LatAm Year Ahead 2011

Transcrição

Latin America Equity Research
12 November 2010
LatAm Year Ahead 2011
Stay Invested
Head of Latin America Research
Ben Laidler AC
(1-212) 622-5252
[email protected]
J.P. Morgan Securities LLC
Contents
Strategy .........................................................5
Sectors.........................................................49
Economics and Commodities ....................113
LatAm Data................................................135
For a complete list of contributors to
this report, please see table of
contents on page 3.
See page 158 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
LatAm Year Ahead 2011 — Stay Invested
What to own
What to avoid
• Brazil
• Chile
• Colombia
• Peru
• Argentina
• Materials
• Off-Index
• Utilities
• Discretionary
• Staples
• Financials
A detailed view of our country and sector recommendations
within LatAm is available on page 14. For more detail
please see country and sector pages.
• Telecoms
Focus on sectors within countries rather than country
recommendations.
10 Top Analyst Picks
(See page 16)
Top Picks
Vale
PDG Realty
Cemex
Bradesco
Santander Brasil
Corporacion Geo
ICA
Grupo Mexico
Copasa
Brasil Foods SA
Country
Brazil
Brazil
Mexico
Brazil
Brazil
Mexico
Mexico
Mexico
Brazil
Brazil
To PT (%)
49.4
41.6
35.7
34.9
34.7
32.3
32.1
31.1
29.0
26.9
10 Stocks to Avoid
(See page 17)
Stock to avoid
Ecopetrol
SQM
Grupo Financiero Inbursa
Telmex SA
Fibria
CPFL Energia
IAM
Bancolombia
Buenaventura
Eletropaulo
Country
Colombia
Chile
Mexico
Mexico
Brazil
Brazil
Chile
Colombia
Peru
Brazil
To PT (%)
(36)
(28)
(24)
(21)
(13)
(6)
(4)
(2)
(1)
0
Source: J.P. Morgan. Note: To PT = Returns to analyst price target from 28 Oct 2010.
The year-ahead process
The goal of this document is to present our key strategy themes for 2011 using most- and least-favored stocks from J.P.
Morgan’s LatAm equity research team.
This 150+ page handbook includes strategy sections from our country strategists as well as overviews on the outlook for
each major company sector and the analysts’ top picks and stocks to avoid for the year ahead. Analysts were asked to pick
1-2 large cap stocks that should lead performance in 2011 as well as a large cap stock they expected to underperform.
We are positive LatAm into 2011. Macro fundamentals are robust, credit conditions very supportive, EM fund inflows
expected to remain strong. Valuations are not stretched, and the earnings backdrop robust. Risks range from the fiscal and
interest rates outlook in Brazil, to the security situation in Mexico, and the presidential elections in 2011 in Argentina and
Peru. Capital control risks also remain real, especially in Brazil.
2
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Table of Contents
Strategy
LatAm Strategy (Ben Laidler) .......................................................................... 6
EM Equity Strategy (Adrian Mowat)............................................................... 18
Brazil Strategy (Emy Shayo Cherman).......................................................... 30
Mexico Strategy (Ben Laidler) ....................................................................... 32
Chile Strategy (Brian P Chase)...................................................................... 34
Colombia Strategy (Brian P Chase)............................................................... 36
Peru Strategy (Brian P Chase) ...................................................................... 38
Argentina Strategy (Brian P Chase) .............................................................. 40
Sectors
Agribusiness, Pulp & Paper (Debbie Bobovnikova, CFA).............................. 44
Financials (Saul Martinez) ............................................................................. 50
Financials (SMid) (Frederic de Mariz)............................................................ 56
Food, Beverages & Tobacco (Alan Alanis) .................................................... 62
Homebuilders (Adrian E Huerta).................................................................... 70
Metals & Mining (Rodolfo R. De Angele, CFA) .............................................. 78
Oil, Gas & Petrochemicals (Sergio Torres).................................................... 86
Retail & Healthcare (Andrea Teixeira, CFA) .................................................. 92
Telecom, Media & Technology (Andre Baggio, CFA) .................................. 100
Utilities (Anderson Frey, CFA) ..................................................................... 106
Economics and Commodities
Global Economic Outlook (Bruce Kasman) ................................................. 115
Brazil Economics (Fabio Akira).................................................................... 122
Mexico Economics (Gabriel Casillas) .......................................................... 123
China Economics (Qian Wang/Grace Ng/Lu Jiang)..................................... 124
China Infrastructure (Qian Wang/Grace Ng/Lu Jiang) ................................. 126
China FAI (Qian Wang/Grace Ng/Lu Jiang) ................................................ 130
Market Forecasts......................................................................................... 131
J.P. Morgan FX............................................................................................ 132
Commodities Forecasts............................................................................... 133
Appendix
LatAm Data.................................................................................................. 135
Note: All ratings and prices are as of the close on October 28, 2010, unless
otherwise noted.
3
Ben Laidler
(1-212) 622-5252
[email protected]
4
November 2010
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Strategy
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Ben Laidler AC
LatAm Strategy
We are positive LatAm into 2011. Macro fundamentals
are robust, credit conditions very supportive, EM fund
inflows expected to remain strong. Valuations are not
stretched, and the earnings backdrop robust. Risks range
from the fiscal and interest rates outlook in Brazil, to the
security situation in Mexico, and the presidential
elections in 2011 in Argentina and Peru. Capital control
risks also remain real, especially in Brazil. We are
overweight Brazil relative to MSCI LatAm index, as
valuations are reasonable, flows returning, and market
overhangs – such as the Petrobras offering and the
presidential election – are lifting. We also see
outperformance from Colombia and Argentina. We are
neutral Mexico, and underweight Chile. We focus on
domestic stocks for which we see good growth and
reasonable valuations, such as financials and
homebuilders.
Fundamentals to remain robust: 2010 and 2011 GDP
growth expectations have been rising, and are above
long-term potential GDP growth. This has been
supporting the earnings revision cycle. Inflation
expectations have also been rising, and Central Banks
are expected to gradually tighten policy in 2011, within
the constraint of appreciating currencies but partly offset
by output gaps remaining in some countries. Long-term
REERs point to the undervaluation of the Mexican Peso,
and overvaluation of the Brazilian Real. For more on
economics team’s view, please see Latin America
Outlook Presentation.
LatAm GDP outlook
LatAm
Argentina
Brazil
Chile
Colombia
Ecuador
Mexico
Peru
Venezuela
2010e
Forecast
Current
Jan-10
forecast
4.4
5.7
4.0
8.5
6.2
7.5
5.0
5.5
3.0
4.5
2.0
2.5
3.5
4.5
5.5
8.2
1.0
-2.2
Source: J.P. Morgan Economics.
2011e
Forecast
Current
Jan-10
forecast
3.4
4.1
3.0
5.5
4.0
4.5
5.0
6.0
4.0
4.1
3.0
3.0
2.5
3.5
6.0
6.0
2.5
1.0
Long-term
potential
GDP growth
3.4
3.5
4.0
4.2
4.5
3.0
2.5
6.0
3.0
(1-212) 622-5252
[email protected]
Bloomberg JPMA LAIDLER <GO>
LatAm inflation outlook
2010e
Forecast in
Current
Jan-10
forecast
7.2
7.3
9.0
10.5
4.7
5.4
2.5
3.8
3.8
2.7
4.0
3.4
5.1
4.8
2.0
2.4
40.0
33.0
Latin America
Argentina
Brazil
Chile
Colombia
Ecuador
Mexico
Peru
Venezuela
Credit conditions remain supportive: This could
support a meaningful multiple rerating and increased
equity fund flows and is already altering corporate
behavior. The strong outperformance of EM corporates
has significantly improved relative valuations. The lower
LatAm cost of equity has pushed up ‘fair value’ for
stocks. Regional corporates are responding by
releveraging and stepping up M&A activity, and
financials are boosting capital. EM corporates are seeing
strong fund inflows. This is a mirror of what equities are
seeing. We believe the drivers here are sustainable into
2011, with risk-free rates likely to stay very low, EMBI
spreads tight, and the EM growth premium high. See our
recent note for details: LatAm Strategy – Credit rally
supports equities.
LatAm ‘fair value’ vs 12m fwd P/E
15.0
13.0
11.0
9.0
7.0
5.0
03
03
04
05
06
12 mth Fw d PE
Source: MSCI, IBES, Datastream.
6
2011e
Forecast in
Current
Jan-10
forecast
6.8
7.3
10.0
12.0
4.6
5.1
3.0
3.4
4.0
4.0
3.8
3.8
4.0
4.0
2.5
2.5
40.0
35.0
07
08
09
Gordon Grow th
10
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Implied P/E – LatAm corp’s & equities
21.0
18.0
15.0
12.0
9.0
P/E:
CEMBI Latin IG - 19.5x
CEMBI Latin - 17.4x
CEMBI Latin HY- 12.6x
MSCI LatAm - 11.9x
6.0
3.0
0.0
2001
2003
2004
2005
Cembi Latin HY
2006
Cembi Latin IG
2007
2008
MSCI LatAm
2009
2010
CEMBI LatAm Broad
Source: J.P. Morgan, MSCI, Datastream. * 12m fwd MSCI LatAm P/E and inverse of J.P. Morgan CEMBI Corporate Bond Yields.
EM fund flows continue strong: Year-to-date equity
fund flows into EM have exceeded US$70 billion, above
the previous record of US$64bn in 2009. These flows
have been focused on ETF products and on EM and Asia
funds. Flows into LatAm, as proxied by LatAm funds,
have been poor. Fund flows should continue strong, as
both global equity allocations increase, EM allocations
within global equities are built, and LatAm flows within
EM recover as Brazil ‘overhangs’ lift. This is a
phenomenon across the asset class and has arguably been
more powerful in corporate and FX markets so far. We
generally see this as another source of upside risk to
multiples. Risk here is from issuance, which has been
high. Please see our weekly fund flows product for
details: Herd Instinct.
GEM fund cumulative US$bn flows
120
2006
2007
2008
90
2009
2010
69.7
60
64.4
40.8
30
22.4
0
(39.4)
(30)
(60)
Jan Feb Mar Apr May Jun
Jul
Aug Sep Oct Nov Dec
2010 LatAm fund flows, US$mn
2,500
1,500
500
(500)
ETF Flow s
Total Flow s
(1,500)
(2,500)
Jan 10
Feb 10 Apr 10 May 10
Jul 10
Aug 10
Oct 10
Source: EPFR Global, J.P. Morgan.
Capital control risks: Virtually every EM CB has
intervened, and a number already have controls. Pressure
will likely continue, as we expect more FX appreciation,
with US$ weakness to persist and EM inflows to build.
We see ‘real’ capital controls, such as unremunerated
reserve requirements and minimum holding periods, as
unlikely. An increase in transaction costs – such as
Brazil’s 2% equity IOF – is a last resort, but arguably
near inevitable in this flows environment. It is not
enough to change our positive view on Brazil, where the
potential upside beats a moderate potential transaction
cost increase. For details see our report: The threat from
capital controls.
Source: EPFR Global.
7
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Other risks: Brazil fiscal and rates outlook. In the short
term we await to see the composition of Dilma
Rousseff’s first cabinet and the outlines of fiscal policy
going forward. This is important as an early indication of
the policy direction of the new administration at a time
when inflation expectations are drifting higher and the
economy is growing above potential. Mexico security
concerns. Investor angst here is high. We see this as an
unfortunate issue that detracts from growth (1-1.5%pa)
at a bad time, with the economy weak. We believe
greater concerns here are likely overdone, with violence
localized and largely between cartels. The risk is that this
spreads to Mexico City or cartels decide to openly target
the State and civilians. The electoral calendar in 2011 is
significant. Peru presidential elections are in April, with
three centrist candidates leading in the polls and leftist
Ollanta Humala currently 4th. He is likely to rise
somewhat (and this could unnerve markets) though
unlikely to ultimately prevail. Argentina also goes to the
polls in October. The political environment has been
thrown open by the unexpected death of ex-President
Kirchner. This potentially opens the way for a more
market-friendly candidate, possibly from within the
Peronist party.
Valuations are not stretched: We do not see LatAm
valuations as demanding, with most metrics within
historical ranges or at discounts to peers’. LatAm is
currently trading on 11.9x 12m forward P/E, compared
to 11.6x for emerging markets and 11.5x for global
equities. This 12m forward P/E is at the top end of the
region’s 15-year average. As highlighted before, the
current regional cost of equity would argue for
significant multiple expansion from these levels. When
comparing EM countries we are also careful to adjust for
index composition. This makes commodity-heavy
indices such as Brazil more expensive and staples-heavy
indices such as Mexico and Chile somewhat cheaper.
15-year MSCI LatAm 12m fwd P/E
15.00
13.00
11.00
9.00
7.00
5.00
Chile
Mexico
Indonesia
Korea
South Africa
EM
Turkey
India
Brazil
China
Taiwan
Russia
Sector-Neutral P/E
16.0
14.5
14.8
9.9
11.8
11.9
11.4
17.7
12.3
14.3
15.6
11.8
EM Latam
Source: IBES, MSCI, J.P. Morgan.
Av erage
+1SD
-1SD
12 Mth Fwd P/E
17.8
15.3
15.3
10.0
11.7
11.6
10.9
17.0
11.1
12.0
12.9
6.6
Diff
(1.8)
(0.9)
(0.5)
(0.0)
0.2
0.3
0.5
0.6
1.2
2.3
2.8
5.2
Source: MSCI, IBES, J.P. Morgan. Sector-neutral P/E multiplies the country sector P/E by
the MSCI Emerging Markets Index sector weight.
LatAm enjoyed a strong earnings recovery cycle in
2010. We expect this to stabilize in 2011. LatAm
earnings growth (local currency) is forecast at 21% for
next year versus 15% for developed markets. This is a
high number, and we see risks as balanced. Commodity
earnings have been easing – especially in steels and
Petrobras. Domestic earnings have been moving higher
as GDP expectations are raised, and earnings remain
below all-time highs despite higher nominal GDP
growth. Forecasts for Mexico and Brazil are very similar
(~20-21%).
LatAm EPS growth expectations
Colombia
Peru
S.Africa
India
Brazil
EM Latam
Indonesia
Mexico
EM
Malaysia
Russia
Global
DW
China
EMEA
EM Asia
Korea
Chile
Taiwan
Turkey
Argentina
Czech
EPS Growth Expectations %
2010e
2011e
2012e
29.4
52.5
5.0
27.3
31.6
13.1
26.5
27.1
17.8
23.4
22.7
17.6
16.3
21.6
11.5
15.8
21.4
16.1
20.3
20.9
13.5
9.0
20.4
16.3
30.6
17.2
14.0
29.4
15.7
11.2
29.8
15.4
17.1
36.2
15.3
13.2
37.2
15.0
13.0
26.7
14.9
16.4
25.0
14.7
15.6
40.7
14.6
13.9
51.4
13.1
11.1
23.0
11.2
7.1
89.1
9.4
11.2
18.5
8.2
13.6
5.4
6.4
18.1
-4.8
3.3
5.7
Source: MSCI, IBES, J.P. Morgan.
95 97 98 99 00 01 02 03 04 05 06 07 08 10
8
Sector-neutral P/E
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
MSCI LatAm EPS revision cycle
1. The positive view is that lower risk-free rates are
sustainable for 2011, as we forecast, and this justifies
further multiple rerating. This could be significant. Our
Gordon-growth ‘fair’ value target is near 15.0x earnings,
over 30% above current multiples. This indicator has
tracked well historically. Upside here is concentrated in
Brazil. This targets 53% upside for the region and 70%
for Brazil. Mexico is penalized by a potentially too
aggressive 2.5% potential GDP growth.
150.0
140.0
130.0
120.0
110.0
100.0
90.0
80.0
Feb-09
Jun-09
Oct-09
2011 EPS
Feb-10
Jun-10
Oct-10
2010 EPS
MSCI Brazil domestic vs commodity 12m fwd earnings integer
180.0
3. The cautious view assumes both a derating and that
earnings fall. A derating scenario back to long-term
historical multiples (down 14%, from 12.0x to 10.5x
earnings) and a 20% fall in index earnings versus current
expectations, as we assume earnings growth only in line
with nominal GDP growth. This shows 14% downside
for the region, led by Colombia, with Chile defensive.
150.0
120.0
90.0
60.0
Jan 07
Aug 07
Mar 08
Oct 08 May 09 Dec 09
Brazil Commodities
2. The mid-case assumes current multiples are fair, at
the top end of long-term historical ranges, and consensus
earnings growth correct, at a reasonable premium to
nominal GDP growth. This targets respectable 18%
upside, with all countries closely clustered. This would
be our Mexico base case.
Jul 10
Brazil Domestics
Attractive risk/reward for 2011 justifies continued
bullish positioning. We run three valuation scenarios for
2011. The MSCI LatAm potential upside is 53% and the
potential downside 14%. For details see our report:
Measuring the risk/reward.
Our baseline view is somewhere between the more
bullish two scenarios, looking for even lower Treasury
yields and tight EM spreads, whilst the relative
Emerging growth and earnings premium remain high,
continuing to attract flows and support multiples. QE2
and recent developed market data have reduced
downside tail-risks.
Summary year-end 2011 target and index levels
LatAm
Brazil
Mexico
Chile
Colombia
Argentina
Peru
Positive Target
122,500
122,000
39,500
5,450
16,000
2,300
41,300
% Upside
53
70
8
8
1
(31)
101
Mid-Case Target
94,500
84,500
42,500
5,700
18,000
3,950
24,500
% Upside
18
18
17
13
14
19
19
Cautious Target
69,000
61,500
31,600
4,700
10,600
3,275
16,500
% Upside
(14)
(14)
(13)
(6)
(33)
(1)
(20)
Source: J.P. Morgan estimates.
9
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
We remain overweight Brazil, with valuations
significantly derated, strongly returning flows, and
multiple overhangs (election, rate cycle, Petrobras, China
slowdown) reduced. Fiscal policy and equity IOF risks
remain but are manageable. The focus remains on
domestic stocks, especially those with growth at
reasonable multiples, such as financials and
homebuilders. We have good growth visibility, the
earnings revision cycle remains positive, and valuations
ex-staples are all cheap/fair. Top-performing staples and
retailers are expensive and will likely keep performing in
this environment if they can continue delivering on
earnings. However, this does not mean the risk/reward is
attractive. We are selective and own CBD. We see cheap,
underowned, but low-growth sectors – such as utilities
and telecom – as value traps but have continued to
selectively add where we see pockets of growth (such as
NII Holdings and TSU). In our model portfolio, we are
neutral energy (positive oil and E+P but cautious
Petrobras), and underweight materials – we are positive
Vale but own no Steels. The sector is cheap (though
earnings are falling), underowned, and benefiting in the
short term from perceived QE upside, though global
growth remains subpar and the sector chronically
oversupplied.
Brazil macro outlook
We are neutral Mexico. The market has performed well
in the last month on signs of a bottoming in US growth
expectations (we took our global growth numbers up for
the first time since April) and moderate Mexican
consumer acceleration. We do not see Mexico as
underweight, with the market well supported by a
gradual US growth reacceleration, high equity market
correlation, undervalued currency, easy monetary policy,
and valuations less expensive than they ‘seem’. However,
the traditional drivers of Mexican outperformance are
lacking – major market sell-off, strong US data surprise,
or strong local consumer recovery. We focus on
domestic recovery plays – Televisa, First Cash, AMX –
and special situations – Cemex and ICA.
US Economic Activity Surprise Index
40.0
30.0
20.0
10.0
0.0
(10.0)
(20.0)
(30.0)
(40.0)
Jan 09
May 09
Sep 09
Jan 10
May 10
Sep 10
Source: Bloomberg, J.P. Morgan.
Mexico consumer confidence and formal employment
Brazil interest rate futures
13.0
12.5
12.0
11.5
Source: J.P. Morgan Economics, INEGI, IMSS.
11.0
10.5
10.0
9.5
Feb 10
Apr 10
Jun 10
Jan-11
Source: Bloomberg.
10
Aug 10
Jan-12
Oct 10
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
In the smaller markets, we struggle to see a sustainable
second leg to the well-known (and very positive)
Chilean story. Valuations are high, and the stocks we
want to own (banks/discretionary) are even pricier. We
do see further fundamental upside in Colombia on the
ongoing reform agenda, investment grade outlook, and
capital markets development, but would play this off
index (through Copa and Pacific Rubiales) given high
on-index valuations. We remain exposed to Argentina.
Valuations have become expensive at first glance, but
the outlook for real political change – however moderate
– means the market still likely has upside. Penetration
rates are low and nontraditional valuation metrics
(franchise value, replacement cost) attractive. We stick
with GF Galicia.
Colombia pension fund equity exposure to rise on
multifunds/demographics
Estimated End-2010
AUM
1
0.0
2
90.6
3
0.0
Total
90.6
Equity
0.0
39.4
0.0
39.4
%
NM
43.5%
NM
43.5%
Limit
0.0
40.8
0.0
40.8
%
20.0%
45.0%
70.0%
45.0%
Cushion
0.0
(1.4)
0.0
(1.4)
%
NM
-1.5%
NM
-1.5%
Pro Forma 2011
AUM
1
4.5
2
53.4
3
32.6
Total
90.6
Equity
0.9
24.0
22.8
47.8
%
20.0%
45.0%
70.0%
52.8%
Limit
0.9
24.0
22.8
47.8
%
20.0%
45.0%
70.0%
52.8%
Cushion
0.0
0.0
0.0
0.0
%
0.0%
0.0%
0.0%
0.0%
Source: Superfinanciera and J.P. Morgan estimates.
12 mth fwd P/E relative to MSCI LatAm: Smaller markets at
premium to LatAm
Can Cristina maintain her currently positive image?
3.7
3.2
2.7
2.2
1.7
1.2
0.7
0.2
60.0%
40.0%
20.0%
Jan-03 Feb-04 Mar-05 Apr-06 May -07 Jun-08 Jul-09 Aug-10
Chile
Source: IBES, Datastream, MSCI.
Argentina
Peru
Colombia
0.0%
J-08 M-08 S-08 J-09 M-09 S-09 J-10 M-10 S-10
Source: Management y Fit and J.P. Morgan.
11
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Latin America Model Portfolio by Country
Ticker
Brazil
Bradesco
CBD
Cetip
Gafisa
NII Holdings
OGX
PDG Realty
Petrobras PN
Santander Brasil
TIM Participacoes
Vale PN
Mexico
AMX
Cemex
First Cash
ICA
Televisa
Chile
Cencosud
Colombia
Copa
Pacific Rubiales
Argentina
GF Galicia
Peru
EMF LATAM
BBDC4 BZ
PCAR5 BZ
CTIP3 BZ
GFSA3 BZ
NIHD US
OGXP3 BZ
PDGR3 BZ
PETR4 BZ
SANB11 BZ
TSU US
VALE/P US
AMX US
CX US
FCFS US
ICA* MM
TV US
CENCOSUD CI
CPA US
PRE CN
GGAL US
Price*
245,843
36.5
66.1
19.1
14.3
42.6
22.9
22.2
27.0
25.0
34.1
28.9
33,431
58.0
9.2
29.5
33.3
22.9
5,971
3,717.2
3,120
50.6
33.4
254,619
15.1
3,376
79,524
Change
1M
YTD
(%)
(%)
1.2
4.1
6.9
21.4
11.1
1.7
17.6
33.7
2.8
0.9
0.3
26.9
0.7
33.6
5.7
28.0
-1.4
-26.4
5.9
4.6
4.5
14.8
3.7
16.4
7.7
18.5
6.6
23.4
10.7
-19.1
10.4
32.9
8.2
9.2
21.1
10.3
3.9
38.6
14.0
116.1
6.5
58.1
-3.8
-7.1
18.0
116.4
21.7
65.0
51.9
162.8
14.8
47.9
3.1
11.3
Port.
MSCI
Weight
(%)
(%)
70.3
67.8
10.0
4.5
6.0
0.4
5.0
0.0
5.0
0.4
5.0
0.0
4.0
1.9
5.0
0.8
10.0
13.0
7.0
0.5
2.0
0.2
11.3
11.0
18.0
18.2
6.0
6.4
3.0
1.0
3.0
0.0
3.0
0.0
3.0
1.2
3.7
7.1
3.7
0.8
6.0
3.8
3.0
0.0
3.0
0.0
2.0
0.0
2.0
0.0
0.0
3.1
100.0
100.0
Dev.
(%)
2.5
5.5
5.6
5.0
4.6
5.0
2.1
4.2
-3.0
6.5
1.8
0.3
-0.2
-0.4
2.0
3.0
3.0
1.8
-3.4
2.9
2.2
3.0
3.0
2.0
2.0
-3.1
0.0
P/E
10E
(x)
12.9
14.1
30.5
31.2
17.0
25.5
nm
15.2
8.3
15.4
31.0
9.6
17.7
15.8
nm
17.2
31.1
22.4
19.6
38.9
25.9
10.6
37.2
14.9
24.8
19.9
14.2
P/E
11E
(x)
10.6
12.7
24.9
23.5
12.7
13.0
nm
9.8
10.4
11.7
15.0
7.0
14.7
13.5
nm
14.7
22.5
17.5
17.6
30.3
17.0
7.7
13.8
14.0
17.6
15.1
11.6
EPS
growth
10E
16.3
26.3
-7.7
22.0
31.3
-26.4
-96.4
67.8
-1.8
23.7
-41.9
202.0
9.0
-24.9
-233.3
23.7
-8.5
16.1
23.0
78.6
26.9
3.2
-266.7
5.4
24.5
27.7
15.8
ROE
10E
(%)
13.7
21.8
6.9
38.2
9.3
8.9
2.1
13.3
10.3
11.6
5.2
23.3
16.5
25.0
-0.8
18.7
3.7
20.0
12.2
8.0
na
na
18.2
na
14.5
Analyst
Saul Martinez
Andrea Teixeira
Frederic de Mariz
Adrian E Huerta
Andre Baggio
Sergio Torres
Adrian E Huerta
Sergio Torres
Saul Martinez
Andre Baggio
Rodolfo R. De Angele
Andre Baggio
Adrian E Huerta
Ben Laidler
Adrian E Huerta
Rajneesh Jhawar
Andrea Teixeira
Jamie Baker
Sergio Torres
Saul Martinez
13.9
Source: Bloomberg, MSCI, J.P. Morgan estimates. All estimates are for the calendar year. Updated as of 3 November 2010.
Our LatAm model portfolio is a vehicle to express our strategy views on regional equity markets, sectors, and stocks. This
portfolio will normally include stocks which will be constructed relative to the MSCI EM Latin America Index and will be
updated on a regular basis through our ‘LatAm Key Trades’ publication. The portfolio is primarily driven by our
fundamental analyst views, and we use our analysts’ published company valuation and estimates to support inclusion, but a
strategy overlay is incorporated and hence the published strategy may on occasion differ from analyst views. Analyst
ratings are driven by company attractiveness relative to their sector coverage, whereas we take a regional LatAm view. The
portfolio can include: 1) non-Latin America listed stocks, to the extent the region is a significant company driver; and 2)
stocks not currently covered by JPM analysts, to the extent these are heavily weighted MSCI Latin America Index
companies, though these companies must always be incorporated at a neutral relative weighting so as to express no strategy
or fundamental view.
This portfolio has been run since November 2007. Year to date in 2010 the portfolio is up 22.0% compared to a rise for the
MSCI LatAm index of 12.0%. This return is indicative only and is calculated on price returns only, excluding dividends but
also excluding trading costs – which an invested portfolio would bear. Portfolio changes are implemented on the day of
‘Key Trades’ publication.
12
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Latin America Model Portfolio by Sector
Ticker
Discretionary
Gafisa
PDG Realty
Televisa
Staples
CBD
Cencosud
Energy
OGX
Pacific Rubiales
Petrobras PN
Financials
GF Galicia
Cetip
Bradesco
First Cash
Santander Brasil
Industrials
Copa
ICA
Materials
Cemex
Vale PN
Telecoms
AMX
NII Holdings
TIM Participacoes
Utilities
EMF LATAM
Price*
GFSA3 BZ
PDGR3 BZ
TV US
PCAR5 BZ
CENCOSUD CI
OGXP3 BZ
PRE CN
PETR4 BZ
GGAL US
CTIP3 BZ
BBDC4 BZ
FCFS US
SANB11 BZ
CPA US
ICA* MM
CX US
VALE/P US
AMX US
NIHD US
TSU US
667.8
14.3
22.2
22.9
628.8
66.1
3717.2
1161.3
22.9
33.4
27.0
1064.7
15.1
19.1
36.5
29.5
25.0
277.0
50.6
33.3
1219.1
9.2
28.9
588.6
58.0
42.6
34.1
383.9
79524.0
Change
1M
YTD
(%)
(%)
2.1
9.2
2.8
0.9
5.7
28.0
21.1
10.3
3.4
21.9
11.1
1.7
14.0
116.1
2.6
-15.5
0.7
33.6
18.0
116.4
-1.4
-26.4
3.3
22.0
51.9
162.8
17.6
33.7
6.9
21.4
10.4
32.9
5.9
4.6
3.8
28.5
-3.8
-7.1
8.2
9.2
3.0
12.3
10.7
-19.1
3.7
16.4
3.6
8.1
6.6
23.4
0.3
26.9
4.5
14.8
2.3
9.2
3.1
11.3
Port.
MSCI
Weight
(%)
(%)
13.0
5.3
5.0
0.4
5.0
0.8
3.0
1.2
9.7
11.6
6.0
0.4
3.7
0.8
17.0
16.6
4.0
1.9
3.0
0.0
10.0
13.0
27.0
22.3
2.0
0.0
5.0
0.0
10.0
4.5
3.0
0.0
7.0
0.5
6.0
4.6
3.0
0.0
3.0
0.0
14.3
24.4
3.0
1.0
11.3
11.0
13.0
8.7
6.0
6.4
5.0
0.0
2.0
0.2
0.0
5.5
100.0
100.0
Dev.
(%)
7.7
4.6
4.2
1.8
-1.9
5.6
2.9
0.4
2.1
3.0
-3.0
4.7
2.0
5.0
5.5
3.0
6.5
1.4
3.0
3.0
-10.1
2.0
0.3
4.3
-0.4
5.0
1.8
-5.5
0.0
P/E
10E
(x)
17.6
17.0
15.2
22.4
24.0
30.5
38.9
10.9
nm
37.2
8.3
14.7
24.8
31.2
14.1
17.2
15.4
27.4
10.6
31.1
13.3
nm
9.6
12.4
15.8
25.5
31.0
11.7
14.2
P/E
11E
(x)
13.8
12.7
9.8
17.5
19.8
24.9
30.3
10.2
nm
13.8
10.4
12.3
17.6
23.5
12.7
14.7
11.7
22.0
7.7
22.5
9.5
nm
7.0
10.7
13.5
13.0
15.0
10.7
11.6
EPS
Growth
10E
27.9
31.3
67.8
16.1
21.5
-7.7
78.6
7.1
-96.4
-266.7
-1.8
19.6
24.5
22.0
26.3
23.7
23.7
24.6
3.2
-8.5
40.1
-233.3
202.0
15.4
-24.9
-26.4
-41.9
8.8
15.8
ROE
10E
(%)
16.1
9.3
13.3
20.0
12.9
6.9
8.0
9.7
2.1
18.2
10.3
16.2
14.5
38.2
21.8
18.7
11.6
10.2
na
3.7
15.6
-0.8
23.3
27.1
25.0
8.9
5.2
8.7
13.9
Analyst
Adrian E Huerta
Adrian E Huerta
Rajneesh Jhawar
Andrea Teixeira
Andrea Teixeira
Sergio Torres
Sergio Torres
Sergio Torres
Saul Martinez
Frederic de Mariz
Saul Martinez
Ben Laidler
Saul Martinez
Jamie Baker
Adrian E Huerta
Adrian E Huerta
Andre Baggio
Andre Baggio
Andre Baggio
Source: Bloomberg, MSCI, J.P. Morgan estimates. All estimates are for the calendar year. Updated as of 3 November 2010.
LatAm Model Portfolio sector allocation relative to MSCI Emerging Latin America Markets Index
Discretionary
Financials
Telecoms
Industrials
Energy
Staples
Utilities
Materials
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
Source: MSCI, J.P. Morgan estimates. Updated as of 3 November 2010.
13
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
LatAm Model Portfolio country allocation relative to MSCI Emerging Latin America Markets Index
Brazil
Colombia
Argentina
Mex ico
Peru
Chile
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
Source: MSCI, J.P. Morgan estimates. Updated as of 3 November 2010.
Historical changes to model portfolio
Nov 10
Sep 10
Aug 10
Jul 10
Jun 10
May 10
Mar 10
Feb 10
Jan 10
Nov 09
Oct 09
Sep 09
Aug 09
Jun 09
May 09
Apr 09
Mar 09
Feb 09
Dec 08
Oct 08
Sep 08
Aug 08
Jul 08
Jun 08
Apr 08
Feb 08
Source: J.P. Morgan Strategy.
14
Bought
TIM Participacoes
Cetip, OGX, Cemex
GF Galicia, Banrisul, Cencosud
Televisa, Banorte
Gafisa, Copa Holdings
NIHD, Cemex, First Cash Financial
BM&F Bovespa, Metalurgica Gerdau, Vivo, Pacific Rubiales
None
ICA, CBD
Santander Brazil, Cielo, Lan Airlines
OGX, Silver Wheaton
Itauunibanco, Geo, ALL
Gerdau, Gafisa
BM&F Bovespa, Banco Macro
Ternium, Grupo Mexico
Lojas Renner, Banorte, Santander
Banco do Brasil, ALL, Tenaris, Geo
Banco Itau, Entel, Slc Agricola, Cemex
Porto Seguro, Bradesco, Credicorp
Asur, Walmex, Bradespar, Urbi
GVT,PDG Realty
Homex
Embraer
Petrobras PN ADR, CCR, CTC, Coeur d'Alene
Banco do Brasil, Megacable
Urbi, Rodobens, Gafisa, Telecom Argentina
Sold
BM&F Bovespa
Banrisul, Banorte, Urbi
Lan Airlines, OGX, Banco Macro
Cemex, Ternium
Metalurgica Gerdau, Tenaris
Vivo, Grupo Mexico, Banorte
Cielo, Gerdau, Silver Wheaton
None
Cemex, Lojas Renner, Gafisa
BM&F Bovespa, Banco do Brasil, Santander Chile
ALL, Televisa
Banco Bradesco, Urbi, TAM
Bradespar, GVT
Porto Seguro, Credicorp
Copa Holdings, Femsa.
Embraer, Walmex, Entel
Bradesco, SLC, Ternium, Asur
Unibanco, Urbi, Gafisa, Santander Chile
Telecom Arg., CCR, Banco do Brasil
Banorte, Lojas Renner, Homex
CTC, Coeur d'Alene, Rodobens
Megacable, Urbi
VCP
Petrobras ON, NETC, Silver Wheaton
B2W
Cesp, Company SA, Cyrela
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Analysts’ Top Picks
Top picks
Name
Brazil
AES Tiete
Banrisul
Bradesco
Brasil Foods
Cetip
Copasa
DASA
Hypermarcas
OGX
PDG Realty
Santander Brasil
Sao Martinho
Tim Participacoes
Vale
Mexico
America Movil
Cemex
Compartamos
Corporacion Geo
FEMSA
First Cash Financial
Grupo Mexico
Grupo Televisa
ICA
Chile
Antofagasta
CCU
Falabella
Colombia
Exito
Millicom
Pacific Rubiales
Peru
Credicorp
Silver Wheaton
Argentina
Grupo Clarin
Tenaris
Share
Price
Price
Target
% Change
to target
Bloomberg
Ticker
JPM
Rating
Analyst
Mkt Cap,
US$ MM
P/E (X)
2010E
P/E (X)
2011E
EPS
2010E
EPS
2011E
Yield (%)
2011E
ROE (%)
2011E
23.5
18.0
34.8
24.4
18.0
26.4
20.6
28.0
21.7
10.6
24.5
21.6
32.2
31.8
27.0
20.0
47.0
31.0
20.0
34.0
18.0
30.0
20.3
15.0
33.0
13.0
40.0
47.5
15.6
2.6
26.7
23.5
3.7
21.6
-13.7
7.9
-10.1
36.6
27.2
-43.5
17.6
40.4
GETI4 BZ
BRSR6 BZ
BBDC4 BZ
BRFS3 BZ
CTIP3 BZ
CSMG3 BZ
DASA3 BZ
HYPE3 BZ
OGXP3 BZ
PDGR3 BZ
SANB11 BZ
SLCE3 BZ
TSU US
VALE US
OW
OW
OW
OW
OW
OW
OW
OW
OW
OW
OW
N
OW
OW
Anderson Frey
Frederic de Mariz
Saul Martinez
Alan Alanis
Frederic de Mariz
Anderson Frey
Andrea Teixeira
Andrea Teixeira
Sergio Torres
Adrian E Huerta
Saul Martinez
Debbie Bobovnikova
Andre Baggio
4,835
4,267
73,018
12,881
2,568
1,895
2,816
8,847
42,952
7,144
58,007
1,339
8,417
173,421
10.7
11.2
13.5
26.3
29.4
6.4
24.2
28.3
nm
14.5
15.1
33.2
29.5
10.9
9.9
9.6
12.1
14.4
22.2
6.0
18.7
20.7
nm
9.4
11.5
22.5
14.3
7.7
2.19
1.61
2.59
0.93
0.61
4.13
0.85
0.99
0.06
0.73
1.62
0.65
1.86
2.92
2.38
1.88
2.88
1.70
0.81
4.39
1.10
1.35
0.02
1.13
2.13
0.96
3.84
4.13
10.7
4.2
2.9
1.5
3.1
8.3
30.6
2.1
0.0
1.7
5.2
1.1
1.7
2.9
181.4
19.0
21.2
8.8
45.3
12.0
31.2
7.6
0.6
19.2
14.4
11.1
10.0
23.3
57.1
8.8
85.9
39.3
52.9
29.4
40.4
22.2
32.5
72.0
12.0
100.0
52.0
59.0
34.5
53.0
27.5
43.0
21.6
22.4
8.7
32.5
5.2
14.5
25.4
17.5
26.9
AMX US
CX US
COMPARTO MM
GEOB MM
FMX US
FCFS US
GMEXICOB MM
TV US
ICA* MM
OW
OW
OW
OW
OW
OW
OW
OW
OW
Andre Baggio
Adrian E Huerta
Frederic de Mariz
Adrian E Huerta
Alan Alanis
Ben Laidler
Rajneesh Jhawar
Adrian E Huerta
119,244
9,800
3,216
1,762
20,060
913
26,902
13,699
1,781
15.8
nm
19.7
12.2
13.1
17.1
17.2
22.0
30.4
13.4
nm
16.1
9.6
11.5
14.6
10.9
17.2
22.0
44.98
-0.16
4.36
3.23
4.05
1.72
0.19
12.54
1.07
52.72
0.02
5.34
4.08
4.61
2.01
0.30
16.02
1.48
0.7
0.0
1.3
0.0
8.0
0.0
5.2
1.4
0.0
26.1
0.1
34.8
22.0
11.0
17.9
24.6
23.0
4.9
1326.0
56.1
4849.5
1100.0
62.0
4556.0
-23.0
5.5
-4.5
ANTO LN
CCU US
FALAB CI
OW
OW
N
Amos Fletcher
Alan Alanis
Andrea Teixeira
22,718
3,744
23,833
16.5
15.1
38.5
11.4
13.7
31.4
80.30
3.70
125.92
116.50
4.08
154.40
0.5
4.5
0.8
116.5
21.6
13.0
23080.0
94.7
31.7
17800.0
120.0
36.0
-27.7
28.9
8.1
EXITO CB
MICC US
PRE CN
N
OW
OW
Andrea Teixeira
Jean-Charles Lemardeley
Sergio Torres
4,477
10,140
8,843
55.5
14.2
35.2
42.8
11.8
13.0
415.58
6.69
0.90
539.80
8.00
2.43
0.0
7.3
0.0
4.3
26.1
34.1
124.7
27.6
120.0
31.0
-5.9
-11.6
BAP US
SLW US
N
OW
Saul Martinez
John Bridges
10,171
12,106
17.2
38.3
15.2
21.0
7.23
0.72
8.20
1.31
1.7
0.0
22.1
18.5
10.0
41.3
9.0
52.0
-10.0
14.8
GCLA LI
TS US
OW
OW
Rajneesh Jhawar
Sergio Torres
1,437
26,733
3.4
20.1
2.5
16.0
2.92
2.06
4.00
2.59
0.0
0.9
12.7
14.8
Source: Bloomberg, J.P. Morgan estimates. J.P. Morgan ratings: OW = Overweight; N = Neutral; UW = Underweight.
15
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Analysts’ Top Stocks to Avoid
Top stocks to avoid
Name
Brazil
Cyrela Brazil Realty
Eletropaulo
Fibria
Minerva SA
Panamericano
Tele Norte Leste
Usiminas
Mexico
Consorcio Ara
Grupo Inbursa
Organizacion Soriana
Telmex SA
Chile
IAM
SQM
Colombia
Bancolombia
Ecopetrol
Peru
Buenaventura
Argentina
Edenor
Share
Price
Price
Target
% Change
to target
22.8
29.9
30.0
6.1
7.7
48.5
21.0
29.0
30.0
26.0
8.1
10.0
57.0
26.0
30.3
0.0
-16.7
34.1
37.7
14.9
13.3
7.6
53.9
37.2
15.2
9.0
41.0
31.0
12.0
747.0
51.5
Bloomberg
Ticker
JPM
Rating
Analyst
Mkt Cap,
US$ MM
P/E (X)
2010E
P/E (X)
2011E
EPS
2010E
EPS
2011E
Yield (%)
2011E
ROE (%)
2011E
CYRE3 BZ
ELPL6 BZ
FIBR3 BZ
BEEF3 BZ
BPNM4 BZ
TMAR5 BZ
USIM5 BZ
UW
UW
UW
N
UW
N
UW
Adrian E Huerta
Anderson Frey
Debbie Bobovnikova
Alan Alanis
Frederic de Mariz
Andre Baggio
5,536
3,229
8,587
376
1,043
7,699
14,775
12.1
4.8
17.1
10.6
12.1
5.6
20.5
9.9
8.4
96.9
5.8
7.2
6.7
11.1
1.88
6.29
1.76
0.58
0.64
8.60
1.02
2.31
3.54
0.31
1.05
1.07
7.21
1.88
0.0
13.8
0.0
0.0
8.0
8.9
3.1
20.1
18.0
5.0
10.8
16.4
14.9
8.8
15.5
-21.6
-17.6
-24.3
ARA* MM
GFINBURO MM
SORIANAB MM
TMX US
UW
UW
UW
UW
Adrian E Huerta
Saul Martinez
Andrea Teixeira
Andre Baggio
829
14,247
5,536
14,410
11.5
25.3
21.6
12.7
9.9
21.0
18.9
13.2
0.66
2.13
1.72
18.51
0.77
2.57
1.97
17.30
1.3
1.4
0.4
5.0
10.1
12.2
9.7
37.0
720.0
37.0
-4.0
-29.4
IAM CI
SQM US
N
N
Anderson Frey
Brian P Chase
1,561
13,799
16.1
43.6
16.1
30.4
46.36
1.18
46.36
1.69
5.9
0.0
8.1
24.6
66.0
4360.0
65.0
2795.0
-3.9
-39.9
CIB US
ECOPETL CB
UW
UW
Saul Martinez
Sergio Torres
13,322
102,728
20.0
22.1
17.9
14.9
3.30
197.47
3.68
292.19
1.8
3.3
18.4
34.5
51.7
46.0
-16.9
BVN US
N
John Bridges
15,262
19.8
14.6
2.61
3.55
0.9
26.5
10.3
na
na
EDN US
UW
Anderson Frey
485
13.3
12.2
0.77
0.84
0.0
7.0
Source: Bloomberg, J.P. Morgan estimates. J.P. Morgan ratings: OW = Overweight; N = Neutral; UW = Underweight.
16
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Emerging Market Equity Strategy
The Drivers
Potential Returns
1. The declining EM risk premium continues
MSCI EM end-2011 target 1500 (+25%)
• Forward PE at 1500 is 13 (based on consensus 2012
EPS)
2. Strong demand from EM credit continues
3. High nominal growth and nominal FX appreciation
4. DM neither a driver nor a drag
• Current credit conditions, FX appreciation, earnings
growth, and earnings estimate revisions provide upside
Other targets
KOSPI 2300, NIFTY 7000
Investment themes
Risks
1.
China drifts away from the Asian growth model
2.
Structural OW on domestic demand
3.
FDI in non-China EM increases
4.
Growth premiums continue to expand
5.
CEMBI Surfers still riding in 2011
6.
Warning flags: Real credit growth and core CPI
7.
Beware co-investing with governments
8.
Liquidity without a valuation anchor
9.
Higher REER bad for exporters’ margins
Market Risks
• Lack of valuation cushion
• Bond market volatility
• High correlation
Policy and Political risks
• Capital controls
• Anti-asset inflation policies
• Trade wars
• Leadership change in China, Thai and Philippines
elections
• Strained social contract
Economic risks
• Uncertain outlook for commodities
• Unintended consequences of QE2
• Public sector debt stress in developed economies
Key issues for 2011 – Briefing notes
Market Performance
1.
Scale of emerging markets
MSCI EM and MSCI World performance
2.
Capital controls and FX intervention
1250
3.
Western-China-driven growth
1050
4.
Strength of consumption in China
5.
China’s infrastructure investment
6.
Will China have a housing inventory problem?
MSCI EM
850
650
450
250
MSCI World
50
88
90
92
94
96
98
00
02
04
06
08
10
Source: Bloomberg, 8 November 2010.
17
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Emerging Market Equity
Strategy
We are bullish on EM equities. Our end 2011 target for
MSCI EM is 1500 (+25%). Based on consensus 2012
EPS the forward PE at 1500 is 13. Current credit
conditions could support a larger re-rating (please see
page 27 for potential returns). MSCI EM life high is
1338 (29 October 2007).
What about the biggest bull market of your career?
Between 11 March 2003 and 29 October 2007 MSCI
EM increased from 270 to 1338; +395%, or an
annualized return of 38%. On 2 March 2009 EM was
475. The index is 140% higher today. To match the
2003/7 bull market MSCI EM would need to be 2351 by
20 October 2013. This requires an annualized return
of 21%.
In last year’s Emerging Markets Year Ahead our end2010 MSCI EM target was 1200. The index is within 5%
of this target. But the ride was not smooth; between 15
April and 25 May the index declined by 19% to 855.
Zero interest rates, QE2, currency wars, and high
correlation across asset classes are likely to lead to
volatility in 2011. Even with this year’s volatility, EM
volatility-adjusted returns are the highest for growth
assets.
Our asset allocation starts with long-term trends (EM
consumer, China’s changing economic policy, sector
RoEs and investment cycles, currencies, etc.) combined
with short-term tactical allocation driven by market
factors (relative valuations and performance, retail
activity, consensus positioning). Benchmark composition
often represents historical rather than future growth
trends. We are bullish on the Brazilian and Chinese
domestic economies yet have been underweight these
markets in 2010. We have been overweight Brazilian and
Chinese domestic demand but underweight the larger
sectors, i.e., energy, materials and Chinese SoEs. As was
the case in 2010, focus on sectors within countries
rather than simple country asset allocation (see page
26).
Investors are seeking carry, growth and momentum.
Both emerging fixed income and equity markets offer
this. For now it is foolish to fight the trend. But
remember the risks (see page 31). QE2 is an experiment.
China’s ability to rebalance the driver of growth from
investment to consumption is also an experiment.
18
Monitor the data; core inflation, property sales, actual
commodity demand rather than financial demand, etc.
MSCI EM performance
1400
1200
1000
800
600
400
200
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Source: Bloomberg.
Valuations in EM trend rather than mean revert
42
37
Forw ard PE based on Trend EPS
32
27
22
17
Forw ard PE based on
12
Consensus EPS
7
88 89 90 91 92 93 95 96 97 98 99 00 02 03 04 05 06 07 09 10
Source: Datastream, MSCI, IBES. Note: MSCI EM fwd PE based on trend and consensus
EPS. The trend EPS is calculated by plotting a trend line through the log chart of MSCI
EM realized EPS.
Higher risk-adjusted returns in EM
2.5
2.0
1.5
1.0
EM
US
0.5
0.0
-0.5
-1.0
World
-1.5
Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10
Source: Bloomberg
Note: EM, US and World: Three-month rolling returns adjusted for 90-day volatility.
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
There is limited statistical evidence of valuations mean
reverting in EM (see figure on previous page). Investors
should focus on factors that are currently driving a re- or
derating. The rerating factors are:
1.
2.
3.
4.
Expanding growth premium in a low-growth world
Equities are cheap relative to sovereign and
corporate bonds
Accelerating investment and consumption growth in
key EMs
Lower relative risk profile of EM versus DM
Base Case
In the risk section on page 31 we highlight the risks to
our base case.
The declining EM risk premium continues
Emerging economies survived the big ugly experiment
of an extreme external demand shock and a credit crisis.
This hit EM economies when they were a year into a
tightening cycle. In passing this test and with the
economies recovering ahead of developed economies,
the risk premium demanded for EM should decline. Note
that stock-specific risk (corporate governance,
transparency, policy risk, etc.) is still higher.
Strong demand for EM credit and carry continues
Investor appetite for risk has slowly increased since 9
March 2009. The bias is corporate credit for yield and
emerging markets for growth. EM US dollar and local
currency credit offers both and is thus attracting large
flows relative to its market cap. J.P. Morgan forecast for
this to continue in 2011. We maintain our CEMBI
surfer theme of favoring current account deficit
markets.
High nominal growth and nominal FX appreciation
Data support positive nominal GDP revisions. These
data include strong retail sales, car sales and loan
growth. EM Central Banks are slowing FX appreciation
but not reversing the trend.
EMBI and earnings yield spread between EM and DM
1600
Earnings Yield Spread betw een
1400
EM and DM (RHS)
1200
6
5
4
1000
3
800
2
600
1
400
200
0
EMBI Spread (LHS)
-1
0
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Bloomberg, MSCI.
EM net debt inflow (Cum. USD bn)
80
2010
59
60
2007
40
20
34
2009
0
31
-14
2008
-20
Jul Aug Sep Oct Nov Dec
Source: J.P. Morgan estimates and EPFR Global.
EM net equity inflows (Cum. USD bn)
80
2010
60
69
64
41
40
2009
20
2007
0
-20
-40
-40
2008
-60
Jul Aug Sep Oct Nov Dec
Source: EPFR Global.
DM neither a driver nor a drag
Focus on the local EM dynamics rather than swings in
net exports. Economic expansion in the US and Euro
Area resumed in 3Q09. J.P. Morgan forecast 2011 GDP
growth of 2.5% and 1.5% for the US and Euro Area
respectively. This growth may be politically
unacceptable as it is too slow to reduce unemployment,
but for EM, slow DM growth is a benign to positive
backdrop. It is benign for external demand and positive
as interest rates remain low.
19
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Investment Themes
China drifts away from the Asian growth model
China is a souped-up version of the Asian growth model.
Investment rather than consumption drives growth. This
requires a transfer of wealth from the household sector to
the corporate sector through low wages, low return on
savings and undervalued currency. 2010 policy and the
12th Five-Year Plan all point to a move toward
consumption. This is a long-term positive. But it may
mean that the growth in Chinese commodity demand is
overestimated. Beneficiaries of the change are a small
part of the benchmark, which may result in ongoing
underperformance of MSCI China.
Structural OW on domestic demand
This is where the growth is (globally). We acknowledge
that these stocks do trade at a premium and the call is
consensus.
Beware co-investing with governments
A third of MSCI market cap is companies in which
governments are the controlling shareholder. It can be
profitable being a minority shareholder in these
companies when the major shareholder offers favorable
policies and is focused on returns. With today’s flood of
capital into EMs, investor-friendly policies may not be a
top priority and thus these companies could be at risk
from politically expedient policies.
SoEs are 79% of MSCI China market cap. Policies
designed to boost consumption by increasing the
household income-to-GDP ratio will reduce the ratio of
profits to GDP. SoEs in our view are particularly
vulnerable to policy risk. Our structural bias is to be
underweight SoEs. Russian oils stocks’
underperformance is notable, with Rosneft, Lukoil and
Gazprom unchanged year to date. In contrast, Russian
financials are up 25% ytd. Gazprom, with one-sixth of
the world’s oil reserves, has a 2011e PE of 4. Russian
energy stocks are unlikely to rerate while the market
fears higher taxes.
Household income growth lagging tax and profits
800%
748%
GDP
Gov ernment
Profits
Income
700%
600%
500%
400%
300%
512%
343%
200%
100%
258%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: J.P. Morgan economics. Note: Income proxy is the change in urban per capita
household income; Profits are the growth in aggregate industrial profits.
EM and US as a share of global consumption
%
40
US
35
EM
30
25
20
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Source: J.P. Morgan economics.
Ownership structure in MSCI EM
MNC
5%
Institutional
27%
Gov ernment
30%
Family
Cross
h
h ldi
Source: MSCI, Datastream, J.P. Morgan Strategy.
20
19%
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
FDI in non-China EM increases
Higher labor cost, strengthening Renminbi and tensions
between Japan and China improves the attractiveness of
other emerging markets for FDI. The main beneficiaries
are ASEAN, Turkey and Mexico. Note in table below
that a small change in China’s share of FDI could lead to
a large increase in FDI in ASEAN.
FDI into China and ASEAN
EM equities cheap relative to bonds
US$ billions
2007
2008
2009
China
138.4
147.8
78.2
Indonesia
6.9
9.3
4.9
Malaysia
8.6
7.2
1.4
Philippines
2.9
1.5
1.9
Thailand
11.3
8.6
6.0
Source: CEIC.
CEMBI (1/y ld)
20
Fw d PE
17
14
Warning flags: Real credit growth and core CPI
Central banks responding to inflation have always ended
the bull market in EM. As of now EM central banks have
maintained a pro-growth bias even when headline
inflation is higher than the target level. Each week we
publish a detailed table on inflation in our dashboards.
The warning flags are a combination of higher real credit
growth and rising core CPI. These conditions increase
the probability of the central bank moving to a policy
designed to slow growth in order to fight inflation. EM
equities are growth assets. Lower growth and higher
discount rates result in a derating.
Real credit growth and Core CPI
China
Brazil
Korea
Taiwan
India
South Africa
Russia
Mexico
Malaysia
Indonesia
Turkey
Thailand
CEMBI surfers still riding in 2011
Demand for EM credit remains strong (see Error!
Reference source not found.). The yield on the
emerging market corporate bond indices (CEMBI) is
5.3%; this is lower than the average investment grade
bond yield in past decade (JULI). Our bias is to own
current account deficit markets when credit conditions
are favorable; OW India and Turkey.
Real Credit Growth %oya
15
14
3
4
9
2
0.1
3
11
14
16
4
Core CPI %oya
0.7
5
2
0.7
9
3
5
4
1.1
5
4
1.1
Source: CEIC, J.P. Morgan economics, Bloomberg and central bank websites, September
2010. Note: Credit growth as of June 2010 for China, Korea, Taiwan, India, Malaysia,
Indonesia, Thailand and August 2010 for Brazil.
Growth premiums continue to expand
Lack of developed world growth combined with low
discount rates supports high growth premium. Maintain a
structural bias to high growth themes; EM consumer.
Compare valuations with other growth stocks rather than
markets.
11
8
5
01
02
03
04
05
06
07
08
09
Source: MSCI, Bloomberg, J.P. Morgan Indices.
Note: The inverse of the CEMBI yield is used to compare PEs with EM corporate bond
yields.
Liquidity without a valuation anchor
The range of valuations since late 2007 is extremely
wide. Correlation of risk asset is high, indicating that
asset-specific fundamentals are secondary to general
market trend. Higher commodity prices are partly
justified by monetary conditions rather than supply or
demand. Equities are inexpensive relative to bonds but if
economic activity improves then bonds are expensive.
Risk assets march in step: Correlation with MSCI US
0.8
0.6
JPM Industrial Metals Index
JPM Precious Metals TR
0.4
0.2
0.0
-0.2
-0.4
-0.6
JPM TR Energy
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Bloomberg, J.P. Morgan indices.
Note: Three year correlation of monthly returns of MSCI US vs. JPMCI Energy, Precious
metals and Industrial metals.
21
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
The lack of valuation anchors in equities, bonds,
commodities and currencies means a wide range of
possible returns and high volatility. It is critical to keep
monitoring the fundamentals while acknowledging that
the near term drivers of markets are dominated by
momentum and casual relationships between asset
classes. When implied volatility is low, consider buying
protection. Remember that the 2003/7 EM bull market
had five 15-20% corrections.
YTD Returns and Correlation with MSCI US
Topix
Energy
US cash
GSCI TR
Global Gov Bonds
MSCI Europe
EM FX
US Fixed Income
MSCI AC World
EM Local Bonds
US High Grade
S&P500
MSCI EM
EM $ Corp.
EMBIG
Gold
Year to date
return
-6
-4
0.2
4
6
7
8
9
9
10
11
12
15
16
17
27
3 year correlation of monthly
returns with MSCI US
0.8
0.6
-0.4
0.6
-0.3
0.9
0.8
0.2
1.0
0.5
0.4
1.0
0.9
0.6
0.7
0.1
Source: Bloomberg.
Higher REER bad for exporters’ margins
Capital-flows support EM FX appreciation. Nominal
appreciation combined with inflation differentials results
in a real effective exchange rate appreciation. In China
there have been a number of large wage increases in
foreign owned export factories. This is bad for margins.
Avoid export industries in Brazil and China with a large
labor cost.
Movement in major currencies
AUD
ZAR
BRL
KRW
IDR
PLN
CZK
MXN
HUF
THB
TRY
SGD
JPY
MYR
RUB
INR
TWD
PHP
CNY
HKD
-20 -10
10
Av g 05-07
Source: Bloomberg.
22
0
20
30
40
50
60
Mar low
70
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Focus on sectors within countries rather than country recommendations
The table below provides a level summary of our views on sectors within countries. Financials is 26%, Materials is 15%
and Energy is 14% of EM. All recommendations are relative to EM. The Industrials sector consists of an eclectic group of
stocks. We do not rate the sector.
Key country and sector recommendations, performance and fundamentals
Country/Sector
Wt
Rec
Demand
Classification
EM
China
China Financials
China Energy
China Telecom
China Industrials
China CS
China Materials
China CD
Brazil
Brazil Financials
Brazil Materials
Brazil Energy
Brazil CS
Korea
Korea IT
Korea Financials
Korea Industrials
Korea Materials
Korea CD
Taiwan
Taiwan IT
Taiwan Financials
Taiwan Materials
India
India Financials
India IT
India Energy
South Africa
SA Materials
SA Financials
SA Cons Discr
SA Telecom
Russia
Russia Energy
Mexico
Mexico Telecom
Mexico CS
Malaysia
Indonesia
Turkey
Turkey Financials
Thailand
Chile
Poland
Philippines
Hungary
Czech Republic
100
18.5
7.2
3.2
2.1
1.5
1.1
1.0
1.0
16.2
4.3
4.0
3.7
1.4
13.4
3.4
2.1
2.3
1.9
2.1
10.5
6.0
1.6
1.4
8.1
2.3
1.3
1.1
7.4
1.9
1.9
1.0
1.0
6.0
3.3
4.3
1.6
1.1
2.8
2.3
1.8
1.1
1.7
1.7
1.6
0.5
0.4
0.4
-N
N
UW
UW
n/a
OW
UW
OW
N
OW
N
UW
N
UW
UW
UW
n/a
N
OW
N
N
OW
N
OW
OW
OW
OW
N
UW
N
OW
OW
N
UW
UW
N
UW
OW
N
OW
OW
OW
N
N
OW
N
N
DD
GPT
DD
50% DD
DD
GPT
DD
DD
GPT
GPT
DD
GC/C
DD
60% DD
GPT
GC
GC/C
DD
GPT
DD
GCap
GPT
GPT
DD
DD
DD
GPT
DD
DD
DD
Jan 06
to date
64
149
215
144
111
92
303
132
133
146
159
201
130
185
28
11
-17
72
192
55
19
4
6
87
123
153
84
202
53
33
39
106
60
5
-20
58
86
100
108
227
55
78
101
145
19
123
1
25
Performance
(USD Returns)
EM low
12M
to date
154
24
167
15
173
9
236
27
53
12
176
17
225
36
335
9
272
28
190
9
260
25
219
13
126
-18
227
29
163
32
155
23
92
5
226
51
270
43
283
70
102
21
97
16
117
11
114
37
186
39
209
48
171
50
140
23
182
36
210
31
162
35
320
58
147
25
154
10
115
-3
136
31
116
27
144
40
108
33
259
48
225
57
316
69
224
72
174
56
94
23
159
48
134
6
54
-10
PE
YTD
10E
11E
EPS Growth
(%)
10E
11E
17
12
10
21
14
15
14
8
11
7
21
11
-17
25
19
7
3
39
17
49
8
1
6
24
25
42
27
10
24
16
23
40
19
8
-2
21
24
19
32
36
43
50
58
41
19
40
4
-3
13.5
14.3
12.9
12.6
12.9
14.9
22.7
17.0
18.4
13.5
14.6
11.5
11.6
23.5
10.6
9.5
10.6
13.9
10.1
10.6
14.1
12.6
19.6
16.8
20.8
24.9
24.8
16.5
14.6
19.5
12.3
17.0
12.9
7.8
5.6
17.8
13.5
23.2
17.7
17.4
11.6
10.7
15.2
19.7
13.7
18.8
12.9
10.8
11.6
12.2
10.6
11.4
12.1
13.6
18.8
12.5
15.6
11.2
12.3
8.1
12.0
19.0
10.0
10.6
8.8
12.1
9.7
8.9
12.7
11.4
15.0
15.4
17.0
19.8
20.4
13.2
11.6
12.5
10.4
14.1
10.8
6.2
4.8
14.8
11.7
19.3
14.8
14.7
10.8
10.2
13.2
17.2
11.7
16.4
10.0
10.2
28.4
26.8
25.7
26.2
3.0
64.7
13.7
54.2
38.3
15.5
17.2
87.8
-15.0
21.3
46.7
82.8
61.7
42.3
22.9
9.2
86.7
125.1
29.0
28.9
19.8
17.5
15.8
40.1
28.0
236.8
14.9
19.3
18.5
44.0
25.9
7.4
13.7
-5.0
25.7
19.9
18.4
14.4
17.2
22.3
25.0
18.1
-3.4
-2.4
16.3
17.6
21.7
10.4
6.9
10.1
20.9
36.2
18.1
20.1
18.8
41.5
-3.1
23.6
5.3
-10.4
19.5
14.3
3.2
18.9
11.5
10.5
30.6
9.3
22.2
25.3
21.2
24.7
25.8
55.8
18.7
20.8
19.0
25.0
16.2
20.4
15.5
20.4
19.7
17.7
8.0
5.1
15.0
15.0
16.7
14.2
29.6
5.5
EPS
CAGR
(06-11)
EPS
CAGR
by SD
8.4
14.1
26.2
10.4
9.3
10.5
17
2.5
13.4
9.2
10.7
14.6
0.7
16.2
10.3
11.0
1.6
9.9
13.7
27.4
4.3
3.4
20.1
-0.8
12.7
15.7
13.3
12.7
8.9
20.3
3.9
11.9
9.1
6.8
6.2
5.5
16.4
18.7
7.6
18
12.8
20
5.9
18.2
1.1
4.3
-4.9
8.7
0.5
0.9
1.1
0.7
0.8
0.2
1.5
0.1
0.8
0.6
0.6
0.2
0.0
0.3
0.3
0.0
0.0
0.3
1.7
0.5
0.1
0.0
0.0
0.0
0.8
1.6
1.3
0.9
0.4
0.2
0.2
1.2
0.7
0.3
0.4
0.3
1.5
0.6
0.3
1.1
0.8
0.8
0.2
1.5
0.1
0.3
-0.2
0.6
PEG
Ratio
DY
(%)
10E
ROE
(%)
10E
1.7
1.1
0.5
1.3
1.4
1.7
1.2
7.6
1.5
1.5
1.4
1.1
13.4
1.7
1.0
0.8
8.0
1.4
0.7
0.4
3.5
4.1
1.1
NM
1.9
1.7
2.0
1.7
2.1
4.4
3.4
1.8
1.6
1.2
0.9
4.3
1.1
1.3
2.4
1.1
0.9
0.5
2.6
1.2
12.8
4.8
NM
1.2
2.4
2.5
2.9
3.2
3.3
1.8
1.6
1.4
1.8
2.6
2.7
2.4
1.9
2.5
1.0
0.1
2.2
1.0
1.1
0.7
3.4
3.4
2.6
3.9
1.2
1.0
1.3
1.1
2.9
1.9
4.1
1.9
3.2
1.9
2.2
2.4
3.9
1.4
3.1
2.3
2.4
1.8
3.0
1.7
3.2
3.4
3.0
6.4
14.8
16.2
17.7
17.4
15.2
11.7
17.7
11.8
21.6
14.1
16.2
17.9
10.1
12.8
14.2
17.8
10.6
12.6
15.2
17.6
13.4
16.4
6.9
11.3
16.1
11.8
24.7
15.9
15.3
12.7
12.3
17.2
20.8
13.3
14.2
16.4
41.4
14.3
12.6
24.2
17.7
18.4
15.8
11.6
11.8
16.0
10.4
17.5
Source: MSCI, IBES, Bloomberg, J.P. Morgan, 5 November 2010. Note: Outperformance of more than 2% vs. MSCI EM. Underperformance of more than 2% vs MSCI EM. DD=Domestic
Demand, GPT=Global Price Takers, GC/C=Global Capex/Consumer, GC=Global Consumer, GCap=Global Capex.
23
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Potential Returns and
Earnings Estimates
End-2011 strategy team index forecasts
• MSCI EM 1500 (+25%)
Base case
• Current MSCI EM forward PE 11.6
• 2012 MSCI EM EPS 112 (before currency
appreciation)
• EM FX appreciation 5%
• 10% re-rating to forward PE 13
Statistical warning
EM equity markets’ valuations trend rather than meanrevert. Indices also evolve with sector composition
changing. The growth characteristics of stocks also
change and thus their valuations. Prior to the mid-90s
current account crisis, fixed exchange rates and high
nominal growth supported high valuations. Investors
should be suspicious of statistical justification for index
targets.
Pick your methodology
To illustrate the impact of different methodologies on
potential returns we calculate index targets using six
assumptions:
1.
Current earnings to bond yield ratio using
September 2011 yield forecast and end-2011e PE.
5. Five-year average earnings to bond yield ratio using
September 2011 yield forecast and end-2011e PE.
6. Current forward PE multiplied by 2012e EPS based
on the lower of 2012e EPS growth or potential
nominal GDP.
7. Current forward PE multiplied by 2012 EPS forecast.
8. Three-year average PE multiplied by 2012 EPS
forecast.
9. Gordon Growth model theoretical PE multiplied by
2012e EPS. This generates PE in excess of 30 for six
markets as local bond yields in these countries are
very low relative to nominal GDP growth and RoE.
24
Current forward PE with standard deviation ranges
Index
EM
EM Asia
Latam
EMEA
China
India
Indonesia
Korea
Malaysia
Philippines
Taiwan
Thailand
Brazil
Mexico
Chile
S Africa
Russia
Turkey
Current
Fwd PE
11.7
12.7
11.8
9.3
13.0
17.2
14.9
9.9
15.0
16.6
12.8
12.3
10.5
15.1
17.4
11.7
6.4
11.2
Avg
10Y
10.7
11.5
10.0
9.8
13.1
14.1
9.6
9.1
14.1
13.9
14.3
10.4
8.0
12.1
15.6
10.0
7.9
9.1
+1 SD
-1 SD
12.2
13.3
11.7
11.4
16.3
17.3
12.9
10.9
15.5
16.1
18.0
11.8
10.4
13.8
17.6
11.4
10.3
11.2
9.2
9.7
8.4
8.2
9.8
10.8
6.2
7.2
12.7
11.7
10.6
9.0
5.6
10.4
13.5
8.7
5.6
7.1
Top
Decile
12.6
14.0
12.3
11.7
17.3
18.0
13.7
11.6
15.9
17.1
20.4
12.1
11.7
14.1
18.2
11.7
11.1
11.7
Bottom
Decile
8.8
9.3
8.0
8.0
9.9
9.9
5.0
6.5
12.3
11.5
11.4
8.9
5.3
9.8
12.8
8.1
4.6
6.5
Source: MSCI, IBES, Datastream, 5 November 2010.
Note: Current PE > +1SD in red.
Consensus Earnings Growth Forecast (%)
Index
EM
Brazil
Chile
China
Czech Republic
Hungary
India
Indonesia
Korea
Malaysia
Mexico
Peru
Philippines
Poland
Russia
South Africa
Taiwan
Thailand
Turkey
Consensus Earning Growth (%)
10E
11E
12E
30.6
17.2
14.0
18.4
21.0
11.0
23.1
12.0
11.0
26.7
14.9
16.4
(4.8)
3.3
5.7
(2.9)
29.8
21.9
23.4
22.7
17.6
20.3
20.9
13.5
51.4
13.1
11.1
29.4
15.7
11.2
2.9
28.9
13.1
27.3
31.6
13.1
22.2
12.2
14.8
23.9
16.9
9.3
29.8
15.4
17.1
26.5
27.1
17.8
89.1
9.4
11.2
19.1
18.7
15.9
18.5
8.2
13.6
Source: MSCI, Datastream, IBES, J. P. Morgan, 5 November 2010.
EPS growth
CAGR 11/ 06
8.2
9.0
18.3
14.3
9.1
(4.9)
10.6
18.3
8.6
7.8
5.7
8.4
4.4
1.1
6.8
9.0
5.4
7.2
12.9
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Pick your methodology and thus your return: Percentage return to end-2011 targets based on multiple methodologies
Brazil
Chile
China
India
Indonesia
Korea
Malaysia
Mexico
Philippines
Poland
Russia
South Africa
Taiwan
Thailand
Turkey
Index
Level
(1)
Current
EY/BY
(2)
5yr avg
EY/BY
249321
5942
73
839
4672
543
558
33913
774
1904
815
808
301
425
1038342
14
13
15
25
10
4
14
18
29
12
20
16
6
8
15
0
31
5
2
27
20
8
10
41
6
85
9
63
15
59
(3)
FWD PE
2010 EPS
= GDP
7
6
11
12
8
5
8
6
7
6
7
7
6
7
7
(4)
Current
FWD PE
14
13
18
29
14
11
14
18
20
12
20
22
14
24
15
(5)
3year
average
FWD PE
11
(1)
15
8
(7)
7
3
(6)
(5)
2
42
(1)
42
(12)
(15)
Median
Max
Min
Range of
returns
11
13
15
12
10
7
8
10
20
6
20
9
14
8
15
14
31
18
29
27
20
14
18
41
12
85
22
63
24
59
0
(1)
5
2
(7)
4
3
(6)
(5)
2
7
(1)
6
(12)
(15)
14
33
12
27
34
16
11
24
47
10
79
23
57
36
74
(6)
Gordon
Growth
PE
(38)
(21)
169
110
127
153
123
(2)
115
39
486
17
172
165
51
Source: MSCI, IBES, Datastream, Bloomberg, J.P. Morgan. 5 November 2010
Note: All returns are local currency; please email [email protected] for the assumptions.
Consensus EPS estimates and revisions since the beginning of 2010
Index
EM
Brazil
Chile
China
Czech
Hungary
India
Indonesia
Israel
Korea
Malaysia
Mexico
Peru
Phi
Poland
Russia
S Africa
Taiwan
Thailand
Turkey
Actual
08
58
15593
236
3.31
34.7
170
29
213
18
22
31
1446
63
30
148
111
57
7.0
19
70564
09
65
16618
247
3.76
34.7
106
34
224
21
35
25
1713
71
34
109
91
42
11
24
72915
Current Consensus EPS
10E
11E
12E
84
98
112
19678
23812
26435
303
339
376
4.79
5.51
6.41
33.0
34.1
36.0
103
134
163
42
51
60
269
325
369
27
31
37
49
55
61
32
37
41
1763
2272
2588
90
119
135
42
47
54
136
159
173
118
136
159
52
66
78
21
23
26
28
33
39
86436
93550
106291
Consensus EPS beginning of this Year
10E
11E
12E
77
93
104
17942
21381
25574
276
317
381
4.64
5.39
6.03
33.8
36.0
37.2
116
150
171
42
50
61
261
309
369
28
33
34
47
52
55
30
35
39
2063
2440
2834
89
102
111
41
46
70
116
144
158
98
144
151
56
71
85
17
22
24
27
31
35
78669
93247
108651
Revision in Consensus EPS (%)
10E
11E
12E
9.3
6.0
7.5
9.7
11.4
3.4
9.5
6.9
(1.2)
3.3
2.1
6.2
(2.4)
(5.2)
(3.1)
(11.1)
(11.1)
(4.4)
(0.5)
2.3
(1.1)
3.1
5.4
(0.0)
(4.7)
(4.5)
8.5
5.0
6.5
11.6
5.3
6.6
5.4
(14.6)
(6.9)
(8.7)
1.5
16.6
20.8
2.5
1.1
(22.6)
16.5
9.9
10.1
19.8
(5.8)
5.4
(6.6)
(6.9)
(8.0)
23.2
8.1
10.6
5.3
6.2
11.2
9.9
0.3
(2.2)
Source: MSCI, Datastream, IBES, J. P. Morgan, 5 November 2010.
25
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
to losses or low profits at AU Optronics, Chimei
Innolux, Chunghwa picture tubes, E-Ink). The
median EPS growth is 24% (see second table on
next page).
Dissection of EM EPS
growth
The objective
Disaggregate the EM EPS growth into countries, sectors
and key sectors in countries.
Main observations on 2011e EPS growth
• MSCI EM weighted and median EPS growth is
17%. This is 5% higher than our economists’ 2011
nominal GDP growth forecast of 12%.
•
Financials and materials are the highest contributors
to 2011e earnings growth.
•
The contribution of IT and healthcare is the lowest
(see top table, next page).
•
Two sectors contribute c20% of MSCI EM 2011e
EPS growth; Brazilian steel and Russian oil & gas
sectors (2011e EPS growth for Vale, Sider and
Gazprom is estimated by IBES to be 41%, 44% and
23% respectively).
•
Note that the weighted EPS growth for Taiwan
electronic components is high at 62% (primarily due
Dataset
IBES EPS forecasts for MSCI EM constituents
Calculation
The index’s calendar year EPS is calculated using the
profit-weight of the constituents.
Index EPS = I x (∑ (C-EPS x FFS) / ∑ (FFS x P))
where C-EPS = Index constiuent’s EPS, FFS = free float
shares for the constituents, I = index level and P =
current market price.
The check
Median EPS growth of the index constituents:
Reviewing the median helps identify sectors in which a
single stock’s impact on weighted EPS growth is large.
This could be due its large weight in the index or moving
from loss to profit.
Emerging markets earning growth and contribution
Country
Brazil
Russia
China
South Africa
Korea
India
Taiwan
Mexico
Indonesia
Malaysia
Thailand
Poland
Chile
Peru
Colombia
Turkey
Hungary
Egypt
Philippines
Czech Republic
Morocco
Mkt Cap
Weight
16.2
6.0
18.7
7.4
13.2
8.1
10.5
4.4
2.3
2.8
1.8
1.6
1.7
0.8
0.9
1.9
0.4
0.4
0.5
0.4
0.2
Earnings weights (%)
2010E
2011E
2012E
16.4
16.9
16.6
11.2
12.4
12.4
17.0
16.7
17.1
6.9
7.4
7.6
17.6
16.2
15.7
5.3
5.5
5.8
10.3
9.6
9.5
3.1
3.4
3.4
1.8
1.9
1.8
2.2
2.2
2.1
1.6
1.6
1.6
1.5
1.5
1.5
1.2
1.2
1.1
0.5
0.6
0.5
0.4
0.5
0.5
2.2
2.0
2.0
0.4
0.5
0.5
0.5
0.5
0.6
0.4
0.3
0.3
0.5
0.4
0.4
0.1
0.1
0.1
Index EPS Growth
2010E
2011E
2012E
18.4
21.0
11.0
29.8
15.4
17.1
26.7
14.9
16.4
26.5
27.1
17.8
51.4
13.1
11.1
23.4
22.7
17.6
89.1
9.4
11.2
2.9
28.9
13.1
20.3
20.9
13.5
29.4
15.7
11.2
19.1
18.7
15.9
23.9
16.9
9.3
23.1
12.0
11.0
27.3
31.6
13.1
29.4
52.5
5.0
18.5
8.2
13.6
(2.9)
29.8
21.9
32.7
19.6
42.9
22.2
12.2
14.8
(4.8)
3.3
5.7
4.1
10.7
9.2
Source: IBES, Datastream, J.P. Morgan calculations. Note: Sorted by 2011e earning growth contribution.
26
Median EPS Growth
2010E
2011E
2012E
18.4
24.1
19.0
33.4
34.5
15.4
25.0
21.1
18.8
14.4
19.4
18.3
31.8
14.3
12.9
12.9
19.3
20.2
25.3
13.3
10.0
15.6
17.2
12.4
18.7
20.4
12.0
19.7
12.5
10.0
15.5
19.9
15.7
15.0
20.5
13.8
33.8
16.5
8.9
23.4
34.8
18.1
30.4
33.3
25.0
13.5
8.7
14.2
(0.9)
20.3
10.0
34.9
17.5
19.4
20.7
14.3
12.5
(7.8)
5.0
7.7
(0.4)
12.7
13.0
Contribution to Earning growth (%)
2010E
2011E
2012E
9
20
15
13
20
13
15
15
20
6
10
9
24
8
13
4
7
8
20
6
8
0
5
4
1
2
2
2
2
2
1
2
2
1
2
1
1
1
0
0
1
1
0
1
0
1
1
2
0
1
1
1
1
1
0
0
0
0
0
0
0
0
0
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
EM Sectors’ earning growth and contribution
EM Sectors
Financials
Materials
Energy
Utilities
Consumer Discretionary
Telecommunication Services
Industrials
Consumer Staples
Information Technology
Health Care
EM
Mkt Cap
Weight
26.3
14.6
14.3
3.4
6.8
7.8
7.3
6.7
11.9
0.8
100
2010
2011
2012
24.1
25.2
25.9
13.8
15.3
15.2
19.9
19.3
18.8
2.8
3.5
3.3
6.4
6.4
6.5
8.3
7.9
7.7
6.6
6.4
6.4
4.4
4.2
4.2
13.6
11.9
11.9
0.5
0.5
0.5
100.0 100.0 100.0
Index EPS Growth
2010
2011
2012
25.1
22.2
16.8
63.7
31.0
16.4
11.8
10.2
9.0
7.4
26.5
14.2
28.6
15.5
13.7
7.4
10.7
10.7
47.5
13.9
15.4
18.1
11.4
16.1
118.5
7.6
13.2
32.7
15.6
13.8
30.6
17.2
14.0
Median EPS Growth
2010
2011
2012
20.7
19.4
16.1
31.0
23.7
15.5
21.5
15.5
14.0
1.9
13.2
9.0
19.5
17.2
16.1
7.0
6.7
9.1
20.7
15.2
16.8
18.1
17.2
14.3
33.3
15.4
12.4
14.3
17.6
19.9
19.9
17.5
14.8
Contribution to Earning growth (%)
2010
2011
2012
19
31
31
21
24
14
13
15
16
-1
7
2
6
6
7
3
5
6
9
5
6
3
3
4
27
3
11
0
0
1
100
100
100
Source: IBES, Datastream, J.P. Morgan calculation. Note: Sorted by 2011e earnings growth contribution.
Countries’ sub-industry contributing 70% of EM earning growth
Country Sub-Industry
Mkt Cap
Brazil Steel
Russia Integrated Oil & Gas
China Diversified Banks
Russia Diversified Banks
Brazil Diversified Banks
Korea Diversified Banks
South Africa Gold
Taiwan Electronic Components
Korea Electric Utilities
Russia Div. Metals & Mining
Brazil Homebuilding
Mexico Wireless Telecom
Mexico Construction Materials
S Africa Wireless Telecom
Russia Oil & Gas E&P
China Life & Health Insurance
Taiwan Electronic Mftg Services
South Africa Diversified Banks
Taiwan Diversified Banks
S Africa Precious Metals
India Diversified Banks
India Steel
China Real Estate Development
Russia Steel
South Africa Int Oil & Gas
China Oil & Gas E&P
Korea Construction & Eng.
Poland Diversified Banks
India It Consulting & Other svs
Mexico Div Metals & Mining
Indonesia Coal & Consumable
India Oil & Gas R&M
Korea Steel
Thailand Diversified Banks
Korea Auto Manufacturers
Colombia Diversified Banks
China Coal & Consumable Fuels
Russia Wireless Telecom
Taiwan Communications Equip
Brazil Packaged Foods & Meats
Weight
3.8
2.9
4.5
1.0
3.7
1.2
0.9
0.9
0.2
0.4
0.5
1.5
0.2
0.9
0.4
1.6
0.9
0.7
0.8
0.6
1.3
0.5
0.9
0.3
0.7
1.2
0.6
0.7
1.3
0.3
0.3
0.9
0.9
0.6
1.0
0.2
0.9
0.4
0.5
0.3
2010
4.6
7.4
5.1
0.8
3.6
1.5
0.5
0.6
(0.1)
0.4
0.7
1.5
(0.2)
1.0
0.9
0.8
0.8
0.8
0.7
0.4
0.7
0.5
0.9
0.2
0.9
1.1
0.5
0.5
0.7
0.3
0.2
0.7
1.4
0.6
1.4
0.2
0.8
0.4
0.4
0.2
2011
5.6
7.3
5.1
1.3
3.6
1.9
0.7
0.8
0.2
0.6
0.8
1.5
0.0
1.0
0.9
0.8
0.9
0.9
0.8
0.5
0.7
0.5
0.9
0.3
0.9
1.1
0.5
0.5
0.7
0.4
0.3
0.7
1.3
0.6
1.3
0.2
0.7
0.4
0.4
0.2
2012
5.5
7.2
5.4
1.3
3.7
1.9
0.7
0.9
0.3
1.0
0.9
1.4
0.0
1.0
0.9
0.9
0.9
0.9
0.7
0.5
0.8
0.6
0.9
0.4
0.9
1.0
0.6
0.6
0.8
0.4
0.3
0.7
1.2
0.6
1.2
0.2
0.7
0.5
0.4
0.3
Index EPS Growth
2010
107
24.6
22.1
456
17.8
77.8
(377)
(202)
623
NA
52.1
18.0
(194)
23.2
8.7
9.8
27.5
14.4
63.4
43.1
18.4
56.3
18.9
(571)
15.4
71.9
67.9
24.0
12.3
52.8
20.0
16.9
24.3
19.9
55.1
36.9
35.0
132.6
66.7
81.9
2011
42.0
15.6
17.5
95.0
19.1
43.6
82.8
61.0
(437)
84.6
37.8
14.3
(120)
20.0
21.1
24.2
21.8
21.9
25.0
48.3
23.0
33.3
17.2
61.7
17.2
12.8
28.8
29.0
19.1
45.5
58.0
19.0
9.1
21.0
8.7
66.3
14.5
27.5
29.0
61.5
2012
11.7
13.2
20.2
15.4
15.0
16.8
6.1
36.7
40.7
84.7
22.6
12.5
100.0
13.0
7.6
24.1
18.8
23.0
2.2
22.1
23.6
19.9
25.6
29.2
20.5
6.4
16.1
19.4
19.8
18.8
1.9
14.0
9.2
14.5
7.3
(8.2)
13.7
20.0
11.9
35.9
Median EPS Growth
2010
47.7
17.4
25.0
456
23.8
65.2
(3.7)
46.4
NM
NM
64.6
18.0
NM
23.3
8.7
13.6
4.2
11.0
34.0
16.7
19.7
11.7
22.8
504
15.4
74.1
29.9
25.8
11.2
52.8
(10.3)
22.2
34.3
19.9
50.5
36.9
45.1
25.0
19.2
223.1
2011
41.1
4.1
17.4
95.0
17.1
15.0
79.1
24.2
NM
84.6
35.2
14.3
NM
15.8
21.1
25.4
18.5
20.2
25.0
41.2
22.9
20.0
19.4
55.5
17.2
22.5
13.8
28.2
18.5
45.5
52.3
17.4
7.0
25.9
9.7
66.3
13.7
35.6
47.7
46.2
2012
13.9
11.5
17.8
15.4
14.9
11.8
17.8
13.7
40.7
84.7
23.8
12.5
100.0
9.0
7.6
24.7
18.8
24.2
0.0
26.3
23.7
21.9
24.3
29.3
20.5
15.1
18.1
18.5
20.7
18.8
1.2
10.5
8.3
14.7
7.0
(8.2)
11.8
29.3
(13.8)
41.4
Contribution to Earning growth
(%)
2010
2011
2012
10
11
5
6
7
7
4
5
7
3
4
1
2
4
4
3
4
2
3
2
0
4
2
2
(0)
2
1
0
2
4
1
1
1
1
1
1
(1)
1
0
1
1
1
0
1
0
0
1
1
1
1
1
0
1
1
1
1
0
0
1
1
0
1
1
1
1
1
1
1
2
1
1
1
0
1
1
2
1
0
1
1
1
0
1
1
0
1
1
0
1
0
0
1
0
0
1
1
1
1
1
0
1
1
2
1
1
0
1
(0)
1
1
1
1
1
1
1
1
0
0
1
1
Source: IBES, Datastream, J.P. Morgan calculation. Note: Sorted by 2011 earning growth contribution.
27
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Risks to our strategy
Market risks
Lack of valuation cushion
Our strategy is biased toward growth with good
momentum but at a valuation premium. A growth
premium is justified in a world where growth is in short
supply. High valuations are vulnerable to a reversal in
EM portfolio flows and stock-specific risk.
Bond market volatility
The Fed’s objective with QE2 is to lower bond yields.
The result is that bonds are expensive relative to J.P.
Morgan’s growth forecasts. Higher US growth could
lead to a spike in bond yields.
Politics: Elections and change of leadership in Brazil
and China
Leadership change in China will occur in 2012. The
transition may result in confusion on policy. Brazil’s
new president needs to maintain reform momentum and
develop infrastructure.
2011 election calendar
Jan
Feb
Mar
May
Jun
Vietnam
Presidential
Jul
Sep
High correlation
High correlation between risk assets may propagate
volatility. A counter-trend rally in the US dollar may
drive that volatility.
Turkey
Parliamentary
Oct
Argentina
Presidential
Poland
Parliamentary
Policy and Political risks
Source: IFES.
Capital controls
Strong foreign inflows and continued FX appreciation
have prompted EM central banks to implement capital
control measures. These include: 1) Increase in IOF tax
on foreign purchase of fixed income instruments from
2% to 6% in Brazil; 2) One-month minimum holding
period restriction on SBI bonds in Indonesia; 3) 15%
withholding tax on foreign bond holders in Thailand; 4)
Restrictions on forward currency positions of foreign
bank branches and local banks in South Korea. For
equity investors, controls designed to reduce the
effective carry in fixed income markets are ok. Broader
capital controls which reduce the ability of equity
investors to buy and sell would be negative as they
reduce liquidity and increase volatility.
EM CPI and earnings yield
Anti-asset inflation policies
Central banks are targeting asset prices in EM to counter
asset inflation. These policies introduce economic and
sector-specific risks. Note how poorly real estate stocks
have performed in EM despite low interest rates.
Trade wars
High US unemployment, China’s large current account
surplus and polarized politics in the US increase the risk
of a trade war.
28
Nov
Apr
Peru
Presidential &
Legislative
Aug
Philippines
Subnational Legislative
Dec
Russia
Parliamentary
Thailand
Parliamentary
(Tentative)
12
MSCI EM 12m Fw d PE
EM CPI %oy a
11
(RHS inv erted)
10
(LHS)
EM central banks'
9
av erage target range ceiling
8
7
6
5
4
3
Jan-02 Jun-03 Nov -04 Apr-06 Sep-07 Feb-09
Jul-10
3
6
9
12
15
Source: J.P. Morgan economics, IBES, MSCI, November 2010. Note: CPI data is to
August 2010.
Strained social contract
Political and regulatory risk is high. The corporate sector
has emerged from the global recession and credit crunch
stronger than the households. Note that profits as a share
of GDP are near cyclical highs but unemployment is
10%. Policy makers constrained by high fiscal deficits
are likely to redress this imbalance through higher taxes
and increased regulation. This would add to business
costs and delay normal investment decisions, threatening
the recovery.
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
As is the case in the US, Chinese corporate share of GDP
increased while the household share decreased. Labor
disputes and subsequent large pay increases may start to
reverse this trend. This rebalancing is healthy and should
move China to a more sustainable growth model. But
near term the result is likely lower profit margins.
Strained social contract: US profit share and unemployment
22
% sa
Profit share
3
18
16
6
14
Economic risks
Uncertain outlook for commodities
Our commodities and energy underweight is driven by a
combination of long-term economic cycles and a
potential inflection point in the growth of Chinese
material demand. The timing is complicated by the large
influence of financial investors on commodity markets.
The timing risk in a bearish view on commodity
companies is high. Industrial metal prices rallied since
May while global leading indicators fell. Correlation of
commodities to risk assets (equities) is high today.
Momentum in a world of zero interest rates is an
attractive attribute. An UW commodity call is unlikely to
work at this point. When it does eventually, the
correction may prove to be violent as financial investors
exit.
0
20
12
9
Unemploy ment rate (inv erted)
10
8
12
70
75
80
85
90
95
00
05
10
Source: J.P. Morgan. Note: Chart shows % share of gross value added, J.P. Morgan
forecast for 2010.
Shares outstanding in commodity ETF
210000
180000
150000
120000
90000
60000
Unintended consequences of QE2
If QE2 results in a sharp increase in commodity prices it
may choke off growth and ultimately be
counterproductive.
Peripheral Europe sovereign stress
Greek, Irish and Portuguese bond spreads to German
bunds are at record highs. Sovereign stress could disrupt
risk appetite as it did in 2Q10.
US state and municipal stress
US states and municipalities are required to balance their
budgets. The result may be rising unemployment as US
local government downsizes. This would place a larger
burden on the private sector to create jobs.
30000
Dec-07 May -08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov -10
Source: Bloomberg, DBCSO Index.
Peripheral stress in Europe
7
10
Greece (RHS)
6
8
5
4
6
Ireland (LHS)
3
4
2
2
1
0
Jan 08
0
Jul 08
Jan 09
Jul 09
Jan 10
Jul 10
Source: Bloomberg
Note: Spread of Greek and Irish 10-year bond yields to German bunds.
29
November 2010
30
1Q-04
1Q-05
1Q-06
GDP
1Q-07
1Q-08
1Q-09
1Q-10
Household Consumption
Source: IBGE.
Unemployment rate (%)
11
10
9
8
7
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
6
Source: IBGE.
BRL (rh, inverted scale) versus BZ Commodity Export Index (lh)
500
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
2.3
2.4
2.5
450
BRL
400
350
300
BZ Commodity Index
250
200
150
2/4/05
9/2/05
3/31/06 10/27/06 5/25/07 12/21/07 7/18/08 2/13/09 9/11/09
4/9/10
Source: Bloomberg; J.P. Morgan.
Foreign Net Inflows into Brazilian Equities (secondary) R$bi
5
4.04
4
3
2.21
2
1.65
YTD 2010 = R$4.7 bi
YTD 2009 = R$19.2 bi 3.15
1.14 0.93
1
3.51
3.14
1.60
0.51
0
-0.15
-1
Oct-10
Sep-10
Aug-10
Jul-10
Apr-10
Mar-10
Dec-09
Nov-09
Oct-09
Source: BM&FBovespa; Bloomberg.
Jan-10
-2.10
-3
-0.60
-1.51
Jun-10
-1.08
-1.25
May-10
-1.09
Feb-10
-2
Sep-09
Recommendations
We recommend exposure to domestic names and are
focused on financials and homebuilders. Although we
like discretionary, we feel that there are better entry
points considering the strong performance of late. In
financials, Bradesco is our top pick, a blue chip, large
cap bank that can better withstand the rise in interest
rates as about 30% of its business is insurance. In
homebuilders, we like PDG: the stock is cheaper than
peers’, benefits from the Agre acquisition are not fully
priced, the company is fully exposed to the high-growth
lower-income segment. On the commodity side, we
likeVale: it is cheap, with risks mostly priced in already,
while China appears to be rebounding. In the oil and gas
sector, we recommend OGX as the better vehicle to get
exposure to offshore as more of the company’s findings
are turning into reserves.
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
1Q-03
Jul-06
Drivers of returns – Multiples and growth
Valuation is not an impediment to Brazil’s performance.
The country is trading in line with the five-year average,
with commodities cheaper than domestics but with the
latter likely delivering more growth in the short/medium
run. Flows are key for performance and are catching up
in 4Q 2010 after being lackluster most of the year. With
major hurdles behind (large capitalizations, elections)
and DM prospects of a muddle-through, inflows into
Brazilian equities are likely to be boosted in 2011.
Household consumption rising above GDP (4Q/4Q rolling average)
Jul-09
Growth characteristics and how they are changing
Credit growth at around 20% combined with the best
labor market in a generation provides for a sturdy
outlook for consumption in 2011. We forecast GDP of
4.5% in 2011, on top of 7.5% in 2010e. Strong growth is
adding to inflation risks, and we expect a rise in interest
rates in 2011. Although GDP is little influenced by
commodities (exports = 11%), Brazil’s two largest
companies are commodity driven. Over the next few
years, investment (under 18% of GDP) will need to rise
to meet the country’s need for more capacity and
infrastructure. This would also allow for faster
sustainable growth in the years to come.
Bloomberg JPMA SHAYO <GO>
Aug-09
Key country dynamics
Domestic growth and China’s demand for commodities
are the main drivers for Brazil in 2011, together with a
clearer definition of policies to be adopted by the newly
elected government. The exchange rate is an important
focus, with capital control risks on the rise.
(5511) 3048-6684
[email protected]
Banco J.P. Morgan S.A.
Jan-06
Brazil Strategy
Emy Shayo Cherman AC
Jun-09
Ben Laidler
(1-212) 622-5252
[email protected]
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Top picks and stocks to avoid
Price
Top picks
Bradesco
PDG Realty
VALE
OGX
Stocks to avoid
Usiminas
Eletropaulo
Tele Norte Leste
Code
Rating
Mkt cap
(US$MM)
P/E (x)
10E
EPS
10E
11E
11E
Div. yield
11E (%)
ROE
11E (%)
34.8
10.6
BBDC4
PDGR3
OW
OW
73,018
7,144
13.5
14.5
12.1
9.4
2.59
0.73
2.88
1.13
2.9%
1.7%
21.2%
19.2%
31.8
21.7
VALE
OGXP3
OW
OW
173,421
42,952
10.9
nm
7.7
nm
2.92
0.06
4.13
0.02
2.9%
0.0%
23.3%
0.6%
21.0
29.9
48.5
USIM5
ELPL6
TMAR5
UW
UW
N
14,775
3,229
7,699
20.5
4.8
nm
11.1
8.4
nm
1.02
6.29
8.60
1.88
3.54
7.21
3.1%
13.8%
8.9%
8.8%
18.0%
14.9%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.
MSCI Brazil absolute and Relative to EMF Index
1400
MSCI fair value range
Absolute
Relativ e to MSCI EMF Index
FWD PE
1200
PE
1000
(211296)
(135082)
(339385)
(119256)
PB (89127)
800
600
DY
400
BY/EY
200
(277670)
(124074)
(273109)
(445307)
(212792)
(196127)
BY/DY
(326196)
0
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
50000
Mar-10
150000
250000
Source: MSCI, Datastream.
Source: MSCI, IBES, Datastream, J.P. Morgan.
Currency outlook (BRL/USD)
MSCI EPS integer over time
3.0
2.8
2.6
J.P. Morgan forecast:
450000
150
end Dec 10: 1.70
140
end Mar 11 : 1.80
end Jun 11: 1.82
2011
130
2.4
120
2.2
J.P. Morgan
2.0
2010
110
100
1.8
1.6
Consensus
90
80
1.4
Dec 04
350000
Apr 06
Jul 07
Nov 08
Feb 10
Jun 11
Feb-09
Jul-09
Dec-09
May -10
Oct-10
31
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Mexico Strategy
The key constraints on Mexican equities are structurally
lower US GDP growth and a lackluster Mexican
consumer rebound. This is offset by a cheap currency,
easy monetary policy, a gradual reacceleration of US
economic growth – at least into mid-2011 – and a high
market correlation with US equities. Additionally, we
view some concerns as currently overdone – such as the
fiscal situation (oil production has stabilized) and
security environment (violence localized) – whilst others
are not – such as Mexico’s declining equity market
relevance on lack of issuance.
Mexican GDP growth is set to slow next year (to 3.5%
from an estimated 4.5% in 2010), along with the US
(2.7% GDP growth to 2.5% in 2011e). Manufacturing
and IP, which led the sharp growth recovery from the
-6.5% seen in 2009, should slow and domestic demand
increasingly come to the fore. Consensus MSCI Mexico
earnings growth could be at risk, with expectations for
18% growth versus only 12% this year. Growth is
expected to be led by staples and materials.
Ben Laidler AC
(1-212) 622-5252
[email protected]
Bloomberg JPMA LAIDLER <GO>
Contributions to GDP growth, 2008-2011e
Mexico 12 mth fwd PE
17.00
15.00
13.00
11.00
9.00
7.00
95 97 98 99 00 01 02 03 04 05 06 07 08 10
Mex ico
Av erage
+1SD
Source: MSCI, IBES, Datatsream.
Mexico is trading at the high end of traditional valuation
ranges, and we do not see room for significant multiple
expansion. The valuation premiums to other markets are
lower than they seem, often just reflecting Mexico’s high
staples and telecom index composition. Whilst the
traditional drivers of Mexican outperformance – 1)
significant market weakness, 2) strong US macro
surprise, 3) strong Mexico consumer recovery – look
absent to us in 2011, we do expect respectable absolute
performance. Local investors remain underweight the
market and are seeing robust inflows. Foreign investors
remain moderately overweight.
Recommendations
Our strategy focus is on stocks exposed to the
strengthening domestic demand environment at
reasonable valuations. We also like a number of special
situations exposed to recovering infrastructure segments.
We would avoid very defensive staples with high
valuations and low gearing to the strengthening
consumer.
32
Mexico consumer confidence and formal employment
Source: J.P. Morgan Economics, INEGI, IMSS.
-1SD
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Price
Top picks
America Movil
Cemex
Grupo Televisa
ICA
First Cash Financial
Stocks to avoid
Telmex
Grupo Inbursa
Consorcio Ara
Code
Rating
Mkt cap
(US$MM)
P/E (x)
10E
EPS
10E
11E
Div. yield
11E (%)
11E
ROE
11E (%)
57.1
8.8
22.2
32.5
29.4
AMX
CX
TV
ICA*
FCFS
OW
OW
OW
OW
OW
119,244
9,800
13,699
1,781
913
15.8
nm
22.0
30.4
17.1
13.4
nm
17.2
22.0
14.6
44.98
-0.16
12.54
1.07
1.72
52.72
0.02
16.02
1.48
2.01
0.7%
0.0%
1.4%
0.0%
0.0%
26.1%
0.1%
23.0%
4.9%
17.9%
15.2
53.9
7.6
TMX
GFINBURO
ARA*
UW
UW
UW
14,410
14,247
829
12.7
25.3
11.5
13.2
21.0
9.9
18.51
2.13
0.66
17.30
2.57
0.77
5.0%
1.4%
1.3%
37.0%
12.2%
10.1%
MSCI Mexico absolute and relative to EMF Index
500
Absolute
450
400
FWD PER (17980)
PER
350
300
(20184)
(25937)
(33101)
PBR
250
200
DY
150
100
BY/EY
(25349)
(41784)
(14776)
(125613)
(24866)
50
0
Dec-02
(22590)
(29973)
BY/DY
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
(196457)
0
50000
100000
Currency outlook (MXN/USD)
105
16.0
end Dec 10: 12.50
14.0
end Mar 11: 12.50
J.P. Morgan
250000
100
95
end Jun 11: 12.25
13.0
90
12.0
2010
85
Consensus
11.0
10.0
80
75
9.0
Dec 04
200000
2011
15.0
150000
70
Apr 06
Jul 07
Nov 08
Feb 10
Jun 11
Feb-09
Jul-09
Dec-09
May -10
Oct-10
33
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Chile Strategy
Chile will look to build on the momentum of an historic
2010, which saw the inauguration of center-right Piñera
(after 20 years of the center-left Concertacion), an 8.8magnitude earthquake (5th largest in history), World
Cup success (advancing to the round of 16), the
country’s 200-year anniversary and the unprecedented
extraction of 33 miners trapped underground for 68 days.
Confidence is running high, and the country appears to
be entering a period of renewal, which could accelerate
the path to developed country status (possibly by the end
of the decade). However, with expectations mounting,
there is room for disappointment, especially if
social/political differences get in the way of progress.
For the first time in recent years, Chile is expected to
lead regional growth in the coming year on the back of
an aggressive Piñera pro-growth agenda, accelerated by
ongoing earthquake reconstruction efforts. This should
be further helped by supportive demand dynamics out of
China and expansionary fiscal policies (benchmark rate
not likely to surpass 4.25% – lowest YE11e level in the
region), not to mention micro-level incentives for
investment by both locals and foreigners.
The top-down scenario remains attractive, but valuations
are lofty at nearly 18x forward P/E, representing a 50%
premium to LatAm, which is just ahead of historical
levels (despite recent factors that are working to close
the spread – such as the move to IFRS and regional
expansion). As the Chile premium suggests, performance
is largely tied to supportive domestic flows (and limited
foreign ownership). This support was strong in 2010
given weakness elsewhere. In the event that key markets,
such as Brazil, China and the US, perform well in 2011
(especially relative to domestic fixed income), this will
likely limit domestic flows, specifically from pension
funds, which may be forced to trim domestic equity
positions to remain within their limits.
Recommendations
Although we like the Chile growth profile, we focus on
names that are expanding abroad (Falabella, CCU). We
also find copper play Antofagasta at an attractive
valuation with significant growth potential. We avoid
utility IAM, given strong relative outperformance in the
utilities sector and potential Aguas Andinas share sale
overhang. We also see limited upside after the
speculative rise in SQM’s share price.
34
Brian P. Chase AC
56 2 425 5245
[email protected]
Inversiones y Asesorias Chase Manhattan Ltda.
Bloomberg JPMA CHASE <GO>
Business and consumer confidence returning to historical highs
Bus Conf
65
Cons Conf
55
45
35
25
J-06
S-06
M-07
J-08
S-08
M-09
J-10
S-10
Source: Adimark and ICARE.
Chile GDP growth (oya) catching back up to EM standards
13%
EM
Chile
8%
3%
-2%
85
87 89 91
93
95 97 99
01
03 05 07
09 11E
Source: World Bank and J.P. Morgan.
Chile fwd P/E premium to LatAm at historical levels
2.4
2.1
1.8
1.5
1.2
0.9
0.6
94 96 97 98 99 00 01 02 03 04 05 06 07 09 10
Source: Datastream and J.P. Morgan.
Chile fwd P/E premium to EM vs. AFP % ownership of free float (RHS)
2.5
Premium to EM
% of Free Float
2.0
40%
1.5
20%
1.0
0.5
Feb-97
60%
0%
Jul-99
Dec-01
May -04
Source: Datastream, SAFP and J.P. Morgan.
Oct-06
Mar-09
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Price
P/E (x)
10E
EPS
10E
Div. yield
11E (%)
ROE
11E (%)
Code
Rating
Mkt cap
(US$MM)
N
OW
OW
24,106
3,647
22,744
38.5
15.1
16.5
31.4
13.7
11.4
125.92
3.70
80.30
154.40
4.08
116.50
0.8
4.5
0.5
13.0
21.6
116.5
N
N
15,735
13,873
1,558
43.6
16.1
30.4
16.1
1.18
46.36
1.69
46.36
0.0
5.9
24.6
Top picks
Falabella
CCU
Antofagasta Minerals
4849.5
56.1
1326.0
FALAB
CCU
ANTO
Stocks to avoid
IAM
SQM
747.0
51.5
IAM
SQM
11E
11E
MSCI Chile absolute and relative to EMF Index
700
Absolute
(4068)
PER
500
(2906)
PBR
400
300
DY
200
BY/EY
100
(5772)
(4293)
FWD PER
600
(6797)
(4723)
(2181)
(3979)
BY/DY
0
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
1000
Mar-10
2000
3000
4000
Currency outlook (CLP/USD)
800
750
700
6000
7000
135
end Dec 10: 480
125
end Mar 11: 505
end Jun 11: 500
2011
115
650
600
Consensus
550
105
95
2010
500
85
450
75
400
Dec 04
5000
Apr 06
Jul 07
Nov 08
Feb 10
Jun 11
Feb-09
Jul-09
Dec-09
May -10
Oct-10
35
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Colombia Strategy
The long-term structural rerating story continues in 2011
with the implementation of a new pension multifund
system and potential advancements in tax/fiscal reform,
which will likely result in investment grade. This should
continue to drive investment growth in the country. We
are also likely to see improvements on the trade front,
including restored relations with Venezuela and
numerous pending trade agreements. With key FARC
leaders out of the picture, Colombia will move a step
closer to peace, which could yield additional dividends.
We see the key risk as reform watered down in order to
maintain political consensus.
Despite the structural improvements and macro-level
progress, which is boosting investment, Colombia still
faces challenges in achieving its full growth potential
(JPM 2011e GDP growth at just 4.1%), primarily on the
private consumption side. We believe this represents an
opportunity for the Santos Administration, but major
progress will take time, requiring a combination of job
creation and investment diversity initiatives (via payroll
tax reform and education/innovation programs). We also
see access to credit as a key theme, with current caps
limiting expansion in the lower-income segments (as
well as for SMEs).
Colombia shares a similar dynamic with Chile, as
supportive domestic flows (and limited foreign
ownership) help prop up valuations (current premium
well ahead of historical averages). This is furthered by
local accounting rules and complicated cross-holding
structures, not to mention hidden assets. While growth
fundamentals may not justify current valuations, we see
flow support continuing in 2011 on the back of the
multifund switch and Andean stock exchange integration,
which should keep valuations riding high.
Recommendations
We focus on selective growth opportunities at reasonable
valuations (Pacific Rubiales, Millicom) and second-tierliquidity stocks that have lagged this year (Exito) but
could benefit from supportive domestic/regional flows.
We avoid the large/liquid names that have led 2010
outperformance (Bancolombia, Ecopetrol), especially as
flows may be redirected to second tier names and a
series of new listings.
36
Brian P. Chase AC
56 2 425 5245
[email protected]
Investment growth driving internal demand recovery
Internal Demand
Inv estment
Consumption
30.0
20.0
10.0
0.0
-10.0
-20.0
1Q08
3Q08
1Q09
3Q09
1Q10
Source: BanRep.
Exports likely to continue their gradual recovery
100%
Import Grow th
Ex port Grow th
50%
0%
-50%
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Source: BanRep.
Colombia fwd P/E premium to LatAm above historical averages
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
94 96 97 98 99 00 01 02 03 04 05 06 07 09 10
Source: Datastream, Superfinanciera and J.P. Morgan.
Pension fund equity exposure to rise on multifunds / demographics
Estimated End-2010
AUM
1
0.0
2
90.6
3
0.0
Total
90.6
Equity
0.0
39.4
0.0
39.4
%
NM
43.5%
NM
43.5%
Limit
0.0
40.8
0.0
40.8
%
20.0%
45.0%
70.0%
45.0%
Cushion
0.0
(1.4)
0.0
(1.4)
%
NM
-1.5%
NM
-1.5%
Pro Forma 2011
AUM
1
4.5
2
53.4
3
32.6
Total
90.6
Equity
0.9
24.0
22.8
47.8
%
20.0%
45.0%
70.0%
52.8%
Limit
0.9
24.0
22.8
47.8
%
20.0%
45.0%
70.0%
52.8%
Cushion
0.0
0.0
0.0
0.0
%
0.0%
0.0%
0.0%
0.0%
Source: Superfinanciera and J.P. Morgan estimates.
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Price
Code
Rating
Mkt cap
(US$MM)
P/E (x)
10E
EPS
10E
11E
11E
Div. yield
11E (%)
ROE
11E (%)
Top picks
Pacific Rubiales
Almacenes Exito
Millicom
31.7
23080.0
94.7
PRE
EXITO
MICC
OW
N
OW
9,070
4,520
10,460
35.2
55.5
14.2
13.0
42.8
11.8
0.90
415.58
6.69
2.43
539.80
8.00
0%
0%
7.3%
34.1%
4.3%
26.1%
Stocks to avoid
Bancolombia
Ecopetrol
66.0
4360.0
CIB
ECOPETL
UW
UW
13,419
102,932
20.0
22.1
17.9
14.9
3.30
197.47
3.68
292.19
1.8%
3.3%
18.4%
34.5%
MSCI Colombia absolute and relative to EMF Index
2000
Absolute
(536)
FWD PER
(2178)
1800
1600
1000
800
(2693)
(897)
PBR
(2725)
600
400
Mar-04
May -05
Aug-06
Oct-07
Jan-09
0
Mar-10
(3357)
(949)
DY
200
0
Dec-02
(1024)
PER
1400
1200
500
1000
1500
2000
2500
3000
3500
Currency outlook (COP/USD)
3,000
2,800
end Dec 10: 1800
2,600
end Jun 11: 1850
200
170
end Mar 11: 1830
2011
140
2,400
2,200
J.P. Morgan
110
2,000
80
1,800
Dec 04
2010
Consensus
1,600
Apr 06
Jul 07
Nov 08
Feb 10
50
Jun 11
Feb-09
Jul-09
Dec-09
May -10
Oct-10
37
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Peru Strategy
1H11 will be dominated by the run-up to April
presidential elections. Although we saw political
overhang in 1H10, it has since started to dissipate as
leftist candidate Humala is running 4th. The three
currently leading candidates are all center-right,
suggesting that it is unlikely we will see any meaningful
changes to Peru’s market-oriented macroeconomic
policy. We believe this will help cement the current
economic consensus in the country. However, given
Peru’s history of surprises on election day, we don’t rule
out intensified noise and/or a renewed overhang leading
up to the elections, especially considering that most polls
don’t include rural areas, which tend to favor Humala. In
addition, the emergence of Keiko Fujimori as the leading
contender could reignite some historical social/political
polemics.
Brian P. Chase AC
56 2 425 5245
[email protected]
Poll figures have not changed much in past 15 months
Fujimori
30%
Valuation premiums are a bit ahead of historical levels.
However, they are still lower than other Andean peers’,
primarily due to commodity exposure and liquid gaps
(index top and bottom heavy). We believe that scarcity
value in the liquid names (BAP, BVN, SCCO) is
relevant and if polling data continue to suggest political
continuity, it is likely to boost these names and possibly
widen the premiums. We also see Peru as a beneficiary
of Andean stock exchange integration, as domestic
investors in Chile and Colombia look to diversify away
from their home markets.
Recommendations
We focus on playing continued strong domestic growth
and potentially positive election results through the only
liquid domestic proxy, leading bank Credicorp. We also
play precious metal momentum and our generally bullish
stance on silver through Silver Wheaton. We avoid
Buenaventura given strong outperformance recently, but
acknowledge its reserve replacement track record and
scarcity value as a liquid Peruvian name.
38
Toledo
Humala
20%
10%
0%
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Ipsos-Apoyo.
Humala well behind in run-off scenarios
Fujimori
51%
60%
28%
40%
51%
Humala
29%
Castaneda
20%
After a return to Asia-level GDP growth in 2010 (JPMe
GDP growth of 8.2%), we expect growth to taper off to
6% in 2011, mainly due to a pullback in stimulus and
tighter monetary policy. However, with tame inflation,
strong commodity prices, growing credit growh and the
CB on hold, there is room for upside surprises. In
addition, given strong economic ties to China, progress
there will be a key determinant of the extent of growth.
Castaneda
0%
Scenario 1
Scenario 2
Source: Ipsos-Apoyo.
Recovery thus far led by investment
Internal Demand
Consumption
40.0
Inv estment
20.0
0.0
-20.0
1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10
Source: BCRP.
Peru fwd P/E premium ahead of historical averages
2.5
2.0
1.5
1.0
0.5
0.0
06
07
Source: Datastream and J.P. Morgan.
08
09
10
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Top picks
Credicorp
Silver Wheaton
Stocks to avoid
Buenaventura
P/E (x)
10E
EPS
10E
Div. yield
11E (%)
ROE
11E (%)
Price
Code
Rating
Mkt cap
(US$MM)
124.7
27.6
BAP
SLW
N
OW
10,099
11,374
17.2
38.3
15.2
21.0
7.23
0.72
8.20
1.31
1.7%
0%
22.1%
18.5%
51.7
BVN
N
14,939
19.8
14.6
2.61
3.55
0.9%
26.5%
11E
11E
MSCI Peru absolute and relative to EMF Index
1200
Absolute
FWD PER
(634)
(3026)
1000
PER
800
600
(1764)
PBR
(3495)
(970)
(2635)
400
(751)
DY
200
(2285)
0
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
0
Mar-10
500
1000 1500 2000
Currency outlook (PEN/USD)
3.5
170
3.3
150
3.1
2.9
2.7
4000 4500
2011
130
J.P. Morgan
110
end Dec 10: 2.78
2010
end Mar 11: 2.84
90
end Jun 11: 2.82
Consensus
70
2.5
Dec 04
2500 3000 3500
Apr 06
Source Bloomberg, J.P. Morgan.
Jul 07
Nov 08
Feb 10
Jun 11
Feb-09
Jul-09
Dec-09
May -10
Oct-10
39
November 2010
All eyes will be on the political situation in 2011 ahead
of October presidential elections. The outlook is highly
uncertain as most candidates will likely have to reinvent
themselves after the death of ex-President Nestor
Kirchner. We see this as a potential opportunity for
Cristina Fernandez Kirchner and Peronist dissidents (PJ)
to unite, while key opposition groups (PRO and
Radicals) now face the challenge of adjusting their
campaign from a primarily anti-Kirchner stance to a
more progressive form. We take a cautious stance and
see a Peronist win as the base case but acknowledge that
any move toward political/economic orthodoxy and
subsequent reform would be a big catalyst for the market.
After accelerated growth in 2010 (JPMe GDP growth
8.5%), growth in 2011 will taper off (JPMe GDP growth
5.5%) as activity is curbed by rapidly rising inflation
(JPMe proxy 25-30%). The use of fiscal resources
should remain strong, especially in an election year and
helped by what we expect to be robust agricultural
commodity prices. Risks to growth (upside and
downside) are largely tied to the global economy.
With the near-term “spread reduction trade” priced and
the longer-term “election trade” accelerated on the death
of Nestor Kirchner, we believe multiples are for the most
part accurately reflecting the current balance of risks. We
only see an opportunity for significant further multiple
expansion in the event of a more orthodox political and
economic environment, backed by a reform agenda.
Although there is growing optimism for a move in that
direction, we believe it is still too early to tell who will
win in 2011 and whether or not a reform agenda can and
will be implemented. Furthermore, while the focus is on
politics, at the micro level we are likely to see slower
growth and inflation thinning margins.
Recommendations
We focus on names with solid growth prospects in the
coming year at attractive valuations that will likely
benefit from the immediate political situation (Clarin and
Tenaris). We avoid utilities, such as Edenor, which face
an uncertain potential reform agenda. That said, the
shares are likely to move on any signs of political
progress.
40
Brian P. Chase AC
56 2 425 5245
[email protected]
Can Cristina maintain her currently positive image?
60.0%
40.0%
20.0%
0.0%
J-08
M-08
S-08 J-09
M-09
S-09
J-10
M-10 S-10
Voting intentions suggest the 2011 race is wide open
50%
39%
40%
25%
30%
20%
6%
10%
6%
5%
4%
3%
3%
2%
4%
0%
Co
bo
s
Al
fo
ns
in
M
D e acri
Na
rva
ez
Du
ha
lde
Sc
R e ioli
ute
m
an
n
Ot
he
Un
r
de
cid
ed
Argentina Strategy
CF
K
Ben Laidler
(1-212) 622-5252
[email protected]
Inflationary pressures starting to rise
30.00
Indec
Priv ate
20.00
10.00
0.00
J-04 S-04 M-05 J-06 S-06 M-07 J-08 S-08 M-09 J-10 S-10
Source: Indec and J.P. Morgan.
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
P/E (x)
10E
EPS
10E
Div. yield
11E (%)
ROE
11E (%)
Price
Code
Rating
Mkt cap
(US$MM)
Top picks
Grupo Clarin
Tenaris
10.0
41.3
GCLA
TS
OW
OW
1,437
26,237
3.4
20.1
2.5
16.0
2.92
2.06
4.00
2.59
0%
0.9%
12.7%
14.8%
Stocks to avoid
Edenor
10.3
EDN
UW
494
13.3
12.2
0.77
0.84
0%
7.0%
11E
11E
MSCI Argentina absolute and relative to EMF Index
1000
Absolute
FWD PER
900
800
(4509706)
PER
700
600
PBR
300
200
DY
100
0
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
`
(33410334)
(50289622)
(15631857)
15400000
30400000
45400000
60400000
Source: MSCI, IBES, Datastream, J.P. Morgan
Currency outlook (ARS/USD)
4.2
(13335147)
400000
Mar-10
4.4
(21956168)
(66024799)
500
400
4.6
(64068241)
110
end Dec 10: 4.05
J.P Morgan
end Mar 11: 4.15
100
end Jun 11: 4.15
90
4.0
Consensus
3.8
3.6
2011
80
70
3.4
3.2
60
2010
3.0
50
2.8
Dec 04
Apr 06
Jul 07
Nov 08
Feb 10
Jun 11
Feb-09
Jul-09
Dec-09
May -10
Oct-10
41
Ben Laidler
(1-212) 622-5252
[email protected]
42
November 2010
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Sectors
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Agribusiness, Pulp and
Paper
Debbie Bobovnikova, CFA AC
(1-212) 622-3489
[email protected]
Bloomberg JPMA BOBOVNIKOVA <GO>
Growth in 2011 for our covered names will be more a
function of commodity prices than of capacity
expansions. Longer term, we see all of our companies as
having a global cost advantage and expanding
production through greenfields, debottlenecking and
M&A.
We are not expecting multiples rerating as we do not see
structural changes justifying it. Multiples should
continue to reflect cyclical trends (peak multiples on
trough earnings and vice versa). Near-term growth will
remain dependent on commodity prices.
Recommendations
We highlight the Brazilian sugar and ethanol producer
Sao Martinho (SMTO3/OW) as the best play on higher
near-term sugar prices. We are UW on Fibria
(FIBR3/FBR) as we believe pulp sector momentum will
remain negative in ’11 and valuations are not yet
attractive enough to justify owning at this point of the
cycle.
44
Pulp inventories vs. prices
950
4850465047
44
43
41
850
36
750 343434
313232
650
50
45
3534
34
32
30
29
2928
272626 27 2826 27
25
25 25
550
40
35
30
25
450
20
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Grain prices seem to be well supported at current levels
even after a 30-60% rally since early July. Robust
Chinese demand along with concerns over supply,
especially in light of a La Nina year, should keep risk
premiums high. As J.P.Morgan’s Soft Commodity
Strategy team highlights, there’s a real possibility of
corn prices hitting $7/bu in ’11, which would reverberate
through the rest of the grain complex. Sugar prices
continue to confound, having gone from 30c/lb to 13c/lb
and back again in the course of 2010, with the only
constant volatility. Any shortfall in Indian and Brazilian
production estimates could take sugar prices higher still.
That being said, we believe any supply squeeze would be
relatively temporary and see sugar prices settling at
closer to 15-18c/lb longer term. We remain structural
bulls on pulp but cautious on 12M outlook. Pulp prices
as of October were already 5% below their June peak,
and we expect another ~17% decline through 2011 as
pulp supply recovers from market- and weather-related
downtime in ’09-’10 and as end demand remains
lackluster. That being said, any significant improvement
in developed world employment should lead to improved
paper demand and poses upside risk to our outlook.
Day s Inv entory (RHS)
BEK, $/tonne to Europe
Source: PPPC, RISI, J.P. Morgan.
Sugar stock/use vs. prices, 00/01-10/11
25
0%
20
10%
15
10
20%
5
30%
0
40%
00/01
02/03
04/05
Price ($c/lb)
06/07
08/09
10/11
Stock-to-Use (%)
Source: USDA, Bloomberg and J.P. Morgan.
Cotton stock/use vs. prices, 00/01-10/11
100
0%
75
20%
50
40%
25
60%
0
80%
00/01
02/03
04/05
Price ($/lb)
06/07
08/09
10/11
Stock-to-Use (%)
Soy stock/use vs. prices, 00/01-10/11
15
0%
10
10%
5
20%
0
30%
00/01
02/03
04/05
Price ($/bu)
06/07
08/09
Stock-to-Use (%)
10/11
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Top picks
Sao Martinho
Stocks to avoid
Fibria
Mkt cap
(US$MM)
P/E (x)
10E*
Price (R$)
Code
Rating
23.00
SMTO3
OW
1,529
22
30.03
FIBR3
UW
8,266
17
EPS (R$)
10E*
11E*
Div. yield
11E* (%)
ROE
11E* (%)
9
1.06
2.55
1.2%
11.6%
97
1.76
0.31
0%
5%
11E*
Source: Bloomberg, J.P. Morgan estimates. Note: SMTO3 share price and valuation are as of November 8, 2010. Note: * CY10E = SMTO FY11E, CY11E = SMTO FY12E. FIBR3 share price and
valuation are as of October 28, 2010.
Paper and pulp absolute and relative to MSCI LatAm
500
Absolute
Paper and pulp EPS integer
140
130
450
400
2011
120
350
300
110
250
200
100
2010
90
150
100
80
50
0
70
60
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
Feb-09
Jul-09
Dec-09
May -10
Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.
Paper and pulp 12 mth fwd PE
Paper and pulp trailing PB
45
2
37
1.7
29
1.4
21
1.1
13
0.8
5
0.5
95
97
98
99
00
PE
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
95
97
98
99
00
PB
01
02
03
04
Av g
05
06
+1SD
Oct-10
07
08
10
-1SD
45
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Overweight
Sao Martinho
R$23.00 (08 Nov 10)
SMTO.SA
www.saomartinho.ind.br
Price Target: R$29
End Date: Dec 2011
Company description
São Martinho is a top-five sugar and ethanol producer in Brazil. In the 2009/10
crop year, São Martinho crushed 13 mt of sugarcane, of which 65% was owned
(40% came from third parties) and 40% was destined for sugar production
(60% to ethanol). São Martinho operates 3 mills, 2 in São Paulo state and one
in Goiás state. The company’s Goiás unit (Boa Vista mill) started up in the
2009 crop and will exclusively produce ethanol and electricity. São Martinho
(SMTO3 BZ) shares are listed on Bovespa’s Novo Mercado.
Brazil
Agribusiness
Investment case
We see Sao Martinho as the best way to gain exposure to stronger global sugar
and Brazilian ethanol prices. Given the diversification of the rest of its listed
domestic peers, SMTO is now the most exposed operationally to S&E. In
addition, we believe the company has interesting partnerships with both
Petrobras (rated Neutral by JPM LatAm oil & gas analyst Sergio Torres) and
with biotech producers, the latter potentially leading to new revenue streams.
Price performance
Debbie Bobovnikova AC
(1-212) 622-3489
[email protected]
R$
24
20
R$
16
12
Potential for earnings upgrades
Given the sharp rally in sugar and ethanol prices since midyear, there should be
significant upside to consensus estimates if it is sustained. Our FY11E
EBITDA of R$493m is 8% above consensus.
Nov-09
Mkt Cap (R$ mn)
Fiscal Year End
Shares O/S (mn)
Price Target (R$)
Price Target End
Date
46
23.00
08 Nov 10
23.00 12.55
2,599.00
Mar
113
29.00
31 Dec 11
Aug-10
Nov-10
Performance
1M
3M
12M
Absolute (%)
23.4
46.9
23.7
Relative (%)
7.6
18.1
14.1
Source: Bloomberg.
Price target and risks
We have an OW rating on SMTO3 and a price target of R$29/sh for Dec.’11
based on a mix of: (1) DCF of R$27.5 using normalized sugar prices of 15c/lb
and BRL of R$2.05 (equivalent to sugar prices of 18c/lb at spot BRL) and a
WACC of 9.3% which incorporates a risk premium for lower share liquidity;
(2) 5x multiple on FY12 EBITDA resulting in R$28.3; (3) replacement value
analysis leading to R$27.1; and (4) recent M&A multiples of $100/tonne
implying FV of R$36.1. Key risks to our rating and estimates on SMTO are:
(1) evolution of sugar and ethanol prices; (2) stronger-than-expected BRL; (3)
operational problems; (4) worse-than-expected economics of farnesene JV.
Sao Martinho S.A. (SMTO3.SA;SMTO3 BZ)
2010A
EPS Reported FY (R$)
0.82A
Revenues FY (R$ mn)
1,183A
EBITDA FY (R$ mn)
374A
May-10
Source: Bloomberg and J.P. Morgan.
Prospects for re-/derating
We see Sao Martinho as a well-managed company, with good capital discipline
and corporate governance. On the other hand, lack of share liquidity is a
concern for many investors, as is the volatility of the sector, which we do not
foresee changing in the near term. Hence we are not looking for a rerating.
Company Data
Price (R$)
Date Of Price
52-week Range (R$)
Feb-10
Priced as of the close on
November 8, 2010; see our note
out November 9 for further details.
2011E
1.06
1,293
493
Source: Company data, Bloomberg, J.P. Morgan estimates.
2012E
2.55
1,562
646
2013E
2.04
1,427
535
2014E
1.79
1,386
488
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Sao Martinho: Summary of Financials
Income Statement
FY10A
FY11E
FY12E
FY13E
FY14E
Balance Sheet
Revenues
Cost of goods sold
SG&A
Depreciation
EBITDA
EBITDA margin
Financial income
Financial expense
FX & Monetary gains (losses)
Other Nonoperarting income
Equity income
EBT
Taxes
Minority interest
Extraordinary
Net income
Net income margin
EPS
1,183
928
412
262
374
31.6%
105
171
(3)
0
0
128
(32)
0
0
93
7.9%
0.82
1,293
947
427
286
493
38.1%
14
69
0
0
0
163
(43)
0
0
120
9.3%
1.06
1,562
987
372
222
646
41.4%
42
43
0
384
(96)
0
288
18.4%
2.55
1,427
970
366
223
535
37.5%
54
46
0
307
(77)
0
230
16.2%
2.04
1,386
980
378
230
488
35.2%
66
53
0
269
(67)
0
202
14.6%
1.79
52.8%
58.2%
(233.4%)
-
9.3%
32.0%
29.1%
-
20.8%
31.0%
139.4%
-
(8.7%)
(17.1%)
(20.0%)
-
Operating Data, Ratios
FY10A
FY11E
FY12E
Capex
Change in working capital
Free cash flow
Dividends
Dividend % of net income
Capex/depreciation
CAPEX/sales
Working capital
Working capital/sales
313
12
35
18
19.7%
1.2
26.4%
242
-
174
(49)
202
15
12.7%
0.6
13.5%
290
-
Shipments
Avg price/t
Cash COGS/t
EBITDA/t
1,906
621
353
196
Shipments chg
Avg price/t chg
Cash COGS/t chg
EBITDA/t chg
Revenue growth
EBITDA growth
Net income growth
FCF growth
Capex
Maintenance
Expansion
FY10A
FY11E
FY12E
FY13E
FY14E
Cash
Accounts receivable
Inventories
Other current assets
Net PP&E
Other assets
Total assets
Short-term debt
Accounts payable
Other current liabilities
Long-term debt
Deferred taxes
Other liabilities
Total liabilities
Minority interest
Shareholders' equity
Liabilities + Equity
131
42
218
137
2,548
137
3,321
327
76
79
628
225
296
1,631
0
1,689
3,321
708
40
293
127
2,426
127
3,825
327
80
90
619
219
296
1,632
0
2,193
3,825
912
48
287
127
2,525
127
4,131
279
92
90
663
219
296
1,640
0
2,491
4,130
1,117
44
285
127
2,584
127
4,388
253
90
90
777
219
296
1,725
0
2,663
4,388
1,282
43
283
127
2,645
127
4,612
217
90
90
891
219
296
1,803
0
2,808
4,611
(2.9%)
(8.9%)
(12.3%)
-
Net debt
Net Debt/Capital
Debt/Capital
Net Debt/EBITDA
825
31.2%
28.8%
2.2
239
7.6%
24.7%
0.5
30
0.9%
22.8%
0.0
(87)
(2.4%)
23.5%
(0.2)
(175)
(4.5%)
24.0%
(0.4)
FY13E
FY14E
Valuation, Macro
FY10A
FY11E
FY12E
FY13E
FY14E
320
10
239
30
10.4%
1.4
20.5%
280
-
282
4
189
72
31.3%
1.3
19.8%
276
-
290
3
145
58
28.5%
1.3
21.0%
272
-
1,781
726
368
277
1,936
807
395
334
1,917
744
390
279
2,005
691
374
243
EV/EBITDA
P/E
P/BV
EV/tonne
FCF yield
Dividend yield
ROE
Net income margin
Net revenue/Assets
Assets/Equity
ROIC
Shares
ADRs
9.2
27.9
1.5
263
1.4%
5.5%
7.9%
35.6%
2.0
3.6%
113
-
5.8
21.6
1.2
222
7.8%
5.5%
9.3%
33.8%
1.7
5.4%
113
-
4.1
9.0
1.0
194
9.2%
11.6%
18.4%
37.8%
1.7
11.1%
113
-
4.7
11.3
1.0
181
7.3%
8.7%
16.2%
32.5%
1.6
8.0%
113
-
5.0
12.9
0.9
168
5.6%
7.2%
14.6%
30.1%
1.6
6.5%
113
-
25.9%
621
353
25.7%
(6.6%)
726
368
41.2%
8.7%
807
395
20.5%
(1.0%)
744
390
(16.3%)
4.6%
691
374
(12.9%)
DCF
WACC
Perpetual Growth
Cost of equity
Cost of debt
27.47
9.3%
2.2%
11.8%
4.6%
313
217
96
174
114
60
320
160
160
282
167
115
290
175
116
Source: Company reports and J.P. Morgan estimates.
Note: R$ in millions (except per-share data). Fiscal year ends Mar
47
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Underweight
Fibria
R$30.03 (28 Oct 10)
FIBR3.SA
www.fibria.com.br
Price Target: R$26
End Date: Dec 2011
Company description
Fibria was formed by the merger of VCP and Aracruz and is the leading market
pulp producer in the world, with 11% global market share. It has 5.6mt of
market pulp capacity at 5 sites in Brazil along with 540,000 ha of eucalyptus
plantations. The company is controlled by the Votorantim Group (29%) and by
the local development bank, BNDES (30%), and has recently migrated to the
Novo Mercado level of the Bovespa, the highest corporate governance standard
in Brazil.
Brazil
Pulp and Paper
Investment case
Despite our structurally optimistic view on the sector, we continue to see
downside to near-term pulp prices and believe that neither sector momentum
nor company valuations provide reasons for owning the stock at this point.
Price Performance
Fibria is highly sensitive to changes in pulp prices given its operational focus
(>90% of profits) and levered balance sheet (4.7x ND/EBITDA as per last
reported balance sheet). Every $30/t move in the pulp price leads to a 10%
change in EBITDA. Our sense is that consensus estimates are assuming flat
pulp prices for ’11, suggesting downside risk to estimates if we are right on the
pulp cycle outlook.
Debbie Bobovnikova, CFA AC
(1-212) 622-3489
[email protected]
40
R$
30
20
Oct-09
Jan-10
Jul-10
Oct-10
Source: Bloomberg.
Performance
Absolute (%)
Cyclical stocks tend to trade at higher multiples on trough earnings and vice
versa. Given our expectation of still an above average cyclical year in ’11 for
prices (BEK avg of $800/t vs. normalized $750), we believe the stock should
trade at or below a normalized multiple of ~8x.
Apr-10
1M
3M
12M
8.2
5.8
19.9
Source: Bloomberg.
We rate Fibria UW and have a R$26 ($16) Dec-11 price target. Our price target
is based on: (1) DCF analysis using 9.6% WACC (R$24/sh); (2) 8x target
multiple on ’11E EBITDA (R$24/sh) and (3) replacement value (R$30.5/sh).
Key upside risks to our UW rating include: (1) higher pulp prices; (2) weaker
BRL; (3) potential divestiture of paper assets.
Fibria Celulose S.A. (FIBR3.SA;FIBR3 BZ)
Company Data
Price (R$)
Date Of Price
52-week Range (R$)
Mkt Cap (R$ mn)
Fiscal Year End
Shares O/S (mn)
Price Target (R$)
Price Target End
Date
48
30.03
28 Oct 10
41.50 22.98
14,052.09
Dec
468
26.00
31 Dec 11
EBITDA FY (R$ mn)
Bloomberg EBITDA FY (R$ mn)
2009A
1,472
1,580
1.44
2010E
2,806
2,955
1.76
2011E
2,620
3,454
0.31
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Fibria: Summary of Financials
Income Statement
FY09A
FY10E
FY11E
FY12E
FY13E
Balance Sheet
FY09A
FY10E
FY11E
FY12E
FY13E
Revenues
Cost of goods sold
SG&A
Depreciation
EBITDA
EBITDA margin
Financial income
Financial expense
Equity income
EBT
Taxes
Minority interest
Extraordinary
Net income
Net income margin
EPS
6,000
639
1,248
1,472
24.5%
487
(1,492)
2,775
0
0
1.44
7,173
657
1,466
2,806
39.1%
143
(821)
(22)
0
0
1.76
7,142
683
1,330
2,620
36.7%
20
(730)
(435)
0.31
7,204
694
1,405
2,747
38.1%
51
(750)
(362)
0.60
7,853
754
1,534
3,019
38.4%
38
(766)
(296)
0.99
Cash
Accounts receivable
Inventories
Net PP&E
Other assets
Total assets
Short-term debt
Accounts payable
Long-term debt
Deferred taxes
Other liabilities
Total liabilities
Minority interest
3,898
842
948
671
28,324
94
18,290
10,015
-
327
829
1,047
412
28,239
159
12,641
15,579
-
851
857
1,027
398
28,827
158
12,685
16,124
-
625
865
1,027
398
29,613
160
12,898
16,696
-
906
942
1,077
398
30,437
174
13,080
17,338
-
-
-
-
-
-
Net debt
Net Debt/Capital
Debt/Capital
Net Debt/EBITDA
10,817
43.7%
6.4
10,387
39.5%
3.7
9,864
36.7%
3.8
10,311
37.3%
3.8
10,155
35.7%
3.4
FY09A
FY10E
FY11E
FY12E
FY13E
Valuation, Macro
FY09A
FY10E
FY11E
FY12E
FY13E
Capex
Free cash flow
Dividends
Capex/depreciation
CAPEX/sales
Working capital
1,609
(121)
(2,038)
-
1,247
200
1,467
-
1,400
50
560
-
2,409
(16)
(377)
-
1,949
(71)
271
-
Shipments
Avg price/t
Cash COGS/t
EBITDA/t
-
-
-
-
-
12.9
21.3
7.7%
9.8%
5.6%
3.8%
-
8.6
17.5
(6.7%)
32.6%
5.3%
5.6%
-
9.0
98.7
8.6%
118.6%
0.9%
4.6%
-
8.7
51.1
2.6%
229.0%
1.7%
4.7%
-
7.9
31.1
8.3%
376.6%
2.7%
5.1%
-
Shipments chg
Avg price/t chg
Cash COGS/t chg
EBITDA/t chg
-
-
-
-
-
1,609
-
1,247
-
1,400
-
2,409
-
1,949
-
Revenue growth
EBITDA growth
Net income growth
FCF growth
Capex
Maintenance
Expansion
EV/EBITDA
P/E
P/BV
EV/tonne
FCF yield
Dividend yield
ROE
Net income margin
Net revenue/Assets
Assets/Equity
ROIC
Shares
ADRs
DCF
WACC
Perpetual Growth
Cost of equity
Cost of debt
Note: R$ in millions (except per-share data). Fiscal year ends Dec
49
November 2010
Recommendations
Overweight: Santander Brasil (top pick), Banco
Bradesco, Banco Itaú Unibanco, Grupo Financiero
Galicia, Bladex. Avoid: Grupo Financiero Inbursa,
Bancolombia, Redecard, and Cielo.
50
5.0
Santander Chile
Banco de Chile
Credicorp
4.0
Itau Unibanco
Bancolombia
Macro
3.0
GFInbursaGFGalicia
Bradesco
GFNorte
Banco do Brasil
2.0
Santander Brasil
1.0
Bladex
0.0
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Risk Adjusted ROE (2011-2012)
Source: J.P. Morgan and Bloomberg, share price data as of October 28, 2010. Riskadjusted ROE calculated by subtracting est COE from forecast ROE in 2011 and 2012.
Share price performance in local currency – YTD: Latin American
financials ex-Brazil were the main outperformers
81%
57% 56%
42% 42% 40%
38% 36%
29% 27%
22%
17%
13% 13% 10% 10%
7%
6%
6%
3%
3%
-5%
Source: Bloomberg. Share price data through October 28, 2010. Credicorp’s share price is
adjusted for the performance of the currency (Nuevo Sol).
Cielo
Redecard
Ibovespa
S&P
Santander Brasil
KBW bank Index
Bladex
Itau Unibanco
Banorte
Mexico Index
Bradesco
Banco do Brasil
Porto Seguro
Compartamos
Argentina Index
Peru Index
Chile Index
Inbursa
-21%
Bancolombia
When regressing expected 2011 and 2012 ROEs against
price-to-book value multiples for Latin American banks
in our coverage universe, Santander Brasil, Itau
Unibanco, Bradesco, and Banco do Brasil trade roughly
5%-20% below the fair price to book value predicted by
the regression analysis. We expect a convergence of
multiples across the region as the Brazilian banks
continue posting good results and some of the “macro”
overhangs related to the sector (election cycle, equity
offerings) have been removed.
6.0
Santander Chile
What could be the positive drivers for banks?
Operating dynamics remains favorable for Brazilian
banks. We see good double-digit earnings growth driven
by 15%-20% loan growth, some efficiency
improvements, and lower credit losses. For Banorte, loan
growth will likely re-emerge and delinquency rates
should continue declining, thereby leading to healthy
earnings growth of 26.5% in 2011, according to our
estimates. We see continued high-20% ROEs for
Santander Chile and Banco de Chile in an environment
of moderate inflation and good economic growth.
Bancolombia should generate ROE expansion (albeit
from a relatively low high-teen range) as loan growth
picks up and, possibly, interest rates rise. At Credicorp,
strong loan growth and cost controls should offset lower
trading gains and drive 13% earnings growth in 2011.
Regression of risk-adjusted ROE to price-to-book value multiples:
Brazilian banks are still trading below the regression line
Credicorp
In contrast with the positive credit trends, we have a
cautious view of the Brazilian merchant acquiring
business. We believe pressure on MDRs and POS rental
rates should be meaningful in the coming years.
Bloomberg JPMA MARTINEZ <GO>
Banco de Chile
We continue to see mostly favorable credit dynamics in
the region. In Brazil, Peru, Chile, and Argentina, we
believe that credit growth should remain healthy in 2011.
We are forecasting loan growth of 17%-19% for the
banks we cover in these markets. Asset quality trends
should also continue improving, albeit at a more
moderate pace than in 2010. In addition, we are seeing
rapidly improving credit trends in Mexico and Colombia,
which we expect to continue. However, continued low
benchmark rates could pose risk to NIMs in Mexico.
(1-212) 622-3602
[email protected]
P /B V
Financials
Saul Martinez AC
Macro
Ben Laidler
(1-212) 622-5252
[email protected]
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Top picks
Santander Brasil
Bradesco
Stocks to avoid
Bancolombia (ADR)
Price
Code
Rating
R$24.57
R$34.96
SANB11
BBDC4
OW
OW
$66.04
CIB US
UW
P/E (x)
10E
11E
54,565
76,854
15.0
13.5
10.7
12.2
13,007
20.0
18.0
Mkt cap
(US$MM)
EPS
10E
11E
Div. yield
11E (%)
ROE
11E (%)
R$1.62
R$2.59
R$2.13
R$2.88
5.2
2.9
14.4
21.2
$3.30
$3.68
1.8
18.4%
Financials absolute and relative to MSCI LatAm
1200
Financials EPS integer
Absolute
160
2011
150
1000
140
800
130
600
120
400
110
2010
100
200
90
0
80
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
Feb-09
Jul-09
Dec-09
May -10
Financials 12 mth fwd PE
Financials trailing PB
16
Oct-10
4.5
4
14
3.5
12
3
2.5
10
2
8
1.5
6
1
4
0.5
95
97
98
99
00
PE
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
95
97
98
99
00
PB
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
51
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Banco Santander Brasil
SANB11.SA
www.santander.com.br
Overweight
R$24.57 (28 Oct 10)
Price Target: R$33
End Date: Dec 2011
Company description
Santander Brasil is Brazil’s 3rd-largest private bank, based on assets, loans,
deposits. The bank serves individuals and corporates and has grown through
acquisitions, notably of Banespa, in November 2000 and Banco Real from
ABN AMRO in 2008. The bank IPO’d in October 2009. As of Sept 2010, the
bank has assets of R$357bn, loans of R$153bn and equity of R$73.0 bn.
Brazil
Financial Institutions
Saul Martinez AC
(1-212) 622-3602
[email protected]
Investment case
As a leading financial institution, Santander should benefit from growth in
penetration. In addition, earnings growth driven by volumes, cost saves, lower
credit losses, coupled with capital optimization, should drive meaningful ROE
expansion. We see adjusted IFRS ROE growing to 16.4% by 2012 from 1112% now. This should see P/BV expansion from its current 1.7x BV. Our 2011
price target of R$33 is based on a target 11E book value multiple of 2.2x.
There is a lack of consensus about which accounting standards sell-side
analysts base financial projections for Santander Brasil on (IFRS or Brazilian
GAAP). Hence, it is difficult to assess the extent earnings upgrades are
possible. Our forecasts and the company’s primary reporting standard is IFRS.
We forecast IFRS earnings growth of 28.8 % in 2011 and 17.3% in 2012.
How much is already priced in?
We do not believe the multiyear ROE expansion is adequately priced. In 2012,
we expect the bank to generate adjusted IFRS ROE of 16.4%. Based on current
ROEs vs P/BV multiples for publicly traded Latin American banks in our
coverage universe, this ROE is consistent with a P/BV multiple of 2.1x.
Price Performance
26
24
R$ 22
20
18
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
1M
3M
Absolute (%)
13.8
12.7
9.0
Relative (%)
7.3
-1.3
-13.2
Source: Bloomberg.
Performance
12M
Source: Bloomberg.
YE11 R$33/share, US$18/ADR (at JPM’s 2011 FX of R$1.8). We use a
residual income model & regression of risk-adjusted ROE to P/BV. Key risks:
resumption of asset quality deterioration; failure to realize cost synergies from
Banco Real merger; slower loan growth recovery; business disruptions due to
IT integration issues; negative ruling from federal government on deductibiltiy
of goodwill amortization for tax purposes; negative actions taken by Santander
Spain that could impact the growth and profitability of Santander Brasil.
Company Data
Price (R$)
Date Of Price
52-week Range (R$)
Mkt Cap (R$ mn)
Fiscal Year End
Shares O/S (mn)
Price Target (R$)
Price Target End
Date
52
24.57
28 Oct 10
25.99 17.93
93,376.32
Dec
3,800
33.00
31 Dec 11
Banco Santander (Brasil) S.A. (SANB11.SA;SANB11 BZ)
2009A
2010E
EPS - Recurring (R$)
Q1 (Mar)
0.21
0.37A
Q2 (Jun)
0.44
0.38A
Q3 (Sep)
0.33
0.42A
Q4 (Dec)
0.31
0.46A
FY
1.31
1.62A
1.70
1.99A
2011E
2012E
2.13
2.56
2.57
3.00
Source: Company data, Bloomberg, J.P. Morgan estimates. Please note that EPS Recurring stands for EPS
IFRS adjusted and EPS Reported stands for EPS IFRS.
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Banco Santander (Brasil) S.A.: Summary of Financials
Income Statement
Interest Income
Interest Expense
Net interest Income
LL Provision
Net Interest Income after Provision
Fee Income
Other Non Interest Income
Personnel Expenses
Non Interest Expenses
Other Non Interest Expense
Non-Operating Income/(Expenses)
Non recurring income (losses)
Pretax income
Taxes
Statutory Profit Sharing
Minority Interests
Extraordinary
Net Income
Recurring Net Income
Dividends
Per share analysis
EPS
EPADR
BVPS
Dividend per Share
BVADR
Dividend/ADR
Growth
EPS growth
Fee income
Non interest expenses
Loan
Deposits
Ratios
NIM
Fees/Expenses
PDL/Loans
LL Reserves/Total Loans
LL Reserves/NPL
Cost/Income
Loans/Deposits
Loans/Assets
Equity/Assets
Dividend Payout
FY09A
FY10E
FY11E
FY12E FY13E Balance Sheet
40,436 40,480 47,213 53,179
(18,269) (16,555) (19,862) (22,113)
22,167 23,925 27,351 31,067
(9,983) (8,520) (9,612) (10,818)
12,184 15,405 17,739 20,249
6,238
6,991
7,969
9,005
2,874
1,583
1,693
1,784
(10,947) (11,241) (11,803) (12,747)
(5,615) (3,214) (3,131) (3,445)
3,403
240
150
150
8,137
9,763 12,616 14,997
(2,629) (2,190) (2,902) (3,599)
51
30
0
0
5,508
7,573
9,715 11,397
5,457
7,543
9,715 11,397
1,575
3,939
4,857
5,699
-
FY09A
FY10A
FY11E
1.31
0.87
13.76
0.41
7.88
0.21
1.62
0.92
14.34
1.04
8.20
0.59
2.13
1.18
15.20
1.28
8.21
0.71
2.57
1.38
16.27
1.50
8.47
0.80
-
3.2%
5.5%
(5.1%)
(1.3%)
(6.4%)
38.2%
12.1%
2.7%
15.9%
26.4%
28.8%
14.0%
5.0%
18.4%
14.4%
17.3%
13.0%
8.0%
17.7%
13.8%
-
9.6%
57.0%
6.7%
92.5%
101.7%
38.5%
89.2%
48.6%
21.9%
28.8%
9.4%
62.2%
5.7%
5.8%
102.0%
36.4%
82.6%
49.1%
19.3%
52.2%
9.2%
67.5%
5.1%
5.2%
102.0%
33.4%
85.5%
50.2%
17.4%
50.0%
8.9%
70.6%
4.8%
5.7%
102.0%
31.8%
88.4%
52.0%
16.2%
50.0%
-
FY09A
FY10E
FY11E
82,816
27,269
152,163
17,984
35,739
315,971
170,636
27,178
48,893
246,707
69,265
85,319
58,697
178,077
17,715
36,319
376,127
215,669
30,438
57,318
303,426
72,695
98,828
73,371
210,876
19,521
32,964
435,560
246,667
33,273
79,680
359,619
75,934
FY09A
FY10A
FY11E
FY12E FY13E
P/E
P/BV
Dividend yield
ROE
ROA
14.5
1.8
1.7%
9.9%
1.5%
12.3
1.7
4.2%
11.6%
1.9%
9.6
1.6
5.2%
14.4%
2.1%
8.2
1.5
6.1%
16.4%
2.2%
-
Shares
ADRs
3,800
-
3,800
-
3,800
-
3,800
-
-
Securities
Cash and Due from Banks
Interbank Investment
Loan and Leasing Operatings
Other Receivables and Assets
Permanent Asset
Total assets
Total deposits
Demand deposits
Savings deposits
Interbank deposits
Time deposits
Interest bearing liabilities
Other Current Liabilities
Total Liabilities
FY12E FY13E Valuation, Macro
FY12E FY13E
110,688
81,442
248,134
21,511
32,964
494,739
280,696
36,253
97,769
414,717
80,015
Source: Company reports and J.P. Morgan estimates. Adjusted IFRS figures.
Note: R$ in millions (except per-share data). Fiscal year ends Dec.
53
-
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Underweight
Bancolombia
$68.74 (4 Nov 10)
CIB
www.grupobancolomia.com
Price Target: $65
End Date: Dec 2011
Company description
Bancolombia is Colombia’s largest bank (23% loan share). It also owns
Banagricola, El Salvador’s largest bank (31% share). The company also
provides financial products in Panama, Peru, Brazil, the US and Spain.
Colombia
Financial Institutions
Saul Martinez AC
Investment case
Bancolombia is the leader in the underpenetrated Colombian and El Salvador
banking systems. Economic activity is improving and rates are unsustainably
low in Colombia and likely to increase, benefiting earnings and profitability.
We forecast local currency earnings growth of 19.2%, on average, from 2010
to 2012, and for ROEs to expand to 19.2% in 2012 from 17.9% in 2010. Newly
elected President Santos has a market-friendly economic policy. This could
lead to policy changes, such as modifications to the existing usury laws, that
would increase the maximum interest rate that can be charged by banks.
Faster-than-expected economic growth and an increase in NIMs due to higher
rates lead to upside risk to consensus local currency numbers. US$ earnings
could also benefit if the Colombian peso remains strong. Our 2011 EPADR
estimate incorporates an average COP/US$ exchange rate of 2,200 versus the
November 4th exchange rate of COP1,818/US$.
Even factoring in improving prospects, the bank is pricing ample improvement.
The stocks trades 3.4x bv and 18.0x 12e local EPS (18x 12e US$ earnings). It
is generating ROEs of about 18%. Our regression of ROE to P/B using a cross
section of LatAm banks, shows this is consistent with a 2.8x P/B multiple.
Ultimately, we feel Bancolombia benefits from scarcity value; being the only
domestic-focused stock with a liquid ADR. Hence, it may be susceptible to the
emergence of alternative domestic investment opportunities. Operationally,
while good local currency earnings growth is likely, Bancolombia has lost
share in consumer lending and struggled with costs.
(1-212) 622-3602
[email protected]
Price Performance
65
$
55
45
35
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Performance
1M
3M
12M
Absolute (%)
2.9
6.6
56.1
Relative (%)
-1.0
5.5
48.2
Source: Bloomberg.
out November 5 for further details.
YE11 US$60/ADR (at JPM’s end-2011e FX of COP$2,200). We use a residual
income model and regression of risk-adjusted ROE to P/B. Key risks: fasterthan-expected improvement in economic conditions; a faster-than-expected
rebound in NIMs; value-creating acquisitions; and continued positive sentiment
toward the country’s improving macroeconomic and political dynamics.
Bancolombia S.A. (CIB;CIB US)
Company Data
Price ($)
Date Of Price
52-week Range ($)
Mkt Cap ($ mn)
Fiscal Year End
Shares O/S (mn)
Price Target ($)
Price Target End
Date
54
68.74
04 Nov 10
69.44 40.10
13,538.81
Dec
197
65.00
31 Dec 11
EPADR - Recurring ($)
Q1 (Mar)
Q2 (Jun)
Q3 (Sep)
Q4 (Dec)
FY
2009A
2010E
2011E
2012E
0.65
0.68
0.72
0.64
2.77
0.89A
0.77A
1.03A
0.96A
3.65A
3.97
4.28
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Bancolombia: Summary of Financials
Income Statement
FY09A
FY10E
FY11E
FY12E Balance Sheet
Interest Income
6,427,698 5,009,056 6,053,546 7,315,953
Interest Expense
(2,625,416) (1,575,512) (2,049,436) (2,601,836)
Net interest Income
3,802,282 3,433,543 4,004,110 4,714,117
LL Provision
(1,153,374) (594,373) (694,071) (917,678)
Net Interest Income after provision
2,648,908 2,839,170 3,310,040 3,796,439
Fee Income
1,506,273 1,573,672 1,762,513 1,956,389
Foreign Exchange and Trading transaction 380,676 495,949 547,232 547,232
Non Interest Income
198,761 193,658 183,975 193,174
Non Interest Expenses
(3,000,674) (3,189,237) (3,489,950) (3,854,198)
Non Operating results
Pretax income
1,733,944 1,913,212 2,313,809 2,639,036
Taxes
(462,013) (530,139) (654,172) (746,493)
Statutory Profit Sharing
Minority Interest
(15,081) (17,260) (18,468) (19,761)
Net Income
1,256,850 1,365,813 1,641,169 1,872,782
Recurring Net Income
1,170,050 1,365,813 1,641,169 1,872,782
Dividends
Per share analysis
EPS
BVPS
Dividend per Share
Growth
EPS growth
Fee income
Non interest expenses
Loan
Deposits
Ratios
NIM
Fees/Expenses
PDL/Loans
LL Reserves/Total Loans
LL Reserves/NPL
Cost/Income
Loans/Deposits
Loans/Assets
Equity/Assets
Dividend Payout
FY09A
FY10E
FY11E
FY12E
Securities
8,436,244 8,895,070 9,517,725 10,183,965
Loans, gross
42,041,974 47,811,195 55,561,779 64,647,131
Cash and due from Banks
7,372,359 5,417,489 5,742,538 6,144,516
Repurchase Agmt and Derivatives
Loan loss reserves
(2,431,667) (2,453,431) (2,497,502) (2,715,179)
Other assets
6,445,455 7,225,066 7,663,474 7,719,250
Total assets
61,864,365 66,895,388 75,988,014 85,979,682
Total deposits
42,149,330 43,978,839 50,920,026 58,554,431
Other funding
5,428,960 5,890,742 6,479,816 7,127,798
Bonds and subordinated debts
Other liabilities
7,253,246 9,118,253 9,572,115 10,048,671
Total liabilities
61,864,365 66,895,388 75,988,014 85,979,682
Shareholder's equity
FY09A
FY10A
FY11E
FY12E Valuation, Macro
2.97
17.44
1.08
3.65
19.66
1.34
3.97
20.41
1.29
P/E
4.28 P/BV
22.94 Dividend yield
1.46 ROE
ROA
(2.6%)
14.7%
10.1%
(5.8%)
4.4%
31.9%
4.5%
7.0%
13.7%
4.3%
8.8%
12.0%
9.9%
16.2%
15.8%
7.8% Shares
11.0% ADRs
9.6%
16.4%
15.0%
6.6%
53.3%
3.9%
5.8%
149.4%
49.7%
99.7%
68.0%
11.4%
36.3%
5.7%
52.0%
3.3%
5.1%
155.5%
55.0%
108.7%
71.5%
11.8%
36.8%
6.0%
53.0%
3.1%
4.5%
145.0%
52.6%
109.1%
73.1%
11.9%
32.5%
7,032,829 7,907,555 9,016,057 10,248,783
FY09A
FY10A
FY11E
FY12E
23.1
3.9
1.6%
17.8%
1.9%
18.8
3.5
2.0%
19.1%
2.2%
17.3
3.4
1.9%
19.4%
2.3%
16.1
3.0
2.1%
19.4%
2.3%
197
197
197
197
6.2%
53.7%
3.0%
4.2%
140.0%
50.5%
110.4%
75.2%
11.9%
34.2%
Note: $ in millions (except per-share data). Fiscal year ends Dec
55
November 2010
77%
82%
86%
89%
Belgium
76%
Peru
Portugal
76%
Sweden
70%
Mexico
69%
UK
Chile
53%
Brazil
47%
65%
France
31%
39%
64%
Colombia
Figure 1: Brazil/Mexico: Access to funding remains a key bottleneck for
small banks, hence our focus on balance sheet strength
(market share of deposits of top 5 banks)
Argentina
In our coverage of 6 SMid cap financials in Brazil and
Mexico, we like Banrisul, Cetip and Compartamos. We
base our preference for SMid caps on: 1) strong balance
sheets (high BIS, high loan-loss coverage, stable funding,
low debt ratio); 2) low risk of pricing/margin pressure;
3) best EPS growth; 4) M&A potential; 5) limited
political/regulatory risk; 6) product diversification in
2011e adding new revenues sources; 7) attractive
growth-adjusted valuations.
Bloomberg JPMA DEMARIZ <GO>
Italy
SMid caps should continue to experience above-system
growth in 2011, especially in SME lending and
microlending, on the back of favorable macroeconomic
trends and low leverage. We like banks with solid
balance sheets, especially good access to funding, as we
view this is as a structural weakness of small banks
(Figure 1). 2010 was about asset quality; in 2011,
investor focus will be on possible pressure on margins.
(55-11) 3048-3398
[email protected]
Banco J.P. Morgan SA
Spain
SMid Cap Financials
Frederic de Mariz AC *
USA
Ben Laidler
(1-212) 622-5252
[email protected]
Source: Central banks and J.P. Morgan.
Figure 2: Brazil: Loans-to-GDP ratio: We expect SME lending to play a
key role in the next growth phase
50
45
40
35
In Mexico, Compartamos should continue to grow, on
the back of 1) the underpenetration of lending, especially
for lower-income segments; 2) the benign regulatory
environment (we don’t think problems in Indian
microfinance will spill over to other markets); 3)
contained competition.
Loan growth will be the main earnings driver, while
inflows (especially from foreign investors) will continue
to support valuations. Efficiency gains will also drive
earnings growth, and we expect efficiency to improve (at
Banrisul) or remain stable (at Cetip and Compartamos).
Recommendations
Overweight: Banrisul, Cetip, Compartamos. Stocks to
avoid: PanAmericano.
56
30
25
Source: Brazilian Central Bank.
* Registered/qualified as a research analyst under NYSE/NASD rules.
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
20
1989
In Brazil, SME lenders (roughly half of Banrisul’s
portfolio is small corporate) should see loan growth
above 25% versus a system average of ~20%, adding to
recent strong loan growth in Brazil (Figure 2). With loan
growth and stable asset quality viewed as a given,
investors will focus on margin compression (on the back
of changes in mix and/or increased competition). We
expect Cetip to see strong earnings growth (JPMe 34%
growth in EPS in 2011) on the back of higher volumes.
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Top picks
Banrisul
Compartamos
Cetip
Stocks to avoid
PanAmericano
Mkt cap
(US$MM)
P/E (x)
10E
Price
Code
Rating
R$18.00
MXN85.93
R$17.95
BRSR6
COMPARTO
CTIP3
OW
OW
OW
3.949
3.032
2.387
11.6x
20.1x
29.8x
R$7.73
BPNM4
UW
1,110
11.9x
EPS
10E
11E
Div. yield
11E (%)
ROE
11E (%)
10.0x
16.4x
22.3x
1.61
4.36
0.61
1.88
5.34
0.81
3%
1%
1%
19.0%
34.8%
45.3%
7.2x
0.64
1.07
8%
16.4%
11E
Loan growth
Non performing loans to total loans
44%
35%
28%
27%
10.2% 9.8%
30%
24%
25%
10.5%10.2%
6.8%
20%
6.0%
17% 15%
2.4% 2.8%
2.5% 2.3%
ABC Brasil
Banrisul
BicBanco
2010e
Compartamos
PanAmericano
ABC Brasil
Banrisul
BicBanco
2011e
2010e
Compartamos
2011e
Cost to income
EPS growth
50% 48%
51% 50%
66%
50% 50%
40%
26% 25%
ABC Brasil
PanAmericano
24% 22%
Banrisul
BicBanco
2010e
17%
Compartamos
PanAmericano
ABC Brasil
22%
16%
Banrisul
2011e
26%
34%
20%
BicBanco
2010e
21%
Cetip
22% 22%
Compartamos
-16%
PanAmericano
2011e
57
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Banrisul
Overweight
BRSR6.SA
www.banrisul.com.br
Price Target: $20
R$18.00 (28 Oct 10)
End Date: Dec 2011
Company description
Banrisul is the largest of the small caps under our coverage. It is also the only
small bank with access to retail funding. The bank is controlled by the state of
Rio Grande do Sul (owns 57%) and has a dominant market share in its home
state (17% loan market share). The bank offers a wide variety of loans,
including individual (45% of total book, mostly payroll), corporate (32% of
loans), real estate (8% of loans), and agribusiness (7% of loans). Banrisul is the
11th-largest bank by assets in Brazil and has a market share of 0.8% of total
loans in the Brazilian banking system (largest bank, Banco do Brasil, has 21%).
Latin America
SMid Cap Financials
(55-11) 3048-3398
[email protected]
Investment case
We have an Overweight rating on the stock (BRSR6) due to the bank’s strong
funding structure (based on stable and cheap retail funding), good loan growth
outlook (around 25% in 2010-12e), and solid coverage of nonperforming loans
(ratio of loan-loss reserves to loans past due 60 days or more 226% in 2Q10).
Price Performance
19
17
R$ 15
We expect loan growth to be the main driver of earnings growth, as net interest
margins and loan-loss provisions should remain relatively stable in the next 12
months. Additionally, improved operating efficiency (historically a weak point
at Banrisul) should continue improving, mostly on the back of lower
administrative expenses.
13
11
Mar-10
Jun-10
Sep-10
Source: Bloomberg.
Performance
Prospects for derating
Lower-than-expected loan growth and the potential appointment of a new and
heterodox management team at the bank could disappoint investors.
Absolute (%)
1M
3M
12M
9.4
29.7
36.7
Source: Bloomberg.
* Registered/qualified as a research analyst
under NYSE/NASD rules.
Our Dec-11 price target of R$20 is based on a residual income methodology
and a regression of ROE and P/BV multiples for banks. We assume a cost of
equity of 13.1% and long-term earnings growth of 5%. Risks to our price target
and OW rating include 1) political interference at the bank; 2) lower-thanexpected loan growth; 3) limited gains in efficiency.
Banrisul (BRSR6.SA;BRSR6 BZ)
Company Data
Price (R$)
Date Of Price
52-week Range (R$)
Mkt Cap (R$ mn)
Fiscal Year End
Shares O/S (mn)
Price Target (R$)
Price Target End
Date
58
18.00
28 Oct 10
19.05 10.74
7,361.54
Dec
409
20.00
31 Dec 11
Q1 (Mar)
Q2 (Jun)
Q3 (Sep)
Q4 (Dec)
FY
2008A
2009A
2010E
2011E
2012E
0.30
0.46
0.27
0.00
1.03
0.26
0.25
0.36
0.45
1.32
0.30A
0.45A
0.43A
0.44A
1.61A
1.88
2.18
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Banrisul: Summary of Financials
Income Statement - Annual
Net interest income
Provisions
Noninterest income
Total revenues
Expenses
Earnings before taxes
Income taxes
Profit sharing and minority interest
Net income - Reported
Nonrecurring income (losses) (AT)
Net income - Core
Diluted shares outstanding
EPS - Reported
EPS - Core
Dividends
FY08A FY09A FY10E FY11E
1,722
(257)
539
2,004
(1,171)
704
(83)
(30)
421
0
421
409
1.03
1.03
0.74
2,542
(423)
579
2,699
2,791
(534)
641
2,898
3,136
(608)
718
3,246
(1,846) (1,888)
853
1,010
(268)
(305)
(45)
(45)
541
660
0
0
541
660
409
409
(2,065)
1,181
(366)
(47)
768
0
768
409
1.32
1.32
0.56
1.61
1.61
0.65
Income Statement - Quarterly
1Q10A 2Q10A 3Q10E 4Q10E
Net interest income
Provisions
Noninterest income
Total revenues
647
(154)
150
644
711
(127)
157
741
706
(130)
164
740
727
(123)
170
774
Expenses
Income taxes
Nonrecurring income (losses)
Net income - Core
(462)
182
(48)
(11)
122
0
122
409
(464)
277
(83)
(11)
183
0
183
409
(472)
268
(80)
(11)
177
0
177
409
(490)
283
(94)
(11)
179
0
179
409
0.30
0.30
0.10
0.45
0.45
0.19
0.43
0.43
0.18
0.44
0.44
0.17
1.88
1.88
0.75
EPS - Reported
EPS - Core
Dividends
Balance Sheet
Balance Sheet
1Q10A 2Q10A 3Q10E 4Q10E
Securities
Total gross loans
Loan loss reserves
Total net loans
Total earning assets
Total assets
6,111
11,453
971
10,483
24,495
25,205
7,408
13,414
1,017
12,398
28,197
29,084
8,418
17,023
1,177
15,846
32,037
33,222
8,839
21,109
1,469
19,640
35,142
37,981
Securities
Total gross loans
Loan loss reserves
Total net loans
Total assets
7,760
14,766
1,082
13,684
28,913
29,864
8,091
15,442
1,039
14,403
29,980
31,099
8,253
16,060
1,109
14,951
30,997
32,028
8,418
17,023
1,177
15,846
32,037
33,222
Total deposits
Total liabilities
Common equity
14,256
22,126
3,079
3,079
16,370
25,676
3,408
3,408
19,275
29,420
3,802
3,802
22,076
33,719
4,262
4,262
Total deposits
Total liabilities
Common equity
16,520
26,384
3,480
3,480
17,145
27,509
3,590
3,590
18,093
28,334
3,694
3,694
19,275
29,420
3,802
3,802
Ratio Analysis (%)
Ratio Analysis (%)
1Q10A 2Q10A 3Q10E 4Q10E
Average loan growth
Average earning assets growth
Average deposit growth
Avg loans / avg deposits
34.2%
19.3%
15.3%
85.9%
20.5%
20.0%
14.8%
90.1%
26.8% 24.0%
14.4% 14.4%
17.7% 15.0%
97.0% 105.0%
Average loan growth
9.8%
3.2%
0.9%
98.0%
4.8%
4.0%
3.8%
98.9%
4.0%
2.7%
6.0%
97.5%
6.0%
3.8%
7.0%
97.0%
Net interest margin
Efficiency ratio
Return on assets (ROA)
Return on equity (ROE)
7.8%
4.7%
1.8%
14.3%
9.7%
6.0%
2.0%
16.7%
9.1%
5.5%
2.1%
18.3%
8.9%
5.3%
2.2%
18.5%
Net interest margin
Efficiency ratio
9.0%
5.9%
1.7%
14.2%
9.5%
5.5%
2.4%
20.7%
9.1%
5.5%
2.2%
19.4%
9.1%
5.5%
2.2%
19.1%
Tangible common equity ratio
BIS ratio
20.1%
17.5%
16.5%
15.7%
BIS ratio
16.5%
15.7%
15.7%
15.5%
NPAs / gross loans
Net chargeoffs / average loans
Loan loss reserves / loans
Loan loss reserves / NPLs
14.2%
1.7%
8.5%
59.6%
11.9%
2.2%
7.6%
63.9%
10.2%
1.5%
6.9%
67.8%
9.8%
1.5%
7.0%
71.0%
NPAs / gross loans
11.3%
2.2%
7.3%
65.0%
10.8%
1.7%
6.7%
62.4%
10.4%
1.5%
6.9%
66.5%
10.2%
1.3%
6.9%
67.8%
Note: R$ in Millions (except per-share data).
59
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Banco PanAmericano
Underweight
BPNM4.SA
www.panamericano.com.br
Price Target: $10
R$7.73 (28 Oct 10)
End Date: Dec 2011
Company description
PanAmericano offers consumer loans to the lower-income segments of the
population, making it an ideal play on rising income levels in Brazil. Roughly
two-thirds of the bank’s loan portfolio are vehicle lending, with payroll and
credit cards making up the rest of the portfolio. The bank has a network of 199
points of sale, 2.1 million clients and 12.1 million issued credit cards. The bank
currently has a market share of 0.4% of loans in the Brazilian banking system
(the leader, Banco do Brasil, has a market share of 21%).
Investment case
We have an out-of-consensus Underweight rating on the stock (BPNM4), due
to 1) accounting issues and weak internal controls; 2) uncertainties around the
new management team; 3) weaker funding structure than that of other banks in
our coverage universe (roughly half of the funding comes from loan cessions,
loan securitization and time deposits with a special guarantee), and 4) lower
loan growth outlook in auto loans than in other loan segments.
The bank will continue to suffer from high loan loss provisioning levels (D-H
ratio at 10.9% as of 2Q10). Also, tougher competition in the auto lending
segment could put pressure on margins.
Prospects for rerating
We have a cautious view on the benefits that CEF could bring to
PanAmericano. CEF announced the purchase of 37% of PanAmericano in Dec09. The stock could rerate if the new management team of PanAmericano were
to articulate how the agreement with CEF could 1) improve the funding
structure of PanAmericano and/or 2) bring revenue synergies.
Latin America
SMid Cap Financials
(55-11) 3048-3398
[email protected]
Price Performance
10.5
R$
9.5
8.5
7.5
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Performance
Absolute (%)
1M
3M
12M
-23.4
-23.9
-37.9
Source: Bloomberg.
* Registered/qualified as a research
analyst under NYSE/NASD rules.
Our Dec-11 price target of R$10 is based on a residual income model and a
regression analysis of ROE and P/BV. We consider a cost of equity of 13.1%
and a long term earnings growth of 6%. Risks to our UW rating relate to a
redefinition of the strategy of the bank by the new management team, an
improvement in funding structure and significant revenue synergies with CEF.
Company Data
Price (R$)
7.73
Date Of Price
28 Oct 10
52-week Range (R$) 12.36 - 6.55
Mkt Cap (R$ mn)
1,888.78
Fiscal Year End
Dec
Shares O/S (mn)
244
Price Target (R$)
10.00
Price Target End Date 31 Dec 11
60
Banco PanAmericano (BPNM4.SA;BPNM4 BZ)
2008A
2009A
Q1 (Mar)
0.28
0.29
Q2 (Jun)
0.36
0.06
Q3 (Sep)
0.27
0.19
Q4 (Dec)
0.04
0.23
FY
0.94
0.77
2010E
2011E
2012E
0.18A
(0.09)A
0.24A
0.28A
0.64A
1.07
1.19
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Banco PanAmericano: Summary of Financials
Net interest income
Provisions
Noninterest income
Total revenues
Expenses
Income taxes
Nonrecurring income (losses) (AT)
Net income - Core
EPS - Reported
EPS - Core
Dividends
Balance Sheet
1,777
(542)
180
1,415
(1,189)
99
(3)
(0)
96
14
236
250
0.94
0.94
-
2,237
(730)
118
1,625
2,732
(744)
175
2,163
2,952
(768)
194
2,378
(1,148) (1,566) (1,720)
257
410
472
(82)
(193)
(151)
(0)
(1)
(1)
174
217
320
(205)
(246)
(246)
189
157
261
244
244
244
0.77
0.77
0.16
0.64
0.64
0.19
1Q10A 2Q10A 3Q10E 4Q10E
Net interest income
Provisions
Noninterest income
Total revenues
697
(172)
39
565
639
(250)
44
433
691
(144)
45
592
705
(177)
46
574
Expenses
Income taxes
Nonrecurring income (losses)
Net income - Core
(391)
126
(51)
(0)
75
(79)
44
244
(397)
(23)
11
(0)
(11)
(68)
(21)
244
(402)
150
(75)
(0)
75
(50)
58
244
(377)
157
(78)
(0)
79
(50)
69
244
0.18
0.18
0.00
(0.09)
(0.09)
0.19
0.24
0.24
0.00
0.28
0.28
0.00
1.07
1.07
0.27
EPS - Reported
EPS - Core
Dividends
Balance Sheet
1Q10A 2Q10A 3Q10E 4Q10E
Securities
Total gross loans
Loan loss reserves
Total net loans
Total assets
736
6,631
522
6,108
8,900
8,976
1,377
8,784
578
8,206
10,363
11,591
1,862
10,317
704
9,613
12,481
13,725
1,881
11,865
829
11,036
14,688
15,216
Securities
Total gross loans
Loan loss reserves
Total net loans
Total assets
1,161
8,984
577
8,407
11,346
11,812
1,826
9,183
660
8,524
12,064
12,583
1,844
9,642
671
8,972
12,852
13,053
1,862
10,317
704
9,613
13,438
13,725
Total deposits
Total liabilities
Common equity
4,413
7,789
1,188
1,188
6,922
10,277
1,314
1,314
0
12,228
1,497
1,497
0
13,523
1,693
1,693
Total deposits
Total liabilities
Common equity
7,115
10,424
1,388
1,388
7,476
11,212
1,371
1,371
0
11,624
1,429
1,429
0
12,228
1,497
1,497
1Q10A 2Q10A 3Q10E 4Q10E
Ratio Analysis (%)
Ratio Analysis (%)
Average loan growth
33.0%
(12.8%)
20.1%
81.1%
32.5%
46.4%
19.5%
89.9%
17.5%
21.4%
25.0%
84.5%
15.0%
11.7%
15.0%
84.5%
Average loan growth
29.9%
57.1%
28.7%
87.4%
21.9%
36.4%
29.3%
79.8%
20.7%
24.8%
34.4%
81.3%
17.5%
21.4%
25.0%
84.5%
Net interest margin
Efficiency ratio
20.0%
10.3%
2.9%
20.0%
21.6%
9.5%
1.8%
15.1%
21.9%
10.5%
1.2%
11.2%
20.1%
9.9%
1.8%
16.4%
Net interest margin
Efficiency ratio
24.6%
11.0%
1.5%
13.1%
21.2%
11.3%
(0.7%)
(6.1%)
21.5%
10.5%
1.8%
16.5%
21.0%
9.5%
2.1%
18.8%
BIS ratio
24.2%
17.0%
17.6%
17.1%
BIS ratio
14.8%
14.3%
18.0%
17.6%
NPAs / gross loans
12.2%
5.0%
7.9%
11.2%
10.5%
6.7%
6.6%
8.1%
10.5%
5.8%
6.8%
7.5%
10.2%
5.8%
7.0%
6.9%
NPAs / gross loans
10.8%
6.4%
6.4%
2.1%
10.9%
6.2%
7.2%
1.8%
10.7%
6.0%
7.0%
1.8%
10.5%
5.8%
6.8%
2.0%
Note: R$ in Millions (except per-share data).
61
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Food, Beverages & Tobacco
Key sector dynamics
LatAm beverage markets are mainly oligopolies with
rational pricing and stable volume growth. Companies
have seen aggregate sales CAGR of 12% last decade.
They have little or no debt, robust margins and high
ROICs. On the other side, LatAm food can be divided in
two: packaged food companies with branded products,
and meat/commodities beef companies with volatile
margins (raw material and Fx). For tobacco, it is all
about brands and pricing power while containing higher
taxes and usage restrictions.
Economics, demographics and specific company
strategies should keep driving organic LatAm staples
growth, especially in beverages. For the food sector we
expect a confluence of both organic and inorganic
growth as we expect consolidation in the food space to
continue. In our view, tobacco sector growth will be
driven mostly via pricing and innovation and despite
stable to declining volumes.
Emerging market staples are trading above developed
markets’. This is a first. Plus, the LatAm staples group is
already trading at a record premium of 70% over the rest
of the LatAm MSCI. We don’t see this gap spreading
further, but it should remain stable. A key valuation
driver should be use of cash, specifically how much is
returned to shareholders. These beverage and tobacco
companies pose upside risks to increased dividends.
Meat (beef) companies face a different challenges related
to how to maintain or expand their low profitability and
their delevering process.
Recommendations
Despite some relatively rich valuations we still see as an
opportunity FMX (OW) for EPS growth, CCU (OW) for
its relative value and Modelo (OW) for event-driven
growth. Among food companies, we prefer processed
food powerhouse and poultry exporter Brasil Foods
(OW). This company has a solid growth outlook and
material upside risk to merger synergies. On our sole
tobacco company, Souza Cruz, we currently remain
Neutral on valuation. In one sentence, our sector has
high-quality names that are not cheap but pose selected
opportunities with the right risk/reward balance.
Alan Alanis AC
(1-212) 622-3697
[email protected]
Bloomberg JPMA ALANIS <GO>
Top 8 LatAm bevcos more than tripled revenues ($ bn) this decade
Robust top-line CAGR of 12% in the last decade – most of which was organic
60
50
40
30
20
10
16
17
17
20
24
00
01
02
03
04
29
05
35
06
42
07
50
45
45
08
09 10E
S
Source: Company reports and J.P. Morgan estimates for AmBev, FEMSA, Grupo Modelo,
CCU, Coca-Cola FEMSA, Embotelladora Arca, Andina and Contal.
MSCI EM vs. Developed Market consumer staples, 12 mo. fwd P/E
EM staples now trading at 15% premium vs. a 15-year avg. discount of 16%
35
25
15
5
Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09
MSCI DM Staples
MSCI EM Staples
Source: Datastream.
MSCI LatAm Consumer Staples vs. MSCI LatAm, 12 mo. fwd P/E
LatAm staples now trading at 70% premium to the market
24
19
14
9
4
Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09
MSCI Latam Consumer Staples
MSCI Latam
Source: Datastream.
MSCI LatAm Consumer Staples (index constituents)
Company
AmBev PN
Walmex
FMX
BRFS
Cencosud
Natura
CRUZ3
Hypermarcas
Modelo
Kimber
CBD
Bimbo
JBS
KOF
Cosan
Exito
MRFG3
CCU
Conchatoro
Total
Weights
18.6%
15.6%
11.7%
9.7%
6.2%
4.8%
4.0%
4.0%
3.6%
3.5%
3.2%
2.7%
2.4%
2.3%
1.9%
1.9%
1.4%
1.3%
1.2%
100%
Source: Datastream. In bold the names under our food, beverage and tobacco coverage.
62
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Top picks
FEMSA
Brasil Foods
Stocks to avoid
Minerva
P/E (x)
EPS
Price
Code
Rating
Mkt cap
(US$MM)
10E
11E
10E
11E
Div. yield
11E (%)
ROE
11E (%)
26.4
23.5
CSMG3
GETI4
OW
OW
1,783
5,246
6.4
10.7
6.0
9.8
4.13
2.19
4.39
2.38
8.3
10.7
12.0
181.4
40.4
CPFE3
UW
11,368
13.7
13.9
2.94
2.90
5.4
25.3
Food and beverages absolute and relative to MSCI LatAm
600
Absolute
Food and beverages EPS integer
130
2011
500
120
400
110
300
100
200
90
100
80
2010
0
70
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
Feb-09
Jul-09
Dec-09
May -10
Oct-10
Food and beverages 12 mth fwd PE
Food and beverages trailing PB
22
4
20
3.5
18
3
16
2.5
14
2
12
1.5
10
1
8
0.5
95
97
98
99
00
PE
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
95
97
98
99
00
PB
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
63
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Brasil Foods
Overweight
BRFS3.SA
www.perdix-international.com
Price Target: R$31
R$24.42 (28 Oct 10)
World’s largest exporter of chicken
Brasil Foods (BRFS3) is the merged entity of Perdigao and Sadia, the two
leading poultry companies in Brazil. With $15bn in annual revenues, Brasil
Foods is the fourth-largest protein co. in the world. It sells mainly poultry.
Most BRFS sales are in the domestic Brazilian market, yet it is the global
leader in chicken exports. Domestically, BRFS3 is the undisputed leader in
processed foods, which have better margins than commodity proteins. The co.
also sells pork, beef cuts, milk and other dairy products. Its operations are fully
integrated, and it owns the largest number of consumer brands in Brazil.
Undisputed leader in the growing Brazilian market
Poultry has been the fastest-growing protein globally for well over a decade.
Strong demand continues in Brazil and abroad. The premium in price of beef
vs. chicken is well above the historical average. We expect beef prices to
remain high; given this and recent increases in corn and soy prices, we estimate
we are entering a year when prices for global poultry should increase. In this
sense, Brasil Foods is well positioned to benefit from this situation.
Potential for earnings upgrades – More synergies, less taxes
For a LatAm meat company, Brasil Foods’ ’10e net debt to EBITDA of 1.9x is
one of the lowest. Plus, once Brazil’s regulatory authority, CADE, approves the
integration with Sadia, we believe the company is likely to positively surprise
the market with synergies materially higher than its current guidance of
R$500mn/year. Net net: with higher-than-expected FCF generation, we see
upside risk to our ’11e EPS estimate of R$1.44 for BRFS3.
End Date: Dec 2011
Latin America
Food, Beverage and Tobacco
Alan Alanis AC
(1-212) 622-3697
[email protected]
Price Performance
27
25
R$ 23
21
19
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Performance
Absolute (%)
1M
3M
12M
2.0
8.6
10.9
Source: Bloomberg.
Stock should at least maintain its valuation multiple
Although at 8.5x ’11e EV/EBITDA and 17.0x ’11e P/E the stock does not look
cheap, we believe these multiples have yet to capture the full value of the
company given a) post integration BRFS will have unparalleled scale and
pricing power in Brazil, b) that BRFS3 should be a key beneficiary of
accelerated global growth in poultry market and, lastly, c) its potential to
deliver higher-than-guidance synergies from the merger and yet-to-beaccounted tax benefits.
Dec ’11 PT offers 27% potential upside – with some risks
Using perpetuity growth of 3% and a WACC of 9.5%, our DCF model
indicates a Dec ’11 PT of R$31 for BRFS3, implying 27% upside & a 2% div
yield. Key risks are a) a weaker-than-expected rebound in poultry market; b)
failure to deliver expected synergies; and c) Fx & grain price volatility.
Company Data
Price (R$)
Date Of Price
52-week Range (R$)
Mkt Cap (R$ mn)
Fiscal Year End
Shares O/S (mn)
Price Target (R$)
Price Target End
Date
64
24.42
28 Oct 10
26.65 19.80
21,305.80
Dec
872
31.00
31 Dec 11
BRF - Brasil Foods SA (BRFS3.SA;BRFS3 BZ)
2009A
EBITDA FY (R$ mn)
1,222
EV/EBITDA FY
19.9
Revenues FY (R$ mn)
20,936
0.28
P/E FY
88.5
Source: Company data, J.P. Morgan estimates.
2010E
2,340
10.9
23,040
0.53
46.0
2011E
2,970
8.6
25,313
1.44
17.0
2012E
3,655
7.0
27,735
1.60
15.3
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Brasil Foods SA: Summary of Financials
FY09A FY10E FY11E
Revenues
Cost of goods sold
Gross profit
20,936 23,040 25,313
(16,207) (16,867) (18,431)
4,729
6,173
6,881
Revenues
Cost of revenues
Gross profit
5,047
(3,768)
1,279
5,532
(4,018)
1,514
5,924
(4,338)
1,586
6,537
(4,743)
1,794
Other operating expenses
Operating income
(1,008)
271
(1,121)
393
(1,198)
388
(1,313)
482
447
587
595
710
(156)
(170)
(211)
(161)
51
151
112
249
0
7
(13.7%)
1
(13)
8.6%
(20)
18.0%
(45)
18.0%
53
131
86
191
(64)
(72)
(65)
(72)
53
132
87
192
SG&A
LFL Operating income
1Q10A 2Q10A 3Q10E 4Q10E
(4,313)
416
(4,639)
1,534
(4,797)
2,084
LFL EBITDA
1,222
2,340
2,970
EBITDA
Interest, net
588
(698)
(598)
Interest, net
Pretax income
740
563
1,633
Pretax income
0
(499)
67.3%
(71)
12.6%
(294)
18.0%
Equity income
Income taxes
Tax rate
220
460
1,252
Net income - operating
(263)
(273)
147
Net income - reported (GAAP)
241
463
1,255
872
872
872
872
872
872
872
EPS (LFL)
EPS - reported (GAAP)
EPS - consensus (I/B/E/S)
0.28
0.28
0.76
0.53
0.53
0.80
1.44
1.44
1.32
EPS (LFL)
0.06
0.06
0.12
0.15
0.15
0.19
0.10
0.10
0.27
0.22
0.22
0.32
Equity income
Income taxes
Tax rate
Non-operating income / (expense)
Balance Sheet and Cash Flow Data
FY09A FY10E FY11E
Cash and cash equivalents
Accounts receivable
Inventories
Current assets
4,244
1,787
3,101
10,446
2,967
2,149
3,350
9,683
3,101
2,282
3,605
10,327
PP&E
Goodwill
Intangibles
Total assets
9,275
3,792
25,714
9,382
3,825
25,681
9,562
3,825
26,821
Short-term debt
Current liabilities
2,914
5,877
1,926
5,149
1,930
5,453
Long-term debt
Total liabilities
5,884
12,575
5,715
12,118
5,737
12,520
13,135
13,558
14,293
Net Income (including charges)
D&A
Other adjustments
Cash flow from operations
241
806
1,173
3,007
463
807
(255)
887
1,255
886
(208)
1,689
Capex
Free cash flow
Free cash flow / share
1,198
0
0.00
887
1,005
1.15
1,266
1,121
1.29
894
(5,142)
0.03
(855)
(1,310)
0.18
(1,266)
(289)
0.36
Cash flow from investing activities
Cash flow from financing activities
Share buybacks
Dividends
Ratio Analysis
FY09A FY10E FY11E FY12E
Reported sales growth
organic growth
volume change
price / mix change
FX
Other
(5.4%)
(5.4%)
-
10.0%
10.0%
-
9.9%
9.9%
-
9.6%
9.6%
-
Gross margin
SGA / sales
EBIT margin
EBITDA margin
Return on invested capital (ROIC)
22.6%
2.0%
5.8%
1.8%
-
26.8%
6.7%
10.2%
3.4%
-
27.2%
8.2%
11.7%
8.8%
-
27.2%
13.2%
9.1%
-
EBITDA growth
EBIT growth
Net income growth - operating
EPS growth - operating
(47.4%)
(71.5%)
-
91.5%
268.8%
92.4%
92.4%
26.9%
35.9%
171.0%
171.0%
23.0%
0.0%
Core operating cycle (days)
Working capital as % of sales
-
15.2%
14.6%
14.6%
4,554
3.2
20.8%
4,675
1.9
22.1%
4,565
1.5
20.8%
4,467
1.2
19.4%
89.4
19.9
0.8
0.0%
0.1%
-
46.5
10.9
1.1
4.7%
0.7%
-
17.2
8.6
1.0
5.2%
1.5%
-
15.4
7.0
0.9
11.0%
1.6%
-
Net debt
Net debt / EBITDA
Net debt / capital (book)
P/E
Enterprise value / EBITDA
Enterprise value / revenues
FCF yield
Dividend yield
Market Cap / cash earnings
CFO / FV
65
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Overweight
FEMSA
$54.92 (28 Oct 10)
FMX
www.femsa.com
Price Target: $59
End Date: Dec 2011
A consumer conglomerate
FEMSA (FMX) is a holding company with three major investments: (a) 100%
ownership of Oxxo, a chain of +8k convenience stores in Mexico that is among
the fastest-growing and most profitable retailers in the region. (b) 54%
ownership and full management control of Coca-Cola FEMSA (KOF), the
largest Coke bottler in Latin America. KOF sells Coke products in nine Latin
American countries – including Mexico and Brazil – for the equivalent of what
would be more than 1 out of 10 Coke products in the world. (c) 20% ownership
of Heineken, a leading global beer company.
At a very attractive discount to the sum of its parts
FMX’s valuation gets a deep discount for its corporate structure. We believe
this is unmerited and unsustainable. Both Heineken and KOF are listed, so
taking their current prices, we see Oxxo with an implied EV/EBITDA multiple
of only 7x. This is half the current valuation of Walmex, Mexico’s leading
retailer. Yet Oxxo has faster growth, better margins and more scale versus its
competitors. Furthermore, Oxxo keeps opening stores at a pace of almost 3 per
day. Working capital of the business is a beauty – all they sell is cash, all they
buy is on credit. Payback for store investments is ~ 3 years.
From a net cash position, FMX balance sheet is getting even stronger
We expect dividends coming from Heineken to increase, as well as those
coming from KOF. On top of that, Oxxo should continue to grow and expand
its margins regardless of the economic scenario.
Latin America
Alan Alanis AC
(1-212) 622-3697
[email protected]
Price Performance
56
52
$ 48
44
40
Oct-09
Jan-10
Apr-10
Jul-10
1M
3M
Oct-10
Source: Bloomberg.
Performance
Absolute
3%
13%
12M
22%
Source: Bloomberg.
Catalysts include higher dividends and continued growth
FMX (ex-KOF) is already sitting on +$500mn of net cash. So absent any large
acquisition, shareholders of FMX have material upside risk on dividends
(currently 2% for ’11e). Also, we see room for multiple expansion if KOF
resumes double-digit growth next year.
Our PT for FMX is based on the PT of Heineken (rated N by JPM European
beverages analyst Mike Gibbs), our Dec 11 PT of $79 for KOF, and a 14x ’11e
EBITDA for Oxxo (similar to Walmex’s historical average). We apply a 10%
holdco discount to obtain a Dec ’11 PT of $59. Key risks are macro,
particularly around Fx. Also, volatility of Heineken and KOF stock prices.
Overweight
Company Data
Price ($)
Date Of Price
52-week Range ($)
Mkt Cap ($ mn)
Fiscal Year End
Shares O/S (mn)
Price Target ($)
Price Target End
Date
66
FEMSA (FMX;FMX US)
52.92
28 Oct 10
55.50 39.74
18,935.97
Dec
358
59.00
31 Dec 11
EPS Reported FY ($)
P/E Majority FY
EBITDA FY ($ mn)
EV/EBITDA FY
2009A
2.11
26.0
2,736
7.0
2010E
2.90
18.9
2,462
8.8
2011E
3.38
16.2
2,529
7.8
2012E
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
FEMSA: Summary of Financials
Income Statement
FY09A
Revenues
Cost of goods sold
SG&A
Operating Profit (EBIT)
EBIT Margin
Depreciation
EBITDA
EBITDA margin
Net Interest
FX Gains (Losses)
Monetary gains (losses)
EBT
Taxes
Minority interest
Extraordinary
Net income
14,506 14,266 14,826
(7,816) (8,170) (8,662)
(4,695) (4,195) (4,157)
1,995
1,901 2,006
13.8% 13.3% 13.5%
741
560
523
2,736
2,462 2,529
18.9% 17.3% 17.1%
1,403
1,850 1,946
(441)
(443) (490)
962
1,408 1,456
Number of ADRs (million)
EPADS
358
2.11
FY10E FY11E FY12E Balance Sheet
358
2.90
358
3.38
Revenue growth
EBITDA growth
Gross Profit growth
(0.9%) (1.7%)
(1.7%) (10.0%)
(1.2%) (8.9%)
3.9%
2.7%
1.1%
FY09A
Capex
Free cash flow
(1,012)
217
908
(713)
(64)
1,191
(680)
(120)
1,180
Cash from Operating Activities
1,920
1,904
1,859
Cash from Investing Activities
(1,012)
(713)
(680)
Cash from Financing Activities
302
(1,058)
(495)
Net change in cash
Net cash at Beginning
Net Cash at End
1,210
697
1,907
133
1,357
1,489
685
2,383
3,068
Dividends
Capex/depreciation
CAPEX/sales
Working capital
(124)
12.9%
1.4
7.0%
287
2.0%
(200) (294)
14.2% 20.2%
1.3
1.3
5.0% 4.6%
1,945 2,979
13.6% 20.1%
-
Cash
Accounts receivable
Inventories
Net PP&E
Goodwill
Other assets
Total assets
Short-term debt
Accounts payable
Long-term debt
Pension plan and seniority premium
Other liabilities
Total liabilities
Minority interest
- Liabilities + Equity
-
- Net debt
- Net Debt/Equity
Net Debt/Capital
Net Debt/Annualized EBITDA
FY10E FY11E FY12E Valuation, Macro
- EV/EBITDA
- P/E
- P/BV
P/S
- FCF yield
Dividend yield
- ROE
Net income margin
Net revenue/Assets
Assets/Equity
- ROIC
-
FY09A FY10E
FY11E FY12E
1,350 2,475
901
443
1,137
720
366
393
5,326 3,211
1,679
737
16,160 11,964
3,349
471
812
425
3,457
1,003
13,354
-
678
207
2,777 1,867
13
13
2,585 1,520
257
133
13
13
7,293 5,081
8,867 11,701
16,160 16,782
178
1,886
14
1,300
131
14
4,781
13,213
17,994
-
1,912 (749) (1,870)
21.6% (6.4%) (14.2%)
15.8% (5.6%) (12.7%)
0.7
(0.3)
(0.7)
-
FY09A FY10E
7.0
20.8
2.1
1.3
5.0%
FY11E FY12E
8.8
13.6
1.6
1.3
6.5%
7.8
11.9
1.4
1.2
6.5%
10.7
-
0.6% 1.0%
10.8% 12.0%
6.6% 9.9%
0.9
1.2
1.8
1.0
12.8% 13.3%
1.5%
11.0%
9.8%
1.1
1.0
15.5%
-
DCF Assumptions
WACC
Perpetual Growth
Cost of equity
Cost of debt
67
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Minerva
Neutral
BEEF3.SA
www.minerva.com
Price Target: R$8.10
R$6.14 (28 Oct 10)
End Date: Dec 2011
A sophisticated Brazilian exporter of beef
Minerva (BEEF3) is the 3rd-largest beef producer in Brazil, with a slaughtering
capacity of ~9k head/day in 10e. It’s a pure beef player that gets 70% of its
revenues from exports. Minerva’s main products are fresh and processed beef,
but the company is also Brazil’s largest live cattle exporter.
Meat packers are seeing profit margin compression
International beef prices are increasing, but not at the same pace as rising cattle
prices. In fact, Brazilian cattle prices are now more expensive than in the US
and Australia, the other two big players in the international beef market. Also,
we don’t see much space for beef producers to increase prices domestically to
protect margins as the beef price premium over chicken is above the historical
average. Substitution toward poultry may accelerate. Hence we have a bearish
view on the overall beef sector. This industry outlook leads us to believe that
BEEF3 should be a stock to avoid in ’11, despite its professional and
sophisticated management team.
Volatility of earnings may continue
Minerva’s involvement in complex financial instruments such as derivative
hedges clouds earning estimates. Thus, consensus EPS estimates vary by orders
of magnitude. At +4x net debt to EBITDA, Minerva is among the most levered
companies in LatAm staples. We see limited potential for earnings upgrades, as
these are likely to remain volatile for this producer of meat as a commodity
(low-margin business).
Latin America
Alan Alanis AC
(1-212) 622-3697
[email protected]
Price Performance
7.5
R$
6.5
5.5
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Performance
Absolute (%)
1M
3M
12M
-11%
-10%
1%
Source: Bloomberg.
It may take many consistent (good) quarters for rerating up
At 6x ’11e EV/EBITDA and 9x ’11e P/E Minerva looks inexpensive (thus our
Neutral rating); but it is likely to remain that way, in our view. There is
downside risk to its margins due to continued high cattle prices. Its lack of
operating leverage gives limited scope for rerating.
Dec. ’11 PT offers nice upside, but with high risks – Remain N
Using perpetuity growth of 3% and a WACC of 10.7%, our DCF model
indicates a Dec 11 PT of R$8.1 for BEEF3, implying ~30% upside. This
apparent high return poses high risks, thus our relative skepticism.
Furthermore, outstanding warrants (BEEF11) likely to be exercised would be
dilutive. Add to macro and Fx risks, other risks inherent to the meat packing
industry, such as changes in trade restrictions and further sector consolidation.
Neutral
Company Data
Price (R$)
Date Of Price
52-week Range (R$)
Mkt Cap (R$ mn)
Fiscal Year End
Shares O/S (mn)
Price Target (R$)
Price Target End Date
68
Minerva SA (BEEF3.SA;BEEF3 BZ)
6.14
28 Oct 10
7.92 - 5.31
649.23
Dec
106
8.10
31 Dec 11
EBITDA FY (R$ mn)
Revenues FY (R$ mn)
EV/EBITDA FY
P/E FY
2009A
182
2,602
9.4
6.2
1.00
2010E
238
3,435
7.2
NM
(0.08)
2011E
282
4,011
6.1
9.0
0.69
2012E
324
4,544
7.4
0.83
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Minerva SA: Summary of Financials
Revenues
Cost of goods sold
Gross profit
FY09A FY10E FY11E
2,602
(2,132)
470
3,435
(2,769)
666
4,011
(3,233)
778
(329)
141
(467)
199
(536)
242
LFL EBITDA
182
238
282
Interest, net
(68)
(186)
(100)
73
1
123
7
10.0%
0
0.0%
(30)
24.0%
-
-
-
SG&A
LFL Operating income
Pretax income
Equity income
Income taxes
Tax rate
-
-
-
81
1
94
105
135
EPS (LFL)
1.00
1.00
(0.08)
0.16
744
(611)
133
888
(711)
177
893
(718)
175
909
(729)
180
(92)
41
(124)
53
(124)
51
(127)
54
54
62
60
63
Interest, net
(65)
(67)
(30)
(24)
Pretax income
(23)
(17)
17
25
Equity income
Income taxes
Tax rate
0
0.0%
0
0.0%
0
0.0%
0
0.0%
-
-
-
-
Operating income
EBITDA
-
-
-
-
(23)
(17)
17
25
135
105
106
135
135
0.69
0.57
EPS (LFL)
(0.22)
0.09
(0.16)
0.12
0.12
0.15
0.18
0.11
FY09A FY10E FY11E
424
199
270
1,216
682
189
281
1,553
583
216
320
1,577
PP&E
Goodwill
Intangibles
Total assets
765
2,073
849
2,486
909
2,683
-
-
-
1,546
1,800
1,825
527
686
858
Net Income (including charges)
D&A
Other adjustments
81
41
(15)
153
1
39
(69)
0
93
40
(79)
65
Capex
Free cash flow
(138)
-
(123)
-
(100)
-
Cash flow from investing activities
Cash flow from financing activities
Share buybacks
Dividends
(138)
(33)
0.00
(122)
380
0.00
(100)
(63)
-
Long-term debt
Total liabilities
1Q10A 2Q10A 3Q10E 4Q10E
Accounts receivable
Inventories
Current assets
Short-term debt
Current liabilities
Revenues
Cost of revenues
Gross profit
Ratio Analysis
Reported sales growth
organic growth
volume change
price / mix change
FX
Other
22.7%
-
32.0%
-
16.8%
-
13.3%
-
Gross margin
SGA / sales
EBIT margin
EBITDA margin
Return on invested capital (ROIC)
18.1%
5.4%
7.0%
15.4%
4.9%
19.4%
5.8%
6.9%
0.1%
6.2%
19.4%
6.0%
7.0%
10.8%
6.6%
19.5%
6.1%
7.1%
11.8%
-
EBITDA growth
EBIT growth
Net income growth - operating
18.9%
11.3%
-
30.5%
40.9%
-
18.6%
21.7%
-
14.9%
15.2%
21.0%
Core operating cycle (days)
Working capital as % of sales
21.1%
18.0%
17.4%
17.2%
799
-
761
-
820
-
877
-
6.1
9.4
0.7
0.0%
-
NM
7.2
0.5
0.0%
-
8.8
6.1
0.4
-
7.3
0.4
-
Net debt
Net debt / EBITDA
Net debt / capital (book)
P/E
Enterprise value / revenues
FCF yield
Dividend yield
Market Cap / cash earnings
CFO / FV
69
November 2010
Recommendations
PDG is the top pick among the BZ HB as its earnings
have upside potential on the back of the Agre acquisition.
Geo is our top pick among the MX HB given its strong
growth and potential improvement in margins. We
recommend that investors avoid Cyrela given current
uncertainties about future results.
70
300
BZ HB index
17.0
Selic
250
15.0
200
13.0
150
11.0
100
9.0
-
7.0
May-06
Aug-06
Nov-06
Feb-07
May-07
Aug-07
Oct-07
Feb-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Aug-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
50
Source: J.P. Morgan estimates and Bloomberg.
Working capital for MX continues to deteriorate
Adj. Cash Conversion Cycle - In Days
Geo
500
Homex
Urbi
400
300
200
100
0
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
Source: Company reports.
BZ HB vs IBOV
130
Ibov
BZ HB
120
110
100
90
80
Oct-10
Sep-10
Aug-10
Jul-10
Jun-10
May-10
Mar-10
Apr-10
70
Feb-10
Source: J.P. Morgan estimates and Bloomberg.
MX HB vs Bolsa
120
100
80
60
40
Jul-10
Source: Bloomberg and J.P. Morgan estimates.
* Registered/qualified as a research analyst under NYSE/NASD rules.
Oct-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
20
Oct-07
We are not expecting multiple expansion in Brazil or in
Mexico as in both countries companies are trading in
line with their 12-month averages (around 10.0-11.0x),
so earnings growth will drive the upside, in our view.
However, we believe investors could pay a higher
multiple in Mexico if the economic outlook improves
and in Brazil if companies start to generate cash.
Regarding growth, we assume a conservative view for all
the companies.
Selic should not have a negative impact on Brazilian homebuilders
Jul-07
Despite the positive outlook for all income segments in
Brazil, given attractive mortgage conditions and pent-up
demand, the companies have been increasing their
exposure to the lower-income segment to benefit from
the government’s housing program and its shorter cycle.
In Mexico, the sector is still recovering from the credit
crisis, which reduced mortgage availability, especially
from Fovissste and banks (which are focused on the
middle-income and residential segments). As a result,
companies remain focused on the AEL segment and are
in fact increasing their exposure further due to its
resilient characteristics.
Bloomberg JPMA HUERTA <GO>
Jan-10
We continue to prefer the Brazilian Homebuilders vs the
Mexican names as we expect Brazil’s macroeconomic
scenario to continue supporting the sector on the back of
positive government participation and a robust growth
outlook. Further, we believe the expected tightening in
the Selic that could begin in 2011 represents only a
marginal adjustment to government monetary policy and
is already priced in. Despite cost pressures in Brazil,
companies have been able to maintain margins given a
positive outlook on housing prices. On the other hand, in
Mexico companies are in a transition phase, moving
more toward the AEL segment and also entering the
informal sector (self employed and informal jobs) where
there is high pent-up demand but not much mortgage
availability yet. Moreover, the focus is now on free cash
flow generation, which is still at question given its WC
demands. Revenue growth should remain in the low
double digits in the near term.
(52 81) 8152-8720
[email protected]
J.P. Morgan Casa de Bolsa, S.A de C.V.,
J.P. Morgan Grupo Financiero.P. Morgan Securities LLC
Apr-07
Homebuilders
Adrian Huerta AC *
Jan-07
Ben Laidler
(1-212) 622-5252
[email protected]
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Top picks
PDG
Geo
Stocks to avoid
Cyrela
P/E (x)
10E
Mkt cap
(US$MM)
Price
Code
Rating
R$21.18
Ps39.31
PDGR3 BZ
GEOB MM
OW
OW
6,874
1,747
14.5
12.2
R$22.80
CYRE3 BZ
UW
5,659
12.2
EPS
10E
11E
Div. yield
11E (%)
ROE
11E (%)
9.4
9.7
1.46
3.23
2.26
4.08
-
19.2%
22.0%
9.9
1.88
2.31
-
20.1%
11E
Homebuilders absolute and relative to MSCI LatAm
Homebuilders EPS integer
170
800
Absolute
700
2011
160
150
600
500
140
400
130
300
120
200
110
100
100
0
2010
90
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
Feb-09
Jul-09
Dec-09
May -10
Homebuilders 12 mth fwd PE
Homebuilders trailing PB
18
Oct-10
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
15
12
9
6
3
95
97
98
99
00
PE
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
95
97
98
99
00
PB
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
71
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Corporacion Geo
Overweight
GEOB.MX
www.corporaciongeo.com
Price Target: Ps52
Ps39.31 (28 Oct 10)
End Date: Dec 2011
Company description
Geo is the largest homebuilder in Mexico, selling more than 56k units per year
and focused mainly on lower-income housing, with revenues of more than
Ps18 bn in 2009. The company has operations in 17 states and 56 cities.
Investment case
Geo is our top pick among the MX HB given its strong top-line growth of
~15% and its potential to improve operating margins. Also, the company has
made significant progress on its debt profile and maintains the lowest net
investment in land, which has helped it to post the highest ROEs among its
peers at more than 20%.
In the 1H10, the company grew more than expected, with revenues +14% yoy
vs 8-11% guidance. Further, Geo released a 5-year target growth plan recently,
and it expects to build 100K homes by 2015 (12.5% CAGR) and to expand
gross margins by 3pp and SG&A by 1pp; however, in our estimates we are
only incorporating a 1pp increase in gross margins to be conservative.
Mexico
Homebuilders
Adrian E Huerta AC *
(52 81) 8152-8720
[email protected]
J.P. Morgan Grupo Financiero
Price Performance
41
38
Ps
35
32
Oct-09
Jan-10
Performance
We ate Geo Overweight with a Dec-11 price target of Ps52, which is the
average of our DCF-based valuation and our GGM-based valuation. The COE
of 10.6% is based on a beta of 1.2, country risk of 1.6%, and a risk-free rate of
3.0%, resulting in a WACC of 10.9%. We see lower-than-expected growth in
revenues as the main downside risk. The company needs to generate significant
FCF in 2H10 in order to be neutral to slightly positive in FCF for the year.
Negative FCF for the year likely will be taken negatively by investors.
Source: Bloomberg.
Mkt Cap (Ps mn)
Fiscal Year End
Shares O/S (mn)
Price Target (Ps)
Price Target End
Date
72
39.31
28 Oct 10
44.60 30.75
21,084.15
Dec
536
52.00
31 Dec 11
Corporacion Geo (GEOB.MX;GEOB MM)
2008A
EPS Reported FY (Ps)
2.75
Bloomberg EPS FY (Ps)
3.10
EBITDA FY (Ps mn)
4,119
Revenues FY (Ps mn)
17,453
Jul-10
Oct-10
Source: Bloomberg.
Despite the company’s robust growth plans, it trades at a discount to peers on
P/E basis, given a lower net margin. This should change as Geo executes its
growth plans, improves margins and starts to generate positive FCF.
Company Data
Price (Ps)
Date Of Price
52-week Range (Ps)
Apr-10
1M
3M
Absolute (%)
8
15
12M
9
Relative (%)
2
8
-11
2009A
2.85
3.25
4,401
19,211
2010E
3.23
3.04
4,515
19,821
Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg
consensus estimates.
2011E
4.08
3.58
5,201
22,361
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Corporacion Geo: Summary of Financials
FY08A
FY09A
Net Revenues
Cost of goods sold
Gross profit
Gross margin
SG&A
Other Operating Expenses
EBIT
Depreciation
EBITDA
EBITDA margin, %
Financial income
Financial expense
Other Nonoperating income
Equity income
EBT
Taxes
Minority interest
Extraordinary
Net income
Net income margin
EPS
17,453
(11,662)
5,791
33.2%
(1,672)
2,914
(277)
4,119
23.6%
102
(614)
(7)
2,293
(731)
(89)
1,473
8.4%
2.75
Net Revenue growth
EBITDA growth
Net income growth
FCF growth
16.5%
10.1%
15.8%
6.8%
1.7%
3.8%
(75.2%) (692.1%)
FY10E
FY11E Balance Sheet
19,211 19,821 22,361 Cash
(13,135) (13,442) (15,053) Accounts receivable
6,076
6,379
7,308 Inventories
31.6%
32.2%
32.7%
Land bank
(1,676) (1,864) (2,107)
Real Estate & Construction
- Others current assets
3,306
3,286
3,893 Net PP&E
(276)
(456)
(503) Other assets
4,401
4,515
5,201 Total Assets
22.9%
22.8%
23.3% ST Loans
124
81
134 Accounts Payables
(667)
(660)
(628)
Suppliers
(70)
(60)
(70)
Land Payables
- Other current liabilities
2,620
2,647
3,329 LT Debt
(963)
(794)
(999) Deffered taxes
(107)
(119)
(140) Other non current liabilities
- Total Liabilities
1,529
1,734
2,191 Minority Interests
8.0%
8.7%
9.8% Shareholders Equity
2.85
3.23
4.08 Liabilities and Equity
3.2%
2.6%
13.4%
(8.4%)
12.8%
15.2%
26.4%
2.1%
Net debt
Net Debt/Equity
Debt/Equity
NetDebt/EBITDA
FY08A
FY09A
FY10E
Working Capital changes
FCFF-firm
Dividends
(3,763)
(247)
-
(2,292)
1,461
-
(2,285)
1,337
-
Working capital
Units
Avg. price/Unit (Ps '000)
15,996
91.7%
51,879
336
18,288
95.2%
56,559
340
19,214
96.9%
57,443
345
Units chg
Avg.price/Unit chg
13%
3%
9%
1%
2%
2%
Days receivable
Days inventory
adj. (excl. land)
Days payable
adj. (excl. land)
Cash Conversion Cycle
Adj. Cash Conversion Cycle
175
327
176
88
63
414
287
188
340
204
107
92
421
300
15
610
471
111
92
515
394
(2,278) EV/EBITDA
1,365
land adj.
- P/E
land adj.
P/BV
P/CE
21,492
96.1% FCF yield
62,424 Dividend yield
358 Capex/Revenues
Cash Earnings
9% Coverage EBIT/Interest)
4%
ROE
15 ROIC
614 Shares
474
115 WACC
92 Perpetual Growth
514 Cost of equity
398 Cost of debt
2,578
8,346
10,462
4,852
5,610
731
1,717
919
25,141
4,523
2,812
2,011
801
1,775
2,921
2735.8
1,775
14,821
942
10,320
25,141
3,393
9,877
12,247
4,901
7,346
861
2,010
1,381
30,227
2,660
3,836
3,298
538
1,610
5,587
3616.6
1,610
18,609
1,749
11,618
30,227
4,474
815
22,474
5,131
17,343
1,296
2,050
747
32,382
2,774
4,075
3,375
699
3,055
6,473
4013.6
3,055
21,690
1,487
10,339
32,029
4,252
919
25,307
5,742
19,566
1,296
2,106
747
35,233
2,774
4,735
3,780
955
3,055
6,473
4013.6
3,055
22,350
1,487
12,530
34,880
4,866
52%
79%
118%
4,853
49%
84%
110%
4,773
54%
104%
106%
4,995
45%
84%
96%
6.0
6.0
14.5
2.2
7.9
5.4
5.4
14.0
2.1
7.3
5.3
5.3
12.4
12.0
2.4
8.0
4.7
4.7
9.8
9.5
1.9
7.7
(1.2%)
0.0%
3.3%
2,651
6.7
7.0%
0.0%
3.0%
2,865
6.6
6.4%
0.0%
2.5%
2,587
6.8
6.6%
0.0%
2.5%
2,694
8.3
17.1% 15.9% 18.5% 22.0%
21.3% 20.1% 18.8% 16.9%
536
536
536
536
10.9%
4.0%
10.6%
11.2%
-
Note: Ps in millions (except per-share data). Fiscal year ends Dec.
73
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
PDG Realty
Overweight
PDGR3.SA
www.pdgrealty.com.br
Price Target: R$30
R$21.18 (28 Oct 10)
End Date: Dec 2011
Company description
PDG became the largest market cap (around USD6.9bn) company among the
BZ HB after acquiring AGRE early in the year, thereby gaining exposure to the
mid- and high-income segments and now having exposure to all income
segments. The company is geographically diversified, has one of the best
management teams among its peers, with a strong focus on cash flows and with
management interest aligned with minority shareholders.
Investment case
We believe that the recent acquisition of AGRE will provide room for stronger
top-line growth versus peers’ and will allow the company to deliver one of the
highest operating margins in the industry. PDG also offers opportunities to
improve AGRE’s lower ROEs through better operating efficiencies and lower
financial expenses.
We believe that the company offers one of the highest potential upsides to
earnings given the lack of track record for the combined company as PDG has
only reported one quarter consolidating AGRE. We believe investors are still
conservative on growth and margin assumptions for PDG.
Currently PDG is trading at 9.4 P/E 11E, in line with Cyrela and Rossi and at a
discount to MRV; however, we believe that if margins improve and growth
accelerates, it could trade at least in line with MRV’s multiples.
We rate PDG Overweight with a Dec-11 price target of R$30, which is the
average of our DCF-based valuation and GGM-based valuation. The COE of
11.6% used is based on a beta of 1.3x, country risk of 2.1%, and a risk-free rate
of 3.0%, resulting in a WACC of 10.5%. The main risks to our positive view
are lower-than-expected synergies from the AGRE acquisition impacting our
forecasts on growth and margins resulting in lower-than-expected results.
Given its significant exposure to lower income, through Goldfarb, PDG can
also be impacted by changes in MCMV policy and CEF execution capabilities.
Brazil
Homebuilders
Adrian E Huerta AC *
(52 81) 8152-8720
[email protected]
Price Performance
24
20
R$
16
12
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Performance
Absolute (%)
1M
3M
12M
2
15
51
10
34
Relative (%)
Source: Bloomberg.
PDG Realty (PDGR3.SA;PDGR3 BZ)
Company Data
Price (R$)
Date Of Price
52-week Range (R$)
Mkt Cap (R$ mn)
Fiscal Year End
Shares O/S (mn)
Price Target (R$)
Price Target End
Date
74
21.18
28 Oct 10
22.73 12.32
11,675.24
Dec
551
30.00
31 Dec 11
EBITDA FY (R$ mn)
P/E FY
Revenues FY (R$ mn)
Bloomberg EPS FY (R$)
2009A
0.87
417
24.4
1,984
0.93
2010E
1.46
1,366
14.5
5,332
1.50
2011E
2.26
1,878
9.4
7,498
2.19
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
PDG Realty: Summary of Financials
FY09A
FY10E
FY11E
FY12E Balance Sheet
Net Revenues
Cost of goods sold
Gross profit
Gross margin
SG&A
Selling expenses
G&A
Depreciation
EBITDA
EBITDA margin, %
Financial income
Financial expense
Equity income
EBT
Taxes
Minority interest
Extraordinary
Net income
Net income margin
EPS
1,984
(1,294)
690
29.0%
(268)
(129)
(140)
(5)
417
21.0%
79
(27)
21
371
(37)
4
0
338
17.0%
0.87
5,332
(3,253)
2,080
33.0%
(713)
(316)
(397)
(43)
1,366
25.6%
230
(210)
0
1,023
(199)
(21)
0
803
15.1%
1.46
7,498
(4,724)
2,774
32.0%
(886)
(424)
(462)
(60)
1,878
25.0%
203
(106)
0
1,540
(265)
(32)
0
1,244
16.6%
2.26
7,883
(4,966)
2,917
32.0%
(937)
(451)
(486)
(63)
1,990
25.2%
239
(111)
0
1,661
(278)
(35)
0
1,348
17.1%
2.45
Net Revenue growth
EBITDA growth
Net income growth
FCF growth
61.1% 168.8%
40.6%
62.7% 227.7%
37.5%
85.3% 137.5%
54.8%
27.2%
1.3% (64.6%)
5.1%
6.0%
8.4%
(514.6%)
FY09A
FY10E
FY11E
FCFF-firm
Dividends
(1,439)
(1,048)
13.5%
(2,201)
(1,062)
10.5%
(1,952)
(376)
16.1%
(113)
1,559
23.1%
Working capital
Launches (Co's share)
Pre-sales (Co's share)
Units
Price/M2
3,399
8,692
171.4% 163.0%
3,027
7,000
2,670
6,577
32,129 58,333
158
150
10,644
142.0%
8,400
7,712
67,308
156
10,757
136.5%
9,240
8,201
71,191
162
177
10%
6%
6%
4%
Price/Unit
Launches chg
Pre-sales chg
Units chg
Price/M2 chg
Days receivable
Days inventory
Days payable
159
16%
47%
14%
(29%)
165
131%
146%
82%
(5%)
172
20%
17%
15%
4%
462
473
147
430
427
96
380
340
77
Cash
Accounts receivable
Inventories
Land bank
Others current assets
Net PP&E
Other assets
Total Assets
ST Loans
Accounts Payables
Suppliers
Land Payables
LT Debt
Deffered taxes
Other liabilities
Total Liabilities
Minority Interests
Shareholders Equity
Liabilities and Equity
Net debt
Net Debt/Equity
Debt/Equity
NetDebt/EBITDA
EV/EBITDA
P/E
P/BV
P/CE
FCF yield
Dividend yield
Capex/Revenues
Inventory/Revenues
Assets/Equity
Coverage (EBIT/Interest)
ROE
ROIC
Shares
WACC
Perpetual Growth
360 Cost of equity
340 Cost of debt
77
FY09A
FY10E
FY11E
FY12E
1,099
2,509
1,678
1,010
668
177
82
308
6,103
543
788
640
148
165
963
87.8
165
3,142
20
2,961
6,103
723
6,282
3,805
2,205
1,600
617
86
629
13,295
1,833
1,394
292
1,102
362
1,973
51.6
362
7,241
101
6,054
13,295
268
7,806
4,406
2,315
2,091
617
64
629
14,944
2,025
1,568
411
1,157
362
2,181
51.6
362
7,815
133
7,129
14,944
1,250
7,775
4,629
2,431
2,199
617
40
629
16,094
2,025
1,647
432
1,215
362
2,181
51.6
362
7,894
168
8,200
16,094
407
14%
51%
98%
3,083
52%
64%
226%
3,938
56%
60%
210%
2,956
37%
52%
149%
FY09A
FY10E
FY11E
FY12E
15.6
24.4
1.5
-
6.6
14.5
1.0
-
5.3
9.4
0.9
-
4.5
8.7
0.8
-
0.0%
0.0%
0.0%
0.0%
0.6%
0.7%
1.7%
2.7%
(0.6%) (0.5%) (0.5%) (0.5%)
84.6% 71.4% 58.8% 58.7%
207.5% 223.3% 213.6% 200.4%
15.3%
12.4%
390
15.0%
12.8%
551
19.2%
15.2%
551
17.9%
14.6%
551
10.5%
3.0%
11.6%
8.6%
Source: Company reports and JPMorgan estimates.
75
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Cyrela Brazil Realty
Underweight
CYRE3.SA
www.cyrela.com.br
Price Target: R$29
End Date: Dec 2011
Company description
Cyrela is the second-largest homebuilder in Brazil in market cap and is
considered a premium player in the sector given its long track record. The
company is a diversified player, acting on the lower-income segment via its
“Living” brand, which launched more than 16k units in 2009, representing 40%
of its total launches. Cyrela is present in 66 cities and 16 states, having one of
best geographic diversifications, with a land bank of R$34.9bn in PSV.
Investment case
It is our stock to avoid given the lack of good results in 1H10 as the company
launched only 24% of full-year guidance vs 40-50% from peers, and also due
to weakening margins in recent quarters on the back of higher-than-expected
costs.
We see limited room for positive earnings surprise in the short term, and given
its increasing focus on the lower-income segment, margins are not likely to
improve from the levels seen in recent quarters. It is important to flag that in
the last 3 quarters Cyrela reported higher-than-expected project costs.
Despite its weak results in 1H10 Cyrela is trading in line with peers at 9.9x P/E
11E and 2.3x P/BV. We believe these valuations already reflect a potential
recovery in 2H10 and 2011 results.
We rate Cyrela Underweight with a Dec-11 price target of R$29, which is the
average of our DCF-based valuation and GGM-based valuation. The COE of
11.6% used is based on a beta of 1.30, country risk of 2.1%, and a risk-free rate
of 3.0%, resulting in a WACC of 10.3%. The main upside risks to our price
target and rating include better-than-expected margins as we are assuming a
conservative approach on the name given the weak results in 2Q. We are also
not incorporating company launch and presale guidance for 2012, which, if it
follows plan, could result in higher-than-expected growth in the coming years.
Company Data
Price (R$)
Date Of Price
52-week Range (R$)
Mkt Cap (R$ mn)
Fiscal Year End
Shares O/S (mn)
Price Target (R$)
Price Target End
Date
76
22.80
28 Oct 10
26.15 16.58
9,642.37
Dec
423
29.00
31 Dec 11
R$22.80 (28 Oct 10)
Cyrela Brazil Realty (CYRE3.SA;CYRE3 BZ)
2009A
1.73
EBITDA FY (R$ mn)
921
P/E FY
13.2
Revenues FY (R$ mn)
4,088
1.70
Brazil
Homebuilders
Adrian E HuertaAC
(52 81) 8152-8720
[email protected]
Price Performance
24
R$
20
16
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Performance
1M
3M
Absolute (%)
-8
-2
12M
7
Relative (%)
-9
-7
-10
Source: Bloomberg.
2010E
1.88
1,101
12.2
5,215
1.81
2011E
2.31
1,374
9.9
6,150
2.24
2012E
2.56
1,449
8.9
6,461
2.83
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Cyrela Brazil Realty: Summary of Financials
FY09A
FY10E
FY11E
FY12E Balance Sheet
FY09A
FY10E
FY11E
FY12E
Net Revenues
Cost of goods sold
Gross profit
Gross margin
SG&A
Selling expenses
G&A
Depreciation
EBITDA
EBITDA margin, %
Financial income
Financial expense
Equity income
EBT
Taxes
Minority interest
Extraordinary
Net income
Net income margin
EPS
4,088
(2,639)
1,449
34.5%
(572)
(291)
(281)
(36)
921
22.5%
211
(225)
111
941
(73)
(98)
0
729
17.8%
1.73
5,215
(3,384)
1,830
33.8%
(763)
(412)
(351)
(52)
1,101
21.1%
303
(237)
5
1,054
(130)
(104)
0
793
15.2%
1.88
6,150
(3,966)
2,183
34.0%
(875)
(461)
(414)
(61)
1,374
22.3%
347
(265)
5
1,308
(147)
(123)
0
975
15.9%
2.31
6,461
(4,168)
2,294
33.5%
(914)
(485)
(430)
(65)
1,449
22.4%
394
(224)
5
1,431
(154)
(129)
0
1,081
16.7%
2.56
Cash
Accounts receivable
Inventories
Land bank
Others current assets
Net PP&E
Other assets
Total Assets
ST Loans
Accounts Payables
Suppliers
Land Payables
LT Debt
Deffered taxes
Other liabilities
Total Liabilities
Minority Interests
Shareholders Equity
Liabilities and Equity
1,666
4,917
3,362
2,256
1,106
293
241
60
10,551
392
306
292
306
1,948
2,231
177.5
1,948
6,445
253
4,105
10,551
1,002
6,429
3,856
2,579
1,276
402
276
72
12,049
537
464
357
464
2,302
2,337
194.9
2,302
7,239
339
4,810
12,049
1,882
6,739
4,055
2,708
1,346
402
282
72
13,444
574
542
421
542
2,394
2,499
204.7
2,394
7,735
462
5,710
13,444
3,036
6,550
4,258
2,844
1,415
402
288
72
14,620
574
569
443
569
2,489
2,499
214.9
2,489
7,944
591
6,676
14,620
Net Revenue growth
EBITDA growth
Net income growth
FCF growth
43.6%
27.6%
98.4%
19.6%
162.7%
8.8%
358.5% (62.9%)
17.9%
24.8%
22.9%
(258.4%)
5.1%
5.5%
10.8%
56.3%
Net debt
Net Debt/Equity
Debt/Equity
NetDebt/EBITDA
957
25%
68%
104%
1,871
42%
64%
170%
1,192
23%
59%
87%
37
1%
51%
3%
FY09A
FY10E
FY11E
FY09A
FY10E
FY11E
FY12E
FCFF-firm
Dividends
(2,072)
(1,413)
0
0.0%
(1,429)
(524)
0
0.0%
(276)
830
0
0.0%
12.5
13.5
0.9
-
11.2
12.4
0.8
-
8.4
10.1
0.7
-
7.1
9.1
0.6
-
Working capital
Launches (Co's share)
Pre-sales (Co's share)
Units
Price/M2
7,973
195.0%
4,465
4,088
26,417
0
9,820
188.3%
5,450
5,032
40,370
0
Price/Unit
Launches chg
Pre-sales chg
Units chg
Price/M2 chg
207
18%
18%
-
195
22%
23%
-
203
15%
14%
-
Days receivable
Days inventory
Days payable
439
465
227
450
416
197
400
373
179
130
1,297
0
0.0%
EV/EBITDA
P/E
P/BV
P/CE
10,252 10,239 FCF yield
166.7% 158.5% Dividend yield
6,268
6,894 Capex/Revenues
5,720
6,274 Inventory/Revenues
44,640 47,216 Assets/Equity
0
0 Coverage (EBIT/Interest)
209
10%
10%
-
ROE
ROIC
Shares
WACC
Perpetual Growth
370 Cost of equity
373 Cost of debt
178
(13.1%) (4.9%)
7.7% 12.0%
0.0%
0.0%
0.0%
0.0%
(3.9%) (1.1%) (1.1%) (1.1%)
82.2% 73.9% 65.9% 65.9%
273.8% 269.5% 256.2% 240.3%
3.7
4.2
4.6
5.6
24.4%
11.3%
422
19.1%
11.6%
423
20.1%
12.4%
423
19.1%
11.8%
423
10.3%
3.0%
11.6%
8.1%
77
November 2010
Metals & Mining
Key sector dynamics
The key themes for the metals and mining sector in 2011
should be (1) the outlook for China’s commodity
demand, (2) the pace of global economic growth, (3)
industry fundamentals, and (4) government regulations.
China remains the center stage of global commodity
demand and should be strong in 2011 (partially
offsetting weakness in the developed world) – it should
announce its 12th 5-year plan in 1Q11, which our China
economist believes will re-emphasize its commitment to
urbanization and infrastructure development. The
outlook for different subsectors appears to be mixed, and
we believe iron ore and copper will be outperformers in
2011 as their supply remains tight relative to steel, which
should continue to be in gross overcapacity. Finally,
government regulations should be a source of noise,
especially for the miners, but further clarity should ease
concerns.
Given J.P. Morgan expects the global economy to grow
at 3.0% in 2011, the sector should continue to build on
the growth shown in 2010. However, we highlight two
key points: (1) Emerging economies should grow at a
faster rate compared to the developed ones (5.8% vs.
1.9%), led by China (9.0%); and (2) The growth should
be relatively moderate compared to 2010e.
We believe the main drivers of returns will be both
sector/stock rerating/derating as well as changing
earnings expectations for the different subsectors. We
highlight steel as a sector in whixh we see risks of
downward revision of earnings, and a potential derating
as the industry could stabilize at a lower normal given
slower recovery in demand as well as weaker margins.
Iron ore and copper, on the other hand, should benefit
from both upward revision of estimates and a potential
rerating, mainly as the overhang of government
influence eases as more clarity emerges on regulations.
Recommendations
Within miners, we recommend Vale (OW) and Grupo
Mexico (OW) as the best vehicles to gain exposure to
iron ore and copper, respectively, our favored
commodities. We remain cautious on the steel sector,
especially Brazilian flat steels, and see Usiminas (UW)
as the most exposed to (1) the deteriorating pricing
environment, and (2) higher raw material costs that we
do not expect to subside meaningfully until 2014.
78
Rodolfo R. De Angele, CFA AC
(55-11) 3048-3888
[email protected]
Bloomberg: JPMA ANGELE <GO>
Global GDP should grow by 3.0% in ’11, driven by EMs, especially China
10%
8%
6%
% YoY
Ben Laidler
(1-212) 622-5252
[email protected]
10%
4%
9%
7%
2%
4%
6%
3%
2%
2%
0%
2010
Global
2011
Dev eloped markets
Emerging markets
China
World steel capacity utilization remains much below pre-crisis peak of
91%, even though production is close to pre-crisis levels
Global steel output
130
World steel capacity utilization
100%
120
90%
110
100
80%
90
70%
80
60%
70
60
50%
Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10
Source: Bloomberg.
Brazilian flat-steel imports have stabilized at high levels
Flat-steel imports (LHS)
500
Imports as a % of Apparent Consumption
35%
30%
400
25%
300
20%
200
15%
10%
100
5%
0
0%
Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Source: SECEX/MDIC, IAB (Brazilian Steel Institute) and J.P. Morgan.
In valuation terms, miners remain at a discount to the steelmakers
15.8
12.1
11.4
7.5
8.6
7.6
6.9
9.2
5.9
2010E
6.1
5.2
5.1
2011E
Latam Steel
Global Steel
Latam Mining ex -Precious
Global Mining ex -Precious
Latam Precious Metals
Global Precious Metals
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Top picks
Vale
Grupo Mexico
Stocks to avoid
Usiminas
Price
Code
Rating
$31.80
Ps40.44
VALE
GMEXICOB
OW
OW
R$20.96
USIM5
UW
P/E (x)
10E
11E
EPS
10E
11E
Div. yield
11E (%)
ROE
11E (%)
163,216
25,453
10.2
17.5
7.4
10.9
2.92
0.19
4.13
0.30
3.0
5.1
23.3
24.6
12,386
21.2
12.1
1.02
1.88
2.95.4
xx.xx
Mkt cap
(US$MM)
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010. Vale price refers to ONs. Price for PNs was $28.29.
Metals & Mining absolute and relative to MSCI LatAm
Metals & Mining EPS integer
160
1200
Absolute
1000
2011
150
140
130
800
2010
120
600
110
100
400
90
200
80
0
70
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
Feb-09
Jul-09
Dec-09
May -10
Oct-10
Metals & Mining trailing PB
Metals & Mining 12 mth fwd PE
18
4
3.5
15
3
12
2.5
2
9
1.5
1
6
0.5
3
0
95
97
98
99
00
PE
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
95
97
98
99
00
PB
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
79
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Grupo Mexico
Overweight
GMEXICOB.MX
www.gmexico.com
Price Target: Ps53
Ps40.44 (28 Oct 10)
End Date: Dec 2011
Company description
Grupo Mexico is one of the largest copper producers in globally, and has
copper operation in Mexico, Peru and the US through its subsidiaries SCCO
(80%) and Asarco (100%). The company has a $5.6B expansion plan in place
that should increase its copper capacity by ~600kt to over 1.5Mtpy. It also has
railroad operations in Mexico and controls a leading market share through its
two subsidiaries Ferromex (56%) and Ferrosur (75%).
Investment case
We remain bullish on copper prices and see GMex as a unique copper growth
story with large capex expansions in regions with relatively stable business
environments. In addition, we view Asarco as a hidden asset in GMex’s
portfolio, especially with copper above $8,000/t. Finally, GMex trades at a
31% discount to its NAV, which is unwarranted, in our view, and we believe it
should trade at a ~15% discount that incorporates any concerns related to the
“holding” nature of the company. Trading at 5.4x ’11e EBITDA, it remains
cheap vs. SCCO at 8.9x and peers at 5.7x.
We remain 4% above consensus on ’11e EBITDA and believe consensus
should move up as we see more upgrades on copper price assumptions.
We see multiple potential catalysts for rerating of GMex shares over the next
12 months – a SCCO-Asarco merger and the IPO of the railroad business,
which should bring transparency to GMex valuation. On the other hand,
potentially any significant increase in hedging of copper production may cause
a derating as investors may not get the desired exposure to copper prices.
Mexico
Metals & Mining
Rodolfo R. De Angele, CFA AC
(55-11) 3048-3888
[email protected]
Bloomberg: JPMA ANGELE <GO>
Price Performance
42
38
Ps 34
30
26
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Performance
1M
3M
12M
Absolute (%)
12.1
22.4
24.8
Relative (%)
4.9
11.8
17.4
Source: Bloomberg.
Note: Prices as of close on 28th October, 2010.
Performance in USD relative to Mexican Bolsa.
We base our price target and OW rating on GMex on an SOTP analysis –
Dec’11 PT of Ps53.0 ($4.32/sh at JPMe FX rate for end-11 of Ps12.25/USD),
assuming a holding company discount of 15%. The main downside risks are (1)
weaker copper and moly prices; (2) appreciation of USD vs. MXN or PEN; (3)
slower global growth, especially China; (4) recurrence of mining strikes; and
(5) revocation of railroad concessions, weaker domestic economy, etc.
Company Data
Price (Ps)
Date Of Price
52-week Range (Ps)
Mkt Cap (Ps mn)
Fiscal Year End
Shares O/S (mn)
Price Target (Ps)
Price Target End
Date
80
40.44
28 Oct 10
42.00 25.52
314,825.40
Dec
7,785
53.00
31 Dec 11
Grupo Mexico (GMEXICOB.MX;GMEXICOB MM)
2009A
EPS - Recurring FY ($)
0.12
Revenues FY ($ mn)
4,785
EBITDA FY ($ mn)
2,126
EV/EBITDA FY
16.3
P/E FY
28.8
2010E
0.18
7,981
3,768
8.2
17.5
2011E
0.30
10,599
5,588
5.4
10.9
2012E
0.40
12,828
7,323
4.1
8.1
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Grupo Mexico: Summary of Financials
Income Statement
FY09A
FY10E
FY11E FY12E
FY13E
Balance Sheet
FY13E
Revenues
COGS ex D&A
SG&A
Depreciation
EBITDA
EBITDA margin
Financial income
Financial expense
Equity income
EBT
Taxes
Minority interest
Extraordinary
Net income
Net Income Recurring
Net income margin (recurring)
EPS
EPS Recurring
4,785
(2,519)
(140)
(407)
2,126
44.4%
91
(130)
0
10
0
1,689
(559)
(165)
(80)
886
965
20.2%
0.11
0.12
7,981
(4,012)
(201)
(590)
3,768
47.2%
62
(302)
0
(11)
0
2,927
(1,045)
(458)
28
1,452
1,424
17.8%
0.19
0.18
10,599
(4,740)
(270)
(628)
5,588
52.7%
168
(341)
0
35
0
4,822
(1,760)
(750)
26
2,338
2,312
21.8%
0.30
0.30
12,828
(5,178)
(327)
(648)
7,323
57.1%
168
(349)
43
0
6,536
(2,386)
(1,017)
27
3,160
3,133
24.4%
0.41
0.40
14,897
(5,998)
(380)
(707)
8,519
57.2%
168
(319)
50
0
7,711
(2,815)
(1,200)
29
3,726
3,697
24.8%
0.48
0.47
Cash
Accounts receivable
Inventories
Total Current Assets
Net PP&E
Other assets
Total assets
Accounts payable
Total Current Liabilities
Long-term debt
Deferred taxes
Other liabilities
Total liabilities
Minority Interests
1,335
628
825
688
3,475
5,698
2,394
11,567
570
0
906
1,476
2,848
0
798
5,122
1,390
5,055
11,567
4,093
800
600
589
6,081
6,864
1,624
14,570
211
0
1,359
1,570
3,852
0
1,817
7,239
1,429
5,902
14,570
4,929
987
701
727
7,344
7,547
2,005
16,897
240
0
1,678
1,917
4,375
0
2,243
8,536
1,429
6,932
16,897
4,987
1,195
766
880
7,828
8,226
2,427
18,480
219
0
2,031
2,250
4,006
0
2,715
8,971
1,429
8,080
18,480
5,518
1,388
887
1,022
8,815
8,737
2,818
20,370
211
0
2,358
2,569
3,850
0
3,152
9,571
1,429
9,369
20,370
66.8%
32.8%
77.3%
48.3%
63.9%
61.0%
(410.3%) (44.4%)
21.0%
31.0%
35.2%
48.1%
16.1%
16.3%
17.9%
23.5%
Net debt
Net Debt/Capital
Debt/Capital
Net Debt/EBITDA
2,083
24.6%
40.3%
1.0
(30)
(0.3%)
40.8%
(0.0)
(314)
(2.7%)
40.0%
(0.1)
(761) (1,457)
(6.2%) (10.8%)
34.3%
30.2%
(0.1)
(0.2)
FY11E FY12E
FY13E
Valuation, Macro
Revenue growth
EBITDA growth
Net income growth
FCF growth
(19.5%)
(25.6%)
(17.3%)
(186.1%)
FY09A
FY10E
Capex
Free cash flow
Dividends
Capex/depreciation
CAPEX/sales
Working capital
599
1,170
(1,371)
445
50.3%
1.5
12.5%
1,354
28.3%
719
(547)
4,255
764
52.6%
1.2
9.0%
807
10.1%
1,311
150
2,366
1,308
55.9%
2.1
12.4%
957
9.0%
1,327
110
3,505
2,012
63.7%
2.0
10.3%
1,067
8.3%
1,218
170
4,329
2,436
65.4%
1.7
8.2%
1,236
8.3%
507
9,438
4,969
4,192
482
16,570
8,329
7,823
645
16,441
7,353
8,669
775
16,559
6,684
9,453
1,024
14,541
5,855
8,316
Shipments
Avg price/t
Cash COGS/t
EBITDA/t
Shipments chg
Avg price/t chg
Cash COGS/t chg
EBITDA/t chg
0.3%
(19.8%)
(13.7%)
(25.8%)
(5.0%)
33.8%
75.6% (0.8%)
67.6% (11.7%)
86.6%
10.8%
20.2%
32.2%
0.7% (12.2%)
(9.1%) (12.4%)
9.0% (12.0%)
Capex
Maintenance
599
176
719
327
1,311
271
1,327
311
1,218
384
Expansion
423
392
1,040
1,015
834
Short-term debt
EV/EBITDA
P/E
P/BV
EV/tonne
FCF yield
Dividend yield
ROE
Net income margin
Net revenue/Assets
Assets/Equity
ROIC
Shares
ADRs
WACC
Perpetual Growth
Cost of equity
Cost of debt
16.3
26.4
5.0
4,386
(0.4%)
1.7%
17.5%
20.2%
41.4%
2.3
11.7%
7,785
-
8.2
17.9
53.3
4,267
1.4%
3.0%
24.6%
17.8%
54.8%
2.5
18.0%
7,785
-
5.4
11.0
45.4
3,136
0.8%
5.1%
33.7%
21.8%
62.7%
2.4
24.3%
7,785
-
4.1
8.1
39.0
2,565
1.1%
7.9%
39.1%
24.4%
69.4%
2.3
30.9%
7,785
-
FY13E
3.4
6.9
33.6
1,889
1.4%
9.6%
39.8%
24.8%
73.1%
2.2
33.4%
7,785
-
9.9%
3.0%
Note: $ in millions (except per-share data). Fiscal year ends Dec.
81
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Vale
Overweight
VALEp
www.vale.com
Price Target (PN): $41.50
PN $28.29 (28 Oct 10)
End Date: Dec 2011
Company description
The world’s 2nd-largest miner, largest iron ore producer, and 2nd-largest
nickel producer also produces manganese, alloys, thermal & coking coal,
bauxite, alumina, aluminum, copper, cobalt, fertilizers. Most operations are in
Brazil, with presence in Canada (Inco), other LatAm, Africa, Indonesia, China.
Investment case
We remain bullish iron ore and China commodity demand. Given Vale’s costleadership, reserve quality and expected growth, we believe it is best leveraged
to benefit from this tightness. The current share price fails to capture the
potential, in our view. Our model suggests the current share price implies $53/t
(FOB Brazil) for fines; low vs a current and YTD average of ~$120/t. At 4.9x
’11e EBITDA, Vale is cheap vs. respective historical and peer averages of 6.8x
and 5.6x, and more than discounts higher capex and royalties/taxation concern.
Iron ore market remains very tight, and given the steep cost curve, marginal
increase in demand can lift prices sharply and, in our view, presents the biggest
potential for earnings upgrades. Similarly, higher prices for other commodities
could add similar upside risks, and vice versa.
Vale could rerate if concerns related to a slowdown in the global economy
(double dip) mitigate and/or investor optimism on China demand improves
further (announcement of China’s 12th 5-year plan could reinforce this). In
addition, detailed disclosure of Vale’s capex plan as well as clarity on new
regulations for the industry should help by removing potential overhangs. If
these concerns continue or become more widespread, the stock may derate.
Brazil
Metals & Mining
Rodolfo R. De Angele AC
(55-11) 3048-3888
[email protected]
Bloomberg JPMA ANGELE <GO>
Price performance (PN - US$)
32
28
24
20
16
Oct-09
Feb-10
Jun-10
Oct-10
Source: Bloomberg
Performance
1M
3M
12M
Absolute (%)
4.3
17.5
32.3
Relative (%)
3.1
9.3
12.5
Source: Bloomberg
We base our Overweight and price target for Vale PNs on a combination of
DCF and an EV/EBITDA multiple of 7.5x, and use a WACC of 9.2% and 3%
perpetuity growth. We then add a “voting share” premium of 14% (historical
average) to arrive at our fair value for Vale ONs. Risks are a weaker-thanexpected global economy, especially China; harsher-than-expected government
regulation; capex delay and/or cost run-ups; and higher operating costs.
O verw eight
C om pan y D ata
P rice ($)
D ate O f P rice
52-w eek R ange ($)
M kt C ap ($ m n)
Fiscal Year End
S hares O /S (m n)
P rice Target ($)
P rice Target E nd
D ate
82
28.29
28 O ct 10
29.67 19.89
151,784.75
D ec
5,365
41.50
31 D ec 11
C om . V ale do R io D oce (C VR D ) (V ALE p;V ALE /P U S)
2009 A
E P S - R ecurring FY ($)
1.00
R evenues FY ($ m n)
23,311
E B ITD A F Y ($ m n)
9,629
E V /E B ITD A FY
17.7
P /E (U S D ) FY
28.8
2010E
3.02
41,995
24,188
7.0
9.5
2011E
4.13
54,963
34,785
4.8
7.0
2012E
4.62
61,085
38,832
4.1
6.2
S ource: C om pany data, B loom berg, J.P. M organ estim ates.
(1) P/E m ultiples calculated assum ing 100% P N s. P/E m ultiples, considering O N s as w ell, are 10.3x, 7.4x and
6.6x for '10, '11 and '12, respectively.
(2) Shares O /S in the 'C om pany D ata' table represents the total num ber of shares outstanding for V ale, i.e.
O N s and PN s.
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Vale PN: Summary of Financials
Income Statement
FY09A
FY10E
Revenues
COGS ex D&A
SG&A
Depreciation
EBITDA
EBITDA margin
Financial income
Financial expense
Equity income
EBT
Taxes
Minority interest
Extraordinary
Net income
EPS
EPS Recurring
23,311
(11,030)
(1,130)
(2,722)
9,629
41.3%
381
(1,558)
675
(2,503)
433
6,952
(2,100)
(107)
171
5,349
5,178
22.2%
1.00
1.00
Revenue growth
EBITDA growth
Net income growth
FCF growth
(37.7%)
80.2%
(52.8%)
151.2%
(59.6%) 199.7%
(124.3%) (480.9%)
FY11E
FY12E
FY13E
41,995 54,963 61,085 57,600
(14,466) (16,483) (18,332) (19,099)
(1,548) (2,026) (2,252) (2,124)
(3,033) (3,744) (3,957) (4,136)
24,188 34,785 38,832 34,804
57.6%
63.3%
63.6%
60.4%
282
282
469
766
(2,076) (2,076) (2,646) (3,167)
119
(305)
(304)
(283)
(2,633) (2,717) (2,874) (2,814)
1,169
1,308
1,358
1,088
18,640 27,895 31,189 26,744
(3,485) (6,695) (7,485) (6,419)
(141)
(332)
(296)
(286)
(151)
0
0
0
16,033 22,176 24,766 21,127
16,184 22,176 24,766 21,127
38.5%
40.3%
40.5%
36.7%
2.99
4.13
4.62
3.94
3.02
4.13
4.62
3.94
Cash
Accounts receivable
Inventories
Net PP&E
Other assets
Total assets
11,040 19,359 31,110 51,339 63,607
3,120
7,633
9,987 11,090 10,460
3,196
4,589
5,305
5,845
6,093
3,938
3,986
5,215
5,791
5,462
21,294 35,567 51,617 74,065 85,622
68,810 79,416 89,816 99,256 105,611
12,175 22,528 27,231 28,775 26,319
102,279 137,512 168,664 202,097 217,553
2,982
4,071
4,071
4,071
4,071
2,309
3,862
5,054
5,612
5,293
3,890
6,080
7,955
8,834
8,332
9,181 14,014 17,080 18,517 17,696
19,898 26,844 33,589 40,350 45,294
12,703 23,014 24,980 31,493 29,134
41,782 63,871 75,649 90,359 92,124
3,562
4,811
6,890
8,277
9,291
56,935 68,830 86,125 103,461 116,137
102,279 137,512 168,664 202,097 217,553
Short-term debt
Accounts payable
Long-term debt
Deferred taxes
Other liabilities
Total liabilities
Minority Interests
FY10E
FY11E
FY12E
FY13E
11.1%
11.6%
11.7%
33.5%
(5.7%)
(10.4%)
(14.7%)
2.7%
Net debt
Net Debt/Capital
Debt/Capital
Net Debt/EBITDA
11,840
14.2%
27.4%
1.2
11,555
11.1%
29.6%
0.5
6,549
5.0%
28.8%
0.2
FY11E
FY12E
FY13E
Valuation, Macro
FY09A
FY10E
FY11E
FY12E
FY13E
EV/EBITDA
P/E
P/BV
EV/tonne
FCF yield
Dividend yield
ROE
Net income margin
Net revenue/Assets
Assets/Equity
ROIC
Shares
ADRs
17.7
28.4
1.8
727
(1.3%)
1.8%
9.4%
22.2%
22.8%
1.8
6.6%
5,365
5,365
7.0
9.4
2.4
643
4.9%
2.0%
23.3%
38.5%
30.5%
2.0
18.8%
5,365
5,365
4.8
6.8
1.9
576
8.6%
3.2%
25.7%
40.3%
32.6%
2.0
20.7%
5,365
5,365
4.1
6.1
1.6
502
11.5%
4.9%
23.9%
40.5%
30.2%
2.0
19.1%
5,365
5,365
4.4
7.2
1.4
439
11.8%
5.6%
18.2%
36.7%
26.5%
1.9
14.7%
5,365
5,365
WACC
Perpetual Growth
Cost of equity
Cost of debt
9.2%
3.0%
11.1%
8.8%
FY09A
Capex
Free cash flow
Dividends
Capex/depreciation
CAPEX/sales
Working capital
(11,024)
17
(1,958)
(2,724)
50.9%
4.0
47.3%
4,055
17.4%
(12,826) (15,384) (14,688) (11,822)
(2,210) (1,232)
(783)
(110)
7,459 13,143 17,545 18,027
(3,000) (4,881) (7,430) (8,451)
18.7%
22.0%
30.0%
40.0%
4.2
4.1
3.7
2.9
30.5%
28.0%
24.0%
20.5%
6,265
7,497
8,280
8,390
14.9%
13.6%
13.6%
14.6%
Shipments
Avg price/t
Cash COGS/t
EBITDA/t
247,261
94
45
39
281,284 308,962 330,012 363,340
149
178
185
159
51
53
56
53
86
113
118
96
Shipments chg
Avg price/t chg
Cash COGS/t chg
EBITDA/t chg
(16.5%)
(25.4%)
(10.9%)
(43.5%)
13.8%
58.4%
15.3%
120.8%
Capex
Maintenance
(11,024)
(2,158)
(12,826) (15,384) (14,688) (11,822)
(2,270) (2,539) (3,051) (3,570)
(8,866)
FY09A
30.9%
43.8%
38.3%
76.2%
Expansion
FY10E
Balance Sheet
9.8%
19.2%
3.7%
30.9%
6.8%
4.0%
4.1%
4.5%
(10,557) (12,845) (11,637)
10.1%
(14.4%)
(5.4%)
(18.6%)
(6,918) (14,243)
(4.4%)
(8.1%)
28.4%
28.2%
(0.2)
(0.4)
(8,251)
83
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Usiminas
Underweight
USIM5.SA
www.usiminas.com.br
Price Target: R$26
R$20.96 (28 Oct 10)
End Date: Dec 2011
Company description
Usiminas is the largest flat-steel producer in Brazil, with ~9.5Mtpy of crude
steel capacity. It has two plants – its original plant in Ipatinga and the plant of
former Cosipa in the state of São Paulo. The company produces a broad range
of steel products and is the main domestic supplier for the automotive and auto
parts industries in Brazil. Aside from this, USI also owns iron ore mines and
has interests in logistics and capital goods assets.
Brazil
Metals & Mining
Rodolfo R. De Angele AC
(55-11) 3048-3888
[email protected]
Bloomberg JPMA ANGELE <GO>
Investment case
We expect the outlook for Usiminas to continue to be challenging in the
medium term, driven by deteriorating fundamentals for the Brazilian flat-steel
industry. Imports into Brazil, in our view, are here to stay as Brazil lacks
rolling capacity to supply the flat-steel demand in the domestic market, keeping
prices as well as domestic premiums under pressure. In addition, the company
should continue to suffer higher raw material costs, which we believe are
unlikely to subside meaningfully until 2014. We see potential in USI’s mining
unit, but there are challenges related to finding a viable solution for the port.
Price performance (R$)
Price Performance
30
R$
26
22
18
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Potential for earnings downgrades
We believe there are downside risks to the consensus expectations for domestic
steel prices, as premiums should remain under pressure, driven by continued
strong inflow of imports and a strong Real. In addition, we expect raw material
prices to remain tight, keeping margins under check. Finally, a potential delay
in the recovery of heavy plates should cause further downside to earnings.
Performance
1M
3M
Absolute (%)
-17.8
-9.3
12M
-8.3
Relative (%)
-10.8
-29.0
-21.3
Source: Bloomberg.
Global steel supply discipline (resulting in higher prices) and any weakening in
raw material costs should help rerate Usiminas. In addition, a solution to the
port issues and/or a potential IPO of the mining unit could rerate the stock.
We rate Usiminas UW based on our Dec 11 price target of R$26/share
UPDATE, which is derived from a combination of DCF (80%) and multiples
(20%). We use a WACC of 10.9%, perpetuity growth of 3% and target
EV/EBITDA of 5.0x (historical average). The main upside risks are related to
depreciation in BRL, higher international steel prices and potential increases in
steel import duties.
Usiminas (USIM5.SA;USIM5 BZ)
Company Data
Price (R$)
Date Of Price
52-week Range (R$)
Mkt Cap (R$ mn)
Fiscal Year End
Shares O/S (mn)
Price Target (R$)
Price Target End
Date
84
20.96
28 Oct 10
32.22 19.57
21,215.63
Dec
1,012
26.00
31 Dec 11
EPS - Recurring FY (R$)
Revenues FY (R$ mn)
EBITDA FY (R$ mn)
Bloomberg EBITDA FY (R$
mn)
EV/EBITDA FY
P/E (USD) FY
2009A
1.10
10,924
1,715
1,537
2010E
1.02
14,183
3,230
3,113
2011E
1.88
16,049
4,413
4,202
2012E
2.45
17,831
5,503
5,103
2013E
2.63
18,103
5,572
16.3
24.6
7.8
23.4
6.1
13.3
5.2
10.7
5.3
10.2
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Usiminas: Summary of Financials
Income Statement
FY09A
Revenues
COGS ex D&A
SG&A
Depreciation
EBITDA
EBITDA margin
Financial income
Financial expense
Equity income
EBT
Taxes
Minority interest
Extraordinary
Net income
EPS
EPS Recurring
10,924
(8,465)
(740)
(975)
1,715
15.7%
378
(627)
818
251
40
1,599
(489)
0
128
1,239
1,111
10.2%
1.22
1.10
FY10E
FY11E
FY12E
FY13E
Balance Sheet
FY09A FY10E FY11E FY12E FY13E
Cash
Accounts receivable
Inventories
Net PP&E
Other assets
Total assets
Accounts payable
Long-term debt
Deferred taxes
Other liabilities
Total liabilities
Minority Interests
3,083
1,793
3,637
815
9,329
11,562
4,857
25,747
917
815
1,506
3,238
6,124
812
10,173
355
15,219
25,747
6,477
2,113
3,996
780
13,366
14,580
5,149
33,094
785
1,068
1,471
3,324
9,280
921
13,525
377
19,193
33,094
5,097
2,247
4,238
882
12,464
17,059
5,595
35,118
739
1,063
1,665
3,466
8,734
1,042
13,241
377
21,500
35,118
5,345
2,496
4,507
980
13,328
18,172
6,022
37,522
781
1,130
1,850
3,761
9,239
1,157
14,157
377
22,988
37,522
6,052
2,534
4,581
995
14,162
19,453
6,087
39,702
832
1,149
1,878
3,859
9,839
1,175
14,873
377
24,453
39,702
3,957
17.8%
31.6%
2.3
3,588
12.3%
34.4%
1.1
4,376
14.1%
30.6%
1.0
4,675
14.2%
30.4%
0.8
4,619
13.2%
30.4%
0.8
14,183
16,049
(10,119) (10,732)
(870)
(824)
(822)
(917)
3,230
4,413
22.8%
27.5%
394
618
(999) (1,326)
(372)
(270)
(187)
(211)
211
221
1,454
2,528
(419)
(628)
0
0
0
0
1,035
1,901
1,035
1,901
7.3%
11.8%
1.02
1.88
1.02
1.88
17,831
18,103
(11,413) (11,601)
(826)
(839)
(1,073) (1,143)
5,503
5,572
30.9%
30.8%
478
499
(1,403) (1,494)
(222)
(27)
(234)
(238)
243
234
3,291
3,403
(810)
(740)
0
0
0
0
2,481
2,663
2,481
2,663
13.9%
14.7%
2.45
2.63
2.45
2.63
(30.4%)
(71.5%)
(62.8%)
(110.9%)
29.8%
88.3%
(16.4%)
(522.6%)
13.2%
36.7%
83.6%
(62.7%)
11.1%
24.7%
30.5%
(345.5%)
1.5%
1.3%
7.3%
36.7%
Net debt
Net Debt/Capital
Debt/Capital
Net Debt/EBITDA
FY09A
FY10E
FY11E
FY12E
FY13E
Valuation, Macro
Capex
Free cash flow
Dividends
Capex/depreciation
CAPEX/sales
Working capital
2,061
811
364
700
56.5%
2.1
18.9%
4,164
38.1%
3,392
(488)
(1,540)
461
44.5%
4.1
23.9%
4,651
32.8%
3,396
(309)
(574)
665
35.0%
3.7
21.2%
4,960
30.9%
2,186
(400)
1,409
992
40.0%
2.0
12.3%
5,360
30.1%
2,424
(86)
1,926
1,198
45.0%
2.1
13.4%
5,446
30.1%
Shipments
Avg price/t
Cash COGS/t
EBITDA/t
5,631
1,940
1,503
305
7,065
2,007
1,432
457
7,407
2,167
1,449
596
7,805
2,285
1,462
705
8,007
2,261
1,449
696
(21.5%)
(11.4%)
22.2%
(63.6%)
25.5%
3.5%
(4.7%)
50.1%
4.8%
7.9%
1.2%
30.4%
5.4%
5.4%
0.9%
18.3%
2.6%
(1.0%)
(0.9%)
(1.3%)
Capex
Maintenance
2,061
476
3,392
439
3,396
466
2,186
506
2,424
531
Expansion
1,585
2,957
2,930
1,680
1,893
Revenue growth
EBITDA growth
Net income growth
FCF growth
Shipments chg
Avg price/t chg
Cash COGS/t chg
EBITDA/t chg
Short-term debt
EV/EBITDA
P/E
P/BV
EV/tonne
FCF yield
Dividend yield
ROE
Net income margin
Net revenue/Assets
Assets/Equity
ROIC
Shares
ADRs
16.3
22.4
1.5
4,928
1.6%
3.3%
8.1%
10.2%
42.4%
1.7
2.4%
1,012
-
WACC
Perpetual Growth
Cost of equity
Cost of debt
10.9%
3.0%
7.8
21.3
1.2
3,838
(6.6%)
2.2%
5.4%
7.3%
42.9%
1.7
5.6%
1,012
-
6.1
12.1
1.1
3,759
(2.5%)
3.1%
8.8%
11.8%
45.7%
1.6
8.1%
1,012
-
5.2
9.8
1.0
3,599
6.0%
4.7%
10.8%
13.9%
47.5%
1.6
9.7%
1,012
-
5.3
9.3
1.0
3,498
8.2%
5.6%
10.9%
14.7%
45.6%
1.6
9.4%
1,012
-
85
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Oil, Gas & Petrochemicals
It’s all about creating economic value. The value chain
of oil production has many moving parts, but at the end
of the day what matters here as in any other business is
adding value to the base of capital employed. Production
growth, backlog growth and asset growth matter little if
the returns on new investments don’t cover the cost of
capital, in our view.
Sergio Torres AC
(1-212) 622-3378
[email protected]
Bloomberg JPMA TORRES <GO>
Integrated oils
EV/DACF
Bullish oil curve favors all; one must be selective
An improved outlook for oil prices has emerged in
tandem with global currency issues benefiting the
earnings outlook of the sector as a whole. As always, we
favor portfolios that can beat the performance of the
underlying commodity. Services & equipment are now a
large portion of our coverage, and there we focus on
exposure to capex trends and superior earnings power
relative to peers.
Integrated oils: Petrobras and Ecopetrol are both
national oil companies (NOCs) with the mandate to
supply the domestic fuels market. This imposes
significant pressure on their E&P segments to keep
replenishing reserves. Historically PBR has done a great
job, but we are worried about its ability to add value on
the recent asset purchase for $43 billion. In the meantime
Ecopetrol is expanding production of low-cost barrels
and finding new ways to boost its exploration success.
E&P: The appeal of independent E&P names keeps
growing; emphasis remains on exploration. The market
will operate in 2011 with 2 new players in Brazilian
E&P, HRT and Karoon. The heavyweight remains OGX,
which was our top pick in 2010. In Colombia, juniors are
spreading, with adult names being scarce.
Services & equipment: The cycle stage still appears to
favor exploration over development, and the key is
gaining exposure to capex trends. Tenaris is enhancing
positioning with minimal investments but more
importantly it stands to benefit from cost reductions.
Lupatech is investing in value-neutral ventures in order
to gain access to new sources of revenue.
Petrochemicals: The change in scope of PBR’s
Comperj project changed drastically the outlook for
Braskem in the Brazilian market.
Recommendations
Our top picks for 2011 are Tenaris (TS US), the world’s
most profitable OCTG producer, and Pacific Rubiales
(PRE CN), the largest and most dynamic independent
E&P producer in Colombia.
86
10E
11E
12E
Petrobras
9.5x
9.5x
10.4x
Petrochina
7.7x
7.2x
6.6x
Ecopetrol
18.3x
14.1x
12.5x
Majors
5.8x
5.2x
4.9x
Sinopec
6.1x
5.4x
5.0x
10E
11E
12E
Petrobras
9.8x
12.2x
12.2x
Petrochina
13.2x
12.8x
12.0x
Ecopetrol
25.6x
17.9x
14.9x
Majors
9.6x
8.8x
8.3x
Sinopec
9.4x
8.2x
8.0x
12E
P/E
Source: J.P.Morgan estimates, Bloomberg.
E&P
EV/EBITDA
10E
11E
OGX
n.m
n.m
n.m
Pacific Rubiales
9.1x
4.5x
3.4x
Gran Tierra Energy
5.0x
3.9x
3.1x
Latam Peers
10.2x
9.8x
6.8x
Global Peers
28.2x
7.3x
20.4x
JPMe
EV/BOE
2P
2P+2C
OGX
n.m
9.9
5.9
Pacific Rubiales
30.3
13.5
9.6
Gran Tierra Energy
56.7
34.6
7.4
Latam Peers
14.0
6.0
n.m
Global Peers
18.5
11.2
10.7
Oil services & equipment
EV/EBITDA
10E
11E
12E
Tenaris
11.3x
7.9x
7.0x
Vallourec
6.2x
7.9x
6.6x
TMK
8.1x
6.2x
4.8x
Lupatech
14.4x
9.2x
5.9x
10E
11E
12E
Tenaris
20.0x
15.9x
14.0x
Vallourec
25.3x
12.3x
10.2x
TMK
20.2x
11.0x
7.2x
Lupatech
n.m
16.8x
13.3x
P/E
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Top picks and stock to avoid
Top picks
Pacific Rubiales
Tenaris
Avoid
Lupatech
Price
Code
Rating
31.69
41.33
PRE CN
TS US
21.55
LUPA3 BZ
Mkt cap
(US$MM)
OW
OW
N
604
P/E (x)
10E
11E
EPS
10E
11E
Div. yield
11E (%)
ROE
11E (%)
36.4
11.4
13.2
7.9
0.90
2.11
2.43
2.68
-
15.2
13.3
16.8
13.3
0.11
1.28
-
1.0
Energy absolute and relative to MSCI LatAm
Energy EPS integer
140
2000
Absolute
2011
130
1800
1600
120
1400
1200
2010
110
1000
800
100
600
400
90
80
200
0
70
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
Feb-09
Jul-09
Dec-09
May -10
Energy 12 mth fwd PE
Energy trailing PB
18
4.5
15
3.5
12
2.5
Oct-10
4
3
2
9
1.5
1
6
0.5
0
3
95
97
98
99
00
PE
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
95
97
98
99
00
PB
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
87
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Pacific Rubiales Energy
Overweight
PRET.TO
www.pacificrubiales.com
Price Target: C$36
C$31.69 (28 Oct 10)
End Date: Dec 2011
Pacific Rubiales is the largest independent E&P company in Colombia and
the second-largest operator after NOC Ecopetrol. PRE has been a successful
growth and value play since 2009. In our view, PRE’s low risk development
story is already priced in, but we believe that the risk/reward is still attractive.
PRE is our favorite stock to play the potential of heavy oil in Colombia.
Low-risk exploration in attractive prospects should drive value in 2011.
PRE has 2P reserves of 269 mn boe but has identified ~628 mn bbl of
prospective oil resources in Colombia and Peru. PRE’s track record in
exploration is over 80% success in Colombia, and it has recently acquired
exploration licenses in onshore Guatemala that are believed to be exposed to a
continuation of the onshore basins in Mexico.
Our price target is not fully loaded. We are conservative in our NAV
assumptions because we are only assuming half of the prospective resource
estimated by PRE. Our estimates have upside from further drilling success that
could confirm the company’s prospective figures, from the gas export project
that could start in 2013 and from further analysis of the prospects in Guatemala
and block CPO-12 in Colombia.
The company still trading at compelling multiples. PRE is trading at 3.7x
EV/EBITDA for 2011e. Our Dec’11 target price of C$36/share implies an
EV/EBITDA exit multiple of 3.9x 2012e. With the company having doubled
production in 2010 to 67 kboed (net after royalties), we expect production to
grow 67% in 2011 and 22% in 2012, excluding exploration potential.
Colombia
Exploration & Production
Sergio Torres AC
(1-212) 622-3378
[email protected]
Price Performance
30
C$
20
10
Nov-09
Feb-10
May-10
Aug-10
Nov-10
Source: Bloomberg, J.P.Morgan.
Performance
Absolute (%)
1M
3M
12M
15
29
29
Main risks: 1) unsuccessful exploratory drilling; 2) uncertainty over capital
expenditures; 3) disappointing results at Rubiales field tests for secondary
recovery; and 4) a decline in oil prices.
Company Data
Price (C$)
Date Of Price
52-week Range (C$)
Mkt Cap (C$ mn)
Fiscal Year End
Shares O/S (mn)
Price Target (C$)
Price Target End
Date
88
31.69
28 Oct 10
33.58 12.86
8,356.65
Dec
264
36.00
31 Dec 11
Pacific Rubiales Energy Corp (PRE.TO;PRE CN)
2009A
EPS FY ($)
(0.54)
Bloomberg EPS FY ($)
(0.40)
P/E FY
NM
EBITDA FY ($ mn)
222
EV/EBITDA FY
33.8
ROE FY
(10.2%)
ROCE FY
(10.2%)
2010E
0.90
1.05
35.1
898
7.6
18.2%
18.5%
2011E
2.43
2.49
13.0
1,705
3.7
34.1%
44.9%
2012E
2.39
2.96
13.2
1,976
2.7
24.1%
45.4%
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Pacific Rubiales: Summary of Financials
Revenues
Cost of products sold
Gross profit
SG&A
DD&A
Operating Income
EBIT
EBITDA
FY09A
FY10E FY11E FY12E
639
(488)
151
(125)
(196)
(292)
26
26
1,633 3,132 3,452
(993) (1,931) (2,229)
640 1,200 1,223
(115)
(160)
(178)
(396)
(701)
(797)
(597) (1,231) (1,431)
525 1,040 1,045
525 1,040 1,045
Revenues
Gross profit
SG&A
DD&A
Operating Income
EBIT
1Q10A
2Q10A
3Q10E
4Q10E
381
(196)
184
(62)
(65)
(131)
122
122
-
-
-
222
898
1,705
1,976
EBITDA
187
-
-
-
Net interest income / (expense)
Income applicable to minority interests
Pretax income
Taxes
Tax rate (%)
Reported net income
Non-recurring items, disc ops
Adjusted net income
Average diluted shares outstanding
(48)
2
(109)
(46)
(154)
(154)
283
(84)
0
430
(142)
288
288
283
(61)
0
999
(300)
699
699
283
(53)
0
1,011
(303)
708
708
283
Pretax income
Taxes
Tax rate (%)
Reported net income
Adjusted net income
(14)
0
81
(49)
32
32
292
-
-
-
EPS
EPS growth rate (%)
Dividend per share
(0.54)
0.90
2.43
- (287.7%) 142.6%
0.00
0.00
0.00
2.39
1.2%
0.00
EPS
EPS growth rate (%)
Dividend per share
0.11
0.00
-
-
-
WTI crude price ($/bbl)
Henry Hub natural gas price ($/mcf)
61.66
3.44
83.00
3.58
78.76
3.51
-
-
-
FY09A
FY10E
FY11E
FY12E
(59.9)
24.0
33.8
54.2
31.9
44.3
7.6
7.7
13.2
9.3
3.7
4.6
13.0
7.3
2.7
3.2
14.8%
29.3%
4.6
(10.2%)
(10.2%)
3.2%
27.1%
10.4
18.2%
18.5%
(29.3%)
21.1%
24.8
34.1%
44.9%
(50.0%)
15.9%
25.7
24.1%
45.4%
FY09A
79.50
3.50
86.00
3.65
FY10E FY11E FY12E
Total current assets
Net PP&E
Other assets
Total assets
399
21
594
1,991
177
2,763
568
21
763
1,991
177
2,932
1,363
21
1,558
1,991
177
3,727
2,377
21
2,572
1,991
177
4,740
Total debt
Total liabilities
Minority interests
Preferred stock
621
1,262
1,501
621
1,262
1,670
651
1,292
2,436
651
1,292
3,449
Net Income
DD&A
Deferred taxes
Other
Cash earnings
Capex
Dividends
Share buybacks (net)
Change in debt
Change in preferred stock
Other uses of cash
Change in cash
(154)
(196)
26
(87)
111
(393)
0
426
308
288
(396)
525
0
695
(853)
0
0
167
699
(701)
1,040
0
1,380
(613)
0
30
797
708
(797)
1,045
0
1,486
(473)
0
0
1,013
549
325
30
0
Free cash flow
Ratio Analysis
Valuation
P/E (adjusted)
P/CF
Enterprise value/EBITDA
EV/DACF
Ratios
Net debt/equity
Net debt/capital
Net coverage ratio
ROE
ROCE
Yield and cash returns
CFPS
CF yield
FCF yield
Dividend yield
Dividend payout ratio
Buyback yield
Total cash returns (%)
Mkt Cap (current) ($bn)
Enterprise Value (current)
1.31
0.71
3.39
4.30
(241.1%)
69.5%
136.8%
171.8%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
573.0% 31,588.8% 67,971.8% 69,153.6%
8.59
5,724
89
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Tenaris
Overweight
TS
www.ir.tenaris.com
Price Target: $52
$41.33 (28 Oct 10)
End Date: Dec 2011
TS is one of the best early-cycle plays. We believe oil prices will lead a
reactivation of exploration and development drilling globally. Tenaris is the
most profitable manufacturers of steel tubular goods for the oil and gas
industry. The company has a leading footprint in the niche of premium (oil
country tubular goods (OCTG). We believe that Tenaris (TS) is likely to keep
its dominance position on global OCTG market and gain market share in other
key growing markets such as the US, Saudi Arabia, Iraq and, yes, Brazil.
We project an annualized earnings expansion of 12.9% between 2009 and
2012, mostly driven by cost reduction and volume growth. Reduction in
structural costs is a major differentiating factor because the industry is
suffering from sluggish pricing and cost pressures. Equipment producers with
global footprints, such as TS, offer investors a broadly diversified play on oil,
gas, onshore and offshore projects, with ROCEs that are bouncing from the
cycle trough.
Global
Oil Services & Equipment
Sergio Torres AC
(1-212) 622-3378
[email protected]
Price Performance
48
44
$ 40
36
32
Nov-09
Benefits from expansion to be visible as early as 2011. TS is adding capacity
in its Mexico plant in late 2010. Ramp-up of capacity would allow TS to export
low-diameter OCTG out of Mexico to the US shale gas market, among other
destinations. New facilities could also allow TS to reallocate output from
higher-cost sites, such as Europe.
We don’t see risk of overcapacity in seamless OCTG. For now we believe
the NA market appears in check. With the countervailing duties on China there
is a shortfall of about 1.5 mn tons of seamless pipe in the US alone. Planned
expansions are targeting such shortfall.
Feb-10
May-10
Aug-10
Nov-10
Source: Bloomberg, J.P.Morgan.
Performance
Absolute (%)
1M
3M
12M
7.8
3.3
12.3
We have a YE11 target of $52/ADR, derived from a combination of SOTP
model and target multiples. On an EV/EBITDA basis, TS is trading at 7.9x,
similar to peer Vallourec. We believe TS deserves a premium because it
generates ~22% higher EBITDA per ton than VK (rated OW by JPM European
machinery analyst Alessandro Abate).
Tenaris SA (TS;TS US)
Company Data
Price ($)
Date Of Price
52-week Range ($)
Mkt Cap ($ mn)
Fiscal Year End
Shares O/S (mn)
Price Target ($)
Price Target End
Date
90
41.33
28 Oct 10
47.79 32.91
24,395.80
Dec
590
52.00
31 Dec 11
EPS FY ($)
Bloomberg EPS FY ($)
Revenues FY ($ mn)
EBITDA FY ($ mn)
EV/EBITDA FY
P/E FY
2009A
2.05
2.02
8,183
2,114
9.5
20.2
2010E
2.06
2.00
7,869
2,192
9.6
20.0
2011E
2.59
2.97
9,434
2,940
6.9
15.9
2012E
2.95
3.58
10,474
3,282
6.0
14.0
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Tenaris SA: Summary of Financials
Revenues
Gross profit
SG&A
DD&A
Operating Income
EBIT
8,183
(4,598)
3,318
(1,235)
(266)
(4,865)
1,847
1,847
7,869
(4,133)
3,330
(1,547)
(405)
(4,539)
1,787
1,787
9,434
(4,671)
4,218
(1,824)
(546)
(5,217)
2,394
2,394
10,474
(5,202)
4,692
(1,990)
(579)
(5,781)
2,702
2,702
EBITDA
2,114
2,192
2,940
3,282
EBITDA
Pretax income
Taxes
Tax rate (%)
Reported net income
Adjusted net income
(89)
(46)
1,785
(511)
1,208
-
(59)
(36)
1,771
(517)
1,219
-
(57)
(40)
2,337
(767)
1,530
-
(30)
(50)
2,672
(882)
1,740
-
Pretax income
Taxes
Tax rate (%)
Reported net income
Adjusted net income
2.05
(43.2%)
0.86
2.06
0.9%
0.38
2.59
25.5%
0.38
2.95
13.8%
0.52
EPS
EPS growth rate (%)
Dividend per share
61.66
-
79.94
-
86.00
-
83.00
-
EPS
EPS growth rate (%)
Dividend per share
Total current assets
Net PP&E
Other assets
Total assets
2,123
502
5,622
3,255
502
13,483
980
481
5,623
3,711
481
13,796
1,691
481
7,066
3,868
481
15,182
2,468
481
7,446
3,522
481
15,440
1,447
4,391
629
9,092
1,213
4,111
619
9,685
1,213
4,217
619
10,965
1,292
4,263
619
11,177
Net Income
DD&A
Deferred taxes
Other
Cash earnings
Capex
Dividends
Share buybacks (net)
Change in debt
Change in preferred stock
Other uses of cash
Change in cash
1,208
(266)
861
1,132
1,737
3,064
461
508
(1,465)
4
1,219
(405)
0
1,122
(1,077)
372
881
226
(239)
(1,032)
1,530
(546)
0
1,526
(625)
1,491
490
224
0
776
1,740
(579)
0
1,740
362
2,732
511
305
79
1,996
Free cash flow
(1,176)
1,962
2,308
1,526
Total debt
Total liabilities
Minority interests
Preferred stock
Revenues
Gross profit
SG&A
DD&A
Operating Income
EBIT
Ratio Analysis
Valuation
P/E (adjusted)
P/CF
Enterprise value/EBITDA
EV/DACF
1Q10A 2Q10A 3Q10E 4Q10E
1,639
(916)
652
(292)
(71)
(987)
309
309
1,982
(1,112)
798
(337)
(71)
(1,183)
405
405
1,900
(942)
828
(415)
(130)
(1,072)
413
413
2,349
(1,163)
1,052
(503)
(133)
(1,296)
550
550
380
531
543
683
(13)
(3)
328
(105)
220
-
(18)
(13)
400
(105)
282
-
(14)
(10)
399
(131)
258
-
(15)
(10)
535
(176)
350
-
0.37
(1.3%)
0.00
0.48
28.5%
0.42
0.44
(8.4%)
0.00
0.59
35.3%
0.19
78.76
-
76.00
-
80.00
-
85.00
-
20.2
21.6
9.5
-
20.0
21.7
9.6
-
15.9
16.0
6.9
-
14.0
14.0
6.0
-
Ratios
Net debt/equity
Net debt/capital
Net coverage ratio
ROE
ROCE
13.7%
17.6
14.0%
21.6%
11.1%
26.3
13.0%
19.1%
10.0%
36.5
14.8%
24.2%
10.4%
41.4
15.7%
26.8%
Yield and cash returns
CFPS
CF yield
FCF yield
Dividend yield
Dividend payout ratio
Buyback yield
Total cash returns (%)
1.92
2.0%
28.5%
-
1.90
0.9%
20.0%
-
2.58
0.9%
20.0%
-
2.95
1.2%
20.0%
-
Mkt Cap (current) ($bn)
Enterprise Value (current)
25.15
91
November 2010
Retail & Healthcare
Andrea Teixeira AC
Solid growth in both the retail and healthcare sectors in
Brazil has been led by strong consumer demand driven
by: (1) Income mobility to middle-income segment. (2)
Strong job creation, which is driving unemployment
rates to record lows. (3) Inflation under control. These
factors are leading to record-high consumer confidence.
(1-212) 622-6735
[email protected]
Bloomberg JPMA TEIXEIRA <GO>
Middle-income expansion is a positive driver for retailers and
healthcare companies in Bz
100%
28,6%
80%
60%
As a result we believe the country is the best positioned
in terms of growth within Latin America for retailers and
healthcare names, while we are still cautious with retail
in Mexico. While there is some evidence of economic
recovery, correlation with the US economy is still high.
0%
14,2%
15,7%
44,2%
42,5%
42,3%
46,7%
48,6%
48,9%
51,9%
13,0%
11,6%
11,6%
12,6%
13,3%
14,4%
15,5%
2002
2003
2004
2006
2007
2008
2005
A&B
C
D
E
Source: FGV.
Recent consumer deleverage in BZ supports Bz Retailers
25%
20%
16.5%
15%
10%
5%
Brazil
Source: BACEN, J.P. Morgan estimates.
Wage mass growing steadily in Brazil
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
Source: IBGE.
Unemployment rates at lowest levels
11.0%
10.0%
9.0%
8.0%
7.0%
Unemploy ment Rate
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
May-07
Jan-07
6.0%
Source: IBGE.
92
13,3%
15,5%
Sep-06
Recommendations
OW: Hypermarcas (HYPE3) is a core holding in
Brazil consumer, given its focus on high-growth lowerincome segments such as pharma and HPC. Its
accelerated M&A allows for more synergies in 20112013e. It trades at a relatively cheap P/E 11e of 20.7x, a
25% discount to Brazilian peers that we view as
unwarranted given high EPS CAGR 10-13e of 20%.
OW: DASA (DASA3): We expect revenue growth to
pick up in 2011 as the company has resumed M&A.
DASA will likely start capturing revenue synergies as a
result of its integration with MD1.
UW: SORIANA (SORIANAB): Lack of catalysts in
the short/mid term and rich valuation, trading at 12-M
forward P/E of 18.5x, a 20% premium to historical, and
12-M fwd EV/EBITDA of 9.7x, 23% above historical,
which in our view does not reflect the risks.
15,3%
14,2%
May-06
Nevertheless, we don’t expect further reratings for the
sectors given recent outperformance. Any potential
appreciation is likelier to come from earnings surprises.
18,4%
15,0%
Jan-05
Mar-05
May-05
Jul-05
Sep-05
Nov-05
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
For the healthcare sector, the main drivers are: (1) wage
mass increase; (2) formal job creation; and (3) increased
penetration of private healthcare spending within the
population, which is currently very low.
21,7%
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Main drivers of growth for the retail sector are (1)
consumer confidence, (2) unemployment rate and wage
mass increase, (3) inflation, and (4) credit supply.
24,8%
25,4%
30,4%
20%
Jan-06
In Brazil, both sectors are growing fast, on the back of
the solid growth of the Brazilian economy. We expect
solid growth to continue but to slightly decelerate in
2011 given tougher comparisons.
40%
30,4%
Sep-07
Ben Laidler
(1-212) 622-5252
[email protected]
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Price
Top picks
Hypermarcas
DASA
Code
R27.99
R$21.07
Stocks to avoid
Soriana
Ps37.40
Mkt cap
(MM)
Rating
HYPE3 BZ
DASA3 BZ
P/E (x)
10E
11E
EPS
10E
11E
Div. yield
11E (%)
ROE
11E (%)
OW
OW
R$14,941
R$6,555
28.3
30.9
20.7
17.8
0.99
0.68
1.35
1.18
300.7
31.9
SORIANAB MM UW
Ps67,320
21.6
18.2
1.73
2.06
0.4
10.2
Source: Bloomberg, J.P. Morgan estimates. Note: DASA3 and SORIANAB share prices and valuations are as of November 9, 2010; HYPE3 valuations share prices and valuations are as of
October 28, 2010.
Retail absolute and relative to MSCI LatAm
Retail EPS integer
170
1400
Absolute
2011
1200
150
1000
130
800
2010
110
600
90
400
200
70
0
50
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
Feb-09
Jul-09
Dec-09
May -10
Retail 12 mth fwd PE
Retail trailing PB
40
Oct-10
14
35
12
30
10
25
8
20
6
15
4
10
2
5
0
95
97
98
99
00
PE
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
95
97
98
99
00
PB
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
93
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Diagnosticos da America (DASA)
Overweight
DASA3.SA
www.dasa.com.br
Price Target: $26
R$21.07 (9 Nov 10)
End Date: Dec 2011
Company description
Dasa is the largest diagnostic laboratory in Brazil. Its business model is divided
into three segments: (1) private clinical and image analysis, (2) public services
provider and (3) lab-to-lab operations. Its growth is based on a mix of organic
growth and acquisitions. Currently, Dasa is established in 12 states and holds
21 different brands (after acquisition of MD1 and Cerpe).
Investment case
Our positive view on the company is due to its leading position in the most
important markets in Brazil (SP and RJ after the acquisition of MD1) and its
exposure to less affluent demographic sectors.
Dasa announced in the beginning of October the acquisition of MD1, the
fourth-largest laboratory in Brazil. The integration process has the potential to
create both revenue and cost synergies. DASA should also still benefit from
margin expansion as new management is focused on increasing profitability.
Although the stock has been performing strongly lately (more than +40%
YTD), we think there is more upside to come. After its weak period of top-line
expansion, we expect revenue growth to pick up in 2011 since the company
will likely capture revenue synergies as a result of operating leverage from
growth and the integration of recent acquisitions MD1 and Cerpe. Dasa trades
at a 15% premium to Fleury on a P/E 11e basis, which we believe is warranted
given (1) its position in less affluent segments, (2) higher diversification of
payers and (3) higher stock liquidity.
Brazil
Retail & Healthcare
Andrea Teixeira, CFA AC
(1-212) 622-6735
[email protected]
Price Performance
20
R$
16
12
Nov-09
Feb-10
May-10
Aug-10
Nov-10
Source: Bloomberg.
Performance
Absolute (%)
1M
3M
12M
3.0
27.5
73.1
Source: Bloomberg.
out November 10 for further
details.
Our R$26 price target (end date Dec-11) is based on a 9-year discounted free
cash flow to firm (no acquisitions) at a 10.3% nominal reais discount rate and
5.0% perpetuity growth. Main risks to our thesis are (1) if management does
not deliver its guidance of 27.5% EBITDA margin, (2) pricing pressure and/or
increased competition for acquisitions, and (3) economic slowdown.
Company Data
Price (R$)
Date Of Price
52-week Range (R$)
Mkt Cap (R$ mn)
Fiscal Year End
Shares O/S (mn)
Price Target (R$)
Price Target End
Date
94
21.10
09 Nov 10
22.00 12.14
6,565.03
Dec
311
26.00
31 Dec 11
Diagnosticos da America (DASA) (DASA3.SA;DASA3 BZ)
2009A
2010E
0.66
0.68
EV/EBITDA FY
21.9
17.3
P/E FY
31.7
30.9
EBITDA FY (R$ mn)
319
401
2011E
1.18
11.7
17.9
580
2012E
1.33
15.8
655
Source: Company data, Bloomberg, J.P. Morgan estimates. Adj. EPS=EPS (reported)+Goodwill Tax Shield.
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Diagnosticos da America (DASA): Summary of Financials
Income Statement
FY09A
FY10E
FY11E
Revenues
Cost of Services
SG&A
EBIT Margin
Depreciation
EBITDA
EBITDA margin
Financial income
Financial expense
Equity income
EBT
Taxes
Minority interest
Extraordinary
Net income
Net income margin
Technical Reserve Provisions
Goodwill Amortisation
Adjusted Net Incoome
EPS
1,388
(943)
(256)
189
13.6%
105
319
23.0%
12
(41)
4
152
2
(1)
0
153
6.0%
84
0.66
1,505
(947)
(260)
298
19.8%
103
401
26.6%
98
(164)
8
240
(83)
0
0
157
10.4%
157
0.68
2,158 2,385 2,626
(1,346) (1,488) (1,627)
(371)
(399)
(428)
441
497
572
20.4% 20.9% 21.8%
139
158
161
580
655
732
26.9% 27.5% 27.9%
28
47
90
(96)
(102)
(102)
11
12
13
384
454
572
(131)
(154)
(194)
0
0
0
0
0
0
367
415
492
11.7% 12.6% 14.4%
253
300
377
1.18
1.33
1.58
22.0%
14.0%
(418.8%)
19.2%
8.4%
25.6%
87.1%
(74.9%)
43.4%
44.6%
61.6%
(348.9%)
10.5%
13.1%
18.3%
72.3%
FY09A
FY10E
FY11E
Capex
Free cash flow
Dividends
Capex/depreciation
CAPEX/sales
Working capital
93
4
(273)
0
0.0%
0.9
6.7%
272
19.6%
96
73
(69)
9
5.6%
0.9
6.4%
296
19.7%
321
58
Revenue growth
EBITDA growth
Net income growth
FCF growth
Adjusted MLR
HC Members ('000)
Dental Plan Members ('000)
Total Membership ('000)
% of Individual Plans/Total
Market Share
Average Ticket (R$/month)
# of PSCs
Revenue/Requisition
Capex
Maintenance
Expansion
FY12E
FY13E
Balance Sheet
Cash
Accounts receivable
Inventories
FY09A FY10E
FY11E
FY12E
FY13E
287
269
47
268
283
47
396
393
67
780
475
72
1,044
522
79
Net PP&E
Other assets
Total assets
Technical Reserves
Short-term debt
Accounts payable
Long-term debt
Deferred taxes
Other liabilities
Total liabilities
Minority Interests
110
425
159
1,619
152
50
156
545
8
168
1,080
0
539
1,619
106
575
163
1,794
113
67
224
494
18
179
1,095
0
699
1,793
152
586
233
2,177
113
94
315
494
16
256
1,288
0
889
2,177
170
591
91
2,529
113
102
343
494
76
287
1,415
0
1,113
2,529
187
606
101
2,890
113
111
374
494
84
317
1,493
0
1,397
2,890
10.1%
11.7%
25.9%
25.4%
Net debt
Net Debt/Capital
Debt/Capital
Net Debt/EBITDA
410
33.2%
56.4%
1.3
339
25.9%
46.5%
0.8
211
14.1%
40.6%
0.4
(173)
(10.0%)
35.3%
(0.3)
(437)
(21.8%)
30.3%
(0.6)
FY12E
FY13E
Valuation, Macro
FY09A FY10E
FY11E
FY12E
FY13E
150
(56)
171
63
25.0%
1.1
7.0%
402
18.6%
162
(70)
294
75
25.0%
1.0
6.8%
444
18.6%
162
(70)
369
94
25.0%
1.0
6.2%
490
18.6%
337
58
466
68
475
68
482
69
EV/EBITDA
P/E
P/BV
P/S
FCF yield
Dividend yield
ROE
Net income margin
Net revenue/Assets
Assets/Equity
ROIC
Shares
ADRs
21.9
31.7
12.2
4.7
1.7%
0.0%
16.5%
6.0%
85.8%
3.0
15.7%
230
-
17.3
11.7
30.9
17.8
9.4
7.4
4.4
3.1
1.8%
3.0%
41.6% 300.7%
25.3% 31.9%
10.4% 11.7%
83.9% 99.1%
2.6
2.5
230
311
-
15.8
5.9
2.8
355.8%
30.0%
12.6%
94.3%
2.3
311
-
13.3
4.7
2.5
447.9%
30.1%
14.4%
90.9%
2.1
311
-
DCF
WACC
Perpetual Growth
Cost of equity
Cost of debt
10.3%
5.0%
10.4%
15.0%
93
-
96
-
150
-
162
-
162
-
-
-
-
-
-
95
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Hypermarcas
Overweight
HYPE3.SA
www.hypermarcas.com.br
Price Target: $30
R$27.99 (28 Oct 10)
End Date: Dec 2011
Company description
Hypermarcas, one of the leading consumer products company in Brazil, is
established in 3 segments: pharmaceutical, household/personal care and food.
Brazil
Retail & Healthcare
(1-212) 622-6735
[email protected]
Investment case
Hypermarcas is a combination of fast-growing consumer exposure in Brazil
with a defensive profile as its portfolio is mostly composed of staple goods.
Still, the HPC and pharma industries are very fragmented, meaning that there is
enough room for additional M&A. Still, even if acquisitions stop, we estimate
an improvement in EBITDA margin of at least 200bps.
Price Performance
The company is targeting 15% same brand sales (SBS) growth for the next few
years, which we view as conservative. We believe that the market might
incorporate higher estimates as the company delivers stronger results. Also,
Hypermarcas has the potential to unlock value by delivering more than official
guidance of R$2.5bn in acquisitions for 2010-2011 (it has already delivered
R$1.3bn). Recent debenture issue of R$1bn may indicate a continued interest
in shopping.
28
R$
24
20
Mar-10
Jun-10
Sep-10
Dec-10
Source: Bloomberg.
Performance
Our Dec 11 price target is R$30, derived from a 50/50 mix of organic model
(R$29 per share) and acquisitions-plus-growth DCF (R$32/share) and
considering company official M&A guidance. Also, we ran a sensitivity
analysis incorporating an additional R$1bn in M&A, which added R$1 to our
PT. Hypermarcas currently trades at P/E 11e of 21x, a 16% discount to Brazil
peers, which we view as unwarranted given high EPS CAGR 10-13e of 20%.
Absolute (%)
1M
3M
12M
-2.8
21.6
27.8
Source: Bloomberg.
Our price target is based on a 9-year DCF analysis at 11.3% WACC and
perpetuity growth of 6%. We blend the organic and the organic-plusacquisitions scenarios 50/50 in our price target valuation. Main risks to our
thesis are (1) increasing competition for acquisitions, (2) potential overhang
from private equity fund which owns 17.3% of the company and (3)
Hypermarcas is reliant on founder “Junior” to prospect for and negotiate deals.
Company Data
Price (R$)
Date Of Price
52-week Range (R$)
Mkt Cap (R$ mn)
Fiscal Year End
Shares O/S (mn)
Price Target (R$)
Price Target End
Date
96
27.99
28 Oct 10
30.25 15.95
14,936.24
Dec
534
30.00
31 Dec 11
Hypermarcas S.A. (HYPE3.SA;HYPE3 BZ)
2009A
Adj. EPS FY (R$)
1.21
P/E FY
23.1
2010E
0.99
28.2
2011E
1.35
20.7
2012E
1.55
18.1
2013E
1.73
16.2
Source: Company data, Bloomberg, J.P. Morgan estimates. *Adj. EPS = EPS (reported) + Goodwill Tax
Shield.
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Hypermarcas: Summary of Financials
FY09A
FY10E
FY11E
1Q10A
2Q10A
3Q10E
4Q10E
Revenues
COGS
Gross profit
2,025
(843)
1,182
3,262
(1,416)
1,847
4,111
(1,781)
2,330
Revenues
COGS
Gross profit
657
(274)
383
758
(327)
431
855
(359)
496
993
(455)
538
SG&A
Operating income
(718)
464
(1,138)
708
(1,415)
915
SG&A
Operating income
(222)
161
(299)
132
(285)
211
(333)
205
503
784
1,044
EBITDA
175
150
234
226
15
(166)
(157)
0
0
0
Interest, net
Other Income
Pretax income
(60)
(44)
(57)
(5)
0
0
0
479
542
758
0
101
88
153
200
(166)
(34.6%)
(194)
(35.7%)
(258)
(34.0%)
(39)
(38.4%)
(35)
(39.5%)
(52)
(34.0%)
(68)
(34.0%)
517
529
758
93
91
153
191
421
534
548
481
541
548
548
EPS- Reported
Adj. EPS
0.74
1.21
0.65
0.99
0.91
1.35
EPS- Reported
Adj. EPS
0.13
0.19
0.10
0.17
0.18
0.28
0.24
0.35
FY09A
FY10E
FY11E
Ratio Analysis
FY09A
FY10E
FY11E
499
725
1,836
1,753
1,000
3,612
1,550
1,161
3,677
Sales growth
Same store sales growth
EBITDA growth
EBIT growth
51.9%
60.8%
67.0%
61.1%
56.0%
52.6%
26.0%
33.1%
29.1%
296
868
846
753.3%
(18.3%)
36.6%
Total assets
6,278
9,466
9,504
Short-term Debt
Current liabilities
889
1,292
900
1,487
649
1,334
58.4%
22.9%
24.8%
56.6%
21.7%
24.0%
56.7%
22.2%
25.4%
Long-term Debt
Total liabilities
1,322
6,278
2,214
9,466
1,796
9,504
3,437
5,341
5,655
4.4
4.0
2.3
39
76
130
(319)
207
(338)
173
(171)
514
Enterprise value / Revenues
29.1
18.2
13.2
(1,961)
(1,342)
(3.19)
(1,488)
(962)
(1.80)
(103)
1,182
2.16
P/E
23.1
28.3
20.7
0.00
0.00
185.40
EBITDA
Interest, net
Other Income
Pretax income
Income taxes
Tax rate
Accounts receivable
Current assets
PP&E
D&A
Capex
Free cash flow
Dividends
Income taxes
Tax rate
Gross margin
EBIT margin
EBITDA margin
Debt / EBITDA
Source: Company reports and J.P. Morgan estimates. *Adj. EPS = EPS (reported) + Goodwill Tax Shield.
97
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Soriana
Underweight
SORIANAB.MX
www.soriana.com
Price Target: Ps38
Ps37.40 (9 Nov 10)
End Date: Dec 2011
Company description
Organizacion Soriana is a food retailer operating 500 stores (as of 3Q10) across
Mexico. The store formats are mostly hypermarkets, clubs and convenience
stores.
Investment case
Our negative view on Soriana is due to a lack of catalysts in the short/middle
term. Soriana has been experiencing weak sales growth despite easy
comparisons. Last year, the company was hard hit by the economic downturn.
We still see competition and cautious consumer purchase of discretionary
categories in Mexico as dragging Soriana’s growth. Also, the stock is trading at
rich valuations, at P/E 11e of 22.1x and EV/EBITDA 11e of 10.8x.
Mexico
Retail & Healthcare
(1-212) 622-6735
[email protected]
Price Performance
38
Ps
We see limited room for positive earnings surprises as the improvement in SSS
performance expected for the 4Q10 and 2011 seems already priced into
consensus. We expect Soriana to continue to face headwinds from heavy
competition as (1) Walmex is aggressively lowering prices and has greater
bargaining power with suppliers; (2) Fourth-largest competitor Chedraui is now
well capitalized and is gaining share (SSS at 3Q10 stood at 4.4% vs. 2.9% for
Soriana and 2.8% for Walmex).
We believe further recovery is priced in, as Soriana is trading at significant
premiums to its historical averages. At a 12-month forward P/E, the stock
trades at 23.3x, a 44% premium, and 12-month fwd EV/EBITDA of 11.1x,
47% above historical, which in our view do not reflect the risks.
34
30
Nov-09
Feb-10
May-10
Aug-10
Nov-10
Source: Bloomberg.
Performance
Absolute (%)
1M
3M
12M
4.4
9.1
17.5
Source: Bloomberg.
out November 10 for further
details.
Our Ps38 December 2011 price target is based on a 50/50 blend of a 9-year
DCF at 7.4% nominal WACC, 4% growth and 16.8x P/E 12E (30% discount to
peers). Upside risks to our cautious view include: (1) faster-than-anticipated
recovery in the economy; and (2) better-than-anticipated execution, i.e., no
market share losses.
Company Data
Price (Ps)
Date Of Price
52-week Range (Ps)
Mkt Cap (Ps mn)
Fiscal Year End
Shares O/S (mn)
Price Target (Ps)
Price Target End
Date
98
37.40
09 Nov 10
40.10 29.58
67,320.00
Dec
1,800
38.00
31 Dec 11
Organizacion Soriana (SORIANAB.MX;SORIANAB MM)
2009A
2010E
EPS FY (Ps)
1.59
1.73
EV/EBITDA FY
11.3
10.5
P/E FY
23.5
21.6
EBITDA FY (Ps mn)
6,568
7,107
2011E
2.06
9.3
18.2
7,837
2012E
2.21
8.5
17.0
8,418
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Organizacion Soriana: Summary of Financials
Income Statement
FY09A
FY10E
FY11E
FY12E
FY13E Balance Sheet
Revenues
Cost of goods sold
SG&A
EBIT Margin
Depreciation
EBITDA
EBITDA Margin
Financial income
Financial expense
Equity income
EBT
Taxes
Minority interest
Extraordinary
Net Income
Net income margin
EPS
88,637
(70,344)
(13,710)
4,584
5.2%
1,984
6,568
7.4%
148
885
79
0
3,842
(974)
2,868
3.2%
1.59
93,853
(74,573)
(14,225)
5,055
5.4%
2,052
7,107
7.6%
166
601
66
(4)
4,558
(1,423)
3,110
3.3%
1.73
100,365
(79,746)
(14,909)
5,710
5.7%
2,127
7,837
7.8%
38
459
0
0
5,151
(1,442)
3,708
3.7%
2.06
107,127
(85,065)
(16,040)
6,022
5.6%
2,396
8,418
7.9%
59
459
0
0
5,514
(1,544)
3,970
3.7%
2.21
115,242
(91,452)
(17,303)
6,488
5.6%
2,626
9,114
7.9%
95
459
0
0
6,008
(1,682)
4,326
3.8%
2.40
Revenue growth
EBITDA growth
Net income growth
FCF growth
(7.3%)
5.9%
6.9%
8.0%
8.2%
10.3%
66.4%
8.4%
19.3%
(133.8%) (101.0%) (6104.7%)
6.7%
7.4%
7.1%
(47.5%)
7.6%
8.3%
9.0%
170.4%
Cash
Accounts receivable
Inventories
2,139 1,119 1,301 2,114 2,263
3,305 4,384 4,667 4,981 5,359
11,084 13,207 13,817 14,505 15,344
Net PP&E
Other Assets
Total assets
Short-term debt
Accounts payable
Long-term debt
Deferred taxes
Other liabilities
Total liabilities
Minority interest
89
37,610
11,367
65,594
3,529
15,976
0
5,500
7,532
1,127
33,664
0
31,930
65,594
Net Debt
Net Debt/Capital
Debt/Capital
Net Debt/EBITDA
6,889 7,512 5,331 4,517 4,368
16.8% 17.4% 11.9% 9.3% 8.3%
22.0% 20.0% 14.8% 13.7% 12.7%
1.0
1.1
0.7
0.5
0.5
FY09A
FY10E
FY11E
FY12E
Capex
Free Cash Flow
Dividends
Capex/Depreciation
Capex/Sales
Working capital
1,164
(479)
4,141
0
0.0%
0.6
1.3%
(1,498)
(1.7%)
3,100
2,127
(41)
70
2.3%
1.5
3.3%
629
0.7%
3,655
(447)
2,459
260
7.0%
1.7
3.6%
182
0.2%
5,290
(451)
1,291
278
7.0%
2.2
4.9%
(268)
(0.3%)
6,752
(518)
3,490
303
7.0%
2.6
5.9%
(786)
(0.7%)
Sales Area (Sq,m)
Floor Space Growth
No. of Stores
SSS growth (nominal terms)
# of PL cards issued
% of sales in 0+5x (no interest)
% of sales on interest plans
Bad Debt Provisions
Personal Loans Portfolio
Capex
Maintenance
Expansion
2,824,481 2,923,125 3,058,125
1.5%
2.5%
5.5%
471
511
566
(10.3%)
(0.7%)
0.8%
1,164
-
3,100
-
3,655
-
EV/EBITDA
P/E
P/BV
P/S
FCF yield
Dividend yield
ROE
Net income margin
Net revenue/Assets
Assets/Equity
3,253,981 3,515,043 ROIC
4.0%
7.2% Shares
634
718 ADRs
0.7%
0.7%
- DCF
- WACC
- Perpetual Growth
- Cost of equity
- Cost of debt
5,290
-
95
38,615
12,135
69,555
4,039
17,057
0
4,592
8,041
1,203
34,932
0
34,623
69,555
102
40,142
12,920
72,948
2,039
18,403
0
4,592
8,561
1,281
34,876
0
38,072
72,948
108
43,036
13,790
78,535
2,039
19,864
0
4,592
8,909
1,367
36,771
0
41,764
78,535
117
47,162
14,835
85,079
2,039
21,605
0
4,592
9,584
1,470
39,291
0
45,788
85,079
11.3 10.5
9.3
8.5
7.9
23.5 21.6 18.2 17.0 15.6
2.1
1.9
1.8
1.6
1.5
0.8
0.7
0.7
0.6
0.6
5.6% (0.1%) 3.4% 1.8% 4.9%
0.0% 0.1% 0.4% 0.4% 0.4%
9.3% 9.5% 10.2% 9.9% 9.9%
3.2% 3.3% 3.7% 3.7% 3.8%
1.4
1.3
1.4
1.4
2.1
2.0
1.9
1.9
5.7% 7.3% 8.2%
1,800 1,800 1,800 1,800 1,800
-
7.4%
4.0%
7.7%
4.1%
6,752
-
Note: Ps in millions (except per-share data). Fiscal year ends Dec
99
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Telecom, Media &
Technology
We believe investors should only have a selective
exposure to the sector, either through highgrowth/underpenetrated market stories or through stocks
offering a mix of growth and cash flow (like TSU/AMX).
Generally, telecom stocks tend to be defensive, while
media stocks are more cyclically exposed, as are tech
stocks. We believe the telecom sector could offer
attractive cash flow and dividend yields, compensating
for slower growth. Media stocks fared better in earnings
than developed peers as most of the media expenditure is
still staple variety rather than discretionary. Tech stocks
offer highest growth among TMT sector, as LatAm is
still underpenetrated, with high demand.
Among telecom companies, growth is mainly driven by
the increasing contribution from data revenues:
companies are investing a large amount in data networks,
and there will be a 3G license auction in Brasil (NIHD
likely to be the only bidder) as there was in Mexico.
Looking at media companies, we could see them grow,
on increasing pay-TV penetration and also from the offer
of combined services. Tech companies could benefit
from good economic momentum, given higher demand.
TMT investors benefit from attractive cash flow yields
as well as good dividend distribution, as the sector
usually provides low growth for reasonable cash
generation, and thus is considered defensive. We believe
exposure should be taken in stocks with cheap FCF yield
relative to EBITDA growth.
Andre Baggio AC
(55-11) 3048-3427
[email protected]
Bloomberg JPMA BAGGIO <GO>
EV/EBITDA is a key metric for the sector . . . .
8
5.5
6
4.4
5
4
3.4
UW: Telmex (TMX): weak trends, demonstrated by
double-digit EBITDA decline over the last six quarters;
rich valuation relative to higher-growth LatAm peers;
tough outlook, given rising competition in Mexico.
2.9
2
1
0
VIV
TSU
AMX ENTEL NIHD TEO
PT
TI
VOD
TEF
. . . and we should also look at FCF yields
20%
15%
15.1%
10.8%
10%
9.4%
11.4%
8.0%
10.3%
7.8%
7.0%
4.4%
5%
0%
-1.2%
-5%
VIV
TSU AMX ENTEL NIHD TEO
PT
TI
VOD TEF
Best combination: cheap FCF yield relative to EBITDA growth
EBITDA CAGR 2011-2013E
15%
10%
TSU
ENTEL
5%
AMX TEF
VIV
VOD
PT
0%
TI
TEO
4%
6%
8%
10%
12%
14%
16%
2011 FCF yield
EBITDA CAGR, 2011-2013e, for covered telecom stocks
15%
10%
14%
9%
6%
5%
5%
AMX
ENTEL
5%
0%
-5%
VIV
TSU
100
5.5
5.1
4.6
4.2
3
-5%
Recommendations
OW: TIM Participações (TSU): only pure mobile
player in Brazil, with the highest growth among
Brazilian telcos; lower exposure to MTR changes;
valuation of 9.3% FCF yield and 2.9 x EV/EBITDA
2011E.
7.2
6.4
7
NIHD
-3%
TEO
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Top pick and stock to avoid
Price (US$)
Top pick
TIM Participacoes
Stock to avoid
Telmex
Code
Rating
Mkt cap
(US$MM)
P/E (x)
10E
EPS
10E
11E
31.85
TSU
OW
7,900
29.4
14.3
0.19
15.02
TMX
UW
13,586
12.2
13.0
0.8
11E
Div. yield
11E (%)
0.4
0.7
ROE
11E (%)
1.7%
10%
5%
37%
Telecom absolute and relative to MSCI LatAm
Telecom EPS integer
150
600
Absolute
140
500
400
130
300
120
200
110
100
100
0
2011
2010
90
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
Feb-09
Jul-09
Dec-09
May -10
Telecom 12 mth fwd PE
Telecom trailing PB
24
Oct-10
5
21
4
18
3
15
12
2
9
1
6
0
95
97
98
99
00
PE
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
95
97
98
99
00
PB
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
101
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
TIM Participacoes
Overweight
TSU
www.tim.com.br
Price Target: $40
$32.21 (28 Oct 10)
End Date: Dec 2011
Company description
TIM Participações S.A. (NYSE: TSU) provides telecommunication services all
across Brazil. Most of its revenues come from mobile, and it also has long
distance and data transmission services. TSU is controlled by the Telecom
Italia group.
Investment case
TSU is our top pick: (i) turnaround to go on, demonstrated by better FCF; (ii)
higher growth among Brazilian telcos; (iii) increasing presence as data service
provider; (iv) lower MTR exposure, even when compared to VIV/TSP
combined; (v) cheap valuation of 9.8% FCF yield 2011e and 2.8x EV/EBITDA
(still cheap on ON+PNs, at 8.1%/3.4x).
We believe TSU could upgrade earnings if: (1) it maintains a high number of
subscriber additions without substantial dilution in ARPU, (2) it is able to
increase levels of data as % of service revenues toward the ones reported by
Vivo and Claro, as well as improve its offer of data services; (3) it reduces
advertisement expenses.
The market could derate TSU, if: 1) results from the free on-net minutes
strategy disappoint in ARPU; 2) competition increases with the entry of new
players (5th license); and 3) capex rises as result of more voice or data traffic,
depressing FCF.
Brazil
Telecom, Media & Technology
Andre Baggio AC
(55-11) 3048-3427
[email protected]
Price Performance
34
30
$
26
22
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Performance
Absolute (%)
1M
3M
12M
14%
27%
29%
Source: Bloomberg.
We rate TSU OW and our Dec 11 price target is $40 based on the average of
our DCF and multiples valuation. Our DCF valuation is based on 9.4% WACC,
1.5% LT growth and yields, a $43.3 fair value. Our multiples-based valuation
derives from a 10% target FCF yield, resulting in a fair value of $36.7. The
downside risks are mentioned above.
TIM Participacoes (TSU;TSU US)
Company Data
Price ($)
Date Of Price
52-week Range ($)
Mkt Cap ($ mn)
Fiscal Year End
Shares O/S (mn)
Price Target ($)
Price Target End
Date
Div. Yield
Debt/Total Capital
102
32.21
28 Oct 10
34.13 22.49
7,974.34
Dec
248
40.00
31 Dec 11
1.5%
17.9%
Revenues FY (R$ mn)
EBITDA FY (R$ mn)
EBITDA Margin FY (R$)
EPS FY (R$)
P/BV FY
2009A
13,907
3,571
26%
3.20
0.03
1.8
2010E
14,406
4,195
29%
1.86
1.95
1.5
2011E
15,862
4,704
30%
3.84
4.07
1.5
2012E
17,220
5,111
30%
6.14
5.47
1.5
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
TIM Participacoes: Summary of Financials
Income Statement
Net Revenue
Cash Costs
EBITDA
EBITDA margin
Depreciation and Amortisation
EBIT
Net interest expense
Other nonoperating income
EBT
Taxes
Minority interest
Extraordinary
Net Income
Adj. Net Income
Shares Outstanding
EPS
Adj. EPS
FY09A FY10E FY11E FY12E FY13E Balance Sheet
13,907 14,406 15,862 17,220 18,348 Cash
-10,336 -10,211 -11,158 -12,110 -12,879 Accounts receivable
3,571
4,195 4,704 5,111 5,469 Inventories
26%
29%
30%
30%
30% Other current assets
-3,141 -3,198 -3,149 -2,989 -2,883 Net PP&E
444
997 1,555 2,121 2,586 Other Assets
253
-278
-187
-32
-32 Total assets
0
0
0
0
0 Short-term debt
697
719 1,368 2,089 2,554 Accounts payable
-6
-259
-419
-568
-608 Other current liabilities
0
0
0
0
0 Long-term debt
- Deferred taxes
691
460
949 1,521 1,946 Other liabilities
691
460
949 1,521 1,946 Total liabilities
2,476
2,476 2,476 2,476 2,476 Minority interest
3.20
1.86
3.84
6.14
7.87 Shareholders' equity
2.79
1.86
3.84
6.14
7.87 Liabilities + Equity
2,559 1,852 2,040 2,214
2,480 2,881 3,172 3,444
406
248
273
296
1,321 1,662 1,824 1,975
5,323 5,333 4,984 4,795
5,360 5,341 5,341 5,341
17,450 17,317 17,634 18,066
1,417 1,597 1,597 1,597
0
0
0
0
4,320 4,607 5,066 5,493
2,743 1,502
642
816
1,013
709
698
715
-365
118
129
112
9,127 8,533 8,131 8,732
0
0
0
0
8,323 8,785 9,504 9,333
17,450 17,317 17,634 18,066
Revenue growth
EBITDA growth
Net income growth
FCF growth
5.8%
3.6% 10.1%
23.2% 17.5% 12.1%
249.8% -33.4% 106.3%
-72.1% -605.5% 125.7%
1,684 1,317
269
269
269
1,684 1,317
39 -1,652 -3,590
9.6% 7.6% 1.5% 1.5% 1.4%
23.8% 17.9% 12.7% 13.4% 13.8%
0.5
0.3
0.1
0.1
0.0
Capex
Free Cash Flow Equity
Dividends/Share
Consolidated Dividends
Sharebuybacks
Capex/Depreciation
Capex/Sales
Working capital
Net income margin
FY09A
-2,671
-243
-112
0.68
24.3%
168
0
0.9
19.2%
111
0.8%
5.0%
Lines in Service
Broadband Subs
Broadband Net Adds
Mobile Subs
Mobile Net Adds
Mobile ARPU
Mobile MOU
PayTV subs
0
0
0
41,115
4,713
26.54
83
0
Fx, Avg
Quarterly Data
Revenue
Net Income
EPS
1.99
1Q10A
3,296
30
0.13
8.6%
8.7%
60.2%
32.3%
6.5%
7.0%
28.0%
14.6%
Net Debt
Adj. Net Debt
Net Debt/Capital
Debt/Capital
Net Debt/EBITDA
FY10E FY11E FY12E FY13E Valuation, Macro
-3,000 -2,800 -2,800 -2,876 EV/EBITDA
-90
-20
-19
-16 Adj. P/E
566 1,278 1,691 1,938 P/BV
0.82
0.93
6.83
7.83
44.3% 24.3% 111.2% 99.6% FCF yield
204
230 1,691 1,938 Dividend yield
0
0
0
0 ROE
0.9
0.9
0.9
1.0
Net revenue/Assets
20.8% 17.7% 16.3% 15.7%
Assets/Equity
201
221
240
256
1.4%
1.4% 1.4%
1.4% ROIC
3.2%
6.0% 8.8% 10.6% Shares
ADRs
0
0
0
0
0
0
0
0
0
0
0
0 WACC
48,052 52,857 57,085 60,510 Perpetual Growth
6,937 4,805 4,229 3,425 Cost of equity
24.58 23.65 23.42 23.42 Cost of debt
0
0
0
0 Subsidiary Share
0
0
0
0
1.79
1.83
1.88
2Q10A 3Q10E 4Q10E
3,559 3,680 3,870
101
121
208
0.41
0.48
0.84
FY13E
2,359
3,670
316
2,101
4,788
5,341
18,574
1,597
0
5,848
961
715
111
9,232
0
9,342
18,574
4.7
3.5
3.0
2.5
2.0
19.7
29.5
14.3
8.9
7.0
1.8
1.5
1.5
1.5
1.6
-0.7%
1.2%
8.3%
0.8
2.1
4.2% 9.2% 11.9% 13.3%
1.5% 1.7% 12.4% 14.3%
5.2% 10.0% 16.3% 20.8%
0.8
0.9
1.0
1.0
2.0
1.9
1.9
2.0
3.5%
2,476
248
6.2%
2,476
248
9.7% 13.2% 16.6%
2,476 2,476 2,476
248
248
248
9.6%
1.5%
10.8%
5.2%
0.0%
1.92
Quarterly Data
Revenue
Net Income
EPS
1Q11E 2Q11E 3Q11E 4Q11E
-
103
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Telmex
Underweight
TMX
www.telmex.com
Price Target: $12
$15.15 (28 Oct 10)
End Date: Dec 2011
Company description
Telmex provides fixed-line telecommunications services in Mexico. The
company’s service coverage comprises the operation of the nation’s most
complete local and long distance networks. Additionally, Telmex offers
services such as connectivity, internet access, co-location, web hosting and
interconnection services to other telecommunications operators.
Investment case
The key reasons for our UW rating are: (1) Continuing weak core trends at
TMX as demonstrated by double-digit EBITDA decline over the last six
quarters; (2) Likelihood of adverse regulation hurting trends further; (3) Less
alignment with Carlos Slim, given recent AMX-CGT-TII transaction, which
lowered his effective stake in TMX significantly; (4) Rising competition in
Mexico, especially from cable operators.
We believe TMX could upgrade earnings if it is able to control costs, which
have increased in line with inflation although revenues have been declining.
Moreover, TMX could get a pay-TV license, which would help trends.
The market could rerate TMX, if trends improved or if there is an expectation
of a tender offer for minorities from its controlling shareholder AMX at a
premium to market price. No such offer has been announced.
Mexico
Telecom, Media & Technology
Andre Baggio AC
(55-11) 3048-3427
[email protected]
Price Performance
19
17
$
15
13
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Bloomberg.
Performance
1M
Absolute (%)
2%
3M
-1%
12M
-18%
Source: Bloomberg.
Our PT of US$12 is based on a combination of DCF ($14.1 value), growth
model ($10.1) and multiples ($11.5). Our DCF methodology and uses a WACC
of 10.4%, LT growth of -1% and LT margin of 39%. We rate TMX UW in
light of weak trends, rich valuation relative to higher-growth LatAm peers, and
a tough outlook. Upside risks to our rating are the same as the ones mentioned
in the above paragraph (better trends, a tender from AMX).
Telmex SA (TMX;TMX US)
Company Data
Price ($)
Date Of Price
52-week Range ($)
Mkt Cap ($ mn)
Fiscal Year End
Shares O/S (mn)
Price Target ($)
Price Target End
Date
Div. Yield
Debt/Total Capital
104
15.15
28 Oct 10
18.48 13.00
13,779.68
Dec
910
12.00
31 Dec 11
5.4%
60.2%
Revenues FY (Ps mn)
EBITDA FY (Ps mn)
EBITDA Margin FY (Ps)
EPS FY (Ps)
P/BV FY
P/E FY
2009A
119,100
52,315
44%
22.28
4.7
8.4
2010E
112,804
45,385
40%
18.51
4.7
10.1
2011E
108,244
42,811
40%
17.30
4.8
10.8
2012E
103,133
40,308
39%
15.23
7.6
12.3
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Telmex SA: Summary of Financials
Income Statement
Net Revenue
Cash Costs
EBITDA
EBITDA margin
Depreciation and Amortisation
EBIT
Net interest expense
Other nonoperating income
EBT
Taxes
Minority interest
Extraordinary
Net Income
Adj. Net Income
Shares Outstanding
EPS
Adj. EPS
Cash
Accounts receivable
Inventories
Net PP&E
Other Assets
Total assets
Short-term debt
Accounts payable
Long-term debt
Deferred taxes
Other liabilities
Total liabilities
Minority interest
14,380
0
0
37,456
104,305
22,214
178,355
19,769
0
17,519
83,105
0
19,641
140,034
0
38,321
178,355
Net Debt
Adj. Net Debt
Net Debt/Capital
Debt/Capital
Net Debt/EBITDA
88,494 89,379 83,871 78,541 72,832
121,494 110,716 97,055 84,803 72,846
49.6% 53.6% 52.9% 52.0% 49.8%
57.7% 60.2% 59.8% 59.2% 57.3%
1.7
2.0
2.0
1.9
1.9
FY09A FY10E FY11E FY12E FY13E Valuation, Macro
Capex
Free Cash Flow Equity
Dividends/Share
Consolidated Dividends
Sharebuybacks
Capex/Depreciation
Capex/Sales
Working capital
Net income margin
-9,001 -10,000 -9,596 -9,143 -8,825 EV/EBITDA
963 -5,493
831 1,047
734 Adj. P/E
29,480 19,592 22,209 20,388 18,822 P/BV
16.42 10.02
9.88
9.48
8.02
73.7% 52.7% 56.8% 62.0% 49.5% FCF yield
15,093 8,803 8,547 8,136 6,865 Dividend yield
4,095 6,074 2,553 1,322
648 ROE
0.5
0.6
0.6
0.6
0.7
Net revenue/Assets
7.6%
8.9%
8.9%
8.9% 8.9%
Assets/Equity
19,937 15,491 14,932 14,227 13,732
16.7% 13.7% 13.8% 13.8% 13.8% ROIC
17.2% 14.8% 13.9% 12.7% 13.9% Shares
ADRs
15,882 15,509 15,124 14,671 14,231
6,524 7,349 8,112 8,598 8,770
1,514
825
763
487
172 WACC
0
0
0
0
0 Perpetual Growth
0
0
0
0
0 Cost of equity
0.00
0.00
0.00
0.00
0.00 Cost of debt
0
0
0
0
0 Subsidiary Share
0
0
0
0
0
Revenue growth
EBITDA growth
Net income growth
FCF growth
Lines in Service
Broadband Subs
Broadband Net Adds
Mobile Subs
Mobile Net Adds
Mobile ARPU
Mobile MOU
PayTV subs
Fx, Avg
119,100
-66,785
52,315
44%
-17,943
34,372
-5,411
0
28,963
-8,486
0
0
20,477
16,506
18,383
22.28
18.50
112,804
-67,419
45,385
40%
-17,357
28,028
-5,546
0
23,858
-7,157
0
0
16,700
13,403
17,564
18.51
14.70
-4.0% -5.3%
-9.3% -13.2%
1.5% -18.4%
-4.0% -33.5%
13.50
12.68
108,244
-65,433
42,811
40%
-16,424
26,388
-5,789
0
21,209
-6,151
0
0
15,058
12,435
17,296
17.30
14.21
103,133
-62,825
40,308
39%
-14,836
25,473
-5,871
0
18,733
-5,620
0
0
13,113
11,164
17,170
15.23
13.00
99,549
-60,853
38,696
39%
-12,511
26,186
-5,498
0
19,794
-5,938
0
0
13,856
12,580
17,115
16.19
14.67
-4.0% -4.7%
-5.7% -5.8%
-9.8% -12.9%
13.4% -8.2%
-3.5%
-4.0%
5.7%
-7.7%
12.35
12.38
10,958
0
0
38,503
97,170
20,103
166,735
3,790
0
23,012
96,547
0
8,326
131,676
0
35,059
166,735
10,958
0
0
37,113
90,343
20,103
158,516
3,790
0
22,181
91,039
0
8,326
125,337
0
33,180
158,516
10,958
0
0
35,361
84,650
20,103
151,071
3,790
0
21,134
85,709
0
19,174
129,807
0
21,264
151,071
10,958
0
0
34,132
80,964
20,103
146,157
3,790
0
20,400
80,000
0
19,174
123,364
0
22,793
146,157
5.8
10.1
4.7
6.1
12.7
4.7
6.0
13.2
4.8
6.1
14.4
7.6
6.2
12.8
7.3
13.1%
8.8%
53.4%
0.7
4.7
9.0%
5.4%
47.6%
0.7
4.8
11.5%
5.3%
45.4%
0.7
4.8
10.8%
5.1%
61.7%
0.7
7.1
10.3%
4.3%
60.8%
0.7
6.4
18.3% 15.4% 15.8% 17.9% 19.0%
18,383 17,564 17,296 17,170 17,115
919
878
865
858
856
10.4%
-1.0%
11.1%
4.2%
12.65
Note: Ps in millions (except per-share data). Fiscal year ends Dec.
105
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Utilities
Key sector dynamics
In Brazil, the main sector drivers for 2011 should be: (1)
inflation. If inflation expectations increase in 2011, most
companies in the sector provide a hedge due to indexed
tariffs; (2) energy prices. With long-term electricity
supply-vs.-demand balance still comfortable, free market
prices seem capped for the near term, limiting upside to
generators. Outcome of new capacity auctions will give
the market more visibility on balance and price trend; (3)
regulation. The pending issue of concession renewals
might be tackled in 2011; additionally, while water
companies are expected to benefit from new regulation,
uncertainty should be high for power discos as they start
their 3rd cycle of tariff resets. Overall, we remain
lukewarm on the sector outlook for 2011 and
recommend investors to selectively focus on individual
cases of potential regulatory upside and stocks that
provide inflation hedges. In Chile, expectation of tight
reserve margin in 2011 means thinner margins for
generators (especially heavily hydro-based) and overall
growth outlook remains uncertain for major players.
Despite the high demand growth and increased need for
new capacity, auction for greenfield projects should
remain competitive, thereby limiting the upside for
generators. Discos should also benefit less from demand
growth in the future due to recent changes in tariff
regulation.
Valuation discount of Brazilian to global utilities is
sustained by high local interest rates, and we do not
expect this to change in 2011. Major potential for rederatings will come from regulatory changes. Although
cost cutting and M&A are potential drivers for power
discos, we are skeptical on execution during 2011.
Recommendations
Our top picks among Latin American utilities are:
Brazilian water utility Copasa (CSMG3) due to expected
rerating coming from a new tariff framework, and
Brazilian power utility AES Tiete (GETI4) due to
earnings stability, high dividend yield and inflation
hedge on revenues. We recommend that investors avoid
Brazilian power utility Eletropaulo (ELPL6), due to the
risk related to the tariff reset process in July 2011 and
potential nonrecurring R$1bn liability, and vertical
Brazilian utility CPFL Energia (CPFE3), due to
relatively expensive valuation.
106
Anderson Frey AC
(1-212) 622-6615
[email protected]
Bloomberg JPMA FREY <GO>
Inflation expectations in Brazil for 12M forward
In %
6.5
6.0
IPCA
IGPM
Apr-09
Jul-09
5.5
5.0
4.5
4.0
3.5
Jan-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Source: Brazilian Central Bank consensus.
Forecast of reserve margin in Brazil for electricity
In % of total sector assured generation capacity
15
gov ernment
alternativ e w ith some project delay s
alternativ e w ith some project cancellations
10
5
0
-5
-10
2010e
2011e
2012e
2013e
2014e
2015e
2016e
2017e
2018e
2019e
Source: EPE and J.P. Morgan estimates.
Global utilities valuation
2011E P/E and EV/EBITDA, see our weekly report for list of companies
16
2011e P/E
2011e EV/EBITDA
14
12
10
8
6
4
Brazil
Chile
Asia Pacific
Europe
USA
Source: J.P. Morgan estimates. Priced as of 28-Oct.-2010.
Declining regulatory returns for power utilities
After-tax, real, regulated WACC for Brazilian utilities
12%
11.26%
9.18%
10%
9.95%
8%
7.24%
7.15%
Transcos 2009-13
Discos 2011-14
6%
4%
2%
0%
Discos 2003-05
Source: ANEEL.
Transcos 2005-09
Discos 2007-10
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Top picks
Copasa
AES Tiete
Stocks to avoid
Eletropaulo
CPFL Energia
P/E (x)
EPS
Price
Code
Rating
Mkt cap
(US$MM)
10E
11E
10E
11E
Div. yield
11E (%)
ROE
11E (%)
26.4
23.5
CSMG3
GETI4
OW
OW
1,783
5,246
6.4
10.7
6.0
9.8
4.13
2.19
4.39
2.38
8.3
10.7
12.0
181.4
29.9
40.4
ELPL6
CPFE3
UW
UW
2,936
11,368
4.8
13.7
8.5
13.9
6.29
2.94
3.54
2.90
12.3
5.4
18.0
25.3
Utilities absolute and relative to MSCI LatAm
Utilities EPS integer
180
800
Absolute
700
170
160
600
2011
150
500
140
400
130
300
120
200
110
100
100
0
2010
90
Dec-02
Mar-04
May -05
Aug-06
Oct-07
Jan-09
Mar-10
Feb-09
Jul-09
Dec-09
May -10
Utilities 12 mth fwd PE
Utilities trailing PB
30
Oct-10
1.4
1.2
25
1
20
0.8
15
0.6
0.4
10
0.2
5
0
95
97
98
99
00
PE
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
95
97
98
99
00
PB
01
02
03
04
Av g
05
06
+1SD
07
08
10
-1SD
107
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
COPASA
Overweight
CSMG3.SA
www.copasa.com.br
Price Target: R$34
R$26.35 (28 Oct 10)
End Date: Dec 2011
Company description
Controlled by the state government of Minas Gerais in Brazil, COPASA
(CSMG3) is a water utility providing water distribution for 603 municipalities
(population of 13.8mn) and sewage collection for 156 municipalities
(population of 7.8mn) in the state.
Investment case
CSMG3 trades at a valuation discount to peer SABESP, global water utilities
and Brazilian electric utilities, mainly due to the lack of a regulatory
framework in which the company’s capex is properly remunerated by marketbased return rates. Nevertheless, a regulatory agency was created in the state
and is expected to develop a new and market-friendly tariff framework during
2011, to be implemented by Mar 2012. Additionally, COPASA benefits from
high cost efficiency relative to peers, high corporate governance, high volume
growth prospects and a high dividend yield (2010e at 7.8%).
Brazil
Utilities
Anderson Frey AC
(1-212) 622-6615
[email protected]
Price Performance
36
32
R$ 28
24
20
Nov-09
For 2011, positive surprises on earnings could come from: (1) sales volume
growth above our 9.5% estimate; and (2) tariff adjustment above inflation in
March. For the long term, since there is still uncertainty regarding the final
design of the new tariff framework, we chose to be more conservative and
assume a mild tariff reset of +2.3% in March 2012 (i.e., below inflation).
Earnings upside could come from a better outcome.
Feb-10
May-10
Aug-10
Nov-10
Source: Bloomberg.
Performance
1M
3M
12M
Absolute (%)
3.2
5.5
-15.9
Relative (%)
-1.5
-2.9
-25.6
While globally water utilities trade at a valuation premium to electric utilities,
in Brazil CSMG3 currently trades at a significant discount to electricity peers.
We expect valuation convergence under a new tariff framework.
We have a DCF-based 2011YE price target of R$34, with 9.1% real cost of
equity and 0% perpetuity growth. The main risks are: (1) worse-than-expected
tariff reset; (2) sales volume growth for 2011 below our expectation; (3) belowinflation tariff adjustment in Mar 2011; (4) lower-than-50% earnings payout;
and (5) high increases in operating costs.
Company Data
Price (R$)
Date Of Price
52-week Range (R$)
Mkt Cap (R$ mn)
Fiscal Year End
Shares O/S (mn)
Price Target (R$)
Price Target End
Date
Div. Yield
Debt/Total Capital
108
26.35
28 Oct 10
34.25 20.95
3,038.16
Dec
115
34.00
31 Dec 11
7.8%
45.4%
Cia Saneamento Minas Gerais (CSMG3.SA;CSMG3 BZ)
2010E
2009A
Revenues FY (R$ mn)
2,229
2,332
EBITDA FY (R$ mn)
939
951
42.1%
40.8%
4.73
4.13
4.18
4.11
P/E FY
5.6
6.4
P/BV FY
0.8
0.8
2011E
2,589
1,074
41.5%
4.39
4.00
6.0
0.7
2012E
2,874
1,152
40.1%
3.80
4.00
6.9
0.7
2013E
3,188
1,267
39.7%
4.13
6.4
0.6
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
COPASA: Summary of Financials
Income Statement
Net Revenues
Cost and Expenses
EBITDA
EBITDA margin (%)
Depreciation
EBIT
Net Financial Result
Non-operating income
EBT
Taxes
Minority interest
Net income
Net Margin (%)
Shares
EPS
2,229
(1,546)
939
42.1%
(256)
683
13
(2)
0
522
(148)
0
546
24.5%
115
4.73
Capex
FCFF
FCFE
Dividends
Net debt to EBITDA
Net Debt to Equity
Current ratio
Interest Coverage
Capex/depreciation
Net Margin (%)
Revenues/Assets
Assets/Equity
ROE (%)
(54)
(1,045)
(309)
(52)
158
29.0%
2.2
54.5%
1.5
(69.6)
4.1
24.5%
0.3
1.9
14.6%
960.7 1009.6 1105.6 1192.3 1264.5
5,242 5,549 6,512 6,946 7,595
2.6
2.6
2.6
2.7
2.8
11,540 11,655 11,655 11,655 11,655
2,332
(1,648)
951
40.8%
(267)
684
(42)
(8)
0
425
(157)
0
476
20.4%
115
4.13
(21)
(950)
(178)
(76)
238
50.0%
2.6
63.0%
1.0
22.4
3.6
20.4%
0.3
1.8
12.0%
2,589 2,874 3,188 Cash
(1,787) (1,991) (2,213) Accounts receivable
1,074 1,152 1,267 Other current assets
41.5% 40.1% 39.7% Long Term assets
(272) (268) (293) Net fixed assets
802
883
975 Total assets
(112) (252) (290) Short-term debt
(4)
(25)
(25) Accounts payable
0
0
1 Other current liabilities
460
406
442 Long-term debt
(181) (168) (183) Other long-term liabilities
0
1
2 Total liabilities
506
438
476 Minority interest
19.5% 15.2% 14.9% Shareholders' equity
115
115
115 Liabilities + Equity
4.39 3.80 4.13 Net debt
(61)
(64)
(71) Sales (million m3)
(800) (836) (874) Connections
58
84
140 Avg.Tariff ($/m3)
303
189
236 # employees
253
219
238
50.0% 50.0% 50.0% FX rate (eop)
2.6
2.8
2.9 Inflation (%)
67.2% 73.2% 78.3% GDP growth (%)
1.1
1.1
1.2 Interest Rates (%,eop)
9.6
4.6
4.4
2.9
3.1
3.0 EV/EBITDA
19.5% 15.2% 14.9% P/E
0.3
0.3
0.3 P/BV
1.9
1.9
2.0 FCFE yield (%)
12.0% 9.9% 10.2% Dividend yield
415
404
112
967
5,025
6,923
201
97
327
1,709
858
3,191
0
3,731
6,923
2,035
48
423
112
977
5,708
7,267
201
103
273
1,861
858
3,297
0
3,970
7,267
2,501
73
469
112
999
6,236
7,889
201
112
273
2,222
858
3,666
0
4,223
7,889
2,837
41
521
112
1,025
6,804
8,502
201
124
273
2,583
879
4,061
0
4,442
8,502
3,250
39
578
112
1,053
7,385
9,166
201
138
273
2,973
901
4,487
0
4,680
9,166
3,664
1.74 1.75 1.85 1.93
(1.7%) 9.2% 5.2% 4.5%
(0.2%) 7.5% 4.5% 4.0%
8.8% 10.8% 12.5% 10.5%
2.00
4.5%
4.0%
9.5%
5.7
5.6
5.0
5.5
6.3
5.9
0.8
0.8
0.7
(1.7%) (2.5%) 10.0%
5.3% 7.9% 8.4%
4.2
6.3
0.7
7.8%
7.9%
4.6
6.9
0.7
6.2%
7.3%
109
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
ELETROPAULO
Underweight
ELPL6.SA
www.eletropaulo.com.br
Price Target: R$30
R$29.90 (28 Oct 10)
End Date: Dec 2011
Company description
Controlled by the US utility AES and BNDES (Brazilian Development Bank),
Eletropaulo (ELPL6 BZ) is a pure power distribution company that owns the
concession for the metropolitan area of Sao Paulo city and serves 6.0 million
customers (9% market share in Brazil).
Brazil
Utilities
Anderson Frey AC
(1-212) 622-6615
[email protected]
Investment case
We believe that the stock’s performance in 2011 should be capped by the
following potential negative drivers: (1) increased likelihood of a cash
disbursement of ~ R$1.1bn in the judicial dispute with Brazilian utility
Eletrobras; and (2) uncertainty regarding the outcome of the July 2011 tariff
reset. Moreover, we expect sustainable dividend yields to decrease post 2011 to
levels below of those of more predictable utilities in Brazil, which is a major
negative since a high dividend yield has been for years one of the highlights of
ELPL6’s investment case.
Price Performance
40
36
R$
32
28
Nov-09
Since the potential cash disbursement of R$1.1bn in the judicial dispute with
Eletrobras is not yet included in our estimates, this represents the single highest
downside risk for 2011 earnings. The second major source of downside (or
upside) is the outcome of the July 2011 tariff reset. We assumed a 1.6% tariff
increase allowed by the regulator.
Feb-10
May-10
Aug-10
Nov-10
Source: Bloomberg.
Performance
1M
3M
Absolute (%)
-1.0
-10.3
12M
8.0
Relative (%)
-5.7
-18.6
-1.8
ELPL6 currently trades at similar valuation levels to other power utilities in
Brazil. Although we do not expect this to change in the near future, we do
expect a relevant reduction in profitability after the July 2011 tariff reset.
We have a DCF-based 2011YE price target of R$30, with 10.0% real cost of
equity and 0% perpetuity growth. The main risks: (1) a better-than-expected
outcome from the July 2011 tariff reset; (2) lower-than-expected expense with
pension liability; (3) a favorable resolution to the ~R$1.1bn debt dispute with
Eletrobras; (4) steep reduction in controllable costs; and (5) a sooner-thanexpected restart of the sale process of a controlling stake by BNDES.
Company Data
Price (R$)
Date Of Price
52-week Range (R$)
Mkt Cap (R$ mn)
Fiscal Year End
Shares O/S (mn)
Price Target (R$)
Price Target End
Date
Div. Yield
Debt/Total Capital
110
29.90
28 Oct 10
39.98 28.76
5,003.59
Dec
167
30.00
31 Dec 11
21.8%
71.7%
ELETROPAULO (ELPL6.SA;ELPL6 BZ)
2009A
Revenues FY (R$ mn)
8,050
EBITDA FY (R$ mn)
1,573
19.5%
6.35
5.45
P/E FY
4.7
P/BV FY
1.5
2010E
8,758
1,983
22.6%
6.29
6.16
4.8
1.5
2011E
8,931
1,353
15.2%
3.54
4.02
8.5
1.5
2012E
9,439
1,340
14.2%
3.11
3.36
9.6
1.5
2013E
10,118
1,459
14.4%
3.18
9.4
1.5
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
ELETROPAULO: Summary of Financials
Income Statement
Net Revenues
Cost and Expenses
EBITDA
EBITDA margin (%)
Depreciation
EBIT
Net Financial Result
Non-operating income
EBT
Taxes
Minority interest
Net income
Shares
EPS
Capex
FCFF
FCFE
Dividends
Dividend payout (%)
8,050 8,758 8,931 9,439 10,118 Cash
1,249
931
669
419
213
(6,477) (6,776) (7,578) (8,100) (8,660) Accounts receivable
1,434 1,363 1,396 1,475 1,581
1,573 1,983 1,353 1,340 1,459 Other current assets
959
999
899
799
799
19.5% 22.6% 15.2% 14.2% 14.4% Long Term assets
1,505 1,360 1,331 1,331 1,331
(382) (398) (400) (414) (427) Net PP&E
6,699 6,916 7,136 7,355 7,574
1,192 1,585
953
926 1,032 Other fixed assets
10
10
10
10
10
5 (112) (158) (251) (262) Total assets
11,855 11,578 11,439 11,388 11,507
224
9
(11)
0
0 Short-term debt
624
115
300
300
300
0
75
75
75
0 Accounts payable
830
836
868
918
984
1,421 1,557
859
750
770 Other current liabilities
2,225 1,791 1,679 1,579 1,579
(357) (505) (267) (230) (237) Long-term debt
1,505 1,360 1,331 1,331 1,331
- Other long-term liabilities 3,391 4,196 3,980 3,978 3,978
1,063 1,053
592
520
533 Total liabilities
8,574 8,297 8,158 8,106 8,172
167
167
167
167
167 Minority interest
0
0
0
0
0
6.35
6.29
3.54
3.11 3.18 Shareholders' equity
3,281 3,281 3,281 3,281 3,335
11,855 11,578 11,439 11,388 11,507
160
510
(47)
(30) (40)
(516) (615) (620) (633) (646) Net debt
3,999 3,742 3,999 4,248 4,454
861 1,448
532
519
523 Net debt to EBITDA
2.5
1.9
3.0
3.2
3.1
1,406 1,533
256
274
299 Net Debt to Equity
121.9% 114.1% 121.9% 129.5% 133.6%
1,080 1,053
592
520
480 Current ratio
1.0
1.2
1.0
1.0
0.9
101.6% 100.0% 100.0% 100.0% 90.0% Interest Coverage
(318.9)
17.8
8.6
5.3
5.6
Nominal Capacity (avg MW)
Distribution Customers ('000)
Distribution Demand (GWh)
Avg.GenerationTariff ($/MWh)
Avg.Regulated Disco Tariff ($/MWh)
# employees
Net RAB
- FX rate (eop)
6,036 6,279 6,524 6,774 7,029 Inflation (%)
34,436 35,965 37,156 38,456 39,802 GDP growth (%)
- Interest Rates (%,eop)
437.4 454.4 461.4 470.9 486.8
4,360 4,360 4,360 4,360 4,360 EV/EBITDA
5,522 5,892 6,283 6,554 6,816 P/E
P/BV
1.4
1.5
1.5
1.5
1.5 FCFE yield (%)
1,846 2,009 2,048 2,165 2,321 Dividend yield
13.2% 12.0% 6.6% 5.5% 5.3%
67.9% 75.6% 78.1% 82.9% 87.9% genco EV/kW capacity
3.6
3.5
3.5
3.5
3.5 disco EV/customer
32.4% 32.1% 18.0% 15.8% 16.0% discoEV/Net RAB
1.74
1.75
1.85
1.93
2.00
(1.7%) 9.2% 5.2% 4.5% 4.5%
(0.2%) 7.5% 4.5% 4.0% 4.0%
10.1% 10.0% 12.1% 11.1% 10.0%
Capex/depreciation
Revenue/Employee ('000)
Net Margin (%)
Revenues/Assets (%)
Assets/Equity
ROE (%)
5.2
4.1
6.1
6.1
5.6
4.7
4.7
8.4
9.6
9.3
1.5
1.5
1.5
1.5
1.5
28.1% 30.6% 5.1% 5.5% 6.0%
22.5% 22.0% 12.4% 10.8% 10.0%
1.4
1.5
1.3
1.4
1.3
1.3
1.2
1.2
0.7
0.7
111
Ben Laidler
(1-212) 622-5252
[email protected]
112
November 2010
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Economics and Commodities
Ben Laidler
(1-212) 622-5252
[email protected]
114
November 2010
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Global Economic Outlook
•
•
•
•
•
Global GDP growth slowdown may have already
bottomed.
Data flow has been generally positive, with our
global PMIs signaling a slight pickup in growth
this quarter.
Global GDP growth in 2011 revised up a touch,
the first upward revision since April.
Inflation pressures muted well past 2011 in the
major developed economies; return to target
unlikely.
Fed and BoJ open quantitative easing spigot,
BoE likely to follow by early next year.
Laying the seeds for 1H11 acceleration
We are becoming more confident that the seeds are being
sowed for a lift to above-trend growth starting in 1H11.
The latest developments in the US, Europe and Asia all
suggest that earlier drags are fading. And while midyear
shocks will reverberate through production plans as
firms slow the pace of inventory accumulation, evidence
suggests this adjustment is moving forward
constructively. Largely in response to the stronger-thanexpected Chinese data out last month, we have marked
up our global GDP outlook for 2011(%oya) to a
modestly above-trend pace of 3% from 2.9% as of the
last GMOS. Although the change is small, it is the first
upward revision since late April and the momentum in
positive data surprises has turned positive in the last four
weeks after a midyear run of negative outturns.
Consequently, along with our tiny upward revision to the
growth outlook, the risk bias has shifted to the upside.
The deceleration in global economic activity looks to
have continued in the current quarter. After jumping
3.9% annualized in 2Q10, global GDP growth
downshifted to a 2.7%pace last quarter and is projected
to step further down to a2.3% pace this quarter. Some
deceleration should not have been a surprise as the
record surge in global manufacturing in the first year of
the recovery came off the boil. However, the downshift
was amplified by an unexpected slowing in consumer
and business spending, coupled with deterioration in
sentiment and risk appetites. Given the global nature of
the step down in manufacturing output growth, the
deceleration has been broad-based, with growth slowing
across the developed and emerging markets.
Bruce Kasman
(1-212) 834-5515
[email protected]
JPMorgan Chase Bank NA
David Hensley
(1-212) 834-5516
[email protected]
Joseph Lupton
(1-212) 834-5735
[email protected]
Carlton Strong
(1-212) 834-5612
[email protected]
Michael Mulhall
(1-212) 834-9123
[email protected]
Nikolaos Panigirtzoglou
(44-20) 7777-0386
[email protected]
J.P. Morgan Securities Ltd.
Grace Koo
(44-20) 7325-1362
[email protected]
John Normand
(44-20) 7325-5222
[email protected]
Paul Meggyesi
(44-20) 7859-6714
[email protected]
The forces behind the midyear slowdown—a policyinduced downshift in China, a sovereign debt crisis in
Europe and a slide in consumer confidence and spending
in the US—were broad-based and together posed a
legitimate risk to an expansion still in its early stages.
Also of concern was that these drags would be magnified
by a sharper retrenchment in business spending. Another
worry was of a negative feedback loop where slower
growth fed weakness through a deterioration in financial
conditions. In the event, firms appear to be bending
modestly in the face of slower growth but continue to
increase capital spending and hiring. Moreover,
financial conditions remain a positive for growth, helped
in part by the easing signals sent by central banks.
115
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Economic Activity Surprise Index (EASI)
Index
Inflation probability distribution for 2011 (developed)
% , p ro b a b ility (b a s e d o n 1 9 2 p o s s ib le o u tc o m e s )
E u r o ar ea
30
5
15
0
0
-15
-30
-45
-60
-5
US
M ean
2007
2008
2009
2010
China provides the most concrete signs that drags are
abating. The latest figures confirm that the most intense
phase of the midyear inventory correction has passed and
that growth bottomed in 2Q. A steady rebound is now
under way, with domestic demand rising at a robust pace
despite softness in the export sector. We expect
economic activity in China to accelerate further in the
coming quarters, fueled by ongoing strengthening in
domestic demand. With monetary conditions still very
easy and government infrastructure projects for next year
to begin ramping up, the risk of overheating is now
increasing. We have thus raised our estimate for China’s
real GDP growth in coming quarters.
Recent developments suggest the risks to our Euro area
growth forecast are to the upside, with a shallower and
shorter soft patch than the one currently in our
projections. While the downward pressure on growth in
the periphery remains intense, the extent of the spillover
to the area wide economy looks to be more moderate
than we have been anticipating. Indeed, German business
surveys continue to impress.
In the US, developments are less clear-cut, with
consumer confidence still depressed and the impact of an
imminent fiscal tightening uncertain. However, goods
consumption rebounded smartly in the three months
ending in September and the latest reading on October
auto sales points to a further acceleration into the current
quarter. In addition, an upturn in investment and hours
worked remains intact. A key issue relates to the impact
of the Fed’s recently announced quantitative easing
package. While we are not building in significant growth
benefits from these actions in our forecast, the Fed’s
success in promoting more stimulative financial
conditions helps limit downside risks as the economy
continues to move forward at a modest pace. Perhaps the
most important effect of the Fed’s actions will be its
impact on confidence and asset prices.
= 1.1%
J . P . M o rg a n fc s t = 1 . 0 %
P ro b (< ta rg e t)
-0 . 5 -0 . 0
Source: J.P. Morgan.
116
30
25
20
15
10
5
0
0 . 0 -0 . 5
-10
0 . 5 -1 . 0
1 . 0 -1 . 5
1 . 5 -2 . 0
2 . 0 -2 . 5
= 64%
2 . 5 -3 . 0
> 3.0
H e a d lin e in fla tio n (% 4 Q / 4 Q )
The most recent readings from our J.P. Morgan global
PMIs are adding some upside risk to the projected
further slowing in growth in the current quarter. Based
on the data in hand, the J.P. Morgan all-industry PMI
(out tomorrow) appears to have jumped from 52.6 to just
under 55, a large move that would be the first increase
since peaking back in April and erase all of the decline
since July. If the current level of the index holds through
the end of the year, global GDP could expand at an
annualized pace of 2.9%, over 1/2%-point stronger than
our current forecast. More importantly, it is signalling
that the midyear slowdown may have already bottomed
as of the third quarter.
Deflation odds low, inflation odds also
low
Although economic activity appears set to accelerate into
2011, we are still only looking for trend-like growth in
1H11 and a move to above trend by 2H11.
Consequently, the elevated levels of economic slack—
primarily in the US, Euro area, Japan and UK—will
remain in place well past 2011 and so too will the
downward pressure on inflation. Despite a year of abovetrend growth in the first year of the recovery and a jump
in commodity prices from their recession lows, core
inflation rates in the developed markets (DM) have slid
to the lowest level in over 50 years. In this regard, the
historical record is clear: the level of economic slack
matters more than its change. Since 1970, negative
output gaps in every OECD country have been
associated with declines in core inflation even in periods
of above-trend growth. Phillips-curve-based model
estimates suggest headline inflation will fall further next
year in the developed markets, reaching just 0.1%oya by
the end of 2011. By contrast, the J.P. Morgan forecast
looks for headline inflation to remain near 1%oya.
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
The J.P. Morgan forecast rests on two key factors that
should stabilize inflation next year. The first is that
inflation expectations remain anchored near central bank
targets. Improved monetary policy over the past two
decades supports the view that expectations will remain
anchored. With that said, the greater risk is that
expectations will move down in line with the recent
decline in core inflation. The second factor underlying
the J.P. Morgan forecast is the considerable evidence
that the transmission of slack to inflation is diminished at
lower levels of inflation. Institutional as well as
behavioral impediments create significant downward
nominal rigidities in the price-setting process, thereby
putting a floor under inflation.
The initial installment was modest in size, although
officials have said they will expand it if necessary. We
also look for the Bank of England to renew its bondbuying program by early next year, although, with
inflation proving stickier at an elevated level, this is a
much closer call. In sharp contrast to each of these
central banks, the ECB has indicated it sees the potential
costs of quantitative easing as outweighing any potential
benefits. That said, none of these central banks is
expected to begin raising rates until mid-2012 at the
earliest.
Note: This piece is excerpted from the issue of Global
Markets Outlook and Strategy dated November 3, 2010.
In a recent report, we estimate that DM inflation will
average 1.1%oya in 2011 across a wide range of possible
behavioral and economic scenarios (“Stuck in a low
inflation rut,” Global Issues, October 27, 2010). This
result is in line with the J.P. Morgan forecast. Deflation
for the DM as a whole is unlikely, with a probability of
just 2%, but is somewhat more likely in the US.
Although deflation risks appear low, our analysis shows
that it will be difficult for central banks to raise inflation
to a level with which they are comfortable. We estimate
a two-thirds probability that inflation in the developed
markets remains below central bank targets by the end of
next year.
Although the risk of a deflationary spiral appears low,
this will be of limited comfort to central banks, who face
a formidable challenge in returning inflation to a level
with which they are comfortable. Large negative output
gaps continue to exert a powerful downward pull on
inflation. As an illustration, we estimate that GDP
growth would need to reach about 5.5% in the US, 3.3%
in the Euro area and 5.8% in Japan in 2011 to return
inflation to target in the coming year. Moreover, these
calculations assume stable inflation expectations,
anchored at central bank targets. If inflation expectations
move down in coming quarters, in line with past
experience, growth will need to be even stronger.
It is against this backdrop that the Fed has reopened the
quantitative easing spigot today, roughly in line with
market expectations. While the recent FOMC statement
indicated inflation is only somewhat low, recognizing
that the unemployment rate will remain elevated for
some time suggests an admission of failure on both legs
of its dual mandate. The BoJ has also already acted with
the announcement of a wide-ranging new asset-purchase
program.
117
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Global Economic Outlook
Note: For some emerging economies, 2010-2011 quarterly forecasts are not available and/or seasonally adjusted GDP data are estimated by J.P. Morgan.
Bold denotes changes from last edition of Global Markets Outlook and Strategy published November 3, 2010, with arrows showing the direction of
changes. Underline indicates beginning of J.P. Morgan forecasts.
118
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Central Bank Watch
Change from
Official interest rate
Global
Current Aug '07 (bp)
Forecast
Last change
Next meeting
next change
Dec 10 Mar 11 Jun 11 Sep 11 Dec 11
GDP-weighted average
1.79
-316
1.80
1.85
1.92
1.96
2.05
excluding US GDP-weighted average
2.44
-237
2.45
2.52
2.61
2.67
2.80
Developed
0.61
-358
0.62
0.63
0.65
0.68
0.72
Emerging
5.09
-201
5.11
5.26
5.47
5.56
5.79
Latin America GDP-weighted average
7.24
-217
7.27
7.74
8.33
8.39
8.40
CEEMEA
4.08
-294
4.05
4.07
4.13
4.32
4.80
EM Asia
4.71
-154
4.75
4.82
4.97
5.02
5.22
The Americas
1.28
-453
United States
Federal funds rate
0.125
-512.5
16 Dec 08 (-87.5bp)
14 Dec 10
On hold
1.29
1.38
1.49
1.51
1.55
0.125
0.125
0.125
0.125
0.125
Canada
Overnight funding rate
1.00
-325
8 Sep 10 (+25bp)
7 Dec 10
1 Mar 11 (+25bp)
1.00
1.25
1.50
1.75
2.25
Brazil
SELIC overnight rate
10.75
-125
21 Jul 10 (+50bp)
8 Dec 10
Mar 11 (+25bp)
10.75
11.50
12.50
12.50
12.50
Mexico
Repo rate
4.50
-270
17 Jul 09 (-25bp)
26 Nov 10
On hold
4.50
4.50
4.50
4.50
4.50
Chile
Discount rate
2.75
-225
16 Sep 10 (+50bp)
16 Nov 10
16 Nov 10 (+25bp)
3.25
4.00
4.25
4.25
4.25
Colombia
Repo rate
3.00
-600
30 Apr 10 (-50bp)
19 Nov 10
1Q 11 (+50bp)
3.00
4.00
5.00
5.50
5.50
Peru
Reference rate
3.00
-150
9 Sep 10 (+50bp)
11 Nov 10
May 11 (+25bp)
3.00
3.00
3.50
4.25
4.50
Europe/Africa
1.45
-322
1.45
1.45
1.46
1.51
1.62
Euro area
Refi rate
1.00
-300
7 May 09 (-25bp)
4 Nov 10
On hold
1.00
1.00
1.00
1.00
1.00
United Kingdom Repo rate
0.50
-500
5 Mar 09 (-50bp)
4 Nov 10
On hold
0.50
0.50
0.50
0.50
0.50
Sweden
1.00
-250
26 Oct 10 (+25bp)
15 Dec 10
15 Dec 10 (+25bp)
1.25
1.25
1.25
1.50
2.00
Repo rate
Norway
Deposit rate
2.00
-250
5 May 10 (+25bp)
15 Dec 10
3Q 11 (+25bp)
2.00
2.00
2.00
2.25
2.75
Switzerland
3-month Swiss Libor
0.25
-225
12 Mar 09 (-25bp)
4Q 10
Jun 11 (+25bp)
0.25
0.25
0.50
0.75
1.00
Czech Republic 2-week repo rate
0.75
-200
6 May 10 (-25bp)
4 Nov 10
2Q 11 (+25bp)
0.75
0.75
1.00
1.25
1.75
Hungary
2-week deposit rate
5.25
-250
26 Apr 10 (-25bp)
29 Nov 10
3Q 11 (+25bp)
5.25
5.25
5.25
5.50
5.75
Israel
Base rate
2.00
-200
27 Sep 10 (+25bp)
22 Nov 10
22 Nov 10 (+25bp)
2.25
2.50
2.75
3.25
3.50
Poland
7-day intervention rate
3.50
-100
24 Jun 09 (-25bp)
23 Nov 10
2Q 11 (+25bp)
3.50
3.50
3.75
4.00
4.25
Romania
Base rate
6.25
-75
4 May 10 (-25bp)
5 Jan 11
3Q 11 (+25bp)
6.25
6.25
6.25
6.50
6.75
Russia
1-week deposit rate
2.75
-25
31 May 10 (-50bp)
Nov 10
3Q 11 (+25bp)
2.75
2.75
2.75
3.00
3.50
South Africa
Repo rate
6.00
-350
9 Sep 10 (-50bp)
18 Nov 10
18 Nov 10 (-50bp)
5.50
5.50
5.50
5.50
5.50
Turkey
1-week repo rate
7.00
-1050
-
11 Nov 10
4Q 11 (+50bp)
7.00
7.00
7.00
7.00
8.00
Asia/Pacific
3.01
-119
3.03
3.09
3.19
3.24
3.37
Australia
Cash rate
4.75
-150
2 Nov 10 (+25bp)
6 Dec 10
1Q 11 (+25bp)
4.75
5.00
5.25
5.50
5.75
4.00
New Zealand
Cash rate
3.00
-500
29 Jul 10 (+25bp)
8 Dec 10
10 Mar 11 (+25bp)
3.00
3.25
3.50
3.75
Japan
Overnight call rate
0.05
-48
5 Oct 10 (-5bp)
5 Nov 10
On hold
0.05
0.05
0.05
0.05
0.05
Hong Kong
Discount window base
0.50
-625
17 Dec 08 (-100bp)
4 Nov 10
On hold
0.50
0.50
0.50
0.50
0.50
China
1-year working capital
5.56
-101
19 Oct 10 (+25bp)
1Q 11
2Q 11 (+25bp)
5.56
5.56
5.81
5.81
6.06
Korea
Base rate
2.25
-225
9 Jul 10 (+25bp)
15 Nov 10
4Q 10 (+25bp)
2.50
2.75
2.75
2.75
3.00
Indonesia
BI rate
6.50
-200
5 Aug 09 (-25bp)
4 Nov 10
2Q 11 (+25bp)
6.50
6.50
6.75
6.75
6.75
India
Repo rate
6.25
-150
2 Nov 10 (+25bp)
16 Dec 10
1Q 11 (+25bp)
6.25
6.50
6.50
6.75
7.00
Malaysia
Overnight policy rate
2.75
-75
8 Jul 10 (+25bp)
12 Nov 10
On hold
2.75
2.75
2.75
2.75
2.75
Philippines
Reverse repo rate
4.00
-350
9 Jul 09 (-25bp)
18 Nov 10
2Q 11 (+25bp)
4.00
4.00
4.25
4.50
4.50
Thailand
1-day repo rate
1.75
-150
26 Aug 10 (+25bp)
1 Dec 10
1 Dec 10 (+25bp)
2.00
2.00
2.00
2.00
2.00
Taiwan
Official discount rate
1.500
-163
30 Sep 10 (+12.5bp) 23 Dec 10
3Q 11 (+12.5bp)
1.50
1.50
1.50
1.625
1.75
Bold denotes move since last GMOS and forecast changes.
119
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Capital Controls and FX Intervention
State of current FX regime, capital controls and possible future Intervention measures in Emerging Markets
China
India
Indonesia
Korea
Malaysia
Philippines
Singapore
Sri Lanka
Taiwan
Thailand
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Czech
Hungary
Israel
Poland
Russia
South Africa
Turkey
FX regime
Recent measures
Possible future measures
Closed Capital Account. Bond Investment only possible through
QFI, but discouraged by authorities
Strict Limits on size of foreign bond investment. Limit of $5bn on
government bonds and $15 bn on corporates
None
None
In September, SEBI announced the Potential for currency intervention, but we
expect no action against bonds.
increases in the FII Limits to $10bn for
government bonds and $20bn for
corporates
Interest and an income tax at 20%, but majority of investors use tax 1-month minimum holding period for
Further restrictions on SBIs; Tax
treaties to reduce these taxes between 0-10%
foreigners investing in SBIs
increases are unlikely as it needs
parliamentary approval
Withholding tax was made exempt on MSB and KTB since May In June, caps on foreign banks FX forward Possibly reimposing WHT on MSBs and
2009
positions were announced leading to less KTBs. Further lowering of cap on foreign
banks FX fwd positions.
MSB holdings.
No taxes
None
None
Income tax of 20% on interest income and capital gains.
None
None
Open capital account. No taxes.
None
None
None
Easing of capital controls.
Strict Limits on size of foreign investment in T-bonds and T-bills at
10% of total outstanding. Investment in corporate bonds is not
permitted.
None
Time deposits are not allowed for foreigners. FINI account required
Verbally discourage fixed income
for foreign investment, frequest inspections of custodian banks
investment by FINI accounts, propose
mandatory use of USD for foreigners
equity margin accounts.
Foreigners exempt from WH tax for government bonds
15% WHT was reintroduced to equalize Potential introduction of across the board
tax on all fixed income inflows with
with current tax regime for domestic
potential restrictions on minimum holding
holders.
period.
Non Convertible and capital outflow controls remain in place with a
None
None
minimum holding period of 1year and US$2mm outflow per month
Risks remain high for further
Non Convertible. Tax of 6% on foreign fixed income investment and
Increase IOF Tax on fixed income
interventions.
2% on equity investment. Increase margin for derivative transactions investment to 4% on Oct 4th and to 6% on
Oct 18
Non Convertible. No capital controls
None
Near-term risks are limited although an
increase in FX intervention is possible if
CLP rallies further
USD purchases of $20mm day
Risks remain high for further interventions
Non Convertible. 33% tax on income and capital gains and 6% WHT
both in spot FX and potentially increases
on coupon payments for bonds with maturities up to 5 years and 4%
in Reserve
for longer bonds.
Free floating and deliverable. No FX controls. Banxico sells $600mm
None
None
of USDMXN puts per month.
Reinstated 4% fee on Bank CDs
Unlikely to initiate new tax measures but
Non Convertible. Reserve Requirements on foreign deposits
purchases of USD have been high this
(120%), 30% tax on interest paid to non-residents. Limits on pension
year at $8bn YTD.
fund short USD positions
Free floating and convertible
None
None
Free floating and convertible. It is important to note the heavy
None
None
indebtedness of the private sector in foreign currency debt.
None
None
Free floating and convertible. Interventions in the fx market have
been substantial and we estimate have been running at a $700mm
per month pace.
Free floating and convertible.
None
None
Managed float vs a basket of EUR and USD (45%/55%). Current
Recently widened the band
Moving toward more currency flexibility
band of the basket is between 32.90 and 36.90
Freely convertible. SARB does intervene on occasion. No capital
None
Risk of more aggressive intervention
controls
Risk of aggressive and unorthodox
Freely floating and convertible. CBRT engages in daily FX auctions
Lowered the interest rate on foreign
intervention is low, but policy of building
of $40mm USD and sets a weekly guidance of an extra amount.
currency deposit rates to 0.25% from
reserves remains in place.
2.50%. Increased weekly auction amounts
to $500mm most recently.
Source: J.P. Morgan, “Get over It: EM FX Appreciation and Interventions Are Here to Stay,” Sclater -Booth et al, 21 Oct 10.
120
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Foreign exchange reserve appreciation (YTD)
23.6
17.7
USD Bn
16.9
15.5
15.3
15.0
12.2
% change
25
20
12.2
8.5
9.4
6.8
15
6.4
6.1
5.3
5.2
4.1
10
3.7
0.1
5
-1.7
-5
Malaysia
South Africa
India
Chile
Argentina
Czech
Colombia
Peru
Korea
Taiwan
China
Turkey
Russia
Thailand
Poland
Brazil
Mexico
Philippines
0
Indonesia
70
60
50
40
30
20
10
0
-10
Source: Bloomberg.
FX appreciation vs. US$ (YTD %)
15
12.1
11.0
10.9
8.6
10
7.0
6.5
6.3
5.6
5.4
5.2
4.9
4.8
5
3.9
3.4
2.8
2.2
2.1
-2.5
-4.0
Argentina
Russia
Poland
China
Brazil
Peru
Chile
Korea
India
Taiwan
Indonesia
Turkey
Mexico
South Africa
Philippines
Colombia
Malaysia
Thailand
-5
Czech
0
Source: Bloomberg.
10-year government bond yields (%)
8.3
7.8
5.2
5.2
7.1
5.1
7.0
4.1
6.0
5.6
4.0
3.7
3.7
5.4
5.4
3.5
3.1
4.5
2.9
5.3
2.7
3.9
2.4
3.6
2.4
3.5
2.2
Czech
Russia
Korea
Peru
Philippines
Mexico
Poland
Colombia
Indonesia
Turkey
SA
India
Brazil
2
0
3.1
1.4 1.3 0.9
Taiwan
8.0
Thailand
6.5
After-tax
China
10
8
6
4
Pre-tax
11.9
Malaysia
14
12
Source: Bloomberg, J.P. Morgan calculations. Note: After-tax assumes US institutional investor tax treatment.
121
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Brazil Economics
Inflation risks on the rise
Despite the slowdown observed in the central quarters of
the year, the economic activity scenario remains very
robust, especially due to the domestic demand drivers.
The labor market is extremely tight, with the
unemployment rate at a historical low and real wage
gains accelerating at a worrisome pace. On top of that,
credit conditions continued to improve despite the 200bp
monetary tightening implemented between April and
September. Against this backdrop of strong domestic
demand expansion, we believe Brazil’s growth rate will
reaccelerate by the end of this year and will begin 2011
on a strong footing. The resumption of growth in an
environment of already tight utilization rates will put
even more pressure on headline and core inflation, which
are already running above the BCB target of 4.5%.
Will Rousseff rebalance Brazil’s policy mix?
The economic policy mix in the last year of the Lula
Administration has been clearly unbalanced, with the
expansionary fiscal policy putting upward pressure on
interest rates, and the high yields of local rates market
attracting short-term capital inflows. The problem is that
the government has responded to the resulting fx
appreciation pressures with the imposition of new
taxation on foreign capital inflows instead of promoting
a fiscal adjustment aimed at reducing aggregate demand.
We expect that the next administration will promote
some fiscal correction, but the resumption of a monetary
tightening is inevitable, in our view. Our forecast is that
the Selic rate will be increased by 175bp next year, to
12.50%. Assuming some policy action will be taken by
the next administration, we anticipate growth will
moderate to 4.5% next year (from 7.5% in 2010), which
will help to reduce inflation from 5.6% this year to a
still-above-target 5.1% in 2011.
All eyes on cabinet formation
The market expects a market-friendly cabinet, with exFinance Minister Palocci likely setting the agenda from
the Chief of Staff’s chair. BCB Governor Meirelles is
seen as an invaluable asset and should be retained, either
remaining at the BCB or being appointed to a more
political position. If Meirelles leaves the BCB, an
appointment from within is likely. For the finance
portfolio, Guido Mantega and Luciano Coutinho are the
leading contenders, in our view.
Fabio Akira
AC
(55-11) 3048-3634
[email protected]
High utilization of labor and capital resources
% of full capacity, sa
% of labor force, sa, inverted
88
6
FGV operating rates
86
8
84
82
10
80
Unemployment rates
76
03
05
07
14
09
IPCA headline and core inflation
%oya, nsa
7
Headline
6
Core
5
4
3
2006
2007
2008
2009
2010
Brazil: economic indicators
Average
2003-07
2008
2009
2010f
2011f
Real GDP, % change
Consumption*
Investment*
Net trade*
Consumer prices, %oya
% Dec/Dec
Producer prices, %oya
Government balance, % of GDP
4.0
2.7
1.2
0.0
7.1
6.0
9.6
-3.3
5.1
4.5
2.7
-2.0
5.7
5.9
13.7
-1.9
-0.2
3.1
-3.4
0.1
4.9
4.3
-0.2
-3.3
7.5
6.1
4.5
-3.1
5.0
5.6
4.5
-3.4
4.5
4.3
1.7
-1.6
5.6
5.1
3.1
-2.5
Exchange rate, units/$, eop
Merchandise trade balance ($ bil.)
Exports
Imports
Current account balance
% of GDP
2.36
37.9
117.3
79.3
9.4
1.0
2.31
24.9
198.7
173.8
-29.2
-1.8
1.74
25.0
153.5
128.5
-25.2
-1.6
1.70
13.7
196.7
183.0
-49.3
-2.4
1.85
-0.6
221.0
221.6
-68.3
-3.1
International reserves, ($ bil.)
Total external debt, ($ bil.)
Short term†
Total external debt, % of GDP
Total external debt, % of exports‡
Interest payments, % of exports‡
83.8
229.9
32.7
25
157
11
192.8
306.4
38.8
18
124
7
236.8
301.2
30.8
19
160
9
292.3
335.2
29.8
16
137
7
300.3
352.2
29.8
16
131
6
* Contribution to growth of GDP.
† Debt with original maturity of less than one year.
‡ Exports of goods, services, and net transfers.
Source: BCB and J.P. Morgan.
122
12
78
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Mexico Economics

External demand might curb growth, but auto
sector and credit could boost domestic demand

Unfortunately, gubernatorial elections will likely
create a political impasse for structural reforms

Sluggish growth and well-behaved inflation will
keep Banxico on hold all year long

Favor long MXN over front-end receivers in
TIIE swaps
Fundamentals and politics in 2011
Structural change in the auto sector and credit
growth could overcompensate sluggish US growth
The externally driven manufacturing production has led
Mexico’s economic recovery throughout the year.
Nevertheless, growing concerns about longer-term
sluggish growth in the US is posing risks ahead. In this
context, we believe Mexico’s GDP will grow 3.5% in
2011 (consensus: 3.5%). We could even see lower
growth rates in Mexico. Nevertheless, it is our take that
the structural change that the auto sector has experienced
in the Mexican economy and credit growth in Mexico
will help to overcompensate US growth’s sluggishness.
On the one hand, several automakers across the world
have reallocated part of their production to Mexico to
benefit from a weaker peso, skilled Mexican labor, stillhigh transport costs, and the country’s strategic
geographic location.
On the other hand, commercial banks’ credit might post
significantly high growth rates in 2011. The Mexican
banking system is composed of 41 well-capitalized
commercial banks. The average capitalization index
stands at 17.7, with a range of 12.3 to early 240.
Unfortunately, total commercial bank credit to the
private sector represents less than 15% of GDP. After the
credit boom in Mexico in 2004-2006, nonperforming
loans increased significantly, making banks rethink their
credit-giving policies. Nevertheless, commercial banks
have now “cleaned up” their credit balances and
employment conditions have improved significantly in
the past 12 months. As a result, we believe that it is
highly likely that all these factors will probably lead to
an ascending trend in the country’s domestic credit cycle.
Gabriel CasillasAC
(52-55) 5540-9558,
[email protected]
Banco J.P. Morgan S.A., Institución de Banca Múltiple
J.P.Morgan Grupo Financiero
Gubernatorial elections will likely create a political
impasse for structural reforms
There is no doubt that Mexico needs several structural
reforms, particularly meaningful fiscal and labor-market
reforms as well as new guidelines to empower antitrust
officials to dilute monopolies and foster competitiveness.
We strongly believe that the lack of these structural
reforms is restraining domestic demand and Mexico’s
potential GDP. Furthermore, the prevailing legal
uncertainty with regard to enforcing contracts is shortcircuiting the credit intermediation function of
commercial banks. Unfortunately, the seemingly large
GDP growth rates that the country has observed in 2010
appear to be providing a “false sense of security” to
government officials, particularly legislators, who have
now downplayed the need for reforms in Mexico.
Furthermore, with gubernatorial elections in six states
next year, particularly in the highly populated State of
Mexico, it is going to be difficult to secure congressional
approval for the key reforms that the country needs.
Not all long-term plans are negative. We believe
infrastructure projects, including construction of roads,
water treatment plants, and massive transportation
systems, will play an important role in the next two years.
This is mainly because several projects that had been in a
feasibility study phase over the past two years are now
ready to start construction. Furthermore, several projects
suffered important delays because of the global financial
crisis. However, state-owned development bank
BANOBRAS has modified its lending framework to
provide guarantees in addition to funding and is now
working with the National Infrastructure Fund to also
provide direct, nonrefundable funds to projects with a
high social return.
Banxico to keep rates on hold throughout the year
The growth backdrop we have sketched above, in
addition to well-anchored medium-term inflation
expectations and moderate wage increases, clearly
support our “low-for-long” monetary policy call, in
which we anticipate that the first hike will not take place
until 2Q12 (consensus: 1Q12).
Market strategy
We favor long MXN over receivers in the front end of
the TIIE swap curve.
123
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
China Economics
Growth momentum in China’s economy improved
moderately in 3Q10, with real GDP rising 8.1%q/q saar
by our calculation, exceeding our forecast of 7.5% and
following a 7.2%q/q saar expansion in 2Q. The latest
macro figures confirm our view that growth bottomed in
2Q and has been on a steady rebound since, with
domestic demand rising at a solid pace despite softness
in the export sector and with the most intense phase of
inventory correction gradually fading. We expect growth
in China to pick up steadily in coming quarters, with
further solid expansion in domestic demand in particular.
Local governments are anticipated to gear up for the start
of new projects going into 2011. This, along with the
central government’s efforts to meet the 5.8-million-unit
housing target, solid private consumption and investment
demand, the gradual fading of the inventory drag, and
largely accommodative monetary conditions, could
increase the risk of overheating by early next year. We
have moderately increased our estimate for China’s real
GDP growth in coming quarters. Our forecast for 2010
full-year GDP growth has been fine-tuned to 10.0%oya
(previously: 9.8%), while our estimate for 2011 GDP
growth is now 9.0%oya (previously: 8.6%).
We have also revised the forecast for 2010 average CPI
inflation rate to 2.9%oya (previous forecast: 2.8%). The
forecast for 2011 average CPI inflation now stands at
3.2%oya, taking into account the impact of potential
further resource and energy price liberalization. Indeed,
we believe the PBoC’s 25bp rate hike effective on
October 20th is intended to signal that the central bank is
keen to contain inflation expectations. As such, we
expect headline CPI inflation to peak in coming months,
with the inflation rate gradually stabilizing at around
3.2% by early next year. Our US team is looking for the
Fed to maintain its fed funds target rate through to 2Q12,
and to begin QE2 in early November. So these factors
imply the PBoC would be somewhat constrained should
it want to undertake further rate hikes. We now expect
the PBoC to be on hold in coming months as it monitors
the impact of tightening measures on the property sector.
We expect the next rate hike to come in 2Q11, and we
look for a total of two rate hikes next year. For the
property sector, we believe the authorities will continue
to focus on sector-specific measures, targeting both the
demand and the supply sides, in an effort to contain
further rises in property prices.
124
Qian Wang
(852) 2800 7009,
[email protected]
Grace Ng
(852) 2800 7002,
[email protected]
Lu Jiang
(852) 2800 7053,
[email protected]
JP Morgan Chase Bank, N.A., Hong Kong
China: real GDP growth
%oya
%q/q, saar
%q/q, saar
16
20
%oya
14
15
12
10
10
5
8
6
00
02
04
06
08
10
0
Source: CEIC and J.P. Morgan estimates.
China: headline CPI, food prices, and nonfood CPI inflation
%oya, both scales
10
8
6
4
2
0
-2
-4
2002
CPI
CPI: food
prices
25
20
Nonfood CPI
15
10
5
0
-5
2003
2004
2005
2006
2007
2008
2009
2010
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Meanwhile, CNY/USD appreciation has accelerated in
recent weeks, and the trend could continue post the US
midterm elections and G-20 summit in November. The
probability of more significant near-term CNY/USD
appreciation could yet be capped by Chinese
policymakers’ fears over ongoing uncertain external
demand and its impact on exports, and if the spot rate
begins to show more two-way volatility when political
pressure starts to ease later this year. Our forecast is for
the CNY/USD rate to be unchanged at 6.6 at year-end,
with the bilateral rate expected to appreciate steadily
toward 6.3 by end-2011.
China: benchmark lending and deposit rates
% per annum
J.P. Morgan
forecasts
8
7
1-year lending rate
6
5
4
1-year deposit rate
3
2
1
04
05
06
07
08
09
10
11
On the fiscal front, we expect the focus to shift from
infrastructure investment toward consumption and
achieving more balanced growth. In addition to
structural reforms and the gradual buildup of social
security, urbanization and infrastructure spending will
likely remain a key focus in the 12th five-year plan.
Therefore, solid public investment and steadily
strengthening private consumption should ensure that the
economy expands at a solid 8% pace over the next five
years, despite soft global demand. This, together with the
government’s commitment to increase the supply of
housing, suggests that commodity demand from China
will remain solid in coming years. However, the
government’s firm resolve to conserve energy and
slower the pace of private investment growth, given the
softer global demand and abundant capacity in many
manufacturing sectors, suggests that the booming pace of
China’s commodity demand growth during the past
decade is unlikely to be repeated.
125
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
China Infrastructure
Qian Wang
Target railway capex for 2010 and 2011
As per the Ministry of Railway’s (MOR) plan announced
in July 2009, the total railway spending target for 2010
and 2011 is Rmb825 billion and Rmb900 billion
respectively. The target capex on civil works, which
accounts for c.85% of the total railway capex, is
Rmb700 billion for 2010 and Rmb750 billion for 2011.
This implies that spending on civil works is estimated to
increase by 17% in 2010 and 7% in 2011. This is
significantly lower than the average growth rate of 64%
in the last four years.
Grace Ng
(852) 2800 7009,
[email protected]
(852) 2800 7002,
[email protected]
Lu Jiang
(852) 2800 7053,
[email protected]
JP Morgan Chase Bank, N.A., Hong Kong
Target railway length
Based on the latest version of the MOR’s medium- to
long-term railway development plan (announced in
2008), China plans to achieve a total ending length of
120,000km by 2020. During late 2008 and early 2009, in
response to the financial crisis outside China, the MOR
fast-tracked a number of projects on back of the
government’s aggressive fiscal stimulus. With this year’s
ending length at approximately 90,000km, our regional
infrastructure team expects China to achieve a total
railway length of 110,000km by 2012. The MOR’s
existing medium-term target of 120,000km of railway
network by 2020 can be achieved as early as 2015.
Strong railway spend so far
Railway capex is up 27% yoy in 9M2010. The MOR’s
railway spending amounted to Rmb491 billion in the
first nine months, achieving 60% of the full-year target
of Rmb825 billion, ahead of last year’s ratio of 55% over
the same nine-month period. Within this, a total of
Rmb430 billion was spent on civil works, forming 88%
of the railway spending and achieving 61% of the fullyear target, ahead of last year’s 57%. For the final
quarter of the year, the pace of increase is expected to
soften markedly to a meager 3% yoy, assuming the
MOR’s target is kept unchanged. It is likely that the
current target may be exceeded if the current momentum
is maintained.
Expectations from the 12th Five-Year Plan
While the 12th Five-Year plan has not yet been officially
announced, our regional infrastructure team believes that
there is a high likelihood of upward revisions to railway
infrastructure spending and increases in the MOR’s
medium-term railway operating length target. The
government has emphasized on several occasions that
improving transportation links, particularly the railway
network, is vital to rebalancing economic growth across
regions.
China infrastructure spending outlook
Spending (Rmb B)
Capex on total railway spending
Capex on civil works
Capex on locomotives and others
% capex on civil works
% capex on locomotives and others
Y/Y growth (capex on civil works)
Y/Y growth (capex on locomotives)
Ending railway length (km)
MOR’s railway spending during the year
Highway/Tollroads (Rmb B)
Source: MOR, J.P. Morgan estimates.
126
2005
120
89
31
74
26
2006
208
155
52
75
25
75
68
2007
255
177
78
69
31
14
49
2008
414
337
77
81
19
90
(1)
2009
701
600
101
86
14
78
31
2010E
825
700
125
85
15
17
23
2011E
900
750
150
83
17
7
20
2012E
880
700
180
80
20
(7)
20
75,438
89
76,919
155
77,904
177
79,625
337
86,500
600
90,000
700
93,500
750
108,000
700
649
688
967
1160
1276
na
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Western-China-driven growth
Real GDP growth – Western China lagged until 2008
15
Western China
Western China includes six provinces (Gansu, Guizhou,
Qinghai, Shaanxi, Sichuan, and Yunnan), five
autonomous regions (Guangxi, Inner Mongolia, Ningxia,
Tibet, and Xinjiang), and one municipality (Chongqing).
The major cities (with a population over 5 million) are
Chengdu, Chongqing, Xi'an, Kunming, Wulumuqi.
Land area and population
Western China accounts for 71% of mainland China’s
area. Its population as of 2009 was 370 million, or
27.5% of China’s total population.
GDP growth
From 2000 to 2008, Western China’s GDP growth
consistently lagged that of the non-western regions (see
table top right). As a result, Western China’s share of
China’s real GDP experienced a steady decline during
the period (see figure top right). In 2007, Western China
accounted for 15.9% of China’s real GDP growth, lower
than its share in 2000 (16.3%). However, in 2009 the
trend reversed, with Western China’s GDP growing at
12.4%, higher than the non-western region’s at 11.5%.
The two main reasons for this were: a) With its greater
reliance on China’s exports, the impact of the global
recession in 2008 was more severe on Eastern China;
and b) Western China benefited from China’s massive
infrastructure spending in 2009, as significant resources
were allocated to the western region, which has poor
infrastructure facilities.
Per-capita GDP
There is significant scope for economic development in
Western China compared to the more developed coastal
regions. 2009 average per capita GDP in the 12 western
provinces was Rmb17,595. This is less than half of the
per capita GDP of Rmb42,469 in the coastal provinces.
The average per capita urban income for the 12 western
provinces was Rmb13,896. This is only 70% of the
average in coastal provinces (Rmb19,766).
14
Non-w estern region
13
12
Western region
11
10
9
8
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: CEIC, J. P. Morgan Economics.
Western China’s real GDP as % of national real GDP
16.4
16.2
16.0
15.8
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
GDP per capita – Western vs. coastal provinces (Rmb/yr)
Coastal
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
99
00
01
02
03
04
Western
05
06
07
08
09
127
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Policy initiatives and projects announced in 2010
In 2000, Beijing adopted the ‘Go West’ policy to
develop its relatively isolated and underdeveloped
Western China region. The main components of the
policy included infrastructure development, attracting
foreign investment, improving ecological protection,
promoting education, and retaining high-skilled labor
from moving to richer provinces. From 2000 to 2009,
China launched 120 projects with a total cost of Rmb2.2
trillion (source: Reuters).
In 2010, the following projects and preferential policies
were announced to further improve the development of
the western region:
1. The National Development Reform and Commission
(NDRC) announced on 6 July that China will embark on
23 new projects in the west region this year totaling
Rmb682 billion (US$100 billion). These projects range
from railway, airports, power grids, power stations, wind
powers to coal mines.
128
2. China’s State Council announced on 7 July that the
new resource tax, which was levied in Xinjiang as of 1
June 2010, and is charged at 5% of the revenue of coal,
oil and gas companies, should be extended to all 12
provinces in Western China. The resource tax reform
will help the local governments in Western China to
collect taxation revenue to develop the local economy
and gradually bridge the gap between developed coastal
regions and the less developed western regions.
3. The state council confirmed that the encouraged
industries in Western China will be entitled to 15%
preferential income tax rate for another 10 years. In
comparison, the income tax rate of Chinese enterprises in
other regions will be unified to 25%. This measure
should help boost Western China’s medium-term growth
by attracting more factories/companies and creating
more job opportunities.
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Chinese car sales (%yoy)
Chinese retail sales (%yoy)
120
100
25
80
20
60
40
15
20
10
0
-20
5
-40
0
Jan-99 Jul-00 Jan-02 Jul-03 Jan-05 Jul-06 Jan-08 Jul-09
01
02
03
04
05
06
07
08
09
10
Source: J.P. Morgan Economics, September 2010.
Wage growth (%yoy)
Consumer loan increase as a % of total loan increase
22
15%
20
12%
18
9%
16
14
6%
12
3%
10
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
0%
Source: CEIC, J. P. Morgan.
Minimum wage increases in several provinces and municipalities
in 2010
Provinces/
Municipals
Shanghai
Zhejiang
Guangdong
Beijing
Jiangsu
Tianjin
Shandong
Fujian
Hubei
Shanxi
Jilin
Ningxia
Minimum monthly
wage (RMB)
Before
After
960
1,120
960
1,100
860
1,030
800
960
850
960
820
920
760
920
720
900
700
900
736
850
650
820
560
710
8
1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
Recent minimum
wage increase
(%)
17%
15%
20%
20%
13%
12%
21%
25%
29%
16%
26%
27%
Adjustment
effective
date
1-Apr-10
1-Apr-10
1-May-10
1-Jul-10
1-Feb-10
1-Apr-10
1-May-10
1-Mar-10
1-May-10
1-Apr-10
1-May-10
1-May-10
% of households grouped by annual income as of 2008
Annual income
<RMB10000
RMB10000-20000
RMB20000-30000
RMB30000-40000
RMB40000-50000
RMB50000-60000
RMB60000-70000
RMB70000-80000
RMB80000-90000
RMB90000-100000
>RMB100000
% of households
1.5
9.9
17.7
18.3
15.0
10.8
7.8
5.3
3.7
2.6
7.5
Source: CEIC.
Source: finance.sina, Bloomberg news. Note: Except Shanghai and Beijing, all districts in
the table have multiple tiers of minimum wages. The minimum wages and increase %
shown for those districts are of the highest tier.
129
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
China FAI: Do not extrapolate
Can housing starts continue to grow in 2011 or will there be an inventory correction?
Residential construction (advanced 12 months) versus sales (millions of square meters GFA per month)
160
140
Note: Increases in affordable housing construction starts 167M sq m of GFA
in 2011 – just six weeks of private construction starts (J.P. Morgan
estimates, see China affordable housing, Kwong et al, 27 October 2010).
120
100
80
60
40
20
0
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Estimated total monthly residential construction starts
Jan-10
Jul-10
Jan-11
Jul-11
Monthly residential sales
Source: CEIC, J.P. Morgan calculations. Notes: Monthly total construction data is available in China. The ratio from 2005 to 2010 of residential construction to total construction is 80%. This ratio
is used to estimate the residential starts from the monthly total construction starts. The monthly total constructions starts and monthly residential sales data are seasonally adjusted.
Per capita consumption of cement (tonnes) vs. adjusted per capita nominal GDP
Russia (1991-2009E)
Cement consumption per capita (tonnes)
1997: per capita cement consumption peaked in Korea
1.4
India (1985-2009E)
China 2010 E
1993: per capita cement consumption peaked in Taiwan
China (1985-2010E)
US (1930-2008)
UK (1985-2009E)
China 2009
1.2
Brazil (1985-2009E)
Germany (1985-2009E)
Japan (1985-2009E)
Taiwan (1985-2009)
1.0
South Korea (1985-2009E)
Mexico (1985-2009E)
S. Korea 2009E
0.8
Japan 2009E
0.6
Russia 2009E
Germany 2009E
Taiwan 2009
Mexico 2009E
0.4
0.2
Brazil 2009E
US 2008
UK 2009E
India 2009E
0.0
0
6000
12000
18000
24000
30000
36000
GDP per capita (USD)
Source: US Geological Survey and J.P. Morgan estimates. Note: The GDP per capita is restated for today's dollars by adjusting the deflator series.
130
42000
48000
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Market Forecasts
Source: Bloomberg, Datastream, IBES, Standard & Poor’s Services, J.P. Morgan estimates.
131
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
J.P. Morgan FX Forecasts vs. Forwards & Consensus
Exchange rates vs. U.S dollar
JPM forecast gain/loss vs Dec-11*
Actual change in local FX vs USD
Oct 1
Dec 10
Mar 11
Jun 11
Sep 11
Dec 11
forward rate
Consensus**
Past 1mo
YTD
Past 12mos
EUR
1.37
1.30
1.30
1.30
1.30
1.25
-8.5%
-0.7%
7.3%
-4.2%
-5.8%
JPY
83.3
79
81
83
85
88
-6.1%
3.8%
1.4%
11.9%
7.9%
GBP
1.58
1.49
1.48
1.48
1.49
1.47
-6.7%
-5.5%
2.4%
-2.0%
-0.8%
AUD
0.97
0.93
0.95
0.99
1.01
0.98
6.9%
12.1%
7.1%
8.3%
12.4%
CAD
1.03
1.03
1.02
0.99
0.97
0.99
4.8%
5.1%
2.5%
2.0%
5.3%
NZD
0.74
0.71
0.72
0.76
0.77
0.74
3.7%
7.1%
4.3%
2.1%
3.6%
JPM USD index
82.2
82.8
82.9
82.7
82.3
83.9
-3.1%
-2.0%
-2.4%
DXY
78.7
81.4
81.7
81.7
81.7
84.5
-4.6%
1.1%
2.2%
Current
Majors
Europe, Middle East & Africa
Americas
CHF
0.98
0.99
0.98
0.96
0.96
1.00
-2.8%
6.8%
4.0%
5.9%
6.0%
ILS
3.63
3.75
3.75
3.75
3.75
3.75
-2.2%
1.8%
4.2%
4.4%
3.7%
SEK
6.71
6.92
6.92
6.88
6.88
7.20
-5.2%
0.3%
8.6%
6.7%
4.9%
NOK
5.85
6.00
5.92
5.92
5.85
6.08
-1.4%
0.2%
5.9%
-0.9%
-0.8%
CZK
17.79
18.85
18.65
19.23
18.85
19.20
-6.7%
0.9%
8.5%
3.3%
-1.9%
PLN
2.87
3.00
2.96
2.92
2.88
2.96
0.5%
0.9%
8.0%
-0.3%
1.0%
HUF
200
212
212
208
206
212
-1.1%
0.5%
11.3%
-5.6%
-8.0%
RUB
30.49
29.66
29.21
28.99
29.36
29.74
7.7%
1.8%
0.7%
-1.5%
-1.1%
TRY
1.45
1.50
1.50
1.49
1.48
1.41
11.2%
8.2%
4.9%
3.7%
3.3%
ZAR
6.92
7.00
7.15
7.30
7.70
8.10
-8.2%
-1.8%
5.4%
6.7%
10.4%
ARS
3.96
4.05
4.15
4.15
4.25
4.25
6.7%
3.7%
-0.3%
-4.1%
-3.0%
BRL
1.67
1.75
1.80
1.82
1.83
1.85
0.2%
1.0%
4.3%
4.2%
6.4%
CLP
481.8
480
505
500
500
500
0.0%
2.6%
3.1%
5.3%
15.0%
7.0%
COP
1795
1800
1830
1850
1880
1900
-2.5%
3.1%
0.9%
13.9%
MXN
13.08
12.50
12.50
12.25
12.25
12.25
7.5%
4.9%
4.3%
4.3%
9.1%
PEN
2.80
2.78
2.84
2.82
2.79
2.78
1.4%
2.5%
-0.1%
3.3%
2.9%
-21.9%
-12.0%
0.1%
-49.9%
-49.9%
3.1%
4.0%
6.9%
VEF
Asia
4.29
114.37
LACI
4.30
5.50
5.50
5.50
5.50
112.71
110.48
110.90
110.37
109.91
CNY
6.69
6.60
6.50
6.40
6.30
6.20
4.6%
4.1%
1.8%
2.1%
2.0%
HKD
7.76
7.78
7.78
7.79
7.80
7.80
-0.7%
-0.4%
0.2%
-0.1%
-0.1%
IDR
8920
8700
8600
8550
8500
9200
2.2%
-3.4%
1.0%
5.4%
8.1%
INR
44.5
45.5
44.5
44.0
43.5
42.0
12.1%
6.6%
5.3%
4.7%
7.4%
KRW
1130
1150
1180
1140
1100
1100
4.1%
-1.6%
4.8%
3.0%
3.9%
MYR
3.09
3.10
3.07
3.04
3.02
3.02
3.8%
2.0%
1.5%
11.1%
12.8%
7.7%
PHP
43.72
43.25
42.75
42.25
42.00
42.25
7.7%
4.0%
3.1%
5.6%
SGD
1.31
1.32
1.30
1.29
1.28
1.33
-1.3%
-0.9%
2.7%
7.1%
7.9%
TWD
31.30
31.20
31.00
30.75
30.50
30.50
-1.4%
0.4%
2.4%
2.2%
3.2%
THB
30.18
30.25
30.10
30.00
29.70
30.80
-1.1%
0.6%
3.2%
10.6%
11.0%
115.0
115.1
115.9
117.4
119.0
119.0
2.6%
3.9%
4.5%
ADXY
Actual change in local FX vs EUR
Exchange rates vs Euro
JPY
114
103
105
108
111
110
2.6%
4.5%
-5.5%
16.8%
GBP
0.87
0.87
0.88
0.88
0.87
0.85
2.0%
-4.8%
-4.5%
2.3%
5.4%
CHF
1.34
1.29
1.27
1.25
1.25
1.25
6.3%
7.5%
-3.0%
10.6%
12.5%
SEK
9.21
9.00
9.00
8.95
8.95
9.00
3.6%
1.0%
1.2%
11.4%
11.3%
NOK
8.03
7.80
7.70
7.70
7.60
7.60
7.8%
0.9%
-1.3%
3.4%
5.3%
CZK
24.4
24.50
24.25
25.00
24.50
24.00
2.0%
1.6%
1.1%
7.8%
4.2%
PLN
3.94
3.90
3.85
3.80
3.75
3.70
9.8%
1.6%
0.7%
4.1%
7.2%
-2.3%
HUF
274
275
275
270
268
265
8.1%
1.2%
3.7%
-1.5%
RON
4.27
4.15
4.10
4.05
4.00
3.90
16.7%
6.3%
-0.2%
-0.8%
0.2%
TRY
1.98
1.95
1.95
1.94
1.92
1.76
21.6%
9.0%
-1.9%
8.4%
9.9%
RUB
41.86
38.56
37.98
37.69
38.17
37.18
17.7%
2.6%
-6.1%
3.3%
5.2%
↑ indicates revision resulting in stronger local FX , ↓ indicates revision resulting in weaker local FX
* Negative indicates JPM more bullish on USD than consensus,** Consensus Economics Publication: Foreign Exchange Consensus Forecasts September 2010
Source: J.P.Morgan
132
14.5%
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Commodities Forecasts
• J.P. Morgan are above consensus with oil and copper forecasts.
• J.P. Morgan are below consensus with nickel forecasts.
• China’s share of 2010 global demand is 8% (oil), 41% (iron ore), 41% (aluminum), 39% (copper) and 31% (nickel).
Energy Forecasts: Oil, thermal and coking coal
WTI Crude
J.P. Morgan forecasts
Forward price
Consensus Price
WTI (billions bbls)
Total Oil Supply
Total Oil Demand
Surplus (Deficit)
China Demand
(US$/bbl)
2001
77.6
77.5
0.1
4.7
WTI (change)
Price
Global Supply
Global Demand
Chinese Demand
China's share of
demand
Q4 10
86
85.6
80
Q1 11
88
88.8
81.4
Q2 11
88
89.8
82.75
Q3 11
90
90.4
85
Q4 11
89.75
90.0
85
2012
105
92
93
2013
120
92
106
2014
2002
77.5
78.3
-0.8
5.0
2003
80.3
79.2
1.1
5.6
2004
83.6
83.1
0.5
6.4
2005
84.8
84.4
0.4
6.7
2006
85.6
85.4
0.2
7.2
2007
85.6
86.8
-1.2
7.6
2008
86.6
86.2
0.5
7.7
2009
85.2
84.9
0.2
8.3
2010
86.9
87.3
-0.4
9.2
2011
88.3
88.9
-0.6
9.6
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1%
0%
8%
6%
1%
4%
10%
7%
5%
4%
16%
8%
2%
1%
4%
8%
1%
1%
8%
8%
2%
0%
4%
9%
-1%
1%
2%
9%
-1%
-2%
7%
10%
3%
2%
10%
10%
2%
2%
5%
11%
92
95
Coal (USD/tonne)
Hard coking coal
Thermal coal
Q3'10
225
100
Q4'10
205
100
CY2010E
190
95
Q1'11
205
95
Q2'11
220
100
Q3'11
210
105
Q4'11
210
105
CY2011E
211
101
2012E
210
105
2013E
210
105
Coal (change)
Hard coking coal
Thermal coal
Q3'10
Q4'10
-9%
0%
CY2010E
-7%
-5%
Q1'11
8%
0%
Q2'11
7%
5%
Q3'11
-5%
5%
Q4'11
0%
0%
CY2011E
0%
-4%
2012E
0%
4%
2013E
0%
0%
Source: J.P. Morgan estimates, Bloomberg.
Iron Ore Forecasts
Iron Ore
(US$/tonnes)
J.P. Morgan forecasts
Forward Price
Iron ore (000s
tonnes)
World Supply
World Demand
Balance: Surplus
(Deficit)
China Demand
Price
Global Supply
Global Demand
Chinese Demand
China's share of
demand
4Q10E
1Q11E
2Q11E
3Q11E
4Q11E
2010E
2011E
2012E
2013E
2014E
145
158
140
156
150
153
150
149
140
144
145.1
145
145
145
145
132
116
98.6
2005
2006
2007
2008
2009e
2010e
2011e
2012e
2013e
2014e
1313
1299
14
1491
1482
9
1634
1619
15
1758
1725
33
1651
1631
20
1806
1806
0
1933
1937
-4
2059
2052
8
2206
2154
52
2339
2261
78
471
597
709
823
894
979
1067
1147
1214
1286
36%
14%
14%
27%
26%
10%
9%
19%
32%
8%
7%
16%
33%
-6%
-5%
9%
39%
9%
11%
10%
41%
0%
7%
7%
9%
43%
0%
7%
6%
8%
45%
-20%
7%
5%
6%
47%
-15%
6%
5%
6%
49%
Source: J.P. Morgan estimates, Bloomberg.
133
Ben Laidler
(1-212) 622-5252
[email protected]
134
November 2010
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
LatAm Data
Ben Laidler
(1-212) 622-5252
[email protected]
136
November 2010
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
LatAm Dashboards
Profit Outlook: Earnings Forecasts Matrix for Countries and Sectors
EM
Total Market
Consumer Staples
Energy
Financials
Health Care
Industrials
Materials
Utilities
Mexico
Total Market
Consumer Staples
Energy
Financials
Health Care
Industrials
Materials
Utilities
Peru
Total Market
Consumer Staples
Energy
Financials
Health Care
Industrials
Materials
Utilities
Weight
(%)
100.0
6.8
6.8
14.0
26.4
0.8
7.2
12.0
14.5
8.0
3.5
Weight
(%)
100.0
9.7
25.4
0.0
6.0
0.0
4.7
0.0
16.2
38.0
0.0
Weight
(%)
100.0
0.0
0.0
0.0
30.8
0.0
0.0
0.0
69.2
0.0
0.0
MSCI Mexico
Weight
(%)
AMX
Walmex
Grupo Mexico
Femsa
Grupo Televisa
Cemex
Banorte
Telmex
Inbursa
Grupo Modelo
Grupo Carso
35.5
10.6
7.8
7.3
6.6
5.0
3.8
2.6
2.2
2.2
2.1
2010
28.1
29.0
19.5
17.9
24.7
24.0
30.7
57.3
52.7
8.0
9.3
Consensus
2011
16.4
14.1
11.6
15.7
21.8
17.2
13.8
4.7
27.4
10.9
16.9
2010
9.0
39.9
-4.9
NA
39.4
NA
23.8
NA
-10.2
13.4
NA
Consensus
2011
20.4
14.0
20.4
NA
27.2
NA
-3.7
NA
50.4
15.3
NA
2010
27.7
NA
NA
NA
21.4
NA
NA
NA
31.5
NA
NA
Consensus
2011
31.1
NA
NA
NA
18.2
NA
NA
NA
38.2
NA
NA
2012
22.5
NA
NA
NA
NA
NA
NA
NA
24.3
NA
NA
2010
-1.6
-42.9
81.6
28.9
-3.5
-141.4
23.6
-12.0
17.2
20.4
4.9
Consensus
2011
15.9
19.5
49.3
18.6
13.2
-228.2
28.8
4.1
12.7
9.8
-11.5
2012
36.7
22.0
18.1
25.3
10.1
171.9
24.5
3.7
-3.0
7.9
-18.0
2012
13.9
14.4
11.2
12.0
17.2
16.1
15.7
11.0
13.0
10.9
14.7
2012
16.3
9.4
4.5
NA
15.7
NA
NA
NA
25.8
8.1
NA
LATAM
Total Market
Consumer Staples
Energy
Financials
Health Care
Industrials
Materials
Utilities
Chile
Total Market
Consumer Staples
Energy
Financials
Health Care
Industrials
Materials
Utilities
Colombia
Total Market
Consumer Staples
Energy
Financials
Health Care
Industrials
Materials
Utilities
MSCI Chile
Copec
Cencosud
Enersis
CMPC
Endesa
SQM
Lan Airlines
Santander Chile
CAP
Falabella
Colbun
Source: I/B/E/S, Bloomberg, MSCI, J.P. Morgan
Note: Average earnings growth calculated based on earnings aggregate of MSCI contituents from IBES.
Weight
(%)
100.0
5.3
11.9
16.3
22.2
0.0
4.5
1.1
24.4
8.8
5.5
Weight
(%)
100.0
4.6
15.2
0.0
9.7
0.0
20.5
0.0
23.1
2.7
24.1
Weight
(%)
100.0
0.0
5.9
29.0
39.5
0.0
0.0
0.0
16.3
0.0
9.2
Weight
(%)
13.7
11.3
9.5
9.5
9.4
7.5
6.8
6.7
6.1
4.6
3.1
2010
15.8
45.1
11.5
-14.8
18.4
NA
-18.1
12.1
84.5
3.1
5.6
Consensus
2011
21.4
27.9
21.5
7.1
19.6
NA
24.6
1.6
40.1
15.4
8.8
2010
23.0
65.0
84.1
NA
26.7
NA
51.3
NA
177.0
-2.3
-19.6
Consensus
2011
11.2
18.7
12.7
NA
9.4
NA
27.5
NA
4.1
15.4
8.0
2010
26.9
NA
20.1
26.3
36.7
NA
NA
NA
-0.2
NA
21.1
Consensus
2011
47.1
NA
38.8
42.3
67.0
NA
NA
NA
45.7
NA
16.7
2012
-34.8
NA
24.6
NA
NA
NA
NA
NA
NA
NA
10.6
2010
70.8
112.8
-11.0
157.4
-2.6
-2.4
125.8
21.4
-1501.5
79.1
16.7
Consensus
2011
25.0
21.7
3.7
17.4
1.5
20.1
15.0
11.0
19.6
22.8
-14.3
2012
27.9
16.2
-1.4
20.6
4.9
41.5
17.0
7.6
7.8
20.1
91.7
2012
16.1
17.6
13.3
8.8
16.6
NA
26.7
2.2
19.7
6.9
19.4
2012
7.1
19.6
8.3
NA
23.1
NA
NA
NA
14.6
7.4
27.8
Brazil
Total Market
Consumer Staples
Energy
Financials
Health Care
Industrials
Materials
Utilities
Argentina
Total Market
Consumer Staples
Energy
Financials
Health Care
Industrials
Materials
Utilities
MSCI Brazil
Petrobras
Vale
Itauunibanco
Bradesco
Ambev
Itausa
OGX
BM&F Bovespa
CSN
Banco do Brasil
BRF Foods
MSCI Latam (others)
Buenaventura
Ecopetrol
Southern Copper
Credicorp
Bancolombia
Suramericana
Bancolombia SA
Inveragos
ISA
Cementos Argos
Exito
Weight
(%)
100.0
4.8
8.8
22.5
26.5
0.0
3.3
1.6
25.1
2.4
5.0
Weight
(%)
100.0
0.0
0.0
10.0
44.5
0.0
0.0
0.0
NA
39.4
0.0
Weight
(%)
19.0
16.4
9.4
6.6
3.4
3.0
2.9
2.7
2.1
1.9
1.6
Weight
(%)
1.2
1.1
1.0
1.0
0.5
0.5
0.4
0.4
0.3
0.2
0.2
2010
16.3
46.7
21.3
-15.5
16.9
NA
-47.7
12.1
105.0
-17.5
18.8
Consensus
2011
21.6
34.5
23.6
6.1
18.7
NA
39.7
1.6
41.2
15.7
8.8
2012
16.1
21.2
18.7
5.2
15.7
NA
31.6
2.2
11.1
9.0
12.1
2010
17.1
NA
NA
NM
7.0
NA
NA
NA
NA
21.4
NA
Consensus
2011
4.8
NA
NA
-41.8
3.6
NA
NA
NA
NA
27.7
NA
2012
6.7
NA
NA
9.6
11.8
NA
NA
NA
NA
3.3
NA
2010
-0.9
97.4
32.1
13.9
13.9
29.9
89.7
37.9
-33.0
19.9
5.3
Consensus
2011
-4.1
47.8
20.1
16.4
12.5
16.6
75.7
19.2
62.2
12.9
66.7
2012
0.9
12.4
15.4
12.3
6.5
42.9
172.3
19.5
5.8
18.4
32.9
2010
13.6
31.4
77.0
26.3
11.0
2.0
11.0
NA
30.3
1.7
17.5
Consensus
2011
36.0
31.4
50.1
18.1
24.1
2.0
24.1
NA
-3.3
-7.1
24.9
2012
-4.4
52.2
22.7
18.0
20.5
NA
20.5
NA
NA
22.6
57.8
Updated as October, 2010
137
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Profit Growth Outlook: Changes in 2010 and 2011 EPS Forecasts
Emerging Markets (EM)
World
125
145
2011
155
2011
145
115
85
Feb-09
Jul-09
Dec-09
May-10
Oct-10
2010
140
130
100
90
85
Feb-09
85
Feb-09
Dec-09
May-10
Oct-10
105
120
100
2011
Dec-09
May-10
Oct-10
70
Feb-09
2010
Dec-09
May-10
Oct-10
70
Feb-09
May-10
Oct-10
2011
2010
105
95
2010
85
Jul-09
Dec-09
May-10
Oct-10
75
Feb-09
Jul-09
Dec-09
May-10
Oct-10
Colombia
200
2011
150
2011
Dec-09
115
80
170
90
125
Peru
100
Jul-09
135
75
Jul-09
80
Feb-09
Chile
85
Argentina
110
Oct-10
2011
90
80
90
May-10
95
90
100
Dec-09
Mexico
130
100
2010
Jul-09
Jul-09
2010
110
2010
95
110
120
80
Feb-09
120
115
Brazil
2011
110
130
105
Jul-09
2011
140
95
EM Latin America
150
150
2011
125
105
95
160
135
125
2010
EM Europe
165
135
115
105
EM Asia
155
135
170
2011
140
130
80
60
50
Feb-09
110
110
70
2010
Jul-09
Dec-09
May-10
Oct-10
2010
90
80
70
Feb-09
50
Feb-09
Jul-09
Dec-09
May-10
Oct-10
2010
Jul-09
Dec-09
May-10
Source: I/B/E/S
Notes: The dashboard aims to show changes in earnings expectations. All year ends are for December. EPS figures are normalized, starting at 100 on base date Feb 2009 for ease of comparison.
These numbers are directly from IBES aggregate and may differ from those in the growth expectations pages where adjustments are made for exceptional items.
138
Oct-10
Updated as of October 2010
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Profit Growth Outlook: Changes in 2010 and 2011 EPS Forecasts
Consumer Staples
190
Energy
115
2011
170
2011
130
155
145
2011
115
125
95
130
110
90
Feb-09
Dec-09
May-10
Oct-10
65
Feb-09
Jul-09
155
140
130
Dec-09
May-10
Oct-10
Jul-09
100
125
90
115
2010
2011
Dec-09
May-10
Oct-10
95
Feb-09
May-10
Oct-10
Oct-10
60
Feb-09
May-10
Oct-10
125
2011
115
105
2010
80
May-10
Dec-09
2011
135
100
2010
Dec-09
Jul-09
145
120
Jul-09
85
Feb-09
Telecom
140
105
70
Dec-09
160
135
110
Jul-09
70
Feb-09
2010
95
Materials
145
2011
120
60
Feb-09
85
Industrials
80
105
2010
75
Jul-09
115
2010
100
85
2010
2011
135
105
150
Financials
145
125
Jul-09
Dec-09
May-10
95
Oct-10
85
Feb-09
2010
Jul-09
Dec-09
May-10
Oct-10
Utilities
190
2011
170
150
130
110
90
Feb-09
2010
Jul-09
Dec-09
May-10
Oct-10
Source: I/B/E/S
Notes: The dashboard aims to show changes in earnings expectations. All year ends are for December. EPS figures are normalized, starting at 100 on base date Feb 2009 for ease of comparison.
These numbers are directly from IBES aggregate and may differ from those in the growth expectations pages where adjustments are made for exceptional items.
139
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Value: Regional and Countries Valuations
P/E (x)
Brazil
Mexico
Chile
Argentina
Colombia*
Peru*
EMF LATAM*
Global*
USA*
Europe*
Japan*
EMF Asia
EMF EMEA*
Emerging Markets
Korea
Taiwan
China
Russia*
South Africa*
India
Malaysia
Poland*
Turkey*
Thailand
Indonesia
Hungary*
Egypt
Czech Republic
Philippines
28-Oct-10
MSCI Index
240,463
33,007
5,857
239,902
3,031
3,371
77,963
316
1,129
1,151
511
667
418
46,685
531
296
69
836
778
798
553
1,836
1,007,187
395
4,675
1,322
1,379
333
763
Div. Yield (%)
Avg.
Current
12m
Prospective
02-07
Trailing
Fwd
2009
2010E
11.4
15.6
25.2
29.0
17.4
15.2
13.7
18.4
19.0
16.4
19.4
14.6
14.6
14.3
11.5
24.7
16.1
12.7
14.3
18.9
16.3
6.5
7.1
11.8
13.0
12.1
17.8
19.4
16.9
13.1
17.8
19.9
13.9
26.7
40.3
14.6
13.5
15.5
10.7
NM
14.3
11.3
13.6
11.3
15.1
15.1
8.2
14.9
21.4
18.2
13.9
12.1
15.8
17.6
13.1
13.0
10.4
19.1
10.9
15.1
17.7
13.0
18.3
16.6
11.9
11.6
13.2
9.0
12.8
12.4
9.1
11.6
10.2
12.7
12.7
6.4
11.8
17.6
15.1
11.9
11.0
13.7
14.9
10.5
10.7
9.9
16.7
14.9
19.2
23.8
14.4
33.1
26.5
16.3
16.4
20.1
13.9
NM
18.3
14.2
16.8
15.7
26.0
18.5
11.2
18.4
25.0
22.0
16.6
14.0
18.0
20.5
12.8
16.4
10.2
22.0
12.8
17.6
19.3
13.8
25.7
20.7
14.0
13.0
14.8
10.3
14.5
13.7
10.8
13.1
10.7
13.9
14.6
7.8
14.3
20.8
17.6
13.5
11.8
15.4
17.1
13.1
12.5
10.4
18.7
P/BV (x)
Avg.
Current
Prospective
2011E
02-07
Trailing
2009
2010E
10.6
14.6
17.4
12.9
16.8
15.8
11.5
11.3
12.9
8.8
12.4
12.2
8.9
11.3
10.2
12.5
12.4
6.2
11.5
17.0
14.6
11.6
10.8
13.4
14.6
10.1
10.4
9.8
16.3
3.8
1.8
2.3
1.3
3.0
3.8
2.9
2.1
1.8
2.9
1.1
2.3
2.4
2.4
2.0
3.0
2.3
1.8
3.0
1.5
2.4
2.5
2.2
3.3
3.2
1.9
3.0
3.7
1.9
3.1
3.4
2.5
NA
2.1
2.5
3.1
2.7
2.0
3.5
2.2
2.3
2.6
2.4
1.0
3.4
2.4
1.6
2.9
1.2
3.1
3.1
2.5
2.9
2.3
2.8
3.2
6.4
3.3
2.4
2.4
1.3
NA
1.0
0.9
2.3
2.5
1.9
3.3
2.1
2.0
2.3
2.1
0.8
2.8
2.1
0.3
2.4
1.0
2.4
2.3
3.4
2.6
2.0
1.9
2.5
5.4
3.1
2.6
2.4
1.7
NA
1.9
2.1
2.5
2.7
2.0
3.5
2.2
2.3
2.7
2.5
1.0
3.5
2.5
1.8
2.9
1.2
3.2
3.3
2.4
3.0
2.4
3.0
3.3
6.6
3.4
ROE (%)
Avg.
Current
Prospective
2011E
02-07
Trailing
2009
2010E
2011E
2008
2009
2010E
2011E
3.3
3.6
2.6
NA
2.2
2.6
3.3
3.0
2.1
4.0
2.4
2.7
3.3
2.9
1.2
4.2
2.9
2.3
3.6
1.3
3.4
4.0
2.9
3.2
2.8
3.8
4.1
6.7
3.1
2.0
2.8
1.9
2.5
1.9
3.2
2.2
2.5
2.9
2.3
1.8
2.0
2.3
2.1
1.6
2.0
2.4
1.8
2.6
3.9
2.0
2.2
1.9
2.2
3.1
2.6
4.1
1.9
1.9
1.7
2.8
2.2
1.8
2.4
5.7
1.9
1.7
2.0
1.6
1.0
2.1
1.6
2.0
1.5
1.9
2.4
1.1
2.3
3.4
2.2
1.6
2.1
2.5
4.3
1.4
1.4
1.8
3.0
2.3
2.6
2.5
NA
1.5
6.9
2.4
1.8
2.2
1.6
1.1
2.3
1.7
2.2
1.7
2.0
2.7
1.2
2.6
3.7
2.4
1.9
2.4
2.7
5.0
1.6
1.5
1.9
3.2
1.8
2.9
2.4
NA
3.0
5.4
2.0
1.6
2.0
1.6
1.0
2.1
1.5
2.0
1.5
1.9
2.4
1.1
2.2
3.4
2.2
1.6
2.1
2.4
4.2
1.4
1.4
1.8
3.0
1.7
2.7
2.2
NA
3.0
4.5
1.9
1.5
1.8
1.5
1.0
1.8
1.4
1.8
1.3
1.7
2.1
0.9
2.0
2.9
2.1
1.5
1.9
2.2
3.6
1.3
1.3
1.7
2.8
18.7
19.3
13.3
22.8
11.4
30.6
18.5
11.0
11.3
15.0
7.8
10.6
17.2
12.3
7.7
5.4
14.2
17.3
19.1
12.9
14.2
15.4
17.8
12.1
28.4
22.0
12.7
19.7
13.2
15.3
13.7
10.5
NA
4.5
13.9
14.5
11.1
11.2
11.7
NM
13.2
14.0
13.6
11.4
8.0
15.2
12.7
14.4
14.3
11.2
11.6
18.8
14.9
26.7
12.9
12.0
20.1
14.9
13.7
16.5
12.2
NA
11.8
13.8
13.9
13.1
14.1
15.7
7.0
15.9
15.0
15.8
15.0
13.9
17.2
14.4
16.6
17.0
13.1
12.7
19.1
16.6
26.5
11.2
11.8
18.0
16.5
16.2
18.6
12.7
NA
17.6
15.1
16.3
14.0
14.8
17.4
7.7
16.0
16.4
16.4
13.9
14.4
17.9
15.9
18.2
18.3
14.6
12.9
18.2
17.2
26.4
13.2
13.0
18.1
17.6
Source: I/B/E/S, MSCI, J.P. Morgan
* Market forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using I/B/E/S estimates
For all other markets, forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using JPM estimates for covered stocks and I/B/E/S estimates for the rest.
USA, Europe and Japan PE are I/B/E/S aggregate estimates. Japan Valuation estimates are for the financial year ending March
140
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Brazil
Mexico
Chile
Argentina
Peru
14.4
12.0
14.4
13.3
15.4
31.0
NA
NA
NA
18.4
18.4
17.3
20.4
19.9
20.1
24.0
24.6
NA
34.5
Energy
10.4
10.3
8.7
8.2
5.6
12.0
10.3
10.0
NA
NA
10.8
NA
20.7
Financials
10.9
9.3
9.2
12.3
10.8
12.4
12.6
12.4
15.2
14.1
12.5
15.3
11.3
Health Care
11.4
10.5
10.8
18.8
14.1
22.0
NA
NA
NA
NA
NA
NA
NA
Industrials
13.4
12.1
13.2
13.4
10.7
14.4
22.9
24.3
20.9
22.3
NA
NA
NA
12.8
12.2
13.6
11.2
9.9
12.3
10.4
10.4
NA
NA
NA
NA
NA
Materials
Utilities
Market Aggregate
Sector Neutral*
11.8
12.0
12.3
11.6
12.0
13.6
13.2
12.8
13.2
11.5
10.5
10.4
10.7
9.0
10.9
11.2
11.6
11.8
11.6
11.6
12.2
10.9
10.8
9.1
10.9
12.3
12.3
13.7
12.4
12.9
10.1
11.0
10.9
11.9
12.9
8.6
8.0
9.4
10.9
12.3
16.8
12.0
NA
15.1
14.4
19.5
11.7
13.1
17.7
15.9
NA
9.1
NA
13.0
12.6
16.6
NA
NA
16.6
13.5
51.5
NA
37.3
18.3
21.2
Colombia
EMF LATAM
12.8
14.2
EMF EMEA
12.8
12.7
Emerging
Markets
12.8
14.5
Europe
13.9
Consumer Staples
USA
12-month forward PE
Global
EMF Asia
Value: PE Matrix for Countries and Sectors
Europe
Emerging
Markets
EMF EMEA
EMF Asia
EMF LATAM
Brazil
Mexico
Chile
Argentina
Peru
Colombia
Consumer Staples
Energy
Financials
Health Care
Industrials
Materials
Utilities
Market Aggregate
USA
Trailing P/B
Global
Value: P/BV Matrix for Countries and Sectors
2.1
3.0
1.7
1.2
2.6
2.1
2.9
2.1
1.9
1.4
1.7
2.8
3.5
1.9
1.1
2.5
2.7
3.7
2.8
2.0
1.5
2.0
2.0
3.1
1.6
1.0
3.1
2.4
2.5
1.9
1.6
1.4
1.6
2.7
3.5
1.4
2.1
4.3
2.1
2.3
2.2
2.5
1.3
2.0
3.2
4.0
1.0
2.0
3.2
2.1
1.1
2.7
2.8
1.1
1.6
2.5
3.7
2.4
2.1
5.2
2.0
2.3
2.0
2.1
1.5
2.1
3.0
3.1
1.4
2.6
NA
2.8
18.8
2.2
3.3
1.2
1.9
2.8
3.0
1.4
2.5
NA
3.3
18.8
2.3
1.3
0.9
1.7
3.2
3.5
NA
2.6
NA
1.8
NA
1.3
5.3
NA
2.8
4.9
3.0
NA
4.2
NA
3.2
NA
2.6
2.8
2.1
2.2
NA
1.9
0.7
2.7
NA
NA
NA
NA
1.5
NA
1.7
NA
NA
NA
3.8
NA
NA
NA
7.1
NA
NA
5.6
NA
NA
5.1
2.1
NA
NA
NA
1.4
NA
2.7
2.3
Source: IBES, MSCI, J.P. Morgan. Note: PEs are derived from bottom-up calculations of each individual MSCI constituents using JPM estimates for covered stocks and IBES estimates for the rest.
*Sector neutral PE are calcuated by using sector weights of MSCI EM and sector PE of respective markets (MSCI EM sector PE used where country sector does not exist)
141
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Value: Trailing P/BV for Regions/Countries
World
EM Asia
3.3
4.5
3.0
4.0
+1SD
3.5
-1SD
1.5
2.4
2.4
2.1
2.1
1.8
1.8
1.5
1.5
-1SD
1.2
1.0
97
98
99
00
01
02
03
04
05
06
07
08
10
95
97
98
99
00
01
02
EM Latin America
+1SD
3.5
2.0
2.0
1.5
1.5
1.0
1.0
-1SD
00
01
02
03
04
05
08
10
06
07
08
10
95
98
99
00
01
02
04
98
99
00
01
02
03
04
05
06
07
08
99
00
01
02
03
04
05
07
08
10
03
04
05
06
07
08
09
+1SD
2.3
2.0
1.7
1.4
1.1
-1SD
-1SD
0.8
97
98
99
00
01
02
03
04
05
06
07
08
95
10
97
98
99
00
01
Colombia
02
04
05
06
07
08
10
6.0
3.5
+1SD
5.0
3.0
+1SD
03
USA
4.0
+1SD
2.5
4.0
2.0
3.0
1.5
2.0
06
02
2.6
95
10
-1SD
-1SD
95
97
98
99
00
01
02
03
04
05
06
-1SD
2.0
0.5
1.0
98
01
2.9
1.0
97
00
Chile
1.3
97
99
10
+1SD
1.6
-1SD
0.0
3.0
95
08
1.9
4.0
0.0
07
2.2
3.0
-1SD
06
3.1
6.0
1.0
05
3.2
Peru
2.0
03
2.5
5.0
07
08
10
Source: I/B/E/S
Notes: The dashboard aims to show historical consensus trailing P/BV with +/-1 SD bands since Dec 1995 . For EMEA Trailing P/BV since Feb 1999.
142
97
2.8
95
-1SD
1.0
0.9
7.0
+1SD
1.5
-1SD
3.4
Argentina
5.0
4.0
2.0
Mexico
+1SD
0.5
0.0
99
07
3.7
2.5
98
06
3.5
2.5
97
05
4.0
3.0
95
04
4.0
3.0
0.5
03
2.5
Brazil
4.0
+1SD
3.0
1.2
0.9
95
+1SD
2.7
3.0
2.0
3.5
3.0
+1SD
2.7
2.5
EMEA
3.3
0.0
1.0
95
97
98
99
00
01
02
03
04
05
06
07
08
10
95
97
98
99
00
01
02
03
04
05
06
07
08
10
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Value: Forward PE for Regions/Countries
World
EM Asia
20.0
25.0
30.0
18.0
17.0
25.0
15.0
14.0
20.0
12.0
11.0
15.0
9.0
+1SD
+1SD
22.0
EMEA
+1SD
+1SD
19.0
16.0
13.0
-1SD
7.0
95
97
98
99
00
-1SD
8.0
10.0
01
02
03
04
05
06
07
08
-1SD
95
97
98
99
00
01
EM Latin America
02
03
04
05
06
07
08
95
10
97
98
99
00
01
Brazil
16.0
03
04
05
06
07
08
95
10
97
98
99
00
01
02
03
04
05
06
07
08
10
Chile
17.0
23.0
+1SD
+1SD
+1SD
02
Mexico
14
14.0
3.0
5.0
5.0
10
-1SD
6.0
10.0
+1SD
12
15.0
20.0
10
13.0
17.0
8
11.0
14.0
12.0
10.0
8.0
-1SD
6.0
6
4.0
95
97
98
99
00
01
02
03
04
05
06
07
08
10
9.0
-1SD
7.0
4
98
99
00
01
02
03
05
06
07
08
09
95
10
97
98
99
00
01
Peru
Argentina
03
04
05
06
07
08
10
95
97
98
99
00
01
02
03
04
05
06
07
08
10
USA
24
24
21
25
+1SD
24
+1SD
8.0
Colombia
32
30
02
-1SD
11.0
-1SD
18
20
+1SD
21
+1SD
15
18
12
16
15
9
10
8
-1SD
5
-1SD
0
97
98
Source: I/B/E/S
12
3
0
95
15
-1SD
6
99
00
01
02
03
04
05
06
07
08
10
0
95
97
98
99
00
01
02
03
04
05
06
07
08
10
-1SD
9
95
97
98
99
00
01
02
03
04
05
06
07
08
10
95
97
98
99
00
01
02
03
04
05
06
07
08
10
143
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Fair Value P/E*: Gordon Growth P/E
MSCI Brazil
MSCI LatAm
15
17
12 Mth Fwd PE
12 Mth Fwd PE
Gordon Growth P/E
15
MSCI Mexico
17
Gordon Growth P/E
12 Mth Fwd PE
MSCI Chile
Gordon Growth P/E
Gordon Growth P/E
18
16
13
9
11
12 Mth Fwd PE
20
15
12
13
22
14
11
12
9
6
10
9
7
8
5
Jan 03 Feb 04 Mar 05 Apr 06 May 07 Jun 08
Jul 09
Aug 10
3
Jan 03
Feb 04
Mar 05
Apr 06
May 07
Jun 08
Jul 09
Aug 10
7
Jan 03
Feb 04
Mar 05
Apr 06
May 07
Jun 08
Jul 09
Aug 10
6
Jan 03
Feb 04
Mar 05
Apr 06
May 07
Jun 08
Jul 09
Aug 10
Source: MSCI, J.P. Morgan.
*We use a re-organized Gordon growth model to derive a ‘fair value’ P/E = (ROE-g)/ROEx(COE-g).
1) COE made up of the US 10-year treasury yield as the risk-free rate, the respective country EMBIG spreads, and a fixed equity market risk premium of 5% (30-year average)
2) We take the potential GDP growth as the growth rate; 3)the 12m-forward I/B/E/S consensus ROE
Value: Forward PE for Sector
Consumer Staples
Energy
20
30
Financials
18
20
+1SD
25
15
+1SD
17
15
+1SD
+1SD
12
20
14
10
11
5
9
15
-1SD
10
5
95
97
98
99
00
01
02
03
04
05
06
07
08
-1SD
95
97
98
99
00
Industrials
01
02
03
04
05
06
07
08
95
10
97
98
99
00
01
03
05
06
07
08
95
10
97
98
99
00
01
02
03
04
05
06
07
08
10
Utilities
32
21
+1SD
24
+1SD
12
15
04
24
14
+1SD
02
Telecom
Materials
16
21
18
3
0
8
10
-1SD
6
-1SD
18
+1SD
10
12
16
15
8
9
12
6
6
-1SD
3
98
99
00
01
02
03
05
06
07
8
08
09
10
9
-1SD
4
2
97
98
99
00
01
02
03
04
05
06
07
Source: I/B/E/S
Notes: The dashboard aims to show historical consensus forward PE with +/-1 SD bands since Dec 1995 . No Heathcare sector
144
0
6
95
08
10
-1SD
-1SD
95
97
98
99
00
01
02
03
04
05
06
07
08
10
95
97
98
99
00
01
02
03
04
05
06
07
08
10
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Economic Forecasts: Changes in Real GDP Forecasts
Real GDP Growth (% Y/Y)
JPM
Consensus
2010E
2011E
2010E
2011E
LATAM
Argentina
Brazil
Colombia
Mexico
Peru
EMEA
Russia
South Africa
Poland
Turkey
Hungary
Egypt
Czech Republic
Morocco
Jordan
Asia
S Korea
Taiwan
China
India
Thailand
Indonesia
Philippines
Malaysia
Change in Forecasts Past 3 months (%)
JPM
Consensus
2010E
2011E
2010E
2011E
Economic Momentum
GDP SAAR
3Q 10E
4Q 10E
2Q10E
Inflation
(% Y/Y)
2010E
2011E
1Q11E
8.5
7.5
4.5
4.5
8.2
5.5
4.5
4.1
3.5
6.0
8.3
7.1
4.6
4.7
7.0
4.8
4.5
4.7
3.5
6.0
0.0
0.0
0.0
0.0
0.9
1.0
0.5
0.0
0.0
0.0
2.0
0.6
1.2
0.3
1.0
0.3
0.0
0.7
-0.1
0.7
12.6
5.1
3.9
13.5
12.7
0.0
2.3
3.7
-3.6
4.8
2.0
3.2
4.0
3.1
3.5
6.0
5.7
4.0
2.9
5.8
8.2
5.0
2.2
4.2
1.7
10.0
5.4
3.4
3.9
2.3
4.3
2.9
3.5
7.1
1.0
na
2.0
na
na
4.7
3.1
3.8
4.3
2.8
na
3.2
na
na
4.2
3.1
3.2
7.1
0.9
na
2.0
na
na
4.3
3.6
3.5
4.5
2.6
na
2.0
na
na
-0.7
-0.2
-0.1
1.2
0.0
na
0.0
na
na
-0.3
-0.4
0.0
-0.7
-0.3
na
0.0
na
na
0.2
0.0
0.2
0.8
0.4
na
0.3
na
na
-0.2
-0.1
0.0
0.2
-0.2
na
-0.2
na
na
4.3
3.2
4.1
11.7
0.0
na
3.8
na
na
2.5
3.1
3.5
-3.0
2.0
na
2.5
na
na
5.0
3.2
3.5
-8.5
2.0
na
2.3
na
na
5.0
3.1
3.0
6.1
2.0
na
2.5
na
na
6.8
4.4
2.5
8.6
4.9
na
na
na
na
7.8
4.4
2.8
6.5
3.6
na
na
na
na
6.1
9.9
10.0
8.3
8.5
6.0
7.0
6.8
4.0
4.1
9.0
8.5
4.0
5.4
4.5
4.6
6.0
4.6
10.0
8.4
7.5
6.0
5.9
6.8
4.6
4.0
9.0
8.4
4.5
6.3
5.0
5.2
0.0
1.1
0.0
0.0
0.0
0.0
0.2
-0.4
0.0
-0.1
0.2
0.0
-1.0
0.0
0.2
0.0
0.0
0.0
0.0
0.2
1.9
0.0
1.8
1.9
0.0
0.0
0.1
na
0.1
0.0
0.7
0.8
5.8
7.2
7.2
8.5
0.6
7.5
7.7
7.2
2.5
1.5
8.1
8.0
2.8
4.5
0.8
0.0
3.8
2.3
8.7
8.9
2.8
5.0
1.6
2.0
4.0
4.2
9.5
8.0
4.9
5.3
5.7
4.9
2.7
1.0
2.8
11.6
3.1
5.1
3.7
1.5
3.3
1.8
2.7
10.2
1.9
5.3
2.3
1.7
2010E GDP Growth: JPM Minus Consensus
Change in Consensus Forecasts for 2010E GDP over last 3 months (%)
1.5
1.2
0.8
Source: J.P. Morgan estimates, Bloomberg
Note: Consensus estimates for Jordan, Egypt and Israel sourced from WES and Morocco from EIU
Chile
Malaysia
Philippines
Colombia
Peru
Argentina
Turkey
Thailand
China
Indonesia
S Korea
Poland
Brazil
Taiwan
India
South
Africa
Mexico
Hungary
Russia
Czech
Republic
Argentina
Russia
Poland
Hungary
Taiwan
Peru
China
Mexico
Brazil
Chile
Turkey
South
Africa
Thailand
Philippines
Malaysia
Colombia
(0.6)
S Korea
0.0
(1.5)
Indonesia
(0.8)
Czech
Republic
0.6
0.0
145
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Economic Forecasts: Policy Rate Trend and Forecasts
Country
Official interest rate
Q1'10
Q2'10
Q3'10
Current
Q4'10F
Q1'11F
Q2'11F
Q3'11F
Last Change
Next Change
Latin America
Brazil
SELIC overnight rate
8.75
10.25
10.75
10.75
10.75
11.50
12.50
12.50
21 Jul 10 (+50bp)
Mar 11 (+25bp)
Mexico
Repo rate
4.50
4.50
4.50
4.50
4.50
4.50
4.75
5.25
17 Jul 09 (-25bp)
Jun 10 (+25bps)
Chile
Discount rate
0.50
0.50
2.50
2.75
3.25
4.00
4.25
4.25
16 Sep 10 (+50bp)
16 Nov 10 (+25bp)
Colombia
Repo rate
3.50
3.00
3.00
3.00
3.00
4.00
5.00
5.50
30 Apr 10 (-50bp)
1Q 11 (+50bp)
Peru
Reference Rate
1.25
1.75
3.00
3.00
3.00
3.00
3.50
4.25
9 Sep 10 (+50bp)
May 11 (+25bp)
On hold
Developed Markets
United States
Federal funds rate
0.125
0.125
0.125
0.125
0.125
0.125
0.125
0.125
16 Dec 08 (-87.5bp)
Euro Area
Refi Rate
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
7 May 09 (-25bp)
On hold
Japan
Overnight Call Rate
0.10
0.10
0.10
0.05
0.05
0.05
0.05
0.05
5 Oct 10 (-5bp)
On hold
Europe, Middle East and Africa
Czech Republic
2-week repo rate
1.00
0.75
0.75
0.75
0.75
0.75
1.00
1.25
6 May 10 (-25bp)
2Q 11 (+25bp)
Hungary
2-week deposit rate
5.50
5.25
5.25
5.25
5.25
5.25
5.25
5.50
26 Apr 10 (-25bp)
3Q 11 (+25bp)
Poland
7-day intervention rate
3.50
3.50
3.50
3.50
3.50
3.50
3.75
4.00
24 Jun 09 (-25bp)
2Q 11 (+25bp)
Russia
1-week deposit rate
2.75
3.50
2.75
2.75
2.75
2.75
2.75
3.00
31 May 10 (-50bp)
3Q 11 (+25bp)
South Africa
Repo rate
6.50
6.50
6.00
6.00
5.50
5.50
5.50
5.50
9 Sep 10 (-50bp)
18 Nov 10 (-50bp)
Turkey
O/n borrowing rate
6.50
6.50
7.00
7.00
7.00
7.00
7.00
7.00
-
4Q 11 (+50bp)
EM Asia
China
1-year working capital
5.31
5.31
5.31
5.56
5.56
5.56
5.81
5.81
19 Oct 10 (+25bp)
2Q 11 (+25bp)
Korea
Overnight call rate
2.00
2.00
2.25
2.25
2.50
2.75
2.75
2.75
9 Jul 10 (+25bp)
4Q 10 (+25bp)
India
Repo rate
5.00
5.00
6.00
6.00
6.25
6.50
6.50
6.75
16 Sep 10 (+25bp)
2 Nov 10 (+25bp)
Thailand
1-day repo rate
1.25
1.25
1.75
1.75
2.00
2.00
2.00
2.00
26 Aug 10 (+25bp)
1 Dec 10 (+25bp)
Taiwan
Official discount rate
1.38
1.38
1.50
1.50
1.50
1.50
1.50
1.63
30 Sep 10 (+12.5bp)
3Q 11 (+12.5bp)
Change in policy rates
Colombia
Brazil
India
Peru
Thailand
Czech
Poland
Korea
China
Hungary
Russia
Japan
Mexico
EU
USA
Turkey
Taiwan
SAfrica
-1100
Change from Aug 07
18
Forecast change to Jun 11
Nominal Policy Rate
14
10
6
Real Rate
2
-900
Source: J.P. Morgan Economics, Bloomberg.
146
Emerging Markets policy rate
22
-700
-500
-300
-100
100
300
-2
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Commodity Prices: Movement and Forecasts
1,200.0
1,000.0
Platinum
Silver
Gold
1,400.0
2300
21.0
2000
625.0
18.0
1700
525.0
1400
425.0
1100
325.0
15.0
J.P. Morgan
J.P. Morgan
12.0
800.0
9.0
600.0
Apr 06
Jul 07
Nov 08
Feb 10
3.0
Dec 04
Jun 11
Apr 06
Copper
Jul 07
Nov 08
Feb 10
Jun 11
Nov 08
Feb 10
Crude
Apr 06
Jul 07
Nov 08
Feb 10
Jun 11
600
550
500
450
400
350
300
250
200
150
100
Jan-02
400
80.0
300
50.0
20.0
Dec 04
200
Apr 06
Jul 07
Nov 08
Feb 10
100
Jan 02
Jun 11
Nov 08
Feb 10
Apr 03
Jul 04
Oct 05
Jan 07
Apr 08
Aug 09
Jun 11
50,000.0
J.P. Morgan
20,000.0
10,000.0
Apr 06
Jul 07
Nov 08
Feb 10
Jun 11
S&P GSCI Agricultural Index
500
J.P. Morgan
Jul 07
40,000.0
0.0
Dec 04
600
110.0
Apr 06
Nickel
J.P. Morgan
S&P GSCI Industrial Metals Index
140.0
125.0
Dec 04
60,000.0
1,000.0
900.0
Dec 04
Jun 11
Jun 11
2,000.0
1,200.0
Jul 07
Feb 10
30,000.0
1,800.0
1,500.0
Apr 06
Nov 08
3,000.0
2,100.0
2,000.0
Jul 07
4,000.0
2,400.0
J.P. Morgan
J.P. Morgan
Zinc
J.P. Morgan
2,700.0
6,000.0
0.0
Dec 04
Apr 06
5,000.0
3,000.0
8,000.0
725.0
225.0
500
Dec 04
Aluminum
10,000.0
4,000.0
J.P. Morgan
800
6.0
400.0
Dec 04
Palladium
24.0
Apr-03
Jul-04
Oct-05
Jan-07
Apr-08
Aug-09
0.0
Dec 04
Apr 06
Jul 07
Nov 08
Feb 10
Jun 11
S&P Goldman Sachs Commodity Index
950
850
750
650
550
450
350
250
150
Jan-02
Apr-03
Jul-04
Oct-05
Jan-07
Apr-08
Aug-09
Commodity Price Forecasts
Spot Price
10Q4
11Q1
11Q2
11Q3
2009
2010E
2011E
WTI oil $/bbl
82.2
81.0
78.0
81.0
83.0
61.9
78.5
82.5
Brent oil $/bbl
82.8
83.0
80.0
83.0
85.0
62.5
79.2
84.5
3.4
4.5
4.8
5.0
5.3
4.7
5.1
5.4
1,335
1,275
1,250
1,250
1,250
976
1,221
1,438
Natural gas $/mmbtu
Gold ($/oz)
Silver ($/oz)
23.7
19.6
19.2
19.2
19.2
14.7
18.7
22.1
Platinum ($/oz)
1,685
1,700
1,750
1,800
1,800
1,205
1,598
1,600
626
600
650
675
675
262
495
613
Copper ($/metric ton)
8,330
6,750
6,750
7,000
6,800
5,157
7,294
8,713
Aluminium ($/metric ton)
2,229
2,100
2,100
2,150
2,175
1,696
2,175
2,338
Zinc ($/metric ton)
2,467
2,350
2,200
2,100
2,100
1,669
2,143
2,275
Nickel ($/metric ton)
23,029
21,000
20,000
20,000
20,000
15,363
22,170
22,000
Corn ($/bushel)
5.6
5.3
5.3
5.2
5.1
3.8
4.2
5.2
Wheat ($/bushel)
7.1
6.6
7.2
7.1
6.5
5.3
5.9
6.6
12.0
10.5
10.6
10.4
10.2
10.2
10.0
10.4
Palladium ($/oz)
Soybeans ($/bushel)
Source: Datastream, J.P. Morgan Estimates
147
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Economic Forecasts: Currency Movements and Forecasts
Brazilian Real (BRL)
2.8
2.6
15.0
14.0
2.4
13.0
2.2
J.P. Morgan
end Dec 10: 12.50
end Mar 11: 12.50
end Jun 11: 12.25
1.4
Dec 04
Apr 06
Jul 07
Nov 08
Feb 10
9.0
Dec 04
Jun 11
2,600
J.P. Morgan
2.5
Dec 04
Apr 06
Jul 07
38
36
Nov 08
Feb 10
Jun 11
1.60
1.50
J.P. Morgan
2,000
Consensus
Feb 10
1,600
Dec 04
Jun 11
Consensus
Apr 06
Jul 07
Nov 08
Feb 10
Jun 11
7.5
Consensus
28
Dec 04
Apr 06
Jul 07
Nov 08
Feb 10
6.0
Dec 04
39
36
Consensus
Jul 07
Nov 08
Feb 10
Jun 11
end Dec 10: 29.66
end Mar 11: 29.21
end Jun 11: 28.99
Consensus
33
J.P.Morgan
24
Feb 10
Jun 11
Dec 04
Apr 06
Jul 07
Jul 07
Nov 08
Feb 10
Jun 11
Nov 08
Expected % Gain vs USD till December 2010 (J.P. Morgan)
Consensus
end Dec 10: 79
end Mar 11: 81
end Jun 11: 83
75
Dec 04
Apr 06
J.P. Morgan
Jul 07
Nov 08
Feb 10
Jun 11
South African Rand (ZAR)
21
Nov 08
Apr 06
105
85
J.P. Morgan
27
Consensus
Jul 07
Consensus
115
95
Apr 06
J.P Morgan
Japansese Yen (JPY)
30
Apr 06
end Dec 10: 4.05
end Mar 11: 4.15
end Jun 11: 4.15
125
end Dec 10: 1.30
end Mar 11: 1.30
end Jun 11: 1.30
1.10
Dec 04
42
J.P. Morgan
6.5
Jun 11
Jun 11
Russian Rouble (RUB)
7.0
32
Feb 10
1.30
45
end Dec 10: 6.60
end Mar 11: 6.50
end Jun 11: 6.40
8.0
J.P. Morgan
Nov 08
1.40
Chinese Yuan Renminbi (CNY)
end Dec 10: 31.20
end Mar 11: 31.00
end Jun 11: 30.75
30
Jul 07
1.20
1,800
8.5
34
Apr 06
4.6
4.4
4.2
4.0
3.8
3.6
3.4
3.2
3.0
2.8
Dec 04
Euro (EUR)
1.70
2,200
Nov 08
400
Dec 04
1.80
2,400
Taiwan Dollar (TWD)
40
Jul 07
end Dec 10: 1800
end Mar 11: 1830
end Jun 11: 1850
2,800
3.3
2.7
500
Colombian Peso(COP)
3,000
end Dec 10: 2.78
end Mar 11: 2.84
end Jun 11: 2.82
Consensus
550
450
Apr 06
Peruvian Nuevo Sol (PEN)
3.5
3.1
700
600
Consensus
10.0
Consensus
750
650
11.0
1.8
2.9
J.P. Morgan
Argentinian Peso (ARS)
end Dec 10: 480
end Mar 11: 505
end Jun 11: 500
800
12.0
2.0
1.6
Chilean Peso (CLP)
Mexican Peso (MXN)
16.0
end Dec 10: 1.70
end Mar 11 : 1.80
end Jun 11: 1.82
3.0
Feb 10
Jun 11
14.0
end Dec 10: 7.00
13.0
end Mar 11: 7.15
12.0
end Jun 11: 7.30
11.0
10.0
9.0
8.0
7.0
6.0
5.0
Dec 04
Apr 06
Jul 07
Consensus
J.P. Morgan
Nov 08
Feb 10
Jun 11
Expected % Loss vs USD till December 2010 (J.P. Morgan)
0.5
8.0
7.0
(1.0)
6.0
5.0
(2.5)
4.0
(4.0)
3.0
(5.5)
2.0
1.0
148
EUR
RUB
IDR
CLP
JPY
CNY
BRL
PHP
THB
MXN
TWD
INR
ARS
KRW
PLN
TRL
CZK
HUF
Source: Datastream, J.P. Morgan estimates, Bloomberg.
MYR
(7.0)
0.0
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Flows and Positioning
EM Managers’ Positioning Relative to MSCI EM: Major EM Markets
Country
OW-UW
< 0.1%
EM %
Regional and US Mutual Fund Flows
> 2% OW
< 2% UW
JPM reco
Russia
16 (17)
8 (11)
8 (6)
3 (3)
6.0
N
Indonesia
11 (9)
4 (4)
7 (5)
4 (4)
2.4
N
Total EM Equity****
Weekly Index
Net Weekly
2010 YTD
2009
12M
chg
Flows
Agg.
Agg.
Avg.
(%)
US$M
US$M
US$M
(x).
(0.2)
2,691
66,401
64,373
1.4
Mexico
10 (8)
5 (5)
5 (3)
3 (3)
4.2
N
Global EM Equity*
(0.2)
1,646
44,218
29,058
1.3
India
12 (10)
10 (7)
2 (3)
1 (1)
8.4
OW
LatAm Equity*
(1.3)
239
1,390
8,786
1.1
Brazil
11 (10)
10 (12)
1 (-2)
0 (0)
16.6
UW
EMEA Equity*
(1.3)
320
4,695
2,017
1.8
China+HK
11 (10)
14 (15)
-3 (-5)
0 (0)
17.8
N
Asia ex-Japan Equity*
0.2
458
15,131
19,108
0.7
South Africa
6 (6)
19 (20)
-13 (-14)
2 (2)
7.5
N
BRIC Equity*
(1.1)
28
966
5,404
0.3
Malaysia
2 (2)
18 (19)
-16 (-17)
12 (13)
2.9
OW
Japan Equity Funds
(1.6)
(108)
(1,461)
(5,461)
(0.5)
China
4 (5)
20 (24)
-16 (-19)
0 (0)
17.8
N
Developed Europe*
(1.7)
838
(10,765)
2,506
1.0
1 (2)
13.4
N
International Equity*
(1.4)
490
1,824
18,727
0.6
1 (1)
10.5
N
US Equity***
0.5
5,269
9,727
(8,290)
1.3
US Bond***
2.7
4,202
140,307
180,622
1.2
US Money Market***
0.1
17,329
(399,002)
(466,143)
1.8
Korea
5 (3)
23 (23)
-18 (-20)
Taiwan
1 (1)
28 (25)
-27 (-24)
Source: EPFR Global, MSCI, J.P. Morgan calculations. The survey covers 45 fund managers. The calculation of OW is greater than 2% overweight
versus the MSCI benchmark. UW is less than -2% of benchmark weighting. Fund weightings are as of 30 September 2010 and MSCI weightings as of 1
October 2010. Numbers in brackets are the previous month values. Potentially China stocks have been misclassified as Hong Kong, hence the combined
weight for Hong Kong and China. Hong Kong investment may be providing non-China exposure
Source: Bloomberg, J.P. Morgan, I:Net, MKK, Lipper FMI, MSCI, Datastream. *EPFR Global data. ***Data from Lipper
FMI. BRIC Funds separated from EM Funds from 11 May 07. 12 month average column shows ratio of current flows
to past 12 months rolling average. ****Total EM Equity includes Global EM, LatAm, EMEA, Asia ex Japan and BRIC
funds.
Cumulative EM Fund Flows (US$ BN), by Year
2010 LatAm Funds Cumulative Total and ETF Flows (US$ MN)
120
1,500
2006
2007
2008
2009
90
2010
Total Flows
1,000
66.4
500
64.4
60
0
40.8
(500)
30
22.4
0
(1,000)
ETF Flows
(1,500)
(2,000)
(30)
(2,500)
(39.4)
(60)
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
(3,000)
Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10
Jul 10
Aug 10 Sep 10 Oct 10
Source: J.P. Morgan estimates, Bloomberg and EPFR
149
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Economic Forecasts: Credit Risk
External (2010E)
Current
External Debt
Account
2010F**
2010F**
(US$bil)
%GDP
%GDP
Foreign
Reserves
(US$bil)
LATAM
Argentina
Brazil
Colombia
Mexico
Peru
EMEA
Russia
South Africa
Poland
Turkey
Hungary
Czech Republic
Morocco*
Jordan*
Asia
Korea
Taiwan
China
India
Malaysia
Thailand
Indonesia
Philippines
Sovereign Ratings (Long Term Foreign Debt)
Moody's
Action
Rating
Rating
Aug-14-08
Sep-22-09
Jun-19-08
Jan-06-05
Dec-16-09
BBBBBBBBBB
BBB-
Downgrade, O/L stable
Upgrade, stable
Upgrade, stable
Downgrade, O/L changed to stable
Upgrade, stable
Aug-11-08
30-Apr-08
30-Apr-08
Dec-14-09
30-Apr-08
Date
0.0
-2.4
-2.0
-0.8
-0.7
118.0
221.0
54.3
178.0
33.2
32.9
10.9
19.4
16.8
22.3
-1.5
-3.3
-2.7
-0.5
-1.9
-1.0
-3.4
-4.2
-2.5
-2.5
51.2
64.1
48.8
37.4
24.7
46.4
61.7
47.9
34.1
22.1
472.9
41.7
81.6
78.0
37.1
44.0
13.6
5.3
4.5
-5.0
-2.5
-4.8
0.5
-1.8
-0.9
-14.4
502.8
82.6
261.3
273.5
181.4
84.0
na
na
33.5
24.0
51.0
37.4
141.6
44.5
na
na
-5.9
-6.7
-7.1
-5.5
-4.0
-5.9
na
na
-4.2
-5.0
-7.0
-3.4
-4.2
-5.0
na
na
8.0
32.9
51.0
55.4
78.3
35.3
na
na
7.9
38.2
53.2
49.0
79.3
38.5
na
na
Baa1
A3
A2
Ba2
Baa1
A1
Ba1
Ba2
O/L changed to stable, Affirmed
Upgrade, O/L changed to stable
Affirmed, O/L stable
Upgrade, O/L stable
Downgrade, O/L (-)
O/L changed to stable
O/L changed to stable
Dec-12-08
Jul-16-09
Jan-05-10
Jan-08-10
Mar-31-09
Dec-08-08
Jun-18-03
Jan-08-07
BBB
BBB+
ABB
BBBA
BB+
BB
O/L changed to (-), Affirmed
Upgrade, O/L (+)
Upgrade, O/L stable
Dec-21-09
Nov-11-08
Oct-27-08
Feb-19-10
Oct-2-09
Dec-21-09
Mar-23-10
Mar-12-10
290.1
387.7
2766.0
273.6
100.2
155.5
83.6
41.4
2.7
7.4
4.8
-3.3
15.6
3.7
0.6
4.8
402.9
na
443.6
277.9
70.0
72.3
183.0
56.5
42.3
na
7.5
16.0
33.7
22.6
26.2
27.8
-1.7
-3.6
-3.3
-6.8
-7.1
-3.9
-1.6
-3.9
-0.5
-1.5
-2.1
-5.1
-5.2
-2.5
-2.0
-4.0
44.4
na
19.3
42.3
53.3
34.2
35.8
52.6
42.8
na
19.0
41.1
46.9
34.4
32.5
49.3
A1
Aa3
A1
Baa3
A3
Baa1
Ba2
Ba3
Upgrade, O/L stable
Affirmed, O/L stable Jan-24-02
O/L changed to (+), Affirmed
Upgrade, O/L stable
Upgrade, O/L stable
Affirmed, O/L (-)
Apr-14-10
Jan-24-02
Nov-09-09
Jan-22-04
Dec-16-04
Apr-13-10
Jan-21-10
Mar-29-10
A
AAA+
BBBABBB+
BB+
BB-
O/L changed to (-), Affirmed
Affirmed, O/L (-)
Upgrade, O/L (+)
Jan-12-10
Apr-14-09
Jan-12-10
Mar-18-10
May-15-08
Apr-13-10
Mar-12-10
Apr-18-08
1000
900
800
700
EMBI Asia Spreads and Yields
800
11
15.0
700
10
600
9
400
300
200
Jul-09
Spread (L)
Mar-10
Yield
10.5
900
8
7
9.0
300
6
7.0
200
5
300
5.0
100
Oct-08
4
100
Oct-08
Mar-10Yield
12.5
1100
400
Jul-09
Spread (L)
1000
1300
500
11.0
500
EMBI Latin America Spreads and Yields
EMBI Europe Spreads and Yields
17.0
13.0
600
B3 O/L changed to stable
Baa3 (+) Upgrade, O/L (+)
Ba1 Upgrade, O/L stable
Baa1 Upgrade, O/L stable
Baa3 Upgrade, O/L changed stable
S&P
Action
Date
51.2
262.8
26.5
111.8
32.5
EMBI Global Spreads and Yields
100
Oct-08
Fiscal Position
Fiscal Deficit
Public Sector Debt
2010F**
2011F**
2009
2010F**
% GDP
% GDP
% GDP
% GDP
700
8.5
500
6.5
4.5
Jul-09
Spread (L)
Source: Bloomberg, J.P. Morgan
Source: CEIC, J.P. Morgan estimates, Moody's, Standard & Poor's, Bloomberg * Data from World Economic Outlook for October 2009, ** F denotes forecast.
Mar-10
Yield
18.0
900
800
15.0
700
600
12.0
500
400
9.0
300
200
100
Oct-08
6.0
Jul-09
Spread (L)
Mar-10
Yield
150
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Perspective: Demographic and Key Economic Statistics
Population##
2010E
Growth
million
%YoY
USA
Population and Demographics
Age
Dependency Ratio*
Young
Old
Nominal GDP
Gross
Enrollment Ratio
Secondary**
US$
billion
Per capita
(US$)
2010E
10 year CAGR***
Total
Per capita
(%)
(%)
Real GDP
10 year CAGR***
Total
Per capita
(%)
(%)
310
1.0
na
na
98
14,646
47,213
4.1
3.1
3.0
2.0
Brazil#
Chile
Colombia
Mexico
Peru
194
17
46
111
30
1.2
1.0
1.5
1.0
1.2
0.4
0.4
0.5
0.5
0.5
0.1
0.1
0.1
0.1
0.1
102
89
75
80
92
2095
199
298
1046
150
10822
11632
6418
9450
5085
12.5
10.2
13.5
6.1
10.9
11.1
8.9
12.5
4.8
9.2
3.1
3.6
3.9
1.5
5.4
1.7
2.3
2.2
0.4
3.8
Russia#
South Africa
Israel
Poland
Turkey
Hungary
Egypt
Czech Rep.
Morocco
Jordan
141
49
7
38
76
10
78
10
32
6
-0.1
0.7
2.2
-0.1
1.2
-0.1
2.0
0.2
1.4
2.3
0.2
0.5
0.4
0.2
0.4
0.2
0.5
0.2
0.5
0.5
0.2
0.1
0.2
0.2
0.1
0.2
0.1
0.2
0.1
0.1
93
90
93
97
79
97
87
96
48
87
1598
371
199
473
714
130
216
199
94
25
11316
7581
26845
12450
9426
13008
2759
19198
2909
4062
19.9
10.8
5.1
10.7
13.7
10.5
8.1
13.4
9.8
11.4
20.4
9.8
3.1
10.8
12.1
10.7
5.9
13.2
8.4
8.8
5.9
3.2
2.8
3.6
3.2
1.9
4.9
3.1
4.9
6.3
6.4
2.2
0.5
3.8
1.9
2.1
2.8
3.0
3.8
3.9
Korea
Taiwan
China
India
Thailand
Indonesia
Philippines
48
23
1354
1184
68
233
94
0.1
0.3
0.6
1.3
0.7
1.2
1.8
0.3
0.3
0.3
0.5
0.3
0.4
0.6
0.1
0.1
0.1
0.1
0.1
0.1
0.1
91
na
73
54
77
64
86
1013
430
6016
1682
325
729
196
20981
18531
4441
1415
4709
3129
2081
6.6
2.8
17.6
13.8
10.2
16.0
9.9
6.2
2.4
16.8
12.1
9.2
14.5
7.9
6.0
3.3
10.4
10.0
4.4
5.2
4.6
5.6
2.9
9.7
8.4
3.5
3.9
2.7
LATAM
EMEA
Asia
Source: CEIC, Datastream, Bloomberg, US Consensus Bureau, World Bank, IMF, UNESCO, J.P. Morgan estimates
* Age dependency ratio defined as dependents to working-age population.
** Gross Enrollment Ratio is defined as pupils enrolled in a secondary level, regardless of age expressed as a percentage of the population in the relevant official age group
*** 10-year CAGR for period 1999-2009, in local currency. # CAGR for period 1999-2009 ## Population data based on IMF estimate as on July 2007
Data for Gross enrollment data for 2004 except for Malaysia, Brazil and Argentina which is for 2003
151
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Perspective: Global Emerging Capital Markets
MSCI EMF Index
Markets Concentration
JPM EMBI Global
Total Market Cap
Estimated Free
Float
Companies
Average Daily
Turnover
% of Emerging
Market Trading
Volume
Weighting in MSCI
EMF
Stocks constituting 75%
of Country Market Cap
Stocks constituting 75%
of Country Market Cap
Market
Capitalisation
Issues
US$ Bn
(%)
Number
US $ Mn
%
(%)
Number
(%)
US$ Bn
Number
1007
171
147
283
60
58
36
22
56
46
75
16
8
21
3
2980
146
49
337
145
16
1
0
2
1
16
2
1
4
1
16
9
4
7
2
17
69
50
29
67
50
5
7
50
8
23
8
7
29
8
640
383
129
215
27
36
41
29
35
70
45
32
60
47
34
21
28
45
22
20
4
10
4
3
1426
1019
214
641
81
53
55
6
8
5
1
3
0
0
0
0
6
7
2
2
0
0
0
0
5
17
7
11
2
7
3
4
25
40
23
60
75
30
50
100
33
4
3
22
1
1
na
1
4
4
3
14
1
1
na
1
779
554
1363
847
256
172
214
57
7407
63
70
49
35
41
36
41
33
49
99
118
125
60
39
20
22
12
754
3766
2207
4088
336
292
494
252
44
18629
20
12
22
2
2
3
1
0
100
13
11
18
8
3
2
2
1
100
28
31
9
22
20
14
10
7
18
25
15
33
62
70
41
67
na
na
7
na
9
na
6
19
232
na
na
8
na
7
na
5
14
141
LATAM
Brazil
Chile
Colombia
Mexico
Peru
EMEA
Russia
South Africa
Poland
Turkey
Hungary
Egypt
Czech Republic
Morocco
ASIA
Korea
Taiwan
China
India
Malaysia
Thailand
Indonesia
Philippines
Total
AC World Index Market Capitalisation
MSCI Regional Market Capitalisation
Emerging
Markets
11%
Japan
8%
Developed Asia
5%
Developed
Europe
26%
Source: MSCI, J.P. Morgan
152
EM Latin
America
24%
North America
47%
EM Asia
58%
EM Europe and
Middle East
18%
Top 8 versus Rest of Emerging Markets
India Russia
8% 6%
Mexico
4%
Rest of EM
16%
Korea
13%
Taiwan
11%
China
19%
Brazil
16%
South Africa
7%
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Perspective: MSCI Emerging Market Index Composition by Countries and Sectors
Source: MSCI, J. P. Morgan
1.1
2.0
1.0
0.3
0.4
0.4
0.4
0.0
0.0
4.5
6.8
0.8
0.6
1.1
0.2
0.5
0.4
0.3
0.2
4.5
0.4
3.1
0.1
1.1
0.0
0.3
0.7
3.2
6.8
5.7
14.1
5.4
2.1
7.1
1.6
2.2
0.9
0.7
0.6
0.2
15.5
26.1
0.3
0.3
0.0
0.2
0.0
0.1
0.1
0.2
0.1
0.1
0.3
0.5
0.8
0.7
2.2
1.4
0.4
0.9
0.5
0.1
0.1
5.6
7.3
0.0
0.0
3.6
1.0
6.1
1.3
3.0
1.9
1.0
1.4
0.9
0.0
0.2
0.1
12.0
12.3
5.6
14.4
Telecom Services
1.1
4.1
0.7
0.4
0.5
0.1
5.8
0.9
1.9
0.2
0.0
0.4
1.7
0.0
2.1
0.4
0.9
0.1
0.2
0.0
0.1
0.1
0.1
2.0
0.4
2.1
0.5
0.1
0.3
0.3
0.1
0.1
3.8
7.9
Total
0.0
0.2
0.3
7407
Utilities
1.0
0.0
0.0
0.5
0.2
0.3
M aterials
0.3
3.9
3.3
0.7
0.2
0.1
0.1
Inform ation
Technology
0.1
2.8
0.2
0.4
0.0
0.2
1.3
4.2
0.3
0.2
0.2
0.3
5.3
1.0
1.9
0.8
1.1
0.2
0.2
0.1
0.1
Health care
3.7
Financials
1.4
1.1
0.3
Energy
0.8
0.4
0.1
Industrials
Brazil
Mexico
Chile
Peru
Colombia
LatAm
Russia
South Africa
Poland
Turkey
Hungary
Egypt
Czech Republic
Morocco
Jordan
EMEA
Korea
China
Taiwan
India
Malaysia
Indonesia
Thailand
Philippines
Asia
Total
Total Market Capitalization (in billion US$):
Consum er Staples
MSCI Emerging Markets Free
Index
754
Consum er
Discretionary
Number of Companies:
0.8
16.1
4.4
1.7
0.8
0.9
23.8
6.1
7.3
1.6
1.9
0.4
0.5
0.4
0.2
0.4
0.1
1.3
0.3
0.1
0.2
0.7
0.2
0.3
0.4
0.3
0.1
0.0
0.1
1.5
3.5
18.3
13.4
18.3
10.6
8.1
2.9
2.4
1.7
0.5
57.9
100.0
153
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
Other companies recommended in this report (and priced as of October 28, 2010):
Bladex (BLX/US$15.29/OW)
Cielo (CIEL3.SA/R$14.60/Neutral)
Coca-Cola FEMSA (KOF/US$78.40/Neutral)
Compania Cervecerias Unidas (CCU/US$56.05/Overweight)
Fleury (FLRY3.SA/R$21.85/Neutral)
Grupo Modelo (GMODELOC.MX/Ps68.67/Overweight)
Heineken (HEIN.AS/€36.34/Neutral)
Itau Unibanco Holding SA (ITUB4.SA/R$41.14/Overweight)
Redecard (RDCD3.SA/R$22.50/Neutral)
SABESP (SBSP3.SA/R$39.79/Neutral)
Southern Copper Corporation (SCCO/US$43.08/Neutral)
Souza Cruz SA (CRUZ3.SA/R$86.60/Neutral)
Telesp (TSP/US$24.24/Overweight)
Vallourec (VLLP.PA/€74.75/Overweight)
Vivo Participacoes (VIV/US$28.18/Overweight)
154
Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
LatAm Equity Research
Ben Laidler, Director of Research
Equity Strategy / Special Situations
Ben Laidler (LatAm & Mexico)
Emy Shayo (Brazil)
Brian Chase (Chile/Argentina/Andes)
Vinay Joseph (LatAm)
Pablo Monsivais (Mexico)
Economics / Fixed Income Strategy
Joyce Chang (Head of GEM Strategy)
Luis Oganes (Head of LatAm Economics)
Fabio Akira Hashizume (Brazil)
Gabriel Casillas (Mexico)
Julio Callegari (Brazil, Colombia & Peru)
Franco Uccelli (Central America & Caribbean)
Neeraj Arora (Central America & Caribbean)
Ben Ramsey (Andes)
Vladimir Werning (Argentina & Chile)
Agribusiness / Pulp & Paper
Debbie Bobovnikova
Lucas Ferreira
Basic Materials
Rodolfo Angele (Steel & Mining)
Rodrigo Fernandes
Mandeep Singh Manihani
John Bridges (Precious Metals)
Cement / Construction / Homebuilders
Adrian Huerta
Marcelo Motta
Varun Ginodia
Financials / Exchanges / Merchant Acquirers
Saul Martinez
Frederic de Mariz (SMid Cap Financials)
Mariana Barros
Marina Mansur
Ken Worthington (Exchanges)
Retail / Healthcare / Cosmetics
Andrea Teixeira
Joao Mamede
Felipe Oliveira
Beverages / Food / Tobacco
Alan Alanis
Sambuddha Ray
Pedro Leduc
Telecoms / Media / Technology
Andre Baggio
Rajneesh Jhawar
Anna Daher
Transport / Aerospace / Industrials
Fernando Abdalla
Adrian Huerta (Airports)
Jamie Baker (Airlines)
Joe Nadol (Aerospace)
Utilities & Concessions
Anderson Frey
Pedro Manfredini
Energy / Petrochemicals
Sergio Torres
Felipe Dos Santos
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157
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November 2010
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
analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the
research analyst(s) in this report.
In compliance with Instruction 483, issued by Comissão de Valores Mobiliários (the Brazilian securities commission) on July 6, 2010,
the Brazilian primary analyst signing this report declares: (1) that all the views expressed herein accurately reflect his or her personal
views about the securities and issuers; (2) that all recommendations issued by him or her were independently produced, including from
the entity in which he or she is an employee; and (3) that he or she will set forth any situation or conflict of interest believed to impact
the impartiality of the recommendations herein, as per article 17, II of Instruction 483.
Important Disclosures
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under coverage for at least one year, are available through the search function on J.P. Morgan’s website
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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)
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J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2010
Overweight
Neutral
Underweight
(buy)
(hold)
(sell)
J.P. Morgan Global Equity Research Coverage
46%
43%
12%
IB clients*
49%
45%
33%
JPMS Equity Research Coverage
43%
48%
8%
IB clients*
69%
60%
50%
*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.
Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks
on any securities recommended herein. Research is available at http://www.morganmarkets.com, or you can contact the analyst named
on the front of this note or your J.P. Morgan representative.
Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon
various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which
include revenues from, among other business units, Institutional Equities and Investment Banking.
158
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November 2010
Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of nonUS affiliates of JPMSI, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of
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Ben Laidler
(1-212) 622-5252
[email protected]
November 2010
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
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“Other Disclosures” last revised September 1, 2010.
Copyright 2010 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.
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