Investment Management - Lecture Material

8/6/2019 Investment Management - Lecture Material

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Asia Pacific Equity Research01 August 2006

Indonesian StrategyThe road to recovery for domestic demand

IndonesiaEquity Strategy

Rizal B. Prasetijo AC

(62-21) [email protected]

PT J.P. Morgan Securities Indonesia

See page 13 for analyst certification and important disclosures, including investment banking relationshipJPMorgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firmmay have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor inmaking their investment decision. Customers of JPMorgan in the United States can receive independent, third-party research on the companyor companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research atwww.morganmarkets.com or can call 1-800-477-0406 toll free to request a copy of this research.

JCI and IDR: Five-year weekly pri ces

200

700

1,200

1,700

6/01 6/02 6/03 6/04 6/05 6/06

8,000

9,500

11,000

12,500

JCI (L) IDR ( R)

Index Rp/US$

Source: Bloomberg.

We hold the view that the recent malaise in domestic demand was not triggered by Bank Indonesias decision to raise itsbenchmark rate by 425bp during 2H05. We think it was mainlycaused by the governments decision to hike the subsidizedregular gasoline price by 88% in October 2005, which curtaileddisposable income drastically .

We believe disposable income could rebound next year, on theback of: (1) the normalization of the farmers purchasing power, (2)a 9-10% Y/Y increase in minimum wages in the manufacturing andconstruction sectors, and (3) an increase in the Indonesian overseasforeign workers salary repatriation. We think that these threeevents, not foreign investors positions in Indonesia or the marketscurrent valuations, will be major drivers for the appreciation of Indonesian equities.

Based on: (1) the 12-month forward consensus P/E of 11.1x, (2) thetrailing P/E-to-12-month consensus EPS growth ratio of 0.7x, (3)the markets earnings yield of 10.5%, and (4) the average fair valueof 31 companies under our coverage in June 2007E, we believe thatthe Jakarta Composite Index (JCI) will be fairly valued at 1,425in mid-2007E, representing 5% upside from the current level .We would be aggressive buyers if the JCI falls below the 1,280

level, and aggressive sellers if the JCI exceeds the 1,565 level. Anticipating a recovery in disposable income and domestic

demand in 1H07E, we raise the beta of our portfolio byincreasing exposure to the banking sector, at the expense of theenergy sector . We have bought Bank Danamon and partially soldour positions in Bank Rakyat Indonesia and Medco Energi.

JPMorgan Indonesias model portfolio

Model portfolio Price Mkt cap Daily vol. P/E (x) P/B (x) Yield (%)Weigh ting (%) (Rp) (US$MM) (US$MM) FY06E FY07E FY06E FY07E FY06E FY07E

PT Telekomunikasi Indonesia 35.0 7,450 16,559 20.55 11.9 11.2 5.57 5.16 4.8 7.2Astra International 20.0 9,600 4,285 9.55 10.3 7.6 1.77 1.53 4.2 2.9Bank Danamon 15.0 4,250 2,299 1.83 17.4 11.0 2.51 2.34 6.9 6.2

Bank Rakyat Indonesia 10.0 4,275 5,747 9.47 12.6 10.8 3.66 3.07 3.7 3.9Medco Energi 10.0 3,800 1,396 3.72 9.6 6.0 1.88 1.52 2.0 4.0Indofood 10.0 1,050 987 4.75 18.1 15.1 1.88 1.74 0.5 2.2

Source: Bloomberg and JPMorgan estimates. Note: Prices and valuations are as of 31 July 2006.


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Rizal B. Prasetijo(62-21) [email protected]

Hike in energy prices and not interestrates, was the culpritWe hold a view that the recent malaise in domesticdemand was not triggered by Bank Indonesiasdecision to raise its benchmark rate by 425bp duringthe July 2005 to January 2006 period, but it was mainlycaused by the governments decision to hike thesubsidized regular gasoline price by 88%the largesthike over the past 15 yearsin October 2005. Ourassessment is based on three reasons:

Figure 1: Hike in subsidized regular gasoline pricesM/M%

0

20

40

60

80

100

7/91 1/93 5/98 2/00 6/01 1/02 1/03 3/05 10/05

Source: Pertamina.

First, by looking at the current nominal and interestrates of 12.25% and -2.7%, respectively, and

comparing it with their 15-year averages of 16.0%and 3.8%, respectively, one can argue that the currentmonetary policy is not too tight.

Second, while there has been a rapid growth inconsumer loans over the past six years, we believethat Indonesian consumers, measured by the amountof money borrowed from and money deposited in thebanking industry (an LDR of 48%), still have lowleverages. Thus, the 425bp hike in benchmark ratesduring the July 2005 to January 2006 period shouldnot affect their disposable income significantly.

Lastly, by taking the Central Bureau of Statisticssurvey on monthly expenditures per capita, assumingthere is an 85% Y/Y increase in fuel-relatedexpenditures and a 10% Y/Y growth in income, wefound that non-fuel-related expenditures will have todecrease by 5% Y/Y during the current year.

Figure 2: One-month nominal interest rates%

5

10

15

20

25

1/91 1/93 1/95 1/97 1/99 1/01 1/03 1/05

Nominal Average

Source: Bank Indonesia.

Figure 3: One-month real* interest rates%

-10-50

510

15

1/91 1/93 1/95 1/97 1/99 1/01 1/03 1/05

Real Average

Source: Bank Indonesia, Biro Pusat Statistik. Note: *Deriving by deducting one-monthnominal rates with core CPI Y/Y%.

Figure 4: Consumers leverage% Y/Y%

10

20

30

40

50

1/01 1/02 1/03 1/04 1/05 1/06

20

30

40

50

60

Individual LDR (L) Individual loans (R )


Table 1: Breakdown of monthly expenditures per capitaRupiah/capita/month

Mid-2005 Mid-2006* Y/Y%Fuel-related expendi tures 29,093 46,220 59

Transport-related 12,386 22,914 85Electricity 8,944 8,944 0Energy-related 7,763 14,362 85

Non-fuel related expendi tures 93,988 89,169 -5Total expendi tures 123,081 135,389 10Source: Biro Pusat Statistik, JPMorgan estimates. Note: *Assuming a 10%Y/Y increase inmonthly expenditures.


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In a nutshell, we believe that the 88% hike in the price of subsidized regular gasoline, last October, is responsible

for the deterioration in consumer confidence. It has led tothe weakening in the automotive, cement, and retail salesgrowth rates over the past 12 months.

Figure 5: Consumer confidence index3MMA

60

80

100

120

1/02 7/02 1/03 7/03 1/04 7/04 1/05 7/05 1/06


Figure 6: Automotive sales3MMA Y/Y%

-70

-35

0

35

70

1/02 7/02 1/03 7/03 1/04 7/04 1/05 7/05 1/06

Cars Motorcycles

Source: GAIKINDO.

Figure 7: Cement consumption12MMA Y/Y%

-10

-5

0

5

10

15

1/02 7/02 1/03 7/03 1/04 7/04 1/05 7/05 1/06

Source: ASI.

Figure 8: Retail sales index12MMA Y/Y%

-10

-5

0

5

10

15

20

1/02 7/02 1/03 7/03 1/04 7/04 1/05 7/05 1/06


Monitoring recovery of domesticdemandGiven the above-mentioned analysis, we believe thatdomestic demand and corporate earnings inIndonesia will not accelerate over the next 12 monthsif there is no improvement in consumer confidencethrough an increase in disposable income . In anattempt to monitor the recovery of disposable income, weurge investors to pay attention to these following fourmacro indicators:

First, the farmers terms of trade index, measured thedifference between commodity price received by andproduction cost paid by farmers.

Figure 9: Farmers terms of trade index12MMA Y/Y%

-20

-15

-10

-5

0

5

10

1/92 1/94 1/96 1/98 1/00 1/02 1/04 1/06

Source: Biro Pusat Statistik.

It is interesting to note that while the current reading isstill in the red, the index has actually bottomed out,thanks to the 40%+ increase in rice price during the July2005 to February 2006 period. This indicates that thepace of deterioration of real income among workers inthe agriculture sector (accounting for 25%-30% of thelabor market) has been on the decline. If the currenttrend continues, we expect that farmers purchasing


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power will return back to its normal level by early-2007. The main risk to our call is the shortage of

fertilizers, due to the inability of state-owned fertilizercompanies to buy natural gas at current market prices,and the longer-than-expected drought season.

Second, the real minimum wage growth, measured bysubtracting the nominal minimum wage growth ratewith the average inflation rate during the observationperiod.

We currently estimate that workers in the manufacturingand construction sectors (representing 15-20% of thelabor market), who are mainly paid minimum wages, willonly enjoy a 1% real wage growth rate during the currentyear. Therefore, given our expected average inflation rateof 6.5% during the next year, we believe that themanufacturing and construction workers purchasingpower will revive, if their employers raise theirminimum wages by 9-10% in 2007 . We think there is areasonable chance that our expectations will materialize.

Figure 10: Real minimum wagesY/Y%

-30-20-10

0

10203040

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06E

Growth Average growth

Source: CEIC.

Third, the repatriation of Indonesian overseas foreignworkers salaries to their home towns.

Although the repatriation proceeds are still relatively low

compared to the Philippines, given the relativelydifficult domestic job market, we expect that thenumber of Indonesians who opt to work overseas willincrease . Accordingly, we predict that the amount of the repatriation will also rise next year . The downsiderisk to our forecast is a geopolitical risk, especially in theMiddle East, where the majority of Indonesian overseasforeign workers live.

Figure 11: Repatriation of overseas foreign workers salariesUS$ in millions %

0

200

400

600

3/97 3/98 3/99 3/00 3/01 3/02 3/03 3/04 3/05 3/06

0.0

0.5

1.0

1.5

Repatriation proceeds (L) % of GDP (R )

Source: Bank Indonesia, Biro Pusat Statistik.

Lastly, an increase in employment rate via higherinvestment activities.

Given the labor militancy, cumbersome localregulations, and legal uncertainties, we do not expectthat investment activities during the next year willincrease the employment rate meaningfully . Althoughwe predict that investments in non-tradable segments(such as the banking and telecommunication sectors) willcontinue, these capital-intensive industries are unlikely tocreate significant job opportunities during 2007. In fact,investors should note that due to the gradual shift ininvestment pattern from the tradable (labor-intensive) to

non-tradable (capital-intensive) industries since the1997/98 financial crisis, the cost to create one job inIndonesia has increased dramatically. In 1992-1998, one

job could be created from the US$4,320 realizedinvestment. However, the figure went up to US$8,030 for1999-2005.

Figure 12: Realized investments and employment rateUS$ in billions %

0

3

69

12

15

92 93 94 95 96 97 98 99 00 01 02 03 04 05

88

90

9294

96

98

Investment (L) Employment rate (R )

Source: BKPM, CEIC.


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By using the labor forces 10-year historical annualaverage growth rate of 2.3% and US$8,030 realized

investment-to-one-job ratio, we estimate that thecountry should have US$18 billion realizedinvestment next year if it wants to keep itsemployment rate at 90% . We think this is unlikely tohappen. The upside risk to our call is if the centralgovernment is able to completely reform the labormarket, to reduce bureaucracy at the regional level, torestore law and order, and to jump-start its megainfrastructure projects during 2007.

Table 2: 2007E employment rate and required investments

Employment Jobs creation Required realizedrate (%) (MM) investments (US$B)

90 2.25 18.091 3.35 26.992 4.46 35.893 5.57 44.794 6.68 53.695 7.78 62.5Source: JPMorgan estimates.

The bottom line is, if (1) the farmers terms of tradeindex keeps heading north at the current rate, (2)employers in the manufacturing and construction sectorsare willing to raise their workers minimum wages by 9-10% in 2007, and (3) there is no major geopolitical risk,which could curtail the amount of repatriation of

Indonesian overseas foreign workers next year, webelieve that disposable income, consumer confidence,and domestic demand will rebound during 2007.

Relatively heavy positions and...In our view, the three conditions mentioned abovewill become the major drivers behind the accelerationin corporate earnings growth and appreciation of Indonesian equities in the next year . We do notsubscribe to a view that the recent market pull-back could trigger a technical rebound as foreigninvestors have not reduced their holdings over thepast two months . Indeed, the data from the JakartaStock Exchange indicated that these investors were netbuyers during the recent correction.

Figure 13: MSCI Indonesia and net foreign buyin gIndex US$ in millions

0300600900

1,2001,5001,8002,100

1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06

-600-400-2000200400600800

Net foreign buying (R ) MSCI Indonesia (L)

Source: Jakarta Stock Exchange, MSCI.

Figure 14: Emerging market investors positions in IndonesiaX against the neutral benchmark

0.5

1.0

1.5

2.0

1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06

Source: EmergingPortfolio.com Fund Research.

and modest valuations are unlikely toreverse the markets directionWe also think that current market valuations areunlikely to be used as an excuse by foreign investorsto further raise their already overweight positions inIndonesian equities, for four reasons:

First, the market currently trades at 11.0x 12-monthforward P/E. This is almost on par with its 15-year

historical average of 11.1x.


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Figure 15: MSCI Indonesia and its 12-month fo rward consensusP/EIndex X

200

600

1,000

1,400

1,800

2,200

1/92 1/94 1/96 1/98 1/00 1/02 1/04 1/06

0.0

5.0

10.0

15.0

20.0

25.0

MSCI Indonesia (L) 12-mth forward P/E (R )

Average (R ) + 1 stdev (R )

Source: I/B/E/S, MSCI.

Second, while the market appears attractive, based onthe P/E-to-growth matrix (12.8x trailing P/E against12-month EPS growth of 15.6%), this is notappealing enough against its historical standard.Investors should note that the trailing P/E multiples of Indonesian equities have averaged at 0.7x of its 12-month EPS growth over the past 15 years.

Figure 16: MSCI Indonesias trailin g consensus P/E to 12-monthEPS growthX

0.00.30.60.91.21.5

1.8

1/92 1/94 1/96 1/98 1/00 1/02 1/04 1/06

P/E-to-growth -1 stdev (R )Average (R ) + 1 stdev (R )


Third, the Indonesian equity market currently tradesat a 12% discount to the Asia ex-Japans 12-monthforward consensus P/E. This is higher than its 15-yearhistorical discount average of 21%.

Figure 17: MSCI Indonesias 12-month forward consensus P/Erelative to Asia ex-Japan's%

-80-60-40-20

0204060

1/92 1/94 1/96 1/98 1/00 1/02 1/04 1/06

Prem/(Disc) -1 stdev (R )Average (R ) + 1 stdev (R )


Finally, the markets current earnings yield stillimplies that Bank Indonesia will loosen its monetarypolicy aggressively over the next 12 months.

Figure 18: MSCI Indonesias earning y ield* and one-month SBIrate%

0.0

5.010.0

15.0

20.0

25.0

30.0

1/92 1/94 1/96 1/98 1/00 1/02 1/04 1/06

Earnings yield 1-mth SBI

Source: Bank Indonesia, I/B/E/S, MSCI. Note: *Inverse of 12-month forward consensusP/E.

We expect the JCI to hit 1,425 by mid-2007EIn an effort to determine the fair value of the JCI by mid-2007E, we used four methodologies:

First, we attached the 15-year historical average of the 12-month forward consensus P/E of 11.1x to theStreets June 2008 EPS consensus of 141 andobtained the fair value of 1,562.


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Table 3: JCI fair value #1: 12-month forward consensus P/E

MSCI at 1,861 JCI at 1,352

EPS P/E (x) EPS P/E (x)Dec-06E 154 12.1 112 12.1Jun-07E 166 11.2 121 11.2Dec-07E 179 10.4 130 10.4Jun-08E 194 9.6 141 9.6Dec-08E 210 8.9 152 8.9Source: Bloomberg, I/B/E/S, MSCI.

Second, we applied the 15-year historical averagetrailing consensus P/E-to-12-month EPS growth ratioof 0.7x to the markets EPS growth consensus forJune 2007E to June 2008E of 16.7% Y/Y. Themethodology yielded the markets fair trailing P/E of 11.8x, equivalent to the JCI of 1,429.

Table 4: JCI fair value #2: P/E-to-growthJun-08E Jun-08/07E Fair Jun-07E JCI fair

EPS Y/Y% P/E (x) value136 12.7 9.0 1,087138 14.7 10.4 1,258141 16.7 11.8 1,429143 18.7 13.2 1,600145 20.7 14.7 1,771

Source: I/B/E/S, JPMorgan estimates.

Third, we assumed that the markets earnings yield(the inverse of the 12-month forward P/E) will equateto our economists forecast on one-month benchmark rate of 10.5% by mid-2007E. This means that themarkets fair 12-month forward P/E will be 9.5x byJune 2007E, equivalent to the JCI of 1,343.

Table 5: JCI fair #3: Earnings yi eld

Jun-08/07 One-month benchmark rate in Jun-07E (%)Y/Y% 9.0 10.0 10.5 11.0 11.512.7 1,513 1,362 1,297 1,238 1,18414.7 1,540 1,386 1,320 1,260 1,20516.7 1,567 1,410 1,343 1,282 1,22618.7 1,594 1,435 1,366 1,304 1,24720.7 1,621 1,459 1,389 1,326 1,268

Source: I/B/E/S, JPMorgan estimates.

Finally, we asked our analysts to submit their fair

values on stocks under their coverage by mid-2007E.Investors should note that JPMorgan Indonesiacurrently covers 31 companies, accounting for 74%of the total market capitalization. The bottom-upanalysis indicates that the market offers 1.3% upsidefrom the current level, equivalent to the JCI of 1,369.

Table 6: JCI fair value #4: Bottom-up analysis

Current Fair value* Upside

Company pric e (Rp) mid-07E (Rp) (%)Bank Central Asia 4,175 4,800 15.0Bank Danamon 4,250 5,175 21.8Bank Intn'l Indonesia 180 170 -5.6Bank Lippo 1,010 960 -5.0Bank Mandiri 1,760 1,645 -6.5Bank Niaga 640 785 22.7Bank Panin 430 440 2.3Bank Rakyat 4,275 4,625 8.2Banking 11.0Indocement 4,200 5,270 25.5Semen Gresik 25,450 24,730 -2.8Building material 1.3Gudang Garam 9,300 8,600 -7.5Indofood 1,050 1,260 20.0Kalbe Farma 1,200 1,400 16.7Matahari 820 640 -22.0

Ramayana 790 910 15.2Unilever 4,225 4,100 -3.0Consumer -3.6Astra International 9,600 11,250 17.2Bakrie Brothers 170 225 32.4United Tractors 5,600 7,500 33.9Industrial 20.4Astra Agro Lestari 8,350 8,000 -4.2Bakrie Sumatra 1,070 850 -20.6Bumi Resources 830 820 -1.2Energi Mega 660 820 24.2INCO Indonesia 19,950 18,775 -5.9London Sumatra 4,475 4,300 -3.9Medco Energi 3,800 5,060 33.2Peru. Gas Negara 11,800 7,320 -38.0PT Bukit Asam 3,275 3,250 -0.8Resources -19.8Excelcomindo 2,125 2,150 1.2Indosat 4,275 6,400 49.7PT Telkom 7,450 8,100 8.7Telecom 11.7JPM universe 1.3Source: Bloomberg, JPMorgan estimates. Note: *Note that fair values mentioned in thetable may or may not be price targets for mid-2007E.

By averaging fair values derived from these fourmethodologies, we obtained the JCI fair value of 1,426. We rounded it up to 1,425 and made it our fairvalue .

Table 7: JCI fair valueSummary

Methodology Fair value12-month forward P/E 1,562P/E-to-growth 1,429Earnings yield 1,343Bottom-up analysis 1,369 Average Source: JPMorgan estimates.


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Investors should note that our fair value estimate for theIndonesian equity market represents 6% upside from the

current level. Given our fair value estimate, we wouldbe aggressive buyers if the JCI drops below 10% of ourfair value (or below the 1,280 level), and be aggressivesellers if the JCI exceeds 10% of our value (or higherthan the 1,565 level) .

Portfolio adjustmentAnticipating a recovery in disposable income anddomestic demand in 1H07E, we have raised the betaof our portfolio by increasing our exposures in thebanking sector, at the expense of the energy sector .We have bought Bank Danamon up to 15% of our modelportfolio, and reduced our positions in Bank RakyatIndonesia and Medco Energi to 10% of the modelportfolio, respectively. Our decision to include Bank Danamon in the model portfolio is based on two factors:

First, given the banks high exposure to fixed-rateconsumer loans (42% of outstanding loans),especially in motorcycle financing (23% of outstanding loans), we believe that Bank Danamonsearnings will benefit from lower interest rates and agradual recovery in domestic demand over the nextsix to twelve months. Based on 2Q06 results, we have

just recently revised up our FY06, FY07, and FY08

EPS estimates by 28%, 13%, and 13%, respectively. Second, going forward, we believe that the market

will be surprised by: (1) the widening of the banksnet interest margin (from 9.2% in 2Q FY06 to ourestimate of 10.3% in 4Q FY07E), and (2) thenormalization of Bank Danamons credit cost (from2.5% of total earnings assets in 3Q06E to 1.3% in4Q07E.

Our price target for the bank is Rp5,125 by the end of Jun-07E, representing 22% upside from the current level.

We derived the price target based on the combination of the Gordon Growth and Dividend Discount Models. Wethink that the largest risk to our price target is a hike indomestic subsidized gasoline prices. This would push theinflation rate up, prevent BI from lowering its benchmark rates, and cut the mass populations borrowing appetite.

Figure 19: Bank Danamons weekly share prices and its 12-monthforward P/B bandsRp.

0

2,000

4,000

6,000

8,000

1/01 1/02 1/03 1/04 1/05 1/06

Price 1.15x 2.21x 3.27x

Source: Bloomberg, company, JPMorgan estimates.


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Appendix I: Key economic indicatorsTable 8: Key economic indicators

1998 1999 2000 2001 2002 2003 2004 2005 2006E 2007EEconomyReal GDP (Y/Y%) -13.1 0.8 4.9 3.8 4.4 4.9 4.9 5.6 4.7 5.2

Consumption (Y/Y%) -7.1 4.3 2.0 3.9 4.7 4.6 4.9 4.4 3.5 3.5Investment (Y/Y%) -27.9 -14.6 19.2 8.2 -4.5 -4.6 23.5 4.2 2.0 10.0Exports (Y/Y%) 11.2 -31.8 26.5 0.6 -1.2 8.2 11.1 8.6 9.0 9.0Imports (Y/Y%) -5.3 -40.7 25.9 4.2 -4.2 2.7 25.6 12.3 5.6 10.0

Nominal GDP (Rp in trillions) 956 1,100 1,390 1,684 1,863 2,046 2,262 2,730 3,259 3,840Nominal GDP (US$ B) 101 142 164 165 202 239 252 280 339 413GDP/capita (US$) 496 686 797 792 956 1,118 1,165 1,279 1,500 1,800PricesCPI (average Y/Y%) 58.0 20.7 3.8 11.5 11.9 6.6 6.1 10.5 13.2 6.5CPI (Dec/Dec Y/Y%) 77.5 2.0 9.3 12.5 10.0 5.1 6.4 17.1 6.9 7.2PPI (average Y/Y%) 101.8 9.2 12.5 13.2 4.1 3.2 7.4 16.1 10.0 8.7Exchange ratesRp/US$1 - average 9,426 7,733 8,467 10,203 9,235 8,566 8,972 9,738 9,600 9,300Rp/US$1 - year end 8,025 7,100 9,595 10,400 8,940 8,465 9,290 9,830 9,300 9,300Interest rates (year end)Short-term rate (28-day SBI rate %) 38.4 12.5 14.5 17.6 12.9 8.3 7.4 12.8 11.0 10.5Deposit rate (%) 49.2 13.0 13.2 17.2 13.6 7.1 6.7 11.8 10.7 10.9Lending rate (%) 34.8 20.7 17.7 19.2 18.3 15.1 13.4 16.2 15.8 15.6MonetaryM2 (Rp in trillions) 577 646 747 844 884 956 1,034 1,203 1,308 1,422Y/Y% 62.3 11.9 15.6 13.0 4.7 8.1 8.1 16.4 8.7 8.7Loans (Rp in trillions) 487 225 269 308 365 438 554 690 798 947Y/Y% 28.9 -53.8 19.5 14.3 18.8 19.8 26.4 24.6 15.7 18.7Deposits (Rp in trillions) 574 626 720 809 845 902 965 1,134 1,262 1,409Y/Y% 60.4 9.1 15.1 12.3 4.4 6.8 7.0 17.5 11.3 11.7Fiscal balancePublic deficit (Rp in trillions) -16.8 -25.3 -36.4 -16.1 -40.5 -23.7 -33.7 -28.6 -36.0 -32.6Government balance (% of GDP) -1.8 -2.3 -2.6 -1.0 -2.2 -1.2 -1.5 -1.0 -1.1 -0.8External demandExports (US$ B) 48.8 48.7 62.1 56.3 57.2 61.1 71.6 85.6 90.0 104.0Imports(US$ B) 27.3 24.0 33.5 31.0 31.3 32.6 46.5 57.6 66.4 82.4Trade balance (US$ B) 21.5 24.7 28.6 25.4 25.9 28.5 25.1 28.0 23.6 21.5Current account (US$ B) 4.1 5.8 8.0 6.9 7.8 8.1 1.6 0.9 8.9 6.9Current account (% of GDP) 4.0 4.1 4.9 4.2 3.9 3.4 0.6 0.3 2.6 1.7IndebtednessDomestic public debt (Rp in trillions) 35.5 511.5 651.5 655.0 639.1 623.2 621.8 619.6 639.6 659.6Domestic public debt (US$ B) 4.4 72.0 67.9 63.0 71.5 73.6 66.9 63.0 68.8 70.9External public debt (US$ B) 72.1 80.5 74.9 71.4 74.7 81.7 82.7 79.6 78.6 77.6External private debt (US$ B) 78.8 67.7 66.8 61.7 56.7 53.7 54.3 53.9 57.9 61.9Public debt (% of GDP) 75 107 87 81 72 65 59 51 43 36External debt (% of GDP) 149 104 86 81 65 57 54 48 40 34Source: Bank Indonesia, BPS, CEIC, and JPMorgan estimates.


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Appendix II: Equity market statisticsTable 9: JPMorgan Indonesia universeSize, liquidity and past performance

Company Share Market Dailyprice cap. liquidity 12 months Price performance (%) Relative perfor mance (%)

Rating (Rp) (US$ MM) (US$ 000) High Low 1 mth 3 mth 12 mth 1 mth 3 mth 12 mBank Central Asia OW 4,175 5,670 4.79 4,925 2,925 1.8 -4.6 14.4 -1.3 3.4 0.1Bank Danamon OW 4,250 2,299 1.83 6,100 3,325 6.9 -17.5 -24.1 3.6 -10.6 -33.6Bank Intn'l Indonesia N 180 948 1.78 205 125 -2.7 -2.7 -2.7 -5.7 5.4 -14.9Bank Lippo UW 1,010 436 0.03 1,630 870 9.8 -14.4 -33.6 6.4 -7.3 -41.9Bank Mandiri UW 1,760 3,941 19.57 2,375 1,100 2.3 -8.3 9.3 -0.8 -0.7 -4.4Bank Niaga OW 640 835 2.32 690 305 16.4 3.2 41.5 12.8 11.8 23.7Bank Pan Indonesia UW 430 952 0.90 579 318 15.8 -14.3 -25.7 12.2 -7.1 -35.0Bank Rakyat Indo. OW 4,275 5,747 9.47 5,050 2,050 4.3 -7.6 33.6 1.1 0.1 16.9Bank ing 20,828 40.70 4.3 -7.8 11.9 1.1 -0.1 -2.1

Indocement OW 4,200 1,705 1.43 5,700 2,300 0.0 -16.0 16.7 -3.1 -9.0 2.0Semen Gresik N 25,450 1,664 0.53 30,050 14,800 6.9 -7.1 27.9 3.7 0.6 11.9Building material 3,369 1.96 3.4 -11.6 22.2 0.3 -4.2 6.9

Gudang Garam UW 9,300 1,973 0.82 12,900 9,150 -2.1 -11.8 -27.6 -5.1 -4.5 -36.7Indofood OW 1,050 987 4.75 1,240 670 19.3 -7.1 -3.7 15.7 0.7 -15.7Kalbe Farma OW 1,200 1,344 2.85 1,570 700 -4.0 -21.1 33.3 -6.9 -14.5 16.6Matahari UW 820 245 0.26 1,100 650 9.3 -15.5 13.9 6.0 -8.4 -0.4Ramayana UW 790 612 0.05 950 640 5.3 -13.2 -9.2 2.1 -5.9 -20.6Unilever N 4,225 3,554 1.05 5,100 3,625 2.4 -7.7 -2.9 -0.7 0.1 -15.0Cons umer 8,715 9.77 2.7 -11.2 -3.0 -0.4 -3.8 -15.1

Astra International OW 9,600 4,285 9.55 13,300 8,200 -1.5 -19.7 -27.3 -4.6 -13.0 -36.4Bakrie Brothers OW 170 506 5.39 215 75 13.3 0.0 21.4 9.9 8.3 6.2United Tractors OW 5,600 1,759 3.11 6,150 3,050 3.7 2.8 25.8 0.5 11.3 10.1Industr ial 6,549 18.05 1.0 -12.1 -9.2 -2.1 -4.8 -20.6

Astra Agro Lestari OW 8,350 1,450 0.81 8,850 3,400 28.5 26.5 102.4 24.5 37.1 77.1Bakrie Sumatra UW 1,070 275 2.82 1,170 325 20.2 27.4 164.2 16.5 38.0 131.1Bumi Resources N 830 1,776 4.97 1,070 670 7.8 -8.8 0.0 4.5 -1.2 -12.5Energi Mega OW 660 1,017 2.15 980 630 1.5 -25.8 -16.5 -1.6 -19.7 -26.9INCO Indonesia N 19,950 2,186 2.68 24,600 11,300 2.0 -0.2 33.0 -1.1 8.1 16.3London Sumatra N 4,475 540 1.57 5,000 1,710 28.8 14.7 90.4 24.8 24.3 66.6Medco Energi OW 3,800 1,396 3.72 5,050 2,975 2.0 -20.8 18.8 -1.1 -14.2 3.9Peru. Gas Negara UW 11,800 5,696 7.93 13,950 3,100 4.9 -4.8 265.9 1.7 3.1 220.0Tambang Bukit Asam N 3,275 832 6.69 4,025 1,520 4.0 9.2 108.6 0.8 18.3 82.5Resou rces 15,167 33.34 7.7 -2.5 127.2 4.4 5.7 98.7

Excelcomindo UW 2,125 1,661 0.00 4,925 1,950 6.3 -11.5 NA 3.0 -4.1 NAIndosat OW 4,275 2,476 7.64 6,150 4,025 0.0 -20.8 -26.3 -3.1 -14.2 -35.5PT Telkom N 7,450 16,559 20.55 8,500 4,700 1.4 -1.3 34.2 -1.7 6.9 17.4Telecommunication 20,696 28.20 1.6 -4.5 24.2 -1.5 3.5 9.7

JPM univ erse* 75,325 132.02Source: Bloomberg and JPMorgan based on closing prices as of 31 July 2006. *JPMorgan Indonesia universe account for 74% of JCI's market capitalization and 77% of the market totals turnover.


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Table 10: JPMorgan Indonesi a universeValuation

Year-end December

Company Reported P/E (x) Dividend yield (%) P/B (x) EV/EBITDA (x)Rating 05E 06E 07E 05E 06E 07E 05E 06E 07E 05E 06E 07E

Bank Central Asia OW 14.7 12.6 11.4 3.1 4.1 4.5 3.28 2.91 2.58 NA NA NABank Danamon OW 10.4 17.4 11.0 1.6 6.9 6.2 2.43 2.51 2.34 NA NA NABank Intn'l Indonesia N 11.9 13.0 11.7 2.9 3.0 2.7 1.83 1.66 1.45 NA NA NABank Lippo UW 9.6 8.8 7.8 0.0 2.1 2.3 1.48 1.30 1.13 NA NA NABank Mandiri UW 58.7 19.0 13.6 7.4 2.0 3.2 1.54 1.46 1.37 NA NA NABank Niaga OW 21.4 6.9 4.9 2.0 1.4 1.7 1.91 1.63 1.42 NA NA NABank Pan Indonesia UW 14.1 13.7 11.3 5.2 2.3 2.6 1.97 1.39 1.28 NA NA NABank Rakyat Indo. OW 13.4 12.6 10.8 3.5 3.7 3.9 3.90 3.66 3.07 NA NA NABank ing 15.6 13.4 10.9 3.8 3.6 4.0 2.47 2.25 2.02 NA NA NA

Indocement OW 20.9 16.3 12.3 0.2 1.4 1.8 2.75 2.68 2.29 11.0 9.9 7.7Semen Gresik N 14.7 14.9 13.3 1.6 3.4 5.0 3.31 2.99 2.79 7.4 7.1 6.7Bui ldi ng mater ial 17.3 15.6 12.8 0.9 2.4 3.4 3.00 2.83 2.52 9.0 8.4 7.2

Gudang Garam UW 9.5 15.7 11.0 5.4 5.4 3.2 1.36 1.35 1.25 6.5 8.0 6.8Indofood OW 72.1 18.1 15.1 4.1 0.5 2.2 2.08 1.88 1.74 7.1 5.9 5.6Kalbe Farma OW 18.7 15.8 13.6 0.2 0.0 1.8 5.10 3.84 3.16 3.0 2.9 2.5Matahari UW 10.0 13.5 19.5 1.8 3.3 2.4 1.07 1.05 0.68 5.9 5.4 4.3Ramayana UW 18.4 17.9 16.1 3.8 3.9 4.4 3.15 2.99 2.83 12.3 11.3 10.8Unilever N 22.4 19.9 17.1 4.7 4.7 4.7 14.83 14.23 12.27 15.3 13.7 11.7Cons umer 17.1 17.6 14.5 4.0 3.6 3.6 3.06 2.88 2.53 7.1 6.9 6.1

Astra International OW 7.1 10.3 7.6 4.4 4.2 2.9 1.90 1.77 1.53 5.9 8.4 6.3Bakrie Brothers OW 11.0 11.1 9.2 0.2 0.6 0.9 1.10 0.98 0.90 6.6 3.9 3.1United Tractors OW 15.2 15.2 11.6 0.7 2.0 2.0 3.89 3.41 2.78 7.5 6.1 5.3Industr ial 8.6 11.4 8.5 3.1 3.3 2.5 2.07 1.90 1.64 6.3 7.0 5.6

Astra Agro Lestari OW 16.6 16.3 15.2 1.9 3.9 1.8 5.01 4.39 3.72 9.3 9.0 8.0Bakrie Sumatra UW 21.6 13.1 12.6 0.0 0.8 1.3 5.08 3.78 3.02 8.9 7.5 7.5Bumi Resources N 13.2 5.4 20.9 0.6 24.1 0.0 8.71 1.01 0.96 5.5 0.5 32.3Energi Mega OW 32.1 21.3 11.9 0.0 0.0 0.0 14.37 4.78 3.38 21.5 10.3 6.9

INCO Indonesia N 8.1 7.3 10.4 5.5 2.4 4.2 1.70 1.42 1.32 1.4 1.2 1.3London Sumatra N 13.8 13.4 11.0 0.0 1.7 2.2 4.36 3.54 2.89 10.6 8.2 7.0Medco Energi OW 17.5 9.6 6.0 2.4 2.0 4.0 2.22 1.88 1.52 2.1 1.7 1.7Peru. Gas Negara UW 62.3 34.8 23.5 0.6 0.9 1.5 12.30 9.75 7.65 5.5 4.8 2.7Tambang Bukit Asam N 16.0 11.6 12.2 2.6 3.1 4.3 3.66 3.05 2.72 1.2 0.9 0.8Resou rces 19.0 12.6 13.9 1.6 4.3 2.1 4.53 2.68 2.36 3.5 2.7 2.4

Excelcomindo UW -57.2 33.5 92.4 0.0 0.0 0.0 1.05 0.98 0.92 10.5 8.8 7.7Indosat OW 13.8 11.2 11.4 3.6 4.0 4.4 1.57 1.46 1.37 3.1 2.9 2.7PT Telkom N 18.8 11.9 11.2 3.1 4.8 7.2 6.45 5.57 5.16 4.9 3.9 3.6Telecommunic ation 20.1 12.4 12.1 2.9 4.3 6.3 3.62 3.25 3.03 4.7 3.9 3.6

JPMorgan universe* 16.3 13.2 11.8 3.0 3.9 4.0 3.06 2.60 2.33 4.8 4.1 3.6Source: Bloomberg, company reports and JPMorgan estimates based on closing prices as of 31 July 2006. Note: *JPMorgan Indonesia universe account for 74% of JCIs market capitalization and77% of the market totals turnover.


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Appendix III: The mostattractive in our universeTable 11: Top five lowest P/E-to-growth

FY06E FY06-08E EPS P/E-toP/E (x) CAGR (%) growth (x)

Bank Niaga 6.9 34.2 0.20Danamon 17.4 60.2 0.29Bakrie Broth. 11.1 37.5 0.30Astra Intnl 10.3 31.2 0.33Bukit Asam 11.6 28.8 0.40Source: JPMorgan estimates.

Table 12: Top fi ve lowest EV/EBITDA-to-growth

FY06E EV/ FY06-08E EBITDA EV/EBITDA-toEBITDA (x) CAGR (%) growth (x)Bukit Asam 0.9 24.6 0.04P Gas Negara 4.8 58.8 0.08Energi Mega 10.3 64.1 0.16Kalbe Farma 2.9 16.2 0.18Bakrie Broth. 3.9 22.0 0.18Source: JPMorgan estimates.

Table 13: Top five highest dividend yield

FY07E dividend yield (%)PT Telkom 7.2Bank Danamon 6.2Semen Gresik 5.0Unilever 4.7Bank Central Asia 4.5Source: JPMorgan estimates.

Appendix IV: The leastattractive in our universeTable 14: Top five highest P/E-to-growth

FY06E FY06-08E EPS P/E-toP/E (x) CAGR (%) growth (x)

Indosat 11.2 -1.8 -6.29Medco Energi 9.6 -4.8 -2.00Excelcomindo 33.5 -34.9 -0.96Matahari 13.5 -17.2 -0.79INCO Indo. 7.3 -48.0 -0.25Source: JPMorgan estimates.

Table 15: Top five high est EV/EBITDA-to-growth

FY06E EV/ FY06-08E EBITDA EV/EBITDA-tEBITDA (x) CAGR (%) grow th (x)Semen Gresik 7.1 5.5 1.28Indofood 5.9 2.7 2.19Bakrie Suma. 7.5 2.2 3.39INCO Indo. 1.2 -13.9 -0.09Bumi Resour. 0.5 -90.9 -0.01Source: JPMorgan estimates.

Table 16: Top five lowest div idend yield

FY07E dividend yield (%)Bakrie Sumatra 1.3Bakrie Brothers 0.9Bumi Resources 0.0Energi Mega Persada 0.0Excelcomindo Pratama 0.0Source: JPMorgan estimates.


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Companies Recommended in This Report (all prices in this report as of market close on 01 August 2006)Astra International (ASII.JK/Rp9,900/Overweight), Bank Danamon (BDMN.JK/Rp4,525/Overweight), Bank Rakyat

Indonesia (BBRI.JK/Rp4,375/Overweight), Indofood (INDF.JK/Rp1,060/Overweight), Medco Energi(MEDC.JK/Rp3,775/Overweight), PT Telekomunikasi (TLKM.JK/Rp7,650/Neutral)

Analyst Certification:The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarilyresponsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, withrespect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this reportaccurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the researchanalysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by theresearch analyst(s) in this report.

Important Disclosures

Client of the Firm: Astra International is or was in the past 12 months a client of JPMSI. Bank Danamon is or was in the past 12months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-relatedservice and non-securities-related services. Bank Rakyat Indonesia is or was in the past 12 months a client of JPMSI; during the past12 months, JPMSI provided to the company non-securities-related services. Indofood is or was in the past 12 months a client of JPMSI. Medco Energi is or was in the past 12 months a client of JPMSI. PT Telekomunikasi is or was in the past 12 months a clientof JPMSI.

Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investmentbanking services in the next three months from Astra International, Bank Danamon, Bank Rakyat Indonesia, PT Telekomunikasi.

Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services otherthan investment banking from Bank Danamon. An affiliate of JPMSI has received compensation in the past 12 months for productsor services other than investment banking from Astra International, Bank Danamon, Bank Rakyat Indonesia.

MSCI: The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without priorwritten permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated orused to create any financial products, including any indices. This information is provided on an 'as is' basis. The user assumes theentire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing orcompiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitnessfor a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of

its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damagesof any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates.

Price Charts for Compendium Reports: Price charts are available for all companies under coverage for at least one year through thesearch function on JPMorgan's website https://mm.jpmorgan.com/disclosures/company or by calling this toll free number (1-800-477-0406).

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:JPMorgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform theaverage total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelvemonths, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] The analyst or analysts teams coverage universe is the sectorand/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Rizal B. Prasetijo: Bank Central Asia (BCA) (BBCA.JK), Bank Danamon (BDMN.JK), Bank Pan Indonesia (Panin)(PNBN.JK), Bank Rakyat Indonesia (BBRI.JK), Ciputra Surya (CTRS.JK), PT Bank Mandiri Tbk. (BMRI.JK)
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JPMorgan Equity Research Ratings Distribution, as of July 3, 2006

Overweight(buy)

Neutral(hold)

Underweight(sell)

JPM Global Equity Research Coverage 42% 40% 18%IB clients* 44% 47% 37%

JPMSI Equity Research Coverage 38% 47% 15%IB clients* 62% 57% 47%

*Percentage of investment banking clients in each rating category.For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating fall s into a holdrating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent JPMorgan research report for an analysis of valuation methodology and risks on anysecurities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on thefront of this note or your JPMorgan representative.

Analysts Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon

various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, whichinclude revenues from, among other business units, Institutional Equities and Investment Banking.

Other Disclosures

Options related research: If the information contained herein regards options related research, such information is available only to persons whohave received the proper option risk disclosure documents. For a copy of the Option Clearing Corporations Characteristics and Risks of Standardized Options, please contact your JPMorgan Representative or visit the OCCs website athttp://www.optionsclearing.com/publications/risks/riskstoc.pdf.

Legal Entities DisclosuresU.S.: JPMSI is a member of NYSE, NASD and SIPC. J.P. Morgan Futures Inc. is a member of the NFA. J.P. Morgan Chase Bank, N.A. is amember of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is amember of the London Stock Exchange and is authorised and regulated by the Financial Services Authority. South Africa: J.P. Morgan EquitiesLimited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific)Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong.Korea: J.P. Morgan Securities (Far East) Ltd, Seoul branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. MorganAustralia Limited (ABN 52 002 888 011/AFS Licence No: 238188, regulated by ASIC) and J.P. Morgan Securities Australia Limited (ABN 61003 245 234/AFS Licence No: 238066, a Market Participant with the ASX) (JPMSAL) are licensed securities dealers. New Zealand: J.P. MorganSecurities New Zealand Limited is a New Zealand Exchange Limited Market Participant. Taiwan: J.P.Morgan Securities (Taiwan) Limited is aparticipant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Commission. India: J.P. MorganIndia Private Limited is a member of the National Stock Exchange of India Limited and The Stock Exchange, Mumbai and is regulated by theSecurities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand andis regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is amember of the Jakarta Stock Exchange and Surabaya Stock Exchange and is regulated by the BAPEPAM. Philippines: This report is distributedin the Philippines by J.P. Morgan Securities Philippines, Inc. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de ValoresMobiliarios (CVM) and by the Central Bank of Brazil. Japan: This material is distributed in Japan by JPMorgan Securities Japan Co., Ltd., whichis regulated by the Japan Financial Services Agency (FSA). Singapore: This material is issued and distributed in Singapore by J.P. MorganSecurities Singapore Private Limited (JPMSS) [mica (p) 235/09/2005 and Co. Reg. No.: 199405335R] which is a member of the SingaporeExchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A.,Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by

JPMorgan Securities (Malaysia) Sdn Bhd (18146-x) (formerly known as J.P. Morgan Malaysia Sdn Bhd) which is a Participating Organization of Bursa Malaysia Securities Bhd and is licensed as a dealer by the Securities Commission in Malaysia

Country and Region Specific DisclosuresU.K. and European Economic Area (EEA): Issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment researchissued by JPMSL has been prepared in accordance with JPMSLs Policies for Managing Conflicts of Interest in Connection with InvestmentResearch which can be found at http://www.jpmorgan.com/pdfdoc/research/ConflictManagementPolicy.pdf. This report has been issued in theU.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion)Order 2001 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are notrelevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engagedin only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) intheir home jurisdiction Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd. Frankfurt Branch and JPMorgan ChaseBank, N.A., Frankfurt Branch who are regulated by the Bundesanstalt fr Finanzdienstleistungsaufsicht. Australia: This material is issued anddistributed by JPMSAL in Australia to wholesale clients only. JPMSAL does not issue or distribute this material to retail clients. Therecipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the
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purposes of this paragraph the terms wholesale client and retail client have the meanings given to them in section 761G of the CorporationsAct 2001. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of theHong Kong Code of Conduct for persons licensed by or registered with the Securities and Futures Commission. (For research published withinthe first ten days of the month, the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong)Limited is the liquidity provider for derivative warrants issued by J.P. Morgan International Derivatives Ltd and listed on The Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk/prod/dw/Lp.htm. Korea: This report may havebeen edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul branch. Singapore: JPMSI and/or itsaffiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holdingis disclosed in the Legal Disclosures section above. India: For private circulation only not for sale.

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorganChase & Co. or its affiliates and/or subsidiaries (collectively JPMorgan) do not warrant its completeness or accuracy except with respect to anydisclosures relative to JPMSI and/or its affiliates and the analysts involvement with the issuer that is the subject of the research. All pricing is asof the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of thismaterial and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer orsolicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individualclient circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies toparticular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instrumentsmentioned herein. JPMSI distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic

updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any otherpublicly available information. Clients should contact analysts and execute transactions through a JPMorgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

Revised July 3, 2006.

Copyright 2006 JPMorgan Chase & Co. All rights reserved.


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