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Emerging Markets Equity Research

02 December 2009

Emerging Equity Markets Year Ahead


Stock Ideas for 2010
Emerging Markets
Equity Research

Adrian MowatAC
(852) 2800-8599
adrian.mowat@jpmorgan.com

For a full list of authors please


refer to the sector and country
head list on the back page

% of global
consumption

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

J.P. Morgan Securities (Asia Pacific) Limited

See page 396 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Emerging Market Year Ahead - Stocks for 2010


What to own What to avoid
• Banks: China, Korea, Taiwan, Thailand, Brazil, Mexico, • Telcos: China, India, Korea, Brazil, Mexico, Central
Turkey, Russia, South Africa, MENA Europe
• Consumer Discretionary: Brazil, Mexico • Utilities
• Technology: ex-PC ODMs • Cement: China, India
• Internet & Media: China, Turkey, South Africa, Russia • Consumer Staples: India, Indonesia, Brazil, Mexico
• Transportation: especially, airlines • Consumer Discretionary: South Africa
• Other Industrials: India capex and investment cycle • Smaller sectors in country: Taiwan Insurance, Dubai
Property
• Telecom capital management: Malaysia, Taiwan
• Energy: Brazil, Russia
• Smaller sectors in country: China internet, China gas, A detailed view on our country and sector recommendations
China food inflation, Indonesian interest rate sensitive, within EM is available on Page 11. For more detail please
Abu Dhabi Real Estate, South African Platinum see country and sector pages.
Focus on sectors within countries rather than country
recommendations
97 Top Picks 48 Stocks to Avoid
See pages 109 to 287 See pages 289 to 371
Examples of top picks Examples of stocks to avoid
Code Top Picks County To PT (%) Code Stocks to avoid County To PT (%)
VAKBN TI Vakifbank Turkey 73 TII US Telmex Internacional Mexico (34)
GAZP RU Gazprom Russia 71 2498 TT HTC Corp Taiwan (31)
CTCM US CTC Media Russia 69 TMX US Telmex Mexico (26)
006400 KS Samsung SDI South Korea 67 USIM5 BZ Usiminas Brazil (23)
ASYAB TI Bank Asya Turkey 66 762 HK China Unicom Hong Kong (22)
2610 TT China Airlines Taiwan 60 2338 HK Weichai Power China (22)
LH TB Land & Houses Thailand 60 857 HK PetroChina China (21)
TOP TB Thai Oil Public Company Thailand 56 MER PM Manila Electric Co Philippines (21)
QTEL QD Qtel Qatar 55 PCU US Southern Copper United States (21)
LSRG LI LSR Russia 54 HUVR IN Hindustan Unilever India (20)
Source: J.P. Morgan. Note: To PT = Returns to analyst price target from 27 Nov 2009. Source: J.P. Morgan. Note: To PT = Returns to analyst price target from 27 Nov 2009.

The Year Ahead Process Table of contents


The goal of this document is to present our key strategy Investment strategy ............................................................ 4
themes for 2010 using most and least favored stocks from
Surprises for 2010 ............................................................26
J.P. Morgan’s team of analysts.
Rates outlook....................................................................27
Both J.P. Morgan EM equity research analysts and our
Economic outlook ............................................................32
macroeconomic team have been involved in the production
of this document. The process started with the Strategy Team Economic forecasts ..........................................................42
briefing analysts on our key themes and macroeconomic
Country strategy ...............................................................47
forecasts for 2010. Analysts then reviewed their earnings
models and presented their top picks and stocks to avoid to Sector strategy ..................................................................77
both their sector and country strategists. The sector and
Summary tables of stock ideas .........................................93
country teams then produced their list of top long and short
ideas, which were then compiled by the regional strategy Top picks........................................................................109
teams. These ideas form the core of this document.
Stocks to avoid ...............................................................289
Strategy dashboards........................................................373

2
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Higher Markets with Higher Volatility


The drivers – three steps to heaven Potential returns
1. Compression in risk premiums MSCI EM end-2010 target 1300 (+30%)
• Implied end-2010 forward P/E of 14x (J.P. Morgan
2. Economic and earnings recovery
estimate)
3. Overshoot as risk-free rates remain low for long
• Currency, earnings estimate revisions, and low riskfree
(See page 4 for details) rates provide upside.
(See page 4 for details)

Investment themes Risks are high for year-one of recovery


1. Stay high beta for now – front-loaded returns • Investor driven correction in commodity prices
2. Economic growth surprises pessimistic expectations • G3 bond volatility
3. 2010 is the year of G3 monetary stimulus – no change in • Lack of G3 policy flexibility
G3 rates in 2010
• Rapid rise in EM inflation resulting in faster tightening
4. Earnings estimate revisions drive markets
• Risk appetite fades, driving investors back into low beta
5. Focus on sectors in countries defensive markets like SA, Israel and Malaysia
6. Policy normalization outside G3 – source of volatility • Dubai World debt moratorium impacts ability to raise EM
rather than a cap on returns corporate debt
7. Inflation ends the party in emerging markets before (For more risks please see page 12)
developed markets. Enjoy the party until inflation exceeds
central bank target zone
8. M&A
9. BRIC consumers
(See page 4)

Key issues for 2010 – briefing notes Market performance


1. A longer perspective on asset performance Figure 1: MSCI EM and MSCI World

2. The policy risk to the asset inflation trade 1400 MSCI EM MSCI World
1200
3. And now the monetary stimulus
1000
4. The rolling recovery trade of 2009: and settling the 800
decoupling debate
600
5. Potential bond market volatility 400
6. Now is the time for earnings estimate revisions 200
0
7. Falling inflation with growth
88 90 92 94 96 98 00 02 04 06 08
8. Fiscal outlook
Source: Bloomberg. Chart rebased to 100 in 1988
9. South Africa - 2010 Soccer World Cup Winners
(See page 15)

3
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Emerging Market Equity Strategy


For now we remain positive on EM equities. The factors Figure 3: Beta versus PE
supporting the powerful recovery from the October 2008 18.0 India
lows remain in place. These conditions are: compression Taiw an
in excessive risk premiums, economic and earnings 16.0 Malay sia China Poland
Phil
recovery trade, and overshoot as risk-free rates remain 14.0 Mex ico Indonesia
low. MSCI EM could retest its all-time high. Brazil
12.0 Hungary
Our end-2010 index target for MSCI EM is 1300, Thailand S Africa Czech
10.0 Korea
+30%. This implies an end-2010 forward PE of 14. The Turkey Russia
return is 10% in excess of consensus earnings forecasts. 8.0
In our view, the difference will be made up of currency 0.4 0.6 0.8 1.0 1.2 1.4
appreciation and earnings revisions.
Source: Bloomberg. Note: Two year weekly beta for MSCI indices vs. MSCI EM. Forward
PE on y-axis and Beta on the x-axis.
The low for EM was 454 on 27 October 2008. The index
has more than doubled since then. To retest its high the
Figure 4: EM consumption exceeded US consumption in 2008!
index would need to increase by 38%. The low in 40
developed markets was on 9 March. The MSCI World
36
index has rallied 70% from its 2009 low. EM
32
Stay high beta, for now – front-loaded returns 28
Early 2010 conditions should continue to be very US
24
favourable for EM equities in our view, with strong
growth, positive earnings estimate revisions, acceptable 20
inflation, and ongoing rally in credit markets. The stage 16
three of the bull market is an overshoot in valuations as 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
risk-free rates stay low for long. Source: J.P. Morgan economics. Note: Chart shows EM and US consumption as % of
global consumption.
A less favourable base effect for inflation plus a potential
slowing in earnings estimate revisions may make 2H10 A quick review
more challenging. P/Es could decline in this phase. EM survived ‘the big ugly experiment’: a combination of
a severe financial shock, the deepest developed consumer
Figure 2: Bungee jump or slingshot? recession since WWII, the lagged impact of anti-inflation
310 Gulf War policies, and a sharp drop in commodity prices. The main
Mex ican crisis
280 Asian crisis conclusion of the experiment is that the domestic
250 Tech bubble inflation/monetary cycles were more dominant than
Credit crisis
220 external demand. This economic decoupling during the
190 stress test supports a higher relative valuation of EM
160 equities versus developed world equities. But global
130 capital flows do link EM monetary policy to record low
100 G3 rates resulting in the risk of a boom bust cycle and
70 asset bubbles. Policymakers in EM are moving to restrict
-24m -18m -12m -6m Trough +6m +12m +18m +24m capital flows and non-conventional measures to control
asset prices. A combination of higher economic and asset
Source: Datastream, 27 October 2009. Note: Chart shows the performance of MSCI EM volatility, with policy risk, may be negative for equity
US$ index two years pre and post crisis lows. Note: MSCI EM (USD) is indexed to 100 at
the trough of each crisis. valuations.

4
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Risks are high for the first year of the global recovery although non-commodity sectors have also done well.
The bulk of the risks are global rather than EM centric. Within EM, the previously important markets of Korea,
Please see page 12 for risks. The three key risks or Malaysia, Mexico, Taiwan and South Africa
sources of volatility are: underperformed. This is consistent with the
underperformance of nominal GDP in these countries.
• G3 bond volatility BRIC nominal GDP is 60% of EM nominal GDP. Will
non-BRIC markets drop off the radar screen? Yes, unless
• Commodity volatility
they offer a premium growth rate or acceleration in trend
• Policy risks growth. There are strong arguments in favour of
Indonesia joining the BRIC grouping. But the country
Post the synchronized global recession and the credit
needs to demonstrate to long-term direct investors that
crunch, EM has earned a lower risk premium. Emerging
there is sufficient effective protection of their legal
economies led the global recovery. Decoupling proved?
interest in order to be permanently promoted to the BRIC
Decoupling in a global economy and capital markets was
league.
literally impossible. But EMs did prove they can generate
their own recovery rather than rely on the developed
An overweight BRIC consumer is consensus. This has
world consumer. EM consumption exceeded US
been a good trade with strong relative returns from BRIC
consumption in 2008.
financials and consumer discretionary. The valuations
relative to history and market are high; Brazil, Brazil
An overweight in EM equities vs DM is consensus; as
Materials, Brazil Energy, Brazil Financials, India
is an OW in BRICs vs EM. Both have been successful
Financials, Mexico Materials, SA Materials and
strategies. However, EM was led by sectors driven by
Indonesia are more than one standard deviation above
global growth, not local; note the performance of our
their long-term average relative to history and EM.
demand classification indices, global consumer +97% ,
However, the premium in these sectors is modest
global price taker +95%, ahead of domestic consumption
compared to the actual returns achieved (for more see
+58% (these indices are published in our weekly
page 9).
dashboards).
Figure 5: Performance of BRIC vs MSCI EM
Bungee jump or slingshot? EM equities have recovered 160
115% from their 2008 lows. EMBI spreads have
tightened from a peak of 865bp to 310bp. But the three-
year CAGR for EM equities is just 4% and EMBI 130
spreads averaged 195bp in 06/07.
100
The catalyst for the rally from March was the evidence of
stabilization in developed world end-demand. Cyclical
sectors outperformed: technology, materials, consumer 70
discretionary and energy. Jan-02 Jan-04 Jan-06 Jan-08
Source: Datastream, 24 November 2009.
Extreme volatility in equities, currencies, commodities
and bonds makes assessment of fair value very difficult.
Many investors struggled to join the rally this year as
they anchored on the lows and were reluctant to buy after
sharp gains. To provide a longer perspective please see
the briefing note, a longer perspective on asset
performance. This reviews three, five and eight year
CAGR.

The five-year CAGR for MSCI BRIC is 22%, ahead of


MSCI EM CAGR of 14% and significantly ahead of
MSCI World’s +1%. The material and energy bull
market partly explains the outperformance of BRIC,

5
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Economic growth surprises low expectations Figure 6: Tracking inventory - Global IP and final sales proxy
In our view, the consensus is skeptical of sustainable 115

growth. This supports a cyclical bias even with the ISM 110
J.P.Morgan final
above 50. Our base case is: 105 sales proxy
100
• No change in G3 interest rates in 2010 Industrial
95
• Above-consensus US and European 2010 GDP production
growth of 3.3% and 2.6% respectively 90
85
The three drivers of economic growth in 2010 are:
00 01 02 03 04 05 06 07 08 09 10
• Industrial production/inventory cycle
Source: J.P. Morgan, September 2009.
• Exports
Figure 7: Sequential recovery in exports growth (% oya)
• Delayed monetary stimulus 40
The relationship between final sales and production 30
indicates substantial de-stocking in the past three 20
10 China
quarters. As end demand slowly recovers, production
needs to increase faster due to low inventories. The turn 0
in IP is typically durable and sustained for 13 months on -10 Korea
average. This is a normal feature of a recovery. -20
-30
Taiwan
Global growth of 3.5% in 2010 should support a recovery -40
in external demand for most economies. Sequential -50
trends are consistent with 2010 oya% export growth. Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09
Source: J.P. Morgan, October 2009.
2010 is the year of G3 monetary stimulus
Three conditions are required for a monetary stimulus: Figure 8: Emerging markets can rise with interest rates (%)
available credit; low market rates; and willing borrowers. 1500 10
MSCI EM Index (LHS)
If credit markets continue to rally and J.P. Morgan
1200 Fed Funds target rate (RHS) 8
economic growth numbers are correct, these conditions
will be met in 2010. Counter-intuitively exit strategies 900 6
signal that the monetary stimulus is building. Note, this is
primarily a developed market event. China monetary 600 4
stimulus fed through rapidly. Current account deficit
300 2
economies will benefit from this delayed stimulus into
2010, i.e., India, Turkey, South Africa, etc. (See page 17 0 0
for more on the delayed monetary stimulus.) 88 90 92 94 96 98 00 02 04 06 08
Source: Datastream, MSCI, IBES, J.P. Morgan economics
Earnings estimate revisions will now drive stocks
Stocks are driven primarily by earnings estimate Focus on sectors in countries
revisions rather than a compression in risk premiums. The rolling country-by-country growth recovery trade is
This argues for a cyclical bias. Potentially ‘scarred and done. Economic decoupling occurred with the global
overworked’ analysts are even slower to upgrade. In this recovery led by India, Indonesia and China. The balance
phase, markets trade expensive. Please see Steve Malin’s of EM Asia, Brazil, Russia and Turkey recovered a
briefing on page 19 for more on the power of earnings quarter before DM (see page 18 for more on the rolling
estimate revisions after the economic recovery. recovery). Country asset allocation needed to lead the
economic recovery by a quarter. Thus country relative
performance changed during the year. Sector strategy
was more stable with a bias towards cycles.

6
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Now that the rolling recovery trade is done, the leverage. We are also bullish the S+P 500, and the
confidence in country calls is lower. Focus on key sectors correlation with the Mexbol is very high. The market is
within countries that offer: (1) High probability of trading below its 5-year average multiple, and earnings
positive EPS revisions (2) High secular and/or defensive momentum is positive (Q3 index EPS +20% oya).
growth
Figure 9: Turkey – Structurally low policy rates and inflation
50
The Secular and Cyclical Trade
Overweight Turkey: We believe that Turkey could 40 CPI Policy Rate
outperform EM and CEEMEA as structurally lower
inflation and interest rates result in higher trend; India in 30
the mid-90s is good example of this trend. The IMF 20
standby program, if signed, should ease Turkey’s
reliance on external financing and reduce the crowding 10
out of the private sector. These improved fundamentals
0
are neither reflected in valuations nor relative
03 04 05 06 07 08 09
performance. Turkey’s forward PE of 9 is at a significant
discount to MSCI EM's 13. The index has marginally Source: J.P. Morgan economics, October 2009.

underperformed MSCI EM year to date. Since mid-


Figure 10: Mexico - second highest GDP swing (11pt) in 2010
March 2009, the local currency index is in line with 15%
MSCI EM.
12%

Higher trend growth and lower interest rates are positive 9%


for Turkish banks, a large part of the benchmark. We 6%
forecast an acceleration of earnings growth from 10-20% 3%
in 2010 to 20-30% in 2011.
0%

South Africa

India
Russia

Chile

Korea

China
Brazil
Mexico

Taiwan
Turkey

Deterioration in global credit markets and/or delays in


negotiating a deal with the IMF are a threat. J.P. Morgan
forecasts a 2010 current account deficit of 2% of GDP.
Source: J.P. Morgan economics. Note: Chart shows the difference between 2009 and
Overweight Mexico 2010 GDP growth forecast.
Catalysts are clear. A robust 3.3% - around 100bps above
consensus - US economic recovery, led by manufacturing Figure 11: Secular decline in interest rates
(+4.5% in 2010), which is the key linkage between the Turkey
Brazil
US and Mexico. IP is 30% of Mexico GDP, and 80% of Mex ico
exports go to the US. Mexico’s historical beta to global Philippines
Indonesia
GDP recovery is over 2.0x. This drives a forecast 11 India
point Mexico GDP swing into next year, the second Thailand
highest globally and arguably with upside risks. The Korea
South Africa
currency also offers short-term upside, as a clear EM Taiw an
underperformer YTD, and with oil prices (1/3 fiscal Malay sia
China
revenue) set to remain high. In this context, fiscal and Russia
rating concerns are overdone and likely well-priced short
term, though remain real long term, as fiscal -3 -1 2 5 7 10
revenue/GDP is low (22% GDP), and poorly structured Source: J.P. Morgan economics. Difference between 5 year average policy rate (2004-08)
(off falling oil production). and Average forecasted policy rate in 2009-10, ranked by greatest difference.

The market is under-owned by foreign investors; local


pension funds only have 8% in domestic equities, and
EM investors are OW, but focused on the defensive 2/3
of the market. We focus on the 1/3 cyclical portion of the
market for cheaper asset values, and stronger earnings

7
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Policy normalization outside G3 today’s situation unusual. At the simplest level


Not all countries will be subject to the same companies are returning capital to investors either via
disinflationary forces. A number of smaller economies, higher dividends or through capital reduction. EM
quasi peripheral to the G3, have suffered much less companies continue to expand regionally and globally.
during the recession, and are thus likely to normalize Private equity funds are far more developed and
monetary policy earlier. Israel and Australia have started disciplined compared to the past. Most of the large
increasing policy rates and are set to continue. Other private equity funds will continue to lead deals. This is
countries will likely follow suit in coming months— not a one-way trend, with EM companies now acquiring
Norway, Czech, Korea, and Brazil—by our forecast, an developed-world businesses.
earlier start of the rate normalization cycle should benefit
their currencies and hurt their bond markets. The impact Figure 12: MSCI EM PE and US interest rates (%)
on their equity markets is less obvious but will likely be a 40 MSCI EM Fw d PE (LHS) 10
small negative. 35
8
30 Fed Funds target rate (RHS)
Inflation ends the party in EM before DM 6
25
The inflation cycle could be desynchronized. EM
inflation models are unlikely to be accurate due to the 20 4
short history of post pegged exchange rate inflation. Asia 15
2
is more at risk due to limited currency appreciation 10
relative to LATAM and EMEA. All one can do is 5 0
monitor the data. The table below is published in both 88 90 92 94 96 98 00 02 04 06 08
Perspectives and Portfolios and Key Trades and Risks Source: Datastream, MSCI, IBES, J.P. Morgan economics
every two weeks. The table monitors inflation relative to
central bank target zones. Inflation today is benign but Figure 13: EM average policy rates (%)
base effects in 2010 will be less favorable. The message 25
from the previous inflation cycle was to sell equities 20
when the inflation rate breached the central banks’ target
15
zone. Nominal
10
Conditions supportive for M&A activity 5 Real
Low funding costs and generally healthy balance sheets
0
provide supportive financial conditions for corporate
activity. Improvement in the global economic situation is -5
increasing the confidence of business and financial 98 99 00 01 02 03 04 05 06 07 08 09
investors. The diversity of potential participants makes Source: J.P. Morgan economics, September 2009.

8
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Table 1: Monetary policy and inflation


Inflation Target Change in CPI in CPI Forecast 2009 J.P. Morgan
% (Central Bank) Current CPI Food CPI last 12 months end (J.P. Morgan) forecast 2009

US core PPI na 1.8 na (2.2) 2.7 On Hold


US core CPI na 1.5 na (1.0) 1.7 On Hold
US Unit Labor Costs na (1.4) na 0.0 na On Hold

Inflation Data
Japan CPI - -2.2 -0.5 -4.3 -1.3 On Hold
Malaysia CPI 2.5 - 3.0 -2.0 -19.5 -10.2 0.2 On Hold
Taiwan CPI 2.0 -0.9 1.4 -4.0 -0.8 On Hold
China CPI 4.8 -0.8 1.5 -5.4 -0.6 On Hold
Czech CPI 2.0-4.0 -0.3 -5.8 -6.7 1.2 On Hold
Chile CPI 3.0 (±1.0) 0.2 1.0 -8.6 1.5 On Hold
Thailand CPI 0-3.5 0.4 1.6 -3.5 -0.9 On Hold
Philippines CPI 3.0-5.0 0.7 2.2 -11.1 2.0 On Hold
India Wholesale Price Index 5.5 1.5 15.7 -9.3 8.2 On Hold
South Korea CPI 2.5 - 3.5 2.0 4.6 -2.8 2.8 On Hold
Indonesia CPI 4.0-6.0 2.6 4.8 -9.2 4.7 On Hold
Colombia CPI 3.5 - 4.5 3.2 2.2 -4.4 4.5 On Hold
Poland CPI 1.5 - 3.5 3.4 4.5 -1.1 3.5 On Hold
Israel CPI 1.0 - 3.0 3.8 1.6 0.5 na On Hold
Brazil CPI 4.5 (±2) 4.3 3.5 -1.9 5.1 On Hold
Mexico CPI 3 (±1) 4.9 7.0 -0.6 5.4 On Hold
Hungary CPI 2.0-4.0 4.9 3.0 -0.8 4.2 Easing
Turkey CPI 7.5(±2) 5.1 5.8 -6.9 6.1 Easing
South Africa CPI 3.0 - 6.0 6.1 4.9 -7.0 7.2 On Hold
Russia CPI 10.5 15.1 8.4 6.6 12.0 On Hold
Venezuela CPI 19.5 28.9 na -7.1 na Accommodating
Source: Bloomberg, J.P. Morgan Economics. 4 November 2009. Inflation targets are extracted from ‘EM Inflation: Trouble Beyond the Headlines’, Hensley et al, 7 July 2008.

Check the valuation signal


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

9
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Table 2: Hindsight sector valuations


Sector 12m Forward PE 12m Forward PE relative to EM
10yr 10yr
Current Average +1sd -1sd Current Average +1sd -1sd
Brazil Financials 13.2 9.4 11.4 7.4 1.0 0.9 1.0 0.7
Russia Energy 6.9 7.2 9.6 4.8 0.5 0.7 0.9 0.5
Brazil Energy 13.0 6.8 9.7 4.0 1.0 0.6 0.8 0.4
Russia 8.7 8.1 10.5 5.8 0.7 0.7 0.9 0.5
Brazil 13.6 7.8 10.1 5.5 1.0 0.7 0.8 0.6
Turkey Financials 8.1 9.5 13.2 5.8 0.6 0.9 1.2 0.5
South Africa Energy 9.6 8.3 10.1 6.5 0.7 0.7 0.9 0.5
Korea Financials 10.8 8.0 10.1 5.9 0.8 0.7 0.9 0.6
Mexico Materials 16.5 8.2 10.6 5.7 1.3 0.7 1.0 0.5
Korea Industrials 9.5 8.4 11.6 5.2 0.7 0.8 1.0 0.5
South Africa Materials 18.9 12.5 15.7 9.2 1.5 1.1 1.4 0.9
Mexico Telecommunication Services 12.7 12.4 14.8 10.1 1.0 1.1 1.3 1.0
India Energy 13.8 10.5 14.5 6.4 1.1 1.0 1.3 0.6
Turkey 9.0 9.6 12.4 6.9 0.7 0.9 1.1 0.7
Korea Consumer Staples 13.5 11.2 15.1 7.3 1.0 1.0 1.4 0.7
Mexico 14.6 12.0 13.7 10.3 1.1 1.1 1.2 1.0
India Financials 21.2 12.4 18.9 5.8 1.6 1.1 1.6 0.6
Brazil Materials 15.0 8.0 10.0 6.0 1.2 0.7 0.9 0.6
South Africa 11.9 10.0 11.4 8.6 0.9 0.9 1.0 0.8
Korea 10.0 9.1 11.0 7.2 0.8 0.8 1.0 0.7
India 17.7 14.1 17.5 10.8 1.4 1.3 1.5 1.1
Poland 15.1 12.9 16.0 9.8 1.2 1.2 1.4 1.0
Korea Information Technology 10.2 11.2 16.2 6.2 0.8 1.0 1.6 0.5
Israel Health Care 12.4 21.5 32.5 10.6 1.0 1.9 3.0 0.9
Mexico Consumer Staples 18.4 15.0 17.5 12.4 1.4 1.4 1.6 1.1
Korea Consumer Discretionary 8.7 7.9 10.0 5.9 0.7 0.7 0.9 0.6
India Information Technology 20.1 25.3 48.5 2.2 1.5 2.2 3.7 0.7
South Africa Consumer Discretionary 12.0 10.3 12.4 8.1 0.9 0.9 1.1 0.8
South Africa Telecommunication Services 10.4 14.7 25.7 3.7 0.8 1.3 2.0 0.6
China Telecommunication Services* 12.5 15.8 23.6 8.1 1.0 1.4 2.0 0.7
South Africa Financials 9.9 8.3 9.8 6.7 0.8 0.8 0.9 0.6
China Financials 14.4 14.1 19.0 9.3 1.1 1.3 1.7 0.9
China 14.8 13.5 18.2 8.7 1.1 1.2 1.6 0.9
Taiwan Information Technology 15.7 18.2 30.7 5.6 1.2 1.7 3.0 0.4
Hungary 10.9 9.9 11.9 8.0 0.8 0.9 1.0 0.8
Israel 11.7 15.9 19.6 12.1 0.9 1.5 1.8 1.1
Chile 15.2 15.6 17.7 13.4 1.2 1.4 1.6 1.2
Korea Materials 9.7 7.3 9.6 5.0 0.7 0.7 0.8 0.5
Indonesia 14.0 9.1 12.3 6.0 1.1 0.8 1.0 0.6
Taiwan 16.8 14.9 19.1 10.7 1.3 1.4 1.8 1.0
Thailand 10.9 13.9 34.6 -6.9 0.8 1.2 2.4 0.0
China Industrials 18.5 13.5 17.3 9.6 1.4 1.2 1.5 1.0
Taiwan Materials 17.1 11.6 14.7 8.5 1.3 1.1 1.3 0.8
Malaysia 15.6 14.4 16.4 12.4 1.2 1.3 1.5 1.2
Taiwan Financials 20.2 14.5 17.1 11.9 1.6 1.3 1.6 1.1
China Energy* 12.5 9.4 11.9 6.9 1.0 0.8 1.1 0.6
EM 13.0 11.1 13.0 9.1 - - - -
Philippines 14.9 14.0 16.3 11.7 1.1 1.3 1.5 1.1
Source: IBES, Datastream. Red (dark grey) denotes expensive ie more than 1sd, Green (light grey) denotes at or less than 10 year average. Note: * China Energy and China Telecom averages are
from June 2000.

10
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Focus on sectors within countries rather than country recommendations


The table below provides a level summary of our views on sectors within countries. Financials are 25%, Materials is 15%
and Energy is 16% of EM. All recommendations are relative to EM. The Industrials sector consists of an eclectic group of
stocks. We do not rate the sector. We are overweight early cyclicals and transportation sub-sectors.

Table 3: Key country and sector recommendations


PE EPS Growth DY ROE
US$ Return (%) 09E 10E 11E 09E 10E (%) 10E 03-08
Country/Sector Wts Reco 1 yr 3 yr 5 yr X X X (%) (%) CAGR 05 10E % 10E% Avg
EM 100 -- 106 22 119 15.8 12.7 10.8 (4) 24 7.2 2.2 13.0 15.6
Brazil 16.8 N 155 97 371 16.6 13.3 11.4 (11) 25 4.8 2.7 14.6 18.6
Brazil Materials 4.8 N 174 124 393 20.8 14.1 11.5 (40) 48 2.9 2.4 11.9 28.2
Brazil Energy 4.6 OW 199 150 581 15.1 13.0 12.3 (22) 16 3.2 2.3 37.3 27.1
Brazil Financials 3.7 OW 156 72 490 15.9 12.9 10.6 6 24 5.8 2.3 15.7 21.9
China 18.3 UW 103 53 191 17.5 14.3 12.2 9 22 13.5 2.2 14.2 15.5
China Financials 7.2 OW 120 67 270 17.4 13.6 11.1 18 29 29.3 2.4 15.6 10.8
China Energy 3.2 UW 131 50 201 15.4 13.1 11.6 (11) 17 6.6 2.7 14.7 21.0
China Telecommunication 2.4 UW 20 20 197 12.3 12.4 11.8 (14) (0) 14.8 3.5 14.9 18.1
China Industrials 1.6 n/a 97 37 86 22.2 17.1 13.9 56 29 3.9 1.4 8.0 11.7
Hungary 0.6 N 109 (6) 43 12.5 10.9 8.6 (41) 15 (1.5) 1.8 11.1 22.3
India 7.5 OW 124 25 184 20.7 17.0 13.9 3 22 14.0 1.0 15.0 20.9
India Financials 1.9 OW 145 30 219 25.1 20.7 17.1 (2) 21 13.3 0.9 11.3 15.9
India Energy 1.3 OW 105 60 367 17.4 12.7 11.4 7 37 18.3 1.1 15.6 20.7
India IT 1.2 N 114 (1) 117 21.5 18.5 15.6 2 16 17.9 1.3 27.0 30.0
Indonesia 1.8 N 209 57 207 15.8 14.5 12.2 7 10 14.2 2.7 23.7 24.8
Israel 2.7 UW 57 47 94 15.3 11.8 10.1 19 30 10.7 1.4 12.9 12.6
Israel Health Care 1.5 UW 32 68 103 15.9 11.9 NA 8 34 16.6 0.9 NA 16.1
Korea 12.6 N 128 (1) 84 13.7 11.2 9.3 44 22 4.6 1.2 10.3 13.7
Korea IT 3.5 OW 135 (6) 58 18.2 14.2 10.9 NM 28 3.9 0.2 10.4 17.2
Korea Financials 2.4 OW 172 (12) 101 16.0 11.6 9.3 (27) 38 0.2 1.0 7.8 10.9
Korea Industrials 1.9 n/a 108 (10) 174 11.2 9.7 8.5 55 15 15.4 1.3 12.8 10.7
Korea Materials 1.8 N 182 76 215 12.0 10.0 8.7 (12) 20 5.8 1.6 11.7 16.9
Korea CD 1.4 N 164 19 79 10.5 9.5 7.9 56 10 8.6 1.4 12.0 13.6
Korea Consumer Staples 0.7 N 52 (3) 101 13.9 13.6 12.0 9 2 11.9 1.7 16.9 14.9
Malaysia 2.7 UW 65 41 85 18.1 15.6 13.1 0 16 6.4 2.7 10.9 12.9
Mexico 4.4 OW 69 4 127 18.1 14.9 12.1 9 22 7.0 2.3 15.2 18.2
Mexico Telecommunication 1.8 UW 51 17 189 13.2 12.4 11.2 24 7 16.3 3.3 39.4 30.4
Mexico Consumer Staples 1.0 N 63 22 153 22.4 18.1 14.5 23 24 13.9 1.3 14.9 15.3
Mexico Materials 0.7 OW 199 (26) 59 48.4 20.5 10.1 (48) 136 (13.7) 2.0 2.6 14.4
Philippines 0.4 OW 86 23 125 16.8 15.1 13.2 24 11 5.5 3.8 14.3 13.2
Poland 1.3 N 55 (10) 76 16.8 14.6 11.3 (34) 15 (3.0) 3.3 9.6 15.6
Russia 6.6 OW 103 (26) 72 11.3 8.6 6.5 (33) 32 4.5 1.3 10.5 15.8
Russia Energy 4.0 OW 84 (34) 57 7.9 6.8 5.5 (24) 15 2.3 1.4 11.9 16.0
South Africa 6.9 N 91 19 89 14.9 11.6 9.4 (13) 29 11.8 2.8 14.7 18.4
South Africa Materials 1.9 UW 106 (1) 69 34.6 17.9 13.7 (45) 93 20.6 1.4 7.8 10.3
South Africa Financials 1.8 OW 80 18 70 11.7 9.7 7.8 (14) 21 7.4 4.1 13.3 19.2
SA Telecommunication 0.9 UW 63 44 116 11.9 10.3 9.0 2 16 13.8 2.4 19.2 26.7
SA Consumer Discretionary 0.8 N 150 38 125 14.8 12.1 9.8 11 22 12.0 2.0 16.5 20.9
South Africa Energy 0.7 UW 83 27 139 12.0 9.4 7.4 (18) 28 9.4 3.0 16.7 23.7
Taiwan 11.1 OW 92 5 37 30.5 19.1 13.4 8 60 (0.7) 3.0 6.4 12.4
Taiwan IT 6.6 OW 118 (3) 43 33.2 18.8 12.3 (13) 77 4.0 2.9 6.7 13.3
Taiwan Financials 1.7 OW 93 (8) (4) 29.2 19.5 15.2 NM 50 6.0 2.7 5.0 6.1
Taiwan Materials 1.4 UW 62 44 89 27.3 21.5 16.2 (17) 27 (13.0) 3.1 6.8 19.7
Thailand 1.2 OW 94 16 61 12.4 11.2 9.3 28 10 (2.4) 3.3 13.7 19.4
Turkey 1.3 OW 96 23 87 9.7 8.8 7.4 6 11 11.1 2.8 16.6 17.4
Turkey Financials 0.8 OW 127 35 128 8.3 7.9 6.6 23 5 16.4 2.0 18.3 17.1
Source: J.P. Morgan Asian strategy team, MSCI, Datastream. Table sorted by descending weight in index, countries first followed by country-sectors. 10 November 2009.

11
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Risks to our strategy


Bond market volatility The lack of a valuation cushion
The end of QE plus banks unwilling to add to duration Valuations in EM and DM are mid a wide and
risk is a dangerous technical situation for government statistically debatable valuation range. If news flow
bonds. Risks assets typically struggle as bond yields remains incrementally positive then it is not a challenge
rapidly increase to "normal" levels. Please see Mercury to performance, but there is no valuation cushion.
Rising on page 22 which highlights the relationship
between bond market volatility and EM corrections. Figure 14: Global Bond Supply ($tr)
$7 Gov ernment Agencies, Supra, Muni, etc
Corporates incl Gov t Guranteed Securitized
Dubai World debt moratorium
Our base case is that this is a Dubai-specific rather than $6

pan-EM issue. The risk is that we underestimate the


damage to investor confidence in the region. $5

Lack of G3 policy flexibility $4


High fiscal deficits and record low interest rates limit
policymakers’ ability to respond to a relapse in growth. A $3
growth relapse is not our base case. If it occurred it
would be a serious blow to risk assets. Credit spreads $2
could expand and equities fall. Please see page 23 for a
review of the impact of fiscal stimulus on growth and
$1
potential fiscal drag in 2011.
$0
Central banks target asset prices
2009 2010
We are in a post Greenspan world; central banks target
Source: J.P. Morgan. Global bond supply and demand 2009 in $tr, demand and supply
asset prices and the common wisdom is that the market
figures are annualized, supply is calculated by the change in bond out standings at face
cannot be trusted. Brazil "got away with" market value, demand is calculated by the change in bond out standings at market value. 2010
intervention. The Brazilian market outperformed last forecast $tr, demand and supply figures are annualized.
week despite implementing a 2% tax on speculative
inflows. This tax is politically appealing as it targets Figure 15: Global Bond Demand ($tr)
QE Banks FX Reserv es Retail Bond Funds Other
international "speculators" who are viewed to be behind
$7
the credit crunch and putting at risk Brazilian
manufacturing jobs (and they do not get a vote in the
$6
2010 Brazilian presidential election). China and India
already have capital controls. It is now open season for
$5
non-market policies as central banks attempt to manage
conflicting policy goals. Be careful in the consensus asset
$4
inflation trade.
$3
More rapid increase in Asian inflation
With the exception of Thailand, J.P. Morgan's inflation
$2
forecasts for 2010 are within the central bank target
zones. Modeling inflation in emerging economies is
$1
difficult due to the short history of floating exchange
rates and large weighting to food and other primary
$0
products. The base effect for commodities is notably
2009 2010
unfavourable in 1H10. There is a risk that inflation
increases faster than our forecast. This would be negative Source: J.P. Morgan. Global bond supply and demand 2009 in $tr, demand and supply
figures are annualized, supply is calculated by the change in bond out standings at face
for equities. value, demand is calculated by the change in bond out standings at market value. 2010
forecast $tr, demand and supply figures are annualized.

12
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Uncertain outlook for commodity Renminbi and Asian currencies


Financial investors’ influence on commodity prices is The RMB effectively re-pegged to the US dollar 15
now substantial .Commodities rallied prior to the months ago. With headline inflation and exports down
recovery rather than typically lagging the recovery. With year over year, we see no catalyst for Beijing to change
zero interest rates investor flows could remain strong, policy until mid 2010. The RMB is anchoring other
pushing up commodity prices which would be negative Asian currencies as they try to maximize export
for growth. It is also possible that flows reverse. competitiveness.
Upwardly sloping forward curves result in a negative roll
or high cost of carry for financial investors. Investors Election-induced volatility
may become discouraged by the low returns available Several emerging markets go into election in 2010. This
due to the negative carry. could be a source of volatility for the markets. Korea’s
regional election in June 2010 is going to be the last
Figure 16: Oil forward curve ($/bbl) nation-wide election before the presidential election in
100 Crude Oil, WTI : 11/24/2009 2012, meaning the current ruling party is likely to put
95
every effort to win the election. Brazil elects a new
president in October 2010. The base case is the current
90 PT-led centre-left coalition remains in power. With fewer
macro issues in play this time around, the potential
85
outcome is less dramatic, though pre-election volatility is
80 likely, and sectoral and micro risks are on the rise.
Colombia elects a new President in May 2010, with
75
uncertainty as to whether current President Uribe can run
10 11 12 13 14 15 16 17 again.
Source: Bloomberg.
Table 4: 2010 Election Calendar
Figure 17: The financial investor is also driving commodities
Jan Feb Mar Apr
Cumulative inflows into commodity fund by year (US$ billion)
Colombia Hungary
45 2004 2005 Legislative Parliamentary
40 2006 2007 39.9 election election
35 2008 2009
14 Mar
30 May Jun Jul Aug
25 Philippines Czech Republic
20.1
20 17.5 Legislative & Parliamentary,
15 13.0 Presidential First Round
12.1 election,
10
10 May Hungary
5 8.9
Presidential
0 Colombia election
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Presidential
election, Korea
Source: J.P. Morgan, up to October 2009. 30 May Regional election
Sep Oct Nov Dec
Carry trade volatility Poland
Presidential
The carry trade is a poorly defined term. We use it as election, First
shorthand for investors’ desire to generate a return when Round
cash returns are zero. This may simply be the switch Brazil
Presidential
from cash to higher risk asset. It will also include election, First
currency forwards as investors search for higher yielding Round 3
FX. Invariably momentum in risk assets will attract the Oct
leveraged investor. The correction in carry trades can be Source: IFES.
sharp.

13
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Managing Risks 35%. Since January 2009, on average, the VIX tended to
increase by 1.2 points for every 1% strengthening in the
Risks for the first year of recovery are high. Investors
Dollar and this was strongly negatively correlated with
should consider protecting their portfolios. Option
equity markets.
implied volatility has fallen from the highs in 2008, it is
reasonable to buy portfolio insurance by going long
Our base case assumes emerging market FX
index puts.
appreciation. Hedging the portfolio with a position in
USD is an inexpensive way to diversify sudden EM FX
Recent research from J.P. Morgan's Equity Derivatives
depreciation when risk aversion spikes.
and Delta one strategy team shows that investors who
want to protect their portfolios beyond a three-month Figure 18: Correlation between DXY and EM FX index - Very
period had to bear a 30% annualized cost of rolling the Negative
long VIX futures position. The research suggests that the 0.2
recent increase in correlation between the USD, VIX and 0.0
equity prices can be used as a more efficient way to
achieve diversification and portfolio insurance. While we -0.2
believe that investors should not overemphasize this -0.4
casual relationship between asset markets and the USD, -0.6
we recommend building a small USD long in portfolios
to protect against sharp market corrections. This tail risk -0.8
is particularly important for investors reporting -1.0
performance in USD terms; if equity markets were to 93 95 97 99 01 03 05 07 09
drop 20%, and the USD appreciates by 17%, a dollar- Source: Bloomberg.
denominated foreign portfolio would fall in value by

14
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

A longer perspective on asset performance


To avoid being drowned by an anchor and provide an Table 7: Major EM country index performance (% for US$ indices)
objective perspective of asset performance, we look back Country Weight 3yr CAGR 5yr CAGR 8yr CAGR
Colombia 0.6 17 27 40
at three, five and eight-year US$ returns. The three-year Egypt 0.5 0 25 34
CAGR for EM equities is just 4.3%. This is higher Peru 0.7 28 31 33
than -6.8% CAGR return from DM equities. MSCI EM Indonesia 1.8 11 21 32
Czech Republic 0.4 2 15 30
outperformed the DM world index over these years. Brazil 16.8 21 30 26
More recently, ‘BIC’ has driven returns as Russia India 7.5 6 21 22
underperformed by 16% over three years and 4% over BRIC 49.1 8 21 21
China 18.3 13 21 19
three years. Note the divergence in performance of oil Hungary 0.6 -7 3 17
and Russian equities and ruble. At a sector level, Russia 6.5 -13 8 17
Commodities have outperformed, along with consumer Thailand 1.2 1 6 17
South Africa 7.0 2 9 16
stocks. Financials managed to outperform only Chile 1.3 10 15 16
marginally. IT has been the worst performing sector. Turkey 1.3 2 9 16
EM 100 4 13 16
Currency returns are a meaningful part of the US$ Morocco 0.3 7 19 15
returns on equity indices. The currency bloc matters, as Mexico 4.4 -1 15 15
Korea 12.6 -3 11 13
shown in Table 6. CE3 currencies have appreciated the Poland 1.3 -8 7 12
most, along with the Euro. Interestingly, Asian currencies Philippines 0.4 3 14 12
ex the RMB and Thai Baht, have been laggards. The Malaysia 2.7 8 9 11
Israel 2.7 10 11 9
Mexican Peso is a notable underperformer in Latam. Taiwan 11.1 -4 2 4
Table 5: MSCI EM Sector performance (% for US$ indices) World - -7 0 2
MSCI EM Sector Weight 3yr CAGR 5yr CAGR 8yr CAGR Source: MSCI. Sorted descending 8 year CAGR. Grey line separates perf rel to EM
EM Energy 15.0 5 19 24
EM Materials 6.6 10 18 22
EM Cons Disc 5.4 5 11 18
EM Cons Staples 2.2 11 19 17
Table 8: Major EM country sector CAGR returns (%)
EM Utilities 0.0 7 17 17 3 year 5 year 8 year
EM Financials 12.9 5 15 16 Country Sector Weight CAGR CAGR CAGR
EM Industrials 5.3 0 11 16 Brazil Materials 4.8 27 32 38
EM Telecoms 3.5 2 13 12 India Energy 1.3 16 35 35
EM IT 8.9 -3 7 8 Brazil Energy 4.6 32 41 33
S Africa Cons Disc 0.8 9 13 31
Source: MSCI. Sorted descending 8 year CAGR. Grey line separates perf rel to EM
China Energy 3.3 12 21 30
India Financials 1.9 8 25 30
S Africa Telecoms 0.9 12 13 29
Table 6: Currency and commodity performance (%) Brazil Financials 3.7 17 37 28
Korea Materials 1.8 19 22 24
Currency 3yr CAGR 5yr CAGR 8yr CAGR
Korea Industrials 1.9 -5 20 21
WTI Crude 10 9 19 Korea Cons Discr 1.4 5 11 20
GSCI Industrial Metals -8 10 13 Mexico Telecoms 1.8 4 21 20
Czech Koruna 7 6 10 India IT 1.2 -2 15 18
GSCI Agricultural Index 9 14 10 Korea Cons Staples 0.7 -2 14 18
Euro 5 3 7 Turkey Financials 0.7 8 16 18
Hungarian Forint 4 1 6 China Financials 7.2 17 28 18
Polish Zloty 2 3 5 Israel Health Care 1.5 18 14 17
Brazilian Real 8 10 5 Russia Energy 3.9 -15 8 16
S African Rand -1 -5 4 Taiwan Materials 1.4 7 6 16
Thai Baht 3 4 4 Korea IT 3.5 -3 9 16
Chinese Yuan 5 4 2
Mexico Cons Staples 1.0 6 18 15
EM Currency Basket 0 1 2
China Industrials 1.6 9 11 15
Israeli Shekel 5 3 2
S Africa Financials 1.8 2 6 14
Malaysian Ringgit 2 2 1
China Telecoms 2.3 4 21 12
Philipine Peso 2 4 1
S Africa Materials 1.9 -2 8 12
Indonesian Rupiah -1 -1 1
Mexico Materials 0.7 -11 7 10
Korean Won -7 -2 1
Korea Financials 2.3 -6 13 8
Taiwanese Dollar 1 0 1
Taiwan Financials 1.7 -5 -3 4
Russian Ruble -3 0 0
South Africa Energy 0.7 6 16 3
Indian Rupee -1 -1 0
Taiwan IT 6.6 -4 5 1
Turkish Lira -1 -1 0
Mexican Peso -5 -3 -4 Source: MSCI. Sorted descending 8 year CAGR. Grey line separates perf rel to EM .
Dollar Index -4 -2 -6
Source: Bloomberg. Sorted descending 8 year CAGR. Grey line separates perf rel to EM .
J.P. Morgan. The EM Currency Basket is calculated using the difference in the returns in
the MSCI EM local and USD indices. All performance versus the US$ except Dollar Index

15
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

The Policy Risk to the Asset Inflation Trade


On 19 October 2009, the Brazil government announced a Figure 19: A muted response from Brazil
116
2% upfront charge for foreign investors making portfolio
MSCI Brazil
investments in local fixed income and equities (IOF).
112
The government was concerned about the pace of Real
(BRL) appreciation; +35% ytd. If BRL resumes its
108
appreciation trend further measures are possible.
104
Minister Mantega said that the “FX floating regime” BRL Currency
remains in place and he is supportive of capital markets,
100
but the intention is to avoid “excessive BRL
01-Oct 07-Oct 13-Oct 19-Oct 25-Oct
appreciation.” Brazilian authorities have voiced concern
Source: MSCI, Bloomberg, J.P. Morgan. The Brazilian Real index is inverted. Indices
about the exchange rate, and the more the BRL rebased to 100 on 1 October 2009. The red line shows the announcement of the IOF tax.
appreciates the greater the policy risks. We believe that Figure 20: Relative performance post knee-jerk reaction positive
with Brazil’s successful experiment last week, there is 108
the risk that other central banks attempt non-market 107 MSCI Brazil relativ e to MSCI EM
policies to manage conflicting policy goals. 106
105
The Brazil government's move was not a surprise as they 104
were vocal about their concerns with BRL appreciation. 103
The size and breadth of the move, however, was a 102
surprise. Between March and October 2008, Brazil 101
imposed a 1.5% IOF on fixed income investments by 100
foreigners. The currency continued to appreciate until 01-Oct 07-Oct 13-Oct 19-Oct 25-Oct
July 2008. Source: MSCI, Bloomberg, J.P. Morgan.
Figure 21: The Thai experience—Impact on currency
MSCI Brazil underperformed MSCI EM by only 1% in 37.5
the week post the imposition of IOF (19-23 October Thai Baht Onshore
2009). Brazil has ‘gotten away’ with the capital control. 36.5
This is in sharp contrast the Thai experience (see below) 35.5

Policy risks growing 34.5


The lack of a sustained negative response to Brazil’s
33.5
capital control measure may encourage other central Thai Baht Offshore
banks to implement non-conventional policies. This, we 32.5
believe, is a risk to the consensus asset inflation trade. 1-Dec-06 22-Dec-06 12-Jan-07 2-Feb-07 23-Feb-07
Source: Bloomberg.
Learning from the Thai experience Figure 22: The Thai experience – Impact on the stock market
In December 2006, the Thai government imposed FX 330
controls on all inbound portfolio capital. The initial rules
310
implied that foreigners would have to deposit 30% of the
funds brought into the country as a reserve with the 290
central bank and only the remaining 70% could be
invested. For withdrawing capital within one year, only 270
two-thirds of the amount would be refunded. 250

The stock market dropped 17% the following day. This 230
pushed the government to change their stance and limit 1-Dec-06 22-Dec-06 12-Jan-07 2-Feb-07 23-Feb-07
the controls to inflows in bonds and commercial paper. Source: MSCI, Bloomberg.

16
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

And now the monetary stimulus


Monetary stimulus requires three conditions: available investors. This combination results in further spread
credit, at an attractive interest rate, and willing reduction and absolute decline in yields. Higher risk
borrowers. An ongoing rally in the credit markets bonds are likely to follow this trend.
provides the first two conditions. By mid-2010 several
quarters of economic expansion should boost business The irony of the post-credit-crunch interest-rate dynamic
confidence. Initially the effect will be a reduction in is that the improvement in credit markets allows central
borrowers’ propensity to repay loans. This is a developed banks to move away from emergency interest rates.
world event. The monetary stimulus in EM, particularly Investors should view this as a bullish sign. As we
in China, fed through rapidly in 2009. highlighted in our guide to monetary policy in EM (26
August 2009, Mowat et al) the nominalization of interest
The technical position in investment-grade bonds may rates is concurrent with strong markets and economies. It
get more favorable. The negative carry between short- is only when higher inflation drives central bank policy
term working capital loans and long term interest rates action, that investors should sell equities. Please see our
should discourage further bond issuance. The momentum extended markers for a summary of inflation and central
of returns in credit markets is likely to continue to attract bank target ranges.

Figure 23: Compression in excessive risk premium – Yields for government and corporate bonds plus earnings yield for US and emerging
equity markets
22
High Low Avg 05-07 Spot Diff
20 US High Yield 21.0 7.5 8.4 9.8 1.4
CEMBI 14.3 5.7 6.4 7.0 0.6
US EARNINGS YIELD 11.4 6.1 6.6 6.9 0.3 US HY
18
EMBI 12.0 6.3 7.0 6.7 (0.3)
JULI 8.7 4.9 5.7 5.3 (0.4)
16 US 10 Yr 5.2 2.1 4.6 3.5 (1.1) US Earnings
EM EARNINGS YIELD 17.3 6.8 8.7 7.6 (1.2) EM Earnings y ield y ield
14 1 Month T-Bill 5.2 (0.1) 4.0 0.1 (4.0)
CEMBI

12
EMBI
10

6
Juli Av g : 6%
JULI
4
US 10 y r
2 1 month T-Bill
Negativ e Yields
0
Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09

Source: J.P. Morgan, Bloomberg, 6 November 2009.Note: JULI = J.P. Morgan high grade bond index, CEMBI = emerging market corporate bond index

17
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

The rolling recovery trade of 2009: And settling the decoupling debate
The debate on economic decoupling is settled. Emerging Brazil, Russia and Turkey in 2Q09. Developed
economies led the recovery out of the synchronized economies returned to growth in 3Q09. Finally Hungary
recession in 4Q08. Growth remains robust despite weak and South Africa return to growth in 4Q09. Markets
exports. Domestic inflation and monetary conditions typically outperformed in the three months prior to their
appear to be the dominant drivers of EM growth. The recovery. Within EM exporters started to outperform in
evidence of capital market decoupling is more limited. 2Q09.
Correlation between DM and EM is a function of
common investors. That said, the low in EM equities was The rolling recovery trade is now mature. For the past
on 27 October 2008, four months ahead of the developed two years, stock price movements have been dominated
equity markets. by macro factors. In 2010, we would expect a more
normal balance of stock specific factors and macro
China, India and Indonesia led the economic recovery in factors driving share prices.
1Q09. This recovery broadened to the balance of Asia,

Table 9: Rolling with the decoupled recovery – Real GDP growth (QoQ SAAR) in key Emerging markets; recession in red, recovery in green
Avg 2003-
QoQ saar 2007 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09E 4Q09E 1Q10E 2Q10E 3Q10E 4Q10E
EM Asia 8.4 7.6 4.9 3.8 -5.3 2.5 12.6 9.8 5.3 6.8 7.0 7.3 7.0
China 11.1 10.7 8.7 5.8 2.4 8.4 14.8 10.0* 9.1 9.0 9.5 9.3 8.7
India 9.3 6.9 5.9 7.7 1.6 8.2 6.7 9.0 -1.0 10.0 7.0 9.6 9.0
Indonesia 5.8 5.9 6.8 5.2 1.9 4.9 4.3 5.3 3.5 5.5 6.0 6.0 6.0
Korea 4.4 4.4 1.7 1.0 -18.8 0.5 11.0 12.3 4.0 2.0 3.5 3.5 3.5
Malaysia 6.1 7.2 2.3 0.6 -8.8 -17.7 12.8 6.1 4.5 1.6 4.9 4.9 4.9
Philippines 5.7 0.4 7.1 3.0 1.1 -8.1 10.0 4.0 4.0 5.0 5.0 5.0 5.0
Taiwan 5.1 3.6 -2.3 -2.9 -27.2 -10.2 20.7 11.5 4.2 3.8 4.0 3.8 3.8
Thailand 5.8 4.7 0.3 2.2 -21.5 -7.2 9.6 7.0 5.3 4.9 5.7 7.0 7.0
Lat Am 5.2 5.4 4.7 1.4 -8.5 -10.0 0.8 6.0 5.6 4.7 3.2 3.9 2.3
Brazil 4.1 7.5 6.2 5.5 -12.8 -3.8 7.8 7.2 6.7 4.3 5.0 4.0 4.0
Colombia 6.4 -1.4 2.9 0.0 -5.6 1.1 2.7 1.9 3.2 3.5 4.3 5.5 4.5
Mexico 3.5 4.5 1.1 -2.7 -9.2 -21.2 -4.4 10.1 7.5 3.7 -0.6 3.3 -0.9
EMEA 6.4 6.1 5.1 3.4 -9.3 -20.2 2.2 6.6 5.0 3.5 3.3 3.4 3.6
Czech 5.6 0.5 5.0 1.8 -5.0 -17.9 0.4 4.5 5.0 2.8 2.5 2.2 2.0
Hungary 3.4 3.5 -0.9 -3.8 -7.4 -10.0 -7.9 -2.0 2.5 2.0 2.0 2.5 2.5
Poland 5.5 6.1 4.1 1.6 -0.4 0.4 2.8 5.5 3.0 2.5 3.0 3.5 3.5
Russia 7.4 7.2 7.1 5.9 -14.2 -33.6 4.9 9.5 6.5 4.5 4.0 4.0 4.5
South Africa 4.7 1.7 5.0 0.2 -1.8 -6.4 -3.0 0.5 3.4 4.4 3.8 3.6 4.1
Turkey 6.8 7.7 -4.5 -5.6 -21.6 -14.4 19.1 11.7 4.5 0.0 3.6 8.2 8.2
USA 2.9 -0.7 1.5 -2.7 -5.4 -6.4 -0.7 3.5 3.5 3.0 4.0 4.0 3.5
Euro area 2.1 3.1 -1.3 -1.5 -7.1 -9.6 -0.7 3.0 2.5 3.0 3.0 3.0 2.5
Japan 2.1 3.5 -2.8 -5.1 -12.8 -12.4 2.3 3.0 2.5 2.5 1.5 1.5 2.0
Australia 3.4 3.0 1.4 1.3 -2.8 1.6 2.5 1.2 3.8 2.1 2.4 4.4 6.2
Hong Kong 6.8 4.1 -3.9 -3.2 -7.4 -16.1 13.9 9.0 5.0 4.2 4.0 3.8 3.5
Singapore 7.7 12.2 -7.7 -2.1 -16.4 -12.2 20.7 14.9 -2.0 4.1 7.4 8.2 8.2
Source: Actual data plus J.P. Morgan estimates, 11 November 2009. *Reported for China.

18
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Reiterating our overweight on earnings revisions


Steve MalinAC, Head of Quant Research

Those familiar with our research may detect a sense of Figure 24: The L/S return to Earnings Revisions in GEM
800
irony in our title because the reality is that there are very
700
few periods when we would not advocate being 600
overweight on earnings revisions—it is after all one of 500

the most consistent quant strategies for alpha delivery. 400


300

200
Occasionally earnings revisions do fail, as they did last
100
year and early this year. The severity of the 0

Nov-94

Nov-95

Nov-96

Nov-97

Nov-98

Nov-99

Nov-00

Nov-01

Nov-02

Nov-03

Nov-04

Nov-05

Nov-06

Nov-07

Nov-08
underperformance was dramatic and enough to make

Base
some ask the question “Is it broken for good?” We
believe not. Based on the strength of the recovery from
Source: Thomson, J.P. Morgan calcs.
prior failure periods we believe that now is exactly the
time to focus on changes in earnings estimates.
Why did they fail recently?
Why do earnings revisions work? During the crisis and subsequent recovery macro drivers,
Earnings revisions belong to the momentum family of not micro drivers such as earnings revisions were driving
alpha drivers. Research into momentum is extensive and markets. The rapid deterioration in the economic data
while the jury is still out as to why it works, even the took analysts by surprise and for most of 2008 and part
most ardent advocates of ‘efficient markets’ struggle to of 2009 analysts simply played catch-up. As far as the
deny that it exists. Whilst this isn’t the forum for a market was concerned EPS changes were at best not
detailed discussion, arguably the most convincing relevant and at worst behind the curve resulting in the
arguments for ‘why earnings revisions work’ stem from strategy generating negative returns.
behavioral finance.
Have they failed before?
In this field the behavior and reaction of analysts to The recent period was a record period of
events that make them acknowledge their under/over- underperformance but earnings revisions have failed
stated opinion about a company’s future have been before; notably in 97 and 01 (See below).
studied in depth. In a nutshell earnings revisions trend
and are serially correlated (i.e. when one analyst Remember, momentum relies on serial correlation.
upgrades others follow), the market typically under- That is, what has worked in the past is most likely to
reacts to these changes and this makes the signal continue to work in the future. Conditions of rapid
systematically exploitable. changes in risk appetite plus limited guidance from
companies have contributed to the underperformance of
Do they work in emerging markets? the strategy. The period 97/98 was the Asia financial
Using our extensive global back-testing infrastructure we crisis and 01/02 was the fallout from the Tech sell-off as
have investigated the performance of various forms of well as Sep 11th. This was followed by a slight recovery
earnings momentum in numerous universes. The before the Asia region lurched into SARS.
conclusion is invariably the same. Earnings revisions
have been a strong driver of returns over the long What happened next?
term in emerging markets – indeed it is one of the The point that we would most like to stress is that in both
strongest universes for observing the phenomena previous ‘failure cases’ when revisions started to work
globally. again they did extremely well. Whilst this is observable
on the 12-month rolling return chart above, for clarity we
also demonstrate this in the annotated draw-down chart
and success rate (i.e. the number of positive L/S return
months in the rolling year) chart below.

19
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

From March 1998 Earnings Revisions generated +32% Figure 25: The 12-month rolling return to Earnings Revisions in
of alpha on a long/short basis as it recovered very GEM
50%
quickly. Similarly Jan 02 to Aug 03 saw a +28% L/S
40%
return. 30%
20%
What has happened this time? (So far) 10%
The ‘drought’ in the performance of earnings revisions 0%
-10%
was finally broken at the end of May. Subsequently
-20%
investing in earnings revisions has been a winning
-30%
strategy five months in succession (and it is again up this

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08
month at the time of writing).
Source: Thomson, J.P. Morgan Calcs.
In summary we continue to be very optimistic about
the earnings revisions based strategies in the current Figure 26: Draw-down analysis – Recovery periods are strong
environment. The speed and magnitude of previous

Jun-94

Jun-95

Jun-96

Jun-97

Jun-98

Jun-99

Jun-00

Jun-01

Jun-02

Jun-03

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09
recoveries in performance are evident and we are already
0%
seeing effectiveness improve.
-5%

In addition the fundamental support for earnings -10%

revisions is strong. The correlation between stocks and -15% +28% Jan 02 to Aug 03

markets continues to drop back suggesting that ‘micro’ is


-20%
+32% March 98 to March 99
getting the better of ‘macro’ and hence stock picking +8% Since Jun 09
opportunities are likely to continue to improve. -25%

Source: Thomson, J.P. Morgan Calcs.


With the revisions environment having normalized and
all the ‘easy yards’ already accomplished for valuations it Figure 27: Strategy success rate (rolling year)
seems reasonable that attention will remain on earnings
120%
going forwards. With clarity returning as each reporting Average success rate > 70% of months in any rolling 12 month period
100%
period passes and the endorsement of most market
strategists (who are suggesting the economic picture will 80%

continue to improve), the stage appears set. 60%

40%
How do you find revisions for stocks? 20%
Sharp Recovery following Sharp fall in effectiveness
We calculate earnings revision rankings for stocks and
0%
sectors globally on a daily basis. Please contact Steve
Nov-94

Nov-95

Nov-96

Nov-97

Nov-98

Nov-99

Nov-00

Nov-01

Nov-02

Nov-03

Nov-04

Nov-05

Nov-06

Nov-07

Nov-08

Malin or Rob Smith at quant.research@jpmorgan.com


for more in formation on accessing the latest information
via our web portal or to receive latest changes direct to Source: Thomson, J.P. Morgan Calcs.
your inbox.
Figure 28: Recent returns… back on track
4%

2%

0%

-2%

-4%

-6%

-8%
Nov-08
Jun-08
Jul-08

Jan-09

Jun-09
Jul-09
Mar-08
Apr-08
May-08

Aug-08
Sep-08
Oct-08

Dec-08

Feb-09
Mar-09
Apr-09
May-09

Aug-09
Sep-09
Oct-09

Source: Thomson, J.P. Morgan Calcs.

20
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

The odd couple: Above-trend growth and falling core inflation


(David Hensley AC and Joseph LuptonAC extracts from ‘Global core inflation falling fast’, GDW 21 August 2009)
J.P. Morgan’s global economic outlook stands apart from Figure 29: Developed market core inflation (US core ex tobacco)
the consensus. The forecast is for a sustained return to %oya
above-trend growth beginning this quarter and a 1.9
continued slide in core inflation to near zero in the
developed economies (DM) by late next year (see Slack
Attack, Global Issues, May 29, 2009). This sounds 1.6

incongruous; however a resumption of above trend-


growth accompanied by falling core inflation is standard 1.3
operating procedure after deep economic downturns.
Developed market core inflation is now at 1.1% oya,
down from the peak at 1.9% oya in August last year. The 1.0
current level is equal to the previous low in 2003. This is 03 04 05 06 07 08 09 10
accompanied by depressed wage growth.
Source: J.P. Morgan.
The output gap and the death of the pricing power
Our core inflation forecast is underpinned by the huge Figure 30: Resource utilization and core CPI, developed
output gap in the economy. This large and growing economies
amount of resource slack is a reflection of the Std. dev . from 1990-2007 av g %-pt; 8 qtr chg in %oy a inflation rate
extraordinarily low levels of aggregate demand and 2 2
resource utilization. Global output gap is estimated to 1 1
reach -4.9% of GDP in 2Q09. The measure of resource 0
0
utilization, which is a weighted average of the rates of -1
-1
unemployment and manufacturing capacity utilization, -2
was 3.8 standard deviations below its norm. In the past, -2
-3
economic recessions and the accompanying buildup of Resource utilization Core CPI -3
-4
slack consistently have delivered a significant decline in -5 -4
core inflation and wage growth (see Slack Attack). 90 92 94 96 98 00 02 04 06 08 10
Core inflation tends to move slowly in the developed
Source: J.P. Morgan.
world, meaning that the full transmission of resource
slack to pricing tends to occur with a lag. The large Figure 31: EM consumer prices excluding food and energy
decline in core inflation to date was magnified by pass- % change over 12 months
through from energy prices in 2H08. The death of pricing
8 CEEMEA
power is apparent when looking at core inflation and
energy prices in 1H09 casually. This shows little a pass 6 Latam
through of the bounce in energy prices into core inflation.
Either businesses were unable to pass through higher 4
energy costs because of the weak economy, or this was EM
offset by disinflationary pressure elsewhere. Either way, 2
it appears that the surging output gap already is taking a EM Asia
0
toll on pricing power.
-2
EM decline limited to Asia
The shallower recession in EM suggests a smaller Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10
reduction in core inflation for the group. However, the
Source: J.P. Morgan.
actual reduction has been more dramatic with core
inflation falling 1.5% to 2.4% from last year’s peak. This
decline is entirely due to EM Asia, especially China.
Core inflation has plateaued in Latam and CEEMEA.

21
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Fear bond market volatility – Mercury may rise in 2010


EM equities typically correct when bond market purchasing programs, nor does it expect the Fed to alter
volatility rise. Statically this is when the 10-year UST the already announced amounts of purchases. The end of
yield exceeds two standard deviations versus its three quantitative easing could result in higher bond yields in
month moving average. Since 2004, the mercury rising 2010.
indicator has correctly signaled corrections in seven out
of 10 occasions. The mercury rising indicator
We define a rapid adjustment in 10-year UST yields as a
Yields are low but the curve is steep change in the yields that is greater than 2 standard
The current 10-year UST yield of 3.5% is low relative to deviations relative to the three-month moving average.
the long term history. But the yield is steep; the average
curve is 1.75%. The curve steepness rewards duration We emphasize that this indicator does not identify market
risk and banks have rapid accumulated USTs. The tops. Note that in March 2006 the indicator signaled a
appetite is finite. “sell”, and although three-month forward returns were
-5% in EM equities, the MSCI EMF rallied a further 15%
US fiscal deficit from March levels before peaking in May 2006. As a
The US Fiscal deficit is estimated at US$1.35 trillion in result, we interpret the signal as an early warning sign to
2010 following a deficit of US$1.6 trillion for 2009. The begin reducing risk.
net US treasury paper issuance in 2010 is estimated at
US$1.8 trillion; this is larger than the US$1.6 trillion We believe that emerging markets are susceptible to
estimated to be issued in 2009. Potentially, the market’s sharp corrections as volatility spikes in global markets.
inability to digest the large sustained fiscal deficits and Our work on quantifying the relationship between the
issuance of treasury papers may cause UST yields to rise direction of US Treasury yields and EM equity returns
rapidly in 2010. suggests that the probability of such a correction in 2010
is high if UST yields rise rapidly and increases the risk of
End of quantitative easing a rapid adjustment. We advise investors to monitor the
Reinforced by the FOMC statement in November, we pace of change in 10-year UST yields in 2010.
expect the Fed to continue with its already scheduled
purchases, concluding purchases in 1Q10. Our baseline
does not expect any further announcements of new

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

-1
-2

-3
MSCI EM (Log scale RHS)
Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09

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

22
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

The manic-depressive's guide to the fiscal outlook


Originally from the GDW, 11 September 2009 Figure 33: Estimated contribution of fiscal policy to GDP growth
The fiscal impetus from the economic stimulus package 4
ramped up earlier this year. More recently, the overall 3
flow of spending is starting to level off and, looking
2
ahead a few quarters, spending will decline
1
incrementally. This prospect has raised fears of a
0
“double-dip” recession as the boost to growth from the
stimulus turns into a drag. Given the most likely path for -1
spending, these fears appear greatly overblown. The -2
reason is that spending ramped up much more quickly -3
than it will ramp down. As such, the drag from waning 2009 2010 2011
stimulus over the course of the next year should be
relatively modest: By our calculations the drag should be Source: J.P. Morgan. % saar. Includes
less than 1% point on average. A more significant hit After that, going into next year we expect that stimulus
could come in early 2011, when not only do most of the support will decline and subtract from GDP growth, on
stimulus measures come off, but some of the Bush-era average in the magnitude of about 0.5%-pt per quarter.
tax cuts are set to expire. While that prospect poses The growth rate drag in 2010 is expected to be smaller
downside risk to 2011, much political uncertainty than the growth rate boost in 2009 because the stimulus
remains regarding how much stimulus will roll off versus spending should decline at a slower pace than it
be renewed. increased. That holds true at least until the beginning of
2011, at which point things get interesting. Currently, not
While the likelihood of a stimulus-induced double-dip in only should much of the stimulus spending begin to dry
2010 looks comfortably low, the longer-term budget up in 2011, but the Making Work Pay tax credit for
outlook remains uncomfortably perilous. We project that lower-income households and the Bush-era tax cuts for
the federal budget deficit for FY2010 will come in at upper-income households are both scheduled to expire at
$1,350bn, an improvement from the $1,600bn projected the beginning of 2011.
for FY2009 but not a huge improvement given how
terrible the backdrop was for the last fiscal year. Looking Fiscal challenge for DM
further ahead, the stream of deficits in either the The deficit for the 2009 fiscal year is likely to come in a
administration’s or the CBO’s estimates looks very little under $1,600bn. We project a deficit for FY2010 of
worrying. As bad as that is, estimates that also $1,350bn. Considering how dire the economic and
realistically incorporate current policies look terrifying. financial situation was in the 2009 fiscal year, the
There have been episodes in the past when deficit improvement in 2010 does not look all that impressive.
projections looked awful—such as the early 1990s—but We do not have official deficit projections for years
the outcome turned out better. That said, the challenges further out, though it is safe to project an incredibly
look much greater this time around and will require even gloomy fiscal outlook. Our best guess for FY2011 is a
more political will to be resolved. deficit of around $1,100bn—that is, after incorporating
the expiration of the Bush tax cuts. (In the event, the
Stimulus so far expiration of upper-income Bush tax cuts should add
Through September 4, $96bn of stimulus funds have about $30bn to FY2011 revenue). For years beyond 2011
been paid out, which is about 19% of the $500B the improvement in the deficits is likely to be only
allocated to spending measures. modest and nowhere near enough to bring the deficit
anywhere close to balance. Over the next 10 years, even
The bar chart presents our estimates of how much the the administration’s assessment of the budget outlook
stimulus has contributed, and will contribute, to overall sees the deficit never falling below $700bn, and the
growth. According to our estimates, the stimulus has cumulative deficits over that period are projected to be
contributed, or will contribute, about 2-3%-pts to GDP $9tn. While the CBO has yet to update its estimate of the
growth, on average, in each of the last three quarters of administration’s budget, when it does it will likely add
the year. $1tn to the administration’s 10-year deficit total. A
similarly gloomy picture emerges from analysis
conducted by the Committee for a Responsible Federal

23
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Budget, which realistically extends current policies— Table 10: General Government Fiscal Deficit (% of GDP)
such as the AMT patch—to arrive at a $12.6tn 10-year Public debt (%
Fiscal Position Change 2008 to 2009 of GDP)
deficit estimate. 2008 2009 Cyclical Disc 2010 F
Global -2.6 -6.8 -2.5 -1.7 na
Another case in point is Japan. The latest OECD data Developed -3.1 -7.7 -2.9 -1.7 na
(June 2009) showed that gross financial liabilities (debt) US1 -3.2 -10.2 -5.0 -2.0
of Japan’s general government were 172% of GDP in Japan -6.0 -9.7 -1.7 -2.0 227
Euro area -2.0 -4.0 -1.0 -1.0 na
2008, and are expected to exceed 200% by 2010, by far UK -5.9 -9.1 -1.6 -1.6 82
the highest level among major countries Emerging -0.8 -3.5 -1.3 -1.5 na
Latam -0.6 -3.3 -1.7 -1.0 na
One grim point should be noted to connect the comments Brazil -1.3 -2.5 -0.9 -0.3 70
Chile 8.7 -4.5 -10.6 -2.6 9
earlier in this note to the immediately preceding Colombia -1.4 -3.0 -1.6 0.0 44
discussion. As we noted regarding early 2011, even Mexico -1.8 -3.9 -0.7 -1.4 36
modest fiscal “restraint”— coming from a starting point Peru 2.4 -1.6 -1.5 -2.5 25
Em Asia -1.4 -3.6 -0.1 -2.1 Na
of 11% of GDP deficits— will be a hit to economic China2 -0.5 -3.0 -0.4 -2.1 20
growth. If, at some point, the political establishment Hong Kong -5.0 -6.0 2.0 -3.0 Na
shows the will to return the deficit to a more reasonable India -6.5 -6.3 5.2 -5.0 46
Indonesia -1.3 -2.4 -1.1 0.0 35
2-3% of GDP, the cumulative drag of a fiscal rebalancing Korea 1.5 -2.0 -2.4 -1.1 44
of up to 8% of GDP poses a long run cyclical drag; the Malaysia -4.8 -7.0 -1.0 -1.2 44
implications of the political establishment not showing Philippines -1.3 -1.5 -0.2 0.0 62
Singapore 5.0 -2.0 -7.0 0.0 na
that will, however, is even more depressing. Taiwan -1.2 -3.6 -1.8 -0.6 na
Thailand -2.5 -5.0 -1.1 -1.4 39
Fiscal Cushion in EM CEEMEA 0.8 -3.6 -3.8 -0.5 na
Public sector debt to GDP ratios in Emerging markets are Czech Rep -2.0 -5.0 -3.0 0.0 38
Hungary -3.0 -2.6 0.4 0.0 80
much better developed markets. The public sector debt as Israel -0.3 -3.0 -2.7 0.0 na
a percent of GDP is the largest in Brazil and India among Poland -2.5 -3.2 -0.7 0.0 53
the emerging markets, and we expect it to be around 70% Russia 5.7 -4.0 -8.6 -1.1 7
South Africa 1.0 -3.8 -3.2 -1.6 38
for Brazil and 46% for India in 2010. This makes for Turkey -1.3 -2.3 -1.0 0.0 50
good comparison with the G3 countries where the public Source: J.P. Morgan economics 'Priming the Pump’, Lupton and Hensley, 13 February 09
debt is as much as the GDP itself or even more. 1: Discretionary stimulus for the US only includes spending and tax measures related to
boosting economic activity and not the measures being undertaken to support financial
markets. Consequently, roughly $400bn of financial support is included as cyclical.
For more, see Key Trades and Risks, Mowat et al, 2: China’s widely announced stimulus plan amounted to roughly 7% of GDP in 2009.
October 21, 2009, and JGB challenge: Exploding public However, we only show the 30% of this, that is expected to be financed by the public
debt amid falling domestic saving, October 21, 2009. sector.

24
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

South Africa - 2010 Soccer World Cup Winners


Figure 34 summarizes the average outperformance of is likely to be FirstRand given that it is an official
equity market sectors relative to MSCI World in the sponsor and via the Visa link benefits from tapping into
previous three World Cups (earlier historical analysis that customer base.
constrained by data availability). IT, Telcos and
Consumer Discretionary were the stand-out sector Construction was an early beneficiary of the World Cup
winners during previous World Cups. We expect similar spending given the capex on new soccer stadiums,
benefits for these sectors in SA with MTN, in particular, transport links etc, but much of this has largely occurred
appearing very well-placed given that it is the first and we believe for this sector to be rejuvenated it
African World Cup Sponsor, making it a direct requires new private sector capex to be forthcoming, in
beneficiary from increased sales and awareness. particular, new mining capex.

We expect accommodation, transportation, food, Our favourite SA Soccer World Cup strategy picks
beverage, and leisure sectors to benefit from soccer- include MTN, Vodacom, SABMiller, City Lodge, Sun
related consumption. SABMiller, City Lodge, Sun International, Naspers, FirstRand, Rainbow, Famous
International, Comair, 1Time, Naspers, Rainbow, Brands, Comair, 1Time, Imperial and Bidvest
Famous Brands and Imperial would be our top strategy
picks in these sectors. A beneficiary in the banking sector .
Figure 34: Hosting countries’ equity sector performance relative to MSCI World sectors
40
35
30
25
20
15
10
5
0
Health.Care
Utilities

Industrials

Cons.Stap.
IT

Cons. Disc

Materials
Telecoms

Financials

Energy

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

Table 11: SA Soccer World Cup strategy picks


Bloomberg Ticker Price JPM Rec. Analyst
MTN MTN SJ 119.8 OW Jean-Charles Lemardeley
Vodacom VOD SJ 55.9 Neutral Jean-Charles Lemardeley
SABMiller SAB SJ 209.9 Neutral Mike J. Gibbs
City Lodge CLH SJ 78.2 NR -
Sun International SUI SJ 93.9 NR -
Naspers NPN SJ 282.9 OW Ziyad Joosub
FirstRand FSR SJ 17.4 OW Mervin Naidoo
Rainbow RBW SJ 15.9 Neutral Vikhyat Sharma
Famous Brands FBR SJ 20.0 NR -
Comair COM SJ 2.2 NR -
1Time 1TM SJ 0.8 NR -
Imperial IPL SJ 82.1 NR -
Bidvest BVT SJ 121.7 NR -
Source: J.P. Morgan estimates. Note: JPMorgan does not have coverage of certain of the stocks in the leisure, air transport and industrial sectors as shown above. City Lodge, Sun International,
Famous Brands, Comair, 1 Time, Imperial and Bidvest have been included in our list of top picks purely to reflect our positive stance on Soccer World Cup-related stocks. J.P. Morgan has no
fundamental opinion on these companies.

25
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

None of these events reflect an


official J.P. Morgan view; they Surprises for 2010
are intended to stimulate
discussion
The US dollar strengthens. This is driven by the better-than-expected US growth.
Initially, emerging equity markets and commodities decline as traders assume that
the casual inverse relationship between EM equities and the DXY will dominate. The
“new dollar funded” carry trade unwinds, adding to the sell-off. Eventually, as
investors recognize that healthy US growth is good for equities, markets recover.
And of course, the “old yen funded” carry trade is reinstated.

The renminbi appreciates by more than 10%. Our base case is a very modest
appreciation from Rmb/US$6.82 to 6.5 by end-10. A recovery in exports plus the
move to positive inflation encourages Beijing to allow faster appreciation. Other
Asian currencies rally more than the Rmb. This move combined with the increased
use of Rmb in trade settlement is the start of the Asian renminbi block.

MSCI announces that it will include China A-shares in standard indices.


DXY strength…new carry trade Initially, a limited investibility factor is applied. Assuming a 35% free-float in the A-
unwinds share market, China moves from 18% to 37% of MSCI EM. This event is
destabilizing. Investors have the Hobson choice of needing to be ahead of large
capital inflows but recognizing they are buying expensive stocks.
Rmb stronger than 6.5/US$
Run on the Japanese yen and Japanese Government Bonds. International
China 37% of EM
investors would require a risk premium to fund a country where public sector debt to
GDP is 190% in 2009 (J.P. Morgan estimate) but for now, Japan’s excess savings are
sufficient. In JGB challenge: exploding public debt amid falling domestic savings,
Run on JPY and JGB Kanno et al, 21 October 2009, we estimate that assuming no major fiscal initiatives,
demographic demands should push this ratio to 300% by 2019. Current demographic
trend could push the savings rate to zero in five years. This, plus the strong yen
Momentum of flows in hollowing out Japanese manufacturing, could require foreign savings to fill the gap.
commodity funds pushes up
prices and chokes growth
Today’s 10-year JGB yield of 1.34% is too low to attract foreign capital.

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

In contrast to above, commodity investors become frustrated with low financial


Don’t be too keen to return to returns due to the cost of roll (upward sloping future curves). This results in 2009
property
record inflows into energy and commodity funds reversing. Although the sharp fall
in commodity and energy prices is unnerving, the resulting stimulus underpins the
EM FX momentum unstoppable recovery.

Developed economies property markets, after a relief rally, stagnate in real terms
as better economic data drive up mortgage costs.

EM FX bubble builds despite unconventional policies used to lean against the trend.

26
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Emerging Market Rates Outlook Joyce ChangAC


(1-212) 834-4203
joyce.chang@jpmorgan.com
J.P. Morgan Securities Inc., New York

Emerging Markets pass a stress test surpassing that of the US. Indeed, over the past four
years, EM contributed more to global GDP growth than
Investing in EM assets has been a one-way bet over
the whole of developed markets. In 2010, EM growth
the past year. Across all asset classes (e.g., equities,
will recover to 5.8%oya, with risks to the upside, while
sovereign credit, corporate credit and local markets), EM
G-3 growth will remain below par at only 2.7%. We
strongly outperformed (chart 1). Going into 2010, EM
recommend overweight positions in EM credit (both
fundamental and financial markets outlook remain
sovereign and corporate) versus developed fixed income
robust. EM is shedding its image as the most volatile
markets. We also expect EM local markets, as tracked in
asset class. The outperformance of EM fixed income in
J.P. Morgan’s GBI-EM index, to generate double-digit
the midst of market turbulence in 2008 and the
returns next year.
subsequent outperformance over the past year as the
market recovered have resulted in a re-rating of EM risk.
2009 will be remembered as the year that EM carried
Even frontier EM countries have outperformed. With EM
the global economy, with EM consumption well
growth and yields well above developed markets, EM
surpassing that of the US. Indeed, over the past four
will continue to move into the mainstream as an asset
years, EM contributed more to global GDP growth than
class in 2010. We expect a first quarter rally as both
the whole of developed markets. In 2010, EM growth
EMBIG cashflows and strategic inflows from non-
will recover to 5.8%oya, with risks to the upside, while
traditional investors are high. External demand for EM
G-3 growth will remain below par at only 2.7%. We
assets remains strong and we expect inflows into EM
recommend overweight positions in EM credit (both
fixed income to reach $30-35bn in 2010 compared to
sovereign and corporate) versus developed fixed income
only $18bn this year. Worldwide pension funds are
markets. We also expect EM local markets, as tracked in
starting from a position of close to zero allocation to
J.P. Morgan’s GBI-EM index, to generate double-digit
Emerging Markets, and yet assets are more than $17bn.
returns next year.
New and growing sources of inflows include high grade
crossover investors, US pension and endowment
allocations, sovereign wealth funds and Japanese retail EM valuations more compelling than US
allocations. High Grade markets
Yields for the EMBIG have fallen to 6.49% (close to
Figure 35: Asset class performance the record low of 6.34% reached in April 2007), but
remain much higher than US investment grade yields
(5.2%) and yields for the Barclay’s Global Aggregate
index (3%). Other US fixed income asset classes will
deliver near flat or negative returns for the full year 2010,
assuming our preliminary spread and yield forecasts for
2010 are accurate. We expect EMBIG returns in 2010 to
reach a maximum of 6.5% compared to 4.5% for US
investment grade. We have been overweight the EMBIG
for the past seven months and upgraded several smaller
weighted EM countries in the benchmark index last
week. In addition to our overweight recommendations in
Dominican Republic, Indonesia, Mexico, and Russia, we
upgraded Poland, Hungary, Jamaica, and Belize to
Source: J.P. Morgan, 1-J.P. Morgan commodity total return index, 2-Barclays capital global Overweight. We downgraded high beta Venezuela to
aggregate Marketweight from Overweight and maintained the
overweight in Argentina but switch assets for relative
2009 will be remembered as the year that EM carried value considerations.
the global economy, with EM consumption well

27
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

EM sovereigns have already prefinanced one-third of Figure 37: EM local yields remain attractive
the total $66bn EM sovereign financing needs. EM
sovereign issuance for the year reached $71 billion last
week. Note that five countries – Argentina, Poland,
Russia, Turkey and Venezuela – account for nearly 50%
of total EM sovereign issuance needs. Technicals for the
EMBIG remain favorable as coupons and amortizations
are also the highest in 1Q10, with cashflow of $21.5
billion to be put to work (chart 2). EM sovereign cash
flows will total $56.4bn in 2010 versus $66.5bn in
sovereign financing requirements.

Figure 36: EMBIG coupons and amortizations highest in 1Q10

Source: J.P. Morgan.

We favor the higher carry currencies going into 2010


and recommend TRY, RUB, PLN and HUF in
particular, as all are likely to deliver returns in excess
of 15%. While FX intervention is likely to intensify in
Asia and Latin America, CEEMEA countries are more
focused on FX reserve accumulation. Brazil was the
outperformer in 2009 (+25%), but the most attractive
opportunities for 2010 are concentrated in the CEEMEA
region. Appetite for local rates remains subdued due to
the growing uncertainty about the timing and pace of
monetary policy normalization. EM local markets debt
returns (USD unhedged) break down roughly into half
local rates returns and half FX returns. Our bottoms-up
Source: J.P. Morgan.
return forecast for the GBI-EM Global Diversified index,
which is the leading EM local markets benchmark, is
Shift the focus to local markets: GBI-EM 12% in 2010.
returns to reach 12% in 2010
After a brief dip during the credit crisis, international EM Corporates likely to outperform EM
demand for EM bond markets is growing again, sovereigns and US High Grade
particularly for high carry markets. The weak USD The resilience shown by EM Corporates throughout
trend will persist next year and J.P. Morgan forecasts the credit crisis has improved their profile amongst
EUR/USD bottoming at 1.62 in mid-2010 before investors, with the asset class likely to garner a
recovering to end the year at 1.50. The Fed is proving greater following as valuations in developed credit
more comfortable with a zero rate environment than markets look increasingly expensive. Although the
almost every other G-10 or EM central bank and the most pace of the market’s recovery has brought us back to pre-
recent balance of payments data indicate that the US is crisis levels, we believe that there is still room for
also suffering from a re-emergence of net FDI/M&A spreads to tighten and set a year-end 2010 target for the
outflows and weaker equity inflows than other countries, CEMBI Broad at 300bp versus 388bp at present. . There
highlighting that USD weakness is more than a simple were notable casualties in 2009, with combined defaults
carry trade. and debt exchanges rising to 10.8% of the EM corporate
high yield bond stock (compared with a par-weighted
default rate of 10.96% and 16.24% including distressed
exchanges in the US high yield market), many of the
concerns that shaped expectations for a more serious

28
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

collapse and prolonged period of market weakness at the We project a total of 14 countries across EM regions
end of 2008—such as rising capital flight and mounting tightening monetary policy next year, either by raising
external refinancing risks in Russia, unhedged corporate reserve requirements or interest rates.
derivative exposures in Brazil and Mexico, the downturn
in and overheated real estate markets in China and Dubai However, the still depressed size of the global pie is an
respectively, and short-term FX funding needs in obstacle to the relative adjustments that are needed
Korea—have come to pass without prompting broader and markets have arguably priced too much
systemic failures. tightening in. Even after three quarters of expansion,
EM export volumes stand about 10% below their
At the aggregate level, we move EM Corporates as an previous peak. For China, which provided an important
asset class (CEMBI Broad) to Overweight relative to part of demand stimulus to lift the global economy,
EM sovereigns (EMBIG) and US credit (JULI). At the export volumes are still 20% below their peaks. It is in
regional level, we expect credits from Asia and Europe to this context that Chinese authorities can justify their
contribute the lion’s share of the spread tightening dollar peg. Other Asian export-intensive countries, in
followed by Latin America, while at the country level we turn, maintain a tight leash on their currencies in order to
still expect some of the more significant spread limit the loss of competitiveness against China. A world
opportunities in higher beta countries such as Indonesia, in which US interest rates are likely to remain close to
India, Kazakhstan and Argentina, although note that zero and the renminbi is held artificially low may serve
these account for less than 6% of the corporate index. We domestic needs but is producing undesirable
believe that Russian corporate performance will be much consequences and finger-pointing on a global level.
more muted in 2010 despite the macro backdrop for
Russia and the CIS, which is likely to be significantly The reluctance to lean too heavily on rate hikes has
improved as commodity prices recover. We do not prompted EM policymakers to rely on other
believe that developments in Dubai will have a long-term measures. EM foreign exchange reserves have increased
impact on the EM quasi-sovereign sector outside of the by US$700 bn this year to reach US$4.2 trillion and
Middle East region. some countries are actively managing bank reserve
requirements. Brazil recently introduced a financial
Economic recovery to prompt earlier transactions tax (IOF) on portfolio inflows and other
tightening in EM during 2010 countries are shifting in a similar direction.

While the world needs accommodative policies, a one-


EM issuance to go further down the
size fits all policy stance is increasingly inappropriate
as utilization rates are widely divergent despite a credit curve
world generating synchronized above-trend growth. The issuance outlook for 2010 remains biased towards
The most severe decline in employment by far has taken investment grade bonds. In 2009, we estimate that 60%
place in the US where utilization rates stand at historic of issuance from EMBIG-eligible sovereign issuers came
lows. By contrast, our aggregate measure of EM from investment grade credits. In net terms, we estimate
utilization rates is close to its long-term norm (chart 3). that issuance year-to-date has been just below the full-
In addition to the relatively modest loss of jobs in year coupons and amortizations by $1.7bn. However, we
emerging market economies, this contrast reflects the estimate investment grade net issuance at $6.0bn,
very high EM utilization rates at the time the recession contributing towards the upward drift in index rating. For
began. With policymakers having moved uniformly into 2010, we estimate gross EMBIG sovereign issuance at
aggressive easing mode at this time last year, a quicker $66.5bn, with net issuance estimated at $14.4bn. Of this
move toward EM policy normalization is appropriate. net issuance figure, we estimate investment grade net
supply will reach $9.7bn, or 68% of the total, again
Asset price inflation is also become a greater concern, contributing to upward ratings momentum.
particularly for EM Asia central bankers. Easy
monetary conditions, high household savings rates, intact EM Corporates, mainly quasi-sovereigns, have issued
banking systems, and strong housing demand have led to $118bn this year—decisively breaking through our
sharp rebounds in residential real estate prices. The full year forecast of $103bn—concentrated in
dollar carry trade is fueled both by low US rates and the investment grade issuance. Rather than slowing down
understanding that Asian currencies are artificially low. as the end of year approaches, supply remains extremely

29
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

strong with a record of over $23bn sold in the month of inflows to Emerging Market dedicated funds have
October, and 60% of total supply for the year issued increased sharply from the end-April lows.
since July. Deal sizes have averaged $720mn,
substantially larger than previous averages of $380mn in Figure 38: Cumulative flows to US real money funds has reached
2008 and $371mn in 2007, as quasi-sovereign and $18bn year-to-date, excluding fund flows from Japan
investment grade corporates have dominated the new US$
issue space. Of the $118bn issued this year, roughly 61% 40b
has come from the quasi-sovereign segment (including
supranational banks), just under one-quarter from 30
investment grade corporates, and the balance of around
15% from high yield corporates. We estimate that the 20
EM corporate bond stock now stands at $589bn versus
$529bn at the start of the year. 10

Sovereign ratings downgrades were much lighter 0


during the recent down cycle and thus ratings
agencies have been less aggressive in upgrading -10
countries since the financial storm has passed. Rating
downgrades exceeded upgrades in 2008 and so far in -20
2009 for S&P and Moody’s, after eight years in a row in Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
which the up moves exceeded the down ones. However,
this will reverse again in 2010, when the number of 2005 2006 2007 2008 2009
upgrades is expected to be small but to exceed
Source: J.P. Morgan.
downgrades. Since 2008, the following sovereigns have
been downgraded: El Salvador, Estonia, Hungary,
Jamaica, Latvia, Lithuania, Mexico, Nigeria and Ukraine. Japanese demand for carry is strong and rising.
However, a handful of EM countries have actually been Cumulative inflows from Japan to Emerging Market
upgraded, including Belize, Bolivia, Chile, Ecuador, bonds over the past 5 years had reached $38bn, and has
Indonesia, Lebanon, Pakistan, Philippines, South Africa, also been far more stable than similar inflows to EM
Uruguay, and most notably Brazil. In contrast, the ratings bond funds in the US and Europe. The pattern of inflows
cycle point to more downgrades in the developed market from Japan has shifted significantly over the past few
countries in the coming years. Indeed, using current and years. Earlier inflows were to EM hard currency bond
projected debt/GDP levels, the analysis of our global funds, but these ceased in early 2008. Inflows to EM
fixed income analysts finds that Spain, Ireland and local currency bond funds started increasing more rapidly
Greece may suffer additional 1-2 notch downgrades by in mid-2007 and peaked in 3Q08, although they have
2011. started to grow again since mid-2009. Inflows to EM
hard currency funds have now resumed, but only in EM
FX overlay strategies in which the investor buys USD-
EM fixed income inflows will catch up in denominated credit assets but the coupon is paid out in
2010 currencies ranging from AUD, to ZAR, TRY and BRL.
We estimate cumulative inflows to EM debt real money
funds at $17.8 billion so far this year, the majority of
which has come from strategic allocations (chart 4).
Next year, inflows should rebound to the $30-35bn range
recorded in 2006-2008. Real money remains overweight
as asset allocations increase, while hedge funds have not
increased exposure. Indeed, in their 3Q09 update, Hedge
Fund Research (HFR) noted that Emerging Market hedge
fund assets increased to $86.5bn but only because of
performance, with net flows virtually flat at -$37mn,
bringing year-to-date net outflows to $8.9bn. By contrast,

30
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Trading themes The economic recovery will see monetary stimulus


removed across CEEMEA
Stay overweight the EMBIG versus US High Grade.
The central banks of Poland, South Africa, the Czech
EMBIG spreads to tighten to 250bp by end-2010,
Republic, Turkey and Israel are expected to tighten
implying a total return of maximum 6.5% compared to
policy in 2010. In Hungary and Russia currency
only 4.5% for US High Grade and flat returns in other
appreciation is expected to result in further easing.
US fixed income markets. Position for a rally in 1Q10,
However, the normalization of monetary policy should
when nearly 50% of EMBIG cashflows ($51.8bn) are
not prevent bond markets from delivering positive
generated. Strategic inflows into EM fixed income have
returns in 2010, as this unwind is already anticipated in
reached $18bn so far in 2009 and may more than double
bond prices. The divergence between fx-implied yields
next year with increased demand from non-traditional
and local t-bill yields and the lack of concerns over
investors. We stay overweight Argentina, Belize,
capital controls suggests carry trades are better expressed
Dominican Republic, Hungary, Indonesia, Jamaica,
in local instruments. Spreads are especially wide in 1-
Mexico, Poland and Russia sovereign debt.
year t-bills versus fx implied rates in Israel (195bp),
Hungary (150bp) and Poland (130bp).
Overweight EM Corporates vs. both EM sovereigns
and US High Grade
Linkers offer best value in Latin America rates
We forecast the CEMBI Broad at 325bp versus 403bp
While central banks have been focusing on current
currently, with the EM high yield corporate default rate
goldilocks (the 4Q09 rebound has taken place amid low
to fall to 2.2% from an estimated 12.3% this year. EM
inflation) and in some cases even protest the tightening
Corporate credits from Asia and Emerging Europe
priced in by local yield curves, market participants have
offering the most attractive opportunities, while new
been wary of policy rate levels and fiscal policies that are
issues continue to offer better liquidity than secondary
turning increasingly pro-cyclical. The “low for long”
market. While refinancing risk was clearly a concern last
message seems at odds with the fact that Latin countries
year, access to alternative sources of capital including
are coming out of this recession with much tighter slack
local markets, has reduced this risk in a number of key
than G3 and in some cases already buoyant credit
markets. In 2010, we expect the default rate for the asset
markets. We favor outright exposure through linkers
class to fall to 2.2% of the EM corporate high yield bond
across the region. They look especially cheap in Chile
stock or just under 1% of the total bond stock.
and Colombia. In Chile we recommend receiving 2Y UF
outright. On the breakeven side, Mexico stands-out. We
Shift the focus to local markets, with the GBI-EM
believe inflation is unlikely to move below 5% in 2010
return likely to reach 12% in 2010
due to the fiscal reform, and recommend buying 3Y B/E
EM FX appreciation will endure at least through 1H10
inflation through UDI-TIIE swaps
amid USD weakness. We favor the higher carry
currencies going into 2010 and recommend TRY, RUB,
PLN and HUF in particular, as all are likely to deliver
returns in excess of 15%.

EM Asia local yield curves likely to be higher and


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

31
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Emerging Asia Economic outlook David FernandezAC


(65) 6882-2461
david.g.fernandez@jpmorgan.com
J.P. Morgan Securities Singapore Private Limited

EM Asia growth set to return to trend in 2010, but Early policy normalization from India and Korea, but
watch for choppiness don’t get carried away
After a traumatic entrance into 2009 that set the stage for Policymakers in China and the rest of EM Asia are still
a full-year growth performance (4.2%) well below the unlikely to make major adjustments to monetary policy
region’s potential, EM Asia is set to turn in a solid, trend- in the near term. The Bank of Korea and the Reserve
like year of growth in 2010. Indeed, if the J.P. Morgan Bank of India have been leaders in signalling to the
forecast of US GDP growth reaching 3.5% is achieved, market that they will be willing to begin to normalize
then there is upside risk to our forecast of 7.3% GDP
monetary conditions relatively early, with policy rate
growth in EM Asia next year.
changes expected from both Korea and India in 1Q10.
At the same time, developed market growth still poses a
downside risk to EM Asian GDP as our region remains But the BoK MPC is also aware that the market has taken
full-coupled to the fortunes of the US and the Euro Area, that message to heart and is pricing in 100-150bp of
in particular. Domestic stimulus, including sizable tightening over the next six months. Indonesia is another
monetary support, has clearly helped China and other key case where we believe the market has gotten ahead of
countries in the region recover quickly in 2009. itself. For 2010, Bank Indonesia believes that inflation
However, it is exactly the concern over DM growth (with will return to “normal levels in the 5±1% range” and
no bravado of de-coupling heard from Asian importantly sees medium-term inflation declining toward
policymakers) that will ensure that stimulative policies 3% over time based on the strong commitment by BI and
are only gradually normalized in 2010. the government to fighting inflation. Clearly, this is not a
central bank that wants to feed expectations of early
A useful reminder of the volatility of the GDP growth in
tightening. Overall, be aware that the market can
EM Asia is playing out as we enter 2010 as the region
overshoot in its expectations of tightening, and we should
rolls down after achieving extremely high growth in the
middle of 2009. On the J.P. Morgan forecast, EM Asia is expect Asian policymakers to tread carefully in sending
on track to slow down to about a 5% growth pace in 4Q such signals too strongly, especially early in 2010.
after averaging over 11% in 2Q and 3Q. It is a clear
possibility that some high beta economies such as The market is also keenly focused on China, but we
Singapore actually contract in 4Q. So, while the growth similarly think expectations of policy changes there may
recovery in EM Asia has been undeniably impressive, be overdone. We think PBoC will move in stages, relying
markets should tighten their safety belts as choppiness more on open market operations to withdraw excess
looks like could be a continuing theme going into 2010. liquidity, and combine that with sector-specific actions,
like a partial withdrawal of the stimulus provided to real
Figure 39: EM Asia—GDP growth
Forecasts estate late last year, to contain the risk of an asset bubble
and inflation. As for policy adjustment through the Rmb,
5
China’s policymakers still view the 2010 economic
0 oya
recovery in developed markets, especially in the US, with
5 a high degree of uncertainty. Over time, possibly by 2Q,
they may take a view that global recovery is on a surer
0
footing, with a turn to positive oya export growth from
-5 %q/q, saar China being a concrete signal of such a turn. But, only
0 when such confidence is achieved will the Rmb begin to
2005 2006 2007 2008 2009 2010 resume a gradual appreciation trend. J.P. Morgan’s
Source: J.P. Morgan economics. forecast is for Rmb/US$ to reach 6.5 by end-10, with the
appreciation only taking on meaningful momentum by
2Q10.

32
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

After dropping in 2009, EM Asia’s external surpluses Table 12: Asia—Current account balance forecasts
stabilize 2007 2008 2009E 2010E
For two consecutive years, EM Asia’s CA surpluses have Japan 212.739 158.867 133.941 115.677
dropped significantly. However, the global growth Australia -50.279 -44.683 -41.780 -50.840
New Zealand -19.289 -11.706 -5.342 -9.591
recovery and an expectation that oil prices will stay in a Em Asia 518.596 489.034 460.478 468.875
range of $70-90, should make 2010 a year of stabilization ex China and India 164.643 114.292 165.449 141.090
in the region’s CA surplus. In total, EM Asia is expected China 371.833 404.905 326.213 368.346
Hong Kong 25.527 30.623 26.113 25.863
to run a CA surplus of 5.3% of GDP compared with India -18.668 -29.733 -31.195 -41.040
5.5% in 2009. Importantly, China’s surplus will stabilize Indonesia 10.155 0.312 6.094 5.173
as a share of GDP, meaning the absolute size of the Korea 7.335 -5.292 38.463 17.120
Malaysia 29.105 38.722 32.576 40.148
surplus will rise by over $40 billion versus 2009. On the Philippines 7.119 4.227 5.852 3.051
other side, Korea and Thailand are expected to see strong Singapore 39.167 22.878 14.105 17.521
domestic growth which will push import growth higher Thailand 14.049 -2.503 12.912 4.818
than exports, resulting still in CA surpluses, but of a Taiwan 32.975 24.894 29.345 27.875
Source: J.P Morgan economics. Figures in US$ billions.
smaller magnitude.
Except for south Asia, the rest of the region will again
run significant CA surpluses. Combined with capital
inflows from equity and fixed income, as well as FDI, we
forecast regional FX reserves to rise another $350 billion
in 2010. Global rebalancing certainly has a long way to
go.

33
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

CEEMEA Differentiated Rebound Michael MarreseAC


(1-212) 834-4876
michael.marrese@jpmorgan.com
J.P. Morgan Securities Inc

Energy Exporters to Shine countries. Current-account balances are moving into


J.P. Morgan forecasts that 2010 average CEEMEA surpluses for most energy exporters, except for
growth will be 4.5% (at potential) given that a comfortably financeable deficits in Nigeria and Egypt.
substantial amount of global de-leveraging has already Only in Romania do we forecast a rapidly widening
occurred, a significant part of the global economy current account deficit. There is fiscal consolidation
remains committed to fiscal stimulus, and global interest across all CEEMEA countries because revenue
rates are forecast to remain low. Yet for 2010 we foresee performance is set to improve and the size of fiscal
great differentiation across countries, with only Russia, stimulus packages is declining.
Qatar, and Nigeria predicted to grow faster than
potential. Our 2010 growth forecast for Russia (5%) is Table 13: CEEMEA GDP growth forecasts
well above consensus, and we see upside risks to that
Real GDP (%) 2009 2010 2011 Potential GDP Growth
forecast given buoyant oil prices, sound macro Czech Rep -4.0 2.5 4.0 4.0
management, declining interest rates, and an anticipated Egypt** 4.7 5.0 5.5 6.0
revival in consumption. For Turkey, our forecast of 5% Hungary -6.5 1.0 4.0 3.5
Israel 0.0 3.0 4.5 4.0
growth is based on our belief that an IMF agreement will
Kazakhstan 0.3 2.0 2.8 7.0
be reached by early 2010, allowing the authorities to Nigeria 2.8 9.6 8.0 8.0
avoid crowding out the private sector. Even though the Poland 1.7 3.2 4.0 4.5
South African consumer will remain under pressure until Qatar 10.0 22.0 14.6 4.6
Romania -6.0 2.0 5.0 5.0
well into 2010, better external conditions, an inventory Russia -8.5 5.0 5.0 4.0
rebound and the 2010 FIFA World Cup are likely to South Africa -2.0 3.0 3.5 3.2
produce 3% growth by our estimates. Turkey -5.3 5.0 5.5 5.5
UAE 0.3 2.9 4.2 3.5
Ukraine -15.2 3.0 5.0 4.5
Recent GDP data showed that countries with IMF- CEEMEA* -3.8 4.5 5.0 4.6
imposed fiscal restraints and a large share of fx Source: National statistics offices and J.P. Morgan estimates
borrowing - Hungary and Romania - remained in *Weighted average; **Fiscal year

recession in the past quarter, although the pace of their


output contraction eased. The magnitude of fiscal
tightening has been by far the greatest in Hungary - the Table 14: CEEMEA Macro 2010 Forecasts
main reason for its underperformance. The recovery in CA Balance Fiscal Balance Public debt CPI
the rest of Central Europe has been much more closely % of GDP % of GDP % of GDP %eop
Czech Rep -2.5 -4.0 37.8 3.2
aligned with the Euro area cycle as these countries have Egypt** -3.1 -8.5 78.0 15.3
been able to implement modest fiscal stimulus and were Hungary -2.0 -3.8 80.5 3.0
much less exposed to fx borrowing. Israel 2.0 -4.0 84.0 3.4
Kazakhstan 6.2 0.0 10.4 8.0
Nigeria -3.0 -0.3 12.0 8.1
We predict 2011 growth will be even stronger than in Poland -2.8 -5.5 53.5 2.5
2010 across most of the region, with even Hungary and Qatar*** 42.1 15.8 6.2 4.5
Romania -6.5 -7.0 24.5 6.0
Romania returning to an acceptable pace of expansion.
Russia 4.0 -5.6 7.4 7.5
Upside risks to our 2011 forecasts are related to interest South Africa -4.8 -6.2 37.9 4.9
rates remaining low for even longer than we forecast and Turkey -2.6 0.9 51.4 5.1
to potentially higher commodity prices than we are UAE 10.6 8.6 16.4 4.2
Ukraine -0.9 -6.2 43.0 15.8
incorporating (for example, we assume oil prices will be CEEMEA* 1.3 -3.1 33.7 6.2
11% higher than the 2009 average in 2010 and 21% Source: National statistics offices and J.P. Morgan estimates
higher in 2011). Downside risks include increasing *Weighted average; **Fiscal year; *** Inflation is average not eop
capital controls and protectionism.

Other 2010 CEEMEA indicators are mostly reassuring.


Inflation remains within acceptable limits in most

34
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Brazil: Monetary policy normalization in sight Fabio Akira HashizumeAC


(55-11) 3048-3634
Fabio.Akira@jpmorgan.com
Banco J.P. Morgan S.A.

• Reduced economic slack and expansionary fiscal tightening cycle of 200bp in 2010, with most of the hikes
policies to trigger early normalization in rates implemented in the first half of next year.
• New measures to lean against BRL strength are
The unbalanced policy mix is conducive to further
likely
appreciation—and further FX intervention. The likely
• Hold positive carry DVO1 neutral exposure combination of an expansionary fiscal policy, higher
interest rates, and global USD weakness supports a
Fundamentals and politics in 2010 stronger BRL. In turn, this is likely to trigger a new
Brazil enjoyed a non-inflationary economic recovery round of ad hoc measures to curb currency appreciation.
in 2009. After facing the sharpest recession of its recent Much like the 2% IOF tax on foreign capital inflows of
history, Brazil’s economy printed an impressive 7.8%q/q last month, we believe new measures will produce noise,
(saar) growth rate in 2Q09. Encouragingly, the economic but will not be able to contain BRL strength driven by a
data flow thereafter is indicating that the slowdown, if global trend of USD weakness. Thus, we could see the
any, in the second half of this year will be just marginal. USD/BRL as low as 1.60 during the first half of 2010.
Thus, Brazil stands out as one of the few countries However, in the second half, when our global FX
registering positive growth rates already this year (0.3%), strategists anticipate a reversion in the weak USD trend,
and the risk to our 5.0% forecast for 2010 is becoming and Brazil’s current account deficit will be heading to a
biased to the upside. The pillar of this year’s recovery level above 3.0% of GDP, we believe BRL could start to
has been household consumption—supported by a strong depreciate, ending the year at 1.75 against USD.
labor market, fiscal and quasi-fiscal stimuli, and an early
revival in credit markets. Although consumption will Presidential elections are important to clarify fiscal
remain upbeat next year, we think the main driver of next policy beyond 2010. In October, Brazilians will go to the
year’s GDP will be a rebound in capital formation. So polls to elect a new president, after eight years of the
far, huge economic slack at the beginning of the year Lula administration. We think a large shift in economic
along with the exchange rate appreciation has supported policy is unlikely, but the leading contenders have not yet
strong activity indicators without stoking inflation. IPCA unveiled their ideas on this front. What is becoming
inflation should end 2009 at 4.3%, down from 5.9% in increasingly necessary, is a fiscal adjustment at the
2008, but we see increasing inflation risks for 2010. beginning of the next administration, given the pace of
deterioration of fiscal accounts in recent months, and the
Emerging inflation risks will require early policy prospects for next year.
normalization in 2010. The side effect of a faster-than
anticipated recovery has been a tightening of all Market strategy
measures of economic slack: among others, the
In FX, buy (1x2) 2-month 1.734 USD put/BRL call
unemployment rate is close to historical lows, and the
spread (1.734;1.662): Entered October 23 at 190bp cost.
manufacturing utilization rate is already above its long-
term average. This suggests that some degree of
In rates, receive Jan’13 versus pay Jan’15 (DV01
normalization in the current stimulative stance of fiscal
neutral steepener): Entered November 20 at 43bp.
and monetary policies is necessary to reduce prospective
inflationary risks. However, 2010 is an election year and
Favor NTNF ’17 over BRL Global ’16: Entered June
thus fiscal policy is unlikely to adjust in the near term. In
26 at 207bp.
fact, fiscal authorities are signaling that next year’s 3.3%
of GDP target for the primary surplus will be
Receive Jan’13 versus pay Jan’12 and Jan’14 (1x2x1
downgraded to accommodate the generous expenditure
fly): Entered October 23 at 40bp. Target: 15bp; stop:
side of the 2010 budget in the face of underperforming
55bp.
tax revenues. This places the burden of anti-inflation
policy on monetary authorities, and we forecast a

35
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Russia: Recovering from deep recession Anatoliy ShalAC


7(495) 937-7321
anatoliy.a.shal@jpmorgan.com
J.P. Morgan Bank International LLC

• Russia’s GDP expected to grow 5% in 2010 capital inflows may well bring net flows closer to
breakeven.
• BoP to be supportive for ruble strengthening
Gradual fiscal consolidation and higher oil prices are
• Despite gradual fiscal consolidation, Russia is
unlikely to prevent Russia from issuing US$9 billion
likely to issue US$9 billion of Eurobonds next year
of Eurobonds in 2010 and a similar amount in 2011.
Fundamentals and politics in 2010 With Urals at US$68/bbl, we see Russia’s federal budget
deficit at 5.6% of GDP next year, a small improvement
We expect Russia’s economy to expand annually 5% from just above 6% expected in 2009. This reduction is
in 2010 and 2011, recovering from the deep recession likely to come from measures to contain spending and
of 2008-2009, when the peak to trough GDP decline higher tax collection from the non-oil sector. That said,
exceeded 12%. With the initial impulse received from despite higher oil prices, the budget’s oil revenues are
net exports and higher commodity prices, the economy likely to shrink as a percentage of GDP due to a stronger
will, however, need to find a stronger 2010 underpinning ruble. As a result, the non-oil fiscal gap, which better
for domestic demand (which in 2009 has been weak). describes the fiscal position of an oil economy, may
Both consumption and investment are likely to be shrink more than the headline deficit from -14.1% in
supported by spillover effects from higher oil revenues, 2009 to -12.8% in 2010 and -10.2% in 2011. Despite
improving confidence, and easing financial conditions. these improvements, we expect that Russia’s financing
The corporate sector is expected to enjoy better access to needs will remain high and will be only partially covered
external financing, while domestic banks, after a sharp by use of oil savings. In 2010, Russia may need to
phase of deleveraging (the loan to deposit ratio dropped borrow up to US$20 billion on domestic and US$9
from 1.13 to 1.00 during January – September 09), are billion on Eurobond markets, we estimate.
expected to restart lending from early 2010. The renewed
buildup of reserves by the CBR and external financing of Market strategy
fiscal deficits by MinFin are expected to keep domestic
Stay overweight in EMBIG: We expect Russia’s new
liquidity abundant.
Eurobonds to be SEC-registered, which may be followed
Disinflation is expected to continue through 1H10, by SEC registration of existing ’18s, ’28s, and ’30s notes.
despite increasing money supply and lower policy This should trigger inclusion of those bonds in the
rates. As the amount of slack in the economy remains Barclays Capital US Aggregate Index, and attract a new
high—the negative output gap of around 5% of potential client pool to purchase Russian SEC-registered issues.
GDP is expected to close slowly in coming years—while
We recommend short USD/RUB for 2010: The
the ruble is strengthening, core inflation will keep
prospect of further dollar weakness and higher
slowing.
commodity prices bodes well for RUB in 2010. Further,
Supported by higher commodity prices, the balance as growth recovers and reserves return to a more
of payments is expected to exhibit a large surplus next comfortable level, the CBR is expected to scale back its
year. The current account is projected to be 4% of GDP intervention and allow faster appreciation. We target
in 2010, down from an estimated 4.8% in 2009. Although USD/RUB 26.5 and 33 versus the basket by end-2010.
export revenues will rise on higher oil prices (Urals up
We recommend long 4-year OFZs: While supply is
from US$59 to US$68/bbl in 2010), this will be offset by
increasing, the CBR continues to provide liquidity to the
growing imports, which are expected to recover on the
banking system to support issuance, while encouraging
back of a strengthening ruble and domestic demand. We
banks to increase the quality of balance sheet assets,
also conservatively assume that net private capital
indicating a bias to support government debt supply.
outflows could moderate from around US$40 billion in
2009 to US$20 billion in 2010. However, should oil
prices surprise on the upside or the CBR be too rigid in
exchange rate and interest rate policies, speculative

36
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

India: RBI to focus on financial stability Jahangir AzizAC


(9122) 6157-3385
jahangir.x.aziz@jpmorgan.com
J.P. Morgan India Private Limited

• Industry derives strength from increased festive February this year. A muted pace of core inflation
demand; capital goods expansion is welcome (0.0%m/m, sa) suggests that demand-side pressures
remain weak. The upward pressure on food prices is
• Mixed external trade signals suggest the recovery
likely to ease as the heightened festive demand declines.
is still not secure
Expectations of an improved winter crop will also help
• RBI to be on guard against shift in inflation alleviate the pressure. However, a rise in global
expectations; tightening likely in 1Q10 commodity prices will be critical in determining the
impact on overall prices. On headline inflation, with the
Fundamentals and politics in 2010 high base effect expected to fade, the year-ago prints will
Industrial activity strengthened in September likely increase. We expect the year-ago print to be
supported by festive demand. But October Markit around 7.5% by end-March 2010.
manufacturing PMI declined to 55 due to destocking On policy, increased focus on financial stability would
after the festivals. In details, IP strengthened as total keep the RBI on guard against material shifts in
production grew a healthy 1.1%m/m (sa), to be up a inflation expectations. Even if core inflation remains
robust 9.1%oya. With this, the average for the first half benign, we expect that fears of easy liquidity spawning
of FY10 improved to 6.5%oya from 5.0% in the first half potential asset price bubbles could prompt the central
of FY09. September production derived support from bank to tighten. In October, RBI withdrew
capital goods (7.5%m/m, sa) and consumer durables unconventional measures that were deemed no longer
(4.3%). Continued strength in motor vehicle sales and necessary with improving domestic and financial
increased production of white goods to meet festival markets. We expect that the tightening will likely be
demand also likely boosted total output. On a year-ago initiated by a 50bp hike in the cash reserve ratio followed
basis, IP growth is expected to print relatively strong by 25bp hikes in the policy rates in 1Q10 and 2Q10.
numbers in the second half of FY10, largely supported by
a very low base from the abysmally weak growth last Market strategy
year.
In FX, we recommended holding on to USD/INR
Merchandise trade data continue to show mixed signs shorts, entered at 46.95, and target 45 by December:
of revival. The trade deficit narrowed to US$7.8 billion The push toward a stronger INR continues as risk
in September from US$8.3 billion in August. A modest sentiment improves and capital flows continue to be
gain in exports (1.6%m/m, sa) together with a contraction strong. Offshore parties have driven the INR rally so far.
in imports (-5.6%) helped narrow the trade gap. With Onshore exporters have yet to position and retain the key
this, the trade deficit for the first half of FY10 stood at to the next down move, which will depend on the timing
US$46.7 billion versus US$76.0 billion in first half of of the introduction of economic reform bills in
FY09. Sequentially, exports expanded for the sixth Parliament.
consecutive month. However, the year-ago comparison
In rates, we are bullish on 5-year bonds, but neutral
continued to contract (-13.8%oya), weighed down by last
on OIS swaps: Yields are at one-year highs, as the G-sec
year’s high base. Imports contracted for the ninth
calendar is coming to an end in January, and as loan
consecutive month (-31.3%oya). Still-weak exports
growth remains anemic. However, the 1-year swap has
together with sluggish nonoil imports suggest that the
dropped into the LAF corridor, so further downside is
pace of economic revival is not yet secure.
limited. Meanwhile, we are not keen to pay as negative
Upside pressure from food prices is likely to ease, but carry is extremely steep.
year-ago prints to rise on a fading favorable base
effect. October inflation declined 0.2%m/m (sa) to be up
1.34% on a year-ago basis. The fall in overall inflation
was largely driven by the dip in prices of primary
articles. Importantly, the food index, as well as the
overall index sequentially declined for the first time since

37
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

China: Recovery despite policy fine-tuning Grace NgAC


(852) 2800-7002
grace.h.ng@jpmorgan.com
JPMorgan Chase Bank, N.A., Hong Kong

• Exports, consumption, and housing should be key the PPI front picked up strongly during 3Q, it has eased
growth drivers in 2H09 and 2010 going into 4Q. If this trend continues, it should further
calm inflation concerns going into next year.
• CPI and PPI on recovering trend, but sequential
trend rose at a slower pace in October It will be important to monitor the authorities’ macro
policy tone, especially in the run-up to the annual
• Major near-term monetary policy shift unlikely;
central economic work summit to be held early next
central bank focus is on managing excess liquidity
month. On monetary policy, we expect the PBoC to
Fundamentals and politics in 2010 normalize overall monetary conditions in stages, relying
on open market operations to withdraw excess liquidity
China’s economy continued to record a solid pace of in the near term, combined with sector-specific actions
recovery in 3Q09, rising at 8.9%oya. In seasonally like a partial withdrawal of the stimulus provided to real
adjusted terms, we calculate that real GDP rose 10.0%q/q estate to contain the risk of an asset bubble and inflation.
(saar) in 3Q, easing modestly from the 14.8% spike in We expect the benchmark policy rates to start rising by
2Q. October data confirmed that the Chinese economy’s mid-2010, with a total of two 27bp hikes over the rest of
upbeat momentum continued into 4Q, adding to the next year. On the currency front, the PBoC’s latest tone
strong gain in activity seen in September. The latest data hints at greater flexibility in the exchange rate, which
also support our view that the major sources of growth in would likely begin sometime in 2Q10 in our view, when
the Chinese economy have been broadening from public over-year-ago export growth resumes and when officials
investment to include consumption, private investment, are convinced the global recovery is on a sure footing.
and the steady recovery in exports. Our forecast is for CNY/USD to reach 6.5 by end-2010.
We expect the economy to continue to grow solidly in
Market strategy
the coming quarters. On the back of the 3Q GDP report,
we have fine-tuned the 2009 full-year GDP growth In FX, we remain short USD/CNY via the longer-
forecast to 8.6% (previous forecast: 8.4%), while keeping dated 12-month NDFs: Policymakers should tighten
the 2010 GDP growth forecast at 9.5%. Continuing with into 2010 as growth and exports settle into a more
the theme of broadening sources of growth, we expect sustainable pattern. The NDF dollar discount and
the key growth drivers to include a solid recovery in negative carry to short USD/CNY widened during
exports. Our global team is looking for a sustained, President Obama’s recent official visit to China, but we
synchronized expansion of the global economy through view this pre-positioning as overdone, and would look to
2010. As such, net external trade, which had been a build short USD/CNY positions should the NDFs pull
significant drag on China’s overall growth since late last back.
year, would likely come back to contribute positively to
In interest rate markets, we stay with our
GDP growth again. On the domestic front, we look for a
recommendation of a 1s/5s steepening trade on the
broad-based pickup in private consumption, along with
ND-OIS swap curve: Liquidity will remain flush until
improving labor markets and hence household income,
the RRR is hiked (likely in 2Q) as ongoing open market
on top of further fiscal stimulus, and marked expansion
operation withdrawals are not strong enough to fully
in private housing investment as well as other private
sterilize FX inflows. Meanwhile, the long end of the
sector investment.
curve will suffer as upbeat growth is priced into the 5-
Encouragingly, the growth-inflation balance year sector.
improved somewhat in October, with notable easing
in the pace of the sequential gain in food prices and
PPI. October headline CPI fell 0.5%oya, translating into
a slower pace of monthly gain of 0.2%m/m, compared to
0.3%m/m and 0.4% in September and August,
respectively, which in turn reflects the slower pace of the
rise in food prices. While pipeline inflation pressure from

38
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

South Africa: A slow recovery is in store Graham StockAC


(44-20) 7777-3430
graham.stock@jpmorgan.com
JPMorgan Chase Bank N.A, London Branch

• The consumer will remain under pressure until The current account adjustment should fade steadily
well into 2010 as domestic demand recovers. The slowdown in
domestic activity and lower dividend outflows should
• Inflation pressures will continue to ease and the
bring the current account deficit down to 4.7% of GDP
output gap will allow rates to stay low
this year. We expect a similar level in 2010 as household
• The political outlook is settled, but pressures for consumption expenditure lags the recovery. Financing
higher spending will persist for the deficit remains comfortable, thanks to buoyant
portfolio, FDI, and public sector borrowing inflows.
Fundamentals and politics in 2010
President Zuma assumed office in April 2009 and the
The South African economy has suffered given the ANC’s dominance remains intact. Nevertheless, slow
global contraction. We estimate that domestic economic growth and heavy job losses are likely to fuel social
activity only just turned positive last quarter. Monthly pressures and criticism of the government from within
economic activity reports have revealed fewer signs of a the ANC and its alliance partners. The government has
recovery in consumer spending than in other countries. not engaged in active fiscal stimulus beyond allowing the
While the drags from sticky inflation and labor market deficit to widen due to the weak revenue performance
uncertainty should fade as 2010 progresses, the drop in and pushing ahead with existing infrastructure
household wealth and restricted access to credit will investment plans. The consolidated 2009/10 fiscal year
likely dampen expenditure growth relative to growth in budget deficit is expected to widen to around 7.5% of
disposable income until late in the year. GDP, taking the public sector borrowing requirement to
A bounce is on the way. Despite lackluster consumer 12% of GDP as the parastatals maintain their investment
spending, we think the improvement in external demand programs. We are encouraged by the expenditure
and easing in inventory reduction is set to boost GDP, discipline shown in the Medium-Term Budget Policy
helping to lift the economy out of recession. We believe Statement, and expect the government to be market-
that the inventory drawdown in the first half of 2009 has friendly.
created the scope for a bounce when the cycle finally
Market strategy
turns, and we expect economic growth of 3% in 2010.
The banking sector has weathered the crisis in better Marketweight external debt: Net 2010 issuance of
shape than its counterparts elsewhere, which will help to US$2 billion will be absorbed easily, but we think South
underpin the recovery. We estimate the 2010 FIFA Africa will remain vulnerable to any global downturn.
World Cup will add around 0.4%-pts to GDP next year.
In local rates, we recommend overweight positions for
The downward trend in inflation will likely be 2010. International and local investors are closing out
interrupted by base effects at the start of 2010. The their underweight positions. Bonds should benefit from
significant output gap, fading supply shocks in food lower inflation expectations and high local yields should
inflation, and pass-through from rand strength since be attractive for carry-focused investors. Supply from
March should all sustain the ongoing moderation in national government and parastatal issuers is a concern,
headline inflation, which fell to 6.1%oya in September. but the high yields compensate adequately for this factor.
Base effects from sharp declines in food and fuel prices
We are neutral USD/ZAR for 2010: The early
at end-2008 will delay re-entry into the 3-6% target band
resumption of equity portfolio flows and a narrowing of
until the first quarter of 2010, but headline inflation will
the current account deficit resulted in a strong ZAR
hold close to the midpoint through much of the year.
performance in 2009. At a grassroots level, opposition to
Although electricity tariff hikes of up to 45% pose the
ZAR appreciation has increased and, in our view, there is
main threat to the inflation outlook, we think the large
a risk that some controls are imposed on inflows.
output gap and moderate pace of recovery will encourage
Therefore, with the SARB once again accumulating
the SARB to keep rates on hold at 7% until late in 2010.
reserves, we project 7.40 in USD/ZAR at end-2010,
broadly unchanged.

39
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Emerging Markets Corporate Outlook - 2010 Warren MarAC


(1-212) 834-4274
warren.j.mar@jpmorgan.com
J.P. Morgan Securities Inc.

The resilience shown by EM corporates throughout Our strategy for 2010 recognizes that yields have
the credit crisis has improved their profile among retraced to historical lows and spreads to levels closer
investors, with the asset class likely to garner a to long-run averages, and that tighter valuations will
greater following as valuations in developed credit need to be driven much more by relative value
markets look increasingly expensive. Although there considerations. At the aggregate level, we move EM
were notable casualties in 2009, with combined defaults corporates as an asset class (CEMBI Broad) to
and debt exchanges rising to 12.3% of the EM corporate Overweight relative to EM sovereigns (EMBIG) and US
high yield bond stock (compared with a par-weighted credit (JULI). At the regional level, we expect credits
default rate of 16.24% including distressed exchanges in from Asia and Europe to contribute the lion’s share of the
the US high yield market), many of the concerns that spread tightening, followed by Latin America, while at
shaped expectations for a more serious collapse and the country level we still expect some of the more
prolonged period of market weakness at the end of significant spread opportunities to be in the higher-beta
2008—such as rising capital flight and mounting external countries such as Indonesia, India, Kazakhstan, and
refinancing risks in Russia, unhedged corporate Argentina, although note that these account for less than
derivative exposures in Brazil and Mexico, the downturn 6% of the corporate index. We believe that Russian
in China’s real estate market, and short-term FX funding corporate performance will be more muted in 2010
needs in Korea—have come to pass without prompting despite the improved macro backdrop as commodity
broader systemic failures. Of particular note was the prices recover.
generally proactive and targeted response of governments Looking into the first quarter of 2010, we are likely to
in respective markets to provide financial support continue to favor new issues for adding risk, with
packages to ease financial stress in the corporate sector. supply expected to reach around US$128bn. New
The one exception was of course Dubai, which decided issues in our view are most likely to offer investors the
recently to call a standstill on the debt of its largest state- best avenue for adding meaningful positions with
owned entity, Dubai World and its property subsidiary secondary market liquidity expected to remain
Nakheel. constrained. Looking out over the first half of 2010, we
Looking to 2010, we remain constructive on EM favor a more active approach to rotating out of lower-
corporates as an asset class despite this year’s stellar beta credits and into higher-beta opportunities in order to
performance. Although the pace of the market’s enhance overall returns (premised on credit fundamentals
recovery has brought us back to pre-crisis levels, we continuing to show sequential improvements) and
believe that there is still room for spreads to tighten selectively taking profits in names that were the first to
toward our 2010 year-end target of 325bp for the CEMBI benefit from the market’s recovery, and where technicals
Broad versus 403bp as of November 30, 2009. We do not have clearly contributed to pushing prices beyond fair
expect the recent Dubai event to have a long-lasting value.
impact on EM corporate valuations outside of the Middle Table 15: Key forecasts
East region and see this spread compression next year Current/year-to- 2010 Direction/mar
driven by stable yields and rising interest rates, based on date (as of targets ket impact
November 30, and
the core assumption that the shape of the global recovery 2009 forecasts)
will remain robust and technicals generally supportive. CEMBI Broad (SOT) 403 325 ↓; positive
We also note that the EM corporate indices have EM corporate supply (US$ 118,166 127,500 ↑; neutral
millions)
rebalanced toward higher-quality assets over the course Asia 41,693 45,000
of 2009, given the bias of new issuance this year. With Emerging Europe 20,283 30,000
over 80% of new issuance coming from investment grade Latin America 38,313 42,500
credits (versus an overall debt stock that is 69% Middle East and Africa 17,877 10,000
EM corporate defaults (%)1 12.3 2.2 ↓; positive
investment grade), there has been an associated Asia 11.0 2.4
tightening in index spreads. We caution that our year-end Emerging Europe 18.4 2.1
point target is unlikely to be reached in a straight line as Latin America 5.9 2.0
Middle East and Africa 4.4 2.9
market volatility returns in an intensifying debate over Source: J.P. Morgan 1. Current year-to-date and 2010 default rates calculated as a
the pace at which monetary policies are normalized percentage of Total Bond Stock as of December 31, 2008, and October 30, 2009,
globally. respectively and assumes that Nakheel defaults in 2009.

40
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

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

Table 16: High-Conviction Buy Recommendations


Issue Ticker, rating Region Z-spread/ price Rationale
Chinatrust UT2 5.625% call CHIFIN, Asia 600bp After raising US$1 billion of equity, concerns over asset quality drag should be
2015 Baa1/BBB/A- eased.
DBS FRN call 2016 DBSSP, Asia DM+261bp FRNs remain chronically cheap, but we like the prospects for longer-duration
Aa2/A+/A+ FRNs to trade up as and when US rates shift higher. High-quality bank is
defensive in downturns.
ICICI 6.375% call 2017 ICICI Baa3/BB/BB Asia 535bp One of the highest-yielding bonds in Asia, with reassurance from dated
structure. September earnings demonstrate bank is shifting to more defensive
franchise, which we believe spreads do not yet reflect.
Henderson Land 5.5% 2019 HENLND, Asia 260bp Offers best value in the HK property space, in our view. Currently trades 60-
NR/NR/NR 65bp wider than Swire, but we believe the fair value is just 20bp wider. Lack of
ratings has been a key overhang on performance.
Korea Hydro 6.25% 2014 KOHNPW, Asia 199bp Our top pick in the Korean quasi-sovereign corporate land. Though supply in
A2/A/A+ the space could continue to be an overhang in the near term, taking a medium-
term view, we see value in these bonds.
BUMA 11.75% 2014 PTBMMU, Asia 942bp We like this as a short- to medium-term play. BUMA is Indonesia’s second-
Ba3/NR/BB- largest coal mining contractor, with almost all the major miners as its
customers. In our view, one of the few better-quality HY corporates yielding in
double digits.
Ciliandra 10.75% 2011 CLPKIJ, Asia 736bp Short-dated bond with decent carry. Expect company to successfully
B2/NR/BB- refinance/ exchange with the capital markets now open. Also sitting on high
cash balance. Self-sustaining operations even at CPO prices of US$450/ton
(versus ytd average of around US$600/ton).
Lippo Karawaci 8.875% 2011 LIPPO, B1/B/B+ Asia 893bp Stable recurrent income from hotels and hospitals portfolio provides a cushion
in the current downturn. Has lower structural subordination risks compared to
China property counterparts.
Lai Fung 9.125% 2014 LAIFNG, Asia 857bp Benefits from a portfolio of investment properties that provides stable rental
B1/B+/NR income that helps to fund working capital needs.
Paiton 9.34% 2014 PAITON, B1/B/NR Asia 647bp Indonesian IPP with PLN as sole off-taker. Bonds have sinking fund provision,
which reduces average life to around 2.3 years. We believe there are sufficient
protective mechanisms in place for the existing lenders before the company
starts raising debt for the new plant.
Gazprom 10.5% 2014 GAZPRU, CEEMEA 436bp Among the cheapest Gazprom bonds on the curve, like 52bp pickup to 8.125%
Baa1/NR/NR ’14s. The negative basis of -195bp to 5-year GAZPRU CDS also looks
attractive.
Alrosa 8.875% 2014 ALROSA, CEEMEA 602bp The cheapest of Russian quasi-sovereigns; expect the company’s credit profile
Ba3/NR/B to improve further in 2010.
Alliance Bank 9.25% 2013 ALLIBK, C/SDRD CEEMEA US$29.5 We believe that Alliance offers the best upside potential amongst the
distressed Kazakh names. We see restructuring well advanced and deal risk
low.
ATF 9.25% 2012 ATFBP, Ba3/B/B- CEEMEA 731bp A full subsidiary of Italy’s Unicredito, ATF is well provisioned and well
capitalized and likely to further gain market share in 2010. Good outright value
and cheap to ’16s.
Pricing as of November 12, 2009.
Source: J.P. Morgan.

41
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Economics Forecasts
GDP and CPI growth forecasts
Real GDP % over a year ago Real GDP % over previous period, saar Consumer Prices % over a year ago
2008 2009E 2010E 2Q09 3Q09 4Q09E 1Q10E 2Q10E 3Q10E 4Q10E 2Q09 4Q09E 2Q10E 4Q10E
The Americas
United States 0.4 -2.5 3.2 -0.7 2.8 3.5 3.0 4.0 4.0 3.5 -1.6 1.2 2.2 1.1
Canada 0.4 -2.6 2.4 -3.4 0.5 3.0 3.0 3.0 3.5 4.0 -0.9 0.8 1.4 2.3
Latin America 3.8 -3.1 4.0 2.0 5.7 6.0 4.7 3.1 4.0 1.9 5.9 5.6 6.8 7.2
Argentina 6.8 -4.0 4.0 1.1 -14.0 -4.0 12.0 10.0 6.0 4.0 5.9 6.0 10.0 10.2
Brazil 5.1 0.3 5.0 7.8 7.2 6.7 4.3 5.0 4.0 4.0 4.4 4.2 4.5 4.7
Chile 3.2 -1.5 5.0 -1.2 4.6 10.0 6.0 4.0 2.0 3.0 -0.6 -0.8 2.0 2.6
Colombia 2.4 -0.5 3.0 2.7 1.9 3.2 3.5 4.3 5.5 4.5 3.2 3.3 3.9 4.3
Ecuador 6.5 -1.0 1.5 -1.0 -2.0 0.0 2.0 2.5 4.0 4.0 3.5 3.5 2.4 4.0
Mexico 1.3 -7.0 3.5 -1.1 12.2 7.5 3.7 -0.6 3.3 -0.9 5.1 4.6 5.3 5.2
Peru 9.8 1.0 5.4 -1.6 8.0 13.0 3.0 3.5 3.5 4.0 1.9 1.1 1.5 2.0
Venezuela 4.8 -2.5 1.5 -4.1 -7.8 5.0 3.0 3.0 5.0 0.0 28.7 29.0 34.2 37.9
Asia/Pacific
Japan -0.7 -5.2 2.4 2.7 4.8 2.5 2.5 1.5 1.5 2.0 -2.2 -1.8 -1.8 -1.3
Australia 2.4 1.0 2.9 2.5 1.2 3.8 2.1 2.4 4.4 6.2 1.3 2.1 2.5 2.6
New Zealand 0.1 -1.3 2.8 0.3 2.5 2.1 2.6 4.3 3.4 2.8 1.7 2.6 2.4 1.7
Asia ex Japan 5.8 4.2 7.3 12.4 9.3 5.4 6.9 7.1 7.3 6.9 1.4 2.7 4.3 3.4
China 9.0 8.6 9.5 14.8 10.0 9.1 9.0 9.5 9.3 8.7 -1.3 0.9 3.2 2.7
Hong Kong 2.4 -3.3 4.5 14.8 1.6 5.0 4.2 4.0 3.8 3.5 -0.9 -0.4 0.6 2.1
India 6.1 6.0 7.5 6.7 9.0 -1.0 10.0 7.0 9.6 9.0 11.8 12.2 11.9 6.2
Indonesia 6.1 4.3 5.3 4.3 5.3 3.5 5.5 6.0 6.0 6.0 2.8 2.8 4.9 6.0
Korea 2.2 0.2 4.7 11.0 12.3 4.0 2.0 3.5 3.5 3.5 2.0 2.5 3.0 3.3
Malaysia 4.6 -2.4 5.0 10.1 9.4 4.5 1.6 4.9 4.9 4.9 -2.4 -1.2 0.5 1.5
Philippines 3.8 1.5 5.0 7.0 4.1 4.0 5.0 5.0 5.0 5.0 0.3 3.0 3.6 3.7
Singapore 1.1 -2.1 6.5 21.7 14.2 -3.6 8.2 7.0 4.9 4.9 -0.4 -0.8 1.9 1.8
Taiwan 0.7 -3.0 5.8 18.8 8.3 6.0 3.8 5.0 4.6 3.5 -1.3 -1.0 1.8 2.1
Thailand 2.6 -3.1 6.1 9.0 5.5 5.3 4.9 5.7 7.0 7.0 -2.2 1.4 4.6 4.0
Africa/Middle East
Israel 4.0 0.0 3.0 1.0 2.2 2.5 3.0 3.0 3.0 3.0 3.2 3.3 3.4 3.3
South Africa 3.1 -2.0 3.0 -3.0 0.5 3.4 4.4 3.8 3.6 4.1 6.4 6.2 4.3 4.8
Europe
Euro area 0.6 -3.9 2.5 -0.7 1.5 2.5 3.0 3.0 3.0 2.5 -0.4 0.3 0.9 1.2
Germany 1.0 -4.7 3.4 1.8 2.9 4.0 3.5 3.5 3.5 2.5 -0.4 0.3 0.5 0.3
France 0.3 -2.3 2.5 1.1 1.1 2.5 3.0 3.0 3.0 2.5 -0.5 0.6 1.0 0.7
Italy -1.0 -4.8 1.7 -1.9 2.4 1.0 2.0 2.0 2.0 2.5 0.1 1.0 1.4 1.0
Norway 2.1 -1.1 2.8 1.3 2.0 3.0 3.0 3.0 3.0 3.0 1.8 1.3 1.0 0.4
Sweden -0.5 -4.2 3.2 1.2 0.7 4.0 4.0 3.5 3.5 3.0 -1.1 -0.3 0.8 0.5
Switzerland 1.8 -1.3 2.2 -1.0 1.8 2.3 2.5 2.5 3.0 3.0 -1.0 -0.4 0.6 0.7
United Kingdom 0.6 -4.6 1.6 -2.3 -1.2 2.0 2.0 2.5 2.8 3.5 1.5 2.2 2.3 1.4
Emerging Europe 4.1 -5.3 4.0 2.1 4.7 4.9 3.4 3.2 3.3 3.6 7.0 6.2 5.2 5.3
Czech Republic 2.7 -4.0 2.5 1.2 3.2 5.0 2.8 2.5 2.2 2.0 0.1 0.6 1.9 3.6
Hungary 0.6 -6.5 1.0 -7.9 -7.0 3.5 3.0 2.5 2.5 3.5 5.0 5.1 3.7 2.8
Poland 5.0 1.7 3.2 2.8 5.5 3.0 2.5 3.0 3.5 3.5 3.5 3.4 2.1 2.3
Romania 7.1 -6.0 2.0 … … … … … … … 5.0 4.7 5.5 6.5
Russia 5.6 -8.5 5.0 4.5 7.9 6.5 4.5 4.0 4.0 4.5 11.4 9.5 7.0 7.4
Turkey 0.9 -5.3 5.0 … … … … … … … 5.3 5.0 6.3 5.2
Global 1.3 -2.5 3.3 1.4 3.4 3.4 3.4 3.6 3.7 3.4 -0.1 1.2 1.9 1.6
Developed markets 0.4 -3.4 2.7 -0.3 2.3 2.9 2.8 3.1 3.2 3.0 -1.0 0.5 1.1 0.8
Emerging markets 5.0 0.7 5.8 7.6 7.3 5.4 5.6 5.3 5.7 5.0 3.5 4.0 5.0 4.6
Source: J.P. Morgan economics, 27 November 2009.

42
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Sources of GDP Growth


Share of Real GDP Contribution to Real GDP growth GDP Deflator Y/Y
Country 2007 2008 2009 2010 2007 2008 2009 2010 2008 2009 2010
USA Real GDP 2.1 0.4 -2.4 3.3 2.4 1.5 0.8
Consumption 88.7 88.7 90.9 89.8 2.2 0.4 0.0 1.8
Fixed investment 16.2 15.0 11.8 12.8 -0.6 -1.2 -3.5 1.4
Net external demand -4.9 -3.7 -2.7 -2.6 0.6 1.2 1.0 0.0
UK Real GDP 2.6 0.6 -4.7 1.6 3.0 0.8 1.7
Consumption 84.7 85.4 88.2 87.9 1.6 1.1 -1.3 1.0
Fixed investment 18.7 17.6 13.9 13.8 1.5 -1.0 -4.3 0.1
Net external demand -3.4 -2.9 -2.1 -1.6 -0.5 0.5 0.9 0.4
Euro Real GDP 2.7 0.6 -3.9 2.5 2.3 1.2 1.3
Consumption 76.3 76.5 79.5 78.6 1.8 0.6 0.0 1.1
Fixed investment 22.2 22.0 20.0 20.4 0.5 0.0 -2.7 0.9
Net external demand 1.5 1.6 0.4 1.0 0.4 0.0 -1.1 0.5
Japan Real GDP 2.3 -0.7 -5.2 2.4 -0.9 0.0 -2.0
Consumption 72.1 73.1 76.9 76.2 0.9 0.6 -0.1 1.3
Fixed investment 23.2 22.0 20.4 20.0 0.2 -1.4 -2.6 0.0
Net external demand 4.7 4.9 2.7 3.9 1.2 0.1 -2.5 1.1
Australia Real GDP 4.0 2.4 1.0 2.9 6.7 0.3 1.1
Consumption 73.7 74.1 74.3 73.6 2.9 2.2 0.9 1.5
Fixed investment 28.6 29.9 27.8 28.0 3.1 2.0 -1.9 1.0
Net external demand -2.3 -4.0 -2.1 -1.6 -2.0 -1.8 1.9 0.4
Brazil Real GDP 5.7 5.1 0.3 5.0 5.9 4.0 4.5
Consumption 78.4 78.6 81.0 81.3 4.6 4.3 2.6 4.3
Fixed investment 19.3 21.2 18.6 19.7 2.2 2.9 -2.6 2.1
Net external demand 2.3 0.2 0.4 -1.1 -1.1 -2.1 0.2 -1.5
China Real GDP 13.0 9.0 8.6 9.5 7.6 -0.5 2.5
Consumption 48.9 48.7 48.9 48.9 4.7 4.2 4.4 4.5
Fixed investment 41.7 42.4 45.4 45.7 5.6 4.6 6.8 4.7
Net external demand 9.4 8.8 5.7 5.4 2.7 0.2 -2.6 0.2
Czech Republic Real GDP 6.1 2.7 -4.0 2.5 14.2 8.0 12.2
Consumption 68.2 68.3 71.9 71.1 2.6 2.0 0.7 1.0
Fixed investment 31.0 29.3 25.8 27.8 2.8 -0.9 -4.5 2.6
Net external demand 0.8 2.4 2.3 1.1 0.7 1.6 -0.2 -1.2
Hong Kong Real GDP 6.4 2.4 -3.3 4.5 1.4 -0.5 0.8
Consumption 68.2 67.7 69.6 69.8 5.3 1.0 -0.3 3.3
Fixed investment 20.9 20.2 19.8 19.8 1.6 -0.3 -1.0 0.9
Net external demand 10.8 12.2 10.6 10.4 -0.6 1.6 -2.0 0.3
Hungary Real GDP 1.2 0.6 -6.5 1.0 3.5 4.0 3.0
Consumption 74.1 73.4 74.0 72.1 -1.2 -0.2 -4.3 -1.2
Fixed investment 22.5 22.8 15.6 15.1 -0.7 0.5 -8.2 -0.4
Net external demand 3.5 3.8 10.4 12.9 3.1 0.3 6.0 2.6
India Real GDP 9.1 6.1 6.0 7.5 8.5 4.5 5.8
Consumption 66.9 66.5 64.7 63.2 5.2 3.6 2.1 3.2
Fixed Investment 37.4 39.3 41.7 45.8 5.2 4.3 4.9 7.5
Net external demand -4.3 -5.8 -6.3 -9.0 -1.3 -1.8 -0.9 -3.3
Indonesia Real GDP 6.3 6.1 4.3 5.3 18.3 6.0 6.5
Consumption 65.4 65.3 66.3 66.1 3.2 3.9 3.8 3.3
Fixed investment 25.1 25.1 23.8 24.1 2.4 1.5 -0.2 1.5
Net external demand 9.5 9.6 9.9 9.8 0.6 0.7 0.8 0.5
Korea Real GDP 5.1 2.2 0.2 4.7 2.7 0.2 2.0
Consumption 67.6 67.2 68.2 67.6 3.5 1.1 1.1 2.5
Fixed investment 28.9 28.4 23.9 25.8 0.9 0.1 -4.5 3.1
Net external demand 3.4 4.4 7.9 6.6 0.7 1.1 3.5 -1.0
Malaysia Real GDP 6.3 4.6 -2.4 5.0 10.3 2.0 5.0
Consumption 63.4 66.1 65.0 63.8 6.1 5.7 -2.6 2.0
Fixed investment 22.4 20.8 19.8 23.3 1.2 -0.5 -1.5 4.7
Net external demand 14.2 13.1 15.2 12.9 -1.0 -0.5 1.8 -1.7
Mexico Real GDP 3.6 1.3 -7.0 3.5 6.6 3.1 3.7
Consumption 80.0 80.1 80.9 80.3 2.9 1.1 -4.8 2.2
Fixed investment 22.9 23.8 21.7 22.3 1.3 1.2 -3.6 1.4
Net external demand -2.9 -3.9 -2.6 -2.6 -0.6 -1.0 1.5 -0.1

43
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Sources of GDP Growth (cont'd)


Share of Real GDP Contribution to Real GDP growth GDP Deflator Y/Y
Country 2007 2008 2009 2010 2007 2008 2009 2010 2008 2009 2010
Philippine Real GDP 7.1 3.8 1.5 5.0 7.5 3.0 4.0
Consumption 84.2 84.7 85.0 84.6 5.2 3.7 1.7 3.8
Fixed investment 12.1 13.9 14.9 17.5 -3.2 2.4 1.2 3.5
Net external demand 3.7 1.4 0.1 -2.1 5.1 -2.3 -1.3 -2.2
Poland Real GDP 6.8 5.0 1.7 3.2 5.0 1.7 3.2
Consumption 78.4 79.4 79.8 79.5 3.7 4.9 1.8 2.2
Fixed investment 26.0 25.5 22.5 21.9 5.3 0.8 -2.6 0.0
Net external demand -4.4 -4.9 -2.4 -1.3 -2.2 -0.7 2.5 1.0
Russia Real GDP 8.1 5.6 -8.5 5.0 19.2 3.0 6.5
Consumption 73.6 76.3 80.8 79.5 8.2 7.0 -2.4 2.7
Fixed investment 30.0 32.5 18.1 19.3 6.5 4.3 -16.0 2.2
Net external demand -3.6 -8.9 1.1 1.1 -6.7 -5.8 9.9 0.1
Singapore Real GDP 7.8 1.1 -2.1 6.5 1.1 -0.5 2.5
Consumption 48.5 49.7 50.0 48.6 2.3 1.7 -0.7 1.7
Fixed investment 20.3 29.9 28.5 28.1 1.9 10.0 -2.0 1.4
Net external demand 31.2 20.4 21.5 23.3 3.6 -10.6 0.7 3.3
South Africa Real GDP 5.1 3.1 -2.0 3.0 10.8 8.0 6.0
Consumption 87.5 87.4 87.7 86.6 5.4 2.6 -1.4 1.5
Fixed investment 20.3 20.5 19.9 21.4 1.1 0.8 -1.0 2.2
Net external demand -7.8 -7.9 -7.5 -8.1 -1.4 -0.3 0.5 -0.8
Taiwan Real GDP 5.7 0.1 -3.8 5.8 -2.4 -0.2 1.0
Consumption 65.8 65.7 68.9 67.4 1.4 0.0 0.7 2.4
Fixed Investment 19.0 17.0 13.9 14.6 0.5 -2.0 -3.6 1.5
Net external demand 15.2 17.3 17.1 18.0 3.8 2.1 -0.8 1.9
Thailand Real GDP 4.9 2.6 -3.1 6.1 2.3 2.5 5.0
Consumption 60.9 60.7 62.3 60.8 1.7 1.3 -0.3 2.2
Fixed investment 23.1 24.0 20.0 23.5 0.3 1.5 -4.6 5.0
Net external demand 16.0 15.4 17.8 15.7 3.0 -0.2 1.8 -1.1
Turkey Real GDP 4.7 0.9 -5.3 5.0 11.7 5.5 5.3
Consumption 79.0 79.0 79.4 78.5 3.8 0.7 -3.8 3.0
Fixed investment 25.6 23.9 20.4 21.3 2.1 -1.5 -4.5 1.9
Net external demand -4.6 -2.9 0.2 0.2 -1.2 1.7 3.0 0.1
Source: J.P. Morgan economics.

44
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Interest Rate Forecasts


Change from Forecast next
Official interest rate Current Aug '07 (bp) Last change Next meeting change Dec 09E Mar 10E Jun 10E Sep 10E Dec 10E
Global GDP-weighted average 1.31 -341 1.30 1.32 1.36 1.43 1.48
excluding US GDP-weighted average 1.86 -257 1.85 1.88 1.94 2.04 2.12
Developed GDP-weighted average 0.49 -365 0.50 0.51 0.52 0.54 0.57
Emerging GDP-weighted average 4.54 -246 4.47 4.56 4.71 4.94 5.13
Latin America GDP-weighted average 5.75 -306 5.75 6.13 6.66 6.94 7.03
CEEMEA GDP-weighted average 4.78 -222 4.44 4.29 4.23 4.58 4.87
EM Asia GDP-weighted average 4.00 -232 4.00 4.07 4.17 4.34 4.53

The Americas GDP-weighted average 0.75 -484 0.75 0.79 0.85 0.88 0.89
United States Federal funds rate 0.125 -512.5 16 Dec 08 (-87.5bp) 16 Dec 09 on hold 0.125 0.125 0.125 0.125 0.125
Canada Overnight funding rate 0.25 -425 21 Apr 09 (-25bp) 08 Dec 09 on hold 0.25 0.25 0.25 0.25 0.25
Brazil SELIC overnight rate 8.75 -275 22 Jul 09 (-50bp) 09 Dec 09 Jan 10 (+50bp) 8.75 9.75 10.75 10.75 10.75
Mexico Repo rate 4.50 -275 17 Jul 09 (-25bp) 27 Nov 09 Jun 10 (+25bp) 4.50 4.50 4.75 5.25 5.25
Chile Discount rate 0.50 -500 9 Jul 09 (-25bp) 10 Dec 09 2Q 10 (+50bp) 0.50 0.50 1.00 2.00 3.50
Colombia Repo rate 4.00 -525 25 Sep 09 (-50bp) 23 Nov 09 on hold 4.00 4.00 4.00 4.00 4.00
Peru Reference rate 1.25 -350 6 Aug 09 (-75bp) 10 Dec 09 on hold 1.25 1.25 1.25 1.25 1.25

Europe/Africa GDP-weighted average 1.36 -323 1.32 1.31 1.30 1.39 1.46
Euro area Refi rate 1.00 -300 7 May 09 (-25bp) 03 Dec 09 on hold 1.00 1.00 1.00 1.00 1.00
United Kingdom Repo rate 0.50 -525 5 Mar 09 (-50bp) 10 Dec 09 3Q 10 (+25bp) 0.50 0.50 0.50 0.75 1.00
Sweden Repo rate 0.25 -325 2 Jul 09 (-25bp) 16 Dec 09 on hold 0.25 0.25 0.25 0.25 0.25
Norway Deposit rate 1.50 -325 28 Oct 09 (+25bp) 16 Dec 09 3 Feb 10 (+25bp) 1.50 1.75 2.00 2.25 2.25
Czech Republic 2-week repo rate 1.25 -200 6 Aug 09 (-25bp) 16 Dec 09 2Q 10 (+25bp) 1.25 1.25 1.75 2.50 3.00
Hungary 2-week deposit rate 7.00 -75 19 Oct 09 (-50bp) 23 Nov 09 24 Nov 09 (-50bp) 6.00 5.50 5.50 5.50 5.50
Israel Base rate 0.75 -325 23 Aug 09 (+25bp) 23 Nov 09 1Q 10 (+25bp) 0.75 1.25 2.25 3.25 4.00
Poland 7-day intervention rate 3.50 -125 24 Jun 09 (-25bp) 25 Nov 09 3Q 10 (+25bp) 3.50 3.50 3.50 4.00 4.50
Romania Base rate 8.00 100 29 Sep 09 (-50bp) 05 Jan 09 1Q 10 (-25bp) 8.00 7.75 7.50 7.25 7.00
Russia 1-week deposit rate 4.75 150 29 Oct 09 (-50bp) 24 Nov 09 24 Nov 09 (-50bp) 4.00 3.50 3.00 3.00 3.00
South Africa Repo rate 7.00 -300 13 Aug 09 (-50bp) 17 Dec 09 4Q 10 (+50bp) 7.00 7.00 7.00 7.00 7.50
Switzerland 3-month Swiss Libor 0.25 -225 12 Mar 09 (-25bp) 10 Dec 09 on hold 0.25 0.25 0.25 0.25 0.25
Turkey Overnight borrowing rate 6.50 -1100 19 Nov 09 (-25bp) 17 Dec 09 3Q 10 (+50bp) 6.50 6.50 6.50 7.50 8.00

Asia/Pacific GDP-weighted average 2.08 -147 2.09 2.14 2.21 2.31 2.42
Australia Cash rate 3.50 -300 3 Nov 09 (+25bp) 01 Dec 09 1 Dec 09 (+25bp) 3.75 4.00 4.50 4.75 5.00
New Zealand Cash rate 2.50 -575 30 Apr 09 (-50bp) 09 Dec 09 8 Jul 10 (+50bp) 2.50 2.50 2.50 3.50 4.00
Japan Overnight call rate 0.10 -40 19 Dec 08 (-20bp) 18 Dec 09 on hold 0.10 0.10 0.10 0.10 0.10
Hong Kong Discount window base 0.50 -625 17 Dec 08 (-100bp) 17 Dec 09 on hold 0.50 0.50 0.50 0.50 0.50
China 1-year working capital 5.31 -171 22 Dec 08 (-27bp) 2Q 09 3Q 10 (+27bp) 5.31 5.31 5.31 5.58 5.85
Korea Base rate 2.00 -300 12 Feb 09 (-50bp) 09 Dec 09 1Q 10 (+25bp) 2.00 2.25 2.50 2.75 3.00
Indonesia BI rate 6.50 -175 5 Aug 09 (-25bp) 03 Dec 09 on hold 6.50 6.50 6.50 6.50 6.50
India Repo rate 4.75 -300 21 Apr 09 (-25bp) 1Q 10 1Q 10 (+25bp) 4.75 5.00 5.25 5.25 5.25
Malaysia Overnight policy rate 2.00 -150 24 Feb 09 (-50bp) 24 Nov 09 2Q 10 (+25bp) 2.00 2.00 2.25 2.50 3.00
Philippines Reverse repo rate 4.00 -200 9 Jul 09 (-25bp) 17 Dec 09 4Q 10 (+25bp) 4.00 4.00 4.00 4.00 4.25
Thailand 1-day repo rate 1.25 -200 8 Apr 09 (-25bp) 02 Dec 09 2Q 10 (+25bp) 1.25 1.25 1.50 1.75 2.00
Taiwan Official discount rate 1.25 -188 18 Feb 09 (-25bp) 4Q 09 4Q 10 (+12.5bp) 1.25 1.25 1.25 1.25 1.375
Source: J.P. Morgan economics, 20 November 2009.
Bold denotes move this week and forecast changes. Underline denotes policy meeting during upcoming week.

45
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Exchange rate Forecasts


FX rate vs US dollar annual average FX rate vs US dollar*** Quarter end forecasts
Country 2005 2006 2007 2008 2009E 2010E 1Q09 2Q09 3Q09 Current 1Q10E 2Q10E 3Q10E 4Q10E
Euro 1.22 1.27 1.39 1.48 1.42 1.56 1.32 1.40 1.46 1.49 1.55 1.62 1.55 1.50
Sterling 1.79 1.85 2.00 1.78 1.57 1.69 1.43 1.65 1.60 1.65 1.65 1.74 1.68 1.67
Yen 112 117 117 101 94 85 99 96 90 89 85 82 85 89

Australia 0.76 0.75 0.85 0.83 0.81 1.00 0.69 0.81 0.88 0.92 0.95 1.02 1.01 1.00
China 8.18 7.93 7.54 6.88 6.81 6.67 6.83 6.83 6.83 6.83 6.75 6.70 6.65 6.58
Hong Kong 7.79 7.77 7.80 7.77 7.76 7.79 7.75 7.75 7.75 7.75 7.77 7.78 7.80 7.80
India 44.0 45.1 40.7 44.6 47.8 43.3 50.6 47.8 47.7 46.6 45.0 43.5 42.8 42.0
Indonesia 9840 9135 9176 9730 10101 9175 11550 10208 9645 9465 9000 9000 9200 9500
Korea 1026 950 929 1127 1239 1120 1375 1275 1177 1159 1130 1130 1100 1120
Malaysia 3.78 3.64 3.41 3.34 3.49 3.29 3.65 3.52 3.46 3.39 3.35 3.30 3.25 3.25
Philippines 54.98 50.85 45.24 45.26 47.5 45.50 48.26 48.16 47.60 46.90 46.00 45.50 45.50 45.00
Singapore 1.67 1.58 1.49 1.40 1.43 1.35 1.52 1.45 1.41 1.39 1.36 1.35 1.34 1.33
Taiwan 32.30 32.65 32.79 31.44 32.44 30.50 33.92 32.86 32.00 32.39 31.00 30.50 30.50 30.00
Thailand 40.63 37.70 34.37 33.39 33.99 32.38 35.47 34.07 33.41 33.25 33.00 32.50 32.00 32.00
Argentina 2.94 3.08 3.12 3.19 3.86 4.08 3.71 3.80 3.84 3.80 4.00 3.95 4.10 4.25
Brazil 2.39 2.16 1.90 1.90 1.96 1.66 2.32 1.95 1.77 1.73 1.65 1.60 1.65 1.75
Chile 552 534 519 538 554 491 584 533 550 502 475 490 500 500
Colombia 2319 2379 2053 2045 2170 1931 2556 2143 1931 1969 1925 1850 1950 2000
Mexico 10.83 11.00 10.93 11.42 13.46 12.78 14.17 13.19 13.50 13.08 12.80 12.50 12.80 13.00
Peru 3.32 3.27 3.11 2.97 3.00 2.78 3.17 3.01 2.88 2.88 2.80 2.75 2.78 2.80
Venezuela 2.148 2.147 2.148 2.147 2.148 2.363 2.147 2.147 2.147 2.147 2.150 2.150 2.150 3.000
South Africa 6.40 7.01 7.00 8.41 8.02 7.35 9.54 7.73 7.52 7.60 7.40 7.20 7.40 7.40
Czech Republic 24.32 22.24 19.92 16.94 18.36 16.01 20.67 18.53 17.25 17.44 16.26 15.43 16.00 16.33
Hungary 204 211 179 169 196 165 233 194 184 181 168 157 165 170
Poland 3.25 3.11 2.69 2.43 3.07 2.55 3.50 3.17 2.87 2.79 2.65 2.47 2.55 2.53
Russia 28.42 26.92 25.29 25.53 30.83 26.41 33.96 31.16 30.03 28.99 26.85 25.41 26.45 26.94
Turkey 1.35 1.47 1.27 1.34 1.52 1.40 1.66 1.54 1.48 1.50 1.45 1.40 1.40 1.35
Source: Datastream, J.P. Morgan estimates, current as of 24 November 2009

Commodities Forecast
Commodity Forecast Current 4Q09E 1Q10E 2Q10E 3Q10E 4Q10E
WTI oil $/bbl 76.7 70.0 70.0 65.0 70.0 70.0
Natural gas $/mmbtu 3.2 5.0 6.0 5.5 5.8 6.5
Gold ($/oz) 1142 1000 1050 1000 1000 975
Silver ($/oz) 18.2 16.1 16.7 15.6 15.6 15.2
Platinum ($/oz) 1435 1275 1300 1325 1350 1375
Palladium ($/oz) 360 290 300 300 300 325
Copper ($/metric ton) 6731 5950 6250 6000 5750 5800
Aluminium ($/metric ton) 1720 1825 1900 1850 1825 1800
Zinc ($/metric ton) 2196 1850 1950 1900 1875 1850
Nickel ($/metric ton) 16658 18000 19000 17000 16500 16000
Corn ($/bushel) 3.6 3.7 4.0 4.2 4.1 4.1
Wheat ($/bushel) 4.0 5.0 5.4 5.4 5.2 5.1
Soybeans ($/bushel) 10.2 9.6 9.8 9.6 9.4 9.1
Source: J.P. Morgan, 20 November 2009.

46
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

EM Markets’ Overviews

47
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Brazil
Stellar Growth amid Low Global Rates
Key country dynamics Emy Shayo ChermanAC
Brazilian growth at 5% (with upside potential) in 2010e is only behind China (55-11) 3048-6684
and India. A powerful infrastructure story related to the oil exploration in the emy.shayo@jpmorgan.com
presalt areas, the Soccer World Cup in 2014 and the Olympic Games in 2016 Banco J.P. Morgan S.A.
are key in attracting investment and enhancing the long-term growth
potential. On the downside, yet another hiking cycle is likely to start in 2009,
which could derail the attractive domestic demand story. Fiscal policy is lax,
leading to an increase in debt, and the reversal of this trend is unlikely in 2010 MSCI Brazil: Absolute and relative to MSCI
Asia Pacific ex-Japan
considering the general elections. The presidential race could be noise and
will determine policy direction as well as the continuation of enhanced role of 700
the public sector in key sectors (oil, mining, utilities, among others). 600
500
Implications of a global recovery 400
The global crisis presented Brazil with a stress test and it came through very
300
successfully. It is now that Brazil is really enjoying the status of an
200
investment grade country in terms of attracting global funds. Brazil remains
the gold medalist in terms of high interest rates and therefore, is also 100
attractive from the flow of funds point of view, leading the BRL to be the best 0
among the best-performing currencies in the world in 2009. Authorities 97 99 01 03 05 07 09
responded to that by imposing a 2% tax on foreign portfolio inflows, and Absolute Relativ e
exchange rate policy now remains an uncertainty. Source: MSCI, Datastream.

How much have valuations already discounted a recovery


We think that the key metric to watch is consensus EPS. They have increased
by only 11% from the trough of the crisis until the present, a far cry from the
average 36% rise in past cycles. As EPS rise, valuations which today are
pretty much at record highs should abate. Still, we think Brazil deserves a
premium to its historical values. The question now is how much of a premium
is deserved on a relative basis.

Recommendations
We have exposure to domestic cyclical names that benefit from a stronger
consumer and are also upbeat on energy. On the domestic side we like
homebuilder PDG, financial Santander, and CBD, which is repricing from a
staple name to a discretionary. We like growth names NET and ALL. We
remain OW Petrobras on higher oil prices and the growth coming from the
new offshore wells. We avoid defensives utilities, telecom and staples.

Top picks and stocks to avoid


Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Petrobras 39.2 PETR4 OW 212,864 13.1 11.9 3.0 3.3 1.7 17.4
Santander Brazil 23.0 SANB11 OW 50,351 17.3 13.5 1.3 1.7 3.3 12.0

Stocks to avoid
Usiminas 50.3 USIM5 UW 14,452 37.8 14.6 1.3 3.5 2.1 10.9
CPFL Energia3 32.7 CPFE3 UW 9,040 13.0 11.2 2.5 2.9 8.5 27.2
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 25 November 2009.

48
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Brazil Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 19.5 13.4 22.6 2.3 3 Month 8.7 0.1 na
2008E -9.1 14.7 17.3 3.0 Long Bond 9.8 0.6 -1.0
2009E -11.4 16.6 14.5 2.7 Inflation 4.3 0.0 -0.1
2010E 24.9 13.3 17.4 2.9 Real 3 Month 4.3 0.1 na

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 5.1 -0.2 0.2 0.0 BAA 2.9 0.0 na
2009E 0.3 0.7 -0.3 0.7 EMBI 3.2 -0.7 0.8
2010E 5.0 0.5 -0.8 1.2 Country 2.2 -0.5 na
Country Relative -0.9 0.3 na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 6.7 4.3 5.0 4.0 EM Funds* 4,063 5,164 4,870
LatAm* 242 758 688
Brazil 651 895 754

MSCI Brazil Absolute and Relative to EMF Index MSCI Fair value Range
1200 Absolute Relative to MSCI EMF
FWD PER (96225) (172103)
1000
PER (104896) (241407)
800
PBR (66011) (212484)
600
DY (123402) (224148)
400
BY/EY (179326) (387224)
200
BY/DY (213292) (338028)
0
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 0 50000 100000 150000 200000 250000 300000 350000 400000

Currency Outlook (BRL/USD) EPS Integer over Time


2.8 Spot Forecast Consensus 130 2009 2010

2.6 J.P. Morgan forecast: 120


end Dec 09: 1.80
2.4 end Mar 10: 1.80 110
end Jun 10: 1.80
100
2.2
90
2.0 Consensus
80
1.8
70
1.6 J.P. Morgan 60

1.4 50
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

49
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

China
Focus on defensive growth in 2010
Key country dynamics Frank LiAC
We expect MSCI China to resume its rally from now to 1Q10, in light of (852) 2800-8511
positive fundamentals including: (1) the expected material improvements in frank.m.li@jpmorgan.com
the liquidity situation in early 2010 as banks tend to front-load their lending ; J.P. Morgan Securities (Asia Pacific) Limited
(2) our view that the government will not start serious tightening until at least
2QFY10; (3) China’s strong economic growth momentum; (4) the strong Flagship reports
4Q09 earnings results, to be released in 1QFY10; and (5) faster Rmb • Views from the Bund
appreciation expected in 2010. The key investment strategy for 2010 should • Where to find the next ten-baggers (September
be to focus on stocks as characterized by defensive growth, given: (1) the 07, 2009)
expected broad-based tightening to kick in as of 2Q10; and (2) a potential • Focus on defensive growth (October 21, 2009)
sharp slowdown in fixed asset investment growth in 2011 as the two-year • China Strategy Dashboards
(FY09/10) economic stimulus policies fade away.
Implications of a global recovery
We expect China’s economy to continue to grow solidly in 2010 (real FY10 MSCI China: Absolute and relative to MSCI Asia
GDP growth forecast at 9.5%). Continuing with the theme of a sustained and Pacific ex-Japan
synchronized expansion of the global economy through 2010, we expect net 150
external trade would likely come back to contribute positively to GDP growth
130
again. On the domestic front, we look for a broad-based pickup in private
consumption, along with improving labor markets and hence household 110
income, and marked expansion in private housing investment as well as other 90
private sector investment. Meanwhile, we believe the central government has 70
enough leeway to smooth growth should external demand or private activities 50
disappoint again. 30
How much have valuations already discounted a recovery 10
We believe there is still a decent upside for MSCI China, as the expected
solid earnings growth for corporate China should at least underpin its 97 99 01 03 05 07 09
valuations at above historical mean levels. Based on our EPS growth forecast Absolute Relativ e
of 20.1% for MSCI China for FY10, we have our end-FY10 MSCI China Source: MSCI, Datastream.
index target of 78, based on 17.2x FY10E P/E, or a 10% premium above the
long-term average trailing P/E. MSCI performance table
Recommendations 2wk 3mth YTD
MSCI China 2.7 12.2 61.3
We recommend to Overweight banks with good earnings visibility and the Weightings in Region 18.4%
potential for NIM expansion, upstream energy (coal and oil) as an inflation MSCI Total Mkt Cap. (US$B) 572.3
hedge, and defensive growth stocks, which include internet, gas, tissue and 2009 P/E Ratio (x) 17.6
diapers, and consumer staples. We Underweight property, the most-likely 2010 P/E Ratio (x) 14.4
2011 P/E Ratio (x) 12.2
target for the potential tightening by the government, telecom, downstream 2010 Yield (%) 2.6
commodities, shipping, and construction names. We introduce two pair 2010 ROE (%) 16.2
trades: (1) Long Netease/Short China Unicom on lower penetration rate, thus Source: Datastream, IBES, MSCI, JPMorgan estimates.
greater growth potential for internet sector than telecom sector; and (2) Long Prices and valuations are as of November 20, 2009
Xinao Gas/Short Datang International on better growth prospects for gas
sector than IPPs.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Xinao Gas 17.28 2688.HK OW 2,341 21.2 18.5 0.8 0.9 1.4 12.6
Baidu.com 386.37 BIDU US OW 13,374 63.0 42.2 6.1 9.2 0.0 29.6
Bank of China – H 4.53 3988.HK OW 153,822 12.3 8.7 0.3 0.5 5.2 20.5
China Mengniu Dairy 23.7 2319.HK OW 5,309 25.6 22.4 0.8 0.9 0.0 16.3
China Yurun Food 17.76 1068.HK OW 3,833 14.7 11.2 1.2 1.6 2.3 25.6
Stocks to avoid
China Unicom 10.42 0728.HK UW 31,679 23.9 34.6 0.4 0.3 1.3 3.0
Datang Intl 3.72 0991.HK N 5,596 25.6 15.6 0.1 0.2 3.1 9.4
Source: Bloomberg, J.P. Morgan estimates. Share prices and valuations are as of 5 November 2009. Note: Price and valuation for the US-Listed Baidu are updated as of 4 November 2009.

50
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

China Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 31.2 16.8 19.4 2.2 3 Month 2.0 0.0 -1.2
2008E -12.7 19.2 15.0 2.1 Long Bond 3.7 0.2 -0.3
2009E 9.1 17.6 15.0 2.2 Inflation -0.8 0.4 1.7
2010E 22.0 14.4 16.2 2.6 Real 3 Month 2.8 -0.4 -2.9

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 9.0 0.1 4.1 0.0 BAA 2.9 0.0 na
2009E 8.6 0.2 8.0 0.3 EMBI 3.2 -0.7 0.8
2010E 9.5 0.5 3.7 0.0 Country 0.8 -0.4 na
Country Relative -2.3 0.4 na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 9.1 9.0 9.5 9.3 EM Funds* 4,063 5,164 4,870
Asia ex Japan* 1,245 1,566 1,452
China -50 499 611

MSCI China Absolute and Relative to EMF Index MSCI Fair value Range
800 Absolute Relative to MSCI EMF
FWD PER (30) (61)
700
PER (41) (72)
600
500 PBR (27) (67)

400
DY (43) (77)
300
BY/EY (47) (123)
200
100 BY/DY (47) (132)

0
10 30 50 70 90 110 130 150
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09

Currency Outlook (CNY/USD) EPS Integer over Time


8.5 Spot Forecast Consensus 120 2009 2010

8.0 110

100
7.5
J.P. Morgan forecast:
end Dec 09: 6.75 Consensus
90
7.0 end Mar 10: 6.70
end Jun 10: 6.65 80

6.5
J.P. Morgan 70

6.0 60
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

51
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

India
Recovery to broaden; challenging policy environment

Key country dynamics Bharat IyerAC


We are constructive on economic growth and corporate earnings over 2010. (91-22) 6157-3600
A low base effect should help too, particularly over 1H. Financial markets bharat.x.iyer@jpmorgan.com
appear to have stabilized. The decisive mandate in the national elections J.P. Morgan Securities Indta Pvt. Ltd.
gives the government considerable policy flexibility to pursue reforms and
growth. Corporate and consumer sentiment have improved considerably due Flagship reports
to these positives. • Stratoscope
• Color of Money
The government and regulators face challenges on the policy front though. • Q-View
Given rising inflation, we expect a tightening in monetary policy over 1H.
The fiscal deficit remains at elevated levels, raising the specter of a MSCI India: Absolute and relative to MSCI Asia
Pacific ex-Japan
withdrawal of fiscal stimuli at some point over CY10. Any delayed impact of
the deficient monsoon on consumption remains a near-term cyclical risk. 700
600
Implications of a global recovery 500
The Indian economy is relatively less dependent on exports (c15%). A global 400
recovery is likely to have a positive impact on IT services, metals and 300
energy. More significant is the dependence on foreign capital. A sustained 200
improvement herein is imperative to fund local growth.
100
0
How much have valuations already discounted a recovery?
Indian equities have re-rated sharply since March on the back of an 97 99 01 03 05 07 09
improvement in global risk appetite and the decisive mandate in the national Absolute Relativ e
elections. Current valuations at 15x FY11E are at a marginal discount to Source: MSCI, Datastream.
historic comparatives and factor in healthy growth expectations (estimated at
21% over FY11E). Rising inflation and potential tightening in monetary MSCI performance table
policy imply that market returns over CY10 could be led more by forecast 2wk 3mth YTD
MSCI India 6.0 15.8 86.1
earnings growth as compared to re-rating. Weightings in Region 7.5%
MSCI Total Mkt Cap. (US$B) 232.6
Recommendations 2009 P/E Ratio (x) 21.1
We expect the government policy to focus on reviving the investment cycle. 2010 P/E Ratio (x) 17.3
2011 P/E Ratio (x) 14.1
We overweight capital goods and infrastructure. A pick up in credit growth 2010 Yield (%) 1.1
coupled with bottoming out of asset quality issues augurs well for financials. 2010 ROE (%) 17.0
We are selective on global sectors given volatility in data flow and an Source: Datastream, IBES, MSCI, JPMorgan estimates.
appreciating rupee. The lagged impact of a deficient monsoon and a potential Prices and valuations are as of November 20, 2009
withdrawal of fiscal stimuli are key risk factors for the consumption cycle.
Telecom and cement sectors will remain adversely impacted due to
competitive pressures.

Top picks and stocks to avoid


Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) FY 10E FY11E FY 10E FY11E FY10E (%) FY10E (%)
Top picks
Infosys Technologies 2,218 INFY.BO OW 27,166 21 18 107 124 1.2 29
ICICI Bank 849 ICBK.BO OW 20,197 27 NA 32 NA 1.4 8
Unitech 86 UNTE.BO OW 4,431 15 13 6 7 0.2 12
Larsen & Toubro 1,576 LART.BO N 20,208 27 23 58 68 0.7 22
Stocks to avoid
Hindustan Unilever 265 HLL.BO UW 12,414 25 22 10 12 3.0 106
Reliance Power 144 RPOL.BO UW 7,417 55 43 3 3 0.0 4
Idea Cellular 50 IDEA.BO UW 3,320 46 NA 1 (4) 0.0 6
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 10 November 2009.

52
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

India Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 18.6 21.5 20.1 1.3 3 Month 3.7 -0.1 -0.7
2008E -1.1 21.8 16.3 1.0 Long Bond 7.3 -0.2 0.2
2009E 3.3 21.1 15.9 1.0 Inflation 11.7 0.0 0.5
2010E 21.7 17.3 17.0 1.1 Real 3 Month -8.1 -0.1 -1.1

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 6.1 -0.1 1.2 0.0 BAA 2.9 0.0 na
2009E 6.0 -0.2 5.4 -1.2 EMBI 3.2 -0.7 0.8
2010E 7.5 0.3 1.7 na Country na na na
Country Relative na na na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR -1.0 10.0 7.0 9.6 EM Funds* 4,063 5,164 4,870
Asia ex Japan* 1,245 1,566 1,452
India 1,153 1,405 1,310

MSCI India Absolute and Relative to EMF Index MSCI Fair value Range
800 Absolute Relative to MSCI EMF
FWD PER (322) (538)
700
PER (389) (698)
600
500 PBR (466) (783)

400
DY (361) (553)
300
BY/EY (416) (1015)
200
100 BY/DY (378) (833)

0
150 300 450 600 750 900 1050
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09

Currency Outlook (INR/USD) EPS Integer over Time


54 Spot Forecast Consensus 130 2009 2010
52
120
J.P. Morgan forecast:
50 end Dec 09: 45.0
end Mar 10: 43.5
110
Consensus
48 end Jun 10: 42.8
100
46
90
44

J.P. Morgan 80
42

40 70

38 60
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

53
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Indonesia
Opportunity knocking

Key country dynamics Aditya SrinathAC


A resilient economy, benign inflation, easy liquidity and favorable politics (62-21) 5291-8573
have aligned to drive Indonesian equities significantly higher in 2009. We aditya.srinath@jpmorgan.com
believe that the country is on the cusp of a substantial opportunity to raise its PT J.P. Morgan Securities Indonesia
growth trajectory in coming years. The newly-formed presidential delivery
unit offers a structure to deliver on high current expectations about Flagship reports
infrastructure development and reform, evidence of its success could be a • Currency + Commodity (March 20, 2009)
source of further upside. We see domestic cyclical momentum driving • An Agenda for the Next 5 years (May-09)
earnings in FY10E, and the credit cycle is also showing signs of life. • Notes of Caution (Sept-09)
Inflation risks could drive rates mildly higher, but see a case for lower real
rates, supported sovereign credit rating upgrades. The major risk is weak MSCI Indonesia: Absolute and relative to MSCI
Asia Pacific ex-Japan
execution on growth and governance reforms.
400
Implications of a global recovery
The resilience of growth and the stability of the fiscal, and BoP positions 300
through the crisis have raised Indonesia’s economic and political credibility.
As growth returns elsewhere, Indonesia’s allure as a pocket of growth, which 200
brought it attention in 2009, may diminish next year.
100
How much have valuations already discounted a recovery
In 2010 the emphasis may shift from recovery to growth. Market valuations 0
are over 1sigma higher than long-term valuations, and to some extent, 97 99 01 03 05 07 09
therefore, probably discount future earnings revisions. However, FY10E EPS Absolute Relativ e
forecasts have risen 11% over the past six months, but remain 27% below Source: MSCI, Datastream.
where they were a year back.
MSCI performance table
Recommendations 2wk 3mth YTD
MSCI Indonesia 5.0 9.5 88.6
Our main thematics to play in Indonesia remain—interest rate-sensitive Weightings in Region 1.8%
sectors, power sector supply chain/feedstock, and domestic consumption MSCI Total Mkt Cap. (US$B) 56.3
plays. We have Overweight rating on Astra International—as a high-quality 2009 P/E Ratio (x) 21.1
rate sensitive and consumption exposure. We also are incrementally positive 2010 P/E Ratio (x) 15.0
2011 P/E Ratio (x) 12.6
on banks, with BCA as our main Overweight. We recommend PTBA among 2010 Yield (%) 3.1
coal stocks—a beneficiary from any improved thrust on infrastructure 2010 ROE (%) 24.3
development. Finally, we recommend ANTM, where we think that a strong Source: Datastream, IBES, MSCI, JPMorgan estimates.
volume growth profile could be boosted if the company grows from being a Prices and valuations are as of November 20, 2009
preferred partner for mining MNCs seeking avenues to invest in Indonesia.
Our main Underweight recommendations are Unilever and BRI.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Astra International 29,800 ASII IJ OW 12,759 14.2 11.7 2,096 2,540 2.8% 24.9%
BCA 4,600 BBCA IJ OW 11,995 17.4 12.9 265 356 3.0% 29.2%
PTBA 14,450 PTBA IJ OW 3,494 10.5 23.6 1,371 612 2.4% 22.6%
ANTM 2,300 ANTM IJ OW 2,302 49.1 18.8 46.9 122.3 1.0% 13.6%
Stocks to avoid
Unilever 10,200 UNVR IJ UW 8,166 29.4 24.0 347 425 350 89.8%
Bank Rakyat 7,200 BBRI IJ UW 9,392 12.5 10.5 577 684 3.2% 28.4%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.

54
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Indonesia Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 61.4 17.3 27.4 3.2 3 Month 6.6 0.0 0.2
2008E -1.4 17.5 27.0 2.6 Long Bond 10.3 -0.4 0.2
2009E 6.8 16.4 25.3 2.6 Inflation 2.7 0.0 0.1
2010E 9.6 15.0 24.3 3.1 Real 3 Month 3.9 -0.1 0.1

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 6.1 0.0 1.2 0.0 BAA 2.9 0.0 na
2009E 4.3 0.2 3.7 0.0 EMBI 3.2 -0.7 0.8
2010E 5.3 0.3 -0.5 -0.3 Country na na na
Country Relative na na na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 3.5 5.5 6.0 6.0 EM Funds* 4,063 5,164 4,870
Asia ex Japan* 1,245 1,566 1,452
Indonesia 113 82 81

MSCI Indonesia Absolute and Relative to EMF Index MSCI Fair value Range
800 Absolute Relative to MSCI EMF
FWD PER (1341) (3544)
700
PER (2160) (4961)
600
500 PBR (1431) (3015)
400
DY (2395) (5684)
300
200 BY/EY (2591) (6218)

100 BY/DY (952)


0
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 0 1000 2000 3000 4000 5000 6000 7000 8000

Currency Outlook (IDR/USD) EPS Integer over Time


14,000 Spot Forecast Consensus 130 2009 2010

13,000 J.P. Morgan forecast:


120
end Dec 09: 9000
end Mar 10: 9000
110
12,000
end Jun 10: 9200
100
11,000
Consensus 90
10,000
80
9,000 70
J.P. Morgan

8,000 60
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

55
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Malaysia
Looking for deliverance

Key country dynamics Chris Oh, CFAAC


We expect PM Najib Razak’s administration to pick up pace in awarding (60-3) 2770-4728
many of the much-anticipated large-scale infrastructure projects and focusing chris.ch.oh@jpmorgan.com
on the implementation of earlier-announced policy reform measures in 2010. JPMorgan Securities (Malaysia) Sdn. Bhd. (18146-
With global economies recovering, private sector confidence is likely to X)

return, enabling the new policy measures to gain traction. Also, domestic
Flagship reports
liquidity conditions remain relatively flush with interest rates at an all-time
• Looking for Deliverance (11/05/2009)
low of 2% for the Overnight Policy Rate and LD ratios still at 78%. Bank
• 2010 Budget (10/23/2009)
Negara continues to mop up M$200B of excess liquidity as at end-September
• Introducing June 2010 KLCI of 1350 (08/20/2009)
2009. We expect inflationary conditions to remain benign with our current
• 2H09 market outlook (06/10/2009)
forecast for 2010 at 0.8%, although we do expect Malaysia to raise interest
• 2nd Stimulus Package (03/10/2009)
rates for 2010 by 100bp to 3% beginning 2Q10, in line with the region as the
• Shifting Sands Series (02/04/2009, 03/27/2009,
economic momentum gains strength.
04/09/2009, 04/23/2009, 07/16/2009)
Implications of a global recovery MSCI Malaysia: Absolute and relative to MSCI
The improvement in the external sector due to the global recovery will boost Asia Pacific ex-Japan
near-term growth as the new administration looks to stimulate domestic 120
growth with new liberalization policies design to spur private investment.
Public expenditure will gradually be reduced from peak deficit levels of 100
7.4% in 2009 as the government looks towards the private sector to stimulate 80
economic growth. Confidence in PM Najib’s administration is key as the
government has been prone to policy flip flops in the past. 60
How much have valuations already discounted a recovery 40
Current forward P/Es of 16x are between +1std and +2std dev. levels.
However, with some scope for further earnings upgrades as the economic 20
recovery flows through, we believe there is still scope for further upside to 97 99 01 03 05 07 09
the market over the next 12 months. Also, foreign investors are underweight Absolute Relativ e
on the Malaysian market. In our view, should the government execute on its Source: MSCI, Datastream.
reform measures, we expect to see foreign investors return, driving P/E MSCI performance table
multiples to 17-18x, similar to the past few market peaks. 2wk 3mth YTD
MSCI Malaysia 1.2 8.5 47.0
Recommendations Weightings in Region 2.7%
Incremental foreign portfolio flow will drive up valuations of key liquid MSCI Total Mkt Cap. (US$B) 83.8
stock names, especially those with a positive macro outlook in light of the 2009 P/E Ratio (x) 18.3
2010 P/E Ratio (x) 15.8
structural reform expected. Top picks are Public and AMMB on banks, 2011 P/E Ratio (x) 13.1
Tenaga for GLCs reform and Genting. Avoid stocks lacking growth or 2010 Yield (%) 3.1
catalyst, are YTL Power (yield plays to underperform) and MISC (lacks 2010 ROE (%) 12.3
near-term catalyst). Source: Datastream, IBES, MSCI, JPMorgan estimates.
Prices and valuations are as of November 20, 2009
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Public Bank 10.9 PBKF MK OW 11257 15.2 12.9 0.72 0.85 3.9 29.5
Tenaga 8.4 TNB MK OW 10655 15.6 14.3 0.53 0.62 2.8 9.3
Genting 7.15 GENT MK OW 7745 24.9 20.3 0.29 0.35 0.7 9.4
AMMB 4.7 AMM MK OW 4142 13.6 11.4 0.32 0.39 1.7 11.0
Stocks to avoid
MISC 8.9 MISF MK N 9680 25.9 20.2 0.34 0.44 3.9 5.9
YTL Power 2.15 YTLP MK N 3755 14.4 10.7 0.15 0.20 2.1 18.2
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.
MISC Berhad - F: We downgraded to UW with new PT of M$7.7 on November 24." and "YTL Power: We downgraded to UW on November 19.

56
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Malaysia Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 44.3 15.7 14.5 3.2 3 Month 2.1 0.0 0.0
2008E -14.1 18.3 11.5 2.9 Long Bond 4.3 0.2 0.0
2009E 0.0 18.3 11.0 2.7 Inflation -2.1 0.4 0.9
2010E 15.7 15.8 12.3 3.1 Real 3 Month 4.2 -0.4 -0.9

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 4.6 -0.5 -0.3 0.0 BAA 2.9 0.0 na
2009E -2.4 0.6 -3.0 1.4 EMBI 3.2 -0.7 0.8
2010E 5.0 0.6 -0.8 0.8 Country 1.6 -0.2 na
Country Relative -1.5 0.5 na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 4.5 1.6 4.9 4.9 EM Funds* 4,063 5,164 4,870
Asia ex Japan* 1,245 1,566 1,452
Malaysia 45 -18 -87

MSCI Malaysia Absolute and Relative to EMF Index MSCI Fair value Range
300 Absolute Relative to MSCI EMF
FWD PER (319) (521)
250
200 PER (391) (650)
150
PBR (342) (693)
100
50 DY (370) (715)
0
BY/EY (196) (1115)
-50
-100 BY/DY (323) (1301)
-150
0 300 600 900 1200 1500 1800 2100
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09

Currency Outlook (MYR/USD) EPS Integer over Time


4.0 Spot Forecast Consensus 110 2009 2010
3.9
3.8 100
3.7
3.6
Consensus 90
3.5
3.4
J.P. Morgan forecast: 80
3.3
end Dec 09: 3.35
3.2
end Mar 10: 3.30
3.1 J.P. Morgan 70
end Jun 10: 3.25
3.0
2.9 60
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

57
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Mexico
Cyclical Upside

Key country dynamics Ben LaidlerAC


Mexico suffered in 2009 from a cyclically weak economy, driven by the US (212) 622-5252
and H1N1 influenza. Fiscal and rating concerns were also high, as the ben.m.laidler@jpmorgan.com
government implemented a contentious and watered-down 1.0% GDP fiscal J.P. Morgan Securities Inc.
adjustment despite the macro weakness. Nevertheless, Mexico’s fiscal
revenue/GDP remains low (22% GDP) and poorly structured (1/3 oil). The
equity market performed better, helped by index composition (70%
defensives) and hence robust earnings (positive 2009, despite GDP plunge).

For 2010 we expect a 10.5-point swing of Mexico GDP (from -7.0% to MSCI Mexico: Absolute and relative to
MSCI Asia Pacific ex-Japan
+3.5%), the second highest we forecast globally, after Russia (13.5 points).
With the output gap to remain large and inflationary pressures likely ones of 800
supply-side shock, we see a rate hike only in June 2010, and +75bps for the 700
year. Risk/reward is high given strong US linkages and fiscal dynamics. 600
500
Implications of a global recovery 400
Mexico historical GDP beta to global recovery is over 2.0x, vs overall EM 300
1.3x. Main driver is the US (destination of 80% exports) and manufacturing. 200
We forecast 4.5% 2010 growth in US manufacturing after -11.4% in 2009e. 100
Oil remains important. US$59 bbl is the budgetary oil forecast, comfortably 0
below our $70 end-2010 forecast and spot closer to $80. The peso has lagged 97 99 01 03 05 07 09
the YTD rally in EM currencies, and there is arguably upside risk. Absolute Relativ e

Source: MSCI, Datastream.


How much have valuations already discounted a recovery?
MSCI Mexico 12m forward earnings fell 27% peak to trough and have
rebounded 13%. They remain 20% from their highs. This recovery should
continue (recent Q3 earnings +20% oya, with 60% of Mexbol reports beating
consensus). The market is trading around 14.6x 2010e earnings, below the 5-
year average (15.6x). We see room for earnings to surprise on the back of the
GDP recovery, as well as US$ gains on an appreciating peso.

Recommendations
Our portfolio is focused on the 1/3 of the index made up of cyclicals (banks,
homebuilders, steel, cement, mining), where we see greater earnings
recovery leverage and cheaper asset valuations, rather than on the more
defensive (staples and telecoms) 2/3s of the index.

Top picks and stocks to avoid


Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Ternium 32.5 TX OW 6,515 26.2 15.2 1.2 2.1 4.2 8.4
Urbi 26.2 URBI* OW 1,986 13.3 10.1 2.0 2.6 0.0 13.8

Stocks to avoid
Telmex Internacional 15.1 TII UW 13,561 22.4 20.4 0.7 0.7 2.5 9.7
Telmex 17.7 TMX UW 16,104 10.7 12.0 1.6 1.5 4.0 48.6
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 25 November 2009.

58
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Mexico Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 12.4 14.4 25.1 2.5 3 Month 4.8 0.1 na
2008E -27.2 19.7 8.3 2.0 Long Bond 5.2 0.1 na
2009E 8.9 18.1 8.7 2.3 Inflation 4.9 -0.2 -0.3
2010E 21.6 14.9 17.2 2.5 Real 3 Month -0.1 0.3 na

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 1.3 0.0 -3.6 0.0 BAA 2.9 0.0 na
2009E -7.0 -0.5 -7.6 0.0 EMBI 3.2 -0.7 0.8
2010E 3.5 -1.5 -2.3 0.7 Country 2.1 -0.6 na
Country Relative -1.0 0.2 na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 7.5 3.7 -0.6 3.3 EM Funds* 4,063 5,164 4,870
LatAm* 242 758 688
Mexico 98 52 -17

MSCI Mexico Absolute and Relative to EMF Index MSCI Fair value Range
500 Absolute Relative to MSCI EMF
FWD PER (19534) (26417)
450
400 PER (11984) (36263)
350
PBR (15042) (36774)
300
250 DY (27110) (41868)
200
BY/EY (9498)
150
100 BY/DY (30060)
50
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 0 10000 20000 30000 40000 50000 60000

Currency Outlook (MXN/USD) EPS Integer over Time


16.0 Spot Forecast Consensus 110 2009 2010

15.0
J.P. Morgan forecast: 100
14.0 end Dec 09: 13.00
end Mar 10: 12.50 Consensus
13.0 end Jun 10: 12.50 90

12.0
J.P. Morgan 80
11.0
70
10.0

9.0 60
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

59
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Philippines
Positioned for a consumption-led upturn

Key country dynamics Kelly Lim-BateAC


With nearly 80% of the country’s GDP driven by private consumption, (632) 878-1188
economic growth has proven to be resilient through the crisis. The main fuel kelly.s.lim-bate@jpmorgan.com
for domestic consumption is the strength in OFW remittances due to strong J.P. Morgan Securities Philippines Inc.
demand for Filipino workers abroad, who are increasingly higher-skilled and
higher-paid service workers. The sustained double-digit growth in the BPO Flagship reports
sector and its multiplier effect on the economy should likewise remain a • Philippine Strategy: Hitting a macro sweet spot
driver as these are relatively higher-paid employees. Main weaknesses in the (Sept 24, 2009)
Philippine dynamic remain weak foreign direct investments and the • Philippine Trendwatch: 3Q09 Turning the corner
government’s lack of fiscal flexibility that has crowded out the private sector (Oct 06, 2009)
and hampered the investment cycle in the country. • Philippine Real Estate: Buy on Dips (Jun 17, 2009)
• Metrobank: Upgrade to OW on PPOP/RoE
Implications of a global recovery
momentum (Nov 5, 2009)
Positioned for a consumption led upturn: We believe the Philippines
• Ayala Corp: More upside (Jul 10, 2009)
economy in 2010 will move to an above-trend and above-consensus growth
of 5%oya, driven by a revival in consumption and government spending.
MSCI Philippines: Absolute and relative to MSCI
Remittances should continue to positively surprise as the job order pipeline Asia Pacific ex-Japan
remains robust, equivalent to seven months worth of deployment with a bias
110
for service and professional workers. National elections are scheduled in
May, where it is estimated that the five presidential candidates alone will 90
spend at least Php25 billion, equivalent to 0.3% of GDP. As domestic
confidence recovers, there is also sizable pent-up demand in the economy to 70
boost growth, reflected by the all-time high spread between GNP and GDP. 50
Corporate balance sheets are robust to support expansion plans to capture
this consumption upturn. 30

How much have valuations already discounted a recovery 10


Valuations are still attractive: The PSEi now stands near its LT average P/E 97 99 01 03 05 07 09
of 15x. Valuations are still attractive, in our view, with previous rallies after Absolute Relativ e
a bear market low having reached a high of +1SD-2SD (18x-22x). Source: MSCI, Datastream.
Furthermore, we believe consensus estimates remain conservative with
MSCI performance table
plenty of room for upgrades. Following downgrades of as much as -30%, the 2wk 3mth YTD
Street has only upgraded EPS by 6%. MSCI Philippines 5.2 10.0 57.8
Weightings in Region 0.4%
Recommendations
MSCI Total Mkt Cap. (US$B) 13.4
Our favored sectors are property, banks, and utilities, which have compelling 2009 P/E Ratio (x) 17.0
valuations and attractive growth prospects. Our top picks are ALI, MBT, 2010 P/E Ratio (x) 15.4
EDC, and MWC. Our top avoid is Meralco. 2011 P/E Ratio (x) 13.5
2010 Yield (%) 4.0
2010 ROE (%) 15.5
Source: Datastream, IBES, MSCI, JPMorgan estimates.
Prices and valuations are as of November 20, 2009
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Ayala Land 12 ALI OW 3319 40.9 40.3 0.29 0.30 0.5 7.2
Metrobank 43.5 MBT OW 1677 16.5 11.2 2.63 3.88 2.3 10.9
Energy Dev. Corp 4.15 EDC OW 1328 10.9 11.0 0.38 0.38 3.2 24.2
Manila Water 16.25 MWC OW 700 9.0 8.1 1.80 2.01 3.2 24.2
Stock to avoid
Manila Electric 207 MER N 4883 30.0 18.0 6.90 11.51 2.8 21.6
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 12 November 2009.

60
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Philippines Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 8.3 17.9 14.1 4.0 3 Month 3.8 -0.1 0.3
2008E -16.0 21.3 12.3 3.4 Long Bond 7.9 0.0 0.6
2009E 25.1 17.0 14.9 3.8 Inflation 1.6 1.6 1.4
2010E 10.8 15.4 15.5 4.0 Real 3 Month 2.2 -1.7 -1.1

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 3.8 -0.8 -1.1 0.0 BAA 2.9 0.0 na
2009E 1.5 0.1 0.9 -0.6 EMBI 3.2 -0.7 0.8
2010E 5.0 0.0 -0.8 0.9 Country 2.4 -0.6 na
Country Relative -0.7 0.2 na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 4.0 5.0 5.0 5.0 EM Funds* 4,063 5,164 4,870
Asia ex Japan* 1,245 1,566 1,452
Philippines 98 9 -19

MSCI Philippines Absolute and Relative to EMF Index MSCI Fair value Range
500 Absolute Relative to MSCI EMF
FWD PER (282) (503)

400 PER (435) (901)

300 PBR (308) (761)

DY (741)
200
BY/EY (525) (1436)
100
BY/DY (896)
0
0 500 1000 1500 2000 2500 3000
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09

Currency Outlook (PHP/USD) EPS Integer over Time


58 Spot Forecast Consensus 110 2009 2010
56
54 100
52
50
Consensus 90
48
46
80
44 J.P. Morgan forecast: J.P. Morgan
42 end Dec 09: 46.0
40
end Mar 10: 45.5 70
end Jun 10: 45.5
38
36 60
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

61
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Russia
Leveraged play on cyclical recovery

Key country dynamics Alex Kantarovich AC


Russia has been a top performer among GEMs since the February trough (7-495) 967-3172
(MSCI RU +150%), but it is still a laggard from the start of the downturn in alex.kantarovich@jpmorgan.com
July 2008. The country has been hard hit by one of the worst GDP J.P. Morgan Bank International LLC
contractions (2009 JPMe -8.5%), with JPMe earnings falling -30% y/y.
Surging risks resulted, in addition to earnings declines, in a nasty multiples Flagship reports
contraction. Conversely, the recent rerating reflects a better outlook. • Russia-2010: well-positioned among GEMs
(11/06/2009)
Implications of a global recovery • Real winners of $100 oil (10/14/2009)
The oil price, Russia’s key external variable, has more than doubled since • Index targets upped, earnings to replace COE as
January; the main economic aggregates have picked up and the ruble has main driver (07/29/2009)
gained over 20% from its low. The MSCI Russia 12M forward P/E has risen • Earnings at trough, risk premiums contracting,
to 9.5x from 3x ytd. Forward EPS bottomed out in April, rising c.40% to international liquidity wanted (04/14/2009)
date. With 2010 JPMe real GDP growth at 5.0%, we expect a recovery in
earnings and a leaner cost base is a margin booster, in addition to rising MSCI Russia: Absolute and relative to MSCI Asia
Pacific ex-Japan
revenue. Banks should be able to cut provisioning expense, the main bottom
line spoiler, by over 50-75%, in our view. As the CBR reduced the 500
benchmark rate by 400bp this year and with liquidity improving, the
400
leveraged segments - like materials, telecoms and developers - should see big
relief from lower interest expenses. We estimate 2010 aggregate earnings 300
should rise 41% and the momentum should extend into 2011. The extensive
2009-2011 earnings swings reflect the dependence on cyclical commodities. 200

100
How much have valuations already discounted a recovery? At a 9.5x
MSCI Russia 12M forward P/E, the 30% discount to GEMs is abnormally 0
high (against the 3Y pre-crisis average of 15%). Moreover, Russia’s earnings 97 99 01 03 05 07 09
growth (>40% in 2010E and 2011E), is double the GEMs average, Absolute Relativ e
invalidating the main reason for the discount in our view.
Source: MSCI, Datastream.

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

Top picks and stocks to avoid


Mkt cap P/E (x) EPS ($) Div. yield ROE
Price ($) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Gazprom 6.30 GAZP RU OW 144,366 6.96 5.76 0.90 1.09 0.8% 12.3%
Sberbank 2.50 SBER RU OW 55,147 103.8 17.2 0.02 0.15 0.9% 12.6%
Stocks to avoid
Severstal 8.80 CHMF RU UW 8,868 n/a 15.9 -0.40 0.55 0.7% 6.4%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of cob 23 November 2009.

62
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Russia Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 30.8 7.3 16.5 1.8 3 Month 9.3 -2.0 na
2008E -3.6 7.6 15.9 0.7 Long Bond 9.3 -2.0 na
2009E -33.5 11.3 10.7 1.3 Inflation 9.7 -1.9 -0.2
2010E 32.3 8.6 13.1 1.7 Real 3 Month -0.4 -0.2 na

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 5.6 0.0 0.7 0.0 BAA 2.9 0.0 na
2009E -8.5 0.0 -9.1 -0.8 EMBI 3.2 -0.7 0.8
2010E 5.0 0.0 -0.8 2.0 Country 2.5 -1.4 na
Country Relative -0.7 -0.7 na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 6.5 4.5 4.0 4.0 EM Funds* 4,063 5,164 4,870
EM Europe* -157 171 102
Russia 187 173 -81

MSCI Russia Absolute and Relative to EMF Index MSCI Fair value Range
600 Absolute Relative to MSCI EMF
FWD PER (447) (932)
500
PER (345) (1378)
400
PBR (508) (1130)
300
DY (441) (1677)
200
BY/EY Not meaningful
100 Not meaningful
BY/DY
0
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 0 500 1000 1500 2000 2500

Currency Outlook (RUB/USD) EPS Integer over Time


43 Spot Forecast Consensus 140 2009 2010

39 J.P. Morgan forecast: 120


end Dec 09: 28.16
end Mar 10: 28.98
35 end Jun 10: 29.30
100
Consensus

31 80

27 60
J.P. Morgan

23 40
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

63
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

South Africa
Catch-up and carry trade in 2010
Key country dynamics Deanne GordonAC
We forecast a rebound in SA real GDP growth to 3% in 2010 from -2% in (+27) 21 712 0875
2009, driven by inventory restocking and a recovery in mining & deanne.gordon@jpmorgan.com

manufacturing production. While SA’s earnings recovery has lagged and J.P. Morgan Equities Ltd
been disappointing in 2009, we believe it could surprise on the upside in
2010. The fall in SA earnings growth in 2009 is the biggest on record versus
previous earnings recessionary periods (-28% vs ave EPS fall -9.3%). Flagship reports
Implications of a global recovery • South African Year Ahead: Team SA – stronger
The strongest beneficiary of the global recovery in SA is the high beta rand earnings kick in 2010 (26/11/2009)
exchange rate, which we expect to remain strong in 1H10. The rand has been • Investment in South Africa: Cyclical Recovery and
one of the best performing currencies in 2009 supported by the carry trade, rerating catch-up (01/10/2009)
high commodity prices and healthy risk appetite and we expect this to persist • Fund Managers’ Companion: Continue to favour
in 1H10 as the dollar is forecast to remain weak. Later in 2010 as the dollar cyclicals (07/08/2009)
regains its footing, we expect some rand weakness and hedge for this via
Platinum exposure. Our bottom-up earnings estimates for 2010 are similar
for Resources, Financials and Industrials at 20-25%. In 2011E, however, we MSCI South Africa: Absolute and relative to MSCI
see a stronger rebound in Resources earnings (+41% versus c20% for Asia Pacific ex-Japan
Financials & Industrials) on some rand weakness. This suggests a tilt to 400
Resources in 2H10. In 1H10, however, domestic cyclical stocks should
continue to be supported by an extended period of flat short rates. 300
How much have valuations already discounted a recovery
SA’s valuations are undemanding; forward P/E of 11.9 versus 13 for MSCI 200
EM. SA has underperformed MSCI EM year to date in local currency terms
(SA 39.6% vs 70% for EMF). In dollars SA performance has been 100
marginally lower than EMF (SA 99% vs 102% for EMF). While MSCI EMF
has rerated 125% in 2009 to date, MSCI SA has rerated only 47%. We 0
expect some rerating catch-up in 2010 as SA’s economic recovery gathers 97 99 01 03 05 07 09
momentum, having lagged the recovery in the rest of EM. Absolute Relativ e
Recommendations Source: MSCI, Datastream.
We recommend OW domestic SA, but include Platinum too as a rand hedge.
Our favourite sectors: Media, Banks, General Industrials, selected Retailers
and Platinum. Our top stock picks include Anglo Plat, Northam, Absa, JD
Group and Naspers. Our choice of stocks to avoid is Nedbank.

Top picks and stocks to avoid


Mkt cap P/E (x) EPS (TKY) Div. yield ROE
Price (ZAR) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Anglo Plat 70500 AMS SJ OW 22067 66.5 31.2 1060.0 2260.0 NM 14.5%
ABSA 12600 ASA SJ OW 11617 11.0 8.2 1216.5 1581.4 5.5% 18.4%
Northam 4100 NHM SJ OW 1938 22.4 31.3 183.0 131.0 1.5% 5.6%
JD Group 4370 JDG SJ OW 1034 37.5 7.3 116.5 597.1 0.1 18.8%
Naspers 28200 NPN SJ OW 15002 23.9 19.2 1178.8 1469.1 NM 12.0%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of cob 23 November 2009.

64
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

South Africa Scorecard


Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 21.5 14.0 18.3 3.6 3 Month 7.0 0.0 na
2008E 8.3 12.9 17.6 3.5 Long Bond 9.0 1.6 na
2009E -13.4 14.9 14.9 2.8 Inflation 6.1 -0.6 0.0
2010E 28.7 11.6 17.4 3.4 Real 3 Month 0.9 0.6 na

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 3.1 0.0 -1.8 0.0 BAA 2.9 0.0 na
2009E -2.0 0.0 -2.6 0.0 EMBI 3.2 -0.7 0.8
2010E 3.0 0.5 -2.8 0.7 Country 1.7 -0.7 na
Country Relative -1.5 0.1 na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 3.4 4.4 3.8 3.6 EM Funds* 4,063 5,164 4,870
EM Europe* -157 171 102
South Africa 298 789 710

MSCI South Africa Absolute and Relative to EMF Index MSCI Fair value Range
400 Absolute Relative to MSCI EMF FWD PER (518) (725)
350
300 PER (546) (727)
250
PBR (560) (765)
200
150 DY (520) (706)
100
BY/EY (546) (1110)
50
0 BY/DY (508) (1098)
-50
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 300 600 900 1200 1500 1800

Currency Outlook (ZAR/USD) EPS Integer over Time


15.0 Spot Forecast Consensus 135 2009 2010

125
13.0 J.P. Morgan forecast:
end Dec 09: 7.30
115
end Mar 10: 7.80
11.0 end Jun 10: 8.00
105
Consensus
9.0
95

85
7.0
J.P. Morgan 75

5.0 65
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

65
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

South Korea
Won to be a big swing factor in 2010
Key country dynamics Scott Seo AC
Three key dynamics for the Korea market in 2010 are expected to be: (1) (822) 758-5759
Won’s movement; (2) an interest rate hike; and (3) regional election. First, scott.seo@jpmorgan.com
the market’s concern that Korean exporters would be sizably hampered by a J.P. Morgan Securities (Far East) Ltd, Seoul
strong Won in 2010 seems overdone, in our view. Market consensus for Branch

Won/US$ by end-10 has fallen near to 1,000 vs. J.P. Morgan’s forecast of
Flagship reports
1,150. We remain bullish on Korean auto makers in particular, expecting
• J.P. Morgan's Heart & Seoul - KRW fears likely to
strong sales volume growth would outweigh the adverse impact of FX move.
be short-lived (Feb/25/2009)
Second, monetary policy normalization is expected to begin in 1Q10, which
• J.P. Morgan's Heart & Seoul - 2Q09 earnings
is potential negative for the Korean consumer segment due to the household
preview (July/10/2009)
sector’s rising debt service burden. However, the funding cost of corporates
• J.P. Morgan's Heart & Seoul - 3Q09 earnings
with lower credit rating is not likely to rise significantly, as there is further
preview (Oct/13/2009)
room for credit spread contraction with credit spread of BBB-rated corporates
still remaining 400bp higher than the pre-crisis level. Last, upcoming regional
MSCI South Korea: Absolute and relative to MSCI
election in June 2010 is going to be the last nation-wide election before the Asia Pacific ex-Japan
presidential election in 2012, meaning the current ruling party is likely to put
500
every effort to win the election. Potentially, the current government might
extend some pro-growth policies and try to keep housing prices stable. If 400
property market prices move up to a worrisome level, however, it is a risk for
300
a more aggressive monetary tightening.
Implications of a global recovery 200
Korean economic indicators have surprised the market on the upside until 100
recently with further acceleration of 3Q09 real GDP growth. However, we
expect Korea’s economic growth to track relatively moderate and stable 0
contour in 2010. The market focus now seems to be moving to liquidity 97 99 01 03 05 07 09
flows. Korean equity funds invested in domestic market have been showing
Absolute Relativ e
large outflows in 2009 YTD despite more than the 40% rally. We expect fund
inflows into equity funds going into 2010, but the magnitude of fund inflows Source: MSCI, Datastream.

to equity funds is likely to be the key to how high KOSPI can reach from the
MSCI performance table
current level.
2wk 3mth YTD
How much have valuations already discounted a recovery MSCI South Korea 3.7 4.5 50.8
J.P. Morgan considers the current market has largely reflected the economic Weightings in Region 12.8%
recovery story and prices in some moderation down the road, expecting MSCI Total Mkt Cap. (US$B) 398.3
2009 P/E Ratio (x) 14.3
relatively moderate upside of KOSPI. Our KOSPI target is 1,850 by the end 2010 P/E Ratio (x) 11.7
of 2010, based on our price target for companies under our coverage universe 2011 P/E Ratio (x) 9.7
and a forward P/E multiple of 11.8x. 2010 Yield (%) 1.2
2010 ROE (%) 12.0
Recommendations
Source: Datastream, IBES, MSCI, JPMorgan estimates.
We remain bullish on export names and the financial sector for 2010, keeping Prices and valuations are as of November 20, 2009
Hyundai Motors and Shinhan Financial Group on our top picks list, while we
prefer low beta stocks in the consumer universe such as Amorepacific.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Hyundai Motor 104,000 005380 KS OW 19,419 9.6 9.1 10,798 11,486 0.96 14.2
Samsung SDI 147,000 006400 KS OW 5,658 22.2 16.8 6,627 8,758 1.30 7.3
Shinhan FG 45,750 055550 KS OW 18,410 14.7 10.5 3,122 4,365 1.97 11.8
Amorepacific 845,000 090430 KS OW 4,123 24.2 22.6 34,940 37,312 0.83 17.2
SK Energy 111,500 096770 KS OW 8,700 9.7 7.9 11,357 13,955 2.08 15.0
Stock to avoid
S-Oil Corp 57,900 010950 KS N 5,526 10.6 9.9 5,457 5,841 3.11 16.0
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009. Amorepacific upgraded to OW on November 7.

66
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Korea Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 9.8 13.1 13.5 1.6 3 Month 2.9 0.1 -0.5
2008E -36.7 20.7 8.0 1.1 Long Bond 5.4 0.0 -0.4
2009E 44.7 14.3 10.7 1.1 Inflation 2.0 0.4 0.5
2010E 22.0 11.7 12.0 1.2 Real 3 Month 1.0 -0.3 -1.1

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 2.2 -0.3 -2.7 0.0 BAA 2.9 0.0 na
2009E 0.2 1.0 -0.4 1.8 EMBI 3.2 -0.7 0.8
2010E 4.7 0.7 -1.1 1.0 Country na na na
Country Relative na na na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 4.0 2.0 3.5 3.5 EM Funds* 4,063 5,164 4,870
Asia ex Japan* 1,245 1,566 1,452
Korea 1,404 2,066 1,947

MSCI Korea Absolute and Relative to EMF Index MSCI Fair value Range
450 Absolute Relative to MSCI EMF
FWD PER (184) (379)
400
350 PER (319) (670)
300
PBR (282) (495)
250
200 DY (221) (370)
150
BY/EY (143)
100
50 BY/DY (176) (684)
0
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 0 300 600 900 1200

Currency Outlook (KRW/USD) EPS Integer over Time


1,650 Spot Forecast Consensus 120 2009 2010
1,550 110
1,450 J.P. Morgan forecast:
end Dec 09: 1130 100
1,350 end Mar 10: 1130
end Jun 10: 1110 Consensus 90
1,250
80
1,150
70
1,050 J.P. Morgan

950 60

850 50
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

67
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Taiwan
Year of sustainable growth
Key country dynamics Nick LaiAC
Potential positive catalysts for Taiwan include: (1) broader-based growth in (886-2) 2725-9864
global economy; (2) continued earnings upgrades; (3) recovered capex and nick.yc.lai@jpmorgan.com
capex cycle; (4) cross-strait development and achievement; and (5) J.P. Morgan Securities (Taiwan) Limited.
consensus underweight on Taiwan by EM PMs. Meanwhile, potential
negative risks include: (1) the end of monetary easing; (2) strong currency; Flagship reports
and (3) delay in free trade agreement negotiations. In 2009/10, Taiwan • Upgrade Taiwan to OW (03/30/2009)
experienced a structural change driven by the pro-growth China policy, fiscal • Another step forward on China policy (04/15/2009)
stimulus and tax reform. • Upgrade index target to 8,000 (04/28/2009)
• Circle of life: from recovery to growth (09/01/2009)
Implications of a global recovery • The weight on a strong NT$ (10/12/2009)
Taiwan as an export-driven economy is highly leveraged to the global • Seeking for growth in 2010 (10/23/2009)
economic cycle. We believe the strength of the recovery in 2010 will be
rather strong considering the degree of contraction in 2009 is the sharpest in MSCI Taiwan: Absolute and relative to MSCI Asia
history. Historical experience suggests that there is potential 10-15% upside Pacific ex-Japan
to our recently upgraded 2010 GDP growth estimate for Taiwan of 5.8%. 140
During the recession, Taiwan’s CBC has cut the discount rate seven times to
a historical low of 1.25%. Unprecedented monetary easing leads to a huge 110
increase in liquidity. Together with fiscal stimulus and capital repatriation,
liquidity will remain one of the drivers in the equity market next year, in our 80
view.
How much have valuations already discounted a recovery 50
Consensus earnings estimates have been consistently revising up since
March this year. MSCI-Taiwan forward P/E is now at around 21x, versus the 20
historical range of 12x-40x post tech bubble. While today’s valuation is 97 99 01 03 05 07 09
around the average of the historical range, we believe earnings upgrades will Absolute Relativ e
be a powerful driver for the equity market’s performance and stock re-rating Source: MSCI, Datastream.
in 2010. We recommend investors focus on sectors or stocks that will deliver MSCI performance table
above-peer or sector average growth in 2010. 2wk 3mth YTD
MSCI Taiwan 2.5 13.1 60.4
Recommendations Weightings in Region 11.1%
Taiwan remains an Overweight market in our regional portfolio. By sector, MSCI Total Mkt Cap. (US$B) 344.3
we are Overweight on tech and financial with funding sources from telecom 2009 P/E Ratio (x) 30.6
2010 P/E Ratio (x) 19.3
and consumer. Within tech, we prefer branded PC over ODM, and white-box 2011 P/E Ratio (x) 13.4
handset over smartphone. In financial, we prefer brokers and banks than 2010 Yield (%) 3.3
insurance. Our top picks are UMC, Acer, Hon Hai, Fubon and Nan Ya 2010 ROE (%) 10.0
Plastics, while we would avoid Quanta, HTC and Taishin FHC. Our Dec-10 Source: Datastream, IBES, MSCI, JPMorgan estimates.
Prices and valuations are as of November 20, 2009
index target is 8800, based on the analysis of the historical trend P/E and
2010 forward earnings.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
UMC 15.5 2303 TT OW 6,184 69.3 15.4 0.22 1.01 0.0 6.0
Acer 77.8 2353 TT OW 6,419 17.5 12.0 4.44 6.48 3.9 17.6
Hon Hai 132.0 2317 TT OW 34,788 16.4 13.0 8.05 10.12 1.9 18.2
Fubon FHC 38.8 2881 TT OW 9,673 14.7 11.6 2.63 3.33 5.2 14.0
Nan Ya Plastics 53.2 1303 TT OW 12,833 32.3 22.1 1.65 2.40 2.9 8.2
Stocks to avoid
Quanta 65.5 2382 TT UW 7,497 10.8 10.3 6.05 6.37 4.9 20.6
HTC 340.0 2498 TT UW 8,314 11.0 13.6 31.01 25.06 5.9 27.6
Taishin FHC 12.7 2887 TT UW 2,716 7.6 17.8 1.66 0.71 5.5 6.5
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.

68
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Taiwan Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 28.2 10.5 17.3 4.6 3 Month 0.9 0.0 -0.4
2008E -68.7 33.4 5.6 3.7 Long Bond 1.4 -0.1 0.3
2009E 9.2 30.6 6.5 3.0 Inflation -1.2 0.5 0.2
2010E 58.7 19.3 10.0 3.3 Real 3 Month 2.1 -0.5 -0.6

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 0.1 0.0 -4.8 0.0 BAA 2.9 0.0 na
2009E -3.8 0.0 -4.4 0.6 EMBI 3.2 -0.7 0.8
2010E 5.8 0.4 0.0 1.3 Country na na na
Country Relative na na na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 4.2 3.8 4.0 3.8 EM Funds* 4,063 5,164 4,870
Asia ex Japan* 1,245 1,566 1,452
Taiwan 1,668 1,059 1,012

MSCI Taiwan Absolute and Relative (vs EMF) Index MSCI Fair value Range
250 Absolute Relative to MSCI EMF
(120)
FWD PER (252)
200
150 PER(140) (311)
100
PBR (225) (421)
50
0 DY (267) (1152)
-50
-100 BY/EY (200) (1422)

-150
BY/DY (427)
-200
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 0 500 1000 1500 2000 2500 3000 3500

Currency Outlook (TWD/USD) EPS Integer over Time


38 Spot Forecast Consensus 120 2009 2010
37
J.P. Morgan forecast: 100
36
end Dec 09: 31.0
35 end Mar 10: 30.5 80
end Jun 10: 30.5
34
60
33 Consensus

32 40
31
20
30 J.P. Morgan

29 0
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

69
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Thailand
Strong outlook with implementation risk

Key country dynamics Sriyan PieterszAC


Key positives are: (1) a multi-year pro-cyclical fiscal stimulus that will (662) 684-2670
augment external demand; (2) sustained high excess liquidity that supports sriyan.pietersz@jpmorgan.com
risk assets; and (3) potential for earnings upgrades, particularly in JPMorgan Securities (Thailand) Limited
banks/property. Key negatives are: (1) propensity for renewed political
turbulence; (2) potential weak implementation on fiscal stimulus; and (3) Flagship reports
unpredictable policy/governance environment. • Thai banks: Increase in earnings estimates
(October 12, 2009)
Implications of a global recovery • Thai Investor Tour (September 23, 2009)
The primary impact of the downturn on Thailand has been operational, rather • Back to 2003? (August 20, 2009)
than on the balance sheet. With exports accounting for 70% of GDP, the • Revisiting valuations (June 8, 2009)
impact of the sharp fall in external demand drove what will likely be a -3.1%
GDP contraction in 2009. A moderate total external debt of US$65 billion or MSCI Thailand: Absolute and relative to MSCI Asia
Pacific ex-Japan
25% of GDP allowed balance sheets to remain solvent. However, the impact
of lower government revenue and increased stimulus expenditure has raised 140
public debt/GDP to 45% from 37% pre-crisis. Thailand is also very
leveraged into an external demand recovery, with strong second-order effects 110
on private consumption likely as employment ramps up. Thailand is also
distinguished by a policy initiative to deploy a large (US$43 billion) pro- 80
cyclical fiscal stimulus from 2010-12. The front-end of the stimulus is labor-
and rural-intensive and is targeted to deliver a large multiplier effect that 50
should allow Thailand to outperform regional peers in 2010.
20

How much have valuations already discounted a recovery 97 99 01 03 05 07 09


A modest recovery in 2010 has been discounted by the SET’s 60% rise YTD. Absolute Relativ e
However, expectations are low, in our view, and likely to see further Source: MSCI, Datastream.
upgrades in 2010. We note that although 2010 earnings forecasts fell 32% MSCI performance table
from the peak to trough, upgrades have been just 5%. SET and MSCI Thai 2wk 3mth YTD
MSCI Thailand -0.9 4.2 53.0
valuations have gone from bargain basement levels in early Mar-09 to above Weightings in Region 1.2%
LT averages and back again, with the 12-month forward P/E for MSCI Thai MSCI Total Mkt Cap. (US$B) 37.5
now at 11.5x (post-2000 mean of 10.9x). We anticipate earnings revisions 2009 P/E Ratio (x) 12.5
combined with multiple expansion back to the levels of 2003 (12x or +0.5 2010 P/E Ratio (x) 11.3
2011 P/E Ratio (x) 9.4
standard deviation above LT average P/E) could underpin the upside in the 2010 Yield (%) 3.8
SET well above 800 in 2010. Post-previous downturns in 2003 and 2006, 2010 ROE (%) 14.4
P/E ratings peaked at 12x and 15x, respectively. Source: Datastream, IBES, MSCI, JPMorgan estimates.
Prices and valuations are as of November 20, 2009
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (Bt) Div. yield ROE
Price (Bt) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Siam Commercial Bank 78.75 SCB.BK OW 8,002 12.6 10.7 6.3 7.4 2.8 17.0
Land & Houses (F) 6.30 LHf.BK OW 1,892 17.7 17.2 0.4 0.4 5.8 14.1
C P All 19.10 CPALL.BK OW 2,571 20.9 17.4 0.9 1.1 4.3 31.9
PTT 234.00 PTT.BK OW 19,852 11.3 9.2 20.7 25.5 3.6 16.0
Thai Oil 40.75 TOP.BK OW 2,490 6.1 5.8 6.7 7.1 7.4 19.8
Stocks to avoid
TMB Bank 1.12 TMB.BK N 1,394 23.1 14.7 0.0 0.1 0.0 6.8
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.

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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Thailand Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 -37.3 25.1 7.4 4.3 3 Month 1.4 0.0 -0.1
2008E 56.6 16.0 11.6 3.6 Long Bond 4.4 0.8 -0.4
2009E 28.7 12.5 14.3 3.3 Inflation 0.5 1.5 0.9
2010E 10.1 11.3 14.4 3.8 Real 3 Month 0.9 -1.5 -1.0

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 2.6 -0.8 -2.3 0.0 BAA 2.9 0.0 na
2009E -3.1 0.0 -3.7 0.7 EMBI 3.2 -0.7 0.8
2010E 6.1 0.0 0.3 3.1 Country 0.5 0.0 na
Country Relative -2.6 0.7 na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 5.3 4.9 5.7 7.0 EM Funds* 4,063 5,164 4,870
Asia ex Japan* 1,245 1,566 1,452
Thailand -254 129 90

MSCI Thailand Absolute and Relative to EMF Index MSCI Fair value Range
400 Absolute Relative to MSCI EMF FWD PER (115) (381)
350
PER (231) (500)
300
250 PBR (218) (466)
200
DY (184) (379)
150
100 BY/EY (127) (840)

50 BY/DY (127) (914)


0
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 0 300 600 900 1200 1500

Currency Outlook (THB/USD) EPS Integer over Time


43 Spot Forecast Consensus 120 2009 2010
41
110
39
100
37
Consensus
35 90
33
J.P. Morgan forecast: 80
31 end Dec 09: 33.00
end Mar 10: 32.50
J.P. Morgan 70
29 end Jun 10: 32.00

27 60
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

71
Adrian Mowat Emerging Markets Equity Research
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adrian.mowat@jpmorgan.com

Turkey
Inflection point in 2010
Key country dynamics Adrian MowatAC
J.P. Morgan forecast a GDP recovery in 2010 to 5% versus the 5.3% (852) 2800-8599
contraction in 2009. The conditions and timing of the IMF agreement outlook adrian.mowat@jpmorgan.com
will influence the economic outlook. We expect the IMF three-year stand by J.P. Morgan Securities (Asia Pacific) Limited
program with total funding of US$ 45 billion to be signed in 2010. The
program will ease Turkey’s reliance on external financing and reduce the
crowding out of the private sector. The government borrowing program will
dominate the financial markets in 1Q10. Banks should benefit from higher
credit growth in 2H10. The recession has created a substantial output gap, MSCI Turkey: Absolute and relative to MSCI
limiting the risk of inflation. EMEA

4000
Implications of a global recovery
Turkey’s current account deficit was less than forecast in 2009 due to modest 3000
import growth combined with resilient exports, notably ex EU. Turkish
exporters will benefit from a recovery in European and middle-east demand 2000
and an increase in tourism as discretionary spending recovers. A $1/bbl rise in
oil prices (assuming a similar rise in other energy prices) widens Turkey’s 1000
CAD about $500 million. For the 2010 outlook, our economist assumes a
13% increase in energy prices over the 2009 average. 0
97 99 01 03 05 07 09
How much have valuations already discounted a recovery
Absolute Relativ e
Turkey’s valuations are undemanding; forward PE of 9 versus 13 for MSCI
EM. The index has marginally underperformed MSCI EM year to date. Since Source: MSCI, Bloomberg, J.P. Morgan.
mid-March 2009, the local currency index is in line with MSCI EM while it
has outperformed by 30% in US$ terms. Turkish financials are flat relative to MSCI performance table
2wk 3mth YTD
EM financials YTD and have marginally outperformed by 13% since mid- MSCI Turkey -4.5 -5.6 58.9
March. Turkey valuations discount a recovery in line with the EM benchmark Weightings in Region 1.3%
MSCI Total Mkt Cap. (US$B) 40.8
2009 P/E Ratio (x) 9.7
Recommendations 2010 P/E Ratio (x) 8.8
We are neutral Turkey recognizing the importance of the agreement with the 2011 P/E Ratio (x) 7.4
IMF next year. We forecast a moderation in financials EPS growth from 30- 2010 Yield (%) 3.5
50% growth in 2009 to 10-20% in 2010. We forecast 2011 EPS growth to 2010 ROE (%) 17.3
Source: Datastream, IBES, MSCI.
accelerate towards 20-30%; which in our view will get gradually priced in
Prices and valuations are as of November 20, 2009
2H10. Current valuations (single digit PE 10E; P/NAV average of about 1.5)
are not pricing in medium-term growth prospects and earnings acceleration in
2H10 and 2011E. Media companies should benefit from a recovery in
business discretionary spending and auto companies focused on exports
should be leveraged to the Euro zone recovery. The key medium call on
Turkey is whether it has moved into a period of sustained single digit
inflation and interest rates. This should help Turkish trend growth accelerate.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Asya 3.1 ASYAB TI OW 1845.5 10 6.8 0.3 0.5 4.0% 22.1%
Vakifbank 3.2 VAKBN TI OW 5428 7.5 6.5 0.4 0.5 5.5% 17.8%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 20 November 2009.

72
Adrian Mowat Emerging Markets Equity Research
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adrian.mowat@jpmorgan.com

Turkey Scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2007 56.9 9.2 18.5 4.7 3 Month 7.1 -1.3 na
2008E -11.2 10.3 16.7 3.9 Long Bond 8.2 -1.7 -1.7
2009E 6.4 9.7 17.7 2.8 Inflation 5.1 -0.2 -0.1
2010E 10.8 8.8 17.3 3.5 Real 3 Month 2.0 -1.1 na

Economic Forecasts Risk Appetite


GDP (YoY) Forecast -3M ∆ - EMF - Cons US$ Spread Spot -3M ∆ +3M ∆
2008 0.9 -0.8 -4.0 0.0 BAA 2.9 0.0 na
2009E -5.3 -0.6 -5.9 0.5 EMBI 3.2 -0.7 0.8
2010E 5.0 2.0 -0.8 1.5 Country 2.5 -0.6 na
Country Relative -0.6 0.2 na
Economic Momentum Foreign Fund Flows (US$ mils)
GDP Q4 09E Q1 10E Q2 10E Q3 10E Month 09 YTD Avg 12-Mo Avg
GDP SAAR 4.5 0.0 3.6 8.2 EM Funds* 4,063 5,164 4,870
EM Europe* -157 171 102
Turkey 21 -1 -33

MSCI Turkey Absolute and Relative to EMF Index MSCI Fair value Range
800 Absolute Relative to MSCI EMF
FWD PER (376414) (850646)
700
PER (397670) (1349945)
600
500 PBR (464556) (1340990)
400
DY (348262) (1075084)
300
200 BY/EY (648389)
100
BY/DY (1194998)
0
Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 0 500000 1000000 1500000 2000000

Currency Outlook (TRL/USD) EPS Integer over Time


2.20 Spot Forecast Consensus 120 2009 2010
2.10
J.P. Morgan forecast: 110
2.00
end Dec 09: 1.40
1.90
end Mar 10: 1.45 100
1.80 end Jun 10: 1.45
1.70
90
1.60 Consensus 80
1.50
1.40 70
1.30 60
J.P. Morgan
1.20
1.10 50
Dec 04 Apr 06 Aug 07 Dec 08 Mar 10 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09

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

73
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

MENA
Geared play into a global economic recovery
Key country dynamics Christian KernAC
The economic backdrop for the MENA region is relatively resilient. (971-4) 428 1789
Benefiting from several years of high budget surpluses and the ~70% christian.a.kern@jpmorgan.com
recovery in the oil price since its lows in Feb-09, we expect the Gulf JPMorgan Chase Bank, N.A., Dubai Branch
countries to continue their growth path, mainly driven by sizeable
infrastructure projects (e.g. KSA, Qatar, UAE) budgeted at an estimated oil Flagship reports
price of around $40/bbl (vs JPME $69). Historical market valuations and • MENA Telecom Sector - Initiating coverage on
foreign ownership remain relatively low compared with other EMs. We GCC telecoms (Oct 8, 2009)
believe the reaction of the global equity markets to the recent Dubai World • MENA Property Sector - Initiating coverage on UAE
restructuring announcement has been overdone and feel going forward there property (Aug 10, 2009)
is an increasing need for differentiation between Dubai and the other MENA • MENA Financial Sector - Initiating coverage on
markets. Dubai accounts for 7% of the market weight of the GCC200 index. UAE banks (Jul 1, 2009)

Implications of a global recovery Figure 1: GCC200 vs EM


220
In our view the MENA region is a geared play into a global economic 200

recovery, mainly due to its natural resource wealth (e.g. ~2/3 of world oil 180

160
reserves and ~45% of world gas reserves) supporting sovereign flows and 140

regional investments. In the U.A.E., we believe the government’s intention is 120

100

to limit the restructuring to Dubai World (incl. property developer Nakheel) 80


Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09

and federal support is likely to be more selective going forward. We see the MXEF Index BGCC200 Index

USD5bn in bonds recently taken up by two Abu Dhabi banks for the DFSF Source: Bloomberg
and reaffirming statements from the U.A.E. Central Bank to support liquidity
of the U.A.E banking system as a clear sign of federal unity. Table 1: Market Weights of BGCC200
Saudi Arabia 52%
How much have valuations already discounted a recovery? Qatar 14%
With regional issues being addressed and worked out (e.g. restructuring of Kuwait 12%
Abu Dhabi 11%
Dubai World, Saad/Algosaibi debts), we believe the lagging performance of Dubai 7%
regional equity markets is likely to catch up with the recent strong EM Oman 2%
performance. While global risk appetite for equities continues to increase, Bahrain 2%
the GCC200 index is still around 50% below its high in Jan-08, whereas the Source: Bloomberg and J.P. Morgan.
MSCI EM is only around 25% below its high in Nov-07.

Recommendations
We accept that the restructuring of Dubai World could have been better
communicated to financial markets, but believe that the reaction of the
financial markets to this news creates attractive opportunities for investors in
our preferred MENA names with no or little exposure to Dubai: Aldar
Properties (Aldar) in the property sector, First Gulf Bank (FGB) in the
financial sector and Qatar Telecom (Qtel) in the telecom sector.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Aldar 5.46 ALDAR UH OW 3,835 7.98 6.42 0.68 0.85 0.0% 11.0%
FGB 18.75 FGB UH OW 7,025 8.59 7.81 2.18 2.40 1.9% 17.0%
Qtel 150.90 Qtel QD OW 6,093 5.75 5.83 20.39 20.42 7.3% 11.1%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of cob 23 November 2009.

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Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

MENA Equity Research


Extended stock coverage into MENA region

Over the past few months, we have built our Dubai-based equity research MENA Equity Research:
team and have extended stock coverage into the MENA region. With Christian KernAC
financials, real estate and telecoms, we cover the three main sectors in the (Telecoms/Infrastructure)
MENA region. This already includes more than a dozen key stocks in our (971-4) 428-1789
christian.a.kern@jpmorgan.com
coverage universe which we will extend on an ongoing basis.
JPMorgan Chase Bank, N.A., Dubai Branch
Financials – Abu Dhabi banks attractively positioned vs CEEMEA peers Alex Comer
We believe Abu Dhabi banks are attractively placed to benefit from balance (Petrochemicals)
sheet growth, driven by economic flows arising out of a) the rising price of (44-20) 7325-1964
alex.r.comer@jpmorgan.com
crude oil supporting the Abu Dhabi's finances and b) Abu Dhabi's continuing
J.P. Morgan Securities Ltd.
infrastructure investments supported by strong capitalization and sovereign
backing within the shareholding structure. Notwithstanding the further Naresh Bilandani
(Financials)
expected asset quality deterioration, to some extent potentially arising out of (971-4) 428-1763
the Dubai World restructuring (where NBAD and FGB have limited naresh.n.bilandani@jpmorgan.com
exposure vs. their balance sheet size) and its secondary impacts, we believe JPMorgan Chase Bank, N.A., Dubai Branch
that strong coverage ratios and pre-provisioning profits provide an ample Muneeza Hasan
buffer for our OW Abu Dhabi names to suffer a rise in NPLs without making (Real Estate/Construction)
any losses on the bottom line. Rising investor risk appetite in GEMs and (971-4) 428-1766
muneeza.z.hasan@jpmorgan.com
attractive valuations of Abu Dhabi banks - trading at a more than 20% NAV JPMorgan Chase Bank, N.A., Dubai Branch
discount vs. their CEEMEA peers - is likely in our view to help close the
35%-45% upsides to Dec-10 PTs that we see in our OW Abu Dhabi stocks. Ranjan Sharma
(91-22) 6157-3305
Our key recommendation within MENA financials is First Gulf Bank. ranjan.x.sharma@jpmorgan.com

J.P. Morgan India Private Limited


Real estate – need for differentiation
As the local equity markets gradually absorb the impact of the announced For MENA Equity Sales advice, please
restructuring of Dubai World and the recent rise in Dubai and Abu Dhabi contact:
CDS spreads, we see an increasing need for differentiation between Dubai Stephen Daly
and Abu Dhabi fundamentals. We remain OW on Abu Dhabi property stocks (971-4) 428-1715
stephen.a.daly@jpmorgan.com
and highlight that while investor risk appetite may reduce in the near to
JPMorgan Chase Bank, N.A., Dubai Branch
medium term, broad sector dynamics remain unchanged and favourable for
Abu Dhabi-based property developers. As Dubai suffers from a housing Sadiq Hussain
(971-4) 428-1741
surplus with vacancy levels as high as 25% in certain areas, Abu Dhabi sadiq.s.hussain@jpmorgan.com
continues to face a housing shortage unlikely to be met until 2011-2012 due JPMorgan Chase Bank, N.A., Dubai Branch
to limited supply in the pipeline. While U.A.E. property prices are down 45-
50% from peak levels, we prefer exposure to Abu Dhabi-based developers, Flagship reports
as they enjoy stronger underlying fundamentals. Our key recommendation
• MENA Telecom Sector - Initiating coverage on
within MENA real estate is Abu Dhabi-focused Aldar Properties.
GCC telecoms (Oct 8, 2009)
• SABIC – A geared play on oil and cyclical
Telecoms – good time to add to GCC telecom positions
recovery: Initiate with OW (Sept 3, 2009)
While local equity markets digest the Dubai World restructuring news, we
• MENA Property Sector - Initiating coverage on
highlight four reasons why we believe it is a good time to add to GCC
UAE property (Aug 10, 2009)
telecom positions: 1) strong valuation support; 2) our expectations of good
• MENA Financial Sector - Initiating coverage on
4Q results; 3) room to catch up for GCC markets; and 4) risk appetite for
UAE banks (Jul 1, 2009)
emerging markets continues to improve. Our top pick within MENA telcos is
Qatar Telecom, rated Overweight with more than 50% prospective upside
and one of our key stock calls in our JPM CEEMEA telecom universe.

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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

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Adrian Mowat Emerging Markets Equity Research
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Sector Overviews

77
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Agribusiness, Pulp and Paper


Long Logistics, Short Sugar

Key sector dynamics Brazil


The agribusiness sector is more about supply than demand. Hence, the global Agribusiness
recovery is less of a factor than the outlook for supply, with some exceptions.
Debbie Bobovnikova, CFAAC
The three exceptions within our coverage are: (1) ethanol demand; (2) cotton (1-212) 622 3489
demand; and (3) freight prices. The pulp and paper sector is more leveraged debbie.bobovnikova@jpmorgan.com
to rising economic activity than the agribusiness sector.
J.P. Morgan Securities Inc.

Implications of a global recovery


Flagship reports
Because it is linked to higher economic activity and rising oil prices, ethanol
demand should benefit next year. However, demand is also tied to • Suzano : Inflection Point in Earnings -
government policies and, in Brazil, sales of flexfuel vehicles. In fact, demand Upgrade to OW (11/10/2009)
has continued to be strong throughout the downturn in Brazil due to • SLC Agricola : Lowering Est and Price
incentives for car purchases. Hence it is hard to see a significant acceleration Target on Lower 09/10 Growth Outlook
of the trend next year. Cotton demand, on the other hand, is tied to global (10/27/2009)
economic recovery, and we are starting to see signs of an improvement, • LatAm Agribusiness : Sector Guide: Key
which would benefit producers such as SLC Agricola (SLCE3/N). However, Discussions at 2nd Annual Conference
the global cotton stock-to-use ratio is still extremely high at 47%, so we (10/22/2009)
expect it will take some time to work this down to more “bullish” levels.
• SLC Agricola : Disappointing 2Q Results -
Finally, logistics prices will benefit as industrial activity picks up, tightening
the availability of transportation. Pulp and paper sector demand benefits from Adj. Est. and Downgrading to Neutral, Intro
economic recovery – due both to rising consumer demand and to rising 2010 Price Target (08/13/2009)
employment (printing and writing papers). While we expect employment to • ALL: CEO Call Highlights (4/19/2009)
be a laggard, rising consumer demand should benefit demand for consumer • LatAm Agribusiness: Sugar Logistics
packaging, such as boxboard. Agreement - LT Positive for ALL
(3/10/2009)
How much have valuations already discounted a recovery? MSCI EM Agribusiness: Absolute and
We think valuations for the sugar/ethanol sector are the most stretched, with relative to MSCI EM
the market valuing peak earnings (on peak sugar prices) as the new normal. 300
Grain markets seem to be factoring in some recovery in supply-demand in
250
both the grains and cotton. On the other hand, we think the pulp/paper and
logistics sectors are not giving full value to the recovery. 200

Recommendations 150
Our top pick in the LatAm agribusiness sector is railroad operator ALL 100
(ALLL11/OW). We also like the pulp/paper producer Suzano (SUZB5/BZ).
We would highlight sugar/ethanol stocks as ones to avoid, especially Acucar 50
Guarani (ACGU3/UW), which is the most levered and least profitable of the 97 99 01 03 05 07 09
three producers. Relativ e Absolute
Source: MSCI, Datastream.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (Ps) Div. yield ROE
Price Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
ALL 16.45 ALLL11 OW 6,185 24.1 18.1 0.74 0.87 1.7% 17.0%
Suzano 17.90 SUZB5 OW 3,059 6.2 14.8 2.79 1.18 0.7% 7.9%

Stocks to avoid
Guarani 4.94 ACGU3 UW 811 NM 45.2 -0.29 0.11 0 2.9%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 25 November 2009.

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Adrian Mowat Emerging Markets Equity Research
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adrian.mowat@jpmorgan.com

Autos & Industrials


Focus on sustainable growth names
Key sector dynamics Frank LiAC
Looking into 2010, we believe the regional auto sector should be supported by (852)-2800-8511
key positives including: (1) continued demand recovery, as driven by rising frank.m.li@jpmorgan.com
household disposable income, low penetration, and a relatively loose credit J.P. Morgan Securities (Asia Pacific) Limited
environment. Among others, China is riding the third auto boom on the breakout
of car demand in tier-three cities. In India, the acceleration in economic growth Flagship reports
could be conducive for sustained auto demand recovery entering 2010; and (2) • DongFeng Motor Co., Ltd.–Pole position (Jan
accommodative policies. We believe the chance for China to renew the 16, 2009)
preferential tax cut policies on expiration at the end of the year is at around 70% • China autos–Staging an earlier-than-
as the government wants to ensure policy continuity for promoting domestic expected recovery in FY09 (Mar 30, 2009)
consumption. In India, while some of the stimulus measures (such as excise duty • AutoWIN & Auto WINdata–Regional auto
cuts) may be partially rolled back next year, the overall policy environment sector views, sales trends, forecasts etc
remains favorable; and (3) relatively low cost of raw materials. On the other (Monthly)
hand, a possible sharp rebound in oil prices and potential monetary tightening • Brilliance China–A phoenix is China’s auto
sector(Oct 30, 2009)
could still weigh on the sector: a broad-based tightening in China is expected to
kick in as of 2Q10, while India’s central bank has signaled that it will end its • India Auto Manufacture: Stay invested, More
steam ahead (Aug 6, 2009)
stance of monetary easing in early 2010.
• Hyundai Mobis: Small step to holding co.,
Implications of a global recovery stronger recurring profit profile, battery
The synchronized global economic recovery and resultant rebound in auto venture in the works. Upgrade to OW (Aug
demand recovery in developed markets could benefit most export-oriented auto 30, 2009)
players such as Korean names. For China and India, whose auto markets are MSCI Autos and MSCI Autos relative to MSCI
generally domestic consumption-driven, a solid recovery in exports could help Emerging Markets Autos
improve their labor markets, their household disposable income growth and their 175
car consumption. Meanwhile, we expect more Chinese auto companies may seek
mergers and acquisitions in overseas markets in 2010 on the back of the 150
improved economic outlook in developed markets. 125
How much have valuations already discounted a recovery 100
Regional auto producers are generally trading at around mid-cycle valuations,
with leading auto names trading at above mid-cycle valuations. For instance, 75
DongFeng Motor is now trading at 11.2x FY10E P/E, about one-standard 50
deviation above the average historical prospective P/E of 8.3x. Meanwhile,
25
Maruti Suzuki is trading at 15.4x FY10E P/E, versus its trough prospective P/E
of 8.0x, and historical average prospective P/E of 14.0x. 97 99 01 03 05 07 09
Relativ e Absolute
Recommendations
We prefer domestic consumption-driven auto names such as China autos and Source: MSCI, Datastream.

India autos due to the low penetration rates in these markets to exports-driven
auto names such as Korean autos. Our top picks within the region include Maruti
Suzuki, Astra International, Hyundai Motor and Yulon Motor. Our stocks to
avoid list includes Weichai Power.

Top picks and stocks to avoid


Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Hyundai Motor Company 94600 005380 KS OW 17762 8.8 8.2 10798 11486 1.6 10.1
Astra International 32000 ASII IJ OW 13587 15.3 12.6 2097 2541 3.2 24.9
DongFeng Motor Co., Ltd. 11.0 489 HK OW 12207 15.0 13.2 0.7 0.8 1.3 23.6
Maruti Suzuki India Ltd 1567 MSIL IN OW 9716 37.2 19.9 42.2 78.8 0.4 21.6
Yulon Motor Co., Ltd. 39.0 2201 TT OW 1895 41.5 56.6 0.9 0.7 0.5 1.8
Stock to avoid
Weichai Power 60.3 2338 HK N 6941 9.9 8.6 6.1 7.0 0.8 45.2
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009. *Indian companies have March year-end.

79
Adrian Mowat Emerging Markets Equity Research
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adrian.mowat@jpmorgan.com

Consumer
Selective stock picking
Key sector dynamics Vineet Sharma, CFAAC
Discretionary consumption trends in Asia will continue to be influenced by (852) 2800-8523
wage growth and ‘wealth creation’ from the property market and local stock vineet.k.sharma@jpmorgan.com
J.P. Morgan Securities (Asia Pacific)
markets. The return of modest inflation in food prices augurs well for staples.
Limited
An end to aggressive discounting to clear inventories is near, which should
aid margin recovery. In LATAM, declining interest spreads, easing credit Andrea TeixeiraAC
supply, increasing consumer confidence, higher disposable income, increase (1-212) 622-6735
in employment, and declining food inflation have allowed for a better share andrea.f.teixeira@jpmorgan.com
of wallet for discretionary items. However, retail sales growth in Mexico still Alan AlanisAC
remains under pressure. In 2010 we believe earnings growth for Russian (1-212) 622-3697
alan.alanis@jpmorgan.comJ.P. Morgan
consumer names should be driven by recovery in consumption, business Securities Inc.
expansion and M&A activity, as well as a stronger ruble.
Implications of a global recovery Sean HolmesAC
(27-11) 507-0373
Export driven economies such as China and Korea should benefit the most sean.x.holmes@jpmorgan.com
from global recovery. Better economic fundamentals, stability in wages, J.P. Morgan Equities Ltd.
employment and improving confidence should propel consumer spending in
2010. We expect consolidation to continue for LATAM food and beverages Elena JouronovaAC
+7 495 967 3888
and Russian retail. However, all is not well for SA and Mexico. There is a
elena.jouronova@jpmorgan.com
risk that household credit growth could remain muted for long in SA, J.P. Morgan Bank International LLC
depressing household consumption. Mexico, which relies heavily on the US
through exports and workers' remittances, will take a while before it revives. Flagship reports
How much have valuations already discounted a recovery • Identifying potential short-term and long
We are positive on dominant staples in Asia and expect them to benefit from term winners (10/18/09)
benign inflation. Expectations are quite low for Chinese discretionary names. • China Discretionary: Time to take profit or
In LATAM, though current prices have started to reflect the strong recovery ride the momentum? (06/09/09)
in retail sales, they are still 20-35% below peak. In SA, furniture counters • SA Retail: In pursuit of value
still have scope to rerate. Our sector analysts in Russia are of the view that • Russian Retail: Growth outlook improving
expected recovery in consumer purchasing power is partially priced in. on faster expansion and stronger FX
MSCI EM Consumer: Absolute and relative
Recommendations
to MSCI EM
We like United Spirits in Asia as a play on the fastest growing spirits market 270
globally. Our top picks in CEEMEA are JD Group and Magnit in CEEMEA, 210
and FEMSA and LAME in LATAM. 150
90
30
97 99 01 03 05 07 09
Relativ e Absolute
Source: MSCI, Datastream.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
JD Group 4340 JDG SJ OW 937 37.3 7.3 116.5 597.1 0.0 18.8
Femsa 45.2 FMX US OW 16174 24.7 20.3 1.8 2.2 1.1 10.3
China Mengniu Dairy Co. 23.1 2319 HK OW 5165 28.2 24.8 0.8 0.9 0.0 17.5
United Spirits Limited 1228 UNSP IN OW 3309 44.0 34.8 27.9 35.3 0.3 12.6
LAME 13.9 LAME4 BZ OW 5519 58.8 34.9 0.2 0.4 1.1 62.9
Magnit OAO 59.5 MGNT RU OW 4953 91.5 58.9 0.7 1.0 0.0 29.3
Stocks to avoid
Massmart 8519.0 MSM SJ UW 2270 14.4 14.7 592 581 4.4 35.8
Soriana 31.8 SORIANAB MM UW 4376 20.6 18.5 1.5 1.7 0.5 9.3
Hindustan Unilever Ltd. 284.3 HUVR IN UW 13305 25.3 27.3 11.3 10.4 2.6 99.5
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

80
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Energy
Oil price recovery done
Key sector dynamics Brynjar Bustnes AC
Demand data does not support current oil prices, and inventories are high and (852) 2800-8578
OPEC’s compliance is fading. Weak demand and non-OPEC production brynjar.e.bustnes@jpmorgan.com
would put downward pressure on oil. We expect gasoline demand to stay J.P.Morgan Securities (Asia Pacific)
weak, due to weak US demand. Distillate demand is expected to return to Limited

growth as a dominating EM market product. Since 2009, Russian oils have Nadia KazakovaAC
had to pay lower royalties and have enjoyed extensive tax breaks on (7-495) 937 7329
Greenfield developments. We might see further tax initiatives to encourage nadia.kazakova@jpmorgan.com
output growth in Russia. In LATAM, active rigs have increased 2% since J.P Morgan Securities Ltd.
August ’07 while they have declined 44% in the US and 9% in the Middle
East, the largest producing region globally Sergio TorresAC
(212) 622-3378
sergio.torres@jpmorgan.com
Implications of a global recovery
J.P. Morgan Securities
Oil prices are at the high-end of the trading range (US$60- 80/bbl). High oil
prices have pushed oil companies’ earnings up. In Russia, we estimate Flagship reports
output might be up be over 1% in 2009E and could rise by 2.6% y/y in 2010E
(to 10.1MMbppd), driven by the launch of East Siberian greenfields projects. • One Minute on Oil (ad hoc)
In Asia, Petchem had a strong recovery but ME capacity is still missing. Next • Crude Reality (weekly)
year this capacity should have a major negative impact on margins, despite a • Russian Gas: Gazprom revisited
potential pick-up in demand. • Russia Integrated Oils: Oil shares hit year-
endPTs.
How much have valuations already discounted a recovery • Petrobras: More Oil Than Meets the Eye
Our sector analysts in Asia are positive on integrated and refining relative to MSCI EM Energy: Absolute and relative to
upstream/ petchem. Integrated/less oil leverage stocks are currently cheapest MSCI EM
with rerating or positive news being potential drivers. Russian integrated oils 700
are also trading at 12%-19% discounts to historical average PERs, and have 600
not yet discounted a recovery. 500
400
Recommendations
300
We like Rosneft and Gazprom in CEEMEA, and Sinopec and SK Energy in
200
Asia. In LATAM, we prefer stocks that can deliver production growth on top
of revenue enhancement driven by the value of crude. Our top picks reflect 100
our optimism for Brazilian offshore: OGX and Petrobras. Our stock to avoid 0
is Ecopetrol. 97 99 01 03 05 07 09
Relativ e Absolute
Source: MSCI, Datastream.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Gazprom 5.6 GAZP RU OW 133282 6.3 5.2 0.9 1.1 0.0 12.3
Rosneft 7.9 ROSN LI OW 83620 11.8 7.2 0.7 1.1 1.4 19.5
SK Energy Co Ltd 108000 096770 KS OW 8512 9.5 7.7 11357 13955 2.1 14.7
Sinopec Corp - H 6.4 386 HK OW 136013 8.6 8.3 0.7 0.8 3.0 16.6
Petrobras 38.5 PETR4 BZ OW 206917 12.9 11.7 3.0 3.3 1.7 17.4
OGX 1430 OGXP3 BZ OW 26309 nm nm 16.4 5.7 0.0 3.8
Stocks to avoid
Lukoil 55.6 LKOH RU N 47291 6.6 6.4 8 9 2.5 12.5
Ecopetrol 2600.0 ECOPETL CB UW 53189 16.8 13.2 154 197 4.6 27.1
PetroChina 9.4 857 HK UW 339259 15.4 13.8 0.6 0.7 3.2 14.0
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

81
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Financials
Credit trends improving
Key sector dynamics Sunil GargAC
We expect credit demand to recover cyclically in EM in sync with economic (852) 2800-8518
growth and backed by a continuation of monetary policy. Nominal interest sunil.garg@jpmorgan.com
rate increases are expected to drive modest NIM expansion. Credit trends are J.P. Morgan Securities (Asia Pacific)
improving in the region and this bodes well for the re-emergence of loan Limited
growth. Valuations are pretty cheap in CEEMEA and we believe P/NAV
Paul FormankoAC
above 3 could be the peak of the market by 2011. We fear non conventional (+44) 207-325-6028
intervention in credit markets in Asia. paul.formanko@jpmorgan.com

Implications of a global recovery J.P. Morgan Securities Ltd.


Bank earnings lag economic recoveries, and to that extent, 2010 promises to
be a seriously positive earnings recovery year in EM. We might however see Saul MartinezAC
(1-212) 622-3602
regulatory insistence on reducing leverage in the business over the next few Saul.martinez@jpmorgan.com
years. In LATAM, economic conditions differ throughout the region. We
J.P. Morgan Securities Inc.
expect an increase in loan origination and a fall in early stage delinquencies
in Brazil. The move from deflation to inflation would improve the NIMs in Flagship reports
Chilean banks. In CEEMEA, Turkish financials should do well in the
medium to long term. SA banks are likely to be a 2H story in our view and • From Fear to Growth (05-09)
could underperform in 1H vs some of their peers in CEE, Turkey, Russia and • The Empire Strikes Back (10 -09)
GCC because of a delayed earnings rebound, defensive balance sheets and • CEEMEA Financials: Beyond 2009
investor preference for higher beta banking stocks. • MENA Financials: Initiating coverage on
UAE banks
How much have valuations already discounted a recovery
• Santander Brasil: Closing the GAAP
Despite a substantial 121% rally in MSCI Asia financials from Mar-09 lows,
we see an c20% upside to consensus estimates in Asia. Similarly in LATAM, MSCI EM Financials: Absolute and relative
to MSCI EM
as profits improve we see meaningful multiple expansion still likely at 270
Bradesco, Santander Brasil and Bancolombia. In CEEMEA, valuations are
still cheap and have not completely discounted a recovery. 210
Recommendations
Our top picks in Asia include BOC (growth opportunity), Fubon (a play on 150
structural turnaround in Taiwan). In LATAM, we like Santander Brasil. Our
top picks from CEEMEA are Vakifbank (cheap valuation) and Sberbank. 90

30
97 99 01 03 05 07 09
Relativ e Absolute
Source: MSCI, Datastream.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Vakifbank 3.1 VAKBN TI OW 5059 6.8 5.8 0.5 0.5 6.1 18.9
Bank of China - H 4.1 3988 HK OW 145716 12.7 9.0 0.3 0.5 5.0 21.3
Shinhan Financial Group 44150 055550 KS OW 17845 16.2 10.6 2717 4165 2.0 11.8
Fubon Financial Holdings 36.0 2881 TT OW 9034 13.6 10.8 2.6 3.3 5.6 14.0
Santander Brazil 22.0 SANB11 BZ OW 47594 16.5 12.9 1.3 1.7 3.3 12.0
Sberbank 2.2 SBER RU OW 48139 111.5 14.9 0.0 0.2 0.9 12.6
Stocks to avoid
Nedbank Group Ltd 11120.0 NED SJ UW 7334 12.3 9.1 901 1216 4.9 13.2
Bank Rakyat Indonesia 7650.0 BBRI IJ UW 9896 13.3 11.2 577 684 3.0 28.4
Banorte 45.9 GFNORTEO MM N 7083 15.8 13.1 2.9 3.5 0.4 15.2
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

82
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

India IT services
Improving fundamentals but mostly reflected in share
prices; we see limited upside
Key sector dynamics Manoj SinglaAC
The IT services and software sector has seen a good rebound in terms of (91-22) 6157-3587
revenues, earnings and share prices along with greater confidence from CIOs manoj.singla@jpmorgan.com
to spend on technology. While the sector saw better resilience than global IT J.P. Morgan India Private Limited
even in 2008 due to the anti-cyclical nature of the sector (cost pressure in
downturns force CIOs to move work offshore due to significant cost Flagship reports
savings), improvement in outlook for the banking sector has been a key • Indian IT Services: (11/05/2009)
driver in the past three months. We note that the banking sector is the largest • Hexaware: Turnaround at mid-cycle (10/09/2009)
contributor of revenues for Indian IT companies. Moving forward, developed • Polaris Software: A leveraged play to the recovery
market economic recovery (primarily the US and the UK) and general CIO in financial services IT spending (10/09/2009)
sentiment remain key for the sustenance of growth in 2010. The other key • Infotech Enterprises: Engineered for growth
variable is currency—a strengthening rupee will be negative for the sector. (10/09/2009)
Implications of a global recovery
We believe that the global downturn has led to further polarization of MSCI Software Services and MSCI Software
Services relative to MSCI Emerging Markets
business towards large players. Further, Satyam’s debacle and expanding Software Service
service portfolio of large players are accelerating the move towards large
players. We believe that large players would be the first ones to benefit from 500
the recovery as technology spending improves. However, a sustained
400
recovery should eventually benefit mid-sized players as well. Further, we do
think that hardware and semiconductor has a higher leverage to economic 300
recovery and would benefit more than IT services (given that IT services is
slightly anti-cyclical). 200

How much have valuations already discounted a recovery 100


We believe that valuations for the sector are largely discounting a recovery
0
with most analysts already factoring in ~20% growth in 2010E and P/Es at
97 99 01 03 05 07 09
17-19x. We do not see a significant P/E re-rating from here with estimate
Relativ e Absolute
upgrades key for further share price upsides. Hence, we expect stocks to
Source: MSCI, Datastream.
have limited absolute upside (~10-15%), although downsides may be limited
as well given continued global recovery.
Recommendations
Infosys remains our top pick in the large-cap sector given its top-tier
execution and management quality. Among mid-caps, we believe Mindtree
has the best management and quality systems. Vanceinfo is our pick from the
Chinese IT services sector. Among stocks to avoid, we are negative on HCL
Infosystems.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS Div. yield ROE
Price Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
MindTree Ltd. 634.5 MTCL IN OW 537 80.8 12.6 7.9 50.4 0.8 33.8
Infosys Technologies 2327.9 INFO IN OW 28638 22.8 21.8 102 107 1.3 29.6
VanceInfo Technologies Inc. 17.6 VIT US OW 782 34.5 26.1 0.5 0.7 0.0 19.2
Stock to avoid
HCL Infosystems 146.8 HCLI IN N 687 10.5 10.1 14.0 14.6 4.1 18.7
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.

83
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Internet and Media


Expect reaccelerating ad spend growth
Key sector dynamics Jean-Charles LemardeleyAC
Advertising is going through a deep global recession that has hit previously (44-20) 7325 5763
fast growing emerging markets harder than developed markets, as some of jean-charles.lemardeley@jpmorgan.com
the price increases in recent years have unraveled. Most markets in Central J.P. Morgan Securities Ltd
and Eastern Europe are down 25-35% from 2008. While television is holding
up better than print and other media (except online), it is also shrinking in Dick WeiAC
(852) 2800-8535
excess of 20% in most markets. Many broadcasters report that they believe dick.x.wei@jpmorgan.com
they have reached the trough, although the recovery has yet to start. Online
J.P. Morgan Securities (Asia Pacific)
portals in Asia are likely to see a gradual recovery in earnings in FY10, Limited
mainly driven by the increased online ad spending. We expect internet ad
spending in China to see significant pick up in 2010, benefited by higher ad Manoj SinglaAC
rates, and events like World Expo and World Cup. The structural growth of (91-22) 6157-3587
manoj.singla@jpmorgan.com
Korean online market on the other hand is capped given Korea’s high
penetration of online ads. The online recruitment industry in India is a late J.P. Morgan India Private Limited

cycle-play on the economic recovery.


Flagship reports
Implications of a global recovery • CEEMEA Telecoms and Media: Key
Recovery in EM advertising markets post crisis and deep recessions usually Sector Views and Global Weekly
takes 2-3 years. This would point to stabilization in 2H09/1H10, followed by Perspective
a fairly rapid recovery. In our view, while the secular concerns that have been • NCsoft: Aion's flight to the US and Europe
in place since long before the crisis are still in place, this is more than offset MSCI EM Internet and Media: Absolute and
by the still strong growth potential in ad markets in the region. Chinese relative to MSCI EM
domestic spending growth will likely lead to a pick-up in financial services, 240
auto, real estate and general industries ad-spending next year. 200

How much have valuations already discounted a recovery 160


Most internet stocks have recovered YTD in 2009. 2010 recovery still has not 120
fully reflected in the share prices. Stocks of CEEMEA broadcasters,
particularly CTCM and CME, have only partially priced in the recovery. 80

40
Recommendations
97 99 01 03 05 07 09
Our top picks in the space are Russian broadcaster CTC Media and internet
Relativ e Absolute
companies Sohu.com, Info Edge India, Baidu & NCsoft.
Source: MSCI, Datastream.

Top picks and stocks to avoid


Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Sohu.Com 56.0 SOHU US OW 2154 15.2 13.2 3.7 4.2 0.0 24.5
CTC Media 15.0 CTCM US OW 2276 17.8 15.6 0.8 1.0 0.0 19.7
Info Edge India 806.4 INFOE IN OW 472 36.9 38.3 21.9 21.1 0.0 16.2
Baidu.com 442.2 BIDU US OW 15338 72.1 48.3 6.1 9.2 0.0 36.0
NCsoft 145000.0 036570 KS OW 2682 71.5 77.4 2029 1874 0.0 7.6
Stocks to avoid
The9 Limited 7.6 NCTY US N 214 NM NM -1.7 -2.1 0.0 -18.1
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

84
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Metals and Mining


Emerging Stronger in 2010
Key sector dynamics Steve ShepherdAC
(27-11) 507 0386
We are bullish on the real estate sector, driven by robust demand from China steve.a.shepherd@jpmorgan.com
and expected above trend growth in the developed economies in 2010.
However, what could contain external supply is a strengthening ruble and Yuriy VlasovAC
rand. This could force the exporters to shrink their export flow in exchange (7-495) 967-7033
yuriy.a.vlasov@jpmorgan.com
for the benefits of domestic supply. This especially holds true for Russia J.P. Morgan Bank International LLC
which expects a +16% y/y growth in steel demand (JPM e). In SA, platinum
supply is likely to be constrained by ongoing enforced safety-related Rodolfo R. De Angele, CFAAC
production stoppages, low rand PGM basket prices, an uncertain outlook for (55-11) 3048-3888
rodolfo.r.angele@jpmorgan.com
an inadequate electricity and water supply to fund new mining projects, and
uncertainty regarding BBBEE/nationalisation issues. Banco J.P. Morgan S.A.

Flagship reports
Implications of a global recovery
The demand for commodities is highly leveraged to a global recovery, and • Platinum Foresight: Recovery Ahead
the commodities sector should emerge much stronger in 2010. The demand • Russian Steel : Time to revisit investment
situation is improving across the world, driven earlier by restocking demand case
and later by recovery in real demand, mainly in China. The key risks remain • Russian Metals & Mining: Shifting the
in the form of stabilization of inventories at below-normal levels. goalpost to end of 2010
• Latin Steels: Expectations are just too high
How much have valuations already discounted a recovery
The market sees a steady recovery path for the sector in 2010. In SA, we MSCI EM Metals and Mining: Absolute and
believe the ingredients are coming together for another surge in PGM prices, relative to MSCI EM
possibly in 2010/11. On the other hand, valuations seem stretched in 800
LATAM. The stocks in the sector already seem to be discounting healthy 700
growth in volumes along with a robust pricing scenario. 600
500
Recommendations 400
We like MMK (strong domestic footprint) in Russia. In SA, the only “shop 300
for platinum” in the world our top pick is highly geared AngloPlat. In 200
LATAM, we continue to prefer stocks that are cheap, at least on a relative 100
basis. Our top picks are Ternium and Group Mexico. We recommend that 0
investors avoid Usiminas (UW), as we maintain our cautious view on 97 99 01 03 05 07 09
Brazilian flat-steel prices. Relativ e Absolute
Source: MSCI, Datastream.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Grupo Mexico 30.5 GMEXICOB MM OW 18135 19.5 13.7 0.1 0.2 3.4 23.2
Ternium 33.4 TX US OW 6686 26.9 15.6 1.2 2.1 4.1 8.4
MMK 0.7 MAGN RU OW 8269 74.0 18.5 0.01 0.04 1.4 4.9
Northam Platinum Ltd 3950.0 NHM SJ OW 1883 21.6 30.2 183 131 1.5 5.6
Anglo Platinum 73504.0 AMS SJ OW 23168 69.3 32.5 1060 2260 0.0 14.5
Stocks to avoid
Usiminas 50.5 USIM5 BZ UW 14367 38.0 14.6 1.3 3.5 2.1 10.9
Southern Copper 35.9 PCU US UW 30481 30.4 20.3 1.2 1.8 2.5 31.9
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

85
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Real estate
Away from manufacturers to landowners
Key sector dynamics Christopher GeeAC
EM homebuilders rebounded strongly in 2009, primarily on account of low (65) 6882-2345
interest rates and abundant liquidity. On the other hand, property prices in the christopher.ka.gee@jpmorgan.com
MENA region and Russia fell c. 35-50% from their 2008 peak. We expect J.P. Morgan Securities Singapore Private
Limited
property prices to stabilize next year as the macroeconomic landscape
improves and demand starts to recover. In LatAm, we prefer the Brazil HBs Elena JouronovaAC
over the Mexico HBs given a more favorable growth outlook in Brazil. +7 495 967 3888
elena.jouronova@jpmorgan.com
Implications of a global recovery JPMorgan Bank International LLC
With improving global dynamics and strengthening oil prices, the UAE and
Muneeza HasanAC
Russian economic fundamentals are stabilizing. The liquidity situation, which +971 4 428-1766
was very tight in 1H09, is easing, with banks opening up to mortgage muneeza.z.hasan@jpmorgan.com
lending. On the back of Dubai World restructuring, we see an increasing need JPMorgan Chase Bank N.A. Dubai Branch
for differentiation between Dubai and Abu Dhabi fundamentals; broad sector
Adrian E HuertaAC
dynamics continue to remain favorable for Abu Dhabi based property
(52 81) 8152-8720
developers. In Asia, homebuilders would face competition in markets like adrian.huerta@jpmorgan.com
China and India where strong debt and equity capital markets have restored J.P. Morgan Casa de Bolsa, S.A. de C.V.,
the balance sheets of second or third-tier homebuilders who may now J.P. Morgan Grupo Financiero

compete for land and with new launches. In LATAM, Brazil should grow
Flagship reports
stronger than Mexico; we see upside in both.
• MENA Property Sector-Initiating coverage
How much have valuations already discounted a recovery
on UAE property
Real estate prices have limited downside in Abu Dhabi and Russia from
• Russian Homebuilders
current levels with tough industry fundamentals gradually being priced in.
• The Bricks & Mortar Report
Property prices are down c. 45-50% from peaks in the UAE and 35% in
• Asian REITs Report: August 09
Russia. In LatAm, we believe that a recovery is more priced in for Mexico
• BZ-HB – Benefiting from the Crisis
HBs relative to Brazil HBs. Residential home pricing has rebounded in most
MSCI EM Real Estate: Absolute and
of Asia, and regulators are acting to stem exceptional price increases as we relative to MSCI EM
saw in Korea, Singapore. Asian property stocks are trading at a 17% discount 120
to NAVs, with some mild potential for discount narrowing in 2010. 90
60
Recommendations
30
Our top pick from MENA is Abu Dhabi focused Aldar Properties. We favour
0
homebuilder LSR in Russia. Our top picks among the LatAm HBs are PDG
97 99 01 03 05 07 09
and Urbi. In Asia, we like stocks with greater commercial real estate
Relativ e Absolute
exposure. We retain our UW on China HBs, and are OW on HK REITs.
Source: MSCI, Datastream.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Aldar Properties 5.5 ALDAR UH OW 3867 8.1 6.5 0.7 0.9 0.0 11.0
Urbi 25.3 URBI* MM OW 1889 12.8 9.7 2.0 2.6 0.0 13.8
PDG Realty 17.4 PDGR3 BZ OW 3647 21.2 14.7 0.8 1.2 1.2 19.7
LSR 6.5 LSRG LI OW 3044 50.0 17.6 0.1 0.4 0.0 11.8
Ayala Land 11.8 ALI PM OW 3231 40.1 39.4 0.3 0.3 0.5 7.1
Stocks to avoid
Homex 71.0 HOMEX* MM N 1824 9.7 8.2 7.3 8.7 0.0 19.2
Beijing Capital Land 4.0 2868 HK N 1063 19.2 12.0 0.2 0.3 2.8 14.1
New World China Land 2.9 917 HK UW 2146 10.1 20.2 0.3 0.1 2.4 2.1
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

86
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Semiconductor
The margin trends between upstream and
downstream would be the key factor to watch
Key sector dynamics JJ ParkAC
We went through a sudden and substantial inventory de-stocking to re- (822) 758-5717
stocking in a short period, mainly driven by macro issues. Now, the global jj.park@jpmorgan.com
market volatility has already been covered and overall situation is back to J.P.Morgan Securities (Far East) Limited,
normal. In 2009, downstream companies (especially assemblers) have Seuoul Branch

enjoyed decent margins due to low component prices and better expected
Flagship reports
end-demand, while component makers suffered from margin pressure due to
falling UT given high fixed costs. We expect the trend to reverse in 2010 • Semiconductor Migration (09/21/2009)
since semiconductor companies are likely see robust volume recovery with • Display Tracker (09/29/2009)
an end-demand recovery. • Korea Technology (10/14 /2009)
• TSMC: Looking for… (10/08/2009)
Implications of a global recovery • IC Assembly & Testing (10/18/2009)
We expect key end-demand to show double-digit growth in 2010, with
10.3% increase in PC shipments, 12.1% increase in handset market, and 20% MSCI Semiconductors and MSCI
growth in LCD TV. Due to the low base in 2009 and ongoing ASP decline, Semiconductors relative to MSCI Emerging
Markets Semiconductors
we expect overall market size to be still below recent peak level. Hence, we
forecast the tech space to experience more moderate growth rather than a 250
sharp recovery due to a combination of ASP decline and relatively high base
in 2H09. 200

How much have valuations already discounted a recovery 150


Most tech stocks are trading at mid-cycle valuations, except for some sub-
sectors such as TFT-LCD (close to trough value) and LED (close to peak 100
value). Hence, earnings momentum in sub-sectors would be key catalysts to
individual stocks since current share prices seem to be priced in a moderate 50
recovery in 2010. 01 02 03 04 05 06 07 08 09
Relativ e Absolute
Recommendations Source: MSCI, Datastream.
We prefer multi-year growth story such as rechargeable battery for EV
(SDI), LED TV theme (SEMCO), and solar supply chains (OCI). We
continue to believe foundry and back-end companies are likely to benefit
given robust volume growth and relatively moderate ASP decline. We
recommend a pair trading (Long Korea panels and Short Taiwan panels) in
the TFT-LCD space. For DRAMs, we expect DRAM price momentum to
start loosening by the year-end, so investors would find a good entry point
after a share price correction.

Top picks and stocks to avoid


Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Powertech Technology Inc 88.2 6239 TT OW 1826 11.0 8.2 8.0 10.8 5.1 27.6
LG Display 30950 034220 KS OW 9439 11.3 8.6 2738 3612 2.3 12.7
TSMC 60.0 2330 TT OW 48056 17.5 13.8 3.4 4.4 5.0 25.1
UMC 15.6 2303 TT OW 6266 69.8 15.5 0.2 1.0 0.0 6.0
Stock to avoid
AU Optronics 32.9 2409 TT UW 8982 NM 43.6 -2.0 0.8 0.0 2.3
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009. LG Display upgraded to OW on November 12.

87
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Technology Hardware
Content meeting hardware

Key sector dynamics Alvin KwockAC


Our three sector-wide themes are: (1) content becomes the key focus: cloud (852) 2800-8533
computing, smartphone app store, internet explorer TV—favoring companies alvin.yl.kwock@jpmorgan.com
involved in application store, input and network interface; (2) hardware J.P. Morgan Securities (Asia Pacific) Ltd.
commoditization leads up to a secular fall in hardware price point; (3)
accelerated outsourcing—LCD TV mega outsourcing trend and Nokia Flagship reports
moving away from Japanese vendors; (4) handset winners take it all—iPhone • Acer: More catalysts for margin upside in
ending exclusivity, Moto moving to whitebox model for EM; and (5) PC 2010/11, introduce Jun-10 TP at NT$83
pricing power shifting from ODMs to brands. (8/20/2009)
• Mediatek: Smartphone strategy: Low price
Implications of a global recovery
device, lots of contents (9/15/2009)
Downstream pricing power is falling. Consumers are trading down during
• PC forecasts: Unit resilient in 2009, raise
the downturn—this will likely continue as employment rate is still weak. A
2010/11 forecasts on corporate rebound
much faster-than-expected recovery in global manufacturing is causing
and rising EM penetration (9/21/2009)
supply bottlenecks, e.g., labor shortage is re-surfacing in Chinese coastal
• Notebook ODMs: 2003-04 Déjà vu: Win 7
areas, while upstream vendors are now running at high utilization rates.
Optimism, Calpella GM woes (9/25, 2009)
Corporate IT spending will likely pick up from 2010 onward, due to a • Hon Hai: Improving revenue outlook for
rebound in corporate profits and also an aging PC installation base. We 2010, raise PT to NT$155 (11/5/2009)
expect a gradual, rather than a sharp, rebound, due to the high unemployment • China IT Distribution Primer: A complex
rate. web (11/13/2009)

How much have valuations already discounted a recovery MSCI Technology Hardware and MSCI
Most PC stocks are now trading at three-year high in valuations, both on P/E Technology Hardware relative to MSCI
Emerging Markets Technology Hardware
and P/B terms; thus Windows 7 launch is already in the price, and partially
due to the corporate upgrade cycle as well. Handset stocks are still trading 370
towards the lower-end of the historical range, though probably justified 320
considering a much slower growth trajectory in the next decade.
270
Recommendations 220
Pricing power (Acer and AsusTek) and an addressable market expansion
170
(Hon Hai, AAC Acoustics and Mediatek) are the key criteria for our stock
picks. We would avoid areas with elevated competition (HTC, Quanta and 120
BYD Electronics). With the uncertainty in the timing of corporate upgrade 70
cycle, we prefer a pair trade strategy to LONG Catcher and AVOID Compal. 97 99 01 03 05 07 09
Relativ e Absolute
Source: MSCI, Datastream.
Top picks and stocks to avoid
Price Code Rating Mkt cap P/E (x) EPS (LC) Div. yield ROE
(LC) (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
MediaTek Inc. 504.0 2454 TT OW 16993 14.5 11.9 34.8 42.4 4.9 37.4
Acer Inc 79.5 2353 TT OW 6604 17.9 12.3 4.4 6.5 3.8 17.6
AAC Acoustic 10.1 2018 HK OW 1607 19.7 12.6 0.5 0.8 3.2 26.4
ASUSTek Computer 63.0 2357 TT OW 8275 22.0 13.1 2.9 4.8 2.5 11.6
Hon Hai Precision 135.0 2317 TT OW 35820 16.8 13.3 8.0 10.1 1.9 18.0
Stocks to avoid
Quanta Computer Inc. 63.1 2382 TT UW 7271 10.4 9.9 6.1 6.4 5.1 20.6
HTC Corp 362.5 2498 TT UW 8925 12.9 14.8 28.1 24.6 5.4 24.6
BYD Electronic 5.7 285 HK UW 1646 22.8 16.3 0.2 0.3 0.0 11.4
Pair Trade
Long Catcher 80.2 2474 TT OW 1,653 15.4 11.0 5.2 7.3 2.8 12.9
Avoid Compal 40.35 2324 TT UW 5,024 10.6 11.6 3.8 3.5 5.9 14.8
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 5 November 2009.

88
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Telecom
Limited exposure in selective growth markets
Key sector dynamics Andre BaggioAC
As a non-cyclical sector, telecom stocks have been less sensitive to an (55-11) 3048-3427
improving macro economic environment in 2009; specific local market andre.baggio@jpmorgan.com
Banco J.P. Morgan S.A.
competition risks matter more. In CEEMEA, the crisis has had a visible
impact on revenue growth, resulting in significantly slower growth in Jean-Charles LemardeleyAC
previously fast expanding markets or even contraction in the more mature +44 (0) 20 7325 5763
ones. Within Asia, in 2009, the perceived growth markets of India and China jean-charles.lemardeley@jpmorgan.com
have been burdened with excess capacity and competition. J.P. Morgan Securities Ltd

Implications of a global recovery Tim StoreyAC


(852) 2800-8563
Although telecom revenues are closely correlated to GDP growth, the swings
tim.storey@jpmorgan.com
in telecom revenues above or below GDP tend to be small, indicating that
J.P. Morgan Securities (Asia Pacific)
telcos should be good defensive stocks. Select stocks in CEEMEA offer Limited
exposure to high growth markets in Africa. Growth in Asia remains sluggish
despite the recovery due to competition and overcapacity; we recommend Flagship reports
investors own ex-growth Taiwanese and Malay stocks with strong capital • CEEMEA Telecoms and Media: Key Sector
management ideas Views and Global Weekly Perspective
• CEEMEA Telecoms: Revisiting the secular
How much have valuations already discounted a recovery growth case (February 06, 2009)
Telecom sector share price underperformance YTD is not surprising. We • LatAm Mobile: Lessons on termination
expect this trend to last into 2010 and therefore we remain Underweight the rates from Europe (Jul-09)
sector for next year. The MSCI EM telecom index has lagged the broader • Br Mobile Key call: Quality Matters (Jul-09)
MSCI EM index by nearly 30% YTD. Valuations in the sector are not rich • AP Telecom Daily
but not cheap either. We think the sector is close to fairly valued, so a • Asia Telecom Outlook (April/7/2009)
selective exposure is better. • China: 3G too expensive (Oct/6/2009)
MSCI EM Telecom: Absolute and relative to
MSCI EM
Recommendations
280
Telecoms in emerging markets are largely going ex-growth. We recommend
exposure to stocks that are exposed to selective growth markets or are focused 240
on capital management. In CEEMEA, a number of reasonably priced growth 200
stocks are available. Our top picks are MTN, QTel and Turk Telekom.
160
Central European incumbents are unattractive. In Asia, we recommend
defensive Far East Tone. Telmex, in Latam, should be avoided as it faces 120
declining core voice trends, aggressive regulation and in 2010 negative 80
impact of new taxes and is richly valued. China suffers overcapacity and
40
China Unicom, is vulnerable to further downside.
97 99 01 03 05 07 09
Relativ e Absolute
Source: MSCI, Datastream.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Turk Telekom 4.4 TTKOM TI OW 9987 9.6 7.2 0.5 0.6 10.0 35.3
Qtel 148.7 QTEL QD OW 5989 7.5 7.3 20 20 7.4 19.3
MTN Group Limited 11465.0 MTN SJ OW 27920 11.3 9.7 1016 1180 2.5 21.6
Far EasTone Tele. 37.0 4904 TT OW 3729 13.3 11.9 2.8 3.1 7.3 14.0
Totvs 104.5 TOTS3 BZ OW 1853 20.2 15.8 5.2 6.6 1.1 34.1
Stocks to Avoid
Magyar Telekom 726.0 MTEL HB UW 4133 9.0 8.9 81 82 10.2 9.6
Telmex 17.9 TMX US UW 16224 11.0 12.3 1.6 1.5 4.0 48.6
China Unicom 10.3 762 HK UW 31314 26.8 38.8 0.4 0.3 1.2 3.0
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

89
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Transportation
Darkest before dawn
Key sector dynamics Corrine PngAC
We forecast a moderate 7% and 8% rebound in passenger and shipping (65) 6882-1514
volumes in 2010, respectively. However, upside surprises are possible as corrine.ht.png@jpmorgan.com
passenger and cargo demand has historically grown at 1.7x and 2.0x real J.P. Morgan Securities Singapore Private
GDP growth, respectively, and J.P. Morgan Economics team forecasts a 7.2% Limited
real GDP growth for Asia ex-Japan in 2010. We are more bullish on the
Adrian E HuertaAC
airline and land transport sectors’ earnings recovery than shipping as the (52 81) 8152-8720
former does not face structural overcapacity once demand normalizes. adrian.huerta@jpmorgan.com
Airport operators’ performance is strongly correlated to passenger traffic J.P. Morgan Casa de Bolsa, S.A. de C.V.,
volumes, and given Mexico’s exposure to tourism, we believe the sector J.P. Morgan Grupo Financiero
could benefit significantly from a synchronized economic recovery. A
smaller supply-demand gap could drive an earlier re-rating. Rebounding fuel Flagship reports
prices are less of a concern when demand recovers, as surcharges help to • Airline Traffic Monitor (Monthly)
offset this impact. Most transport stocks benefit from a weak US$ given their • Transportation: 2H09 Outlook and Beyond
large US$ capex and debt. This downturn will drive consolidation but cross- • MX-AP – Not ready to take off
border M&As are more difficult due to regulatory restrictions and political
sensitivity. MSCI EM Transportation: Absolute and
relative to MSCI EM
Implications of a global recovery 180
Transport stocks are early cyclicals and have begun to price in part of the
150
recovery. Most are near their historical average valuations. Although the
stocks could trade range-bound for the near-term or correct when they 120
announce weak 2H/4Q results, we see any weakness as a good opportunity to 90
accumulate airlines, select shipping and land transport companies as they
have historically provided large returns in a cyclical upturn. We expect traffic 60
to improve in 2010 mainly due to better comps. 30
0
How much have valuations already discounted a recovery
97 99 01 03 05 07 09
Looking at P/E 12 months forward, companies are trading on average at an Relativ e Absolute
8% premium to the last 24 months’ average. GAP is trading with the highest
Source: MSCI, Datastream.
premium, 19%, vs 6% for Asur and 1% for OMA.

Recommendations
Our top picks are Asur, Container Corp of India and China Airlines.

Top picks and stocks to avoid


Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rtg (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Asur 63.0 ASURB MM OW 1445 20.1 17.1 3.1 3.7 3.5 17.2
Container Corporation of
India 1155.0 CCRI IN OW 3221 18.3 16.9 63.1 68.4 1.2 21.5
China Airlines 10.0 2610 TT OW 1410 NM 80.0 -2.3 0.1 0.0 1.3
Stocks to avoid
GAP 35.4 GAPB MM N 1520 19.6 18.7 1.8 1.9 5.0 34.3
China Cosco Holdings 9.7 1919 HK N 18608 NM 49.2 -0.3 0.2 0.4 4.2
China Southern Airlines 2.5 1055 HK N 5529 33.2 82.4 0.1 0.0 0.0 2.3
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

90
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Utilities
Still a defensive sector
Key sector dynamics Anderson Frey, CFAAC
The long term growth prospects of utilities in EM remains positive due to low (1-212) 622 6615
penetration. However, regulated prices and returns, raw material price anderson.frey@jpmorgan.com
inflation and competition in some markets make this sector unattractive. In J.P. Morgan Securities Inc.
Russia, a considerable portion of the wholesale electricity market has been
liberalized. In Asia, Hong Kong/Indian/Thailand power utilities have an Edmond LeeAC
(852) 2800-8575
automatic cost pass-through mechanism and are preferred as they are
edmond.ch.lee@jpmorgan.com
insulated to cost price inflation. Latam utilities face a lot of competition and
J.P. Morgan Securities (Asia Pacific)
tight government returns. Limited

Implications of a global recovery Sergey ArininAC


Utilities’ volumes are linked to the global recovery and the uptick in IP. (7-495) 967-7031
sergey.v.arinin@jpmorgan.com
However, they are likely to underperform the market and unlikely to re-rate
significantly as some utilities face margin pressures. We expect 2010 will be J.P. Morgan Bank International LLC

more supportive for power equipment manufacturers.


Flagship reports
• BRAZILIAN ELECTRIC UTILITIES : 2010
How much have valuations already discounted a recovery
Outlook (11/08/09)
Following the significant re-rating since Mar-09, most of the utilities in Asia
• ENERSIS: Long-Term Value, Recovery
are trading at close to our price targets, and hence we do believe recovery has
Upside, Upgrade to OW (11/09/09)
been well discounted by the market already. Russian utilities seem attractive
• China Infra-Strategy: From recovery
if earnings projections are based on continuing market liberalization.
potential to sustainable GARP (Aug09)
• China Power Checkers: Plenty of –VE
Recommendations
drivers but catch up potential intact (Oct09)
In Brazil, we recommend looking at the distribution companies and the
• RusHydro: Looking beyond the accident: do
Chilean utility ENERSIS (ENERSIS/ENI), due to its leverage to a recovery in
not overlook positive triggers, upgrading to
electricity demand in the Andean countries. In Russia, RusHydro is an
OW (09/30/2009)
interesting stock, as it is becoming attractive on a relative basis. RusHydro
trades at 5.6x 2011E EV/EBITDA vs. 9.7x for international peers. In Asia, we MSCI EM Utility: Absolute and relative to
MSCI EM
recommend Xinao and PGAS within the gas utilities sector on >20% core 190
EPS CAGR from FY08-11E on low penetration rates. We also like Tata
Power on 25% EPS CAGR from FY08-11E driven by continued capacity 150
addition protected by strong coal linkages.
110

70

30
97 99 01 03 05 07 09
Relativ e Absolute
Source: MSCI, Bloomberg, J.P. Morgan.
Top picks and stocks to avoid
Mkt cap P/E (x) EPS (LC) Div. yield ROE
Price (LC) Code Rating (US$MM) 09E 10E 09E 10E 10E (%) 10E (%)
Top picks
Enersis 182.8 ENERSIS CI OW 12070 8.4 9.1 22 20 4.5 18.6
RusHydro 0.04 HYDR RU OW 9898 13.8 14.5 0.003 0.003 0.000 6.0
Perusahaan Gas Negara 3575.0 PGAS IJ OW 9089 13.9 14.8 256 242 2.9 41.8
Tata Power 1321.0 TPWR IN OW 6723 24.0 18.4 55.0 71.6 1.1 12.8
Xinao Gas 18.2 2688 HK OW 2471 23.3 18.8 0.8 1.0 1.3 14.5
Stocks to Avoid
Sabesp 31.2 SBSP3 BZ UW 4040 5.5 5.8 5.7 5.4 4.7 10.0
CPFL Energia 32.4 CPFE3 BZ UW 8851 12.9 11.1 2.5 2.9 8.6 27.2
Datang International 3.3 991 HK N 12610 23.8 14.6 0.1 0.2 3.3 7.2
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 27 November 2009.

91
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

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92
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Stocks for 2010

93
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Large-cap ideas: J.P. Morgan’s large-cap top picks


Price %
Share Target Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%)
Name Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010E
Gazprom 6 10 75.8 GAZP RU OW 133282 6.3 5.2 0.9 1.1 0.0 12.3
Vakifbank 3 5 73.1 VAKBN TI OW 5104 6.8 5.8 0.5 0.5 6.1 18.9
Aldar Properties 5.5 8 41.6 ALDAR UH OW 3867 8.1 6.5 0.7 0.9 0.0 11.0
Rosneft 8.1 10.3 27.3 ROSN LI OW 85739 12.1 7.4 0.7 1.1 1.4 19.5
Turk Telekom 4 6 36.4 TTKOM TI OW 10078 9.6 7.2 0.5 0.6 10.0 35.3
Qtel 148.7 230.0 54.7 QTEL QD OW 5989 7.5 7.3 19.7 20.4 7.4 19.3
SK Energy Co Ltd 108000 150000 38.9 096770 KS OW 8516 9.5 7.7 11357 13955 2.1 14.7
First Gulf Bank 18.8 26.0 38.7 FGB UH OW 7019 8.6 7.8 2.2 2.4 1.9 16.9
ABSA Group Ltd 12421 15371 23.8 ASA SJ OW 12012 10.9 8.1 1144 1542 5.2 18.4
Hyundai Motor Company 94600 140000 48.0 005380 KS OW 17769 8.8 8.2 10798 11486 1.6 10.1
Sinopec Corp - H 6.4 8.5 33.9 386 HK OW 136013 8.6 8.3 0.7 0.8 3.0 16.6
LG Display 30950 40000 29.2 034220 KS OW 9444 11.3 8.6 2738 3612 2.3 12.7
PTT Public Company 222 315 41.9 PTT TB OW 18910 10.7 8.7 20.7 25.5 3.8 16.0
Bank of China - H 4 6 38.0 3988 HK OW 145716 12.7 9.0 0 0 5.0 21.3
Enersis 185 241 30.2 ENERSIS CI OW 12217 8.4 9.1 21.8 20.0 4.4 18.6
MTN Group Limited 11540 15843 37.3 MTN SJ OW 28599 11.4 9.8 1016 1180 2.5 21.6
Shinhan Financial Group 44150 60000 35.9 055550 KS OW 17853 16.2 10.6 2717 4165 2.0 11.8
Siam Commercial Bank 78.5 110.0 40.1 SCB TB OW 8009 12.5 10.6 6.3 7.4 2.8 16.7
Fubon Financial Holdings 36 54 50.2 2881 TT OW 9037 13.6 10.8 3 3 5.6 14.0
Petrobras 38.5 46.0 19.6 PETR4 BZ OW 209104 12.9 11.7 3.0 3.3 1.7 17.4
All 16 21 35.5 ALLL11 BZ OW 6130 15.2 11.8 1.0 1.3 1.8 17.0
MediaTek Inc. 504.0 630 25.0 2454 TT OW 16998 14.5 11.9 34.8 42.4 4.9 37.4
Far EasTone Tele 37.0 45.0 21.6 4904 TT OW 3730 13.3 11.9 2.8 3.1 7.3 14.0
Credicorp 72 88 22.7 BAP US N 5721 12.9 12.0 5.7 6.2 2.8 20.5
Acer Inc 79.5 92.0 15.7 2353 TT OW 6606 17.9 12.3 4.4 6.5 3.8 17.6
Copel 34 38 12.2 CPLE6 BZ OW 5300 9.4 12.4 3.6 2.7 2.1 7.9
Astra International 32000.0 37000.0 15.6 ASII IJ OW 13587 15.3 12.6 2097 2541 3.2 24.9
Public Bank (F) 10.9 14 26.6 PBKF MK OW 11289 15.2 12.9 0.7 0.8 3.9 29.5
Santander Brazil 22 28 26.2 SANB11 BZ OW 48486 16.5 12.9 1 2 3.3 12.0
Bancolombia 42.8 50.0 16.9 CIB US OW 8426 15.3 12.9 2.9 3.4 2.7 19.2
ASUSTek Computer 63.0 70.0 11.1 2357 TT OW 8277 22.0 13.1 2.9 4.8 2.5 11.6
Bank Central Asia (BCA) 4675 5500 17.6 BBCA IJ OW 12088 17.6 13.1 265 356 2.9 29.2
DongFeng Motor Co., Ltd. 11.0 13.0 18.4 489 HK OW 12207 15.0 13.2 0.7 0.8 1.3 23.6
Hon Hai Precision 135.0 155.0 14.8 2317 TT OW 35831 16.8 13.3 8.0 10.1 1.9 18.0
Grupo Mexico 30.5 31.5 3.3 GMEXICOB MM OW 18350 19.5 13.7 0.1 0.2 3.4 23.2
Unitech Ltd 79.3 120 51.3 UT IN OW 4055 10.8 13.7 7 6 0.1 17.2
TSMC 60.0 72.0 20.0 2330 TT OW 48071 17.5 13.8 3.4 4.4 5.0 25.1
Pacific Rubiales 15.0 18.0 20.2 PRE CN OW 3014 nm 14.0 -0.6 1.1 0.0 21.6
Tenaga 8.4 10.3 22.3 TNB MK OW 10716 39.9 14.0 0.2 0.6 1.6 9.7
Samsung SDI 125500 210000 67.3 006400 KS OW 4876 18.9 14.3 6627 8758 0.0 7.6
RusHydro 0.0 0 9.0 HYDR RU OW 9898 13.8 14.5 0 0 0.0 6.0
PDG Realty 17 19 10.3 PDGR3 BZ OW 3651 21.2 14.7 1 1 1.2 19.7
Perusahaan Gas Negara 3575 4700 31.5 PGAS IJ OW 9089 13.9 14.8 256 242 2.9 41.8
Sberbank 2.3 3.0 34.2 SBER RU OW 48571 112.5 15.0 0.0 0.2 0.9 12.6
Suzano 17.6 22 25.0 SUZB5 BZ OW 3145 6.3 14.9 2.8 1.2 0.7 7.5
AMMB Holdings 5 5.3 7.1 AMM MK OW 4331 15.5 15.4 0.3 0.3 1.6 11.0
UMC 15.6 19.0 21.8 2303 TT OW 6268 69.8 15.5 0.2 1.0 0.0 6.0
Ternium 31.8 31.0 (2.5) TX US OW 6373 26.9 15.6 1.2 2.1 4.3 8.4
China Yurun Food Group 18 21 16.9 1068 HK OW 3877 19.0 16.7 1 1 1.5 20.6
Container Corporation of India 1144 1260 10.1 CCRI IN OW 3187 18.1 16.7 63.1 68.4 1.2 21.5
LSR 6.5 10.0 53.8 LSRG LI OW 3044 50.0 17.6 0.1 0.4 0.0 11.8
Tata Power 1321.0 1450 9.8 TPWR IN OW 6713 24.0 18.4 55.0 71.6 1.1 12.8
MMK 0.7 1.1 52.7 MAGN RU OW 8269 74.0 18.5 0.0 0.0 1.4 4.9
Naspers Ltd 27900.0 34108.7 22.3 NPN SJ OW 15161 23.7 19.0 1179 1469 1.0 12.0
Buenaventura 39.8 34.0 (14.7) BVN US N 10983 19.6 19.4 2.1 2.1 0.3 21.5
Genting 7.1 8.5 20.6 GENT MK OW 7659 24.5 19.7 0.3 0.4 0.7 9.6
Maruti Suzuki India Ltd 1567 1630 4.0 MSIL IN OW 9701 37.2 19.9 42.2 78.8 0.4 21.6
Femsa 44.5 50.0 12.3 FMX US OW 15937 24.7 20.3 1.8 2.2 1.1 10.3
Tambang Batubara Bukit 15800 22500 42.4 PTBA IJ OW 3818 12.7 21.1 1241 750 3.9 28.1

94
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adrian.mowat@jpmorgan.com

Large-cap ideas: J.P. Morgan’s large-cap top picks (cont'd)


Price %
Share Target Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%)
Name Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010E
Infosys Technologies 2327.9 2550.0 9.5 INFO IN OW 28593 22.8 21.8 102.0 107.0 1.3 29.6
Nan Ya Plastics Corp 54.1 61.0 12.8 1303 TT OW 13143 32.9 22.5 1.6 2.4 2.9 8.2
Amorepacific Corp 859000 998000 16.2 090430 KS OW 4282 24.6 23.0 34940 37312 0.0 18.5
China Mengniu Dairy Co. Ltd. 23 23 (0.2) 2319 HK OW 5165 28.2 24.8 1 1 0.0 17.5
ICICI Bank 851 NA - ICICIBC IN OW 20307 26.6 26.8 32 32 1.4 7.1
Larsen & Toubro 1589.5 1675.0 5.4 LT IN N 20441 31.0 27.6 51.2 57.6 0.0 19.2
Anglo Platinum 74900.0 91000.0 21.5 AMS SJ OW 24025 70.7 33.1 1060 2260 0.0 14.5
United Spirits Limited 1228.0 1140.0 (7.2) UNSP IN OW 3304 44.0 34.8 27.9 35.3 0.3 12.6
LAME 14.0 17.0 21.8 LAME4 BZ OW 5626 58.8 34.9 0.2 0.4 1.1 62.9
Ayala Land 11.8 13.9 18.3 ALI PM OW 3230 40.1 39.4 0.3 0.3 0.5 7.1
Baidu.com 434.2 460.0 5.9 BIDU US OW 15063 70.8 47.4 6.1 9.2 0.0 36.0
Magnit OAO 59.5 80 34.5 MGNT RU OW 4953 91.5 58.9 0.7 1.0 0.0 29.3
OGX 1416.0 2030.0 43.4 OGXP3 BZ OW 26325 nm nm 16.4 5.7 0.0 3.8
Source: Datastream, MSCI, IBES, J.P. Morgan estimates
Note: Prices and valuations as of November 27, 2009. Large cap are stocks with market cap over US$ 3 billion. Sorted in ascending order of 2010E PE

Large-cap ideas: J.P. Morgan’s large-cap stocks to avoid


Price %
Share Target Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%)
Name Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010E
Sabesp 32 32 1.2 SBSP3 BZ UW 4143 5.5 5.8 5.7 5.4 4.6 10.0
Lukoil 56.8 75.0 32.0 LKOH RU N 48312 6.7 6.6 8.4 8.7 2.4 12.5
Weichai Power 60.3 47.0 (22.0) 2338 HK N 6941 9.9 8.6 6.1 7.0 0.8 45.2
Magyar Telekom 727.0 685.8 (5.7) MTEL HB UW 4148 9.0 8.9 80.8 81.9 10.2 9.6
Nedbank Group Ltd 11250.0 10747.0 (4.5) NED SJ UW 7551 12.5 9.3 901 1216 4.8 13.2
S-Oil Corp 54500 64000 17.4 010950 KS N 5232 10.0 9.3 5457 5841 3.3 16.3
Quanta Computer Inc. 63 57.0 (9.7) 2382 TT UW 7273 10.4 9.9 6.1 6.4 5.1 20.6
CPFL Energia 32.7 34.0 4.0 CPFE3 BZ UW 9027 12.9 11.1 2.5 2.9 8.5 27.2
Bank Rakyat Indonesia 7650.0 6650.0 (13.1) BBRI IJ UW 9896 13.3 11.2 577 684 3.0 28.4
Redecard 26.4 32.0 21.4 RDCD3 BZ N 10208 12.7 11.6 2.1 2.3 7.4 97.9
YTL Power 2.3 2.1 (7.5) YTLP MK UW 3987 21.4 11.8 0.1 0.2 6.6 18.2
Telmex 17.6 13.0 (26.3) TMX US UW 16052 11.0 12.3 1.6 1.5 4.1 48.6
Banorte 47 49 5.4 GFNORTEO MM N 7253 15.8 13.1 2.9 3.5 0.4 15.2
Ecopetrol 2585.0 2795.0 8.1 ECOPETL CB UW 52376 16.8 13.2 154 197 4.6 27.1
Severstal 8 8 4.9 CHMF RU UW 7590 NM 13.7 -0.4 0.6 0.8 6.4
PetroChina 9.4 7.4 (21.1) 857 HK UW 339259 15.4 13.8 0.6 0.7 3.2 14.0
Cencosud 1490 1578 5.9 CENCOSUD CI UW 6586 17.4 14.4 84.5 102.0 2.1 9.8
Datang International 3.3 4.3 28.7 991 HK N 12610 23.8 14.6 0.1 0.2 3.3 7.2
Usiminas 50.0 38.5 (23.0) USIM5 BZ UW 14413 38.0 14.6 1.3 3.5 2.1 10.9
HTC Corp 362.5 250.0 (31.0) 2498 TT UW 8927 12.9 14.8 28.1 24.6 5.4 24.6
Grupo Modelo 65.3 60.0 (8.1) GMODELOC MM N 16314 24.2 18.0 2.7 3.6 2.3 14.7
Manila Electric Company 209 165 (21.1) MER PM N 4997 30.3 18.2 7 12 3.5 20.1
Soriana 31.8 31.0 (2.5) SORIANAB MM UW 4423 20.6 18.5 1.5 1.7 0.5 9.3
Southern Copper 34.6 28 (20.6) PCU US UW 29444 30.4 20.3 1.2 1.8 2.5 31.9
Telmex Internacional 15 10 (33.6) TII US UW 13512 23.4 21.3 1 1 2.4 9.7
SQM 38.0 33.0 (13.1) SQM US UW 9995 30.9 25.5 1.3 1.5 0.0 28.2
Unilever Indonesia Tbk 10950.0 9700.0 (11.4) UNVR IJ UW 8762 31.6 25.8 347 425 3.2 86.6
Hindustan Unilever Limited 284.3 225.0 (20.9) HUVR IN UW 13284 25.3 27.3 11.3 10.4 2.6 99.5
VTB 4.3 4 0.9 VTBR LI UW 22229 NM 38.6 -0.3 0.1 0.5 3.5
China Unicom 10.3 8.0 (22.3) 762 HK UW 31314 26.8 38.8 0.4 0.3 1.2 3.0
MISC Berhad - F 8.9 7.7 (13.0) MISF MK UW 9654 23.4 41.0 0.4 0.2 4.0 3.9
AU Optronics 32.9 27.0 (17.9) 2409 TT UW 8985 NM 43.6 -2.0 0.8 0.0 2.3
China Cosco Holdings, Ltd. 10 10.0 2.7 1919 HK N 18608 NM 49.2 -0.3 0.2 0.4 4.2
Reliance Power 141.1 122.0 (13.5) RPWR IN UW 7246 138.3 54.4 1.0 2.6 0.0 4.4
Idea Cellular Limited 49.0 45.0 (8.1) IDEA IN UW 3251 16.2 65.3 3.0 0.7 0.0 1.6
China Southern Airlines 3 2 (16.7) 1055 HK N 5529 33.2 82.4 0 0 0.0 2.3
Source: Datastream, MSCI, IBES, J.P. Morgan estimates
Note: Prices and valuations as of November 27, 2009. Large cap are stocks with market cap over US$ 3 billion. Sorted in ascending order of 2010E PE

95
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Mid-cap ideas: J.P. Morgan mid-cap top picks


Name Share Price Target % Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%)
Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010E
Thai Oil Public Company 39.8 62.0 56.0 TOP TB OW 2439 6.0 5.6 6.7 7.1 7.5 19.8
Bank Asya 3.0 5.0 65.6 ASYAB TI OW 1779 9.4 6.7 0.3 0.5 3.6 22.0
Powertech Technology Inc 88.2 108.0 22.4 6239 TT OW 1827 11.0 8.2 8.0 10.8 5.1 27.6
Urbi 25.5 34.0 33.4 URBI* MM OW 1923 12.8 9.7 2.0 2.6 0.0 13.8
Arca 37.4 44.0 17.6 ARCA* MM OW 2330 11.1 10.4 3.4 3.6 5.2 17.0
Energy Development (EDC) 4.1 5.6 38.3 EDC PM OW 1610 10.6 10.7 0.4 0.4 9.3 24.2
Metropolitan Bank 45.5 50.0 9.9 MBT PM OW 1744 17.0 11.5 2.7 4.0 2.6 1012.7
AAC Acoustic 10.1 14.6 44.0 2018 HK OW 1607 19.7 12.6 0.5 0.8 3.2 26.4
Sohu.Com 54 74 36.3 SOHU US OW 2087 14.8 12.8 4 4 0.0 24.5
Land & Houses 6.0 9.5 59.7 LH TB OW 1794 14.8 13.3 0.4 0.4 7.5 17.3
CTC Media 14.8 25.0 68.7 CTCM US OW 2255 17.6 15.4 0.8 1.0 0.0 19.7
Totvs 102.0 125.0 22.5 TOTS3 BZ OW 1828 20.2 15.8 5.2 6.6 1.1 34.1
Asur 61.6 53.0 (13.9) ASURB MM OW 1427 20.1 17.1 3.1 3.7 3.6 17.2
PT Aneka Tambang Tbk 2250.0 2750.0 22.2 ANTM IJ OW 2251 48.0 18.4 46.9 122.3 1.0 13.6
Xinao Gas 18 22 21.7 2688 HK OW 2471 23.3 18.8 0.8 1 1.3 14.5
CP All Pcl 20.8 23.0 10.6 CPALL TB OW 2811 22.7 19.0 0.9 1.1 4.0 31.9
Northam Platinum Ltd 3980.0 6100.0 53.3 NHM SJ OW 1930 21.7 30.4 183.0 131.0 1.5 5.6
Yulon Motor Co., Ltd. 39.0 50.0 28.2 2201 TT OW 1895 41.5 56.6 0.9 0.7 0.5 1.8
NCsoft 145000.0 190000.0 31.0 036570 KS OW 2683 71.5 77.4 2029.0 1873.6 0.0 7.6
China Airlines 10.0 16.0 60.5 2610 TT OW 1410 NM 80.0 -2.3 0.1 0.0 1.3
Source: Datastream, MSCI, IBES, J.P. Morgan estimates
Note: Prices and valuations as of November 27, 2009. Mid cap are stocks with market cap between US$1billion & US$3billion. Sorted in ascending order of 2010E PE

Mid-cap ideas: J.P. Morgan mid-cap stocks to avoid


Name Share Price Target % Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%)
Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010E
Homex 73.4 102.0 39.0 HOMEX* MM N 1904 9.7 8.2 7.3 8.7 0.0 19.2
Beijing Capital Land 4 4 (12.5) 2868 HK N 1063 19.2 12.0 0.2 0.3 2.8 14.1
TMB Bank Public Company 1.1 1.0 (6.5) TMB TB N 1337 22.1 14.1 0.0 0.1 0.0 6.8
Massmart 8440.0 7390.0 (12.4) MSM SJ UW 2288 14.3 14.5 592.0 580.9 4.4 35.8
BYD Electronic 5.7 3.6 (36.4) 285 HK UW 1646 22.8 16.3 0.2 0.3 0.0 11.4
Taishin Financial Holdings 12.2 12.0 (1.2) 2887 TT UW 2146 7.3 17.1 1.7 0.7 5.9 6.5
GAP 35.6 30.0 (15.8) GAPB MM N 1545 19.6 18.7 1.8 1.9 5.0 34.3
New World China Land 2.9 3.2 9.0 917 HK UW 2146 10.1 20.2 0.3 0.1 2.4 2.1
Exito 17140.0 17800.0 3.9 EXITO CB N 2478 32.7 30.2 526.0 570.3 0.4 3.4
Source: Datastream, MSCI, IBES, J.P. Morgan estimates.
Note: Prices and valuations as of November 27, 2009. Mid cap are stocks with market cap between US$1billion & US$3billion. Sorted in ascending order of 2010E PE.
Note: BYD Electronic - We revised PT to HK$4.8 on November 29.

96
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Small-cap ideas: J.P. Morgan small-cap top picks


Name Share Price Target % Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%)
Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010E
JD Group 4390.0 5253 19.7 JDG SJ OW 965 37.7 7.4 116.5 597.1 0.0 18.8
Manila Water Company 16.0 19.0 18.8 MWC PM OW 680 10.7 9.5 1.5 1.7 3.2 22.1
MindTree Ltd. 634.5 700.0 10.3 MTCL IN OW 536 80.8 12.6 7.9 50.4 0.8 33.8
VanceInfo Technologies 16.6 23 38.3 VIT US OW 741 32.7 24.7 0.5 0.7 0.0 19.2
Info Edge India 806.4 900 11.6 INFOE IN OW 472 36.9 38.3 21.9 21.1 0.0 16.2
Source: Datastream, MSCI, IBES, J.P. Morgan estimates
Note: Prices and valuations as of November 27, 2009. Small cap are stocks with market cap less than US$1billion. Sorted in ascending order of 2010E PE

Small-cap ideas: J.P. Morgan small-cap stocks to avoid


Name Share Price Target % Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%)
Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010E
HCL Infosystems 146.8 160.0 9.0 HCLI IN N 686 10.5 10.1 14.0 14.6 4.1 18.7
Guarani 4.9 NA - ACGU3 BZ UW 800 nm 44.9 -0.3 0.1 0.0 2.9
The9 Limited 7.5 6.5 (12.8) NCTY US N 209 NM NM -1.7 -2.1 0.0 -18.1
Source: Datastream, MSCI, IBES, J.P. Morgan estimates
Note: Prices and valuations as of November 27, 2009. Small cap are stocks with market cap less than US$1billion. Sorted in ascending order of 2010E PE

97
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Top Picks by country strategists


Name Share Price Target % Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%)
Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 20099E 2010E 2010E 2010E
Brazil
Petrobras 38.5 46.0 19.6 PETR4 BZ OW 209104 12.9 11.7 3.0 3.3 1.7 17.4
All 15.5 21.0 35.5 ALLL11 BZ OW 6130 15.2 11.8 1.0 1.3 1.8 17.0
Copel 33.9 38.0 12.2 CPLE6 BZ OW 5300 9.4 12.4 3.6 2.7 2.1 7.9
Santander Brazil 22.2 28.0 26.2 SANB11 BZ OW 48486 16.5 12.9 1.3 1.7 3.3 12.0
PDG Realty 17.2 19.0 10.3 PDGR3 BZ OW 3651 21.2 14.7 0.8 1.2 1.2 19.7
Suzano 17.6 22.0 25.0 SUZB5 BZ OW 3145 6.3 14.9 2.8 1.2 0.7 7.5
Totvs 102.0 125.0 22.5 TOTS3 BZ OW 1828 20.2 15.8 5.2 6.6 1.1 34.1
LAME 14.0 17.0 21.8 LAME4 BZ OW 5626 58.8 34.9 0.2 0.4 1.1 62.9
OGX 1416.0 2030.0 43.4 OGXP3 BZ OW 26325 nm nm 16.4 5.7 0.0 3.8
China
Bank of China - H 4.1 5.7 38.0 3988 HK OW 145716 12.7 9.0 0.3 0.5 5.0 21.3
China Yurun Food Group 18.0 21.0 16.9 1068 HK OW 3877 19.0 16.7 0.9 1.1 1.5 20.6
Xinao Gas 18.2 22.2 21.7 2688 HK OW 2471 23.3 18.8 0.8 1.0 1.3 14.5
China Mengniu Dairy Co. Ltd. 23.1 23.0 (0.2) 2319 HK OW 5165 28.2 24.8 0.8 0.9 0.0 17.5
Baidu.com 434.2 460 5.9 BIDU US OW 15063 70.8 47.4 6.1 9.2 0.0 36.0
India
Unitech Ltd 79.3 120.0 51.3 UT IN OW 4055 10.8 13.7 7.4 5.8 0.1 17.2
Infosys Technologies 2327.9 2550.0 9.5 INFO IN OW 28593 22.8 21.8 102.0 107.0 1.3 29.6
ICICI Bank 850.9 NA - ICICIBC IN OW 20307 26.6 26.8 32.0 31.8 1.4 7.1
Larsen & Toubro 1589.5 1675.0 5.4 LT IN N 20441 31.0 27.6 51.2 57.6 0.0 19.2
Indonesia
Astra International 32000.0 37000 15.6 ASII IJ OW 13587 15.3 12.6 2097 2541 3.2 24.9
Bank Central Asia (BCA) 4675.0 5500 17.6 BBCA IJ OW 12088 17.6 13.1 265 356 2.9 29.2
PT Aneka Tambang Tbk 2250.0 2750 22.2 ANTM IJ OW 2251 48.0 18.4 47 122 1.0 13.6
Tambang Batubara Bukit Asam 15800.0 22500 42.4 PTBA IJ OW 3818 12.7 21.1 1241 750 3.9 28.1
Korea
SK Energy Co Ltd 108000 150000 38.9 096770 KS OW 8516 9.5 7.7 11357 13955 2.1 14.7
Hyundai Motor Company 94600 140000 48.0 005380 KS OW 17769 8.8 8.2 10798 11486 1.6 10.1
Shinhan Financial Group 44150 60000 35.9 055550 KS OW 17853 16.2 10.6 2717 4165 2.0 11.8
Samsung SDI 125500 210000 67.3 006400 KS OW 4876 18.9 14.3 6627 8758 0.0 7.6
Amorepacific Corp 859000 998000 16.2 090430 KS OW 4282 24.6 23.0 34940 37312 0.0 18.5
Malaysia
Public Bank (F) 10.9 13.8 26.6 PBKF MK OW 11289 15.2 12.9 0.7 0.8 3.9 29.5
Tenaga 8.4 10.3 22.3 TNB MK OW 10716 39.9 14.0 0.2 0.6 1.6 9.7
AMMB Holdings 4.9 5.3 7.1 AMM MK OW 4331 15.5 15.4 0.3 0.3 1.6 11.0
Genting 7.1 8.5 20.6 GENT MK OW 7659 24.5 19.7 0.3 0.4 0.7 9.6
Mexico
Urbi 25.5 34.0 33.4 URBI* MM OW 1923 12.8 9.7 2.0 2.6 0.0 13.8
Arca 37.4 44.0 17.6 ARCA* MM OW 2330 11.1 10.4 3.4 3.6 5.2 17.0
Grupo Mexico 30.5 31.5 3.3 GMEXICOB MM OW 18350 19.5 13.7 0.1 0.2 3.4 23.2
Ternium 31.8 31.0 (2.5) TX US OW 6373 26.9 15.6 1.2 2.1 4.3 8.4
Asur 61.6 53.0 (13.9) ASURB MM OW 1427 20.1 17.1 3.1 3.7 3.6 17.2
Femsa 44.5 50.0 12.3 FMX US OW 15937 24.7 20.3 1.8 2.2 1.1 10.3
Philippines
Manila Water Company Inc 16.0 19.0 18.8 MWC PM OW 680 10.7 9.5 1.5 1.7 3.2 22.1
Energy Development (EDC) 4.1 5.6 38.3 EDC PM OW 1610 10.6 10.7 0.4 0.4 9.3 24.2
Metropolitan Bank 45.5 50.0 9.9 MBT PM OW 1744 17.0 11.5 2.7 4.0 2.6 1012.7
Ayala Land 11.8 13.9 18.3 ALI PM OW 3230 40.1 39.4 0.3 0.3 0.5 7.1
Russia
Gazprom 5.6 9.9 75.8 GAZP RU OW 133282 6.3 5.2 0.9 1.1 0.0 12.3
Sberbank 2.3 3.0 34.2 SBER RU OW 48571 112.5 15.0 0.0 0.2 0.9 12.6
South Africa
JD Group 4390.0 5253.0 19.7 JDG SJ OW 965 37.7 7.4 116 597 0.0 18.8
ABSA Group Ltd 12421.0 15371.0 23.8 ASA SJ OW 12012 10.9 8.1 1144 1542 5.2 18.4
Naspers Ltd 27900.0 34108.7 22.3 NPN SJ OW 15161 23.7 19.0 1179 1469 1.0 12.0
Northam Platinum Ltd 3980.0 6100.0 53.3 NHM SJ OW 1930 21.7 30.4 183 131 1.5 5.6
Anglo Platinum 74900.0 91000.0 21.5 AMS SJ OW 24025 70.7 33.1 1060 2260 0.0 14.5

98
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Top Picks by country strategists (cont'd)


Share Price Target % Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%)
Name Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 20099E 2010E 2010E 2010E
Taiwan
Fubon Financial Holdings 36.0 54.0 50.2 2881 TT OW 9037 13.6 10.8 2.6 3.3 5.6 14.0
Acer Inc 79.5 92 15.7 2353 TT OW 6606 17.9 12.3 4.4 6.5 3.8 17.6
Hon Hai Precision 135.0 155 14.8 2317 TT OW 35831 16.8 13.3 8.0 10.1 1.9 18.0
UMC 15.6 19.0 21.8 2303 TT OW 6268 69.8 15.5 0.2 1.0 0.0 6.0
Nan Ya Plastics Corp 54.1 61.0 12.8 1303 TT OW 13143 32.9 22.5 1.6 2.4 2.9 8.2
Thailand
Thai Oil Public Company 39.8 62.0 56.0 TOP TB OW 2439 6.0 5.6 6.7 7.1 7.5 19.8
PTT Public Company 222.0 315 41.9 PTT TB OW 18910 10.7 8.7 20.7 25.5 3.8 16.0
Siam Commercial Bank 78.5 110 40.1 SCB TB OW 8009 12.5 10.6 6.3 7.4 2.8 16.7
Land & Houses 6.0 9.5 59.7 LH TB OW 1794 14.8 13.3 0.4 0.4 7.5 17.3
CP All Pcl 20.8 23.0 10.6 CPALL TB OW 2811 22.7 19.0 0.9 1.1 4.0 31.9
Turkey
Vakifbank 3.1 5 73.1 VAKBN TI OW 5104 6.8 5.8 0.5 0.5 6.1 18.9
Bank Asya 3.0 5.0 65.6 ASYAB TI OW 1779 9.4 6.7 0.3 0.5 3.6 22.0
MENA
Aldar Properties 5.5 7.8 41.6 ALDAR UH OW 3867 8.1 6.5 0.7 0.9 0.0 11.0
Qtel 148.7 230 54.7 QTEL QD OW 5989 7.5 7.3 19.7 20.4 7.4 19.3
First Gulf Bank 18.8 26 38.7 FGB UH OW 7019 8.6 7.8 2.2 2.4 1.9 16.9
Chile
Enersis 185.1 241.0 30.2 ENERSIS CI OW 12217 8.4 9.1 21.8 20.0 4.4 18.6
Peru
Credicorp 71.7 88.0 22.7 BAP US N 5721 12.9 12.0 5.7 6.2 2.8 20.5
Buenaventura 39.8 34 (14.7) BVN US N 10983 19.6 19.4 2.1 2.1 0.3 21.5
Colombia
Bancolombia 42.8 50.0 16.9 CIB US OW 8426 15.3 12.9 2.9 3.4 2.7 19.2
Pacific Rubiales 15.0 18 20.2 PRE CN OW 3014 nm 14.0 -0.6 1.1 0.0 21.6
Source: Datastream, MSCI, IBES, J.P. Morgan estimates
Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE

99
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Stocks to avoid by country strategists


Name Share Price Target % Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%)
Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010E
Brazil
Sabesp 31.6 32.0 1.2 SBSP3 BZ UW 4143 5.5 5.8 5.7 5.4 4.6 10.0
CPFL Energia 32.7 34.0 4.0 CPFE3 BZ UW 9027 12.9 11.1 2.5 2.9 8.5 27.2
Redecard 26.4 32.0 21.4 RDCD3 BZ N 10208 12.7 11.6 2.1 2.3 7.4 97.9
Usiminas 50.0 38.5 (23.0) USIM5 BZ UW 14413 38.0 14.6 1.3 3.5 2.1 10.9
Guarani 4.9 NA - ACGU3 BZ UW 800 nm 44.9 -0.3 0.1 0.0 2.9
China
Datang International 3.3 4.3 28.7 991 HK N 12610 23.8 14.6 0.1 0.2 3.3 7.2
China Unicom 10.3 8.0 (22.3) 762 HK UW 31314 26.8 38.8 0.4 0.3 1.2 3.0
India
Hindustan Unilever Limited 284.3 225.0 (20.9) HUVR IN UW 13284 25.3 27.3 11.3 10.4 2.6 99.5
Reliance Power 141.1 122.0 (13.5) RPWR IN UW 7246 138.3 54.4 1.0 2.6 0.0 4.4
Idea Cellular Limited 49.0 45.0 (8.1) IDEA IN UW 3251 16.2 65.3 3.0 0.7 0.0 1.6
Indonesia
Bank Rakyat Indonesia 7650.0 6650.0 (13.1) BBRI IJ UW 9896 13.3 11.2 577.3 684.3 3.0 28.4
Unilever Indonesia Tbk 10950.0 9700.0 (11.4) UNVR IJ UW 8762 31.6 25.8 346.8 425.0 3.2 86.6
Korea
S-Oil Corp 54500.0 64000.0 17.4 010950 KS N 5232 10.0 9.3 5457 5841 3.3 16.3
Malaysia
YTL Power 2.3 2.1 (7.5) YTLP MK UW 3987 21.4 11.8 0.1 0.2 6.6 18.2
MISC Berhad - F 8.9 7.7 (13.0) MISF MK UW 9654 23.4 41.0 0.4 0.2 4.0 3.9
Mexico
Homex 73.4 102.0 39.0 HOMEX* MM N 1904 9.7 8.2 7.3 8.7 0.0 19.2
Telmex 17.6 13.0 (26.3) TMX US UW 16052 11.0 12.3 1.6 1.5 4.1 48.6
Banorte 46.5 49.0 5.4 GFNORTEO MM N 7253 15.8 13.1 2.9 3.5 0.4 15.2
Grupo Modelo 65.3 60.0 (8.1) GMODELOC MM N 16314 24.2 18.0 2.7 3.6 2.3 14.7
Soriana 31.8 31.0 (2.5) SORIANAB MM UW 4423 20.6 18.5 1.5 1.7 0.5 9.3
GAP 35.6 30.0 (15.8) GAPB MM N 1545 19.6 18.7 1.8 1.9 5.0 34.3
Telmex Internacional 15.1 10.0 (33.6) TII US UW 13512 23.4 21.3 0.7 0.7 2.4 9.7
Philippines
Manila Electric Company 209.0 165.0 (21.1) MER PM N 4997 30.3 18.2 6.9 11.5 3.5 20.1
Russia
Severstal 7.5 7.9 4.9 CHMF RU UW 7590 NM 13.7 -0.4 0.6 0.8 6.4
VTB 4.3 4.3 0.9 VTBR LI UW 22229 NM 38.6 (0.3) 0.1 0.5 3.5
Taiwan
Quanta Computer Inc. 63.1 57.0 (9.7) 2382 TT UW 7273 10.4 9.9 6.1 6.4 5.1 20.6
HTC Corp 362.5 250.0 (31.0) 2498 TT UW 8927 12.9 14.8 28.1 24.6 5.4 24.6
Taishin Financial Holdings 12.2 12.0 (1.2) 2887 TT UW 2146 7.3 17.1 1.7 0.7 5.9 6.5
Thailand
TMB Bank Public Company 1.1 1.0 (6.5) TMB TB N 1337 22.1 14.1 0.0 0.1 0.0 6.8
Chile
Cencosud 1490.0 1578.0 5.9 CENCOSUD CI UW 6586 17.4 14.4 84.5 102.0 2.1 9.8
SQM 38.0 33.0 (13.1) SQM US UW 9995 30.9 25.5 1.3 1.5 0.0 28.2
Peru
Southern Copper 34.6 27.5 (20.6) PCU US UW 29444 30.4 20.3 1.2 1.8 2.5 31.9
Colombia
Ecopetrol 2585.0 2795.0 8.1 ECOPETL CB UW 52376 16.8 13.2 154.3 197.5 4.6 27.1
Exito 17140.0 17800.0 3.9 EXITO CB N 2478 32.7 30.2 526.0 570.3 0.4 3.4
Source: Datastream, MSCI, IBES, J.P. Morgan estimates
Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE

100
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Top Picks by Sector Heads


Price %
Name Share Target Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%)
Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010E
Auto
Hyundai Motor Company 94600 140000 48.0 005380 KS OW 17769 8.8 8.2 10798 11486 1.6 10.1
Astra International 32000 37000 15.6 ASII IJ OW 13587 15.3 12.6 2097 2541 3.2 24.9
DongFeng Motor Co., Ltd. 11.0 13.0 18.4 489 HK OW 12207 15.0 13.2 0.7 0.8 1.3 23.6
Maruti Suzuki India Ltd 1567 1630 4.0 MSIL IN OW 9701 37.2 19.9 42.2 78.8 0.4 21.6
Yulon Motor Co., Ltd. 39.0 50.0 28.2 2201 TT OW 1895 41.5 56.6 0.9 0.7 0.5 1.8
Agribusiness, Pulp and Paper
All 15.5 21.0 35.5 ALLL11 BZ OW 6130 15.2 11.8 1.0 1.3 1.8 17.0
Suzano 17.6 22.0 25.0 SUZB5 BZ OW 3145 6.3 14.9 2.8 1.2 0.7 7.5
Consumer
JD Group 4390 5253 19.7 JDG SJ OW 965 37.7 7.4 116.5 597.1 0.0 18.8
Femsa 44.5 50.0 12.3 FMX US OW 15937 24.7 20.3 1.8 2.2 1.1 10.3
China Mengniu Dairy Co. Ltd. 23.1 23.0 (0.2) 2319 HK OW 5165 28.2 24.8 0.8 0.9 0.0 17.5
United Spirits Limited 1228 1140 (7.2) UNSP IN OW 3304 44.0 34.8 27.9 35.3 0.3 12.6
LAME 14.0 17.0 21.8 LAME4 BZ OW 5626 58.8 34.9 0.2 0.4 1.1 62.9
Magnit OAO 59.5 80.0 34.5 MGNT RU OW 4953 91.5 58.9 0.7 1.0 0.0 29.3
Energy
Gazprom 5.6 9.9 75.8 GAZP RU OW 133282 6.3 5.2 0.9 1.1 0.0 12.3
Rosneft 8.1 10.3 27.3 ROSN LI OW 85739 12.1 7.4 0.7 1.1 1.4 19.5
SK Energy Co Ltd 108000 150000 38.9 096770 KS OW 8516 9.5 7.7 11357 13955 2.1 14.7
Sinopec Corp - H 6.4 8.5 33.9 386 HK OW 136013 8.6 8.3 0.7 0.8 3.0 16.6
Petrobras 38.5 46.0 19.6 PETR4 BZ OW 209104 12.9 11.7 3.0 3.3 1.7 17.4
OGX 1416 2030 43.4 OGXP3 BZ OW 26325 nm nm 16.4 5.7 0.0 3.8
Financial Services
Vakifbank 3.1 5.4 73.1 VAKBN TI OW 5104 6.8 5.8 0.5 0.5 6.1 18.9
Bank of China - H 4.1 5.7 38.0 3988 HK OW 145716 12.7 9.0 0.3 0.5 5.0 21.3
Shinhan Financial Group 44150 60000 35.9 055550 KS OW 17853 16.2 10.6 2717 4165 2.0 11.8
Fubon Financial Holdings 36.0 54.0 50.2 2881 TT OW 9037 13.6 10.8 2.6 3.3 5.6 14.0
Santander Brazil 22.2 28.0 26.2 SANB11 BZ OW 48486 16.5 12.9 1.3 1.7 3.3 12.0
Sberbank 2.3 3.0 34.2 SBER RU OW 48571 112.5 15.0 0.0 0.2 0.9 12.6
Internet & Media
Sohu.Com 54.3 74.0 36.3 SOHU US OW 2087 14.8 12.8 3.7 4.2 0.0 24.5
CTC Media 14.8 25.0 68.7 CTCM US OW 2255 17.6 15.4 0.8 1.0 0.0 19.7
Info Edge India 806.4 900.0 11.6 INFOE IN OW 472 36.9 38.3 21.9 21.1 0.0 16.2
Baidu.com 434.2 460.0 5.9 BIDU US OW 15063 70.8 47.4 6.1 9.2 0.0 36.0
NCsoft 145000.0 190000.0 31.0 036570 KS OW 2683 71.5 77.4 2029 1874 0.0 7.6
Metals & Mining
Grupo Mexico 30.5 31.5 3.3 GMEXICOB MM OW 18350 19.5 13.7 0.1 0.2 3.4 23.2
Ternium 31.8 31.0 (2.5) TX US OW 6373 26.9 15.6 1.2 2.1 4.3 8.4
MMK 0.7 1.1 52.7 MAGN RU OW 8269 74.0 18.5 0.01 0.04 1.4 4.9
Northam Platinum Ltd 3980.0 6100.0 53.3 NHM SJ OW 1930 21.7 30.4 183 131 1.5 5.6
Anglo Platinum 74900.0 91000.0 21.5 AMS SJ OW 24025 70.7 33.1 1060 2260 0.0 14.5
Real Estate
Aldar Properties 5.5 7.8 41.6 ALDAR UH OW 3867 8.1 6.5 0.7 0.9 0.0 11.0
Urbi 25.5 34.0 33.4 URBI* MM OW 1923 12.8 9.7 2.0 2.6 0.0 13.8
PDG Realty 17.2 19.0 10.3 PDGR3 BZ OW 3651 21.2 14.7 0.8 1.2 1.2 19.7
LSR 6.5 10.0 53.8 LSRG LI OW 3044 50.0 17.6 0.1 0.4 0.0 11.8
Ayala Land 11.8 13.9 18.3 ALI PM OW 3230 40.1 39.4 0.3 0.3 0.5 7.1
Technology - Hardware
MediaTek Inc. 504.0 630.0 25.0 2454 TT OW 16998 14.5 11.9 34.8 42.4 4.9 37.4
Acer Inc 79.5 92.0 15.7 2353 TT OW 6606 17.9 12.3 4.4 6.5 3.8 17.6
AAC Acoustic 10.1 14.6 44.0 2018 HK OW 1607 19.7 12.6 0.5 0.8 3.2 26.4
ASUSTek Computer 63.0 70.0 11.1 2357 TT OW 8277 22.0 13.1 2.9 4.8 2.5 11.6
Hon Hai Precision 135.0 155.0 14.8 2317 TT OW 35831 16.8 13.3 8.0 10.1 1.9 18.0
Technology - Tech Panel/Semiconductor
Powertech Technology Inc 88.2 108.0 22.4 6239 TT OW 1827 11.0 8.2 8.0 10.8 5.1 27.6
LG Display 30950 40000 29.2 034220 KS OW 9444 11.3 8.6 2738 3612 2.3 12.7
TSMC 60.0 72.0 20.0 2330 TT OW 48071 17.5 13.8 3.4 4.4 5.0 25.1
UMC 15.6 19.0 21.8 2303 TT OW 6268 69.8 15.5 0.2 1.0 0.0 6.0
Technology - IT Services
MindTree Ltd. 634.5 700.0 10.3 MTCL IN OW 536 80.8 12.6 7.9 50.4 0.8 33.8
Infosys Technologies 2327.9 2550.0 9.5 INFO IN OW 28593 22.8 21.8 102 107 1.3 29.6
VanceInfo Technologies Inc. 16.6 23.0 38.3 VIT US OW 741 32.7 24.7 0.5 0.7 0.0 19.2

101
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Top Picks by Sector Heads (cont'd)


Price %
Name Share Target Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%)
Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010E
Telecoms
Turk Telekom 4.4 6.0 36.4 TTKOM TI OW 10078 9.6 7.2 0.5 0.6 10.0 35.3
Qtel 148.7 230.0 54.7 QTEL QD OW 5989 7.5 7.3 20 20 7.4 19.3
MTN Group Limited 11540.0 15843.0 37.3 MTN SJ OW 28599 11.4 9.8 1016 1180 2.5 21.6
Far EasTone
Telecommunications Co., Ltd 37.0 45.0 21.6 4904 TT OW 3730 13.3 11.9 2.8 3.1 7.3 14.0
Totvs 102.0 125.0 22.5 TOTS3 BZ OW 1828 20.2 15.8 5.2 6.6 1.1 34.1
Transportation
Asur 61.6 53.0 (13.9) ASURB MM OW 1427 20.1 17.1 3.1 3.7 3.6 17.2
Container Corporation of India Ltd 1144.4 1260.0 10.1 CCRI IN OW 3187 18.1 16.7 63.1 68.4 1.2 21.5
China Airlines 10.0 16.0 60.5 2610 TT OW 1410 NM 80.0 -2.3 0.1 0.0 1.3
Utilities
Enersis 185.1 241.0 30.2 ENERSIS CI OW 12217 8.4 9.1 22 20 4.4 18.6
RusHydro 0.04 0.04 9.0 HYDR RU OW 9898 13.8 14.5 0.003 0.003 0.000 6.0
Perusahaan Gas Negara 3575.0 4700.0 31.5 PGAS IJ OW 9089 13.9 14.8 256 242 2.9 41.8
Tata Power 1321.0 1450.0 9.8 TPWR IN OW 6713 24.0 18.4 55.0 71.6 1.1 12.8
Xinao Gas 18.2 22.2 21.7 2688 HK OW 2471 23.3 18.8 0.8 1.0 1.3 14.5
Source: Datastream, MSCI, IBES, J.P. Morgan estimates
Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE

102
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Stocks to Avoid by Sector Heads


Price
Name Share Target % Change Bloomberg JPM Mkt Cap, P/E (X) EPS (LC) Yield (%) ROE (%)
Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2009E 2010E 2010E 2010E
Auto
Weichai Power 60.3 47.0 (22.0) 2338 HK N 6941 9.9 8.6 6.1 7.0 0.8 45.2
Agribusiness, Pulp and Paper
Guarani 4.9 NA - ACGU3 BZ UW 800 nm 44.9 -0.3 0.1 0.0 2.9
Consumer
Massmart 8440.0 7390.0 (12.4) MSM SJ UW 2288 14.3 14.5 592 581 4.4 35.8
Soriana 31.8 31.0 (2.5) SORIANAB MM UW 4423 20.6 18.5 1.5 1.7 0.5 9.3
Hindustan Unilever Ltd. 284.3 225.0 (20.9) HUVR IN UW 13284 25.3 27.3 11.3 10.4 2.6 99.5
Energy
Lukoil 56.8 75.0 32.0 LKOH RU N 48312 6.7 6.6 8 9 2.4 12.5
Ecopetrol 2585.0 2795.0 8.1 ECOPETL CB UW 52376 16.8 13.2 154 197 4.6 27.1
PetroChina 9.4 7.4 (21.1) 857 HK UW 339259 15.4 13.8 0.6 0.7 3.2 14.0
Financial Services
Nedbank Group Ltd 11250.0 10747.0 (4.5) NED SJ UW 7551 12.5 9.3 901 1216 4.8 13.2
Bank Rakyat Indonesia 7650.0 6650.0 (13.1) BBRI IJ UW 9896 13.3 11.2 577 684 3.0 28.4
Banorte 46.5 49.0 5.4 GFNORTEO MM N 7253 15.8 13.1 2.9 3.5 0.4 15.2
Internet & Media
The9 Limited 7.5 6.5 (12.8) NCTY US N 209 NM NM -1.7 -2.1 0.0 -18.1
Metals & Mining
Usiminas 50.0 38.5 (23.0) USIM5 BZ UW 14413 38.0 14.6 1.3 3.5 2.1 10.9
Southern Copper 34.6 27.5 (20.6) PCU US UW 29444 30.4 20.3 1.2 1.8 2.5 31.9
Real Estate
Homex 73.4 102.0 39.0 HOMEX* MM N 1904 9.7 8.2 7.3 8.7 0.0 19.2
Beijing Capital Land 4.0 3.5 (12.5) 2868 HK N 1063 19.2 12.0 0.2 0.3 2.8 14.1
New World China Land 2.9 3.2 9.0 917 HK UW 2146 10.1 20.2 0.3 0.1 2.4 2.1
Technology - Hardware
Quanta Computer Inc. 63.1 57.0 (9.7) 2382 TT UW 7273 10.4 9.9 6.1 6.4 5.1 20.6
HTC Corp 362.5 250.0 (31.0) 2498 TT UW 8927 12.9 14.8 28.1 24.6 5.4 24.6
BYD Electronic 5.7 3.6 (36.4) 285 HK UW 1646 22.8 16.3 0.2 0.3 0.0 11.4
Technology - Tech Panel/Semiconductor
AU Optronics 32.9 27.0 (17.9) 2409 TT UW 8985 NM 43.6 -2.0 0.8 0.0 2.3
Technology - IT Services
HCL Infosystems 146.8 160.0 9.0 HCLI IN N 686 10.5 10.1 14.0 14.6 4.1 18.7
Telecoms
Magyar Telekom 727.0 685.8 (5.7) MTEL HB UW 4148 9.0 8.9 81 82 10.2 9.6
Telmex 17.6 13.0 (26.3) TMX US UW 16052 11.0 12.3 1.6 1.5 4.1 48.6
China Unicom 10.3 8.0 (22.3) 762 HK UW 31314 26.8 38.8 0.4 0.3 1.2 3.0
Transportation
GAP 35.6 30.0 (15.8) GAPB MM N 1545 19.6 18.7 1.8 1.9 5.0 34.3
China Cosco Holdings 9.7 10.0 2.7 1919 HK N 18608 NM 49.2 -0.3 0.2 0.4 4.2
China Southern Airlines 2.5 2.1 (16.7) 1055 HK N 5529 33.2 82.4 0.1 0.0 0.0 2.3
Utilities
Sabesp 31.6 32.0 1.2 SBSP3 BZ UW 4143 5.5 5.8 5.7 5.4 4.6 10.0
CPFL Energia 32.7 34.0 4.0 CPFE3 BZ UW 9027 12.9 11.1 2.5 2.9 8.5 27.2
Datang International 3.3 4.3 28.7 991 HK N 12610 23.8 14.6 0.1 0.2 3.3 7.2
Source: Datastream, MSCI, IBES, J.P. Morgan estimates.
Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE.
Note: BYD Electronic - We revised PT to HK$4.8 on November 29.

103
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(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Contrarian calls
2009 losers picked to be 2010 winners (Stocks with relative underperformance end
2008 to date and top pick)
Share Price % Performance
Name Price Target Change Bloomberg JPM Mkt Cap, P/E (X) Yield (%) ROE (%) end 08 to date (%)
(LC) (LC) to target Code Rating US$ MM 2009E 2010E 2010E 2010E Absolute Rel to Region
Top Picks
Gazprom 5.6 9.9 75.8 GAZP RU OW 133282 6.3 5.2 0.0 12.3 52.3 (16.6)
Aldar Properties 5.5 7.8 41.6 ALDAR UH OW 3867 8.1 6.5 0.0 11.0 38.8 (30.2)
Turk Telekom 4 6.0 36.4 TTKOM TI OW 10078 9.6 7.2 10.0 35.3 27.0 (41.9)
JD Group 4390.0 5253.0 19.7 JDG SJ OW 965 37.7 7.4 0.0 18.8 47.4 (21.6)
Qtel 148.7 230.0 54.7 QTEL QD OW 5989 7.5 7.3 7.4 19.3 35.8 (33.1)
SK Energy Co Ltd 108000.0 150000.0 38.9 096770 KS OW 8516 9.5 7.7 2.1 14.7 58.4 (10.6)
ABSA Group Ltd 12421.0 15371.0 23.8 ASA SJ OW 12012 10.9 8.1 5.2 18.4 42.0 (26.9)
Sinopec Corp - H 6 9 33.9 386 HK OW 136013 8.6 8.3 3.0 16.6 35.4 (33.6)
LG Display 30950.0 40000.0 29.2 034220 KS OW 9444 11.3 8.6 2.3 12.7 62.8 (6.2)
PTT Public Company 222 315 41.9 PTT TB OW 18910 10.7 8.7 3.8 16.0 32.5 (36.4)
Enersis 185.1 241.0 30.2 ENERSIS CI OW 12217 8.4 9.1 4.4 18.6 44.1 (24.8)
Manila Water Company Inc 16.0 19.0 18.8 MWC PM OW 680 10.7 9.5 3.2 22.1 21.8 (47.2)
MTN Group Limited 11540 15843.0 37.3 MTN SJ OW 28599 11.4 9.8 2.5 21.6 31.8 (37.1)
Urbi 25.5 34.0 33.4 URBI* MM OW 1923 12.8 9.7 0.0 13.8 42.6 (26.4)
Arca 37 44.0 17.6 ARCA* MM OW 2330 11.1 10.4 5.2 17.0 63.9 (5.0)
Fubon Financial Holdings 36.0 54.0 50.2 2881 TT OW 9037 13.6 10.8 5.6 14.0 52.7 (16.3)
Far EasTone Telecommunications 37.0 45.0 21.6 4904 TT OW 3730 13.3 11.9 7.3 14.0 0.7 (68.3)
Credicorp 71.7 88.0 22.7 BAP US N 5721 12.9 12.0 2.8 20.5 47.8 (21.1)
Public Bank (F) 10.9 13.8 26.6 PBKF MK OW 11289 15.2 12.9 3.9 29.5 30.7 (38.2)
Bank Central Asia (BCA) 4675 5500.0 17.6 BBCA IJ OW 12088 17.6 13.1 2.9 29.2 66.8 (2.2)
Sohu.Com 54.3 74.0 36.3 SOHU US OW 2087 14.8 12.8 0.0 24.5 18.3 (50.7)
Land & Houses 6 10 59.7 LH TB OW 1794 14.8 13.3 7.5 17.3 65.3 (3.6)
TSMC 60.0 72.0 20.0 2330 TT OW 48071 17.5 13.8 5.0 25.1 37.9 (31.1)
Tenaga 8.4 10.3 22.3 TNB MK OW 10716 39.9 14.0 1.6 9.7 37.5 (31.5)
Asur 61.6 53.0 (13.9) ASURB MM OW 1427 20.1 17.1 3.6 17.2 30.9 (38.1)
Femsa 45 50.0 12.3 FMX US OW 15937 24.7 20.3 1.1 10.3 50.0 (18.9)
Nan Ya Plastics Corp 54 61 12.8 1303 TT OW 13143 32.9 22.5 2.9 8.2 60.2 (8.7)
Amorepacific Corp 859000 998000 16.2 090430 KS OW 4282 24.6 23.0 0.0 18.5 45.0 (23.9)
United Spirits Limited 1228.0 1140.0 (7.2) UNSP IN OW 3304 44.0 34.8 0.3 12.6 42.5 (26.4)
China Airlines 10.0 16.0 60.5 2610 TT OW 1410 NM 80.0 0.0 1.3 -7.5 (76.5)
Source: Datastream, MSCI, IBES, J.P. Morgan estimates.
Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE.

104
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

2009 winners picked to be 2010 losers (Stocks with relative outperformance end 2008
to date and stocks to avoid)
Share Price Performance
Name Price Target % Change Bloomberg JPM Mkt Cap, P/E (X) Yield (%) ROE (%) end 08 to date (%)
(LC) (LC) to target Code Rating US$ MM 2009E 2010E 2010E 2010E Absolute Rel to Region
Stocks to Avoid
Lukoil 56.8 75 32.0 LKOH RU N 48312 6.7 6.6 2.4 12.5 73.8 4.8
Weichai Power 60.3 47.0 (22.0) 2338 HK N 6941 9.9 8.6 0.8 45.2 312.7 243.7
Quanta Computer Inc. 63.1 57 (9.7) 2382 TT UW 7273 10.4 9.9 5.1 20.6 87.0 18.0
HCL Infosystems 146.8 160.0 9.0 HCLI IN N 686 10.5 10.1 4.1 18.7 71.4 2.5
Bank Rakyat Indonesia 7650.0 6650.0 (13.1) BBRI IJ UW 9896 13.3 11.2 3.0 28.4 93.9 24.9
Beijing Capital Land 4.0 3.5 (12.5) 2868 HK N 1063 19.2 12.0 2.8 14.1 222.6 153.6
Banorte 46.5 49.0 5.4 GFNORTEO MM N 7253 15.8 13.1 0.4 15.2 97.6 28.7
Severstal 7.5 8 4.9 CHMF RU UW 7590 NM 13.7 0.8 6.4 130.8 61.8
TMB Bank Public Co. 1.1 1.0 (6.5) TMB TB N 1337 22.1 14.1 0.0 6.8 89.5 20.5
Cencosud 1490.0 1578.0 5.9 CENCOSUD CI UW 6586 17.4 14.4 2.1 9.8 111.3 42.4
Usiminas 50.0 38.5 (23.0) USIM5 BZ UW 14413 38.0 14.6 2.1 10.9 154.3 85.3
BYD Electronic 5.7 4 (36.4) 285 HK UW 1646 22.8 16.3 0.0 11.4 107.3 38.4
Taishin Financial Holdings 12.2 12.0 (1.2) 2887 TT UW 2146 7.3 17.1 5.9 6.5 113.4 44.4
Manila Electric Co. 209.0 165 (21.1) MER PM N 4997 30.3 18.2 3.5 20.1 253.6 184.6
Southern Copper 34.6 27.5 (20.6) PCU US UW 29444 30.4 20.3 2.5 31.9 123.3 54.3
Exito 17140.0 17800 3.9 EXITO CB N 2478 32.7 30.2 0.4 3.4 92.4 23.4
VTB 4.3 4.3 0.9 VTBR LI UW 22229 NM 38.6 0.5 3.5 89.9 20.9
Guarani 4.9 NA - ACGU3 BZ UW 800 nm 44.9 0.0 2.9 221.4 152.4
China Cosco Holdings 9.7 10 2.7 1919 HK N 18608 NM 49.2 0.4 4.2 80.7 11.8
China Southern Airlines 2.5 2.1 (16.7) 1055 HK N 5529 33.2 82.4 0.0 2.3 95.3 26.4
Source: Datastream, MSCI, IBES, J.P. Morgan estimates.
Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE.
Note: BYD Electronic - We revised PT to HK$4.8 on November 29.

105
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Running with 2009 winners (Stocks with relative outperformance end 2008 to date and
top picks)
Price % Yield ROE Performance end 08 to
Name Share Target Change Bloomberg JPM Mkt Cap, P/E (X) (%) (%) date (%)
Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2010E 2010E Absolute Rel to Region
Top Picks
Thai Oil Public Company 39.8 62.0 56.0 TOP TB OW 2439 6.0 5.6 7.5 19.8 76.0 7.0
Vakifbank 3.1 5.4 73.1 VAKBN TI OW 5104 6.8 5.8 6.1 18.9 168.0 99.0
Bank Asya 3.0 5.0 65.6 ASYAB TI OW 1779 9.4 6.7 3.6 22.0 161.6 92.7
Rosneft 8.1 10.3 27.3 ROSN LI OW 85739 12.1 7.4 1.4 19.5 111.2 42.3
First Gulf Bank 18.8 26.0 38.7 FGB UH OW 7019 8.6 7.8 1.9 16.9 104.9 36.0
Powertech Technology Inc 88.2 108.0 22.4 6239 TT OW 1827 11.0 8.2 5.1 27.6 72.2 3.2
Hyundai Motor Company 94600.0 140000.0 48.0 005380 KS OW 17769 8.8 8.2 1.6 10.1 164.0 95.1
Bank of China - H 4.1 5.7 38.0 3988 HK OW 145716 12.7 9.0 5.0 21.3 94.8 25.9
Shinhan Financial Group 44150.0 60000.0 35.9 055550 KS OW 17853 16.2 10.6 2.0 11.8 71.0 2.1
Siam Commercial Bank 78.5 110.0 40.1 SCB TB OW 8009 12.5 10.6 2.8 16.7 70.0 1.0
Energy Development Corp. 4.1 5.6 38.3 EDC PM OW 1610 10.6 10.7 9.3 24.2 168.7 99.7
Metropolitan Bank 45.5 50.0 9.9 MBT PM OW 1744 17.0 11.5 2.6 1012.7 99.5 30.6
Petrobras 38.5 46.0 19.6 PETR4 BZ OW 209104 12.9 11.7 1.7 17.4 124.8 55.9
All 15.5 21.0 35.5 ALLL11 BZ OW 6130 15.2 11.8 1.8 17.0 110.9 41.9
MediaTek Inc. 504.0 630.0 25.0 2454 TT OW 16998 14.5 11.9 4.9 37.4 132.5 63.5
Acer Inc 79.5 92.0 15.7 2353 TT OW 6606 17.9 12.3 3.8 17.6 91.3 22.4
Copel 33.9 38.0 12.2 CPLE6 BZ OW 5300 9.4 12.4 2.1 7.9 86.9 17.9
MindTree Ltd. 634.5 700.0 10.3 MTCL IN OW 536 80.8 12.6 0.8 33.8 178.0 109.0
AAC Acoustic 10.1 14.6 44.0 2018 HK OW 1607 19.7 12.6 3.2 26.4 191.4 122.4
Astra International 32000.0 37000.0 15.6 ASII IJ OW 13587 15.3 12.6 3.2 24.9 251.6 182.7
Bancolombia 42.8 50.0 16.9 CIB US OW 8426 15.3 12.9 2.7 19.2 86.8 17.9
ASUSTek Computer 63.0 70.0 11.1 2357 TT OW 8277 22.0 13.1 2.5 11.6 74.1 5.2
DongFeng Motor Co., Ltd. 11.0 13.0 18.4 489 HK OW 12207 15.0 13.2 1.3 23.6 339.2 270.2
Hon Hai Precision 135.0 155.0 14.8 2317 TT OW 35831 16.8 13.3 1.9 18.0 145.5 76.5
Grupo Mexico 30.5 31.5 3.3 GMEXICOB MM OW 18350 19.5 13.7 3.4 23.2 284.3 215.3
Unitech Ltd 79.3 120.0 51.3 UT IN OW 4055 10.8 13.7 0.1 17.2 87.0 18.0
Pacific Rubiales 15.0 18.0 20.2 PRE CN OW 3014 nm 14.0 0.0 21.6 691.7 622.7
Samsung SDI 125500.0 210000.0 67.3 006400 KS OW 4876 18.9 14.3 0.0 7.6 151.5 82.6
RusHydro 0.0 0.0 9.0 HYDR RU OW 9898 13.8 14.5 0.0 6.0 74.6 5.7
PDG Realty 17.2 19.0 10.3 PDGR3 BZ OW 3651 21.2 14.7 1.2 19.7 316.3 247.4
Perusahaan Gas Negara 3575.0 4700.0 31.5 PGAS IJ OW 9089 13.9 14.8 2.9 41.8 122.8 53.9
Sberbank 2.3 3.0 34.2 SBER RU OW 48571 112.5 15.0 0.9 12.6 201.4 132.4
Suzano 17.6 22.0 25.0 SUZB5 BZ OW 3145 6.3 14.9 0.7 7.5 94.2 25.2
AMMB Holdings 4.9 5.3 7.1 AMM MK OW 4331 15.5 15.4 1.6 11.0 102.4 33.5
UMC 15.6 19.0 21.8 2303 TT OW 6268 69.8 15.5 0.0 6.0 113.1 44.2
CTC Media 14.8 25.0 68.7 CTCM US OW 2255 17.6 15.4 0.0 19.7 211.7 142.7
Totvs 102.0 125.0 22.5 TOTS3 BZ OW 1828 20.2 15.8 1.1 34.1 277.2 208.2
China Yurun Food Group 18.0 21.0 16.9 1068 HK OW 3877 19.0 16.7 1.5 20.6 97.1 28.2
Container Corp. of India 1144.4 1260.0 10.1 CCRI IN OW 3187 18.1 16.7 1.2 21.5 93.0 24.0
LSR 6.5 10.0 53.8 LSRG LI OW 3044 50.0 17.6 0.0 11.8 755.3 686.3
PT Aneka Tambang Tbk 2250.0 2750.0 22.2 ANTM IJ OW 2251 48.0 18.4 1.0 13.6 139.3 70.4
Tata Power 1321.0 1450.0 9.8 TPWR IN OW 6713 24.0 18.4 1.1 12.8 75.8 6.9
MMK 0.7 1.1 52.7 MAGN RU OW 8269 74.0 18.5 1.4 4.9 174.1 105.1
Xinao Gas 18.2 22.2 21.7 2688 HK OW 2471 23.3 18.8 1.3 14.5 123.3 54.3
CP All Pcl 20.8 23.0 10.6 CPALL TB OW 2811 22.7 19.0 4.0 31.9 76.7 7.7
Naspers Ltd 27900.0 34108.7 22.3 NPN SJ OW 15161 23.7 19.0 1.0 12.0 110.3 41.4
Buenaventura 39.8 34.0 (14.7) BVN US N 10983 19.6 19.4 0.3 21.5 108.3 39.4
Genting 7.1 8.5 20.6 GENT MK OW 7659 24.5 19.7 0.7 9.6 94.4 25.5
Maruti Suzuki India Ltd 1567.2 1630.0 4.0 MSIL IN OW 9701 37.2 19.9 0.4 21.6 198.3 129.4
Tambang Batubara Bukit
Asam 15800.0 22500.0 42.4 PTBA IJ OW 3818 12.7 21.1 3.9 28.1 165.5 96.5
Infosys Technologies 2327.9 2550.0 9.5 INFO IN OW 28593 22.8 21.8 1.3 29.6 112.2 43.3

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Running with 2009 winners (Stocks with relative outperformance end 2008 to date and
top picks) (cont'd)
Price % Yield ROE Performance end 08 to
Name Share Target Change Bloomberg JPM Mkt Cap, P/E (X) P/E (X) (%) (%) date (%)
Price (LC) (LC) to target Code Rating US$ MM 2009E 2010E 2010E 2010E Absolute Rel to Region
China Mengniu Dairy Co. 23.1 23.0 (0.2) 2319 HK OW 5165 28.2 24.8 0.0 17.5 128.7 59.7
VanceInfo Technologies 16.6 23.0 38.3 VIT US OW 741 32.7 24.7 0.0 19.2 269.5 200.5
ICICI Bank 850.9 NA - ICICIBC IN OW 20307 26.6 26.8 1.4 7.1 91.9 23.0
Larsen & Toubro 1589.5 1675.0 5.4 LT IN N 20441 31.0 27.6 0.0 19.2 102.5 33.5
Northam Platinum Ltd 3980.0 6100.0 53.3 NHM SJ OW 1930 21.7 30.4 1.5 5.6 140.7 71.7
Anglo Platinum 74900.0 91000.0 21.5 AMS SJ OW 24025 70.7 33.1 0.0 14.5 77.4 8.5
LAME 14.0 17.0 21.8 LAME4 BZ OW 5626 58.8 34.9 1.1 62.9 196.9 127.9
Info Edge India 806.4 900.0 11.6 INFOE IN OW 472 36.9 38.3 0.0 16.2 102.3 33.4
Ayala Land 11.8 13.9 18.3 ALI PM OW 3230 40.1 39.4 0.5 7.1 85.2 16.2
Baidu.com 434.2 460.0 5.9 BIDU US OW 15063 70.8 47.4 0.0 36.0 238.7 169.7
Yulon Motor Co., Ltd. 39.0 50.0 28.2 2201 TT OW 1895 41.5 56.6 0.5 1.8 180.8 111.8
Magnit OAO 59.5 80.0 34.5 MGNT RU OW 4953 91.5 58.9 0.0 29.3 270.7 201.8
NCsoft 145000.0 190000.0 31.0 036570 KS OW 2683 71.5 77.4 0.0 7.6 204.4 135.5
OGX 1416.0 2030.0 43.4 OGXP3 BZ OW 26325 nm nm 0.0 3.8 263.0 194.1
Source: Datastream, MSCI, IBES, J.P. Morgan estimates
Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE

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Non-consensus top picks and stocks to avoid


Price
Name Share Target % Change Bloomberg JPM IBES Mkt Cap, P/E (X) Yield (%) ROE (%)
Price (LC) (LC) to target Code Rating Rating US$ MM 2009E 2010E 2010E 2010E
Top Picks
Anglo Platinum 74900 91000 21.5 AMS SJ OW UW 24025 70.7 33.1 0.0 14.5
Stocks to Avoid
Sabesp 31.6 32.0 1.2 SBSP3 BZ UW OW 4143 5.5 5.8 4.6 10.0
Lukoil 56.8 75.0 32.0 LKOH RU N OW 48312 6.7 6.6 2.4 12.5
Homex 73.4 102.0 39.0 HOMEX* MM N OW 1904 9.7 8.2 0.0 19.2
Weichai Power 60.3 47.0 (22.0) 2338 HK N OW 6941 9.9 8.6 0.8 45.2
S-Oil Corp 54500 64000 17.4 010950 KS N OW 5232 10.0 9.3 3.3 16.3
Quanta Computer Inc. 63.1 57.0 (9.7) 2382 TT UW OW 7273 10.4 9.9 5.1 20.6
HCL Infosystems 147 160.0 9.0 HCLI IN N OW 686 10.5 10.1 4.1 18.7
Redecard 26.4 32.0 21.4 RDCD3 BZ N OW 10208 12.7 11.6 7.4 97.9
HTC Corp 363 250 (31.0) 2498 TT UW OW 8927 12.9 14.8 5.4 24.6
CPFL Energia 32.7 34.0 4.0 CPFE3 BZ UW OW 9027 12.9 11.1 8.5 27.2
Bank Rakyat Indonesia 7650 6650 (13.1) BBRI IJ UW OW 9896 13.3 11.2 3.0 28.4
PetroChina 9.4 7.4 (21.1) 857 HK UW OW 339259 15.4 13.8 3.2 14.0
Cencosud 1490 1578 5.9 CENCOSUD CI UW OW 6586 17.4 14.4 2.1 9.8
Beijing Capital Land 4.0 3.5 (12.5) 2868 HK N OW 1063 19.2 12.0 2.8 14.1
GAP 35.6 30.0 (15.8) GAPB MM N OW 1545 19.6 18.7 5.0 34.3
YTL Power 2.3 2.1 (7.5) YTLP MK UW OW 3987 21.4 11.8 6.6 18.2
Datang International 3.3 4.3 28.7 991 HK N OW 12610 23.8 14.6 3.3 7.2
Grupo Modelo 65.3 60.0 (8.1) GMODELOC MM N OW 16314 24.2 18.0 2.3 14.7
SQM 38.0 33.0 (13.1) SQM US UW OW 9995 30.9 25.5 0.0 28.2
China Southern Airlines 2.5 2.1 (16.7) 1055 HK N OW 5529 33.2 82.4 0.0 2.3
Usiminas 50.0 38.5 (23.0) USIM5 BZ UW OW 14413 38.0 14.6 2.1 10.9
Severstal 7.5 7.9 4.9 CHMF RU UW OW 7590 NM 13.7 0.8 6.4
Guarani 4.9 NA - ACGU3 BZ UW OW 800 nm 44.9 0.0 2.9
AU Optronics 32.9 27.0 (17.9) 2409 TT UW OW 8985 NM 43.6 0.0 2.3
Source: Datastream, MSCI, IBES, J.P. Morgan estimates.
Note: Prices and valuations as of November 27, 2009. Sorted in ascending order of 2010E PE.

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Top Picks

109
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AAC Acoustics Overweight


HK$9.65
Price Target: HK$11
www.aacacoustic.com

Company description HK/China


AAC Acoustics is a manufacturer of miniature acoustic components, which Technology Hardware
are mainly used in mobile handsets. It manufactures speakers, receivers, Charles GuoAC
MFDs, microphones, vibrators, and other acoustic components for handsets. (852) 2800-8532
Its key customers include Nokia, Motorola, and leading smartphone players charles.x.guo@jpmorgan.com
such as Apple and RIM. The company is also diversifying into non-acoustic J.P. Morgan Securities (Asia Pacific)
components, which include phone camera lenses, ceramic components and Limited
antennae.
Price performance
12
Post mortem 9
AAC continues to gain share within Nokia in speaker and receiver, as well as 6
penetrating into new segments such as microphone and vibrator. Besides, 3
smartphone opportunities and non-acoustic forays provide AAC a strong 0
mid/long-term growth outlook, in our opinion. We expect its margins to No v-08 Feb-09 M ay-09 A ug-09 No v-09

continue to improve through 2010, mainly due to newer products and better A A C A co ustics (HK$ )
HSI (rebased)
mix (due to higher smartphone content). Source: Bloomberg.

Potential for earnings upgrades Performance


We estimate that a 1% upside in top line will lead to a 1.5% increase in net 1M 3M 12M
profit. We believe AAC is not sensitive to credit cost fluctuation as it is Absolute (%) 15.4 37.9 44.7
operating at minimal debt level. Relative (%) 9.8 31.5 66.7
Source: Bloomberg.
How much recovery is priced into the stock?
The stock has risen from nearly 4x forward P/E in Dec-08, when the handset Company data
industry was looking at a 10% decline in 2009, to about 12x forward P/E, 52-week range (HK$) 2.20-10.22
when we are looking at a 12% handset industry growth in 2010. Hence, any Mkt cap. (HK$MM) 11,850
improvement in handset outlook and better visibility should lead to a further Mkt cap. (US$MM) 1,529
re-rating of the stock. Avg daily value (US$MM) 1.9
Avg daily volume (MM) 2.0
Price target and key risks
Shares O/S (MM) 1,228
Our Dec-10 PT of HK$11 is based on our 10-year DCF valuation, assuming
Date of price 5-Nov-09
a WACC of 9%, a terminal growth rate of 0%, and a risk-free rate of 2.4%.
Index: Hang Seng 21,479
Our PT implies an FY10E P/E of 14x, the mid-point of its historical trading
Free float (%) 53
range of 4x-20x. A key risk to our PT is global handset demand volatility.
Exchange rate 7.8
Source: Bloomberg.
Bloomberg: 2018 HK; Reuters: 2018.HK
Rmb in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 2,256 2,239 3,093 3,809
Net profit 590 596 873 1,072
EPS (Rmb) 0.48 0.49 0.71 0.87
FD EPS (Rmb) 0.48 0.49 0.71 0.87
DPS (Rmb) 0.10 0.19 0.28 0.35
Sales growth (%) 15.6% (0.8%) 38.2% 23.1%
Net profit growth (%) 7.8% 0.2% 47.3% 22.8%
EPS growth (%) 8.2% 1.1% 46.5% 22.7%
ROE (%) 20.8% 18.2% 23.7% 25.1%
P/E (x) 17.7 17.5 12.0 9.7
FD P/E (x) 17.7 17.5 12.0 9.7
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009. We raised our PT to HK$14.6 on 10 Nov 2009.

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AAC Acoustics: Summary of financials


Profit and loss statement Cash flow statement
Rmb in millions, year-end December Rmb in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenues 2,256 2,239 3,093 3,809 Net Income 590 596 873 1,072
Cost of Goods Sold 1,316 1,259 1,713 2,122 Depr. & Amortisation 133 162 192 231
Gross Profit 940 980 1,380 1,688 Change in working capital 93 -389 99 -122
SGA &RD Expenses 272 275 327 396 Other 2 -5 -2 -2
Operating Profit (EBIT) 631 651 983 1,206 Cash flow from operations 818 364 1,163 1,178
EBITDA 764 813 1175 1437
Interest Income 0 0 0 0 Capex -438 -228 -400 -400
Interest Expense -10 -5 -4 -4 Disposal/(purchase) -113 -11 0 0
Investment Income (Exp.) 0 0 0 0 Cash flow from investing -551 -239 -400 -400
Non-Operating Income (Exp.) -5 8 0 0 Free cash flow 380 136 763 778
Earnings before tax 616 654 979 1,202
Tax -26 -62 -108 -132
Equity raised/ (repaid) -66 -38 0 0
Net Income (Reported) 590 596 873 1072
Debt raised/ (repaid) 37 38 -108 15
Other 0 -3 2 2
Rmb Dividends paid 0 -239 -349 -429
EPS (Reported) 0.48 0.49 0.71 0.87 Cash flow from financing -28 -241 -456 -412
BPS 2.53 2.79 3.22 3.74
DPS 0.10 0.19 0.28 0.35
Net change in cash 232 -115 307 366
Shares Outstanding (MM) 1,230 1,228 1,228 1,228
Beginning cash 1,051 1,283 1,167 1,474
Source: Company, J.P. Morgan estimates. Ending cash 1,283 1,167 1,474 1,840
Source: Company, J.P. Morgan estimates.

Balance sheet
Rmb in millions, year-end December Ratio analysis
FY08 FY09E FY10E FY11E %, year-end December
Cash and cash equivalents 1,283 1,167 1,474 1,840 FY08 FY09E FY10E FY11E
Accounts receivable 574 1,022 1,114 1,292 Gross Margin 41.7 43.8 44.6 44.3
Inventories 296 530 434 504 EBITDA margin 33.9 36.3 38.0 37.7
Others 102 104 104 104 Operating Margin 28.0 29.1 31.8 31.7
Current assets 2,254 2,824 3,125 3,741 Net Margin 26.2 26.6 28.2 28.1
SG&A/Sales 12.1 12.3 10.6 10.4
LT investments 0 0 0 0
Net fixed assets 1,359 1,425 1,633 1,803
Sales growth 15.6 -0.8 38.2 23.1
Others 91 102 102 102
Operating Profit Growth 5.5 3.2 50.9 22.7
Total assets 3,704 4,351 4,860 5,645
Net profit growth 7.8 0.2 47.3 22.8
EPS (Reported) growth 8.2 1.1 46.5 22.7
Liabilities
ST loans 200 239 130 145
Interest coverage (x) 62.9 134.3 243.6 298.9
Payables 366 632 719 836
Net debt to total capital Net Cash Net Cash Net Cash Net Cash
Others 23 53 59 69
Net debt to equity Net Cash Net Cash Net Cash Net Cash
Total current liabilities 589 923 908 1050
Long term debt 0 0 0 0
Other liabilities 0 0 0 0 Asset Turnover 60.9 51.5 63.6 67.5
Total liabilities 589 923 908 1050 Working Capital Turns (X) 1.4 1.3 1.5 1.6
Shareholders' equity 3,108 3,428 3,952 4,595 ROE 20.8 18.2 23.7 25.1
ROIC 19.8 17.1 22.6 24.3
Source: Company, J.P. Morgan estimates.
ROIC (net of cash) 32.0 26.3 34.3 39.0
Source: Company, J.P. Morgan estimates.

111
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ABSA Group Ltd Overweight


R126.00
23 November 2009
www.absa.co.za Price Target: R153.71
Jun 2010
Company description South Africa
Absa provides the most geared play on the domestic retail market and its Computer Hardware
investment banking division provides a more robust earnings base off which to Mervin NaidooAC
grow in our view. Growth opportunities in Africa are currently limited to (27-11) 507-0716
investment banking and bancassurance/wealth management. Absa is 58% held mervin.x.naidoo@jpmorgan.com
by Barclays. J.P. Morgan Equities Ltd.

Post mortem Absa relative price performance


Mortgage impairment unwind should support earnings growth during FY10E
and FY11E. We expect NIR growth to be a key earnings differentiator and ASA 3.0
is well positioned for NIR growth from its: (i) large and established retail 2.0
banking franchise, distribution and cross-sell ability; and (ii) established and
1.0
growing corporate franchises, enjoying flow, scale as well as strong client
relationships in our view. 0.0
02 03 04 05 06 07 08 09
Potential for earnings upgrades
Top line across the SA banks is set remain relatively sluggish and the negative Source: I-Net.
endowment should exacerbate margin pressure. We expect robust NIR growth
and the mortgage impairment unwind should support earnings growth during
FY10E and FY11E. A more expansionary stance introduces upside risk to
FY10E, whilst a healthy banking system provides downside protection.

How much recovery is priced into the stock?


Absa remains our top pick in the sector, with a cheap valuation not reflecting its
strong ROE franchise and robust earnings trajectory in our view. Management
instability however remains a key overhang.

Price target and key risks


Our Jun-10 price target of 15,371c is calculated at the lower of our SOTP and
economic valuation methodology, rolled forward at COE. Key risks to rating
and PT include significant variation to our base case interest rate assumptions,
while a collapse in the property market could significantly impact the value of
realizations.

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ABSA Group Ltd: Summary of Financials


Profit and Loss Statement Ratio Analysis
R mn millions, year end Dec FY08A FY09E FY10E FY11E R mn millions, year end Dec FY08A FY09E FY10E FY11E
Per Share Data
Net interest income 22,106 21,815 22,920 25,966 EPS Reported 1567.56 1143.53 1542.41 1987.04
% Change Y/Y 17.0% (1.3%) 5.1% 13.3% EPSAdjusted 1,412.10 1,216.48 1,581.38 2,039.56
Non-interest income 13,343 14,947 17,585 20,005 % Change Y/Y 7.3% (13.9%) 30.0% 29.0%
Fees & commissions - - - - DPS 595 500 642 828
% change Y/Y - - - - % Change Y/Y 6.2% -15.9% 28.4% 28.8%
Trading revenues - - - - Dividend yield 5.5% 4.3% 5.5% 7.0%
% change Y/Y - - - - Payout ratio 38.0% 43.8% 41.7% 41.6%
Other Income - - - - BV per share 6,950.10 7,892.95 8,878.82 10,125.50
Total operating revenues 35,449 36,763 40,504 45,971 NAV per share 6,950.10 7,892.95 8,878.82 10,125.50
% change Y/Y 16.3% 3.7% 10.2% 13.5% Shares outstanding 680.3 718.2 718.9 721.1
Admin expenses -21,193 -22,285 -24,029 -26,707
% change Y/Y 14.9% 5.2% 7.8% 11.1% Return ratios
Other expenses - - - - RoRWA - - - -
Pre-provision operating profit 21,048 21,482 23,658 26,760 Pre-tax ROE - - - -
% change Y/Y 27.5% 2.1% 10.1% 13.1% ROE 23.4% 16.4% 18.4% 20.9%
Loan loss provisions 8,858 14,513 14,147 14,933 RoNAV 23.7% 16.8% 18.7% 21.2%
Other provisions - - - -
Other nonrecurrent items - - - - Revenues
Earnings before tax 15,209 11,220 15,606 20,315 NIM (NII / RWA) - - - -
% change Y/Y 8.0% (26.2%) 39.1% 30.2% Non-IR / average assets 1.9% 1.9% 2.1% 2.2%
Tax (charge) 3,966 2,995 4,271 5,731 Total rev / average assets 5.2% 4.4% 4.9% 5.3%
% Tax rate 26.1% 25.0% 26.0% 27.0% NII / Total revenues 45.8% 35.5% 38.4% 42.3%
Minorities 194 229 252 277 Fees / Total revenues 54.2% 64.5% 61.6% 57.7%
Net Income (Reported) 10,592 7,996 11,083 14,307 Trading / Total revenues - - - -

Balance sheet
R mn millions, year end Dec FY08A FY09E FY10E FY11E R mn millions, year end Dec FY08A FY09E FY10E FY11E

ASSETS Cost ratios


Net customer loans 532,171 521,753 567,625 639,774 Cost / income 49.4% 50.1% 49.6% 49.2%
% change Y/Y 16.7% (2.0%) 8.8% 12.7% Cost / assets 3.0% 2.9% 2.9% 2.9%
Loan loss reserves 8,858 14,513 14,147 14,933 Staff numbers 37,828 35,558 35,558 35,914
Investments - - - -
Other interest earning assets - - - - Balance Sheet Gearing
% change Y/Y - - - - Loan / deposit 132.1% 120.2% 127.7% 132.6%
Average interest earnings assets 597,154 670,570 702,657 777,464 Investments / assets 4.2% 4.5% 4.5% 4.5%
Goodwill 957 957 957 957 Loan / assets 68.8% 66.4% 66.3% 67.0%
Other assets 62,228 67,206 72,583 78,389 Customer deposits / liabilities 60.6% 59.6% 58.3% 57.9%
Total assets 773,758 785,714 856,082 955,051 LT Debt / liabilities 24.7% 25.9% 26.6% 26.8%

LIABILITIES Asset Quality / Capital


Customer deposits 436,914 431,200 458,084 506,686 Loan loss reserves / loans 1.6% 2.7% 2.4% 2.3%
% change Y/Y 18.6% (1.3%) 6.2% 10.6% NPLs / loans 3.5% 7.3% 6.4% 5.6%
Long term funding 182,840 191,627 214,065 239,195 LLP / RWA - - - -
Interbank funding - - - - Loan loss reserves / NPLs 46.8% 36.9% 38.2% 40.5%
Average interest bearing liabs 402,730 434,057 444,642 482,385 Growth in NPLs 158.8% 107.8% (5.7%) (0.5%)
Other liabilities - - - - RWAs - - - -
Retirement benefit liabilities - - - - % YoY change - - - -
Shareholders' equity - - - - Core Tier 1 - - - -
Minorities 1,042 1,271 1,523 1,800 Total Tier 1 - - - -
Total liabilities 720,792 723,111 786,083 875,594

Source: Company reports and J.P. Morgan estimates.

113
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Acer Inc. Overweight


NT$77.8
Price Target: NT$92
www.acer.com
Company description Taiwan
Acer (TWSE: 2353) is the No #2 notebook PC brand globally and operates four Computer Hardware
sub brands—Acer, Gateway, Packard Bell and e-machines. It operates a purely Gokul HariharanAC
outsourced business model with what we believe to be a high degree of focus (852) 2800-8564
on channel management and branding. gokul.hariharan@jpmorgan.com

Alvin KwockAC
Post mortem (852) 2800-8533
We believe Acer has negotiated the downturn well, with a strong focus on alvin.yl.kwock@jpmorgan.com
J.P. Morgan Securities (Asia Pacific) Limited
inventory, receivables management, and lower price points (netbooks). Acer
has invested in the expansion of its China business. The company’s OP margins Price performance
have also been on an upswing as Acer has kept its OPEX under a tight control. 90

In 2009, Acer has benefited from the consolidation in the NB brand market NT$ 60

share, and emerged as the clear No #2 in PCs, surpassing Dell. 30


Nov-08 Feb-09 May-09 Aug-09 Nov-09

Potential for earnings upgrades 2353.TW share price (NT$)


TSE (rebased)
We believe the potential for upward earnings estimate revisions comes from OP Source: Bloomberg.
margin upside through: (1) better pricing vis-à-vis ODM vendors; and (2) a
focus on more profitable growth with disciplined pricing to distributors. Performance
Improvement in product mix towards emerging markets should also facilitate 1M 3M 12M
this process. Acer is trying to offer a broader SME product line and is also Absolute (%) -1.8 14.3 72.1
considering avenues to tap into the corporate market. If these come through, Relative (%) -0.8 5.6 13.1
then we see upside risk to revenue growth assumptions for 2010. Source: Bloomberg.

How much recovery is priced into the stock? Company data


Acer’s strong execution and market share gains appear to be priced into its 52-week range (NT$) 36.6-86.5
share price. What is not yet priced in, in our view, is the potential for margin Mkt cap. (NT$B) 208.94
Mkt cap. (US$B) 6.42
expansion, which leaves room for earnings upside in 2010E. The market Avg daily value (US$MM) 36.36
ascribes a zero value to Acer’s smartphone foray, which even if moderately Avg daily volume (MM) 36.36
successful, could trigger a re-rating. Shares O/S (MM) 2,686
Date of price 5-Nov-09
Index: TWSE 7.417
Price target and key risks Free float (%) 68
Our Jun-10 PT of NT$92 implies 15x 2010E core earnings, which we believe is Exchange rate 32.5
fair, supported by 36%/19% OP profit growth in 2010/2011E, largely driven by Source: Bloomberg.
OP margin expansion. A key risk to our PT is increase in competition.
Bloomberg: 2353.TT; Reuters: 2353.TW
NT$ in billions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Sales 546 574 668 766 ROE (%) 14.7 13.4 16.8 18.5
Operating profit 13.7 15.3 20.9 24.9 Core ROIC (%) 14.0 13.7 17.9 19.1
EBITDA 14.6 16.1 21.7 25.7 Core adjusted EPS 4.43 4.23 6.18 7.38
Pre-tax profit 14.8 15.3 21.7 26.3 Core OP growth (%) 55% 12% 36% 19%
Net profit 11.7 11.8 17.4 21.0 Core adjusted P/E (x) 17.7 17.7 12.1 10.1
MV of employee bonus 2.1 2.2 3.1 3.8 Quarterly EPS (NT$) 1Q 2Q 3Q 4Q
Adjusted net profit 11.7 11.8 17.4 21.0 EPS (FY08) 1.21 1.20 1.15 1.06
New Taiwan GAAP EPS (NT$)* 4.62 4.44 6.48 7.82 EPS (FY09E) 0.77 0.89 1.29 1.49
New Taiwan GAAP P/E (x) 16.8 17.5 12.0 9.9 EPS (FY10E) 1.36 1.38 1.76 1.96
NEW Taiwan GAAP EPS growth 4% -4% 46% 21% DPS (NT$) 3.60 2.00 3.15 4.10
YE BPS (NT$) 32.62 35.36 38.53 42.40
P/BV (x) 2.4 2.2 2.0 1.8 Jun-10 PT NT$ 92
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

114
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adrian.mowat@jpmorgan.com

Acer Inc.: Summary of financials


NT$ in millions, year-end December
Income statement FY08 FY09E FY10E FY11E Ratio analysis FY08 FY09E FY10E FY11E
%
Revenues 546,274 574,380 667,558 765,826 Gross margin 10.4 10.1 10.6 10.6
Cost of Goods Sold 489,377 516,089 596,908 684,704 EBITDA margin 2.7 2.8 3.3 3.4
Gross profit 56,897 58,290 70,649 81,123 Operating margin 2.5 2.7 3.1 3.3
R&D Expenses 550 924 1,068 1,225 Net profit margin 2.1 2.1 2.6 2.7
SG&A Expenses 41,113 39,857 45,679 51,387 R&D/sales 0.1 0.2 0.2 0.2
Operating Profit (EBIT) 13,683 15,275 20,928 24,917 SG&A/Sales 7.5 6.9 6.8 6.7
EBITDA 14,639 16,091 21,706 25,661
Interest Income 1,208 570 1,075 1,209 Sales growth 18 5 16 15
Interest Expense -1,306 -562 -1,272 -1,349 EBIT growth 34 12 37 19
Investment Income (Exp.) 404 318 300 300 Net profit growth (%) -9 1 47 21
Non-Operating Income (Exp.) 428 (289) 708 1,189 EPS (Reported) growth -13 -4 46 21
Earnings before tax 14,807 15,318 21,739 26,266 EPS (new TW GAAP) growth 4 -4 46 21
Tax -3,169 -3,479 -4,348 -5,253 Interest coverage (x) 10 27 16 18
Net income 11,742 11,838 17,391 21,013 Net Debt to total Capital -9 -16 -12 -16
Net Income (new TW GAAP) 11,742 11,838 17,391 21,013 Net debt to equity -10 -20 -14 -20

EPS (reported) (NT$) 4.62 4.44 6.48 7.82 Sales/Assets (x) 2.2 1.9 2.0 2.1
EPS (new TW GAAP) (NT$) 4.62 4.44 6.48 7.82 Working Capital Turns (X) 3.0 3.1 3.2 0.0
BPS (NT$) 32.62 35.36 38.53 42.40 ROE 14.7 13.4 16.8 18.5
DPS (NT$) 2.00 3.15 4.10 5.00 ROIC 11.7 11.6 15.0 16.0
Shares Outstanding (MM) 2,643 2,686 2,686 2,686 Core ROIC 14.0 13.7 17.9 19.1

Balance sheet FY08 FY09E FY10E FY11E Cash flow statement FY08 FY09E FY10E FY11E

Cash and Cash Equivalents 22,142 40,946 40,527 48,785 Net income 11,742 11,838 17,391 21,013
Accounts receivable 108,668 138,570 162,508 178,899 Depreciation & amortisation 956 816 777 744
Inventories 40,028 55,428 65,003 71,560 Other Non-Cash Items 0 0 0 0
Others 15,553 16,859 19,772 20,730 Change in working capital -8,043 -11,412 -14,077 -3,949
Current assets 186,391 251,804 287,810 319,973 Cash flow from operations 4,551 1,242 4,092 17,808

LT investments 6,774 9,174 9,125 8,844 Capex 1,673 1,019 0 0


Net fixed assets 5,988 4,447 3,669 2,925 Disposal/ (purchase) 4,430 -2,400 49 281
Other long term assets 44,290 33,499 33,499 33,499 Net Cash from Investing -6,350 9,116 49 281
Total Assets 243,442 298,924 334,103 365,241 Free cash Flow -6,634 12,440 3,792 17,508

Liabilities Equity raised/(repaid) 5,634 -1,160 0 0


ST Debt 9,337 1,360 1,578 1,626 Debt raised/(repaid) -8,709 8,589 3,530 779
Payables 72,116 107,737 125,626 138,330 Other -2,274 6,304 0 0
Others 67,862 67,437 71,897 79,149 Dividends -8,655 -5,286 -8,091 -10,610
Total current liabilities 149,315 176,535 199,101 219,105 Cash flow from financing -14,004 8,447 -4,560 -9,831
Long term debt 4,135 20,701 24,013 24,744
Other liabilities 7,115 7,517 7,517 7,517 Net change in cash -15,803 18,805 -420 8,259
Total liabilities 160,565 204,752 230,631 251,366 Beginning cash 37,945 22,142 40,946 40,527
Shareholder's equity 82,878 94,171 103,472 113,875 Ending cash 22,142 40,946 40,527 48,785
Source: Company reports and J.P. Morgan estimates.

115
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Aldar Properties Overweight


Price: AED5.46
Price Target: AED7.8
www.aldar.com
Company description MENA
Aldar Properties is Abu Dhabi’s largest property developer, with a UAE Property
diversified construction portfolio and 37% sovereign ownership. Tasked with Muneeza HasanAC
implementing Abu Dhabi’s Plan 2030, Aldar operates as a master developer, (Real Estate/Construction)
sourcing land for development, selling completed residential properties and (971-4) 428-1766
muneeza.z.hasan@jpmorgan.com
developing recurring income-generating assets. Aldar was listed on the Abu
JPMorgan Chase Bank N.A. Dubai Branch
Dhabi stock Exchange in April 2005, where the company has a foreign
ownership limit of 40%. Price Performance

Post mortem 6
Al Raha Beach and Yas Island are the company’s two most important
Dh
projects and account for over 70% of the total landbank under development. 4

With a total built-up area of 6.4Mn Sq M, Al Raha is a mixed-used


residential project with residential handovers starting from mid 2010. Yas 2

Island, which accounts for a sizable portion of Aldar’s investment property Nov-08 Feb-09 May-09 Aug-09 Nov-09

portfolio, is one of the two key tourist destinations being developed in Abu Source: Bloomberg
Dhabi, with a flagship Formula 1 race track, theme parks, retail and
hospitality. The two projects account for 54% of Aldar's SOTP-based NAV. Performance
1M 3M 12M
Absolute (%) -12.0 17.7 9.3
Potential for earnings upgrades
For future sales, we assume 30-35% lower residential and land sale prices Source: Bloomberg

from the peak in 2008. However, while there have not been any new
residential launches this year, the recent pick-up in land transactions is Company data
Price (Dh) 5.46
encouraging - 3Q09 land sales by Aldar were at prices that were 80-85% Date of price 23-Nov-09
above our forecasts. As the market stabilizes and retail investors’ confidence Price Target (Dh) 7.8
is restored, better then forecast prices for future residential and land sales 52-week range (Rs) 6.65 - 1.96
Market cap (AED Mn) 14,075
could serve as key triggers for profitability growth and stock performance. Market cap (US$ Mn) 3,835
Source: Bloomberg & J.P. Morgan
Price target and key risks
Aldar, our top pick and one of the preferred names in our EMEA property
universe, trades at attractive valuations (30% discount to our Dec 2010 SOTP-
based PT of AED7.8 – favourable compared to its regional peers at 20-25%
premiums). Key risks include Aldar’s high exposure to external debt, where an
extended property market downturn could restrict Aldar’s ability to meet its debt
obligation. Although we see this as unlikely as the company enjoys strong govt.
support and is critical to Abu Dhabi’s plan 2030.
Bloomberg: ALDAR UH; Reuters: ALDR.AD
AED Mn; year end December FY08 FY09E FY10E FY11E
Sales 4,978 2,574 7,189 6,901
Net profit 3,447 1,764 2,192 2,539
Headline EPS (AED) 1.34 0.68 0.85 0.98
Adjusted EPS (AED) 0.74 0.02 0.32 0.56
Sales growth (%) 306% -48% 179% -4%
Net profit growth (%) 53% -49% 24% 16%
P/E (x) 4.1 8.0 6.4 5.5
Net D/E 66% 124% 107% 94%
P/BV 0.88 0.79 0.70 0.63
ROE (%) 21% 10% 11% 11%
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

116
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adrian.mowat@jpmorgan.com

Aldar Properties: Summary of Financials


Profit and Loss statement FY08A FY09E FY10E FY11E Cash flow statement FY08A FY09E FY10E FY11E
Dh in millions, year-end Dec Dh in millions, year-end Dec
Sales 4,978 2,574 7,189 6,901 Net Income 3,447 1,764 2,192 2,539
% change Y/Y 305.8% (48.3%) 179.3% (4.0%) Depreciation & amortisation 14 163 203 211
Gross Profit 2,683 978 2,495 2,904 Change in working capital ex capex 2,335 (692) 525 5,164
% change Y/Y 379.2% (63.6%) 155.1% 16.4% Fair value gain on investment prop. -1,533 -1,700 -1,360 -1,088
EBITDA 2,310 306 1,630 2,287 Other - - - -
% change Y/Y (4.3%) (86.8%) 433.1% 40.3% Cash flow from operations 4,645 (386) 2,155 7,451
EBIT 3,818 1,843 2,788 3,164
% change Y/Y 59.4% (51.7%) 51.3% 13.5% Capex (16,341) (10,063) (904) (6,853)
Net Interest (371) (79) (596) (625) Other adjustments (4,523) (544) (253) 417
Earnings before tax 3,447 1,764 2,192 2,539 Free cash flow (9,060) (9,757) 1,015 318
% change Y/Y 77.5% (48.8%) 24.3% 15.8% Cashflow from Investments (20,864) (10,607) (1,157) (6,436)
Revaluation gain 1,533 1,700 1,360 1,088
Net Income (Reported) 3,447 1,764 2,192 2,539 Debt raised/(repaid) 17,361 10,614 0 0
% change Y/Y 77.5% (48.8%) 24.3% 15.8% Dividends paid (232) 0 0 (51)
Net Income (Adjusted) 1,914 64 832 1,451 Others (1,137) (457) 231 (65)
% change Y/Y 1494.2% (96.7%) 1206.9% 74.4% Cashflow from Financing 16,224 10,156 231 (65)
Shares Outstanding 2,577.9 2,577.9 2,577.9 2,577.9 Change in Cash (196) (916) 633 325
EPS (reported) 1.34 0.68 0.85 0.98 Beginning cash 3,358 3,163 2,246 2,879
% change Y/Y 53.1% (48.8%) 24.3% 15.8% Ending cash 3,163 2,246 2,879 3,204

Balance sheet FY08A FY09E FY10E FY11E Ratio Analysis FY08A FY09E FY10E FY11E
Dh in millions, year-end Dec Dh in millions, year-end Dec
Cash and cash equivalents 12,066 11,150 11,783 12,108 Gross Margin 53.9% 38.0% 34.7% 42.1%
Accounts receivable 5,651 6,176 5,751 5,866 EBITDA Margin 46.4% 11.9% 22.7% 33.1%
Trading property under development 7,130 11,471 10,502 12,806 EBIT margin 76.7% 71.6% 38.8% 45.9%
Other - - - - Adjusted net profit margin 38.4% 2.5% 11.6% 21.0%
Current assets 24,847 28,798 28,036 30,781 SG&A/Sales 3.1% 5.0% 4.5% 4.5%
Investment property 5,149 6,210 10,190 19,124
Investment property under development 15,804 21,394 20,287 16,645 Sales growth 305.8% (48.3%) 179.3% (4.0%)
Others 1,098 1,642 1,895 1,478 EBITDA growth (4.3%) (86.8%) 433.1% 40.3%
Total assets 49,767 61,520 64,042 71,795 Adjusted net profit growth 1494.2% (96.7%) 1206.9% 74.4%
ST loans 2,683 2,683 2,683 2,683 Adjusted EPS growth 1274.8% (96.7%) 1206.9% 74.4%
Payables 7,464 6,948 8,627 6,901
Others 2,136 1,878 299 7,303 Interest coverage (x) 10.3 23.3 4.7 5.1
Total current liabilities 12,283 11,509 11,609 16,887 Net debt to Total Capital 21.1% 35.8% 33.4% 29.4%
Long term debt 21,429 32,193 32,423 32,409 Net debt to Equity 75.1% 123.9% 107.2% 93.8%
Other liabilities 1,546 1,696 1,927 1,912
Total liabilities 33,735 43,724 44,054 49,319 Sales/assets 10.0% 4.2% 11.2% 9.6%
Minorities 0 0 0 0 ROE 21.5% 9.9% 11.0% 11.3%
Shareholders' equity 16,032 17,796 19,988 22,476 ROCE 6.1% 0.3% 2.7% 3.8%
Total Liabilities & Shareholders Equity 49,767 61,520 64,042 71,795

Source: Company reports and J.P. Morgan estimates.

117
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

América Latina Logística (ALL) Overweight


R$15.5
Price Target: R$21.0
www.all-logistica.com

Company description Brazil


América Latina Logística (ALL) is the largest independent provider of Agribusiness
logistics services in South America. It operates rail service on over 20,000
Debbie Bobovnikova, CFAAC
km of track in Brazil and Argentina and has an intermodal trucking business. (1-212) 622 3489
70% of its volumes (and a higher % of profits) come from shipping debbie.bobovnikova@jpmorgan.com
agricultural products, mainly soy, soy meal, corn, sugar, and fertilizer.
J.P. Morgan Securities Inc.

Post mortem Price performance


The company has continued to invest in efficiency and capacity expansion R$
throughout the downturn, which should allow it to benefit from higher
volumes and lower costs as well as from higher prices during the recovery. 20.0
In addition, the economic downturn has increased new industrial business as 15.0
clients focused again on cost control and decided to finally make the switch 10.0
to cheaper rail transport (vs. truck).
5.0
Potential for earnings upgrades 0.0
Economic recovery, as well as a significant recovery in agricultural Nov-08 M ar-09 Jul-09 Nov-09

production in Argentina and Brazil, will likely help ALL grow its front haul Source: Bloomberg.
and back haul (mostly fertilizer) traffic. It should also force truck rates up,
allowing ALL to increase its rates, which are referenced to truck rates. Performance
1M 3M 12M
How much recovery is priced into the stock? Absolute (%) 22% 17% 33 %
We think ALL valuations are not factoring in a significant recovery in Relative (%) 19% 1% -49 %
volumes and yields next year. ALL is trading at 7.9x ’10e EBITDA
Source: Bloomberg. As of Nov 17 09.
compared to hist. avg of 10.6x. It’s also trading at a 10% discount to US
peers, whereas historically it has traded at a significant premium.
Company data
52-week range (BRL) 7.49-16.57
Price target and key risks Mkt cap. (BRL) 10,808
We have a R$21/share price target for Dec ’09. It is based on a mix of DCF Mkt cap. (US$MM) 6,276
analysis and a 10.6x historical multiple on 2010e EBITDA. Key risk is Avg daily value (US$MM) 42.8
Avg daily volume (MM) 5.2
recovery in prices, diesel prices and operational problems (accidents). ALL Shares O/S (MM) 688
shares are much less volatile than those of the rest of our agribusiness Date of price 11/25/09
coverage. Index: iBovespa 67,917
Free float (%) 92%
Exchange rate 1.7221
Source: Bloomberg
Bloomberg: ALLL11 BZ; Reuters: ALLL11.SA
BRL in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 2,530 2,862 3,191 3,570
Net profit 293 448 598 772
EPS (LC) 0.51 0.78 1.04 1.34
FD EPS (LC) 0.05 0.07 0.09 0.11
DPS (LC) 0.13 0.19 0.26 0.34
Sales growth (%) 19% 13% 12% 12%
Net profit growth (%) 35% 53% 33% 29%
EPS growth (%) 35% 53% 33% 29%
ROE (%) 11% 15% 17% 19%
P/E (x) 30.3 19.8 14.8 11.5
FD P/E (x) 19.74 14.80 11.46 9.20
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 25 November 2009.

118
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

América Latina Logística: Summary of financials


Profit and loss statement Cash flow statement
BRL in millions, year-end December BRL in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 2,515 2,862 3,191 3,570 EBIT 933 1,043 1,140 1,293
% change Y/Y 18.7% 13% 12% 12% Depreciation & amortization (194) -256 -310 -350
Gross margin (%) 51.6% 41% 40% 40% Change in working capital -450 -22 125 51
EBITDA 1,182 1,477 1,689 1,924 Taxes (49) -143 -189 -244
% change Y/Y 29% 20% 14% 14% Cash flow from operations 461 1,079 1,331 1,396
EBITDA margin (%) 47% 52% 53% 54% Capex 790 -624 -644 -661
EBIT 933 1,043 1,140 1,293 Disposal/(purchase)
% change Y/Y 134% 17% 9% 13% Net interest (415) 222 198 159
EBIT margin (%) 37% 36% 36% 36% Free cash flow 363 -521 -333 -252
Net interest 206 -452 -354 -278 Equity raised/(repaid) 0 0 0
Earnings before tax 222 591 787 1,016 Debt raised/(repaid) 0 0 0
% change Y/Y -17% 62% 33% 29% Other -741 0 0 0
Tax (16) -143 -189 -244 Dividends - -112 -149 -193
as % of EBT -7% 24% 24% 24% Beginning cash 1,816 2,196 1,635 1,302
Net income (reported) 206 448 598 772 Ending cash 2,643 1,635 1,302 1,050
% change Y/Y -5% 53% 33% 29% DPS (LC) - 0.19 0.26 0.34
Shares O/S (MM) 576 576 576 576 Source: Company, J.P. Morgan estimates.
EPS (reported) (LC) 0.36 0.78 1.04 1.34
Source: Company, J.P. Morgan estimates.

Ratio analysis
%, year-end December
Balance sheet
FY08 FY09E FY10E FY11E
BRL in millions, year-end December EBITDA margin 47% 52% 53% 54%
FY08 FY09E FY10E FY11E Operating margin 37% 36% 36% 36%
Cash and cash equivalents 2,643 1,635 1,302 1,050 Net profit margin 8% 16% 19% 22%
Accounts receivable 154 212 237 265 SG&A/sales 0.03 4% 3% 3%
Inventories 94 101 108 118 Sales growth 19% 13% 12% 12%
Others 430 279 303 330 Net profit growth -5% 53% 33% 29%
Current assets 3,320 2,228 1,950 1,764 Sales per share growth -31% 13% 12% 12%
LT investments 3,721 652 652 652 EPS growth -5% 53% 33% 29%
Net fixed assets 4,724 4,331 4,665 4,975 Interest coverage (x) 1.08 1.77 2.24 3.28
Total assets 11,765 10,128 10,185 10,309 Net debt to total capital 0.27 92% 75% 58%
Liabilities Net debt to equity 1.27 0.92 0.75 0.58
ST loans 765 928 663 398 Sales/assets 0.21 0.28 0.31 0.35
Payables 987 EBIT margin 37% 36% 36% 36%
Others 547 425 546 582 ROCE 0.10 0.13 0.14 0.15
Total current liabilities 2,300 2,145 2,060 1,912 Assets/equity (x) 4.71 3.30 2.90 2.52
Long-term debt 5,049 3,530 3,278 3,026 ROI 1.8% 4.0% 6.0% 7.0%
Other liabilities 1,902 1,384 1,329 1,274 ROE 8.3% 15.0% 17.0% 19.0%
Total liabilities 9,251 7,059 6,667 6,212 Source: Company, J.P. Morgan estimates.
Shareholders’ equity 2,496 3,070 3,518 4,097
BVPS (LC) 4.33 5.33 6.11 7.11
Source: Company, J.P. Morgan estimates.

119
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adrian.mowat@jpmorgan.com

AMMB Holdings Overweight


Price: M$4.70
Price Target: M$5.25
www.ambg.com.my

Company description Malaysia


AMMB Holdings is the holding company of the AmBank Group, one of Banks
Malaysia’s premier financial services group with leadership positions in the Chris Oh, CFAAC
commercial banking, investment banking and insurance sectors. The (60-3) 2770-4728
AmBank Group has total assets of M$86.5B, 186 branches nationwide and a chris.ch.oh@jpmorgan.com
staff strength close to 10,000. JPMorgan Securities (Malaysia) Sdn. Bhd.
(18146-X)
Post mortem
Price performance
With a leading wholesale investment banking franchise, we expect the bank
M$
to benefit from the capital market pick-up in tandem with the improvement
in the economy. Also, recent liberalization measures should create a more 5
4
vibrant capital market which we believe AMMB will benefit from. We also 3
expect ANZ management’s transformation efforts to pay off in the coming 2
18 months as the group has developed new income streams, namely treasury 1
whilst strengthening the consumer and SME banking business and enhanced

10-08

01-09

04-09

07-09

10-09
its risk management system.
Source: Bloomberg.

Potential for earnings upgrades Performance


We see scope for significant earnings upgrades as the wholesale banking is a 1M 3M 12M
flow business where earnings flow straight through the bottom-line. Also, Absolute (%) 7.6 10.8 88.8
earlier concerns on rising credit costs should dissipate in tandem with the Relative (%) 4.3 4.3 37.8
improving economy. Source: Bloomberg.

How much recovery is priced into the stock? Company data


52-wk range (M$) 1.94-4.83
The stock is trading at a P/B of 1.5x which we believe does not reflect the Mkt. cap (M$MM) 14,166.67
potential of the transformational changes that ANZ is putting through as well Mkt. cap (US$MM) 4,140.49
as the upside income potential for the wholesale banking business. Liquidity (US$MM) 9.1
Avg. daily volume (MM) 7.2
Shares O/S (MM) 3,014.2
Price target and key risks Date of price 5-Nov-09
Our Jun-10 PT of M$5.25 is based on a two-stage DDM model assuming KLCI Index 1254.0
sustainable ROEs of 16%. The key risk is that capital markets fail to recover Free float (%) 46.4
Exchange rate 3.42
and that the economic recovery stalls.
Source: Bloomberg.

Bloomberg: AMM MK; Reuters: AMMB.KL


M$ in millions, year-end March
FY09 FY10E FY11E FY11E
Net profit 861 935 1,262 1,569
Basic EPS (sen) 32.3 31.8 41.9 52.1
Cash adj. EPS (sen) 32.3 31.8 41.9 52.1
DPS (sen) 6.0 7.9 16.7 20.8
Basic EPS growth (%) 14.2 -1.5 31.7 24.4
ROE (%) 11.6 11.0 13.1 14.9
P/E (basic) (x) 14.6 14.8 11.2 9.0
BVPS (M$) 2.8 3.1 3.3 3.6
Tangible NAV 3.5 3.7 3.9 4.2
P/BV (x) 1.7 1.5 1.4 1.3
Div. yield (%) 1.3 1.7 3.6 4.4
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

120
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adrian.mowat@jpmorgan.com

AMMB Holdings: Summary of financials


Income statement - M$mn 2009 2010E 2011E 2012E 09/08 10E/09E 11E/10E 12E/11E Balance sheet gearing 2009 2010E 2011E 2012E

Margins (% of earning assets) 2.19% 2.11% 2.06% 2.08% 3% -4% -2% 1% Loan/deposit 89% 92% 92% 92%
Earning assets/assets 94% 94% 94% 94% 0% 1% 0% 0% Investment/assets 10% 10% 10% 9%
NIM (as % of avg. assets) 2.05% 1.99% 1.95% 1.97% 3% -3% -2% 1% Loan/assets 63% 65% 65% 65%
Customer deposits/liab. 78% 79% 79% 79%
Net interest income 1,776 1,814 1,885 2,081 10% 2% 4% 10% Long-term debt/liabilities 5% 4% 4% 3%

Total non-interest revenues 1,495 1,684 2,045 2,306 -14% 13% 21% 13%
Fee income 457 463 606 697 -14% 1% 31% 15% Asset quality/capital 2009 2010E 2011E 2012E
FX/trading gains (6) 132 178 222 -102% -2319% 35% 25% Loan loss reserves/loans 3.1% 3.5% 3.6% 3.6%
Other operating income 1,044 1,089 1,261 1,387 12% 4% 16% 10% NPLs/loans 4.1% 4.8% 4.7% 4.6%
Total operating revenues 3,271 3,498 3,929 4,387 -2% 7% 12% 12% Loan loss reserves/NPLs 75.1% 73.0% 76.7% 79.5%
Operating costs (1,612) (1,699) (1,807) (1,867) 5% 5% 6% 3% Growth in NPLs -32.6% 22.9% 6.9% 0.0%
Operating profit 1,659 1,799 2,123 2,520 -9% 8% 18% 19% Tier 1 Ratio 9.7% 11.8% 11.7% 12.1%
Loan loss provisions (344) (431) (365) (352) -33% 25% -15% -4% Total CAR 15.5% 17.4% 16.8% 16.8%
Other provisions (97) (80) (50) (50)
Exceptionals - - - - Per share data 2009 2010E 2011E 2012E
Disposals/ other income (0) (25) (25) (25) 0% 0% 0% 0% EPS (M$) 0.32 0.33 0.43 0.53
Pre-tax profit 1,218 1,263 1,683 2,093 2% 4% 33% 24% Dividend (M$) 0.06 0.08 0.17 0.21
Tax [rate] (339) (328) (421) (523) 28% 26% 25% 25% Payout ratio 0.19 0.24 0.39 0.39
Minorities/preference dividends (17) - - - 0% 0% 0% 0% NAV 2.84 3.08 3.33 3.64
Attributable net income 861 935 1,262 1,569 29% 9% 35% 24% Avg. Shares issued (MM) 2,723 2,941 3,014 3,014

Key balance sheet - M$mn 2009 2010E 2011E 2012E 09/08 10E/09E 11E/10E 12E/11E DuPont 2009 2010E 2011E 2012E

Net customer loans 56,948 60,118 66,078 71,316 8% 6% 10% 8% NIR/avg. assets 2.05% 1.99% 1.95% 1.97%
Loans loss reserves (1,821) (2,177) (2,447) (2,690) -25% 20% 12% 10% Non IR/avg. assets 1.73% 1.85% 2.11% 2.18%
Gross loans 58,769 62,295 68,525 74,007 7% 6% 10% 8% Non IR/total revenue 45.7% 48.1% 52.0% 52.6%
Investments 8,806 9,285 9,793 10,329 -9% 5% 5% 5% Total rev/avg. assets 3.78% 3.85% 4.06% 4.15%
Other earning assets 17,250 15,267 17,500 19,500 38% -11% 15% 11% Cost/income 49.3% 48.6% 46.0% 42.6%
Average earning assets = (A) 81,020 85,836 91,332 99,827 7% 6% 6% 9% Cost/assets 1.86% 1.87% 1.87% 1.77%
Goodwill 1,808 1,781 1,753 1,725 Goodwill amort.
Total assets 89,893 91,942 101,433 109,883 8% 2% 10% 8% Operating ROAA 1.92% 1.98% 2.20% 2.38%
- - - - LLP/loans -0.59% -0.69% -0.53% -0.48%
Interbank funding 6,135 6,239 6,881 7,446 0% 0% 0% 0% Loans/assets 67.9% 68.5% 70.9% 70.0%
Customer deposits 64,132 65,217 71,928 77,827 15% 2% 10% 8% Other inc: provs
Long-term bond funding 3,854 3,279 3,279 3,279 Pre-tax ROAA 1.41% 1.39% 1.74% 1.98%
Other interest-bearing liabilities 3,215 3,107 3,558 4,046 -26% -3% 15% 14% Tax 27.9% 26.0% 25.0% 25.0%
Average interest-bearing liab. = (B) 74,160 77,589 81,744 89,122 6% 5% 5% 9% MI -0.02% 0.00% 0.00% 0.00%
Average assets 86,542 90,918 96,688 105,658 7% 5% 6% 9% ROAA 0.99% 1.03% 1.31% 1.49%
Shareholders' equity 7,736 9,279 10,036 10,978 8% 20% 8% 9% RoRWA 1.34% 1.47% 1.86% 2.12%
Risk-weighted assets 62,954 64,389 71,036 76,954 Equity/assets 8.61% 9.36% 9.99% 9.94%
Average risk-weighted assets 64,414 63,672 67,713 73,995 2% -1% 6% 9% ROE 11.6% 11.0% 13.1% 14.9%

Source: Company, J.P. Morgan estimates

121
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Amorepacific Overweight
W837,000
Price Target: W998,000
www.amorepacific.com

Company description South Korea


Amorepacific is the leading cosmetic company in Korea with a 35% market Cosmetics
share in the domestic cosmetic market. It dominates in the premium channel, Jinah LeeAC
with over 60% of the door-to-door market and holds around a 16% share in (822) 758-5723
the department store channel. jinah.lee@jpmorgan.com

Post mortem J.P. Morgan Securities (Far East) Limited,


Seoul Branch
The company is the leader in the Korean cosmetic segment where market
leaders continue gaining pricing power and competitiveness. The company’s Price performance
future value would come largely from its growth prospects in China. While
W
the company has been expanding its stores over the past 4~5 years, its brand
building efforts have been less of a focus area, thus the same-store sales 850,000
growth has been 3~4%. Starting next year, Amorepacific will start to carry 650,000
out mass-marketing through TV and this is likely to start boosting brand 450,000
recognition. Together with its third brand introduction, Sul Hwa Soo, we Oct-08 Feb-09
HMC Jun-09 KOSPI
Oct-09
expect Amorepacific’s sales growth to take on a stronger growth momentum
going into 2011. Source: Bloomberg.
Performance
Potential for earnings upgrades
1M 3M 12M
In the near future, earnings surprise is likely to come from the domestic
Absolute (%) 2.1 17.9 41.1
premium side, in our view. We believe there is a good chance that
Relative (%) 3.8 17.3 (2.0)
Amorepacific will narrow the market share gain it lost in the department
Source: Bloomberg.
store channel this year as foreign brands aggressively raised their prices due
to currency movements. Company data
52-week range (W) 875,000~524,000
How much recovery is priced into the stock? Mkt cap. (WB) 4,892
We believe there is around a 22% upside potential from the current share Mkt cap. (US$MM) 4,188
price over the next one year. The share currently trades at 20tx 2011E Avg daily value
earnings. However, going into 2010, Amorepacific’s earnings growth could (US$MM) 11.2
outshine other consumer companies. While 2010 prospects are priced in, the Avg daily volume 22,100
likely growth continuity into 2011 is not priced in for now. Shares O/S (MM) 6.9
Price target and key risks Date of price 6-Nov-09
Our Dec-10 price target of W998,000 is based on 20x 2011E earnings. 20x is Index: KOSPI 1,572.46
the average P/E since 2006. A key risk to our price target is domestic macro Free float (%) 47
conditions. Exchange rate 1,168.0
Source: Bloomberg.

Bloomberg: 090430 KS; Reuters: 090430.KS


Won in billions, year-end December
FY08 FY09E FY10E FY11E
Sales 1,531 1,756 1,907 2,062 52-week range (W) 875,000~524,000
Operating profit 255 317 366 398 Market cap (WB) 4,892
Net profit 170 241 258 345 Market cap (US$MM) 4,188
EPS (W) 24,666 34,940 37,312 49,922 Shares issued (MM) 6.9
EPS growth (%) -4.3 41.7 6.8 33.8 Free Float (%) 47
P/E (x) 33.9 24.0 22.4 16.8 Avg daily value (US$MM) 11.2
Avg daily volume (Shares) 22,100
BVPS (W) 161,600 186,994 217,317 259,777 Index (KOSPI) 1,572.46
P/B (x) 5.2 4.5 3.9 3.2 Exchange rate (W/US$1) 1,168.0
DPS (W) 4,999 5,004 6,990 7,464
Dividend yield (%) 0.6 0.6 0.8 0.9
ROE (%) 15.3 18.7 17.2 19.2
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 6 November 2009.

122
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Amorepacific: Summary of financials


Won in billions, year-end December
P/L 2007 2008 2009E 2010E 2011E B/S 2007 2008 2009E 2010E 2011E
Net Sales 1,357 1,531 1,756 1,907 2,062 Total Assets 1,268 1,455 1,625 2,400 2,192
Cosmetics 1,108 1,269 1,469 1,605 1,738 Current Assets 414 445 481 561 878
Premium 754 816 891 930 965 Quick Assets 300 303 319 385 689
Mass 308 403 510 581 637 Inventory 114 142 161 176 190
Export 25 37 56 83 125
MB&S 249 261 287 303 324 Non-current Assets 854 1,010 1,145 1,276 1,314
Investment Assets 140 149 155 157 158
Operating Profit 249 255 317 366 398 Tangible Assets 651 779 912 1,041 1,078
Cosmetics 244 256 295 340 363 Intangible Assets 17 24 22 22 22
MB&S 4 0 22 27 35 Other Non-current Assets 46 58 56 56 56

OPM 72.3% 66.3% 71.7% 76.1% 76.4% Total Liabilities 315 340 372 400 429
Cosmetics 87.5% 80.1% 79.6% 83.8% 82.6% Current Liabilities 177 199 226 246 266
MB&S -2.6% -4.0% 27.7% 31.7% 39.7% Others 67 71 80 87 94

Non-opg Income 35 35 38 3 81 Non-current Liabilities 138 140 146 154 163


Interest Income 11 13 9 12 22
Gain on Equity Method 11 2 17 -13 34 Total Stockholders' Equity 953 1,115 1,291 1,500 1,793
Others 13 20 15 17 16 Paid-in Capital 35 35 35 35 35
Common Stock 29 29 29 29 29
Non-operating Expenses 35 46 35 28 23 Preferred Stock 5 5 5 5 5
Loss on Equity Method 28 35 19 14 8 Capital Surplus 713 713 713 713 713
Others 7 11 16 13 15 Capital Adjustment -1 -1 -2 -2 -2
Retained Earnings 203 339 545 754 1,047
Pre-tax profit 249 244 320 341 456
Income Taxes 71 74 79 84 112
Net Profit 178 170 241 258 345

C/F 2007 2008 2009E 2010E 2011E Ratio 2007 2008 2009E 2010E 2011E
Operating CF 227 238 326 310 464 Growth
Net profit 178 170 241 258 345 Sales growth 12.8% 14.6% 8.6% 8.1%
Additions 108 125 106 110 110 Cosmetics 14.5% 15.8% 9.2% 8.3%
Depreciation 50 57 64 78 83 Premium 8.2% 9.2% 4.3% 3.8%
Prov for Severance 22 22 18 18 19 Mass 30.8% 26.6% 13.8% 9.7%
Equity method loss 28 35 19 14 8 Export 48.0% 50.0% 50.0% 50.0%
MB&S 4.8% 10.1% 5.4% 7.0%
Deductions 14 8 11 24 -41
Operating profit growth 2.6% 24.2% 15.5% 8.7%
Working capital -45 -49 -9 -31 -31 Cosmetics 4.5% 15.3% 15.2% 7.0%
Receivablees 10 -18 -15 -11 -11 MB&S n.a. n.a. 18.5% 31.4%
Inventory -31 -29 -19 -14 -14
Payables 7 11 6 5 5 Net profit growth -4.3% 41.7% 6.8% 33.8%
Retirement pay -18 -20 -11 -11 -11
Equity method gain/oper profit 4.5% 0.9% 5.4% -3.6% 8.6%
Cash Flows from Investing -221 -172 -232 -207 -120 Equity method loss/oper profit 11.4% 13.8% 6.0% 3.9% 2.1%
Net contribution to operating profit -6.9% -12.9% -0.6% -7.5% 6.5%
Cash Flows from
Financing -31 -35 -35 -48 -52
EPS (Won) 25,770 24,666 34,940 37,312 49,922
Increase in Cash -25 32 60 55 293 P/E (times) 32.5 33.9 24.0 22.4 16.8
Cash at the Beginning 130 105 137 196 251
Cash at the End 105 137 196 251 441 Shares outstanding (MM) 6.9 6.9 6.9 6.9 6.9

BVPS (Won) 138,124 161,600 186,994 217,317 259,777


Price/Book 6.1 5.2 4.5 3.9 3.2

ROE (%) 18.7% 15.3% 18.7% 17.2% 19.2%


DPS (W) 4,503 4,999 5,004 6,990 7,464
Source: J.P. Morgan estimates, Company data.

123
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Anglo Platinum Overweight


Price: 73,384c

www.angloplatinum.com Price Target: 91,000c

Company description South Africa


AMS is the world’s largest PGM producer, operating multiple sites in SA Gold & Precious Metals
and Zimbabwe. Under Neville Nicolau (new CEO) the group is being Steve ShepherdAC
restructured. A 15% (at least) headcount cut and the redrawing of operations (27-11) 507 0386
management boundaries at problematical Rustenburg and at Amandelbult are steve.a.shepherd@jpmorgan.com
positives. Nicolau is the first mining engineer at the helm in decades - and Allan CookeAC
his experience should be key to “getting the mining right” after a decade of (27-11) 507 0384
poor performance in our view. The group’s entered into JVs with mid-tier allan.j.cooke@jpmorgan.com
and BEE miners and has developed a significant 3rd party concentrate J.P. Morgan Equities Ltd.
purchasing business. Moreover, by allowing some partners control of mines
improved focus and better costs control should result, in our view. Price Performance
75,000
Post mortem 65,000
AMS has been a perennial underperformer in the Pt sector over the past c 55,000
decade. We can see this reversing under the new regime. Moreover, our 45,000
analysis indicates that AMS is well positioned to move platinum production 35,000
from its mines up by around 10% (200-250koz) within 6 months in response Nov-08 Feb-09 May-09 Aug-09 Nov-09
to strong demand, if needed - no other producer can do this.
Source: Bloomberg
Potential for earnings upgrades
It is hard to accurately predict the impact of restructuring on costs. We think Performance
the market is likely to underestimate the potential benefits. AMS’ peers have 1M 3M 12M
Absolute (%) 9.7 8.9 76.7
little hope of matching it in terms of costs containment in our view. The
Source: Bloomberg
group’s profits and valuation are highly geared to a recovery in rand metal
prices.
Company data
How much recovery is priced into the stock? Price(c) 73,384
Date of Price 23-Nov-09
While the group is already factoring some price recovery, at mid-cycle Price Target (c) 91,000
prices, we estimate that it currently trades at around 80% of our fair value. Price Target End Date 31-Aug-10
52-week Range (c) 76,820 – 36,800
Price target and key risks Mkt Cap (Rbn) 174.80
Our Aug-10 DCF-based price target is R910/sh. The key risks are that the Shares O/S (mn) 238
rand PGM basket price fails to recover and/or the ops fail to turn as we Source: Bloomberg, J.P. Morgan
expect.
Bloomberg: AMS SJ; Reuters: AMSJ.J
Rand millions, year-end Dec
FY08 FY09E FY10E FY11E
Sales 50,765 36,735 44,351 55,196
Net profit 13,280 2,521 5,376 9,779
FD EPS (SAcps) 5,610 1,060 2,260 4,110
DPS (SAcps) 3,500 0 0 2,160
Sales growth (%) 8.9 -27.6 20.7 24.5
Net profit growth (%) 8.0 -81.0 113.2 81.9
EPS growth (%) 7.1 Nm 113.2 81.9
ROE (%) 45.6 7.9 14.5 23.3
FD P/E (x) 13.2 69.7 32.7 18.0
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of cob 23 November 2009.

124
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Anglo Platinum: Summary of Financials


Production & Economic Assumptions Balance Sheet
Year end Dec FY07A FY08A FY09E FY10E FY11E R in millions, year end Dec FY07A FY08A FY09E FY10E FY11E
Platinum ($/oz) 1,302 1,570 1,183 1,338 1,469 Property, Plant & Equipment 20,697 28,435 34,761 41,296 47,668
Palladium ($/oz) 355 355 250 306 425 Net Fixed Assets 39,218 49,953 57,471 64,006 70,378
Rhodium ($/oz) 4,344 5,174 1,458 1,788 2,625 Cash and Cash equivalents 3,833 2,476 1,210 2,088 2,613
Nickel ($/ton) 37,567 21,583 14,831 15,875 15,000 Others 10,999 16,239 17,794 21,049 24,967
Avg exch. rate (R/$) 7.04 8.08 8.56 8.65 9.24 Current Assets 14,832 18,715 19,003 23,137 27,580
Total Assets 54,050 68,668 76,474 87,142 97,958
Cash Costs ($/oz Pt) 1,409 1,628 1,357 1,372 1,390
Current Liabilities 6,547 10,567 8,828 10,443 12,387
Sales Volumes Debt 7,465 15,820 21,056 24,556 26,056
Platinum (koz) 2,479 2,220 2,400 2,539 2,621 Other Liabilities 11,265 12,785 12,273 12,450 15,190
Palladium (koz) 1,390 1,319 1,292 1,518 1,561 Shareholder's Equity 28,773 29,496 34,317 39,693 44,325
Rhodium (koz) 307 311 326 344 345 Minorities 0 0 0 0 0
Nickel (t) 20,273 16,036 19,615 24,679 25,400 Total Liabilities & Shareholders Equity 54,050 68,668 76,474 87,142 97,958

Profit & Loss Statement Ratio Analysis


R in millions, year end Dec FY07A FY08A FY09E FY10E FY11E Year end Dec FY07A FY08A FY09E FY10E FY11E
Revenues 46,616 50,765 36,735 44,351 55,196 Gross Margin (%) 41.0% 33.7% 10.2% 17.1% 25.9%
% change Y/Y 19.1% 8.9% (27.6%) 20.7% 24.5% EBITDA Margin (%) 44.1% 32.6% 17.2% 26.1% 34.0%
EBITDA 20,573 16,540 6,302 11,566 18,778 EBIT Margin (%) 40.0% 34.8% 9.4% 16.8% 25.3%
% change Y/Y 14.0% (19.6%) (61.9%) 83.5% 62.4% Net Margin (%) 26.4% 26.2% 6.9% 12.1% 17.7%
EBIT 18,654 17,654 3,471 7,442 13,976 FCF Margin (%) 6.9% 5.8% (19.4%) (6.4%) 2.9%
% change Y/Y 14.7% (5.4%) (80.3%) 114.4% 87.8%
Net interest 221 118 (127) (57) (143) Interest Coverage (x) 84.4 149.6 27.4 130.2 97.9
Earnings before tax 19,323 17,988 3,397 7,405 13,870 Net debt to equity (%) 12.6% 45.2% 57.8% 56.6% 52.9%
% change Y/Y 15.6% (6.9%) (81.1%) 118.0% 87.3% Sales/Assets (x) 0.9 0.8 0.5 0.5 0.6
Tax (6,656) (4,470) (749) (1,888) (3,884)
Tax as % of EBT 34.4% 24.8% 22.1% 25.5% 28.0% ROE (%) 42.8% 45.6% 7.9% 14.5% 23.3%
Net income (reported) 12,294 13,280 2,521 5,376 9,779 ROIC (%) 42.7% 35.1% 5.5% 9.5% 15.5%
% change Y/Y 4.6% 8.0% (81.0%) 113.2% 81.9%
Shares Outstanding 234.70 236.80 238.15 238.20 238.20 P/E (x) 14.1 13.2 69.7 32.7 18.0
EPS (Adjusted) 5,240 5,610 1,060 2,260 4,110 EV/EBITDA (x) 8.8 11.0 28.8 15.7 9.7
% change Y/Y NM 7.1% NM 113.2% 81.9% EV/FCF (x) 56.5 61.8 (25.5) (64.2) 112.9
DPS (Gross) 5,200 3,500 0 0 2,160 Dividend Yield (%) 7.0% 4.7% 0.0% 0.0% 2.9%
% change Y/Y (1.9%) (32.7%) (100.0%) - - FCF Yield (%) 2.0% 1.8% (4.4%) (1.7%) 1.0%

Cash Flow Statement Valuation & Recommendation


R in millions, year end Dec FY07A FY08A FY09E FY10E FY11E NPV 86,200
EBIT 18,654 17,654 3,471 7,442 13,976 P/NPV 0.79
Depreciation & Amortization 2,757 3,313 3,899 4,384 4,937 PT 91,000
Change in working capital 110 2,555 (1,470) (1,640) (1,974) PT/NPV 1.1
Taxes (6,821) (1,799) (575) (123) (1,964) PT Date 31-Aug-10
Cash flow from Operations 13,862 17,296 4,256 9,803 14,840 Recommendation OW

Capex (10,653) (14,362) (11,368) (12,628) (13,234) Weekly Mkt Turnover ($ millions)
Disposals/(Purchase) 632 (194) 1,712 260 136 JSE 220
Net interest 5 (99) (78) (57) (143) LSE 0
Free Cash flow 3,209 2,934 (7,111) (2,824) 1,606 ADR 1
Free Cash flow per share 13.6 12.3 (29.9) (11.9) 6.7

Equity raised/ repaid 0 0 0 0 0


Debt raised/ repaid 7,575 10,501 4,445 3,500 1,500 Weekly Mkt Turnover/Mkt Cap (%)
Dividends paid (12,658) (14,237) (61) 0 (2,573) JSE 1.0%
Other 346 (262) (173) 0 0 LSE 0.0%
ADR 0.0%
Beginning Cash 4,724 3,833 2,476 1,210 2,088
Ending Cash 3,833 2,476 1,210 2,088 2,613

Source: Company reports and J.P. Morgan estimates.

125
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Astra International Overweight


Rp29,800
Price Target: Rp37,000
www.astra.co.id
Company description Indonesia
Astra International is part of the Jardine Matheson group. It is the Auto Parts
partner/distributor for Japanese majors including Toyota, Daihatsu, Honda Aditya Srinath, CFAAC
(two-wheelers) and Komatsu. Astra also holds majority stakes in United (62-21) 5291-8573
Tractors (59.5%) and Astra Agro Lestari (80%). aditya.srinath@jpmorgan.com
Post mortem PT J.P. Morgan Securities Indonesia
Astra’s solid balance sheet and reputation have resulted in market share gains
during the downturn. We see improved pricing power, resulting from a Price performance
stronger rupiah in core auto businesses, offsetting vulnerability from UNTR 35,000
and AALI, which are weak currency beneficiaries. As a result of proactive
Rp 20,000
management in the car and financial services business, supported by the
strong growth in United Tractors, Astra should be able to end 2009 without a 5,000
significant earnings decline, which we think is creditable. Nov-08 Feb-09 May-09 Aug-09 Nov-09

Potential for earnings upgrades ASII.JK share price (Rp)


JCI (rebased)
We think that the auto cycle is in early stages of recovery, and have been Source: Bloomberg.
surprised by two- and four-wheeler vehicle volumes in recent months. We Performance
think that the stronger-than-expected vehicle volumes could set the stage for
earnings upgrades going into 2010. If the recovery in two-wheeler 1M 3M 12M
profitability seen in 3Q proves sustainable, it could provide added impetus to Absolute (%) -7.6 -1.4 212.1
earnings. Relative (%) -4.6 -1.1 134.4
Source: Bloomberg.
How much recovery is priced into the stock?
Company data
We think that the emphasis on stock drivers is likely to shift from recovery to
growth. The fact that a recovery which is underway is probably priced in, but 52-week range (Rp) 7,800-35,300
the strength of the recovery is being underestimated. Mkt cap. (RpMM) 120,640,979
Price target and key risks Mkt cap. (US$MM) 12,814
We have an SOTP-based Dec-10 PT of Rp37,000 for Astra. Our PT uses J.P. Avg daily val (US$MM) 12.82
Morgan PTs (DCF-based) for listed subsidiaries UNTR and AALI. We use Avg daily volume (MM) 2.75
the market values of smaller quoted holdings (Bank Permata, Astra Auto Shares O/S (MM) 4,048
Parts and Astra Graphia) and DCF/DDM-based valuations for motor Date of price 5-Nov-09
businesses and financial services business. Our valuation assumes a 10.5% Index: JCI 2382
risk-free rate and a 5.5% equity risk premium, translating into a 16% cost of Free float (%) 49.9
equity. Using market values, as opposed to J.P. Morgan PTs, would imply a Exchange rate 9,415
share price of Rp36,000 for Astra. Risks to our PT are if higher rates hit the Source: Bloomberg.
recovery and the fact that the stock may be well owned. We see Astra as
being in the midst of a re-rating relative to the market which is yet
incomplete, and expect further outperformance.
Bloomberg: ASII IJ; Reuters: ASII.JK
Rp in mn, year-end Dec FY07A FY08E FY09E FY10E FY11E
Revenue (Rp bn) 70,183 97,064 90,236 108,131 125,185
Net Profit (Rp bn) 6,519 8,965 8,487 10,284 12,100
Asia EPS (Rp) 1,610.35 2,214.75 2,096.50 2,540.53
DPS (Rp) 644 910 839 1,016
Revenue growth (%) 26.0% 38.4% -7.1% 19.8% 15.8%
EPS growth (%) 75.6% 37.5% -5.3% 21.2%
ROCE 21.6% 26.1% 22.5% 23.9% 24.7%
ROE 26.4% 29.9% 23.8% 24.9% 25.2%
P/E 18.8 13.7 14.5 11.9
P/BV 4.5 3.6 3.2 2.3
EV/EBITDA 1.1 0.9 1.2 1.2 1.0
Dividend Yield 2.1% 3.0% 2.8% 3.3%
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 5 November 2009.

126
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Astra International: Summary of financials


Rp in billions, year end December
Income statement Cash flow statement
FY06 FY07 FY08E FY09E FY10E FY06 FY07 FY08E FY09E FY10E

Revenues 55,709 70,183 97,064 90,236 108,131 EBIT 6,256 9,997 13,490 13,301 15,843
% change Y/Y (9.7%) 26.0% 38.4% (7.1%) 19.8% Depr. & amortization 1,921 2,292 2,542 3,295 3,675
EBITDA 8,177 12,289 16,032 16,596 19,517 Change in working capital -128 737 -571 -3,011 -1,147
% change Y/Y -11.1% 50.3% 30.5% 3.5% 17.6% Taxes -1453 -2663 -3944 -3533 -3530
EBIT 6,256 9,997 13,490 13,301 15,843 Cash flow from operations 5,505 9,549 11,162 8,770 12,811
% change Y/Y NM 59.8% 34.9% NM 19.1%
EBIT Margin 11.2% 14.2% 13.8% 14.7% 14.6% Capex -3,455 -3,389 -9,094 -4,500 -3,500
Net Interest -336 -288 142 -583 -786 Disposal/(purchase) -652 -541 -318 0 0
Earnings before tax 5,944 10,634 14,960 14,183 15,950 Net Interest -336 -288 142 -583 -786
% change Y/Y -27.5% 78.9% 40.7% -5.2% 12.5% Other 4,333 -783 -4,076 -6,250 -9,414
Tax -1,453 -2,663 -3,944 -3,533 -3,530 Free cash flow 2,049 6,160 2,069 4,270 9,311
as % of EBT 24.4% 25.0% 26.4% 24.9% 22.1%
Net income (reported) 3,712 6,519 8,965 8,487 10,284 Equity raised/(repaid) 0 0 -0 0 0
% change Y/Y -31.9% 75.6% 37.5% -5.3% 21.2% Debt raised/(repaid) -3,341 -3,333 3,688 0 3,000
Shares outstanding 4 4 4 4 4 Other -531 1,848 4,425 630 630
EPS (reported) 916.94 1,610.35 2,214.75 2,096.50 2,540.53 Dividends paid -1,781 -2,607 -3,684 -3,395 -4,114
% change Y/Y (31.9%) 75.6% 37.5% (5.3%) 21.2% Beginning cash 4,510 5,239 6,523 8,944 4,199
Ending cash 5,239 6,523 8,944 4,199 3,613
DPS 440 644 910 839 1,016

Balance sheet Ratio Analysis


FY06 FY07 FY08E FY09E FY10E FY06 FY07 FY08E FY09E FY10E

Cash and cash equivalents 4,820 6,322 8,877 4,099 3,513 EBITDA margin 14.6% 17.4% 16.4% 18.3% 18.0%
Accounts receivable 4,558 6,018 6,474 8,139 9,433 Operating margin 11.19% 14.19% 13.84% 14.69% 14.60%
Inventories 4,001 4,582 8,666 7,226 8,284 Net margin 6.6% 9.3% 9.2% 9.4% 9.5%
Others 2,024 2,409 2,040 3,214 3,851
Current assets 15,822 19,532 26,124 22,778 25,181
Sales per share growth (9.7%) 26.0% 38.4% (7.1%) 19.8%
LT investments - - - - - Sales growth (9.7%) 26.0% 38.4% (7.1%) 19.8%
Net fixed assets 13,030 14,127 20,679 21,884 21,710 Net profit growth -31.9% 75.6% 37.5% -5.3% 21.2%
Total Assets 57,929 63,520 80,740 84,850 96,493 EPS growth (31.9%) 75.6% 37.5% (5.3%) 21.2%

Liabilities Interest coverage (x) 24.36 42.68 - 28.47 24.82


Short-term loans 12,963 10,998 12,979 12,800 12,800
Payables 3,390 4,434 6,815 5,713 6,554 Net debt to equity 83.8% 54.0% 48.6% 54.3% 55.6%
Others 7,073 10,236 13,837 12,225 14,067 Sales/assets 0.94 1.16 1.35 1.09 1.20
Total current liabilities 20,037 21,234 26,816 25,025 26,867 Assets/equity 2.59 2.36 2.44 2.23 2.20
Long-term debt 10,215 8,848 10,554 10,733 13,733 ROE 17.3% 26.4% 29.9% 23.8% 24.9%
Other liabilities 721 828 1,902 1,933 1,963 ROCE 13.5% 21.6% 26.1% 22.5% 23.9%
Total Liabilities 31,498 31,512 40,163 38,681 43,653
Shareholders' equity 22,376 26,963 33,080 38,172 44,342
BVPS 5,527 6,660 8,172 9,430 13,053
Source: Company reports, J.P. Morgan estimates.

127
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Asustek Computer Overweight


Price: NT$60.9
Price Target: NT$70
www.asus.com
Company description Taiwan
Asus (TWSE: 2357) is the largest motherboards maker in the world. Starting with Computer Hardware
its MB business, Asus has rapidly grown in the NB space, especially for netbook. Gokul HariharanAC
Currently, NB accounts for more than 70% of its revenue. The company’s (852) 2800-8564
products include MB, NB, Eee PC, GPS smartphone, and PC peripherals. gokul.hariharan@jpmorgan.com

Alvin KwockAC
Post mortem (852) 2800-8533
After facing serious inventory issues in 4Q08 and burdened by a heavy mix of alvin.yl.kwock@jpmorgan.com
high-end products, Asus was in a restructuring mode in 1H09. It has reoriented J.P. Morgan Securities (Asia Pacific) Limited
product its line-up towards the mainstream market, and instituted more cost
control measures, by adopting common platforms in NBs, and streamlining a Price performance
80
number of models. As a result, Asus posted a strong recovery in profitability in
3Q09, with its NB volume also recovering back to 2008 levels. NT$ 50

20
Potential for earnings upgrades Nov-08 Feb-09 May-09 Aug-09 Nov-09
With a stronger-than-expected operating margin recovery in 3Q09, we believe the
2357.TW share price (NT$
Street’s upward earning estimate revisions are still on. Our 2010 earnings TSE (rebased)
estimate is about 17% higher than current Bloomberg consensus estimate. We Source: Bloomberg.
expect revenue momentum to surprise on the upside in 2010, as Asus’ key
markets—Eastern Europe and China—are likely to post strong growth in NB. Performance
1M 3M 12M
How much recovery is priced into the stock? Absolute (%) 13.20 23.28 30.11
Volume recovery in 2H09 for Asus appears to be priced into the stock, but we Relative (%) 13.51 13.82 -12.68
believe margin expectations have stayed low. Going into 2010, there is still Source: Bloomberg.
investor skepticism regarding Asus’ ability to continue gaining market share and
Company data
keep OP margins stable, which should provide an upside opportunity for the 52-week range (NT$) 29.4-63.8
stock, in our view. Mkt cap. (NT$B) 259
Mkt cap. (US$B) 8
Price target and key risks Avg daily value (US$B) 40
Avg daily volume (MM) 26
Our Jun-10 PT of NT$70 implies 14x FY10E earnings, given the strong OP Shares O/S (MM) 4,247
margin improvement and sustainability of Asus’ cost-down measures in notebook Date of price 5-Nov-09
business. 14x P/E represents the mid-point of Asus’ historical trading range. A Index: TWSE 7,417.5
key risk to our PT is execution issues in the mainstream NB rollout. Free float (%) 95
Exchange rate 32.5
Source: Bloomberg.

Bloomberg: 2357.TT; Reuters: 2357.TW


NT$ in billions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Sales 266.9 236.6 277.3 316.1 YE BPS (NT$) 39.2 40.0 43.3 45.2
Operating profit 11.4 4.5 13.7 15.4 P/BV (x) 1.6 1.5 1.4 1.3
EBITDA 12.4 5.8 15.2 17.3 ROE 9.5 7.2 11.6 12.1
Pre-tax profit 20.6 14.0 24.3 27.0 Core ROIC (%) 16.6 3.6 0.8 6.0
Net profit 16.5 12.2 20.6 22.8 DPS (NT$) 4.3 2.0 1.5 2.9
MV of employee bonus 1.00 -0.15 2.27 2.55 Quarterly EPS (NT$) 1Q 2Q 3Q 4Q
Adjusted net profit 16.5 12.2 20.6 22.8 EPS (FY08) 1.56 1.23 1.54 -0.66
New Taiwan GAAP EPS (NT$)* 3.73 2.87 4.82 5.34 EPS (FY09E) 0.11 -0.03 1.53 1.26
New Taiwan GAAP P/E (x) 16.3 21.2 12.6 11.4 EPS (FY10E) 0.99 1.04 1.36 1.43
sales growth -65% -11% 17% 14%
New Taiwan GAAP EPS growth -26% -23% 68% 11%
Normalized OP growth -44% -56% 218% 13% Jun -10 PT NT$ 70
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 5 November 2009.

128
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Asustek Computer: Summary of financials


NT$ in billions, year-end December
Income statement Ratio analysis
FY08 FY09E FY10E FY11E % FY08 FY09E FY10E FY11E
Revenues 266.9 236.6 277.3 316.1 Gross Margin 14.8 12.1 15.1 14.9
Cost of Goods Sold 227.5 208.0 235.4 269.0 EBITDA margin 4.6 2.4 5.5 5.5
Gross Profit 39.4 28.6 41.9 47.0 Operating Margin 4.3 1.9 4.9 4.9
R&D Expenses 7.3 6.0 7.0 7.9 Net Margin 6.2 5.2 7.4 7.2
SG&A Expenses 19.7 16.2 18.9 21.2 R&D/sales 2.7 2.5 2.5 2.5
Operating Profit (EBIT) 11.4 4.5 13.7 15.4 SG&A/Sales 7.4 6.8 6.8 6.7
EBITDA 12.4 5.8 15.2 17.3
Interest Income 1.1 1.0 1.0 1.1 Sales growth -11.3 17.2 14.0
Interest Expense -1.0 -0.9 -1.0 -0.9 Operating Profit Growth -60.4 203.0 12.7
Investment Income (Exp.) 4.0 7.0 7.6 7.9 Net profit (Adjusted) growth -25.7 68.5 10.7
Non-Operating Income (Exp.) 5.1 2.4 3.0 3.5 EPS (Reported) growth -23.1 68.0 10.7
Earnings before tax 20.6 14.0 24.3 27.0 EPS (Adjusted) growth -23.1 68.0 10.7
Tax 4.1 1.7 3.7 4.2 Interest coverage (x) -11.8 -5.1 -13.4 -17.1
Net Income (Reported) 16.5 12.2 20.6 22.8 Net debt to total capital -6.1 -6.7 -6.6 -4.2
Net Income (Adjusted) 16.5 12.2 20.6 22.8 Net debt to equity -6.6 -7.3 -7.2 -4.5

EPS (Reported) (NT$) 3.73 2.87 4.82 5.34 Asset Turnover (%) 112.9 98.2 104.2 111.4
EPS (Adjusted) (NT$) 3.73 2.87 4.82 5.34 Working Capital Turns (X) 3.2 4.8 5.8 6.1
BPS (NT$) 39.21 40.00 43.31 45.23 ROE 9.5 7.2 11.6 12.1
DPS (NT$) 1.98 1.54 2.88 0.00 ROCE 8.1 5.3 9.8 10.9
Shares Outstanding (B) 4.4 4.3 4.3 4.3

Balance sheet Cash flow statement


FY08 FY09E FY10E FY11E FY09E FY10E FY11E
Cash and cash equivalents 23.7 27.0 29.1 25.7 Net Income 12.2 20.6 22.8
Accounts receivable 43.2 40.1 47.2 53.2 Depr. & Amortisation 1.2 1.5 1.8
Inventories 41.8 36.1 42.5 47.9 Change in working capital 9.3 -5.7 -4.9
Others 10.9 11.7 13.8 15.5 Other 0.0 0.0 0.0
Current assets 119.6 114.9 132.5 142.3 Cash flow from operations 22.8 16.4 19.8

LT investments 111.5 120.6 128.2 136.1 Capex -2.3 -1.5 -1.8


Net fixed assets 3.7 4.8 4.8 4.8 Disposal/ (purchase) -8.1 -7.6 -7.9
Others 1.6 0.6 0.6 0.6 Cash flow from investing -10.4 -9.1 -9.7
Total assets 236.5 240.9 266.1 283.8 Free cash flow 20.4 14.9 17.9

ST loans 12.7 14.5 15.7 16.9 Equity raised/ (repaid) 1.4 0.0 0.0
Payables 27.5 36.1 42.5 47.9 Debt raised/ (repaid) 1.8 1.2 1.2
Others 26.7 19.4 22.8 25.7 Other -1.1 0.2 -2.3
Total current liabilities 66.9 70.0 81.1 90.5 Dividends paid -8.4 -6.6 -12.3
Cash flow from financing -6.3 -5.2 -13.4
Long term debt 0.0 0.0 0.0 0.0
Other liabilities 0.0 0.0 0.0 0.0 Net change in cash 6.0 2.1 -3.4
Total liabilities 66.9 70.0 81.1 90.5 Beginning cash 23.7 27.0 29.1
Shareholders' equity 166.8 170.9 185.1 193.3 Ending cash 29.7 29.1 25.7
Source: Company reports and J.P. Morgan estimates.

129
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Ayala Land Overweight


Php12.00
Price Target: Php13.90
www.ayalaland.com.ph

Company description Philippines


Ayala Land is the largest and most diversified developer in the Philippines Real Estate
with interests in housing, retail, office, and hotel development. It is a major Kelly Lim-BateAC
landlord in the prime CBDs of Makati and Fort Bonifacio. While (632) 878-1188
traditionally known as a high-end property developer, Ayala Land has in kelly.s.lim-bate@jpmorgan.com
recent years leveraged on its brand equity to tap the lower-income markets. J.P. Morgan Securities Philippines Inc.

Post mortem Price performance


The company has over 4,000 ha of land bank that is good for at least 10 years 20

of development. Its pricing power is strong owing to the Ayala reputation for 18
16
14
quality products and services. Cost efficiency has been an ongoing issue for 12
10
the company, but this could change with the new President at the helm who 8
6
has a track record of reaping operational efficiency. We believe the 4
2
company’s conservative balance sheet has allowed it weather the crisis well, 0

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09
and seize opportunities in striking joint-venture/land lease deals to grow its
market share. Source: Bloomberg.

Potential for earnings upgrades Performance


Property volumes are highly leveraged to an economic upturn, fueled by 1M 3M 12M
growing overseas foreign remittances and low interest rates. The company’s Absolute (%) -12.8 6.8 65.3
move to aggressively launch more projects (in line with its target to double Relative (%) -15.9 6.1 20.1
earnings and ROE in five years) should further boost volume sales. Potential Source: Bloomberg.
margin increase from lower costs should lead to positive earnings estimate
revisions, in our view. Company data
52-week range (Php) 4.90-12.50
How much recovery is priced into the stock? Mkt cap. (PhpMM) 155,556
We believe the stock has priced in very little of a recovery as it is trading at a Mkt cap. (US$MM) 3,330
42% discount to NAV, equivalent to -1SD, and more than the 35% average Avg daily value (US$MM) 2
during the 2002-03 trough of the property market. Avg daily volume (MM) 12.1
Shares O/S (MM) 12,963
Price target and key risks Date of price 12-Nov-09
Our Dec-10 PT of Php13.9 is based on a 25% discount to NAV, equivalent Index: PSEi 3,074
to the historical average of the past 17 years. Key risks to our PT are a Free float (%) 46
decline in land values and a sharp rise in interest rates. Exchange rate 46.72
Source: Bloomberg.

Bloomberg: ALI PM.TT; Reuters: ALI.PS


P h p in m n , y e a r -e n d D e c FY08A FY09E FY10E FY11E
R e venu e 2 9 ,2 9 5 2 6 ,6 4 3 2 6 ,6 8 8 3 1 ,7 2 2
N e t P ro fit 4 ,8 1 2 .3 3 ,7 9 9 .7 3 ,8 6 9 .2 4 ,4 4 8 .4
E P S (P h p ) 0 .3 7 0 .2 9 0 .3 0 0 .3 4
D P S (P h p ) 0 .0 6 0 .0 6 0 .0 6 0 .0 6
R e v e n u e g ro w th (% ) 3 6 .3 % -9 .1 % 0 .2 % 1 8 .9 %
E P S g ro w th (% ) 1 0 .3 % -2 1 .0 % 1 .8 % 1 5 .0 %
ROCE 9 .9 % 7 .4 % 7 .6 % 8 .6 %
ROE 1 0 .2 % 7 .5 % 7 .1 % 7 .7 %
P /E ( x ) 3 2 .3 4 0 .9 4 0 .2 3 5 .0
P /B V (x ) 3 .2 2 .9 2 .8 2 .6
E V /E B IT D A ( x ) 2 6 .0 3 1 .4 2 9 .5 2 5 .1
D iv id e n d Y ie ld 0 .5 % 0 .5 % 0 .5 % 0 .5 %
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuation are as of 12 November 2009.

130
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Ayala Land: Summary of financials


Php in millions, year-end December
Income statement Cash flow statement
FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E

Revenues 21,490 29,295 26,643 26,688 31,722 EBIT 4,989 6,042 5,013 5,369 6,370
% change Y/Y (4.5%) 36.3% (9.1%) 0.2% 18.9% Depr. & amortization - - - - -
EBITDA 4,989 6,042 5,013 5,369 6,370 Change in working capital 3,660 -1,223 1,992 1,989 1,371
% change Y/Y 3.6% 21.1% -17.0% 7.1% 18.6% Taxes -1556 -2065 -1575 -1698 -2079
EBIT 4,989 6,042 5,013 5,369 6,370 Cash flow from operations 8,530 3,616 7,256 7,387 7,578
% change Y/Y 3.6% 21.1% NM 7.1% 18.6%
EBIT Margin 23.2% 20.6% 18.8% 20.1% 20.1% Capex 1,390 -5,693 -5,340 -6,772 -8,694
Net Interest 277 522 356 106 134 Disposal/(purchase) -810 918 -1,689 -716 518
Earnings before tax 6,652 7,448 6,254 6,448 7,574 Net Interest 277 522 356 106 134
% change Y/Y 13.8% 12.0% -16.0% 3.1% 17.5% Other - - - - -
Tax -1,556 -2,065 -1,575 -1,698 -2,079 Free cash flow 9,920 -2,077 1,916 615 -1,116
as % of EBT 23.4% 27.7% 25.2% 26.3% 27.4%
Net income (reported) 4,386 4,812 3,800 3,869 4,448 Equity raised/(repaid) 1,361 -765 0 0 0
% change Y/Y 13.5% 9.7% -21.0% 1.8% 15.0% Debt raised/(repaid) -3,655 -2,710 -107 0 0
Shares outstanding 13,035 12,963 12,963 12,963 12,963 Other -47 995 0 0 0
EPS (reported) (Php) 0.34 0.37 0.29 0.30 0.34 Dividends paid -1,084 -951 -778 -778 -778
% change Y/Y 13.3% 10.3% (21.0%) 1.8% 15.0% Beginning cash 4,631 11,272 15,443 14,786 13,906
Ending cash 11,272 12,655 14,786 13,906 12,530
DPS (Php) 0.05 0.06 0.06 0.06 0.06

Balance sheet Ratio analysis


FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E

Cash and cash equivalents 13,626 15,443 14,786 13,906 12,530 EBITDA margin 23.2% 20.6% 18.8% 20.1% 20.1%
Accounts receivable 11,125 15,796 12,092 11,392 12,563 Operating margin 24.50% 22.40% 20.15% 20.52% 20.50%
Inventories 6,696 8,140 6,792 6,175 6,555 Net margin 20.4% 16.4% 14.3% 14.5% 14.0%
Others 2,533 4,556 4,556 4,556 4,556
Current assets 33,979 43,935 38,226 36,030 36,206
Sales per share growth (4.7%) 37.1% (9.1%) 0.2% 18.9%
LT investments 28,587 31,628 38,855 45,720 52,251 Sales growth (4.5%) 36.3% (9.1%) 0.2% 18.9%
Net fixed assets 20,415 24,890 22,842 22,166 23,209 Net profit growth 13.5% 9.7% -21.0% 1.8% 15.0%
Total Assets 82,981 100,453 99,923 103,916 111,665 EPS growth 13.3% 10.3% (21.0%) 1.8% 15.0%

Liabilities Interest coverage (x) - - - - -


Short-term loans 3,990 1,524 1,280 1,280 1,280
Payables 15,759 20,654 17,706 18,382 21,115 Net debt to equity -8.1% 2.8% 3.7% 5.0% 7.1%
Others 790 1,205 1,094 1,090 1,280 Sales/assets 0.27 0.32 0.27 0.26 0.29
Total current liabilities 20,539 23,383 20,079 20,752 23,675 Assets/equity 1.82 2.05 1.89 1.86 1.87
Long-term debt 6,150 15,228 15,365 15,365 15,365 ROE 10.2% 10.2% 7.5% 7.1% 7.7%
Other liabilities 5,547 6,799 5,536 4,884 4,992 ROCE 9.1% 9.9% 7.4% 7.6% 8.6%
Total Liabilities 32,235 45,410 40,980 41,000 44,032
Shareholders' equity 45,705 49,028 52,827 55,919 59,589
BVPS (Php) 3.51 3.78 4.08 4.31 4.60
Source: Company reports and J.P. Morgan estimates.

131
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Baidu Overweight
US$386.37
Price Target: US$460.00
www.baidu.com
Company description China
Baidu is a leading internet search provider in China with a focus on Chinese IT and Internet
web pages. The company generates majority of its revenue through pay-per- Dick WeiAC
click advertising and customized search solutions. It is the number 1 site in (852) 2800-8535
China in terms of traffic reach, according to Alexa. dick.x.wei@jpmorgan.com

Post mortem J.P. Morgan Securities (Asia Pacific)


Limited
Baidu remains the dominant player in China’s search market with ~63%
market share as of 3Q09 in China (according to Analysys). We expect Baidu Price performance
to maintain its leadership in China due to: (1) its good Chinese search US$
technology; (2) our view that Baidu’s products are tailored better to local
needs; (3) its strong local brand name; (4) good relationship with the Chinese 400

government; and (5) it has among the widest distribution networks in China $ 250

(a key to market development and driving sales), and is well ahead of other 100
competitors in search. Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

Potential for earnings upgrades BIDU share price ($)


NASDAQ Composite (rebased)
We believe there are earnings upside potential in 2010, with: (1) transition to Source: Bloomberg.
Phoenix Nest monetization system; (2) domestic economic growth to lead to
an upside in search ad spending; and (3) expect eCommerce growth to lead Performance
to search spending upside. We also expect some margin leverage in SG&A. 1M 3M 12M
How much recovery is priced into the stock? Absolute (%) 3.3 22.5 133.4
With a weak 4Q09 guidance, shares have recently seen some weakness. Relative (%) 2.8 15.0 90.1
Hence, we believe investors have given a big discount to the potential ad Source: Bloomberg.
recovery in 2010. We note that the softness is mainly due to the earlier-than-
expected transition from the classic bidding system in Phoenix Nest. We Company data
expect incremental positive datapoint on ad segment in early 2010 to be the 52-week range (US$) 100.5-439.9
driver of the stock. Mkt cap. (Rmb MM) 100,700
Price target and key risks Mkt cap. (US$ MM) 14,760
Our Dec-10 PT of US$460 is based on DCF valuation. Our nominal case Avg daily value (US$MM) 60.7
DCF valuation suggests a valuation of: US$459.8. (20% long-term growth Avg daily volume (MM) 1.8
from 2014–2018E, 15% growth from 2019E – 2025E). We use WACC of Shares O/S (MM) 35
12% and 0% terminal growth. Downside risks to our rating and price target Date of price 12-Nov-09
include: (1) slower-than-expected online search spending; (2) large Index: NASDAQ 2056
infrastructure-related expense; (3) unsuccessful Japan initiatives; and (4) and Free float (%) 74
potential margin decline due to TAC. Exchange rate 6.83
Source: Company, Bloomberg.
Bloomberg: BIDU US; Reuters: BIDU
US$ in millions, year-end December
FY08 FY09E FY10E FY11E
Sales 465.5 644.7 916.7 1,321.7
Net profit 152.5 213.5 322.9 470.3
GAAP EPS (US$) 4.39 6.13 9.15 13.14
Adj. EPS (US$) 4.74 6.51 9.56 13.59
DPS (US$) 0 0 0 0
Sales growth (%) 100.9 38.5 42.2 44.2
Net profit growth (%) 82.6 40.0 51.2 45.7
EPS growth (%) 82.5 39.7 49.3 43.6
ROE (%) 44.3 39.3 37.6 35.7
GAAP P/E (x) 97.4 69.7 46.7 32.5
Adj. P/E (x) 90.1 65.6 44.7 31.4
Source: Company, Bloomberg, J.P. Morgan estimates. Note: Share price and valuations are as of 12 November 2009.

132
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Baidu: Summary of financials


Profit and loss statement Cash flow statement
US$ in millions, year-end December US$ in millions, year-end December
FY08 FY09E FY10E FY11E FY08 FY09E FY10E FY11E
Revenue 465.5 644.7 916.7 1,321.7 Net Income 153 214 323 470
% change Y/Y 100.9 38.5 42.2 44.2 Depr. & Amortisation 40 48 64 82
Gross margin (%) 64.0 63.4 62.6 62.4 Change in working capital 24 36 76 85
EBITDA 211.4 293.8 431.4 614.0 Other 38 13 14 16
% change Y/Y 107.0 39.0 46.8 42.3 Cash flow from operations 254 311 477 653
EBITDA margin (%) 45.4 45.6 47.1 46.5 Capex / Investments -59 -81 -76 -94
EBIT 159.6 232.2 352.6 516.4 Others -34 0 0 0
% change Y/Y 119.7 45.46 51.87 46.45 Cash flow from investing -93 -81 -76 -94
EBIT margin (%) 34.3 36.0 38.5 39.1 Free cash flow 195 230 401 559
Net interest 6.9 5.6 15.7 26.0 Equity raised/ (repaid) -9 28 50 60
Earnings before tax 169.4 240.6 368.9 543.0 Debt raised/ (repaid) 0 0 0 0
% change Y/Y 107.1 42 53.34 47.19 Other 4 -3 0 0
Tax 16.9 27.1 46.0 72.7 Dividends paid 0 0 0 0
as % of EBT 9.97 11.25 12.47 13.38 Cash flow from financing -5 25 50 60
Net income (reported) 152.5 213.5 322.9 470.3 Net change in cash 176 257 451 618
% change Y/Y 82.6 40.0 51.2 45.7 Beginning cash 211 388 644 1,095
Shares O/S (MM) 34.8 34.8 35.3 35.8 Ending cash 388 644 1,095 1,713
EPS (reported) (US$) 4.39 6.13 9.15 13.14 Source: Company, J.P. Morgan estimates.
Source: Company, J.P. Morgan estimates.

Balance sheet
Ratio analysis
US$ in millions, year-end December
%, year-end December
FY08 FY09E FY10E FY11E
FY08 FY09E FY10E FY11E
Cash and cash equivalents 388 644 1,095 1,713
EBITDA margin 45.4 45.6 47.1 46.5
Accounts receivable 14 20 30 41
Operating Margin 34.3 36.0 38.5 39.1
Inventories 0 0 0 0
Net Margin 32.8 33.1 35.2 35.6
Others 14 24 36 50
R&D/sales 7.8 8.4 8.1 7.5
Current assets 415 688 1,161 1,805
SG&A/Sales 19.3 17.0 14.5 14.6
Sales growth 100.9 38.5 42.2 44.2
LT investments 2 2 2 2
Operating Profit Growth 119.7 45.5 51.9 46.4
Net fixed assets 129 160 173 187
Net profit growth 82.6 40.0 51.2 45.7
Other LT assets 28 30 29 28
Diluted EPS growth 82.5 39.7 49.3 43.6
Total assets 573 880 1,366 2,021
Net debt to total capital -86.2 -91.6 -100.4 -104.7
Liabilities
Net debt to equity -86.2 -91.6 -100.4 -104.7
ST loans 0 0 0 0
Asset Turnover 81.2 73.3 67.1 65.4
Payables 62 87 138 196
Working Capital Turns (X) 2.1 1.6 1.3 1.1
Others 62 89 137 189
ROE 44.3 39.3 37.6 35.7
Total current liabilities 124 176 275 385
ROIC 42.8 38.5 36.2 34.1
Long term debt 0 0 0 0
Other liabilities 0 1 1 1 Source: Company, J.P. Morgan estimates.
Total liabilities 124 177 275 386
Shareholders' equity 450 703 1,090 1,636
Source: Company, J.P. Morgan estimates.

133
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 02 December 2009
adrian.mowat@jpmorgan.com

Bank Asya Overweight, AFL


Price: TRY3.06
Price Target: TRY5.00
www.bankasya.com
Company description CEEMEA Banks
The largest of four banks (and the only independent as the other 3 have been
Paul FormankoAC
acquired by GCC strategic partners) in a niche, fast growth participation (+44) 207-325-6028
sector (CAGR in assets 03-09 c.35-40%) in Turkey. Its footprint includes paul.formanko@jpmorgan.com
155 branches; it had some TRY11bn (US$7.3bn) in assets in Q3. Despite the
J.P. Morgan Securities Ltd.
severe 2008-09 recession, Asya delivered some 19% loan growth YTD to
September and has made profits in every one of the past 11 quarters with Price Performance
average ROE near 20% - it has historically achieved ROE of over 30%.
3.5

Post mortem 2.5


TL
We expect profits of TRY285mn (EPS of TRY0.32 in 09E), up 15% yoy;
1.5
despite the fact that due to its participation model Asya has been unable to
benefit either from securities gains or more aggressive liability re-pricing 0.5
enjoyed by its peers and cost of risk YTD has been running over 350bps in Nov-08 Feb-09 May-09 Aug-09 Nov-09
2009. However, we expect EPS growth to accelerate towards 40% levels
(net profits EPS of TRY0.45 in 10E and EPS TRY0.60 in 11E). Source: Company data, Bloomberg

Potential for earnings upgrades Performance


1M 3M 12M
At US$42bn market cap, the stock is still below the radar screen - we expect
Absolute (%) -13.6 3.4 163.8
more international research coverage; JPM expects earnings upgrades to
continue throughout 2010, supported by macro strengthening towards 5%
GDP growth, driving some 34% loan growth in 10E and 26% by 11E, well Company data
supported by core Tier 1 of 14.5% (09E) and improving capital generation 52-week range (LC) 3.68-0.94
into recovery. Mkt cap. (TLMM) 2,,754
Mkt cap. (US$MM) 1,842
Avg daily value (US$MM) 18.4
How much recovery is priced into the stock? Avg daily volume (MM) 9.3
From the February 09 trough, Asya shares have rallied over 200% from Shares O/S (MM) 900
TRY1 to over TRY3. Since August the shares have stagnated, despite Date of price 23 Nov 09
Index: ISE 45801
att