Philip Morris

Erste Group Research – Company Report 05 December 2013 All prices are those current at the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors.

Erste Group Research – Company Report Philip Morris CR | Tobacco | Czech Republic 05 December 2013

Philip Morris CR

Reduce

CZK mn 2012 2013e 2014e 2015e

Net sales 12,963.0 12,124.5 11,594.7 11,930.1

EBITDA 3,492.0 2,915.2 2,588.9 2,767.4

EBIT 3,039.0 2,454.4 2,131.5 2,314.7

Net result after min. 2,440.0 1,987.1 1,725.5 1,903.7

EPS (CZK) 888.76 723.80 628.52 693.43

CEPS (CZK) 1,053.04 893.08 795.11 858.30

BVPS (CZK) 2,985.01 2,896.01 2,823.74 2,897.21

Div./share (CZK) 813.16 701.15 620.32 669.11

EV/EBITDA (x) 6.9 8.0 9.1 8.4

P/E (x) 12.0 14.9 17.1 15.5

P/CE (x) 10.2 12.0 13.5 12.5

Dividend Yield 7.6% 6.5% 5.8% 6.2%

9,000

9,500

10,000

10,500

11,000

11,500

12,00052 weeks

Philip Morris CR PX

Performance 12M 6M 3M 1M

in CZK 0.7% -2.2% -1.3% -0.5%

Share price (CZK) close as of 02/12/2013 10,760 Reuters TABK.PR Free float 22.4%

Number of shares (mn) 2.7 Bloomberg TABAK CP Shareholders Philip Morris, B.V. (77.6%)

Market capitalization (CZK mn / EUR mn) 29,540 / 1,076 Div. Ex-date 17/04/11

Enterprise value (CZK mn / EUR mn) 23,229 / 846 Target price 10,200 Homepage:www.philipmorrisinternational.com

Excise taxes threaten tobacco market

We have cut our 12M target price to CZK 10,200, from CZK 10,470, confirming our recommendation at Reduce.

Dividends remain crucial to PM CR’s stock development. We expect that a downward trend in the dividend payout will continue in the coming years. The main reasons are tax hikes, lower consumption and market share erosion.

A further increase in the excise tax in the CR and SR is scheduled for the next year, in accordance with a European Directive, while the amount of excise tax is expected to reach EUR 90 (approx. CZK 2350) per 1000 cigarettes. The tax per pack of cigarettes should increase by CZK 4 per pack.

There is likely to be a weakening of the overall tobacco market in Europe (including PM CR’s key markets) due to tax hikes and bans on smoking in public places.

We have decreased the expected share in both core markets, as the economic slowdown shifts demand towards cheaper brands, where there is a stronger competitive environment.

Analyst:

Josef Novotny +420 224 995-213 [email protected]

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Erste Group Research – Company Report 05 December 2013

Investment case 12M: We have cut our 12M target price to CZK 10,200, from CZK 10,470, while our recommendation remains Reduce. We have used a standard dividend discount model to value PM CR, as the company continues to pay out 100% of its unconsolidated net profit. PM CR stock has decreased modestly in the last year. The decline was driven mainly by weakening of the tobacco market, tax hikes and market share erosion. As we have slightly decreased our target price, we do not see any upside potential. PM CR is traded with a premium of 16% on 2014 P/E, and with a premium to the peer group on the 2015 estimate. The company has historically been traded with a significantly higher discount (more than 20%). 2014 is likely to witness declining profitability and negative pressure on the company's shares.

Valuation We have used a standard dividend discount model to value PM CR, as the company continues to pay out 100% of its unconsolidated net profit (around 95% of consolidated profit). Compared to our last report, we have decreased the RfR, as market yields dropped significantly in the region, from 3.5% to 3.0% (10Y government bonds). Beta was slightly changed to 0.5 (defensive character) for the detailed period (PM CR is a practically debt-free company) and 0.9 for the TV. For more details, see the tables below, including the sensitivity analysis.

Recommendation remains

Reduce





Source: Erste Group Research





Production estimate decrease We have slightly decreased our estimates for total production (see chart below), but the changes are not too significant. In our assumption, production will remain stable at around 30bn cigarettes pa. The main reasons are the weakening of the tobacco market, market share erosion in the CR and decreasing shipments in core markets (mainly in the CR). We estimate an overall production decrease of 3.5% to slightly more than 30bn cigarettes this year, due to decreasing shipments in the CR and lower than originally expected volume in the export segment in 2013. The company has extended its production line and increased production capacity from 30bn to 40bn cigarettes since 2010. The production capacity utilization is around 75%, which we expect to remain stable. We do not expect significant changes in the coming years. Improvement in the variability of production is more important than a production increase and will be a key factor in the competitive tobacco market environment.

Production outlook

31.7

29.6 29.9 30.3 30.3 30.4 30.431.7

30.8 30.9 30.9 30.8 30.630.8

20.0

22.0

24.0

26.0

28.0

30.0

32.0

34.0

36.0

38.0

2012 2013e 2014e 2015e 2016e 2017e 2018e

in b

n u

nit

s p

.a.

Production in bn units Old estimates Source: PM CR & Erste Group Research

We expect a further decline in market shares in both the CR and SR. While for the SR, we estimate just a mild decrease (by 2.7%), for the CR, the situation is significantly worse. Shipments in the CR went down 6.9% y/y to 6,076mn cigarettes in the first nine months of this year and shipments in the export segment decreased 4% in the same period. The tobacco market in the CR and SR will be negatively affected by a hike in excise tax again. A further increase in the excise tax in the CR and SR is scheduled for next year, in accordance with a European Directive, while the amount of excise tax is expected to reach EUR 90 (approx. CZK 2350) per 1000 cigarettes. The tax per pack of cigarettes should increase by CZK 4 per pack. The price increase, pulled by the tax hike, should adversely impact the overall tobacco market in Europe and increase the illegal and unregulated black market. Excise taxes were increased at the start of this year by CZK 2 per pack in the CR. As a result, shipments of PM CR fell 9% in the first half of this year. Operating profit decreased in the first half of this year by 23% to CZK 1,066mn and net income shrank 25% to CZK 851mn (our estimate: CZK 1,129mn) in the same period.

We expect weakening of tobacco market and market

share erosion





However, the company should increase the proportion exported to other subsidiaries of PM Int. (the segment with the lowest margin). The threat of a widening budget gap and cooling economy may lead to tax hikes (excise and VAT), lower household consumption and lower demand in the premium segment of cigarettes. We have decreased the expected share in both core markets, as the economic slowdown shifts demand towards cheaper brands, where there is a stronger competitive environment.

Shipments by country

10.19.3 9.2

8.6 8.4 8.6 8.6 8.8

3.9 3.7 3.7 3.6 3.5 3.5 3.5 3.5

13.8

15.716.8

17.6 17.8 18.1 18.1 18.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2010 2011 2012 2013e 2014e 2015e 2016e 2017e

in b

n u

nit

s p

.a.

PM shipments CR PM shipments SR Exports PM CR

Source: PM CR & Erste Group Research

Market erosion The volume of shipments to the Czech and Slovak markets is derived from total market consumption and PM CR’s market share. In our assumptions, we calculate with a long-term 0.3-0.6% annual decline in overall consumption and an approx. 0.1% annual average decrease in the core markets’ shares. We adjusted our market share estimates for both the Czech Republic and Slovakia to reflect the latest data. The Czech market share dropped 2.5% in 9M, with most of the drop witnessed in the most profitable segment. However, we saw a slightly positive development in Slovakia, where the market share rose 0.5%. We thus estimated a modest increase in the market share in 2013 to 51%. PM CR has increased retail prices this year (slightly above the tax hike), which led to the higher margins. But the higher prices caused the market share decrease in the CR. We expect that the CR and SR tobacco markets shrank in 2014 by approx. 1%, reflecting the impact of the price increase, upswing in the illegal market and public pressure against smoking.





Market share in Czech Republic and Slovakia

44.0%

46.0%

48.0%

50.0%

52.0%

54.0%

56.0%

58.0%

2008 2009 2010 2011 2012 2013e 2014e 2015e 2016e 2017e

CR SR


Persistent pressure on average revenue per pack The persistent pressure on the tobacco market in the EU, together with future tax increases, will negatively affect the average revenue per pack (excise tax increases) in 2014. We have further slightly decreased our estimates of average revenues per pack in the CR and Slovakia. The decrease is driven by higher excise taxes and the stronger competitive environment on the domestic tobacco markets. Looking at margins, they have also been negatively affected by the rising share of cheaper brands with lower margins in the home markets at the expense of the medium segment (Petra, LM). In the premium segment (Marlboro), we anticipate a slightly positive development of the market share (approx. 17.8%). The move towards cheaper brands is projected to be gradual, however. According to our assumptions, we should see a slowly growing value segment at the expense of medium segments, as retail prices should continue growing in the next five years.

Product mix outlook

52.5% 52.5% 53.4% 55.0% 55.9% 56.3% 56.9%

30.0% 29.9% 28.9% 27.2% 26.3% 25.9% 25.2%

17.5% 17.6% 17.7% 17.8% 17.8% 17.8% 17.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013e 2014e 2015e 2016e 2017e

Value Medium Premium

Combined markets (CZK & SKK)


Persistent pressure on tobacco market to negatively affect average revenue and

margin





Dividend policy Dividends remain crucial to PM CR’s stock development. We expect a downward trend in the dividend payout to continue in the coming years. PM CR is going to pay out almost 100% of its net income as a dividend. The dividend yield is therefore relatively high and we expect that it will be close to 7% in the next two years. The dividend is a critical factor for the value of the company and its stock development. We have slightly changed our dividend expectation (chart above). Generally, we expect that the dividend payout per share will fall to CZK 701 this year and decrease to below CZK 700 in 2017. The significant drop in our estimates is in 2013 and 2014, for which we lower our DPS 22.5% this year and 11% in 2014. In accordance with an EU restriction, the Ministry of Finance is preparing an increase in the excise tax. The calculation made by the MinFin shows that the tax per pack should increase by CZK 4 in 2014. In our view, PM CR will be able to partly offset this negative factor with a price increase, but part of the excise tax will fall directly on PM CR’s margin. PM is traded with a dividend yield of around 6.5%, but its historical dividend yield was significantly higher (more than 10%).

Dividend outlook

1260

868813

701620

669 655 676

837

724

737706

670

0

200

400

600

800

1000

1200

1400

2010 2011 2012 2013e 2014e 2015e 2016e 2017e

in C

ZK

Dividends per share (CZK) Old estimates

2014 EU new

excise tax


Peer group comparison

2014e 2015e 2014e 2015e 2014e 2015e 2014e 2015e 2014e 2015e

BAT 15.0 14.1 11.3 10.6 8.3 7.8 41.9% 42.1% 4.7% 5.1%

Imperial Tobacco 10.7 10.1 9.0 8.8 4.1 4.1 43.1% 43.7% 5.8% 6.0%

Japan Tobacco 14.7 13.3 9.5 9.0 3.0 2.6 31.7% 33.0% 2.8% 3.4%

JT International 12.8 12.6 8.0 7.8 4.1 3.7 15.5% 15.3% 3.9% 4.1%

Lorillard 14.5 13.1 9.3 8.7 3.2 3.4 42.9% 43.4% 4.8% 5.3%

PMI 15.2 13.9 11.0 10.3 3.8 4.1 47.0% 46.7% 4.4% 4.8%

PT Gudang 14.5 12.5 10.0 8.7 2.2 2.0 14.1% 14.6% 2.8% 3.3%

Reynolds 14.7 13.4 9.4 8.8 5.5 5.5 39.5% 41.8% 5.4% 5.8%

Swedish match 15.1 14.0 12.6 12.0 4.1 3.8 29.9% 30.3% 3.8% 4.1%

Peer group (median) 14.7 13.3 9.5 8.8 4.1 3.8 39.5% 41.8% 4.4% 4.8%

Philip Morris CR 17.1 15.5 9.1 8.4 3.8 3.7 22.3% 23.2% 6.5% 5.8%

Premium/discount 16.2% 16.2% -4.5% -4.3% -6.4% -2.6% -43.5% -44.4% 46.7% 20.8%

Source: Bloomberg & Erste Group Research

Div. yieldP/E EV/EBITDA EBITDA marginP/Bv

We expect downward trend for

dividend payout





PM CR has for a long time been traded with a discount to its main competitors. We believe that this discount is due to the lack of growth opportunities and that the current valuation reflects its position and decreasing market share in core markets. PM CR is traded with a significant discount, comparing the dividend yield with the peer group median yield. The highest dividend yield is due to the almost 100% payout ratio. The expected dividend yield for 2013 is 6.5%, significant lower than the historical dividend yield of 10.0%. According to P/E 2013, PM CR is traded with a premium of 16.2%, and we expect that this ratio will remain unchanged in 2015. However the company was historically traded with a discount (more than 15%). The EBITDA margin for 2014 is more than 22% below the peer group median and we expect a decrease in the coming years. With its price near CZK 11,000, PM CR stock is definitely expensive. We are skeptical about the future stock price development.

Change in estimates

Consolidated, IFRS 2013e 2014e 2015e

(EUR, mn) Now Before Change Now Before Change Now Before Change

Revenues 12124.5 12301.1 -1.4% 11594.7 12304.0 -5.8% 11930.1 12301.1 -3.0%

EBITDA 2915.2 3520.0 -17.2% 2588.9 3542.1 -26.9% 2767.4 3520.1 -21.4%

EBIT 2454.4 3102.3 -20.9% 2131.5 3075.2 -30.7% 2314.7 3102.1 -25.4%

Net profit 1988.1 2486.4 -20.0% 1725.5 2464.1 -30.0% 1903.7 2486.4 -23.4%

EPS 723.8 905.0 -20.0% 629 897.2 -29.9% 693.4 905.0 -23.4%

Dividends / share 701.1 808.0 -13.2% 620 795.0 -22.0% 669 808.0 -17.2%






Income Statement 2010 2011 2012 2013e 2014e 2015e(IAS, CZK mn, 31/12) 31/12/2010 31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015

Net sales 11,402.00 12,155.00 12,963.00 12,124.50 11,594.69 11,930.07

Invent. changes + capitalized costs 11,402.00 12,155.00 12,963.00 12,124.50 11,594.69 11,930.07

Total revenues 11,402.00 12,155.00 12,963.00 12,124.50 11,594.69 11,930.07

Other operating revenues 140.00 148.00 187.00 150.00 200.00 214.90

Material costs -7,105.00 -7,702.00 -8,702.00 -8,214.56 -8,012.16 -8,175.67

Personnel costs -883.00 -848.00 -821.00 -976.76 -991.65 -986.81

Other operating expenses -121.00 -137.00 -135.00 -168.00 -202.00 -215.13

EBITDA 3,433.00 3,616.00 3,492.00 2,915.18 2,588.88 2,767.36

Depreciation/amortization -458.00 -472.00 -453.00 -460.74 -457.37 -452.62

EBIT 2,975.00 3,144.00 3,039.00 2,454.45 2,131.50 2,314.74

Financial result 0.00 20.00 10.00 0.00 0.00 10.00

Extraordinary result 0.00 0.00 0.00 0.00 0.00 0.00

EBT 2,975.00 3,164.00 3,049.00 2,454.45 2,131.50 2,324.74

Income taxes -585.00 -623.00 -608.00 -466.35 -404.99 -420.00

Result from discontinued operations 0.00 0.00 0.00 0.00 0.00 0.00

Minorities and cost of hybrid capital -1.00 0.00 -1.00 -1.00 -1.00 -1.00

Net result after minorities 2,389.00 2,541.00 2,440.00 1,987.10 1,725.52 1,903.74

Balance Sheet 2010 2011 2012 2013e 2014e 2015e(IAS, CZK mn, 31/12)

Intangible assets 106.00 79.00 51.00 49.00 87.00 86.00

Tangible assets 2,752.00 2,735.00 2,897.00 2,921.24 2,927.66 2,952.25

Financial assets 5.00 7.00 5.00 6.01 6.01 6.01

Total fixed assets 2,863.00 2,821.00 2,953.00 2,976.25 3,020.67 3,044.26

Inventories 1,169.00 1,297.00 1,775.00 1,791.67 1,712.20 1,762.51

Receivables and other current assets 4,602.00 7,419.00 7,883.00 6,978.14 6,648.74 6,823.20

Other assets -9.00 9.00 5.00 5.00 5.00 5.00

Cash and cash equivalents 7,100.00 5,887.00 5,208.00 6,312.68 6,044.28 6,272.65

Total current assets 12,862.00 14,612.00 14,871.00 15,087.49 14,410.22 14,863.36

TOTAL ASSETS 15,725.00 17,433.00 17,824.00 18,063.75 17,430.89 17,907.62

Shareholders'equity 9,176.00 8,271.00 8,195.00 7,950.66 7,752.25 7,953.96

Minorities 1.00 0.00 1.00 1.00 1.00 1.00

Hybrid capital and other reserves 0.00 0.00 0.00 0.00 0.00 0.00

Pension and other LT personnel accruals 0.00 0.00 0.00 0.00 0.00 0.00

LT provisions 16.00 18.00 16.00 20.00 20.00 20.00

Interest-bearing LT debts 0.00 0.00 0.00 0.00 0.00 0.00

Other LT liabilities 1,048.00 124.00 135.00 150.00 150.00 150.00

Total long-term liabilities 1,048.00 124.00 135.00 150.00 150.00 150.00

Interest-bearing ST debts 0.00 0.00 0.00 0.00 0.00 0.00

Other ST liabilities 5,484.00 9,020.00 9,477.00 9,942.09 9,507.64 9,782.66

Total short-term liabilities 5,484.00 9,020.00 9,477.00 9,942.09 9,507.64 9,782.66

TOTAL LIAB. , EQUITY 15,725.00 17,433.00 17,824.00 18,063.75 17,430.89 17,907.62

Cash Flow Statement 2010 2011 2012 2013e 2014e 2015e(IAS,CZK mn, 31/12)

Cash flow from operating activities 4,034.00 3,556.00 2,332.00 2,513.78 2,120.31 2,397.60

Cash flow from investing activities -557.00 -512.50 -518.52 -484.98 -463.79 -477.20

Cash flow from financing activities -2,376.00 -4,363.00 -2,360.65 -2,217.45 -1,924.92 -1,692.03

CHANGE IN CASH , CASH EQU. 1,101.00 -1,213.00 -679.00 1,104.68 -268.40 228.37

Margins & Ratios 2010 2011 2012 2013e 2014e 2015eSales growth -2.5% 6.6% 6.6% -6.5% -4.4% 2.9%

EBITDA margin 30.1% 29.7% 26.9% 24.0% 22.3% 23.2%

EBIT margin 26.1% 25.9% 23.4% 20.2% 18.4% 19.4%

Net profit margin 21.0% 20.9% 18.8% 16.4% 14.9% 16.0%

ROE 26.4% 29.1% 29.6% 24.6% 22.0% 24.2%

ROCE 67.7% 89.7% 86.2% 80.4% 93.6% 102.1%

Equity ratio 58.4% 47.4% 46.0% 44.0% 44.5% 44.4%

Net debt -7,100.0 -5,887.0 -5,208.0 -6,312.7 -6,044.3 -6,272.7

Working capital 7,387.0 5,583.0 5,389.0 5,140.4 4,897.6 5,075.7

Capital employed 3,141.0 2,526.0 3,139.0 1,809.0 1,879.0 1,852.3

Inventory turnover 4.8 5.4 4.9 4.0 3.9 4.0

Source: Company data, Erste Group estimates





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Sezai Saklaroglu (Equity) +90 212 371 2533 Nilufer Sezgin (Fixed income) +90 212 371 2536 Ilknur Unsal (Equity) +90 212 371 2531

Group Institutional & Retail Sales Institutional Equity Sales Core Markets Head: Brigitte Zeitlberger-Schmid +43 (0)5 0100 83123 Cash Equity Sales Hind Al Jassani +43 (0)5 0100 83111 Werner Fuerst +43 (0)5 0100 83121 Josef Kerekes +43 (0)5 0100 83125 Cormac Lyden, CFA +43 (0)5 0100 83127 Stefan Raidl +43 (0)5 0100 83113 Simone Rentschler +49 711 810 400 5590 Derivative Sales Christian Luig +43 (0)5 0100 83181 Sabine Kircher +43 (0)5 0100 83161 Christian Klikovich +43 (0)5 0100 83162 Armin Pfingstl +43 (0)5 0100 83171 Roman Rafeiner +43 (0)5 0100 83172 Institutional Equity Sales London Declan Wooloughan +44 20 7623 4154 Institutional Equity Sales Croatia

Damir Eror (Equity) +385 72 37 28 36 Zeljka Kajkut (Equity) +385 72 37 28 11 Institutional Sales Czech Republic Head: Michal Rizek +420 224 995 537 Pavel Krabicka (Equity) +420 224 995 411 Jiri Feres (Equity) +420 224 995 554 Jiri Smehlik (Equity) +420 224 995 510 Institutional Sales Hungary Gregor Glatzer (Equity) +361 235 5144 Attila Holló (Fixed Income) +361 235-5846 Levente Nándori (Equity) +361 235 5141 Attila Preisz (Equity) +361 235 5140 Norbert Siklósi (Fixed Income) +361 235 5842 Balázs Zánkay (Equity) +361 235 5156 Institutional Equity Sales Poland Pawel Czuprynski (Equity) +4822 330 6212 Jacek Krysinski (Equity) +4822 330 6218 Lukasz Mitan (Equity) +4822 538 6265 Przemyslaw Nowosad (Equity) +4822 538 6266 Emil Onyszczuk (Equity) +4822 330 6214 Grzegorz Stepien (Equity) +4822 330 6211 Institutional Equity Sales Turkey Simin Öz Gerards (Head) +9 0212 371 2525 Murat Guneren (Equity) +9 0212 371 2521 Varol Guzel (Equity) +9 0212 371 2523 Mine Yoruk (Equity) +9 0212 371 2526 Ebru Doganay Percin (Equity) +9 0212 371 2522 Institutional Equity Sales Slovakia Head: Dusan Svitek +48 62 56 20 Andrea Slesarova (Client sales) +48 62 56 27 Saving Banks & Sales Retail Head: Thomas Schaufler +43 (0)5 0100 84225 Equity Retail Sales Head: Kurt Gerhold +43 (0)5 0100 84232 Fixed Income & Certificate Sales Head: Uwe Kolar +43 (0)5 0100 83214 Treasury Domestic Sales Head: Markus Kaller +43 (0)5 0100 84239 Corporate Sales AT Martina Kranzl +43 (0)5 0100 84147 Karin Rattay +43 (0)5 0100 84112 Markus Pistracher +43 (0)5 0100 84152 Günther Gneiss +43 (0)5 0100 84145 Jürgen Flassak, MA +43 (0)5 0100 84141 Antonius Burger-Scheidlin, MBA +43 (0)5 0100 84624 Fixed Income Institutional Desk Head G7: Thomas Almen +43 (0)5 0100 84323 Head Germany: Ingo Lusch +43 (0)5 0100 84111 Fixed Income International & High End Sales Vienna Jaromir Malak/ Zach Carvell +43 (0)5 100 84254 U. Inhofner/ P. Zagan/ C. Mitu +43 (0)5 100 84254 Fixed Income International Sales London Antony Brown +44 20 7623 4159





Philip Morris CR Rating history

04/06R

10,000

10,200

10,400

10,600

10,800

11,000

11,200

11,400

11,600

11,800

Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13

Target price 12 m fwd

Date Rating Price Target Price

05. Jan 11 Reduce 10170.00 9600.01

12. Mar 10 Sell 10030.00 8600.01

25. Jun 09 Accumulate 6170.00 7150.00

14. Oct 08 Buy 5761.00 8900.00

06. Dec 07 Hold 8161.00 8800.00

12. Jun 07 Reduce 10438.00 9655.00

Company description

PM CR is a majority owned subsidiary of Philip Morris

International producing, selling and distributing tobacco products

in the Czech and Slovak Republics. Most of the production

comprises of cigarettes, while PM CR is well positioned in all

segments low, medium and premium brands (Marlboro, L&M,

Petra, Red&White etc) and is able to export significant part of its

output to other PMI´s subsidiaries across Europe. Overall PM CR

is a market leader in both countries with more than 50% of the

respective markets.





Important Disclosures THIS DOCUMENT MAY NOT BE TAKEN, TRANSMITTED OR DISTRIBUTED INTO THE UNITED STATES, CANADA, AUSTRALIA OR JAPAN OR TO ANY U.S. PERSON OR TO ANY INDIVIDUAL OUTSIDE CANADA, AUSTRALIA OR JAPAN WHO IS A RESIDENT OF THE UNITED STATES, CANADA, AUSTRALIA OR JAPAN OR TO THE PRESS IN THESE COUNTRIES

General disclosures

All recommendations given by Erste Group Research are independent and based on the latest company, industry and general information publicly available. The best possible care and integrity is used to avoid errors and/or misstatements. No influence on the rating and/or target price is being exerted by either the covered company or other internal Erste Group departments. Each research piece is reviewed by a senior research executive or agreed with a senior analyst/deputy (4-eyed principle). Erste Group Compliance Rules state that no analyst is allowed to hold a direct ownership position in securities issued by the covered company or derivatives thereof. Analysts are not allowed to involve themselves in any paid activities with the covered companies except as disclosed otherwise. No part of their compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or views expressed by them contained in this document. Erste Group may engage in transactions with financial instruments, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Erste Group, including strategists and sales staff, may take a view that is inconsistent with that taken in this research report.

Disclosure Checklist

Company ISIN Disclosure

Philip Morris CR CS0008418869 2, 3

Disclosures of potential conflicts of interest relating to Erste Group AG, its affiliates, subsidiaries (together “Erste Group AG”) and its relevant employees with respect to the issuers, financial instruments and/or securities forming the subject of this document are valid as of the end of the month prior to publication of this document. Updating this information may take up to ten days after month end.





Description of specific disclosures

(2) Erste Group AG and/or its affiliates act(s) as market maker or liquidity provider for securities issued by the covered company.

(3) Erste Group AG and/or its affiliates have an agreement with the covered company relating to the provision of investment banking services or have received compensation during the past 12 months.

Erste Group rating definitions

Buy

Accumulate

Hold

Reduce

Sell

> +20% to target price

+10% < target price < +20%

0% < target price < +10%

-10% < target price < 0%

< -10% to target price

Our target prices are established by determining the fair value of stocks, taking into account additional fundamental factors and news of relevance for the stock price (such as M&A activities, major forthcoming share deals, positive/negative share/sector sentiment, news) and refer to 12 months from now. All recommendations are to be understood relative to our current fundamental valuation of the stock. The recommendation does not indicate any relative performance of the stock vs. a regional or sector benchmark.

Distribution of ratings

Coverage universe Inv. banking-relationship

Recommendation No. in % No. in %

Buy 47 24.6 4 20.0

Accumulate 61 31.9 7 35.0

Hold 45 23.6 6 30.0

Reduce 12 6.3 2 10.0

Sell 13 6.8 1 5.0

N.R./UND.REV./RESTR. 13 6.8 0 0.0

Total 191 100.0 20 100.0 Explanation of valuation parameters and risk assessment Unless otherwise stated in the text of the financial analysis/investment research, target prices in the publication are based on either a discounted cash flow valuation and/or comparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst's views on the likely course of investor sentiment. Whichever valuation method is used there is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company’s products. Such demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, from changes in social values. Valuations may also be affected by changes in taxation, in exchange rates and, in certain industries, in regulations. Investment in overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, political and social conditions.





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