Strategy | A U S T R A L I A 2011 Outlook

NOMURA INTERNATIONAL (HK) LIMITED

+852 2252 1424 +61 2 8062 8412

[email protected] [email protected]

TOP DOWN

A N C H O R

R E P O R T

Mixo Das Richard Johnson

Sunny side up We retain our Bullish stance on Australian equities entering 2011. As deflation fears recede and investors reallocate funds from bonds to equities globally, developed markets will be favoured, in our view. Given its attractive valuation and excellent return profile, Australia stands to benefit. In contrast to most markets in the region, monetary conditions in Australia will likely ease in 2011, as the RBA is already past the bulk of tightening and is in a position to conduct policy more flexibly. In addition, the AUD is likely to remain stable against the US$ (meaning it will weaken against most trade partners’ currencies). Commodity prices are likely to remain strong over the next two years, keeping terms-of-trade elevated. Despite the favourable conditions, Australian equities are cheap at 11.5x 2011F earnings and a dividend yield of 4.6%. We continue to recommend switching from banks to consumer staples and initiate a new switch from US to Australian health care. We also recommend owning a basket of Australian LNG players.

 A rebalancing economy  One step forward, one step back

Stocks for action Stock

Rating

Price

Price target 7.55

Amcor (AMC AU)

BUY

6.8

Cochlear (COH AU)

BUY

80.4

89.0

Myer Holdings (MYR AU)

BUY

3.6

4.50

RIO Tinto (RIO LN)

BUY 4,584p 5,900p

Westpac (WBC AU)

BUY

22.4

25.0

Woodside (WPL AU)

BUY

42.6

56.4

REDUCE

30.9

28.6

Leighton (LEI AU)

Pricing as of 30 December, 2010

Analysts Mixo Das +852 2252 1424 [email protected] Richard Johnson +61 2 8062 8412 [email protected] Stephen Roberts +61 2 8062 8631 [email protected]

 Linking into the Silk Road And the Australia Research team

Nomura Anchor Reports examine the key themes and value drivers that underpin our sector views and stock recommendations for the next 6 to 12 months.

Don’t miss our companion outlook reports on Asia and Global Economics, published 6 December 2010.

Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 69 to 72. Nomura

4 January 2011

Strategy | A U S T R A L I A 2011 Outlook

NOMURA INTERNATIONAL (HK) LIMITED

Mixo Das Richard Johnson

+852 2252 1424 +61 2 8062 8412

[email protected] [email protected]

TOP DOWN

 Action

Market calls

After narrowly missing a recession in 2008-09, Australia’s economy has taken full advantage of the upturn in commodity trade as China and India have returned to trend-line growth. The domestic economy has begun to rebalance itself as better employment conditions have allowed the central bank to tighten rates. With the terms of trade at the highest level ever, the currency is well supported. A minerals investment boom is emerging, which we think ought to go some way in improving the economy's competitive position in commodities.

We retain a positive view on Australian equities entering 2011. We continue to recommend switching from banks to consumer staples and initiate a new switch from US to Australian health care. We also recommend owning a basket of Australian LNG players.

Anchor themes With funds flowing out of global bond markets as deflation fears subside, Australia looks attractively priced for international investors at 11.5x 2011F earnings and a dividend yield of 4.6%. With the country's productive capacity almost used up, the RBA will need to be on guard to contain inflation. With real rates positive and further rate hikes up to 5.25% in 2011, the A$ ought to remain strong against the US$, underwriting total returns.

Sunny side up

Stock

Rating

Australia has gone a long way to address its overleveraged problems, in contrast to others like China and India, where the economies/markets appear unbalanced in relation to inflationary pressures. By pre-emptively raising rates, the RBA has bought itself flexibility, while other Asian central banks have maintained loose monetary policy in hopes that China will take the lead in controlling inflation.

 One step forward, one step back With the focus on the mining boom, Australia has taken a back foot in productivity. Multi-factor productivity growth has declined in the past decade and is now in negative territory. The demographics are also decidedly turning against Australia, with the working-age population nearing a peak. This, combined with declining productivity, bodes ill for sustainable growth. The manufacturing sector in particular looks most worrisome with its productivity losses and lack of capital expenditure.

BUY

6.8

7.55

Cochlear (COH AU)

BUY

80.4

89.0

Myer Holdings (MYR AU)

BUY

3.6

4.50

RIO Tinto (RIO LN)

BUY

4,584p

5,900p

Westpac (WBC AU)

BUY

22.4

25.0

Woodside (WPL AU)

BUY

42.6

56.4

REDUCE

30.9

28.6

Leighton (LEI AU)

Pricing as of 30 December, 2010

Mixo Das +852 2252 1424 [email protected] Richard Johnson +61 2 8062 8412 [email protected] Stephen Roberts +61 2 8062 8631 [email protected] and the Australia Research team

 Linking into the Silk Road Nomura's regional energy team expects a five-fold increase in Australia's LNG export capacity, given that the building of several projects is under way. The team expects a quadrupling of gas production from the current 47bcm to just under 200bcm by 2020F. The expansion of LNG projects in Western Australia’s offshore basin alongside Coal Seam Gas (CSG) projects in Eastern Australia and ventures in Papua New Guinea ought to lift Australasia from number six to the largest LNG exporter in the world by 2015F, we expect.

1

Price target

Amcor (AMC AU)

Analysts

 A rebalancing economy

Nomura

Price

4 January 2011

Strategy | Australia

Mixo Das

Contents Top picks

3

Recommendations

4

Sunny side up

6

Sector Aggregates and Indices

12

Quantitative Insights

14

Australia Factor Returns

15

Economic outlook: Tiger taming

16

Baseline economic forecast

16

Correlations may be misleading

20

One step forward, one step back

24

Linking into the Silk Road

28

Economic housing: the next driver?

33

Impact from Basel III

36

Appendix 1: Commodity Price Forecasts

38

Appendix 2: Nomura FX forecasts

39

Stock picks

41

Amcor

42

Cochlear

46

Leighton Holdings

50

Myer Holdings

54

Westpac Banking Corp

58

Woodside Petroleum

62

Rio Tinto

66

Also see our Anchor Report: Asia Pacific Strategy — Deflation, inflation and the return of the productive economy (6 December, 2010)

Also see our NOMURA: 2011 Global Economic Outlook — Rocky Road of Recovery (6 December, 2010)

Nomura

2

4 January 2011

Strategy | Australia

Mixo Das

Stocks for Action

Top picks Exhibit 1. Top Picks Company Amcor (AMC AU)

Price Price target (local) (local)

Nomura rating

Analyst comment Packaging share prices have historically performed best during periods of acquisition-sponsored earnings growth. Amcor is in just such a period.

Analyst(s) Richard Johnson Simon Thackray

6.8

7.55

BUY

Cochlear (COH AU)

80.4

89.0

BUY

We believe the market size of cochlear implantation is large, Dr. David Stanton with the major potential growth impediment being a rise in Zara Lyons cochlear implant support staff.

Myer Holdings (MYR AU)

3.55

4.50

BUY

An emerging sustainable improvement in underlying sales fundamentals points to solid value opportunities in the Australian discretionary retail sector. Recent sector weakness on tightened policy rates provides a good entry point, in our view, with solid employment and wage growth set to drive discretionary spend in 2011F.

4,584p

5,900p

BUY

A prolonged period of high commodity prices will spur super- Paul Cliff normal free cashflow over the next several years, particularly in iron ore, coal, and copper. We prefer those miners more inclined to return excess cash to shareholders.

Westpac (WBC AU)

22.4

25.0

BUY

We believe the current valuation discount to peers presents Victor German a good opportunity for investors looking to achieve exposure Anthony Hoo to a quality domestic banking franchise. Prue Rydstand

Woodside (WPL AU)

42.6

56.4

BUY

Clean and efficient natural gas is expected to see robust Xavier M Grunauer demand growth in the Asia Pacific region in the medium and longer term. We expect global attention to turn to Australia’s vast gas reserves, especially once new infrastructure is built.

Leighton (LEI AU)

30.9

28.6

REDUCE

Rio Tinto (RIO LN)

Nick Berry David Cooke Rob Freeman

Whilst broader macroeconomic and resource themes tend to Richard Johnson dominate the sector, company-specific risks remain in our Simon Thackray view and we see EPS remaining sensitive to impairment and the risk of further provisions on major contracts.

Note: pricing as of 30 December, 2010 Source: Bloomberg, Nomura estimates

Nomura

3

4 January 2011

Strategy | Australia

Mixo Das

Market calls

Recommendations On 2 September 2010, we initiated a trade to be long consumer staples versus banks. Banks in Australia, we note, have long-term funding issues and regulatory overhang. Consumer stocks, in contrast, will likely see benefits over time, in our view, as the income shock percolates through the economy.

Exhibit 2. Australia consumer staples vs banks

We continue to prefer consumer stocks to banks

104 102 100 98 96 94 92 30-Dec

23-Dec

16-Dec

9-Dec

2-Dec

25-Nov

18-Nov

11-Nov

4-Nov

28-Oct

21-Oct

14-Oct

7-Oct

30-Sep

23-Sep

16-Sep

9-Sep

2-Sep

90

Source: Bloomberg, Nomura

We now also recommend a switch from US healthcare stocks into Australian healthcare stocks. The healthcare sector in Australia is likely to see improving ROE and better growth in 2011 compared to US counterparts, in our view. It is also one of the few sectors in Australia that has been improving productivity and is one of the top sectors for additional expenditure allocation in Australia. The sector is currently seeing positive analyst earnings revisions, according to data compiled by Nomura Strategy Insight (please contact your sales representative to receive access to the Nomura Strategy Insight website).

Exhibit 3. Australia / US healthcare

We believe Australian healthcare sector should continue to outperform the US sector

30 25 20 15 10 5

Oct-10

Apr-10

Oct-09

Apr-09

Oct-08

Apr-08

Oct-07

Apr-07

Oct-06

Apr-06

Oct-05

Apr-05

Oct-04

Apr-04

Oct-03

Apr-03

Oct-02

Apr-02

Oct-01

Apr-01

Oct-00

Apr-00

0

Source: Bloomberg, Nomura research

Nomura

4

4 January 2011

Strategy | Australia

Mixo Das

Exhibit 4. Australia healthcare – earnings estimate revisions

Australia Healthcare sector is seeing upward earnings estimate revisions

100 80 60 40 20 0 (20) (40) (60) Nov-10

Jul-10

Mar-10

Nov-09

Jul-09

Mar-09

Nov-08

Jul-08

Mar-08

Nov-07

Jul-07

Mar-07

Nov-06

Jul-06

Mar-06

Nov-05

Jul-05

Mar-05

(80)

Note: (Upgrade – Downgrade) / (Upgrade + Downgrade). In % Source: Nomura Strategy Insight

We also recommend owning a basket of Australian LNG players – Woodside, Oil Search, Santos and Origin. Nomura's regional energy team expects a five-fold increase in Australia's LNG export capacity and a quadrupling of gas production from the current 47bcm to just under 200bcm by 2020F.

Exhibit 5. Australian LNG players consensus valuations Nomura Name

Ticker

Price

PER (x)

PBR (x)

Dividend yield (%)

Rating (local) FY1F FY2F FY1F FY2F

FY1F

ROE (%)

We recommend holding a basket of participants in Australian rapidly growing LNG sector

FY2F FY1F FY2F

Woodside

WPL AU

BUY

42.8 22.0

23.3

3.0

2.8

2.4

2.2

14.7

Origin

ORG AU

BUY

17.0 22.4

18.6

1.5

1.4

3.0

3.2

6.5

13.5 7.9

Oil Search

OSH AU

BUY

7.2 73.7

65.6

3.4

3.2

0.6

0.6

4.6

5.2

Santos

STO AU

BUY

13.3 33.0

29.4

1.5

1.5

2.9

2.5

5.1

5.1

Note: as of 30 Dec 2010. IBES consensus estimates Source: Bloomberg; Nomura International (Hong Kong) limited – Investment Strategy

Exhibit 6. Australian LNG players performance 180

LNG players will continue to outperform the market

Benchmark Performance Basket Performance

162 144 126 108 90

Nov-10

Dec-10

Oct-10

Sep-10

Jul-10

Aug-10

Jun-10

May-10

Apr-10

Feb-10 Mar-10

Jan-10

Nov-09

Dec-09

Oct-09

Sep-09

Aug-09

Jul-09

Jun-09

Apr-09

May-09

Jan-09

Feb-09 Mar-09

72

Note: as of 30 Dec 2010. Benchmark is MSCI Australia. Performance in USD Source: Bloomberg; Nomura International (HK) Ltd – Investment Strategy

Nomura

5

4 January 2011

Strategy | Australia

Mixo Das

Australia outlook 2011

Sunny side up We upgraded the Australian equity market to Bullish on 7 October 2010. We retain a positive view on Australian equities entering 2011. Stronger commodity demand, a firm currency, stable inflation and continued capital spending will likely produce favourable returns despite a decline in productivity and peaking demographics, in our view.

We retain our Bullish view on Australian equities

We continue to recommend switching from banks to consumer staples and initiate a new switch from US to Australian health care stocks. We also recommend owning a basket of Australian LNG players — namely Woodside, Oil Search, Santos and Origin.

Recommendations: Banks to Consumer Staples, US to Australia Healthcare, Australian LNG players

Insatiable demand from Asia in general and China in particular for Australia’s exports means that Australia is seeing an unprecedented improvement in its terms of trade. This is causing significant additions to personal income and corporate wealth. Apart from the first-round benefits to the mining sector, this additional wealth will likely start to show in incremental investment and benefit companies that help to increase productivity, in our view. Finally, as the income shock to the mining sector starts to percolate into the rest of the economy, personal consumption may surprise on the upside given very low expectations. One of our key investment themes for 2011 is the movement of funds away from fixed income into equities. The much higher returns on investment in equity markets, alongside easing deflation fears, ought to be rewarded by global investors reallocating money away from fixed income. In this respect, developed markets should benefit due to their larger market capitalisation and bigger free float, and as emerging markets see diminishing returns.

Investors will reallocate funds from fixed income to equities in 2011

Exhibit 7. Flows into emerging markets and forward relative returns

As emerging markets see diminishing returns, flows are likely to favour developed markets

2.5

-60

Emerging market returns relative to developed (RHS, inverted)

2.0 1.5

-40 -20

1.0 0 0.5 20

0.0

40

-0.5

2010

2009

60 2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1997

1996

-1.0

1998

Net Purchases of Global Emerging Markets* (LHS)

Note: * Purchases of Global Emerging Market Equity Funds as a percentage of market capitalisation, 12-month moving average Source: EPFR, FTSE, Datastream, Nomura International (Hong Kong) Limited – Investment Strategy

Among developed markets, Australian equities should benefit, in our view, as they offer attractive ROE and ROA while real interest rates are positive. With economic growth reviving and the central bank raising rates seven times, there has been a noticeable divergence in investment styles. Income themes such as dividend yield have sharply underperformed while momentum and earnings have been stellar outperformers. Also, with the yield curve flattening, financial indicators such as ROE and pre-tax margin are likely to become more important (Exhibits 35-38).

Nomura

6

4 January 2011

Strategy | Australia

Mixo Das

Australia offers better returns than other developed markets

Exhibit 8. Australia vs World ROA 18

Australia

World

16 14 12 10 8 6 4 2 Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

Jan-00

Jan-99

Jan-98

Jan-97

Jan-96

Jan-95

Jan-94

Jan-93

Jan-92

Jan-91

Jan-90

Jan-89

Jan-88

0

Note: FTSE World indices Source: Nomura Strategy Insight

The Australian equity market, however, remains quite inexpensive. Valuation multiples remain low even as the risk premium continues to reduce. In comparison to government bonds, equities also look inexpensive, having been cheaper only during 2008-09. Australian equities are still cheap, especially in comparison to bonds

Exhibit 9. Australia 1yr fwd earnings yield–1-yr govt bond yield (%) 10 8 6 4 2 0 (2) 2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

(4)

Note: FTSE world Index for earnings yield. Source: Nomura Strategy Insight, Bloomberg, Nomura International (Hong Kong) Limited – Investment Strategy

We believe that Australia’s biggest driver in the recent past and the near future has been and will be the strong demand for commodities. We expect commodity prices to remain strong over the next two years (Appendix 1). On the back of strong commodity demand, Australia has seen unprecedented improvement in its terms of trade, which is in turn driving investment expenditure.

Nomura

7

Commodity prices are likely to remain strong over the next two years…

4 January 2011

Strategy | Australia

Mixo Das

…implying that improvements in the terms of trade are likely to be sustainable…

Exhibit 10. Australia: terms of trade (% y-y) 40 30 20 10 0 (10) (20) Jun-10

Jun-08

Jun-06

Jun-04

Jun-02

Jun-00

Jun-98

Jun-96

Jun-94

Jun-92

Jun-90

Jun-88

Jun-86

Jun-84

(30)

Source: CEIC, Nomura International (Hong Kong) Limited – Investment Strategy

The composition of Australia's improving terms of trade has been far more broadbased than investors assume. The country has accrued gains not only from higher base metal prices such as copper and ferrous metals such as iron ore, but also from firmer soft commodity prices. Moreover, lesser-known metal prices such as titanium and uranium have also rallied. In addition, Australia has attained lower import prices from the deflationary pressures that have emerged from China and in technology.

125 115

Source: Bloomberg, Nomura International (HK) Investment Strategy

Jun-10

Oct-09

Feb-10

Jun-09

Oct-08

Feb-09

Jun-08

Oct-07

Source: Bloomberg, Nomura International (HK) Investment Strategy

Australia is the fastest-growing economy in the G10 and is now seeing inflationary pressures build due to limited spare capacity in the economy. Consensus GDP growth estimates for 2011F are very strong at 3.7%. SMEs are also seeing improvement in business conditions and expect 2011 to be better than 2010. In the labour market, even with record participation rates, unemployment is low.

Nomura

Feb-08

Jun-05

Jun-10

Dec-09

Jun-09

80 Dec-08

85

80 Jun-08

90

100 Dec-07

95

120

Jun-07

100

140

Dec-06

160

Jun-06

105

Dec-05

180

Jun-05

Machinery and Industrial Equipment

110

Jun-07

Metals excl Non Monetary Gold

200

Feb-07

220

Consumption Goods

120

Oct-06

Food & Live Animals

240

Capital Goods

130

Oct-05

260

Jun-06

Mineral Fuels

280

Exhibit 12. Australia: selected import price indices

Feb-06

Exhibit 11. Australia: selected export price indices

…helped further by a broad-based weakening in import prices

8

Australia is the fastest-growing country in the G10…

4 January 2011

Strategy | Australia

Mixo Das

Exhibit 13. Australia: consensus 2011 GDP growth estimate (% y-y) 2011 GDP Growth Estimate

4.1 3.9 3.7 3.5 3.3 3.1 2.9 2.7

Nov-10

Oct-10

Sep-10

Aug-10

Jul-10

Jun-10

Apr-10

May-10

Mar-10

Feb-10

Jan-10

Nov-09

Dec-09

Oct-09

Sep-09

Jul-09

Aug-09

Jun-09

Apr-09

May-09

Mar-09

Feb-09

2.5

Source: Bloomberg, Nomura International (Hong Kong) Limited – Investment Strategy

The RBA has had to be the leader of this rate hike cycle. After raising rates seven times in the past 15 months, Australia is one of the few countries in Asia with positive real interest rates. At this point, we think that the bulk of the tightening is already done and it gives the RBA much more flexibility in conducting monetary policy going forward. Our economist, Stephen Roberts, expects the RBA to hike twice in March and May 2011 to 5.25%. The rate differential to the Fed’s target will then be over 500bps.

The RBA has aggressively intervened to control inflation by raising rates 7 times in the past 15 months…

Exhibit 14. RBA rate forecast (%)

…and is now expected to raise rates just twice more in 2011

8 7 Estimate 6 5 4 3

Feb-11

Feb-10

Feb-09

Feb-08

Feb-07

Feb-06

Feb-05

Feb-04

Feb-03

Feb-02

Feb-01

Feb-00

2

Source: Bloomberg, Nomura Global Economics, Nomura International (Hong Kong) Limited – Investment Strategy

Our FX team forecasts the Australian dollar will hold around parity against the greenback in 2011F and 2012F. According to the FX team, the Australian dollar is more stretched now than when it reached its previous peak of A$0.985/US$ in July 2008. However, the team believes that as Australia is the only strong economy in the G10, the degree of stretch is now more sustainable than it was in the past. The Australian dollar is likely to retrace back towards fair value only when substitute assets provide a reasonable investment outlook, which for now looks unlikely.

Nomura

9

4 January 2011

Strategy | Australia

Mixo Das

Our FX team believes that the AUD is “sustainably overvalued”

Exhibit 15. Key factors (and impacts) in the Australian dollar outlook Country-specific factors

Likely Impact

Rate differential

Direction: bullish

↑

Mispricing: bearish

↓

Terms of trade

bullish

↑

Resource production

bullish

↑

very bearish

↓

bearish

↓

Valuation & competitiveness Private capital flows Fiscal policy

bullish

↑

Housing

neutral

—

Global factors Global risk sentiment

neutral

—

Global USD direction

neutral (for AUD)

—

Source: Nomura research

Given that the bulk of the RBA’s tightening and AUD strengthening is done, monetary conditions are not that tight anymore

Exhibit 16. Australia: monetary conditions index 50 40

Loose

30 20 10 0 (10)

Tight

(20)

Nov-09

Nov-08

Nov-07

Nov-06

Nov-05

Nov-04

Nov-03

Nov-02

Nov-01

Nov-00

Nov-99

Nov-98

Nov-97

Nov-96

Nov-95

Nov-94

Nov-93

Nov-92

Nov-91

Nov-90

(30)

Note: M3 (% y-y) - real interest rate (%) – REER (% y-y). Source: Bloomberg, CEIC, Nomura

Despite the RBA having to deal with inflationary pressures due to rising commodity prices, strong GDP growth and a small and narrowing output gap, long-term inflation expectations have remained well under control within the RBA’s target 2-3% range all year. Our economist thinks inflation is likely to remain around and slightly exceed the top of the RBA’s target range over the next two years. The RBA has been successful so far in keeping inflation in check

Exhibit 17. Australia: break-even inflation (10-year) 3.1

AU 10yr BE (LHS)

3.0

AOI (RHS)

5,200 5,000

2.9 2.8

4,800

2.7

4,600

2.6 2.5

4,400

2.4

4,200

2.3 Dec-10

Nov-10

Oct-10

Sep-10

Aug-10

Jul-10

Jun-10

May-10

Apr-10

Mar-10

Feb-10

4,000 Jan-10

2.2

Source: Bloomberg, Nomura International (Hong Kong) Limited – Investment Strategy

Nomura

10

4 January 2011

Strategy | Australia

Mixo Das

In terms of valuation, the market is certainly still attractive, in our view. At a forward 2011F P/E of 11.5x, only Korea and China H-shares are cheaper. P/BV of 1.7x is also fairly reasonable and well below the long-term average. Please see the Quantitative Insight section for more on historical valuations for Australia.

In terms of valuation, the market is certainly still attractive

Exhibit 18. Regional valuation comparison Market Australia China Hong Kong

India Indonesia Korea

P/E (x)

P/BV (x)

P/CF (x)

P/S (x)

Index Universe

2010F

2011F

2010F

2011F

2010F

2011F

2010F

AOI

13.8

11.5

1.9

1.7

9.5

8.1

1.5

1.4

CSI 300

15.6

13.0

2.3

2.1

9.9

7.7

1.2

1.0 2.3

2011F

HSI

14.4

12.2

1.9

1.7

9.5

8.6

2.5

HSCCI

14.4

13.2

2.2

2.0

8.2

7.2

2.3

2.1

HSCEI

11.8

9.9

2.1

1.9

7.5

6.6

1.0

0.8 1.8

HSCI

15.2

13.0

2.0

1.8

10.0

9.3

2.1

SENSEX

18.6

15.8

3.4

2.7

21.6

11.3

2.2

2.0

JCI

18.5

15.5

3.8

3.2

12.6

10.8

2.6

2.3 0.9

KOSPI

11.0

10.2

1.5

1.4

8.0

7.6

1.0

KLCI

17.2

15.3

2.3

2.1

10.0

9.1

2.1

2.0

Philippines

PASHR

18.0

16.2

2.5

2.3

10.4

10.2

2.3

2.1

Singapore

FSTAS

15.3

14.0

1.7

1.6

10.7

9.0

1.4

1.3

TWSE

15.4

13.4

2.1

1.9

9.0

8.1

1.0

0.9

SET

14.8

12.7

2.1

1.9

8.9

8.2

1.0

0.9

Malaysia

Taiwan Thailand

Data as of 30 Dec 10 Source: Bloomberg, IBES, Nomura International (HK) Quantitative Strategies

In comparison with the rest of the region, the equity market in Australia looks attractively priced, with high double-digit earnings growth forecast for 2011F and a dividend yield of 4.6%, which is the highest in Asia. Profitability is exceptional, with Australia also ranking highest in terms of expected ROA for 2011F.

Exhibit 19. Regional comparison Market Australia China Hong Kong

India Indonesia

Index Universe

EPS growth (%)

Dividend yield (%)

ROE (%)

ROA (%)

2010F

2011F

2010F

2011F

2010F

2011F

2010F

2011F

AOI

12.0

18.8

4.1

4.6

13.7

15.2

8.9

12.2

CSI 300

28.9

19.9

2.2

2.6

16.4

17.3

7.2

7.6

HSI

22.3

17.4

3.1

3.6

13.5

14.8

7.3

7.7

HSCCI

13.1

9.2

2.7

2.9

15.8

15.6

9.3

9.4

HSCEI

25.8

18.6

3.3

4.0

19.2

20.2

6.4

6.8

HSCI

24.7

17.0

2.6

3.0

13.5

14.7

7.0

7.5

SENSEX

11.4

17.7

1.0

1.4

15.4

17.3

15.4

10.8 11.6

JCI

29.6

18.9

2.1

2.6

22.3

23.0

8.9

KOSPI

34.3

8.0

1.7

2.1

14.7

14.3

8.7

8.5

KLCI

28.3

12.5

3.1

3.4

12.9

13.9

6.5

6.9

Philippines

PASHR

18.0

11.1

2.4

2.6

14.4

15.1

5.3

7.6

Singapore

FSTAS

14.4

9.7

2.7

2.9

10.7

11.0

5.7

5.6

TWSE

59.0

13.9

3.7

4.2

13.4

14.3

8.9

9.3

SET

19.3

16.9

3.3

3.6

15.1

15.9

8.1

9.2

Korea Malaysia

Taiwan Thailand

Data as of 30 Dec 10 Source: Bloomberg, IBES, Nomura International (HK) Quantitative Strategies

Nomura

11

4 January 2011

Strategy | Australia

Mixo Das

Sector Aggregates and Indices Exhibit 20. Sector aggregate metrics ROE change (2011 vs 2010)*

Net income margin 15.6

Operating margin 22.4

P/E 2011F 12.4

P/B 2011F 2.0

Div yld 2011F 0.0

Metals & Mining

6.5

ROE 2011F 14.5

Oil, Gas and Chemicals

3.9

6.1

10.0

8.2

14.9

1.6

0.0

1.0

Health Care

2.7

17.8

9.5

16.9

17.8

4.1

2.8

0.4

Sector

Beta 1.3

Transport

2.7

8.1

-0.6

8.3

14.6

1.1

4.7

1.1

Hotels, Leisure and Other Services

1.7

19.6

8.4

15.7

15.7

2.4

4.3

0.5

Commercial Services

1.5

18.9

6.6

9.9

15.0

2.4

2.9

0.9

Real Estate

1.0

10.7

4.4

0.8

13.0

1.5

3.9

0.6

Telecommunication Services

0.8

16.8

16.7

21.5

11.3

2.1

4.8

0.5

Food, Beverages and Staples retailing

0.6

10.8

2.8

5.9

15.0

1.3

4.8

0.4

Media

0.6

11.2

11.2

13.7

12.6

1.3

5.1

0.8

Diversified Financials

0.6

12.3

13.7

14.1

14.8

2.1

5.2

1.1

Insurance

0.4

13.9

7.6

12.9

11.9

1.8

4.9

0.7

Construction, Engineering and Machinery

0.4

15.4

4.2

5.9

13.6

2.0

3.7

1.1

REITs

0.3

6.8

16.0

32.7

11.8

0.8

6.9

1.3

Banks

0.0

14.3

13.6

18.7

11.4

1.7

6.1

1.2

Utilities

-0.1

7.9

8.1

18.4

16.6

1.2

8.9

0.6

Software & Services

-2.0

28.7

16.9

23.2

15.0

4.2

4.3

0.7

Building & Packaging Products

-2.5

6.9

1.0

5.7

14.4

1.0

4.7

1.0

Durables and Durables retailing

-3.5

20.5

5.3

7.1

11.6

2.3

5.3

0.8

Note: Median of constituents except Net Income Margin and Operating Margin which are sum of total. Sorted by ROE change. IBES estimates. Based on AOI members as of 20 Dec 2010 over $100mn market cap. *calculated as sector median ROE for 2011 – sector median ROE for 2010. Source: Factset, Bloomberg, IBES, Nomura International (HK) – Investment

Exhibit 21. Materials

Source: Bloomberg, Nomura Int’l (HK) – Investment Strategy

Nomura

Apr-10

Apr-09

Apr-08

Apr-07

Apr-06

Apr-05

Apr-04

0 Apr-03

1,000

0

Apr-02

2,000

Apr-00

2,000

Apr-10

3,000

4,000

Apr-09

6,000

Apr-08

4,000

Apr-07

5,000

8,000

Apr-06

10,000

Apr-05

6,000

Apr-04

7,000

12,000

Apr-03

14,000

Apr-02

8,000

Apr-01

9,000

16,000

Apr-00

18,000

Apr-01

Exhibit 22. Banks

Source: Bloomberg, Nomura Int’l (HK) – Investment Strategy

12

4 January 2011

Strategy | Australia

Mixo Das

Exhibit 23. Consumer Staples

Exhibit 24. Consumer Discretionary

10,000

4,000

9,000

3,500

8,000

3,000

7,000 6,000

2,500

5,000

2,000

4,000

1,500

3,000

Source: Bloomberg, Nomura Int’l (HK) – Investment Strategy

Source: Bloomberg, Nomura Int’l (HK) – Investment Strategy

Exhibit 25. Energy

Exhibit 26. Healthcare

Apr-10

Apr-09

Apr-08

Apr-07

Apr-06

Apr-05

Apr-04

Apr-03

Apr-02

Apr-00

Apr-10

Apr-09

Apr-08

Apr-07

Apr-06

Apr-05

Apr-04

Apr-03

0 Apr-02

0 Apr-01

500 Apr-00

1,000

Apr-01

1,000

2,000

12,000

25,000

10,000

20,000

8,000

15,000

6,000 10,000

4,000

5,000

2,000

Exhibit 28. Telecom

8,000

3,500

7,000

3,000

6,000

Apr-10

Exhibit 27. Industrials

Apr-10

Source: Bloomberg, Nomura Int’l (HK) – Investment Strategy

Apr-09

Source: Bloomberg, Nomura Int’l (HK) – Investment Strategy

Apr-09

Apr-08

Apr-07

Apr-06

Apr-05

Apr-04

Apr-03

Apr-02

Apr-01

Apr-00

Apr-10

Apr-09

Apr-08

Apr-07

Apr-06

Apr-05

Apr-04

Apr-03

Apr-02

Apr-01

0 Apr-00

0

2,500

5,000

2,000

4,000

1,500

3,000

Source: Bloomberg, Nomura Int’l (HK) – Investment Strategy

Nomura

Apr-08

Apr-07

Apr-06

Apr-05

Apr-04

Apr-03

Apr-02

Apr-00

Apr-10

Apr-09

Apr-08

Apr-07

Apr-06

Apr-05

Apr-04

Apr-03

0 Apr-02

0 Apr-01

500 Apr-00

1,000

Apr-01

1,000

2,000

Source: Bloomberg, Nomura Int’l (HK) – Investment Strategy

13

4 January 2011

Strategy | Australia

Mixo Das

Quantitative Insights Sandy Lee / Quantitative Research Team

Exhibit 29. Australia: mutual fund investing

1.5

1,500 Oct-09

300

2,500

- Sep-10

2.0

Nov-08

400

3,500

P/BV

Jan-07

2.5

4,500

Dec-07

500

5,500

Feb-06

3.0

Apr-04

600

7,500 6,500

Mar-05

700

3.5

May-03

4.0

Aug-10

Note: updated up to 30 November, 2010

Note: updated up to 17 Dec, 2010

Source: Bloomberg, IBES, Datastream, Nomura Int’l (HK) – Quant Research

Source: Bloomberg, IBES, Datastream, Nomura Int’l (HK) – Quant Research

Exhibit 31. Australia: 12m Fwd P/E Band

Exhibit 32. Australia: Rolling dividend yield

Note: updated up to 17 Dec, 2010

Note: updated up to 17 Dec, 2010

Source: Bloomberg, IBES, Datastream, Nomura Int’l (HK) – Quant Research

Source: Bloomberg, IBES, Datastream, Nomura Int’l (HK) – Quant Research

Exhibit 33. Australia: Cumulative market breadth

Exhibit 34. Australia: Implied risk premium 8 6

+2

4 2

+ Mean RP = 0.5%

0

-

(2)

Sep-09

Jun-08

Mar-07

Aug-04

May-03

Feb-02

Nov-00

Jul-99

Apr-98

Nov-05

-2

(4) Jan-97

Apr-10

Aug-10

Dec-09

Aug-09

Apr-09

Dec-08

Aug-08

Apr-08

Dec-07

Aug-07

Apr-07

Dec-06

Apr-06

Aug-06

Dec-05

Risk premium (%)

Oct-95

7,500 7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500

Jul-94

AUAOI

AUAOI Index

Apr-93

Cumulative breadth (AU) 4,000 2,000 0 (2,000) (4,000) (6,000) (8,000) (10,000) (12,000) (14,000)

Note: updated up to 17 Dec, 2010

Note: updated up to 17 Dec, 2010

Source: Bloomberg, IBES, Datastream, Nomura Int’l (HK) – Quant Research

Source: Bloomberg, IBES, Datastream, Nomura Int’l (HK) – Quant Research

Nomura

Dec-10

Dec-09

-2 Jan-97

Dec-09

Sep-08

Jul-07

May-

Mar-05

Dec-03

Oct-02

Aug-01

May-

Jan-98

Mar-99

Oct-96

Aug-95

Apr-93

Jun-94

1,500

-

Dec-08

6x

Dec-07

2,500

Mean DY = 3.7%

Dec-06

9x

Dec-05

3,500

Dec-04

12x

Low on 11/20/08 8.9x

+2 +

Dec-03

4,500

22.5x

Dec-02

15x

High on 03/22/00

Dec-01

Mean PE = 16x

5,500

10 9 8 7 6 5 4 3 2 1 0

Dec-00

6,500

18x

Dec-99

Current PE = 13.3x

Yield (%)

Dec-98

21x

7,500

Dec-97

AUAOI

14

4 January 2011

Dec-10

Dec-09

Apr-09

Aug-08

Dec-07

Apr-07

Aug-06

Dec-05

Apr-05

Aug-04

Apr-03

Dec-03

(2,000)

800

Index 8,500

Price

+

Jul-01

(1,000)

4.5

Jun-02

0

900

Aug-00

1,000

5.0

Oct-98

2,000

1,000

Sep-99

1,100

Rolling P/BV (x) 6.0 Current PBV = 2.33x High on 11/01/07 5.46x 5.5 Mean PBV = 2.85x Low on 07/17/96 1.88x

Jan-96

3,000

1,200

Nov-97

Benchmark (US$, MSCI index)

MSCI Australia (RHS) Cumulative net inflow (LHS)

4,000

Dec-96

Cumulative net inflow (US$mn)

Exhibit 30. Australia: Rolling fwd calendar year P/B

Strategy | Australia

Mixo Das

Australia Factor Returns Exhibit 35. Size, momentum and liquidity factors Market cap * Price momentum (1M) Price momentum (12M -1M) Volume turnover ratio

140 120 100 80 60 40 20 0 (20) (40) (60) (80)

Exhibit 36. Valuation factors 60 40

Dividend yield

Earnings yield

Cashflow yield

EBITDA/EV

B/P

20 0 (20) (40)

Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10

Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10

(60)

Exhibit 37. Revision and earnings yield factors Revision index Change in earnings yield StarMine predicted surprise Normalised E/P Sales growth (FY2) EPS growth (FY2)

100 80 60 40

Exhibit 38. Financial and risk factors Return on equity Shareholders’ equity ratio Pretax profit margin Volatility Estimate dispersion Default probability *

60 40 20 0

20

(40)

(20)

(60) Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10

0

Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10

(20)

Source: Worldscope, I/B/E/S, Nomura research Note: Data are based on estimates for stocks in the MSCI Australia Index. Factor returns are annualised figures. Factor returns and rankings are generated by calculating the subsequent performance of an equal-weighted portfolio that is long the highest one-third and short the one-third with the lowest scores (country and sector diversified for regional universe and sector diversified for country universe), except for the factors marked with *, which are reversebased

Nomura

15

4 January 2011

Strategy | Australia

Mixo Das

Australia economics

Economic outlook: Tiger taming Stephen Roberts +612 8062 8631 / [email protected] Tatiana Byrne +612 8062 8505 / [email protected]

Above-trend GDP growth later in 2011, driven by a major increase in investment spending in the resources sector, will have policymakers trying to tame growth and limit inflationary pressure.

Baseline economic forecast GDP growth We expect persistently strong GDP growth from mid-2011 and in 2012 (3.3% in 2011, up from 2.8% in 2010, and accelerating to 3.6% in 2012), above the long-term trend (3.3%), with very rapid growth in exports and pronounced acceleration in business investment spending the main drivers. Another feature is unusually strong GDP growth in current prices (exhibit below, LHS). Our forecast increases in export volumes and a record lift in spending on resource projects both derive from our view of robust growth in major Asian export markets, especially with China taking close to a quarter of merchandise exports, thus keeping commodity prices elevated.

We expect above-trend GDP growth from mid-2011 on record resource investment spending

Very rapid growth in export volumes and business investment spending will be tempered, in our view, by cautious household and government spending extending through 2011 and 2012. We see a high household debt burden weighing on household spending, especially with borrowing interest rates pushing further above the average of the past decade on more policy rate hikes in the first half of 2011 on our forecasts. We believe that the lift in the household savings ratio to a quarter-century high (exhibit below, RHS) is likely to persist over at least the next year, helping to maintain belowlong-term-average growth in nominal and real retail sales and constraining housing activity, notwithstanding the persistent undersupply of new homes relative to what strong population growth implies for demand for new homes.

Weighed by a heavy debt burden, household spending is likely to stay cautious

We also see weaker government spending acting as a drag on growth through 2011. On our calculations, the end of several big post global financial crisis (GFC) spending initiatives in 2010, including the major impetus to construction spending from the schools building programme, will see government spending providing 1.3 percentage points (pp) less impetus to GDP growth than in 2010.

Weaker government spending is also likely to temper the pace of GDP growth, in our view

Exhibit 39. Australia: real and nominal GDP growth (% y-y) 12

Real GDP

Nomura forecast

Nominal GDP

Exhibit 40. Australia: household savings ratio % disposable income 12

10 8

8 6

4

4 2

0

0 (2) (4) Dec-02

Dec-04

Dec-06

Source: Nomura Global Economics

Nomura

Dec-08

Dec-10 F Dec-12 F

(4) Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Source: Nomura Global Economics

16

4 January 2011

Strategy | Australia

Mixo Das

Inflation Economic spare capacity is limited, especially in the labour market where we see the unemployment rate falling below 5% in 2011 – a level that in the past has been consistent with higher wage increases and rising inflation. In the private sector in 2011, we see annual wage increases above 4%, on the edge of presenting wage-push inflation pressure, compared with a well-contained 3.2% average estimated annual increase through 2010. While Australian dollar strength (we forecast AUD/USD appreciating to 1.02 by end-2011) and forward-looking monetary-policy tightening by the Reserve Bank (RBA) may limit how far inflation rises, we still expect year-on-year CPI and underlying inflation to move a little above the RBA’s target band in the second half of 2011 (Exhibit below, LHS) and stay elevated in 2012.

Limited economic capacity could add to wage pressure, with inflation moving above the RBA’s target

Balance of payments We expect the current-account deficit to narrow to AUD25bn (1.8% of GDP) in 2011 from AUD35bn (2.6% of GDP) in 2012, due mostly to stronger export volumes and prices, but also with the firmer AUD exchange rate providing a valuation effect containing the net-income deficit. A relatively high household savings ratio in 2011 and a smaller government deficit in FY11 – effectively less government dissaving – also point to a smaller call on overseas savings to fund Australian investment.

Stronger exports should contribute to the current-account deficit narrowing to 1.8% of GDP in 2011

Policy responses We believe policymakers will have to deal with the consequences of a massive, positive shock to national income and GDP growth from a once-in-a-century improvement in the terms of trade (Exhibit below, RHS). We see policy to be set to offset this in part, making space by limiting growth in government and household spending.

Policymakers need to offset the positive shock to GDP growth from terms-of-trade strength

Apart from the run-off in government spending post GFC, we see the RBA working to establish a cash rate early in 2011 consistent with commercial banks’ standard variable mortgage interest rates of around 8.50%, about 1pp above the long-term average. Our forecast is that two more 25bp cash rate hikes to 5.25% should suffice and, given that the RBA probably wants to establish the rate level ahead of accelerating business investment in mid-2011, these should be complete by 3Q11. At this stage, we view March and May as likely months for the next two hikes allowing for an accumulation of firmer economic readings, notably monthly labour market readings, as well as signs in the 4Q10 CPI report (due in late January 2011) and the 1Q11 CPI (due in late April) that inflation is threatening to accelerate.

Monetary policy is likely to become tighter, with the RBA likely to hike twice in 2011, we think

Exhibit 41. Australia: annual inflation

Exhibit 42. Australia: terms of trade

CPI Average underlying upper band level lower band level RBA forecast (CPI) RBA forecast (average underlying)

(% y-y) 7

5

Index, 2005-2006=100 140

Nomura forecast

130

Terms of trade

120

Nomura forecast

110

RBA forecast

100 90

3

80 70 60

1 Dec-99

Dec-02

Dec-05

Source: ABS, RBA Nomura Global Economics

Nomura

Dec-08

Dec-11

50 Dec-92

Dec-97

Dec-02

Dec-07

Dec-12

Source: Nomura Global Economics

17

4 January 2011

Strategy | Australia

Mixo Das

Risks to our forecasts We think that any substantial setback in Asian growth, especially in Chinese growth, would present downside risk to growth. We conclude this because at present a substantial share of Australia’s merchandise exports are destined for Asia (75% in the 12 months to June 2010), the share of exports destined for China has grown rapidly over the past decade (Exhibit below, LHS), and these exports are dominated by key commodity exports, such as iron and coal (Exhibit below, RHS). However, the potential downside risk to Australian growth would, in our view, be limited by two considerations:

Large export exposure to Asia would reduce growth on any major Asian growth setback

1.) The export transmission channel to Australian growth is quite narrow. The total export proportion of real GDP is comparatively modest at 23.3% in Q3 2010, although on our forecasts this share climbs to 25% by the end of 2012.

The extent of the growth reduction would be limited by the relatively narrow export channel

2.) A strong fiscal position with a low deficit and almost no net government debt as well as a strong monetary policy position after seven RBA cash rate hikes in the last 15 months mean that policymakers are in a position to respond with aggressively expansionary policies in the event of any substantial downside risk to growth prospects.

Sound fiscal and monetary settings mean policymakers are able to respond forcefully to weakness

We think that worse global financial market conditions, through the channel of higher Australian bank funding costs and borrowing interest rates, could intensify deleveraging in the heavily indebted household sector, limiting growth in household consumption spending more than we currently forecast. Given the build-up in household savings since the GFC, however, the household sector is comparatively well-placed to manage higher debt servicing. Compounding pressures on household income and wealth would probably need to be in play too, event s such as sharply falling house prices (unlikely while population growth continues to outstrip by some way the supply of new homes), or a sharp lift in the unemployment rate.

A high household debt burden could also limit growth on higher borrowing interest rates

Exhibit 43. Australia’s major export markets (% of exports) 70 60

Japan Korea Big 4 total

Exhibit 44. Australia’s major export commodities (% of exports) 50

China India

40

50

Iron ore Coal LNG Coal + Iron ore+ LNG

30

40 30

20

20 10

10 0 Oct-00

Oct-02

Oct-04

Oct-06

Source: ABS and Nomura Global Economics

Nomura

Oct-08

Oct-10

0 Oct-00

Oct-02

Oct-04

Oct-06

Oct-08

Oct-10

Source: ABS and Nomura Global Economics

18

4 January 2011

Strategy | Australia

Mixo Das

Exhibit 45. Australia macro forecasts % y-y growth unless otherwise stated

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

2010

2011

2012

0.8

4.0

3.2

3.2

4.0

4.0

3.6

3.6

-

-

-

% q-q, sa

0.2

1.0

0.8

0.8

1.0

1.0

0.9

0.9

-

-

-

% y-y

2.7

3.0

3.2

2.8

3.6

3.6

3.8

3.9

2.8

3.3

3.6

Household consumption

3.2

2.9

2.8

2.5

2.4

2.3

2.3

2.3

2.7

2.5

2.4

Government (total spending)

9.0

4.3

(0.2)

(1.0)

(1.6)

(1.0)

1.0

2.2

8.7

(1.2)

2.0

Investment (private)

2.6

1.1

7.6

10.8

12.0

13.5

11.3

7.9

0.8

11.0

7.0

Exports

4.2

4.2

9.3

6.7

5.4

5.5

7.4

9.5

5.1

6.7

9.0

Imports

12.9

5.3

7.9

8.4

4.8

7.1

9.2

9.9

12.2

6.2

7.9

Domestic final sales

4.3

2.8

3.1

3.2

3.5

4.0

4.3

3.9

3.6

3.5

3.4

Inventories and statistical discrepancy

0.1

0.4

0.1

0.0

(0.1)

0.0

0.0

0.0

0.6

(0.4)

(0.1)

(1.7)

(0.2)

0.0

(0.4)

0.2

(0.4)

(0.5)

(0.3)

(1.4)

0.2

0.3

5.2

5.0

5.0

4.9

4.9

4.8

4.8

4.7

5.2

4.9

4.7

Employment, ‘000

35.7

30.0

25.0

25.0

25.0

25.0

28.0

28.0

30.1

25.0

28.0

Consumer prices

2.8

3.0

2.9

3.0

3.2

3.3

3.3

3.2

3.0

3.1

3.1

Trimmed mean

2.5

2.5

2.5

2.8

3.0

3.1

3.1

3.1

2.7

2.9

3.1

Weighted median

2.3

2.8

2.6

2.9

3.1

3.2

3.2

3.1

2.7

3.0

3.1

(4.2)

(2.8)

(1.0)

Real GDP (sa, % q-q, annualised)

Contribution to GDP growth (% points):

Net trade Unemployment rate

Federal deficit (%of GDP) FY end-June Current account deficit (%GDP)

(2.6)

(1.8)

(2.3)

Cash rate

4.50

4.75

5.00

5.25

5.25

5.25

5.25

5.25

4.75

5.25

5.25

90-day bank bill

4.97

5.00

5.25

5.50

5.50

5.50

5.50

5.50

5.00

5.50

5.50

3-year bond

4.75

5.20

5.30

5.60

5.90

6.20

6.20

6.10

5.20

6.20

6.00

10-year bond

4.96

5.50

5.70

5.90

6.10

6.30

6.30

6.20

5.50

6.30

6.10

A$/US$

0.97

0.96

0.96

0.98

1.00

1.02

1.02

1.02

0.96

1.02

1.02

Note: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table last revised 5 November 2010. Source: Australian Bureau of Statistics; Reserve Bank and Nomura Global Economics

Nomura

19

4 January 2011

Strategy | Australia

Mixo Das

A rebalancing market

Correlations may be misleading The past three years have provided a number of textbook examples of countries falling to the problems of running current account deficits financed by short-term portfolio flows which have resulted in asset markets eventually collapsing. Paradoxically, Australia emerged unscathed from the financial crisis of 2008 and indeed, was one of the few countries able to show positive quarterly growth through 2008-09 despite its persistent current account deficit. Superficially, investors will consider overweighting Australia within international portfolios as being distinguished by China's demand for commodities. Certainly a glance at the terms-of-trade for both economies provides a real time view of the changes in underlying profitability within the two economies. But, there has been certainly a much more noticeable difference in performance of the two exchange rates even though the countries run opposite current account positions. The counterintuitive performance of exchange rates relative to their current account positions suggests that equity investors need to be careful in their asset allocation process.

Exhibit 46. Terms of trade : Australia vs China (% y-y)

Australia

40

In contrast to many markets in Asia, Australia has done much towards rebalancing its economy…

Exhibit 47. FX rates: AUD/CNY 7.5

China

7.0

30

6.5

20

6.0

10

Source: CEIC: Nomura International (Hong Kong) Limited – Investment Strategy

Jul-10

Jan-10

Jul-09

Jan-09

Jul-08

Jan-08

Jul-07

Source: Bloomberg; Nomura International (HK) Limited – Investment Strategy

Again, a glance at interest rate differentials suggests very different monetary policies than the markets are assuming. Unlike other countries, Australia has positive real interest rate differentials after raising interest rates seven times since the financial crisis commenced versus just once by China. Moreover, Australia's yield curve has begun to flatten, suggesting that the rapid policy tightening phase is over while our China economists expect the central bank to raise rates by a further 75bps in 2011 despite the Christmas hike. By pre-emptively raising rates, the RBA has bought itself flexibility in contrast to other Asian central banks that have maintained a loose monetary policy amid hopes that China would take leadership in controlling inflation.

Nomura

Jan-07

Jul-06

Jan-06

Jan-05

Sep-10

Mar-10

Sep-09

Mar-09

Sep-08

Mar-08

4.0

Sep-07

(30)

Mar-07

4.5

Sep-06

(20)

Mar-06

5.0

Sep-05

(10)

Jul-05

5.5

0

20

…however, this has not been reflected in financial markets

4 January 2011

Strategy | Australia

Mixo Das

Australia’s positive real interest rate is quite distinctive

Exhibit 48. Real interest rates (%): Australia, China and India 6

China

Australia

India

4 2 0 (2) (4) (6) (8) (10) Nov-10

Jul-10

Mar-10

Nov-09

Jul-09

Mar-09

Nov-08

Jul-08

Mar-08

Nov-07

Jul-07

Mar-07

Nov-06

Jul-06

Mar-06

Nov-05

Jul-05

(12)

Note: CPI adjusted 1 year government bond yields Source: Bloomberg: Nomura International (Hong Kong) Limited – Investment Strategy

The same is also true for property markets. On the surface, the economies of Australia, China and India have very different growth profiles but all three having been experiencing upward pressure on their property markets. To keep property prices in check, Australia has let conventional monetary policy work through higher mortgage rates while China has used administrative measures. Interestingly, this might allow Australia to avoid a hard landing for its economy in the future and protect its banking system from ill-advised lending policies.

Despite vastly different policy stances…

Exhibit 49. Property prices: Australia vs China

…Australia and China’s house prices have followed the same path

(% y-y)

Australia

20

China

15 10 5 0 (5) (10)

Sep-10

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

Mar-09

Dec-08

Sep-08

Jun-08

Mar-08

Dec-07

Sep-07

Jun-07

Mar-07

Dec-06

Sep-06

(15)

Source: CEIC: Nomura International (Hong Kong) Limited – Investment Strategy

While exports will have a high correlation to terms-of-trade and exchange rates, the services sector may be influenced by broader economic variables. Indeed, a glance at the lead indicators in the US and Europe perhaps offers investors potential earnings surprises. After a decade of overseas acquisitions, Australian earnings have become more sensitive to global growth outside the commodity sector.

Nomura

21

Improvements in global economic conditions benefit the large services sector

4 January 2011

Strategy | Australia

Mixo Das

Exhibit 50. US non-manufacturing ISM

Exhibit 51. German IFO – business climate

(diffusion index) 65

115

(2000=100)

60

110

55

105 100

50

95 45

90

Jun-92 Jun-93 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10

Mar-10

Mar-09

Mar-08

Mar-07

Mar-06

Mar-05

Mar-04

Mar-03

Mar-02

Mar-01

80

Mar-00

35

Mar-99

85

Mar-98

40

Source: Bloomberg: Nomura International (HK) Limited – Investment Strategy

Source: Bloomberg; Nomura International (HK) Limited – Investment Strategy

Ironically, the economy and Australian investor sentiment may be far more influenced by changes in global monetary conditions and demand than is currently discounted. The reliance of the Australian financial sector in the past to overseas funding was demonstrated in 2008-09 but the turnaround in global credit conditions perhaps has been under-estimated alongside the change in OECD lead indicators.

Exhibit 52. TED spread vs Australian bank performance relative to global banks FTSE AU banks relative to global banks - lhs TED spread % - rhs

900 800

Australian banks and A$ are highly sensitive to global risk levels

4.0 3.5

700

3.0

600

2.5

500

2.0

400

1.5

300

Dec-10

Sep-10

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

Mar-09

Dec-08

Sep-08

Jun-08

Mar-08

0.0

Dec-07

0

Sep-07

0.5

Jun-07

100

Mar-07

1.0

Dec-06

200

Source: Bloomberg; Thomson Reuters Datastream: Nomura International (Hong Kong) Limited – Investment Strategy

Hence, while Australia runs a current account deficit and appears to be 'reliant on commodities', the reality, in our view, is that there are far more economic variables that determine the 'flow of funds' than the market is attributing. Indeed, we would suggest that Australia will perhaps perform relatively better versus other Asian equity markets as global bond yields rise. Intuitively, countries running current account deficits ought to experience pressure on asset markets as global bond yields rise, but with both an improving terms-of-trade and resilient portfolio flows, Australia may result in better total returns than investors are imagining, in our view. Further, the dividend yield of the equity market stands at a premium to global stock markets.

Nomura

22

Investors are not acknowledging the multiple factors playing into Australia’s benefit

4 January 2011

Strategy | Australia

Mixo Das

Exhibit 53. Australia vs World: dividend yield (%) 8

Australia

Exhibit 54. Australia: P/E premium over World (%) 20

World

10

7

0

6

(10)

5

(20)

4

(30)

3

Jan-10

Jan-08

Jan-06

Jan-04

Jan-02

Jan-00

Jan-98

Jan-96

Jan-94

Jan-92

Jan-88

Jan-10

Jan-08

Jan-06

Jan-04

Jan-02

Jan-00

Jan-98

Jan-96

Jan-94

Jan-92

(60)

Jan-90

1

Jan-88

(50)

Jan-90

(40)

2

Note: FTSE World indices are used

Note: FTSE World indices are used

Source: Nomura Strategy Insight; Nomura International (Hong Kong) Limited – Investment Strategy

Source: Nomura Strategy Insight; Nomura International (Hong Kong) Limited – Investment Strategy

Perhaps Australia, 'the lucky country', has earned its iconic status by a combination of fortuitous factors, but company earnings reflect the reality of a much more diversified earnings stream than is being represented by consensus. Ironically, markets may have failed to see that Australia is far more 'advanced' than other developed economies in addressing their imbalances. Australia’s underperformance in 2010is unlikely to be repeated this year

Exhibit 55. MSCI Australia US$ relative to MSCI World US$ 850 750 650 550 450 350

Dec-10

Jun-10

Dec-09

Jun-09

Dec-08

Jun-08

Dec-07

Jun-07

Dec-06

Jun-06

Jun-05

Dec-05

Dec-04

Jun-04

Dec-03

Jun-03

Dec-02

Jun-02

Dec-01

Jun-01

Dec-00

250

Source: Bloomberg, Nomura International (Hong Kong) Limited – Investment Strategy

Nomura

23

4 January 2011

Strategy | Australia

Mixo Das

Productivity

One step forward, one step back With the focus on the mining boom, Australia has taken a back foot in productivity. Multi-factor productivity growth has declined in the past decade. The trend is decidedly downwards and is now in negative territory. The demographics are also decidedly turning against Australia, with the working-age population nearing a peak. This combined with the declining productivity bodes ill for sustainable growth. Although productivity is key for all markets in the region, its importance is possibly most pronounced in Australia.

Multi-factor productivity growth has declined in the past decade, and demographics data may not offer many reasons to cheer

Exhibit 56. Australia: multi-factor productivity growth (% y-y)

Multi-factor productivity growth is now negative

5 4 3 2 1 0 (1) (2) (3) (4)

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

(5)

Source: CEIC, ABS, Nomura International (Hong Kong) Limited – Investment Strategy

However, domestic income growth this decade has still been the strongest among the last four. This primarily comes about through growth in population and an improvement in the terms of trade. The terms of trade have improved further since the publication of the data used in the chart below and is expected to remain strong over the next year. Dismal contribution from productivity countered by termsof-trade and labour growth

Exhibit 57. Australia: contribution to real domestic income growth (% y-y) 4.5

Growth in MFP

Growth in Labor input

Growth in Capital input

Growth in Terms-of-trade

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 (0.5) 1970s

1980s

1990s

2000s*

Note: * up to June 2009. Source: Australia Productivity Commission, Nomura International (Hong Kong) Limited – Investment Strategy

Australia has however benefited from a combination of three factors that have together more than compensated for the lack of productivity growth. The first is the unprecedented improvement in the terms-of-trade. The second is the increasing demographic dividend. The working-age population as a percentage of the total in Australia had been rising over the past decade. But this is likely to reverse now, as working-age population starts to decline.

Nomura

24

4 January 2011

Strategy | Australia

Mixo Das

The favourable demographic trend is starting to reverse now

Exhibit 58. Australia: working-age population (20-65 yrs old) % of total (%) 62

Working Age %

61 60 59 58 57 56 55 2049

2046

2043

2040

2037

2034

2031

2028

2025

2022

2019

2016

2013

2010

2007

2004

2001

1998

1995

1992

1989

1986

54

Source: US Census Bureau, Nomura International (Hong Kong) Limited – Investment Strategy

Thirdly, overall population growth has recently been the highest in 40 years. Australia is quite unique in its population set-up in terms of the importance of immigration in overall growth. The Productivity Commission estimates that in 2010, over a quarter of Australia’s population consisted of those born overseas, compared with a 3% worldwide average. Population growth in Australia has therefore been quite robust due to immigration flows (increasingly from China and India), even though the domestic fertility rate has been on a long-term decline, according to the Productivity Commission. Australia’s population is currently growing at 2% p.a. compared to a growth of 0.3% in the developed world (according to the US census bureau). This has in part also helped put a floor on asset prices. Australia’s population is growing at around 2%, due largely to immigration, while developed world population is growing at 0.3%

Exhibit 59. Australia: population growth breakdown

Note: Natural increase = births – deaths. NOM = Net Overseas Migration Source: Australia Productivity Commission, Nomura International (Hong Kong) Limited – Investment Strategy

In terms of sectors, agriculture and utilities along with the two big sectors — mining and manufacturing — are all losing ground on productivity.

Nomura

25

4 January 2011

Strategy | Australia

Mixo Das

Exhibit 60. Growth in multifactor productivity by sector and cycle (% y-y)

Manufacturing is the biggest loser. Financial services and trade/transport are gainers

Source: Australia Productivity Commission, Nomura International (Hong Kong) Limited – Investment Strategy

Although the long-term value added in manufacturing trend of is positive, it has been on a decline over the past decade

Exhibit 61. Manufacturing real unit value added index 1.20 1.10 1.00 0.90 0.80 0.70

Jun-10

Jun-08

Jun-06

Jun-04

Jun-02

Jun-00

Jun-98

Jun-96

Jun-94

Jun-92

Jun-90

Jun-88

Jun-86

Jun-84

Jun-82

Jun-80

Jun-78

Jun-76

Jun-74

Jun-72

Jun-70

Jun-68

0.60

Note: Manufacturing PPI: Articles manufactured / Manufacturing PPI: Materials Used Source: CEIC, Nomura International (Hong Kong) Limited – Investment Strategy

This is also evident in the chart below. New capital expenditure plans in the manufacturing sector are non-existent. In contrast, the mining sector has seen increasing planned capex in recent years. As the mining sector gains from higher mineral prices, aggressive capacity expansion through capex and M&A is becoming more common.

Exhibit 62. Private new capital expenditure expected — long term (A$mn) 45,000

Mining

40,000

Manufacturing

Mining sector engaging in increasing capital spending while manufacturing sits out

Others

35,000 30,000 25,000 20,000 15,000 10,000 5,000

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

0

Note: Average of estimates as of 4 quarters to March of each year. 2011 number average of June and Sep quarter. Source: CEIC, Nomura International (Hong Kong) Limited – Investment Strategy

Nomura

26

4 January 2011

Strategy | Australia

Mixo Das

The other longer-term benefit of terms-of-trade improvements will eventually start to show in greater income for the household sector. Over the past 30 years, consumption patterns in Australia show that the financial services, eating out, household equipment, recreation and healthcare sectors are the most elastic and are likely to see the highest incremental allocation.

Exhibit 63. Australia household expenditure and elasticity Sector Purchase of vehicles

% of total expenditure [A]

% of incremental expenditure [B]

Elasticity [B] / [A]

3

11

3.7

10

19

1.9

Hotels, cafes & restaurants

7

10

1.4

Furnishings & household equipment

5

7

1.4

12

14

1.2

Insurance & other financial services

Recreation & culture Health

6

6

1.0

Clothing & footwear

4

4

1.0

Transport services

3

3

1.0

Electricity, gas & other fuel

2

2

1.0

Alcoholic beverages

2

2

1.0

Cigarettes & tobacco

2

2

1.0

Other Goods & services

6

4

0.7 0.7

Communications Food Education services Rent & other dwelling services Operation of vehicles

3

2

11

6

0.5

3

1

0.3

17

5

0.3

5

1

0.2

100

100

Highlighted sectors will see the highest incremental spending

Note: based on quarterly data since 1974 Source: CEIC, Nomura International (HK) Limited – Investment Strategy

Nomura

27

4 January 2011

Strategy | Australia

Mixo Das

LNG in Australia

Linking into the Silk Road Over the past five decades Australia has experienced a series of commodity booms. Gold, uranium, copper and titanium have all experienced significant investment expansion and, more recently, nickel and iron ore. Oil and gas have had much more mixed records, and the cycle has been dominated by offshore development. Australia ranks second highest in the world in terms of planned capex over the next three years in the Oil&Gas sector

Exhibit 64. Oil&Gas: Trends in planned development capex, 2009-13F (source file not available)

Source: BP, Company data, Nomura research

Offshore exploration expenditure has dominated the current capex cycle

Exhibit 65. Petroleum Exploration: expenditure — offshore (A$mn)

Sep-08

Sep-06

Sep-04

Sep-02

Sep-00

Sep-98

Sep-96

Sep-94

Sep-92

Sep-90

Sep-88

Sep-86

Sep-84

Sep-82

Sep-80

Sep-78

Sep-76

Sep-74

(A$mn) 1,000 900 800 700 600 500 400 300 200 100 0

Source: CEIC, Nomura International (Hong Kong) Limited – Investment Strategy

However, a transformation is occurring in Australia as China's pipe distribution network and import capability are now able to meet the country's burgeoning demand for natural gas. The same demand growth is also seen in India. Natural gas demand in China and India is likely to triple over the next decade, while Australia, with ample supplies and new projects coming on stream, is likely the biggest beneficiary. Malaysia and Qatar will also benefit, in our view.

Nomura

28

4 January 2011

Strategy | Australia

Mixo Das

A transformation is occurring as piping infrastructure gets built out in China

Exhibit 66. Gas pipelines in China

Source: IEA

China's natural gas industry is still in its infancy, contributing only 3.7% of primary energy demand in 2009 (BP statistical review), far below the world's average of 23.8%. With natural gas prices at a 30% discount to those of electricity, oil and diesel in China, there is strong substitution effect possible longer term. Ironically, gas supply shortages in China have limited its gas industry development. However, a series of pipelines (such as W-to-E pipelines II and III, Sichuan-to-East) coming on-stream in the next couple of years, together with increasing imported LNG supplies, is likely to make natural gas a viable alternative to other fuels, in our view. In India, despite being the third-largest consumer of natural gas in Asia, it still accounts for only 12% of the energy basket. Natural gas consumption in China is set to grow

Exhibit 67. China natural gas consumption, 2009 and 2020F

Source: BP Stats review, EIA, Nomura research

Currently, Asia-Pacific accounts for approximately 16.8% of global natural gas demand and 14.6% of it supply. However, within the region there is a supply and demand mismatch between the different countries resulting in significant trade. With limited inter-country pipeline infrastructure in the region, 89% of the trade in 2009 was done via LNG. The Asia Pacific region accounts for about 63% of global LNG trade; 31% was imported from the Middle East.

Nomura

29

4 January 2011

Strategy | Australia

Mixo Das

Transport of natural gas has large potential as distribution infrastructure gets built.

Exhibit 68. Global natural gas production vs trade, 2009 (billion cubic metres) 4,000

3,000

2,987

2,000 877

1,000

LNG Pipeline

0 Production

Trade

Source: BP Stats Review 2010, Nomura research

Over the past two to three years, China has secured several long-term contracts globally to gain access to natural gas through LNG to secure its future supplies of the commodity. The three Chinese oil giants Petrochina (along with parent CNPC), Sinopec and CNOOC are active players in the LNG market, with CNOOC the most aggressive. Reliance industries’ strong operational performance makes it one of the key beneficiaries in India. Australia’s natural gas, unlike that from Russia or Qatar, cannot be piped on land to international demand centres. It must be shipped in the form of LNG to countries that have the infrastructure to store LNG and convert it back to natural gas. As natural gas is a much cleaner fuel than regular petroleum distillates, LNG terminals are being rapidly built across the world. Global LNG Info reports that as of Dec 2010, there are 71 re-gasification terminals, while 22 are under construction and a further 42 are planned. Nomura's regional energy team expects a five-fold increase in Australia's LNG export capacity as several projects are in the process of being built. They expect a quadrupling of gas production from 47bcm to just under 200bcm by 2020F.

Further, as liquefaction and regasification infrastructure is being expanded, LNG becomes a viable option

Exhibit 69. Australia’s oil and gas basins, pipelines and LNG hubs

Given Australia’s location, LNG is the only option to exploit the vast conventional and un-conventional reserves

Source: Australian Government Department of Resources, Nomura

Nomura

30

4 January 2011

Strategy | Australia

Mixo Das

Conventional wisdom would not expect Australia to be the world's sixth-largest LNG exporter, given that it is a net importer of crude oil. Ironically, it is not oil that is causing the dramatic change in natural gas but Coal Seam Gas (CSG) and the development of projects in Papua New Guinea. The expansion of LNG projects in the Western Australian offshore basin alongside overseas ventures ought to lift Australasia from number six to the largest LNG exporter in the world by 2015F, we expect. Australia is about to undertake a rapid expansion in LNG capacity

Exhibit 70. Current and expected 2015F LNG capacity by country (mtpa) 80

Expected addtions by 2015

70 60 50 40 30 20 10 Egypt

Trinidad

Malaysia

Algeria

Nigeria

Indonesia

Australasia

Qatar

0

Source: Nomura estimates, company data

One of the idiosyncrasies about Australia's energy sector is that domestic growth is not strong enough to consume the production of natural gas. By 2020, a quarter of Australia's gas production is expected to come from unconventional reserves and, in particular, CSG reserves in Eastern Australia. While West Coast production has been recognised as the main source of conventional gas production, it is the East Coast production that is likely to show the strongest growth in unconventional production, in our view. Over time, Australia’s LNG exports have the potential to become as large as its mineral ore exports, as LNG demand is estimated to remain very strong over the coming decade.

LNG exports of Australia are already about 4% of total. A fivefold increase makes it comparable to current levels of iron ore exports

Exhibit 71. Global LNG demand estimates

LNG demand is set to remain very robust in the next decade

(bcm) 500 450 400 350 300

Japan

Korea

Taiwan

USA

Mexico

Argentina

Dominican Rep

Puerto Rico

Belgium

France

Greece

Italy

Portugal

Spain

Turkey

UK

China

India

New entrants

250 200 150 100 50 0 2004

2006

2008

2010F

2012F

2014F

2016F

2018F

2020F

Source: Company data, Nomura estimates, BP Statistical Review, Shell

Nomura

31

4 January 2011

Strategy | Australia

Mixo Das

Much of the upcoming increase in capacity in Australia is already backed up by long-term contracts

Exhibit 72. Proposed LNG capacity and contracted volumes to date LNG (mtpa)

Proposed capacity

Sold in LT contracts

2013

2016

120 100 80 60 40 20 0 2010

2011

2012

2014

2015

2017

2018

2019

2020

Source: Company data, Nomura estimates

Interestingly it is Japan that accounts for Australia's primary customer presently for LNG, with China far behind with 20% of the total. Japan is the largest importer of Australian LNG, although China and India are increasing in importance

Exhibit 73. Australia’s LNG exports by destination

South Korea 7%

Taiwan 2%

China 20%

India 5%

Japan 66% Source: BP Statistical Review of World Energy June 2010, Nomura estimates

Since the formation of the Gas Exporting Countries Forum (GECF) in 2001, Russia has been looking to join with Qatar and Algeria to push for the formation of an OPEClike cartel for natural gas. This cartel would help coordinate production among natural gas producers and help keep supply and prices in check. However, given the widely dispersed natural gas assets unlike concentrated oil pockets, a natural gas cartel has not become a reality yet. And an unrestrained production binge has left the world with a 30% oversupply of natural gas (according to the IEA). This has meant that natural gas has been the worst-performing major commodity in 2010. A formation of a cartel would possibly bring production under check and boost prices.

Nomura

32

4 January 2011

Strategy | Australia

Mixo Das

China’s steel consumption

Economic housing: the next driver? The Australian market is greatly exposed to policy in China. Mineral ores and coal form around half of Australia’s merchandise exports (a majority of it heading to China), and around three-quarters of the incremental steel consumption in China in 2010 is expected to have come from construction (divided equally among property, infrastructure and rural construction), according to our economics team. Thus, any slowdown in China’s construction activity will quickly impact both export prices and the current account balance.

Despite a possible slowdown in private property construction in China, the upcoming surge in economic housing will keep overall construction robust

So, is China’s housing construction about to slow given the surge of micro-measures to contain property prices? The answer is probably “yes”, in our view. However, while private housing growth might be much slower in 2011 as compared to 2010, our China property analyst sees a surge in economic housing next year, keeping overall housing construction growth quite high. As the government pushes on its drive to provide housing for the low-middle-income households and with economic housing being an important part of the 12th Five-Year Plan, these estimates are very likely to see upside surprise, in our view. China will likely chalk out proper incentives for involved parties (local governments and developers) to mend the so-far poor completion rates in economic housing. This year the Ministry of Housing and Urban Rural Development (MoHURD) has already signed more binding agreements with local government officials on their 2010 targets, which could hold them accountable if they fail to fulfil their stated targets.

China is issuing laws and setting up incentives for involved parties (local governments and developers) to mend the so-far poor completion rates in economic housing.

On the construction starts front, it was agreed by local governments that some 5.8mn units of subsidised housing would be started in 2010, including 1mn units of low rent housing, 2mn units of economic housing and 2.8mn units of relocation housing for squatter settlement redevelopment. According to Xinhua news, longer-term goals might be to provide around 25-30mn units of subsidised housing in the next five years, to help lower-income households meet their housing needs. This translates into around 5-6mn units of subsidised housing to be built per year. Investors anticipating a slowdown in iron ore and coal exports to China on the back of policy measures are likely to get disappointed. China’s steel consumption is likely to continue to rise in coming years

Exhibit 74. Steel production intensity and economic development

Note: 2009 prices converted at 2005 PPP exchange rates; 5 year-moving averages; US iron production intensity prior to 1897; Japan steel production is by fiscal year prior to 1980 Sources: Conference Board Total Economy Database (January 2010); IMF; Japan Iron and Steel Federation; Johnston and Williamson (2010); Maddison (2009); RBA; US Bureau of Mines; US Geological Survey; World Steel Association (worldsteel) Source: RBA

Nomura

33

4 January 2011

Strategy | Australia

Mixo Das

Exhibit 75. China steel demand breakdown forecast (mn tons) 2006

2007

2008

2009

2010F

2011F

2012F

187

209

239

285

326

353

371

69

84

99

107

115

111

133

144

157

165

Construction Property Infrastructure Rural development Machinery

58

66

Auto

59

68

83

89

92

75

97

114

127

140

20

23

26

30

35

38

42

Home appliance

8

9

10

11

14

16

17

Shipbuilding

6

7

7

14

16

18

21

Oil & gas

6

6

7

7

10

11

11

70

87

61

92

77

73

71

356

408

426

535

591

636

673

Others Total steel demand

The construction sector will account for 75% of the incremental demand for steel in China

Source: China Steel Association, Nomura estimates

Exhibit 76. China property: housing starts forecast 2007

2008

2009

2010F

2011F

Total Residential Starts

787,955

836,421

932,984

1,288,777

1,546,532

Growth rate (%y-y) Private Housing

22 739,852

6 780,203

12 879,438

38 1,216,777

20 1,354,532

Growth rate (%y-y) Economic Housing

23 48,103

5 56,219

13 53,547

38 72,000

11 192,000

Growth rate (%y-y)

10

17

-5

34

167

Starts in ‘000 sqm

Slowdown in private housing growth is being compensated by rapid increase in economic housing

Source: CEIC, Nomura estimates

China’s economic housing is starting to pick up

Exhibit 77. Targeted economic housing supply over 2010-15F (mn sqm) 70

Avg GFA delivery between 2004-09: 35m sqm / year

60 50

Targeted GFA delivery between 2010-15: 50m sqm / year 43%

40 30 20 10 2015E

2014E

2013E

2012E

2011E

2010E

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

0

Source: CEIC, Soufun, Nomura estimates

Nomura

34

4 January 2011

Strategy | Australia

Mixo Das

Over 55mn urban households have yet to buy a new home

Exhibit 78. New urban households and new homes sold New urban households New commodity residential units sold

Mn units 12 10 8 6 4 2 0 95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

Note: Assume average 90sqm per unit for new residential units sold Source: CEIC, Nomura research

Nomura

35

4 January 2011

Strategy | Australia

Mixo Das

Australia Banks

Impact from Basel III Victor German

The core proposals of the Basel III address capital, leverage, liquidity and net stable funding. In his recently published note Can’t get it… pay for it, dated 17 December 2010, our Australian banks analyst Victor German highlights his view on the impact on Australian banks:

While Australian banks qualify on leverage targets and will likely be able to grow capital organically, NSFR and LCR will cost 5-6bps on margins over the next 3-5 years

 Capital (Tier 1) ratio: while all Australian banks are short on capital on a Core Tier 1 basis, the majors should be able to largely close the gap with organically generated capital.  Leverage: every Australian bank already exceeds the minimum 3% leverage threshold.  Liquidity coverage ratio (LCR): the Basel committee recently detailed plans to allow banks to establish contractual liquidity facilities with their central bank (subject to a fee) to meet a shortfall in the LCR due to lack of adequate liquid assets (in countries where govt debt is small). Australia is one such country. Meeting the LCR is likely to cost banks ~4% of annual earnings (or ~A$1bn pa).  Net Stable Funding Ratio (NSFR): banks will need to raise an additional A$30-60bn (per bank) of term funding over the next 8 years to meet the 100% NSFR. Our analysts estimate an overall 5-6bp impact on margins over the next 3-5 years. Higher quality liquids and the fee that the banks are likely to be required to pay to the RBA will take off 2-3bps per year (with a cumulative impact of ~5% per year by FY15). Also, they estimate a ~3bp impact on margins as banks term out their short-term funding to meet 100% net stable funding requirements.

Exhibit 79. Australia banks LCR and NSFR (%) 100

100

100

90 62

85

40

86

86

86

85 84

84

BEN

CBA

84

38

82

0 Liquidity coverage ratio Jul-10

Nomura

90

88

60

Source: APRA

(%) 92

15

80

20

Exhibit 80. NSFR of Australian banks

Net stable funding ratio Required

80 ANZ

NAB

WBC

BOQ

Source: Nomura estimates, BIS, company data

36

4 January 2011

Strategy | Australia

Exhibit 81. Basel III estimated capital requirement

Mixo Das

Exhibit 82. Tier 1 Capital of Australian banks (%) 7.5 7.0 6.4

6.5

6.7 6.7

6.7

6.6 6.6

6.4

6.0 5.6

5.5 5.0 ANZ CBA As reported Nomura estimates Source: BIS, Nomura Research

NAB WBC CBA (double gearing adj)

Source: Nomura estimates, company data

Tier 1 capital ratio is total Tier 1 capital by total risk-weighted assets. BIS will limit core Tier 1 capital to common equity and retained earnings. To qualify for additional Tier 1, equity instruments must be considered to be loss absorbent on a going concern basis, are required to be subordinated, have discretionary non-cumulative dividends/coupons and not have a maturity date or incentive to redeem. This must reach a minimum of 7% by 2019 plus an additional 2.5% countercyclical buffer and an additional buffer for systemically important banks. The leverage ratio has been proposed to supplement the existing Tier 1 ratio. It is calculated as the new definition of Tier 1 as a percentage of total exposures (total balance sheet assets and off balance sheet assets) and has been indicated by Basel as being a minimum 3% (which Basel will test during a parallel run period, with final adjustments to be made in 2017). The LCR aims to ensure banks have sufficient liquidity to survive an acute short-term stress scenario for a minimum 30-day time horizon. The key aim of NSFR is to achieve a better alignment between the durations of assets and liabilities. Like the liquidity ratio, weights are assigned to the elements of the available and required amount of stable funding. Importantly, this requirement is not due to come into force until 2018, and hence, banks will have a long-dated timeframe to position for this.

Nomura

37

4 January 2011

Strategy | Australia

Mixo Das

Appendices

Appendix 1: Commodity Price Forecasts Exhibit 83. Commodity price forecasts Commodity

Unit

2010E

2011F

2012F

2013F

Long-term

Base metals Aluminium

($/t)

2,104

2,206

2,275

2,325

2,425

Copper

($/t)

7,485

8,377

8,818

7,937

4,960

Nickel

($/t)

21,380

19,841

19,290

18,739

18,739

Zinc

($/t)

2,029

1,950

2,000

2,100

2,100

Gold

($/oz)

1,189

1,250

1,150

1,050

950

Platinum

($/oz)

1,598

1,681

1,725

1,700

1,650

Palladium

($/oz)

484

508

520

530

510

Precious metals

Iron Ore (fines) (CY) China Spot CIF

($/t)

147

169

160

130

80

Realised Aus FOB

($/t)

115

159

152

128

70

Hard Coking (CY)

($/t)

191

241

250

220

140

Thermal (JFY)

($/t)

98

110

120

100

80

Brent Crude *

($/barrel)

79

95

110

($/MMBtu)

4

4.5

5.25

Polyethylene (HDPE)

($/t)

1,143

1,240

1,486

Polyester (PTA)

($/t)

933

1,100

1,196

Plastics (PVC)

($/t)

942

1,035

1,113

Plastics (Polypropelene)

($/t)

1,223

1,310

1,526

(RMB/t)

4,868

5,598

5,766

Wheat

($/t)

218

201

206

210

Rice

($/t)

453

436

426

427

Oilseeds

($/t)

410

412

405

401

Butter

($/t)

3043

2821

2716

2709

Australian Coal

China Natural Gas**

75

Petrochems

China HRC Steel Agricultural Commodities ***

Note: Nomura forecasts except Agricultural Commodities * period average prices ** Petrochina, Sinopec, CNOOC's average well head prices *** OECD-FAO Agricultural Outlook forecasts Source: Nomura estimates, OECD-FAO

Nomura

38

4 January 2011

Strategy | Australia

Mixo Das

Appendix 2: Nomura FX forecasts Exhibit 84. Exchange rate forecasts Change (%) Currency

Now

Q1 2011

Q2 2011

Q3 2011

Q4 2011

2012

2011*

CNY

6.6

6.5

6.4

6.3

6.22

5.9

5.7

2012 5.1

HKD

7.8

7.75

7.75

7.75

7.75

7.75

0.3

0.0

IDR

8973

8900

8800

8680

8520

8200

5.0

3.8

INR

44.8

44.1

43.4

42.9

42.3

40.3

5.6

4.7

KRW

1126

1080

1060

1040

1020

960

9.4

5.9

MYR

3.07

3.00

2.97

2.93

2.88

2.72

6.2

5.6

PHP

43.8

42.4

41.9

41.4

40.9

38.9

6.6

4.9

SGD

1.29

1.27

1.25

1.24

1.22

1.17

5.1

4.1

THB

30.1

29

28.5

28.1

27.8

26.8

7.5

3.6

TWD

29.1

29.6

29.3

29

28.7

27.5

1.5

4.2

DXY

79.5

79.2

78.5

78.4

78.3

81.1

-1.5

3.6

JPY

81.5

80

82.5

85

85

90

-4.3

-5.9

EURJPY

108

106

111

115

115

117

-6.1

-1.7

EUR

1.3

1.32

1.34

1.35

1.35

1.30

1.5

-3.7

CHF

0.9

1.05

1.06

1.06

1.07

1.09

-14.1

-1.9

EURCHF

1.2

1.38

1.42

1.43

1.44

1.42

-15.4

1.4

GBP

1.5

1.63

1.68

1.71

1.73

1.71

12.0

-1.2 2.6

EURGBP

0.9

0.81

0.80

0.79

0.78

0.76

9.5

AUD

1.02

0.96

0.98

1.00

1.02

1.02

0.3

0.0

CAD

1.0

0.97

0.97

0.99

0.99

1.00

1.0

-1.0

NZD

0.8

0.77

0.80

0.82

0.84

0.84

8.8

0.0

EURNOK

7.8

7.8

7.6

7.6

7.7

7.7

1.6

0.0

EURSEK

9.0

8.9

8.8

8.9

9

9

-0.2

0.0

BRL

1.7

1.72

1.68

1.65

1.62

1.6

2.4

1.2

CLP

468

475

465

450

440

420

6.0

4.5

MXN

12.4

11.9

11.8

11.75

11.7

11.5

5.6

1.7

* from current values As of 30 Dec 2010. Source: Nomura FX team estimates. Last published in Global FX weekly 17 December 2010

Nomura

39

4 January 2011

Strategy | Australia

Mixo Das

This page has been intentionally left blank

Nomura

40

4 January 2011

Strategy | Australia

Mixo Das

Stock picks

Nomura

41

4 January 2011

Amcor A M C A U B AS I C M AT E R I AL S | AU S T R AL I A

Maintained NOMURA AUSTRALIA LIMITED

[email protected] [email protected]

BUY

 Action

Closing price on 30 Dec

We are buyers for the benefits of the undemanding multiple and the well-above average forecast EPS growth, notwithstanding FX and raw material cost headwinds. Even if markets remain subdued for the next six to 12 months, EPS growth should still be attractive, in our view, as the material acquisition synergies are extracted.

(set on 12 Aug 10)

 Catalysts

 Well positioned for strong growth in FY11 and FY12 Recent commentary on current trading has been pragmatic given the anaemic state of key markets (particularly in Europe), FX and resin price headwinds. Underlying markets remain subdued but are generally stable after the sharp volume declines in food and beverage end-user markets last year. We have incorporated this scenario into our forecasts but despite these headwinds still expect above average EPS growth of +30% in FY11F and 18% in FY12F.

Key financials & valuations FY10 FY11F FY12F FY13F

Revenue

9,878

11,810

12,825

13,150

183 409

417 570

635 675

740 740 0.61

Reported net profit Normalised net profit Normalised EPS (A$) Norm. EPS growth (%)

0.35

0.47

0.55

(14.0)

32.6

18.4

9.6

19.2 9.3

14.5 6.9

12.2 6.4

11.1 6.0

Norm. P/E (x) EV/EBITDA (x) Price/book (x)

2.0

2.0

1.9

1.8

Dividend yield (%)

4.4

4.7

5.0

5.3

RO E (%) Net debt/equity (%)

5.2 74.8

10.2 76.7

15.1 73.7

16.6 66.5

Earnings revisions Previous norm. net profit

570

675

740

Change from previous (%) Previous norm. EPS (A$)

0.47

0.55

0.61

Source: Company, Nomura estimates

Share price relative to MSCI Australia

Absolute (A$) Absolute (US$) Relative to Index Market c ap (US$mn)

Oc t10

1m

3m

4.7

3.7

5.8

10.8

8.9

26.2

0.5

(0.0)

(5.4) 8,415

Estimated free float (%)

6m

100.0 7.00/5.81

52-week range (A$)

31.28 Easy

3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) Commonwealth Bank of Australia

7.1

Mondrian Investment Partners Limited

6.6

Source: Company, Nomura estimates

Nomura

Nov 10

Sep10

130 125 120 115 110 105 100 95 90 Aug10

Jul10

Jun10

Feb10

Apr10

Price Rel MSCI Australia

(A$) 7.2 7.0 6.8 6.6 6.4 6.2 6.0 5.8 5.6 Jan10

One of the critical questions, in our view, is the extent to which Amcor's acquisition of Alcan will enable it to build a more sustainable business model for its European flexible packaging business, which has, in our view, long been its Achilles’ heel. Following the acquisition of the Alcan assets, AMC now has the opportunity to transform this business from one characterised as being a producer of intermediate products caught between both larger customers and suppliers, to one that is a more integral part of a far more harmonious industry supply chain, where pricing power (or lack thereof) is not the sole determinant of value. This will not be easy to achieve and will require tight management but the early signs look good.

635 -5.9%

30 Jun (A$mn)

Dec09

 Well placed to solve the flexibles challenge ... at last

FY12F net profit (A$mn) Difference from consensus

Consensus forecasts appear to include synergy assumptions at the lower end of the guidance range. This appears to us to be overly conservative.

Packaging share prices have historically performed best during periods of acquisition-sponsored earnings growth. Amcor is in just such a period.

AMC has highlighted that the Alcan integration is very much on track and the focus is increasingly starting to shift towards leveraging the strategic benefits of the group’s dominant positions in key flexible packaging markets. AMC’s outlook is assisted by its acquisition synergies, the contribution from which should be material over the next three years, in our view. Around 40% of our forecast EBIT growth in FY11F is due to synergies, 60% in FY12F and 59% in FY13F.

11.9% 2.0%

Nomura vs consensus

Anchor themes

 Synergies are a key source of growth

Upside/downside Difference from consensus

Source: Nomura

Confidence should rise as evidence of synergies emerge and as the full structural benefits of the transformational Alcan acquisition are better understood and recognised by the market.

Inexpensive growth

A$6.75

A$7.55

Price target

May10

+61 2 8062 8412 +61 2 8062 8409

Mar10

Richard Johnson Simon Thackray

42

4 January 2011

Amcor

Richard Johnson

Valuation and rating

Strengthening fundamentals The ability to acquire earnings at bottom-of-the-cycle prices should have put Amcor in a sweet spot — something that has yet to be fully reflected in its share price, in our view. History has long suggested that the sub-optimal market dynamics of consumer packaging make restructuring and acquisitions an ever-present part of the industry’s profit equation. Packaging company share prices, as a result, often perform best during acquisition-sponsored growth phases. Apart from the last few months of 2008 and early 2009, when AMC’s defensive characteristics supported share price outperformance, there have been two big upward moves in AMC’s share price in the past ten years, both of which corresponded with acquisitive-based growth phases. Prior to this latest acquisitive phase, the most recent was in 2001-02. The creation of Amcor Flexibles Europe in April 2001 and the A$2.9bn acquisition of Schmalbach-Lubeca’s global PET and Closure operations in May 2002 supported a 62% rise in the share price from around A$5.57 to A$9.05 (the broader market rose by around 8% over this period). We believe the EPS accretion and perceived strategic benefits of the expansion were the main factors behind the move in the share price. And, in our view, there is every reason to think the same thing should happen again following the transformational moves the company has made. The main negative risk to our view would be a further unexpected strengthening of the A$. Concerns about the euro in particular have overshadowed the share price in recent weeks and this may continue on for awhile yet. AMC’s greatest currency sensitivity post its recent acquisitions is the €/A$ rate. We estimate that the sensitivity of post-tax profit to a 1c movement in the €/A$ rate is A$4.5mn. A 1c movement in the US$/A$ exchange rate is A$3mn. Our forecasts assume an A$/€ ex change rate of 0.74 in both FY11 and FY12, which is broadly where the spot rate is currently.

Price target and valuation Our PT of A$7.55 is derived using DCF analysis and factors in acquisition integration risks

Our price target for Amcor of A$7.55 is based on our DCF analysis of A$7.94 per share to which we apply a 5% discount to account for acquisition integration risks.

Exhibit 85. Amcor: DCF valuation assumptions Target D/DE ratio (%)

40.0

Tax rate (%)

30.0

Long run growth rate (%)

2.0

Risk free rate (%)

5.25

Equity beta

1.1

Equity risk premium (%)

6.0

Cost of debt (%)

6.0

WACC (pre tax)

9.5

Source: Nomura estimates

Risks to our investment view The main downside risk to our price target would be a failure to integrate the acquired assets smoothly. One of the main challenges will be the manufacturing footprint rationalisation programme, which we expect will account for around one-third of the total synergy savings from Alcan. This element of the programme will, however, be at the back end of the three-year programme. Other risks relate to volume pressures in key markets (European food flexibles, PET, Australia, Sunclipse), inability to fully pass on or retain movements in raw material costs, weak growth in Europe and a rising Australian dollar.

Nomura

43

4 January 2011

Amcor

Richard Johnson

Financial statements Income statement (A$mn) Year-end 30 Jun

FY09

FY10

FY11F

FY12F

FY13F

9,539 (8,480) 1,059 (412)

9,878 (8,664) 1,214 (455)

11,810 (10,164) 1,645 (639)

12,825 (11,025) 1,800 (656)

13,150 (11,256) 1,894 (660)

647

759

1,007

1,144

1,234

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

1,059 (412)

1,214 (455)

1,645 (639)

1,800 (656)

1,894 (660)

647 (182)

759 (183)

1,007 (220)

1,144 (211)

1,234 (212)

465 (98) 367 (6)

576 (148) 428 (19)

787 (202) 584 (14)

933 (244) 690 (15)

1,022 (267) 755 (15)

360 (149) 212

409 (226) 183

570 (153) 417

675 (40) 635

740 740

Dividends Transfer to reserves

(286) (75)

(360) (177)

(391) 26

(415) 220

(439) 301

Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit

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 %) Growth (%) Revenue EBITDA

16.5 18.4 28.1 5.0 9.1 1.9 10.3 16.9 11.1 11.1 6.8 2.2 21.1 135.3 5.9 1.4

19.2 21.4 42.9 4.4 10.0 2.0 9.3 14.9 12.3 12.3 7.7 1.9 25.7 196.8 5.3 1.1

14.5 16.2 19.8 4.7 7.0 2.0 6.9 11.3 13.9 13.9 8.5 3.5 25.7 93.7 5.9 1.1

12.2 13.7 13.0 5.0 7.2 1.9 6.4 10.0 14.0 14.0 8.9 5.0 26.1 65.4 5.5 1.1

11.1 12.5 11.1 5.3 6.6 1.8 6.0 9.2 14.4 14.4 9.4 5.6 26.1 59.4 4.9 1.0

7.1 8.0

5.2 7.9

10.2 8.7

15.1 9.3

16.6 9.8

2.4 (1.0)

3.6 14.6

19.5 35.5

8.6 9.4

2.5 5.2

EBIT

(1.6)

17.4

32.6

13.7

7.8

Normalised EPS Normalised FDEPS

(4.5) (4.5)

(14.0) (14.0)

32.6 32.6

18.4 18.4

9.6 9.6

Per share Reported EPS (A$) Norm EPS (A$) Fully diluted norm EPS (A$) Book value per share (A$) DPS (A$)

0.24 0.41 0.41 3.58 0.34

0.16 0.35 0.35 3.33 0.30

0.34 0.47 0.47 3.35 0.32

0.52 0.55 0.55 3.53 0.34

Acquisition synergies a key growth driver

0.61 0.61 0.61 3.78 0.36

Source: Nomura es timates

Nomura

44

4 January 2011

Amcor

Cashflow (A$mn) Year-end 30 Jun

Richard Johnson

FY09

FY10

FY11F

FY12F

FY13F

1,059 168 (571) 656 (564) 91 (198) (100) (117) 46 158 (120) (311) 29

1,214 (311) (120) 783 (521) 262 45 (2,466) (340) 498 319 (1,683) (286) 1,571

1,645 81 (551) 1,175 (700) 475 (231) 20 30 294 (391) -

1,800 (109) (543) 1,148 (700) 448 (121) 71 398 (439) -

1,894 30 (671) 1,253 (650) 603 (266) 216 553 (439) -

332 50 (70) 258 188 2,643

477 1,761 79 189 267 3,044

96 (295) (0) 267 267 3,141

41 (398) (0) 267 267 3,182

(113) (552) 0 267 267 3,068

FY09 189

FY10 267

FY11F 267

FY12F 267

FY13F 267

1,141 980 9 2,318 509 3,796 1,499

1,787 1,469 23 3,546 464 4,801 1,836

2,362 1,653 23 4,305 464 5,024 1,836

2,565 1,796 23 4,650 464 5,055 1,836

2,630 1,709 23 4,629 464 5,006 1,836

324 8,446 956 1,754 274 2,984 1,876

664 11,310 1,379 2,495 372 4,245 1,933

645 12,274 1,379 3,337 370 5,085 2,029

766 12,771 1,379 3,621 322 5,322 2,070

1,032 12,967 1,379 3,581 372 5,331 1,957

511 5,370 63

1,009 7,186 56

1,009 8,123 56

1,009 8,401 56

1,009 8,296 56

2,440 884

4,030 695

4,030 722

4,030 942

4,030 1,242

(312) 3,013

(657) 4,068

(657) 4,094

(657) 4,314

(657) 4,615

8,446

11,310

12,274

12,771

12,967

0.78 3.6

0.84 4.1

0.85 4.6

0.87 5.4

0.87 5.8

Leverage Net debt/EBITDA (x)

2.50

2.51

1.91

1.77

1.62

Net debt/equity (%)

87.7

74.8

76.7

73.7

66.5

Activity (days) Days receivable Days inventory Days payable Cash cycle

45.5 45.1 77.2 13.4

54.1 51.6 89.5 16.2

64.1 56.1 104.7 15.5

70.3 57.2 115.5 12.1

72.1 56.8 116.8 12.2

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 Source: Nomura es timates

Balance sheet (A$mn) As at 30 Jun 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

Alcan debt and equity funded

Liquidity (x) Current ratio Interest cover

Source: Nomura es timates

Nomura

45

4 January 2011

CONVICTION CALL

CONVICTION CALL

CONVICTION CALL

CONVICTION CALL

Cochlear C O H A U H E AL T H C AR E & P H AR M AC E U TI C AL S | AU S TR AL I A

Maintained NOMURA AUSTRALIA LIMITED

[email protected] [email protected]

BUY

 Action

Closing price on 30 Dec

Besides cochlear implants, Cochlear also produces BAHA and Hybrid implants. Cochlear continues to roll out its fifth-generation cochlear implants, which consist of an implant and an external processor. In Europe and the US, Cochlear Nucleus 5 has received approvals for sale. We expect implant growth of 20% in FY11F. We note that COH’s major competitor has issued a worldwide recall of its implant.

(set on 6 Dec 10)

 Catalysts

Upside/downside Difference from consensus

9.0% 30.4%

FY12F net profit (A$mn) Difference from consensus

213.2 6.4%

Source: Nomura

We believe key catalyst for P/E re-rating is evidence of market share gains by Cochlear due to competitor recall, underpinned by its newly released Nucleus 5.

Nomura vs consensus

Anchor themes

The major difference in our forecasts compared with the Street is our house view on AUD/USD, which we forecast to reach 0.97 in 2011F.

Cochlear implants can help patients who have severe to profound sensor neural hearing loss and are unable to benefit adequately from the use of hearing aids. We believe the market size of cochlear implantation is large, with the major potential growth impediment being a rise in cochlear implants support staff.

Key financials & valuations 30 Jun (A$mn)

FY10 FY11F FY12F FY13F

Revenue

2.76

3.24

3.76

4.27

Norm. EPS growth (%)

17.9

17.6

16.1

13.4

Norm. P/E (x) EV/EBITDA (x)

29.8 19.6

25.3 16.6

21.8 14.6

19.2 12.9

Price/book (x)

10.5

9.3

8.2

7.3

Dividend yield (%)

2.3

2.8

3.2

3.7

RO E (%) Net debt/equity (%)

38.7 26.0

39.2 33.4

40.3 28.7

40.5 17.2

183.5

213.2

241.8

3.24

3.76

4.27

Earnings revisions Previous norm. net profit Change from previous (%) Previous norm. EPS (A$) Source: Company, Nomura estimates

Share price relative to MSCI Australia Price Rel MSCI Australi a

(A$) 84

 BUY rating and price target of A$89.00 United Nations data suggest cochlear manufacturers will not outgrow the market for cochlear implants. We believe investors may be willing to pay a higher P/E premium should the global CI market become (albeit temporarily) more consolidated. To determine the potential P/E expansion possible, we look at the example of AB’s 2004 withdrawal. At that time, we believed AB had c. 25% global market share. After this withdrawal, COH’s 12-month P/E expanded 51.7% to 26.7x in 12 months. Should this multiple be applied to COH’s new 12-month forward EPS of A$3.45, this implies COH’s share price could re-rate to A$92.17.

Nomura

90

59

80 Mar10

100

64 Jan10

110

69

Feb10

Overall, we believe growth rates in the cochlear industry and bilateral implantation rates have the potential to gain market share due to increased utilisation rates for Cochlear’s products. We expect Cochlear to register strong growth in the near to medium term.

120

74

Dec 09

 We already factor in strong cochlear growth

130

79

Absolute (A$) Absolute (US$) Relative to Index Market c ap (US$mn)

Oct10

Besides cochlear implants (CI), Cochlear also produces bone anchored hearing aid (BAHA) and Hybrid implants. We believe Cochlear is attempting to become a ‘hearing-loss leader’. We estimate that up to 55,000 Americans could benefit from a cochlear implant per year, which corresponds to the global industry’s 20,000 per annum.

Normalised EPS (A$)

Nov10

leader”

1,029 241.8 241.8

Jun10

 Cochlear on the way to becoming a “hearing-loss

1,009 213.2 213.2

May10

We believe COH is likely to see strong cochlear volume growth in FY11F, given that sales growth in 2QFY10 reached 20% in countries where Nucleus 5 has been introduced. In addition, we believe solid FY11F NPAT growth is achievable due to ongoing manufacturing efficiencies.

879 183.5 183.5

Apr10

 Cochlear continues to dominate the cochlear market

735 155.2 155.2

Reported net profit Normalised net profit

Sep10

Healthy hearing

A$81.7

A$89.0

Price target

Aug10

+61 2 8062 8410 +61 2 8062 8407

Jul10

Dr David Stanton Zara Lyons

1m

3m

4.4

16.3

9.9

10.6

22.1

31.1

0.2

13.2

(0.5) 4,710

Estimated free float (%)

6m

100.0 81.7/61.3

52-week range (A$)

13.31 Easy

3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) Capital Group

7.8

Colonial FS

4.6

Source: Company, Nomura estimates

46

4 January 2011

Cochlear

Dr David Stanton

Valuation and rating

Valuation We outline below COH’s positives.  Dominant market position – COH has been commanding a market share of 70% for some time, because of its history of innovation and incumbency. We believe this dominant market share is more likely than not to continue.  Good safety record – Based on latest data from PubMed, COH’s cochlear failure rate was 2%, compared with its major competitor, ABC, at 7%. We believe this will be a very valuable marketing tool for potential implant candidates.

COH’s cochlear implant failure rate was 2%

 Market size is large – UN data suggest there are many more potential cochlear candidates than actual patients implanted with cochlear in a given year in a developed country alone. Hence, we believe the potential market for cochlear implantation is large, and is likely to grow.  Bilateral opportunity – We believe bilateral (both-sided) cochlear implantation is a potential growth driver for COH. At present, management estimates 15% of total candidates get bilateral cochlear, with most of them in Australia, the EU and the US. On a global basis, if this increases to 25%, it would increase our valuation by 8%.  Rollout of Nucleus 5 is likely to lead to strong volume growth – COH has released a new cochlear implant platform, known as Generation 5. The average volume growth rate over the past five half-year following these launches was 23%, compared with the long-term average rate of 17%. This suggests that COH’s cochlear may see continued strong volume growth after the release of Generation 5.

The average rate of volume growth over the past five halfyear following previous cochlear generation launches was 23%

Total recall by COH’s competitor One of COH’s major competitors in the cochlear implant market, Advanced Bionics (AB), the CI subsidiary of Sonova Group (SOON VX, Not rated), issued a voluntary product recall of its HiRes 90K CI device worldwide due to two instances of a rare malfunction that required removal of the implant. AB’s market withdrawal will inevitably result in competitors taking market share. As market leader with c. 70% share, COH is well positioned to benefit from this recall. We note management believe that the newly released Nucleus 5 will continue to underpin growth in FY11 and software enhancement will be available towards the end of 2011, which should facilitate upgrade processor sales. We believe AB’s recall will underpin solid FY11F growth for COH. Given the life-changing nature of CI, we believe there are likely to be lingering reputational issues for AB should it return to the market at some time in the future. We believe potential recipients and surgeons are likely to prefer to use other CIs, rather than risk using AB’s CI. This has the potential to lead to prolonged market-share gains for COH. We believe AB’s next CI product launch is likely to be two-three years away.

AB’s CI malfunction has led to required removal of the implant in recipients

Valuation methodology and risks to our investment view We use a blend of three valuation methodologies to derive a valuation for COH: DCF, a capitalisation of EV/EBITDA and normalised P/E multiples. Upside risks include faster-than-expected growth in cochlear and BAHA sales. Downside risks include faster-than-expected new product launches from its competitors ABC and Med-El.

We use a blend of three valuation methodologies to derive our price target

Exhibit 86. Valuation methodology Metric

Weight (%) Valuation (A$ ps) Blended valuation (A$ ps)

DCF valuation

33.3

85.41

28.47

P/E valuation* at (26.9x FY1)

33.3

85.67

28.56

EV/EBITDA valuation* at (19.5x FY1)

33.3

95.96

31.99

Price target

89.01

* P/E and EV/EBITDA multiples have a 15% premium to average of comparable companies (from Factset consensus). Source: Nomura estimates, Factset consensus estimates

Nomura

47

4 January 2011

Cochlear

Dr David Stanton

Financial statements Income statement (A$mn) Year-end 30 Jun

FY09

FY10

FY11F

FY12F

FY13F

Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit

695 (196) 498 (324)

735 (202) 533 (313)

879 (250) 628 (363)

1,009 (290) 719 (415)

1,029 (301) 728 (386)

175

219

265

304

343

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

199 (22) (3) 175 (7)

242 (23) 219 (11)

289 (24) 265 (12)

328 (24) 304 (10)

367 (25) 343 (9)

9 176 (46) 131 -

1 209 (54) 155 -

253 (70) 183 -

294 (81) 213 -

333 (92) 242 -

131 131

155 155

183 183

213 213

242 242

Dividends Transfer to reserves

(90) 41

(107) 48

(128) 55

(149) 64

(169) 73

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)

35.0 38.2 34.9 2.0 31.1 12.6 23.8 27.1 71.8 28.7 25.1 18.8 25.9 68.6 3.8 1.2

29.8 32.5 29.6 2.3 25.6 10.5 19.6 21.6 72.5 33.0 29.9 21.1 25.9 69.0 11.1 3.5

25.3 27.6 25.2 2.8 30.1 9.3 16.6 18.1 71.5 32.9 30.2 20.9 27.5 70.0 8.3 3.1

21.8 23.8 21.7 3.2 25.0 8.2 14.6 15.8 71.2 32.5 30.1 21.1 27.5 70.0 3.1 1.3

19.2 21.0 19.1 3.7 18.3 7.3 12.9 13.8 70.8 35.7 33.3 23.5 27.5 70.0 3.1 1.3

ROE (%) ROA (pretax %)

38.2 29.8

38.7 33.5

39.2 34.4

40.3 34.9

40.5 37.3

Growth (%) Revenue EBITDA

15.5 8.4

5.8 21.6

19.6 19.1

14.9 13.5

1.9 11.9

7.4

25.6

20.9

14.6

12.7

12.3 12.9

17.9 17.6

17.6 17.6

16.1 16.1

13.4 13.4

EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (A$) Norm EPS (A$) Fully diluted norm EPS (A$) Book value per share (A$) DPS (A$)

2.34 2.34 2.33 6.50 1.60

2.76 2.76 2.74 7.75 1.89

3.24 3.24 3.23 8.78 2.27

3.76 3.76 3.74 9.91 2.63

COH has not issued guidance for FY11F

4.27 4.27 4.25 11.19 2.99

Source: Nomura es timates

Nomura

48

4 January 2011

Cochlear

Cashflow (A$mn) Year-end 30 Jun 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

Dr David Stanton

FY09

FY10

FY11F

FY12F

FY13F

199 (3) (50) 147 (27) 120 (20) (15) 0 15 100 (90) 14 17

242 (96) 33 180 (81) 98 (11) 15 8 (23) 87 (107) 20 (32)

289 (53) (82) 154 (73) 80 (8) 72 (128) 4 43

328 (52) (91) 185 (31) 154 154 (149) -

367 (13) (101) 253 (32) 221 221 (169) -

1 (57) 43 37 80 109

(5) (124) (37) 80 43 114

(82) (9) 43 33 166

(149) 5 33 38 161

(169) 52 38 90 109

FY09 80

FY10 43

FY11F 33

FY12F 38

FY13F 90

194 106 12 392 47 174 35 33 679 65 52 117 189

236 104 90 473 50 160 52 17 752 74 71 69 213 83

282 125 90 531 88 160 71 17 867 94 85 69 247 106

328 145 90 601 91 160 76 17 945 94 98 69 261 106

339 150 90 670 93 160 81 17 1,021 94 102 69 264 106

9 315 97 251

17 313 117 299

17 370 121 354

17 384 121 418

17 387 121 491

16 364

22 438

22 497

22 561

22 634

679

752

867

945

1,021

Source: Nomura es timates

Balance sheet (A$mn) As at 30 Jun 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

COH continues to generate significant levels of cash

Liquidity (x) Current ratio Interest cover

3.34 24.7

2.22 19.7

2.15 21.7

2.30 30.7

2.53 37.9

Leverage Net debt/EBITDA (x)

0.54

0.47

0.58

0.49

0.30

Net debt/equity (%)

29.8

26.0

33.4

28.7

17.2

100.6 190.7 116.9 174.4

106.7 189.9 122.4 174.1

107.7 167.4 113.5 161.6

110.7 170.3 115.4 165.6

118.4 179.4 121.6 176.2

Activity (days) Days receivable Days inventory Days payable Cash cycle Source: Nomura es timates

Nomura

49

4 January 2011

CONVICTION CALL

CONVICTION CALL

CONVICTION CALL

CONVICTION CALL

Leighton Holdings L E I A U I N D U S TR I AL S / E N G I N E E R I N G & C O N S TR U C TI O N | AU S T R AL I A

Maintained NOMURA AUSTRALIA LIMITED

[email protected] [email protected]

REDUCE

 Action

Closing price on 30 Dec

Ongoing concerns about cost overruns and time delays for major civil projects combine with our view of impending balance sheet impairment and the likelihood of a further profit downgrade. Uncertainty around ownership of the majority shareholders and the potential unsettling effect on management adds to the risks not fully reflected in the current share price. We retain a REDUCE rating.

(set on 2 Nov 10)

 Catalysts

Our price target is derived by applying an equal weighting of 50% to our DCF of A$32.34/share and 50% to our market-weighted peerbased P/E valuation of A$24.86/share. We think this valuation methodology allows sufficient discounting for any working capital cashflow volatility that is inherently difficult to forecast, as well as providing an anchor to the broader earnings risks reflected in marketbased valuations. Our price target therefore is A$28.60/share and at >5% below the current trading price, we recommend REDUCE until risks subside.

FY10 FY11F FY12F FY13F

Revenue

14,545

15,415

16,026

17,360

615 632

504 504

588 588

715 715 2.38

Reported net profit Normalised net profit Normalised EPS (A$) Norm. EPS growth (%) Norm. P/E (x) EV/EBITDA (x)

1.00

1.68

1.95

(53.0)

66.9

16.6

21.6

31.0 5.1

18.6 5.3

15.9 4.9

13.1 4.5

Price/book (x)

3.6

3.5

3.3

3.0

Dividend yield (%)

4.8

4.0

4.4

5.3

RO E (%) Net debt/equity (%)

25.1 13.9

19.2 16.5

21.2 18.2

24.1 17.1

Earnings revisions Previous norm. net profit

504

588

715

Change from previous (%) Previous norm. EPS (A$)

1.68

1.95

2.38

Source: Company, Nomura estimates

Share price relative to MSCI Australia Price Rel MSCI Australia

(A$) 46

110 105

41

100

36

95 90

31

85

Absolute (A$) Absolute (US$) Relative to Index Market c ap (US$mn)

Oct10

1m

3m

(1.3)

(5.9)

7.4

4.6

(1.2)

28.2

(5.8)

(10.1)

(3.5) 9,520

Estimated free float (%)

6m

45.0

52-week range (A$)

41.27/28.00

3-mth avg daily turnover (US$mn) Stock borrowability

33.57 Hard

Major shareholders (%) Hochtief Limited

55.0

Source: Company, Nomura estimates

Nomura

Nov10

Sep10

Aug10

Jul10

Jun10

80 May10

26 Jan10

 Valuation below DCF to account for risks

Key financials & valuations

Feb10

Despite the emphasis on the company’s recent tour (see Chinese whispers, 25 November 2010) that it was leveraged to the growing Asian market, it is worth remembering that Leighton Asia (Indonesia, Mongolia, HK/Macau) currently only represents 6% of FY10 revenue. This portion will undoubtedly rise once opportunities pursued come online; however, this will more likely be a post FY12 story.

588 -13.8%

30 Jun (A$mn)

Dec 09

 Despite buzz, need some Asian perspective

FY12F net profit (A$mn) Difference from consensus

We believe further contract losses and impairments will cause consensus downgrades in FY11 through to FY12. REDUCE for risk avoidance.

Whilst broader macroeconomic and resource themes tend to dominate the sector, company-specific risks remain in our view and we see EPS remaining sensitive to impairment and the risk of further provisions on major contracts.

Leighton Holdings (LEI) rightly points to a pipeline of long-term growth opportunities across a wide range of attractive geographies. Whilst we acknowledge this long-term growth potential given leverage to attractive macro themes, we also believe a number of medium-term risks may leave LEI vulnerable to a significant PE de-rating. In particular, we continue to expect a significant Middle East JV impairment charge and further profit downgrades attributed to trouble with major civil projects (eg. Airport Link and Victorian Desalination). With no changes to our forecasts, we maintain our REDUCE recommendation.

-8.0% -20.7%

Nomura vs consensus

Anchor themes

 Nearer-term issues outweigh long-term upside

Upside/downside Difference from consensus

Source: Nomura

Further possible downgrades to FY11F NPAT expectations combine with leadership uncertainty associated with a successful bid by ACS for HOT (LEI major shareholder) to create a series of downside risks for LEI.

Macro myopia

A$31.10

A$28.60

Price target

Apr10

+61 2 8062 8409 +61 2 8062 8412

Mar10

Simon Thackray Richard Johnson

50

4 January 2011

Leighton Holdings

Simon Thackray

Valuation methodology

Detailed valuation methodology Exhibit 87. DCF valuation assumptions Target D/DE ratio (%)

25

Tax rate

30

Long-run growth rate (%)

2.5

Risk-free rate (%)

5.25

Equity beta

1.47

Equity risk premium (%)

6

Cost of debt (%) (pre-tax)

8.25

Source: Nomura estimates

Exhibit 88. LEI valuation using peer FY11F consensus P/E weighted by USD market cap Mkt cap (US$mn)

FY11 PE (x)

Weighted PE (x)

10,138

19.9

19.9

10,138

15.3

1.5

Transfield

1,529

13.4

0.2

Downer

1,772

9.4

0.2

UGL

2,553

15.0

0.4

Balfour Beatty

3,026

7.9

0.2

Company/peer LEI - Nomura LEI - consensus

Bilfinger Berger

3,420

9.7

0.3

Ferrovial

8,410

44.5

3.6

Vinci

29,531

11.6

3.3

Bouyges

15,671

8.2

1.2

ACS Actividades de Construccion y Servicios SA

2.0

16,234

12.9

Hochtief AG

5,849

15.8

0.9

Acciona

5,548

15.9

0.9

113,820

15.0

Total

14.7

Valuation per share using FY11 EPS (Nomura)

$24.86

Source: Bloomberg and Nomura estimates

Risks to our investment view During the period of senior management change, we believe uncertainty around the forward EPS forecasts, coupled with the concerns about balance sheet risk, a possible P/E de-rating and uncertainty surrounding the ACS-HOT bid may cap share price performance in the next six to 12 months. Furthermore, if contract mining machinery acquisition costs rise further than expected this would negatively affect our valuation. However, we acknowledge the long-term growth potential of LEI and the share price/work-in-hand relationship that can see the stock reacting positively to individual contract announcements.

Nomura

51

4 January 2011

Leighton Holdings

Simon Thackray

Financial statements Income statement (A$mn) Year-end 30 Jun

FY09

FY10

FY11F

FY12F

FY13F

13,257 (12,042) 1,215 (610)

14,545 (12,883) 1,662 (794)

15,415 (13,766) 1,649 (1,023)

16,026 (14,242) 1,784 (1,044)

17,360 (15,391) 1,969 (1,084)

605

868

626

740

885

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

1,247 (642)

1,692 (824)

1,649 (1,023)

1,784 (1,044)

1,969 (1,084)

605 (141) 379 18 861 (228) 632 (1)

868 (165) 202 (41) 864 (235) 629 3

626 (165) 216 (2) 675 (173) 502 2

740 (167) 216 (3) 786 (201) 585 3

885 (167) 242 (3) 956 (245) 712 3

632 (192) 439

632 (17) 615

504 504

588 588

715 715

Dividends Transfer to reserves

(339) 101

(449) 166

(378) 126

(412) 176

(501) 215

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)

14.5 13.4 20.9 3.7 10.5 4.0 6.1 10.1 9.2 9.4 4.6 3.3 26.5 77.1 8.0 1.7

31.0 28.5 31.8 4.8 11.3 3.6 5.1 9.1 11.4 11.6 6.0 4.2 27.2 73.0 6.2 1.1

18.6 17.1 18.6 4.0 7.2 3.5 5.3 11.6 10.7 10.7 4.1 3.3 25.6 75.0 7.3 1.1

15.9 14.6 15.9 4.4 7.1 3.3 4.9 10.3 11.1 11.1 4.6 3.7 25.6 70.0 7.1 1.1

13.1 12.0 13.1 5.3 5.8 3.0 4.5 8.8 11.3 11.3 5.1 4.1 25.6 70.0 7.5 1.2

na na

25.1 14.8

19.2 11.1

21.2 12.1

24.1 13.5

28.8 11.9

9.7 35.7

6.0 (2.6)

4.0 8.2

8.3 10.4

43.5

(27.9)

18.2

19.6

(53.0) (53.0)

66.9 66.9

16.6 16.6

21.6 21.6

Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit

ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT

(10.0)

Normalised EPS Normalised FDEPS Per share Reported EPS (A$) Norm EPS (A$) Fully diluted norm EPS (A$) Book value per share (A$) DPS (A$)

1.49 2.14 2.14 7.85 1.14

0.98 1.00 1.00 8.52 1.49

1.68 1.68 1.68 8.93 1.26

1.95 1.95 1.95 9.51 1.37

EPS subject to material downside risk from impairment and writedowns

2.38 2.38 2.38 10.21 1.66

Source: Nomura es timates

Nomura

52

4 January 2011

Leighton Holdings

Cashflow (A$mn) Year-end 30 Jun

Simon Thackray

FY09

FY10

FY11F

FY12F

FY13F

1,247 (178) (194) 876 (1,064) (188)

1,692 179 (132) 1,739 (895) 844 (59) (80) (155) 276

1,649 6 (347) 1,308 (1,127) 181 (129) 416 (77) (59)

1,784 (108) (363) 1,313 (1,144) 169 6 339 (225) 29

1,969 41 (405) 1,605 (1,304) 302 (229) 326 3 44

(40) (415) 691 (283)

826 (359) 46 195

333 (420) -

317 (394) -

446 (451) -

26 19 (21) 687 666 613

(60) (178) 648 666 1,314 357

(420) (88) 1,314 1,226 444

(394) (77) 1,226 1,149 522

(451) (5) 1,149 1,144 527

FY09 666

FY10 1,314

FY11F 1,226

FY12F 1,149

FY13F 1,144

2,392 577 79 3,713 1,842 1,820 124

2,452 556 37 4,359 1,902 2,034 125

2,576 566 28 4,396 2,031 1,986 125

2,678 624 33 4,484 2,025 1,938 125

2,901 675 40 4,759 2,254 2,013 125

192 7,692

347 8,766

424 8,962

649 9,221

646 9,797

3,615

3,792

3,922

3,980

4,301

3,615 1,279

3,792 1,670

3,922 1,670

3,980 1,670

4,301 1,670

460 5,354 (1)

736 6,198 3

677 6,270 3

705 6,356 3

749 6,720 3

1,172 1,120

1,233 1,372

1,233 1,496

1,233 1,670

1,233 1,881

48 2,339

(41) 2,565

(41) 2,688

(41) 2,862

(41) 3,073

7,692

8,766

8,962

9,221

9,797

1.03 4.3

1.15 5.3

1.12 3.8

1.13 4.4

1.11 5.3

Leverage Net debt/EBITDA (x)

0.49

0.21

0.27

0.29

0.27

Net debt/equity (%)

26.2

13.9

16.5

18.2

17.1

56.3 13.1 98.7 (29.4)

60.8 16.0 104.9 (28.1)

59.5 14.9 102.3 (27.9)

60.0 15.3 101.5 (26.2)

58.7 15.4 98.2 (24.1)

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

149

Source: Nomura es timates

Balance sheet (A$mn) As at 30 Jun 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

Despite cash up 45% y-y we are concerned this may be flattered by advance payments and duplicate final contract payments

Liquidity (x) Current ratio Interest cover

Activity (days) Days receivable Days inventory Days payable Cash cycle Source: Nomura es timates

Nomura

53

4 January 2011

Myer Holdings M Y R A U C O N S U M E R R E L AT E D / R E T AI L | AU S TR AL I A

Nick Berry David Cooke Rob Freeman

+61 2 8062 8404 +61 2 8062 8408 +61 2 8062 8402

Maintained NOMURA AUSTRALIA LIMITED

[email protected] [email protected] [email protected]

BUY

 Action

Closing price on 30 Dec

A$3.57

A$4.50

Price target

1Q11 sales ahead of expectations and Myer’s inaugural investor day, both in November, provided comfort that sales and margin growth initiatives remain on track. Unseasonal promotional depth – while a near-term margin headwind – appears more than captured at current trading levels, and combined with a c7% yield should see the company appeal to both growth and value investors alike.

(set on 16 Sep 10)

 Catalysts

Upside/downside Difference from consensus

26.1% 3.7%

FY12F net profit (A$mn) Difference from consensus

215.1 6.0%

Source: Nomura

2Q11 sales due February should prove a positive share price catalyst, with initial

contributions from new stores expected to drive market share gains.

Nomura vs consensus

Anchor themes

We believe consensus forecasts and price targets could be factoring in lower gross margin expansion from Exclusive Brands gains as a portion of total sales.

An emerging sustainable improvement in underlying sales fundamentals points to solid value opportunities in the Australian discretionary retail sector. Recent sector weakness on tightened policy rates provides a good entry point, in our view, with solid employment and wage growth set to drive discretionary spend in 2011.

3,678

3,845

182.3 182.3

215.1 215.1

236.4 236.4

Normalised EPS (A$)

0.30

0.31

0.37

0.41

Norm. EPS growth (%)

30.3

4.4

18.7

9.9

Norm. P/E (x) EV/EBITDA (x)

12.1 7.1

11.5 6.4

9.7 5.4

8.8 4.9

Price/book (x)

2.4

2.2

2.1

2.0

Dividend yield (%)

5.9

6.8

8.1

8.8

RO E (%) Net debt/equity (%)

10.9 36.6

20.4 30.0

22.5 20.2

23.2 14.5

182.3

215.1

236.4

0.31

0.37

0.41

Earnings revisions Previous norm. net profit Change from previous (%) Previous norm. EPS (A$) Source: Company, Nomura estimates

Share price relative to MSCI Australia

Nomura

Absolute (A$) Absolute (US$) Relative to Index Market c ap (US$mn)

Oc t10

Nov 10

Sep10

120 115 110 105 100 95 90 85 80 Aug10

Jul10

Jun10

Apr10

 Near-term headwinds provide attractive entry point Discretionary retail share prices have underperformed the broader market in recent months, with Myer no exception. In our view this reflects concerns around higher interest rates, unseasonal sales promotional depth and a view to a rapidly overheating housing market. With the RBA recently moving to a more neutral stance on rates these concerns should abate for consumers in 2011, combining with strong employment and wage growth to drive discretionary spend. Myer is our preferred exposure trading on a PEG of 1.0x with a dividend yield of c7%, versus the market cap. weighted average of the discretionary retailers under coverage of 1.3x and 5.7% respectively.

Price Rel MSCI Australia

(A$) 4.2 4.0 3.8 3.6 3.4 3.2 3.0 2.8

May10

Following four years of significant investment to rationalise its cost base, investment focus now turns to top-line and gross margin growth. We forecast significant margin upside in further Exclusive Brands sales penetration (c120bp), reduced shrinkage (c50bp), increased direct sourcing (c10-15bp) and increased buying power as new stores open. In our view a 10%-plus EBIT margin is achievable (FY10A: 8.1%).

3,499

67.2 163.5

Mar10

 Margin where it matters

3,324

Reported net profit Normalised net profit

Feb10

Our analysis suggests that not only is Myer’s store rollout program feasible, its quick action in securing new store leases through to FY14F has placed it at a distinct advantage to its competition (particularly in David Jones and Target). As a result, the department store (DS) category is set the ‘buck the trend’ of a 20-plus year decline in market share to specialty retailers, and we forecast total sales growth ahead of market in FY11F. Assuming the lower end of management ROIC guidance, Myer’s 14 new stores account for A$0.63 of our A$4.50 DCF-based valuation.

FY10 FY11F FY12F FY13F

Revenue

Jan10

 Forecasting solid market-share growth

Key financials & valuations 01 Jul (A$mn)

Dec09

Bucking the trend

1m

3m

6m

(2.2)

(5.1)

13.0

3.6

(0.3)

34.8

(6.8)

(9.2)

3.1 2,112

Estimated free float (%)

100.0 3.99/2.97

52-week range (A$)

13.22 Easy

3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) na

na

Source: Company, Nomura estimates

54

4 January 2011

Myer Holdings

Nick Berry

Drilling down

Valuation Key drivers for Myer include:  Growing Exclusive Brands (EB) should expand GM 120bp: Our analysis suggests Myer achieves a 70% first margin (i.e. GM pre-promotional/discount funding) on its EB sales – clothing brands owned and produced by third-party manufacturers for Myer. Growing EB as a proportion of sales from FY10’s 17% to c22% should see c125bp of upside to group gross margin by FY13F/FY14F. We understand EB are on track for 18% sales share in FY11F.  Further shrinkage reduction should yield c50bp of GM upside: Shrinkage (stolen and unaccounted for products) currently accounts for c1-2% of Myer’s sales, or A$35-70mn pa. Myer has several initiatives underway to reduce shrinkage, including: the introduction of CCTV to all stores and all distribution centres; electronic article systems (EAS); and fitting room management reviews. To date, an annualised 51bp of shrinkage reduction (cA$16-17mn) has been achieved, and we calculate a further approximate 50bp benefit through FY12F.  New store rollout program feasible and a key differentiator: Our analysis suggests Myer’s signed leases on 14 new stores are a key advantage versus the competition, with retail space supply limited in FY13F. Assuming the lower end of new store returns guidance the 14 new stores contributes A$0.63 of our valuation.  Taking EB international: At its recent strategy day Myer alluded to discussions with offshore counterparts in the UK to develop an international distribution channel for EB. We view this sort of brand management/licensing approach as a positive, low risk approach to maximizing the significant margin potential in EB.  Loyalty program MYERone underpinning growth: Our analysis indicates MYERone members spent A$2,197mn (+8.8% y-y) at Myer in FY10, representing additional sales of A$178mn or 7.74x total company sales growth of A$23mn. Myer should be able to leverage its MYERone customer base to increase targeted marketing programs and the efficiency of marketing dollars spent

Valuation methodology We value Myer at A$4.50 per share using our preferred discounted cashflow (DCF) methodology (WACC and terminal growth rate unchanged at 9.4% and 2.5% respectively). We set our price target in line with our valuation. New store openings contribute A$0.63 of the valuation and the underlying business accounts for the remainder.

Risks to our investment view A forecast sustainable improvement in underlying sales fundamentals is central to our positive investment thesis for Myer. In our view, the core risks to this macro forecast include: a series of further rapid interest rate rises (either through policy implementation or bank variable rate increases); evidence of a structural shift in consumption patterns impacting margin mix longer term; a collapse in Australian house prices; a lower-than-expected AUD/USD (Nomura forecasts 97c for FY11); or a material increase in unemployment. Positive risks include: faster/deeper penetration of exclusive brands sales than forecast; greater strength in the consumer spending recovery than forecast; and market-share gains from competitor disruption due to brand repositioning (eg. Kmart). The key neutral risk is how Myer deploys its balance sheet capacity in the medium term (we view investment in third-party channel distribution of EB as most likely).

Nomura

55

4 January 2011

Myer Holdings

Nick Berry

Financial statements Income statement (A$mn) Year-end 01 Jul

FY09

FY10

FY11F

FY12F

FY13F

3,261 (1,983) 1,278 (1,042) 236

3,324 (2,007) 1,318 (1,047) 270

3,499 (2,092) 1,406 (1,113) 293

3,678 (2,198) 1,481 (1,148) 333

3,845 (2,288) 1,557 (1,196) 362

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

301 (65) 236 (82) 154 (45) 109 109 109

336 (65) 270 (42) 228 (65) 164 164 (96) 67

370 (77) 293 (33) 260 (78) 182 182 182

419 (86) 333 (26) 307 (92) 215 215 215

458 (96) 362 (24) 338 (101) 236 236 236

Dividends Transfer to reserves

109

(122) (55)

(140) 42

(169) 46

(183) 53

Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit

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)

15.6 19.7 15.6 10.2 4.3 9.2 11.7 39.2 9.2 7.2 3.3 29.2 3.6 1.8

12.1 15.3 29.1 5.9 8.1 2.4 7.1 8.8 39.6 10.1 8.1 2.0 28.4 182.0 3.1 1.6

11.5 14.4 11.5 6.8 7.3 2.2 6.4 8.0 40.2 10.6 8.4 5.2 30.0 77.0 3.4 1.5

9.7 12.2 9.7 8.1 6.4 2.1 5.4 6.8 40.3 11.4 9.1 5.8 30.0 78.4 2.5 1.1

8.8 11.1 8.8 8.8 6.5 2.0 4.9 6.2 40.5 11.9 9.4 6.1 30.0 77.5 2.5 1.0

ROE (%) ROA (pretax %)

32.1 13.4

10.9 14.8

20.4 15.7

22.5 17.5

23.2 18.6

Growth (%) Revenue EBITDA

(1.8) 9.3

1.9 11.5

5.2 10.2

5.1 13.3

4.5 9.1

EBIT

10.7

14.6

8.5

13.6

8.6

Normalised EPS Normalised FDEPS

0.5 0.5

30.3 28.6

4.4 5.9

18.7 18.7

9.9 9.9

Per share Reported EPS (A$) Norm EPS (A$) Fully diluted norm EPS (A$) Book value per share (A$) DPS (A$)

0.23 0.23 0.23 0.83 -

0.12 0.30 0.29 1.47 0.21

0.31 0.31 0.31 1.59 0.24

0.37 0.37 0.37 1.70 0.29

Myer Melbourne reopening, plus several store refurbishments

0.41 0.41 0.41 1.80 0.32

Source: Nomura es timates

Nomura

56

4 January 2011

Myer Holdings

Nick Berry

Cashflow (A$mn) Year-end 01 Jul

FY09

FY10

FY11F

FY12F

FY13F

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

301 (5) (129) 167 (119) 48 2 15 33 (50) 47 (2) (2) 46 139 185 694

336 3 (98) 241 (105) 136 2 21 (14) (10) 134 315 (364) (164) (213) (79) 185 106 314

370 11 (95) 286 (119) 167 (2) 2 167 (131) (131) 36 106 142 278

419 23 (118) 324 (92) 232 232 (154) (154) 78 142 220 200

458 (14) (125) 318 (96) 222 222 (174) (174) 47 220 268 152

As at 01 Jul 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

FY09 185 33 356 29 602 8 372 350 559 97 1,987 468 127 594 879 133 1,607 85 314 (19) 380

FY10 106 24 353 483 6 468 350 571 76 1,954 438 120 557 420 119 1,096 517 320 20 857

FY11F 142 35 339 516 8 510 350 571 76 2,031 462 104 566 420 119 1,105 554 372 926

FY12F 220 37 368 625 8 516 350 571 76 2,145 515 104 619 420 119 1,158 554 433 987

FY13F 268 38 404 710 8 516 350 571 76 2,231 538 104 643 420 119 1,182 554 495 1,049

Total equity & liabilities

1,987

1,954

2,031

2,145

2,231

1.01 2.9

0.87 6.5

0.91 9.0

1.01 12.9

1.10 15.1

Capex delay on POS

Source: Nomura es timates

Balance sheet (A$mn)

Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x)

2.31

0.94

0.75

0.48

0.33

Net debt/equity (%)

182.6

36.6

30.0

20.2

14.5

Activity (days) Days receivable Days inventory Days payable Cash cycle

3.6 64.5 83.2 (15.2)

3.1 64.4 82.3 (14.8)

3.1 60.4 78.5 (15.0)

3.6 58.9 81.3 (18.9)

3.6 61.5 84.0 (18.9)

Source: Nomura es timates

Nomura

57

4 January 2011

Westpac Banking Corp W B C A U F I N AN C I AL S / B AN K S | AU S TR AL I A

Maintained NOMURA AUSTRALIA LIMITED

[email protected] [email protected] [email protected]

BUY

 Action

Closing price on 30 Dec

Pleasing trends evident in the FY10 result (stabilisation of the NIM and normalised trading income levels) suggest that WBC’s underlying performance is unlikely to lag peers in FY11F, although underlying profit growth expectations remain a key issue for the bank sector. This, coupled with WBC’s sector-leading capital position, strong organic capital generation capabilities and prudent provisioning levels, suggests to us that the relative PE discount to CBA and ANZ is not justifiable. Maintain BUY.

(set on 6 Dec 10)

We believe the valuation gap between WBC and peers is likely to close as the market refocuses its attention towards WBC’s superior returns and capital position.

 Valuation potential upside WBC is trading at a 15% FY11F P/E discount to its closest peer CBA, which we believe is not warranted given WBC’s strong organic capital generation and sector-leading capital position. We continue to see potential valuation upside and retain WBC as our top pick in the sector.

9,938

10,163

10,806

11,434

Reported net profit Normalised net profit

6,346 5,879

6,179 6,379

6,900 6,900

7,128 7,128

Normalised EPS (A$)

1.98

2.12

2.26

2.30

Norm. EPS growth (%)

22.2

7.1

6.6

1.8

Norm. P/E (x) Price/adj. book (x)

11.8 1.68

11.0 1.61

10.4 1.53

10.2 1.46

Price/book (x)

1.68

1.61

1.53

1.46

6.1

6.4

6.9

7.0

16.5 1.05

14.9 0.97

15.6 1.01

15.1 0.97

6,379

6,900

7,128

2.12

2.26

2.30

Dividend yield (%) RO E (%) RO A (%) Earnings revisions Previous norm. net profit Change from previous (%) Previous norm. EPS (A$) Source: Company, Nomura estimates

Share price relative to MSCI Australia 30

Price Rel MSCI Australia

(A$)

115 110 105 100 95 90 85 80

28 26 24 22

Absolute (A$) Absolute (US$) Relative to Index Market c ap (US$mn)

1m

3m

5.8

(2.7)

6.5

12.1

2.2

27.1

1.7

(6.7)

(4.6) 69,129

Estimated free float (%)

6m

1.0 28.25/20.79

52-week range (A$)

204.3 Easy

3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) na

na

na

na

Source: Company, Nomura estimates

Nomura

Nov 10

Oc t10

Sep10

Aug10

Jul10

Jun10

20 Apr10

WBC’s impairment charge declined materially in 2H10, and its impaired assets to non-housing loans remain at the bottom end of peers, which suggests bad debts are likely to be lower in FY11. Additionally, it boasts the strongest provisioning levels (to credit risk weighted assets) of the majors, which should see it benefit from a gradual capital release as conditions improve.

FY10 FY11F FY12F FY13F

PPOP

Feb10

 Good credit quality and strong provisioning levels

Key financials & valuations

Jan10

After experiencing a material NIM decline over the first three quarters of 2010, the stabilisation of margin trends occurred in the 4Q10. Further, WBC improved its funding position and trading income levels normalised from the highs of 2H09, suggesting that WBC’s NIM performance is unlikely to be materially different to peers’, which was a key market concern.

6,900 4.5%

30 Sep (A$mn)

Dec09

 Margin trends stabilised and improved funding position

FY12F net profit (A$mn) Difference from consensus

We continue to believe WBC’s current valuation discount to peers is unjustifiable given healthy levels of organic capital generation and a strong RoTE profile.

The current valuation discount to peers presents a good opportunity for investors who are looking to achieve exposure to a quality domestic banking franchise.

WBC’s sector-leading capital position, combined with its strong levels of organic capital generation (41bps in FY10 vs peers at 5-20bps), suggest to us that it is well placed to meet the more stringent Basel III requirements over the coming years. This, combined with WBC’s strong return on capital (~23% in 2H10), makes it challenging for us to justify a valuation discount to peers.

10.6% 0.9%

Nomura vs consensus

Anchor themes

 Sector leading capital position at a discount

Upside/downside Difference from consensus

Source: Nomura

 Catalysts

Quality franchise at a discount

A$22.61

A$25.00

Price target

May10

+61 2 8062 8411 +61 2 8062 8414 +61 2 8062 8413

Mar10

Victor German Anthony Hoo Prue Rydstrand

58

4 January 2011

Westpac Banking Corp

Victor German

Key issues

Sector-leading capital position … strong provisioning On a Basel III basis, WBC estimates that it would have a Core Tier 1 of ~6.7% (vs ANZ at 6.6%). This strong position, combined with WBC’s organic capital generation (41bps vs peers at 5-19bps), suggests it is the best-placed major to reach the more stringent minimum capital requirements under Basel III. Further, WBC’s strong provisioning levels vs peers should see it benefit from a capital release as conditions improve.

Exhibit 89. Banks Tier 1 under Basel III

Exhibit 90. Collective provision to Credit RWA (bps) 200

(%) 7.5

15 0

7.0 6.5

6.7 6.7

6.7

6.6 6.6 6.4

131

150

138 135

13 3 135 125 112

113 1 06

6.4

0

5.0

Source: Nomura estimates, company data

89

105

92

50

5.5

ANZ CBA As reported Nomura estimates

1 00

75

72

6.0

146

125 94

100 5.6

142

ANZ

NAB WBC CBA (double gearing adj)

CBA

2H08

1H09

NAB 2H09

1H10

WBC 2H10

Note: Organic capital generation is cash earnings, ex net dividend and RWA movements. Source: Nomura estimates, company data

Tough revenue environment … but normalising trends Operating revenue was under pressure in FY10 as: 1) banks reduced exception fees (~A$300mn impact for WBC), 2) trading revenue normalised from the exceptionally strong levels of FY09, and 3) margins were under pressure from higher funding costs. Additionally, we flag that WBC’s NIM appears to have normalised following a poor 1H10 performance. Pleasingly, WBC has rectified its bias towards short-term funding (now~23% of total funding vs 32% for 2007), and it is now in line with peers, suggesting that NIM performance is unlikely to be dissimilar to peers. While we expect revenue growth to remain subdued in FY11, given margins are likely to remain under pressure and volumes are not likely to rebound strongly, we see less obvious headwinds for banks. In this respect, WBC is arguably better positioned than peers, having undertaken broader fee reductions as well as experiencing a rebasing of its trading revenue to more normalised levels.

Valuation methodology We maintain our 12-month target price of A$25.00/share, which is based broadly on the mid-point of our DCF and SOTP (P/E-based) valuations of A$27.77/share and A$23.49/share respectively. Our DCF assumes a WACC of 11.25% (beta of 1.0, riskfree rate of 5.25%, equity risk premium of 6%) and terminal growth rate of 5%, which is based on LT GDP growth.

We value WBC using the midpoint of our SOTP and DCF valuations

Risks to our investment view Key downside risk is from a material deterioration in the credit quality in the St George portfolio, market-share losses in the mortgages portfolio due to higher interest rates versus peers, and material changes in the regulatory environment for retail banks due to government intervention.

Nomura

59

4 January 2011

Westpac Banking Corp

Victor German

Financial statements Profit and Loss (A$mn) Year-end 30 Sep Interest income Interest expense Net interest income Net fees and commissions Trading related profits Other operating revenue Non-interest income Operating income Depreciation Amortisation Operating expenses Employee share expense Op. profit before provisions Provisions for bad debt Other provision charges Operating profit Other non-operating income Associates & JCEs Pre-tax profit Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/book (x) Price/adjusted book (x) Net interest margin (%) Yield on interest earning assets (%) Cost of interest bearing liabilities (%) Net interest spread (%) Non-interest/operating income (%) Cost to income (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (%) Operating ROE (%) Operating ROA (%) Growth (%) Net interest income Non-interest income Non-interest expenses Pre-provision earnings Net profit Normalised EPS Normalised FDEPS

FY09

FY10

FY11F

FY12F

FY13F

30,446 (19,013) 11,433 2,637 1,294 901 4,832 16,265 (401) (6,133)

34,077 (22,222) 11,855 2,433 1,825 797 5,055 16,910 (509) (6,463)

37,213 (25,198) 12,016 2,576 1,942 757 5,275 17,290 (565) (6,563)

40,011 (27,482) 12,529 2,766 2,094 813 5,673 18,201 (587) (6,808)

43,276 (30,178) 13,098 2,963 2,251 871 6,085 19,182 (614) (7,135)

9,731 (3,238)

9,938 (1,456)

10,163 (1,083)

10,806 (992)

11,434 (1,299)

6,493 6,493 (1,958) 4,535 (71) -

8,482 8,482 (2,537) 5,945 (66) -

9,080 9,080 (2,633) 6,447 (68) -

9,814 9,814 (2,846) 6,968 (68) -

10,135 10,135 (2,939) 7,196 (68) -

4,464 (1,018) 3,446

5,879 467 6,346

6,379 (200) 6,179

6,900 6,900

7,128 7,128

3,446

6,346

6,179

6,900

7,128

14.4 16.0 18.1 5.1 1.8 1.8 2.33 6.21 na na 29.7 40.2 30.2 12.2 0.67 22.9 1.26

11.8 13.0 10.6 6.1 1.7 1.7 2.21 6.35 na na 29.9 41.2 29.9 16.5 1.05 22.0 1.40

11.0 12.2 11.0 6.4 1.6 1.6 2.16 6.68 na na 30.5 41.2 29.0 14.9 0.97 21.9 1.42

10.4 11.5 10.0 6.9 1.5 1.5 2.09 6.68 na na 31.2 40.6 29.0 15.6 1.01 22.2 1.44

10.2 11.2 9.8 7.0 1.5 1.5 2.02 6.68 na na 31.7 40.4 29.0 15.1 0.97 21.5 1.37

58.3 24.1 30.4 55.9 19.8 (18.3) (18.9)

3.7 4.6 5.4 2.1 31.7 22.2 22.7

1.4 4.3 1.5 2.3 8.5 7.1 6.7

4.3 7.5 3.7 6.3 8.2 6.6 6.5

4.5 7.3 4.8 5.8 3.3 1.8 1.8

We see NIM coming under pressure… decreasing by ~5bps per year

Source: Nomura es timates

Nomura

60

4 January 2011

Westpac Banking Corp

Victor German

Balance Sheet (A$mn) As at 30 Sep

FY09

FY10

FY11F

FY12F

FY13F

Cash and equivalents Inter-bank lending Deposits with central bank Total securities Other interest earning assets Gross loans Less provisions Net loans Long-term investments Fixed assets Goodwill Other intangible assets Other non IEAs Total assets Customer deposits Bank deposits, CDs, debentures Other interest bearing liabilities Total interest bearing liabilities Non interest bearing liabilities Total liabilities Minority interest Common stock Preferred stock Retained earnings Proposed dividends

3,272 9,974 80,994

4,464 12,588 91,701

4,759 13,419 97,758

5,147 14,514 105,735

5,567 15,699 114,363

467,843 (4,384) 463,459 766 11,541 19,581 589,587 329,456 9,235 1,671 340,362 212,654 553,016

482,366 (4,711) 477,655 1,322 11,504 19,043 618,277 337,385 8,898 635 346,918 231,241 578,159

514,487 (5,283) 509,204 1,409 10,258 20,301 657,108 359,669 9,486 677 369,832 244,784 614,615

555,780 (5,025) 550,755 1,524 10,258 21,957 709,891 389,018 10,260 732 400,010 264,498 664,508

600,516 (4,819) 595,697 1,649 10,258 23,749 766,981 420,762 11,097 792 432,651 285,927 718,578

23,637 (188) 11,244 -

24,686 (190) 13,750 -

25,486 (190) 15,325 -

26,455 (190) 17,246 -

27,486 (190) 19,235 -

Other equity Shareholders' equity Total liabilities and equity Non-performing assets (A$)

1,878 36,571 589,587 3,770

1,872 40,118 618,277 4,585

1,872 42,493 657,108 5,714

1,872 45,383 709,891 4,558

1,872 48,403 766,981 3,192

Balance sheet ratios (%) Loans to deposits Equity to assets

142.0 6.2

143.0 6.5

143.0 6.5

142.9 6.4

142.7 6.3

Asset quality & capital NPAs/gross loans (%) Bad debt charge/gross loans (%) Loss reserves/assets (%) Loss reserves/NPAs (%) Tier 1 capital ratio (%) Total capital ratio (%)

0.8 0.69 0.74 116.3 8.1 10.8

1.0 0.30 0.76 102.7 9.1 11.0

1.1 0.21 0.80 92.5 9.1 10.9

0.8 0.18 0.71 110.2 9.2 10.8

0.5 0.22 0.63 151.0 9.2 10.7

Growth (%) Loan growth Interest earning assets Interest bearing liabilities Asset growth Deposit growth

47.8 34.1 34.2 34.1 41.0

3.1 5.0 1.9 4.9 2.4

6.6 6.6 6.6 6.3 6.6

8.2 8.2 8.2 8.0 8.2

8.2 8.2 8.2 8.0 8.2

Per share Reported EPS (A$) Norm EPS (A$) Fully diluted norm EPS (A$) DPS (A$) PPOP PS (A$) BVPS (A$) ABVPS (A$) NTAPS (A$)

1.25 1.62 1.57 1.16 3.53 12.43 12.43 8.51

2.14 1.98 1.92 1.39 3.34 13.42 13.42 9.57

2.05 2.12 2.05 1.46 3.37 14.03 14.03 10.64

2.26 2.26 2.18 1.55 3.54 14.76 14.76 11.43

2.30 2.30 2.22 1.58 3.69 15.52 15.52 12.23

WBC is well positioned to reach Basel III requirements

Source: Nomura es timates

Nomura

61

4 January 2011

Woodside Petroleum W P L A U O I L & G AS / C H E M I C AL S | AU S TR AL I A

Maintained NOMURA AUSTRALIA LIMITED

[email protected]

BUY

 Action

Closing price on 30 Dec

We expect 2011 to be a year of change for Woodside with the much-awaited commissioning of Pluto’s first train expected to increase daily production by 45% in Q411. The new capacity has been well timed, ahead of rising construction costs in Australia and concurrent with our expectations of rising oil prices. Well-flagged changes in management in FY11 along with Shell’s search for a strategic buyer of its 24% stake in Woodside are all expected to bring about positive change. BUY.

(set on 22 J un 10)

The confirmation of gas volumes in the Central Hub, along with the successful delivery of Pluto’s first shipments, is expected to be well received by the market.

 BUY rating with a A$56.4 per share price target Our valuation models point to A$6 per share being locked into Pluto’s expansion projects, with a further S$1.6 per share locked into Sunrise, we are of the opinion that developments in 2011 could unlock value for shareholders. We reaffirm our BUY rating.

4,723

8,443

1,421 1,421

1,689 1,689

3,378 3,378

Normalised EPS (US$)

1.93

1.81

2.15

4.31

Norm. EPS growth (%)

(11.7)

(5.9)

18.9

100.0

25.2 13.1

23.5 12.3

19.9 11.1

9.9 5.4

Norm. P/E (x) EV/EBITDA (x) Price/book (x)

3.9

3.2

3.2

2.5

Dividend yield (%)

2.4

2.6

2.6

2.6

RO E (%) Net debt/equity (%)

21.2 42.4

14.6 28.7

16.1 26.9

28.5 9.1

1,421

1,689

3,378

1.81

2.15

4.31

Earnings revisions Previous norm. net profit Change from previous (%) Previous norm. EPS (US$) Source: Company, Nomura estimates

Share price relative to MSCI Australia Price Rel MSCI Australi a

(A$) 51 49

106 104 102 100 98 96 94 92 90

47 45 43 41 Oct10

1m

3m

Absolute (A$)

2.0

(2.5)

2.3

Absolute (US$)

7.9

2.3

21.9

(2.6)

(6.8)

(9.9) 34,102

Relative to Index Market c ap (US$mn) Estimated free float (%)

6m

65.0

52-week range (A$)

49.28/40.56

3-mth avg daily turnover (US$mn) Stock borrowability

189.7 Easy

Major shareholders (%) RD SHELL

24.3

Source: Company, Nomura estimates

Nomura

Nov10

Sep10

Jul10

39 Aug10

We are of the opinion that Shell’s search for a strategic investor to take its 24% stake in WPL realises a window for new entrants who can benefit from this stake, and in turn, add value to Woodside’s shareholders.

4,159

1,441 1,441

Jun10

 Shell’s sell-down to potentially create opportunities

3,450

Reported net profit Normalised net profit

May10

With both CEO Don Voelte and CFO Mark Chatterji stepping down by YE11, we see an opportunity for fresh management to revisit negotiations with Timor-Leste with our models pointing to A$1.6 per share of value locked into WPL’s 33% stake of this 5 TCF project.

FY09 FY10F FY11F FY12F

Revenue

Jan10

 New management and Sunrise

Key financials & valuations

Feb10

Following the acquisition of Hess interests in the Central Hub (WA404-P), we expect WPL to be able to move forward with Pluto’s expansion train (T2) in 2011 with our models pricing in final investment decision (FID) by mid 2011, first LNG by 2015, and expected project costs of US$9.5bn.

1,689 16.6%

31 Dec (US$mn)

Dec 09

 FID of Pluto’s second train expected late 2011

FY11F net profit (US$mn) Difference from consensus

Earnings estimates for 2011 come in ahead of consensus on above consensus oil price call of US$95/bbl average for the year.

Clean and efficient natural gas is expected to see robust demand growth in the Asia Pacific region in the medium and longer term. We expect global attention to turn to Australia’s vast gas reserves, especially once new infrastructure is built.

Pluto’s LNG foundation project is now 95% complete with the first shipment from the 4.3mtpa train scheduled for September 2011. With construction delays behind us, and fresh delays not expected, we are looking for Pluto’s first train to benefit from a rising oil price assumptions and expectations that costs could continue to rise in Australia, increasingly becoming a burden on competing LNG projects.

31.8% 6.4%

Nomura vs consensus

Anchor themes

 Pluto to deliver in September

Upside/downside Difference from consensus

Source: Nomura

 Catalysts

2011 – major milestones ahead

A$42.80

A$56.4

Price target

Apr10

+61 2 8062 8416

Mar10

Xavier M Grunauer

62

4 January 2011

Woodside Petroleum

Xavier M Grunauer

Major milestones ahead

Pluto’s T1 – ahead of the competition Woodside’s Pluto Foundation reports a 95% complete project, with a revised start-up and first LNG now scheduled for September 2011, three months behind our previously modelled start-up of July 1, 2011. The company points to flare tower design problems as the main cause of delays, which contribute to an additional A$0.9bn in costs. Also included in the cost overrun are sourcing costs associated with missed LNG cargoes, with the company pointing to these costs as being less significant and not material.

First LNG now expected in September 2011, three months delay on our estimates

With regards to Pluto expansion projects, company guidance points to two more exploration wells in the Central Hub which together with drilling successes and acquisition in the Central Hub (WA-404-P), position the company well to be in a position of having sourced sufficient gas to take a 90% stake in Pluto’s T2 expansion train which DCF model now pricing in T2 expansion at an expected cost of US$9.5bn. While the company is not keen to share cost estimates for Pluto expansion projects on the grounds that Australia has become a very competitive environment, we now have included Pluto T2 into our core production model coming online in early 2015, which in turn implies a FID for Pluto T2 in the coming year, with our models pointing to mid-year 2011 as most likely given Woodside’s drilling and appraisal schedule.

Life post Shell’s sell-down of a 10% stake in Woodside We are of the opinion that announcements by Shell (8 November 2010) that it was looking for a strategic investor to take the remaining 24.27% stake realises a potential window for new entrants who can benefit from an equity stake in Woodside. We are of the opinion that there are only a handful of companies that could benefit from owning a 24% stake in Woodside, and more importantly, could receive approval from both Woodside shareholders and Australia’s Foreign Investment Review Board. We see three clear potential acquirers:  BHP (BHP AU): Potentially creating a merger of equals  Chevron (CVX US): Leveraging project synergies with Wheatstone LNG  Conoco (COP US): Benefiting from west coast consolidation? While our previous thoughts of Darwin becoming an LNG hub have yet to materialise, we are of the opinion that as operator of Darwin’s 3.6mtpa LNG facility, Conoco would benefit from an expanded footprint, potentially adding Woodside-led Sunrise LNG if it can negotiate approval from Timor-Leste, and potentially bringing Browse natural gas to Darwin as well. We could envision a scenario where Conoco swaps Shell’s 24% stake in Woodside for a stake in Conoco/Origin’s CSG to LNG project (APLNG). The combination would bring Woodside’s marketing expertise to Conoco upstream global experience. From Origin’s point of view, including Shell in the fray could facilitate new offtake agreements facilitating FID of APLNG earlier than expected.

Conoco could swap Shell’s 24% stake in Woodside for a stake in APLNG

Valuation methodology and risks to our investment view Near term, we expect Pluto to have a significant impact on Woodside’s balance sheet once it is up and running. We expect daily production to increase by over 45% in 4Q11, increasing the company’s leverage to global oil prices as we price in US$110 oil in 2012. We value Woodside using a combination of a DCF model and a sum-of-theparts (SOTP) approach. Our DCF valuation focuses on WPL's core business and makes use of an 8.5% WACC and a 3.5% terminal growth rate. The fair value of the core business, which includes Pluto T1 and T2, comes in at A$48/share. Our SOTP valuation adds the present value of longer-term LNG projects not accounted for in our DCF valuation, which include Pluto T3 along with Sunrise and Browse. All in, we arrive at a price target of A$56.4 per share.

We arrive at a price target of A$56.4 per share

Risks to our forecasts and investment view include oil price volatility, operational risks from offshore operations, and project risk from delays and large cost overruns.

Nomura

63

4 January 2011

Woodside Petroleum

Xavier M Grunauer

Financial statements Income statement (US$mn) Year-end 31 Dec

FY08

FY09

FY10F

FY11F

FY12F

Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit

5,106 (2,220) 2,885 (74) 2,811

3,450 (1,146) 2,304 (33) 2,270

4,159 (1,921) 2,238 (55) 2,183

4,723 (2,088) 2,636 (55) 2,581

8,443 (3,120) 5,323 (75) 5,248

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

3,637 (826) 2,811 (20) 2,792 (1,269) 1,522 -

3,078 (808) 2,270 (13) 2,258 (816) 1,441 -

2,965 (782) 2,183 23 2,206 (785) 1,421 -

3,287 (706) 2,581 2,581 (892) 1,689 -

6,384 (1,136) 5,248 (10) 5,238 (1,860) 3,378 -

1,522

1,441

1,421

1,689

3,378

1,522

1,441

1,421

1,689

3,378

Dividends Transfer to reserves

(433) 1,089

(823) 618

(862) 558

(862) 826

(862) 2,515

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)

27.7 36.5 24.8 1.1 11.7 7.1 12.3 15.9 56.5 71.2 55.1 29.8 45.5 28.4 76.3 4.7

25.2 33.1 24.1 2.4 23.6 3.9 13.1 17.7 66.8 89.2 65.8 41.8 36.2 57.1 138.0 5.9

23.5 31.0 23.6 2.6 13.3 3.2 12.3 16.8 53.8 71.3 52.5 34.2 35.6 60.7 78.4 4.2

19.9 26.2 19.9 2.6 9.7 3.2 11.1 14.1 55.8 69.6 54.6 35.8 34.6 51.1 67.8 4.5

9.9 13.1 9.9 2.6 7.3 2.5 5.4 6.6 63.0 75.6 62.2 40.0 35.5 25.5 35.4 2.6

na na

21.2 16.8

14.6 12.8

16.1 14.7

28.5 28.0

(32.4) (15.4)

20.6 (3.7)

13.6 10.8

78.8 94.2

ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT

(19.2)

(3.8)

18.2

103.3

Normalised EPS Normalised FDEPS

(11.7) (5.3)

(5.9) (1.4)

18.9 18.3

100.0 100.0

1.93 1.93 1.85 11.83 1.10

1.81 1.81 1.82 13.54 1.10

2.15 2.15 2.15 13.28 1.10

Per share Reported EPS (US$) Norm EPS (US$) Fully diluted norm EPS (US$) Book value per share (US$) DPS (US$)

2.18 2.18 1.95 6.75 0.62

EBITDA to rise as Pluto comes online

4.31 4.31 4.31 16.91 1.10

Source: Nomura es timates

Nomura

64

4 January 2011

Woodside Petroleum

Cashflow (US$mn) 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

Xavier M Grunauer

FY08

FY09

FY10F

FY11F

FY12F

3,637 (412) 3,225 (3,894) (668)

3,078 (797) (808) 1,474 (4,761) (3,287) 9

2,965 366 (807) 2,524 (3,259) (735) (13)

3,287 95 74 3,456 (3,203) 253 -

6,384 596 (2,403) 4,577 (2,993) 1,585 -

10 98

(23) (42)

267

(668) (217) 217 904

(3,171) (292) 1,317 2,989

(814) (262) 1,060 (145)

520 (262) 262 (253)

1,585 (533) 533 (1,585)

904 235 (136) 99

271 4,285 1,114 99 1,213 3,751

716 1,369 555 1,213 1,768 3,050

(267) (520) 0 1,768 1,768 2,797

(1,585) (0) 1,768 1,768 1,212

FY10F 1,768 498 122 85 2,473 131 16,495 26 227 19,352 1,000 440 1,440 4,818 1,934 8,192 541 4,845 4,857 917 10,619

FY11F 1,768 592 122 85 2,567 131 16,389 227 19,314 1,189 440 1,629 4,565 2,201 8,395 511 4,064 6,284 61 10,409

FY12F 1,768 1,185 122 85 3,160 131 18,245 227 21,763 2,377 440 2,817 2,980 2,201 7,998 511 4,064 9,129 61 13,254

-

Debt accounts for Pluto T2 construction

Source: Nomura es timates

Balance sheet (US$mn) 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

FY08 99 375 76 44 594 126 9,557 214 10,491 1,175 486 1,660 2,078 1,878 5,617 160 1,379 3,296 40 4,715

FY09 1,213 505 110 603 2,431 118 15,089 204 17,841 1,192 395 1,587 4,963 1,976 8,526 459 3,648 5,153 55 8,856

Total equity & liabilities

10,491

17,841

19,352

19,314

21,763

0.36 143.4

1.53 179.0

1.72 na

1.58 na

1.12 524.8

Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x)

net cash

1.22

1.03

0.85

0.19

Net debt/equity (%)

net cash

42.4

28.7

26.9

9.1

Activity (days) Days receivable Days inventory Days payable Cash cycle

-

46.6 29.5 376.9 (300.8)

44.0 22.0 208.2 (142.2)

42.1 21.3 191.3 (127.9)

38.5 14.3 209.1 (156.3)

Source: Nomura es timates

Nomura

65

4 January 2011

Rio Tinto

RIO LN

E U R O P E AN M E T AL S & M I N I N G | E M E A

Maintained NOMURA INTERNATIONAL PLC

paul [email protected]

BUY

 Action

Closing price on 30 December

We expect Rio Tinto, our top mining pick, to outperform the sector on high iron ore prices that will help the miner to turn net cash by end-2011F, with excess cash likely to be returned to shareholders. A return to its old self, with a conservative balance sheet and M&A strategy, should return the miner to its former ‘best-inclass’ status with renewed emphasis on organic growth, especially in iron ore. BUY.

 Catalysts

 Share buybacks likely in 2H 2011F With a manageable US$11bn capex budget for 2011F, Rio Tinto should generate enough cash next year to turn net cash by end2011F and leave the miner with nearly US$50bn in balance sheet headroom, on our estimates. We believe the group will likely initiate a share buyback programme in 2H 2011F after regaining a single-A credit rating.

Key financials & valuations FY09 FY10F FY11F FY12F

Revenue Reported net profit Normalised net profit Normalised EPS (US$) Norm. EPS growth (%) Norm. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) Earnings revisions Previous norm. net profit Change from previous (%) Previous norm. EPS (US$)

42,320 4,872 6,298 3.57 19.8 10.8 3.0 0.5 13.7 29.0

51,025 13,489 13,489 6.89 93% 10.2 6.2 2.4 1.3 23.4 14.6

57,808 19,416 19,416 9.92 44% 7.1 4.3 1.8 1.3 25.8 -6.9

60,394 21,127 21,127 10.79 9% 6.6 3.5 1.5 1.4 22.4 -31.1

13,489 6.89

19,416 9.92

21,127 10.79

Source: Company, Nomura estimates

Share price relative to FTSE All Share (GBp)

Price

5000

3200

rel FTSE All-Share

3100

4500

3000 2900

4000

2800 3500

2700 2600

3000

2500

Absolute (p) Absolute (US$) Relative to Index Market cap (£mn) Estimated free float (%) 52-week range (p) 3-mth avg daily turnover (£mn) Stock borrowability Major shareholders (%) Shining Prospects PTE Blackrock

1m 12.4 11.0 4.2

66

Dec-10

Nov-10

3m 23.2 20.6 15.3

6m 54.4 58.9 32.8 92,887 92% 2812-4584 205

19.8 17.0

Source: Company, Nomura estimates

Nomura

Oct-10

Sep-10

Aug-10

Jul-10

Jun-10

May-10

2400 Jan-10

2500 Feb-10

We anticipate Rio Tinto will keep organic growth in focus. Significant cash generation from iron ore should help the company to fund its impressive organic growth portfolio, which is one of the most attractive in the sector. We see the expansion of the Pilbara iron ore operations by 100 mtpa as value accretive for shareholders, contributing 653p or 11% to our £59 NPV price target. Rio Tinto also seeks to increase its stake in the world-class Oyu Tolgoi copper-gold project (550 ktpa copper, 650 koz pa gold), which will help to increase copper volumes as other mines struggle to maintain stable production.

-3.0%

31 Dec (US$mn)

Dec-09

 Organic growth firmly in focus

Difference from consensus

We are 18% and 26% ahead of 2011F and 2012F consensus EPS, with our iron ore forecasts 24% and 25% ahead of consensus estimates, respectively.

A prolonged period of high commodity prices will spur super-normal free cashflow over the next several years, particularly in iron ore, coal and copper. We prefer miners that are more inclined to return excess cash to shareholders.

We forecast 2011F iron ore prices will rise by 38% y-y on strong China steel demand and weak domestic iron production. With more than two-thirds of 2011F EBITDA likely to be derived from iron business, we anticipate Rio Tinto will generate significant cash over the next 12 months and turn net cash by end-2011F, spurring the group to return cash to shareholders. Further, we see incremental positives in other divisions, with improvements in aluminium margins through divestments of higher-cost European smelters and minor expansions in Australian coal production.

28.7% 20.1% 13,489

Nomura vs consensus

Anchor themes

 Record iron prices to turn Rio net cash by end-2011F

Upside/downside Difference from consensus FY10F net profit (US$mn)

Source: Nomura

Higher-than-expected iron ore prices will serve as a catalyst. Rio Tinto regaining its single-A credit rating could also be a catalyst for share buybacks in 2011.

High iron prices to boost RIO

4584.0p

5900p

Price target

Apr-10

+44 20 7102 4349

Mar-10

Paul Cliff

4 January 2011

Rio Tinto

Paul Cliff

Valuation methodology Our NPV-based target price of £59 assumes a WACC of 8%, which is the lowest in the mining sector, and shared only with BHP Billiton. Risks to our call The primary risk to our positive call on Rio Tinto is a slump in iron ore prices, derived either from stronger than Chinese domestic production or a softening of Chinese iron demand due to lower steel production.

Exhibit 91. Mining valuation sheet (based on Nomura commodity forecasts) Mkt Cap Nomura Current Company

Base

Growth

(mn)

Rating

Price

$69,119

Buy

£15.25

£13.5

£3.4

£16.9

$138,156

Buy

£45.84

£40.3

£18.8

BHP Billiton (BLT LN)

$226,631 Reduce

£26.16

£17.3

Vale Common (VALE US)

$178,993

Buy

$33.77

Anglo American (AALN LN)

$64,507

Buy

ENRC (ENRC LN)

P/E

Price/

FCF yld (%)

11F

12F

10F

11F

12F

11F

0.90

13.5

9.2

7.5

8.2

5.5

4.4

12.1

£59.1

0.77

10.2

7.1

6.7

6.2

4.2

3.6

13.4

£5.3

£22.6

1.16

12.4

8.5

7.5

7.0

4.6

3.7

12.9

$32.7

$6.5

$39.2

0.86

11.4

5.9

5.2

7.7

3.4

2.6

17.4

£33.76

£27.0

£8.5

£35.5

0.95

12.6

7.9

6.9

8.8

5.3

4.4

11.7

$21,016 Reduce

£10.53

£8.4

£1.3

£9.6

1.09

9.6

6.9

6.6

6.6

4.7

4.2

14.2

Kazakhmys (KAZ LN)

$13,588 Reduce

£16.38

£13.7

£0.8

£14.4

1.14

9.4

6.9

6.3

5.4

3.8

3.1

12.6

Antofagasta (ANTO LN)

$24,967

£16.34

£11.5

£2.2

£13.8

1.19

20.1

11.3

10.3

12.4

6.9

5.8

9.1

Buy C$108.00

C$66.0

C$35.0 C$101.0

1.07

14.5

11.5

6.9

8.4

6.0

3.1

7.9

First Quantum (FM CN) Vedanta (VED LN)

Buy

$9,295

£25.50

£21.2

£1.8

£23.0

1.11

8.0

5.1

4.3

7.0

4.6

3.6

14.9

SEK 37,115 Reduce SEK136

SEK78

SEK10

SEK88

1.54

12.4

13.3

11.6

7.2

6.7

6.0

8.2

EUR 51 EUR 239

1.08

16.0

10.9

11.5

8.1

6.2

5.9

-2.6

£13.8

1.43

29.8

18.6

17.3

16.8

11.6

10.4

1.9

n/a NOK 46

0.93

36.6

18.8

15.2

9.5

6.7

5.8

4.1

Average Diversified Mining Sector

0.93

12.0

7.7

6.8

7.6

4.6

3.7 13.5%

Weighted Average Mining Sector

0.98

15.8

9.3

8.3

8.4

5.0

4.1 13.4%

Boliden (BOL SS) Eramet (ERA FP) Lonmin (LMI LN) Norsk Hydro (NHY LN)

$12,833

EUR 6,858

Neutral

NPV Total NPV

EV/ EBITDA

10F

Xstrata (XTA LN) Rio Tinto (RIO LN)

NPV Options

Total

Neutral EUR 257 EUR 188

$5,902 Reduce NOK 65,619

£19.83

£10.5

Neutral NOK 43

NOK 46

£3.3

Source: Company data, Bloomberg, Datastream, Nomura estimates

Exhibit 92. Iron ore spot and contract prices US$/tonne 250

Iron ore spot (inc. Freight) Contract Australia FOB Australian Freight

Exhibit 93. Rio Tinto: EBITDA by segment (2011F)

Spot Australia FOB Forecast Contract Australia FOB

Diamonds 0.2%

Others 0%

Copper 16%

200

Aluminum 5% 150

100

Industrial Minerals 2% Q4 2010

Coal & Energy 9%

50

Iron ore 68%

0

Source: Bloomberg, Nomura estimates

Nomura

Source: Company data, Nomura estimates

67

4 January 2011

Rio Tinto

Paul Cliff

Financial statements $ mn

2009

2010E

2011E

2012E

2013E

2014E

2015E

Iron Ore & Pellets Iron Ore Production (kt) (Attributable) Benchmark Fines Price ($/tonne) (CY) (65%) % Change (YoY) Revenue

171,546

176,171

176,627

183,727

183,727

183,727

71

115

159

150

128

98

62.2%

38.2%

-5.5%

-24.8%

183,727 83

-15.0%

-23.5%

-15.4%

12,598

22,454

31,149

30,857

26,233

20,068

16,985

5,486

6,399

8,368

7,756

7,344

7,995

6,836

32

36

47

42

40

44

37

7,112

16,055

22,781

23,102

18,889

12,073

10,149

Alumina Production (Kt)

8,815

9,350

10,510

11,910

12,310

12,310

12,310

Aluminum Production (Kt)

3,794

3,747

3,767

3,767

3,767

3,767

3,767

Aluminum Price ($/tonne)

1,670

2,104

2,206

2,275

2,325

2,375

2,425

12,038

12,589

13,485

14,216

14,615

14,920

15,225

Aluminum

8,856

8,670

9,142

9,427

9,634

9,841

10,049

Alumina & bauxite

4,176

3,390

3,784

4,214

4,393

4,477

4,562

530

558

576

589

601

614

10,901

12,144

11,676

12,145

12,385

12,552

12,719

Costs ($ mn) Costs ($/tonne) EBITDA Aluminum & Alumina

Revenue

Other Products Total Costs Cost for aluminum production ($ mn)

(994) 8,250

8,044

8,280

8,407

8,499

8,590

8,681

Alumina

1,585

1,970

2,078

2,142

2,190

2,237

2,284

Shipping/Other

1,653

567

598

617

631

644

658

Cost of smelting

5,012

5,507

5,604

5,648

5,679

5,709

5,739

1,321

1,470

1,488

1,499

1,508

1,516

1,524

3,758

3,607

2,876

3,202

3,338

3,403

3,467

493

519

536

547

559

571

594

2,667

1,809

2,071

2,231

2,368

2,506

Hard Coking Coal Production (Kt)

7,468

9,414

10,220

9,560

9,980

9,980

9,980

Semi Soft Coking Coal production (Kt)

2,884

3,360

3,200

3,200

3,200

3,200

3,200

19,618

19,543

20,425

21,900

19,752

19,752

19,752

Hard Coking Coal Price ($/tonne) (CY)

173

191

241

250

220

180

150

Semi-soft Coking Coal ($/tonne) (CY)

124

134

172

179

157

129

107

84

91

107

118

105

85

80

Revenue

3,870

4,025

5,202

5,535

4,772

3,887

3,420

Costs

2,071

2,431

2,792

2,930

2,710

2,581

2,543

69.1

75.2

82.5

84.5

82.3

78.4

77.2

1,799

1,594

2,410

2,605

2,063

1,306

877

$/tonne Costs for alumina & bauxite production Other Costs EBITDA

(1,107)

Australian Coal Business

Thermal Coal Production (Kt)

Thermal Coal ($/tonne) (CY)

per tonne ($) EBITDA Copper Attributable Mined Copper Production (Kt)

810

707

769

759

750

741

733

Copper Price ($/tonne)

5,164

7,485

8,377

8,818

7,937

7,165

6,614

Revenue

6,206

7,159

8,326

8,618

7,710

6,943

6,364

-

-

-

-

-

-

-

Costs

2,732

2,614

3,323

3,120

2,647

2,493

2,318

EBITDA

3,474

4,545

5,436

5,905

5,063

4,450

4,046

1,216

469

703

703

703

703

703

71

76

159

164

159

154

497

208

178

139

139

139

139

(373)

(15)

235

206

1,033

1,002

924

33,628

34,891

30,285

22,200

19,497

of which: provisional pricing

Other Segments EBITDA Industrial Minerals Diamond US Coal Business Other/Corporate Rio Tinto Consolidated EBITDA

(7)

14,312

25,594

Net Income

6,298

13,498

19,366

20,755

18,532

13,888

12,686

Diluted EPS

3.57

6.89

9.89

10.60

9.46

7.09

6.48

6.74

6.74

7.95

7.87

NA

NA

NA

19.3x

10.0x

7.3x

9.7x

10.6x

Diluted EPS (Consensus) P/E EV/EBITDA Net Debt Net debt/EBITDA Total Firm NPV

7.0x

6.5x

10.5x

6.0x

4.1x

3.3x

3.2x

3.7x

3.6x

18,920

8,933

-7,398

-26,531

-44,353

-57,677

-69,138

1.32

0.35

(0.22)

(0.76)

(1.46)

(2.60)

(3.55)

146,132

Less Net Debt (H1 10A)

12,411

Less minority interest

11,652

NPV of equity ($ mn)

122,069

NPV per share (GBp)

NPV of firm: Breakup

146,132

Iron Ore

84,717

4,030

Alcan Aluminium

24,067

Value of growth options (GBp)

1,882

Australian Coal

Total NPV per share (Gbp)

5,912

Copper

Target Price (GBp)

5,900

Other

6,735 26,791 3,823

US dollars in millions unless otherwise noted Source: Company data, Nomura estimates

Nomura

68

4 January 2011

Strategy | Australia

Mixo Das

Analyst Certification We, Mixo Das, Richard Johnson, Simon Thackray, Victor German, Nick Berry, David Cooke, Rob Freeman, Anthony Hoo, David Stanton, Zara Lyons, Prue Rydstrand, Xavier M Grunauer and Paul Cliff, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our 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 our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

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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 (Price Target - Current Price) / Current Price, subject to limited management discretion. In most cases, the Price Target 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.

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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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4 January 2011

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