News

Carnival PLC (NYSE:CUK) ADR achieved our target price on 03 April 2009. We believe this reflects a boost in investor confidence from the company’s better than expected 1Q 09 results and efficient cost control measures. However, due to the limited visibility for the leisure industry and following this increase in ADR price, we believe the medium term upside potential has been exhausted. Therefore, we are moderating the ADR (1 ADR = 1 UK share) from a BUY to a HOLD over our 6-12 month investment horizon. We will reassess the ADR rating in our next full update report in the coming weeks. We reiterate the UK stock a BUY as we continue to expect a significant positive currency impact over our investment horizon. We will reassess the UK stock in our next full update report in the coming weeks.

On 03 April 2009, Primus Guaranty Ltd. (NYSE:PRS) reported on the credit event performance of it CDS portfolio during 1Q 09, identifying a credit event of US$10 mn notional value on its CDS exposure to Idearc Inc. (Idearc). Overall, our outlook for Primus remains negative given credit mitigation costs and the current challenging operating conditions. Therefore, we maintain the NYSE common stock rating a SELL. We will reassess our target price and rating in our next update report. Despite our expectation of a positive currency impact over the medium term, we maintain the European stock a SELL based on our fundamental concerns. We will reassess our target price and rating in our next update report, once the company announces its 4Q 08 and FY 2008 results.

Spreadtrum Communications, Inc.’s (NASDAQ:SPRD) ADR declined 20.3% on 03 April 2009 following news of the resignation of the company’s Chief Financial Officer (CFO), Richard Wei. Until the company appoints a new CFO, the Vice President of Finance, Shannon Gao, will assume finance and accounting responsibilities. We remain concerned by the delay in announcement of 4Q 08 and FY 2008 results and reiterate our HOLD rating for the stock although the current stock price no longer suggests a HOLD rating. We will reassess our target price and rating for the ADR (1 ADR = 3 common shares)1 after the company announces its 4Q 08 and FY 2008 results. We maintain our current BUY rating for the European stock as we continue to anticipate a significant positive currency impact on the European stock in the medium term. We will reassess the European stock (1 European stock = 3 common shares)1 rating for Spreadtrum after the company announces its 4Q 08 and FY 2008 results.

STMicroelectronics N.V.’s (NYSE:STM) ADR price has appreciated significantly since our 4Q 08 and FY 2008 update report reflecting positive sentiment in the broader equity market and fueled by the encouraging news that the company has secured US$500 mn in medium-term credit facilities (announced by the company on 30 March 2009). However, we downgrade our rating for the company’s ADR from a HOLD to a SELL as we believe the ADR is fundamentally overvalued at the current price level. We will reassess our rating and target price for STM ADR in our next full update report once the company releases its 1Q 09 results on 29 April 2009. We continue to expect a significant positive currency impact on the European stock (1 ADR = 1 European share) in the medium term. However, based on current price levels, we downgrade the European stock from a BUY to a HOLD. We will reassess our target price and rating in our next update report, once the company releases its 1Q 09 results on 29 April 2009.

Thomson Reuters Corporation’s (NYSE:TRI) NYSE common stock achieved our target price of US$27.80 on 03 April 2009, reflecting improved market sentiments and the fundamental factors outlined in our update report. At current levels, we believe that the NYSE common stock is fairly valued, and hence, we are downgrading our rating for the common stock from a BUY to a HOLD. We will reassess our rating for the common stock after the company announces its 1Q 09 results. We do not anticipate a change in our rating for the Canadian stock as we continue to expect a positive currency impact on the Canadian stock over the next 6-12 months. We will reassess the Canadian stock rating for the Thomson Reuters’ Canadian stock in the coming weeks.

On 03 April 2009, the Aracruz Celulose S.A. (NYSE:ARA) ADR reached our target price. Given that our fundamental outlook remains unchanged, we believe that the ADR’s upside potential has now been exhausted. We therefore moderate it from a BUY to a HOLD. We will reassess our ADR (1 ADR = 10 Brazilian preferred shares) rating for Aracruz in our next full update report. We continue to anticipate a significant positive currency impact on the Brazilian preferred stock over our investment horizon. Therefore, we reiterate the Brazilian preferred stock a BUY. We will reassess our Brazilian preferred stock rating for Aracruz in our next full update report.

The Credicorp Ltd. (NYSE:BAP) NYSE common stock has appreciated significantly since our last update report, as investors have reacted positively to rising commodity prices and predictions that the Peruvian economy will be the strongest performer in the region. Nevertheless, the IMF expects the economy’s growth rate to fall from 9% in 2008 to 6% in 2009. Considering this, we reiterate the common stock a HOLD. We will reassess our rating for Credicorp in our next full update report. The Peruvian stock trades in US dollars. Therefore, there is no currency impact on the Peruvian stock. Based on our fundamental outlook, we reiterate the common stock from a HOLD and will reassess our Peruvian stock rating in our next full update report.

Infosys Technologies Ltd. (NASDAQ:INFY) achieved our target price on 02 April 2009, supported by broader market recovery and fundamental factors outlined in our update report. As the current price no longer supports a BUY rating, we are temporarily downgrading the common stock rating to a HOLD. We will reassess our rating for the Infosys common stock after the company announces its 4Q 09 and FY 2009 results in mid-April 2009. As we anticipate a significant negative currency impact on the ADR over the medium term we do not expect a change in our current rating for the ADR. We will reassess the ADR rating and target price for the Infosys ADR in the coming weeks.

WNS (Holdings) Ltd’s (NYSE:WNS) ADR achieved our target price on 03 April 2009 supported by broader market recovery and fundamental factors outlined in our update report. As the current price no longer supports a BUY rating, we are temporarily downgrading the ADR rating to a HOLD. We will reassess our rating for the WNS ADR after the company announces its 4Q 09 and FY 2009 results in May 2009. As we continue to anticipate a significant positive currency impact on the European stock in the coming 6-12 months, we do not expect a change in our current rating. We will reassess the European stock rating for WNS after the company announces its 4Q 09 & FY 2009 results in May 2009.

Compania de Bebidas das Americas’ (NYSE:ABV) preferred stock has appreciated significantly since our previous company news alert dated, dated 05 March 2009, reflecting positive investor sentiments associated with the US$1 tn global economic stimulus package announced by the G-20. As the preferred stock target price supports a HOLD, we maintain our HOLD rating and will reassess our target price and rating in our 4Q 08 and FY 2008 update report. Given the current target price and our anticipation of a significant negative currency impact on the ADR over our 6-12 months investment horizon,, we maintain our SELL rating for the ADR. We will reassess our target price and rating in our 4Q 08 and FY 2008 update report.

Honda Motors Co. Ltd.’s (NYSE:HMC) common stock price has appreciated significantly since our company news alert, dated 30 January 2009. North American automotive sales for March 2009 increased 25% m-o-m, supporting investor confidence. Furthermore, expectation of gaining a higher share in the US automobile market, based on the anticipated bankruptcy of Chrysler and General Motors, coupled with the announcement of a US$1 tn global stimulus package by the G-20 on 02 April 2009, further strengthened investor confidence, resulting in significant appreciation of the common stock. However, in light of current economic conditions, we continue to expect sales to remain low over the medium term. Hence, our outlook for the company remains unchanged and we maintain our SELL rating for the common stock. We will reassess our target price and rating in our 3Q 09 update report. Although we continue to expect a significant positive currency impact on the ADR over the medium term, we downgrade the ADR from a HOLD to a SELL based on our fundamental outlook. We will reassess our target price and rating in our 3Q 09 update report.

Toyota Motors Corporation’s (NYSE:TM) common stock has appreciated significantly since our supplement to the 2Q 09 update report, dated 29 December 2008. North American automotive sales for March 2009 increased 25% m-o-m, supporting investor confidence. Furthermore, expectation of gaining a higher share in the US automobile market, based on the anticipated bankruptcy of Chrysler and General Motors, coupled with the announcement of a US$1 tn global stimulus package by the G- 20 on 02 April 2009, further strengthened investor confidence, resulting in significant appreciation of the common stock. However, in light of current economic conditions, we continue to expect sales to remain low over the medium term. Hence, our outlook for the company remains unchanged and we maintain our SELL rating for the common stock. We will reassess our target price and rating in our 3Q 09 update report. Although we continue to expect a significant positive currency impact on the ADR over the medium term, we maintain our HOLD rating based on our fundamental outlook. We will reassess our target price and rating in our 3Q 09 update report.

New Valuations

Korea Electric Power Corporation(NYSE:KEP) Going forward, we expect Kepco to witness only modest revenue growth due to a decline in electricity demand, reflecting a slowdown in the South Korean economy. According to International Monetary Fund (IMF) data published in February 2009, the South Korean economy is expected to contract by 4.0% in FY 2009, and is expected to grow approximately 4.2% in FY 2010. We expect Kepco will incur huge operating losses in FY 2009 primarily due to our expectation of a significant depreciation of the Korean won against a number of currencies. A decline in the Korean won will inflate the company’s fuel costs, as the majority of the company’s fuel is imported from the US, the UK, Russia, Australia and China. In addition, we believe Kepco will incur high purchased power expenses, as vendors increase their fuel prices given the depreciation of the Korean won. We expect maintenance costs will rise as the company’s newly incurred capital expenditure increases the total operating expenses of the company. Kepco is set to incur high interest expenses over our investment horizon and beyond, resulting from the additional debt taken onboard to fund its capital expenditure target of KRW10,021 bn for FY 2008. Furthermore, approximately 10% of the company’s debt, as on 31 December 2008, was denominated in foreign currencies, further increasing the company’s potential financial burden given a decline in the Korean won. Hence, we maintain our negative outlook for the company and continue to foresee significant downside in the company’s stock price in the coming 6-12 months.

Total S.A. (NYSE:TOT) The company has some major project start-ups scheduled for FY 2009, such as the deep offshore Akpo project located in Nigeria (Production capacity: 225 thousand barrels of oil equivalent per day [boepd], Total’s share: 24%) and the Yemen LNG project located in Yemen (Production capacity: 190 thousand boepd, Total’s share: 39.6%). However, we expect the increase in the company’s upstream production from these start-ups will be completely offset by a reduction in the company’s production from OPEC regions. OPEC is continuously announcing cuts in oil production from its member countries in order to curb the current crude price decline. Since September 2008, OPEC has announced production cuts to the tune of 4.2 mn boepd. We believe that the current economic slowdown will dampen demand for the company’s refined oil products, particularly as the majority of the company’s sales arise from Europe (78.1% in FY 2008) where the demand for oil is expected to shrink by 4.1% yo- y in FY 2009 according to March 2009 figures from the Energy Information Administration. Lower oil prices will also negatively impact the company’s top-line in FY 2009. Even though lower oil prices will lead to lower input costs in FY 2009, we expect these benefits will be offset by higher other operating expenses and depreciation costs, as a percentage of revenues.

Compagnie Générale de Géophysique-Veritas (NYSE:CGV)acquired Wavefield after the completion of the agreed share exchange on 19 December 2008. Wavefield’s revenues and earnings will be accretive to that of CGG Veritas. The company’s backlog stood at approximately US$2.0 bn (including Wavefield’s order backlog) as of 01 February 2009 (compared to US$1.9 bn on 01 October 2008). Of the backlog, US$1.6 bn is attributed to the Services segment, with the remaining US$0.4 bn attributed to CGG Veritas’ subsidiary. Sercel. With our forecast of lower average oil prices for FY 2009 compared to FY 2008, we expect Exploration & Production (E&P) spending within the hydrocarbon industry to decline further going forward. CGG Veritas expects E&P spending within the hydrocarbon industry to witness a decline of 10-15% in FY 2009. In line with these expectations, we have forecast a y-o-y decline in the company’s revenues over our 6-12 month investment horizon. The Wavefield acquisition will improve the company’s operating margins as Wavefield’s fleet is comparatively new and will demand lower maintenance costs. However, this benefit will be offset by higher overall costs of operations and depreciation costs, as a percentage of revenues; lowering margins in 1Q 09 and FY 2009. The company’s costs are generally fixed costs, such as fleet maintenance activities, so the short term drop in top-line will have a significant negative impact on margins. We expect oil prices to increase and the global economy to witness signs of recover in FY 2010, which will lead to an increase in E&P spending within the hydrocarbon industry. Higher E&P spending from FY 2010 will boost the company’s revenues and earnings during the period. Therefore, we believe that the company’s common stock price has been left significantly undervalued by the negative market conditions and we believe CGG Veritas’ common stock provides an attractive investment opportunity at current price levels.

China Telecom Corporation Ltd(NYSE:CHA)The relatively low level of wireless penetration in China offers tremendous opportunity for the CDMA business, reflected by robust growth in CDMA subscriber-base. However, as the demand for communication is greater from rural areas, characterized by typically low end subscribers, Average Revenue per User (ARPU) is expected to decline, further impacted by an anticipated increase in competition due to the revamp of the telecom industry. Nevertheless with the launch of 3G service, mobile data revenues will boost CDMA revenues. The non-voice business is expected to be driven by growth in Internet access revenue and Value Added Service (VAS) revenues. We expect Internet access revenues to be driven by an increase in broadband subscriber-base. Furthermore, Management’s intention to incur higher capex for high growth business such as Internet & Data will enable the company to make further inroads in the Chinese broadband market. However, fixed-line revenues are expected to decline due to a decline in fixed-line subscriber-base driven by fixed-to-mobile migration and VOIP substitution, partially contained by offering bundled products to customers. In order to promote bundling offers and the new CDMA business the company will need to incur higher SG&A expenses, going forward. Furthermore, attracting and retaining skilled personnel is expected to gradually increase personnel expenses.

Hutchison Telecommunications International Limited(NYSE:HTX) We continue to expect strong performance from HTIL’s Hong Kong and Macau operations, especially from the cellular segment as we believe the bid for Broadband Wireless Access radio spectrum, will help the company to reinforce its position for upcoming ultra-high speed mobile data services. In addition, the launch of Long Term Evolution by FY 2011 would present the company with the first mover advantage in the country. Moreover, operations in Indonesia and Israel are doing well and indicate robust organic growth over the next couple of years. Meanwhile, Vietnam is about to experience the nationwide launch of GSM in 1Q 09 and we expect an excellent response due to low penetration levels prevalent in the country and the absence of any significant players in the industry. However, we remain concerned with the company’s Thai operations in light of continued erosion in subscriber-base.

Perfect World Co. Ltd (NASDAQ:PWRD) The Chinese economy, like other countries across the globe has witnessed a slowdown. However, we do not expect growth in the online game industry to slow in the face of this economic downturn as gaming is a cheaper mode of entertainment and presents a feasible option compared to other more expensive means of entertainment or social activities. Recently, Perfect World announced its plans to acquire a browser game development company. The acquisition will increase Perfect World’s exposure to provide browser games by initially allowing it to release 10 new browser games. In addition the acquisition will support the company’s in-house game offerings, which in turn will support revenue Meanwhile, we are optimistic on Perfect World’s stance to form several alliances and launch different game titles in order to diversify its existing game offerings. Hence considering, the company’s strong presence in game offerings and its ability to benefit from growing MMORPG industry along with rising Internet penetration, we maintain a positive outlook on the company.

Portugal Telecom, SGPS, S.A. (NYSE:PT)has managed to sustain modest top-line growth despite witnessing intense competition in its overall market and lower Average Revenue Per User (ARPU) due to a decline in Mobile Termination Rates (MTR) in Portugal. Going forward, we expect the company to benefit from network-upgrades and expansion initiatives in Brazil and Portugal, positively impacting the company’s long term growth prospects. Through Vivo’s acquisition of Telemig and commencing operations in the North-east region of Brazil, we expect PT to witness exponential growth in the long run. In addition, Vivo’s launch of 3.5G services in Brazil will enhance the company’s reach to provide better services to a wider customer base. Moreover TMN, despite an anticipated decline in ARPU, is expected to see steady growth in revenues on account of increasing subscriber-base. Nevertheless, we believe the growing popularity of pay-TV and growth in ADSL retail customers for broadband in PT’s domestic wire-line business will support overall revenue growth despite witnessing erosion in revenues. Thus going forward, although we expect PT to continue to face intense competition both on the domestic front and in Brazil, taking into account PT’s solid market position in the Portuguese and Brazilian telecom industry, at current levels the stock offers an attractive investment opportunity.

Fomento Económico Mexicano, S.A.B. de C.V. (NYSE:FMX)Under FEMSA cerveza, the company increased Average Selling Prices (ASP’s) across Mexico and Brazil, well ahead of its competitors in the industry, resulting in lower volume growth during the quarter. Going forward, particularly in 1Q 09, Management expect’s to soften the price increase, in-line with competitors, to offer products at reasonable prices, and focus on volume growth. For Coca-cola Femsa, we expect strong volume growth to be driven by the launch of a wide range of new products under the Jugos Del Valle line of business in Colombia, Costa Rica, Panama and Nicaragua. Femsa’s initiative to diversify its existing beverage portfolio, by introducing several brands in Mexico, which is the second largest market in terms of per capita consumption of soft drink (with approximately 40% of the consumers under the age of 20), followed by the US, is likely to fuel overall volume growth. Morevoer, for the Oxxo brand retail format, the company intends to open more than 800 new stores and is expected to expand the business in Latin America, particularly in Central and Southern Mexico, where the penetration level is very low. In terms of costs, we expect cost of sales to decline. However, spending on promotional activities and increasing distribution channels will result in higher selling expenses for FY 2009 and FY 2010.

Gold Fields Limited (NYSE:GFI) Spot gold prices have improved significantly in 2Q 09. Going forward over our investment horizon; we expect global gold prices to remain at higher-than-historical levels. Furthermore, supported by the appreciation of the US dollar against the South African rand, we believe the company’s rand realized gold prices will continue to rise in FY 2009 and FY 2010. In addition, the company anticipates lower input costs over the near term, leading to operating margin improvement in FY 2010. The company also announced in 2Q 09 a brown-field project at its Australian operations near St Ives at Athena. The company has started its nascent exploration, which it expects to report the initial resources findings by the end of 3Q 09. However, we anticipate gold prices to decline from FY 2011. In addition, we expect the rand to strengthen against the US dollar from FY 2011. These factors are likely to result in decline in revenues and margins from FY 2011. In light of these factors, and given the significant appreciation in the common stock price, we believe the common stock is fairly valued at current price levels.

Mindray Medical International Ltd (NYSE:MR) derived approximately 43% of its revenues from the domestic Chinese market in 4Q 08. The Chinese Government plans to improve healthcare conditions in China by increasing healthcare spending. We believe this provides an excellent growth opportunity for Mindray, as the company is likely to benefit from the anticipated modernization of medical equipment in hospitals. In the international market, increasing competition in the medical equipment market and lower capital expenditure by hospitals, has led to pricing pressure. However, since Mindray is a vertically integrated medical equipment company, it enjoys pricing flexibility. We continue to believe that competitive pricing will enable the company to garner a larger market share in Europe and developing countries. We expect the company’s revenues to benefit from wider acceptance of its new products in FY 2009. Mindray spent 9.5% of its revenues on Research and Development (R&D) of new products in FY 2008. We believe this high level of spending in R&D will result in more sophisticated products, which will positively contribute to the company’s revenues, going forward. We continue to expect margins to experience pressure by the Datascope acquisition over the medium term, since Datascope operated at lower margins relative to Mindray prior to its acquisition. However, Management expects FY 2009 gross margin to improve to FY 2008 levels through savings in purchasing costs. Moreover, we expect synergy benefits to be reflected in operating margin from FY 2010 onwards. With a Total Debt/Equity ratio of 0.33, we believe the company is in a strong position to repay its debt through its cash flow from operations. Consequently, we maintain our positive outlook for the company.

Sina Corporation (NASDAQ:SINA) Despite macro-economic concerns affecting the advertising market in China, Sina’s competitive position and strong brand recognition in the online advertising market will enable it to take advantage of the growing Internet penetration and an increasing shift of corporate advertising spend by large and medium enterprises from offline to online media. However, to maintain its position in the Chinese economy which has been affected by the global economic turmoil, Sina may reduce its advertising fees to remain competitive amongst Chinese Internet portals, which will shrink margin growth going forward. Furthermore Sina’s acquisition of Focus Media Holding Limited’s (Focus Media) assets to diversify into the offline outdoor advertising business, which is outside its core competency, will bring additional risks. At the same time, we do not see any synergies emerging from this acquisition. Hence, although we expect an economic rebound in mid FY 2010 and economic stimulus packages to provide some relief to large and medium enterprises, boosting prospects for higher advertising budgets, considering the impact of the slowdown in the Chinese advertising space and the possibility of declining advertising rates, coupled with weak sequential growth guidance for 1Q 09, our outlook for Sina’s for the near-to-medium term is cautious. However, at current levels we believe the ADR offers an attractive investment opportunity.

Sony Corporation (NYSE:SNE) With recessionary conditions prevailing in 3 developed economies; the US, Japan and UK, consumer spending has weakened significantly. In addition, emerging markets have also experienced moderation in GDP growth. Since Sony derives most of its revenues (approximately 78% of 3Q 09 revenues) from exports, any further weakness in global economic conditions are likely to have a significant impact on the company’s performance. Considering the Games segment’s revenues and profitability are primarily dependent on developed markets, we expect Sony to further lower its prices for the PS3 to remain competitive with Nintendo’s Wii in the current economic conditions. Consequently, we expect lower revenues and weaker product margins, resulting in operating losses for the Games segment over the coming year. Moreover, demand for Liquid Crystal Display (LCD) TV’s, digital cameras and laptops is also expected to remain subdued over the next year and half. Going forward, we expect margins to remain under pressure as Sony is likely to reduce prices for its high end LCD TVs in response to intense competition from low cost Chinese manufacturers. In addition, Sony’s Financial Services segment is expected to experience pressure, considering the prevailing recession in the domestic market. However, we anticipate the Pictures segment’s revenues and profitability to improve, in light of upcoming releases. We also believe Management’s on-going cost reduction measures will partially offset the margin contraction over next 2 years. Moreover, working capital requirements are expected to apply significant pressure on Free Cash Flow (FCF), partially offset by the anticipated slow down in capital expenditure over the next 2 years. Consequently our outlook for the common stock remains weak.

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Disclaimer
Independent International Investment Research PLC supplies this research via Pronet Analytics.com Ltd. (’Pronet’). Pronet is Regulated and Authorized by the Financial Services Authority (FSA) and registered with the Securities Exchange Commission (SEC). You are reminded that investment advice provided by Pronet is for your general information and use and is not intended to address your particular requirements. Any advice or recommendations contained in this report may not be suitable for you and are not intended to be relied upon by you in the making (or refraining from making) any specific investment or other decision. Such decisions should only be made on the basis of independent advice from an appropriately qualified adviser. Pronet Analytics.com Ltd. and Independent Financial Markets Research Ltd. are subsidiaries of Independent International Investment Research PLC (the ‘Group’). Research analysts working for the Group are subject to stringent confidentiality and security policies and are located in secure-access premises which may be in the proximity of professionals conducting similar work for other firms. The Group is not nor has been nor will be engaged in investment banking and does not make markets in any of the securities covered in this report or have any investment banking relationship with the firm whose security is covered in this report. No employee or contractor of the Group is permitted to personally buy or sell stock in the company covered in this report, and neither the analysts responsible for this report nor any related household members are officers, directors, or advisory board members of any covered company. No one at a covered company is on the Board of Directors of the Group or any of its affiliates. This report is not a solicitation to buy or sell any security and past performance is no guarantee of future results.
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