Market Outlook & Strategy 2Q2010: Volatile Market Uptrend Amid Policy Normalisation - 31/01/2010

MARKET DATELINE
PP 7767/09/2010(025354)
31 March 2010
•
Malaysia
Market Outlook
& Strategy 2Q2010
Volatile Market Uptrend Amid
Policy Normalisation
Executive Summary
 The prospects of a sustainable global economic recovery have improved in recent
months despite the emergence of sovereign debt worries of late. This augurs well for
the country’s exports, which coupled with strengthening domestic private sector demand
will see the Malaysian economy rebounding to expand by 4.5% in 2010. Similarly,
the recovery in corporate earnings has gained momentum and the normalised net EPS
for the FBM KLCI stocks under our coverage is projected to bounce back sharply from
a contraction of 14.2% in 2009 to a double-digit growth of 15.3% each in 2010 and
2011.
 Whilst both the economic and corporate earnings recoveries are gaining pace, valuations
are also back to normal levels. It is, however, still a very under-owned market by
foreign investors and potentially, the market could be re-rated if foreign investors turn
positive on the country’s economic reforms to bring about a more competitive economy.
Meanwhile, we expect external events to dominate market movements and any global
policy changes will likely cause the market to be volatile. Our year-end FBM KLCI
target, however, remains unchanged at 1,400 or 15x 2011 earnings.
 In our view, any significant weakness in the market is an opportunity to accumulate

quality stocks for longer-term performance as we believe that a global sovereign
credit problem will unlikely unfold and the global economic recovery is more sustainable
than feared. Nevertheless, investors would have to factor in the anticipated global
policy changes, rebalance their portfolios and prepare for greater market volatility
ahead.
 Stock picking is key. The challenge is to look for Alpha+ stocks, including recovery
leaders and quality cyclicals that have a strong leverage to the economic recovery.
In our view, the banking sector would continue to benefit from the economic recovery,
while pent-up demand and new applications will likely attract new focus into the
semiconductor industry. In addition, a base tariff review, which coupled with fundamental
recovery in electricity demand, should augur well for TNB in the power sector, while
strong data traffic and attractive dividend yields would present good investment
themes for the telco sector.
Please read important disclosures at the end of this report.
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download
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CONTENTS
EXECUTIVE SUMMARY 1
MACRO ECONOMIC OUTLOOK 3
MARKET REVIEW 10
MARKET OUTLOOK 13
MARKET STRATEGY 20
FBM KLCI FROM THE TECHNICAL PERSPECTIVE 24
SECTOR COVERAGE
Banking 26
Building Materials 28
Construction 30
Consumer 32
Gaming 34
Infrastructure 36
Insurance 38
Manufacturing 40
Media 42
Motor 44
Oil & Gas 46
Plantation 49
Power 52
Property 54
Semiconductor & Information Technology 56
Telecommunications 58
Timber 60
Transportation 62
APPENDIX
Valuations and Ratings of Individual Stocks 64
Under Coverage
STRATEGY 2 PAPER
Macro Economic Outlook
The Malaysian economy emerged from a recession in the 4Q of last year,

underpinned by the Government’s stimulus spending and a recovery in exports.
We expect the export recovery to be sustained in 2010 despite various
challenges that threaten to derail it. Similarly, we expect domestic demand to
gain momentum, underpinned by a pick-up in consumer spending, while
businesses will likely resume their investment during the year. As a whole, we
expect the Malaysian economy to expand by 4.5% in 2010, from -1.7% in 2009.
As the Malaysian economic recovery gains pace, the Government has unveiled
a new economic model (NEM) on 30 March to chart the direction for the
country’s development towards 2020. The current account surplus in the
balance of payments will likely narrow, as the recovery of the economy will suck
in more imports. The surplus, however, will remain large and provide an
underlying support to the ringgit, which is projected to strengthen to RM3.20/
US$ by end-2011. Inflation will likely trend up but remain manageable at 2.0%
in 2010. The Central Bank will likely raise the OPR by another 25 basis points
to 2.5% in July.
Economic Recovery Strengthening
Like many other countries in this region and the developed economies, the Malaysian We expect the economy
economy emerged from a recession in the 4Q of last year, underpinned by a to expand by 4.5% in
recovery in exports and the Government’s stimulus spending. We expect the export 2010, compared with a
recovery to be sustained in 2010 despite various challenges that threaten to derail recession in 2009, on the
it, including budget deficit and debt woes in some countries in the Euroland, concerns back of a pick-up in
over a double dip in the global economic recovery as government spending fizzles exports and strengthening
out and policy tightening on the back of asset price inflation in Asia and emerging domestic demand
economies. Similarly, we expect domestic demand to gain momentum, and
consumer and business spending to gradually take up the slack left by the fiscal
stimulus spending when it fizzles out in 2H 2010. This will likely be underpinned by
a pick-up in consumer spending, on the back of an improvement in job market. In
the same vein, investors will likely resume their investment given brightening
economic prospects. As a whole, we expect the Malaysian economy to expand
by 4.5% in 2010, compared with -1.7% in 2009.
A New Economic Model To Lead The Country Forward
As the Malaysian economic recovery gains pace, the Government unveiled a new The NEM contains eight
economic model (NEM) on 30 March to chart the direction for the country’s strategic reform
development towards 2020. The NEM contains eight strategic reform initiatives aimed at
initiatives (SRIs) to help the country transform itself into a high-income economy assisting the country to
by the year 2020. Among the proposed action plans are strategies to re-energise achieve a more
the private sector to drive growth, creating a competitive domestic economy via the competitive and high
phasing out of subsidies and price controls, a revamping of affirmative action policies income economy by the
and reducing the dependent on foreign workers as well as measures to promote
year 2020
sustainability of growth.
The NEM sets a target to achieve an average economic growth of 6.5% a year The NEM sets a target to
over 2011-2020. Although the growth target set is more ambitious than an achieve an average
average growth of 4.3% a year achieved in 2001-09, it has to be the case in order economic growth of 6.5%
to encourage people to work harder and to surpass what was achieved in the last a year over 2011-2020, but
nine years. However, we believe it is not an easy task given the presence of we believe it is not an easy
global imbalances and countries such as China, Vietnam, India and Indonesia have task
become attractive hosts for foreign direct investment (FDI). Also, policy measures
have to be well executed in order to ensure the success implementation of the NEM
to bring about a more competitive and higher income economy. Under the NEM, the
Government aims to push the GNP per capita to US$17,725 by 2020, from the
current level of US$7,558.
STRATEGY 3 PAPER
At the same time, the National Economic Advisory Council (NEAC) vows to adopt The NEAC vows to adopt a
a new way of doing things in order to help it achieve its growth target. However, new way of doing things in
not all the approaches such as growth through productivity, private sector-led order to help it to achieve
growth, cluster economic activities and retain skilled workers are new, in our view. its growth target
These approaches have been adopted in the last few Malaysia economic plans, but
the results left much to be desired, partly because of greater competition for FDI
from other emerging economies, the lack of skilled labour and less business friendly
public delivery system.
Whilst the NEM will chart new direction for the economy, we believe the impact will The impact of the NEM,
only be felt more significantly over the medium term given the challenges however, will only be felt
that the country is facing. The country is suffering from brain drain and the shortage more significantly over
of skilled manpower for it to move up the value chain and to be transformed into the medium term given
a services-based economy. Meanwhile, Malaysian companies are venturing abroad
the challenges that the
in search for growth and business opportunities, while the country is facing keen
country is facing
competition in attracting foreign direct investment (FDI). As a result, the country
suffered a net outflow of direct investment in the last three consecutive years.
Indeed, we believe the successful implementation of the NEM still lies with the The success of the NEM
execution of key policy initiatives and the political will to force through still lies with the execution
changes. Whilst the launching of a Government Transformation Programme on 28 and the political will to
January to improve the Government’s delivery system is a good start, much remains force through changes
to be done to bring about a more competitive high-income economy.
Normalisation Of Extremely Loose Monetary Conditions Has Begun

In Some Countries
Meanwhile, the prospects of a sustainable global economic recovery have Prospects of a sustainable
improved in recent months, in our view, despite various challenges that threaten global economic recovery
to derail it. This is primarily on account of a combination of factors, including have improved in recent
aggressive policy stimulus around the globe where policymakers are unlikely to roll months and the
it back prematurely, significant improvement in financial markets and risk appetite
normalisation of policies
of investors and more importantly, asset prices have reached a favourable inflection
has begun in some
point. Unlike during the crisis, investors are no longer fearful of catching a falling
countries
knife and more substantial weakness in asset prices will be taken as investment
opportunities. As a result, policymakers around the globe have begun to exit their
extremely loose policy and emergency lending programmes, but the process
remains gradual in our view, suggesting that its impact on economic activities will
unlikely be significant.
Global Economic Recovery Picking Up Momentum
Indeed, the global economic recovery is gaining momentum. As it stands, The global economic
global manufacturing activities have recovered to positive growth for the last recovery is gaining
seven consecutive months, albeit at a more moderate pace in February, while momentum
services activities strengthened during the month (see Chart 1). Similarly, the
OECD composite leading indicator’s 12-month rate of change strengthened to 9.6%
in January, the fifth successive month of increase and from +8.1% in December and
+6.0% in November (see Chart 2). The improvement was across the board,
suggesting that prospects of OECD countries’ economies are likely to improve in the
months ahead.
In the US, the economy grew at a stronger pace in the 4Q, underpinned by inventory Improvement in the US
rebuilding and an increase in business spending. The improvement is gradually economy is gradually
trickling down to a better job market, as indicated by employment of temporary trickling down to a better
workers, which picked up for the last five consecutive months up to February. As job market and a
a result, non-farm payrolls recorded a significantly smaller drop of an average of sustained increase in
31,000 jobs a month in January-February, compared with a loss of 557,000 a month
consumer spending
in 1H 2009. Similarly, the personal consumption expenditure (PCE) strengthened to
an annualised rate of 2.1% in January, from +1.7% in December and after hitting
STRATEGY 4 PAPER
Chart 1 Chart 2
Global Manufacturing And Services OECD Composite Leading
Activities Picking Up Indicator Points To Brighter Economic
Prospects
Index
ISM % 12-mth annualised rate of change
65
Services 30
25
60

20
55
15

50 10
5
45
0
40 ISM -5
Manufacturing
-10
35
Total OECD Japan US Euroarea China
-15
30
-20
05 06 07 08 09 10
00 01 02 03 04 05 06 07 08 09 10
Source: Markit Economics Source: OECD
a low of +1.1% in November. Although an improvement in the housing sector has

weakened somewhat, it will unlikely pose a major drag to the US economic recovery.
As a whole, the US economy will likely recover to around +3.0% in 2010, from
-2.4% in 2009.
Similarly, we expect the Euroland’s economy to gradually recover, despite the The Euroland’s economy
emergence of sovereign debt worries of late. Given its export dependency, the will likely improve, while
Japanese economic recovery will likely be sustained into 2010 as well, in tandem exports recovery will lift
with a recovery in exports. In the same vein, China’s economy will likely continue
the Japanese and Chinese
to expand in the months ahead, after recording +10.7% yoy in the 4Q. Meanwhile,
economies
the Chinese authorities have stepped up their efforts to control credit expansion,
particularly to local governments, in a move to moderate the pace of asset price
inflation and reduce the potential risks of default.
The global economic recovery in 2010 will, however, remain uneven, in our The global economic
view, given sustained high unemployment situation in the key developed countries, recovery in 2010 will,
debt problems in some of the European countries, and deflation in Japan. however, remain uneven
Exports On The Path To Recovery
As a whole, we expect a pick-up in global economic activities to translate into higher The country’s real exports
demand for the country’s manufactured goods and commodity products. We expect are projected to record a
the country’s real exports to record a growth of 6.5% in 2010, a rebound from growth in 2010
-10.1% in 2009.
Domestic Demand Will Likely Improve
Domestically, consumer and business confidence will likely improve further and Domestic demand is
translate into stronger spending, on the back of an improvement in economic projected to rise by 3.2%
prospects. As a result, domestic demand is projected to rise by 3.2% in 2010 in 2010, driven by an
(see Table 1), compared with -0.4% in 2009. This will likely be driven by an increase
increase in consumer
in consumer spending, which is envisaged to grow at a stronger pace of 4.8% in
spending
2010, after slowing down to +0.8% in 2009. The pick-up in consumer spending will
be underpinned by an improvement in the job market, while firmer commodity prices
will encourage rural households to spend. Also, the Government has put in more
efforts to promote the tourism industry and measures to encourage consumer
spending in the 2010 Budget. Similarly, we believe high savings and rising
consumerism as well as pent-up demand will continue to provide support to
consumer spending in the country.
STRATEGY 5 PAPER
Table 1
GDP By Demand Aggregate (2000=100)
2007 2008 2009 2008 2009 2010(f) 2011(f)
4Q 1Q 2Q 3Q 4Q
% Growth in Real Terms
GDP 6.2 4.6 -1.7 0.1 -6.2 -3.9 -1.2 4.5 4.5 5.0
Consumption:
Private 10.4 8.5 0.8 5.3 -0.7 0.5 1.5 1.7 4.8 6.0
Public 6.5 10.9 3.7 12.7 2.1 1.0 10.9 1.3 -2.5 4.5
Total investment 9.6 0.8 -5.5 -10.2 -10.8 -9.6 -7.9 8.2 3.0 8.2
Private 11.8 0.8 -21.8 n.a n.a n.a n.a n.a 10.0 12.7
P u b lic 7.1 0.7 12.9 n.a n.a n.a n.a n.a -1.5 4.9
Goods & services:
Exports 4.5 1.3 -10.1 -13.3 -15.2 -17.3 -13.4 7.3 6.5 7.7
Imports 6.0 1.9 -12.5 -10.2 -23.5 -19.7 -12.9 6.9 9.9 9.1
Agg.domestic demand 9.6 6.8 -0.4 2.8 -2.9 -2.2 0.4 3.0 3.2 6.3
(f): RHBRI's forecasts
In the same vein, we believe the private investment will likely bounce back in Private investment will
2010, albeit from a low base, as investors resume their investment and capacity likely bounce back but
utilisation rate rises on the back of an improvement in global economic outlook. public spending is
These will likely be enhanced by an improvement in business confidence. Public projected to contract
investment, however, is projected to contract in 2010, in line with a cutback in during the year
development expenditure by the Federal Government due to fiscal consolidation.
This will likely be made worse by a sharper drop in non-financial public enterprises’
(NFPEs) development spending during the year. Still, fixed capital formation is
envisaged to increase by 3.0% in 2010, a rebound from -5.5% in 2009, as a pick-
up in private investment will mitigate the decline in public investment. Meanwhile,
public consumption will likely contract during the year, in line with the Government’s
efforts to cut its budget deficit.
Fiscal Consolidation Will Hold Back Growth
In its 2010 Budget, the Federal Government has undertaken a bold move to reduce The Federal Government’s
its budget deficit, after rising sharply due to the implementation of two economic budget deficit is projected
stimulus packages totaling RM67bn to cushion the Malaysian economy from a severe to narrow significantly to
global recession. As a result, the Federal Government’s budget deficit is 5.6% of GDP or RM40.5bn
projected to narrow significantly to 5.6% of GDP or RM40.5bn in 2010, from in 2010, from a deficit of
a deficit of 7.0% of GDP or RM47.4bn in 2009. Indeed, the budget deficit incurred 7.0% of GDP or RM47.4bn
in 2009 was smaller than the initial estimate of 7.4% of GDP or RM51.1bn due partly
in 2009
to a smaller-than-expected development expenditure. The bold move to contain its
budget deficit, in our view, will prevent the country’s sovereign credit rating
from deteriorating. This remains a key concern to the authorities, after the Fitch
Rating Agency downgraded Malaysia’s long-term local currency rating to single-A on
9 June 2009, from single-A-plus, on concerns over the country’s ballooning budget
deficit. The Government’s move, together with a cutback in development
expenditure by non-financial public enterprises (NFPEs), however, will contribute to
a projected reduction of 0.8 percentage point from real GDP growth in 2010.
STRATEGY 6 PAPER
Manufacturing Sector To Bounce Back And Services Sectors To
Strengthen
On the supply side, we envisage a broad-based recovery in economic activities from Manufacturing sector will
manufacturing to services, construction, agriculture and mining sectors. Value added rebound in 2010, on the
in the manufacturing sector is projected to bounce back and expand by 7.5% in back of a pick-up in
2010, from -9.3% in 2009 (see Table 2). Growth will likely be driven by a pick-up exports and domestic
in output of export-oriented industries, on the back of an improvement in global demand
demand for the country’s exports. Similarly, output of domestic-oriented industries
will likely pick up, on account of an improvement in consumer spending and private
investment.
Table 2
GDP By Industrial Origin At 2000 Prices
2007 2008 2009 2008 2009 2010(f) 2011(f)

4Q 1Q 2Q 3Q 4Q
% Growth in Real Terms
GDP 6.2 4.6 -1.7 0.1 -6.2 -3.9 -1.2 4.5 4.5 5.0
Agriculture 1.4 4.0 0.4 0.5 -4.3 0.3 -0.5 6.0 2.3 2.8
Mining 2.0 -0.8 -3.8 -5.7 -5.2 -3.6 -3.5 -2.8 1.2 2.0
Manufacturing 3.1 1.3 -9.3 -8.8 -17.9 -14.5 -8.6 5.3 7.5 8.0
Construction 4.7 2.1 5.7 -1.6 1.1 4.5 7.9 9.2 3.1 2.8
Services 9.6 7.2 2.6 5.7 -0.2 1.6 3.4 5.1 4.5 4.7
(f) : RHBRI's forecasts
In the same vein, the broad services sector is projected to grow at a faster The services sector is
pace of around +4.5% in 2010, compared with +2.6% in 2009, in line with higher projected to grow at a
consumer spending and trade activities. Also, the Government’s efforts to promote faster pace, as consumer
the sector and a sustained increase in tourist arrivals as a result of an improvement spending and trade
in confidence will boost activities in the sector. As a result, we expect activities in activities pick up
transport & storage sub-sector to turn around during the year. At the same time,
activities in communications, wholesale & retail trade and accommodation &
restaurants sub-sectors will likely strengthen. We also expect activities in finance &
insurance and real estate & business sub-sectors as well as output of utilities to pick
up, in tandem with an improvement in business activities during the year.
The agriculture sector is also envisaged to bounce back to +2.3% in 2010, Agriculture sector is
after slowing down to +0.4% in 2009. This is on account of a pick-up in palm oil envisaged to rebound,
production due to the low base effect as well as expanded matured areas. At the mainly on account of a
same time, the decline in output of saw logs will likely narrow further during the year, pick-up in palm oil
after falling by a smaller magnitude in 2009. Similarly, the production of rubber will production
likely bounce back during the year, given better pricing and after going through three
consecutive years of decline. Meanwhile, the non-commodity sub-sector such as
fisheries, livestock and crops will contribute to growth as well, on the back of the
implementation of various projects by the Government.
Similarly, we expect mining output to record a modest growth of 1.2% in Mining value added is
2010, after two consecutive years of contraction and compared with -3.8% in 2009. projected to increase
This is mainly on account of a pick-up in the production of crude oil and liquefied modestly in 2010
natural gas (LNG) due to higher demand. Also, several new oil fields are expected
to start production, while the expansion of MLNG Dua is expected to increase
production of LNG during the year.
In tandem with a slower increase in the Government’s development expenditure, Construction activities,
construction activities are projected to moderate to 3.1% in 2010, from however, will likely
+5.7% in 2009. As a result, we expect the growth in civil engineering sub-sector moderate due to fiscal
to moderate during the year. This, however, will likely be mitigated by a pick-up in consolidation
construction activities in the residential property sub-sector as demand conditions
have improved and property developers are coming up with more launches, while
construction activities in non-residential property sub-sector are still ongoing.
STRATEGY 7 PAPER
Monetary And Loan Expansion To Remain Supportive Of Economic
Growth
The broader money supply, M3, moderated to +7.9% yoy in January 2010, after Monetary policy to remain
reaching a high of +10.0% in November. Despite the moderation, growth remained supportive of economic
commendable, indicating that the underlying economic activities are still expanding. growth
Going forward, we expect monetary policy to remain supportive of economic
growth and M3 will likely pick up to around 10.5% in 2010, from +9.1% at end-
2009, in line with a pick-up in economic activities.
Loan growth, however, strengthened to 8.6% yoy in January, from +7.8% in Loans will pick up in 2010,
December and a low of +7.0% in November. This was the strongest growth in eight in tandem with a recovery
months, underpinned by a pick-up in corporate and household borrowings during the in the economy
month. Going forward, we expect the banking system’s loans to expand by 9.0%
in 2010, from 7.8% in 2009, in tandem with the pick-up in the economy.
In terms of asset quality, the expansion in loan base, coupled with the recovery in The NPL ratios are likely
non-performing loans (NPLs) and bad debt written-off, further reduced the banking to improve in 2010
system’s NPL ratios. As a result, the 3-month gross NPL ratio of the banking system
eased to 3.20% of total loans in January, from 3.36% in November and a high of
4.11% in January last year. Similarly, the 3-month net NPL ratio fell to 1.73% of
total loans in January, from 1.92% in November and 2.20% a year ago. Going
forward, NPLs will likely improve in 2010, in line with the recovery in the
economy. As a whole, we expect the banking system’s 3-month gross and net NPL
ratios to ease to around 3.0% and 1.5%, respectively, by end-2010, compared with
3.2% and 1.8%, respectively, at end-2009.
Current Account Surplus To Narrow And Ringgit Will Likely

Appreciate
In tandem with a pick-up in economic activities, imports are expected to rise faster The current account
than that of exports. This will lead to a smaller merchandise trade account surplus surplus of the balance of
in 2010. At the same time, we envisage the deficit in the income account to widen payments is projected to
during the year, as non-resident controlled companies repatriate higher dividend on narrow in 2010
the back of improving corporate earnings. These, however, will likely be mitigated
by an improvement in the services account, which is projected to record a larger
surplus during the year, in line with a pick-up in travel receipts. Similarly,
repatriations of salaries and wages by foreign workers are likely to drop, in line with
the Government’s policy of reducing the employment of foreign workers. As a
result, we expect the current account surplus of the balance of payments to
narrow to around RM97.1bn or 13.4% of GNI in 2010, from a surplus of
RM112.7bn or 17.3% of GNI in 2009 (see Table 3). Still, the current account surplus
remains sizeable and will contribute to a build-up in the country’s foreign exchange
reserves and fuel domestic liquidity in the financial system.
Table 3
Balance Of Payments
2008 2009 2008 2009 2010(f) 2011(f)
4Q 1Q 2Q 3Q 4Q
(RMbn)
Current account 129.5 112.7 29.6 31.4 28.8 25.3 27.3 97.1 98.5
(% of GNI) (18.1) (17.3) n.a n.a n.a n.a n.a (13.8) (13.0)
Goods 170.6 141.5 38.8 37.0 33.1 33.4 38.0 133.2 132.9
Services 0.2 3.2 0.4 2.5 1.0 0.1 -0.4 1.1 1.7
Income -23.7 -12.6 -5.6 -3.9 -1.5 -1.6 -5.5 -22.2 -23.1
Current transfers -17.5 -19.4 -4.0 -4.2 -3.9 -6.7 -4.7 -15.0 -15.0
Capital account 0.6 -0.2 -0.0 -0.0 -0.0 -0.0 -0.0 0.0 0.0
Financial account -118.5 -82.9 -71.8 -29.8 -24.2 -11.1 -17.9 -35.5 -21.5
Errors & omissions* -29.9 -15.7 -19.6 1.7 -2.4 -2.7 -12.3 -25.0 -20.0
Overall balance -18.3 13.9 -61.9 3.3 2.1 11.5 -3.0 36.6 57.0
Outstanding reserves^ 317.4 331.3 317.4 320.7 322.9 334.4 331.4 367.9 424.9
(US$)^ 91.5 96.7 91.5 87.8 91.5 96.0 96.7 111.5 132.8
(f): RHBRI's forecast ^: As at end-period
* : Reflect mainly revaluation gains/losses from Ringgit depreciation/appreciation and statistical discrepancies
STRATEGY 8 PAPER
Capital outflow, on the other hand, will likely ease further to RM35.5bn in 2010, Capital outflow, on the
after slowing down to RM82.9bn in 2009. This is on account of a pick-up in portfolio other hand, will likely ease
investment in 2010, after recording a small inflow in 2009, in line with an further in 2010, in line with
improvement in the country’s economic prospects. Similarly, net direct investment
an improvement in the
is projected to record a net inflow in 2010 due to higher inward direct investment,
country’s economic
as investors resume their investment, in tandem with an improvement in global
prospects
economic prospects. These, however, will likely be offset partially by an increase
in Malaysians’ other investments abroad, including loans and trade credits, as
businesses look for new opportunities overseas.
As a whole, the overall balance of payments is projected to record a larger The overall balance of
surplus of around RM36.6bn in 2010, compared with a surplus of RM13.9bn in 2009, payments is projected to
after taking into account a larger deficit in errors & omissions. Consequently, the record a larger surplus in
country’s foreign exchange reserves will likely increase to US$111.5bn by end-2010, 2010
from US$96.7bn at end-2009.
The build-up in foreign exchange reserves will continue to provide an underlying The ringgit will likely
support to the ringgit. The movement of the ringgit, however, has been volatile in settle at around RM3.20/
recent months, as investors adjusted to changes in policy and the pace of economic US$ by end-2010
recovery. This was further complicated by concerns over Greece’s deficit problem
that had weighed down the euro. As a whole, the ringgit has overshot RM3.30/US$
due to inflow of speculative funds, as Asian currencies (ex-Japan) strengthen against
the US dollar on account of a stronger economic recovery in Asia and a faster pace
of policy normalisation. We believe this will likely be temporary and the ringgit will
likely settle at around RM3.30/US$ by end-2010 and at RM3.20/US$ by end-
2011. Based on the real effective exchange rate (REER) model, the fair value of
the ringgit is currently estimated at around RM3.43/US$.
Higher Price Pressure In 2010, But Manageable
Despite the Chinese New Year celebration, the headline inflation rate moderated Inflation rate will likely
to 1.2% yoy in February, from +1.3% in January but higher than +1.1% in trend up to 2.0% in 2010,
December. This was the first easing after two consecutive months of picking up, on the back of stronger
indicating that price pressure has eased somewhat, as traders might have difficulties domestic demand
in raising prices given that economic recovery is still at its early stage. Going
forward, inflation rate will likely inch up, on the back of stronger domestic demand.
Higher crude oil price, which is projected to fluctuate at between US$80-100/barrel
in 2010, compared with an average of US$62/barrel in 2009, and other commodity
prices will also contribute to a pick-up in consumer prices. In addition, the Government
plans to gradually remove some of the subsidies in order to reduce its financial
burden. As a whole, we believe inflation will likely trend up to 2.0% in 2010, from
+0.6% in 2009.
Normalisation Of Interest Rates Will Continue
While the headline inflation is likely to gradually trend up, we believe it will likely be We expect Bank Negara to
manageable. Nevertheless, as the economy has turned around in the 4Q of last year
raise its OPR by another
and is expected to improve further in 2010, there is a need for the Central Bank
25 basis points in July
to bring interest rates back to a more neutral level to prevent financial imbalances
2010 to 2.5% and the OPR
from building up. As a result, the Central Bank raised its overnight policy rate (OPR)
by 25 basis points to 2.25% on 4 March. We believe it will raise it again, albeit at will likely stay at this level
a measured pace, and the OPR will likely be raised by another 25 basis points until the end of the year
in July 2010 to 2.5%. Indeed, Bank Negara Malaysia Governor Tan Sri Dr Zeti
said on 16 March that “the Central Bank may increase interest rates further to avert
asset bubbles and discourage risky investments by people seeking better returns,
even as inflation will likely remain modest this year”. However, we believe it would
not raise interest rates at every policy meeting given expectation of an uneven
global economic recovery. This suggests that the OPR will likely stay at 2.50% until
the end of the year. Given that this is a normalisation and not policy tightening per
se, we believe a mild and gradual increase in interest rates from an extremely low
level would unlikely affect consumer spending and business activities in a material
way.
STRATEGY 9 PAPER
Market Review
External Issues Dominated Market Movements
Despite higher volatility with declining volumes, the local bourse was relatively External issues dominated
resilient although it underperformed markets in Indonesia, Thailand and the Philippines market movements
in the 1Q. The FBM KLCI benchmark was up by 3.1% year to date, with external during the quarter under
issues dominating market movements. Apart from key economic data releases, review
particularly from the US and China, major events that led to the volatility of the
market include credit tightening in China, the proposal to restrict the scope of banks’
activities in the US, debt worries in Europe as well as normalisation of policies in
some countries around the globe.
In general, the market got off to a good start in the new year as investors returned The new year got off to a
to the market after the year-end holidays, with trading volume picking up. This was good start with broadening
partly attributed to asset reallocation exercises by institutional investors and the market participation on
sentiment was also buoyed by Wall Street’s upbeat performance on the back of more the back of more positive
positive data supporting the strength of the global economic recovery. The FBM KLCI economic data releases
benchmark trended up although there were occasional profit-taking activities caused globally
by China’s tightening measures. From second liners and selected blue chips, investor
interest broadened to include more sectors as well as laggards and smaller capitalised
stocks. Investors on Wall Street were expecting more positive corporate earnings
in the results reporting season and the local benchmark crossed the psychological
important 1,300-point level on 19 January.
The FBM KLCI benchmark continued to trend up and hit a high of 1,308.36 on 21 The KLCI benchmark hit a
January before succumbing to more significant profit-taking pressures (see Chart 3) high of 1,308.36 on 21
as US markets slumped. This was on account of US President’s proposal to set limits January before
on risk-taking activities of the big banks, sending fears that banks’ potential earnings succumbing to profit-
and size will be severely affected by the proposed rulings. The Dow Jones Industrial taking pressures due to
Average fell briefly to below the 10,000-point mark. This, coupled with the emergence
US proposal to restrict
of debt problems in several highly indebted European nations, sent the global bourses
banks’ activities and debt
reeling and the FBM KLCI benchmark plunged to a low of 1,233.86 on 9 February
problems in Europe
with falling volumes.
Chart 3
FBM KLCI Movements From October 2009 To March 2010
Index Relisting of Fitch US President’s Release of China’s

Maxis downgraded proposal to set 4QGDP by inflation rate
1,340 2010 Budget 19 Nov 09 Greece’s limit on risk- BNM. unexpectedly
speech by credit rating. taking activities of 24 Feb 10 jump to
the Prime 8 Dec 09 the big banks. BNM raised 2.7% yoy
Minister. Visit by 22 Jan10 OPR by 25 for Feb.
1,320 Chinese bps. 11 Mar 10
23 Oct 09 Haiti

premier to 4 Mar 10

quake
M’sia
14 Jan 10

1,300 10 Nov 09 US Fed Reserve



hiking discount

rate by 25bps.

1,280 19 Feb 10

1. Released


of BNM

1.FOMC & BNM maintained Annual


1,260

Moody’s
interest rates at 0.25% & 2.0% Report.
Investor
respectively.26/27 Jan 10 24 Mar 10

Services
2.Chinese banks tightened new 2. Fitch cut
1,240 Standard & warning
credit. 27 Jan 10 Portugal’s
BNM Poor about the
BNM 3. PM unveiled Government credit rating

Maintained downgraded potential risk

Maintained Transformation Programme (GTP) as debt
OPR at Greece’s of UK losing
1,220 OPR at 28 Jan 10 Greece’s proposal of an crisis
2.0%. credit its top credit
2.0%. austerity programme to heightened.
24 Nov 09 rating. rating.
28 Oct 09 cut its large fiscal deficit. 25 Mar 10
17 Dec 09 15 Mar 10
9 Feb 10
1,200
01/10/09
08/10/09
15/10/09
22/10/09
29/10/09
05/11/09
12/11/09
19/11/09
26/11/09
03/12/09
10/12/09
17/12/09
24/12/09
31/12/09
07/01/10
14/01/10
21/01/10
28/01/10
04/02/10
11/02/10
18/02/10
25/02/10
04/03/10
11/03/10
18/03/10
25/03/10
STRATEGY 10 PAPER
The market, however, regained its upward trajectory after the lunar new year as The market, however,
investors were cheered by a series of positive news flow, including positive economic regained its upward
data in the US as well as optimism that Greece’s debt problems will be resolved. The trajectory after the lunar
sentiment, however, took a turn for the worse when the US Federal Reserve announced new year on positive news
its decision to hike the discount rate by 25 basis points to 0.75% -- a signal that it flow, but sentiment took
is beginning to normalise monetary conditions for the economy. The correction in a turn for the worse when
the local market, however, was relatively mild and brief as local market sentiment
the Fed Reserve raised its
was subsequently buoyed by strong corporate earnings during the results reporting
discount rate
season and the release of a stronger-than-expected economic growth of 4.5% yoy
for 4Q 2009 by the Central Bank.
Subsequently, positive
Subsequently, more positive economic data from the US, particularly from the job economic data from the
market, and the Greece’s proposal of an austerity drive programme to cut its large US and locally, and
fiscal deficit brought back investor confidence globally. Locally, the Central Bank Greece’s proposal to cut its
raised its overnight policy rate by 25 basis points to 2.25% on 4 March to gradually
fiscal deficit brought
normalise the extremely loose monetary conditions and this was taken as a confirmation
confidence back to the
of the strength of economic recovery. The FBM KLCI benchmark continued to trend
market
up and reached a new high of 1,328.22 on 10 March.
Profit-taking activities, however, emerged when China released a higher-than-expected The market, however,
inflation rate of 2.7% yoy for February, sending fears to the local and regional came under selling
bourses over further policy tightening in China and its impact on asset prices and pressures again on
economic growth. This was exacerbated by Moody’s Investor Service warning about worries about China
the potential risk of UK losing its top credit rating. The FBM KLCI reversed its tightening and risk of UK
uptrend and broke the psychological support of 1,300 on 15 March and continued to losing its top credit rating
languish in a sideway trading given the lack of fresh domestic leads, apart from the
proposed privatisation of Astro at RM4.30 per share. The FBM KLCI benchmark
eased to 1,293.65 on 22 March.
The market came back thereafter following Wall Street rallies amid signs of a The market came back
strengthening economic recovery. Despite the downgrade of Portugal’s credit rating thereafter following Wall
by Fitch Ratings and conflicting statements by the European leaders on the resolution street rallies,
of the debt problems in Greece, the local market continued to trend up. Local announcement of a joint
investors were cheered by the more upbeat official GDP growth forecast of 4.5-5.5% bailout plan for Greece
for 2010 when the Central Bank released its 2009 Annual Report on 24 March. and positive news flow
Subsequently, investor confidence was boosted further by the joint bailout plan from domestically
the European Union (EU) and the International Monetary Fund (IMF) for Greece as
well as the run-up to the Invest Malaysia Conference and the impending release of
a new economic model to chart the country’s economic direction over the medium
term. The FBM KLCI benchmark closed higher at 1,319.35 on 30 March.
Year-to-date, the FBM KLCI benchmark was up by 3.1%, although it has Year-to-date, the
underperformed markets in Indonesia (+10.4%), Thailand (+6.8%) and the Philippines Malaysian market was up
(+3.9%). It has, however, outperformed markets in China (-2.2% to -7.9%), Hong by 3.1% with the
Kong (-5.0%), Taiwan (-4.3%), Singapore (-0.3%), South Korea (+0.3%), India telecommunications &
(+0.5%) and Vietnam (+1.7%) (see Table 4). The telecommunications & technology technology sector
sector surged by 34.3%, outperforming the market by a significant margin (see outperforming the FBM
Table 5). This was mainly on account of the surge in share prices of semiconductor KLCI benchmark
stocks on the back of a recovery in demand for their products, translating to sharp significantly
rise in earnings. In addition, the mining (+11.1%), industrial products (+8.4%),
consumer (+6.3%), construction (+6.0%), and banking & finance (+5.9%) sectors
also outperformed the FBM KLCI benchmark in the 1Q. In contrast, the industrial
sector (-0.1%), plantation (+0.6%), property (+1.9%) and services & trading (+2.3%)
underperformed the index during the quarter under review. A list of top performers
and underperformers under our coverage is included in Table 6.
STRATEGY 11 PAPER
Table 4
FBM KLCI Performance Versus Other Regional Markets
Index 2009 2010 2009 2010

Country Indices 25 Mar 10 2Q 3Q 4Q 1Q* YTD
% Change
Malaysia FBM KLCI 1,312.5 23.2 11.8 5.9 3.1 +45.2 +3.1
Singapore Straits Times 2,888.4 37.2 14.5 8.4 -0.3 +64.5 -0.3
Thailand Bangkok SET 784.4 38.5 20.0 2.4 6.8 +63.2 +6.8
Philippines PSE Composite 3,171.1 22.7 14.9 9.0 3.9 +63.0 +3.9
Indonesia Jakarta Composite 2,799.1 41.3 21.7 2.7 10.4 +87.0 +10.4
Hong Kong Hang Seng 20,778.6 35.4 14.0 4.4 -5.0 +52.0 -5.0
Taiwan Taiwan Weighted 7,838.1 23.4 16.7 9.0 -4.3 +78.3 -4.3
Korea Korea Composite 1,688.4 15.2 20.4 0.6 0.3 +49.7 +0.3
China Shanghai Composite 3,019.2 24.7 -6.1 17.9 -7.9 +80.0 -7.9
China Shenzhen Composite 1,175.3 22.7 -1.4 26.6 -2.2 +117.1 -2.2
India Mumbai Sensex 30 17,558.9 49.3 18.2 2.0 0.5 +81.0 +0.5
Vietnam Vietnam SE 503.4 59.7 29.6 -14.8 1.7 +56.8 +1.7
US Dow Jones 10,841.2 11.0 15.0 7.4 4.0 +18.8 +4.0

US S&P 500 1,165.7 15.2 15.0 5.5 4.5 +23.5 +4.5
US Nasdaq 2,397.4 20.0 15.7 6.9 5.7 +43.9 +5.7
* As at 25 Mar 2010
Table 5
Bursa Malaysia Performance By Sector
Index 2009 2010 2009 2010

Bursa M’sia by sector^ 25 Mar 10 2Q 3Q 4Q 1Q* YTD
% Change
FBM KLCI 1,312.5 23.2 11.8 5.9 3.1 +45.2 +3.1

FBM Emas 8,871.1 26.4 12.4 5.1 4.3 +48.6 +4.3
FBM 70 8,759.8 30.3 10.7 3.0 5.9 +52.0 +5.9
FBM 100 8,615.3 24.8 12.8 5.3 3.7 +48.0 +3.7
FBM Small Cap 11,208.0 43.7 8.6 3.1 10.3 +55.1 +10.3
FBM Fledgling 8,080.4 23.1 8.4 5.8 8.9 +36.9 +8.9
FBM Emas Syariah 8,851.3 23.7 11.1 2.9 4.0 +43.0 +4.0
FBM ACE 4,211.7 39.2 -0.7 5.7 -2.0 +29.0 -2.0
FBM Hijrah Syariah 9,380.7 20.1 10.5 3.6 0.7 +40.2 +0.7
Industrial 2,651.8 12.0 11.7 1.0 -0.1 +28.6 -0.1
Telecom & Technology 24.4 28.5 13.4 11.7 34.3 +32.5 +34.3
Construction 237.7 23.7 11.0 -2.8 6.0 +36.6 +6.0
Consumer 395.8 13.1 12.7 2.5 6.3 +32.0 +6.3
Finance 11,708.7 30.8 16.2 11.1 5.9 +62.7 +5.9
Industrial Products 102.6 28.9 5.9 5.3 8.4 +41.6 +8.4
Plantation 6,402.7 20.0 9.3 8.0 0.6 +53.6 +0.6
Property 796.3 42.1 8.8 0.2 1.9 +51.6 +1.9
Services & Trading 164.7 22.3 10.5 2.1 2.3 +36.5 +2.3
Mining 324.2 25.2 15.1 -10.0 11.1 +26.3 +11.1
^ According to Bursa Malaysia’s classifications.

* As at 25 Mar 2010
STRATEGY 12 PAPER
Table 6
Top Performers & Underperformers Of Stocks Under RHBRI’s Coverage
(Year-To-Date)
Top performers 25/3/10 31/12/09 % chg. Underperformers 25/3/10 31/12/09 % chg.

(RM/share) (RM/share) (RM/share) (RM/share)
Unisem 2.78 1.64 +69.5 Kurnia Asia 0.55 0.70 -20.9

Kossan Rubber 7.88 5.43 +45.1 H-Displays 0.06 0.07 -14.3
Astro 4.24 3.00 +41.3 Genting Bhd 6.58 7.34 -10.4
Hock Seng Lee 1.48 1.06 +39.6 Puncak 2.74 3.03 -9.6
Media Chinese Int’l 0.75 0.54 +39.3 Hunza Properties 1.23 1.32 -6.9
Faber 2.24 1.61 +39.1 KNM Group 0.73 0.77 -5.8
CSC Steel 1.76 1.30 +35.4 KLCC Property 3.26 3.44 -5.2
Top Glove 13.52 10.06 +34.4 TNB 7.97 8.40 -5.1
Jaya Tiasa 3.50 2.61 +34.1 Sino Hua-An 0.47 0.50 -5.1
Hartalega 8.21 6.22 +32.0 Petra Perdana 1.38 1.45 -4.8
Alianz M’sia 5.20 4.06 +28.1 Sime Darby 8.61 8.97 -4.0
Axiata 3.82 3.05 +25.2 VS Industry 1.23 1.28 -3.9
MPI 6.68 5.35 +24.9 Quill Capital 1.04 1.08 -3.7
Hai-O 4.39 3.53 +24.5 IJM Land 2.27 2.35 -3.4
Media Prima 2.06 1.67 +23.4 Ann Joo 2.71 2.80 -3.2
Notion Vtec 3.30 2.72 +21.3 Furniweb 0.47 0.48 -3.1
Ta Ann 5.80 4.81 +20.6 MISC-F 7.93 8.18 -3.1
Sunway Hldgs. 1.52 1.27 +19.7 Hiap Teck 1.40 1.43 -2.1
M’sia Airports Hldgs. 4.75 3.97 +19.6 YNH Property 1.50 1.53 -2.0
MRCB 1.51 1.27 +19.4 Freight 0.79 0.81 -1.9
Market Outlook
Sustainable, Albeit Uneven Global Economic Recovery
In our view, the prospects of a sustainable global economic recovery have Good prospects of
improved in recent months despite the emergence of sovereign debt worries of sustainable global
late. As a whole, the global economy has emerged from recession since 4Q 2009 economic recovery despite
and global manufacturing and services activities have been trending up over the last a number of global issues
seven consecutive months. The labour market conditions have also improved with and concerns
the non-farm private sector in the US having recruited temporary workers consistently
since August 2009. The latest indication suggests that non-farm payroll employment
is set to increase in March, even though it is partly due to the hiring of workers to
conduct the 2010 Census. Similarly, the OECD composite leading indicator’s 12-
month rate of change has recovered to positive growth for the last five consecutive
months, pointing to improving economic outlook in the OECD countries. Indeed,
economic growth is Asia ex-Japan has been gaining momentum and appears to be
self-sustaining at this stage. As asset prices have reached a favourable inflection
point and policymakers are in no hurry to implement exit strategies, a “double dip”
in the global economic recovery will unlikely occur, in our view. The global economic
recovery, however, will likely be uneven, as global growth could slow once stimulus
spending fizzles out given the still high unemployment situation in the developed
countries and weak recovery in private sector demand. Global growth will also be
tempered by countries facing debt problems cutting expenditure or raising taxes to
reduce their fiscal deficits. In other words, global economic growth could slow down
more significantly in the 2H before picking up again in 2011.
STRATEGY 13 PAPER
Debt Worries And Deficit Reduction
Whilst the global economic recovery is gaining strength, new worries on the threat New worries on the threat
of sovereign debt default have emerged, particularly in some of the European of sovereign default have
countries, such as Portugal, Ireland, Italy, Greece and Spain (PIIGS). More and emerged and policy
more countries that are faced with high and rising fiscal deficits are forced to cut changes around the globe
expenditure or raise tax revenue to reduce their fiscal deficits to a more manageable have also spooked
level. Investors worried that these measures could jeopardise the nascent economic
investors
recovery in these countries. These, however, are not the only cause for concern.
Policy changes around the world have also spooked investors. Various countries in
the emerging world have begun to experience assets price-reflation of late and have
been tightening credit conditions to prevent asset bubbles from building up. Notably,
China has taken a number of measures to rein in its lending binge, while Reserve
Bank of India has raised reserve requirements of banks and Brazil is phasing out
its fiscal stimulus. With the exception of Japan, reserve banks of the developed
nations are gradually unwinding the emergency liquidity facilities and quantitative
easing. All these measures will temper the pace of economic recovery in these
countries and have created fears of pushing the global economy back into a recession.
Nevertheless, we believe a global sovereign credit problem (see Table 7 for A global sovereign credit
countries ranked by sustainability of debt position) will unlikely unfold given that problem, however, will
Greece has taken steps to cut its budget expenditure by 4.8bn euros with the aim unlikely unfold and
of reducing its fiscal deficit to 8.7% of GDP in 2010, from a deficit of 12.7% of GDP European debt probelms
in 2009. More importantly, the EU and the IMF had announced a joint bailout plan are likely to be
for Greece, although it comes with strict conditions and makes no money available manageable
at this stage. Under the plan, each EU country would provide non-subsidised loans
to Greece based on its share in the European Central Bank (ECB), and it will make
Table 7
From Shakiest To Safest
Countries ranked* by sustainability of debt position
% of GDP, 2010 forecast
Primary budget GDP growth Sovereign

balance, cyclically Net less cost of debt, years
adjusted1 debt1 finance #, % to maturity^
Greece -4.6 94.6 -3.2 7.7

Ireland -7.0 38.0 -5.1 6.8
Britain -6.7 59.0 -1.5 13.7
Japan -5.9 104.6 0.1 5.4
Portugal -2.7 62.6 -2.3 6.5
Spain -4.3 41.6 -3.0 6.7
France -3.8 60.7 -0.7 6.9
United States -7.0 65.2 1.4 4.8
Poland -5.3 32.4 -0.7 5.2
Italy 2.2 100.8 -1.0 7.2
Hungary 4.2 62.1 -3.5 3.3
Belgium 1.3 85.4 -0.6 5.6
Netherlands -1.4 36.5 -0.6 5.4
Austria -0.9 42.9 -0.6 7.0
Germany -1.2 54.7 -0.5 5.8
Czech Republic -1.9 5.3 0.0 6.4
Norway -7.8 -143.6 2.4 4.9
Canada -2.7 32.6 2.0 5.2
Denmark -1.4 1.6 0.1 7.9
Australia -0.7 -1.3 0.2 5.0
Switzerland 0.4 11.0 0.5 6.7
Finland -0.9 -46.4 0.9 4.3
Sweden -0.3 -13.1 1.5 6.4
* Based on the sum of the countries’ rank for the first three debt measures.
1
General government.
# Forecast average nominal GDP growth for 2010-11 less latest yield on government bonds of average maturity.
^ Weighted average
Source: Bloomberg, EIU, OECD, The Economist.
STRATEGY 14 PAPER
up more than half of the loans and the IMF will provide the rest, if necessary. This
bailout plan could also be used for other EU countries, such as Portugal and Span
that are facing debt problems. In addition, the ECB has extended its current
emergency collateral rules to its member countries beyond 2010, which was originally
scheduled to be withdrawn at the end of 2010, softening its stance as Greece
struggles to cut its budget deficit. Under such circumstances, we believe any further
fallout of other European Union member countries are likely to be addressed by the
EU governments and the IMF as well. Consequently, the European debt problems
will unlikely snowball into a much bigger issue that will jeopardise the global economic
recovery. Similarly, we believe the normalisation/tightening of policies by central
banks around the globe would likely be gradual and will unlikely cause the global
economy to fall into a “double-dip” recession.
Nevertheless, the fiscal deficit reduction either via cutting expenditure or raising Nevertheless, the uneven
taxes would imply uneven economic recovery in these countries that would have economic recovery in
implications for the rest of the world. This, coupled with occasional negative news these countries and the
flow and debt worries in other part of the world, implies that world financial markets negative news flow will
would likely be volatile for the greater part of the year, in our view. still cause markets to be
volatile
Local Economic Recovery Strengthening
Locally, the Malaysian economy has turned around to register a stronger-than- The Malaysian economy
expected growth of 4.5% yoy in 4Q 2009, from -1.2% in the 3Q. Apart from the has experienced a
Government’s stimulus expenditure, consumer spending continued to strengthen on stronger-than-expected
the back of improving employment outlook and rising confidence. With improving recovery in 4Q 2009
prospects, the business sector, which had previously cut back on spending, has
begun to invest and expand their operations. The overall growth was, however, lifted
by the recovery in external demand for the country’s exports, which have turned
around to record a positive growth of 7.3% in 4Q 2009 (see Chart 4), from -13.4%
in the 3Q.
Chart 4
Economy Turning Up Strongly In 4Q2009
% yoy
2 0
1 5
1 0
-5
G D P
-1 0 E x p o rts
P r iv a t e C o n s u m p t io n
-1 5
F ix e d c a p it a l in v e s t m e n t
-2 0
0 5 0 6 0 7 0 8 0 9
Moving forward, the global electronic upcycle and sustained recovery in external Expect the economic
demand for the country’s exports will likely bolster domestic private sector demand recovery to gain pace and
and strengthen the economic recovery. These will more than offset the impact from bounce back to +4.5% in
the planned reduction in government expenditure to reduce its budget deficit to 5.6% 2010
of GDP in 2010, from 7.0% of GDP in 2009. Overall, we project the Malaysian
economy to bounce back and expand by 4.5% in 2010, from -1.7% in 2009.
Robust Corporate Earnings Momentum
Reflecting the improvement in the economy, the recovery in corporate earnings is

also gaining momentum (see Chart 5). Indeed, corporate earnings have consistently
surprised on the upside over the last three results reporting seasons, with more
companies reporting better margins from improving demand, better product mix and
STRATEGY 15 PAPER
lower operating expenses on the back of the implementation of cost-cutting measures. Normalised net EPS for the
This view is reinforced by our company visits and corporate briefings attended by FBM KLCI stocks is
analysts where the corporate representatives are turning more optimistic on their projected to rebound
business prospects. Many of the corporates are beginning to expand their business sharply to +15.3% in 2010
operations and are guiding for improving outlook in the quarters ahead. We expect
net EPS for the FBM KLCI stocks under our coverage to bounce back from a
contraction of 14.2% in 2009 to a double-digit growth of 15.3% in 2010, and
we believe, there is still room for upside earnings surprises as the economic recovery
gains momentum. The recovery in earnings thus far has been relatively broad base
and we project net EPS growth for the FBM KLCI stocks under our universe to be
sustained at +15.3% in 2011.
Chart 5
Corporate Earnings Recovery Gaining Momentum
%
60
40
20
-2 0
-4 0 qoq yoy
-6 0
1QCY06
2QCY06
3QCY06
4QCY06
1QCY07
2QCY07
3QCY07
4QCY07
1QCY08
2QCY08
3QCY08
4QCY08
1QCY09
2QCY09
3QCY09
4QCY09
Note: Normalised EPS for RHBRI covered stocks in FBM KLCI.
Exclude Astro
But Market Valuations Are Back To Normal Levels
Whilst both the economy and corporate earnings are trending up and on track to Market valuations,
recover in 2010, much of the positive developments have already been factored into however, are back to
the market, in our view. Based on our current earnings projection, the FBM KLCI normal levels
is already trading at 15.9x 2010 earnings and 2.2x price/book (see Table 8), which
are slightly ahead of its mid-cycle average since the Asian financial crisis. Though
still not stretched, valuations are by no means cheap and are back to normal levels.
Table 8
Earnings Outlook And Valuations
FBM KLCI RHBRI’s Basket
COMPOSITE INDEX @1,312.48 2008a 2009a 2010f 2011f 2008a 2009a 2010f 2011f
25/3/2010
EBITDA Growth (%) 3.4 -5.7 19.5 12.1 4.6 -1.6 17.8 11.8
Pre-Tax Earnings Growth (%) -7.9 -9.1 30.8 15.5 -6.2 -4.1 27.9 15.4
Normalised Earnings Growth (%)* 1.0 -9.4 19.8 15.3 -0.4 -6.4 21.5 15.2
Normalised EPS Growth (%)* -1.6 -14.2 15.3 15.3 -3.5 -10.0 17.0 15.2
Prospective PER (x)* 16.3 18.2 15.9 13.8 16.5 17.5 15.1 13.1
Price/EBITDA (x) 8.7 9.4 7.9 7.0 8.8 8.6 7.5 6.7
Price/Book (x) 2.4 2.3 2.2 2.1 2.4 2.0 2.0 1.8
Price/NTA (x) 2.8 2.9 2.6 2.4 2.8 2.3 1.3 1.2
Net Interest Cover (x) 6.5 5.9 6.0 7.6 6.2 6.9 7.0 7.8
Net Gearing (%) 71.3 61.3 52.5 49.2 64.1 53.9 48.5 46.7
EV/EBITDA (x) 6.9 7.6 6.6 5.7 7.1 7.6 6.6 5.8
ROE (%) 15.3 12.7 14.1 15.0 13.7 11.9 13.4 14.1
* For FBM KLCI, earnings are adjusted to exclude Astro from 2009-10
STRATEGY 16 PAPER
Based on the latest FactSet Asian and IBES consensus numbers, the local market is It is, however, still a very
trading at comparable PER valuation vis-a-vis the Singapore market, although it is under-owned market by
still trading at a premium relative to most of the other regional peers (see Table 9). foreign investors, implying
This, in our view, is a reflection of high domestic liquidity and strong participation potential market re-rating
by the Government-linked funds, and will unlikely change in the foreseeable future. if foreign investors turn
It is, however, still a very under-owned market by foreign investors and positive on the country’s
non-strategic foreign equity ownership of the Malaysian market is estimated at below
economic reforms
21% currently (20.4% as at end-2009), a sharp drop from a recent high of 27.5%
at end-April 2007. In terms of market turnover, foreign participation in the market
has fallen from an average of 36% over the past five years to about 29% currently.
This implies limited downside risk to the market and potentially, the market could be
re-rated if foreign investors turn positive on the country’s economic reforms.
Table 9
Regional Comparisons
Malaysia Singapore Thailand Philippines Indonesia Hong Kong Taiwan Korea
FactSet Asian Consensus Trends report dated 24 February 2010

EPS growth(%)
2009a 2.4 -5.4 32.6 27.2 53.7 11.3 40.7 43.9
2010f 25.8 13.2 13.6 3.9 15.2 22.5 59.6 50.1
2011f 12.2 10.3 15.4 8.1 22.4 16.8 18.4 8.9
PER (x)
2009a 18.2 16.3 11.8 13.0 16.0 16.1 22.5 14.2
2010f 14.1 14.2 10.7 12.6 13.7 13.3 14.1 9.6
20011f 12.6 12.9 9.3 11.7 11.2 11.4 11.9 8.8
IBES Consensus dated 18 March 2010

EPS growth(%)
2009a -19.2 -8.7 28.8 17.8 9.2 20.1 79.9 59.3
2010f 27.2 21.0 13.4 17.9 21.2 14.2 84.1 40.4
2011f 14.7 11.9 15.9 12.2 20.2 16.4 17.1 13.4
PER (x)
2009a 18.2 16.8 12.8 15.1 16.8 16.3 27.4 14.0
2010f 13.9 13.8 11.3 12.6 13.8 14.3 14.9 9.8
2011f 12.1 12.4 9.8 11.2 11.8 12.3 12.6 8.7
Performance (%)
2008 (yoy) -39.3 -49.2 -47.6 -48.3 -50.6 -48.3 -46.0 -40.7
2009(yoy) +45.2 +64.5 +63.2 +63.0 +87.0 +52.0 +78.3 +49.7
2010 (ytd)* +3.1 -0.3 +6.8 +3.9 +10.4 -5.0 -4.3 +0.3
* as at 25 Mar 2010 closing
A New Economic Model And Reforms To Drive The Market Over The
Longer Term
Whilst the market lacks strong catalysts to entice foreign institutional interest in the Meanwhile, the Malaysian
near term, the Malaysian Government has embarked on a series of reforms to Government has
improve the economy’s prospects over the longer term. Apart from the 1 Malaysia embarked on a series of
concept, a Government Transformation Programme (GTP) has been launched in reforms to improve the
January 2010 to improve its delivery system and reduce the cost of doing business country’s economic
in the country. Under the programme, national and ministerial key result areas are prospects
spelt out to ensure that the objectives of reducing crime rate, corruption and poverty
as well as improving education standards, rural infrastructure and urban transportation
are met over time.
Meanwhile, the Government has taken this transformation a step further by announcing A new approach of policy
a new approach of policy towards affirmative action which are market friendly, merit towards affirmative action
based more transparent and needs based. The details of this affirmative action are via the new economic
contained in the new economic model (NEM), unveiled by the Prime Minister on 30 model has been
March during the Invest Malaysia Conference. The NEM aims to move the country announced during the
towards a high-income economy through innovation, knowledge and R&D as well as
Invest Malaysia
improve efficiency and productivity. It essentially shifts the ethnic focus of the
Conference
previous National Economic Policy to one that focuses on the bottom 40% of households
by income levels. The Prime Minister also highlighted six national economic activities
STRATEGY 17 PAPER
to be the engines of growth, including oil & gas, electronics, electrical, tourism,
agriculture and financial services. We believe resources are a key focus in moving
up the value chain and as it stands, larger planters like IOI, KLK and Sime Darby,
and major timber companies like Jaya Tiasa, Ta Ann, WTK and Lingui are already
involved in downstream activities.
Whilst the NEM is supposed to contain further liberalisation measures and a gradual Whilst it still lacks details
phasing out of subsidies to bring about a more competitive economy, it still lacks in terms of actual policy
details in terms of the actual policy changes at this stage. More detailed plans are changes at this stage,
expected to be launched in June 2010 (together with the release of the Tenth more detailed plans are
Malaysia Plan (10 MP), 2011-15) after a consultative period with the public. Assuming expected to be launched
the Government follows through with plans to address and possibly end or shrink the together with the release
subsidy system, we believe this will be positive for Tenaga Nasional (although any
of the 10MP in June
hike in electricity tariffs will likely be announced separately). The Prime Minister
mentioned Pos Malaysia with regards to a wage increase and Khazanah Nasional’s
potential sale of its 32.2% shareholding to a new investor. We believe this can only
happen if postal rates are raised (and we note management has proposed a plan
to raise rate as a means of paying higher salaries).
Whilst the new reforms could bring back investor interest to the local bourse, we In our view, the
believe the tangible impact can only be felt over the longer term. This is because implementation of a new
certain structural issues will still need to be addressed including : (i) Improvement economic model could
in education standards; (ii) Balancing higher incomes with the likelihood of higher revive foreign interest on
costs; (iii) Shortage of skilled manpower; and (iv) Local players may not be ready the local market, although
for greater foreign competition, leading to a risk of policy flip flop later. The reality we believe tangible impact
is that the big listed companies are primarily brick and mortar businesses and cannot
can only be felt over the
quickly change direction. As a result, we do not expect any quick wins here. At
longer term
the end, consistent implementation will still be crucial.
Nevertheless, as the NEM will likely be the over-arching theme for the 10MP, the Development of prime
momentum of positive news flow may continue to build up, particularly for the land belonging to the
construction sector with regards to the implementation of more infrastructure projects Government, the listing of
as the Government embarks on a new set of privatisation initiatives to implement MOF Inc’s companies and
its development programmes. The overall sentiment, however, could still be capped GLC restructuring will
by the need to reduce the country’s fiscal deficit further and the announced plan to likely build momentum
cut the Federal Government’s gross development expenditure to RM180bn in the
and attract new focus into
10MP, from RM230bn under the Ninth Malaysia Plan. The difference, however, is to
the Malaysian market
be filled by private finance initiative projects as the Government embarks on a
scheme to unlock its asset values, including the development of prime land
belonging to the Federal Government, as well as the listing of Ministry Of
Finance Inc’s companies. During the Invest Malaysia Conference, the Prime
Minister highlighted that Petronas had identified two subsidiaries for listing but did not
elaborate. In our 19 January Market Update, we highlighted the possibility of
Petronas’ oil & gas trading company (Mitco) and the petrochemical plants being
listed. Whilst the Government aims to remove the safety net for the Government-
linked companies (GLCs) under the NEM, we believe this could be difficult to implement
for all given the social impact. More importantly, GLCs will collaborate with private
companies, particularly to drive regional and global expansions. These initiatives,
coupled with further restructuring of the GLCs and the reduction of holdings by
the Government-linked investment companies (GLICs), could gradually build
momentum and attract new focus into the Malaysian market, in our view.
The other domestic theme that is beginning to emerge is the Sarawak state Sarawak state elections
elections, which are due by May 2011 but widely expected to be held this year. As could be another
political parties have recently focused effort on strengthening and expanding their emerging domestic
support in the state, expectations are building up and this could gradually attract investment theme
more focus into the Sarawak-based companies, in our view. Already, companies
such as HSL, Naim Holdings, CMSB and Weida have outperformed the FBM KLCI year
to date and, in our view, will likely continue to be supported by positive news flow
in the run up to the state elections. Among the Sarawak stocks that we cover, we
STRATEGY 18 PAPER
believe HSL will likely be a prime beneficiary of more construction projects, although
there would be some focus on the state’s natural resources as well. These include
the plantations, timber and oil & gas sectors. The plantation companies stand to
benefit if the state government opens up more land for oil palm plantations. Whilst
the timber players are less tied to domestic projects, they could potentially be
involved in other downstream activities. Longer term, we expect the Sarawak
Corridor of Renewable Energy (SCORE) to build momentum given the significant
potential for cheap energy which is being used to attract energy-intensive industries.
This will have knock-on effects on the construction, building materials and housing
sectors.
Whilst greater corporate restructuring, and mergers and acquisitions (M&As) could be Also expect more M&As in
in the pipeline to unlock shareholder values for investors, it is generally difficult to the pipeline
identify them until closer to the event date.
Normalising Interest Rates Positive For Banks
Meanwhile, the Central Bank has begun to normalise monetary conditions by raising Meanwhhile, Bank Negara
its overnight policy rate by 25 basis points to 2.25% on 4 March 2010. This came is set to raise its overnight
about when economic recovery turned up to be stronger than expected in 4Q 2009 policy rate by another 25
and the Central Bank viewed the low interest rate as no longer appropriate and sees bps in July and this will be
a need to prevent financial imbalances from building up as money searches for positive for the banking
returns to beat inflation that is creeping up. We expect the Central Bank to raise sector, albeit temporary
its policy rate by another 25 basis points in July and the country’s overnight policy
rate will likely stay at 2.5% until the end of the year. Apart from the positive impact
on confidence on the sustainability of the economic recovery, it tends to have a
positive impact on the net interest margins of banks as assets are being re-priced
faster than liabilities. As the banking sector carries heavier weight in the FBM KLCI
benchmark, better performance of the banking stocks tends to lift sentiment on the
overall market.
Stronger Ringgit Also Supportive Of Market
The ringgit has been on an appreciating trend vis-a-vis the US dollar and the regional A gradual appreciation of
currencies since the Central Bank raised its overnight policy rate on 4 March. We the ringgit vis-a-vis the US
expect this trend to persist as regional trade rebounds and Asia ex-Japan experiences dollar will also be
a stronger economic recovery and a faster pace of policy normalisation. Given debt supportive of the market
worries and sovereign credit issues in the developed countries, the ringgit has
overshot RM3.30/US$ temporarily as investors adjust to changes in policy and the
pace of economic recovery. Nevertheless, we expect the ringgit to settle at around
RM3.30/US$ at the end of the year before appreciating to RM3.20 by end-2011.
Although the appreciation of the currency is envisaged to be gradual, it tends to be
supportive of foreign capital flows into the local capital markets and would have a
mild positive impact on local equities as well.
In terms of companies, beneficiaries of a stronger ringgit include those that buy raw
materials/components from abroad (priced in foreign currency) and sell their products
locally (denominated in ringgit). These would include food and beverage as well as
motor companies. A clear beneficiary of a stronger ringgit, for instance, is Amway.
In addition, local companies with a large amount of foreign debt such as Tenaga
Nasional and Telekom Malaysia will also benefit from lower debt servicing. In
contrast, exporters such as semiconductor and other manufacturing companies could
be impacted negatively, although glove manufacturers are able to pass on the impact
to end-customers with a slight time lag. In addition, a stronger ringgit would also
impact overseas profits for companies that have ventured abroad such as Tanjong
and YTL Power.
STRATEGY 19 PAPER
External Events And Global Policy Changes Signal Market Volatility
Meanwhile, external events such as negative news flow from the heavily indebted Gradual normalisation of
developed countries would cause the market to be volatile. As more countries in policies around the globe
the heavily indebted countries in the developed world are forced to reduce expenditure would signal tightening in
or raise revenue via higher taxes to trim fiscal deficit, fears of a “double-dip” the not too distant future
recession will surface.
The gradual normalisation of interest rates domestically has been taken positively Meanwhile, external
thus far as it reconfirms the strength of the economic recovery. However, we believe events are likely to cause
the same cannot be said when more and more countries begin to normalise monetary the market to be volatile
conditions as policymakers could “before long” begin to tighten policies more
significantly to engineer for a more sustainable economic recovery. When this situation
emerges, we expect the global financial markets to experience a period of greater
volatility.
The key is the US, which has started to normalise monetary conditions by raising The key is the US where
Federal Reserve’s discount rate, the rate it charges banks for emergency loans, by the gradaul scaling back of
25 basis points to 0.75% with effect from 19 February. In a prepared testimony for unconventional monetary
the House’s Financial Services Committee, the Fed chief said the interest rate paid policy stimulus will likely
to banks on excess reserves held at central bank may for a time replace the Federal curb investors’ appetite
funds rate as the main operating target for policy. Raising the rate would give banks for risk
an incentive to park more funds at the Fed instead of lending them out to companies
or households. As part of the Fed’s plans to wind down its emergency liquidity
measures, Mr. Bernake is also looking at using term deposits and reverse repurchase
agreements (repos) to siphon off excess liquidity from the system. In this way, the
Fed would be able to restrain an economy that risks overheating and sparking
inflation in the future. The gradual scaling back of unconventional monetary policy
stimulus, in our view, will likely curb investors’ appetite for risk even if the Fed
leaves the Federal funds rate on hold for an extended period.
Given external developments and as valuations of the equity market are no longer Envisage a volatile
cheap and are back to normal levels, we expect greater volatilities in stock uptrend for the market
prices in the coming months. Our year-end FBM KLCI target, however, with end-2010 FBM KLCI
remains unchanged at 1,400 or 15x 2011 earnings. We believe this target is target remaining
achievable and there could even be a slight upside for the market to trade up to unchanged at 1,400
1,450 should the recovery in corporate earnings turn up to be stronger than expected.
We expect the market to come back and trade up to our target level in the latter
part of the year when there is more certainty on the strength of the global economic
recovery. This implies a potential upside of about 10% from end-2009 level and
about 6% from the current level, which is consistent with the historical performance
where returns are always lower in the second year after hitting a cyclical low.
Market Strategy
Accumulate On Weakness And Ride The Volatility
In our view, the current market volatility/correction is an opportunity to accumulate Need to factor in the
quality stocks for longer-term performance given our view that a global sovereign anticipated global policy
credit problem will unlikely unfold and the global economic recovery is more sustainable changes in the months
than feared. Nevertheless, investors would have to factor in the anticipated ahead
global policy changes in the months ahead, rebalance their portfolios and
prepare for greater market volatility for the greater part of the year.
In our view, stock picking is key. The challenge is to look for stocks that could Stock picking is key and
generate capital upside from earnings growth as well as have attractive divided yield we like recovery leaders
to outperform the market. The focus would include recovery leaders that have and quality cyclicals
a strong leverage to the economic recovery and quality cyclicals for an
early reflation trade. These would include, amongst others, the industry leaders in
the banking space, the bigger semiconductor companies, Tenaga Nasional and Media
STRATEGY 20 PAPER
Prima, in our view. As valuations are back to normal levels, we believe dividend
will also play a more significant role in determining share price performance this
year. The key is to avoid companies with poor fundamentals and high valuations.
A list of our top picks is reflected in Table 10. Our key overweight sectors are
banking, semiconductor, power and telecommunications (see Table 11).
Table 10
Top Picks
Fair Mkt EPS EPS GWTH PER P/BV P/CF GDY
FYE Price Value Cap (sen) (%) (x) (x) (x) (%)
25/3/2010 (RM/s) (RM/s) (RM Mil) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
Maybank Jun 7.39 8.96 52,304 51.3 60.7 35.7 18.1 14.4 12.2 1.9 n.a. 3.9
CIMB Dec 13.96 16.24 49,303 95.5 112.6 20.2 17.9 14.6 12.4 2.3 n.a. 1.3
Maxis Dec 5.38 6.20 40,350 33.2 36.2 6.6 9.1 16.2 14.9 4.0 10.5 6.2
Tenaga Aug 7.97 9.50 34,538 64.9 73.6 30.4 13.4 12.3 10.8 1.2 4.2 3.3
Genting Dec 6.58 8.90 24,378 45.8 56.1 38.9 22.5 14.4 11.7 1.5 5.8 1.4
KLK Sep 16.34 18.40 17,443 87.5 123.3 23.7 40.8 18.7 13.3 2.9 15.0 2.8
Top Glove Aug 13.52 15.50 4,107 89.0 96.2 55.3 8.1 15.2 14.1 4.0 12.4 3.4
IJM Land Mar 2.27 3.19 2,504 18.4 34.4 88.5 87.2 12.3 6.6 1.4 4.6 0.9
Media Prima Dec 2.06 2.23 1,947 14.8 15.8 +>100 6.7 13.9 13.0 2.1 6.7 4.9
Wah Seong Dec 2.56 3.09 1,788 19.3 20.8 46.1 8.0 13.3 12.3 2.5 4.8 3.0
Sunway City Dec 3.31 5.33 1,556 34.8 38.8 9.8 11.6 9.5 8.5 0.7 6.1 2.4
Unisem Dec 2.78 3.39 1,442 20.5 31.0 77.6 51.5 13.6 9.0 1.7 5.1 1.8
Kossan Dec 7.88 10.74 1,260 82.6 103.0 10.3 24.7 9.5 7.6 2.6 8.3 1.3
Evergreen Dec 1.65 2.35 846 21.3 23.3 26.1 9.4 7.7 7.1 1.1 10.9 3.0
Faber Dec 2.24 3.30 813 26.5 24.2 16.4 -8.8 8.4 9.3 1.7 5.3 3.1
Notion Vtec Sep 3.30 4.59 510 33.4 45.9 30.4 37.5 9.9 7.2 2.5 7.0 2.0
Daibochi Dec 3.64 4.40 276 36.7 39.9 22.4 8.8 9.9 9.1 2.0 8.5 6.5
Table 11
Sector Weightings & Valuations
Covered Stocks Mkt Cap Weight EPS Gwth (%) PER (x) Recommendation
RMbn % FY09 FY10 FY11 FY09 FY10 FY11
Banks & Finance 185.3 25.4 -3.1 19.5 14.5 16.9 14.1 12.3 Overweight
Plantation 111.5 15.3 -27.4 3.1 23.8 20.6 19.7 15.9 Overweight
Telecommunications 102.6 14.1 -13.7 15.9 10.9 19.7 17.0 15.3 Overweight
Power 56.5 7.8 -8.3 24.4 9.1 14.6 11.6 10.7 Overweight
Gaming 47.7 6.5 -14.3 8.6 14.2 15.3 13.9 12.2 Overweight
Oil & Gas 30.3 4.2 -7.0 21.3 11.3 19.4 15.7 14.1 Overweight
Motor 16.4 2.3 -9.5 44.1 7.0 14.6 10.3 9.6 Overweight
Property 15.9 2.2 -1.7 18.0 25.6 14.5 12.1 9.6 Overweight
Building Materials 11.4 1.6 -19.3 29.1 10.8 14.9 9.6 8.7 Overweight
Insurance 3.4 0.5 53.2 17.6 11.3 10.8 9.7 8.7 Overweight
Semiconductors & IT 2.9 0.4 -18.0 67.6 50.4 23.6 12.0 8.8 Overweight
Transportation* 52.2 7.2 -18.3 22.3 13.9 24.6 20.6 17.8 Neutral
Consumer 28.7 3.9 5.2 9.1 6.7 16.1 14.7 13.8 Neutral
Construction^ 18.3 2.5 -2.2 26.6 7.6 19.8 15.6 14.5 Neutral
Infrastructure 18.2 2.5 20.3 -1.4 48.2 13.7 13.9 9.4 Neutral
Media# 13.9 1.9 -10.1 38.4 17.9 17.5 12.6 19.5 Neutral
Manufacturing 9.4 1.3 36.6 32.7 16.1 16.8 12.6 10.9 Neutral
Timber 3.6 0.5 -18.4 101.5 36.6 20.6 10.2 7.5 Neutral
728.3 100
# Exclude Astro * Exclude MAS earnings in 09-10

^ Exclude MRCB earnings in 2009 Note : RHBRI’s basket
In the immediate term, we are more positive on the banking sector as an Banks’ earnings are
economic and earnings recovery play as banks finance the various sectors in gaining momentum, which
the economy and are beginning to experience a broad-based earnings recovery on coupled with a host of
the back of rising loan growth, stable to improving net interest margins, growing other positive factors,
Islamic and fee-based incomes as well as lower loan loss provisioning as asset suggest that banks would
quality improves. Despite significant share price outperformances, many banking likely continue to
stocks are still trading at/or one standard deviation below their post-Asian financial
outperform the market
crisis average rolling PER and trailing P/B valuations with relatively low foreign
shareholdings. The past experience suggests that banks will likely continue to
outperform in a second year of the market recovery as earnings momentum gets
stronger. Meanwhile, increasing competition may prompt talks of M&As to increase
competitiveness and create positive news flow for the banking sector. The adoption
STRATEGY 21 PAPER
of FRS 139 and Basel II internal ratings based approach is likely to be neutral or
positive to banks’ earnings and capital ratios, while it is still premature to worry
about Basel III at this stage given that it is still at the early stage of formulation.
In addition, we also like the semiconductor sector, as it is poised for a strong Semiconductor sector is
recovery given the pent-up demand and positive outlook for key product segments. poised for a strong
The demand for smart phones, for instance, is rising rapidly, given increasing trend recovery given pent-up
towards wireless compatibility, strong demand for web-based phones and greater demand and positive
affordability stemming from the emergence of entry-level smart phones. Similarly, outlook for key product
with the rollout of cheaper notebooks (based on new ultra-low-voltage technology), segments
the demand for mobile personal computers (particularly from China and India) is
also on an uptrend. In tandem with the global economic recovery, which coupled
with the ongoing replacement cycle (i.e. windows 7) as well as the growth in network
capacity, corporate IT spending will likely gain momentum as well, in our view. At
the same time, demand for tablets (such as iPad) is expected to be strong given
growing emphasis on mobility as well as the convergence of computing and
communications.
In addition, the power and telecommunications sectors also appear to be Base tariff review still on
interesting. For the power sector, a base tariff review is past due for Tenaga the cards, which coupled
Nasional, but indications are that a tariff increase could be on the cards. When this with fundamental
materialises, it will provide a nice lift to earnings which are already trending up on recovery in electricity
the back of a fundamental recovery in electricity demand (+5.7% yoy from September
demand, will augur well
2009 to January 2010). As this big cap index-linked stock is trading at three PER
for earnings and lead to a
multiple discount to the FBM KLCI benchmark, we anticipate a significant re-rating
re-rating for TNB, in our
to its share price when this materialises. In addition, the independent power producers
view
(IPPs) such as Tanjong and YTL Power have diversified and/or overseas businesses
and are on the lookout for growth opportunities in overseas markets. Dividend
yields for both companies are attractive and, more importantly, sustainable, in our
view.
Despite voice revenue slowing, we see three investment themes for the Data traffic will drive
telecommunications sector this year : (i) Strong data traffic to drive earnings growth; earnings growth, which
(ii) Good visibility and attractive dividend yields; and (iii) Capital management to coupled with attractive
provide further upside to yields. We are more optimistic with respect to the growth dividend yields, would
prospects for mobile broadband and data revenue, which we believe, are poised for present good investment
significant growth ahead given an unusually large gap between the number of internet themes for the telco
users in the country and broadband penetration, a young demographic profile that sector
is internet and tech savvy, an increasing range and choice of handsets and
smartphones, and rising popularity of social networking services.
Amongst the other sectors where we have an overweight recommendation include Prospects of gaming are
the gaming, plantation, oil & gas, property, glove manufacturers, building materials, also improving
motor and insurance sectors. The prospects of the gaming industry are
improving in a recovering economic environment. In particular, we like Genting
Berhad as a cheaper entry to Genting Singapore as we anticipate more excitement
over the Genting Singapore’s Integrated Resorts and its potential contribution to
Commodity/asset
earnings, while any slowdown in domestic casino earnings would be buffered by its
reflation theme could
plantations and power divisions. Over time, we believe commodity/asset reflation
gradually emerge as an
theme could gradually emerge as a catalyst for greater market
investment theme over
performance, given expectations of higher demand and prices to underpin earnings.
Under such circumstances, the plantations, oil & gas and property sectors should also time
deliver some share price performance moving forward.
In addition, we remain positive on the glove manufacturers despite the Sustained strong demand
significant run-up in their share prices given the sustained strong demand prospects prospects for gloves,
for gloves globally. This is underpinned by rising healthcare awareness in developing while building material
countries such as China and India, and more frequent outbreak of diseases such as industry is benefiting from
H1N1. Although latex prices are trending up and the US dollar has weakened against higher demand and prices
the ringgit, glove manufacturers have been able to pass on the higher costs to
STRATEGY 22 PAPER
customers, albeit with a slight time lag. Within the building material sector, demand
for cement is picking up with expectations of more project implementation in the
months ahead, while global steel product prices rally appears to be
sustainable in the foreseeable future.
The motor industry is benefiting from the stronger-than-expected recovery Car sales are picking up
in car sales and new model launches. A potential structural change in the and the insurance industry
motor tariff to a more risk-based regime, on the other hand, is likely to provide is gearing up for
a boost in earnings to the general insurance industry and lead to a re-rating liberalisation and
in the insurance sector, apart from the improving business prospects from a recovering improving earnings
economy. It has been reported that plans are afoot by the regulator to limit third prospects
party motor insurance claims to RM100,000, inclusive of hospitalisation, rehabilitation,
pain, suffering, loss of income and future earnings. This could lead to the introduction
of new basic insurance and takaful schemes for mandatory basic protection by mid-
2010. In our view, this will address the industry’s main concern on high claims and
potential losses from third party policies, and make the third party coverage profitable,
thus reducing the cross-subsidy from comprehensive coverage. At the same time,
motor insurers will also benefit from lower capital requirement under the risk-based
capital regime as risk charge will be lower.
Meanwhile, we have upgraded the construction sector from underweight to Upgraded construction
neutral given : (i) The correction in construction stock prices; and (ii) A better sector to neutral on
sector news flow in terms of the awards of infrastructure projects and new expectations account of more positive
leading up to the announcement of the 10MP in June 2010. We believe these may, news flow and the recent
to a certain extent, moderate the negative elements that have weighed down on the correction in share prices
performance of the construction stocks over the last two quarters such as : (i) The
slow pace of the rollout of public projects, sinking margins and declining dominance
of established players in large-scale projects locally; and (ii) The not-so-rosy outlook
and increased operating risks in key overseas markets.
Table 12
High Dividend Yielding Stocks
Yr End Div. Yield (%) P/NTA (x) ROE (%) Recommendation

FY10 FY11 FY10 FY10
Ann Joo Dec 8.9 10.0 1.2 20.4 Outperform

AXIS Reit Dec 8.1 8.6 1.2 9.5 Outperform
LPI Capital Dec 8.0 9.1 2.0 16.4 Outperform
Quil Capita Dec 7.9 8.3 0.8 6.6 Outperform
MPI Jun 7.8 7.8 2.0 12.7 Outperform
Hai-O-Ent^ Apr 7.3 8.8 1.5 42.5 Outperform
YTL Cement Jun 7.1 7.1 1.3 14.4 Outperform
Amway Dec 6.8 7.1 4.9 37.1 Outperform
Glomac^ Apr 6.7 6.7 0.7 16.8 Outperform
Daibochi Dec 6.5 6.9 4.1 21.2 Outperform
Digi Dec 6.5 7.2 24.8 70.7 Outperform
BP Plastics Dec 6.5 7.1 0.8 7.4 Outperform
CSC Steel Dec 6.4 6.4 0.9 11.0 Outperform
Maxis Dec 6.2 6.7 n.m 26.1 Outperform
MCIL^ Mar 6.0 5.7 1.3 12.7 Outperform
EPIC Dec 5.9 5.9 0.8 13.9 Outperform
Freight Jun 5.7 5.7 0.8 18.5 Outperform
Tanjong^ Jan 5.7 5.8 1.7 16.5 Outperform
B-Toto^ Apr 5.4 5.7 n.m 90.8 Outperform
PLUS Dec 5.3 5.9 2.8 19.3 Outperform
YTL Power Jun 9.1 9.1 1.8 17.7 Market Perform
TM Dec 7.6 7.6 1.9 6.8 Market Perform
VS Industry Jul 6.5 8.7 0.7 6.2 Market Perform
S TA R Dec 6.1 6.6 2.0 13.1 Market Perform
^ FY10-11 valuations refer to those of FY11-FY12.
STRATEGY 23 PAPER
FBM KLCI From The Technical Perspective
Chart 6
FBM KLCI Daily
Heavy Technical Resistance Zone Removed
In our quaterly technical strategy report dated 17 Dec 2009, we highlighted a tough The FBM KLCI finally broke
resistance zone for the FBM KLCI near 1,250 – 1,300 region, which would cap the out from the tough
index from staging an extended uptrend going forward. In the report, we had resistance zone of 1,250
expected the FBM KLCI to succumb to more profit-taking pressure, hence rolling into – 1,300 region in early
a retracement trend. In late January 2010, the index retreated sharply after failing March 2010
an attempt to remove the tough 1,300 psychological hurdle, and reached a low of
1,224.37. Thereafter, it relaunched another rally that eventually led to a breakout
of the crucial resistance zone of 1,250 – 1,300 region in early March 2010.
Although the subsequent pullback on the FBM KLCI had dragged it to below the The steady close at above
1,300 level, the recent push on the index has successfully lifted it back onto the the 1,300 level and the
uptrend. By 26 March 2010, the index has reached a high of 1,315.14, which is 10-day SMA shows sign of
above the 1,300 psychological level and the supportive 10-day SMA near 1,303. This a medium-term bullish
has laid a solid base for a bullish medium-term breakout signal on the FBM KLCI. breakout on the FBM KLCI
Moreover, the uptick on the sliding 10-day SMA in late March 2010 (see Chart 6) has The uptick on the 10-day
indicated a likely reversal on the short-term trading sentiment on the FBM KLCI. This SMA indicates better
strengthened our earlier view that, when the 10-day SMA cut above the 40-day SMA, trading sentiment, which
it will trigger a medium-term “buy” signal on the chart. Should the index sustain at will likely rechallenge the
above the 10-day SMA, it will rechallenge the previous high of 1,334.34 in the near previous high of 1,334.34
term.
According to the weekly chart (see Chart 7), the heavy resistance zone of 1,250 – The removal of the
1,300 was also near the extended Neckline resistance of the previous Head & extended Neckline
Shoulders formation on the FBM KLCI. That partly explained our previous concern resistance on the FBM KLCI
on the index’s direction going forward. However, March’s performance on the FBM means another chart
KLCI has been encouraging, as the index managed to pierce through the 1,300
breakout pattern
Chart 7
FBM KLCI Weekly
STRATEGY 24 PAPER
hurdle and sustained at above the resistance zone for the past few weeks. This, if
it sustains, will indicate another breakout pattern on the chart. It will also indicate
a reversal of the bearish sentiment due to the previous Head & Shoulders formation
on the FBM KLCI.
As shown in the monthly chart (see Chart 8), the FBM KLCI has recovered onto the The Long-term Uptrend of
Long-term Uptrend (UTL) since it penetrated the 1,150 hurdle in July 2009. Given the FBM KLCI remains
the successful defence at above the 1,250 support level in 1Q 2010, the index has intact, as it gears toward
earned another chance to prolong its current uptrend to a higher resistance level of the next significant
1,390. As it has registered another bullish candle on the monthly chart (as at the
resistance at 1,390
close of 26 March 2010), it is poised to stage a further rally in the months ahead.
Even if the index were to reverse from the current position, we are confident that
the 1,250 and the UTL near 1,150 will cap further downside pressure. In other
words, the Long-term Uptrend of the FBM KLCI remains firmly in place.
Chart 8
FBM KLCI Monthly
In a nutshell, the FBM KLCI has removed the heavy resistance zone of 1,250 – 1,300 Resistance zone of 1,250
in 1Q 2010. Though the timing and the performance slightly surprised us on the – 1,300 removed, the FBM
upside, we are convinced that the resistance-turn-support zone of 1,250 – 1,300 will KLCI will retest 1,390 in 2Q
now cap downside pressure in the quarters ahead (see Chart 9). This does not mean or 3Q 2010
that we do not expect short- to medium-term volatilities on the FBM KLCI in the 2Q,
rather, we see its capability (from the technical perspective) to weather the
uncertainties going forward. Should the support zone stay intact going forward, we
forecast an acceleration in trading sentiment soon, hence leading the FBM KLCI
towards 1,390 in the next two quarters. Beyond that, the index could potentially take
on the all-time high of 1,524.69 over the longer term.
Chart 9
FBM KLCI Weekly
STRATEGY 25 PAPER
Banking : Earnings Gaining Momentum Overweight
The banking sector’s earnings growth momentum is picking up on the back of rising Earnings growth gaining
loan growth (we have raised our 2010 projections from 7-8% to 9%), stable to momentum
improving NIM (given that liabilities re-pricing has caught up after the OPR cuts in
late 08 and early 09 as well as positive impact from the 25bps hike in OPR on 4 Mar
10 – we are expecting another 25bps hike in OPR during the 8 Jul 10 policy meeting
and this would provide an additional boost to NIM, albeit temporary), growing Islamic
income (due to increasing popularity) and non-interest income (transactional income
will grow in tandem with rising economic activities while the revival of the capital
markets will be a boon to fee-based income) as well as lower LLP as asset quality
improves. Due to the festive season, industry NPLs are likely to fluctuate at around
the current level given that the system will still be under stress from three consecutive
quarters of GDP contraction (CY1Q09 to CY3Q09) and the traditional seasonal factor.
However, given that we expect the economic recovery to gain traction in 2010,
industry asset quality should improve in tandem and a more visible trend should
emerge from Mar/Apr 2010 onwards.
Chart 10 Chart 11
Loan Loss Coverage NPLs
% RMm %
95 G ro s s N P L (LH S) G ro s s N P L rat io (R H S) N e t N P L rat io (R H S) 17.0
6 90 00
90
6 40 00 15.0
85
80 5 90 00 13.0
75 5 40 00
11.0
70
4 90 00
65 9.0
4 40 00
60
7.0
55 3 90 00
50 5.0
3 40 00
45
2 90 00 3.0
40
35 2 40 00 1.0
J a n -9 9 J a n -0 0 J a n -0 1 J a n -0 2 J a n -0 3 J a n -0 4 J a n -0 5 J a n -0 6 J a n -0 7 J a n -0 8 J a n -0 9 J a n - 10 J u n-9 9 J u n-00 J u n-01 J u n-02 J un -03 J un -04 J un -05 J un -0 6 J un -0 7 J un -0 8 J u n-0 9
Source : BNM Source : BNM
The issuance of more licences implies that competition will intensify in an already
Increasing competition
crowded market. Increasing competition may prompt talks of M&As to increase
may prompt M&A
competitiveness. This should excite the market given that most banks (except for
excitement
CIMB, HL Bank and Public Bank) are trading well below 2x P/B vis-à-vis average
P/B of 1.6x and 2x for the first and second rounds of consolidation, respectively.
The offer by HL Bank for the assets and liabilities of EON Cap (now hanging in the
balance) has prompted some excitements and may attract other bidders for the
latter. The age issue of Public Bank’s major shareholder may also evoke speculation
while DBS’s interest in a foothold in Malaysia may also prompt interest in AFG (due
to common shareholder). However, given that domestic banks are already competitive
(whereby domestic banks as a whole have gained market share in terms of total
assets and the percentage share is now at all-time high), domestic M&As may not
add significant values vis-à-vis regional M&As (which provide greater opportunities
for growth). Moreover, given the different interests involved (including the interests
of strategic partner(s)), pricing would likely be the main stumbling block.
The adoption of FRS 139 in 2010 (effective interest rate calculation rather than Regulatory adoptions –
actual interest rate for that particular year and impairment test on recoverable neutral or positive to
collateral value rather than provision based on GP3 as well as treatment in the
earnings and capital
balance sheet) and Basel II internal ratings based (IRB) approach in 2010 or 2012
ratios
(trade-off between lower credit risk vis-à-vis higher/introduction of market and
operation risks) could have implications on banks’ earnings and capital ratios. Due
to the lack of detailed information and guidelines, we are unable to assess the
impact of these two regulatory adoptions. However, feedback from banks indicated
that both will have either neutral or positive impact on earnings and capital ratios.
The impact of Basel III on banks would be significant given that the initial consultative
Basel III has more
paper suggests more stringent qualifications for Tier-1 capital and higher minimum
significant impact but still
ratios. If adopted, banks may need more high quality capital in the form of equity
i.e. may need to undertake cash call or limit dividend payment. It will also impact uncertain
banks’ ability to grow assets (or loans) and indirectly weigh down on economic
recovery. Thus, we expect the final standard to be watered down vis-à-vis the
concept paper and will likely allow banks more time to phase in the changes.
STRATEGY 26 PAPER
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Capital ratios of the industry are well above the minimum levels and are at or near Potential of more active
their historical peaks. This implies that the sector is well capitalised and has excess capital management,
capital. Thus, banks have the ability to pay higher dividends (to enhance ROEs) in
pending Basel III
2010 when the economic recovery gains traction, pending the final outcome of Basel
III.
With rising investor interest in banking stocks and with the sharp run-up in share Relatively low foreign
prices in 2009, foreign shareholding of most banks are now off their lows. However, shareholdings
the levels are still well below peaks as well as below levels at the time of the entry
of strategic partners.
Despite share price appreciations and significant share price outperformances, many PER and P/B valuations
banking stocks are still trading near their post-Asian financial crisis average rolling
of most banks near post-
PER and trailing P/B valuations except for CIMB Group (P/B above), HL Bank (both
Asian financial crisis
above), Maybank (both below) and Public Bank (both above). More importantly, all
banks are still trading at below the previous peak in 2007 and/or one-standard mean
deviation above the mean. This implies that amidst positive sentiment (whereby
valuations tend to overshoot during the early stage of recovery), there is still room
for valuations to expand.
We continue to believe that the sector will take the lead in taking the market to Maintain Overweight
higher grounds. This will be underpinned by earnings growth gaining momentum,
potential M&As excitement(s), more aggressive capital management or higher dividend
pending Basel III, both PER and P/B valuations are still below their recent peaks
and/or less than one-standard deviation above post-Asian financial crisis mean and
foreign shareholdings are still relatively low and well below peaks. Moreover, most
banks have their unique story to sustain investors’ interests. Thus, we are maintaining
our Overweight rating on the sector. Top pick is Maybank. For big cap exposure,
we also like AMMB, CIMB Group and Public Bank. AFG, EON Cap and RCE Cap
are also rated as Outperform while Affin is rated Market Perform and HL Bank
Underperform.
Table 13
Valuation Bases
Fair Value
Company (RM/share) Valuation Methodology
Affin 3.03 11x CY10 EPS, 5x discount to reflect its low profitability and market capitalisation
AFG 3.27 15x CY10 EPS, 1x discount to reflect relatively lower liquidity and market capitalisation
AMMB 6.13 Benchmark 16x CY10 EPS
CIMB Group 16.24 17x CY10 EPS, 1x premium to benchmark to reflect its growing status as a regional
universal bank and in position to benefit from the current window of opportunities arising from
western banks pulling back their resources in the region
EON Cap 8.07 15x CY10 EPS, 1x discount to benchmark to reflect its relatively small market capitalisation and
lower liquidity
HL Bank 9.05 15x CY10 EPS, 1x discount to benchmark to reflect its relatively lower liquidity
Maybank 8.96 Benchmark 16x FY11 EPS
Public 13.12 Benchmark 16x CY10 EPS
RCE 1.08 11x CY10 EPS, 5x discount to reflect its non-deposit taking status and small market capitalisation
Source: RHBRI
Table 14
Valuations Of Banking Stocks
FYE Price EPS EPS Growth PER P/BV GDY ROE Rec
(sen) (%) (x) (x) (%) (%)
(RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY11
CIMB Dec 13.96 95.5 112.6 20.2 17.9 14.6 12.4 2.3 2.1 1.3 1.3 16.1 17.4 OP
PBB-F Dec 11.60 82.0 91.7 11.8 11.8 14.2 12.7 3.2 3.4 5.2 5.6 24.2 23.8 OP
PBB-L Dec 11.64 82.0 91.7 11.8 11.8 14.2 12.7 3.2 2.9 5.2 5.6 24.2 23.8 OP
AMMB^ Mar 4.97 39.9 45.7 19.0 14.6 12.5 10.9 1.6 1.4 2.0 2.0 12.1 12.5 OP
EON Cap Dec 7.03 53.8 60.9 9.4 13.2 13.1 11.5 1.3 1.1 1.4 1.4 10.0 10.4 OP
Maybank Jun 7.39 51.3 60.7 35.7 18.1 14.4 12.2 1.9 1.8 3.9 4.7 14.0 15.2 OP
AFG^ Mar 2.80 23.5 26.6 40.5 13.0 11.9 10.5 1.3 1.2 2.2 2.2 11.8 12.0 OP
RCE^ Mar 0.68 10.6 11.3 5.9 6.1 6.3 6.0 1.2 1.0 1.5 1.5 20.3 18.0 OP
Affin Dec 2.83 27.5 29.6 10.5 7.6 10.3 9.6 0.9 0.9 3.0 3.0 8.6 9.0 MP
HL Bank Jun 8.60 56.5 56.6 5.1 0.2 15.2 15.2 2.1 1.9 2.8 2.8 14.8 13.4 MP
RHB Cap* Dec 5.60 54.9 61.2 13.9 11.5 10.2 9.2 1.2 1.1 3.4 3.7 12.3 12.9 NC
Sector Avg 19.5 14.5 14.1 12.3
* Not under our coverage. I/B/E/S Estimates forecasts are used for companies not covered by RHB Research Institute.
^ FY10-11 valuations refer to those of FY11-FY12
STRATEGY 27 PAPER
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Building Steel Price Near-Term Outlook Still Good, Overweight
Materials : Investor’s Risk Appetite For Cement Stocks
To Improve
Steel: Near-term outlook still good
Global steel prices have risen substantially since late-Dec 09, mainly driven by cost- Steel price rally likely to
pushed factors, in particular, rising iron ore and coking coal prices. We believe that sustain over the near
global steel price strength is likely to sustain over the near term, underpinned by:
term
1. Rising iron ore prices. Given that the annual iron ore contract price has yet
to be finalised and global iron ore miners are pushing for a significant increase
in 2010 iron ore contract price (the latest being a 90% hike), we believe spot
prices of iron ore are likely to trend up further, lending support to steel prices
globally;
2. Seasonally strong demand. Steel consumption is seasonally strong in 2Q on
the back of good weather (which boosts construction activities and hence steel
consumption) and worldwide seasonal stock replenishing activities; and
3. Less concerns on overcapacity, at least for now. This is mainly on the back
of the still-rosy near-term demand outlook. Also, we believe the Chinese
government’s intensified efforts in curbing excess capacity in the country’s steel
sector will lift sentiment, boosting restocking activities by stockists.
On the local front, steel producers have yet to see signs of a pick-up in demand for Domestic demand
downstream steel products (such as steel bars and wire rod), mainly due to a slow expected to pick up in 2H
roll-out of both public and private projects (4Q and 1Q are seasonally weaker on the
back of festivities and rainy season). However, we anticipate demand for down-
stream steel products to pick up from 2H, underpinned by:
1. The implementation of the remaining projects under the two stimulus packages;
2. Increased property development activities; and
3. More intense restocking activities by steel stockists ahead of the announcement
of the 10MP.
We believe domestic steel producers will report a good set of 1H performance, due Anticipating stellar 1H
mainly to: 2010 performance
1. The rising global steel prices that are outpacing production cost, as most steel
producers managed to stock up raw materials at low prices (when prices weak-
ened on seasonal factors in 4Q);
2. The demand in the Southeast Asia (SEA) region has started to pick up since Jan
09 and this augurs well for steel exports; and
3. Inventory replenishing activities by steel stockists are seasonally stronger in 1H.
While we believe that global steel consumption will strengthen into end-2010 (under- Global steel prices likely
pinned by the final leg of the stimulus spending), global steel prices are likely to take to take a breather in 2H
a breather in 2H and price volatility may return, as concerns on overcapacity may
resurface on the back of:
1. Rising steelmaking capacity utilisation in China (in particular the smaller steel
producers), prompted by attractive steel prices; and
2. Steel producers in the rest of the world (such as the European region) may restart
some of their idle capacity when both prices and demand in that region improve.
Concerns on overcapacity aside, we also believe that the possible change in iron ore
benchmark pricing system is likely to result in greater volatility in iron ore prices and
in turn greater steel price volatility (as iron ore is one of the major inputs in
producing steel). This is mainly because the world’s major iron ore producers (both
Vale and Rio Tinto) are currently lobbying to scrap the 35-year old annual bench-
mark pricing system and replace it with a quarterly pricing system. We note that iron
ore spot prices historically have been more volatile during the iron ore benchmark
price negotiation process and therefore moving from an annual to a quarterly ad-
justment should result in more fluctuation in the iron ore spot market (and hence
global steel prices). Given iron ore producers’ significantly stronger power (on the
back of the rising steel consumption and production in China, the world’s biggest
steel consumer and producer), we believe the iron ore producers’ wish is likely to
be granted, this time around.
We are keeping our Overweight stance on the steel sub-sector, as we believe the Maintain Overweight on
global steel price strength is likely to sustain over the near-term. For exposure to steel sub-sector
the building materials sector, our top picks are Ann Joo Resources (OP, FV = RM3.53)
and Perwaja (OP, FV = RM1.79).
STRATEGY 28 PAPER
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Cement: Investors’ risk appetite for cement stocks to improve
We believe the cement sub-sector is due for a re-rating, underpinned by: Cement sub-sector due
1. New expectations leading up to the announcement of the 10 Malaysia Plan th for a re-rating
(10MP) in Jun 10, which will in turn boost investors’ risk appetite towards construc-
tion-related stocks (including cement producers, whose fortunes are tied largely
to construction activities); and
2. The anticipation of a meaningful pick-up for domestic cement consumption from
2Q 2010 arising from the implementation of large-scale projects (see Table 15)
as well as a pick-up in property development activities (as evidenced in the surge
in property launches since 2H 09).
Table 15
The Expected Flow Of Large-Scale Projects
Project Value (RMbn)
2009 (Awarded)
Pahang-Selangor Water Transfer - Upstream (water tunnel) 1.3
Medini, Iskandar (utility & infrastructure packages) 1.0
New LCCT (Earthwork Package 1) 0.4
Sub-total 2.7
2010
New LCCT (Earthwork Package 2) (Awarded) 0.3
New LCCT (Terminal, satellite, parking apron & runway) 1.9
Pahang-Selangor Water Transfer - Upstream (Klau Dam, dual pipelines & Semantan pump station) 2.5
Nanga Merit access road, Kapit, Sarawak 1.2
Murum access road, Kapit, Sarawak 0.9
Sub-total 6.8
2011
Ampang & Kelana Jaya LRT line extension (civil works) 3.5
Medini & EduCity (infrastructure and building) 2.0
Mengkuang Dam, Seberang Prai 1.0
Sub-total 6.5
2012 & Beyond
Gemas-JB double tracking 5.0
Pahang-Selangor Water Transfer - Downstream (Langat 2 water treatment plant) 4.1
Kota Damansara - Cheras new LRT line 25.0
Sub-total 34.1
Total 50.1
Source: Bursa Malaysia, RHBRI, various news reports
Given the higher demand going forward, we believe rebates given by cement pro- Rebates likely to decline,
ducers are likely to decline (hence resulting in higher net selling prices). With higher higher dividend is possible
net selling prices and minimal capex going forward, we believe cement producers
are likely to declare higher dividend in the near term. We estimate that Lafarge can
raise gross dividend per share (GDPS) by 50% from 30 sen in FY12/08 to 45 sen,
assuming: (1) Net gearing is to be maintained at 0.1x from FY12/09; and (2) Free
cash flow of RM350m in FY12/10. For YTL Cement, we estimate that YTL Cement can
double GDPS from 7.5 sen in FY06/09 to 15 sen, assuming: (1) Net gearing is to be
maintained at 0.3x; and (2) Free cash flow of RM250m in FY06/10.
Nevertheless, we do expect the rise in net selling prices and domestic demand for Expecting higher energy
cement to be partly offset by higher energy cost. This is mainly due to the global costs in 2010
economic recovery that has boosted demand for electricity (and hence demand and
prices of thermal coal that is one of the major inputs in power generation).
Given the improved fundamentals of the cement sub-sector, our rating for the ce- Top pick is Lafarge
ment sub-sector is upgraded from underweight to Overweight. Our top pick for the
cement sub-sector is Lafarge (OP, FV = RM7.21).
Table 16
Valuations Of Building Material Stocks
FYE Price EPS EPS Gwth PER EV/EBITDA P/NTA P/CF GDY Rec
(sen) (%) (x) (x) (x) (x) (%)
(RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10
Kinsteel Dec 0.99 10.2 11.7 +>100 15.2 9.7 8.4 4.7 1.0 3.3 1.0 O P
Ann Joo Dec 2.71 40.1 45.0 +>100 12.2 6.8 6.0 5.9 1.2 n.m 8.9 O P
Hiap Teck Jul 1.40 19.1 21.2 +>100 11.3 7.3 6.6 8.3 0.7 n.m 1.4 O P
CSC Steel Hldgs Dec 1.76 22.4 22.5 -7.2 0.3 7.8 7.8 3.6 0.9 12.2 6.4 O P
Lafarge Mcement Dec 6.16 51.5 52.6 6.1 2.3 12.0 11.7 8.5 1.6 9.3 4.9 O P
Sino Hua Dec 0.47 5.9 9.5 +>100 59.9 7.9 5.0 4.0 0.6 7.3 0.0 O P
Perwaja Hldgs Dec 1.41 15.0 22.8 +>100 51.8 3.8 3.3 7.4 0.8 35.3 0.0 O P
YTL Cement Jun 4.24 46.6 45.8 -9.0 -1.7 9.1 9.2 4.4 1.3 6.7 7.1 O P
Sector Avg 29.1 10.8 9.6 8.7
STRATEGY 29 PAPER
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Construction : Investors’ Risk Appetite To Improve Neutral
We are turning a little more upbeat on the sector in 2Q2010, prompted largely by Improved investors’ risk
investors’ improving risk appetite for construction stocks following: (1) The massive appetite
underperformance of the sector vis-à-vis the market in 4Q2009 and 1Q2010; and (2)
A better sector news flow and new expectations leading up to the announcement of
the 10th Malaysia Plan (10MP) in June 2010. We believe these may to a certain
extent, moderate the negative elements that have weighed down on the performance
of the construction stocks over the last two quarters such as: (1) The slow pace of
the roll-out of public projects, shrinking margins and declining dominance of established
players in large-scale projects locally; and (2) The not-so-rosy outlook and increased
operating risks in key overseas markets (following the Dubai credit crisis, Dong’s
devaluation and rising arbitration cases).
Gross development expenditure under the 10MP is projected at RM180bn, sharply 10MP - New expectations
lower than RM230bn under the 9MP. However, the shortfall will be met with RM50bn
worth of projects to be carried out via private finance intiatives (PFI). Already, we
gathered on the ground that a teaching-hospital project in Kuantan based on the PFI
model is now under bidding. We understand that this RM400m project comes with
a 25-year concession (construction period of 3.5 years + operating period of 21.5
years). Assuming a 70:30 debt-to-equity structure, the contractor will have to fork
out RM120m “seed money” to be put into the special purpose vehicle (SPV) as equity
with the balance RM280m to be raised from the debt market in the form of SPV
borrowings.
In terms of the flow of large-scale projects, we expect it to gradually pick up from Better flow of large-
2Q after a slow start in 1Q. We expect the remaining packages of the new LCCT scale projects going
and upstream portion of the Pahang-Selangor Inter-state Raw Water Transfer project, forward
coupled with two access road projects in Sarawak, i.e. Murum and Nanga Merit, to
be awarded. As to the much anticipated Ampang and Kelana Jaya LRT line extension
project (total value of RM7bn of which only half is civil works), it now increasingly
appears that it is unlikely to be in full swing this year due to various issues including
public objection, design, alignment, basis of contract award, land acquisition and
funding (see Table 17).
Generally, based on the current valuations, we continue to see more value in small- We see value in small-cap
cap and mid-cap construction stocks, while high valuations will continue to cap and mid-cap construction
performance of large-cap construction stocks. We are now Neutral on the construction stocks
sector, compared to underweight previously.
Table 17
The Expected Flow Of Large-Scale Projects
Project Value (RMbn)
2009 (Awarded)
Pahang-Selangor Water Transfer - Upstream (water tunnel) 1.3
Medini, Iskandar (utility & infrastructure packages) 1.0
New LCCT (Earthwork Package 1) 0.4
Sub-total 2.7
2010
New LCCT (Earthwork Package 2) (Awarded) 0.3
New LCCT (Terminal, satellite, parking apron & runway) 1.9
Pahang-Selangor Water Transfer - Upstream (Klau Dam, dual pipelines & Semantan pump station) 2.5
Nanga Merit access road, Kapit, Sarawak 1.2
Murum access road, Kapit, Sarawak 0.9
Sub-total 6.8
2011
Ampang & Kelana Jaya LRT line extension (civil works) 3.5
Medini & EduCity (infrastructure and building) 2.0
Mengkuang Dam, Seberang Prai 1.0
Sub-total 6.5
2012 & Beyond
Gemas-JB double tracking 5.0
Pahang-Selangor Water Transfer - Downstream (Langat 2 water treatment plant) 4.1
Kota Damansara - Cheras new LRT line 25.0
Sub-total 34.1
Total 50.1
Source: Bursa Malaysia, RHBRI, various news reports
STRATEGY 30 PAPER
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Table 18
Key Areas That Stand To Receive Substantial Allocations Under Budget 2010
Key Area/Sub-segment Value (RMm)
1. Hospitals and clinics 14,800 (Part of)
 Construction and upgrading of hospitals in Kluang, Bera, Shah Alam, Alor Gajah & Tampoi na
2. Civil infrastructure projects 9,000
 Roads and bridges 4,700
 Water supply and sewerage 2,600
 Rail facilities 899
 Seaports 820
 Airports 276
3. Regional corridors 3,500 (Part of)
 Public housing in Iskandar na
 Cleaning of Segget River in Iskandar na
 Farming entrepreneurs training centre in Northern Corridor Economic Region (NCER)
 Widening of federal roads (Kuala Krai – Gua Musang, Kuala Lipis – Raub – Bentong) in na
East Coast Economic Region (ECER)
 Access roads for Murum Dam and Baram Dam in Sarawak Corridor of Renewable Energy (SCORE) na
4. Schools 2,700
 80 new schools, 1,100 additional blocks & 347 replacement schools 1,600
 School upgrading, especially in Sabah & Sarawak 1,100
5. Infrastructure in rural areas 2,300
 510km of rural road & 316km of village roads including those in Kapit, Lawas and Simunjan in 857
Sarawak & Kinabatangan, Kota Belud & Keningau in Sabah
 Electricity supply to 30,000 houses 825
 Water supply to 16,000 houses 530
 5,356 rural clinics, community halls & public recreational areas 88
6. Public-private partnership na
 CIQ in Bukit Kayu Hitam na
 6 UiTM campuses na
 MATRADE Centre Naza
Table 19
Valuations Of Construction Stocks
(sen) (%) (x) (x) (x) (x) (%)
Fajarbaru Jun 1.06 12.5 18.1 -17.5 44.9 8.5 5.8 2.0 1.5 14.6 5.2 OP
Sunway Hldgs Dec 1.52 21.4 22.7 57.6 5.9 7.1 6.7 5.9 1.2 6.2 1.8 OP
Emas Kiara Dec 0.50 13.1 15.2 15.0 16.7 3.8 3.3 3.4 0.5 2.4 3.0 OP
MRCB Dec 1.51 7.1 7.6 86.4 8.0 21.3 19.7 14.5 1.6 21.9 0.0 TB
HSL Dec 1.48 13.0 15.1 27.2 16.4 11.4 9.8 6.9 2.3 13.8 1.7 MP
IJM^ Mar 4.77 31.7 32.6 50.6 2.7 15.0 14.6 8.7 1.2 7.7 2.2 MP
Gamuda Jul 2.84 13.6 16.1 40.4 17.9 20.8 17.7 26.9 1.8 97.6 2.8 UP
WCT Dec 2.74 18.2 16.9 -3.0 -7.0 15.1 16.2 13.1 1.5 14.8 2.2 UP
Sector Avg 26.6 7.6 15.6 14.5
STRATEGY 31 PAPER
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Consumer : Resilience In The Consumer Sector Neutral
RHBRI expects an uneven economic recovery as more economic data is unveiled Resilience in the consumer
and as a result, the FBM KLCI is expected to continue to be volatile moving into sector
2Q10. Based on historical data, the consumer sector has proven to be resilient
during a period of volatility as investors resort to defensive / high dividend yielding
stocks to seek shelter (see Chart 12).
RHBRI’s economic team forecasts that consumer spending will likely grow at a Retail sales to continue to
stronger pace of +4.8% yoy in 2010, as compared to +2.1% in 2009, as consumer grow
confidence rises on the back of improving employment prospects and pent-up demand.
We also gather that employers are now offering higher salaries to retain and attract
talent, and the overall trend of salaries and therefore, disposable income is now
going up. Coupled with the scrapping of the petrol subsidy scheme, we believe
consumers now feel less uncertain as to the future outlook and as such, would
resume their old spending patterns and not hold back on their intended purchases.
This would bode well for retailers like AEON (OP, FV = RM5.85), Parkson (MP,
FV = RM6.40), Amway (OP, FV = RM8.45) and Hai-O (OP, FV = RM5.20). Our
Market Perform recommendation on Parkson reflects our view that there is limited
upside given the recent outperformance of share price.
Chart 12 Chart 13
Historical Correlation of FBM KLCI vs. KL Improving Domestic Demand On Account Of
Consumer Index Rising Consumer Spending
350% % yo y
25.0
300%
Cons umer s pending

250%
K L C o n s u m e r In d e x F B M K L C I In d e x 20.0
Domes tic demand
200%
15.0
150%
10.0
100%
5.0
50%
0% 0.0
00
01
02
03
04
05
06
07
08
09
10
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
- 5.0
The F&B sub-sector is also expected to benefit from the increase in consumer spending F&B driven by increasing
and expansions into new markets, either geographically or via the introduction of new consumer spending and
products. For KFCH (OP, FV = RM9.63), we expect its ongoing effort to reach into market expansion
less tapped markets such as Sabah and Sarawak, as well as the opening of more
drive-through outlets (to cater to changing consumer lifestyle) to provide sustainable
earnings growth for the company. Meanwhile, we opine that KFCH’s expansion plans
into India would cater for its medium-to longer-term growth despite initial hiccups
(eg. time lag in openings of its two maiden restaurants). As for QL Resources (OP,
FV = RM3.93), we believe products innovation and new market exploration, as well
as its diversified and independent divisional operations, with different revenue and
cost structures, will provide QL a solid ground for sustainable earnings in the near
to medium term. Daibochi (OP, FV = RM4.40) would indirectly benefit from the
increase in F&B consumption as >90% of its customers are from the F&B sector.
The FIFA World Cup in Jun/Jul 2010 together with increasing consumer spending could Brewers to benefit from
translate into higher consumption of malt liquor in 2010 and this would help grow World Cup and better
industry TIV yoy. Nevertheless, we have forecast a conservative 1% yoy TIV growth margins
for 2010. Furthermore, to encourage tourism and to support downstream industries
such as F&B outlets, we believe that the Government would not increase excise duty
for another year. Easing pressure from raw material prices helps brewers in 2010 as
they typically lock in raw material costs for 6-18 months forward.
While the anticipated growth in consumer spending in 2010 could also translate into Tobacco remains under
higher consumption of cigarettes, we believe the high illicit trades together with pressure, but pressure is
government anti-tobacco stance would continue to put industry players under pressure. easing
STRATEGY 32 PAPER
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In the worst case scenario, the Government could impose a ban on public smoking,
which would have a drastic impact on BAT (UP, FV = 38.95). Nevertheless, we
understand that the Customs Department is now arresting retailers who are caught
selling contraband cigarettes instead of just issuing compound notices, which could
help reduce illicit cigarettes sold in the market (latest data at 38.7% for Jun-Aug 09).
In 2010 Budget, a sum of RM14.8bn was allocated to the healthcare sector to Faber and KPJ
enhance the quality of the healthcare services in Malaysia. We think the bulk of this beneficiaries of
would go to the construction of new government hospitals, which would benefit Faber increasing emphasis on
(OP, FV = RM3.30) given that the company provides non-medical hospital support healthcare
(IFM) services to government hospitals in six states across Malaysia. We continue
to like Faber for its resilient earnings derived from the concession business in the
IFM segments, together with its ongoing expansion plans for its non-concession
business both locally and overseas. For the private healthcare business, we expect
it to grow on the back of higher uptake on medical insurance policies in Malaysia,
which would benefit players such as KPJ (OP, FV = RM3.20). Furthermore, the tax
incentive for medical tourism i.e. 100% relief in tax for any incremental net profit
yoy from medical tourism would encourage the development of medical tourism in
Malaysia, which could potentially place Malaysia as one of the leading medical
tourism markets in Asia such as Thailand and Singapore.
Our top picks for the sector are Faber and Daibochi. We like Faber for: 1) its resilient Top picks are Faber and
earnings derived from the concession business in non-medical hospital support Daibochi
services; 2) its ongoing expansion plans for its non-concession business both locally
and overseas; 3) recovery in property development earnings on several new launches
in FY10 and FY11 onwards; and 4) potential M&A re-rating catalyst. Furthermore, we
think that Faber is relatively undervalued, given that it is currently trading at 7.0x
FY10 PE, a steep discount relative to our consumer sector target PER of 14.5x. For
Daibochi, we like the company as it continues to innovate and move into areas that
are not commonly associated with flexible packaging. Not only does Daibochi create
new markets for themselves in the non-F&B sector, it also helps to create packaging
solutions for its existing F&B customers. Potential re-rating catalyst from its successful
venture into the healthcare and electronics industry. For more defensive attributes,
we like Carlsberg as it has committed to paying out 50-70% of net profit as
dividends for the next 5 years, equivalent to an average of 6% net dividend yield
p.a.. This is higher than our projected net dividend yield for BAT of 5% p.a..
Nevertheless, we are keeping our Neutral stance for the consumer sector given our Maintain Neutral
Underperform recommendation on heavily-weighted BAT and Market Perform on
Parkson.
Table 20
Valuations Of Consumer Stocks
(sen) (%) (x) (x) (x) (x) (%)
KFC Dec 7.85 77.1 89.5 17.2 16.2 10.2 8.8 5.0 1.9 6.5 3.3 OP
Amway Dec 7.34 54.5 56.5 23.6 3.5 13.5 13.0 8.5 4.9 7.3 6.8 OP
Carlsberg Dec 4.98 41.3 42.2 70.1 2.3 12.1 11.8 7.8 2.8 22.6 5.0 OP
KPJ Health Dec 2.88 21.9 23.2 17.3 6.0 13.1 12.4 7.8 1.3 11.7 4.9 OP
Hai-O^ Apr 4.39 48.3 57.7 24.7 19.4 9.1 7.6 5.9 1.5 4.7 7.3 OP
Faber Dec 2.24 26.5 24.2 16.4 -8.8 8.4 9.3 3.2 1.9 5.3 3.1 OP
QL R^ Mar 3.42 31.3 36.9 16.2 17.7 10.9 9.3 5.4 2.4 11.7 3.1 OP
Daibochi Dec 3.64 36.7 39.9 22.4 8.8 9.9 9.1 6.2 4.1 8.5 6.5 OP
AEON Dec 4.90 41.7 46.6 9.6 11.8 11.8 10.5 4.4 1.6 9.5 2.4 OP
Parkson Jun 5.77 29.2 36.3 15.0 24.3 19.8 15.9 5.2 3.0 7.8 1.2 MP
B AT Dec 42.90 243.5 233.2 -6.9 -4.2 17.6 18.4 12.4 n.m 13.1 5.1 UP
Sector Avg 9.1 6.7 14.7 13.8
STRATEGY 33 PAPER
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Gaming : New Opportunities Amongst Threats Overweight
More relevant numbers for Singapore in 3-6 months. The first of the two More relevant numbers
Singapore casinos, Resorts World Sentosa (RWS) opened on 14 Feb and according to for Singapore in 3-6
media reports and confirmed by management, visitors to the casino have been around months
20,000-25,000 per day. We note that extrapolating these daily visitor numbers for the
rest of the year would bring total visitor numbers to around 6.4-7.6m for FY10, which
is lower than our projection of approximately 8.2m for FY10. However, we believe it
would not be completely accurate to extrapolate these numbers, given that firstly,
these numbers were given when only the casino had opened, without the benefit of
Universal Studios Singapore (USS) which opened more than a month later; and
secondly, both the casino and USS are opening in phases and ramping up its capacity
to full capacity on a gradual basis. Currently, we understand only 300 tables and 1,300
slots are operational in RWS’ casino, out of a total potential of 500-700 tables, while
at USS, only 3,000-4,000 tickets per day are being made available, out of a total
capacity of 30,000 tickets per day. We expect to see a more sustainable visitor trend
only in another 3-6 months, particularly after Marina Bay Sands opens - slated for 27
Apr.
Cooling down the gaming industry in Macau. In the region, the Macau Macau Government aims
government has recently made some regulation changes to cool the current booming to cool down robust
growth in the gaming industry in order to promote long-term sustainability of casino gaming industry growth
operators and diversify the city’s revenue base. This involved, amongst others, the
freeze on approval of new casino projects and a cap on the number of new gaming
tables to 500 over the next three years. Although the approval freeze would not affect
casinos that have already been approved and are in the midst of construction like
Galaxy’s Cotai casino (to be opened in 1Q2011) and Sands China’s Parcels 5 & 6 in
Cotai (to be opened by end-2011), the table cap ruling would have an impact, given
that these three projects alone are slated to add an additional 1,300 tables to the
existing 5,000 tables in Macau. When these regulation changes take effect, this could
have an impact on the regional gaming industry overall, as new gaming investment
dollars may end up being channeled elsewhere as the global economic recovery
continues to gain strength. We note that in Feb 2010, gaming revenue in Macau
continued to grow by a robust 69% yoy, bringing YTD cumulative growth to 66% yoy,
thus showing no signs of cannibalisation by the Singapore casino so far, which is as
expected, given the difference in target market.
No “discernible cannibalisation” of business in Malaysia so far. In Malaysia, No “discernible

management of Genting Malaysia (GM) has commented that since the opening of cannibalisation” of
Resorts World Singapore’s (RWS) casino during the Chinese New Year, business business in Malaysian
continues to be satisfactory, despite a slight decline in visitor arrivals from Singapore,
casino so far
but that there was no “discernible cannibalisation of business” so far. GM intends to
continue doing more direct marketing and promotional activities throughout the year,
as well as continue to invest in upgrading works for the hotels, theme park and
gaming equipment in order to combat the competition. We note that capex planned
for FY10 of RM300m is expected to be more than double that spent in FY09 of
RM129.7m. We maintain our belief that the impact from the opening of RWS and the
planned opening of Marina Bay Sands on 27 Apr would be short term in nature and
would not be significant, due to the fact that 71% of the Malaysian casino patrons are
daytrippers and it is not economically feasible for the mostly (circa 70%) grind market
patrons to do a day trip to Singapore on a regular basis. In Malaysia in 2009, the
casino resort recorded a +1.5% yoy rise in visitors, although in 4Q09 itself, visitors
rose by 3.8% yoy. For 2010, we maintain our casino visitor arrival projections of a
4% decline followed by a 2% p.a. growth for 2011-12 (versus 10-yr historical average
of 4.5% p.a.), on the back of the economic recovery gaining momentum.
No re-rating for GM unless capital management or EPS-enhancing No re-rating for Genting

acquisition. Despite its business resiliency, we continue to expect that any share Malaysia unless capital
price re-rating for GM (MP, FV = RM2.90) will be hindered by continued investor management or EPS-
disappointment that no capital management in the form of special dividends or
enhancing acquisition
treasury share cancellation seems to be forthcoming despite its large cash hoard (of
seen
RM5.3bn) and lack of significant expansion/acquisition plans. However, we believe a
potential opportunity has emerged for GM to expand its operations globally, in the
form of MGM’s 50%-owned Atlantic City Borgota casino, given MGM’s recently
STRATEGY 34 PAPER
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announced plan to exit the Atlantic City market in favour of its MGM Macau operations
and the agreement with the regulators to sell its stake within the next 30 months.
Depending on the pricing, this could give GM a chance to get a piece of the US gaming
market, albeit not in Las Vegas.
Preference still for Genting. We continue to prefer Genting (Outperform, FV = Preference still for
RM8.90) as we expect its diversified earnings to protect it from any potential Genting
slowdown in the domestic casino earnings, while the valuation gap between Genting
and Genting Singapore could be an arbitrage opportunity.
New opportunities from further liberalisation of NFO policies? The NFO New opportunities for
segment has undergone several new developments of late in the form of the NFO industry?
allocation of 20 overlapping special draws for 2010, the approval of a new jackpot 4D
game for Magnum and the approval of two higher minimum jackpot lotto replacement
games for BToto. There is also potential for more industry changes in the form of the
potential emergence of a new jackpot game for Tanjong and the possible approval of
a sports betting licence, all of which have intensified industry hopes that the
government is becoming more liberal in its gaming policies. Market talk has increased
lately on the possibility of an approval of a sports betting licence before the World Cup
2010 starts in June 2010. This could either come in the form of a revival of the sports
betting licence granted to Ascot Sports, a Vincent Tan-owned private company in 2003
(which was pre-paid for 25 years), or a new licence altogether being granted to either
one of the NFOs. According to some estimates, the illegal gaming syndicate market
size is about RM10bn, similar to the current NFO market size, of which the majority
is from sports betting. We believe a revival of the sports betting licence under Ascot
Sports would be positive for BToto, even though it may not necessarily be under BToto
directly, as BToto could be given distribution rights to be the key agent. We do not
rule out the possibility of the other NFOs also being appointed as agents by Ascot, in
order to increase the penetration rates, although this may be done on a phase by
phase basis, with BToto being the first agent appointed, given its wider reach with the
largest number of outlets (of 681 vs Magnum’s 487 and Tanjong’s 347). If a new
licence is granted to either one of the NFOs or even to a neutral party, it would then
depend on how it is to be implemented. Nevertheless, if the NFOs only end up as
distribution agents, the earnings impact would not be too significant, given that they
would only earn an agency fee for distribution. Currently, BToto pays its 4D and
jackpot agents a commission rate of 5%.
We believe BToto has been given a new lease of life with the launch of New lease of life for
Supreme 6/58, its new RM8.88m minimum replacement jackpot lotto game for Super BToto
6/49. We expect this game to help create bigger jackpots than those previously under
the Mega 6/52 game (of >RM20m), and bigger than Magnum’s 4D jackpot game,
resulting in higher sales per draw day. Depending on luck and the jackpot build-up,
this could also help BToto regain some of its market share lost to Magnum (estimated
at 0.2-0.5%-pt) since its 4D jackpot game was launched in Sep-09. So far, we note
that sales per draw for this game has been about RM765,000, which is notably, more
than double the sales/draw of the 6/49 game and >80% above the sales/draw of
BToto’s RM3m minimum 6/55 game. Our NFO industry segment growth projections
have been revised downward to 1.1% for 2009, 0.1% for 2010 and 2% for 2011 (from
4%, 0.4% and 1.4%, respectively previously). While we maintain our 8% decline in
sales per draw for BToto in FY04/10, we believe this should reverse to +7% in FY11
and +3% in FY12. We believe longer-term prospects for BToto have improved with the
launch of this game and maintain our Outperform rating with RM4.95 fair value.
Maintain Overweight on
All in, we maintain our overall Overweight call on the gaming sector. gaming sector
Table 21
Valuations Of Gaming Stocks
FYE Price EPS* EPS Gwth PER EV/EBITDA P/NTA P/CF GDY Rec
(sen) (%) (x) (x) (x) (x) (%)
Genting Dec 6.58 45.8 56.1 38.9 22.5 14.4 11.7 4.7 2.0 5.8 1.4 OP
B-Toto^ Apr 4.42 32.1 33.4 2.7 3.9 13.8 13.2 9.9 n.m 18.2 5.4 OP
Genting S’pore Dec 0.93 2.8 3.7 +>100 33.5 33.1 24.8 17.6 2.4 8.7 0.0 OP
Genting M’sia Dec 2.81 21.0 22.4 -13.3 6.8 13.4 12.5 5.9 1.6 10.5 2.4 MP
Sector Avg 8.6 14.2 13.9 12.2

STRATEGY 35 PAPER
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Infrastructure : Water Sector Restructuring in Neutral
Selangor Remains Long Drawn and
Painful, Toll Roads A Defensive Play
Water: Water Sector Restructuring Unlikely to Materialise Anytime Soon
Despite the surprise offer launched by Syarikat Pengeluar Air Sungai Sdn Bhd Better offer from splash
(Splash) to take over Selangor state’s existing water assets on 18 Mar 10 was higher will not expedite Selangor
than Selangor state government’s earlier offer in Jun 09, we believe it will still take water sector
a long while before the state’s water sector restructuring can materialise. This is restructuring
mainly due to several issues arise from the latest development, which are:
1. The proposed acquisition of Selangor water assets defeats the purpose of the
Government’s initiated water restructuring, i.e. to house all water assets under
one roof (at cheap funding rate) to improve efficiency and resolve the issue on
future heavy capex that is unsustainable under the current model. This means
Splash may not be able to obtain the greenlight from both the Federal Govern-
ment and state government; and
2. Puncak is likely to reject the offer (despite the new offer being higher than
Selangor government’s offer in Jul 09). This is mainly because the combined
effective offer price for Puncak’s 100% stake in PNSB and 70% stake in Syabas
is worth only RM1.2bn, having adjusted for net debt (see Table 22), which is lower
than our DCF-derived NPV for Puncak of RM1.5bn (before attributing a 30%
discount to reflect Puncak’s regulatory risk).
Table 22
Details on SPLASH’s Offer Price
SPLASH PNSB Syabas Abass Total

(RM’000) (RM’000) (RM’000) (RM’000) (RM’000)
Selangor’s offer in Jul 09 2,975 1,936 3,361 946 9,218

Proposed additional by SPLASH 0 0 782 0 782
SPLASH’s offer 2,975 1,936 4,143 946 10,000
Compensation to SPLASH’s O&M 750 0 0 0 750
operators
SPLASH’s total offer 3,725 1,936 4,143 946 10,750
Source: Gamuda
Table 23
Effective Offer Price For Puncak
PNSB Syabas Total

(RM’000) (RM’000) (RM’000)
SPLASH’s offer 1,936.0 4,143.0 6,079.0

Adjustment for:
Estimated net debt (as at 31 Dec 09)* (2,332.8) (1,845.8) (4,178.6)
(396.8) 2,297.2 1,900.4
30% minority interest at Syabas - (689.2) (689.2)
Effective offer price to Puncak (396.8) 1,608.0 1,211.2
*Assuming 50% of Puncak’s cash balance goes to Syabas

Source: RHBRI
We continue to believe that the scheduled 37% water tariff hike is unlikely to happen 37% water tariff hike
any time soon, as such an unpopulist move is out of the Government’s agenda under unlikely to come forth
the current political environment. A case in point is the Government’s move to reject
a 10% toll rate hike earlier this year. We believe compensation for revenues forgone
due to the delay in scheduled tariff hike is likely to be addressed together with the
water restructuring in due course.
STRATEGY 36 PAPER
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We reiterate our cautious view on the water sub-sector as we believe that the water Cautious on water sub-
sector restructuring in Selangor is unlikely to materialise anytime soon. sector
Toll Roads: A dividend play
We project traffic volume growth at PLUS’s core expressways (consisting of North- FY12/10 traffic volume
South Expressway, New Klang Valley Expressway, Federal Highway Route 2, and growth to slow down
Seremban-Port Dickson Highway) to slow down to 3% from a growth rate of 7.1%
in 2009 due to:
1. The high base effect in FY12/09; and
2. The potential petrol price hike in 1HFY12/10 arising from the restructuring of the
fuel subsidy scheme (which may have a negative impact on PLUS’s traffic
volume).
We believe PLUS is likely to declare higher dividends from FY12/10, given: (1) Its Likely to declare higher
current low debt-to-equity ratio of 1.8x (as at 31 Dec 09) vis-à-vis the global toll dividend
road players’ debt-to-equity ratio of 3.5x that allows it to raise borrowings in the
near term; and (2) Its stable free cash flow of RM900m per annum. In our forecast,
we project PLUS’s dividend to increase from 16.5 sen in FY12/09 to 18 sen and 20
sen in FY12/10-11.
Infrastructure Sector: Impact on IFRIC 12
IFRIC 12 - Service Concession Agreements, which covers accounting treatment of IFRIC to take effect from
service concession agreements (such as “service concession”, build-operate-trans- 1 Jul 2010
fer” and “rehabilitate-operate-transfer” arrangements) in the financial statements of
the operator, is targeted to take effect in Malaysia from 1 Jul 2010. This means
affected companies (in particular concessionaires) are likely to migrate to this new
accounting practice in the next financial year.
The implementation of IFRIC 12 will impact concessionaires under RHBRI’s infra- IFRIC 12 will impact
structure sector (i.e. PLUS Expressways and Puncak Niaga) in two major aspects: concessionaires in two
major aspects
1. Concessionaires can no longer recognise concession assets as tangible assets.
The reclassification of the concession assets of PLUS and Puncak Niaga from
tangible assets to intangible assets in its balance sheet will turn their net tangible
assets (NTAs) into the negative; and
2. Concessionaires are required to migrate to a new amortisation method, i.e.

either: (1) Use of volume method; or (2) Straight-line method, and the change
in amortisation method will result in higher amortisation expenses, hence lower
earnings.
In any case, this is nonetheless accounting entry and it will not affect our DCF-
derived indicative fair value on these companies.
Our top pick for the sector is PLUS. We like PLUS for its defensive earnings quality PLUS – the infrastructure
and decent dividend yield of about 5-6% per annum. Investors may be in for a sector’s top pick
windfall if the rumoured privatisation materialises at a higher price.
Table 24
Valuations Of Infrastructure Stocks
(sen) (%) (x) (x) (x) (x) (%)
PLUS Dec 3.41 23.6 36.3 -0.3 53.5 14.4 9.4 9.9 2.8 8.7 5.3 OP
Puncak Dec 2.74 31.1 28.8 -10.4 -7.4 8.8 9.5 3.3 0.7 2.6 2.2 UP
Sector Avg -1.4 48.2 13.9 9.4
STRATEGY 37 PAPER
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Insurance : Gearing Up For Liberalisation And Overweight
Improving Earnings Prospects
The insurance industry’s prospects are improving, with growth driven by four major Four factors to shape
factors: 1) 4.5% GDP growth in 2010; 2) rising public awareness on insurance sector’s growth
protections; 3) low penetration rate; and 4) further liberalisation on the sector.
RHBRI’s economic team forecasts Malaysian economy to expand by 4.5% in 2010, Riding on 4.5% GDP
underpinned by recovery in exports and pick-up in domestic demand which is supported growth, rising awareness
by increase in consumer and business spending (on the back of improvement in job and low penetration rate
market). This would benefit both life and general insurers in our universe, i.e.
Allianz (OP, FV=RM6.68), LPI (OP, FV=RM16.65) and Kurnia Asia (OP,
FV=RM0.74), as demand will improve accordingly. To be specific, we anticipate
general insurance demand will be underpinned by: 1) improvement in property
market which in turn provides rising demand for various related insurance policies;
2) increase demand for motor insurance coverage as motor TIV recovers in 2010
with 8.5% growth (according to RHBRI’s forecasts); and 3) increase in overall business
activities, resulting in better demand for general insurance products. As for life
insurance products, the rising disposable income and additional personal tax relief for
annuity premiums will spur the sector growth for the quarters ahead. In addition,
rising awareness on insurance cover as protection cum savings will also help the
sector growth. Moreover, given the low penetration rate as compared to other developed
and developing countries (see Charts 14 and 15), we believe there is room for
growth in the sector.
Chart 14 Chart 15
Life Insurance Penetration (Premiums As General Insurance Penetration (Premiums As
% Of 2008 GDP) % Of 2008 GDP)
%
16 . 0 %
13 . 5 5 .0 4 .6
14 . 0 4 .5
12 .0 10 . 7 4 .0
9 .7
10 .0 3 .5 2 .9 2 .9 2 .9
7 .7
8 .0 3 .0
5 .6 2 .5 2 .1
6 .0 4 .3 4 .2 4 .0 2 .0 1.6 1.6 1.5
4 .0 2 .8 2 .2 1.3
2 .1 1. 5 1.0
2 .0 0 .9 1. 0 0 .6 0 .4
0 .0 0 .5
0 .0
Source: Swiss Re Source: Swiss Re
We have imputed 8-18% growth to our general insurance stocks and 12% growth Growth story continues
to Allianz life business for 2010. We project 18% growth for LPI’s gross premiums
in 2010, led by fire portfolio, on the back of Public Bank’s 14% loan growth assumption
and enlarged agency force base. As for Kurnia and Allianz, we conservatively
assume gross premium growth of 8-10% for 2010, as both insurers continue with
their cautious growth on motor portfolio (largest portfolio), in order to contain the
claims ratio. As for Allianz life business, our 12% gross premium assumption is in
line with industry growth projection by LIAM (Life Insurance Association Malaysia)
of 12.5% for new business in 2010. As for MNRB (MP, FV=RM2.94), we project
18% growth for its reinsurance premium, as the company continues with its strategy
to expand to overseas market.
Further liberalisation will be imminent to the general insurance sector. Even though New liberalisation move
preparing insurers and public on a full de-tariffed market will take another 2-3 in the pipeline
years, we reiterate our opinion that a gradual change is imminent in the near term.
We opine the introduction of new basic insurance and takaful schemes for mandatory
basic protection (third party bodily injury and death) by mid-2010 will address the
industry main concern on high claims ratio on third party (TP) claims. Assuming
Malaysia follows India’s move to gradually de-tariff the insurance market, TP
premiums collected by all insurers will be channeled out to a TP pool which will be
used to pay any TP claims. This mechanism will ensure higher accessibility to basic
motor insurance coverage to the public vs. current mechanism of which TP coverage
from MMIP (Malaysia Motor Insurance Pool) can only be obtained from a few
channels. However, given that TP coverage generally is a loss-making business, we
STRATEGY 38 PAPER
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opine the premium charged may potentially be higher, after taking into consideration
more risk-based motor premium structure. As an example, in India, TP premium for
private car increased by 33-257.1% post de-tariff.
Given that the increase in TP premium will directly be channeled to the pool, this will TP removal will ease
potentially result in lower gross premium growth for the sector. However, we are pressure on underwriting
more excited about the impact to the bottom line, as we expect general insurers’ experience
claims ratios to improve, which in turn, will ease the combined ratios, and thus result
in better underwriting profit. Chart 16 shows the sector’s historical combined ratio
(claims + management expense + commission ratios) experience for motor portfolio,
which has been unfavourable since 2000-2008.
Chart 16
2000-2008 Motor Insurance Combined Ratio
350
300
250
200
15 0
10 0
50
-
2002 2003 2004 2005 2006 2007 2008
'A c t ' C o v e r² O t h e rs ³ T o tal
Source: PIAM
Note:
1) TP cover consists of Act cover and third party property damage cover.
2) “Act” cover refers to third party death or bodily injury risks as stipulated under
Road Transport Act, 1987.
3) Others” cover refers to risks other than those insured under “Act” cover
including accidental property damage and theft.
However, in a full detariffed market, LPI Capital as a niche player in fire insurance Fire premium may
is likely to be adversely affected by the reduction in fire gross premium. This is potentially be reduced in
because current premium charged under fire tariff is higher than the risk-based a full detariffed market
premium. Thus, to compensate for the potential reduction in fire premium, we
believe LPI will likely leverage on its miscellaneous insurance (second biggest portfolio),
such as workmen compensations, which is in higher demand due to increase in
commercial buildings and improvement in property market.
We are maintaining our Overweight stance on the sector, after taking into account Top pick is Allianz
the sector’s growth direction which will be shaped by: 1) 4.5% GDP growth in 2010;
2) rising public awareness on insurance protections; 3) low penetration rate; and 4)
further liberalisation on the sector. Top pick is Allianz because we believe it is
relatively undervalued due to its ability to maintain above-industry premium growth
but below-industry combined ratio. In addition, Allianz has a highly productive agency
force, strong bancassurance tie-up with CIMB and backing by parent. Moreover, its
life business has achieved critical mass and has been growing rapidly, resulting in
rising profit transfer.
Table 25
Valuations Of Insurance Stocks
(sen) (%) (x) (x) (x) (x) (%)
Kurnia Asia Dec 0.55 6.8 7.6 76.5 12.1 8.1 7.3 5.9 2.1 8.1 0.0 OP
Allianz Dec 5.20 66.4 75.0 -14.0 13.0 7.8 6.9 n.a 1.3 7.8 0.4 OP
LPI Capital Dec 13.70 111.0 125.7 22.2 13.2 12.3 10.9 12.6 2.0 3.5 8.0 OP
MNRB^ Mar 3.04 34.3 35.7 15.1 4.0 8.9 8.5 n.a 0.6 8.1 3.3 MP
Sector Avg 17.6 11.3 9.7 8.7
STRATEGY 39 PAPER
www.rhbinvest.com
Manufacturing : Improving Demand Prospects Amid Neutral
Rising Cost
We believe the global economic recovery is gaining momentum, although the pace Global economic recovery
of the recovery is likely to be uneven. Nevertheless, this would likely translate into is gaining momentum
an improvement in demand for Malaysia’s exports and should generally bode well
for the manufacturers, in our view.
We are still positive on the glove manufacturers given that demand prospects for Demand prospects for
gloves would continue to be strong, supported by organic demand growth and rising gloves continue to be
healthcare awareness in developing countries such as China and India. The possi- strong
bility of more H1N1-type flu outbreaks in the future could provide another catalyst
for demand moving forward. The quarterly numbers reported by the glove manu-
facturers have also been strong and not surprisingly, the rubber glove manufactur-
ers have started 2010 on a strong note, with share prices generally up 22.5-44.9%,
Latex prices are currently
as compared to +2.9% YTD for FBM KLCI (see Table 26). While demand prospects
trending upwards, while
remain favourable, some headwinds have appeared. For example, latex prices are
currently trending upwards (YTD=+19.7%) while the US dollar has weakened against US dollar has weakened
the ringgit (-2.5% YTD). That said, past trends show that the glove manufacturers against RM
have been able to pass on the bulk of the higher cost/weaker US dollar to their
customers, albeit with a slight time lag. We believe this ability remains intact and
has not changed. For instance, Top Glove mentioned that they have put through 3-
4 rounds of price revisions in the past three months to factor in the higher latex
prices and the weakening US dollar. We continue to like Top Glove (FV=RM15.50),
Kossan (FV=RM10.74), Adventa (FV=RM4.34) and maintain our Outperform
We maintain Overweight
call on these three companies. As for Hartalega (FV=RM7.93), given that the
stance on the glove
share price has run up against our fair value, we downgrade rating to Underperform
from Market Perform. Overall, we maintain our Overweight stance on the glove sector
sector.
Demand from local and export markets for BP Plastics’ (OP, FV=RM0.80) prod- BP Plastic is in a position
ucts has been improving on the back of the improving global economy. In addition, to take advantage of
we are encouraged by its ability to maintain margins that are above its peers, which improving demand for
we believe is due to its more efficient cost structure and cost pass-through ability Malaysian exports
given that resin prices are currently on an uptrend. In mitigation, the potential
additional supply of resins from the Middle East could cap the current uptrend in raw
material prices. As for V.S Industry (MP, FV=RM1.33), we expect earnings in the
Expecting a pick-up in
coming quarters to pick up, in tandem with improving economic conditions. Coupled
with the increase in sales to Dyson and the introduction of new products, these orders for VSI
should generally be positive for the company moving forward.
Furniweb’s (OP, FV=RM0.66) 4Q performance suggests that the worst could be Worst is over for
over for the company, although management expects a slow and gradual recovery Furniweb
in orders from FY10 onwards. The company is the 2nd largest manufacturer of
furniture webbing in the world and its plan to list in Vietnam would allow the
company to gain direct access to the Vietnamese capital market and to raise funds
for future expansion plans.
As for Wellcall (UP, FV=RM1.14), while orders are expected to gradually improve
in tandem with improving economic conditions, management remains cautious as
prices of its raw materials could rise as well in the coming quarters. This could
potentially impact Wellcall’s margins if such costs are not fully passed on to custom-
ers.
Maintain neutral call on

Overall, we are maintaining our Neutral call on the sector.
the sector
STRATEGY 40 PAPER
www.rhbinvest.com
Table 26
YTD Share Price Performance Of Glove Companies Against FBM KLCI
FBM KLCI TOPG KRI HART ADV SUCB* LT X *

Returns (%) 2.9 35.1 44.9 32.4 20.3 39.8 22.5
Source: Bloomberg
*not rated
Table 27
Manufacturing Sector Recommendation And Fair Value
Company Recommendation FV Valuation Benchmark

RM/share
Adventa Outperform 4.34 Target CY10 PER of 13x
BP Plastic Outperform 0.80 Target CY10 PER of 8x
Furniweb Outperform 0.66 Target CY10 PER of 8.5x
Hartalega Underperform 7.93 Target CY10 PER of 13x
Kossan Outperform 10.74 Target CY10 PER of 13x
Top Glove Outperform 15.50 Target CY10 PER of 17x
VS Ind Market Perform 1.33 Target CY10 PER of 7.5x
Wellcall Underperform 1.14 Target CY10 PER of 9x
Table 28
Valuations Of Manufacturing Stocks
(sen) (%) (x) (x) (x) (x) (%)
Adventa^ Oct 3.69 31.5 42.8 43.2 35.7 11.7 8.6 9.4 2.5 8.2 3.3 OP
Kossan Dec 7.88 82.6 103.0 10.3 24.7 9.5 7.6 6.4 2.6 8.3 1.3 OP
Top Glove Aug 13.52 89.0 96.2 55.3 8.1 15.2 14.1 9.3 4.2 12.4 3.4 OP
Furniweb Ind Dec 0.47 7.7 10.8 88.4 40.0 6.0 4.3 2.3 0.3 1.6 0.0 OP
BP Plastics Dec 0.62 10.0 10.9 15.7 8.9 6.2 5.7 1.9 0.8 3.9 6.5 OP
VS Industry July 1.23 12.7 24.9 92.2 95.5 9.7 4.9 3.9 0.7 4.8 6.5 MP
Hartalega^ Mar 8.21 63.5 65.7 18.3 3.6 12.9 12.5 9.3 4.4 11.7 2.9 UP
Wellcall Sep 1.29 11.9 14.7 17.3 23.7 10.8 8.8 5.7 2.0 13.5 10.0 UP
Sector Avg 32.7 16.1 12.6 10.9
STRATEGY 41 PAPER
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Media : Ad Spend for 2010 To Improve On The Back Neutral
Of Economic Recovery And Ad-Friendly Events
According to Nielsen Media Research, YTD (Jan and Feb) gross advertising expenditure YTD gross adex grew
(adex) for TV and print media grew 23.1% yoy with both TV and print up by 42.5% 23.1% with both TV and
yoy and 10.4% yoy respectively. We believe this yoy growth was mainly due to low print up by 42.5% yoy and
base effect as a result of weak economic conditions a year ago. 10.4% yoy respectively
Generally, we expect 2010 to be a relatively better year for ad spending, especially 2010 expected to be a
as compared to 2009. Historically, there has been a close correlation between GDP good year for ad spend
growth and adex growth (correlation of 89.7% for 1989-2008). Based on our projected due to improving
2010 GDP growth of 4.5% (-1.7 for 2009) and the average GDP multiplier of 2.1x economic conditions and
(between 1989 and 2008), 2010 gross adex could see growth of 9.5%. Apart from sporting events taking
higher overall ad spending anticipated as the global economy recovers, adex growth place
in 2010 would also be supported by “ad-friendly” events such as the 2010 FIFA World
Cup, Thomas/Uber Cup and the Commonwealth Games.
Over at the cost side, newsprint prices have inched-up recently to around US$530- Cost environment benign
550/tonne. This is as expected given our expectations that the global economy is, thus far with newsprint
in general, improving. Thus, demand and input cost for newsprint (main costs are prices staying stable …
energy and pulp) should firm up ahead. Nevertheless, current prices are still
significantly lower than newsprint prices of US$925-950/tonne in early-4Q08. As for
… while content cost well
Media Prima, direct cost for FY09 fell by 6% yoy, which management attributed to
controlled by Media Prima
savings achieved from the TV networks as a result of better cost control for both in-
house and syndicated content as well as repeats of highly-rated content. Astro, on
the other hand, appears to be facing cost pressures next year with content cost
Astro, however, appears
expected to rise to 40% of revenue in FY01/11, from around 35% in FY01/10. This
to be facing cost
is mainly due to the launch of High Definition service, impact of the new Barclays
Premier League contract (from Aug 2010) and 2010 being a high sporting event year, pressures
as mentioned above.
In terms of stock picks, we prefer companies that offer high leverage to ad spending We prefer companies
and have a cost structure that is relatively fixed as this means that the bulk of the that offer high leverage
stronger revenue would flow straight down to bottomline. Media Prima (Outperform, to ad spending and a cost
FV=RM2.23) fits this bill well, in our view. Over the past five years, we note that structure that is
the average GDP multiplier for TV adex is around 2.9x, as compared to 1.6x for the
relatively fixed
print media. Together with its high fixed cost structure, we expect Media Prima to be
a prime beneficiary of the faster recovery in TV adex. In addition, according to
management, NSTP would be seeking shareholders’ approval to be delisted and a
75% approval level would be sufficient. To allow the remaining NSTP minorities a
chance to exit prior to the delisting, an offer on similar terms to the revised offer
would be made. The delisting of NSTP is expected to be completed by Jul ’10. Aside Media Prima offers high
from improving fundamentals, further potential catalysts we see ahead for the enlarged leverage to an improving
entity include the potential realisation of merger synergies and a rerating in valuations. ad spent environment
We also like MCIL (Outperform, FV=RM0.92) given that its major operating cost, We also like MCIL given
i.e. newsprint, has been locked-in at an attractive price. The Malaysian operations that its major operating
are currently carrying around 8-10 months worth of stock at an average cost of cost, i.e. newsprint, has
US$500-550/tonne while the Hong Kong operations have around six months worth of
been locked-in at an
stock at similar cost. We note that these stock holdings are almost double the typical
attractive price
stock levels for both operations. After newsprint cost, staff cost is usually the next
largest cost item for print media companies, accounting for another 25-35% of
operating cost. Management said that the Group’s headcount has been reduced by
around 4-5% this year, which has resulted in staff cost savings of around US$8m in
9MFY03/10. With two major cost items under control, we think MCIL is poised to
benefit from the upswing in ad spend ahead. MCIL reported a strong set of results MCIL should also benefit
in 3QFY10, where its operating profit margin expanded by 7.0% qoq. We believe this from the ad spend
reflects the stronger ad revenue during the quarter, which would flow straight to upswing ahead
operating profit, and on going cost-control measures.
STRATEGY 42 PAPER
www.rhbinvest.com
As for Star (Market Perform, FV=RM3.60), the company typically has the highest Star – still running down
leverage to adex given that over 80% of its revenue relates to ad revenue. While its high cost newsprint
positive for Star, we believe 1H10 bottomline would still be dragged by the utilisation stock
of its remaining high-cost newsprint stock. We understand that the average price is
around US$750-800/tonne (vs. current spot prices around US$530-550/tonne. This
means that its highest-cost newsprint stock is currently being consumed. According
to management, Star still has around 3-4 months worth of newsprint stock that cost
an average of US$750-800/tonne.
As for Astro (Market Perform, FV=RM4.30), the focus would mainly be on the Astro – conditional take-
conditional take-over offer it received from a special purpose vehicle, Astro Holdings over offer to dominate
Sdn Bhd, to acquire all the ordinary shares in Astro for RM4.30/share. According to focus
press reports, Astro would need to spend around RM3-3.5bn over the next three
years to accelerate its domestic and international growth and a private structure
would provide Astro more flexibility in achieving this goal. A relisting of Astro could
also be on the cards once it achieved a more stable earnings profile. In our view,
the offer price appears fair and would likely be accepted by minorities.
Overall, we maintain our Neutral stance on the sector.
Chart 17 Chart 18
Print And TV Gross ADEX YoY Adex Growth
(R M m ) ( yo y g r o w t h )
6 0 0 .0
0.6
5 0 0 .0
0.5
4 0 0 .0 0.4
3 0 0 .0 0.3
0.2
2 0 0 .0
0.1
10 0 .0
0
A pr J un A ug Oct D ec F eb A pr J un A ug Oct D ec F eb
0 .0
-0.1
P rin t TV -0.2
P rint TV P rint + T V
Source: NMR
Table 29
Valuations Of Media Stocks
(sen) (%) (x) (x) (x) (x) (%)
Media Prima Dec 2.06 14.8 15.8 +>100 6.7 13.9 13.0 7.7 2.9 6.7 4.9 OP
MCIL^ Mar 0.75 8.8 8.4 19.4 -4.1 8.5 8.9 3.7 1.3 6.7 6.0 OP
Star Dec 3.42 22.6 25.8 15.4 14.0 15.1 13.3 7.5 2.0 11.6 6.1 MP
Astro^ Jan 4.24 7.4 11.6 -38.9 57.7 57.6 36.5 12.9 20.2 15.6 3.3 MP
Sector Avg (Ex- Astro) 38.4 17.9 12.6 19.5
STRATEGY 43 PAPER
www.rhbinvest.com
Motor : Rising Car Sales and Improving Overweight
Earnings Prospects
Malaysian automotive industry’s TIV increased 8.7% yoy in Feb 2010 (vs. +32.8% Commendable yoy growth
yoy in Jan 2010) with 40,654 units sold (vs. 59,622 units in Jan 2010) despite the despite seasonal factor
shortened working month due to the Chinese New Year holidays versus the full
working month of February last year. This goes to show that buyers’ demand is
growing in line with the economic recovery. For Feb 2010, most top marques posted
yoy growth, albeit at a slower rate. Yoy growth for Proton, Perodua, Toyota and
Nissan moderated to 10.1%, 6.5%, 14.3% and 3% respectively (from +42.9%,
+36.7%, +38.8% and +30% in Jan 2010). However, Honda bucked the trend with a
contraction of 27.8% (vs. +1.6% in Jan 2010). Overall, mom sales declined by 19.7%
in Feb 2010 (vs +6.2% mom in Jan 2010) but this was mainly due to the shorter
working month of February as well as strong demand for new car registrations in Jan
2010.
We expect demand for passenger and commercial motor vehicles to improve further Positive underlying
in the months ahead as 1) sentiment recovers; 2) better business conditions supported factors
by the Government’s stimulus packages; 3) higher economic activities; and 4)
introduction of new models to help spur demand. We expect consumer spending to
pick up from +2.5% in 2009 to +4.8% in 2010.
We believe that although the market is improving, consumers are still cautious and Cautious yet continuous
preference continues to be for the more economical range. Nevertheless, we expect improvement in the
demand for premium cars to improve ahead as economic recovery gains more market
traction. Furthermore, Toyota market share of 15.1% in Feb 2010 (vs. 13.3% in Jan
2010 and 14.4% in Feb 2009) suggests that car buyers’ confidence in Toyota marques
remains intact despite the quality issues for certain Toyota marques in US and
Europe.
Despite news of massive safety recalls made by Toyota, Ford, General Motors, Suzuki China leading the global
and Nissan, auto sales in the global market were not affected. For China, the combined auto sales while Malaysia
auto sales in Jan-Feb surged 84% yoy. Besides improving sentiment, it was buoyed also benefiting
by the government’s car purchase incentives (i.e. lower tax-cut and old-for-new
programme in January 2010) as well as strong sales ahead of the Chinese New Year.
Malaysia is also benefiting from the economic recovery and improved sentiment,
while consumers are also not affected by the safety recalls made in the western
countries.
We understand that Berjaya Corp (BCorp) is negotiating with the Government on the New Chinese marque in
grant to manufacture Chinese marque BYD given the current freeze on new Malaysia?
manufacturing licences for the production of petrol-powered cars below 1.8 litres.
Recall in Feb 2010, BCorp secured a deal from BYD Auto Company (fourth largest
car assembler in China) to assemble cars for the Asean market. However, we believe
the freeze will unlikely be lifted given that: 1) entry of CKD Chinese cars would pose
a threat to Proton and Perodua; and 2) over-capacity issues in the local car assembly
industry.
TCM is expected to introduce A and B segment models by end-2011, which the Tan Chong turning
company is currently not represented in these segments (A and B segments represent stronger ahead
the <1,000cc and 1,000-1,500cc category respectively). Note that these segments
collectively account for more than half of total TIV (with A-segment and B-segment
accounting for 15% and 43% of TIV respectively). Management expects FY12 earnings
to double yoy mainly due to stronger units sales growth (on the back of these new
models) as well as margin expansion stemming from higher utilisation of its Serendah
plant. Hence, we reiterate our Outperform call on the stock with unchanged SOP fair
value of RM3.60. We highlight potential re-rating catalysts are: 1) higher-than-expected
sales of its A and B segment cars; 2) earlier-than-expected earnings contribution
from its regional expansion; and 3) earlier-than-expected development of Segambut
land. Given rising demand and improving prospects as well as more positive
developments, we continue to like the stock which is the top pick in the sector.
STRATEGY 44 PAPER
www.rhbinvest.com
We see a brighter year ahead for Proton as sales of Exora are getting stronger Positive outlook for
amidst the gradual economic recovery coupled with pent up demand for the anticipated Proton
launch of Waja replacement model, which is expected to take place in 2H2010.
Furthermore, we highlight that we have not factored in potential earnings contribution
from contract manufacturing as well as tie-ups in India and Iran. Fair value maintained
at RM5.48 based on stripped-down book value. We reiterate our Outperform call
on the stock.
Despite the recent problems with certain Toyota cars in the US, MAA statistics show UMW – sales of Toyota
that Jan-Feb Toyota unit sales were up 25.9% yoy as car buyers remained unperturbed
remain resilient despite
by the quality issues which are limited to US and Europe. We have highlighted that
quality issues
the quality issues affecting Toyota cars are limited to US and Europe given that auto
part models in this region are sourced from different suppliers. We expect brighter
prospects for Toyota as it will benefit from improving sentiment and affordability on
the back of economic recovery, where preference towards premium products will
start to improve. For O&G division, we expect increased contract flows ahead in 2H
2010, driven mainly by: 1) stronger exploration activities; and 2) revival of deepwater
projects on the back of rising trend of crude oil prices over the longer term. We are
positive on the acquisition of the remaining stake in Naga Two and Three as well
as jv for onshore drilling as these will boost earnings contribution from O&G going
forward. We thus reiterate our Market Perform call on the stock. No change to
our SOP-based fair value of RM6.71 for now, which is based on 15x PER for its
automotive and oil & gas divisions and 7x for its heavy equipment and manufacturing
divisions.
In line with the increasing demand for MPV, the launch of Perodua Alza is anticipated MBM still rated
to increase MBM’s market share. The manufacturing segment is also looking positive Outperform
as demand picks up due to the economic recovery and improved sentiment. We
believe there is still upside to our FY10-11 earnings projections from higher unit car
sales and associate Perodua contributions on the back of improved sentiment as
well as stronger-than-expected sales of the newly-launched MPV. Hence, we maintain
our Outperform call on MBM with a fair value of RM3.93 per share.
The strong mom gain in Dec 2009 (+5.5%) which bucked the trend of seasonal Maintain Overweight
decline arising from year-end registrations as well as still resilient growth in Feb stance on the sector
2010 (+8.7% yoy), suggest that strong demand for cars would likely flow through
in the months ahead. Hence, we expect TIV for motor vehicles to turn around from
a contraction of 2.0% in 2009 to a positive growth of 8.5% in 2010 and 2.5% in
2011. We believe there is potential upside to our 2010-11 TIV projections given
stronger-than-expected car sales arising from higher business spending as well as
new model launches. We reiterate our Overweight stance on the sector.
Table 30
Motor Sales Forecast By Key Marques & Segment
2009a 2010f 2011f 2012f 2010f 2011f 2012f

(Numbers) (% growth)
Proton 148,031 157,940 162,854 163,926 6.7 3.1 0.7
Perodua 166,736 195,090 196,803 202,252 17.0 0.9 2.8
Toyota 81,785 89,512 91,106 97,110 9.4 1.8 6.6
Nissan 31,493 34,227 35,847 36,365 8.7 4.7 1.4
Honda 38,783 35,000 37,000 43,348 -9.8 5.7 17.2
TIV 536,905 580,599 596,332 605,956 8.5 2.5 2.2
Passenger 486,342 528,351 542,381 559,127 8.6 2.7 3.1
Commercial 50,563 51,352 52,967 45,983 1.6 3.1 -13.2
Source: RHBRI
Table 31
Valuations Of Motor Stocks
(sen) (%) (x) (x) (x) (x) (%)
Proton^ Mar 4.27 65.3 70.2 39.0 7.5 6.5 6.1 0.4 7.4 n.m 0.0 OP
MBM Dec 2.69 45.8 48.2 62.4 5.3 5.9 5.6 0.7 13.8 14.1 4.5 OP
Tan Chong Dec 3.54 31.6 32.7 39.6 3.3 11.2 10.8 1.5 8.1 9.1 3.2 OP
UMW Dec 6.27 51.2 52.5 52.3 2.5 12.2 12.0 2.0 6.1 8.8 3.7 MP
Sector Avg 44.1 7.0 10.3 9.6
Sector Avg(ex-Proton) 47.3 6.8 17.1 16.0
STRATEGY 45 PAPER
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Oil & Gas : Stronger Contract Flows In 2H2010 Overweight
We note that the 29 March 2010 spread between the crude oil spot price and one- Crude oil price will likely
month futures remained low at 60 cents, increasing marginally from its 18-months remain volatile in 2010
low of 40 cents in 9 March 2010. Note that the current spread is 75% lower than
the US$2.35 spread on 30 Dec 2009. The potential backwardation (i.e. spot price
to rise above longer-dated futures) suggests that oil demand would likely catch up
with supply going forward, thus capping downside risk to crude oil price over the
medium term. With crude oil price hovering around US$70-85/barrel for the past 20
weeks since 18 Oct 2009, we believe the gradual uptrend in 2010 would be driven
by expectations of an economic recovery and higher oil consumption in the future
despite still-weak demand and high inventories currently. Hence, we reiterate our
2010 crude oil projection of US$80-100, and maintain that range for 2011 for now.
According to industry sources, 2010 global E&P spending is likely to increase 10- Leading indicators
15% yoy (vs. -15% yoy in 2009) driven mainly by recovery in US and Canada pointing to better E&P
spending (i.e. non-conventional projects such as oil sands and shale gas) as well spending ahead
as resilient spending in Asia, Africa, Russia and Middle East. In addition, we highlight
that the following positive trends further point towards a stronger recovery in E&P
spending in 2H 2010:
1) According to Seadrill and Transocean, demand for all segments (i.e. jack-up to Improving rig activities
drillship) has improved since early 2010, with the most significant gain in the
high-specification jack-ups and tender rigs. We understand that both companies
are in talks with E&P players for rigs capacity up to 2011. For deepwater rigs,
Seadrill remains optimistic that rising deepwater projects (i.e. 4,500-7,500 feet)
will likely absorb the extra capacity over the next 18 months and in turn push
up the day rates to US$500k (vs. US$350-450k currently).
2) We believe the pick up in project announcements for Canada’s oil sands sector Pick-up in oil-sands
suggests that oil majors are moving forward with their respective plans for new investment
or expanded projects to take advantage of still-low costs as well as under-
utilised labour market. Recall that ConocoPhillips-Total and Suncor Energy Inc
are expected to start work on phase 2 of Surmont project and Phase 3 Firebag
oil sands project respectively in Canada. Note that Canadian Association of
Petroleum Producers (CAPP) forecasts 2010 capital spending in oil sands to
increase 20% yoy (vs. -50% in 2009).
3) For the floating, production, storage and offloading (FPSO) market, we under- Uptick in FPSO leasing
stand that the number of formal inquiries is up in most segments except for market
small-mid FPSO vessels in Africa. According to Fred Olsen (a Norwegian floater
specialist), the FPSO vessel leasing market has picked up significantly beginning
4Q 2009 with FPSO demand to remain strong in 2010 driven by E&P activities
in Asia and South America. Note that the company secured six new lease
contracts in 4Q 2009, which was the highest level of awarded contracts for a
single quarter since 2006.
While delays in final investment decisions on major projects would persist in 1H Final decision on
2010, we believe E&P spending would pick up momentum in 2H 2010 given the developments to pick up
gradual increase in crude oil price as well as stabilisation of project costs. We in 2H 2010
highlight that projects cannot be postponed indefinitely as declining production at
more mature oilfields will have to be offset by resources that are increasingly
located in frontier areas (i.e. deepwater and oil sands) as well as through enhanced
oil recovery (EOR) activities for the current brownfield blocks to boost current output
level. We believe Petronas and other national oil companies would need to restart
greenfield upstream projects in a more substantial way in 2H 2010 to sustain longer-
term production targets. Already, Shell is targeting production output of 3.5m boepd
(barrels of oil equivalent per day) and rising to 3.7m boepd in 2014 (from 3.15m
boepd in 2009) given stronger contribution from Gorgon LNG and Qatar gas-to-
liquids project as well as Canada’s oil sands projects. In addition, Nigeria plans to
STRATEGY 46 PAPER
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increase its 2010 capex spending by 32% yoy to develop its Niger Delta (i.e. to boost
its current oil output of 2m bpd). In the same vein, Petrobras (Brazilian state oil
company) plans to invest around US$42bn (+12% yoy) in 2010, with more than 50%
to be spent on exploration and production.
With global energy demand expected to surge in the next 5-10 years and declining M&A activities set to rise
supply from conventional oil & gas resources, we believe many of the larger players in 2010
are looking to acquire or enter into a j.v. with smaller companies, whose expertise
and assets will help them thrive in a more competitive environment going forward.
A joint bid of US$3bn by Shell and PetroChina for Australian coal-seam gas producer
Arrow Energy became the latest takeover deal following the spate of M&As (see
Table 32). Hence, given still-low asset prices and more favourable financing
environment as well as growing E&P spending, we believe local service providers
would likely acquire strategic assets to increase their chances of securing sizeable
contracts.
Table 32
M&A On The Rising Trend
Acquirer Target/JV partners Timing Rational

Kencana Global Industries May 2009 Allows the company to perform higher-margin
offshore construction jobs to extend the life of
brownfield facilities as well as full-range of marine
activities in Malaysia
Baker Hughes BJ Services Aug 2009 Access to specialised pressure-pumping capabilities,

used to break up rock and reach hard-to-access
natural gas supplies
Wah Seong Socotherm’s 32.5% Aug 2009 To increase earnings contribution

stake in PPSCIH from deepwater pipe-coating business
Alam Maritim Swiber Engineering Sep 2009 Allows the company to address execution risk by
leveraging on Swiber’s expertise as well as jointly
share the huge capital outlay of the barge to
effectively manage its gearing level
ExxonMobil XTO Energy Dec 2009 To step up on its exposure to the natural-gas market
given that XTO Energy is the largest US natural gas
producer
Schlumberger Smith International Feb 2010 To transform itself into a larger, more diverse service
provider capable of accommodating E&P companies
that are faced with the task of accessing more challenging
and complex reserves
CNOOC Bridas Energy Mar 2010 To gain access to natural resources in South America
Shell & PetroChina Arrow Energy Mar 2010 To gain access to unconventional natural gas
(i.e. coal-bed methane) in Australia
Source: Various
With declining production from conventional oil fields and still-high cost for deepwater Gas vs. oil
E&P projects, we believe E&P players are looking into gas resources to meet the
energy demand going forward. The latest M&A spurts, which include the acquisition
of XTO Energy and Arrow Energy by ExxonMobil and Shell-PetroChina respectively,
suggest that oil majors are looking beyond the medium-term supply glut (which
continues to weigh down on natural gas prices) to the long-term demand growth
driven by growing residential and industrial gas demand as well as industry trend of
moving towards cleaner burning fuels (i.e. a potential bridge to a carbon-free
economy). Thus we believe companies that have technologies and expertise for gas
E&P or looking to acquire the expertise, are the key beneficiaries to growing E&P
spending for gas projects, i.e. Wah Seong for its gas compression business and
Dialog’s specialist products and services (used for the gas treatment activities) as
well as KNM’s higher-margin gas processing equipment.
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While crude oil price is expected to remain volatile in 2010, we believe the oil and Stock picking
gas sector would remain supported by the positive news flow from E&P projects to
be announced in 2H 2010. Meanwhile, given stronger outlook of E&P spending as well
as still-low asset prices, we believe companies with strong balance sheet (i.e. Dialog
and Kencana) would be in a better position to acquire strategic assets over the
medium term. We note that Wah Seong is already in the midst of acquiring earnings-
accretive assets. In addition, we believe investors should also focus on companies
with the assets and expertise related to E&P gas projects (Wah Seong, Dialog and
KNM). We also favour companies with strong recurrent earnings and conservative
management (i.e. Dialog) and improving cost management (i.e. SapuraCrest and
Kencana).
While sizeable contract flows appeared to be minimal in 1Q 2010, we believe contracts Reiterate Overweight
will likely flow more substantially in 2H 2010 given the gradual pick up in energy
demand as well as increased reserve replenishment activities by national oil companies
and major E&P players. In the longer term, we reiterate our view that the continued
shortage of offshore E&P assets (exacerbated by delays in E&P spending) will underpin
the growth for the support services companies. Hence, we maintain our Overweight
stance on the sector. Our top picks for the sector are Wah Seong and Dialog.
Table 33
Oil And Gas Fair Value Calculations
Share Price Fair Value Basis Of Valuation Rec

(RM/share) (RM/share)
Dialog 1.01 1.29 16x CY10 PER plus DCF for Kertih Terminals and TLP tank OP
terminals at WACC of 16.8%
EPIC 1.56 2.69 10x FY10 PER OP
Kencana 1.47 1.88 16x CY10 PER OP
Wah Seong 2.43 3.09 16x FY10 PER OP
SapuraCrest 2.35 2.66 16x FY01/11 PER MP
Petra Perdana 1.29 1.00 13x FY10 PER for operating earnings plus share of Petra UP
Energy fair value at 11.7x
KNM 0.80 0.90 13x FY10 PER MP
Petronas Gas 9.75 10.08 DCF with WACC of 9.6% UP
Source: RHBRI estimates
Table 34
Valuations
@ Table only includes oil and gas companies Of coverage
under RHBRI Oil & Gas Stocks
Source: Company data, RHBRI
(sen) (%) (x) (x) (x) (x) (%)
Wah Seong Dec 2.56 19.3 20.8 46.1 8.0 13.3 12.3 5.5 3.0 4.8 3.0 OP
Dialog Jun 1.10 6.4 9.3 -3.4 45.4 17.3 11.9 11.8 4.3 15.0 3.2 OP
EPIC Dec 1.61 26.9 27.2 7.9 1.1 6.0 5.9 4.9 0.8 4.2 5.9 OP
Kencana July 1.59 10.2 11.7 42.9 15.0 15.6 13.6 9.1 3.1 11.6 0.5 OP
SapuraCrest^ Jan 2.49 16.6 18.4 40.9 10.3 15.0 13.6 5.7 2.1 6.5 1.6 MP
KNM Dec 0.73 5.7 7.0 52.4 21.5 12.6 10.4 9.7 10.5 11.0 2.8 MP
Petra Perdana Dec 1.38 8.0 17.1 -18.5 +>100 17.2 8.1 4.8 0.8 1.5 1.4 UP
P Gas^ Mar 9.73 55.0 57.0 17.8 3.6 17.7 17.1 8.7 3.0 11.5 6.0 UP
Sector Avg 21.3 11.3 15.7 14.1
Sector Avg(EX P Gas) 31.7 19.7 13.6 11.4
STRATEGY 48 PAPER
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Plantation : Smooth Sailing Or Choppy Waters? Overweight
 Positive supply and demand fundamentals in the midst of volatile Positive supply and
external factors. We believe that the basic supply and demand fundamentals demand fundamentals in
of the 17 oils and fats and of CPO continue to be positive and would help the midst of volatile
support CPO prices at a price range of RM2,300-2,800/tonne over the short to external factors
medium term. Although based on our CPO price range expectations, there does
not seem to be that much more upside (possibly another 5-10%) to CPO prices,
we believe that in the current market environment, where volatility in external
factors like crude oil prices, exchange rates and financial commodity demand
is the norm, CPO prices could undershoot or overshoot our projected price
range. On a longer-term basis, we believe strong fundamentals would continue
to keep CPO prices above the RM2,000/tonne mark.
 Is RM3,000/tonne a possibility? While we believe that with the right RM3,000/tonne a

combination of external factors and the current positive fundamental factors, possibility, but if so, not
CPO prices could potentially hit the RM3,000/tonne mark again, we believe this for long
may not be a sustainable price target. This is due to the fact that price-ensitive
markets like China and India would then reduce demand in order to “re-
balance” prices. This has already happened recently with some buyers in India
recently announcing a plan to shift some of its import purchases from palm to
soya oil owing to a change in the price differential. We note that as a result of
the recent run up in CPO prices and the weakness in soyoil prices due to the
upcoming South American bumper crop, the discounts between CPO and soyoil
have narrowed to as low as US$95/tonne currently, below the historical average
of US$100/tonne. Despite this, we believe this switch would not necessarily
have a significant or long-term impact on demand for palm oil, given the
projected supply deficiency of global soyoil exports in the market.
Chart 19
Discount Between CPO And Soyoil And CPO And Rapeseed Oil In US$
6 9 0
6 6 0
6 3 0
6 0 0
5 7 0
5 4 0
5 1 0
4 8 0
4 5 0
4 2 0
3 9 0
US$/tonne
3 6 0
3 3 0
3 0 0
2 7 0
2 4 0
2 1 0
1 8 0
1 5 0
1 2 0
9 0
6 0
3 0
0
J a n - A p r - J u l- O c t- J a n - A p r - J u l- O c t- J a n - A p r- J u l- O c t- J a n - A p r - J u l- O c t- J a n - A p r - J u l- O c t- J a n - A p r- J u l- O c t- J a n - A p r - J u l- O c t- J a n -
- 3 0
0 3 0 3 0 3 0 3 0 4 0 4 0 4 0 4 0 5 0 5 0 5 0 5 0 6 0 6 0 6 0 6 0 7 0 7 0 7 0 7 0 8 0 8 0 8 0 8 0 9 0 9 0 9 0 9 1 0
C P O v s o y o il C P O v ra p e s e e d o il
Source: Bloomberg, RHBRI
 Soyoil exports to disappoint... We highlight that global soyoil exports are Soyoil exports to
only projected to rise by 2.2% yoy in Oct09/Sep10, while global soyoil demand disappoint ….
is projected to grow by 4.8% yoy. We highlight that the discrepancy between
the small growth estimated for soyoil exports of 2.2% versus the large projected
increase in global soybean production of 19.6% in the same period is due to
two main reasons: (1) low oil content of soybean (of only 18-19%) versus that
of sunflower seed and rapeseed (of about 40%); and (2) higher domestic
consumption of soyoil in soyoil producing countries for biofuel production under
the various country-specific mandates. We note that out of total soyoil production
projected for 2010, about 15% is estimated to go to biodiesel production, which
is an increase from 12.5% in 2009, and this is going to be on a rising trend
given the gradual rising biofuel mandates (see Table 35). On the longer-term
basis, we believe the reducing availability of landbank for soybean planting and
the shift away from soybean to corn planting in the US will also limit soybean
oil supply going forward. The USDA projects soybean land to decline by 0.7%
p.a. over the next 10 years to 2018, as a result of switching to corn.
STRATEGY 49 PAPER
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 … while CPO supply is more promising, albeit still not enough to meet … while CPO supply more
demand. As such, in order to fulfill the projected global demand growth for the promising, albeit not
17 oils and fats of 3.9% in 2010 and the likelihood of the continuation of an enough to meet global
average demand growth of 3.8% p.a. (as per the 20-year historical average), vegetable oil demand
we believe the only vegetable oil which will be able to satisfy a major part of
this demand growth would be palm oil, whose supply is projected to grow by
4.4% in 2010 and whose production is estimated to grow at a 5-year CAGR of
6-7% p.a. to 2015. Despite this, on an overall basis, for the 17 oils and fats,
Oil World forecasts global stock/usage ratio to fall to 8.1% in 2010 (from 11.4%
in 2009), on the back of an increase in demand of 3.9% yoy, which outpaces
a projected increase in production of 3.5% yoy.
Table 35
Current Biofuel Targets
Location Current Policies Impact
EU 5.75% blend by 2010 Biofuel demand could reach 11-12m

tonnes by 2010
7% blend by 2015 Biofuel demand could reach 20m tonnes
by 2020
10% blend by 2020
Ireland 4% blend from 2010, 10% from 2020
US 2012 – 2% replacement of highway diesel fuel 2009 – 500m gallons (1.6m tonnes),
2015 – 5% replacement of highway diesel fuel 2012 – 1bn gallons (3.2m tonnes),
2015 – 2bn gallons (6.4m tonnes),
Total renewable fuel demand – 36bn
gallons (1.2bn tonnes) by 2022
ie. – Ethanol (15bn gallons or 487m
tonnes) and advanced biofuel (incl.
cellulostic biofuel and biomass diesel –
21bn gallons or 682m tonnes)
China 10% biofuels use by 2015 Biofuel demand could reach 14m tonnes
by 2020
15% biofuels use by 2020
Japan 3% biofuels use by 2010 Demand by 2010 - 1.8m tonnes
Argentina 5% export tax on biodiesel (vs 32% tax on soybean oil) Demand in 2008 - 1.4m tonnes
5% biofuel blend from Jan 2010
Brazil 2% biodiesel from Jan 2008 Demand in 2008 - 0.8m tonnes
5% biodiesel from 2010
20% from 2015
Thailand 2% biodiesel blend from Feb 2008
5% biodiesel blend from 2009 Demand by 2010 – 800m gallons (2.6m
tonnes)
10% biodiesel blend by 2012
India 5% bioethanol blend by 2008 Demand could reach 12-14bn litres per
year
10% bioethanol blend by 2020
South Korea Increase biodiesel mandates by 0.5% every year from

1% in 2008 to 3% by 2012. Extended tax
breaks until 2010.
Indonesia 2.5-3% biodiesel blend in 2010, rising to 5-7% in 2015,
10% in 2020 and 20% in 2025. Biodiesel subsidy of
US$120/tonne Approx. 1.5m tonnes by 2010
Malaysia 5% biodiesel blend to be implemented in stages starting
from 1 June 2011 Approx. 0.5m tonnes by 2010
WORLD 2010 - 22m tonnes
2012 – 32m tonnes
2015 – 45m tonnes
Source: Price Outlook 2008 Conference, Media, RHBRI estimates
 The risk of external factors to be the wild card. We believe the risk of Risk of external factors
external factors would continue to be the wild card affecting CPO and vegetable is the wild card…
oil prices in the future. Besides the volatilities of crude oil prices, exchange particularly potential El
rates and financial commodity demand mentioned above, another major Niño impact on CPO
uncertainty facing CPO supply currently is the potential impact of El Niño. Based
supply
on current observations and dynamical model forecasts, El Niño is expected to
continue at least through to May/June 2010. In Malaysia, several dams and
rivers have recorded low water levels in Johor and the northern states of
Peninsular Malaysia as well as Sabah, while the Meteorological Department said
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that for the first 10 days of March, 29 out of 34 main meteorological stations
recorded zero to 48mm of rain, which was between 0% and 66.3% of the
average amount. If these conditions continue until May/June 2010, the likelihood
of CPO supply being affected is higher, and this impact would be seen from 3Q/
4Q CY2010 onwards.
 Expect stronger prices going into 2010. Although we have not imputed the We maintain our CPO
risk of any untoward external factors into our price forecasts, we reiterate our price projections with a
view that fundamentals and price prospects for CPO in CY2010 remain positive. note of caution to keep
We maintain our CPO price assumptions at RM2,500/tonne for 2010, RM2,700/ to more liquid stocks in
tonne for 2011 and RM2,500/tonne for 2012. In view of the many external view of anticipated
factors and potential volatilities they bring, we continue to advise investors to
volatilities
keep to the more liquid stocks and to trade the volatilities.
 Maintain Overweight on sector. We maintain our Overweight stance on the Overweight on sector
sector and continue to apply a target PE of 18x CY10 for the plantation earnings reiterated, top pick is KLK
of the big-cap plantation stocks. However, we raise our target PE for the mid-
cap plantation stocks to 16.5x (from 14.5x) CY10 and for the small-cap plantation
stocks to 14x (from 12x) CY10, to take into account the rising investor risk
appetite for small and mid-cap stocks. Nevertheless, we continue to believe that
in the volatile market environment we are expecting for 2010, the more liquid
big-cap stocks will be favoured, especially since the gap between the big-cap
and smaller-cap stocks have narrowed recently. At current price levels, we
note that valuations of some of the mid-cap plantation stocks have almost
caught up with the big-cap stocks, making the big-cap stocks seem inexpensive
in comparison.
 Top pick remains KLK. We maintain our Outperform recommendations on

IOIC (FV unchanged = RM6.65), KLK (FV unchanged = RM18.40), Sime
Darby (FV unchanged = RM9.85) and CBIP (FV = RM3.60 (from RM3.30))
and Underperform on Genting Plantation (FV = RM6.65 (from RM5.85))
and IJMP (FV = RM2.35 (from RM2.05)). We continue to rate KLK as our top
pick, due to its inexpensive valuations (as it remains the cheapest amongst the
big-cap plantation stocks currently) and for its strong management with a good
track record. Further catalysts could come from better-than-expected FFB
production growth as well as potential return to profitability of the retail division.
Table 36
Valuations Of Plantation Stocks
FYE Price EPS* EPS Gwth PER EV/EBITDA P/NTA P/CF GDY Rec
(sen) (%) (x) (x) (x) (x) (%)
Sime Darby Jun 8.61 40.7 51.6 8.5 26.8 21.1 16.7 12.4 2.3 15.2 2.6 OP
KLK Sep 16.34 87.5 123.3 23.7 40.8 18.7 13.3 11.5 3.0 15.0 2.8 OP
IOI Corp Jun 5.39 27.9 31.5 -13.0 13.0 19.3 17.1 13.2 3.9 16.9 2.2 OP
CBIP Dec 2.87 41.2 49.7 37.5 20.6 7.0 5.8 6.2 1.4 5.5 4.9 OP
IJMP^ Mar 2.51 13.8 15.9 34.8 15.4 18.2 15.8 10.3 1.7 14.4 2.0 UP
Genting Plant Dec 6.99 40.3 46.8 34.0 16.0 17.3 14.9 12.4 1.9 15.6 1.6 UP
Sector Avg 3.1 23.8 19.7 15.9
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Power : Tariff Review Delayed But Improving Overweight
Demand To Mitigate
According to press reports, the Government had deferred announcing an increase Tariff review deferred for
in electricity tariffs in Feb ’10, pending a programme to educate the public on the now but indications are
need to raise rates. Originally scheduled for end-2009, we believe, investors were that a tariff increase
disappointed by (yet again) another delay in the tariff review. However, a potential could be on the cards
silver lining is that a tariff increase appears to be on the cards, but it is just a matter
of timing. At this stage, however, it is unclear whether the electricity tariff increase
would be in relation to the base tariff hike or for higher fuel costs or a combination
of both.
A base tariff review is past due for TNB. The last review for TNB took place back Base tariff review is past
in mid-2006 and the last review was due mid-2009. An increase is all the more due and a hike could help
important this time round as TNB would need to meet rising capacity payments for provide a nice lift to
Jimah Power. To recap, the additional capacity payment for Jimah Power was around earnings
RM200m in FY09, but this would rise to around RM800m in FY10 and further to
RM1bn in FY11. A tariff hike would also help ensure a minimum return to shareholders.
We have not factored in any tariff revisions in our earnings model and project FY10
ROA of 4%, below TNB’s weighted average cost of debt of 5.1%. In order for ROA
to be raised by 1%-pt, we estimate that a 4% hike in the base tariff would be
required. This hike would also raise our FY11 earnings projections by around 26%.
Apart from the above, a tariff increase would also help TNB cover rising fuel costs. Tariff hike also needed to
Based on the Government’s actions in the past two tariff adjustments, we think that cover rising fuel cost
gas prices should not be an issue for TNB as tariffs would be adjusted accordingly
to accommodate the higher or lower gas prices. For every 10% change in gas price,
we estimate tariffs would need to be adjusted by just 2.6% to neutralise the impact.
As for coal, our sensitivity analysis suggests a US$10/tonne change in our average Gas price not likely an
coal cost assumptions of US$88/tonne for FY10-12 would impact TNB’s earnings by issue …
around 12%. In order to cover this increase, we estimate a tariff revision of 1.9%.
We note that the current Newcastle Coal Benchmark price is around US$95/tonne,
which would bring TNB’s all-in cost (adjusted for TNB’s lower grade requirements
vis-à-vis the benchmark) to around US$100/tonne. For now, coal cost does not
appear to be an issue as management expects FY10 coal cost to average around … but coal price on the
US$85/tonne, i.e. in line with the cost recoverable under the Mar 2009 tariff rise and could affect
adjustment. However, future profitability could be affected if coal prices remain at future profitability
current levels and in the absence of a tariff adjustment.
Finally, the long-awaited National Energy Plan, which was supposed to be announced The long-awaited
in 2H09, could be unveiled later this year. We believe investors will look to the National Energy Plan
blueprint to address prevailing uncertainties in the industry, as well as provide a could be unveiled next
roadmap in terms of future interaction and growth among the players. A clear year …
direction for the industry from the National Energy Plan would be positive for the
sector on the whole. Aside from that, Energy, Green Technology and Water Minister,
Datuk Seri Peter Chin, had said that a new act on renewable energy (RE) is
expected to be tabled in parliament this year and that Malaysia plans to introduce
the Feed-in Tariff as a form of support mechanism for RE. The move towards RE … as well as a new
should be a long-term positive for the country’s energy security as, present day, Renewable Energy Act
non-RE sources account for around 93-94% of Malaysia’s generation mix.
Fundamentally, we see TNB as an excellent proxy to a recovering economy. The TNB – delay in tariff
delay in tariff review has, not surprisingly, adversely impacted TNB’s share price review has overshadowed
performance and overshadowed the strong recovery in electricity demand. Jan ’10 fast improving electricity
electricity demand jumped 13.2% yoy (Dec ’09: +7.6% yoy). All three sectors demand
reported stronger demand but more importantly, electricity unit sales to the industrial
segment surged 17.8% yoy. YTD (Sep ’09-Jan ’10), electricity demand was up 5.7%
yoy. For now, we have left our FY10 demand growth assumption of +3.8% unchanged
but the strong YTD figure suggests that there could be some upside potential to our
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demand growth assumption. Our sensitivity analysis suggests that every 1%-pt
change in our demand growth assumption would impact our net profit projections
by around 2.5-3%. Furthermore, as mentioned above, FY10 coal cost appears to be
under control and is, in our view, another positive for TNB.
As for the IPPs, shielded by PPAs, demand and fuel risk remains concentrated on IPPs’ position still
TNB’s shoulders. Hence, the IPPs have also been targeted with reports that the relatively insulated
Government plans to review the PPAs. We highlight that talks between TNB and IPPs thanks to PPAs
on PPAs have not been successful in the past and thus, we believe any fresh
negotiations will similarly be protracted and complicated. We doubt the IPPs would
be willing to accept lower payments without any incentives in return, for instance,
the IPPs may link negotiations to a possible extension of current concessions or
future planting up.
Both Tanjong and YTL Power (YTLP) offer rather similar investment thesis, i.e. both Both Tanjong and YTLP
have diversified and/or overseas businesses to help cushion the impact of domestic offer rather similar
power policy changes, if any. Both remain on the lookout for growth opportunities investment cases …
in overseas markets given huge energy demand in regions such as Middle East-
North Africa, India sub-continent, South Africa and Southeast Asia. Finally, dividend
yields for both companies are attractive and, more importantly, sustainable, in our
view (Tanjong: FY01/11-13 gross yields of 5.5-6%; YTL Power: FY06/10-12 gross
yields of 9%).
Tanjong remains our preferred pick as valuations are cheaper. Growth for the power … but Tanjong is our
division would depend on acquisitions and management has expressed a target of preferred pick
doubling its power capacity to 8,000MW over the next four to five years. As liquidity
begins to flow again, we believe there is greater possibility of a new acquisition. As
for the gaming division, we believe it is just a matter of time before Tanjong
introduces a new game. Assuming the new game brings in around RM1m in sales
per draw, we estimate our earnings projections could be raised by around 2%.
As for YTLP, focus, we think, would increasingly turn towards the group’s WiMax YTLP- focus turning to
rollout as well as pricing strategy. A potential concern here is that YTLP could decide WiMAX launch but
to start a price war in order to win subscribers, especially given that it would be dividends thus far intact
coming into the market with a nationwide mobile WiMAX network that is largely
unutilised. This would be similar to Axiata’s Indonesian subsidiary, XL, strategy back
in 2008, although the key difference is that XL was already an established third
player in its market back then, whereas YTLP is an upstart. For now, however, YTLP
has thus far maintained its quarterly dividends, which means that a key investment
thesis for the stock, i.e. attractive dividend yields, is intact.
Maintain Overweight
Overall, we maintain our Overweight stance on the sector. stance on the sector
Table 37
Power Sector Fair Value Calculations
FV
Company Recommendation RM Comments
TNB Outperform 9.50 Target CY10 PER of 14x
Tanjong Outperform 19.20 SOP comprising DCF for power and target FY11 PER of 15x for gaming
YTL Power Market Perform 2.12 SOP comprising EV/RCV of 1.1x for Wessex Water, DCF for power
(investment cost for PowerSeraya)
Table 38
Valuations Of Power Stocks
(sen) (%) (x) (x) (x) (x) (%)
Tenaga Aug 7.97 64.9 73.6 30.4 13.4 12.3 10.8 6.9 1.2 4.2 3.3 OP
Tanjong^ Jan 17.90 171.9 175.5 4.1 2.1 10.4 10.2 7.0 1.7 7.6 5.7 OP
YTL Power Jun 2.20 14.3 14.7 24.1 2.8 15.4 15.0 8.9 1.8 10.4 9.1 MP
Sector Avg 24.4 9.1 11.6 10.7
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Property : Continue To Shine Under The Current Overweight
Asset Reflation Ambience
The continuous strong take-up / booking rate recorded by developers (under our Malaysian property sector
coverage) have again confirmed our bullish view on the sector. The sector, which is is in the recovery mode
driven by: a) improving economic outlook; b) easy monetary conditions; and c)
rising inflationary expectation, is on track to recover from the global economic
downturn in 2008-2009.
Although the recent 25bps rate hike in BLR will likely reduce home buyer’s affordability, Strong sales despite rate
demand on properties remains strong. We believe the strong demand is well supported hike
by two key factors, i.e.: a) high affordability due to still cheap mortgage rates and
attractive financial packages offered by developers and; and b) home buyers are
rushing to buy properties to capitalise on current cheap financial packages (offered
by both bankers and developers) before further rate hikes amidst the economic
recovery. We believe the current strong sales momentum would filter into 2H10 in
view of the abovementioned positive issues.
As the economy is back on the recovery path, developers’ confidence is getting Stronger developers’
stronger. This can be seen in their aggressive launching and land acquisition plans. confidence level
Many of them are lining up new launches for 2010. Developers with strong balance
sheet like Mah Sing and Glomac are actively replenishing their landbank to tap into
the coming property upcycle. The former has proposed to acquire a 19.2 acres
freehold industrial land in Shah Alam for its iParc 2 as well as 6.32 acres freehold
commercial land in Cyberjaya early this year, whilst the latter is now in talks to
acquire a very prime land in the city centre which will be developed into a RM4-5bn
iconic integrated commercial project, similar concept as Glomac Damansara.
Meanwhile, Sunrise has started its “Stage 3 Growth” strategy (i.e. further widening
product range, targeting new markets and new areas) via a JV with Sime Darby to
develop a freehold commercial land in Bukit Jelutong.
Our recent discussions with developers revealed that most of their property launches Dominated by local
were snapped up by local buyers over the past three months. With continued buying demand now but foreign
interest by local buyers, prices are expected to be well supported. However, we demand is expected to
expect increasing participation of foreign buyers given three key reasons: a) relatively
increase in the coming
cheap property prices in Malaysia compared to its regional peers. It will likely attract
months
attention of international buyers. According to Global Property Guide, Malaysia average
property buying price is trading at 50%, 87% and 91% discount to China, Singapore
and Hong Kong prices, respectively; b) anticipation of stronger exchange rate; and
c) expect more active foreign participation in the coming months as confidence in
the new economic model gathers momentum.
Given improving economic outlook and strong property demand, most developers No more housing
have indicated their intention not to continue with existing financial packages or only schemes?
provide housing incentives to certain property projects. The gradual withdrawals of
housing incentives suggest lower interest expenses to be borne by developers, and
hence, stronger margins in the coming periods.
We do not expect more government measures to curb speculation activities after the Do not expect more
re-introduction of real property gains tax (RPGT) in end-2009 as there is no housing government measures to
bubble in the local property market. This was evident in Malaysia House Price Index curb speculative activities
provided by NAPIC, where average house price in the country had grown by merely
3.5% CAGR over the past nine years.
Our top picks for the property sector (in order of preference) are IJM Land (huge Top picks are, IJM Land,
unbilled sales of close to RM1bn, a proxy to the property sector with relatively high Suncity and Mah Sing
liquidity versus other property stocks as well as potential earnings surprise from the
disposal of commercial properties; OP, FV = RM3.19), Suncity (would benefit from
both property development and investment property divisions under the current
asset reflation environment; OP, FV = RM5.33), as well as Mah Sing (for its fast
turnaround business model; OP, FV = RM2.45).
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We like M-REITs due to their natural defensive qualities and solid property market M-REITs, an excellent
fundamentals. These make them an excellent asset class in the current volatile alternative defensive
market environment. In our view, the M–REITs sector, though still at an early stage asset class
of development, is at an inflection point, following the footsteps of its more established
peer, the Singapore REITs. It is worth noting that M–REITs offer higher net yield of
approximately 7.8% versus KLCI’s defensive stocks (under RHBRI coverage) of
6.7% but at significantly lower beta of 0.52 compared to our universe of defensive
stocks of 0.58. Hence, we view M–REITs as an excellent defensive asset class which
provides attractive yields and at the same time is less susceptible to market volatility.
Apart from that, M-REITs are also more attractive than bonds and even its regional More attractive than
peer. M-REITs average yield is 364 bps and 250 bps higher than the 10-year MGS bonds and even its
(4.18%) and 10-year Cagamas bond (5.32%), respectively. Meanwhile, M-REITs are regional peer
also trading at 148 bps FY10 spread over S-REITs.
Attractive valuation is further supported by solid property market fundamentals. We Solid property market
see improving commercial property market as economic activities are picking up. We fundamentals
expect office and industrial property rentals to stabilise at the current level before
picking up in the 2H10 given business expansion and increasing manufacturing/
export activities. As for retail properties, we believe popular malls such as Suria
KLCC, Sunway Pyramid, Sungai Wang Plaza, etc. will continue to do well and able
to maintain or increase their rental rates vis-a-vis newly completed shopping malls,
in anticipation of gradual improvement in consumer spending.
With improving economic outlook, REIT players will likely revisit their focus on Positive view on M-REITs.
portfolio expansion and growth in distributable income. Further acquisitions are likely Top pick is Axis REIT
in the coming years as REIT players look to enhance their portfolio quality ahead
of the full recovery of the real estate market. We advocate that investors with lower
risk appetite and longer-term investment horizon should position themselves in M-
REITs given the high yield and the defensive nature of M-REITs. In addition, as the
industry grows, liquidity will improve and we expect a sustainable narrowing of yield
gap with S-REITs. We are positive on M-REITs and our top pick for the sector is Axis
REIT (proven track record with hands-on management and its aggressive acquisition
plans; OP, FV = RM2.34).
We are maintaining our Overweight stance on the property sector as a whole. Maintain Overweight on
property sector
Table 39
Valuations Of Property Stocks
(sen) (%) (x) (x) (x) (x) (%)
Sunrise Jun 2.08 32.9 36.2 17.6 10.1 6.3 5.7 4.1 0.9 6.7 2.4 OP
Glomac^ Apr 1.35 15.4 19.4 24.7 26.5 8.8 6.9 5.3 0.7 10.7 6.7 OP
Sunway City Dec 3.31 34.8 38.8 9.8 11.6 9.5 8.5 11.4 0.7 6.1 2.4 OP
Axis REIT Dec 2.01 16.4 17.3 2.6 6.0 12.3 11.6 13.3 1.2 6.0 8.1 OP
IJM Land^ Mar 2.27 18.4 34.4 88.5 87.2 12.3 6.6 10.3 1.4 4.6 0.9 OP
Mah Sing Dec 1.90 15.8 21.1 8.3 33.7 12.0 9.0 4.4 1.4 9.0 4.4 OP
Quil Capita Dec 1.04 8.9 9.3 7.3 4.7 11.7 11.1 13.3 0.8 3.0 7.9 OP
SP Setia Oct 4.09 18.6 21.7 16.4 16.7 22.0 18.9 26.8 1.9 17.8 2.3 MP
YNHB Dec 1.50 16.1 18.0 15.8 11.6 9.3 8.3 6.0 0.8 6.9 4.3 MP
KLCC^ Mar 3.26 26.3 29.7 2.5 12.6 12.4 11.0 5.5 0.6 6.8 3.4 MP
Hunza Prop Jun 1.23 24.2 24.7 27.4 2.1 5.1 5.0 4.8 0.6 4.8 6.1 MP
Sector Avg 18.0 25.6 12.1 9.6
Sector Avg (EX- REIT & KLCC 19.0 27.0 12.1 9.5
STRATEGY 55 PAPER
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Semiconductor & IT : Pent-up Demand For Key Overweight
Product Segments
According to Gartner, demand for silicon wafer in 2010 is expected to increase Stronger silicon wafer
29.5% yoy (vs. -18% yoy in 2009) largely due to production ramp-up by major demand ahead
foundries to replenish the low-inventory level plus anticipation of higher chips
demand ahead. We believe the risk of rising excess inventory level is low as chip
producers are still running tight inventory despite the stronger outlook for chips
demand.
While 2010 global chip sales growth will be driven mainly by consumer electronics, Strong outlook for key
we highlight three key product segments i.e. smart phones, mobile PCs and tablets. product segments to
We believe the general theme for new product features going forward would include
drive chips demand in
smaller form factor and lower ownership cost as well as greater wireless
2010
compatibility.
1) Smart phones.According to US Consumer Electronics Association (CEA), smart
phones total unit shipments are expected to increase to 235m in 2010 (vs.
174.2m in 2009) driven mainly by: 1) greater affordability stemming from
emergence of entry-level smart phones; 2) strong demand for web based
phones; and 3) increasing trend towards wireless compatibility. Volume growth
coupled with higher chips density for smart phones (given its wireless and touch
screen capability) will drive global chips demand in 2010-11, in our view.
2) Mobile PCs.The mobile PCs remain the main driver for the PC segment due
to strong demand from emerging markets (i.e. China and India) and roll-out of
cheaper notebooks (based on new ultra-low-voltage technology). In addition,
the corporate IT spending in 2010 would likely gather momentum, driven by on-
going replacement cycle (i.e. Windows 7) as well as growth in network capacity.
In tandem, Gartner revised upwards its 2010 PC unit shipments growth forecast
to 20% (vs. 10% previously). As PC products contribute 25-30% to the chip
sales, we expect these to support chips growth in 2010.
3) Tablets. We expect stronger demand ahead for tablets (such as iPad) given
growing emphasis on mobility as well as convergence of computing and
communication. Gartner expects 2010 total shipments for tablets to reach 10.5m
and would rise significantly in 2011-12 on account of roll-out of tablets by other
CE (consumer electronics) manufacturers.
Given the sharp pull-back in capex spending in 2009 (-45% yoy) as well as Improving outlook for
stronger chips demand ahead, we expect capex spending to increase significantly equipment orders in 2010
over the next two years. Already, Jan 10 equipment bookings were 3.5x higher
than the 12-year low of US$247m in Mar 09. With a book-to-bill ratio of 1.20, Jan
10 was the seventh consecutive month with a book-to-bill ratio of above one
suggesting resilient growth in capex trend beginning Jul-09. In tandem, SEMI expects
chip suppliers to increase their capex spending by 45-60% yoy in 2010, spurred
by higher IC demand and capacity constraint in major chip segments (i.e. memory
and logic). We highlight that key drivers for a stronger capex spending in 2010
would be:
1) Increase in fab spending. We have highlighted that 2010 foundry capex
spending is expected to rise against the backdrop of increased process migration
for the memory segment as well as ramp-up in the 300-mm wafer capacity.
Note that this project has been postponed due to the economic downturn beginning
4Q 2008. In tandem, SEMI raised 2010 worldwide fab spending forecast to 88%
(vs. 60% previously). In addition, note that TSMC and UMC have raised 2010
capex guidance to US$4.8bn and US$1.2-1.5bn (from US$2.7bn and US$1bn
previously) against the backdrop of stronger chips demand and technological
advancement (i.e. migration to node <65nm).
2) Spending on manufacturing equipment. In the same vein, global spending
on other semiconductor manufacturing equipment (i.e. back-end equipment) is
expected to rise by 45-55% yoy in 2010 after registering a three-year decline.
Recall that Samsung, Intel, and Micron are in expansion mode with plans to
spend US$6.8bn, US$4.8bn and US$2.5bn respectively in 2010 (vs. US$4.6bn,
US$4.5bn and US$1.5bn in 2009).
In 2010, we believe chip players would likely focus on specific segments in which Chip players moving to
they have technological advantage to improve its profit margins. We understand higher-margin products
that Infineon Technologies AG is moving away from the memory and communication
STRATEGY 56 PAPER
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market to focus on its higher-margin core businesses such as system-level IC and
industrial electronics. On the same token, ST Microelectronics N.V, NXP Semiconductor
and Freescale Semiconductor are streamlining its product line to focus on higher-
value power management as well as automotive chips. Already, we note that
operating margin for semiconductor suppliers have started to improve beginning
2Q09 before reaching its 7-year high of 21.4% in 4Q09. We are positive on the
latest development as this would benefit chip assemblers as margins for Unisem
and MPI would likely remain resilient, supported by its customers’ higher-margin
products.
According to iSuppli, semiconductor utilisation rates are expected to rise in 2010, Utilisation rates to
driven mainly by slower-than-expected capacity ramp-up by chip players. Already, increase in 2010
Unisem expects overall 1QFY12/10 utilisation rate to be higher at 75% (vs. 70%
in 4QFY12/10) on account of stronger-than-expected demand for technology-based
products from emerging markets. Similarly, MPI’s current utilisation rates for its
Ipoh, Suzhou and Dynacraft plants stand at 60%, 80% and 65% respectively (vs.
35%, 40%, 35% in 3QFY06/09) given stronger chips demand arising from the pick-
up in consumer electronics (i.e. handphones and netbook computers) as well as
China’s investment in its 3G infrastructure. In tandem, major chip suppliers (i.e.
TSMC, UMC, ASE and SPIL) have recently announced plans in increasing its headcount
to beef up its production capacity.
Management guided FY10 capex of around RM199m (vs. RM134m in FY09) with 75% Capacity expansion in
of the capex to be spent in Chendu’s capacity expansion. Note that Unisem expects Chengdu
its QFN capacity in Chengdu to increase to 10m/day by 4Q10 (from 5m/day 4Q).
Management expects FY10 revenue contribution from Unisem Chengdu to increase
to 35% before rising to >50% in FY11 (from 20% in FY09) driven mainly by: 1)
stronger chips demand arising from China’s robust economy; and 2) still resilient
demand for wireless and networking chips, driven by China’s stimulus package.
Hence, we have raised FY10-12 earnings projections by 10.2%, 8.3% and 12.7%
p.a. respectively to reflect stronger-than-expected chips demand as well as higher
utilisation for its Chendu plant. Accordingly, we have raised our fair value to
RM3.39/share (from RM3.07 previously). We note that Unisem’s share price has
outperformed the FBM KLCI index by 79.2% since end-Dec 09.
We believe MPI’s medium-term earnings visibility remains bright given still-resilient MPI – longer term
chips demand from China. Further out, we highlight that earnings growth would be earnings visibility remains
driven by stronger chips demand from US and Europe as well as margin expansion
intact
stemming from higher contribution of high-density packages and module packages.
Hence, we maintain our Outperform call with fair value of RM8.15/share which is
based on unchanged 15x CY10 PER.
We believe Notion’s earnings will be driven mainly by: 1) stronger demand in the Riding on the electronic
2.5’’ HDD segment particularly the robust orders from Samsung; and 2) stronger industry
contribution from its camera division given volume loading from Nikon. We expect
margins to remain stable supported by 1) stronger contribution of higher-margin
camera segment; 2) continuous stable HDD ASP; and 3) cost-cutting measures via
efficient in-house tooling capability. Given the strong demand outlook for all the
business segments, we maintain our Outperform call with fair value of RM4.59/
share which is based on unchanged 10x FY11 PER.
We believe the semiconductor sector is poised for a stronger recovery in 2010
given stronger outlook for key product segments (i.e. mobile PCs, smart phones
and LCD tablets) as well as new electronic gadgets/applications, as these will drive
chips demand going forward. Hence, against the backdrop of improved earnings
visibility and stronger chip sales in 2010, we are reiterating our Overweight stance
on the sector. Our top pick for the sector is Unisem.
Table 40
Valuations Of Semiconductor/IT Stocks
(sen) (%) (x) (x) (x) (x) (%)
Unisem Dec 2.78 20.5 31.0 77.6 51.5 13.6 9.0 5.7 1.7 5.1 1.8 OP
MPI Jun 6.68 42.6 66.0 +>100 54.9 15.7 10.1 4.5 2.0 4.1 7.8 OP
Notion Vtec Sep 3.30 33.4 45.9 30.4 37.5 9.9 7.2 5.8 2.5 7.0 2.0 OP
H-Displays Dec 0.06 0.9 1.4 +>100 48.8 6.4 4.3 1.0 0.9 4.4 0.0 UP
Cuscapi Dec 0.11 1.0 1.8 +>100 86.9 10.8 5.8 5.8 0.8 4.8 9.5 UP
Sector Avg 67.6 50.4 12.0 8.8
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Telecommunication : Data Traffic To Drive Growth Overweight
According to data from the Malaysian Communications and Multimedia Commission Mobile penetration at
(MCMC), the mobile industry added 2.67m subscribers last year, representing a 106.2% as at end-2009 ...
subscriber growth rate of 9.6% yoy. This brought the mobile penetration rate to
106.2% as at end-2009, up from 98.9% as at end-2008. Excluding 2006, where
mobile subscriber base contracted as a result of the prepaid registration exercise,
last year’s subscriber growth was the slowest thus far this decade. Going forward,
we believe there is still room for sim penetration to grow given: 1) trends in
countries that have continued to witness subscriber growth even after passing the
100% mark; 2) Malaysia’s favourable demographic structure, where the youth segment
makes up close to half of the population; and 3) under-served areas such as the
East Coast and East Malaysia, which would continue to present opportunities for
mobile operators. However, we expect that subscription growth would continue to
slow ahead and project FY09-12 mobile subscription CAGR of 5.7%. By our estimates, … and expected to rise to
this would bring Malaysia’s mobile penetration rate to 120% by end-2012. 120% by end-2012
We see three investment themes for the telecommunications sector this year, which Three themes for the
are: sector:
1. Data traffic – the next wave of growth. While we expect voice revenue to 1)Data traffic to drive
see slower growth ahead, we are more optimistic with respect to the growth growth;
prospects for broadband and data revenue. Factors such as an unusually large
gap between the number of internet users in Malaysia and broadband penetration,
a young demographic profile that is internet and tech savvy, an increasing range
and choice of handsets and smartphones and rising popularity of social networking
services all lead us to believe that the non-voice revenue segment is poised for
significant growth ahead.
2. Strong cash flows, healthy balance sheets and well articulated dividend 2) Good visibility and
policies lend visibility to attractive yields. Cash flows for both Digi and attractive dividend yields;
Maxis remain strong while we expect TM’s cash flows would be sufficient to cover
its capex requirements. Based on their respective dividend policies, we project
FY10 net yields of between 4.7% and 5.7%, which would help to lend support to
share prices, in our view.
3.Capital management activities still on the cards. We believe capital 3)Capital management to
management would be a recurring theme for the sector this year. Digi remains provide further upside to
committed to moving towards a more efficient balance sheet while the management yields
of Maxis has reassured investors that the balance sheet would not be left idle.
The key risk is still, in our view, competition. Apart from the three incumbent mobile Competition still the key
operators, we note from various press articles that the industry has witnessed a slew risk
of new entrants, especially over the past two years. This includes mobile virtual
network operators (MVNOs) such as XoX.Com and Tune Talk, U Mobile (a quasi-
MVNO given that it also has a 3G licence) and WiMAX players such as Packet One
(P1) and Asiaspace DotCom. Apart from that, mobile number portability (MNP) was
officially introduced in 4Q08. Despite the number of new operators that have come
into the market, we think that the direction of tariffs would still depend heavily on
the pricing behaviour of the incumbent mobile operators. More importantly, while we
expect tariffs to continue to remain under pressure due to the intense competition,
we do not expect irrational pricing to set-in.
Having addressed gearing concerns with a rights issue last year, we believe Axiata Axiata – XL to drive
is now on firmer ground to move to the next level. Generally, we continue to see earnings growth while
Celcom as the group’s anchor and cash cow while XL is expected to continue with Celcom provides strong
its recovery, boosting further the group’s earnings growth. However, we think the cash flows
near-term outlook for Idea, Dialog and Axiata Bangladesh (AxB) could remain rather
muted in the face of steep competition as well as an uncompetitive cost structure
(for Dialog). Axiata has also proposed a private placement of up to 1.7bn XL shares,
representing 20% of XL’s issued share capital. Based on the placement price of
Rp3,300/share, we estimate Axiata’s proforma net debt/EBITDA as at end-2009
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would fall further to 1.5x from 1.8x currently. This, we think, would help further ease
concerns regarding Idea’s potential funding need (Axiata’s portion estimated around
US$200-300m previously). In addition, we think that Axiata’s fast-improving gearing
levels could allow the group to start declaring “regular” dividends earlier than expected.
Although Digi would still be busy expanding its 3G network coverage this year, by Digi – Ongoing 3G
end-2010, its network coverage target of 50% would mean that the coverage gap coverage expansion
to its peers would close significantly. In addition, Digi had also reached a deal with would help Digi compete
Apple to distribute the iPhones. We understand that Digi plans to make available the better while dividend
iPhones sometime within 1H2010 while pricing details, e.g. price of the iPhone and yields still attractive
packages, will only be revealed after the launch date has been announced. Generally,
the deal with Apple coupled with ongoing expansion of its 3G coverage should help
Digi better compete and tap into the data revenue market. We note that Digi’s data
revenue currently accounts for around 20% of mobile revenue, which significantly
lags behind peers Celcom (~30%) and Maxis (32.4%). On the flip side, its low base
suggests strong upside potential and growth ahead. In the meantime, Digi’s ongoing
move towards a more efficient balance sheet coupled with the payment of quarterly
dividends would provide investors a steady and attractive dividend income stream.
We believe Maxis is in a strong position to capture the rising popularity of mobile Maxis – strong position to
broadband and strong data revenue growth. Firstly, Maxis has a large customer base capture the rising data
with a relatively higher proportion of postpaid subscribers, which we believe are traffic while capital
typically of higher value relative to its rivals. These customers, we think, are also management initiatives
likely to be early adopters of technology and this would be positive in terms of could provide further
adoption of wireless broadband and smartphones. In addition, with its strong cash upside to yields
flows and healthy balance sheet, we think Maxis would be able to supplement its
regular dividends further with special dividends. Assuming Maxis targets a net debt/
EBITDA of 1x (in line with peers in Singapore), potentially, Maxis could pay out
another 19 sen/share (net) in special dividends to shareholders, which translates to
a net yield of 3.5%. This would be in excess to its normal dividend payments based
on its 75% payout policy.
TM launched its “UniFi” next-generation High Speed Broadband (HSBB) service on 24 TM – All eyes on HSBB
Mar, which comprise triple-play services of high speed Internet, video (IPTV) and
phone. For residential customers, the packages and respective monthly prices will be
5 Mbps (RM149), 10 Mbps (RM199) and 20 Mbps (RM249). While there could be some
reservations with respect to the incremental contribution from HSBB, especially given
that the initial areas of launch appear to be areas which are already well-covered
by Streamyx, we highlight several points. Firstly, the potential offering of a bundled
service together with improved network quality could potentially help TM both in
terms of customer retention and acquisition in these areas, especially in the face of
rising competition. Secondly, upgrading activities (e.g. from Streamyx to HSBB)
would be positive for ARPUs. In the meantime, TM’s key investment thesis has not
changed, i.e. a dividend policy that offers investors the comfort of a minimum
dividend income stream.
We retain our Overweight stance on the sector. Maintain Overweight

stance
Table 41
Valuations Of Telecommunications Stocks
(sen) (%) (x) (x) (x) (x) (%)
Digi Dec 22.74 139.0 152.4 8.0 9.7 16.4 14.9 8.0 24.8 9.8 6.5 OP
Axiata Dec 3.82 23.6 27.1 28.8 14.8 16.2 14.1 6.7 2.8 6.3 0.0 OP
Maxis Dec 5.38 33.2 36.2 6.6 9.1 16.2 14.9 9.1 n.m 10.5 6.2 OP
TM Dec 3.48 13.5 14.4 1.9 6.6 25.7 24.1 5.5 1.9 4.2 7.6 MP
Sector Avg 15.9 10.9 17.0 15.3
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Timber : Prospects Are Looking Better Neutral
Japan housing starts have recorded a 14th straight month of decline, with the latest Japan housing starts
Jan 2010 figure standing at 64,951 units, a drop of 8.1% yoy (see Chart 20). showing signs of recovery
Nevertheless, the rate of decline has been narrowing since Sep 2009 and accord-
ingly, there have been some signs of economic recovery given improving wage
levels and unemployment rate (dropping to a 10-month low of 4.9% in Jan 2010).
Given the low base in Feb 2009, we could potentially see a first yoy growth (in 15
months) for Japan housing starts in Feb 2010.
Chart 20 Chart 21
Monthly Japan Housing Starts Yearly Japan Housing Starts
'0 0 0 u n it s
130 1 4 0 0 .0
1 2 9 0 .4
120 1 2 3 6 .1
1 1 8 9 .0
110 1 2 0 0 .0
1 0 9 3 .5
1 0 6 0 .8
100
90 1 0 0 0 .0
80
7 8 8 .4
'000 units
70 8 0 0 .0
60
50 6 0 0 .0
40
30 4 0 0 .0
20
10 2 0 0 .0
0
Ja n Fe b Ma r A pr Ma y Ju n Ju l A ug Sep Oct No v De c 0 .0
2004 2005 2006 2007 2008 2009
2005 2006 2007 2008 2009 2010
Japan housing starts dropped 27.9% yoy to 787,410 units in 2009 (see Chart 21), Gradual recovery in Japan
the lowest starts since 1964’s 751,429 units (when the database collection first housing starts in 2010
started) and the first “less than one million units” housing starts in 41 years. Given
the low base in 2009 and improving economic indicators, we believe that we could
potentially see a yoy recovery in 2010, albeit a weak and gradual one. As such, we
do not expect housing starts to cross the one million unit mark in 2010, and expect
this to potentially happen only in 2011.
Official figures from Japan Lumber have confirmed the upward trend of plywood Selling prices for plywood
prices, with average selling prices increasing by 9-11% in 1Q10 from full-year 2009 firming up
average. While this is currently within our expectations, we note that the price trend
of plywood prices have since inched up by another 5% in 2Q10 from 1Q10’s average.
We believe that the increase in average selling prices was driven mainly by shortages
in supply, as the largest supplier of plywood products (which we believe to be Shin
Yang) in Malaysia started to shift its market focus away from Japan in 1Q10 due to
low volumes and prices offered (according to Japan Lumber). This led to some panic
buying from Japan trading houses as their inventory levels started to decline. If this
supplier continues to halt its supply to Japan, we believe that in the near term, there
could be upward price pressure for plywood products and this could potentially
benefit the timber players under our coverage. However, there is still a risk that Shin
Yang (which has plywood capacity of 1.2m m3, or double that of Ta Ann and WTK’s
combined plywood capacity) may return to the Japanese market when market con-
ditions improve and if demand is not enough to offset this supply, the downward price
pressure for plywood could come back again. Nevertheless, following the price re-
bound and our expectations that this trend should continue on a slow but gradual
trend for the rest of the year, we have raised our average selling price increase
forecast to 5-15% yoy for FY10 (from 5-7%); but lowered it to 2-5% for FY11 (from
5-6%); and 2-3% for FY12 (from 5%). We believe that average selling prices have
now settled at a higher equilibrium.
While average selling prices of plywood products have seen a gradual recovery (in Maintain Neutral call on
line with our expectations of a recovery in plywood prices to happen from 1Q10 the sector
onwards), log prices are still holding firm on a qoq basis, with no significant price
trend movement, hovering around the US$175-185/m3 levels for Meranti Log (me-
dium). As such, we are maintaining our log price assumptions, expecting prices to
increase by 10% yoy in FY10 and prices to stay relatively flat in FY11-12.
We are maintaining our Neutral call on the timber sector as there could still be a risk
of another false start to the economic recovery in Japan as has happened several
times since 1990s and the risk relating to slower demand recovery coming from still
weak Japan housing start numbers. Of the three timber concession players under our
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coverage, Ta Ann is the most sensitive to changes in plywood and log prices and
this is followed by WTK and Jaya Tiasa.
Chart 22
Tropical Plywood Price Trend
U S /m m 3
7 5 0
7 0 0
6 5 0
6 0 0
5 5 0
5 0 0
4 5 0
4 0 0
3 5 0
3 0 0
2 5 0
Jan-05
Mar-05
May-05
Jul-05
Nov-05
Jan-06
Mar-06
May-06
Jul-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Nov-09
Jan-10
Mar-10
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
C o n c r e t e P a n e l (3 'x 6 ' c u m ) F lo o r B a s e ( 3 'x 6 ' c u m )
After increasing our plywood price assumptions, we have increased our earnings Increase in earnings
forecasts for Ta Ann by 0.3-18% p.a. for FY10-12; WTK by 0.8-31% p.a. for FY10- forecasts for timber
12 and Jaya Tiasa by 2-14% p.a. for FY11-12. players
Following RHBRI’s recent upgrade in target PER for small and mid-cap plantation Increasing target PER for
stocks, we have upgraded our target PER for Ta Ann and Jaya Tiasa’s timber division plantation sector
to 14x CY10 (from 12x CY10 previously). Our target PERs for the timber earnings
remain unchanged at 14x CY10. We summarise the changes to earnings and fair
value for the timber companies in Table 42 below.
Our top picks are Ta Ann (OP; FV = RM7.60) and Evergreen (OP; FV = RM2.35). For Top picks are Ta Ann and
Ta Ann, earnings would be driven mainly by its plantation division while any further Evergreen
upside to the plywood division would further boost its earnings. For Evergreen,
structural changes in the industry i.e. gradual increase in real demand and supply
shortages from the closure of plants will be major boosters to capacity utilisation and
average selling prices and thus, earnings for the group.
Table 42
Change In Valuation Bases
Company Fair Value (RM/share) Earnings Valuation Methodology Recommendation

Before After changes Before After Before After
Ta Ann 5.95 7.60 Increased earnings Target PER of 14x Target PER of 14x OP OP
forecasts by 0.3- CY10 earnings for CY10 earnings for
18% p.a. for FY10- the timber division the timber division
12. and 12x CY10 earn- and 14x CY10
ings for the planta- earnings for the
tion division plantation division
WTKH 1.18 1.55 Increased earnings Target PER of 14x Target PER of 14x MP OP
forecasts by 0.8- CY10 earnings CY10 earnings
31% p.a. for FY10-
12.
JTiasa 2.35 3.05 Increased earnings Target PER of 14x Target PER of 14x UP UP
forecasts by 2-14% CY10 earnings for CY10 earnings for
p.a. for FY04/11-12. the timber division the timber division
and 12x CY10 earn- and 14x CY10
ings for the planta- earnings for the
tion division plantation division
Evergreen 2.35 2.35 No changes to Target PER of 11x OP OP
Target PER of 11x
earnings forecasts
CY10 earnings CY10 earnings
Table 43
Valuations Of Timber Stocks
(sen) (%) (x) (x) (x) (x) (%)
Ta Ann Dec 5.80 54.1 65.7 90.0 21.2 10.7 8.8 7.1 1.7 7.4 1.2 OP
Evergreen Dec 1.65 21.3 23.3 26.1 9.4 7.7 7.1 6.7 1.1 10.9 3.0 OP
WTKH Dec 1.19 11.1 14.6 +>100 32.0 10.8 8.1 5.7 0.7 n.m 5.0 OP
Jaya Tiasa^ Apr 3.50 27.7 55.5 +>100 n.m 12.6 6.3 9.3 0.9 8.6 0.0 UP
Sector Avg (Timber) +>100 36.6 10.2 7.5
STRATEGY 61 PAPER
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Transportation : Slow Recovery, Speed Bumps Neutral
Likely Along The Way
Airlines: Reduced losses in 2010
International Air Transport Association (IATA) expects the global airline industry to Smaller losses in 2010
record smaller losses of US$2.8bn in 2010 vis-à-vis US$9.4bn in 2009 (see Table
44). It believes traffic growth rates for both passenger and cargo already bottomed
in 2009 and they will return to the growth path from 2010 (see Chart 23). However,
it does caution that “Oil is a wild-card, over-capacity is still a danger, and costs must
be kept under control”. These are consistent with our view that: (1) A mild rebound
in the global economy will not materially stimulate demand for air travel; (2) Over
the short term, new capacity will continue to hit the market, intensify competition and
capping yields; and (3) Rising crude oil prices may crimp margins.
Table 44
Airline Industry P&L
US$bn 2007 2008 2009F 2010F
Revenue 510.0 564.0 479.0 522.0
Fuel cost -134.0 -189.0 -113.0 -132.0
Non-fuel cost -363.1 -390.9 -375.4 -392.8
Net profit 12.9 -15.9 -9.4 -2.8
Breakeven weight load factor (%) 60.8 63.8 62.6 63.6
Weight load factor achieved (%) 63.3 62.8 62.6 64.6
Crude oil price (US$/barrel) 73.0 99.0 62.0 79.0
Source: IATA
Chart 23
Global Air Passenger & Freight Growth Rates
15
10
5
%
0
2007 2008 2009E 2 0 10 F 2 0 11F 2 0 12 F 2 0 13 F
-5
- 10
- 15
R evenue P assenger Km F r e ig h t T o n n e K m
Source: IATA
Airport operator: A better proxy to air travel sector

Over the longer term, the growth prospects of the air travel sector in Asia Pacific Spared many troubles of
are good underpinned by rising per capita income, rapid urbanisation, availability of airlines
low-cost alternative and rising mobility. As a key airport operator in the region,
MAHB offers investors exposure to the booming air travel sector, less the troubles
of airlines such as intense competition on massive overcapacity that caps yields and
hence profitability, huge losses from fuel hedges gone bad and high gearing.
Shipping (Petroleum tanker segment): Overcapacity still a concern
While petroleum tanker freight rates are unlikely to revisit the lows in 2009 (see Subdued freight rates
Chart 24), they are generally expected to remain relatively subdued in 2010 (with
small relief occasionally from spikes due to temporary mismatch in demand and
supply) as a modest rise in demand on the back of the recovery in the global
economy will be overshadowed by the still rising capacity. Based on statistics
published by Drewry Shipping Consultants, we estimate industry capacity to expand
by 10.6% to 434.9m dwt in 2010, way outpacing a 1% growth in world crude oil
STRATEGY 62 PAPER
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demand to 85.24m barrels/day projected by OPEC. The demand for petroleum
tanker service correlates to world crude oil demand.
Chart 24
Arabian Gulf To Singapore 80,000-Tonne Dirty Tanker Rate
3 0 ,0 0 0
2 5 ,0 0 0
2 0 ,0 0 0
15 , 0 0 0
10 , 0 0 0
5 ,0 0 0
Source: www.pareto.no
Logistics: ILB a China play, Freight Management a LCL specialist
There have been a few positive developments for ILB on the China front: (1) The Positive developments
signing of idX, a US-based international interior design firm, as the tenant for ILB’s for ILB in China
entire new warehouse in Wujiang; (2) The successful listing of China associate
Hengyang on the Catalist Board of SGX; and (3) The possibility of ILB embarking
on a new warehouse project in the eastern central part of China, backed by a long-
term tenancy signed with a multi-national. On the other hand, Freight Management,
a freight forwarder covering international destinations, carves itself a niche in the
lucrative “less than container load” (LCL) business.
Table 45
Valuations Of Transportation Stocks
(sen) (%) (x) (x) (x) (x) (%)
ILB Dec 0.95 9.5 10.2 +>100 7.1 9.9 9.2 9.7 0.5 5.7 2.1 OP
Freight Jun 0.79 11.7 13.6 10.1 16.2 6.8 5.8 3.2 0.8 4.9 5.7 OP
MAHB Dec 4.75 34.1 39.0 19.3 14.4 13.9 12.2 9.2 1.4 9.8 3.6 OP
A i r A sia Dec 1.37 11.0 12.2 -39.9 11.5 12.5 11.2 11.3 1.3 5.6 0.0 MP
MISC^ Mar 7.99 33.0 36.7 51.4 11.2 24.2 21.8 12.6 1.4 11.2 4.5 MP
MAS Dec 2.17 11.4 14.4 +>100 2 5 . 8 19.0 15.1 11.1 2.0 11.4 0.0 UP
Sector Avg 22.3 13.9 20.6 17.8
STRATEGY 63 PAPER
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Table 46
Valuations And Ratings Of Individual Stocks Under Coverage
Financial Price Fair EPS EPS Growth PER EV/EBITDA

Year End Value (sen) (%) (x) (x)
(RM/s) (RM/s) 09a 10f 11f 09a 10f 11f 09a 10f 11f 09a 10f 11f
OUTPERFORM
Adventa^ Oct 3.69 4.34 22.0 31.5 42.8 +>100 43.2 35.7 16.8 11.7 8.6 12.2 9.4 7.4
AEON Dec 4.90 5.85 38.0 41.7 46.6 10.7 9.6 11.8 12.9 11.8 10.5 4.6 4.4 3.8
AFG Mar 2.80 3.27 16.7 23.5 26.6 13.2 40.5 13.0 16.7 11.9 10.5 n.a n.a n.a
Allianz Malaysia Dec 5.20 6.68 77.2 66.4 75.0 68.0 (14.0) 13.0 6.7 7.8 6.9 n.a. n.a. n.a.
AMMB^ Mar 4.97 6.13 33.5 39.9 45.7 7.8 19.0 14.6 14.8 12.5 1 0 . 9 n.a. n.a. n.a.
Amway Dec 7.34 8.45 44.1 54.5 56.5 (23.7) 23.6 3.5 16.6 13.5 13.0 9.9 8.5 8.2
Ann Joo Dec 2.71 3.53 6.0 40.1 45.0 (77.3) +>100 12.2 44.8 6.8 6.0 19.9 5.9 5.2
Axiata Dec 3.82 4.05 18.4 23.6 27.1 27.1 28.8 14.8 20.8 16.2 14.1 7.6 6.7 5.8
Axis REIT Dec 2.01 2.34 16.0 16.4 17.3 4.8 2.6 6.0 12.6 12.3 11.6 13.9 13.3 13.0
B-Toto^ Apr 4.42 4.95 31.3 32.1 33.4 (4.3) 2.7 3.9 14.1 13.8 13.2 9.9 9.9 9.7
CIMB Dec 13.96 16.24 79.5 95.5 112.6 37.4 20.2 17.9 17.6 14.6 1 2 . 4 n.a. n.a. n.a.
CSC Steel Dec 1.76 2.02 24.2 22.4 22.5 54.4 (7.2) 0.3 7.3 7.8 7.8 2.3 3.6 3.5
BP Plastics Dec 0.62 0.80 8.7 10.0 10.9 31.9 15.7 8.9 7.1 6.2 5.7 3.5 1.9 1.3
Carlsberg Dec 4.98 5.90 24.3 41.3 42.2 (1.8) 70.1 2.3 20.5 12.1 11.8 11.7 7.8 7.2
CBIP Dec 2.87 3.60 30.0 41.2 49.7 (32.0) 37.5 20.6 9.6 7.0 5.8 7.9 6.2 5.4
Dialog Jun 1.10 1.29 6.6 6.4 9.3 22.0 (3.4) 45.4 16.7 17.3 11.9 14.1 11.8 6.5
Daibochi Dec 3.64 4.40 30.0 36.7 39.9 +>100 22.4 8.8 12.1 9.9 9.1 8.0 6.2 5.5
Digi.com Dec 22.74 23.90 1 2 8 . 7 1 3 9 . 0 1 5 2 . 4 (13.4) 8.0 9.7 17.7 16.4 14.9 8.6 8.0 7.4
Emas Kiara Dec 0.50 1.31 11.4 13.1 15.2 (14.7) 15.0 16.7 4.4 3.8 3.3 4.3 3.4 2.8
Evergreen Dec 1.65 2.35 16.9 21.3 23.3 8.2 26.1 9.4 9.8 7.7 7.1 8.7 6.7 5.5
Eon Cap Dec 7.03 8.07 49.2 53.8 60.9 +>100 9.4 13.2 14.3 13.1 1 1 . 5 n.a. n.a. n.a.
EPIC Dec 1.61 2.69 24.9 26.9 27.2 81.0 7.9 1.1 6.5 6.0 5.9 4.3 4.9 4.1
Faber Dec 2.24 3.30 22.8 26.5 24.2 35.3 16.4 (8.8) 9.8 8.4 9.3 4.1 3.2 2.9
FajarBaru Jun 1.06 1.35 15.2 12.5 18.1 56.3 (17.5) 44.9 7.0 8.5 5.8 2.3 2.0 1.1
Freight Jun 0.79 1.40 11.1 13.0 15.1 11.5 16.5 16.4 7.4 6.8 5.8 4.2 3.2 2.9
Furniweb Dec 0.47 0.66 4.1 7.7 10.8 (42.4) 88.4 40.0 11.3 6.0 4.3 4.1 2.3 1.9
Genting Dec 6.58 8.90 33.0 45.8 56.1 (28.3) 38.9 22.5 20.0 14.4 11.7 6.7 4.7 3.6
Genting S’pore (S$) Dec 0.93 1.35 -1.4 2.8 3.7 (29.8) +>100 33.5 n.m. 33.1 2 4 . 8 n.m 1 7 . 6 1 2 . 6
Glomac^ Apr 1.35 1.56 12.3 15.4 19.4 (1.4) 24.7 26.5 11.0 8.8 6.9 6.1 5.3 4.7
Hai-O ^ Apr 4.39 5.20 38.7 48.3 57.7 49.9 24.7 19.4 11.3 9.1 7.6 7.4 5.9 4.7
Hiap Teck Jul 1.40 1.80 5.3 19.1 21.2 (88.7) +>100 11.3 26.3 7.3 6.6 11.8 8.3 7.4
IJM Land^ Mar 2.27 3.19 9.8 18.4 34.4 64.6 88.5 87.2 23.3 12.3 6.6 20.8 10.3 5.8
ILB Dec 0.95 1.24 -9.0 9.5 1 0 . 2 (792.8) +>100 7.1 n.m. 9.9 9.2 10.6 9.7 8.7
IOI Corp Jun 5.39 6.65 32.1 27.9 31.5 (0.1) (13.0) 13.0 16.8 19.3 17.1 13.5 13.2 11.9
Kencana July 1.59 1.88 7.1 10.2 11.7 (24.3) 42.9 15.0 22.3 15.6 13.6 13.3 9.1 7.6
KFCH Dec 7.85 9.63 65.8 77.1 89.5 10.0 17.2 16.2 11.9 10.2 8.8 6.0 5.0 4.2
Kinsteel Dec 0.99 1.22 -1.3 10.2 11.7 (>100) +>100 15.2 n.m. 9.7 8.4 18.0 4.7 4.3
KLK Sep 16.34 18.40 70.8 87.5 1 2 3 . 3 (33.3) 23.7 40.8 23.1 18.7 13.3 14.8 11.5 8.5
Kossan Dec 7.88 10.74 74.9 82.6 1 0 3 . 0 +>100 10.3 24.7 10.5 9.5 7.6 7.7 6.4 4.9
KPJ Healthcare Dec 2.88 3.20 18.7 21.9 23.2 15.11 17.29 6.04 15.4 13.1 12.4 8.5 7.8 7.3
Kurnia Asia Dec 0.55 0.74 3.8 6.8 7.6 n.a. 76.5 12.1 14.4 8.1 7.3 15.0 5.9 5.2
Lafarge Dec 6.16 7.21 48.5 51.5 52.6 12.1 6.1 2.3 12.7 12.0 11.7 8.1 8.5 7.9
LPI Capital Dec 13.70 16.65 90.9 111.0 125.7 21.0 22.2 13.2 15.1 12.3 10.9 14.9 12.6 10.9
MAHB Dec 4.75 5.45 34.4 34.1 39.0 23.8 19.3 14.4 16.6 13.9 12.2 9.7 9.2 8.4
Maybank Jun 7.39 8.96 37.8 51.3 60.7 (39.7) 35.7 18.1 19.5 14.4 1 2 . 2 n.a. n.a. n.a.
^ FY09, FY10 & FY11 valuations refer to those of FY10, FY11 & FY12
STRATEGY 64 PAPER
Table 46
P/CF P/NTA Div Yield ROE % Chg In Price Mkt

(x) (x) (%) (%) Cap
09a 10f 11f 09a 10f 11f 09a 10f 11f 09a 10f 11f 1 Mth 3 Mth 12 Mth (RMm)
OUTPERFORM
16.0 8.2 6.4 3.0 2.5 2.1 1.4 3.3 4.0 18.1 22.8 47.2 5.4 31.8 350.0 535
5.4 9.5 5.0 1.7 1.6 1.4 2.4 2.4 2.4 14.3 14.1 14.0 (1.0) (2.0) 31.0 1720
n.a. n.a. n.a. 1.5 1.3 1.2 2.2 2.2 2.2 9.1 11.8 12.0 0.7 4.5 65.7 4335
6.7 7.8 6.9 1.6 1.3 1.1 0.4 0.4 0.4 26.6 18.3 17.2 9.5 26.8 73.3 800
n.a. n.a. n.a. 2.0 1.7 1.5 2.0 2.0 2.0 11.8 12.1 12.5 1.4 2.1 89.0 14980
16.1 7.3 8.1 5.1 4.9 4.8 6.5 6.8 7.1 30.7 37.1 37.3 (0.5) 0.5 6.6 1207
5.0 n.m 6.9 1.5 1.2 1.1 3.3 8.9 10.0 3.6 20.4 19.4 0.6 (3.2) (4.2) 1417
6.1 6.3 5.8 3.4 2.8 2.3 0.0 0.0 0.0 9.6 10.4 10.7 2.4 26.5 26.5 32260
10.0 6.0 5.8 1.1 1.2 1.2 7.9 8.1 8.6 8.6 9.5 10.5 3.1 3.1 54.6 540
30.2 18.2 18.3 n.m n.m n.m 5.3 5.4 5.7 114.8 90.8 76.3 3.5 3.3 0.3 5972
n.a. n.a. n.a. 4.5 4.0 3.4 1.3 1.3 1.3 15.0 16.1 17.4 7.2 8.7 99.4 49303
4.0 12.2 7.5 0.8 0.9 0.8 11.4 6.4 6.4 12.3 11.0 10.9 3.5 39.7 122.8 669
5.1 3.9 3.2 0.8 0.8 0.7 6.5 6.5 7.1 0.6 7.4 8.2 (0.8) 8.8 100.0 112
19.8 22.6 9.7 3.1 2.8 2.6 2.9 5.0 5.1 15.5 24.3 22.6 6.4 10.9 50.0 1534
7.5 5.5 4.8 1.7 1.4 1.2 3.5 4.9 5.9 17.4 22.3 22.5 6.3 (3.4) 32.3 395
14.2 15.0 10.7 3.6 4.3 3.6 3.3 3.2 4.6 22.7 26.8 59.6 8.9 20.3 83.7 1539
8.5 8.5 7.7 4.8 4.1 3.4 5.3 6.5 6.9 19.1 21.2 20.8 8.9 20.3 83.7 276
10.6 9.8 8.7 30.9 24.8 16.0 6.0 6.5 7.2 58.5 70.7 71.3 1.0 3.7 10.5 17680
1.8 2.4 2.2 0.6 0.5 0.4 3.0 3.0 3.0 13.4 13.3 13.7 1.0 3.7 10.5 42
9.5 10.9 5.8 1.3 1.1 1.0 2.4 3.0 3.6 13.4 15.1 14.7 2.5 31.0 226.7 846
n.a. n.a. n.a. 1.4 1.3 1.2 1.1 1.4 1.4 10.1 10.0 10.4 1.9 2.8 146.7 4873
3.4 4.2 3.8 0.9 0.8 0.7 5.4 5.9 5.9 14.2 13.9 12.9 1.9 11.8 28.8 506
6.1 5.3 5.6 2.3 1.9 1.6 2.7 3.1 3.6 23.4 22.5 33.0 34.9 46.4 215.5 813
3.4 14.6 8.2 1.3 1.5 1.3 5.2 5.2 5.2 21.1 18.9 24.7 (4.5) 2.9 19.2 144
5.7 4.9 4.2 0.9 0.8 0.7 6.3 5.7 5.7 16.7 18.5 19.3 15.3 (2.5) 31.7 96
2.4 1.6 1.2 0.3 0.3 0.2 0.0 0.0 0.0 5.1 9.0 21.6 (4.1) 9.4 52.5 42
7.2 5.8 4.7 1.8 2.0 1.7 1.1 1.4 1.7 9.3 11.4 12.3 4.3 (10.0) (10.0) 24378
n.m 8.7 10.5 2.6 2.4 2.2 0.0 0.0 0.0 n.m 7.6 9.3 3.4 (20.9) 97.3 10813
7.5 10.7 7.9 0.7 0.7 0.6 6.7 6.7 6.7 12.9 16.8 18.0 3.8 8.0 171.7 401
6.5 4.7 3.5 1.8 1.5 1.2 5.9 7.3 8.8 42.3 42.5 74.4 8.4 32.2 32.2 890
3.5 n.m n.m 0.8 0.7 0.7 0.7 1.4 1.8 3.1 10.0 10.6 (13.4) (19.7) 111.5 458
2.7 4.6 2.9 1.5 1.4 1.1 0.9 0.9 0.9 6.8 11.7 18.9 9.1 4.6 4.6 2504
4.7 5.7 5.1 0.5 0.5 0.5 3.2 2.1 2.1 n.m 4.9 5.0 (5.0) 6.2 52.4 186
15.1 16.9 15.1 4.0 3.9 3.4 1.5 2.2 2.5 22.7 20.0 20.1 0.4 (0.4) 39.6 31592
15.1 11.6 10.3 5.1 3.1 2.4 0.3 0.5 0.5 27.4 23.5 34.9 8.9 15.5 123.2 2634
6.4 6.5 6.5 2.2 1.9 1.6 3.1 3.3 3.6 17.6 18.0 18.2 (1.1) 6.2 13.0 1556
50.8 3.3 7.3 1.2 1.0 0.9 1.0 1.0 1.0 n.m 12.6 12.9 (1.0) 11.3 140.2 927
17.3 15.0 12.5 3.1 3.0 2.7 2.4 2.8 4.0 13.5 16.0 20.6 (2.4) 1.6 52.7 17443
15.5 8.3 8.4 3.5 2.6 2.0 0.0 1.3 1.6 36.5 31.2 51.3 14.9 56.0 181.4 1260
15.9 11.7 9.3 1.3 1.3 1.3 4.2 4.9 5.6 16.3 17.0 15.4 19.5 20.2 182.8 1519
14.4 8.1 7.3 2.5 2.1 1.6 0.0 0.0 2.8 17.2 25.1 22.0 (13.4) (19.7) 111.5 819
7.6 9.3 9.1 1.6 1.6 1.5 6.2 4.9 4.9 12.8 12.5 12.2 (2.2) (1.0) 56.3 5234
3.7 3.5 3.3 2.1 2.0 1.9 4.9 8.0 9.1 14.0 16.4 17.7 3.6 2.5 52.2 1901
n.m 9.8 9.1 1.5 1.4 1.2 3.2 3.6 4.1 9.0 9.7 10.1 (3.8) 21.8 79.2 5225
n.a. n.a. n.a. 2.1 1.9 1.8 1.1 3.9 4.7 9.9 14.0 15.2 6.0 8.7 87.9 52304
STRATEGY 65 PAPER
Table 46

OUTPERFORM
Mah Sing Dec 1.90 2.45 14.6 15.8 21.1 (2.4) 8.3 33.7 13.0 12.0 9.0 5.8 4.4 2.5
Maxis Dec 5.38 6.20 31.1 33.2 36.2 (2.7) 6.6 9.1 17.3 16.2 14.9 10.2 9.1 8.1
MBM Dec 2.69 3.93 28.2 43.7 48.2 (41.7) 54.8 10.4 9.5 5.9 5.6 24.3 13.8 11.6
MCIL^ Mar 0.75 0.92 7.3 8.8 8.4 64.7 19.4 (4.1) 1 0 . 2 8.5 8.9 4.9 3.7 3.2
Media Prima Dec 2.06 2.23 6.9 14.8 15.8 (50.4) +>100 6.7 29.8 13.9 13.0 22.4 7.7 7.1
MPI Jun 6.68 8.15 -7.1 42.6 66.0 (>100) +>100 54.9 n.m. 15.7 10.1 10.8 4.5 3.7
MRCB Dec 1.51 1.66 3.8 7.1 7.6 161.3 86.4 8.0 39.7 21.3 19.7 20.0 14.5 13.2
Notion Vtec Sep 3.30 4.59 25.6 33.4 45.9 8.1 30.4 37.5 13.9 9.9 7.2 8.5 5.8 4.3
Perwaja Dec 1.41 1.79 -20.6 15.0 22.8 n.m. +>100 51.8 4.4 3.8 3.3 n.m 7.4 6.5
Plus Dec 3.41 4.13 23.7 23.6 36.3 9.8 (0.3) 53.5 14.4 14.4 9.4 9.6 9.9 7.4
Proton^ Mar 4.27 5.48 46.9 65.3 70.2 +>100 39.0 7.5 9.1 6.5 6.1 8.0 7.4 7.1
PBB-F Dec 11.60 13.12 73.3 82.0 91.7 (4.7) 11.8 11.8 15.8 14.2 1 2 . 7 n.a. n.a. n.a.
PBB-L Dec 11.64 13.12 73.3 82.0 91.7 (4.7) 11.8 11.8 15.9 14.2 1 2 . 7 n.a. n.a. n.a.
QL Resources^ Mar 3.42 3.93 27.0 31.3 36.9 19.6 16.2 17.7 12.7 10.9 9.3 6.3 5.4 4.7
Quill Capita Dec 1.04 1.17 8.3 8.9 9.3 10.2 7.3 4.7 12.5 11.7 11.1 13.2 13.3 12.9
RCE Cap^ Mar 0.68 1.08 10.0 10.6 11.3 7.3 5.9 6.1 6.7 6.3 6.0 8.7 9.1 9.3
Sime Darby Jun 8.61 9.85 37.5 40.7 51.6 (38.1) 8.5 26.8 22.9 21.1 16.7 13.7 12.4 10.0
Sino Hua An Dec 0.47 0.71 -1.8 5.9 9.5 n.m. >+100 59.9 n.m. 7.9 5.0 29.5 4.0 2.5
Suncity Dec 3.31 5.33 31.7 34.8 38.8 9.3 9.8 11.6 10.5 9.5 8.5 6.4 11.4 8.7
Sunrise Jun 2.08 2.76 27.9 32.9 36.2 10.5 17.6 10.1 7.4 6.3 5.7 5.1 4.1 3.8
Sunway Dec 1.52 1.69 13.6 21.4 22.7 (27.0) 57.6 5.9 11.2 7.1 6.7 7.3 5.9 6.2
Ta Ann Dec 5.80 7.60 28.5 54.1 65.7 (15.2) 90.0 21.2 20.4 10.7 8.8 10.1 7.1 5.7
Tan Chong Dec 3.54 3.60 22.7 31.6 32.7 (24.9) 39.6 3.3 15.6 11.2 10.8 10.5 8.1 8.0
Tanjong^ Jan 17.90 19.20 165.1 171.9 175.5 26.4 4.1 2.1 10.8 10.4 10.2 7.2 7.0 6.6
Tenaga Aug 7.97 9.50 49.8 64.9 73.6 (7.4) 30.4 13.4 16.0 12.3 10.8 7.8 6.9 6.2
Top Glove Aug 13.52 15.50 57.3 89.0 96.2 54.2 55.3 8.1 23.6 15.2 14.1 13.2 9.3 8.3
Unisem Dec 2.78 3.39 11.5 20.5 31.0 (17.1) 77.6 51.5 24.1 13.6 9.0 7.6 5.7 4.6
Wah Seong Dec 2.56 3.09 13.2 19.3 20.8 30.8 46.1 8.0 19.4 13.3 12.3 7.2 5.5 5.2
WTK Dec 1.19 1.55 -0.2 11.1 14.6 (>100) +>100 32.0 n.m. 10.8 8.1 17.0 5.7 4.7
YTL Cement Jun 4.24 5.07 51.3 46.6 45.8 74.8 (9.0) (1.7) 8.3 9.1 9.2 4.6 4.4 4.1
^ FY09, 10 & FY11 valuations refer to those of FY10,11 & FY12
STRATEGY 66 PAPER
Table 46

(x) (x) (%) (%) Cap
OUTPERFORM
7.0 9.0 3.3 1.6 1.4 1.3 3.4 4.4 5.9 12.3 12.5 15.3 (3.8) 21.8 79.2 1228
10.4 10.5 9.2 n.m n.m n.m 3.7 6.2 6.7 26.9 26.1 25.9 (3.8) 21.8 79.2 40350
14.7 13.6 12.1 0.7 0.7 0.6 3.3 4.5 4.5 7.9 11.9 11.5 (0.4) 9.8 34.5 651
7.9 6.7 6.9 1.5 1.3 1.2 4.8 6.0 5.7 11.6 12.7 11.3 30.7 35.5 35.5 1256
6.3 6.7 6.5 3.5 2.9 2.9 3.6 4.9 5.5 9.8 15.7 15.2 7.3 28.8 107.2 1947
6.5 4.1 3.0 2.0 2.0 1.9 7.8 7.8 7.8 n.m 12.7 18.8 7.1 28.0 47.1 1402
n.m 21.9 21.5 2.0 1.6 1.5 0.0 0.0 0.0 5.3 9.9 7.8 10.2 21.7 82.2 1370
8.7 7.0 5.3 2.8 2.5 1.9 1.5 2.0 2.7 24.0 28.0 30.4 0.7 4.5 65.7 510
n.m 35.3 5.3 0.8 0.8 0.7 0.0 0.0 0.0 n.m 8.6 11.8 0.0 15.6 110.4 1010
8.2 8.7 7.6 2.8 2.8 2.5 4.8 5.3 5.9 19.5 19.3 26.6 (1.2) 5.6 14.4 17050
n.m n.m n.m 0.5 0.5 0.4 0.0 0.0 0.0 4.8 6.3 6.3 5.4 7.8 170.3 2345
n.a. n.a. n.a. 4.6 3.8 3.4 4.7 5.2 5.6 24.5 24.2 23.8 4.3 7.4 56.9 40970
n.a. n.a. n.a. 4.6 3.9 3.4 4.7 5.2 5.6 24.5 24.2 23.8 4.9 7.6 58.5 41112
17.6 11.7 7.9 2.8 2.4 1.9 2.6 3.1 3.6 33.3 29.9 29.2 0.9 9.1 71.0 1354
9.2 3.0 2.8 0.9 0.8 0.7 7.4 7.9 8.3 6.8 6.6 6.7 3.0 0.0 26.8 406
n.m n.m n.m 1.4 1.1 1.0 1.5 1.5 1.5 23.5 20.3 18.0 1.5 5.5 68.8 528
16.8 15.2 12.5 2.4 2.3 2.2 2.4 2.6 3.4 10.5 11.2 13.4 1.9 (4.0) 48.4 51742
9.1 7.3 6.2 0.7 0.6 0.6 0.0 0.0 0.0 n.m 8.5 12.0 (3.1) 0.0 135.0 527
1.4 6.1 6.1 0.7 0.7 0.6 3.9 2.4 2.4 7.7 7.2 7.4 0.3 6.1 114.9 1556
n.m 6.7 7.1 1.1 0.9 0.8 1.4 2.4 2.4 15.8 15.5 14.9 (1.9) (1.9) 129.8 1018
2.9 6.2 7.0 1.4 1.2 1.0 1.5 1.8 1.8 15.9 15.4 14.1 7.8 24.6 125.2 814
7.2 7.4 5.9 1.9 1.7 1.4 0.9 1.2 2.0 8.6 14.5 14.5 20.6 27.5 93.3 1245
11.9 9.1 8.9 1.7 1.5 1.4 2.5 3.2 3.4 11.1 14.2 25.1 11.7 21.2 176.6 5026
4.7 7.6 7.2 1.9 1.7 1.6 5.6 5.7 5.8 17.7 16.5 15.4 1.6 7.3 26.1 7218
5.2 4.2 4.2 1.3 1.2 1.1 2.2 3.3 3.7 8.4 10.4 11.0 0.1 (4.2) 30.7 34538
17.5 12.4 11.5 5.1 4.2 3.6 2.2 3.4 3.5 22.6 28.7 26.0 19.4 35.9 184.4 4107
6.0 5.1 4.5 1.9 1.7 1.4 0.9 1.8 1.8 8.3 12.9 16.8 26.4 82.9 367.2 1442
22.7 4.8 5.3 4.0 3.0 2.4 2.9 3.0 3.2 23.1 50.4 44.9 11.7 8.0 95.6 1788
n.m n.m n.m 0.7 0.7 0.6 5.0 5.0 5.0 n.m 4.4 5.6 1.7 13.3 55.6 521
6.4 6.7 6.8 1.3 1.3 1.3 7.1 7.1 7.1 16.3 14.4 14.0 4.4 (0.9) 64.3 2085
STRATEGY 67 PAPER
Table 46

MARKET PERFORM
Affin Dec 2.83 3.03 24.9 27.5 29.6 27.0 10.5 7.6 11.4 10.3 9.6 n.a. n.a. n.a.
AirAsia Dec 1.37 1.49 18.3 11.0 12.2 +>100 (39.9) 11.5 7.5 12.5 11.2 8.2 11.3 11.1
Astro^ Jan 4.24 4.30 12.0 7.4 11.6 +>100 (38.9) 57.7 35.2 57.6 36.5 11.8 12.9 10.9
Genting M’sia Dec 2.81 2.90 24.2 21.0 22.4 (0.5) (13.3) 6.8 11.6 13.4 12.5 5.3 5.9 5.1
HL Bank Jun 8.60 9.05 53.7 56.5 56.6 14.5 5.1 0.2 16.0 15.2 15.2 n.a. n.a. n.a.
HSL Dec 1.48 1.56 10.2 13.0 15.1 35.3 27.2 16.4 14.5 11.4 9.8 9.3 6.9 5.4
Hunza Prop Jun 1.23 1.43 19.0 24.2 24.7 (44.9) 27.4 2.1 6.5 5.1 5.0 9.5 4.8 4.5
IJM Corp^ Mar 4.77 4.88 21.1 31.7 32.6 (35.7) 50.6 2.7 22.6 15.0 14.6 11.9 8.7 8.2
KLCCP^ Mar 3.26 3.64 25.7 26.3 29.7 7.2 2.5 12.6 12.7 12.4 11.0 5.6 5.5 4.9
KNM Dec 0.73 0.90 3.8 5.7 7.0 (55.2) 52.4 21.5 19.3 12.6 10.4 9.4 9.7 8.2
MISC^ Mar 7.99 8.06 21.8 33.0 36.7 (42.3) 51.4 11.2 36.7 24.2 21.8 12.2 12.6 11.9
MNRB^ Mar 3.04 2.94 29.8 34.3 35.7 +>100 1 5 . 1 4.0 10.2 8.9 8.5 n.m n.m n.m
SP Setia Oct 4.09 4.66 16.0 18.6 21.7 (13.7) 16.4 16.7 25.6 22.0 18.9 23.3 26.8 20.8
Parkson Jun 5.77 6.40 25.4 29.2 36.3 22.0 15.0 24.3 22.7 19.8 15.9 6.2 5.2 3.8
SapuraCrest^ Jan 2.49 2.66 11.8 16.6 18.4 40.8 40.9 10.3 21.1 15.0 13.6 7.8 5.7 4.6
Star Dec 3.42 3.60 19.6 22.6 25.8 (11.4) 15.4 14.0 17.5 15.1 13.3 7.7 7.5 6.6
TM Dec 3.48 3.55 13.3 13.5 14.4 (41.8) 1.9 6.6 26.2 25.7 24.1 5.2 5.5 5.3
UMW Dec 6.27 6.71 33.6 51.2 52.5 (35.8) 52.3 2.5 18.7 12.2 12.0 7.3 6.1 5.8
VS. Industry Jul 1.23 1.33 6.6 12.7 24.9 (81.4) 92.2 95.5 18.6 9.7 4.9 4.6 3.9 3.9
YNH Property Dec 1.50 1.86 13.9 16.1 18.0 (36.3) 15.8 11.6 10.8 9.3 8.3 6.7 6.0 5.4
YTL Power Jun 2.20 2.12 11.5 14.3 14.7 (12.3) 24.1 2.8 19.1 15.4 15.0 12.1 8.9 9.0
STRATEGY 68 PAPER
Table 46

(x) (x) (%) (%) Cap
MARKET PERFORM
n.a. n.a. n.a. 1.1 1.1 1.1 3.0 3.0 3.0 8.1 8.6 9.0 7.2 11.9 111.1 4229
4.6 5.6 5.0 1.3 1.3 1.2 0.0 0.0 0.0 20.9 10.8 10.8 (4.9) 3.0 40.5 3365
14.1 15.6 13.4 17.7 20.2 17.3 3.9 3.3 3.5 22.8 16.9 28.0 25.1 34.6 92.7 8200
9.7 10.5 9.9 1.6 1.6 1.5 2.6 2.4 2.6 15.0 12.7 12.7 3.3 (0.7) 28.3 16592
n.a. n.a. n.a. 2.4 2.1 2.0 2.8 2.8 2.8 16.7 14.8 13.4 2.4 7.8 57.8 13589
20.2 13.8 11.7 2.8 2.3 1.9 1.6 1.7 1.7 21.1 22.4 21.5 16.5 35.8 202.0 813
11.8 4.8 4.7 0.5 0.6 0.5 4.6 6.1 6.1 8.7 12.5 11.0 (1.6) (8.8) 4.7 178
9.7 7.7 7.7 1.3 1.2 1.1 2.2 2.2 2.2 5.7 8.4 8.1 7.7 8.4 56.0 6311
5.6 6.8 6.2 0.6 0.6 0.6 3.4 3.4 3.4 5.0 4.9 5.4 (0.3) (1.5) 7.9 3045
n.m 11.0 11.5 27.4 10.5 5.9 2.8 2.8 2.8 8.8 12.9 14.1 (9.9) (0.7) 74.7 2903
11.0 11.2 10.0 1.4 1.4 1.4 4.4 4.5 4.6 3.9 7.0 7.7 1.5 (3.7) (3.7) 29721
9.2 8.1 7.8 0.7 0.6 0.6 1.3 3.3 3.3 6.9 7.4 7.3 11.4 (1.3) 14.7 648
15.1 17.8 16.3 2.0 1.9 1.8 3.4 2.3 2.7 8.1 8.9 9.7 (2.2) 9.4 37.7 37.7
6.9 7.8 5.8 3.4 3.0 2.6 0.9 1.2 1.4 18.0 18.8 18.9 4.3 9.5 46.4 5980
8.5 6.5 5.8 2.6 2.1 1.8 1.6 1.6 1.6 15.9 33.8 31.7 5.5 8.3 223.4 3179
12.1 11.6 10.7 2.1 2.0 2.0 6.7 6.1 6.6 11.7 13.1 14.4 1.2 8.2 7.5 2526
1.5 4.2 3.7 1.8 1.9 2.0 7.6 7.6 7.6 5.4 7.0 7.7 0.1 (4.2) 30.7 12289
9.8 8.8 8.5 1.9 2.0 1.8 3.2 3.7 3.9 10.5 15.8 29.4 0.0 (1.1) 17.2 6998
4.9 4.8 3.7 0.8 0.7 0.7 1.4 6.5 8.7 3.3 6.2 11.5 (1.6) 5.1 23.0 276
14.8 6.9 7.6 0.9 0.8 0.8 4.3 4.3 4.3 7.7 8.7 9.2 (9.1) (5.1) 50.0 571
7.9 10.4 6.5 1.9 1.8 1.9 8.0 9.1 9.1 14.5 17.7 17.6 1.9 (1.3) 14.0 12531
STRATEGY 69 PAPER
Table 46

(RM/s) (RM/s) 09f 10f 11f 09f 10f 11f 09f 10f 11f 09f 10f 11f
UNDERPERFORM
B AT Dec 42.90 38.95 261.5 243.5 233.2 (8.0) (6.9) (4.2) 16.4 17.6 18.4 11.7 12.4 12.8
Cuscapi Dec 0.11 0.09 0.1 1.0 1.8 (76.1) +>100 8 6 . 9 +>100 1 0 . 8 5.8 9.1 5.8 5.1
Gamuda Jul 2.84 2.05 9.7 13.6 16.1 (40.1) 40.4 17.9 29.2 20.8 17.7 30.7 26.9 21.1
Genting Plantation Dec 6.99 6.65 30.1 40.3 46.8 (39.0) 34.0 16.0 23.2 17.3 14.9 16.0 12.4 10.5
Hartalega Mar 8.21 7.93 53.6 63.5 65.7 64.2 18.3 3.6 15.3 12.9 12.5 11.3 9.3 8.4
H-Displays Dec 0.06 0.06 (12.2) 0.9 1.4 (>100) 1 0 7 . 7 48.8 n.m. 6.4 4.3 n.m 1.0 n.m
IJM Plantations^ Mar 2.51 2.35 10.2 13.8 15.9 (46.8) 34.8 15.4 24.5 18.2 15.8 10.4 10.3 9.5
Jaya Tiasa^ Apr 3.50 3.05 9.8 27.7 55.5 9 9 . 1 +>100 +>100 3 5 . 8 12.6 6.3 13.8 9.3 5.8
MAS Dec 2.17 1.60 -47.7 11.4 14.4 (>100) +>100 2 5 . 8 n.m. 19.0 15.1 n.m 11.1 10.3
P Gas^ Mar 9.73 10.08 46.7 55.0 57.0 (0.5) 17.8 3.6 20.8 17.7 17.1 9.8 8.7 8.3
Petra Perdana Dec 1.38 1.00 9.8 8.0 17.1 (53.1) (18.5) +>100 1 4 . 0 17.2 8.1 4.7 4.8 3.3
Puncak Dec 2.74 2.55 34.7 31.1 28.8 +>100 (10.4) (7.4) 7.9 8.8 9.5 4.5 3.3 3.3
WCT Bhd Dec 2.74 2.10 18.8 18.2 16.9 43.6 (3.0) (7.0) 14.6 15.1 16.2 9.6 13.1 13.8
Wellcall Sep 1.29 1.14 10.2 11.9 14.7 (24.0) 17.3 23.7 12.7 10.8 8.8 7.1 5.7 4.2
STRATEGY 70 PAPER
Table 46

(x) (x) (%) (%) Cap
09f 10f 11f 09f 10f 11f 09f 10f 11f 09f 10f 11f 1 Mth 3 Mth 12 Mth (RMm)
UNDERPERFORM
15.0 13.1 18.6 n.m n.m n.m 5.5 5.1 4.9 168.5 135.1 114.3 2.2 1.4 (5.7) 12249
8.5 4.8 3.9 0.8 0.8 0.7 0.0 9.5 9.5 0.6 5.6 10.3 (4.5) 10.5 16.7 23
n.m 97.6 44.6 1.9 1.8 1.7 2.8 2.8 2.8 6.1 8.4 9.1 2.5 8.8 39.9 5706
20.2 15.6 13.4 2.1 1.9 1.7 1.3 1.6 1.9 9.3 11.0 11.6 12.9 13.8 61.8 5290
13.7 11.7 11.4 5.8 4.4 3.6 2.2 2.9 3.2 43.4 68.7 58.0 12.0 35.3 35.3 1989
n.m 4.4 3.3 1.0 0.9 0.7 0.0 0.0 0.0 n.m 10.2 13.5 (25.0) (14.3) (52.0) 13
19.1 14.4 12.9 1.8 1.7 1.6 1.6 2.0 2.6 8.8 9.7 10.5 2.4 0.4 26.8 2212
10.3 8.6 4.7 1.0 0.9 0.8 0.0 0.0 0.4 2.5 6.6 11.7 27.3 35.7 104.7 989
n.m 11.4 9.6 5.9 2.0 1.7 0.0 0.0 0.0 n.m 16.9 11.9 4.3 (12.3) (8.0) 3626
12.5 11.5 11.1 3.0 3.0 3.0 5.1 6.0 6.2 28.6 34.1 35.7 0.8 (1.7) (0.7) 19253
3.0 1.5 9.6 0.8 0.8 0.7 1.4 1.4 1.4 6.0 9.2 18.1 2.2 (2.1) (6.8) 411
n.m 2.6 2.6 1.2 0.7 0.7 2.2 2.2 2.2 9.7 7.0 6.5 2.2 (10.5) (7.4) 1127
7.4 14.8 16.1 1.7 1.5 1.4 3.6 2.2 2.2 12.1 10.6 9.1 3.4 5.4 146.8 2148
6.1 13.5 8.3 2.1 2.0 1.9 11.4 10.0 11.6 17.0 19.2 0.0 0.8 0.8 66.4 167
STRATEGY 71 PAPER
This page is left blank intentionally
STRATEGY 72 PAPER
STRATEGY 73 PAPER
STRATEGY 74 PAPER
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STRATEGY 75 PAPER
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Market Outlook & Strategy 2Q2010: Volatile Market Uptrend Amid Policy Normalisation - 31/01/2010

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Market Outlook & Strategy 2Q2010: Volatile Market Uptrend Amid Policy Normalisation - 31/01/2010

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MARKET DATELINE

 In our view, any significant weakness in the market is an opportunity to accumulate

Please read important disclosures at the end of this report.

MACRO ECONOMIC OUTLOOK 3

FBM KLCI FROM THE TECHNICAL PERSPECTIVE 24

The Malaysian economy emerged from a recession in the 4Q of last year,

Economic Recovery Strengthening

A New Economic Model To Lead The Country Forward

Normalisation Of Extremely Loose Monetary Conditions Has Begun

Global Economic Recovery Picking Up Momentum

a low of +1.1% in November. Although an improvement in the housing sector has

Exports On The Path To Recovery

Domestic Demand Will Likely Improve

2007 2008 2009 2008 2009 2010(f) 2011(f)

(f): RHBRI's forecasts

Fiscal Consolidation Will Hold Back Growth

2007 2008 2009 2008 2009 2010(f) 2011(f)

% Growth in Real Terms

(f) : RHBRI's forecasts

Current Account Surplus To Narrow And Ringgit Will Likely

Higher Price Pressure In 2010, But Manageable

Normalisation Of Interest Rates Will Continue

External Issues Dominated Market Movements

Index Relisting of Fitch US President’s Release of China’s

1,300 10 Nov 09 US Fed Reserve

1.FOMC & BNM maintained Annual

Maintained downgraded potential risk

Index 2009 2010 2009 2010

US Dow Jones 10,841.2 11.0 15.0 7.4 4.0 +18.8 +4.0

Index 2009 2010 2009 2010

FBM KLCI 1,312.5 23.2 11.8 5.9 3.1 +45.2 +3.1

^ According to Bursa Malaysia’s classifications.

Top performers 25/3/10 31/12/09 % chg. Underperformers 25/3/10 31/12/09 % chg.

Unisem 2.78 1.64 +69.5 Kurnia Asia 0.55 0.70 -20.9

Sustainable, Albeit Uneven Global Economic Recovery

Countries ranked* by sustainability of debt position

% of GDP, 2010 forecast

Primary budget GDP growth Sovereign

Greece -4.6 94.6 -3.2 7.7

Robust Corporate Earnings Momentum

Reflecting the improvement in the economy, the recovery in corporate earnings is

But Market Valuations Are Back To Normal Levels

Malaysia Singapore Thailand Philippines Indonesia Hong Kong Taiwan Korea

FactSet Asian Consensus Trends report dated 24 February 2010

IBES Consensus dated 18 March 2010

* as at 25 Mar 2010 closing

Normalising Interest Rates Positive For Banks

Stronger Ringgit Also Supportive Of Market

Accumulate On Weakness And Ride The Volatility

# Exclude Astro * Exclude MAS earnings in 09-10

deliver some share price performance moving forward.

Yr End Div. Yield (%) P/NTA (x) ROE (%) Recommendation

Ann Joo Dec 8.9 10.0 1.2 20.4 Outperform

^ FY10-11 valuations refer to those of FY11-FY12.

Heavy Technical Resistance Zone Removed

Source : BNM Source : BNM

Source: Bursa Malaysia, RHBRI, various news reports

^ FY10-11 valuations refer to those of FY11-FY12

Cons umer s pending

No “discernible cannibalisation” of business in Malaysia so far. In Malaysia, No “discernible

No re-rating for GM unless capital management or EPS-enhancing No re-rating for Genting

Sector Avg 8.6 14.2 13.9 12.2

Water: Water Sector Restructuring Unlikely to Materialise Anytime Soon