JPMorgan Securities (Malaysia) Sdn. Bhd. (18146-X)

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1 YTL Cement Catalysts to watch We identify 3 prime catalysts that will likely propel share price performance for YTL Cement. Catalyst 1 - Acquisitions: Management is currently executing the fund raising of US$200 mil nominal value 5-year guaranteed Exchangeable Bonds. The funds raised will be used for acquisitions of cement plants / companies in China and Vietnam, similar to the recent acquisition of Jin Yuan Cement in China. Catalyst 2 - Volume growth: The onset of execution of mega projects under the 9MP will also lead to a build up in building materials demand, and we expect this to contribute up to 5-6% annual volume growth in local demand. We observed strong top line revenue growth in CY07 that was driven solely by higher prices with moderate demand. We expect construction activities to intensify throughout this year, hence delivering exceptional growth for FY08E. Catalyst 3 - APM implementation: The implementation of APM removes the price ceiling, and cement prices will be revised on a quarterly basis based on a spread over a cost index. The APM is already implemented, and the first price review will take place end Mar- 08. On a medium-term view, we see a potential for price increases. Overweight, Jun-08 PT of M$7.00: We remain Overweight on YTL Cement, and continue to value the company on a long-term sustainable EV multiple of US$150 per tonne. However, we are adjusting our Jun-08 Price Target downwards from M$7.50 to M$7.00 to reflect the devaluation of the US$ (Previous US$1/M$3.47 to Revised US$1/M$3.23). At current valuations of US$110 EV/tonne (undiluted), the company is trading at a deep discount to its closest peer. We highlight a sharp oversupply and a possible price war in CY09 as risks. Bloomberg: YTLC MK, Reuters: YTLC.KL M$MM; Y/E June FY07A FY08E FY09E FY10E Sales Core net profit Core net EPS Net DPS (sen) Net profit growth 18.2% 45.1% 12.2% 8.3% EPS growth 19.2% 43.9% 12.2% 8.3% ROE 13.7% 17.3% 17.1% 15.7% P/E P/BV EV/EBITDA Net div yield 2.0% 2.4% 2.4% 2.4% Source: Company reports and JPMorgan estimates Overweight M$ February 2008 Price Target: M$7.00 Malaysia Building Materials Jon Oh AC Price Performance M$ Feb-07 May-07 Aug-07 Nov-07 Feb-08 YTLC.KL share price (M$) KLCI (rebased) YTD -1M -3M -12M Absolute 0.0% -3.8% -2.0% 16.3% Relative 2.0% -0.3% -3.9% 2.9% Source: RIMES, Reuters. Company data 52-wk range (M$) M$ Mkt. cap (m$ M) Mkt. cap (US$ M) Shares O/S (MM) Free float (%) Avg. daily volume 0.14 Liquidity (M$ MM) 0.72 Exchange rate 3.23 KLCI Index Year-end June Source: Bloomberg. JPMorgan Securities (Malaysia) Sdn. Bhd. (18146-X) See page 8 for analyst certification and important disclosures, including investment banking relationships. JPMorgan 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. The analysts listed above are employees of either JPMorgan Securities (Malaysia) Sdn. Bhd. (18146-X) or another non-us affiliate of JPMSI, and are not registered/qualified as research analysts under NYSE/NASD rules, unless otherwise noted.

2 3 catalysts to propel the company to a new level We identify 3 prime catalysts that will likely propel share price performance for YTL Cement: 1. Announcing more private equity type acquisitions 2. Volume growth leading to higher capacity utilization 3. APM implementation could lead to margin expansion Targeting China and Vietnam Catalyst 1 Raising funds for private equity deals Management is currently executing the fund raising of US$200 mil nominal value 5- year guaranteed Exchangeable Bonds. As stated before, the funds raised will be used for acquisitions of cement plants / companies in China and Vietnam, similar to the recent acquisition of Jin Yuan Cement in China. Management clarified that their acquisition strategy is based off 2 fundamental principles: Identify cheap cement plants that are valued at around US$50 EV/tonne; and / or Acquire cement companies that have a controlling market share in a region. Their recent move into Jin Yuan Cement (EV of US$13 per tonne) is consistent with management s direction to grow independent of the Malaysian market, and we view this as a key catalyst for a structural re-rating of earnings in the future. Could add up to 4.0 million tpa Based on our sensitivity analysis, assuming that 100% of the US$200 million is used for new acquisitions at an average EV/tonne multiple of US$50, then YTL Cement could be acquiring anywhere from million tpa in capacity, raising their total production capacity to above 11.5 million tpa. Table 1: Potential capacity acquisition from 5-year Guaranteed Exchangeable Bonds of US$200 million Amount Raised (US$) Allocation of Fresh Funds for Acquisition (%) Capacity acquired (Average EV-per-tonne (US$)) 60% 65% 70% 75% 80% 85% 90% 95% 100% EV = US$10 per tonne EV = US$13 per tonne EV = US$20 per tonne EV = US$30 per tonne EV = US$50 per tonne EV = US$100 per tonne EV = US$120 per tonne EV = US$150 per tonne EV = US$180 per tonne EV = US$200 per tonne

3 Expect 5-6% annual volume growth Catalyst 2 Volume growth The onset of execution of mega projects under the 9MP will lead to a build up in building materials demand, and we expect this to contribute up to 5-6% annual volume growth in local demand. Table 2: Mega Projects under construction for CY08 Project Name Value (M$ mil) KASEH Highway 900 Eastern Dispersal Link 1,100 Second Penang Bridge 4,600 Double Tracking - Ipoh to Padang Besar 12,500 CY07 growth was without 9MP mega projects! We observed strong top line revenue growth in CY07, and that was driven solely by higher prices with moderate demand. We expect construction activities to intensify throughout CY08, hence delivering exceptional growth. Figure 1: YTL Cement Sales and Pretax Profit Figure 2: Lafarge Sales and Pretax Profit 30.0% % % 20.0% 15.0% 10.0% 5.0% 0.0% 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 Sales (RHS) Pretax Margins (LHS) % 0.0% -10.0% -20.0% 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 Sales (RHS) Pretax Margins (LHS) Source: Company Announcements, JPMorgan estimates Source: Company Announcements, JPMorgan estimates Figure 3: CIMA Sales and Pretax Profit Figure 4: Tasek Sales and Pretax Profit 20.0% % % 0.0% -10.0% -20.0% % 0.0% -20.0% -40.0% % 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 Sales (RHS) Pretax Margins (LHS) % 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 Sales (RHS) Pretax Margins (LHS) Source: Company Announcements, JPMorgan estimates Source: Company Announcements, JPMorgan estimates Margin expansion in CY07 was driven by 10% blended price hike Catalyst 3 APM could lead to margin expansion As observed in CY07, the 10% blended hike in cement prices have clearly driven the top line growth, and proves to be the single largest factor in driving margin expansion for YTL Cement. 3

4 Figure 5: Cost structure Coal 35% Others 25% Raw Mats 16% Power 24% Figure 6: Pre-tax Margins YTL Cement 26.0% 24.5% 23.8% 24.0% 22.0% 21.0% 20.0% 18.6% 18.3% 17.3% 18.0% 16.0% 14.9% 14.0% 13.5% 14.1% 12.0% 1QFY06 2QFY06 3QFY06 4QFY06 1QFY07 2QFY07 3QFY07 4QFY07 1QFY08 APM will remove the price ceiling The implementation of APM essentially removes the price ceiling, and cement prices will be revised on a quarterly basis based on a spread over a cost index. The APM is fundamentally different from the existing dynamics whereby cement prices are determined by supply-demand economics, albeit with a price ceiling. Medium-term price hike, in our view The APM is already implemented, and the first price review will take place end Mar- 08. On a medium-term view, we see a potential for price increases for 2 distinct reasons: 1. Inflationary pressure on raw materials such as fuel, electricity and coal will lead to a cost pass through under the APM. While this is a cost escalation exercise, it could improve margins for a low-cost producer such as YTL Cement, given their relative efficiency compared to their peers. 2. Room to catch up to regional prices, since Malaysian cement prices are still trading at a discount to regional prices. (average of US$60 per tonne relative to regional average of above US$70 per tonne) Learning from CY05 We hypothesize that 9MP spending is not structural Risk Potentially another price war in CY09? The cement price war in 2005 was a result of desperate measures among cement makers in defending their market shares due to a slowing construction environment. Cement prices went to as low as M$110 per tonne, trading at a 45% discount to the regulated ceiling price in Although no formal agreement has been made between the cement makers, we do not envision any immediate price wars since demand is expected to rise structurally. Nevertheless, a price war is inevitable in a contractionary market once the manufacturers are plagued with excess capacity. We argue the risk of a potential price war after the next 2 years and support our argument on the back of a key hypothesis i.e. The construction spending of Ninth Malaysia Plan (9MP) is not structural. We offer 3 key facts to supplement our hypothesis. Fact 1: Already an excess capacity of up to 25% of throughput capacity Based on existing supply and demand situation, exports still make up close to onequarter (26%) of total production capacity in Peninsula Malaysia. Although the 4

5 Table 3: Industry-wide capacity and market share breakdown (Peninsula Malaysia only) cement manufacturers effectively operate close to maximum utilization, the export percentages still imply a situation of excess capacity. No. Cement company Estimated cement capacity (MM tonnes p.a.) Market share 1 Lafarge Malayan Cement % 2 YTL Cement % 3 CIMA % 4 Tasik % 5 Others % Total Capacity % Average Utilization % Local Construction Demand % Exports and Excess %. Fact 2: Lafarge (Non-Rated) and YTL Cement have indicated their reluctance to spend in Peninsular Malaysia A recent check with management of Lafarge and YTL Cement confirms their reluctance to immediately add capacity in Peninsular Malaysia within the next 2 years, again citing reasons of excess capacity driven by the export ratios. Fact 3: CIMA (Non-Rated) is the only manufacturer who has demonstrated their intentions to expand their capacity That CIMA has committed spending up to M$400 million on a brown-field expansion indicates a potential increase of annual capacity by 1.2 to 1.5 million tonnes (assuming EV range of US$77-96/tonne). This will create even more excess capacity within the industry by CY2009. Our industry-wide forecast Early signs of another price war in 2009 Remain Overweight Adjusting Jun-08 PT for US$ effect, from M$7.50 to M$7.00 Since the demand for cement will continue to rise on the back of rising construction activities, we are forecasting an industry-wide demand volume growth of 5% for CY07 and CY08, 4% for CY09. However, we are expecting a sharp drop in cement demand by CY10, declining by up to 4%. As such, the proportion of exports should systematically decline from its current levels of 26% to around 19% by CY08. However, should CIMA put on an additional 1.5 million tonnes of capacity by CY09, we expect the proportion of exports to increase again to over 22%. Given that CIMA will be laden with excess capacity as the proportion of their exports becomes overwhelming and depressing their profitability, we predict a potential price war taking place within CY09, all else equal. Valuation, adjusting PT for US$ devaluation We remain Overweight on YTL Cement, and continue to value the company on a long-term sustainable EV multiple of US$150 per tonne. However, we are adjusting our Jun-08 Price Target downwards from M$7.50 to M$7.00 to reflect the devaluation of the US$ (Previous US$1/M$3.47 to Revised US$1/M$3.23). Our PT is based on an undiluted share base; taking into consideration the mandatory conversion of the ICULS, the revised Jun-08 PT is M$5.40 (Previous of M$5.80). 5

6 Current valuations of US$110 EV/tonne is still a discount to region At current valuations of US$110 EV/tonne (undiluted), the company is trading at a deep discount to its closest peers i.e. Lafarge Malayan Cement (circa US$160 EV/tonne). Table 4: Key estimates for YTL Cement - FY08E and FY09E FY08E FY09E Capacity (mil tpa) Blended ASP per tonne (US$) Sales (M$ MM) Pretax Profit (M$ MM) Net profit (M$ MM) Source: JPMorgan estimate Table 5: Price Target Derivation Undiluted Assuming 484 million shares FY08 Target EV-per-tonne multiple (US$) 150 Exchange Rate (M$ per US$1) 3.23 Annual Cement Capacity (mil tonnes) 7.7 Net Debt on FY08 (M$ mil) Target EV (M$ mil) Target Net Equity Value (M$ mil) Existing share base (mil) Implied Price Target (undiluted) (M$) 7.0 Fully Diluted - Assuming conversion within first 4 years Target EV-per-tonne multiple (US$) 150 Exchange Rate (M$ per US$1) 3.23 Annual Cement Capacity (mil tonnes) 7.7 Net Debt on FY08 (M$ mil) Target EV (M$ mil) Target Net Equity Value (M$ mil) Existing share base (mil) Implied Price Target (fully diluted) (M$) 5.4 6

7 Appendix Supplementary Information Table 6: The industry snapshot CY06 CY07E CY08E CY09E CY10E Average Annual Production Capacity (mil tonnes) Local Demand (mil tonnes) Annual demand growth (%) - 5% 5% 4% -4% Exports and Excess (mil tonnes) Percentage of Exports and Excess (%) 26.3% 22.6% 18.8% 21.7% 24.8% Local Demand (mil tonnes) Table 7: Revised Cement Price Ceiling (by region) Peninsular Malaysia Price Ceiling M$ per tonne Northern Region 217 Central Region 219 Eastern Region 233 Southern Region 224 East Malaysia Price Ceiling M$ per tonne Sabah 309 to 325 Sarawak 275 to 352 Table 8: The Malaysian cement industry snapshot CY06 CY07E CY08E CY09E CY10E Average Annual Production Capacity (mil tonnes) Local Demand (mil tonnes) Annual demand growth (%) 5% 5% 4% -4% Exports and Excess (mil tonnes) Percentage of Exports and Excess (%) 26.3% 22.6% 18.8% 21.7% 28.3% Table 9: ICULS Analysis Existing Share Base (mil) New shares arising from ICULS conversion (before Year 4) New shares arising from ICULS conversion (between Year 4-7) New shares arising from ICULS conversion (beyond Year 7) Enlarged Share Base (before Year 4) Enlarged Share Base (between Year 4-7) Enlarged Share Base (beyond Year 7) Average Dilution Factor (before Year 4) 26.9% Average Dilution Factor (between Year 4-7) 32.9% Average Dilution Factor (beyond Year 7) 35.5% Assuming Mandatory Conversion before Year 4 *Net Income FY07E *Net Income FY08E *Net Income FY09E *FD EPS FY07E 0.28 *FD EPS FY08E 0.34 *FD EPS FY09E

8 Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures YTL Cement (YTLC.KL) Price Chart Date Rating Share Price (M$) Price Target (M$) Price(M$) 5 OW M$5.9 OW M$7 OW M$7.5 OW M$ Apr-07 OW Jun-07 OW Oct-07 OW Oct-07 OW Feb 05 May 05 Aug 05 Nov 05 Feb 06 May 06 Aug 06 Nov 06 Feb 07 May 07 Aug 07 Nov 07 Feb 08 Source: Reuters and JPMorgan; price data adjusted for stock splits and dividends. Initiated coverage Apr 05, This chart shows JPMorgan's continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. JPMorgan ratings: OW = Overweight, N = Neutral, UW = Underweight. Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: JPMorgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] The analyst or analyst s team s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe. Coverage Universe: Jon Oh: Gamuda (GAMU.KL), ICP (ICPB.KL), IJM Corporation (IJMS.KL), MPI (MPIM.KL), Proton (PROT.KL), Tan Chong Motor (TNCS.KL), UEM World Bhd (UEMW.KL), UMW Holdings (UMWS.KL), Unisem (UNSM.KL), WCT Engineering (WCTE.KL), YTL Cement (YTLC.KL) JPMorgan Equity Research Ratings Distribution, as of December 31, 2007 Overweight (buy) Neutral (hold) Underweight (sell) JPM Global Equity Research Coverage 45% 41% 14% IB clients* 50% 51% 38% JPMSI Equity Research Coverage 41% 47% 12% IB clients* 71% 64% 49% *Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. 8

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11 All Data As Of 08-Feb-08 Q-Snapshot: YTL Cement Bhd Targets & Recommendations EPS Revisions EPS Momentum (%) Historical Total Return (%) Consensus Changes (4wks) Targets Recoms Consensus Changes (4wks) Up Dn Total* Up Up Dn Total* -1 Mth -3 Mth 1Mth 3Mth 1Yr 3Yr Consensus Growth Outlook (%) FY1 FY2 FY1 FY EPS Actual To FY1 EPS FY1 To FY2 EPS FY2 To FY3 Cash Flow FY1 To FY2 Dividends FY1 To FY2 Sales FY1ToFY2 Quant Return Drivers (A Score >50% indicates company ranks 'above average') Score 0% (worst) to 100% (best) vs Country Peers vs (regional) IBES Industry Peers Valuations: P/E Vs Market (12mth fwd EPS) 73% 64% Valuations: P/E Vs Sector (12mth fwd EPS) 71% 63% Valuations: EPS Growth (forecast) 75% 72% Momentum: 12 Month Price Momentum 46% 43% Momentum: 1 Month Price Reversion 46% 25% Quality: Return On Equity (forecast) 45% 43% Quality: Earnings Risk (Variation in Consensus) 68% 77% Earnings&Sentiment: Earnings Momentum 97% 97% Earnings&Sentiment: Change in Recomms 40% 44% Earnings&Sentiment: Net Revisions Fy2 EPS 45% 53% COMPOSITE Q-SCORE** (0% To 100%) 84% 80% FY1 FY2 JPMorgan Composite Q-Score I N D U S T R Y Regional IBES Industry Peers (Closest by Size, Consensus. ADV = Average daily value traded in US$m over the last 3 mths) Code Name Country USD MCAP ADV PE FY1 Q-Score** H22-SG Hong Leong Asia Ltd. Singapore % 5EN-SG Midas Holdings Ltd. Singapore % KR Hanil Cement Co. Ltd. South Korea % 5232-JP Sumitomo Osaka Cement Co. Ltd. Japan % IN Simplex Infrastructures Ltd. India MY YTL Cement Bhd Malaysia % KR Pyeong San Co. Ltd. South Korea % STCM-GB Steppe Cement Ltd. Malaysia % AP-TH Asian Property Development PCL Thailand % 6829-MY Industrial Concrete Products Bhd Malaysia % TPIPL-TH TPI Polene PCL Thailand % Country Peers (Closest by Size, Consensus. ADV = average daily value traded in US$m over the last 3 mths) Code Name Industry USD MCAP ADV PE FY1 Q-Score** 9679-MY WCT Engineering Bhd Engineering & Construction % 5138-MY Hap Seng Plantations Holdings Bhd Agricultural Commodities/Milling MY Star Publications (M) Bhd Publishing: Newspapers % 1651-MY Malaysian Resources Corp. Bhd Engineering & Construction % 5304-MY Proton Holdings Bhd Motor Vehicles % 8737-MY YTL Cement Bhd Construction Materials % 5103-MY Titan Chemicals Corp. Bhd Chemicals: Specialty % 5032-MY Bintulu Port Holdings Bhd Other Transportation % 2003-MY Kulim (Malaysia) Bhd Agricultural Commodities/Milling % 7277-MY Dialog Group Bhd Oilfield Services/Equipment % 4502-MY Media Prima Bhd Broadcasting % Source: Factset, Thomson and JPMorgan Quantitative Research. For an explanation of the Q-Snapshot, please visit Q-Snapshots are a product of JPMorgan s Global Quantitative Analysis team and provide quantitative metrics summarized in an overall company 'Q-Score.' Q-Snapshots are based on consensus data and should not be considered as having a direct relationship with the JPMorgan analysts recommendation. * Total number of target prices, recommendations or EPS forecasts that make up consensus. ** The Composite Q-Score is calculated by weighting and combining the 10 Quant return drivers shown. The higher the Q-Score the higher the one month expected return. On a 14 Year back-test the stocks with the highest Q-Scores have been shown (on average) to significantly outperform those stocks with the lowest Q-Scores in this universe. (%) C O U N T R Y 100% 75% 50% 25% 0% (Local Currency %) HIGH/STRONGER LOW/WEAKER 0% 25% 50% 75% 100% 94

12 YTL Cement - Summary of Financials Profit and Loss statement Cash flow statement M$ in millions, year-end June FY07A FY08E FY09E FY10E M$ in millions, year-end June FY07A FY08E FY09E FY10E Revenues 1, , , ,846.1 EBIT % change Y/Y 8.0% 34.8% 18.2% 1.0% Gross Margin (%) 26.8% 24.7% 22.8% 23.5% Cash flow from operations EBITDA Cash flow from investing % change Y/Y 34.8% 23.2% 7.3% 4.8% Cash flow from financing EBITDA Margin (%) 25.4% 23.2% 21.1% 21.9% EBIT Capex % change Y/Y 34.8% 23.2% 7.3% 4.8% Free cash flow EBIT Margin (%) 25.4% 23.2% 21.1% 21.9% Net Interest (54.2) (61.0) (53.5) (45.9) Earnings before tax % change Y/Y 50.4% 25.6% 11.4% 7.8% Equity raised/ (repaid) Tax (57.5) (44.8) (49.9) (53.8) Debt raised/ (repaid) as % of EBT 24.2% 15.0% 15.0% 15.0% Other Net Income (Core) Dividends paid % change Y/Y 18.2% 45.1% 12.2% 8.3% Net Change in Cash Shares Outstanding Undiluted Beginning cash Undiluted EPS (reported) - M$ Ending cash % change Y/Y 19.2% 43.9% 12.2% 8.3% Gross DPS - M$ Balance sheet Ratio Analysis M$ in millions, year-end June FY07A FY08E FY09E FY10E M$ in millions, year-end June FY07A FY08E FY09E FY10E Cash and cash equivalents EBITDA margin 25.4% 23.2% 21.1% 21.9% Accounts receivable Operating margin 25.4% 23.2% 21.1% 21.9% Inventories Net profit margin 14.2% 15.3% 14.5% 15.6% Others Pretax margin 20.7% 19.3% 18.2% 19.4% Current assets , , ,121.2 Sales per share growth 8.0% 34.8% 18.2% 1.0% LT investments Sales growth 8.0% 34.8% 18.2% 1.0% Net fixed assets 1, , , ,973.1 Net profit growth 18.2% 45.1% 12.2% 8.3% Total assets 2, , , ,094.4 EPS growth 19.2% 43.9% 12.2% 8.3% Liabilities Interest coverage (x) ST loans Net debt to total capital (x) Payables Net debt to equity (x) Others Sales/assets (x) Total current liabilities Assets/equity (x) Long term debt ROE 13.7% 17.3% 17.1% 15.7% Other liabilities ROCE 21.1% 23.7% 24.0% 22.9% Total liabilities 1, , , ,124.3 Shareholders' equity 1, , , ,835.2 BVPS - M$ Source: Company, JPMorgan estimates * Company does not report depreciation as a separate line-item in the Income Statement 12