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8/3/2019 0900b8c084332fe4[1]
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8 November 2011 Strategy Australian Equity Strategy
Page 2 Deutsche Bank AG/Sydney
Domestic cyclicals are trading cheaply relative to history
Domestic cyclicals (ie, retailing, transport, media, gaming, building materials) are trading very
cheaply, on a median PE of ~11x. This is on par with the depths of the financial crisis, and
they appear quite cheap relative to defensives. Still, the relative valuation case rests upon the
reliability of forecast earnings, and recent data raises concerns that an earnings rebound may
remain elusive.
Figure 2: Domestic cyclicals are as cheap as they were in the financial crisis
8
10
12
14
16
18
20
8
10
12
14
16
18
20
03 04 05 06 07 08 09 10 11
PE ratios on 12m forward earnings*Domestic cyclicals
Defensives
Banks
x
*Domestic cyclicals is the median of TAH, TTS, EGP, CWN, CSR, BLD, HVN, DJS, MYR, JBH, SWM, FXJ, AUN, SXL, TEN, APN, SEK, AIO, TOL, VBA, QAN. Defensives
is the median of stocks in the consumer staples, healthcare, telcos, utilities, property and general insurance sectors Source: IBES, Datastream, Deutsche Bank
Non-discretionary spending (eg, housing, food, utilities) has far exceeded growth in
discretionary spend (7% on pcp, vs 4%), due to inflation. Further, on a volume basis
discretionary spend has been quite solid; 4.4% growth on pcp, compared to historical
average of 4.8%, and non-discretionary spend at 2.4%. This suggests that price deflation hashurt companies, rather than the actual volume growth of purchases.
Figure 3: Discretionary spending is certainly lagging non-discretionary spend, but this is largely a deflation story
-3
0
3
6
9
12
-3
0
3
6
9
12
90 92 94 96 98 00 02 04 06 08 10
Prices
Volumes
Value
yoy%
Non-discretionary household spending
-3
0
3
6
9
12
-3
0
3
6
9
12
90 92 94 96 98 00 02 04 06 08 10
Prices
Volumes
Value
yoy%
Discretionary household spending
Note: Non-discretionary spending comprises food, tobacco, alcohol, housing costs, utilities, healthcare, operation of vehicles, communications, education & financial services. Discretionary spending comprises clothing &
footwear, furnishings & household equipment, vehicle purchases, transport services, recreation & culture, cafes & restaurants and other Source: ABS, Deutsche Bank
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8 November 2011 Strategy Australian Equity Strategy
Deutsche Bank AG/Sydney Page 3
Households preference for services over goods is not helping a
range of listed companies
Looking in more detail at discretionary spending, there is a further problem for domestic
cyclicals. Spending on discretionary goods, where listed companies have more exposure, has
been quite poor, falling 3% over the year to June. All of the strength has been concentrated
in services, where the equity market has comparatively less exposure (eg, household
spending money overseas on holidays, spending at cafes/restaurants that arent listed).
Figure 4: Spending on discretionary services has been very strong, while spending on goods is going backwards
-8
-4
0
4
8
12
-8
-4
0
4
8
12
90 92 94 96 98 00 02 04 06 08 10 12
Goods
Services
yoy%Discretionary household spending - values
-6
-4-2
0
2
4
6
8
10Discretionary household spending - values
FY10
FY11
%,
pcp
Note: Discretionary spending comprises clothing & footwear, furnishings & household equipment, vehicle purchases, transport services, recreation & culture, cafes & restaurants and other Source: ABS, Deutsche Bank
This is also evident in the NAB survey, where in the September quarter retailers reported
conditions to be not much better than in the financial crisis, while companies in recreation
reported above average conditions. The survey suggests that companies expect these
conditions to persist.
Figure 5: The Sept qtr NAB survey shows retailers continue to find it tough, while the recreation sector is doing well
-40
-30
-20
-10
0
10
20
30
-40
-30
-20
-10
0
10
20
30
90 92 94 96 98 00 02 04 06 08 10 12
Business conditions - NAB survey
Recreation industry
Retail industry
Dev from
LR avg
-40
-30
-20
-10
0
10
20
30
-40
-30
-20
-10
0
10
20
30
90 92 94 96 98 00 02 04 06 08 10 12
Expected profitability - NAB survey
Recreation industry
Retail industry
Dev from
LR avg
Source: NAB, Datastream, Deutsche Bank
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Page 4 Deutsche Bank AG/Sydney
Households still choosing services/experiences over goods in the
September quarter
While the national accounts data is only up until June, more recent data from the retail trade
survey suggests these trends are continuing. The chart below shows strength in
cafes/restaurants and tourism. There is also strength in areas of retail with exposure to
people doing things, whether recreation or home improvement. In contrast, clothing,
footwear and electrical are performing poorly, through a combination of household
preference for services, price deflation and overseas competition.
Figure 6: Good growth in services & recreational goods, clothing/footwear lagging
-15
-13
-7
-5
2
2
4
4
46
6
7
8
9
10
15
-15 -10 -5 0 5 10 15
Footwear
Clothing
Newspaper/books
Dept stores
Takeaway food
Electrical
Total
Food
O/S tourismPersonal goods
Hardware
Furniture
Liquor
Specialised food
Cafes/restaurants
Sporting/toys/media
Retail trade, values
mom% trend,
annualised
Note: Data on overseas tourism are not from the retail trade survey, but sourced from the ABS trade data Source: ABS, Deutsche Bank
These trends are quite consistent with recent reports from listed retailers. The larger retailers
who sell clothing and electrical items are struggling, but those with exposure to households
activities (eg, KMD, Super Cheaps stores, Bunnings) are reporting good growth.
Figure 7: Retailers with exposure to consumers outdoor activities are doing best
-10.0
-7.9
-4.2
-4.1
-2.8
-1.0
0.0
0.5
0.9
3.0
5.3
6.3
15.8
-12 -8 -4 0 4 8 12 16
Myer
David Jones
Big W
Target
Harvey Norman
JB Hi-Fi
Specialty Fashion
Kmart
Premier
Super Cheap's outdoor
Super Cheap auto
Bunnings
Kathmandu
Retailer comparable store sales, latest data*
%, pcp
*September quarter for Big W, Target, Harvey Norman, Kmart, Bunnings. July quarter for Myer, David Jones. June half for JB Hi-Fi, Specialty Fashion. July half for
Kathmandu, Premier.15 weeks to mid-October for Super Cheaps 2 divisions. Super Cheaps outdoor division comprises Rays Outdoor and BCF Source: Company
data, Deutsche Bank
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Growth in overseas travel remains very strong
Overseas travel remains very popular with Australians, with departures growing 10% over
the past year. Tourists are increasingly opting for South-east Asia (largely Thailand and
Indonesia), and North America is getting more popular. Clearly the stronger AUD has been a
contributor, and this is also having the effect of dampening arrivals into Australia. Until 2007
had always had a surplus of travelers (ie, inbound tourists exceed outbound tourists), but thishas changed significantly in recent years.
Figure 8: Growth in overseas travel has ramped up, with South-east Asia a particularly popular destination
100
200
300
400
500
600
100
200
300
400
500
600
91 93 95 97 99 01 03 05 07 09 11
Australians going overseas
Foreigners visiting Australia
Overseas leisure travel*000s
`
0.0
0.4
0.8
1.2
1.6
2.0
2.4 Australian overseas short-term departures200620072008200920102011 ytd
million
*Leisure travel is the sum of holiday and visiting friends and relatives Source:ABS, Deutsche Bank
The scale of this turnaround has been quite striking. Through much of the 1990s and last
decade, in a given quarter arrivals amounted to 1-2% of the Australian resident population.
And since people tend to spend more while travelling, this represented a non-trivial boost to
growth for Australian companies. But now this has swung around, with implications for a
range of sectors exposed to tourism spend.
Figure 9: Tourism used to provide Australia with a net boost, but this has reversed
-3
-2
-1
0
1
2
3
-3
-2
-1
0
1
2
3
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Tourism balance as % of Australian populationArrivals less
departures as %
of total population
`
Australians going offshore
exceeding foreigners
visting Australia
Source: ABS, Deutsche Bank
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Domestic airline activity is solid also
Even with Australians increasingly opting for overseas holidays, domestic air travel is growing
solidly. This partly reflects the resilience of business travel, but also an ongoing shift by
households toward air travel and away from car travel. Both Virgin and Qantas have grown
revenue passenger kilometers by ~5% over the past year.
Figure 10: Domestic airline activity is growing a solid pace for both major airlines
-6
-3
0
3
6
9
12
15
-6
-3
0
3
6
9
12
15
05 06 07 08 09 10 11
Domestic airline activity (revenue passenger kilometres)
Qantas (incl. Jetstar)
Virgin
% yoy
Source: Company data, Deutsche Bank
The issues with a smaller discount competitor have helped the listed airlines gain share, and
this has also contributed to growing yields. Discount airfares have increased by almost 30%
over the past year, while business-class fares have grown by 15%.
Figure 11: Airfares have grown strongly over the past year, particularly discount
-30
-20
-10
0
10
20
30
-30
-20
-10
0
10
20
30
03 04 05 06 07 08 09 10 11
Best discount
Business
Full economy
Domestic airfaresyoy%
Source: BITRE, Deutsche Bank
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Gambling spend is growing at a decent pace
Households are also growing spending on gambling at a moderate rate, highlighting a
preference for experiences over goods. For example, our analysts forecast December half
main gaming floor revenue to at Crown to be up ~5% on pcp, and the recent AGM
commentary delivered comfort around this forecast (management pointing to 3.5% growth
on pcp in the half thus far). In contrast, retail sales ex food in the September quarter was flaton pcp. Further, spending on gaming machines in Victoria and Queensland is growing broadly
in line with historical rates.
Figure 12: Casino spending is growing at a faster rate than discretionary retail
0
2
4
6
8
10
0
2
4
6
8
10 Casino spending vs discretionary retailRetail sales ex food
Crown Melbourne & Burswood
%
pcp
-9
-6
-3
0
3
6
9
12
15
-9
-6
-3
0
3
6
9
12
15
04 05 06 07 08 09 10 11
Victoria
Queensland
Electronic gaming machine expenditureyoy%
Note: Casino spending for Dec-11 is DB forecast, while retail trade is September quarter on pcp. Source: VCGR, Qld Office of Gaming, Company data, ABS, Deutsche Bank
While some sectors of the economy are clearly under pressure, others are quite strong, and
thus on average the economy is tracking reasonably well. As a result, stocks that have broad
exposure across sectors and regions should perform, such as Seek and the banks. There has
been concern recently around a slowing labour market, and the limited growth in job ads.
However, the NAB business survey suggests that the underlying pulse of labour demand is
holding up better than suggested by official data. Further, our analysts do not have any
volume growth for SEK in their forecasts, but earnings are nonetheless yet expected to grow
strongly in part due to higher prices.
Figure 13: Internet job ads havent grown much recently, but the NAB survey still suggests a solid jobs outlook
-60
-40
-20
0
20
40
60
80
0
50
100
150
200
250
300
00 02 04 06 08 10 12
Number (lhs)
Growth on pcp (rhs)
Internet Job Advertisements000s %
-50
-40
-30
-20
-10
010
20
30
40
89 91 93 95 97 99 01 03 05 07 09 11
-4
-3
-2
-1
0
1
2
3
4
5
6
7
NAB survey and employmentEmployment (lhs)
NAB employment index (rhs)
qoq%
annual.Index
Source: Datastream, ABS, Deutsche Bank
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Page 8 Deutsche Bank AG/Sydney
The Masterchef effect? Households eating higher quality food.
Another interesting development in household spending has been a recent preference for
higher quality food. This is evident in the outperformance of the cafes & restaurants sector
relative to takeaway food sales, as well as specialized food retailers relative to supermarkets.
There has been some suggestion that this can be traced to the popular cooking show
Masterchef, but clearly this is difficult to quantify.
Figure 14: Households are growing spending on higher quality food, both to eat at home and when going out
-20
-15
-10
-5
0
5
10
15
20
25
-20
-15
-10
-5
0
5
10
15
20
25
05 06 07 08 09 10 11
Retail sales
Cafes & restaurants
Takeaway food
mom %,
trend
annual.
-25
-20
-15-10
-5
0
5
10
15
20
25
30
-25
-20
-15-10
-5
0
5
10
15
20
25
30
05 06 07 08 09 10 11
Retail salesSpecialised food*
Supermarkets
mom %,
trend
annual.
*Specialised food
includes fruit shops,
butchers, bakers etc
Source: ABS, Deutsche Bank
Still, spending at supermarkets continues to grow around mid-single digits, reflecting the
underlying defensiveness of the business. There is also the prospect of food inflation in the
near future. The chart below suggests that food inflation in Australia tends to emerge around
3 quarters after inflation has picked up globally, and suggest upside over the remainder of
FY12. (Note that for the Australian measures we use Woolworths reported inflation, and the
food deflator from the retail trade survey. The latter measure reflects what is actually spent
on food, in contrast to the food component of the CPI which is a fixed weight over time).
Figure 15: High global food inflation should begin to feed into domestic inflation
-1
0
1
23
4
5
6
7
8
-25
-20
-15
-10
-50
5
10
15
20
25
30
35
96 98 00 02 04 06 08 10 12
Global and Australian food price inflationGlobal food inflation (AUD, 3 qtr lead, lhs)
Australian food prices* (rhs)
Woolworths inflation
% yoy
*Australian food prices is calculated as the implied price deflator of food retailing in the retail trade survey, and thus reflects actual food purchases, unlike the CPI
Source: UN, Company data, ABS, IRESS, Deutsche Bank
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Deutsche Bank AG/Sydney Page 9
Deutsche Banks preferred consumer exposures
Figure 16: Metrics for Deutsche Banks preferred stocks with consumer exposure (DB analyst numbers)
FY10 FY11F FY12F FY13F12m
fwd PEFY11F FY12F FY13F
12m
fwd DYFY11F FY12F FY13F
AIO Asciano na 658% 9% 28% 17.2x 20.4x 18.7x 14.6x 1.8% 1.3% 1.7% 2.0%
CCL Coca-Cola Amatil 11% 5% 11% 8% 16.2x 17.3x 15.7x 14.5x 4.4% 4.1% 4.6% 5.0%
CKF Collins Foods na na -20% 28% 5.2x 4.9x 6.2x 4.9x 7.6% 0.0% 4.1% 9.9%
CWN Crown -3% 17% 23% 24% 13.9x 18.2x 14.8x 11.9x 4.5% 4.6% 4.6% 4.6%
DMP Domino's Pizza 15% 19% 15% 12% 19.3x 23.3x 20.3x 18.1x 3.6% 3.0% 3.4% 3.8%
FLT Flight Centre 74% 22% 11% 9% 10.1x 11.7x 10.5x 9.7x 5.0% 4.2% 4.9% 5.1%
KMD Kathmandu 64% 49% 17% 17% 10.5x 12.7x 10.9x 9.3x 4.9% 4.0% 4.7% 5.3%
PMV Premier -24% -37% 21% 15% 12.8x 15.9x 13.2x 11.5x 6.8% 6.8% 6.8% 6.8%
QAN Qantas 144% 40% -4% 52% 7.8x 8.5x 8.9x 5.8x 3.7% 0.0% 3.1% 4.6%
SEK Seek 31% 26% 29% 22% 13.8x 19.2x 14.9x 12.2x 3.7% 2.4% 3.3% 4.1%
TTS Tatts 1% -5% 15% -32% 11.2x 11.0x 9.6x 14.0x 9.0% 9.2% 10.1% 7.3%
VBA Virgin Blue na na na 60% 12.7x -21.4x 14.7x 9.2x 1.8% 0.0% 0.0% 5.2%
WES Wesfarmers -14% 23% 30% 12% 14.5x 19.4x 15.0x 13.4x 5.6% 4.6% 5.4% 6.0%
WOW Woolworths 9% 6% 4% 10% 13.2x 14.2x 13.6x 12.4x 5.4% 5.0% 5.2% 5.7%
XAIXB Industrials ex banks -3% 0% 11% 13% 12.3x 14.4x 12.9x 11.4x 5.2% 5.2% 5.0% 5.5%
PE ratio Dividend yieldEPS growth
Note: Equity strategy teams model portfolio includes CWN, SEK, VBA, WES, WOW. All stocks in the table are rated a BUY by DB analysts, with the exception of WES. Source: Deutsche Bank
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Page 10 Deutsche Bank AG/Sydney
COMPANIES MENTIONED LIST
C o d e S t o c k n a m e L a s t p r i c eAIO Asciano Ltd 1.50
APN APN News & Media Ltd 0.88
AUN AUSTAR United Communications Ltd 1.16
BLD Boral Ltd 3.63
CCL Coca-Cola Amatil Ltd 12.20
CKF Collins Foods Ltd 1.21
CSR CSR Ltd 2.36
CWN Crown Ltd 8.09
DJS David Jones Ltd 3.14
DMP Domino's Pizza Enterprises Limited 7.21
EGP Echo Entertainment Group Ltd 3.78
FLT Flight Centre Ltd 19.80
FXJ Fairfax Media Ltd 0.90
HVN Harvey Norman Holdings Ltd 2.12
JBH JB Hi-Fi Ltd 15.15
KMD Kathmandu Holdings Ltd 1.90
MYR Myer Holdings Ltd 2.33
PMV Premier Investments Ltd 5.30
QAN Qantas Airways Ltd 1.62
SEK Seek Ltd 5.95
SFH Specialty Fashion Group Ltd 0.58
SUL Super Retail Group Ltd 5.51
SWM Seven West Media Ltd 3.25
SXL Southern Cross Media Group Ltd 1.19
TAH Tabcorp Holdings Ltd 2.90
TEN Ten Network Holdings Ltd 0.92
TOL Toll Holdings Ltd 4.74
TTS Tatts Group Limited 2.33
VBA Virgin Blue Holdings Ltd 0.39
WES Wesfarmers Ltd 32.32
WOW Woolworths Ltd 24.60Source: Deutsche Bank
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Appendix 1
Important Disclosures
Additional information available upon requestFor disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see
the most recently published company report or visit our global disclosure look-up page on our website at
http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the
undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in
this report. Tim Baker
Equity rating key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-
holder return (TSR = percentage change in share price
from current price to projected target price plus pro-
jected dividend yield ) , we recommend that investors
buy the stock.
Sell: Based on a current 12-month view of total share-
holder return, we recommend that investors sell the
stock
Hold: We take a neutral view on the stock 12-months
out and, based on this time horizon, do not recommendeither a Buy or Sell.
Notes:
1. Newly issued research recommendations and target
prices always supersede previously published research.
2. Ratings definitions prior to 27 January, 2007 were:
Buy: Expected total return (including dividends) of
10% or more over a 12-month period
Hold: Expected total return (including dividends)
between -10% and 10% over a 12-month period
Sell: Expected total return (including dividends) of -
10% or worse over a 12-month period
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Page 12 Deutsche Bank AG/Sydney
Regulatory Disclosures
1. Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
2. Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent
or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at
http://gm.db.com.
3. Country-Specific Disclosures
Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning ofthe Australian Corporations Act and New Zealand Financial Advisors Act respectively.
Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) andits(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly
affected by revenues deriving from the business and financial transactions of Deutsche Bank.
EU countries: Disclosures relating to our obligations under MiFiD can be found athttp://www.globalmarkets.db.com/riskdisclosures.
Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registrationnumber - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117.
Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan.
Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption
tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to
losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses
stemming from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are notregistered credit rating agencies in Japan unless Japan is specifically designated in the name of the entity.
Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, anyappraisal or evaluation activity requiring a license in the Russian Federation.
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Deutsche Bank AG/Sydney
International locations
Deutsche Bank Securities Inc.
60 Wall Street
New York, NY 10005
United States of America
Tel: (1) 212 250 2500
Deutsche Bank AG London
1 Great Winchester Street
London EC2N 2EQ
United Kingdom
Tel: (44) 20 7545 8000
Deutsche Bank AG
Groe Gallusstrae 10-14
60272 Frankfurt am Main
Germany
Tel: (49) 69 910 00
Deutsche Bank AG
Deutsche Bank Place
Level 16
Corner of Hunter & Phillip Streets
Sydney, NSW 2000
AustraliaTel: (61) 2 8258 1234
Deutsche Bank AG
Filiale Hongkong
International Commerce Centre,
1 Austin Road West,Kowloon,
Hong Kong
Tel: (852) 2203 8888
Deutsche Securities Inc.
2-11-1 Nagatacho
Sanno Park Tower
Chiyoda-ku, Tokyo 100-6171
Japan
Tel: (81) 3 5156 6770
Global Disclaimer
The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). The information herein is believed to be reliable and has been obtained from public sources
believed to be reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such information.
Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including strategists andsales staff, may take a view that is inconsistent with that taken in this research report.Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without
notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes
inaccurate. Prices and availability of financial instruments are subject to change without notice. This report is provided for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial
instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst judgement.
As a result of Deutsche Banks March 2 010 acquisition of BHF-Bank AG, a security may be covered by more than one analyst within the Deutsche Bank group. Each of these analysts may use differing methodologies to valuethe security; as a result, the recommendations may differ and the price targets and estimates of each may vary widely.
In August 2009, Deutsche Bank instituted a new policy whereby analysts may choose not to set or maintain a target price of certain issuers under coverage with a Hold rating. In particular, this will typically occur for "Hold" rated
stocks having a market cap smaller than most other companies in its sector or region. We believe that such policy will allow us to make best use of our resources. Please visit our website at http://gm.db.com to determine the
target price of any stock.
The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed investment decisions. Stock transactions can lead to losses as a result of price fluctuations and
other factors. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the investment. Past performance is not necessarily indicative of future
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and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the Financial Services Authority for the conduct of investment business in the UK an d authorized by the BaFin.
This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. This report is distributed in Singapore by Deutsche Bank AG, Singapore Branch, and recipients in
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