Initiation KPJ Healthcare Berhad Overweightkpj.listedcompany.com/misc/analyst/KPJ_JPMorgan_20120116.pdf Asia Pacific Equity Research 16 January 2012 KPJ Healthcare Berhad Initiation

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Asia Pacific Equity Research16 January 2012

KPJ Healthcare Berhad

Initiation

OverweightKPJH.KL, KPJ MK

Still healthyPrice: M$4.80

Price Target: M$5.55

Malaysia

Gaming, Consumer, Medical Supplies & Devices

May Yee Soh AC

(60-3) 2270 4725

[email protected]

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

YTD 1m 3m 12mAbs 2.8% 10.8% 16.7% 23.8%Rel 3.4% 6.6% 7.8% 26.5%

KPJ Healthcare Berhad (Reuters: KPJH.KL, Bloomberg: KPJ MK)

M$ in mn, year-end Dec FY09A FY10A FY11E FY12E FY13ERevenue (M$ mn) 1,456 1,655 1,824 2,060 2,337Core Net Profit (M$ mn) 106 111 126 149 182Reported EPS (M$) 0.22 0.23 0.23 0.27 0.33Adjusted EPS (M$) 0.21 0.21 0.23 0.27 0.32DPS (M$) 0.06 0.08 0.11 0.13 0.16Revenue growth (%) 14.9% 13.6% 10.2% 12.9% 13.5%Core EPS growth (%) 12.7% 1.2% 7.2% 17.9% 22.3%ROCE 14.1% 13.7% 14.1% 15.6% 18.1%ROE 18.3% 17.0% 15.7% 16.9% 18.7%Adjusted P/E (x) 22.9 22.4 21.3 18.1 14.8P/BV (x) 4.0 3.5 3.2 2.9 2.6EV/EBITDA (x) 16.5 14.5 13.0 10.9 9.0Dividend Yield 1.3% 1.6% 2.4% 2.8% 3.4%Source: Company data, Bloomberg, J.P. Morgan estimates.

Company DataShares O/S (mn) 586Market cap (M$ mn) 2,812Market cap ($ mn) 898Price (M$) 4.80Date Of Price 13 Jan 12Free float (%) 24.3%3mth Avg daily volume 1,274,223.003M - Average daily Value (M$ mn)

5.70

Average 3m Daily Turnover ($ mn)

1.82

FBMKLCI 1,523Exchange Rate 03.13Fiscal Year End Dec

See page 21 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.

3.2

3.6

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4.8

M$

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12

Price Performance

KPJH.KL share price (M$)FBMKLCI (rebased)

Initiate with OW, Dec-12 PT of M$5.55, based on DCF. The stock has outperformed FBMKLCI by 10% since Sept-11. But we believe interest should remain strong, helped by 1) structural changes in healthcare spending trends in Malaysia, 2) preference for defensive healthcare names amid current market conditions, 3) KPJ's 22-23% valuation discount to its regional peers and 4) possible multiple expansion with the listing of Khazanah’s healthcare assets in 2012.

As Malaysia's largest private healthcare operator, KPJ is poised to leverage on lagging healthcare/capita (only 5% of its developed peerslike US and Australia). We see the sector as a long-term structural story, tied to Malaysia's ambition to double GNI/capita to US$15,000 by 2020. Matching Singapore’s healthcare/capita requires a 4x spending increase, possible with positive demographics, rising income levels and healthcare awareness as underlying drivers. With a track record of 10-16% earnings CAGR over the past 3 years, we expect KPJ to meet our 3-year EPS CAGR of 13%. A 14% growth in OCF and positive FCFs supports DPS payouts at 50%, or 2-3% net yields, with potential special dividends from REIT injections, where the latter would also lead improving ROEs.

Integrated Healthcare’s (IHH) listing could come to the market in 2012 and if it were to list at a premium P/E relative to the regional sector average, this could provide scope for peer re-ratings. KPJ, currently trading at 18.0x/14.7x FY12E/13E P/E (22-23% disc to regional peers), could benefit on a relative valuation basis.

Other possible re-rating catalysts: 1) potential M&A, 2) catch-up in Malaysia’s healthcare spending, 3) potential special dividends.

Valuation, price target, risks to our view. Our Dec-12 PT of M$5.55 is based on 20% discount to its DCF value of M$6.90 (implying FY12E/FY13E P/E of 21.9x/17.9x – 4-6% discount to its regional peers). Key risks are: 1) stronger-than-expected competition, 2) delays in hospital expansion and 3) unfavorable RPT with parent company.

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May Yee Soh(60-3) 2270 [email protected]

Company Description P&L sensitivity metrics (FY12E)

EPS impact (%)

KPJ Healthcare is the largest private healthcare provider in Malaysia, with 20 hospitals across the country and two more in Indonesia. Major shareholder Johor Corporation holds an ~40% stake.

Average revenue per inpatient 4,238.25

Impact of every 1% 5.20%

Average revenue per outpatient 345.67


No of inpatients 266,481


No of outpatients 2,632,528


EBITDA margins 13.9%


Source: J.P. Morgan estimates

Price target and valuation analysisOur Dec-12 PT of M$5.55 is based on DCF valuation, using a WACC of 10% and terminal growth rate of 3%. At our PT, the stock would trade at 21.9x FY12E P/E and 17.9x FY13E P/E, 4-6% discount to regional peers but at +2SD from 5-year mean levels.

Market share of private healthcare operator (2009)

Key risks: 1) stronger-than-expected competition from other private

healthcare operators and potentially from liberalization of sector, 2)

delay in expansion plans, and 3) unfavorable related party

transactions with parent company.

Source: Association of Private Hospitals Malaysia

EPS: J.P. Morgan vs consensus

J.P. Morgan Consensus

FY11E 0.23 0.22

FY12E 0.27 0.28

FY13E 0.32 0.31

Source: Bloomberg, J.P. Morgan estimates

KPJ22%

Pantai & Gleneagles

17%

Columbia Asia4%Lam Wah

Ee3%

Sime Darby

Medical3%

Mahkota Medical

3%

Assunta3%

Prince Court3%

Others42%

3



Positive share price drivers

Beneficiary of Malaysia’s rising need for private healthcare

KPJ is the largest private healthcare provider in Malaysia – a country where the healthcare delivery system is: 1) very much public-centric (Figure 1) and 2) growing at 12% on average per annum (Figure 2). KPJ currently operates a network of 20hospitals and ~2,600 beds with a presence in all states except Terengganu, Perlis, Putrajaya and Melaka (Table 1). Currently, 10 of KPJ’s hospitals are accredited by Malaysian Society for Quality in Health (MSQH), which is Malaysia’s own accreditation system. Two of its hospitals, Ampang Puteri and Seremban, are working towards Joint Commission International (JCI) accreditation - an indication of strong operational performance, benchmarked against best global practices.

Table 1: KPJ: List of hospitals in MalaysiaName State Number of licensed beds MSQHKPJ Johor Johor 213 √Puteri Specialist Hospital Johor 150Pusat Pakar Kluang Utama Johor 40Kedah Medical Kedah 106 √Perdana Specialist Kelantan 83 √Sentosa Medical Centre W. Persekutuan 212Tawakal Hospital W. Persekutuan 191KPJ Seremban Negeri Sembilan 109 √Kuantan Specialist Pahang 81KPJ Penang Penang 136 √KPJ Ipoh Perak 260 √Taiping Medical Perak 48Sabah Medical Sabah 178Damai Specialist Sabah 48Kuching Specialist Sarawak 75Sibu Specialist Sarawak 35KPJ Damansara Specialist Selangor 155 √KPJ Ampang Puteri Selangor 230 √KPJ Selangor Selangor 180 √KPJ Kajang Selangor 68 √Total 20 2,598 10

Source: Company

Beneficiary of Malaysia's catch-up in healthcare spending ... With a dominant 22% market share (Figure 3) of the private healthcare market in 2009, we believe KPJ is well poised to benefit from step-up in healthcare spending on the back of Malaysia’s lagging healthcare/GDP and healthcare/capita spending (Figure 4). Against its more developed peers, Malaysia has tremendous room to play catch up in terms of healthcare spending – where healthcare per capita of developed countries like Australia and USA (Figure 4) are 19-21x that of Malaysia. We see healthcare as a long-term structural story, tied to Malaysia's aspiration to double GNI/capita to US$15,000 by 2020. We believe healthcare spending can only increase going forward as income, education levels, awareness and healthcare costs rises. Benchmarking against Singapore’s healthcare spending per capita of US$1,373 from Malaysia’s US$307 currently suggests an addressable market of US$38.2B vs. US$8.5B currently.

Figure 1: Malaysia: Public vs. Private hospital beds (1996-2009)

Source: CEIC

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100%

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Figure 2: Malaysia’s healthcare expenditure (1995-2009) (M$MM)

Source: CEIC

M$0

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Figure 3: Market share of private healthcare operators (by number of beds), 2009

Source: Association of Private Hospitals Malaysia

KPJ22%

Pantai & Gleneagles

17%

Columbia Asia4%Lam Wah

Ee3%

Sime Darby

Medical3%

Mahkota Medical

3%

Assunta3%

Prince Court3%

Others42%

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… and increasing private sector emphasis. Although Malaysia’s healthcare delivery system is very much public-centric, the government realizes this disproportionate balance and has identified healthcare as one of the 12 key pillars in the country’s Economic Transformation Programme (ETP.) This could change thepublic:private mix going forward. Specifically, the healthcare NKEA intends to identify private sector opportunities to reframe health as an economic commodity in an effort to position healthcare as an engine of growth. Healthcare is expected to contribute US$10.4B to Gross National Income (GNI) by 2020 as the government seeks to add on the economic/profitability element (Figure 5).

Figure 5: Healthcare NKEA: 6 EPPs, two business opportunities, baseline growth and multiplier effect to deliver M$35.3B incremental GNI impact by 2020

Source: ETP

Favorable demographics to drive rising demand for higher quality healthcare

Higher income levels, aided by rising higher education enrollment and urbanization, naturally translates into demand for higher quality and more healthcare-related services. We believe KPJ’s branding is particularly strong among the majority Malay population. As such, it will benefit from the growing middle-income Malay segment as this is another support for the gradual migration from public to private healthcare systems. To recap, the Malay population saw its mean household income rise 34% over the past five years – clearly outpacing the 13-24% growth for the Chinese, Indians and Malaysia as a whole (Figure 7 and 8). This trend is expected to remain in play over the coming years.

Figure 4: Comparing healthcare spending across key countries (2009 data)

Source: CEIC

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Figure 6: Rising education enrollment

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Figure 7: Mean household income: Malaysia

Source: CEIC

Figure 8:Mean household income: Bumiputera

Source: CEIC

Growing ageing population. By 2020, Malaysia would have reached ageing nation status with 10% of its total population above 60 years. A growing proportion of older people mean greater incidences of age-related disorders like Alzheimer’s, high blood pressure and heart-related ailment – diseases that require more sophisticated and long-term treatment. (Figure 9 and 10)

Figure 9: Malaysia's growing older generation (% of total population)

Source: CEIC

Longer life expectancy. Life expectancy in Malaysia has also improved from 63.6 years in 1970 to 74.4 years in 2010 (Figure 11). Over the medium term, we expect this trend to continue owing to advances in medical technology and increasing awareness of pre-emptive care.

Rising cases of chronic diseases. Stressful lifestyles, unhealthy food intake and alcohol and tobacco consumptions meant rising risks of chronic conditions like diabetes, hypertension and cardiovascular diseases. This, in time, drives demand for relatively expensive treatment and long-term rehabilitative care. A recent National Health and Morbidity survey reported that 15% of Malaysians are obese (up 1% since 2006) and almost half of adult Malaysians are overweight/obese. (Figure 12)

Rising healthcare awareness and protection. As income, education levels and healthcare costs rises, awareness and protection needs have also increased, as seen by rising demand for medical and health insurances. Over the past 4 years, medical and health insurance sales rose by 66%, quicker than the 14% rise in household income

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Figure 12: Rising cases of chronic diseases

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Figure 13: Total premiums/contributions of medical & health insurance and takaful

Source: Bank Negara, Company

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Figure 11: Malaysia's rising life expectancy

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Source: CEIC

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(Figure 13). Personal income tax relief for such policies could have helped. We believe a big chunk of such insurance premiums were for hospitals and surgeries, benefiting private operators like KPJ. In KPJ’s instance, we have seen this effect in its payment mix where 45% of payments today are via insurance/company benefits, an increase from the 30% when they first started (Figure 14 and 15). A quick check across trends in neighboring countries showed that Malaysia is still lagging in terms of insurance coverage with close to three quarters of private healthcare payments in the form of out-of-pocket payments (Table 2). A pick-up on this front would further propel private healthcare demand, in our view.

Figure 14: KPJ: Payment mix (1990)

Source: Company, J.P. Morgan estimates

Figure 15: KPJ: Payment mix (2010)


Decent earnings growth …

A decent 13% 3-year EPS CAGR. Over the past five years, KPJ has posted average earnings growth of 31% (Figure 17). A simple correlation exercise revealed that this was driven primarily by a 14% increase in inpatients over the similar period. Going forward, we expect earnings growth momentum to ease to mid-teens levels, with our projections showing a 3-year EPS CAGR of 13% for FY10-FY13E. This will be driven by a more modest 7-10% growth in beds (Table 4) and patients and a 1-2%-pt expansion in EBITDA margins (thanks to better operating leverage and higher economies of scale) over the similar period. Our estimates are 9% below/3% aboveconsensus estimates for FY12E/FY13E.

Insurance/Co

Benefits, 30%

Cash, 70%

Insurance/ Co

Benefits, 45%

Cash, 55%

Table 2: Non-insurance private healthcare spending (2009)

Out-of-pocket as a % of Private healthcare expenditure

Malaysia 73.3%Singapore 94.1%Thailand 68.1%Indonesia 73.2%India 74.4%China 82.6%Australia 63.8%UK 63.7%USA 24.2%Brazil 57.1%

Source: Bank Negara

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Figure 16: KPJ's revenue (2007-2013E) (M$MM)


Figure 17: KPJ's PAT (2007-2013E) (M$MM)


Table 4: KPJ's expansion plans (2011E-2013E)

2010 2011E 2012E 2013E

Number of hospitals 20 21 24 26Growth (%) 7% 10% 10%Number of beds 2,635 2,819 3,099 3,422Growth (%) 7% 10% 10%New hospitalsSibu 35Klang 100 50Muar 30 30Pasir Gudang 60 30Pahang 80Perlis 45Additional beds 35 190 235

Source: Company, Various press reports

… and cash flow generation

Decent 14% growth in operating cash flows (OCF) over FY10-FY13E, helped byincreasing contributions from KPJ’s matured hospital clusters (Tawakal Hospital (Jul-10) and Johor Hospital (2011). Despite the still aggressive capex plans, free cash flow is projected to turn positive in our forecasts years, helped by KPJ’s frequent REIT injection (Figure 19).

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Table 3: KPJ's PAT correlation factors with key drivers

Correlation of KPJ’s core PAT with:No. of hospitals 0.90No. of beds 0.95No. of patients 0.95No. of inpatients 0.97


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Figure 18: KPJ's operating cash flows (2006-2013E) (M$MM)


Figure 19: KPJ's free cash flows (2006-2013E)(M$MM)


Integrated Healthcare’s listing to re-rate sector valuations?

Integrated Healthcare (IHH), which aggregates the healthcare assets of Malaysia’s investment arm, Khazanah Nasional, appears set to undertake an IPO exercise this year, going by newsflow over the past 12 months (Table 5). To recap, IHH's core holding is its 100% stake in Parkway Pantai which owns ~19 hospitals in Singapore, Malaysia, Brunei, India and the UAE. Beyond Parkway, IHH also owns a 12% stake in India-listed Apollo Hospitals - Asia's biggest healthcare provider with ~54 hospitals and a range of supporting medical businesses. Just recently, in Dec-11, IHH reportedly acquired a 75% stake in Acibadem Saglik Yatirimlari Holding AS, Turkey’s leading private healthcare service provider which owns and operates some 9 hospitals.

IHH assets acquired at P/Es of 16x-26x. At this juncture, IHH’s valuation multiple is still unknown but this could be a major re-rating catalyst for healthcare stocks like KPJ, in our view. Do recall that the individual healthcare assets in IHH were acquired at P/Es of 16-26x (Table 7), excluding Acibadem at 119.4x due to potentially explosive earnings prospects. Furthermore, recent healthcare M&A, involving Singapore’s Thomson Medical (Nov-10) and Australia’s Healthscope (May-10), supports healthcare valuation at >18-28x (Table 8).

Table 7: Valuations of IHH's healthcare assets

Date Details Pricing ValuationsAug-05 Khazanah bought 13.2% stake in Apollo INR350/share 25.5x annualized 9MFY06E P/EAug-06 Pantai acquired by Khazanah & Parkway M$2.65/share 16.3x FY07E P/EJul-10 Khazanah privatized Parkway Holdings S$3.95/share 20.8x FY11E P/EApr-11 Mitsui acquired 30% stake of IHH M$3.3B n/aDec-11 IHH bought 75% stake in Acibadem 75% of US$1.68B value 119.4x annualized 1HFY11 P/E

Source: Various press reports, Bloomberg, J.P. Morgan estimates

Table 8: Healthcare-related M&As

Date Details Pricing ValuationsNov-10 Thomson Medical’s major shareholder’s all cash offer S$1.75/share 28.38x CY11E P/EMay-10 Private equity leveraged buyout offer for Healthscope A$6.26/share 18.10x FY11E P/E

Source: Various press reports, J.P. Morgan estimates

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Table 5: Newsflow on IHH's impending listing

Date NewsApr-11 Khazanah to list healthcare unit

in 1-2 years in Malaysia and/or Singapore, says MD

Oct-11 Parkway Pantai chairman, Datuk Mohammed Azlan Hashim, said it was looking to relist

Nov-11 Integrated Healthcare planning US$2B IPO after completing purchase of Turkish hospitals

Nov-11 Khazanah tight lipped on rumors that it is raising US$2B by selling Parkway shares

Dec-11 Khazanah has hired BoA-ML, Deutsche and CIMB Group as joint global coordinators for listing of healthcare unit

Source: Various press reports

Table 6: Market Cap of regional healthcare stocks

As at: 09 Jan-12 Mkt capHealthcare stocks (US$ mn)

Apollo Healthcare 1,600Bumrungrad Hospital 1,135KPJ Healthcare 894Raffles Medical Group 892Fortis Healthcare India 800Bangkok Chain Hospital 452

Source: Companies, Bloomberg

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Table 9: Parkway Pantai - Historical financials (2007-2010)

(S$MM) 2007 2008 2009 2010Revenue 869.68 912.9 965.28 1,113.95% growth 5% 6% 15%EBITDA 18.31 135 215.28 236.14% growth 637% 59% 10%PBT 324.12 59.6 155.04 160.70PAT 297.96 38.05 118.88 117.36

No. of hospitals 15 16 16 16% growth 7% 0% 0%

No. of beds 2,746 2,860 2,987 2,955% growth 4% 4% -1%

Admissions 224,254 258,126 252,657 265,437% growth 15% -2% 5%

Source: Company

Table 10: Acibadem Saglik - Historical Financials (2007-2010)

(T$MM) 2007 2008 2009 2010Revenue 1040.16 1101.3 1268.12 1563.02Growth 6% 15% 23%EBITDA 143.14 169.5 191.87 292.05Growth 18% 13% 52%PBT 51.25 -93.8 -6.56 39.01PAT 35.43 -89.08 40.51 24.47

No. of hospitals 5 7 9Growth 40% 29%

No. of beds 557 879 1119Growth 58% 27%

No. of patients 1,452,731 1,426,846 1,702,901 2,059,912 Growth -2% 19% 21%

Source: Company

Table 11: Parkway and Acibadem's expansion plans

Existing Additions2011 2012 2013 2014

Parkway 16 - 3 - 2Acibadem 9 2 2 n/a n/aTotal 25 2 5 ≥2

Source: Various press reports

Malaysia’s major IPOs perform well historically. Meanwhile, as highlighted by press reports, IHH's upcoming listing is expected to be one of Malaysia's major IPO exercises for 2012. Looking back, major IPOs have performed well, generating 9-53% returns in the first two months post listing. Interestingly, these stocks are still sustaining such returns to-date and have seen P/E expansion (5x-16x), likely due to the scarcity premium (Table 12). We believe the listing of the region’s new healthcare leader is likely to impact small-cap players like KPJ.

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Table 12: Key statistics for Malaysia's major IPO exercises

StockListing

dataListing price Share price performance

PE expansion

(M$/share)

1 mth from listing

2 mth from listing To-date

(listing vs. max)

Bumi Armada 21-Jul-11 3.03 29% 17% 36% 6.29MSM Malaysia Holdings 28-Jun-11 3.50 53% 52% 40% 5.35Petronas Chemicals 26-Nov-10 5.20 6% 16% 24% 5.79MMHE 29-Oct-10 3.80 9% 31% 24% 16.19

Source: Bloomberg, Various press reports

M&A candidate?

Related companies were recently privatization targets. In mid-Dec 11, Johor Corp, who is KPJ’s 41% major shareholder, together with global fund, CVC Capital Partners, launched a takeover offer for QSR Brands (QSR MK, Not Rated) and KFC Holdings (M) (KFC MK, Not Rated) at 13-17% premiums to their pre-takeover closing prices. We believe the market was surprised by these privatization offers, especially when Johor Corp is reportedly saddled with huge debts (of which some M$3.6B is due for repayment mid-2012 (Source: Starbiz).Going by this, we deduce that funding might not necessarily be a hurdle in the takeover of companies with strong cash flows – KPJ fits this profile as well. We do not discount the possibility of KPJ as one of the key listed holdings of Johor Corp, being a takeover target as well, as its stable cash flow generation is an attractive trait and could come in handy for Johor Corp.

Malaysia’s privatization premiums are attractive. Meanwhile, a quick browse through privatization exercises for Malaysian companies over the past one year revealed decent average premiums of ~17% for such exercises – lending support that any potential takeover exercise is likely to be accompanied by premium offers as well (Table 13). Furthermore, for KPJ, we believe the takeover premium (if any) could be even higher given the scarcity value of healthcare stocks.

Potential spin off of education arm? Beyond privatization, we see the possibility of a potential spin-off of KPJ’s healthcare arm, KPJ International University College of Nursing and Health Sciences (KPJIUC) over the medium-term. As it is, KPJIUC generated revenue M$30MM on a student base of 2,500 in FY10. Although this is only <10% of one of Malaysia's listed education play, Masterskill Education (MASEG MK, Not Rated), which in turn is trading at FY12E P/E of <10x based on consensus estimates, the company is bullish on growth and expects to post revenue of M$100MM by end-2012 (Table 14).

Asset light model

REIT injection to fuel future growth ... KPJ maintains an asset light model where it injects matured hospitals into its 49%-associate, Al-Aqar Healthcare REIT (AQAR MK, Not Rated) and rents back these assets at a fixed fee. This model enables KPJ to enhance its ROE, pare down gearing as well as maintain its dividend payouts (historical payment has comfortably exceeded 50%) – traits we view as particularly attractive during current uncertain global growth prospects. Since the establishment of the REIT in 2006, 19 hospitals (out of its total portfolio of 22) have been injected into the REIT. KPJ is currently in the process of disposing three more hospitals (Klang, Kluang and Jakarta) into the REIT. This exercise is expected to be completed by FY12.

Table 14: Comparing KPJ's education arm with Masterskill

M$MM KPJ Masterskill

Revenue 100 248.7PAT n/a 49.92012E P/E 9.8x

Source: Bloomberg, Companies

Table 13: Privatization premiums for takeover targets in Malaysia

Date Target PremiumOct-10 PLUS 3.1%Dec-11 KFC Holdings 17.3%Dec-11 QSR Brands 13.3%Oct-11 Leader Universal 31.0%Dec-11 YTL Cement 1.5%Mar-11 Berjaya Retail 52.9%Jun-11 HPI Resources 12.0%Oct-11 Hirotako Holdings 10.2%Jul-11 AIC Corp 20.8%Range 1.5 - 52.9%

Source: Bursa Malaysia, Various press reports

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… and special dividends. Incidentally, during previous injections, we saw a corresponding step-up in DPS (Figure 20). With another injection on the cards, the possibility of special dividends is in place. In a way, KPJ has not dished out special dividends after its third injection in 2010. We do not discount the potential for bumper dividends ahead.

Figure 20: KPJ: DPS and payout trends (2006-2013E)


Key risks and negative share price drivers

Rising local competition

KPJ’s competitors are also expanding capacities in an attempt to seek a bigger slice of Malaysia’s healthcare pie (Table 15). While we believe that KPJ is still a comfortable leader with its 22% market share vs. runner-up, Parkway, at 17% market share, a quicker-than-normal expansion of the latter could dethrone KPJ’s growth trajectory. Having said that, this risk is somewhat managed by the Ministry of Health’s zoning rule, guided by two beds for every one thousand persons within a 40km radius.

Table 15: Expansion by selected hospitals

Current position Expansion plans in the next 2-3 years Others

Hospitals Beds No. of hospitals No. of bedsKPJ 22 2,676Parkway(including Gleneagles)

21 >3,000 3 (Malaysia) 5 (Singapore, Vietnam,

China, India, UAE)

600 (Malaysia) 333 (Singapore)

Keen to expand into China and India

2 (Iskandar) & Kota Kinabalu(KK))

Expansion of KL hospital

150-300 (Iskandar); 200 (KK)

100 (KL)

Looking for landbank in East Coast; To acquire smaller hospitals

Sime Darby 1 393 2 (Ara Damansara & Desa Park City)

220 (Ara Damansara) 300 (Desa ParkCity)

Five years for both to reach full capacity

Mahkota Malacca

1 365 Expansion of the current hospital

220

Source: Various media sources, Company websites

Talent shortage

With KPJ (and its peers) adding capacity, the issue of talent shortage (specialists, doctors and nurses) is a risk especially when patients are sticky to qualified (and experienced) names. For KPJ, this risk is somewhat managed by its in-house education arm, KPJIUC, as the latter’s students eventually supports the clinical staff at its hospitals. While KPJUIC addresses the nurse shortage issue, by Sept-2012,

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1st REITinjection (M$481MM)

2nd REITinjection (M$170MM)

3rd REITinjection (M$292MM)

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KPJIUC is expected to start nurturing its own doctors following earlier approvals from the Ministry for the establishment of a medical school.

More foreign competition

In Jul-11, the Government announced that it is working on a phased approach to liberalize the sector by 1) removing restrictions on foreign equity participation in the setup of private hospitals and 2) relaxing entry restrictions for foreign medical practitioners i.e. doctors and dentists. While this appears negative as it would bring in more competition for existing players like KPJ, it could help address the talent shortage issue. As it is, we gather that the government is still deliberating on these issues and this relaxation could only come into play from 2015 onwards.

Investor perception towards the Johor Corp group

Investor perception towards the Johor Corp group of companies has been tainted by perceived corporate governance issues. In its normal course of business, KPJ does engage in related-party transactions (RPTs) with companies under the Johor Corp umbrella. While there has yet to be glaring transactions raising corporate governance concerns, one cannot discount such possibilities going ahead.

IHH possible listing at potentially lower valuations may offer a cheaper substitute

The risk stems from IHH’s regional footprint and potentially stronger growth profile(vs. KPJ’s primarily single market exposure and mid-teens earnings growth). As such, a listing of IHH at modest valuation multiples amidst uncertain market conditions may in turn, affect the regional healthcare multiples (and KPJ’s re-rating potential as well). Additionally, a potentially lower valuation by IHH may drive greater demand for a regional player at the expense of KPJ, the local champion.

Valuations and share price analysis

Our DCF-based Dec-12 PT of M$5.55 is derived after pegging a 20% discount toits DCF value of M$6.90/share. We are applying a DCF methodology to value thestock to better capture the structural shift in Malaysia’s healthcare spending whichwill play out only over the medium- to long-term. Our 20% discount attempts toreflect KPJ’s poorer liquidity, smaller size and the longer-term nature of its earningsdrivers. Our assumptions beyond our forecast years are based on: 1) the government'saspirations to double GNI by 2020, 2) private healthcare spending reaching 61% oftotal healthcare spending by 2020 (from 55% currently), 3) US Census Bureau’spopulation estimates for Malaysia and 4) KPJ maintaining its 8% private healthcaremarket share. We have assumed a WACC of 10% and a terminal growth rate of 3%,which is only half of the rate at which a developed market like US has grown overthe past 10 years. We believe a DCF valuation better reflects the medium- to long-term structural shift in Malaysia’s (and ultimately KPJ’s healthcare spending). Webelieve that our DCF assumptions are fair as they imply that Malaysia’s healthcarespending/capita by 2020 is still at a 30% discount to Singapore’s spending today.

Our PT implies FY12E P/E of 21.9x and FY13E P/E of 17.9x, a slight 4-6% discountto its regional peers (Table 19) and a steeper 31-33% discount to sector marketleader, Apollo Hospitals. While a steeper 20% discount appears warranted to reflect

Table 16: Corporate governance metrics

Company dividend policy

Dividend track record

No formal policy Between 49% and 69% from FY05-FY10

# days to publish quarterly report

# days to consolidate annual report

60 days 150 days% independent directors

Inter-company transactions

64% (7 out of 11 directors)

Yes, asset injections into associate Al-'Aqar Healthcare REIT and asset purchases from parent Johor Corp. Last acquisition in Mar-10 for 3.2ac of land in Pasir Gudang, Johor; three in total since 2000.

History of share placement

Insider ownership (%)

No share placement since listing in Nov-94

41%

Source: Bloomberg, Company, Annual reports.

Table 17: Listing of government-linked/owned companies

Year Companies

2010 Malaysia Marine and Heavy Engineering

Petronas Chemicals2011 MSM Malaysia

Source: Bursa Malaysia.

Table 18: DCF assumptions

Risk free rate 4.5%Risk premium 7.9%Beta 0.9 Cost of equity 11.5%% equity 80%Cost of debt 5%% debt 20%Tax rate 25%WACC 10.0%Terminal growth 3%


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KPJ’s more subdued 2-year EPS CAGR of 20.1% vs. its peers’ average growth of25.7%, we believe that valuing KPJ on a smaller discount is fair given its dominantpresence and scarcity premium of healthcare names in Malaysia.

Table 19: Regional sector comparison - healthcareAs at: 13 Jan-12 Ticker Ctry Mkt cap Price Rating Target P/E 2yr EPS

CAGREV/Ebitda ROE Div Yld P/B

(US$mn) (LC) (LC) CY12E CY13E 2011-2013 FY12E FY13E FY12E FY13E FY12E FY12E FY13EAsiaKPJ Healthcare KPJ MK MYS 894 4.78 OW 5.55 18.0 14.7 20.1% 11.1 9.2 16.9 18.7 2.8% 2.9 2.6Apollo Hospitals APHS IN IND 1,600 626.10 OW 650.00 32.8 25.9 21.2% 1.4 1.5 11.1 11.0 0.7% 3.6 3.4Fortis Healthcare India FORH IN IND 800 102 N 160 21.2 14.7 46.8% 2.5 1.8 4.0 6.1 0.0% 1.2 1.1Raffles Medical Group RFMD SP SGP 892 2 NR NR 20.1 16.9 21.2% 14.4 12.3 17.0 17.6 1.7% 3.2 2.8Bangkok Chain Hospl KH TB THA 452 7 NR NR 17.9 14.8 24.1% 9.8 8.7 21.0 22.3 3.3% 3.4 3.1Bumrungrad Hospital BH TB THA 1,135 50 NR NR 20.9 17.9 26.4% 12.6 11.5 24.7 25.1 2.4% 4.8 4.2Weighted average 5,773 23.4 18.8 25.8% 7.9 6.9 15.4 16.2 1.6% 3.3 3.0AustraliaPrimary Health Care PRY AU AUS 1,382 2.86 N 3.64 11.2 10.0 13.7% 7.0 6.6 4.4 4.9 4.5% 0.6 0.5Ramsay Health Care RHC AU AUS 3,854 19.75 OW 19.36 14.3 12.7 11.7% 8.4 7.3 17.8 18.2 3.0% 2.8 2.5Weighted average 5,236 13.5 12.0 12.2% 8.1 7.1 14.3 14.7 3.4% 2.2 2.0

Source: J.P. Morgan estimates, Bloomberg, Bloomberg consensus for stocks Not Rated (NR)

Figure 21: KPJ's PE Band vs. regional peers

Source: Companies, Bloomberg, J.P. Morgan estimates

Premium to historical P/E and P/B. Against KPJ's 5-year historical bands, the stock is currently trading at the higher-end (+1SD to +2SD) from mean levels (Figure 22 and 23).

Mean = 25.0x

-2SD = 14.0x

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KPJ Healthcare

Asia healthcare sector

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Figure 22: KPJ's P/E Band


Figure 23: Figure 30: KPJ's P/B Band


Scarcity premiums are relevant and sustainable in Malaysia. Over the medium-term, the mere scarcity element of healthcare stocks could sustain such valuations, in our view. We believe the healthcare sector is similar to the scarce oil and gas sector, which is commanding an average sector P/E of 25.2x, vs. the FBMKLCI’s 18.3x (Table 20).

Table 20: Oil & Gas peer comparison

As at: 13 Jan-12 Ticker Mkt cap Price Rating Target P/E ratio ROE Div Yld P/B Upside/(US$mn) (LC) (LC) CY12E CY13E FY12E FY13E FY12E FY13E FY12E FY13E downside

MalaysiaBumi Armada BAB MK 4.13 NR NR 31.1 20.8 19.0 17.7 0.2% 0.1% 3.1 2.5 NA 4.13Coastal Contracts COCO MK 1.94 NR NR 4.5 4.1 22.8 22.5 3.3% 2.6% 0.8 0.7 NA 1.94Dialog Group DLG MK 2.43 OW 2.80 29.4 24.6 28.7 28.9 1.2% 1.5% 8.5 7.1 15.2% 2.43Kencana Petroleum KEPB MK 2.97 NR NR 24.1 14.4 14.2 16.7 0.4% 0.8% 3.0 2.6 NA 2.97MMHE MMHE MK 5.60 N 6.40 20.6 19.7 15.9 14.7 1.0% 1.0% 3.1 2.7 14.3% 5.60SapuraCrest Petroleum SCRES MK 4.60 NR NR 20.3 16.1 24.9 25.5 2.5% 2.4% 4.4 3.7 NA 4.60Weighted average 12,653 25.2 19.0 20.0 19.8 1.0% 1.0% 4.0 3.4JPM coverage basket 18.3 16.0

Source: J.P. Morgan estimates, Bloomberg, Bloomberg consensus for stocks Not Rated (NR)

Solid M&A premiums. In the past (or in Proton Holdings' (PROH MK, Not Rated) case currently), the market has pegged sizeable M&A premiums for impending M&As and/or upcoming corporate activities. A prime example is Proton, whose share price has almost doubled since early Nov-11, when speculation about Proton's stake sale first surfaced (Figure 24). Besides Proton, privatization and/or stake sale speculation involving prime assets like Pos Malaysia and PLUS Expressways also resulted in strong share price performances in those companies (Figure 25 and 26).

Mean = 10.5x

+1SD = 14.6x

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Figure 24: Proton: Share price performance since Jul-11

Source: Bloomberg.. 1: Business Times (15 Nov-11) reports DRB-Hicom and the Naza Group held closed-door presentations for the

42.7% Khazanah stake in Proton Holdings. 2. The Edge Weekly (5 Dec) published article that Khazanah also approached Sime Darby

Motors, Hyundai-Berjaya and UMW Holdings for bids.

Figure 25: Pos Malaysia: Share price chart Mar-10 to Jun-10

Source: Bloomberg.. 1: .Khazanah Nasional (30 Mar-10)

announces divestment of 32.2% stake in Pos Malaysia.

Figure 26: PLUS Expressways: Share price chart Sep-10 to Nov-10

Source: Bloomberg.. 1: The Edge Weekly (18 Sep-10) publishes

article that Khazanah may sell its 55.2% stake in PLUS

Expressways. 2: PLUS Expressways (14 Oct-10) requests

suspension of trading as stock rallies ahead of EPF-Khazanah

offer.

Stock has outperformed the broader index since Sept-11 by 10% (Figure 27). Incidentally, this coincided with 1) lower risk appetite and hence, defensive healthcare stocks were in favour and 2) possibly a reaction to an impending listing of IHH in 2012.

Figure 27: KPJ: Share price chart vs. FBMKLCI since 2010

Source: Bloomberg

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KPJ FBM KLCI Index

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We initiate coverage on KPJ Healthcare with an Overweight rating and a Dec-12 DCF-based PT of M$5.55. Key re-rating catalysts are: 1) potential M&A, 2) quicker-than-expected catch-up in Malaysia’s healthcare spending, 3) potential special dividends, and 4) potential value accretive acquisition. Key risks to our recommendation and PT are: 1) stronger-than-expected competition from other private healthcare operators and potentially from liberalization of sector, 2) delay in expansion plans, and 3) unfavourable related party transactions with parent company

Financials

A decent 13% 3-year EPS CAGR. Over the past five years, KPJ has posted average earnings growth of 31% (Figure 17). A simple correlation exercise revealed that this was driven primarily by a 14% increase in inpatients over the similar period. Going forward, we expect earnings growth momentum to ease to mid-teens levels, with our projections showing a 3-year EPS CAGR of 13% for FY10-FY13E. This will be driven by a more modest 7-10% growth in beds (Table 4) and patients and a 1-2%-pt expansion in EBITDA margins (thanks to better operating leverage and higher economies of scale) over the similar period. Our estimates are 9% below/3% above consensus estimates for FY12E/FY13E.

KPJ’s earnings are most sensitive to average revenue/inpatient where every 1% change from our base case would lead to a 9.7% change in FY12E core EPS, as shown in our sensitivity analysis in Table 22.

Table 21: KPJ: Our key operational assumptions

Key drivers 2009 2010 2011E 2012E 2013E

No. of hospitals 19 20 21 24 26No. of beds 2,402 2,635 2,819 3,099 3,422No. of patients 2,185,576 2,457,928 2,637,249 2,899,009 3,201,446- No. of inpatients 206,907 225,936 242,419 266,481 294,281- No. of outpatients 1,978,669 2,231,992 2,394,829 2,632,528 2,907,165Average revenue/inpatient (M$) 3,825 3,982 4,107 4,238 4,374Average revenue/outpatient (M$) 327 330 338 346 354Revenue (M$MM) 1,456.35 1,654.61 1,823.86 2,059.71 2,337.31EBITDA (M$MM) 183.63 207.54 236.77 285.29 345.44EBITDA margins (%) 12.61 12.54 12.98 13.85 14.78


Table 22: Sensitivity analysis

Impact on 2012 Net Profit (%)

Avg. revenue/inpatient

Avg. revenue/outpatient

No. of inpatients

No. of outpatients EBITDA

3% 16.0% 13.0% 29.2% 13.0% 28.6%2% 11.0% 8.5% 19.5% 8.7% 19.1%1% 5.2% 4.2% 9.7% 4.3% 9.5%0% 0.0% 0.0% 0.0% 0.0% 0.0%-1% -5.2% -4.2% -9.7% -4.3% -9.5%-2% -11.0% -8.5% -19.5% -8.7% -19.1%-3% -16.0% -13.0% -29.2% -13.0% -28.6%


Healthy balance sheet …As at end-Sept 11, KPJ’s balance sheet remains healthy with net gearing at only 0.2x. KPJ’s net gearing has been on a clear downtrend over the past five years, thanks to frequent asset disposals to its REIT (Figure 28). Despite a ~M$200MM annual capex plan, we are projecting the company’s net gearing to

17



remain stable at 0.2-0.3x during our forecast years thanks to 1) strong cash flows with negative cash conversion cycle and 2) KPJ’s frequent REIT injection.

Figure 28: KPJ: Operating cash flows (M$MM) vs. net gearing (x) (2006-2013E)


… to support dividend yields of 2-3%. Although KPJ does not have a formal dividend payout policy, the healthy balance sheet position, manageable gearing and frequent REIT injection lends support to its historical payouts of at least 50%, which translates into decent net dividend yields of 2-3%. More importantly, we do not discount the possibility of special DPS after its third REIT injection (2010) and soon-to-be completed fourth tranche injection.

ROEs on an uptrend too. Meanwhile, we are also projecting improving capital efficiency with ROEs gradually rising to 16-18% levels over our projection period (Figure 29), from 16%. Specifically, we see an efficiency bump-up, helped by the first and second year of operations of new capacities in Tawakal Hospital and Johor Hospital, which collectively represent 15% of its overall bed capacities.

Figure 29: KPJ's improving ROEs (2006-2013E)


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SWOT AnalysisStrengths Dominant presence in Malaysia with 20 community-

based hospitals across Malaysia.

Asset –light model by injecting operating hospitals into associate, Al-Aqar REIT and rents back these assets at a fixed fee.

Prime beneficiary of migration from public to private healthcare helped by KPJ’s strong branding with the majority Malays, further backed by rising middle-income segments and better healthcare awareness and protection.

Weaknesses Limited free float and a relatively illiquid stock as the

stock is tightly held by Johor Corp (41% stake), while the Employees Provident Fund, Lembaga Tabung Hajiand Skim Amanah Saham collectively own 26%.

Corporate governance risks as KPJ does engage in related-party transactions (RPTs) with companies under the Johor Corp umbrella.

Opportunities Poised to gain from increasing emphasis on private

healthcare, as Malaysia is still lagging against its more developed peers (Australia and US).

Potential re-rating of sector valuations with the entry of IHH

Potential privatisation by JCorp, following recent move by the parent co to privatize related companies, QSR Brands and KFC Holdings. .

A beneficiary of government’s rising emphasis on medical tourism with two of its hospitals currently seeking internationally recognized JCI accreditation.

Threats Rising competition as KPJ’s peers are expanding

aggressively (Pantai and Columbia) in an attempt to seek a bigger slice of Malaysia’s healthcare pie.

Limited supply of qualified medical personnel might delay expansion plans of the private healthcare players, resulting in stiff competition for staffing talent.

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Appendix

Figure 30: Johor Corporation corporate structure

Source: Company.

Figure 31: Integrated Healthcare Holdings corporate structure

Source: Khazanah Nasional.

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KPJ Healthcare Berhad: Summary of FinancialsIncome Statement Cash flow statementM$ in millions, year end Dec FY09 FY10 FY11E FY12E FY13E M$ in millions, year end Dec FY09 FY10 FY11E FY12E FY13E

Revenues 1,456 1,655 1,824 2,060 2,337 Earnings before tax 144 167 178 210 256% change Y/Y 14.9% 13.6% 10.2% 12.9% 13.5% Depr. & amortization 46 59 64 81 95

Gross Margin 28.8% 30.5% 31.4% 31.9% 32.7% Change in working capital -23 -19 40 38 3EBITDA 184 208 237 285 345 Taxes -23 -36 -44 -52 -64

% change Y/Y 10.7% 13.0% 14.1% 20.5% 21.1% Others -11 17 -25 -25 -25EBITDA Margin 12.6% 12.5% 13.0% 13.9% 14.8% Cash flow from operations 133 188 213 252 266

EBIT 137 148 172 205 250% change Y/Y 10.1% 8.0% 16.3% 18.7% 22.4% Capex -237 -250 -200 -200 -200

EBIT Margin 9.4% 9.0% 9.5% 9.9% 10.7% Disposal/(purchase) 213 65 0 0 0Net Interest -17 -14 -19 -19 -18 Free cash flow 109 3 13 52 66Earnings before tax 144 167 178 210 256

% change Y/Y 26.1% 15.9% 6.6% 17.9% 22.3% Equity raised/(repaid) 2 69 0 0 0Tax 29 40 44 52 64 Debt raised/(repaid) 0 31 44 -22 -21

as % of EBT 20.3% 24.3% 25.0% 25.0% 25.0% Other 6 -8 0 0 0Net income (reported) 110.9 118.9 126.2 148.7 182.0 Dividends paid -79 -42 -84 -74 -91

% change Y/Y 29.4% 7.3% 6.1% 17.9% 22.3% Beginning cash 106 144 197 170 125Shares outstanding 528 560 560 560 560 Ending cash 144 197 170 125 79EPS (reported) 0.22 0.23 0.23 0.27 0.33 DPS 0.06 0.08 0.11 0.13 0.16

% change Y/Y 32.2% 4.3% (0.2%) 17.9% 22.3%Adjusted EPS 0.21 0.21 0.23 0.27 0.32

% change Y/Y 16.5% 2.2% 5.3% 17.9% 22.3%

Balance sheet Ratio AnalysisM$ in millions, year end Dec FY09 FY10 FY11E FY12E FY13E M$ in millions, year end Dec FY09 FY10 FY11E FY12E FY13E

Cash and cash equivalents 144 197 170 125 79 EBITDA margin 12.6% 12.5% 13.0% 13.9% 14.8%Accounts receivable 243 298 310 319 361 EBIT margin 9.4% 9.0% 9.5% 9.9% 10.7%Inventories 30 42 38 44 49 Net margin 7.6% 7.2% 6.9% 7.2% 7.8%Others 9 12 13 14 14Current assets 426 550 530 501 504

Sales per share growth 17.3% 10.5% 3.7% 12.9% 13.5%LT investments 26 28 28 28 28 Sales growth 14.9% 13.6% 10.2% 12.9% 13.5%Net fixed assets 447 537 672 792 897 Net profit growth 29.4% 7.3% 6.1% 17.9% 22.3%Intangibles 116 136 140 145 149 EPS growth 32.2% 4.3% (0.2%) 17.9% 22.3%Other LT Assets 357 429 451 460 470 Adjusted EPS growth 16.5% 2.2% 5.3% 17.9% 22.3%Total Assets 1,372 1,680 1,822 1,926 2,047

Interest coverage (x) 10.98 15.26 12.77 15.00 19.12Liabilities Net debt to total capital 23.1% 18.7% 22.3% 22.6% 23.2%Short-term loans 66 363 181 172 164 Net debt to equity 35.6% 26.3% 32.6% 32.1% 31.4%Payables 261 308 355 409 460 Sales/assets 1.10 1.08 1.04 1.10 1.18Others 30 54 54 54 54 Assets/equity 2.17 2.19 2.17 2.09 2.00Total current liabilities 356 725 591 636 678 ROE 18.3% 17.0% 15.7% 16.9% 18.7%Long-term debt 303 37 262 249 236 ROCE 14.1% 13.7% 14.1% 15.6% 18.1%Other liabilities 36 55 43 41 41Total Liabilities 695 817 895 925 955Minorities 45 95 88 79 69Shareholders' equity 632 769 839 922 1,023BVPS 1.20 1.37 1.50 1.65 1.83

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

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Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report 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(s) in this report.

Important Disclosures

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailing [email protected] with your request.

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N= Neutral, UW = Underweight

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan 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.] In our Asia (ex-Australia) and UK small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.morganmarkets.com.

Coverage Universe: Soh, May Yee: Berjaya Sports Toto (BSTB.KL), British American Tobacco (M) Bhd (BATO.KL), Genting Berhad (GENT.KL), Genting Malaysia (GENM.KL), Genting Singapore (GENS.SI), Media Prima Berhad (MPRM.KL), Parkson Holdings Bhd (PRKN.KL), Top Glove Corporation (TPGC.KL)

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KPJ Healthcare Berhad (KPJH.KL) Price Chart

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

mailto:[email protected]

https://mm.jpmorgan.com/disclosures/company

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J.P. Morgan Equity Research Ratings Distribution, as of January 6, 2012

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 47% 42% 12%IB clients* 52% 45% 36%

JPMS Equity Research Coverage 45% 47% 8%IB clients* 72% 62% 58%

*Percentage of investment banking clients in each rating category.For purposes only of FINRA/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.

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Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of

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publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. JPMSAL does not issue or distribute this material to "retail clients". The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms "wholesale client" and "retail client" have the meanings given to them in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan, Type II Financial Instruments Firms Association and Japan Securities Investment Advisers Association. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. 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Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules.

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

"Other Disclosures" last revised January 6, 2012.

Copyright 2012 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P

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