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  • 8/3/2019 Examining EM Exposure

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    European Strategy WeeklyEUROPEAN STRATEGY

    EQUITY RESEARCH

    Examining EM exposure (again) October 9, 2011

    Despite recent underperformance, we do not think it is a good idea

    for European portfolio managers to systematically seek out

    companies with exposure to emerging Economies.

    Since the end of August, European companies with large exposure toemerging economies have underperformed the wider European market.

    This is the first time since 2008 that investor concerns about emerging

    markets (EM) have permeated through the European market.

    Despite this underperformance, the EM-exposed companies still trade atan 11% premium to the wider European market.

    Perhaps more interestingly, EM-exposed stocks have been re-ratedrelative to other European growth stocks.

    In the past, these valuation premiums have been justified by betterearnings trends among the EM-exposed companies, but that is not the

    case at the moment.

    So although we would caution against a blanket sale of EM exposure,we are not persuaded to seek it out.

    Research analysts

    European Strategy

    Ian Scott - NIplc

    [email protected]

    +44 20 7102 2959

    Inigo Fraser-Jenkins - NIplc

    [email protected]+44 20 7102 4658

    Shanthi Nair - NIplc

    [email protected]+44 20 7102 4518

    Mark Diver - NIplc

    [email protected]+44 20 7102 2987

    Saurabh Katiyar

    [email protected]+44 20 7102 9135

    Rohit Thombre

    [email protected]+44 20 710 25461

    Robertas Stancikas - NIplc

    [email protected]+44 20 7102 3127

    Maureen Hughes - NIplc

    [email protected]+44 20 7102 4659

    See Appendix A-1 for analystcertification, importantdisclosures and the status ofnon-US analysts.

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    Nomura | European Strategy Weekly October 9, 2011

    2

    We do not think it is a good idea to systematically seek out European companies with

    exposure to emerging Economies1. We see nothing wrong with these companies per se,

    but as a group they continue to command a sizeable premium over the overall European

    market, as well as other growth stocks, while this premium does not appear to be

    justified at the moment by a superior earnings trend.

    Fig. 1: Relative performance of European stocks with significant exposure to emergingeconomies and the relative performance of EM equity markets

    Source: FTSE, Nomura Strategy rresearch

    Our EM exposure basket2detailed in the Appendix has underperformed the wider

    European market by 3% since 31 August. Although there have been periods since 2008

    when local emerging market stocks have underperformed their global peers, this is the

    first time concerns about EM have permeated through the European market. This

    suggests that investors are more concerned about the fundamental outlook for emerging

    economies rather than the deleveraging of capital from local EM markets.

    Fig. 2: Relative valuation* of Europes EM exposed companies** compared with thewider European market

    *Median forward P/E of stocks in the EM basket divided by European market 12-month forward P/E.

    ** See appendix for details

    Source: FTSE, IBES, Nomura Strategy research

    1In last weeks Global Strategy Weekly, we reiterated our preference for developed

    market equities within our Global Regional allocation: Still too soon to up Emerging

    Markets, Global Strategy Weekly, 2 October 2011.2First published in European Strategy weekly, Not all emerging market exposure is the

    same, 20February 2009.

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    Index, Jan 1, 2008 = 100

    Relative Performance of EM exposed European stocks

    Emerging Markets performance relative to World

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    Ratio

    Ian Scott

    +44 20 7102 2959

    [email protected]

    EM-exposed companies havestarted to underperform the

    wider European market

    They continue to trade at apremium valuation comparedwith the rest of the Europeanmarket

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    Nomura | European Strategy Weekly October 9, 2011

    3

    The EM-exposed stocks currently trade on an 11% premium to the wider European

    market. This is 4% above the premium that has existed since 2003. So, although they

    have underperformed recently, they have not been through anything like to the

    deleveraging experienced during 2008.

    Fig. 3: Relative valuation of Europes EM-exposed companies compared with othergrowth stocks*

    *Ratio of median forward P/E of EM exposed basket divided by median P/E of Nomuras European Composite Growthbasket (see appendix for details).

    Source: IBES, FTSE, Nomura Strategy research

    The EM-exposed companies trade on a similar multiple to other growth stocks in Europe.

    Again, there is a marked contrast to the 2008/09 period when the deleveraging of

    exposure to emerging market and emerging economy exposed companies brought a

    substantial de-rating relative to other growth stocks.

    Fig. 4: Earnings revisions for Europes EM-exposed stocks

    Source: IBES, Nomura Strategy research

    Moreover, earnings estimates are coming down for the group. Some 10% more

    estimates have been cut than raised in the past month, broadly in line with the wider

    European market.

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    Ratio

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    Net earnings revisions %,(up -down) / total, 3MMA

    EM-exposed companies seemfully valued relative to othersources of growth unlike 2008when EM exposure becamevery cheaply priced

    Earnings estimates are beingcut for EM-exposed companies

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    Nomura | European Strategy Weekly October 9, 2011

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    Fig. 5: Gap in earnings revisions between EM-exposed stocks and the wider Europeanmarket* and the valuation premium for EM-exposed stocks

    Footnote: chart describes the gap in earnings revisions between stocks exposed to Emerging Markets and the rest of theEuropean market (red line) and the ratio of the forward PE multiples for the EM exposed stocks compared with the widerEuropean market (grey line).

    Source: IBES, FTSE, Nomura Strategy research

    As Figure 5 shows, the premiums attached to the EM-exposed companies have been

    associated with their superior earnings revisions, with revisions now in line with the wider

    European market, the 11% premium is no longer as justifiable as it was, in our view.

    In summary, European companies with large exposure to emerging economies look

    expensive, but no longer have a sufficient differentiated earnings trend to command such

    a premium, in our view. So in line with our overall cautious stance toward the relative

    performance potential for emerging equity markets, we would not be seeking to

    systematically overweight European companies with significant exposure to emerging

    economies.

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    Ratio of forward PEsGap in revisions balance

    Relative Earnings Revisions (LHS)

    Relative Valuation (RHS)

    The premium valuation attachedto EM-exposed stocks is notsupported by superior EPSrevisions

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    Nomura | European Strategy Weekly October 9, 2011

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    AppendixFig. 6: Constituent stocks in Nomuras European Emerging Markets Exposure Basket (see NMRAEQEM onBloomberg

    Source: Worldscope, Nomura Strategy research

    Fig. 7: Current constituent stocks in Nomuras European High Composite Growth basket* (see NMRAGRWL on

    Bloomberg

    *Selected on three criteria: IBES mean consensus forecast long term earnings growth, IBES mean consensus growth between FY0 and FY3 and internal growth measured byROE * (1-payment ratio).

    Source: IBES, Nomura Strategy research

    Company Sector Company Sector

    ANGLO AMERICAN PLC Basic Industries BG GROUP PLC Energy

    BAYER AG Basic Industries SAIPEM SPA Energy

    HOLCIM LIMITED Basic Industries TECHNIP Energy

    LAFARGE Basic Industries BANCO BILBAO VIZCAYA ARGENTARIA SA Financials

    XSTRATA PLC Basic Industries BANCO SANTANDER SA FinancialsABB LIMITED Capital Goods HSBC HOLDINGS PLC Financials

    ATLAS COPCO AB Capital Goods OLD MUTUAL PLC Financials

    COMPAGNIE FINANCIERE RICHEMONT S.A, Consumer Cyclicals PRUDENTIAL PLC Financials

    LVMH Consumer Cyclicals RAIFFEISEN INTERNATIONAL BANK Financials

    RENAULT (REGIE NATIONALE DES USINES) SA Consumer Cyclicals STANDARD CHARTERED PLC Financials

    SWATCH GROUP OF SWITZERLAND (THE) Consumer Cyclicals UNICREDITO ITALIANO SPA Financials

    BRITISH AMERICAN TOBACCO P.L.C. Consumer Stables TELEFONAKTIEBOLAGET LM ERICSSON Technology

    COCA-COLA HELLENIC BOTTLING COMPANY S.A. Consumer Stables PORTUGAL TELECOM SGPS SA Telecoms

    ANHEUSER-BUSCH INBEV Consumer Stables TELEFONICA SA Telecoms

    SABMILLER PLC Consumer Stables TELENOR GROUP ASA Telecoms

    Company Sector Company Sector

    ANTOFAGASTA PLC Basic Industries RENAULT S.A. Consumer Cyclicals

    ANGLO AMERICAN PLC Basic Industries SWATCH GROUP AG Consumer Cyclicals

    WOLSELEY PLC Basic Industries VOLKSWAGEN AG (PFD NON-VTG) Consumer Cyclicals

    XSTRATA PLC Basic Industries RANDSTAD HOLDING N.V. Consumer Cyclicals

    SYNGENTA AG Basic Industries HERMES INTERNATIONAL S.C.A. Consumer Cyclicals

    K+S AG Basic Industries COMPAGNIE FINANCIERE RICHEMONT S.A. Consumer Cyclicals

    NOVOZYMES A/S Basic Industries BUREAU VERITAS S.A. Consumer Cyclicals

    COMPAGNIE DE SAINT-GOBAIN S.A. Basic Industries AMADEUS IT HOLDING S.A. Consumer Cyclicals

    EURASIAN NATURAL RESOURCES CORP. PLC Basic Industries BG GROUP PLC Energy

    ROLLS-ROYCE HOLDINGS PLC Capital Goods NORSK HYDRO ASA Energy

    EUROPEAN AERONAUTIC DEFENCE & SPACE CO. EADS Capital Goods REPSOL YPF S.A. Energy

    ATLAS COPCO AB Capital Goods PETROFAC LTD. Energy

    ABB LTD. Capital Goods ROYAL BANK OF SCOTLAND GROUP PLC Financials

    MAN SE Capital Goods UNICREDIT S.P.A. Financials

    SKF AB Capital Goods DANSKE BANK A/S Financials

    SAFRAN S.A. Capital Goods SWEDBANK AB Financials

    SANDVIK AB Capital Goods ERSTE GROUP BANK AG Financials

    THYSSENKRUPP AG Capital Goods ADMIRAL GROUP PLC Financials

    VOLVO AB Capital Goods SHIRE PLC Healthcare

    SIEMENS AG Capital Goods COLOPLAST A/S Healthcare

    ALFA LAVAL AB Capital Goods FRESENIUS SE Healthcare

    EXPERIAN PLC Consumer Cyclicals NOVO NORDISK A/S Healthcare

    NEXT PLC Consumer Cyclicals BRITISH SKY BROADCASTING GROUP PLC Media

    BURBERRY GROUP PLC Consumer Cyclicals JCDECAUX S.A. Media

    ADECCO S.A. Consumer Cyclicals EUTELSAT COMMUNICATIONS Media

    ADIDAS AG Consumer Cyclicals ASML HOLDING N.V. Technology

    BMW AG Consumer Cyclicals INFINEON TECHNOLOGIES AG Technology

    FIAT SPA Consumer Cyclicals TELENOR ASA Telecoms

    CONTINENTAL AG Consumer Cyclicals

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    Nomura | European Strategy Weekly October 9, 2011

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    European recommended portfolio

    Price (LC) Mkt Cap

    Calendarised EPS y/e

    Dec1

    Price/

    earnings Date

    Rel Perf.

    since

    Rel Perf.

    Over Analyst

    Sector Stock Currency 6 Oct 11 US$m 2010a/e 2011e 2012e Dec 11 (x) Added Added week Rating2

    Basic Industries CRH PLC EUR 12.75 12,090 0.8 0.9 1.0 14.9 9 Sep 11 13 8 Not Rated

    RIO TINTO PLC GBP 31.27 70,819 7.2 10.8 12.3 2.9 11 Dec 09 8 5 Not Rated

    Capital Goods GAMESA CORP TECNO EUR 3.52 1,167 0.3 0.3 0.5 11.7 13 Nov 09 -72 5 Not Rated

    KLOECKNER EUR 9.52 1,273 1.2 0.3 0.7 27.5 9 Sep 11 -6 -6 Buy

    MEGGITT PLC GBP 3.36 4,011 0.3 0.3 0.3 10.8 3 Dec 10 5 0 Buy

    THALES SA EUR 24.31 2,594 -0.2 2.6 3.0 9.4 8 Oct 10 -2 -1 Buy

    Consumer Cyclicals DEUTSCHE LUFTHANSA EUR 9.54 2,927 2.5 1.3 1.7 7.5 9 Sep 11 -12 -6 Neutral

    DEUTSCHE POST EUR 9.84 11,904 2.1 1.0 1.3 9.6 9 Sep 11 -1 -1 BuyEnergy AMEC PLC GBP 8.18 4,171 0.6 0.7 0.8 11.9 3 Dec 10 -15 -5 Not Rated

    BP PLC GBP 3.93 113,848 1.1 1.2 1.2 3.4 22 May 09 -34 -1 Not Rated

    REPSOL EUR 21.05 34,428 1.9 1.9 2.3 11.0 4 Oct 10 18 5 Not Rated

    TULLOW GBP 13.50 18,769 0.1 0.8 1.1 16.1 4 Oct 10 12 2 Not Rated

    Financials - Banks BNP PARIBAS EUR 32.03 44,746 6.3 8.0 9.0 4.0 16 Apr 10 -28 2 Buy

    CREDIT AGRICOLE EUR 5.44 7,003 0.5 1.7 2.2 3.2 12 Jun 11 -32 0 Neutral

    LLOYDS GBP 0.36 22,157 0.0 0.0 0.1 NM 2 Jul 10 -38 -2 Neutral

    NATIONAL BANK OF GREECE EUR 2.14 2,740 0.5 0.6 1.0 3.5 11 Dec 09 -85 -23 Neutral

    UBS AG CHF 10.97 45,231 2.0 2.0 2.5 5.6 17 Sep 10 -25 -5 Buy

    UNICREDITO ITALIANO EUR 0.83 16,057 0.1 0.2 0.2 5.1 16 Apr 10 -51 0 Buy

    Financials - Insurance AEGON NV EUR 3.25 8,306 0.8 0.7 0.7 5.0 9 Jan 09 -60 2 Buy

    AVIVA PLC GBP 3.19 14,052 0.6 0.6 0.7 5.3 31 Jul 09 -5 1 Buy

    AXA EUR 10.50 32,637 1.8 2.1 2.3 5.1 9 Jan 09 -44 1 Buy

    LEGAL & GENERAL GROUP PLC GBP 1.03 9,278 0.1 0.1 0.2 7.2 11 Dec 09 54 3 Buy

    ZURICH FINANCIAL SERVICES AG CHF 194.30 31,141 24.6 21.3 24.2 9.1 11 Dec 09 24 -2 Buy

    Financials - Other 3I GROUP PLC GBP 1.92 2,846 0.2 -0.2 0.3 NM 8 Jul 11 -17 -1 Not Rated

    GT PORTLAND ESTATES GBP 3.46 1,665 0.2 0.1 0.1 44.6 3 Dec 10 10 -1 Not Rated

    ICAP PLC GBP 4.21 4,239 0.4 0.4 0.5 10.4 3 Dec 10 -5 -2 Not Rated

    LAND SECURITIES PLC GBP 6.87 8,228 0.4 0.4 0.4 18.5 3 Dec 10 19 5 Not RatedHealthcare MERCK KGAA EUR 59.61 5,161 2.9 4.3 4.6 13.7 4 Sep 09 -6 -4 Buy

    NOBEL BIOCARE HLDG CHF 9.01 1,217 0.4 0.7 0.8 13.8 3 Dec 10 -31 -6 Buy

    NOVARTIS AG CHF 51.55 139,156 4.3 4.7 4.9 11.0 9 Jan 09 9 0 Buy

    Media REED ELSEVIER GBP 5.12 9,567 0.4 0.5 0.5 11.2 4 Sep 09 21 1 Buy

    WPP PLC GBP 6.14 11,876 0.6 0.6 0.6 9.9 3 Dec 10 -7 -3 Buy

    Technology CAPGEMINI SA EUR 26.11 5,421 2.5 2.4 2.7 10.8 22 Jul 11 -18 0 Not Rated

    ILIAD S.A. EUR 83.56 2,452 5.9 5.4 5.2 15.5 23 Oct 09 12 -4 Buy

    SAP AG EUR 38.98 48,032 2.3 2.6 3.0 14.9 23 Oct 09 17 1 Buy

    STMICROELECTRONICS EUR 5.15 4,711 0.7 0.9 1.2 5.8 9 Jan 09 -8 3 Buy

    Telecoms DEUTSCHE TELECOM EUR 9.24 40,527 1.0 1.0 1.0 9.2 4 Sep 09 9 4 Buy

    TELENOR ASA NOK 89.55 12,666 8.7 7.4 7.8 12.1 8 May 09 106 -3 Buy

    Utilities NATIONAL GRID PLC GBP 6.41 35,093 0.5 0.5 0.5 12.4 4 Sep 09 33 -1 Neutral

    Portfolio perf. (Euro Return, %)3 1 WK 1 MTH YTD 12 MTH 2010 2009 2008 4 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995

    Nomura Strategy Recommend Portfolio 0.3 4.5 -19.8 -17.7 5.3 49.4 -20.7 -4.5 20.9 21.7 7.7 22.5 -34.0 -21.2 14.7 67.4 26.4 43.2 35.7 17.8

    FTSE-World Europe Index 0.7 3.7 -14.2 -9.6 11.7 33.2 -20.4 3.6 17.2 23.0 9.4 12.6 -31.7 -17.3 -2.9 25.4 18.6 40.5 24.7 11.2

    1 EPS estimates are based on Nomura estimates (for stocks under coverage), IBES (for stocks not under coverage).2

    Analyst rating refers to Nomura research department rating.3 Return history presented as price return in euro terms from before 2006. Returns from 2007 to present are on a total return basis.4 Ending 12 September 2008.

    Please turn to the back cover for an explanation of Nomura's rating system.

    Past performance should not and cannot be viewed as an indicator of future performance. Complete record available upon request.

    Source: IBES, IDC/Exshare, Factset, Nomura Strategy estimates

    European recommended sector allocation

    BenchmarkRecommended

    WeightingRecommendation

    Basic Industries 11 8 Underweight -Capital Goods 7 8 Neutral

    Consumer Cyclicals1

    9 4 Underweight

    Consumer Staples 14 0 Underweight -Energy 11 20 Overweight

    Financials 20 33 Overweight

    of which: Banks 12 15 Overweight -Insurance 5 11 Overweight

    Other 2 7 Overweight

    Healthcare 11 5 Underweight

    Media 2 6 Overweight

    Technology 3 9 Overweight

    Telecoms 7 5 Underweight -

    Utilities 5 3 Underweight

    - We have an underweight recommendation on Telecoms.

    - We underweight Utilities and Healthcare.1

    Combination of Cyclical Consumer Goods and Cyclical Services excluding Media.

    Source: Nomura Strategy research

    We recommend overweighting Oils and underweighting Basic Industries; demand for

    non-oil commodities has become more sensitive to prices, while Mining is also

    expensive relative to Oils.

    We underweight sectors that are vulnerable to a rise in bond yields and prefer sectors

    that should benefit from a reduction in the equity risk premium. We also overweight

    sectors that should benefit from increased capital spending.

    We overweight Financials as asset price reflation should provide support. W e believe

    that valuations discount further capital raising; we think these concerns will be

    mitigated by rising asset values.

    We also overweight Tech and Media, which should benefit from increased business

    spending.

    We recently increased our exposure selectively to areas within the cyclicals, which are

    valued at trough levels, like Building & Construction, Steel and Transport. However, we

    remain underweight the sector in aggregate.

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    Nomura | European Strategy Weekly October 9, 2011

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    European Index

    Pan-European equity market forecasts for 2011

    End 2011

    Current Level* End 2011

    Price Return

    (%)**

    FTSE Europe 129 162 25 -

    FTSE Europe ex UK 114 145 27EURO STOXX 50 2179 2850 31 -

    FTSE 100 (UK) 5102 6200 22

    Dax 30 5473 7500 37

    CAC 40 2974 3950 33 -

    SMI 5505 6200 13

    AEX 278 355 28 -IBEX 8477 10300 22

    OMX 900 1100 22

    MIB 14805 19250 30

    **Eur terms

    * As of 05-Oct-2011

    We use the FTSE All World Developed index for Europe and Europe ex UK.

    Source: Nomura Strategy research

    We think 2011 will see companies reinvest in their businesses, either through

    organic investment or through M&A.

    We expect the European market to recover from current lows.

    Equity valuations appear attractive to us, with embedded risk premiums at high

    levels and we expect the earnings recovery to continue, though at a slower

    pace.

    We think the market has overreacted to concerns of slowing growth and

    sentiment has moved to depressed levels.

    European earnings growth forecasts

    2010 2011 2012

    Europe ex UK1 11% 11% 14%

    UK2

    17% 10% 13%

    Europe 13% 11% 14%

    * EPS growth1

    FTSE Europe ex UK2

    FTSE 100

    Source: Nomura Strategy research

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    Nomura | European Strategy Weekly October 9, 2011

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    Investible themes

    Source: Bloomberg

    For details of the investible products based on these themes and how to trade them please contact the Quantitative Solutions Group on +44 (0) 20

    7103 9988 or [email protected]. Our investible themes and style portfolios are listed on Bloomberg at NMRA. Bloomberg codes are listed,

    where applicable, with each theme below.

    Our investible themes and style portfolios are listed on Bloomberg at NMRA. We show live tradable prices for these themes. Option 1 shows the

    long/short return of our key style portfolios, option 2 shows the returns of the top and bottom quartiles of the full range of styles and allows access to

    the constituents.

    Investible themes are available under option 3 as shown below.

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    Nomura | European Strategy Weekly October 9, 2011

    9

    -

    -

    -

    Source: FTSE All World, Exshare, Nomura Strategy research

    -

    -

    Source: FTSE All World, Worldscope, Exshare, Nomura Strategy research

    -

    -

    -

    Source: Nomura research, Bloomberg, FTSE All World, Exshare

    Divestiture Basket

    Within overall M&A activity, we think divestitures deserve special attention.

    We believe we could see divestitures and spin-offs increase during the rest of

    the year as companies seek to increase value for their shareholders.

    The basket consists of 19 European stocks that Nomura sector analysts

    consider potential candidates for spin-offs and divestitures.

    See European Strategy Weekly, Unlocking the value in divestitures, 10 April

    2011

    Chart shows the performance of a basket of European stocks that are considered potential candidates for spin-offs and divestitures. The performance is shown on an equal-weighted USD total

    return basis relative to the market.

    Chart shows the performance of a basket of European stocks that we consider could be potential takeover targets based on a screening that takes into account valuation and the

    attractiveness of the companies as a strategic asset for potential buyers. The performance of the basket is shown relative to the FTSE ALL World Europe Index. The performance is shown on

    an equal-weighted USD total return basis.

    M&A Basket

    We expect M&A activity to pick up in 2011. It has been at a low ebb until

    recently, yet corporates have large amounts of available cash.

    We identify companies that we think are potential targets to be bid for. For

    more details of the basket please see Can Companies Provide the Catalyst?

    (III) 30 January 2011

    Organic Growth Basket II

    Chart shows the performance of a basket of European stocks that we consider could be potential takeover targets based on a screening that takes into account valuation and theattractiveness of the companies as a strategic asset for potential buyers. The performance of the basket is shown relative to the FTSE ALL World Europe (ex financials) Index. The

    performance is shown on an equal-weighted USD total return basis.

    We expect the market to reward companies that can invest in

    profitable internal growth opportunities.

    We have refreshed the constituents of our original Organic Growth

    basket, which we closed on 09/06/2011.

    To derive the basket, we look for European companies with ROCE

    >10%, where capex / depreciation (2010) ratio is greater than 1.5 and

    where capex is expected to grow in the next few years. We also

    looked for expected EPS growth in the next three years in excess of

    10% pa, giving a total of 51 constituents.

    76.0

    80.0

    84.0

    88.0

    92.0

    96.0

    100.0

    104.0

    Jan -10 May-10 Sep -10 Jan -11 May-11 Sep -11

    Index

    93.0

    98.0

    103.0

    108.0

    113.0118.0

    123.0

    128.0

    133.0

    Jan -10 May-10 Sep -10 Jan -11 May-11 Sep -11

    Index

    97.0

    99.0

    101.0

    103.0

    105.0

    107.0

    109.0

    111.0

    Dec-10 Feb-11 Apr-11 Jun-11 Aug-11

    Index

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    Nomura | European Strategy Weekly October 9, 2011

    10

    -

    -

    -

    -

    Source: FTSE, Worldscope, IBES, Exshare, Nomura Strategy research

    -

    -

    -

    Source: FTSE World, Worldscope, IDC/Exshare, Nomura Strategy research

    Trade On Trade Off Return

    Emerging Market Exposed Basket NMRAEQEM 20/02/2009 31/07/2009 27.60% Return relative to FTSE World European index in USD

    Government Spending basket NMRAFISC 23/01/2009 15/01/2010 37.80% Return relative to FTSE World European index in USD

    Organic Growth Basket I 06/12/2010 09/06/2011 -0.30% Return relative to FTSE World European ex Financials index in USD

    European Q-GAARP Basket 08/01/2010 03/12/2010 -5.33% Long/Short

    Capital Structure Arbitrage Basket 09/10/2009 03/12/2010 -6.24%

    Dividend Theme Basket 19/02/2010 03/12/2010 -6.63% Return relative to FTSE World European index in USD

    Source: Nomura Strategy research

    Closed trades

    European Multifactor Model

    Chart shows the relative performance of attractive relative to unattractive styles according to our style selector model with s tyles rebalanced each month.

    A quant-driven model that selects attractive and unattractive stocks each

    quarter.

    Uses a broad range of factors with regressions used to assign coefficients to

    factors based on the efficacy of factors in each sector.

    Incorporates a non-linear interaction term that captures the level of

    agreement between value and momentum.

    European Style Selector

    Chart shows the performance of our long-short European multifactor stock selection model. The performance is on a USD total return basis with a five-day implementation lag at each quarter

    end. Sectors are equally weighted and stocks equally weighted within sectors. The Portfolios have been rebalanced quarterly.

    A quant-driven model that selects attractive and unattractive styles eachquarter.

    Uses the valuation of style factors and the recent momentum of style factors

    to rank styles each month.

    See European Multifactor Model, 3 November 2008.

    See European Style Selector, 5 June 2009.

    92.0

    94.0

    96.0

    98.0

    100.0

    102.0

    104.0

    106.0

    108.0

    Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11

    Index

    90

    95

    100

    105

    110

    115

    120

    125

    Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11

    Index

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    European valuation and profitability

    12 month Forward P/E1

    Current Values Post 1990 Average

    Eur ex UK UK Europe EEMEA Eur ex UK UK Europe EEMEA5

    Basic Industries 8.8 5.4 7.1 7.8 Basic Industries 12.9 12.0 12.5 11.1

    Capital Goods 9.0 8.7 9.0 8.0 Capital Goods 15.7 11.7 14.3 7.8

    Consumer Cyclicals 9.2 10.7 9.5 10.0 Consumer Cyclicals 15.4 12.6 14.0 9.0

    Consumer Staples 13.4 12.3 12.9 15.1 Consumer Staples 16.9 12.8 14.7 10.9

    Energy 7.0 7.0 7.0 4.1 Energy 13.9 14.3 14.1 7.6

    Financials2

    5.9 7.2 6.3 7.7 Financials2 13.1 12.3 12.8 9.0

    of which: Banks 5.6 6.8 6.0 7.3 of which: Banks 11.7 11.5 11.5 9.2

    Insurance 5.8 7.1 6.1 9.6 Insurance 16.5 15.1 15.7 8.6

    Healthcare 10.7 9.6 10.4 7.6 Healthcare 18.2 17.2 17.8 18.9

    Technology 11.9 18.0 12.7 13.6 Technology 21.7 18.6 20.8 13.9

    Media 8.1 10.7 9.1 15.3 Media 18.0 18.8 18.2 41.6

    Telecoms 9.2 9.6 9.4 8.9 Telecoms 19.8 16.1 17.0 14.2

    Utilities 9.4 11.6 9.9 6.7 Utilities 14.5 10.2 11.8 11.6

    Market 8.6 8.4 8.5 6.6 Market 14.3 12.7 13.6 9.7

    Enterprise Value / Sales

    Current Values Post 1990 Average

    Eur ex UK UK Europe EEMEA Eur ex UK UK Europe EEMEA5

    Basic Industries 1.0 1.5 1.1 2.0 Basic Industries 1.0 1.5 1.2 2.1

    Capital Goods 0.8 0.9 0.8 0.7 Capital Goods 0.8 0.9 0.8 0.8

    Consumer Cyclicals 0.9 0.9 0.9 0.8 Consumer Cyclicals 0.8 1.1 0.9 0.7

    Consumer Staples 1.2 1.5 1.3 0.9 Consumer Staples 1.1 1.3 1.2 0.6

    Energy 0.7 0.6 0.6 0.8 Energy 1.0 1.1 1.1 1.2

    Financials2

    NA NA NA NA Financials2 NA NA NA NA

    of which: Banks NA NA NA NA of which: Banks NA NA NA NA

    Insurance NA NA NA NA Insurance NA NA NA NA

    Healthcare 2.6 2.7 2.6 2.2 Healthcare 3.1 3.6 3.3 4.1

    Technology 0.9 2.3 1.0 2.2 Technology 1.9 1.7 1.9 1.9

    Media 1.3 1.5 1.4 3.8 Media 1.7 2.2 1.9 1.8

    Telecoms 1.8 2.1 1.9 1.7 Telecoms 2.5 2.6 2.4 2.8

    Utilities 1.0 1.5 1.1 1.2 Utilities 1.8 1.7 1.7 1.8

    Market ex Financials 1.1 1.1 1.1 1.1 Market ex Financials 1.1 1.4 1.2 1.3

    Enterprise Value / EBITDA

    Current Values Post 1990 Average

    Eur ex UK UK Europe EEMEA Eur ex UK UK Europe EEMEA5

    Basic Industries 6.2 4.3 5.4 6.6 Basic Industries 6.1 7.5 6.5 7.5

    Capital Goods 5.9 4.0 5.7 6.1 Capital Goods 6.8 7.1 6.8 5.7

    Consumer Cyclicals 5.5 7.8 5.8 8.3 Consumer Cyclicals 6.7 8.5 7.1 6.3

    Consumer Staples 8.5 9.6 8.9 10.1 Consumer Staples 8.7 8.6 8.6 6.6

    Energy 2.9 4.4 3.6 3.3 Energy 5.3 7.1 6.0 5.1

    Financials2

    NA NA NA NA Financials2 NA NA NA NA

    of which: Banks NA NA NA NA of which: Banks NA NA NA NA

    Insurance NA NA NA NA Insurance NA NA NA NA

    Healthcare 8.8 5.8 7.7 7.7 Healthcare 11.4 12.0 11.6 16.2Technology 5.6 13.9 6.4 12.0 Technology 12.0 11.5 11.7 11.1

    Media 5.7 8.6 6.5 13.5 Media 8.1 10.6 8.9 8.7

    Telecoms 5.0 5.5 5.2 4.5 Telecoms 5.5 6.9 5.9 7.6

    Utilities 5.1 7.9 5.6 4.3 Utilities 7.0 6.5 6.7 6.5

    Market ex Financials 5.7 5.7 5.7 5.0 Market ex Financials 6.9 7.7 7.1 6.3

    1Ratios reflect earnings before goodwill amortisation

    2Financials excluding Real Estate

    5Post 2000 average for EEM EA region

    Source: FTSE, Worldscope, IBES, Nomura Strategy research

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    European valuation and profitability

    Return on Capital Employed4 (ROE4 Financials)

    Current Values Post 1990 Average

    Eur ex UK UK Europe EEMEA Eur ex UK UK Europe EEMEA5

    Basic Industries 7.3 15.7 9.9 13.1 Basic Industries 9.1 11.7 9.8 14.7

    Capital Goods 9.0 15.2 9.7 7.8 Capital Goods 8.2 10.4 8.6 8.6

    Consumer Cyclicals 6.8 13.2 7.8 13.8 Consumer Cyclicals 6.5 9.3 7.1 15.8

    Consumer Staples 10.5 13.4 11.6 19.1 Consumer Staples 11.8 12.4 12.0 19.4Energy 12.1 7.1 9.4 12.6 Energy 12.6 12.5 12.6 17.7

    Financials1,2

    9.3 8.5 9.1 17.1 Financials1,2 9.7 11.9 10.2 15.6

    of which: Banks2

    8.4 7.1 8.1 17.1 of which: Banks2 9.3 14.6 10.4 15.9

    Insurance2

    11.9 13.2 12.1 21.1 Insurance2 11.4 11.4 11.4 19.9

    Healthcare 14.9 25.7 17.7 15.1 Healthcare 13.4 26.7 17.0 14.0

    Technology 13.0 13.7 13.2 8.8 Technology 10.6 12.8 11.1 9.0

    Media 14.8 13.4 13.9 14.4 Media 12.1 16.1 13.8 13.4

    Telecoms 10.2 13.4 11.7 13.9 Telecoms 8.8 9.4 9.3 13.4

    Utilities 7.4 10.2 7.9 4.6 Utilities 7.8 9.0 8.1 5.9

    Market ex Financials 9.5 12.6 10.5 12.5 Market ex Financials 9.0 11.4 9.6 13.8

    Enterprise Value / Capital Employed (P/BV Financials)

    Current Values Post 1990 Average

    Eur ex UK UK Europe EEMEA Eur ex UK UK Europe EEMEA5

    Basic Industries 1.1 1.2 1.1 1.7 Basic Industries 1.3 1.6 1.4 1.9

    Capital Goods 1.1 1.7 1.2 0.9 Capital Goods 1.3 1.5 1.3 1.0

    Consumer Cyclicals 1.0 1.6 1.1 1.6 Consumer Cyclicals 1.2 1.6 1.2 1.7

    Consumer Staples 1.8 2.1 1.9 3.2 Consumer Staples 2.1 2.0 2.0 2.2

    Energy 1.0 1.2 1.1 0.8 Energy 1.6 2.0 1.8 1.3

    Financials1,3

    0.6 0.7 0.6 1.3 Financials1,3 1.8 1.8 1.8 1.9

    of which: Banks3

    0.5 0.7 0.5 1.3 of which: Banks3 1.6 2.0 1.7 2.1

    Insurance3

    0.7 0.9 0.8 1.4 Insurance3 2.7 2.0 2.5 1.5

    Healthcare 1.9 2.9 2.1 1.4 Healthcare 2.6 5.5 3.4 2.9

    Technology 1.3 2.6 1.4 1.4 Technology 3.0 14.4 2.9 1.7

    Media 1.2 1.5 1.3 2.2 Media 2.1 2.8 2.4 1.8

    Telecoms 1.2 1.0 1.2 1.5 Telecoms 1.4 1.5 1.4 2.3

    Utilities 0.8 1.4 0.9 0.7 Utilities 1.3 1.2 1.2 0.9

    Market ex Financials 1.2 1.5 1.3 1.1 Market ex Financials 1.5 1.8 1.6 1.5

    1 Financials excluding Real Estate

    2Return on equity used for Financials.

    3 Price to book value used for Financials.

    4 RO E and RoC E calculated pre goodwill and pre exceptionals.

    5Post 2000 average for EEM EA region

    Source: FTSE, Worldscope, IBES, Nomura Strategy research

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    Appendix A-1

    Analyst Certification

    I, Ian Scott, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or

    all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be

    directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my

    compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,

    Nomura International plc or any other Nomura Group company.

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    Important DisclosuresOnline availability of research and additional conflict-of-interest disclosuresNomura Equity Research is available on nomuranow.com, Bloomberg, Capital IQ, Factset, Reuters and ThomsonOne.Important disclosures may be accessed through the left hand side of the Nomura Disclosure webpage http://go.nomuranow.com/research/globalresearchportal or requested from Nomura Securities International, Inc., on 1-877-865-5752. Ifyou have any difficulties with the website, please [email protected] for technical assistance.The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, aportion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report arenot registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject toFINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities heldby a research analyst account.Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for thesales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content ofresearch reports in which their names appear. Marketing Analysts identified in some Nomura research reports are research analysts employedby Nomura International plc who are primarily responsible for marketing Nomuras Equity Research product in the sector for which they havecoverage. Marketing Analysts may also contribute to research reports in which their names appear and publish research on their sector. Distribution of ratings (US)The distribution of all ratings published by Nomura US Equity Research is as follows: 39% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 8% of companies with thisrating are investment banking clients of the Nomura Group*.54% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 3% of companies with thisrating are investment banking clients of the Nomura Group*.7% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 0% of companies with thisrating are investment banking clients of the Nomura Group*.As at 30 September 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report.Distribution of ratings (Global)The distribution of all ratings published by Nomura Global Equity Research is as follows: 49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with thisrating are investment banking clients of the Nomura Group*.41% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 50% of companies withthis rating are investment banking clients of the Nomura Group*.10% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 20% of companies withthis rating are investment banking clients of the Nomura Group*.As at 30 September 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report.Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for

    ratings published from 27 October 2008

    The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock.Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited managementdiscretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriatevaluation methodology such as discounted cash flow or multiple analysis, etc.STOCKSA rating of 'Buy',indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral',indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ' Reduce', indicates thatthe analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, targetprice and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstancesincluding, but not limited to, when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company.Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks(accessible through the left hand side of the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal);GlobalEmerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORSA 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance,indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates thatthe analyst expects the sector to underperform the Benchmark during the next 12 months.Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI EmergingMarkets ex-Asia.Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from30 October 2008 and in Japan from 6 January 2009STOCKSStock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price,subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock,based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc.A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended'indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certaincircumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company.

    http://go.nomuranow.com/research/globalresearchportalmailto:[email protected]://go.nomuranow.com/research/globalresearchportalhttp://go.nomuranow.com/research/globalresearchportalmailto:[email protected]://go.nomuranow.com/research/globalresearchportal
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    Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entityidentified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/orcompanies.SECTORSA 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positiveabsolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocksunder coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted averagerecommendation of the stocks under coverage is) a negative absolute recommendation.Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings inEurope, Middle East and Africa, US and Latin America published prior to 27 October 2008)STOCKSA rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next sixmonths. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% overthe next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmarkby less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform theBenchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock tounderperform the Benchmark by 15% or more over the next six months.Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additionalresearch reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or otherinformation contained herein.SECTORSA 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance,indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A ' Bearish' stance, indicates that

    the analyst expects the sector to underperform the Benchmark during the next six months.

    Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector -Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe;

    Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: BloombergWorld Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published priorto 30 October 2008STOCKSStock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price,subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value ofthe stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn'tthink the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from theintrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and ourestimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within thishorizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside

    implied by the recommendation.A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and20%. A 'Neutral' recommendation indicates that upside or downside is less than 10%. A 'Reduce' recommendation indicates that downside isbetween 10% and 20%. A 'Sell' recommendation indicates that downside is more than 20%.SECTORSA 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positiveabsolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocksunder coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted averagerecommendation of the stocks under coverage is) a negative absolute recommendation.Target PriceA Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may beimpeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if thecompany's earnings differ from estimates.

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    DisclaimersThis publication contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or, with the sole or jointcontributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein or elsewhere identified in thepublication. Affiliates and subsidiaries of Nomura Holdings, Inc. (collectively, the 'Nomura Group'), include: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan;Nomura International plc ('NIplc'), United Kingdom; Nomura Securities International, Inc. ('NSI'), New York, NY; Nomura International (Hong Kong) Ltd. (NIHK),Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. (NFIK), Korea (Information on Nomura analysts registered with the Korea Financial InvestmentAssociation ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr ); Nomura Singapore Ltd. (NSL), Singapore (Registration number 197201440E,regulated by the Monetary Authority of Singapore); Capital Nomura Securities Public Company Limited (CNS), Thailand; Nomura Australia Ltd. (NAL), Australia(ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial services licence number246412; P.T. Nomura Indonesia (PTNI), Indonesia; Nomura Securities Malaysia Sdn. Bhd. (NSM), Malaysia; Nomura International (Hong Kong) Ltd., TaipeiBranch (NITB), Taiwan; Nomura Financial Advisory and Securities (India) Private Limited (NFASL), Mumbai, India (Registered Address: Ceejay House, Level 11,Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; SEBI Registration No: BSE INB011299030, NSE INB231299034, INF231299034,INE 231299034); Banque Nomura France (BNF); NIplc, Dubai Branch (NIplc, Dubai); NIplc, Madrid Branch (NIplc, Madrid) and OOO Nomura, Moscow (OOO

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