.9

12.3 12.6

4390.0 12421.0 27900.0 3980.0 74900.0

5253.0 15371.0 34108.7 6100.0 91000.0

19.7 23.8 22.3 53.3 21.5

OW OW OW OW OW

965 12012 15161 1930 24025

37.7 10.9 23.7 21.7 70.7

7.4 8.1 19.0 30.4 33.1

116 1144 1179 183 1060

597 1542 1469 131 2260

0.0 5.2 1.0 1.5 0.0

18.8 18.4 12.0 5.6 14.5

JDG SJ ASA SJ NPN SJ NHM SJ AMS SJ

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Top Picks by country strategists (cont'd) Name Taiwan Fubon Financial Holdings Acer Inc Hon Hai Precision UMC Nan Ya Plastics Corp Thailand Thai Oil Public Company PTT Public Company Siam Commercial Bank Land & Houses CP All Pcl Turkey Vakifbank Bank Asya MENA Aldar Properties Qtel First Gulf Bank Chile Enersis Peru Credicorp Buenaventura Colombia Bancolombia Pacific Rubiales

Share Price Target % Change Bloomberg Price (LC) (LC) to target Code

JPM Rating

P/E (X) EPS (LC) Mkt Cap, Yield (%) ROE (%) US$ MM 2009E 2010E 20099E 2010E 2010E 2010E

36.0 79.5 135.0 15.6 54.1

54.0 92 155 19.0 61.0

50.2 15.7 14.8 21.8 12.8

2881 TT 2353 TT 2317 TT 2303 TT 1303 TT

OW OW OW OW OW

9037 6606 35831 6268 13143

13.6 17.9 16.8 69.8 32.9

10.8 12.3 13.3 15.5 22.5

2.6 4.4 8.0 0.2 1.6

3.3 6.5 10.1 1.0 2.4

5.6 3.8 1.9 0.0 2.9

14.0 17.6 18.0 6.0 8.2

39.8 222.0 78.5 6.0 20.8

62.0 315 110 9.5 23.0

56.0 41.9 40.1 59.7 10.6

TOP TB PTT TB SCB TB LH TB CPALL TB

OW OW OW OW OW

2439 18910 8009 1794 2811

6.0 10.7 12.5 14.8 22.7

5.6 8.7 10.6 13.3 19.0

6.7 20.7 6.3 0.4 0.9

7.1 25.5 7.4 0.4 1.1

7.5 3.8 2.8 7.5 4.0

19.8 16.0 16.7 17.3 31.9

3.1 3.0

5 5.0

73.1 VAKBN TI 65.6 ASYAB TI

OW OW

5104 1779

6.8 9.4

5.8 6.7

0.5 0.3

0.5 0.5

6.1 3.6

18.9 22.0

5.5 148.7 18.8

7.8 230 26

41.6 ALDAR UH 54.7 QTEL QD 38.7 FGB UH

OW OW OW

3867 5989 7019

8.1 7.5 8.6

6.5 7.3 7.8

0.7 19.7 2.2

0.9 20.4 2.4

0.0 7.4 1.9

11.0 19.3 16.9

185.1

241.0

30.2 ENERSIS CI

OW

12217

8.4

9.1

21.8

20.0

4.4

18.6

71.7 39.8

88.0 34

22.7 BAP US (14.7) BVN US

N N

5721 10983

12.9 19.6

12.0 19.4

5.7 2.1

6.2 2.1

2.8 0.3

20.5 21.5

42.8 15.0

50.0 18

16.9 CIB US 20.2 PRE CN

8426 3014

15.3 nm

12.9 14.0

2.9 -0.6

3.4 1.1

2.7 0.0

19.2 21.6

OW OW

Source: Datastream, MSCI, IBES, J.P. Morgan estimates Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE

99

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Stocks to avoid by country strategists Name Brazil Sabesp CPFL Energia Redecard Usiminas Guarani China Datang International China Unicom India Hindustan Unilever Limited Reliance Power Idea Cellular Limited Indonesia Bank Rakyat Indonesia Unilever Indonesia Tbk Korea S-Oil Corp Malaysia YTL Power MISC Berhad - F Mexico Homex Telmex Banorte Grupo Modelo Soriana GAP Telmex Internacional Philippines Manila Electric Company Russia Severstal VTB Taiwan Quanta Computer Inc. HTC Corp Taishin Financial Holdings Thailand TMB Bank Public Company Chile Cencosud SQM Peru Southern Copper Colombia Ecopetrol Exito

Share Price Target % Change Bloomberg Price (LC) (LC) to target Code 31.6 32.7 26.4 50.0 4.9

32.0 34.0 32.0 38.5 NA

3.3 10.3

4.3 8.0

284.3 141.1 49.0

1.2 4.0 21.4 (23.0) -

SBSP3 BZ CPFE3 BZ RDCD3 BZ USIM5 BZ ACGU3 BZ

P/E (X) Mkt Cap, US$ MM 2009E 2010E

EPS (LC) 2009E 2010E

Yield (%) 2010E

ROE (%) 2010E

UW UW N UW UW

4143 9027 10208 14413 800

5.5 12.9 12.7 38.0 nm

5.8 11.1 11.6 14.6 44.9

5.7 2.5 2.1 1.3 -0.3

5.4 2.9 2.3 3.5 0.1

4.6 8.5 7.4 2.1 0.0

10.0 27.2 97.9 10.9 2.9

28.7 991 HK (22.3) 762 HK

N UW

12610 31314

23.8 26.8

14.6 38.8

0.1 0.4

0.2 0.3

3.3 1.2

7.2 3.0

225.0 122.0 45.0

(20.9) HUVR IN (13.5) RPWR IN (8.1) IDEA IN

UW UW UW

13284 7246 3251

25.3 138.3 16.2

27.3 54.4 65.3

11.3 1.0 3.0

10.4 2.6 0.7

2.6 0.0 0.0

99.5 4.4 1.6

7650.0 10950.0

6650.0 9700.0

(13.1) BBRI IJ (11.4) UNVR IJ

UW UW

9896 8762

13.3 31.6

11.2 25.8

577.3 346.8

684.3 425.0

3.0 3.2

28.4 86.6

54500.0

64000.0

N

5232

10.0

9.3

5457

5841

3.3

16.3

2.3 8.9

2.1 7.7

(7.5) YTLP MK (13.0) MISF MK

UW UW

3987 9654

21.4 23.4

11.8 41.0

0.1 0.4

0.2 0.2

6.6 4.0

18.2 3.9

73.4 17.6 46.5 65.3 31.8 35.6 15.1

102.0 13.0 49.0 60.0 31.0 30.0 10.0

39.0 (26.3) 5.4 (8.1) (2.5) (15.8) (33.6)

N UW N N UW N UW

1904 16052 7253 16314 4423 1545 13512

9.7 11.0 15.8 24.2 20.6 19.6 23.4

8.2 12.3 13.1 18.0 18.5 18.7 21.3

7.3 1.6 2.9 2.7 1.5 1.8 0.7

8.7 1.5 3.5 3.6 1.7 1.9 0.7

0.0 4.1 0.4 2.3 0.5 5.0 2.4

19.2 48.6 15.2 14.7 9.3 34.3 9.7

209.0

165.0

(21.1) MER PM

4997

30.3

18.2

6.9

11.5

3.5

20.1

7.5 4.3

7.9 4.3

UW UW

7590 22229

NM NM

13.7 38.6

-0.4 (0.3)

0.6 0.1

0.8 0.5

6.4 3.5

63.1 362.5 12.2

57.0 250.0 12.0

(9.7) 2382 TT (31.0) 2498 TT (1.2) 2887 TT

UW UW UW

7273 8927 2146

10.4 12.9 7.3

9.9 14.8 17.1

6.1 28.1 1.7

6.4 24.6 0.7

5.1 5.4 5.9

20.6 24.6 6.5

1.1

1.0

(6.5) TMB TB

N

1337

22.1

14.1

0.0

0.1

0.0

6.8

1490.0 38.0

1578.0 33.0

5.9 CENCOSUD CI (13.1) SQM US

UW UW

6586 9995

17.4 30.9

14.4 25.5

84.5 1.3

102.0 1.5

2.1 0.0

9.8 28.2

34.6

27.5

(20.6) PCU US

UW

29444

30.4

20.3

1.2

1.8

2.5

31.9

2585.0 17140.0

2795.0 17800.0

UW N

52376 2478

16.8 32.7

13.2 30.2

154.3 526.0

197.5 570.3

4.6 0.4

27.1 3.4

17.4 010950 KS

HOMEX* MM TMX US GFNORTEO MM GMODELOC MM SORIANAB MM GAPB MM TII US

4.9 CHMF RU 0.9 VTBR LI

8.1 ECOPETL CB 3.9 EXITO CB

Source: Datastream, MSCI, IBES, J.P. Morgan estimates Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE

100

JPM Rating

N

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Top Picks by Sector Heads Name

Share Price (LC)

Price % Target Change Bloomberg (LC) to target Code

Auto Hyundai Motor Company 94600 140000 Astra International 32000 37000 DongFeng Motor Co., Ltd. 11.0 13.0 Maruti Suzuki India Ltd 1567 1630 Yulon Motor Co., Ltd. 39.0 50.0 Agribusiness, Pulp and Paper All 15.5 21.0 Suzano 17.6 22.0 Consumer JD Group 4390 5253 Femsa 44.5 50.0 China Mengniu Dairy Co. Ltd. 23.1 23.0 United Spirits Limited 1228 1140 LAME 14.0 17.0 Magnit OAO 59.5 80.0 Energy Gazprom 5.6 9.9 Rosneft 8.1 10.3 SK Energy Co Ltd 108000 150000 Sinopec Corp - H 6.4 8.5 Petrobras 38.5 46.0 OGX 1416 2030 Financial Services Vakifbank 3.1 5.4 Bank of China - H 4.1 5.7 Shinhan Financial Group 44150 60000 Fubon Financial Holdings 36.0 54.0 Santander Brazil 22.2 28.0 Sberbank 2.3 3.0 Internet & Media Sohu.Com 54.3 74.0 CTC Media 14.8 25.0 Info Edge India 806.4 900.0 Baidu.com 434.2 460.0 NCsoft 145000.0 190000.0 Metals & Mining Grupo Mexico 30.5 31.5 Ternium 31.8 31.0 MMK 0.7 1.1 Northam Platinum Ltd 3980.0 6100.0 Anglo Platinum 74900.0 91000.0 Real Estate Aldar Properties 5.5 7.8 Urbi 25.5 34.0 PDG Realty 17.2 19.0 LSR 6.5 10.0 Ayala Land 11.8 13.9 Technology - Hardware MediaTek Inc. 504.0 630.0 Acer Inc 79.5 92.0 AAC Acoustic 10.1 14.6 ASUSTek Computer 63.0 70.0 Hon Hai Precision 135.0 155.0 Technology - Tech Panel/Semiconductor Powertech Technology Inc 88.2 108.0 LG Display 30950 40000 TSMC 60.0 72.0 UMC 15.6 19.0 Technology - IT Services MindTree Ltd. 634.5 700.0 Infosys Technologies 2327.9 2550.0 VanceInfo Technologies Inc. 16.6 23.0

48.0 15.6 18.4 4.0 28.2

JPM Rating

Mkt Cap, US$ MM

EPS (LC) P/E (X) Yield (%) ROE (%) 2009E 2010E 2009E 2010E 2010E 2010E

005380 KS ASII IJ 489 HK MSIL IN 2201 TT

OW OW OW OW OW

17769 13587 12207 9701 1895

8.8 15.3 15.0 37.2 41.5

8.2 12.6 13.2 19.9 56.6

10798 2097 0.7 42.2 0.9

11486 2541 0.8 78.8 0.7

1.6 3.2 1.3 0.4 0.5

10.1 24.9 23.6 21.6 1.8

35.5 ALLL11 BZ 25.0 SUZB5 BZ

OW OW

6130 3145

15.2 6.3

11.8 14.9

1.0 2.8

1.3 1.2

1.8 0.7

17.0 7.5

19.7 12.3 (0.2) (7.2) 21.8 34.5

JDG SJ FMX US 2319 HK UNSP IN LAME4 BZ MGNT RU

OW OW OW OW OW OW

965 15937 5165 3304 5626 4953

37.7 24.7 28.2 44.0 58.8 91.5

7.4 20.3 24.8 34.8 34.9 58.9

116.5 1.8 0.8 27.9 0.2 0.7

597.1 2.2 0.9 35.3 0.4 1.0

0.0 1.1 0.0 0.3 1.1 0.0

18.8 10.3 17.5 12.6 62.9 29.3

75.8 27.3 38.9 33.9 19.6 43.4

GAZP RU ROSN LI 096770 KS 386 HK PETR4 BZ OGXP3 BZ

OW OW OW OW OW OW

133282 85739 8516 136013 209104 26325

6.3 12.1 9.5 8.6 12.9 nm

5.2 7.4 7.7 8.3 11.7 nm

0.9 0.7 11357 0.7 3.0 16.4

1.1 1.1 13955 0.8 3.3 5.7

0.0 1.4 2.1 3.0 1.7 0.0

12.3 19.5 14.7 16.6 17.4 3.8

73.1 38.0 35.9 50.2 26.2 34.2

VAKBN TI 3988 HK 055550 KS 2881 TT SANB11 BZ SBER RU

OW OW OW OW OW OW

5104 145716 17853 9037 48486 48571

6.8 12.7 16.2 13.6 16.5 112.5

5.8 9.0 10.6 10.8 12.9 15.0

0.5 0.3 2717 2.6 1.3 0.0

0.5 0.5 4165 3.3 1.7 0.2

6.1 5.0 2.0 5.6 3.3 0.9

18.9 21.3 11.8 14.0 12.0 12.6

36.3 68.7 11.6 5.9 31.0

SOHU US CTCM US INFOE IN BIDU US 036570 KS

OW OW OW OW OW

2087 2255 472 15063 2683

14.8 17.6 36.9 70.8 71.5

12.8 15.4 38.3 47.4 77.4

3.7 0.8 21.9 6.1 2029

4.2 1.0 21.1 9.2 1874

0.0 0.0 0.0 0.0 0.0

24.5 19.7 16.2 36.0 7.6

3.3 (2.5) 52.7 53.3 21.5

GMEXICOB MM TX US MAGN RU NHM SJ AMS SJ

OW OW OW OW OW

18350 6373 8269 1930 24025

19.5 26.9 74.0 21.7 70.7

13.7 15.6 18.5 30.4 33.1

0.1 1.2 0.01 183 1060

0.2 2.1 0.04 131 2260

3.4 4.3 1.4 1.5 0.0

23.2 8.4 4.9 5.6 14.5

41.6 33.4 10.3 53.8 18.3

ALDAR UH URBI* MM PDGR3 BZ LSRG LI ALI PM

OW OW OW OW OW

3867 1923 3651 3044 3230

8.1 12.8 21.2 50.0 40.1

6.5 9.7 14.7 17.6 39.4

0.7 2.0 0.8 0.1 0.3

0.9 2.6 1.2 0.4 0.3

0.0 0.0 1.2 0.0 0.5

11.0 13.8 19.7 11.8 7.1

25.0 15.7 44.0 11.1 14.8

2454 TT 2353 TT 2018 HK 2357 TT 2317 TT

OW OW OW OW OW

16998 6606 1607 8277 35831

14.5 17.9 19.7 22.0 16.8

11.9 12.3 12.6 13.1 13.3

34.8 4.4 0.5 2.9 8.0

42.4 6.5 0.8 4.8 10.1

4.9 3.8 3.2 2.5 1.9

37.4 17.6 26.4 11.6 18.0

22.4 29.2 20.0 21.8

6239 TT 034220 KS 2330 TT 2303 TT

OW OW OW OW

1827 9444 48071 6268

11.0 11.3 17.5 69.8

8.2 8.6 13.8 15.5

8.0 2738 3.4 0.2

10.8 3612 4.4 1.0

5.1 2.3 5.0 0.0

27.6 12.7 25.1 6.0

OW OW OW

536 28593 741

80.8 22.8 32.7

12.6 21.8 24.7

7.9 102 0.5

50.4 107 0.7

0.8 1.3 0.0

33.8 29.6 19.2

10.3 MTCL IN 9.5 INFO IN 38.3 VIT US

101

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Top Picks by Sector Heads (cont'd) Name Telecoms Turk Telekom Qtel MTN Group Limited Far EasTone Telecommunications Co., Ltd Totvs Transportation Asur Container Corporation of India Ltd China Airlines Utilities Enersis RusHydro Perusahaan Gas Negara Tata Power Xinao Gas

Share Price (LC)

Price % Target Change Bloomberg (LC) to target Code

Mkt Cap, US$ MM

EPS (LC) P/E (X) Yield (%) ROE (%) 2009E 2010E 2009E 2010E 2010E 2010E

4.4 148.7 11540.0

6.0 230.0 15843.0

36.4 TTKOM TI 54.7 QTEL QD 37.3 MTN SJ

OW OW OW

10078 5989 28599

9.6 7.5 11.4

7.2 7.3 9.8

0.5 20 1016

0.6 20 1180

10.0 7.4 2.5

35.3 19.3 21.6

37.0 102.0

45.0 125.0

21.6 4904 TT 22.5 TOTS3 BZ

OW OW

3730 1828

13.3 20.2

11.9 15.8

2.8 5.2

3.1 6.6

7.3 1.1

14.0 34.1

61.6 1144.4 10.0

53.0 1260.0 16.0

(13.9) ASURB MM 10.1 CCRI IN 60.5 2610 TT

OW OW OW

1427 3187 1410

20.1 18.1 NM

17.1 16.7 80.0

3.1 63.1 -2.3

3.7 68.4 0.1

3.6 1.2 0.0

17.2 21.5 1.3

185.1 0.04 3575.0 1321.0 18.2

241.0 0.04 4700.0 1450.0 22.2

OW OW OW OW OW

12217 9898 9089 6713 2471

8.4 13.8 13.9 24.0 23.3

9.1 14.5 14.8 18.4 18.8

22 0.003 256 55.0 0.8

20 0.003 242 71.6 1.0

4.4 0.000 2.9 1.1 1.3

18.6 6.0 41.8 12.8 14.5

30.2 9.0 31.5 9.8 21.7

ENERSIS CI HYDR RU PGAS IJ TPWR IN 2688 HK

Source: Datastream, MSCI, IBES, J.P. Morgan estimates Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE

102

JPM Rating

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Stocks to Avoid by Sector Heads Name

Share Price (LC)

Price Target % Change Bloomberg (LC) to target Code

Auto Weichai Power 60.3 47.0 Agribusiness, Pulp and Paper Guarani 4.9 NA Consumer Massmart 8440.0 7390.0 Soriana 31.8 31.0 Hindustan Unilever Ltd. 284.3 225.0 Energy Lukoil 56.8 75.0 Ecopetrol 2585.0 2795.0 PetroChina 9.4 7.4 Financial Services Nedbank Group Ltd 11250.0 10747.0 Bank Rakyat Indonesia 7650.0 6650.0 Banorte 46.5 49.0 Internet & Media The9 Limited 7.5 6.5 Metals & Mining Usiminas 50.0 38.5 Southern Copper 34.6 27.5 Real Estate Homex 73.4 102.0 Beijing Capital Land 4.0 3.5 New World China Land 2.9 3.2 Technology - Hardware Quanta Computer Inc. 63.1 57.0 HTC Corp 362.5 250.0 BYD Electronic 5.7 3.6 Technology - Tech Panel/Semiconductor AU Optronics 32.9 27.0 Technology - IT Services HCL Infosystems 146.8 160.0 Telecoms Magyar Telekom 727.0 685.8 Telmex 17.6 13.0 China Unicom 10.3 8.0 Transportation GAP 35.6 30.0 China Cosco Holdings 9.7 10.0 China Southern Airlines 2.5 2.1 Utilities Sabesp 31.6 32.0 CPFL Energia 32.7 34.0 Datang International 3.3 4.3

(22.0) 2338 HK

JPM Rating N

Mkt Cap, US$ MM

P/E (X) 2009E 2010E

EPS (LC) Yield (%) 2009E 2010E 2010E

ROE (%) 2010E

6941

9.9

8.6

6.1

7.0

0.8

45.2

- ACGU3 BZ

UW

800

nm

44.9

-0.3

0.1

0.0

2.9

(12.4) MSM SJ (2.5) SORIANAB MM (20.9) HUVR IN

UW UW UW

2288 4423 13284

14.3 20.6 25.3

14.5 18.5 27.3

592 1.5 11.3

581 1.7 10.4

4.4 0.5 2.6

35.8 9.3 99.5

32.0 LKOH RU 8.1 ECOPETL CB (21.1) 857 HK

N UW UW

48312 52376 339259

6.7 16.8 15.4

6.6 13.2 13.8

8 154 0.6

9 197 0.7

2.4 4.6 3.2

12.5 27.1 14.0

(4.5) NED SJ UW (13.1) BBRI IJ UW 5.4 GFNORTEO MM N

7551 9896 7253

12.5 13.3 15.8

9.3 11.2 13.1

901 577 2.9

1216 684 3.5

4.8 3.0 0.4

13.2 28.4 15.2

209

NM

NM

-1.7

-2.1

0.0

-18.1

(12.8) NCTY US

N

(23.0) USIM5 BZ (20.6) PCU US

UW UW

14413 29444

38.0 30.4

14.6 20.3

1.3 1.2

3.5 1.8

2.1 2.5

10.9 31.9

39.0 HOMEX* MM (12.5) 2868 HK 9.0 917 HK

N N UW

1904 1063 2146

9.7 19.2 10.1

8.2 12.0 20.2

7.3 0.2 0.3

8.7 0.3 0.1

0.0 2.8 2.4

19.2 14.1 2.1

(9.7) 2382 TT (31.0) 2498 TT (36.4) 285 HK

UW UW UW

7273 8927 1646

10.4 12.9 22.8

9.9 14.8 16.3

6.1 28.1 0.2

6.4 24.6 0.3

5.1 5.4 0.0

20.6 24.6 11.4

(17.9) 2409 TT

UW

8985

NM

43.6

-2.0

0.8

0.0

2.3

686

10.5

10.1

14.0

14.6

4.1

18.7

9.0 HCLI IN

N

(5.7) MTEL HB (26.3) TMX US (22.3) 762 HK

UW UW UW

4148 16052 31314

9.0 11.0 26.8

8.9 12.3 38.8

81 1.6 0.4

82 1.5 0.3

10.2 4.1 1.2

9.6 48.6 3.0

(15.8) GAPB MM 2.7 1919 HK (16.7) 1055 HK

N N N

1545 18608 5529

19.6 NM 33.2

18.7 49.2 82.4

1.8 -0.3 0.1

1.9 0.2 0.0

5.0 0.4 0.0

34.3 4.2 2.3

UW UW N

4143 9027 12610

5.5 12.9 23.8

5.8 11.1 14.6

5.7 2.5 0.1

5.4 2.9 0.2

4.6 8.5 3.3

10.0 27.2 7.2

1.2 SBSP3 BZ 4.0 CPFE3 BZ 28.7 991 HK

Source: Datastream, MSCI, IBES, J.P. Morgan estimates. Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE. Note: BYD Electronic - We revised PT to HK$4.8 on November 29.

103

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Contrarian calls 2009 losers picked to be 2010 winners (Stocks with relative underperformance end 2008 to date and top pick) Name

Share Price (LC)

Price % Target Change Bloomberg JPM (LC) to target Code Rating

Top Picks Gazprom 5.6 9.9 Aldar Properties 5.5 7.8 Turk Telekom 4 6.0 JD Group 4390.0 5253.0 Qtel 148.7 230.0 SK Energy Co Ltd 108000.0 150000.0 ABSA Group Ltd 12421.0 15371.0 Sinopec Corp - H 6 9 LG Display 30950.0 40000.0 PTT Public Company 222 315 Enersis 185.1 241.0 Manila Water Company Inc 16.0 19.0 MTN Group Limited 11540 15843.0 Urbi 25.5 34.0 Arca 37 44.0 Fubon Financial Holdings 36.0 54.0 Far EasTone Telecommunications 37.0 45.0 Credicorp 71.7 88.0 Public Bank (F) 10.9 13.8 Bank Central Asia (BCA) 4675 5500.0 Sohu.Com 54.3 74.0 Land & Houses 6 10 TSMC 60.0 72.0 Tenaga 8.4 10.3 Asur 61.6 53.0 Femsa 45 50.0 Nan Ya Plastics Corp 54 61 Amorepacific Corp 859000 998000 United Spirits Limited 1228.0 1140.0 China Airlines 10.0 16.0

75.8 41.6 36.4 19.7 54.7 38.9 23.8 33.9 29.2 41.9 30.2 18.8 37.3 33.4 17.6 50.2 21.6 22.7 26.6 17.6 36.3 59.7 20.0 22.3 (13.9) 12.3 12.8 16.2 (7.2) 60.5

GAZP RU ALDAR UH TTKOM TI JDG SJ QTEL QD 096770 KS ASA SJ 386 HK 034220 KS PTT TB ENERSIS CI MWC PM MTN SJ URBI* MM ARCA* MM 2881 TT 4904 TT BAP US PBKF MK BBCA IJ SOHU US LH TB 2330 TT TNB MK ASURB MM FMX US 1303 TT 090430 KS UNSP IN 2610 TT

Source: Datastream, MSCI, IBES, J.P. Morgan estimates. Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE.

104

OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW N OW OW OW OW OW OW OW OW OW OW OW OW

Mkt Cap, US$ MM 133282 3867 10078 965 5989 8516 12012 136013 9444 18910 12217 680 28599 1923 2330 9037 3730 5721 11289 12088 2087 1794 48071 10716 1427 15937 13143 4282 3304 1410

P/E (X) Yield (%) ROE (%) 2009E 2010E 2010E 2010E 6.3 8.1 9.6 37.7 7.5 9.5 10.9 8.6 11.3 10.7 8.4 10.7 11.4 12.8 11.1 13.6 13.3 12.9 15.2 17.6 14.8 14.8 17.5 39.9 20.1 24.7 32.9 24.6 44.0 NM

5.2 6.5 7.2 7.4 7.3 7.7 8.1 8.3 8.6 8.7 9.1 9.5 9.8 9.7 10.4 10.8 11.9 12.0 12.9 13.1 12.8 13.3 13.8 14.0 17.1 20.3 22.5 23.0 34.8 80.0

0.0 0.0 10.0 0.0 7.4 2.1 5.2 3.0 2.3 3.8 4.4 3.2 2.5 0.0 5.2 5.6 7.3 2.8 3.9 2.9 0.0 7.5 5.0 1.6 3.6 1.1 2.9 0.0 0.3 0.0

12.3 11.0 35.3 18.8 19.3 14.7 18.4 16.6 12.7 16.0 18.6 22.1 21.6 13.8 17.0 14.0 14.0 20.5 29.5 29.2 24.5 17.3 25.1 9.7 17.2 10.3 8.2 18.5 12.6 1.3

Performance end 08 to date (%) Absolute Rel to Region 52.3 38.8 27.0 47.4 35.8 58.4 42.0 35.4 62.8 32.5 44.1 21.8 31.8 42.6 63.9 52.7 0.7 47.8 30.7 66.8 18.3 65.3 37.9 37.5 30.9 50.0 60.2 45.0 42.5 -7.5

(16.6) (30.2) (41.9) (21.6) (33.1) (10.6) (26.9) (33.6) (6.2) (36.4) (24.8) (47.2) (37.1) (26.4) (5.0) (16.3) (68.3) (21.1) (38.2) (2.2) (50.7) (3.6) (31.1) (31.5) (38.1) (18.9) (8.7) (23.9) (26.4) (76.5)

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

2009 winners picked to be 2010 losers (Stocks with relative outperformance end 2008 to date and stocks to avoid) Name Stocks to Avoid Lukoil Weichai Power Quanta Computer Inc. HCL Infosystems Bank Rakyat Indonesia Beijing Capital Land Banorte Severstal TMB Bank Public Co. Cencosud Usiminas BYD Electronic Taishin Financial Holdings Manila Electric Co. Southern Copper Exito VTB Guarani China Cosco Holdings China Southern Airlines

Share Price (LC) 56.8 60.3 63.1 146.8 7650.0 4.0 46.5 7.5 1.1 1490.0 50.0 5.7 12.2 209.0 34.6 17140.0 4.3 4.9 9.7 2.5

Price Target % Change Bloomberg (LC) to target Code

JPM Rating

75 47.0 57 160.0 6650.0 3.5 49.0 8 1.0 1578.0 38.5 4 12.0 165 27.5 17800 4.3 NA 10 2.1

N N UW N UW N N UW N UW UW UW UW N UW N UW UW N N

32.0 (22.0) (9.7) 9.0 (13.1) (12.5) 5.4 4.9 (6.5) 5.9 (23.0) (36.4) (1.2) (21.1) (20.6) 3.9 0.9 2.7 (16.7)

LKOH RU 2338 HK 2382 TT HCLI IN BBRI IJ 2868 HK GFNORTEO MM CHMF RU TMB TB CENCOSUD CI USIM5 BZ 285 HK 2887 TT MER PM PCU US EXITO CB VTBR LI ACGU3 BZ 1919 HK 1055 HK

Mkt Cap, US$ MM 48312 6941 7273 686 9896 1063 7253 7590 1337 6586 14413 1646 2146 4997 29444 2478 22229 800 18608 5529

P/E (X) Yield (%) ROE (%) 2009E 2010E 2010E 2010E 6.7 9.9 10.4 10.5 13.3 19.2 15.8 NM 22.1 17.4 38.0 22.8 7.3 30.3 30.4 32.7 NM nm NM 33.2

6.6 8.6 9.9 10.1 11.2 12.0 13.1 13.7 14.1 14.4 14.6 16.3 17.1 18.2 20.3 30.2 38.6 44.9 49.2 82.4

2.4 0.8 5.1 4.1 3.0 2.8 0.4 0.8 0.0 2.1 2.1 0.0 5.9 3.5 2.5 0.4 0.5 0.0 0.4 0.0

12.5 45.2 20.6 18.7 28.4 14.1 15.2 6.4 6.8 9.8 10.9 11.4 6.5 20.1 31.9 3.4 3.5 2.9 4.2 2.3

Performance end 08 to date (%) Absolute Rel to Region 73.8 312.7 87.0 71.4 93.9 222.6 97.6 130.8 89.5 111.3 154.3 107.3 113.4 253.6 123.3 92.4 89.9 221.4 80.7 95.3

4.8 243.7 18.0 2.5 24.9 153.6 28.7 61.8 20.5 42.4 85.3 38.4 44.4 184.6 54.3 23.4 20.9 152.4 11.8 26.4

Source: Datastream, MSCI, IBES, J.P. Morgan estimates. Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE. Note: BYD Electronic - We revised PT to HK$4.8 on November 29.

105

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Running with 2009 winners (Stocks with relative outperformance end 2008 to date and top picks) Name Top Picks Thai Oil Public Company Vakifbank Bank Asya Rosneft First Gulf Bank Powertech Technology Inc Hyundai Motor Company Bank of China - H Shinhan Financial Group Siam Commercial Bank Energy Development Corp. Metropolitan Bank Petrobras All MediaTek Inc. Acer Inc Copel MindTree Ltd. AAC Acoustic Astra International Bancolombia ASUSTek Computer DongFeng Motor Co., Ltd. Hon Hai Precision Grupo Mexico Unitech Ltd Pacific Rubiales Samsung SDI RusHydro PDG Realty Perusahaan Gas Negara Sberbank Suzano AMMB Holdings UMC CTC Media Totvs China Yurun Food Group Container Corp. of India LSR PT Aneka Tambang Tbk Tata Power MMK Xinao Gas CP All Pcl Naspers Ltd Buenaventura Genting Maruti Suzuki India Ltd Tambang Batubara Bukit Asam Infosys Technologies

106

Share Price (LC)

Price Target (LC)

39.8 62.0 3.1 5.4 3.0 5.0 8.1 10.3 18.8 26.0 88.2 108.0 94600.0 140000.0 4.1 5.7 44150.0 60000.0 78.5 110.0 4.1 5.6 45.5 50.0 38.5 46.0 15.5 21.0 504.0 630.0 79.5 92.0 33.9 38.0 634.5 700.0 10.1 14.6 32000.0 37000.0 42.8 50.0 63.0 70.0 11.0 13.0 135.0 155.0 30.5 31.5 79.3 120.0 15.0 18.0 125500.0 210000.0 0.0 0.0 17.2 19.0 3575.0 4700.0 2.3 3.0 17.6 22.0 4.9 5.3 15.6 19.0 14.8 25.0 102.0 125.0 18.0 21.0 1144.4 1260.0 6.5 10.0 2250.0 2750.0 1321.0 1450.0 0.7 1.1 18.2 22.2 20.8 23.0 27900.0 34108.7 39.8 34.0 7.1 8.5 1567.2 1630.0 15800.0 2327.9

22500.0 2550.0

% Change Bloomberg to target Code 56.0 73.1 65.6 27.3 38.7 22.4 48.0 38.0 35.9 40.1 38.3 9.9 19.6 35.5 25.0 15.7 12.2 10.3 44.0 15.6 16.9 11.1 18.4 14.8 3.3 51.3 20.2 67.3 9.0 10.3 31.5 34.2 25.0 7.1 21.8 68.7 22.5 16.9 10.1 53.8 22.2 9.8 52.7 21.7 10.6 22.3 (14.7) 20.6 4.0

TOP TB VAKBN TI ASYAB TI ROSN LI FGB UH 6239 TT 005380 KS 3988 HK 055550 KS SCB TB EDC PM MBT PM PETR4 BZ ALLL11 BZ 2454 TT 2353 TT CPLE6 BZ MTCL IN 2018 HK ASII IJ CIB US 2357 TT 489 HK 2317 TT GMEXICOB MM UT IN PRE CN 006400 KS HYDR RU PDGR3 BZ PGAS IJ SBER RU SUZB5 BZ AMM MK 2303 TT CTCM US TOTS3 BZ 1068 HK CCRI IN LSRG LI ANTM IJ TPWR IN MAGN RU 2688 HK CPALL TB NPN SJ BVN US GENT MK MSIL IN

42.4 PTBA IJ 9.5 INFO IN

JPM Mkt Cap, Rating US$ MM

P/E (X) 2009E 2010E

Yield (%) 2010E

ROE Performance end 08 to date (%) (%) 2010E Absolute Rel to Region

OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW N OW OW

2439 5104 1779 85739 7019 1827 17769 145716 17853 8009 1610 1744 209104 6130 16998 6606 5300 536 1607 13587 8426 8277 12207 35831 18350 4055 3014 4876 9898 3651 9089 48571 3145 4331 6268 2255 1828 3877 3187 3044 2251 6713 8269 2471 2811 15161 10983 7659 9701

6.0 6.8 9.4 12.1 8.6 11.0 8.8 12.7 16.2 12.5 10.6 17.0 12.9 15.2 14.5 17.9 9.4 80.8 19.7 15.3 15.3 22.0 15.0 16.8 19.5 10.8 nm 18.9 13.8 21.2 13.9 112.5 6.3 15.5 69.8 17.6 20.2 19.0 18.1 50.0 48.0 24.0 74.0 23.3 22.7 23.7 19.6 24.5 37.2

5.6 5.8 6.7 7.4 7.8 8.2 8.2 9.0 10.6 10.6 10.7 11.5 11.7 11.8 11.9 12.3 12.4 12.6 12.6 12.6 12.9 13.1 13.2 13.3 13.7 13.7 14.0 14.3 14.5 14.7 14.8 15.0 14.9 15.4 15.5 15.4 15.8 16.7 16.7 17.6 18.4 18.4 18.5 18.8 19.0 19.0 19.4 19.7 19.9

7.5 6.1 3.6 1.4 1.9 5.1 1.6 5.0 2.0 2.8 9.3 2.6 1.7 1.8 4.9 3.8 2.1 0.8 3.2 3.2 2.7 2.5 1.3 1.9 3.4 0.1 0.0 0.0 0.0 1.2 2.9 0.9 0.7 1.6 0.0 0.0 1.1 1.5 1.2 0.0 1.0 1.1 1.4 1.3 4.0 1.0 0.3 0.7 0.4

19.8 18.9 22.0 19.5 16.9 27.6 10.1 21.3 11.8 16.7 24.2 1012.7 17.4 17.0 37.4 17.6 7.9 33.8 26.4 24.9 19.2 11.6 23.6 18.0 23.2 17.2 21.6 7.6 6.0 19.7 41.8 12.6 7.5 11.0 6.0 19.7 34.1 20.6 21.5 11.8 13.6 12.8 4.9 14.5 31.9 12.0 21.5 9.6 21.6

76.0 168.0 161.6 111.2 104.9 72.2 164.0 94.8 71.0 70.0 168.7 99.5 124.8 110.9 132.5 91.3 86.9 178.0 191.4 251.6 86.8 74.1 339.2 145.5 284.3 87.0 691.7 151.5 74.6 316.3 122.8 201.4 94.2 102.4 113.1 211.7 277.2 97.1 93.0 755.3 139.3 75.8 174.1 123.3 76.7 110.3 108.3 94.4 198.3

7.0 99.0 92.7 42.3 36.0 3.2 95.1 25.9 2.1 1.0 99.7 30.6 55.9 41.9 63.5 22.4 17.9 109.0 122.4 182.7 17.9 5.2 270.2 76.5 215.3 18.0 622.7 82.6 5.7 247.4 53.9 132.4 25.2 33.5 44.2 142.7 208.2 28.2 24.0 686.3 70.4 6.9 105.1 54.3 7.7 41.4 39.4 25.5 129.4

OW OW

3818 28593

12.7 22.8

21.1 21.8

3.9 1.3

28.1 29.6

165.5 112.2

96.5 43.3

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Running with 2009 winners (Stocks with relative outperformance end 2008 to date and top picks) (cont'd) Name China Mengniu Dairy Co. VanceInfo Technologies ICICI Bank Larsen & Toubro Northam Platinum Ltd Anglo Platinum LAME Info Edge India Ayala Land Baidu.com Yulon Motor Co., Ltd. Magnit OAO NCsoft OGX

Price Share Target Price (LC) (LC) 23.1 23.0 16.6 23.0 850.9 NA 1589.5 1675.0 3980.0 6100.0 74900.0 91000.0 14.0 17.0 806.4 900.0 11.8 13.9 434.2 460.0 39.0 50.0 59.5 80.0 145000.0 190000.0 1416.0 2030.0

% Change to target (0.2) 38.3 5.4 53.3 21.5 21.8 11.6 18.3 5.9 28.2 34.5 31.0 43.4

Bloomberg Code 2319 HK VIT US ICICIBC IN LT IN NHM SJ AMS SJ LAME4 BZ INFOE IN ALI PM BIDU US 2201 TT MGNT RU 036570 KS OGXP3 BZ

JPM Mkt Cap, Rating US$ MM OW 5165 OW 741 OW 20307 N 20441 OW 1930 OW 24025 OW 5626 OW 472 OW 3230 OW 15063 OW 1895 OW 4953 OW 2683 OW 26325

P/E (X) 2009E 28.2 32.7 26.6 31.0 21.7 70.7 58.8 36.9 40.1 70.8 41.5 91.5 71.5 nm

P/E (X) 2010E 24.8 24.7 26.8 27.6 30.4 33.1 34.9 38.3 39.4 47.4 56.6 58.9 77.4 nm

Yield (%) 2010E 0.0 0.0 1.4 0.0 1.5 0.0 1.1 0.0 0.5 0.0 0.5 0.0 0.0 0.0

ROE Performance end 08 to date (%) (%) 2010E Absolute Rel to Region 17.5 128.7 59.7 19.2 269.5 200.5 7.1 91.9 23.0 19.2 102.5 33.5 5.6 140.7 71.7 14.5 77.4 8.5 62.9 196.9 127.9 16.2 102.3 33.4 7.1 85.2 16.2 36.0 238.7 169.7 1.8 180.8 111.8 29.3 270.7 201.8 7.6 204.4 135.5 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

107

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Non-consensus top picks and stocks to avoid Name Top Picks Anglo Platinum Stocks to Avoid Sabesp Lukoil Homex Weichai Power S-Oil Corp Quanta Computer Inc. HCL Infosystems Redecard HTC Corp CPFL Energia Bank Rakyat Indonesia PetroChina Cencosud Beijing Capital Land GAP YTL Power Datang International Grupo Modelo SQM China Southern Airlines Usiminas Severstal Guarani AU Optronics

Price Target % Change Bloomberg (LC) to target Code

JPM Rating

IBES Rating

74900

91000

OW

UW

24025

70.7

31.6 56.8 73.4 60.3 54500 63.1 147 26.4 363 32.7 7650 9.4 1490 4.0 35.6 2.3 3.3 65.3 38.0 2.5 50.0 7.5 4.9 32.9

32.0 75.0 102.0 47.0 64000 57.0 160.0 32.0 250 34.0 6650 7.4 1578 3.5 30.0 2.1 4.3 60.0 33.0 2.1 38.5 7.9 NA 27.0

SBSP3 BZ UW LKOH RU N HOMEX* MM N 2338 HK N 010950 KS N 2382 TT UW HCLI IN N RDCD3 BZ N 2498 TT UW CPFE3 BZ UW BBRI IJ UW 857 HK UW CENCOSUD CI UW 2868 HK N GAPB MM N YTLP MK UW 991 HK N GMODELOC MM N SQM US UW 1055 HK N USIM5 BZ UW CHMF RU UW ACGU3 BZ UW 2409 TT UW

OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW

4143 48312 1904 6941 5232 7273 686 10208 8927 9027 9896 339259 6586 1063 1545 3987 12610 16314 9995 5529 14413 7590 800 8985

5.5 6.7 9.7 9.9 10.0 10.4 10.5 12.7 12.9 12.9 13.3 15.4 17.4 19.2 19.6 21.4 23.8 24.2 30.9 33.2 38.0 NM nm NM

Share Price (LC)

21.5 AMS SJ 1.2 32.0 39.0 (22.0) 17.4 (9.7) 9.0 21.4 (31.0) 4.0 (13.1) (21.1) 5.9 (12.5) (15.8) (7.5) 28.7 (8.1) (13.1) (16.7) (23.0) 4.9 (17.9)

Source: Datastream, MSCI, IBES, J.P. Morgan estimates. Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE.

108

Mkt Cap, US$ MM

P/E (X) 2009E 2010E

Yield (%) 2010E

ROE (%) 2010E

33.1

0.0

14.5

5.8 6.6 8.2 8.6 9.3 9.9 10.1 11.6 14.8 11.1 11.2 13.8 14.4 12.0 18.7 11.8 14.6 18.0 25.5 82.4 14.6 13.7 44.9 43.6

4.6 2.4 0.0 0.8 3.3 5.1 4.1 7.4 5.4 8.5 3.0 3.2 2.1 2.8 5.0 6.6 3.3 2.3 0.0 0.0 2.1 0.8 0.0 0.0

10.0 12.5 19.2 45.2 16.3 20.6 18.7 97.9 24.6 27.2 28.4 14.0 9.8 14.1 34.3 18.2 7.2 14.7 28.2 2.3 10.9 6.4 2.9 2.3

Emerging Markets Equity Research 02 December 2009

Top Picks

Adrian Mowat (852) 2800-8599 [email protected]

109

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

AAC Acoustics

Overweight

www.aacacoustic.com

Price Target: HK$11

Company description AAC Acoustics is a manufacturer of miniature acoustic components, which are mainly used in mobile handsets. It manufactures speakers, receivers, MFDs, microphones, vibrators, and other acoustic components for handsets. Its key customers include Nokia, Motorola, and leading smartphone players such as Apple and RIM. The company is also diversifying into non-acoustic components, which include phone camera lenses, ceramic components and antennae.

HK/China Technology Hardware

HK$9.65

Post mortem AAC continues to gain share within Nokia in speaker and receiver, as well as penetrating into new segments such as microphone and vibrator. Besides, smartphone opportunities and non-acoustic forays provide AAC a strong mid/long-term growth outlook, in our opinion. We expect its margins to continue to improve through 2010, mainly due to newer products and better mix (due to higher smartphone content). Potential for earnings upgrades We estimate that a 1% upside in top line will lead to a 1.5% increase in net profit. We believe AAC is not sensitive to credit cost fluctuation as it is operating at minimal debt level. How much recovery is priced into the stock? The stock has risen from nearly 4x forward P/E in Dec-08, when the handset industry was looking at a 10% decline in 2009, to about 12x forward P/E, when we are looking at a 12% handset industry growth in 2010. Hence, any improvement in handset outlook and better visibility should lead to a further re-rating of the stock. Price target and key risks Our Dec-10 PT of HK$11 is based on our 10-year DCF valuation, assuming a WACC of 9%, a terminal growth rate of 0%, and a risk-free rate of 2.4%. Our PT implies an FY10E P/E of 14x, the mid-point of its historical trading range of 4x-20x. A key risk to our PT is global handset demand volatility.

Charles GuoAC (852) 2800-8532 [email protected] J.P. Morgan Securities (Asia Pacific) Limited

Price performance 12 9 6 3 0 No v-08 Feb-09 M ay-09 A ug-09 No v-09 A A C A co ustics (HK$ ) HSI (rebased)

Source: Bloomberg.

Performance Absolute (%) Relative (%)

1M

3M

12M

15.4 9.8

37.9 31.5

44.7 66.7

Source: Bloomberg.

Company data 52-week range (HK$)

11,850

Mkt cap. (US$MM)

1,529

Avg daily value (US$MM) Avg daily volume (MM) Shares O/S (MM) Date of price Index: Hang Seng

FY10E 3,093 873 0.71 0.71 0.28 38.2% 47.3% 46.5% 23.7% 12.0 12.0

21,479 53

FY11E 3,809 1,072 0.87 0.87 0.35 23.1% 22.8% 22.7% 25.1% 9.7 9.7

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009. We raised our PT to HK$14.6 on 10 Nov 2009. 110

5-Nov-09

7.8

Rmb in millions, year-end December FY09E 2,239 596 0.49 0.49 0.19 (0.8%) 0.2% 1.1% 18.2% 17.5 17.5

2.0 1,228

Exchange rate Source: Bloomberg.

FY08 2,256 590 0.48 0.48 0.10 15.6% 7.8% 8.2% 20.8% 17.7 17.7

1.9

Free float (%)

Bloomberg: 2018 HK; Reuters: 2018.HK

Sales Net profit EPS (Rmb) FD EPS (Rmb) DPS (Rmb) Sales growth (%) Net profit growth (%) EPS growth (%) ROE (%) P/E (x) FD P/E (x)

2.20-10.22

Mkt cap. (HK$MM)

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

AAC Acoustics: Summary of financials Profit and loss statement

Cash flow statement

Rmb in millions, year-end December

Rmb in millions, year-end December

Revenues Cost of Goods Sold Gross Profit SGA &RD Expenses Operating Profit (EBIT) EBITDA Interest Income Interest Expense Investment Income (Exp.) Non-Operating Income (Exp.) Earnings before tax Tax Net Income (Reported)

FY08 2,256 1,316 940 272 631 764 0 -10 0 -5 616 -26 590

FY09E 2,239 1,259 980 275 651 813 0 -5 0 8 654 -62 596

FY10E 3,093 1,713 1,380 327 983 1175 0 -4 0 0 979 -108 873

FY11E 3,809 2,122 1,688 396 1,206 1437 0 -4 0 0 1,202 -132 1072

Rmb EPS (Reported) BPS DPS Shares Outstanding (MM)

0.48 2.53 0.10 1,230

0.49 2.79 0.19 1,228

0.71 3.22 0.28 1,228

0.87 3.74 0.35 1,228

Source: Company, J.P. Morgan estimates.

Net Income Depr. & Amortisation Change in working capital Other Cash flow from operations

FY08 590 133 93 2 818

FY09E 596 162 -389 -5 364

FY10E 873 192 99 -2 1,163

FY11E 1,072 231 -122 -2 1,178

Capex Disposal/(purchase) Cash flow from investing Free cash flow

-438 -113 -551 380

-228 -11 -239 136

-400 0 -400 763

-400 0 -400 778

Equity raised/ (repaid) Debt raised/ (repaid) Other Dividends paid Cash flow from financing

-66 37 0 0 -28

-38 38 -3 -239 -241

0 -108 2 -349 -456

0 15 2 -429 -412

232 1,051 1,283

-115 1,283 1,167

307 1,167 1,474

366 1,474 1,840

Net change in cash Beginning cash Ending cash

Source: Company, J.P. Morgan estimates.

Balance sheet Ratio analysis

Rmb in millions, year-end December Cash and cash equivalents Accounts receivable Inventories Others Current assets

FY08 1,283 574 296 102 2,254

FY09E 1,167 1,022 530 104 2,824

FY10E 1,474 1,114 434 104 3,125

FY11E 1,840 1,292 504 104 3,741

LT investments Net fixed assets Others Total assets

0 1,359 91 3,704

0 1,425 102 4,351

0 1,633 102 4,860

0 1,803 102 5,645

Liabilities ST loans Payables Others Total current liabilities Long term debt Other liabilities Total liabilities Shareholders' equity

200 366 23 589 0 0 589 3,108

239 632 53 923 0 0 923 3,428

130 719 59 908 0 0 908 3,952

145 836 69 1050 0 0 1050 4,595

Source: Company, J.P. Morgan estimates.

%, year-end December FY08 41.7 33.9 28.0 26.2 12.1

FY09E 43.8 36.3 29.1 26.6 12.3

FY10E 44.6 38.0 31.8 28.2 10.6

FY11E 44.3 37.7 31.7 28.1 10.4

Sales growth Operating Profit Growth Net profit growth EPS (Reported) growth

15.6 5.5 7.8 8.2

-0.8 3.2 0.2 1.1

38.2 50.9 47.3 46.5

23.1 22.7 22.8 22.7

Interest coverage (x) Net debt to total capital Net debt to equity

62.9 Net Cash Net Cash

134.3 Net Cash Net Cash

243.6 Net Cash Net Cash

298.9 Net Cash Net Cash

60.9 1.4 20.8 19.8 32.0

51.5 1.3 18.2 17.1 26.3

63.6 1.5 23.7 22.6 34.3

67.5 1.6 25.1 24.3 39.0

Gross Margin EBITDA margin Operating Margin Net Margin SG&A/Sales

Asset Turnover Working Capital Turns (X) ROE ROIC ROIC (net of cash)

Source: Company, J.P. Morgan estimates.

111

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

ABSA Group Ltd www.absa.co.za

Overweight R126.00 23 November 2009 Price Target: R153.71 Jun 2010

Company description Absa provides the most geared play on the domestic retail market and its investment banking division provides a more robust earnings base off which to grow in our view. Growth opportunities in Africa are currently limited to investment banking and bancassurance/wealth management. Absa is 58% held by Barclays.

South Africa Computer Hardware

Post mortem Mortgage impairment unwind should support earnings growth during FY10E and FY11E. We expect NIR growth to be a key earnings differentiator and ASA is well positioned for NIR growth from its: (i) large and established retail banking franchise, distribution and cross-sell ability; and (ii) established and growing corporate franchises, enjoying flow, scale as well as strong client relationships in our view.

Absa relative price performance

Potential for earnings upgrades Top line across the SA banks is set remain relatively sluggish and the negative endowment should exacerbate margin pressure. We expect robust NIR growth and the mortgage impairment unwind should support earnings growth during FY10E and FY11E. A more expansionary stance introduces upside risk to FY10E, whilst a healthy banking system provides downside protection. How much recovery is priced into the stock? Absa remains our top pick in the sector, with a cheap valuation not reflecting its strong ROE franchise and robust earnings trajectory in our view. Management instability however remains a key overhang. Price target and key risks Our Jun-10 price target of 15,371c is calculated at the lower of our SOTP and economic valuation methodology, rolled forward at COE. Key risks to rating and PT include significant variation to our base case interest rate assumptions, while a collapse in the property market could significantly impact the value of realizations.

112

Mervin NaidooAC (27-11) 507-0716 [email protected] J.P. Morgan Equities Ltd.

3.0 2.0 1.0 0.0 02 03 04 05 06 07 08 09 Source: I-Net.

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

ABSA Group Ltd: Summary of Financials Profit and Loss Statement R mn millions, year end Dec

FY08A

FY09E

FY10E

Net interest income % Change Y/Y Non-interest income Fees & commissions % change Y/Y Trading revenues % change Y/Y Other Income Total operating revenues % change Y/Y Admin expenses % change Y/Y Other expenses Pre-provision operating profit % change Y/Y Loan loss provisions Other provisions Other nonrecurrent items Earnings before tax % change Y/Y Tax (charge) % Tax rate Minorities Net Income (Reported)

22,106 17.0% 13,343 35,449 16.3% -21,193 14.9% 21,048 27.5% 8,858 15,209 8.0% 3,966 26.1% 194 10,592

21,815 (1.3%) 14,947 36,763 3.7% -22,285 5.2% 21,482 2.1% 14,513 11,220 (26.2%) 2,995 25.0% 229 7,996

22,920 5.1% 17,585 40,504 10.2% -24,029 7.8% 23,658 10.1% 14,147 15,606 39.1% 4,271 26.0% 252 11,083

Ratio Analysis FY11E R mn millions, year end Dec Per Share Data 25,966 EPS Reported 13.3% EPSAdjusted 20,005 % Change Y/Y - DPS % Change Y/Y - Dividend yield - Payout ratio - BV per share 45,971 NAV per share 13.5% Shares outstanding -26,707 11.1% Return ratios - RoRWA 26,760 Pre-tax ROE 13.1% ROE 14,933 RoNAV - Revenues 20,315 NIM (NII / RWA) 30.2% Non-IR / average assets 5,731 Total rev / average assets 27.0% NII / Total revenues 277 Fees / Total revenues 14,307 Trading / Total revenues

Balance sheet R mn millions, year end Dec

FY08A

FY09E

FY10E

FY11E R mn millions, year end Dec

ASSETS Net customer loans % change Y/Y Loan loss reserves Investments Other interest earning assets % change Y/Y Average interest earnings assets Goodwill Other assets Total assets

532,171 16.7% 8,858 597,154 957 62,228 773,758

521,753 (2.0%) 14,513 670,570 957 67,206 785,714

567,625 8.8% 14,147 702,657 957 72,583 856,082

639,774 12.7% 14,933 777,464 957 78,389 955,051

LIABILITIES Customer deposits % change Y/Y Long term funding Interbank funding Average interest bearing liabs Other liabilities Retirement benefit liabilities Shareholders' equity Minorities Total liabilities

436,914 18.6% 182,840 402,730 1,042 720,792

431,200 (1.3%) 191,627 434,057 1,271 723,111

458,084 6.2% 214,065 444,642 1,523 786,083

506,686 10.6% 239,195 482,385 1,800 875,594

FY08A

FY09E

FY10E

FY11E

1567.56 1,412.10 7.3% 595 6.2% 5.5% 38.0% 6,950.10 6,950.10 680.3

1143.53 1,216.48 (13.9%) 500 -15.9% 4.3% 43.8% 7,892.95 7,892.95 718.2

1542.41 1,581.38 30.0% 642 28.4% 5.5% 41.7% 8,878.82 8,878.82 718.9

1987.04 2,039.56 29.0% 828 28.8% 7.0% 41.6% 10,125.50 10,125.50 721.1

23.4% 23.7%

16.4% 16.8%

18.4% 18.7%

20.9% 21.2%

1.9% 5.2% 45.8% 54.2% -

1.9% 4.4% 35.5% 64.5% -

2.1% 4.9% 38.4% 61.6% -

2.2% 5.3% 42.3% 57.7% -

FY08A

FY09E

FY10E

FY11E

Cost ratios Cost / income Cost / assets Staff numbers

49.4% 3.0% 37,828

50.1% 2.9% 35,558

49.6% 2.9% 35,558

49.2% 2.9% 35,914

Balance Sheet Gearing Loan / deposit Investments / assets Loan / assets Customer deposits / liabilities LT Debt / liabilities

132.1% 4.2% 68.8% 60.6% 24.7%

120.2% 4.5% 66.4% 59.6% 25.9%

127.7% 4.5% 66.3% 58.3% 26.6%

132.6% 4.5% 67.0% 57.9% 26.8%

Asset Quality / Capital Loan loss reserves / loans NPLs / loans LLP / RWA Loan loss reserves / NPLs Growth in NPLs RWAs % YoY change Core Tier 1 Total Tier 1

1.6% 3.5% 46.8% 158.8% -

2.7% 7.3% 36.9% 107.8% -

2.4% 6.4% 38.2% (5.7%) -

2.3% 5.6% 40.5% (0.5%) -

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

113

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Acer Inc.

Overweight

www.acer.com

Price Target: NT$92

Company description Acer (TWSE: 2353) is the No #2 notebook PC brand globally and operates four sub brands—Acer, Gateway, Packard Bell and e-machines. It operates a purely outsourced business model with what we believe to be a high degree of focus on channel management and branding.

Taiwan Computer Hardware

NT$77.8

Gokul HariharanAC (852) 2800-8564 [email protected]

Alvin KwockAC

Post mortem We believe Acer has negotiated the downturn well, with a strong focus on inventory, receivables management, and lower price points (netbooks). Acer has invested in the expansion of its China business. The company’s OP margins have also been on an upswing as Acer has kept its OPEX under a tight control. In 2009, Acer has benefited from the consolidation in the NB brand market share, and emerged as the clear No #2 in PCs, surpassing Dell.

(852) 2800-8533 [email protected] J.P. Morgan Securities (Asia Pacific) Limited

Price performance 90 NT$

60 30 Nov-08

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

Absolute (%) Relative (%)

NT$

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009. 114

1M

3M

12M

-1.8 -0.8

14.3 5.6

72.1 13.1

Company data 52-week range (NT$) Mkt cap. (NT$B) Mkt cap. (US$B) Avg daily value (US$MM) Avg daily volume (MM) Shares O/S (MM) Date of price Index: TWSE Free float (%) Exchange rate Source: Bloomberg.

NT$ in billions, year-end December FY08 14.7 14.0 4.43 55% 17.7 1Q 1.21 0.77 1.36 3.60

Nov-09

Source: Bloomberg.

Bloomberg: 2353.TT; Reuters: 2353.TW FY10E FY11E 668 766 ROE (%) 20.9 24.9 Core ROIC (%) 21.7 25.7 Core adjusted EPS 21.7 26.3 Core OP growth (%) 17.4 21.0 Core adjusted P/E (x) 3.1 3.8 Quarterly EPS (NT$) 17.4 21.0 EPS (FY08) 6.48 7.82 EPS (FY09E) 12.0 9.9 EPS (FY10E) 46% 21% DPS (NT$) 38.53 42.40 2.0 1.8 Jun-10 PT

Aug-09

Performance

Price target and key risks Our Jun-10 PT of NT$92 implies 15x 2010E core earnings, which we believe is fair, supported by 36%/19% OP profit growth in 2010/2011E, largely driven by OP margin expansion. A key risk to our PT is increase in competition.

FY08 FY09E 546 574 13.7 15.3 14.6 16.1 14.8 15.3 11.7 11.8 2.1 2.2 11.7 11.8 4.62 4.44 16.8 17.5 4% -4% 32.62 35.36 2.4 2.2

May-09

Source: Bloomberg.

How much recovery is priced into the stock? Acer’s strong execution and market share gains appear to be priced into its share price. What is not yet priced in, in our view, is the potential for margin expansion, which leaves room for earnings upside in 2010E. The market ascribes a zero value to Acer’s smartphone foray, which even if moderately successful, could trigger a re-rating.

Sales Operating profit EBITDA Pre-tax profit Net profit MV of employee bonus Adjusted net profit New Taiwan GAAP EPS (NT$)* New Taiwan GAAP P/E (x) NEW Taiwan GAAP EPS growth YE BPS (NT$) P/BV (x)

Feb-09

2353.TW share price (NT$) TSE (rebased)

FY09E FY10E FY11E 13.4 16.8 18.5 13.7 17.9 19.1 4.23 6.18 7.38 12% 36% 19% 17.7 12.1 10.1 2Q 3Q 4Q 1.20 1.15 1.06 0.89 1.29 1.49 1.38 1.76 1.96 2.00 3.15 4.10 92

36.6-86.5 208.94 6.42 36.36 36.36 2,686 5-Nov-09 7.417 68 32.5

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Acer Inc.: Summary of financials NT$ in millions, year-end December Income statement

FY08

FY09E

FY10E

FY11E

Revenues Cost of Goods Sold Gross profit R&D Expenses SG&A Expenses Operating Profit (EBIT) EBITDA Interest Income Interest Expense Investment Income (Exp.) Non-Operating Income (Exp.) Earnings before tax Tax Net income Net Income (new TW GAAP)

546,274 489,377 56,897 550 41,113 13,683 14,639 1,208 -1,306 404 428 14,807 -3,169 11,742 11,742

574,380 516,089 58,290 924 39,857 15,275 16,091 570 -562 318 (289) 15,318 -3,479 11,838 11,838

667,558 596,908 70,649 1,068 45,679 20,928 21,706 1,075 -1,272 300 708 21,739 -4,348 17,391 17,391

765,826 684,704 81,123 1,225 51,387 24,917 25,661 1,209 -1,349 300 1,189 26,266 -5,253 21,013 21,013

EPS (reported) (NT$) EPS (new TW GAAP) (NT$) BPS (NT$) DPS (NT$) Shares Outstanding (MM)

4.62 4.62 32.62 2.00 2,643

4.44 4.44 35.36 3.15 2,686

6.48 6.48 38.53 4.10 2,686

7.82 7.82 42.40 5.00 2,686

Balance sheet

FY08

FY09E

FY10E

FY11E

Cash and Cash Equivalents Accounts receivable Inventories Others Current assets

22,142 108,668 40,028 15,553 186,391

40,946 138,570 55,428 16,859 251,804

40,527 162,508 65,003 19,772 287,810

48,785 178,899 71,560 20,730 319,973

LT investments Net fixed assets Other long term assets Total Assets

6,774 5,988 44,290 243,442

9,174 4,447 33,499 298,924

9,125 3,669 33,499 334,103

8,844 2,925 33,499 365,241

Liabilities ST Debt Payables Others Total current liabilities Long term debt Other liabilities Total liabilities Shareholder's equity

9,337 72,116 67,862 149,315 4,135 7,115 160,565 82,878

1,360 107,737 67,437 176,535 20,701 7,517 204,752 94,171

1,578 125,626 71,897 199,101 24,013 7,517 230,631 103,472

1,626 138,330 79,149 219,105 24,744 7,517 251,366 113,875

Ratio analysis % Gross margin EBITDA margin Operating margin Net profit margin R&D/sales SG&A/Sales

FY08

FY09E

FY10E

FY11E

10.4 2.7 2.5 2.1 0.1 7.5

10.1 2.8 2.7 2.1 0.2 6.9

10.6 3.3 3.1 2.6 0.2 6.8

10.6 3.4 3.3 2.7 0.2 6.7

18 34 -9 -13 4 10 -9 -10

5 12 1 -4 -4 27 -16 -20

16 37 47 46 46 16 -12 -14

15 19 21 21 21 18 -16 -20

2.2 3.0 14.7 11.7 14.0

1.9 3.1 13.4 11.6 13.7

2.0 3.2 16.8 15.0 17.9

2.1 0.0 18.5 16.0 19.1

FY08

FY09E

FY10E

FY11E

Net income Depreciation & amortisation Other Non-Cash Items Change in working capital Cash flow from operations

11,742 956 0 -8,043 4,551

11,838 816 0 -11,412 1,242

17,391 777 0 -14,077 4,092

21,013 744 0 -3,949 17,808

Capex Disposal/ (purchase) Net Cash from Investing Free cash Flow

1,673 4,430 -6,350 -6,634

1,019 -2,400 9,116 12,440

0 49 49 3,792

0 281 281 17,508

Equity raised/(repaid) Debt raised/(repaid) Other Dividends Cash flow from financing

5,634 -8,709 -2,274 -8,655 -14,004

-1,160 8,589 6,304 -5,286 8,447

0 3,530 0 -8,091 -4,560

0 779 0 -10,610 -9,831

Net change in cash Beginning cash Ending cash

-15,803 37,945 22,142

18,805 22,142 40,946

-420 40,946 40,527

8,259 40,527 48,785

Sales growth EBIT growth Net profit growth (%) EPS (Reported) growth EPS (new TW GAAP) growth Interest coverage (x) Net Debt to total Capital Net debt to equity Sales/Assets (x) Working Capital Turns (X) ROE ROIC Core ROIC Cash flow statement

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

115

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Aldar Properties

Overweight

www.aldar.com

Price Target: AED7.8

Company description Aldar Properties is Abu Dhabi’s largest property developer, with a diversified construction portfolio and 37% sovereign ownership. Tasked with implementing Abu Dhabi’s Plan 2030, Aldar operates as a master developer, sourcing land for development, selling completed residential properties and developing recurring income-generating assets. Aldar was listed on the Abu Dhabi stock Exchange in April 2005, where the company has a foreign ownership limit of 40%.

MENA UAE Property

Price: AED5.46

Post mortem Al Raha Beach and Yas Island are the company’s two most important projects and account for over 70% of the total landbank under development. With a total built-up area of 6.4Mn Sq M, Al Raha is a mixed-used residential project with residential handovers starting from mid 2010. Yas Island, which accounts for a sizable portion of Aldar’s investment property portfolio, is one of the two key tourist destinations being developed in Abu 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. Potential for earnings upgrades For future sales, we assume 30-35% lower residential and land sale prices 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 encouraging - 3Q09 land sales by Aldar were at prices that were 80-85% above our forecasts. As the market stabilizes and retail investors’ confidence is restored, better then forecast prices for future residential and land sales could serve as key triggers for profitability growth and stock performance. 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 SOTPbased 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 Sales Net profit Headline EPS (AED) Adjusted EPS (AED) Sales growth (%) Net profit growth (%) P/E (x) Net D/E P/BV ROE (%)

FY08 4,978 3,447 1.34 0.74 306% 53% 4.1 66% 0.88 21%

FY09E 2,574 1,764 0.68 0.02 -48% -49% 8.0 124% 0.79 10%

FY10E 7,189 2,192 0.85 0.32 179% 24% 6.4 107% 0.70 11%

FY11E 6,901 2,539 0.98 0.56 -4% 16% 5.5 94% 0.63 11%

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

116

Muneeza HasanAC (Real Estate/Construction) (971-4) 428-1766 [email protected] JPMorgan Chase Bank N.A. Dubai Branch

Price Performance 6 Dh

4 2 Nov-08

Feb-09

May-09

Aug-09

Nov-09

Source: Bloomberg

Performance Absolute (%)

1M -12.0

3M 17.7

12M 9.3

Source: Bloomberg

Company data Price (Dh) Date of price Price Target (Dh) 52-week range (Rs) Market cap (AED Mn) Market cap (US$ Mn) Source: Bloomberg & J.P. Morgan

5.46 23-Nov-09 7.8 6.65 - 1.96 14,075 3,835

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Aldar Properties: Summary of Financials Profit and Loss statement Dh in millions, year-end Dec Sales % change Y/Y Gross Profit % change Y/Y EBITDA % change Y/Y EBIT % change Y/Y Net Interest Earnings before tax % change Y/Y Revaluation gain Net Income (Reported) % change Y/Y Net Income (Adjusted) % change Y/Y Shares Outstanding EPS (reported) % change Y/Y

FY08A FY09E 4,978 305.8% 2,683 379.2% 2,310 (4.3%) 3,818 59.4% (371) 3,447 77.5% 1,533 3,447 77.5% 1,914 1494.2% 2,577.9 1.34 53.1%

Balance sheet Dh in millions, year-end Dec Cash and cash equivalents Accounts receivable Trading property under development Other Current assets Investment property Investment property under development Others Total assets ST loans Payables Others Total current liabilities Long term debt Other liabilities Total liabilities Minorities Shareholders' equity Total Liabilities & Shareholders Equity

2,574 (48.3%) 978 (63.6%) 306 (86.8%) 1,843 (51.7%) (79) 1,764 (48.8%) 1,700 1,764 (48.8%) 64 (96.7%) 2,577.9 0.68 (48.8%)

FY08A FY09E 12,066 5,651 7,130 24,847 5,149 15,804 1,098 49,767 2,683 7,464 2,136 12,283 21,429 1,546 33,735 0 16,032 49,767

11,150 6,176 11,471 28,798 6,210 21,394 1,642 61,520 2,683 6,948 1,878 11,509 32,193 1,696 43,724 0 17,796 61,520

FY10E FY11E Cash flow statement Dh in millions, year-end Dec 7,189 6,901 Net Income 179.3% (4.0%) Depreciation & amortisation 2,495 2,904 Change in working capital ex capex 155.1% 16.4% Fair value gain on investment prop. 1,630 2,287 Other 433.1% 40.3% Cash flow from operations 2,788 3,164 51.3% 13.5% Capex (596) (625) Other adjustments 2,192 2,539 Free cash flow 24.3% 15.8% Cashflow from Investments 1,360 1,088 2,192 2,539 Debt raised/(repaid) 24.3% 15.8% Dividends paid 832 1,451 Others 1206.9% 74.4% Cashflow from Financing 2,577.9 2,577.9 Change in Cash 0.85 0.98 Beginning cash 24.3% 15.8% Ending cash FY10E FY11E Ratio Analysis Dh in millions, year-end Dec 11,783 12,108 Gross Margin 5,751 5,866 EBITDA Margin 10,502 12,806 EBIT margin - Adjusted net profit margin 28,036 30,781 SG&A/Sales 10,190 19,124 20,287 16,645 Sales growth 1,895 1,478 EBITDA growth 64,042 71,795 Adjusted net profit growth 2,683 2,683 Adjusted EPS growth 8,627 6,901 299 7,303 Interest coverage (x) 11,609 16,887 Net debt to Total Capital 32,423 32,409 Net debt to Equity 1,927 1,912 44,054 49,319 Sales/assets 0 0 ROE 19,988 22,476 ROCE 64,042 71,795

FY08A

FY09E

FY10E FY11E

3,447 14 2,335 -1,533 4,645

1,764 163 (692) -1,700 (386)

2,192 2,539 203 211 525 5,164 -1,360 -1,088 2,155 7,451

(16,341) (10,063) (4,523) (544) (9,060) (9,757) (20,864) (10,607)

(904) (6,853) (253) 417 1,015 318 (1,157) (6,436)

17,361 (232) (1,137) 16,224 (196) 3,358 3,163

10,614 0 (457) 10,156 (916) 3,163 2,246

FY08A

FY09E

FY10E FY11E

53.9% 46.4% 76.7% 38.4% 3.1%

38.0% 11.9% 71.6% 2.5% 5.0%

34.7% 22.7% 38.8% 11.6% 4.5%

305.8% (4.3%) 1494.2% 1274.8%

0 (51) (65) (65) 325 2,879 3,204

42.1% 33.1% 45.9% 21.0% 4.5%

(48.3%) 179.3% (4.0%) (86.8%) 433.1% 40.3% (96.7%) 1206.9% 74.4% (96.7%) 1206.9% 74.4%

10.3 23.3 21.1% 35.8% 75.1% 123.9% 10.0% 21.5% 6.1%

0 0 231 231 633 2,246 2,879

4.2% 9.9% 0.3%

4.7 5.1 33.4% 29.4% 107.2% 93.8% 11.2% 9.6% 11.0% 11.3% 2.7% 3.8%

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

117

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

América Latina Logística (ALL)

Overweight

www.all-logistica.com

Price Target: R$21.0

Company description América Latina Logística (ALL) is the largest independent provider of logistics services in South America. It operates rail service on over 20,000 km of track in Brazil and Argentina and has an intermodal trucking business. 70% of its volumes (and a higher % of profits) come from shipping agricultural products, mainly soy, soy meal, corn, sugar, and fertilizer.

Brazil Agribusiness

Post mortem The company has continued to invest in efficiency and capacity expansion throughout the downturn, which should allow it to benefit from higher volumes and lower costs as well as from higher prices during the recovery. In addition, the economic downturn has increased new industrial business as clients focused again on cost control and decided to finally make the switch to cheaper rail transport (vs. truck).

Price performance

R$15.5

Potential for earnings upgrades Economic recovery, as well as a significant recovery in agricultural production in Argentina and Brazil, will likely help ALL grow its front haul 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. How much recovery is priced into the stock? We think ALL valuations are not factoring in a significant recovery in volumes and yields next year. ALL is trading at 7.9x ’10e EBITDA 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.

Debbie Bobovnikova, CFAAC (1-212) 622 3489 [email protected] J.P. Morgan Securities Inc.

R$

20.0 15.0 10.0 5.0 0.0 Nov-08

M ar-09

Source: Bloomberg.

Performance 1M

3M

12M

Absolute (%)

22%

17%

33 %

Relative (%)

19%

1%

-49 %

Company data 52-week range (BRL) Mkt cap. (BRL) Mkt cap. (US$MM) Avg daily value (US$MM) Avg daily volume (MM) Shares O/S (MM) Date of price Index: iBovespa Free float (%) Exchange rate Source: Bloomberg

Bloomberg: ALLL11 BZ; Reuters: ALLL11.SA BRL in millions, year-end December FY08 2,530 293 0.51 0.05 0.13 19% 35% 35% 11% 30.3 19.74

FY09E 2,862 448 0.78 0.07 0.19 13% 53% 53% 15% 19.8 14.80

FY10E 3,191 598 1.04 0.09 0.26 12% 33% 33% 17% 14.8 11.46

FY11E 3,570 772 1.34 0.11 0.34 12% 29% 29% 19% 11.5 9.20

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

118

Nov-09

Source: Bloomberg. As of Nov 17 09.

Price target and key risks We have a R$21/share price target for Dec ’09. It is based on a mix of DCF analysis and a 10.6x historical multiple on 2010e EBITDA. Key risk is recovery in prices, diesel prices and operational problems (accidents). ALL shares are much less volatile than those of the rest of our agribusiness coverage.

Sales Net profit EPS (LC) FD EPS (LC) DPS (LC) Sales growth (%) Net profit growth (%) EPS growth (%) ROE (%) P/E (x) FD P/E (x)

Jul-09

7.49-16.57 10,808 6,276 42.8 5.2 688 11/25/09 67,917 92% 1.7221

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

América Latina Logística: Summary of financials Profit and loss statement

Cash flow statement

BRL in millions, year-end December Revenue % change Y/Y Gross margin (%) EBITDA % change Y/Y EBITDA margin (%) EBIT % change Y/Y EBIT margin (%) Net interest Earnings before tax % change Y/Y Tax as % of EBT Net income (reported) % change Y/Y Shares O/S (MM) EPS (reported) (LC)

FY08 2,515 18.7% 51.6% 1,182 29% 47% 933 134% 37% 206 222 -17% (16) -7% 206 -5% 576 0.36

BRL in millions, year-end December FY09E 2,862 13% 41% 1,477 20% 52% 1,043 17% 36% -452 591 62% -143 24% 448 53% 576 0.78

FY10E 3,191 12% 40% 1,689 14% 53% 1,140 9% 36% -354 787 33% -189 24% 598 33% 576 1.04

FY11E 3,570 12% 40% 1,924 14% 54% 1,293 13% 36% -278 1,016 29% -244 24% 772 29% 576 1.34

EBIT Depreciation & amortization Change in working capital Taxes Cash flow from operations Capex Disposal/(purchase) Net interest Free cash flow Equity raised/(repaid) Debt raised/(repaid) Other Dividends Beginning cash Ending cash DPS (LC)

FY08 933 (194) -450 (49) 461 790

FY09E 1,043 -256 -22 -143 1,079 -624

FY10E 1,140 -310 125 -189 1,331 -644

FY11E 1,293 -350 51 -244 1,396 -661

(415) 363

222 -521 0 0 0 -112 2,196 1,635 0.19

198 -333 0 0 0 -149 1,635 1,302 0.26

159 -252 0 0 0 -193 1,302 1,050 0.34

FY10E 53% 36% 19% 3% 12% 33% 12% 33% 2.24 75% 0.75 0.31 36% 0.14 2.90 6.0% 17.0%

FY11E 54% 36% 22% 3% 12% 29% 12% 29% 3.28 58% 0.58 0.35 36% 0.15 2.52 7.0% 19.0%

-741 1,816 2,643 -

Source: Company, J.P. Morgan estimates.

Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December

Balance sheet BRL in millions, year-end December Cash and cash equivalents Accounts receivable Inventories Others Current assets LT investments Net fixed assets Total assets Liabilities ST loans Payables Others Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders’ equity BVPS (LC)

FY08 2,643 154 94 430 3,320 3,721 4,724 11,765

FY09E 1,635 212 101 279 2,228 652 4,331 10,128

FY10E 1,302 237 108 303 1,950 652 4,665 10,185

FY11E 1,050 265 118 330 1,764 652 4,975 10,309

765 987 547 2,300 5,049 1,902 9,251 2,496 4.33

928

663

398

425 2,145 3,530 1,384 7,059 3,070 5.33

546 2,060 3,278 1,329 6,667 3,518 6.11

582 1,912 3,026 1,274 6,212 4,097 7.11

EBITDA margin Operating margin Net profit margin SG&A/sales Sales growth Net profit growth Sales per share growth EPS growth Interest coverage (x) Net debt to total capital Net debt to equity Sales/assets EBIT margin ROCE Assets/equity (x) ROI ROE

FY08 47% 37% 8% 0.03 19% -5% -31% -5% 1.08 0.27 1.27 0.21 37% 0.10 4.71 1.8% 8.3%

FY09E 52% 36% 16% 4% 13% 53% 13% 53% 1.77 92% 0.92 0.28 36% 0.13 3.30 4.0% 15.0%

Source: Company, J.P. Morgan estimates.

Source: Company, J.P. Morgan estimates.

119

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

AMMB Holdings

Overweight

www.ambg.com.my

Price Target: M$5.25

Company description AMMB Holdings is the holding company of the AmBank Group, one of Malaysia’s premier financial services group with leadership positions in the commercial banking, investment banking and insurance sectors. The AmBank Group has total assets of M$86.5B, 186 branches nationwide and a staff strength close to 10,000.

Malaysia Banks

Price: M$4.70

(60-3) 2770-4728 [email protected] JPMorgan Securities (Malaysia) Sdn. Bhd. (18146-X)

Price performance M$

How much recovery is priced into the stock? The stock is trading at a P/B of 1.5x which we believe does not reflect the potential of the transformational changes that ANZ is putting through as well as the upside income potential for the wholesale banking business.

Company data

M$ in millions, year-end March Net profit Basic EPS (sen) Cash adj. EPS (sen) DPS (sen) Basic EPS growth (%) ROE (%) P/E (basic) (x) BVPS (M$) Tangible NAV P/BV (x) Div. yield (%)

FY09 861 32.3 32.3 6.0 14.2 11.6 14.6 2.8 3.5 1.7 1.3

FY10E 935 31.8 31.8 7.9 -1.5 11.0 14.8 3.1 3.7 1.5 1.7

FY11E 1,262 41.9 41.9 16.7 31.7 13.1 11.2 3.3 3.9 1.4 3.6

FY11E 1,569 52.1 52.1 20.8 24.4 14.9 9.0 3.6 4.2 1.3 4.4

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

120

3M 10.8 4.3

10-09

07-09

Performance

Bloomberg: AMM MK; Reuters: AMMB.KL

1M 7.6 4.3

Source: Bloomberg.

Potential for earnings upgrades We see scope for significant earnings upgrades as the wholesale banking is a flow business where earnings flow straight through the bottom-line. Also, earlier concerns on rising credit costs should dissipate in tandem with the improving economy.

Price target and key risks Our Jun-10 PT of M$5.25 is based on a two-stage DDM model assuming sustainable ROEs of 16%. The key risk is that capital markets fail to recover and that the economic recovery stalls.

04-09

01-09

5 4 3 2 1 10-08

Post mortem With a leading wholesale investment banking franchise, we expect the bank to benefit from the capital market pick-up in tandem with the improvement in the economy. Also, recent liberalization measures should create a more vibrant capital market which we believe AMMB will benefit from. We also expect ANZ management’s transformation efforts to pay off in the coming 18 months as the group has developed new income streams, namely treasury whilst strengthening the consumer and SME banking business and enhanced its risk management system.

Chris Oh, CFAAC

Absolute (%) Relative (%)

12M 88.8 37.8

Source: Bloomberg.

52-wk range (M$) Mkt. cap (M$MM) Mkt. cap (US$MM) Liquidity (US$MM) Avg. daily volume (MM) Shares O/S (MM) Date of price KLCI Index Free float (%) Exchange rate Source: Bloomberg.

1.94-4.83 14,166.67 4,140.49 9.1 7.2 3,014.2 5-Nov-09 1254.0 46.4 3.42

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

AMMB Holdings: Summary of financials Income statement - M$mn

2009

2010E

2011E

2012E

Margins (% of earning assets)

2.19%

2.11%

2.06%

94%

94%

94%

NIM (as % of avg. assets)

2.05%

1.99%

Net interest income

1,776

Total non-interest revenues

10E/09E

11E/10E

2.08%

3%

-4%

-2%

1%

Loan/deposit

89%

94%

0%

1%

0%

0%

Investment/assets

10%

1.95%

1.97%

3%

-3%

-2%

1%

Loan/assets

63%

Customer deposits/liab. 1,814

1,885

2,081

10%

2%

4%

10%

Long-term debt/liabilities

1,495

1,684

2,045

2,306

-14%

13%

21%

13%

457

463

606

697

-14%

1%

31%

15%

(6)

132

178

222

-102%

-2319%

35%

25%

Other operating income

1,044

1,089

1,261

1,387

12%

4%

16%

10%

NPLs/loans

Total operating revenues

3,271

3,498

3,929

4,387

-2%

7%

12%

12%

Operating costs

(1,612)

(1,699)

(1,807)

(1,867)

5%

5%

6%

3%

Operating profit

1,659

1,799

2,123

2,520

-9%

8%

18%

19%

Tier 1 Ratio

-33%

25%

-15%

-4%

Total CAR

Earning assets/assets

Fee income FX/trading gains

Loan loss provisions

(344)

(431)

(365)

(352)

Other provisions

(97)

(80)

(50)

(50)

Exceptionals

-

Tax [rate]

2009

2011E

2012E

92%

92%

92%

10%

10%

9%

65%

65%

65%

78%

79%

79%

79%

5%

4%

4%

3%

Asset quality/capital

2009

2010E

2011E

2012E

Loan loss reserves/loans

3.1%

3.5%

3.6%

3.6%

4.1%

4.8%

4.7%

4.6%

Loan loss reserves/NPLs

75.1%

73.0%

76.7%

79.5%

Growth in NPLs

-32.6%

22.9%

6.9%

0.0%

9.7%

11.8%

11.7%

12.1%

15.5%

17.4%

16.8%

16.8%

Per share data

2009

2010E

2011E

2012E

EPS (M$)

0.32

0.33

0.43

0.53

-

-

-

(25)

(25)

(25)

0%

0%

0%

0%

1,218

1,263

1,683

2,093

2%

4%

33%

24%

Dividend (M$)

0.06

0.08

0.17

0.21

(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%

Attributable net income

861

935

1,262

1,569

29%

9%

35%

24%

Key balance sheet - M$mn

2009

2010E

2011E

2012E

09/08

10E/09E

11E/10E

12E/11E

Net customer loans

56,948

60,118

66,078

71,316

8%

6%

10%

8%

NIR/avg. assets

Loans loss reserves

(1,821)

(2,177)

(2,447)

(2,690)

-25%

20%

12%

10%

Non IR/avg. assets

Gross loans

58,769

62,295

68,525

74,007

7%

6%

10%

8%

Non IR/total revenue

45.7%

Investments

2010E

(0)

Disposals/ other income Pre-tax profit

12E/11E

Balance sheet gearing

09/08

NAV

2.84

3.08

3.33

3.64

Avg. Shares issued (MM)

2,723

2,941

3,014

3,014

DuPont

2009

2010E

2011E

2012E

2.05%

1.99%

1.95%

1.97%

1.73%

1.85%

2.11%

2.18%

48.1%

52.0%

52.6%

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%

1,808

1,781

1,753

1,725

89,893

91,942

101,433

109,883

-

-

Goodwill Total assets

-

Goodwill amort. 8%

2%

10%

8%

-

Operating ROAA

1.92%

1.98%

2.20%

2.38%

LLP/loans

-0.59%

-0.69%

-0.53%

-0.48%

67.9%

68.5%

70.9%

70.0%

Interbank funding

6,135

6,239

6,881

7,446

0%

0%

0%

0%

Loans/assets

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

ROE

11.6%

11.0%

13.1%

14.9%

2%

-1%

6%

9%

Source: Company, J.P. Morgan estimates

121

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Amorepacific

Overweight

www.amorepacific.com

Price Target: W998,000

Company description Amorepacific is the leading cosmetic company in Korea with a 35% market share in the domestic cosmetic market. It dominates in the premium channel, with over 60% of the door-to-door market and holds around a 16% share in the department store channel.

South Korea Cosmetics

Post mortem The company is the leader in the Korean cosmetic segment where market leaders continue gaining pricing power and competitiveness. The company’s future value would come largely from its growth prospects in China. While the company has been expanding its stores over the past 4~5 years, its brand building efforts have been less of a focus area, thus the same-store sales growth has been 3~4%. Starting next year, Amorepacific will start to carry out mass-marketing through TV and this is likely to start boosting brand recognition. Together with its third brand introduction, Sul Hwa Soo, we expect Amorepacific’s sales growth to take on a stronger growth momentum going into 2011.

J.P. Morgan Securities (Far East) Limited, Seoul Branch

W837,000

Potential for earnings upgrades In the near future, earnings surprise is likely to come from the domestic premium side, in our view. We believe there is a good chance that Amorepacific will narrow the market share gain it lost in the department store channel this year as foreign brands aggressively raised their prices due to currency movements. How much recovery is priced into the stock? We believe there is around a 22% upside potential from the current share price over the next one year. The share currently trades at 20tx 2011E earnings. However, going into 2010, Amorepacific’s earnings growth could outshine other consumer companies. While 2010 prospects are priced in, the likely growth continuity into 2011 is not priced in for now. Price target and key risks Our Dec-10 price target of W998,000 is based on 20x 2011E earnings. 20x is the average P/E since 2006. A key risk to our price target is domestic macro conditions.

Jinah LeeAC (822) 758-5723 [email protected]

Price performance W 850,000 650,000 450,000 Oct-08 Feb-09 Oct-09 HMC Jun-09 KOSPI Source: Bloomberg.

Performance 1M

3M

12M

Absolute (%)

2.1

17.9

41.1

Relative (%)

3.8

17.3

(2.0)

Source: Bloomberg.

Company data 52-week range (W) Mkt cap. (WB)

4,892

Mkt cap. (US$MM)

4,188

Avg daily value (US$MM) Avg daily volume Shares O/S (MM)

6-Nov-09

Index: KOSPI

1,572.46

Free float (%) Exchange rate

Bloomberg: 090430 KS; Reuters: 090430.KS Won in billions, year-end December

BVPS (W) P/B (x) DPS (W) Dividend yield (%) ROE (%)

FY08 1,531 255 170 24,666 -4.3 33.9

FY09E 1,756 317 241 34,940 41.7 24.0

FY10E 1,907 366 258 37,312 6.8 22.4

FY11E 2,062 398 345 49,922 33.8 16.8

161,600 5.2 4,999 0.6 15.3

186,994 4.5 5,004 0.6 18.7

217,317 3.9 6,990 0.8 17.2

259,777 3.2 7,464 0.9 19.2

52-week range (W) Market cap (WB) Market cap (US$MM) Shares issued (MM) Free Float (%) Avg daily value (US$MM) Avg daily volume (Shares) Index (KOSPI) Exchange rate (W/US$1)

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 6 November 2009.

122

11.2 22,100 6.9

Date of price

Source: Bloomberg.

Sales Operating profit Net profit EPS (W) EPS growth (%) P/E (x)

875,000~524,000

875,000~524,000 4,892 4,188 6.9 47 11.2 22,100 1,572.46 1,168.0

47 1,168.0

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Amorepacific: Summary of financials Won in billions, year-end December P/L Net Sales Cosmetics Premium Mass Export MB&S

2007 1,357 1,108 754 308 25 249

2008 1,531 1,269 816 403 37 261

2009E 1,756 1,469 891 510 56 287

2010E 1,907 1,605 930 581 83 303

2011E 2,062 1,738 965 637 125 324

249 244 4

255 256 0

317 295 22

366 340 27

398 363 35

72.3% 87.5% -2.6%

66.3% 80.1% -4.0%

71.7% 79.6% 27.7%

76.1% 83.8% 31.7%

76.4% 82.6% 39.7%

Non-opg Income Interest Income Gain on Equity Method Others

35 11 11 13

35 13 2 20

38 9 17 15

3 12 -13 17

81 22 34 16

Non-operating Expenses Loss on Equity Method Others

35 28 7

46 35 11

35 19 16

28 14 13

23 8 15

249 71 178

244 74 170

320 79 241

341 84 258

456 112 345

2007 227 178 108 50 22 28

2008 238 170 125 57 22 35

2009E 326 241 106 64 18 19

2010E 310 258 110 78 18 14

2011E 464 345 110 83 19 8

Deductions

14

8

11

24

-41

Working capital Receivablees Inventory Payables Retirement pay

-45 10 -31 7 -18

-49 -18 -29 11 -20

-9 -15 -19 6 -11

-31 -11 -14 5 -11

-31 -11 -14 5 -11

-221

-172

-232

-207

-120

Cash Flows from Financing

-31

-35

-35

-48

-52

Increase in Cash Cash at the Beginning Cash at the End

-25 130 105

32 105 137

60 137 196

55 196 251

293 251 441

Operating Profit Cosmetics MB&S OPM Cosmetics MB&S

Pre-tax profit Income Taxes Net Profit C/F Operating CF Net profit Additions Depreciation Prov for Severance Equity method loss

Cash Flows from Investing

B/S Total Assets Current Assets Quick Assets Inventory

2007 1,268 414 300 114

2008 1,455 445 303 142

2009E 1,625 481 319 161

2010E 2,400 561 385 176

2011E 2,192 878 689 190

Non-current Assets Investment Assets Tangible Assets Intangible Assets Other Non-current Assets

854 140 651 17 46

1,010 149 779 24 58

1,145 155 912 22 56

1,276 157 1,041 22 56

1,314 158 1,078 22 56

Total Liabilities Current Liabilities Others

315 177 67

340 199 71

372 226 80

400 246 87

429 266 94

Non-current Liabilities

138

140

146

154

163

Total Stockholders' Equity Paid-in Capital Common Stock Preferred Stock Capital Surplus Capital Adjustment Retained Earnings

953 35 29 5 713 -1 203

1,115 35 29 5 713 -1 339

1,291 35 29 5 713 -2 545

1,500 35 29 5 713 -2 754

1,793 35 29 5 713 -2 1,047

2007

2008

2009E

2010E

2011E

12.8% 14.5% 8.2% 30.8% 48.0% 4.8%

14.6% 15.8% 9.2% 26.6% 50.0% 10.1%

8.6% 9.2% 4.3% 13.8% 50.0% 5.4%

8.1% 8.3% 3.8% 9.7% 50.0% 7.0%

Operating profit growth Cosmetics MB&S

2.6% 4.5% n.a.

24.2% 15.3% n.a.

15.5% 15.2% 18.5%

8.7% 7.0% 31.4%

Net profit growth

-4.3%

41.7%

6.8%

33.8%

Ratio Growth Sales growth Cosmetics Premium Mass Export MB&S

Equity method gain/oper profit Equity method loss/oper profit Net contribution to operating profit

4.5% 11.4% -6.9%

0.9% 13.8% -12.9%

5.4% 6.0% -0.6%

-3.6% 3.9% -7.5%

8.6% 2.1% 6.5%

EPS (Won) P/E (times)

25,770 32.5

24,666 33.9

34,940 24.0

37,312 22.4

49,922 16.8

6.9

6.9

6.9

6.9

6.9

138,124 6.1

161,600 5.2

186,994 4.5

217,317 3.9

259,777 3.2

18.7% 4,503

15.3% 4,999

18.7% 5,004

17.2% 6,990

19.2% 7,464

Shares outstanding (MM) BVPS (Won) Price/Book ROE (%) DPS (W)

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

123

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Anglo Platinum

Overweight

www.angloplatinum.com

Price Target: 91,000c

Company description AMS is the world’s largest PGM producer, operating multiple sites in SA and Zimbabwe. Under Neville Nicolau (new CEO) the group is being restructured. A 15% (at least) headcount cut and the redrawing of operations management boundaries at problematical Rustenburg and at Amandelbult are positives. Nicolau is the first mining engineer at the helm in decades - and his experience should be key to “getting the mining right” after a decade of poor performance in our view. The group’s entered into JVs with mid-tier and BEE miners and has developed a significant 3rd party concentrate purchasing business. Moreover, by allowing some partners control of mines improved focus and better costs control should result, in our view.

South Africa Gold & Precious Metals

Price: 73,384c

Steve ShepherdAC (27-11) 507 0386 [email protected]

Allan CookeAC (27-11) 507 0384 [email protected] J.P. Morgan Equities Ltd. Price Performance 75,000

Post mortem AMS has been a perennial underperformer in the Pt sector over the past decade. We can see this reversing under the new regime. Moreover, our analysis indicates that AMS is well positioned to move platinum production from its mines up by around 10% (200-250koz) within 6 months in response to strong demand, if needed - no other producer can do this. Potential for earnings upgrades It is hard to accurately predict the impact of restructuring on costs. We think the market is likely to underestimate the potential benefits. AMS’ peers have little hope of matching it in terms of costs containment in our view. The group’s profits and valuation are highly geared to a recovery in rand metal prices. How much recovery is priced into the stock? While the group is already factoring some price recovery, at mid-cycle prices, we estimate that it currently trades at around 80% of our fair value. Price target and key risks Our Aug-10 DCF-based price target is R910/sh. The key risks are that the rand PGM basket price fails to recover and/or the ops fail to turn as we expect. Bloomberg: AMS SJ; Reuters: AMSJ.J Rand millions, year-end Dec Sales Net profit FD EPS (SAcps) DPS (SAcps) Sales growth (%) Net profit growth (%) EPS growth (%) ROE (%) FD P/E (x)

FY08 50,765 13,280 5,610 3,500 8.9 8.0 7.1 45.6 13.2

FY09E 36,735 2,521 1,060 0 -27.6 -81.0 Nm 7.9 69.7

FY10E 44,351 5,376 2,260 0 20.7 113.2 113.2 14.5 32.7

FY11E 55,196 9,779 4,110 2,160 24.5 81.9 81.9 23.3 18.0

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

124

65,000 c 55,000 45,000 35,000 Nov-08

Feb-09

May-09

Aug-09

Nov-09

Source: Bloomberg

Performance Absolute (%)

1M 9.7

3M 8.9

12M 76.7

Source: Bloomberg

Company data Price(c) Date of Price Price Target (c) Price Target End Date 52-week Range (c) Mkt Cap (Rbn) Shares O/S (mn) Source: Bloomberg, J.P. Morgan

73,384 23-Nov-09 91,000 31-Aug-10 76,820 – 36,800 174.80 238

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Anglo Platinum: Summary of Financials Production & Economic Assumptions Year end Dec FY07A Platinum ($/oz) 1,302 Palladium ($/oz) 355 Rhodium ($/oz) 4,344 Nickel ($/ton) 37,567 Avg exch. rate (R/$) 7.04 Cash Costs ($/oz Pt)

1,409

FY08A 1,570 355 5,174 21,583 8.08

FY09E 1,183 250 1,458 14,831 8.56

FY10E 1,338 306 1,788 15,875 8.65

FY11E 1,469 425 2,625 15,000 9.24

1,628

1,357

1,372

1,390

Sales Volumes Platinum (koz) Palladium (koz) Rhodium (koz) Nickel (t)

2,479 1,390 307 20,273

2,400 1,292 326 19,615

2,539 1,518 344 24,679

2,621 1,561 345 25,400

Profit & Loss Statement R in millions, year end Dec Revenues % change Y/Y EBITDA % change Y/Y EBIT % change Y/Y Net interest Earnings before tax % change Y/Y Tax Tax as % of EBT Net income (reported) % change Y/Y Shares Outstanding EPS (Adjusted) % change Y/Y DPS (Gross) % change Y/Y

FY07A FY08A FY09E 46,616 50,765 36,735 19.1% 8.9% (27.6%) 20,573 16,540 6,302 14.0% (19.6%) (61.9%) 18,654 17,654 3,471 14.7% (5.4%) (80.3%) 221 118 (127) 19,323 17,988 3,397 15.6% (6.9%) (81.1%) (6,656) (4,470) (749) 34.4% 24.8% 22.1% 12,294 13,280 2,521 4.6% 8.0% (81.0%) 234.70 236.80 238.15 5,240 5,610 1,060 NM 7.1% NM 5,200 3,500 0 (1.9%) (32.7%) (100.0%)

FY10E 44,351 20.7% 11,566 83.5% 7,442 114.4% (57) 7,405 118.0% (1,888) 25.5% 5,376 113.2% 238.20 2,260 113.2% 0 -

FY11E 55,196 24.5% 18,778 62.4% 13,976 87.8% (143) 13,870 87.3% (3,884) 28.0% 9,779 81.9% 238.20 4,110 81.9% 2,160 -

Cash Flow Statement R in millions, year end Dec EBIT Depreciation & Amortization Change in working capital Taxes Cash flow from Operations

FY07A 18,654 2,757 110 (6,821) 13,862

FY10E 7,442 4,384 (1,640) (123) 9,803

FY11E 13,976 4,937 (1,974) (1,964) 14,840

2,220 1,319 311 16,036

FY08A 17,654 3,313 2,555 (1,799) 17,296

Capex Disposals/(Purchase) Net interest Free Cash flow Free Cash flow per share

(10,653) (14,362) 632 (194) 5 (99) 3,209 2,934 13.6 12.3

Equity raised/ repaid Debt raised/ repaid Dividends paid Other

0 0 7,575 10,501 (12,658) (14,237) 346 (262)

Beginning Cash Ending Cash

4,724 3,833

3,833 2,476

FY09E 3,471 3,899 (1,470) (575) 4,256

Balance Sheet R in millions, year end Dec Property, Plant & Equipment Net Fixed Assets Cash and Cash equivalents Others Current Assets Total Assets

FY07A 20,697 39,218 3,833 10,999 14,832 54,050

FY08A 28,435 49,953 2,476 16,239 18,715 68,668

FY09E 34,761 57,471 1,210 17,794 19,003 76,474

FY10E 41,296 64,006 2,088 21,049 23,137 87,142

FY11E 47,668 70,378 2,613 24,967 27,580 97,958

Current Liabilities Debt Other Liabilities Shareholder's Equity Minorities Total Liabilities & Shareholders Equity

6,547 7,465 11,265 28,773 0 54,050

10,567 15,820 12,785 29,496 0 68,668

8,828 21,056 12,273 34,317 0 76,474

10,443 24,556 12,450 39,693 0 87,142

12,387 26,056 15,190 44,325 0 97,958

Ratio Analysis Year end Dec

FY07A FY08A 41.0%

EBITDA Margin (%) EBIT Margin (%) Net Margin (%) FCF Margin (%)

44.1% 32.6% 17.2% 40.0% 34.8% 9.4% 26.4% 26.2% 6.9% 6.9% 5.8% (19.4%)

Interest Coverage (x) Net debt to equity (%) Sales/Assets (x)

84.4 149.6 12.6% 45.2% 0.9 0.8

27.4 130.2 97.9 57.8% 56.6% 52.9% 0.5 0.5 0.6

ROE (%) ROIC (%)

42.8% 45.6% 42.7% 35.1%

7.9% 14.5% 23.3% 5.5% 9.5% 15.5%

P/E (x) EV/EBITDA (x) EV/FCF (x)

0 3,500 0 0

2,476 1,210

1,210 2,088

10.2%

17.1%

25.9%

26.1% 34.0% 16.8% 25.3% 12.1% 17.7% (6.4%) 2.9%

13.2 11.0

69.7 28.8

32.7 15.7

18.0 9.7

56.5

61.8

(25.5)

(64.2)

112.9

Dividend Yield (%)

7.0%

4.7%

0.0%

0.0%

2.9%

FCF Yield (%)

2.0%

1.8%

(4.4%) (1.7%)

1.0%

Valuation & Recommendation NPV P/NPV PT PT/NPV PT Date Recommendation

(11,368) (12,628) (13,234) Weekly Mkt Turnover ($ millions) 1,712 260 136 JSE (78) (57) (143) LSE (7,111) (2,824) 1,606 ADR (29.9) (11.9) 6.7 0 4,445 (61) (173)

14.1 8.8

33.7%

FY09E FY10E FY11E

Gross Margin (%)

0 1,500 Weekly Mkt Turnover/Mkt Cap (%) (2,573) JSE 0 LSE ADR 2,088 2,613

86,200 0.79 91,000 1.1 31-Aug-10 OW

220 0 1

1.0% 0.0% 0.0%

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

125

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Astra International

Overweight

www.astra.co.id

Price Target: Rp37,000

Company description Astra International is part of the Jardine Matheson group. It is the partner/distributor for Japanese majors including Toyota, Daihatsu, Honda (two-wheelers) and Komatsu. Astra also holds majority stakes in United Tractors (59.5%) and Astra Agro Lestari (80%). Post mortem Astra’s solid balance sheet and reputation have resulted in market share gains during the downturn. We see improved pricing power, resulting from a stronger rupiah in core auto businesses, offsetting vulnerability from UNTR and AALI, which are weak currency beneficiaries. As a result of proactive management in the car and financial services business, supported by the strong growth in United Tractors, Astra should be able to end 2009 without a significant earnings decline, which we think is creditable. Potential for earnings upgrades We think that the auto cycle is in early stages of recovery, and have been surprised by two- and four-wheeler vehicle volumes in recent months. We think that the stronger-than-expected vehicle volumes could set the stage for earnings upgrades going into 2010. If the recovery in two-wheeler profitability seen in 3Q proves sustainable, it could provide added impetus to earnings. How much recovery is priced into the stock? We think that the emphasis on stock drivers is likely to shift from recovery to growth. The fact that a recovery which is underway is probably priced in, but the strength of the recovery is being underestimated. Price target and key risks We have an SOTP-based Dec-10 PT of Rp37,000 for Astra. Our PT uses J.P. Morgan PTs (DCF-based) for listed subsidiaries UNTR and AALI. We use the market values of smaller quoted holdings (Bank Permata, Astra Auto Parts and Astra Graphia) and DCF/DDM-based valuations for motor businesses and financial services business. Our valuation assumes a 10.5% risk-free rate and a 5.5% equity risk premium, translating into a 16% cost of equity. Using market values, as opposed to J.P. Morgan PTs, would imply a share price of Rp36,000 for Astra. Risks to our PT are if higher rates hit the recovery and the fact that the stock may be well owned. We see Astra as being in the midst of a re-rating relative to the market which is yet incomplete, and expect further outperformance.

Indonesia Auto Parts

Rp29,800

Bloomberg: ASII IJ; Reuters: ASII.JK Rp in mn, year-end Dec Revenue (Rp bn) Net Profit (Rp bn) Asia EPS (Rp) DPS (Rp) Revenue growth (%) EPS growth (%) ROCE ROE P/E P/BV EV/EBITDA Dividend Yield

FY07A FY08E FY09E FY10E FY11E 70,183 97,064 90,236 108,131 125,185 6,519 8,965 8,487 10,284 12,100 1,610.35 2,214.75 2,096.50 2,540.53 644 910 839 1,016 26.0% 38.4% -7.1% 19.8% 15.8% 75.6% 37.5% -5.3% 21.2% 21.6% 26.1% 22.5% 23.9% 24.7% 26.4% 29.9% 23.8% 24.9% 25.2% 18.8 13.7 14.5 11.9 4.5 3.6 3.2 2.3 1.1 0.9 1.2 1.2 1.0 2.1% 3.0% 2.8% 3.3%

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

126

Aditya Srinath, CFAAC (62-21) 5291-8573 [email protected] PT J.P. Morgan Securities Indonesia

Price performance 35,000 Rp 20,000 5,000 Nov-08

Feb-09

May-09

Aug-09

Nov-09

ASII.JK share price (Rp) JCI (rebased)

Source: Bloomberg.

Performance 1M

3M

12M

Absolute (%)

-7.6

-1.4

212.1

Relative (%)

-4.6

-1.1

134.4

Source: Bloomberg.

Company data 52-week range (Rp)

7,800-35,300

Mkt cap. (RpMM)

120,640,979

Mkt cap. (US$MM) Avg daily val (US$MM) Avg daily volume (MM) Shares O/S (MM) Date of price Index: JCI

12,814 12.82 2.75 4,048 5-Nov-09 2382

Free float (%)

49.9

Exchange rate

9,415

Source: Bloomberg.

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Astra International: Summary of financials Rp in billions, year end December Income statement

Cash flow statement FY06

FY07

FY08E

FY09E

FY10E

55,709 (9.7%) 8,177 -11.1% 6,256 NM 11.2% -336 5,944 -27.5% -1,453 24.4% 3,712 -31.9% 4 916.94 (31.9%)

70,183 26.0% 12,289 50.3% 9,997 59.8% 14.2% -288 10,634 78.9% -2,663 25.0% 6,519 75.6% 4 1,610.35 75.6%

97,064 38.4% 16,032 30.5% 13,490 34.9% 13.8% 142 14,960 40.7% -3,944 26.4% 8,965 37.5% 4 2,214.75 37.5%

90,236 (7.1%) 16,596 3.5% 13,301 NM 14.7% -583 14,183 -5.2% -3,533 24.9% 8,487 -5.3% 4 2,096.50 (5.3%)

108,131 19.8% 19,517 17.6% 15,843 19.1% 14.6% -786 15,950 12.5% -3,530 22.1% 10,284 21.2% 4 2,540.53 21.2%

FY06

FY07

FY08E

FY09E

FY10E

Cash and cash equivalents Accounts receivable Inventories Others Current assets

4,820 4,558 4,001 2,024 15,822

6,322 6,018 4,582 2,409 19,532

8,877 6,474 8,666 2,040 26,124

4,099 8,139 7,226 3,214 22,778

LT investments Net fixed assets Total Assets

13,030 57,929

14,127 63,520

20,679 80,740

21,884 84,850

3,513 EBITDA margin 9,433 Operating margin 8,284 Net margin 3,851 25,181 Sales per share growth - Sales growth 21,710 Net profit growth 96,493 EPS growth

Liabilities Short-term loans Payables Others Total current liabilities Long-term debt Other liabilities Total Liabilities Shareholders' equity BVPS

12,963 3,390 7,073 20,037 10,215 721 31,498 22,376 5,527

10,998 4,434 10,236 21,234 8,848 828 31,512 26,963 6,660

12,979 6,815 13,837 26,816 10,554 1,902 40,163 33,080 8,172

12,800 5,713 12,225 25,025 10,733 1,933 38,681 38,172 9,430

12,800 6,554 14,067 26,867 13,733 1,963 43,653 44,342 13,053

Revenues % change Y/Y EBITDA % change Y/Y EBIT % change Y/Y EBIT Margin Net Interest Earnings before tax % change Y/Y Tax as % of EBT Net income (reported) % change Y/Y Shares outstanding EPS (reported) % change Y/Y

Balance sheet

FY06

FY07

FY08E

FY09E

FY10E

EBIT Depr. & amortization Change in working capital Taxes Cash flow from operations

6,256 1,921 -128 -1453 5,505

9,997 2,292 737 -2663 9,549

13,490 2,542 -571 -3944 11,162

13,301 3,295 -3,011 -3533 8,770

15,843 3,675 -1,147 -3530 12,811

Capex Disposal/(purchase) Net Interest Other Free cash flow

-3,455 -652 -336 4,333 2,049

-3,389 -541 -288 -783 6,160

-9,094 -318 142 -4,076 2,069

-4,500 0 -583 -6,250 4,270

-3,500 0 -786 -9,414 9,311

Equity raised/(repaid) Debt raised/(repaid) Other Dividends paid Beginning cash Ending cash DPS

0 -3,341 -531 -1,781 4,510 5,239 440

0 -3,333 1,848 -2,607 5,239 6,523 644

-0 3,688 4,425 -3,684 6,523 8,944 910

0 0 630 -3,395 8,944 4,199 839

0 3,000 630 -4,114 4,199 3,613 1,016

FY06

FY07

FY08E

FY09E

FY10E

14.6% 11.19% 6.6%

17.4% 14.19% 9.3%

16.4% 13.84% 9.2%

18.3% 14.69% 9.4%

18.0% 14.60% 9.5%

(9.7%) (9.7%) -31.9% (31.9%)

26.0% 26.0% 75.6% 75.6%

38.4% 38.4% 37.5% 37.5%

(7.1%) (7.1%) -5.3% (5.3%)

19.8% 19.8% 21.2% 21.2%

Interest coverage (x)

24.36

42.68

-

28.47

24.82

Net debt to equity Sales/assets Assets/equity ROE ROCE

83.8% 0.94 2.59 17.3% 13.5%

54.0% 1.16 2.36 26.4% 21.6%

48.6% 1.35 2.44 29.9% 26.1%

54.3% 1.09 2.23 23.8% 22.5%

55.6% 1.20 2.20 24.9% 23.9%

Ratio Analysis

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

127

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Asustek Computer

Overweight

www.asus.com

Price Target: NT$70

Company description Asus (TWSE: 2357) is the largest motherboards maker in the world. Starting with its MB business, Asus has rapidly grown in the NB space, especially for netbook. Currently, NB accounts for more than 70% of its revenue. The company’s products include MB, NB, Eee PC, GPS smartphone, and PC peripherals.

Taiwan Computer Hardware

Price: NT$60.9

Gokul HariharanAC (852) 2800-8564 [email protected]

Alvin KwockAC

Post mortem After facing serious inventory issues in 4Q08 and burdened by a heavy mix of high-end products, Asus was in a restructuring mode in 1H09. It has reoriented product its line-up towards the mainstream market, and instituted more cost control measures, by adopting common platforms in NBs, and streamlining a 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.

(852) 2800-8533 [email protected] J.P. Morgan Securities (Asia Pacific) Limited

Price performance 80 NT$ 50

Potential for earnings upgrades With a stronger-than-expected operating margin recovery in 3Q09, we believe the Street’s upward earning estimate revisions are still on. Our 2010 earnings estimate is about 17% higher than current Bloomberg consensus estimate. We 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. How much recovery is priced into the stock? Volume recovery in 2H09 for Asus appears to be priced into the stock, but we believe margin expectations have stayed low. Going into 2010, there is still investor skepticism regarding Asus’ ability to continue gaining market share and keep OP margins stable, which should provide an upside opportunity for the stock, in our view.

20 Nov-08

Feb-09

Performance 1M

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

13.20

23.28

30.11

13.51

13.82

-12.68

Source: Bloomberg.

Company data 52-week range (NT$) Mkt cap. (NT$B) Mkt cap. (US$B) Avg daily value (US$B) Avg daily volume (MM) Shares O/S (MM) Date of price Index: TWSE Free float (%) Exchange rate

128

FY09E FY10E FY11E 40.0 43.3 45.2 1.5 1.4 1.3 7.2 11.6 12.1 3.6 0.8 6.0 2.0 1.5 2.9 2Q 3Q 4Q 1.23 1.54 -0.66 -0.03 1.53 1.26 1.04 1.36 1.43 NT$

12M

Relative (%)

NT$ in billions, year-end December FY08 39.2 1.6 9.5 16.6 4.3 1Q 1.56 0.11 0.99

3M

Absolute (%)

Bloomberg: 2357.TT; Reuters: 2357.TW FY10E FY11E 277.3 316.1 YE BPS (NT$) 13.7 15.4 P/BV (x) 15.2 17.3 ROE 24.3 27.0 Core ROIC (%) 20.6 22.8 DPS (NT$) 2.27 2.55 Quarterly EPS (NT$) 20.6 22.8 EPS (FY08) 4.82 5.34 EPS (FY09E) 12.6 11.4 EPS (FY10E) 17% 14% 68% 11% 218% 13% Jun -10 PT

Nov-09

Source: Bloomberg.

Source: Bloomberg.

FY08 FY09E 266.9 236.6 11.4 4.5 12.4 5.8 20.6 14.0 16.5 12.2 1.00 -0.15 16.5 12.2 3.73 2.87 16.3 21.2 -65% -11% -26% -23% -44% -56%

Aug-09

2357.TW share price (NT$ TSE (rebased)

Price target and key risks Our Jun-10 PT of NT$70 implies 14x FY10E earnings, given the strong OP margin improvement and sustainability of Asus’ cost-down measures in notebook business. 14x P/E represents the mid-point of Asus’ historical trading range. A key risk to our PT is execution issues in the mainstream NB rollout.

Sales Operating profit EBITDA Pre-tax profit Net profit MV of employee bonus Adjusted net profit New Taiwan GAAP EPS (NT$)* New Taiwan GAAP P/E (x) sales growth New Taiwan GAAP EPS growth Normalized OP growth

May-09

70

29.4-63.8 259 8 40 26 4,247 5-Nov-09 7,417.5 95 32.5

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Asustek Computer: Summary of financials NT$ in billions, year-end December Income statement

Ratio analysis %

FY08

FY09E

FY10E

FY11E

Revenues Cost of Goods Sold Gross Profit R&D Expenses SG&A Expenses Operating Profit (EBIT) EBITDA Interest Income Interest Expense Investment Income (Exp.) Non-Operating Income (Exp.) Earnings before tax Tax Net Income (Reported) Net Income (Adjusted)

266.9 227.5 39.4 7.3 19.7 11.4 12.4 1.1 -1.0 4.0 5.1 20.6 4.1 16.5 16.5

236.6 208.0 28.6 6.0 16.2 4.5 5.8 1.0 -0.9 7.0 2.4 14.0 1.7 12.2 12.2

277.3 235.4 41.9 7.0 18.9 13.7 15.2 1.0 -1.0 7.6 3.0 24.3 3.7 20.6 20.6

316.1 269.0 47.0 7.9 21.2 15.4 17.3 1.1 -0.9 7.9 3.5 27.0 4.2 22.8 22.8

Gross Margin EBITDA margin Operating Margin Net Margin R&D/sales SG&A/Sales

EPS (Reported) (NT$) EPS (Adjusted) (NT$) BPS (NT$) DPS (NT$) Shares Outstanding (B)

3.73 3.73 39.21 1.98 4.4

2.87 2.87 40.00 1.54 4.3

4.82 4.82 43.31 2.88 4.3

5.34 5.34 45.23 0.00 4.3

FY08

FY09E

FY10E

FY11E

Cash and cash equivalents Accounts receivable Inventories Others Current assets

23.7 43.2 41.8 10.9 119.6

27.0 40.1 36.1 11.7 114.9

29.1 47.2 42.5 13.8 132.5

25.7 53.2 47.9 15.5 142.3

Net Income Depr. & Amortisation Change in working capital Other Cash flow from operations

LT investments Net fixed assets Others Total assets

111.5 3.7 1.6 236.5

120.6 4.8 0.6 240.9

128.2 4.8 0.6 266.1

136.1 4.8 0.6 283.8

ST loans Payables Others Total current liabilities

12.7 27.5 26.7 66.9

14.5 36.1 19.4 70.0

15.7 42.5 22.8 81.1

16.9 47.9 25.7 90.5

Long term debt Other liabilities Total liabilities Shareholders' equity

0.0 0.0 66.9 166.8

0.0 0.0 70.0 170.9

0.0 0.0 81.1 185.1

0.0 0.0 90.5 193.3

Balance sheet

FY08

FY09E

FY10E

FY11E

14.8 4.6 4.3 6.2 2.7 7.4

12.1 2.4 1.9 5.2 2.5 6.8

15.1 5.5 4.9 7.4 2.5 6.8

14.9 5.5 4.9 7.2 2.5 6.7

Sales growth Operating Profit Growth Net profit (Adjusted) growth EPS (Reported) growth EPS (Adjusted) growth Interest coverage (x) Net debt to total capital Net debt to equity

-11.8 -6.1 -6.6

-11.3 -60.4 -25.7 -23.1 -23.1 -5.1 -6.7 -7.3

17.2 203.0 68.5 68.0 68.0 -13.4 -6.6 -7.2

14.0 12.7 10.7 10.7 10.7 -17.1 -4.2 -4.5

Asset Turnover (%) Working Capital Turns (X) ROE ROCE

112.9 3.2 9.5 8.1

98.2 4.8 7.2 5.3

104.2 5.8 11.6 9.8

111.4 6.1 12.1 10.9

FY09E

FY10E

FY11E

12.2 1.2 9.3 0.0 22.8

20.6 1.5 -5.7 0.0 16.4

22.8 1.8 -4.9 0.0 19.8

Capex Disposal/ (purchase) Cash flow from investing Free cash flow

-2.3 -8.1 -10.4 20.4

-1.5 -7.6 -9.1 14.9

-1.8 -7.9 -9.7 17.9

Equity raised/ (repaid) Debt raised/ (repaid) Other Dividends paid Cash flow from financing

1.4 1.8 -1.1 -8.4 -6.3

0.0 1.2 0.2 -6.6 -5.2

0.0 1.2 -2.3 -12.3 -13.4

Net change in cash Beginning cash Ending cash

6.0 23.7 29.7

2.1 27.0 29.1

-3.4 29.1 25.7

Cash flow statement

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

129

Emerging Markets Equity Research 02 December 2009

Ayala Land

Overweight

www.ayalaland.com.ph

Price Target: Php13.90

Company description Ayala Land is the largest and most diversified developer in the Philippines with interests in housing, retail, office, and hotel development. It is a major landlord in the prime CBDs of Makati and Fort Bonifacio. While traditionally known as a high-end property developer, Ayala Land has in recent years leveraged on its brand equity to tap the lower-income markets.

Philippines Real Estate

Post mortem The company has over 4,000 ha of land bank that is good for at least 10 years of development. Its pricing power is strong owing to the Ayala reputation for quality products and services. Cost efficiency has been an ongoing issue for the company, but this could change with the new President at the helm who has a track record of reaping operational efficiency. We believe the company’s conservative balance sheet has allowed it weather the crisis well, and seize opportunities in striking joint-venture/land lease deals to grow its market share.

Price performance

Potential for earnings upgrades Property volumes are highly leveraged to an economic upturn, fueled by growing overseas foreign remittances and low interest rates. The company’s move to aggressively launch more projects (in line with its target to double earnings and ROE in five years) should further boost volume sales. Potential margin increase from lower costs should lead to positive earnings estimate revisions, in our view.

Performance

Php12.00

Kelly Lim-BateAC (632) 878-1188 [email protected] J.P. Morgan Securities Philippines Inc.

Jul-09

Jul-08

Jan-08

Jul-07

Jan-07

Jul-06

Jan-06

20 18 16 14 12 10 8 6 4 2 0 Jan-09

Adrian Mowat (852) 2800-8599 [email protected]

Source: Bloomberg.

1M

3M

Absolute (%)

-12.8

6.8

12M 65.3

Relative (%)

-15.9

6.1

20.1

Source: Bloomberg.

Company data 52-week range (Php)

4.90-12.50

How much recovery is priced into the stock? We believe the stock has priced in very little of a recovery as it is trading at a 42% discount to NAV, equivalent to -1SD, and more than the 35% average during the 2002-03 trough of the property market.

Mkt cap. (PhpMM)

155,556

Mkt cap. (US$MM)

3,330

Price target and key risks Our Dec-10 PT of Php13.9 is based on a 25% discount to NAV, equivalent to the historical average of the past 17 years. Key risks to our PT are a decline in land values and a sharp rise in interest rates.

Date of price

Avg daily value (US$MM) Avg daily volume (MM) Shares O/S (MM) Index: PSEi Free float (%) Exchange rate Source: Bloomberg.

Bloomberg: ALI PM.TT; Reuters: ALI.PS P h p in m n , y e a r -e n d D e c R e venu e N e t P ro fit E P S (P h p ) D P S (P h p ) R e v e n u e g ro w th (% ) E P S g ro w th (% ) ROCE ROE P /E ( x ) P /B V (x ) E V /E B IT D A ( x ) D iv id e n d Y ie ld

FY08A 2 9 ,2 9 5 4 ,8 1 2 .3 0 .3 7 0 .0 6 3 6 .3 % 1 0 .3 % 9 .9 % 1 0 .2 % 3 2 .3 3 .2 2 6 .0 0 .5 %

FY09E 2 6 ,6 4 3 3 ,7 9 9 .7 0 .2 9 0 .0 6 -9 .1 % -2 1 .0 % 7 .4 % 7 .5 % 4 0 .9 2 .9 3 1 .4 0 .5 %

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 12 November 2009.

130

FY10E 2 6 ,6 8 8 3 ,8 6 9 .2 0 .3 0 0 .0 6 0 .2 % 1 .8 % 7 .6 % 7 .1 % 4 0 .2 2 .8 2 9 .5 0 .5 %

FY11E 3 1 ,7 2 2 4 ,4 4 8 .4 0 .3 4 0 .0 6 1 8 .9 % 1 5 .0 % 8 .6 % 7 .7 % 3 5 .0 2 .6 2 5 .1 0 .5 %

2 12.1 12,963 12-Nov-09 3,074 46 46.72

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Ayala Land: Summary of financials Php in millions, year-end December Income statement

Cash flow statement FY07

Revenues % change Y/Y EBITDA % change Y/Y EBIT % change Y/Y EBIT Margin Net Interest Earnings before tax % change Y/Y Tax as % of EBT Net income (reported) % change Y/Y Shares outstanding EPS (reported) (Php) % change Y/Y

21,490 (4.5%) 4,989 3.6% 4,989 3.6% 23.2% 277 6,652 13.8% -1,556 23.4% 4,386 13.5% 13,035 0.34 13.3%

FY08

FY09E

FY10E

FY11E

29,295 26,643 36.3% (9.1%) 6,042 5,013 21.1% -17.0% 6,042 5,013 21.1% NM 20.6% 18.8% 522 356 7,448 6,254 12.0% -16.0% -2,065 -1,575 27.7% 25.2% 4,812 3,800 9.7% -21.0% 12,963 12,963 0.37 0.29 10.3% (21.0%)

26,688 0.2% 5,369 7.1% 5,369 7.1% 20.1% 106 6,448 3.1% -1,698 26.3% 3,869 1.8% 12,963 0.30 1.8%

31,722 18.9% 6,370 18.6% 6,370 18.6% 20.1% 134 7,574 17.5% -2,079 27.4% 4,448 15.0% 12,963 0.34 15.0%

FY11E

Balance sheet

FY07

FY08

FY09E

FY10E

FY11E

EBIT Depr. & amortization Change in working capital Taxes Cash flow from operations

4,989 3,660 -1556 8,530

6,042 -1,223 -2065 3,616

5,013 1,992 -1575 7,256

5,369 1,989 -1698 7,387

6,370 1,371 -2079 7,578

Capex Disposal/(purchase) Net Interest Other Free cash flow

1,390 -810 277 9,920

-5,693 918 522 -2,077

-5,340 -1,689 356 1,916

-6,772 -716 106 615

-8,694 518 134 -1,116

Equity raised/(repaid) Debt raised/(repaid) Other Dividends paid Beginning cash Ending cash DPS (Php)

1,361 -3,655 -47 -1,084 4,631 11,272 0.05

-765 -2,710 995 -951 11,272 12,655 0.06

0 -107 0 -778 15,443 14,786 0.06

0 0 0 -778 14,786 13,906 0.06

0 0 0 -778 13,906 12,530 0.06

FY07

FY08

FY09E

FY10E

FY11E

Ratio analysis FY07

FY08

FY09E

FY10E

Cash and cash equivalents Accounts receivable Inventories Others Current assets

13,626 11,125 6,696 2,533 33,979

15,443 15,796 8,140 4,556 43,935

14,786 12,092 6,792 4,556 38,226

13,906 11,392 6,175 4,556 36,030

LT investments Net fixed assets Total Assets

28,587 31,628 20,415 24,890 82,981 100,453

12,530 EBITDA margin 12,563 Operating margin 6,555 Net margin 4,556 36,206 Sales per share growth 38,855 45,720 52,251 Sales growth 22,842 22,166 23,209 Net profit growth 99,923 103,916 111,665 EPS growth

Liabilities Short-term loans Payables Others Total current liabilities Long-term debt Other liabilities Total Liabilities Shareholders' equity BVPS (Php)

3,990 15,759 790 20,539 6,150 5,547 32,235 45,705 3.51

1,280 17,706 1,094 20,079 15,365 5,536 40,980 52,827 4.08

Interest coverage (x) 1,524 20,654 1,205 23,383 15,228 6,799 45,410 49,028 3.78

1,280 18,382 1,090 20,752 15,365 4,884 41,000 55,919 4.31

1,280 21,115 1,280 23,675 15,365 4,992 44,032 59,589 4.60

Net debt to equity Sales/assets Assets/equity ROE ROCE

23.2% 20.6% 18.8% 20.1% 20.1% 24.50% 22.40% 20.15% 20.52% 20.50% 20.4% 16.4% 14.3% 14.5% 14.0%

(4.7%) (4.5%) 13.5% 13.3%

37.1% (9.1%) 36.3% (9.1%) 9.7% -21.0% 10.3% (21.0%)

0.2% 0.2% 1.8% 1.8%

18.9% 18.9% 15.0% 15.0%

-

-

-

-

-

-8.1% 0.27 1.82 10.2% 9.1%

2.8% 0.32 2.05 10.2% 9.9%

3.7% 0.27 1.89 7.5% 7.4%

5.0% 0.26 1.86 7.1% 7.6%

7.1% 0.29 1.87 7.7% 8.6%

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

131

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Baidu

Overweight

www.baidu.com

Price Target: US$460.00

Company description Baidu is a leading internet search provider in China with a focus on Chinese web pages. The company generates majority of its revenue through pay-perclick advertising and customized search solutions. It is the number 1 site in China in terms of traffic reach, according to Alexa.

China IT and Internet

Post mortem Baidu remains the dominant player in China’s search market with ~63% market share as of 3Q09 in China (according to Analysys). We expect Baidu to maintain its leadership in China due to: (1) its good Chinese search technology; (2) our view that Baidu’s products are tailored better to local needs; (3) its strong local brand name; (4) good relationship with the Chinese government; and (5) it has among the widest distribution networks in China (a key to market development and driving sales), and is well ahead of other competitors in search.

J.P. Morgan Securities (Asia Pacific) Limited

Potential for earnings upgrades We believe there are earnings upside potential in 2010, with: (1) transition to Phoenix Nest monetization system; (2) domestic economic growth to lead to an upside in search ad spending; and (3) expect eCommerce growth to lead to search spending upside. We also expect some margin leverage in SG&A.

BIDU share price ($) NASDAQ Composite (rebased)

US$386.37

How much recovery is priced into the stock? With a weak 4Q09 guidance, shares have recently seen some weakness. Hence, we believe investors have given a big discount to the potential ad recovery in 2010. We note that the softness is mainly due to the earlier-thanexpected transition from the classic bidding system in Phoenix Nest. We expect incremental positive datapoint on ad segment in early 2010 to be the driver of the stock. Price target and key risks Our Dec-10 PT of US$460 is based on DCF valuation. Our nominal case DCF valuation suggests a valuation of: US$459.8. (20% long-term growth from 2014–2018E, 15% growth from 2019E – 2025E). We use WACC of 12% and 0% terminal growth. Downside risks to our rating and price target include: (1) slower-than-expected online search spending; (2) large infrastructure-related expense; (3) unsuccessful Japan initiatives; and (4) and potential margin decline due to TAC.

Dick WeiAC (852) 2800-8535 [email protected]

Price performance US$ 400 $ 250 100 Oct-08

Jan-09

Apr-09

US$ in millions, year-end December Sales Net profit GAAP EPS (US$) Adj. EPS (US$) DPS (US$) Sales growth (%) Net profit growth (%) EPS growth (%) ROE (%) GAAP P/E (x) Adj. P/E (x)

FY08 465.5 152.5 4.39 4.74 0 100.9 82.6 82.5 44.3 97.4 90.1

FY09E 644.7 213.5 6.13 6.51 0 38.5 40.0 39.7 39.3 69.7 65.6

FY10E 916.7 322.9 9.15 9.56 0 42.2 51.2 49.3 37.6 46.7 44.7

FY11E 1,321.7 470.3 13.14 13.59 0 44.2 45.7 43.6 35.7 32.5 31.4

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 12 November 2009.

132

Oct-09

Source: Bloomberg.

Performance 1M

3M

12M

Absolute (%)

3.3

22.5

133.4

Relative (%)

2.8

15.0

90.1

Source: Bloomberg.

Company data 52-week range (US$)

100.5-439.9

Mkt cap. (Rmb MM)

100,700

Mkt cap. (US$ MM)

14,760

Avg daily value (US$MM) Avg daily volume (MM) Shares O/S (MM) Date of price Index: NASDAQ Free float (%) Exchange rate Source: Company, Bloomberg.

Bloomberg: BIDU US; Reuters: BIDU

Jul-09

60.7 1.8 35 12-Nov-09 2056 74 6.83

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Baidu: Summary of financials Profit and loss statement

Cash flow statement

US$ in millions, year-end December Revenue % change Y/Y Gross margin (%) EBITDA % change Y/Y EBITDA margin (%) EBIT % change Y/Y EBIT margin (%) Net interest Earnings before tax % change Y/Y Tax as % of EBT Net income (reported) % change Y/Y Shares O/S (MM) EPS (reported) (US$)

FY08 465.5 100.9 64.0 211.4 107.0 45.4 159.6 119.7 34.3 6.9 169.4 107.1 16.9 9.97 152.5 82.6 34.8 4.39

US$ in millions, year-end December FY09E 644.7 38.5 63.4 293.8 39.0 45.6 232.2 45.46 36.0 5.6 240.6 42 27.1 11.25 213.5 40.0 34.8 6.13

FY10E 916.7 42.2 62.6 431.4 46.8 47.1 352.6 51.87 38.5 15.7 368.9 53.34 46.0 12.47 322.9 51.2 35.3 9.15

FY11E 1,321.7 44.2 62.4 614.0 42.3 46.5 516.4 46.45 39.1 26.0 543.0 47.19 72.7 13.38 470.3 45.7 35.8 13.14

Net Income Depr. & Amortisation Change in working capital Other Cash flow from operations Capex / Investments Others Cash flow from investing Free cash flow Equity raised/ (repaid) Debt raised/ (repaid) Other Dividends paid Cash flow from financing Net change in cash Beginning cash Ending cash

FY08 153 40 24 38 254 -59 -34 -93 195 -9 0 4 0 -5 176 211 388

FY09E 214 48 36 13 311 -81 0 -81 230 28 0 -3 0 25 257 388 644

FY10E 323 64 76 14 477 -76 0 -76 401 50 0 0 0 50 451 644 1,095

FY11E 470 82 85 16 653 -94 0 -94 559 60 0 0 0 60 618 1,095 1,713

Source: Company, J.P. Morgan estimates.

Source: Company, J.P. Morgan estimates.

Balance sheet

Ratio analysis

US$ in millions, year-end December Cash and cash equivalents Accounts receivable Inventories Others Current assets

FY08 388 14 0 14 415

FY09E 644 20 0 24 688

FY10E 1,095 30 0 36 1,161

FY11E 1,713 41 0 50 1,805

2 129 28 573

2 160 30 880

2 173 29 1,366

2 187 28 2,021

0 62 62 124 0 0 124 450

0 87 89 176 0 1 177 703

0 138 137 275 0 1 275 1,090

0 196 189 385 0 1 386 1,636

LT investments Net fixed assets Other LT assets Total assets Liabilities ST loans Payables Others Total current liabilities Long term debt Other liabilities Total liabilities Shareholders' equity

%, year-end December EBITDA margin Operating Margin Net Margin R&D/sales SG&A/Sales Sales growth Operating Profit Growth Net profit growth Diluted EPS growth Net debt to total capital Net debt to equity Asset Turnover Working Capital Turns (X) ROE ROIC

FY08 45.4 34.3 32.8 7.8 19.3 100.9 119.7 82.6 82.5 -86.2 -86.2 81.2 2.1 44.3 42.8

FY09E 45.6 36.0 33.1 8.4 17.0 38.5 45.5 40.0 39.7 -91.6 -91.6 73.3 1.6 39.3 38.5

FY10E 47.1 38.5 35.2 8.1 14.5 42.2 51.9 51.2 49.3 -100.4 -100.4 67.1 1.3 37.6 36.2

FY11E 46.5 39.1 35.6 7.5 14.6 44.2 46.4 45.7 43.6 -104.7 -104.7 65.4 1.1 35.7 34.1

Source: Company, J.P. Morgan estimates.

Source: Company, J.P. Morgan estimates.

133

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Bank Asya

Overweight, AFL

www.bankasya.com

Price Target: TRY5.00

Company description The largest of four banks (and the only independent as the other 3 have been acquired by GCC strategic partners) in a niche, fast growth participation sector (CAGR in assets 03-09 c.35-40%) in Turkey. Its footprint includes 155 branches; it had some TRY11bn (US$7.3bn) in assets in Q3. Despite the severe 2008-09 recession, Asya delivered some 19% loan growth YTD to September and has made profits in every one of the past 11 quarters with average ROE near 20% - it has historically achieved ROE of over 30%.

CEEMEA Banks

Price: TRY3.06

Paul FormankoAC (+44) 207-325-6028 [email protected] J.P. Morgan Securities Ltd.

Price Performance 3.5

Post mortem We expect profits of TRY285mn (EPS of TRY0.32 in 09E), up 15% yoy; despite the fact that due to its participation model Asya has been unable to benefit either from securities gains or more aggressive liability re-pricing enjoyed by its peers and cost of risk YTD has been running over 350bps in 2009. However, we expect EPS growth to accelerate towards 40% levels (net profits EPS of TRY0.45 in 10E and EPS TRY0.60 in 11E). Potential for earnings upgrades At US$42bn market cap, the stock is still below the radar screen - we expect more international research coverage; JPM expects earnings upgrades to continue throughout 2010, supported by macro strengthening towards 5% GDP growth, driving some 34% loan growth in 10E and 26% by 11E, well supported by core Tier 1 of 14.5% (09E) and improving capital generation into recovery. How much recovery is priced into the stock? From the February 09 trough, Asya shares have rallied over 200% from TRY1 to over TRY3. Since August the shares have stagnated, despite attractive valuation of $110, negatively impacting CAR. Bloomberg: ASYAB TI Reuters: ASYAB.IS TRY million, year-end Dec Pre-provision op. profit Net profit EPS (TRY) EPS growth (%) Tier I ratio (%) NPL ratio (%) Dividend yield RONAV (%) P/E (x) P/NAV

FY08 469 247 0.27 11% 13.1% 5.1% 0% 22% 11.2 2.0

FY09E 603 285 0.32 15% 14.5% 7.5% 0% 18% 9.7 1.6

FY10E 683 404 0.45 42% 13.2% 6.8% 4% 22% 6.8 1.4

FY11E 844 537 0.60 33% 12.9% 5.8% 5% 25% 5.1 1.2

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

134

TL

2.5 1.5 0.5 Nov-08

Feb-09

May-09

Aug-09

Nov-09

Source: Company data, Bloomberg

Performance Absolute (%)

1M -13.6

3M 3.4

12M 163.8

Company data 52-week range (LC) Mkt cap. (TLMM) Mkt cap. (US$MM) Avg daily value (US$MM) Avg daily volume (MM) Shares O/S (MM) Date of price Index: ISE Free float (%) Exchange rate(USD/TRY) Source: Bloomberg

3.68-0.94 2,,754 1,842 18.4 9.3 900 23 Nov 09 45801 45.5% 1.5

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Bank Asya: Summary of Financials Profit and Loss Statement TL in millions, year end Dec

FY07A

Net interest income % Change Y/Y Non-interest income Fees & commissions % change Y/Y Trading revenues % change Y/Y Other Income Total operating revenues % change Y/Y Admin expenses % change Y/Y Other expenses Pre-provision operating profit % change Y/Y Loan loss provisions Other provisions Earnings before tax % change Y/Y Tax (charge) % Tax rate Minorities Net Income (Reported)

417 501 45.4% 20.2% 245 357 145 226 36.3% 56.3% 15 59 180.1% 305.3% 85 72 662 859 45.2% 29.7% -147 -216 39.1% 46.9% (119) (174) 396 469 46.1% 18.3% -123 -157 273 312 39.1% 14.3% (52) (65) 18.9% 21.0% 0 0 221 247

Balance sheet TL in millions, year end Dec

FY07A

FY08A FY09E

FY10E FY11E TL in millions, year end Dec

ASSETS Net customer loans % change Y/Y Loan loss reserves Investments Other interest earning assets % change Y/Y Average interest earnings assets Goodwill Other assets Total assets

4,610 50.6% 145 136 0 5,114 132 6,260

6,381 7,617 38.4% 19.4% 197 347 192 400 0 0 6,981 9,197 0 288 425 8,109 10,937

Cost ratios 9,979 12,558 Cost / income 31.0% 25.9% Cost / assets 436 522 Staff numbers 437 480 0 0 Balance Sheet Gearing - Loan / deposit 11,580 13,908 Investments / assets - Loan / assets 514 706 Customer deposits / liabilities 12,845 15,612 LT Debt / liabilities

LIABILITIES Customer deposits % change Y/Y Long term funding Interbank funding Average interest bearing liabs Other liabilities Retirement benefit liabilities Shareholders' equity Minorities Total liabilities & Shareholders Equity

4,698 46.8% 0 313 4,176 385 854 0 6,260

5,843 8,555 24.4% 46.4% 0 0 458 398 5,661 7,627 405 296 1,404 1,688 0 0 8,109 10,937

Asset Quality / Capital 10,266 12,568 Loan loss reserves / loans 20.0% 22.4% NPLs / loans 0 0 LLP / RWA 470 597 Loan loss reserves / NPLs 9,844 11,950 Growth in NPLs 118 54 RWAs % YoY change 1,991 2,394 Core Tier 1 0 0 Total Tier 1 12,845 15,612

FY08A FY09E 609 21.5% 459 260 15.0% 93 56.5% 106 1,068 24.4% -259 20.0% (206) 603 28.8% -248 356 14.1% (71) 20.0% 0 285

Ratio Analysis FY10E FY11E TL in millions, year end Dec Per Share Data 766 910 EPS Reported 25.8% 18.8% EPSAdjusted 437 533 % Change Y/Y 317 403 DPS 22.0% 27.0% % Change Y/Y 48 50 Dividend yield (48.4%) 4.2% Payout ratio 72 80 BV per share 1,203 1,443 NAV per share 12.6% 19.9% Shares outstanding -290 -334 12.0% 15.0% Return ratios (230) (265) RoRWA 683 844 Pre-tax ROE 13.1% 23.6% ROE -178 -173 RoNAV 505 672 Revenues 41.9% 33.0% NIM (NII / RWA) (101) (134) Non-IR / average assets 20.0% 20.0% Total rev / average assets 0 0 NII / Total revenues 404 537 Fees / Total revenues Trading / Total revenues

FY07A

FY08A FY09E FY10E FY11E

0.25 0.25 51.2% 0.00 0.0% 0.0% 0.95 0.95 900.0

0.27 0.27 11.4% 0.00 0.0% 0.0% 1.56 1.56 900.0

0.32 0.32 15.5% 0.00 0.0% 0.0% 1.88 1.88 900.0

0.45 0.45 41.9% 0.11 3.7% 25.0% 2.21 2.21 900.0

0.60 0.60 33.0% 0.15 33.0% 4.9% 25.0% 2.66 2.66 900.0

4.8% 36.7% 29.8% 29.8%

3.0% 27.6% 21.8% 21.8%

2.5% 23.0% 18.4% 18.4%

3.0% 27.4% 22.0% 22.0%

3.2% 30.6% 24.5% 24.5%

8.2% 4.7% 12.7% 63.0% 21.9% 0.7%

7.2% 5.0% 12.0% 58.4% 26.3% 1.8%

6.6% 4.8% 11.2% 57.0% 24.4% 18.5%

6.6% 3.7% 10.1% 63.7% 26.4% 1.7%

6.5% 3.7% 10.1% 63.1% 27.9% 1.4%

FY07A

FY08A FY09E FY10E FY11E

40.2% 4.2% 3,329

45.4% 4.8% 3,806

43.5% 4.2% 4,250

43.3% 4.1% 4,250

41.5% 3.8% 4,250

91.9% 105.2% 2.2% 2.4% 71.3% 78.2% 92.7% 94.0% 5.8% 6.8%

86.2% 3.7% 69.6% 96.8% 4.3%

94.7% 3.4% 79.3% 98.9% 4.3%

97.8% 3.1% 82.2% 99.6% 4.5%

3.2% 5.3% 2.19% 61.4% 82.7% 5,620 59.9% 15.2% 15.2%

3.1% 4.6% 4.3% 4.6% 5.1% 7.5% 6.8% 5.8% 1.46% 2.13% 1.18% 0.93% 60.5% 60.7% 62.9% 80.0% 37.8% 75.7% 21.3% 7.5% 10,702 11,642 15,071 18,615 90.4% 8.8% 29.4% 23.5% 13.1% 14.5% 13.2% 12.9% 13.1% 14.5% 13.2% 12.9%

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

135

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Bank Central Asia

Overweight

www.klikbca.co.id

Price Target: Rp5,500

Company description BCA is Indonesia’s largest private sector bank. The major shareholder is the Hartono family (Djarum group). The bank has a pre-eminent position in payment/transaction banking in Indonesia, and an exceptionally strong deposit franchise. The bank has a strong corporate lending business, and is expanding its presence in various consumer lending segments.

Indonesia Banks

Post mortem BCA came through the crisis largely unscathed; its low LDR and high capitalization protected it from risks on the liabilities side, while pricing power in loans returned. Although non-performing loans rose starting in 4Q last year, they have started declining in 3QFY09.

Price performance

Rp4,600

Potential for earnings upgrades We think that the credit cycle in Indonesia is just starting to turn, while credit quality is likely to have bottom out. Mildly higher rates in 2010 could result in margin compression being arrested. Combined with lower tax rates, these add up to a positive picture for earnings. We think the consensus earnings growth of 15% for FY10E is too conservative; our forecasts are 13% higher than consensus. How much recovery is priced into the stock? Among banks, BCA is strongly leveraged to a credit cycle recovery, with lending having outpaced industry growth in 6 out of last 7 years. We do not think that a credit cycle recovery is priced into BCA, as the stock has underperformed the JCI by 33% YTD and in line with the sector since the end of 3QFY09. Price target and key risks We have a DDM-based Dec-10 PT of Rp5,500 for BCA (10.5% Rf, β=1, 15.8% cost of equity, normalized ROE: 29.44), in line with BCA’s 52-week high. High multiples are a risk to our PT, although they have sustained over the recent past. Investor perception on management changes if any could also be a risk to our PT.

Aditya Srinath, CFAAC (62-21) 5291-8573 [email protected] PT J.P. Morgan Securities Indonesia

5,000 Rp 3,500 2,000 Nov-08

136

Aug-09

Nov-09

Performance 1M

3M

Absolute (%)

0.5

12.4

12M 63.8

Relative (%)

3.5

12.7

-13.9

Source: Bloomberg.

Company data 52-week range (Rp)

2,275-5,500

Mkt cap. (RpMM)

113,413,046

Mkt cap. (US$MM) Avg daily value (US$MM) Avg daily volume (MM) Shares O/S (MM) Date of price Index: JCI Free float (%) Exchange rate Source: Bloomberg.

FY06A FY07A FY08A FY09E FY10E 6,577,242 6,520,046 9,422,056 11,258,657 12,425,255 4,242,926 4,489,369 5,776,139 6,537,782 8,766,378 172 182 234 265 356 172 182 234 265 356 72 85 63 157 137 17.8% 5.8% 28.7% 13.2% 34.1% 25.0% 23.3% 26.4% 25.8% 29.2% 27.4 25.9 20.2 17.8 13.3 733 829 944 1,109 1,328 6.4 5.7 5.0 4.3 3.6 1.5% 1.8% 1.3% 3.3% 2.9%

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

May-09

Source: Bloomberg.

Bloomberg: BBCA IJ; Reuters: BBCA JK Year-end Dec (Rp in mn) Operating Profit Net Profit Cash EPS (Rp) Fully Diluted EPS (Rp) DPS (Rp) EPS growth (%) ROE P/E BVPS (Rp) P/BV Div. Yield

Feb-09

BBCA.JK share price (Rp) JCI (rebased)

11,995 4.5 16.2 24,655 5-Nov-09 2395 52 9,455.00

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Bank Central Asia: Summary of financials Income Statement Rp in millions, year end Dec

FY06

FY07

FY08

FY09E

NIM (as % of avg. assets) Earning assets/assets Margins (% of earning assets)

7.5% 73.5% 5.5%

6.7% 67.9% 4.6%

7.3% 69.2% 5.0%

7.6% 73.6% 5.6%

Net Interest Income

Growth Rates

9,006,566

FY10E

7.5% Loans 75.8% Deposits 5.7% Assets Equity 9,029,239 11,675,823 14,409,658 16,436,368 RWA

Total Non-Interest Income Fee Income Dealing Income Other Operating Income Total operating revenues

2,701,636 3,396,249 4,542,707 4,588,133 4,542,499 2,701,636 3,396,249 4,542,707 4,588,133 4,542,499 11,708,202 12,425,488 16,218,530 18,997,791 20,978,867

Operating costs

-5,130,960 -5,905,442 -6,796,474 -7,739,134 -8,553,612

Pre-Prov. Profits Provisions Other Inc/Exp. Exceptionals Disposals/ other income Pre-tax Tax Minorities Other Distbn. Attributable Income

6,577,242 568,564 57,925 7,203,731 1,823,794 -117 4,242,926

Per Share Data Rp EPS DPS Payout Book value Fully Diluted Shares

FY06 172.15 72 42.1% 733 -

6,520,046 9,422,056 11,258,657 12,425,255 188,786 1,754,149 3,110,979 1,535,400 70,370 52,136 224,349 68,118 - Balance Sheet Gearing 6,779,202 11,228,341 14,593,985 14,028,773 Loan/deposit 1,912,378 1,943,904 1,834,245 2,191,595 Investment/assets -117 0 0 0 Loan/Assets - Customer deposits/liab. 4,489,369 5,776,139 6,537,782 8,766,378 LT debt/liabilities FY07 182.09 85 46.5% 829 -

FY08 234.28 63 26.8% 944 -

FY09E 265.17 157 59.3% 1,066 -

FY10E 355.56 137 38.5% 1,301 -

Key Balance sheet Rp in millions FY06 FY07 FY08 FY09E FY10E Net Loans 59,688,265 80,702,481 110,026,231 116,102,488 141,049,817 LLR -1,734,043 -1,686,152 -2,757,475 -5,343,629 -6,183,812 Gross Loans 61,422,308 82,388,633 112,783,706 121,446,118 147,233,629 NPLs 798,021 669,697 674,769 2,428,922 2,061,271 Investments 49,139,082 46,777,950 39,810,702 46,558,992 48,261,992 Other earning assets 7,810,359 9,222,138 14,501,875 16,018,526 18,649,026 Avg. IEA 120,140,797 134,032,960 160,337,276 188,492,548 219,184,868 Goodwill Assets 176,798,726 218,005,008 245,569,856 266,872,414 311,630,335 Deposits Long-term bond funding Other Borrowings Avg. IBL Avg. Assets Common Equity RWA Avg. RWA

Net Interest Income Non-Interest Income of which Fee Grth Revenues Costs Pre-Provision Profits Loan Loss Provisions Pre-Tax Attributable Income EPS DPS

152,736,195 189,172,191 209,528,921 228,154,034 262,571,409 2,330,275 3,680,719 5,082,101 3,286,094 3,286,094 0 0 0 0 0 143,052,642 173,959,690 203,731,966 223,025,575 248,648,815 163,489,739 197,401,867 231,787,432 256,221,135 289,251,374 18,067,360 20,441,731 23,279,310 27,349,615 32,738,090 73,537,710 98,937,004 134,164,949 146,769,973 154,197,597 69,721,059 86,237,357 116,550,976 140,467,461 150,483,785

FY06

FY07

13.5% 17.9% 17.7% 14.0% 11.6%

34.1% 23.9% 23.3% 13.1% 34.5%

FY08 FY09E FY10E 36.9% 10.8% 12.6% 13.9% 35.6%

7.7% 8.9% 8.7% 17.5% 9.4%

21.2% 15.1% 16.8% 19.7% 5.1%

23.7% 0.3% 29.3% 23.4% 14.1% 5.9% 25.7% 33.8% 1.0% -1.0% 5.9% 25.7% 33.8% 1.0% -1.0% 1904.5% 612.6% 3052.6% 1713.6% 1042.8% 14.8% 15.1% 15.1% 13.9% 10.5% 22.6% -0.9% 44.5% 19.5% 10.4% 58.0% -66.8% 829.2% 77.3% -50.6% 17.9% 5.8% 28.7% 13.2% 34.1% 17.8% 5.8% 28.7% 13.2% 34.1% -19.6% 17.0% -25.8% 150.5% -12.9% FY06 40.2% 27.8% 33.8% 86.4% 1.3%

FY07 43.6% 21.5% 37.0% 86.8% 1.7%

FY08 FY09E FY10E 53.8% 53.2% 56.1% 16.2% 17.4% 15.5% 44.8% 43.5% 45.3% 85.3% 85.5% 84.3% 2.1% 1.2% 1.1%

Asset Quality/Capital Loan loss reserves/loans NPLs/loans Loan loss reserves/NPLs Growth in NPLs Tier 1 Ratio

FY06 FY07 2.8% 2.0% 1.3% 0.8% 0.0% 0.0% -13.6% -16.1% 20.0% 17.3%

FY08 FY09E FY10E 2.4% 4.4% 4.2% 0.6% 2.0% 1.4% 0.0% 0.0% 0.0% 0.8% 260.0% -15.1% 14.9% 16.4% 19.1%

Total CAR Du-Pont Analysis NIM (as % of avg. assets) Earning assets/assets Margins (as % of Avg. Assets) Non-Int. Rev./ Revenues Non IR/Avg. Assets Revenue/Assets Cost/Income Cost/Assets Pre-Provision ROA LLP/Loans Loan/Assets Other Prov, Income/ Assets Operating ROA Pre-Tax ROA Tax rate Minorities & Outside Distbn. ROA RORWA Equity/Assets ROE

22.7% FY06 7.5% 73.5% 5.5% 23.1% 1.7% 6.6% 43.8% 3.1% 9.8% 1.0% 35.3% 0.0% 4.0% 10.1% -0.0% 2.6% 6.1% 10.4% 25.0%

16.6% 17.9% 20.6% FY08 FY09E FY10E 7.3% 7.6% 7.5% 69.2% 73.6% 75.8% 5.0% 5.6% 5.7% 28.0% 24.2% 21.7% 2.0% 1.8% 1.6% 6.6% 7.1% 6.7% 41.9% 40.7% 40.8% 2.9% 3.0% 3.0% 9.5% 10.1% 9.7% 1.6% 2.7% 1.1% 42.1% 45.7% 46.4% 0.0% 0.1% 0.0% 4.1% 4.4% 4.3% 10.2% 11.5% 10.2% 0.0% 0.0% 0.0% 2.5% 2.6% 3.0% 5.0% 4.7% 5.8% 9.4% 9.9% 10.4% 26.4% 25.8% 29.2%

19.6% FY07 6.7% 67.9% 4.6% 27.3% 1.7% 5.7% 47.5% 3.0% 8.7% 0.2% 36.4% 0.0% 3.3% 8.8% -0.0% 2.3% 5.2% 9.8% 23.3%

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

137

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Bank of China – H

Overweight

www.boc.cn

Price Target: HK$5.7

Company description One of the “big four” banks in China, BOC has the most extensive international branch network among all Chinese banks and a dominant over-40% market share in China’s FX-related banking business. It has a strong universal banking platform, with presence in investment banking, insurance, fund management, financial leasing.

China

HK$4.54

Post mortem Bank of China delivered stronger-than-sector average loan increase. In Rmbdenominated lending, market share increased by 1ppt. BoC is also a major beneficiary of stronger foreign-currency lending. The bank expects more market share gain and still relatively solid loan growth despite a slowdown. Meanwhile, asset quality further has been proven in the past one year, with significant improvement in asset quality and NPL coverage. We expect more ROE improvement going forward. A structural change in business mix may improve underlying profitability and NIM, particularly driven by the 5ppt increase in the percentage of Rmb-denominated loans, and rising spread in both Rmb and foreign-currency assets. Also, discontinuation of overseas securities provisioning will also contribute nearly 1ppt ROE improvement. Potential for earnings upgrades We believe NIM expansion could be bigger than its key peers and better than our expectation. The major potential upside surprise may come from the writeback of 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. How much recovery is priced into the stock At 1.7x FY10E P/B and below 9x FY10E P/E, we believe the share price has not priced in the expected significant ROE improvement in the next two years or its better-than-peers earnings trend. Price target and key risks Our current DDM-based Dec-09 price target is HK$5.7, implying a P/BV of 2.4x and P/E of 12x (FY10E). We assume a risk-free rate of 5.3%, cost of equity of 11.1% and terminal “g” of 5.8%. Key risks to PT are unexpected prolonged weakness in US credit market and drastic Rmb appreciation.

Banks Samuel ChenAC (852) 2800-8557 [email protected] J.P. MorganSecurities(Asia Pacific) Limited

12M share price performance H-share

5.5 4.5 3.5 2.5 1.5 Nov08

Jan09

Mar- May09 09

RmbMM, Y/E Dec Attributable earnings EPS (Rmb) DPS (Rmb EPS growth (%) ROE (%) ROA (%) P/E (x) – H share BVPS (Rmb) P/BV (x) – H share Div. yield (%)- H

FY07 56,248 0.22 0.10 22.1 14.0 0.99 18.2x 1.66 2.44x 2.5

FY08 64,360 0.25 0.13 14.4 14.5 0.99 15.9x 1.83 2.21x 3.2

FY09E 82,529 0.33 0.16 28.2 16.9 1.03 12.4x 2.01 2.01x 4.0

Source: Company data, Bloomberg, J.P. Morgan estimates. Share price is as of 5 November 2009.

138

FY10E 117,024 0.46 0.21 41.8 21.3 1.21 8.8x 2.32 1.74x 5.1

FY11E 151,011 0.59 0.27 29.0 23.6 1.35 6.8x 2.72 1.48x 6.6

Jul09

Sep09

Nov09

Source: Bloomberg.

Performance H Absolute (%) A Absolute (%)

1M 14.1 6.4

3M 19.3 (9.6)

12M 101.8 36.5

Source: Bloomberg.

Company data (H-shares) 52-week range (HK$) Mkt cap (US$MM) Mkt cap (A+H) (US$MM) Avg daily val (US$MM)

1.84 – 4.66 44,336 152,429 173

Avg daily volume (MM)

325

Shares O/S (A+H MM)

253,839 5-Nov-09

Date of price Index: I Free float (%) Exchange rate Source: Bloomberg.

3988 HK; 601988 CH

A-share

21615 100 7.75

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Bank of China – H: Summary of financials Rmb million, year end December 31 Income statement - Rmb mn

2007

2008

2009E

2010E

2.76% 98% 2.70%

2.63% 96% 2.52%

2.05% 99% 2.02%

2.28% 98% 2.24%

Net Interest Income

152,745

162,936

161,566

215,703

Total Non-Interest Revenues Fee income Dealing income Other operating income Total operating revenues Operating costs Operating profit Loan Loss Provisions Other provisions Exceptionals Disposals/ Other income Pre-tax profit Tax Minorities/preference dividends Attributable net income Common dividends

31,427 35,535 -11,972 7,864 184,172 -75,392 108,780 -8,252 -12,011 917 1,263 90,697 -28,661 -5,788 56,248 25,384

56,750 39,947 7,054 9,749 219,686 -89,078 130,608 -16,792 -28,239 876 726 87,179 -21,285 -1,534 64,360 32,999

62,846 47,140 5,328 10,378 224,411 -91,252 133,159 -17,006 -3,616 300 800 113,637 -27,273 -3,835 82,529 41,265

72,817 58,735 2,807 11,275 288,520 -109,398 179,121 -24,182 3,363 600 880 159,782 -38,348 -4,410 117,024 52,661

Per Share Data restated EPS (Rmb/ share) restated DPS (Rmb/ share) Payout restated BVPS (Rmb/ share) Avg. Shares Issued PPOP per share

2007 0.22 0.10 45% 1.66 253,821 0.43

2008 0.25 0.13 51% 1.83 253,839 0.51

2009E 0.33 0.16 50% 2.01 253,839 0.52

2010E 0.46 0.21 45% 2.32 253,839 0.71

2007

2008

2009E

2010E

Net Customer Loans Loans loss reserves Gross Loans Investments Other Earning Assets Average Earning Assets Goodwill Total assets

2,754,493 (96,068) 2,850,561 1,712,927 1,209,213 5,526,875

3,189,652 (106,494) 3,296,146 1,646,208 1,768,611 6,191,254

4,644,187 (113,441) 4,757,627 1,877,456 1,812,180 7,883,995

5,472,823 (126,603) 5,599,426 2,138,132 2,155,239 9,460,301

6,262,050 (139,997) 6,402,047 2,381,082 2,615,753 11,018,963

5,991,217

6,951,680

8,722,923

10,196,948

11,727,765

Interbank funding Customer deposits LT Sub-debt Other Interest Bearing Liabilities Avg. Interest Bearing Liab. Average Assets Shareholders' equity Risk Weighted Assets Avg. Risk Weighted Assets

663,815 4,400,111 60,000 142,754 5,075,454 5,659,435 420,430 3,754,108 3,611,563

859,343 5,102,111 60,000 115,780 5,686,870 6,471,449 464,258 3,966,943 3,860,526

1,074,179 6,614,742 74,000 90,692 7,284,272 7,994,048 510,788 5,233,754 4,600,348

1,342,723 7,687,214 94,000 90,692 8,518,481 9,649,134 589,836 6,118,169 5,675,961

1,597,841 8,838,238 94,000 95,421 9,904,776 11,181,603 690,158 7,036,659 6,577,414

Margins (% of Earning Assets) Earning Assets/Assets NIM (as % of avg. Assets)

Key balance sheet - Rmb mn

2011E Growth Rates

2007

2008

2009E

2010E

2011E

17% 8% 12% 10%

16% 16% 16% 10%

44% 30% 25% 10%

18% 16% 17% 15%

14% 15% 15% 17%

26% 74% 76% 32% 23% 39% -33% 34% 31% 22% 150%

7% 81% 12% 19% 18% 20% 103% -4% 14% 14% 30%

-1% 11% 18% 2% 2% 2% 1% 30% 28% 28% 25%

34% 16% 25% 29% 20% 35% 42% 41% 42% 42% 28%

25% 19% 21% 23% 21% 25% 8% 28% 29% 29% 29%

2007

2008

2009E

2010E

2011E

65% 29% 48% 79% 1%

65% 24% 47% 79% 1%

72% 22% 55% 81% 1%

73% 21% 55% 80% 1%

72% 20% 55% 80% 1%

Asset Quality/Capital Loan loss reserves/Loans Impaired loan ratio Impaired loan coverage Growth in NPLs

2007 3.5% 3.17% 106% -13%

2008 3.3% 2.76% 117% 1%

2009E 2.4% 1.54% 155% -19%

2010E 2.3% 1.21% 187% -8%

2011E 2.2% 1.00% 220% -6%

Tier 1 Ratio Total CAR

10.7% 13.3%

10.8% 13.4%

9.7% 12.2%

9.5% 12.0%

9.7% 12.1%

2007

2008

2009E

2010E

2011E

2.70% 0.56% 17.1% 3.25% 40.9% 1.33% 0.0% 1.92% -0.31% 47.1% -0.17% 1.60% 31.6% -0.10% 0.99% 1.56% 7.1% 14.0%

2.52% 0.88% 25.8% 3.39% 40.5% 1.38% 0.0% 2.02% -0.53% 49.2% -0.41% 1.35% 24.4% -0.02% 0.99% 1.67% 6.8% 14.5%

2.02% 0.79% 28.0% 2.81% 40.7% 1.14% 0.0% 1.67% -0.40% 52.8% -0.03% 1.42% 24.0% -0.05% 1.03% 1.79% 6.1% 16.9%

2.24% 0.75% 25.2% 2.99% 37.9% 1.13% 0.0% 1.86% -0.44% 57.6% 0.05% 1.66% 24.0% -0.05% 1.21% 2.06% 5.7% 21.3%

2.41% 0.78% 24.4% 3.18% 37.2% 1.18% 0.0% 2.00% -0.40% 57.8% 0.07% 1.83% 24.0% -0.04% 1.35% 2.30% 5.7% 23.6%

2.44% Loans 99% Deposits 2.41% Assets Equity 269,068 Net Interest Income 86,766 Non-Interest Income 71,285 of which Fee Grth 2,763 Revenues 12,718 Costs 355,834 Pre-Provision Profits -132,363 Loan Loss Provisions 223,471 Pre-Tax -26,171 Attributable Income 5,982 EPS 800 DPS 1,000 205,082 Balance Sheet Gearing -49,220 -4,851 Loan/Deposit 151,011 Investment/Assets 67,955 Loan/Assets Customer deposits/Liab. LT Debt/Liabilities 2011E 0.59 0.27 45% 2.72 253,839 0.88

2011E Du-Pont Analysis NIR/Avg. Assets Non IR/Avg. Assets Non IR/Total Rev Total Rev/Avg. Assets Cost/Income Cost/Assets Goodwill Amort. Pre-prov.g Op. ROAA LLP/Loans Loan/Assets Other inc:provs Pre-tax ROAA Tax MI ROAA RoRWA Equity/Assets ROE

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

139

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Catcher Technology

Overweight

www.catcher.com.tw

Price Target: NT$112

Company description Catcher (TWSE: 2474) is a leading aluminum and magnesium casing maker in Taiwan. The company is primarily engaged in manufacturing and sales of a wide spectrum of light metal casing products in 3C area, but mainly in NB.

Taiwan Computer Hardware

Price: NT$80.2

Post mortem Catcher’s profitability is highly dependent on: (1) the utilization rate; and (2) corporate demand. Given that PC brands prefer aluminum for their thin and light models, we expect Catcher to be a key beneficiary of this trend in 2010. In addition, a potential pick up in corporate demand from 2H10 should also help Catcher. While Foxconn Tech should benefit from rising metal adoption, Hon Hai’s aggressive notebook ODM plans could limit the upside for Foxconn Tech, which benefits Catcher.

Gokul HariharanAC (852) 2800-8564 [email protected] J.P. Morgan Securities (Asia Pacific) Limited

Price performance 100 NT$

70 40 Nov-08

Performance

NT$

140

3M

12M

-3.6 -2.6

3.0 -5.7

17.7 -41.3

52-week range (NT$) Mkt cap. (NT$MM) Mkt cap. (US$MM) Avg daily value (US$MM) Avg daily volume (MM) Shares O/S (MM) Date of price Index: TWSE Free float (%) Exchange rate Source: Bloomberg.

NT$ in millions, year-end December

Jun-10 PT

1M

Company data

Bloomberg: 2474.TT; Reuters: 2474.TW

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

Nov-09

Source: Bloomberg.

Price target and key risks Our Jun-10 PT of NT$112 is based on 15x FY10E earnings. 15x is the average P/E multiple since 2002, which we believe is a fair valuation for Catcher. With 40/12% potential earnings growth in 2010/11E and industry trends becoming in favor of light metal, we believe Catcher should merit a valuation re-rating as a pure-play notebook light metal vendor. A key risk to our PT is execution issue in the ramp up of new models in 2010.

FY08 15.7% 17.5% 4.0 1Q 2.60 1.31 1.00 5% -38%

Aug-09

Source: Bloomberg.

Absolute (%) Relative (%)

How much recovery is priced into the stock? The recovery in 2009 might be already in the price but we believe the strong momentum in 2010 is not. We believe the market is overly concerned about the impact on gross margins due to increasing competition and is not fully factoring in the extent of operating leverage in Catcher’s business model.

ROE (%) Core ROIC (%) Cash div (NT$) Quarterly EPS (NT$) EPS (FY07) EPS (FY08) EPS (FY09E) Sales growth EPS growth

May-09

2474.TW share price (NT$ TSE (rebased)

Potential for earnings upgrades We believe the potential for upward earnings estimate revisions comes from both revenue and OP margin upside through: (1) an improvement in yield; and (2) a strong pick up in the utilization rate on favorable industry trend.

FY08 FY09E FY10E FY11E Sales 19,049 18,422 24,610 29,215 Operating profit 4,989 3,747 5,375 6,018 EBITDA 6,481 5,819 7,678 8,346 Pre-tax profit 4,932 4,073 5,715 6,407 Net profit (reported) 4,346 3,449 4,843 5,432 MV of employee bonus 543 427 586 657 Net profit (adjusted) 4,346 3,449 4,843 5,432 New Taiwan GAAP EPS (NT$) 6.63 5.22 7.28 8.17 New Taiwan GAAP P/E (x) 12.1 15.4 11.0 9.8 YE BPS (NT$) 44.8 54.4 58.8 63.1 P/BV (x) 1.8 1.5 1.4 1.3 Net debt (3.49) net cash net cash net cash

Feb-09

FY09E FY10E FY11E 10.5% 12.9% 13.4% 10.5% 13.9% 14.1% 1.0 2.3 3.0 2Q 3Q 4Q 1.78 2.98 3.26 1.38 2.14 1.81 1.10 1.41 1.71 -3% 34% 19% -21% 40% 12% 112

41.36-94.00 53,326 1,639 34 13.48 664.9 5-Nov-09 7,417 70 32.5

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Catcher Technology: Summary of financials NT$ in millions, year-end December Profit and loss statement

Ratio analysis FY08 19,049 5.3% 40.2% 6,481 -19.4% 34.0% 4,989 -32.9% 26.2% 83 4,932 -36.0% 571 11.4% 4,346 -39.7% 4,346 -37.3% 655 6.63 6.63

FY09E 18,422 -3.3% 34.1% 5,819 -10.2% 31.6% 3,747 -24.9% 20.3% -76 4,073 -17.4% 618 16.5% 3,449 -20.7% 3,449 -20.7% 661 5.22 5.22

FY10E 24,610 33.6% 35.7% 7,678 31.9% 31.2% 5,375 43.5% 21.8% -8 5,715 40.3% 872 16.2% 4,843 40.4% 4,843 40.4% 665 7.28 7.28

FY11E 29,215 18.7% 33.9% 8,346 8.7% 28.6% 6,018 12.0% 20.6% -19 6,407 12.1% 975 16.2% 5,432 12.1% 5,432 12.1% 665 8.17 8.17

Cash and Cash Equivalents Accounts receivable Inventories Others Current assets

FY08 7,375 8,206 2,964 4,239 22,783

FY09E 11,250 8,017 2,898 5,985 28,150

FY10E 10,305 11,173 4,039 8,341 33,858

FY11E 11,704 12,133 4,387 9,058 37,282

LT investments Net fixed assets Total Assets

413 19,894 44,627

486 20,024 49,202

526 20,721 55,647

569 21,393 59,787

Liabilities ST bank loans Payables Others Total current liabilities Long term debt Other liabilities Total liabilities Shareholder's equity BVPS (NT$)

6,785 2,242 1,882 10,910 4,084 80 15,074 29,553 44.80

5,003 2,204 2,394 9,602 3,335 69 13,006 36,196 54.44

5,777 3,494 3,337 12,607 3,851 69 16,528 39,120 58.83

6,068 4,007 3,624 13,699 4,045 69 17,813 41,974 63.13

Revenues % change Y/Y Gross margin (%) EBITDA % change Y/Y EBITDA margin (%) EBIT % change Y/Y EBIT margin (%) Net interest Earnings before tax % change Y/Y Tax as % of EBIT Net income (reported) % change Y/Y Net income (adjusted) % change Y/Y Shares outstanding (MM) EPS (reported) EPS (adjusted) Balance sheet

EBITDA margin (%) Operating margin (%) Net profit margin (%) SG&A/sales (%)

FY08 34.0% 26.2% 22.8% 6.9%

FY09E 31.6% 20.3% 18.7% 6.9%

FY10E 31.2% 21.8% 19.7% 7.0%

FY11E 28.6% 20.6% 18.6% 6.5%

Sales per share growth (%) Sales growth (%) Net profit growth (repo’d) (%) Net profit growth (adj) (%) EPS growth (reported) (%) EPS growth (adjusted) (%)

4.8% 5.3% -39.7% -37.3% -40.0% -37.6%

-4.1% -3.3% -20.7% -20.7% -21.3% -21.3%

32.8% 33.6% 40.4% 40.4% 39.6% 39.6%

18.7% 18.7% 12.1% 12.1% 12.1% 12.1%

Interest Coverage (x) Net debt to total Capital (%) Net debt to equity (%) Sales/Assets (%) Assets/Equity (%) ROE (%) ROCE (%)

19.7 9% 12% 43% 151.0% 15.7% 12.1%

19.8 -7% -8% 37% 135.9% 10.5% 7.5%

37.2 -1% -2% 44% 142.2% 12.9% 9.8%

37.9 -3% -4% 49% 142.4% 13.4% 10.1%

EBIT Depreciation & amortisation Change in working capital Taxes Cash flow from operations

FY08 4,989 1,492 -4,950 571 2,102

FY09E 3,747 2,072 -1,017 618 5,419

FY10E 5,375 2,302 -4,420 872 4,129

FY11E 6,018 2,329 -1,225 975 8,097

Capex Disposal/ (purchase) Net Interest Free cash Flow

-7,115 -853 83 -5,013

-2,202 921 -76 3,217

-3,000 -40 -8 1,129

-3,000 -43 -19 5,097

Equity raised/(repaid) Debt raised/(repaid) Other Dividends Beginning cash Ending cash DPS (NT$)

581 4,197 -2,608 15 10,972 7,375 4.00

652 -2,531 2,285 -593 7,375 11,250 1.00

0 1,289 -1,820 -1,496 11,250 10,305 2.25

0 485 -2,125 -1,995 10,305 11,704 3.00

Cash flow statement

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

141

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

China Airlines

Overweight

www.china-airlines.com

Price Target: NT$16.00

Company description China Airlines (CAL) is Taiwan’s government-owned carrier with a wellbalanced revenue mix, including 53% contribution from passenger revenue; 42% from cargo revenue; and 5% from other services.

Taiwan Transportation, Airlines

NT$9.99

Post mortem China Airlines has one of the youngest fleets versus Asian and global peers, implying better operating efficiency; its safety track record has improved significantly in the past five years. CAL also has easier access to credit and relatively low funding costs despite its high financial leverage.

Corrine PngAC (65) 6882-1514 [email protected] J.P. Morgan Securities (Asia Pacific) Limited

Price performance 16 NT$ 12

Potential for earnings upgrades Direct flights represent a structural change for the Taiwan airlines and will likely start to have a bigger impact on the airline’s earnings in 2010. We expect, Contrary to the market’s common perception, CAL to be a bigger beneficiary of the progressive liberalization of China-Taiwan direct flights than EVA, with a c.17% boost to its 2010 revenue, helped by its 94% stake in Mandarin Airlines. How much recovery is priced into the stock? 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 the outlook and it incurred substantial losses in 2009. However, we expect CAL to provide substantial absolute and relative upside in 2010 as the cycle and its earnings recover. Price target and key risks Our Dec-10 PT of NT$16 based on 1.7x P/BV, 1 std dev above CAL’s average valuation, as we expect better-than-mid-cycle results in 2010 and near-peak-cycle earnings by 2011. Key risks to our PT include: (1) volatile fuel prices; (2) high gearing; (3) aircraft incidents; and (4) delays in crossstraits flights liberalization.

8 Nov-08

Feb-09

NT$ in millions, year-end December Sales Net profit EPS (NT$) FD EPS (LC) DPS (NT$) Sales growth (%) Net profit growth (%) EPS growth (%) ROE (%) P/E (x) FD P/E (x)

FY08 125,221 -32,352 (7.11) (7.11) 0.00 -1.4 nm 1.036.5 -75.4 -1.4 -1.4

FY09E 95,738 -8,969 (2.26) (2.26) 0.00 -23.5 nm -68.2 -25.7 -4.5 -4.5

FY10E 122,660 495 (0.12) (0.12) 0.00 28.1 nm 105.5 1.3 80.6 80.6

FY11E 141,301 3,562 (0.90) (0.90) 0.00 15.2 619 618.8 8.6 11.2 11.2

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009. 142

Aug-09

Nov-09

Source: Bloomberg.

Performance 1M

3M

12M

Absolute (%)

-6.5%

-22.1%

-5.1%

Relative (%)

-7.2%

-29.4%

-54.7%

Source: Bloomberg.

Company data 52-week range (NT$) Mkt cap. (NT$MM) Mkt cap. (US$MM)

8.67-14.58 45,677 1,403

Avg daily value (US$MM)

16.35

Avg daily volume (MM)

39.65

Shares O/S (MM)

4,572

Date of price

5-Nov-09

Index: TWSE

7,417.46

Free float (%)

40

Exchange rate

33

Source: Bloomberg.

Bloomberg: 2610 TT; Reuters: 2610.TW

May-09

2610.TW share price (NT$ TSE (rebased)

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

China Airlines: Summary of financials NT$ in millions, year end December Income statement FY07 FY08 FY09E FY10E FY11E Revenue 126,993 125,221 95,738 122,660 141,301 % change Y/Y 4.1% (1.4%) (23.5%) 28.1% 15.2% EBITDA 12,213 104 3,323 14,913 18,740 % change Y/Y -10.1% -99.2% 3102.7% 348.8% 25.7% EBIT 1,351 -10,206 -7,065 4,076 7,454 % change Y/Y NM NM NM NM 82.9% EBIT margin 1.1% -8.2% -7.4% 3.3% 5.3% Net interest -4,751 -4,097 -3,434 -3,723 -3,623 Earnings before tax -3,138 -36,690 -9,169 562 4,039 % change Y/Y -2239.1% 1069.2% -75.0% -106.1% 618.8% Tax 619 4,339 200 -66 -478 As % of EBT 19.7% 11.8% 2.2% 11.8% 11.8% Net income (reported) -2,519 -32,352 -8,969 495 3,562 % change Y/Y -441.1% 1184.5% -72.3% -105.5% 618.8% Shares outstanding 4,026 4,551 3,972 3,972 3,972 EPS (reported) (NT$) (0.63) (7.11) (2.26) 0.12 0.90 % change Y/Y (426.8%) 1036.5% (68.2%) (105.5%) 618.8%

Balance sheet Cash and cash equivalents Accounts receivable Inventories Others Current assets

Cash flow statement EBIT Depr. & amortization Change in working capital Taxes Cash flow from operations

FY07 FY08 FY09E 1,351 -10,206 -7,065 10,863 10,310 10,388 7,092 1,977 -920 -119 -95 200 15,886 -2,252 -831

FY10E 4,076 10,837 1,296 -66 12,421

FY11E 7,454 11,286 898 -478 15,537

Capex Disposal/(purchase) Net Interest Other Free cash flow

953 5,389 -10,000 -10,000 -10,000 15,456 10,894 0 0 0 -4,751 -4,097 -3,434 -3,723 -3,623 -3,318 -631 0 0 0 16,839 3,137 -10,831 2,421 5,537

Equity raised/(repaid) Debt raised/(repaid) Other Dividends paid Beginning cash Ending cash DPS (NT$)

-14,383 -469 5,245 6,088 0.00

-7,599 -4,000 0 0 6,088 7,282 7,282 11,251 0.00 0.00

-2,000 -5,000 0 0 11,251 11,671 11,671 12,208 0.00 0.00

FY07 FY08 FY09E 9.6% 0.1% 3.5% 1.06% (8.15%) (7.38%) -2.0% -25.8% -9.4%

FY10E FY11E 12.2% 13.3% 3.32% 5.28% 0.4% 2.5%

Ratio analysis FY07 FY08 FY09E 6,088 7,282 11,251 12,458 8,913 6,815 5,381 5,152 3,939 3,429 930 886 27,357 22,277 22,890

FY10E 11,671 8,731 5,046 926 26,375

FY11E 12,208 10,058 5,813 954 29,034

LT investments Net fixed assets Total assets

15,687 20,443 20,443 20,443 20,443 177,104 165,349 164,961 164,124 162,838 230,808 218,060 218,116 220,972 222,553

Liabilities Short-term loans Payables Others Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity BVPS (NT$)

30,204 13,808 10,918 54,930 106,717 13,991 175,638 55,170 13.70

EBITDA margin Operating margin Net margin

Sales per share growth Sales growth Net profit growth EPS growth Interest coverage (x)

30,692 11,878 32,436 75,006 98,485 13,085 187,374 30,686 6.74

21,692 17,692 12,692 9,082 11,635 13,404 30,957 32,764 34,015 61,730 62,091 60,110 103,485 105,485 105,485 13,085 13,085 13,085 179,099 181,459 179,479 39,017 39,513 43,075 9.82 9.95 10.84

Net debt to equity Sales/assets Assets/equity ROE ROCE

(0.3%) (12.8%) (12.4%) 28.1% 15.2% 4.1% (1.4%) (23.5%) 28.1% 15.2% -441.1% 1184.5% -72.3% -105.5% 618.8% (426.8%) 1036.5% (68.2%) (105.5%) 618.8% 2.57

0.03

0.97

4.01

5.17

236.5% 284.0% 326.9% 284.0% 256.6% 0.54 0.56 0.44 0.56 0.64 4.18 7.11 7.02 6.76 6.11 (4.6%) (75.4%) (25.7%) 1.3% 8.6% 0.7% -5.8% -4.4% 2.5% 4.6%

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

143

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

China Mengniu Dairy

Overweight

www.mengniu.com.cn

Price Target: HK$23.00

Company description Mengjiu is a leading dairy producer in China. Its major products include liquid milk products and ice cream. In 2008, it was ranked No.1 in the sectors of liquid milk, yogurt and ice cream in China’s dairy industry.

Country Food & Food Manufacture

HK$23.70

Jasmine BaiAC (852) 2800 8559 [email protected]

Post mortem Liquid milk gross margin and EBIT margin are at the low-end in the China F&B sector. We believe one reason for this is the aggressive pricing of sector majors, Mengniu and Yili. EBIT margins of both companies have declined since 2002. Mengniu management indicated that after the melamine incident, the company has been focusing more on high-end product mix and profitability rather than on market share. We believe as dairy processors become more rational, EBIT margin would have more upside potential. Meanwhile, we believe the melamine incident in China has resulted in consumers being more willing to pay for high-end products. Potential for earnings upgrades We have factored in raw milk price increases in China and the EBIT margin assumption for FY09 and FY10 are 6.5% and 7.2%, respectively. Earnings upgrades will come from margin expansion rather than from revenue surprises. How much recovery is priced into the stock? The share price is trading at 25x FY09E earnings and 21x FY10E earnings. This is at the low end of big-cap China consumer staples. Price target and key risks Our DCF-based Dec-09 price target is HK$23 (free cash flow = cash flow from operation – capex; WACC = 12%. We assume a terminal growth rate from 2018 of 2%). Key risks to our price target are: (1) if the selling expense surges again; (2) an unexpected change in raw milk prices; and (3) any food safety issue in China.

J.P. Morgan Securities (Asia Pacific) Limited

Price performance HK$ 25 20 HK$

15 10 5 0 Oct-08

Jan-09

Rmb in millions, year-end December Sales Net profit EPS (Rmb) DPS (Rmb) Sales growth (%) Net profit growth (%) EPS growth (%) ROE (%) P/E (x) P/BV (x) EV/EBITDA (x) Dividend yield (%)

FY08 23,865 (952) (0.61) 0.15 11.9 -201.7 -191.8 -21.3 -34.3 7.3 -69.7 0.7%

FY09E 25,106 1,347 0.78 0.16 5.2 -241.5 -227.3 15.7 23.3 3.7 10.5 0.9%

FY10E 27,239 1,615 0.93 0.19 8.5 19.9 19.9 16.3 19.5 3.2 8.3 1.0%

FY11E 29,941 1,857 1.07 0.21 9.9 15.0 15.0 16.3 16.9 2.8 0.0 1.2%

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009. 144

Jul-09

Oct-09

Source: Bloomberg.

Performance 1M

3M

12M

Absolute (%)

17.0

29.1

251.1

Relative (%)

11.9

24.3

206.4

Source: Bloomberg.

Company data 52-week range (HK$) Mkt cap. (HK$ MM)

6.2 – 23.7 41,146

Mkt cap. (US$MM)

5,309

Avg daily value (US$MM) Avg daily volume (MM) Shares O/S (MM) Date of price Index: I Free float (%) Exchange rate Source: Bloomberg.

Bloomberg: 2319 HK; Reuters: 2319.HK

Apr-09

2319.HK Share Price (HK$

23.5 9.2 1736 5-Nov-09 21479 43.8 7.75

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

China Mengniu Dairy: Summary of financials Profit and loss statement

Cash flow statement

Rmb in millions, year-end December Revenues % change yoy Gross Profit EBITDA % change yoy EBITDA margin (%) EBIT % change yoy EBIT margin (%) Net interest Earnings before tax % change yoy Tax % of EBT Net income % change yoy No. of shares outstanding EPS (Rmb)

Rmb in millions, year-end December

FY08 23,865 11.9% 4,669 (504) -130.8% -2.1% -1134 -201.6% -4.8% 15 -1089 -196.4% 161 14.8% -952 -201.7% 1562

FY09E 25,106 5.2% 6,510 2,337 -563.6% 9.3% 1640 -244.6% 6.5% 9 1664 -252.7% -200 12.0% 1347 -241.5% 1736

FY10E 27,239 8.5% 7,111 2,727 16.7% 10.0% 1950 18.9% 7.2% 39 2004 20.4% -261 13.0% 1614 19.8% 1736

FY11E 29,941 9.9% 7,920 3,116 14.3% 10.4% 2276 16.8% 7.6% 68 2361 17.8% -354 15.0% 1854 14.9% 1736

-0.61

0.78

0.93

1.07

Earnings before tax Depreciation & amortisation Change in working capital Others Cash flow from operations

FY08 (1,134) 640 927 155 587

Capex Others Cash flow from investing Free Cash Flow

(828) (422) (1,250) (663)

Equity raised/(repaid) Debt raised/(repaid) Dividends paid Others Cash flow from financing Net change in cash DPS (Rmb)

0 1,302 (228) 80 1,155 492 0.15

FY09E 1,640 707 (1,518) (191) 638

FY10E 1,950 787 637 (222) 3,152

FY11E 2,276 850 (705) (286) 2,135

(850) (15) (865) (227)

(1,100) (16) (1,116) 2,036

(730) (17) (747) 1,389

3,058 (670) (269) 2,119 1892 0.16

(404) (323) (727) 1309 0.19

(99) (371) (470) 919 0.21

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

Balance sheet Ratio analysis

Rmb in millions, year-end December Cash and cash equivalents Accounts receivable Inventories Others Current assets Net fixed assets Other non current assets Total assets Liabilities Short Term loans Accounts payable Others Total current liabilities Long term debt Total liabilities Shareholder's equity BVPS (Rmb)

FY08 3,042 349 824 507 4,723 5,751 559 11,033

FY09E 4,934 614 1,213 507 7,269 5,893 574 13,736

FY10E 6,243 580 992 507 8,323 6,207 590 15,119

FY11E 7,162 897 1,662 507 10,228 6,087 606 16,921

1,282 4,202 0 5,483 628 6,568 4,465 2.86

132 3,338 0 3,470 1,108 5,152 8,600 4.96

228 3,720 0 3,948 608 5,260 9,891 5.70

129 4,002 0 4,131 608 5,596 11,374 6.55

Source: Company, J.P. Morgan estimates.

%, year-end December FY08 19.6% -2.1% -4.8% -4.0%

FY09E 25.9% 9.3% 6.5% 5.4%

FY10E 26.1% 10.0% 7.2% 5.9%

FY11E 26.5% 10.4% 7.6% 6.2%

Sales growth Net profit growth EPS growth

11.9% -201.7% -191.8%

5.2% -241.5% -227.3%

8.5% 19.8% 19.8%

9.9% 14.9% 14.9%

Net debt to equity Sales/assets (x) Assets/equity (x) ROE ROCE

-25.4% 2.2 2.5 -21.3% -20.4%

-43.0% 1.8 1.6 15.7% 16.0%

-54.7% 1.8 1.5 16.3% 17.5%

-56.5% 1.8 1.5 16.3% 17.8%

Gross margin EBITDA margin Operating margin Net profit margin

Source: Company, J.P. Morgan estimates.

145

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Overweight

China Yurun Food Group

HK$17.76

www.yurun.com.hk Company description China Yurun Food is a leading meat processing company in China. Its business includes upstream hog slaughtering and downstream meat processing. China Yurun has been expanding capacity over years and we expect it to benefit from industry consolidation.

China Food & Food Manufacture

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

J.P. Morgan Securities (Asia Pacific) Limited

Potential for earnings upgrades We have assumed hog prices at Rmb12.1/kg and Rmb13.8/kg for FY09 and 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 reported impressive product-mix improvement, which is likely to surprise margins on the upside. How much recovery is priced into the stock? China Yurun’s share price is trading at 23x of FY09E earnings and 17x FY10E earnings. We believe the margin expansion backed by products mix improvement has not priced in. Recommendation and key risks We see China Yurun as a half commodity, and a half branded consumer company. In our view, this is the best entry point in the cycle and we observe impressive product-mix improvement. Key risks to our view include: (1) outbreak of unexpected food safety issue in the pork processing sector; and (2) unexpected government action.

Jasmine BaiAC (852) 2800 8559 [email protected]

Price performance HK$ 19 17 15 13 HK$ 11 9 7 5 Nov-08

Feb-09

May-09

Performance Absolute (%) Relative (%)

1M

3M

12M

4.7% -0.4%

39.0% 34.2%

89.9% 45.2%

Source: Bloomberg.

Company data 52-week range (HK$) Mkt cap. (HK$ MM) Mkt cap. (US$MM) Avg daily value (US$MM) Avg daily volume (MM) Shares O/S (MM) Date of price Index: HSI Free float (%) Exchange rate

Bloomberg: 1068HK; Reuters: 1068.HK HK$ in millions, year-end December FY08 13,024 1138 0.74 50.8% 11.5% 11.2% 30.9% 21.7% 24.1 32.0 5.2 23.5 1.1

FY09E 14,047 1525 0.91 7.9% 49.9% 37.5% 24.0% 19.0% 19.4 23.3 3.7 15.6 1.3

FY10E 20,246 1717 1.03 44.1% 34.9% 34.9% 12.6% 18.4% 17.3 17.3 3.2 13.2 1.5

FY11E 25,092 2003 1.20 23.9% 16.6% 16.6% 16.6% 18.5% 14.8 14.8 2.7 10.7 1.7

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009. We revised PT to HK$21 on November 19. 146

Nov-09

Source: Bloomberg.

Source: Bloomberg.

Sales Net profit EPS (HK$) Sales growth (%) Net profit growth (%) Recurring EPS growth(%) EPS growth (%) ROE (%) P/E (x) Recurring P/E (X) P/BV (x) EV/EBITDA (x) Dividend yield (%)

Aug-09

1068.HK Share Price (HK$

8.18 – 17.76 29,703 3,833 17.17 8.9 1673 Nov. 5, 2009 21,479 59.2% 7.75

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

China Yurun Food Group: Summary of financials HK$ in millions, year-end December Income statement 2008 Revenues 13,024 % change yoy 50.8% Gross Profit 1,690 EBITDA 1304 % change yoy 36.7% EBITDA margin (%) 10.0% EBIT 1175 % change yoy 34.8% EBIT margin (%) 9.0% Recurring EBIT 982 Interest Expense 64 Earnings before tax 1238 % change yoy 35.8% Recurring earrings before tax 950 % change yoy 16.7% Tax -101 % of EBT -8.2% Net income 1138 Recurring net income 849 % change yoy 11.5% No. of shares outstanding 1531 Recurring EPS (HK$) 0.55 EPS (HK$) 0.74

2009E 14,047 7.9% 2,193 1889 44.8% 13.4% 1729 47.1% 12.3% 1609 -52 1676 35.3% 1554 63.5% -151 -9.0% 1525 1273 49.9% 1669 0.76 0.91

2010E 20,246 44.1% 2,950 2282 20.8% 11.3% 1981 14.6% 9.8% 1981 -29 1951 16.4% 1951 25.6% -234 -12.0% 1717 1717 34.9% 1669 1.03 1.03

Cash flow statement

2011E 25,092 23.9% 3,589 2776 21.6% 11.1% 2355 18.9% 9.4% 2355 -26 2329 19.3% 2329 19.3% -326 -14.0% 2003 2003 16.6% 1669 1.20 1.20

2008 1,175 129 172 -282 1,195

2009E 1,729 160 -499 -152 1,239

2010E 1,981 301 -443 -235 1,604

2011E 2,355 420 -346 -327 2,103

Capex Sale of assets Free Cash Flow

-1882 0 -688

-1938 -699

-1740 -136

-1158 945

Cash flow from investing

-2,022

-1,938

-1,740

-1,158

31

1,675

-

-

Debt raised/(repaid) Dividends paid Cash flow from financing

250 -291 -10

-588 -390 697

-81 -439 -520

-340 -512 -852

Net change in cash

-837

-2

-656

93

Equity raised/(repaid)

DPS (HK$)

Balance sheet Cash and cash equivalents Trade & other receivables Inventories Others Total current assets Net fixed assets Others Total assets Liabilities Short Term loans Trade & other payables Others Total current liabilities Long term debt Others Total liabilities Shareholder's equity Capital employeed BVPS (HK$)

EBIT Depreciation & amortization Change in working capital Others Cash flow from operations

0.19

0.23

0.26

0.31

Ratio analysis 2008 1,209 704 703 640 3,256 2,588 2,477 8,321

2009E 1,293 1,003 988 71 3,356 4,372 2,385 10,112

2010E 637 1,446 1,441 71 3,596 5,817 2,379 11,792

2011E 730 1,792 1,792 71 4,386 6,561 2,373 13,319

1,096 903 20 2,018 1,011 57 3,086 5,235 7112 3.42

638 988 20 1,646 364 57 2,067 8,045 8819 4.82

0 1,441 20 1,462 950 57 2,469 9,323 11154 5.59

0 1,792 20 1,812 636 57 2,505 10,814 12589 6.48

Gross margin EBITDA margin Operating margin Recuring operating margin Net profit margin Recurring net profit margin

2008 13.0% 10.0% 9.0% 7.5% 8.7% 6.5%

2009E 15.6% 13.4% 12.3% 11.5% 10.9% 9.1%

2010E 14.6% 11.3% 9.8% 9.8% 8.5% 8.5%

2011E 14.3% 11.1% 9.4% 9.4% 8.0% 8.0%

Sales growth Net profit growth EPS growth

50.8% 11.5% 30.9%

7.9% 49.9% 24.0%

44.1% 34.9% 12.6%

23.9% 16.6% 16.6%

Interest coverage (x) Net debt to equity Sales/assets (x) Assets/equity (x) ROE ROCE Recuring ROCE Sales/non-current assets (x)

-18.4 17.1% 1.6 1.6 21.7% 16.5% 13.8% 2.57

33.1 Net cash 1.4 1.3 19.0% 19.6% 18.3% 2.08

68.2 3.4% 1.7 1.3 18.4% 17.8% 17.8% 2.47

92.1 Net cash 1.9 1.2 18.5% 18.7% 18.7% 2.81

Source: Company, J.P. Morgan estimates.

147

Emerging Markets Equity Research 02 December 2009

Container Corporation of India Ltd.

Overweight

www.concorindia.com

Price Target: Rs1,260

Company description Concor is India’s largest railway container transport operator with a market share in excess of 90%. Concor has a dominant network of 60 ICDs and over 200 rakes. The company is reliant on India’s foreign trade segment, as it derives 80% of revenue from this segment.

India Logistics & Freight

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

J.P. Morgan India Private Limited

Rs1,138.7

(91-22) 6157-3596 [email protected]

Price performance (Rs)

Aug-09

May-09

Feb-09

1,300 1,100 900 700 500 Nov-08

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.

Aditya MakhariaAC

Nov-09

Adrian Mowat (852) 2800-8599 [email protected]

Source: Bloomberg.

Performance

How much recovery is priced into the stock? While container volumes have risen from trough levels, volumes remain benign. Consequently, while valuations have risen from trough levels, factoring in the recovery, we believe that as the growth momentum accelerates, valuations will likely re-rate further.

Rs n millions, year-end March FY09E 34,172 7,915 60.9 14 2 5 5 21.0 289 18.7 14.0

FY10E 39,484 8,909 68.5 14 16 13 13 20.1 342 16.6 11.9

FY11E 45,103 10,902 83.9 17 14 22 22 20.7 405 13.6 9.5

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009. 148

12M

+1

+75

Relative (%)

-1

0

+16

Company data

Bloomberg: CCRI.IN; Reuters: CCRI.BO FY08 33,473 7,505 57.9 13 10 8 8 23.6 245 19.7 14.9

3M

-6

Source: Company data, Bloomberg.

Price target and key risks We expect Concor’s earnings to grow by 22% over FY11E, driven by rising sales and an improved margin outlook (given the revival in the EXIM segment).We have a Mar-10 PT of Rs1,260—which is at a 10% premium to its DCF-based value. At this price, the stock is valued at one-year forward P/E of 15x on FY11E EPS, which is at a 10% premium to the company’s historical five-year trading multiple. We believe that the valuations are justified given that growth over the next 12-18 months will be driven by a revival in the EXIM segment (earnings growth of 22% in FY11E). Risks to our price target include a delayed global recovery as well as an increase in the competitive environment.

Net sales Net profit EPS (Rs) DPS (Rs) Net sales growth (%) Net profit growth (%) EPS growth (%) ROE (%) BVPS (Rs) P/E (x) EV/EBITDA (%)

1M Absolute (%)

52-week range (Rs) Mkt cap. (RsMM) Mkt cap. (US$MM) Avg daily value (US$MM)

540-1,355 148,007 3,147 2.0

Avg daily volume (MM)

0.1

Shares O/S (MM)

130

Date of price Index: SENSEX Free float (%) Exchange rate Source: Bloomberg.

5-Nov-09 16064 37 47.03

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Container Corporation of India Ltd.: Summary of financials Profit and loss statement

Cash flow statement

Rs in millions, year-end March Revenues % change Y/Y

FY08 33,473 10%

FY09 34,172 2%

FY10E 39,484 16%

FY11E 45,103 14%

8,904 0% 26.6% 1,063 1,645 0 9,485 1,980 20.9 7,505 8% 17 7,522

9,311 5% 27.2% 1,159 2,111 0 10,262 2,347 22.9 7,915 5% (3) 7,912

10,720 15% 27.2% 1,330 2,106 0 11,496 2,587 22.5 8,909 13% 8,909

12,854 20% 28.5% 1,537 2,659 0 13,977 3,075 22.0 10,902 22% 10,902

65 57.9 8% 13 22%

130 60.9 5% 14 23%

130 68.5 13% 14 21%

130 83.9 22% 17 21%

EBITDA % change Y/Y EBITDA Margin (%) Depreciation Other Income Interest Expense Earnings before tax Tax as % of EBT Net Income (Adjusted) Change (%) Prior Period adjustments Net Income (Reported) Shares Outstanding (in M) EPS (Adjusted) % change Y/Y DPS (Rs) Div Payout Ratio(%)

Rs in millions, year-end March FY08

FY09

FY10E

FY11E

7,840

8,151

9,390

11,317

Depreciation & amortization Dec/(Inc) in Working Capital Taxes Cash flow from operations Extra ordinary Items Net Capex (Pur)/Sale of Invest. Free cash flow Equity raised/ (repaid) Debt raised/ (repaid) Dividends paid Net Interest (Paid)/ Recd CF fron financing activity

1,063 (379) (1,856) 6,668 17 -1,892 -237 4,556 40 0 -1,652 1,645 33

1,159 336 (2,147) 7,500 -3 -4,733 -477 2,286 0 0 -1,977 2,111 134

1,330 (271) (2,393) 8,056 0 -5,000 -500 2,556 0 0 -2,129 2,106 -23

1,537 (207) (2,862) 9,785 0 -4,000 -500 5,285 0 0 -2,140 2,659 519

Cash generated Beginning cash Ending cash

4,589 10,626 15,215

2,420 15,215 17,635

2,533 17,635 20,168

5,805 20,168 25,973

FY08

FY09

FY10E

FY11E

EBITDA margin(%) Sales growth(%) Net profit growth(%) EPS growth(%)

26.6 10 8 8

27.2 2 5 5

27.2 16 13 13

28.5 14 22 22

Dividend Payout (%)

22

23

21

21

19.7 17.2 14.9 4.0 4.6 1.1

18.7 16.3 14.0 3.8 3.9 1.2

16.6 14.5 11.9 3.2 3.3 1.3

13.6 11.9 9.5 2.7 2.8 1.5

0.0

0.0

0.0

0.0

22.4 1.0 1.1 23.6 28.2 42.7

23.2 0.9 1.1 21.0 25.9 37.2

22.6 0.8 1.0 20.1 24.7 35.6

24.2 0.8 1.0 20.7 25.4 39.0

EBIT

Source: Company, J.P. Morgan estimates.

Source: Company, J.P. Morgan estimates.

Ratio analysis Balance sheet

%, year-end March

Rs in millions, year-end March Net fixed assets Capital WIP Trade investments

FY08 16,652 1,721 1,554

FY09 19,490 2,457 2,031

FY10E 23,160 2,457 2,531

FY11E 25,623 2,457 3,031

Cash Accounts receivable Inventories Loans & Advances Current assets

15,215 137 48 3,621 19,021

17,635 157 51 3,936 21,780

20,168 182 108 4,253 24,711

25,973 207 124 4,601 30,905

Payables Others Total current liabilities Net Current Assets Total Assets

4,144 1,227 5,371 13,650 33,576

4,802 1,395 6,197 15,582 39,560

5,106 1,230 6,336 18,375 46,522

5,560 1,437 6,997 23,908 55,018

Debt Deferred Tax Share Capital Networth Liabilities BVPS (Rs per share)

1,737 650 31,839 33,576 245

1,938 1,300 37,622 39,560 289

2,131 1,300 44,391 46,522 342

2,344 1,300 52,674 55,018 405

Source: Company, J.P. Morgan estimates.

P/E (x) Cash P/E (x) EV/EBITDA (x) EV/Sales (x) Price to Book Value (x) Dividend Yield(%) Debt to equity (x) Net profit margin(%) Sales/assets (x) Assets/equity (x) ROE (%) ROCE (%) ROIC(%)

Source: Company, J.P. Morgan estimates.

149

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

CP All Pcl

Overweight

www.cpall.co.th

Price Target: Bt23.00

Company description CPALL is the largest convenient store (CVS) operator in Thailand, managing 4,912 stores countrywide.

Thailand Broadlines/Department Stores

Price: Bt19.10

Post mortem CPALL has a quasi-monopoly position in the Thai convenience store space, with more than 10x more stores than its closest competitor, Family Mart (525 stores). 1H09 same store sales grew at a 9.1% Y/Y pace, which far exceeded its target of 3-5% despite aggressive store expansion, and was a major achievement in a deflationary environment. Its gross margin improved to 27.5% in 2Q09 from 27.2% in FY08, due to rising food product mix in stores. Potential for earnings upgrades CPALL should see sales accelerate in an inflationary environment, supported by the end of the government’s subsidy on utilities, which should boost POS bill payment fees. The SP fiscal stimulus should also drive higher sales via the consumption multiplier. CPALL paid Bt0.60 dividend per share for FY08 operations (72% payout), and with high cash balances, we believe the company will continue its high dividend payout policy. How much recovery is priced into the stock? CPALL has been a defensive outperformer, given its domestic orientation and net cash balance sheet. Its current P/E of 17.4x is near top historical range, but its superior growth profile justifies further re-rating, in our view, as does valuation based on enterprise value, free cash flow, and ROE. Price target and key risks Our Dec-10 PT of Bt23 is based on our dividend discount model with a terminal growth of 4% and a WACC of 11.2% (assuming a risk-free rate of 5%, a risk premium of 6.2%, and a beta of 1). Key risks to our PT include higher-than-expected capex and operating expenses. Bloomberg: CPALL TB; Reuters: CPALL.BK Bt in millions, year-end December Revenue Net profit EPS (Bt) DPS (Bt) Revenue growth (%) EPS growth (%) ROE (%) P/E (x) P/BV (x) Dividend Yield (%)

FY08 92,959 3,740 0.83 0.60 20.0 48.6 31.2 22.9 6.5 3.1

FY09E 105,044 4,109 0.91 0.69 13.0 9.9 29.7 20.9 5.9 3.6

FY10E 115,548 4,929 1.10 0.82 10.0 20.0 31.9 17.4 5.2 4.3

FY11E 127,103 5,389 1.20 0.90 10.0 9.3 31.3 15.9 4.8 4.7

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

150

Anne JirajariyavechAC (66-2) 684-2684 [email protected] JPMorgan Securities (Thailand) Limited

Price performance 20 Bt

14 8 Nov-08

Feb-09

May-09

Aug-09

Nov-09

CPALL.BK share price (Bt) SET (rebased)

Source: Bloomberg.

Performance 1M

3M

Absolute (%)

-4.0

14.4

12M 94.9

Relative (%)

1.1

7.9

45.8

Source: Bloomberg.

Company data 52-week range (Bt) Mkt cap. (BtMM) Mkt cap. (US$MM) Avg daily value (US$MM) Avg daily volume (MM) Shares O/S (MM) Date of price Index: SET Free float (%) Exchange rate Source: Bloomberg.

9.65-20.30 85,819 2,571 5.0 4.9 4,493 5-Nov-09 682 41 33.38

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

CP All Pcl: Summary of financials Profit and Loss statement THB in millions, year-end Dec

FY08A

FY09E

FY10E

FY11E

Revenues % change Y/Y Gross Margin (% ) EBITDA % change Y/Y EBITDA Margin (% ) EBIT % change Y/Y EBIT Margin (% ) Net Interest Earnings before tax % change Y/Y Tax as % of EBT Equity income and minorities Extra items Net Income (Reported) % change Y/Y Shares Outstanding EPS (reported) % change Y/Y

92,959 20.0 26.7 6,330 38.7 6.8 4,107 58.0 4.4 576 4,684 50.2 946 20.2 0.0 2.6 3,740 49.4 4,493 0.83 49

105,044 13.0 27.0 7,907 24.9 7.5 5,179 26.1 4.9 450 5,629 20.2 1,520 27.0 0.0 0.0 4,109 9.9 4,493 0.91 10

115,548 10.0 27.2 9,728 23.0 8.4 6,303 21.7 5.5 450 6,753 20.0 1,823 27.0 0.0 0.0 4,929 20.0 4,493 1.10 20

127,103 10.0 26.9 11,070 13.8 8.7 6,933 10.0 5.5 450 7,383 9.3 1,993 27.0 0.0 0.0 5,389 9.3 4,493 1.20 9

Balance sheet THB in millions, year-end Dec

FY08A

FY09E

FY10E

FY11E

Cash and cash equivalents Accounts receivable Inventories Others Current assets

8,987 97 4,940 2,322 16,346

8,745 97 5,533 2,624 16,999

10,351 97 6,044 2,886 19,377

12,347 97 6,648 3,175 22,267

LT investments Net fixed assets Total assets

7,961 9,317 33,624

7,961 11,079 36,038

7,961 12,458 39,796

7,961 13,462 43,690

Liabilities ST loans Payables Others Total current liabilities Long term debt Other liabilities Total liabilities Shareholders' equity BVPS

0 12,611 6,487 19,098 0 1,396 20,495 13,129 2.92

0 12,769 7,330 20,100 0 1,396 21,496 14,542 3.24

0 13,947 8,063 22,010 0 1,396 23,406 16,390 3.65

0 15,341 8,870 24,211 0 1,396 25,607 18,082 4.02

Cash flow statement THB in millions, year-end Dec

FY08A

FY09E

FY10E

FY11E

4,107 2,223 -663 -862 4,805

5,179 2,729 106 -1,452 6,562

6,303 3,426 1,138 -1,756 9,110

6,933 4,138 1,308 -1,926 10,453

Capex Disposal/ (purchase) Net Interest Free cash flow

-2,868 0 493 2,430

-4,490 0 383 2,454

-4,805 0 383 4,688

-5,142 0 383 5,694

Equity raised/ (repaid) Debt raised/ (repaid) Other Dividends paid Beginning cash Ending cash

135 0 -1,353 -1,565 9,340 8,987

0 0 0 -2,696 8,987 8,745

0 0 0 -3,082 8,745 10,351

0 0 0 -3,697 10,351 12,347

0.60

0.69

0.82

0.90

FY08A

FY09E

FY10E

FY11E

EBIT Depreciation & amortisation Change in working capital Taxes Cash flow from operations

DPS

Ratio Analysis % , year-end Dec EBITDA margin Operating margin Net profit margin

6.8 4.2 4.0

7.5 4.7 3.9

8.4 5.2 4.3

8.7 5.2 4.2

Sales per share growth Sales growth Net profit growth EPS growth

19.4 20.0 49.4 48.6

13.0 13.0 9.9 9.9

10.0 10.0 20.0 20.0

-100.0 10.0 9.3 9.3

Net debt to total capital Net debt to equity Sales/ avg operating assets Assets/equity Net Debt/EBITDA ROE

0 n/a 5705 281 -142 31.2

0 n/a 2744 260 -111 29.7

0 n/a 2181 257 -106 31.9

0 n/a 2184 253 0 31.3

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

151

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

CTC Media

Overweight

www.ctcmedia.ru

Price Target: $25.00

Company description CTC Media is Russia’s leading independent broadcaster, operating three nationwide networks: CTC, Domashny and DTV, with a combined audience share of 12.7% over 9M09. The network’s programming is entertainmentfocused, with almost all its revenue coming from the sale of television advertising. Major shareholders are MTG (39.44%) and Alfa Group (26%).

Russia Media

Post mortem Considering the very difficult operating environment in 2009, CTCM has fared relatively well, controlling costs better than its listed peers, gaining audience share and significantly boosting its power ratio. While part of the power ratio improvement may be reversed in 2010, we believe that it also in part reflects the strength of the franchise, while the cost and audience share performance underline the improvement in company management over the past two years.

Price Performance

Price: $15.59

Jean-Charles LemardeleyAC +44 (0) 20 7325 5763 [email protected] J.P. Morgan Securities Ltd.

20 15 $ 10 5 0 Nov-08

Feb-09

May-09

Aug-09

Nov-09

Source: Company data, Bloomberg

Potential for earnings upgrades CTCM seems determined to keep advertising prices flat this year, as the average sell-out ratio for 2009 is likely to remain in the low 90% region. Encouragingly, CTC confirmed the reduction of long-term pricing contracts with Video International to roughly 30-35% (vs. 60-70% previously). This 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 upgrades as moderate in 2010 but more significant in 2011 and beyond as we expect rapid recovery in the ad market then. In the long run, we believe that CTC Media offers investors exposure to strong secular growth prospects. How much recovery is priced into the stock? Looking at implied valuations 3 to 4 years out, we believe that the recovery is only partially priced in. Price target and key risks Our PT of $25 for year-end 2010 is based on a discounted terminal value and dividend analysis using an exit multiple of 13x P/E year end 2013E. Key downside risks are potential market share and earnings volatility in a highly fragmented Russian television market. Bloomberg: CTCM US; Reuters: CTCM $ in millions, year end Dec Sales Net profit EPS DPS Sales growth (%) Net profit growth (%) EPS growth (%) ROE (%) P/E (x)

FY08 640 22 0.15 0.04 35.60% -83.50% NM 4% n/a

FY09E 481 128 0.84 0 -24.90% 470.60% 470.60% 21% 19.2

FY10E 534 147 0.96 0 11.10% 14.50% 14.50% 21% 16.8

FY11E 690 197 1.29 0.93 29.10% 34.20% 34.20% 26% 12.5

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

152

Performance Absolute (%)

1M

3M

12M

-17%

17%

290%

Source: Company data, Bloomberg

Company data 52-week range ($) Mkt cap. ($ bn) Shares O/S (mn) Date of price Price Target End Date Free float (%) Avg daily volume (MM) Avg daily value (US$MM)

20.07-2.37 2.5 158 23-Nov-09 31-Dec-10 25% 0.470 7.1

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

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

CTC Media: Summary of Financials Profit and Loss Statement $ in millions, year end Dec

FY08

FY09E

FY10E

FY11E

Cash flow statement FY12E $ in millions, year end Dec

640 35.6% 280 27.1% 43.8% 34 -82.3% 5.3% (3) 4 -97.9% 22 -83.5% 152 0.15 NM 0.04

481 -24.9% 195 -30.4% 40.6% 184 439.1% 38.3% (2) 184 4078.2% 128 470.6% 152 0.84 470.6% 0.00

534 11.1% 221 13.0% 41.3% 209 13.3% 39.1% 4 214 16.5% 147 14.5% 152 0.96 14.5% 0.00

690 29.1% 292 32.4% 42.3% 280 34.1% 40.6% 8 290 35.6% 197 34.2% 152 1.29 34.2% 0.93

859 24.5% 374 28.1% 43.5% 362 29.2% 42.1% 10 373 28.7% 251 27.4% 152 1.65 27.4% 1.49

Balance sheet $ in millions, year end Dec

FY08

FY09E

FY10E

FY11E

Ratio Analysis FY12E $ in millions, year end Dec

Cash and cash equivalents Accounts Receivables ST financial assets Others Current assets LT investments Net fixed assets Total assets ST loans Payables Others Total current liabilities Long term debt Other liabilities Total liabilities Shareholders' equity

98 34 131 263 521 23 807 62 41 89 192 28 39 260 547

199 30 116 344 519 27 891 55 36 86 177 14 39 230 661

321 16 44 381 524 24 929 52 21 74 148 11 39 197 732

414 21 57 491 547 23 1,061 67 44 96 207 11 39 258 804

Revenues % Change Y/Y EBITDA % Change Y/Y EBITDA Margin EBIT % Change Y/Y EBIT Margin Net Interest PBT % change Y/Y Net Income (clean) % change Y/Y Average Shares Clean EPS % change Y/Y DPS

473 26 71 569 575 24 1,168 83 34 120 238 44 39 320 848

FY08

FY09E

FY10E

FY11E

FY12E

269 (3) (20) 15 261

187 (2) (54) 14 145

212 4 (64) 2 153

280 8 (87) 33 235

359 10 (112) 2 259

Capex PPE Net investments CF from investments Dividends Share (buybacks)/ issue

(5) (414) (419) (6) -

(11) (12) (23) 0 -

(8) (17) (25) 0 -

(10) 0 (10) (147) -

(13) 0 (13) (236) -

CF to Shareholders FCF to debt

(6) (164)

0 123

0 128

(147) 78

(236) 10

OpFCF (EBITDA - PPE) EFCF pre Div, PPE

264 (158)

177 123

204 128

270 224

346 246

FY08

FY09E

FY10E

FY11E

FY12E

EBITDA margin EBIT Margin Net profit margin Capex/sales Depreciation/Sales

43.8% 5.3% 3.5% 0.8% 2.1%

40.6% 38.3% 26.6% 2.2% 2.3%

41.3% 39.1% 27.4% 1.5% 2.2%

42.3% 40.6% 28.5% 1.5% 1.8%

43.5% 42.1% 29.2% 1.5% 1.5%

Revenue growth EBITDA Growth EPS Growth

35.6% 27.1% NM

-24.9% -30.4% 470.6%

11.1% 13.0% 14.5%

29.1% 32.4% 34.2%

24.5% 28.1% 27.4%

Net debt/EBITDA CF to Shareholders FCF to debt

(0.0) (6) (164)

(0.7) 0 123

(1.2) 0 128

(1.2) (147) 78

(1.0) (236) 10

OpFCF (EBITDA - PPE) EFCF pre Div, PPE

264 (158)

177 123

204 128

270 224

346 246

Cash EBITDA Interest Tax Other Cash flow from operations

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

153

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

DongFeng Motor Co., Ltd

Overweight

www.dfmc.com

Price Target: HK$13.0

Company description DongFeng Motor Co., Ltd. is China’s third-largest auto producer operating a comprehensive auto-related business comprising passenger vehicles, commercial vehicles, auto engines and auto parts. Its market share in China’s passenger vehicles and commercial vehicles was around 11.3% in FY08.

China Auto & Industrials Frank LiAC

Post mortem DongFeng Motor is our top pick among large-cap names in China’s auto sector, as: (1) DFM, which holds a leading position in most of its wide range of auto businesses, is well positioned to ride China’s third auto boom due to the break out of car demand in tier-three cities due to its multi-strategicpartner business model (Honda, Nissan and PSA); and (2) it has been a consistent outperformer since its listing, whether during the cyclical upturn in FY06 and FY07, or during the cyclical downturn in FY05 and FY08.

J.P. Morgan Securities (Asia Pacific) Limited

HK$10.46

Potential for earnings upgrades We see good potential for consensus earnings estimate upgrades, because: (1) we expect its commercial vehicle business to perform much better than expected as of 2H09 due to accelerating fixed asset investment growth in China. We expect its commercial vehicle business to contribute Rmb608 million profit in FY09 compared with only Rmb75 million in 1H09; (2) we expect its DongFeng PSA business to contribute a much stronger-thanexpected profit of Rmb1,002 million in FY09 versus around Rmb114 million in 1H09 because of the sharp rise in its PSA sales volume as of 2Q09. We now expect its Dongfeng PSA to sell 260,000 cars in FY09 versus its target of 210,000 and its PSA business’ breakeven point of around 200,000. How much recovery is priced into the stock? While its 326% return this year has discounted a lot of good news about the current third auto boom, and Dongfeng’s strong earnings growth, we still see 24% upside to our PT of HK$13, with an estimated over 20% rise in consensus FY09/FY10 earnings estimates in coming months. Price target and key risks Our Jun-10 price target of HK$13.0 is based on 14x FY10E P/E, which is two standard deviations above the average historical prospective P/E of 8.3x. Key risks to our price target include the possible removal of the vehicle purchase tax cut policy upon expiration at the end of the year.

852-2800-8511 [email protected]

Price performance 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Nov -08

FY08 70,569 7,215 5,190 4,040 0.47 0.05 10.2 14.2 0.5 19.6 3.7 21

FY09E 93,503 10,609 8,127 6,309 0.73 0.11 5.6 7.3 1.3 11.3 2.6 26

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

154

FY10E 104,169 11,616 9,080 7,162 0.83 0.15 4.7 6.1 1.8 9.9 2.1 24

Aug-09

Nov -09

HSCEI(rebased)

Source: Bloomberg.

Performance Absolute (%) Relative (%)

1M

3M

12M

26 19

32 25

403 326

Source: Bloomberg.

Company data 52-week range (HK$) Mkt cap. (HK$MM) Mkt cap. (US$MM) Avg daily value (US$MM) Avg daily volume (MM) Shares O/S (MM) Date of price HSCEI Free float (%) Exchange rate Source: Company data, Bloomberg.

Rmb in millions, year-end December FY07 59,318 5,724 3,941 3,770 0.44 0.05 13.5 19.6 0.5 21.0 4.5 24

May -09

Dongfeng Motor-H Share Price

Bloomberg: 489 HK; Reuters: 489.HK

Revenue EBITDA EBIT Net profit EPS (Rmb) DPS (Rmb) EV/EBITDA EV/EBIT Dividend yield (%) P/E (x) P/B (x) ROE (%)

Feb-09

FY11E 113,431 12,893 10,236 7,946 0.92 0.18 3.8 4.8 2.2 8.9 1.8 22

1.45-10.52 90,125 11,629 19 26 2,856 5-Nov-09 12805 31 7.75

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

DongFeng Motor Co., Ltd: Summary of financials Rmb in millions, year-end December Profit and Loss statement FY07 Revenues 59,318 % change Y/Y 22.9 Gross profit 9,815 % change Y/Y 19.6 Gross margin (%) 16.5 Operating profit 3,941 % change Y/Y 37.5 Operating Margin (%) 6.6 Net Interest -175 Earnings before tax 3,835 % change Y/Y 43.2 Tax 202 Net Income (Reported) 3770 % change Y/Y 81 Net Margin (%) 6.4 Wt. avg. share number (MM) 8616 Wt. avg. EPS (Rmb) 0.44

Cash flow statement FY08 70,569 19.0 11,881 21.0 16.8 5,190 31.7 7.4 -393 4,892 27.6 -647 4040 7 5.7 8616 0.47

FY09E 93,503 32.5 16,783 41.3 17.9 8,127 56.6 8.7 -265 7,892 61.3 -1263 6309 56 6.7 8616 0.73

FY10E 104,169 11.4 18,510 10.3 17.8 9,080 11.7 8.7 49 9,177 16.3 -1652 7162 14 6.9 8616 0.83

FY11E 113,431 8.9 20,090 8.5 17.7 10,236 12.7 9.0 181 10,437 13.7 -2087 7946 11 7.0 8616 0.92

Cash and cash equivalents Accounts receivable Inventories Others Current assets

FY07 10,473 2,229 7,573 11,070 31,345

FY08 14,113 2,101 9,356 10,378 35,948

FY09E 19,378 2,784 12,231 13,163 47,555

FY10E 22,980 3,101 13,656 14,620 54,358

FY11E 27,587 3,377 14,880 15,886 61,730

LT investments Net fixed assets Other LT assets Total assets

677 16,438 35,082 52,197

787 18,189 40,789 59,765

787 18,713 52,562 72,063

787 21,036 59,608 81,430

787 23,208 66,787 90,782

ST loans Payables Others Total current liabilities

5,751 9,650 13,599 29000

6,919 10,259 16,285 33463

6,500 13,411 19,973 39884

5,900 14,974 22,199 43072

5,300 16,317 24,112 45728

Long term debt Other LT liabilities Total non-current liabilities Total liabilities Shareholders' equity Minority interest

2514 284 2798 31798 17713 2686

1781 319 2100 35563 21365 2837

1500 236 1736 41620 27286 3157

1100 236 1336 44408 33501 3521

700 236 936 46664 40194 3924

Balance sheet

Profit before tax Depreciation & amortization Change in working capital Others Cash flow from operations

FY07 3,835 2,026 -48 -711 5,102

FY08 4,892 2,318 1,657 -1,119 7,748

FY09E 7,892 2,834 1,276 -1,445 10,556

FY10E 9,177 2,960 589 -2,123 10,602

FY11E 10,437 3,140 490 -2,613 11,454

Purchase of fixed assets Others Cash flow from investment

-2,751 -529 -3,280

-4,080 -3,700 -7,780

-4,000 -204 -4,204

-4,800 -254 -5,054

-4,800 206 -4,594

Equity raised/ (repaid) Debt raised/ (repaid) Other Dividends paid Cash flow from financing Beginning cash Ending cash

0 105 -138 -345 -378 5,659 7,103

0 435 76 -388 123 7,103 12,416

0 -700 0 -388 -1,088 12,416 17,681

0 -1,000 0 -946 -1,946 17,681 21,283

0 -1,000 0 -1,253 -2,253 21,283 25,890

Ratio analysis %, year-end December Gross margin Operating margin Net profit margin SG&A/sales

FY07 16.5 6.6 6.4 8.7

FY08 16.8 7.4 5.7 8.4

FY09E 17.9 8.7 6.7 8.2

FY10E 17.8 8.7 6.9 7.8

FY11E 17.7 9.0 7.0 7.4

Sales growth Net profit growth Gross profit growth Operating profit growth

22.9 81.2 19.6 37.5

19.0 7.2 21.0 31.7

32.5 56.2 41.3 56.6

11.4 13.5 10.3 11.7

8.9 11.0 8.5 12.7

ROE

23.6

20.7

25.9

23.6

21.6

Source: Company, J.P. Morgan estimates.

155

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Energy Development Corporation

Overweight

www.energy.com.ph

Price Target: Php5.60

Company description Energy Development Corporation owns 150MW of steam capacity and 1050MW of power ‘plus’ steam capacity with take-or-pay contracts with NPC (for 695MW of total power capacity). EDC also owns a 60% stake in 112MW Pantabangan-Masiway hydro plant with the remaining stake being held by its parent, First Gen.

Independent Power Producers

Post mortem Although the financial crisis had limited impact on EDC’s core business, given its take-or-pay contracts and US$ linked tariffs, it was negatively affected due to its ¥-denominated debt and concerns about the financial viability of its recent parent, First Gen, given its premium pricing on EDC’s purchase undertaken by it in November 2007.

Price performance (Php)

Php4.05

Ajay MirchandaniAC (65) 6882-2419 [email protected] J.P. Morgan Securities Singapore Private Limited

6 4 2

Nov-09

Sep-09

Jul-09

May-09

Mar-09

Jan-09

Nov-08

0

Source: Bloomberg.

Potential for earnings upgrades We see potential earnings upgrades linked largely to the execution of its recently acquired 305MW Palipinon-Tonngonan. We could see upgrades in case of other efficiencies and rehabilitation of 49MW Northern Negros plant. How much recovery is priced into the stock? 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 Law. Price target and key risks Our DCF-based Dec-10 PT of Php5.6 implies FY10E P/E of 14.7x and 2.3% yield. We arrive at our PT by discounting EDC’s FCF to 2031, when the Geothermal Service Contract would expire. We incorporate terminal value but with a 0% ‘g’. Key risks to our PT include execution risk associated with the Palinpinon-Tongonan plant rehabilitation.

Performance Absolute (%) Relative (%)

Php in millions, year-end December Recurring net profit Recurring EPS (Php) DPS (Php) P/E (x) P/BV (x) EV/EBITDA (x) Operating cash flow / EV (%) Dividend yield (%) RoE (%) Net debt (%)

FY08 5,532 0.37 0.13 13.7 2.2 8.7 8.2% 3.1% 20.3% 122.1%

FY09E 5,965 0.38 0.13 12.7 2.3 8.8 10.6% 3.3% 22.1% 114.0%

FY10E 7,089 0.38 0.13 10.7 2.4 7.7 12.0% 3.3% 22.4% 109.6%

FY11E 6,931 0.37 0.13 11.0 2.1 7.2 13.3% 3.2% 19.2% 77.8%

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

156

3M

12M

8.9 4.5

12.5 6.0

58.2 11.4

Source: Bloomberg.

Company data 52-week range (Php) Mkt cap. (PhpMM) Mkt cap. (US$MM) Avg daily value (US$MM) Avg daily volume (MM) Shares O/S (MM) Date of price Index: PSEi Free float (%) Exchange rate Source: Bloomberg.

Bloomberg: EDC PM; Reuters: EDC.PS

1M

2.7-4.1 75,937 1,602 2.5 30 18,750 5-Nov-09 2,944 60 47.6

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Energy Development Corporation: Summary of financials Php in millions, year-end December Profit & loss statement

Balance sheet FY08 12,518 4,242 726 19,595

FY09E 13,544 4,753 784 21,051

FY10E 16,344 4,974 823 23,996

FY11E 17,161 5,144 0 24,040

(394)

(885)

(1,400)

(1,400)

Share capital Reserves & Surplus Share holders equity Minorities Long term debt BOT lease obligations

(1,130)

(1,331)

(1,562)

(1,410)

Royalty fee payable

(4,661) (676) (590) (2,410) 10,409 10,409

(5,434) (775) (214) (3,072) 10,113 10,113

(5,255) (1,105) (218) (3,223) 12,339 12,339

(5,384) (1,234) (222) (3,326) 12,298 12,298

Other non-current liabilities Total Non-current Liabilities Total Liabilities

9,734

9,338

11,233

11,064

Interest expenses Interest Income

(2,153) 333

(2,958) 475

(3,671) 563

(3,305) 214

Profit before Tax taxation Profit after tax Core Net Income

2,653 (1,308) 1,308 5,532

6,855 (685) 5,965 5,965

8,126 (813) 7,089 7,089

7,972 (797) 6,931 6,931

Electricity Steam Others Consolidated Revenue BOT fees Other purchased services & utilities Operations & maintenance expenses Depreciation & Amortization Royalty fee Others Proforma EBITDA EBITDA EBIT

Key ratios Gross Margins (%) EBITDA Margins (%) Op Margin (%) Sales growth (%) Core Net profit growth (%)

FY08 65.4% 53.1% 49.7% 3.7% -1.3%

FY09E 62.6% 48.0% 44.4% 7.4% 7.8%

FY10E 64.9% 51.4% 46.8% 14.0% 18.8%

FY11E 65.0% 51.2% 46.0% 0.2% -2.2%

No. of O/S shares (MM) EPS (Php) DPS (Php) Dvd payout ratio (%)

15,000 0.37 0.13 34%

15,625 0.38 0.13 35%

18,750 0.38 0.13 35%

18,750 0.37 0.13 35%

BVPS Debt / Equity (%) Net Debt / Equity (%) ROE (%) ROCE (%) EBITDA / Gross Interest EBITDA / Net Interest

1.8 86.9% 122.1% 4.8% 12.7% 4.8 5.7

1.7 114.5% 114.0% 22.1% 13.0% 3.4 4.1

1.7 115.5% 109.6% 22.4% 14.9% 3.4 4.0

1.9 100.0% 77.8% 19.2% 14.5% 3.7 4.0

156.2

157.8

156.7

148.0

receivables (days)

Property, plant and equipment Production wells/Intangible assets BOT power plants / concession receivable Exploratory & development costs Other Non-current assets Current Assets Cash and Bank Balances Account Receivables Other current assets Current Liabilities Accounts Payable Current portion of debt & BOT fees other current liabilities Total Assets

FY08 15,000 5,898 27,251 1,484 23,557 0

FY09E 15,000 5,665 27,018 1,688 30,924 0

FY10E 15,000 10,273 31,626 1,912 36,529 0

FY11E 15,000 14,778 36,131 2,156 36,133 0

0

0

0

0

1,339 24,896 53,632

1,339 32,263 60,969

1,339 37,868 71,406

1,339 37,473 75,759

5,280 9,389

5,417 9,107

16,304 8,825

17,166 8,543

32,647 1,000 9,731 11,233 957 5,412 2,815 15,648 2,980

30,536 1,000 9,187 24,704 13847 5,814 2,932 18,982 3,357

28,306 1,000 9,062 14,272 2248 6,628 3,167 6,363 4,058

25,950 1,000 8,937 20,600 8434 6,640 3,170 6,437 4,126

10,785 1,884 53,632

13,733 1,891 60,969

395 1,910 71,406

395 1,915 75,759

FY08 10,450 0 (1,602) (1,731) 2189 (134) 9,172 (6,119)

FY09E 10,113 2,048 (2,483) (685) (134) 0 8,859 (505)

FY10E 12,339 2,111 (3,108) (813) (329) 0 10,200 (11,585)

FY11E 12,298 2,230 (3,092) (797) 58 0 10,697 (1,690)

1,317 (4,538) 4,634 (528) (245) (5,303) (404) (6,976) 2 (2,339)

419 (86) 8,773 10,428 (112) (2,088) (4111) 4,117 0 12,890

(0) (11,585) (1,385) (7,733) 0 (2,481) 0 (10,215) 0 (11,599)

(0) (1,690) 9,007 (395) 0 (2,426) 0 (2,821) 0 6,186

Cash flow statement EBITDA Concession Receivable impact less: Net Interest less: tax less: changes in Working Capital Others Operational Cash Flow Capital Expenditure Investment, dividend from associates Cash flow from investments Free cash Flow Repayment of Debt Payment of BOT Lease Dividends paid to shareholders Equity raised / write-offs / Cashflow from financing Exchange rate Movement in Net Debt/Net Cash

Source: Company, J.P. Morgan estimates.

157

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Enersis

Overweight

www.enersis.cl

Price Target: Ch$241

Company description Enersis is one of the main privately owned multinational electric power corporations in Latin America. It currently holds direct and indirect participation in electric power generation, transmission, and distribution businesses in Argentina, Brazil, Chile, Colombia, and Peru. The Enersis Group generating companies boast an installed capacity of 14,280 MW and through the distribution companies supply electricity to near 12.5 million customers, or approximately 45 million inhabitants. The controlling shareholder of Enersis is Endesa, a Spanish multinational that holds 60.62% ownership.

Chile Latin American Utilities

Ch$189

Post mortem Within a regional context, we believe the greatest recovery opportunities in the utilities space lie along the Andean corridor, where a combination of strong market position (leaders in key cities) and supportive regulatory frameworks should allow the company to capture demand recovery. Potential for earnings upgrades Given the predictable cash flows of the company, we see modest upside risk on greater-than-expected demand recovery. How much recovery is priced into the stock? Since Enersis is a defensive company listed in a defensive market, the shares have underperformed significantly in the past six months at both the regional and country level despite continued high cash generation and long-term value. Therefore, we feel that recovery is generally not priced in. Price target and key risks We derive our PT of Ch$241 from our DCF-based SOTP analysis. Risks to our thesis include lower generation prices in Chile, upcoming distribution tariff settings, and AFP overhang, Bloomberg: ENERSIS CI, ENI; Reuters: ENE.SN, ENI.N LC in /billions, year-end Dec 31 Sales Net profit EPS (LC) FD EPS (LC) DPS (LC) Sales growth (%) Net profit growth (%) EPS growth (%) ROE (%)

FY08 6,595.0 599.28 18.35 18.35 3.9 44.0% 208.3% 208.3% 19.4%

FY09E 6,280.4 712.16 21.81 21.81 12.1 (4.8%) 9.7% 9.7% 18.9%

FY10E 5,936.6 654.11 20.03 20.03 8.6 (5.5%) (10.3%) (10.3%) 14.2%

FY11E 5,914.2 678.35 20.78 20.78 8.9 (0.4%) 3.7% 3.7% 12.4%

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

158

Brian P. ChaseAC +562 425 5245 [email protected] Inversiones y Asesorias Chase Manhattan Ltda.

Performance Absolute (%) Relative (%)

1M -4.5 0.4

3M -5.7 -5.7

12M 7.4 -20.4

Source: Bloomberg

Company data 52-week range (LC) Mkt cap. (LCBN) Mkt cap. (US$MM) Avg daily value (US$MM) Avg daily volume (MM) Shares O/S (MM) Date of price Index: Free float (%) Exchange rate Source: Bloomberg

161.2-208.5 6,171 12,379 7.8 32.7 11/25/2009 IPSA 196 R$493/US$

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Enersis: Summary of financials Profit and loss statement

Cash flow statement

LC in billions, year-end Dec 31 Revenue % change Y/Y Gross margin (%) EBITDA % change Y/Y EBITDA margin (%) EBIT % change Y/Y EBIT margin (%) Net interest Earnings before tax % change Y/Y Tax as % of EBT Net income (reported) % change Y/Y Shares O/S (MM) EPS (reported) (LC)

LC in billions, year-end Dec 31

FY08 6,595.0 44.0% 48.2% 2,379.3 53.9% 2,379.3 1,930.0 29.3% (319.0) 1,651.3 (396.6) -20.5% 599.28 208.3% 32.7 18.35

FY09E 6,280.4 (4.8%) 51.7% 2,499.0 5.0% 2,499.0 2,049.7 6.2% 32.6% (301.8) 1,754.6 6.3% (378.0) -18.4% 712.16 9.7% 32.7 21.81

FY10E 5,936.6 (5.5%) 52.0% 2,408.9 (3.6%) 2,408.9 1,917.3 -6.5% 32.3% (296.1) 1,623.9 -7.4% (389.7) -20.3% 654.11 (10.3%) 32.7 20.03

FY11E 5,914.2 (0.4%) 52.4% 2,411.2 0.1% 2,411.2 1,907.9 -0.5% 32.3% (226.5) 1,684.1 3.7% (404.2) -21.2% 678.35 3.7% 32.7 20.78

Net income Depreciation & amortization Change in working capital Cash flow from operations Capex Disposal/(purchase) Intangibles Investing Cash Flow Equity raised/(repaid) Debt raised/(repaid) Other Dividends Beginning cash Ending cash DPS (LC) Net income

FY08 565.3 609.2 191.8 1,366.4 (826.8) (382.2) (5.3) (1,214.2) 0 366.2 12.6 (128.4) 498.4 900.9 3.9 565.3

FY09E 402.1 575.1 876.6 1,853.9 (889.6) 0.0 0.0 (889.6) 0 0.0 0.0 (395.7) 900.8 1,469.4 12.1 402.1

FY10E 412.3 575.2 597.8 1,585.3 (781.4) 0.0 0.0 (781.4) 0 0.0 0.0 (281.5) 1469.4 1,991.8 8.6 412.3

FY11E 440.5 582.6 715.0 1,738.1 (691.0) 0.0 0.0 (691.0) 0 0.0 0.0 (292.2) 1991.8 2,746.7 8.9 440.5

FY09E 39.8% 32.6% 11.3% -11.9% (4.8%) 9.7% (4.8%) 9.7% 8.28 0.36 0.78 0.44 0.33 NA 3.80 NA 18.9%

FY10E 40.6% 32.3% 11.0% -11.5% (5.5%) (10.3%) (5.5%) (10.3%) 8.13 0.24 0.47 0.39 0.32 NA 3.27 NA 14.2%

FY11E 40.8% 32.3% 11.5% -11.6% (0.4%) 3.7% (0.4%) 3.7% 10.64 0.15 0.27 0.37 0.32 NA 2.91 NA 12.4%

Source: Company, J.P. Morgan estimates.

Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end Dec 31

Balance sheet LC in billions, year-end Dec 31 Cash and cash equivalents Accounts receivable Inventories Others Current assets LT investments Net fixed assets Total assets Liabilities ST loans Payables Others Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders’ equity BVPS (LC)

FY08 1,318.1 1,338.3 99.4 171.0 2,926.8 2430.4 8,577.3 13,934.4

FY09E 1,540.7 1,381.6 96.4 177.5 3,196.2 2386.7 8,748.9 14,331.8

FY10E 2,317.4 1,301.8 91.9 167.2 3,878.4 2373.0 8,855.2 15,106.5

FY11E 2,964.9 1,330.0 92.6 170.9 4,558.4 2359.4 9,075.7 15,993.4

1,247.3 1,099.8 338.2 2,685.3 3,821.8 1398.2 7,905.3 3,091.3 94.5

767.7 1,039.8 326.6 2,134.1 3,703.0 1558.4 7,395.5 3,772.2 115.4

767.7 991.7 307.7 2,067.1 3,703.0 1558.4 7,328.5 4,613.9 141.1

767.7 999.0 314.4 2,081.1 3,703.0 1558.4 7,342.5 5,486.8 167.8

EBITDA margin Operating margin Net profit margin SG&A/sales Sales growth Net profit growth Sales per share growth EPS growth Interest coverage (x) Net debt to total capital Net debt to equity Sales/assets EBIT margin ROCE Assets/equity (x) ROI ROE

FY08 36.1% 29.3% 9.1% -12.1% 44.0% 208.3% 44.0% 208.3% 7.46 0.46 1.21 0.47 0.29 NA 4.51 NA 19.4%

Source: Company, J.P. Morgan estimates.

Source: Company, J.P. Morgan estimates.

159

Emerging Markets Equity Research 02 December 2009

Far Eastone Telecommunications

Overweight

www.fetnet.net

Price Target: NT$45.00

Company description Far Eastone (FET) is a wireless operator in Taiwan with licences to operate both 2G and 3G networks. FET began 2G operations in January 1998 and acquired KG Telecom from the Koo Group in 2004. FET owns a 24.5% stake in NCIC, a small fixed-line operator in Taiwan focused on the enterprise segment. Douglas Hsu’s Far Eastern Group is FET’s largest shareholder with a 45.5% stake. Strategic partners, NTT DoCoMo and SingTel, hold 4.5% and 4.0% stakes in the company, respectively.

Taiwan Telecommunications

NT$37.00

Jimmy CheongAC (852) 2800-8566 [email protected] J.P. Morgan Securities (Asia Pacific) Ltd

Price performance NT$

55

Post mortem FET has a strong position in the Taiwan mobile market with a 26% market share, and has withstood the economic downturn very well, in our view. With a net cash balance sheet, and NT$19.5 billion in capital surplus and NT$9.0 billion in legal reserves, the pending changes in Taiwan corporate law means FET will be able to tap into these accounts to maintain high dividend levels if necessary. Capital management will be a key focus in 2010, in our view. Potential for earnings upgrades Mobile fundamentals at FET remain weak but have shown signs of turning the corner in the 3Q09 results. We believe earnings are likely to find a trough in 2009 as mobile business turns around and investors focus on 2010 numbers, which should be better than 2009. We believe the potential risk for upward earning estimates is high. Non-operating loss items are likely to narrow as the operating performance of NCIC turns positive in 2010.

50

45

40

35

Absolute (%) Relative (%)

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009. 160

Jul-09

Sep-09

May-09

Jan-09

Nov-08

Jul-08

Sep-08

3M

12M

0.1 -0.6

-1.9 -9.2

-10.5 -39.1

Company data 52-week range (NT$) Mkt cap. (NT$) Mkt cap. (US$MM) Avg daily value (US$MM) Avg daily volume (MM) Shares O/S (MM) Date of price Index: Taiwan SE Free float (%) Exchange rate (NT$/ US$) Source: Bloomberg.

NT$ in millions, year-end December FY10E 59,463 23,422 10,111 3.10 2.70 1.4% 11.7% 7.3 14.0 11.9 4.3

1M

Source: Bloomberg.

Bloomberg: 4904 TT; Reuters: 4904.TW FY09E 58,658 23,162 9,049 2.78 2.42 -6.2% -10.9% 6.6 12.7 13.3 4.6

May-08

Performance

Price target and key risks Our DCF-based Dec-10 price target of HK$45 assumes a WACC of 9.4%, a 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.

FY08 62,518 25,252 10,161 3.12 2.80 -2.4% -12.6% 7.6 13.5 11.9 4.3

Jan-08

Source: Bloomberg.

How much recovery is priced into the stock? Taiwan telcos are not recovery plays but are more known for their stable earnings streams and high dividend yields. We believe FET offers a little more excitement that that, although we expect an increase in positive news flow regarding China Mobile’s strategic stake. In our view, announcements regarding the strategic partnership in 2010 should heighten investor interest in the name and any JV investments with CM should be positive for FET in the long run.

Revenue EBITDA Net profit EPS (NT$) DPS (NT$) Sales growth (%) Net profit growth (%) Dividend yield (%) ROE (%) P/E (x) EV/EBITDA (x)

Mar-08

Nov-07

30 Mar-09

Adrian Mowat (852) 2800-8599 [email protected]

FY11E 59,495 23,375 10,706 3.29 2.86 0.1% 5.9% 7.7 14.4 11.3 4.1

29.25-41.00 120,238 3,695 7.2 6.3 3,258.5 5-Nov-09 7,417 42.0 32.54

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

Far Eastone Telecommunications: Summary of financials NT$ in millions, year-end December Profit and loss

Balance sheet

Revenue

2006 67,227

2007 64,037

2008 62,518

2009E 58,658

2010E 59,463

EBITDA

28,506

26,329

25,252

23,162

23,422

(11,818) (111) 16,578 16,150 82 (104) (22) 16,128 (3,111) 13,156 -9.7% 3,873 3.40

(11,213) (64) 15,052 14,419 186 (42) 144 14,563 (3,141) 11,619 -9.7% 3,873 3.00

(10,851) (61) 14,341 13,167 180 (23) 157 13,324 (3,302) 10,161 -8.5% 3,259 3.12

(10,988) (120) 12,053 11,653 147 (33) 114 11,767 (2,918) 9,049 -11.7% 3,259 2.78

(10,793) (120) 12,509 12,209 188 (8) 179 12,388 (2,478) 10,111 5.3% 3,259 3.10

DPS (NT$) DPS payout ratio

3.10 91%

3.10 103%

2.80 88%

2.42 87%

2.70 87%

Revenue growth EBITDA growth Net profit growth EPS growth DPS growth

-6.5% -7.8% -10.6% -10.6% 0.0%

-4.7% -7.6% -11.7% -11.7% 0.0%

-2.4% -4.1% -12.6% 3.9% -9.7%

-6.2% -8.3% -10.9% -10.9% -13.4%

1.4% 1.1% 11.7% 11.7% 11.4%

2006

2007

2008

2009E

2010E

EBITDA margin

42.4%

41.1%

40.4%

39.5%

39.4%

FCF margin ROE

26.2% 17.9%

25.5% 15.2%

21.1% 13.5%

21.7% 12.7%

22.8% 14.0%

ROC ROA

20.4% 17.2%

18.6% 15.8%

18.4% 15.5%

16.6% 13.8%

17.2% 14.4%

Tax rate Capex/sales Debt/capital Net (debt) or cash/equity Interest cover (x)

19.3% 9.0% 7.4% -3.7% -1,299

21.6% 9.0% 3.7% -11.1% 182

24.8% 12.0% 2.7% -9.9% 161

24.8% 12.0% 0.6% -12.4% 203

20.0% 12.0% 0.6% -20.0% 131

Depreciation Amortization Operating profit EBIT Interest income Interest expense Associates Profit before tax Tax Net profit Shares Out EPS (NT$)

Ratios

Cash and equivalents Accounts receivable Inventories Others Total current assets

2006 7,852 6,096 973 2,815 17,735

2007 10,278 6,507 671 3,383 20,839

2008 7,236 6,181 853 3,753 18,022

2009E 7,492 5,799 800 3,696 17,788

2010E 13,346 5,879 811 3,708 23,744

Net fixed assets Other long term assets

54,666 21,280

48,929 26,773

45,428 25,048

41,471 26,557

37,819 26,208

Total assets

93,681

96,541

88,499

85,816

87,771

ST loans Others Total current liabilities

3,168 12,438 15,605

3,018 12,115 15,133

1,936 13,303 15,239

400 12,226 12,625

400 11,970 12,370

Long term debt Other liabilities Total liabilities

2,822 463 18,891

74 919 16,125

27 991 16,257

27 991 13,644

27 991 13,389

Shareholders' equity

74,790

80,415

72,241

72,172

74,383

Total liabilities and equity

93,681

96,541

88,499

85,816

87,771

(Net debt)/cash Book value/share (NT$)

2,768 19.31

8,828 20.76

7,030 22.17

8,822 22.15

14,676 22.83

2006

2007

2008

2009E

2010E

25,968

24,947

23,410

20,040

21,048

Cash flow Cash flow from operations Capex Cash flow from other investing Cash flow from financing

(6,081) (454)

(5,786) (1,564)

(7,470) (154)

(7,031) (154)

(7,141) (154)

(16,222)

(15,170)

(18,828)

(12,600)

(7,899)

Change in cash for year

3,211

2,427

-3,042

255

5,854

Beginning cash Closing cash

4,640 7,852

7,852 10,279

10,279 7,236

7,236 7,492

7,492 13,346

Source: Company and J.P. Morgan estimates.

161

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

FEMSA

Overweight

www.femsa.com

Price Target: $50

Company description FEMSA (FMX) is a leading beverage company and convenience store operator in Latin America, with $14bn in 2009E sales. The company operates through its 3 subsidiaries; Cerveza, which has beer operations in Mexico and Brazil and exports to the US; KOF, the largest Coke bottler in LatAm and second largest in world by sales volume and Oxxo, which is the 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.

Latin America Food & Beverages

Price: $45.20

Post mortem FMX used the crisis to capture the trade-down of consumers looking for value. In our view, investors should pay special attention to such companies because they (1) are operating in oligopolies with low competitive intensity; (2) have strong brands and pricing power; (3) have high barriers to entry and (4) generate significant free cash flow with returns above cost of capital. Potential for earnings upgrades FEMSA being a leader in soft drinks has pricing power. In beer, they are price followers; the leaders are already taking pricing and they are following. Oxxo should continue to expand regardless of the economic scenarios. How much recovery is priced into the stock? FEMSA’s revenue and EBITDA will greatly benefit from a US economic recovery as in beer its stronghold territories are the North of Mexico. In our view, this not fully priced into the stock. Its current net debt/EBITDA ratio is 0.7x. Even without further economic improvements it has FCF yield of 10% with ROIC of 13%. The stock is trading at 7.4x '10E EBITDA. We believe there is upside risk to our estimates with the recovery and our Dec ‘10 $50 PT may be conservative. Price target and key risks Our Dec ’10 PT of $50 for FMX is based on SOTP valuation where we assign multiples to each of its business units. FMX has high correlation to Ps$ and so is expected to have more upside if the peso strengthens further. Risks are mainly macro, devaluation of Ps$ and large dilutive acquisitions.

Alan AlanisAC (1-212) 622 3697 [email protected] J.P. Morgan Securities Inc.

Price performance US$ 55 45 35 25 15 Nov

Feb

Ps in millions, year-end December Sales Net profit EPS (LC) FD EPS (LC) DPS (LC) Sales growth (%) Net profit growth (%) EPS growth (%) ROE (%) P/E (x) FD P/E (x)

FY08 163,289 8,964 2.51 2.51 0.45 11% -25% -25% 11% 32.5x 32.5x

FY09E 193,273 12,968 3.62 3.62 0.45 18% 45% 45% 12% 24.3x 24.3x

FY10E 213,244 15,594 4.36 4.36 0.54 10% 20% 20% 13% 20.0x 20.0x

FY11E 229,381 17,352 4.85 4.85 0.65 8% 11% 11% 13% 17.7x 17.7x

Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009. 162

Aug

Nov

Source: Bloomberg

Performance Absolute (%) Relative (%)

1M

3M

-0.9% -4.6%

14.1% 3.0%

12M 63.5% 1.0%

Source: Bloomberg

Company data 52-week range (LC) Mkt cap. (Ps MM) Mkt cap. (US$MM) Avg daily value (US$MM) Avg daily volume (MM) Shares O/S (MM) Date of price Index: Mexican Bolsa Free float (%) Exchange rate Source: Bloomberg.

Bloomberg: FMX US; Reuters: FMX.N

May

19.91-45.98 207.53 16.2 73.8 1.5 358 11/25/2009 31,364 60% 12.8

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

FEMSA: Summary of financials Profit and loss statement

Cash flow statement

Ps in millions/billions, year-end December Revenue % change Y/Y Gross margin (%) EBITDA % change Y/Y EBITDA margin (%) EBIT % change Y/Y EBIT margin (%) Net interest Earnings before tax % change Y/Y Tax as % of EBT Net income (reported) % change Y/Y Shares O/S (MM) EPS (reported) (LC)

FY08 163,289 11% 46% 31,040 12% 19% 22,216 14% 14% 4,188 13,119 -22% 4,155 32% 8,964 -25% 3,578 2.51

FY09E 193,273 18% 46% 36,648 18% 19% 26,317 18% 14% 4,769 18,914 44% 5,946 31% 12,968 45% 3,578 3.62

Ps in millions/billions, year-end December FY10E 213,244 10% 44% 40,241 10% 19% 28,684 9% 13% 3,889 22,277 18% 6,683 30% 15,594 20% 3,578 4.36

FY11E 229,381 8% 44% 43,378 8% 19% 30,759 7% 13% 3,201 24,789 11% 7,437 30% 17,352 11% 3,578 4.85

EBIT Depreciation & amortization Change in working capital Taxes Cash flow from operations Capex Disposal/(purchase) Net interest Free cash flow Equity raised/(repaid) Debt raised/(repaid) Other Dividends Beginning cash Ending cash DPS (LC)

FY08 22,216 8,824 1,187 4,155 18,975 14,223

FY09E 26,317 10,331 3 5,946 23,302 11,773

FY10E 28,684 11,557 1,497 6,683 28,648 13,538

FY11E 30,759 12,619 240 7,437 30,211 14,561

4,188 11,339 0 610 1,045 1,620 10,456 13,313 0.45

4,769 16,982 0 1,404 975 1,620 9,110 25,083 0.45

3,889 19,595 0 (4,049) 1,519 1,945 15,095 22,792 0.54

3,201 19,829 0 (2,440) 1,012 2,339 22,792 33,473 0.65

FY10E 18.9% 13.5% 7.3% 31% 10% 20% 10% 20% 6.52 8% 10% 0.99 13% 24% 1.68 13% 13%

FY11E 18.9% 13.4% 7.6% 31% 8% 11% 8% 11% 7.72 -1% -1% 0.99 13% 26% 1.60 13% 13%

Source: Company, J.P. Morgan estimates.

Source: Company, J.P. Morgan estimates.

Ratio analysis %, year-end December

Balance sheet Ps in millions/billions, year-end December Cash and cash equivalents Accounts receivable Inventories Others Current assets LT investments Net fixed assets Total assets Liabilities ST loans Others Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders’ equity BVPS (LC)

FY08 9,110 10,759 13,065 6,083 39,017 65,299 61,425 146,023

FY09E 15,095 12,179 13,026 5,451 45,751 69,468 70,640 155,722

FY10E 22,792 10,971 14,581 6,770 55,114 64,060 78,029 160,641

FY11E 33,473 11,682 15,526 7,209 67,890 58,242 85,788 163,785

11,648 32,104 43,752 31,275 13,118 44,393 96,895 27.08

8,221 32,856 41,077 32,679 14,093 46,772 113,625 31.75

6,961 36,019 42,981 28,630 15,612 44,242 128,533 35.92

6,101 38,354 44,455 26,190 16,623 42,814 144,406 40.36

EBITDA margin Operating margin Net profit margin SG&A/sales Sales growth Net profit growth Sales per share growth EPS growth Interest coverage (x) Net debt to total capital Net debt to equity Sales/assets EBIT margin ROCE Assets/equity (x) ROI ROE

FY08 19.0% 13.6% 5.5% 33% 11% -25% 11% -25% 4.67 24% 35% 0.88 14% 22% 1.91 12% 11%

FY09E 19.0% 13.6% 6.7% 32% 18% 45% 18% 45% 4.99 17% 23% 0.96 14% 23% 1.77 13% 12%

Source: Company, J.P. Morgan estimates.

Source: Company, J.P. Morgan estimates.

163

Adrian Mowat (852) 2800-8599 [email protected]

Emerging Markets Equity Research 02 December 2009

First Gulf Bank

Overweight

www.fgb.ae

Price Target: AED 26.00

Company description First Gulf Bank is the 4th largest bank in the UAE and among the Top-10 banks in the MENA region (by assets). Incorporated in 1979, the bank is c.65% owned by the Abu Dhabi ruling family and commands a franchise of 18 branches in the UAE and presence in Libya, Singapore, Qatar, U.K. & India, c.1,000 full-time employees and c.$25bn in loans & c.$24bn in customer deposits.

United Arab Emirates Banks

Price: AED 18.75

Naresh BilandaniAC (+971) 44 281763 [email protected] J.P. Morgan Chase Bank N.A., Dubai Branch Price Performance

Post mortem FGB’s key strengths, which we see benefiting its stock vs. peers, are i) robust capital (Tier I 17%, CAR 20% 09E) – among the best in CEEMEA space – backed by sovereign ownership giving comfort on b/s profile and ii) est. asset quality deterioration lower vs. CEEMEA peers, with NPLs peaking at just 3.5% 10E (incl. >100% coverage). FGB’s higher-than-peers exposure to Abu Dhabi retail / HNWI is reflected in its strong NIM of c.3.6% 09E, 3.4% 10E & fee income, >1% of avg. assets (peer Abu Dhabi banks lower) while FGB’s