Asia Pacific Equity Research 31 May 2011 Top Storiesimg.jrjimg.cn/2011/05/20110531144005601.pdf ·...

Asia Pacific Equity Research

31 May 2011

Top Stories Market strategy, Global Emerging Markets China 2020: How demographics change the economy (Adrian Mowat) China’s investment in physical infrastructure is legendary, but we believe investors are underestimating the country’s investment in human capital. This provides China with the ability to maintain high growth through shifting labor from manufacturing, construction and agriculture to services.

Tenaga (OW), Malaysia Upgrade to OW, lift PT to M$7.70; ripe for a re-rating (Hoy Kit Mak) Tenaga is a deep-value stock trading at trough valuations. We expect the share price to re-rate as the approved tariff adjustment mechanism should provide more visibility on earnings and cash flows. Further potential upside could come from the next tariff review, due in December. Raise FY11E/FY12E/FY13E EPS by 9.2%/20.5%/19.2%.

Semiconductor/Display Market, Global Industry recovery likely, but we remain selective in the supply chain (JJ Park) Given the oversupply in the touch panel industry, we expect the pressure on margins to continue, but the sector leader could be far better than the high-beta names, thanks to stable margins. In IC design, Novatek should be the biggest beneficiary. Be selective in the display supply chain.

Cement, Greater China We raise TCC/ACC PTs to NT$37, but advise selling into near-term strength (Nick Lai) Taiwan cement prices will rise by 5-10% in 2H11 due to anti-dumping tariffs against China imports, leading to margin expansion, but the benefit to Taiwan companies’ bottom lines will be limited given that domestic operations only account for 5-8% of their bottom line. Our bullish long-term view on the China cement sector stays.

Li & Fung (OW), Hong Kong PT trimmed to HK$21 – recent weakness a buying opportunity (Ebru Sener Kurumlu) We maintain our top-line estimates but lower earnings by 8% as we are modeling higher operating expenses, a short-term pressure. We now estimate c18% EPS growth for 2011 and feel comfortable with our top-line CAGR assumption of 14% during 2011-2013 without any major acquisitions.

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Sunil Garg (852) 2800-8518 [email protected] Send me your feedback! AM perspective Adrian Mowat, Chief Equity Strategist China 2020: 130 million swing

Source: J.P. Morgan economics. Note: Graph shows non graduate available workforce 15-39 years old. The number of graduates in China increased by 74 million in the past decade (2010 Census). The tertiary enrollment ratio is now 35%. This, combined with a 2% decline in the working-age population, leads to a 91 million fall in non-graduates in the workforce; it grew by 28 million in the 2000s. We believe that this is the most important driver of reduced fixed-asset investment. It reverses the commonly held belief that China must have growth above 8% to generate sufficient jobs. Continuing the current investment-driven model will be inflationary. For more, please see China 2020: 130 million swing, Mowat et al, May 31, 2011. Click below for the: J.P. Morgan Daily Valuations Latest Weekly AP Banks Analyzer (.xls) Daily Global Economic Briefing

Link to Other FTMs page Link to Morgan Markets page

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Recommendation and Forecast Changes • Alam Sutera (Overweight), TIP Markets (Liliana

Bambang) Constructing growth

• Asia Cement, Taiwan (Nick Lai) Greater China Hard Hat: Drought in China, anti-dumping in Taiwan

• Bumi Resources Mineral (Overweight), TIP Markets (Stevanus Juanda) 1Q11 results below consensus expectation; lower PT to Rp780.

• Colgate-Palmolive (India) Limited (Underweight), India (Latika Chopra, CFA) Q4FY11 : In-line operational performance

• Havells India Ltd (Overweight), India (Princy Singh) Big FY11 earnings beat, increase price target to Rs600

• Li & Fung (Overweight), Hong Kong (Ebru Sener Kurumlu)

Business model very much valid, near term pressure from high operating expenses

• Reliance Infrastructure Ltd (Neutral), India (Shilpa Krishnan) FY11 PAT in-line, balance sheet details awaited

• Reliance Power (Underweight), India (Shilpa Krishnan) Mar-q strong, but fundamental risks remain: Maintain UW

• Taiwan Cement, Taiwan (Nick Lai) Greater China Hard Hat: Drought in China, anti-dumping in Taiwan

• Tenaga (Overweight), Malaysia (Hoy Kit Mak) Tariff mechanism here at last - potentially a big rerating catalyst

Strategy • Market Strategy, Asia Pacific (Adrian Mowat)

Asia Pacific Strategy Dashboards

• Market Strategy, Global (Adrian Mowat) Global Developed Markets Strategy Dashboards

Economics • Economy, China (Grace Ng)

Food prices began to tick up gain

• Economy, India (Sajjid Z Chinoy) Appreciation interrupted, part deux

• Economy, Malaysia (Matt L Hildebrandt) Modest energy price hikes bear watching

• Economy, Singapore (Matt Hildebrandt) Data Watch

• Economy, TIP Markets (Matt L Hildebrandt) GDP boosted by inventories while fiscal consolidation still a drag

• Indian Oil Corporation (Neutral), India (Pradeep Mirchandani, CFA) Subsidy support, refining, forex gains prop 4Q earnings - ALERT

• Malaysia Airports Holdings Berhad (Overweight), Malaysia (Hoy Kit Mak) 20 eye joint offer to develop 50 acres of land near KLIA2 - ALERT

• Neptune Orient Lines (NOL) (Neutral), Singapore (Corrine Png) April Container Monitor - ALERT

• Oil and Natural Gas Corporation (Overweight), India (Pradeep Mirchandani, CFA) 4QFY11 impacted by subsidies, dry well write-offs - ALERT

• Petronas Chemicals Group Berhad (Overweight), Malaysia (Samuel Lee, CFA) Impact of higher gas tariff in Malaysia - ALERT

• PLUS Expressways (Neutral), Malaysia (Hoy Kit Mak) 1Q11 earnings beat expectations - ALERT

• Reliance Capital (Overweight), India (Seshadri K Sen, CFA) 4Q11: Catalysts may take time to play out

• Shinhan Financial Group (Overweight), South Korea (Scott YH Seo) A little dent in 2Q11 earnings from an unexpected litigation charge

• Tata Communications Ltd (Underweight), India (Malvika Gupta) Q4'FY11: Neotel drag continues; watching the focus on profitability - ALERT

• Tenaga (Neutral), Malaysia (Hoy Kit Mak) Review on power tariffs, but timing uncertain - ALERT

• Top Glove Corporation (Neutral), Malaysia (May Yee Soh) Stretching costs with natural gas and electricity price hikes - ALERT

• Unitech Ltd (Overweight), India (Saurabh Kumar) 4Q PAT falls on low margin projects recognition. Operating trends suggest core franchise still intact. - ALERT

• Unitech Ltd (Overweight), India (Saurabh Kumar) Priced for sustainability than fundamentals

Sector Research • Automobile Manufacture, Asia Pacific (Frank Li)

Auto WIN: Regional auto industry highlights • Auto Parts; Automobile Manufacture, Asia Pacific

(Frank Li) Auto WINdata: Asian vehicle sales round-up

• Food & Food Manufacture, Taiwan (Caren Huang) Taiwan Consumer Industry: DEHP contamination scandal spreads - ALERT

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Results and Company Views • Bharat Petroleum Corporation (BPCL) (Neutral), India

(Pradeep Mirchandani, CFA) Strong refining performance, subsidy support underpins 4Q - ALERT

• Crompton Greaves Limited (Overweight), India (Sumit Kishore) Key takeaways from analyst meet post recent developments - ALERT

• Genting Malaysia (Overweight), Malaysia (May Yee Soh)

Betting on Miami? - ALERT • Hindalco Industries (Neutral), India (Pinakin Parekh, CFA)

Projects again pushed back with Utkal slated for 2012 (from Early 2012 previously), capex costs increased; - ALERT

• HTC Corp (Overweight), Taiwan (Alvin Kwock) Upside/ downside by geography

• Integrated Oils, China (Brynjar Eirik Bustnes, CFA) China oil and gas: Power shortages leave refiners in a quandary over maintenance; jet fuel price increased Rmb800/ton

• Metals & Mining, India (Pinakin Parekh, CFA) The Lodestone: LME warehouse review study result out

• Property, China (Ryan Li) China Property Weekly: Property sales for the week ending May 15, 2011

• Property, Hong Kong (Amy Luk, CFA) Hong Kong Property Update: Weekly primary sales: 185 units

• Shipping, Asia Pacific (Corrine Png) Baltic Freight Indices: Week to 27th May

• Telecom Services, Asia Pacific (James R. Sullivan, CFA)

JPM Asia Telco Back Testing Analysis: Investing our recommendations: 30th May 2011

Markets at a glance China Hong Kong India SHASHR Index 2,834.53 HSI Index 23,184.32 Sensex Index 18,232.06Chg from previous day -0.13% Chg from previous day 0.29% Chg from previous day -0.19%T/O value (CNYmn / US$MM) 71,189 / 10,981 T/O value (HK$ mn / US$MM) 64,167 / 8,248 T/O value (INR bn / US$MM) 494 / 10,960Chg from previous day -22.61% Chg from previous day 0.00% Chg from previous day -26.08%Exchange rate CNY6.5 / US$1 Exchange rate HKD7.78 / US$1 Exchange rate INR45.1 / US$1O/N interbank (%) 2.57 O/N interbank (%) 0.01 O/N interbank (%) 7.25Market cap (CNYBn) 17,699.1 Market cap (HK$Bn) 20,046.0 Market cap (US$Bn) 1469.9Market cap (US$ Bn) 2,730 Market cap (US$ Bn) 2,577 Market cap (INR Bn) 66,265FY1E Market P/E 13.5 FY1E Market P/E 14.1 FY1E Market P/E 19.8FY2E Market P/E 11.4 FY2E Market P/E 13.2 FY2E Market P/E 16.3

Indonesia Malaysia Philippines JCI Index 3,826.14 KLCI Index 1,542.84 PSE Index 4,295.24Chg from previous day -0.16% Chg from previous day -0.38% Chg from previous day 0.48%T/O value (Rp bn / US$MM) 2,890 / 338 T/O value (MYR MM / US$MM) - T/O value (Php MM / US$MM) 3,266 / 75Chg from previous day -2.36% Chg from previous day - Chg from previous day -31.51%Exchange rate Rp8,548 / US$1 Exchange rate MYR3.02 / US$1 Exchange rate Php43.32 / US$1O/N interbank (%) 6.90 O/N interbank (%) 2.99 O/N interbank (%) 4.50Market cap (US$Bn) 399.6 Market cap (US$ bn) 269.2 Market cap (US$ bn) 93.2Market cap (Rp bn) 3,416,168 Market cap (MYR bn) 813 Market cap (Php bn) 4,035FY1E Market P/E 17.3 FY1E Market P/E 15.9 FY1E Market P/E 15.5FY2E Market P/E 14.3 FY2E Market P/E 14.0 FY2E Market P/E 13.6

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Singapore South Korea Taiwan STI Index 3,140.60 KOSPI Index 2,093.79 TWSE Index 8,823.68Chg from previous day 0.70% Chg from previous day -0.31% DoD Change 0.16%T/O value (SGD MM / US$MM) 649 / 526 T/O value (KRW bn / US$MM) 5,658 / 5,238 52-Week Range 9,207 / 7,049Chg from previous day -38.68% Chg from previous day -19.1% T/O value (NT$ mn / US$MM) 16,708 / 581Exchange rate SGD1.23 / US$1 Exchange rate KRW1080.10 / US$1 Chg from previous day -15.05%O/N interbank (%) 0.08 O/N interbank (%) 3.00 Exchange rate TWD28.8 / US$1Market cap (US$ bn) 563.3 Market cap (KRW Bn) 1,248 O/N interbank (%) 0.33Market cap (SGD bn) 695 Market cap (US$ Bn) 1,156 10 Year Gov Bond Yield (%) 1.44FY1E Market P/E 15.4 FY1E Market P/E 12.5 Market cap (NT$Bn) 23,363.0FY2E Market P/E 13.6 FY2E Market P/E 10.3 Market cap (US$ Bn) 912 FY1E Market P/E 16.8 FY2E Market P/E 13.1

Thailand SET Index 1,076.50 Chg from previous day 0.89% T/O value (Bt bn / US$MM) 20 / 657 Chg from previous day -18.20% Exchange rate Bt30.35 / US$1 O/N interbank (%) 2.37 Market cap (US$Bn) 286.0 Market cap (Bt bn) 8,679 FY1E Market P/E 15.7 FY2E Market P/E 13.8

Source: Bloomberg, J.P. Morgan estimates.

Asia Analyst Focus List OPEN TRADES (as of May 30, 2011 close) Long Trades – Relative1 Country/ Company Name

BBG Ticker Analyst Name Rating2 Add Date

Add Price

Current Price

Price Target2

Trade Time

Horizon Abs. Perf

Since Add Date (%)

Return Relative to Country Index

(%)3Australia National Australia Bank NAB AU Scott Manning OW 6-May-11 27.78 26.17 32.68 6-12 M -5.8 -4.3Onesteel Limited OST AU Benjamin Wilson OW 2-May-11 2.08 1.87 2.70 6-12 M -10.1 -6.6ASX Ltd ASX AU Russell Gill OW 6-Apr-11 33.75 32.32 38.80 6-12 M -4.2 0.7Insurance Australia Group IAG AU Siddharth Parameswaran OW 18-Mar-11 3.36 3.53 4.40 6-12 M 5.1 4.2Suncorp Group Ltd SUN AU Siddharth Parameswaran OW 18-Mar-11 7.95 8.36 10.86 6-12 M 5.2 4.3Qantas Airways QAN AU Scott Carroll OW 2-Mar-11 2.28 2.09 2.86 6-12 M -8.3 -5.6Telstra Corporation TLS AU Laurent Horrut OW 2-Mar-11 2.79 3.02 3.13 6-12 M 8.2 10.9Charter Hall Group CHC AU Rob Stanton OW 24-Feb-11 2.34 2.35 2.83 6-12 M 0.4 3.4Credit Corp Limited CCP AU Alexander Mees, ACA OW 15-Feb-11 4.90 5.07 6.17 6-12 M 3.5 8.8ING Office Fund IOF AU Michael Scott OW 7-Feb-11 0.60 0.63 0.70 6-12 M 4.2 8.1Mirvac Group MGR AU Richard Jones, CFA OW 4-Feb-11 1.24 1.27 1.50 6-12 M 2.4 6.2iiNet IIN AU Laurent Horrut OW 2-Aug-10 2.66 2.80 3.41 6-12 M 5.1 2.8China (SHASHR) Skyworth Digital Holdings 751 HK Leon Chik, CFA OW 12-May-11 5.24 4.99 7.00 6-12 M -4.8 -4.6Lenovo Group Limited 992 HK Gokul Hariharan OW 21-Mar-11 4.18 4.57 5.80 6-12 M 9.3 16.3China Agri-Industries 606 HK Ying-Jian Chan OW 25-Jan-11 7.81 8.19 10.60 6-12 M 4.9 3.7China Cosco Holdings, Ltd. 1919 HK Corrine Png OW 11-Jan-11 8.70 7.04 11.80 6-12 M -19.1 -15.6China Minsheng Banking - A 600016 CH Samuel Chen OW 27-Nov-10 5.13 5.92 8.20 6-12 M 15.4 21.1China Minsheng Banking - H 1988 HK Samuel Chen OW 27-Nov-10 6.90 7.27 10.00 6-12 M 5.4 11.1The United Laboratories 3933 HK Leon Chik, CFA OW 5-Nov-10 15.30 12.76 22.00 6-12 M -16.6 -3.0Shenzhen Expressway - H 548 HK Karen Li, CFA OW 8-Sep-10 3.77 5.09 9.10 6-12 M 34.9 34.5China Unicom H Share 762 HK Lucy Liu OW 2-Aug-10 10.72 17.28 18.60 6-12 M 61.2 60.0

https://mm.jpmorgan.com/stp/t/c.do?i=7F654-5&u=a_p*d_602608.pdf*h_-3hrrtcl%0d%0a

Focus Media FMCN US Dick Wei OW 3-Jun-10 15.87 31.40 39.00 6-12 M 97.9 92.0AAC Acoustic 2018 HK Alvin Kwock OW 8-Sep-08 4.69 19.38 22.00 6-12 M 313.0 287.0Industrial and Commercial Bank of China - A 601398 CH Samuel Chen OW 30-Oct-09 4.79 4.56 7.00 6-12 M -4.7 5.1Hong Kong Nine Dragons Paper Holdings Ltd 2689 HK Leon Chik, CFA OW 11-May-11 8.13 7.02 13.00 6-12 M -13.6 -12.2AIA Group Ltd 1299 HK Bao Ling Chan OW 18-Apr-11 25.70 27.45 28.00 6-12 M 6.8 10.8Pacific Basin Shipping 2343 HK Corrine Png OW 11-Jan-11 4.88 4.60 7.00 6-12 M -5.7 0.0China Minsheng Banking - H 1988 HK Samuel Chen OW 27-Nov-10 6.90 7.27 10.00 6-12 M 5.4 11.1Wheelock & Company Ltd 20 HK Benjamin Lo, CFA OW 19-Nov-10 28.85 32.00 35.80 6-12 M 10.9 13.1HSBC Holdings plc 5 HK Sunil Garg OW 24-May-10 69.15 80.65 110.00 6-12 M 16.6 -11.9COSCO Pacific 1199 HK Karen Li, CFA OW 26-Aug-08 9.87 14.86 20.70 6-12 M 50.6 28.7India Sintex Industries Limited SINT IN Princy Singh OW 13-Jan-11 167.30 190.35 270.00 6-12 M 13.8 19.1IndusInd Bank IIB IN Seshadri K Sen, CFA OW 19-Nov-10 265.15 259.75 325.00 6-12 M -2.0 5.8Ballarpur Industries Ltd. BILT IN Princy Singh OW 20-Oct-10 37.13 31.85 50.00 6-12 M -14.2 -4.3Apollo Hospitals Enterprise Ltd. APHS IN Princy Singh OW 5-Oct-10 463.15 482.15 600.00 6-12 M 4.1 16.2Indonesia Bank Rakyat Indonesia BBRI IJ Aditya Srinath, CFA OW 1-Apr-11 5784.00 6400.00 7300.00 6-12 M 10.7 7.4Japan Canon (7751) 7751 JT Hisashi Moriyama OW 14-Jan-11 4185 3825 5000 6-12 M -8.6 2.9Nikon (7731) 7731 JT Hisashi Moriyama OW 4-Jan-11 1732 1854 2500 6-12 M 7.0 16.8Inpex Corporation 1605 JT Brynjar Eirik Bustnes OW 1-Sep-10 384334 567000 750000 6-12 M 47.5 45.7DAINIPPON SCREEN MFG. (7735) 7735 JT Hisashi Moriyama OW 22-Jun-10 489 685 1200 6-12 M 40.1 47.4FUJIFILM Holdings (4901) 4901 JT Hisashi Moriyama OW 26-Jan-10 2891 2349 3800 6-12 M -18.7 -8.3Honda Motor (7267) 7267 JT Kohei Takahashi OW 19-Jan-10 3229 3030 3900 6-12 M -6.2 7.5Hitachi (6501) 6501 JT Yoshiharu Izumi OW 29-Jul-09 302 455 590 6-12 M 50.7 61.4Malaysia IJM Land IJMLD MK Simone Yeoh OW 3-May-11 2.80 2.80 3.40 6-12 M 0.0 -1.0Dialog Group Bhd DLG MK Hoy Kit Mak OW 28-Apr-11 2.56 2.75 3.00 6-12 M 7.4 6.7RHB Capital RHBC MK Harsh Wardhan Modi OW 18-Nov-10 7.68 9.28 10.40 6-12 M 20.9 17.5Philippines Philippine Stock Exchange PSE PM Harsh Wardhan Modi OW 9-Oct-07 176.47 257.00 605.00 6-12 M 45.6 54.3International Container Terminal Services Inc ICT PM Jeanette G Yutan OW 8-Sep-10 35.15 52.20 60.00 6-12 M 48.5 48.3Singapore CapitaMalls Asia CMA SP Joy Wang OW 21-Jan-11 1.89 1.63 2.75 6-12 M -13.7 -10.5Singapore Airlines SIA SP Corrine Png OW 23-May-10 13.88 14.14 19.00 6-12 M 1.9 -11.6Noble Group Ltd NOBL SP Ajay Mirchandani OW 12-Nov-09 1.74 2.07 2.75 6-12 M 19.2 7.6Olam International Limited OLAM SP Ajay Mirchandani OW 2-Oct-08 1.64 2.94 3.70 6-12 M 79.5 54.3DBS Group Holdings DBS SP Harsh Wardhan Modi OW 8-Aug-08 14.19 14.78 24.00 6-12 M 4.1 -1.4South Korea Nong Shim 004370 KS Jinah Lee OW 17-Mar-11 220500 248000 270000 6-12 M 12.5 5.9Samsung Engineering 028050 KS Jinmook Kim OW 6-Feb-11 206000 243000 250000 6-12 M 18.0 16.7LG Electronics 066570 KS JJ Park OW 15-Jan-11 114000 97000 140000 6-12 M -14.9 -14.5LG Chem Ltd 051910 KS Samuel Lee, CFA OW 14-Oct-10 323567 510000 491000 6-12 M 57.6 44.2LG Innotek 011070 KS Hyunjoon Roh OW 23-Mar-10 111111 98900 240000 6-12 M -11.0 -37.2LG Display 034220 KS JJ Park OW 15-Mar-10 35451 36000 50000 6-12 M 1.5 -27.6Taiwan Wistron Corporation 3231 TT Alvin Kwock OW 27-Apr-11 47.10 52.90 65.00 6-12 M 12.3 14.9Teco Electric & Machinery 1504 TT Nick Lai OW 16-Feb-11 17.65 20.35 24.00 6-12 M 15.3 13.7SPIL (Siliconware Precision Industries) 2325 TT Rick Hsu OW 15-Feb-11 40.45 38.00 46.00 6-12 M -6.1 -7.7TSMC 2330 TT Rick Hsu OW 19-Jan-11 78.00 75.10 88.00 6-12 M -3.7 0.6Novatek Microelectronics Corp. 3034 TT Cynthia Chou OW 3-Dec-10 98.50 97.30 120.00 6-12 M -1.2 3.1Quanta Computer Inc. 2382 TT Alvin Kwock OW 13-Oct-10 48.15 64.20 80.00 6-12 M 33.3 37.7First Financial Holding Co Ltd 2892 TT Joseph Leung OW 3-Sep-10 18.85 24.10 33.00 6-12 M 27.9 32.2Powertech Technology Inc 6239 TT Cynthia Chou OW 2-Aug-10 101.50 107.00 130.00 6-12 M 5.4 9.8Unimicron Technology Corp. 3037 TT Christopher Ma OW 18-Apr-10 39.74 53.00 60.00 6-12 M 33.4 37.7Thailand Big C Supercenter Pcl BIGC TB Maria Lapiz OW 23-May-11 88.00 88.75 117.00 6-12 M 0.9 1.1Siam Makro MAKRO TB Maria Lapiz OW 9-May-11 172.50 199.00 193.00 6-12 M 15.4 16.3LPN Development LPN TB Anne Jirajariyavech OW 18-Jan-11 8.28 9.95 10.50 6-12 M 20.2 15.0Banpu Public BANPU TB Sukit Chawalitakul OW 15-Oct-10 713.26 748.00 923.00 6-12 M 4.9 -2.2PTT Public Company PTT TB Sukit Chawalitakul OW 23-Mar-10 248.77 358.00 437.00 6-12 M 43.9 11.6

Long Trades – Absolute1

Company Name BBG Ticker Analyst Name Rating2 Add DateAdd

VWAPCurrent

VWAPPrice

Target2 Trade Time

Horizon Abs. Perf Since

Add Date (%)Return Relative to

MSCI AsiaXJ (%)Powertech Technology Inc 6239 TT Cynthia Chou OW 4-Aug-10 100.96 106.30 130.00 < 6 M 16.48 14.94China ZhengTong Auto Service Holding Limited 1728 HK Frank Li OW 4-Mar-11 7.48 8.70 8.80 < 3 M 16.44 2.63LG Electronics 066570 KS JJ Park OW 15-Sep-10 98365 97476 140000 < 3 M 6.29 11.23Banpu Public BANPU TB Sukit Chawalitakul OW 25-Jan-11 750.71 750.56 888.0 < 6 M 2.12 1.02COSCO Pacific 1199 HK Karen Li, CFA OW 10-Mar-11 15.25 14.93 20.7 < 3 M -1.96 3.31Asian Property Development AP TB Anne Jirajariyavech OW 4-Apr-11 5.23 5.05 7.5 < 6 M -3.89 -1.94

Short Trades – Relative1 or Absolute1 Country/ Company Name

BBG Ticker Analyst Name Rating2 Add Date

Add Price

Current Price

Price Target2

Trade Time Horizon

Abs. Perf Since Add Date (%)

Return Relative to Country Index (%)3

Australia Woodside Petroleum WPL AU Benjamin Wilson UW 7-Apr-11 46.95 45.97 45.15 6-12 M -2.1 2.7

Pair Trades – Absolute1

Company Name BBG Ticker Analyst Name Country

Long/ Short Rating2 Add Date

Add VWAP

Current VWAP

Price Target2

Trade Time

Horizon

Abs. Perf Since Add

Date (%)

Return Relative to

MSCI AsiaXJ (%)

China Agri-Industries 606 HK Ying-Jian Chan China Long OW 26-Jan-11 8.12 8.24 10.60 < 3 M 5.11 0.23Wilmar International Limited WIL SP Ying-Jian Chan Singapore Short N 26-Jan-11 5.38 5.36 5.40 < 3 M -3.15 -0.23 Pair Trade 1.97 iShares MSCI Taiwan Index Fund EWT US Adrian Mowat Taiwan Long - 18-Feb-11 15.17 15.31 - < 6 M 0.93 3.10iShares MSCI South Korea Index Fund EWY US Adrian Mowat South Korea Short - 18-Feb-11 60.38 64.76 - < 6 M -7.25 -3.00 Pair Trade -6.32 Techtronic Industries 669 HK Leon Chik, CFA China Long OW 16-Dec-10 10.24 9.47 14.00 < 6 M -7.53 3.97VTech Holdings 303 HK Leon Chik, CFA China Short N 16-Dec-10 87.22 91.91 77.00 < 6 M -5.34 -3.82 Pair Trade -12.87

1 - Relative indicates trades that are intended to generate returns relative to the relevant country index over the next 6-12 months. Absolute indicates trades that are intended to generate absolute returns in less than 6 months. 2 - Rating and price targets reflect J.P. Morgan's fundamental long-term views. 3 - Relative returns for relative trades are relative to MSCI country indices except for Shanghai listed A-Shares which are relative to the SHASHR. Source: Bloomberg, J.P. Morgan estimates. J.P. Morgan’s Asia Analyst Focus List (AFL) is a selection of instruments chosen by individual analysts/strategists as ‘Relative’ or ‘Absolute’ trades over a defined time horizon. The Relative trade list is a selection of stocks chosen by individual analysts that represent their top picks with the potential to provide an annualized total return in excess of +/-20% over the next 6-12 months - either Long or Short and relative to the relevant country index (which are MSCI country indices, except for Shanghai listed A-shares which are relative to SHASHR). The Absolute trade list is a selection of stocks and/or indices, chosen by individual analysts and strategists, respectively, representing their trading ideas - either Long or Short, that are intended to generate absolute returns in the short term (< 6 months). The ideas may be expressed as single stocks or in pairs. A stock or index will be removed from this list if its absolute return (based on VWAP) falls below 10%. If a stock is placed under research restriction, J.P. Morgan may remove the stock from the AFL list pursuant to applicable law and/or J.P. Morgan policy without any further notice. Each trade is current only for the time horizon indicated. The short-term action expressed in the absolute trade list (Long or Short) may differ from J.P. Morgan's rating on the corresponding equities (Overweight, Neutral, or Underweight). For J.P. Morgan's long-term view on these names, including an analysis of valuation methodology and risk, please see the most recent company-specific research available at MorganMarkets http://www.morganmarkets.com or contact your J.P. Morgan representative. The Analyst Focus List is not intended to be viewed as model portfolios. Please refer to specific company research for the fundamental investment thesis for each stock included in this list as well as the analysts’ complete views. Important disclosures, including price charts for all companies under coverage for at least one year, are available through the search function on J.P. Morgan's website https://mm.jpmorgan.com/disclosures/company. Total returns exclude commissions. Past results are not indicative of future performance. Additional information available upon request.

Upcoming Events Conference Call: Thai Politics: An Election Update & In-Depth Analysis of the Current Thai Political Landscape on Thursday, June 02, 2011, at 9:30am UK / 3:30pm Thailand / 4:30pm HK & Singapore, Speaker: Pichai Chuensuksawadi (Editor in Chief of the Bangkok Post), Dial in: +442071538954 (UK), 0018 006 121 241 (Toll Free Thailand), +85230114573 (Hong Kong), +6566221092 (Singapore), +864008116060 (China), +60377124674 (Malaysia), +886221626730 (Taiwan), +81357675584 (Japan), +82234831220 (South Korea), +61 (0)3 9221 4420 (Toll Melbourne), 1888 223 5103 (Toll Free Canada), +12124440118 (USA), +33170994761 (France), +4930590024917 (Germany), +41434569367 (Switzerland), +34917889848 (Spain), +0008 004 401 249 (Toll Free India), Replay through 9/6: 1800 053 110 (TOLL FREE AUSTRALIA), 800 876 5013 (TOLL FREE CHINA), 0008001007453 (TOLL FREE INDIA), 00531160932 (TOLL FREE JAPAN), 00308132212 (TOLL FREE KOREA), 1800 814 301 (TOLL FREE MALAYSIA), 800 101 2157 (TOLL FREE SINGAPORE), 00801127120 (TOLL FREE TAIWAN), 08081011302 (TOLL FREE UK), 18665727808 (TOLL FREE USA), +852 3012 8000 (FOR HONG KONG & ALL OTHER COUNTRIES); Passcode: 649379

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Emerging Markets Equity Research 31 May 2011

China 2020: 130 million swing

How demographics change the economy

Emerging Markets Equity Strategy

Adrian MowatAC

(852) 2800-8599 [email protected]

J.P. Morgan Securities (Asia Pacific) Limited

Ben Laidler (1-212) 622-5252 [email protected]

J.P. Morgan Securities LLC

David Aserkoff, CFA (44-20) 7325-1775 [email protected]

J.P. Morgan Securities Ltd.

Rajiv Batra (91-22) 6157-3568 [email protected]

J.P. Morgan India Private Limited

Faheem S Desai (91-22) 6157-3329 [email protected]


Ravi Saraogi (91-22) 6157-3305 [email protected]


• The number of graduates in China has increased by 74 million in past decade (2010 Census). The tertiary enrolment ratio is now 35%. This combined with a 2% decline in the working age population leads to a 91 million fall in non-graduates in the workforce; it grew by 28 million in 2000-2010. We believe that this is the most important driver of reduce fixed asset investment. It reverses the commonly held belief that China must have growth above 8% to generate sufficient jobs. Continuing the current investment-driven model will be inflationary.

• China’s official GDP growth target and inflation rate for this decade are 7% and 4%, respectively. Considering a 10.5% GDP CAGR in 2000-2010 with just 2% inflation, this lower target appears conservative. To achieve the 7% target China requires circa10% labor productivity. It is investment in human capital that makes this high level of productivity possible, as higher-paying service sector jobs replace lower-paid construction and manufacturing jobs. The challenge is creating jobs for graduates.

• If we assume a return to the consumption/investment ratio in 2000 and 7% GDP growth, the consumption CAGR accelerates from 8.5% to 8.9%. Fixed investment CAGR falls from 12.7% to 4.8% (see page 10). Commodity bulls take note. The 12th Five-Year Plan aims to rebalance. But it is China’s 1979 one-child policy that is driving economic change today.

Figure 1: Demographics should reverse this trend

343%

512%

748%

258%

0%100%200%300%400%500%600%700%800%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

GDPGovernmentProfitsIncome

Source: CEIC. Note: Household income lagging profits and GDP growth

Figure 2: China needs jobs for graduates, not in pouring concrete or manufacturing: Change in the non-graduate available workforce 15-39 years old %oya, Millions

0

100

200

300

400

500

600

-6%-5%-4%-3%-2%-1%0%1%2%3%

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

2020

2023

2026

2029

2032

2035

2038

2041

2044

2047

%oya Number

Source: PRC NBS, Ministry of Education PRC, US Census, J.P. Morgan calculation

EM 101

Asia Pacific Equity Research 30 May 2011

Tenaga ▲ Overweight

Previous: Neutral

TENA.KL, TNB MK

Tariff mechanism here at last - potentially a big re-rating catalyst ▲

Price: M$6.52

Price Target: M$7.70 Previous: M$6.60

Malaysia Electric Utilities

Hoy Kit MakAC

(60-3) 2270-4728 [email protected]

JPMorgan Securities (Malaysia) Sdn. Bhd. (18146-X)

5

8

11

M$

May-10 Aug-10 Nov-10 Feb-11 May-11

Pr ice Per fo rman ce

TENA.KL share price (M$)FBMKLCI (rebased)

YTD 1m 3m 12m Abs -3.1% 8.7% 3.5% -21.9% Rel -4.7% 8.0% 0.0% -42.0%

Tenaga Nasional Bhd (Reuters: TENA.KL, Bloomberg: TNB MK) M$ in mn, year-end Aug FY09A FY10A FY11E FY12E FY13E Revenue 28786 30320 33402 36472 38236 Reported Net Profit 918 3,202 2,734 2,935 3,423 FD EPS (M$) Net DPS (M$) 0.10 0.16 0.17 0.17 0.18 Revenue growth (%) 11.8% 5.3% 10.2% 9.2% 4.8% FD EPS growth (%) ROE (%) 3.6% 11.7% 9.2% 9.3% 10.1% ROCE (%) 7.6% 8.5% 8.2% 8.3% 8.5% Adj P/E (x) 16.5 14.0 13.0 12.1 10.4 P/B (x) 1.4 1.2 1.2 1.1 1.0 EV/EBITDA (x) 7.3 6.0 5.7 5.3 5.0 Net Div yield (%) 1.5% 2.4% 2.7% 2.7% 2.8%

Shares O/S (mn) 5,452 Market cap (M$ mn) 35,545 Market cap ($ mn) 11725 Price (M$) 6.52 Date Of Price 30 May 11 Free float (%) 40.6% 3mth Avg daily volume 3,770,053.00 3M - Average daily Value (M$ mn) 23.66 Average 3m Daily Turnover ($ mn) 7.81 FBMKLCI 1,543 Exchange Rate 3.03 Fiscal Year End Aug

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

Table 1: Valuations Year-end Mar FY11E FY12E Old Core EPS (M$) 0.46 0.45 New EPS (M$) 0.50 0.54 % change 9.2% 20.5% P/E (x) 13.1 12.2 P/BV (x) 1.2 Net Div. Yield 2.7% Dec-11 PT 7.70 Source: J.P. Morgan estimates.

∑ Tariff mechanism at last: What many investors have been waiting for has finally materialized. The Cabinet has approved a Fuel Cost Pass-Through mechanism for the power sector to be reviewed every six months. Tenaga’s management has clarified that gas is a major component in the mechanism, and that gas prices are set based on forward expectations. Here, the government is looking at a M$3.00/mmbtu gas cost increase every six months from 1 June 2011 to 31 December 2015. Another major component is coal. For coal, it will be based on historical cost incurred, so there will be a lag effect before Tenaga is reimbursed.

∑ 7.2% tariff rise for a start: In conjunction with the fuel pass through mechanism introduction, the Cabinet has approved the following: 1) 7.2% electricity tariff increase effective 1 June; 2) gas price rise of 28%; 3) base tariff revision of 2%. The base tariff was originally due for revision in 2009 (i.e. three years after the last tariff review in 2006), but was delayed until now. Note this round of tariff increase does not cover higher coal costs, which management estimates will average around US$110/MT, against the benchmark US$85/MT. Therefore, Tenaga’s management is confident that in the next tariff review in December, Tenaga will be able to recoup some of its higher coal incurred, and gradually beyond that.

∑ Upgrade to OW: As our earnings forecasts reflect higher coal costs, the effect of the tariff rise is positive on earnings. We raise our EPS estimates by 9.2% for FY11 (three-month impact due to one-month lag in billings), 20.5% for FY12, and 19.2% for FY13. As a result, we raise our DCF-based PT (assuming all other parameters are unchanged) to M$7.70 from M$6.70, which implies 18% upside. Further potential upside could come from the next tariff review, due in December (this is not in our numbers yet). We upgrade to OW on the increased visibility on earnings and cash flow. The major rerating catalyst we have been waiting for is finally here. Tenaga is a deep-value stock at a near-trough P/BV of 1.2x, down more than 21.9% and underperforming KLCI by 42% over the past 12 months.


Global Display Market

Industry recovery likely, but we remain selective on supply chains

Semiconductors

JJ ParkAC


J.P. Morgan Securities (Far East) Ltd, Seoul Branch

Hyunjoon RohAC

(82-2) 758 5712 [email protected]


Narci ChangAC


J.P. Morgan Securities (Taiwan) Limited.

Yoshiharu Izumi (81-3) 6736-8637 [email protected]

JPMorgan Securities Japan Co., Ltd.

Justin J. Park (82-2) 758-5725 [email protected]


Yushi Kawamoto (81-3) 6736-8634 [email protected]

JPMorgan Securities Japan Co., Ltd.

Rahul Chadha (91-22) 6157-3261 [email protected]


∑ Oversupply to be significantly reduced in 2H11: Our revised global TFT-LCD industry model suggests that supply and demand will be balanced in 2H11 and recent panel price strength will continue into 3Q11. Although end-demand remains a concern, industry UT is likely to remain relatively low given that some panel prices are still below cash costs. Hence, we expect large-sized panel revenue to show growth from 2Q11 onwards after a sequential decline for three quarters in a row.

∑ Focus on size mix change and new products: The gap between unit growth and area growth will accelerate in the next two years, as a meaningful panel price decline is likely to lead to a size-mix change (moving to bigger screens). This would help consume additional supply growth. Meanwhile, value-added products such as LED and 3D TVs should help reduce volatility in blended panel prices.

∑ No hope for LED? Despite the sharp share-price corrections from the peak across the board, valuations remain broadly unchanged given that consensus estimates were revised down significantly. On the other hand, industry UT should improve significantly in 2Q11, and lower input cost (i.e. Sapphire Ingot prices) could eventually help improve the margins. From the angle of general lighting and earnings recovery, we like Epistar, but look for better entry points in other LED names.

∑ Stick to sector leader in touch panels and Novatek in IC design: Given the oversupply in the touch panel industry, we expect the pressure on margins to continue, but the sector leader could be far better than the high-beta names, thanks to stable margins. In IC design, Novatek should be the biggest beneficiary on the back of strong growth in small-panel driver IC and the bottoming out of the panel industry as well as its attractive valuation (6% dividend yield).

∑ Selective on display supply chain: Unlike the previous cycle, we expect an industry recovery to be moderate rather than rapid. Hence, we remain selective in display supply chains. In order of preference, our top picks are Novatek, LGD, AUO, and Epistar.

Display supply chain top picks

Company Ticker Rating Price Market cap P/E (x) P/BV (x) ROE (%) (LC) (US$ B) FY11E FY12E FY11E FY12E FY11E FY12E

IC design Novatek 3034 TT OW 95.20 2.0 11.1 9.1 2.5 2.3 22.6 26.1 TFT-LCD LGD 034220 KS OW 36,950 12.3 12.0 7.4 1.1 0.9 9.5 13.6 AUO 2409 TT OW 23.10 7.0 na 10.0 0.8 0.7 -4.3 7.2 LED Epistar 2448 TT OW 90.40 2.7 14.1 10.9 1.6 1.5 11.4 14.1 Source: Company data, Bloomberg, J.P. Morgan estimates. Prices as of May 27, 2011.


Greater China Hard Hat 1101.TW, 1101 TT Neutral

NT$41.60

Price Target: NT$37.00

Drought in China, anti-dumping in Taiwan

1102.TW, 1102 TT Neutral NT$39.45

Price Target: NT$37.00

Taiwan Cement

Nick LaiAC


J.P. Morgan Securities (Taiwan) Limited.

Relative share price performance vs. TWSE or HSI index

(%) 1M YTD 12M TCC 1 28 41 ACC 5 24 31 Conch-H -4 41 85 Sinoma -4 15 42 CNBM -4 75 130 BBMG -9 6 34

Source: Bloomberg.

∑ Two near-term macro drivers in 2H11: Share price performance of cement stocks in China and Taiwan have diverged in the last one month with Taiwan outperforming while China fell behind. Our views in 2H11 are:

∑ Taiwan- anti dumping against China and three implications: Taiwan government recently decided that starting from May 30, import of Chinese cement is subject to 95% temporary anti-dumping tariff until early Sep, after which the government will decide whether a long-term (i.e. 5 year) anti-dumping tariff is necessary. Three implications to investors, in our view: 1) Cement price in Taiwan will increase by 5-10% in 2H11 in our view, leading to margin expansion. 2) However, the benefit to bottom line from such price hike will be rather limited given domestic Taiwan operations only account for 5-8% of Taiwan Cement (TCC) and Asia Cement (ACC)’s bottom line. The rest majority profit comes from their diversified LT non-cement investments and China operation. 3) Similarly, on July 19th 2002, Taiwan imposed 5-year anti-dumping tariff against imports from Korea and Philippines of 42-126%. Cement sector, nonetheless, underperformed TWSE by 7% one month after the announcement. To reflect our view of expected cement price hike in 2H11, we raise our operating profit estimates for TCC and ACC sustainably by ~50-100% but even such a degree of earnings upgrade, the benefit to bottom line is only ~2%. We revise our Dec-11 PT on TCC and ACC to NT$37 from NT$35 on SOTP analysis. We maintain Neutral on both stocks and recommend investors sell into any near term strength.

∑ In China, we remain bullish: Recent droughts in central/ eastern China further weighted on the already severe power shortage through less supply from hydro-power generation. Hunan province in central China is facing the most severe power shortage and hence reduction in cement production- retail cement price soared by >20% in the last few weeks. Sequentially, we are moving into 3Q low season with ~10% seasonal decline in volume but power control should help offset seasonal earnings weakness due to higher cement price. In the long term, we maintain our bullish view on Chinese cement sector for three main reasons- 1) better supply discipline, 2) rising industry concentration- top 10 players accounted for 23% capacity in 2010 and is expected to rise to 40% by 2015, and 3) improving industry capacity utilization- from 83% in 2010 to over 90% in the next few years.

Valuation summary

Company Ticker Rating Dec-11PT (LC)

Price LC

Mkt Cap PE(x) PB(x) ROE (%) EV/ton (US$)

May 30 US$ Mn 11E 12E 11E 12E 11E 12E 11E 12E Taiwan Cement 1101 TT N 41.6 37 5,031 16.3 12.3 1.6 1.4 10% 12% 97 87 Asia Cement 1102 TT N 39.45 37 4,015 13.0 12.2 1.5 1.4 12% 12% 108 98 Anhui Conch - H 914 HK OW 34.5 47 20,018 12.9 11.2 3.3 2.6 30% 26% 156 139 Anhui Conch - A 600585 CH OW 35.76 60 20,018 17.3 15.0 4.4 3.4 30% 26% 156 139 CNBM 3323 HK OW 15.52 22.5 10,603 10.1 7.3 2.7 2.0 21% 22% 120 98 BBMG 2009 HK OW 11.36 13.5 7,602 9.4 7.1 2.0 1.6 21% 23% 109 107 Sinoma 1893 HK OW 7.26 9.5 3,305 14.8 12.0 2.0 1.8 0.2 18% 60 52 Source: Company, J.P. Morgan estimates. Valuations based on share price on May 30th 2011.

Emerging Markets Equity Research 31 May 2011

China 2020: 130 million swing

How demographics change the economy

Emerging Markets Equity Strategy

Adrian MowatAC



Ben Laidler (1-212) 622-5252 [email protected]

J.P. Morgan Securities LLC

David Aserkoff, CFA (44-20) 7325-1775 [email protected]

J.P. Morgan Securities Ltd.

Rajiv Batra (91-22) 6157-3568 [email protected]


Faheem S Desai (91-22) 6157-3329 [email protected]


Ravi Saraogi (91-22) 6157-3305 [email protected]


• The number of graduates in China has increased by 74 million in past decade (2010 Census). The tertiary enrolment ratio is now 35%. This combined with a 2% decline in the working age population leads to a 91 million fall in non-graduates in the workforce; it grew by 28 million in 2000-2010. We believe that this is the most important driver of reduce fixed asset investment. It reverses the commonly held belief that China must have growth above 8% to generate sufficient jobs. Continuing the current investment-driven model will be inflationary.

• China’s official GDP growth target and inflation rate for this decade are 7% and 4%, respectively. Considering a 10.5% GDP CAGR in 2000-2010 with just 2% inflation, this lower target appears conservative. To achieve the 7% target China requires circa10% labor productivity. It is investment in human capital that makes this high level of productivity possible, as higher-paying service sector jobs replace lower-paid construction and manufacturing jobs. The challenge is creating jobs for graduates.

• If we assume a return to the consumption/investment ratio in 2000 and 7% GDP growth, the consumption CAGR accelerates from 8.5% to 8.9%. Fixed investment CAGR falls from 12.7% to 4.8% (see page 10). Commodity bulls take note. The 12th Five-Year Plan aims to rebalance. But it is China’s 1979 one-child policy that is driving economic change today.

Figure 1: Demographics should reverse this trend

343%

512%

748%

258%

0%100%200%300%400%500%600%700%800%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

GDPGovernmentProfitsIncome

Source: CEIC. Note: Household income lagging profits and GDP growth

Figure 2: China needs jobs for graduates, not in pouring concrete or manufacturing: Change in the non-graduate available workforce 15-39 years old %oya, Millions

0

100

200

300

400

500

600

-6%-5%-4%-3%-2%-1%0%1%2%3%

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

2020

2023

2026

2029

2032

2035

2038

2041

2044

2047

%oya Number

Source: PRC NBS, Ministry of Education PRC, US Census, J.P. Morgan calculation

EM 101


Alam Sutera Initiation

Overweight ASRI.JK, ASRI IJ

Constructing growth

Price: Rp300

Price Target: Rp485

Indonesia Property

Liliana BambangAC


PT J.P. Morgan Securities Indonesia

Christopher Gee, CFA (65) 6882-2345 [email protected]

J.P. Morgan Securities Singapore Private Limited

Sumedh Samant (91-22) 6157-3286 [email protected]


160

220

280Rp



ASRI.JK share price (Rp)JCI (rebased)

YTD 1m 3m 12m Abs -1.6% 1.7% 22.4% 76.5% Rel -4.2% 1.5% 12.1% 39.7%

Alam Sutera (Reuters: ASRI.JK, Bloomberg: ASRI IJ) Rp in mn, year-end Dec FY08A FY09A FY10A FY11E FY12E FY13E Revenue 435,325 403,627 765,213 1,373,826 1,734,235 2,118,616 Net Profit 58,814.9 94,020.5 290,483.8 542,588.9 697,226.5 846,235.1 EPS (Rp) 3.43 5.26 16.26 30.37 39.03 47.37 DPS (Rp) 1 1 1 4 8 11 Revenue growth (%) 41.4% -7.3% 89.6% 79.5% 26.2% 22.2% EPS growth (%) 189.9% 53.3% 209.0% 86.8% 28.5% 21.4% ROCE 2.3% 4.2% 12.2% 20.0% 22.8% 25.5% ROE 3.4% 5.1% 14.0% 22.2% 24.8% 26.9% P/E (x) 87.4 57.0 18.4 9.9 7.7 6.3 P/BV (x) 2.9 2.8 2.4 2.0 1.8 1.6 EV/EBITDA (x) 89.1 45.2 14.7 8.0 6.3 5.3 Dividend Yield 0.2% 0.3% 0.2% 1.3% 2.8% 3.6%

Company Data Shares O/S (mn) 17,863 Market cap (Rp mn) 5,358,930 Market cap ($ mn) 626 Price (Rp) 300 Date Of Price 30 May 11 Free float (%) 50.5% 3mth Avg daily volume (mn) 46.55 3M - Average daily Value (Rp mn) 13,327.59 Average 3m Daily Turnover ($ mn) 1.56 JCI 3,826 Exchange Rate 8,565.00 Fiscal Year End Dec


∑ Initiating with an OW rating and Jun-12 PT of Rp485 (62% upside potential): Despite establishing a strong track record, ASRI trades at a discount to its peer groups – in our view, due to the perception that it is dependent on a single development. Its new Pasar Kemis development, which we expect to be launched in 4Q11, should help dispel this notion and underpin a rerating of the stock to valuations more in line with its sector-high range of 22% RoE and 26% EPS CAGR. We initiate coverage on ASRI with an Overweight rating and Jun-12 price target of Rp485, based on a 19% discount to our NAV estimate of Rp600. Our price target implies an FY11E P/E of 16.0x and FY12E P/E of 12.2x.

∑ Attractive valuation: The stock is trading at FY11E/12E P/Es of 9.9x/7.7x, compared to peers’ FY12E P/E multiples of 10.2x-37.0x, despite a better ROE and healthy growth profile. We believe that consistent recording of earnings coupled with the successful launch of Pasar Kemis in 4Q11 will lead to a re-rating of the shares.

∑ Strong earnings growth and potential upside to estimates: On the back of a projected 28% CAGR in marketing sales for FY11-13, we estimate that ASRI will be able to generate a 26% earnings CAGR in FY11-13. Our FY11-12 earnings estimates are currently around 10% above consensus estimates, as we believe that the company’s marketing sales will continue to exceed expectations, driven by pricing power and lack of land availability.

∑ Key risks: Key risks to our rating, earnings estimates and price target are: (1) a weak response of Pasar Kemis in 4Q11; (2) higher-than-expected operating expenses from marketing sales and wider diversification; (3) diversification risks; and (4) weak consumer confidence, driven by a potential fuel subsidy rise in 4Q11.

Seedling


Bumi Resources Mineral

Overweight BRMS.JK, BRMS IJ

1Q11 results below consensus expectation; lower PT to Rp780. ▼

Price: Rp690

Price Target: Rp780 Previous: Rp830

Indonesia Metals

Stevanus JuandaAC


PT J.P. Morgan Securities Indonesia

600

750

900

Rp



BRMS.JK share price (Rp)JCI (rebased)

YTD 1m 3m 12m Abs 4.5% 0.0% 7.7% 10.2% Rel 1.0% -0.7% -2.7% -31.0%

Bumi Resources Mineral (Reuters: BRMS.JK, Bloomberg: BRMS IJ) Rp in bn, year-end Dec FY08A FY09A FY10A FY11E FY12E FY13E Revenue 21 18 149 137 997 5,407 Net Profit -1.7 -0.2 764.6 494.1 394.3 1,328.4 EPS (Rp) (0.18) (0.02) 80.86 30.79 20.95 70.58 DPS (Rp) 0 0 0 0 0 0 Revenue growth (%) 39.9% -13.5% 729.7% -7.9% 629.2% 442.3% EPS growth (%) 0% (89%) (400477%) (62%) (32%) 237% ROCE 115.3% -0.1% 1.1% 0.6% 3.0% 8.5% ROE 93.3% 0.1% 9.3% 2.8% 2.1% 6.7% P/E (x) NM NM 8.5 22.4 32.9 9.8 P/BV (x) NM NM 0.4 0.6 0.7 0.6 EV/EBITDA (x) NM 179291.7 177.7 124.9 18.7 4.5 Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Company Data Shares O/S (mn) 25,570 Market cap (Rp bn) 17,643 Market cap ($ mn) 2,060 Price (Rp) 690 Date Of Price 30 May 11 Free float (%) 18.2% Avg Daily Volume (mn) 30 Avg Daily Value (Rp bn) 20 Avg Daily Value ($ mn) 2 JCI 3,826 Exchange Rate 8,565.00 Fiscal Year End Dec


∑ 1Q11 below consensus expectation: BRMS reported 1Q11 net income of Rp138.5bn, down 49% Y/Y. Due to lack of historical quarterly data, we analyze the result using 25% per quarter profit contribution as the base then assume that profit contribution from Batu Hijau will decline in subsequent quarters. With these, the reported net income came in below (21%) consensus FY11E net income expectation of Rp670bn while it is in-line (28%) with that of JPM’s FY11E expectation of Rp494bn.

∑ Flat core net income: 1Q11 results were distorted by the presence of forex gain (loss) that swung from large gain to loss on Y/Y, loss on derivatives transaction, and unrealized gain on fair value changes. Adjusting for these and proportionate allocation of minority stake, BRMS actually recorded a core net income of Rp169B, slightly down by 4% from Rp175B in 1Q10.

∑ Underground mining under protected forest is passed: On 19 May 2011 the Presidential Decree no. 28 Year 2011 that permits conditional underground mining in the protected forest area was issued. The Decree will be followed by the Principal Agreement by the Ministry of Forestry (up to 2 years and extendable) and seconded by the Borrow & Use Permit by the Ministry of Forestry (up to 20 years and extendable). Once the permits are passed/obtained, BRMS’ Dairi lead and zinc assets can commence operations.

∑ Maintain OW and June-12 PT of Rp780: We apply the new average exchange rate forecast of Rp8,600 (from Rp9,000) and year end forecast of Rp8,500 (from Rp8,700) in our model which resulted in us tweaking our FY11E forecast upwards by 1.4% mainly from forex translation gain as operating profit is adjusted downwards by 4.4% due to stronger IDR. We also extend the time horizon of our PT from Dec-11 to June-12. These adjustments resulted in us lowering our PT from Rp830 to Rp780. Risks: (1) Execution risks – project delay, etc. (2) Batu Hijau Earnings and dividends visibility during FY11E-FY12E.


Colgate-Palmolive (India) Limited

Underweight COLG.BO, CLGT IN

Q4FY11 : In-line operational performance ▲

Price: Rs896.90

Price Target: Rs865.00 Previous: Rs795.00

India Cosmetics & Personal Care

Latika Chopra, CFAAC



Ebru Sener Kurumlu (852) 2800-8521 [email protected]


700

800

900

Rs



COLG.BO share price (Rs)NIFTY (rebased)

YTD 1m 3m 12m Abs 3.2% -0.5% 9.2% 18.4% Rel 14.3% 3.5% 6.6% 10.8%

Colgate-Palmolive (India) Limited (Reuters: COLG.BO, Bloomberg: CLGT IN) Rs in mn, year-end Mar FY09A FY10A FY11A FY12E FY13E Revenue 16,948 19,625 22,206 25,395 28,675 Net Profit 2,803.6 4,013.9 4,025.8 4,626.7 5,337.3 EPS (Rs) 20.62 29.52 29.60 34.02 39.25 DPS (Rs) 17.20 23.37 25.23 28.50 34.20 Revenue growth (%) 15.0% 15.8% 13.2% 14.4% 12.9% EPS growth (%) 21.4% 43.2% 0.3% 14.9% 15.4% ROCE 157.4% 167.0% 138.6% 136.0% 134.2% ROE 148.1% 148.0% 113.4% 109.7% 107.5% P/E (x) 43.5 30.4 30.3 26.4 22.9 P/BV (x) 56.4 37.4 31.8 26.5 EV/EBITDA (x) 29.3 19.3 18.1 15.8 13.7 Dividend Yield 1.9% 2.6% 2.8% 3.2% 3.8%

Company Data Shares O/S (mn) 136 Market cap (Rs mn) 121,972 Market cap ($ mn) 2,700 Price (Rs) 896.90 Date Of Price 30 May 11 Free float (%) 3mth Avg daily volume 90,235.00 3M - Average daily Value (Rs mn) 78.22 Average 3m Daily Turnover ($ mn) 1.73 NIFTY 5,473 Exchange Rate 45.17 Fiscal Year End Mar


∑ Q4FY11 review. Company reported Net sales, EBITDA and PAT growth of 13%, 0% and 8% y/y, respectively, for Q4FY11. Base qtr (Q4FY10) results include impact of amalgamation of a subsidiary and are hence not comparable strictly on a y/y basis. While revenue growth was a little subdued, EBITDA came broadly in line with our expectations. Lower than expected tax rate during the qtr led to net earnings coming in 5% ahead of estimates.

∑ Overall volume growth moderates to 9% during Q4 led by subdued growth for toothbrushes and declining toothpowder market. However toothpastes registered healthy 12% vol growth, supported by increasing rural distribution (rural now accounts for 40% of sales vs 35% share 5 yrs ago) reach and differentiated consumption building initiatives.

∑ Gross margin pressures come to the fore…High input costs (packaging and flavors in particular) led to 240bp q/q compression in gross margins during Q4FY11. Management noted that RM inflation is likely to persist in the near term and price hikes and cost saving measures will help mitigate input cost push and keep EBITDA margins stable. Colgate has taken c3-4% price hike across its toothpaste portfolio and we expect this growth to flow through in FY12 too with upside risk if raw material inflation sustains.

∑ …however mitigated by lower A&P spends which dipped 4% y/y during Q4FY11. However, for full year FY11 A&P/Sales stood at 15.7% (+40bp y/y) and is likely to remain stable at these levels in FY12.

∑ Other updates. 1) Focus on premiumisation remains strong with new launches like Colgate Sensitive Pro-Relief toothpaste, Colgate Total Clean Mint, 360 Acti Flex toothbrush and Plax mouthwash; 2) Tax rates to move up from 22.6% in FY11 to 30% over next five years as tax benefits for Baddi plant subside; 3) Colgate's toothpaste market share dipped sequentially q/q in Q4 though on y/y basis share was still up (FY11 vol mkt share at 53.1%, +20bp y/y).

∑ TP revision. Our earnings estimates remain broadly unchanged. We roll forward our target price timeframe to Mar’12 and set a new TP of Rs 865. The stock is trading at 27x FY12E, which is expensive in our view.


Havells India Ltd

Overweight HVEL.NS, HAVL IN

Big FY11 earnings beat, increase price target to Rs600 ▲

Price: Rs396.20


India Electrical Equipment

Princy SinghAC


Dinesh S. Harchandani, CFA (91-22) 6157-3583 [email protected]


250

350

450

Rs



HVEL.NS share price (Rs)BSE30 (rebased)

YTD 1m 3m 12m Abs -0.0% -3.7% 25.0% 43.0% Rel 10.9% 2.4% 22.5% 33.4%

Havells India Ltd (Reuters: HVEL.NS, Bloomberg: HAVL IN) Rs in mn, year-end Mar FY09A FY10A FY11A FY12E FY13E Adjusted EPS (Rs) 3.31 5.57 21.90 32.51 40.72 EPS growth (%) -77.3% 68.6% 292.8% 48.4% 25.3% Revenue 54,775 51,626 56,126 64,676 72,556 Net Profit 384.8 696.0 3,070.5 4,059.4 5,084.0 DPS (Rs) 1.29 1.85 2.50 3.31 4.14 Revenue growth (%) 9.5% -5.7% 8.7% 15.2% 12.2% EBITDA 2,886 3,114 5,489 6,674 7,811 EBITDA margin 5.3% 6.0% 9.8% 10.3% 10.8% P/E (x) 120.0 71.0 16.1 12.2 9.7 P/BV (x) 7.5 12.4 7.6 4.9 3.4 EV/EBITDA (x) 21.2 19.4 11.1 9.0 7.4 Dividend Yield 0.3% 0.5% 0.6% 0.8% 1.0%

Shares O/S (mn) 125 Market cap (Rs mn) 49,436 Market cap ($ mn) 1,091 Price (Rs) 396.20 Date Of Price 27 May 11 Free float (%) 34.7% 3-mth trading value (Rs mn) 342.2 3-mth trading value ($ mn) 7.6 3-mth trading volume (mn) 1.0 BSE30 18,266 Exchange Rate 45.31 Fiscal Year End Mar


∑ Solid improvement in Sylvania margins: Sylvania reported strong FY11 performance with normalised (excl. one-offs gains) EBITDA margins of 5.8% (+410bps YoY), with Europe EBITDA margins improving 890bps YoY to 4.9%. Revenues increased 8% YoY driven by growth in Latin America even as revenues in Europe declined 2% YoY with volume declines offsetting pricing increases. Management guided for 6%-7% revenue growth and 8%-9% EBITDA margins for FY12.

∑ New products driving domestic business: Domestic revenues grew 22% YoY driven by strong growth in Lighting & Fixtures (+27% YoY) and Cables and Wires (+25%). Electrical consumer durables grew 40% YoY driven by launch of new products. Further launches of new electrical appliances (Electrical irons/Juicers/Mixers/Grinders) in Jul-11 should further enhance growth. Domestic margins were stable as HAVL increased prices to mitigate raw material cost impact. Management guided for FY12 domestic revenue growth of 15%-18% and stable margins.

∑ FY11 beats estimates: FY11 pre-exceptional profits (netted of pension gains/losses) grew 131% YoY to Rs2.4B (reported PAT grew 336% YoY), 27% ahead of our estimates, driven by better-than-expected performance at Sylvania. Consolidated revenues grew 9% while EBITDA margins improved by 380bps to 9.8%. We increase our FY12/FY13 EPS estimates by 8%/5% to factor in higher margins for Sylvania going forward.

∑ Solid earnings growth, strong cash flow and capital return profile; increase PT to Rs600: We believe HAVL offers investors EPS CAGR of 36% over the next two years, with FY12E free cash yield of 14.6% and ROCE of 23.6%. In this context, the stock looks attractive to us at 11.9x FY12E P/E. We reiterate our OW rating and increase our PT to Rs600, now rolled forward to Mar-12 and based on 15x FY13E P/E. Key risks include a slowdown in Europe business, a rise in raw materials prices, inability to scale up new products, rising competitive intensity, and F/X fluctuations.


Reliance Infrastructure Ltd

Neutral RLIN.BO, RELI IN

FY11 PAT in-line, balance sheet details awaited ▼

Price: Rs558.90


India Electric Utilities

Shilpa KrishnanAC



Sumit Kishore (91-22) 6157-3581 [email protected]


Deepika Belani (91-22) 6157-3582 [email protected]


500

900

1,300

Rs



RLIN.BO share price (Rs)NIFTY (rebased)

YTD 1m 3m 12m Abs -33.7% -16.2% -8.3% -47.0% Rel -23.0% -10.1% -11.0% -56.5%

Reliance Infrastructure Ltd (Reuters: RLIN.BO, Bloomberg: RELI IN) Rs in mn, year-end Mar FY09A FY10A FY11E FY12E FY13E Revenue 125,013 148,649 154,083 186,687 214,583 Adjusted Profit 13,531 15,194 15,516 15,725 21,770 Adjusted EPS (Rs) 59.85 62.04 58.00 61.98 85.80 Revenue growth (%) 49.8% 18.9% 3.7% 21.2% 14.9% Adjusted profit growth (%) 14.9% 12.3% 2.1% 1.3% 38.4% ROCE 3.0% 3.7% 4.3% 4.9% 6.0% ROE 8.1% 8.1% 6.9% 6.5% 8.5% Adjusted P/E (x) 9.34 9.01 9.64 9.02 6.51 P/BV (x) 0.7 0.7 0.6 0.6 0.5 EV/EBITDA (x) 5.2 6.1 6.2 6.2 4.7

Shares O/S (mn) 267 Market cap (Rs mn) 149,461 Market cap ($ mn) 3,309 Price (Rs) 558.90 Date Of Price 27 May 11 Free float (%) 42.5% 3mth Avg daily volume (mn) 2.00 3M - Average daily Value (Rs mn) 1,269.00 Average 3m Daily Turnover ($ mn) 28.10 NIFTY 5,476 Exchange Rate 45.17 Fiscal Year End Mar


∑ Reliance Infrastructure reported FY11 PAT of Rs15.5bn (up 2% YoY), slightly ahead of est. (Rs15.3bn). Mar-q EBIT and PAT de-grew by 11% and 13% respectively. Weak operating level performance in Mar-q was led by poor execution in EPC segment. Largely regulated electrical energy EBIT (~Rs2.4bn) was stable. The PAT de-growth was lower on account of a tax-refund in the Mumbai distribution business. The quantum of this refund was not provided by management on the call.

∑ Commentary of execution of EPC order backlog, now Rs296bn. After registering a de-growth of ~9.5% in EPC segment revenue (Rs~30bn) in FY11, management guided to at least a ‘doubling’ of topline for the segment in current fiscal, as projects have reached an inflexion point on execution. EPC EBIT margin was 8.1% in FY11; management has guided to stable margins. Update on regulated businesses: FY11 standalone EBIT was stable but consol electrical energy EBIT grew by 49%. We infer this is mainly owing to high level of AT&C loss reduction linked incentives and strong operational performance in Delhi DISCOMs.

∑ Balance sheet will be available after ~10days. On the call management shared that FY11 capex was ~Rs33bn (vs. our est. of Rs59bn) implying spillover of project execution to FY12-13. Post capex-slip in FY11, we have reduced our FY12 interest and depreciation est. by ~11%.

∑ Plans to transfer 433MW plants to RPWR have been shelved; accordingly we have re-instated ~Rs2.8bn of IPP EBITDA in estimates. This along with reduction in capital costs has resulted in 20% increase in FY12 estimates. Post housekeeping changes, FY13 PAT is up ~2%.

∑ Although buyback adjusted Mar-12 SOP PT of Rs825 (vs. Rs845 earlier), implies ~50% upside potential to CMP, we maintain N. Our concerns on the stock arose from group exposures, use of cash flows for unrelated/low-return ventures, sustainability of Mumbai distribution cash flows and EPC risks. RELI's sharp underperformance is reflecting these concerns (stock is trading at 0.6x BV), but it would take some improvement in market risk appetite plus stock-specific catalysts for a decisive bounce back – for example, an increase in Delhi retail tariffs, re-winning Mumbai distribution license.


Reliance Power

Underweight RPOL.BO, RPWR IN

Mar-q strong, but fundamental risks remain: Maintain UW

Price: Rs110.10

Price Target: Rs90.00

India Independent Power Producers

Shilpa KrishnanAC



Sumit Kishore (91-22) 6157-3581 [email protected]




100

140

180

Rs



RPOL.BO share price (Rs)BSE30 (rebased)

YTD 1m 3m 12m Abs -26.8% -10.4% 4.8% -25.2% Rel -15.9% -4.3% 2.3% -34.8%

∑ 4Q results improve with Rosa operating at high PLF combined with a tax benefit. Rosa (600MW) reported a high PLF of >90% vs. 53% in 3Q; also the plant recorded all fixed costs in 4Q coupled with more incentives. The improved performance was on account of a higher proportion of blending from imported and reject coal, given the shortfall in linkage coal supply. In 4Q 43% of non-linkage coal was used as opposed to 19% for the full year. Mgt guided to continuance of this practice until supply of linkage coal picks up even for Rosa 2 and Butibori. 4Q PAT of Rs1.9B was up 30% yoy, ahead of our and street expectations, also aided by a tax credit and higher other income. We assume an 80% sustainable PLF and no under recovery of fixed charges resulting in an 8% increase in FY12 estimates.

∑ Rosa II (600MW), Butibori (600MW) and Samalkot (2.4GW) inch closer to commissioning. (1) Rosa II: Mgt guided to a Mar '12 commissioning, broadly in line with our estimates. However, power will be sold on regulated returns as opposed to 50% merchant sales previously given the uncertainty in fuel supply and pricing. (2) Butibori: We delayed the project as per the guidance of a Jun '12 commissioning, assuming a 3 month lag. 50% of power will be sold at merchant rates, for the balance mgt has signed medium term PPAs (120MW@ Rs5.1, Rs150MW @ Rs4.72). Beyond FY13 we assume a sustainable tariff of Rs3.25. (3) Samalkot: Mgt maintained its stance of commencement of single cycle operations by Nov ’11 and expects delivery of 2 GE gas turbines by June. The change in offtake agreements and delay in Butibori commissioning result in a 13% decrease in our FY13 estimate.

∑ Progress on Chitrangi and Sasan mines. Chitrangi has crossed some important pre-construction hurdles such as land acquisition, environmental clearance and PPA signed with UP for 2.5GW @ Rs3.7. However, financial closure is still pending. We estimate inclusion of Chitrangi could result in an Rs40/share accretion to our target price with a 20% discount to fair value. Mgt expects coal extraction from Moher and Moher Amroli mines to commence in 2QFY13 and Unit 1 of Sasan to commence production in 2012.

∑ An improvement in funding and execution climate, or any progress on the Chitrangi project (ignored due to funding concerns) would make us more positive. The stock has underperformed its peers and the market quite sharply, and we believe this will continue in the near term. We maintain our UW rating and Mar-12 PT of Rs90/share.

Reliance Power: Earnings results summary (Bloomberg: RPWR IN Reuters: RPOL.BO) Earnings revision and valuation Rs. in millions, year-end March 4QFY11 JPM est. 3QFY11 % Q/Q Consolidated FY12E F`Y13E Revenue 4,954 3,637 2,513 97.2 Old EPS (Rs) 1.73 6.57 EBITDA 1,556 1,620 617 152.3 New EPS (Rs) 1.87 5.75 EBITDA mgn (%) 31.4 44.5 24.5 28.0 % change 8.1 (12.6) Other Income 1,028 940 1038 (1.0) P/E (x) 62.1 20.2 PBT 1,543 1,843 892 72.9 ROE (%) 3.09 8.94 Tax (323) 507 (544) NM P/B (x) 1.9 1.7 PAT 1,866 1,336 1436 30.0 EV/EBITDA (x) 77.6 21.8 Source: Bloomberg, Company reports and J.P. Morgan estimates. Price as on 27th May 2011.


Asia Pacific Strategy Dashboards

Asia Pacific Strategy Team Country Recommendation Adrian MowatAC Asian and Emerging Markets Equity Strategist [email protected] (852) 2800 - 8599 J.P. Morgan Securities (Asia Pacific ) Limited Overweight Steve Malin Quantitative Strategist [email protected] (852) 2800 - 8568 J.P. Morgan Securities (Asia Pacific ) Limited India and ASEAN David Fernandez Economic and Policy Research [email protected] (65) 6882 - 2461 JPMorgan Chase Bank, N.A., Singapore Branch Yen Ping Ho Asian Currency Strategist [email protected] (65) 6882 - 2216 JPMorgan Chase Bank, N.A., Singapore Branch Underweight Rajiv Batra Asian and Emerging Markets Equity Strategy [email protected] (91-22) 6157-3568 J.P. Morgan India Private Limited Korea and Australia

Key Changes Market performance to 27 May 2011

• Week: MSCI Asia Pacific ex Japan 2.2% outperformed MSCI World by 0.1%

• Top three markets during the week: Korea 2.4%, China 2% and India 1.7%

• Bottom three markets during the week: Philippines 0.1%, Australia 0.8% and Taiwan 0.9%

• YTD Performance: MSCI Asia Pacific ex Japan 1.4% underperformed MSCI World by 2.5%

• YTD Top three markets in US$: Indonesia, Korea and Thailand

• YTD Bottom three markets in US$: India, Philippines and Hong Kong Sector performance

• Week: MSCI APxJ Energy 4.5% outperformed MSCI APxJ by 2.4%

• Week: MSCI APxJ Information Technology 1.5% underperformed MSCI APxJ by 0.6%

• Top three key sectors during the week in US$: Korea Consumer Discretionary 8.1%, China Energy 5.6% and India Energy 4.5%

• Bottom three key sectors during the week in US$: India Information Technology -1%, Hong Kong Consumer Discretionary -0.8% and Hong Kong Industrials -0.5%

• YTD Top three key sectors in US$: Korea Consumer Discretionary 31.1%, Korea Materials 13.1% and Taiwan Materials 11.7%

• YTD Bottom three key sectors in US$: India Information Technology -13.8%, India Financials -11.6% and China Industrials -8.9%

Demand classification sector performance

• YTD: Global Price Takers 4%, Domestic Demand 3.2%, Global Consumer 1.2% and Global Capex -4%

Headline inflation data published in the previous week • Hong Kong April CPI 4.6% [J.P. Morgan 4.4%; Consensus 4.6%] • Singapore April CPI 4.5%oya (J.P. Morgan 4.3%; Consensus 4.4%)

Table of Contents Page # Regional Summary 2

Market Performance 3

Liquidity Monitor 4

Monitoring Inflation 5

Market Drivers 6

Earnings Revisions 7,8

Cross-section Earnings Growth 9

Market Implied Growth Rates 10

Sector-Country PE Matrix 11

Valuation Distribution 12

Demand Classification 13

Currency Forecasts 14

Economic Momentum 15

Interest Rate Trend 16

Asia in Perspective 17

Asian Balance Sheets 18

Index Weightings 19

Please see Cyclical or Structural?:

Perspectives and Portfolios - Lite, Mowat et al, 13 May 2011, for our latest Asian equity

strategy

mailto:[email protected]�

Global Equity Research 30 May 2011

Global Developed Markets Strategy Dashboards

See page 24 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.

J.P. Morgan Equity Strategy Key Calls (see page 4 for details) Adrian MowatAC Global Emerging Markets and Asian Strategy [email protected] (852) 2800 - 8599 J.P.Morgan Securities (Asia Pacific ) Limited Regional Calls Thomas Lee US Equity Strategy [email protected] (1-212) 622 - 6505 J.P. Morgan Securities LLC OW Core EMU vs Periphery Mislav Matejka European Equity Strategy [email protected] (44-20) 7325 - 5242 J.P. Morgan Securities Ltd. Sector Calls Hajime Kitano Japan Equity Strategy [email protected] (81-3) 6736 - 8655 J.P. Morgan Securities Japan Co., Ltd.

UW Cyclicals vs Defensives Paul Brunker Australia Equity Strategy [email protected] (61-2) 9220 - 7841 J.P. Morgan Securities Australia Limited

Key Changes Market performance to May 27 2011

• YTD Performance: Developed World up 4.6%, outperforming EM by 4.9%.

• Regional Performance: EMU the best performing region (up 7.8% YTD), Japan the worst performing region (down 8.0%).

• Sector Performance: Healthcare (up 11.9%) and Energy (up 8.6%) are the best performing sectors YTD, while Materials (up 0.2%) and Utilities (down 0.1% YTD) are the worst.

• Style Performance: Developed World Growth up 4.4%, Value up 4.7%.

• Developed World Mid Caps have Outperformed Small & Large Caps YTD.

J.P. Morgan's revisions to 2011 growth forecasts

• Positive: Sweden 4.7% [4.6%]

• Negative: Developed markets 2.0% [2.1%], United States 2.5% [2.6%], Norway 2.5% [2.9%]

Table of Contents Page #

Market Drivers 2

Index Targets 3

Key Calls 4

Earnings Revisions 5,6

Sector Revisions 7,8

Macro Earnings Growth Driver 9

Cross-sector Earnings Growth 10

Regional Valuation 11,12

Sector-Country Valuation Matrix 13

Policy Rates Forecast 14

Yield Curve & Liquidity 15

Regional Monetary Condition Index 16

Economic Momentum 17

Currency Forecasts 18

Performance: Equities relative to Bonds 19

Performance: Sector & Industry 20,21

Balance Sheets 22

Index Weightings 23

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Bharat Petroleum Corporation (BPCL)

Neutral BPCL.BO, BPCL IN

Strong refining performance, subsidy support underpins 4Q - ALERT

Price: Rs628.15

27 May 2011

Independent Refiners

Pradeep Mirchandani, CFAAC


Neil Gupte (91-22) 6157 3592 [email protected]


∑ BPCL profits rise on refining performance: BPCL reported 4Q profits of Rs9.35bn (up 399% q/q) as the company benefitted from a strong refining performance and inventory gains in 4Q.

∑ Refining performance robust: BPCL reported quarterly GRMs of $6.94/bbl, with crude throughput rising to 5.59MMT (from 5.03MMT in 3Q). The company also reported inventory gains of Rs2.9bn this quarter.

∑ Pension provisions, forex losses lead to higher expenses: BPCL provided for an adjustment to the employee superannuation scheme, with an additional charge of ~Rs8.4bn this quarter. The company also reported a forex loss of Rs310mn in the quarter.

∑ Subsidies provide earnings support: BPCL received Rs80.8bn of subsidy support in the quarter (govt.-Rs46.6bn; upstream-Rs34.2bn). The EGoM on fuel pricing is expected to meet on June 9 to consider action on diesel/cooking fuel pricing. We would be happy with a Rs4/ltr (c.10%) hike in diesel prices as a signaling mechanism on Government’s resolve on reforms.

∑ While we expect reforms, it is likely to be a bumpy ride: While we expect reforms due to the unsustainably high subsidy loss levels in FY12E, we expect the path to remain bumpy as the government balances fiscal, inflationary and political considerations. We stay cautious on the SOE space and re-iterate our preference for the upstream sector in the SOE space.

Table 2: BPCL 4Q earnings summary

Rs mn Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Y/Y (%) Q/Q (%) Net revenues 375,703 342,325 354,348 366,859 452,720 20% 23% Raw material costs 323,440 330,287 301,556 334,243 404,321 25% 21% Employee expenses 7654.7 5412.3 4526.2 5695.8 12394.2 62% 118% Other opex 33,142 20,685 23,401 19,433 19,359 -42% 0% Operating expenses 40,797 26,097 27,927 25,128 31,754 -22% 26% EBITDA 11,466 -14,059 24,865 7,488 16,646 45% 122% Interest 2,059 2,324 2,780 2,747 3,157 53% 15% Depreciation 3,208 4,007 4,019 3,700 4,828 50% 30% Other income 5,884 3,209 5,336 3,103 5,101 -13% 64% Profit before tax 12,083 -17,181 23,402 4,144 13,762 14% 232% Total tax 5,052 0 1,980 2,270 4,410 -13% 94% Net profit 7,032 -17,181 21,422 1,874 9,352 33% 399% Source: Company reports.


Crompton Greaves Limited

Overweight CROM.BO, CRG IN

Key takeaways from analyst meet post recent developments - ALERT

Price: Rs257.80

27 May 2011

Engineering

Sumit KishoreAC



Shilpa Krishnan (65) 6882-2348 [email protected]




∑ Acquisition of US based QEI completes CG's package for power automation, as per management. Earlier Mr. Trehan (MD) had remarked that the Emotron acquisition was done to secure industrial drive technology and plug the last remaining gap in the Industrial systems product portfolio. QEI should provide SCADA and automation systems targeted towards electrical utilities and electrified transit. QEI’s revenue for 8 months ending Mar-11 was US$10mn and EBITDA of US$2.8mn (annualized revenue of US$15bn and EBITDA margin of 28%). According to management, QEI can scale up revenue in North America and Europe to US$30mn each over the next two years. In India, they expect to enter the market and garner 20% market share (~Rs5bn) over next 2-3 years.

∑ Transformer manufacturing unit in Brazil to be operational in next 3 years. Mr. Trehan clarified that they opted for local manufacturing unit in Brazil as cost of acquisition was too high. Over 5 years, CG expects revenue of ~Rs6.5bn from Latin America.

∑ Summing up growth potential from recent overseas acquisitions. According to management, new products/markets which CG would have access to post these acquisitions/ developments, would add additional Rs12-13bn revenue each to overseas and India operations. The medium term mix of India and overseas revenues will remain at 50:50. As per CG, these small sized acquisitions (which do not impact CG’s comfortable position on net-D/E materially) are key growth drivers which will enable the company to move towards its Vision 2015 (US$8bn revenue by 2014 vs. US$2.2bn currently).

∑ Jalgaon distribution will not entail too much investment. According to CG, ~750mn of investments will be required over next 3 years. Management is targeting a reduction in T&D losses to drive returns (not quantified), though MSEDCL has not set any time-bound targets. CG will get control of distribution operations ~Sep-11. Mr. Trehan said the utility model of billing customers directly will emerge as their 4th business model (after Power systems, Industry and Consumers). They will continue to bid for distribution franchisee opportunities in the country.


Genting Malaysia

Overweight GENM.KL, GENM MK

Betting on Miami? - ALERT

Price: M$3.61

27 May 2011

Gaming

May Yee SohAC


JPMorgan Securities (Malaysia) Sdn. Bhd. (18146-X)

Kenneth Fong , CFA (852) 2800-8597 [email protected]


∑ Buying land and properties in Miami, Florida for US$236MM. Genting Malaysia (GENM) has entered into a SPA with American newspaper publishing company, The McClatchy Company (MCC) (MNI US, Not Rated), to acquire freehold, water-fronting properties and land in downtown Miami comprising: 1) the Miami Herald Building, and 2) 9.3 acres of land parcels including a 3-storey vacant building for US$236MM (vs. independent valuer's land-only valuation of US$203MM-249MM). MCC will also enter into a lease agreement with GENM to continue occupying part of the premises for 24 months on a rent-free basis. GENM will fund this via internal cash and US$200MM borrowings.

∑ What is the (real) rationale? In the announcement, GENM unveiled plans for Resorts World Miami, a mixed-use development to including hotel, convention, entertainment, restaurant, retail, residential and commercial facilities. The aim is to capitalize on Miami which is one of the world’s leading tourism hubs. But a glaringly absent feature from this list is an explicit mention of gaming facilities.

∑ Not entirely a surprise but too early? The market might be surprised by this. For us, this move is not totally unexpected, although timing might seem a bit too early. Do recall that in our Time To Shine? update report in Feb-11, we highlighted that GENM could be the frontrunner if Florida’s governor Rick Scott and his state legislature decide to pursue resort casino gambling in an effort to raise state revenues. In Mar-11, Bloomberg reported that a proposal was in place to create five Las Vegas-style casinos in Florida’s largest cities - Tampa, Jacksonville, Orlando, Miami and a location in the state’s panhandle region. But in Apr-11, Bloomberg reported that State Sen. Dennis Jones, who had earlier proposed to expand gaming to five “destination resorts”, had withdrawn the proposal. Checks with our US gaming analyst Joseph Greff also suggest that chances for resort casinos in Florida are unlikely to be anytime soon. Putting all these into context, it might be too early to be excited about potentially another new gaming venture for GENM in the US. But we do applaud GENM’s early bird strategy to show commitment and visibility ahead of the eventual granting of a casino license, though timing is debatable at this juncture. As such, we are largely neutral on this deal and view this as an opportunity for GENM to lock-in a prime, water-fronting property at decent prices.

∑ A snapshot of Florida’s gaming market. Based on our quick checks, the casino scene in Florida is currently dominated by the Seminole Indian tribe casinos where product offerings are understood to be relatively patchy (Table 1). Beyond these, there are some 15-20 racetracks and racinos which also offer poker tables and slot machines.

∑ Impact to GENM. This mark’s GENM’s second venture into the US, after Resorts World New York, which is on schedule for debut in 2H11. Although GENM’s cash pile of M$3.2B as at end-Mar 11 can easily fund this acquisition, it will take on a US$200MM borrowing. Post-acquisition, GENM’s net cash pile will dip by ~30% to M$1.5B while gross gearing will rise from 0.09x to 0.14x.

∑ How will the market react? We do not expect a major re-rating on the back of this latest news. We believe the market will remain cautious until we get more clarity on the potential inclusion of gaming facilities. We stay OW.


Hindalco Industries

Neutral HALC.BO, HNDL IN

Projects again pushed back with Utkal slated for 2012 (from Early 2012 previously), capex costs increased; - ALERT

Price: Rs197.55

27 May 2011

Metals

Pinakin Parekh, CFAAC


Neha Manpuria (91-22) 6157-3589 [email protected]


∑ Negative backdrop to tomorrow’s analyst meet as projects AGAIN pushed

back: The long delayed projects have again been pushed out, and as per the HNDL's latest announcement- Utkal which was scheduled for ‘Early 2012’ as per HNDL’s Q3 presentation is now scheduled as ‘2012’ and Mahan which was ‘Oct 2011’ is now ‘End 2011’. The commissioning date in Nov 2009 for Utkal and Mahan both were July 2011. Aditya Aluminum is now slated for commissioning in ‘Early 2013'. In tomorrow’s analyst meet we would look to gauge management confidence in the latest timelines and would also look for clarity on ‘Ramp up’ time lines of the above projects and when do they start contributing to the P&L. We are intrigued by the schedule of the projects with the aluminum smelter scheduled before alumina, and for the first few months costs are likely to remain elevated at smelter.

∑ Press release gives downbeat assessment of capex costs, delays: HNDL in the press release has highlighted that ‘These greenfield projects are located at remote places, without adequate infrastructure and in an uncertain regulatory environment’. HNDL also highlights ‘While the critical long lead equipment for UAIL, Mahan and Aditya Smelters have been tied up and committed, severe inflationary pressure is being witnessed, triggered by increase in the commodity and fuel prices, for the ongoing civil an

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