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ABC SUBSEA UK - Subsea Focus on Europe and Africa London, 12 November 2013 Subsea in Africa & Europe Finding growth in a Slowing but Growing World David Phillips* Global Co-Head, Oil & Gas Equity Research, HSBC Bank plc +44 20 7991 2344, [email protected] *Employed by HSBC Bank plc, a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations View HSBC Global Research at: http://www.research.hsbc.com Issuer of report: HSBC Bank plc. Disclosures & Disclaimer - this report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Source: Aker Solutions Sources for illustrations: Aker Solutions, Island Offshore, Sealion
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Page 1: SUBSEA UK - Subsea Focus on Europe and Africa London, 12 ... · - expand LNG - gas for GTL/fertilisers - gas to South Africa - FLNG for some fields? But avoid being another AUS -

ABC

SUBSEA UK - Subsea Focus on Europe and Africa

London, 12 November 2013

Subsea in Africa & Europe Finding growth in a Slowing but Growing World David Phillips*

Global Co-Head, Oil & Gas Equity Research, HSBC Bank plc

+44 20 7991 2344, [email protected]

*Employed by HSBC Bank plc, a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations

View HSBC Global Research at: http://www.research.hsbc.com

Issuer of report: HSBC Bank plc.

Disclosures & Disclaimer - this report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the

Disclaimer, which forms part of it.

Source: Aker Solutions

Sources for illustrations: Aker Solutions, Island Offshore, Sealion

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2

Finding growth in a Slowing but Growing World

AGENDA

1 – The ‘Known Knowns’

- Rigs and subsea backlogs

2 – The ‘Known Unknowns’

- Oil prices, industry capex

3 – Growth – Africa & Europe

- Offshore capex, key drivers,

regional issues, gas & oil

4 – Challenges

- growth pains, speed bumps,

supply chains, execution

5 – Conclusions

Source: Subsea 7

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3

Source: Subsea 7

(1) Subsea markets – the ‘known knowns’

“There are known knowns; there are things we know that we know.

There are known unknowns; that is to say, there are things that we now know we don't know.

But there are also unknown unknowns – there are things we do not know we don't know.”

(Donald Rumsfeld, Feb 2002)

Offshore rigs

Subsea backlogs

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4

0%

2%

4%

6%

8%

10%

12%

14%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

y-o

-y g

row

th

floaters (y-o-y growth)

Deepwater rigs

- Expansion in the floating rig

fleet an important driver of

offshore activity to come

25% fleet growth 2012-16

- more drillships than semis

. . . and +80-85% for 2008-16

- More fleet additions working

on exploration work – next

phase is production drilling

- Was a bottleneck in the last

cycle – still not easy to get a

rig when needed but better

(and rates softening?)

Source: IHS/ODS Petrodata

Growth of the floater rig fleet, 2000-16

0

50

100

150

200

250

300

350

400

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

num

ber o

f rig

s in

the

glob

al fl

eet

floaters (number of rigs)

supply growth2012-2016 +25%

(cagr +6%)

2008-2016

up 80-85%

Subsea markets – the ‘known knowns’ – offshore rigs

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5

A real grower

- Subsea installation backlog

in total up 21% y-o-y

up 80% vs start 2010

- Subsea equipment backlog

in total up 60% y-o-y

up 150% vs start 2010

- Record bookings of

equipment this year, continual

growth since early 2010

Hot spots – West Africa,

Brazil, US GoM, North Sea

But order intake slowing?

Less from Brazil in 2014?

….have backlogs peaked?

Source: Company data

Subsea equipment and installation – backlog development 2005-present

Total subsea backlog now USD61bn

+35% year-on-year

Doubled vs start 2010

Subsea markets – the ‘known knowns’ – subsea backlogs

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6

Source: Subsea 7

(2) Subsea markets – the ‘known unknowns’

Oil prices

Oil industry capex

Page 7: SUBSEA UK - Subsea Focus on Europe and Africa London, 12 ... · - expand LNG - gas for GTL/fertilisers - gas to South Africa - FLNG for some fields? But avoid being another AUS -

7

The shale tale

- Surging shale oil supply in

North America

- But shale isn't “cheap” –

economics not dissimilar to

deepwater (USD50-80/bbl)

- Nor is it all the same –

drilling focus has been on

resource “sweet spots”

- Fuel for nice headlines in

the media but we don’t see

a world awash with shale

(gas is more important)

- Near term oil outlook softer

but in an “OK” range

Source: IEA Estimates

Subsea markets – the ‘known unknowns’ – oil prices

4

5

6

7

8

Oct-03 Oct-05 Oct-07 Oct-09 Oct-11 - 0.5 1.0 1.5

Russia

Europe

Colombia

Process gains

Africa

Other FSU

Canada

Biofuels

OPEC NGLs

Brazil

USA

Source: EIA

Current Brent futures curve (2013-2019, USD/bbl)

Source: Thompson Reuters Datastream

US crude production (mbd) Global crude supply growth, 2016 vs 2013 (mbd)

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8

Big spenders

- Overall capex at a plateau

- Overall planned spend in

the USD630bn+ range

- Uncertainty driven by cost

inflation (back to 2008

levels), politics / tax - also

relative appeal of shale

- But moving into an offshore

age – unavoidable growth

- Pace of discoveries, need

to progress prospects to

production

- Key themes – ultra-deep,

offshore gas / FLNG,

subsea processing

Overall E&P capex outlook (upper chart) Offshore capex outlook (lower chart)

Subsea markets – the ‘known unknowns’ – E&P capex

Source: EIA

Source: Infield Systems

Source: Company data

2011-2015 total

is 55% greater

than 2006-2010

2011-2015 total

is 33% greater

than 2006-2010

Page 9: SUBSEA UK - Subsea Focus on Europe and Africa London, 12 ... · - expand LNG - gas for GTL/fertilisers - gas to South Africa - FLNG for some fields? But avoid being another AUS -

9

Source: Subsea 7

(3) Subsea markets – Growth

Africa - Growing

Europe – Growing but slowing?

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10

Subsea in Africa & Europe - “The” growing region

Rig fleet growth

Offshore Europe

-- floater rig fleet up 40%

versus that in 2005

- bottleneck of suitable units?

Also an older fleet

Offshore Africa

-- floater rig fleet for East &

West Africa up 85% vs 2005

- East Africa only small so far

(5-7 rigs)

-- production drilling plans

imply significant fleet growth

Growing offshore floater rig fleets – Europe (upper chart), Africa (East & West, lower chart)

Source: IHS Petrodata

Start 2005 – end 2013

fleet growth of 40%

Start 2005 – end 2013

fleet growth of 85%

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11

Subsea in Africa & Europe - “The” growing region

Offshore spend

Offshore Africa

- USD15bn per yr by 2016

and USD1bn per yr by 2018

in Mozambique alone

- deepwater rig access

(market tight but softening)

- installation vessel access

(market tightening)

Offshore Europe

- Europe overall USD25bn per

year by 2015/2016

- But harsh environment rig

access is a bottleneck (NCS)

Source: Infield Systems Ltd

(total includes costs for procurement, engineering, installation)

Global offshore capex – on a long term growth trend

Europe + Africa make up a rising share of the market

- was 25-30% of global offshore capex last cycle, now 35-40%

- Lat Am accounts for 15-20%

- Asia/Australasia accounts for 25-30%

Europe + Africa make up 50-60% of capex growth to 2016/17

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12

Subsea in Africa - Exploration Euphoria

Similarity trends

New resources in recent

years - more gas than oil

- E Africa key, waiting for new

big numbers from W Africa

Brazil…now Angola and

Mozambique - helps if you

speak Portuguese!

Cross-Atlantic similarities

- W Africa/Brazil

- SE Africa/Falklands

Key African theme for oil

services - OFFSHORE

- presalt oil (West)

- offshore gas (East)

Source: Ophir Energy

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Subsea in Africa - Exploration Euphoria - Gas

Gas in the East

East Africa - one of ‘the’ up

and coming gas plays globally

- Anadarko, Eni, BG, Ophir,

Shell, Statoil, Exxon

- early moves 2000-05

- key players move 2006-10

- the next step – 2010+

- Mozambique 150tcf in place

- Windjammer/Prosperidade

The OFS angle

- most supply chain

infrastructure NOT in place

- LNG, subsea, pipelines

Source: Ophir Energy

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14

Subsea in Africa - Development Dilemmas

LNG options

Initial phase LNG moving

fwd, 45km subsea-to-shore

Next phases?

- expand LNG

- gas for GTL/fertilisers

- gas to South Africa

- FLNG for some fields?

But avoid being another AUS

- costs, delays, economics

And does the world need

more LNG?

- landed cost into Asia

- competition with shale LNG

(greenfield vs brownfield)

- Chinese/Asian demand

Source: HSBC

0.0

2.5

5.0

7.5

10.0

12.5

N Am East

Coast

N Am W

Coast

Qatar SE Asia Russia Australia -

NW

Australia -

CBM

E Africa

del

iver

ed c

ost

, U

SD

/mm

Btu

gas price liquefaction transport/shipping regas/other

LNG – estimated landed costs into Asia

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15

Subsea in Africa – Development Dilemmas

LNG timescales

Remember timelines

-The NLNG project took 10-

12 yrs to get to 25mtpa from

FID in the mid 1990s

- West African offshore oil

projects have seen significant

delays in recent years - Egina

More ‘moving parts’

- progression of competing

LNG schemes globally

North America?

- how many LNG plants can

the world build at once?

0

0.5

1

1.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Middle East Gulf Asia Pacific Atlantic Basin Africa

2011 2012 2013 2014 2015 2016 2017 2018

T1 Pluto

Angola LNG Skikda

Gorgon T1 & Gassi Touil

Papua New GuineaGorgon T2 & Curtis T1

Gorgon T3 & Curtis T2

Gladstone T1

APLNG T1

Gladstone T2

Prelude

Wheatstone

Australia Pacific T2*

Prosperidade Phase 1

Bcf/d

0

0.5

1

1.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Middle East Gulf Asia Pacific Atlantic Basin Africa

2011 2012 2013 2014 2015 2016 2017 2018

T1 Pluto

Angola LNG Skikda

Gorgon T1 & Gassi Touil

Papua New GuineaGorgon T2 & Curtis T1

Gorgon T3 & Curtis T2

Gladstone T1

APLNG T1

Gladstone T2

Prelude

Wheatstone

Australia Pacific T2*

Prosperidade Phase 1

0

0.5

1

1.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Middle East Gulf Asia Pacific Atlantic Basin Africa

2011 2012 2013 2014 2015 2016 2017 20182011 2012 2013 2014 2015 2016 2017 2018

T1 Pluto

Angola LNG Skikda

Gorgon T1 & Gassi Touil

Papua New GuineaGorgon T2 & Curtis T1

Gorgon T3 & Curtis T2

Gladstone T1

APLNG T1

Gladstone T2

Prelude

Wheatstone

Australia Pacific T2*

Prosperidade Phase 1

Bcf/d

Source: HSBC, Company data

LNG – recent and planned LNG project start-ups

Page 16: SUBSEA UK - Subsea Focus on Europe and Africa London, 12 ... · - expand LNG - gas for GTL/fertilisers - gas to South Africa - FLNG for some fields? But avoid being another AUS -

16

Oil in the West

West African presalt - one of

‘the’ global exploration plays

- Cobalt, Total, Maersk, Ophir

- onshore work in 1950s/60s

- deepwater started mid-1990s

- new seismic & rigs in 2000s

The OFS angle

- similar stresses & strains on

offshore supply chain as Brazil

- rigs, subsea, FPSOs

- Supply chain infrastructure at

least partly in place already

How big is this theme?

- discuss – 50% of Brazil?

Subsea in Africa - Exploration Euphoria - Oil

Source: Ophir Energy

Page 17: SUBSEA UK - Subsea Focus on Europe and Africa London, 12 ... · - expand LNG - gas for GTL/fertilisers - gas to South Africa - FLNG for some fields? But avoid being another AUS -

17

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

capex -10% base case,

$11/boe

capex

capex +10% capex +20% capex + 30% capex + 40% capex + 50%

pro

ject

IR

R (

%)

at $

90 B

ren

t

Subsea in Africa & Europe - NPV erosion risks

Is this inevitable?

Cost inflation

- overall upstream costs back

to or above 2008 levels

- deepwater was USD15-20k

per boe/d of peak prodn, now

USD30-40k or higher

- Aus LNG looking like USD2-

3000/tpa vs USD500-1000

Politics

- local content requirements,

volatility with taxes/royalties,

tax on farm-out gains

People & infrastructure

- where are all the engineers?

lack of skilled personnel

- local supply chain

Source: HSBC

Deepwater IRRs

Page 18: SUBSEA UK - Subsea Focus on Europe and Africa London, 12 ... · - expand LNG - gas for GTL/fertilisers - gas to South Africa - FLNG for some fields? But avoid being another AUS -

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Subsea in Europe – Growing but slowing?

An Arctic Plateau

- At a high level of activity but

is there growth in subsea in

the North Sea?

- Near term yes but longer

term at a plateau?

- Value chain bottlenecks –

rigs, subsea engineers – as

well as capex & cashflow

issues with operators

- But important recent

discoveries – Johan Sverdrup

Johan Castberg, Aasta

Hansteen – sets up the

medium term potential

Subsea capex by region (upper chart) and specifically in Europe (lower chart)

Source: Infield Systems

(subsea Capex includes EPC, Installation & development drilling costs for subsea trees, manifolds, templates, etc)

Page 19: SUBSEA UK - Subsea Focus on Europe and Africa London, 12 ... · - expand LNG - gas for GTL/fertilisers - gas to South Africa - FLNG for some fields? But avoid being another AUS -

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Source: Subsea 7

(4) Subsea markets – Challenges

Growing pains

Speed bumps

Supply chains

Execution issues

Page 20: SUBSEA UK - Subsea Focus on Europe and Africa London, 12 ... · - expand LNG - gas for GTL/fertilisers - gas to South Africa - FLNG for some fields? But avoid being another AUS -

20

Oilfield Services in Africa - A Reality Check

Recap - what can

go wrong?

- sdfsfsfsd

This may be too

extreme but . . .

(…as seen in a park in Hong Kong)

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Subsea in Africa & Europe - Growing Pains

Subsea

‘speed bumps’

Record backlog growth

- 2013 has seen a record

number of ‘tree’ awards

- Industry backlogs continue

to set new records

- But executing on this

record workload is causing

challenges – supply chain

delays, higher costs

- Subsea profitability has

disappointed this year

- And likely not to see a

quick recovery

All eyes are on 2015

Subsea installation / equipment – backlog growth (upper chart), margins (lower chart)

Source: Company data

Page 22: SUBSEA UK - Subsea Focus on Europe and Africa London, 12 ... · - expand LNG - gas for GTL/fertilisers - gas to South Africa - FLNG for some fields? But avoid being another AUS -

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Subsea in Africa & Europe – Supply Chains

Expectations . . .

Brazil...“is all about tomorrow

but always will be…”

- plans have taken a step

down but still ambitious

Will Africa’s next phase be

the next Brazil?

- Handling new local content

requirements and HSE

- Specific stresses & strains

on the ultra-deep value chain

- Winners - vessel owners or

equipment/service providers?

- cost and delay scenarios –

returns OK if capex up 50%?

0

1000

2000

3000

4000

5000

6000

7000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

tota

l p

rod

uct

ion

(m

bo

e/d

)

ov erall prodn + 2011-15 plan ov erall prodn + 2012-16 plan

Poly . (ov erall prodn + 2011-15 plan) Poly . (ov erall prodn + 2012-16 plan)

Source: Petrobras

Petrobras – past & planned production

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Subsea in Africa & Europe - A Reality Check

Recap - what can

go wrong?

- oil prices – of course . . . . . . . . OPEC spare capacity, Asian demand, Middle East politics - market volatility risks

- HSE, accidents, regulation . . . . .offshore E&P clearly can’t afford another Macondo – major delay risks

- politics and taxation . . . . . . . . . West Africa, Brazil, Australian unions, US LNG politics – project delay risks

- costs and supply chains . . . . . . local content, local costs (Brazil, Australia, Africa) – new project execution/delay risks

- asset bottlenecks – . . . . . . . . . lack of ultra-deepwater assets, lack of skilled labour – project delay risks

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(5) Subsea in Africa & Europe . . . Conclusions

1 – THE ‘KNOWN KNOWNS’ – an expanding floating rig fleet (25% higher in 2016 vs 2012, not far off doubling vs 2008) is an

important ‘enabler’ for future offshore activity (and some rates are softening as well). Also backlogs for subsea equipment and

installation are up strongly (21% for installation, 60% for equipment) . . . But will there be order growth in 2014?

2 – THE ‘KNOWN UNKNOWNS’ – improving oil supply indicates moderately softer near term outlook for prices, but within the

USD90-100/bbl range – good enough for offshore. But E&P capex heading to a plateau – offshore a relative ‘growth winner’

3 – GROWTH – AFRICA & EUROPE – two of the “themes of the decade” are in Africa – presalt in the West, Gas in the East - key

for overall market growth in subsea. Europe also is on a growth path but a mix of brownfield and greenfield; also facing bottlenecks

in some areas – harsh environment rigs, subsea engineers. Africa & Europe drive 50-60% of medium term offshore capex growth.

4 – CHALLENGES – growing pains and ‘speed-bumps’ are a near term challenge as the industry executes on record backlog

levels; subsea companies have in general missed financial market expectations this year - all eyes are on 2015, not 2014.

Execution and project management issues are a key focus while oil companies budget for the next wave of projects

Subsea is still a growth market but this growth is more selective – no longer ‘doubling in 5 years’

Source: Subsea 7

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25

Disclosure appendix Analyst Certification

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject

security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation

was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: David Phillips

Important disclosures

Equities: Stock ratings and basis for financial analysis

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual

circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its

equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of

companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental,

quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has

assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term

trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities

can be found under the Reports section of this website.

HSBC believes 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. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should

carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning

the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not

be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings

HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5

percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

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Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price

target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands

as a result of normal share price fluctuations without necessarily triggering a rating change.

*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an

industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also

behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid

misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status

to change.

Rating distribution for long-term investment opportunities

As of 08 November 2013, the distribution of all ratings published is as follows:

Overweight (Buy) 45% (33% of these provided with Investment Banking Services)

Neutral (Hold) 37% (34% of these provided with Investment Banking Services)

Underweight (Sell) 18% (27% of these provided with Investment Banking Services)

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in

HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at

www.hsbcnet.com/research.

Additional disclosures

1 This report is dated as at 08 November 2013.

2 All market data included in this report are dated as at close 07 November 2013, unless otherwise indicated in the report.

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