Asia Pacific Equity Research 10 February 2011 Top Storiesimg.jrjimg.cn/2011/02/20110210140906673.pdf · 10 February 2011 Top Stories LG Electronics (OW), South Korea Keep an eye on

Asia Pacific Equity Research

10 February 2011

Top Stories LG Electronics (OW), South Korea Keep an eye on all industry-first products; accumulate the stock (JJ Park) Following the success of Optimus One, LGE’s new flagship models, Optimus 2X and Black, should significantly contribute to the potential turnaround of its handset business. A laggard among its global peers, LGE is one of our top picks among Asia technology stocks. We reiterate our Dec-11 share price target of W150,000.

Global Logistic Properties Ltd (OW), Singapore Recent share price weakness creates an attractive buying opportunity (Christopher Gee, CFA) Any recent share price weakness related to China's rate hikes and policy tightening appears unwarranted, given the group’s US$1.2 billion of cash (and US$280 million per annum of EBIT from Japan) which insulates the group from higher working capital costs. Our S$2.90 price target implies 39% upside by the end of this year.

Life insurance, Taiwan Book profit in life insurers to fund rising weighting in banks (Dexter Hsu) Life insurers will likely see substantial FX losses in January. Book profit on Shinkong (N), as expectations have been too high. Although Fubon’s (N) superior ROE of 10%-11% should be sustainable, rising liability costs due to re-pricing of the interest-sensitive annuities could cap the earnings growth.

Banks, China Another 25bp rate hike moderately positive; buy on weakness (Samuel Chen) Although inflation and tightening concerns may continue to dampen near-term sentiment, and prevent any significant re-rating, we believe the market weakness could be a buying opportunity given the very clear outlook for solid earnings growth and appealing valuations. Our top picks: China Minsheng, ICBC, Citic.

Daegu Bank (OW), South Korea Upgrade to Overweight with PT raised to W20,000 (Scott YH Seo) Our upgrade of the stock is prompted by substantially lowered execution risks on FHC formation and M&A, as well as a 12%-14% increase in our NP forecasts for FY11-12. 4Q10 results were in-line, and the company’s outlook on FY11 earnings was upbeat – net profit guidance of W320 billion is equivalent to +40.7% Y/Y growth.

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Sunil Garg (852) 2800-8518 [email protected] Send me your feedback! AM perspective Adrian Mowat, Chief Equity Strategist Cyclical Headwinds Persist

Source: J.P. Morgan Note: Chart shows US EASI Index (J.P.Morgan’s Economic Activity Surprise Index). Developed markets have outperformed emerging by 8% since October. The driver of the DM outperformance is stronger developed world growth. The driver of EM underperformance is higher inflation and the resulting fear of tighter policy. If DM growth continues to exceed expectations then developed equities should continue to rally. This condition is best monitored using the J.P. Morgan economic surprise index (EASI). The EASI index crossing the x-axis should signal the end of the developed market cyclical trade... For more please see Cyclical Headwinds Persist : Perspectives and Portfolios, Mowat et al, 31 January 2011. Click below for the: J.P. Morgan Daily Valuations Latest Weekly AP Banks Analyzer (.xls) Daily Global Economic Briefing

Link to Other FTMs page Link to Morgan Markets page

See the end pages of each individual note 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.

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Recommendation and Forecast Changes • Daegu Bank (Overweight), South Korea (Scott YH Seo)

Buy on reduced risks related to M&A and FHC formation

• Hyundai Development Company (Neutral), South Korea (Jinmook Kim) Reiterate Neutral; order flow weak, provisioning larger than expected, but more visibility of land bank buying

• PTT Public Company (Overweight), TIP Markets (Sukit Chawalitakul) GSP#6 COD by end 1Q10 (or sooner)

• Rallis India Limited (Overweight), India (Princy Singh)

Ensuring a good harvest • United Spirits Limited (Overweight), India (Latika Chopra,

CFA) 3Q FY11 : Marginally below estimates; re-calibrating expectations

Strategy • Market Strategy, Malaysia (Hoy Kit Mak)

Inflation less of a threat

Economics • Economy, Taiwan (Grace Ng)

January CPI inflation lower-than-expected at 1.1%oya, central bank to raise rates at a steady pace

Results and Company Views • China Shenhua Energy, China (Nathan M. Zibilich, CFA)

2010 Net Income below consensus due to decreasing margins - ALERT

• Globe Telecom (Underweight), TIP Markets (James R. Sullivan, CFA) 4Q10 net 22% below Street, expect 8% downside to Street's 2011

• Xtep International Holdings Limited (Overweight), Hong Kong (Elsa Yang) Another strong set of numbers - 24% Q3 order growth - ALERT

• YungShin Global Holding Corp (Not Covered), Taiwan (Caren Huang) Company Visit Note

Sector Research • Banks; Brokers & Asset Managers; Insurance, Asia

Pacific (Sunil Garg) Asia Pacific Financials Dashboards

• Petrochemicals, Asia Pacific (Samuel Lee, CFA) Chemical Reactions – January: Record cotton prices allow PX and MEG spreads to soar

• Petrochemicals, Asia Pacific (Samuel Lee, CFA) Chemical Reactions – Polyester: Surge in 2010 China PSF exports suggest switch to polyester from cotton is underway - ALERT

• Technology, Asia Pacific (Laura Chen) Regain momentum in the smartphone market?: The implications of Nokia potential strategy movement

• Technology, Taiwan (Laura Chen) Mobile World Congress Preview: Booming smartphone market

• Wireless Services, India (Malvika Gupta) India Telecoms: Impact from TRAI's 2G spectrum pricing

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Asia Analyst Focus List

Company Name / Country of Listing Ticker Analyst RatingMkt. Cap

(MM) Mkt. Cap (US$ MM)

Focus List Add Date

Focus List Add Price

Close 02/09/11

Target Price

Date Target Price Set

Australia Campbell Brothers Limited (A$) CPB AU Alexander Mees, ACA OW 2768 2798 9-Sep-09 24.33 41.00 39.18 30-Nov-10 iiNet (A$) IIN AU Laurent Horrut OW 406 411 2-Aug-10 2.78 2.67 3.33 2-Aug-10 ING Office Fund (A$) IOF AU Michael Scott OW 1692 1710 7-Feb-11 0.61 0.62 0.69 7-Sep-10 Mirvac Group (A$) MGR AU Richard Jones, CFA OW 4304 4350 4-Feb-11 1.26 1.26 1.48 25-Jan-11 China Baoshan Iron & Steel – A (Rmb) 600019 CH Nathan M. Zibilich, CFA OW 119432 18125 12-Oct-10 7.11 6.82 10.00 12-Oct-10 China Agri-Industries (HK$) 606 HK Ying-Jian Chan OW 33155 4258 25-Jan-11 7.81 8.21 10.30 25-Jan-11 China Cosco Holdings, Ltd. (HK$) 1919 HK Corrine Png OW 112872 14494 11-Jan-11 8.63 8.21 11.80 29-Oct-10 China Minsheng Banking - A (Rmb) 600016 CH Samuel Chen OW 136629 20735 27-Nov-10 5.13 5.03 7.50 10-Jan-11 China Minsheng Banking - H (HK$) 1988 HK Samuel Chen OW 161473 20735 27-Nov-10 6.90 6.59 9.20 10-Jan-11 Industrial and Commercial Bank of China - A (Rmb) 601398 CH Samuel Chen OW 1533378 232709 30-Oct-09 4.95 4.24 6.70 27-Nov-10 Hong Kong AAC Acoustic (HK$) 2018 HK Charles Guo OW 24744 3177 8-Sep-09 6.91 20.15 22.00 2-Nov-10 China High Speed Transmission (HK$) 658 HK Boris Kan OW 15923 2045 6-May-10 18.42 11.58 24.30 6-May-10 China Unicom (Hong Kong) Limited (HK$) 762 HK Lucy Liu OW 313377 40242 2-Aug-10 10.22 13.30 12.90 1-Nov-10 Cosco Pacific (HK$) 1199 HK Karen Li OW 38883 4993 26-Aug-08 10.64 14.34 16.10 10-Nov-10 HSBC Holdings plc (HK$) 5 HK Sunil Garg OW 1588242 203950 24-May-10 71.65 89.70 115.00 22-Apr-10 K Wah International Holdings (HK$) 173 HK Amy Luk, CFA OW 9259 1189 13-Apr-10 2.98 3.63 3.80 25-Aug-10 Longfor Properties Co. Ltd. (HK$) 960 HK Ryan Li OW 59386 7626 18-Nov-10 9.44 11.52 13.50 18-Nov-10 Mongolian Mining Corporation (HK$) 975 HK Nathan M. Zibilich, CFA OW 39866 5119 15-Nov-10 8.68 10.76 11.45 9-Jan-11 Pacific Basin Shipping (HK$) 2343 HK Corrine Png OW 9640 1238 11-Jan-11 5.01 4.99 7.00 3-Aug-10 Shenzhen Expressway H Share (HK$) 548 HK Karen Li, CFA OW 11789 1514 8-Sep-10 3.90 4.69 8.70 2-Dec-10 The United Laboratories (HK$) 3933 HK Leon Chik, CFA OW 16008 2056 5-Nov-10 15.52 12.30 24.00 7-Jan-11 Wheelock & Company Ltd (HK$) 20 HK Benjamin Lo, CFA OW 59025 7580 19-Nov-10 28.85 29.05 38.10 19-Nov-10 Zhejiang Expressway (HK$) 576 HK Karen Li, CFA OW 31053 3988 20-Apr-10 6.83 7.15 9.10 21-Nov-10 India Apollo Hospitals Enterprise Ltd. (Rs) APHS IN Princy Singh OW 56949 1252 5-Oct-10 463.15 456.65 575.00 5-Oct-10 Ballarpur Industries Ltd (Rs) BILT IN Princy Singh OW 18991 418 20-Oct-10 35.20 28.90 50.00 20-Oct-10 IndusInd Bank (Rs) IIB IN Seshadri K Sen, CFA OW 97635 2147 19-Nov-10 265.15 209.65 350.00 11-Oct-10 Sintex Industries Limited (Rs) SINT IN Princy Singh OW 40375 888 13-Jan-11 167.30 147.90 243.00 13-Jan-11 Spicejet Ltd (Rs) SJET IN Princy Singh OW 17673 389 2-Dec-10 82.15 43.65 115.00 2-Dec-10 Japan Canon (¥) 7751 JT Hisashi Moriyama OW 5255028 63648 14-Jan-11 4240.00 3940.00 5000.00 14-Jan-11 Dainippon Screen Mfg. (¥) 7735 JT Hisashi Moriyama OW 194544 2356 22-Jun-10 478.00 766.00 1000.00 17-Jan-11 FUJIFILM Holdings (¥) 4901 JT Hisashi Moriyama OW 1514029 18338 26-Jan-10 2942.00 2942.00 4500.00 28-May-10 Hitachi (¥) 6501 JT Yoshiharu Izumi OW 2186799 26486 29-Jul-09 293.00 484.00 590.00 23-Apr-10 Honda Motor (¥) 7267 JT Kohei Takahashi OW 6475857 78435 19-Jan-10 3370.00 3575.00 4300.00 13-Jan-11 Inpex Corporation (¥) 1605 JT Brynjar Eirik Bustnes OW 1941235 23512 1-Sep-10 389000.00 531000.00 630000.00 31-Aug-10 Nikon (¥) 7731 JT Hisashi Moriyama OW 772494 9356 4-Jan-11 1747.00 1927.00 2500.00 4-Jan-11 Malaysia RHB Capital (M$) RHBC MK Harsh Wardhan Modi OW 18068 5945 18-Nov-10 7.80 8.39 10.60 16-Nov-10 Philippines International Container Terminal Services, Inc. (Php) ICT PM Jeanette Yutan OW 83240 1911 8-Sep-10 35.20 43.00 49.00 20-Oct-10 Philippine Stock Exchange Inc (Php) PSE PM Harsh Wardhan Modi OW 10983 252 9-Oct-07 407.50 358.00 605.00 4-Oct-10 Singapore CapitaMalls Asia (S$) CMA SP Joy Wang OW 7807 6123 21-Jan-11 1.91 2.01 2.75 21-Jan-11 DBS Group (S$) DBS SP Harsh Wardhan Modi OW 34587 27126 8-Aug-08 14.36 14.98 24.00 19-Jan-11 Global Logistic Properties Ltd (S$) GLP SP Christopher Gee OW 9283 7281 18-Nov-10 2.18 2.02 2.90 18-Nov-10 Noble Group Ltd (S$) NOBL SP Ajay Mirchandani OW 13454 10551 12-Nov-09 1.83 2.23 2.50 10-Nov-10 Olam International (S$) OLAM SP Ajay Mirchandani OW 6549 5137 2-Oct-08 1.80 3.08 3.70 10-Aug-09 Singapore Airlines (S$) SIA SP Corrine Png OW 17171 13467 23-May-10 14.60 14.34 20.00 10-Nov-10 South Korea CJO Shopping (W) 035760 KS Jinah Lee OW 1517761 1366 11-Jan-11 250500.00 245200.00 277000.00 11-Jan-11 Hyundai E&C (W) 000720 KS Jinmook Kim OW 9520918 8570 6-Feb-11 86200.00 85500.00 101000.00 6-Feb-11 LG Chem Ltd (W) 051910 KS Samuel Lee, CFA OW 25812590 23235 14-Oct-10 327000.00 389500.00 430000.00 14-Oct-10 LG Display (W) 034220 KS JJ Park OW 13668560 12303 15-Mar-10 35900.00 38200.00 52000.00 12-Jan-11 LG Electronics (W) 066570.KS JJ Park OW 17430060 15689 15-Jan-11 114000.00 120500.00 150000.00 15-Jan-11 LG Innotek (W) 011070 KS Hyunjoon Roh OW 2777523 2500 23-Mar-10 115000.00 138000.00 240000.00 15-Jul-10 Samsung Engineering (W) 028050 KS Jinmook Kim OW 8320000 7489 6-Feb-11 206000.00 208000.00 250000.00 6-Feb-11 SK Innovation Co Ltd (W) 096770 KS Brynjar Eirik Bustnes OW 17938320 16147 5-Oct-07 147500.00 194000.00 165000.00 13-Sep-10 Taiwan First Financial Holding Co Ltd (NT$) 2892 TT Dexter Hsu OW 170341 5912 3-Sep-10 18.45 26.30 33.00 8-Jan-11 Formosa Chemicals and Fibre Corp (NT$) 1326 TT Samuel Lee, CFA OW 594654 20639 9-Dec-10 93.20 104.50 109.00 9-Dec-10 Novatek Microelectronics Corp (NT$) 3034 TT Cynthia Chou OW 54576 1894 3-Dec-10 98.50 91.60 120.00 3-Dec-10 Pegatron Corp (NT$) 4938 TT Gokul Hariharan OW 88901 3086 24-Aug-10 40.15 39.40 52.00 24-Aug-10 Powertech Technology Inc (NT$) 6239 TT Cynthia Chou OW 75829 2632 2-Aug-10 101.50 106.00 130.00 3-Aug-10 Quanta Computer Inc. (NT$) 2382 TT Alvin Kwock OW 229587 7968 13-Oct-10 48.05 59.90 68.00 29-Oct-10 TSMC (NT$) 2330 TT Rick Hsu OW 1911962 66359 19-Jan-11 78.00 73.80 88.00 7-Dec-10 Unimicron Technology Corp. (NT$) 3037 TT Christopher Ma OW 84488 2932 18-Apr-10 40.75 54.60 60.00 18-Apr-10

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Thailand Banpu Public (Bt) BANPU TB Sukit Chawalitakul OW 196202 6385 15-Oct-10 724.00 722.00 906.00 15-Dec-10 LPN Development(Bt) LPN TB Anne Jirajariyavech OW 12396 403 18-Jan-11 8.15 8.40 9.70 17-Jan-11 PTT Public Company (Bt) PTT TB Sukit Chawalitakul OW 940184 30595 23-Mar-10 256.00 330.00 437.00 9-Feb-11 United States Focus Media (US$) FMCN Dick Wei OW 3777 3777 3-Jun-10 15.44 26.38 28.00 29-Sep-10 Source: Bloomberg, J.P. Morgan estimates. *Under applicable law and/or JPMorgan Chase & Co policy, all J.P. Morgan ratings and estimates for this company have been removed.

For details on the AFL methodology, please see the Asia Cash Equities page on mm.jpmorgan.com or contact your J.P. Morgan salesperson/the covering analyst.

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Asia Pacific Equity Research 09 February 2011

LG Electronics

Overweight 066570.KS, 066570 KS

Keep an eye on all industry-first products; accumulate the stock

Price: W120,500

Price Target: W150,000

South Korea Consumer Electronics

JJ ParkAC

(822) 758-5717 [email protected]

Hyunjoon Roh (82-2) 758 5712 [email protected]

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

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

90,000

120,000

150,000

W

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

Pr ice Per fo rman ce

066570.KS share price (W )KOSPI (rebased)

YTD 1m 3m 12m Abs 0.4% 6.2% 23.2% 10.0% Rel 1.6% 8.1% 18.2% -20.3%

• Keep an eye on Optimus 2X and Optimus Black: Following the success of Optimus One, we think LG Electronics’ new flagship models Optimus 2X and Black should significantly contribute to the potential turnaround of its handset business. We are hearing positive feedback and encouraging reviews about Optimus 2X. It has been sold through SKT in Jan-11, and will be launched at global carriers by end-1Q11. Optimus Black, which is a slim and light smartphone, will also be launched at the end of 1Q11.

• MWC (Mobile World Congress) should provide further progress: During the Consumer Electronics Show, LGE proved itself to be a tier-1 player vs. previously a tier-2 player on smartphones and tablets with the latest version of Android phones with high performance along with eye-catching designs. In the upcoming MWC, LGE will introduce Optimus 3D, which is a glass-free 3D phone and its first tablet, and Optimus Pad, which carries an 8.9" multi-touch display and features both 3D/HD video recording. Hence, we expect LGE to show the first-ever 3D phone and tablet at MWC following its industry-first dual-core processor phone Optimus 2X.

• Business reorganization: LGE realigned its five divisions into four by dissolving BS (business solutions) to focus on four major operations. Also, its new growth engines such as CAC (commercial AC), solar, and LED lighting, which belong to the AE division, have become additional profit centers in addition to handset and TV, in our view. This should help LGE continue delivering double-digit CAGR going forward.

• LGE is one of our top picks among Asia technology stocks: We restructure our earnings model upon the reorganization and changes in our major assumptions. We believe that LGE will show the highest operating leverage on the back of the turnaround of its core operations. Due to the prevailing skepticism about its handset margin recovery, however, LGE remains a laggard among its global peers. LGE remains on our Asia Analyst Focus List (AFL) and on the LONG side of our AP Tech Portfolio, and we recommend investors accumulate the stock.

Reuters: 066570.KS; Bloomberg: 066570 KS (financials on a global basis) W B, YE-Dec. FY09 FY10 FY11E FY12E GDR Sales 55,491 55,754 59,409 65,915 52-week range W130,000-91,400 Reuters N/A Operating profit 2,834 224 1,478 2,502 Market cap W17,430B Bloomberg N/A Net profit 2,350 1,282 1,948 3,101 Market cap US$15,719MM 52-week range N/A EPS (Won) - pref. include 14,541 7,347 10,884 17,323 Shares outstanding 145MM Ratio N/A DPS (Won) 1,750 1,750 1,750 1,750 Free Float 60% Avg daily volume N/A Net Debt 4,262 5,250 5,409 3,558 Avg daily value W114.9B Current discount N/A ROE (%) 22.6 10.0 14.2 19.3 Avg daily value US$103.6MM 13-wk avg discount N/A P/E (x) 8.3 16.4 11.1 7.0 Avg daily volume 1.MM shares 52-wk avg discount N/A BPS (Won) 76,778 71,654 81,683 98,151 Index 2,046 EV/EBITDA (x) 5.2 14.2 7.7 5.1 Exchange rate W1,109/US$1 Quarterly EPS (Won) 1Q 2Q 3Q 4Q Date of price 09-Feb-11 EPS (FY10) 4,188 4,784 42 -1,431 Price Target W150,000 EPS (FY11)E 1,028 3,308 3,781 2,767 Consensus PT W140,000 EPS (FY12)E 4,006 4,904 4,674 3,740 Difference (%) 7% Source: Company data, Bloomberg, J.P. Morgan estimates.


Global Logistic Properties Ltd

Overweight GLPL.SI, GLP SP

3QFY Mar 11 results preview: look for China leasing momentum

Price: S$2.08

Price Target: S$2.90

Singapore Real Estate

Christopher Gee, CFAAC


Joy Wang (65) 6882-2312 [email protected]

J.P. Morgan Securities Singapore Private Limited

1.9

2.2S$



GLPL.SI share price (S$)FTSTI (rebased)

Global Logistic Properties Ltd (Reuters: GLPL.SI, Bloomberg: GLP SP) $ in mn, year-end Mar FY11E FY12E FY13E FY14E Revenue ($ mn) 485 568 639 761 Net Profit ($ mn) 761.9 632.1 632.4 675.8 EPS ($) 0.17 0.14 0.14 0.15 DPS ($) 0.00 0.00 0.00 0.00 Revenue growth (%) 17.7% 17.1% 12.4% 19.1% EPS growth (%) NM 0.0% 0.0% 6.9% ROCE 5.9% 4.9% 5.2% 5.8% ROE 18.8% 9.2% 8.5% 8.3% P/E (x) 9.9 12.0 12.0 11.2 P/BV (x) 1.2 1.1 1.0 0.9 EV/EBITDA (x) 4.5 4.3 4.3 3.6 Dividend Yield 0.0% 0.0% 0.0% 0.0%

Shares O/S (mn) 4,596 Market cap ($ mn) 7,506 Market Cap (S$ mn) 9,559 Price (S$) 2.08 Date Of Price 09 Feb 11 Free float (%) 45.0% 3mth Avg daily volume (mn) 13.89 3M - Average daily Value (S$ mn) 30.14 Average 3m Daily Turnover ($ mn) 23.67 FTSTI 3,185 Exchange Rate 1.27 Fiscal Year End Mar

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

• GLP reports 3Q FY Mar 11 results on 11 Feb: GLP is expected to report its 3QFY11 results after market close on Friday 11 Feb, which will be the first post-listing financial statements from the group. We expect GLP’s 3Q FY Mar 11 PATMI to be US$80million, which would show strong growth versus the previous corresponding period last year.

• Leasing momentum is key operational driver. GLP's leasing momentum in China in 1H FY11 was at an annualized rate of 1.2million sqm (versus 3.4million sqm completed portfolio in China). Strong customer demand for GLP's China facilities underpins the group's robust growth trajectory and is supportive of a positive valuation for GLP's development pipeline.

• Recent share price weakness on macro concerns creates an attractive buying opportunity. As compared to its IPO pricing of S$1.96/share, the shares have outperformed both the FTSE Straits Times index as well as the FTSE EPRA/NAREIT Asia index since the listing in mid Oct 2010. Any recent share price weakness related to China's rate hikes and policy tightening appears unwarranted, given the group’s US$1.2billion of cash (and US$280million per annum of EBIT from Japan) which insulates the group from higher working capital costs. Higher capital costs in China should reinforce the trend of outsourcing logistics real estate by manufacturers, retailers and third-party logistics service providers to GLP, whilst raising entry barriers to less well-financed competitors.

• Overweight rating maintained, as is our end Dec 2011 target price of S$2.90/share for GLP, based on our S$2.94/share SOTP valuation. Key risks to our rating and price target are: 1) volatility in its net asset value with JPY and RMB fluctuation versus USD; 2) Management’s inability to deploy capital effectively in accretive projects would also adversely affect our valuation of the stock.

Asia Pacific Equity Research 28 January 2011

Taiwan Life Insurance

FX loss likely to materialize in January

Taiwan Insurance - Life

Dexter HsuAC

(886-2) 2725-9868 [email protected]

J.P. Morgan Securities (Taiwan) Limited.

Sunil Garg (852) 2800-8518 [email protected]

J.P. Morgan Securities (Asia Pacific) Limited

• Better-than-expected result last December was a surprise. Though NT$ appreciated sharply during the “mid-day” last December, Cathay Life and Shinkong Life reported net profits of NT$750MN and NT$63MN, respectively, for that month. While the Street started to attribute the earnings result to the improved hedging strategy, we believe the better-than-expected results could be attributed to (1) the intervention by the government (i.e. NT$ appreciated by only 1.4% based on the closing price vs. 4.7% if based on the mid-day price); (2) MTM gains on the NDF contracts – due to the anticipation of NT$ appreciation, the cost of NDF contracts increased substantially and life insurers which hold the hedging contracts benefited from the MTM gains.

• Life insurers will likely see substantial FX losses in January. As the CBC started to close the gap between the closing price and the mid-day price in January, NT$ has appreciated by 3.6% based on the closing price. While the NDF contracts were already marked to market last December (i.e. limited buffers in January), we expect life insurers to book substantial FX losses in January or they have to realize more gains by disposing their stock investments. Based on our estimates, the FX losses for Cathay, Shinkong and Fubon could be NT$5.4BN, NT$4.3BN and NT$1.5BN. For Shinkong, we estimate one third of the FX losses would be reflected in the book value due to accounting classification.

• Book profit in life insurers to fund rising weighting in banks. We believe the Street has yet to factor in higher hedging costs for 2011 as the I/B/E/S consensus estimates are still high (i.e. 30%-40% higher than our forecasts). Cathay’s (2882 TT; N) adjusted valuation (i.e. taking out unrealized property gains from the market cap) of 1.7x appears to be unattractive if compared to its profitability outlook. We would book profit on Shinkong (2888 TT; N) as the expectation has been too high. Though Fubon’s (2881 TT; N) superior ROE of 10%-11% should be sustainable due to the most diversified business mix, rising liability costs due to re-pricing of the interest-sensitive annuities could cap the earnings growth.

Summary of valuation 1/27/2011 Ticker Mkt Cap Stock Price Dividend

(US$MN) Price Target +/- Rating 10E 11E 12E 10E 11E 12E 10E 11E 12E YieldLife InsurersFubon 2881 TT 11,905 40.4 43.0 6% N 14.7 15.2 15.1 1.62 1.62 1.59 11.1% 10.7% 10.6% 3.7%Cathay 2882 TT 18,740 53.6 54.0 1% N 56.0 46.5 86.9 1.82 1.72 1.64 4.4% 5.2% 2.8% 0.9%Shinkong 2888 TT 4,255 14.7 14.0 -4% N 48.4 nm 311.6 1.04 1.08 1.16 2.9% -2.5% 0.5% 0.0%

ROE (%)P/E (x) P/B (x)*

Source: J.P. Morgan estimates. * We excluded the unrealized property gains from Cathay's and Shinkong's market cap when calculating the P/B. Share prices are as of 27 January 2011.


China banks

Another 25bps interest rate hike moderately positive to China banks. Buy on weakness

China Banks

Samuel ChenAC


Cindy Xu (852) 2800-8502 [email protected]



PBOC benchmark rates

• Blended impact on banking spreads and earnings is positive. PBOC announced another 25bps interest rate hike for 1-year lending and deposit rates, effective from today. Meanwhile, demand deposit rate was also adjusted up by 4bps and rates of more than 1-year deposits were increased by 35bps-45bps vs. 20bps-23bps rate hikes for loans with over 3 years maturity. Although the rate hike appears asymmetrical at first glance, we believe the blended impact on banks’ earnings is still modestly positive.

• We estimate current rate hike structure might on average drive up banking spreads by 7bps, NIM by 1bps and net income by 1% as 1) more than 90% of the deposits are concentrated within 1 year maturity, so the impact of a 35bps rate hike for medium and long-term deposits is negligible. 2) Banking spreads could widen further due to the rate of demand deposits (which accounted for nearly 50% of total deposits) but was only raised by 4bps compared with the 25bps hike for loans. 3) Inter-bank rate and investment yield will also rise over time post the benchmark rate hike. We expect asset yields will still pick up faster especially as the significant enhancement of credit pricing power enjoyed by banks in the current environment will undoubtedly help to continue contributing to further NIM expansion and earnings growth as already seen in the recent increase in mortgage prices.

• Small and medium-size banks could benefit more. Thanks to higher L/D ratio and shorter credit re-pricing period, we believe small and medium-size banks would still benefit a bit more than big banks in the rising rate environment and the increasing loans yields will outweigh higher funding cost pressures, leading to better NIM expansion.

• Maintain positive stance on the sector. Although inflation and tightening concerns may continue to dampen near-term sentiment, and prevent any significant re-rating, we believe the market weakness could be a buying opportunity given the very clear outlook for solid earnings growth and appealing valuation. A few banks have already announced more than 50% y/y earnings increase in 2010 and policy overhang on provision was also partly dismissed. We firmly believe asset quality concerns would be alleviated by 1H11 when the banks announced 1Q11 and 2Q11 results. Our top picks are China Minsheng, ICBC, Citic. We also like Bocomm at current valuation level. Within the A-share space, wee like Industrial Bank, SPDB and China Misnheng.

Blended impact of rate hike Avg lending yield impact 23bps Avg deposit cost impact 17bps Banking spread chg 7bps Asset yield chg 17.9bps Funding cost chg 17.3bps NIM chg 0.6bps FY10E earnings chg 1.0% Source: J.P. Morgan estimates

Old New Chg Deposits Demand 0.36% 0.40% 0.04% 3M 2.25% 2.60% 0.35% 6M 2.50% 2.80% 0.30% 1 Year 2.75% 3.00% 0.25% 2 Years 3.55% 3.90% 0.35% 3 Years 4.15% 4.50% 0.35% 5 Years 4.55% 5.00% 0.45% Loan 6M 5.35% 5.60% 0.25% 1 Year 5.81% 6.06% 0.25% 1- 3 yrs 5.85% 6.10% 0.25% 3- 5 yrs 6.22% 6.45% 0.23% Above 5 yrs 6.40% 6.60% 0.20%

Source: PBOC


Daegu Bank ▲ Overweight

Previous: Neutral

005270.KS, 005270 KS

Buy on reduced risks related to M&A and FHC formation ▲

Price: W16,750

Price Target: W20,000 Previous: W15,500

South Korea Banks/Bank-centric FHCs

Scott YH SeoAC

(82-2) 758 5759 [email protected]

Jaehee Kim (82-2) 758-5733 [email protected]


13,000

16,000

19,000

W




YTD 1m 3m 12m Abs 0.9% -2.9% 9.5% 17.1% Rel 2.1% -1.0% 4.5% -13.2%

Daegu Bank (Reuters: 005270.KS, Bloomberg: 005270 KS) Year-end Dec (W in mn) FY10A FY11E FY12E FY13E Operating Profit (W bn) 563 539 594 665 Net Profit (W bn) 227 284 335 389 Cash EPS (W) 1,721 2,151 2,532 2,943 Fully Diluted EPS (W) 1,721 2,151 2,532 2,943 DPS (W) 300 425 500 600 EPS growth (% ) 33.4% 25.0% 17.7% 16.2% ROE 12.0% 13.2% 13.6% 13.9% P/E 9.7 7.8 6.6 5.7 BVPS (W) 15,234 17,393 19,819 22,666 P/BV 1.1 1.0 0.8 0.7 Div. Yield 1.8% 2.5% 3.0% 3.6%

52-wk range (W) 17,600 - 12,450 Market cap (W mn) 2,213,094 Market cap ($ mn) 2,003 Shares outstanding (mn) 132 Fiscal Year End Dec Price (W) 16,750 Date Of Price 09 Feb 11 Avg daily value (W mn) 12,087.2 Avg daily value ($ mn) 10.9 Avg daily vol (mn) 3.6 KOSPI 2,046 Exchange Rate 1,104.68


Bloomberg JPMA SEO <GO>

• We are raising our rating on Daegu Bank (DGB) to OW from N on the back of: (1) substantially removed uncertainties related to M&A and FHC formation, and (2) our NP forecast increase by 12%-14% for FY11-12. We also raise our DDM-based PT (Dec-11) to W20,000 from W15,500 (Jun-11), implying 9.3x FY11E EPS and 1.1x FY11E BV. Of note, we believe larger banks such as KB Financial and Shinhan Financial would outperform smaller peers at least during an early stage of earnings recovery cycle, which we expect to commence in 1Q11.

• Broadly in-line 4Q10 results: DGB’s 4Q10 NP came in at W44 billion, which was slightly below our estimate of W51 billion and the Bloomberg consensus of W49 billion. Higher-than-expected credit cost (loan loss provision + loss from NPL disposal) was the main reason for the less-than-expected earnings for DGB.

• Substantially lowered execution risks on FHC formation and M&A: As the current share price exceeds the put-back option price (W15,043) in relation to the bank’s transformation into a FHC, DGB is expected to complete the transformation smoothly in March or April 2011 without a sizable share buyback from the dissenting shareholders toward the FHC formation. On top of that, we increasingly believe DGB to be a standalone without being involved in major banking sector M&A, at least for the next couple of years.

• Upbeat guidance on FY11 earnings: DGB guided for W320 billion of NP in FY11, equivalent to +40.7% Y/Y growth. Major assumptions by the company are 9% loan growth and 65bp of credit cost; our revised FY11 estimates for each are +7% Y/Y and 80bp, respectively.

• Key risks to our PT include unexpected regulatory changes that could affect our view on the company, as well as potentially shareholder-unfriendly announcement(s) related to DGB’s acquisitive growth strategy(s).


Hyundai Development Company

Neutral 012630.KS, 012630 KS

Reiterate Neutral; order flow weak, provisioning larger than expected, but more visibility of land bank buying ▲

Price: W35,400

Price Target: W40,000 Previous: W38,000

South Korea Construction

Jinmook KimAC



20,000

30,000

40,000

W




YTD 1m 3m 12m Abs 3.2% -3.8% -1.7% 8.9% Rel 4.4% -1.9% -6.7% -21.4%

Bloomberg JPMA KIM <GO>

• Weaker 4Q results: Revenue rose 45%YoY to W907bn bolstered by solid revenue recognition of in-house divisions, in-line with our expectation. However, OP fell 43%YoY to W44bn due to a larger than expected provisioning of unsold housing units (W72bn) in Ilsan and Ulsan. In 2010, the company’s total new orders fell 22%YoY to W3.2tn given its 100% exposure to domestic construction. New orders of civil fell 50%, architecture fell 32%, and in-house housing orders shrank 20%.

• Outlook still mixed in 2011: We forecast new order growth of 6%YoY in 2011 at W3.3tn. We assume slightly lower (-5%yoy) new orders for contract housing reflecting enhanced competition in reconstruction projects in Seoul. Also, we assume flat growth in civil engineering new orders at W500bn. The only upside potential we see is in-house contracts, as we think land bank acquisition is likely within 2011.

• Our rationale on land bank buying: The company has good cash inflow from profitable in-house projects now. Also, we think it needs to buy more land as some of the existing land banks are facing difficulties in terms of the rezoning process. Therefore, in our view, the company is likely to start buying land banks once it becomes more confident about the housing market recovery. In particular, we recommend investors watch the presale results of Suwon P-3, which we think will act as a catalyst for the company in terms of its confidence in further land purchases.

• Reiterate Neutral rating: Hyundai Dev was the last to report 2010 results and our overall read on domestic housing from this earnings season is mixed. We believe the domestic housing cycle is in a mild recovery mode. However, this is likely to be a positive only as far as normalizing excessive unsold units and it is still too early to expect upside in new housing orders. The recent risk-unwinding rally of housing-exposed companies suggests this is well priced in already.

• Valuation: PT lifted by 4.8% to W40,000 reflecting higher operating value – we raise EV/EBITDA multiple to 5.2x as we reduce the discount relating to the land bank, given our increased confidence of land acquisitions this year. However, this resulted in a higher net-debt position by the end of 2011, so our valuation rises just 4.8% from the previous W38,000 per share.

Hyundai Development – 4Q10 earnings results summary Valuation (Won in billions) 4Q10A 4Q10E Diff. (%) Consensus 4Q09A YoY (%) 3Q10A QoQ (%) 2011E 2012E Sales 907 917 -1.1% 784 625 45.0% 623 45.6% EPS (Won) 4,313 3,577 Operating Profit 44 94 -53.4% 92 77 -42.8% 79 -44.4% P/E (x) 8.2 9.9 OP margin % 4.9% 10.3% - 11.7% 12.3% - 12.7% - ROE (%) 13.1 9.8 Net Profit 4 79 -94.5% 65 46 -90.6% 45 -90.4% P/B (x) 1.0 0.9 NP margin % 0.5% 8.6% - 8.3% 7.4% - 7.2% - Source: Company, J.P. Morgan estimates. Share price data as at 9 February.


PTT Public Company

Overweight PTT.BK, PTT TB

GSP#6 COD by end 1Q10 (or sooner) ▲

Price: Bt330.00

Price Target: Bt437.00 Previous: Bt395.00

Thailand Integrated Oils

Sukit ChawalitakulAC (66-2) 684-2679 [email protected]

JPMorgan Securities (Thailand) Limited

Brynjar Eirik Bustnes, CFA (852) 2800-8578 [email protected]


200

260

320Bt



PTT.BK share price (Bt)SET (rebased)

YTD 1m 3m 12m Abs 5.3% 4.7% -1.5% 55.3% Rel 10.1% 9.8% 4.8% 12.4%

PTT Public Company Limited (Reuters: PTT.BK, Bloomberg: PTT TB) Bt in mn, year-end Dec FY09A FY10E FY11E FY12E Revenue 1,586,174 1,724,086 1,804,088 1,938,834 Net Profit 59,547.0 76,761.9 83,475.8 105,522.2 EPS (Bt) 21.01 27.09 29.46 37.24 DPS (Bt) 8.50 9.50 10.00 10.50 Revenue growth (%) -20.7% 8.7% 4.6% 7.5% EPS growth (%) 14.8% 28.9% 8.7% 26.4% ROCE 15.1% 16.3% 17.8% 22.0% ROE 14.7% 16.9% 16.4% 18.4% P/E (x) 15.7 12.2 11.2 8.9 P/BV (x) 2.2 1.9 1.7 EV/EBITDA (x) 7.9 6.6 5.9 4.6 Dividend Yield 2.6% 2.9% 3.0% 3.2% Adjusted EPS (Bt) 19.65 25.86 29.63 37.24 Adjusted P/E 16.80 12.76 11.14 8.86

Shares O/S (mn) 2,849 Market cap (Bt mn) 940,184 Market cap ($ mn) 30,575 Price (Bt) 330.00 Date Of Price 09 Feb 11 Free float (%) 30.0% 3mth Avg daily volume 6,251,853.00 3M - Average daily Value (Bt mn) 2,119.98 Average 3m Daily Turnover ($ mn) 68.94 SET 970 Exchange Rate 30.75 Fiscal Year End Dec


<Bloomberg page: JPMA CHAWALITAKUL>

• According to the PTT, its gas separation plant#6 (GSP#6) is now operating consistently at 95% capacity. While the plant remains under test-run, PTT expects to declare commercial operations (COD) by the end of this quarter—at the latest.

• Ethane output doubled: We view GSP#6’s commissioning as a critical milestone—more than one year after the original schedule (due to legal issues). As PTT’s biggest gas plant, GSP#6 raises its overall treatment capacity by 49% to 2,640MMcfd. And, critically, GSP#6 boosts the group’s ethane supply (to petrochemical division) 118% to 2.4MMtpa.

• Buoyant gas volume outlook: PTT cannot currently book income from GSP#6 (pre-COD). However, it is already receiving revenues from gas sales (test-run) and these can be charged off against investment costs. But, with GSP#6 commissioned by end of this quarter (if not sooner), we project the company's gas sales to pick up dramatically from 2Q11 onwards. After a projected 9.2% volume growth in FY10E (this now appears too conservative), we forecast another 6.6% expansion in gas sales this year—coming strongly from the petrochemical division.

• EPS and PT adjustments: We adjust our core EPS estimates for FY10E/FY11E/FY12E by 2%/0%/6%. The small upward adjustment for FY10E is driven by better profits at PTTEP (actual). The upgrade for FY12E is underpinned by forecast higher contributions from PTTEP, TOP and higher gas sales volume. We roll over our PT to Dec-11, setting it at Bt437/share (from Jun-11 PT of Bt395). In addition to the roll over effect, the PT increase is underpinned by higher est. DCF valuation of PTTEP, higher price targets for PTTCH, TOP and PTTAR. Our PT is derived from SOTP valuation (p.2 pie chart breakdown), with 10% implied holding company discount. Key risks: (1) Low petroleum prices, (2) Low gas demand and (3) Negative changes to regulations.


Rallis India Limited Initiation

Overweight RALL.BO, RALI IN

Ensuring a good harvest

Price: Rs1,250.00

Price Target: Rs1,640.00

India Agriculture/Fertilizers

Princy SinghAC


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

J.P. Morgan India Private Limited

600

1,000

1,400

Rs



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

YTD 1m 3m 12m Abs -11.6% -7.2% -10.7% 71.5% Rel 1.7% 0.3% 4.1% 60.0%

Rallis India Limited (Reuters: RALL.BO, Bloomberg: RALI IN) Rs in mn, year-end Mar FY09A FY10A FY11E FY12E FY13E Adjusted EPS (Rs) 33.06 50.84 65.15 90.94 114.15 EPS growth (%) -45.3% 53.8% 28.1% 39.6% 25.5% Revenue 8,367 8,787 10,264 13,331 15,873 Net Profit 720.2 1,014.9 1,266.9 1,768.5 2,219.8 DPS (Rs) 18.72 21.29 18.99 31.81 46.58 Revenue growth (%) 24.0% 5.0% 16.8% 29.9% 19.1% EBITDA 1,303 1,667 2,014 2,659 3,308 EBITDA margin 15.6% 19.0% 19.6% 19.9% 20.8% P/E (x) 21.2 15.5 19.6 14.0 11.2 P/BV (x) 4.3 3.6 4.7 3.9 3.2 EV/EBITDA (x) 21.5 16.3 13.5 10.1 8.0 Dividend Yield 1.5% 1.7% 1.5% 2.5% 3.7%

Shares O/S (mn) 19 Market cap (Rs mn) 24,309 Market cap ($ mn) 537 Price (Rs) 1,250.00 Date Of Price 09 Feb 11 Free float (%) 44.2% 3-mth trading value (Rs mn) 45.3 3-mth trading value ($ mn) 1.0 3-mth trading volume (mn) 0.0 BSE30 17,776 Exchange Rate 45.31 Fiscal Year End Mar


• Initiate with Overweight, price target of Rs1640: Our PT implies potential upside of 31% from current levels. Rallis is a leading player in the Indian crop protection market with 13% market share. It also has strong international operations – it undertakes contract manufacturing for large global players and also sells its own registered products in Latin America.

• Rallis well positioned to benefit from growing domestic crop protection market: Crop protection market (pesticides) in India is estimated by the company to be US$1.1B, growing at 10%-12% per annum driven by rising farm incomes, increasing focus on productivity and paucity of farm labour. We see these as sustainable themes, which will continue to drive strong growth for pesticides in India. Strong brands, fresh product portfolio (~30% of products less than 3 years old), and a strong distribution network with 1500 dealers and 30,000 retailers across India are driving domestic market share gains for Rallis. Recently acquired Metahelix Life Sciences will also allow Rallis to scale up presence in the fast growing seeds market in India.

• Enhanced capacity to address growing international demand: Rallis has set up a new plant in Dahej which will cater to international markets. Rallis is seeing strong enquiries from customers for contract manufacturing and 1/3rd of the plant’s capacity has been tied up. Rallis should also benefit from excise and tax savings, as the plant is located in a SEZ. We estimate a CAGR for international business revenue of 31% over FY10-FY13E.

• Solid capital management: Rallis’ capital management is best in class versus domestic peers (based on FY10 debtor days). It operates with net ‘negative’ working capital and has sustainable free cash flows. We estimate cash on its balance sheet will rise to Rs800MM by FY13E from Rs119MM in FY10.

• Price target, valuation, key risks: Our PT of Rs1,640 is based on 16x Sep-12 P/E, a 25% premium to domestic peer group. We think the premium is supported by Rallis’ above par growth, stronger balance sheet and higher capital efficiency ratios. Key risks include delay in expansion plans, inability to scale up seeds business, raw material costs and adverse weather.


United Spirits Limited

Overweight UNSP.BO, UNSP IN

3Q FY11 : Marginally below estimates; re-calibrating expectations ▼

Price: Rs1,056.70

Price Target: Rs1,362.00 Previous: Rs1,660.00

India Beverages

Latika Chopra, CFAAC



1,000

1,300

1,600

Rs



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

YTD 1m 3m 12m Abs -28.0% -22.6% -29.3% -17.4% Rel -13.3% -11.6% -12.7% -27.0%

United Spirits Limited (Reuters: UNSP.BO, Bloomberg: UNSP IN) Rs in mn, year-end Mar FY09A FY10A FY11E FY12E FY13E Revenue 54,681 63,623 70,644 83,163 97,480 Net Profit 1,875.0 3,025.7 4,165.0 5,536.8 6,986.0 EPS (Rs) 21.02 25.82 34.03 45.24 57.08 DPS (Rs) 2.41 2.68 3.40 4.52 5.71 Revenue growth (%) 18.2% 16.4% 11.0% 17.7% 17.2% EPS growth (%) 12.7% 22.9% 31.8% 32.9% 26.2% ROCE 10.7% 11.6% 11.4% 13.2% 14.4% ROE 8.4% 9.8% 10.5% 12.6% 14.1% P/E (x) 50.3 40.9 31.0 23.4 18.5 P/BV (x) 4.0 3.3 3.1 2.8 2.4 EV/EBITDA (x) 11.2 10.2 9.9 8.0 6.9 Dividend Yield 0.2% 0.3% 0.3% 0.4% 0.5%

Shares O/S (mn) 131 Market cap (Rs mn) 138,211 Market cap ($ mn) 3,051 Price (Rs) 1,056.70 Date Of Price 09 Feb 11 Free float (%) 3mth Avg daily volume 253,824.00 3M - Average daily Value (Rs mn) 345.35 Average 3m Daily Turnover ($ mn) 7.62 NIFTY 5,254 Exchange Rate 45.31 Fiscal Year End Mar


• Earnings marginally below estimates: United Spirits registered LTL (ex-Balaji) net sales, EBITDA and PAT growth of 17%, 18% and 7% respectively for 3Q FY11. While sales growth was in line with estimates, EBITDA was c3% below our expectations on account of slightly higher-than-anticipated input costs. UNSP consolidated financials for Balaji Distilleries (a toll manufacturing unit) starting Apr'10 in 3Q FY11, which led to higher reported sales, though EBITDA and earnings were not affected much. Whyte & Mackay’s performance was subdued during the quarter.

• Volume growth of 14%, LTL price/mix growth of 7%: Overall net sales growth was 21% (adjusting for Balaji merger), supported by volume growth of 14%. During 9M FY11, UNSP registered 12% volume growth, in line with our full year FY11 volume growth estimate of 12%. Faster growth for premium brands (c14% in 9M FY11) is aiding healthy price/mix growth.

• Re-calibrating ENA cost assumptions: During 3Q FY11 ENA cost/case was up 3.5% q/q, although it was down 6% on a y/y basis. While management expects raw material tailwinds to strengthen starting in 4Q FY11, the quantum of decline is likely to be lower than our estimate, and we now build a 7% decline in ENA costs in FY11E and flat costs in FY12E (vs our earlier expectation of c10% decline). Diversion of molasses towards ethanol manufacture has kept the ENA price decline under check.

• Increased net debt (by Rs2.5B) on a sequential basis in 3Q FY11 was largely attributable to capex loans (acquisition of Pioneer Distilleries), working-capital-related loans, and exchange difference for Whyte & Mackay acquisition loans. As of Dec. 10, consolidated net debt was cRs56.6B.

• Earnings estimate revisions: Our EPS estimates for FY11-12 are lowered by 14-19% on account of 1) incorporation of 5.2MM shares issued for Balaji Distilleries merger which leads to c5% EPS dilution, 2) higher ENA and packaging cost assumptions, 3) higher interest charges on account of increased debt levels and potential debt re-financing at higher rates, and 4) lower EBITDA estimates for Whyte & Mackay.


Malaysia Strategy

Inflation less of a threat

Malaysia Hoy Kit MakAC


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

Sriyan Pietersz (662) 684 2670 [email protected]


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


Figure 1: FBMKLCI

1200

1300

1400

1500

1600

Feb-10 Jun-10 Oct-10 Feb-11Source: Bloomberg

• Net exporter of oil and oil seeds cushions inflation fears. With global food commodity prices climbing and oil prices trading in the US$90-100 range, inflation has been a key concern among EM investors. Our ASEAN Strategist Sriyan Pietersz is of the view that rotational weakness in other ASEAN markets is less likely to affect Malaysia, as a deeply under-held market among foreign investors, with strong support from local institutional fund flows. Malaysia is less vulnerable to commodity-linked price inflation pressures given its status as a net exporter of edible oils and crude oil.

• Subsidies in place with gradual removals. Another factor that should keep Malaysia’s inflation at bay is the elaborate subsidy scheme that shields consumers from much of the movement in global food and oil prices. Subsidy liberalization began since July 2010, but at a measured pace of five years until market prices are attained. Expected toll rate hikes were also frozen for five years for two major highways of PLUS Expressways and MTD Capital.

• Prudent Central Bank. As an early mover on interest rates in ASEAN, the Malaysian central bank is expected to remain vigilant on inflationary pressures, supporting investor confidence. J.P. Morgan Economics forecast inflation to average 2.9% in 2011. We earlier expected OPR moving from 2.75% to 3.25% by 1H2011, which remains mildly accommodative. However, the latest BNM rate meeting minutes suggest that other non-rate tightening measures such as statutory reserve requirements (SRR) and macro-prudential measures may be employed instead. BNM’s track record in staying ahead of the curve is exemplified by in the past—both in 2006 during another period of energy price hike, and last year when BNM front-loaded rate hikes ahead of the rest of the region.

• Market implications. In our view, the market should remain resilient as it is under-owned, with average allocations of EM portfolio managers at just 1.8% relative to a MSCI neutral weight of 2.8%, according to EPFR data. Valuations also appear attractive relative to history, with FY11 consensus P/E of 15x, its 10-year average. In a mild inflation scenario, sectors we think will benefit the most include property and banks. Our top pick in the property sector is IJM Land (OW, IJMLD MK), as a value plus growth play. Our top pick for banks is RHB Capital (OW, RHBC MK) as we believe the bank offers significant upside on loan growth, margins and valuations due to innovation on “bottom of the pyramid” consumer banking. Top picks for commodity/energy stocks as our primary plays on commodity prices include Sime Darby (SIME MK), leveraged to CPO prices; and Petronas Chemicals (OW, PCHEM MK) where product prices (but not raw material costs) are linked to oil prices.


China Shenhua Energy

2010 Net Income below consensus due to decreasing margins - ALERT

Mining

Nathan M. Zibilich, CFAAC *

(852) 2800 8570 [email protected]

Wenwen Wang


601088.SS, 601088 CH Neutral Rmb23.46

09 February 2011

1088.HK, 1088 HK Neutral HK$30.60

09 February 2011

* Registered/qualified as a research analyst under NYSE/NASD rules

• 2010 EPS of Rmb1.89 below consensus of Rmb1.92. Shenhua reported preliminary full year 2010 EPS of Rmb1.89 (excluding extraordinary items) vs. JPMe of Rmb1.94, or a 23% rise over 2009 EPS of Rmb1.53. Total sales revenue in 2010 grew 25% y/y to Rmb152 billion, which is 5% higher than our forecast of Rmb145 billion. Operating profit stood at Rmb54 billion, implying a 21% increase over 2009 vs. our forecasts of Rmb56 billion. Net margin for the whole year of 2010 reached 24%, one percentage point lower than 2009 vs. our forecast of 27%.

• 2010 coal sales volume of 293 million tons, or a 15% y/y rise. Shenhua released operational results for full year 2010 recently. Coal production reached 225 million tons in 2010 (+7% rise from 2009), which is slightly lower than our forecast of 229 million tons. Coal shipments increased by 15% y/y to 293 million tons vs. our forecast of 272 million tons. Total power output dispatch was recorded at 131 billion kwh for full year 2010, or a 35% y/y rise, compared to JPMe of 137 billion kwh. Turnover of self-owned railway transportation for 2010 stood at 150 billion ton km, (+9% y/y growth), which was in line with our forecasts.

• Shenhua would change its pricing mechanism for spot coal to be based on the weekly thermal coal price index around the Bohai Sea. We believe that Shenhua’s adoption of its weekly pricing mechanism is an attempt to improve profitability on spot sales. In addition we see Shenhua’s self-produced coal volume growth as slowing. In 2010, coal production growth declined to 7% from a CAGR of 15% over 2007-09 periods.

Table 1: Shenhua Energy 2010 income state results summary Unit: Rmb billion except for per share data

Unaudited y/y change JPM forecasts Revenue 152.1 25% 144.8 Operating profit 53.6 21% 56.5 Profit before tax 53.3 21% 54.7 Net profit attribute to shareholders 37.2 23% 38.5 EPS1 (Rmb) 1.89 23% 1.94

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

Table 2: Shenhua Energy balance sheet results summary Unit: Rmb billion except for per share data

2010 2009 y/y change Total assets 339.3 310.5 9.3% Total liabilities 111.3 113.8 -2.2% Equity 196.9 169.3 16.3% BVPS (Rmb) 9.9 8.5 16.3% ROE2 20.5% 19.3% +1.2 percentage points

Source: Company reports.

Note1,2: Excluding extraordinary items


Globe Telecom

Underweight GLO.PS, GLO PM

4Q10 net 22% below Street, expect 8% downside to Street's 2011

Price: Php779.00

Price Target: Php620.00

Philippines Wireline Services/Incumbents, Wireless Services

James R. Sullivan, CFAAC


Vishesh Gupta (65) 6882 2367 [email protected]


700

1,000

1,300Php



GLO.PS share price (Php)PSE (rebased)

YTD 1m 3m 12m Abs -1.7% -5.1% -6.9% -19.3% Rel 6.3% 2.6% 2.8% -55.5%

Globe Telecom (Reuters: GLO.PS, Bloomberg: GLO PM) Php in mn, year-end Dec FY09A FY10E FY11E FY12E Revenue 63,861 64,107 63,635 65,893 EBITDA 36,462 32,909 31,218 30,838 EBITDA growth (%) -2.5% -9.7% -5.1% -1.2% Recurring profit 12,401 9,390 7,730 7,337 Recurring EPS (Php) 93.33 70.54 58.07 55.12 EPS growth (%) 5.6% (24.4%) (17.7%) (5.1%) DPS (Php) 98.76 76.51 64.77 57.33 EV/EBITDA (x) 4.0 4.6 4.9 4.9 P/E 8.3 11.0 13.4 14.1 Dividend Yield 12.7% 9.8% 8.3% 7.4% FCF to mkt cap (%) 9.1% 8.3% 8.1% 8.0%

52-wk range (Php) 1,035.00 - 745.00 Mkt cap (Php mn) 103,100 Mkt cap ($ mn) 2,376 Shares O/S (mn) 132 Free float (%) 22.1% 3-mth avg trading volume: 45,897 Average 3m Daily Turnover ($ mn) 0.85 PSE 3,878 Exchange Rate 43.40 Price (Php) 779.00 Date Of Price 08 Feb 11


• Street continues to underestimate margin decline: Globe Telecom reported strong top line growth of 7% YoY. 4Q10 revenues were thus 4% ahead of the Street. 4Q10 EBITDA margin at 48.1% was 980 bps below street estimates and thus EBITDA missed by 14%. Reported net income was 22% below Street and we expect 8% downside to Street's 2011 estimates. Globe’s 4Q10 revenue and EBITDA were 1-2% ahead of JPM estimates while net income missed by 2%.

• No special dividend for 2009, 2010 interim at Php31/sh: Globe did not pay out a special dividend for 2009 while declared a 31 peso interim dividend for 2010. This implies an annual payout ratio of 85% for both 2009/10 which is much lower than Street's 2010/11E payout at 101%/94%.

• Strong net adds and ARPU: Globe’s 4Q10 net adds at 356k were the highest since 3Q08. Data ARPU’s largely drove the 6% beat in total wireless ARPU. Total wireless revenue thus came 7% ahead of JPM estimates. Fixed line revenues were in line.

• Broadband net adds weak on higher ARPU’s: Wireless and wireline broadband net adds missed our estimates by 53-23%. 4Q10 wireless broadband net adds at 19k were the weakest since 2Q09 but on the back of higher than expected ARPU's. Blended broadband ARPU at Php527 remained flat QoQ beating our estimates by 5%.

• EBITDA margin misses on rising OpEx/sub: Globe’s OpEx/sub increased by 11% YoY in 4Q10 while network OpEx/sub rose by 14%. 4Q10 EBITDA margin at 48.1% was thus down 763bps YoY.

• 2010 capex below guidance, 2011 guidance at US$500 mn: 2010 capex amounted to Php19.5 bn vs. management guidance at Php21bn. Globe plans to spend US$500mn (Php21.7 bn) in 2011, including US$69 mn carryover from 2010. US$185 mn is allocated for broadband business and US$160 mn for mobile telephony.


Xtep International Holdings Limited

Overweight 1368.HK, 1368 HK

Another strong set of numbers - 24% Q3 order growth - ALERT

Price: HK$5.46

08 February 2011

Apparel, Footwear

Elsa YangAC


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


• Strong Q3 2011 order growth. Xtep announced Q3 2011 trade fair order value growth of 24% y/y after the market close today. Together with Q1’s 23% and Q2's 25% growth, the first nine months’ run rate should be around 24%, exceeding our full-year sales forecast of 19% for Xtep branded products. Management remains confident on the 20% sales growth target for the full year of 2011.

• The upside mainly came from the higher ASP increase in apparels. According to Xtep, Q3 apparel ASP recorded double-digit growth and footwear ASP posted single-digit growth. On the other hand, both apparel and footwear saw double-digit y/y volume growth, reflecting the resilient underlying demand for the products despite the retail price hike (note that Xtep keeps the 60% wholesale discount rate unchanged; therefore, the ASP increase fully reflects the retail price growth). This is similar to the H1 order trends. We currently assume only a low single-digit ASP increase for both apparel and footwear on a full-year basis. Leveraging on the cost control, management expects gradual gross margin improvement in 2011; A&P expense ratio should remain around 11-13% in 2011 and is expected to increase to 12-14% in 2012.

• Solid Q4 2010 retail operations. Q4 2010 SSS growth accelerated to above 10% versus H1’s mid- to high-single-digit rise and Q3’s 8-10% (note that the SSS growth calculation covered over 60% of the total network); retail discounts remained healthy at 15-20%; retail inventory over sales ratio maintained at 4-4.5x. As of December 2010, the company had around 7,000 stores and plans to open 800-1,000 stores in 2011.

• Positive bias on 2011E sales and earnings growth. Based on our calculations, assuming everything else is the same, 5% higher sales growth of Xtep branded products, i.e., 24% growth in 2011E revenue, should translate into 4% earnings upside. However, the company announced its plan to place 50mm shares for the TDR listing. The c.2% placement dilution will offset the potential upside and result in around 2% upside on a net basis. Therefore, we leave our estimates unchanged for now. We currently project 22% and 15% EPS growth for 2010 and 2011, respectively. The stock currently trades at 11x 2011E PER.

• Another set of results reinforced our positive view on the company’s fundamentals. Xtep has consistently delivered better-than-expected and above-the-industry norm results. We remain positive on the company's growth outlook. In our view, the recent share price weakness provides a good entry point. We suggest investors buy before the 2010 results announcement.


Company Visit Note

YungShin Global Holding Corp

Taiwan Pharmaceuticals

Caren HuangAC



3705 TT, Not Covered NT$41.0 price date 9 Feb, 2011 Price performance

0

50

100

150

200

Jan-08 Jan-09 Jan-10

(NT$)

TTY Biopharm TWOTCI rebased

YTD 1M 3M 12M Abs -1% 2% -1% 24% Rel -2% 0% -7% 2%

Source: Bloomberg,

• Founded in 1952, YungShin Global Holding (YSH) manufactures and markets medicine for human and veterinary use. YSH focuses on generic drugs and is the largest wholesale and retailing pharmaceutical company in Taiwan. YSH has plants in Taiwan, Malaysia, the US, and China.

• According to the company, earnings growth momentum this year will come from three factors: 1) a 30% y/y earning pickup from its US subsidiary, Carlsbad technology, as it successfully penetrates major chain stores like Walgreens and CVS, 2) strong revenue growth in health supplements (+30% y/y) and veterinary drugs (+14% y/y), 3) penetrating new export markets: China, India, and other South East Asia countries.

• YSH reported preliminary consolidated revenue of NT$4.2bn (+5% y/y) and EPS of NT$2.4 (+16% y/y) in FY10. Looking forward, management expects to see 20% y/y growth in FY11 consolidated revenue and a 25% y/y jump in EPS. Based on management’s estimate, the stock is trading at 14x FY11 EPS.

NOTE: THIS DOCUMENT IS INTENDED AS INFORMATION ONLY AND NOT AS A RECOMMENDATION FOR ANY STOCK. IT CONTAINS FACTUAL INFORMATION, OBTAINED BY THE ANALYST DURING MEETINGS WITH MANAGEMENT. J.P. MORGAN DOES NOT COVER THIS COMPANY AND HAS NO RATING ON THE STOCK.

Yung Shin (Bloomberg code 3705 TT, Reuters code 3705.TW)

Consolidated, NT$ in millions FY07 FY08 FY09 9M10 Company data Sales 3,737 3,909 4,079 3,071 52-wk range (NT$) 31.7 - 44.5 Net profit 558 503 524 438 Mkt cap. (NT$B) 10 EPS (NT$) 2.20 1.98 2.07 1.73 Mkt cap. (US$MM) 361 DPS (NT$) 2.00 2.00 1.50 0.00 Shares O/S (MM) 254 Net debt (cash)/equity (%) -7% -5% -9% -6% Free float (%) 50 Sales growth (%) 6.3% 4.6% 4.3% 0.3% Avg. daily volume 1 M Net profit growth (%) -5.4% -9.9% 4.3% 24.4% Avg. daily value (NT$MM) 57 EPS growth (%) -5.6% -10.0% 4.5% 24.5% Avg. daily value (US$MM) 2.0 ROE (%) 10.7% 10.1% 10.4% 33.6% Exchange rate (NT$/US$) 28.8 P/E (x) 18.6 20.7 19.8 23.7 Index (TWSE) 9,007 P/B (x) 2.0 2.0 2.0 2.0 Year-end Dec Dividend yield (%) 4.9% 4.9% 3.7% Source: TEJ, Bloomberg.


Asia Pacific Financials Dashboards

Sunil GargAC (852) 2800 – 8518 [email protected] J.P.Morgan Securities (Asia Pacific ) Limited

Joseph Leung (852) 2800 - 8517 [email protected] J.P.Morgan Securities (Asia Pacific ) Limited

Raghav Jain (91 22) 6157 3298 [email protected] J.P. Morgan India Private Limited

LATEST: Loan growth is strong across the regions, and deposits are also catching up. LDR increases at a slower pace, and credit multiplier remains comfortable. Spreads are stable, except long bond rate surged in Indonesia and credit spreads widened in China, India and Indonesia.

OUTLOOK: (1) Volume momentum is likely to continue, supported sound macro environment. (2) Liquidity appears to be better than 2010. (3) Monetary measures in relation to inflation, US monetary policy and Europe issue should cause some uncertainties.

Loans y/y Money supply y/y Cr Mtpr Loan/GDP LDR 3mth rate 10yr bond Cr Spread Latest Latest Latest Latest Latest Latest m/m chg Latest m/m chg m/m chg Australia 3.4% Dec-10 10% Dec-10 0.3x 150% 160% 4.94% -1bp 5.5% -3bp 5bp China 19.9% Dec-10 20% Dec-10 1.2x 120% 67% 2.75% 0bp 4.0% 11bp 55bp Hong Kong 28.5% Dec-10 8% Dec-10 2.7x 238% 62% 0.20% -8bp 2.8% -8bp - India 26.6% Dec-10 17% Dec-10 1.0x 53% 76% 9.30% 30bp 8.2% 24bp 19bp Indonesia 22.4% Nov-10 14% Nov-10 1.5x 27% 79% 6.60% -3bp 8.9% 126bp 25bp Korea 5.5% Sep-10 7% Nov-10 0.7x 114% 152% 3.03% 23bp 4.7% 20bp -1bp Malaysia 13.2% Nov-10 7% Dec-10 1.2x 114% 77% 3.01% 3bp 4.1% 2bp -1bp Philippines 6.6% Sep-10 8% Nov-10 0.7x 32% 57% 2.56% 150bp 7.2% 110bp 10bp Singapore 14.5% Nov-10 8% Dec-10 1.0x 105% 74% 0.44% 0bp 2.6% -9bp 1bp Taiwan 6.7% Nov-10 7% Nov-10 0.6x 145% 64% 0.72% 1bp 1.4% -16bp 9bp Thailand 14.2% Nov-10 5% Dec-10 0.8x 83% 122% 2.40% 25bp 3.8% 7bp -4bp Asia Pacific ex-Japan 15% 10% 107% 90% 3.27% 20bp 4.8% 24bp 14bp

Real GDP Inflation P/E EPS cagr PEG P/B ROE Div EY/BY IVG 10E 10E 10E 11/12 11/12 11E 11E 11E Latest Range Latest Range Australia 2.7% 3.1% 12.0x 8% 1.6 1.90x 16.4% 5.9% 1.4 2.4 - 0.1 21% 0.9 - (0.3) China 10.3% 9.6% 8.5x 16% 0.5 1.58x 20.3% 4.7% 3.0 3.5 - 1.0 -20% 0.6 - (0.3) Hong Kong 6.6% 4.1% 16.2x 16% 1.0 2.31x 14.7% 3.9% 3.2 14.1 - 0.9 -16% 0.6 - (1.9) India 8.5% 8.8% 12.2x 19% 0.6 1.92x 15.4% 1.7% 0.5 2.7 - 0.3 71% 0.8 - (0.5) Indonesia 6.0% 5.4% 9.0x 22% 0.4 2.14x 24.1% 2.4% 0.8 1.2 - 0.5 57% 0.7 - 0.2 Korea 6.1% 4.2% 8.5x 26% 0.3 0.99x 9.0% 2.2% 1.5 3.1 - 0.0 37% 1.0 - (0.3) Malaysia 6.8% 4.2% 13.3x 15% 0.9 2.22x 16.5% 3.1% 1.5 3.2 - 1.2 38% 0.5 - (0.1) Philippines 7.3% 5.3% 13.4x 23% 0.6 1.72x 12.6% 3.3% 0.7 1.0 - 0.1 64% 0.9 - 0.4 Singapore 14.7% 5.0% 12.0x 16% 0.8 1.53x 9.9% 4.2% 2.2 7.1 - 1.1 23% 0.5 - (1.1) Taiwan 10.5% 5.0% 17.5x 16% 1.1 1.58x 7.9% 2.7% 2.6 6.9 - 0.0 47% 1.0 - (0.4) Thailand 7.9% 5.0% 11.5x 18% 0.6 1.52x 13.0% 2.9% 1.8 4.4 - 0.4 31% 0.8 - (0.5) Asia Pacific ex-Japan 8.7% 7.0% 9.9x 17% 0.6 1.60x 17.1% 3.4% 1.6 2.5 - 0.5 30% 0.8 - (0.1) Source: Bloomberg, CEIC, J.P. Morgan estimates. Updated as of 9 Febuary 2011 Note: 3m rate is 3-month interbank rate 10y Yld is 10-year government bond yield Cr Mtpr: Credit multiplier, loan growth to nominal GDP growth LDR is loans to deposits ratio. Cr Spread: Credit spread of JACN series EY/BY is MSCI financial earnings yield to bond yield IVG is Implied value of growth based on MSCI financials

Country Recommendation

Overweight

China Hong Kong Philippines Taiwan Malaysia

Underweight

Australia Indonesia

Neutral

Thailand India Singapore Korea

Table of Contents Page #

Money supply & Loan growth 2

Nominal GDP & loan growth 3

Credit Multipliers 4 CPI & interbank rate 5 Loan-Deposit ratios 6 Interbank rate & bond yields 7

Credit spreads 8 Deposits spreads 9 EPS forecast revisions 10 MSCI financials performance 11


Chemical Reactions - January

Record cotton prices allow PX and MEG spreads to soar

Petrochemicals

Samuel Lee, CFAAC



Sukit Chawalitakul (66-2) 684-2679 [email protected]


Brynjar Eirik Bustnes (852) 2800-8578 [email protected]


Figure 1: Chart of the Month PX, PTA and MEG prices are near record highs despite oil prices 32% off its 2008 peak

-40%-30%-20%-10%

0%10%20%30%

Brent PX PTA MEG

Source: Bloomberg, CMAI Global. Note: Jan 2011 prices divided by peak prices in 2008.

• Higher cotton helps lift feedstock prices: With cotton reaching record highs in Jan, PX, PTA and MEG spot prices also jumped to July 2008 levels, when crude oil was near $150/bbl. But with Naphtha cost only 70% of peak levels, spreads for the whole polyester chain increased significantly in Jan. Butadiene prices rose another 10% in Jan on the back of strong natural rubber prices. Polymer prices such as PE, PP, PVC and ABS were generally flat ahead of the Chinese New Year holidays with reduced demand for PVC during the winter season.

• Honam and Hanwha resume out-performance: Share prices of these two companies were up on average 32% in Jan, followed by companies with polyester feedstock exposure (NPC, FCFC, PCG) at 10%. Thai petrochem names, in particularly IVL, were weaker for the month in line with the SET index, which was down 7%. Formosa Group announced Jan revenue numbers with NPC out-performing the rest of the group on an M/M basis, which is in line with our expectations that 4Q10 would mark the trough for quarterly earnings. LGC announced preliminary net income of W1,977b, +31% Y/Y and 1.2% below our estimates.

• Post-holidays cheers? All eyes are now on the Chinese market after the recent holidays. During the break, crude prices continued to trade higher so it will be interesting to see if petchem prices will follow suit. We believe near-term cotton will be range bound with flooding in Australia possibly reducing the harvest there as a positive catalyst but offset by ICE Futures US exchange to potentially limit speculation in cotton futures. For Ethylene, March will be the start of the maintenance shutdown season in North Asia which means prices are likely to hold as shutdowns will offset increase supply from ME and Thailand.

• Stay with polyester exposure: We continue to believe 4Q10 was the start of a structural change in PX and MEG industry dynamics, which should lead to a multi-year recovery in spreads. While it is unlikely spreads will increase every month, we see dips as buying opportunities.

Table 1: Regional Petrochemical valuations Company Rating LC Price PT Mkt Cap PE (x) PB (x) ROE (%) Yield (%)

(LC) (LC) USD mil FY10e FY11e FY10e FY11e FY10e FY11e FY10e FY11e FPCC UW NT$ 97.0 71.0 31,825 25.9 23.4 4.0 3.9 15.3% 16.7% 3.9% 3.5% Nan Ya Plastics OW NT$ 86.1 88.0 23,286 16.6 13.3 2.4 2.3 15.3% 17.4% 2.2% 5.4% Formosa Plastics N NT$ 102.0 79.0 21,503 14.6 14.3 2.6 2.5 18.3% 17.6% 3.9% 6.1% FCFC OW NT$ 106.0 109.0 20,775 13.3 11.2 2.3 2.1 18.2% 19.6% 4.2% 6.5% LG Chem OW KRW 407,000 430,000 24,475 13.5 12.5 3.5 2.8 30.5% 25.1% 0.9% 0.9% Honam Petrochem UW KRW 344,000 110,000 9,945 16.0 22.6 2.5 2.2 17.0% 10.4% 0.3% 0.3% Hanwha Chemical UW KRW 39,900 15,000 5,079 13.1 18.0 1.9 1.7 15.0% 9.9% 0.9% 1.2% PTTCH UW THB 148.0 109.0 7,306 22.1 15.3 2.1 1.9 9.8% 13.2% 2.0% 2.7% PTTAR OW THB 39.3 40.0 3,808 19.8 12.2 1.9 1.7 9.6% 14.5% 3.2% 3.7% SCG N THB 315.0 311.0 12,311 13.8 13.1 2.8 2.6 23.1% 20.5% 4.0% 3.0% IVL UW THB 42.5 32.5 5,999 28.2 18.7 5.6 3.5 25.9% 23.7% 1.1% 1.6% Source: Bloomberg. J.P. Morgan estimates. Note: Priced as of February 8, 2011.


Chemical Reactions - Polyester

Surge in 2010 China PSF exports suggest switch to polyester from cotton is underway - ALERT

Petrochemicals

Samuel Lee, CFAAC


Brynjar Eirik Bustnes, CFA (852) 2800-8578 [email protected]


China PSF exports by country

2010 2010 Tons % Chg

Total 584,147 45% US 135,969 20% Pakistan 113,763 71% Vietnam 31,922 234% Russia 27,514 211% Indonesia 19,694 221% Iran 20,189 110% India 19,146 210% Others 99,604 31%

Source: China Customs, Emerging Textiles.

• Based on the latest China Customs data presented by Emerging textiles, 2010 Chinese polyester staple fiber (PSF) exports surged 45% and 74% Y/Y in volume and dollar terms respectively. As PSF is mainly used in blends (such as cotton/polyester blends) or stuffing, we believe that the surge in PSF exports suggest polyester substitution of cotton is already underway due to a surge in cotton prices during 4Q10. Interestingly, PSF exports to large cotton producing countries such as India and Pakistan also saw very strong growth, which we believe is an important signal that either cotton has become too expensive or availability is low.

• Separately, CEIC data indicates that the China polyester fiber production growth in 2010 reached pre-crisis level of 3.3m tons, representing 15% Y/Y growth. With the potential for higher economic growth in developed countries, we believe 2011 Chinese polyester production growth will be similar or higher in volume terms. 3.3m tons of incremental polyester (just in China) translates to 2.0m tons of PX, 3.0m tons of PTA and 1.1m tons of MEG demand - which is similar or less than the capacity growth we are forecasting for the individual products in 2011.

• We remain positive on polyester feedstock related plays in Asia, namely NPC and FCFC in Taiwan, PTTAR in Thailand and PCG in Malaysia. While the spreads in PX/PTA/MEG will not make a similar jump every month this year as in January, we do believe that 4Q10 marked the recent trough in spreads and that PX and MEG industry dynamics will structurally improve from that quarter onwards. Given the recent rise in crude oil prices, the fiber industry is eagerly waiting for spot price indications from China after the Chinese New Year break. Our current expectations are for March contract PX/MEG nominations to be either flat or slightly higher despite the big jump in February.

China polyester fiber production growth back to pre-crisis levels Million tons

1.3 1.4 1.52.0

1.6

3.3 3.1

0.9

2.1

3.3

0.00.51.01.52.02.53.03.5

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0%5%10%15%

20%25%30%

Incremental Production Y/Y production grow th % (RHS)

Source: CEIC.


Regain momentum in the smartphone market?

The implications of Nokia potential strategy movement

Technology

Laura ChenAC



Alvin Kwock (852) 2800-8533 [email protected]


Smartphone shipment target by brands

2010E 2011E Y/Y

Nokia 105.5 151.0 43% Apple 46.4 62.9 36% Samsung 26.9 56.5 110% RIM 47.9 59.4 24% HTC 25.3 47.6 88% LG Electronics 6.2 21.5 247% Motorola 13.6 19.9 46% Source: Company data and J.P. Morgan estimates

• Nokia to team up with Microsoft? According to our global communications equipment analyst Rod Hall who covers Nokia, Nokia is most likely to announce to team up with Microsoft for its smartphone product in the CMD on this Friday (see his note published on Feb 7 “Nokia CMD Expectations: Windows Mobile tie up possible.” For details.) Nevertheless, we think it might still take time for Nokia to transform from a hardware platform-focused company to an ecosystem player. We note that general market feedback for Windows Phone 7 was not upbeat due to: (1) the difficulty to differentiate since Microsoft has standardized all the hardware/software/UI and customization is not allowed; (2) few critical features have been removed, eg. copy paste and wireless modem; and (3) limited language support. Microsoft plans to link its cloud services such as App store and Zune with language (local) support. However, current language support is available only in English, French, Italian, German and Spanish. Asian languages will only be ready by the end of 2011. We believe how Nokia can really leverage Microsoft to regain momentum and create differentiation in smartphones will be interesting to watch.

• How about android? We reckon that android has the highest potential to compete with Apple. However, Nokia is more likely to stick with Meego in the high-end market due to better control and this should put the company in a better position to differentiate its products. As many of the operator requirements are not ready yet, only few Meego products are likely to be launched in 2H11. The volume is unlikely to be big in 2011.

• Nokia and RIM will likely lose market share. According to our estimates, Samsung, HTC and LGE will show the strongest YoY growth momentum in 2011. We also see upside to our current iphone estimates. Nokia still holds around 30% share in the global smartphone market, and most of its products are at the lower-end at around US$200-250 running with Symbian S40 OS. RIM is also facing challenges as it has very little products to offer for the next one to two quarters. We believe Nokia and RIM could struggle on market share loss.

• Nokia’s strategy is potentially positive for Asian OEMs. Nokia has been a hardware-centric company with a strong manufacturing capability. If Nokia decides to leverage more on third-party OS for its upcoming products, we would view it as a positive for its Asian ODMs/OEMs such as BYDE and FIH. It might take time to see that materialized, and we believe in 1Q/1H 2011, Nokia’s supply chain could remain muted given its slow shipment growth outlook.


Mobile World Congress Preview

Booming smartphone market

Taiwan Technology

Laura ChenAC



Alvin Kwock (852) 2800-8533 [email protected]


Chart Smartphone market growth outlook

0%10%20%30%40%50%

2008 2009 2010E 2011E 2012E 2013E 2014E-

200.0

400.0

600.0

800.0

Smartphone shipment (m units)

Smartphones as % of total handsets (L)

Source: Gartner.

• Dual core smartphones likely to be the latest trend in the high-end market. During the Consumer Electronics Show in January, many of the handset brands have released their latest dual core smartphone embedded with dual-core 1GHz+ processor such as Motorola Atrix 4G, DROID Bionic and LGE Optimus 2x. We expect more product launches at the upcoming Mobile World Congress (MWC). Due to faster web page load time and multitasking capability, low power consumption, and higher quality game/multimedia experience, we see dual core smartphones as a new trend in the high-end segment. We expect more product launches with dual core CPUs and rich multimedia support such as full-HD, HDMI and 1080p video. The trend of discrete application processor is likely to emerge as Apple, Samsung, LGE and Motorola would go for separate solutions instead of integrated chips in order to have better graphic/powerful engines for their devices. We believe HTC is also looking to move to NVIDIA from Qualcomm Snapdragon for better multimedia performance.

• Low-end smartphones to take off? We believe low-end smartphones (US$150 or below) will be a crucial driver to accelerate smartphone popularity. However, it could take longer to reach the inflection point due to: (1) immature low-cost chipset solutions; (2) lack of operator subsidy in emerging markets; and (3) lack of support for application download (eg. 3D gaming and graphics). However, we expect few select models such as ZTE’s Orange San Francisco (Android 2.1 OS, running with Qualcomm MSM7227 chipset at a price of around US$190 under subsidy) to be launched in the next three to six months. We believe the most hot-selling smartphone will remain in the high-end segment given better features and operators’ push. Mediatek’s Android 3G solution announcement will be the key to watch, in our view.

• Web OS device from HP. In addition to Nokia’s OS strategy change, we expect HP to unveil its revamped WebOS soon. However, due to lack of third-party developer interest, the market share of the WebOS has been sliding in the smartphone market. (HP is covered by our US IT Hardware analyst Mark Moskowitz.)

• Android tablet should hit the market in 2Q. We expect to see the launch of many android tablets at the MWC. However, most of them could still be running with Gingerbread instead of Honeycomb. Vendors are likely to claim that the OS could be upgraded through OTA once Google releases Honeycomb’s source code later this month. Due to limited R&D support from Google, we expect the launch of android’s tablet by late 2Q


India Telecoms

Impact from TRAI's 2G spectrum pricing

India Wireless Services

Malvika GuptaAC



James R. Sullivan, CFA (65) 6882-2374 [email protected]


TRAI has submitted its recommendations on 2G spectrum pricing to the DoT. Compared to 2001 pricing of Rs2.7B/Mhz, under the new recommendations spectrum up to 6.2Mhz would be priced 6.6x higher, at Rs17.7B/Mhz, and Rs45.7B/Mhz (17x) beyond that. On a per-MHz basis, the 2G pricing is 0.5x 3G pricing up to 6.2Mhz and 1.4x 3G pricing beyond that (see Table 1 below). For Bharti, the one-off payment for excess spectrum is in line with 3G pricing, but for Idea we estimate that it is higher. We believe this is negative given that broad market expectations were for 2G pricing to be at a discount to 3G pricing.

• One-off payment for “excess” spectrum: We estimate the liability for Bharti is US$820MM to US$1B, while for Idea it is US$330-475MM. For Bharti, these estimates are not very different from pricing linked to 3G spectrum (US$930MM), but for Idea, we note that under the new pricing regime the payout would be higher – incrementally negative, in our view. We consider three scenarios for pricing 900MHz [1] equal to 1800Mhz, [2] 1.5x 1800Mhz, and [3] 2.5x 1800Mhz.

• Renewal of licenses: For a 10-year renewal period, we estimate the present value of a spectrum renewal charge across the 22 circles would be US$1.2B for Bharti or Rs14/share, US$1.15B for Vodafone, and US$842MM or Rs11.5/share for Idea (using a 10% discount rate). Over the next five years, Bharti has eight licenses up for renewal, Idea 7, and Vodafone 10.

• Implications for new entrants: The recommendations establish a base price for additional spectrum, in our view, with a pan-India move from 4.4Mhz to 6.2Mhz implying a charge of ~Rs32B. This contrasts sharply with the subscriber-linked criteria of spectrum award where a telco would be eligible for the additional 1.8Mhz on reaching subscriber thresholds at no extra cost. Please see Table 7 as an example of what Uninor could be required to pay. The mechanism for awarding the spectrum remains undecided, and if an auction process is adopted, the charge could be higher.

• Pushback expected: While Kapil Sibal, India's Telecom Ministers, has said that the recommendations appear suitable in principle, we expect the telecom operators to push back on the pricing. We estimate the impact on Bharti at Rs25/share and on Idea at Rs17/share. We note that these are still recommendations, and the final decision still rests with the DoT.

Table 2: TRAI’s recommendations for 2G spectrum

Amount (Rs B) Amount (US$ MM) Per Mhz (Rs B) Vs. 3G Vs. 2001

2G 2001 17 368 2.67 3G 168 3,722 33.5 2G Upto 6.2 110 2,439 17.7 0.5 6.6 2G Beyond 6.2 45.7 1.4 17.1

Source: DoT, TRAI, J.P. Morgan

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