Jpm top country and sector ideas 121015

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  • 1. Asia Pacific Equity Research 15 October 2012The Asian View Sunil Garg AC (852) 2800-8518Top country and sector ideas sunil.garg@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited Countries Page Sector Page Strategy 2 Consumer New 15 China 5 Energy 16 Hong Kong 6 Financials 17 India 7 Gaming and Leisure 18 Indonesia 8 Healthcare 19 Malaysia 9 Infrastructure 20 Singapore 10 Insurance 21 South Korea 11 Internet / New Media 22 Taiwan 12 Metals & Mining 23 Thailand 13 Real Estate 24 SMID-Caps 25 Technology Hardware New 26 Technology Upstream 27 Telecommunications 28 Transportation 29 Utilities & Power equipment 30 Derivatives 31See the end pages of this presentation 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 mayhave a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making theirinvestment decision. In the United States, this information is available only to persons who have received the proper option risk disclosure documents. 1Please contact your J.P. Morgan representative or visit http://www.optionsclearing.com/publications/risks/riskstoc.pdf.
  • 2. Adrian MowatAC (852) 2800-8599 adrian.mowat@jpmorgan.com J.P. Morgan Securities (Asia Pacific) LimitedEmerging markets and AP equity strategy Key Messages Investment themes/issues  2013 is a continuation of 2012 macro trends  Focus on earnings revisions…micro not macro  Slow DM growth  EM Nifty Fifty: (JPGIENIF Index)  Lower profits in China lead to lower capex and cost reduction to rebuild margin = lower GDP  China’s three inflection points  Demographics  Investors reluctantly buy equities  2008/9 stimulus  QE3: interest rates low until 2015  Deflating housing bubble  ECB and Fed actions reduce tail risks  OW Tech…an unusual seasonal lift  Do not extrapolate previous QEs  Money chases momentum  Margin expansion – falling PPI – Credit and equities not commodities  Strong demand for EM fixed income – DM equities plus EM growth  Knee-jerk reaction: Rotation into underperformers  OW India and Turkey Country recommendations Risks to our view + volatility  Overweight:  China: Large stimulus  Mexico, India, Turkey, Thailand and Philippines  QE: Leading to higher commodity and energy prices  Technology, consumer discretionary  Underweight:  Drivers of volatility  China, Brazil, (Australia)  Euro fiscal crisis  Materials  US fiscal cliff  China data 2
  • 3. Heat-maps: Key sectors in country recommendations OW: India, Turkey, Mexico, Thailand and Philippines UW: China, Brazil, (Australia) Emerging Markets Equity Strategy Heat Map Mexico tel. Mexico China Others China Brazil Financials Thailand Taiwan IT Brazil Energy Others Energy China Brazil Materials Brazil CS Brazil Others Mexico CS Telecom China CS Twn. Financials SA Telecom Indonesia China Fin. ex China CD Twn. Mater. Korea SA SA CD Twn. Others Chile banks China Ind. Materials Financials Russia Philippines Korea China Mater. India Energy SA Others Energy Financials Korea IT SA Materials India China Banks India Others Malaysia Financials Korea Turkey Fin. Russia Korea CD Korea Others CE3 India IT Industrials Turk. Others Others Source: J.P. Morgan Strategy. Note: Red Indicates UW, green OW and white Neutral. Smaller markets with weights < 0.5% of MSCI EM are not included. Area of the sector indicates weight in MSCI EM. Overweight Underweight Asia Pacific ex-Japan Equity Strategy Heat Map Korea Others HK Indust. Australia CS Korea IT HK CD HK Malaysia Aus. Indus Korea CD Korea HK Utilities Financials Australia Financials Australia Financials Taiwan Taiwan IT Energy Korea Korea Financials India Materials Industrials Taiwan India Others Financials Indonesia Australia China mat. China CS Materials India Energy Others China CD China Indus. Taiw. Others India IT China Banks China Singapore Thailand China Fin. China Sing. Others Australia Materials Energy China Others Financials Ex banks Telecom Sing. Indus Philippines Source: J.P. Morgan Strategy, MSCI, Datastream. Note: Red Indicates UW, green OW and white Neutral. Area of the sector indicates weight in MSCI APxJ. 3
  • 4. 4Countries
  • 5. Sunil GargAC (852) 2800-8518 sunil.garg@jpmorgan.comChina J.P. Morgan Securities (Asia Pacific) Limited Valuation comps for our highest-conviction recommendations Mkt cap Rating Price PT P/E (x) P/BV (x) ROE (%) DY (%) Company BB CMP (US$MM) target End date FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13ETop Picks21Vianet Group Inc. VNET US 12 409 OW 16.3 31-Dec-13 142.8 88.1 8.5 7.9 5.6 9.3 0.0 0.0Baidu.com BIDU US 111 30,182 OW 200 31-Dec-13 24.0 17.8 9.4 6.0 48.6 41.3 0.0 0.0Beijing Capital International Airport 694 HK 5.26 1,275 OW 8.3 31-Dec-12 13.3 10.8 1.2 1.1 9.3 10.5 1.1 1.4Beijing Enterprises 392 HK 49.1 7,205 OW 60 30-Jun-13 18.3 13.7 1.2 1.1 6.6 8.2 1.6 2.2China Shenhua Energy - H 1088 HK 31.3 13,722 OW 35 30-Jun-13 11.2 10.3 2.0 1.8 19.0 18.3 3.4 3.7China Shipping Container Lines 2866 HK 1.81 876 OW 2.85 31-Dec-13 -68.3 24.0 0.7 0.7 -1.0 2.7 0.0 0.0China State Construction 3311 HK 8.92 4,473 OW 13 31-Dec-13 15.2 11.0 3.1 2.6 21.5 26.1 1.9 2.7China ZhengTong Auto 1728 HK 4.85 1,382 OW 5.5 30-Jun-13 13.4 10.5 1.2 1.1 9.8 11.1 1.0Country Garden 2007 HK 2.95 6,937 OW 3.55 30-Jun-13 7.5 6.6 1.2 1.0 17.4 16.7 5.2 5.9Galaxy 27 HK 25 13,520 OW 31 31-Dec-12 14.8 12.7 4.9 3.6 39.9 32.8 0.0 0.0Golden Eagle Retail 3308 HK 16.2 4,034 OW 19.5 30-Jun-13 20.7 18.2 4.9 4.4 25.4 25.4 2.4 2.7ICBC - H 1398 HK 4.96 55,531 OW 5.8 31-Dec-12 6.3 6.4 1.3 1.1 21.3 18.3 5.1 5.0Lenovo 992 HK 6.16 8,170 OW 8.1 31-Mar-13 17.0 13.9 3.1 3.5 22.1 25.8 2.3 3.1Ping An Insurance Group - H 2318 HK 61 24,627 OW 65 31-Dec-12 15.9 13.1 2.6 2.2 17.5 18.2 0.9 1.0Sinopec Corp - H 386 HK 7.82 16,927 OW 9 31-Dec-12 7.6 6.9 1.0 0.9 14.6 14.4 3.1 3.4The United Laboratories 3933 HK 4.05 850 OW 4.5 31-Dec-12 21.3 12.0 1.2 1.2 5.6 9.9 1.7 3.2Stocks to AvoidAnta Sports Products Ltd. 2020 HK 6.78 2,180 UW 3.6 30-Jun-13 9.5 14.2 2.0 1.9 21.9 13.9 6.5 4.3Aluminum Corporation of China - H 2600 HK 3.34 1,699 UW 2.7 30-Jun-13 -7.4 139.1 0.8 0.8 -9.3 0.6 0.0 0.0China Merchants Holdings Intl 144 HK 23.6 7,579 UW 20 31-Dec-12 13.2 12.7 1.3 1.2 9.9 9.9 3.3 3.4Glorious Property 845 HK 1.14 1,146 UW 1 31-Dec-12 5.2 5.3 0.4 0.4 8.0 7.4 0.0 0.0New China Life Insurance Company Ltd - A 601336 CH 23 7,591 UW 25 31-Dec-12 23.4 15.3 2.1 1.8 9.3 12.7 1.8 0.7PetroChina 857 HK 10.4 28,251 UW 8.75 31-Dec-12 10.2 9.9 1.4 1.3 14.6 13.9 4.4 4.6Source: J.P. Morgan estimates, Bloomberg. Pricing date is 12 October 2012. 5
  • 6. Adrian MowatAC (852) 2800-8599 Adrian.mowat@jpmorgan.comHong Kong J.P. Morgan Securities (Asia Pacific) Limited  Overall market view: We stay cautious and expect a Hong Kong – Hang Seng Index12M-fwd P/E range-bound market in 2H12. Outlook for the economy x remains poor, with 2012 GDP growth forecast low at 30 Current=9.2x 1.9% by JPMe. We think inflation is likely to fall further 25 on the back of the lower import prices and slower pace +2 std dev of Rmb appreciation. Market is de-rating on poor 20 fundamentals, trading at 12m P/E of 9.2x. +1 std dev 15 long term avg=13.5x  Sector calls: Focus on residential among properties, as we think current prices have factored in potential 10 downside. We maintain our positions in casinos -1 std dev although we expect near-term pressure. Prefer 5 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Insurance over Banks; UW on utilities. Source: Bloomberg, J.P. Morgan.  Drivers/catalysts/events: 1) China policy easing on soft economic data, 2) declining inflation rate, 3) Stock views Recovery of property transactions, slower land sales, diminishing policy risk and record low mortgage rates P/E (x) BB Code Rating Price PT FY12E FY13E are positive for the property sector, 4) expect new Top Picks launch (Cotai Central II) in Macau in 3Q12. AIA 1299 HK OW 29.25 31 19.2 15.5  Key issues / risks: 1) Global economic uncertainty, BOCHK 2388 HK OW 24.1 27 12.6 12.9 2) trade sector supply and demand can incrementally Cheung Kong 1 HK OW 113.2 120 11.6 11.5 swing both ways, 3) central office demand is under Galaxy 27 HK OW 25 31 14.8 12.7 pressure as financial companies are downsizing and Lifestyle 1212 HK OW 17.02 19 15.3 14.2 relocating. Pacific Basin Shipping 2343 HK OW 3.88 4.5 -4.4 30.5 Power Assets 6 HK OW 66.55 70 14.2 13.7  View relative to region: Underweight. Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 12, 2012. 6
  • 7. Bharat IyerAC (91-22) 6157-3600 bharat.x.iyer@jpmorgan.com J.P. Morgan India Private LimitedIndia  At a 12-13x one-year forward P/E, Indian equities are MSCI India – 12 M forward P/E trend trading at the lower end of the last decade’s trading range.  But the economy’s potential growth rate has deteriorated markedly over the past two years.  In the absence of structural reforms to address growth constraints, markets could remain cheap.  Over the interim, investors may have to contend with market returns in line with earnings growth (estimated at about 10-12% over FY12-14E).  Political window of opportunity to address policy concerns over the next two quarters. Source: MSCI, Bloomberg, IBES  Portfolio Stance Top Picks and Avoids  Overweight private sector banks on expected policy stimuli. P/E (x)  Underweight consumption as rural growth momentum BB Code Rating Price PT FY12E FY13E moderates. Top Picks  Stock-specific approach for global sectors, given the ICICI Bank ICICIBC IN OW 1044.75 1025 19.3 15.6 uncertain environment. TATA Consultancy Services TCS IN N 1298.45 1400 23.9 18.4  Key risks IDFC IDFC IN OW 151.05 150 14.6 13.0  A sustained rise in global crude oil prices Power Grid Corporation of India PWGR IN OW 119.95 120 18.4 15.3  Policy environment remains directionless ITC ITC IN OW 283.5 260 33.9 29.1 Avoids  We have an overweight rating on India in an Asia and Jubilant Foodworks Ltd JUBI IN UW 1364.8 995 82.3 56.6 Emerging Markets context. Adani Power ADANI IN UW 50.45 31 -291.3 -4086.5 Bank of India BOI IN UW 301.95 250 6.5 6.9 Source: Bloomberg, J.P. Morgan estimates, prices as of October 12, 2012. 7
  • 8. Aditya Srinath, CFAAC (62-21) 5291-8573 aditya.s.srinath@jpmorgan.com PT J.P. Morgan Securities IndonesiaIndonesia MSCI Indonesia: 12M Forward P/E Abs & and Rel to MSCI APxJ J.P. Morgan weighting: Neutral – Relative to MSCI EM/APxJ Indonesia has reversed early year underperformance of Asia ex-Japan & EM Rotation to the fore until clarity on earnings emerges Investment positives  Valuation pressures being deflated  Oil declining – inflation risks contained  Domestic growth to be relatively resilient Source: MSCI, Bloomberg, Investment negatives  Policy hazards Key stocks P/E (x)  The rupiah BB Code Rating Price PT FY12E FY13E  Risks to demand from commodity prices Top Picks Bank Rakyat Indonesia BBRI IJ OW 7500 8200 10.8 8.6 Sector weightings: Banks OW, Industrials OW, Materials Indocement INTP IJ OW 21000 23000 17.8 15.3 OW, Consumer Staples N & Utilities OW, Consumer Disc. Perusahaan Gas Negara PGAS IJ OW 4375 4100 15.3 14.1 UW, Energy UW, Telcos N Avoids United Tractors UNTR IJ UW 19900 18000 12.9 11.6 Off Index OW –Property (SMRA) Indika Energy INDY IJ N 1550 2000 0.0 0.0 Reinstated BBRI as top pick along with INTP, PGAS Source: Bloomberg, J.P. Morgan estimates, prices as of 12 October 2012. Avoids: UNTR, INDY 8
  • 9. Hoy Kit MakAC (60-3) 2270-4728 hoykit.mak@jpmorgan.comMalaysia JPMorgan Securities (Malaysia) Sdn. Bhd. (18146-X)  Malaysia’s defensiveness stands out amidst KLCI performance during 12th GE (2008) global uncertainties. Combination of large 1550 domestic funds presence and resilient economy/earnings drove MSCI Malaysia 1450 -4% valuations to a 29% premium to APxJ (historical average of 13%). 1350 -5% -9% -5%  Key market driver/risk is the upcoming general 1250 elections, not due until Apr 2013. Sept/Oct are 1150 probable/final windows to hold elections. Pullback (close to 10%) highly likely regardless, when 1050 parliament is dissolved, as per 2008 outcome. We Jan-08 Feb-08 Mar-08 Apr-08 May-08 are uncomfortable with the market’s 2012 P/E of Source: CEIC. Bloomberg. 16.5x, against a historical average of 15x, suggesting event risk is not priced in. Stock views: Key top picks and avoids  Tactical pre-elections call: We recommend that P/E (x) investors stick with apolitical stocks with earnings BB Code Rating Price PT FY12E FY13E growth prospects - AirAsia, Axiata, Sime Darby, OW Dialog, and KPJ Healthcare. AirAsia AIRA MK OW 3.05 4 5.5 14.1  Post elections drivers: 1) Political stability = Sime Darby SIME MK OW 9.72 11.3 13.9 13.0 policy continuity (ETP gaining traction). 2) Strong Dialog DLG MK OW 2.39 2.8 31.5 28.0 KPJ Healthcare KPJ MK OW 6.13 6.6 23.6 19.2 domestic-driven demand (on robust fixed capital Axiata AXIATA MK OW 6.47 5.6 17.3 15.4 formation) offsetting external demand drag. 3) Avoids Improving earnings momentum. 4) Consensus Hong Leong HLBK MK UW 13.92 11.5 13.9 14.9 UW with EM funds 2.5% weight vs. neutral weight British American Tobacco ROTH MK UW 61.04 50.2 21.6 20.8 of 3.7%; locals all cashed up. Rising free float IOI Corporation IOI MK UW 5.03 4.6 18.1 16.7 positive. Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 12 October 2012.  Key risks: 1) BN loses even a simple majority. 2) Sharper-than-expected external sector slowdown. 9
  • 10. James R. Sullivan, CFAAC (65) 6882-2374 james.r.sullivan@jpmorgan.comSingapore J.P. Morgan Securities Singapore Private Limited Summary of market correlations across sectors  Market to head lower? Singapore macro actuals have 1.00 begun to miss estimates for the first time since Summer 2011 (GDP, IP recently; Retail sales have been missing for 0.90 Difficult period for Fundamental stock picking, some time). 2) More importantly, the trend of actuals is now stock specifics countered by high cross sector correlations - all trade as one 0.80 below the trend of revisions, i.e., additional negative revisions are likely. Per the chart on the right below, the 0.70 market has now traded higher despite this revision risk. 3) Singapore market earnings revisions turned negative in mid- 0.60 August. 4) Technicals have now turned cautious, versus 0.50 Positive period for fundamental stock picking their very bullish stance previously.  Mitigating Factors: 1) EASI has moved into positive 0.40 territory, the median 6 -month return for the Singapore 0.30 market post a move into positive territory is 10%. 2) Singapore inflation moderating (although this could actually 0.20 strengthen the slowdown argument). 3) Great stock-picking Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 environment, as cross-sector correlations are extremely low. Source: J.P. Morgan estimates, Bloomberg  Stock picks: Own outward-looking Singapore (NOL, SIA, KEP), avoid anything inward-looking save inflating assets Stock views (CAPL). P/E (x) Market (blue) rising while likely revisions (red) falling BB Code Rating Price PT CY12E CY13E (sustainable)? Top Picks 12 1800 Neptune Orient Lines NOL SP OW 1.1 1.35 467.5 18.5 10 8 1700 Singapore Airlines SIA SP OW 10.47 13 26.9 18.3 6 4 1600 Keppel Corporation KEP SP OW 11.21 13.3 11.3 13.2 2 ? 1500 CapitaLand CAPL SP OW 3.16 3.4 13.5 11.7 0 ‐2 1400 Avoids ‐4 China Minzhong Food Limited MINZ SP UW 0.835 0.7 3.5 3.4 ‐6 1300 Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 12, 2012. IP Actual trend ‐ Forecast Trend  MXSG Source: J.P. Morgan estimates, Bloomberg. 10
  • 11. Scott YH SeoAC (82-2) 758 5759 scott.seo@jpmorgan.comSouth Korea J.P. Morgan Securities (Far East) Ltd, Seoul Branch Overall market view – Entering 2Q12 earnings Korea – MSCI Korea 12M-fwd P/BV x season, we recommend that investors focus 2.0 more on the companies’ LT fundamentals 1.8 instead of short-term earnings volatility. Given 1.6 undemanding market valuations (i.e., below -1 1.4 STD of the historical average P/BV and P/E), we 1.2 1.0 expect to see a ST rebound when the macro 0.8 environment turns favorable (i.e., QE 3, China 0.6 government’s economic boosting measures). Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Jul-1 MSCI KOREA - 12MTH FWD P/BPS Average +1 stdev -1 stdev Sector calls – In a recovery phase, we expect Source: Datastream. IT and autos to continue to outperform the Korea – Top picks/avoids market. Moving toward 2H12, we expect easing P/E (x) P/B (x) regulatory pressure and probable boosting BB Code Rating Price PT FY12E FY12E measures for domestic consumption to be a Top picks catalyst for domestics. Doosan Heavy Industries 034020 KS OW 54100 71000 11.01 0.93 Kia Motors 000270 KS OW 68200 100000 6.04 1.55 Potential drivers/catalysts/events: 1) Mando 060980 KS OW 148500 220000 10.27 1.64 headline inflation managed within the BoK’s inflation target (3±1%), 2) more stable KRW Lotte Shopping 023530 KS OW 340000 388000 10.28 0.56 Orion movement (KRW to be less volatile than during 001800 KS OW 1018000 1020000 34.39 5.16 Samsung Electronics GFC, in our view), 3) easing regulatory 005930 KS OW 1296000 1800000 9.64 1.82 Samsung Life Insurance pressure, and 4) gradual recovery in residential 032830 KS OW 94900 140000 18.06 0.98 property market. Shinhan Financial Group 055550 KS OW 37250 50000 6.77 0.81 Stocks to avoid Key issues / risks: Korea market is particularly Honam Petrochem 011170 KS UW 240500 180000 0.01 1.45 vulnerable to macro volatilities due to its highly S-Oil 010950 KS UW 99600 70000 11.11 1.94 cyclical/export-focused industry structure. For domestics, regulatory direction ahead of the Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 12, 2012. presidential election (Dec-12) should be a key concern. 11
  • 12. Nick LaiAC (886-2) 2725-9864 nick.yc.lai@jpmorgan.comTaiwan J.P. Morgan Securities (Taiwan) Limited Sector calls 2012 YTD relative share price performance by sector  Overweight: Tech (we prefer foundry, backend, NB ODM and avoid DRAM and display). 30% 20%  Underweight: Consumer/discretionary, and Materials 10% (we are selective on SMCap stocks). 0%  Neutral: Telco, Financials (we prefer banks over -10% brokers and insurance). -20% -30% Market view Transportation Elec. Distribution Plastic&Chemical Elec&Machinery Computer Chemical Components Info service Glass&Porcelain Communication Construction Biotech Textiles Machinery Cement Elec. Appliances Depart. Electronics Food Steel Auto Semicon Other elect. Financials Tourism Energy Rubber Plastic Opto elec. Others Paper  J.P. Morgan is neutral on Taiwan in its regional portfolio; we foresee the market trading sideways or being range-bound at~7,000-7,600 in 2H12. Macro developments will be key to sentiment and Source: Bloomberg, *Performance is based on the closing price on 25th June 2012 performance, especially in tech . Top Five Large-Cap Picks BB Code Rating Price Mkt Cap P/E (x) P/BV (x) ROE (%) DY (%) (US$ MM) FY12E FY13E FY12E FY13E FY12E FY13E FY12E TSMC 2330 TT OW 86.3 76,380 14.2 13.0 3.1 2.8 23.3 22.6 3.5 ASE 2311 TT OW 21.95 5,691 11.0 8.4 1.3 1.2 12.4 14.9 3.0 Quanta Computer 2382 TT OW 69.3 9,101 9.8 8.0 2.0 1.8 21.7 23.6 6.2 Far EasTone Telecom 4904 TT OW 74.2 8,257 21.2 17.3 3.2 3.2 15.5 18.6 5.2 Chinatrust 2891 TT OW 16.8 7,124 10.8 10.2 1.2 1.2 11.4 11.7 3.8 Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 12, 2012. 12
  • 13. Sriyan PieterszAC (662) 684 2670Thailand sriyan.pietersz@jpmorgan.com JPMorgan Securities (Thailand) Limited Thailand 12M fwd P/E x Current 12-month forward P/E (SET Index) = 11.8x  We believe Thai equities will provide another half year of 20 outperformance, given their ability to orient toward both domestic 18 +2 stdev = 16.3x 16 themes and global growth re-acceleration. +1 stdev = 13.6x 14 12  Key drivers: (+) domestic growth outlook, (+) positive earnings 10 Average = 10.8x revisions on Financials, (-) external growth/risk aversion, (+) 8 -1 stdev = 8.1x accommodative policy, (+) sustained investment cycle; (-) politics 6 -2 stdev = 5.4x 4 and policy risk factors. 02 03 04 05 06 07 08 09 10 11 12 Source: J.P. Morgan estimates and calculations.  Potential catalysts: monthly bank loan growth data, 2H12 earnings upgrades, political developments, global growth data. JPMQ Global Revisions Landscape As At 21-Aug-2012  Valuations are back at 10-year average P/E. Region Net Revs FY2 Net Revs FY1 EMOM 3MTHFY1 EMOM 3MTHFY2 MSCI All World -21% -14% -3% -3%  Key issues/risks: 1) significant acceleration in inflation; 2) political ASIAPAC Ex JP -28% -26% -4% -4% risk; 3) cash calls. ASIAPAC -29% -27% -4% -3% China -47% -47% -4% -5%  Sector weightings: We are overweight on Banks and Property, Hong Kong -26% 9% -2% -3% Korea -31% -42% -6% -3% neutral on Materials (Petrochemicals), and underweight on Malaysia -6% -5% -1% 0% Telecoms, Consumer and Energy. Singapore -20% -8% 2% -2% Taiw an -45% -44% -8% -7%  Top picks are KBANK, SCB, SCC, LH, IVL, and BTS. Indonesia 5% -2% -2% -2% Philipines 33% 19% 0% 0% Thailand -18% -22% -3% -3% Source: J.P. Morgan Mkt P/E (x) P/B (x) Yield (%) Stock picks BB Code Rating Price PT Cap (US$MM) FY12E FY13E FY12E FY13E FY12E FY13ETop picksKasikornbank KBANK TB OW 180 220 14,028 12.4 10.7 2.4 2.0 2.0 2.2Siam Commercial Bank SCB TB OW 168.5 200 18,620 13.5 11.4 2.6 2.2 2.5 2.9Siam Cement SCC TB OW 357 400 13,945 16.3 14.7 2.8 2.5 3.1 3.4Land & Houses LH TB OW 8.6 9 2,820 17.2 17.4 2.9 2.8 5.0 4.9Indorama Ventures IVL TB OW 27.5 41 4,329 11.8 7.4 1.8 1.5 2.5 4.1BTS Group Holdings BTS TB OW 5.75 7.6 1,865 26.5 39.6 1.5 1.3 5.2 1.9Tisco Financial Group TISCO TB N 45.5 49 1,078 8.8 7.9 1.8 1.6 4.9 5.5Stocks to avoidsThai Oil TOP TB UW 64.25 53 4,286 13.8 14.0 1.6 1.5 5.2 5.3Big C Supercenter BIGC TB UW 192.5 190 5,193 25.4 21.2 4.9 4.2 1.2 1.4Source: Bloomberg, J.P. Morgan estimates, prices as of 12 October 2012. 13
  • 14. 14 Sectors
  • 15. Ebru Sener KurumluAC (852) 2800-8521 ebru.sener@jpmorgan.com J.P. Morgan Securities (Asia Pacific) LimitedConsumer  2013 outlook. We are of the view that a Comparison of Chinese sportswear retailers and other retailers SSSG significant recovery in discretionary sales in 20.0% 18.0% 2013 is unlikely, so get ready to embrace longer- 16.0% 14.0% term single-digit or low-double digit SSSG in the 12.0% 10.6% space. 10.0% 10.0% 8.0% 0.0% 6.0% 4.8%  Recent update: Retailers indicate a lackluster 4.0% 7.8% 7.8% 5.5% 3Q so far, and we believe 3Q SSSG is likely to 2.0% 3.8% 0.0% come in slightly below 2Q’s. We rebase our 2009 2010 2011 1H12 2013 estimates and cut our 2013 earnings Volume Pricing estimates for retailers by 5% on average. Source: J.P. Morgan estimates, Company data. Includes data from Parkson, Golden Eagle, Belle, Trinity, Daphne, and Ports Design.  Top Picks: We remain positive on select Stock views retailers from a long-term perspective but do not P/E (x) expect an immediate re-rating catalyst to arrive BB Code Rating Price PT FY12E FY13E in 2012 in the form of a strong SSSG pick-up. OW Golden Eagle 3308 HK OW 16.18 19.5 20.7 18.2 Among retailers, Golden Eagle and Trinity are Trinity 891 HK OW 5.19 6.5 16.6 14.6 our top picks, but with a longer-term focus as 2H Chow Tai Fook 1929 HK OW 9.89 12 15.6 14.0 China Foods 506 HK OW 8.34 9.2 23.6 19.0 is likely to be lackluster. We also like CTF, Sa Sa China Mengniu 2319 HK OW 22.55 28 20.0 16.0 and Giordano. Among staples we have OW on UW Hengan 1044 HK UW 73.8 61 25.3 21.1 China Foods and Mengniu on the back of China Yurun 1068 HK UW 5.74 4.6 20.7 8.7 product mix upgrades. Tsingtao – A 600600 CH UW 33.12 26 24.1 20.7 Tsingtao Brewery - H 168 HK UW 44.55 32 26.3 22.7 Parkson 3368 HK UW 6.85 5.6 14.6 13.4 Anta 2020 HK UW 6.78 3.6 9.5 14.2 Li Ning 2331 HK UW 4.83 3.3 -71.5 16.7 Xtep 1368 HK UW 3.19 2.2 6.4 9.5 Source: Company data, J.P. Morgan estimates. Prices are as of October 12, 2012 15
  • 16. Brynjar Eirik Bustnes, CFAAC (852) 2800-8578Energy brynjar.e.bustnes@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited  We believe risk to demand is now greater than supply risk with EU/US economic issues to be resolved. Political risk to China, India, Japan, US and EU5 demand weakening (kBOPD) oil supply has subsided with the “worst” case now in the market. Resolution in Libya brought on light crude, pushing down oil prices and refining margins. Iran is the main wild card, threatening supply cuts or suffering EU sanctions. We believe lost crude from Syria, Yemen and Sudan is also priced in, partially offset by US liquids.  Supplies from Saudi remain high, making up for less Iranian crude. Iraqi production is also increasing, along with North Y/Y change Sea. Angola should ramp up with Canadian oil sands and GRM strong last year on Libya/Japan EQ shale oil in the US at least adding to mid US supplies. 90% 10 Overall demand growth in Asia is trending down, with OECD 88% 8 in general not growing al all. China doesn’t need diesel 86% 6 imports (power trouble not happening) and coming out of 84% 4 maintenance and adding new capacity (1.0 mn BOPD in 82% 2 2012 along with India) should add more products in the 80% 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 E 2012 E 2013 E regional export market. Utilization GRM (US$/bbl - RHS)  Based on the above, we see flat to weaker oil prices and weaker refining margins in 2012. Petrochemicals has been Source: J.P. Morgan estimates, Bloomberg, PAJ badly hit by Chinese tightening and is unlikely to rebound Stock views until 1H2013 at the earliest . P/E (x) BB Code Rating Price PT FY11A FY12E  We think Sinopec offers the best value. China BlueChem is OW also not overpriced, in our view, while small-cap MIE offers PTT Public Company PTT TB OW 315 430 8.5 9.0 good value along with Inpex – but are asset plays. We think Inpex Corporation 1605 JT OW 466500 750000 10.5 10.6 SK Inno is the cheapest refiner in the region, but diesel Sinopec Corp - H 386 HK OW 7.82 9 7.6 7.6 spread reversal could be a negative for SKI as well. China Oilfield Services Limited 2883 HK OW 14.28 13 13.0 11.0  We see downside to CNOOC along with PetroChina due to UW deteriorating fundamentals and valuations. We think S-Oil in PetroChina 857 HK UW 10.38 8.75 11.7 10.2 Korea still prices in high expectations in both refining and Reliance Industries Ltd RIL IN UW 818.9 675 12.7 13.6 PX., while we think RIL has virtually no growth and trades at CNOOC 883 HK UW 15.88 13 8.2 9.5 a high valuation, and we see SK Innovation as fairly priced S-Oil Corp 010950 KS UW 99600 70000 9.6 11.1 at the high end and more defensive in a falling-margin Source: J.P. Morgan estimates, Bloomberg; Table priced as of October 12, 2012 environment. 16
  • 17. Josh KlaczekAC (852) 2800-8534 josh.klaczek@jpmorgan.comFinancials J.P. Morgan Securities (Asia Pacific) Limited In 1Q, we saw loan growth begin to decelerate Loan/Deposit Ratios: Large Increase Since 2008, Still Well <100% across the region, with weaker credit growth a 20 19 particular focus in China. For now, falling interbank rates & relatively conservative 15 14 leverage gives us a more constructive view on 9 Chg since 2008 (%) 10 6 asset quality – increasingly in China as well 4 5 3 2 2 0 -26 Key country calls : OW on Philippines & 0 -16 -19 Thailand, turning positive on China banks; UW -5 on Indonesia, Australia. Watch USD funding stress in ASEAN on external issues. -10 TH HK SG PH ID CH MY IN TW AU US KR Mar-12 95 68 88 65 82 68 77 73 84 128 81 102 Reasons to be constructive: 1) inflation Source: BIS falling, policymakers have more “bullets” than the West, 2) LDRs have risen but interbank Stock views markets show no signs of panic/stress, 3) P/E (x) valuations are now 7-9x P/E across the region BB Code Rating Price PT FY12E FY13E Key risks: Higher provisions are the most Top Picks important risk to the region, although we think Metropolitan Bank MBT PM OW 90.85 100 13.2 10.9 more immediate downgrades are likely to result China Minsheng Banking - H 1988 HK N 6.65 7.25 5.1 5.5 from NIM compression as policy-makers ease HSBC Holdings plc 5 HK OW 74.2 83 11.7 9.9 liquidity & credit demand begins to wane. Avoids Sinopac Financial Holdings 2890 TT N 11.6 10 12.3 12.3 With credit quality being a continued focus, our TMB Bank Public Company Limited TMB TB UW 1.79 1.3 13.3 15.9 portfolio remains anchored in positions in higher- Bank Central Asia (BCA) BBCA IJ UW 8150 7000 18.3 14.9 quality & defensive franchises – such as ICBC, Source: Bloomberg, J.P. Morgan estimates. BOCHK, HSBC, HDFCB, SCB – as well as a mix Note: Share prices and valuations are as of October 12, 2012. of “growth” stories like Minsheng & Yes Bank. 17
  • 18. Kenneth Fong , CFAAC (852) 2800-8597 kenneth.kc.fong@jpmorgan.comGaming and Leisure J.P. Morgan Securities (Asia Pacific) Limited Macau names rolling forward EBITDA multiple  Key theme: The sector may see some near-term pressure on the back of a tougher comparison ahead EV/EBITDA (x) 16 (especially in July and August) and elevated analyst 15 expectations (Street’s revenue growth expectation for 14 2012 is 20-25% vs. actual delivered 26% ytd). We 13 12 advise investors to lock in some profit now as we see 11 opportunities for investors to gradually accumulate 10 9 over the next few months. We expect the sector to re- 8 rate again in late 3Q, when a gradually improving 7 Mar-10 May-10 Mar-11 May-11 Mar-12 May-12 Jan-10 Jul-10 Sep-10 Nov-10 Jan-11 Jul-11 Sep-11 Nov-11 Jan-12 China economy stimulates VIP headline revenue growth again and Sands Cotai Central phase II opens. 1-yr Rolling forward EBITDA mutiple Mean  Key driver: We expect gaming revenue to grow 24% Source: J.P. Morgan. Bloomberg consensus estimates in 2012 and 18% in 2013. Stock views  Key risk: Slower-than-expected China economic P/E (x) growth as Macau is a leveraged China internal BB Code Rating Price PT FY12E FY13E consumption play. OW Galaxy Entertainment Group 27 HK OW 25 31 14.8 12.7  Stock picks: In the short term, we like SJM for its MGM China Holdings Ltd 2282 HK OW 13.4 18.0 10.2 10.5 defensiveness, in the medium term we like Galaxy for Sands China Ltd 1928 HK OW 27.65 30 25.3 15.2 earnings upgrades, and Sands China for its longer- SJM Holdings Limited 880 HK OW 16.5 21 12.9 10.9 term mass market story. Wynn Macau Ltd 1128 HK OW 20.2 25.8 15.5 13.4 Neutral Melco International Development 200 HK N 6.75 8.9 11.6 11.3 Source: Bloomberg, J.P. Morgan estimates. Priced as at 12 October 2012. 18
  • 19. Sean WuAC (852) 2800-8538 sean.wu@jpmorgan.comHealthcare J.P. Morgan Securities (Asia Pacific) Limited  Key investment points: Low spending as a part of GDP means considerable room for  The worst is likely over for the drug sector growth  Pricing pressure rising for medical - Expected healthcare spending as % of GDP to go up to 10% by 2020E consumable but should be manageable  Fundamentals of the healthcare industry stay 1,900.0 Healthcare Spending % of GDP Y/Y Growth 1,980.0 35% strong - remain positive in the longer term 1,700.0 1,611.9 30% 1,500.0 1,453.5 25%  Key drivers: 1) new healthcare reform 1,300.0 1,157.4 20% 12th initiatives, 2) five-year plan fostering 1,100.0 866.0 984.3 15% 900.0 industry consolidation, and 3) potential 700.0 658.4 759.0 10% 579.0 corrections to Anhui EDL tendering 500.0 367.9 404.8 458.7 502.6 5% 319.7 300.0 0% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010  Key issues / risks: 1) Further price cuts, 2) Source: China Statistics Bureau. Adoption of DRG reimbursement, and 3) channel markup rule change  OW on The United Laboratoeis – a high-beta play with commodity prices recovering. Stock views P/E (x)  OW on Sino Biopharm– the best and most BB Code Rating Price PT FY12E FY13E OW balanced product portfolio and pipeline, in Sino Biopharmaceutical 1177 HK OW 2.91 3.6 19.5 16.5 our view The United Laboratories 3933 HK OW 4.05 4.5 21.3 12.0 UW  UW on China Shineway: 1) strong exposure China Shineway 2877 HK UW 10.9 12 10.1 9.2 to EDL; 2) adverse effects of TCM injections Source: J.P. Morgan estimates. Prices are as of 12 October 2012 19
  • 20. Karen Li, CFAAC (852) 2800-8589Infrastructure karen.yy.li@jpmorgan.com J.P. Morgan Securities (Asia Pacific) LimitedInvestment thesis: Key issues / risks: Infra capex: Key beneficiaries of increasing govnt  For infra operators in China, the key challenge is on the capex in China may be in two sectors: transport margin front as cost inflation continues despite softening infra and social housing. We expect rail capex to top-line volume growth (if any) and inability of tariff recover from end-2Q’12, to benefit names adjustments. including CRG, CRCC, CCCC, CSR, CSC, HOLI,  For E&C sector in Asia region, the key concern is IJM, WIKA. whether inflation would return to haunt, resulting in Machinery: Though valuation seems cheap, we sooner-than-expected ending of current stimulus remain concerned about cash flow and receivable measures of policy easing. collection; hence Neutral on Zoomlion, Lonking and Sany Heavy. Key calls:  Port operators have rebounded substantially P/E Next Yr YTD. We like HPH Trust for yield and Adani Company Name BB Code Rating Price PT FY2012E FY2013E EPS Y/Y Ports for growth. Hutchinson Port Trust HPHT SP OW 0.79 1 25.3 21.0 7.1 Tollroads, we believe, are defensive plays with CMHI 144 HK UW 23.6 20 13.2 12.7 -21.1 solid cash generation, healthy balance sheet and CCCC 1800 HK OW 6.71 11 6.5 6.0 5.6 decent yield. Operators are likely to benefit from CRCC 1186 HK OW 7.49 8.5 8.6 7.3 11.4 lifting of policy overhang at end-May as the sector CRG 390 HK OW 3.68 4.1 8.8 7.9 8.0 clean-up work comes to an end. Most Chinese CSR Corp Ltd. 1766 HK OW 5.66 9.3 13.2 10.2 7.5 names are good yield plays, in our view. Hollysys Automation HOLI US OW 10.331 13 10.1 9.2 35.8 Airports: Beijing Capital Airports growth Zhejiang Expressway 576 HK OW 5.54 7.1 11.4 12.3 -4.9 potential has been long overlooked while concerns Beijing Capital Intl Airport 694 HK OW 5.26 8.3 13.3 10.8 25.1 may be overblown on the construction of the 2nd WCT WCT MK OW 2.72 3.1 12.0 10.3 12.7 airport in Beijing. We also believe MAHB looks IJM Corporation IJM MK OW 5.06 5.8 16.6 13.9 19.0 interesting as KLIA II will be operational in Wijaya Karya WIKA IJ N 1330 1290 19.1 14.1 21.9 2012/2013. Samsung Engineering 028050 KS OW 170000 260000 10.8 9.9 22.9 Stock picks in China: BCIA, CSR, CCCC, CRG, GS E&C 006360 KS N 70000 80000 10.0 9.5 -15.7 CRCC Hollysys, Hutch Ports, Zhejiang Exy, and Adani Ports ADSEZ IN OW 125.4 160 24.0 17.7 13.9 selected machinery names. Outside China, our top Source: Bloomberg, J.P. Morgan estimates. picks in the region include: IJM, Wijaya Karya, Note: Share prices and valuations are as of October 12, 2012. Adani Ports, Samsung E&C and GS E&C. 20
  • 21. Bao Ling ChanAC (852) 2800-8592 baoling.chan@jpmorgan.comInsurance J.P. Morgan Securities (Asia Pacific) Limited The recovery in NBV growth appears modest year Change in Group EV & NBV for a 25bps decrease in investment yield & to date and remains vulnerable to changes in the risk discount rate respectively macro outlook. Valuation multiple expansion 5.0% appears unlikely for the life insurers in the absence 1.9% -2.7%-2.7% -1.4%-1.1% 0.1% 1.0% 0.8% of positive regulatory changes to drive sales. 0.0% -1.0% -0.3% -1.8% -2.3% -1.5% -1.4% -1.4% We think non-life insurers are likely to fare worse -5.0% -1.6% -3.8%-3.8% -3.3% -3.9% -3.4% -5.8% -4.5% than their life counterparts, given concerns about -5.1% -6.2% auto underwriting deterioration. Regulatory -10.0% -10.0% changes in Korea on long-term insurance likely to -13.1% worsen the operating outlook. -15.0% Change in Group EV Change in NBV -16.1% Equity market performance, if it holds up, could -20.0% CL NCL CTIH TYL PA SK Dongbu SLI KLI CPIC HMF Fubon SFM AIA lend support to earnings growth in the near term but the decline in bond yields and flattening of yield curves are likely to exert pressure on reinvestment Source: 2009-2010 company data. Note: ROE post dividend is defined as ROE x (1-payout yield in the medium-/long-term. ratio); Ping An and Fubons required capital growth has been inflated by acquisitions. The same issues facing the sector are likely to Stock view persist: 1) risk of EV/NBV cut from lowering of investment yield assumptions given low interest FY12E rates, and 2) capital consumption outpacing BB Code Rating Price PT P/E P/BV P/EV internal generation. Top Picks Top picks: AIA Group, Ping An and Samsung Life. AIA Group Ltd 1299 HK OW 29.25 31 19.2 2.0 1.5 Stocks to avoid: Shin Kong FHC. Ping An Insurance Group - H 2318 HK OW 61 65 15.9 2.6 1.5 Sector view Samsung Life Insurance 032830 KS OW 94900 140000 18.1 1.0 0.7 Avoids Shin Kong Financial Holdings 2888 TT N 7.87 9 5.3 0.7 0.2682996 Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 12, 2012. Source: J.P. Morgan. 21
  • 22. Dick WeiAC (852) 2800-8535 dick.x.wei@jpmorgan.comInternet / New Media J.P. Morgan Securities (Asia Pacific) Limited  Sector Focus: Mobile Internet, social companies Sector Valuation – Fwd P/E Trend to be the focus in China. 2H advertising trend still 55 52.3 unclear. 50 45  Poised for rerating: Ad stocks currently are 40 35.5x trading closer to the low end of historical multiples, 35 until there is more clarity we believe. We see 30 29.4x Baidu, with long-term growth clarity, as cheap, and 25 23.3x gaming & social sectors to be a relatively safe 20 15 17.2x haven. 10 12.2 11.1x  Key stock picks –Baidu, Tencent, Youku, NCSoft. 5 0 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12  Multiples: We see valuations of internet leaders Fwd PE (x) tracking around 16.8x forward P/E – in line with the Source: J.P. Morgan estimates, Bloomberg. Note: index includes BIDU, Tencent, historical mean. We believe that if the market SOHU, Alibaba, NTES, SNDA. improves, the sector can trade close to 1x-1.2x PEG, from around 0.6- 0.8x PEG at present Stock views  Stock catalysts: Data points for ad recovery, P/E (x) growth in webpage games, and monetization of BB Code Rating Price PT FY12E FY13E social and mobile products. OW  Key issues: GDP slowdown, new corporate Baidu BIDU US OW 111.22 200 24.0 17.8 governance issues, lack of IPO pipeline. Tencent 700 HK OW 258.8 276 30.4 23.0 Youku YOKU US OW 19.95 30 -27.2 -226.2 NcSoft 036570 KS OW 219000 380000 29.2 10.4 Source: Bloomberg, J.P. Morgan . Prices as of 12 October,2012. 22
  • 23. Daniel KangAC (852) 2800 8570 daniel.kang@jpmorgan.comMetals & Mining J.P. Morgan Securities (Asia Pacific) Limited Sector sell-off since 2Q as markets in risk-off Re-rating potential remains (P/B, P/NPV) mode, Europe debt crisis, Chinese growth 5 5 concern, lack of stimulus response 4 4 Key calls: Positive on Steel, Thermal muted recovery, Coking coal under near-term pressure, 3 3 still cautious on Aluminium. 2 2 Catalysts: 1) EU/US debt crisis contained, 1 1 China soft landing and FAI recovery, 2) supply cuts accelerating, 3) consolidation M+A activity 0 0 Steel Aluminium Coal Diversifieds Key issues: 1) China FAI slowdown, 2) Min to Max PBV Avg 3 yr PBV Spot PBV resource nationalism/policy risk, 3) cost inflation pressures remain. Top HK/China picks Investment themes: 1) Stay long where China P/E (x) is short - coal, copper, iron ore, 2) miners preferred to metals, 3) regional energy security BB Code Rating Price PT FY12E FY13E positive for thermal coal OW China Shenhua Energy - H 1088 HK OW 31.3 35 11.2 10.3 2012 Asia top picks: Angang Steel - H 347 HK OW 4.43 5.5 -9.1 61.5 1) OW – Shenhua, MMC, Rio Tinto, PanAust, Mongolian Mining Corporation 975 HK OW 3.84 7.5 9.3 5.1 Nalco, Angang; 2) Avoid – Chalco, Coal India UW Aluminum Corporation of China - H 2600 HK UW 3.34 2.7 -7.4 139.1 Source: Bloomberg, J.P. Morgan estimates Note: Market price as of 12 October 2012 23
  • 24. Lucia Kwong, CFAAC Joy WangAC (852) 2800-8526 (65) 6882-2312 lucia.yk.kwong@jpmorgan.com joy.qq.wang@jpmorgan.comReal Estate J.P. Morgan Securities (Asia Pacific) Limited J.P. Morgan Securities Singapore Private Limited  Monetary easing in China: Regional property stocks Asian Real Estate: prem/disc to NAV rallied 7.7% in June on interest rate cut in China and 20% positive global cues. Further credit easing is in store for +2 s.d. China as the PBoC announced a second 25bp rate cut 10% +1 s.d. on 5 July. We believe property restrictive measures are 0% here to stay, although developers should benefit from Mean = -14.1% higher volumes and, subsequently, lower inventory. -10% Remain constructive on Chinese developers. -1 s.d. -19.8% -20%  Prefer developers over landlords/REITs in HK and -2 s.d. Singapore: The valuation gap between Singapore and -30% HK developers and landlords/REITs has widened -40% significantly over the past six months. Given cheap Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 valuations, strong downside support and waning policy Source: Bloomberg, J.P. Morgan . risk, we believe developers will outperform landlords/REITs. Recent office and retail data in HK have not been encouraging, which should cap upside in Stock views landlords in the near term. P/E (x)  Fund-raising risks in China and S-REITs: Select BB Code Rating Price PT FY12E FY13E Chinese developers may take advantage of the recent Top Picks run-up to raise equity recapitalize their balance sheets. New World Development 17 HK OW 12.52 13.6 13.4 11.6 Singapore REITs, after strong YTD performance, have Agile Property Holdings 3383 HK OW 8.5 12.5 5.4 4.9 now turned acquisitive and might be exposed to equity- CapitaLand CAPL SP OW 3.16 3.4 12.9 11.2 raising risks. Prestige Estate Projects Limited PEPL IN OW 146.8 165 58.3 21.1  Our top picks after the recent rally. Play the credit Summarecon Agung SMRA IJ OW 1670 2300 26.1 18.1 policy easing theme in China. We also suggest adding Avoids Singapore and HK developers in the near term. Our top HangLung Properties picks across the region are: NWD, Agile, CAPL, 101 HK N 26 30.5 24.8 19.3 Glorious Property Prestige and SMRA. 845 HK UW 1.14 1 5.2 5.3 Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 12, 2012. 24
  • 25. Leon Chik, CFAAC (852) 2800-8590 leon.hk.chik@jpmorgan.com J.P. Morgan Securities (Asia Pacific) LimitedSMID-Caps Key message: We are switching our focus (from 16 One-year performance Asia ex Japan Small caps vs. market Aug) to prefer companies with domestic focus and 8% exposed to gov’t stimulus-induced demand that can improve pricing power and margins over the next 12 4% months. 0% Drivers/catalysts/events: 1) improving demand as -4% government starts stimulus, 2) Re-rating of industrials in 2013 as margins improve 3) market consolidation -8% 7/6/12 8/6/12 9/6/12 10/6/12 boosting pricing power. Key issues/risks: 1) Slower pace of recovery in 2012 MSCI APxJ APxJ Small compared to 2009. 2) Further 2012 earnings downgrades, 3) oversupply in capital -intensive Source: Bloomberg. industries and low pricing power. Stock views Key OW stock calls – ND Paper , prices rise as costs Price PT P/E (x) are kept under control’ CSC, contracts continue to BB Code Rating (HK$) HK$ FY12E FY13E surge; St Shine Optical, branded contact lens maker in Top picks Taiwan with attractive margins; and Siam Global Nine Dragons Paper 2689 HK OW 4.67 5.3 13.0 9.6 House, Thailand’s leader in home repair retailer in a China State Cons 3311 HK OW 8.92 13 15.2 11.0 structural growth story. St Shine Optical 1565 TT OW 415 430 18.1 15.7 Avoids Key Avoid calls –Vtech on challenges to its 40% Vtech 303 HK UW 95 90 16.1 15.2 European business, Fufeng, another year of stiff Fufeng 546 HK N 2.77 3.5 6.0 4.7 competition for MSG; and Jet Airways India on tough Jet Airways India JETIN IN UW 376.8 245 -1.8 -11.3 competitive landscape. Source: Bloomberg, J.P. Morgan estimates. Share prices as at  12 October 2012   25
  • 26. Alvin KwockAC (852) 2800-8533 alvin.yl.kwock@jpmorgan.comTechnology Hardware J.P. Morgan Securities (Asia Pacific) Limited  We turned positive on Tech in early August after a Tech stocks: 4Q momentum vs. 2-to-3-year outlook cautious/ bearish stance since March. We expect 6 Strong 4Q,  the rally to continue until end of October, given 3Q Weak 4Q,  Strong 2‐3 years Strong 2‐3 years 5 results and 4Q guidance are likely to be upbeat Quanta from most vendors. Hiwin 4 Synnex Lenovo Chroma Ju Teng AirTAC ZTE 3 ASIA  Key calls: 1) China IT demand recovery from 4Q Delta 2 DC Kinsus Spreadtrum onwards; 2) Greater China chipset makers repeat Advantech 1 their success in low-price smartphones; 3) Apple Tripod Chicony Unimicron TXC 4Q12 momentum solid in 4Q12 and 1Q13. 4) Enterprise -6 -5 -4 -3 -2 -1 0 0 1 2 Wistron 3 Asus 4 5 6 may see a budget flush in 4Q12 due to the removal -1 Hon Hai of tail risk. 5) Speeding up of China TD-LTE -2 Compal deployment in 2013 Catcher Acer -3 Pegatron HTC -4  Drivers/catalysts/events: 1) End of supply woes Strong 4Q,  Weak 4Q,  unleash LTE product cycle; 2) new product Weak 2‐3 years -5 2-3 Years Weak 2‐3 years launches in Android and Apple products and Windows 8; 3) TD smartphone cycle begins – after Stock views WCDMA; 4) announcement of TD-LTE spectrum P/E (x) allocation in 4Q12. BB Code Rating Price PT FY12E FY13E  Key issues / risks: 1) High-end smartphones may Top Picks go ex-growth if global carriers cut subsidies in a Lenovo 992 HK OW 6.16 8.1 17.0 13.9 weak consumer environment; 2) new product ZTE 763 HK OW 12.54 16 16.0 11.4 launch disappointment; 3) tail risks in macro events Quanta 2382 TT OW 69.3 90 9.8 8.0 Avoids  Key themes: 1) Whitebox datacenter (Quanta & Acer 2353 TT UW 27.5 20 47.2 15.4 Wistron); 2) China Affordable Broadband (Lenovo Catcher 2474 TT UW 129 120 10.1 9.5 & Digital China); 3) Rmb500-1000 smartphone Largan 3008 TT UW 612 570 18.6 16.0 (Mediatek & Spreadtrum & Kinsus); 4) LTE capex Source: Bloomberg, J.P. Morgan estimates. upcycle in China Note: Share prices and valuations are as of Oct 12, 2012. 26
  • 27. JJ ParkAC (822) 758-5717 jj.park@jpmorgan.comTechnology Upstream J.P. Morgan Securities (Far East) Ltd, Seoul Branch Although the macro economic outlook remains Annual chip cycle ex-memory* uncertain, we believe the overall tech sector will regain momentum in 2012 given the: 1) already- low product prices across all categories, 2) relatively undemanding valuations, and 3) prolonged underperformance. We expect 2012 to be another year of converged devices-smartphones and tablets on the back of new product launches along with new OS, especially Windows 8, which could drive robust volume growth for key components like mobile display (including AM-OLED), and AP while Source: WSTS, J.P. Morgan estimates, * In terms of Y/Y sales growth. DRAM, HDD, traditional CPU will likely witness decelerating growth due to PC unit cannibalization by tablets and to some extent by smartphones. Stock views Also, major panel makers would try to vertically P/E (x) integrate touch panels to capture revenue BB Code Rating Price PT FY12E FY13E opportunity in mobile display. Top Picks We like brand companies and related supply TSMC 2330 TT OW 86.3 110 14.2 13.0 chains (SEC, SDI, SEMCO, LGE, and LGI), AP Samsung Electronics 005930 KS OW 1296000 1800000 9.6 7.6 players (TSMC, SEC & UMC), Taiwan OSAT LG Display 034220 KS OW 27150 36000 38.0 7.3 (SPIL), AM-OLED supply chains (Korea material Avoids makers), while we remain cautious on display Chimei Innolux Corporation 3481 TT UW 10.15 8 -2.3 -11.9 related IC design companies, and Japan tech Source: Bloomberg, J.P. Morgan estimates. losing share to Korean counter-parties. Note: Share prices and valuations are as of October 12, 2012. 27
  • 28. James R. Sullivan, CFAAC (65) 6882-2374 james.r.sullivan@jpmorgan.comTelecommunications J.P. Morgan Securities Singapore Private Limited  Earnings revisions drive telecom stocks, which Stages of Telecom Investing are in turn driven by the stage of development. The critical difference between Stages 1 & 2 and Stage 3 is that data is not a scalable product. It is the first “rational” product a Telco has sold. LRIC base is the most important differentiator – spectrum and access to fiber are the key differentiators.  Drivers: 1) End of empty network periods. 2) Increasing WiFi offload capabilities. 3) Spectrum advantages.  Additional spectrum grants and irrational competition are the key risks. Source: Bloomberg, J.P. Morgan  We are OW on CU, Axiata and VNET. Avoid CM, Stock views Globe Telecom and M1. P/E (x) BB Code Rating Price PT FY12E FY13E Top Picks China Unicom (Hong Kong) Limited 762 HK OW 13.26 15.6 38.2 25.1 21 Vianet VNET US OW 12.01 16.3 142.8 88.1 Axiata Group Berhad AXIATA MK OW 6.47 5.6 17.3 15.4 Avoids China Mobile Limited 941 HK N 84.35 92 10.9 11.0 Globe Telecom GLO PM UW 1130 1000 15.1 15.1 M1 M1 SP N 2.65 2.5 17.4 14.0 Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 12, 2012. 28
  • 29. Corrine PngAC (65) 6882-1514 corrine.ht.png@jpmorgan.com J.P. Morgan Securities (Asia Pacific) LimitedTransportation Buy cheap stocks with low equity-raising risks and turnaround plays as Current valuations and profitability vs. history recovery is fragile: Transport stocks have corrected since their peak in Current Average Peak Trough Current vs Average Current vs Peak Current vs Trough Feb on the back of global demand growth and industry oversupply fears. P/BV (x) Valuations are c.27% below their historical average and are looking more Airlines 1.13 1.55 2.62 0.80 -25% -56% 31% attractive. The rerating catalysts will depend on whether the transport Dry Bulk Shipping 0.79 1.24 2.98 0.56 -29% -75% 27% companies can exercise enough capacity discipline to support loads and Container Shipping 0.85 1.28 2.35 0.64 -26% -63% 15% yields. However, recent rebound in fuel prices is negative for the sector. ROE(%) We recommend buying cheap stocks with strong B/S as well as Airlines 7.1 9.5 29.2 (21.5) (6.5) (26.2) 27.8 turnaround plays. Dry Bulk Shipping 1.4 15.3 34.8 (7.2) (20.3) (39.8) 10.2 Drivers/catalysts/events: Airlines: 1) Sector faces slight oversupply this Container Shipping 1.7 10.2 35.8 (22.2) (1.5) (1.1) (1.2) year (particularly for cargo) which will put pressure on yields and margins. Source: Bloomberg, Company reports and J.P. Morgan estimates The outlook from 2013 will be more benign as demand-supply growth balances again at c.7%. 2) We are bullish on the budget air travel market P/BV (x) and believe this threat is less priced in by the N Asian carriers. Bulk Shipping: 1) Although the near-term outlook is dire, the orderbook is Stock views BB Code Rating Price PT FY12E FY13E markedly overstated and vessel delivery shortfalls will be significant given Top Picks financing challenges for many ship owners and builders. Low freight rates AirAsia AIRA MK OW 3.05 4 1.5 1.4 and fuel efficiency priorities will drive accelerated scrapping. 3) Air China 753 HK OW 5.13 7 1.1 1.1 Oversupply will peak this year with a more balanced demand-supply Cebu Air CEB PM OW 57.1 90 1.7 1.5 growth balance of c.6% from 2013. Container Shipping: 1) Oversupply China Cosco 1919 HK OW 3.66 5.8 1.2 1.3 could persist until late 2013 given the sector’s c.70% demand exposure to CSCL 2866 HK OW 1.81 2.85 0.7 0.7 Europe and US. 2) To sustain/raise rates further, the liners would need to Evergreen 2603 TT OW 15.3 24 0.8 0.7 continue to remove capacity. Newbuild vessels would add c.7.6% to the Korean Air 003490 KS OW 47000 56000 1.1 1.1 global average container shipping capacity this year and another c.8.8% NOL NOL SP OW 1.1 1.35 0.9 0.8 in 2013E vs. demand growth of c.4.5% this year and c.6.0% next year. OOIL 316 HK OW 45 65 0.8 0.8 Pacific Basin 2343 HK OW 3.88 4.5 0.8 0.8 Key risks: 1) Europe recession and US recovery stalls although the Asian Samsung Heavy 010140 KS OW 33750 54000 1.5 1.3 airlines and bulk shipping companies are less affected than container SIA SIA SP OW 10.47 13 1.0 0.9 shipping companies as c.65% of their revenue originates from Asian SIA Engineering SIE SP OW 4.17 4.7 3.5 3.6 economies. 2) Weaker-than-expected China demand for raw materials. 3) Volatile fuel prices and F/X. 4) Industry consolidation/alliances. Avoids Jet Airways JETIN IN UW 376.8 245 24.8 -13.6 Top Picks: 1) Full service airlines: SIA, Korean Air, Air China. 2) LCCs: EVA Airways 2618 TT N 17.85 19 1.5 1.5 Cebu Air, AirAsia. 3) Bulkers: PacBasin, China Cosco. 4) Liners: OOIL, SMRT MRT SP N 1.73 1.6 3.3 3.2 Evergreen, CSCL, NOL. 5) Related industries: Samsung Heavy, SIA Eng. Source: Bloomberg, J.P. Morgan estimates. FY13 and FY14 for SIA, SIA Engg, Jet Airways and Top Avoids: Jet Airways, EVA Air and SMRT. SMRT as they have March year end Note: Share prices and valuations are as of Oct 12, 2012 29
  • 30. Boris KanAC (852) 2800-8573 boris.cw.kan@jpmorgan.comUtilities & Power Equipment J.P. Morgan Securities (Asia Pacific) Limited Asian utilities: One-year forward P/B now vs. avg. level in 2H08 Asian utilities have by and large outperformed the market (x) over the past 12M thanks to their defensive qualities, but Pgas -11% just staying defensive doesn’t work all the time. Phil uti +120% HK uti +6% With valuations ( in one-year forward P/B ) now falling below China city… +51% 2H08 levels for over half of the sub-sectors, we believe China water +16% India pwr… -71% investors should focus less on making a call on the overall Malay uti -20% market direction (turnaround / continued downturn) and India pwr uti -49% Thai uti 8% instead focus on the following potential positive catalysts -53% China pwr… over the next six months. China IPP -33% China wind… -85% Positive catalysts include #1) weakening fuel costs (spot Korea uti -54% regional coal prices will be down10-20% Y/Y in 2012E even 0 1 2 3 4 5 without a further decline), #2) the expected strength in P/B in 2H08 P/B today US$ against all currencies except JPY (China IPPs and Source: Bloomberg, J.P. Morgan estimates. (% figures represent % higher (lower) than cash-rich HK utilities will benefit), #3) volume growth average level in 2H2008. support from strong LT structural growth and stimulus- related stories(China city gas & waste treatment operators). Stock views We prefer stocks with the above positive catalysts in the P/E (x) next 6M and a strong operating CF yield (~10% with some BB code Rating Price PT 2012E 2013E upside potential) over those with potential negative Top picks surprises. Our top picks are (1) Huaneng (weakening coal CKI 1038 HK OW 46.45 56 11.4 10.9 costs & interest rate cut), (2) KEPCO (weakening fuel costs and potential tariff hikes), (3) CKI (M&A , positive 2012E BJ Ent 392 HK OW 49.1 60 18.3 13.7 earnings surprise), (4) BJ Ent (strong volume support from Kepco 015760 KS OW 26450 33000 -8.6 48.0 Huayou and gas-fired power plants & coal weather in BJ), Huaneng 902 HK N 5.6 6 9.9 8.7 (5) CEI (only listed dual play on China’s wastewater and CH. Everbright 257 HK OW 3.97 4.8 12.2 11.9 solid waste treatment). Avoids Longyuan 916 HK N 5.28 5.50 13.4 11.5 Stocks we would avoid are (1) Longyuan (overhang on JPVL JPVL IN OW 37.85 40 24.8 14.1 share placement and grid connection), and (2) JPVL (new Source: Bloomberg, J.P. Morgan estimates. project delay, high leverage). Note: Share prices and valuations are as of October 12, 2012. 30
  • 31. Tony SK LeeAC Asia Pacific ex Japan Equity Derivatives & Delta One Strategy (852) 2800-8857 tony.sk.lee@jpmorgan.comDerivatives J.P. Morgan Securities (Asia Pacific) LimitedBuy NIFTY versus MSCI Asia ex-Japan Outperformance Option  Amid the sharp correction in the crude oil prices, Indian equities held up relatively well and started outperforming the region. Our EM equity strategist Adrian Mowat upgraded India from Neutral to OW in his model portfolio as lower oil prices will reduce the countrys current account deficit (oil is a third of imports) and fiscal deficit (due to reduction in subsidies of PSU oil companies).  Option strategy: Investors who believe that the global economy will continue to remain weak keeping the oil prices low and benefiting Indian equities relatively, can consider buying an outperformance option of NIFTY versus MSCI Asia ex-Japan (MXASJ).  Outperformance structures provide the exposure of the relative performance between two underlying assets, with the downside limited to the option premium paid. Providing the relative performance on both upside and downside, these outperformance strategies tend to be more expensive. Below are the indicative options pricings:  Buy a 3M NIFTY-MXASJ 105% outperformance option at 2.57% premium  Buy a 3M NIFTY-MXASJ 105%-115% outperformance call spread at 2.02% premium Rolling returns of Brent crude vs. NIFTY–MXASJ since 2008 31
  • 32. Risks of Common Option Strategies Risks to Strategies: Not all option strategies are suitable for investors; certain strategies may expose investors to significant potential losses. We have summarized the risks of selected derivative strategies. For additional risk information, please call your sales representative for a copy of “Characteristics and Risks of Standardized Options.” We advise investors to consult their tax advisors and legal counsel about the tax implications of these strategies. Please also refer to option risk disclosure documents. Put Sale. Investors who sell put options will own the underlying asset if the asset’s price falls below the strike price of the put option. Investors, therefore, will be exposed to any decline in the underlying asset’s price below the strike potentially to zero, and they will not participate in any price appreciation in the underlying asset if the option expires unexercised. Call Sale. Investors who sell uncovered call options have exposure on the upside that is theoretically unlimited. Call Overwrite or Buywrite. Investors who sell call options against a long position in the underlying asset give up any appreciation in the underlying asset’s price above the strike price of the call option, and they remain exposed to the downside of the underlying asset in the return for the receipt of the option premium. Booster. In a sell-off, the maximum realized downside potential of a double-up booster is the net premium paid. In a rally, option losses are potentially unlimited as the investor is net short a call. When overlaid onto a long position in the underlying asset, upside losses are capped (as for a covered call), but downside losses are not. Collar. Locks in the amount that can be realized at maturity to a range defined by the put and call strike. If the collar is not costless, investors risk losing 100% of the premium paid. Since investors are selling a call option, they give up any price appreciation in the underlying asset above the strike price of the call option. Call Purchase. Options are a decaying asset, and investors risk losing 100% of the premium paid if the underlying asset’s price is below the strike price of the call option. Put Purchase. Options are a decaying asset, and investors risk losing 100% of the premium paid if the underlying asset’s price is above the strike price of the put option. Straddle or Strangle. The seller of a straddle or strangle is exposed to increases in the underlying asset’s price above the call strike and declines in the underlying asset’s price below the put strike. Since exposure on the upside is theoretically unlimited, investors who also own the underlying asset would have limited losses should the underlying asset rally. Covered writers are exposed to declines in the underlying asset position as well as any additional exposure should the underlying asset decline below the strike price of the put option. Having sold a covered call option, the investor gives up all appreciation in the underlying asset above the strike price of the call option. Put Spread. The buyer of a put spread risks losing 100% of the premium paid. The buyer of higher-ratio put spread has unlimited downside below the lower strike (down to zero), dependent on the number of lower-struck puts sold. The maximum the lower strike. Investors who own the underlying asset will have downside protection between the higher-strike put and the lower-strike put. However, should the underlying asset’s price fall below the strike price of the lower-strike put, investors regain exposure to the underlying asset, and this exposure is multiplied by the number of puts sold. Call Spread. The buyer risks losing 100% of the premium paid. The gain is limited to the spread between the two strike prices. The seller of a call spread risks losing an amount equal to the spread between the two call strikes less the net premium received. By selling a covered call spread, the investor remains exposed to the downside of the underlying asset and gives up the spread between the two call strikes should the underlying asset rally. Butterfly Spread. A butterfly spread consists of two spreads established simultaneously – one a bull spread and the other a bear spread. The resulting position is neutral, that is, the investor will profit if the underlying is stable. Butterfly spreads are established at a net debit. The maximum profit will occur at the middle strike price; the maximum loss is the net debit. Pricing Is Illustrative Only: Prices quoted in the above trade ideas are our estimate of current market levels, and are not indicative trading levels. 32
  • 33. Disclosures Companies Recommended in This Report (all prices in this report as of market close on 15 October 2012, unless otherwise indicated) Bank of China (BOCHK) (2388.HK/HK$21.80[19 March 2012]/Overweight), Changsha Zoomlion Heavy Industry (1157.HK/HK$9.96/Neutral), China Shenhua Energy - H (1088.HK/HK$31.25/Overweight), Coal India (COAL.BO/Rs356.45/Underweight), Digital China (0861.HK/HK$12.94/Overweight), Doosan Heavy Industries & Construction (034020.KS/W53200/Overweight), GS Engineering & Construction (006360.KS/W107000[19 March 2012]/Overweight), Giordano (0709.HK/HK$6.34/Overweight), HDFC Bank (HDBK.BO/Rs498.85[19 March 2012]/Overweight), Honam Petrochemical Corp (011170.KS/W240500/Underweight), Industrial and Commercial Bank of China - H (1398.HK/HK$4.94/Overweight), Kia Motors (000270.KS/W66100/Overweight), Kinsus Interconnect Technology Corp (3189.TW/NT$82.10/Overweight), Korean Air (003490.KS/W47000[12 October 2012]/Overweight), LG Display (034220.KS/W29150[19 March 2012]/Overweight), LG Electronics (066570.KS/W90400[19 March 2012]/Overweight), LG Innotek Co., Ltd (011070.KS/W106500[19 March 2012]/Overweight), Lonking Holdings Ltd (3339.HK/HK$1.55/Neutral), Lotte Shopping (023530.KS/W346500/Overweight), Malaysia Airports Holdings Berhad (MAHB.KL/M$5.84/Neutral), Mando (060980.KS/W140000/Overweight), MediaTek Inc. (2454.TW/NT$315.00/Not Rated), NCSoft (036570.KS/W301000[19 March 2012]/Overweight), National Aluminium Co Ltd (NALU.BO/Rs49.30/Overweight), Orion (001800.KS/W1031000/Overweight), PanAust Limited (PNA.AX/A$3.27[19 March 2012]/Overweight), Rio Tinto Limited (RIO.AX/A$65.85[19 March 2012]/Overweight), S-Oil Corp (010950.KS/W97600/Underweight), SANY Heavy Equipment International Holdings Company (0631.HK/HK$4.00/Neutral), SK Innovation Co Ltd (096770.KS/W169500[19 March 2012]/Neutral), SPIL (2325.TW/NT$31.60/Overweight), Sa Sa International Holdings Limited (0178.HK/HK$5.25/Overweight), Samsung Electronics (005930.KS/W1260000[19 March 2012]/Overweight), Samsung Engineering (028050.KS/W251000[19 March 2012]/Overweight), Samsung Heavy Industries (010140.KS/W40300[19 March 2012]/Overweight), Samsung Life Insurance (032830.KS/W99400[19 March 2012]/Overweight), Shinhan Financial Group (055550.KS/W44900[19 March 2012]/Overweight), Siam Commercial Bank (SCB.BK/Bt166.00/Overweight), Siam Global House Pcl (GLOB.BK/Bt16.80/Overweight), Spreadtrum Communications (SPRD/$20.48[12 October 2012]/Overweight), UMC (2303.TW/NT$11.40/Overweight), Wistron Corporation (3231.TW/NT$31.50/Neutral), Yes Bank (YESB.BO/Rs394.95/Overweight) Disclosures This report is a product of the research departments Global Equity Derivatives and Delta One Strategy group. Views expressed may differ from the views of the research analysts covering stocks or sectors mentioned in this report. Structured securities, options, futures and other derivatives are complex instruments, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Because of the importance of tax considerations to many option transactions, the investor considering options should consult with his/her tax advisor as to how taxes affect the outcome of contemplated option transactions. Important Disclosures · Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Samsung Electronics, Shinhan Financial Group, Kia Motors within the past 12 months. · Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: GS Engineering & Construction, NCSoft, Samsung Electronics, Samsung Engineering, Samsung Heavy Industries, Samsung Life Insurance, Shinhan Financial Group, LG Display, LG Electronics, SK Innovation Co Ltd, Doosan Heavy Industries & Construction, Honam Petrochemical Corp, Kia Motors, Korean Air, Mando, Orion. · Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Samsung Electronics, Shinhan Financial Group, LG Electronics, Kia Motors. 33
  • 34. Disclosures · Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: GS Engineering & Construction, Samsung Electronics, Samsung Engineering, Samsung Heavy Industries, Samsung Life Insurance, Shinhan Financial Group, LG Display, LG Electronics, SK Innovation Co Ltd, Doosan Heavy Industries & Construction, Kia Motors, Korean Air, Mando, Orion. · Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: Samsung Electronics, Samsung Life Insurance, Shinhan Financial Group, LG Electronics, SK Innovation Co Ltd, Doosan Heavy Industries & Construction, Kia Motors. · Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking Samsung Electronics, Shinhan Financial Group, LG Electronics, Kia Motors. · Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Samsung Electronics, Shinhan Financial Group, LG Electronics, Kia Motors. · Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from GS Engineering & Construction, Samsung Electronics, Samsung Engineering, Samsung Heavy Industries, Samsung Life Insurance, Shinhan Financial Group, LG Display, LG Electronics, SK Innovation Co Ltd, Doosan Heavy Industries & Construction, Kia Motors, Korean Air, Mando, Orion. · J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants of GS Engineering & Construction and owns 14,399,460 as of 15-Oct-12. · J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants of NCSoft and owns 20,101,610 as of 15-Oct-12. · J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants of Samsung Electronics and owns 54,258,570 as of 15-Oct-12. · J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants of Samsung Engineering and owns 13,781,210 as of 15-Oct-12. · J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants of Samsung Heavy Industries and owns 17,614,690 as of 15-Oct-12. · J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants of Samsung Life Insurance and owns 3,599,990 as of 15-Oct-12. 34
  • 35. Disclosures · J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants of Shinhan Financial Group and owns 14,233,140 as of 15-Oct-12. · J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants of LG Display and owns 39,141,580 as of 15-Oct-12. · J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants of LG Electronics and owns 35,212,130 as of 15-Oct-12. · J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants of LG Innotek Co., Ltd and owns 3,599,900 as of 28-Dec-11. · J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants of SK Innovation Co Ltd and owns 13,934,350 as of 15-Oct-12. · J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants of Doosan Heavy Industries & Construction and owns 16,313,450 as of 15-Oct-12. · J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants of Honam Petrochemical Corp and owns 17,965,060 as of 15-Oct-12. · J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants of Kia Motors and owns 45,719,870 as of 15-Oct-12. · J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants of Korean Air and owns 14,013,350 as of 15-Oct-12. · J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants of Lotte Shopping and owns 3,599,990 as of 15-Oct-12. · J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants of S-Oil Corp and owns 10,465,040 as of 15-Oct-12. 35
  • 36. Disclosures 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 analysts 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 research.disclosure.inquiries@jpmorgan.com with your request. Explanation of Equity Research Ratings, Designations 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.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. 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. J.P. Morgan Equity Research Ratings Distribution, as of September 28, 2012 Overweight Neutral Underweight (buy) (hold) (sell) J.P. Morgan Global Equity Research Coverage 44% 44% 12% IB clients* 52% 46% 34% JPMS Equity Research Coverage 42% 48% 10% IB clients* 69% 61% 53% *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. Please note that stocks with an NR designation are not included in the table above. Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.morganmarkets.com , contact the primary analyst or your J.P. Morgan representative, or email research.disclosure.inquiries@jpmorgan.com. Equity 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. Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. 36
  • 37. Disclosures Other Disclosures J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries. Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporations Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCCs website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf Legal Entities Disclosures U.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities plc (JPMS plc) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 25 Bank Street, London, E14 5JP. South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of the National Stock Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number - INB 010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MICA (P) 088/04/2012 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE. 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 analysts 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. 37
  • 38. Disclosures 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 JPMS plc. Investment research issued by JPMS plc has been prepared in accordance with JPMS plcs policies for managing conflicts of interest arising as a result of 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 plc, 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 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. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. 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. "Other Disclosures" last revised September 29, 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. 38