Earning Release

While TAM S.A.’s (NYSE:TAM) FY 2008 revenues were in line with our expectation, operating performance was significantly better-than-expected. Massive fuel hedge and forex expenses in 4Q 08 led to a reported net loss. However, hedging losses aren’t expected to be reported going forward and as a result of the strong operating performance, at current price levels, we do not anticipate a change in our preferred stock rating. We will reassess the common stock rating for TAM in our next update report. Although we continue to expect a negative currency impact on the ADR over our 6-12 month investment horizon, we reiterate the TAM ADR a BUY at current levels. We will reassess the rating for TAM in our next update report.

Huaneng Power International, Inc. (NYSE:HNP) reported strong revenue growth in FY 2008, in-line with our estimate. However, earnings were significantly lower than our estimates. Given the company’s poor operating performance in FY 2008, we do not anticipate a change in our current rating for the common stock. Therefore, although the common stock target price does not support a HOLD rating at current price levels, we maintain our HOLD rating and will reassess our target price and rating in our FY 2008 update report. Based on the company’s FY 2008 results and our fundamental outlook for the company, we do not anticipate a change to our current rating for the ADR (1 ADR = 40 common shares). Therefore, although the ADR target price does not support a HOLD rating at current price levels, we maintain our HOLD rating and will reassess our target price and rating in our FY 2008 update report. The Hong Kong dollar is currently pegged to the US dollar.

News

On 31 March 2009, Validus Holdings Ltd. (Validus) made an unsolicited bid for IPC Holdings Limited (NASDAQ:IPCR) in an all stock deal worth approximately US$1.7 bn based on the closing prices of 30 March 2009. The proposal values IPC Holdings’ shares at a 5% premium to the 31 March 2009 closing price. IPC Holdings, which is currently in the process of planning a merger with Max Capital Group Ltd. (Max Capital), is obliged to review the terms of the proposal. Whatever the outcome, we believe that IPC Holdings is a healthy investment opportunity at current levels, and therefore maintain our current BUY rating for the NASDAQ common stock. We will reassess our common stock rating for IPC Holdings once the company announces its 1Q 09 results on 23 April 2009, or as the situation develops. Based on our fundamental outlook coupled with an anticipated significant positive currency impact on the European stock over our 6-12 month investment horizon, we maintain our current BUY rating for the European stock. We will reassess the European stock rating for IPC Holdings in our 4Q 08 and FY 2008 update report.

On 31 March 2009, KB Financial Group Inc.’s ( NYSE:KB) subsidiary, Kookmin Bank (Kookmin), announced that it has raised KRW1.0 tn by issuing hybrid bonds to a state-backed recapitalization fund. Meanwhile, we remain concerned about the near term impact of the global economic downturn and ongoing volatility in financial markets, as well as the company’s disappointing 4Q 08 earnings. Considering these factors, we maintain our HOLD rating for the coming 6-12 months, even though the target price derived in our last update report does not support a HOLD. We will reassess our common stock rating for KB in our next full update report. We continue to expect a significant negative currency impact on the ADR over the coming 6-12 months. Therefore, we maintain our SELL rating. We will reassess our ADR rating (1 ADR = 1 common share) for KB in our next full update report.

Unibanco-Uniao de Bancos Brasileiros S.A. (NYSE:UBB) was delisted from the Sao Paulo Stock Exchange on 31 March 2009, following its merger with Banco Itau Holding Financeira S.A. (Itau). As a result, we are terminating our coverage. Instead, we will cover the successor company, Itau Unibanco Holding S.A. (Itau-Unibanco). We terminate our coverage of the GDR, in line with the common stock.

New Valuations

Teléfonos de Mexico S.A. de C.V.(NYSE:TMX) is Mexico’s largest fixed-line player with close to 17.6 mn lines in operation, translating into an approximately 90% national market share. Voice revenues, which are Telmex’s core area of operation (74.7% of total revenues) have been experiencing a slowdown due to migration of subscribers towards wireless services and rising competition from pay TV operators engaged in providing telephone services. Thus, to strengthen its revenue stream, Telmex is focusing on growing its broadband services. Furthermore, we believe the company’s initiative to sell computers (payment can be made in installments of up to 48 months), will continue to result in a significant increase in its data related business. Mexico’s under-penetrated Internet market also provides a growth opportunity to boost Telmex’s data business. A plausible threat to Telmex is the new interconnection plan published by Mexico’s Federal Commission of Telecommunications (Cofetel) that will require all telecommunication operators to interconnect their networks in 2009 to improve accessibility of services and boost competition. The new regulations will force existing fixed-line operators to share infrastructure with rivals and charge reasonable prices in return. The move, though positive for smaller players (reduction in interconnection fees), will have a negative impact on Telmex as the move will increase competition and challenge its dominant status in the market. Besides the effect of this plan, we expect Telmex’s Internet, Corporate Network and other business lines such as its multi-service packages (triple play, IPTV, computer sales) to sustain top-line growth going forward and hence we have a positive outlook for the company.

BT Group PLC(NYSE:BT) Although the company has maintained moderate revenue growth, margins have declined considerably over the last couple of quarters, primarily attributable to a delay in realization of cost savings and oneoff charges in the Global Services division. Moreover, the company expects another one-off charge and higher costs to continue for the Global Services division in 4Q 09. While BT’s Management are quite optimistic regarding margin expansion in FY 2010, we remain highly skeptical considering the current economic environment and declining consumer and corporate spending and expect margin declines to continue until FY 2010. Moreover, we expect only a gradual margin improvement at operating level beyond FY 2010 and defer our decision for any significant improvement until the ongoing review program in the Global Services division is completed. On the pension front we remain extremely cautious as the deficit may expand drastically, which is detrimental to BT’s highly levered financial health. However, we believe that BT’s common stock is undervalued due to the pension fund deficit issue and presents an attractive investment opportunity at current levels, considering the strong order book for the next two years and improved margin performance from the Retail and Wholesale divisions.

Siliconware Precision Industries Ltd(NASDAQ:SPIL) 2009 is expected to be the first year in semiconductor history in which the industry experiences consecutive years of revenue decline. On 25 February 2009, Gartner Inc. reduced its forecast for worldwide semiconductor revenues from its 16 December 2009 projection of a 16% decline to a 24.1% decline. SPIL too experienced a 54.4% y-o-y drop in January 2009 sales. However, the market has demonstrated signs of improvement lately, reflecting a surge in demand from China triggered by the stimulus package announced by the Chinese government for consumer electronics products. SPIL recorded a 28.6% m-o-m growth in revenues in February 2009, following a m-o-m drop of 11.8% in January 2009. Consequent to the demand build-up from China, many Taiwanese companies including Taiwan Semiconductor Manufacturing Company Ltd. (TSMC) and Media Tek Inc., (Media Tek) have increased 1Q 09 revenue forecasts, with an expectation that the demand boost will continue into April 2009. Media Tek, which accounts for 10%-15% of SPIL’s sales, now expects sequential revenue growth of 8% to 13%, in comparison to its previous forecast of an 8% to 16% sequential drop in 1Q 09. 2Q 09 outlook for companies that provide back-end services has also improved due to rising orders from the handset, telecom equipment and graphics processor segments in China. Nevertheless, although we expect the support of demand conditions from China to partially mitigate overall economic weakness, we still expect SPIL to record a full year revenue decline of 23.9% as the situation has deteriorated further since our last update report. Margins are also expected to contract significantly in FY 2009 as a result of ASP erosion, high fixed costs coverage and high raw material costs, despite the company’s cost-cutting efforts, through improved efficiency and reduction of the workforce. However, we expect operating performance to see a recovery in FY 2010 (although we do not expect a recovery to FY 2008 levels). We are encouraged that the company generated positive cash flow from operating activities in FY 2008, is expected to report profits in an environment in which most peers are reporting losses, and has low debt levels (debt-to-capital ratio of 2.3% at the end of 4Q 08) compared to peers such as Advanced Semiconductor Engineering, Inc. and Amkor Technology, which are highly leveraged. The company’s stringent cost management is also expected to benefit it once the industry recovers. However, we believe that these positive factors have now been reflected in the stock price, after a significant recent appreciation.

Warner Chilcott Limited (NASDAQ:WCRX)settled both Femcon and Loestrin 24 FE patent cases during the first quarter of FY 2009, with favorable terms for the company. Actavis Elizabeth LLC (Actavis) submitted an Abbreviated New Drug Application (ANDA) to the US Food and Drug Administration (FDA) for approval to manufacture and sell generic versions of DORYX 100 mg and 75 mg delayed-release tablets, while Impax Laboratories, Inc. submitted an ANDA for approval to manufacture and sell a generic version of Doryx 150 mg in 1Q 09. Approximately 50% of Warner Chilcott’s franchisees have switched to the new 150 mg dose, which has a patent listed in the FDA Orange Book. If generics of DORYX 100 mg and 75 mg or DORYX 150 mg delayed release tablets are launched, we expect sales growth to be negatively impacted. In January 2009, Warner Chilcott increased the price of its key products, such as Doryx 75 mg and 100 mg delayed release tablets and Femcon FE. We believe this decision will positively impact future revenue growth. Furthermore, greater acceptance of Taclonex, Leostrin 24 FE and other products is also expected to contribute to revenue growth in FY 2009. Warner Chilcott’s development pipeline is progressing with a low-dose oral contraceptive on track for 1H 09 filing. Moreover, the oral erectile dysfunction project is expected to start Phase III trials in late FY 2009. We believe the strong portfolio will support revenue growth over the long term. We expect improvement in adjusted EBITDA margin, reflecting Management’s expectation of lower Selling, General and Administrative (SG&A) expenses, as a percentage of revenues, in FY 2009. We expect operating and net margins to be negatively impacted by higher amortization expenses associated with intangible assets in FY 2009 (according to the 10-K for the period ending December 2008 filed by the company). Operating margin is expected to improve from FY 2010 onwards. The company continues to focus on reducing its outstanding debt by consistently using its Free Cash Flow (FCF), and we do not see this trend reversing anytime soon. Consequently, our overall outlook for the company remains broadly positive.

Bunge Ltd (NYSE:BG) Although we are optimistic about the company’s long term agribusiness growth potential, its 4Q 08 results point to significant near term concerns. Commodity prices have declined substantially in the last few months, and we expect them to remain at or near current levels for the near future. In addition, the USDA has estimated that demand for soybean meal (which is used as a biofuel) will remain weak through 3Q 09, reflecting low crude oil prices; this will have an impact on the company’s Agribusiness segment, although Management expects growth to resume in 4Q 09, supported by growing consumption of protein in emerging markets in Latin America and Asia. Meanwhile, the company’s Fertilizer segment is expected to benefit from a fall in the value of the Brazilian real against the US dollar, which will limit imports of fertilizer and favor players with a local footprint, including Bunge. Moreover, although agribusiness industry players continue to restrict credit to Brazilian farmers, the government and financial institutions have stepped in to extend credit. Despite this, the company expects fertilizer demand to remain subdued through 1H 09, picking up from 2H 09. Considering this, we have lowered our FY 2009 estimates (see below). Over the longer term, however, we are encouraged by the company’s global reach and wide-ranging product portfolio, which places it well to capture rising demand once macroeconomic conditions improve.

Banco Santander-Chile (NYSE:SAN) Chilean GDP contracted by 3.4% in 4Q 08 (compared to growth of 4.6% in 3Q 08), and the central bank (Banco Central de Chile, or BCC) is forecasting that GDP will be flat in 2009, with growth of 3% anticipated in 2010. Meanwhile, CPI inflation has eased from a high of 9.9% in October 2008 to 5.5% in February 2009, and, according to the BCC’s Economic Expectation Survey (March 2009), inflation will fall to an annualized rate of 2.3% in December 2009 and 3.0% in 2010. Lower inflationary pressure and the slowdown in GDP growth have prompted the BCC to lower its Monetary Policy Rate (MPR) by 600 bps, in three stages, to 2.25% as of 12 March 2009. Considering the country’s downbeat economic outlook, we expect credit off-take to decline in the near-to-medium term. In addition, low inflation and MPR cuts are likely to eat into Net Interest Margin (NIM) during FY 2009, before recovery in FY 2010. However, as liabilities (deposits) tend to be re-priced at prevailing rates more quickly than assets (loans), and considering favorable trends in corporate spreads (foreign lenders have restricted credit, enhancing the company’s domestic market power), we expect the pressure on NIM to be limited. Meanwhile, the company’s strong credit rating should ensure that it retains access to lower-cost funding. Separately, although we are concerned about ongoing deterioration in asset quality, the company is addressing the issue by focusing on higher-income customers in its retail segment, which should limit growth in provisions. We expect provision expenses to stand at around 2% of total loans in FY 2009, before falling from FY 2010 onwards. On balance, Santander-Chile has a strong capital adequacy ratio and is therefore well-placed to withstand the present financial crisis. Furthermore, although the economic downturn may dent fee income in the near term, there is healthy long term growth potential, given the company’s large client base (which enhances cross-selling opportunities) and the underpenetrated Chilean banking market.

Diageo Plc (NYSE:DEO) Going forward, we expect Diageo’s top-line to increase at a modest pace, driven by an increase in revenues across all geographies. However, in 2H 09, revenues are expected to decline as recessionary market conditions impact organic growth of the company. In the North American region, consumers are switching from the super and ultra-premium brands to premium and value brands. While in Europe, Spain is expected to remain a difficult market as wholesalers have started de-stocking due to their inability to finance large stocks. Furthermore, a 70% increase in excise duty will also impact revenues from Australia, going forward. Hence, although the tough market conditions will limit Diageo’s near term growth, given its unrivalled brand portfolio and global presence, Diageo is expected to sustain the tough economic conditions with ease. The business restructuring plan of the company is also likely to deliver annual savings of GBP100 mn from FY 2010, which will support improvement in operating profit. In addition, a strong balance sheet (given the postponed share buyback programme) will also provide the company with flexibility to acquire potential targets at lower valuations. Hence, although the operating environment is likely to remain challenging over the near term, we expect the company to experience resilient performance and continue to deliver robust earnings growth, given its brand positioning in the market, geographical diversification, robust balance sheet and strong and stable cash flow.

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