1 March 2010

PP 7767/09/2010(025354)
Malaysia Corporate Highlights
RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts N o t e
1 March 2010
MARKET DATELINE

Hock Seng Lee Share Price

Fair Value
:
:
RM1.29
RM1.56
FY12/09 Net Profit Grows By 35% Recom : Outerform
(Maintained)

Table 1 : Investment Statistics (HSL; Code: 6238) Bloomberg: HSL MK

Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/CF P/NTA ROE Gearing GDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009 375.0 56.3 10.3 35.6 12.6 - 17.6 2.5 19.3 Cash 1.9
2010f 514.5 72.4 13.0 26.9 9.9 11.0 12.0 2.0 20.4 Cash 1.9
2011f 597.5 84.2 15.1 16.4 8.5 12.0 10.2 1.7 19.7 Cash 1.9
2012f 617.5 87.6 15.8 4.1 8.2 - 9.8 1.4 17.3 Cash 1.9
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

RHBRI Vs. Consensus

♦ No issue. FY12/09 net profit came in within our forecast but beat the Above
market consensus by 10%. In Line
Below
♦ Forecasts. Maintained.
Issued Capital (m shares) 582.7
♦ Risks. The risks include: (1) New contracts secured in FY12/10-11 coming Market Cap(RMm) 751.7
in below our target of RM500m per annum; and (2) Rising input costs. Daily Trading Vol (m shs) 0.6
52wk Price Range (RM) 0.46-1.35
♦ Sector’s best case priced in. On the big picture, while a rosy picture for Major Shareholders: (%)
the construction sector has been priced in based on construction stocks’ Yii/Yu family 52.0
current rich valuations, it is still far from being a reality, especially so after Amanah Saham B’putera 10.2
a slew of negative developments including reduced gross development
expenditure in 2010, Dong’s devaluation, the Dubai credit crisis and the
FYE Dec FY10 FY11 FY12
seemingly declining dominance of the big boys in large-scale projects. We
EPS Revision (%) - - -
believe the market has under-appreciated two other key risks as well, Var to Cons (%) +18 +26 -
namely: (1) Possible delays in project implementation; and (2) Sub-par
margins due to stiff competition. PE Band Chart

♦ Maintain Outperform. However, HSL is an exception due to the high PER = 12x
entry barrier to the construction market in Sarawak and this status quo PER = 10x
PER = 8x
appears unlikely to change over the short to medium term. Having spoken PER = 6x
to people from all walks of life during our recent visit to Kuching, the
general consensus is that: (1) The coming Sarawak state election is likely to
be called by the end of the year; and (2) It is likely to turn out to be a non-
event. Assuming the election is to be a non-event as predicted, we believe
it will be positive for the construction players in Sarawak. Status quo Relative Performance To FBM KLCI
means a certain degree of “special consideration” or exclusivity given to
Sarawak-based contractors for most public projects in Sarawak will stay.
Competition within only a small pool of contractors in Sarawak means Hock Seng Lee
Sarawak-based players can still enjoy better margins vis-à-vis their peers in
West Malaysia. HSL’s outstanding construction orderbook is estimated at
RM1.2bn. Indicative fair value is RM1.56 based on 12x FY12/10 EPS, in line
with our 1-year forward target PER for the construction sector of 10-14x. FBM KLCI

Please read important disclosures at the end of this report.

Joshua CY Ng
(603) 92802151
joshuang@rhb.com.my

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 1 of 3
available for download from www.rhbinvest.com
 1 March 2010

Table 2: Earnings Review (YoY Cumulative)

FYE Dec 2008 2009 YoY Observations/Comments
(RMm) 12M 12M Chg
Turnover 309.1 375.0 21% Driven by strong topline growth at the construction division.
Construction 277.2 345.6 25% New contracts, particularly, the RM452m Kuching Sewerage project, began to
hit key billing milestones.
Property 31.9 29.4 (8%) Reflective of the slowdown in the property sector.
EBIT 55.7 74.1 33% Higher construction profits, partially offset by lower property profits.
Construction 47.5 67.4 42% Also helped by improvement in margins.
Property 8.2 6.7 (18%) Reflective of the slowdown in the property sector.
Net inc/(exp) 0.7 1.5 >100%
Pretax profit 56.5 75.6 34%
Taxation (14.6) (19.2) 32%
Net profit 41.8 56.3 35% Construction profits were the key driver.
EPS (sen) 7.6 10.3 36%

EBIT margin - Overall 18.0% 19.8% 1.7% pts

EBIT margin - Construction 17.1% 19.5% 2.3% pts We believe initial teething problems at certain new projects were overcome.
Pretax margin 18.3% 20.2% 1.9% pts
Effective tax rate 25.9% 25.5% (0.4% pt)

Table 3: Earnings Review (QoQ)

FYE Dec 2009 2009 2009 2009 QoQ Observations/Comments
(RMm) 1Q 2Q 3Q 4Q Chg
Turnover 77.9 82.1 101.7 113.3 11%
Construction 70.9 74.8 94.5 105.4 11% Work progress on key contracts, particularly, the
RM452m Kuching Sewerage project, gathered
momentum.
Property 6.9 7.3 7.2 8.0 11% Normal quarterly fluctuation.
EBIT 13.6 16.7 20.3 23.5 16%
Construction 12.1 15.2 18.7 21.4 14% Helped further by slight improvement in margins.
Property 1.5 1.5 1.6 2.1 32% Normal quarterly fluctuation.
Net inc/(exp) 0.4 0.4 0.4 0.3 (12%)
Pretax profit 14.0 17.1 20.7 23.8 15%
Taxation (3.6) (4.3) (5.2) (6.2) 19%
Net profit 10.4 12.8 15.5 17.6 14% Construction profits were the key driver.
EPS (sen) 1.9 2.3 2.8 3.2 14%

EBIT margin - Overall 17.4% 20.4% 20.0% 20.7% 0.8% pt

EBIT margin - Construction 17.0% 20.3% 19.8% 20.3% 0.5% pt Normal quarterly fluctuation.
Pretax margin 17.9% 20.8% 20.3% 21.0% 0.7% pt
Effective tax rate 25.4% 25.1% 25.2% 26.0% 0.8% pt

Table 4: Earnings Forecasts Table 5: Forecast Assumptions

FYE Dec (RMm) FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 375.0 514.5 597.5 617.5 Construction EBIT margin (%) 18.0 18.0 18.0
Turnover growth (%) 21.3 37.2 16.1 3.3 New orderbook secured (RMm) 500 500 500

EBITDA 79.5 98.7 113.7 117.3

EBITDA margin (%) 21.2 19.2 19.0 19.0

Depreciation -5.4 -4.0 -4.0 -4.0

Net Interest 1.5 1.8 2.6 3.6
Associates 0.0 0.0 0.0 0.0
EI 0.0 0.0 0.0 0.0

Pretax Profit 75.6 96.5 112.3 116.9

Tax -19.2 -24.1 -28.1 -29.2
PAT 56.3 72.4 84.2 87.6
Minorities 0.0 0.0 0.0 0.0
Net Profit 56.3 72.4 84.2 87.6
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions
and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to
opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer,

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 2 of 3
available for download from www.rhbinvest.com
 1 March 2010

invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no
reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an
interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of
persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular
investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend
on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or
damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group
may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of
any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services
from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon
various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over
a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended securities,
subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 3 of 3
available for download from www.rhbinvest.com