Global Gambits - 2006 Consumer Staples - J.P. Morgan · • We believe the market is underestimating the level of contribution from Bavaria as it enters the SABMiller group. The contribution

Global Equity ResearchDecember 8, 2005

Global Gambits - 2006The Right Moves for Right Now

See jpmorganSaVanT.com for gobal sector valuation tools

The following is a chapter from Global Gambits � The Right Moves for Right Now, dated December 8, 2005. This chapter is presented for convenience, and should be read in conjunction with the full report and its analyst certifications and important disclosures. The full report is available on MorganMarkets.

Consumer Stapleschapter

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December 8, 2005

Global Equity Research Global Gambits - 2006 — The Right Moves for Right Now See jpmorganSaVanT.com for global sector valuation tools

47

Consumer Staples Investors Should Look for Smokes, Suds and Salsa

Key Drivers • We are positive on consumer staples globally, as our global

strategist recommends that investors significantly overweight the group. Consumer staples stocks tend to perform well in periods when earnings growth is decelerating for the broader market.

• We are generally more bullish on the group from a fundamentals point of view this year, as many companies have finally begun to reinvest in their businesses after years of skimping on the marketing line. They have freed up this additional spending either through significant restructuring programs, or lowering earnings expectations.

• We believe that earnings momentum for consumer staples should accelerate into 2006 as the companies cycle additional marketing investments, restructurings, and high raw material costs. This reacceleration, combined with a general contraction of P/E multiples, makes the group attractive, in our opinion.

Our Non-Consensus Views • We recommend continuing to focus on tobacco. We continue

to prefer tobacco amongst the consumer staples groups, with Japan Tobacco and Altria as our top picks. We are generally less bullish on the European tobacco names given that we find valuations less attractive. We like tobacco for two key reasons: (1) greater pricing power than the rest of consumer staples, with manufacturer prices expected to be up 5-6% in 2006; (2) US litigation risk continues to decline, and we see the likely dismissals of the Price and Engle class actions as well as the successful resolution of the Department of Justice case

providing an opportunity for further re-rating of US-linked tobacco stocks. Litigation in the rest of the world remains a news flow risk, rather than a financial risk, in our opinion.

• Latin exposure is a key differentiator. With the continued growth of hard discounters and the struggling European consumer, we believe investors should look towards Latin America for strong organic growth in consumer staples. In both Brazil and Mexico, 2006 will be an election year, which should lead to a reacceleration in GDP growth in those markets. Furthermore, Latin American currencies have been strong relative to developed currencies over the past year, which should benefit multinationals with significant Latin exposure. AmBev is our top Latin American pick, and Colgate offers significant Latin exposure, with 30% of the company’s operating profit coming from the region.

• Go global for beer. We believe the global environment for beer remains strong, even though the US and Western European markets are relatively weak. Both AmBev and SABMiller (through the Bavaria acquisition) should benefit from strong demand growth in Latin America, in our view. In addition, we believe the market is not correctly pricing in strong growth forecast in SABMiller’s South African business.

• We are negative on the international soft-drinks bottlers. We are worried about San Miguel’s restructuring of the CSD business; for Coca-Cola Femsa, we are concerned about higher concentrate pricing from the Coca-Cola Company.

Global Sector Coordinator

John Faucher (1-212) 622-6443 [email protected] J.P. Morgan Securities Inc. Full sector coverage details on page 52

December 8, 2005


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Consumer Staples: Top Picks Company Key Financials Rationale and Catalysts SABMiller Plc Recommendation: Overweight Fiscal EPS (Local): Year-end March Ticker: SAB LN / SAB.L 2004 2005 2006E 54.7 64.3 73.7 Exchange: London Stock Exchange P/E (Calendar) Price (Local): 1,034p 2005E 2006EMkt Cap (US$): 26.3 bn 16.0 14.0 Analyst: Nigel Davies, ACA EV/EBITDA (Calendar) Phone: (44-20) 7325-1788 2005E 2006EEmail: [email protected] 8.7 8.1

• We believe the market is underestimating the level of contribution from Bavaria as it enters the SABMiller group. The contribution is far higher than the base case as discussed when the group bought Bavaria in July 2005, when the December 31, 2004, results were quoted. We believe the 4Q figures for Bavaria will make investors more aware of its performance. Our estimates are 7% above consensus for March 2006 and March 2007.

• The impact of South Africa and Africa is yet to be reflected in the company’s valuation, in our view. There appears to be a failure to price in the EBITA growth of 13% p.a. achieved since 1996 and its forecasted sustainability, given the consumer environment in South Africa.

• The medium-term investment framework of 4-5% (and above) in organic volume growth, turnover of 7-8% and underlying EBITA growth of 10-22% achieved in each period since March 2002 is not fully recognized, in our opinion. There is a misconception that growth has been derived from foreign exchange.

Colgate-Palmolive Co. Recommendation: Overweight Fiscal EPS (Local): Year-end December Ticker: CL US / CL 2004 2005E 2006E 2.42 2.63 2.96 Exchange: NYSE P/E (Calendar) Price (Local): US$53.87 2005E 2006EMkt Cap (US$): 27.9 bn 20.5 18.2 Analyst: John Faucher EV/EBITDA (Calendar) Phone: (1-212) 622-6443 2005E 2006EEmail: [email protected] 13.0 12.2

• Colgate is our top pick in the large-cap household products and personal care group. Following robust 3Q results, we believe the company’s momentum remains strong and its product pipeline is healthy.

• Colgate’s gross margin is under less pressure than its peers. Despite higher raw material costs, the company’s gross margin increased in calendar 3Q05 and we forecast that it will continue to rise throughout the remainder of 2005 and into 2006, driven by improved pricing, divestitures, and savings from restructuring.

• Latin America, where Colgate has a leading position in the oral care market, accounts for 30% of the operating profit and represents the company’s largest segment as a percentage of operating profit mix. Over the past three quarters, the company experienced robust performance in the region, posting average sales growth of 15.4%. We believe that the outlook for Latin America remains solid, mostly due to favorable macroeconomic trends and strengthening currency, and we believe Colgate is best positioned to capitalize on this strength among the companies in our HPC universe.

• Colgate trades at 18.2x 2006E P/E, slightly below its peers. We believe the company has moved out of the earnings trough, and should continue to post double-digit EPS growth throughout 2006. The company faces easy year-over-year comparisons in the first half of 2006.

AmBev Recommendation: Overweight Fiscal EPS (Local R$/ADR): Year-end December Ticker: AMBV3 / AMBV4 2004 2005E 2006EADR ABV US / ABV/C 0.88 0.87 1.72 Exchange: NYSE: ADR, Bovespa: Local P/E (Calendar) Price (ADR): US$37.56 2005E 2006EMkt Cap (US$): 11.8 bn 36.5 21.8 Analyst: Andrea Teixeira, CFA EV/EBITDA (Calendar) Phone: (1-212) 622-6735 2005E 2006EEmail: [email protected] 11.7 9.1

• We believe AmBev has a unique combination of market leadership in key growth markets (Latin America), and cash flow diversification with more mature markets (Labatt).

• The company consistently returns cash to shareholders (dividends, buybacks). We believe the announced €500 million share purchase program of AmBev shares by InBev, coupled with the R$200 million share buyback that AmBev recently announced, reflects management’s commitment to continue to return cash to shareholders.

• Relatively lower earnings volatility and efficiently managed capital structure should lead to a lower blended cost of capital (WACC), in our view.

• Main risks to our thesis are: (1) corporate governance issues and potential conflicts of interest between InBev and AmBev shareholders, and (2) increased competition in Brazil if M&A activity picks up. However, we believe that AmBev’s dominant position in the Brazilian market should persist, at least in the short term.

Source: Company data, Datastream, JPMorgan estimates, JPMorgan SaVanT. Prices as of November 22, 2005.

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Consumer Staples: Top Picks (cont’d) Company Key Financials Rationale and Catalysts Japan Tobacco Recommendation: Overweight Fiscal EPS (Local): Year-end March Ticker 2914 JP / 2914.T 2004 2005 2006E 87278.4 101564.1 115300.6 Exchange: Tokyo Stock Exchange P/E (Calendar) Price: (Local) ¥1,640,000 2005E 2006EMkt Cap : US$ 27.5 bn 16.1 14.2 Analyst : Michael Smith, ACA; Erik Bloomquist, CFA EV/EBITDA (Calendar) Phone (44-20) 7325-7196; (44-20) 7325- 9917 2005E 2006EEmail.

[email protected] [email protected]

5.4 5.0

• Japan Tobacco is our top global tobacco sector pick and is on the Asia Analyst Focus List. For a detailed review of Japan Tobacco, see our report “The Big Three Still Look Good,” September 19, 2005.

• Japan Tobacco’s international growth momentum is the best in class. Japan Tobacco International (JTI) accounts for 50% of the group’s cigarette volume and is weighted to fast growing emerging markets, where the Winston brand is outperforming competitor brands. JTI’s EBIT growth is accelerating from an approximately 20% CAGR 2000-05 to nearly 50% growth in FY03/06, on our estimates. This forecast is driven by volume growth, price increases and brand mix improvement.

• Japan Tobacco has an impressive cash flow and under-leveraged balance sheet. On our estimates, Japan Tobacco will have nearly US$5 billion net cash at end FY06 and should generate nearly 60% of its market cap in pre-dividend free cash flow during 2006-10.

• Despite its higher-than-average EPS growth outlook, JTI is the most attractively valued of the global tobacco group. It has nearly a 10% 2007E free cash flow yield compared to the sector average of 7.7%. Given its stronger-than-average balance sheet, Japan Tobacco trades at only 5.1x 2007E EV/EBITDA compared to the sector average of over 8x.

Altria Group Recommendation: Overweight Fiscal EPS (Local): Year-end December Ticker ADR: MO US / MO 2004 2005E 2006E 4.67 5.07 5.53 Exchange: NYSE P/E (Calendar) Price : (Local) US$73.12 2005E 2006EMkt Cap : US$ 152.3 bn 13.2 12.3 Analyst : Michael Smith, ACA; Erik Bloomquist, CFA EV/EBITDA (Calendar) Phone (44-20) 7325-7196; (44-20) 7325-9917 2005E 2006EEmail.

[email protected]. [email protected]

8.8 8.3

• For a detailed review of Altria, see our report “Break up Could Yield Best of Breed,” July 13, 2005. • In late 2004, Altria publicly announced its intention to break up into two or three business parts through spinning off its

84% ownership of Kraft stock and possibly spinning off Philip Morris International (PMI). This could allow PMI to trade without the taint of US litigation. The spin-off will be possible when the three large-scale US lawsuits (Price, Engle, Department of Justice) are resolved, and developments during 2005 have given increased visibility on these cases being resolved in the industry’s favor, in our view.

• We believe PMI’s EBITA could nearly double organically over the next decade to US$13 billion p.a., making it one of the biggest and fastest growing consumer goods companies in the world. The pre-eminent Marlboro and L&M brands, combined with market leading distribution and management, give PMI one of the best growth outlooks in the industry. A standalone PMI would be virtually debt free by 2008, on our estimates.

• The US cigarette industry is seeing one of its best trading periods for several years, with reduced price discounting and premium brands gaining market share. Philip Morris USA is delivering mid to high-single digit underlying EBITA growth and could be debt free in 2006, on our estimates.


December 8, 2005


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Consumer Staples: Top Picks (cont’d) Company Key Financials Rationale and Catalysts Nestlé Recommendation: Overweight Fiscal EPS (Local): Year-end December Ticker: NESN VX / NESN.VX 2004 2005E 2006E 19.69 21.44 23.64 Exchange: Virt-X Switzerland P/E (Calendar) Price (Local): CHF395.5 2005E 2006EMkt Cap (US$): 120.8 bn 18.4 16.7 Analyst: Arnaud Langlois EV/EBITDA (Calendar) Phone: (44-20) 7325-1996 2005E 2006EEmail: [email protected] 11.3 10.2

• Nestlé is our top pick within the European food and home and personal care sector with a 6-12 month investment horizon, and has an 8% potential upside based on our target price of CHF425. Excluding the market value of Nestlé’s stakes in L'Oréal (26%) and Alcon (75%), we estimate Nestlé’s underlying food and beverages segment is trading at 12.6x our 2006 earnings estimates, representing a major discount to the European food sector average of 16.4x.

• Nestlé delivered ‘best-in-class’ top-line performance in 3Q05 (+7% LFL), and we expect the company to deliver strong margin expansion in 2H05 (+50bps at current currency). We think this will be helped by the strong growth seen in Nestlé’s highly profitable emerging markets, and a currency-induced positive regional mix. We are also reassured by management comments that the outlook for 2006, especially for input costs, is more positive.

• Additionally, the company announced on November 17 its intention to increase its share buyback program to CHF 3 billion in 2006. This buyback confirms Nestle’s commitment to shareholder value, in our view.

• Risks to our target price include negative foreign exchange movements, a further deterioration in raw material cost pressure, and performance disappointments in Europe, which could impact top-line targets and delay realization of cost savings at the bottom line.


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Consumer Staples: Stocks to Underweight Company Key Financials Rationale and Catalysts San Miguel Corporation Recommendation: Underweight Fiscal EPS (Local): Year-end December Ticker: SMCB PM / SMCB.PS 2004 2005E 2006E 2.84 2.37 2.65 Exchange: Philippine Composite Index P/E (Calendar) Price (Local): Php89.50 2005E 2006EMkt Cap (US$): 3.1 bn 37.7 33.7 Analyst: Kelly Lim EV/EBITDA (Calendar) Phone: (63-2) 878-1188 2005E 2006EEmail: [email protected] 10.7 9.2

• We expect reaping cost synergies from San Miguel’s recent acquisition of National Foods and Berri Juice will prove to be much tougher than expected, as the two companies occupy very disparate markets and channels.

• Higher finance costs from San Miguel’s acquisitions in Australia should continue to be a drag on the company’s profitability.

• Restructuring of San Miguel’s soft-drinks business is taking longer than expected, thereby negatively impacting volumes and limiting margin improvement. Furthermore, the soft-drinks business is suffering from a structural decline due to competitive pressures and consumer preferences.

• We do not believe these concerns are accurately reflected in the share price, which has been supported by key shareholders (Kirin and Sy Group) that are keen on increasing their stake in the company.

Coca-Cola Femsa SA Recommendation: Underweight Fiscal EPS (US$/ADR): Year-end December Ticker: KOF US / KOF 2004 2005E 2006E 1.96 2.13 2.44 Exchange: NYSE P/E (Calendar) Price (ADR): US$25.18 2005E 2006EMkt Cap (US$): 4.7 bn 11.8 10.3 Analyst: Andrea Teixeira, CFA EV/EBITDA (Calendar) Phone: (1-212) 622-6735 2005E 2006EEmail: [email protected] 6.5 5.9

• The recently announced increase in concentrate costs in Mexico and Brazil, starting in 2007, is an overhang for the stock in the short/medium term, in our view. We believe KOF will cut marketing spending to offset the increase in concentrate prices, which should hurt the top line over the long run.

• Although we believe the impact is mostly priced in already, we believe that the stock will continue to underperfom on a relative basis, until better negotiation terms with the Coca-Cola Company can be achieved.

• Another potential short-term negative catalyst is the raw material costs hike (mostly PET resin), which should be mainly felt during 4Q05.

H.J. Heinz Recommendation: Underweight Fiscal EPS (Local): Year-end April Ticker: HNZ US / HNZ 2004 2005 2006E 2.30 2.31 2.41 Exchange: NYSE P/E (Calendar) Price (Local): US$35.68 2005E 2006EMkt Cap (US$): 11.9 bn 15.8 15.1 Analyst: Pablo E. Zuanic EV/EBITDA (Calendar) Phone: (1-212)-622-6744 2005E 2006EEmail: [email protected] 9.6 9.0

• We rate HNZ Underweight on EPS trends and valuation. Ongoing profit margin pressures in the European franchise (40% of EBIT), tough comps in the NA retail unit as WMT laps aggressive frozen section expansion, the stronger dollar, and the potential 25-29 cent EPS dilution from planned asset sales, should result in lackluster earnings growth.

• We believe adjusted or normalized one-year earnings are close to US$2. HNZ expects the sale of underperforming units in Europe and the sale of the NZ chicken business to result in 25-29 cents of EPS dilution. Without factoring the 21 cents in one-off charges previously announced for FY06 (a separate issue from the 25-29 cents dilution), EPS guidance would be US$2.10-2.16 (factoring asset sale dilution), or US$1.89-1.95 when we include the 21 cents in charges.

• In our view, the valuation is unattractive, with HNZ trading at a premium to the group and to its historical range. Taking the mid point of guidance after the asset sale dilution is factored in, HNZ trades at 16.6x on a pre-charges basis (21 cents), and at 18.4x if the 21 cents charges are included. The large packaged food group, ex-confectionery, trades at 16.2x on our estimates and at 15.3x on consensus. The three-year average HNZ P/E is 14.9x.


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JPMorgan Global Consumer Staples Team – Research Equity Research Credit Research Beverage Food Household and Personal Care Luxury Tobacco John Faucher Americas Americas Americas Americas Americas Americas Global Sector Coordinator

United States John Faucher Dara Mohsenian, CFA Ruma Mukerji Josh Shannon, CFA Neal Rudowitz

United States Pablo E. Zuanic

United States John Faucher Dara Mohsenian, CFA Ruma Mukerji Josh Shannon, CFA Neal Rudowitz SofyaTsinis

United States Erik Bloomquist, CFA Michael Smith

United States Virginia Chambless, CFA Carla Casella, CFA (HY-Consumer Products) Zubin Kapadia (HY–Consumer Products) Zafar Nazim, CFA (HY-Food)

Latin America Andrea Teixeira, CFA Adriana Velho

Latin America Andrea Teixeira, CFA Latin America Pablo Mautone

EMEA EMEA EMEA EMEA EMEA EMEA Pan Europe Nigel Davies

Simon Hales Vicki Kalb (Specialist Sales) Paul Rostas (Specialist Sales)

Pan Europe Arnaud Langlois Celine Pannuti, CFA Tim Service Vicki Kalb (Specialist Sales) Paul Rostas (Specialist Sales)

Pan Europe Arnaud Langlois Celine Pannuti, CFA Tim Service Vicki Kalb (Specialist Sales) Paul Rostas (Specialist Sales)

Pan Europe Melanie Flouquet David WedickVicki Kalb (Specialist Sales)

Pan Europe

Michael Smith Erik Bloomquist, CFA Vicki Kalb (Specialist Sales) Paul Rostas (SpecialistSales)

Pan Europe Katie Ruci (HY) Bertrand Molliere (HY)

South Africa Natasha Ingham John Thompson CEEMEA Douglas Krehbiel Victoria Miles Tatiana Tchembarova

Asia Pacific Asia Pacific Asia Pacific Asia Pacific Asia Pacific Pan Asia Pacific Vineet Sharma, CFA Pan Asia Pacific Vineet Sharma, CFA Pan Asia Pacific Vineet Sharma, CFA Pan Asia Pacific Vineet Sharma, CFA Australia,

New Zealand Allison Bellows Tiernan

Australia

Stuart Jackson, CFA Shaun Cousins Scott Manning

Australia Stuart Jackson, CFA Shaun Cousins Scott Manning

China Molly Chen India Vijay Chugh

China Molly Chen China Molly Chen Hong Kong Ebru Sener Kurumlu Indonesia Stevanus Juanda India Vineet Sharma, CFA

Vijay Chugh Hong Kong Ebru Sener Kurumlu India Vijay Chugh Japan Michael Smith

Hong Kong Ebru Sener Kurumlu India Vijay Chugh Indonesia Stevanus Juanda Malaysia Melvyn Boey, CFA Malaysia Melvyn Boey, CFA Indonesia Stevanus Juanda South Korea Jinah Lee South Korea Jinah Lee Philippines Kelly Lim Malaysia Melvyn Boey, CFA

South Korea Jinah Lee Singapore Adele Yeo See page 193 for team member contact details.

December 8, 2005


Analyst Certification The research analyst who is primarily responsible for this research and whose name is listed first on the front cover certifies (or in a case where multiple research analysts are primarily responsible for this research, the research analyst named first in each group on the front cover or named within the document individually certifies, with respect to each security or issuer that the research analyst covered in this research) that: (1) all of the views expressed in this research accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research.

Important Disclosures for Compendium Reports — U.S., European, Latin American, and Australian equities recommended in this report: Important disclosures, including price charts for all companies under coverage for at least one year, are available through the search function on JP Morgan's website https://mm.jpmorgan.com/disclosures/company or by calling this U.S. toll-free number (1-800-477-0406).

Important Disclosures — Asian and Japanese equities recommended in this report: • Market Maker: JPMSI makes a market in the stock of Pacific Basin Shipping, SPIL (Siliconware Precision Industries). • Lead or Co-manager: JPMSI or its affiliates acted as lead or co-manager in a public offering of equity and/or debt securities for San Miguel Corporation,

Standard Chartered within the past 12 months. • Analyst Position: The covering analyst, research associate, or member(s) of their respective household(s) have a long position in the securities of CapitaLand. • Beneficial Ownership (1% or more): JPMSI or its affiliates beneficially own 1% or more of a class of common equity securities of Maanshan Iron and Steel. • Client of the Firm: Acer Inc is or was in the past 12 months a client of JPMSI. Alcatel is or was in the past 12 months a client of JPMSI; during the past 12

months, JPMSI provided to the company investment banking services and non-investment banking securities-related service. AU Optronics is or was in the past 12 months a client of JPMSI. CapitaLand is or was in the past 12 months a client of JPMSI. China Oriental is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. Chinatrust Financial Holdings is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Henderson Land Development is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. Hyundai Motor is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service and non-securities-related services. Ibiden (4062) is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service. Japan Tobacco (2914) is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service. Komatsu (6301) is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Mitsubishi UFJ Financial Group (8306) is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. NEC Electronics (6723) is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service and non-securities-related services. Pacific Basin Shipping is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services. Polaris Industries is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-securities-related services. San Miguel Corporation is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Sinopec Corp. is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-securities-related services. SPIL (Siliconware Precision Industries) is or was in the past 12 months a client of JPMSI. Standard Chartered is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Taiwan Cement is or was in the past 12 months a client of JPMSI. Tata Consultancy Services is or was in the past 12 months a client of JPMSI.

December 8, 2005


• Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for investment banking services from Alcatel, China Oriental, Chinatrust Financial Holdings, Henderson Land Development, Komatsu (6301), Mitsubishi UFJ Financial Group (8306), Pacific Basin Shipping, San Miguel Corporation, Standard Chartered.

• Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next three months from Alcatel, CapitaLand, China Oriental, Chinatrust Financial Holdings, Henderson Land Development, Hyundai Motor, Komatsu (6301), Mitsubishi UFJ Financial Group (8306), NEC Electronics (6723), Pacific Basin Shipping, San Miguel Corporation, Standard Chartered.

• Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other than investment banking from Alcatel, Chinatrust Financial Holdings, Hyundai Motor, Ibiden (4062), Japan Tobacco (2914), Komatsu (6301), NEC Electronics (6723), San Miguel Corporation, Standard Chartered. An affiliate of JPMSI has received compensation in the past 12 months for products or services other than investment banking from CapitaLand, Chinatrust Financial Holdings, Hyundai Motor, Komatsu (6301), NEC Electronics (6723), San Miguel Corporation, Standard Chartered.

Explanation of Ratings and Analyst(s) Coverage Universe: JPMorgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication.

JPMorgan Equity Research Ratings Distribution, as of September 30, 2005 Overweight

(buy) Neutral (hold)

Underweight(sell)

JPM Global Equity Research Coverage 40% 42% 18% IB clients* 46% 45% 39% JPMSI Equity Research Coverage 34% 49% 17% IB clients* 65% 55% 45%

*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category, our Neutral rating falls into a hold rating category, and our Underweight rating falls into a sell rating category.

Valuation and Risks: Company notes and reports include a discussion of valuation methods used, including methods used to determine a price target (if any), and a discussion of risks to the price target.

Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

December 8, 2005


Other Disclosures:

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Revised November 21, 2005.

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