MORGAN STANLEY RESEARCH
Morgan Stanley & Co.
JUNE 30, 2011
Global
North
America
HIGHLIGHTS
INVESTMENT
PERSPECTIVES
5 US Equity Strategy
Bring China Home
Adam Parker et al.
29 Amazon.com
Adding to the US Best Ideas List
Scott Devitt et al.
37 Glencore
Master of Commodity Flows —
Initiating at Overweight
Ephrem Ravi et al.
Strategy and Economics
3
5
Global Strategy & Economics Roundups
Industry Analysis
15
US Equity Strategy Bring China Home
Gregory W. Locraft, Scott Thomas, Kai Pan
Adam Parker et al.
7
US IG Credit Strategy Credit at a Crossroads
17
Rizwan Hussain, Maya Abdurahmanova
9
US HY Credit Strategy
Cycling Through the Capital Structure
Adam Richmond, Julie Powers
11
13
Global Commodity Strategy
Oil – Improving Fundamentals Overshadowed by
Macro Uncertainty
Hussein Allidina, Chris Corda, Tai Liu
Europe Composite Insurers The Famous Five:
Allianz Up to OW, Zurich Down to EW
Jon Hocking, Farooq Hanif, Damien Kingsley-Tomkins,
David T Andrich
21
UK Equity Strategy Chartered Territory
Graham Secker
US Insurance – Property & Casualty 2011
Reserve & Capital Analysis: Excess Remains
UK Non-Food Retailing Facing Its Biggest
Structural Change in a Decade
Geoff Ruddell, Fred Bjelland, Edouard Aubin
23
 Japan Construction J-Insight:
Downgrade Industry to Cautious,
Margin Risks Ahead as Wages Rise
Atsushi Takagi
27
A/P Optical Lens Industry Leaders Pull Away
in the Next Leg of the Capex Race
Jasmine Lu, Po-Ling Chen
(continued)
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MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Table of Contents (Continued)
Company Analysis
29
Amazon.com Adding to the Best Ideas List
Scott Devitt, Andrew Ruud, Joseph Okleberry, Zachary Arrick
31
 ARM Holdings Plc Taking a Breather
Francois A. Meunier, Sunil George, Patrick Standaert,
Sanjay Devgan
33
 Bristol-Myers Squibb Upgraded to Overweight on
Apixaban and Pipeline Potential
David Risinger, Thomas Chiu, Dana Yi,
Christopher Caponetti
35
CareFusion
Resetting FY12; Multiple Shots for Leverage Remain
David R. Lewis, James Francescone, Steve Beuchaw,
Jonathan L. Demchick
37
39
Glencore Master of Commodity Flows
Li & Fung
Synergies Between Platforms To Be Unlocked
Angela Moh, Robby Gu, Dustin Wei
41
LinkedIn Empowering Professionals in a
Connected World; Initiating at Overweight
Scott Devitt, Joseph Okleberry, Andrew Ruud, Zachary Arrick
43
Phoenix New Media A Leading Information Gateway
for China’s High-end Consumers: OW
Richard W. Ji, Gillian Chung, Philip Wan, Timothy Chan
45
 Telstra Corporation NBN Deal Done,
Our View = Market View = Equal-weight
Mark Blackwell, John A Burns, Navin Killa
47
VMware
Renewals and New Orders Should Fuel ELA Upside
Adam Holt, Keith Weiss, Kelvin Wu
Ephrem Ravi, Alain Gabriel, Markus Almerud, Dmitriy
Kolomytsyn, Peter Richardson, Joel Crane, Hussein Allidina
Events
Insurance Corporate Access Day II
Telecom & Media Corporate Access Day
Semiconductor & Semi-Cap Corporate Access Day
Global Industrials Conference
Global Healthcare Unplugged Conference
China Global Healthcare Day
Business & Education Services Conference
Japan Equity Conference
Asia Pacific Summit
Global Consumer Staples Conference
Global Basic Materials Conference
Transportation Corporate Access Day
Date
August 10
August 11
August 24
August 30-31
September 13-14
September 15
September 21-22
October 3-4
November 15-17
November 15-16
November 17-18
December 5-6
Location
New York
New York
Chicago
New York
New York
Boston
New York
New York
Singapore
New York
New York
New York
All events require advance registration. Clients should contact their financial advisor.
Due to the US’s Independence Day holiday, Global Investment Perspectives
will not be published next week. The next issue will be published on July 14.
2
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Strategy and Economics
Global Strategy Roundup
A synopsis of the major reports issued globally by Morgan Stanley strategists in the past week. Please follow the links to full versions of these
articles appearing elsewhere in this report or on our Client Link Website. Please contact your Morgan Stanley representative for access if needed.
US Equity Strategy: Bring China Home
Adam Parker et al.
Increasing the return on your Chinese investment. In order to increase your exposure to the Chinese equity market, our analysis suggests adding two baskets of stocks. For investors who can own Chinese ADRs, a set of nine liquid names has a 70% correlation with MSCI China. For those who can’t own ADRs, in addition to S&P 500 exposure, they should add metal and mining stocks
and a basket of US stocks correlated to the Chinese equity market.
See full article on page 5
US Investment-Grade Credit Strategy: Credit at a Crossroads
Rizwan Hussein, Maya Abdurahmanova
The mid-year pinch. A confluence of events in the financial markets over the next six weeks will likely add to volatility. We think
credit is at an important juncture now given current debates around catalysts in the markets. While the negative tail risks have indeed grown fatter, our base case on many of these debates remains supportive of credit risk-taking. Time will tell, but one recommendation is sure to play out: Put aside for now those hopes for lazy summer days.
See full article on page 7
US High-Yield Credit Strategy: Cycling Through the Capital Structure
Adam Richmond, Julie Powers
Looking at relative value – credit vs. equities. Given our constructive second-half outlook for the economy, is credit more attractive than equities? For now, we think that investors who expect improvement in 2H11 macro data, as well as a steady move higher
in rates, should not expect outperformance of credit vs. equities. However, for those expecting a continued uncertain macro picture
and range-bound risk-free rates, continuing to clip a coupon in credit makes sense.
See full article on page 9
UK Equity Strategy: Chartered Territory
Graham Secker
Profit warnings have been rising this year as costs rise and domestic customers remain weak. UK companies have posted
remarkable profitability in this recovery, and margin declines going forward are a growing risk. We created two stock screens. One
lists cyclical companies where the consensus 12m forward margin is within 2% of its 8-year high; the second includes companies
where that same margin is 5% or more below its median level over the last 8 years.
See full article on page 11
Global Commodity Strategy: Oil – Improving Fundamentals Overshadowed by Macro Uncertainty
Hussein Allidina et al.
A temporary headwind for oil. Our global cross-asset strategy team believes the current weakness in the global recovery and
any doubts about its sustainability reflect a temporary soft patch rather than a cyclical shift. With crude inventories not likely to draw
meaningfully in coming weeks, crude prices may oscillate with the market’s appetite for risk. But our fundamental analysis points to
significant inventory declines in 2H11 – supportive of crude flat price and structure.
See full article on page 13
Global Equity Strategy: Cycle Drives Post-Bubble
Gerard Minack
After bubbles burst, equity markets are often more driven by the macro cycle. For example, Japan has been in a post-bubble
environment for 20 years. Credit super-cycles have their biggest effect on assets, not growth: Investors are willing to increase borrowing as rates fall, so lower rates are good for risk assets. Post-bubble, investors do not respond to lower rates in the same way.
In my view, it would be unequivocally bearish for long-end yields to decline.
Full article available on Client Link
Global Interest Rate Strategy: 2H11 Global Interest Rate Outlook
Jim Caron, Laurence Mutkin
The key debate in the US, UK and Europe is whether economic growth and stability will outweigh polices to tighten financial conditions. In Japan, our outlook is for a V-shaped post-quake recovery. At the outset of 2H11, we expect global rates to rise.
But this rise in rates may not be sustainable as the focus turns toward pricing uncertainties in 2012. Effectively, we are looking to
buy an early rise in rates and then build a core position in carry strategies.
Full article available on Client Link
ASEAN Equity Strategy: Resilience in Earnings
Hozefa Topiwalla, Trong Tri Tran
Indonesia remains our preferred market in ASEAN. Investors seem concerned about earnings risk in ASEAN, particularly Indonesia, in the event of a slowdown in global growth. We think MSCI SEA’s and MSCI Indonesia’s earnings will remain resilient,
based on the experience during the 2007-09 global financial crisis and the encouraging outlook for domestic earnings growth.
Within ASEAN, MSCI Indonesia’s profits are least exposed to globally linked companies.
Full article available on Client Link
3
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Strategy and Economics
Global Economics Roundup
A synopsis of the major reports issued globally by Morgan Stanley economists in the past week. Please see full versions of these articles
elsewhere in this report or on our Client Link Website. Please contact your Morgan Stanley representative for access if needed.
Our latest Global Economic Forecasts appear in our “Weekly Calendar and Forecasts,” available on Client Link
Global Economics: BIS: ‘Boost Interest Rates Soon’ — The Global Monetary Analyst
Joachim Fels
We agree with recent BIS analysis that medium-term risks to global inflation are on the upside, reflecting easy global monetary policy and less slack in the economy than meets the eye. Yet just as central banks politely ignored warnings from the Bank of
International Settlements about excessive credit growth and asset bubbles in the mid-2000s, most of them are unlikely to heed the
bank’s call for much tighter global policy this time around.
Full article available on Client Link
Brazil Economics: The Coming Slowdown? — This Week in Latin America
Arthur Carvalho, Gray Newman
Brazil’s economy is slowing — that is partly old news as well as new good news. GDP has been growing close to 4% for most of
the past 12 months, much slower than the robust 7.5% annual average for 2010. Output has been slowing due in large part to the
lack of growth in industrial plant, despite robust demand. That “growth mismatch” – driven by currency strength – has now begun to
correct due to policy responses and inherent tensions.
Full article available on Client Link
Asia-Pacific Economics: Nearing the End of Rate Hike Cycle
Chetan Ahya, Derrick Kam
Moving into the last leg of monetary tightening. With inflation likely to show clear signs of peaking by 3Q and growth already
moderating, we believe that the Asia-Pacific region is closer to the end of monetary tightening. We expect regional policy makers to
complete their rate hikes over the next 2-3 months (with the exception of Taiwan). However, the end of tightening does not imply
the start of easing soon.
Full article available on Client Link
Korea Economics: Caution on Overspending
Sharon Lam, Jason Liu
Koreans have been overspending: Korea’s household expenditure has been rising faster than income for some time, while
household gross savings are dropping. Real income growth is negative and household debt is rising, while inflation is eating into
purchasing power. We expect income growth to be stable at best in coming quarters. The government is concerned about household debt, and we think administrative tightening will continue to restrain further credit expansion. Full article available on Client Link
China Economics: China Inflation Tracker: CPI may record new high and likely cycle peak in June
S. Zhang, E. Ho
CPI may have reached its cycle peak in June due to: (1) Carryover effect has peaked in June and will decline for rest of the year.
(2) Vegetable prices may normalize quickly with improving weather. (3) Pork prices will peak out with the unfolding of the low consumption season. (4) Grain prices should stabilize on the back of encouraging summer harvest. However, CPI may remain elevated as a result of catching-up of non-food inflation after gradual phase-out of price controls.
Full article available on Client Link
India Economics: What Can the Government Do to Kick Start the Capex Cycle? — India EcoView
Chetan Ahya et al.
Need to expedite execution of policy measures. Amid signs that growth is beginning to slow, policy actions to boost investment
remain insufficient, in our view. However, the good news is that many of the changes/reforms have already been through a long
period of debate. Two factors will be important for India’s growth outlook beyond the next 2-3 quarters: 1) outcome of DM growth in
the coming 12 months; and 2) domestic policy action to boost private investment.
Full article available on Client Link
Nigeria Economics: On a Growth Charge
Andrea Masia, Michael Kafe
Our view on Nigeria is constructive, as we resume macro coverage. The economy is on a growth charge and could reach
South Africa’s current GDP level of some US$400 billion before the close of the decade — and even overtake it by 2025. Sources
of output growth are broadening and accelerating, retail trade is vibrant, and its financial markets are deepening. Also, fiscal consolidation is under way and Nigeria’s external debt levels are among the lowest in EM.
Full article available on Client Link
4
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Strategy and Economics
June 26, 2011
US Equity Strategy
Bring China Home
Morgan Stanley & Co. LLC
Adam S. Parker, Ph.D.
Adam.Parker@morganstanley.com
Antonio Ortega, Adam Gould,
Phillip Neuhart
Increasing the return on your Chinese investment: The
China hard vs. soft landing debate is key for US equity investors. In 2010 Morgan Stanley’s fundamental analysts investigated US companies with high revenue and earnings growth
exposure (“The China Files,” September 20, 2010). We
thought it might also be helpful to take a different angle and
show how US equity portfolio managers can approximate
exposure to the Chinese equity market with US stocks.
Does a China vs. US equity debate make sense? While
the US and Chinese equity markets have meaningfully different sector constitutions, the markets have a 0.61 correlation
over the recent year, substantially higher than in 2005-2009.
Only very short-term pair trades between “EM” and “DM” have
been sensible since then. While the importance of China’s
economy to US stocks is unquestionable, even if the bull case
of a China soft landing unfolds, we don’t think the correlation
between US and Chinese equities will rise. Therefore, increasing your exposure to the Chinese equity market through
US stocks is one way to play a soft landing.
How do PMs get Chinese equity market exposure?
Among the US GICS sectors and industries we tested, only
the metals and mining industry provided consistent, incremental correlation benefits to the Chinese equity market. To
further increase exposure to the Chinese equity market, our
analysis suggests adding two baskets of stocks. For investors
who can own Chinese ADRs, a set of nine liquid names has a
70% correlation with MSCI China. For those who can’t own
ADRs, in addition to S&P exposure, they should add metal
and mining stocks, as well as a basket of stocks correlated to
the Chinese equity market. Investors could also reduce their
Chinese equity exposure by reversing this approach. Importantly, more “obvious” stocks like CAT or AAPL don’t incrementally explain Chinese equities above and beyond the US
market. A basket of US stocks that incrementally explain the
Chinese market would require high turnover, so Chinese
ADRs are likely preferable for most investors.
Given the correlation between the US and Chinese markets is
so high, in order to identify the sectors or industries that a US
equity investor should gain exposure to, you have to strip out
the US equity market’s explanation of the Chinese market’s
returns. After removing this US equity market beta (or explanation), we studied the US sector-level and industry-level residuals’ relationship with MSCI China. None of the ten GICS
sectors provides statistically significant exposure to Chinese
equities above and beyond what the US equity market itself
already explains.
At the industry level, a few areas provide a statistically significant exposure to the Chinese market above and beyond the
overall US market. These are oil, gas & consumable fuels,
energy equipment & services, metals & mining, and food &
staples retailing. Excluding equity market beta, the oil & gas
and energy equipment & services industries have exhibited
correlation with Chinese equities throughout recent history.
Notably, the correlation has broken down somewhat this year.
Metals and mining has been one of the most significantly correlated industries, and this relationship appears to be a bit
more persistent and consistent than the other industries we
examined. The food and staples retailing industry has had a
significant negative relationship with Chinese equities for
much of the past six years, though this effect has become
less significant recently. This is likely a result of costs, more
than consumption.
China ADR Basket
We studied American Depository Receipts of Chinese companies and found nine listings with sufficient daily liquidity (
Exhibit 1) (i.e., so that a 1% position in a $1 billion fund can
be liquidated within 21 days at 10% of average daily volume).
We then used these names to create a cap-weighted China
ADR basket. This is a modified cap-weight basket with individual equity weights capped at 20% to control idiosyncratic
risk and enhance liquidity. Unlike MSCI China, the financials
sector is not well represented by liquid Chinese ADRs, at only
3.67% of the total weight of the ADRs versus 35.8% of MSCI
China.
Exhibit 1
Nine Chinese ADRs Currently Have Daily Trading
Volume of $4mm or More
Ticker
CHL
CEO
PTR
CHU
LFC
SNP
YZC
ACH
CHA
Company Name
China Mobile Ltd.
CNOOC Ltd.
PetroChina Co. Ltd.
China Unicom (Hong Kong) Ltd.
China Life Insurance Co. Ltd.
China Petroleum & Chemical Corp.
Yanzhou Coal Mining Co. Ltd.
Aluminum Corp. of China Ltd.
China Telecom Corp. Ltd.
Sector
Telecom
Energy
Energy
Telecom
Financials
Energy
Energy
Materials
Telecom
Dollar Volume
(Daily Avg, $M)
$63.6
$54.5
$46.1
$41.1
$28.5
$20.2
$10.9
$5.4
$4.4
MSCI China
Weight
8.26%
6.35%
4.61%
1.77%
3.67%
2.31%
1.09%
0.51%
1.29%
Source: Factset, Morgan Stanley Research.
5
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Strategy and Economics
As China has become more important to the global economy,
Chinese ADRs have become more correlated with US equities. As recently as the beginning of 2004, the Chinese ADR
basket closely tracked the MSCI China Index, but had a low
correlation with US equities. Over time, the correlation of
Chinese ADRs with MSCI China fell while the correlation with
US equities rose. Since the Financial Crisis, the ADR basket
has had similar correlations to US and Chinese equity markets. This observation is consistent with the rise in correlation
of the Chinese and US equity markets.
Our China Models
The final step is the creation of a basket of individual stocks
through which an investor can gain additional exposure to the
Chinese market. For each stock in our modeling universe
(approximately 1000 stocks per year), we compute a residual
by removing the effects of the S&P 500 and the metals/mining
industry on that stock’s return, given that we know the broader
market and that industry help explain China’s stock market.
We then constructed a basket of stocks whose residuals have
a high correlation with Chinese returns.
Once the composition of the stock basket is determined, we
construct performance models using standard statistical techniques. We present two models: One seeks to match the
China market returns by allocating funds to the S&P, the metals & mining industry and a basket of individual US stocks.
This model is aimed at investors unable to allocate to ADRs.
The second model uses the S&P, the China ADR basket and
the individual stock portfolio to try to mimic the Chinese market’s returns.
In addition to our statistically derived stock baskets, we test
models that include a fundamentally derived basket of stocks
with significant exposure to China. As noted above, in September 2010, Morgan Stanley Research published a Blue
Paper titled “The China Files.” This collaborative and in-depth
publication explored the growing importance of China and
named a number of companies with fundamental exposure to
China’s changing landscape. One result of this note was the
US China Exposure Basket, which lists stocks that Morgan
Stanley Research believes are well-positioned for the China
growth theme. This list was never intended to track the
weekly fluctuations in the Chinese equity market, but we include it to show how difficult it is to gain Chinese equity market exposure from US stocks, beyond what the overall US
market provides.
After constructing our models, we evaluate their performance
during the out-of-sample period since April 2010 (Exhibit 2).
We fix the model weights at the beginning of the out-of-
sample period and measure how accurately each model predicts the actual China market return using the root mean
square error. The root mean square error (RMSE) is a measure of how widely dispersed the prediction error is for each
model (If the prediction is unbiased, RMSE is the standard
deviation of the prediction error). These models show that
more factors improve model performance, as the RMSE decreases with additional factors. A lower RMSE means a more
effective model. We found that the model that allocates funds
to the S&P, the metals & mining industry, and our statistically
derived stock basket offers the best performance.
Exhibit 3 lists our current US stock basket for exposure to
Chinese equity market. To reiterate, this basket contains US
stocks that currently offer significant incremental exposure to
MSCI China, after adjusting for overall US market and metals
and mining exposure.
Exhibit 2
Performance Statistics for China Models
Overall Performance - since April 2010
Root Mean
Square
Model Inputs
Error
No China ADR Allocation
S&P only
2.198%
S&P, metals/mining
2.091%
S&P, metals/mining, Strategy basket
2.057%
S&P, metals/mining, China Blue Paper basket
2.090%
Includes China ADR Allocation
S&P, China ADR, Strategy basket
S&P, China ADR, China Blue Paper basket
1.686%
1.738%
Source Morgan Stanley Research.
Exhibit 3
Chinese Equity Market Exposure Can Be Gained
with the Following Stocks
Ticker
UNP
CL
DOW
DHR
CSX
NSC
AGN
AMT
CHK
CBS
CLX
DAL
UAL
FOSL
HTZ
BEC
DISCA
Company Name
Union Pacific Corp.
Colgate-Palmolive Co.
Dow Chemical Co.
Danaher Corp.
CSX Corp.
Norfolk Southern Corp.
Allergan Inc.
American Tower Corp.
Chesapeake Energy Corp.
CBS Corp (Cl B)
Clorox Co.
Delta Air Lines Inc.
United Continental Holdings Inc.
Fossil Inc.
Hertz Global Holdings Inc.
Beckman Coulter Inc.
Discovery Communications Inc. (Series A)
Industry
Railroads
Household Products
Diversified Chemicals
Industrial Machinery
Railroads
Railroads
Pharmaceuticals
Wireless Telecommunication Services
Oil & Gas Exploration & Production
Broadcasting
Household Products
Airlines
Airlines
Apparel, Accessories & Luxury Goods
Trucking
Health Care Equipment
Broadcasting
Source: Factset, Morgan Stanley Research.
6
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Strategy and Economics
Earnings Expectations: Less Robust for 2Q versus
1Q, but Still Supportive
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Debate 2: What about the other European issue – banking system stress tests? Somewhat lost in the sound and
fury surrounding Greece has been the pending results of the
second round of European bank stress tests, now likely to
surface around mid-July. Among all the issues Europe faces,
our Europe credit strategy team views the stress tests as
somewhat less problematic. But we see two points of concern: (1) This round will not test for how the 91 banks would
fare in an outright sovereign default, and (2) any haircuts of
sovereign holdings will only apply to securities classified as
‘available for sale’ or in ‘trading books’, while much of the
banks’ sovereign exposures are not classified in a way that
would trigger adjustments. Nonetheless, on balance, we see
the skew of risks surrounding the releases as less negative
than other events in the Euro periphery. Perhaps the greatest
value in the first round of stress tests was the additional financial disclosure on the banks that gave investors greater clarity
on which to base their own views, and we believe the same
benefit applies this time around.
Debate 3: Can the 2H US recovery be confirmed or denied? There is currently little concern about a US ‘double-dip’
per equity analyst consensus estimates (despite escalating
worries in the markets), but cyclical/industrial sectors are
Te
le
Debate 1: What happens when the Fed exits the Treasury
market? Many fears earlier this year of Treasury yields spiking higher after QE2 ends developed while inflation expectations were climbing, completing the technical-fundamental 1-2
punch to Treasuries. But recent growth scares have caused
inflation expectations to moderate. Given the relationship
between rates and inflation expectations, our rates strategy
team sees Treasury yields remaining well-behaved as we
transition past QE2. That should give US credit investors
some comfort – as some stability in rates (if not an outright
slow, manageable climb higher) is something many investors
we speak with would welcome as a reason to add credit risk.
Exhibit 1
lth
Credit market performance in the early to mid-1990s still
serves as a worthy guidepost for the year to come, in our
view. We offer our take here on the five main stress points
we see near term, with follow-on comments on 2H11 performance potential.
un
ic
a
Maya.Abdurahmanova@morganstanley.com
til
iti
e
Maya Abdurahmanova, CFA
ea
Rizwan.Hussain@morganstanley.com
m
Rizwan Hussain
U
Morgan Stanley & Co. LLC
H
US IG Credit Strategy
Credit at a Crossroads
faring better than financials and consumer-oriented names on
revisions for 2Q earnings estimates (see “The Path of Repair,”
Investment Perspectives, June 22). While that may argue for
a two-speed recovery in the US, it could also augur more
credit-friendly balance sheet discipline from the sectors seeing less of an economic uplift. In Exhibit 1 we compare yearover-year earnings growth for 1Q11 and estimated earnings
growth for 2Q11. While the chart shows that estimates for 2Q
growth this year are lower than those for last quarter across
the majority of sectors, year-over-year growth is still expected
to be quite strong, with 17.8% forecast for the broad S&P 500
index.
co
m
June 24, 2011
1Q11 Y/Y Earnings Growth
2Q11E Y/Y Earnings Growth
Source: Morgan Stanley, Thomson Financial, FactSet consensus estimates
Debate 4: What about the US debt ceiling? Worry about
the potential breach of the US debt ceiling has spiked in our
discussions with investors of late. But our economists view
any triggering of a ‘technical’ default by the US as extremely
unlikely (see “Debt Ceiling Showdown: An Update,” Investment Perspectives, May 18). Our perverse sense is that any
vigorous debate over austerity and the budget deficit would
prove supportive of bond valuations generally, inclusive of
credit. Our economists frankly argue that the direction of
rates here is less certain, but the band of rate outcomes is
rather large. In the near term, though, the higher level of
rates volatility due to this debate will act as an impediment to
adding credit risk in portfolios and is indeed a negative.
Debate 5: What will ongoing financial regulation mean?
The timing of this last challenge isn’t limited in scope from now
through July – credit markets will contend with the debate and
implementation of reform and regulation for years. Our global
banks equity research team recently stratified their banks coverage group into cohorts differentiated by additional capital
buffers global banks will need according to their projected
7
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Strategy and Economics
status as systematically important financial institutions (SIFI,
see Global Banks: What Economic Impact Could the G-SIFI
Surcharge Have?, Huw van Steenis, Betsy Graseck et al., June
19). Their bottom line is that many of the 25 banks could approach their projected SIFI standards in the next 3-4 years
through operations, but at the cost of dividends, equity returns,
or more aggressive balance-sheet deleveraging.
The last potential driver is one our bank analysts view as a
risk to both the economic recovery and ROE expectations
embedded in bank stocks. However, we would also opine
from our credit seats that some of the recent pressure on
banks stocks stems from equity investors pricing in these
risks to earnings. We continue to argue that the three headwinds to equity prices noted above could actually be considered credit-friendly. Clearly, broadly terrible credit market
technicals are weighing most heavily on the financials now,
but we believe the global banks team’s note supports the continuation of trends at work to make banks even better credits
in the future.
Return prospects for the remainder of the year. Part of
the trepidation many investors feel entering credit risk stems
from a comparison to price action this time last year, when the
investment-grade cash bond index widened from T+132 bp to
T+202 bp from April to June on the rising tensions in Europe.
Today, with the same index residing at T+158 bp after bottoming at similar levels in April, a sense of déjà vu suggests a
lopsided risk proposition now. Year to date, we estimate
credit excess returns of 0.75%, and total returns of 4.23%, the
former having been hit particularly hard given the 28bp widening from the April tights. What return prospects lie ahead?
we first identified in our 2011 IG credit outlook (Looking for
More, But Bracing For Less, Dec. 8, 2010). Exhibit 2 suggests a range for total returns of an additional 1.0% to 2.5%
for the remainder of the year, based on an incremental 25 bp
move higher in Treasury yields from here and IG corporate
spreads tightening 10-30 bp from current levels (bookending
our fair value range) by year-end 2011. Given the total returns of 4.23% YTD, this translates to a range of approximately 5.25-6.75% in total returns for the year as a whole.
To frame the year’s potential excess returns, tightening of
spreads to the midpoint of our ‘fair value’ range of 138 bp
would yield an estimate of excess returns of 288 bp for all of
2011 (with IG excess returns at 75 bp YTD). We put the potential total and excess credit returns in some historical context in Exhibit 3, with a look to performance over the last 21
years. While this year’s return prospects may look lackluster
vs. returns of the last two years, they are certainly on par with
historical returns since the early- to mid-1990s, a period that
often guides our thinking today about the IG credit asset class
– as that period also followed on the heels of recession induced by a financial-system-inspired credit crisis and an ensuing economic recovery that was slow and uninspiring.
Exhibit 3
Comparing and Contrasting Total and Excess IG
Returns – A Return to the Mid-1990s?
30
20
10
0
Exhibit 2
Potential Incremental IG Total Return Next 6 Months
US Corp Index Total Returns (%)
-25
0
25
+50
-75
10.1%
4.1%
+75
+100
+125
+150
8.0%
6.0%
2.1%
0.3%
-1.6%
-50
8.0%
6.0%
4.1%
2.1%
0.3%
-1.6%
-3.4%
-5.1%
-30
6.4%
4.5%
-1.2%
-3.0%
-4.8%
-6.5%
-10
4.8%
2.9%
2.5%
1.0%
0.6%
-3.4%
-0.8%
-2.6%
-4.4%
-6.1%
-7.8%
0
4.1%
2.1%
0.3%
-1.6%
-3.4%
-5.1%
-6.8%
-8.5%
+10
3.3%
1.4%
-0.5%
-2.3%
-4.1%
-5.8%
-7.5%
-9.2%
+30
1.8%
-0.1%
-1.9%
-3.7%
-5.5%
-7.2%
-8.8%
-10.5%
+50
0.3%
-1.6%
-3.4%
-5.1%
-6.8%
-8.5%
-10.1%
-11.7%
+75
-1.6%
-3.4%
-5.1%
-6.8%
-8.5%
-10.1%
-11.7%
-13.3%
Source: Morgan Stanley, the YieldBook
First, targeting total returns, in Exhibit 2 we approximate total
returns under various scenarios of spread and rate moves,
using sensitivities around the current market-implied 10-year
Treasury forward yield of 3.15% for year-end 2011 (or about
25 bp higher from here). For spread moves we remain constructive on credit risk broadly through the end of 2011, despite the well-known headwinds and growing tail risks of late,
and we reiterate the fair value range of T+125 bp to T+150 bp
19
9
19 0
91
19
9
19 2
93
19
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
00
20
0
20 1
02
20
0
20 3
0
20 4
0
20 5
0
20 6
0
20 7
0
20 8
09
20
10
-20
Govt. Benchmark Yield Change
Spread Chg.
-10
IG Corp Excess Returns
2011E Excess Returns
2011 YTD Excess Returns
IG Corp Total Returns
2011E Total Returns
2011 YTD Total Returns
Source: Morgan Stanley, the YieldBook
Note: 2011E total and excess returns are Morgan Stanley Research estimates
The mid-year pinch. While credit investors often look to
summer for some respite from market volatility, a confluence
of events in the financial markets over the next six weeks will
certainly push against that hope. In many respects, we think
credit is at an important juncture now given current debates
around catalysts in the markets. And while the negative tail
risks have indeed grown fatter, our base case on many of
these debates remains supportive of credit risk-taking. Time
will tell, but one recommendation is sure to play out: Put
aside for now those hopes for lazy summer days.
8
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Strategy and Economics
June 23, 2011
US HY Credit Strategy
Cycling Through the Capital
Structure
Morgan Stanley & Co. LLC
Adam Richmond
Adam.Richmond@morganstanley.com
Julie Powers
Julie.Powers@morganstanley.com
Looking at relative value – credit vs. equities. Our economists are constructive on 2H11 growth and believe risk-free
yields will end the year moderately higher than today, an environment we think supports high yield. However, given our
constructive second-half outlook for the economy, is credit
more attractive than equities? We have looked at relative
value between high yield bonds and stocks.
rates, a huge tailwind to total returns. Even though falling
rates likely also supported equity valuations, this tailwind to
credit returns will not be there over the next three decades.
This is mathematically impossible.
As a way to more precisely look at historical risk-adjusted
performance, in Exhibit 1, we show the Sharpe ratios across
asset classes over the last 20 years. To calculate these ratios, we simply take the average annualized monthly total
returns (less 3-month T-bills), divided by volatility over that
same time period. Again, these numbers are influenced by
falling 10-yr Treasury rates, but over our admittedly short history, investment-grade corporates and BB-rated bonds have
had the highest risk-adjusted returns. Although equities and
CCCs have had historically robust returns over the past 20
years, these two buckets have among the lowest risk-adjusted
returns given their much higher volatility.
Exhibit 1
Credit vs. equity performance. In addition, recent flows into
credit and out of equities have likely been influenced by past
performance. Over the last 20 years, credit has essentially
performed in line with stocks, but with meaningfully less volatility. Despite a very strong decade for stocks in the 1990s,
HY credit has still marginally outperformed, without the same
magnitude of price swings. CCCs have performed best, although all of the CCC outperformance has come in the past
2.5 years. But note an important caveat: Credit has been
supported by essentially three decades of falling risk-free
Sharpe Ratio by Asset Class
0.80
0.60
0.40
0.20
C
C
P
Le
50
ve
0
ra
ge
d
Lo
an
s
R
us
se
ll
20
00
S&
C
B
BB
C
or
p
H
Y
IG
C
or
p
0.00
Tr
ea
su
ry
The cycle is now likely at the point where inflows into credit
(and out of equities) could reverse, or at the very least, slow
down, similar to 2004-2006. However, we do not expect a
dramatic near-term shift in HY flows given low yields elsewhere in fixed income and the numerous economic uncertainties hindering equities, such as growth in 2H11, the end result
for European sovereigns, and concerns about a China hard
landing. And even if inflows change course, it does not mean
spreads will widen, just that the pace of tightening likely
slows. For example, from March 2004 to June 2006 as the
rally slowed, high yield funds suffered outflows of over $30
billion, but spreads still tightened by 140 bp.
Adjusted for Volatility, Credit Returns Have Outperformed
10
-Y
Following the flows. For much of the past four years, thanks
in part to the weak economic recovery, equity mutual funds
have experienced slow and steady outflows. Some of that
flow has found its way to high yield, given the need for yield
and the view that credit markets can still perform well in an
environment of below-trend growth. As long as earnings are
strong enough to allow companies to delever, the fact that we
are not witnessing a V-shaped recovery likely has kept companies conservative for longer.
Source: Morgan Stanley, Bloomberg, the Yield Book, S&P LCD
Note: Leveraged loan returns back to 1997. All others back to 1990.
Relative valuations. The data above are backward looking,
but we have also attempt to more precisely compare credit vs.
equity valuations. In Exhibit 2 we show our Pure Equity Premium (PEP) model. Essentially, we subtract the credit risk
premium from the equity risk premium for S&P 500 companies to approximate the PEP, or the incremental risk premium
offered to equity holders due to the form of risk they hold.
Historically, a value of zero – indicating that equity investors
are receiving no additional premium compared to credit holders – was a clear signal to “buy credit, sell stocks.” Today,
the PEP is above average, telling us that based on this model,
credit is moderately rich relative to equity. A point of
pushback to this model is that equities look cheap, but in reality, earnings growth could be lower than it has been in the
past, essentially making equity more credit-like.
9
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Strategy and Economics
serve as a headwind for credit total returns. The ‘sweet spot’
for Bs/BBs relative to stocks is when rates are range-bound and
growth is positive but below (or at) trend.
Exhibit 2
Credit Moderately Rich Relative to Equities
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
Equity Risk Premium
Pure Equity Premium
Default Risk Premium
Average
Source: Morgan Stanley, Bloomberg, the Yield Book
We also looked at the earnings yield of the Russell 2000 (an
index closer to HY credit relative to the S&P 500), compared
to the bond yield of the HY cash index we follow. Given that
credit yields are historically low, the difference between bond
yields and earnings yields is also very low. According to this
model, equities are meaningfully cheap to HY credit. Although neither model is tactical, both of these frameworks
make the case that in the long run, equities could outperform
credit. In our view, the near-term credit/equity call simply
comes down to the view on rates and the macro backdrop.
Exhibit 3
Stable Rates and Near-Trend Growth Create the
Credit Total Return ‘Sweet Spot’
Median Quarterly Total Returns Given Change in 10-Y Treasury Yield
(%)
10
8
Falling Rates Buy Quality
Stable Rates Credit Sweet Spot
Clearly, if sovereign risks and/or inflation become a big problem, rising rates may not affect risk assets in the same way
we have seen over the past decade. But while this may
sound obvious, for now we think those expecting improvement in 2H11 macro data, as well as a steady move higher in
rates, should not expect outperformance of credit vs. equities.
However, for those expecting a continued uncertain macro
picture and range-bound risk-free rates, continuing to clip a
coupon in credit makes sense.
Single-name swaps. See our June 23 Leveraged Finance
Insights for more detailed analysis. Finally, in Exhibit 4 we
conclude by searching for names where the credit may be
cheap relative to the stock. Essentially, we ran a screen of
credit yields for individual bonds, relative to earnings yields for
the stock of the same name. The earnings yield is the inverse
of the P/E ratio, where the earnings are consensus 2011 forecasts. Very simply, the names in the top basket have high
bond yields relative to forward earnings yields, and so based
on this framework alone, the credit is cheap relative to the
stock. The names on the bottom are the opposite, where
credit yields are low relative to equity yields, and as such
these credits are relatively rich.
Exhibit 4
Single-Name Swaps
Rising Rates Buy Beta
Name
6
4
2
0
-2
-4
-6
-8
-10
>-75
10-Y Treasury
-75<-->-20
A Rated
-20<-->0
BB Rated
0<-->20
B Rated
20<-->75
CCC Rated
75<
S&P 500
Source: Morgan Stanley, Bloomberg, the Yield Book
Note: Data back to 1987
In Exhibit 3 we plot the median total return since 1987 across
credit, stocks, and risk-free rates (for comparison) given various
changes in 10-yr Treasury rates. When the 10-yr is dropping
quickly, usually it is due to weak growth, and as such, highquality, rates-sensitive credit outperforms. In the other extreme,
when rates rise by greater than 20 bp (especially due to strong
growth), equities and high-beta credit (CCCs) often outperform.
In that environment, spreads usually tighten, but rising rates
Coupon
Maturity
Rating
Bond
Yield
Est
Earnings
Yield
Bond Yield High Relative to Earnings Yield - Credit Relatively Cheap
CIT Group
7
5/1/2017
B2/B+
7.22
FerrellGas
6.5
5/1/2021
Ba3/B+
6.67
Calpine
7.5 2/15/2021
B1/B+
7.14
Crown Castle
7.125 11/1/2019
B1/B6.11
XM Sat. Radio
7.625 11/1/2018
B2/BB6.80
Manitowoc
8.5 11/1/2020
B3/B+
7.47
Exco Resources
7.5 9/15/2018
B3/B
8.05
NRG Energy
7.625 1/15/2018
B1/BB7.50
Spectrum Brands
9.5 6/15/2018
B1/B
6.51
Regal Entertain.
9.125 8/15/2018
B3/B8.28
Bond Yield Low Relative to Earnings Yield - Credit Relatively Rich
Warner Chilcott
7.75 9/15/2018
B3/BB
7.13
Tesoro
6.5
6/1/2017 Ba1/BB+
5.42
TRW Automotive
7.25 3/15/2017
Ba2/BB+
4.82
Sanmina-SCI
7 5/15/2019
B1/B
7.79
CF Industries
6.875
5/1/2018 Ba1/BB+
4.62
SuperValu
8
5/1/2016
B2/B
7.50
Steel Dynamics
7.75 4/15/2016
Ba2/BB+
5.67
Chesapeake Energy
6.625 8/15/2020
Ba3/BB+
6.08
Constellation Brands
7.25
9/1/2016 Ba2/BB+
5.29
Sinclair Television
9.25 11/1/2017
Ba3/BB6.18
Smithfield Foods
7.75
7/1/2017
B3/B+
6.85
Earnings
Yield –
Bond
Yield
0.74
0.47
1.00
1.17
1.95
2.74
3.67
3.29
2.63
4.64
-6.48
-6.20
-6.14
-4.94
-4.85
-4.72
-4.38
-4.21
-3.87
-3.64
16.44
14.55
12.94
15.54
11.07
13.48
11.01
10.25
9.14
9.98
10.52
9.30
9.13
8.12
7.75
6.45
5.98
5.34
4.17
3.85
3.80
3.67
Source: Morgan Stanley, Bloomberg, the Yield Book
10
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Strategy and Economics
Exhibit 1
… as costs rise and domestic customers remain weak.
One reason for the sharp jump in profit warnings in 1Q11 was
the severe weather disruption seen last winter, with around a
third of warnings citing this factor. More interesting to us was
the 25% of warnings that citied increased costs and pricing
pressure, reflecting the squeeze on margins from higher input
costs and a weak end-customer. Pressures are greatest for
companies servicing the consumer and/or the government –
the sectors witnessing the most warnings were General Retail, Support Services and Media.
Despite its domestic bias, the FTSE250 is at a record 12month P/E high versus the FTSE100. That the majority of
profit warnings were in domestic-facing sectors gives us the
opportunity to move on to our second point, the strong performance of mid-caps over large-caps. Despite the former’s
greater degree of domestic exposure, the index appears unaffected to an extent by the weakness in the UK macro outlook,
with the Mid-250 index continuing to meaningfully outperform
the FTSE100. Most striking to us is Exhibit 2 which shows that
the consensus 12m forward P/E for the Mid-250 relative to the
FTSE100 is now back at its record peak, last seen at the top
of the market in 2007.
The stronger performance and higher valuations of the
FTSE250 primarily reflect the differing composition of the two
indices. The FTSE250 is most heavily weighted in Financial
Services, Industrials and Travel & Leisure (where the average
12m P/E is 11.2), while the FTSE100 is most heavily weighted
in Oil, Basic Resources and Banks (where the average 12m
P/E is 8.4).
2.0
100
80
0.0
60
-2.0
40
UK Real GDP Growth YoY %
4.0
120
-4.0
20
1Q 11
2Q 10
3Q 09
4Q 08
1Q 08
2Q 07
3Q 06
4Q 05
2Q04
1Q 05
3Q03
4Q02
1Q02
2Q01
-6.0
3Q00
0
4Q99
Profit warnings have been rising this year …
While one proverbial swallow does not make a summer, we
think this week’s profit warning from Charter International (followed later in the week by Philips in Europe) is interesting on a
number of levels. First, it prompts us to take a renewed look
at the analysis of UK profit warnings that Ernst & Young undertakes on a quarterly basis. As Exhibit 1 shows, UK quoted
companies issued 75 profit warnings in 1Q11, the largest
amount since 1Q09 and a 47% increase on 4Q10.
140
1Q99
Graham.Secker@morganstanley.com
6.0
No. of profit warnings
UK GDP Growth - rhs
2Q98
Graham Secker
160
3Q97
Morgan Stanley & Co.
International plc
Profit warnings in 1Q11 were the highest since 1Q09
Number of profit warnings
UK Equity Strategy
Chartered Territory
Source: Ernst & Young, Datastream, Morgan Stanley Research
Exhibit 2
FTSE250 approaching a record 12m forward P/E
premium against the FTSE100
140
130
12m fwd PE of FTSE250 vs FTSE100
June 23, 2011
120
110
100
90
80
70
60
50
Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11
Source: Datastream, IBES, Morgan Stanley Research
Corporate margins face input cost pressures.
The Charter profit warning also gives us the opportunity to
reiterate our view that margins will likely disappoint (relatively
bullish) consensus expectations for 2011 and 2012. Perhaps
the best way to illustrate the pressures building on corporate
margins is Exhibit 3. This chart plots the spread between output prices and input costs in the Philly Fed survey against
changes to US corporate profitability, and shows a fairly consistent relationship over time. As the chart shows, in the US
input cost inflation is currently running at a 40-year high relative to output price inflation.
Analyst margin forecasts are coming under pressure.
In Exhibit 4 the thick red line shows a similar series for the UK
economy, namely producer output prices minus producer input prices. The second line provides a real-time proxy for
11
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Strategy and Economics
Margin estimates weaker for FTSE100 than FTSE250.
Two other points to note in this regard. First, as illustrated in
Exhibit 5, consensus expectations for margins have fallen
more significantly for the FTSE100 than they have for the
FTSE250. The former is tracking the differential between output and input prices quite closely, but margin forecasts for the
mid-caps look increasingly optimistic. Second, there appears
to be a reasonable relationship between the outlook for corporate margins and market valuations, with the consensus 12m
forward P/E closely following this series.
Margin sustainability to be a key theme for 2H11.
With margin sustainability likely to be an increasingly important theme in 2H11, it is worth seeing where we are starting
from. With IBES consensus data showing conflicting margin
trends for the FTSE350 versus MSCI UK, we have instead
looked at the 12m forward margin for the median UK stock.
These data suggest that UK companies have posted remarkable profitability in this recovery, with the current EBITDA
margin of 19.5% compared to 17.5% at the peak in 1H08.
From such a level, we believe the probability of margin declines going forward is higher than the probability that corporate profitability keeps rising, especially in an environment of
slowing global growth.
Exhibit 4
PPO vs. PPI spread suggests consensus margin
forecasts will come under growing pressure
20
UK FY1 earnings revisions ratio minus sales revisions ratio (3m avg)
15
10
5
0
-5
-10
-15
-20
-25
UK output prices (PPO) minus input prices (PPI)
-30
Feb-04
Feb-05
Feb-06
Feb-07
Feb-08
Feb-09
Feb-10
Feb-11
Source: Datastream, IBES, Morgan Stanley Research
Exhibit 5
Analysts have scaled back margin expectations
more in large-caps than mid-caps
UK FY1 earnings revisions ratio minus sales revisions ratio (3m
avg)
margin expectations by comparing analyst net earnings revisions against net sales revisions. When this line is falling, it
implies that analysts are seeing a weaker earnings trajectory
in relation to the sales outlook – i.e., margins are compressing. As illustrated, the spread between output and input
prices tends to lead analysts’ margin expectations by a modest amount and implies that the latter is likely to fall further in
the coming months.
25
FTSE250
15
5
-5
-15
FTSE100
-25
-35
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Source: Datastream, IBES, Morgan Stanley Research
Exhibit 3
US input costs at 40-year high versus output pricing
YoY Change In US Non Financial Corporate Pretax Profit Margins (%pt)
8
0
Phil Fed Prices Received Less Prices Paid 12MA, Advanced By 12M (RHS)
6
-5
4
-10
2
-15
0
-20
-2
-25
-4
-30
-6
-8
-35
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
Note: Corporate pretax profit margins based on NIPA data without IVA & CC adjustment.
Source: BEA, Federal Reserve Bank of Philadelphia, Morgan Stanley Research
Looking for stocks most exposed to growing margin
pressures. With this in mind, we created two stock screens
(see our full note). One consists of cyclical companies in the
FTSE350 where the consensus 12m forward margin is within
2% of its 8-year high. With the median stock in this list having a
12m forward P/E of 13.8 and having outperformed by 16% over
the last year (the median stock in the overall market trades on a
12m P/E of 11.7), we believe share prices for this group of
stocks is particularly vulnerable to margin disappointment. In
contrast, the second screen includes companies where the
consensus 12m forward margin is 5% or more below its median
level over the last 8 years. With the median stock in this list
having more modest margin assumptions, coupled with lower
valuations (a median 12m P/E of 11.6 and a median 12m P/BV
of 1.3) and weaker prior performance, share prices here may
be less sensitive to any margin disappointment.
12
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Strategy and Economics
June 23, 2011
Global Commodity Strategy
Oil – Improving Fundamentals
Overshadowed by Macro
Uncertainty
Morgan Stanley & Co. LLC
Hussein Allidina, CFA
Hussein.Allidina@morganstanley.com
Chris Corda, Tai Liu
A pronounced bout of risk aversion has depressed crude
oil prices (along with other risky assets). This caution has
been prompted by growing concerns relating to Greece and
Europe (which have supported the US dollar) along with a
string of weak economic data points.
A temporary headwind for oil. Our global cross-asset strategy team believes the current weakness in the global recovery and any doubts about its sustainability reflect a temporary
soft patch rather than a cyclical shift. Their constructive
stance over the next 3-6 months is contingent on three fundamental factors: (1) a 2H11 growth rebound in the US; (2) a
temporary reprieve on the current European debt problems;
and (3) a passing of the growth scare in China (see Global
Debates Playbook: Looking for Credit, June 16, 2011).
Exhibit 1
Inventories to Draw Meaningfully in 2H11
(Total OECD Inventories – QoQ Δ, kb/d)
1,000
500
(500)
(1,000)
(1,500)
(2,000)
Q1
MS - 2011
Q2
MS w/ Higher OPEC Prod
Q3
IEA - 2011
Q4
5Y Avg
Source: IEA estimates, Morgan Stanley Commodity Research estimates
But our fundamental analysis points to significant inventory declines in 2H11 that will only be mitigated by increases
in OPEC production. With inventories not likely to draw
meaningfully in the coming weeks, crude prices may continue
to oscillate with the market’s appetite for risk. Nonetheless, if
our forecast proves correct, assuming only 700 kb/d of demand growth in the second half, inventories are likely to fall
precipitously in 2H11 – supportive of crude flat price and
structure. As inventories draw, OPEC will need to respond,
and this could reduce already limited spare capacity.
About a month ago we lifted our 2011 and 2012 Brent
crude price forecasts to $120/bbl and $130/bbl, respectively, from $100/bbl and $105/bbl previously. Recall that in
2009, after our in-depth bottom-up review of the supply side,
we concluded that equilibrium in the oil market would only be
found if oil prices increased to ration demand (see Crude Oil:
Balances to Tighten Again by 2012, Sept. 14, 2009). The loss
of Libyan production serves only to increase our conviction in
this thesis. Thus, we reiterate our recommendation to stay
long Dec ’11 West Texas Intermediate crude.
IEA Announcement Bearish for Crude
— Hussein Allidina, Evan Calio et al. (June 23)
IEA move underscored supply-demand imbalance.
The International Energy Agency (IEA) announced release of up to 60 million barrels of oil in the coming
month in response to the ongoing supply disruption from
Libya. Accordingly, crude prices weakened considerably. Despite the negative price move in reaction to the
IEA announcement, the need to release government inventories underscores the expected supply-demand imbalance of 1.6 mmb/d highlighted for 2H11 (and potentially raises questions over OPEC’s willingness or ability
to lift production).
Bearish flat price and structure near term, more so
for Brent and light-sweet crudes. Prior to this announcement, we were modeling an inventory drawdown
of 1.3 mmb in 3Q11 – assuming OPEC production remained steady at May levels. If the entire 60 million barrels being made available to the market is spread over
the third quarter, the deficit in 3Q would narrow to 600
kb/d. The availability of 60 mmb of reserve presents potential downside to our $120/bbl price forecast for 2011
of some $10/bbl. Moreover, as the loss of Libyan production, and recent issues in North Sea production, have
led to Brent outperformance (versus other crudes) and
the widening of the light-heavy spread, the availability of
light-sweet reserves in Europe should pressure Brent
and other light-sweet benchmarks disproportionately. All
else equal, this should lead to European refining margin
outperformance relative to North American margins.
Bullish medium-term. An inventory draw, whether from
industry or government reserves, is a draw nonetheless.
If government reserves are to be replenished, demand
will be higher (just as supply is higher today), a support
for deferred price and structure.
13
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Strategy and Economics
Exhibit 2
Investors Are Seeking Downside Protection in Oil,
Leaving Upside Exposure ‘Cheap’
(Brent option skew)
42.5%
40.0%
37.5%
35.0%
32.5%
30.0%
25% 20% 15% 10% 5% ATM 5% 10% 15% 20% 25%
OTM OTM OTM OTM OTM
OTM OTM OTM OTM OTM
20-Jun
13-Jun
23-May
21-Mar
Source: Morgan Stanley Commodity Research estimates
Inventories seen tightening without increased OPEC
production. Using our economists’ bear case growth forecasts (global GDP growth of 3.4% in 2011), we see oil demand growing by 1.2 mmb/d in 2011. With non-OPEC production seen flat year over year, inventories are poised to fall
markedly in 2H if OPEC production is held steady at current
levels (April data show OPEC production at 28.8 mmb/d). In
all likelihood, OPEC will lift its production to ease declining
inventories. Although the cartel failed to form a consensus at
their recent meeting, Saudi Arabia and other countries in the
Gulf Cooperation Council have stated that they will lift production (and recent weakness in Dubai timespreads confirms
this). Although the decline in inventories will be tempered by
higher production, prices are still likely to move higher on falling spare capacity.
Exhibit 3
Without Increased OPEC Production, Demand Will
Exceed Supply
(Global supply and demand, mmb/d)
92
OPEC I ntervention
Needed to Combat
Growing Demand
Expect ations
91
90
89
Takeaways from China Trip –
Bullish Agriculture
— Hussein Allidina, Bennett Meier (June 23)
We recently spent four days with investors in China,
visiting numerous agricultural facilities and management
teams across the eastern part of the country. The trip
supported our view that protein demand will continue to
show robust growth going forward. Modernization, particularly within the downstream protein sector, is lowering
costs and increasing domestic confidence in the safety
of Chinese meat. As this trend continues in tandem with
per-capita income growth across China, we believe that
demand for feed grains will continue to grow, and perhaps accelerate, in the coming years.
Production growth, however, will remain challenged.
While our travels highlighted many efforts to modernize
protein facilities, difficulties in the country’s efforts to increase agricultural production were just as apparent.
These challenges include the limited potential for nearterm improvement in seed technology, increasingly
sparse water reserves, and infringement of new housing
developments on farmland. With China’s arable land
largely maxed out, increased production will rely on domestic yield growth. However, in the near term, yields
will likely struggle to match the rate of demand growth,
necessitating future imports.
China’s impact on the world agriculture market over
the coming years will reflect government actions.
With China reportedly facing a production deficit in corn
of nearly 10 million metric tonnes in 2010/11, and possibly larger in coming years, the government has opted to
limit industrial consumption, rather than allow for increased imports. This policy of selectively limiting demand is nothing new, and if the government is able to
execute the strategy successfully, it may be able to temper large-scale imports of corn for a couple years. However, given that the government faces the need to rebuild strategic reserves, we see a high probability of material Chinese imports again in 2011/12 and beyond.
China could still import more US corn in the 2010/11
marketing year, as the recent weakness in US prices has
opened the arbitrage from the US gulf coast.
88
87
86
85
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
MS Forecasts
Total Demand
Total Supply
Supply with Saudi Arabia @ 10 mmb/d
Source: IEA, Morgan Stanley Commodity Research estimates
14
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Industry Analysis
June 21, 2011
US Insurance – Property &
Casualty
2011 Reserve & Capital Analysis:
Excess Remains
Morgan Stanley & Co. LLC
tate higher returns through accretive capital deployment (buybacks, dividends, M&A, new business). Each continues to
trade near historical low valuation levels, which should offer
downside protection.
Exhibit 1
Excess Reserve as % of Equity
Gregory W Locraft
20%
Gregory.Locraft@morganstanley.com
15%
Scott Thomas, CFA, CPA
Scott.Thomas@morganstanley.com
5%
Kai.Pan@morganstanley.com
0%
$1.5b $845m $345m
$1.6b
$120m $270m $30m
-5%
($2b)
-10%
AIG **
WRB
ALL
PGR
TRH
TRV
ACGL
XL
CB
ACE
PRE *
RNR
Source: SNL, Company Data, Morgan Stanley Research estimates
Exhibit 2
Excess Capital as % of Equity
30%
Estimated Excess Capital as % of Equity (2Q11E)
$6.5b excess capital available to shareholders
25%
$600m
20%
$2.5b
15%
$900m
10%
$500m
$300m $400m
5%
$1.4b $300m $200m
$150m
$500m $100m
0%
TRH
ALL
WRB
AXS
PGR
TRV
PRE
ACGL
RE
XL
CB
RNR
Source: Company Data, Morgan Stanley Research estimates
Exhibit 3
Excess Capital: 2Q11E vs. Initiation
35%
30%
Estimated Excess Capital as % of Equity
$6b
Initiation (no estimates for ALL, PGR, WRB, and XL)
$6.5b
25%
2Q11E
$3.5b
$700m
$600m
20%
$800m
$1b
$2.5b
$1.2b
15%
$750m
$3.4b
$900m
10%
$500m
$400m
$300m
5%
$300m
$200m
$1.4b
$300m
$150m
$500m$100m
0%
TRH
ALL
WRB
AXS
PGR
TRV
PRE
ACGL
RE
XL
CB
RNR
Overweights RNR, ACE, and CB have the highest excess
capital levels at 15-25% of book value. This should facili-
$2.4b
$175m
ACE
Capital deployment a key driver of shareholder value late
in the underwriting cycle, we think. While property has inflected higher, the muted casualty trend gives us confidence in
our “late cycle” investment playbook. We recommend strong
balance sheets (with excess capital to drive shareholder returns
through buybacks, dividends, and M&A), while preserving optionality to participate in the next P&C cycle upswing.
$790m
ACE
P&C pricing cycle closer to a bottom; property has
turned, while casualty remains muted. Property pricing
rose following the Japan earthquake and tsunami and this
trend appears likely to continue at least through 1Q12.
Longer tail casualty lines have broadly “stopped going down”
and are showing pockets of improvement, but the future trajectory is less clear. More balance sheet “pain” is required in
the form of inadequate reserving on long tail lines before a
broader P&C cycle upturn is declared, in our view. Current
casualty reserve trends point to late 2012/2013 for a turn, but
cycle timing remains a key investor debate. We recommend
investors buy select names to position for a potential upswing.
* PRE excess reserve pro-forma
(YE09 study reduced by 2010 reserve releases)
** AIG reserve and equity for Chartis only
$525m
AXS
Excess capital robust, but lower than July 2010. We found
overall amounts have decreased as lower excess reserves,
capital deployment (buybacks + dividends), worsening underwriting trends (especially catastrophes), and higher PMLs from
the new RMS 11 model led to lower capital levels than in our
July 2010 analysis. We estimate an actuarially reasonable
range of reserves between $512.5 and $580.8 billion. Industry
carried reserves of $561.9 billion fall at the 72nd percentile of
this range, or about $15.3 billion above our midpoint.
$1.0b excess reserve
10%
Kai Pan
Our 2011 industry reserve analysis identifies $15 billion in
excess, a 21% decline from July 2010. Excess reserves are a
key input in our earnings models; this analysis supports ongoing reserve releases through 2012e. An outside actuarial firm
assisted in the effort.
Excess Reserve as % of Equity (YE10)
25%
Industry View: In-Line — Insurance - Property & Casualty
We expect ROEs to be flat to down on mixed fundamentals. Investment
income (80%+ of profits) is near a trough, but underwriting profitability is
declining on lower policy pricing as reserve releases fade and core margins under pressure. We think careful stock selection matters more than
“timing” the cycle given similarity of up- and down-cycle returns.
Source: Company Data, Morgan Stanley Research estimates
15
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Industry Analysis
Accident year 2010 loss picks a touch aggressive in light
of pricing deterioration. The jump in the industry’s loss pick
from AY07 (61%) to AY09 (68%) seems reasonable (Exhibit 5
in our full note), but AY10’s 69% looks low, especially in light of
still-rising loss trends and only modestly improving (at best)
rates. The initial cushion built into AY10’s reserves is no doubt
considerably less than that originally built into AYs 2007–09.
Disclaimer: Our review of the P&C industry’s consolidated
reserves relies on statutory data (Schedule P) and our industry data is based on the sum of each company’s “combined/group” statutory filing. Our analysis utilizes six different
actuarial reserving methods, producing a range of reasonable
reserves for each statutory line of business and in total.
Companies mentioned: ACE Ltd. (ACE, $65, Overweight),
Allstate (ALL, $30, Equal-weight), American Int’l Group (AIG,
$29, Equal-weight), Arch Capital Group (ACGL, $33, Equalweight), Axis Capital Holdings (AXS, $31, Overweight), PartnerRe (PRE, $68, Equal-weight), RenaissanceRe Holding
(RNR, $21, Equal-weight), The Chubb Group (CB, $63, Overweight), The Progressive Corp. (PGR, $21, Equal-weight), The
Travelers Companies (TRV, $58, Overweight), Transatlantic
Holdings (TRH, $48, Equal-weight), W.R. Berkley (WRB, $32,
Underweight), XL Capital (XL, $22, Equal-weight).
Exhibit 4
Reserve Excess / (Deficiency) by Company ($b)
Rating
Excess /
(Deficiency)
Company
Min' of Range
Midpoint
Max' of Range
INDUSTRY
$512.456
$546.619
$580.781
$15.310
% of Equity
Overweight
ACE
$15.266
$16.043
$16.819
$2.893
12.3%
Equal-weight
ALL
$13.947
$14.758
$15.569
$0.272
1.4%
Equal-weight
AIG
$77.223
$78.447
$79.671
($3.723)
-5.1%
Equal-weight
ACGL
$4.234
$5.123
$6.012
$0.481
11.3%
Overweight
AXS
$5.261
$5.862
$6.464
$1.165
21.3%
Overweight
CB
$13.099
$14.586
$16.073
$1.451
9.1%
Equal-weight
PRE
$5.696
$6.391
$7.087
$1.266
22.2%
Equal-weight
PGR
$5.495
$5.734
$5.973
$0.120
1.9%
Overweight
RNR
$0.505
$0.631
$0.757
$0.525
17.9%
Equal-weight
TRH
$6.455
$7.524
$8.593
$0.174
4.3%
Overweight
TRV
$33.483
$35.433
$37.384
$1.607
6.2%
Underweight
WRB
$7.418
$8.080
$8.742
$0.028
0.7%
Equal-weight
XL
$15.622
$17.303
$18.985
$0.898
9.4%
Note: Red dot signifies carried reserves at YE10; YE09 for ACE, ACGL & PRE.
Source: SNL, Company Data, Morgan Stanley Research estimates.
16
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Industry Analysis
June 28, 2011
Differentiating the Famous Five composites
Europe Composite Insurers
The Famous Five: Allianz Up to
OW, Zurich Down to EW
Allianz, Aviva, AXA, Generali and Zurich together account for
half of the SXIP’s market capitalisation, yet are notoriously
hard to differentiate for investment purposes – with the exception
of Generali, all trade within one P/E ratio point of each other
(ranging from 6.9x – 7.5x IFRS FY12, on our estimates). Although the composite model brings with it substantial benefits
of scale, capital risk diversification and branding, it also results in complexity and opacity. In our view, investors have
increasingly preferred more concentrated business models
where the value drivers are clearer.
Morgan Stanley & Co.
International plc+
Jon Hocking
Jon.Hocking@morganstanley.com
Farooq Hanif
Farooq.Hanif@morganstanley.com
Damien Kingsley-Tomkins
Damien.Kingsley-Tomkins@morganstanley.com
David T Andrich
David.Andrich@morganstanley.com
The market struggles to differentiate between the five
large European composite insurers, in our view …
The group trades on similar P/E multiples despite substantial
differences in mix, operating performance and financial
strength. In aggregate, these five names (Allianz, AXA, Aviva,
Generali and Zurich) account for ~50% of the SXIP’s market
capitalisation – so our findings are therefore fundamental to
our broader sector view.
… we think differentiation is possible based on the
‘Three Cs’ – cash flow, capex and capital flexibility.
We prefer composites that i) generate strong cash flow, after
deducting ‘maintenance capex’; ii) have high-growth capex
that supports future earnings; and iii) have high levels of surplus cash generation, driving financial flexibility and the ability
to redeploy capital for growth.
Upgrading Allianz to Overweight: We think Allianz differentiates itself through a combination of strong cash generation,
robust capital reinvestment in growth (at attractive returns)
and significant financial flexibility.
In this deep dive research piece, we propose a cash flowbased methodology that, we believe, highlights fundamental
underlying differences in valuation. We also look at the exposure to growth markets and the various ongoing restructuring
programmes. However, we believe neither is a material differentiating factor (although we note that AXA is now alone in
communicating detailed long-term targets).
Our findings also support our positive view on European insurers – in aggregate, we see 24% upside to our price targets. We see 18% upside to our bull case earnings estimates
for the group on a weighted basis.
‘The Three Cs’ and earning surprise analysis
We believe that static earnings analysis is of limited use in
differentiating the group. Looking at multiples of free cash flow
generated is more useful. However, we believe that the picture
can easily be distorted – it easy to generate cash flow from a
life business simply by slowing down new business sales.
We have applied the following framework:

Cash generation – after deducting only maintenance
capex: Life insurers have to write a certain amount of new
business to retain a constant stock of VIF – we denote the
aggregate new business strain and capital required to
achieve this as the “maintenance” capex. This provides a
more comparable basis for judging relative cash flow.

What proportion of capex is spent on growth?
We differentiate those insurers that are spending capex on
expanding VIF and future cash flows, and those that are
investing to maintain current cash generation. We consider all group capex including any capital required for
P&C or asset management.
Downgrading Zurich to Equal-weight: Although not expensive, we find ZFS moderately constrained by its dividend policy and believe that it has less upside surprise from cost savings given the significant success of The Zurich Way programme over the past decade.
We think the overall group – and by implication the
broader sector – should be re-rated. In our view, increased
focus on capital generation in life insurance, a bottoming out
phase for the P&C cycle, together with a more disciplined
approach to geographic reach, should lead the group to be
re-rated. We note that the composites have been continuously
de-rated since the early ‘90s as bond yields have structurally
declined.
17
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Industry Analysis
Exhibit 1
Changes to our ratings, price targets and earnings estimates
Allianz
Aviva
AXA
Generali
Zurich
Rating
Previous
Current
EW
OW
EW
EW
EW
EW
UW
UW
OW
EW
Currency
EUR
GBp
EUR
EUR
SFr
Previous
111.50
NA
16.00
16.00
290.00
2011e
Current
% Change
Previous
Previous
Price Target
Current
124.20
508
18.35
14.91
239.00
2012e
Current
% Change
11.4%
14.7%
-6.8%
-17.6%
% Change
Previous
2013e
Current
Allianz
12.35 e
10.93 e
-11.5%
13.09 e
12.51 e
-4.4%
13.33 e
13.17 e
Aviva
51.99 e
72.02 e
38.5%
56.57 e
61.31 e
8.4%
60.34 e
64.87 e
1.96 e
1.42 e
2.87 e
1.47 e
46.8%
3.4%
2.04 e
1.47 e
2.04 e
1.57 e
0.0%
6.7%
2.23 e
1.53 e
2.28 e
1.67 e
25.50 e
24.42 e
-4.2%
29.77 e
27.49 e
-7.6%
32.30 e
29.65 e
AXA
Generali
Zurich
% Change
Comments
-1.2% Asset markets in 2011e, otherwise minimal changes
Market movements and lower P&C combined ratio;
7.5% impact of disposals in 2011e
Market movements and impact of disposals in 2011e;
2.3% otherwise small changes
9.3% Lower P&C combined ratio and better life margins
Lower bond yields and higher P&C combined ratio to
-8.2% reflect 2011e earnings to date
Source: Morgan Stanley Research estimates
Exhibit 2
The composite insurers: the Morgan Stanley order of preference
Stock
Allianz
Price at
Price
Rating
24/6/11
target
Upside
OW
92.1
124.2
35%
AXA
EW
14.5
18.35
26%
Aviva
EW
423
508
20%
Zurich
EW
205
239
17%
Generali
UW
13.6
14.91
9%
Investment thesis
Allianz has strong cash flow generation, both unadjusted and adjusted to
reflect maintenance capex. Proportionately it also spends the most of its peer
group on growth capex. Allianz has excellent financial flexibility with comfortable dividend cover and a high quality balance sheet. In our view, it has a
powerful franchise – it is the leading global primary P&C company and a
major player in asset management through PIMCO and Allianz GI.
AXA is attractive on cash flow, has ample capital flexibility and relatively high
growth capex. However, we believe relative balance sheet strength and earnings surprise potential gives it less upside than Allianz. AXA is now the only
insurer amongst the group that sets out detailed long-term financial goals
(through the recently published “Ambition AXA” programme).
Aviva looks inexpensive on the basis of adjusted cash flow, but spends the
highest proportion on maintaining the stock of VIF. Management has made
significant strides in improving dividend cover and financial flexibility, we are
also encouraged by the significant recent improvements in general insurance
operating results (a 97% COR reported at 1Q11).
Zurich scores reasonably well on cash flow valuation and growth capex investment; however, we believe it is highly constrained on capital flexibility
given a low dividend cover – and we see less valuation upside than peers.
The Zurich Way improvement programme continues to be very successful.
We believe that Generali looks the most expensive of our group on the basis
of adjusted cash flows – although it scores well on new business returns. In
addition, we believe Generali has the most negative earnings surprise skew.
However, Generali has strong market positions and improving P&C results.
MOST PREFERRED
Source: Datastream, Morgan Stanley Research estimates
Exhibit 3
How to differentiate the European Composites – The ‘Three Cs’ and Potential Earnings Surprise*
Differentiating the Composites on
cash and earnings surprises
CASH
GENERATION
CAPEX ON
GROWTH
CAPITAL
FLEXIBILITY
POTENTIAL EARNINGS
SURPRISE
OVERALL
ALLIANZ
AXA
AVIVA
ZURICH
GENERALI
Source: Morgan Stanley Research
*NB. Please see Exhibit 10, on page 5 of our full note for a detailed explanation of the underlying methodology and calculations
18
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Industry Analysis

Capital flexibility: We study the residual holding company
cash generation post capex, dividend payments and other
factors (e.g. disposals). A higher buffer gives better downside balance sheet protection, and an ability to redeploy
capital to accelerate growth. We are particularly attracted to
companies where the balance sheet is also of high quality
with limited need for ongoing repair or deleveraging.
In addition to the ‘Three Cs’, we have conducted an earnings
surprise analysis to identify the principal risks (both upside
and downside) to our forecasts.
Conclusions – Allianz is our preferred play
Our valuations are based on a sum-of-the-parts
methodology, where we estimate long-term sustainable returns on capital for each business unit and apply appropriate
multiples to allocated capital. For fee-earnings businesses
such as asset management, we normally apply P/E multiples
to estimate value. We value all surplus capital or debt in a
company at face value. Our price targets are based on a
20:60:20 weighted average of bear, base and bull cases. We
see the following risks to our price targets:
Allianz

Allianz is our preferred play amongst the group – which we
upgrade to Overweight – it had the best overall performance on
our ‘Three Cs’ tests, earnings surprise analysis and valuation.
Uncertainty in investment markets affects valuation and
earnings in both life & non-life insurance; uncertainty in life
and non-life profitability and underwriting risks; uncertainty
in regulation – particularly Solvency 2.
Our principal findings:
Aviva

AXA and Aviva look least expensive and Generali the
most expensive on cash flow, once this has been adjusted to reflect only maintenance capex. Allianz looks
moderately less expensive than Zurich. Generali is the
outlier on this measure, looking significantly more expensive than peers.

Allianz and AXA spend the highest proportion of total
capex on growth – for FY12, we estimate that 84% of Allianz’s and 78% of AXA’s capex will be focused on producing incremental future cash flows. Aviva looks worst on
this measure, with only around half of capex expansionary
in nature.

Allianz looks strong on capital flexibility, we estimate
cumulative FY11-FY15e holding company cash flows
equivalent to ~15% of current market capitalisation.
Dividend cover is also strong. Although Zurich’s capital
position is robust, its dividend cover is weak – a function of
earning in dollars / euros and paying a dividend in Swiss
Francs. Aviva has the highest level of capital generation –
however, this is boosted by disposals; underlying dividend
cover remains relatively weak.




Uncertain combined ratio and reserving experience in
non-life; uncertain growth prospects and new business
profitability in life insurance; uncertainty in regulation and
asset markets.
AXA
Uncertainty in pricing and profitability in life and non-life
businesses; uncertainty in AXA’s inorganic growth strategy
in growth markets; uncertainty in regulation and asset
markets.
Generali
Uncertainty in regulation – especially Solvency 2; uncertain outlook for European P&C pricing and combined ratio;
volatility in asset markets affects valuation.
Zurich

Uncertainty in combined ratio and profitability outlook, particularly in global corporate markets, US commercial and
European P&C markets; uncertainty in investment yields,
especially in non-life.
We see the greatest upside potential in Allianz’s
earnings – driven primarily by the P&C operations. We
generally see a positive risk skew for all apart from Generali where our estimates remain materially below consensus.
19
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Industry Analysis
Exhibit 4
Exhibit 7
New business maintenance and growth definition
Deducting maintenance capex, AXA and Aviva look
least expensive on price / sustainable cash flow
Unwind
of
discount
rate
Cash
flow paid
out
Growth new
business: growing
VIF above start
year level
New
business
value
Maintenance new
business: keeps
VIF flat over the
year
VIF at end
year
VIF at
start of
the year
Price to gross cashflow less maintenance capex
14.0
12.3
12.0
11.7
10.0
8.0
6.2
6.0
6.4
5.6
6.9
5.8
7.3
6.5
6.9
4.0
2.0
AXA
VIF = Value of in-force life insurance business
Source: Morgan Stanley Research
Allianz
Zurich
Generali
2013e
Source: Morgan Stanley Research estimates
Exhibit 5
European composites are generating healthy free
cash flow yields, although Generali’s is lower
Free Cash Flow Yield
Exhibit 8
Allianz and AXA spend the greatest proportion of
their capex on growth, Aviva and Generali the least
Growth Capex / Total Capex 2012e (%)
12.0%
10.1%
9.9% 9.9%
10.0%
8.0%
Aviva
2012e
10.9%
10.9%
10.7%
9.5%
0%
9.7%
10%
20%
30%
40%
50%
60%
70%
80%
Allianz
7.5% 7.5%
6.0%
90%
84%
AXA
78%
4.0%
Zurich
2.0%
71%
0.0%
Generali
Aviva
2012e
Allianz
AXA
Zurich
Generali
55%
2013e
Aviva
Source: Morgan Stanley Research estimates
Exhibit 6
52%
Source: Morgan Stanley Research estimates
Risks attached to our base case earnings forecasts
Bull / Base / Bear earnings
Consensus earnings
130
Exhibit 9
Risk-reward SoTP view: Allianz is our preferred play
100%
120
BULL
80%
60%
110
40%
100
35%
26%
20%
20%
24%
17%
9%
BASE
current
price
90
-20%
80
PT
-40%
BEAR
-60%
70
Allianz
Allianz
Aviva
AXA
Zurich
Generali
Weighted
Avg
AXA
Aviva
Zurich
Generali
Weighted Avg
Source: Morgan Stanley Research estimates
Source: Morgan Stanley Research estimates
20
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Industry Analysis
Exhibit 1
June 27, 2011
UK Non-Food Retailing
Facing Its Biggest Structural
Change in a Decade
Morgan Stanley & Co.
International plc+
Geoff Ruddell
Geoff.Ruddell@morganstanley.com
Fred Bjelland, CFA
Edouard Aubin
Non-food goods saw prices fall for a decade
Inflation in UK 'Predominantly non-food' stores
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
This is about far more than rising cotton prices …
Many readers of this report will no doubt be familiar with the
fact that apparel retailers in both Europe and the US are currently facing sourcing cost pressures that have not been seen
in a generation and that these are being primarily driven by a
dramatic increase in the price of cotton.
This article, however, is much broader in scope. We are not
talking here only about apparel. We are talking about the
c60% of all retailed goods that are ‘non-food’, the majority of
which are not made of cotton at all.
… it is about the end of a 30-year super-cycle in which
China became ‘The Factory of the World’
Whilst raw material prices are certainly relevant to our discussions, our thesis is that there is a much more important structural transition underway. We believe that the world is currently in the latter stages of a 30-year super-cycle in which the
manufacturing of most non-food retailed goods has shifted
from expensive ‘developed’ economies to low-cost ‘emerging’
countries, particularly China.
This structural transition, however, appears now to be nearing
completion. China alone is now responsible for the production
of 80% of the world’s toys, and accounts for nearly half the
clothing imported into Europe, whilst Home Retail Group (the
UK’s largest non-food retailer) has estimated that 49% of all of
the goods it now sells were manufactured in China.
-6.0%
M
ar
-8
M 9
ar
-9
M 0
ar
-9
M 1
ar
-9
M 2
ar
-9
M 3
ar
-9
M 4
ar
-9
M 5
ar
-9
M 6
ar
-9
M 7
ar
-9
M 8
ar
-9
M 9
ar
-0
M 0
ar
-0
M 1
ar
-0
M 2
ar
-0
M 3
ar
-0
M 4
ar
-0
M 5
ar
-0
M 6
ar
-0
M 7
ar
-0
M 8
ar
-0
M 9
ar
-1
0
Retail deflation appears to be coming to an end
If we were to try to encapsulate the subject of this article using
a single chart it would be Exhibit 1, which shows the level of
inflation in UK non-food stores since 1989. It shows clearly
that, for more than a decade, consumers have benefitted from
falling selling prices, but that this deflation now appears to
have come to an end.
Source: ONS, Morgan Stanley Research
Recently, we met with William Fung, one of the two brothers
behind Li & Fung, the biggest sourcing agent in the world,
which effectively acts as a middle-man between c15,000 factories in China and most of the world’s leading retailers
(in 2010 it was responsible for sourcing around $40 billion of
merchandise). Dr Fung believes that China is now entering a
new phase of development that will see wages there rise rapidly. There is good evidence to support this view; not least the
fact that China’s new 5-year plan, approved earlier this year,
has committed to the minimum wage rising by at least 13%
per annum on average between now and 2016.
Li & Fung, and other sourcing agents and retailers, are increasingly looking to other countries in Asia, and beyond, as
the costs of manufacturing rise in China. However, we think
there is much less scope than is commonly assumed to offset
cost pressure by moving production to other markets.
Consumers are going to have to pay more for less …
The key component costs of most products (i.e. raw materials,
labour, energy) are likely to continue to rise over time (as they
have, incidentally, throughout most of the last 20 years).
However, manufacturers now have no way to offset these
pressures by moving production from high-cost countries to
low-cost ones (because, where it makes sense to do so, it has
already happened). Thus, the cost of production, and hence,
ultimately, the price which consumers pay for goods, looks set
to increase for the foreseeable future.
It is beyond the scope of this article to look in detail at the
price elasticities of demand that will result (which, we think,
are likely to vary by product category). However, we think
21
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Industry Analysis
Exhibit 2
The proportion of consumers’ total expenditure
spent in retail stores is now increasing for the first
time in decades
UK Retail Sales as % of Total UK Consumer Expenditure
50%
45%
40%
35%
30%
25%
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
20%
Source: ONS, Morgan Stanley Research
households in developed markets, which have become accustomed to buying more and more for less and less over the last
20 years, are going to have to get used to consuming very
differently.
… which could significantly change their consumption
patterns
Exhibit 2 shows that the proportion of consumers’ expenditure
spent on retailed goods in the UK has been in long-term decline, with consumers choosing to allocate an increasing proportion of their spending on other things (such as holidays
and eating out). Interestingly, however, the proportion spent
on retailed goods, which had fallen each year since 1984,
increased in both 2009 and 2010.
Whilst we think it too early to call this an inflexion point, we do
think that rising retail prices could have a significant impact on
the way consumers choose to spend their finite (and in many
cases very-stretched) budgets over the coming years.
… which may yet turn out to be good news for retailers …
Indeed, although it may seem counter-intuitive, we think that
rising input costs could yet prove to be a blessing, rather than
a curse, for the retail industry.
Throughout the ‘Noughties’, non-food retailers faced inflation
in their operating costs bases (principally rents and labour
costs) but deflation in their selling prices. This meant that they
typically had to deliver c4% like-for-like volume growth each
year just to stand still. Having to do this, year after year, for a
decade, represented an enormous headwind for the industry
and we think it goes a long way to explaining why the industry
(with a few notable exceptions), has offered such low returns
for long-term investors since the mid 1990s.
However, it looks to us as though this headwind has now
gone and, indeed, may even become a tail wind (with retailed
goods potentially inflating faster than operating costs in the
years ahead). Put simply, we believe that consumers spending more on less has the potential to be good news for retailers (whose operating costs are mainly driven by the volume,
rather than value, of sales).
… although it will definitely be bad news for consumers
We find it hard, however, to see how this structural change
can be anything other than bad news for consumers. The
biggest risk, in our view, is that if the UK starts importing significant amounts of inflation from China, the Bank of England
may have no choice but to raise interest rates faster, and further, than it would otherwise wish. Clearly, that would be very
bad news for the consumer spending environment, which in
turn would be very bad news for the retail industry.
We no longer see the retailers as being oversold …
Since the beginning of April, the UK General Retail index has
outperformed the wider market by 13%. We no longer think,
therefore, that the sector is in danger of becoming oversold
(as we flagged in our report UK General Retail – How bad can
it get, March 14, 2011.
… and are very sceptical about the recent uptick in consumer confidence
Moreover, we are deeply sceptical that the big uptick in consumer confidence reported by both the GfK and Nationwide
indices last month will prove to be anything more than a postRoyal-Wedding blip.
We remain buyers of Next, but are not tempted to buy the
wider sector at current levels
In our view, the UK retailers face the prospect of many years
of low growth. Whilst the end of ‘differential inflation’ (i.e. operating costs inflating faster than selling prices) should remove one headwind, there are plenty of others (the Internet,
non-food expansion by the big grocers, overcapacity, etc.).
We believe that investors should be very selective in their
approach to UK General Retail. Next remains by far our preferred stock in the sector as we believe it can continue to deliver double-digit EPS growth for the foreseeable future even
in a low/no growth environment.
Share price: Next 2,282p
22
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Industry Analysis
We lower industry view from Attractive to Cautious: We
anticipate relative underperformance vs. both the TOPIX (12mnth forward target 1,100) and the real estate industry after a
significant outperformance since 2008 (see exhibit 39).We
expect post-quake reconstruction demand to do little to boost
earnings, and in next one to two years, foresee increasingly
visible worsening of profit margins as labor costs rise. It will
take less time than we expected after the earthquake for profit
margins to worsen at the Big 4 general contractors.
June 16, 2011
Japan Construction
J-Insight: Double Downgrade,
Margin Risks Ahead as Wages
Rise
Atsushi Takagi
Morgan Stanley MUFG
Securities Co., Ltd.+
Atsushi.Takagi@morganstanleymufg.com
What's Changed
Industry View: Construction
Attractive to Cautious
Companies Featured
Company (Ticker, Price, PT, Upside)
Rating
Taisei (1801, ¥187 ¥150, -19.7%)
Obayashi (1802, ¥356, ¥320, -10.1%)
Shimizu (1803, ¥348, ¥200, -42.5%)
Kajima (1812, ¥237, ¥180, -24.0%)
Maeda (1824, ¥249, ¥230, -7.6%)
Toda (1860, ¥292, ¥300, 2.7%)
Equal-weight
Overweight
Underweight
Equal-weight
Equal-weight
Equal-weight
Margin risks not discounted: When margins hit historical
lows 3 years ago we foresaw a sharp rise, a scenario that
materialized in F3/11. The market expects that even if margins narrow slightly, rising demand will boost profit levels. In
contrast, we think the market will start to realize that higher
orders spell sharply poorer margins as in the past. The tendency in the past 10 years has been for firms to raise margins
from low levels, even when construction demand has been
falling sharply, by reining in supply capacity; from higher levels margins have tended to worsen, even when construction
demand has risen, as firms increase supply capacity and lose
pricing power.
Share prices as at June 15, 2011, close
What’s Changed: PTs and Ratings
Company (Ticker)
PT, Rating
Taisei (1801)
Obayashi (1802)
Shimizu (1803)
Kajima (1812)
Maeda (1824)
Toda (1860)
¥290→¥150, OW→EW
¥420→¥320
¥410→¥200, OW→UW
¥320→¥180, OW→EW
¥280→¥230
¥340→¥300
Industry Risk-Reward: Cautious industry view
80%
BULL
60%
40%
20%
current
price
-8%
-10%
-20%
-24%
SP
¥187
SP
¥237
-40%
-60%
-80%
Downgrade stocks: We have reviewed ratings in light of an
outlook for rapid margin deterioration. Of the Big 4, we downgrade Shimizu from OW to UW and Taisei and Kajima from
OW to EW, staying OW only on Obayashi. We retain EW ratings for Maeda and Toda.
BASE
3%
-20%
We cut earnings forecasts to reflect wage inflation: We
expect post-quake restoration/ reconstruction to tighten the
labor market which will cause wage inflation. It will take a year
or two to reflect higher costs in construction prices, and in the
next two years, we anticipate rapid contraction in margins.
Hence, we lowered our earnings forecasts for F3/12 onwards
(see Exhibit 43 for details on our forecast revisions).
PT
-43%
SP
¥292
SP
¥249
Toda
Maeda
SP
¥356
Obayashi
Taisei
Kajima
BEAR
SP
¥348
Shimizu
Share prices as at June 15, 2011, close
Source: Morgan Stanley Research
For valuation methodology and risks associated with any price targets implied above, please
email morganstanley.research@morganstanley.com with a request for valuation methodology and risks on a particular stock.
23
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Industry Analysis
Report Summary: Double Downgrade, Margin Risks Ahead as Wages Rise
Focus Point 1: Limited profit contributions from
restoration/reconstruction demand
☆Assumed supplementary budget for quake reconstruction
¥16trn approx.
(equal to infrastructure damage)
☆ Incl. approx. ¥5trn for infrastructure rebuilding/updating
(based on proportion allocated after Kobe quake)
☆ Big 4 general contractor order share 5%:
¥250bn in orders
☆ ¥7.5bn at 3% OPM
☆ 3yr rebuilding period: OP ¥700mn (per firm, per year)
Source: Morgan Stanley Research
Focus Point 2: GPM for building construction –
We lower earnings forecasts in anticipation of wage
inflation
(%)
13.0
11.8
12.0
11.8
11.5
11.0
10.8
11.0
10.0
10.0
9.0
7.9e(old)
9.7
8.3e(old)
8.3
9.1
8.8
9.2
8.0
8.0
8.0
7.3
7.0
6.7
6.5
6.0
7.0
7.2e
6.8
6.4
6.2
5.8
5.0
6.1e
5.0
4.4
4.0
F3/11
F3/13 e
F3/09
F3/07
F3/05
F3/03
F3/01
F3/99
F3/97
F3/95
F3/93
F3/91
F3/89
3.0
Limited profit contributions from restoration/rebuilding
demand
Conclusion: Maximum OP impact c.5% per Big 4 general
contractor. Damage in all regions affected by the earthquake
is estimated at about ¥16trn. Assuming this is covered in full
by supplementary budgets, we estimate this works out at no
more than 3% in relation to OP at each of the Big 4.
Rationale: General contractors say their forecasts do not factor
for restoration/reconstruction orders, and we think this is the
right approach. In the Kobe earthquake, damage in all affected
regions ran to about ¥10trn, and the total supplementary
budget to about ¥5trn. The amount allocated to public works
for infrastructure restoration, etc, was about ¥1.4trn. Assuming
a supplementary budget of ¥16trn for the Tohoku earthquake,
on the same basis we would estimate the public works portion
at about ¥5trn. The Big 4 general contractors’ share in public
works-related business is c.5% at most. At sales of around
¥250bn and OPMs of 3-5%, the OP impact works out to ¥7.512.5bn. This is ¥2-3bn per company, amounting to ¥700mn1bn in impact for a single year if booked over 3 years.
Expect downtrend to replace uptrend in building construction profit margins
Conclusion: We lower our GPM forecasts for F3/12 on by
about 2ppt. We expect Big 4 building construction GPMs,
which trended upward until F3/11, to trend down until F3/13,
leaving F3/13 margins some 2ppt below our earlier forecast of
7.9%, at 6.1%.
Rationale: We expect construction market wage growth
to emerge along with order recovery. Labor market conditions in construction have started to change since about
summer 2010, in that the labor market deflation that has
driven the uptrend in profit margins in the last 3 years has
come to an end. A sense of shortage is emerging in some
skills areas, which we expect to spread across all fields going
forward.
e = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
What’s New
 Industry view Attractive → Cautious
 Shimizu (1803) OW → UW, Taisei (1801) & Kajima (1812) OW → EW, Obayashi (1802) stays OW
Investment Thesis
Profit margins to worsen as recovery in construction spend lifts wages
 Restoration/reconstruction demand to have little impact on individual companies’ earnings
 Meanwhile, turnaround to growth in domestic construction spending to highlight structural shortage of skilled workers
 Expect wage growth to become visible from 2H, once 2nd supplementary budget is drafted
Where We Differ from the Market
 General market view is that wages will not rise for skilled workers in construction, due to structural oversupply. We think the view that there is a structural oversupply is mistaken.
 General market view is that profit levels will rise as orders increase, even though profit margins
may fall. This is very similar to the stock market consensus in F3/07, but in fact earnings were
hurt by plummeting profit margins.
Catalysts
 Monthly data on skilled worker shortages
 Monthly data on construction unit prices
 Yet we expect the actual share price responses to
come upon confirmation of falling margins via results
releases. From this standpoint, the first events to
watch are 1Q results releases in early August
Risks
 Temporary share price gains as drafting of a
2nd supplementary budget instigates a debate
on the budget scale
 Near-term uptrend in share prices when restoration demand actually starts showing up in order
data for the top 50 firms
 However, we think both of the above would be
brief
24
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Industry Analysis
Focus Point 3: Discussion points raised by the
earthquake ~ It took 10 years for Hyogo Pref real
gross product to regain pre-quake level
Four discussion points – but unclear who will take the
initiative in leading the debate
We see the following main discussion points
1） Restoration/reconstruction plans in areas directly affected
by the quake
Index(F3/95=100)
120
2） Issues relating to buildings/civil engineering infrastructure,
and impact on existing infrastructure
Hyogo Prefecture
Nationwide
115
3） How to raise the funds
4） How to cope with sharp increases/decreases in construction spending in quake-afflicted areas
110
Source: Hyogo Prefecture, Cabinet Office, Govt of Japan, Morgan Stanley Research
Reconstruction plans are being considered by the Reconstruction Design Council, set up on April 14. Yet in an uncertain political landscape, we are not confident in orderly implementation of the outcomes. Moreover, it remains to be seen
who will take responsibility for driving the debates on discussion points 2-4, let alone implementing their outcomes. Remember that even at the time of the Kobe earthquake, it took
10 years for the real gross product of Hyogo Prefecture to
regain the pre-quake level.
Focus Point 4: Our new post-quake growth scenario
Longer run, a trigger for higher construction investment
105
100
F3/10
F3/09
F3/08
F3/07
F3/06
F3/05
F3/04
F3/03
F3/02
F3/01
F3/00
F3/99
F3/98
F3/97
F3/96
F3/95
95
(Billion Yen)
20.0%
900000
18.0%
Construction Investment
Const Investment/GDP
16.0%
800000
14.0%
700000
12.0%
10.0%
600000
8.0%
500000
6.0%
4.0%
400000
2.0%
F3/13e
F3/12e
F3/11
F3/10
F3/09
F3/08
F3/07
F3/06
F3/05
F3/04
F3/03
F3/02
F3/01
F3/00
F3/99
F3/98
F3/97
F3/96
F3/95
F3/94
F3/93
F3/92
300000
F3/91
0.0%
Line shows construction investment as % of GDP (left scale), bars show total construction
investment (right scale).]
e = Morgan Stanley Research estimate. Source: Morgan Stanley Research
Focus Point 5: Lowering industry view to Cautious
80%
BULL
60%
40%
20%
current
price
BASE
3%
-8%
-20%
-10%
-20%
-24%
SP
¥187
SP
¥237
-40%
-60%
-80%
PT
-43%
SP
¥292
SP
¥249
Toda
Maeda
SP
¥356
Obayashi
Note: Share price as at June 15, 2011 close
Source: Morgan Stanley Research
Taisei
Kajima
SP
¥348
Shimizu
BEAR
Conclusion: Expect ¥48trn construction market (construction investment + maintenance/updates) to grow into
¥60trn in the future. The backlash to excessive cuts in infrastructure spending had already begun where the electric power
industry and some local governments were concerned. Once
the job of tackling the discussion points raised by the Tohoku
earthquake begins, we anticipate a debate on the extent of the
social capital investment that needs to be made to ensure people can live comfortably and safely. In western European nations with mature infrastructure, the scale of construction markets exceeds 11% of GDP. Considering the much greater risk
Japan faces from natural disasters, we would expect the construction market to occupy a larger percentage of GDP. We
think it will be possible to fund investment by passing on the
cost to usage charges. Naturally, this is predicated on efficient
management of the social capital, likely necessitating solutions
such as PPPs (public-private partnerships).
We downgrade our industry view
Conclusion: From Attractive to Cautious. We anticipate
relative underperformance vs. both TOPIX and the real estate
industry after a significant outperformance since 2008 (see
exhibit 39). We also lower PTs for all our coverage stocks,
taking relative P/E in the phase of declining profit in F3/07 as
our guide. Our view on the industry is Cautious, but we are
OW on Obayashi, as we see relatively more upside vs. other
industry stocks. By contrast we downgrade through two levels, from OW to UW, for Shimizu, which looks noticeably
overvalued for a phase of falling profit. We go from OW to EW
for Taisei and Kajima, and maintain Maeda and Toda at EW.
25
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Industry Analysis
Risk-Reward Snapshot: Obayashi (1802, ¥356, OW, PT ¥320)
Risk-Reward View: Our PT allows for the robust balance sheet
Investment Thesis
¥500
¥470 (+32%)
450
400
¥ 356
350
¥320 (-10%)
300
¥270(-24%) ●
250
¥240 (-33%)
200
150
100
Dec-09
Jun-10
Price Target (Jun-12)
Price Target ¥320
Bull Case
¥470
Key Value Drivers
 OP from construction business, excluding special factors, to drive the
share price. One-off factors such as
large project related profits/losses do
not have ongoing impact.
 Margin improvement remains the
key, rather than the order trend.
50
0
Jun-09
 Profits to continue declining through
F3/13 as wage inflation for skilled labor lowers gross margins on building
construction.
Dec-10
Historical Stock Performance
Jun-11
Dec-11
Jun-12
Current Stock Price
Applies a 20% premium to base-case fair value, since Obayashi
is trading at a P/B roughly 20% lower than Shimizu (1803) and
Kajima (1812). Upside risk for our PT if labor market inflation
takes longer to materialize than we expect, with positive implications for earnings. Conversely, if this happens more quickly than
we expect, the share price could drop below our bear case fair
value.
F3/13e
EPS ¥19.6
P/E 24x
F3/13 profit margins only fall about 0.5ppt: The bull case applies a target P/E of 24x, the top end (170%) of the relative P/E
range in F3/07.
Base Case F3/13e
¥270
EPS ¥17.1
P/E 16x
Earnings continue to slip in F3/13 as margins worsen: GPM
on building construction for the Big 4 general contractors started
falling in F3/07, when these stocks traded at 100-170% of the
TOPIX P/E in F3/07. Base-case P/E of 16x applies weighted average relative P/E during F3/08 of 120% and the current Nikkei
225 multiple of 14x.
Bear Case
¥240
No evident trough for margin deterioration: Low end of the
F3/07 relative P/E range (100%) becomes applicable, for bearcase P/E of 14x.
F3/13e
EPS ¥17.1
P/E 14x
Potential Catalysts
WARNINGDONOTEDIT_RRS4RL~1802.T~
 Profit margins in quarterly results
 Data for skilled labor shortage released each month
 Data for construction costs released
with a two-month lag
 Stock price could trend up on expectations for scale of earthquakerelated supplementary spending before such packages are announced
Price Target Risks
 The stock could fall beyond our bear
case if liquidity in the stock market
falls further or undue pessimism regarding overseas construction works
spreads in the market
Note: Share price as at June 15, 2011, close
e = Morgan Stanley Research estimates
Source: FactSet, Morgan Stanley Research
26
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Industry Analysis
June 28, 2011
A/P Optical Lens Industry
Leaders Pull Away in the Next Leg
of the Capex Race
Morgan Stanley Asia Limited+
Jasmine Lu
Morgan Stanley Taiwan
Limited+
Po-Ling Chen
Jasmine.Lu@morganstanley.com
Po-Ling.Chen@morganstanley.com
The optical lens industry is enjoying healthy structural
growth. Barriers to entry are rising via pixel migration
and lens design upgrades. We have upgraded both Largan and AAC to OW as plays on this theme, although for
different reasons.
Both Largan (NT$1,111) and AAC (HK$23) trade at the low
end of their historical ranges on 2012e earnings after recent pullbacks: We see good entry points to build positions,
and cite the following fundamental positives: 1) For Largan,
we see robust top-line growth following capacity expansion,
uptrend in margins, solidifying position. We have increased
our 2011e and 2012e EPS by 2% and 20%, respectively. Our
new 2011-12e EPS are now at the upper end of consensus.
2) For AAC, we see an acoustic growth story powered by tablets and smartphones. Its strategic move to optics offers potential long-term re-rating if executed well. The stock trades at
15x and 11x 2011e and 2012e EPS, vs. the historical trading
range of 6x-19x – which we think is fairly compelling considering the stock’s growth potential and uptrend in ROE.
A beneficiary of the rise of smartphones and tablets:
These devices are equipped with lenses of higher resolution
and/or an increased number of pieces. To a lesser extent,
optical lens applications are also broadening to game consoles, notebooks (NB) and eventually, auto and medial use
areas. The pricing environment remains benign, in our opinion
– we expect ongoing supply tightness to persist until at least
1Q12.
We forecast that global optical lens revenues will grow
39% YoY in 2011 to US$2.2 bn, and a further 18% YoY in
2012 to US$2.6 bn; long term, we project a 22% CAGR
over the 2010-2014 period: This is driven mainly by volume
increases on top of resilient blended ASP through rising pixel
and lens design (increase in pieces of lens for lower- resolution lenses with high-definition (HD) function added) migration, dual cameras, and broadening applications.

Smartphones should account for 37% of total revenues in
2011 and 42% in 2012.

Tablets should rise to 7% of the mix this year and 10%
next year.
Barriers to entry – already fairly high – are rising… This is
evidenced by the divergence in financial performance among
lens makers. Based on financial results in 2010, Largan led
the pack in terms of revenue scale and margin performance.
More importantly, we believe the trend is unlikely to reverse
soon and thus project Largan to maintain well above industry
average margin performance.
…via ongoing pixel migration… In the past few years, Largan has been leading the pixel migration from sub-2MP and
now primarily focuses on 5MP+. This allows Largan to capture
most of the demand in smartphones that require higher resolution than other devices – such as feature phones and NBs.
We think that pixel grade beyond 8MP is likely to decelerate,
even though migration might carry over to 10-16MP for flagship smartphone projects – albeit likely in small volume, owing
to rich pricing points and limited image differentiation compared with the migration from 3MP to 5/8MP. The majority of
tablets are equipped with 1.3MP (iPad) and 5MP (Androidbased) lenses, but we believe Apple could further upgrade
resolution to 5MP for the next generation iPad to match the
industry trend – which will likely drive up another wave of migration for other Android-based tablets.
…and lens design upgrades – the focus of shifting competition; these upgrades drive up demand and defend
ASP:

Rising requirements for pieces per unit – from 4P to 5P
(pieces per lens) in the case of possible 8MP camera used
for iPhone 5. Additionally, we note there is also rising demand for pieces per unit from 2P to 4P – this is visible in
low-resolution (sub-2MP/FF) lenses, with the addition of
HD features. iPad2 is an example here; despite lower
resolution, it requires more pieces and smaller sensor
size. We believe eventually front cameras used for smartphones will include HD function to defend ASP, given its
low resolution at sub 2MP/FF.
Capacities are increasing to fight for market share in
2011… Taiwanese and China-based lens makers are aggressively expanding capacity. Targeted 2011 capex exceeds the
prior peak cycle level in 2008.
27
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Industry Analysis
…and thus the market is worrying about oversupply risk:
We think the risk is not as high as many perceive. We estimate only 9% oversupply in 2012 on an aggregate basis. In
spite of aggressive capacity expansion industry-wide, our
supply/demand analysis suggests the risks are only slightly
higher at Tier Two companies that focus on sub 4P (pieces of
lens) design while 5P supply stays tight – which positions a
leader like Largan well to easily boost utilization rate.
Concern is also mounting over the demand outlook for smartphones (i.e., iPhone), given decelerating momentum in 2Q,
which we read as more of a model transition than end- demand issue. Low visibility for NBs/gaming likely slows competitors to move in equipments as planned and reduce supply.
We expect the leaders to pull away from the field in the
next leg of the capex race: In light of strong demand, all lens
makers are aggressively expanding. Consequently, we expect
technology leaders – namely, Largan – are likely to take most
of the sweet spots in the capex race during the upcycle. We
cite strong demand from Apple for all its products covering
iPhone, iPad, etc.
Lower-tier companies might incur the risk of idle capacity
if they fail to lift their yield rates amid migration to higher
pixel rates and rising number of pieces per lens. This would
be especially true if the supply/demand balance were to reverse in 2012.
Key Industry Debates
Will CMOS sensor supply be a bottleneck?
Market View: Consensus is mixed. Given ongoing tightness
since 2H10, the Street is worried that CMOS sensor tightness
will be a bottleneck to shipments.
Our View: A non-event now. We believe supply tightness
has been alleviated from 2Q11 and should remain healthy
in 2H11.
Where we could be wrong: Smartphone momentum turns
out to be much stronger than anticipated in 2H11, and all current CMOS capacity is required to fulfill the total demand, thus
leading to shortage.
Are Voice Coil Motors (VCM) promising as a key value
driver for lens makers?
Market View: Yes. The Street expects VCMs to help revenue
growth for lens makers.
Our View: Conservative. We are more optimistic about
AAC’s entry into VCM (by leveraging its mechanical/magnetic
know-how) than Largan, but we barely factor the potential inhouse VCM growth in our earnings estimates for both in 2012.
Where we could be wrong: Largan’s faster-than-expected
ramp on in-house VCM with decent yield creates more upside
risk to our earning estimate in 2012, whereas AAC fails to
penetrate into any handset customers for its VCM solution.
Will aggressive capacity lead to oversupply soon?
Market View: Yes – in 2H11 at the earliest.
Our View: Risk is higher only in lower-tier companies.
This is noticeable if we break down supply and demand by the
number of pieces in lens design. We think 4P and HD raise
the bar to lift yield – which helps technology leaders like Largan to gain more share.
Where we could be wrong: 1) Oversupply risk might deteriorate if the 2H11 demand is softer than expected owing to either delayed model launches from handset OEMs or the
macro slowdown is stronger than expected, which might lead
to excessive capacity coming out in 2H11; 2) other lens players (except for Largan) see faster-than-expected pick-ups in
yield, which would narrow the competitive edge gap with Largan; thus more intense competition; and 3) Apple’s focus
switches from pixel migration to improvements in other functions for iPhone or iPad might also change the competitive
landscape.
Are any other new entrants likely to pose a threat to existing optical lens players?
Market View: Disruptive technology like wafer level lens or
newcomers, such as AAC, come to share the pie and grab
share from current lens players.
Our View: Distant or not yet. Wafer level lenses are still
limited to sub 2MP lens segment; however, we will continue to
monitor AAC’s development.
Where we could be wrong: Leading smartphone brands,
such as Apple, decelerate the pixel upgrade race and switch
instead to other functionality. AAC duplicates its acoustic success in the optical realm, using its magnetic know-how (the
processes are similar) and good relationships with smartphone/tablet brands.
28
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
June 27, 2011
Amazon.com
Adding to the Best Ideas List
Morgan Stanley & Co. LLC
Stock Rating: Overweight
Price target
Shr price, close (Jun 24, 2011)
Mkt cap, curr(mm)
52-Week Range
Reuters: AMZN.O Bloomberg: AMZN US
$245.00
$192.55
$88,576
$206.39-105.80
Fiscal Year ending
Revenue, net($mm)
EBITDA, adj($mm)**
ModelWare EPS($)
Consensus EPS($)§
12/10
34,205
2,504
2.53
2.53
Scott Devitt
Scott.Devitt@morganstanley.com
Andrew Ruud
Andrew.Ruud@morganstanley.com
Joseph Okleberry
Joseph.Okleberry@morganstanley.com
Zachary Arrick
Zachary.Arrick@morganstanley.com
Amazon.com has been added to the Morgan Stanley Best
Ideas List for its strong projected top-line growth and potential for operating margin expansion into the seasonally
stronger calendar 2H11. Amazon.com's global market share
opportunity remains underestimated by the market, in our
view. Amazon.com is growing at four times the rate of eCommerce growth in the US, and 2.5 times that internationally.
We expect category / geographic expansion and new product
cycle(s) to continue to drive meaningful share gains over the
next 5-20 years.
What are Amazon.com shares worth? We are raising our
price target to $245 (implying a 22x EV / 2013E EBITDA multiple) after gaining further conviction on Amazon.com’s current
position and future opportunities in international markets.
Based on our analysis of key demographic themes, we are
raising our long-term international eCommerce penetration
rate to 20% (greater than our assumption that the US will be
at 15%) and raising our assumption for Amazon.com’s market
share gains by increasing our 2010-2020E international revenue CAGR to 22% from 18.5% previously.
12/13e
77,603
4,961
5.30
5.44
Price Performance
Amaz on.com Inc. (Left, U.S. Dollar)
Relativ e to S &P 500 (Right)
Relativ e to MSCI W orld Index /Retailing (Right)
$
%
500
200
450
400
150
350
300
100
250
200
150
50
100
08
09
50
11
10
Source: FactSet Research Systems Inc.
Company Description
Amazon.com operates eight global websites where users can search,
find and obtain millions of products to buy online. Amazon.com also
enables third parties to sell to its customers — for which it earns fixed
fees, sales commissions, per-unit activity fees, or a combination thereof.
Amazon.com also provides marketing and promotional services, such
as sponsored search, and has a co-branded credit card agreement.
Industry View: Attractive — Internet & Consumer Software
We maintain that investors still underestimate the impact the Internet
will have in changing business process and consumer behavior on a
global basis. We continue to believe that, at the margin, online is gaining share from offline, that this will occur for some time to come, and
that this should benefit the Internet leaders.
Exhibit 1
Amazon.com represents only a small portion of
global retail sales (US$ billion)
Fiscal Year-End
2009
2010
2011E
2012E
2013E
$144
$166
$188
$212
$235
Europe
188
195
211
247
283
Asia
107
156
209
267
323
42
56
73
95
122
Global eCommerce
$482
$572
$681
$821
$963
Global Retail Sales
$11,161
$11,575
$12,158
$12,813
$13,539
Global eCommerce / Global Retail Sales
4.3%
4.9%
5.6%
6.4%
7.1%
Amazon.com / Global eCommerce
5.1%
6.0%
6.9%
7.4%
8.1%
Amazon.com / Global Retail Sales
0.2%
0.3%
0.4%
0.5%
0.6%
U.S.
Amazon’s global addressable market
As of fiscal year-end 2010, Amazon operated in eight countries, globally. Sales from UK, Germany and Japan each accounted for 11-15% of total Amazon sales. This implies
France, Italy, Canada and China accounted for only $2 billion
of sales.
12/12e
60,738
3,792
3.58
3.77
§ = Consensus data is provided by FactSet estimates
** = Based on consensus methodology
e = Morgan Stanley Research estimates
07
Why buy now? With the stock trading at a current valuation
of 16.4 times EV / 2013e EBITDA, we believe the market is
not giving credit for the sales momentum and potential margin
expansion opportunities heading into 2H11. Additionally, we
believe the share price is not factoring in any option value for
the possibility of a strong new product cycle over the next 618 months.
12/11e
46,715
2,906
2.49
2.40
Rest of World
Source: eMarketer; Euromonitor International; Morgan Stanley Research
29
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
Total international eCommerce penetration will be higher
than domestic penetration
After analyzing some of they key drivers of eCommerce sales,
we conclude that the international markets have the potential
to drive a higher percentage of total retail sales through the
eCommerce channel as compared with the US. We support
our estimate by examining some of the key international
themes.
Exhibit 2
Density of Amazon fulfillment centers in Europe
is higher than in the US
vices (AWS) business. This follows a 6-quarter period (the
typical length of investment cycles) where LTM operating
margins expanded 100 basis points from 5.7% to 6.6%.
Based on historical context, we believe Amazon may leverage
y/y cyclically weaker operating margins.
Investors often ask what the bear case is for Amazon’s investment initiatives in adjacent projects. While we believe the
company will continue to be inventor and innovator of the customer experience, we do acknowledge the risk involved.
However, we would like to share a response by Jeff Bezos,
the Chairman and CEO, who addressed this concern at the
2011 Annual Shareholders’ Meeting.
“We're flexible on details and stubborn on vision...if you get to
a point where…you say…we're continuing to invest a lot of
money…and it's not working and…we're going to give up on
this…what happens? Your operating margins go up because
you've stopped investing in something that wasn't working. So
is that really such a bad day?”
Source: Company data; Google Maps; Morgan Stanley Research
More fulfillment centers = more eCommerce penetration
We estimate that Amazon has one fulfillment center for
~13MM people, both in US and Western Europe. The key
point of differentiation is how many square miles each fulfillment center “covers”. In the US, we estimate there is one
fulfillment center per 150K SqMi. In the UK and Germany, we
estimate there is one fulfillment center per 21K SqMi. This
fulfillment center density allows Amazon to exploit the lack of
ubiquitous, large-scale general merchandise stores. In the
US, for example, Walmart stores are both plentiful and very
large relative to their counterparts in Europe.
Based on the above, we are convinced that Amazon’s market
share of global eCommerce will continue to grow as it is one
of the only players with the requisite experience and scale to
invest in a truly global platform.
Margins appear set to expand
Over the past four fiscal quarters, Amazon has invested heavily in gaining market share and funding its Amazon Web Ser
Calendar 4Q11 shows potential to be very strong
We believe Amazon is well positioned to show especially strong
sales growth outperformance in 4Q. Relative to total eCommerce sales (ex-travel), Amazon has experienced higher y/y
growth in each of the past five years, with average outperformance of 26 percentage points in the last four years. We attribute the outperformance primarily to Amazon’s broadening merchandise selection, Amazon Prime shipping offering and low
pricing strategy. Additionally, we believe margins may expand
y/y due to the revenue growth and higher than average investment cycle over the past four quarters.
Valuation and Risks
Our $245 price target is 22 times our base case 2013e EV /
EBITDA value, a premium we believe is warranted because of
the strength and first mover positioning of the company in
eCommerce.
Risks include competition from Apple and other vendors as
Media sales (40% of total revenue in CQ1) transition to digital
distribution, negative effects on working capital if growth slows
and potential broad-based sales tax legislation.
30
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
June 29, 2011
ARM Holdings Plc
Taking a Breather
Morgan Stanley & Co.
International plc+
Morgan Stanley & Co. LLC
Stock Rating: Equal-weight
Price target
Shr price, close (Jun 27, 2011)
52-Week Range
Mkt cap, curr (mn)
Reuters: ARM.L Bloomberg: ARM LN
ADR: ARMH.O
625p
582p
652-270p
£7,863
Francois A Meunier
Francois.Meunier@morganstanley.com
Sunil George
Patrick Standaert
Sanjay Devgan
Sanjay.Devgan@morganstanley.com
Strong share outperformance, limited valuation upside –
downgrading to Equal-weight
We have had lots of good news on ARM so far this year and
we still have faith in the long-term story. However, with the
shares up 42% YTD (ARM has outperformed the SOX index
by 15% since mid-February when the SOX peaked at 475),
we believe that it might be time to take a breather. We still
believe that ARM will maintain its 95%-plus share in smartphones, its leading share in tablets and take share in the laptop market when Microsoft launches Windows8 on ARM.
However, with the share price close to our 625p price target
(implying 6% upside), an Overweight rating is no longer warranted, in our view. We are not changing our aboveconsensus forecasts for 2012/13 and expect Q2 results (26
July) to confirm strong demand for ARM licences.
What could take ARM higher to the next level? …
We see three factors:
i) Strong consumer demand for ARM-based Windows8 tablets
and laptops and the availability of these products with attractive form factors earlier than the 2H12 expectation.
ii) If Apple were to look at ARM for its Macbook product line
(see our 11 May note, The Race for Apple).
iii) Servers and cloud computing: We believe there is room for
ARM in a server market dominated by Intel (95% market
share) and AMD (5% market share). However, we are still
waiting for ARM to announce a 64bit and multi-threading core.
… what could take it lower to 500-550p?
If Q2 results are just in line and the macro environment remains difficult, leading to more consumer weakness related
profit warnings, we could see PE compression on ARM, even
with no cuts on estimates. At 500p, the shares would trade
on 33x 2012e and 25x 2013e PE.
Neutral into the 2Q11 results: Unlike 4Q10 and 1Q11, we
are forecasting only a small percentage above consensus
earnings for Q2 and Q3 (5% and 1% respectively at the EPS
level, see Exhibit 1). We still forecast 10% above 2012
Fiscal Year ending
ModelWare EPS(p)
P/E**
Div per shr (p)
Div yld (%)
12/10
7
12/11e
9
12/12e
12
12/13e
17
45.3
3
0.6
51.4
3
0.6
40.3
5
0.8
30.7
7
1.2
** = Based on consensus methodology
e = Morgan Stanley Research estimates
Price Performance
ARMHoldings PLC (Left, British Pounds)
Relative to FTSE UK ALL-SHARE(GBP) (Right)
Relative to MSCI World Index /Semiconductors & Semiconductor Equipment (Right)
£
%
6
450
400
5
350
4
300
250
3
200
2
150
100
1
07
08
09
10
50
11
Source: FactSet Research Systems Inc
Company Description
ARM designs high-performance, low-cost, power-efficient, RISC (Reduced Instruction Set Computing) embedded microprocessor (MPU)
cores. These are designed to enhance the performance and costeffectiveness of a wide variety of embedded applications. The company's recent acquisition of Artisan not only increases the breadth of
products available but adds a complementary distribution channel.
Technology - Semiconductors/United Kingdom
Industry View: In-Line
GICS Sector: Information Technology
Strategists' Recommended Weight: 3.0%
MSCI Europe Weight: 3.0%
consensus estimates, and potentially more if Windows8 on
ARM devices are launched in H1 and attract consumer interest, but we believe that consensus estimates for 2012 are
more likely to move in 1H12 than in 2H11.
Neutral into 2Q results: As a result of the recent outperformance and in light of numerous profit warnings in the sector
(TomTom, Nokia, RIMM, Wolfson...), we are neutral into the
Q2 results. We still believe in the long-term story but feel that
the next leg of the story (servers & Windows8 laptops) is more
likely to lead to consensus estimate upgrades in late
2011/2012 than in the next few months.
31
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
Exhibit 1
MSe vs. Cons* for Q2 and Q3
Q2 2010
Actual
23.7
49.3
73.0
13.3
13.7
100.0
94.9%
42.7
42.7%
43.5
2.34
PD Licensing
PD-Royalty
Total PD
Total PIPD
Other
Revenues (£m)
Gross Margins
Normalized operating income
Operating Margin
Normalized PBT
EPS (pence)
* Supplied by ARM
e = Morgan Stanley Research estimates
MSe
28.9
52.9
81.8
14.7
14.1
110.7
94.7%
46.0
41.6%
48.6
2.55
Q2 2011
Cons
29.2
51.5
80.7
14.1
14.3
109.1
94.2%
44.1
40.4%
45.3
2.43
Variance
-1%
3%
1%
4%
-1%
1%
1%
4%
3%
7%
5%
MSe
30.0
53.0
83.0
14.8
15.9
113.7
94.7%
49.3
43.3%
51.9
2.71
Q3 2011
Cons
29
55.5
84.5
14.7
15
114.2
94.6%
48.7
42.6%
49.9
2.67
Variance
3%
-4%
-2%
1%
6%
0%
0%
1%
2%
4%
1%
Source: Company data, Morgan Stanley Research
Exhibit 2
MSe vs. Cons* for 2011-12
Mse
120.5
224.6
345.1
62.8
59.1
468.4
94.8%
206.9
44.2%
217.4
11.48
PD Licensing
PD-Royalty
Total PD
Total PIPD
Other
Revenues (£m)
Gross Margins
Normalized operating income
Operating Margin
Normalized PBT
EPS (pence)
* Supplied by ARM e = Morgan Stanley Research estimates
2011
Cons
119.0
225.1
344.1
59.2
58.9
462.2
94.6%
198.9
43.0%
203.6
10.93
Variance
1%
0%
0%
6%
0%
1%
0%
4%
3%
7%
5%
Mse
128.9
283.5
412.4
76.7
64.4
553.5
95.3%
276.3
49.9%
292.8
14.62
2012
Cons Variance
2%
126.7
3%
275.1
401.8
3%
17%
65.4
3%
62.8
530
4%
0%
95.0%
12%
247.6
7%
46.7%
16%
252.6
9%
13.36
Source: Company data, Morgan Stanley Research
Exhibit 3
ARM Holdings (ARM.L): Visible earnings growth but limited upside
p800
722p (+22%)
700
592p
625p (+6%)
600
500
400
300
220p (-63%)
200
100
0
Jun-09
Dec-09
Price Target (Jun-12)
Jun-10
Dec-10
Jun-11
Historical Stock Performance
Dec-11
Jun-12
Current Stock Price
WARNINGDONOTEDIT_RRS4RL~ARM
BULL CASE 722p: Strong demand drives unit growth in the
smartphone and tablet market 20-30% higher than our base
case from 2011-13. 25% share in laptops in 2013, but no incremental revenues from servers in 2010-13.
BASE CASE 628p: ARM benefits from unit growth in the
smartphone and tablet market, in line with Morgan Stanley’s
global model, loses some market share in smartphones as Intel
enters the market. 15% market share in laptop microprocessors
in 2013.
BEAR CASE 220p: Double dip scenario. In a double-dip scenario, we assume investors would not look at DCF but value
ARM on a PE basis. ARM’s PE troughed at 15x during the liquidity
crisis. We believe ARM’s PER could trough at 20x in a doubledip, as investors would be likely to see through the downturn to
ARM’s better positioning in the semiconductor market.
PRICE TARGET METHODOLOGY: DCF-based (WACC of 10%
and LT growth of 4%) and risk weighted base case 50%, bull
case 40% and bear case 10%.
Source: FactSet (historical share price weakness), Morgan Stanley Research estimates
32
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
June 23, 2011
Bristol-Myers Squibb
Upgraded to Overweight on
Apixaban and Pipeline Potential
Morgan Stanley & Co. LLC
David Risinger
David.Risinger@morganstanley.com
Thomas Chiu
Thomas.Chiu@morganstanley.com
Dana Yi
Dana.Yi@morganstanley.com
Stock Rating: Overweight
Price target
Shr price, close (Jun 22, 2011)
Mkt cap, curr(mm)
52-Week Range
Fiscal Year ending
ModelWare EPS($)
Prior ModelWare EPS($)
P/E
Consensus EPS($)§
Div yld(%)
Reuters: BMY.N Bloomberg: BMY US
$34.00
$27.74
$47,658
$28.99-24.23
12/10
2.16
12.3
2.16
4.9
12/11e
2.20
2.20
12.6
2.21
4.8
Christopher Caponetti
§ = Consensus data is provided by FactSet estimates
e = Morgan Stanley Research estimates
Christopher.Caponetti@morganstanley.com
Price Performance
We have upgraded BMY to Overweight from Equal-weight
and raised our price target to $34 from $28. The catalyst
was news that apixaban (novel blood thinner) showed superiority to warfarin (gold standard) on efficacy and bleeding in
the Phase III atrial fibrillation study. Apixaban appears to have
a superior profile to Xarelto and Pradaxa, which we believe is
negative for J&J/Bayer and privately-held Boehringer Ingelheim (BI), but we await details at European Society of Cardiology (ESC) in August. Bristol plans to file apixaban in the US
and EU in 2H11. Though BMY increased 5%+ in after-hours
trading on the announcement, we expect the continued appreciation as expectations rise for apixaban and other pipeline
products. Apixaban is 50-50 partnered with Pfizer, but it is 4
times as important to Bristol because Bristol’s enterprise
value is one quarter that of Pfizer.
Bull case playing out; downside de-risked. We anticipate
apixaban launch in late 2012 and a steep ramp: we boosted
2015 probability-adjusted apixaban pipeline revenue estimate
33%, to $2.4B from $1.8B. We raised our EPS estimates as
follows: 2012 up 3% to $2.13, 2013 up 11% to $2.17, 2014 up
15% to $2.50, and 2015 up 19% to $2.34. Our 2012-2015
EPS CAGR is 3%, with upside potential. We believe Bristol is
one of the few companies with a clear path to growth among
Major Pharma. Our $34 DCF-based price target increased
from $28 using our increased 2015 EPS estimate and terminal growth rate of 2.5%. At $34, EV/2013e EBITDA would be
10.8x, justified by R&D.
We expect BMY will be re-rated on fundamentals: Bristol
has an outstanding pipeline beyond apixaban, in our opinion. We expect dapagliflozin to be recommended for approval
by the FDA panel July 19th and generate over $1B in peak
sales. We also believe expectations will rise in 2012 for Bristol's Phase II pipeline, including oncology and hepatitis-C
candidates.
12/12e
2.13
2.06
13.0
2.05
4.8
12/13e
2.17
1.95
12.8
1.99
4.8
Bristol-Myers Squibb Co. (Left, U.S. Dollar)
Relative to S&P 500 (Right)
Relative to MSCI World Index /Pharmaceuticals Biotechnology & Life Sciences (Right)
$
%
32
140
30
130
28
120
26
110
24
100
22
90
20
80
18
16
70
07
08
09
10
Source: FactSet Research Systems Inc.
Company Description
Bristol-Myers Squibb Company engages in the discovery, development,
licensing, manufacture, marketing, distribution, and sale of pharmaceuticals products worldwide. The company's pharmaceuticals products are
in several therapeutic categories: cardiovascular (PLAVIX,
AVAPRO/AVALIDE, and PRAVACHOL); virology (REYATAZ, SUSTIVA, and BARACLUDE); oncology (ERBITUX, TAXOL, SPRYCEL,
and IXEMPRA); affective and other psychiatric disorders (ABILIFY);
immunoscience (ORENCIA); and others (includes EFFERALGAN, ASPIRINE UPSA, DAFALGAN, and FERVEX).
Industry View : In-Line — Major Pharmaceuticals
We do not believe that the risk-reward outlook for the group warrants an
aggressive view.
Dapagliflozin a novel first-in-class opportunity for diabetes: FDA panel July 19, PDUFA October 28. Dapa could be
the first and only oral anti-diabetic agent that lowers body
weight and blood pressure. Dapa’s A1c lowering effect is
comparable to DPP-IVs. Bristol estimates that 30-40% of diabetics are overweight and hypertensive. The drug is 50-50
partnered with AstraZeneca. We model 80% odds of approval
and 2015e probability-adjusted sales of $919M.
Infection risk appears manageable. In Phase III studies,
UTI events were 4-13% in dapa vs. 2-8% in placebo. GI
events were 6-13% in dapa vs. 1-5% in placebo. Genital infections have been mild to moderate and treatable, but infection risk is greater in women and thus could limit adoption by
females. According to an investigator, genital infection in men
was mostly fungal infection of foreskin and patients improved
33
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
with simple external treatment with cream. Female yeast infections are common in diabetes and relatively easy to treat.
However, we note that infection risk could be higher in the
real world than in clinical trials given less follow-up with clinicians.
Exhibit 2
BMY Poised for Growth: See >20% Upside Potential
$40
$38 (+36%)
35
$34.00 (+22%)
$ 27.98
30
$28 (+0%)
Immuno-oncology pipeline has several interesting compounds. In addition to Yervoy (ipilimumab), which was recently approved for melanoma, Bristol has elotuzumab (antiCS1 mAb) for multiple myeloma, anti-PD1 antibody for solid
tumors, anti-PD-L1 antibody, anti-CD137 antibody, and IL-21.
All these agents modulate the immune system to treat cancers.
25
20
15
10
5
0
Jun-09
Dec-09
Jun-10
Price Target (Jun-12)
Exhibit 1
Bristol’s Immuno-Oncology Pipeline
Source: Company presentation
Hepatitis C candidates moving into comprehensive Phase
II development: NS5A inhibitor could be a ‘eureka.’ Bristol’s NS5A inhibitor BMS-790052, in combination with
Pharmasset’s PSI7977, a nucleotide polymerase inhibitor,
could eliminate interferon-based therapy. The two companies
began a proof-of-concept study in treatment-naïve patients
with HCV genotype 1, 2, or 3 in 1H:11.
PEG-interferon lambda is a hedge: It is a potential replacement for PEG-Intron/Pegasys if potentially better efficacy
and/or tolerability are confirmed. Key value drivers include
pipeline newsflow and management strategic action.
Upside risks to our price target include pipeline surprises
on the upside and/or external strategic action.
Downside risks include pipeline disappointments, financial shortfalls, and/or litigation/regulatory risks.
Dec-10
Historical Stock Performance
Jun-11
Dec-11
Jun-12
Current Stock Price
WARNINGDONOTEDIT_RRS4RL~BMY.N~
Bull DCF assuming
Pipeline surprises on upside and mgmt.
Case 8.0% WACC/3.5% deploys cash. Pipeline developments con$38
growth rate in per- tinue to exceed expectations. BMY deploys
petuity
its $10B cash accretively and announces
value-creating partnerships and/or acquisitions.
Base DCF assuming
Pipeline news confirms superior R&D
Case 8.0% WACC/2.5% execution. Dapagliflozin is recommended
th
$34
growth rate in per- for approval on July 19 and approved Ocpetuity
tober 28th. Apixaban Phase III details at
ESC in late August are encouraging. Newsflow on hep-C and oncology Phase II assets
is encouraging.
Bear DCF assuming
Pipeline disappoints. Dapagliflozin is reCase 8.0% WACC/1.0% jected by FDA. Apixaban details at ESC
$28
growth rate in per- reveal issues with statistical analysis (e.g.,
petuity
very weak warfarin comparator arm efficacy)
or new safety concerns. Valuation support
from 5% dividend yield at $28, plus potential
for strategic activity.
Source: FactSet, Morgan Stanley Research
Chart data reflect June 21, 2011 closing price.
Other stocks mentioned:
Covered by Peter Verdult (Cautious Europe Pharmaceuticals industry
view): Astra Zeneca (AZN.L, 3,059p, Overweight) and Bayer AG
(BAYGn.DE, €58, Underweight)
Covered by David Lewis (In-Line US Medical Technology industry
view): Johnson & Johnson (JNJ, $66, Equal-weight)
Covered by David Friedman (In-Line US Biotech industry view):
Pharmasset (VRUS, $108, Overweight).
Morgan Stanley is currently acting as financial advisor to Pfizer Inc.
("Pfizer") with respect to the sale of its Capsugel business to Kohlberg
Kravis and Roberts & Co L.P., as announced on April 4, 2011. Upon
completion of the transaction, Pfizer will pay fees to Morgan Stanley
for its financial advisory services. Please refer to the notes at the end
of the report.
Morgan Stanley is currently acting as financial advisor to Dentsply
International Inc. ("Dentsply") with respect to the acquisition of AstraZeneca Plc's Astra Tech business, as announced on June 22, 2011.
The proposed transaction is subject to regulatory approval and other
customary closing conditions. Dentsply has agreed to pay fees to
Morgan Stanley for its financial services, including transactions fees
that are subject to the consummation of the proposed transaction.
34
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
June 27, 2011
CareFusion
Resetting FY12; Multiple Shots for
Leverage Remain
Morgan Stanley & Co. LLC
David R. Lewis
David.R.Lewis@morganstanley.com
James Francescone
James.Francescone@morganstanley.com
Steve Beuchaw
Steve.Beuchaw@morganstanley.com
Stock Rating: Overweight
Price target
Shr price, close (Jun 24, 2011)
Mkt cap, curr(mm)
52-Week Range
Fiscal Year ending
ModelWare EPS($)
Prior ModelWare EPS($)
P/E
Consensus EPS($)§
Div yld(%)
Reuters: CFN.N Bloomberg: CFN US
$30.00
$26.40
$5,975
$29.97-20.63
06/10
1.33
17.0
1.42
-
06/11e
1.64
1.63
16.1
1.64
-
Jonathan L. Demchick
§ = Consensus data is provided by FactSet estimates.
e = Morgan Stanley Research estimates
Jonathan.Demchick@morganstanley.com
Price Performance
CareFusion can likely reach higher margin targets faster
than consensus or even our previous expectation. Recent meetings with management increase our conviction that
the company has significant number of levers to drive leverage. Within 2-3 years, we now believe the company can reach
50-52% gross margin and 20-24% operating margin, in line
with peers. We assume 19.5% FY14 operating margin in our
model, which is increasingly likely to prove conservative.
06/12e
1.88
1.91
14.1
1.89
-
CareFusion Corp. (Left, U.S. Dollar)
Relativ e to S &P 500 (Right)
Relativ e to MSCI W orld Index /Health Care Equipment & Ser v ices (Right)
$
%
140
30
135
28
130
26
125
24
120
22
115
110
20
105
18
We continue to see CareFusion as structurally better positioned than most peers in the evolving healthcare environment. In a cost conscious market, CareFusion is focused
on reducing total expenditures while improving outcomes and
efficiency. Most of the company’s key franchises are directly
involved in reducing hospital-acquired infections or medication
errors. As hospitals focus more on connectivity, reliability and
cost, CareFusion is well positioned to offer high ROI equipment to meet these needs.
In our view, revenue growth will accelerate into FY12
from 1-2% in FY11, but consensus expectations for 6%
growth are likely optimistic. We have trimmed our FY12
CC revenue growth estimate to 3.8% from 4.9%. Management remains committed to improving execution vs. Street
revenue expectations, a dynamic that may drive conservative
initial guidance. As this overhang lifts into guidance, we see
an attractive entry point.
The pace of acquisition activity is likely to accelerate over
the next 12 months, but management remains disciplined. The company is more focused than many peers on
driving strong returns on capital (as opposed to simple EPS
accretion) and appears to have more internal expertise in
business development than we previously appreciated.
New management is beginning to offer a clearer view of
the company’s strategic path over the next several years.
06/13e
2.05
2.06
12.9
2.07
-
100
07
08
09
10
11
Source: FactSet Research Systems Inc.
Company Description
CareFusion is a leading hospital supplies and devices company formed
through a spin-off from Cardinal Health.
Industry View: In-Line — Medical Technology
We expect revenue growth rates to slow to 4-6% over the next 3-5
years. Given our lowered growth outlook, we don’t see the stocks trading at historical premiums to the market. Cyclical improvement may
provide a near-term bounce, but sustained outperformance is unlikely
until (1) companies reset expectations for long-term growth; (2) dividend
yields and buyback commitments increase; and (3) specific actions to
address secular pressures emerge.
The first phase, which is largely complete (FY10-11), focused
on achieving independence from Cardinal and associated
TSAs, optimizing the business portfolio (e.g., ISP divestiture),
and a reduction in force. In the second phase, beginning in
FY12, management expects to further focus on business optimization, structural cost, and operational efficiency. In this
phase, management remains confident it can drive 11-15%
operating income growth. In the third phase, beginning
roughly in FY13, the company expects to begin to drive
growth reacceleration.
Even after two large restructurings to reduce costs, management sees substantial opportunity to increase operational efficiency. In the near term, FY12 will benefit from
$10-15 million in savings from the TSA agreements with Cardinal and an incremental $25 million in savings from the Au35
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
gust 2010 restructuring. In the long-term, gross margins
should reach parity with peers at 50-52%, though GM may dip
down over the next several quarters. Infusion upside related
to the Colleague recall will flow through at depressed gross
margins considering the heavy discounts CareFusion offered
on Alaris and the lower-than-average margins on capital
equipment. Management indicated that investors should expect to see some of the impact in FY4Q11, with the full impact
realized in FY1H12. Over the long term, several trends are
favorable. Higher disposable sales following infusion share
gains should drive positive mix as soon as FY2H12, as will
continued double digit growth from ChloraPrep and any incremental contribution from Medegen and to a lesser extent
kyphoplasty. The company is also exploring multiple avenues
to drive cost improvements through general manufacturing
efficiencies, distributor footprint reduction from 11 facilities to
3, and improved sourcing on its $700 million materials spend.
9.5% within two to three years. Potential shareholder value
creation from capital deployment appears substantial. Assuming the company could deploy 75% of its $1.2 billion cash
reserve in deals at a ~9% ROIC (in line with WACC), this
could drive ~$0.35 in accretion over several years.
CareFusion’s markets are growing at only 1-2%, but the
company believes it can grow above market rates
through share gains and expansions into adjacencies.
Share trends remain favorable in Infusion and Dispensing,
and we expect CareFusion to leverage its presence throughout the hospital to enter adjacent markets where it can improve outcomes or reduce costs. One example of this would
be the recent Vestara acquisition. Geographic expansion is
also a potential source of future growth. In the long-term, the
company may expand into new disease states, which is more
likely to be accomplished through acquisitions than R&D.
Management reiterated its commitment to setting and
meeting top line expectations. The company is clearly disappointed with its track record of missing Street top line estimates in six of the last seven quarters, and is focused on improving communication with investors to set more realistic
expectations. It’s worth noting that despite the top line
misses, CareFusion has beat consensus EPS estimates for
six of the seven last quarters.
Management is beginning to focus more on capital deployment as a way to create value. CareFusion has a net
cash position despite carrying a debt load of nearly 2x total
debt to EBITDA, with about $1.2 billion in total cash. On a
normalized basis, we estimate the company will generate at
least $500-600MM in FCF annually after many one time items
distorted trends in FY10-12. Given the minimal returns on its
cash balances, we see the potential for value creation through
more active capital deployment. Strategically, management’s
near-term flexibility is constrained because ~90% of current
cash and 50%+ of cash generation is overseas.
Overseas acquisitions look to be the most likely use of
cash, though business development is not exclusively
targeted overseas. The company said it is actively evaluating opportunities, and would be comfortable doing either small
($200 million) or large ($1 billion) deals. In evaluating acquisitions, the company is sensitive to dilution, though most deals
would be accretive to the extent they are financed with cash.
Management looks more closely on ROIC, where it likes to
see deals that begin to earn the company’s WACC of 9.0-
CareFusion’s ability to return cash to shareholders or
accelerate deleveraging is limited by its overseas cash
mix. We think it is unlikely we will see a buyback or dividend
implemented in the next several years. To the extent the
company does return cash to shareholders, management
would prefer to use buybacks instead of dividends to retain
greater flexibility. The company does plan to pay down debt
as it comes due, but will not be able to accelerate debt paydown as its outstanding bonds are not callable, trade substantially above par, and would have to be repurchased with US
cash.
Valuation looks more attractive than some investors realize after adjusting for amortization. On a cash P/E basis
(i.e., excluding amortization), CFN trades at 11.5x 2012e
EPS, a slight discount to the broader hospital supply group at
12-13x. On EV/EBITDA, CFN trades at less than 7x 2012e
EBITDA, a nearly 25% discount versus peers. Similarly, free
cash flow yield of 8.8% 2012e FCF is favorable versus peers
at 7.8%. Our price target of $30 assumes 8.5x 2011e
EV/EBITDA, and is justified in our view by the company’s
more attractive medium-term outlook for operating income
growth vs. peers. Risks include failure to realize expected
cost savings, delay in Infusion acceleration as hospitals take
longer to purchase new pumps and low single digit market
growth rates limiting leverage opportunities.
We revisited our CareFusion model in light of aggressive
Street numbers to examine potential financial results for
FY12. Overall, we lowered constant currency revenue growth
rates 110 bps to 3.8% from 4.9%. A more favorable FX outlook contributed 50 bps versus our prior model. We now
model 12% operating income growth, on the lower end of
management’s expected 11-5% growth rate. Our EPS estimates for FY12 have decreased $0.03 to $1.88 from $1.91.
36
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
June 29, 2011
Glencore
Master of Commodity Flows
Morgan Stanley & Co.
International plc+
OOO Morgan Stanley Bank+
Morgan Stanley Australia
Limited+
Morgan Stanley & Co. LLC
Stock Rating: Overweight
Price target
Shr price, close (Jun 27, 2011)
52-Week Range
Mkt cap, curr (mn)
Reuters: GLEN.L Bloomberg: GLEN LN
604p
476p
559-452p
US$54,382
Fiscal Year ending
ModelWare EPS (US$)
Consensus EPS (US$)§
P/E**
Div yld (%)
12/10
0.63
0.52
13.4
0.0
Ephrem Ravi
Ephrem.Ravi@morganstanley.com
Alain Gabriel, CFA, Markus A Almerud
Dmitriy Kolomytsyn, CFA
Peter G Richardson,
Joel B Crane
Hussein Allidina, CFA
A unique and differentiated business model, true global
scale, an attractive risk-reward and an undervalued marketing business ... initiating coverage with Overweight and a
£6.04 price target, implying 27% upside potential.
The geographic spread of its industrial and marketing assets
provides valuable information flow and local knowledge of
supply and demand dynamics. The company adopts a successful combination of scale, upstream integration, leading
addressable market share, and commodity breadth to obtain
valuable information and market visibility that enables it to
identify and benefit from arbitrage opportunities.
Market has focused on Glencore’s share ‘weakness’ even
though it has performed in line with the sector.
As a high-profile IPO, Glencore’s share price weakness since
its stock market debut has attracted considerable media attention. Although investor concerns about the near-term direction of commodity prices and M&A newsflow explain most of
this weakness, in our opinion, we see other company-specific
issues, on which we elaborate below, as being less relevant
to the long-term investment case. In fact, we argue that the
stock has actually performed in line with the large-cap mining
sector, trading on a blended multiple of 8.7x P/E, which undervalues its marketing business, which we value at 13x P/E.
12/12e
1.14
1.05
6.7
2.2
12/13e
1.14
1.04
6.7
2.4
** = Based on consensus methodology
§ = Consensus data is provided by FactSet estimates
e = Morgan Stanley Research estimates
Price Performance
Glencor e International PLC (Left, Br itish Pounds)
Relativ e to FTSE UK ALL-SHARE(GBP) (Right)
Relativ e to MSCI W orld Index /Materials (Right)
Flow monster – market visibility and informational edge
help identify arbitrage opportunities
At its heart, Glencore’s business model is that of a player that
leads the flow in the commodities it chooses to operate in. It
has between 14% (in nickel) and 60% (in zinc) of the addressable market share in its key commodities, with oil an
outlier at 3% (of global daily demand). This gives it not only a
multitude of arbitrage opportunities (product, geography, time)
but unparalleled visibility on the dynamics of the market in
these commodities. In short, if a mispricing occurs (or an
event that could lead to a mispricing opportunity for that matter) Glencore is more likely to spot it and exploit it than any
other player in these markets.
12/11e
0.89
0.86
8.6
2.0
£
%
5.3
102
5.2
100
5.1
5
98
4.9
96
4.8
94
4.7
4.6
16-May-11
23-May-11
30-May-11
06-Jun-11
13-Jun-11
20-Jun-11
92
27-Jun-11
Source: FactSet Research Systems Inc
Company Description
Glencore is one of the world’s leading integrated producers and marketers
of commodities (metals and minerals, energy products and agricultural
products). The company’s marketing operations employ over 2,700
people worldwide while the industrial operations include mines and oil
fields in Kazakhstan, DRC, Zambia, Colombia and Australia. Glencore
holds stakes in Xstrata, Rusal, Century Aluminium and Nyrstar.
Metals & Mining/United Kingdom
Industry View: In-Line
GICS Sector: Materials
Strategists' Recommended Weight: 10.6%
MSCI Europe Weight: 10.6%
Nor does Glencore’s share price reflect the superior organic
growth in its Industrial businesses with a 5-year volume
CAGR of c.17% versus 6-9% for other diversified miners. We
believe that the company’s ability to execute opportunistic
deals is underappreciated by the market.
Highly correlated with Xstrata: Around a third of Glencore’s
value today is represented by its stake in Xstrata, another
third by its Industrial business (which from a commodity exposure perspective looks similar to Xstrata – with copper and
thermal coal dominating the business mix, with little/no iron
37
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
ore exposure) – and we expect it to trade in line with the mining stock until the market gets comfortable with the stability of
profits in the Marketing business across the cycle to warrant a
re-rating.
Exhibit 1
Glencore has leading shares in the addressable
traded markets for both major metals & minerals…
Glencore
Others
100%
Company-specific issues: In our conversations with investors,
many bottom-up issues have been raised to explain Glencore’s
share price performance: a) Project ramp-up risks; b) Growing
risks of resource nationalism and taxation (mainly in Zambia
and Peru); c) Xstrata’s quarterly earnings expectation risk. While
we acknowledge these risks exist, we argue that some are industry-wide issues and do not affect Glencore disproportionately.
80%
60%
40%
20%
C
ob
al
t
ch
ro
m
e
rro
Fe
Growth in industrial assets: We estimate 17% volume
CAGR over the next 5 years: While physical assets have
been part of Glencore’s strategy for well over a decade, it is
reaching an inflection point in growth over the next 3 years.
Volume growth of 17% p.a. here will outpace peers (at c.6%).
N
ic
ke
l
C
op
pe
rm
C
et
op
al
pe
rc
on
c.
Zi
nc
m
et
al
Zi
nc
co
nc
Le
.
ad
m
et
al
Le
ad
co
nc
.
Al
um
in
a
Al
um
in
iu
m
0%
Source: Company data (2010), Morgan Stanley Research
Exhibit 2
The Marketing business provides a more stable source of
earnings: The Marketing business will continue to grow with
new fast growing business areas in iron ore and agricultural
commodities in particular. While we are not forecasting any
margin expansion from the historical average, volume growth
at 4.8% CAGR should outpace IP growth rates 2010-14e.
45,000
(kt)
We expect Glencore to grow its marketed and produced volumes by a 2010-14 CAGR of 5.5%
Marketing
Cu Equivalent Volumes
Industrials
40,000
2010-2014 CAGR @ 5.5%
35,000
30,000
25,000
20,000
15,000
Associate companies represent significant value:
The value of the listed stakes in Xstrata, Rusal and other associate and investment accounted companies is worth $28
billion. Glencore does not hold stakes in these companies for
the value implied alone, but the marketing agreements with
these companies are a significant component of its strategy.
10,000
5,000
2010
2011e
2012e
2013e
2014e
Based on Morgan Stanley commodity price estimates
Source: Select company data, Morgan Stanley Research (estimates for 2010 and beyond).
Exhibit 3
Glencore (GLEN.L): The marketing business, along with superior growth in the Industrial business, remains
unrewarded, skewing the risk-reward to the upside
p1,200
1,000
987.00p (+107%)
800
604p (+27%)
600
476p
400
338.00p (-29%)
200
0
Jun-09
Dec-09
Price Target (Jun-12)
Jun-10
Dec-10
Jun-11
Historical Stock Performance
BASE CASE 604p: Our base case valuation is based on our
house forecast for LT commodity price at $2.38/lb for Copper,
$0.99/lb for Zinc, $8.62/lb for Nickel, $82/t for Thermal Coal, 13x
P/E for Marketing division earnings and mtm for stakes in listed
companies.
BEAR CASE 338p: We factor in zero recoveries for various
advances and an mtm discount for stakes in listed subsidiaries
along with our global team’s bear case commodity price forecasts.
PRICE TARGET METHODOLOGY: We set our price target at
our base case valuation using a WACC of 10% and LT growth
rate of 2%.
Dec-11
Current Stock Price
BULL CASE 987p: Oil optionalities in West Africa and we assume that listed subsidiaries trade at the price targets set by MS
Research. We also incorporate our global commodity team’s
higher commodity prices in our numbers.
WARNINGDONOTEDIT_RRS4RL~GLEN.L~
Source: FactSet (historical share price data), Morgan Stanley Research estimates
38
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
June 23, 2011
Li & Fung Ltd
Synergies Between Platforms to
Be Unlocked
Morgan Stanley Asia
Limited+
Angela Moh
Stock Rating: Overweight
Price target
Up/downside to price target(%)
Shr price, close (Jun 22, 2011)
52-Week Range
Sh out, dil, curr(mn)
Mkt cap, curr(mn)
EV, curr(mn)
Avg daily trading value(mn)
Reuters: 0494.HK Bloomberg: 0494 HK
HK$21.80
40
HK$15.52
HK$19.20-14.14
7,731
HK$119,984
HK$132,310
HK$300
Angela.Moh@morganstanley.com
Robby Gu
Robby.Gu@morganstanley.com
Dustin Wei
Dustin.Wei@morganstanley.com
What's Changed
Price Target
Net Profit 2011/12
HK$25.50 to HK$21.80
Down 12% / 7%
We reiterate our Overweight rating on Li & Fung. We continue to believe the company remains in a solid position to
gain further share in the sourcing world and in providing customers with the best low-cost solution. Our revised price target of HK$21.80 implies 2012e P/E of 25x. We look for an
earnings CAGR of ~25% between 2010 and 2013.
Key Takeaways from Analyst Day
Li & Fung held an analyst day on June 22, with a presentation
by senior management followed by tours to its showrooms
and warehouse. We identify the key messages from the
company as follows:
More color on cross-selling opportunities: L&F’s business
encompasses three divisions now, namely trading, logistics,
and distribution. Management from each division has helped
investors identify a number of initiatives of the cross-selling
effort, to name a few examples here:
1. LF Logistics has 200 customers vs. 2,000 customers for
the whole group. 80% of its business is still from thirdparty customers. Selling to customers in the LF trading
network is a focus going forward.
2. The three sub-divisions of LF Distribution, namely USA,
Europe and Asia, are also collaborating. According to L&F,
it is the only company that can take a brand and license it
all over the world at the same time.
3. Sharing of customers between LF Beauty from the trading
network and LF Asia – Food, Health, Beauty & Cosmetics
from the distribution network.
Fiscal Year ending
ModelWare EPS(HK$)
Prior ModelWare EPS(HK$)
Revenue, net(HK$mn)
EBITDA(HK$mn)
ModelWare net inc(HK$mn)
P/E*
P/BV*
12/10
0.55
0.55
124,115
6,695
4,278
34.6
5.2
12/11e
0.67
0.76
162,243
8,305
5,390
23.2
4.1
12/12e
0.86
0.92
181,694
10,080
6,884
18.1
3.9
12/13e
1.05
1.15
203,083
11,782
8,450
14.8
3.6
* = GAAP or approximated based on GAAP
e = Morgan Stanley Research estimates
Company Description
Li & Fung Ltd is an export trading company that sources high-volume,
time-sensitive consumer goods from over 40 countries around the
world. The company's products include soft goods (69% of 2010 sales)
and hard goods (30%). In 2010, about 65% of sales went to US clients
and 27% to Europe. The company provides value-added services from
the initial design stage to final logistics arrangements.
Hong Kong Consumer
Industry View: Attractive
4. LF USA started in 2005 with almost all sales from apparel.
By leveraging the trading network, it has diversified into
fashion accessories, footwear, home products. Apparel is
60% of sales now.
Cost saving is a major focus in 2011:
1. The 2010 operating cost was US$1,513 mn. According to
L&F, the pro forma 2010 operating cost (assume full year
for acquisitions) would be US$2,036 mn. L&F believes
that it can rationalize part of the additional of about half a
bn dollar cost in the next few years.
2. LF USA aims to reduce SG&A/sales by 500bps by 2013
by offshoring costs. This could result in some extra expenses initially in 1H11 as some duplication of costs takes
place during the training up of personnel in Asia.
3. LF Europe aims to reduce opex/sales by 300bps by 2013
through scale effects and integration of facilities from acquisitions.
39
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
4. Taking points 2 and 3 into consideration, the cost saving
could translate into an 85bps reduction in blended
opex/sales on the group level. Currently we assume
opex/sales to drop by only 15bps from Pro Forma 2010 to
2013. If L&F can deliver on the cost saving mentioned
above, there could be upside to our operating profit estimates for 2013.
L&F also announced it completed five acquisitions in May
and June at 6.5x P/E.
A more lopsided 1H:2H year in 2011. We expect the earnings split for 2011 to be a bit more lopsided compared to the
past few years. L&F’s 1H has historically been lighter due to
seasonality of sales, while costs are less seasonal. In 19992010, 1H sales on average accounted for 42% of full year
sales, while 1H profit was around 38% of FY net profit. Excluding the more exceptional years of 2001, 2008 and 2010,
1H only accounted for 35% of FY net earnings.
For 2011, we forecast 41% of sales and 30% of net profit in
1H11. This means for 2011 interim results, we may see 29%
growth in sales and a 26% decline in net profit. In 2H11, we
think the trend reversing into a 32% YoY sales growth and
79% YoY net profit growth. The comparison for 1H11 is fairly
difficult on the expense front and we expect a big jump YoY.
We have reduced our earnings forecasts for 2011-12 by
7% and 12% to reflect: 1) slight net increase in sales as recent acquisitions offset slightly lower sales growth given some
slowdown in US recovery; 2) initially higher costs related to
integration and offshoring of some of the overhead costs in
places like the US; 3) higher non-core operating expenses
related to acquisition amortization costs; 4) higher interest
expenses and 5) higher effective tax rate.
Our price target of HK$21.80 is derived from our DCF
valuation model, which continues to assume a 10% WACC
and 3% terminal growth rate. The stock trades at 18x 2012e
P/E. Valuation had dipped to the lower end of its historical
trading range on most metrics on concerns over the viability of
its business model and concerns over the transparency of its
earnings given new accounting rules. We feel the model remains intact and there are still sizable opportunities as L&F
leverages off the three platforms. While the new accounting
rules may distort earnings, investors should be able to see
through any exceptional gains/losses below the core operating profit line.
Downside risks to our price target include: 1) weaker order flow
from delayed demand recovery; 2) sluggish performance in its
US/EU onshore business; 3) more-than-expected uncollectible
commissions due to customer bankruptcies; and 4) greaterthan-expected increases in SG&A resulting from new deals.
Li & Fung (0494.HK) Bull Case: Stronger Demand Recovered and Faster Synergy Unlocked
HK$35
30
Bull
Case
HK$28.6
Stronger top-line growth; sustainable gross
margin: 1) Stronger growth in trading business
on better consumer sentiment in US and
Europe. Distribution business in US/EU ramps
up much faster. 2) Gross margin further improves given strong growth in higher-margin
distribution business and service income.
Base
Case
HK$21.8
Improving fundamentals on stronger topline and continued margin expansion: 1)
Organic growth in trading resumes more
meaningfully to 8-9% in 2011 and contribution
from new deals/acquisitions leads to stronger
top-line. 2) Sales growth is strong at 31% and
go down to low-teens in later years.
Bear
Case
HK$13.3
Growth hampered by delayed economic
recovery: 1) Organic sales growth decrease
on worse-than-expected integration of new
acquisitions/deals made in prior years and
remain at mid-low single digits afterwards. 2)
Bigger gross margin dip due to slow growth in
onshore business and greater pressure from
customer to cut commissions.
HK$28.6 (+84%)
25
HK$21.8 (+40%)
20
15
HK$13.3 (-14%)
HK$ 15.52
10
5
0
Jun-09
Dec-09
Jun-10
Base Case (Dec-12)
Dec-10
Jun-11
Dec-11
Historical Stock Performance
WARNINGDONOTEDIT_RRS4RL~2909.HK~
Jun-12
Dec-12
Current Stock Price
Source: FactSet, Morgan Stanley Research
40
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
June 28, 2011
LinkedIn
Empowering Professionals
in a Connected World;
Initiating at Overweight
Morgan Stanley & Co. LLC
Scott Devitt
Scott.Devitt@morganstanley.com
Joseph Okleberry
Joseph.Okleberry@morganstanley.com
Andrew Ruud
Andrew.Ruud@morganstanley.com
Zachary Arrick
Zachary.Arrick@morganstanley.com
LinkedIn is becoming the transformative standard for online
recruiting of professionals. Its disruptive business model
should drive meaningful penetration of a $52B addressable
market in talent recruiting and online advertising. Our $88 PT
represents 15% upside.
Five Drivers of Dominance: 1) professional focus, 2) global
reach, 3) strong technology, 4) seasoned management, and
5) social-driven network effects.
Disruptive Business: LinkedIn is fundamentally changing
the talent recruiting process by adding social relevancy, and
we believe it could soon become a standard utility for HR recruiters.
Strong Growth plus Upside from Engagement: LinkedIn
revenue grew a robust +110% in CQ1:11, marking its 7th
straight quarter of accelerating Y/Y growth. LinkedIn is rapidly
becoming a comprehensive resource for all things professional, which could provide revenue upside from increased
engagement.
We are positive on all four key debates: 1) Will LinkedIn
drive user engagement? 2) How high can LinkedIn’s margin
rise over the long term? 3) Will substantial C2011-C2012 investments pay off? 4) How sustainable is LinkedIn’s competitive position?
Stock Rating: Overweight
Price target
Shr price, close (Jun 27, 2011)
Mkt cap, curr(mm)
52-Week Range
Reuters: LNKD.N Bloomberg: LNKD US
$88.00
$76.38
$7,833
$121.97-60.22
Fiscal Year ending
Revenue, net($mm)
EBITDA($mm)**
Consensus EPS($)§
ModelWare EPS($)
12/10
243
48
0.26
0.33
12/11e
419
25
0.18
(0.23)
12/12e
634
84
0.65
0.05
12/13e
914
180
1.12
0.60
§ = Consensus data is provided by FactSet Estimates.
** = Based on consensus methodology
e = Morgan Stanley Research estimates
Company Description
LinkedIn aims to "connect the world's professionals to make them more
productive and successful", and to link talent with opportunity at massive scale across the globe. The company aspires to curate the professional identities of its members by helping them build a professional
network, engage with like-minded colleagues, access shared knowledge and insights, and discover new business opportunities.
Industry View: Attractive — Internet & Consumer Software
We maintain that investors still underestimate the impact the Internet
will have in changing business process and consumer behavior on a
global basis. We continue to believe that, at the margin, online is gaining share from offline, that this will occur for some time to come, and
that this should benefit the Internet leaders.
Key Risks: 1) Competing social networks could develop polished professional products. 2) Recruiters could fail to find
sustainable value in LinkedIn’s products. 3) LinkedIn’s members-first mantra might conflict with the short-term interests of
investors.
Valuation: Our base case DCF implies a 12-month price
target of $88 and assumes a 10-year revenue CAGR of 26% /
adjusted EBITDA margin expansion to 35%. At $9.6B,
LinkedIn would trade at 52x C2013e EV / EBITDA, but given
LinkedIn’s large TAM, significant competitive advantages, and
disruptive business model, we believe a premium valuation is
justified.
41
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
Risk-Reward Snapshot: LinkedIn Corp (LNKD, $76.38, Overweight, PT $88)
Risk-Reward View: Risks associated with nascent business model and
large market opportunity drive wide bull/bear spread
$ 140
$130 (+70%)
120
100
$ 76.38
80
$88.00 (+15% )
60
$45 (-41%)
40
20
0
Jun-09
Dec-09
Jun-10
Price Target (Jun-12)
Dec-10
Historical Stock Performance
Jun-11
Dec-11
Jun-12
Current Stock Price
WARNINGDONOTEDIT_RRS4RL~LNKD.N~
Source: FactSet, Morgan Stanley Research
Price Target $88
Based on DCF, assuming WACC of 11.5% and terminal growth rate of 6%
Bull
Case
$130
56x Bull Case
C2013e
EV/EBITDA of
$247MM
Rapid adoption of recruiting tools/upside from engagement.
LinkedIn’s Hiring Solutions accounts grow to 26K in C2013 with 3.3 seats
sold per account, and increased website engagement drives upside in
Marketing Solutions revenue. Revenue CAGR of +29% from C2011C2020E, and EBITDA margins expand to 40% in C2020E.
Base
Case
$88
52x Base Case
C2013e
EV/EBITDA of
$180MM
Continued execution in enterprise market. LinkedIn continues to add
corporate accounts, reaching 25K total, with 3.18 seats sold per account.
LinkedIn’s adjusted EBITDA margin climbs back up to 20% after completing its investment phase. Revenue CAGR of +26% from C2011-C2020E
and EBITDA margins to 35% in C2020E.
46x Bear Case
C2013e
EV/EBITDA of
$100MM
Slowdown of corporate signups/return to profitability. Slow adoption
of recruiting tools and/or macroeconomic slowdown leads to fewer corporate accounts signed up (21K) and fewer seats per account (3.07).
LinkedIn’s adjusted EBITDA margin stalls at 13% following the investment
period. Revenue CAGR of +20% from C2011-C2020E.
Bear
Case
$45
SWOT Analysis – LinkedIn Corp
Strengths
1. Leading professional social network
with over 100MM registered users
2. Hiring Solutions products are disruptive to online jobs market
3. Barriers to entry due to professional
focus (rival social networks) and
network effect (online job boards)
Opportunities
1. $50B opportunity due to disconnect
in online advertising spend
2. Branching out into B2C online advertising category
3. Under-monetized internationally
Weaknesses
1. LinkedIn members currently 21-24x
less engaged than Facebook users
2. Hiring Solutions business may be
sensitive to macroeconomic
changes
3. Concentrated usage by a minority
of users
Threats
1. Competing professional products
from rival social networks
2. Heavy investments in technology
may not pay off
3. Heavy inside ownership
Why Overweight?
 Leading professional social network
with 100MM+ members globally
 Disruptive business model addressing large market opportunities in
worldwide talent acquisition ($27B)
and online advertising ($25B)
 Strong barriers to entry due to professional focus/network effects
 Upside to Marketing Solutions from
increased user engagement if
LinkedIn executes on new products
 Strong revenue growth will mitigate
the effects of EBITDA margin contraction during investment phase
Key Value Drivers
 Penetration of 200K addressable
enterprise accounts
 Growth in seat licenses per account
 Page view growth driven by increased user engagement
 Revenue per page view (RPM)
 Increased premium subscriptions
 Product development/sales and marketing cost ramps
Potential Catalysts
 New Hiring Solutions products accelerate corporate adoption
 LinkedIn Today drives increased
page views and user engagement
 Financial outperformance could lead
to “beat & raise” quarters
 Improved international monetization
could close the gap with domestic
Potential Risks
 Social networks that may choose to
develop a competing product
 User engagement may not increase
if product rollouts are not compelling
 Low float IPO & 10x Class B Shares
result in high PCT of inside voting
power
 Members-first mantra could conflict
with short-term interests of investors
Source: Morgan Stanley Research, Michael Porter’s Competitive Strategy
42
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
June 24, 2011
Phoenix New Media
A Leading Information Gateway for
China’s High-end Consumers: OW
Morgan Stanley Asia
Limited+
Richard W. Ji
Richard.Ji@morganstanley.com
Gillian Chung
Gillian.Chung@morganstanley.com
Philip Wan, CFA
Philip.Wan@morganstanley.com
Timothy Chan, CFA
Timothy.Yh.Chan@morganstanley.com
Stock Rating: Overweight
Shr price, close (Jun 22, 2011)
52-Week Range
Sh out, dil, curr(mn)
Mkt cap, curr(mn)
Avg daily trading value (mn)
Reuters: FENG.N Bloomberg: FENG US
US$9.11
US$15.09-8.67
81
US$742
US$2.3
Fiscal Year ending
ModelWare EPS(Rmb)
Revenue, net(Rmbmn)
EBITDA(Rmbmn)
ModelWare net inc(Rmbmn)
P/E
P/BV
ROE(%)
12/10
(4.05)
529
90
(165)
NM
NM
-
12/11e
(7.24)
915
65
(508)
NM
51.4
NM
12/12e
2.81
1,351
265
237
21.0
39.1
30.8
12/13e
5.28
1,958
509
451
11.1
27.1
44.1
e = Morgan Stanley Research estimates
We have initiated coverage of Phoenix New Media (PNM)
with an Overweight rating. In our view, a premium user
base and differentiated content give PNM a competitive edge
over peers, facilitating its emergence as one of the fastestgrowing new media leaders in China. Although wireless exposure and competition could prove challenging, PNM’s operating profit should surge ~80% per year, 2011-13, according
to our forecasts. Our DCF-based fair value of US$13.0 per
ADS implies 40-45% upside for the stock.
Owning a leading multimedia platform. PNM is one of the
fastest-growing new media leaders in China. As one of the
top five most popular Chinese online portals, ifeng.com is a
traffic leader among online news channels. It enjoys the
highest number of page views per visitor among online portals, implying high user stickiness. Revenues doubled in
2010, with advertising sales up 1.5 times 2009’s level.
Thanks to its operating leverage, the company’s adjusted
earnings (ex-share-based compensation expenses) jumped 8
times in 2010. We expect adjusted earnings to expand 7075% a year, 2011-13.
Creating differentiated content. Content from Phoenix TV
attracts ~5% of total page views, 50% of total video page
views, and almost 100% of the pay-per-view video page
views. The company owns an impressive editorial team, as it
produces content in-house that accounts for half of its total
page views, and it optimizes third-party content from 500+
content partners.
Boasting a highly educated and affluent user base.
Around 63% of ifeng.com’s users have college degrees, four
times the level for general Internet users in China, while the
average monthly income for ifeng.com’s users is four times
the average for overall Chinese Internet users.
Company Description
Incorporated in November 2007, Phoenix New Media (FENG.N) is
emerging as one of the fastest-growing new media companies in China.
It stands out among peers with its multimedia platform, exclusive content from its parent company, Phoenix TV, and its highly educated and
affluent user base. The company was listed on the New York Stock Exchange in May 2011.
China Media
Industry View: Attractive
PNM: Demonstrating Content Strengths
Phoenix TV's
Third-party
exclusive
professional
content Same world, content
different topics
Same event,
different angles
Same coverage,
User- different experience
generated
Self-made
content
content
Note: The phrases in the circle form the company’s content production motto.
Source: Company data, Morgan Stanley Research
Premium brand attracts high-end advertising clients.
Thanks to its premium user demographics, ifeng.com increased its advertising customer volume at a 60% CAGR in
2009-10, with a 41% annual increase in their spending and
less than 5% customer churn. The company enjoys pricing
power, which allowed it to raise advertising rates 70% in 2010
and 20% in early 2011, with a further hike likely in 2H11.
43
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
Backed by prominent shareholders. PNM benefits from
strong synergies with Phoenix TV and China Mobile, the
dominant mobile carrier in China and a major shareholder in
Phoenix TV. PNM sources exclusive content from Phoenix
TV, which cross-promotes PNM via its TV programs. In addition, PNM produces nearly half of its revenues via China Mobile.
Mobile carrier risks. PNM’s high revenue concentration, with
~50% of the 2010 total generated through China Mobile, increases its vulnerability to austerity measures implemented by
mobile carriers. Since 2005, Chinese mobile carriers have
made several changes in their policies (e.g., tightened regulations over direct advertising and required additional notices
and customer confirmation during the purchasing process of
mobile VAS products), impairing the business of mobile VAS
providers. Notably, PNM’s wireless VAS sales fell 20% in
2009 while Sina’s mobile VAS revenue contribution contracted from ~50% of total sales in 2005 to ~20% in 2010.
Qiyi, Ku6), and mobile services companies (e.g., A8, KongZhong). The competitors generally have longer operating histories and larger scale. However, PMN sets itself apart via its
differentiated content, premium customer base, and strong
synergies with Phoenix TV and China Mobile.
Our preferred methodology for valuing PNM is discounted cash flow (DCF), as it incorporates our long-term
view about the company. We apply a discount rate of 14%
and a free cash flow exit multiple of 10x (or a terminal growth
rate of 4%) based on the following assumptions: beta of 1.5,
equity-risk premium of 3.5%, a China risk premium of 2%, and
a risk-free rate of 3.3%; an additional 3ppts in risk premium
given PNM’s short history, and a long-term debt-to-equity ratio
of zero, as PNM is debt free.
Key risks include: 1) high sales concentration in wireless
VAS exposes the company to mobile carrier risk;
2) competition intensifies in China’s Internet and mobile industry; and 3) rising content and bandwidth costs erode margins.
Intensifying competition. PNM faces competition on multiple
fronts, including from online portals (e.g., Sina, Sohu,
Tencent, NetEase), online video rivals (e.g., Youku, Tudou,
Phoenix New Media (FENG.N) Risk-Reward View: Solid Upside Potential on Strong Market Position
US$TRUE
6/10/2011
$16.84 (+85%)
16
14
$13.02 (+43% )
12
Solid user volume and ARPU growth: Advertiser volume expands at about 10% a year,
as average spending per advertiser rises at a
rate of 15-20% for 2011-21. Mobile VAS subUS$13.02
scribers increase at about 10% a year, and
average spending per subscriber rises at less
than 5% a year.
Base
10
ase
Strong execution: Advertiser volume expands
at around 15% a year, as average spending
Case
per advertiser rises at an annual rate of close
to 20% over 2011-21. Mobile VAS subscribers
US$16.84
increase at about 15% a year, and average
spending per subscriber rises around 5% a
year.
Bull
2011-FY
18
Case
$ 9.11
8
6
$5.13 (-44%)
4
Bear
Case
2
US$5.13
0
Jun-09
Dec-09
Jun-10
Base Case (Jun-12)
Dec-10
Historical Stock Performance
Jun-11
Dec-11
Slowdown in market share gains: Advertiser
volume expands at 5-10% a year, as average
spending per advertiser increases at an annual
rate of 10-15% for 2011-21. Mobile VAS subscribers increase at about 5% annual rate, and
average spending per subscriber remains
flattish.
Current Stock Price
WARNINGDONOTEDIT_RRS4RL~F
Source: FactSet, Morgan Stanley Research
44
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
June 23, 2011
Telstra Corporation
NBN Deal Done, Our View =
Market View = Equal-weight
Morgan Stanley Australia
Limited+
Mark Blackwell
Stock Rating: Equal-weight
Price target
Up/downside to price target(%)
Shr price, close (Jun 23, 2011)
52-Week Range
Sh out, dil, curr(mn)
Mkt cap, curr(mn)
EV, curr(mn)
Avg daily trading value(mn)
Reuters: TLS.AX Bloomberg: TLS AU
A$3.20
8
A$2.96
A$3.36-2.55
12,443
A$36,832
A$51,255
A$162
Mark.Blackwell@morganstanley.com
John A. Burns
John.A.Burns@morganstanley.com
Morgan Stanley Asia
Limited+
Navin Killa
Navin.Killa@morganstanley.com
What's Changed
Rating
Overweight to Equal-weight
We have move to Equal-weight on TLS, which now trades
close to our A$3.20 fundamental valuation. We NO longer
see any tangible distinction between our/market view. We
prefer Telecom NZ (TEL.NZ, NZ$3.00, OW), which is embarking upon a demerger of its network business.
Core NBN deal consistent with prior guidance. One year
ago Telstra announced an A$11 bn deal, and that is precisely
what has been finalized today. The balance of payments between disconnection and infrastructure has altered slightly,
and there is far more detail today on the components of the
deal, but nothing meaningfully positive or negative. The best
news is that Telstra can now move on with less management
and board distraction.
Fiscal Year ending
ModelWare EPS(A$)
Prior ModelWare EPS(A$)
Consensus EPS(A$)§
Revenue, net(A$mn)
EBITDA(A$mn)
ModelWare net inc(A$mn)
P/E
06/11e
0.25
0.25
0.25
24,896
9,861
3,122
11.8
06/12e
0.27
0.27
0.28
24,861
10,102
3,380
10.9
06/13e
0.28
0.28
0.28
24,708
9,946
3,295
10.7
§ = Consensus data is provided by FactSet Estimates.
e = Morgan Stanley Research estimates
Company Description
Telstra Corporation Ltd is the full-service incumbent telecommunications provider in Australia. The company offers a full range of local, domestic and international voice, video (including pay-TV through Foxtel)
and data services. Telstra operates national GSM and CDMA mobile
networks.
Australia/NZ Telecommunications
Industry View: In-Line
Declining Fixed Line EBITDA Balanced by Estimated NBN Payments of ~A$2b pa
New costs disclosed: in-line with our existing forecasts.
The only new information, which may have been interpreted
negatively, was the three categories of costs announced, totaling A$2 bn in NPV. We have long included very rough estimates of A$1 bn of capex and A$100 mn of ongoing opex in
our valuation, associated with transferring customers to NBN.
Telstra has provided better detail on these costs today, but
they are quite close to our existing cost allowance. Telstra
also explained that A$1.5 bn of the new costs are not truly
incremental, but the recent share price fall suggests the market is taking a more sanguine view of this new disclosure.
Small details probably play to Telstra’s strengths. It has
been a full year since the Heads of Agreement was signed,
during which it seems clear that Telstra’s appetite and skill for
contractual detail has been fully exercised. Of the three parties to the negotiation, Telstra, NBN Co and the government,
we are confident that Telstra has the best experience and
information on the possible outcomes and drivers of value.
06/10
0.31
0.31
24,813
10,847
3,883
10.4
Compensation (pre tax)
Fixed line
DCF for Fixed Line Business
NBN Compensation
A$11bn
A$11bn
A$22bn
(or 5x FY12 EBITDA)
6
5
0.1
1.1
1.6
1.9
4
1.9
3
2.0
5.6
2.1
4.7
4.6
4.1
2
1.9
3.7
2.0
3.4
2.7
2.2
1
1.7
1.3
0.9
FY10
FY11e
FY12e
FY13e
FY14e
FY15e
FY16e
FY17e
FY18e
FY19e
FY20e
e = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research
45
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
Optus deal looks richer, at first glance. Separately, Optus
announced an A$800 mn deal for the transfer of customers
from its HFC (cable) network. At first glance, this deal looks
richer. Optus has 504k telephony customers on this network
so Optus is effectively receiving A$1,600 per customer. Telstra, by contrast, is being paid A$4 bn for transferring 7.3 mn
retail voice customers, or A$550 per customer. This comparison is not entirely fair however, because 86% of Optus HFC
telephony customers bundle another product, mostly broadband. Telstra has 7.3 mn retail voice customers, but only 2.4
mn broadband customers.
In our view, a better comparison perhaps, is to compare the
value of the respective NBN deals to the revenue each company earns from fixed line services. The deals are closer on
this metric: Telstra is being paid 60c per $1 of current revenue, and Optus 67c. Once Telstra’s much higher fixed line
margins are taken into account however, the payment to Optus looks richer than that to Optus on an earnings basis.
Our primary valuation tool is a sum-of-the-parts DCF. We
think this approach best reflects the longer-term declines in
Telstra’s fixed line business, both as a result of the NBN and
the broader industry trend from fixed to mobile communications. The key drivers of our WACC calculation are long term
40% debt to EV, cost of debt at 7.5%, equity beta at 1.0, risk
free rate of 6% and market risk premium at 6%. Upside risks
to our price target include better-than-expected recent operational performance. Downside risks include Future Fund selling and falling EPS if a buyback does not occur.
Sum-of-the-Parts Valuation
EVFY12e EBITDA
Fixed Line - Voice
Fixed Line - Internet
Compensation
Mobiles
IP & Data
Advertising & Directories
CSL New World
TelstraClear
Other
ENTERPRISE VALUE
Foxtel
SouFun
Net Debt
Minorities
EQUITY VALUE
9,401
1,902
11,000
16,105
4,815
4,466
1,040
550
2,947
52,227
1,518
481
(13,926)
(312)
39,988
Number of Shares
Value per Share
Current share price
Discount/(Premium)
EV / EBITDA
3,800
754
2.5
2.5
2,645
1,123
1,022
193
106
460
10,102
243
6.1
4.3
4.4
5.4
5.2
6.4
5.2
6.2
Per share
0.76
0.15
0.88
1.29
0.39
0.36
0.08
0.04
0.24
4.20
0.12
0.04
(1.12)
(0.03)
3.21
12,443
3.21
2.96
7.9%
18%
4%
21%
31%
9%
9%
2%
1%
6%
100%
Insulated value
Exposed value
Compensation
Bear
Base
Bull
0.71
0.11
0.88
0.81
0.39
0.36
0.08
0.04
0.24
3.63
0.12
0.04
(1.12)
(0.03)
2.65
0.76
0.15
0.88
1.29
0.39
0.36
0.08
0.04
0.24
4.19
0.12
0.04
(1.12)
(0.03)
3.21
0.94
0.25
0.88
1.39
0.39
0.60
0.08
0.04
0.24
4.82
0.12
0.04
(1.12)
(0.03)
3.83
0.94
0.82
0.88
1.42
0.91
0.88
1.76
1.19
0.88
Base-Bear
Bull-Base
Bull-Bear
0.05
0.04
0.48
0.56
-
0.18
0.10
0.10
0.24
0.62
-
0.23
0.13
0.58
0.24
1.18
-
0.56
0.62
1.18
Source: Morgan Stanley Research estimates
Telstra (TLS.AX) Risk-Reward View
A$4.50
4.00
Bull
Case
A$3.83
Better Fixed Line Margin Outcome: Assumes Telstra retains 50% of the fixed line
market at 40% EBITDA margins and wireless
broadband market grows to 75% penetration.
Base
Case
A$3.21
Move On, Compete: Telstra retains 50% of
fixed line market, but at 20% margins. Telstra
also maintains superior 34% mobile margins
and wireless broadband market grows to 50%
penetration. Sensis print directories in rapid
decline.
Bear
Case
A$2.65
Exit Fixed Line: Telstra gradually exits the
fixed line business as the NBN is built to FY18.
Mobile margins fall to current Optus level of
~27%.
A$3.83 (+29%)
3.50
A$ 2.96
A$3.20 (+8%)
3.00
A$2.65 (-10%)
2.50
2.00
1.50
1.00
0.50
0.00
Jun-09
Dec-09
Price Target (Jun-12)
Jun-10
Dec-10
Historical Stock Performance
Jun-11
Dec-11
Jun-12
Current Stock Price
WARNINGDONOTEDIT_RRS4RL~TLS.AX~
Source: FactSet, Morgan Stanley Research
46
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
June 22, 2011
VMware
Renewals and New Orders
Should Fuel ELA Upside
Morgan Stanley & Co. LLC
Adam Holt
Adam.Holt@morganstanley.com
Keith Weiss, CFA
Keith.Weiss@morganstanley.com
Stock Rating: Overweight
Price target
Shr price, close (Jun 21, 2011)
Mkt cap, curr(mm)
52-Week Range
Fiscal Year ending
ModelWare EPS($)
EPS($)**
P/E**
12/10
0.95
1.51
58.9
Kelvin Wu
** = Based on consensus methodology
e = Morgan Stanley Research estimates
Kelvin.K.Wu@morganstanley.com
Price Performance
Field work and analysis of VMW’s Enterprise License
Agreements (ELAs) increases our conviction that ELAs
should drive upside to fiscal 2011 billings. Renewals have
been a core driver of strong ELA billings (+118% in 1Q11),
which we estimate contributed ~$250M or ~1/3 of ELA billings
in FY10, and this could easily double to ~$450-500M in fiscal
2011 given a strong vintage of ELAs up for renewal. Further,
new billings have remained strong at 45–50% of ELA billings
in recent quarters, and our work suggests ELAs could drive
$100M-175M of upside to our total fiscal 2011 billings estimate of $4.2B or add 3-5 points to growth. Further, VMW has
acquired another 2 points of calendar 2011 billings growth
that is not in consensus and EMC has accelerated its buyback. Rapid growth, improving secular demand and positive
revisions should drive VMW toward our $114 price target.
ELA renewals and new orders should fuel upside VMW
has consistently renewed ELAs at 100%+ of original deal values and our checks suggest this should continue, driven by
strong maintenance renewals, new products, and footprint
expansions. Further, fiscal 2008 ELA billings grew ~92% YoY
providing an attractive fiscal 2011 renewal base for the next
three quarters. We think VMW will continue to renew at
100%+, and expect ELA renewal billings to almost double to
~$450-500M relatively easily. Given the strong renewals, our
ELA billings estimate. of $860M or +24% YoY (roughly in line
with consensus) implies an unlikely deceleration in net new
ELA activity from +5% YoY in FY10 to -17% YoY in FY11. If
new ELA billings grow +5% YoY in fiscal 2011 as our checks
suggest they should be able to (new ELA billings grew 27% in
Q1), ELAs alone would drive ~$100M of upside to our billings
estimates for 2Q–4Q. Even if new ELAs slow sharply to -5%
YoY in fiscal 2011, we would see ~$50M of upside.
Acquisitions Provide Cushion. VMW has acquired seven
companies over the last 12 months, representing roughly
$120–160M in annual revenue. VMW has closed three deals
this quarter with roughly $65-90m in annual revenue (Shavlik,
Reuters: VMW.N Bloomberg: VMW US
$114.00
$94.52
$40,500
$102.73-61.17
12/11e
1.43
1.98
47.7
12/12e
1.90
2.43
38.8
12/13e
2.38
2.90
32.6
VMware Inc. (Left, U.S. Dollar)
Relativ e to S &P 500 (Right)
Relativ e to MSCI W orld Index /Software & Serv ices (Right)
$
%
200
120
180
100
160
140
80
120
60
100
40
80
60
20
07
08
09
10
40
Source: FactSet Research Systems Inc
Company Description
VMware provides virtualization and cloud infrastructure solutions.
Industry View: In-Line — Software
As we move beyond the early cycle phase of the economic recovery
into the growth phase, there may be more relative upside from here in
mid-cycle technology groups. We still believe our group holds some
absolute upside, but stock picking will become more important.
Socialcast and SlideRocket), which add about another 2
points to billings growth in calendar 2011 that is not yet reflected in consensus numbers.
ELAs underappreciated in forecasts
ELAs and ELA renewals continue to be an important driver of
billings growth for VMW and account for ~22% of total billings
in 1Q and 26% in 4Q. ELA billings grew over 100% YoY in 1Q
and included five 8 figure deals, while in fiscal 2010, we estimate ELA billings grew ~60% YoY vs. total billings growth of
37% YoY. Underlying the recent acceleration in ELA billings
has been a surge in ELA renewals, which reflected the strong
growth in ELA activity in 2008 — since the ELAs typically expire in three years. We estimate ELA renewals contributed
~$250M or ~1/3 of ELA billings in F2010, and could easily
double to ~$450-500M in F2011 if renewal rates just hold at
roughly 105%. Our conversations suggest that ELAs are renewing in the 100-120% range on the back of strong maintenance renewals, adoption of new products like Operations
Manager and View and footprint expansions.
47
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Company Analysis
Enterprise License Agreement (ELA)
An ELA can come in several forms, but is most commonly an
“all you can eat” deal that permits a VMware customer to deploy unlimited quantities of a product or group of products at
specified locations for a typical duration of 3 years. While licenses deployed under an ELA are perpetual licenses, support and subscription end when the ELA expires. At expiration, customers typically negotiate a new ELA that renews
support and potentially expands on the number of products
and/or locations covered by the ELA.
Beyond renewal billings, we also sense that new ELA billings
are remaining strong—and have actually increased as a percentage of billing even as renewals have accelerated. Given
how robust the renewal cycle is, however, our CY11 billings
target of 24% growth, which is roughly in line with consensus
and based on the revenue guidance, implies (17%) new billings growth this year, a material deceleration from +5%
growth last year. Our sense is new ELA billings should grow
at least 5-10% this year after growing 27% YoY in Q1.
Renewal Economics Should Put Upward Pressure on
Billings. Over the past few quarters, VMW has consistently
renewed ELAs at slightly over 100% of original deal value on
average. This metric enables us to estimate renewal billings
based on ELA billings in the 3-year ago period. That said,
renewal billings actually consist of two components: a recurring component from the renewal of maintenance, and a second component due to new purchases, which in effect expand
the original ELA. New purchases are driven by additional licenses for existing products, vSphere upgrades, and the addition of newer products like View and Site Recovery Manager.
A key assumption in our base case analysis is that renewal
billings continue to represent ~105% or more of original deal
value. Our checks indicate that ELA renewals are likely to
continue at these levels or better given VMW’s broader product offerings, traction with View, and VMW becoming more
strategic in the enterprise. Since ELAs renewed this year are
of FY08 vintage, and ELA billings grew ~92% YoY in FY08,
our base case assumption implies renewal billings should
nearly double in FY11 vs. FY10, and comprise an even larger
proportion of ELA billings. Indeed, we estimate renewal billings should increase from ~1/3 of ELA billings in FY10 to ~1/2
in FY11.
VMW: Growth in vSphere and Desktop Drive Upside
$140
$129 (+36%)
120
$114.00 (+21%)
$ 94.52
100
80
$64 (-32%)
60
40
20
0
Jun-09
Dec-09
Price Target (Jun-12)
Jun-10
Dec-10
Historical Stock Performance
Jun-11
Dec-11
Jun-12
Current Stock Price
W ARNINGDONOTEDIT_RRS4RL~VMW .N
Price Target
$114
Our price target calculations are based on
unlevered FCF and $7.48 net cash per share at the
end of 1Q11, and a premium multiple vs. peers that
we think Is warranted given the company’s leadership in key secular growth markets.
Bull: $129
EV/FCF=
27x
CY12 FCF/shr =
$4.51
vSphere and desktop virtualization see higher
adoption. VMware sees better than expected growth
driven by high x86 server growth, higher adoption of
vSphere, mgmt modules, and desktop virtualization.
Top line grows at 30% in CY11, 27% in CY12, and
margins expand to 31.5%, leading to EPS of $2.07 in
CY11, $2.70 in CY12. Stock trades at 27x our CY12
FCF.
Solid vSphere traction with stable ASPs Continued
traction of vSphere, ELA renewals, adoption of management modules, SMB penetration, and desktop virtualization gains momentum while x86 server shipments
grow 6% in CY11. VMware defends its ASP and market
share from increased competition. Top line grows at
26% in CY11, 21% in CY12, with margins expanding to
~30%, leading to EPS of $1.98 in CY11, $2.43 in CY12.
FCF reaches $3.38/shr in CY11, $4.25 in CY12, and
stock trades at 25x our CY12 FCF/share — a ~10%
discount to our 28% unlevered FCF growth rate in
CY12.
ASPs and market share decline faster than expected. vSphere loses traction, mgmt modules adoption is negligible, and increased pricing pressure leads
to a decline in ASPs and VMW’s market share declines
faster than expected. Desktop virtualization adoption is
also slower than expected. Top line grows at 18% in
CY11, 10% in CY12, with op margins contracting to
21.7% in CY12, driving EPS of $1.42 in CY11, $1.48 in
CY12. Stock trades at 17x our CY12 FCF/share.
Base: $114
EV/FCF=
25x
CY12 FCF/shr =
$4.25
Bear: $64
EV/FCF=
17x
CY12 FCF/shr =
$3.30
Source: FactSet (historical chart data), Morgan Stanley Research estimates
Key risks include pricing pressure from increased competition,
dilutive acquisitions, slower x86 server growth, and slow desktop virtualization.
48
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
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49
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
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50
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
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Global Stock Ratings Distribution
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Stock Rating Category
Overweight/Buy
Equal-weight/Hold
Not-Rated/Hold
Underweight/Sell
Total
Coverage Universe
Investment Banking Clients (IBC)
% of
% of % of Rating
Total
Count
Count Total IBC Category
1153
1140
108
390
2,791
41%
41%
4%
14%
464
365
20
108
957
48%
38%
2%
11%
40%
32%
19%
28%
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Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index; Europe - MSCI Europe; Japan TOPIX; Asia - relevant MSCI country index.
51
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
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MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
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53
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
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54
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
North America
Director of Research
CONSUMER STAPLES
HEALTHCARE
Associate Director of Research
Food & Food Service
Sharon Pearson
Michael Eastwood
Biotechnology
Vincent Andrews
Jaclyn Inglesby
Greg Van Winkle
Ian Bennett
Ted Drangula
Stephen Penwell
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1+212-761-3159
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Gail Alvarez
Aaron Finnerty
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MACRO
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Economics
David Greenlaw
Ted Wieseman
David Cho
Dane Vrabac
1+212-761-7157
1+212-761-3407
1+212-761-0908
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U.S. Strategy
Adam Parker
Brian Hayes
Antonio Ortega
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Phillip Neuhart
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1+212-761-7991
1+212-761-4783
1+212-761-1821
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Derivatives
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Christopher Metli
Jay Sole
Peter Mallik
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1+212-761-7550
1+212-761-5866
1+212-761-0896
Commodities
Hussein Allidina
Chris Corda
Tai Liu
Bennett Meier
Tian Yu
1+212-761-4150
1+212-761-6005
1+212-761-3585
1+212-761-4967
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Sectors
CONSUMER DISCRETIONARY/RETAIL
RETAIL
Autos & Auto-Related
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Ravi Shanker
Yejay Ying
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1+212-761-6350
1+212-761-7096
1+212-761-0766
1+212-761-8576
Department Stores
Michelle Clark
Christopher Cuomo
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1+212-761-3265
Food & Drug
Mark Wiltamuth
Justin Van Vleck
Stephen Shin
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1+212-761-0332
1+212-761-1863
Gaming & Lodging
Mark Strawn
Ryan Meliker
Amir Markowitz
Daniel Fuss
1+212-761-4990
1+212-761-7079
1+212-761-5949
1+212-761-4669
Hardlines
David Gober
Cynthia Rupeka
Shaun Kolnick
1+212-761-6616
1+212-761-7151
1+212-761-5921
Restaurants
John S. Glass
Jon M. Tower
David Dorfman
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Vincent Andrews
Beverages/HPC
Dara Mohsenian
Ruma Mukerji
Kevin Grundy
Alison Lin
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1+212-761-6575
1+212-761-6754
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Clean Tech
Joshua Paradise
Smittipon Srethapramote
Vidya Adala
Timothy Radcliff
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1+212-761-3914
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Integrated Oil
Evan Calio
Ben Hur
Marko Lazarevic
Todd Firestone
1+212-761-6472
1+212-761-7827
1+212-761-3692
1+212-761-7674
MLPs
Stephen J. Maresca
Dale Santiago
Robert Kad
Brian Lasky
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1+212-761-4896
1+212-761-6385
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Oil Services & Equipment
Ole Slorer
Paulo Loureiro
Fotis Giannakoulis
Igor Levi
Benjamin Swomley
Stuart Young
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1+212-761-6875
1+212-761-3026
1+212-761-3232
1+212-761-4248
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Banks/Large/Mid Cap Banks
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Peter Newman
Michael Cyprys
Ken Zerbe
Joshua Wheeler
Giselle Cheung
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1+212-761-6412
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Timothy Skiendzielewski
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Vincent Caintic
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Brokers & Exchanges
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Kevin Kaczmarek
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1+212-761-0531
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Insurance/Life & Annuity
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Hayley M. Locker
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1+212-761-6271
David Friedman
Sara Slifka
Communications Equipment
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Ricky Goldwasser
Donald Hooker
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Managed Care
Doug Simpson
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Colin Weiner
Aaron Gorin
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Pharmaceuticals
David Risinger
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Dana Yi
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Aerospace & Defense
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Wesley Brooks
Charles Dan
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1+212-761-8285
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Coal
Wes Sconce
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Cable & Satellite
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Ryan Fiftal
Hersh Khadilkar
Bernard McTernan
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1+212-761-3665
1+212-761-4149
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1+415 576-2321
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Scott Schmitz
Jerry Liu
1+212-761-6249
1+212-761-0227
1+212-761-3735
Internet & PC Application Software
Scott Devitt
Joseph Okleberry
Andrew Ruud
John Egbert
Nishant Verma
Zachary Arrick
1+212-761-3365
1+212-761-8094
1+212-761-5978
1+212-761-7678
1+212-761-6320
1+415 576-2614
Glenn Fodor
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Matthew Lipton
Hanish Rathod
1+212-761-0071
1+212-761-4682
1+212-761-6980
1+212-761-5852
Semiconductors/Capital Equipment
Sanjay Devgan
Sean Hazlett
Atif Malik
1+415-576-2382
1+415-576-2388
1+415-576-2607
Wireline & Wireless Telecom Services
Simon Flannery
Daniel Gaviria
Edward Katz
Daniel Rodriguez
1+212-761-6432
1+212-761-3312
1+212-761-3244
1+212-761-6648
TRANSPORTATION
Airlines & Freight Transportation
Steel
Evan Kurtz
Adam Holt
Jennifer A. Swanson
Keith Weiss
Kelvin Wu
Melissa Gorham
Jon Parker
Elena Ackley
TELECOM
Agricultural Chemicals
Vincent Andrews
Enterprise Software
Payment/Processing Technology
INDUSTRIALS
Heidi Wood
Michael Sang
1+212-761-8564
1+415-576-2060
1+212-761-3247
1+212-761-1738
Enterprise Systems & PC Hardware
Life Science Tools
Marshall Urist
Ehud Gelblum
Kimberly Watkins
Michael Kim
Jeremy David
1+212-761-7527
1+212-761-3005
1+212 761-5120
1+212-761-4786
Bill Greene
Adam Longson
John Godyn
Edward Gilliss
Elizabeth Thys
Alex ander Vecchio
1+212-761-8017
1+212-761-4061
1+212-761-6605
1+212-761-7748
1+212-761-8002
+1 212-761-6233
Entertainment & Broadcasting
Benjamin Swinburne
Micah Nance
1+212-761-7527
1+212-761-7688
Insurance/Property & Casualty
Gregory W. Locraft Jr.
Kai Pan
Scott Thomas
1+212-761-0040
1+212-761-8711
1+212-761-6586
REITs Strategy
1+617-856-8752
1+617-856-8750
1+617-856-8751
Softlines
Kimberly Greenberger
Laura Ross
Nicholas Smith
Sharyn Uy
David J. Adelman
Matthew Grainger
FINANCIALS
Branded Apparel
Joseph Parkhill
Jane Zhao
Tobacco
Agricultural Products
Accounting
Gregory Jonas
Megan Lynch
John Mark Warren
Todd Castagno
Snehaja Mogre
1+212-761-3293
1+212 761-3667
1+212 761-4968
1+212-761-0031
1+212-761-4958
TECHNOLOGY
1+212-761-6284
1+212-761-6117
1+212-761-7276
1+212-761-5156
Paul Morgan
Chris Caton
Samir Khanal
Swaroop Yalla
Jorel Guilloty
1+415-576-2627
1+415-576-2637
1+415-576-2696
1+415-576-2361
1+415 576-2631
55
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Asia/Pacific
Head of Pan-Asian Research
S. Korea
Neil Perry
+81 3 5424 5305
Marcus Walsh
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Deputy Head of Pan-Asian Research
Associate Director of ASEAN Research
Hozefa Topiwalla
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Associate Director of Australia Research
Lou Pirenc
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Will McKenzie
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Head of Australia Research and Distribution
Associate Director of Greater China
Research
Dickson Ho
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Associate Director of India Research
Ridham Desai
+91 22 6118-2222
Associate Director of South Korea
Research
Shawn Kim
+82 2 399-4940
MACRO
Strategy
Asia/Pacific ex. Japan / GEMs
Jonathan Garner
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Pankaj Mataney
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Pauline Yeung
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ASEAN
Hozefa Topiwalla
+65 6834-6439
Trong Tri Tran
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Australia
Toby Walker
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Antony Conte
+61 2 9770-1544
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Corey Ng
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Allen Gui
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James Cao
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India
Ridham Desai
+91 22 6118-2222
Amruta Pabalkar
+91 22 6118-2225
Utkarsh Khandelwal
+91 22 6118-2226
S. Korea
Shawn Kim
+82 2 399-4940
HyunTaek Lee
+82 2 399-9854
Economics
Asia/Pacific
Chetan Ahya
Derrick Kam
ASEAN
Chetan Ahya
Deyi Tan
Australia
Gerard Minack
China / Hong Kong
Steven Zhang
Denise Yam
Ernest Ho
India
Chetan Ahya
Tanvee Gupta
S. Korea / Taiwan
Sharon Lam
Jason Liu
Commodities
Peter Richardson
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CONSUMER DISCRETIONARY
Automobiles
China
Kate Zhu
Kevin Luo
Cedric Shi
Bin Hu
India
Binay Singh
Shreya Gaunekar
S. Korea
Sangkyoo Park
Joon Soo Ryu
Consumer / Retail
ASEAN
Divya Gangahar Kothiyal
Australia
Thomas Kierath
Crystal Wang
India
Nillai Shah
Girish Achhipalia
Greater China
Angela Moh†
Robby Gu
Penny Tu
Dustin Wei
Jessica Wang
Robert Lin
Philip Yang
Lillian Lou
+852 2848-6843
+852 2239-1527
+86 21 2326-0015
+86 21 2326-0024
+91 22 6118-2218
+91 22 6118-2219
+82 2 399-4846
+82 2 399-9920
+65 6834-6438
+61 2 9770-1578
+61 2 9770-1195
+91 22 6118-2244
+91 22 6118-2243
+852 2848-5405
+852 3963-0277
+852 2848-5874
+852 2239-7823
+852 2848-5887
+852 2848-5835
+886 2 2730-2995
+852 2848-6502
Kelly Kim
Leisure & Lodging
China
Lin He
Praveen Choudhary
Ying Guo
India
Parag Gupta
Satyam Thakur
ENERGY
+82 2 399-4837
+86 21 6279-7041
+852 2848-5068
+86 21 2326-0018
+91 22 6118-2230
+91 22 6118-2231
Clean Tech / Solar Devices
S. Korea
Sung Hee Lim
+82 2 399-4937
Fertilizer
Taiwan
Jeremy Chen
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Lily Chen
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Oil & Gas
Australia
Stuart Baker†
+61 3 9256-8929
Philip Bare
+61 3 9256-8932
China
Wee-Kiat Tan
+852 2848-7488
Sara Chan
+852 2848-5292
Josh Du
+852 2239-7593
India
Vinay Jaising†
+91 22 6118-2252
Rakesh Sethia
+91 22 6118-2253
Thailand
Mayank Maheshwari
+65 6834-6719
FINANCIALS
Banks
ASEAN
Nick Lord
Edward Goh
Australia
Richard Wiles
Arvid Streimann
David Shi
China
Minyan Liu
Katherine Lei
Jocelyn Yang
Hong Kong
Anil Agarwal†
Isabella He
India
Anil Agarwal
Mihir Sheth
Subramanian Iyer
Sumeet Kariwala
Mansi Shah
S. Korea
Joon Seok
James Kwon
Gil Woo Lee
Taiwan
Lily Choi
Insurance
Australia
Andrei Stadnik
China
Ben Lin
Christy He
S. Korea
Sara Lee
Dana Kang
Taiwan
Lily Choi
HEALTH CARE
Australia
Sean Laaman
James Rutledge
China
Bin Li
Christopher Lui
Yolanda Hu
India
Sameer Baisiwala
Saniel Chandrawat
INDUSTRIALS
+65 6834-6746
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+61 2 9770 1684
+852 2848-5830
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+82 2 399-4836
+82 2 399-4843
+852 2848-6564
+61 2 9770-1559
+61 2 9770-1659
+852 2239-7596
+852 2239-1883
+852 2848-5649
+91 22 6118-2214
+91 22 6118-2215
Capital Goods / Shipbuilding
China / Hong Kong
Andy Meng
+852 2239-7689
Kate Zhu
+852 2848-6843
Kevin Luo
+ 852 2239-1527
Cedric Shi
+86 21 2326-0015
S. Korea
Sangkyoo Park
+82 2 399-4846
Joon Soo Ryu
+82 2 399-9920
Capital Goods
India
Akshay Soni
+91 22 6118-2212
Pratima Swaminathan
+91 22 6118-2213
Cement / Glass / Auto Components
/ Property / Steel
India
Akshay Soni
+91 22 6118-2212
Ashish Jain
+91 22 6118-2240
Pratima Swaminathan
+91 22 6118-2213
Taiwan
Jeremy Chen
+886 2 2730-2876
Lily Chen
+886 2 2730-2871
Gaming / Multi-Industry
China / Hong Kong
Praveen Choudhary
+852 2848-5068
Corey Chan
+852 2848-5911
Xin Jin Ling
+852 2239-7597
Calvin Ho
+852 2239-7834
Katherine Sun
+852 2239-7832
India
Akshay Soni
+91 22 6118-2212
Pratima Swaminathan
+91 22 6118-2213
Transportation & Infrastructure
Regional
Chin Y. Lim†
+65 6834-6858
Sophie Loh
+65 6834-6823
Chin Ser Lee
+65 6834-6735
Australia
Scott Kelly
+61 2 9770-1583
Julia Weng
+61 2 9770-1197
China
Edward Xu
+852 2239-1521
Andy Meng
+852 2239-7689
Victoria Wong
+852 2239-7817
Kate Zhu
+852 2848-6843
Kevin Luo
+852 2239-1527
Cedric Shi
+86 21 2326-0015
India
Parag Gupta
+91 22 6118-2230
Satyam Thakur
+91 22 6118-2231
INFORMATION TECHNOLOGY
Hardware Components
China / Hong Kong
Jasmine Lu
Tim Hsiao
Grace Chen
Terence Cheng
Bill Lu
Charlie Chan
S. Korea
Keon Han
Young Suk Shin
Mike Chung
Taiwan
Jasmine Lu
Tim Hsiao
Po-Ling Chen
Sharon Shih
Brad Lin
Grace Chen
Terence Cheng
Internet / Media
Australia
Andrew McLeod
Mark Goodridge
China
Richard Ji
Philip Wan
Gillian Chung
Timothy Chan
Carol Wang
Alvin Jiang
India
Vipul Prasad
Ketaki Kulkarni
Ritish Rangwalla
South Korea
Shawn Kim
HyunTaek Lee
Semiconductors
S. Korea
Keon Han
Young Suk Shin
Mike Chung
Taiwan
Bill Lu
Charlie Chan
Software & Services
China
Carol Wang
Alvin Jiang
India
Vipin Khare
Gaurav Rateria
+852 2239-1348
+852 2848-1975
+886 2 2730-2890
+886 2 2730-2873
+852 2848-5214
+852 2848-5636
+82 2 399-4933
+82 2 399-9907
+82 2 399-4939
+852 2239-1348
+852 2848-1975
+852 2239 7816
+886 2 2730-2865
+886 2 2730-2989
+886 2 2730-2890
+886 2 2730-2873
+61 2 9770-1591
+61 2 9770-1761
+852 2848-6926
+852 2848-8227
+852 2848-5456
+852 2239-7107
+82 61 6279-8494
+86 21 2326-0153
+91 22 6118-2238
+91 22 6118-2239
+91 22 6118-2258
+82 2 399-4940
+86 2 399-9854
+82 2 399-4933
+82 2 399-9907
+82 2 399-4939
+852 2848-5214
+852 2848-5636
+82 21 2326-0026
+86 21 2326-0153
+91 22 6118-2236
+91 22 6118-2237
TFT-LCD
Taiwan
Jerry Su
MATERIALS
Building Materials
India
Akshay Soni
Aarti Shah
Pratima Swaminathan
Chemicals
India
Vinay Jaising†
Rakesh Sethia
S. Korea
Harrison Hwang
Kyle Kim
Materials
ASEAN, China
Charles Spencer†
Mean Phil Chong
John Lam
Aishwarya Narayanan
India
Nillai Shah
S. Korea
Charles Spencer
Metals & Mining
Australia
Cameron Judd
Sarah Lester
India
Vipul Prasad
Ketaki Kulkarni
Ritish Rangwalla
PROPERTY
Australia
Lou Pirenc
Todd McFarlane
John Meredith
ASEAN
Brian Wee
Wilson Ng
China / Hong Kong
Coral Ching
Angus Chan
Jacky Chan
India
Sameer Baisiwala
Arunabh Chaudhari
Harshal Pandya
SMALL AND MID CAP
Emerging Companies
Australia
Christopher Nicol
David Evans
James Bales
Mid Cap
China
Lin He
Ying Guo
Taiwan
Jeremy Chen
Lily Chen
+886 2 2730-2860
+91 22 6118-2212
+91 22 6118-2211
+91 22 6118-2213
+91 22 6118-2252
+91 22 6118-2253
+82 2 399-4916
+82 2 399-4994
+65 6834-6825
+65 6834-6194
+852 2848-5412
+852 2239-7810
+91 22 6118-2244
+65 6834-6825
+61 3 9256-8904
+61 3 9256-8436
+91 22 6118-2238
+91 22 6118-2239
+91 22 6118-2258
+61 2 9770-1569
+61 2 9770-1316
+61 2 9770-1317
+65 6834-6731
+65 6834-6345
+852 2848-1735
+852 2848-5259
+852 2848 5973
+91 22 6118-2214
+91 22 6118-2216
+91 22 6118-2217
+61 3 9256-8909
+61 2 9770-1504
+61 2 9770-1603
+86 21 2326-0016
+86 21 2326-0018
+886 2 2730-2876
+886 2 2730-2871
TELECOMMUNICATIONS
Australia
Mark Blackwell
John Burns
+61 3 9256-8959
+61 2 9770-1395
Greater China / Malaysia / Thailand
Navin Killa†
Gary Yu
Vanessa D’Souza
Doreen Ma
India
Vinay Jaising
Surabhi Chandna
S. Korea
Sam Min
Jessica Bang
UTILITIES
+852 2848-5422
+852 2848-6918
+852 2239-7687
+852 2239-7821
+91 22 6118-2252
+91 22 6118-2255
+82 2 399-4936
+82 2 399-1408
Australia
Mark Blackwell
John Burns
China / Hong Kong
Simon Lee
Vincent Chow
Eva Hou
Helen Wen
Ivy Lu
India
Parag Gupta
Satyam Thakur
+852 2848-1985
+852 2239-1588
+86 21 2326-0031
+852 2848-5438
+852 2239-7814
Asia/Pacific
Peter Joos
Yang Bai
Manas Dwivedi
Crystal Ng
+852 2848-6953
+852 2239-7685
+852 2239-7836
+852 2239-1468
QUANTITATIVE
+61 3 9256-8959
+61 2 9770-1395
+91 22 6118-2230
+91 22 6118-2231
56
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Europe
Director of Research
Tobacco
Rupert Jones
Toby McCullagh
+44 (0)20 7425 4271
Associate Director of Research
Juliet Estridge
Matthew Ostrower
Mitzi Frank
+44 (0)20 7425 8160
+44 (0)20 7425 8560
+44 (0)20 7425 8022
Product Development & SSC
Ben Britz
Fergus O’Sullivan
Management
Sarah Waugh
Sharon Reid
Media Relations
Sebastian Howell
+44 (0)20 7425 3055
+44 (0)20 7425 6404
+44 (0)20 7425 8154
+44 (0)20 7677 6101
+44 (0)20 7425 5324
MACRO
Equity Strategy
Ronan Carr
Matthew Garman
Graham Secker
Economics
+44 (0)20 7425 4944
+44 (0)20 7425 3595
+44 (0)20 7425 6188
Joachim Fels
+44 (0)20 7425 6138
Manoj Pradham
+44 (0)20 7425 3805
Spyros Andreopoulos
+44 (0)20 7677 0528
Elga Bartsch
+44 (0)20 7425 5434
Daniele Antonucci
+44 (0)20 7425 8943
Olivier Bizimana
+44 (0)20 7425 6290
Melanie Baker
+44 (0)20 7425 8607
Cath Sleeman
+44 (0)20 7425 1820
Tevfik Aksoy
+44 (0)20 7677 6917
Pasquale Diana
+44 (0)20 7677 4183
Jarek Strzalkowski +44 (0)20 7425-9035
Jacob Nell
+7 495 287-2134
Alina Slyusarchuk +44 (0)20 7677 6869
Michael Kafe
+27 11 507 0891
Andrea Masia
+27 11 507 0887
Derivatives and Portfolios
Neil Chakraborty
Praveen Singh
+44 (0)20 7425 2571
+44 (0)20 7425 7833
Sectors
CONSUMER DISCRETIONARY/
INDUSTRIALS
Aerospace & Defence
Rupinder Vig
+44 (0)20 7425 2687
Autos & Auto Parts
Stuart Pearson
Edoardo Spina
Laura Lembke
+44 (0)20 7425 6654
+44 (0)20 7425 0664
+44 (0)20 7425-7944
Business & Employment Services
Jessica Alsford
+44 (0)20 7425 8985
David Hancock
+44 (0)20 7425 3752
Simone Porter Smith+44 (0)20 7425 3893
Capital Goods
Ben Uglow
Guillermo Peigneux
Robert Davies
+44 (0) 20 7425 8750
+44 (0)20 7425 7225
+44 (0)20 7425 2057
Jamie Rollo
Vaughan Lewis
Alex Davie
Andrea Ferraz
+44 (0)20 7425 3281
+44 (0)20 7425 3489
+44 (0)20 7425 9867
+44 (0)20 7425 7242
Leisure/Hotels
CONSUMER STAPLES
Beverages
Michael Steib
Eveline Varin
+44 (0)20 7425 5263
+44 (0)20 7425 5717
Michael Steib
Toby McCullagh
Erik Sjogren
Audrey Borius
+44 (0)20 7425 5263
+44 (0)20 7425 6636
+44 (0)20 7425 3935
+44 (0)20 7425 7242
Food Producers/HPC
+44 (0)20 7425 6636
MEDIA
Oil & Gas
Martijn Rats
+44 (0)20 7425 6618
Jamie Maddock
+44 (0)20 7425 4405
Albina Sadykova +44 (0) 20 7425 7502
Sasikanth Chilukuru +44 (0)20 7425 3016
Oil Services
Patrick Wellington
Julien Rossi
Chris Sellers
Bart Gysens
Chris Fremantle
Bianca Riemer
Bobby Chada
Nicholas Ashworth
Arsalan Obaidullah
Igor Kuzmin
Emmanuel Turpin
Carolina Dores
Anne N. Azzola
+44 (0)20 7425 5238
+44 (0)20 7425 7770
+44 (0)20 7425 4267
+44 (0)20 7425 8371
+44 (0)20 7425 6863
+44 (0)20 7677 7167
+44 (0)20 7425-6230
RETAIL
Allen Wells
Andrew Humphrey
+44 (0)20 7425 4146
+44 (0)20 7425 2630
FINANCIALS
Banks/ Diversified Financials
Huw van Steenis
Alice M. Timperley
Steven Hayne
Bruce Hamilton
Anil Sharma
Chris Manners
Hubert Lam
Francesca Tondi
Thibault Nardin
Magdalena Stoklosa
Hadrien de Belle
Samuel Goodacre
Henrik Schmidt
+44 (0)20 7425 9747
+44 (0)20 74259094
+44 (0)20 7425 8332
+44 (0)20 7425 7597
+44 (0)20 7425 8828
+44 (0)20 7425 3917
+44 (0)20 7425 3734
+44 (0)20 7425 9721
+44 (0)20 7677 3787
+44 (0)20 7425 3933
+44 (0)20 7425 4466
+44 (0)20 7677 0759
+44 (0)20 7425 8808
Insurance
Jon Hocking
+44 (0)20 7425 2307
Farooq Hanif
+44 (0)20 7425 6477
Adrienne Lim
+44 (0)20 7425 6679
Maciej Wasilewicz +44 (0)20 7425 9104
Damien Kingsley-Tomkins
+44 (0)20 7425 1830
David Andrich
+44 (0)20 7425-2449
HEALTHCARE
Biotech & Medical Technology
Michael Jungling
Karl Bradshaw
Andrew Olanow
+44 (0)20 7425 5975
+44 (0)20 7425 6573
+44 (0)20 7425 4107
Pharmaceuticals
Peter Verdult
Liav Abraham
Simon Mather
Matt Hartley
+44 (0)20 7425 2244
+44 (0)20 7425 8273
+44 (0)20 7425 3227
+44 (0)20 7425 2272
MATERIALS
Building & Construction
Alejandra Pereda
+34 91 412 1747
Chemicals
Paul Walsh
Peter J. Mackey
Amy Walker
+44 (0)20 7425 4182
+44 (0)20 7425 4657
+44 (0)20 7425-0640
Metals & Mining
Ephrem Ravi
Hannah Kirby
Alain Gabriel
+44 (0)20 7425 2127
+44 (0) 20 7425 6014
+44 (0)20 7425 8959
Paper & Packaging
Markus Almerud
+44 (0)20 7425 9870
Economics
Financials
Dan Cowan
Suha Urgan
+971 4 709 7165
+971 4 709 7240
Muneeba Kayani
Saul Rans
Nida Iqbal
+971 4 709 7117
+971 4 709 7110
+971 4 709 7103
Infrastructure
Property
+44 (0)20 7425 6618
+44 (0)20 7425 4388
Clean Energy
+44 (0)20 7425 8605
+44 (0)20 7425 9755
+44 (0)20 7425-4013
PROPERTY
Martijn Rats
Rob Pulleyn
Utilities
MIDDLE EAST NORTH AFRICA
Media & Internet
ENERGY/UTILITIES
+44 (0)20 7425 5862
+44 (0)20 7425 5761
+44 (0)20 7425 2646
Telecoms/Media
Edward Hill-Wood
+44 (0)20 7425 9224
Madhvendra Singh
+971 4 709 7122
RUSSIA
Retailing/Brands
Louise Singlehurst
Emily Tam
Pallavi Verma
+44 (0)20 7425 7239
+44 (0)20 7425 4055
+44 (0)20 7425 2644
Economics
Geoff Ruddell
Fred Bjelland
Edouard Aubin
+44 (0)20 7425 8954
+44 (0)20 7425 3612
+44 (0)20 7425 3160
Dmitriy Kolomytsyn
Kirill Prudnikov
Retailing
Metals & Mining
Telecoms/Media
Technology
+44 (0)20 7425 9290
+44 (0)20 7425 4450
+44 (0)20 7425 2363
+44 (0)20 7425 2686
+44 (0)20 7425-6603
+44 (0)20 7425 3436
TELECOMS
Telecommunications Services
Nick Delfas
Luis Prota
Frederic Boulan
Terence Tsui
Ryan Fox
+44 (0)20 7425 6611
+34 91 412 1217
+44 (0)20 7425 6830
+44 (0)20 7425 4399
+44 (0)20 7425 5413
TRANSPORTATION
+7 495 589 9942
+7 495 287-2314
+44 (0)20 7425 5387
+7 495 287 2118
Ed Hill-Wood
+44 (0)20 7425 9224
Cesar Tiron
+44 (0)20 7425 8846
Polina Ugryumova
+7 495 589 9944
Transport
Menno Sanderse
+44 (0)20 7425 6148
Bobby Chada
Igor Kuzmin
+44 (0)20 7425 5238
+44 (0)20 7425 8371
Utilities
SOUTH AFRICA RMB MORGAN STANLEY
Head of Research/Strategy
Vaughan Henkel
+27 11 282 8260
Michael Kafe
Andrea Masia
+27 11 507 0891
+27 11 507 0887
Magdalena Stoklosa
Greg Saffy
Derinia Chetty
+27 11 282 1082
+27 11 282-4228
+27 11 282 8553
Anthony de la Cour
Roy Campbell
+27 11 282 8139
+27 11 282 1499
Economics
Financials
Transport
Menno Sanderse
Jaime Rowbotham
Penny Butcher
Suzanne Todd
Doug Hayes
Daniel Ruivo
+7 495 287-2134
+44 (0)20 7677 6869
Oil & Gas
Matt Thomas
Timur Salikhov
TECHNOLOGY
Patrick Standaert
Adam Wood
Ashish Sinha
Guillaume Charton
Francois Meunier
Sunil George
Jacob Nell
Alina Slyusarchuk
+44 (0)20 7425 6148
+44 (0)20 7425 5409
+44 (0)20 7425 6698
+44 (0)20 7425 8316
+44 (0)20 7425 3831
+44 (0)20 7425 5816
Industrials
Insurance & Property
EMERGING MARKETS
Vincent Anthonyrajah
+27 11 282 1593
Equity Strategy (Global)
Simon Kendall
Leigh Bregman
Christopher Nicholson
+27 11 282 4932
+27 11 282 8969
+27 11 282-1154
Natasha Moolman
Danie Pretorius
Qaqambile Dwayi
+27 11 282 8489
+27 11 282 1082
+27 11 282 4146
Jonathan Garner
Marianna V. Kozintseva
5534
Mining
+852 2848 7288
+44 (0) 20 7425
Economics
Tevfik Aksoy
+44 (0)20 7677 6917
Pasquale Diana
+44 (0)20 7677 4183
Jarek Strzalkowski +44 (0)20 7425-9035
Banks/ Diversified Financials
Magdalena Stoklosa
Samuel Goodacre
Hadrien de Belle
Consumer
+44 (0)20 7425 3933
+44 (0)20 7677 0759
+44 (0)20 7425 4466
Daniel Wakerly
+44 (0)20 7425 4389
Maryia Berasneva +44 (0) 20 7425 7502
Telecoms/Media
Ed Hill-Wood
Cesar Tiron
+44 (0)20 7425 9224
+44 (0)20 7425 8846
Retail
TMT
Edward Hill-Wood
+44 (0)20 7425 9224
Peter Takaendesa
+27 11 282 8240
Sub-Sahara Africa
Dexter Mahachi
+27 11 282 1884
TURKEY
Sayra Can Altuntas
Erol Danis
Batuhan Karabekir
+44 (0)20 7425 2365
+44 (0)20 7425 7123
+44(0) 207425 3346
Tevfik Aksoy
+44 (0)20 7677 6917
Economics
Banks
Magdalena Stoklosa
+44 (0)20 7425 3933
Ed Hill-Wood
Cesar Tiron
+44 (0)20 7425 9224
+44 (0)20 7425 8846
Telecoms/Media
57
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Japan
Director of Asian Research
Neil Perry
+813-5424-5305
Economic Research
Director of Economic Research
Robert A. Feldman
+813-5424-5385
Economics
Takehiro Sato
Takeshi Yamaguchi
Maki Uchikoga
Chie Takita
+813-5424-5367
+813-5424-5387
+813-5424-5344
+813-5424-5913
Equity Research
Machinery and Capital Goods
Yoshinao Ibara
Yusuke Yoshida
Jin Sup Park
Masako Kusano
Services: General Services / Internet
Services
Naoshi Nema
Atsuko Watanabe
Tomokazu Soejima
Michiko Sekiya
Macro
Equity Strategy
Alexander Kinmont
Masaru Ohnishi
Yohei Yamada
Maki Uchikoga
+813-5424-5337
+813-6422-8658
+813-5424-5923
+813-5424-5344
Sectors
Autos
Noriaki Hirakata
Ryosuke Hoshino
Keita Suzuki
Umi Togasawa
+813-5424-5307
+813-5424-5916
+813-5424-5903
+813-5424- 5308
Auto Parts
Shinji Kakiuchi
Kaori Morishita
Naoko Hosaka
+813-5424-5914
+813-5424-5924
+813-5424-5388
Yukimi Oda
Sai Aoyama
+813-5424-5319
+813-5424-5926
+813 5424-5316
+813 5424-5928
+813 5424-5382
MATERIALS
+813-5424-5333
+813-5424-5918
Lalita Gupta
Hiroshi Kawaguchi
Mitsuhiro Kojima
Kayo Sano
Kaori Ikeda
+813-5424-5909
+813-5424-5347
+813-5424-5342
+813-5424-5332
+813-5424-5921
Utilities
Yuka Matayoshi
Hikaru Ishikawa
Junko Yamamoto
+813-5424-5910
+813-5424-5378
+813-5424-5334
+813-5424-5349
+813-5424-5907
+813-5424-5323
+813-5424-5366
Financial Services, Insurance
Hideyasu Ban
Atsushi Shinoda
Ayako Kubodera
Naoko Hatakeyama
Lalita Gupta
Hiroshi Kawaguchi
Mitsuhiro Kojima
Kayo Sano
Kaori Ikeda
+813-5424-5909
+813-5424-5347
+813-5424-5342
+813-5424-5332
+813-5424-5921
Harunobu Goroh
Akira Morimoto
Leigha Miyata
Emiko Ishikawa
+813-5424-5343
+813-6422-8650
+813-6422-8671
+813-5424-5376
MEDIA
+813-5424-5381
+813-5424-5922
+813-5424-5323
+813-5424-5348
TECHNOLOGY
Information Technology
+813-5424-5321
+813-5424-5324
Technology: Consumer Electronics /
Precision Instruments
Masahiro Ono
Takumi Kakazu
Sachie Uchida
+813-5424-5362
+813-5424-5929
+813-5424-5369
Technology: Electronic Components
Shoji Sato
Yusuke Yoshida
+813-5424-5303
+813-6422-8652
Technology: Interactive Entertainment
Mia Nagasaka
Hiroshi Taguchi
+813-5424-5309
+813-5424-5339
Technology: Japan Semiconductors
Kazuo Yoshikawa
Ryotaro Hayashi
Midori Takeuchi
+813-5424-5389
+813-5424- 5327
+813-5424-5315
TRANSPORTATION
Media
Hironori Tanaka
Takahisa Ueshima
+813-5424-5336
+813-6422-8651
PROPERTY
Banks
Graeme Knowd
Takaaki Nishino
Ayako Kubodera
Ikuko Matsumoto
+813-5424-5380
+813-5424-5925
Steel / Nonferrous Metals/ Wire & Cable
Oil & Coal Products
+813-5424-5328
+813-5424-5331
Masaharu Miyachi
Hiroko Ando
Construction
Food
FINANCIALS
CONSUMER DISCRETIONARY/
INDUSTRIALS
Retailing: Specialty, Restaurants
Mayo Mita
Shinichiro Muraoka
Yukihiro Koike
Ayako Fukuda
Kaoru Wada
Glass & Ceramics / Chemicals
ENERGY/UTILITIES
+813-5424-5397
RETAIL
Healthcare/Pharmaceuticals
Atsushi Takagi
Rina Asano
Stefan Pendert
Dennis Yamada
+813-5424-5345
+813-5424-5329
HEALTHCARE
CONSUMER STAPLES
Taizo Demura
Haruka Miyake
Deputy Head of Japan Research
+813-5424-5320
+813-5424-5338
Trading Companies
Head of Japan Research/Institutional
Equity Distribution
+813-5424-5689
+813-5424-5302
+813-6422-8652
+813-6422-8670
+813-5424-5917
Transportation
Takuya Osaka
Shino Takahashi
+813-5424-5915
+813-5424-5314
Housing
Tomoyoshi Omuro
Atsushi Takagi
Keisuke Kumagai
Makiko Matsuki
Rina Asano
+813-5424-5386
+813-5424-5380
+813-5424-5312
+813-5424-5304
+813-5424-5925
Real Estate
Tomoyoshi Omuro
Keisuke Kumagai
Makiko Matsuki
+813-5424-5386
+813-5424-5312
+813-5424-5304
Latin America
Director of Research
Dario Lizzano
1+212-761-3936
Associate Director of Research
Jorge Kuri
1+212-761-6341
1+212-761-4407
CONSUMER STAPLES/BEVERAGE
Economics
Gray Newman
1+212-761-6510
Arthur Carvalho
+55-11-3048-6272
Luis A. Arcentales, CFA 1+212-761-4913
Daniel Volberg
1+212-761-0124
GEMs Equity Strategy
Jonathan Garner
Guilherme Paiva
Cesar Medina
Nikolaj Lippmann
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Regiane Yamanari
AEROSPACE & DEFENSE
Heidi Wood
Macro
RETAIL
Sectors
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Lore Serra
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+55-11-3048-6255.
FINANCIALS
Financial Services
Jorge Kuri
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TRANSPORTATION &
INFRASTRUCTURE
Lore Serra
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Jeronimo De Guzman 1+212-761-7084
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Augusto Ensiki
SMALL AND MID CAPS
ENERGY & UTILITIES
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Oil, Gas, Petrochemicals & Clean
Energy
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Ole Slorer
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Nonferrous Metals & Mining, Coal
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58
MORGAN STANLEY RESEARCH
June 30, 2011
Investment Perspectives — Global
Fixed Income Research - Global
Global Cross-Asset Strategy
Currency Strategy
Gregory Peters
Jason Draho
North America
Gabriel de Kock
Ron Leven
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Credit Strategy
North America
Gregory Peters
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Europe
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Japan
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Nishant Sood
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Structured Credit Strategy
Sivan Mahadevan
Ashley Musfeldt
Vishwanath Tirupattur
James Egan
Oliver Chang
Richard Parkus
Andy Bernard
Srikanth Sankaran
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1+212 761-1727
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1+415 576-2395
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Europe
Hans Redeker
Ian Stannard
Tim Davis
Calvin Tse
Asia Pacific
Stewart Newnham
Yee Wai Chong
Interest Rate Strategy
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Economics
North America
David Greenlaw
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David Cho
Europe
Joachim Fels
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Emerging Markets Economics
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Alina Slyusarchuk
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44+20 7677-4183
44+20 7677-6869
27+11 507-0891
27+11 507-0887
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+7 495 287-2134
North America
Jim Caron
Subadra Rajappa
Bill McGraw
Janaki Rao
George Azarias
Zofia Koscielniak
Jonathan Marymor
Europe
Laurence Mutkin
Anthony O’Brien
Mayank Gargh
Anton Heese
Owen Roberts
Elaine Lin
Corentin Rordorf
Rachael Featherstone
Credit Research
1+212 761-1905
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1+212 761-1307
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44+20 7677-4029
44+20 7677-7748
44+20 7677-7528
44+20 7677-6951
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44+20 7677-0518
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Japan
Takehiro Sato
Le Ngoc Nhan
Miho Ohashi
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Asia Pacific
Pieter Van Der Schaft
Rohit Arora
+852 3963-0550
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Europe – Financials
Jackie Ineke
Marcus Rivaldi
Lee Street
Fiona Simpson
Natacha Blackman
Asia Pacific – Financials
Desmond Lee
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Commodities Strategy
Hussein Allidina
Chris Corda
Tai Liu
Bennett Meier
Tian Yu
1+212 761-4150
1+212 761-6005
1+212 761-3585
1+212 761-4967
1+212 761-8582
EM Fixed Income and Foreign
Exchange Strategy
North America
Rogerio Oliveira
Vitali Meschoulam
Juha Seppala
Rosa Velasquez
Andrew Slusser
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1+212 761-1889
1+212 761-1949
1+212 761-8278
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Europe
Rashique Rahman
Paolo Batori, CFA
Vanessa Barrett
Regis Chatellier
James Lord
Robert Tancsa
Meena Bassily
44+20 7677-7295
44+20 7677-7971
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44+20 7677-3254
44+20 7677-6671
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59
MORGAN STANLEY RESEARCH
The Americas
1585 Broadway
New York, NY 10036-8293
United States
Tel: +1 (1)212 761 4000
© 2011 Morgan Stanley
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London E14 4AD
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Tel: +852 2848 5200
Volume 11, Number 23