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Co-ordinated by David May, Tim Hammett and Nicholas Peal This guide will help y

Co-ordinated by David May, Tim Hammett and Nicholas Peal This guide will help you gain a quick, but thorough understanding of 22 equity research sectors and industry groups It will help you to understand the organisation of the sector, the key drivers, indicators and themes, historical context, and suitable valuation approaches It is also an open offer to access HSBC’s expertise in fundamental equity sector research HSBC Nutshell A guide to equity sectors Disclosures and Disclaimer This report must be read with the disclosures and analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it EMEA Equity Research Multi-sector September 2010 1 EMEA Equity Research Multi-sector September 2010 abc Dear Client This HSBC Nutshell: A guide to equity sectors has been compiled by the EMEA Equity Research team at HSBC to help you gain a quick, but thorough, understanding of the 22 sectors and industry groups we cover. The guide assumes some basic working knowledge of the world economy, equity markets, financial terminology and ratios, although it is designed to be used by new joiners or people who are looking at industries with which they are not familiar. As one of its business principles, HSBC Group is committed to providing outstanding customer service. HSBC’s Equity Research team reflects this principle in the way we work with you, our clients, on a daily basis. We view working with our clients as a partnership. Within Equity Research, we aim to provide you with ‘best in class, financially robust, independent, insightful, actionable research on a global, regional and local basis’. We are making our resources, knowledge and expertise available to you. Following the publication of this guide, we would like to remind you, our clients, that we are happy to arrange one-on-one or group meetings with our senior analysts to help you build on your sector, industry or stock knowledge – from the nuts and bolts of the industry dynamics through to individual company valuation and recommendation. Please get in touch with your HSBC representative to organise this, if required, or come to me directly. On the front page of each industry section within this guide, you will find the names and contact details of our sector analysts and, where relevant, their specialist sales person/people. If you do not know these analysts and sales people, we would be delighted to set up an initial meeting or call to discuss the HSBC offering and how we can help you. We hope you find this guide useful, and we look forward to working with you or to continuing to work with you in future. Regards David May Head of Equity Research, EMEA (Europe/CEEMEA) david.may@hsbcib.com +44 20 7991 6781 2 EMEA Equity Research Multi-sector September 2010 abc 3 EMEA Equity Research Multi-sector September 2010 abc Aerospace and Defence 5 Autos 13 Banks 21 Beverages 27 Business Services 35 Capital Goods 43 Chemicals 51 Clean Energy and Climate Change 59 Construction and Building Materials 67 Food and HPC 75 Food Retailing 83 Insurance 91 Luxury Goods 99 Metals and Mining 105 Oil and Gas 113 Real Estate 121 Retail – General 129 Sporting Goods 137 Telecoms, Media and Technology 143 Transport and Logistics 151 Travel and Leisure 159 Utilities 165 Basic Accounting Guide 173 Disclosure appendix 190 Disclaimer 192 NB: Company names listed in the sector organisation charts are examples of major players in those industries We acknowledge the efforts of Elizabeth Gill in the production of this report. Contents 4 EMEA Equity Research Multi-sector September 2010 abc 5 EMEA Equity Research Multi-sector September 2010 abc Aerospace and Defence Aerospace and Defence team Harry Nourse* Analyst HSBC Bank Plc +44 20 7992 3494 harry.nourse@hsbcib.com Sector sales Rod Turnbull* Sector Sales HSBC Bank Plc +44 20 7991 5363 rod.turnbull@hsbcib.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations EMEA Equity Research Multi-sector September 2010 6 abc The aerospace and defence sector Aerospace & Defence Defence Aerospace Boeing Airbus (EADS group company) Bombardier Embraer Superjet International Commercial jet manufacturers Gulfstream Bombardier Dassault Embraer Cessna Hawker Beechcraft Business jet manufacturers Gulfstream Bombardier Dassault Embraer Cessna Hawker Beechcraft Business jet manufacturers General Electric Honeywell IAE (RR, MTU, etc) Pratt & Whitney Rolls-Royce (RR) Safran Engine manufacturers General Electric Honeywell IAE (RR, MTU, etc) Pratt & Whitney Rolls-Royce (RR) Safran Engine manufacturers BAE Systems Boeing Defence EADS (Defence) General Dynamics Lockheed Martin Northrop Grumman Prime contractors BAE Systems Boeing Defence EADS (Defence) General Dynamics Lockheed Martin Northrop Grumman Prime contractors Systems and Component suppliers Finmeccanica L3 Communications Raytheon Thales Safran Tier 2/Primes Cobham Ultra Electronics Rockwell Collins Meggitt Tier 3/Systems providers Cobham Ultra Electronics Rockwell Collins Meggitt Tier 3/Systems providers Chemring Goodrich Meggitt Moog Tier4/Sub-contractors AAR Chemring HEICO Umeco Tier 5/Component suppliers AAR Chemring HEICO Umeco Tier 5/Component suppliers Source: HSBC EMEA Equity Research Multi-sector September 2010 7 abc Aerospace: Commercial aircraft orders versus stock price performance for Boeing 0 20 40 60 80 100 120 140 Jan-80 Jul-80 Jan-81 Jul-81 Jan-82 Jul-82 Jan-83 Jul-83 Jan-84 Jul-84 Jan-85 Jul-85 Jan-86 Jul-86 Jan-87 Jul-87 Jan-88 Jul-88 Jan-89 Jul-89 Jan-90 Jul-90 Jan-91 Jul-91 Jan-92 Jul-92 Jan-93 Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 0 20 40 60 80 100 120 12m M. Avg orders Boeing share price (RHS) R2 (stock price vs orders) = 0.80 over past 10 years The 1980s oil and economic crisis followed by a period of strong growth in liberalised markets Aerospace is a long-cycle industry with peak-to-peak timeframes in orders (and deliveries) being approximately 8-10 years Weak economic conditions in 1990, followed by First Gulf War (1991), significant spike in oil prices and Asian crisis in the mid-90s Mushrooming low-cost airlines, strong traffic growth, particularly in emerging economies, and launch of new aircraft (B787) drives orders Traffic, orders collapse post-9/11: lessors & low-cost airlines come to the rescue Restocking recovery Source: Boeing, Thomson Reuters Datastream, HSBC Defence: US DoD investment account spending vs PE relative to S&P 500 ( US defence primes) -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e 60% 70% 80% 90% 100% 110% 120% 130% y-o-y growth (invt. account spend) PE relative vs S&P 500 (RHS) 30-year average PE relative -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e 60% 70% 80% 90% 100% 110% 120% 130% y-o-y growth (invt. account spend) PE relative vs S&P 500 (RHS) 30-year average PE relative Source: Boeing, Thomson Reuters Datastream, HSBC 8 EMEA Equity Research Multi-sector September 2010 abc Sector description The aerospace and defence (A&D) industry sits at the long end of the cyclical landscape, with peak-to- peak durations in the region of 8-10 years for aerospace OE and 15-17 years for US defence spending.  Aerospace – the sub-sector serves the aviation industry and manufactures commercial jets (>100 seat aircraft), regional jets and business jets. The sub-sector also includes the commercial and institutional satellite/related services business.  Defence – the sub-sector serves the armed services and homeland security markets and its activities relate primarily to the design and manufacture of defence equipment including military aircraft, warships, submarines, land-based vehicles, surveillance and radar equipment, and related armaments. While the drivers for each sub-sector are clearly different (air traffic versus threat and geopolitical considerations), there are significant commonalities in terms of technological development, and components, systems and products utilised. The overlap between the sub-sectors is especially significant at the systems and component supplier level. As a result, most component suppliers in the industry operate in both sub-sectors, thereby deriving benefits of economies of scale from common developments. It is also the case that the major aerospace OEMs have significant defence operations, partly to diversify their businesses and to mitigate cyclical pressures. Players in the industry can be classified as:  Original equipment manufacturers (OEMs) in aerospace and prime contractors (tier 1) in defence. These companies are at the forefront of most defence contracts or programmes, with responsibility for designing, manufacturing and assembling the equipment, integration of electronic systems and satisfactory delivery to the end customer; they bear most risk for the programme. There are few competitors in this category due to the requirements of scale, breadth of products, execution capabilities and political influence (in the case of defence).  Tier 2 suppliers. These are suppliers of major systems and are increasingly transitioning to risk/revenue-sharing partners on commercial aerospace programmes. They do not have the product breadth or execution capabilities to compete as prime contractors. They generally bear only some of the risk on the programmes and therefore exhibit less earnings volatility than tier uploads/Geographie/ sector-guide.pdf