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							MORGAN STANLEY RESEARCH Morgan Stanley & Co.

NOVEMBER 4, 2009

North North America America

HIGHLIGHTS

INVESTMENT PERSPECTIVES

21 Semiconductors Downgrade Semis and Equipment Groups to Cautious – Fundamentals Peaking
Mark Lipacis, Sanjay Devgan, Atif Malik, Michael Chu

33 Adobe Systems Raising Numbers for Omniture; Costs Still Under Control
Adam Holt, Jennifer Swanson, Keith Weiss

39 Cablevision CVC Added to Morgan Stanley’s Best Ideas List
Benjamin Swinburne, David Gober, Ryan Fiftal

Strategy and Economics
3 5 Morgan Stanley Best Ideas List US Economics Consumer Spending: Slow Growth — Not No Growth — Ahead
Richard Berner

Opinion Changes
n Upgrades

15

Managed Care Positioning for 2010: Upgrading UNH to Overweight, Remaining Overweight WLP
Doug R. Simpson, Melissa McGinnis

7

US Credit Strategy A Spooky Comparison
Rizwan Hussain, Gregory Peters, Adam Richmond

17

Cooper Industries Upgrading to Overweight; High-Quality, Late-Cycle Laggard at Attractive Value
Scott Davis, Mike Stein, Matthew Gugino, Rob Wertheimer

9

Equity Derivative Strategy Equities in the Dollar Bear Camp
Sivan Mahadevan, Christopher R. Metli et al.

19

Plains Exploration & Production Expectations Low, Valuation Supportive – Move to Overweight
Stephen Richardson, Sameer Uplenchwar, Stuart Young p Downgrades

11

Global Interest Rate Strategy A New Balance of Risks
Jim Caron, Laurence Mutkin

21

13

Asia/GEMS Equity Strategy Sources of Competitive Advantage in EM, Part II: The Best Business Models List
Vinicius P. Silva, Jonathan Garner, Michael Wang

Semiconductors Downgrade Industry to Cautious – Fundamentals Peaking
Mark Lipacis, Sanjay Devgan

23

Semiconductor Capital Equip. Downgrading Industry to Cautious; Fundamentals Peak In Sight
Atif Malik, Michael Chu, Mark Lipacis

(continued)

Morgan Stanley does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

For analyst certification and other important disclosures, refer to the Disclosures Section.
+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Table of Contents (Continued)
New Coverage
25 A123 Systems Early Leader in a Transformational Industry; Equal-weight
Robert Wertheimer, Ravi Shanker

43

Covidien Actiq ANDA Supports Bullish Pharma Thesis
David Lewis, Andrew Olsen, Ryan Bachman, James Francescone

45 47 49

RadioShack No Cannibal on T-Mobile
Gregory Melich, Oliver Wintermantel, Michael Montani

27

Cimarex Energy Cana Changes the Game; Overweight, $50 Price Target
Stephen Richardson, Sameer Uplenchwar, Stuart Young

Starbucks Is $30 Possible (and How)?
John Glass, Jon Tower

Industry Analysis
29 Banking - Large Cap Banks 3Q09 Results a Net Positive; STI Upgraded to Equal-weight
Betsy Graseck, Cheryl Pate, Justin Kwong, Matthew Kelley

Under Armour Story Improving, but Still Too Early for the Stock
Chi H. Lee, Haruka Miyake

51

Wal-Mart Filling the Bucket
Gregory Melich, Michael Montani

31

Systems and PC Hardware C2010 Revenue Growth Still Underappreciated; More EPS Upside Likely
Kathryn Huberty, Scott Schmitz, Mathew Schneider, Jerry Liu

International
53 Europe Insurance Initiation on Lloyd’s of London Insurers – Overweight Amlin, Underweight Brit
Adrienne Lim, Andrew Broadfield

Company Analysis
33 Adobe Systems Raising Numbers for Omniture; Costs Still Under Control
Adam Holt, Jennifer Swanson, Keith Weiss

57

Europe Oil Services Rebound in Contract Awards Underway
Martijn Rats, Robert Pulleyn

35 37

Amgen Recent Prolia Concerns Provide Entry Point
Steven Harr, Sara Slifka

61 63

State Bank of India Fast Becoming Best in Class
Anil Agarwal, Mihir Sheth, Mansi Shah

Boeing Investor FAQs on Our Recent Downgrade to Underweight
Heidi Wood

Tenaris Shipment Surge Could Spark EPS Revisions; Upgrade to Overweight
Ole Slorer, Paulo Loureiro

39

Cablevision Systems Improving Broadband Pricing Can Drive Multiple Expansion
Benjamin Swinburne, David Gober, Ryan Fiftal

65

Ternium Coming into Cash; Upgrade to Overweight, Target Raised to $33
Carlos de Alba, Bruno Montanari, Cesar A. Medina

41

Celgene We Still View ASH as a Positive Catalyst
Steven Harr, Sara Slifka

US Economic Outlook
Value GDP Growth (%) CPI Inflation (%)
e = Morgan Stanley Research estimates

2008 0.4 3.8

2009e (2.5) (0.4)

2010e 2.7 2.1

2011e 2.8 2.5

Events
All events require advance registration. Clients should contact their Financial Advisors.

9th Annual Technology, Media and Telecoms Conference November 18–19, Barcelona 8th Annual Asia Pacific Summit November 18–19, Singapore

Global Consumer & Retail Conference November 19–20, New York 2010 Morgan Stanley Technology Conference March 1–3, San Francisco

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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

NORTH AMERICA

Best Ideas
Best Ideas are our leading stock investment insights — the best combination of highly differentiated research, favorable risk-reward profiles, and clear catalysts. Differentiated research. We seek out-of-consensus thinking that in-corporates fresh data and analysis. Analysts are expected to identify "what's in the price" and present a compelling challenge to market assumptions on key investment debates. Favorable risk-reward profiles. Scenario analysis lies at the heart of our disciplined approach to research, so we look beyond single-point estimates and price targets. We examine the full risk-reward profile of the investment, assessing the range of plausible outcomes and the scenario skew as indicators of analyst conviction. Clear catalysts. We require a clear roadmap for upcoming data and events in the following few months that can help corroborate our analysts' investment theses and drive a discernable change in market perceptions. Additions and removals of stocks are published as part of regular, stock-specific reports. The complete list appears weekly in Investment Perspectives. Important Note: Best Ideas is not and should not be considered a portfolio. Each investment idea is chosen based on its own merit and without any consideration of the other investment ideas chosen. Specifically, there has been no effort to mitigate the risks of investing in any collective group of Best Ideas. Concepts important to a balanced port-folio, such as negative correlation and diversification, have not been considered. Treating Best Ideas as a portfolio will subject you to the risk of losing all or a substantial portion of your investments. Morgan Stanley Research Stock Selection Committee

Company

Ticker

Nov 2 Price

Price Target

EPS* Bull Base Bear 2009 2010

Consensus EPS* 2009 2010

Annual Growth in EPS* 2009-2011 2009

P/E* 2010 2009

P/B 2010

Bank of America Baker Hughes Celgene Corporation Cablevision Systems Danaher Corp. Walt Disney Co Hewlett-Packard Suncor Textron Inc. Union Pacific Corp.

BAC.N BHI.N CELG.O CVC.N DHR.N DIS.N HPQ.N SU.TO TXT.N UNP.N

14.8 43.43 50.7 24.02 68.98 27.62 47.51 35.14 18.51 59.41

30 99 64 29 80 35 62 49 25 80

41 122 73 38 97 46 70 60 35 96

30 99 64 29 80 35 62 49 25 80

12 25 43 20 53 25 46 27 46

0.07 e 2.05 e 0.26 e 0.81 e 2.09 e 2.25 e 1.95 e 2.06 e 2.08 e 2.67 e 2.07 e 2.66 e 1.27 e 1.45 e 0.96 e 1.40 e 2.91 e 3.75 e 3.40 e 3.86 e 1.74 e 1.90 e 1.76 e 1.87 e 3.82 e 4.42 e 3.72 e 4.22 e 0.91 e 2.73 e 1.04 e 2.52 e 3.53 e 4.57 e 3.56 e 4.19 e

563.5% 53.2% 25.8% 15.9% 22.3% 13.8% 12.7% 93.8% NM 28.8%

223.0 20.8 24.4 18.9 23.7 15.8 12.4 38.7 NM 16.8

7.2 19.3 19.0 16.6 18.4 14.6 10.8 12.9 43.1 13.0

0.5 1.7 5.1 NM 2.1 1.4 2.7 1.8 1.6 1.8

0.5 1.5 4.3 NM 1.9 1.3 2.3 1.7 1.6 1.7

12 (0.09) e 0.43 e 0.19 e 0.90 e

*Uses consensus methodology, all other metrics use ModelWare methodolog
Dividend Yield Company Ticker 2009 2010 FCF Yield Ratio 2009 2010 2009 RNOA 2010 Net Debt/ EBITDA 2009 2010 Interest Cover 2009 2010

Bank of America Baker Hughes Celgene Corporation Cablevision Systems Danaher Corp. Walt Disney Co Hewlett-Packard Suncor Textron Inc. Union Pacific Corp.

BAC.N BHI.N CELG.O CVC.N DHR.N DIS.N HPQ.N SU.TO TXT.N UNP.N

0.3% 1.4% 0.0% 1.7% 0.1% 1.3% 0.7% 1.2% 0.5% 1.8%

0.3% 1.4% 0.0% 2.0% 0.2% 1.4% 0.7% 2.3% 0.5% 1.9% NM 4.1% 11.2% 6.4% 5.3% 8.3% NM 10.7% 3.8% NM 5.3% 14.4% 6.0% 5.1% 8.1% 9.6% 7.1% 5.0%

1.0% e 9.2% e 48.6% e 16.6% e 8.5% e 7.3% e 20.9% e 5.8% e 0.3% e 8.1% e

6.3% e 11.8% e 63.3% e 18.5% e 9.9% e 8.2% e 24.4% e 11.6% e 2.1% e 9.9% e

10.4 e 0.6 e NM 4.1 e 1.5 e 1.3 e 0.1 e 2.0 e 15.1 e 2.1 e

0.4 e 0.9 e NM 4.1 e 1.6 e 1.4 e NM 0.9 e 8.0 e 1.7 e

0.8 e 7.4 e NM 2.0 e 9.2 e 9.2 e 13.9 e 3.0 e 0.3 e 3.8 e

13.6 e 8.4 e NM 2.0 e 10.9 e 11.1 e 18.0 e 8.7 e 2.2 e 4.7 e

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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

NORTH AMERICA

Best Ideas
Research Updates on Best Ideas
Cablevision Systems (CVC, $24.02, Overweight, In-Line Industry view) Benjamin Swinburne CVC added to the Best Ideas list on October 29. We reiterate our Overweight rating on CVC, and highlight further potential upside in our Bull Case from stronger broadband pricing and multiple expansion. We see upside from FCF generation at CVC, and additional upside if improved broadband pricing sentiment drives another half-turn of multiple expansion. In addition, we believe management’s ability and, perhaps more importantly, intent to drive shareholder value will be highlighted by the upcoming MSG spin and increases in share repurchases and dividends in 2010. Finally, we think the incremental competitive pressure in the residential business from FiOS will slow in 2010 versus 2009 and that Cablevision will successfully take share in the margin accretive small business market. All these factors drive our above consensus 2010 EBITDA growth estimate.
See page 39

Celgene (CELG, $50.70, Overweight, In-Line Industry view) Steven Harr We expect ASH in December to drive CELG shares. The key current investment debate is whether data from the MM-015 trial (data at American Society of Hematology meeting on December 9) will be adequate to differentiate induction (short-term) and maintenance (long-term) treatment of Revlimid, an important driver of treatment duration and revenue/patient. Given data to date for Revlimid and Thalomid, we see little risk that over time maintenance will not be superior to short-term treatment, driving investor numbers higher, espe-cially for the EU.
See page 41

Union Pacific (UNP, $59.41, Overweight, Attractive Industry view) William J. Greene Pacer deal accelerates realization of Union Pacific pricing opportunity. Pacer, a major intermodal customer of Union Pacific, accounting for nearly all of UP’s 2011 legacy re-pricing opportunity (or ~5% of revenue, by our estimate), announced an early renegotiation of a major portion of its legacy contract (vs. October 2011). As a result, Union Pacific is likely to benefit from both substantial re-pricing and greater fuel surcharge coverage. We estimate that early renegotiation contract could add a net $0.07–0.10 or more to 2010 consensus estimates even though the full economics of the contract renegotiation would not be felt until 2011 due to certain concessions by UP. Furthermore, Union Pacific’s contract renegotiation is likely to support headline pricing and assuage recent investor concerns that the rail pricing story is at risk.
See “Pacer Deal Likely to Further Support Recent Strength”, November 4, 2009

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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Strategy & Economics
November 2, 2009

US Economics Consumer Spending: Slow Growth — Not No Growth — Ahead
Morgan Stanley & Co. Incorporated

17% — a 13-month high. Moreover, the hiring plans series, which captures the number of respondents whose companies intend to expand payrolls over the next three months, rose an additional three percentage points to a similar 17%. As in the hiring series, this value was the highest mark for this indicator since the intensification of the recession last fall.
Exhibit 1

Richard Berner
Richard.Berner@morganstanley.com

Following a summer splurge, consumer spending is slowing dramatically. We estimate that real growth in consumer spending will slow to under 2% annualized in the fourth quarter, following a temporary boost to nearly a 3½% clip in 3Q. It’s widely understood that the use-it-or-lose-it, “cash-for-clunkers” purchase incentives that began late in July and ended on September 1 fueled more than 40% of that spending gain.1 With consumer fundamentals still under pressure, therefore, many investors regard September’s 0.6% decline in real consumer spending as the start of renewed retrenchment. We disagree. Consistent with our long-standing view, slow growth, not no growth, is likely. Tailwinds are starting to offset still-significant headwinds, and we continue to forecast modest (2%) spending growth over the next several months. Three key consumer tailwinds are poised to strengthen in coming months. The first: Real, after-tax “core” income — income from wages and salaries, the critical driver for consumer spending — is likely to rise modestly in coming months. Although wage gains won’t likely improve much until later in 2010, a rising workweek and slower declines in payroll employment finally seem likely to pull core wage and salary income out of its two-year tailspin. The evidence for such improvement is so far fragmentary, but timely and forward-looking data suggest that it may be for real. For example, initial and continued claims for unemployment insurance benefits have declined steadily since peaking in June, and the decline in the latter over the last four weeks accelerated to 315,000; that’s the fastest pace since an atypical July surge in motor vehicle output reduced continued claims. The employment components of the two ISM Indexes and stability in the private job openings rate over the past three months seem consistent with smaller declines in payrolls. Surveys of hiring and hiring plans such as those from our own Business Conditions Survey (the MSBCI) in early October improved noticeably. The hiring series, which tracks the number of analysts whose firms have employed more workers over the previous three months, nearly doubled in October to
1

Core Income Poised to Accelerate
9
Real personal consumption expenditures, year-over-year percent change

9

6

6

3

3

0
Real after-tax wages and salaries, year-over-year percent change

0

-3

-3

-6
70 73 76 79 82 85 88 91 94 97 00 03 06 09

-6

Note: 4Q09-4Q11 values represent Morgan Stanley Research estimates. Sources: Bureau of Economic Analysis, Morgan Stanley Research

After-tax income also is likely to get a boost from a final installment of tax cuts and rebates early next year. While many observers believe that fiscal stimulus has peaked, they ignore the fact that some of the tax cuts from the stimulus plan don't hit consumer spendable income until the spring of 2010. That’s because the “making work pay” tax credit is just that — a credit — for which consumers got a down payment with the reduction in withholding rates on April 1, 2009. Indeed, we expect a 10% rise in tax refunds in the 2010 refund season that will begin in February, accruing to those who did not adjust withholdings for the 2009 tax year. That increase will offset the modest 3% gain we expect in taxes withheld on income received early in 2010, and would leave overall individual income taxes essentially flat. As a result, real after-tax wage and salary income may grow at a 4½% annual rate over the first half of 2010. Tailwinds 2 and 3. A second, more modest tailwind comes from the rise in equity values, plus debt paydowns and writedowns, which have ended the slide in household net worth. Household and nonprofit equity holdings have retraced about a third of their $11 trillion plunge over the 18 months ended in March. On the other hand, gross housing wealth has declined by $3.9 trillion since early in 2007, and there is so far no sign of an upturn. Without question, households will be adjusting to this breathtaking decline in wealth for some time. But the recent upturn in asset values means that the pressure on bal5

However, the cash-for-clunkers incentives did not significantly add to the Q3 gain in vehicle production or GDP. Rather, we think they will help growth in the current quarter, even as the pace of sales slows, by keeping stocks lean enough to sustain vehicle production at higher levels following the Q3 surge aimed at replenishing lean inventories.

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Strategy & Economics
ance sheets is abating. And consumer deleveraging is also helping balance sheets and discretionary income: The $270 billion decline in consumer and residential mortgage debt over the past year has reduced debt in relation to income by 700 bp. Combined with lower interest rates, that decline has trimmed the household debt service ratio by about 90 bp over the past two years, which has added about $100 billion to consumer discretionary spending power. Finally, lenders seem to be easing slightly their lending standards as the rise in delinquencies slows and both funding and ABS markets have improved. Evidence for that improvement may come in the Fed’s November Senior Loan Officer survey, likely to be released on November 9. Headwinds still linger. We hasten to add that consumer headwinds remain strong. Past weak income and job performance has kept consumers cautious. Real “core” income declined by 2.3% over the past year, the steepest rate since Q3 1980, while hours worked have declined by 7%, a record yearly decline. Ditto for household assets: As noted above, the shock to wealth over the past two years will foster a long period of adjustment to patterns of consumer spending and saving. And while deleveraging has trimmed household debt service, some of the decline in debt is clearly involuntary, as it is the product of defaults and foreclosures. Over time we believe that this tough aspect of cleaning up balance sheets will produce healthier, more resilient consumers, but while it is underway, it leaves them reluctant to spend. Saving rate decline a poor guide to consumer behavior. Some observers view September’s rise in the personal saving rate to 3.3% as an indication that renewed retrenchment is underway. Likewise, they believe the sharp decline from 5.9% in May to 2.8% in August signals that consumers have exhausted their resources. But short-term movements in the saving rate are a poor guide to consumer behavior. While the rise in the saving rate from 1% early in 2008 to just over 3% recently reflects consumers’ response to falling next worth, most of the movements in 2009 reflect lumpy tax refunds, policy changes, and plunging property income. The saving rate began the year at 4.4% and then jumped to 5.9% as consumers received extra tax rebates, transfers, tax cuts and one-time OASDI payments. It fell again as the one-time payments vanished. Declines in interest and dividend income, amounting to $217 billion, accounted for 92% of the decline in overall personal income, and for as much as 180 basis points (more than all) of the decline in the saving rate, as such income tends to be saved rather than spent. Smoothing the rate for those changes since 2008 suggests that a sea change in consumer behavior is underway — one that will take the saving rate to 7-10% over the next several years. Three key risks to this modest consumer spending growth scenario. First, hours worked and core income could be either stronger or weaker than we expect, accentuating the payback from the summer splurge. We think that payrolls might turn positive in the first quarter of 2010 — perhaps in January or February. But we also think there are two risks to this view from a policy perspective, one positive and one negative. The mooted employment tax credit that is now being drafted could be a plus (if enacted quickly). But the uncertainty around healthcare reform could well be a minus, especially if would-be employers who do not currently offer healthcare benefits to their employees are required to choose between introducing a plan and paying a hefty tax. Why hire until the dust settles on those proposals? Employers needing more labor input could respond by boosting the workweek and avoiding hires (that will probably happen over the next couple of months anyway). While the press has highlighted this risk for small businesses, it actually applies to any business that does not currently offer healthcare benefits, including many in services industries. Second, rising energy quotes, especially for gasoline, could add to the near-term downside squeeze on real disposable or discretionary income. Reflecting the renewed global growth and a weaker dollar, crude oil prices have risen roughly $10/bbl over the past month. Wholesale and retail gasoline prices have followed, the latter to $2.75/gallon (average all grades) in the latest week. If gasoline prices peak at about $2.85, we estimate that this price rise might drain about $44 billion, or 0.4%, from disposable income between September and December. Finally, renewed mortgage foreclosures and home price declines may again pressure wealth and credit availability. We are not sure if the famous “shadow inventory” of yet-to-be-foreclosed homes is as high as the most pessimistic estimates have it. But even if the number of pending foreclosures is half the size of the pessimistic estimates, they will add to a looming supply overhang of unoccupied houses, and such additions may promote renewed declines in home prices as they come on the market in the spring.

6

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Strategy & Economics
October 30, 2009

US Credit Strategy A Spooky Comparison
Morgan Stanley & Co. Incorporated

Rizwan Hussain
Rizwan.Hussain@morganstanley.com

Gregory Peters
Greg.Peters@morganstanley.com

Adam Richmond
Adam.Richmond@morganstanley.com

Risky asset markets finally reached the inevitable consolidation that many investors have been looking for. The merely sideways pattern in price action of late has many of those conditioned to a continuation of a straight shot higher and tighter feeling spooked and fearing threats to their performance as year-end approaches. This setback presents yet another test of the ‘buy on dips’ mentality, but this time it is being met with mixed macro data, largely indicative of the slower economic growth our economists look for in 4Q versus a strong 3Q. So there’s the rub now. Will the resumption of strong economic releases be greeted with relief that the US economy can turn the corner into 2010 with some momentum and thus propel risk-taking sentiment higher? Or will the data stoke fears about the reversal of liquidity that many have argued has been the ephemeral support on which risk assets of all stripes have been riding — as still weak labor markets and far-from-buoyant corporate behavior would augur for lower risk tolerance from some? Given this backdrop, we look here at specific seasonal patterns in credit performance, with an eye to prior years when credit investors were also enjoying outsized gains into 4Q. Additionally, with the overall level of credit spreads still attractive, we compare the market breakdown today versus when a high-grade index of corporate spreads was at a similar level at the end of 2007. In summary, we find: x Historically, November and December are actually among the best months for IG credit. More important, in years when annual excess returns are positive, these months have witnessed even better relative performance. x The value in credit still lies in the tails. Even though the IG index is at the same level as in late 2007, AAA through A rated credits trade marginally tighter, whereas BBB credits currently trade wider. In high yield, a similar story holds as ‘cheapness’ resides lower down the scale. x Use sectors with high spread dispersion for single name selection. We include two screens focusing on names where cash bonds today trade wider than similar maturities in late 2007, and names whose curves are meaningfully flatter than in this same period.

’Tis the season. With a long-awaited (and frequently predicted) consolidation finally taking place, investors find themselves asking whether this protecting of profits will carry into year-end, or if the end of the year will finish with the same bullish tone that has persisted through the first 10 months. The worry starting to surface is not only if investors will look to lock in this year’s record performance, but also if banks, with many now on the same year-end fiscal year, will attempt to preserve balance sheets and capital at the same time, creating a meaningful reduction in liquidity and resulting in sloppy price action. On the second point, we certainly see a rationale for concern that a system-wide reduction in liquidity could pressure markets in this largely liquidity-driven rally. However, we don’t see this as a major risk, given the $987 billion in excess bank reserves, the reality that hedge funds are less levered than in prior years, and the tools the Fed has to manage these liquidity risks. Also, this concern over a potential ‘year-end effect’ stemming from banks’ coordinated fiscal years has not proven to be a significant source of volatility at the end of the prior three quarters.
Exhibit 1

Dusting Off Seasonality, Performance Has Begotten More Performance Through Year-End
(%) 0.30 0.20 0.10 0.00 -0.10
Ju ly Au gu Se st pt em be r O ct ob er N ov em be D r ec em be r
Median Excess Ret - Positive Years

Ja nu a Fe ry br ua ry M ar ch

Ap ril

Median Excess Ret - All Years

Source: Morgan Stanley, the Yield Book

Regarding year-end profit-taking concerns, in Exhibit 1 we dust off our seasonality chart and find that November and December are historically among the best months for IG credit excess returns. But of course, those monthly median performances have come over a wide range of portfolio returns through prior year-to-date periods. So, taking it a step further, if we look at only years when the annual excess return was positive, and hence the temptation to take profits high, we find November and December are still the third and fourth best months, respectively. While we caution against putting too much weight on these numbers given the limited history of our credit return data, as well as the rarity of this year’s performance, historically we have not seen a large degree of profit-taking leading up to

M ay Ju ne

7

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Strategy & Economics
year-end just because investors had enjoyed meaningful returns to date. This is particularly true in years when ‘protecting profits’ would have been a worthy driver of investor psychology. Now versus then. Barring an unforeseen blow-up in the final months of 2009, this year will go on record as 3 to 4 times the best prior year that credit investors have experienced. Given this once-in-a-career rally, the spread of the investment-grade cash index is now at 197 bp, a level last seen in December 2007. So, while the headline valuations are identical, we decided to peer deeper into the makeup of the market at both times, to gauge where the value lies heading into 2010. Ratings first, sectors next. First we looked at the cash spread level at each ratings bucket across the ratings curve. As we have noted before, the value across credit markets still lies in the tails. For example, even though the IG index is at the same level as late 2007, AAA thorough A rated credits trade marginally tighter, whereas BBB credits currently trade wider. Unlike in equity markets, credit investors have been more skeptical of weaker names, particularly cyclicals and financials, and if markets continue to normalize as we expect, this quality curve will normalize as well. Indeed, regarding the high yield market, our colleague Jocelyn Chu recently noted the attractiveness of lower quality, cuspy high yield credits with ample runway from a cash-generation perspective and those in the process of re-equitization (see, Leveraged Finance Insights: Right-Sizing Opportunities, October 29, 2009). Next, regarding sectors, we looked at the 20th, 40th, 60th, and 80th percentile of 5-year credit default swap (CDS) spreads by sector today and in December 2007. Once again, we focused on December 2007 as the last period when the IG cash index traded at current levels, although the typical 5-year CDS did trade nearly 20 bp tighter then versus today. Note that essentially across the board, sector dispersion is higher now than it was in late 2007. Even a sector such as consumer goods, a defensive, non-cyclical industry, has much more variation today than a few years ago. This backs up our view that the opportunities going forward are less in the overall market call, and more in the single name and sector view. And similarly, across nearly all sectors, the 20th quintile (tightest group of names) trades wider, but in the same zip code today versus late 2007, whereas the 80th quintile (widest names) trades more than twice as wide today on average. Once again, we continue to believe the value lies in these wider buckets as credit conditions continue to normalize. And ending with the single names. Given our view of the importance of sector and single-name selection, in Exhibits 2 and 3 we present a relatively simple way to screen for names, sticking with our now vs. then theme. In Exhibit 2, of the largest 50 non-financial issuers, we look for names whose 10-year bonds currently trade wider than in late 2007. In addition, all of these credits but one (Alcoa) have a meaningfully higher SPL (spread per unit of leverage, as a measure of quality adjusted valuation) today versus then. The list is dominated by commodity cyclicals, which we argue not only offer among the most value but are also ripe with single-name dispersion.
Exhibit 2

Ten-Year Non-Financial Cash Bonds Wider Today with Higher Spread Per Unit of Leverage
10 Yr Cash Spread 5 Yr CDS SPL (bp/x)* 10/27 12/1 10/27 12/1 10/27 12/1 Credit ’09 ’07 Chg ’09 ’07 Chg ’09 ’07 Chg Alcoa 350 180 +170 198 44 +155 16 31 -15 Valero Energy 324 180 144 210 49 161 125 64 +61 Weatherford Int’l 308 180 128 105 36 69 38 22 16 International Paper 289 184 105 130 46 84 44 18 26 Anadarko Petroleum 275 186 89 80 49 31 49 22 27 NiSource 291 211 80 150 65 85 31 15 16 Marathon Oil 217 176 41 105 40 65 98 55 43 Xerox 249 211 38 169 58 111 38 18 21 Enterprise Products 196 177 19 118 65 53 25 12 12 Energy Transfer 270 253 17 159 102 57 39 26 12 AT&T 173 157 16 85 44 41 46 26 20
*SPL = Spread per Unit of Leverage Source: Morgan Stanley, the Yield Book, Bloomberg

In Exhibit 3, rather than looking simply at long cash bond opportunities we focus on curves. It remains our view that as markets normalize, 5s/10s curves should continue to steepen. In the exhibit we show a similar screen of the top IG non-financial issuers, looking for names where curves are significantly flatter today than in late 2007. All of the names on the list have SPLs equal to or higher than they had two years ago. We see a few of the rails on the list. In our view, though the rails have suffered from lower volumes, they have solid balance sheets and have done a good job cutting costs. Once demand picks up next year, these names are well-positioned to take advantage of the economic turnaround, and they should see steeper curves over the next year. (For details see our Credit Basis Report of October 30, 2009.)
Exhibit 3

Credits with Flatter 5s10s Curves Today Despite the Healing
5s/10s Curve 5 Yr CDS as % of 5 Yr SPL* 10/27 12/1 10/27 12/1 10/27 12/1 Credit ’09 ’07 Chg ’09 ’07 Chg ’09 ’07 Eli Lilly 33 13 +21 15% 85% -69% 32 14 Honeywell 45 21 24 7% 73% -66% 20 12 Xerox 169 58 111 11% 72% -61% 38 18 Dominion Res. 48 41 8 15% 71% -57% 13 11 Wyeth 22 20 2 18% 69% -51% 15 12 News Corp 72 34 38 21% 69% -48% 24 15 Burlington Northern 51 30 21 14% 66% -52% 29 17 Norfolk Southern 47 32 15 15% 62% -47% 23 17 Devon Energy 62 29 33 10% 60% -50% 54 25 Weatherford Int’l 105 36 69 9% 59% -50% 38 22 XTO Energy 97 49 48 5% 56% -51% 58 30 Duke Energy 46 33 13 7% 56% -49% 12 12
*SPL = Spread per Unit of Leverage Source: Morgan Stanley, Bloomberg

Chg +18 9 21 2 4 8 12 6 29 16 27 0

8

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Strategy & Economics
October 27, 2009

Equity Derivatives Strategy Equities in the Dollar Bear Camp
Morgan Stanley & Co. Incorporated

Sivan Mahadevan
Sivan.Mahadevan@morganstanley.com

Christopher R. Metli
Christopher.Metli@morganstanley.com

Matthew L. Evans
Matthew.L.Evans@morganstanley.com Morgan Stanley & Co. International plc+

Christian Kober, CFA
Christian.Kober@morganstanley.com

We expect the negative correlation between the dollar and risky assets to continue for some time before potentially breaking down. With the world still in recovery mode, beta will work if economic conditions improve, meaning emerging markets should outperform US equities, trade flows should improve, commodity demand should rise, etc., all driving higher US equity markets (although lagging EM) and a weaker dollar. We are believers in the safe-haven bid if the recovery suffers a setback, as risk aversion is still somewhat high and non-US investors have not shown significant signs of avoiding the Treasury market. There are exogenous events that could drive a breakdown in correlations, although we see all as relatively remote events. They include a material change in US fiscal policy (which should be slow to materialize, however), official intervention in the markets, or a too-early Fed rate hike that shocks investors (although our Economics team forecasts the first move in 2H10). Of these, intervention appears the most likely, and our FX team recently noted the stress on the EUR as it has borne more than its share of dollar weakness (“Look Who's Talking,” Investment Perspectives, Oct 28, 2009), and Asian countries with floating exchange rates are feeling competitive pressure as the yuan declines with the dollar. Equity hedges cheapened by a currency view. We do caution investors on our negative-correlation view somewhat — small setbacks in recovery that drive modest equity sell-offs could be separate from what happens with the dollar. But for larger moves (+10%) we think correlation will persist. We like taking advantage of this “correlation in the tail” argument to hedge a more bullish equity position with S&P 500 puts that “knock-in” in the scenario where the dollar strengthens. In this
Exhibit 2

Praveen K. Singh
Prav.Singh@morganstanley.com Morgan Stanley Asia Limited+

Viktor Hjort
Viktor.Hjort@morganstanley.com

Philipp Schoenhuber
Philipp.Schoenhuber@morganstanley.com

US equities have benefited from the weaker dollar. Outside of the risk-aversion period post-Lehman, the USD has been in an orderly decline for much of this decade. This has been good for US equities as US companies become more competitive at home (vs. foreign companies) and as exporters abroad. Our FX strategy team believes that this dollar bear theme will continue as the recovery/reflation trade benefits other currencies, the Fed keeps rates low, and the dollar remains an attractive funding currency. The risks going forward. There is a strong argument for the dollar to continue its decline, but we must not ignore the risk factors that our currency team highlights, including any event that causes risk-aversion, faster than expected Fed hikes, or an improvement in the US fiscal position. Given the moves we have had in both equities and the dollar, such dollar strength is a risk equity investors must consider, in our view. Two trades for two scenarios. We believe that hedging equities in a scenario of dollar strength makes sense, and at the same time find upside plays on exporters a good way to position for a continued dollar decline. (1) S&P 500 puts contingent on USD strength — as a hedge against potential equity weakness in tandem with a stronger dollar. (2) Exports to emerging markets upside — continuation of dollar weakness will likely benefit US exporters to EM, and we like playing this theme through a basket of upside calls on such companies. Dollar decoupling? Not yet. The inverse relationship between the dollar and risky assets over the past year is no secret, and as the dollar has sold off in recent months there has been a renewed focus on currencies in equity markets. The implications are two-fold, as the dollar can be used as a signal for the risk tolerance/aversion of global investors, while its value also affects the underlying fundamentals of exporters and domestically focused firms alike.

S&P500 6M Puts Contingent on USD Strength (vs. EUR) Offer Better Risk/Reward in Retracement
ATM Put ATM Put KI 95% KI 90% 100% 100% 95% 90% 4.45% 3.15% 7.10% 7.10% 37% 56% 7/14/09 5/1/09 -15% -17% 10.4% 14.3% 2.3x 4.6x 7.7% 10.4% 1.1x 1.5x 95% Put KI 95% 95% 95% 3.35% 5.10% 34% 7/14/09 -15% 6.5% 1.9x 4.7% 0.9x 95% Put KI 90% 95% 90% 2.40% 5.10% 53% 5/1/09 -17% 10.1% 4.2x 7.4% 1.4x

SPX Strike EUR Barrier Price (% SPX) Vanilla Put % Discount Last at Barrier SPX return to Date KI P/L Risk/Reward Vanilla P/L Risk/Reward

Note: Pricing indicative, barriers observed at expiration only. P/L is the expiry payoff less initial cost if the S&P 500 is at the level on “Last at Barrier” date. Risk/reward is P/L over initial cost. Source: Morgan Stanley Research, Morgan Stanley Quantitative and Derivative Strategies, Bloomberg

9

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Strategy & Economics
approach, the put option only pays off if the S&P is below the strike and the dollar rises by some amount. Correlation is a driver of the relative price of our S&P 500 puts strategy, and we do acknowledge that an inverse dollar/equity relationship is somewhat consensus, and correlation pricing is still relatively “rich” (currently -25% to -40%). Still, it is not -100%, so tying the two asset classes does drive healthy discounts to plain vanilla puts (between 35% and 55% for the strikes/barriers we present in Exhibit 1). See our October 27 Equity Derivatives Dynamics for details. Down-and-in knock-in (KI) puts — so named because they become active if the asset falls below a certain level — can offer very attractive leverage to large moves if the strike is set closer to current levels than the barrier is, because the full payoff from the strike is triggered if the barrier is reached but the cost is reduced due to the presence of the barrier. As such, we like them as hedges against tail risks. They also offer an easy way with known downside to position combined equity and FX views for non-FX specialists, as the maximum potential loss is the premium paid. Micro perspective: exporters over domestics. Our macro view is for a sustainable global recovery, with EM growth more V-like while the path upward in developed markets will be more U-shaped. In this context we like EM equities over US, and within the US market an interesting theme is to buy export-driven firms over those that sell domestically, which should benefit from our core view of dollar weakness as well. Morgan Stanley has created a basket of US stocks with high emerging market sales exposure to play this theme, listed under MSMSEMX on Bloomberg (the 55-stock basket has sector weights equal to those of the S&P 500, with stocks equally-weighted within each sector).* From a basic perspective, FX volatility affects exporters along several dimensions: FX volatility drives earnings volatility directly (if sales are denominated in different currencies than costs) and via translation effects; dollar movements affect firm values and therefore volatility as equity prices rise and fall; and exporters are at least as exposed to risk preferences as domestically oriented firms. In a negative dollar/equity correlation environment, earnings volatility is heightened by FX exposure, while there is an inverse relationship between currency and exporter volatility due to the directional benefit of a weaker dollar.
* The information contained herein has been prepared solely for informational purposes and is
not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Products and trades of this type may not be appropriate for every investor. Please consult with your legal and tax advisors before making any investment decision. Please contact your Morgan Stanley sales representative for more details.

Where do we come out? We think directional trends will be more important than any P/L from volatility moves, and are inclined to think volatility for exporters trends up and down in-line with the broader market. But they should have a higher beta to recovery given their more direct exposure to global growth, and positioning for upside in these names while protecting downside makes sense in the current environment. The trade we like is simply buying OTM calls given reasonable volatility levels versus the broader US market and EM stocks, as well as steeper skew compared to EM names given investors’ bullish bias towards the space. As highlighted in our October 27 Equity Derivatives Dynamics, US exporters trade at implied volatilities similar to that of the broader US market, but below that of the average EM name. True, many of the US companies with high EM-sales exposure are the larger names in the S&P 500, so market-cap adjusted volatility would be somewhat higher. But with the added volatility exposure from FX rates as well as a higher beta to global recovery, we see more opportunity here for option buying. Volatilities for average names in the basket are also lower than traditional dollar-linked groups like Energy or Materials. To find opportunities within this theme, we screen the MSMSEMX constituents for Overweight-rated names where our analysts see a wider range of outcomes than expected by the options market and large upside to their base and bull cases. The 10 names highlighted below have an average option-implied probability of reaching our analysts’ bull cases of 6%, and of reaching their base cases of 20%. The maximum potential loss from buying calls or call spreads is limited to the premium paid.
Exhibit 2

Overweight-Rated* Exporters with Large Projected Upside and Low Vol
Option Implied Prob Bull / 1yr % EM Bear Above Above Below Corr to Bull Base Bear Ticker Sector Sales Range DXY YUM Cons Disc 55% 67% 7% 26% 19% -27% BHI Energy 62% 214% 0% 1% 13% -47% APA Energy 59% 63% 12% 22% 28% -55% SII Energy 53% 168% 1% 5% 35% -44% JPM Financials 26% 106% 7% 16% 10% -29% PFE Healthcare 58% 35% 13% 31% 36% -22% KBR Industrials 85% 87% 9% 37% 8% -49% MON Materials 50% 88% 4% 12% 30% -14% PM Staples 100% 61% 6% 29% 16% -37% INTC Tech 85% 66% 5% 17% 36% -31% 3m ATM Vol 26% 39% 34% 45% 35% 29% 34% 30% 23% 30% Cost of 3m… 105%/ 105% 115% Call Call Spread 2.9% 1.4% 5.6% 1.8% 4.6% 1.7% 6.7% 1.8% 4.8% 1.8% 3.3% 1.4% 4.7% 1.5% 4.0% 1.6% 2.1% 1.2% 3.6% 1.5%

Average 63% 96% 6% 20% 23% -35% 33% 4.2% 1.6% Overweight-rated as of Oct. 27; stock prices as of Oct. 27: Yum! Brands ($34),Baker Hughes ($44), Apache ($98),Smith Int’l ($32), JP Morgan Chase ($44), Pfizer ($17), KBR ($23), Monsanto ($71),Phillip Morris ($49),Intel ($20). *INTC downgraded to Equal-weight on Nov. 3 Source: Morgan Stanley Research, Morgan Stanley Quantitative and Derivative Strategies, Bloomberg

10

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Strategy & Economics
October 30, 2009

Global Interest Rate Strategy A New Balance of Risks
Morgan Stanley & Co. Incorporated Morgan Stanley & Co. International plc+

erage controls to reduce the magnitude of outright tightening. This is consistent with our global theme that measures are now being constructed to increase the cost and reduce the amount of liquidity to various markets around the world.
Exhibit 1

Jim Caron
Jim.Caron@morganstanley.com

Laurence Mutkin
Laurence.Mutkin@morganstanley.com

Asia-Pacific: Consistent Expectations for Rate Hikes Across the Region
Forecast Changes to the Policy Rates (AXJ)
Cumulative Policy Rate Changes from Q1 2009 (bps)
China Malaysia US Hong Kong Taiwan Euro Area India Thailand UK Korea Indonesia

Unsynchronized movements in global rates create opportunity. Changing levels in the rates markets are leading indicators of how risky assets will perform. The leg of the rally driven by inexpensive liquidity and market support facilities is nearing an end — and this will introduce a new risk dynamic to rate markets. Cross-asset hedging to insure against a move to higher rates may dominate flows and relative values across rate markets. We are already seeing this in the high payor skews in the US and yen rate markets (as well as in euros and sterling). Our point is that interest rate markets can become dislocated by the actions of non-traditional rate market players. Reducing liquidity and increasing regulation creates a new balance of risks. From a global perspective, we see an unsynchronized movement in rates, which means that we may see uneven performance in risky assets in 2010 and increased volatility in global rate markets. That, plus the many dislocations in rate markets that may occur due to cross-asset class hedgers, offers an opportunity for us to seize upon. Global authorities have moved decisively towards measures of removing liquidity and increasing its cost. It is most notable that this is happening in an unsynchronized manner, with the Asia-Pacific region using the blunt instrument of rate hikes, while the approach of Anglo economies is more tacit; they are first using increased regulation and allowing support facilities to run off as a means of tightening liquidity. We will refer to this as a global tightening in liquidity. Investors must bear in mind that this shift is occurring. If 2009 was about adding liquidity accommodations, then 2010 will be about removing them, increasing the cost of liquidity, and adding regulation to the mix. We discuss the implications below (for details see our Interest Rate Strategy – Global Perspectives, October 30, 2009). In the Asia-Pacific ex Japan region, we quite simply expect rate curves to flatten as investors brace for interest rate hikes. This is a consistent theme across the region (Exhibit 1). The exception is the Thai curve, which has stayed steep for technical reasons. But this region faces a dilemma. AXJ currencies have rallied, which hurts export-based growth. So governments may instead impose domestic liquidity and lev-

200 150 100 50 0 -50 -100 -150

MS Forecasts

Q1 09

Q2 09

Q3 09

Q4 09

Q1 10

Q2 10

Q3 10

Q4 10

Source: Morgan Stanley Research

In general, this has caused a flattening of yield curves across the AXJ region. How much flattening is too much? The answer lies in one’s expectations for growth in the region. In our view, economic optimism and subsequently flattening have gotten ahead of themselves and will soon present an opportunity to re-enter forward curve steepeners. But not yet. In Japan, speculation on a structural move to higher rates. There has been a lot of speculative interest in playing for higher rates in Japan because of large expected issuance of Japanese government bond (JGB) debt in January–March. This has led investors to refocus on the deteriorating fiscal conditions in Japan, where the debt/GDP ratio is expected to
Exhibit 2

Rising Forward Yen Rates Increase Focus on Japan’s Deteriorating Fiscal Conditions
(And This May Push Rates Even Higher)

Yen Rates Challenge Long-term Trend

Note: Above plotted is 5y forward-starting 5y yen swap rates.. Source: Morgan Stanley Research

11

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Strategy & Economics
spike higher in 2010, while a falling savings rate may lead to fewer purchases of JGBs (Exhibit 2). For those looking for a structural move higher in yen rates, entering into forward-starting payor swaptions on back-end rates provides the opportunity. Yen payor swaption premiums can be approximately half the cost of that in the US, or two-thirds the cost of euro or sterling swaptions (Exhibit 3). This is quite appealing to macro traders with a long-term view for higher rates and for those who believe that global rates are simply headed higher. Note: this does not mean that yen swaptions fit the criterion of being ‘cheap,’ just that in premium terms the price is lower.
Exhibit 3

the Financial Services Authority in the UK to increase Liquid Asset Buffers (LABs) are likely to be adopted in the US and Europe too. The likely net effect is to eventually widen spreads and increase the cost of accessing credit for the consumer — although implementation is likely to take a long time. The key point here is that provision of increased liquidity conditions during the crisis in 2009 will fall away towards liquidity reduction and regulation in 2010 and beyond, now that the markets are on a firmer footing and can withstand increased regulation. Already in the US, operations are being prepared for reverse repos to drain liquidity excesses from the market. Our conclusion is that the leg of the rally in risky assets driven by extensive liquidity and market support facilities is nearing an end (Exhibit 4). Thus, the next leg of the risky asset rally will have to be driven by other factors. The critical link we are making is between ‘liquidity’ and ‘risky asset performance’. As we discussed above, the level of interest rates is the ultimate measure of the cost of liquidity — this is why investors in all asset classes need to pay attention to it. From a trading standpoint, it is as yet unclear what impact these regulations will have on the markets. In general terms, we conclude that they will reduce liquidity and spreads will widen. But their impact on the yield curve and volatility is more debatable. We dig deeper into these issues in our October 30 Interest Rate Strategy – Global Perspectives.
Exhibit 4

Playing for Higher Yen Rates via Swaptions Is Compelling as Yen Premiums Are Low
Yen Vol Trades Comparatively Lower

US Eur UK JPY

Note: Above plotted are 2y10y straddle premiums in up-front bp Source: Morgan Stanley Research

US rates to underperform those of the UK and Europe. In the US, we subscribe to the view that central bank policy rates will be lower for longer. From a risk perspective, the Federal Reserve seems to be the least worried about rising inflation. This means that back-end rates can more easily rise in the US and the curve can steepen. In Europe and the UK, the situation is similar to that of the US, in that central bank policy rates will likely be kept lower for longer. However, it differs in that the central banks are viewed as less tolerant of inflation and that regulatory changes could increase a bid for European and UK government bonds. Thus, longer-term rates may rise by less in Europe and the UK relative to the US. In all three markets we believe that the forward curves are too flat, and thus the negative carry to enter spot curve flatteners will provide a high hurdle for the curves to flatten. As a result, we argue that the curves will remain steeper for longer than history suggests during a recovery cycle. Anticipating a new regulatory environment drives speculation in rates. New regulations that were first put forward by

Strong Spread Tightening to Date but Just Barely on the Cusp of the ‘Strongest Ever’
(Still, the Rally May Be Nearing an End)
Percent Change from Peak
0% -10% -20% -30% -40% -50% -60% -70% -80% -90% 1 7 13 19 25 31 37 43 49 55 61 67 73 79 # of Months From Spread Peak 1932 1991 1970 2002 1975 2008 1983 1986

Source: Morgan Stanley Research

12

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Strategy & Economics
October 28, 2009

Asia/GEMs Equity Strategy Sources of Competitive Advantage in EM, Part II: The Best Business Models List
Morgan Stanley & Co. Incorporated Morgan Stanley & Co. International plc+

from Latin America. Please see our full report for more detailed data on the 26 names.
Exhibit 1

EM Best Business Models List Sorted by Sector
Sector Cons Disc Cons Disc Cons Disc Cons Disc Cons Stap Cons Stap Cons Stap Cons Stap Energy Energy Industry Groups Automobiles & Components Consumer Durables & Multiline Retailing Consumer Services Media Beverages Food & Staples Retailing Food Products Household & Personal Products Oil & Gas Exploration & Production Oil & Gas Refining & Marketing Company Hyundai Mobis China Dongxiang Ctrip.com Tencent Holdings Ltd. Anadolu Efes Wal-Mart de Mexico Tiger Brands Hindustan Unilever CNOOC Reliance Industries Mindray Sun Pharmaceutical Copa Holdings Embraer Larsen & Toubro CCR MediaTek Largan Precision Tata Consultancy Services Pretoria Portland Cement ENRC Implats Limited Novolipetsk Steel PT Telekomunikasi Mobile TeleSystems CPFL ENERGIA MS Ticker 012330.KS 3818.HK CTRP.O 0700.HK AEFES.IS TBSJ.J HLL.BO 0883.HK RELI.BO MR.N SUN.BO CPA.N ERJ.N LART.BO 2454.TW 3008.TW TCS.BO PPCJ.J ENRC.L IMPJ.J NLMKq.L TLKM.JK MBT.N CPFE3.SA Country S. Korea China China China Turkey S. Africa India China India China India Panama Brazil India Taiwan Taiwan India S. Africa Kazakhstan S. Africa Russia Indonesia Russia Brazil

Vinicius P Silva
Vinicius.Silva@morganstanley.com

Jonathan F Garner
Jonathan.Garner@morganstanley.com

WMMVY.PK Mexico

Michael Wang, CFA
Michael.S.Wang@morganstanley.com

Health Care Equipment and Services

This report concludes our two-piece series on Sources of Competitive Advantages in EM. Using the tools introduced in Part I, in this note we highlight the companies with the best business models that have been and we think are likely to continue to be leaders in shareholder value creation (economic profits) within their respective industries over the medium to long term. Exhibit 1 lists this select group of companies in the 26 industry groups of our sample. The sample’s universe is based on our proprietary database of 650 non-financial EM corporations (i.e., it excludes Banks). The selection process involved both quantitative (RNOA, Altman Z-cores) and qualitative aspects based on discussions with Morgan Stanley analysts (strength of the business model, management skills, etc.). Our best business model candidates passed all of the following criteria: 1) 2) 3) 4) high level of average profitability over the business cycle defined by RNOA (a.k.a ROIC); coefficient of variance for historical RNOA lower than 1.0x, i.e., low RNOA volatility; an Altman Z-score above 1.8, i.e., balance sheets above the “distress zone” in the Altman scale; positive assessment by Morgan Stanley analysts regarding the medium to long-term strength of the business model, management skills, sustainability of competitive advantages and barriers to entry; we only considered Morgan Stanley covered stocks with a market capitalization greater than US$1.0 bn and daily trading volume of at least US$5 mn.

Health Care Pharmacueticals Industrials Industrials Industrials Industrials IT IT IT Materials Materials Materials Materials Telecom Telecom Utilities Airlines Capital Goods, Construction & Machinery Construction & Engineering and Congl. Road, Rail & Transportation Semiconductors & Semiconductor Equip. Technology Hardware & Equip. Sofware & Services Construction Materials Diversified Metals & Mining Precious Metals Steel Diversified Telecom Wireless Utilities

CCRO3.SA Brazil

Source: Morgan Stanley Research

List outperformed MSCI EM ex-Financials every year since 1997. Exhibit 2 shows the annual performance of an equally-weighted portfolio constructed around the 26 names on our list. The list has outperformed the MSCI EM ex-Financials index every year since 1997. The cumulative USD total return for the equal-weighted portfolio has been 3,609% since December 1997 vs. 207% for MSCI EM ex-Financials,
Exhibit 2

Annual Performance: EM Best Business Models
Yearly Total Return Performance (US$)
Best Business Models Equal-weighted 190%
140%

MSCI EM ex-Financials

140%

107%

103% 73%

5)

90%

71% 59% 53% 40% 30% 3% 9% -3% 23% 35% 53% 31% 46% 42%

40%

Exposure to 26 industries in 12 countries. Our goal was to create a basket for investors looking to build a broad, long-term exposure to high-quality stocks in EM. The list offers exposure to 26 different industries spread over 12 countries. On a geographic basis, 14 of the 26 firms are Asian, 7 from EMEA, and 5

-10%
-27%

-6% -32%

-6%

-60%

-44% -53%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

YTD 2009

Source: FactSet, MSCI, Morgan Stanley Research. Note: portfolio starts with 12 companies in 1998 and grows to 26 companies in 2007 as the names on the list became public. Past performance is no guarantee of future results. Performance data exclude transaction costs.

13

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Strategy & Economics
outperforming the benchmark by 1,109%. The theoretical portfolio starts with 12 firms, rising to the full 26 over time as all the companies became publicly quoted.
Exhibit 3

Significant outperformance relative to MSCI EM ex-Financials Benchmark
1400

Performance Relative to MSCI EM ex-Financials (US$ Total Return, Indexed to 100)

1200

1000

800

Equal-Weighted Portfolio Market Cap Weighted Portfolio

Based on Morgan Stanley’s analyst estimates, the median 2010 P/E for the stocks in our list is 14.4x and 11.8x for 2011. The MSCI EM ex-Financials benchmark currently trades at 13.2x 2010 P/E and 10.8x 2011 on consensus estimates. The median 2010-2011 EPS CAGR for the names on the list is 34% compared to MSCI EM ex-Financials at 25% (using MS estimates for the former and consensus for the latter). We think that median prospective P/E valuations appear attractive for the high-quality exposure provided by our Best Business Models List. This would suggest a good opportunity to accumulate these stocks, although their medium to long-term appeal may not necessarily translate into attractive entry points in the near term. We have created an equally-weighted basket of the 26 stocks highlighted in this report. The basket can be viewed on Bloomberg under the symbol MSMSBBM. Three important caveats: 1) Selecting one single name for each industry group leaves out many other great companies. 2) The future sustainability of RNOA requires close monitoring as it is subject to variation over the business cycle owing to: (a) intensification of competitive pressures; and (b) company-specific strategic decisions that have the potential to be RNOA dilutive. 3) The medium to long-term appeal of these franchise stocks may not necessarily translate into attractive entry points in the near term. It is rare for many of these stocks to trade at deep discounts to peers or the market.
Exhibit 5

600

400

200

0 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Jun-09 Dec-09

Source: FactSet, MSCI, Morgan Stanley Research. Note: portfolio starts with 12 companies in 1998 and grows to 26 companies in 2007 as the names on the list became public.

Exhibit 4

Aggregate trailing P/E for basket not materially different from that of MSCI EM ex-Financials
35x 30x 25x 20x 15x 10x 5x 0x Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Equal-Weighted EM Best Business Model Portfolio MSCI EM x Financials Market Cap Weighted EM Best Business Model Portfolio

Sector Weights, Best Business Models List
List Mkt Cap Weighted Weights 12.3% 12.2% 31.8% 2.2% 8.0% 10.1% 12.3% 9.0% 2.1% 100% List Equal-Weighted Weights 15.4% 15.4% 7.7% 7.7% 15.4% 11.5% 15.4% 7.7% 3.8% 100% MSCI EM Ex-Financials Weights 6.9% 7.0% 20.9% 2.7% 8.9% 16.9% 19.8% 12.2% 4.7% 100%

Sectors Cons Disc Cons Stap Energy Health Care Industrials IT Materials Telecom Utilities

Source: FactSet, MSCI, Morgan Stanley Research

Valuations look attractive; we like the long-term opportunity to accumulate these stocks. In terms of valuations, historically the list’s equal-weighted portfolio has on average traded at trailing P/E parity with the MSCI EM ex-Financials index. During the period between 2003 and 2008 the list traded at a premium, and it has since then been trading at parity again. The equal-weighted portfolio currently trades at 17.5x trailing earnings versus a historical average of 15.2x and a peak multiple in the last 6 years of 23.2x.

Source: MSCI, Morgan Stanley Research Stock prices: Hyundai Mobis (Krw 162,500), China Dongxiang (HKD 4.7), Ctrip.com (USD 58), Tencent Holdings (HKD 142), Anadolu Efes (TRY 17.5), Wal-Mart de Mexico (USD 35), Tiger Brands (ZAc 15,376), Hindustan Lever (INR 279), CNOOC (HKD 12), Reliance Industries (INR 2036), Mindray (USD 32), Sun Pharma (INR 1378), Copa Holdings (USD 41), Embraer (USD 23), Larsen & Toubro (INR 1588), CCR (BRL 34), MediaTek (TWD 470), Largan Precision (TWD 385), Tata Consultancy (INR 642), Pretoria Portland Cement (ZAc 3300), Eurasian Natural Resources (906p), Implats Ltd (ZAc 17,160), Novolipetsk (USD 27), PT Telekomunikasi (IDR 8350), Mobile TeleSystems (USD 47), CPFL Energia (BRL 32)

14

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Opinion Changes
November 3, 2009

Managed Care Positioning for 2010: Upgrading UNH to Overweight, Remaining Overweight WLP
Morgan Stanley & Co. Incorporated

2010 EPS forecast, a 14% discount to peers Aetna, Coventry Health, and UNH. While we appreciate the concern around the company’s small group and individual exposure, WellPoint has minimal exposure to Medicare Advantage (MA) — roughly 5% of EPS — but trades just a touch above Medicare names, which currently average 6.8x; WellPoint derives ~5% of earnings from Medicaid, but Medicaid-focused shares trade at ~10x 2010e EPS. Hard to call the timing of an end to reform-driven volatility. Reform debate will likely remain a source of above-normal volatility for the next few months. It should settle down thereafter (and help dampen day-to-day volatility), but it’s likely that real specifics around implementation may be lacking for some time. Assuming reform does pass, this issue will play out over the next few years. Potential sub-sector catalysts in 2010-11. While the reform debate and impact will play out over time, there are reasons to be more optimistic that base fundamentals in 2010-11 will look better than the 2008-09 period. We believe the most obvious potential catalysts for the group in 2010, looking to 2011, include: x x x x any improvement in unemployment any uptick in investment yields any shift to the center after mid-term elections. de-leveraging with internal cash flows

Doug R. Simpson
Doug.Simpson@morganstanley.com

Melissa McGinnis
Melissa.McGinnis@morganstanley.com

3Q fundamentals generally better than expected; near-term concerns now better recognized. So far in 3Q, managed care organizations (MCOs) have generally posted better-than-expected results with solid cash flow. Near-term fundamental risks now appear better understood by the market (as 4Q09 estimates have been adjusted). With the strong 3Q outperformance and the sharp reduction in 4Q09 consensus EPS estimates, we are less worried about adverse impact on investor sentiment from higher H1N1 flu and COBRA costs over the next few months. Conference call discussion for 3Q and adjustments to 2010 consensus forecasts also dampen the risk of sentiment pressure from likely weak 1Q10 enrollment. Investors may start to warm up sooner. Given that near-term fundamental risks now appear better understood by the market (and estimates have been adjusted), investors may start to warm to ideas within the group a bit sooner than we initially expected. We believe investors returning to the group will gravitate to the two most liquid names, with no sizeable run-off businesses or pension exposure (may be early to play small caps with M&A less likely before mid-term elections). UnitedHealth Group shares upgraded to Overweight from Equal-weight. In short, we believe expectations for operating margins have become more reasonable and the relative valuation has improved over the last few months. We see UNH trading to $33 over the next year, based on multiples of 9.5x our 2011 forecasts or 11.5x our “run-rate” earnings base case scenario. WellPoint (WLP, $47.61, Overweight) remains our top pick among MCO names given its cheaper relative valuation, as well as the company’s strong cash profile over the next 12-15 months. At current levels, WLP shares trade at 7.6 times our

UnitedHealth (UNH, $26): Upgrade to Overweight UNH’s relative valuation has become more attractive. Over the last six months, UNH shares have lagged the group, dropping 4% versus the average 10.5% positive move for the group. Among the diversified MCOs, UNH is the only one to post a negative return since May. We attribute the underperformance to UNH’s valuation, and concerns over the margin outlook for 2010. However, we believe our 2010 margin forecasts are reasonable. Our pricing survey suggests that UnitedHealth’s commercial pricing remains conservative (Exhibit 2) and our forecasts incorporate meaningful MA margin pressure. UnitedHealth’s capital position and expected cash generation look
Industry View : In-Line — Managed Care Managed care stocks are likely to remain volatile and range-bound until clarity improves around the potential for disintermediation of private health plans under health reform. We expect healthcare reform to be manageable for health insurers and they will remain a key part of the system. But some market reform is likely, which would raise costs and create operating challenges that could push sustained earnings growth below the double-digit rates of the past.

15

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Opinion Changes
strong, and it does not have a pension overhang. UnitedHealth continues to delever, knocking down its debt-to-total capital ratio from 38.1% at the end of 2008 to 32.8% at the end of 3Q09.
Exhibit 1 Exhibit 3

UNH: Big, Liquid, and Showing Signs of Life
$70 60

50

UNH: Relative Valuation Now Looks More Attractive
2010 P/E UNH AET CI CVH WLP HUM Avg. (AET, CI, CVH, WLP, HUM) UNH relative premium Avg. commercial risk names (AET, CVH, WLP) UNH relative premium 5/19/2009 8.4x 6.7x 6.4x 8.7x 7.7x 5.5x 7.0x 20.1% 7.7x 9.0% 11/2/2009 8.5x 9.1x 8.2x 9.1x 7.6x 6.9x 8.2x 4.0% 8.6x -1.2%

40

$38 (+44%) $33.00 (+25%) $ 26.42

30

20

$20 (-24%)

10

0 Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10 Current Stock Price

Price Target (Oct-10)

Historical Stock Performance

Price Target $33

Source: Morgan Stanley Research. Our P/E ratios for AET and CI include $1.50 and $4.50 per share of equity value estimates, respectively to reflect pension funding shortfalls and run-off business exposures. Prices for companies mentioned: Aetna, $26, CIGNA $28, Coventry Health Care $21, Humana $37, WellPoint ($47).

Exhibit 2

Morgan Stanley Broker Survey: Weighted Avg. Gross Renewal Rates, 2009-2010
16.0% 2009A Wtd. Avg Rate 2010E Wtd. Avg Rate 14.0%
13.0% 12.4% 12.5% 12.4% 12.3% 13.0% 12.9%

Bull Case $38

13.6% 13.6% 12.4% 12.0%

Base Case $28

12.0%
10.2%

11.7%

10.0%

9.3%

8.0%
7.0% 6.2%

6.0%

Bear Case $20

4.0%

2.0%

0.0% CI CVH HUM WLP AET UNH HNT Publicly Traded Average

Price target of $33 reflects a multiple of 9.5x our 2011 EPS forecast or 11.5x our “run-rate” earnings estimate, inclusive of the impact of health reform as well as more normalized investment yields. The 9.5 and 11.5 multiples sit above current levels given an expectation for reform “headline risk” to quiet and fundamentals to improve, but below historic 5- and 10year averages given real cyclical, secular, and political challenges. 11x 2011e United we stand: UnitedHealth outperforms on EPS operating expense improvements while holding the line on pricing. Multiples lift towards 11x, and investors wait to factor reform impact into earnings and valuation until closer to implementation, in 2012-13. Company announces a cash dividend. 8.2x Big ship stays on course. Sustains commercial 2011e pricing discipline, as signs of real expense reduction EPS or first seen in Q1/09 prove sustainable and help lev10x aderage earnings power. “Run-rate” earnings reflect justed post-reform margin pressure of 300 bps in ISG risk “run-rate” business and 150 bps in Med Adv and a 5% increEPS mental profit reduction, partially offset by a 100 bps increase investment yields off current historic low levels. 7.5x Bear Market takes time to digest reform. Multiples Case EPS stagnate around 7x as investors wait for MCOs to adapt to a changing environment. Lower “Run-rate” earnings reflect post-reform margin pressure of 400 bps in ISG risk business and 200 bps in Med Adv and a 5% incremental profit reduction, partially offset by a 100 bps increase investment yields off current historic low levels.

Source: FactSet, Morgan Stanley Research

Source: Morgan Stanley Research Small Group Broker Survey, N=65

Risks and Areas to Watch x Unemployment Rate: Spikes in unemployment and a subsequent rise in COBRA uptake could create pressure on the commercial medical loss ratio (analogous to “cost of goods sold” for MCOs). x The timing and magnitude of share repurchases represent primary (non-reform related) swing factors for our 2010-11 forecasts.

16

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Opinion Changes
November 2, 2009

Cooper Industries Upgrading to Overweight; High-Quality, Late-Cycle Laggard at Attractive Value
Morgan Stanley & Co. Incorporated

Stock Rating: Overweight Price target Shr price, close (Oct 30, 2009) Mkt cap, curr(mm) 52-Week Range Fiscal Year ending ModelWare EPS($) Prior ModelWare EPS($) P/E Consensus EPS($)§ Div yld(%)
e = Morgan Stanley Research estimates

Reuters: CBE.N Bloomberg: CBE US $50.00 $38.69 $6,530 $41.20-18.87 12/08 3.59 8.1 3.59 3.3 12/09e 2.40 2.20 16.1 2.37 2.7 12/10e 2.70 1.90 14.3 2.65 2.9 12/11e 3.15 2.32 12.3 3.12 3.3

Scott R. Davis, CFA
Scott.Davis@morganstanley.com

Michael Stein
Mike.Stein@morganstanley.com

§ = Consensus data is provided by FactSet Estimates.

Matthew E. Gugino, CFA, CPA
Matt.Gugino@morganstanley.com

Robert Wertheimer
Robert.Wertheimer@morganstanley.com

Price Performance
Cooper Industries PLC (Cl A) (Left, U.S. Dollar) Relative to S&P 500 (Right) Relative to MSCI World Index /Capital Goods (Right)

We have upgraded CBE to Overweight from Equal-weight. Cooper fits all of our 2010 investment themes, and even after its strong run off the March 2009 bottom, it is still valued ~20% below peers. We have materially raised our 2010 and 2011 estimates and our price target (to $50 from $30) as a result of Cooper’s cost positioning, book/bill rising toward 1, and improved visibility on a mid- and late-cycle recovery. Further, we think upside to our forecasts remains. From a cycle perspective, we favor rotation to mid/late cycle laggards, most of which have lagged for most of the year and could outperform well into 2010, ahead of the forecast 2011 recovery (earlier than our prior recovery forecast). We favor quality names, and more specifically, high-quality management teams based on our view that upcycle cost positioning, balance sheet capacity, and cash reinvestment will likely be the biggest driver of relative stock performance from here. “Smart grid” and environmental retrofit spend is accelerating and is the biggest near-term catalyst for shares. Our biggest theme for 2010 is M&A, and we believe Cooper is well positioned to participate more aggressively in transactions. Electricals look ripe for consolidation and deals within Electrical Equipment are generally easier to bolt on with far lower risk than other subsectors. Cooper has one of the strongest M&A capabilities in our coverage and potential for a transformational deal (e.g., a merger of equals) provides a “call option” to far greater value creation. Bottom line: We see good value for this quality portfolio and management team, with a potential M&A kicker. Commercial construction risks are now well known, and noise from its pull-out of the S&P 500 index (due to reincorporation in Ireland) has passed. We think the risk-reward is favorable and

60 55 50 45 40 35 30 25 20 05 06 07 08 09

140 130 120 110 100 90

Source: FactSet Research Systems Inc

Company Description Cooper is a $4.7 billion (revenue) electrical equipment company operating two business segments: Electrical Products (~85% of sales) and Tools and Hardware (~15% of sales). Cooper is primarily North American based with ~75% of sales in the US and Canada. Industry View: In-Line - Electrical Equip. & Industrial Conglomerates We believe that risk levels in Industrials have declined enough to justify S&P 500-weighted ownership. Visibility on 2010 trough forecasts has improved and valuations look reasonable.

CBE remains one of the least recommended names within the group: We count 5 buys, 7 neutrals, and 2 sells. CBE joins our list of top picks: Quality names have historically traded at a 2-3 multiple point premium to the rest of the group and CBE currently trades at a 20% discount. As late cycle exposures and higher quality names come into favor, we believe CBE will fall into this category. The macro environment is shaping up to be tough over the next 1-2 years, and commercial construction exposure remains a key risk; but aggressive restructuring actions and good pricing discipline should help Cooper attain positive operating leverage on modest revenue growth. As a reminder, mid-cycle maintenance, repair, and operation (MRO) flow goods — about half of Cooper’s sales — are now recovering and inventories now being restocked.

17

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Opinion Changes
Exhibit 1

CBE Joins Our List of Top Picks
$70

the storm better than most as quality management and aggressive cost actions will help company outperform peers. Bullish view on environmental and smart grid spend. M&A as a new catalyst.
$61 (+58%)

60

Exhibit 2
50 $50.00 (+29%)

40

$ 38.69

Not Too Late to Buy: CBE Is Trading Below Historical Average Multiple Relative to the S&P 500
130%

30

$30 (-22%)

120%
20

110% 100%
Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Current Stock Price Oct-10 Historical Stock Performance

10 Oct-07

Price Target (Oct-10)

90% 80% 70% 60%

96%

Valuation

Source: FactSet, Morgan Stanley Research

Base Case $50

Bear Case $30

One of our biggest concerns about the CBE story is commercial construction. An estimated 25% of Cooper’s portfolio serves the commercial construction end markets. The other big risk, in our view, is Cooper’s ability to maintain pricing discipline and in turn create positive operating leverage on light revenue growth. Other risks include end market demand in the Utility and Industrial spaces, inventory destock or timing of restock, currency volatility, and execution in M&A. TNB and HUBB Move to Equal-weight from Not-Rated For Hubbell (HUBb, $42.53) and Thomas & Betts (TNB, $34.21), we see modest relative upside vs. peers and balanced risk-reward. Hubbell’s Burndy acquisition appears smart and the company has executed on costs much better than we expected. We believe TNB remains reasonably valued and its P/E on our fully recovered earnings estimates is attractive. Longer term, the outlook for both companies is improving with Smart Grid and environmental retrofit now a more tangible tailwind.

Source: FactSet, Morgan Stanley Research

Key Debate on the Stock x Depth and timing of a bottom in both non-resi construction and later cycle industrial activity. x Price/cost sustainability. x Timing and magnitude of both environmental retrofit and stimulus impact. x Ability to do accretive acquisitions. Where Do We Differ? x We continue to expect a long and slow recovery in the US industrial economy. However, we believe CBE will weather

O ct Fe 04 bJu 0 5 n0 O 5 ct -0 Fe 5 bJu 0 6 n0 O 6 ct -0 Fe 6 bJu 0 7 n0 O 7 ct -0 Fe 7 bJu 0 8 n0 O 8 ct Fe 08 bJu 0 9 n0 O 9 ct -0 9
CBE PE Rel to S&P Average

Bull Case $61

We rate CBE Overweight with a price target of $50. Our target is based on 16x P/E multiple applied to our 2011 EPS estimate of $3.15. This forward multiple is in line with industrial peers. 17x Bull Assumes strong environmental retrofit demand Case ‘11e and non-residential construction slowdown is EPS of not as bad as anticipated. Positive organic reve$3.58 nue growth (6% in 2010E) and operating margins that bounce back quickly due to the benefits from aggressive cost actions. Our ‘11E EPS of $3.58 drives a share value of $61, with CBE trading at a 17X multiple. 16x Base Assumes continued slowdown in construction Case ‘11e end markets with modest recovery in industrial EPS of end markets; pricing remains intact. Organic $3.15 revenue growth of 4% in ‘10E, with operating margins rebounding on strong incremental margins. Recovery in CBE’s higher margin businesses also drives positive mix shift. Our ‘11E EPS of $3.15 implies a stock value of $50 based on a 16X multiple on earnings. This is the forecast scenario in our earnings model. 12x Bear Severe declines in non-residential construction Case ‘11e and meaningful pricing pressure. Assumes subEPS of stantial negative volume growth driven by another $2.50 leg down in commercial construction and little recovery in MRO activity with significantly increased pricing competition. In this scenario, 2011E EPS of $2.50 implies a share value of $30 with a lower multiple (12X) due to greater than expected cyclicality.

86%

18

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Opinion Changes
October 29, 2009

Plains Exploration & Production Expectations Low, Valuation Supportive — Move to Overweight
Morgan Stanley & Co. Incorporated

Stock Rating: Overweight Price target Shr price, close (Oct 28, 2009) Mkt cap, curr(mm) 52-Week Range Fiscal Year ending ModelWare EPS($) Prior ModelWare EPS($) P/E Consensus EPS($)§ Div yld(%)
e = Morgan Stanley Research estimates

Reuters: PXP.N Bloomberg: PXP US $40.00 $26.93 $3,304 $32.87-15.25 12/08 4.82 4.81 4.8 4.81 0.0 12/09e 3.26 2.54 8.3 1.70 0.0 12/10e 2.99 2.67 9.0 1.52 0.0 12/11e 4.04 3.51 6.7 2.78 0.0

Stephen Richardson
Stephen.I.Richardson@morganstanley.com

Sameer Uplenchwar, CPA
Sameer.Uplenchwar@morganstanley.com

Stuart Young
Stuart.Young@morganstanley.com

§ = Consensus data is provided by FactSet Estimates.

We have upgraded PXP to Overweight from Equal-weight. We view PXP as a low expectations name with valuation support at current levels and a number of clear, near-term catalysts on the horizon via the Gulf of Mexico (GoM) exploration program. We believe that the market is not pricing in what could go right at Plains; net unrisked GoM exploration potential of 328 mmboe could double the proved reserve base. Management has strategically re-positioned Plains to win, in our view. Following ~$1.6 billion in debt and equity capital raises YTD, we believe that management has positioned Plains to benefit from: (1) a crude oil-levered reserve base (crude represents 60% of reserves, 60% of production); (2) a viable strategy to grow production and reserves via the Haynesville JV with Chesapeake, and (3) a shift in market focus from funding/balance sheet concerns to the implications for value from the exploration portfolio. We introduce a 12-month price target of $40 per share, and see a relatively narrow skew to our Bull Case valuation of $47. We see valuation support at ~$25 based on proved reserves and California “super”-probables net of debt at the current strip. This price level implies ~4.9x on our 2010e EV/EBITDA. We see the current valuation as attractive in the context of outlook for strengthening oil prices into 2010 (Morgan Stanley forecasts $85/bbl vs. the current Street view of $75) and a continued challenged environment for natural gas (particularly in early 2010). On our 2010e, PXP trades at 5.2x EV/EBITDA today, below its five-year average of 6x. Our other valuation approach is the PV-10 (present value of proved reserves discounted a 10% annually) at the current commodity strip. Due to the significant reserve write-down in California at year-end 2008 (due to low oil prices), we have adjusted proved reserves by ~200 mmboe of near-proved reserves. On the current 48-month strip, we calculate an EV-to-Adjusted PV10 ratio of 0.9x today, a discount to PXP’s historical ratio of 1.04x.

Price Performance
Plains Exploration & P roduction Co. (Left, U.S. Dollar) Relative to S&P 500 (Right) Relative to MSCI World Index /Energy (Right)

70 60 50 40 30 20 05 06 07 08 09

250

200

150

100

Source: FactSet Research Systems Inc

Company Description Plains Exploration & Production is an independent oil and gas company engaged primarily in acquiring, developing, exploiting, exploring, and producing oil and gas properties in the US. The company's core areas of operations are the Los Angeles and San Joaquin Basins, the Santa Maria Basin, and the Gulf Coast Basin, including the Gulf of Mexico. Industry View: In-Line — Exploration & Production While investor interest is high (particularly with front month gas around $5/Mcf), we remain of the view that risk-reward is skewed more neutral for the group due to current valuation. While storage dislocations will cloud the near-term commodity outlook, the operating environment for E&Ps in 2010 continues to look supportive. We would look for volatility before adding to positions of higher-quality names on this theme.

Catalysts should come primarily from the GoM, where six wells should be down by late 2009/early 2010. As the 2010 commodity price outlook firms and PXP delivers on production growth, we look for consensus to migrate higher. A much improved business model. While valuation reflects low expectations, we look for exploration catalysts to provide the next leg up for the stock. We see an improved (more sustainable) business model on a 2-3 year view. Management has made a number of strategic moves (e.g., entry to the Haynesville, asset divestitures, capital raises) that we think will position the company for the growth in production and reserves that have proven elusive in the past.

19

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Opinion Changes
Exhibit 1

PXP: Expectations Are Low, Catalysts on the Horizon
$90 80 70 60 50 40 30 20 10 0 Aug-07 $ 26.93

Risks include commodity price exposure (PXP has protected 80% of 2010 oil production with $55/bbl puts), potential changes to the hydrocarbon regime in California (60% of Plains’ reserves) and lackluster drilling results from partner Chesapeake in the Haynesville.
Exhibit 3

$47 (+75%) $40.00 (+49%)

PXP NAV at Morgan Stanley Commodity Deck
Value ($MM) Risked Poten. (mmboe) Implied $/Boe $/Share Proved Reserves (PV10) Proved Developed Reserves Proved Undeveloped Reserves Total GoM - Risked $4,649 $310 $4,959 209 83 292 $22.20 $3.75 $16.98 $33.39 $2.23 $35.62

$22 (-18%)

Feb-08

Aug-08

Feb-09

Aug-09

Feb-10 Current Stock Price

Aug-10

Blueberry Hill Flatrock - Development Friesian - Development Davy Jones - Exploration Lucius - Exploration Northwood - Exploration Rickenbacker - Exploration Total Other Upside - Risked California Probables Haynesville Granite Wash T-Ridge (offshore California) Big Mac (S. Texas) Total Other Assets / Liabilities Hedge Book (PV @ MS price deck) Cash (2Q09-proforma) Midstream & Other Assets Book Value of Debt (2Q09) G&A (PV) Net Working Capital, ex. Cash (2Q09) Total Net Equity Value Shares Outstanding (including dilution) Market Value of Equity Upside

$222 $200 $370 $56 $24 $74 $74 $1,020

20 18 50 5 3 10 10 116

$11.10 $11.10 $7.40 $11.10 $7.40 $7.40 $7.40 $8.77

$1.59 $1.44 $2.66 $0.40 $0.18 $0.53 $0.53 $7.33

Price Target (Aug-10)

Historical Stock Performance

Price Target: $40

Bull Case $47

Implied 7.5x 2010e EV/EBITDA

Base Case $40

Implied 6.7x 2010e EV/EBITDA

Bear Case $22

Implied 4.6x 2010e EV/EBITDA

Based on our Net Asset Value model which considers the value of proved, near-proved, and risked probable reserves at Morgan Stanley’s Base Case commodity price forecast. T-Ridge is a Go. The “on again, off again” project offshore California is approved by regulators (state lands). With a proven reservoir and rapid cycle time from drilling to production (platform in place) the project provides significant resource (peak of ~40 kbpd gross) with a low development cost ~$3/bbl. The negotiated royalty will be a key value driver for the project ultimately. The PXP base business + credit for risked reserve upside. x We see $25/shr of value from proved reserves, near-proved reserves (California probables), net of debt at the current commodity strip. x Additional upside from the GoM exploration and development program ($7/shr risked upside), Haynesville ($7/shr risked upside), and MS base case commodity forecast ($5/shr), less other adjustments. x Crude Oil (WTI): $54/bbl in 2009, $85/bbl in 2010, $95/bbl in 2011, $105/bbl forward x Natgas (Henry Hub): $4.30/mcf in 2009, $6.50/mcf in 2010, $7/mcf in 2011 forward Lower commodity price tempers development. We use $70/bbl and $6/Mcf commodity price forecast to bound our bear case outlook for the stock.

$2,072 $969 $23 $963 $39 $4,066

201 575 14 100 889

$10.32 $1.69 $1.69 $9.63 $4.57

$14.89 $6.96 $0.17 $0.00 $0.28 $22.29

159 (0) 446 (2,424) (1,460) (294) (3,574) $6,472 1,298

$1.14 $0.00 $3.21 ($17.41) ($10.49) ($2.11) ($25.67) $40 139

$3,749

$26.93 47%

Source: Company data, Morgan Stanley Research

Source: FactSet, Morgan Stanley Research

Exhibit 2

PXP Near the Value of Proved Reserves Alone
$60

Nexen (NXY.TO, C$23.40) Downside risks well known; upgrade to Equal-weight from Underweight. Our thesis was that Long Lake (Nexen’s 65% owned oil sands project) would remain an overhang, particularly as expectations for a 2010 ramp built. We still believe the project will remain an operational overhang, but this is increasingly the consensus view. Recent drilling in the Gulf of Mexico, North Sea, and Nigeria (including some announced successes) should ease concerns about growth due to delays at Long Lake. We expect market focus to shift to exploration catalysts elsewhere in the portfolio and the benefit of a crude levered (85% of 2010e production) asset base.

$50

$40

$30 Current Stock Price $20

$10

$0 Proved Reserves at strip pricing Proved reserves at MS price deck California Probables Less: Net debt Risked GoM Upside Base Case T-Ridge Bull Case

Source: Morgan Stanley Research

20

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Opinion Changes
November 3, 2009

Semiconductors Downgrade Industry to Cautious – Fundamentals Peaking
Morgan Stanley & Co. Incorporated

Mark Lipacis
Mark.Lipacis@morganstanley.com

Sanjay Devgan
Sanjay.Devgan@morganstanley.com

supply chain has been. Inventory days at most places have declined and are on average 1-to-5 days below the 3-year average. However, two developments make us more cautious. First, inventory dollars are starting to creep up (up 3% in US, up 8% in Taiwan), and secondly, at the Taiwan operations of notebook makers (ODMs), inventories (non-consolidated results of Taiwan Notebook ODMs) increased by 71% QoQ in dollars, even if they only increased by 2 days QoQ. This elevates the risk in our minds that there was a 3Q ship-ahead in the supply chain. We have lowered our price targets broadly on the group as we shift from mid-cycle P/Es to peak-cycle P/Es (i.e., P/Es in the lower half of the normal range). Late-cycle fundamentals means late-cycle multiples.
Exhibit 1

Fundamentals peaking — we downgrade our Semiconductor Industry View to Cautious from Attractive. The pace in the recovery in expectations for the group has been unprecedented. After forecasting that the group would earn next to nothing in the 12 months after February 2009, consensus now forecasts the prior post-bubble peak earnings for C2010. Our EPS estimates for the group have gone from 25% above consensus in the spring to 5% below today. EPS, gross margins, utilization and growth metrics tell us that we are in the final innings of the semis cycle. Peaking fundamentals lead us to shift from mid-cycle to cycle-peak P/E multiples and lower our price targets. On average, our price targets imply 5% upside to stocks. The SOX index is up 74% off the bottom but has started to underperform — we expect continued underperformance, and we shift from being buyers on dips to being sellers on rallies. Enterprise should underpin demand in 2010… On the demand side, we’ve argued that the financial crisis motivated companies to stop spending on IT hardware, and there is now pent-up demand for IT equipment. We still believe that to be the case. Indeed, we think that the upside risk to our “Cautious” Industry View is the potential for Enterprise demand to surprise on the upside. …but peaking fundamentals suggest EPS upside to be offset by lower multiples. Peaking fundamentals like gross margins, utilization, and YoY unit growth tell us that upside to semiconductor company EPS will likely be neutralized by lower P/E multiples. Leverage also baked-in. Average gross margins for the group have improved by 400 basis points over the past two quarters, and we are forecasting them to approach the post bubble peak levels by the end of 2010. This means that the levered earnings surprises that semiconductor companies have reported over the past year are largely behind. Inventories lean – but some negative signals. On the inventory front, we’ve been surprised about how disciplined the

Fastest Cycle in a Decade — 2-3 Times Faster than the Tech Bubble Bust and Recovery
45 months for NTM earnings forecast to retrace 65% of peak 23 months for NTM earnings forecast to retrace 80% of peak

$30 $25 $20 $15 $10

$0.6 bill./mon increase

$1.7 bill./month increase

$5 $0 02/20/2009 11/13/2009

12/11/1998

09/03/1999

05/26/2000

02/16/2001

11/09/2001

08/02/2002

04/25/2003

01/16/2004

10/08/2004

07/01/2005

03/24/2006

12/15/2006

09/07/2007

Source: FactSet, Morgan Stanley Research

Downgrade PC-Related Stocks; Upgrade Defensive Names We have lowered our rating on Intel shares to Equal-weight from Overweight. We still think that investors are underestimating Intel’s gross margins, and we still believe that the company benefits from an Enterprise spending cycle. However, elevated Taiwan original device manufacturer (ODM) inventories suggests expectations for 2010 have risk. We also lower our rating on Micron Technology shares to Equal-weight and ONNN Semiconductor to Underweight due to concerns in the PC supply chain (~20% exposure to PCs), and we lowered NVIDIA stock to Underweight due to
Industry View : Cautious — Semiconductors Our EPS estimates have gone from 25% above consensus in the spring to 5% below today, and EPS, gross margins, utilization and growth metrics tell us that we are in the final innings of the semi cycle.

05/30/2008

Semis NTM Earnings Forecast ($US, bn)

21

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Opinion Changes
concerns about the PC supply chain and the competitive environment. We also downgraded shares of Altera and Xilinx, as our checks now indicate that the potential for upside surprises from China and India has pushed out. We upgrade Maxim Integrated Products and Linear Technology shares to Overweight, due to their defensive characteristics, and their history for outperforming during the late innings of the cycle.
Exhibit 2

We continue to like Broadcom due to its product cycle in wireless. We think that it has an excellent chance of capturing much of the $1.6 billion in wireless baseband revenues that Texas Instruments is walking away from at Nokia. Among small caps, we like shares of PMC-Sierra, Cavium (CAVM, $18.65, Overweight), Skyworks, and Avago based on their product cycles.

Semis Coverage Universe Ratings and Price Target Changes (*= Base Case Valuation)
Company (Ticker, Nov 2 price) NVIDIA (NVDA, $12.07) Altera (ALTR, $19.92) Xilinx (XLNX, $21.75) Intel (INTC, $19.01) ARM Holdings (ARM.L, 150p) ON Semiconductor (ONNN, $6.67) Linear Technology (LLTC, $25.98) Maxim Integrated products (MXIM, $16.75) Micron Technology (MU, $6.58) Advanced Micro Devices (AMD, $4.60) Atheros Communications (ATHR, $25.04) Avago Technologies (AVGO, $14.87) Broadcom (BRCM, $26.38) Lattice Semiconductor (LSCC, $1.93) Microchip Technology (MCHP, $24.09) Marvell Technology Group (MRVL, $13.83) National Semiconductor (NSM, $12.84) STMircoelectronics (STM, $8.01) Texas Instruments (TXN, $23.45) PMC - Sierra (PMCS, $8.61) Skyworks (SWKS, $10.32)
Source: Morgan Stanley Research

Old Rating Equal-weight Overweight Overweight Overweight Equal-weight Equal-weight Equal-weight Equal-weight Overweight Underweight Equal-weight Overweight Overweight Underweight Equal-weight Overweight Equal-weight Underweight Equal-weight Overweight Overweight

p p p p p p n n p

New Rating Underweight Equal-weight Equal-weight Equal-weight Underweight Underweight Overweight Overweight Equal-weight no change no change no change no change no change no change no change no change no change no change no change no change

Old Price Target $11.00* $26.00 $30.00 $25.00 130p $9.00* $30.00* $19.00* $8.75 $6.00* $31.00* $22.00 $37.00 $2.70* $30.00* $20.00 $17.00* $9.00 $28.0* $12.00 $15.00

New Price Target $9.00 $21.50* $24.00* $22.00* no change $6.00* $30.00 $20.00 $8.00* $4.00* $26.00* $19.00 $33.00 1.70* 25.00* $18.00 $14.00* $8.00 $26.00* $10.00 $14.00

Semiconductors: Summary of Industry Investment Debates
INVESTMENT DEBATE Was there a ship-ahead in the supply chain in 3Q09? MARKET’S VIEW Mixed; concerns mainly based on super-seasonal 2Q09 and 3Q09 results. Strong 3Q09 results from semis left some investors believing there is higher risk the supply chain is carrying excess inventory because semis shipped ahead of demand. Mixed. Some investors are starting to get cautious as estimates approach previous peaks; others are just getting around to baking in Enterprise and Telco product cycles we have argued for. OUR VIEW There is a higher risk of "3Q ship-ahead." Overall, our inventory analysis paints a relatively benign picture on a days basis, but two data points elevate the risk of a 3Q ship-ahead, if not the risk of an inventory build in the future. First, on a dollar basis, inventories are starting to creep up. Second, the Taiwan operations of notebook makers saw inventories spike by 71% QoQ in dollar terms, although it appears healthy on a current days basis, as well as on a consolidated basis (including global operations and non-notebook businesses). Thus, we are concerned about names with PC exposure, Limited upside. 1) Our semis versus OEMs revenue analysis indicates that semis revenue forecasts have closed the gap with OEMs in recent weeks, suggesting semis ship in line with OEMs. 2) Our proprietary “What’s in the Price” framework suggests a cautious stance, as our previously Street-leading EPS estimates are now 19% below the levels we believe the market is pricing in for the average semi stock. 3) With utilizations nearing peak levels, we believe that most of the gross margin leverage has played out. We expect lead times to shrink and visibility to get worse over the next six months. That said, we have argued that the financial crisis has translated to pent-up demand for IT equipment, and we think the biggest upside risk to our call is from Enterprise spending.

Is there a meaningful opportunity for upside surprises over the next 6 months?

22

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Opinion Changes
November 3, 2009

Semiconductor Capital Equip. Downgrading Industry to Cautious; Fundamentals Peak In Sight
Morgan Stanley & Co. Incorporated

Foundry orders appear to have peaked in 3Q— overall orders also peaking: Our analysis on the big three spenders’ (Samsung, TSMC, and Intel, comprising ~45% of global capex) quarterly capex run rate indicates that overall equipment orders are in the process of peaking. In addition, foundry spending (~20% of global spend this year) is up 300% in 2H09 vs. 1H09, implying foundry orders have already peaked. Price targets lowered for the group; NVLS and KLAC downgraded to Underweight. We have cut our price targets on the group, as we believe fundamentals are peaking. We have lowered estimates and downgraded KLA-Tencor shares to Underweight on above-average foundry exposure (~30% of sales). On Novellus, we believe that bulls are overestimating top-line growth given limited size of DRAM copper upgrade opportunity and share concerns in High-Density Plasma, or HDP (~20% of sales). Remain Overweight Lam Research and Applied Materials for company-specific reasons. For Lam, we see +$3-4/share earnings power, and share gain in wet clean. For Applied, we note an impending restructuring and we see upside from crystalline silicon. Investment Debate #1: Have Fundamentals Peaked? Market view: No. Fundamentals like chip utilization and equipment orders have not peaked and will likely move higher next year as foundry supply comes on-line and NAND equipment orders pick up. Morgan Stanley view: Not yet, but they are just six months away from peaking. Equipment stocks typically discount chip utilization peak ~6 months in advance (Exhibit 1). We believe orders are in the process of peaking as NAND order upside is offset by foundry order decline. Equipment stocks show better correlation with utilization historically than equipment orders. Leading indicators and signposts: x Monthly pulse per day data by Cymer (a major lithography laser supplier) is a leading utilization indicator. x Monthly semiconductor or IC units data and quarterly SICAS data to validate our proprietary chip utilization model. Where we could be wrong: If semiconductor unit demand grows more than 10-13% Y/Y.
Industry View: Cautious — Semiconductor Capital Equipment We expect fundamental indicators like chip utilization and equipment orders to peak in 1H10. Semi cap stocks are up ~100% off the bottom and have outperformed the market by ~3:1 on YTD basis. We believe stocks typically start underperforming the market ~6 months in advance of a peak in fundamentals.

Atif Malik
Atif.Malik@morganstanley.com

Michael Chu
Michael.X.Chu@morganstanley.com

Mark Lipacis
Mark.Lipacis@morganstanley.com

Fundamentals are peaking — we have downgraded the group to Cautious from Attractive as we expect fundamental indicators like chip utilization and equipment orders to peak in 1H10. Semi cap stocks are up ~100% off the bottom and have outperformed the market by ~3:1 on YTD basis. We believe stocks typically start underperforming the market ~6 months in advance of a peak in fundamentals (Exhibit 1).
Exhibit 1

Stocks Discount Utilization Peak ~6 Months Early
10,000 ~ 7 mos ~ 6 mos ? mos 100% 120%

Semi Cap Index (log scale)

80%

1,000

60%

40%

20%
Est.

100 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

0%

Semi Cap Index

Capacity Utilization

Source: SICAS, Morgan Stanley Research estimates.

We see limited upside to estimates. Our Attractive view was based on our above consensus +60% Y/Y capex view. In the last six months, consensus capex expectations have moved to +55%Y/Y from +35%. In addition, the group’s gross margins have increased sharply by ~22 percentage points off the 1Q bottom and are within 5 points of typical cycle peak levels. Consequently, we see limited upside to our and consensus estimates with risk to the downside if more inventories turn up in the supply chain (see a summary of our Semiconductor industry downgrade on page 21 of this issue of Investment Perspectives), especially at foundries.

Utilization, %

23

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Opinion Changes
Investment Debate #2: Magnitude of 2010 Capex? Market’s view: Expects 55% Y/Y capex growth and accelerated spending through the 2010. Morgan Stanley view: In line with consensus. Our capex forecast has gone from being +35% above consensus six months ago to +3% today. We are now merely in line with consensus, and see limited upside potential to us and consensus. Further, foundry orders peaked in 3Q and overall orders are in the process of peaking. Leading indicators and signposts: Quarterly capex updates by major chipmakers, especially foundries. Where we could be wrong: If 2010 memory spending is more than our expectations (+81%Y/Y), especially on NAND.
Exhibit 2

Investment Debate #3: Have Valuations Peaked? Market’s view: No, there is more upside. Group continues to grind higher on positive estimate revisions next year. Morgan Stanley view: Yes. While positive EPS revisions are possible as NAND spending returns in 1H10, we think multiple contractions will partially offset it. We think the group underperforms in the next 6-8 months given our view on peaking fundamentals (chip utilization, Y/Y equipment orders, and gross margins).

Summary of Changes
Ticker Applied Materials ASML KLA-Tencor Lam Research Novellus Systems Teradyne Verigy AMAT ASML-NL KLAC LRCX NVLS TER VRGY Rating OW EW EW UW OW EW UW UW EW Price Target $15 NA NA $26 $44 $42 NA $18 $7 $15 $12 $16 FY2010 Earnings MS Old MS New Cons $0.66 unch $0.32 € 0.93 unch € 1.03 $0.75 $0.84 $0.99 $1.66 unch $1.30 $1.40 $1.25 $1.40 $0.38 unch $0.65 $0.00 unch $0.03 2011 Earnings MS Old MS New Cons € 1.51 unch € 1.50 $2.57 $1.50 $1.92 $3.14 unch $2.29 $2.02 $1.77 $1.96 $0.74 unch $1.09 $1.16 unch $1.19

Source: FactSet, Morgan Stanley Research Estimates

Exhibit 3

Risk/Reward Profiles in Order of Stock Preference
Risk Reward Profile (% Change in Stock Price)
-50% -25% 0% +25% +50% +75%

Rating

Investment Thesis

LRCX AMAT ASML-NL WFR VRGY NVLS KLAC TER Average
Bull Case / Base Case / Bear Case Price Target / Base Case

Overweight Overweight Equal-weight Equal-weight Equal-weight Underweight Underweight Underweight

High NAND exposure, wet clean share inflection, and undervalued on $3 - $4 earnings power. Semis, services, and display revs all inflect in 2010; Solar now a tailwind on higher c-si mix. Best technology spending play; a core holding but good news priced in on relative valuation. Inflecting semi wafer units and margins offset by uncertain demand/pricing in solar markets Like front-end stocks on higher memory spending. Prefer VRGY to TER on wireless share gains. Operating model efficiency and copper opportunity priced in. Potential share loss in HDP is a risk. High exposure to peaking foundry spending and weak memory exposure in 2010. Prefer front-end stocks; Cautious on HDD and DDR3 revenue contributions in 2010/11.

Source: Morgan Stanley Research Estimates

Prices of stocks mentioned: Applied Materials Inc. (AMAT, $12.30), ASML Holding (ASML.AS, €18.51), KLA-Tencor (KLAC, $32.86), Lam Research (LRCX, $34.03), Novellus Systems (NVLS, $20.78), Teradyne (TER, $8.42), and Verigy (VRGY, $9.79)

24

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

New Coverage
November 3, 2009

A123 Systems Early Leader in a Transformational Industry; Equal-weight
Morgan Stanley & Co. Incorporated

Stock Rating: Equal-weight Price target Shr price, close (Nov 2, 2009) Mkt cap, curr(mm) 52-Week Range Fiscal Year ending Fiscal Year ending ModelWare EPS($) P/E Consensus EPS($)§
e = Morgan Stanley Research estimates

Reuters: AONE.O Bloomberg: AONE US NA $19.54 $2,174 $28.20-16.56 12/08 12/08 (0.98) NM 12/09e 12/09e (0.75) NM (1.25) 12/10e 12/10e (0.76) NM (0.79) 12/11e 12/11e (0.13) NM (0.55)

Robert Wertheimer
Robert.Wertheimer@morganstanley.com

Ravi Shanker
Ravi.Shanker@morganstanley.com

§ = Consensus data is provided by FactSet Estimates.

We have initiated coverage of AONE at Equal-weight. We believe AONE represents a reasonably priced option on the emerging battery vehicle and grid opportunities. At 2.3 times 2012e revenues, the valuation already prices in successes that are uncertain, in our view. Given A123’s position as the early leader in an industry with few peer comps, however, we think investors will pay a premium as long as execution stays on track. The potential revenue pool is large: our Base Case has $3 billion in revenue in five years, our Bull Case more like $7 billion, assuming 10% market share in both cases. We would be reluctant to be out of the stock so long as the technology looks to be leading. Positives: A123’s positioning and technology are excellent, in our view. We like the balanced strategy: early leadership in commercial vehicles provides credibility, scale, and experience for the much larger auto market. Current capacity of 170,000 kWh makes A123 an early capacity leader. We think the grid opportunity is interesting and provides diversification from a volatile auto space. Perhaps most important, in autos A123 has what we regard as one of the best pipelines in the emerging battery space. We believe A123 batteries will be placed on at least the first two vehicles in Chrysler’s ENVI program, with potential for fleet sales (Town & Country/Ram), which would directly leverage A123’s commercial expertise in the light-vehicle arena. Chrysler could clarify its plans as soon as November 4. Risks abound: A123 is not currently profitable and faces a steep challenge to ramp down costs. Its current revenues are very low vs. potential and it faces tough competition in the auto market. Legal challenges may result in royalty payments though we do not see this as a major concern at this time. Our industry checks support our view that A123 has a leading technology position, in what will soon become a technology + scale game. However, all battery manufacturers we checked with expect and need to lower cost by ~50% over roughly five years to make the passenger car market viable ex-subsidies. We find it difficult to predict with any confidence the five-year

Company Description A123 Systems makes and sells advanced lithium-ion batteries and battery systems for the transportation, electric grid services, and consumer markets, using proprietary nanoscale electrode technology. Industry View: In-Line - Electrical Equip. & Industrial Conglomerates We believe that risk levels in Industrials have declined enough to justify S&P 500-weighted ownership. Visibility on 2010 trough forecasts has improved and valuations look reasonable.

cost curves of competing chemistries and management teams. Moreover, the battery industry is capex-intensive, and cell manufacturing could be prone to commoditization. We see no guarantee that even the winners will be high margin entities. A positive is that early leaders should have scale advantages. In addition, we estimate A123 should have $400 million-plus in net cash, plus an incoming Department of Energy grant of $249 million. Where we differ: We favor plug-in hybrids over electrics; consensus underestimates commercial vehicle potential. Most investors we’ve spoken with already believe in the hybrid auto opportunity with questions mainly related to the timing and pace of the volume ramp. We see three inflection points for hybrid demand in the next decade coming in 2010, 2012 and 2015. We differ from consensus in our preference for plug-in hybrid vehicles over electric vehicles. We also believe that the market is underappreciating the importance of the commercial vehicles (CVs) business for A123. We believe hybridization of CVs is economically viable today vs. being about 3-4 years away for light vehicles. We believe hybrid penetration for CVs will grow much faster and earlier than light vehicles and can envision a significant portion of the world’s public utilities fleet (commuter buses, garbage trucks etc.) being hybridized in the next few years. A123’s leadership in this space does not just give it access to that growth opportunity but also serves as a live test bed and customer demonstration fleet for its light vehicles (auto) business.

25

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

New Coverage
We value A123 on EV/Sales multiples based on forward revenues. A123 is likely to burn cash for several years (we project the company FCF-positive in 2012). The projected lack of profitability in the near term as well as volatility of earnings makes P/E or EV/EBITDA valuation difficult. Among all our assumptions, we believe we have the best visibility into A123’s revenue pipeline, making EV/Sales valuation most suitable. Our valuation is supported by a DCF that uses an 11% cost of equity and 4% terminal growth. AONE: Potential for Significant Risk or Reward
$60 $54 (+175%) 50 $44 (+124%) 40

Investment Thesis x AONE shares represent a reasonable option on a substantial market opportunity. The company possesses a leading technology position and is on a path towards being an early leader in manufacturing scale. x A123’s strategy as a leader in the commercial vehicle market positions it well to win auto mandates. Early Chrysler platforms have serious potential in fleet applications. x Large cash position and likely government funding totaling $475 million differentiate versus start-up competitors, and allow scale comparable to multinationals Key Value Drivers x Technology: A123 technology is highly promising. Key advantages in cycle life, stability, and usable energy. x Scale: No manufacturer yet has large scale in lithium ion batteries for transport markets. A123 capacity stands at 170,000 kWh. DOE grant and a possible loan should help A123 expand capacity. x Diversification: From commercial and electric grid. Potential Catalysts x November 4: Chrysler strategic plan. x November 10: A123 earnings. x Potential for revenue wins and other volume contracts We identify three key debates for A123 Systems: 1. What does the auto opportunity look like? Our View: Plug-in hybrids are poised for significant growth in penetration, leading to mass adoption. We see the market for hybrid vehicles, plug-in hybrids and electric vehicles (collectively XEVs) growing from 500,000 units globally today to over 5 million units by 2020, ~5% of global vehicle sales, with tens of billions in market opportunity. 2. Can A123 survive and thrive in a growing market? Our View: It is probably too early to call winners and losers but we believe A123 has what it takes to make it. We see the market as still nascent and extremely fragmented and expect industry consolidation in the next 4-5 years. We believe A123 can win due to: (1) superior technology, (2) early mover advantage in scale and production, and (3) superior customer pipeline and diversification. 3. What is A123’s path to profitability? Our View: Scale will produce reasonable margins but balancing growth with capacity utilization will be a huge challenge. Unabsorbed overhead should ease with scale but A123 will have to walk a tightrope between profits and investing for next year’s revenues for several years.

30 $25 (+27%) $ 19.66 20 $14 (-29%) 10 $3 (-85%) 0 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Current Stock Price

Base Case (Oct-10)

Historical Stock Performance

Our valuation framework is based on discounted revenues, with multiple scenarios to reflect both risk and a wide range of reasonable outcomes. The main drivers of our 5 scenarios are differing revenue paths for A123. The multiple is similar to other high growth green technology companies, though A123 systems has few direct comparables. Extreme 4.0x ExA123 lands second major domestic platform and Bull treme Bull international penetration ramps. Oil prices above Case Case ‘12e $150 drive a rapid shift to hybrid vehicles, and China $54 revenues pushes incentives to electric to curb pollution and for oil security. Bull 3.5x Base A123 lands another major platform by 2013, and Case Case ‘12e Chrysler builds out a complete portfolio of electric Case revenues vehicles, with A123 as exclusive supplier. Com$44 mercial opportunity expands beyond bus fleets to refuse and public utility vehicles. Base 3x Base A123 becomes a significant, but not the leading Case Case ‘12e manufacturer to the EV industry. 2012 passenger $25 revenues vehicle sales approach 50,000 units, driven by Chrysler volumes and international. The company announces new volume platforms in the next two years, and the stock trades on anticipated revenues. Bear 3x Bear Auto opportunity does not work long term for Case Case ‘12e A123. Despite initial sales A123 does not become a $14 revenues volume supplier to Auto. The company’s commercial vehicle business continues to succeed, and the grid opportunity keeps A123 in business as a healthy supplier to smaller industries. Extreme $500 mil- Technology goes in another direction. A123’s Bear lion disfactory investments and pipeline are valued at reCase tressed placement cost or worse. We do not see a zero $3.40 asset value on the shares in any reasonable scenario, as value the IPO proceeds will be put towards assets that have value, and the technology will have niche applications.
Source: FactSet, Morgan Stanley Research

26

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

New Coverage
October 29, 2009

Cimarex Energy Cana Changes the Game; Overweight, $50 Price Target
Morgan Stanley & Co. Incorporated

Stock Rating: Overweight Price target Shr price, close (Oct 28, 2009) Mkt Cap, curr (mm) 52-Week Range Fiscal Year ending ModelWare EPS($) P/E Consensus EPS($)§ Div yld(%)
e = Morgan Stanley Research estimates

Reuters: XEC.N Bloomberg: XEC US $50.00 $39.53 $3,297 $47.85-15.35 12/08 7.06 3.8 7.06 0.9 12/09e 2.09 18.9 2.11 0.6 12/10e 5.29 7.5 4.24 0.6 12/11e 6.87 5.8 5.11 0.6

Stephen Richardson
Stephen.I.Richardson@morganstanley.com

Sameer Uplenchwar, CPA
Sameer.Uplenchwar@morganstanley.com

Stuart Young
Stuart.Young@morganstanley.com

§ = Consensus data is provided by FactSet Estimates.

Price Performance

Transformation under way: Coverage initiated at Overweight with a 12-month price target of $50. Our investment thesis: Cana-Woodford is a transformative play for Cimarex Energy, holding promise of higher returns and better visibility. The play remains in the early stages of development (approximately 60 industry wells drilled to date), but early results are very positive. Reserve recoveries and high liquids content support low per well break-even (10% post-tax IRR) at a ~$3/Mcf NYMEX natural gas price. We estimate the market is assigning $9/share of value to the play; we assign $19/share in our base case. Cana is still early, and not reflected in XEC’s valuation, we believe. Cana appears to have the size (2.2 Tcfe, or nearly 2x XEC’s 1.34 Tcfe of year-end 2008 proved reserve base) and the economics (~20% of recoverable reserves are liquids) to improve company-wide growth and returns. However, at 4.1x our 2010e EV/EBITDA, XEC trades at a 30% discount to its mid-cap “resource play”’ peers, an indication that the market continues to view Cimarex as a low-growth, low-visibility E&P. We expect a return to a group average multiple for XEC, as Cana is de-risked and visibility on the outlook improves. Market focused on growth, but when Cana begins delivering in 2010, we believe consensus will come to our view. We attribute the valuation gap to the consensus forecast that production will decline by 4% in 2010e. While we think flat Y/Y production will be supported by sequential quarterly growth throughout 2010e, the Street will need to see follow-through. We see more evidence of a change in operating philosophy via the increased use of the hedge book to secure natural gas prices through 2010e. While Cimarex has not been a hedger, it is securing future cash flows likely directed toward developing Cana. Locking in 20%-plus returns at current forward prices and reducing the potential for future variability in cash flows makes sense and should improve re-investment visibility at Cimarex. Based on our net asset value (NAV) analysis, we see 26% upside from current levels based on year-end 2008

Cim arex Energy Co. (Left, U.S. Dollar) Relative to S&P 500 (Right) Relative to MSCI World Index /Energy (Right)

180 70 160 60 50 40 30 20 05 06 07 08 09 140 120 100 80 60

Source: FactSet Research Systems Inc

Company Description Cimarex Energy is an independent oil and gas exploration and production company. The company’s operations are mainly located in Mid-continent and Rockies. As of December 31, 2008, proved oil and gas reserves totaled 1.3 trillion cubic feet equivalent (Tcfe), consisting of 1.1 trillion cubic feet (Tcf) of gas and 45.2 million barrels of oil and natural gas liquids with 80% of gas and 82% of oil classified as proved developed (PDP). Our investment thesis is that Cana Woodford has the ability to transform XEC's asset base, driving growth and returns. Industry View: In-Line — Exploration & Production While investor interest is high (particularly with front month gas around $5/Mcf), we remain of the view that risk-reward is skewed more neutral for the group due to current valuation. While storage dislocations will cloud the near-term commodity outlook, the operating environment for E&Ps in 2010 continues to look supportive. We would look for volatility before adding to positions of higher-quality names on this theme.

proved reserves and ~2.2 Tcfe of upside from Cana. We think this Cana upside is conservative and is likely to rise as drilling and well performance progress. Our Bull Case ($65/share, or 64% upside) assumes 80-acre spacing and 5.25 Tcfe recovery from Cana. Attractive risk-reward with limited downside to our Bear Case. XEC fits our E&P investment approach today, with downside valuation support and a compelling case for re-rating. Our bear case assumes Cana results to date are not repeatable. We think XEC can outperform without the commodity moving higher.

27

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

New Coverage
Exhibit 1

Other positives we believe are not priced in the stock: x Conservative reserves booking should benefit Cimarex. We believe Cimarex has yet to book ~2.2 Tcfe (or 2 times the current proved reserve base) at Cana. x Historically, management has delivered on the operating plan. We expect modest production growth in 2010; current Street estimates assume a production decline in 2010. x Permian assets (West Texas-Bone Spring and Southeast New Mexico) provide optionality to oil prices.
Exhibit 2

XEC: Attractive Risk/Reward – Cana Changes the Game
$80 70 $65 (+64%) 60

50 $ 39.53 40

$50.00 (+26%)

30

$30 (-24%)

20

10

0 Nov-07

May-08

Nov-08

May-09

Nov-09

May-10 Current Stock Price

Nov-10

Stock Prices in Some, But Not All, Cana Potential
$70 $60 $50 $40 Current share price $30 $20 $10 $0 Proved Reserves at current Strip Cana-woodford MS commodity deck Net debt Base Case Cana downspacing to 80-acre Bull Case

Price Target (Nov-10)

Historical Stock Performance

Price Target $50

Bull Case $65

Implied EV/EBITDA multiple of 6.25x on 2010e.

Base Case $50

Implied EV/EBITDA multiple of 4.9x on 2010e.

Bear Case $30

Implied unhedged EV/EBITDA multiple of 3.9x on 2010e.

Based on our NAV model at a 10% discount rate, based on year-end proved reserves, and risked upside from other resource plays. Cana-Woodford Delivers; Downspacing the Upside x Assuming a move to 80-acre spacing (~25% recovery), XEC captures 5.25 Tcfe of risked reserve upside from the play. x We assign no value for other assets outside of YE2008 proved reserves. x Base case commodity forecast. Markets Recognize Cana-Woodford Value x Follow-through of well results and development leads to full value from Cana in addition to XEC’s YE2008 proved reserves. x Assuming 160-acre spacing (~15% recovery) and 2.8 Tcfe of potential reserves, this assigns $20/share for XEC’s 98k net acres in the play. x Natural gas prices (Henry Hub, $/mcf): $6.50 in 2010, $7 in 2011 forward. Cana-Woodford Results Disappoint x Unsuccessful development, greater-than-expected geologic anomalies limit repeatability at Cana. x Bear case based on YE2008 proved reserves at the Morgan Stanley commodity deck. At the current forward curve, this value falls to $30/share. x Natural gas prices (Henry Hub, $/mcf): $6.50 in 2010, $7 in 2011 forward.
Base Case Strip 2011 $95.00 $7.00 2012+ $105.00 $7.00 2009 $58.68 $4.13 2010 $83.32 $6.06 2011 $86.04 $6.75 2012+ $87.70 $7.15 2010 $85.00 $6.50

Source: Company data, Morgan Stanley Research

Exhibit 3

Net Asset Value (NAV) at Base Pricing
Risked) Value (mn) Pot’l (bcfe) Year End 2008 PV10 $3,281 1,339 Potential Upside — Risked Cana-Woodford Other Assets/Liabilities $1,550 2,807 Implied $/Mcfe $2.45 $0.55 Value/Sh. $39.99 $18.90 $0.04 (8.61) (8.58) $50 82 20%

Commodity Assumptions: WTI Natural Gas 2009 $53.74 $4.11

Cash $3 Book Value of Debt (2Q09) (707) Total (704) Net Equity Value $4,128 Shares Out. (incl. dilution; mn) Upside

4,146

Source: Company data, Morgan Stanley Research PV10 = Present value of estimated future reserves discounted at a 10% rate.

Note: Strip pricing as of 10/28/2009 Source: FactSet, Bloomberg, Morgan Stanley Research

Potential Catalysts XEC and industry drilling results confirming resource potential from Cana: (1) Per well recoveries may rise from 6+ Bcfe; and (2) downspacing from 160 acres to 80 acres drives valuation to our Bull Case. Risks Beyond commodity price volatility, risks are primarily associated with disappointments surrounding expectations for success at Cana.

What Is the Cana? A potentially large shale play with good economics. The Cana-Woodford is a shale formation in Western Oklahoma, in the Anadarko basin. Economics continue to improve: (1) Cimarex holds 94,000 net acres and estimates average well costs of $7.5–8.0 million with a reserve potential of 6.5 Bcfe; and (2) the company estimates (conservatively, we think) finding & development costs for the play of ~$1.50/Mcfe (post-royalty). Unique to Cana is that ~20% of reserves are liquids, which bolsters the economics of the play.

28

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Industry Analysis
October 30, 2009
Exhibit 1

Banking - Large Cap Banks 3Q09 Results a Net Positive; STI Upgraded to Equal-weight
Morgan Stanley & Co. Incorporated

STI Posted a 1% Decline in NPL Balances in 3Q09
STI NPL Balances ($mil) C&I CRE/ Construction Resi Mortgage/ HE Other Consumer Total Formation Rates C&I CRE/ Construction Resi Mortgage/ HE Other Consumer Total 3Q08 257 1,438 1,549 45 3,290 3Q08 120% 29% 14% 19% 25% 4Q08 322 1,453 2,120 45 3,940 4Q08 25% 1% 37% 1% 20% 1Q09 400 1,690 2,501 50 4,641 1Q09 24% 16% 18% 11% 18% 2Q09 716 1,898 2,840 49 5,504 2Q09 79% 12% 14% -1% 19% 3Q09 595 1,885 2,926 39 5,444 3Q09 -17% -1% 3% -22% -1%

Betsy L. Graseck, CFA
Betsy.Graseck@morganstanley.com

Cheryl M. Pate, CFA
Cheryl.Pate@morganstanley.com

Justin Kwong, CFA
Justin.Kwong@morganstanley.com

Matthew Kelley
Matthew.Kelley@morganstanley.com Source: Company data, Morgan Stanley Research

We view the recent sell-off in large cap banks as a buying opportunity. Results in 3Q09 were a net positive for the sector as 1) NPL formation rates decelerated for the second straight quarter; 2) capital ratios came in higher than expected driven by lower assets and AOCI valuation gains; 3) liquidity improved, suggesting high feasibility of TARP repayment for banks still in the program; and 4) NIM improved for a majority of the coverage group due to downward repricing of deposits and improved funding mix. While we expect the credit outlook over the next 12 months to remain challenging, we believe the group is, in aggregate, 57% of the way through cumulative losses. We look for bank earnings to improve during 2010 as provisions begin to subside, net interest margins expand, and the capital markets mix shifts to higher margin IPO and M&A. We have an attractive view on the Large Cap Banks, driven by our expectation for deceleration in jobless claims/unemployment/GDP shrinkage. Less bad is good for bank stocks. We are Overweight banks with a skew towards early cycle credit and capital markets sensitive revenues (BAC, JPM), lower exposure to at-risk assets (BK, NTRS), and significant expected acquisition generated earnings accretion (WFC, PNC). We are Underweight banks with concentrated exposure to residential construction and lower relative reserve coverage ratios (RF). We upgraded SunTrust to Equal-weight from Underweight... We identify three drivers to our rating change. First, one of the primary drivers of our previous Underweight call— credit deterioration in the bank’s residential mortgage and commercial real estate/ construction portfolios to drive higher levels of NCOs and reserve build into 2010 — showed signs of stabilization. The bank’s CRE/ construction portfolio fared even better, with NPL balances declining 1% q/q vs. prior quarter of 12% growth. We believe lower NPL formation rates should lead to lower levels of reserve build going forward for the bank.

Secondly, STI is aggressively modifying current and noncurrent loans within its portfolio. As of 3Q09, STI had $2.02B in its TDR (troubled debt restructurings) portfolio; however, 67% of the TDRs were restructured loans in which the borrower was current on payments, and is still accruing interest, while the rest of the portfolio consisted of borrowers which were nonperforming at time of modification. With the aggressive modification of current loans, we believe management is looking to pre-empt potential credit issues, which could potentially lead to lower losses going forward. Lastly, STI looks cheap at 0.54 P/B and 0.96 P/TB basis, below the peer group median of 0.7x and 1.4x. Looking forward to 2012 normalized earnings, STI trades at 5.0x EPS, below the peer median of 6.8x. We think the key debate for STI surrounds the tail risk of its commercial real estate and construction portfolios; however, with forward indicators of credit improving in 3Q, we believe the trading gap will close as provisions and associated expenses begin to decline in 2010. …and tweaked our 2009e EPS by a median of -1%, and our 2010e EPS estimates by a median of -10%. However, even with the downward revisions to our 2010 outlook, we remain above the Street by a median of 14% for 2009 EPS, and 35% for 2010. Our estimate changes are primarily driven by higher expected provisions as we look for further reserve build in the first half of 2010. We tweaked up our cumulative loss expectations given trends seen in the quarter. For the banks yet to repay TARP, we’ve also extended our TARP repayment esti-

Industry View: Attractive — Banking - Large Cap Banks We believe the risk of the bear case has been significantly reduced: (1) Stabilizing jobless claims increase our conviction that consumer nonperforming loan (NPL) growth will peak sooner rather than later (2H09, not 1H10). (2) More liquid wholesale credit markets, greater competition among banks should lower corporate borrowing costs over next several quarters, reducing commercial NPLs. (3) Bank pre-provision earnings above Bear Case, accelerating capital repair. We expect the debate to shift from capital adequacy to normalized earnings.

29

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Industry Analysis
mates from 4Q09 to 2Q10 and EPS decline as TARP preferred dividends continue to be paid in 1Q10. Higher expected net interest margins partially offset these negatives as we look for further margin benefit from downward re-pricing of higher cost deposits into 1H2010 and for higher asset re-pricing in 2H2010 as rates go up.
Exhibit 1

Morgan Stanley vs. Consensus EPS Estimates
New MS Estimates 2009 2010 BBT 1.20 2.04 BPFH (0.02) 0.25 C (0.37) 0.20 FITB (1.33) (0.03) KEY (2.08) (0.84) PNC 3.26 4.36 RF (1.14) (0.53) STI (2.91) (0.10) USB 1.04 1.78 WFC 1.91 2.53 WL 0.52 0.80 Source: FactSet, Morgan Stanley Research Consensus 2009 2010 1.05 1.48 (0.33) 0.21 (0.22) 0.05 0.06 (0.30) (2.41) (0.77) 3.01 3.23 (1.05) (0.64) (3.48) (0.81) 1.00 1.49 1.98 1.80 0.27 0.58 Differential 2009 2010 0.15 0.56 0.31 0.04 (0.15) 0.15 (1.39) 0.27 0.33 (0.07) 0.25 1.13 (0.09) 0.11 0.57 0.71 0.04 0.29 (0.07) 0.73 0.26 0.21

Bank Liquidity and TARP: We are now forecasting banks will be able to repay TARP by 2Q10. We believe the banks will be under increasing pressure to repay sooner rather than later as competitors who have already repaid begin to raise dividends. Taking into account the banks’ liquid assets (cash, bank deposits, treasury securities, and MBS), we believe a large majority of the large cap banks will be able to extinguish TARP without raising additional capital.
Exhibit 3

NCO Ratio Estimates Expect NCOs to peak in 2010 at a median of 2.69%
NCO Ratio 2010 4.15% 1.91% 0.96% 5.78% 2.79% 4.62% 3.20% 2.12% 2.91% 2.36% 2.04% 2.58% 1.81% 2.58%

Exhibit 2

Changes to Our Price Targets
Price Target Valuation Base Bull Bear New Old New Old New Old BBT $32 $32 $41 $42 $14 $14 BPFH $8 $8 $11 $10 $2 $2 C $6 $5.5 $10 $9 $2 $2 FITB $13 $14 $17 $19 $4 $4 KEY $8 $8.5 $12 $12 $3 $3 PNC $73 $71 $90 $88 $17 $17 RF $7 $7 $12 $12 $3 $3 STI $30 $26 $40 $35 $8 $8 USB $29 $29 $37 $34 $6 $6 WFC $44 $44 $49 $49 $13 $13 WL $21 $23 $25 $27 $8 $8 Source: Company data, Morgan Stanley Research. Please see our full not for detailed valuation methodology and risks.

BAC BBT BPFH C FITB JPM KEY PNC RF STI USB WFC WL Median

2008 2.26% 0.91% 3.59% 3.10% 3.23% 2.08% 1.68% 0.74% 1.59% 1.25% 1.07% 1.96% 0.57% 1.68%

2009 4.44% 1.85% 0.71% 5.76% 3.12% 3.95% 3.23% 1.61% 2.43% 2.85% 2.12% 2.28% 1.26% 2.43%

2011 3.33% 1.66% 0.70% 5.21% 1.50% 3.36% 1.72% 1.18% 1.37% 1.31% 1.07% 1.36% 1.35% 1.37%

2012 2.62% 1.13% 0.50% 4.47% 0.70% 2.69% 0.68% 0.74% 0.61% 0.77% 0.68% 0.84% 1.00% 0.77%

Source: Company data, Morgan Stanley Research estimates for 2009 forward.

Exhibit 5

Reserve Ratio Estimates Expect reserve build largely done by 2009
2008 2.48% 1.62% 1.63% 4.27% 3.37% 3.18% 2.36% 2.28% 1.87% 1.91% 1.96% 2.41% 1.64% 2.28% Reserve Ratio 2009 2010 4.07% 4.53% 2.50% 2.68% 1.71% 1.51% 6.04% 6.81% 5.08% 5.14% 5.08% 6.45% 4.23% 4.17% 3.27% 3.34% 3.05% 3.20% 2.91% 2.79% 2.88% 2.90% 3.18% 3.10% 2.46% 3.18% 2.47% 3.20% 2011 4.45% 2.66% 1.41% 7.15% 4.98% 6.99% 3.99% 3.33% 3.11% 2.69% 2.85% 3.05% 2.35% 3.11% 2012 4.28% 2.59% 1.31% 7.36% 4.78% 7.01% 3.78% 3.27% 2.99% 2.57% 2.76% 2.94% 2.18% 2.99%

Credit Outlook: The positive take on the quarter was nonperforming loan formation rates decelerated q/q from 26.6% in 2Q09 to 19.9% in 3Q09, supporting our outlook for stabilizing loan losses over the next few quarters. With decelerating NPL growth, we expect banks to reduce their reserve build levels and look for reserve builds to stop by the end of 1H10. We look for a median 2010e NCO ratio of 2.58%, up slightly from the 2.43% in 2009e. In terms of cumulative loss recognition, we believe the large cap bank group is an aggregate 57% of the way through the credit cycle. Capital ratios came in higher than expected with the q/q increases driven by lower RWA/tangible assets and other changes to equity (including AOCI valuation increases). The higher levels are a positive reflection of continued deleveraging.

BAC BBT BPFH C FITB JPM KEY PNC RF STI USB WFC WL Median

Source: Company data, Morgan Stanley Research estimates for 2009 forward .

Companies mentioned: Bank of America (BAC, O, $16, BB&T (BBT, E, $25), Citigroup (C, E, $4), Fifth Third (FITB, E, $9), J.P. Morgan Chase (JPM, $O, $44), KeyCorp (KEY, E, $6), PNC (PNC, O, $52), Regions Financial (RF, U, $5), SunTrust (STI, E, $20), US Bancorp (USB, E, $24), Wells Fargo (WFC, O, $28), Bank of New York (BK, O, $28), Northern Trust (NTRS, O, $51), State Street (STT, E, $44), Boston Private (BPFH, E, $6), Wilmington Trust (WL, E, $13). We recognize the contribution of Manan Gosalia to this report.

30

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Industry Analysis
November 3, 2009

Systems and PC Hardware C2010 Revenue Growth Still Underappreciated; More EPS Upside Likely
Morgan Stanley & Co. Incorporated

Kathryn Huberty, CFA
Kathryn.Huberty@morganstanley.com

Scott Schmitz
Scott.Schmitz@morganstanley.com

We see 5%-plus upside to consensus C2010 EPS estimates for the Systems and PC Hardware group. While consensus margin expectations have moved higher, they still under-appreciate historical operating leverage in a recovery scenario. While EPS estimates (+10%) and stock prices (+5%) have moved higher for the group since early September, we continue to believe consensus estimates under-appreciate an enterprise refresh cycle next year. As was the case in 2002-04 as revenues beat both seasonality and Street forecasts, we expect the IT Hardware group to outperform Software and Semiconductor stocks, as well as the S&P 500.
Exhibit 1

Mathew Schneider
Mathew.Schneider@morganstanley.com

Jerry Liu
Jerry.Y.Liu@morganstanley.com

Historical Revenue Seasonality: Usually Multiple Quarters of Above-Trend Growth in a Recovery
12/04 = Peak Cycle Tech Hardware Stock Prices

Revisiting our Attractive industry view. We see the combination of an enterprise refresh cycle and rebuild of channel inventories driving revenue growth above the current consensus forecast — we model +9% Y/Y revenue growth in C2010 vs. consensus of 7%. The combination of aging IT hardware equipment, continued growth in processing and storage requirements, and underspending in 2H08/2009 are catalysts for higher IT Hardware spending over the next two years, in our view. Additionally, currency and channel inventory replenishment could add another 4-plus percentage points of top-line growth by our estimates (assumes 2 points from a currency tailwind and 2-plus points from inventory). Going forward, we expect several quarters of above seasonal revenue growth, at least in line with the 2002-04 recovery. What’s changed for the better: (1) C3Q09 revenue results beat estimates and normal seasonality, CIOs indicate a strong C4Q budget flush is coming, and despite revenue upside, channel inventory levels have declined since early September. (2) Early signs of reduced pressure on margins and pricing. (3) Additional tailwinds, including currency and share buybacks, could boost C2010 EPS more than we forecast. What’s changed for the worse: (1) 3Q09 operating leverage was weaker than in 2Q09 (though still above our C2010 forecast). (2) Recent supply chain “noise” raises concerns that EPS revisions may not be sustainable. (3) Consensus estimates increased, reducing investor confidence in further share price upside.

15%
Current cycle: Only two quarters of better than normal seasonality (thus far)

10%

Reported

5%

0%

-5%
3-Yr Trailing Avg

-10%

Last cycle: 14 quarters of better than normal seasonality (normal = last 3-year average)

-15%
M ar -0 Ju 1 lNo 01 vM 01 ar -0 Ju 2 lNo 02 vM 02 ar -0 Ju 3 lNo 03 vM 03 ar -0 Ju 4 lNo 04 vM 04 ar -0 Ju 5 lNo 05 vM 05 ar -0 Ju 6 lNo 06 vM 06 ar -0 Ju 7 lNo 07 vM 07 ar -0 Ju 8 lNo 08 vM 08 ar -0 Ju 9 l-0 9

3 Year Trailing Avg

Reported

Source: Company data, Morgan Stanley Research

The stocks where we see the most attractive near-term upside are AAPL, HPQ, NZ, QLGC, and EMC. We favor names that offer: (1) Secular growth, product cycle upside: Key names include Apple (secular trend: Smartphone adoption; product cycle: iPhone), Netezza (secular trend: business intelligence; product cycle: TwinFin launched in July). (2) Low C202010/11 expectations but beneficiary of cyclical uplifts and company-specific restructuring: Hewlett-Packard. (3) Exposure to and likely market share gainers in an enterprise spending cycle:. Key names include: EMC (storage) and QLogic (servers/Nehalem product cycle).

Industry View : Attractive — Systems and PC Hardware We expect enterprise hardware earnings to normalize in 2010 on the back of a return to revenue growth and related operating leverage that we believe is currently underappreciated in consensus estimates

31

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Industry Analysis
Where we could be wrong: If top-line growth surprises to the upside, companies may need to invest more in SG&A, R&D and Capex than we currently model which could cause margins to disappoint in the short term.
Exhibit 2

Stocks Mentioned: Apple (AAPL, $189.31, Overweight), Hewlett-Packard (HPQ, $48.16, Overweight), Netezza (NZ, $9.11, Overweight), QLogic (QLGC, $17.84, Overweight), and EMC Corp. (EMC, $16.43, Overweight).
Exhibit 4

Channel Inventory Has Yet to Rebuild to the Higher Level of Demand in 3Q09
120%

Consensus Estimates Do Not Reflect Above Normal Seasonality in 4Q09 and 2010
Tech Hardware Censensus QoQ Revenue Growth vs. 3 Year Trailing Average
15%

10%

100%
5%

80%

0%

-5%
Enterprise Inventory Enterprise Revenue

60%
3/18/08 4/18/08 5/18/08 6/18/08 7/18/08 8/18/08 9/18/08 1/18/09 2/18/09 3/18/09 4/18/09 5/18/09 6/18/09 7/18/09 8/18/09 10/18/08 11/18/08 12/18/08 9/18/09 10/18/09
-10%

3Q09

4Q09

1Q10

2Q10

3Q10

3 Year Trailing Avg

Consensus

Source: FactSet, Morgan Stanley Research

Systems & PC Hardware: Summary of Industry Investment Debates
INVESTMENT DEBATE Do IT Hardware stocks already price in a full spending recovery? MARKET’S VIEW Yes. Investors worry that stocks have priced in revenue and EPS upside well ahead of an actual recovery. OUR VIEW No. We continue to believe consensus forecasts under-appreciate top-line growth trends over the next year. In particular, we’d point to an improving demand outlook (80% of CIOs expect to spend more on IT Hardware over the next year) and all-time low channel inventory levels. What’s more, currency could add as much as 2%+ points to top-line growth next year. We model 9% revenue growth next year vs. the 7% consensus forecast and believe even our estimates may prove conservative. Costs will be lower for IT Hardware than Software and Semiconductors. While we do model more muted operating leverage versus strong June 2009 results, we believe investments to support higher revenue in Software (rebuild of headcount) and Semiconductors (rebuild of capacity) will be far greater than in IT Hardware sector which leverages channel and manufacturing partners. As a result, we see continued margin upside if our more bullish revenue outlook proves correct. For perspective, we model 29% incremental operating margins in C2010 just above the 27% seen in the 2003 recovery. We believe consensus models more modest leverage, with a 24% incremental operating margin implied in current estimates.

What will be the cost of growth and related pressure on margins next year?

Investments for growth will pressure margins. Consensus models incremental operating margins in-line with historical average, versus a typical recovery environment.

4Q10

Note: Enterprise revenue of IBM, HPQ, DELL and JAVA; indexed to 03/18/09; proprietary channel inventory data. Source: FactSet, Morgan Stanley Research

-15%

32

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
October 29, 2009

Adobe Systems Raising Numbers for Omniture; Costs Still Under Control
Morgan Stanley & Co. Incorporated

Stock Rating: Overweight Price target Shr price, close (Oct 28, 2009) Mkt cap, curr(mm) 52-Week Range Price Performance

Reuters: ADBE.O Bloomberg: ADBE US $40.00 $32.83 $17,459 $35.95-15.70

Adam Holt
Adam.Holt@morganstanley.com

Jennifer Swanson, CFA
Jennifer.Swanson@morganstanley.com

Adobe System s Inc. (Left, U.S. Dollar) Relative to S&P 500 (Right) Relative to MSCI World Index /Sof tware & Services (Right)

Keith Weiss, CFA
Keith.Weiss@morganstanley.com

50 45 40

140 130 120

We have resumed coverage of Adobe with an Overweight rating and $40 price target. While a cyclical recovery is increasingly reflected in the valuations of most software companies, we continue to like Adobe’s potential to deliver above-cyclical growth in CY10, which does not appear to be reflected in the stock’s valuation. Adobe has a three-pronged growth story in CY10 with the potential for a) cyclical recovery in PCs and advertising, b) a strong Creative Suite 5 product cycle and c) tailwinds from the Windows 7 and Snow Leopard releases. Additionally, we think Adobe will control costs, thereby raising margins, while the recently completed Omniture acquisition should be easily accretive to EPS. These factors should drive revenue and earnings estimates higher over the next 6 to 9 months, while we continue to think that the core business will drive further upside over the next 12 to 18 months. Omniture acquisition should easily be accretive. Adobe’s credit facility allows the company to borrow at a 0.20-0.475% premium to LIBOR, with a commitment fee of 0.05-0.15% per year (the current credit agreement matures February 16, 2013). With LIBOR near lows, and expected to remain low through 2010, Adobe’s borrowing cost to fund the Omniture acquisition is minimal. At the same time, cash balance yields are low as well (<1%), minimizing the impact of lost interest income generated by the cash used for Omniture. Since Omniture was expected to be pro forma profitable in 2010, and the impact to other income from funding the acquisition is minimal, the acquisition should be materially accretive to Adobe’s FY10 and FY11 EPS. Our new estimates reflect the Omniture acquisition. For FY10, our new $3.51B revenue estimate includes an expected $0.4B from Omniture, while our new FY10 EPS estimate of $1.79 includes $0.07 of merger accretion. Our model assumes no revenue or cost synergies related to the Omniture acquisition, but we believe there are opportunities for revenue and modest cost synergies, which would be additive to our forecast.

35 110 30 100 25 20 15 05 06 07 08 09 90 80

Source: FactSet Research Systems Inc

Company Description Adobe is one of the largest software companies from its content and productivity software platforms. With the Macromedia acquisition, Adobe has Rich Internet Applications. Industry View: In-Line — Software As we move beyond the early cycle phase of the economic recovery into the growth phase, there may be more relative upside from here in mid-cycle Technology groups. We still believe our group holds some absolute upside, but stock-picking will become more important.

The more material opportunity for synergies is on the revenue side. While these may take some time to materialize, we believe that developing links between Adobe’s tools for creating Web-based content and Omniture’s tools for measuring, analyzing and optimizing the consumption of Web-based content will accelerate the usage of Omniture and increase the value of Adobe’s tools. On this front, our conversations with management lead us to believe we will see some level of integration between Omniture and Adobe in Creative Suite 5, possibly enabling Adobe to raise pricing for those versions. Assuming that any additional revenue from synergies is partially reinvested and carries an operating margin similar to the business overall, we estimate that $20M in additional revenue from merger synergies would add $0.01 to EPS. On the cost side, we expect any synergies to be modest as Adobe intends to run Omniture as a standalone business unit. However, we do think there will be opportunities to make modest expense cuts related to administrative overhead as the organization is integrated into Adobe. We estimate that $20M in cost synergies (10% of Omniture’s projected 2010 S&M, R&D and G&A) would add $0.03 to FY10 EPS.

33

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
Modest Revenue and/or Cost Synergies Would Produce Upside to our $0.07 Accretion Estimate
0.07 0.08 0.08 0.09 0.10 0.11 0.11 0.12 0.13 FY10 Revenue Synergies ($M) 10 20 30 40 0.07 0.08 0.08 0.09 0.08 0.09 0.09 0.10 0.09 0.09 0.10 0.10 0.10 0.10 0.11 0.11 0.10 0.11 0.11 0.12 0.11 0.12 0.12 0.13 0.12 0.12 0.13 0.13 0.13 0.13 0.14 0.14 0.13 0.14 0.14 0.15 50 0.09 0.10 0.11 0.12 0.12 0.13 0.14 0.15 0.15

5 10 15 20 25 30 35 40

Adobe reverts to the mean. Finally, our large-cap software universe currently trades at an average of 20x CY11 EPS, so we assume that Adobe trades in line with the group. As a result, we feel comfortable that 20x is the appropriate multiple for Adobe’s stock. Risks to our price target include the possibility that CS revenue could decline steeply due to a weakening economy and a deceleration in ad spending. There is uncertainty that Acrobat 9 can outpace 8. Beyond Acrobat and CS, other product areas are small. Lastly, the Omniture merger carries integration risk. ADBE: Secular Growth, Product Cycles Favor Reward
$ 60

Source: Company data, Morgan Stanley Research

Outlook for core Adobe business remains healthy. Beyond merger accretion, Adobe should benefit from pent-up demand for CS5; and our recent conversations with customers confirm our belief that the upgrade cycle will be significant. In CY10, Adobe should also see recovering ad spending, a PC replacement cycle, and tailwinds from Win7 and Snow Leopard OS cycles. Near term, we expect to see further signs of demand stabilization in 4Q results. Adobe keeping a tight rein on hiring thus far. One of the biggest risks to our CY10 and CY11 estimates is a step-up in hiring as the outlook improves, limiting EPS upside. Our proprietary hiring tracker indicates that Adobe continues to keep its hiring plans conservative, which is a good sign that costs will stay low. Versus other similar-sized software companies, Adobe has the lowest number of open positions relative to overall headcount — 58 open positions vs. total headcount of 7,564 at the end of Q3, or 0.8% of total headcount— vs. a group average of 3-4%. In addition, 67% of Adobe’s open positions are outside of North America, with many openings located in India where cost per employee is materially lower than in the US. While we expect Adobe to do some hiring over the next couple of quarters, the bulk is likely to be in low-cost regions, minimizing the impact on overall expense levels. Our $40 price target assumes that Adobe trades at 20x our new CY11 EPS estimate of $1.99. We get to this target multiple through a variety of methodologies. First, Adobe trades at 19x consensus CY10 EPS of $1.70, so our price target assumes that the current multiple expands only modestly over the next year as the macro environment improves, Omniture accretion is factored in, and numbers start moving higher. Second, over the past three years, Adobe has traded at 20x out-year earnings on average, so our price target assumes that

Cost Synergies ($M)

50 $47 (+43%) 40 $ 32.83 30 $26 (-21%) 20 $40.00 (+22% )

10

0 Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10 Current Stock Price

Oct-10

Price Target (Oct-10)

Historical Stock Performance

Bull Case $47

CY11 P/E = 21x (4-yr avg. multiple of FY2 EPS)

Base Case $40

CY11 P/E = 20x (3-yr avg. multiple of FY2 EPS)

Bear Case $26

CY11 P/E =16x (1-yr avg. multiple of FY2 EPS)

Product cycles drive segment growth. The CS5 product cycle comes on strong while a healthy recovery in IT spending and a robust PC replacement cycle drive top-line growth to 23% in FY10 and 12% in FY11. The Omniture integration is better-than-hoped and Adobe realizes some revenue synergies from the combined product offering. Expenses start to tick back up, but op. margin still expands to 36.1% in FY11, resulting in $2.27 of FY11 EPS. Macro impacts bottom in FY09, with some recovery in 2010. Creative Solutions revenue benefits from a modest recovery in ad spending and a good CS5 product cycle, while overall revenue gets a boost from better IT spending and a rebound in corporate PCs. The Omniture acquisition contributes to revenue and profits, but with few revenue or cost synergies. Total revenue grows 19% in FY10 and 9% in FY11 while Adobe company keeps a tight rein on hiring, allowing operating margins to expand to 35.3% in FY11, resulting in FY11 EPS of $1.99. Product cycles disappoint. CS5 and Acrobat 10 product cycles disappoint and CS rev. only grows 6% in FY10 and FY11 while KW declines 2% in FY10 and FY11. Omniture adds to revenue, but Adobe is unable to generate any synergies from the merger while competitive pressure from GOOG and other analytics vendors limits Omniture’s top-line growth. Management cuts costs as revenue declines, but operating margins still contract to 33.3% resulting in FY11 EPS of $1.63.

Source: FactSet, Morgan Stanley Research.

34

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
October 27, 2009

Amgen Recent Prolia Concerns Provide Entry Point
Morgan Stanley & Co. Incorporated

Stock Rating: Overweight Price target Shr price, close (Oct 27, 2009) Mkt cap, curr(mm) 52-Week Range Fiscal Year ending EPS($)** ModelWare EPS($) P/E Consensus EPS($)§ Div yld(%)
** = Based on consensus methodology e = Morgan Stanley Research estimates

Reuters: AMGN.O Bloomberg: AMGN US $76.00 $54.41 $57,972 $64.76-44.96 12/08 4.55 4.49 12.9 4.48 0.0 12/09e 5.05 4.96 11.0 5.01 0.0 12/10e 5.19 5.09 10.7 5.11 0.0 12/11e 5.31 5.22 10.4 5.51 2.1

Steven Harr, M.D.
Steven.Harr@morganstanley.com

Sara Slifka
Sara.Slifka@morganstanley.com

Street concerns about the adequacy of skeletal related event data for approval of Prolia are overdone, in our view. A key component of our Amgen investment thesis is that Prolia will be a multi-billion dollar blockbuster, and while the market has recently grown more concerned, we remain confident in our thesis and would use recent weakness as a buying opportunity. We continue to expect approval in 1H10 in osteoporosis and 1H11 in treatment induced bone loss (TIBL). Why the market is concerned. The recent FDA Complete Response letter for Prolia in TIBL (small market) created investor concern that Amgen does not have adequate safety data for approval in the much larger prevention of complications of bone metastases (SREs) market. Specifically, the FDA has requested more clarity on cancer progression in TIBL, and management appears unsure if it will need more trials in TIBL, creating concern the FDA is not comfortable with the cancer progression data in the more important SRE setting. We continue to believe that Amgen’s dataset in the prevention of SREs is sufficient for approval. The TIBL and SRE indications and quality of the data set differ. Most importantly, Dr. Richard Pazdur, Head of the Office of Oncology at the FDA, has outlined criteria for measuring progression events in supportive care trials (see quotes from Dr. Pazdur inside our full note dated October 27, 2009). The key difference is that in the SRE trial Amgen measured progression in a pre-defined, systematic fashion with no difference between Prolia and Zometa. In the TIBL studies, progression was only recorded as safety events (decreasing sensitivity) and the trend favored placebo. Additionally, the safety dataset is more than three times as large in SRE as TIBL, and Amgen believes SRE is a more serious indication, as it is treating a complication of cancer rather than preventing a complication of treatment.

§ = Consensus data is provided by FactSet Estimates.

Price Performance
Am gen Inc. (Left, U.S. Dollar) Relative to S&P 500 (Right) Relative to MSCI World Index /Pharm aceuticals Biotechnology & Life Sciences (Right)

160 80 70 60 50 60 40 05 06 07 08 09 40 140 120 100 80

Source: FactSet Research Systems Inc

Company Description Amgen focuses on hematology, oncology, and rheumatology. Its two largest franchises (Aranesp/Epogen and Neulasta/Neupogen) are supportive care treatments; its third large product, Enbrel, is co-promoted with Wyeth primarily for rheumatoid arthritis. The largest pipeline compound, denosumab for osteoporosis, is currently in Phase III trials in breast cancer patients and post-menopausal women. Industry View: In-Line — Biotechnology We prefer the defensive nature of large cap over small caps as a general rule. In the small cap world, we look to avoid companies with illiquidity, high risk, need for capital, and no catalysts. We still like select names with characteristics that make them potential strategic targets for pharmaceutical companies (US rights, late-stage, etc). In general, though, biotech remains a stock picker rather than industry call (long-term returns are almost all idiosyncratic to company performance).

Why SRE matters: The cancer market offers strong leverage of Amgen’s current supportive oncology franchise. While a (initially) smaller addressable market than osteoporosis (~$1.5 billion vs. $7 billion), the bottom line impact is likely at least as large, as the cancer market fits directly into Amgen’s current supportive care infrastructure for Aranesp, Neulasta and Neupogen and is oncology offers better operating margins and pricing power regardless. Consequently, margins could exceed 65-70% rapidly and would provide Amgen with a significant new source of revenue that flows directly to the bottom line (as opposed to osteoporosis where spend on infrastructure could limit profits for several years).

35

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
AMGN: Prolia’s Commercial Opportunity and Stable Base Earnings Drive the Risk-Reward
$90 80 70 60 50 40 30 20 10 0 Oct-07 $41 (-25%) $ 54.41 $82 (+51%) $76.00 (+40%)

Investment Thesis: x Prolia is a mega blockbuster and will emerge as the principal long-term value driver. We see a high probability of regulatory success. x We believe investors underestimate: (1) the earnings power of Prolia and (2) the company’s ability to protect earnings from its base business. Growth from Vectibix (not in Street models), Enbrel rights returning, cost controls, and a gradual decline from biogenerics should protect base business EPS at over $4.50/share for a prolonged period. x We believe reported superiority data for Prolia vs. Zometa in the oncology setting, an approval for Prolia in treatment of PMO, additional success in cancer trials in 2010 and a potential earlier than expected filing in oncology will drive upward pressure on Street estimates. Potential Catalysts: x Prolia re-filing (possibly in 4Q) x FDA decision on Prolia PDUFA (expected weeks after filing) x 2010 guidance (January 2010). x Prolia PDUFA in PMO (1H10) x Prolia SRE data in prostate cancer (1Q10) x Filing in SRE prevention (perhaps mid-2010)

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10 Current Stock Price

Oct-10

Price Target (Oct-10)

Historical Stock Performance

Bull Case $82

DCF Based Intrinsic Value

Base Case $76

DCF Based Intrinsic Value

Bear Case $41

DCF Based Intrinsic Value

Prolia bigger than Fosamax WW. Our upside case assumes Prolia launches in late 1Q10 and becomes a blockbuster drug with peak sales in osteoporosis almost as large as Merck’s Fosamax ($3-4bn) and cancer reaching at least $2bn. In this scenario, we assume ~$850mn in sales in prevention of bone metastases. Additionally, the base business holds up relatively well in the face of potential biosimilars and other branded competitors. Prolia plus stable base business drives upside. The base case assumes that Prolia receives approval, launches in 1H10 and reaches ~$3.5bn in peak sales across osteoporosis and cancer. This scenario does not include sales in prevention of bone metastases (need to wait for data in prostate cancer in 2010). Prolia growth offsets top-line pressure from anemia and G-CSF erosion and keeps EPS growth in the mid-to-high single digits through at least the mid part of next decade. Prolia is limited commercially and base business declines more aggressively. Limited Prolia revenue, safety issues for Amgen’s ESA drug class plus generic competition, and a lack of drug candidates beyond Prolia in the pipeline lead to a bear case price of $41. The primary risk to Prolia is that company needs to build a large infrastructure, and with generics and physician delivery issues, peak sales could fail to reach >$1bn.

Source: FactSet, Morgan Stanley Research

Our $76 price target is derived from a DCF analysis using a WACC of 10.5%, intermediate growth rate of –1% from 2016–17 (we include the impact of the return of Wyeth’s 50% of Enbrel profits to Amgen post-2013), and a terminal growth rate of 2.5%. Our 12-month price target accounts for the cash cost of stock options. Over time, the company’s decision on deployment of its excess cash flows will have a large impact on both medium and long-term growth. Risks to our price target include: (1) regulatory issues or commercial setbacks for Prolia; (2) greater than expected competition and sales declines for Enbrel, Aranesp, and Neulasta; (3) the potential for decelerating earnings and returns if management does not reinvest its significant cash flows wisely; and (4) potential branded and low-cost entrants into the US and EU EPO market that have a larger affect on Amgen’s EPO franchise than we expect. 36

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
October 29, 2009

Boeing Investor FAQs on Our Recent Downgrade to Underweight
Morgan Stanley & Co. Incorporated

Stock Rating: Underweight Price target Shr price, close (Oct 28, 2009) Mkt cap, curr(mm) 52-Week Range Fiscal Year ending ModelWare EPS($) P/E Consensus EPS($)§ Div yld(%)
e = Morgan Stanley Research estimates

Reuters: BA.N Bloomberg: BA US $43.00 $47.22 $33,381 $55.48-29.05 12/08 3.67 11.6 3.69 3.9 12/09e 1.40 33.8 1.77 3.8 12/10e 3.85 12.3 4.34 3.8 12/11e 3.55 13.3 4.22 3.7

Heidi Wood
Heidi.Wood@morganstanley.com

We have had many discussions with investors following our downgrade of BA to Underweight (see our October 20, 2009 note Risks Skewed To Downside; Underweight) and thought it worthwhile to capture feedback and our responses. We feel more confident in our view that… (1) The 787 program is under far greater strain than has been priced into Boeing shares. The 787 remains challenged; more setbacks and delays are likely ahead, and problems go beyond the schedule — technical/engineering, manufacturing, cost, production complexity. We expect further delays ahead due to manufacturing/production, with looming questions around possible redesign, need to accelerate R&D to the larger 787-9 variant to help solve costly weight problems on 787-8. We feel even more sure that the extent of the problems, and potentially others, will come to light more in 2010, with heightened focus once the first flight is past. (2) The plane likely more costly than market recognizes and cash payback is farther out. In addition to far higher R&D expenses than planned and accelerated work now necessary for the 787-9, we believe that the market has yet to factor in sizable supplier and airline claims. We estimate that supplier claims could potentially be in the $6-12 billion range. Second, missed performance guarantees opens up another liability to airlines in addition to lateness penalties. (3) BA typically trades on orders (R2=0.82) and the company faces a sluggish order pace 2010. Orders next year look like they will be well below deliveries again, just as in 2009. We project deliveries of aircraft 445 next year, but we expect fewer than 300 aircraft orders — and we could see further 787 cancellations. Where we could be wrong: 1. 787’s first flight could happen in 4Q09 — but… First flight slated for late December could occur, but we think it will not be very long (“low and slow”) as the engines are underpowered and there are still issues that will constrain a vigorous flight test commencement. Further, we think first flight is still a distraction that veils significantly larger issues ahead for next

§ = Consensus data is provided by FactSet Estimates.

Price Performance
Boeing Co. (Left, U.S. Dollar) Relative to S&P 500 (Right) Relative to MSCI World Index /Capital Goods (Right)

100 90 80 70 60 50 40 30 05 06 07 08 09

160 150 140 130 120 110 100 90

Source: FactSet Research Systems Inc

Company Description Boeing is the leading manufacturer of mainline commercial aircraft with 70% of the worldwide installed base. The company is the No. 2 or 3 largest US defense contractor; defense capabilities include military aircraft (cargo, fighters, helicopters, unmanned), space & electronic systems, information systems management, and systems integration. Boeing employs 153,000 people and is the US’s largest exporter. Industry View: In-Line – Aerospace & Defense Defense has sizably missed the S&P 500 rally this year, but we believe that a bearish view on defense is now consensus and has more or less played out. For Aerospace names, we remain neutral.

year, including the scope of re-engineering, weight, supplier and airline penalties. 2. 737 rates can hold if a Ryanair deal materializes — but… Boeing and Ryanair talks could finalize by yearend for possibly 100 firm, 100 options for 737s. If a Ryanair order materializes, we will assume that (1) the 737 production rate remains at 31/month; and (2) pricing rises to the fore. Boeing’s 737 backlog may have some form of price re-baselining as other airlines demand price concessions, as we think Ryanair is likely to do. Our Replies to Investor FAQs Following Our Downgrade Q: Isn’t BA too cheap to ignore on a P/E basis? A. BA is not cheap on our estimates, and the price implies upcycle valuation for commercial aircraft division. The 2010 consensus EPS of $4.34 is well above our estimate of $3.85. We think consensus fails to recognize the incremental 37

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
R&D costs that will need to occur on the 787 in 2010; many models project a decline next year and we believe it is flattish. Valuing the commercial aircraft (BCA) and defense (IDS) businesses separately implies that BCA trades at a significant premium relative to both current aero peer multiples and historical trading BA/BCA levels. Q: Could the choice of South Carolina for the second 787 production line resolve some of Boeing’s other issues? A: Decision makes sense but watch for culture issues. There may or may not be a backlash of some kind from Seattle; it bears watching. Q: Does the pension decision leave the company in a better cash position? A: It supports our thesis that consensus EPS will need to come down. We believe one implication of the company’s election to fund pension assets using $1.5 billion of stock is that Boeing is in cash conservation mode. Although the issuance of ~30 million shares of stock is not a huge hit to EPS — just $0.15, on our estimates — it adds to the pressure we see on consensus EPS for next year and beyond. Q: Do near-term cash flow issues matter? Boeing has an investment-grade credit rating and can tap debt markets. A: Near-term liquidity squeeze looks unlikely but we are focused on the long runway to significant CF generation and the near-term value destruction due to 787, delaying the timing of payback beyond many investors’ timeframes. Our rosiest scenario is for positive cash flow to return in 2014, but we believe the more likely scenario is that this timeline is extended as it fails to contemplate the possibility that the 787 could continue to be a drag on cash well into full production. Q: What does the stock do if first flight occurs in 4Q? A. Possible short term rally, but one that could be given back quickly. We believe that Boeing can get the 787 aloft, but we suspect that knowledgeable watchers will likely notice a “low and slow” flight test and not much in the way of meaty testing. Thus, we’d expect the stock to retrace any rally quickly — we see sizable risk in the period between first delivery and the ramp to full production (10 per month). Q: What is the basis for believing there will be production rate cuts on 737/777 given the sizable backlog? We believe 737 production rates will likely hold if a new Ryanair order materializes. But our sense is that that Ryanair wants very steep aircraft discounts, which tells us if an order materializes, that Boeing likely made pricing concessions. We’d likewise anticipate the other 737 clients in the backlog will seek a similar deal, raising the question as to whether the program gets re-baselined. On the 777, demand on common 777 routes demand has softened, and given the longer lead times required for twin aisles vs. single aisles and likely delivery holes in 2011, common sense would point to rate cuts. Q: What is behind the $6–12 billion estimate of supplier claims? A: We are extrapolating, but our figure has not been refuted. Alenia has been open about its claim that Boeing owes it $2 billion. Moreover, given that the plane is undergoing new wiring, that the engine OE’s are having difficulties with adequacy of power and suggest the root cause lies at Boeing, that the claims in various segments continue to rise, we think we are near the mark. There is reason to believe that many supplier claims could be spread over the program rather than cash payments upfront. Valuation Methodology and Risks to Our Call Our $43 PT is based on a number of valuation methodologies including a cycle-appropriate 2011 P/E of 12, a sum-of-the-parts assuming peer defense multiples for Boeing’s defense segment (IDS) and mid-teens for the commercial aerospace segment (BCA), and a DCF. Key upside risks to our call include: (1) no further 787 delays and smooth production ramp, (2) no cuts to 737 / 777 production rates, (3) new aircraft orders pick up pace in 2010, (4) investors are willing to overlook concerns we lay out in our thesis. Key Upcoming Events/Triggers: x Union reaction to 787 second decision x Possible Ryanair aircraft order by year-end 2009 x 787 first flight (scheduling/execution or postponement) x 4Q09 results/2010 guidance in late January 2010 x The US Department of Defense’s Quadrennial Defense Review and F2011 budget in 1Q10 (this often leaks in the preceding fall)

38

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
October 29, 2009

Cablevision Systems Improving Broadband Pricing Can Drive Multiple Expansion
Morgan Stanley & Co. Incorporated

Stock Rating: Overweight Price target Shr price, close (Oct 28, 2009) Mkt cap, curr(mm) 52-Week Range Fiscal Year ending EPS($)** Consensus EPS($)§ ModelWare EPS($) P/E** Div yld(%)

Reuters: CVC.N Bloomberg: CVC US $29.00(1) $22.34 $6,664 $26.07-9.34 12/08 0.75 0.75 1.04 22.5 1.2 12/09e 1.27 0.96 1.51 17.6 1.8 12/10e 1.45 1.39 1.64 15.4 2.1 12/11e 1.71 1.62 1.91 13.1 2.3

Benjamin Swinburne, CFA
Benjamin.Swinburne@morganstanley.com

David Gober, CFA
David.Gober@morganstanley.com

Ryan Fiftal
Ryan.Fiftal@morganstanley.com

We reiterate our Overweight rating on Cablevision Systems. On October 20, we upgraded CVC to Overweight from Equal-weight for several reasons: Strategic and Financial Factors: x Proposed MSG spinoff highlights strong FCF generation of CVC core business, additional disclosure at MSG could raise awareness of potentially undervalued entertainment assets. We believe that the proposed MSG spin will highlight the strong FCF profile of CVC’s core business, which might otherwise be masked by the upcoming $500 million renovation to “the Garden.” Additionally, greater disclosure could improve the market’s valuation of these assets, in our view. Finally, we note that the MSG spinoff indicates a management focus on delivering shareholder value. x Increased confidence that CVC is committed to optimizing capital allocation, and its stated comfort with current leverage might imply growth in share repurchases and/or dividends in 2010. We believe that even in an environment with flat cable asset multiples and modest EBITDA growth (averaging only +3% annually over the next three years), CVC should generate attractive equity value through a combination of de-levering and return of capital to shareholders. x Balance sheet management. Over the last year, CVC has significantly addressed its 2010–12 maturity profile via debt tenders and maturity extensions, which had reduced credit concerns to the benefit of equity holders. Business Fundamentals: x Strong capacity to generate FCF due to its below-peer capital intensity and tax net operating losses (NOLs), and
CVC is on Morgan Stanley's Best Ideas list of our leading stock investment insights — featuring a combination of highly differentiated research, favorable risk-reward profiles, and clear catalysts.

(1) Price target and estimates raised on Nov 4, subsequent to publication of the note summarized here. § = Consensus data is provided by FactSet Estimates. ** = Based on consensus methodology e = Morgan Stanley Research estimates

Price Performance
Cablevis ion Sys tem s Corp. (Lef t, U.S. Dollar) Relative to S&P 500 (Right) Relative to MSCI World Index /Media (Right)

40 35 30 25 20 15 10 05 06 07 08 09

150 140 130 120 110 100 90 80

Source: FactSet Research Systems Inc

Company Description Cablevision provides subscription cable TV services, high-speed data service, sports networks, and national television program networks. Industry View: In-Line — Cable/Satellite We believe that greater broadband pricing power, combined with opportunity in the enterprise market, should allow for flat cable margins despite rising programming costs. In addition, relative to the higher dividend paying Telcos, Cable stocks are now trading at or below asset value, on our estimates.

strong capacity to generate equity returns through its higher-than-peer leverage. We believe that falling capital intensity has been a strong driver of rising RNOA. x Lower-than-peer risk to FCF projections, in our view. We view capex risk at CVC to be lower vs. peers for three reasons: (1) CVC has already completed the transition to all digital; (2) it appears to have made its bet on wireless by rolling out a lower-cost WiFi network; (3) its density advantage should keep capex lower than peers in the future x We are more positive on pricing power in broadband, and CVC is particularly well-positioned to benefit. We have become bullish on growth in broadband average revenue per user (ARPU) due to rapidly rising consumer data consumption and our expectation that the Cable/Telco duopoly in wireline will price rationally, with minimal incremental competition from 4G wireless. CVC is well-positioned to benefit from this trend due to its high penetration. Although our base-case assumes flat 39

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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
broadband pricing going forward, data price increases could lead to multiple expansion and ~$4.50 additional upside beyond our price target. Competitive Factors x Less incremental telco rollout. CVC’s footprint was one of the first areas targeted by Verizon FiOS, and by our estimates the telco fiber rollout is more advanced there today. Therefore, we envision less incremental overlap (and competitive pressure) going forward vs. peers. x Verizon appears less likely to cut rates to build share. Verizon management comments in the 3Q call appear to indicate a desire to balance subscriber growth with profitability. x Potential to gain share in small and medium enterprises (SME). We currently forecast CVC taking 35% of the SME market within its territory in the long run, primarily through aggressive pricing vs. the incumbent Verizon. We believe that CVC’s successful VoIP rollout is a good precedent for SME, noting that it took CVC only five years to become the largest phone company in its markets (by our estimates). CVC Valuation Methodology Our $29 year-end 2010 price target assumes CVC’s forward EV/EBITDA multiple remains in the mid-6x range (modest expansion from 6.4x currently to 6.5x) as its EPS grow at 15–20% annually over the next few years. This implies that its cable-only EV/EBITDA (subtracting out the estimated values of Rainbow and Newsday) expands modestly from 5.7x today to 6x. We believe that CVC’s multiple can expand modestly as capital intensity continues to fall, thereby increasing FCF generation and the potential for return of cash to shareholders. Implicit in our valuation in an assumption that MSG operating assets are valued by the market at $1.8 billion, leading to an initial MSG equity valuation of ~$1.9 billion (due to zero debt and positive cash balance), a premium to our estimated DCF value of ~$1.5 billion and at a large discount to our estimated private market value of roughly $3 billion. Finally, we value CVC’s Rainbow content assets (after allocated corporate overhead) at $3.5 billion, or roughly 10 times 2010e EBITDA, broadly in line with current public market multiples for pure play cable networks. Key downside risks to CVC’s cable business primarily derive from the potential for loss of pricing power due to heightened competition, in our view. Similar risks exist in the high speed data and voice markets. Other operating risks derive from CVC’s current above-peer penetration of core cable services which could limit CVC’s potential to grow its subscriber base. On the financing side, CVC could choose to refinance its low-cost term loans (~$2 billion due in 2012) at a higher rate, leading to higher interest costs. Multiple downside risks exist for the MSG business unit, relating to weak consumer entertainment spend, planned renovation of the Garden, and sports labor and revenue equalization issues. CVC: Leverage Creates Significant Upside and Downside
$40 $38 (+70%) 35 30 25 20 15 10 5

$29 (+30%) $22.34
$20 (-10%)

Nov 07

Feb 08 Price Target

Jul 08

Oct 08

Feb 09

Jun 09

Oct 09

Feb 10

Jun 10

Oct 10

Historical Stock Performance

Current Stock Price

Bull Case $38

Base Case $29

Bear Case $20

Cable Asset Multiple Expansion with Bullish Valuation of MSG Assets: MSG assets are spun out and trade 2010YE at roughly $2.2B valuation (~$2.3B MSG equity valuation, assuming positive cash balance and zero debt) potentially on a more optimistic view that in the long term MSG assets are sold/achieve estimated private market value. In the cable business, competition with Verizon focuses on features rather than pricing, driving CVC’s cable-only fwd EV/EBITDA up ~½ turn to ~6.5x as its EPS grow at 20–30% p.a. over the next few years. MSG Spun Successfully: MSG assets are spun out ~6.0x fwd cable-only and trade at 2010YE to our est public market value of EV/EBITDA ~$1.8B (~$1.9B MSG equity valuation, assuming $1.8bn positive cash balance and zero debt). FiOS continues value of to gain share in both video and data as CVC chooses MSG oper. to drive pricing over unit growth. Forecast assumes moderate annual ARPU growth of 3.5% in ’09 and 3% assets in LT for basic video and declines of ~1% near term for HSD (flat in long-term) generating ~4% cable EBITDA growth for ’09 and ’10. Our base case assumes that CVC’s fwd cable-only EV/EBITDA multiple (ex-MSG) modestly expands from 5.7x to 6x as its EPS grow at 15–20% p.a. over the next few years. MSG Trades Poorly; FiOS Competition Depresses ~5.2x fwd cable-only Cable Multiple: MSG assets are spun out but trade EV/EBITDA poorly at 2010YE at roughly $0.75B valuation $0.75 bn (~$0.85B MSG equity valuation) potentially on a very value of bearish view that MSG trophy assets are “trapped” and never achieve estimated private market value. In MSG cable, competition with Verizon intensifies and focuses on pricing, driving CVC’s fwd cable-only EV/EBITDA multiple down ~1/2 turn ~6.5x fwd cable-only EV/EBITDA $2.2bn value of MSG

Source: FactSet, Morgan Stanley Research Valuations raised on Nov 4, subsequent to publication of the note summarized here.

Morgan Stanley is currently acting as financial advisor to Verizon Wireless with respect to the proposed acquisition of certain of its wireless assets by AT&T, Inc. and Atlantic Tele-Network, as required by the conditions of the regulatory approvals granted for Verizon Wireless' purchase of Alltel Corporation earlier this year. The proposed acquisitions are subject to customary regulatory approvals, as well as other customary closing conditions. Verizon Wireless has agreed to pay fees to Morgan Stanley for its financial services. Please refer to the notes at the end of the report.

40

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
October 30, 2009

Celgene We Still View ASH as a Positive Catalyst
Morgan Stanley & Co. Incorporated

Stock Rating: Overweight Price target Shr price, close (Oct 29, 2009) Mkt cap, curr(mm) 52-Week Range Fiscal Year ending EPS($)** ModelWare EPS($) P/E Consensus EPS($)§ Div yld(%)
** = Based on consensus methodology e = Morgan Stanley Research estimates

Reuters: CELG.O Bloomberg: CELG US $64.00 $51.27 $24,530 $66.50-36.90 12/08 1.56 1.33 41.7 1.37 0.0 12/09e 2.08 1.77 29.0 2.07 0.0 12/10e 2.67 2.36 21.7 2.66 0.0 12/11e 3.28 2.95 17.4 3.32 0.0

Steven Harr, M.D.
Steven.Harr@morganstanley.com

Sara Slifka
Sara.Slifka@morganstanley.com

We expect ASH in December to drive CELG shares. The key current investment debate is whether data from the MM-015 trial (data at American Society of Hematology meeting on December 9) will be adequate to differentiate induction (short-term) and maintenance (long-term) treatment of Revlimid, an important driver of treatment duration and revenue/patient. Given data to date for Revlimid and Thalomid, we see little risk that over time maintenance will not be superior to short-term treatment, driving investor numbers higher, especially for the EU. Additionally, based upon data to date as well as our discussions with management at a dinner we hosted on October 29 (we understand they do not know the data), we see a high probability there will be at least a clear trend when preliminary data are presented at ASH, driving long-term treatment duration estimates and the stock higher. We see three drivers of greater long-term growth than the Street, and we believe models will change at ASH. We argue that (1) consensus’s expected Revlimid penetration in the front-line setting is too low given the decidedly better data we expect for Revlimid when compared to other current therapies; (2) duration of therapy will be longer than many expect, but the extent may not be entirely clear until more mature data are available from MM-015; and (3) pomalidomide is an overlooked asset, whose efficacy in treatment failure populations should become clear at ASH, driving it into investor models. CELG has underperformed as of late as the Street grapples with a key question related to the MM-015 trial. Celgene’s MM-015 trial, exploring Revlimid in the front-line setting, was stopped early because of overwhelming efficacy versus placebo; investors have become concerned that the
CELG is on Morgan Stanley's Best Ideas list of our leading stock investment insights — featuring a combination of highly differentiated research, favorable risk-reward profiles, and clear catalysts.

§ = Consensus data is provided by FactSet Estimates.

Price Performance
Celgene Corp. (Lef t, U.S. Dollar) Relative to S&P 500 (Right) Relative to MSCI World Index /Pharm aceuticals Biotechnology & Life Sciences (Right)

70 60 50 40 30 20 10 05 06 07 08 09

500 400 300 200 100

Source: FactSet Research Systems Inc

Company Description Celgene is focused on the discovery, development and commercialization of small molecules for cancer and inflammatory diseases. Celgene markets Revlimid for multiple myeloma (US and EU) and MDS (US). It also primarily markets Thalomid for multiple myeloma (US). Revlimid and related second-generation drugs expand the potential opportunities in oncology and inflammatory diseases. In March 2008, through its acquisition of Pharmion Corporation, it acquired ex-US rights to Thalomid, worldwide rights to Vidaza, and several other hematology/oncology pipeline candidates. Industry View: In-Line — Biotechnology We prefer the defensive nature of large cap over small caps as a general rule. In the small cap world, we look to avoid companies with illiquidity, high risk, need for capital, and no catalysts. We still like select names with characteristics that make them potential strategic targets for pharmaceutical companies (US rights, late-stage, etc). In general, though, biotech remains a stock picker rather than industry call (long-term returns are almost all idiosyncratic to company performance).

trial was so short (10 months median when stopped) that it may take longer to see a difference for the comparison of maintenance vs. induction Revlimid. The interim analysis will be presented at ASH (December 5–8), and longer follow-up data are likely in 2Q10, at the American Society of Clinical Oncology (ASCO) or European Hematology Association (EHA) meeting. While we agree the median duration is relatively short, we expect these data will be adequate to show a trend clearly in favor of the maintenance arm at ASH. The key is that for the half of patients on therapy for over 10 months, maintenance 41

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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
should have a clear (and growing with time) benefit vs. induction. Therefore, while we are not certain if there will be a statistically significant benefit, we are confident in a strong trend that will allow investors to extrapolate to the benefit over time (and the benefit should get bigger over time, as more induction patients progress). Overall, we believe the magnitude of benefit versus placebo will be bigger than the Street currently expects, and that these data will increase expectations for front-line share (consensus view is that US front-line share, which currently stands at ~34% even without the data, will grow to 40%; this has been management’s guidance) and increased expectations for duration of therapy (we expect Revlimid could show progression-free survival approaching three years, significantly better than any current therapy). CELG: Expect Revlimid to Continue to Drive Upside
$90 80 70 60 $ 50.45 50 40 30 20 10 0 Oct-07 $43 (-15%) $73 (+45%) $64.00 (+27%)

Investment Thesis
x We estimate 25%+ EPS CAGR for 5 years vs. consensus of 3, and see catalysts to move the consensus view in the near term. x We believe the Street underestimates the benefit Revlimid will have in the front-line myeloma population as well as probability of success for pomalidomide. Success in both would likely drive multiple expansion. x Revlimid data at ASH may lead investors to increase estimates of duration of therapy and peak penetration, increasing peak sales assumptions for this 95% GM drug. x We expect the pipeline to emerge as a surprise over the next six months, increasing long-term estimates. In particular, we see investor interest in pomalidomide increasing.

Potential Catalysts
x Dec. 2009: American Society of Hematology (ASH) – frontline (MM-015) Revlimid data and Phase II data for pomalidomide in refractory myeloma

Key risks
x Data may not reach our expectations, or if it does, changes to share or duration of therapy may not occur. x Patent cases could work against the company. x Sales appear to remain sensitive to economic pressures. x US healthcare reform could affect company operations. x Failure of pipeline agents, especially pomalidomide. x Launch of a generic Thalomid or Revlimid before we currently expect.

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10 Current Stock Price

Oct-10

Price Target (Oct-10)

Historical Stock Performance

Price Target $64 Bull Case $73

Base Case $64

Bear Case $43

Based on a DCF that employs a WACC of 9.75%, growth rate of 4.5% from 2016-2018, and terminal growth rate of -3% post-2018 as patent risk increases and Revlimid growth slows. MM-015 data and front-line growth in the EU exceed our expectations. Our bull case scenario models the impact of a better than expected MM-015 result or better than expected uptake in the EU (potentially replacing a portion of the bone marrow transplant market). In this scenario, EU front-line penetration is similar to what we expect in the US (~50%). Duration of use also continues to grow substantially in this scenario as physicians treat to progression. Revlimid sales peak at >$6 bn. MM-015 shows 2-3X PFS increase over control; Revlimid’s front-line penetration and duration of therapy grow. Assumes MM-015 shows a PFS significantly >24 months (benefit likely ~2-3x control arm). Given Revlimid’s easy-to-administer oral regimen and solid side-effect profile, we believe the consensus expectation of 40% peak front-line share is too low under this scenario. We expect front-line share in the US to approach 50% and peak penetration in the EU of ~36%. Further, we expect physicians will evolve to “treat to progression,” with a potential for average duration in front-line setting to exceed two years. With these assumptions, WW Revlimid sales grow to $5bn. Key to visibility on this scenario is the quality and acceptance of the MM-015 data at the ASH meeting in December. Duration and front-line penetration grow little from current levels. Our bear scenario assumes that MM-015 data disappoint and are not sufficient to drive meaningful changes in either duration of use or front-line penetration. In this scenario, Revlimid sales peak at ~$3.5bn WW, with medium-term growth driven by ex-US with little change in mature markets.

Source: FactSet, Morgan Stanley Research

42

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
November 2, 2009

Covidien Actiq ANDA Supports Bullish Pharma Thesis
Morgan Stanley & Co. Incorporated

Stock Rating: Overweight Price target Shr price, close (Oct 30, 2009) Mkt cap, curr(mm) 52-Week Range Fiscal Year ending ModelWare EPS($) Prior ModelWare EPS($) P/E Consensus EPS($)§ Div yld(%)

Reuters: COV.N Bloomberg: COV US $48.00 $42.12 $21,230 $45.52-27.27 09/08 2.70 19.9 2.70 1.2 09/09e 2.84 15.2 2.87 1.5 09/10e 3.32 3.24 12.7 3.21 1.7 09/11e 3.76 3.67 11.2 3.58 2.0

David R. Lewis
David.R.Lewis@morganstanley.com

Andrew Olsen, CFA
Andrew.Olsen@morganstanley.com

Ryan Bachman, CFA
Ryan.Bachman@morganstanley.com

James Francescone
James.Francescone@morganstanley.com

§ = Consensus data is provided by FactSet Estimates. e = Morgan Stanley Research estimates

Price Performance
Covidien PLC (Left, U.S. Dollar) Relative to S&P 500 (Right) Relative to MSCI World Index /Health Care Equipment & Services (Right)

FDA approval of ANDA for Actiq is a key catalyst… On October 30, Covidien received FDA approval to commercialize a generic form of Actiq, a fentanyl product for treatment of breakthrough pain in cancer patients. Covidien expects to launch the product by March 2010. We estimate Actiq could add $30-60 million in annual sales and $0.04-0.06 in EPS (Exhibit 1). Approval of the Actiq ANDA (abbreviated new drug application) is important, as it: (1) should help offset difficult Pharma comps in F2010; we previously forecast a 1% constant-currency decline; (2) shows progress in the revitalization of the Pharma business, an area of prior underinvestment but renewed strategic focus; and (3) comes several months earlier than we expected. … and supports our bullish thesis on Covidien’s Pharma business. We believe that top-line acceleration driven by the Pharma business is key to multiple expansion in 2010–12 and to our Bull Case valuation of $55 for the shares. We believe investors should shift into Covidien shares, where we see catalysts for accelerating top-line growth and upward earnings revisions. We have raised our F2010 EPS by $0.08 to $3.32 and our price target to $48 from $46 to reflect the addition of generic Actiq and currency tailwinds.
Exhibit 1

55 50 45 40 35 30 05 06 07 08 09

170 160 150 140 130 120 110 100 90

Source: FactSet Research Systems Inc

Company Description Covidien is a broad-based healthcare company and manufactures, distributes and services an extensive product line that includes disposable medical supplies, monitoring equipment, innovative wound closure products, advanced surgical devices, medical instruments and bulk analgesic pharmaceuticals. Industry View: Attractive — Medical Technology Analysis of previous recessions shows: (1) Healthcare multiples tend to initially price in deeper revisions than warranted by fundamentals, creating opportunities for outperformance; (2) Med Tech returns beat the S&P 500 going into recession and beat both the S&P and the Health-care sector as a whole coming out.

Covidien: EPS Sensitivity to ANDA Approval
0.23 30% 40% 50% 60% 70% 80% Sales Contribution ($M) per ANDA 25 50 75 100 125 $0.01 $0.02 $0.03 $0.04 $0.05 $0.01 $0.03 $0.04 $0.05 $0.06 $0.02 $0.03 $0.05 $0.06 $0.08 $0.02 $0.04 $0.06 $0.08 $0.10 $0.02 $0.05 $0.07 $0.09 $0.11 $0.03 $0.05 $0.08 $0.10 $0.13 Incremental Operating Margin

Upcoming PDUFA dates for Pennsaid (Nov. 4) and Exalgo (Nov. 22) could be additional positive catalysts. We estimate successful commercialization of Pennsaid and Exalgo could add 100 bp to sales growth by F2011. Covidien’s September-quarter earnings call is scheduled for November 17. Other potential catalysts include an FDA vote on acetaminophen dosing and the Congressional healthcare reform debate.
Exhibit 2

Covidien: Recent Pipeline Additions
Date 24-Nov-08 16-Jun-09 17-Jun-09 --Company Depomed Nuvo Research Neuromed ANDA #1 ANDA #2 Asset Acquired / Licensed AcuForm gastric retentive drug delivery technology Pennsaid (diclofenac sodium) Exalgo (hydromorphone HCI) Actiq -Launch F2010 F2011 F2011 F2Q10 F2011

Source: Company data, Morgan Stanley Research

Source: Company data, Morgan Stanley Research

43

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
Exhibit 3

COV: Upside Driven by Margins, Mix, Pipeline
$60 55 50 $48.00 (+14%) 45 40 35 30 25 20 15 10 Oct-07 $35 (-17%) $ 42.12 $55 (+31%)

valuation. We do not believe this to be the case given structural differences in the businesses. Covidien’s Pharma business garners operating margins that exceed those of branded and generic manufacturers (~33% vs 22-30%). Further, Covidien’s product portfolio is more stable and subject to fewer competitive threats. As a generic manufacturer, its products are not subject to patent expiries or generic substitution, like branded manufacturers. Its products are also subject to significant regulatory requirements, which limit competition from other generic manufacturers. Our 12-month price target for COV is $48. Our price target represents a 13.5x P/E multiple on C2010 earnings of $3.45. This P/E is above the current valuation and a discount to the historical average valuation of 15–16. We believe under-appreciated earnings prospects, FX headwinds, concerns about the impact of a weakening economy on surgical procedure trends, and the potential for significant healthcare payment and tax reform are weighing on COV’s valuation in the near term. In the coming quarters, as these overhangs abate, we believe valuation multiples could expand. Risks include failure to realize returns on investments in R&D, difficulties receiving FDA approval or commercializing its licensed pharma products and outstanding ANDA filings, further deterioration in Ventilation and Imaging businesses, a decline in US surgical volumes, inventory deflation, and large-scale dilutive strategic transactions. CareFusion (CFN, $23.69) Bull Case increasingly reflected; downgrade to Equal-weight from Overweight. Our growth reacceleration and leverage thesis remains intact, but following strong share price performance this is increasingly reflected in valuation. CareFusion has been among the best performers in our coverage since its spin-off (up 28%) despite no material news flow and now carries a sizable valuation premium to its peers (18x vs.13x). In our view, expectations are overly optimistic heading into the company’s first quarter as a public company. We believe the stock is pricing in F2010 EPS of greater than $1.30, above our estimate of $1.21; we are less convinced management markedly raises F2010 guidance given limited visibility into hospital capital spending and the timing of restructuring gains in F2010-11. While we see catalysts for further upside to our forecasts from improved product mix and a resurgence in hospital capex, near-term visibility on these drivers is limited. — October 30, 2009

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10 Current Stock Price

Price Target (Oct-10)

Historical Stock Performance

Bull Case $55

Base Case $48

Bear Case $35

Surgical Success: Medical Devices continues to hit on all cylinders with emerging evidence of reacceleration in the Pharmaceutical segment. New Pharma products have minimal financial impact but improving visibility, expectation of a shift to high-single digit revenue growth amid approval of both ANDAs by FY11 supports multiple expansion. 13.5x Spending to Grow: Top-line acceleration is modest Base and margin improvement in Devices remains the Case primary driver of earnings growth. Expectations reCY10e main for corporate sales growth in the mid-single EPS $3.45 digits. New Pharma products have minimal near-term financial impact and expectations are for commercialization of one ANDA by FY11, supporting little multiple expansion. 11x Bear Hospital Havoc. Medical Devices remains the priCase mary growth driver and top-line growth expectations CY10e remain in the mid-single digits amid uneven perEPS $3.27 formance in the other businesses. Confidence in the reinvigoration of the Pharmaceutical business ebbs as two ANDAs remain approved through CY10. Healthcare reform that imposes an industry tax or adversely affects the 510k approval process or Covidien’s tax management strategies pressures valuations and earnings.

15x Bull Case CY10e EPS $3.55

Source: FactSet, Morgan Stanley Research

Is more pharma a good thing? We think so. Because branded and generic pharma stocks broadly garner lower valuations than medical supplies stocks, including Covidien, some have indicated that growth in the portion of earnings derived from its Pharma business might weigh on Covidien’s
Exhibit 4

Potential Incremental EBIT Margins for Key ANDAs
LOW MARGINS HIGH MARGINS

Generics 10-15 competitors Incremental margins: Gross Margin: 25-30%

Branded 1-3 competitors Incremental margins: Gross Margin: 90%

Two ANDAs Expected Incremental EBIT margins: 50-70%
Source: IMS Health, Company data, Morgan Stanley Research

44

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
October 30, 2009

RadioShack No Cannibal on T-Mobile
Morgan Stanley & Co. Incorporated

Stock Rating: Overweight Price target Shr price, close (Oct 29, 2009) Mkt cap, curr(mm) 52-Week Range Fiscal Year ending EPS($)** P/E** ModelWare EPS($) Consensus EPS($)§ Div yld(%)
** = Based on consensus methodology e = Morgan Stanley Research estimates

Reuters: RSH.N Bloomberg: RSH US $21.00 $17.36 $2,187 $18.33-6.47 12/08 1.52 7.9 1.87 1.49 2.0 12/09e 1.55 11.2 1.86 1.58 1.4 12/10e 1.65 10.5 1.87 1.57 1.8 12/11e 1.77 9.8 1.93 1.65 2.2

Gregory Melich, CFA
Gregory.Melich@morganstanley.com

Oliver Wintermantel
Oliver.Wintermantel@morganstanley.com

Michael Montani
Michael.Montani@morganstanley.com

Fundamental thesis behind our Overweight rating is playing out. We upgraded RSH to Overweight from Equal-weight on September 10, 2009. The fundamental thesis was that the addition of T-Mobile as a third carrier increased the relevance of RadioShack as a wireless retailer. While other pressures remain, with the stock priced at 10.5 times 2010e EPS and 4x 2010e EBITDA the market had set a low bar and an attractive risk/reward. It will take more than one quarter to confirm the thesis that relevancy is being rebuilt, but we think 3Q was a good first step. Once the investment community works through the numbers, we think the Street is likely to migrate toward our $1.65 EPS forecast. If the cannibalization of T-Mobile remains essentially zero, our $1.65 could move toward $1.80. We aren’t there yet. RadioShack’s 3Q results offer encouraging signs from wireless despite the in-line EPS of $0.30. A 40% gain in wireless with strength in Sprint, prepaid, and T-Mobile suggesting that T-Mobile is not cannibalizing the existing AT&T and Sprint business. While this is unlikely to continue indefinitely, it is encouraging given that our estimates assume a 60% cannibalization rate of 1.3m post paid T-Mobile handsets sold by RadioShack next year. What we liked: Wireless up 40%. RadioShack is gaining relevancy as a wireless solutions provider. With one-third of sales and profits derived from wireless, stabilization here matters for the entire store. We quantified a potential $0.20 EPS benefit from T-Mobile; without cannibalization, that would shoot up to $0.35–0.40 (see Exhibit 1). Excluding converter boxes, comps would have been up 3%.
Exhibit 1

§ = Consensus data is provided by FactSet Estimates.

Price Performance
RadioShack Corp. (Lef t, U.S. Dollar) Relative to S&P 500 (Right) Relative to MSCI World Index /Retailing (Right)

35 30 25 20 15 10 5 05 06 07 08 09

110 100 90 80 70 60 50 40 30

Source: FactSet Research Systems Inc

Company Description RadioShack is primarily engaged in the retail sale of consumer electronics goods and services through its RadioShack store chain and non-RadioShack branded kiosk operations. Its products include communication devices, flat panel televisions, residential telephones, home entertainment, computer accessories; batteries, digital cameras, toys, satellite radios, and memory players. Industry View: In-Line — Retail, Hardlines Valuations on Price/Sales and EV/Sales for many stocks have only recovered to where they were in late 2008. That suggests that if 2009 is the trough for retail, upside remains into 2010.

What we didn’t like: Lack of buyback, continued negative results in rest of store. RadioShack did not buy back stock during 3Q. We believe this was driven by their debt tender offer in place for much of the quarter. Also worth noting is that outside wireless sales and the converter box comparisons, sales were probably down close to 10%. Converter box impact now known, while seasonality of RadioShack’s business suggests positive 4Q comps. 3Q showed that converter risks are well known and should be accurately modeled (approx $0.20 of headwind in 2010). If 4Q seasonality returns to 30.8% of sales (the six-year average) vs. 29.8% a year ago, and even with 400bp of converter box pressure in 4Q, we think comps should turn positive, to 2.5%.

Half the Cannibalization Can Add $0.15 to Earnings
New Post paid Units 800,000 800,000 800,000 800,000 800,000 Cannibalization 0% 15% 30% 45% 60% Incremental Units 800,000 680,000 560,000 440,000 320,000 Gross Profit/ Unit Gross Profit $ $131 $104,495,125 $131 $88,820,856 $131 $73,146,588 $131 $57,472,319 $131 $41,798,050 EPS $0.52 $0.44 $0.36 $0.29 $0.21

X X X X X

X X X X X

Source: Company data, Morgan Stanley Research

45

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
Exhibit 2

RSH: T-Mobile Execution Creates a Path to $20-Plus
$30

25

$25 (+44%)

20

$21.00 (+21%) $ 17.36

15 $12 (-31%) 10

5

levels can accelerate share repurchases, we think up to ¼ of the float. x Valuation remains favorable. Trading at a 5 multiple point discount to the Hardlines group, RadioShack offers upside from T-Mobile and potential to retain some converter box customers which could help it to outperform in a sluggish environment. x Rent reduction possibilities. RadioShack screened among the best in retail for potential to reduce rent costs. If sales struggle, it could help mitigate SG&A pressure 30-50bp through 2011.

0 Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10 Current Stock Price

Oct-10

Key Value Drivers
x Cash flow and balance sheet strength. With lease adjusted net debt to EBITDAR of 0.8x, sub 30% debt to capital, and ~$200mn of likely 2010 FCF, RSH appears stable even in a tough market. With projected FCF of $200 million, cash of more than $800 million, and net cash expected to be over $200 million by year-end, we believe buybacks could provide support. x Residual payments do provide a floor of value. We don’t expect FCF to turn negative in the next two years or slip below $100mn even in our bear case.

Price Target (Oct-10)

Historical Stock Performance

Bull Case $25

Base Case $21

Bear Case $12

T-Mobile drives wireless traffic amidst a sluggish 14x Bull Case 10e 2010 Consumer Electronics environment. EPS $1.80 T-Mobile adds 1.4mn shoppers as cannibalization fears prove unfounded, and new handsets are a hit. Either the iPhone hits RadioShack’s shelves (through ATT) or Verizon takes a second look as RadioShack proves relevancy. Comps near 2% in 2010, while other CE retailers fall LSD, and margins expand to 2007 levels of 9% given lean operating structure. $700mn of share buybacks exceed our $400mn base case over 3 years. FCF approaches $300mn levels from ‘07. The multiple expands to 14x a bullish 2010e as the market no longer views the Shack as a no growth retailer, but rather one that manages for cash flow while returning value to shareholders. 13x Base T-Mobile helps stabilize wireless, share Case 10e buy-backs provide an incremental catalyst as EPS $1.65 RSH passes $20. Secular headwinds remain in core wireless, but with 40% of T-Mobile’s customers incremental, RadioShack posts growth in share after years of decline. The rest of the store gains from the stable traffic, while RadioShack retains a few customers who shopped for converter boxes. Tight inventory management limits markdown risk, while sustaining $200mn of FCF. RadioShack screens among the best in retail for potential to reduce rent costs. If sales struggle, it could help mitigate SG&A pressure. If sales turn 1% positive, we see the potential for an AutoZone P/E of 13x based on RadioShack’s FCF and execution. Secular and cyclical storms collide in 2010. 9x Bear Case 10e Comps resume their fall at a high single digit rate EPS $1.30 after a converter box inflated 2009. Wireless sales fall 10% as 80%+ of T-Mobile’s customers cannibalize AT&T and Sprint, and secular headwinds intensify in a maturing market. SG&A deleverages, as margins fall to 4%, sub 2006 levels. Good B/S mgmt and solid FCF remain despite disappointing earnings and lower traffic counts. The stock falls further to $12, with a P/E of 9x for a no growth retailer with an otherwise solid balance sheet that remains free cash flow positive.

Potential Catalysts
x 2009 could be the first full year positive comp since 2005 x Census Bureau US Retail Sales November 16 provide consumer electronics update. x T-Mobile results (expected November 5). x Best Buy 3Q results December 15. We set our price targets on a relative basis and comparing RSH to other low growth names such as AutoZone (with an 11-13x 2010e P/E). We believe that execution on the T-Mobile launch can merit a multiple for RSH at the higher end of this range. Near-term risks come from comps pressure due to cycling converter box sales and traffic. Even with the addition of T-Mobile, RadioShack lacks two important parts to its wireless offering: Verizon and the iPhone. Continued relevancy is an issue amid alternatives such as Best Buy, Wal-Mart, and the Internet.
Morgan Stanley is currently acting as financial advisor to Verizon Wireless with respect to the proposed acquisition of certain of its wireless assets by AT&T, Inc. and Atlantic Tele-Network, as required by the conditions of the regulatory approvals granted for Verizon Wireless' purchase of Alltel Corporation earlier this year. The proposed acquisitions are subject to customary regulatory approvals, as well as other customary closing conditions. Verizon Wireless has agreed to pay fees to Morgan Stanley for its financial services. Please refer to the notes at the end of the report.

Source: Morgan Stanley research; FactSet.

Investment Thesis
x The T-Mobile addition helps stem secular pressures in core wireless (33% of revenues), while cash build of 2x seasonal

46

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
October 30, 2009

Starbucks Is $30 Possible (and How)?
Morgan Stanley & Co. Incorporated Morgan Stanley & Co. Incorporated

Stock Rating: Equal-weight Price target Shr price, close (Oct 29, 2009) Mkt cap, curr(mm) 52-Week Range Fiscal Year ending EPS($)** Consensus EPS($)§ ModelWare EPS($)
** = Based on consensus methodology e = Morgan Stanley Research estimates

Reuters: SBUX.O Bloomberg: SBUX US NA $19.52 $14,576 $21.11-7.06 09/08 0.71 0.71 0.74 09/09e 0.77 0.76 0.88 09/10e 0.93 0.91 0.85 09/11e 1.15 1.07 1.04

John Glass
John.Glass@morganstanley.com

Jon Tower, CFA
Jon.Tower@morganstanley.com

Still Equal-weight. With the rapid rise in SBUX’s shares this past year, the market clearly demonstrated it believes management can remove ~$550 million in costs, a ~500 bp boost to operating margin. We believe the current stock price has already (properly) assumed SBUX, with its new, leaner cost structure and a moderate improvement in sales, will regain its prior peak operating margin of 12% (vs. 9% today and 5–6% at the trough last year). We think new long-term buyers of the stock need to be convinced $30 is a reasonable goal. To be clear, our base case on the stock is $21 (raised today from $20); and we still believe new peak margins are a stretch given what we know today. While we’re not ready to subscribe to the new peak profitability yet (the options market is only pricing in a 10% probability of $30 in the next year), we have mapped out this bull case scenario and conclude new peak margins of up to 15-16% are possible under certain circumstances. What can push SBUX to $30? Our new bull case scenario calls for SBUX to earn $1.50+ by CY11, a 40% increase over current Street estimates. We are not predicting this will happen — in fact, we think our base case of $1.15 in EPS is more likely. However, we illustrate here a path to new peak margins, as we believe the marginal long-term investor today needs to believe in this sort of earnings power to find the investment compelling. In order for SBUX to boost EPS to $1.50-$1.60, we believe three things must happen: (1) Pushing US margins to 18%. We are most confident here. Given the scale of the US, its past experience at 16% operating margin, and given that much of the cost cutting will focus on the US business, we believe that over time US margins could reach a new peak of 18%. Aside from cost reductions, we see the following reasons margins could reach 18%: positive SSS and resumption (over time) of pricing power; more favorable future lease terms; lower cost of growth, including lower pre-opening, and less margin dilution from immature stores; and potentially greater license mix should grow licensed units faster than company or choices to refranchise. (2) Improving international margins to the mid-teens level. This goal of management will be much more challenging than

§ = Consensus data is provided by FactSet Estimates.

Price Performance
Starbucks Corp. (Left, U.S. Dollar) Relative to S&P 500 (Right) Relative to MSCI World Index /Cons um er Services (Right)

40 35 30 25 20 15 10 05 06 07 08 09

130 120 110 100 90 80 70 60 50 40

Source: FactSet Research Systems Inc

Company Description Starbucks is the leading specialty coffee retailer in the world, with over $9 billion in sales and 13,000 locations worldwide. Industry View: In-Line — Restaurants While the shares look inexpensive by most measures, on our forecasts, restaurants are caught in a tightening vise of rising input costs and a weakening consumer that should make the next cyclical recovery more difficult than in the past.

doing so in the US, in our view, if only because they have never been higher than mid- to upper single digits. To make this goal obtainable, we believe SBUX needs to achieve scale in more markets or refranchise to reduce overhead costs. Building out some of the less-developed markets to achieve scale will require time, capital and increased risk. Refranchising, or selling partially owned markets back to license partners, trading company revenue for licensed income, has a greater margin flow-through and requires less G&A spend. We favor refranchising as the lower capital-intensive alternative. (3) Meaningful buybacks, now that deleveraging is complete. We estimate a $1B buyback would add up to $0.12 to EPS. Following that path, SBUX could earn $1.50-$1.60 over the next 2-3 years and hit $30/share based on 18X+ P/E, roughly at parity with high quality, global branded retailers. Management has not yet addressed its willingness to pursue this magnitude of buyback, but we think it is possible.

47

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
Why still Equal-weight? We believe shares already factor in a return of prior peak margins of 12%, or $1.15 in EPS (our FY11 estimate), a scenario that now seems likely based on recent performance. We estimate that the “new SBUX” can sustainably grow EPS in the mid-teens, supported by 4–5% unit growth. At ~$20, the bar is already set high and as of yet, SBUX has only demonstrated cost cutting prowess. SBUX’s embracing a ‘better not bigger’ mindset, as well as speed of progress on margins, sales momentum and magnitude of buyback activity are all factors that would make us more bullish.
Exhibit 1

Key Value Drivers x Buybacks: We see up to $1B+ in commitments as possible. x Cutting costs: The first $500M + is in the shares, but another round is possible in FY10. x Stabilizing US SSS: Lapping easier compares, a better economy and adding Via to stores all could help push SSS toward positive. Potential Risks x Economic sensitivity x 25% stores in California x Increased discounting in the coffee segment as non-traditional outlets (QSRs) grow in the space. x Reliance on cost cuts to drive profit expansion at the expense of store traffic due to lower staffing levels.
Exhibit 2

US Still Dominates Profits, but Int’l Is the Opportunity (% of SBUX’s sales & profit contribution).
Revenue & Profit Contribution
4 19 Greatest Opportunity ? 17 9

SBUX: New Bull Case —Mid-to-Upper Teens Op. Margin
$35 30 $30 (+60%)

77

74
25 $21 (+12%) $ 18.74

20

15

Revenue US International

Profit
10

$13 (-31%)

GCP
5

Source: Company data, Morgan Stanley Research

Investment Thesis x The market is currently (properly, in our view) assuming that SBUX will return to prior peak operating margins of 12%. SBUX can get there assuming current cost cuts hold and SSS turn at least slightly positive. x We think new long-term buyers of the stock need to be convinced that $30 is a reasonable goal. That requires new peak margins of ~15-16% and material buybacks. x Key to this debate will be the fate of the International segment. While still a ways away, we think it’s plausible that US margins reach new highs in the next 2-3 yrs given the focus on cost cuts. However, soft international margins (6-8%) have been a chronic disappointment to investors. We think scale is the issue and refranchising (rather than increased capital investment) is the right course to bring these margins to US levels.

0 Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10 Current Stock Price

Oct-10

Base Case (Oct-10)

Historical Stock Performance

Source: FactSet, Morgan Stanley Research

Fair Value $21

Bull Case $30

20x Bull Case CY11e EPS $1.50

Base Case $21

18x Base Case CY11e EPS $1.18

Bear Case $13

14x Bear Case CY11e EPS $0.93

18x our C2011 EPS estimate of $1.18. EPS est. reflects 12.5% EBIT margin (slightly above prior peak) driven by cost saves & $1B + in buybacks. Perked up: Operating margins in the US hit a new peak (17%+) due to cost saves and lower growth, while int’l margins (11.8%) get boost from refranchising. CPG hits 53% margins. Buybacks exceed $1B. Overall op margins hit 14%+, a new peak & hence the stock is afforded a premium multiple. Freshly brewed: Operating margins reach 12.5%, north of prior peak, on more efficient US (15%+ margin) and improved international (9.9% margin). $1B+ in buybacks factored in. Shares accorded multiple higher than other best in class retailers/branded product companies given LT international growth potential. Burnt Coffee: Despite cost cuts, EBIT margins remain under pressure (10%) due to increased discounting and heavy marketing spend to combat growing competition in the coffee space. Little success from new/revamped products. US SSS flat as traffic lags QSR peers.

48

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
October 27, 2009

Under Armour Story Improving, but Still Too Early for the Stock
Morgan Stanley & Co. Incorporated

Stock Rating: Underweight Price target Shr price, close (Oct 27, 2009) Mkt cap, curr(mm) 52-Week Range Fiscal Year ending EPS($)** P/E** ModelWare EPS($) Consensus EPS($)§ Price Performance

Reuters: UA.N Bloomberg: UA US $23.00 $29.27 $1,488 $33.31-11.94 12/08 0.77 31.1 0.72 0.77 12/09e 0.88 33.3 0.82 0.83 12/10e 0.97 30.2 0.91 0.97

Chi H. Lee
Chi.H.Lee@morganstanley.com

Haruka Miyake
Haruka.Miyake@morganstanley.com

We maintain our Underweight rating… We continue to see disconnect between current valuations (a 2010e P/E over 30) and Under Armour’s growth trajectory; we estimate that the current share price implies a 9% terminal growth rate for Under Armour vs. 6% for other high growth peers. …but we have a more constructive view of the strategy following its 3Q earnings call. Management’s decisions to (1) slow footwear growth in 2010, (2) rework expansion plans, and (3) invest in the organization should fuel healthier earnings growth down the line and we believe the company is now moving in the right direction. That said, expected flat footwear volumes and SG&A reinvestment will likely cap 2010 EPS growth at ~10% and we continue to see better earnings growth opportunities in other names at cheaper valuations. Run, Walk, Run. We believe Under Armour’s decision to slow footwear growth in 2010 confirms our concerns about the footwear strategy, but the pause should give management time to rework the platform for 2011. Through 2010, we think the company will focus on (1) maximizing the product mix by gender, (2) improving product design/consumer messaging, and (3) sharpening the distribution strategy. We believe the bulk of the basketball launch will be pushed out into 2011 (a soft launch of 100,000 pairs is in our 2010 estimate), and declines in running will likely offset growth in cleats and trainers. We have increased our 2009 and 2010 EPS estimates by $0.06 each, to $0.88 and $0.97, respectively, to reflect the 3Q09 beat (+$0.11), partially offset by higher rates of SG&A investment (we now estimate +21.0% and +15.5% SG&A dollar growth for 4Q09 and 2010). The company expects 2010 revenues and EPS to grow in the high-single to low-double-digit range with no growth expected in footwear and a reacceleration of growth in wholesale apparel. Prior to today’s release, the Street had 2010 revenues and EPS modeled up 9% and 18%, respectively.

Under Arm our Inc. (Cl A) (Left, U.S. Dollar) Relative to S&P 500 (Right) Relative to MSCI World Index /Cons um er Durables & Apparel (Right)

70 60 50 40 30 20 10 05 06 07 08 09

240 220 200 180 160 140 120 100 80

Source: FactSet Research Systems Inc

Company Description Under Armour is engaged in the design, development, marketing and distribution of branded performance products. Industry View: In-Line — Branded Apparel Apparel demand remains weak but order visibility has improved and the benefits from cost deflation, leaner inventory, and easier mark-down comparisons in 2H09 mitigate downside earnings risks. Furthermore, credit availability is slowly rising and relative valuations re-main sensible despite the recent rally.

Exhibit 1

Implied Terminal Growth Expectations Remain Optimistic
35% 10% 9% 30%
2010 Consensus EPS Growth

8% 7%

25%

6% 5%

20%

4% 3%

15%

2% 1%

10% 10/5/2008 11/5/2008 12/5/2008 10/5/2009 5/5/2008 6/5/2008 7/5/2008 8/5/2008 9/5/2008 1/5/2009 2/5/2009 3/5/2009 4/5/2009 5/5/2009 6/5/2009 7/5/2009 8/5/2009 9/5/2009

0%

UA: 2010 Consensus EPS Growth UA: Implied Terminal Growth

High Growth* Peers: 2010 Consensus EPS Growth High Growth Peers: Implied Terminal Growth

Source: Company data, FactSet, Morgan Stanley Research estimates

49

Implied Terminal Growth

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
Exhibit 2

UA: Story Improving but Still Too Early for the Stock
$70 60

Our $23 price target assumes UA will trade at 24x our 2010 EPS estimate, in line with the stock’s average 1.35x premium to other high-growth peers (which are currently trading at 1x, on our estimates). Key upside risks to our price target include greater markdown absorption on footwear by retail partners, greater than expected restocking within the sporting goods channel, and higher margin contribution and earnings from direct to consumer operations. Further, we think Under Armour has a viable, multi-year growth platform and the Street could start to pay up for growth stories as cyclical earnings tailwinds dissipate.

50

40

$38.00 (+30%)

$ 29.27
30

$23.00 (-21%)
20 $18.00 (-39%)

10

0 Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10 Current Stock Price

Oct-10

Price Target (Oct-10)

Historical Stock Performance

Bull Case $38

Base Case $23

Bear Case $18

31x F2010e Over Armour: Restocking of Under Armour apEPS of $1.22 parel is greater than expected and apparel volumes grow +20.7% in FY10. Better demand and F2009e EPS stronger footwear execution allow Under Armour to = $0.95 ship 250K pairs of basketball shoes in 2010 and total footwear revenues grow +8.0%. SG&A dollars grow +18.8% (or 55 bps above sales) to support product and personnel investments. EPS rise +27.5% and the stock trades at a 31x P/E, a 1.75x premium to high growth peers. 24x F2010e Rebasing, Reinvesting: Apparel growth accelEPS of $0.97 erates to 13.6% in FY10 from 9.8% in FY09, driven by restocking and assortment expansion. FootF2009e EPS wear volumes remain flat y/y as declines in running = $0.88 are offset by growth in cleats, trainers, and a soft launch of basketball (100K pairs). SG&A dollars grow +15.5% (or 400 bps above sales) to support product and personnel investments. EPS rise 10% and the stock trades at 24x P/E, in line with the recent 1.35x premium to high growth peers (trading at 18x). 20x F2010e Flattish Earnings: Revenue reacceleration is EPS of $0.88 muted and apparel revenues grow just 12.3% in 2010 vs. 9.2% in 2009. No basketball units are F2009e EPS shipped in 2010 and total footwear revenues fall = $0.86 5.5%. SG&A dollars grow +15.5% (or 580 bps above sales) to support product and personnel investments. EPS grow just 2.5% and the shares trade at 20x P/E, closer in line with other high growth peers.

Source: FactSet, Morgan Stanley Research estimates

50

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
October 30, 2009

Wal-Mart Filling the Bucket
Morgan Stanley & Co. Incorporated

Stock Rating: Overweight Price target Shr price, close (Oct 29, 2009) Mkt cap, curr (mm) 52-Week Range Fiscal Year ending EPS ($)** Prior EPS ($)** Consensus EPS ($) § P/E** Div yld (%) ModelWare EPS($) Prior ModelWare EPS($)

Reuters: WMT.N Bloomberg: WMT US $58.00 $50.40 $196,269 $59.23-46.25 01/08 3.12 3.16 16.3 1.7 2.99 01/09 3.42 3.42 13.8 2.0 3.39 01/10e 3.55 3.55 3.56 14.2 2.2 3.49 3.49 01/11e 3.85 3.80 3.88 13.1 2.5 3.82 3.75

Gregory Melich, CFA
Gregory.Melich@morganstanley.com

Michael Montani
Michael.Montani@morganstanley.com

We recently attended Wal-Mart’s investor day, where Mike Duke articulated three main goals for his first year as CEO: growth, leverage, and returns. Management sees these goals as a virtuous circle to drive operating performance and shareholder value. Accelerating what the company calls the “Productivity Loop” is one key means to driving improvement domestically and globally, as cost savings are invested in value offering to drive traffic and share gains. We believe WMT’s top three priorities position it well to drive increased shareholder value in 2010, and consider 13x our 2010e an attractive entry point with acceleration in sales, and EPS growth likely next year. Realizing the value of the ‘Golden Bucket.’ Wal-Mart outlined that value creation is most likely to come from expanding market appreciation of its future cash flows, what it calls the “Golden Bucket”. This is essentially what the market is willing to pay for Wal-Mart’s future cash flow generation. It is also Wal-Mart’s enterprise value less the value of installed base, or the “Blue Bucket.” WMT’s Golden Bucket needs to come from growth, sweating assets and cash flow. WMT’s renewed emphasis on cost control should lead to SG&A savings reinvested in price leadership. This can drive the productivity loop and fill the “golden bucket,” as outlined at the company’s Investor Day. Gross margins can grow from shrink, markdown, and distribution efficiency, but 80bp expansion likely moderates. A modest capex step up is worth watching, but with returns a top three priority, and the right incentives, we accept that it’s driven by comparison issues and timing of 2011 openings. What we liked about the investor day: We haven’t seen this much focus on SG&A control in years. When a new CEO, especially at Wal-Mart, lists leverage as a top 3 priority, we think it’s best to listen. Excluding real estate and benefit step ups, SG&A at Wal-Mart US has been down in dollar terms this year. A sharp focus on corporate expense (transformational stabilization), while benefits took a step function up the past two years, leads us to take EPS up to $3.85 for 2010.

§ = Consensus data is provided by FactSet estimates. ** = Based on consensus methodology e = Morgan Stanley Research estimates

Price Performance
Wal-Mart Stores Inc. (Left, U.S. Dollar) Relative to S&P 500 (Right) Relative to MSCI World Index /Food & Staples Retailing (Right)

160 60 55 50 45 140 120 100 80 60 40

05

06

07

08

09

Source: FactSet Research Systems Inc.

Company Description Wal-Mart is a mass merchant retailer that operates stores and clubs domestically and internationally, with 7,900 stores globally. Industry View: In-Line — Retail, Discounters We believe that consumer spending will remain value driven. In our view, a strong price-value equation will allow discounters to gain share in an otherwise difficult operating environment. Lack of improvement in our Sales Leading Indicator suggests execution remains paramount.
Exhibit 1

Filling the “Golden Bucket”: 2004 Levels of Growth or RNOA Needed to Meet Goals
Value of the Cash Flow Growth Current Asset Value

$248bn

$234bn

CY 04

CY 09

CY 09 WMT Long Rage Plan

Source: Morgan Stanley Research Interpretation of Company Data, $248bn and $234bn shown above represents Enterprise Value for Wal-Mart

51

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Company Analysis
What we didn’t like: Capex step-up. Strong $12bn FCF results in a modest 6% FCF yield primarily because $14bn capex is 2x D&A (“Project Impact” remodels also a driver). This appears driven by capex-intensive food growth, $2bn of land per year, and sq ft growth. This compares to Kroger (KR, $23.52, rated Equal-weight by Mark Wiltamuth with a In-Line Retail, Food and Drug industry view), which has 1.5x capex/D&A without international growth, and Target (TGT, $49.53, Equal-weight) at 1.1x for 2010, with 1% square foot growth). We don’t want SG&A down on higher capex. Current trends and what matters on traffic, ticket, margins. We believe 3Q EPS is running in plan, with sales worse but margins better. It will be critical to see if the likely negative comp is driven by traffic or ticket. We believe deflation in food and general merchandise are driving the decline. Keeping traffic positive is key. Price leadership emphasis means cost saves are likely reinvested to drive traffic, and not a 50bp 2010 margin expansion. Bottom Line: WMT’s valuation at 13x suggests sub-market growth and that Wal-Mart US trades at 10.4x. Our sum-of-the-parts valuation suggests Wal-Mart de Mexico and Canada come free at $50. Applying relative valuation, we obtain a sum-of-the-parts value of $57 for WMT versus $50 today. This implies Wal-Mart’s US stores trade at 10.4x our 2010e, and that current valuation does not discount the equivalent of Walmex and Canada. Wal-Mart US drives the valuation, accounting for 68% ($39) of the $57 fair value we calculate. We assume Wal-Mart trades at 13x P/E, in line with the stock’s current valuation, and a two-multiple-point discount to our target 15x P/E. International accounts for 28% of the $57 total, or $16 per share (after deducting minority interests). Sam’s Club makes up the remaining $3ps (4%) of value. We base our analysis on 2010 P/E valuation for ease of comparisons to peers, and allocate interest/corporate expense by division based on divisional sales as a percent of total to account for capital structure. Comparing our current sum-of-the-parts value of $57 with the $67 we calculated last year (see Project $70, One Year Later, June 5, 2008), our current price target implies a 2009 P/E of 16.3x, versus our assumption for 19.7x last year. We adjusted our implied FY1 target P/E multiple down 3.5 points versus last year given that the stock has fallen 11% YTD, and is trading at 0.85x the S&P P/E multiple on a next twelve month basis versus 1.15x relative P/E during our prior analysis. Our target multiple of 16.3x is an 11% discount to the S&P 500 on an FY1 basis. We assume Wal-Mart purchases the 30% of Walmex that it does not already own, as well as the 25% of D&S shares that remain outstanding. We run the SOP analysis to facilitate comparison versus relative peers, and as a sanity check for valuation. We do not advocate a break up of the company. WMT: $50 Stock Suggests a US Multiple of 10.5
80 70 67 (+33%) 60

58.00 (+15%) 50.40

50 41 (-19%)

40

30

20

10

0 Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10 Current Stock Price

Oct-10

Price Target (Oct-10)

Historical Stock Performance

Price Target $58 Bull Case $67 16.5x Bull Case 10e EPS of $4.05

Base Case $58

15.3x Base Case 10e EPS of $3.85

Bear Case $41

12x Bear Case 10e EPS of $3.40

Price target derived below. We assume a 15x P/E multiple, in line with the prior 5 year average. The “golden bucket” overflows. Comps of 4%, EBIT Margins of 6.1%. Wal-Mart’s strategy of sweating the assets works to a “T” as project impact remodels accelerate apparel and home good comps, expanding EBIT margins and basket size along the way. 5-6x rate of inventory reductions suggest meaningful working capital gains as well, as FCF surpasses $14bn. Wal-Mart gets increased credit for future cash flow generation prospects with improved execution on existing stores, and multiple expansion tests 17x as a result. The “Productivity Loop” accelerates as sharper value offering sustains traffic gains. 2.5% comp, EBIT margins of 5.7%. New CEO Mike Duke is determined to leverage expenses into 2010. This should fuel the productivity loop, as Wal-Mart chooses to widen the price gap vs. relevant peers and drive frequency. Gross margins expand but only by 15bps, as expense savings are redirected to sharper pricing. The alternative is EBIT margins explode to 6.5% (+80bps) as Wal-Mart allows the price gap to narrow. We believe the latter is just not the Wal-Mart way. Many holes in the bucket. Wal-Mart fails to keep new customers, comps fall 2%, EBIT margins fall to 5.2%, -50bps. Traffic declines by 100bps as YoY favorable gas price tailwinds dissipate, and WMT highlights value in an attempt to jump-start traffic that goes unnoticed. Healthcare costs grow again next year, resulting in 80bps of SG&A de-leverage. WMT’s multiple languishes in the penalty box, as poor execution on overhead expense and another year of accelerated job losses among the lowest income consumer take a disproportionate bite out of their business vs. peers.

Risks to our investment thesis: Food deflation headwinds persist through 2010 despite lapping the toughest 2008 compares. EFCA (labor) or protectionist legislation could hit Wal-Mart more than peers. Healthcare insurance costs could intensify into 2010. With or without a new national Healthcare structure, WMT could face more cost pressure if more associates continue to sign up.

52

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

International
October 29, 2009

x

Europe Insurance Initiation on Lloyd’s of London Insurers – Overweight Amlin, Underweight Brit
Morgan Stanley & Co. International plc+

ACI will also give the group the balance of portfolio needed to write higher margin cat-exposed business, taking advantage of the peak rating environment in those business lines. Amlin has £400m of excess capital (28% of 2010e TBV), after taking into account the ACI acquisition – we believe it is well placed to take advantage of future growth opportunities. Consistent and strong run-off releases year-on-year relative to its peers will support future earnings. At 1H09, Amlin had £150m of reserves (12.6% of net reserves) above best estimate (30p per share). Amlin is currently trading at 1.24x 2010e TBV with an expected RoTBV of 23.4%. On earning multiples, Amlin is trading at 6.2x 2010e earnings relative to the Lloyd’s names at 6.1x, primary non-life insurers at 11.1x and the reinsurers at 7.8x. Amlin has a strong track record with an average RoE of 26% and an average combined ratio of 76.8% over the last 6 years – due to its focus on disciplined underwriting and risk selection. In our view, this justifies its premium valuation versus its peers – we note that Amlin has traded at an average of 1.58x trailing book value over the last 5 years.

x

Adrienne Lim
Adrienne.Lim@morganstanley.com

Andrew Broadfield
Andrew.Broadfield@morganstanley.com

x

Order of Preference
Company (Ticker, Price, Price Target)

Rating

x

Amlin (AML.L, 357p, 503p) Catlin (CGL.L, 330p, 414p) Hiscox (HXS.L, 321p, 394p) Brit (BRE.L, 207p, 239p)

Overweight Equal-weight Equal-weight Underweight

For valuation methodology and risks associated with the price targets mentioned, please refer to the full report, which is available through your sales representative, Client Link at www.morganstanley.com, or other electronic systems.

x

We are initiating on Lloyd’s of London insurers We recommend being Overweight on Amlin, Equal-weight on Catlin and Hiscox, and Underweight on Brit.

x

Overweight Amlin – Key debate on valuation
Consensus view: Hold. Amlin is trading at unwarranted rich multiples relative to its Lloyd’s peers. Our view: Overweight. Amlin deserves to trade at a premium valuation given its high historical RoE, strong underwriting expertise and experienced management team. We see limited downside in our risk-reward framework. We believe the market is not giving enough credit to the ACI acquisition (ex-Fortis business). Our analysis suggests that there is potential for earnings surprises from ACI that could result in an 11% uplift to our base case earnings. We show ACI’s impressive historical underwriting performance – it has achieved a net average combined ratio of 76.8% over the last 5 years. In addition, in our full report we show ACI’s competitive position in the Benelux, where it is the market share leader in marine. x We estimate that ACI will contribute 8.9p (or 13%) to 2011 earnings. However, our bull case assumes an additional potential uplift of 11% to our base case earnings.

Underweight Brit: Key debate on risk level
Consensus view: Buy. Brit is trading at attractive multiples relative to its peers and recession-related fears on its casualty portfolio were potentially overdone. Our view: Underweight. We see significant risk to the downside, reflecting our cautious view towards longer-tail lines of business, and think the stock is unlikely to re-rate. We believe the market has yet to recognise that Brit has not fully incorporated the lower interest rate environment in its technical pricing models. In addition, we are relatively more cautious on longer-tail lines of business, of which Brit has the largest exposure. We believe the uncertain inflation outlook and low interest rate environment could put significant pressure on future margins. Our Underweight is relative – Brit has the largest exposure to long-tail lines (35% of its portfolio) where we see significant downside risk to valuation.

53

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

International
x Brit’s portfolio is relatively skewed towards casualty where we view rates as inadequate and the rating environment unattractive. Continued uncertainty regarding potential recessionary-related claims on Brit’s liability portfolio is likely to continue to weigh on the stock. We are also cautious of Brit’s top-line growth, in particular in Brit UK, which is exposed to the competitive UK commercial market, which is still seen as being in the soft part of the cycle. Uncertainty over M&A aspirations after failed discussions to acquire Chaucer. Brit’s proposed re-domicile to the Netherlands places an additional risk to the stock as the HMRC increases its scrutiny of firms choosing to re-domicile to more attractive tax environments. Brit is trading at 0.78x 2010e (vs. Lloyd’s peers at 1.06x 2010e). While this might appear attractive, Brit has a lower 2010e RoTBV than peers at 13.2%. On price to earnings, Brit is trading at 6.2x 2010e earnings. However, we believe there is significant downside risk, which we reflect in our bear case.

x

Higher inflation and low interest rates are likely to put more pressure on margins unless rates start hardening

x

Equal-weight Catlin
The shares trade at 0.91x 2010e TBV with a RoTBV of 18.4%. While this may appear attractive on multiples, we see more relative downside in our risk-reward framework.

x

Equal-weight Hiscox
The shares appear to be relatively fairly valued at 1.1x 2010e TBV. While we believe Hiscox has a robust business model, we do not see a near-term catalyst for the shares. A fragmented picture across the market: The current outlook for the non-life market is extremely varied depending on business line. While catastrophe-exposed business is at the peak of its pricing cycle, we see no sign of rating improvement in longer-tail lines. We expect overall rates to remain flat to slightly down in the near term but expect to see some upward pressure on prices in the medium term due to lower reserve releases, a potentially higher inflation outlook and the low interest rate environment.
Exhibit 1

x

x

Risk-reward of Lloyd’s Insurers
80% 60%
41%

BULL

40%
26% 23% 16%

20%
current price

BASE

-20% -40% -60% Amlin (OW) Catlin (EW) Hiscox (EW) Brit (UW)

PT

BEAR

Source: Morgan Stanley Research estimates

Exhibit 2

Key Metrics of Lloyd’s insurers – Trading at attractive price / earning multiples
Rating Lloyd's insurers Amlin Brit Catlin Hiscox Weighted average OW UW EW EW Currency GBp GBp GBp GBp Current Price 357 207 330 321 Price Target 503 239 414 394 Upside 41% 16% 26% 23% Price/ Earnings 2009e 2010e 2011e 6.5 8.9 4.0 5.8 6.0 6.0 6.2 5.3 6.8 6.1 5.2 5.2 4.6 5.9 5.2 2009e Price/ TBV 2010e 2011e 1.24 0.78 0.91 1.10 1.06 1.07 0.72 0.81 0.97 0.93 Return on TBV 2009e 2010e 2011e 24.1% 9.3% 30.0% 22.7% 23.2% 23.4% 13.2% 18.4% 17.7% 19.4% 23.2% 14.8% 19.2% 18.2% 19.8% Dividend Yield 2009e 2010e 2011e 5.2% 7.2% 7.7% 4.2% 5.8% 5.6% 7.6% 8.1% 4.5% 6.2% 6.1% 8.0% 8.5% 4.7% 6.6%

1.44 0.83 1.01 1.23 1.20

Source: Morgan Stanley Research estimates

54

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

International
Exhibit 3

Amlin has the highest 5-year average RoE relative to the Lloyd’s insurers and Bermudan reinsurers
40% 30% 20% 10% 0% -10% -20% -30% -40%

Highest 5 yr average Lowest

Odyssey Re

Munich Re

Hannover Re

Everest Re

Partner Re

Swiss Re

Hiscox

SCOR

Catlin

Renaissance Re

Amlin

Brit

Transatlantic Re

Source: Company data, Hannover Re, Morgan Stanley Research

Exhibit 4

We show the impact of ACI on earnings – in our bull case, we estimate that ACI earnings could provide an 11% uplift to our base case

0

20
Pro-forma 2011e EPS ex-ACI

40

60
59.7p
ACI Earnings 0.0 Base case

80

8.9p

Base Case EPS

68.6p
ACI Earnings Bull case

0.0

6.1p

Earnings from writing additional 0.0 cat business

1.5p

Bull Case 2011e EPS
Source: Morgan Stanley Research estimates

76.2p

XL Re

55

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

International Lloyd’s of London Insurers
Overview
Lloyd’s of London is the second largest player in the surplus lines market behind AIG (Exhibit 5). Surplus line insurance is coverage of large, complex or unusual risks, typically sold through ‘licensed’ agents that operate globally. The Lloyd’s market consists of some 80 syndicates operating on a subscription basis – this means that more than one syndicate will share in the same risks to avoid the impact of any single large loss on one syndicate. Insurers operating within the Lloyd’s market also benefit from the unique capital structure at Lloyd’s known as the ‘chain of security’. The first link refers to syndicate level assets that are held in premium trust funds and are the first resource for paying policyholder claims. Each member must also provide capital to support its underwriting at Lloyd’s – known as the Members’ Funds at Lloyds (FAL), the second link. The third level of security is the central assets, funded by members’ annual contributions (the central fund) and sub-debt issued by Lloyd’s. In addition, there is also a ‘callable layer’ of up to 3% of members’ overall premium limits. With the combination of its capital security and well-known brand, we believe the Lloyd’s market is well placed to benefit from the continued problems of AIG, especially as insureds choose to spread their risk (via the subscription market at Lloyd’s) in times of continued uncertainty.
Exhibit 5

Lloyd’s is the second-largest player in surplus lines market behind AIG
AIG Lloyd's Zurich Nationwide ACE WR Berkley Markel Alleghany Berkshire Hathaway CNA
0.0% 4.4% 3.9% 3.3% 3.1% 3.0% 2.6% 2.5% 2.0% 5.0% 10.0% 15.0% 20.0% 25.0% 17.0% 22.2%

Surplus Lines GWP (2007) AIG $8.2bn Lloyd's $6.4bn Zurich $1.6bn Nationwide $1.4bn ACE $1.2bn

Source: Catlin, Morgan Stanley Research

NB: Ranked by 2007 market share

Exhibit 6

Lloyd’s insurers benefit from the unique capital structure known as the ‘Chain of Security’

Source: Lloyd’s, Morgan Stanley Research

NB: Figures are as at 31 Dec 2008

Exhibit 7

With the combination of its capital security and well-known brand, we believe the Lloyd’s market is well placed to benefit from the continued problems of AIG

Proportion of 2008 GWP written through Lloyd’s syndicates
100% 90% 80% 70% 60% 50%

Syndicate 2003

Other Syndicate

Amlin, Brit, Catlin and Hiscox operate within this market through their respective syndicates. Exhibit 7 shows the proportion of premium in each company written through Lloyd’s syndicates. We have also shown Amlin’s pro-forma split after taking ACI’s premium into account.

40%

Syndicate 2001
30% 20% 10% 0%
Amlin Amlin (proforma including ACI) Catlin

Syndicate 2987

Syndicate 33

Brit

Hiscox*

Source: Company data, Morgan Stanley Research *NB: Hiscox owns 72.5% of Syndicate 33

56

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

International
November 2, 2009

Europe Oil Services Rebound in Contract Awards Underway
Morgan Stanley & Co. International plc+

other installation services, this acceleration will allow the wider offshore construction sector to start rebuilding order backlogs. Earnings upgrades to follow backlog growth: Backlog growth has historically been a powerful catalyst for share prices, and we expect this to be the case again in the next 12 months. As backlogs start to rise, we expect earnings upgrades to come through: on average, our 2011 EPS forecasts are 17% ahead of consensus for offshore E&C companies. To gain exposure to this, we recommend building positions in Saipem, Acergy and Subsea 7, all of which we are upgrading to Overweight. We would also recommend SBM Offshore, which we already rate Overweight. Not expensive on valuation: Although offshore construction companies have rallied considerably this year, valuation is unlikely to be a constraint yet, in our view. On consensus estimates, the offshore E&C sector now trades on 1- and 2-year forward PE multiples of 14.8 and 12.3 respectively, which is broadly in line with their 10-year average. While the sector is not as undervalued as it was earlier in the year, it is not expensive. We would note, however, that the last time oil prices were as high and interest rates as low as they are today, this sector traded on one- and two-year forward PE multiples of 23 and 19, respectively. This occurred in September 2005, when many offshore construction companies also enjoyed strong growth in order backlogs (up 24% in 2005 vs. 2004 for Saipem, Technip and Acergy on average in offshore construction). In addition to scope for earnings upgrades, this highlights the potential for further multiple expansion.

Martijn Rats
Martijn.Rats@morganstanley.com

Robert Pulleyn
Robert.Pulleyn@morganstanley.com

Companies Featured
Company (Ticker, Price, Price Target)

Rating

Acergy (ACY.OL, NKr 72, NKr 101) PGS (PGS.OL, NKr 54, NKr 78) Saipem (SPMI.MI, €20, €29) SBM Offshore (SBMO.AS, €13, €19.5) Subsea 7 (SUB.OL, NKr 82, NKr 114) Technip (TECF.PA, €43, €59) Wellstream (WSML.L, 514p, 610p) Wood Group (WG.L, NKr 325, NKr 485)

Overweight Overweight Overweight Overweight Overweight Equal-weight Underweight Overweight

Note: For valuation methodology and risks associated with price targets mentioned, please refer to the full report, which is available through your sales representative, Client Link at www.morganstanley.com, or other electronic systems. Source: Morgan Stanley Research

Strong outlook for 2010 and beyond: Upgrading Saipem, Acergy and Subsea 7 to Overweight
Contract awards for offshore construction projects ground to a halt earlier this year. In recent weeks, however, this trend has started to rebound meaningfully. Based on our bottom-up review of the deepwater market, we expect the trend to gain momentum over the next 12 months. An increase in contract awards will allow the wider offshore construction sector to start rebuilding backlogs. Historically, this has been a powerful catalyst for the stocks. To gain exposure to this, we recommend building positions in Saipem, Subsea 7, Acergy and SBM Offshore on any weakness going into year-end. Discernible pick-up in contract awards: We have started to see the effect of these pent-up orders in recent weeks: various construction contracts have been awarded for the Papa-Terra, Anseng, Bonga NW, Escravos and Goliat fields by Petrobras, Noble Energy, Shell, Chevron and Eni, respectively. This trend will likely gain momentum in 2010: we estimate that the number of contract awards for floating production platforms will more than double from 8 in 2009 to around 20 in 2010. (Please see our full report for our project-by-project analysis of all deepwater projects on the oil companies’ drawing boards.) This would put 2010 broadly on a par with 2007, which was a strong year for the oilfield services sector. As all these platforms require associated subsea equipment, heavy lift, pipelay and

Pace of contract awards set to pick up
Over the last year, oil companies delayed contracts awards virtually ‘en masse’ with no contracts being awarded from August 2008 until August 2009. But conditions are now favourable for the oil industry to resume awarding contracts, as we describe below. We initially expected to see this acceleration from early 2010 onwards. However, the last few weeks have shown that this is already happening with several large contract awards coming through.

Industry View: Attractive The large volume of projects being planned for the next few years suggests an upbeat outlook for Oil Services in 2010 and beyond. Although the sector has re-rated back to historical average 1 and 2-year forward PE multiples, we believe that a considerable uptick in contract awards in 2010 will likely drive earnings estimates for 2011 higher and underpin the performance of the sector.

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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

International
x Oil prices are high enough: At an oil price of ~US$60/bbl the majority of deepwater projects offer attractive returns, comfortably meeting hurdle rates. Given that the oil price has been above this level since May, and has recently moved higher towards US$80/bbl, we also expect that confidence in the sustainability of the oil price remaining above this level is building. Oilfield services costs are close to the bottom of this cycle: After four years of steadily increasing prices, oilfield services costs have fallen sharply over the last year. Anecdotal evidence indicates that prices are down 15-20% from their peaks in most segments. Although this is perhaps not as much as some oil companies were hoping for, we believe recent price reductions are close to the maximum that contractors can afford to offer, and that therefore costs are close to the bottom of this cycle. This removes an important incentive for oil companies to delay awards in the hope of better prices. This view is in line with comments from Eni’s CEO Paolo Scaroni, who mentioned on 20 October during the Oil & Money conference that oilfield service prices have started to rise again in recent weeks. This was later echoed at the same conference by Petrofac CEO Ayman Asfari who commented that “signs of inflation were coming back into the system”. Large volume of un-awarded work: In total, we now expect to see around 8 contract awards for floating production platforms this year. This compares to an average run-rate of 25 p.a. during 2004-07. However, very few of the ‘missing 17 projects’ that would have occurred if the historical run-rate had continued have been cancelled. Oil companies are still planning 153 platforms over the next few years. Hence the potential amount of work that can be awarded remains large.
Exhibit 4

Stocks typically under- or outperform depending on changes in order backlog
Stock Period Start End Backlog change Performance Stock Index* Relative

Rising backlogs Technip (%) Acergy (%) Subsea 7 (%) Acergy (%) Falling backlogs Technip (%) Acergy (%) Subsea 7 (%) 4Q07 1Q08 3Q08 1Q09 1Q09 1Q09 -26 -39 -29 -60 -67 -56 -46 -43 -22 -14 -23 -33 3Q04 2Q05 3Q06 4Q07 3Q05 3Q06 3Q07 1Q08 90 53 14 25 52 79 51 -11 25 22 11 -16 27 57 41 6

x

* MSCI Europe Source: Company data, Datastream, Morgan Stanley Research

Exhibit 5

Backlogs (US$bn) still down materially from recent peaks, rebound of 3Q09 to gain momentum
Subsea 7 Acergy Technip Subsea Saipem Offshore 3.9 4.2 3.6 4.0 3.2 5.5 2.6 2.6 2.6 3.0 2.7 5.2 5.0 3.4 3.5 3.3 3.4 3.6 5.4 4.6 4.5 4.1 4.3 2.5 2.4 2.4 3.3 3.3 2.9 2.9 2.6 3.0

3.7 4.1

x

3.9 3.7 3.7 3.8

4.2

9.1 7.4 5.4 5.4 5.8 5.9 5.9 6.1 7.6 6.2 5.5 6.0 6.8

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

Source: Company data, Morgan Stanley Research Note: 3Q09 for Technip remains an estimate, ahead of results on Nov 13th.

We foresee an inflection in backlog momentum, which historically has been an important catalyst …
Across the sector, order backlogs in offshore construction have declined considerably over the last year and were ~30% below their 2007/2008 peaks as of 2Q09. With a large amount of contract awards possible, and the conditions in place for oil companies to move these projects forward, we expect contractors to start rebuilding backlogs. Historically, this has been a powerful catalyst for share prices, as increasing backlogs typically lead to earnings upgrades and greater earnings visibility, which has often allowed higher PE multiples as well. In Exhibit 1, we show examples of some of the strongest increases/decreases of order backlogs and share price performance during those periods.

… and recommend building positions in Saipem, Subsea 7 and Acergy to gain exposure to this trend
European oilfield service companies have rallied strongly already in recent months as rising oil prices allowed investors to foresee an end to the slowdown in E&P capex. As a result, the sector’s average one-year forward PE multiple has re-rated from ~5x back to around 15x, which is close to the historical average. However, with a strong outlook for contract awards, we believe there is another leg to the current rally driven by earnings upgrades. Saipem, Acergy, Subsea 7 and Technip are all strongly exposed to the expected rise in contract awards in the offshore 58

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

International
segment that we discuss in this article. For these companies, we have increased our forecasts for order intake (in offshore construction divisions) by ~10% for both 2010 and 2011. At the same time, we have raised our margin expectations for 2011 by 100bp as we believe that market conditions with be tighter than previously assumed. This has yielded the earnings upgrades described in Exhibit 6. As shown, our new 2011 EPS estimates are 10-45% ahead of consensus. With greater confidence in greater earnings growth, we have also increased our target PE multiples closer to the historical sector average. We now set our end-2010 price target based on 15.5x 2011 EPS for Technip and 15.0x for Saipem. The multiples are broadly in line with the historical average for the oilfield services sector. We apply a small discount for Saipem to reflect the greater contribution to earnings from offshore drilling. For Acergy and Subsea 7, we use a target PE of 13.5x. This discount to Saipem and Technip is also broadly in line with history. The starting point for our previous price targets was a lower target PE multiple for the sector of 14x, which we used to reflect greater uncertainty over oil company spending plans as well as a more cautious stance on the long-term economic outlook. On our new price targets, we see 36-44% upside for Saipem, Acergy and Subsea 7, which supports our upgrade to Overweight. We see 31% for Technip, for which our rating remains Equal-weight. 2) The precise level of trough earnings in 2010: The full impact of the slowdown in order intake over the last 12 months in offshore construction will only become fully visible in 2010, which we believe will be the year of trough earnings in this cycle. We forecast a sharp fall of 15-25% in earnings next year for most offshore construction companies, and this is also reflected in consensus estimates. We believe this anticipated decline is sufficient, but trough earnings are notoriously difficult to forecast. Ultimately, we believe that trough earnings are a poor starting-point for valuation and expect that rising backlogs during 2010 will allow investors to anticipate the earnings recovery in 2011. Our thesis is that the latter will drive shares higher over the next 12 months. However, uncertainty around 2010 guidance and quarterly earnings next year may lead to short-term volatility in share prices. In addition to the bull and bear case scenarios for our stocks, we have also calculated values based on the outside chance that the outlook reverts to the bearish sentiment witnessed in late 2008 or conversely that investor opinion returns to the bullish outlook seen in 2007. Under the possibility that the outlook becomes as bearish as late 2008, we assume that stocks return to all time low price-to-book values. This would imply an average of 47% downside across the sector. In the scenario whereby investor opinion becomes as bullish as it was in mid-late 2007, we assume that stocks return to their all time high price-to-book values. This scenario would suggest an average upside of 150% across the sector, and stocks returning to their previous highs.

The main risks to our view are GDP recovery and the precise level of trough earnings.
Although we believe the prospects for a recovery of the offshore construction market are attractive, and the risk/return trade-offs for Saipem, Acergy and Subsea 7 are favourable, there are two important risks to our upbeat view that need highlighting. 1) A relapse in the global economy: Our economics team’s base case is that the recovery will turn out to be self-sustaining. Although the rate of global GDP growth will likely be anaemic over the next few years, they expect it to remain positive and do not foresee another phase of economic contraction again. However, if a contraction occurs, concerns about economic growth would likely lead to concerns about growth in oil demand, which would put pressure on oil prices. In this scenario, oilfield services companies will likely underperform, despite the long-term favourable outlook that we discuss in this article.

Exhibit 6

Base, Bull, Bear, P/BV Upside & Downside Scenarios
Base Case/ Price Target Bear Case P/BV Upside Scenario P/BV Downside Scenario

Bull Case

Acergy Subsea 7 Saipem SBM Offshore Technip Wellstream

NKr 101 NKr 114 €29.0 €19.5 €59.0 £6.10

NKr 123 NKr 146 €40.0 €25.0 €77.0 £11.80

NKr 66 NKr 70 €17.0 €13.0 €42.0 £3.20

NKr 197 NKr 216 €47.0 €30.5 €80.0 £18.00

NKr 31 NKr 35 €13.0 €10.0 €19.0 £3.00

Source: Morgan Stanley Research

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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

International
Exhibit 7

Comparative Risk-Reward View

200% 150% 100%
50% 49% 45% 43%

BULL
40% 40% 37% 19%

50%
current price

BASE

PT

-50% -100% SBM Offshore Wood Group PGS Saipem Acergy Subsea 7 Technip Wellstream

BEAR

Source: Morgan Stanley Research estimates

Exhibit 8

Changes to 2010 and 2011 EPS Estimates
2010e EPS Old New 2011e EPS Old New Rationale

Saipem Technip Acergy Subsea 7 SBM Offshore PGS

€1.24 €1.44 17% €3.00 €3.01 $0.78 $0.78 $0.85 $0.89 $1.52 $1.60 1% 0% 5% 5%

€1.78 €1.93 €3.66 €3.83

8% 5%

Increased order intake assumption as contract awards resume Increased order intake assumption as contract awards resume Increased order intake assumption as contract awards resume Increased order intake assumption as contract awards resume Contract pricing to rebound quicker than expected in 2010

$1.11 $1.33 20% $1.33 $1.51 13% $1.64 $1.68 $1.15 $1.39 21%

2% Contract award for Aseng FPSO, plus updated modelling after additional disclosure

$0.71 $0.81 13%

Source: Morgan Stanley Research estimates

Exhibit 9

Changes in price targets
Previous price target 2011e EPS Target PE FX PT 2011e EPS New price target Target PE FX PT PT Upside

Saipem Technip SBM Offshore Acergy Subsea 7 Wood Group Petroleum Geo Services

€1.78 €3.66 $1.64 $1.11 $1.33 $0.52 $1.15

14.0 15.5 15.0 10.5 10.0 12.0 8.5

1.00 1.00 1.35 0.15 0.15 1.45 0.15

€25 €56 €18 NKr 77 NKr 87 £4.25 NKr 66.0

€1.93 €3.83 $1.68 $1.33 $1.51 $0.52 $1.39

15.0 15.5 17.5 13.5 13.5 15.5 10.0

1.00 1.00 1.50 0.18 0.18 1.65 0.18

€29 €59 €19.5 NKr 101 NKr 114 £4.85 NKr 78

16% 6% 9% 31% 31% 14% 18%

41% 32% 45% 35% 37% 46% 38%

Source: Morgan Stanley Research estimates

60

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

International
November 3, 2009

State Bank of India Fast Becoming Best in Class
Morgan Stanley Asia Limited+ Morgan Stanley India Company Private Limited+ Morgan Stanley India Company Private Limited+

Anil Agarwal
Anil.Agarwal@morganstanley.com

Stock Rating: Overweight Price target Upside to price target(%) Shr price, close (Oct 30, 2009) 52-Week Range Sh out, dil, curr(mn) Mkt cap, curr(bn)

Reuters: SBI.BO Bloomberg: SBIN IN Rs3,000.00 37 Rs2,191.00 Rs2,500.00-894.00 635 US$30

Mihir Sheth
Mihir.Sheth@morganstanley.com

Mansi Shah
Mansi.S.Shah@morganstanley.com

Fiscal Year ending Rev pre provision(Rsbn) ModelWare net inc(Rsmn) ModelWare EPS(Rs) Prior ModelWare EPS(Rs) P/E
e = Morgan Stanley Research estimates

03/09 430.9 111,731 176.0 6.1

03/10e 472.4 110,607 174.2 171.4 12.6

03/11e 613.4 162,825 234.1 234.7 9.4

03/12e 710.7 234,709 337.5 276.9 6.5

We reiterate our Overweight rating and Rs3,000 price target on SBI. We believe that operating earnings progression at the bank will remain very strong. The stock will likely be volatile in the near term due to asset quality issues and rate movements – a good buying opportunity in our view. Our view is that with an improving economy, incremental NPL creation will start slowing down materially while core earnings will remain strong. This will prop up returns once coverage build-up slows. The stock trades at 1.3x F2011e core book value (ex-insurance), 8.6x F2011e earnings (ex insurance), 4.1x PPOP, and with an ROE of 20% in F2012, on our estimates. SBI (parent) reported F2Q10 earnings of Rs24.9 billion, up 10% YoY and 7% QoQ ahead of our expectations of Rs23.1 billion and Bloomberg consensus expectations of Rs23.3 billion. Consolidated earnings were Rs30.5 billion, up 28% YoY and 11% QoQ. The key positives in the result were very strong core revenue progression: NII was up 12% QoQ (NIM progression was significantly better than our estimates), fees were up 13%, and forex was up 11%. The negative was increase in NPLs (up 13% QoQ) and continued flow into restructured loans (another Rs28 billion added during the quarter). 1. As we have discussed in our recent notes on SBI, the bank is rapidly gaining market share in fee income. This has enabled fees / loans for the bank to ramp up. We are building in stable fees to assets; however, if SBI’s initiatives in corporate fees continue to do well, there is meaningful upside to our fees income assumptions. A question that investors have asked us is whether the fees progression is sustainable. If we look at the last 10 years’ data for SBI, its fees to loans used to be 3.2% in F2001. Since then, market share loss and lack of focus had caused this to drop. Now with increased focus backed

Company Description SBI is the largest bank in India and makes up almost 28% of the deposit base in the country. It has a network of around 9,000 branches on a standalone basis and almost 14,000 branches including associates. It has an asset base of around US$100bn. SBI started stressing retail asset creation only a few years ago, and this already accounts for 23% of its loan book. SBI is the largest financer of government, as almost 24% of all securities issued by the central government are held by the bank India Financial Services Industry View: Attractive Resumption of capital flows has reduced stress on asset quality. Furthermore, core revenue momentum should pick up strongly in F2H2010, driven by margin uptick (especially for SOE banks) and revival in loan growth. MSCI Country: India MSCI Asia/Pac All Country Ex Jp Weight: 7.5%

by technology, this could continue performing extremely well. 2. NIM is progressing better than expected: We were expecting flattish NIMs in F2Q10 and deposit re-pricing benefit to start coming in from F3Q10. However, the bank reported that NIMs had already expanded by about 25 bps QoQ. It also said that looking at the deposit maturity profile, it expects NIM expansion of 10-12 bps every quarter for the next 3-4 quarters. If this does happen, then reported NIM in F2011 could return to peak levels of around 3%, which coupled with strong commission income, would cause very sharp revenue progression. We are building in NIMs (on our calculations) increasing to 2.8% in F2011, but there is upside given the positive sensitivity to rising rates. 3. Asset quality could hold back near term earnings growth. We had built in relatively high provisions for SBI. We now build in even higher growth in NPLs and take the 61

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

International
coverage ratio up to 70%. This is taking away some of the positives from better earnings progression over F2010 and F2011. Despite that, on our estimates, the bank will end up posting an ROE of 17.7% in F2011 on a parent basis and 17.8% on a consolidated basis. F2012 will be normalized earnings; ROE could be as high as 20%. For F2012, we make the following assumptions: 1. In F2011, coverage will reach 70%. This would imply that provisions drop sharply in F2012 from F2011. We are building in relatively normalized credit cost for SBI in F2012 at about 60 bps. NIMs are likely to have rebounded and will average 2.8-3% for the parent and 2.7% for the consolidated entity. In fact, given that SBI’s ALM is positively geared to rising rates, NIMs could be even better than our estimates. Fees income penetration is likely to be subdued. We are building in reasonably higher fees over the next few quarters as the bank focuses on new fee areas. But we are building in stable fees to assets ratio in F2012. We assume limited contribution from capital gains (at 3.5% of PBT in F2012 for the consolidated entity) vs. 31% in F2005 (when ROA peaked last). 5. Finally, the 20% ROE assumes a US$3 billion issuance in F2011. Hence, Tier I ratio in F2012 will be comfortable at 10%.

We value SBI using a sum-of-the-parts analysis. We assign a 15% weighting to our bull-case fair value, an 80% weighting to our base-case fair value, and a 5% weighting to our bear-case value. Downside risks to our price target include a significant increase in NPLs as the economic recovery falters. Other risks would be any significant sops given to rural areas at the expense of banks, and failure of NIMs to pick up. SBI – Price Target Calculation
Rs Base Case Bear Case Bull Case Target Price

2.

Probability Banking Business Life Insurance Fair Value

80% 2722 181 2903

5% 1140 77 1218

15% 3885 224 4109 2818 182 3000

Source: Company data, Morgan Stanley Research

3.

4.

Risk-Reward View
Rs4,500 Rs4,109 (+88%) 4,000 3,500 3,000

Bull Case Rs4,109

Margins & credit costs revert to F2007 levels. Margins expand 50 bps from current levels; credit costs come down by 25 bps; We assign an NBP multiple of 18x to value the insurance business at Rs224 per share. Margin expand by 30bps in F2011, credit costs remain higher than normal. Margins rebound by 30 bps aided by deposit re-pricing and loan growth recovery. Credit costs at 112 bps in F2010 and 82 bps in F2011. We assign a value of Rs182 per share to the life insurance business. Double dip in macro – higher than expected credit costs; loan growth remains muted. Loan book growth slows down. Margins decline more than our base case and stay at depressed levels. Flow of impaired loan creation resumes and credit cost are higher than base case. We assign an NBP multiple of 12x to value the insurance business at Rs77 per share.

Rs2,191.00
2,500 2,000 1,500 1,000 500

Rs3,000 (+37%)

Base Case Rs2,903

Rs1,218 (-44%)

Bear Case Rs1,218

Oct 08

Jan 09

Apr 09

Jun 09

Sep 09

Dec 09

Feb 10

May 10

Aug 10

Oct 10

Price Target Historical Stock Performance Source: FactSet, Morgan Stanley Research

Current Stock Price

62

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

International
November 3, 2009

Tenaris S.A. Shipment Surge Could Spark EPS Revisions; Upgrade to Overweight
Morgan Stanley & Co. Incorporated

Stock Rating: Overweight Price target Shr price, close (Nov 2, 2009) Mkt cap, curr(mm) 52-Week Range Fiscal Year ending ModelWare EPS($) Prior ModelWare EPS($) Consensus EPS($)§ P/E EV/EBITDA Rev hist grth, y/y(%) EBITDA($mm)
e = Morgan Stanley Research estimates

Reuters: TS.N Bloomberg: TS US $65.00 $37.15 $21,928 $41.15-14.82 12/08 3.71 3.80 5.7 3.4 19.2 4,153 12/09e 1.98 1.92 2.10 18.8 8.9 (30.1) 2,494 12/10e 2.90 2.76 2.53 12.8 6.8 30.4 3,330 12/11e 4.15 4.10 3.17 9.0 4.8 26.5 4,588

Ole Slorer
Ole.Slorer@morganstanley.com

Paulo Loureiro
Paulo.Loureiro@morganstanley.com

TS is back on our radar screen, given (1) expected near-term positive earnings revisions, based on higher-than-expected shipments in the US over the next few quarters, coupled with (2) high leverage to the 2010–12 deepwater expansion. Contrary to our early expectations, we saw Oil Country Tubular Goods (OCTG) activity improve meaningfully toward the end of 3Q, supported by US Steel’s 64% spike in tubular shipments and by increasing activity in prominent shale plays, which are heavy users of Tenaris-made premium OCTG. The Street expects earnings to drop by 50% sequentially, despite the aforementioned data points, and we believe a decent 3Q earnings beat will be a catalyst for positive earnings revisions. Street estimates don’t reflect recent positive developments, in our view. These are: (1) a surge in activity in September, driven by US rig count up 12% off the June lows; (2) increased drilling in key shale plays like the Bakken, Marcellus, and Haynesville — key areas of demand for premium OCTG; (3) destocking, with distributor’s inventory levels at one-year of supply, down from two years in March; (4) improved outlook going into 2010 as Chinese exports of welded pipe virtually vanish; and (5) US Steel’s report of 64% surge in tubular shipments. These levers have prompted us to increase our 3Q09e EPS to $0.37 from $0.33 and F2010e to $2.90 from $2.76, ~15% above consensus. We believe the Street will be quick to increase estimates after next week’s earnings release. We see a potential 3Q09 upside earnings surprise on November 6, driven by a surge in volume, particularly in September, which we believe was particularly strong for premium pipe shipments due to activity in key shale plays (positive read-through from US Steel‘s 64% increase in tubular shipments).

§ = Consensus data is provided by FactSet Estimates.

Price Performance
Tenaris S.A. (ADS) (Left, U.S. Dollar ) Relativ e to FTSE ITALIA MIB (Right) Relativ e to MSCI W orld Index /Ener gy (Right)
$ %

70 60 50 40 30 20 10 05 06 07 08 09

700 600 500 400 300 200 100

Source: FactSet Research Systems Inc

Company Description Tenaris manufactures and sells steel pipe products. It produces and sells seamless and welded steel tubular products primarily for energy and industrial applications. It also manufactures welded steel pipe products that are used in the construction of major pipeline projects. Industry View: Attractive —Oil Services, Drilling & Equipment We expect the following sequence of events: A positive inflection in crude, followed by a positive inflection in jackup rates, followed by a positive inflection in deepwater rates. Stocks usually rebound at signs of the most leading indicator, which in this case is the price of crude, and we’d expect all of our names to deliver absolute gains.

Our price target of $65 is based on 16x 2011 EPADS of $4.15, a 20% discount to peer US equipment names (Cameron and Dril-Quip) to account for near-term risks to consensus numbers. Our target multiple is in line with TS’s historical 12-month forward P/E. Risks to our target include deepening of the global recession negatively affecting commodity prices, resulting in a further decline in drilling activity. Venezuela and Mexico drilling budgets, where the company has meaningful footprints, could also add short-term risk.

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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

International
TS: Surge in Shipments Should Spark Positive 2010 EPS Revisions
$100 90 80 70 $65.00 (+75%) 60 50 40 30 $25 (-33%) 20 10 0 Nov-07 $ 37.15 $90 (+142%)

Why Overweight? x The Street expects earnings to drop by 50% sequentially in 3Q09; however, based on the increasing number of rigs drilling in the Bakken, Haynesville and Marcellus shale plays, we believe demand for premium tube is on the rise. Consensus thinks otherwise. x We also see positive read-through from US Steel’s earnings release, which indicated a 64% surge in shipments, while we believe the Street is discounting shipments to be flat to down. x We believe that OCTG will strongly benefit from the 2009–12 offshore drilling expansion and that tubular shipments should increase disproportionately during this rig count upcycle. Risks to our thesis x Project delays as a result of a widening of the current global credit crisis. A decrease in demand for OCTG products could result in an inventory glut. x Negative price renegotiations on E&C pipes (refining, linepipe and petrochemical) due to activity slowdown. x Competition from China, if Chinese OCTG manufacturers should start to develop premium tubing products or the newly adopted anti-dumping duties are relaxed.

May-08

Nov-08

May-09

Nov-09

May-10 Current Stock Price

Nov-10

Price Target (Nov-10)

Historical Stock Performance

Bull Case $90 Base Case $65 Bear Case $25

20x Bull Case 11e EPS of $4.50 16x Base Case 11e EPS of $4.15 10x Bear Case 10e EPS of $2.50

Continued expansion of global deep-water fleet with 2011 delivery slots filled, resulting in continued build in demand visibility beyond 2011. Favorable pricing and margin expansion. Deepwater expansion in 2009-2011, driving demand for premium OCTG and other high-end energy tubular products. US market tightens again providing operating leverage to OCTG producers. Delays for rig deliveries from shipyards and global recession, resulting in slowdown in the growth of demand for tubular equipment.

We Believe Consensus Has Overshot to the Downside
MS vs. Consensus Estimates $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00
3Q09e 4Q09e 2010e 2011e Consensus Morgan Stanley

Source: FactSet, Morgan Stanley

64

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

International
October 30, 2009

Ternium S.A. Coming into Cash; Upgrade to Overweight, Target Raised to $33
Morgan Stanley & Co. Incorporated Morgan Stanley C.T.V.M. S.A.+ Morgan Stanley & Co. Incorporated

Stock Rating: Overweight Price target Shr price, close (Oct 29, 2009) Mkt cap, curr(mm) 52-Week Range Fiscal Year ending ModelWare EPS(US$) Prior ModelWare EPS(US$) P/E EV/EBITDA Consensus EPS(US$)§ Div yld(%) 12/08 2.30 3.7 1.7 3.73 5.8

Reuters: TX.N Bloomberg: TX US US$33.00 US$25.32 US$5,076 US$28.65-4.55 12/09e 0.79 (0.04) 31.9 10.2 0.24 2.0 12/10e 2.93 2.08 8.6 4.1 2.22 2.0 12/11e 2.90 2.75 8.7 3.4 2.82 2.0

Carlos de Alba
Carlos.De.Alba@morganstanley.com

Bruno Montanari
Bruno.Montanari@morganstanley.com

Cesar A. Medina
Cesar.Medina@morganstanley.com

§ = Consensus data is provided by FactSet Estimates. e = Morgan Stanley Research estimates

Upgrading to Overweight — Ternium to hold 55% of its current market cap in cash by year-end 2010e. We think the modest upturn in steel markets and the upcoming payments from the Sidor sale will increase Ternium’s cash balance to $2.8 billion by the end of 2010. Therefore, we expect Ternium to have the strongest balance sheet in our steel coverage universe. As a result of such liquidity, we foresee near-term benefits for shareholders. Unrecognized value in Sidor deal. In May 2009, Ternium transferred its stake in Sidor to the Venezuelan government for $1.97 billion, to be paid in installments through November 2010; the timing of the payments was in part linked to the price of oil. Ternium’s current enterprise value (EV) of $6.08 billion can be broken down in two parts: the steel assets and the Sidor payment. Using our 2011 EBITDA estimates and TX’s average EV/EBITDA trading multiple of 3.7x, we estimate that the market is valuing Ternium’s steel assets at $5.09 billion. Hence, the “difference” of close to $1 billion to reach TX’s current EV of $6.08 billion can be seen as the market’s implicit valuation of the Sidor transaction. We estimate that the market valued the deal at just $1 billion, well below our $1.76 billion estimate ($8.80/ADR); we think Ternium will be paid in full, and the gap between our estimate and market’s value equals 15% of TX’s current market cap. Strength in crude prices could be a catalyst. Oil is at ~$80/bbl today, much higher than the $56/bbl trigger price for accelerated payments contemplated in the Sidor transaction in May. For Ternium, we believe this means: (1) the likelihood of collection for the Sidor claim has increased materially, and (2) full payment may come sooner than November 2010. Raising our forecasts and price target. We have increased our EBITDA estimate for 2009 by 1% on 3Q09 Mexican steel restocking. For 2010, our EBITDA forecast rises by 2% on slightly higher volumes and margins. Below the operating line, our EPS estimates increase significantly in both 2009 and

Price Performance
TERNIUM S.A. (ADS) (Lef t, U.S. Dollar) Relative to LUXEMBOURG LUXX (Right) Relative to MSCI World Index / (Right)

45 40 35 30 25 20 15 10 5 05 06 07 08 09

180 160 140 120 100 80 60 40 20

Source: FactSet Research Systems Inc

Company Description Ternium is one of the largest flat and long steel producers in Latin America with manufacturing, processing and finishing facilities that have an aggregate capacity of approximately 10 million tons of which 2.8 million tons is in Argentina, 4.0 million tons in Venezuela and 3.2 million tons in Mexico. Ternium produces and distributes a broad range of steel products, including cold rolled coils, tin plate, galvanized sheets, pre-painted sheets and tailor-made flat products. The company also produces long steel products such as bars and wire rod. Industry View : No Rating — Latin America Steel With our coverage of this industry encompassing a limited number of companies, we do not publish an industry view in the context of Morgan Stanley’s stock ratings system.

2010. We have marked to market our FX assumptions for 3Q09 and penciled in our economics team’s forecasts of a stronger Mexican peso ahead, which results in bigger foreign exchange gains. Further, given increased certainty over the Sidor claim, we are now including in our model accounting gains related to this financial asset. Our price target rises to $33 from $22 as we are roll it over to year-end 2010. Rolling over our price target to year-end 2010 has two effects. First, we now use a higher EBITDA estimate (2011 vs. 2010 before). Second, it reflects the positive impact of one additional year of deleveraging, which — amid a stable or rising enterprise value — implies a higher valuation for the equity.

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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

International
Exhibit 1 Exhibit 2

TX: Upcoming Cash Increase Not Priced In
$50 45 $43 (+70%) 40 35 $33.00 (+30%) 30 25 $ 25.32 20 15 10 $20 (-21%)

Ternium to Hold $2.8 Bn in Cash by Year-End 2010e This is equivalent to 55% of current market value
ITEM CASH 2Q09 + EBITDA GENERATION + SIDOR PAYMENT - WORKING CAPITAL INV. - CAPEX + DEBT REPAYMENT OTHER CASH END 2010 $M 1,816 1,718 1,570 -416 -405 -1,011 -473 2,798 FROM 3Q09 TO YE2010 $1.97B LESS UPFRONT PAYMENT OF $ 0.4B FROM 3Q09 TO YE2010 MAINTENANCE FROM 3Q09 TO YE2010 FROM 3Q09 TO YE2010 COMMENTS

Source: Company data, Morgan Stanley Research estimates
5 0 Oct-07

Exhibit 3
Apr-08 Oct-08 Apr-09 Historical Stock Performance Oct-09 Apr-10 Oct-10 Current Stock Price

Price Target (Dec-10)

Price Target $33

Our year-end 2010 price target is determined by a sum-of-the-parts valuation based on EV/EBITDA multiples of 5x for Mexican operations and 4x for Siderar (Argentina) on our 2011e EBITDA. We believe our target multiples are conservative, as they are below the industry’s long-term average of 5.6x. We think TX limited trading liquidity and off-index status warrant a valuation discount to its peers. Stronger steel markets, Expansion plans moving ahead. Global growth reaccelerates; cash flow generation improves along with steel prices. Steel markets bottomed in 1H09; No capacity expansions. 2010 volumes grow 5% yoy, but remain 10% below 2008 levels. Deeper than expected recession; steel industry oversupplied. Global production discipline is not sustained. Price declines accelerate dragging down profitability.

We Peg Current Value of Sidor Deal at $1.76B The $0.8 difference is worth 15% of current market cap
SIDOR PAYMENT ANALYSIS ($M) US$M UPFRONT 05/07/09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 TOTAL 400.0 266.0 266.0 157.5 157.5 157.5 157.5 400.0 1,162.0 FIRST TRANCHE SECOND TRANCHE TOTAL 400.0 266.0 266.0 157.5 157.5 157.5 565.5 1,970.0 NPV @ 30% DISCOUNT 400.0 266.0 260.0 144.3 135.0 126.4 425.1 1,757

Bull Case $43 Base Case $33 Bear Case $20

EV/EBITDA (2011e): 5.65x EV/EBITDA (2011e): 4.86x EV/EBITDA (2011e): 7.80x

408.0 408.0

Source: FactSet, Morgan Stanley Research

Exhibit 4

Relative to LatAm Peers, Ample Cash Balance Suggest Higher Growth and Dividends Ahead
80% 60% 40%
22% 55% 43% BALANCE SHEET STRENGTH

Source: FactSet (historical chart data), Morgan Stanley Research estimates

Potential Catalysts x Faster amortization from the Venezuelan government. x Acceleration of CAPEX program. x Higher dividends. Where We Could Be Wrong x NAFTA recovery fails to meet our expectations. x Steel prices below our base case. x Costs reductions at a much slower pace than our forecasts. x Exposure to the Venezuelan government does not extinguish by November 2010. Among others, risks to our rating, price target, and earnings estimates include political and macro risks, a sharp slowdown in the global economy, higher-than-expected decline in steel demand, a prolonged period of depressed steel prices, higher raw material costs, failure to deliver growth plans, insufficient long-term demand to support increased capacity and other unforeseeable operating disruptions.

29% 16% 13% 14% 19% 9%

20% 0% -20% -40%
-43% -19%

(CASH)/(MKT VALUE) -21% (NET DEBT)/(MKT VALUE)

-60% TX ICH SIM GGBR USIM CSN

Source: FactSet, Morgan Stanley Research

Exhibit 5

Deleveraging Boosts Our Equity Price Target…
ITEM VALUE NOTES

Old PT (Year End 2009) Roll-over 2010 Delevarge New PT (Year End 2010)
Source: Morgan Stanley Research

22 +3 +8 33

Used 2010 EBITDA as base for valuation EBITDA NET DEBT 2010e: $ 1,270M 2011e: $ 1,385M 2009e: $ 786M 2010e: $ -987M

CHANGES

Used 2011 EBITDA as base for valuation

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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

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Brands, Inc..

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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from A123 Systems Inc., Adobe Systems, Advanced Micro Devices, Altera Corporation, Amgen, Anadolu Efes, Apache Corp., Apple, Inc., Applied Materials Inc., ARM Holdings Plc, ASML Holding NV, Atheros Communications, Avago Technologies Ltd, Baker Hughes, Bank of America, Bank of New York Mellon Corp, Boeing Company, Broadcom Corporation, Cablevision Systems, Cavium Networks Inc., CCR, Celgene Corporation, Citigroup Inc., CNOOC, Covidien, CPFL ENERGIA, Danaher Corp., Embraer, EMC Corp., Eurasian Natural Resources Corp., Fifth Third Bancorp, Hewlett-Packard, Hubbell Inc., Implats Limited, Intel Corporation, KBR, Inc, KeyCorp, KLA-Tencor Corporation, Lam Research Corporation, Larsen & Toubro, Lattice Semiconductor, Linear Technology, Marvell Technology Group Ltd, Maxim Integrated Products, MediaTek, Microchip Technology, Micron Technology Inc., Mindray, Mobile TeleSystems, Monsanto Company, National Semiconductor, Netezza Corporation, Nexen Inc., Northern Trust Corp., Novellus Systems Inc., Novolipetsk Steel, NVIDIA Corporation, ON Semiconductor, Pfizer Inc, Plains Exploration & Production Co., PMC - Sierra Inc., PNC Financial Services, PT Telekomunikasi, QLogic Corporation, Regions Financial Corp, Reliance Industries, Saipem, Skyworks, Smith International Inc., Starbucks Corp., State Bank of India, State Street Corporation, STMicroelectronics NV, Sun Pharmaceutical Industries, Suncor, SunTrust, Tata Consultancy Services, Technip, Tenaris S.A, Tencent Holdings Ltd., Ternium S.A., Texas Instruments, Textron Inc., Tiger Brands, U.S. Bancorp, Union Pacific Corp., UnitedHealth Group Inc., Wal-Mart de Mexico, Walmart, Walt Disney Co, WellPoint, Inc., Wells Fargo & Co., Wilmington Trust Corporation, Wood Group, Xilinx, Yum! 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Brands, Inc..

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Global Stock Ratings Distribution
(as of October 31, 2009)

For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.
Coverage Universe Investment Banking Clients (IBC) % of % of % of Rating Total Count Count Total IBC Category

Stock Rating Category

Overweight/Buy Equal-weight/Hold Not-Rated/Hold Underweight/Sell Total

875 1,082 26 392 2,375

37% 46% 1% 17%

277 318 3 87 685

40% 46% 0% 13%

32% 29% 12% 22%

Data include common stock and ADRs currently assigned ratings. An investor’s decision to buy or sell a stock should depend on individual circumstances (such as the investor’s existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.

Analyst Stock Ratings
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Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index; Europe - MSCI Europe; Japan TOPIX; Asia - relevant MSCI country index.

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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

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Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Client Link at www.morganstanley.com. For a discussion, if applicable, of the valuation methods and the risks related to any price targets, please refer to the latest relevant published research on these stocks. The recommendations of Bruno Montanari in this report reflect solely and exclusively the analyst's personal views and have been developed independently, including from the institution for which the analyst works. Morgan Stanley Research does not provide individually tailored investment advice. 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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

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Additional information on recommended securities is available on request.

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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

North America
Director of Research
Stephen Penwell Sharon Pearson Michael Eastwood 1+212-761-1466 1+212-761-3159 1+212-761-8015 1+212 761-5183 1+212 761-0064 1+212 761-4014

CONSUMER STAPLES
Food & Food Service
Vincent Andrews Jaclyn Inglesby 1+212-761-3293 1+212 761-3667 1+212-761-6382 1+212-761-8023 1+212-761-3293 1+212-761-0031 1+212-761-6575 1+212-761-6754 1+212-761-3645 1+212-761-4907

REITs Strategy
Paul Morgan Chris Caton Samir Khanal Ryan Meliker Swaroop Yalla 1+415-576-2627 1+415-576-2637 1+415-576-2696 1+212-761-7079 1+415-576-2361

MEDIA
Cable & Satellite
Benjamin Swinburne David Gober Ryan Fiftal Micah Nance Benjamin Swinburne Kristi Bonner 1+212-761-7527 1+212-761-6616 1+212-761-3005 1+212-761-7688 1+212-761-7527 1+212-761-7226

Associate Director of Research

Management
Isabelle Halphen Aaron Finnerty Joshua Paradise

Tobacco
David J. Adelman Matthew Grainger

HEALTHCARE
Biotechnology
Steven Harr Colin Bristow Sara Slifka David Lewis Andrew Olsen James Francescone Ryan Bachman Marshall Urist Jennifer Liu 1+212-761-3805 1+212-761-6672 1+212 761-3920 1+415-576-2324 1+212-761-6209 1+212-761-3222 1+415-576-2019 1+212-761-8055 1+212-761-5120 1+212-761-7323 1+212-761-8535 1+212 761-6184 1+212-761-6494 1+212-761-3688 1+212-761-8713

Entertainment & Broadcasting

Agricultural Products
Vincent Andrews Megan Davis Beverages/HPC Dara Mohsenian Ruma Mukerji Kevin Grundy Scott Shapiro

MACRO
Economics
Richard Berner David Cho David Greenlaw Ted Wieseman 1+212-761-3398 1+212 761-0908 1+212-761-7157 1+212-761-3407 1+212-761-7991 1+212-761-8059 1+212-761-8584 1+212-761-1349 1+212-761-7550 1+212-761-5990 1+212-761-4150 1+212-761-8531 1+212-761-6126 1+212-761-6253

TECHNOLOGY
Enterprise Software
Adam Holt Jennifer A. Swanson Keith Weiss Munish Jain Kelvin Wu Kathryn Huberty Jerry Liu Scott Schmitz Mathew Schneider 1+415 576-2320 1+212-761-3665 1+212-761-4149 1+415 576-8728 1+212-761-3501 1+212-761-6249 1+212-761-3735 1+212-761-0227 1+212-761-3483

Hosp. Supplies & Medical Tech

U.S. Strategy
Jason E. Todd Naseh Kausar Phillip Neuhart Sivan Mahadevan Christopher Metli Matthew Evans

ENERGY & UTILITIES
Exploration & Production
Stephen Richardson Sameer Uplenchwar Stuart Young 1+212-761-3741 1+212-761-4487 1+212-761-8194 1+212-761-6472 1+212-761-3023 1+212-761-7827 1+212-761-8343 1+212-761-4896 +212-761-6385 1+212-761-6198 1+212-761-6875 1+212-761-3232 1+212 761-7201 1+212-761-6851 1+212-761-8518 1+713-512-4483

Enterprise Systems & PC Hardware

Managed Care
Doug Simpson Melissa McGinnis Colin Weiner

Commodities
Hussein Allidina Jeremy Friesen Seth Kleinman Katherine Ragolsky

Integrated Oil
Evan Calio Ryan Todd Ben Hur

Pharmaceuticals
David Risinger Thomas Chiu Dana Yi

Internet & PC Application Software
Mary Meeker 1+212-761-8042 Scott Devitt 1+212-761-3365 Collis Boyce 1+212-761-6578 Mayuresh Masurekar 1+212-761-8094 Liang Wu 1+212-761-6320 Semiconductors/Capital Equipment Mark Lipacis 1+415-576-2190 Sanjay Devgan 1+415-576-2382 Nihal Godambe 1+415 576-2195 Sundeep Bajikar 1+415-576-2388 Lacey Higgins 1+415-576-2614 Matthew Nerlinger 1+415 576-2610 Atif Malik 1+415-576-2607 Michael Chu 1+415 576-2359

MLPs
Stephen J. Maresca Dale Santiago Robert Kad Ole Slorer Paulo Loureiro Igor Levi

Sectors
CONSUMER DISCRETIONARY/RETAIL RETAIL Autos & Auto-Related
Ravi Shanker +1 212 761-6350 1+212-761-0214 1+212-761-3708 1+212-761-7072 1+212-761-6917 1+212-761-7567 1+212-761-8589 1+212-761-0766 1+212-761-6917 1+212-761-6284 1+212-762-1533 1+617-856-8752 1+617-856-8750 1+617-856-8751 1+212-761-4018 1+212-761-5866 1+212-761-6360

INDUSTRIALS
Aerospace & Defense
Heidi Wood Kevin Boone 1+212-761-4407 1+212-761-4130 1+212-761-0078 1+212-761-0011 1+212-761-7064 1+212 761-3555 1+212-761-4453 1+212-761-7670 1+212-761-6334 1+212-761-4717 1+212-761-7144

Oil Services & Equipment

Business & ITServices
Vance Edelson Suzanne Stein Vikram Malhotra Peter Park Cristina Colón Scott Davis, CFA Robert Wertheimer Michael Stein Matt Gugino

Branded Apparel
Chi Lee Haruka Miyake Rodney Singleton

Utilities
Greg Gordon Jonathan Cohen William Appicelli Rudy Tolentino

Discounters
Gregory Melich, CFA Michael Montani

Industrial Conglomerates

TELECOM
Wireline & Wireless Telecom Services
Simon Flannery Daniel Gaviria Sean Ittel Edward Katz 1+212-761-6432 1+212-761-3312 1+212-761-7220 1+212-761-3244

FINANCIALS
Banks/Large/Mid Cap Banks
Betsy Graseck, CFA Cheryl Pate Matthew Kelley Justin Kwong Ken Zerbe John J. Dunn Yoana Koleva Nigel Dally Hayley Busell John O’Connor 1+212-761-8473 1+212 761-3324 1+212-761-8201 1+212-761-6983 1+212-761-7417 1+212-761-2601 1+212-761-0474 1+212-761-4132 1+212-761-6271 1+212-761-3640

Food & Drug
Mark Wiltamuth Joseph Parkhill Gregory Melich, CFA Oliver Wintermantel Matthew McGinley

MATERIALS
Nonferrous Metals & Mining, Coal
Mark Liinamaa Paretosh Misra Wes Sconce 1+212-761-3537 1+212-761-3590 1+212-761-6004 1+212-761-3537 1+212-761-7583

Hardlines & Home Vendors

TRANSPORTATION
Airlines & Freight Transportation
Bill Greene Adam Longson John Godyn Edward Gilliss 1+212-761-8017 1+212-761-4061 1+212-761-6605 1+212-761-7748

Restaurants
John S. Glass Jon M. Tower David Dorfman

Insurance/Life & Annuity

Steel
Mark Liinamaa Evan Kurtz

Softlines
Michelle Clark Jay Sole Scott Feiler

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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Asia/Pacific
Director of Asia/Pacific Research Director of Asia/Pacific Research
Marcus Walsh Chanik Park +852 2848 5912 +82 2 399 4940

Associate Director of Korea Research Associate Director of Greater China Research
Dickson Ho Martin Yule +852 2848 5020 +61 2 9770 1582

Associate Director of Australia Research Associate Director of ASEAN/India Research
Ridham Desai +91 22 2209 7790

MACRO

Oil & Gas / Utilities Stuart Baker +61 3 9256 8929 Philip Bare +61 3 9256 8932 Mark Blackwell +61 3 9256 8959 Property Lou Pirenc +61 3 9770 1569 Todd McFarlane + 61 2 9770 1316 Chhai Ung +61 2 9770 1317 Telecommunications Navin Killa +852 2848 5422 Yvonne Chow +852 2848 8262 Vincent Wu +852 2848 5657 Transportation & Infrastructure Philip Wensley +61 2 9770 1583 Michael Rudland +61 2 9770 1136 Andrew Moller +61 2 9770 1148

Strategy
Australia Toby Walker Antony Conte China Jerry Lou Allen Gui James Cao India Ridham Desai Sheela Rathi S. Korea Chanik Park Jason Pyo Taiwan Jesse Wang Angel Lin +61 2 9770 1589 +61 2 9770 1544 +852 2848 6511 +86 21 6279 7309 +86 21 2326 0037 +91 22 2209 7790 +91 22 2209 7730 +82 2 399 4940 +82 2 399 1408 +886 2 2730 2861 +886 2 2730 2995

CHINA/HONG KONG
Automobiles Kate Zhu +852 2848 6843 Bin Wang +86 21 2326 0024 Kevin Luo + 852 2239 1527 Banks Anil Agarwal +852 2848 5842 Daniel Shum +852 2848 8168 Minyan Liu +852 2848 6729 Eric Mak +852 2239 1568 Edmond Law +852 2239 1830 Capital Goods / Shipbuilding Kate Zhu +852 2848 6843 Andy Meng +852 2239 7689 Kevin Luo + 852 2239 1527 Consumer / Agriculture Angela Moh +852 2848 5405 Penny Tu +852 2848 5874 Dennis Tao +852 2848 7136 Robert Lin +852 2848 5835 Lillian Lou +852 2848 6502 Dan Wang +86 21 2326 0021 Jessica Wang +852 2848 5887 Clean Tech / Fertilizer Sunil Gupta +65 6834 6732 Sophie Lu +65 6834 6718 Pey Herng Yap +65 6834 6742 Conglomerates / Macau Gaming Praveen Choudhary +852 2848 5068 Xin Jin Ling +852 2239 7597 Corey Chan +852 2848 5911 Healthcare Bin Li +852 2239 7596 Sean Wu +852 2848 5649 Christopher Lui +852 2239 1883 Insurance Minyan Liu +852 2848 6729 Eric Mak +852 2239 1568 Edmond Law +852 2239 1830 Internet / Media Richard Ji +852 2848 6926 Jenny Wu +852 2848 6708 Philip Wan +852 2848 8227 Lisa Yuan +852 2239 7107 Carol Wang +86 21 6279 8494 Candy Lin +86 21 2326 0153 Materials Charles Spencer +65 6834 6825 Mean Phil Chong +65 6834 6194 Sandy Niu +852 2239 1520 Kevin Shi +852 2848 6947 Mid Cap Lin He +86 21 6279 7041 Ying Guo +86 21 2326 0018 Oil & Gas Wee-Kiat Tan +852 2848 7488 Sara Chan +852 2848 5292 Property Derek Kwong +852 2848 7221 Angus Chan +852 2848 5259 Coral Ching +852 2848 1735 Daphne Liang +852 2848 5614 Theo Cheng +852 2848 5973

Technology Jasmine Lu Grace Chen Tim Hsiao Bill Lu Charlie Chan Telecommunications Navin Killa Yvonne Chow Vincent Wu Transportation Chin Y. Lim Edward Xu Tommy Wong Sophie Loh Utilities Simon Lee Joseph Lam Chapman Deng Helen Wen

+852 2239 1348 +886 2 2730 2890 +852 2848 1975 +852 2848 5214 +852 2848 5636 +852 2848 5422 +852 2848 8262 +852 2848-5657 +65 6834 6858 +852 2239 1521 +852 2239 1523 +65 6834 6823 +852 2848 1985 +852 2848 8210 +852 2239 1588 +852 2848 5438

Hardware Components Sung Hee Lim Materials Charles Spencer Hyunjae Lee Semiconductors Keon Han Young Suk Shin Shipbuilding Sangkyoo Park Telecommunications HyunTaek Lee

+82 2 399 4937 +65 6834 6825 +82 2 399-4850 +82 2 399 4933 +82 2 399 9907 +82 2 399 4846 +82 2 399 9854

SINGAPORE/ASEAN
Banks Matthew Wilson +65 6834 6746 Samantha Horton +65 6834 8975 Roger Lum +65 6834 6743 Conglomerates Conrad Werner +65 6834 6744 Miang Chuen Koh +65 6834 6169 Consumer Angela Moh +852 2848 5405 Dennis Tao +852 2848 7136 Penny Tu +852 2848 5874 Consumer / Textiles / Retail Hozefa Topiwalla +91 22 2209 7808 Divya Gangahar +65 6834-6438 Kalpesh Makwana +91 22 2209 7171 Materials Charles Spencer +65 6834 6825 Mean Phil Chong +65 6834 6194 Property Melissa Bon +65 6834 6745 Brian Wee +65 6834 6731 Industrials Conrad Werner +65 6834 6744 Miang Chuen Koh +65 6834 6169 Telecommunications Navin Killa +852 2848 5422 Transportation Chin Y. Lim +65 6834 6858 Sophie Loh +65 6834 6823

INDIA
Agriculture Nillai Shah +91 22 2209 7157 Automobiles Binay Singh +91 22 2209 7819 Anosh Koppikar +91 22 2209 7062 Banks Anil Agarwal +852 2848 5842 Mihir Sheth +91 22 2209 7073 Mansi Shah +91 22 2209 7820 Building Materials / Capital Goods Akshay Soni +91 22 2209 7151 Ashish Jain +91 22 2209 7156 Pratima Swaminathan +91 22 2209 7158 Arunabh Chaudhari +91 22 2209 7159 Consumer / Textiles / Retail Hozefa Topiwalla +91 22 2209 7808 Nillai Shah +91 22 2209 7157 Girish Achhipalia +91 22 2229 7170 Hotels / Shipping / Industrials / Utilities Parag Gupta +91 22 2209 7915 Saumya.Srivastav +91 22 2209 7084 Metals & Mining / Steel / Media Vipul Prasad +91 22 2209 7807 Ketaki Kulkarni +91 22 2209 7925 Oil & Gas / Telecom / Chemicals Vinay Jaising +91 22 2209 7780 Mayank Maheshwari +91 22 2209 7821 Surabhi Chandna +91 22 2209 7149 Pharmaceuticals / Property Sameer Baisiwala +91 22 2209 7830 Saniel Chandrawat +91 22 2209 7810 Software Services Vipin Khare +91 22 2209 7765 Gaurav Rateria +91 22 2209 7160

Economics
Asia/Pacific Chetan Ahya Sumeet Kariwala ASEAN Chetan Ahya Deyi Tan Shweta Singh Australia Gerard Minack Greater China Qing Wang Steven Zhang Denise Yam India Chetan Ahya Tanvee Gupta S. Korea Sharon Lam Katherine Tai +65 6834 6738 +91 22 2209 7929 +91 22 2209 7940 +65 6834 6703 +65 6834 6739 +61 2 9770 1529 +852 2848 5220 +86 21 2326 0029 +852 2848 5301 +65 6834 6738 +91 22 2209 7927 +852 2848 8927 +852 2848 8191 +61 3 9256 8943

TAIWAN
Banks Lily Choi Bruce Chou Consumer Angela Moh Dennis Tao Hardware Components Jasmine Lu Tim Hsiao Sharon Shih Grace Chen Terence Cheng Industrials Jeremy Chen Yunchen Tsai Property Jenny Tsai Steel Charles Spencer Mean Phil Chong Telecommunications Navin Killa Gary Yu TFT-LCD Frank Wang Jerry Su Transportation Chin Y. Lim Sophie Loh +852 2848 6564 +886 2 2730 2875 +852 2848 5405 +852 2848 7136 +852 2239 1348 +852 2848 1975 +886 2 2730 2865 +886 2 2730 2890 +886 2 2730 2873 +886 2 2730 2876 +886 2 2730 2871 +886 2 2730 1724 +65 6834 6825 +65 6834 6194 +852 2848 5422 +852 2848 6918 +886 2 2730 2869 +886 2 2730 2860 +65 6834 6858 +65 6834 6823

Commodities
Peter Richardson

S. KOREA
Automobiles Sangkyoo Park Banks/Insurance Joon Seok Sara Lee Gil Woo Lee Chemicals Harrison Hwang Consumer Kelly Kim Jenna Mok +82 2 399 4846 +822 399 4934 +82 2 399 4836 +82 2 399 4935 +82 2 399 4916 +82 2 399 4837 +82 2 399 4938

Country Sub-industry
AUSTRALIA
Banks Richard Wiles +61 2 9770 1537 Glen D’Souza +61 2 9770 1658 David Shi +61 2 9770-1187 Consumer Martin Yule +61 2 9770 1582 Richard Barwick +61 2 9770 1684 Thomas Kierath +61 2 9770 1578 Diversified Financials/Insurance Scott Russell + 61 2 9770 1536 Healthcare Sean Laaman +61 2 9770 1559 Media Andrew McLeod +61 2 9770 1591 Ben Holgate +61 2 9770 1671 Metals & Mining Craig Campbell +61 3 9256 8936 Cameron Judd +61 3 9256 8904

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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Sector by Country
CONSUMER DISCRETIONARY
Agriculture India Nillai Shah Automobiles China Kate Zhu Bin Wang Kevin Luo India Binay Singh Anosh Koppikar S. Korea Sangkyoo Park Hyunjae Lee Consumer/Retail ASEAN Hozefa Topiwalla Divya Gangahar Kalpesh Makwana Australia Martin Yule Richard Barwick Thomas Kierath India Hozefa Topiwalla Nillai Shah Girish Achhipalia Greater China Angela Moh† Penny Tu Dennis Tao Robert Lin Lillian Lou Dan Wang Jessica Wang S. Korea Kelly Kim Jenna Mok Hotels India Parag Gupta Saumya.Srivastav Media Australia Andrew McLeod† Ben Holgate

+91 22 2209 7157

+852 2848 6843 +86 21 2326 0024 + 852 2239 1527 +91 22 2209 7819 +91 22 2209 7062 +82 2 399 4846 +82 2 399 4850 +91 22 2209 7808 +65 6834-6438 +91 22 2209 7171 +61 2 9770 1582 +61 2 9770 1684 +61 2 9770 1578 +91 22 2209 7808 +91 22 2209 7157 +91 22 2229 7170 +852 2848 5405 +852 2848 5874 +852 2848 7136 +852 2848 5835 +852 2848 6502 +86 21 2326 0021 +852 2848 5887 +82 2 399 4837 +82 2 399 4938 +91 22 2209 7915 +91 22 2209 7084 +61 2 9770 1591 +61 2 9770 1671

Hong Kong Anil Agarwal† Daniel Shum India Anil Agarwal Mihir Sheth Mansi Shah S. Korea Joon Seok Sara Lee Gil Woo Lee Taiwan Lily Choi Bruce Chou Insurance Australia Scott Russell China Minyan Liu Eric Mak Edmond Law

+852 2848 5842 +852 2848 8168 +852 2848 5842 +91 22 2209 7073 + 91 22 2209 7820 +822 399 4934 +82 2 399 4836 +82 2 399 4935 +852 2848 6564 +886 2 2730 2875 + 61 2 9770 1536 +852 2848 6729 +852 2239 1568 +852 2239 1830

HEALTH CARE
Australia Sean Laaman Greater China Bin Li Sean Wu Christopher Lui India Sameer Baisiwala Saniel Chandrawat +61 2 9770 1559 +852 2239 7596 +852 2848 5649 +852 2239 1883

Taiwan Jasmine Lu Sharon Shih Tim Hsiao Grace Chen Terence Cheng Internet / Media China Richard Ji Jenny Wu Philip Wan Lisa Yuan Carol Wang Candy Lin Semiconductors S. Korea Keon Han Young Suk Shin Software & Services India Vipin Khare Gaurav Rateria TFT-LCD Taiwan Frank Wang Jerry Su

+852 2239 1348 +886 2 2730 2865 +852 2848 1975 +886 2 2730 2890 +886 2 2730 2873 +852 2848 6926 +852 2848 6708 +852 2848 8227 +852 2239 7107 +82 61 6279 8494 +86 21 2326 0153 +82 2 399 4933 +82 2 399 9907 +91 22 2209 7765 +91 22 2209 7160 +886 2 2730 2869 +886 2 2730 2860

TELECOMMUNICATIONS
Australia Navin Killa† +852 2848 5422 China / Hong Kong / Taiwan Navin Killa† +852 2848 5422 Yvonne Chow +852 2848 8262 Gary Yu +852 2848 6918 Vincent Wu +852 2848-5657 India Vinay Jaising +91 22 2209 7780 Mayank Maheshwari +91 22 2209 7821 Surabhi Chandna +91 22 2209 7149 S. Korea HyunTaek Lee +82 2 399 9854

UTILITIES
Australia Mark Blackwell China / Hong Kong Simon Lee Joseph Lam Chapman Deng Helen Wen India Parag Gupta Saumya.Srivastav +61 3 9256 8959 +852 2848 1985 +852 2848 8210 +852 2239 1588 +852 2848 5438 +91 22 2209 7915 +91 22 2209 7084

MATERIALS DATABASE
+91 22 2209 7151 +91 22 2209 7158 Asia/Pacific Corey Ng Crystal Ng † Regional Team Leader +852 2848 5523 +852 2239 1468

ENERGY
Clean Tech / Fertilizer China / Hong Kong Sunil Gupta† Sophie Lu Pey Herng Yap Oil & Gas Australia Stuart Baker† Philip Bare Mark Blackwell China Wee-Kiat Tan Sara Chan India Vinay Jaising† Mayank Maheshwari Surabhi Chandna

+65 6834 6732 +65 6834 6718 +65 6834 6742 +61 3 9256 8929 +61 3 9256 8932 +61 3 9256 8959 +852 2848 7488 +852 2848 5292 +91 22 2209 7780 +91 22 2209 7821 +91 22 2209 7149

FINANCIALS
Banks ASEAN Matthew Wilson† Samantha Horton Roger Lum Australia Richard Wiles Glen D’souza David Shi China Minyan Liu Eric Mak Edmond Law

+65 6834 6746 +65 6834 8975 +65 6834 6743 +61 2 9770 1537 +61 2 9770 1658 +61 2 9770-1187 +852 2848 6729 +852 2239 1568 +852 2239 1830

Building Materials India Akshay Soni Pratima Swaminathan Chemicals INDUSTRIALS India Capital Goods / Shipbuilding Vinay Jaising† China / Hong Kong Mayank Maheshwari Kate Zhu +852 2848 6843 Ketaki Kulkarni Andy Meng +852 2239 7689 S. Korea Kevin Luo + 852 2239 1527 Harrison Hwang Capital Goods Materials India China, Taiwan Akshay Soni +91 22 2209 7151 Charles Spencer† Pratima Swaminathan +91 22 2209 7158 Mean Phil Chong Arunabh Chaudhari +91 22 2209 7159 Sandy Niu Singapore Kevin Shi Conrad Werner +65 6834 6744 S. Korea Miang Chuen Koh +65 6834 6169 Charles Spencer Cement / Glass / Auto Components / Property / Hyunjae Lee Steel Metals & Mining Akshay Soni +91 22 2209 7151 Australia Ashish Jain +91 22 2209 7156 Craig Campbell Pratima Swaminathan +91 22 2209 7158 Cameron Judd Arunabh Chaudhari +91 22 2209 7159 India Taiwan Vipul Prasad Jeremy Chen +886 2 2730 2876 Ketaki Kulkarni Jenny Tsai +886 2 2730 1724 PROPERTY Yunchen Tsai +886 2 2730 2871 Australia Mid Cap Lou Pirenc China Todd McFarlane Lin He +86 21 6279 7041 Chhai Ung Ying Guo +86 21 2326 0018 China / Hong Kong Transportation & Infrastructure Derek Kwong Regional Angus Chan Chin Y. Lim† +65 6834 6858 Coral Ching Sophie Loh +65 6834 6823 Daphne Liang China Theo Cheng Edward Xu +852 2239 1521 India Tommy Wong +852 2239 1523 Sameer Baisiwala Australia Saniel Chandrawat Philip Wensley +61 2 9770 1583 ASEAN Michael Rudland +61 2 9770 1136 Melissa Bon Andrew Moller +61 2 9770 1148 Brian Wee +91 22 2209 7830 +91 22 2209 7810

+91 22 2209 7780 +91 22 2209 7821 +91 22 2209 7925 +82 2 399 4916 +65 6834 6825 +65 6834 6194 +852 2239 1520 +852 2848 6947 +65 6834 6825 +82 2 399 4850 +61 3 9256 8936 +61 3 9256 8904 +91 22 2209 7807 +91 22 2209 7925

+61 2 9770 1569 +61 2 9770 1316 +61 2 9770 1317 +852 2848 7221 +852 2848 5259 +852 2848 1735 +852 2848 5614 +852 2848 5973 +91 22 2209 7830 +91 22 2209 7810 +65 6834 6745 +65 6834 6731

INFORMATION TECHNOLOGY
Hardware Components China / Hong Kong Jasmine Lu Grace Chen Tim Hsiao Bill Lu Charlie Chan S. Korea Sung Hee Lim

+852 2239 1348 +886 2 2730 2890 +852 2848 1975 +852 2848 5214 +852 2848 5636 +82 2 399 4937

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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Europe
Director of Research
Rupert Jones Jose Maria Saiz Juliet Estridge Ben Britz Fergus O’Sullivan +44 (0)20 7425 4271 +44 (0)20 7425 8560 +44 (0)20 7425 8160 +44 (0)20 7425 3055 +44 (0)20 7425 6404 +44 (0)20 7425 8022 +44 (0)20 7425 8154 +44 (0)20 7425 5324

CONSUMER STAPLES Beverages
Michael Steib Eveline Varin Michael Steib Mark Christensen Erik Sjogren +44 (0)20 7425 5263 +44 (0)20 7425 5717 +44 (0)20 7425 5263 +44 (0)20 7425 5392 +44 (0)20 7425 3935 +44 (0)20 7425 4754

Metals & Mining
Ephrem Ravi Carsten Riek Markus Almerud +44 (0)20 7425 2127 +44 (0)20 7425 3075 +44 (0)20 7425 9870

MIDDLE EAST NORTH AFRICA Head of Research
Sean Gardiner +971 4 709 7120 +44 (0)20 7677 8189 +971 4 709 7165 +971 4 709 7117 +971 4 709 7110 +971 4 709 7120 +971 4 709 7122

Associate Director of Research Product Development & SSC Management
Mitzi Frank Sarah Waugh

Food Producers/HPC

MEDIA Media & Internet
Patrick Wellington Edward Hill-Wood Julien Rossi +44 (0)20 7425 8605 +44 (0)20 7425 9224 +44 (0)20 7425 9755

Economics
Mohamed Jaber

Financials
Dan Cowan

Tobacco
Eileen Khoo

Infrastructure
Muneeba Kayani Menna Shams El Din

Media Relations
Sebastian Howell

PROPERTY Property
Bart Gysens Bianca Riemer Chris Fremantle +44 (0)20 7425 5862 +44 (0)20 7425 2646 +44 (0)20 7425 5761

Property & Building Materials Telecoms
Sean Gardiner Madhvendra Singh

MACRO Equity Strategy
Teun Draaisma Ronan Carr Edmund Ng Matthew Garman Graham Secker Jonathan Garner Michael Wang +44 (0)20 7425 6600 +44 (0)20 7425 4944 +44 (0)20 7425 1449 +44 (0)20 7425 3595 +44 (0)20 7425 6188 +44 (0)20 7425 9237 +44 (0)20 7425 5534

ENERGY/UTILITIES Oil & Gas
Theepan Jothilingam James Hubbard Matthew Lofting Haythem Rashed Matt Thomas Katya Shiro +44 (0)20 7425 9761 +44 (0)20 7425 0749 +44 (0)20 7425 5915 +44 (0)20 7425 4405 +44 (0)20 7425 5387 +44 (0)20 7425 7049 +44 (0)20 7425 6618 +44 (0)20 7425 4388 +44 (0)20 7425 5238 +44 (0)20 7425 7770 +44 (0)20 7425 4267 +44 (0)20 7425 8371 +44 (0)20 7425 6863 +44 (0)20 7425 6230 +44 (0)20 7425 7857

RETAIL Retailing/Brands
Louise Singlehurst Pallavi Verma +44 (0)20 7425 7239 +44(0)20 7425 2644

RUSSIA Economics
Oliver Weeks Alina Slyusarchuk +44 (0)20 7677 6302 +44 20 7677-6869 +7 495 589 9942 +1 212 761 6253 +44 (0)20 7425 5387 +44 (0)20 7425 7049

Oil Services
Martijn Rats Rob Pulleyn

Economics
Joachim Fels +44 (0)20 7425 6138 Manoj Pradham +44 (0)20 7425 3805 Spyros Andreopoulos +44 (0)20 7677 0528 Elga Bartsch +44 (0)20 7425 5434 Melanie Baker +44 (0)20 7425 8607 Cath Sleeman +44 20 7425-1820 Daniele Antonucci +44 (0)20 7425 8943 Oliver Weeks +44 (0)20 7677 6302 Alina Slyusarchuk +44 20 7677-6869 Pasquale Diana +44 (0)20 7677 4183 Tevfik Aksoy +44 (0)20 7677 6917 Mohamed Jaber +971 4 709 7105 Michael Kafe +27 11 507 0891 Andrea Masia +27 11 507 0887

Retailing
Geoff Ruddell +44 (0)20 7425 8954 Fred Bjelland +44 (0)20 7425 3612 Charlie Muir-Sands +44 (0)20 7425 5207

Metals & Mining
Dmitriy Kolomytsyn Marina Zavolock

Utilities
Bobby Chada Nicholas Ashworth Arsalan Obaidullah Igor Kuzmin Emmanuel Turpin Sean Lee Antonella Bianchessi

Oil & Gas
Matt Thomas Katya Shiro

TECHNOLOGY Technology
James Dawson Patrick Standaert Ashish Sinha Guillaume Charton +44 (0)20 7425 9646 +44 (0)20 7425 9290 +44 (0)20 7425 2363 +44 (0)20 7425 2686

Telecommunications Services
Sean Gardiner +44 (0)20 7425 2175 Alexander Vassiouk +44 (0)20 7425 8846 Polina Ugryumova +7 495 589 9944

Clean Energy
Allen Wells +44 (0)20 7425 4146 Andrew Humphrey +44 (0)20 7425 2630

Utilities
Bobby Chada Igor Kuzmin +44 (0)20 7425 5238 +44 (0)20 7425 8371

FINANCIALS Banks/ Diversified Financials
Huw van Steenis +44 (0)20 7425 9747 Steven Hayne +44 (0)20 7425 8332 Bruce Hamilton +44 (0)20 7425 7597 Carlos Egea +44 (0)20 7425 6247 Chris Manners +44 (0)20 7425 3917 Hubert Lam +44 (0)20 7425 3734 Eva Hernandez +44 (0) 20 7425 2138 Juan Pablo Lopez Cobo +44 (0) 20 7425 5628 Maxence Le Gouvello +44 (0)20 7425 6942 Ronny Rehn +44 (0)20 7425 8808 Per Lofgren +44 (0)20 7425 9094 Magdalena Stoklosa +44 (0)20 7425 3933 Hadrien de Belle +44 (0)20 7425 4466

TELECOMS Telecommunications Services
Nick Delfas Luis Prota Frederic Boulan Saroop Purewal Terence Tsui Tope Adegun Alexander Vassiouk +44 (0)20 7425 6611 +34 91 412 1217 +44 (0)20 7425 6830 +44 (0)20 7425 5371 +44 (0)20 7425 4399 +44 (0)20 7425 5413 +44 (0)20 7425 8846

SOUTH AFRICA RMB MORGAN STANLEY Economics
Michael Kafe Andrea Masia +27 11 507-0891 +27 11 507-0887 +27 11 282 1082 +27 11 282 4228 +27 11 282-8553 +27 11 282 8139 +27 11 282 1499 +27 11 282 8489 +27 11 282 1082 +27 11 282 1087 +27 11 282 1154 +27 11 282 8969 +27 11 282 1704

Valuation and Accounting
Juliet Estridge Guy Weyns Neil Chakraborty Christian Kober Praveen Singh +44 (0)20 7425 8160 +44 (0)20 7425 7979 +44 (0)20 7425 2571 +44 (0)20 7425 2025 +44 (0)20 7425 7833

Derivatives and Portfolios

Financials
Magdalena Stoklosa Louis Chetty Derinia Chetty

TRANSPORTATION Transport
Menno Sanderse Jose Arroyas Jaime Rowbotham Penny Butcher Antonio Rodriguez +44 (0)20 7425 6148 +44 (0)20 7425 3831 +44 (0)20 7425 5409 +44 (0)20 7425 6698 +44 (0)20 7425 5816

Sectors
CONSUMER DISCRETIONARY/ INDUSTRIALS Aerospace & Defence
Rupinder Vig Adam Jonas David Cramer Edoardo Spina Jessica Flounders David Hancock Mikko Ervasti +44 (0)20 7425 2687 +44 (0)20 7425 2177 +44 (0)20 7425 7944 +44 (0)20 7425 0664 +44 (0)20 7425 8985 +44 (0)20 7425 3752 +44 (0)20 7425 3893

Industrials
Anthony de la Cour Roy Campbell

Retail
Natasha Moolman Danie Pretorius

Autos & Auto Parts

Insurance
Jon Hocking Adrienne Lim Maciej Wasilewicz Andrew Broadfield Farooq Hanif +44 (0)20 7425 2307 +44 (0)20 7425 6679 +44 (0)20 7425 9104 +44 (0)20 7425 2449 +44 (0)20 7425 1830

TMT
Phihlelo Matjekana

EMERGING MARKETS Equity Strategy (Global)
Jonathan Garner Michael Wang +44 (0)20 7425 9237 +44 (0)20 7425 5534 +44 (0)20 7677 4183 +44 (0)20 7425 3933 +44 (0)20 7425 8808 +44 (0)20 7425 4466 +971 4 709 7120 +44 (0)20 7425 8846 +44 (0)20 7425 4389 +44 (0) 20 7425 7502

Mining
Albert Minassian Leigh Bregman

Business & Employment Services

Food Producers
James Easterbrook

HEALTHCARE Biotech & Medical Technology
Karl Bradshaw Diana Na +44 (0)20 7425 6573 +44 (0)20 7425 4394 +44 (0)20 7425 6647 +44 (0)20 7425 2244 +44 (0)20 7425 2272 +44 (0)20 7425-0704

Economics
Pasquale Diana Magdalena Stoklosa Ronny Rehn Hadrien de Belle Sean Gardiner Alexander Vassiouk

Capital Goods
Scott Babka +44 (0)20 7425 8750 Guillermo Peigneux +44 (0)20 7425 7225 Vidya Adala +44 (0)20 7425 2044 Kasedith Vardhanabhuti +44 (0)20 7425 6235

Banks/ Diversified Financials

TURKEY
Sayra Can Antuntas Suha Urgan Erol Danis +44 (0)20 7425 2365 +44 (0)20 7425 3346 +44 (0)20 7425 1123 +44 20 7677-6917 +44 (0)20 7425 3933 +971 4 709-7120 +44 (0)20 7425 8846

Pharmaceuticals
Andrew Baum Paul Mann Nick Nieland Charles Chugbo

Telecommunications Services Consumer
Daniel Wakerly Albina Sadykova

Economics
Tevfik Aksoy

Leisure/Hotels
Jamie Rollo Vaughan Lewis Audrey Borius Alex Davie +44 (0)20 7425 3281 +44 (0)20 7425 3489 +44 (0)20 7425 7242 +44 (0)20 7425 9867

Banks
Magdalena Stoklosa Sean Gardiner Alexander Vassiouk

MATERIALS Building & Construction
Alejandra Pereda Michael Watts Robert Muir +34 91 412 1747 +44 (0)20 7425 7515 +44 (0)20 7425 1838

Telecommunications Services

Chemicals
Paul Walsh +44 (0)20 7425 4182 Wesley Brooks +44 (0)20 7425 0640 Peter J. Mackey +44 (0) 20 7425 4657

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MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Japan
Director of Research Division
Neil Perry +813-5424-5305

Machinery and Capital Goods
Yoshinao Ibara Junji Sakurada Masako Kusano +813-5424-5302 +813-5424-5927 +813-5424-5917

HEALTHCARE
Healthcare/Pharmaceuticals
Mayo Mita Shinichiro Muraoka Ayako Fukuda Kaoru Wada +813-5424-5319 +813-5424-5926 +813 5424-5928 +813 5424-5382

RETAIL
Retailing: Specialty, Restaurants
Yukimi Oda Sai Aoyama +813-5424-5328 +813-5424-5331

Economic Research
Director of Economic Research
Robert A. Feldman +813-5424-5385 +813-5424-5367 +813-5424-5387 +813-5424-5344 +813-5424-5913

Services: General Services / Internet Services
Naoshi Nema Atsuko Watanabe +813-5424-5320 +813-5424-5338 +813-5424-5345 +813-5424-5329

TECHNOLOGY
Information Technology
Masaharu Miyachi Hiroko Ando +813-5424-5321 +813-5424-5324 +813-5424-5362 +813-5424-5929 +813-6422-8652 +813-5424-5369 +813-5424-5389 +813-5424- 5327 +813-5424-5315

Economics
Takehiro Sato Takeshi Yamaguchi Maki Uchikoga Chie Takita

Trading Companies
Tomokazu Soejima Michiko Sekiya

MATERIALS
Chemicals
Yoshihiro Azuma Kayo Sano +813-5424-5311 +813-5424-5332 +813-5424-5380 +813-5424-5925 +813-5424-5909 +813-5424-5921 +813-5424-5343 +813-6422-8650 +813-5424-5376

CONSUMER STAPLES
Food
Taizo Demura Haruna Sakai Asaka Hano +813-5424-5333 +813-5424-5918 +813-5424-5313

Technology: Consumer Electronics
Masahiro Ono Takumi Kakazu Yusuke Yoshida Sachie Uchida Kazuo Yoshikawa Ryotaro Hayashi Midori Takeuchi

Equity Research
Director of Japan Research
Neil Perry Dennis Yamada +813-5424-5305 +813-5424-5397

Construction
Atsushi Takagi Shoko Yamakami

Glass & Ceramics
Lalita Gupta Keiko Haruyama Kaori Ikeda Harunobu Goroh Akira Morimoto Emiko Ishikawa

Technology: Japan Semiconductors

Associate Director of Research

ENERGY/UTILITIES
Oil & Coal Products
Lalita Gupta Keiko Haruyama Kaori Ikeda +813-5424-5909 +813-5424-5921 +813-5424-5910 +813-5424-5334

Macro
Equity Strategy
Alexander Kinmont Maki Uchikoga +813-5424-5337 +813-5424-5344

Steel / Nonferrous Metals/ Wire & Cable

TELECOMS
Telecommunications
Hironori Tanaka Nami Okayasu +813-5424-5336 +813-5424-5379

Utilities
Yuka Matayoshi Junko Yamamoto

MEDIA
Media
Hironori Tanaka Nami Okayasu +813-5424-5336 +813-5424-5379

Sectors
CONSUMER DISCRETIONARY/ INDUSTRIALS
Autos
Noriaki Hirakata Ryosuke Hoshino Umi Togasawa +813-5424-5307 +813-5424-5916 +813-5424- 5308 +813-5424-5914 +813-5424-5388

TRANSPORTATION
Transportation
Takuya Osaka Shino Takahashi +813-5424-5915 +813-5424-5314

FINANCIALS
Banks
Graeme Knowd Takaaki Nishino Ayako Kubodera Aya Kurita Hideyasu Ban Atsushi Shinoda Ayako Kubodera Naoko Hatakeyama +813-5424-5349 +813-5424-5907 +813-5424-5323 +813-5424-5366 +813-5424-5381 +813-5424-5922 +813-5424-5323 +813-5424-5348

PROPERTY
Housing
Hiroko Kubota Atsushi Takagi Shoko Yamakami +813-5424-5383 +813-5424-5380 +813-5424-5925 +813-5424-5386 +813-5424-5312 +813-5424-5304

Financial Services, Insurance

Auto Parts
Shinji Kakiuchi Naoko Hosaka

Real Estate
Tomoyoshi Omuro Tadashi Okamoto Makiko Matsuki

Latin America
Director of Research
Dario Lizzano 1+212-761-3936

Sectors
AEROSPACE & DEFENSE
Heidi Wood 1+212-761-4407

MATERIALS
Homebuilders & Real Estate
Jorge Kuri Jorge Chirino Carlos de Alba Cesar Medina Bruno Montanari 1+212-761-6341 1+212-761-0324 1+212-761-4927 1+212-761-7027 +55-11-3048-6225

TELECOMS & MEDIA
Telecom
Vera Rossi 1+212-761-4484

Macro
Economics
Gray Newman 1+212-761-6510 Luis A. Arcentales, CFA 1+212-761-4913 Marcelo Carvalho +55 11 3048-6272 Daniel Volberg 1+212-761-0124 Giuliana Pardelli +55 11 3048-6195

CONSUMER STAPLES/BEVERAGE
Lore Serra 1+212-761-7954 Jerônimo De Guzman 1+212-761-7084

Nonferrous Metals & Mining, Coal

TRANSPORTATION & INFRASTRUCTURE
Nicolai Sebrell, CFA Augusto Ensiki +55-11-3048-6133 +1 212 761-3914

GEMs Equity Strategy
Jonathan Garner Vinicius Silva Michael Wang 44+207-425-9237 1+212-761-7674 44+207-425-5534

FINANCIALS
Financial Services
Jorge Kuri Jorge Chirino 1+212-761-6341 1+212-761-0324

RETAIL
Retail
Lore Serra 1+212-761-7954 Jeronimo De Guzman 1+212-761-7084

ENERGY & UTILITIES
Oil, Gas, Petrochemicals & Clean Energy
Subhojit Daripa +55-11-3048-6112 1+212-761-6198 1+212-761-3232 1+212+761-6875

SMALL AND MID CAPS
Javier Martinez de Olcoz Cerdan 1+212 761-4542 Alessandro Baldoni +55 11 3048-6226

Oil Services
Ole Slorer Igor Levi Paulo Loureiro

78

MORGAN STANLEY RESEARCH November 4, 2009 Investment Perspectives — US and the Americas

Fixed Income Research - Global
Credit Strategy
North America Gregory Peters 1+212 761-1488 Rizwan Hussain 1+212 761-1494 Adam Richmond 1+212 761-1485 Europe Andrew Sheets 44+20 7677-2905 Phanikiran Naraparaju 44+20 7677-5065 Serena Tang 44+20 7677-1149 Carlos Egea +44 (0)20 7425 6247 Japan Hidetoshi Ohashi 81+3 5424-7908 Tomoyuki Hirose 81+3 5424-7912 Asia Pacific Viktor Hjort +852 2848-7479 Kelvin Pang +852 2848-8204

Currency Strategy
North America Sophia Drossos Ron Leven Yilin Nie Europe Rashique Rahman Emma Lawson Regis Chatellier Gracie Chen Asia Pacific Stewart Newnham Yee Wai Chong 1+212 761-2786 1+212-761-3413 1+212-761-2886 44+20 7677-7295 44+20 7677-7574 44+20 7677-6982 44+20 7677-7887 852+2848-5320 852+2239-7117

Emerging Markets Economics
Oliver Weeks Tevfik Aksoy Pasquale Diana Alina Slyusarchuk 44+20 7677-6302 44+20 7677-6917 44+20 7677-4183 44+20 7677-6869

Interest Rate Strategy
North America Jim Caron Paul Alston Subadra Rajappa Bill McGraw Janaki Rao Corentin Rordorf Bernard Gordon Igor Cashyn George Azarias Zofia Koscielniak Jonathan Marymor Europe Laurence Mutkin Mayank Gargh Michelle Bradley Anton Heese Owen Roberts Elaine Lin 1+212-761-1905 1+212-761-0914 1+212-761-2983 1+212-761-1445 1+212-761-1711 1+212-761-1909 1+212-761-2647 1+212-761-1696 1+212-761-1346 1+212-761-1307 1+212-761-2056 44+20 7677-4029 44+20 7677-7528 44+20 7677-3702 44+20 7677-6951 44+20 7677-7121 44+20 7677-0579

Japan Freddy Lim Noriyuki Fukuda Atsushi Ito Sandeep Arora Asia Pacific Rohit Arora

81+3 5424-7909 81+3 5424-7926 81+3 5424-7913 81+3 5424-7698 +852 2848-8894

Credit Research
Europe -- Financials Jackie Ineke Marcus Rivaldi Lee Street Fiona Simpson 41+44 220-9246 44+20 7677-1464 44+20 7677-0406 44+20 7677-3745 1+212-761-4150 1+212-761-8531 1+212-761-6126 1+212-761-6253

Economics
North America Richard Berner David Greenlaw Ted Wieseman David Cho Europe Joachim Fels Manoj Pradhan Spyros Andreopoulos Pan-Africa Michael Kafe Andrea Masia 1+212 761-3398 1+212 761-7157 1+212 761-3407 1+212 761-0908 44+20 7425-6138 44+20 7425-3805 44+20 7056-8584 27+11 507 0891 27+11 507-0887

Commodities Strategy
Hussein Allidina Jeremy R. Friesen Seth M. Kleinman Katherine Ragolsky

Structured Credit Strategy
Sivan Mahadevan Ashley Musfeldt Vishwanath Tirupattur James Egan Jocelyn Chu 1+212 761-1349 1+212 761-1727 1+212 761-1043 1+212 761-4715 1+212 761-1470

Leveraged Finance Strategy

Global Management
Global Director of Research
Juan-Luis Perez 1+212-761-8530

Chief Operating Officer
Barry Hurewitz 1+212-761-6245

Global Sector Leaders
Economics
Richard Berner Joachim Fels 1+212-761-3398 44+207-425-6138 44+207-425-9237 44+207-425-5534 1+212-761-7674

Portfolio Analysis
Martin L. Leibowitz Anthony Bova 1+212-761-7597 1+212-761-3781 +44+20-7425-6620 1+212-761-7670

Oil Services
Ole Slorer 1+212-761-6198 1+914-225-4816 1+212-761-8042

Editorial & Publishing Global Director
D'Arcy Carr Vlad Jenkins 1+212-761-1484 1+212-761-4898

Retail
Gregory Melich

GEMs Equity Strategy
Jonathan Garner Michael Wang Vinicius Silva

Healthcare
Duncan Moore

Global Product Strategist

Technology
Mary Meeker

Industrials
Scott Davis

79

MORGAN STANLEY RESEARCH

The Americas 1585 Broadway New York, NY 10036-8293 United States Tel: +1 (1)212 761 4000

Europe 20 Bank Street, Canary Wharf London E14 4AD United Kingdom Tel: +44 (0)20 7425 8000

Japan 4-20-3, Ebisu , Shibuya-ku Tokyo 150-6008 Japan Tel: +81 (0)3 5424 5000

Asia/Pacific 1 Austin Road West Kowloon Hong Kong Tel: +852 2848 5200

© 2009 Morgan Stanley

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