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8 November 2011 Strategy Australian Equity Strategy

Page 2 Deutsche Bank AG/Sydney

Domestic cyclicals are trading cheaply relative to history

Domestic cyclicals (ie, retailing, transport, media, gaming, building materials) are trading very

cheaply, on a median PE of ~11x. This is on par with the depths of the financial crisis, and

they appear quite cheap relative to defensives. Still, the relative valuation case rests upon the

reliability of forecast earnings, and recent data raises concerns that an earnings rebound may

remain elusive.

Figure 2: Domestic cyclicals are as cheap as they were in the financial crisis

8

10

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14

16

18

20

8

10

12

14

16

18

20

03 04 05 06 07 08 09 10 11

PE ratios on 12m forward earnings*Domestic cyclicals

Defensives

Banks

x

*Domestic cyclicals is the median of TAH, TTS, EGP, CWN, CSR, BLD, HVN, DJS, MYR, JBH, SWM, FXJ, AUN, SXL, TEN, APN, SEK, AIO, TOL, VBA, QAN. Defensives

is the median of stocks in the consumer staples, healthcare, telcos, utilities, property and general insurance sectors Source: IBES, Datastream, Deutsche Bank

Non-discretionary spending (eg, housing, food, utilities) has far exceeded growth in

discretionary spend (7% on pcp, vs 4%), due to inflation. Further, on a volume basis

discretionary spend has been quite solid; 4.4% growth on pcp, compared to historical

average of 4.8%, and non-discretionary spend at 2.4%. This suggests that price deflation hashurt companies, rather than the actual volume growth of purchases.

Figure 3: Discretionary spending is certainly lagging non-discretionary spend, but this is largely a deflation story

-3

0

3

6

9

12

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0

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90 92 94 96 98 00 02 04 06 08 10

Prices

Volumes

Value

yoy%

Non-discretionary household spending

-3

0

3

6

9

12

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0

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90 92 94 96 98 00 02 04 06 08 10

Prices

Volumes

Value

yoy%

Discretionary household spending

Note: Non-discretionary spending comprises food, tobacco, alcohol, housing costs, utilities, healthcare, operation of vehicles, communications, education & financial services. Discretionary spending comprises clothing &

footwear, furnishings & household equipment, vehicle purchases, transport services, recreation & culture, cafes & restaurants and other Source: ABS, Deutsche Bank

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Deutsche Bank AG/Sydney Page 3

Households preference for services over goods is not helping a

range of listed companies

Looking in more detail at discretionary spending, there is a further problem for domestic

cyclicals. Spending on discretionary goods, where listed companies have more exposure, has

been quite poor, falling 3% over the year to June. All of the strength has been concentrated

in services, where the equity market has comparatively less exposure (eg, household

spending money overseas on holidays, spending at cafes/restaurants that arent listed).

Figure 4: Spending on discretionary services has been very strong, while spending on goods is going backwards

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4

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12

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4

8

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90 92 94 96 98 00 02 04 06 08 10 12

Goods

Services

yoy%Discretionary household spending - values

-6

-4-2

0

2

4

6

8

10Discretionary household spending - values

FY10

FY11

%,

pcp

Note: Discretionary spending comprises clothing & footwear, furnishings & household equipment, vehicle purchases, transport services, recreation & culture, cafes & restaurants and other Source: ABS, Deutsche Bank

This is also evident in the NAB survey, where in the September quarter retailers reported

conditions to be not much better than in the financial crisis, while companies in recreation

reported above average conditions. The survey suggests that companies expect these

conditions to persist.

Figure 5: The Sept qtr NAB survey shows retailers continue to find it tough, while the recreation sector is doing well

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Business conditions - NAB survey

Recreation industry

Retail industry

Dev from

LR avg

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90 92 94 96 98 00 02 04 06 08 10 12

Expected profitability - NAB survey

Recreation industry

Retail industry

Dev from

LR avg

Source: NAB, Datastream, Deutsche Bank

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Households still choosing services/experiences over goods in the

September quarter

While the national accounts data is only up until June, more recent data from the retail trade

survey suggests these trends are continuing. The chart below shows strength in

cafes/restaurants and tourism. There is also strength in areas of retail with exposure to

people doing things, whether recreation or home improvement. In contrast, clothing,

footwear and electrical are performing poorly, through a combination of household

preference for services, price deflation and overseas competition.

Figure 6: Good growth in services & recreational goods, clothing/footwear lagging

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-13

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-5

2

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15

-15 -10 -5 0 5 10 15

Footwear

Clothing

Newspaper/books

Dept stores

Takeaway food

Electrical

Total

Food

O/S tourismPersonal goods

Hardware

Furniture

Liquor

Specialised food

Cafes/restaurants

Sporting/toys/media

Retail trade, values

mom% trend,

annualised

Note: Data on overseas tourism are not from the retail trade survey, but sourced from the ABS trade data Source: ABS, Deutsche Bank

These trends are quite consistent with recent reports from listed retailers. The larger retailers

who sell clothing and electrical items are struggling, but those with exposure to households

activities (eg, KMD, Super Cheaps stores, Bunnings) are reporting good growth.

Figure 7: Retailers with exposure to consumers outdoor activities are doing best

-10.0

-7.9

-4.2

-4.1

-2.8

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0.0

0.5

0.9

3.0

5.3

6.3

15.8

-12 -8 -4 0 4 8 12 16

Myer

David Jones

Big W

Target

Harvey Norman

JB Hi-Fi

Specialty Fashion

Kmart

Premier

Super Cheap's outdoor

Super Cheap auto

Bunnings

Kathmandu

Retailer comparable store sales, latest data*

%, pcp

*September quarter for Big W, Target, Harvey Norman, Kmart, Bunnings. July quarter for Myer, David Jones. June half for JB Hi-Fi, Specialty Fashion. July half for

Kathmandu, Premier.15 weeks to mid-October for Super Cheaps 2 divisions. Super Cheaps outdoor division comprises Rays Outdoor and BCF Source: Company

data, Deutsche Bank

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Growth in overseas travel remains very strong

Overseas travel remains very popular with Australians, with departures growing 10% over

the past year. Tourists are increasingly opting for South-east Asia (largely Thailand and

Indonesia), and North America is getting more popular. Clearly the stronger AUD has been a

contributor, and this is also having the effect of dampening arrivals into Australia. Until 2007

had always had a surplus of travelers (ie, inbound tourists exceed outbound tourists), but thishas changed significantly in recent years.

Figure 8: Growth in overseas travel has ramped up, with South-east Asia a particularly popular destination

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200

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600

100

200

300

400

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600

91 93 95 97 99 01 03 05 07 09 11

Australians going overseas

Foreigners visiting Australia

Overseas leisure travel*000s

`

0.0

0.4

0.8

1.2

1.6

2.0

2.4 Australian overseas short-term departures200620072008200920102011 ytd

million

*Leisure travel is the sum of holiday and visiting friends and relatives Source:ABS, Deutsche Bank

The scale of this turnaround has been quite striking. Through much of the 1990s and last

decade, in a given quarter arrivals amounted to 1-2% of the Australian resident population.

And since people tend to spend more while travelling, this represented a non-trivial boost to

growth for Australian companies. But now this has swung around, with implications for a

range of sectors exposed to tourism spend.

Figure 9: Tourism used to provide Australia with a net boost, but this has reversed

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-2

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0

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82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Tourism balance as % of Australian populationArrivals less

departures as %

of total population

`

Australians going offshore

exceeding foreigners

visting Australia

Source: ABS, Deutsche Bank

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Domestic airline activity is solid also

Even with Australians increasingly opting for overseas holidays, domestic air travel is growing

solidly. This partly reflects the resilience of business travel, but also an ongoing shift by

households toward air travel and away from car travel. Both Virgin and Qantas have grown

revenue passenger kilometers by ~5% over the past year.

Figure 10: Domestic airline activity is growing a solid pace for both major airlines

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15

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0

3

6

9

12

15

05 06 07 08 09 10 11

Domestic airline activity (revenue passenger kilometres)

Qantas (incl. Jetstar)

Virgin

% yoy

Source: Company data, Deutsche Bank

The issues with a smaller discount competitor have helped the listed airlines gain share, and

this has also contributed to growing yields. Discount airfares have increased by almost 30%

over the past year, while business-class fares have grown by 15%.

Figure 11: Airfares have grown strongly over the past year, particularly discount

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Best discount

Business

Full economy

Domestic airfaresyoy%

Source: BITRE, Deutsche Bank

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Gambling spend is growing at a decent pace

Households are also growing spending on gambling at a moderate rate, highlighting a

preference for experiences over goods. For example, our analysts forecast December half

main gaming floor revenue to at Crown to be up ~5% on pcp, and the recent AGM

commentary delivered comfort around this forecast (management pointing to 3.5% growth

on pcp in the half thus far). In contrast, retail sales ex food in the September quarter was flaton pcp. Further, spending on gaming machines in Victoria and Queensland is growing broadly

in line with historical rates.

Figure 12: Casino spending is growing at a faster rate than discretionary retail

0

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0

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4

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8

10 Casino spending vs discretionary retailRetail sales ex food

Crown Melbourne & Burswood

%

pcp

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0

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6

9

12

15

-9

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0

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6

9

12

15

04 05 06 07 08 09 10 11

Victoria

Queensland

Electronic gaming machine expenditureyoy%

Note: Casino spending for Dec-11 is DB forecast, while retail trade is September quarter on pcp. Source: VCGR, Qld Office of Gaming, Company data, ABS, Deutsche Bank

While some sectors of the economy are clearly under pressure, others are quite strong, and

thus on average the economy is tracking reasonably well. As a result, stocks that have broad

exposure across sectors and regions should perform, such as Seek and the banks. There has

been concern recently around a slowing labour market, and the limited growth in job ads.

However, the NAB business survey suggests that the underlying pulse of labour demand is

holding up better than suggested by official data. Further, our analysts do not have any

volume growth for SEK in their forecasts, but earnings are nonetheless yet expected to grow

strongly in part due to higher prices.

Figure 13: Internet job ads havent grown much recently, but the NAB survey still suggests a solid jobs outlook

-60

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0

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40

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0

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100

150

200

250

300

00 02 04 06 08 10 12

Number (lhs)

Growth on pcp (rhs)

Internet Job Advertisements000s %

-50

-40

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010

20

30

40

89 91 93 95 97 99 01 03 05 07 09 11

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0

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2

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4

5

6

7

NAB survey and employmentEmployment (lhs)

NAB employment index (rhs)

qoq%

annual.Index

Source: Datastream, ABS, Deutsche Bank

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The Masterchef effect? Households eating higher quality food.

Another interesting development in household spending has been a recent preference for

higher quality food. This is evident in the outperformance of the cafes & restaurants sector

relative to takeaway food sales, as well as specialized food retailers relative to supermarkets.

There has been some suggestion that this can be traced to the popular cooking show

Masterchef, but clearly this is difficult to quantify.

Figure 14: Households are growing spending on higher quality food, both to eat at home and when going out

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05 06 07 08 09 10 11

Retail sales

Cafes & restaurants

Takeaway food

mom %,

trend

annual.

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25

30

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05 06 07 08 09 10 11

Retail salesSpecialised food*

Supermarkets

mom %,

trend

annual.

*Specialised food

includes fruit shops,

butchers, bakers etc

Source: ABS, Deutsche Bank

Still, spending at supermarkets continues to grow around mid-single digits, reflecting the

underlying defensiveness of the business. There is also the prospect of food inflation in the

near future. The chart below suggests that food inflation in Australia tends to emerge around

3 quarters after inflation has picked up globally, and suggest upside over the remainder of

FY12. (Note that for the Australian measures we use Woolworths reported inflation, and the

food deflator from the retail trade survey. The latter measure reflects what is actually spent

on food, in contrast to the food component of the CPI which is a fixed weight over time).

Figure 15: High global food inflation should begin to feed into domestic inflation

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96 98 00 02 04 06 08 10 12

Global and Australian food price inflationGlobal food inflation (AUD, 3 qtr lead, lhs)

Australian food prices* (rhs)

Woolworths inflation

% yoy

*Australian food prices is calculated as the implied price deflator of food retailing in the retail trade survey, and thus reflects actual food purchases, unlike the CPI

Source: UN, Company data, ABS, IRESS, Deutsche Bank

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Deutsche Banks preferred consumer exposures

Figure 16: Metrics for Deutsche Banks preferred stocks with consumer exposure (DB analyst numbers)

FY10 FY11F FY12F FY13F12m

fwd PEFY11F FY12F FY13F

12m

fwd DYFY11F FY12F FY13F

AIO Asciano na 658% 9% 28% 17.2x 20.4x 18.7x 14.6x 1.8% 1.3% 1.7% 2.0%

CCL Coca-Cola Amatil 11% 5% 11% 8% 16.2x 17.3x 15.7x 14.5x 4.4% 4.1% 4.6% 5.0%

CKF Collins Foods na na -20% 28% 5.2x 4.9x 6.2x 4.9x 7.6% 0.0% 4.1% 9.9%

CWN Crown -3% 17% 23% 24% 13.9x 18.2x 14.8x 11.9x 4.5% 4.6% 4.6% 4.6%

DMP Domino's Pizza 15% 19% 15% 12% 19.3x 23.3x 20.3x 18.1x 3.6% 3.0% 3.4% 3.8%

FLT Flight Centre 74% 22% 11% 9% 10.1x 11.7x 10.5x 9.7x 5.0% 4.2% 4.9% 5.1%

KMD Kathmandu 64% 49% 17% 17% 10.5x 12.7x 10.9x 9.3x 4.9% 4.0% 4.7% 5.3%

PMV Premier -24% -37% 21% 15% 12.8x 15.9x 13.2x 11.5x 6.8% 6.8% 6.8% 6.8%

QAN Qantas 144% 40% -4% 52% 7.8x 8.5x 8.9x 5.8x 3.7% 0.0% 3.1% 4.6%

SEK Seek 31% 26% 29% 22% 13.8x 19.2x 14.9x 12.2x 3.7% 2.4% 3.3% 4.1%

TTS Tatts 1% -5% 15% -32% 11.2x 11.0x 9.6x 14.0x 9.0% 9.2% 10.1% 7.3%

VBA Virgin Blue na na na 60% 12.7x -21.4x 14.7x 9.2x 1.8% 0.0% 0.0% 5.2%

WES Wesfarmers -14% 23% 30% 12% 14.5x 19.4x 15.0x 13.4x 5.6% 4.6% 5.4% 6.0%

WOW Woolworths 9% 6% 4% 10% 13.2x 14.2x 13.6x 12.4x 5.4% 5.0% 5.2% 5.7%

XAIXB Industrials ex banks -3% 0% 11% 13% 12.3x 14.4x 12.9x 11.4x 5.2% 5.2% 5.0% 5.5%

PE ratio Dividend yieldEPS growth

Note: Equity strategy teams model portfolio includes CWN, SEK, VBA, WES, WOW. All stocks in the table are rated a BUY by DB analysts, with the exception of WES. Source: Deutsche Bank

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COMPANIES MENTIONED LIST

C o d e S t o c k n a m e L a s t p r i c eAIO Asciano Ltd 1.50

APN APN News & Media Ltd 0.88

AUN AUSTAR United Communications Ltd 1.16

BLD Boral Ltd 3.63

CCL Coca-Cola Amatil Ltd 12.20

CKF Collins Foods Ltd 1.21

CSR CSR Ltd 2.36

CWN Crown Ltd 8.09

DJS David Jones Ltd 3.14

DMP Domino's Pizza Enterprises Limited 7.21

EGP Echo Entertainment Group Ltd 3.78

FLT Flight Centre Ltd 19.80

FXJ Fairfax Media Ltd 0.90

HVN Harvey Norman Holdings Ltd 2.12

JBH JB Hi-Fi Ltd 15.15

KMD Kathmandu Holdings Ltd 1.90

MYR Myer Holdings Ltd 2.33

PMV Premier Investments Ltd 5.30

QAN Qantas Airways Ltd 1.62

SEK Seek Ltd 5.95

SFH Specialty Fashion Group Ltd 0.58

SUL Super Retail Group Ltd 5.51

SWM Seven West Media Ltd 3.25

SXL Southern Cross Media Group Ltd 1.19

TAH Tabcorp Holdings Ltd 2.90

TEN Ten Network Holdings Ltd 0.92

TOL Toll Holdings Ltd 4.74

TTS Tatts Group Limited 2.33

VBA Virgin Blue Holdings Ltd 0.39

WES Wesfarmers Ltd 32.32

WOW Woolworths Ltd 24.60Source: Deutsche Bank

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Appendix 1

Important Disclosures

Additional information available upon requestFor disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see

the most recently published company report or visit our global disclosure look-up page on our website at

http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the

undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in

this report. Tim Baker

Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-

holder return (TSR = percentage change in share price

from current price to projected target price plus pro-

jected dividend yield ) , we recommend that investors

buy the stock.

Sell: Based on a current 12-month view of total share-

holder return, we recommend that investors sell the

stock

Hold: We take a neutral view on the stock 12-months

out and, based on this time horizon, do not recommendeither a Buy or Sell.

Notes:

1. Newly issued research recommendations and target

prices always supersede previously published research.

2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of

10% or more over a 12-month period

Hold: Expected total return (including dividends)

between -10% and 10% over a 12-month period

Sell: Expected total return (including dividends) of -

10% or worse over a 12-month period

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Regulatory Disclosures

1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the

"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent

or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at

http://gm.db.com.

3. Country-Specific Disclosures

Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning ofthe Australian Corporations Act and New Zealand Financial Advisors Act respectively.

Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) andits(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly

affected by revenues deriving from the business and financial transactions of Deutsche Bank.

EU countries: Disclosures relating to our obligations under MiFiD can be found athttp://www.globalmarkets.db.com/riskdisclosures.

Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registrationnumber - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117.

Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan.

Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption

tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to

losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses

stemming from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are notregistered credit rating agencies in Japan unless Japan is specifically designated in the name of the entity.

Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, anyappraisal or evaluation activity requiring a license in the Russian Federation.

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Deutsche Bank AG/Sydney

International locations

Deutsche Bank Securities Inc.

60 Wall Street

New York, NY 10005

United States of America

Tel: (1) 212 250 2500

Deutsche Bank AG London

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London EC2N 2EQ

United Kingdom

Tel: (44) 20 7545 8000

Deutsche Bank AG

Groe Gallusstrae 10-14

60272 Frankfurt am Main

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Tel: (49) 69 910 00

Deutsche Bank AG

Deutsche Bank Place

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AustraliaTel: (61) 2 8258 1234

Deutsche Bank AG

Filiale Hongkong

International Commerce Centre,

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Hong Kong

Tel: (852) 2203 8888

Deutsche Securities Inc.

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Tel: (81) 3 5156 6770

Global Disclaimer

The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). The information herein is believed to be reliable and has been obtained from public sources

believed to be reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such information.

Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including strategists andsales staff, may take a view that is inconsistent with that taken in this research report.Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without

notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes

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In August 2009, Deutsche Bank instituted a new policy whereby analysts may choose not to set or maintain a target price of certain issuers under coverage with a Hold rating. In particular, this will typically occur for "Hold" rated

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