Asia/Pacific Morning Meeting Summaryimg.jrjimg.cn/2010/08/20100827160202965.pdf · China Unicom (China) / Increasing Visibility on Mobile Share Gains; ... Company/Industry Analysis

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August 27, 2010

Asia/Pacific Morning Meeting Summary

Highlights

The Morning Call

China Oilfield Services Ltd. (China) / Slowly but Surely Overweight

China Unicom (China) / Increasing Visibility on Mobile Share Gains; Reiterate Overweight Overweight

Fortescue Metals (Australia) / F2010 Result Strong; Cash Flow to Support Expansions Overweight

Guangzhou R&F Properties (China) / Devil in the Details – First Interim Dividend since 2007 Overweight

Industrial and Commercial Bank of China (China) / ICBC Positioned for Growth Overweight

PetroChina (China) / Improved Oil Price Realization Offset by Poor Downstream Equal-weight

Company/Industry Analysis

AGL Energy Ltd (Australia) / F2010 Results: Comfortably Double-digit EPS Growth Overweight

Asciano Group (Australia) / Coal Growth Priced in Equal-weight

Auckland International Airport Ltd (Australia) / Strong F2010, Weaker-than-expected Outlook Equal-weight

Iluka Resources Ltd (Australia) / 1H10 Modestly Ahead. Upside Is in the Price Equal-weight

New Zealand Oil & Gas (Australia) / Coal Dogs Result Equal-weight

PanAust Limited (Australia) / 1H10 US$53mn, Value in Portfolio Expansion Overweight

Ramsay Health Care (Australia) / F2010: Brownfields Deliver, as Does UK Overweight

Virgin Blue (Australia) / New Strategy, Better Profits? Equal-weight

Woolworths Ltd (Australia) / Surprised by a Margin Equal-weight

GCL-Poly Energy (China) / Lower Cost + Larger Market Share; EPS/PT Raised Overweight

Guangzhou Baiyun Int'l Airport (China) / 1H Earnings Hit by Higher Depreciation; Maintain EW Equal-weight

Huadian Power Int'l (China) / Significant Cost Pressure Equal-weight

Companies Featured 010620.KS, 0623.HK, 0697.HK, 0709.HK, 0762.HK, 0857.HK, 1071.HK, 1319.TW, 1387.HK, 1398.HK, 2388.HK, 2626.HK, 2688.HK, 2777.HK, 2883.HK, 2884.TW, 3800.HK, 600004.SS, 600009.SS, 600690.SS, 600897.SS, AGK.AX, AIA.NZ, AIO.AX, FMG.AX, ILU.AX, NZO.AX, PNA.AX, RHC.AX, VBA.AX, WOW.AX

M O R G A N S T A N L E Y R E S E A R C H

Morgan Stanley Asia Limited+

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August 27, 2010 Asia/Pacific Morning Meeting Summary

Hunan Nonferrous Metals Corporation (China) / Lower 1H10 Due to One-Offs; Maintain UW on Valuation and Lack of Near-term Catalysts

Underweight

Qingdao Haier Co. Ltd. (China) / 1H10 in Line, Expecting Slowdown in 2H10 Equal-weight

Renhe Commercial Holdings Co. Ltd (China) / Upgrade to OW on Valuation and Continued NAV Growth Overweight

Shanghai International Airport (China) / 1H Results in Line; Expect Stronger 2H on Expo; OW Overweight

SinoMedia (China) / 1H10: Robust Sales + Deep Discount = Buy Overweight

Xiamen Airport (China) / Lower PT to Rmb22.05; Maintain OW Overweight

Xinao Gas (China) / No Impact from Negative News; Strong 1H10 Overweight

BOC Hong Kong (Hong Kong) / In-line Headline; Core Better than Peers Overweight

Giordano International (Hong Kong) / Upping Earnings on Strong Margins Overweight

Shougang Concord (Hong Kong) / 1H10 Results Well Ahead: Clearly a Turnaround Story Overweight

Hyundai Mipo Dockyard (S. Korea) / Hi Inv and Sec Rights Offering Provide Good Entry Point Overweight

E.Sun Financial (Taiwan) / Revenue Growth Powered by Consumer Strength Overweight

Tong Yang Industry (Taiwan) / Solid Earnings Intact; Raising PT to NT$67.70 Overweight

Strategy/Economics Analysis

AlphaWise Evidence Series / Indian Farmer Survey: Lower Food Price Inflation, Higher Rural Consumption

S. Korea Discovery / Duksan Hi-Metal (077360.KQ): OLED Transformation Complete

S. Korea Discovery / Hansol LCD (004710.KS): Leading BLU Supplier at SEC

Taiwan Discovery / Darfon (8163.TW) – 2Q10 Analyst Meeting Key Takeaways

What's Changed Stock Rating Changes - Upgrades Stock Rating Price Target ModelWare Estimate Ticker Company From To From To From To (FY) Consensus*

1387.HK Renhe Commercial Holdings Co. Ltd

E O HK$1.90 HK$2.02 Rmb0.22 Rmb0.21(12/'10) Rmb0.20

Rmb0.21 Rmb0.23(12/'11) Rmb0.22 Rmb0.15 Rmb0.16(12/'12) Rmb0.15

Estimates/Price Target Changes - Up 0762.HK China Unicom -- O HK$12.50 HK$12.70 Rmb0.10 Rmb0.14(12/'10) Rmb0.24 Rmb0.11 Rmb0.16(12/'11) Rmb0.35 Rmb0.14 Rmb0.23(12/'12) Rmb0.46

2884.TW E.Sun Financial -- O -- NT$16.64 NT$1.00 NT$1.03(12/'10) NT$1.04

FMG.AX Fortescue Metals -- O -- A$6.26 US$1.62 US$1.63(6/'13) --

3800.HK GCL-Poly Energy -- O HK$2.20 HK$2.35 Rmb0.14 Rmb0.18(12/'10) Rmb0.12 Rmb0.18 Rmb0.20(12/'11) Rmb0.14 Rmb0.19 Rmb0.22(12/'12) Rmb0.14

0709.HK Giordano International -- O HK$3.90 HK$4.80 HK$0.31 HK$0.37(12/'10) HK$0.25 HK$0.35 HK$0.40(12/'11) HK$0.28

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HK$0.38 HK$0.44(12/'12) HK$0.31

ILU.AX Iluka Resources Ltd -- E -- A$5.13 A$0.05 A$0.07(12/'10) A$0.03 A$0.32 A$0.33(12/'11) A$0.39 A$0.61 A$0.62(12/'12) A$0.53

1398.HK Industrial and Commercial Bank of China

-- O HK$7.39 HK$7.40 -- -- --

NZO.AX New Zealand Oil & Gas -- E -- A$1.10 NZ$0.10 NZ$0.11(6/'11) NZ$0.11 NZ$0.11 NZ$0.16(6/'12) NZ$0.14

0857.HK PetroChina -- E HK$9.20 HK$9.40 Rmb0.62 Rmb0.66(12/'10) Rmb0.74 Rmb0.64 Rmb0.69(12/'11) Rmb0.82 Rmb0.75 Rmb0.81(12/'12) Rmb0.92

0697.HK Shougang Concord -- O -- HK$1.80 HK$0.08 HK$0.11(12/'10) HK$0.11 HK$0.19 HK$0.20(12/'11) HK$0.19 HK$0.24 HK$0.25(12/'12) HK$0.22

0623.HK SinoMedia -- O -- -- Rmb0.20 Rmb0.23 (12/'10) -- Rmb0.24 Rmb0.28 (12/'11) -- Rmb0.29 Rmb0.31 (12/'12) --

1319.TW Tong Yang Industry -- O NT$65.60 NT$67.70 NT$3.78 NT$4.15(12/'10) NT$4.30 NT$4.34 NT$4.83(12/'11) NT$4.43 NT$5.01 NT$5.53(12/'12) NT$5.29

WOW.AX Woolworths Ltd -- E A$26.80 A$30.00 A$1.58 A$1.64(6/'11) A$1.79 A$1.64 A$1.81(6/'12) A$1.92

Estimates/Price Target Changes - Down AGK.AX AGL Energy Ltd -- O -- A$15.66 A$1.26 A$1.22(6/'12) A$1.08

010620.KS Hyundai Mipo Dockyard -- O W231,000 W225,000 -- -- --

PNA.AX PanAust Limited -- O A$0.73 A$0.70 US$0.05 US$0.04(12/'10) US$0.04 US$0.07 US$0.06(12/'11) US$0.06 US$0.08 US$0.07(12/'12) US$0.08

RHC.AX Ramsay Health Care -- O A$15.10 A$14.94 -- -- --

600897.SS Xiamen Airport -- O Rmb23.54 Rmb22.05 Rmb1.22 Rmb1.10(12/'10) Rmb1.22 Rmb1.32 Rmb1.20(12/'11) Rmb1.32 Rmb1.47 Rmb1.32(12/'12) Rmb1.47

Estimates/Price Target Changes - Up/Down AIO.AX Asciano Group -- E A$1.90 A$1.75 A$0.08 A$0.09(6/'11) A$0.09 A$0.11 A$0.09(6/'12) A$0.11

2388.HK BOC Hong Kong -- O -- HK$25.00 HK$1.34 HK$1.35(12/'10) -- HK$1.68 HK$1.65(12/'11) -- HK$2.03 HK$2.12(12/'12) --

* First Call consensus estimate

The Morning Call

2883.HK, China Oilfield Services Ltd. (HK$9.65) /Slowly but Surely [email protected], Sara.Chan

1H10 results largely in line; OW: 1H10 results were not supposed to be a near-term catalyst for COSL’s share price. Instead, we view it as an indication that COSL’s earnings bottomed in 2009and are gradually improving. Our positive view on the stock reflects the longer-term industry outlook, where we remain bullish. On top of strong workflow in offshore China, COSL’s strong relationship with CNOOC should ensure that all capacity additions would be fully utilized. Meanwhile, CDE will benefit from improving asset mix and hence realized day-rates too, as it will add three new semis over the next three years. In terms of stock catalysts, we are looking for a

Rating: Overweight China Oil & Gas: Attractive Target: HK$13.00 52-Week Range: HK$12.28-6.64 Mkt. Cap(mn): US$5,578 ModelWare EPS: Rmb0.78 (FY 12/'10), Rmb0.95 (FY 12/'11)

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pickup in regional jack-up utilization rates to about 80% by 1H11 vs. 71% currently.

COSL reported 1H10 net profit of Rmb2.2bn, up 111% YoY. However, excluding 1H09 exceptional items, EBIT was flat YoY. While 1H10 EBIT accounted for 55% of our 2010 estimates, we note that operating costs are typically higher in 2H. We maintain our forecasts. Revenue grew 11% YoY, helped mainly by the Well Service and Marine Support divisions. Drilling EBIT was flat YoY. Despite some capacity increase, achieved day rates were lower as expected. 2H10 should do better as more capacities are being added. ·Well services was the segment with strong EBIT growth: up 49% helped by a 33% revenue increase. We see some upside in the bottom line as COSL has successfully restructured its debt, hence lowering its interest expense

Valuation not demanding: At current levels, COSL is trading at 2010e P/E of 11x and 2011e of 9x. With an average three-year ROE of 16% and trading at 2011e P/B of 1.3x, COSL is trading within its historical range even as the outlook gradually improves. 0762.HK, China Unicom (HK$10.34) /Increasing Visibility on Mobile Share Gains;Reiterate Overweight [email protected], Gary.H.Yu, Yvonne.Chow

We reiterate our Overweight on China Unicom after reviewing the company’s 1H10 results, which were above our expectations, on stronger-than-expected mobile revenue growth. These results provide increasing visibility of CU’s mobile share gain story due to its superior 3G product.

We have raised our 2010-11 EBITDA and EPS estimates by 2% and 35-43%, respectively. The EPS change looks big given the small base effect. Our price target has been revised up fromHK$12.50 to HK$12.70, implying 23% upside from current levels.

What we liked: 1) Mobile service revenue growth accelerated to 16.6% in 2Q10 vs. 11.9% in 1Q10 reflecting high-end 3G subscribers; 2) fixed revenues remained stable given accelerating broadband growth; 3) 3G-related subsidies were contained within Rmb1.2bn, well below the amount spent by its peers. What we did not like: 1) Guidance for handset subsidies and 3G-related costs to increase in 2H10, although this is in line with expectation; 2) no visible strategy on accelerating 3G growth from current levels.

Valuation: CU is currently trading at 2010E P/E of 66.8x and EV/EBITDA of 5.3x. While headlineP/E does not look cheap, we believe the stock is reasonably valued at <6x EV/EBITDA, especially given the relatively higher EBITDA CAGR of 11% for 2010-13E.

Rating: Overweight China Telecommunications: In-Line Target: HK$12.70 52-Week Range: HK$11.92-8.11 Mkt. Cap(mn): US$31,878 ModelWare EPS: Rmb0.14 (FY 12/'10), Rmb0.16 (FY 12/'11)

FMG.AX, Fortescue Metals (A$4.50) /F2010 Result Strong; Cash Flow to Support Expansions Morgan Stanley Australia Limited

[email protected], Cameron.Judd, Sarah.Lester

F2010 earnings: Results exceeded our forecast at US$443mn and the market at US$481mn, primarily on stronger revenue. Cash flow for the year was US$1.1bn, and we look for this to rise in F2011 to US$3.3bn. The balance sheet had net debt at US$1.7bn and we forecast this to a netcash position by the end of F2011. The company did not declare a dividend, as expected. Our price target at A$6.26/share implies 39% upside.

Debt restructure likely: The outlook for Fortescue is positive, in our opinion, and the next phaseof expansion is likely to require a debt re-structure. We think the existing debt facilities are restrictive due to covenants, and Fortescue is now in a position where more flexible debt structurecould be put in place. This could occur within the current half and reduce the cost of funding, which in turn would be positive to our DCF valuation through a reduction in our calculated WACC for the company.

Rating: Overweight Australia Metals & Mining: Attractive Target: A$6.26 52-Week Range: A$5.57-3.28 Mkt. Cap(mn): US$13,965 ModelWare EPS: US$0.69 (FY 6/'11), US$1.05 (FY 6/'12)

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Cash flows to support growth: We forecast cash flow of US$3.3bn in 2011 before capex. Cashflow from operations should fund most, if not all of the expansion capex for the next three years. Should Fortescue accelerate capex, the balance sheet and cash flow would support higher levelsof debt and in turn optimize the capital structure of the company.

Catalysts: We see several catalysts in the current half, including a potential debt re-structure, production report and exploration updates, and in late F1Q11, a formal announcement of the next phase of expansion projects by the Fortescue board. 2777.HK, Guangzhou R&F Properties (HK$11.02) /Devil in the Details; First Interim Dividend since 2007 [email protected], Coral.Ching, Angus.Kon.Chan

R&F is paying an interim dividend for the first time in two years: This is a strong message on its much-improved financial position. While net gearing will remain high for some time, strong contract sales and historical high cash balance has allowed the company to pay an interim dividend, not a common feature nowadays. We see the market divided on the interpretation of the interims, and any share price weakness could provide a buying opportunity, in our view.

Confident on a 2H catch-up: The interim earnings represent only 14% of our full-year forecast, and net margin is also uninspiring at 8%. Similar to 2009, we believe there will be a significant catch-up in 2H as higher ASP products are due for delivery. The 1H:2H delivery split is 26%:74%by GFA. There is well over Rmb20bn of unbooked presales, which gives us confidence on the swing in earnings and profitability just like last year.

Contract sales update: R&F has been tracking the sector average in terms of contract sales lock-in, and sales momentum has been picking up in the last few months. Average monthly sales in 1H was Rmb1.3bn; July saw Rmb3bn of sales, and the first three weeks of August saw Rmb2bn.

Outstanding land premium of Rmb1.8bn excluding the Asian Games Village (AGV) project. Presale of AGV is expected to commence in the next month or so, which will provide self-funding source for the remaining unpaid land premium.

Rating: Overweight China Property: In-Line Target: HK$12.90 52-Week Range: HK$16.74-8.55 Mkt. Cap(mn): Rmb31,048 ModelWare EPS: Rmb1.21 (FY 12/'10), Rmb1.17 (FY 12/'11)

1398.HK, Industrial and Commercial Bank of China (HK$5.58) /ICBC Positioned for Growth [email protected], Daniel.Shum, Jocelyn.Yang

Maintain Overweight; PT HK$7.40; raising estimates for 2010-12 by 3-4%: ICBC reported net 1H10 profit of Rmb84.6 bn, up 27% YoY and 10% ahead of our estimate due to lower-than- expected credit cost and opex. With a strong capital base and liquid balance sheet, we believe large cap Chinese banks will see fewer challenges to execute growth strategies.

Tier 1 continued to lead H share banks: Capital generation from operations was positive in 1H10. Tier 1 would reach 10.9% at end-2011, assuming full conversion of CB and completion of right issue.

Strong earnings growth driven by positive trends across key metrics: ICBC reported 27% YoY growth in net profit in 1H10, on NIM improvement, loan growth, fee growth, and lower cost income ratio. NPLs were down 9% HoH with NPL ratio at 1.26% mid-2010. NPL coverage was 190%.

Impact of trust products limited; LGFP exposure is lower than some mid-sized banks: ICBC had around Rmb700bn of LGFP loans, or 11% of total loan book mid-2010. ICBC has Rmb235bn of trust products outstanding mid-2010 with Rmb180bn to mature within 2010. The rest was equivalent to less than 1% of end-2011 RWA. Fees from distribution of credit-type trust

Rating: Overweight China Banks: In-Line Target: HK$7.40 52-Week Range: HK$7.07-5.16 Mkt. Cap(mn): Rmb1,629,621 ModelWare EPS: Rmb0.48 (FY 12/'10), Rmb0.54 (FY 12/'11)

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products were limited, at 6-7% in 1H10. 0857.HK, PetroChina (HK$8.51) /Improved Oil Price Realization Offset by Poor Downstream [email protected], Sara.Chan

Raising EPS, PT; maintain EW: Better-than-expected 1H10 results were due to a higher-than-anticipated oil price realization. However, the positive was offset by a poor downstream contribution, which saw 1Q10 EBIT down 46% YoY. At 2010e P/E of 11x, PetroChina is trading at a 6% premium to CNOOC, where we argue has a much stronger earnings profile. Within the group, we still prefer CNOOC (0883.HK, OW, HK$13.06) for its pure upstream exposure and view it as a safer way to gain exposure in the sector.

1Q10 helped by better realized oil price: 1H10 results came in at Rmb65.3bn. This accounted for 49% of Rmb134bn for consensus. We have raised our 2010-12e by 4-6% to reflect lower oil price realization discount vs. benchmark. We have also raised our PT to HK$9.40.

E&P: 1H10 saw the discount of PetroChina’s realized oil price vs. WTI. Narrowed to US$3.7/bbl vs. a historical average of US$5-7/bbl. In our view, the improvement in oil price realization has been due to the lower discount of Duri (benchmark crude for PetroChina) vs. WTI. Downstream: EBIT fell a significant 47% YoY in 1H10 because of competition in the refined product market. Chemicals also dipped as ethylene-naphtha spreads, fell from US$560/ton in 1Q10 to US$460/ton in 2Q10.

Rising earnings risks into 2H10: With oil price likely to be stable in 2H10, the downstream segments are the key swing factor in 2010 earnings. We expect the oversupply of domestic refined products to persist and put pressure on margins. Similarly, supply additions from Middle East have resulted in further 13% decline in E-N spreads since July-10, and it is not expected to recover until 2012. We therefore see downside risks to 2H10 earnings

Rating: Equal-weight China Oil & Gas: Attractive Target: HK$9.40 52-Week Range: HK$10.56-7.86 Mkt. Cap(mn): US$200,279 ModelWare EPS: Rmb0.66 (FY 12/'10), Rmb0.69 (FY 12/'11)

Company/Industry Analysis

AUSTRALIA

AGK.AX, AGL Energy Ltd (A$14.95) /F2010 Result: Comfortably Double-digit EPS Growth Morgan Stanley Australia Limited

[email protected]

AGL delivered 13.2% NPAT growth and looks set to do so again in F2011 and F2012. Our F2012 forecasts remain above-consensus (EBITDA up a touch, 4% trim to EPS). They include the benefits of consolidating the NSW government-owned retailers, a transaction which appears likely to complete before the end of 2010.

What's new: AGL reported FY10 NPAT at A$426mn, which given June guidance was not a surprise. The highlight was 19.5% EBIT growth in the retail segment, which represents just underhalf the total earnings. No F2011 guidance was provided, in line with AGL’s usual practice.

Investment thesis: We remain Overweight on a longer-term view, and continue to see higher- than-consensus earnings growth from a privatisation of NSW electricity retailers and the re-acceleration of AGL’s wind generation investment, which is already occurring.

What's next: Final bids for NSW electricity assets are due November 1, and we expect the transaction to be announced later in 2010. In our view, the only likely buyers of the retail assets

Rating: Overweight Australia Utilities: In-Line Target: A$15.66 52-Week Range: A$15.69-13.37 Mkt. Cap(mn): A$6,729 ModelWare EPS: A$1.07 (FY 6/'11), A$1.22 (FY 6/'12)

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are the existing incumbents, which should consolidate the industry and improve returns. AIO.AX, Asciano Group (A$1.68) /Coal Growth Priced In Morgan Stanley Australia Limited

[email protected]

We remain Equal-weight but have lowered our price target to A$1.75: We believe Asciano is fully priced at 18.7x 11e P/E vs. global port comps trading on average at 18.1x and rail comps trading at 11.8x.

F2010e EBITDA of $723.7m is underpinned by a coal growth story that is well understood and priced into the stock, in our view. Guidance suggests 31.2% F2011 EBIT growth, mostly driven by contracted coal volumes in QLD. However, container ports continue to disappoint with a 400bp fall in market share to 48.7%, flat revenue growth at odds with industry trend, and a 250bpdecline in EBITDA margin.

Where we differ: Our F2011e EBIT of A$548.1mn is 5.0% below consensus of A$577mn. Our valuation implies a three-year EBIT CAGR of 14.2% as Asciano benefits from a moderately paced and patchy recovery.

What’s next: Uncertainty whether QR will be sold as a vertically integrated company or whetherthe QCIRG consortium will own the below-rail assets may weigh on the stock in the near-term. An outcome is likely to be known in the next two months.

Rating: Equal-weight Australia Infrastructure: In-Line Target: A$1.75 52-Week Range: A$1.94-1.44 Mkt. Cap(mn): A$4,916 ModelWare EPS: A$0.09 (FY 6/'11), A$0.09 (FY 6/'12)

AIA.NZ, Auckland International Airport Ltd (NZ$1.99) /Strong FY10, Weaker-than- expected Outlook Morgan Stanley Australia Limited

[email protected]

F2010 results at top end of guidance: AIA reported an underlying profit (of NZ$105mn, in line with the prior period, at the top end of revised guidance, and in line with MS estimates. Revenue was down 1% on traffic growth of 2%, mainly due to the impact on retail revenues from the ITB development and duty-free un-wind. EBITDA was also down 1% to NZ$276mn, on good cost control and restructuring costs in 2009.

Robust traffic supports robust result: International passengers increased 2.4% during F2010 whilst domestic passengers increased 7.8%. AIA expects a further 850,000 seats to be added by the end of 2011.

Outlook cautious: Management provided profit guidance of NZ$112-118mn for F2011, assuming passenger growth of 5%. Our F2011 forecast is NZ$120mn (consensus is NZ$118mn), an increase of 14% on F2010. Our view on the aviation market remains cautious. Risk also remains around the Commerce Commission's determination on the regulatory framework for NZ airports.

Rating: Equal-weight Australia Infrastructure: In-Line Target: NZ$1.92 52-Week Range: NZ$2.06-1.71 Mkt. Cap(mn): NZ$2,607 ModelWare EPS: NZ$0.09 (FY 6/'11), NZ$0.10 (FY 6/'12)

ILU.AX, Iluka Resources Ltd (A$5.25) /1H10 Modestly Ahead; Upside Is in the Price Morgan Stanley Australia Limited


1H10 loss of A$7mn: This was ahead of our forecast of a loss of A$16mn, and we look for a return to profit in 2H. A dividend was not declared, as expected. Net debt was A$439m as of end-June 2010, and gearing was 29% (ND/ND+E). Net debt to EBITDA (annualized) was 1.9x, and we expect this ratio to reduce over the next two months. We think most of the good news from Iluka is factored into the share price and rate the stock Equal-weight.

Supply an issue: Iluka sees itself as the producer controlling the marginal tonne in zircon and

Rating: Equal-weight Australia Metals & Mining: Attractive Target: A$5.13 52-Week Range: A$5.59-3.22 Mkt. Cap(mn): A$2,663 ModelWare EPS: A$0.07 (FY 12/'10), A$0.33 (FY 12/'11)

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therefore able to balance the market and supply. While this may be the case, we also think that ultimately it places a limit on the upside potential of zircon prices as there is oversupply in the market that Iluka will eventually release. In TiO2 markets, oversupply is also an issue and while some competitors have near-term issues, they are not likely to be permanent. Our forecasts haveprices escalating in the near to medium term, and we think this is reflected in the share price.

Iron ore above forecast: The iron ore royalty from Mining Area C was ahead of our forecast and was the primary driver of the better-than-expected result. We think that on a 24-month view, Iluka is likely to restructure the royalty to better the company’s fair value of this income stream.

Next catalyst: We do not see any near-term company-specific catalysts. Medium term, demand from China is expected to drive zircon and TiO2 markets, but near term the OECD remains a primary driver of demand and prices, in our view. NZO.AX, New Zealand Oil & Gas (A$0.92) /Coal Dogs Result Morgan Stanley Australia Limited

[email protected], Stuart.Baker

F2010 loss after tax of NZ$3.3mn: We were expecting close to break-even, albeit positive, with NPAT of NZ$6.6mn. Like other E&Ps under coverage, NZO's earnings suffered as a result ofsignificant exploration write-offs (NZ$30.7mn), after an unsuccessful F2010 program in NZ. This,combined with losses from Pike River, were the main contributors to the large YoY fall in profit (pcp NZ$55mn).

This year was a tale of two halves: The first half was loss making on declining volumes from Tui and exploration write-offs; the second half was profitable as volumes from Kupe came on line,boosting revenue and the bottom line. We expect profit to normalize around the NZ$55mn level, including contributions from NZO’s PRC investment going forward.

Operating cash flows and the balance sheet are healthy, and we expect both to improve. The company is net cash to the tune of NZ$79.6mn, with cash of NZ$142.4mn as at June 30 (pcp NZ$175m) and investments in Pike River Coal and Pan Pacific Petroleum.

However, growth in the E&P business is hard to see, with exploration prospects immature, and NZ offering few obvious opportunities. The company will now turn its attention overseas, withhopes of progressing investment opportunities over the coming year. This comes with increasedrisks for NZO, in our view.

Like other smaller oils under our coverage, growth remains the key issue, with exploration activity now slowing. NZO has the means to grow, but uncertainty over how and where it will puts its capital to work keeps us Equal-weight at this time. Our price target is unchanged at A$1.10/sh.

Rating: Equal-weight Australia Oil & Gas: Attractive Target: A$1.10 52-Week Range: A$1.47-0.92 Mkt. Cap(mn): NZ$457 ModelWare EPS: NZ$0.11 (FY 6/'11), NZ$0.16 (FY 6/'12)

PNA.AX, PanAust Limited (A$0.57) /1H10 US$53mn; Value in Portfolio Expansion Morgan Stanley Australia Limited


1H10 result of US$53m below our forecast of US$63m: The key item of difference was the put option premium taken out on metal production that was put in place as downside risk protection with a restructured debt package. We have adjusted our forecasts to include this downside earnings protection. The balance of the result was effectively in line with our forecasts. We have adjusted our price target to A$0.70/share following this change to our forecasts. The stock is trading at a discount to our DCF valuation of A$0.74/share and a discount to our price target of A$0.70/share, which takes into account upside and downside risks.

Guidance upgraded: PanAust upgraded production guidance for 2010 to over 63kt of copper, 50koz of gold and 400koz of silver and cash costs to US$0.95/lb to US$1.05/lb. This reflects the

Rating: Overweight Australia Metals & Mining: Attractive Target: A$0.70 52-Week Range: A$0.65-0.39 Mkt. Cap(mn): US$2,979 ModelWare EPS: US$0.04 (FY 12/'10), US$0.06 (FY 12/'11)

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strong performance to date from the Phu Kham copper / gold mine, in our view.

Portfolio development on track: The company has positioned itself for growth and is acting onits project options.

Next Catalyst: We expect exploration success and quarterly production reports to be key news event drivers for PanAust. RHC.AX, Ramsay Health Care (A$13.55) /F2010: Brownfields Deliver, as Does UK Morgan Stanley Australia Limited

[email protected], James.R.Rutledge

Steady underlying business, Brownfields to produce improving returns and UK margin expansion provides an extended growth platform: Our analysis suggests that the UK portfolio was cost-heavy on acquisition. Matching only one KPI of ancillary staff/bed to Australian levels would amount to ~A$29mn pretax earnings upside alone. We also forecast that RHC’s significant capex hump is beginning to make a net positive investment ahead of expectations. These two prongs provide the platform for continued growth in the mid to longer term. Although valuation is beginning to look full, we retain our Overweight rating as our analysis suggests it has the least near-term earnings risk of our Australian healthcare service names.

Brownfields expansion pays off: We expect a further ~A$33.0mn EBIT in F2011 from Brownfields expansion. We forecast this to grow to A$57.3mn in F2012 where ROI will be then 13.6 (vs. longer term guidance for ROI of 15%). Overall, we forecast above long-term growth into F2011-12 driven by Brownfields expansion and are forecasting 10.3% EPS growth.

RHC reported results for the 12 months to June 2010: Core NPAT and core EPS grew ~2% faster than F2010 guidance. F2011 outlook implied ~2-3% upgrades to Street core earnings projections. The earnings beat was largely driven by lower net interest against our numbers. UK saw a further 240bp margin expansion over F2009. RHC will not convert/redeem CARES (hybrids) but will pay an increase to margin by 2%.

Rating: Overweight Australia Healthcare Services & Hospitals: Cautious Target: A$14.94 52-Week Range: A$15.49-10.20 Mkt. Cap(mn): A$2,740 ModelWare EPS: A$0.93 (FY 6/'11), A$1.03 (FY 6/'12)

VBA.AX, Virgin Blue (A$0.32) /New Strategy, Better Profits? Morgan Stanley Australia Limited

[email protected]

We remain cautious on Virgin Blue’s ability to penetrate the corporate traveler market and believe risks surrounding this long-term strategy justify current trading multiples.

What's new: F2010 Underlying PBT of A$31.0mn was within guidance of A$20-40mn and in line with consensus. Short-haul underlying EBIT rose 88% to A$127.6mn, driven by 2.9% domestic yield recovery and 5.7% capacity increase predominantly on its international routes. The long-haul segment continued to struggle, incurring a loss of A$42.8mn; however, management has predicted break-even by the end of F2011 if improving US demand prevails.

Virgin Blue also unveiled plans to set up two hubs in Los Angeles and Abu Dhabi, and enteredan alliance with Etihad to operate 27 weekly services between Abu Dhabi and Australia. The choice of these two hubs is interesting, given the disparity in aviation growth forecasts between Asia, and Europe and US. The latter two markets are also more mature and better served by incumbents. Simultaneously, it will exit South Africa and Phuket, in addition to withdrawing from the NZ domestic market.

Conservative outlook: Management states conditions remain volatile and competitive activity continues to place downward pressure on yields. Virgin Blue has pulled back some capacity andis now targeting 6-8% ASK increase in F2011, which we feel is more appropriate, given we expect a slow-moderate demand recovery. Virgin Blue looks attractive on valuation, but we think

Rating: Equal-weight Australia Airlines: In-Line Target: A$0.37 52-Week Range: A$0.80-0.28 Mkt. Cap(mn): A$707 ModelWare EPS: A$0.00 (FY 6/'10), A$0.00 (FY 6/'11)

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going “up-scale” is more difficult than launching a low-cost carrier offshoot and hence prefer to wait and see if this “game changer” delivers. WOW.AX, Woolworths Ltd (A$27.54) /Surprised by a Margin Morgan Stanley Australia Limited

[email protected], Martin.Yule, Crystal.Wang

Retain Equal-weight; raising forecasts, PT: Woolworths Food and Liquor division has again carried its “newer businesses” through F2010. We think the debate on WOW will begin to shift from sales growth to the sustainability of F&L margins. Should Australian private label penetrationcatch up with other developed nations, then margins should continue to expand. WOW now trades at a F2011 P/E of 15.4x virtually the lowest multiple since the mid-1990s, so slowing incremental returns are probably now in the share price. Our price target rises from A$26.80 to A$30.00 on stronger F&L margin assumptions and the A$700m off-market buyback.

What’s new: F2010 earnings were 1.4% ahead of Morgan Stanley estimates and 0.4% ahead of consensus. The company announced an A$700m off-market buyback. Earnings guidance for 8-11% growth was provided for F2011. WOW still expects double-digit earnings growth in the LT.

Changes to our forecasts: We raise our NPAT forecasts by 3.8% in F2011 and 9.6% in F2012 to reflect stronger Australian food and liquor margins and theA $700m buyback that adds 1.3% and 1.8% to our F2011 and F2012 earnings forecasts, respectively.

Rating: Equal-weight Australia Retail: Cautious Target: A$30.00 52-Week Range: A$30.57-25.19 Mkt. Cap(mn): A$34,108 ModelWare EPS: A$1.64 (FY 6/'11), A$1.81 (FY 6/'12)

CHINA

3800.HK, GCL-Poly Energy (HK$1.87) /Lower Cost + Larger Market Share; EPS/PT Raised Morgan Stanley Asia (Singapore) Pte.

[email protected], Sophie.Lu

Significant cost reduction: In F2Q10, GCL reduced the manufacturing cost of its non-Si wafers to US$0.27/Wp and its polysilicon to US$31.5/kg. With further reductions, it should be well placedto be the world’s lowest-cost producer of wafers for the solar industry next year. As a result of thelower costs and slightly higher polysilicon pricing, we raised our earnings forecasts for F2010 and F2011and our target price to HK$2.35. We believe that consensus estimates are too low and will be increased.

Globally competitive wafer cost: GCL ramped up its wafer manufacturing with an admirable cost structure. In view of its learning curve and further process improvements, we expect it to achieve a cost of US$0.25/Wp (US$0.97/wafer) within a year. While we expect significant oversupply and lower prices in the wafer market in 2011, we believe a low-cost producer like GCL can gain share.

Impressive polysilicon cost: GCL reduced its manufacturing cost to US$31.5/kg and expects to cut it to US$28/kg. This would imply a very competitive cash cost of US$23/kg. With such a cost structure, GCL will likely increase capacity further and gain share in F2012.

Earnings growth despite oversupply: We expect a substantial oversupply of polysilicon and wafers next year to reduce spot polysilicon prices from the current US$60/kg to US$45/kg and spot wafer prices from US$0.85/Wp to US$0.70/Wp. Despite this, we estimate that GCL’s profitswill increase thanks to higher volumes and further cost reductions.

Rating: Overweight China Clean Energy: In-Line Target: HK$2.35 52-Week Range: HK$2.77-1.20 Mkt. Cap(mn): Rmb25,295 ModelWare EPS: Rmb0.18 (FY 12/'10), Rmb0.20 (FY 12/'11)

600004.SS, Guangzhou Baiyun Int'l Airport (Rmb9.76) /1H Earnings Hit by Higher Depreciation; Maintain EW Morgan Stanley Asia Limited

[email protected], Andy.Meng, Tommy.Cw.Wong, Victoria.WY.Wong

Rating: Equal-weight China Transportation: In-Line Target: Rmb10.71 52-Week Range: Rmb12.36-8.47 Mkt. Cap(mn): Rmb11,224

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Morgan Stanley Asia (Singapore) Pte.

[email protected]

We view GBIA’s interim earnings as disappointing due to higher depreciation cost arising from the full operations of the new East-and-West corridors from 2Q10. With only 8% YoY growth in net profit, the interim results account for 40-41% of our and consensus estimates for F2010. While we maintain our PT and rating, we will likely revisit our model after further details from management.

GBIA’s net earnings rose by only 8% YoY in 1H10 to Rmb274mn. With 31% earnings growth in 1Q, this implies declines of 26% QoQ or 13% YoY in 2Q earnings, led by higher depreciation cost. While revenue growth held stable at 13-16% YoY in 1Q-2Q on 12-14% passenger growth over the period, operating costs rose 36% YoY in 2Q, or 14% from 1Q. As result, both GP and OPmargins were dampened to 32% and 19% in 2Q from 38% and 26% in 1Q, respectively.

Double downside risks remain: Despite our EW rating, we think investors should avoid the stock in the near term given the risks from the cancellation of airport construction fees beginning December 30, 2010, and potential new capex of Rmb14bn for the construction of a new runway and terminal in the near future..

ModelWare EPS: Rmb0.60 (FY 12/'10), Rmb0.72 (FY 12/'11)

1071.HK, Huadian Power Int'l (HK$1.88) /Significant Cost Pressure [email protected], Eva.Hou

Huadian reported a 1H10 net profit of Rmb26mn, down 95% from Rmb545mn in 1H09. We believe the underlying power operation was loss-making while income from coal mines contributed Rmb58mn to profit. Unit fuel cost, at Rmb257.52/MWh, increased 17.4% vs. the 2009 average, the worst among all the Chinese IPPs, due to its high dependence on railroad coalfrom Shanxi. Net debt to equity ratio increased to 454% in 1H10 from 408% by 1Q10 due to consolidation of Century Power and Pingshi Power Plant. Huadian performed well on power demand, where its average utilization hours at 2,760 hours, up 19% YoY, the highest growth among all peers. High power demand worked against Huadian as it drove up local coal prices. We expect significant downward pressure on 2010E consensus earnings of Rmb617mn as 1H10accounted for only 4% of the estimate.

What's new: In August, Huadian announced the acquisition of stakes in two coalmines in Inner Mongolia: 35% of the Heiliang mine and 25% of the Manghatu mine. The former is expected to becommissioned in 2013 with annual capacity of 18mn tons. The latter will be commissioned by end-2011 with designed capacity of 12mn tons p.a. and maximum capacity of 24mn tons p.a. Since its power operation is unlikely to see material near-term improvement, coal operations may contribute a significant portion of Huadian’s future earnings.

Investment thesis: Huadian is the only Chinese IPP that showed QoQ earnings deterioration, incurring a loss in 2Q10 vs. a small profit in 1Q10. We remain on the sidelines on Huadian, given its high earnings risk on coal prices and its power plants’ highest exposures to inland/western areas. We remain concerned about Huadian’s highly stretched balance sheet and potential equity issuance.

Rating: Equal-weight China Power: In-Line 52-Week Range: HK$2.78-1.52 Mkt. Cap(mn): Rmb11,130 ModelWare EPS: 0.02Rmb (FY 12/'10), 0.03Rmb (FY 12/'11)

2626.HK, Hunan Nonferrous Metals Corporation (HK$2.27) /Lower 1H10 Due to One-Offs; Maintain UW on Valuation and Lack of Near-term Catalysts Morgan Stanley Asia Limited

[email protected], John.Lam


[email protected]

1H10 results disappointing on inventory write-off and exchange loss: HNC posted a 1H10

Rating: Underweight China Nonferrous Metals & Mining: In-Line Target: HK$2.20 52-Week Range: HK$3.65-1.95 Mkt. Cap(mn): US$1,071 ModelWare EPS: Rmb0.07 (FY 12/'10), Rmb0.11 (FY 12/'11)

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loss of Rmb(0.05)/sh vs. our forecast of profit of Rmb0.05/sh, due to inventory write-off of roughly Rmb200mn and foreign exchange loss of Rmb175mn. Without these two one-offs, we estimate 1H10 would have shown breakeven.

Earnings forecast unchanged: Management highlighted profits from its most recent month, which give us comfort with our full-year forecast of Rmb0.07/sh, still 20% below consensus. Our 2011 EPS is also below consensus by 15%, reflecting our more bearish view on zinc.

Lack of near-term catalysts: The link between Minmetals and Hunan Nonferrous aims to consolidate the zinc, lead and rare earth resources in Hunan province over the next three to five years. However, given the complexity of both companies’ structure, we expect the consolidation,and/or asset injection, to progress slowly.

Valuation unattractive; maintain UW: HNCtrades at 1.6x 2011e P/B. Despite the underperformance (down 12% vs MSCI China up 3%), the valuation is unattractive relative to others in the sector and we believe the company lacks near-term catalysts. We see better risk/reward from other metals & mining companies. 600690.SS, Qingdao Haier Co. Ltd. (Rmb22.79) /1H10 in Line, Expecting Slowdown in 2H10 Morgan Stanley Asia Limited

[email protected]

Morgan Stanley Taiwan Limited

[email protected]

We reiterate EW rating: Despite 52% YoY earnings growth in 1H, we expect growth to slow in 2H due to higher 2H09 base and negative impact from property market.

Qingdao Haier reported 52% YoY earnings growth for 1H10, in line with our estimate. Revenue jumped 39% YoY with growth on aircon, refrigerator and water heater higher than 30%.Operating margin drop 1% as energy saving subsidy (Rmb349mn) was deducted from revenue and went to non-operating income.

What we liked: 1) Water heater revenue jumped 44% YoY, helped by new products and booming solar heater. 2) Aircon revenue rose 33%. 3) Gross margin of commercial aircon increased 3% YoY despite raw material price increase.

What concerns us: 1) Most product lines saw gross margin decline due to higher raw material pricesr. 2) Sales and marketing expenses advanced 36% YoY on efforts to expand distribution network. 3) Financial expenses rose 67% YoY on exchange loss. 4) Revenue growth in 2Q10 slowed to 35% YoY vs. 45% YoY in 1Q10, while net profit growth in 2Q10 was only 7% YoY vs. 159% YoY in 1Q10, due to a higher 2Q09 base..

Rating: Equal-weight China Home Appliances: In-Line 52-Week Range: Rmb25.99-13.96 Mkt. Cap(mn): Rmb30,505 ModelWare EPS: 1.11Rmb (FY 12/'10), 1.38Rmb (FY 12/'11)

1387.HK, Renhe Commercial Holdings Co. Ltd (HK$1.42) /Upgrade to OW on Valuation and Continued NAV Growth [email protected], Derek.Kwong, Angus.Kon.Chan

Upgrade to OW; PT HK$2.02: We raise Renhe’s NAV by 9% to HK$2.89, mainly factoring in latest acquisitions and completion expectations. We also revise 2010E earnings down by 7% and2011E earnings up by 10% to reflect latest completion and margin forecasts. Based on our new estimates, Renhe now trades at 51% discount to NAV, and offers an attractive 42% upside.

Look beyond the 1H numbers: Renhe posted F1H10 earnings of Rmb132mn, down 19% YoY. Not a pleasing set of results, but also not surprising as earnings for Renhe have been back-end loaded since 2008. In addition, the company issued a profit warning on July 30, and the stock hascorrected 15% since. Further, management remains confident about 2H10 and did not lower operational targets. While execution remains a concern, we have modeled in project delay

Rating: Overweight China Property: In-Line Target: HK$2.02 52-Week Range: HK$2.18-1.37 Mkt. Cap(mn): Rmb27,304 ModelWare EPS: Rmb0.21 (FY 12/'10), Rmb0.23 (FY 12/'11)

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discounts of 30-50% for all projects where construction has yet to start or is underway. We believe this provides sufficient buffer against potential execution slippage.

Expect more new projects in 2010: With Rmb5.3bn net cash on hand, Renhe is poised to expand its project reserves. YTD the company has added 1.5mn sqm of the guided 2.8mn sqm ofnew projects. Given zero land cost for Renhe’s underground projects, these will be value-accretive.

Sales target not hard to match: YTD sales is only100,000sqm vs. management’s full-year target of 400,000sqm. However, to meet our earnings forecast, Renhe would only need to sell another 220,000sqm by year-end. This is not a difficult goal to achieve, in our view. 600009.SS, Shanghai International Airport (Rmb12.80) /1H Results In Line; Expect Stronger 2H on Expo; OW Morgan Stanley Asia Limited



[email protected]

SIAC’s 1H10 earnings in line, as they account for 45-47% of our and consensus F2010 estimates. We reiterate our Overweight rating, given the 67% upside implied in our existing price target, and continue to rate SIAC as our top pick among Chinese airports.

Strong 1H10 results: Net earnings jumped 112% YoY to Rmb550mn on a strong 22% revenue rebound with 7-8ppt expansion in GP and OP margins. Operating costs rose by only 11% and depreciation stabilized. Investment income soared by 230%, led by strong contributions from associate Pudong Aviation Oil. Moreover, we observe sequential earnings improvement at 20% in 2Q vs. 1Q, with the effect of 11% higher revenues and further 2ppt increase in OP margin.

We expect sustained earnings momentum in 2H10: We see further positive impact from Shanghai Expo, which will last until October 30, 2010. Our current earnings assumptions imply 18-22% higher revenues and profit in 2H10, representing 28-50% YoY growth, respectively. We are also aware of potential upside risks in the form of higher contributions from Pudong Aviation Oil, should domestic jet fuel prices rise further.

Immune from airport fee risk: With no revenue booked from the airport construction fee, SIAC is the only hub airport in China that would not be affected by any potential government policy changes in this regard. This should further differentiate SIAC as a prudent play in the face of uncertainties.

Rating: Overweight China Transportation: In-Line Target: Rmb21.41 52-Week Range: Rmb21.00-11.15 Mkt. Cap(mn): Rmb24,665 ModelWare EPS: Rmb0.63 (FY 12/'10), Rmb0.79 (FY 12/'11)

0623.HK, SinoMedia (HK$1.93) /1H10: Robust Sales + Deep Discount = Buy [email protected], Timothy.Yh.Chan, Jenny.Wu, Gillian.Chung, Philip.Wan

Sales grew 85% YoY to Rmb606mn in 1H10: Diluted EPS climbed 1.1x YoY to Rmb0.05, vs. our forecast of Rmb0.02, due to higher operating leverage.

What we liked: 1) Ad sales on CCTV rose 83% YoY, with ASP for CCTV-1 and CCTV-4 jumped 4.3x YoY in 1H10, thanks to improved inventory quality and stronger ad recovery. 2) SinoMedia’supgraded inventories should enlarge its CCTV ad agency sales market share by 6ppts to 20%, onour estimates. 3) We expect SinoMedia’s sales to grow 83% YoY in 2H10.

What concerned us: 1) SinoMedia’s 1H10 media costs climed 86% YoY, on our calculation. The company has been able to pass through part of the cost hike to customers, thus maintaining a stable gross margin. 2) Third-party agency sales, which required higher ad rebates, contributed 44% of its 1H10 sales. That said, sales contribution from auto and consumer segments expanded 20ppt in 1H10, driven by higher third-party agency sales.

Rating: Overweight China Media: Attractive 52-Week Range: HK$2.77-1.26 Mkt. Cap(mn): Rmb957 ModelWare EPS: 0.23Rmb (FY 12/'10), 0.28Rmb (FY 12/'11)

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Deeply undervalued proxy for CCTV: SinoMedia currently trades at ~7x our 2010E earnings, a50-70% discount to other Chinese ad leaders. Net cash accounts for around half of SinoMedia’s market value. Notably, 1) Chinese ad leaders raised ad prices by 10-20% earlies this year, signaling stronger ad demand in 2010. 2) A number of player offered strong 3Q10 outlooks, with ad sales likely up 20-40% YoY. 3) We observe that advertisers have allocated more budgets on CCTV. We expect SinoMedia’s earnings to grow 20-30% annually for the next three years. 600897.SS, Xiamen Airport (Rmb16.31) /Lower PT To Rmb22.05; Maintain OW Morgan Stanley Asia Limited



[email protected]

Maintain OW; with 9-10% cut to our 2010-12 earnings estimates on lower assumptions for other aeronautical revenues, we trim our price target by 6% to Rmb22.05 (implying 35% upside from current level): Following the disposals of the engineering and advertising subsidiaries from 3Q09, non-aeronautical revenues dipped 16% YoY in 1H10, leading to only 6%top-line growth. However, with effective cost control and the disposal effect, GP and OP margins improved by 1.9ppt and 3.3 ppt, respectively. As result, net profit rose 18% YoY to Rmb133m, normalizing from 49% growth in 1H09.

Earnings adjustment: We reduce our 2010-12e earnings by 9-10% to Rmb327mn, Rmb357mn and Rmb394mn, respectively, to adjust for lower revenue assumptions.

Immune from airport fee risk: With no revenues booked from the airport construction fee, XIACis one of the three listed airports in China that would not be affected by any potential governmentpolicy changes in this regard. This should further differentiate XIAC as a prudent bet in face of uncertainties.

Rating: Overweight China Transportation: In-Line Target: Rmb22.05 52-Week Range: Rmb21.49-14.18 Mkt. Cap(mn): Rmb4,857 ModelWare EPS: Rmb1.10 (FY 12/'10), Rmb1.20 (FY 12/'11)

2688.HK, Xinao Gas (HK$18.64) /No Impact from Negative News; Strong 1H10 [email protected], Eva.Hou

Net profit of Rmb533m in 1H10, represented growth of 43% and was ahead of our expectation of Rmb490m. Earnings mix continued to improve with operating profit from recurring gas sales reaching 50% of total. In 1H10, Xinao achieved 50-66% of its annual gas sales volume and gas connection targets, and we see room for upward revisions on its 2010 targets. ‘

What's new: Xinao announced eight new projects in China, which was in line with Chairman Wang’s guidance in June. Negative news flow in June had no impact on Xinao’s ability to grow and win new projects in China and overseas.

Investment thesis: At HK$18.64, Xinao trades at 13.8x 2011E P/E, a deep discount to its peers’ 19.0-22.2x. We expect continuous positive re-rating on the stock as management demonstrated that a negative rumor had no impact on Xinao’s ability to win projects. Progress on gas tariff pass-through remained satisfactory, by August 2010, 15 out of the 26 projects achieved gas margin expansion as a result of gas tariff hike. We keep our bullish view on Chinese city gas sector as China’s gas consumption growth will accelerate in next five years with increase of gas availability and China’s pressure on emission reduction.

Rating: Overweight China Gas Distribution: In-Line 52-Week Range: HK$25.80-11.98 Mkt. Cap(mn): Rmb16,898 ModelWare EPS: 0.97Rmb (FY 12/'10), 1.18Rmb (FY 12/'11)

HONG KONG

2388.HK, BOC Hong Kong (HK$20.10) /In-line Headline; Core Better THAN [email protected], Daniel.Shum

BOCHK reported 1H10 earnings in line with expectations. There were a lot of moving parts,

Rating: Overweight Hong Kong Financial Services: In-Line Target: HK$25.00 52-Week Range: HK$21.40-15.08 Mkt. Cap(mn): HK$212,513

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including lower brokerage revenues, sharply lower FX, MTM losses on interest rate swaps and write-back of provisions.

Underlying earnings were up around 4-5% HoH compared to 11% HoH loan growth: This is better than peers’ where, despite sharper loan growth, core earnings have been flattish. The bankalso used capital very effectively, causing RWA growth to be contained (tier 1 declined only 30bp HoH compared to 150bps at Hang Seng).

It also managed liquidity well. Loan growth was 11% HoH, lower than system (it gave up market share in mortgages). However, it concentrated on raising deposits too (+6% HoH compared to a2% decline for the system).

Fees growth compensated for NIMs: The bank reported NIM at 1.58% for 1H10, down 3bp. This shows that NIMs have started stabilizing after the sharp fall last year. Fees income was strong with loan and bill commissions up 17% HoH and credit cards up 12%. Broking revenues were down 25% HoH. Costs (excluding mini bonds) were down 7% HoH and the bank had smallwrite-backs on loans and investments.

We maintain our OW rating and target price of HK$25: BOCHK is a well capitalized bank with strong leverage to increasing flows between China and HK. We believe that it should be able to earn high teens ROE on a sustainable basis. The other support comes from 4.4% yield for 2010E.

ModelWare EPS: HK$1.35 (FY 12/'10), HK$1.65 (FY 12/'11)

0709.HK, Giordano International (HK$4.02) /Upping Earnings on Strong [email protected], Penny.Tu

We maintain Overweight with a new price target of HK$4.80: We continue to like Giordano for its: 1) Impressive gross margin expansion; 2) attractive valuation; and 3) good cash yield

1H10 profit beat on higher margins: Net profit of HK$202mn beat our estimate by 8% mainly due to better gross margin. Sales growth of 6.7% was in line; its major markets started to see some recovery. Gross margin rose 9.7ppt YoY to 57.9% on less discounting, lower sourcing cost through continuous close collaboration with suppliers, and better product mix;

Upping forecasts: We raise our profit estimates by 20-21% for 2010-11, mainly to factor in the stronger gross margin. Management feels GM could be maintained or even higher in 2H10, but we model GM to decline sequentially in 2H10 to leave some buffer for potential higher discounting to spur sales. Our new forecast for 2010 is 25% above Street consensus.

What’s next: Gross margin expansion this year has been significant and would be able to drive the estimated 60% profit growth in 2010. But growth in 2011 would need to come from better sales momentum as further gross margin improvement would be more difficult. Giordano has been adjusting its product offering, closing underperforming stores, and resumed store openings(especially in China), which should provide a better platform for sales growth in 2011.

Rating: Overweight Hong Kong Retail: In-Line Target: HK$4.80 52-Week Range: HK$4.44-1.81 Mkt. Cap(mn): HK$5,996 ModelWare EPS: HK$0.37 (FY 12/'10), HK$0.40 (FY 12/'11)

0697.HK, Shougang Concord (HK$1.19) /1H10 Results Well Ahead: Clearly a Turnaround Story Morgan Stanley Asia (Singapore) Pte.

[email protected], Charles.Spencer

1H10 results well ahead: SCI reported 1H10 net income of HK$436m or EPS HK$5.3 cts, well above our forecast of just breakeven on stronger earnings from all major segments. SCI is clearlya turnaround story and we raise our 2010-11e by 36% and 6%, respectively, to reflect strong 1H10 actual results and improved margin trends in steel and iron ore.

Steel price bounce: After falling by 15% from mid-April to mid-July, regional steel prices recovered by 10% in August to Rmb4,190/t from the low of Rmb3820/t in mid-July. On top of that, major steel mills recently announced a further 5-10% hike in September pricing, suggesting a

Rating: Overweight China Steel: Attractive Target: HK$1.80 52-Week Range: HK$2.33-0.98 Mkt. Cap(mn): HK$9,741 ModelWare EPS: HK$0.11 (FY 12/'10), HK$0.20 (FY 12/'11)

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recovery in demand, pricing and profits for 4Q. In addition, MIIT released a list of 203 iron and steel companies with total capacity of 44mnt (~6% of total capacity) ordered to be closed by 3Q10. This suggests improving demand-supply dynamics, which should increase investor confidence in our 2011e EPS.

Attractive valuation and well positioned to cope with higher raw material costs: SCI tradesat 6x P/E and 0.9x P/B on our F2011 forecast, 40-45% below MSCI China’s. The stock is fifth among AP steel within our coverage. With its interest in iron ore and coking coal, we believe the company is better positioned than its non-integrated steel peers to in an environment with rising raw material costs.

S. KOREA

010620.KS, Hyundai Mipo Dockyard (W154,500) /Hi Inv & Sec Rights Offering Provide Good Entry Point Morgan Stanley & Co. International plc, Seoul Branch

[email protected], Joonsoo.Ryu, Hyunjae.Lee

We reiterate Overweight rating on Hyundai Mipo with a slightly adjusted price target of W225,000, which offers 46% upside potential. We believe that Hyundai Mipo’s recent underperformance relative to peers and the KOSPI was mainly attributable to its potential involvement in its subsidiary’s capital increase. The stock was down 8.8% for the past week, underperforming the KOSPI by 7.4%. Now that the non-core investment is over, we believe the stock could move up again.

What’s new: Hyundai Mipo announced that it would participate in the rights offering of its Hi Investment & Securities subsidiary. This is in line with expectations. The amount Mipo will be paying in is W251.3bn, or 76.15% of the total deal size of W330bn. The purpose of the deal is largely to improve the broker’s operating environment, in our view.

Solid new orders and catalysts emerging: As of the end of July, Hyundai Mipo achieved 100% of its new order target this year, which is US$2.3bn. The composition is predominantly filled with bulkers with 80% share. With this, the top portion of Mipo’s backlog is switched from PC tankers to bulk carriers. Mipo is trying to exploit economies of scale by focusing on a relatively small number of ships, which would lead to higher margin than focusing on scattered types. Mipo has roughly 2.5 years’ worth of backlog, a relatively healthy level under the circumstances. The company indicated that inquiries for smaller containerships and PC tankers have begun to increase recently. We believe this may provide a positive catalyst for Mipo, which has demonstrated its prowess at building smaller containerships as well.

Rating: Overweight S. Korea Shipbuilding: In-Line Target: W225,000 52-Week Range: W172,500-78,200 Mkt. Cap(bn): W3,084 ModelWare EPS: W26,723 (FY 12/'10), W24,095 (FY 12/'11)

TAIWAN

2884.TW, E.Sun Financial (NT$13.75) /Revenue Growth Powered by Consumer Strength Morgan Stanley Taiwan Limited

[email protected]

Morgan Stanley Asia Limited

[email protected]

Maintain Overweight; PT unchanged: E.Sun posted superior fee income growth in 1H10 (up 65% YoY, driven by credit card and wealth management businesses), supporting our view that the bank could resume profitable growth in 2010 after years of asset/customer base expansion. Coupled with the recovery of its niche businesses, we remain confident about E.Sun’s core earnings improvement in Taiwan’s competitive banking environment. Risk/reward also appears

Rating: Overweight Taiwan Financial Services: In-Line Target: NT$16.64 52-Week Range: NT$15.20-9.71 Mkt. Cap(mn): NT$56,618 ModelWare EPS: NT$1.03 (FY 12/'10), NT$1.41 (FY 12/'11) EPS, basic, rpt'd: NT$1.12 (FY 12/'10), NT$1.54 (FY 12/'11)

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favorable.

Incorporating better fee growth and hybrid Tier-1 issuance; up 2010e EPS by 3%: E.Sun announced a plan to issue NT$5bn of non-cumulative perpetual sub debt at its bank sub level, which could improve its Tier 1 ratio by 0.9ppt to 9.1% under current Basel 2. We tweak our 2010-2011e EPS upward to reflect E.Sun’s better fee growth and additional interest expense from hybrid Tier-1 issuance.

Credit cost reduction in 2011: E.Sun steadily built up reserves in 1H10 to prepare for accounting article #34. Its annualized credit cost reached 45bp in 1H10, improving NPL ratio to 0.45% and coverage ratio to 137%. We expect the bank’s credit cost to stay flattish in 2H and decline to sub-40bp in 2011, to reflect the underlying benign asset quality. On a positive note, should E.Sun maintain 45bp credit cost for 2H as we forecast, its NPL reserve would be sufficientto meet FSC’s potential proposal that stipulates banks to set aside 50bp of performing loans for NPL reserve, according to management.Flattish NIM but interest spread up 5bp in 2Q: The expansion of interest spread was mainly due to continued lending yield improvement, a result of loan mix shift toward UPL and SME loans. NIM has also improved 5bp in July to 1.27% given CBC’s rate hike in end-June.. 1319.TW, Tong Yang Industry (NT$54.70) /Solid Earnings Intact; Raising PT to NT$67.70 Morgan Stanley Taiwan Limited

[email protected], Jeremy.Chen

We retain our OW rating: We visited Tong Yang’s (TYG) China plants and remain positive on its earnings momentum. We believe that investor concerns on TYG’s China OEM business are overdone, and TYG should be able to deliver earnings growth of 23% YoY in 2010 and 16% in 2011 despite the high OEM inventory concerns in China. We raise our 2010e and 2011e EPS to NT$4.15 and NT$4.83, respectively, and our PT to NT$67.70 (14.0x 2011e P/E vs. mid-cycle P/E of 14.8x).

2Q10 preview; still positive on 2H10 earnings: We estimate TYG’s 2Q consolidated revenue at NT$6.0bn, up 1.4% QoQ and 21% YoY. We forecast a similar gross margin and operating margin level to 1Q10 at 25% and 12%, respectively. We attribute the weak earnings from Chinaplants in July to China customers’ annual maintenance and summer vacation, plus depreciation write-off on older machinery. We are not overly concerned about the weak July result and instead, we think that September sales should be back on track. Despite the weak seasonality in3Q10, we expect new customers to kick-in from 4Q10 with more earnings contributions. The 2010e revenues should remain solid and intact with 20% YoY growth, in our view.

Watch for near-term share price weakness: We note that TYG’s short-to-long ratio, which hit a recent record high at 98%, could weaken its share price performance. We believe the increase in the ratio is mainly because of the arbitrage opportunity prior to TYG’s merger with Taiwan Kai Yih(1523.TW, NC) on September 1, 2010. Therefore, we recommend investors to accumulate the stock on any potential share price weakness.

Rating: Overweight Taiwan Auto Parts: Attractive Target: NT$67.70 52-Week Range: NT$61.50-34.60 Mkt. Cap(mn): NT$25,438 ModelWare EPS: NT$4.15 (FY 12/'10), NT$4.83 (FY 12/'11)

Strategy/Economics Analysis

AlphaWise Evidence Series/Indian Farmer Survey: Lower Food Price Inflation, Higher Rural Consumption Morgan Stanley India Company Private Limited

[email protected], Ridham.Desai

Investment conclusion: The evidence from our AlphaWise survey of 500 farmers across India

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points to slower food price increases than in the last 12 months and higher farm incomes in F2011 vs. F2010. These findings imply potential downside surprises for inflation and interest rates and upside risk to rural consumption.

Key debates: The market is concerned about agricultural output, despite its low share in GDP, due to its impact on inflation and rural consumption. Key controversies that we investigated usingAlphaWise include: 1) How are rains affecting sowing this year? 2) What are the farmers’ expectations on the kharif output and prices – and what drives these expectations? 3) What are their key concerns?

AlphaWise Evidence: 91% of the farmers have started sowing but not all think the rains are good. Good rains drive farm output expectations. Farmers expect kharif output and prices to rise by 2% and 4% YoY, respectively. Our sample of farmers is not worried about credit access or debt level but about monsoons, electricity, labor and fertilizer prices. From the survey, it appears that lack of labor availability is caused by migration to urban areas rather than by the National Rural Employment Guarantee Act (NREGA).

Investment ideas: A slower rise in interest rates would favor rate-sensitives – notably banks. Our favored rural consumption plays include autos and consumer staples. Please note that not all the stocks are rated Overweight by our analysts, largely due to valuation concerns. S. Korea Discovery/Duksan Hi-Metal (077360.KQ): OLED Transformation Complete Morgan Stanley & Co. International plc, Seoul Branch

[email protected], Young.Shin, Mike.Chung

Duksan Hi-Metal expanded its business into the highly profitable AMOLED business with the acquisition of Ludis, a Korean AMOLED organic materials maker, in 2009. Since then, Duksan has witnessed rapid growth in its organic materials business on the back of rising demand for handset-related AMOLED displays mainly from its captive customer, Samsung Mobile Display (SMD). Before expanding into the AMOLED business, Duksan Hi-Metal specialized in the manufacturing of solder balls used in DRAM. Duksan’s market share has increased over time and it is now the no. 2 solder balls supplier globally, with a market share of approximately 25%, and is the dominant player in Korea, with ~80% of the domestic market.

OLED industry in take off phase: Duksan is the sole supplier of HIL and HTL polymer compounds that form the conductive layer of OLED to SMD. Currently, SMD operates a 4G (730x920mm) OLED fab capable of producing 48K substrates per month. It recently pulled forward the start-up schedule of the next 5.5G OLED line to May 2011, as OLED applications areaccelerating on mobile devices, but supply remains largely constrained. As Phase 1 of the 5.5G could ramp-up capacity to 32K substrates per month, and Duksan estimates SMD’s organic material requirement will rise to increase 3x what is being sold today. Once the chemical formulais determined to make OLED, suppliers seldom change, according to the company. The company believes an incremental volume opportunity could arise from fully increasing 5.5G capacity to 80K in the future in addition to other display manufacturers joining in production.

S. Korea Discovery/Hansol LCD (004710.KS): Leading BLU Supplier at SEC Morgan Stanley & Co. International plc, Seoul Branch

[email protected], Keon.Han, Mike.Chung

Hansol LCD has been specializing in Back Light Unit (BLU) manufacturing for TFT-LCD panels and one of the key suppliers of BLU to Samsung Electronics. Hansol LCD supplies all of its BLU products to SEC with approximately 50% market share at SEC as of 2Q10. The companyhas been the beneficiary of a fast-growing LED TV industry especially with its captive customer, SEC, dominating the LED TV market. As a move to further capitalize on this fast-growing LED industry, Hansol LCD is expanding its business into the upstream LED supply chain, sapphire

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business.

Beneficiary of improving LED BLU mix: Hansol LCD’s sales mix of BLU has shown significant changes since 2009. Toward the end 2009, LED BLU only accounted for about 20% of total BLUshipments on a unit basis. LED BLU shipments have climbed on the back of rising global demand for LED TVs and reached 80% of the company’s total BLU shipments in July 2010. Considering that LED BLU sell for ~2x the price of CCFL BLU, an increase in LED BLU shipments should boost earnings for the company.

Vertical integration of upstream led supply chain: With the acquisition of CrystalOn, Hansol LCD is expecting synergy with its new sapphire ingot business. Hansol LCD should be the only major Korean BLU maker to operate in the upstream LED supply chain, sapphire ingot and wafer.Running both sapphire ingot and wafer business should give Hansol LCD cost competitiveness. . Taiwan Discovery/Darfon (8163.TW) – 2Q10 Analyst Meeting Key Takeaways Morgan Stanley Taiwan Limited

[email protected], Jerry.Su

Conclusion: Darfon is the major keyboard supplier for Apple iMac and iPad (accessory) and themain source for leading tier-one NB makers. Darfon is leveraging its inverter base for the new PVinverter market. The stock is trading at 10x 2Q10 annualized EPS.

What’s New? Darfon reported 2Q10 EPS of NT$0.93 (net profit NT$310mn) vs. 1Q10 EPS of NT$0.67 (net profit NT$222mn) on strong revenue growth of 22% Q/Q. 2Q10 GM and OM were 12.7% and 4.5%, respectively, vs. 1Q10’s 12.7% and 4.1%. 1Q10 revenue by application: human interface (keyboard) 62%, power device (inverter, LED converter, transformer) 22%, andothers 16% (IMR Housing and MLCC).

3Q10 Guidance and Outlook: 1) Total revenue will decline by double-digits Q/Q on weaker NB demand. August revenue will be flat M/M, followed by seasonal revenue uptick M/M for September. It targets 4Q10 revenue to be similar to 2Q10 level. 2) 3Q10 GM will decline Q/Q on lower ASP and revenue, offset by product mix shift and efficiency improvements. 3) 3Q10 operating expense will be 8.3-8.5% of revenue and slightly higher than that in 2Q10 due to revenue decline. 4) 2010 capex will be below NT$1.5bn – ~NT$500mn will be on facilities and ~NT$1bn will be on equipment. 5) 2010 NB keyboard shipment target: 60-65mn units, up 9-18% Y/Y (28mn units shipped in 1H10). 6) 3Q10 ASP trend: overall keyboard down 0-5% Q/Q, MLCC flat Q/Q, and IMR housing down 0-5%. 7) 2010 LED TV penetration of 25-30%, 2011 50-60%. 8) 2010 revenue trend: 1H 48%, 2H 52%. Operational Insights: 1) 2Q10 gross margin: 12-18% for NB keyboards, inverters, converters, and MLCC, 8-12% for DT/AIO keyboards and IMR housing. 2) Current top customers: Apple (PC keyboard), AUO (power converter), and Dell, HP, Acer, andToshiba (NB keyboards). 3) 2Q10 ASP trend: flat to slightly down.

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Disclosure Section The information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley Asia Limited (which accepts the responsibility for its contents) and/or Morgan Stanley Asia (Singapore) Pte. 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For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA. Analyst Certification As to each company mentioned in this report, the respective primary research analyst or analysts covering that company hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. Important US Regulatory Disclosures on Subject Companies The following analyst or strategist (or a household member) owns securities (or related derivatives) in a company that he or she covers or recommends in Morgan Stanley Research: Coral Ching - Hunan Nonferrous Metals Corporation (common or preferred stock); Ridham Desai - ITC Ltd. (common or preferred stock); Sunil Gupta - BOC Hong Kong (common or preferred stock). Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their sub industry as defined by the Global Industry Classification Standard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). 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In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Aluminum Corp. of China Ltd., Asciano Group, Bajaj Auto Ltd., BOC Hong Kong, Chimei Innolux, China Mobile Limited, China Oilfield Services Ltd., China Resources Gas, China Telecom, CNOOC, easyJet, Envestra Ltd, GCL-Poly Energy, HDFC Bank, HSBC Holdings, Huadian Power Int'l, Hutchison Whampoa, Idemitsu Kosan, Iluka Resources Ltd, Industrial and Commercial Bank of China, Jiangxi Copper, LG Chem, LG Display, Mahindra & Mahindra, Merck & Co., Inc., PetroChina, Qantas Airways, Qingdao Haier Co. Ltd., Ryanair, Samsung Electronics, Sharp, SinoMedia, State Bank of India, Tesco, Wesfarmers. 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The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions. STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Global Stock Ratings Distribution (as of July 31, 2010)

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For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.

Coverage Universe Investment Banking Clients (IBC)

Stock Rating Category Count % of Total Count

% of Total IBC

% of Rating Category

Overweight/Buy 1095 42% 380 44% 35%Equal-weight/Hold 1123 43% 388 45% 35%Not-Rated/Hold 14 1% 4 0% 29%Underweight/Sell 362 14% 93 11% 26%Total 2,594 865

Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months. Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months. Not-Rated (NR) - Currently the analyst does not have adequate conviction about the stock's total return relative to the relevant country MSCI Index on a risk-adjusted basis, over the next 12-18 months. Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. For Australian Property stocks, each stock's total return is benchmarked against the average total return of the analyst's industry (or industry team's) coverage universe, instead of the relevant country MSCI Index, on a risk-adjusted basis, over the next 12-18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. .

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brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations. The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property of MSCI and S&P. Morgan Stanley has based its projections, opinions, forecasts and trading strategies regarding the MSCI Country Index Series solely on publicly available information. MSCI has not reviewed, approved or endorsed the projections, opinions, forecasts and trading strategies contained herein. Morgan Stanley has no influence on or control over MSCI's index compilation decisions. Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. Morgan Stanley Research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities/instruments is available on request.

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