December 28, 2010

2011 Global Ideas

Thoughts, Themes & Ideas
(Sales View Only)

Nick Savone
(212) 761-5300
Nick.Savone@morganstanley.com

This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan
Stanley research department. Please refer to important information and qualifications at the end of this material. The information contained herein is does not constitute advice. Morgan
Stanley is not acting as your advisor (municipal, financial, or otherwise) and is not acting in a fiduciary capacity.

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A Quick Introduction
As I step back and reflect on 2010 and Look forward to 2011, I take one thing away from 2010 “The Unexpected
Happened”, just when it seemed that the Euro would implode, it finished the year basically flat; just when it seemed that
Developed Markets would be massive laggards, the US outperformed the Hang Seng & Shanghai Composite; just when
10 yr rates were expected to gap higher they trended lower and then ultimately moved higher into YE, finishing still
c30bps below where we started. The list goes on, from the “expected” contraction in earnings that never came to
fruition, to the rolling over of the US Consumer that everyone was waiting for; 2010 was a year of surprises indeed.

Structural Growth and Cyclical recovery were the best themes from the Long Side. While EM was a prevailing
theme, the best names to play it were often US or European Ideas that provided EM growth at a reasonable valuation
with “best in class” management teams. As we enter 2011, hard to see this trend abate. The consensus view of owning
names like Apple, BMW or PPR while continuing to position for EM growth and US recovery look sensible, but I do fear if
the China story, the engine of such recovery and structural bullishness derails, we may see a disappointed consensus.
This is the big risk in my view for 2011.

If one looked at the results across asset classes, 2010 would give the impression that it was a “boring” year, with most
asset class returns between 10% & 20% and the VIX closing on its year lows. 2010 was anything but boring as
demonstrated by the daily headlines around the European Sovereign challenges to growing Regulation & Political reach
across industries to QE and Stimulus in DMs vs inflation fighting in EMs. It was a constant state of uneasiness – a
tenuous balance between the notion that we as globalized economies can muddle through to grow our way out of the
2008 crisis vs the state of fear around double dip as jobs and housing in the US struggled to improve.

In this presentation I attempt to provide my views on several Thoughts, Themes & Ideas Globally for 2011. I
seek to offer some context around ideas (i) that I think we as a firm have a unique edge on or (ii) where I have a
differentiated perspective or (iii) ideas that may be non-consensus with a good risk/reward around valuation. I go
through many items, including the Macro as well as Regional specific challenges & opportunities with a constant focus
on single stock ideas. I provide detail around 27 Global Stock Ideas (18 Longs & 9 Shorts) that I want to be positioned in
through 2011. As with years past, I look forward to discussing & debating with you.

Best of Luck for a Profitable 2011 – Nick Savone

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Table of Contents

Global View: A Recap of 2010 – the Battle between Macro and Micro (slide 4)

Global View: Themes for 2011 (slides 5 & 6)

Regional Equity Market Themes (US, Europe, Japan & GEMs) (slides 7 – 11)

Global Asset View: Cross Asset Themes (FX, Credit, Rates & Commodities) (slides 12 - 14)

Single Stock Ideas – Global Longs & Shorts (18 Longs & 9 Shorts) (slides 15 - 44)

____________________________________________________________________________________

Appendix

A Continued Focus: Tail Risk Hedging and Ways to Play It (slide 46)

Margin Squeeze Basket – A Short Theme worth Implementing (slides 47 & 48)

Global Conferences in 1H2011 (slide 49)

Disclaimer on Slides 50 & 51

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2010 – The Year that was…..
The Battle between Macro and Micro – The bears who held the view of “sovereign debt and deficits are too much
to absorb” lost out to the bulls view of “corporate balance sheet strength and Earnings strength”. QE2 became the
ultimate driver of the market in Q4 as “Don’t fight the Fed”, was the clear mediator bw Macro & Micro debate.

Differentiation Came to Forefront -- 2010 was a year of Massive Sector and Single Stock dispersion. Stock
picking mattered and this was reflected in performance on the investor side.

Corporate and Investor Confidence – This started to rear its head as Corporates started to open up their wallets
in 2H’10 with buybacks, divis and M&A picking up. Capex & Hiring were still waning – this would be the next
evolution to a “real” recovery. Meanwhile, investors added to gross and net exposure and took advantage of a
healthy calendar of transactions. The appetite here was firm right through to year end.

Most Assets Classes Generally made Money – Credit took the lead but equities caught up to some degree as
we ended the year. Commodities, High Yield, EM, DM, Treasuries, etc – most made money but correlation did
break down as we saw clear winners and losers – ie The PIIGS lived up to their name while large cap low growth
DM equities lagged – reinforcing the differentiation within asset classes.

Tail Risk Hedges helped the Cause – In a year when being short over levered or structurally challenged
companies was often a losing proposition – Tail Risk Hedges added value – whether it was currency overlays, Gold
Long, Index options, etc – it was sensible and was rewarding to pay away premium or position oneself here as
Macro concerns did take the lead in global markets in May / June and in early November.

Regulation and Macro Concerns did have a Dragging Impact – this was manifested in the financials which were
laggards globally given the Sovereign headwinds as well as regulation uncertainty.

Inflation Debate – in 2010 we saw commodities lead – the big debate was whether this was inflation driven or as a
result of true growth? As we see 10 yr yields gap out into 2011, this debate rages on. QE has been a massive
stimulus in 2010, used to fight deflation. Whether we like it not, the FED has done its job and real assets are rising
in value, whether this is an indicator of growth or the beginning of an inflationary spike is still left to be seen as we
enter 2011. Positioning along these lines will be a Big Opportunity in 2011. Watching crude prices will be interesting.
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Key Investment Themes for 2011 – Part I
Search for Yield (but you need Growth) – Corporates globally are awash with record levels of cash. We’ve seen a sharp pickup
in M&A activity through 2H10 and a number companies announcing large buybacks and reinstating dividends recently. With the
expected return on a number of credit instruments near record lows. I still believe in Yield + Growth as a theme, offering a sweet
spot in this market -- When companies like Infineon are starting to offer Dividends and see continued Rev and Ebit growth, the
market stands up and takes notice. I prefer to be Long of companies with solid dividends (2-5% yields) AND strong earnings
growth (5-15% EPS growth). These Companies also need to exhibit operational scale and/or pricing power.

Ideas -- IBM, Diageo, Nestle, Microsoft, National Grid, Home Depot, H&M, Reckitt & Target

Tail Risks – hedge when you can, not when you have to. I continue to see this as a central theme in 2011. There will be periods
of extreme market volatility as ongoing issues (e.g. EU Sov Debt crisis) and unexpected ones (e.g. tensions between North and
South Korea) periodically rear their ugly heads. Take advantage of attractive hedging opportunities whenever possible as the cost
of insuring eases after moments of market stress. VIX hitting year lows as we get to pre-Lehman levels in the mkt is telling.

Ideas – Long USD, Stock replacement strategies, Basket Hedges (better than ETFs) & Inflation Puts

The Year of Reckoning & Structural Challenges – a system awash with liquidity from globally coordinated easy monetary policy
has allowed companies and sovereigns alike to push serious lingering questions about solvency and debt sustainability down the
road. 2011 could be the year when these finally come to a head. Markets could test the EU stop gaps put in place this year as
austerity and budget constraints hurt demand and underlying consumer / economies. Furthermore, business models that have
been under duress but have managed costs well and maintained some share, will see real winners continue to eat away at
challenged business models.

Ideas – German CDS (The Rule of One), Buy VOL (Vix back to lows) & Short Structurally Challenged Cos (Dell, Deutsche
Post, Yell, Game Group, OPAP, Regal, Brinker, Lexmark, Alcatel, Dreamworks, Capita, Electrolux, Disney & Logitech)

Megatrends – MS has put together some truly differentiated work on a number of themes, including our “China Files” series,
Preparing for a Petrochems Supercyle, Solvency 2, Brazil Infrastructure and India vs. China. I believe we have an edge here and
it’s worth paying attention given the level of detail we have developed these theses around.

Ideas – Adidas, Yum, Lyondell, BASF, Potash, Statoil, Larsen & Toubro, HDFC Bank, Wynn & DOW

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Key Investment Themes for 2011 – Part II
Secular Growth – Our QDS team has looked at historical performance in various fundamental scenarios and their work showed
growth stocks tend to outperform in the current “slowdown” scenario –low/moderate (positive or negative) EPS revisions, and a
flattening yield curve. MS has identified our best secular growth stocks in the US, Europe & Japan, independent of any valuation
or rating considerations. The stocks they selected should have double-digit EPS growth almost regardless of the general
economic environment. This has been one of the key underlying themes that started in 2H’10 – it will continue in 2011.

Ideas - Intuit, Chipotle, Netflix, Visa, Burberry, Richemont, BUD, Novo Nordisk, Hitachi Metals, Allergan & Softbank.
Other names here are Weatherford, Givaudan, Amadeus, BMW, LVMH & Diageo

Inflation Debate – this continues to drive markets and will be important to identify winners and losers. While some of the obvious
sectors on the long side are Property and Energy, I am focusing as well on potential shorts that will get margins squeezed from
rising input costs. For example, DM retailers are facing ~10% input cost inflation in spring-summer 2011, with cotton prices
spiking and minimum wage increases in China. There hasn’t been inflation in this market in ~20 years, consumers response here
is unknown. Booming EM growth also pushing up costs for cement players like Holcim to the tune of 5-10% for 2011 while large
capacity additions will make it difficult to pass on.

Idea – The MS Margin Squeeze Basket – See Slides 47 & 48 in this packet to review

Tech and Mobile Internet - Innovation and the Customer Experience will be the Ultimate Differentiators - Winners include -
AAPL - consensual but too many positives to ignore, ARM - signs remain good they stay well ahead of Intel on mobile. The rise
of smartphone and tablets is only starting – Sandisk and Imagination look interesting apart from the more obvious plays
previously mentioned. I am still short Ericsson and Alcatel despite bullish mobile data growth assumptions – Competition
remains fierce from Huawei/ZTE in China and the smaller US players. EM + Internet – While obvious, this is not going away
(Ctrip, Tencent & DangDang) are structurally sound. Other stocks to avoid - Logitech - doing the right thing in building a new
mkt, but see risks in decline in the old ones first with PC peripherals weak, Dell - PC exposure looks challenged structurally.

Event / Catalyst Driven Ideas back en vogue – We started to see this in 2010 with names like Accor in Europe and Autozone in
the US outperforming. As we enter 2011, balance sheet strength coupled with management teams’ focus on top line growth and
operating leverage will lead to more M&A, spin-outs, buybacks, dividends and balance sheet optimization.

Ideas – Lowe’s, Fiat, TNT, Motorola, Tesoro, Whitbread, Cablevision, Ladbrokes, Parmalat, Carrefour & Thyssenkrupp

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Regional Themes for 2011 – MS Views At A Glance
Japan: Cheapest market globally on cyclically adjusted earnings. Tightening in major EM economies could redirect attention
toward Japan as EM longs are reduced. A series of catalysts in 2011 that we see as potential “game changers” for the Japanese
investment case could turn investor sentiment from what we perceive as extreme pessimism. c20% upside to our Topix PT.

Asia Pacific: GDP growth deceleration, input cost inflation, and monetary policy tightening signal caution in 2011. We are more
focused on dividend yield and value plays (history suggests this is the moment these names begin to outperform). China is on the
verge of a critical “megatransition” from production-led to consumption-led growth; we advocate single stock ideas along this
theme. c20% upside to our MSCI EM PT. The debate between India and China, on who will lead the way through the next
decade will be at the forefront of many discussions.

Europe: we expect continued volatility as “reconciliation” of lingering sovereign debt issues will continue to drive equity markets in
2011. Input cost inflation will be a headwind to somewhat optimistic consensus forecasts for earnings profitability in 2011. We are
buyers of names in sectors and industries with strong pricing power. We continue to advocate longs in companies who offer
exposure to structural growth in GEMs at more attractive valuations than local incumbents. Over 10% to our MSCI PT.

USA: Growth estimates lifted by passing of tax bill and we expect company earnings to reach normalized levels. We look for PE
expansion as rates remain low and subdued growth drives a thirst for riskier assets with higher yields. Growth companies with
international exposure may be best poised for the mid-cycle rally. Higher oil prices will dampen negative effects of strengthening
USD on the equity markets. No official house PT, but stocks can see high single-digit growth.

My view: In a world of increased globalization, a company’s regional revenue source and product / strategy differentiation
will matter much more than where said company is domiciled. Cross border M&A has already started to happen just as
companies are becoming more confident with their business strategies – watching for incremental events around balance sheet
optimization as well strategy around divestitures and M&A will be key areas for me to focus on Globally.

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Global View: Regional Themes for 2011 - Japan
2010 was a year that began with the hope that “this time it’s different” in Japan as the Nikkei/Topix was one of the best
performing markets globally in Q1, ended with continued investor skepticism as many of Japan’s structural and cyclical issues
resurfaced. So in fact it wasn’t different at all – maybe 2011 will finally be that year? There are some compelling arguments
for Japan that should be respected.

MS 2011 outlook

Japan is the cheapest market globally. Our dividend discount model puts Japan 25% below fair value. Our CAPE analysis
(looks at net profits on an operating basis as opposed to reported earnings) shows that Japan is the cheapest market in the
world. The TOPIX trades on 13.2x cyclically adjusted earnings vs MSCI China and India on 28.6x and 29.2x respectively.

Japan is under-owned. Dividends paid in 2010 will be record highs (twice 2009 levels).

Growth: we forecast EPS growth of 17-20% in 2011 (IBES cons forecasts 18%) and 15-20% in 2012 (cons f’casts 13% in
2012). Top line should grow by 1.9% in 2011 and 2.2% in 2012.

Q2 earnings beat in 35% of cases with 60% raising FY guidance. 30 years of historical data suggests that when Japanese
companies revise FY Profit at 1H yr, 80% go on to beat in March.

Tightening in major EM economies could redirect attention toward Japan as EM OWs are reduced and investors recognize
the comparative value in Japanese equities.

My view: Companies will be faced with many headwinds in 2011 - uncertainty surrounding domestic policy, demand waning,
and a currency looking overvalued. I therefore look to buy companies with strong management teams and a more global
revenue stream. The Yen may be the ultimate opportunity set for Japan, as many of its best companies are outwardly
facing, providing for some potential rewarding equity returns.

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Global View: Regional Themes for 2011 - Europe
2010 was a macro dominated year as sovereign debt and deficit concerns rocked European markets in May, only to have
core countries shrug it off post-summer and continue to break to new highs by year end. The Germans and Nordics were the
bright spots in Europe, while the PIIGS lived up to their nickname as the region’s major underperformers as we close out the
year. Ironically, questions are left just as unanswered now as they were a year ago. The line in sand continues to be Spain,
but given the recent headlines around France’s credit rating – this line may be crossed.

We saw the market reward and re-rate growth (EM via DM was consensus but worked all year), with industrials, consumer
discretionary and materials the standout sectors for 2010.

MS 2011 Outlook

In 2011, we expect another year of double-digit EPS growth in European equities. The ultimate battle of Macro vs Micro
is being fought in Europe. With margins near peak, there are several headwinds, but….

European companies have increasingly become international, as much of their earnings are now a play on the growth of the
global economy. To illustrate this relationship, if we apply our estimated GDP growth rate of 2.8% to the relationship between
European real GDP growth and EPS growth, it suggests companies in Europe can grow EPS by 15% in 2011 & 2012.
Our base case assumes a MSCI Europe target is 1250.

Going back to my “Thirst for Yield & Asset Allocation” theme from 2010, its interesting to note that European equities offer a
3.8% dividend yield compared to average bond yields of 3.4%, a spread not seen since the 1930s. Equity risk premiums to
credit are also at its highest levels in over 10 years.

Even if consensus estimates seem to bullish here, in years where estimates have been downgraded, equities have risen
over two-thirds of the time.

My view: Europe has seen massive differentiation with Germany and the Nordic region outperforming. In 2011, I believe that
the EU will live and die together here, we will see a convergence around the Macro. Therefore, I like German CDS as a tail
hedge, just as all periphery spreads narrowed to Germany over the last decade, we may see the inverse happen as the “tail
starts to wag the dog”. This will not be good for the Euro clearly but in doing so will provide again the opportunity for
Globally facing companies in Europe to shine yet again.

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Global View: Regional Themes for 2011 - USA
2010 was a year epitomized by cyclical recovery and differentiated valuation for growth as we saw names like Wynn,
Caterpillar, Netflix, Saleforce.com, Ford and Family Dollar lead the way. Earnings growth exceeded expectations and
margins hit near record highs as US companies managed costs exceptionally well. Ultimately, this has caused the “jobless”
recovery we have seen thus far as Corporate America is fearful to hire or spend aggressively until confidence around a sustainable
recovery or around the rules of the game are clarified. Given the changes in Congress coupled with the monetary positioning from
the FED, we witnessed a constant battle in the US between flickers of improvement & bouts of inertia.

2011 Outlook (No Official View from MS Strategy as we have not launched with our New Strategist yet)

US earnings in 2011 are expected to continue upon their current path with S&P 500 EPS ests of $95 (13% above 2010) – this
would be a peak EPS level – ultimately the question resides around the multiple on this. In a world where rates remain low and
“the powers that be” want to inflate it seems sensible to note that a 15X multiple (average of the last two decades is sensible – this
would put us at over 1400 on the S&P.

One driver of US equity markets in 2010 was a reversal of the early strength in the USD; in 2011 we expect the dollar to
strengthen, especially against the euro, as macro improvement continues upon the recent course we have seen in Q4 of 2010.

Lower growth expectation across several asset classes coupled with existing low rates will incent investors to seek higher
yielding or growing assets; in the US, under this scenario, equity returns can be in the high single-digit range and dividend payout
ratios and share buyback will provide for an enhanced return even in a scenario where 2011 S&P estimates are not met.

My view: The US has seen many investors turn bullish since QE2, this in of itself is telling given where consensus was 1 year ago
in the US. Nevertheless, I believe there are ample opportunities in the US around catalyst driven ideas. Where I am skeptical is
with respect to economically sensitive companies that benefit from expanding monetary policies. My concern remains around US
Jobs and Housing. One could argue that we have bottomed and the worst is behind us as we slowly improve from what has been
a massive shock to the system. While a counterpoint is that the excess capacity in the system is too enormous a task that will
require years of de-leveraging to the system creating an environment of slow growth. This will be a Key Debate for 2011.

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Global View: Regional Themes for 2011 – Emerging Markets
The MSCI EM and MSCI Asia Pac Ex Jpn traded to its highs in early November and finished the year close to ~5% off their
peak. GDP growth was roughly in line with expectations; however, inflation rose faster and has yet to peak. It was also a
strong year for EPS which grew by 40% on average for both EM and APxJ. Consumer Discretionary was the best performing
sector (+1400 bps vs EM). Financials outperformed in Brazil, Indonesia and India but not in China. Energy, Utilities, IT and
Telecoms all underperformed while Cons Stap outperformed. Asean (inc Malaysia), Turkey and smaller Latam markets
outperform while China underperformed. More broadly, China passed a critical $7,000 PCI milestone with important
implications for the likely future pace of economic development.

Our 2011 outlook

We are less bullish on the outlook for Asia / EM equities than consensus. We forecast 12.7% EPS growth in 2011 for MSCI
EM (IBES cons f’casts 16.7% EPS growth), and 13% EPS growth for APXJ (cons f’casts 15.5% growth)

We as a house continue to see outperformance for EM equities vs DM, but by a smaller margin (250-500bps)

Our Econ team forecasts a GDP deceleration for EMs as a whole to 6.4% from 7.3% in 2010. Latam will decelerate to 4.1%
vs 6.3% in 2010, APxJ is forecast to growth 7.9% vs 9.0% in 2010, and EEMEA will remain broadly flat at 3.7% growth vs 3.8%
this year.

Inflation is a growing concern We project a peak in inflation in the early summer of 2011 at levels not far above the peak in
the 2003/04 cycle. We project inflation in APxJ (and excluding India) to average 4.2% in 2011 from 3.1% in 2010 and 0.1% in
2009. PPI (input price inflation) has been rising faster than CPI (end market consumer price infl) in recent months in most
Asia/EM geographies. This observation has been associated with major earnings growth deceleration in the past.

Monetary policy – tightening phase. Our GDP-weighted pan-EM policy rate indicator is f’casts to increase to 6.6% by end
2011 from a 5.3% trough in March 2010.

My view: China is a risk and that worries me. The policies in China have so far been executed in a maestro-like manner. I fear
that any slip up here can be compounded as so much has never been riding on the shoulders of one country (the recent
announcement on Christmas Day is just another example of the risks here around policy in China). Russia remains the
forgotten BRIC member that looks interesting to me as consumers strengthen, valuations are cheap and its economy is more
levered than most to commodity prices and has yet to show its true capability.
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Cross Asset View: Themes for 2011
Support for risk on / risk off investing is beginning to fade as cross-asset correlations falls.
While we are still relatively constructive on risky assets in the new year, we warn that the
downside risk is significant and upside may be challenged by structural issues.

Key themes driving our cross-asset calls

As tail risk is dampened, the recovery continues to gain traction, and cross-asset
correlation breaks down Risk on/Risk off investing will lose its luster in 2011

Global rebalancing between EM and DM is propelling recovery, inflation could disturb this

As I wrote in my last 3 yearly European Outlook piece, the PIIGS still “just won’t go away”.
Ireland will continue to pose contagion risk, Portugal may follow in their footsteps due to
structural problems and head to the EFSF, and Spain will have to aggressively address their
Banks. France is now on the radar, “slow train wreck” – watch German CDS

Politicization of economic decisions is a risk; chance of policy error high

We are in the early-cycle recovery in DM and the mid-cycle in EM; this dynamic will be
interesting to watch – China holds the Key here for the World weather we like or not

While we still favor EM over DM, but the tightening in EM in 1H11 could allow DM to climb
higher by the end of 2011; favor lower beta here

As a house, we believe Commodities will lead over all assets, and we prefer real over
nominal assets as protection from higher inflation

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Cross Asset View: Themes for 2011 (continued)
Commodities

We think there is good risk/reward in being long crude; supply-side fundamentals may
drive prices up to ~$100/bbl in 2011; higher OPEC production is the catalyst (reduces
spare capacity)

Keep gold as a hedge if USD comes under pressure, as inflation rises, and reduced
official sector sales become increasingly evident; own palladium for risk

Positive demand coupled with supply/inventory differentials of all LME metals is key to
returns – Vol on the other side given Commodities, for better or worse, are consensus is
something worth considering for those who want to hedge cheaply

China’s production/consumption cycle should drive coal and iron ore. Due to deficit
markets we also like copper, tin, and nickel and would steer away from aluminum and zinc
exposure

Metals and raw materials, while rallying because of a weakened USD, should grind
higher if the global manufacturing sector continues to strengthen, as shown in the latest
set of PMI numbers

Natural Gas is over-supplied; high inventory and active drilling

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Cross Asset View: Themes for 2011 (continued)
FX

Near-term upside risks for higher-beta currencies in the G10 because of a rebounding
global economy and the Fed’s easing - our preferred currencies CHF, GBP, and SEK

Problems in the periphery will not have a lasting effect on the EUR/USD relationship. US
economic data will outperform German data and 2011 should mark the final stages of the
USD weakness.

GBP is an interesting play here, especially against the euro, as we think QE
expectations aren’t priced it; short-term GBP could benefit with the rest of the G4

Canada leads in growth rate differentials; we like CAD, esp. against EUR/JPY

EM banks more accepting of rising currency as growth remains high; we see +6% for
EM basket in 2011

Credit

We have a positive outlook for DM credit as a low growth/low return environment keeps
it in a relatively favorable spot (We are OW US and Asia)

We like higher beta in the US because of growth prospects; unusual degree of interest
duration, so leverage over duration is key (Long IG and HY Corp Credit)

We like financials here as companies repair balance sheets, especially in Europe

Positive technicals include fund flows and smaller net supply; headwinds in Asia include
fully invested investors and positive supply

Worst
case scenario priced into non-agency RMBS; limited downside, good upside of
+10-15%

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 Single Name Stock Ideas

Longs Shorts
Company Name Region Company Name Region
Amadeus Europe Capita Group Europe
BP Europe China Merchants Bank Asia
CNInsure Inc Asia Eisai Japan
FIAT Europe Hewlett-Packard US
Health Net Inc. US Hitachi Japan
Kawasaki Kisen Japan Holcim Europe
KKR US Logitech Europe
Komatsu Japan Regal Entertainment Group US
Li Ning Asia Spirit AeroSystems US
Monsanto Company US
Motorola Mobility US
POSCO Asia
Sberbank EEMEA
SJM Holdings Asia
UBS Europe
Valero Energy Corporation US
Visa Inc. US
Zions Bancorp US

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Longs
Ticker Company Name Stock rating Upside Market Cap Region

AMS SM Amadeus Overweight 35% $9.0bn Europe

BP / LN BP Overweight 45% $137.0bn Europe

CISG US CNInsure Inc Overweight +100% $814mm Asia

F IM FIAT Overweight 25% $24.5bn Europe

HNT US Health Net Inc Equal-Weight 30% $2.6bn US

9107 JP Kawasaki Kisen Overweight 40% $3.3bn Japan

KKR US KKR Not-Rated 30% $10.0bn US

6301 JP Komatsu Overweight 40% $28.8bn Japan

2331 HK Li Ning Equal-Weight 50% $2.3bn Asia

MON US Monsanto Company Overweight 30% $36.4bn US

MMI US Motorola Mobility Not-Rated 25% $8.2bn US

005490KS POSCO Overweight 30% $32.8bn Asia

SBER RU Sberbank Overweight 25% $74.8bn EEMEA

880 HK SJM Holdings Overweight 25% $7.1bn Asia

UBSN VX UBS Overweight 25% $56.7bn Europe

VLO US Valero Energy Corporation Equal-Weight 20% $12.7bn US

V US Visa Inc Overweight 65% $47.4bn US

ZION US Zions Bancorp Overweight 35% $4.0bn US

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 Amadeus (AMS SM, Long, Bull PT €21, 35% upside) Europe
• Thesis: Amadeus is the #1 Player in both GDS and PSS (passenger service
systems) and benefits from robust global travel trends. Critically, unlike airlines it
does not have to deal with higher oil as a potential headwind. Barriers to entry are
high as well from its transaction based business model and “network effect” in GDS.
• There is structural and visible growth in Amadeus’ IT Solutions business (Altéa).
Contracted airline migrations provides good revenue visibility and will take total Altéa
customers to 96m by 2013. Airline mergers are also an opportunity for Altéa. BA/Iberia,
Continental/Delta and LAN/TAM are examples where one airline is/will be an Altéa
customer, so the merger partner could also be a target customer for Altéa.
• Airlines are positive on near-term global traffic growth, with W. Europe recovery
ongoing and strong growth in emerging markets. Despite somewhat relatively tough
4Q10 comps, Amadeus is overall positive on 4Q. While strong traffic recovery/trends in
2010 suggest tough comps for 2011, Amadeus sees airline capacity increases,
especially in W. Europe, as a positive. The company has ~69% market share in W.
Europe and sees itself benefitting in 2011 as these capacity increases translate into
bookings.
• The GDS model is here to stay. Amadeus indicated that despite concerns on the back
of AA-Orbitz and Google-ITA, GDS are unlikely to be dis-intermediated. It sees technical
and economic issues in establishing many-to-many direct connections with airlines and
travel agents, which stresses the need for GDS. Further, the company highlights that
Amadeus/GDS deliver more services than the connection and that would be missed.
• Valuation: 35% upside potential - Our bull case assumes a stronger than
expected macro rebound driving growth in GDS (travel multiplier effect) and 4 new Altéa
contract wins every year. We estimate Distribution revenue CAGR (09-12e) of 8% and
Altéa revenue CAGR (09-12e) of 14%. Faster growth and op. leverage in Altéa drives
group EBITDA CAGR (09-12e) of 15% and 2011e EPS of €1.26. Valued at 10x (top-end
of peer group range) EV/EBITDA, bull case FV is €21.0
• Catalysts - 4Q Results on Feb 28th, monthly travel trends (IATA, AEA),
and new contract wins/migrations in Altéa

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 BP (BP LN, Long, PT 700p, 45% upside) Europe
• Thesis: BP offers exposure to a solid macro story (oil demand in
2011) and micro story (recovering global industry leader). A recovery
story should emerge as 2011 brings accelerated disposals, settlement
discussions, and increased clarity on liabilities. Time of healing.
• Valuation looks very attractive: BP is trading on 6.4x 2012 EPS (on our
est.), a 15% discount to the sector and a 45% discount to its 10yr average
valn. Our 586p SOTP incorporates a $40bn post tax charge relating to
Macondo and a 30% devaluation of the US GoM portfolio. Even still, BP
trades on a ~25% discount in absolute terms.
• A number of catalysts to improve visibility and sentiment:
− dividend restoration in H1 (we estimate 7c p/quarter) will bring back
dividend / income funds who were forced to exit
− disposal program could accelerate; BP has already delivered $20bn of
its ~$30bn target, we think they could upgrade the target to $50bn
− settlements: President's Commission reports before Jan 12th, Spring
2011 will bring updates from the US Dept of Justice and the Marine
Board
− strategic review from new CEO (Feb 1st); Bob Dudley is tasked with
outlining a credible growth plan with BP's first annual strategy update
post Macondo
− clarity on Macondo liabilities; each $5bn (post tax) reduction in
liabilities adds 20p p/share (or 4%). As of Q3 results, BP's provision is
$40bn (pre-tax)
• Valuation: Our 555p base case (16% upside) assumes Macondo costs of
$40bn, 30% depreciation in the value of the GoM portfolio due to a
moratorium on offshore drilling, a 8% WACC, 2% terminal growth rate,
$90/bbl long-term oil prices, and $5.5/bbl LT refining margin. Our 700p
(46%) bull case assumes a slightly reduced GoM depreciation rate,
$105/bbl oil price, and $7/bbl long-term refining margin

18
Sales view only
 CNInsure (CISG US, Long, PT US$36, +100% upside) Asia
• Thesis: We view CISG as a recovery play for 2011 as the market’s
understanding of operations improves. The stock has been a basket
case in 2H10 with investors increasingly concerned about the co’s
complex structure and disclosures.
• The market has focused on 5 Key issues: 1) Agent incentive structure,
2) Relationship with Jingshi (a strategic partner), 3) Concerns that
Finestart is an illegal entity that was created to mislead CISG’s agents, 4)
Accounting of profit contribution from acquisitions, and 5) CISG’s gross
margin of 50%-plus is significantly higher than its peers
• We view the recent investor day as a possible inflection point as
Mgmt used it to address all the key issues currently facing the company.
− Investors had the opportunity to meet Jingshi. This helped alleviate
many concerns the mkt has regarding the relationship between the
two companies
− We now understand Finestart is solely an investment company
created for CISG agents and is not related to CISG. Agents are able to
subscribe to Finestart if they so choose
− Management also provided examples and details on its commission
structure with insurers to support its position that its gross margin of
50% is not overstated
• The company’s commitment to changes is a positive step forward.
These moves include ceasing to commence any new transactions with
Jingshi, simplifying the acquisition model, providing quarterly cash flow
statements, and improving disclosures
• In addition CNInsure just announced the signing of a strategic partnership
with China Continent Property and Casualty Insurance, one of the top ten
property and casualty insurance companies in China. This offers an
opportunity for both parties to leverage each other’s capabilities to reach a
broader customer base and to provide their customers with products that
target their needs
• Valuation is attractive at 10.5x ’11 earnings relative to its growth profile
and we expect CISG to exceed its 30% EPS growth target over the next
two years. In our base case we believe the company can achieve a PT of
$36
• Catalyst: News on potential M&A, 3/2/11 – Q4 Results

19
Sales view only
 Fiat (F IM, Long, PT €19.50, 25% upside) Europe
• Thesis: We expect the US car market to surprise materially in 2011, jumping
+20% to a 14m SAAR. Rebounding US consumer confidence provides the final
ingredient to a set of conditions already ripe for a sharp recovery in demand. These
include record high used vehicle prices, the oldest US fleet age on record, strong
credit quality, and improving credit availability. The latter should also aid Chrysler’s
market share recovery, given the lower average credit score of its customers. With
an effective 35% stake in Chrysler (and option to move to 51%), Fiat is the best
European play on the recovering US market.
• On Jan 3rd Fiat Auto and Fiat Industrial will de-merge into two separate and
distinct equities (prefer to own Fiat Auto).
− Fiat Auto: €10.5/sh – We are bullish on Fiat Auto for a turnaround alongside
Chrysler, structural change, and attractive valuation. Even paying zero for Alfa
and €-1bn for Europe, we value Auto at €10.5/sh, but expect it to trade
significantly lower initially. A potential Ferrari IPO and accelerated move to
majority ownership in Chrysler could unveil hidden value in 2011-12
− Fiat Industrial €9.0/sh – We believe Industrial will be more closely linked to
the broader economic outlook than that of Auto. With clear peer multiples, we
expect Industrial to trade closer to its fair value of €9/sh. However, M&A
speculation could drive Industrial’s multiple even higher
• Chrysler represents substantial hidden value and could be worth €3.6/share,
but currently makes no direct contribution to earnings numbers. Improving US
SAAR and an eventual IPO could unlock significant value here.
• We see at least 25% potential upside to €19.5 PT – this implies €6.9 for Fiat
Auto, €3.6 for Chrysler, €9 for Industrial.
• Potential catalysts - US sales data on first day of each month, Demerger of auto
and industrial on Jan 3rd. 1H 2011e Chrysler likely to receive DoE loans and repay
high cost US Treasury deb. 2H 2011e Potential Chrysler IPO (as flagged by
management)

20
Sales view only
 Health Net (HNT US, Long, Bull Case PT $35, 30% upside) US
• Thesis: HNT has repositioned itself as a more focused western health
plan with a federal business (mgmt has a proven track record of
execution in this region), post the sale of the Northeast assets to UNH.
• We view it as the only managed care company positioned for
commercial MLR declines in 2011.
• Solid capital position should enable continued share buybacks
− We forecast free cash flow of $324 million and $357 million in 2011
and 2012, respectively, which is ~1.2x net income in each year
− We forecast ~$200mm of buybacks annually in both 2011 and
2012
− Cont. cash received from United would likely be put toward
buybacks (this is not included in our ~200mm and would be a
positive catalyst)
• We expect M&A to accelerate across the industry and see some
aspects of HNT’s model that could prove beneficial to a larger player
• Valuation - If HNT executes several clean qtrs (reporting commercial
MLR improvement better than expected and stronger enrollment) we
could reach our bull case of $35 assuming a 10.5x 2012E EPS of
$3.33. Our base case 2011/2012 EPS forecasts of $2.85/ $3.20 are
slightly ahead of the Street’s $2.84/$3.11
• 2 potential catalysts:
− The recently passed CA budget, which calls for the transition of
Aged, Blind and Disabled lives into private Medicaid programs
could prove a meaningful growth opportunity long-term (this could
begin in mid-2011 or more likely 2012).
− Should investors begin to expect larger-scale health plan M&A,
HNT could see multiple expansion

21
Sales view only
 Kawasaki Kisen (9107 JP, Long, PT 510 JPY, 40% upside) Japan
• Thesis: Consensus expects container shipping rates to fall and Japanese
shippers are reflecting this, trading less than 1x book. We think prices will
actually rise in 2011 and K-Line is the most levered way to play rising
container rates.
• We expect record container shipping profit in 2011. With over 90% of K-
Line’s sales derived from shipping we see significant upside for the company
in 2011. During the last cycle (’03-’07) container shipping drove K-Line’s
outperformance (stock up 750%), as the stock’s P/B climbed from 1x to 3x
and ROE jumped from 10-25%.
• Japanese shipper ROE is currently above Asian peers, yet the P/B gap
has turned and is widening for the 1st time in 10 years. We view
Japanese shippers stocks as undervalued and increasingly visible laggards.
K-Line trades just .86x P/B for 2011 - we think the market is too pessimistic
on prices for next year.
• Consensus expects container rates to fall 20-40% YoY in 2011 due to
excess supply, but we think rates will actually increase +6.3% for N.
America and +2.4% for Europe. We look for strong global growth (MSe
4.2%) and the shippers ability to control their own supply via container
layups as reasons for price hikes in 2011. We expect layups in global
containers (currently ~2.5%) to reach between 5-9% of current tonnage as
shippers keep S/D tight, allowing them to hike rates as demand expectations
pick up.
• Valuation: K-Line trades just 5.7x 2011 EPS and .86x P/B. We see FV at
1.2x PBR (Y510), which is the bottom of the last cycle recovery in ‘03-’05
and provides 40% upside. We expect ROE to increase 42% YoY to 19%,
putting it on track for ’03 levels, where the PBR began to rise from 1x to 2.5x,
achieving a PT of 510 JPY.
• Catalysts: European route rate talks in January of ’11, container ship layup
tonnage (industry’s ability to adjust supply) and spot freight rates for
container ships leaving China (ability for industry to hike prices).
22
Sales view only
 KKR & Co. (KKR US, Long, Sales PT $18.50, 30% upside) US
• Thesis: Under-owned, innovative alternative asset manager with a
strong brand in an attractive industry (organic growth, strong FCF,
increasing AUM, and appealing valuations). As Capital markets and
M&A activity open up, KKR is a key play on this:
− Strong franchise value (market does not appreciate the
sustainability of its investment performance over the last 30+
years)
− Market is pricing in minimal performance fees and gains in PE
funds and principal investments, respectively, and is not giving
credit for raising and earning carry in new funds ($12B in ’11-’12
in North America Fund, $4B in ’13-’14 in European Fund, and
$5B in ’11-12 in Asian Fund)
− Favor companies with significant scale-- benefit from a virtuous
cycle that is available to only a few PE firms, with size and scale,
as well as strong limited partner relationships
− Can achieve 1.6-1.8x cost on $24B in investments made in '05-
'07, even with a slow economic recovery, due to improved
balance sheets of portfolio companies, access to in-house
consultants and advisors for operational improvements, and the
ability to exit at opportune times
• Valuation: Stock is currently trading ~6x '11e P/E, below peers, as
BX and traditional asset managers trade at ~9x and 15x ’11e EPS,
respectively. In my view, I believe the stock could trade closer to
peers on 8x '11e EPS and using MS Oct eps ’11 estimate of $2.31 hit
a PT of $18.50
• Catalysts: 4Q10 results in February, Analyst Day in March, pace of
deal activity, financing market/credit terms, changes in tax law, PE
monetization

Please note that this stock is currently not covered by Morgan Stanley and use purely sales view only 23
Sales view only
 Komatsu (6301 JP, Long, Bull Case PT 3,400, 40% upside) Japan
• Thesis: Emerging market play with 65% of sales coming from EM and 40% of OP
coming from China. Komatsu’s hydraulic excavator share in China is #1 at 22%, vs CAT
at 13%. China alone exceeds 50% of the global demand for hydraulic excavators, up
from 25% in ‘09.
• The main driver of demand in China is from infrastructure development and mining
demand, while commercial/residential construction hold a smaller proportion. We expect
steady demand as more regions in China develop, while commodity prices should also
sustain the demand for high margin mining equipment.
• Current cycle peak margins likely to surpass previous cycle: Komatsu is almost
twice as profitable in China than in the US with OPM of 20%. As the geographic mix
dramatically shifts (EM now at 65% of sales), the higher weighting of higher margin
regions will lead to higher current peak margins.
• Buy on the dip: We view China tightening as an opportunity to buy this quality company
on dips. We see little risk to derail this mid-cycle cyclical stock and look for upside
surprises from a North American recovery to help drive its multiple expansion near its
last cycle high of 20x PE (2005).
• Valuation: Komatsu trades 16x EPS for 2011 (MSe) and 2.3x PBR with ROE at 16%.
We look for 26% EPS growth in ’11 driven by top line growth of +10%. Avg PE since ’03
is 16x, peaking at 20x in ’05. Last cycle, when earnings were decelerating and ROE fell
south of 15%, the PE averaged 13.5x (’07-’08).
• Where we Differ: We think Komatsu can trade up towards 20x PE as ROE continues to
improve towards 20%. During the last cycle it took only two years for Komatsu to get
from single digit ROE to 20% ROE, with the stock peaking in ’07 at 24.5%. As the stock
approached 20% ROE, the PE multiple expanded from 13.5x to 19.5x and stayed +15x
until both EPS and ROE peaked 3 years later in ‘07. Given this cycles higher gearing to
the more profitable and higher margin EM, Komatsu’s multiple and ROE should expand
to, and potentially beat, last cycle’s peak.
• Catalysts: (i) Demand expansion for mining machinery alongside the turnaround of
crude oil (ii) Q3 2010 earnings release on 01/28/11 (iii) earlier and larger than expected
recovery in developed construction machinery markets
24
Sales view only
 Li Ning (2331 HK, Long, Sales PT HK$25.5, 50% upside) Asia
• Thesis: Buy the future #1 China local brand at a big discount
• The China consumer should not be underestimated. China just passed an
important growth milestone - exceeding avg income of $7,000. At around $7K,
domestic consumers now become the engine of growth and domestic consumer
spending increases. Li Ning is well positioned to take advantage of this.
• Li Ning's brand is best positioned for the "trading up" trend. Li Ning is ranked
#3 behind Nike and Adidas in market share. Li Ning is seen as the leading
domestic brand, with average prices ~20-30% higher than those of Anta.
As disposable income from wages increases, consumers will want to trade up for a
"higher status brand" and Nike and Adidas are still too expensive to make that
huge jump ( Li Ning is still priced at ~40% discount to them). Li Ning’s goal is to be
the #1 brand in China by 2018, merely coming close to this would offer a great
deal of upside in terms of margin and re-rating.
• Li Ning has a clear strategy to fix distribution channels by revamping its
distribution network and looking to consolidate/reduce 500-600 "ineffective“ stores.
It is also looking to increase the proportion of sales from discount/factory stores to
10% by the end of 2011, helping sell-through and increasing retail productivity.
• Valuation: Li Ning has underperformed the market by more than 20% and YTD is
down +30%. Recent results for the 2Q trade fair for FY2011 provide an excellent
buying opportunity. Shares currently trade on a P/E of 14x, compared to historic
average of ~21x ('05-10) and peer average of 17x'11. In my view, based on our '11
earning estimates (1.3RMB) if the company can achieve 17x P/E (peer average) it
can reach a PT of HK$25.5, c50%upside.
• Where we differ: Li Ning’s strong brand popularity should not be discounted
despite near term sales volatility. A proprietary survey showed that Li Ning is
perceived as the 3rd most popular brand after Nike and Adidas in tier 1-2 cities in
China. Furthermore, 87% of respondents viewed quality as the most important
factor when choosing a brand and view Li Ning far ahead of its domestic peers.
• Catalyst: Full year 2010 results on March 17th

25
Sales view only
 Monsanto (MON US, Long, Sales PT $88, 30% upside) US
• Thesis: Market is underestimating SmartStax and a potential increase in corn prices
• Positive Macro Environment - Corn and soybean prices need to appreciate further to ensure
adequate supply in 2011/12. With US crop yields disappointing this year, supply will not be able
to keep pace with surging demand from protein feeding, ethanol production, and oilseed
crushing. The US corn balance is poised to tighten to levels not seen since 1995/96 by the end
of the 2010/11 marketing year (MY). In our view, corn must appreciate to $6/bu in 2010/11 to
ration near-term demand and encourage the 2 million-plus acres it needs just to keep stocks to
use (S/U) at a very tight 6.5% in 2011/12. US soybean supply has also surprised to the
downside this year, further complicating 2011 US acreage math.
• Ability to put the Balance Sheet to work – Monsanto can leverage its nearly net cash
balance sheet to complete a share repurchase. We believe the company could take on up to
~$6.5Bn of debt (~2x net debt to EBITDA), and buy back ~20-25% of shares outstanding and
still have a BBB investment grade rating. This could be c15% accretive in the first full year.
• SmartStax’s potential could be undervalued – while the market has initially been negative on
the effectiveness of SmartStax, less than 70% of plantings have been harvested, so first results
are still statistically insignificant. The product still offers a good value proposition and is
expected to yield more than triple stacks. In addition, the performance of Roundup 2 could be a
good indicator of the future success of SmartStax. In its second year, Roundup 2 performance
was much better than the first, achieving its advertised 3+ bushel per acre yield advantage (due
to increase in varieties and better weather). SmartStax should benefit as greater
hybrids/varieties are introduced.
• Valuation: Shares are trading below their 52 wk high of $86.65, currently on 22x ’11 P/E. In our
Bull case we project a eps of ~$5 vs $3 for base. In my view, assuming the company can
achieve part of our bull case estimates (based on an increase in corn prices, increase in market
share, roundup prices firming) and continues to trade at 22x then the stock could reach $88,
+30% upside. Stock is not cheap, but the earnings are being under-estimated.
• Catalysts: January 12, 2011 - USDA’s final crop production report for the 2010/11 crop will
likely underscore tightness in the US and global balances, February 24-25, 2011 - The USDA’s
Agricultural Outlook Forum will present the department’s first supply and demand estimates for
MY 2011/12.
26
Sales view only
 Motorola Mobility (MMI US, Long, PT $36, 25 % Upside) US
• Thesis: As MMI gets spun put of Motorola & joins the S&P 500, this will serve
as a catalyst for the Co to garner greater credence from investors as MMI
delivers on its margin uplift with potential upside from execution and/or new
products. Earnings power could be in the high-teens if they achieve industry
average margins.
− Improving margins drives earnings- margins have improved from
(13.1%) in Q209 to 0.1% in Q310. Higher margin Android devices and a
restructuring toward outsourcing lower-end devices is driving the
improvement. Margins should achieve closer to the industry average on a
sustainable basis at 7% (management guided to 8-12% and HTC's
margins are 14%)
− Attractive operational leverage in smartphone business. An
incremental 1mm smartphones sold would be 10% ‘11EPS accretive, well
above peers (see table).
− Comps:
• HTC 14x Earnings vs. MMI 6x: HTC has 2x the margins vs. MMI, but
given carriers will want more quality, manufacturers & MMI will
participate in the Android growth, twice the multiple seems too wide
• NOK's Symbian Operating System is losing Share in Smartphones,
while Android is Growing: Symbian Smartphone share fell from 51% in
Q209 to 36% in Q310, while Android's Smartphone grew from 17% in
Q209 to 25% in Q310. NOK shouldn’t get a higher multiple for lower EPS / 1 MM Smartphones
tier product & slowing addressable market
EPS % 11EPS
• Valuation: valued at a range of $7-14B or $23-48/share, with base case of
$10.7B or $36/share ($5.8B for mobile devices, $1.4B for home, and $2.5B for MMI $0.19 10%
cash); PT implies 11x unlevered ’12e EPS estimate of $2.20, plus $12
AAPL $0.20 1%
cash/share on 297M shares (vs. group average of 12x)
NOK € 0.01 1.20%
• Catalysts: spin in beginning of ’11, 4Q10 results, new phone releases, tablet
release, competitor phone/tablet releases RIMM $0.17 3%

27
Sales view only
 POSCO (005490 KS, Long, PT W650,000, 30% upside) Asia
• Thesis: POSCO is among the best-positioned Asian steel producers, with
modern low-cost production, high-quality product mix, and a nearly debt-free
balance sheet, which should allow it to emerge stronger in the next recovery.
• Industry drivers trump. . . Regional metals markets appear to have strong
potential for a 1H11 restocking cycle, following a 2H10 destocking. After the
recent underperformance (-2% for AP steel vs +10% for AP Materials), this sub-
sector now trades at 1.0x 12e P/B, 35% discount to the market.
• Bullish on POSCO’s investment in ASEAN & India over the coming 3-5
years which are forecast to add over 25% to capacity and earnings power. We
look beyond near-term steel price trends, highlighting the longer-term growth
drivers available to POSCO which is investing in new growth regions such as
India and ASEAN. These are markets with a population base of about 1.8bn
people (nearly 30% more than China) and many regions having a consumption
level of less than 10% of China’s per-cap level, suggesting huge potential
growth in the coming decade.
• Growth drivers unappreciated: Investors currently award no value for these
growth drivers. Posco shares instead discount negative earnings growth (-2.5%
into perpetuity) while investors discount 5% earnings growth. Interestingly the
implied growth for POSCO has actually fallen into negative territory since mid-
year despite the company making significant strides in moving ahead on its
growth investments.
• Valuation - Posco trading at 0.9x PB, below historical average of 1.0x. We see
the stock reaching W650,000 in our base case, if they can achieve volumes of
40t by 2012 from their domestic growth strategy. At W650,000 the stock trades
~10-11x normalized eps.
• Potential Catalysts - Domestic pricing may offer some upside potential if
Chinese/other regional pricing continues to recover. Value-accretive M&A such
as the finalization of a JV with SAIL or Krakatau could offer upside opportunity
for earnings growth.

28
Sales view only
 Sberbank (SBER RU, Long ,PT US$4.30, 25% upside) EEMEA
• Thesis: The cheapest EEMEA stock providing the highest ROE.
• Sberbank should benefit from Credit Normalization. We believe that
after facing years of high loan write-offs in '08/09, the bank is set to benefit
from a credit normalization cycle. Sberbank is likely to exhibit the highest
leverage to the improving asset quality cycle in 2011/12 at 23% ROE
handle and rapidly declining cost of risk.
• We are forecasting stable Top Line Growth. In Russia we forecast a
potential rate hike in Q1'11, as we expect GDP growth of 4.5%Y/Y' 11. This
will help them achieve a more stable interest income – as their assets will
reprice quicker than their deposits and will provide support for asset yields.
• Sberbank should experience positive support from increase in oil
prices. Our commodities team forecasts tightening supply to send WTI oil
prices to an average of US$100/bbl in 2011 and US$105/bbl in 2012.
Sberbank has a 56% correlation with the price of oil (5 yrs back on monthly
basis), which is relatively high if compared to Russian oil company LUKOIL
with a 68% correlation.
• LDR 93%: SBER has higher consumer exposure at 30%, sme is not
broken out, but corp is the remaining 70% (VTB at 15/85).
• SBER is one of the few banks in EMEA with positive margin dynamics
into 2011 and we are projecting 20% loan growth from 2010-12e for
SBER, which will support their margins out to 2012e.
• We see 2 near term catalysts: 1) Potential GDR Listing - We expect
Sberbank's much talked about GDR listing to be completed in 2011. VTB's
GDR trades ~$25-30MM/day 2) Formal Options Program - In 2010 the
company proposed a formal management options program, likely be put in
tact in 1H'11. This will help better aligned mgmt incentives.
• Valuation is Compelling as Sberbank is the cheapest stock in the EEMEA
banks' universe on 2x 2011e book and 8.2x P/E while providing a 27.6%
ROE for 2011 - the highest ROE we project for all EMEA banks. We
believe the stock should be trading on 2.1x tang book, equating to a new
price target of $4.30.

29
Sales view only
 SJM Holdings (880 HK, Long, PT $15HK, 25% upside) Asia
• Thesis: SJM is the largest concessionaire in Macau, with 30% gaming
market share and its flagship casino, Grand Lisboa, ranks as best-in-
class in terms of operating performance with upside potential from
improvement in legacy operations:
− Industry view: demand has remained strong as Macau Gross
Gaming Revenue (GGR) growth for the last four months has been
40%-50% YoY (on a higher base)-- growth expectation of 15% for
‘11 could prove to be conservative. Other possible positive drivers
include; improving infrastructure to drive mass visitation, GDP
growth to drive revenue per visitor, and table cap to increase
yield/VIP table
− Margins could improve too, as table cap regulation should drive yield
per table higher and drive margin higher
− SJM is the only Macau name with a net cash position: a stronger
balance sheet supports potential upside from new projects and it is
best positioned in the event of an interest rate rise or liquidity crunch
− Other drivers of growth: expect revenue-sharing arrangements with
casinos to raise SJM’s win/table to, or above, the market average.
With 1,748 tables under operation, SJM will be the operator least
affected by the government’s proposed table cap
• Valuation: expect SJM (along with Wynn Macau) to deliver meaningful
QoQ growth in 4Q10 vs. peers. MSe of 17.1% QoQ growth looks
attractive relative to its valuation of 10x EV/EBITDA and 16x ’11e vs. 11x
and 18.2x for regional peer averages; historically, stock trades at 6.9x
EV/EBITDA. In our base case we believe the sock could trade at $HK15.
• Catalysts: FY10 results in March, 1Q11 results in May, improving win
rate/table for Oceanus, additional VIP tables at Grand Lisboa at top floors,
integrating Jai Lai with Oceanus, opening of casinos at L’Hermitage,
Portuguese school site redevelopment behind Grand Lisboa

30
Sales view only
 UBS (UBS VX, Long, PT SFr 19.70, 25% upside) Europe
• Thesis: UBS can point to a number of key successes in 2010 (e.g. the
turnaround in its private bank); I think there’s more to go for this recovery
story, especially given continued investor skepticism.
• The turnaround at UBS has been primarily about stabilizing the private
banking business and revitalizing the investment bank (the true “swing
factor” as far as returning UBS to peak profitability is concerned).
− Private Bank: UBS has stemmed the outflows, with positive inflows in Q3.
However, in the PB and WM USA we think UBS is still under-earning, with
margins below mgmt targets (>100bps). Progress from here is predicated
on what mkts do given investors remain risk averse and have little
demand from higher margin products (e.g. HFs, structured products, etc).
However, with 40% AUM exposure to fast-growing APAC and EM, we
think trends will continue to improve
− Investment Bank: In Equities, they are back in a top 5 position but UBS
remains outside the top 10 players in FICC trading and continues to lose
share in IBD. The strategy has been to reinvest and grow scale (mgmt
signaled most of this is now complete). However, we estimate the ibank
does SFr 4.5bn of PBT in 2012, which implies a post tax return on capital
of 10.3%, below its cost of equity. 2011 may be a year of further
significant strategic changes which see mgmt refocusing capital in certain
areas of the ibank where profitability and market share gains are a surer
bet. This could help close the valn discount that ibanks are trading on and
push UBS's above 1x TBV (currently about 0.8x on our ests)
• Valuation: Our SFr 19.70 base case (~25% upside) assumes Investment
Bank revs +9% YoY in 2011 with group level expenses flat vs 2010. UBS
reaches a 22% sustainable ROE with an 11.8% CoE and P/TBV of 2.2x. We
see +60% upside to a SFr 26 bull case assuming UBS can reach its profit
targets sooner (27% ROE, 11.3% CoE and P/TBV of 3.2x).
• Catalyst: Feb 8th, 2010 – 2010 earnings release

31
Sales view only
 Valero (VLO US, Long, Sales PT $28, 20% upside) US
• Thesis: Most prefer Oil Services as key means to play Oil Demand, hard to
argue with this but I would take a look at the Global Refiners as a sub-sector
that has lagged in 2010. As of the last 5-6 weeks, we have started to see
the space gain investor interest, I think this continues into 2011. Within this
group, VLO is attractive with strong corporate performance, appealing
valuation, good earning quality and a well respected mgmt team. Diversity,
size, and scale of portfolio provides leverage in a US recovery in demand
and provides VLO a strong advantage vs. peers:
− Preferred refiner due to its scale, management, better cash position,
and share liquidity
− Forecasts for ’11 assume flat cracks, but there could be upside from
strong EM market demand, while LGT/HVY differentials shouldn’t
narrow in ’11
− Early mover in streamlining its portfolio, focusing on core operating
assets and reducing operating costs (sold Krotz Springs, Lima, and shut
down Delaware City and Aruba)
• Proceeds and PF cash will likely grow or expand refining
− We believe that the company will use the PF cash of $2.6BN to fund its
revised 2010-2011 capex plan (recently increased by $300mm) and
repay approximately $400mm of maturing debt in early 2011
• Valuation: currently, the stock is trading at ~11.7x ’11e P/E and 5.3x ’11e
EV/EBITDA vs. the group at 16.1x ’11e P/E and 6.5x ’11e EV/EBITDA; in
our sales view we believe it could trade at 14.5x ’11e P/E (10% discount to
group) to get our PT of $28, which could prove conservative given
commodity upside and EBITDA growth.
• Catalysts: A possible European acquisition (potentially Pembroke), 4Q10
results in January, executing on additional cost reductions.

32
Sales view only
 Visa (V US, Long, PT $115, 65% upside) US
• Thesis: Not for the Faint of Heart – Visa is on its trough valuation
following the Fed‘s preliminary interpretation of the Durbin legislation,
Keys here are continued solid growth and additional regulatory clarity
in 1H11 should drive multiple expansion. Stock has been abandoned
by investors, mere stability in the political situation around
interchange fees will provide a lot of value:
− Fed proposal is seen by key people on the Hill as far too
aggressive– there is a lower probability of credit interchange
regulation than the market has thought and there is significant
potential for news flow and headline swings that are favorable to
Visa in the weeks ahead
− Accelerating revenue growth in Asia and LatAm and focused
product initiatives (volume growth of 12% in ’11 in Asia/17% in
’11 in LatAm– even higher in ‘12)
− Sustaining the debit strategy in light of the regulatory-induced
challenges (shift away from being the first choice at the point of
sale of issuer to the merchants by leveraging scale)
− Strong fundamentals with solid transaction growth (11% YoY in
‘11), margin expansion (~320bps from ’10-’12), buybacks ($1B,
~11m shares, ~1% accretive to EPS), and a great balance sheet
(~$3B net cash with $2B/year of FCF)
• Valuation: We assume a gradual rebound and P/E multiple just
slightly below its 2-year average-- 20x '11e EPS; GAP analysis
suggests stock is undervalued by 40-50% (at ~$70, pricing in a
severe growth deceleration, low terminal growth rate, and no
additional buybacks/dividend increases).
• Catalysts: 1Q11 results in February, additional clarity around the
Fed's interpretation of Durbin in 1H11, litigation settlement in 1H11,
news/indications regarding the CFBP's intentions.

33
Sales view only
 Zions Bancorp (ZION, Long, PT $32, 35% upside) US
• Thesis: Zions is a top MS pick in the Midcap Banks space on
improving credit, a stable NIM, and a highly attractive valuation
• Company fundamentals continue to improve as credit costs are
declining, the negative earnings and capital impact from security
losses on its TRUPS portfolio has been reduced, and its capital
position has been significantly strengthened following recent capital
raising initiatives.
− We recently upgraded the Midcap Banks space and Zions
remains a top pick, due to its attractive franchise, solid long-term
growth opportunities, and the fact it is leveraged to credit/capital
pressure abating
− Zions is raising enough capital each quarter to fully offset net
losses and does not need to continue doing big equity raises
− Zions could break even in 1Q11 on an operating basis before
preferred dividends and should have positive EPS by 3Q11which
are all leading indicators of credit continue to improve
− We are starting to see some strength in commercial lending
which is a huge positive given ZION is a commercial lender (50%
of loans are commercial)
• Zion’s EPS in 2012 and 2013 stands to benefit from reserve release
by more than 30% and 6% respectively.
• Valuation: Trading at 1.1x tangible book vs. the group at 1.5x; 6.9x
'13e vs. the group at 9.5x; PT of $32 implies the same multiple as
recently profitable bank (WBS, HBAN, EWBC) peers of 1.5x tangible
book.
• Catalysts: 4Q10 results in January, credit/capital headwinds abate,
loan growth increases, additional expansion in the fast-growing
Intermountain West.

34
Sales view only
Shorts

Ticker Company Name Stock rating Downside Market Cap Region

CPI LN Capita Group Underweight 40% $6.7bn Europe

3968 HK China Merchants Bank Equal-Weight 25% $37.2bn Asia

4523 JP Eisai Underweight 40% $10.1bn Japan

HPQ US Hewlett-Packard Overweight 20% $94.6bn US

6501 JP Hitachi Equal-Weight 25% $22.0bn Japan

HOLN VX Holcim Underweight 35% $24.2bn Europe

LOGN VX Logitech Equal-Weight 40% $3.5bn Europe

Regal Entertainment
RGC US Group Underweight 40% $1.9bn US

SPR US Spirit AeroSystems Underweight 25% $2.8bn US

35
 Capita Group (CPI LN, Short, Bear PT 410p, 40% downside) Europe
• Thesis: CPI was a 2010 short and remains on my list for 2011. Capita has de-
rated by ~25% since its April peak and the stock now trades on ~15x 2011 EPS (14x
consensus). I see continued downside as 2011 brings further pressure on margins that
have already begun to fall from recent peak levels and competition for UK govt
contracts intensifies.
• Why am I still negative?
− Lack of visibility on revenue growth. Despite a robust pipeline, Capita has
failed to convert this into actual contract wins with decisions delayed and some
bids lost. Discretionary-linked revs have fallen markedly, by 20% in our estimation
over the past year
− Margin pressure increasing. Mgmt recently signaled that the current 14%
margin level should not be used as a “base of expectation for when you are
bidding for new work”; we think this reflects the intensified competition for contracts
in the public sector
− Valuation still implies more downside to go. Capita’s poor share price
performance this year has been largely via de-rating, with earnings forecasts quite
stable. Organic rev f’casts have fallen markedly, but EPS ests have held in thanks
to acquisitions, cost savings and share buybacks. If margin pressure and low
contract win rates persist next year, EPS fcasts may fall next as Capita runs out of
levers to pull
• What is the bear case? My analyst has a bear case PT of 410p (~42% downside)
which assumes revenue acceleration disappoints at 10% organic growth in FY 2012.
Fierce competition in the public sector sees margins fall to 12% in 2012 from the
14.5% peak reached in 2010. Valuation is based on 12x ’12 bear eps.
• I don’t see these assumptions as particularly aggressive considering the UK
government seems intent on opening the playing field to a number of new entrants who
are willing to work for substantially lower margins (e.g. Serco, a UK peer, is a single-
digit margin contractor by comparison).
• Catalysts: Contract announcements, Acquisitions (Co should continue to make small
bolt-ons) leading to integration risk and Feb 24th 2011 – FY 2010 earnings release.
36
Sales view only
 China Merchants Bank (3968 HK, Short, PT HK $14, 25% downside) Asia
• Thesis: China Merchants Bank is expensive and poised to be challenged
from tighter policy and multiple RRR hikes
• We think managing inflation expectations and liquidity, along with gradual
implementation of regulatory policies will be key performance drivers for
Chinese bank stocks in 2011. We prefer large-cap banks on strong balance
sheet liquidity, capital and reserves and think midcap banks such as China
Merchants which has capital adequacy issues could be poised to lose in a tight
policy / RRR hike environment. I struggle with all Banks in China given the
policy backdrop, valuation and unsustainable levels of loan growth.
• China Construction Bank was a runner up to China Merchants Bank in looking
for short ideas (note our analyst is OW CCB and EW CMB). At China
Construction our worry was loan growth could be lower than expected if
monetary policy tightening is intensified. That being said, CCB started to slow
the pace of loan extension to property developers throughout 2009 and in 2010,
mkt already reflecting this for CCB while CMB not reflecting this inflection.
• Critically, capital adequacy is an issue despite solid internal capital
generation for CMB. A combination of RRR hikes and curbs on new bank
lending is likely to create balance sheet liquidity problems. We think CMB will
need to raise funds. Looking at capital required and potential dilution to catch up
with CITIC in 2011 Tier 1 ratio, we estimate CMB will have a shortfall of -1.22%
(8.15 tier 1 vs 9.37% target tier 1), which would result in potential dilution of 8.2%
• Valuation is unattractive as shares look expensive trading on 2.8x P/B for 2010
and 2.3x P/B for 2011 vs. the Chinese avg of 1.8 and 1.6x respectively. If the
company needs further capital or experiences faster-than-expected opex growth
due to expansion and higher-than-expected credit costs due to catching up on
loan reserve ratio then the downside potential could be more. In our sales view,
assuming the company trades in lines with peers at 1.6x, the stock could drop to
HK$14, representing c25% downside.
• Catalysts: Further potential developments in non-banking business, China
Policy on rates / loan growth & March 15, 2011 – 2010 earnings release
37
Sales view only
 Eisai (4523 JP, Short, Bear PT ¥1,700, 40% downside) Japan
• Thesis: Stock has been holding up despite expiration of the US patent for Aricept (used for
Alzheimer's) in November and Japan patent ends in June 2011. Global peak sales for
Aricept was ¥322.8Bn in F3/10 .
− Aricept accounts for ~40% of F3/10 sales and ~50% of OP (excluding R&D). We expect
F3/12 OP of ¥80Bn, 24% below the company forecast driven by a) lower Aricept sales
estimates b) generics entry in Japan starting Nov 2011 c) competition launch of 3
Alzheimer drugs in 2011 in Japan
− We think stock has held up post patent cliff (11/23) because of the protection of the
authorized generics (by their partner Pfizer), which is only valid for 6 months
• Where we differ: The F3/12 FactSet consensus OP forecast is ¥88 billion, vs. company
guidance of ¥105 billion and our forecast of ¥80 billion. The market is too optimistic on
counter measures such as new drugs and their high-dose version.
− Eisai has been expecting high contributions from three new drugs, but we see risk to
their target. Breast cancer drug Halaven has limited market potential as a 3rd line
treatment, and sepsis drug has high risk given not compelling Ph2 results. No
announcement on entry to Ph3 for the anti-thrombotic drug (E5555) so it is too early to
factor in for earnings contribution.
• Valuation: Stock still trades on a premium (13.8x F3/12 ' P/E) vs. sector avg (12.1x), with 4-
yr EPS CAGR of -4.7%. Assuming the stock starts to trade at a 20% discount to industry
P/E at 10x (firms facing patent expiry typically trade at a 20-30% discount), we could see the
stock potentially trading at ¥1,700 - representing 40+% downside. Also there could be risk to
their 5% div yield which provides support.
• Catalysts: End-2010～spring 2011 Sepsis drug eritoran/E5564 Ph3 data announcement
and application. Ph2 data already released but not very strong.
− April 30, 2011 PDUFA date for Aricept patch. Oral generic will exist by then, so unclear
how many patients will switch to high-priced patch.
− 2011 Patent expiry for Aricept in Japan (June 2011), with generic competitors to come
in Nov 2011. During 2011, three competing drugs will be launched (Takeda/J&J’s
Reminyl, Dai-ichi Sankyo’s memantine, and Ono/Novartis’ Rivastach Patch).

38
Sales view only
 Hewlett-Packard (HPQ, Short, Sales PT $33.25, 20% downside) US
• Thesis: My view is that while the stock looks “cheap” and many see continued hidden
value in the overall make up of the business, I believe HPQ is a structurally challenged
company that will face margin pressure following a year of pent-up demand being
released and inventory restocking (My analyst is OW). HPQ’s challenge is to become
more like IBM without risking ending up looking like a combination of Dell and Lexmark
with core businesses facing substantial margin challenges.
• I see 4 chief concerns that could cause the stock to underperform in 2011:
− HPQ’s exposure to printers (~20% of rev and 29% of EBIT), which are in
secular decline (think Lexmark)
− Their exposure to PCs, which is a low margin business facing tablet
cannibalization (PCs are ~30% of revs and 13% of ebit) (think Dell)
− The potential for HPQ to lose share to ORCL
− The early negative market sentiment against the new CEO and concern about
the future direction of the company. This was a missed opportunity to remove
some of the pressure that has weighed on the stock
• HPQ’s strategy has consisted of cost-cutting and acquisitions, which can’t be used to
predict long-term growth potential and present potential risks including:
− The Impact of Hurd’s aggressive cost-cutting limiting growth
− Continued deceleration in enterprise IT spending, investments in much needed R&D
and sales force could further pressure margins
− Possible poor acquisition integration following deals with Palm and 3Com. This
could prevent HPQ from investing while expanding margins, which could bar HPQ
from moving their mix shift away from PCs
• Valuation: If enterprise IT spending stalls and investments pressure margins, sales
view is the stock could de-rate to a 7x multiple to reflect the low growth environment.
On F11 Non GAAP EPS of $4.75 that implies a PT of $33.25. Ultimately, this is an
earnings risk story as nominal valuation is cheap.
• Potential catalysts: March 23, ‘11 when we receive a detailed update at the Annual
General Meeting
39
Sales view only
 Hitachi (6501 JP, Short, Bear PT ¥300, 25% downside) Japan
• Thesis: restructuring story seems fully priced in -- has a structural challenge
from its conglomerate-style business model and has been slow to cut off
unprofitable business units and concentrate its resources to core businesses:
− Structural challenge: needs to selectively allocate its resources to the
competitive area within the 11 business segments to improve profitability,
but easy financing will lower the incentive for drastic restructuring like
selling unprofitable business et al
− Large business portfolio and listed subsidiaries: 11 business units and
competes w/ various global players, which makes company very difficult to
efficiently manage. Profit is driven by its listed subsidiaries (HCM, Hitachi
Metals, et al) so the core strength of parent company is still questionable
− Risk factors: social infra business will have regulation risk and double dip
of economy will hurt the business sentiment. Intensifying competition from
overseas competitors (Korea et al) is also a risk. More than 70% of IT
service sales come from domestic business so sluggish domestic
economy will be the downside risk for this segment. BS has improved from
equity financing, but still the D/E ratio is 184%
• Valuation: Trades at ‘11e EPS 11.7x and PBR 1.2x w/ ROE at 11.1%.
Hitachi’s historical PBR range is .6x~2x, with average PBR during earnings
recovery phase at .85x. Market currently giving credit to management’s ability
to cut costs and turn profitable, but in order for it to hold its +1x PBR, the
company will need to show sustainable profit growth. Analyst Ibara-san sees
EPS peaking in 2010 and declining 7% in 2011 as ROE follows, declining 18%
YoY. We have 25%+ downside to our bear case (Y300 PT), which would put
the stock at .9x PBR, still higher than its average valuation during recovery.
• Catalysts: Management’s execution ability will be tested in ’11 as the positive
restructuring story is well recognized by the market and any incremental
negative news flow should trigger profit taking.

40
Sales view only
 Holcim (HOLN VX, Short, Bear PT SFr 44, 35% downside) Europe
• Thesis: Holcim offers exposure to a number of key themes I outlined in 2011
that make for promising shorts. Our analyst thinks the cement industry faces
an unusually weak pricing power dynamic which could pose problems given
expectations for rising input cost inflation next year; it has substantial exposure to
high-growth EMs that could face deceleration in 2011; and it's ~20% valuation
premium to sector peers seems unjustified given cement names face broadly
similar challenges.
• The traditional robust pricing power of cement players is not working out
this time due to market fragmentation (EMs are substantially less consolidated
than developed mkts); capacity expansion coming on stream (expansions initiated
during the 2004 - 2007 boom are only coming on stream now in many EMs); and
low freight costs (avg freight costs are $20 vs $80 during the mkt peak in 07/08)
which means cement can be shipped profitably to a much larger number of
markets.
• Holcim's largest earnings contributing countries face increased competition
or muted volume growth. 80% of Holcim's EBIT comes from EMs, so a potential
slowdown in demand or a rise in cost inflation increases earnings risks markedly
vs peers.
• India is an important driver given Holcim is perceived as one of the only ways to
"play" India's infrastructure build theme via EU equities. We see material margin
and pricing risks in India as capacity ramps up and coal and transport costs rise
sharply. This could affect earnings and sentiment as India is 20% of 2010
EBITDA. Cement players in India are guiding for a price recovery post the
monsoon season; if this doesn't happen, sentiment may deteriorate.
• Bear case: Our SFr 44 PT (35%+ downside) assumes continued slowdown to
2013 and price erosion. In Europe and North America, Holcim sees a 35% and
40% peak to trough volume decline (trough in 2012), while Europe, the US, and
India see a 7%, 9% and 15% cumulative price decline, respectively.
• Catalysts: India pricing, consensus downgrades, March 2nd – 2010 earnings
result.
41
Sales view only
 Logitech (LOGN VX, Short, Sales PT SFr11, 40% downside) Europe
• Thesis: Logitech continues in my view to be a structural short as we head
into 2011 – the company is doing the right thing in trying to build a new market
and participate in the “smart tv” revolution, but we see risks in decline in the old PC
peripherals market and execution risk on the long-term offering
• Google TV Continues to Get Poor Press. According to the WSJ, Google is
asking TV makers to put off announcing new Google TV offerings, following initial
negative reviews of the initial Google TV devices from Logitech and Sony. This
may increase concern that sell-through of Logitech’s Revue product (their Google
TV offering) may be worse than expected - Logitech expected $50m of sales in
year-end March'11 (we est 270k units with 165k units in 3Q to Dec)
• Smart TV – a lose/lose either way? If Google TV takes off, Samsung, LG,
Toshiba will undoubtedly come in and be extremely competitive. Also, Apple TV
could rival Google TV (can leverage app store, ecosystem, etc) which would also
shrink LOGN’s share. If Google TV fails, that is obviously bad as well.
• Compelling Entry Point to Build a Short Position – huge move up recently as
mgmt lifted expectations on margins but to hit these expectations, LOGN would
need to grow PC peripherals business 10%+ despite the mkt moving away
towards touch-based interfaces.
• Need to Re-invest Limits Operating Leverage. Despite ~$35m (MSe) of
additional gross profit implied from Logitech’s guidance, ~$10m operating profit
guidance increase suggests that mgmt will re-invest significant incremental profits.
While re-investment is positive for the L/T, this limits the extent of upgrades that
could come from a significant revenue outperformance in the short term
• Valuation: 40% downside to Sales PT – We assume new segment / product /
market opportunities fail to ramp meaningfully resulting in mid/low single digit
topline growth. We assume 7% sales CAGR (FY10-13e) and FY11 OP margins at
~8%. FY11e EPS is $0.86. We use a 11x PE multiple on CY11e EPS to get our
Bear Case Fair Value of SFr11.
• Catalysts: Logitech 3QFY11 results: Jan 21st 2011.

42
Sales view only
 Regal Entertainment (RGC, Short, Sales PT $7, 40% downside) US
• Thesis: structurally challenged business model, as shift from theater
to in-home viewing decreases overall volumes:
− Increasing attractiveness of in-home theater proposition with
more advanced products at more attractive price levels (better
quality, bigger average screen size, cheaper home-theatre
systems)
− In anticipation of slowing ticket sales, studios have been
aggressively shifting strategy to eliminate the exclusivity of
movie theater screenings (box office attendance could decline
even faster than it did in ’10 and more than current forecast of -4-
5%, perhaps as much as -7%)
− Most upside and revenue growth has come from 3D ticket sales,
which are priced at a substantial premium to traditional films– the
release of many in-home 3D friendly TVs (at rapidly declining
prices), will diminish pricing ability (hurting revenue growth and
calling into question sustainability of dividend, driving yields
higher as potential cash flow issues may be at risk here)

• Valuation: We assume 13% ’11e dividend yield and 4.5x ’11e

EV/EBITDA equating to a PT of $7, as film consumption shifts
materially from the theater to the home and lower ticket
prices/concession increases raise questions about sustainability of
current regular dividend; currently, stock trades at 6.3x ’11e
EV/EBITDA, which is below the group average of 9x (but still too high
given the secular/cyclical headwinds)

• Catalysts: 4Q10 results in February, attendance declines,

decreasing margins, declining 3D movie releases/popularity,
decreasing in-home device prices (TVs, blu-ray players, etc.)

43
Sales view only
 Spirit AeroSystems (SPR, Short, PT $15, 25% downside) US
• Thesis: Highly levered play on the commercial aero cycle (especially
Boeing), with 98% of sales tied to commercial aero OEMs.
• Aerospace is far from recovering from ’08 highs on a myriad of
concerns, including 787 delays, declines in air traffic, order
deferrals/cancellations, and scarce aircraft financing:
− Near-term headwinds remain with negative cash flow in ’10 and
margins under pressure from new accounting blocks on existing
programs, 787 ramp, and labor costs potentially rising
− Highly correlated to BA’s stock price (r-squared cash flow, the
aerospace cycle, and 787 progress (or lack thereof))
− Energy prices, and the credit market backdrop are significant
headwinds
− Company has six development programs, five of which have
problems: 787 delays and technical issues lead to higher R&D
spend and push revenues to the right; announcement to refresh
the 737 raises R&D; and additional issues arise on other
programs including G250-G650, among others
− A return to positive cash flow relies on BA execution of the 787
program-- currently selling 787s that cost ~$24M for ~$10M
• Valuation: We believe the stock should trade on 9x ‘11e EPS of
$1.65 (equating to a PT of $15). Shares currently trade on ~12.4 ‘11e
EPS, which is too high given structural issues and potential: 1) CF
problems, 2) 737 refresh, and 3) 787 delays.
• Catalysts: Q410 in January, further BA/FAA announcements on
delay or BA negligence, airlines cancel 787 orders, 737 refresh leads
to lost business, cash flow problems, unfavorable labor contract with
IAM machinists

44
Sales view only
Appendix

Tail Risk – Hedge When You Can, Not When You Have To

Margin Squeeze Basket

Global Conferences in 1H2011

45
Tail Risk: “Hedge When You Can, Not When You Have To”
I continue to believe in the "Hedge when you can, not when you have to" mantra as I think that 2011 will be yet another year
about debates on market moving topics, which is why I think buying the tails is again the right strategy.
There are several ways one can be positioned; here we detail ideas from a thematic perspective and outline four possible tail
risk scenarios.
Key Derivative Themes Tail Risk Scenarios
Don’t ignore the positive growth scenarios Oil price shock
Buy 6m SPX call spread collars. Buy 6m SXEP calls, Buy 3m OTM calls Prices should trend upward (we forecast $100/bbl in early ‘11) due to EM
on KOSPI, HSCEI, NIFTY, TWSE and OTM calls on worst of those demand that is inelastic at times and with capacity falling to pre-crises
indices. Buy SX5E 2012/2013 dividends. levels. Political tension in the Middle East and rising inflation also risks.

Be wary of the politicization of economic decisions US inflation

Buy 9m SPX put spreads. Buy 3m China Property basket risk reversals.
Rising energy and food prices, coupled with lax monetary policy could
Buy 12m SPX ATM puts KI on 10 yr > 4.25%. Buy 6m SPX ATM calls KI
mean higher inflation in the US. With inflation linked to higher gold prices,
on EURUSD < 1.25.
this would be a negative scenario for equity/gold correlation.

Inflation Risks from policy, especially in commodities Rates and Equities Decouple
Buy 6m SPX or HSCEI ATM puts KI on oil > $110. Buy 6m SPX puts KI
Equities and rates correlation is still high. If equities continue to rely too
on gold > $1600. Buy 6m calls on worst of Asia Energy or Material
much on QE2, markets could sharply decline as rates eventually rise.
baskets.
Furthermore, if the Fed weakens the US credit position, rates could rise as
equities fall. Hedge against this falling correlation.
Fewer dislocations, but still some volatility opportunities
Sell April 2011 SPX variance. Sell June 2011 SPX correlation. Long EM Equities and the USD rally
(TWSE, NIFTY)/short SPX volatility through options.
US economy responds well to QE2 and the Fed pulls off the accelerator;
ECB buys bonds aggressively to fight off possibility of another sovereign-
Financials is the single-most important sector led crises – equities advance as the EUR falls.
Buy 6m S&P 500 Financials call spreads. Buy 6m China banks call
spread collars. Buy 3m OTM puts on Australian Bank basket or Indian
Bank basket, sell puts on MS China Banks Index. Consider other side on
Chinese banks as well for those looking for true Tail exposure.

46
Sales view only
Margin Squeeze Basket
Despite seeing a sharp increase in the Producer Price Index (PPI) in 2010, we have yet to see the accompanied increase in
the Consumer Price Index (CPI). We think this is likely to persist in 2011, as pricing power will be challenged due to
excess capacity and weak consumer income/spending trends.
The chart below shows the leading relationship between the PPI-CPI spread and the y/y EPS growth for the S&P 500. The
widening of the PPI-CPI spread suggests that EPS growth is likely to fall significantly post this peak we are currently seeing.

The companies that are most likely to feel this margin squeeze are those that have significant commodity cost inputs
that compete in highly competitive industries with excess capacity (food processors, restaurants, apparel
mfg/distributors, select industrial and non-integrated materials processors). This basket is a play on the rising inflation and
input costs as they pressure the margins of the companies in this basket. Our team suggests investors short this basket
against the S&P 500.

47
Sales view only
Margin Squeeze Basket (continued)

In choosing the stocks, we focused on those companies that are

most likely to see margin contraction from higher inflation and
rising input costs.

Many of these companies reside in the packaged food,

apparel, and other consumer discretionary related
industries.

This basket is equal-weighted and consists of 39 stocks

concentrated in these areas.

MSMSNPUT is published on Bloomberg and is customizable;

the constituents can be changed to fit an investor’s
preference.

48
Sales view only
Global Conferences in 1H2011
Global Insights Day Japan Equity Conference
January 19 (London) March 17 –18 (London)

We will have Barton Biggs and a panel of leading international European Financials Conference
investors sharing their thoughts on 2011, along with a M&A panel March 29 – 31 (London)
from IBD and numerous global MS strategists and analysts
EEMEA Conference
Latin America Executive Conference April 11 – 12 (London)
January 5 – 7 (Miami) The MS Corporate Access
EMEA Conference
Exploration & Production Conference April 13-14 (New York/London) team can help on all matters
January 11 (London) around bespoke trips as well,
Cloud Computing Day whether it be in the US or in
North American Financials Conference May TBD (New York)
the Global Regions – We pride
February 1 – 2 (New York)
Services Summit ourselves on a very productive
Global Economics and Macro Conference May 4 – 5 (New York) and differentiated experience
February 8 (New York) for clients around Corporate
Healthcare Supply Chain Conference Access
Latin America Mid-Cap Conference May TBD (New York)
February 9 – 10 (New York) – please ask for any follow ups
Refining Conference
May 19 (New York)
here
US Technology, Media & Telecom Conference
February 28 – March 3 (San Francisco)
Australia Investment Conference
Morgan Stanley Utilities Conference May 23 – 24 (New York)
March 10 – 11 (New York)
US Retail Conference
India Corporate Day May 24 – 25 (Boston)
March 10 – 11 (London)
China Industrials Conference
Insurance Corporate Access Day May 25 – 26 (Shanghai)
March 15 (New York)
India Summit
MLP and Diversified and Natural Gas Corporate Access Day May 31 – June 2 (New York)
March 16 (New York)

49
Sales view only
 DISCLAIMER
Important Information and Qualifications
The information provided herein was prepared by sales, trading, or other non-research personnel of one of the following: Morgan Stanley & Co. Incorporated, Morgan Stanley &
Co. International PLC, Morgan Stanley MUFG Securities Co., Ltd, Morgan Stanley Capital Group Inc. and/or Morgan Stanley Asia Limited (together with their affiliates,
hereinafter "Morgan Stanley"), but is not a product of Morgan Stanley's Equity Research or Fixed Income Research Departments. This communication is a marketing
communication and is not a research report, though it may refer to a Morgan Stanley research report or the views of a Morgan Stanley research analyst. We are not commenting
on the fundamentals of any companies mentioned. Unless indicated, all views expressed herein are the views of the author’s and may differ from or conflict with those of the
Morgan Stanley Equity Research or Fixed Income Research Departments or others in the Firm. For additional information, research reports and important disclosures, see
https://secure.ms.com.

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HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING
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