En Gro Foods research analysis

7/13/2019 En Gro Foods research analysis

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Please refer to the important disclosures and analyst certification on page 2 and the inside back cover of thisdocument, or on our website www.macquarie.com.au/disclosures.

PAKISTAN

EFOODS PA Outperform

Price (at CLOSE#, 21 May 2012) Rs65.6312-month target Rs 76.90

Upside/Downside % 17.2

Valuation Rs 76.90- DCFGICS sector Food, Beverage

& Tobacco

Market cap Rsm 49,091

30-day avg turnover US$m 4.3Market cap US$m 538

Number shares on issue m 751.8

Investment fundamentals

Year end 31 Dec 2011A 2012E 2013E 2014E

Revenue m 29,859 42,259 55,713 71,235EBIT m 2,412 4,113 6,490 8,990EBIT growth % 159.3 70.5 57.8 38.5Reported profit m 891 2,004 3,393 5,092EPS rep Rs 1.19 2.66 4.51 6.77EPS rep growth % 372.8 124.3 69.3 50.1PER rep x 55.2 24.6 14.5 9.7Total DPS Rs 0.00 0.00 0.00 0.00Total div yield % 0.0 0.0 0.0 0.0EV/EBITDA x 16.3 10.2 6.6 4.9Net debt/equity % 76.2 96.6 64.4 33.7

P/BV x 6.8 5.3 3.9 2.8

Source: FactSet, Macquarie Research, May 2012

(all figures in PKR unless noted)

Analyst(s)Gary Pinge+852 3922 3557 [email protected] SecuritiesAli Ahmad Tiwana92 21 5612290-94 [email protected]

24 May 2012Macquarie Capital Securities Limited

Engro FoodsStrong growth prospects warrant anOutperform ratingInitiating with an Outperform rating and PKR76.9 target

We initiate coverage on Engro Foods Limited (Efoods) with an Outperform rating

and DCF-based TP of PKR76.9. The company has a diverse product portfolio

catering to different price segments in a growing industry, its brand equity is

increasing, its margins are increasing and its marketing expenses as a

percentage of sales are falling.

Pakistan was the fourth-largest milk producer in the world as of 2010, with annual

production of around 38bn litres, according to the United Nations Food and

Agriculture Organization. The Ultra High Temperature (UHT) market had a 12%

CAGR over 200511, but the processed milk industry still only comprises 8% of

the tradable milk market in Pakistan. Increasing modernization, rapid

urbanization, rising income levels, changing lifestyles and living standards,

convenience, and health and hygiene concerns are the key drivers for growth of

this segment.

Efoods began in CY06, and in the short time since has achieved clear leadership

in the Pakistan UHT industry, with a market share of 44% at the end of 2011. It

has launched an array of new products such as ice cream and flavoured milkwhich have significant growth potential. We expect Efoods to report strong

earnings growth in CY12 and beyond, as the company taps into the 92% loose

milk market and ventures into other high-margin products.

Product portfolio caters to different segments

Efoods operates multiple brands that cater to different price segments. Going

forward, the company looks set to continue its strategy of increasing volume

sales in the liquid dairy segment (through Dairy Omung and Tarang) while

keeping unit margins stable. Its focus in the ice cream segment is on improving

both volumes and margins. By spending heavily on brand-building, the company

has been able to make inroads in key packaged dairy products that were

previously dominated by global companies such as Nestl and Unilever.

Multiples likely to remain high

The FMCG sector in general, and Nestl and Unilever in particular, trades at high

multiples due to robust growth prospects and low free float. We do not expect

Efoods to be any different, as a solid five-year estimated earnings CAGR of 59%

and low free float (11%) should keep multiples high. We do not expect intense

competition from Nestl, as it intends to focus on the powdered milk market going

forward, while Efoods will focus on the liquid milk business.

Risks to our view

We see the following risks to our investment case:

Any levy of VAT/RGST may negatively impact both volumes and margins in

the processed milk segment of the business.

Rising competition from Nestl or the possibility of new entrants remains a

risk, given the high return prospects of the sector.


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Macquarie Research Engro Foods

24 May 2012 2

Inside

Investment summary 3

Valuation: Target price PKR76.9 6

Key segments 11

Comparison of key ratios 18

Risks 19

Appendix 1: Direct competition b/w

Nestl and Efoods 20

Appendix 2: Pervasive network 21

EFOODS PA rel Pakistan KSE 100Share performance

Source: FactSet, Macquarie Research, May 2012

(all figures in PKR unless noted)

Engro FoodsCompany profile

Engro Foods started in CY06. Its principal activity is to produce, process and

sell dairy and other food products. Efoods has established plants at Sukkur and

Sahiwal for processing and selling branded UHT milk. It has a powdered milkplant in Sukkur (with an annual capacity of 5,000 tons) and another is being built

in Sahiwal (with an annual capacity of 10,000 tons). It has an ice cream

manufacturing facility in Sahiwal, which has an annual capacity of 36m litres. It

also has a fruit juice plant, a dairy farm and more than 916 milk-collection

centres spread across the provinces of Punjab and Sindh. Efoods has attained

clear market leadership in the Pakistan UHT industry, with a share of 44% at the

end of 2011. It has launched multiple new products, including ice cream,

flavoured milk, fruit juices and milk powders that show significant potential. As

part of its growth strategy, Efoods is looking to become a diversified food

company with a complete range of products in all major segments, from

confectionary to culinary, infant foods and ready-to-cook meals. Efoods intends

to become the premier food company in Pakistan.

The group

Engro Corporation (Engro), which owns 89% of Efoods, is a publicly listed

company and its shares are quoted on all three Pakistani stock exchanges.

Engro is a diversified conglomerate with interests in fertilizer, foods, PVC resin

manufacturing, energy and petrochemicals. It has also set up joint ventures in

the chemical terminal and energy businesses. Engro has over 3,200 employees

and is one of the largest investors in Pakistan, having invested US$1.7bn over

the past five years.

Shareholding structure

Engro Foods Limited currently has 752m shares outstanding, 89% of which areheld by Engro Corp. It is listed on all the Pakistani stock exchanges. Engro

offered 27m shares to the public and institutional investors through an offer-for-

sale arrangement in CY11, at the time of listing. Efoods had earlier sold 48m

shares through a private placement to fund different projects prior to its listing.

Fig 1 Shareholding structure

Source: Company Data, Macquarie Research, FS Research, May 2012

Auditors

The companys auditors are Messrs AF Ferguson & Co, a member firm of

PricewaterhouseCoopers, generally considered among Pakistans top auditing

firms.

Individual

2%

Others

1%

Engro Corp.

89%

Financial Institution

8%

s

s


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24 May 2012 3

Ambiant UHT5%

Powders3%

"TheOpportunity"(u

nbranded)

92%

Investment summaryWe initiate coverage on Efoods with an Outperform rating and a DCF based TP of PKR76.9,

representing 17% upside potential.

We rate Efoods Outperform due to its diverse product portfolio catering to different price

segments in a growing industry, its increasing brand equity, its increasing margins and itsfalling marketing expenses as a percentage of sales.

As of 2010, Pakistan stands as the 4th largest milk producing country in the world, with

annual production of around 38bn litres, according to the United Nations Food and Agriculture

Organization (FAO). Of this amount, tradable milk (production less wastage and farmer

consumption) is around 21bn litres. According to recent TetraPak research, 64% of Pakistans

population is classified as being at the bottom of the economic income pyramid (see Figure

16), which represents 60% of total litres per day of consumption. The agriculture sector

contributes 21% of the countrys total GDP and dairy accounts for over 28% of the total

agriculture sector by value. The Ultra High Temperature (UHT) market grew at a CAGR of

12% during 200611, but the processed milk industry still comprises only 8% of the tradable

milk market. Increasing modernization, rapid urbanization, rising income levels, changing

lifestyles and living standards, convenience, and health and hygiene concerns are the keydrivers for growth in this segment.

Engro Group made the decision to move into this business, through Efoods, because it is

where Pakistan has a competitive advantage. Pakistans large milk resource base provides

ample opportunity for Efoods to add value to unprocessed milk while catering to the needs of

the growing urban economy that requires the convenience of processed and packaged milk.

By spending heavily on brand-building, the company has been able to make inroads into key

packaged dairy products that were previously dominated by global companies such as Nestl

and Unilever.

Fig 2 UHT milk in Pakistan has grown at a five-year

CAGR of 12%

Fig 3 Loose milk is the real opportunity in Pakistan

(2011)

Source: Company Data, Macquarie Research, FS Research, May 2012 Source: Company Data, Macquarie Research, FS Research, May 2012

Efoods only began in CY06, but has already achieved market leadership in the UHT industry,

with a share of 44% at the end of 2011.

It has launched multiple new products, including ice cream and flavoured milk, which have

significant growth potential. We expect Efoods to report strong earnings growth in CY12 and

beyond, as the company taps into the loose milk market, which comprises 92% of the

tradable milk market in Pakistan and ventures into other high-margin products.

In order to fund the increasing demand for liquid dairy and forays into new business ventures,Efoods plans to invest PKR8.7bn during CY12. Of that, PKR5bn will be invested to boost its

liquid dairy segment capacity and PKR2bn will be spent on a powdered milk plant which is

scheduled to come online during 1HCY13. The companys management said that PKR5bn of

this PKR8.7bn capex would be financed using bank loans, and the remainder through internal

cash flow.

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1,000

CY06 CY07 CY08 CY09 CY10 CY11

mn litres

Tradable milk: milk

production less

wastage and

farmers

consumption.

Loose milk:

Tradable milk that isnot processed

Despite double-digit

growth over the past

five years,

processed milk still

accounts for only

8% of tradable milk


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24 May 2012 4

Taking on the global heavyweights

It is not easy for a local company to capture market share from the worlds leading FMCGs,

which have been present in Pakistan for decades. However, in six short years Efoods has

managed to create wide awareness of its brands and has established significant brand equity.

Efoods has captured the leading position in the UHT milk segment in the country (where it

competes with Nestl) with a 44% market share. In the ice cream segment (which it enteredin CY09 and where it competes with Unilever) it has increased its market share to 24%, and

is in second position. It has scope to increase its share of the ice cream market, as it is

present in only 40% of the locations in Pakistan where Unilevers Walls has a presence. In

terms of business model, Nestl is Efoods only direct competitor. However, Nestls

increasing focus on powdered milk, where it is dominant, represents a growth opportunity for

Efoods in the liquid dairy business in our view.

Fig 4 Revenue comparison Fig 5 Improvement in EBITDA

Source: Company data, Macquarie Research, FS Research, May 2012 Source: Company data, Macquarie Research, May 2012

During 200611, Efoods saw a sales CAGR of 82%. In terms of sustainability, Efoods has

diversified its sales according to customers and geographical locations. Tarang, Olpers and

Omore are Efoods top selling brands; Tarang is a liquid tea whitener, Olpers is UHT milk and

Omore is ice cream, and they all have been growing strongly. The company is continuously

adding new products to the portfolio.

Are the competitors waking up?

Nestl recently revealed planned capex of PKR14bn for CY12. However, we believe this

massive investment will not pose a significant threat to Efoods, as Nestl is primarily targeting

the powdered milk segment of the market, while Efoods focus is on the liquid milk segment.

Industry volumes are seeing double-digit growth, and loose milk prices are also rising

steadily, so we do not see any reason for there to be a price war.

Engro has performed well since IPO

Efoods stock has performed exceedingly well since its debut in 3QCY11, but the price surge

has occurred mainly in CY12. We believe that this is due to better-than-expected profitability

which started from 4QCY11 that led to a surge in share price, followed by strong 1QCY12

results.

Given the rise in share price, we think it is possible that the parent company Engro will sell

some of its stake in Efoods, as it has a cash flow issue at one of its subsidiaries (Engro

Fertilizer Limited). We believe that any such offering would likely be a strategic stake sale,

though management has denied any such intention.

-

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2007 2008 2009 2010 2011

Nestle Unilever EFOODS

PKR bn

(2)

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12

2007 2008 2009 2010 2011

Nestle Unilever EFOODS

PKR bn

We believe that

Nestl will continue

to focus on the

powdered dairy

business, whileEfoods focus is on

the liquid dairy

business

Further offer for sale

by parent company

is probable given

the impressive

performance of the

stock


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24 May 2012 5

0.160.13

0.25

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EFOODS KSE

Fig 6 Share price has outperformed KSE Fig 7 Quarterly EPS has also improved

Source: Karachi Stock Exchange, Macquarie Research, FS Research,May 2012 Source: Company data, Macquarie Research, FS Research, May 2012


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24 May 2012 6

Valuation: Target price PKR76.9We have valued the stock using a Discounted Cash flow (DCF) Model. Though we have also

used other valuation techniques such as market-based PER and market-based PBR, we

prefer the DCF model because it incorporates future cash flows rather than just a one-year

view. We have used a risk free rate of 12.5%, beta of 1.0 and an equity risk premium of 6%,

leading to cost of equity of 18.5%, in our model.

Rather than forecasting cash flows for the next 5 years, we have extended explicit forecasts

to CY20, as in our model we have assumed two distinct growth periods: 1) a high growth

period and 2) a relatively stable growth period. The stock at the current price offers upside

potential of 17% to our DCF based target price of PKR76.9/share. We expect robust earnings

growth to continue, and project PAT to increase at a 5-year CAGR of 59% during CY2011-16,

which is the highest in our Foundation Securities universe in Pakistan. We initiate our

coverage with an Outperform rating.

Fig 8 Value of PKR76.9/share based on DCF model

PKR mn CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20

Net income 2,004 3,393 5,092 7,388 8,976 11,294 13,860 16,187 18,617Amortization & Depreciation 1,265 1,826 2,232 2,618 2,975 3,308 3,638 4,002 4,403Interest expense 677 821 738 589 315 113 36 - -Capex (8,700) (4,925) (4,925) (4,432) (4,011) (3,823) (4,205) (4,626) (5,088)Working capital changes (166) 274 (593) (315) (156) (156) (434) (302) (287)Free Cash Flow to Firm (4,920) 1,389 2,544 5,847 8,098 10,735 12,895 15,261 17,644Discounted cashflows (4,920) 1,191 1,866 3,613 4,177 4,640 4,657 4,652 4,538

PV of cash flows 24,414Discounted terminal value 38,488Firm value 62,901Cash 1,645Debt 6,721

Equity value 57,825

Shares outstanding 752Value per share 76.9

Source: Macquarie Research, FS Research, May 2012

Valuation based on peer comparison with FMCG sector

To look at Efoods from another valuation approach, we have compared its multiples with

those of the rest of the FMCG sector in Pakistan, though we stick to our DCF-based value for

our investment thesis. Since the forward multiple data of the different companies is not

available, we have used trailing multiples (CY11 data) to arrive at the multiple based

valuations.

We have taken the top nine companies (including Efoods) as a proxy of the entire FMCG

sector in Pakistan. Rather than taking only Nestl and Unilever (the closest competitors ofEfoods), we have used the broad FMCG sector since the aforementioned shares are trading

at extremely high premiums and are thinly traded. We have determined a peer-based value

based on the average of peer valuation measures which include EV/EBITDA, P/E, EV/Sales

and P/Book Value. The highest value of Efoods comes to PKR99.7/share based on P/Sales,

while the lowest value is PKR72.1/share based on a P/E comparison. Using the arithmetic

average of all measures, we arrive at a value of PKR90.6/share.


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24 May 2012 7

Fig 9 Valuation based on peer comparison with FMCG sector, CY2011

PKR mn Sales Net Profit Equity EV EBITDA Mkt Cap PE PB P/Sales EV/Sales EV/EBITDA

Nestl 64,824 4,668 7,303 192,497 10,076 180,401 38.64 24.70 2.78 2.97 19.10Unilever 51,876 4,094 5,416 93,725 6,697 94,387 23.05 17.43 1.82 1.81 14.00

Rafhan 18,271 2,034 5,833 26,048 3,572 26,111 12.84 4.48 1.43 1.43 7.29Colgate 14,150 1,167 4,374 33,894 2,085 34,513 29.56 7.89 2.44 2.40 16.25Shezan 4,222 141 944 1,277 277 1,160 8.25 1.23 0.27 0.30 4.62EFOODS 29,859 891 7,237 54,041 3,375 49,354 55.39 6.82 1.65 1.81 16.01UnileverFoods 4,940 617 405 18,474 904 18,473 29.95 45.57 3.74 3.74 20.44Ismail 9,087 306 2,033 8,898 1,167 4,393 14.37 2.16 0.48 0.98 7.63National 5,521 231 923 8,112 569 7,228 31.35 7.83 1.31 1.47 14.25Total 202,751 14,148 34,467 436,965 28,722 416,019 27.05 13.12 1.77 1.88 13.29

EV/EBITDA based valuation EV/Sales based valuation

Sector EV/EBITDA 13.3 Sector EV/Sales 1.9EFL CY12 EBITDA 5,378 EFL CY12 Sales 42,259EV 71,452 EV 79,341Debt 6,331 Debt 6,331Cash 352 Cash 352Equity 65,472 Equity 73,362

Target price 87.1 Target price 97.6

P/E based valuation P/B based valuation

Sector P/E 27.0 Sector P/B 13.1EFL CY12 earnings 2,004 Last book value 5,128Price 54,193 Price 67,305Target price 72.1 Target price 89.5

P/Sales based valuation Average

Sector P/Sales 1.8 EV/EBITDA 87.1

EFL CY12 Sales 42,259 EV/Sales 97.6Price 74,799 P/E 72.1Target price 99.5 P/B 89.5

P/Sales 99.5Average 89.1

Source: Company data, Macquarie Research, May 2012. Prices as of 21 May

Efoods operating in high growth consumer segment

Efoods is operating in one of the fastest growing and most lucrative segments of the

economy, as the countrys FMCG sector has witnessed very strong growth over the last five

years. The top nine FMCG companies in Pakistan have posted a 5-year average growth of

26% in revenue over this period. During the past five years, gross margins have remained in

the vicinity of 27% to 31%, highlighting that they are largely intact and stable, while sector

ROE averaged over 37%, indicating high return prospects for Efoods.

Fig 10 Sectors robust revenue growth and stable margins


0.0%

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2007 2008 2009 2010 2011

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Revenue growth (LHS) Gross margin(RHS) EBITDA margin(RHS)


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24 May 2012 8

Dairy Omung the game changer

After achieving the lead position in the premium UHT milk segment in Pakistan with a market

share of 44%, the company is now taking on the loose milk segment, which comprises 92% of

the total tradable milk market, with the recent launch of Dairy Omung. In our opinion this

product is a game changer, as it is priced 12% below the average loose milk price, which is

unheard of in the packaged milk industry. This product is meant to cater to the lower income

class, which represents the majority of Pakistani people, and to accelerate the conversion to

powdered milk from regular milk. Though margins for Dairy Omung are slightly lower than for

normal packaged milk, the company aims to see strong volume growth, which it expects will

offset the margin effect.

According to a recent TetraPak study, 64% of the countrys population is classified as being in

the bottom segment of the economic pyramid (see Figure 16), and consumes 60% of the total

liters of milk consumed per day in Pakistan. The company expects Dairy Omung to

successfully capitalise on this immense opportunity.

This lower priced product should also help the company to target rural areas of KP (Khyber

Pakhtunkhwa) and Baluchistan where, unlike in Punjab and Sindh provinces, people do not

keep cows. The companys strategy is to simply achieve cost leadership in this segment of

the market and further increase the penetration of packaged milk. Cost leadership wouldlikely prove a strong entry barrier for any new potential new entrants.

We expect the growth story to continue as the company focuses on capacity enhancement.

Efoods plans to invest PKR8.7bn during CY12, most of which (PKR5bn) would be invested in

increasing its liquid dairy products capacity, while PKR2bn would be invested in a powdered

milk plant. Efoods also plans to add 300+ milk collection centers during 2012, bringing its total

to over 1,200 by end-CY12.

Strong growth in revenues; signifying the potential

Over the last five years, Efoods revenues have registered stellar growth of 72%, primarily

because of the dairy and juices (DJ) segment. DJ revenue, where liquid dairy products have

an 88% share, grew at 5-year CAGR of 79%, and contributed 90% of the companys overall

revenue during CY11. Ice cream segment revenue has posted growth of 87% since its launch

in 2009 and its contribution to overall revenues stood at 10% during CY11. At its latest

analyst briefing, management mentioned that it is temporarily withdrawing from juices and will

be re-launching its juices with a revised strategy and rebranding. Though, it has not

mentioned a timeframe for this, we believe this will not affect company revenues as its

contribution to overall sales was just under 1% during CY11.

Fig 11 Liquid dairy holds the major chunk ofrevenue, CY11

Fig 12 Rising Efoods volumes generating robustrevenue growth


Liquid dairy

88%

Powder1%

Juices

1% Ice cream

10%

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CY06 CY08 CY10 CY12E CY14E

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Revenue Volumes

mn LitresPKR bn


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24 May 2012 9

Mounting margins expected to match industry levels by CY13

Just like any other FMCG, Efoods initially invested heavily to create a strong brand name,

establishing differentiation to penetrate the market, which was previously dominated by well-

established players like Nestl. These strategies entail a high level of investment and

marketing expenditure, which initially squeeze margins. However, we believe Efoods now has

well-established brands and has attained sufficient volumes (achieving economies of scale).Marketing expense as a percentage of sales has declined significantly from 23% in CY06 to

6% in CY11 due to rising revenue and stabilizing marketing expenditure. Consequently,

margins have started improving and are likely to match the industry margins by CY13.

Fig 13 Efoods EBITDA margin approaching that of the industry


Efoods EBITDA margin has improved significantly from 8% in CY10 to 12% in CY11, which isclose to the industrys 14%. Due to effective product mix strategies, the companys

contribution margin has also seen consistent growth over the last five years, improving to

25% in CY11 from 16% in CY07. With its focus on improving margins in the ice cream

business and forays into the high margin powdered segment, Efoods is likely to witness

further margin improvement going forward in our view.

Fig 14 Consistent decline in Marketing/Sales ratio Fig 15 Improving margins of Efoods


-4%

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CY08 CY09 CY10 CY11Sectors' EBITDA margin EFOODS' EBITDA margin

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Contribution margin Gross margin EBITDA margin


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24 May 2012 10

Product portfolio covers all market segments

Efoods operates multiple brands, such as Olpers milk, Dairy Omung, Olpers Light, Tarrka,

Omore, Olpers flavored milk, Tarang dobala, Olpers cream, and Tarang tea whitener that

cater to different price segments. With so many product variants, Efoods is targeting every

consumer segment of the economic pyramid. As a result, the company has positioned itself to

benefit from the changing demographics of Pakistan.

Fig 16 Efoods products covering the entire economic pyramid


Clear segmentation strategy helps indentify new buyers

Efoods has witnessed robust growth since it started its operations, as evidenced by its market

leadership in the packaged liquid milk business in Pakistan and it having the second highest

share in the ice cream segment. We believe this was achieved only through its clear strategy

and successful segmentation of the market. Segmentation, which is based on age,

demography and income class, etc, has also helped the company to identify and target those

segments which have mostly remained underserved or even unexplored.

This strategy can be witnessed in the launch of lower priced product Dairy Omung, which is

priced 11-12% below the average loose milk sold (in most urban cities) and is catering to the

masses (lower income class) in the country. No other dairy company has targeted this

segment before. Likewise, Efoods also launched Tarang to capitalize on the high level of teadrinking with milk in Pakistan, accounting for 32% of all milk consumption in the country,

according to a Tetra Pak study of May 2012. Moreover, Pakistan is the second largest

creamed tea market in the world (as per Nestls Annual Report). We believe this is why

Tarang has witnessed enormous growth in volumes over the last couple of years and this is

likely to continue as no other dairy manufacturer is targeting the tea market (liquid tea

whitener) in Pakistan. Efoods is also enjoying high margins on this product as it is a vegetable

oil-based product that is a cheaper source of fat. Additionally, unlike Tarang powder which is

aimed at the masses, Nestls Everday Powder, although also targeting the tea segment, is

aimed at the upper segment of the market. Efoods also launched flavored milk before Nestl.

Olwell Milk Owsum

Flavored milkOlfrute

Omore

premium dairy

ice cream

Olpers cream

Tarang Olpers milk Tarrka Omore icecream

Dairy Omung Tarang

Dobala

Ice lollies

Efoods is enjoying

considerably higher

margins on Tarang


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24 May 2012 11

Key segmentsDairy segment

The DJ segment comprises liquid dairy products and juices. Juices and powder contribute

only 2% of the segments revenue as of CY 2011, while the remainder comes from liquid

dairy products.

The DJ segments revenue grew at a 5-year CAGR of 79% during CY06-11. Tarang remained

the major reason for the healthy growth as this product contributes more than 50% of the

segments revenue. According to Efoods, it is currently the market leader in the liquid dairy

segment with 44%, followed by Nestl, which we estimate has a 35% share. With Nestls

increasing focus on powdered milk, and Efoods rising penetration of lower priced Dairy

Omung, Efoods management looks set to further raise its market share.

Fig 17 Market share rises to 44% in CY11 from 24% in CY08


Rising DJ segment margin drawing near Nestls

The dairy and juices segment is really a star segment of Efoods, as during CY11 it

contributed 161% of the companys overall bottom line. The DJ segment has shown strong

margin improvement with a CY11 EBITDA margin of 13% compared with 10% and 6% in

CY10 and CY09, respectively. Rising volumes (economies of scale), contained marketing

expenses and improving efficiencies remain the major reasons for this strong improvement in

EBITDA margin. However, it still lags that of Nestl, as the latter derives around 60% of its

revenues from the powdered segment, which is highly lucrative in term of margins.

Efoods strategy is to maintain the contribution margin and gain profitability through risingvolumes and by containing marketing expenditure. With volumes growing, the companys

increasing focus on improving the product mix, and its forays into the high margin powdered

milk segment, we expect the segments margin to improve further and match Nestls current

margin level of 15% in the next two years.

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300

350

400450

Volumes Market share


12/25


24 May 2012 12

Fig 18 Narrowing gap between Nestl and Efoodsmargins Fig 19 Mounting DJ segment EBITDA of Efoods


Margin subject to seasonal fluctuation

Milk production during a year varies with climate and season. Milk property is classified into

two seasons: 1) Flush (September to April), and 2) Lean (May to August). During the lean

period, milk production decreases to 55% of flush volumes. Thus, during this period, milk

supply is met through imported powdered milk and excess milk stored during the flush period,

most of which is converted to skimmed powdered milk and reconstituted during the lean

period. This is the reason why Efoods inventory level rises during 2Q and 3Q and dips

sharply during 4Q when the milk supply improves. During the lean period, due to the short

milk supply, milk prices generally go up (farmers have the pricing power); however, packaged

dairy product prices increase with a lag. This is the reason why margins contract during 2Q

(which coincides with the lean period). 3Q margins are now comparatively better than 2Q, asthis quarter also happens to currently coincide with the month of Ramadan when demand is

generally higher and milk production begins to improve. Higher product prices also play a part

during 3Q and 4Q, resulting in fatter margins.

Fig 20 Inventory level peaks during 2Q Fig 21 Margin varies owing to seasonal factors


12%

18%

15% 15%

-3%

6%

10%

13%

-5%

0%

5%

10%

15%

20%

CY08 CY09 CY10 CY11

Nestle's DJ segment EBITDA Margin Efoods' DJ segment EBITDA Margin

(1,000)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2008 2009 2010 2011 2012E 2013E

PKR mn

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Jun Sept Dec

PKR bnHigher

inventory level

during lean

period

0%

5%

10%

15%

20%

25%

30%

1QCY11 2QCY11 3QCY11 4QCY11

46.00

48.00

50.00

52.00

54.00

56.00

58.00

Gross Margin Milk Price

PKR/Litre


13/25


24 May 2012 13

58%

24%

21%

Unilever (Wall' s) Efoods (Omore) Unorganised b rands

Ice cream segment

Ice cream consumption in Pakistan is around 92mn liters annually, of which 78% is the

branded market and the remaining 22% unbranded. Unilevers Walls is the market leader in

this segment. This is an attractive segment as 40% of Pakistan population is under the age of

15, clearly highlighting the potential in Pakistan. Efoods ice cream segment has also shown

robust growth since its launch in 2009. Revenue has grown at a 2 year CAGR of 87%, whilevolumes have grown at a 2 year CAGR of 69%. In a short time span, the company has

achieved the number two position with market share of 24%. We believe this is a significant

achievement given it has a presence in just 40% of Walls geographical locations in Pakistan.

To increase its geographical presence, the company has planned capex of around PKR700-

800mn during CY12. Increased power outages and a prolonged winter somewhat hit this

segments growth during CY11. However, due to an expected increase in its geographical

presence during CY12 and likely improvement in load shedding as the election year

approaches, the ice cream segment should perform better during CY12.

Fig 22 Growth in Omore outpacing competitorsFig 23 Efoods the second biggest player in Pakistan,CY2011


Focus shifting towards margin improvement

During CY11, the ice cream segment posted negative EBITDA of PKR22mn, compared with

negative EBITDA of PKR236mn in CY10. This improvement is mainly attributable to rising

volumes and reduction in the marketing expense to sales ratio. In contrast to Walls, which

makes frozen dessert, Efoods is currently manufacturing ice cream. Ice cream is classified by

the amount of milk fat it has. Generally, ice creams contain at least 10% percent milk fat and

6% percent non-fat milk solids. Any similar product with lower ratios of the aforementioned

content is classified as frozen dessert. Ice creams are more complicated and expensive tomake, while frozen desserts are cheaper, easier and faster to produce. As per management,

the company plans to shift all of its current ice cream to frozen dessert; in fact this has

already started. Efoods overall strategy is to increase the EBITDA margin and sales volume.

An increase in volumes should also translate into higher growth in the bottom line as it would

dilute the per unit fixed cost (mainly depreciation and financial charges). Therefore, ice cream

segment margins are likely to improve significantly once the company shifts to frozen dessert.

Efoods is also focusing on water lollies in the ice cream segment, targeting kids and teens, a

market that has significant potential as 40% of Pakistans population is under the age of 15.

Moreover, water lollies enjoy strong margins in the ice cream segment.

-

5

10

15

20

25

30

35

40

45

50

CY09 CY10 CY11

Efoods (Omore) Unilever (Wall's)

mn litres


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24 May 2012 14

Fig 24 Unilevers Walls EBITDA margin Fig 25 Efoods ice cream EBITDA margin


Vulnerable to high seasonal fluctuation

The ice cream industry has an extremely volatile seasonal pattern with demand peaking in

the summer months and tailing off very sharply in the winter months. During the 4 winter

months (Nov-Feb) in Pakistan, average sales volume drops to 10% of sales in the peak

season. Ice cream production capacity is built to meet peak demand in summer, thus

resulting in underutilization of fixed assets during winter and consequently squeezing margins

during winter.

Fig 26 Revenue and margin tilted towards 2Q and 3Q


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2007 2008 2009 2010 2011 -65%

-15%

-1%

8%13%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

2009 2010 2011 2012E 2013E

438

933

798

383

(128)

(77) (80)

(120)

0

100

200

300

400

500

600

700

800

900

1000

1QCY11 2QCY11 3QCY11 4QCY11

(140)

(120)

(100)

(80)

(60)

(40)

(20)

-

Revenue PAT

PKR mn PKR mn


15/25


24 May 2012 15

Dairy farm; further strengthening backward integration

Efoods established its own dairy farm in 2008. The farm covers an area of 557 acres (220

acres owned, 337 acres leased) which is sufficient to house 10,000 animals. The land is also

used to grow fodder for the animals. As part of the company strategy, Efoods imported cows

for its dairy farm as opposed to using local breeds. Efoods dairy farm currently houses 3,204

animals and is producing around 27,000 liters of milk per day. The company undertook thisstrategy as the milk yield of imported cows is higher (more than 20 liters/ day) compared with

the national average of 6-8 liters per day for local breeds. At present, the dairy farm milk is

sold to Efoods at market prices and it meets around 3% of the companys total milk

requirements. The remaining 97% of milk is being supplied through 916+ milk collection

centers and independent contractors/Dhodhis.

Efoods dairy farm is running at a small loss owing to lower yields and low utilization of farm

housing capacity. Efoods is primarily focusing on increasing the number of milk collection

centers rather than increasing its herd size through animal acquisition.

Fig 27 Efoods - Increasing herd size Fig 28 Dairy farm EBITDA a tiny drag on bottom line


Venturing into international Halal foods market

Efoods has entered into the international market with the setting up of Global Business Unit

in North America in early 2011, with ENGRO acquiring Al-Safa (at a price of US$5mn), the

oldest Halal meat brand in North America. It holds a 15% and 3% market share in Canada

and the USA respectively.

The total size of global Halal food industry is US$632 billion, of which the global Halal meat

industry share is 40%, which translates to US$253 billion. The opportunity for growth in North

America is immense as only 5% of the total market is branded and the remaining 95% of themarket unbranded. Moreover, as per management, conversion from unbranded to branded

products is taking place at a very fast pace as consumers are moving towards the organized

sector (modern retail chains) and are looking for convenience. This is why the company has

targeted revenue of US$15mn in CY12, which is 3 times the CY11 revenue. Al-Safa products

are now available in Metro, Wal-Mart, Sobeys, Price Chopper, Nofrills, Maxis, FoodBasics,

Fortinos and Loblaws and the company is in discussions with other major chains to increase

its geographical presence.

Due to a regulation of State Bank of Pakistan, Al-Safa, though managed by Efoods, is

currently a subsidiary of Engro Corporation. As per SBP conditions, Efoods has to show three

years of profitability before Al-Safa can be transferred to its books. In line with an

arrangement between Efoods and Engro Corporation, we expect Al-Safa to be transferred to

Efoods books by the end of 2013. However, we have not incorporated this in our model.

-

500

1,000

1,500

2,000

2,500

3,000

3,500

2008 2009 2010 2011

animals

(11)

(103)

(15) (15)

(120)

(100)

(80)

(60)

(40)

(20)

-

2008 2009 2010 2011

PKR mn


16/25


24 May 2012 16

Fig 29 Significant growth potential in unbranded Halal meat segment


Fig 30 BCG Matrix

Source: FS Research, May 2012

Tarang Omore Tarang Dobala Dairy powder

Olper's Milk Olfrute Olper's Light Tarang Powder

Dairy Omang Olper's Cream

Olper's Flavored Milk

Tarrka

Cash Cow Dog

High Low

Market share

BusinessSegmen

tGrowth

BCG Matrix

High

Star Question mark

Low

"The Opportunity"

Branded

5%

unbranded95%


17/25


24 May 2012 17

Fig 31 SWOT Analysis


1) Strong and well-established brand

2) Experienced sponsor

3) Proactive management

4) Strong distribution network

1) Huge potential in liquid dairy 1) Competing with world class companies

2) Powdered segment

3) Significant growth potential in North

American meat market

2) Risk of price war in ice cream as Wall's

is enjoying higher economies of scale

3) Nestle's huge investment in powdered

segment could prove to be an entry

barrier

4) Due to high return prospects, other

players may try to enter this segment

2) Needs significant investment in

research and development of products,

unlike Nestle which mainly relies on

parent company for research (parent

company product portfolio)

3) Little experience in powdered

segment, which company plans to enter

by 2013

1) Little experience in FMCG sector, as

Nestle has been present in this sector for

the last three decades

SWOT Analysis

Strengths Weaknesses

ThreatsOpportunities


18/25


24 May 2012 18

Comparison of key ratios

Fig 32 ROA Fig 33 ROE


Fig 34 Interest coverage ratio Fig 35 Operating profit


Fig 36 ROCE Fig 37 Gross margin


-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

CY09 CY10 CY11 CY12E CY13E CY14E CY15E

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

CY09A CY10A CY11A CY12E CY13E CY14E CY15E

-2

0

2

4

6

8

10

12

14

16

CY09A CY10A CY11A CY12E CY13E CY14E CY15E

(X)

(2)

-

2

4

6

8

10

12

14

CY08A CY09A CY10A CY11A CY12E CY13E CY14E CY15E

PKR bn

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%



19/25


24 May 2012 19

RisksImposition of VAT/RGST:Any levy of VAT/RGST may negatively impact both volumes and

margins in the processed milk segment of the business.

High inflation and interest rates:With inflation and interest rate continuing to remain in

double digit, consumers purchasing power may erode resulting in a decline in companymargins and possibly volumes. High interest rates will also negatively impact profitability as

Efoods is highly leveraged.

High level of investment in powdered milk plant could prove an entry barrier:Unlike the

liquid dairy and ice cream segments, the powder segment is more capital intensive and it

takes more time to build a powder plant. This could prove an entry barrier for the company.

Moreover, the company has little experience in the powder segment so risk of failure is

higher.

Food safety risk:Any food safety and quality related issues could negatively impact the

brand image. However, Efoods has deployed a stringent quality assurance system and meets

all the required quality related certification, which insures that food quality meets world class

standards.Risk of potential new entrants: Due to the high return prospects of the sector there could

be the risk of potential new entrants into this segment which could dilute the companys

growth. New entrants would however have to spend heavily on a milk collection network and

brand building which is very capital intensive.

Competition from Nestl: Though Nestl currently focuses more on the powdered milk

segment (where it holds a near monopoly), it could ramp up its presence in liquid dairy. The

above could result in a price war, hitting Efoods margins. However, given the

underpenetration of the processed milk industry, we believe there is ample room for both

companies to grow easily.

FTA with India:Possibility of imported products from India may intensify the competition

although we believe the risk is minimal as the huge Indian market still remains underserved.Continuous investment in research and development requires more cash:In order to

maintain market share and counter competitors, FMCG needs to continuously invest in

product branding, innovation and renovation. This approach is being successfully followed by

Efoods; however, this entails high investment. In contrast to Efoods, Nestl can launch new

products from its parent companys product portfolio, thereby requiring minimal or even no

cash.


20/25


24 May 2012 20

Appendix 1: Direct competition b/w Nestland Efoods

Fig 38 Direct competition b/w Nestl and Efoods

EFOODS Nestl

Olper's Milk Milk PakOlper's Light Nesvita

TarangDairy OmangOlper's Cream Milk Pak creamTarang Dobala

Olper's Flavored Milk Nestl Milk PakNestl's Yogurt

Tarang powder EverydayGUMP (e.g NIDO)

CerealInfant nutrition

TarrkaOlfrute Fruita VitalsNesfrutaMeggi

Water(pure life)

EFOODS Unilever

Omore WallsTea

SpreadsPersonal Care

ShampooSoap

Home careKnorr



21/25


24 May 2012 21

Appendix 2: Pervasive network

Fig 39 Pervasive network


Milk collection centers 916+

Milk vehicles 285

UHT distributors 300

Ice cream distributors 7

5000+ice cream-Direct distribution

Milk collection centers


22/25


24 May 2012 22

Engro Foods (EFOODS PA, Outperform, Target Price: Rs76.90)Interim Results 2H/11A 1H/12E 2H/12E 1H/13E Profit & Loss 2011A 2012E 2013E 2014E

Revenue m 16,416 21,130 21,130 27,857 Revenue m 29,859 42,259 55,713 71,235Gross Profit m 4,293 5,489 5,489 7,708 Gross Profit m 7,592 10,977 15,417 19,781Cost of Goods Sold m 12,123 15,641 1 5,641 20,148 Cost of Goods Sold m 22,267 31,282 40,296 51,454EBITDA m 2,075 2,689 2,689 4,158 EBITDA m 3,375 5,378 8,316 11,222Depreciation m 486 632 632 913 Depreciation m 963 1,265 1,826 2,232

Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0EBIT m 1,589 2,056 2,056 3,245 EBIT m 2,412 4,113 6,490 8,990Net Interest Income m -559 -521 -521 -632 Net Interest Income m -1,049 -1,041 -1,263 -1,136

Associates m 0 0 0 0 Associates m 0 0 0 0Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0Other Pre-Tax Income m 0 0 0 0 Other Pre-Tax Income m 0 0 0 0Pre-Tax Profit m 1,031 1,536 1,536 2,613 Pre-Tax Profit m 1,363 3,072 5,226 7,854Tax Expense m -356 -534 -534 -917 Tax Expense m -472 -1,068 -1,834 -2,762Net Profit m 675 1,002 1,002 1,696 Net Profit m 891 2,004 3,393 5,092Minority Interests m 0 0 0 0 Minority Interests m 0 0 0 0

Reported Earnings m 675 1,002 1,002 1,696 Reported Earnings m 891 2,004 3,393 5,092Adjusted Earnings m 675 1,002 1,002 1,696 Adjusted Earnings m 891 2,004 3,393 5,092

EPS (rep) 0.90 1.33 1.33 2.26 EPS (rep) 1.19 2.66 4.51 6.77EPS (adj) 0.90 1.33 1.33 2.26 EPS (adj) 1.19 2.66 4.51 6.77EPS Growth yoy (adj) % 77.8 360.4 48.5 69.3 EPS Growth (adj) % 372.2 124.6 69.3 50.1

PE (rep) x 19.0 24.6 14.5 9.7 PE (adj) x 19.0 24.6 14.5 9.7

EBITDA Margin % 12.6 12.7 12.7 14.9 Total DPS 0.00 0.00 0.00 0.00

EBIT Margin % 9.7 9.7 9.7 11.6 Total Div Yield % 0.0 0.0 0.0 0.0Earnings Split % 75.7 50.0 50.0 50.0 Weighted Average Shares m 750 752 752 752Revenue Growth % 43.8 57.2 28.7 31.8 Period End Shares m 752 752 752 752EBIT Growth % 77.5 150.1 29.4 57.8

Profit and Loss Ratios 2011A 2012E 2013E 2014E Cashflow Analysis 2011A 2012E 2013E 2014E

Revenue Growth % 42.6 41.5 31.8 27.9 EBITDA m 3,375 5,378 8,316 11,222EBITDA Growth % 105.3 59.3 54.6 34.9 Tax Paid m -472 -1,068 -1,834 -2,762EBIT Growth % 159.3 70.5 57.8 38.5 Chgs in Working Cap m -870 4 274 -593Gross Profit Margin % 25.4 26.0 27.7 27.8 Net Interest Paid m 0 0 0 0EBITDA Margin % 11.3 12.7 14.9 15.8 Other m -954 -1,549 -1,300 -1,165EBIT Margin % 8.1 9.7 11.6 12.6 Operating Cashflow m 1,080 2,765 5,456 6,702Net Profit Margin % 3.0 4.7 6.1 7.1 Acquisitions m 0 0 0 0Payout Ratio % 0.0 0.0 0.0 0.0 Capex m -3,436 -8,700 -4,925 -4,925EV/EBITDA x 6.7 10.2 6.6 4.9 Asset Sales m 36 0 0 0EV/EBIT x 9.3 13.3 8.5 6.1 Other m 64 1,294 0 0

Investing Cashflow m -3,335 -7,406 -4,925 -4,925Balance Sheet Ratios Dividend (Ordinary) m 0 0 0 0ROE % 14.4 24.3 31.0 33.5 Equity Raised m 1,264 4 0 0

ROA % 16.6 20.1 24.2 28.2 Debt Movements m 49 4,583 520 -1,238ROIC % 16.5 21.0 23.2 28.0 Other m 1,160 0 0 0Net Debt/Equity % 76.2 96.6 64.4 33.7 Financing Cashflow m 2,474 4,587 520 -1,238Interest Cover x 2.3 3.9 5.1 7.9 Price/Book x 2.3 5.3 3.9 2.8 Net Chg in Cash/Debt m 351 296 1,347 1,886Book Value per Share 9.6 12.3 16.8 23.6

Free Cashflow m -2,356 -5,935 531 1,777

Balance Sheet 2011A 2012E 2013E 2014E

Cash m 351 296 1,347 1,886 Receivables m 87 59 83 121 Inventories m 2,638 4,145 4,441 6,480 Investments m 0 0 0 0 Fixed Assets m 9,615 17,051 20,149 22,842 Intangibles m 134 134 134 134 Other Assets m 3,814 2,649 3,225 2,935 Total Assets m 16,639 24,333 29,379 34,397 Payables m 2,344 3,785 4,955 6,148 Short Term Debt m 252 300 2,500 3,200

Long Term Debt m 5,610 8,930 6,992 4,667 Provisions m 0 0 0 0 Other Liabilities m 1,196 2,073 2,295 2,652 Total Liabi li ties m 9,402 15,089 16,742 16,667 Shareholders' Funds m 6,533 8,539 11,931 17,024 Minority Interests m 0 0 0 0 Other m 704 706 706 706 Total S/H Equity m 7,237 9,245 12,637 17,730 Total Liab & S/H Funds m 16,639 24,333 29,379 34,397

All figures in PKR unless noted.Source: Company data, Macquarie Research, May 2012


23/25


24 May 2012 23

Important disclosures:

Recommendation definitions

Macquarie - Australia/New ZealandOutperform return >3% in excess of benchmark returnNeutral return within 3% of benchmark returnUnderperform return >3% below benchmark return

Benchmark return is determined by long term nominalGDP growth plus 12 month forward market dividendyield

Macquarie Asia/EuropeOutperform expected return >+10%

Neutral expected return from -10% to +10%Underperform expected return +10%Neutral expected return from -10% to +10%Underperform expected return 5% in excess of benchmark returnNeutral return within 5% of benchmark returnUnderperform return >5% below benchmark return

Macquarie - USAOutperform (Buy) return >5% in excess of Russell3000 index returnNeutral (Hold) return within 5% of Russell 3000 indexreturnUnderperform (Sell) return >5% below Russell 3000index return

Volatility index definition*

This is calculated from the volatility of historicalprice movements.

Very highhighest risk Stock should beexpected to move up or down 60100% in a year

investors should be aware this stock is highlyspeculative.

High stock should be expected to move up ordown at least 4060% in a year investors shouldbe aware this stock could be speculative.

Medium stock should be expected to move upor down at least 3040% in a year.

Lowmedium stock should be expected tomove up or down at least 2530% in a year.

Low stock should be expected to move up ordown at least 1525% in a year.* Applicable to Australian/NZ/Canada stocks only

Recommendations 12 monthsNote:Quant recommendations may differ fromFundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the followingadjustments made:

Added back: goodwill amortisation, provision forcatastrophe reserves, IFRS derivatives & hedging,IFRS impairments & IFRS interest expenseExcluded: non recurring items, asset revals, propertyrevals, appraisal value uplift, preference dividends &minority interests

EPS= adjusted net profit / efpowa*ROA= adjusted ebit / average total assetsROA Banks/Insurance= adjusted net profit /averagetotal assetsROE= adjusted net profit / average shareholders fundsGross cashflow= adjusted net profit + depreciation*equivalent fully paid ordinary weighted averagenumber of shares

All Reported numbers for Australian/NZ listed stocksare modelled under IFRS (International FinancialReporting Standards).

Recommendation proportions For quarter ending 31 March 2012

AU/NZ Asia RSA USA CA EUROutperform 53.90% 60.60% 57.50% 43.59% 66.67% 46.89% (for US coverage by MCUSA, 10.86% of stocks covered are investment banking clients)Neutral 31.56% 23.00% 32.50% 51.09% 30.00% 32.60% (for US coverage by MCUSA, 9.50% of stocks covered are investment banking clients)Underperform 14.54% 16.40% 10.00% 5.32% 3.33% 20.51% (for US coverage by MCUSA, 1.36% of stocks covered are investment banking clients)

Company Specific Disclosures:

Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

Analyst Certification:The views expressed in this research accurately reflect the personal views of the Macquarie analyst(s) and Foundation Securities analyst(s) about thesubject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specificrecommendations or views expressed by the analyst(s) in this research. The Macquarie analyst principally responsible for the preparation of thisresearch receives compensation based on overall revenues of Macquarie Group Ltd ABN 94 122 169 279 (AFSLNo. 318062) (MGL) and its relatedentities (the Macquarie Group) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.General Disclaimers:Macquarie Securities (Australia) Ltd; Macquarie Capital (Europe) Ltd; Macquarie Capital Markets Canada Ltd; Macquarie Capital Markets North AmericaLtd; Macquarie Capital (USA) Inc; Macquarie Capital Securities Ltd and its Taiwan branch; Macquarie Capital Securities (Singapore) Pte Ltd;Macquarie Securities (NZ) Ltd; Macquarie First South Securities (Pty) Limited; Macquarie Capital Securities (India) Pvt Ltd; Macquarie Capital Securities(Malaysia) Sdn Bhd; Macquarie Securities Korea Limited and Macquarie Securities (Thailand) Ltd are not authorized deposit-taking institutions for thepurposes of the Banking Act 1959 (Commonwealth of Australia), and their obligations do not represent deposits or other liabilities of Macquarie BankLimited ABN 46 008 583 542 (MBL) or MGL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any of the abovementioned entities. MGL provides a guarantee to the Monetary Authority of Singapore in respect of the obligations and liabilities of Macquarie CapitalSecurities (Singapore) Pte Ltd for up to SGD 35 million. This research has been prepared for the general use of the wholesale clients of the MacquarieGroup and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient you must not use ordisclose the information in this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. Wedo not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. MGL hasestablished and implemented a conflicts policy at group level (which may be revised and updated from time to time) (the "Conflicts Policy") pursuant toregulatory requirements (including the FSA Rules) which sets out how we must seek to identify and manage all material conflicts of interest. Nothing inthis research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. Inpreparing this research, we did not take into account your investment objectives, financial situation or particular needs. Macquarie salespeople, traders

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Australian Securities Exchange and Chi-X Australia Pty Limited. New Zealand: In New Zealand, research is issued and distributed by MacquarieSecurities (NZ) Ltd, a NZX Firm. Canada: In Canada, research is prepared, approved and distributed by Macquarie Capital Markets Canada Ltd, aparticipating organisation of the Toronto Stock Exchange, TSX Venture Exchange & Montral Exchange. Macquarie Capital Markets North America Ltd.,which is a registered broker-dealer and member of FINRA, accepts responsibility for the contents of reports issued by Macquarie Capital MarketsCanada Ltd in the United States and sent to US persons. Any person wishing to effect transactions in the securities described in the reports issued byMacquarie Capital Markets Canada Ltd should do so with Macquarie Capital Markets North America Ltd. The Research Distribution Policy of MacquarieCapital Markets Canada Ltd is to allow all clients that are entitled to have equal access to our research. United Kingdom: In the United Kingdom,


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24 May 2012 24

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Asia ResearchHead of Equity Research

John OConnell (Global Co Head) (612) 8232 7544David Rickards (Global Co Head) (612) 8237 1159

Chris Hunt (Asia Head) (852) 3922 1119

Tim Smart (Asia Deputy Head) (852) 3922 3565

Automobiles/Auto Parts

Janet Lewis (China) (852) 3922 5417

Amit Mishra (India) (9122) 6720 4084

Clive Wiggins (Japan) (813) 3512 7856

Michael Sohn (Korea) (82 2) 3705 8644

Banks and Non-Bank Financials

Ismael Pili (Asia, Hong Kong) (852) 3922 4774

Victor Wang (China) (852) 3922 1479

Suresh Ganapathy (India) (9122) 6720 4078

Nicolaos Oentung (Indonesia) (6221) 2598 8366

Alastair Macdonald (Japan) (813) 3512 7476

Chan Hwang (Korea) (822) 3705 8643

Matthew Smith (Malaysia, Singapore) (65) 6601 0981

Alex Pomento (Philippines) (632) 857 0899

Jemmy Huang (Taiwan) (8862) 2734 7530

Passakorn Linmaneechote (Thailand) (662) 694 7728

Conglomerates

Alex Pomento (Philippines) (632) 857 0899Somesh Agarwal (Singapore) (65) 6601 0840

Consumer and Gaming

Gary Pinge (Asia) (852) 3922 3557

Linda Huang (China, Hong Kong) (852) 3922 4068

Amit Mishra (India) (9122) 6720 4084

Lyall Taylor (Indonesia) (6221) 2598 8489

Toby Williams (Japan) (813) 3512 7392

HongSuk Na (Korea) (822) 3705 8678

Alex Pomento (Philippines) (632) 857 0899Somesh Agarwal (Singapore) (65) 6601 0840

Best Waiyanont (Thailand) (662) 694 7993

Emerging Leaders

Jake Lynch (China, Asia) (8621) 2412 9007

Makoto Egami (Japan) (813) 3512 7879

Industrials

Janet Lewis (Asia) (852) 3922 5417

Patrick Dai (China) (8621) 2412 9082

Saiyi He (China) (852) 3922 3585

Inderjeetsingh Bhatia (India) (9122) 6720 4087Alex Kong (Korea) (822) 3705 8551Juwon Lee (Korea) (822) 3705 8661

Sunaina Dhanuka (Malaysia) (603) 2059 8993

David Gambrill (Thailand) (662) 694 7753

Insurance

Scott Russell (Asia, China) (852) 3922 3567

Chung Jun Yun (Korea) (822) 2095 7222

Media and Internet

Jiong Shao (China, Hong Kong) (852) 3922 3566Steve Zhang (China, Hong Kong) (852) 3922 3578Nitin Mohta (India) (9122) 6720 4090Prem Jearajasingam (Malaysia) (603) 2059 8989


Oil, Gas and Petrochemicals

James Hubbard (Asia) (852) 3922 1226Jal Irani (India) (9122) 6720 4080Polina Diyachkina (Japan) (813) 3512 7886Brandon Lee (Korea) (822) 3705 8669Sunaina Dhanuka (Malaysia) (603) 2059 8993Trevor Buchinski (Thailand) (662) 694 7829

Pharmaceuticals and Healthcare

Abhishek Singhal (India) (9122) 6720 4086Eunice Bu (Korea) (822) 2095 7223

Property

Callum Bramah (Asia) (852) 3922 4731David Ng (China, Hong Kong) (852) 3922 1291Jeffrey Gao (China) (8621) 2412 9026Unmesh Sharma (India) (9122) 6720 4092Felicia Barus (Indonesia) (6221) 2598 8480Sunaina Dhanuka (Malaysia) (603) 2059 8993

Alex Pomento (Philippines) (632) 857 0899Tuck Yin Soong (Singapore) (65) 6601 0838

Corinne Jian (Taiwan) (8862) 2734 7522Patti Tomaitrichi tr (Thailand) (662) 694 7727

Resources / Metals and Mining

Andrew Dale (Asia) (852) 3922 3587Graeme Train (China) (8621) 2412 9035Matty Zhao (Hong Kong) (852) 3922 1293Pelen Ji (China, Hong Kong) (852) 3922 4741Christina Lee (Hong Kong) (852) 3922 3571Rakesh Arora (India) (9122) 6720 4093

Adam Worthington (Indonesia) (852) 3922 4626Riaz Hyder (Indonesia) (6221) 2598 8486Polina Diyachkina (Japan) (813) 3512 7886Chak Reungsinpinya (Thailand) (662) 694 7982

Technology

Jeffrey Su (Asia, Taiwan) (8862) 2734 7512Lisa Soh (China) (852) 3922 1401Nitin Mohta (India) (9122) 6720 4090Damian Thong (Japan) (813) 3512 7877

David Gibson (Japan) (813) 3512 7880George Chang (Japan) (813) 3512 7854Jeff Loff (Japan) (813) 3512 7851Daniel Kim (Korea) (822) 3705 8641Soyun Shin (Korea) (822) 3705 8659

Andrew Chang (Taiwan) (8862) 2734 7526Daniel Chang (Taiwan) (8862) 2734 7516Kylie Huang (Taiwan) (8862) 2734 7528

Telecoms

Nathan Ramler (Asia) (813) 3512 7875Lisa Soh (China, Hong Kong) (852) 3922 1401Riaz Hyder (Indonesia) (6221) 2598 8486Prem Jearajasingam(Malaysia, Singapore) (603) 2059 8989

Alex Pomento (Philippines) (632) 857 0899Joseph Quinn (Taiwan) (8862) 2734 7519

Transport & Infrastructure

Janet Lewis (Asia, Japan) (852) 3922 5417Bonnie Chan (Hong Kong) (852) 3922 3898Nicholas Cunningham (Japan) (813) 3512 6044Sunaina Dhanuka (Malaysia) (603) 2059 8993Corinne Jian (Taiwan) (8862) 2734 7522

Utilities & Renewables

Adam Worthington (Asia) (852) 3922 4626Inderjeetsingh Bhatia (India) (9122) 6720 4087Prem Jearajasingam (Malaysia) (603) 2059 8989


Commodities

Colin Hamilton (Global) (4420) 3037 4061Jim Lennon (4420) 3037 4271Duncan Hobbs (4420) 3037 4497Bonnie Liu (65) 6601 0144Graeme Train (8621) 2412 9035Rakesh Arora (9122) 6720 4093

Data Services

Josh Holcroft (852) 3922 1279

Economics

Peter Eadon-Clarke (Asia, Japan) (813) 3512 7850Richard Gibbs (Australia) (612) 8232 3935Paul Cavey (China) (852) 3922 3570Tanvee Gupta (India) (9122) 6720 3455

Quantitative / CPG

Gurvinder Brar (Global) (4420) 3037 4036Burke Lau (Asia) (852) 3922 5494Simon Rigney (Asia) (852) 3922 4719Eric Yeung (Asia) (852) 3922 4077Patrick Hansen (Japan) (813) 3512 7876

Ayumu Kuroda (Japan) (813) 3512 7569

Strategy/Country

Emil Wolter (Asia) (65) 6601 0538Peter Eadon-Clarke (Japan) (813) 3512 7850Chris Hunt (China, Hong Kong) (852) 3922 1119

Jiong Shao (China) (852) 3922 3566Rakesh Arora (India) (9122) 6720 4093Nicolaos Oentung (Indonesia) (6121) 2598 8366Michael Newman (Japan) (813) 3512 7920Chan Hwang (Korea) (822) 3705 8643Yeonzon Yeow (Malaysia) (603) 2059 8982

Alex Pomento (Philippines) (632) 857 0899Conrad Werner (Singapore) (65) 6601 0182Daniel Chang (Taiwan) (8862) 2734 7516David Gambrill (Thailand) (662) 694 7753

Find our research atMacquarie: www.macquarie.com.au/researchThomson: www.thomson.com/financialReuters: www.knowledge.reuters.comBloomberg: MAC GOFactset: http://www.factset.com/home.aspxCapitalIQ www.capitaliq.comTheMarkets.com www.themarkets.comEmail [email protected] for access

Asia SalesRegional Heads of Sales

Robin Black (Asia) (852) 3922 2074Chris Gray (ASEAN) (65) 6601 0288Peter Slater (Boston) (1 617) 598 2502Jeffrey Shiu (China & Hong Kong) (852) 3922 2061Thomas Renz (Geneva) (41) 22 818 7712

Andrew Mouat (India) (9122) 6720 4100JJ Kim (Korea) (822) 3705 8799Chris Gould (Malaysia) (603) 2059 8888Gino C Rojas (Philippines) (632) 857 0861Eric Roles (New York) (1 212) 231 2559Luke Sullivan (New York) (1 212) 231 2507Paul Colaco (New York) (1 212) 231 2496Sheila Schroeder (San Francisco) (1 415) 762 5001Miki Edelman (Taiwan) (8862) 2734 7580

Regional Heads of Sales contd

Angus Kent (Thailand) (662) 694 7601Angus Innes (UK/Europe) (44) 20 3037 4841Rob Fabbro (UK/Europe) (44) 20 3037 4865Sean Alexander (Generalist ) (852) 3922 2101

Regional Head of Distribution

Justin Crawford (Asia) (852) 3922 2065

Sales Trading

Adam Zaki (Asia) (852) 3922 2002Phil Sellaroli (Japan) (813) 3512 7837Grace Lee (Korea) (822) 3705 8601

Jonathan Seymour (Singapore) (65) 6601 0202

Sales Trading contd

Mike Keen (Europe) (44) 20 3037 4905Chris Reale (New York) (1 212) 231 2555Marc Rosa (New York) (1 212) 231 2555Stanley Dunda (Indonesia) (6221) 515 1555Kenneth Cheung (Malaysia) (603) 2059 8888Michael Santos (Philippines) (632) 857 0813Isaac Huang (Taiwan) (8862) 2734 7582Dominic Shore (Thailand) (662) 694 7707

En Gro Foods research analysis

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