China Mengniu Dairy

2319.HK 2319 HK

EQUITY RESEARCH

FOOD & BEVERAGE

June 14, 2011

Expecting strong 1H11 

Rating Remains

Product mix upgrades and market-share gains drive upward forecast, TP revisions

Buy

Target price Increased from 31.00

HKD 34.00

Closing price June 13, 2011

HKD 24.60

Potential upside

+38.2%

Anchor themes We are positive on China's long-term consumption outlook. China's GDP per capita (about USD3,700 in 2009) is close to seeing consumption pick up, based on the experience of developed markets.

Action: Reiterating BUY During our recent visit to China Mengniu’s HQ in Inner Mongolia, management indicated that the first four months of 2011 saw strong growth in volume and revenue amid market-share gains and product mix upgrades. Moreover, management believes such growth can be sustained in 2H11 and noted its margin expansion targets are well on the track. We revise up earnings forecasts for FY11F and FY12F by 8% and 17%, respectively, to reflect higher volume growth and the enhanced product mix. Our new FY11F earnings forecast is 16% above consensus.

Nomura vs consensus Our new FY11F earnings forecast is 16% above consensus, likely due to our higher assumptions for volume and ASP growth.

Catalysts: earnings upgrades and decline in input costs We believe the street is likely to revise up its earnings forecasts in the short term. Raw milk prices will likely fall in the summer, in our view, when it is high season for supply. Valuation: new TP of HKD34 Based on an unchanged basis of 23x 12-month forward EPS (excluding stock option expense), we have a new target price of HKD34/sh, implying 38% potential upside. If we were to include stock option expense, our target price would come to HKD30/sh.

Research analysts China Food & Beverage Emma Liu - NIHK [email protected] +852 2252 6172

Downside risk: secondary share placement still likely Jinniu and Yinniu still hold a cumulative 4.97% of Mengniu. Their last share placement was on 28 July, 2010. As these companies are not closely involved in Mengniu's operation, we think share placement, if any, may not have much impact on the share price.

31 Dec Currency (CNY)

Revenue (mn)

FY10

FY11F

FY12F

Actual

Old

New

Old

New

FY13F Old

New

30,265

36,594

38,952

43,345

46,991

56,145

Reported net profit (mn)

1,237

1,739

1,885

2,235

2,619

3,276

Normalised net profit (mn)

1,237

1,739

1,885

2,235

2,619

3,276

0.7

1.0

1.1

1.3

1.5

1.9

Normalised EPS Norm. EPS growth (%)

4.5

40.6

52.4

28.5

38.9

Norm. P/E (x)

26.6

N/A

16.7

N/A

11.3

N/A

8.8

EV/EBITDA

13.0

N/A

7.8

N/A

4.9

N/A

3.4

Price/book (x)

3.3

N/A

2.7

N/A

2.2

N/A

1.4

Dividend yield (%)

0.8

N/A

1.3

N/A

2.0

N/A

3.2

13.5

16.7

18.0

18.7

21.4

22.6

net cash net cash net cash net cash net cash

net cash

ROE (%) Net debt/equity (%)

25.1

See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non US affiliates are not registered or qualified as research analysts with FINRA in the US.

Key company data: See page 2 for company data and detailed price/index chart. Rating: See report end for details of Nomura’s rating system.

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Key data on China Mengniu Dairy Income statement (CNYmn) 

Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (CNY) Norm EPS (CNY) Fully diluted norm EPS (CNY) Book value per share (CNY) DPS (CNY)

2,019 -698

3,029 -734

4,132 -880

5,207 -1,075

1,335 24 20 -32 1,346 -126 1,220 -104 0

1,321 43 40 134 1,538 -182 1,356 -119 0

2,296 50 49 -10 2,384 -318 2,066 -181 0

3,253 50 58 10 3,371 -500 2,870 -251 0

4,133 50 70 40 4,292 -702 3,591 -314 0

1,116

1,237

1,885

2,619

3,276

1,116 -245 870

1,237 -278 959

1,885 -424 1,462

2,619 -589 2,030

3,276 -736 2,540

28.3 43.7 28.3 0.7 16.2 3.9 13.8 20.6 26.7 7.8 5.2 4.3 9.4 22.0 2.4 0.9 17.1 17.0

26.6 41.2 26.6 0.8 15.7 3.3 13.0 19.7 25.7 6.7 4.4 4.1 11.8 22.5 4.7 2.0 13.5 14.9

16.7 25.7 16.7 1.3 9.4 2.7 7.8 10.2 26.2 7.8 5.9 4.8 13.3 22.5 4.6 2.5 18.0 21.0

11.3 17.5 11.3 2.0 5.8 2.2 4.9 6.2 26.7 8.8 6.9 5.6 14.8 22.5 5.3 2.8 21.4 25.8

8.8 13.6 8.8 3.2 5.0 1.4 3.4 4.3 27.0 9.3 7.4 5.8 16.3 22.5 5.3 2.8 22.6 27.8

7.7 701.9 na na na

17.7 1.0 -1.0 4.5 4.3

28.7 50.0 73.8 52.4 52.7

20.6 36.4 41.7 38.9 38.9

19.5 26.0 27.1 25.1 25.1

0.68 0.68 0.68 4.94 0.14

0.71 0.71 0.71 5.62 0.16

1.09 1.09 1.09 6.46 0.24

1.51 1.51 1.51 7.63 0.34

1.89 1.89 1.89 11.54 0.54

Price and price relative chart (one year) Price Rel MSCI China

(HKD)

110

28 26

100

24 90 22 80

20 18

70 J un 11

1,999 -664

A pr 11

4,133

M ay 11

3,253

M ar 11

2,296

J an 11

1,321

Thin net margin makes Mengniu’s bottom line highly sensitive to changes in costs

F eb 11

1,335

Notes

N ov 10

FY13F 56,145 -41,003 15,142 -11,009

D ec 10

FY12F 46,991 -34,438 12,553 -9,300

O c t 10

FY11F 38,952 -28,760 10,192 -7,896

S ep 10

Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %)

FY10 30,265 -22,479 7,786 -6,465

J ul 10

EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves

  FY09 25,710 -18,858 6,852 -5,517

A ug 10

Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit

(%)

1M

3M

12M

Absolute (HKD)

1.6

4.3

-6.8

Absolute (USD)

1.8

4.2

-6.9

Relative to index

-4.8

1.3

-14.7

Market cap (USDmn)

4,916.6

Estimated free float 65.0 (%) 52-week range (HKD) 26.8/19.52 3-mth avg daily turnover (USDmn) Major shareholders (%) COFCO HOPU

16.63

14.0 6.0

Source: Nomura estimates

 

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Cashflow (CNYmn)  Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt

  FY09 1,999 23 -77 1,945 -613 1,332 -27 0 -58 -11 0 1,237 0 2,694 -1,021 0 387 2,060 3,297 3,084 6,381 -5,600

FY10 2,019 193 -113 2,100 -1,426 674 -331 0 -118 420 0 645 -245 0 60 0 -41 -226 419 6,381 6,800 -5,959

FY11F 3,029 522 -192 3,359 -1,800 1,559 0 0 0 0 0 1,559 -278 0 0 0 -38 -316 1,244 6,800 8,044 -7,203

FY12F 4,132 1,326 -342 5,117 -2,500 2,617 0 0 0 0 0 2,617 -424 0 0 0 -347 -771 1,846 8,044 9,890 -9,049

FY13F 5,207 1,028 -506 5,729 -3,000 2,729 0 0 0 0 0 2,729 -589 0 0 0 -384 -972 1,757 9,890 11,647 -10,806

Notes

FY09 6,381 0 580 715 339 8,014 85 5,246 199 32 520 14,096 431 2,340 1,784 4,554 350 0 280 5,184 336 0 179 8,397 0

FY10 6,800 0 575 1,176 1,112 9,664 416 5,915 452 222 637 17,306 691 3,548 1,999 6,238 150 0 700 7,088 459 0 179 9,579 0

FY11F 8,044 0 911 1,243 1,223 11,422 416 6,923 452 0 637 19,850 691 3,985 2,599 7,274 150 0 700 8,125 505 0 179 11,041 0

FY12F 9,890 0 882 1,654 1,346 13,772 416 8,484 452 0 637 23,761 691 5,036 3,378 9,105 150 0 700 9,955 556 0 179 13,071 0

FY13F 11,647 0 1,261 1,796 1,480 16,183 416 10,351 452 0 637 28,039 691 5,705 4,392 10,787 150 0 700 11,637 612 0 179 15,611 0

Notes

8,576 14,096

9,758 17,306

11,220 19,850

13,250 23,761

15,790 28,039

1.76 na

1.55 na

1.57 na

1.51 na

1.50 na

net cash net cash

net cash net cash

net cash net cash

net cash net cash

net cash net cash

6.6 14.9 45.8 -24.3

7.0 15.4 47.8 -25.5

7.0 15.4 47.8 -25.5

7.0 15.4 47.9 -25.6

7.0 15.4 47.8 -25.5

Source: Nomura estimates

Balance sheet (CNYmn)  As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle

Net cash position in the long-term

Source: Nomura estimates

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Strong top line According to management, Mengniu recorded strong volume and ASP growth in the first four months of the year. We revise up our revenue growth forecast for FY11F to 29%, from 21%, on the back of assumptions of 17% volume growth (13% previously) and 10% ASP growth (7% previously), compared with a consensus expectation of 19% y-y revenue growth in FY11F. According to management, Mengniu has not only deliberately increased sales of highend products, but has cut sales of low-end products. It believes its ASP growth of about 6-7% from product mix upgrades alone in FY10 will be sustainable for the next two years to the end of FY12. We note that Mengniu has significantly upgraded its ice cream product mix this year, moving to a higher-grade offering. From our observation, high-end packaged milk products have become increasingly popular as gifts in China, likely reflecting Chinese consumers' increasing awareness of health issues. Mengniu is targeting at least a 1-2pp pa increase in sales of high-end products as a percentage of total sales (22% in FY10). On our understanding, Mengniu's high-end products carry gross margins of 30-40%, compared with a 25.7% blended GPM in FY10. We estimate Mengniu has an approximately 60% share of the high-end pure liquid milk segment in China. Furthermore, Mengniu would also see a 3% effective ASP increase in FY11F as a result of direct price hikes implemented at end-FY10 and in early FY11F.

Gross margin expansion on track Management expects gross margin to improve to 28% by end-FY15F, from 25.7% in FY10, with a 0.3-0.5pp improvement pa amid product mix upgrades and assuming no significant volatility in raw milk price. We see limited downside risk to the targeted gross margin improvement given an increasing supply of raw milk. We expect gross margin to increase to 26.2% in FY11F and 26.7% in FY12F, from 25.7% in FY10, on the back of manageable input costs and product mix enhancement. Management said raw milk prices had been relatively weak since April, in view of increasing supply and contracting market demand as a result of the recent industry license inspections. It believes raw milk prices are likely to remain weak in 2Q and 3Q, the high season for supply, with the average price for full-year FY11F seen rising by 35% y-y at most.

Positive operating leverage Management reiterated that Mengniu has attained the scale economies needed to bring positive operating leverage. It was confident that selling expense as a percentage of turnover will be down slightly y-y (within 18% in FY11F) and will decline further thereafter. Recent industry consolidation driven by regulatory change could, we believe, make it easier for Mengniu to achieve its target of controlling selling expenses. Valuation We value Mengniu at 23x 12-month forward EPS of RMB1.218 (excluding stock option expense), at par with the China F&B sector average. Although we contend that Mengniu deserves a premium due to its premium brand status, we value it at par to the sector given risks in the raw milk sourcing chain.

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Fig. 1: Mengniu: key assumptions

Old 20.9 13.0 7.0

FY11F New 28.7 17.0 10.0

pp chg 7.8 4.0 3.0

Old 18.5 15.0 3.0

FY12F New 20.6 16.0 4.0

pp chg 2.2 1.0 1.0

7.5

5.0

(2.5)

2.0

3.0

1.0

Gross margin (%)

25.7

26.2

0.4

26.4

26.7

0.3

SG&A as % to turnover (%)

20.8

20.3

(0.5)

20.2

19.8

(0.4)

Revenue y-y growth (%) Volume y-y growth (%) ASP y-y growth (%) Raw milk cost y-y change (%)

Source: Nomura estimates

Fig. 2: Domestic raw milk price (RMB/kg) 3.4 3.2 3.0 2.8 2.6 2.4 2.2 May-11

Mar-11

Jan-11

Nov-10

Sep-10

Jul-10

May-10

Mar-10

Jan-10

Nov-09

Sep-09

Jul-09

Mar-09

May-09

Jan-09

Nov-08

Sep-08

Jul-08

May-08

Mar-08

Jan-08

2.0

Source: Ministry of Agriculture, Nomura research

Fig. 3: Mengniu: revenue breakdown UHT milk

Milk beverage

Yogurt

Ice cream

Other dairy products

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY06

FY07

FY08

FY09

FY10

Source: Company data, Nomura research

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Fig. 4: Mengniu: GPM and EBIT margin

Gross margin

(%)

EBIT margin

30.0 25.0 20.0 15.0 10.0 5.0 0.0 (5.0) FY08

FY09

FY10

FY11F

FY12F

Source: Company data, Nomura estimates

Fig. 5: Mengniu: rolling 12-month forward P/E bands 90

Price (HK$) 55x

70

45x

50

35x 25x

30

15x 5x

10 (10) (30)

Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11

(50)

Source: Bloomberg, IBES, Nomura International (HK) Limited

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Appendix A-1 Analyst Certification I, Emma Liu, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures Mentioned companies Issuer name China Mengniu Dairy

Ticker 2319 HK

Price HKD 24.60

Price date 13-Jun-2011

Stock rating Buy

Sector rating Not rated

Disclosures 4,58

Disclosures required in the European Union 4

Market maker Nomura International plc or an affiliate in the global Nomura group is a market maker or liquidity provider in the securities / related derivatives of the issuer.

Disclosures required in Hong Kong 58

Nomura financial interest/business relationships disclosures: Nomura International (Hong Kong) Limited or an affiliate in the global Nomura group is a market maker or liquidity provider in the securities / related derivatives of the issuer.

Previous Rating Issuer name China Mengniu Dairy

China Mengniu Dairy (2319 HK)

Previous Rating Neutral

Date of change 19-Nov-2010

HKD 24.60 (13-Jun-2011) Buy (Sector rating: Not rated)

Rating and target price chart (three year history) Date 01-Apr-2011 19-Nov-2010 19-Nov-2010 14-Jul-2010 11-Sep-2009 11-Sep-2009 17-Apr-2009 14-Nov-2008 22-Oct-2008 19-Sep-2008 19-Sep-2008 30-Jul-2008 30-Jul-2008

Rating

Target price 31.00 32.00

Buy 24.00 21.20 Neutral 8.30 Reduce 5.60 12.00 Sell 24.00 Neutral

Closing price 20.10 21.45 21.45 25.65 20.10 20.10 13.02 6.70 8.02 20.00 20.00 22.90 22.90

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our TP of HKD34 is based on 23x 12-month forward EPS (excluding stock option expense) of RMB1.218. Although we believe Mengniu deserves a premium due to its premium brand staus, we value it at par with the sector given risks in the raw milk sourcing chain.

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Risks that may impede the achievement of the target price Downside risks: higher-than-expected raw milk prices, higherthan-expected A&P expenses, and food safety scandals.

Important Disclosures Online availability of research and additional conflict-of-interest disclosures Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and THOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS and BLOOMBERG. Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for technical assistance. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed on the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily responsible for marketing Nomura’s Equity Research product in the sector for which they have coverage. Marketing Analysts may also contribute to research reports in which their names appear and publish research on their sector.

Distribution of ratings (US) The distribution of all ratings published by Nomura US Equity Research is as follows: 38% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 4% of companies with this rating are investment banking clients of the Nomura Group*. 55% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 1% of companies with this rating are investment banking clients of the Nomura Group*. 7% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 0% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 March 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report.

Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 37% of companies with this rating are investment banking clients of the Nomura Group*. 40% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 46% of companies with this rating are investment banking clients of the Nomura Group*. 11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 16% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 March 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report.

Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008 The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research);Global Emerging Markets (exAsia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.

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Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.

Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008) STOCKS A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.

Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and 20%. A 'Neutral' recommendation indicates that upside or downside is less than 10%. A 'Reduce' recommendation indicates that downside is between 10% and 20%. A 'Sell' recommendation indicates that downside is more than 20%. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.

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June 14, 2011

Target Price A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.

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