Market Outlook & Strategy 2H2010: Still A Bumpy Ride - 1/7/2010

MARKET DATELINE
PP 7767/09/2010(025354)
30 June 2010
•
Malaysia
Market Outlook
& Strategy 2H2010
Still A Bumpy Ride
Executive Summary
 Whilst markets have rebounded, uncertainty persists in the global economy. Investors
are still nervous about the speed at which countries in Europe withdraw fiscal support
for their economies. It has also revived worries about consumer price deflation in
the developed countries. At the same time, credit tightening in China and fear of
unsustainable asset bubble also add to investors’ concerns. Nevertheless, we believe
the risk to the global economy is a sharper-than-expected slowdown in the 2H and
not a “double-dip”.
 For Malaysia, economic growth is envisaged to slow down to 4.8% yoy in the 2H, from
an estimate of +8.8% in the 1H, as the “V-shape” export recovery normalised and
demand from Europe and China softened. Consequently, corporate earnings growth
is likely to have peaked. Market valuations, though not cheap, remain at reasonable
levels and foreign participation could increase gradually over time given that it has
just been listed as China’s Qualified Domestic Institutional Investor (QDII) destination.
 Meanwhile, more negative than positive news flow ahead suggests that the equity
market may move into a phase of greater volatility, which in our view, could persist
for the next two to three months until a clearer picture emerges on the strength of
the global economic recovery. However, we believe the longer-term outlook for the
market is still positive given our expectation of the sustained economic and corporate
earnings growth. We believe the market will likely come back towards the 4Q when
there is more certainty on the strength of the global economic recovery and better
news flow domestically on the award of key infrastructure projects/privatisation of
government land for redevelopment. Our year-end FBM KLCI target is maintained at
1,400.
 Under such circumstances, stock picking is key. Investors should trim their holdings
of stocks with relatively rich valuations and look for opportunities to accumulate
fundamentally-robust stocks, i.e. those with positive and visible earnings outlook,
good management and are attractively valued, on weakness. Sector-wise, we are
more positive on the banking, construction, property, power, telecommunications,
gaming, motor and rubber glove sectors.
Please read important disclosures at the end of this report.
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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 23
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 48
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
Economic growth in the country is likely to have peaked in the 1Q and will likely
soften in the 2H of the year, on account of slower global economic growth, as
worldwide fiscal spending fades and austerity measures in some European
countries begin to bite. These will likely be compounded by policies tightening
in some Asian countries. Still, we do not expect a double-dip in the global
economic growth even though there is a risk of a sharper-than-expected slowdown.
Domestically, the Government’s fiscal stimulus will be running out of steam in
the 2H of the year. As a result, we expect real GDP growth to soften to 4.8%
yoy in 2H 2010, from +8.8% estimated for the 1H. For the full-year, real GDP
is envisaged to recover to +6.8% in 2010, from -1.7% in 2009. Meanwhile, the
current account surplus in the balance of payments will likely narrow during the
year. The surplus, however, will remain large and provide an underlying support
to the ringgit which is envisaged to be volatile and fluctuate at around RM3.20-
3.30/US$ in the 2H of the year. Inflation will likely trend up and average 2.0%
in 2010, but will not be a major concern to policymakers. The Central Bank will
raise the OPR at a measured pace and by another 25 basis points to 2.75% in
September.
Signs Of Slower Economic Growth In The 2H Emerging
The Malaysian economy is likely to have reached its peak after recording a double- The country’s economic
digit growth of 10.1% yoy in the 1Q, the strongest in a decade, underpinned mainly growth is likely to have
by a strong surge in exports. Growth will likely slow down in the 2H of the year, peaked in the 1Q and we
on account of a more moderate global economic growth, as worldwide fiscal spending expect real GDP to slow
dissipates and austerity measures in some European countries begin to bite. These down to 4.8% yoy in 2H
will likely be compounded by policies tightening in some countries, particularly in
2010, from an estimate of
Asia and other emerging economies. Already, global manufacturing and services
+8.8% in the 1H
activities are showing signs of weakness in May and the country’s industrial production
and exports have begun to soften in April, after reaching a peak in March.
Domestically, the Government’s fiscal stimulus will be running out of steam in the 2H
of the year, and consumers and businesses will likely turn more cautious. As a
result, we expect real GDP to grow at a slower pace of 4.8% yoy in 2H 2010,
compared with an estimate of +8.8% in the 1H. For the full-year, real GDP is
envisaged to recover to +6.8% in 2010, from -1.7% in 2009.
Slower growth will likely continue into 2011, particularly in the 1H of the year. Slower growth will likely
However, we expect the Government expenditure in the 10th Malaysia Plan (10MP), continue into 1H 2011 but
which has just been launched on 10 June, to be front loaded and provide some the 10MP will likely
cushion. provide some cushion
Global Economic Recovery Softens, But Will Not Fall Off The Cliff
On the external front, global manufacturing activities moderated in May, the first Global manufacturing and
easing in three months (see Chart 1), suggesting that a rebound from the worst services activities
global recession since World War II is beginning to soften. Similarly, global services moderated in May,
activities slackened in May, the first moderation in four months. The weakness was suggesting that global
reflected in slower increases in services activities in Japan, China and India, while economic growth will likely
activities in the US remained stable during the month. In the same vein, the OECD
slow down in 2H 2010
composite leading indicator has been trending lower m-o-m for the last few
months before stabilising somewhat lately, indicating that OECD countries’ economies
are likely to expand at a slower pace in the months ahead. Indeed, the leading
indicator’s 12-month rate of change moderated to 9.7% in April (see Chart 2), the
first easing in eight months and from +10.2% in March and +10.1% in February.
Consequently, we believe global economic growth will likely slow down in 2H
2010, after picking up steadily in the 1H.
STRATEGY 3 PAPER
Chart 1 Chart 2
Global Manufacturing And Services OECD Composite Leading Indicator Points
Activities Showing Signs of Weakness To Slower Economic Activities Ahead
PMI % 12-mth annualised rate of change

Index
Services 30
65
25

60
20
55 15
10
50  5
45 0
PMI -5
40
Manufacturing -10
35 -15
-20 Total OECD Japan US Euro area China
30
05 06 07 08 09 10 00 01 02 03 04 05 06 07 08 09 10
Despite the weakness, we do not expect the global economy to fall into a We do not expect the
double dip even though there is a risk of a sharper-than-expected slowdown, global economy to fall
given that policy normalisation and tightening remain gradual. Also, the global into a double dip even
services sector has started to recruit workers for the first time in more than two though there is a risk of a
years in May, indicating that the sector will be resilient in weathering a slowdown in sharper-than-expected
the months ahead. In Europe, we expect the sovereign debt problems to be
slowdown
manageable despite the lingering concerns, following the announcement of an
emergency stabilisation loan of •750bn and the •110bn rescue package for Greece.
Meanwhile, a deepening in Europe’s sovereign debt crisis will likely affect Malaysia’s The country’s exports will
exports to some extent given that 10.7% of the country’s exports, which grew by likely slow down in 2H
28.9% yoy in January-April 2010, went straight to Europe. There would be indirect 2010, in tandem with a
impact as well since 13% of Malaysia’s exports go to China, (56.2% yoy growth in weaker global economic
January-April 2010), and Europe is China’s largest export market (accounting for growth
19.7% of its total exports). As a whole, in tandem with a more moderate growth in
the global economy, we expect the country’s real exports to slow down to 5.0%
yoy in 2H 2010, from an estimate of +18.9% in the 1H, bringing the full-year
growth to +11.5% compared with -10.4% in 2009.
Major Economies Showing Signs Of Softening
In the US, the economy moderated to an annualised rate of 2.7% in 1Q 2010, after The US economic recovery
a strong growth in the 4Q of last year. Despite a weaker growth, the economic is becoming more
recovery is becoming more sustainable, as its recovery which started from the sustainable but growth will
government stimulus and inventory rebuilding, has now spread to consumer spending. be at a more moderate
Nonetheless, consumers have turned cautious and are beginning to take a pause in pace in the 2H
view of rising economic uncertainties in Europe and the policies tightening in Asia.
Consequently, real personal consumption expenditure stagnated m-o-m in April, the
first in seven months. Furthermore, unemployment rate remains high and job
creation in the non-farm private sector slowed down in May, after four consecutive
months of picking up, implying that a recovery in consumer spending will likely be
gradual. Elsewhere, manufacturing activities slowed down in May, while services
activities held stable during the month. As a whole, the US economy is projected
to grow at a more moderate pace of 2.8% in 2H 2010, compared with +3.2%
in the first half, bringing the full-year growth to around +3.0%, a rebound from -
2.4% in 2009.
Similarly, the Euroland’s economy is expected to sustain its slow pace of recovery The Euroland’s economy is
in 2010, as the deepening sovereign debt problems of late would force some countries expected to sustain its
to cut government spending sharply. Already, manufacturing activities in the region slow pace of recovery,
showed a first sign of weakness in eight months and since it returned to positive while a slowdown in global
growth in October last year, while there were warning signs that services activities
exports will likely hurt the
may be peaking as well. Also, consumer confidence weakened to the lowest level
Japanese economy
in seven months in May, after a temporary improvement in April. In the same vein,
STRATEGY 4 PAPER
a slowdown in global export demand will likely contribute to a slower growth in the
Japanese economy in the 2H of the year. This will likely be compounded by political
uncertainties that could affect the country’s efforts to shake off deflationary pressure.
In China, the country’s economy is showing signs of weakness following the China’s economy is
introduction of measures to control the rapid credit expansion and upward property showing signs of
prices. As it stands, manufacturing activities slowed down to the slowest pace in weakness
three months in May, while fixed-asset investment in urban areas and loans slowed
down from growth of more than 30% to 25.9% and 23.2% respectively in May.
Similarly, retail sales were off the peak in February though exports remained resilient.
As a whole, the key economic indicators point to a slowdown in the country’s
economic growth in the 2H of the year, though growth will likely remain resilient,
after recording a stronger growth of +11.9% yoy in the 1Q.
Global Demand For Electronic Exports Will Likely Moderate
A sharp turnaround in demand for electrical & electronic (E&E) products, which Demand for E&E products
accounted for about 45% of Malaysia’s total exports in 2009, would boost the country’s will likely be softer in the
exports, particularly in 1H 2010. Demand, however, will likely be softer in the 2H 2H of the year
of the year, in line with a slowdown in global economic activities. As it stands,
worldwide semiconductor sales eased to 50.3% yoy in April, after reaching a high
of +58.3% in March, suggesting that sales are beginning to moderate after a spike
up in demand and inventory rebuilding.
Domestic Demand Will Likely Turn Softer
A softer export growth in the 2H of the year, which will translate into slower increases Domestic demand likely to
in jobs and production, will likely affect consumer spending and business investment grow at a slower pace in
as well. As a result, we expect domestic demand to grow at a slower pace 2H 2010
of 3.7% yoy in 2H 2010, compared with +6.2% estimated for the 1H, bringing the
full-year growth to 4.9% in 2010, a rebound from -0.5% in 2009 (see Table 1). This
will likely be reflected in slower increases in both private consumption and investment
during the period, as sentiment turns cautious amidst slowing economic activities. As
a result, we envisage consumer spending to grow at a slower pace of 4.6% yoy
in the 2H versus +5.4% in the 1H. Consumer spending, however, will remain A softer export growth will
resilient, on the back of high savings and rising consumerism. Furthermore, likely translate into slower
manufacturers are still recruiting workers and for the 11th consecutive month in April. increases in jobs and
For the full-year, consumer spending, however, will likely bounce back to +5.0% in consumer spending
2010, from +0.7% in 2009.
Table 1
GDP By Demand Aggregate (2000=100)
2007 2008 2009 2009 2010 2010(f) 2011(f)
1Q 2Q 3Q 4Q 1Q
% Growth in Real Terms
GDP 6.5 4.7 -1.7 -6.2 -3.9 -1.2 4.4 10.1 6.8 5.0
Consumption:
Private 10.5 8.5 0.7 -0.6 0.3 1.3 1.6 5.1 5.0 6.0
Pu b lic 6.6 10.7 3.1 1.6 1.5 9.4 0.7 6.3 -1.5 4.5
Total investment 9.4 0.7 -5.6 -11.2 -9.6 -7.9 8.2 5.4 9.0 8.6
Private 13.1 1.0 -17.2 n.a n.a n.a n.a n.a 6.9 12.7
Pu b lic 5.3 0.5 8.0 n.a n.a n.a n.a n.a 10.8 4.9
Goods & services:
Exports 4.1 1.6 -10.4 -15.5 -17.9 -12.9 6.0 19.3 11.5 7.8
Imports 5.9 2.2 -12.3 -23.0 -19.4 -13.2 7.0 27.5 18.0 10.5
Agg.domestic demand 9.6 6.8 -0.5 -3.1 -2.2 0.1 2.8 5.4 4.9 6.4
(f): RHBRI's forecasts
STRATEGY 5 PAPER
Similarly, private investment is projected to soften to 6.4% yoy in 2H 2010, from Private investment is
+7.3% in the 1H, as businesses turn cautious when excess production capacity builds projected to soften as
up on the back of a slowdown in export demand. As a result, we believe businesses well, as businesses turn
will not be in a hurry to invest and they are likely to delay their investment. As it cautious
stands, the imports of capital goods slowed down somewhat in the 1Q, while total
approved manufacturing investment fell during the quarter. In the same vein,
public investment is projected to expand at a slower pace of 10.2% yoy in the
2H of the year, compared with +11.5% in the 1H, as the government stimulus fizzles
out. Consequently, we expect fixed capital formation to ease to 8.4% yoy in 2H
2010, from +9.5% estimated for the 1H, bringing the full-year growth to 9.0% during
Public development
the year, compared with -5.6% in 2009. Public consumption, on the other hand, will
expenditure will not exert
likely contract by 5.4% yoy in the 2H of the year, compared with an estimate of
a contractionary impact
+4.0% in the 1H, on the back of a fiscal consolidation. As a whole, the public
on the economy as earlier
sector expenditure will not exert a contractionary impact on the economy
as earlier projected, as the Government will not cut back as steeply as projected projected
previously.
Fiscal Consolidation Would Be Less Severe Than Initially Thought
Although the Government scrapped its plan to restructure fuel subsidy in May, we The Government guided
believe it would still be able to reduce its budget deficit according to the plan. that its budget deficit will
Indeed, the Government guided that its budget deficit will likely narrow to likely narrow to 5.3% of
5.3% of GDP or RM40.3bn in 2010, slightly better than -5.6% of GDP or RM40.5bn GDP in 2010
projected previously. This is because the Government has changed the petroleum
income tax to a current year assessment system beginning 2010. The move, in our
view, would help to cushion a decline in petroleum income tax caused by a drop in
crude oil prices in 2009.
A smaller-than-expected drop in oil revenue could help the Government to reduce The Government opted to
its budget deficit more than the initial plan in 2010. However, the Government opted cut its operating and
to cut its operating and development expenditures by a smaller magnitude development expenditures
than originally planned to ensure that a rollback of its expenditure would not by a smaller magnitude
exert too much downward pressure on the economy given the risk of a sharper- than originally planned
than-expected slowdown in the global economy in the 2H of the year. Already, the
Government has proposed a supplementary budget totalling RM12bn for 2010 in late
April. A smaller-than-expected cutback in the Government’s expenditure suggests
that the fiscal consolidation will not exert a contractionary impact on the
economy as previously feared.
Manufacturing And Services Sectors Will Likely Moderate In The 2H
On the supply side, the manufacturing and services activities are likely to expand Growth of the
at a more moderate pace in the 2H of the year, in line with slower increases in trade manufacturing sector is
activities, business and consumer spending. Similarly, construction and agriculture projected to slow down by
sectors are envisaged to grow at a slower pace but mining output will pick up. Value more than half in the 2H
added in the manufacturing sector is projected to slow down sharply to of the year, as exports
6.9% yoy in the 2H of the year, from +14.9% estimated for the 1H, as exports slacken and private
slacken and private spending eases. Already, manufacturing activities in major spending eases
economies like China, US and Euroland have shown signs of weakness in May and
Malaysia will likely experience the same situation as well. Similarly, output of
domestic-oriented industries will likely expand at a slower pace in the 2H of the year,
as consumer spending and private investment moderate. For the full-year, the
manufacturing sector, however, will still chalk up a strong double-digit growth of
10.7% in 2010, after going through a contraction of 9.4% in 2009 (see Table 2).
The services sector is
In the same vein, the broad services sector is projected to grow at a slower projected to grow at a
pace of around 5.1% yoy in the 2H of the year, compared with +7.7% estimated slower pace in the 2H, in
for the 1H, in line with a slowdown in trade activities and private sector spending. line with a slowdown in
For the full-year, the services sector is projected to expand at a faster pace of 6.4% trade activities and
in 2010, compared with +2.6% in 2009. The slowdown in services activities in the private spending
STRATEGY 6 PAPER
Table 2
GDP By Industrial Origin At 2000 Prices
2007 2008 2009 2009 2010 2010(f) 2011(f)

1Q 2Q 3Q 4Q 1Q
% Growth in Real Terms
GDP 6.5 4.7 -1.7 -6.2 -3.9 -1.2 4.4 10.1 6.8 5.0
Agriculture 1.3 4.3 0.4 -4.4 0.4 -0.4 5.9 6.8 3.2 2.8
Mining 2.0 -2.4 -3.8 -5.2 -3.5 -3.6 -2.8 2.1 1.8 2.0
Manufacturing 2.8 1.3 -9.4 -17.9 -14.5 -8.6 5.0 16.9 10.7 8.0
Construction 7.3 4.2 5.8 1.2 4.5 7.9 9.3 8.7 4.8 2.8
Services 10.2 7.4 2.6 -0.2 1.7 3.4 5.2 8.5 6.4 4.6
(f) : RHBRI's forecasts
2H of the year will likely be broad-based. As a result, we expect activities in utilities,

transport & storage, communications, finance & insurance and real estate & business
sub-sectors to weaken in the 2H of the year, as business activities turn softer.
Similarly, a slowdown in consumer spending will likely contribute to slower increases
in activities in wholesale & retail trade and accommodation & restaurants sub-
sectors, while government services will likely slacken during the period.
The agriculture sector is also envisaged to expand at a more moderate Agriculture sector is
pace of 2.2% yoy in 2H 2010, compared with an estimate of +4.3% in the 1H, envisaged to expand at a
on account of slower growth in the production of rubber and saw logs. This will likely more moderate pace
be mitigated somewhat by an improvement in palm oil production during the period.
For the full-year, the sector will likely grow at a stronger pace of 3.2% in 2010, after
slowing down to +0.4% in 2009.
Construction activities are likely to weaken to 2.3% yoy in the 2H of the Construction activities are
year, from +7.7% estimated for the 1H, as the Government’s stimulus spending likely to weaken during
dissipates. This will likely translate into slower growth in civil engineering sub-sector. the period, as the
Construction activities in the residential property sub-sector will likely soften as well, Government’s stimulus
while construction activities in non-residential property sub-sector are still ongoing. spending dissipates
For the full-year, construction activities are projected to moderate to 4.8% in 2010,
from +5.8% in 2009.
Mining output, however, is envisaged to bounce back to +1.9% yoy in the Mining output, however, is
2H of the year, from +1.7% estimated for the 1H. This is mainly on account of envisaged to bounce back
a pick-up in the production of liquefied natural gas (LNG) due to higher demand. in the 2H of the year
For the full-year, mining output is projected to grow by 1.8% in 2010, after two
consecutive years of contraction and compared with -3.8% in 2009.
Money Supply And Loans To Continue Expanding In The 2H
The broader money supply, M3, eased to +8.1% yoy in April, from +8.7% in March We expect monetary
and compared with a peak of +10.0% in November last year. This was mainly on policy to remain
account of a slowdown in government operations, in tandem with a slower increase supportive of economic
in disbursement of government funds after picking up strongly in mid-2009. A growth and M3 growth will
decline in net external operations, on account of a devaluation loss as a result of likely pick up in 2010
the appreciation of the ringgit, worsened the situation. This was, however, mitigated
by a pick-up in demand for funds by the private sector, on account of a stronger loan
growth and a pick-up in the issuance of securities. 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. Similarly, we expect the banking system’s loans to expand
by 9.0% in 2010, faster than +7.8% in 2009, in tandem with the pick-up in the The NPL ratios are likely
economy. In terms of asset quality, the 3-month gross non-performing loan (NPL) to remain relatively stable
ratio of the banking system remained broadly stable at around 3.3-3.4% of total in 2010
STRATEGY 7 PAPER
loans in January-April and compared with 3.2% in December last year. Similarly, the
3-month net NPL ratio hovered at around 1.8-1.9% of total loans during the same
period and compared with 1.8% in December. Going forward, we expect the banking
system’s 3-month gross and net NPL ratios to remain relatively stable at
around 3.3% and 1.8%, respectively, by end-2010, compared with 3.2% and 1.8%,
respectively, at end-2009.
Smaller Current Account Surplus; Ringgit Will Remain Range-Bound
Imports are expected to rise faster than that of exports, as economic activities pick The current account
up and domestic demand improves. This will likely result in a smaller merchandise surplus of the balance of
trade surplus during the year. At the same time, we envisage the deficit in the payments is projected to
income account to widen during the year, as non-resident controlled companies shrink in 2010
repatriate higher dividend on the back of improving corporate earnings. Similarly,
the services account is projected to record a smaller surplus during the year due to
higher payment for transportation charges. These, however, will likely be mitigated
by a smaller deficit in the current transfer, as repatriations of salaries and wages by
foreign workers are likely to drop, in line with the Government’s policy of reducing
foreign workers in the country. As a result, we expect the current account of the
balance of payments to record a smaller surplus of around RM100.8bn or
13.5% of GNI in 2010, compared with a surplus of RM112.1bn or 16.9% of GNI
in 2009 (see Table 3). Whilst the current account surplus will likely narrow, it
remains large 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 2009 2010 2010(f) 2011(f)

1Q 2Q 3Q 4Q 1Q
(RMbn)
Current account 129.5 112.1 31.3 28.0 25.4 27.4 30.4 100.8 93.7
(% of GNI) (18.1) (16.9) n.a n.a n.a n.a n.a (13.5) (11.7)
Goods 170.6 141.8 37.2 33.2 33.4 37.9 45.0 136.9 130.1
Services 0.2 4.7 2.7 1.5 0.6 -0.1 -0.1 1.1 1.7
Income -23.7 -14.6 -4.5 -2.9 -1.7 -5.6 -8.9 -22.2 -23.1
Current transfers -17.5 -19.6 -4.2 -3.9 -6.8 -4.8 -5.6 -15.0 -15.0
Capital account 0.6 -0.2 -0.0 -0.0 -0.0 -0.0 -0.1 0.0 0.0
Financial account -118.5 -80.2 -31.0 -22.3 -9.4 -17.4 -19.5 -56.0 -45.5
Errors & omissions* -29.9 -17.9 1.7 -2.4 -2.7 -13.0 -30.5 -35.0 -25.0
Overall balance -18.3 13.8 3.3 2.1 11.5 -3.0 -19.6 9.8 23.1
Outstanding reserves^ 317.4 331.3 320.7 322.9 334.4 331.4 311.8 341.1 364.2
(US$)^ 91.5 96.7 87.8 91.5 96.0 96.7 95.3 99.7 106.9
(f) : RHBRI's forecast ^ : As at end-period

* : Reflect mainly revaluation gains/losses from Ringgit depreciation/appreciation and statistical discrepancies
Outflow of capital, on the other hand, is envisaged to narrow to around RM56bn Outflow of capital,
in 2010, after recording a smaller outflow of RM80.2bn in 2009. This is on account however, is envisaged to
of a pick-up in portfolio investment in 2010, after recording a smaller inflow in 2009, be smaller in 2010
in line with an improvement in the country’s economic prospects. Similarly, net
direct investment is projected to record a smaller net outflow in 2010 due to higher
foreign direct investment (FDI), as investors resume their investment, in tandem
with an improvement in global economic prospects. These, however, will likely be
offset partially by an increase in Malaysians’ other investments abroad as businesses
look for new investment opportunities overseas. As a whole and after taking into The overall balance of
account a larger deficit in errors & omissions, the overall balance of payments payments is projected to
is projected to record a smaller surplus of around RM9.8bn in 2010, compared with record a smaller surplus
a surplus of RM13.8bn in 2009. The larger deficit in errors & omissions reflects during the year
STRATEGY 8 PAPER
partly a revaluation loss due to a strengthening of the ringgit against other major
currencies. Consequently, the country’s foreign exchange reserves will likely increase
to US$99.7bn by end-2010, from US$96.7bn at end-2009.
The build-up in foreign exchange reserves will continue to provide an underlying The ringgit will likely
support to the ringgit. The movement of the ringgit, however, has been volatile in fluctuate at between
recent months, as investors adjusted to news on a deepening sovereign debt crisis RM3.20 and RM3.30/US$,
in Europe and China’s move to allow a more flexible currency. As a whole, we before settling at around
expect the ringgit to remain volatile and it will likely fluctuate at around RM3.20 by end-2011
RM3.20-3.30/US$ for the rest of 2010 before settling at RM3.20/US$ by end-
2011.
Price Pressure Building Up, But Likely To Be Manageable
The headline inflation rate accelerated to 1.6% yoy in May, from +1.5% in Inflation rate accelerated
April and after hovering at between +1.2 and +1.3% in the previous three months. in May, indicating that
This was the sixth consecutive month of increase and the fastest pace of increase price pressure is building
so far this year, indicating that price pressure is building up and as higher base effect
up
gradually wears off. The pick-up in inflation was on account of higher food & non-
alcohol beverage prices, while the core inflation rate remained relatively stable
during the period. Going forward, inflation will likely increase at a faster
pace and we expect it to trend up to 2.0% in 2010, from +0.6% in 2009, in
line with a pick-up in domestic demand. A rise in international crude oil and
commodity prices could also exert some pressure on domestic inflation. In addition,
Inflation will likely
the Government plans to gradually remove some of the subsidies in order to reduce
its financial burden. However, we believe the removal of subsidies will likely be increase at a faster pace
gradual and done separately in order to reduce the burden on the people. Meanwhile, to 2.0% in 2010, in line
given that output is recovering from low levels, the resultant pressure on inflation with a pick-up in domestic
from the narrowing output gap and a gradual removal of subsidy is expected to be demand
limited.
Policy Normalisation To Be At A Measured Pace
Although inflation is expected to rise, it will not pose a major threat to the economy Further rate hikes to be
at this stage, in our view. Furthermore, Malaysia is already ahead of the curve and data dependent and BNM
faster compared to regional economies in terms of normalising its monetary conditions, will likely take a pause in
we believe BNM will not be in a hurry to increase interest rates. We expect further July’s policy meeting
rate hikes to be data dependent and BNM will likely take a pause in the next before resuming its rate
policy meeting in July before resuming its rate hike in September and by 25 hike in September and by
basis points, bringing the OPR to 2.75%. Thereafter, the OPR will likely stay 25 basis points, bringing
at this level for the rest of this year. We expect the Central Bank to raise its key the OPR to 2.75%
policy rate again in the early part of 2011 and by a total of 50-75 basis points during
the year, pushing the OPR to a more normal level of 3.25-3.50% by end-2011.
STRATEGY 9 PAPER
Market Review
Downdraft Of Fear And Volatile Market Movements
Following a mild uptrend in the 1Q ( the FBM KLCI was up 3.8%) with higher volatility The local bourse was
and declining volumes due to external developments, the local bourse experienced caught in a downdraft of
another bout of volatility and ended relatively flat in the 2Q (0.4% as at 25 June). fear sparked off by
Despite the sharp double-digit 10.1% yoy surge in real GDP growth registered in the Europe’s sovereign debt
1Q, the market was caught in a downdraft of fear sparked off by Europe’s sovereign crisis and experienced
debt crisis and the ban on naked short-selling in Germany. In addition, credit
another bout of volatility
tightening measures implemented by China to cool down the surge in asset prices
and ended relatively flat
also created concerns on the sustainability of China’s economic expansion that
in the 2Q
threatens to undermine the global economic recovery. Nevertheless, the local bourse
was relatively resilient although it underperformed markets in Indonesia, Philippines,
South Korea and Vietnam during the 2Q.
The mild uptrend that started from 23 March, on account of Wall Street rallies, The market was in a mild
announcement of a joint bailout plan by the European Union (EU) and the International uptrend from 23 March to
Monetary Fund (IMF) for Greece and positive news flow domestically (in particular, 7 April on account of a
the release of a New Economic Model), was sustained up to 7 April. Investors were joint bailout plan for
relieved after the debt-laden Greece was able to raise funds from the capital market. Greece and positive news
Much of the improved sentiment was aided by gains in the Chinese stock markets flow domestically
and Wall street’s continued rally, as well as better-than-expected economic data,
especially from the manufacturing sector in the US and China. The FBM KLCI
benchmark reached a high of 1.345.09 on 7 April before a phase of mild correction
and consolidation set in that lasted until 3 May (see Chart 3).
During this consolidation period, global equities stayed on a relatively firm footing It moved into a
on account of a spate of mostly better-than-expected economic data. Many Asian consolidation phase from
countries reported a sharp rise in GDP in the 1Q and Singapore’s Monetary Authority 8 April to 3 May as positive
tightened its exchange rate policy in response to the country’s strong 1Q GDP global economic data were
numbers. These positive developments of a more sustainable US and Asian economies balanced by Europe’s debt
were, however, balanced out by Europe’s debt and contagion fears, Goldman Sachs’ problems and concerns on
lawsuit and concerns of further credit tightening measures in China. further credit tightening in
China
Chart 3
FBM KLCI Movements In 1H2010
PM launched Greece won S’pore revalued its BNM released 1Q Moody’s

Index
US President’s New Economic • 45bn aid currency as growth GDP and raised cut Greece
1,360 proposal to set Model (NEM) pledge from strengthened in the OPR to 2.5%. credit
1.FOMC & BNM
limit on risk- to chart the EU and IMF. 1Q. 15 Apr 13 Maay rating to
maintained

taking activities country’s 12 Apr junk

interest rates at EU unveiled
of the big banks. development status.

1,340 0.25% & 2.0%  a • 750bn

22 Jan ahead. 14 Jun
respectively.

plan to

30 Mar
26/27 Jan

contain the
2.Chinese banks  spread of

1,320 tightened new credit. 1.China 1.DJIA debt crisis


27 Jan Goldman tightened plunged by 11 May

3. PM unveiled Sach property 348 pts.

finance.

Government 5 May

lawsuit
26 Apr

1,300 Transformation 16 Apr 2. Sime

Programme (GTP) 2.Greece, Darby China’s
28 Jan Portugal & announced move to

Moody’s Investor
Spain credit

nearly abandon
Services warned

1,280 ratings RM1bn cost the peg.


about the
downgraded overruns. 20 Jun
potential risk of
by S&P. 6 May
BNM UK losing its top
Haiti 27/28 Apr

1,260 raised credit rating.

quake
14 Jan OPR by 15 Mar

1. Release of BNM PM unveiled

25 bps. the 10th M’sia
Annual Report. 1.Germany unexpectedly
4 Mar Plan. 10 Jun
1,240 24 Mar banned naked short-
Greece’s proposal of an US Fed Reserve 2. Fitch cut Portugal’s selling. 19 May
austerity programme to hiked discount credit rating as debt 2. War tension between Fitch cut Spain’s
cut its large fiscal deficit.  rate by 25bps. crisis heightened. North Korea and South credit rating.
1,220 9 Feb 19 Feb 25 Mar Korea. 25 May 28 May
04/01/10
11/01/10
18/01/10
25/01/10
01/02/10
08/02/10
15/02/10
22/02/10
01/03/10
08/03/10
15/03/10
22/03/10
29/03/10
05/04/10
12/04/10
19/04/10
26/04/10
03/05/10
10/05/10
17/05/10
24/05/10
31/05/10
07/06/10
14/06/10
21/06/10
STRATEGY 10 PAPER
However, more aggressive profit-taking activities set in after that and the FBM KLCI Subsequently, the market
benchmark was on a downtrend until 26 May. This was largely due to growing fear suffered from more
among investors that Greece’s debt crisis could create a contagion effect, and affect aggressive profit-taking
the weaker European countries like Portugal and Spain. Despite an expanded aid activities as Europe’s debt
package from the EU and the IMF, investors were uncertain if Greece can sustain the crisis worsened and the
painful austerity conditions attached to the bailout and if it can successfully pare market downtrend lasted
borrowings under a negative GDP growth outlook, as evidenced by the violent street
until 26 May
protests in Athens. The Greece fears caused Wall Street to become increasingly
nervous, culminating in panic selling where the Dow Jones plunged some 1,000
points in intraday trading on 6 May, the largest drop on record. The Dow Jones,
however, narrowed its losses and ended down 348 points on that day. At the same
time, the Chinese markets also plunged amid fears of further credit tightening
measures. The market, however, recovered slightly following the announcement of
a massive • 750bn emergency stabilisation loan package from the EU and the IMF to
fund European countries that could come under speculative attacks. In addition, the
European Central Bank (ECB) also made the unprecedented move to purchase
bonds issued by governments within the Eurozone directly from the market. The
market, nevertheless, fizzled out quickly as relief gave way to the growing concerns
that steep spending cuts and higher taxes will weigh on overall demand growth and
could, in the worst-case scenario, derail the global economic recovery.
Meanwhile, there were rising fears that credit tightening measures in China could There were rising fears
dampen its growth and impact the rest of Asia. On the local front, Bank Negara also that credit tightening in
raised its overnight interest rate for the second time this year and by 25 basis points China could dampen its
to 2.50% on 13 May. At the same time, the local market sentiment was also weighed growth and impact the rest
down by the selling in Sime Darby’s shares, after the company unveiled nearly of Asia
RM1bn in cost overruns related to its energy and utilities unit. Subsequently, the
market was hit again when global equities came under further selling pressures on
account of the unexpected move by Germany to ban naked short selling of shares
and the escalating political and military tension between North and South Korea,
triggered by the sinking of the latter’s warship in March.
The FBM KLCI benchmark traded to as low as 1,248.94 on 26 May before the market The FBM KLCI benchmark
regained its upward trajectory. The trading volume, however, was relatively thin on traded to a low of
most trading days. As signs of the European sovereign debt crisis eased, investor 1,248.94 on 26 May before
sentiment started to improve although Wall Street’s performance remained volatile. regaining its upward
Apart from the technical rebound, global equities were bolstered by the release of
trajectory as signs of the
positive economic data in the major world economies. Investor sentiment rose
Europe’s debt crisis eased
further following China’s move to abandon the RMB6.83 peg to the dollar, opening
the way for a gradual appreciation of its currency. This lowers the risk of a
damaging trade conflict that could hamper the global economic recovery. At the
same time, it has spurred demand for Asian currencies seen as proxies to China’s
growth and boosted market sentiment further. Overall, the FBM KLCI benchmark has
recovered by almost 7% from 27 May to close at 1,335.29 on 21 June. The euphoria
over the willingness of China to allow yuan to trade more flexibly, however, died
down fairly quickly and questions about the financial health of some European banks,
as well as the pace of global economic recovery returned to haunt investors. The
FBM KLCI benchmark has since been trading in a range-bound pattern and closed
slightly lower at 1,326.45 on 25 June.
For the second quarter as a whole, the FBM KLCI benchmark was up marginally by Year-to-date, the
0.4%, outperforming the markets in China, Taiwan, Hong Kong and Singapore. It Malaysian market was up
has, however, underperformed Indonesia, Philippines, South Korea and Vietnam by 4.2% with the
markets during the quarter. Year-to-date, the FBM KLCI benchmark was up by 4.2%, telecommunications &
underperforming markets in Indonesia (+16.3%), Philippines (+9.8%) and Thailand technology sector
(+8.0%). It has, however, outperformed markets in China (-14.4% to -22.1%), outperforming the FBM
Taiwan (-8.7%), Hong Kong (-5.4%), Singapore (-1.6%), India (+0.6%), Vietnam
KLCI benchmark
(+2.1%) and South Korea (+2.8%) (see Table 4). The telecommunications &
significantly
technology sector turned up to be the best performing sector (+23.3%), outperforming
the market by a significant margin (see Table 5). This was mainly on account of
STRATEGY 11 PAPER
the surge in share prices of Axiata and semiconductor stocks (on the back of a
recovery in demand for their products, translating to sharp rise in earnings). In
contrast, the plantation (-1.0%) and property (+2.2%) sectors were the two key
underperforming sectors. A list of top performers and underperformers under our
coverage is included in Table 6.
Table 4
FBM KLCI Performance Versus Other Regional Markets
Index 2009 2010 2009 2010

Country Indices 25 Jun 10 3Q 4Q 1Q 2Q* YTD
% Change
Malaysia FBM KLCI 1,326.5 11.8 5.9 3.8 0.4 +45.2 +4.2
Singapore Straits Times 2,851.6 14.5 8.4 -0.4 -1.2 +64.5 -1.6
Thailand Bangkok SET 793.7 20.0 2.4 7.3 0.7 +63.2 +8.0
Philippines PSE Composite 3,352.5 14.9 9.0 3.6 6.0 +63.0 +9.8
Indonesia Jakarta Composite 2,947.0 21.7 2.7 9.6 6.1 +87.0 +16.3
Hong Kong Hang Seng 20,690.8 14.0 4.4 -2.9 -2.6 +52.0 -5.4
Taiwan Taiwan Weighted 7,474.7 16.7 9.0 -3.3 -5.6 +78.3 -8.7
Korea Korea Composite 1,729.8 20.4 0.6 0.6 2.2 +49.7 +2.8
China Shanghai Composite 2,552.8 -6.1 17.9 -5.1 -17.9 +80.0 -22.1
China Shenzhen Composite 1,028.6 -1.4 26.6 0.8 -15.1 +117.1 -14.4
India Mumbai Sensex 30 17,574.5 18.2 2.0 0.4 0.3 +81.0 +0.6
Vietnam Vietnam SE 505.1 29.6 -14.8 0.9 1.2 +56.8 +2.1
US Dow Jones 10,143.8 15.0 7.4 4.1 -6.6 +18.8 -2.7

US S&P 500 1,076.8 15.0 5.5 4.9 -7.9 +23.5 -3.4
US Nasdaq 2,223.5 15.7 6.9 5.7 -7.3 +43.9 -2.0
* As at 25 Jun 2010
Table 5
Bursa Malaysia Performance By Sector
Index 2009 2010 2009 2010

Bursa M’sia by sector^ 25 Jun 10 3Q 4Q 1Q 2Q* YTD
% Change
FBM KLCI 1,326.5 11.8 5.9 3.8 0.4 +45.2 +4.2

FBM Emas 8,956.1 12.4 5.1 5.3 0.0 +48.6 +5.3
FBM 70 8,955.7 10.7 3.0 8.4 -0.1 +52.0 +8.3
FBM 100 8,727.8 12.8 5.3 4.7 0.3 +48.0 +5.0
FBM Small Cap 10,945.3 8.6 3.1 11.3 -3.3 +55.1 +7.7
FBM Fledgling 7,824.5 8.4 5.8 8.6 -2.9 +36.9 +5.4
FBM Emas Syariah 8,850.3 11.1 2.9 4.9 -0.8 +43.0 +4.0
FBM ACE 3,866.9 -0.7 5.7 -2.1 -8.1 +29.0 -10.1
FBM Hijrah Syariah 9,348.3 10.5 3.6 1.6 -1.2 +40.2 +0.4
Industrial 2,656.8 11.7 1.0 1.4 -1.3 +28.6 +0.1
Telecom & Technology 22.4 13.4 11.7 30.2 -5.3 +32.5 +23.3
Construction 244.9 11.0 -2.8 7.3 1.8 +36.6 +9.2
Consumer 400.9 12.7 2.5 7.5 0.1 +32.0 +7.6
Finance 11,946.4 16.2 11.1 6.8 1.2 +62.7 +8.1
Industrial Products 99.8 5.9 5.3 9.8 -4.0 +41.6 +5.4
Plantation 6,296.7 9.3 8.0 1.3 -2.3 +53.6 -1.0
Property 799.0 8.8 0.2 4.3 -2.0 +51.6 +2.2
Services & Trading 167.5 10.5 2.1 3.3 0.8 +36.5 +4.1
Mining 332.3 15.1 -10.0 11.8 1.9 +26.3 +13.9
^ According to Bursa Malaysia’s classifications.

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

(RM/share) (RM/share) (RM/share) (RM/share)
Unisem 2.98 1.64 +81.7 KNM Group 0.53 0.77 -31.2

Faber Group 2.80 1.61 +73.9 Sino Hua-An 0.35 0.50 -30.3
Media Chinese 0.86 0.54 +59.8 Kurnia Asia 0.50 0.70 -28.8
CSC Steel 1.86 1.30 +43.1 Hiap Teck 1.24 1.43 -13.3
Kossan 7.59 5.43 +39.8 MNRB Hldgs. 2.68 3.09 -13.3
Tan Chong Motor 4.31 3.12 +38.1 Ann Joo 2.44 2.80 -12.9
Hock Seng Lee 1.45 1.06 +36.8 KLCC Property 3.07 3.44 -10.8
KFC 10.06 7.40 +35.9 Sime Darby 8.10 8.97 -9.7
Top Glove 13.38 10.06 +33.0 SapuraCrest 2.25 2.48 -9.3
KPJ Healthcare 3.38 2.60 +30.0 Puncak Niaga 2.75 3.03 -9.2
Axiata 3.94 3.05 +29.2 Petra Perdana 1.32 1.45 -9.0
Hartalega 7.93 6.22 +27.5 Glomac 1.24 1.35 -8.1
Gamuda 3.24 2.57 +26.3 AirAsia 1.27 1.38 -8.0
M’sia Airports 5.00 3.97 +25.9 CBIP. 2.69 2.92 -7.9
MRCB 1.59 1.27 +25.7 Kinsteel 0.84 0.91 -7.7
Jaya Tiasa 3.28 2.61 +25.7 Fajarbaru Builder 0.97 1.04 -7.2
QL Resources 4.01 3.23 +24.2 IJM Land 2.19 2.35 -6.8
Eastern Pacific 1.82 1.48 +23.0 Sunrise 1.92 2.06 -6.8
Media Prima 2.05 1.67 +22.8 YTL Cement 3.99 4.28 -6.8
Affin 3.04 2.52 +20.6 IOI Corp 5.11 5.47 -6.6
Market Outlook
Uncertainty Persists In The Global Economy
Whilst markets have rebounded, after having been shattered by mounting debt and Widespread fiscal
the possibility of a default in some European countries, investors are still nervous tightening in Europe
about the speed at which countries in Europe withdraw fiscal support for before durable recovery
their economies. To prevent the risk of contagion from Greece’s debt problems, emerges a key risk to
and a downgrade of sovereign credit ratings by international rating agencies, many
sustainable global
countries in Europe took drastic steps to reduce expenditure and raise taxes to cut
economic recovery
fiscal deficit (see Table 7). Indeed, past experience suggests that premature fiscal
tightening is as big a danger as delayed tightening. This dilemma is reflected in the
divergence of policy stance of Europe versus the US -- austerity on public spending
and tax hikes to achieve market credibility vis-a-vis patience and continued policy
support as a way of sustaining economic growth. Although emergency loan packages
have been put in place to help refinance debt and prevent contagion, imposing fiscal
Table 7
Fiscal Austerity In Europe
Country 2009 2010 2014
Budget Deficit (% of GDP)
Greece 13.6 8.7 <3.0

Portugal 9.4 7.3 4.6 1
Italy 5.3 n.a 2.7 2
Spain 11.5 7.3 3.0
Ireland 14.3 n.a 2.9
Germany 3.3 n.a 3.0
UK 11.5 12.6 4.7
1
For year 2011
2
For year 2012
STRATEGY 13 PAPER
discipline on countries that needed aids at a time of insufficient demand and a weak
banking system, could set in motion a downward spiral for the affected nations. In
other words, the individual country’s debt-cutting measures could result in its economy
falling back into contraction or the recovery being stalled. This could undermine the
region’s growth and threaten to send the rest of the world into another economic
downturn.
The new focus on fiscal austerity, particularly in Europe, has also revived worries Rising risk of deflation in
about consumer price deflation. Apart from Japan which has been battling with major developed countries
falling consumer prices for more than a decade, other developed countries are also could also stall the
beginning to face with rising risk of deflation of late (see Chart 4). Spain and recovery in these
Ireland, for instance, are experiencing falling consumer prices, while the core inflation economies
rate in the US has eased significantly to 0.9% yoy in April -- the lowest in four
decades. The risk of deflation is rising as money supply and credit growth in these
countries are either stagnating or shrinking. With a combination of spending cuts
and tax increases and as credit becomes less freely available, demand will likely
weaken further leading to a downward spiral of falling prices. Consequently, deflation
becomes a key risk to the economic recovery in these countries as consumers delay
purchases of goods and services on expectations that prices will fall further. This
could drive the economy into a vicious cycle of weak spending and continuous fall
in prices, sending it deeper into prolonged doldrums.
Chart 4
Rising Risk Of Deflation In Certain Developed Countries
% yoy
Spain (core CPI) US
6 (core CPI)
4

2

-2
Japan
-4 
Ireland
-6
-8
05 06 07 08 09 10
In contrast, with ample liquidity and interest rates remaining low, many developing Credit tightening in China
countries are finding themselves grappling with unwelcome capital inflows, causing and fear of unsustainable
volatility to currencies and surging asset prices (see Charts 5a &b). In addition, asset bubble also add to
some emerging economies are also faced with rising inflation (see Chart 6) and have investors’ concerns
started to normalise/tighten monetary policy. China, for instance, has implemented
credit tightening measures to cool down the surge in asset prices. This,
however, has created concerns on the sustainability of China’s economic
expansion that threatens to undermine the global economic recovery. In particular,
investors are concerned whether China’s property prices are moving up too fast and
whether the bubble will burst relatively quickly given the credit tightening measures
implemented by the authorities. On the average, property prices have risen by
12.4% yoy across 70 cities in May, after having surged by 12.8% in April that was
the most since the data series began in 2005. This suggests that measures ranging
from a ban on loans for third-home purchases to higher mortgage rates and down
payment requirement have yet to cool down the overall property market. The China
Banking Regulatory Commission warned of growing credit risks in the nation’s real
estate industry and increasing pressures of non-performing loans. It warned that the
risks associated with home mortgages are growing and a “chain effect” may reappear
in real estate development loans.
STRATEGY 14 PAPER
Chart 5(a) Chart 5(b)
Surging Asset Prices In Some Countries Led Surging Asset Prices In Some Countries Led
To Fears Of Asset Bubbles To Fears Of Asset Bubbles
% yoy (Property prices) % yoy (Property prices)

Hong
40 Kong 40 Australia
30 30

20
20
10

10

0
0
-10
-10 -20 
China
Singapore
-20 -30
06 07 08 09 10 03 04 05 06 07 08 09 10
Chart 6
Some Emerging Economies Also Face Rising Inflation
% yoy (CPI/WPI)
30
25
20 India
Vietnam
15


10
5 
0
-5 China
06 07 08 09 10
In fact, housing prices to disposable income in capital cities such as Beijing and Whilst the asset bubble
Shanghai are now 13-14 times higher. This, however, may not necessarily lead to may not be as bad as
the building up of a significant asset bubble as measures have already been feared, cautiousness will
implemented by the Chinese authorities to cool down asset prices. Whilst a portion likely prevail until a clearer
of the property market, such as high-end apartments, appears to be overheating, picture emerges from the
demand for homes in the major cities will likely remain robust as rural Chinese Chinese economy
migrate to bigger cities (between 15-20 million population migrate to Beijing and
Shanghai as well as second-tier and third-tier cities in the Mainland each year since
2000). This suggests residential houses are supported by fundamental strong demand
and the property boom is not really a “bubble” that will burst anytime soon.
Nevertheless, uncertainty will likely persist until a clearer picture emerges on the
Chinese economy.
Risk Is A Sharper-than-expected Slowdown In 2H, Not A “Double-

dip”
Whilst Europe’s sovereign debt problems and China’s credit tightening plans have Nevertheless, we believe
dampened optimism about the health of the world economy, we believe the risk the risk to the global
of a “double-dip” is manageable. This is mainly on account of : (i) Emergency economy is a sharper-
stabilisation packages have already been put in place in Europe to prevent contagion
than-expected slowdown
and confidence from spiralling downward. Consequently, the European debt problems
in the 2H and not a
will unlikely snowball into a much bigger issue that will jeopardise the global economic
“double-dip”
recovery; (ii) Many of the eastern and central European countries have already
suffered double-digit economic contraction last year and are undergoing restructuring;
(iii) With US and Asia ex-Japan economies firmly on recovery path, Germany, being
financially stable and the largest economy in Europe, can export and provide the
cushion to stabilise the European region; (iv) More sustainable US economic recovery
where consumer spending is picking up and labour market conditions are improving
STRATEGY 15 PAPER
(see Chart 7); and (v) Economic recovery in Asia ex-Japan is building momentum
relatively well and appears sustainable in the absence of a major exogenous shock
given the relatively healthy balance sheets of the private and public sectors in this
region.
Chart 7 Chart 8
US Labour Conditions Improving China’s Economic Growth Has Peaked, On
Moderating Trend
(‘000) % PMI
% yoy Index
600 12 (RHS)
40 70
400
10 35 60

200
50
8 30
0
40

-200 6 25
30
-400 Fixed-asset

4 20
investment 20
-600 (LHS)
2 15 Loan
Employment in temporary help services (LHS) 10
-800 growth
Non-farm payrolls (LHS)
(LHS)
Unemployment rate (RHS) 10 0
-1000 0
00 01 02 03 04 05 06 07 08 09 10 06 07 08 09 10
Nevertheless, the austerity measures undertaken by each of the major economies

in Europe, such as Greece, Spain, Portugal, Italy and UK, to reduce the fiscal deficit
and restructure the debt suggest that the economic recovery could stall and fall back
in these countries. This would imply weaker external demand for export-dependent
economies and hence, a significant risk of a sharper-than-expected slowdown
in the global economy in the 2H of 2010 that could persist into the 1H of
2011, in our view.
Slowing Economic Growth As Export Recovery Normalised; Speed

Bumps From Europe And China
Malaysia would not be spared as Europe accounts for about 10.7% of its total exports Speed bumps from Europe
directly, which have been growing robustly by 28.9% yoy in the first four months of and China suggest weaker
this year. There would be indirect impact as well since 13% of Malaysia’s exports external demand for
go to China (+56.2% yoy growth in January-April 2010) and Europe is China’s Malaysia’s exports
largest export market (accounting for 19.7% of its total exports). As it stands, the
Chinese economy is already showing signs of moderation (see Chart 8) after its
government implemented credit tightening measures to cool down the surge in asset
prices.
Chart 9 Chart 10
Export And Industrial Production In M’sia Corporate Earnings Growth Might Have
Showing Early Signs Of Easing Peaked
% yoy %
Exports
50 60
40 +39.1
40 +31.3

30 +11.7
20
IPI +7.1
20 +4.0
0
10 +4.2
0 -20

-10 -40
qoq yoy
-20
-60
1QCY06
2QCY06
3QCY06
4QCY06
1QCY07
2QCY07
3QCY07
4QCY07
1QCY08
2QCY08
3QCY08
4QCY08
1QCY09
2QCY09
3QCY09
4QCY09
1QCY10
-30
-40
06 07 08 09 10 Note: Normalised EPS for RHBRI covered stocks in FBM KLCI.
STRATEGY 16 PAPER
Even before taking into account these potential developments, one would expect the “V-shape” export
sharp “V-shape” export recovery to normalise as the low base effect fizzles out. In recovery also set to
effect, this has begun to be reflected in the latest sets of export and industrial normalise as low base
production numbers (see Chart 9). Consequently, the country’s economic growth is effect fizzles out
likely to have peaked in the 1Q and we expect real GDP growth to slow down to
4.8% yoy in 2H 2010, from an estimate of +8.8% in the 1H. Overall growth will,
however, not fall off the cliff as domestic demand is building momentum and exports,
though slowing, will unlikely crash down given expectations of a sustained global
economic recovery.
Earnings Growth Likely To Have Peaked
In tandem with developments in the economy, corporate earnings growth is likely to Earnings growth might
have peaked in the 1Q (see Chart 10), as reflected in the earnings trend in the last have peaked, although the
results reporting season. The bulk of the corporate results that we covered were recovery momentum is
within expectations and unlike the previous three consecutive quarters, corporate sustained
earnings ceased to surprise on the upside. Nevertheless, the outlook for corporate
earnings recovery remains generally intact. We project net EPS for the FBM KLCI
stocks under our coverage to recover from -15.0% in 2009 to +18.3% in 2010
and sustain at +14.4% in 2011 (see Table 8). The recovery in earnings, though
from a sharp contraction last year, was relatively broad base, with sharp rebounds
in earnings across key industries.
Table 8
Earnings Outlook And Valuations
FBM KLCI RHBRI’s Basket
COMPOSITE INDEX @1,326.45 2008a 2009a 2010f 2011f 2008a 2009a 2010f 2011f
25/6/2010
EBITDA Growth (%) 2.2 -6.6 21.8 11.7 4.9 -2.8 20.3 11.8
Pre-Tax Earnings Growth (%) -9.1 -10.0 29.3 20.0 -5.8 -2.8 24.1 19.2
Normalised Earnings Growth (%) 0.4 -10.2 22.7 14.4 -0.8 -6.0 23.4 14.9
Normalised EPS Growth (%) -0.8 -15.0 18.3 14.4 -4.4 -9.5 18.4 14.9
Prospective PER (x) 16.3 18.5 15.7 13.7 16.8 17.5 14.9 13.0
Price/EBITDA (x) 8.7 9.6 7.9 7.1 8.8 8.6 7.5 6.7
Price/Bk (x) 2.4 2.3 2.1 2.0 2.4 2.0 2.0 1.8
Price/NTA (x) 2.8 3.0 2.6 2.4 2.7 2.3 2.2 1.2
Net Interest Cover (x) 6.5 5.9 6.0 8.0 6.2 7.0 7.2 7.9
Net Gearing (%) 71.3 61.3 52.6 49.2 63.8 52.0 48.3 46.3
EV/EBITDA (x) 6.9 7.7 6.5 5.8 7.2 7.7 6.6 5.8
ROE (%) 15.2 12.4 14.1 14.9 13.6 11.7 13.4 14.0
Market Valuations, Though Not Cheap, Remain At Reasonable Levels
Based on our current earnings projection, the FBM KLCI is trading at 15.7x 2010 Valuations are not cheap
earnings and 2.1x price/book, which are reasonable but not cheap. However, looking vis-a-vis its regional
forward into 2011, PER valuation improves to 13.7x (2.0x price/book), which peers, although it is a very
is close to one standard deviation (SD) below the average one-year forward PER for under-owned market by
the FBM KLCI stocks since 2000 (estimated to be around 15x). Using the latest foreign investors
FactSet Asian and IBES consensus numbers, the local market is trading at comparable
valuations vis-a-vis the Singapore and Indonesian markets (see Table 9). While it
continues to trade at a premium vis-a-vis other regional peers, this, in our view, is
a reflection of high domestic liquidity and strong participation by the Government-
linked funds, and will unlikely change in the foreseeable future. The market also did
not suffer from significant foreign selling given low foreign participation in the market.
The non-strategic foreign equity ownership of the Malaysian market is estimated at
below 21% currently (20.5% at end-March 2010), a sharp drop from a recent high
of 27.5% at end-April 2007.
STRATEGY 17 PAPER
Table 9
Regional Comparisons
Malaysia Singapore Thailand Philippines Indonesia Hong Kong Taiwan Korea
FactSet Asian Consensus Trends report dated 28 May 2010

EPS growth(%)
2009a 5.5 -1.5 33.1 32.6 42.1 8.8 43.1 42.1
2010f 23.2 12.0 15.5 11.3 26.3 23.4 72.5 67.2
2011f 12.8 10.0 15.6 5.1 20.9 16.8 12.4 6.8
PER (x)
2009a 18.2 16.3 11.8 13.0 16.0 16.1 22.5 14.2
2010f 13.9 13.6 10.8 11.9 14.0 12.8 12.3 8.5
20011f 12.4 12.3 9.3 11.3 11.6 10.9 10.9 7.9
IBES Consensus dated 17 June 2010

EPS growth(%)
2009a -20.9 -10.0 34.6 18.9 19.8 16.7 78.2 -13.3
2010f 34.2 19.5 17.7 24.3 17.0 19.8 96.1 57.2
2011f 15.3 12.5 17.2 9.4 19.8 12.8 13.9 9.0
PER (x)
2009a 19.3 16.6 12.9 15.6 16.6 16.0 26.0 25.0
2010f 13.9 13.5 11.4 12.3 14.4 13.2 13.2 9.5
2011f 12.1 12.0 9.8 11.2 12.0 11.7 11.6 8.6
Performance (%)
2009(yoy) +45.2 +64.5 +63.2 +63.0 +87.0 +52.0 +78.3 +49.7
2010 (ytd)* +4.2 -1.6 +8.0 +9.8 +16.3 -5.4 -8.7 +2.8
* as at 25 Jun 2010 closing
Just Been Listed As China’s QDII Destination
The foreign participation in the local market, however, may pick up gradually over Foreign participation could
time given that country has just been approved as an investment destination increase gradually over
under China’s Qualified Domestic Institutional Investor (QDII) scheme. time given that it has just
Malaysia is the first emerging market and the 11th member of a small group of QDII
been approved as an
approved investment destinations which comprise Australia, Canada, Hong Kong,
investment destination
Germany, Japan, Luxembourg, Singapore, South Korea, UK and US. In China,
under China’s QDII
domestic funds are not allowed to invest outside the country and only those approved
scheme
under the QDII scheme can do portfolio investments overseas, which is governed
by a quota system. Currently, some 41.8% (US$20bn) of the quota (US$47.8bn)
remains to be invested.
In addition, foreign interest in the local market is also likely to be supported by Prospects of a relatively
prospects of a relatively firm to appreciating ringgit vis-a-vis the US dollar. With firm to appreciating ringgit
China’s move to shift back and manage the yuan based on a basket of currencies will also induce greater
of its trading partners, as was initially done in July 2005, expectations are for the foreign particiaption
yuan to appreciate gradually by 3-5% against the US dollar over the next six to 12
months. Ceteris paribus, proxy currencies, such as the Korean won and the Malaysian
ringgit, are also expected to appreciate in tandem. And with the ringgit’s fundamentals
underpinned by sustained current account surplus in the balance of payments and
rising foreign exchange reserves, expectations of a strong local currency will likely
induce some foreign interest into the local equity market as well.
Greater Volatility But Longer-term Outlook Remains Positive
On balance, more negative than positive news flow ahead suggests that global We expect the market to
equities may move into a phase of greater volatilities, which in our view, move into a phase of
could persist for the next two to three months until a clearer picture emerges on the greater volatility over the
strength of the global economic recovery. Whilst the market has bounced back by next two to three months
about 6.2% from a low of 1,248.94 on 26 May to 1,326.45 as of 25 June, we expect with some downside risk
the market to remain volatile. The downside, as highlighted by RHBRI’s technical
research, is towards the technical support of 1,250 and the psychological level at
1,200. In a relatively quiet environment during the World Cup season and the
summer holiday months for global asset managers, any further negative developments
in the global arena would suggest more downside risk to the market in the near
term.
STRATEGY 18 PAPER
Domestically, there is also a general lack of positive leads to drive the market in the The lack of domestic leads
immediate term. As the economic growth has peaked and will likely moderate in sugggests that external
the 2H, and in the absence of major positive corporate earnings surprises, the factors will likely dominate
market may continue to be volatile over the next two to three months, in our view. market movements in the
Any move by the Government to reduce/restructure subsidies, though positive in immediate term
increasing efficiency in the allocation and utilisation of the country’s resources over
the longer term, will raise the cost of doing business and impact consumer sentiment
and dampen market performance as well.
However, we believe the longer-term outlook for the market is still positive Longer-term outlook of
given our expectation of sustained economic and corporate earnings growth. We the market, however,
believe the global economic recovery is more sustainable than feared, although remains intact
there is a risk of a sharper-than-expected slowdown in the 2H. Domestically, the
Government’s push for reduction/restructuring of subsidies, liberalisation and the
implementation of a new economic model should bode well for a more market-
oriented economic structure that could gradually induce greater foreign participation
in the local market. Further out, we also expect more corporate restructuring, and
merger and acquisition (M&A) activities that could unlock shareholder values for
investors, although it is generally difficult to identify them until closer to the event
date.
On balance, while we envisage greater volatility in the market over the next two to Our year-end FBM KLCI
three months, we believe the market will likely come back towards the 4Q when target remains unchanged
there is more certainty on the strength of the global economic recovery. Consequently, at 1,400
our year-end FBM KLCI target remains unchanged at 1,400 or 14.5x 2011
earnings. This suggests that the market would still likely end at a higher level this
year compared with the end of last year’s level of 1,272.80, and a potential upside
of about 5-6% from the level as of 25 June.
Apart from a clearer picture emanating from the global economic recovery, we see One potential domestic
two potential domestic catalysts that could take the market to a higher level. catalyst that could take
These include the awards of major infrastructure projects/privatisation of the market to a higher
government land for redevelopment as well as the Sarawak state elections.
level is the awards of
Already, market expectations are gradually building up for the implementation of the
major infrastructure
Tenth Malaysia Plan (10MP), 2011-15 with the mammoth RM36bn KL mass rapid
projects/privatisation of
transit (MRT) project catching the limelight in the local media. In addition, the much
government land for
delayed Ampang and Kelana Jaya LRT line extension project appears to be finally
redevelopment
getting off the ground. These news flow could be reinforced by awards of the
privatisation of government land for redevelopment. The various sizeable plots of
government land for redevelopment that could spur greater interest on the construction
and property sectors include : (i) Naza TTDI’s 62.5 acres of commercial land in Jalan
Duta for redevelopment; (ii) The development of the 3,000-acre land in Sungai Buloh
into a residential and commercial hub; (iii) The development of 400 acres land in
Sungai Besi, currently used as the base for the Royal Malaysian Airforce (ownership
to be transferred to 1 Malaysia Development Berhad (IMDB)), into a multi-billion
ringgit commercial project; (iv) The Development of the Kuala Lumpur International
Financial District on 85 acres of land popularly known as Dataran Perdana in Kuala
Lumpur; and (v) The redevelopment of the 245-acre Batu Cantonment army base
in Jalan Ipoh, Kuala Lumpur. Once more and more of these projects are awarded
to the construction companies and/or property developers, news flow and earnings
prospects for these companies will start to improve, translating to share price
performance for the construction and property sectors.
The other potential catalyst for the market is the Sarawak state elections, which are Sarawak state elections
due by May 2011 but widely expected to be held at the end of this year. As political could be another
parties have recently focused efforts on strengthening and expanding their support emerging domestic
in the state, expectations are building up and this could gradually attract more focus investment theme
into the Sarawak-based companies, in our view. Among the sarawak stocks that we
cover, we believe HSL will likely be a prime beneficiary of more construction projects,
STRATEGY 19 PAPER
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.
Market Strategy
Accumulate On Weakness And Ride The Volatility
In our view, the long-term economic picture remains positive although we acknowledge We view any market
that the revival of past concerns about the strength of the global economic recovery downshift as an
will continue to cause volatility in the market. Under such circumstances, we believe opportunity to accumulate
stock picking is key. Investors should trim their holdings of stocks with relatively fundamentally-robust
rich valuations and look for opportunities to accumulate fundamentally-robust stocks on weakness
stocks (those with positive and visible earnings outlook, good management and are
attractively valued) on weakness. A list of our top picks is reflected in Table 10.
Table 10
Top Picks
Fair Mkt EPS EPS GWTH PER P/BV P/CF GDY

FYE Price Value Cap (sen) (%) (x) (x) (x) (%)
25/6/2010 (RM/s) (RM/s) (RM Mil) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
Maybank Jun 7.58 9.66 53,649 51.3 60.7 35.7 18.1 14.8 12.5 2.0 n.a. 3.8
CIMB Dec 7.06 8.40 49,869 47.8 56.3 20.2 17.9 14.8 12.5 2.3 n.a. 1.7
Maxis Dec 5.29 6.20 39,675 33.2 36.2 6.6 9.1 15.9 14.6 3.9 10.3 6.3
TNB Aug 8.45 10.50 36,618 70.7 80.9 42.0 14.4 12.0 10.4 1.3 4.6 3.3
PLUS Dec 3.39 4.13 16,950 23.6 36.3 -0.3 53.5 14.3 9.3 2.8 8.7 5.3
Gamuda Jul 3.24 3.85 6,577 13.6 16.1 40.4 17.9 23.7 20.1 1.9 n.m 3.7
MRCB Dec 1.59 2.10 2,165 7.1 7.6 86.4 8.0 22.4 20.8 1.7 23.1 0.0
Media Prima Dec 2.05 2.80 1,938 16.3 18.0 136.4 10.1 12.6 11.4 2.0 6.3 4.9
KPJ Dec 3.38 4.25 1,783 24.0 26.6 14.6 10.7 14.1 12.7 2.4 13.4 4.1
Mah Sing Dec 1.72 2.09 1,351 13.1 18.3 15.8 39.3 13.1 9.4 1.5 9.3 4.1
Faber Dec 2.80 3.54 1,016 26.5 24.2 16.4 -8.8 10.6 11.6 2.2 6.6 2.5
HSL Dec 1.45 1.95 806 13.4 16.2 30.8 21.4 10.8 8.9 2.3 13.1 1.7
Given the risk of a sharper-than-expected slowdown in the global economy in the Expect greater price
2H, we believe investors may find greater price stability in companies that stability in companies that
have less or hedged exposure to overseas markets. These domestic plays have less or hedged
include Maxis, TNB, PLUS, Allianz, AEON, KFC, KPJ and B-Toto. In addition, Asian exposure to overseas
consumer plays such as Carlsberg (expanding in Singapore), Axiata (expanding markets
mobile footprint across Asia) and Parkson (expanding in China and Vietnam) are also
likely to be relatively sheltered given the higher savings rate, growing consumption
spending and large young population. While we are still optimistic on the earnings
prospects of the semiconductor companies on account of strong pent-up demand and
positive outlook for key product segments, we see a risk of earnings disappointment
should the recovery in external demand turns up to be weaker than expected.
Sector-wise, the banking sector would be a safer bet on weakness, particularly Banking sector would be a
when investors begin to look forward to next year’s earnings and valuations. The safer bet on weakness
sector, in our view, represents the best proxy to the economic recovery. We see
several factors that could take valuations of the banks to higher levels. These
include : 1) earnings growth gaining momentum (from stronger-than-expected loan
growth and higher non-interest income); 2) valuations remain decent relative to the
market and historical levels; and 3) relatively low foreign shareholding levels. In
addition, M&A activities could also spark excitement towards the sector.
STRATEGY 20 PAPER
As mentioned earlier, the construction and property sectors would also feature Construction and property
prominently in our investment radar screen in the 2H of the year given the sectors will likely
potential awards of major infrastructure projects/privatisation of government land for outperform given
redevelopment. We foresee construction stocks to outperform in the 2H as news expectations of positive
flow improves on the award of key infrastructure projects such as : (i) The RM36bn news flow on the potential
KL mass rapid transit (MRT) project; (ii) The RM7bn Ampang and Kelana Jaya light awards of major
rail transit (LRT) line extension project; and (iii) Other public projects earmarked
infrastructure projects/
under the 10MP as well as “high-impact” projects worth RM62.7bn under consideration.
privatisation of
As more privatisation of government land for redevelopment surfaces, the property
government land
sector may also come back and attract new focus into the market, in our view. In
addition, we also see increased interest and hence prices in land and properties in
Iskandar Malaysia on expectation of rising investment and hence economic activities
in the growth corridor, on the back of the improving ties between Malaysia and
Singapore.
In general, we are also positive on the power sector (particularly on Tenaga We see opportunities to
Nasional on account of strong recovery in electricity demand and earnings, and the pick stocks in the power,
stock is trading at a significant discount to the FBM KLCI benchmark), telcos, gaming, motor and
telecommunications (growing data traffic and strong cash flow for sustainable high rubber glove sectors
dividend payments), gaming (better business prospects on the back of improving
consumer sentiment and spending), motor (rising car sales and earnings), and
rubber glove manufacturers (frequent outbreak of diseases in the third world
countries, rising health care awareness particularly in the large population countries
such as China and India, and sustained strong demand prospects) (see Tables 11
& 12).
Table 11
Sector Weightings & Valuations
Covered Stocks Mkt Cap Weight EPS Gwth (%) PER (x) Recommendation
RMbn % FY09 FY10 FY11 FY09 FY10 FY11
Banks & Finance 188.9 25.5 -2.4 19.7 14.4 17.1 14.3 12.5 Overweight
Telecommunications 102.7 13.9 -13.6 16.8 11.3 19.7 16.8 15.1 Overweight
Power 58.8 8.0 -8.34 29.6 10.2 15.2 11.6 10.6 Overweight
Gaming 50.5 6.8 -16.9 21.1 6.0 16.8 13.6 12.9 Overweight
Construction^ 19.5 2.6 -4.0 30.2 7.8 21.5 16.4 15.2 Overweight
Motor 17.4 2.4 -10.5 61.4 10.4 15.7 9.7 8.8 Overweight
Property 16.0 2.2 -2.9 20.1 17.8 14.8 12.2 10.3 Overweight
Insurance 3.4 0.5 44.3 18.8 9.8 11.7 10.0 9.1 Overweight
Plantation 106.5 14.4 -27.1 0.3 24.2 19.7 19.3 15.5 Neutral
Transportation* 55.2 7.5 -10.8 41.3 16.3 29.0 20.8 17.6 Neutral
Consumer 29.8 4.0 5.6 7.9 6.7 16.8 15.6 14.6 Neutral
Oil & Gas 29.5 4.0 -3.3 8.0 12.9 18.1 15.4 13.6 Neutral
Infrastructure 18.1 2.4 20.3 -1.1 47.8 13.6 13.8 9.3 Neutral
Media 14.2 1.9 -6.3 39.6 7.0 17.4 12.4 11.6 Neutral
Manufacturing 8.2 1.1 40.2 31.4 19.0 15.9 12.1 10.2 Neutral
Semiconductors & IT 6.4 0.9 -18.0 63.6 22.2 25.3 10.1 8.8 Neutral
Timber 3.3 0.4 -18.6 87.6 39.8 19.0 10.2 7.3 Neutral
Building Materials 11.1 1.5 -19.3 11.0 23.2 14.6 11.3 9.4 Underweight
739.5 100.0
^ Exclude MRCB earnings in 2009

* Exclude MAS earnings in 09-10
Note : RHBRI’s basket
We are now more neutral on the oil & gas sector (demand for crude oil remains We are now more neutral
lacklustre amidst ample supply, and lack of near-term visibility on contract flows. Its on oil & gas and plantation
near-term outlook is clouded by the BP oil spill and review of capex by oil majors sectors
which may have adverse repercussions for offshore E&P activities in other regions)
and plantation (peak production season and potentially weaker demand and softer
crude palm oil prices in the 2H given risks of a sharper-than-expected slowdown in
the global economy).
STRATEGY 21 PAPER
Table 12
High Dividend Yielding Stocks
Share Price Div. Yield (%) P/NTA (x) ROE (%) Recommendation
FY10 FY11 FY10 FY10
AXIS Reit 2.01 8.2 8.9 1.2 9.6 Outperform

YTL Cement 3.99 7.5 7.5 1.2 15.2 Outperform
Glomac^ 1.24 7.3 7.3 0.6 16.8 Outperform
LPI Capital 15.30 7.2 8.3 2.2 27.3 Outperform
Daibochi 3.18 7.1 7.9 3.4 20.5 Outperform
MCIL^ 0.86 7.0 7.0 1.5 13.2 Outperform
BP Plastics 0.60 6.8 7.4 0.7 7.4 Outperform
Amway 7.68 6.5 6.8 5.1 37.1 Outperform
Maxis 5.29 6.3 6.8 n.m 26.1 Outperform
Digi 22.96 6.1 6.8 13.0 74.7 Outperform
B-Toto^ 4.33 6.0 6.5 n.m 103.4 Outperform
TA Ann 5.15 5.8 7.3 1.6 12.4 Outperform
Freight 0.81 5.6 5.6 0.8 18.5 Outperform
Evergreen 1.53 5.5 6.8 1.0 14.6 Outperform
PLUS 3.39 5.3 5.9 2.8 19.3 Outperform
YTL Power 2.24 8.9 8.9 1.9 17.1 Market Perform
Quil Capita 1.01 8.1 8.5 0.8 6.6 Market Perform
TM 3.36 7.8 7.8 1.9 6.4 Market Perform
CSC Steel 1.86 7.5 8.1 0.9 11.3 Market Perform
P Gas^ 9.85 6.8 7.0 3.1 38.8 Market Perform
STAR 3.40 6.8 6.8 2.0 13.1 Market Perform
VS Industry 1.21 6.6 8.8 0.7 6.2 Market Perform
Hai-O-Ent^ 4.12 6.0 6.8 1.5 34.5 Market Perform
Hunza Prop 1.28 5.8 5.8 0.6 12.5 Market Perform
Tanjong^ 17.80 5.7 5.8 1.7 16.5 Market Perform
^ FY10-11 valuations refer to those of FY11-12
STRATEGY 22 PAPER
FBM KLCI From The Technical Perspective
Chart 11
FBM KLCI Daily
Expect A Weaker 2H
In our quaterly strategy report dated 31 March 2010, we had expected the FBM KLCI The FBM KLCI retreated
to sustain firmly at above the 1,250 – 1,300 resistance-turn-support region and gear from a “triple top”
up to rechallenge the 1,390 key resistance level. The index accelerated its upward formation in May 2010
momentum in April 2010 and tested a two-year high of 1,347.61. However, as profit- with a sharp correction
taking pressure increased, the benchmark index scaled sideways, testing the highs
of 1,349.92 and 1,348.09 on two different occasions but failed to penetrate the tough
resistance zone near 1,350. As a result, the index retreated with a “triple top”
formation in May 2010 (see Chart 11).
Near a strong support of

The reversal, coupled with a bearish medium-term trigger on the 10-day SMA that
cut below the 40-day SMA, evolved into a steep correction phase, forcing the index 1,250, the index launched
to plunge to below the 1,300 psychological level and hit a low of 1,243.86 in late May. a technical rebound back
However, near a crucial support of 1,250, the index rebounded sharply and retook to above the 1,300
1,300 with a follow-through rally. The FBM KLCI hit a high of 1,335.31 before psychological level
consolidating its gains in a sideways trading recently.
On the chart, although the index has recovered to above 1,300 with the 10-day SMA The FBM KLCI’s current
cutting above the 40-day SMA, refreshing a positive outlook for the near-term trend strength may not be
on the index, the volume transacted has been pathetically low of late. Plus the enough to overcome the
weakening momentum readings on the short-term chart, the FBM KLCI’s current crucial resistance zone of
strength may not be enough to overcome the next crucial 1,350 resistance zone 1,350
going forward, in our view. As a result, we remain skeptical on the sustainability of
the recent recovery, and expect the 1,350 key resistance zone to cap near-term
upside on the index.
STRATEGY 23 PAPER
Chart 12
FBM KLCI Weekly
According to the weekly chart (see Chart 12), although the rally in April managed Confirmation lacking from
to lift the FBM KLCI to above the extended neckline resistance level on the previous the removal of the major
Head & Shoulders formation, indicating a likely scenario of a reversal of the previous medium-term neckline
year’s bearish outlook, it lacks confirmation on the medium-term chart as the index resistance level near
has failed to surpass the 1,350 level to confirm the medium-term breakout of 1,300. 1,300
Moreover, the sideways consolidation of the FBM KLCI since April has caused the 10- The 10-week SMA will cut
week SMA to trend slightly lower in recent weeks, while the 40-week SMA is still to below the 40-week SMA
moving on an uptrend. This situation, if it persists, will force the 10-week SMA to cut if the current sideways
below the 40-week SMA in the next one to two months time, according to the chart. consolidation persists –
This means that without a clear breakout from the 1,350 resistance level in the medium-term bearish
coming weeks, the FBM KLCI will trigger a medium-term “sell” signal for the more- signal
than-one-year uptrend that started since April 2009.
Chart 13
FBM KLCI Weekly
STRATEGY 24 PAPER
In fact, as shown in Chart 13, with the recent failure to capture the crucial resistance The FBM KLCI risks
level of 1,350, the FBM KLCI faces a risk of triggering another Head & Shoulders triggering a Head &
formation, if it forms a lop (right shoulder) from the current level and falls below the Shoulders formation if it
1,250 support level (neckline). However, for that medium-term bearish sign to be fails to recross the 1,350
formed, the FBM KLCI must first, lose the current momentum and fall to below the resistance level in the
10-day SMA. In other words, it will have to breach the 1,300 psychological level to coming weeks
form a steeper corrective wave to breach the 1,250 support level, which is also the
trigger for the major Head & Shoulders formation.
Upon triggering a major Head & Shoulders formation, the index will enter a major To avoid a Head &
correction, hence retracing the more-than-one-year old uptrend towards the 1,050 Shoulders formation, the
and 1,150 region on follow-through corrective momentum. This will likely happen in FBM KLCI will have to
the next quarter or two, in our opinion. On the other hand, to avoid this major chart kick-off a stronger rally to
formation, the FBM KLCI has to kick-off a stronger rally, steering out from the above 1,350 with a
current resistance zone at 1,350, with a strong follow-through momentum. A higher
stronger momentum
resistance is seen at the 1,390 level, followed by the 1,450 level and the all-time
high of 1,524.69.
Chart 14
FBM KLCI Monthly
Overall, on the monthly chart (see Chart 14) the FBM KLCI has successfully recovered Long-term chart indicates
to above the long-term Uptrend Line (UTL), thanks to the one-year plus rally since exhaustive mode on the
April 2009. The index, however, has moved into an exhaustive mode in recent current uptrend, a
months, as shown on the “overbought” monthly momentum readings. This explains correction may drag the
partly why the index has lacked momentum in recent months. Given the current index closer to the Long-
situation, a dip from the 10-month SMA near 1,280 may trigger a pullback on the term UTL near 1,150
monthly chart. The target should be seen near the 1,150 region or slightly overshooting
to the 1,050 region, before it eventually stabilises near the 1,150 region, which is
closer to its Long-term UTL.
In conclusion, the FBM KLCI’s chart outlook for short, medium and long term all If the index remains
suggest a likelihood of a correction wave underway. Although the resilient buying unable to remove 1,350,
support seen in recent weeks appears convincing that the FBM KLCI will be supported, it is poised to trigger the
the lacking of follow-through participation and fresh short-term buy signals point to Head & Shoulders
a correction phase around the corner. If the index remains unable to remove the formation soon
1,350 resistance zone in the coming weeks, chances of it triggering the Head &
Shoulders formation is increasing.
As a result, we are lowering our expectation on the follow-through buying support We foresee a weaker 2H
on the market going forward and expect an imminent trigger for a major correction ahead as the market
phase over the next few weeks. We also foresee a weaker 2H ahead, as the market moves into a pullback
moves into a pullback stage following the steady uptrend since April 2009. stage
STRATEGY 25 PAPER
Banking : Valuations Still Decent With Potential For Overweight
Earnings To Surprise
In our view, the banking sector represents the best proxy to the economic recovery Banking sector the best
and we continue to believe that the sector will help take the lead in lifting the market proxy to the economic
to higher grounds. We expect this to be underpinned by factors such as: 1) earnings recovery
growth gaining momentum; 2) valuations remain decent relative to the market and
historical levels; and 3) relatively low foreign shareholding levels. M&A activities
could also spark excitement towards the sector.
Looking ahead to 2H2010, we expect the sector’s earnings growth momentum to Earnings growth expected
pick up steam on the back of rising net interest and non-interest incomes as well to gain momentum ahead
as declining allowance for impairment for loans and advances. We do not discount …
the possibility of earnings surprises ahead and believe the areas that could surprise
on the upside include: 1) interest income; 2) non-interest income; and 3) impairment
allowances.
As mentioned above, a potential surprise could come from stronger-than-expected … with potential upside
loan growth and NIM. Generally, while our loan growth assumptions for the larger surprise from stronger-
banks are in line with managements’ targets, our assumptions for some of the than-expected loan
smaller banks (e.g. EON Cap and Affin) are 3-6%-pts lower than targets. Apart from growth …
loan growth, the impact of the two OPR hikes in Mar and May should start to be
visible in 2H when the next round of quarterly results is out. We expect another
25bps hike in OPR during the Sep ‘10 policy meeting and this could provide an
additional boost to NIMs, albeit temporary. Generally, our sensitivity analysis suggests
that most of the banks (except for AMMB and Maybank) should be beneficiaries from
a rate hike and this would also help cushion competitive pressures on NIMs.
As for non-interest income, we expect transactional income to grow in tandem with … non-interest income …
rising economic activities. The revival of the capital markets would be a boon for
investment-banking-related activities (e.g. M&A, IPOs) and thus far, banking groups
with higher exposure to such activities have indicated that they are comfortable with
the deal pipeline ahead.
The recent quarterly results also saw some of the banks with financial year ending … as well as allowance for
31 Dec adopting FRS139. The main impact noted were: 1) asset quality ratios impairment
generally deteriorated for these banks as impaired loans include loans that were
previously classified as performing (i.e. less than 3 months in arrears); and 2) a
one-off adjustment to retained earnings. Except for CIMB, this had a positive impact
on retained earnings for the other banks. Going forward, as more banks begin to
adopt FRS139, this would help improve comparison among the banks. Another
potential impact is the possibility of further writeback of impairment allowances
ahead in tandem with better economic conditions and as some impaired loans are
restructured, which could potentially lead to lower-than-expected impairment
allowances.
Valuation-wise, we find that the sector is still compelling with the sector weighted Valuations still
average FY11 PER and P/BV at 12.3x (11.9x ex-Maybank and Public Bank) and 2x compelling relative to
(1.7x ex-Maybank and Public Bank) respectively. This is as compared to the FBM market and historical
KLCI’s 2011 PER of 13.8x. Comparing the individual banks’ valuations with historical levels
averages, only Affin and HL Bank are trading above their respective average PER
while in terms of P/BV, Affin, CIMB, Public Bank and HL Bank are above their
average P/BV levels. More importantly, the banks are generally trading at below the
previous peak in 2007 and/or one-standard deviation above the mean. This suggests
that there is still room for valuations to expand.
With rising investor interest in banking stocks and with the sharp run-up in share Foreign shareholding
prices in 2009, foreign shareholding of most banks are now off their lows. However, levels still well below
the levels are still well below peaks as well as below levels at the time of the entry peaks
of strategic partners.
Competition, we think, will remain intense and would continue to put pressure on Competition expected to
margins. However, as mentioned above, this would be cushioned by a rising interest remain intense but
rate environment. BNM also recently announced that five new commercial banking pressure on NIMs
licences. While this may raise concerns of further competition, we highlight the
cushioned by rate hikes
following mitigating factors. Firstly, we believe these new commercial banks, would
STRATEGY 26 PAPER
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not compete head-on with the domestic institutions. As announced by BNM previously, 5 new licences issued …
the new commercial banking licences are to be issued to foreign players in specialised
areas of business that can serve new areas of growth and underserved economic
sectors as well as to foreign players that can help enhance global interlinkages and
facilitate international trade and investment flows. Secondly, with a market share of
around 80%, the domestic banks are currently in a better state of readiness to … but local banks
compete in a more liberalised environment. Hence, we continue to believe that expected to be able to
although increasing competition will put pressure on margins and overheads (e.g. hold their ground
staff cost), domestic banks world still be able to hold their fort.
Increasing competition may also continue to prompt talks of M&As to increase Increasing competition
competitiveness. In the immediate term, we think focus would be on the ongoing
may also continue to
offer by HL Bank for the assets and liabilities of EON Cap. However, as mentioned
prompt talks of M&As
above, the local banks already appear competitive on the domestic front and hence,
domestic M&As may not add significant more value 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.
Finally, further clarity on Basel III is expected to be forthcoming towards the end of Further clarity on Basel
the year. The impact of Basel III on the banks could be significant given that the III expected end-2010
initial consultative paper suggests more stringent qualifications for Tier-1 capital and
higher minimum ratios. If adopted, banks may need more high quality capital in the
form of equity i.e. may need to undertake cash call and/or limit dividend payment.
We continue to hold the view that the final standard would be watered down vis-à-
vis the concept paper and would likely allow banks more time to phase in the
changes.
Overall, we maintain our Overweight stance on the sector. Maybank remains as our Maintain Overweight
top pick for the sector. For an exposure to other big cap banking stocks, we also like stance on the sector
AMMB, CIMB Group and Public Bank while AFG, Affin and RCE Cap are our picks
within the smaller market capitalisation segment. HL Bank and EON Cap are both
rated Market Perform.
Table 13
Valuation Bases
Fair Value
Company (RM/share) Valuation Methodology
Affin 3.55 12x CY11 EPS, 3x discount to reflect its smaller market capitalisation
AFG 3.40 13x CY11 EPS, 2x discount to reflect its smaller market capitalisation
AMMB 6.60 Benchmark 15x CY11 EPS
CIMB Group 8.40 Benchmark 15x CY11 EPS
EON Cap 7.92 13x CY11 EPS, 2x discount to reflect its smaller market capitalisation
HL Bank 9.20 Benchmark 15x CY11 EPS
Maybank 9.66 Benchmark 15x CY11 EPS
Public 13.75 Benchmark 15x CY11 EPS
RCE 1.12 10x CY11 EPS, 5x discount to reflect its non-deposit taking status and small market capitalisation
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
Maybank Jun 7.58 51.3 60.7 35.7 18.1 14.8 12.5 2.0 1.8 3.8 4.6 14.0 15.2 OP
CIMB Dec 7.06 47.8 56.3 20.2 17.9 14.8 12.5 2.3 2.1 1.7 1.7 16.1 17.4 OP
PBB-L Dec 11.90 82.0 91.7 11.8 11.8 14.5 13.0 3.3 2.9 5.0 5.5 24.2 23.8 OP
AMMB^ Mar 5.03 39.9 45.7 14.8 14.6 12.6 11.0 1.4 1.3 3.7 4.2 11.9 12.3 OP
AFG^ Mar 2.97 24.4 26.6 25.2 9.1 12.2 11.2 1.4 1.3 2.9 2.9 12.2 12.0 OP
Affin Dec 3.04 27.5 29.6 10.5 7.6 11.1 10.3 0.9 0.9 2.8 2.8 8.6 9.0 OP
EON Cap Dec 6.93 53.8 60.9 9.4 13.2 12.9 11.4 1.2 1.1 1.4 1.4 10.0 10.4 MP
HL Bank Jun 8.68 56.5 56.6 5.1 0.2 15.4 15.3 2.2 2.0 2.8 2.8 14.8 13.4 MP
RHB Cap* Dec 5.94 59.0 67.0 21.9 13.6 10.1 8.9 1.2 1.1 3.6 4.2 13.7 14.1 NC
RCE^ Mar 0.64 10.8 11.3 4.3 4.6 5.9 5.6 1.0 0.9 1.6 1.6 22.6 22.6 OP
Sector Avg 19.7 14.4 14.3 12.5
* 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 Weak Near-term Outlook For Steel; Demand Underweight
Materials : Outlook Improves For Cement
Steel: Weaker 2H
Both demand and prices of steel products started to decline in May 2010 and we Good times are over
believe prices and demand for steel products will remain weak in the next few
months, on the back of:
1.The concerns on overcapacity in the major steel producing nations (in particular,
China) are likely to remain; and
2.The risk of a sharper-than-expected slowdown in the global economy has height-
ened.
We believe the concerns on overcapacity in China have once again resurfaced and Concerns on overcapacity
this is mainly on the back of: in China resurface
1. The Chinese government’s increased efforts in avoiding a property bubble and this
is likely to weaken buying sentiment on long steel products in anticipation of
weaker near-term steel consumption in the property sector (which currently ac-
counts for half of the country’s long steel product consumption); and
2. The high finished steel output that may prompt steel producers in China (in
particular, the smaller players) to dump steel products in the international market,
hence weighing down on steel prices in the region.
The risk of a sharper-than-expected slowdown in the global economy in the 2H has Heightened risks on a
heightened on the back of: 1) the economic growth in China (the world’s fastest sharper-than-expected
growing economy) that seems to have peaked; and 2) the austerity measures to cut global economic slowdown
expenditure and raise taxes in the European region in order to reduce fiscal deficit in 2H hurts steel
to a more manageable level that may slow economic activities; and 3) the rising consumption
concerns on the debt crisis in the European region that may slow economic activities
in other parts of the world. All these will affect buying sentiment on consumer goods
(such as automobiles and electrical appliances) as well as property demand, hence
filtering down to steel consumption.
We believe the volatile steel output and prices in China will continue to weaken the Independent coke
pricing power of metallurgical coke producers (which inherently have little bargaining producers will likely
power against its customers, i.e. the steel producers and suppliers). Not helping suffer too
either, is the volatile steel output in China and the still-weak demand in other regions
that will further suppress metallurgical coke producers’ pricing power (hence prof-
itability) in the near term.
Despite having anticipated a weaker 2H, we remain positive on the sector’s longer- Long-term prospects
term outlook, as: remain favourable
1.Shortages of iron ore globally are likely to persist over the next two years, and
this will result in an uptrend in iron ore prices over the medium term, hence
lending support to steel prices; and
2.The Chinese government’s continued efforts in curbing overcapacity in the country’s
steel sector, which include: 1) ordering banks to stop providing funding without
proper approvals and increasing backward capacity elimination; and 2) accelerat-
ing consolidation of the country’s steel sector. Lower capacity in China’s steel
sector (which accounts for more than a third of the global steel output) will help
to boost the pricing power of steel producers.
We are keeping our Underweight stance on the steel sub-sector, as we believe Maintain Underweight on
fundamentals of the sub-sector are likely to remain weak in the near term. steel sub-sector
Cement : Better demand from 2H10, but higher energy cost to spoil the
party
We believe that domestic cement demand will pick up from 2H10 and this is mainly Better demand from
on the back of: 1) the roll-out of several mega infrastructure projects such as the 2H10
LCCT and LRT; 2) a pick-up in property development activities witnessed by a pick-
up in property launches in 2H09. Over the longer run, we expect cement consump-
STRATEGY 28 PAPER
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tion is likely to sustain and this is on the back of the recently announced 10MP, which
includes:
1. RM138bn allocated for gross development expenditure on infrastructure projects;
and
2. 52 “high impact” projects worth RM62.7bn that have been identified. These huge
projects will be implemented via privatisation or the public-private partnership
(PPP). These include: 1) seven toll highways worth RM19bn; 2) two coal-fired
power plants worth RM7bn; 3) development of the Malaysia Rubber Boards 3,300
acres of land in Sungai Buloh with a GDV of RM10bn; 4) five University Teknologi
MARA (UiTM) branch campuses; 5) redevelopment of Angkasapuri into a “Media
City”; and 6) integrated transport terminal in Gombak; and 7) privatisation of
Penang port.
In light of the recovering demand, we believe that pricing power of cement produc-
ers will recover in 2H10.
We believe the anticipated rise in net selling prices will be partly offset by higher Higher selling prices to be
energy prices, in particular, thermal coal (accounts for 25-30% of the total produc- partly offset by higher
tion costs), the price of which has risen by 22% yoy to US$99.1/metric tonne. energy prices
Given: 1) improving domestic cement consumption; 2) higher anticipated net selling Cement producers may
prices; 3) cement producers’ healthy balance sheet; and 4) high free cash flow (as declare higher dividends
capex is likely to remain low), we believe cement producers have the ability to
declare higher dividends.
Lafarge (MP, FV = RM6.83) in our view, could potentially raise gross dividend per
share (GDPS) from 38 sen in FY12/09 to 60 sen in FY12/10, translating to gross
dividend yield of 9.1%, assuming: 1) net gearing of 0.1x in FY12/10 (in line with its
historical average net gearing in FY12/06-08); and 2) free cash flow of RM400m in
FY12/10. YTD, Lafarge has declared an interim dividend of 8 sen in FY12/10, its first
time doing so (previously dividends were declared on a semi-annual basis).
We also believe YTL Cement (OP, FV = RM5.51) is able to pay higher dividends
in FY06/10. YTD, YTL Cement declared total dividends of 11.25 sen. Based on our
estimates, YTL Cement could pay up to 35 sen in FY06/10, which translates to a
6.4% gross dividend yield, assuming: 1) no earnings surprises in the 4Q; 2) capex
of RM 30m which translates to FCF of approximately RM290m based on our esti-
mates; and 3) it is in a net cash position at the end of the year.
Given the weak near-term prospects of the steel sub-sector and the downgrade in Overall building materials
our recommendation for Lafarge (from outperform to Market Perform) in May, our
sector call is Underweight
rating for the overall building materials sector is downgraded from Neutral to Un-
derweight.
For exposure to the building materials sector, our top pick is YTL Cement. We like Top pick is YTL Cement
YTL Cement for: 1) the strong demand prospects of the cement sector in Malaysia,
underpinned by an anticipated pick-up in construction activities from 2H10; and 2)
its healthy balance sheet, with net cash of RM80.7m or 16.4 sen/share as at 31 Mar
10.
Table 15
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
YTL Cement Jun 3.99 50.1 54.5 -2.2 8.8 8.0 7.3 3.9 1.2 5.4 7.5 OP
CSC Steel Dec 1.86 24.4 26.0 1.8 6.3 7.6 7.2 1.9 0.9 9.5 7.5 MP
Lafarge Dec 6.55 42.5 48.8 -12.4 14.8 15.4 13.4 11.3 1.8 9.7 4.6 MP
Hiap Teck Jul 1.24 15.5 18.0 +>100 16.3 8.0 6.9 9.1 0.7 n.m 1.6 UP
Kinsteel Dec 0.84 7.9 9.2 +>100 16.1 10.6 9.1 5.1 0.9 4.9 1.2 UP
Ann Joo Dec 2.44 35.5 39.9 +>100 12.4 6.9 6.1 6.2 1.1 n.m 9.8 UP
Sino Hua Dec 0.35 -0.7 3.0 64.1 n.a. n.m. 11.7 32.0 0.6 n.m 0.0 UP
Perwaja Dec 1.24 13.5 16.4 +>100 21.5 4.0 3.4 7.7 0.7 26.0 0.0 UP
Sector Avg 11.0 23.2 11.3 9.4
STRATEGY 29 PAPER
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Construction : A “Tactical” Play In A News Flow Driven Overweight
Market
We are upgrading the construction sector to Overweight from Neutral as we Upgrade to Overweight
foresee construction stocks to generally outperform the market in 2H2010, buoyed
by news flow, particularly, from: (1) The RM36bn KL mass rapid transit (MRT)
project; and (2) The RM7bn Ampang and Kelana Jaya light rail transit (LRT) line
extension project.
Assuming the KL MRT project is to eventually materialise and the contract goes to Gamuda’s share price to
the 50:50 Gamuda-MMC Corp JV, between now and the actual award of the contract, ride on news flow from
a series of events can buoy, if not sustain Gamuda’s share price. These include: KL MRT
(1) The expected almost daily doses of news and commentaries on the KL MRT
project and the Government’s plan to improve the public transportation system in
the Klang Valley under the newly announced 10th Malaysia Plan (10MP); (2) The
green light for the project from the Cabinet; (3) The thumbs up for the project from
businesses, particularly, property developers, and the public; and (4) The
commencement of the actual physical works, particularly, site preparation, as we
believe the Gamuda-MMC Corp JV is inclined to start ahead of the formal award of
the contract (as in the case of the SMART tunnel a few years ago).
For the much delayed Ampang and Kelana Jaya LRT line extension project, it now LRT news flow to sustain
appears that it is finally getting off the ground. Syarikat Prasarana Negara interest on short-listed
(Prasarana), the national public transportation system holding company (an SPV contractors
wholly-owned by the Ministry of Finance Incorporated), was recently quoted by the
press as saying that a “pre-bid briefing” and a “site visit” for pre-qualified main
contractors (see Table 16) were held on 22 and 27 Jun 2010 respectively and the
contractors were given six weeks to submit their tenders after the site visit (that
means by around mid-Aug 2010). Next, Prasarana would need three months to
evaluate the tenders before the award of contracts would take place (that means
by around mid-Nov 2010). It said that “construction work should start by the end
of the year”. The news flow on the project is expected to sustain interest on
construction stocks that have been shortlisted as main contractors and segmental
box girder sub-contractors to the project (also see Table 16).
Table 16
Contractors Pre-qualified For LRT Line Extension Project
Main Contractors Segmental Box Girder Sub-Contractors
1. Sunway Construction Sdn Bhd 1. Sunway Construction Sdn Bhd
2. Fajarbaru Builder Sdn Bhd – Signatium Construction 2. Fajarbaru Builder Sdn Bhd – Signatium Construction
Sdn Bhd JV Sdn Bhd JV
3. WCT – Sinohydro JV 3. WCT – Sinohydro JV
4. IJM Construction Sdn Bhd 4. IJM Construction Sdn Bhd
5. Ranhill – CCCC JV 5. Ranhill – CCCC JV
6. Muhibbah Engineering Sdn Bhd 6. Muhibbah Engineering Sdn Bhd
7. Gamuda Berhad 7. UEM Builders Bhd – Intria Bina Sdn Bhd JV
8. UEM Builders Bhd – Intria Bina Sdn Bhd JV 8. MMC- Zelan JV
9. MMC- Zelan JV 9. MRCB Engineering Sdn. Bhd
10. MRCB Engineering Sdn. Bhd 10. BPHB – Tim Sekata JV
11. Trans Resources Corporation Sdn Bhd 11. Zabima – Leighton JV
12. BPHB – Tim Sekata JV 12. MTDC – Persys JV
13. Zabima – Leighton JV 13. Ahmad Zaki Sdn Bhd
14. Mudajaya Corporation Berhad 14. Bina Puri – Acre Works – SNC Lavalin JV
15. MTDC – Persys JV 15. UEM Construction Sdn Bhd – Projek Penyelenggaraan
16. Loh & Loh Constructions Sdn Bhd Lebuhraya Berhad
17. Ahmad Zaki Sdn Bhd
Source: Prasarana
In addition, news flow can also come from other public projects earmarked for Also news flow from
implementation under the 10MP (see Table 17) as well as “high-impact” projects other public and PFI
worth RM62.7bn “under consideration” to be implemented via the private finance projects
initiative (PFI) model, backed by a RM20bn “facilitation fund” set up to “bridge the
viability gap for private sector investment in projects with high strategic value to the
nation and multiplier effects” (see Table 18).
STRATEGY 30 PAPER
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Table 17
Key Public Project Earmarked For Implementation Under The 10MP
Value*(RMm)
KL MRT 36,000
Ampang & Kelana Jaya LRT line extension 7,000
Gemas-JB double tracking 5,000
Flood mitigation programmes 5,000
Expansion of airports 3,300
3,580km of paved roads, of which 72% in Sabah and Sarawak n.a.
Remaining work for East Coast Expressway (Phase 2) n.a.
Kuala Lipis – Cameron Highlands road n.a.
Jerantut – Sungai Lembing road n.a.
Sewerage treatment plant in Lembah Pantai, KL n.a.
Eight hospitals (including specialist hospitals), 197 clinics and 50 1Malaysia clinics n.a.
78,000 units of affordable public housing n.a.
Repair and maintenance of public/private low-cost housing 500
Source: The 10MP
*The 10 MP & various news reports
Table 18
“High-Impact” Projects Via PFI Under The 10MP
Value(RMm)
Seven toll highways including West Coast Expressway, Guthrie-Damansara Expressway, Sungai Juru 19,000
Expressway and Paroi-Senawang-KLIA Expressway
Two coal-fired power plants 7,000
Development of the Malaysian Rubber Board’s 3,300 acres of land in Sungai Buloh 10,000 (GDV)
Five Universiti Teknologi MARA (UiTM) branch campuses n.a.
Redevelopment of Angkasapuri into a “Media City” n.a.
Integrated transport terminal in Gombak n.a.
Privatisation of Penang port n.a.
Senai Hi-Tech Park in Iskandar, Johor n.a.
The raw water supply project for industrial complex in Tanjong Langsat, Johor n.a.
Land reclamation in Westport, Port Klang n.a.
Malaysia Truly Asia Centre in KL. n.a.
Source: The 10MP
While we believe the market is fully aware that certain negative elements are still Negative elements
lingering in the sector, we feel that it is likely to “brave” these negative elements and downplayed
forge ahead with its move to position itself ahead of the curve, underpinned by the
collective “buy-first-on-news” mentality. These negative elements include: (1) A
23% lower “hard” gross development expenditure of RM138bn under the 10MP,
compared with RM179bn under the 9th Malaysia Plan (9MP); (2) The still slow pace
of the roll-out of public projects as taking the delivery system to the next level
appears to be an uphill battle; (3) A highly competitive market and declining
dominance of established players in large-scale projects locally; and (4) 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).
Our top “tactical” pick for the sector is Gamuda as we believe its share price will Gamuda top “tactical”
be buoyed by the sustained news flow from the RM36bn KL MRT project. Our top pick, Sunway top “value”
“value” pick for the sector is Sunway due to its undemanding valuation of 7-8x 1- pick
year forward earnings on a fully-diluted basis, coupled with its strong earnings
visibility stemming from its firm construction margins and growing non-construction
profits.
Table 19
Valuations Of Construction Stocks
(sen) (%) (x) (x) (x) (x) (%)
HSL Dec 1.45 13.4 16.2 30.8 21.4 10.8 8.9 6.5 2.3 13.1 1.7 OP
Gamuda Jul 3.24 13.6 16.1 40.4 17.9 23.7 20.1 30.0 2.1 n.m 3.7 TB
MRCB Dec 1.59 7.1 7.6 86.4 8.0 22.4 20.8 15.3 1.7 23.1 0.0 TB
Fajarbaru Jun 0.97 13.6 14.7 -10.1 7.7 7.1 6.6 n.m 1.3 14.7 5.7 OP
Sunway Hldgs Dec 1.52 22.8 25.2 68.0 10.2 6.7 6.0 5.5 1.2 5.9 1.8 OP
Emas Kiara Dec 0.52 13.1 15.2 15.0 16.7 4.0 3.4 3.4 0.5 2.5 2.9 OP
IJM^ Mar 4.91 31.7 32.6 58.9 2.7 15.5 15.1 8.9 1.2 8.0 2.2 MP
WCT Dec 2.82 18.2 16.9 -3.0 -7.0 15.5 16.7 13.4 1.6 15.2 2.1 UP
Sector Avg 30.2 7.8 16.4 15.2
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Consumer : Resilient, Though Slowing Growth Trend Neutral
Envisaged In The 2H
RHBRI’s economics team expects softer export growth in 2H 2010, translating into Slower increase in
a slower increase in production and jobs and consequently, a more moderate increase consumer spending
in consumer spending of 4.6% yoy in the 2H vs. +5.4% yoy in the 1H. For the full- outlook
year, however, consumer spending will likely bounce back to +5.0% in 2010 (from
+0.7% in 2009). Nevertheless, there is still a risk in our consumer spending projections,
arising from the uncertainty in government policies, especially on the cut in consumer
subsidy. We believe this uncertainty could further dampen consumer spending
particularly on big-ticket items, until clearer implementation strategies are in place.
We expect retailers and MLM players to be most affected by the removal in subsidy,
while healthcare and F&B sectors would be least affected.
Over the years, total expenditure for healthcare in Malaysia rose from RM8.2bn in Changing dynamics of the
1997 to RM35.1bn in 2008 (see Chart 15), representing a CAGR of 12.9%. Total healthcare sector
healthcare expenditure of RM35.1bn in 2008 represents 4.8% of GDP, up from 2.9%
in 1997. This growth was supported by higher government healthcare spending as
well as increasing contribution from the private sector over the years. Given its
relatively resilient industry, Malaysia’s healthcare industry is expected to grow at a
resilient 8-10% p.a. driven by: 1) approximately 2% steady population growth; 2)
ageing population; and 3) greater affluence in healthcare standards to fuel strong
demand for healthcare services.
Chart 15
Trend For Total Expenditure On Health (From 1997-2008)
RM (bn) % of GDP
40000 6
35000
5
30000
25000 4
20000 3
15000
2
10000
5000 1
0 0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Healthcare spending % to GDP
Source: Ministry of Health, Malaysia
In the 2010 Budget, the Government allocated a sum of RM14.8bn to the healthcare Trading opportunities in
sector to enhance the quality of healthcare services in Malaysia. We think the bulk Faber driven by M&A
of this would go to the construction of new government hospitals, which would
benefit Faber (OP; FV = RM3.54) given that the company provides integrated
facilities management services to government hospitals in six states across Malaysia.
It was recently reported that UEM Group is looking to dispose of its 34% stake in
Faber as part of its ongoing asset disposal programme. Although the potential buyer
is still not known, we expect this would provide a potential trading opportunity for
the stock. We continue to like Faber for its resilient earnings derived from the
concession business in the IFM segments, ongoing expansion for its non-concession
business both locally and overseas, coupled with the possibility of further expansion
through M&A.
As for the private healthcare business, we expect it to grow on the back of higher Re-rating of KPJ on M&A
uptake of medical insurance policies in Malaysia, which would benefit players such activity in the regional
as KPJ (OP; FV = RM4.25). Furthermore, the M&A activity in the healthcare sector healthcare sector
recently, which includes Khazanah‘s proposed partial general offer for Singapore-
listed Parkway Holdings’ shares, and takeover bids for Australia-listed Healthscope
by private equity groups, has resulted in valuations moving higher. This supports our
view that there is significant growth potential for the healthcare sector in the region.
STRATEGY 32 PAPER
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We continue to like KPJ for its leading position and its expansion plans in Malaysia’s
growing healthcare market.
In 2H2010, we expect F&B players to persist with their expansion plans while Expansion drive and
continuing to generate stable earnings. For KFCH (OP; FV = RM11.20), we understand resilient earnings
that it will continue to expand in the Indian market, given its successful opening of expected from F&B
its first outlet in Pune in Apr 10, which is currently generating 2x the revenue of the players
average outlet in Malaysia. As for QL Resources (OP; FV = RM4.60), its expansion
plans in Indonesia (MPM, ILF and POA) and Vietnam (ILF) are starting to bear fruit,
which we believe would contribute more significantly from FY03/12 onwards. For
Daibochi (OP; FV = RM4.20), we expect earnings to be resilient as well, given that
more than 90% of its clients are in the F&B sector.
The Government has put in place the less than 20s pack ban with effect from 2 Jun Tobacco: Less than 20s
10, after a flip flop in policy, which resulted in some temporary confusion amongst pack ban in place
industry players (BAT (UP; FV = RM38.95)). We expect only to see a small tobacco
excise duty hike in the upcoming Budget 2011 (to control illicit cigarette levels).
For the brewers (Carlsberg (OP; FV = RM5.85)), we believe the FIFA World Cup Brewery: Shift in trend to
celebration would help boost earnings for 2Q and 3Q 2010. We understand that beer on-trade consumption,
sales increased by 10-15% from FIFA World Cup 2006, which we believe arose from lead to higher sales and
the change in beer consumption habits i.e. greater on-trade vs. off-trade consumption, better margins
which also yields higher margins. With the booming outlook of F&B outlets in Malaysia,
we expect this trend of on-trade beer consumption to continue in the near term.
Following the slower increase in consumer spending envisaged for 2H vs. 1H, coupled Retail / MLM sales may
with uncertainties looming around the reduction in consumer subsidy, we believe see signs of slowing down
that consumer confidence may be impacted and this could temporarily be negative
for local retailers / MLM players with big-ticket sales items such as Hai-O (MP; FV
= RM4.06). Despite this, we believe prospects for Amway (OP; FV = RM8.45) are
still positive as 80-85% of its total cost is denominated in US$ and demand for its
healthcare products is resilient. Nevertheless, we maintain our Outperform
recommendation for Parkson (FV = RM6.40) and AEON (FV = RM5.80) as Parkson’s
sales are more China-centric vs. Malaysia-centric (about 85-90% of total sales is to
China) while AEON’s products are mainly of lower-ticket value, which would be more
resilient.
Table 20
Valuations Of Consumer Stocks
(sen) (%) (x) (x) (x) (x) (%)
KFC Dec 10.06 77.1 89.5 17.2 16.2 13.1 11.2 6.6 2.4 8.3 2.6 OP
Amway Dec 7.68 54.5 56.5 23.6 3.5 14.1 13.6 8.9 5.1 7.6 6.5 OP
Carlsberg Dec 4.98 40.7 42.8 64.8 5.2 12.2 11.6 8.1 2.7 n.m 4.9 OP
KPJ Health Dec 3.38 24.0 26.6 14.6 10.7 14.1 12.7 8.3 1.5 13.4 4.1 OP
Parkson Jun 5.66 29.2 36.3 15.0 24.3 19.4 15.6 5.1 3.0 7.7 1.2 OP
Faber Dec 2.80 26.5 24.2 16.4 -8.8 10.6 11.6 4.2 2.4 6.6 2.5 OP
QL Resources^ Mar 4.01 31.1 36.5 15.4 17.4 12.9 11.0 6.1 2.8 8.9 2.6 OP
Daibochi Dec 3.18 35.1 38.0 16.9 8.3 9.1 8.4 5.7 3.4 7.6 7.1 OP
AEON Dec 4.90 41.4 45.2 8.7 9.4 11.8 10.8 5.1 1.6 10.8 2.4 OP
Hai-O^ Apr 4.12 37.3 42.3 6.7 13.2 11.0 9.7 7.2 1.5 5.1 6.0 MP
B AT Dec 44.52 243.5 233.2 -6.9 -4.2 18.3 19.1 12.9 n.m 13.6 4.9 UP
Sector Avg 7.9 6.7 15.6 14.6
STRATEGY 33 PAPER
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Gaming : On A Winning Streak Overweight
Singapore IRs going strong, growing market size. We understand there has not Singapore IRs going
been a significant drop in visitor numbers or gaming revenues for Resorts World strong, growing market
Sentosa (RWS) since the opening of Marina Bay Sands on Apr 27. RWS has already size
ramped up its table numbers to more than 300 currently (out of a maximum of 500
and up from 270 tables in mid-Feb 2010) and plans to ramp up the table openings
to the maximum by end-June 2010, or as and when licences for the dealers/croupiers
are obtained. In terms of slots, RWS now has slightly below 1,500 machines which
are operational (up from 1,300 in mid-Feb 2010). Anecdotal evidence suggests that
the gaming market in Singapore has actually grown rather than shrunk upon the
opening of both casinos, given the crowds seen in both RWS and MBS, even in the
daytime on a weekday. We maintain our positive view on the Singapore gaming
market and on Genting Singapore (GS), as we believe the market is definitely big
enough for two players and that ultimately, both players serve a different target
market, both having carved their own niche in the market. We believe, however, that
as the market becomes more mature, both players will have to innovate and cre-
atively rejig the dynamics of its gaming product as well as other attractions, in order
to keep casino patrons interested and sustain the flow of visitors. We maintain our
Outperform recommendation on GS (FV = S$1.35), as we believe the strength of
the whole package that RWS is offering will drive visitor numbers and casino patron-
age strongly at least for the first few years, especially in view of it being a “family”
destination and the novelty factor, while riding on Singapore’s anticipated tourism-led
economic recovery.
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. We understand
that in Singapore, the majority of the casino patrons are domestic, with Singaporeans
making up about 35-45%, followed by Malaysians and Indonesians. While 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 maintain our casino visitor
arrival projections of a 4% decline in 2010 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. We maintain our belief that the impact from the
Singaporean IRs 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.
Still waiting for GM to make its move on an EPS-enhancing acquisition. Still waiting for GM to
Despite its business resiliency, we continue to expect that any share price re-rating make its move on an
for GM (Market Perform, FV = RM2.90) will be hindered by continued investor E P S - e n h a n c i n g
disappointment that no capital management in the form of special dividends or acquisition
treasury share cancellation seems to be forthcoming despite its large cash hoard (of
RM5.3bn) and lack of significant expansion/acquisition plans. Based on several state-
ments made in the press, we believe GM is now aggressively looking for opportunities
to invest in the US casino gaming market, and is likely to acquire either a portfolio
of assets or a substantial stake in a company. One such potential investment could
be MGM’s 50%-owned Atlantic City Borgota casino, given MGM’s recently 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. Another potential investment could be in the form of the
construction and operation of the 90,000 seat Aqueduct Racetrack in New York, for
STRATEGY 34 PAPER
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which GM has submitted an entry fee of US$1m to participate in the bidding process.
A formal bid was submitted on 29 June. While we are excited by these prospects,
it would be difficult to evaluate any potential investment until further details are
made known.
Genting is a cheaper entry into Singapore and benefits from diversified Preference still for
earnings. We continue to prefer Genting (Outperform, FV = RM8.95) as we Genting
expect its diversified earnings to protect it from any potential slowdown in the
domestic casino earnings, while benefitting from any positive surprises from the
Singapore IR. In addition, we believe the valuation gap between Genting and Genting
Singapore provides investors with an arbitrage opportunity, given that Genting is a
much cheaper (by 50-60%) entry point into Genting Singapore, both on a PE and
an EV/EBITDA basis.
Concern on potential backlash from abortion of sports betting licence Potential backlash from
approval. With the Government recent turnaround with regards to the sports betting abortion of sports betting
licence approval given to Ascot Sports, we believe this could lead to a potential licence approval?
backlash in the form of more protests by the opposition parties and the public
against any other gaming liberalisation measures proposed by the Government.
Although there are no further liberalisation measures that have been mentioned by
the Government as yet, one such measure which could be affected is the expected
new lotto game for Tanjong, which we understand, is pending Government approval.
This has been talked about for some time by industry sources and the company,
but has yet to see any signs of progress.
BToto still a good, dependable stock. Although the impact to BToto’s earnings BToto still a good,
from the sports betting licence would have been very minimal at just 2-3% of net dependable stock
profits, we believe sentiment on the stock would be temporarily affected by the
abortion of the deal. We think any weakness in share price should present investors
with an opportunity to buy into this stable business with decent sustainable dividend
yields. We believe there is an opportunity for BToto to declare higher dividends in
the near term, given its holding company BLand’s need for cash for its large scale
property development projects and for the impending redemption of its RM711m
convertible bonds due in Aug 2011. Note that BToto already raised its dividend
payout for FY10 to 93.3% (from initial guidance of 75%). In our projections, we
have assumed BToto’s net dividend payout at a more conservative 80-85% for
FY11-12, which would already yield a respectable 6-7% p.a.. We maintain our
Outperform rating on BToto with a RM5.05 fair value.
Maintain Overweight on sector. All in, we maintain our overall Overweight call Maintain Overweight on
on the gaming sector, as a beneficiary of improving consumer spending and eco- gaming sector
nomic recovery in the region. No change to our earnings forecasts, target prices and
recommendations for all the gaming stocks under our coverage.
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 7.43 53.4 56.4 68.8 5.7 13.9 13.2 5.1 2.3 14.9 1.3 OP
B-Toto^ Apr 4.33 32.3 33.8 11.7 4.9 13.4 12.8 9.7 n.m 17.6 6.0 OP
Genting S’pore Dec 1.14 2.7 3.8 +>100 37.9 41.8 30.3 21.3 4.4 11.1 0.0 OP
Genting M’sia Dec 2.78 21.0 22.4 -13.4 6.8 13.2 12.4 5.9 1.5 10.4 2.4 MP
Sector Avg 21.1 6.0 13.6 12.9
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Infrastructure : News Flow On Water Sector Neutral
Improves; Toll Road Remains A
Defensive Play
Water: News flow improves, but uncertainties remain
We believe the recently reported news (of which the deadlock in the proposed News flow improves
consolidation of water assets in Selangor is said to have broken, with all parties
close to agreeing on pricing of above 1x book value) will boost trading sentiment
of water-related stocks in the near term. It now appears that both parties (state and
federal governments) have agreed to acquire water assets at higher prices.
While the recent news flow will boost the near-term trading sentiment of the water- … but uncertainties
related players, (in particular, the water concessionaires) we believe it would still remain
take a while before the water sector restructuring could materialise, as several
uncertainties remain (and these may drag the entire water sector restructuring
process). These include:
1. Pricing issue. It remains to be seen if water concessionaires would be offered a
much higher price to part their prized assets; and
2. O&M ownership issue. It is unsure whether the Federal, state government (or
both) would end up controlling the operations and maintenance (O&M) business.
We continue to believe that the scheduled 37% water tariff hike is unlikely to happen 37% scheduled 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 but likely to be resolved
a 10% toll rate hike earlier this year. We believe compensation for revenues forgone together with water
due to the delay in scheduled tariff hike is likely to be addressed together with the restructuring
water restructuring in due course.
Our fair value of Puncak (Market Perform) is RM2.92, at 20% discount to our
DCF-derived NPV of RM3.65 (based on WACC of 11.5%).
Toll road: Still a defensive play
We project a FY12/10-11 traffic volume growth of 3% p.a. at PLUS’s core express- Traffic volume projected
ways (consisting of North-South Expressway, New Klang Valley Expressway, Federal to grow 3% in FY12/11
Highway Route 2, and Seremban-Port Dickson Highway), which is lower compared
to FY12/08-09 growth of 5.2% and 7.1% respectively, due to:
1.The high base effect; and
2.The potential toll rate hike that would have a negative impact on PLUS’s traffic
volume.
We note that our projected FY12/10 traffic volume growth of 3% for PLUS’s core Impact on petrol price
expressways is relatively conservative compared to its Jan-May 2010 traffic volume hike likely to have knee-
growth of 9.8%, as we believe the potential petrol price hike (which is rumoured to jerk impact on PLUS’s
happen in Jul 10) will have a negative impact on PLUS’s traffic volume. While higher traffic volume in FY12/10
petrol prices will likely have a negative impact on PLUS’s traffic volume, the impact
is likely to be temporary and contained. Recall, PLUS’s traffic volume in 2QFY12/06
contracted by 0.1% yoy, following a 30 sen/litre hike in RON97 petrol price from
RM1.62/litre to RM1.92/litre in end-Feb 06. However, PLUS was already starting to
shrug off the impact, by recording a 0.8% yoy growth in traffic volume in 3QFY12/
06. Also, we believe the impact will also be cushioned by a 9.8% increase in PLUS’s
core expressways’ traffic volume in Jan-May 2010.
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Traffic volume aside, we believe PLUS is likely to declare higher dividends from FY12/ High dividend yield
10, given: (1) Its current low debt-to-equity ratio of 1.8x (as at 31 Mar 10) vis-à-
vis the global toll 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.
Our top pick for the sector is PLUS. We like PLUS for its defensive earnings PLUS – the infrastructure
quality and decent dividend yield of about 5-6% per annum. sector’s top pick
Table 22
Valuations Of Infrastructure Stocks
(sen) (%) (x) (x) (x) (x) (%)
PLUS Dec 3.39 23.6 36.3 -0.3 53.5 14.3 9.3 9.9 2.8 8.7 5.3 OP
Puncak Dec 2.75 31.8 36.3 -8.2 14.1 8.6 7.6 3.3 0.7 2.6 2.2 MP
Sector Avg -1.1 47.8 13.8 9.3
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Insurance : Premium Growth Intact, Stiff Overweight
Competition Ahead
In the absence of a clear decision from Bank Negara Malaysia (BNM) with regards TPBID reform decision
to the proposed new scheme for Third Party Bodily Injury and Death (TPBID) poli- yet to be announced
cies, this catalyst for the insurance sector appears to have evaporated. Recall that
BNM was poised to make changes to the regulated tariff and underlying claims. After
seeking public feedback in mid-April, BNM had indicated that they would “consult with
the parties of interest” and announce the reforms in Jun but no decision has been
forthcoming. Nevertheless, we believe BNM would not be able to delay the reforms
for too long, as insurance companies are refusing to sell TPBID policies as a standalone
policy, instead opting to sell the covers together with its comprehensive policies to
reduce its risk exposure. This would result in less accessibility to the mandatory third
party cover policies, a problem that the proposed reforms were supposed to have
addressed.
We continue to be positive on the outlook for the general insurance industry, how- General insurance demand
ever. As insurance premium growth is largely domestic driven, we believe general to grow in line with local
insurance demand will continue to grow in line with local economic growth. In our economic growth
view, the specific drivers for the growth in general insurance premiums are: 1) GDP
growth of 6.8% in 2010 as forecast by RHBRI’s economics team, supported by a pick
up in various business activities which we believe will result in higher demand for
general insurance products such as marine and cargo insurance; and 2) Motor Total
Industry Volume (TIV) growth of 4.0% in 2011 (based on RHBRI’s forecast) which
will drive the demand for motor insurance.
On the life insurance side, we are of the opinion that our 12% p.a. projection of life Low penetration rate to
insurance premium growth for Allianz is fair and we believe the segment will be drive growth in life
driven by: 1) low penetration rate relative to advanced countries in the region; 2) premiums
rising household medical costs increasing the need for health insurance; 3) higher
household disposable income, as an effect of the recovering economy; and 4) the
Government’s encouragement in the form of tax incentives for retirement-based life
insurance policies. Malaysia’s current penetration rate for life insurance of 3.0% (total
premiums as % of GDP) is relatively low as compared to other countries in the
region, as shown in Table 23 indicating strong potential for growth. Moreover, house-
hold healthcare expenditure has risen at a CAGR of 14.8% since 2000, (vs. GDP
CAGR of 5.4%) which suggests that the rising costs need to be covered by health
insurance, in our view.
Table 23
Penetration rate as a per cent of GDP
Country Penetration rate (%)
Hong Kong 9.9
Singapore 7.5
South Korea 9.1
Taiwan 13.9
Malaysia 3.0
Table 1: Penetration rate as a per cent of GDP
Source: Business Monitor International

Table 1: Penetration rate as a per cent of GDP
Liberalisation of the sector continues with the recently concluded two-part deal be- Change in competitive
tween Hong Leong Assurance’s (HLA) general insurance arm and Japan’s Mitsui landscape
Sumitomo Insurance Co. (MSI). The merger would change the competitive landscape
in the general insurance industry. The first deal, upon completion would involve the
injection of HLA’s general insurance arm into MSIG Insurance Malaysia (MSIG), a unit
of MSI, and consequently make MSIG the second largest general insurer in Malaysia
by gross written premiums while having the largest fire insurance and marine cargo
portfolio. HLA Holdings (HLA’s parent) would own 30% of the enlarged entity. MSIG
STRATEGY 38 PAPER
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would be able to benefit from HLA’s extensive distribution network, being able to
market its products via bancassurance through Hong Leong Bank branches besides
other cross-selling opportunities. Hong Leong Bank currently has 185 branches na-
tionwide while MSIG currently has 14 branches nationwide. We are wary of the tie-
up as it would stiffen the competition for the stocks in our insurance sector coverage
which comprise mainly general insurers. LPI (OP FV=RM16.70), for example, de-
rives 34% and 53.7% of its gross premium and underwriting surplus respectively
from fire policies, and could face greater competition in the form of the enlarged
MSIG. However, Public Bank continues to provide strong support in terms of distri-
bution channels, with 248 branches coupled with LPI’s 16 local branches nationwide.
The second part of the deal involves MSI acquiring a 30% stake in HLA for RM940m.
MSI’s stake in HLA means that it will gain an exposure to the local life insurance
industry, reaffirming our view on the life insurance sector’s growth potential.
After factoring in the new competitive landscape for general insurance, we are thus
lowering our FY11-12 earnings for Kurnia (OP, FV=RM0.63) by 7.9-10%. We are
also rolling forward our valuation base year to FY12/11 (from FY10) with target PER
of 9x (11x previously). We believe that the uncertainty surrounding the TPBID issue
and Kurnia stock’s recent poor performance is cause for having a lower target PER.
Our fair value for Kurnia is thus reduced to RM0.63, from RM0.74 previously. This
implies that there is still 27% upside to the current share price, although near-term
catalysts appear to have disappeared.
We are maintaining our Overweight stance on the insurance sector, as we believe Top pick is Allianz
that it is a proxy to domestic economic growth. Recent lack of news flow on the
TPBID issue seems to indicate that it is a non-starter but in any case, we have not
factored in any benefits from the proposed reforms. We prefer the life insurance
business where there is significant growth potential given the low penetration rate.
We thus continue to recommend Allianz (OP, FV = RM6.68) as our top pick due
to its ability to maintain above-industry premium growth and below-industry average
claims ratio.
Table 24
Valuations Of Insurance Stocks
(sen) (%) (x) (x) (x) (x) (%)
Kurnia Asia Dec 0.50 6.6 7.0 73.7 5.3 7.4 7.1 5.1 1.9 7.4 0.0 OP
Allianz Dec 4.69 71.9 86.2 -7.0 19.9 6.5 5.4 n.a 1.2 7.1 0.4 OP
LPI Capital Dec 15.30 111.4 128.2 22.5 15.1 13.7 11.9 14.0 2.2 3.9 7.2 OP
MNRB^ Mar 2.68 22.8 18.1 6.9 -20.8 11.7 14.8 n.m 0.6 10.3 3.7 UP
Sector Avg 18.8 9.8 10.0 9.1
STRATEGY 39 PAPER
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Manufacturing : Still Positive On Glove Neutral
Manufacturers
Given the strong start of the global economic recovery in 1HFY10 and speed bumps Economy will likely grow
from Europe and China, we believe the economy will likely grow at a more moderate at a more moderate pace
pace in 2HFY10 as the sharp “U-shaped” export recovery normalised. This would in 2HFY10
mean that the demand for the country’s exports would eventually experience some
slow down in 2HFY10.
We remain positive on the glove manufacturers given that demand prospects for Demand prospects for
gloves would continue to be strong as rubber gloves are considered to be the most gloves continue to be
basic and affordable form of protection against viruses in the healthcare industry. strong
The rising demand for gloves is also supported by rising healthcare awareness in
emerging markets, especially the Latin American countries (e.g. Brazil and Argen-
tina) as well as China and India, where the healthcare spending per capita is still low.
The possibility of more H1N1-type flu outbreaks in the future could provide another
catalyst for demand moving forward. While demand prospects remain favourable, Latex prices hit an all-
latex price, however, hit an all-time high of RM7.80/kg in Apr ’10 and the US dollar
time high, while US dollar
has weakened against RM by 4.7% YTD. That said, past trends show that the glove
has weakened against RM
manufacturers 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. As for the impact on the removal of subsidies for natural
gas, we do not expect this to impact earnings too significantly given that natural gas
only accounts for 6-7% of total production cost. Moreover, this too would be passed
on to customers. We continue to like Top Glove (FV=RM16.40) and Adventa
(FV=RM4.92). We have rolled-forward our valuation years for Kossan and We maintain Overweight
Hartalega to FY11 (from CY10 previously) and as a result, our fair values for stance on the glove
Kossan and Hartalega have been raised by 26.5% and 4.5% respectively and reit- sector
erate our Outperform calls on both of these two companies. Overall, we maintain
our Overweight stance on the glove sector.
Demand for stretch film from both the local and export markets have been improving BP Plastic is in a position
on the back of a rosier economic outlook in the 1HFY10. We expect BP Plastic to to take advantage of
be in a position to take advantage of this trend as these products are mainly used improving demand for
by various warehouses and logistics distribution centres and expect demand to Malaysian exports
remain firm in 2HFY10. In addition, we are encouraged by the potential additional
supply of resin from the GCC that could reduce the volatility of raw material prices.
As we rolled-forward our valuation year to FY11 (from CY10 previously), we have
arrived at a fair value of RM0.88 for BP Plastic, based on unchanged target PER of
8x. We reiterate our Outperform call on the company.
As for V.S Industry (OP, FV= RM1.87), we expect earnings in the coming quarters Expecting a pick-up in
to pick up, in tandem with improving economic conditions. Coupled with the increase orders for VSI
in sales to Dyson and the introduction of new products, these should generally be
positive for the company moving forward. In addition, the company should benefit
from the recent protest by workers in China demanding for higher wages as this
would put pressure on staff cost for the other EMS manufacturers there, giving VSI’s
domestic operations an edge over peers.
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As for Wellcall, while orders are expected to improve gradually 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 customers. As we rolled-
forward our valuation year for Wellcall to FY11 (from CY10 previously), we have
arrived at a fair value of RM1.33 based on unchanged target PER of 9x and upgraded
our call on the stock to Market Perform (from Underperform).
Maintain neutral call on

Overall, we are maintaining our Neutral call on the sector.
the sector
Table 25
Manufacturing Sector Recommendation And Fair Value
Company Recommendation FV Valuation Benchmark

RM/share
Adventa Outperform 4.92 Target FY11 PER of 13x
BP Plastic Outperform 0.88 Target FY11 PER of 8.5x
Hartalega Outperform 9.29 Target FY11 PER of 13x
Kossan Outperform 13.39 Target FY11 PER of 13x
Top Glove Outperform 16.40 Target FY11 PER of 17x
VS Ind Outperform 1.87 Target FY11 PER of 7.5x
Wellcall Market Perform 1.33 Target FY11 PER of 9x
Table 26
Valuations Of Manufacturing Stocks
(sen) (%) (x) (x) (x) (x) (%)
Adventa^ Oct 3.22 27.4 37.8 24.4 38.1 11.8 8.5 9.3 2.3 8.2 3.7 OP
Kossan Dec 7.59 82.6 103.0 10.3 24.7 9.2 7.4 6.2 2.6 8.0 1.4 OP
Top Glove Aug 13.38 89.0 96.2 55.3 8.1 15.0 13.9 9.2 4.1 12.3 3.4 OP
VS Industry Jul 1.21 12.7 24.9 92.2 95.5 9.5 4.9 3.9 0.7 4.8 6.6 OP
Hartalega^ Mar 7.93 71.5 83.6 21.0 16.9 11.1 9.5 8.0 3.9 10.2 1.5 OP
BP Plastics Dec 0.60 10.0 10.9 15.7 8.9 5.9 5.4 1.8 0.7 3.7 6.8 OP
Wellcall Sep 1.26 11.9 14.7 17.3 23.7 10.6 8.5 5.5 2.0 13.2 10.2 MP
Sector Avg 31.4 19.0 12.1 10.2
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Media : Adex Growth Momentum Continues Neutral
According to Nielsen Media Research, YTD (Jan-May) gross advertising expenditure YTD gross adex grew
(adex) for TV and print media grew 29.9% yoy with both print and TV up by 30.6% 29.9% with both print and
and 28.9% yoy respectively. We believe this yoy growth was mainly due to low base TV up by 30.6% and
effect as a result of the weak economic conditions a year ago, coupled with improv- 28.9% yoy respectively
ing economic conditions.
While YTD (Jan-May) adex growth stood at 29.9%, we expect the growth rate to slow We expect 2HFY10 adex
down in 2H10. Firstly, following the strong start to the global economic recovery in growth rate to slow down
1HFY10, we believe the economy will likely grow at a more moderate pace in 2HFY10
although we do not expect the global economy to fall into a double dip. Secondly,
adex will now be coming from a higher base. Nevertheless, adex growth should
continue to remain healthy, supported by sporting events such as the FIFA World Cup
and Commonwealth Games.
Over at the cost side, newsprint prices have eased recently to around US$660/tonne Cost environment benign
from US$700/tonne a month ago. This is not too surprising given our expectations thus far with newsprint
above that the global economy is, in general, likely to grow moderately ahead. Thus, prices staying stable …
demand and input cost for newsprint (main costs are energy and pulp) should
stabilise. In addition, current prices are still significantly lower than newsprint prices … while content cost well
of US$925-950/tonne in early-4Q08. As for Media Prima, excluding the full consoli- controlled by Media Prima
dation of NSTP in 1Q10, direct cost in 1Q10 fell by 4% yoy, which management
attributed to savings achieved from repeats of highly-rated TV contents and defer-
ment of purchase of high-valued contents.
In terms of stock picks, we continue to like companies that offer high leverage to We continue to like
ad spending and have a cost structure that is relatively fixed as this means that the companies that offer
bulk of the stronger revenue would flow straight down to bottomline. Media Prima high leverage to ad
(Outperform, FV=RM2.80) fits this bill well, in our view. Over the past five years, spending and a cost
we note that the average GDP multiplier for TV adex is around 2.9x, as compared structure that is
to 1.6x for the print media. Together with its high fixed cost structure, we expect
relatively fixed
Media Prima to be a prime beneficiary of the faster recovery in TV adex. In addition,
management expects discounts for the TV segment to average around 65% level this
year (vs. 69% in FY09) as economic conditions improve (we assume 65.5%). For
Media Prima offers high
every 1%-pt decline in the average discount rate, revenue would increase by an
leverage to an improving
estimated RM20.4m (3.1%) and the bulk of this increase should flow down to Media
ad spent environment
Prima’s bottomline. Aside from improving fundamentals, further potential catalysts
we see ahead for the enlarged entity include the potential realisation of merger
synergies and a rerating in valuations.
We continue to like MCIL (Outperform, FV=RM1.16). Recall that MCIL’s FY10 EBIT MCIL should also benefit
margin expanded by 5.6%-pts yoy, which was mainly due to: 1) recovery in ad from the ad spend
revenue; 2) effective cost-control measures; and 3) lower newsprint cost. Manage- upswing ahead and on
ment expects stronger ad revenue ahead with bookings visibility having improved to going cost-control
around two months as opposed to only a month a year ago. As for newsprint, measures
currently, the Hong Kong and Malaysian operations are carrying around 3 and 8
months worth of newsprint stock respectively at an average cost of US$550-580/
tonne. We believe the stronger ad revenue and on going cost-control measures
should bode well for MCIL moving forward.
STRATEGY 42 PAPER
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As for Star (Market Perform, FV=RM3.86), the company typically has the highest Star – 2H10 adex could
leverage to adex given that over 80% of its revenue relates to ad revenue. In our slow down but should
view, while Star’s ad revenue growth in 2H10 could slow down yoy, the company benefit from cheaper
should benefit from cheaper newsprint stock. Currently, Star is carrying 10-11 months newsprint stock
of newsprint stock at an average cost of US$650/tonne (vs. current spot price of
US$660/tonne).
Neutral sector rating
Overall, we maintain our Neutral stance on the sector.
maintained
Table 27
Valuations Of Media Stocks
(sen) (%) (x) (x) (x) (x) (%)
MEDIA
Media Prima Dec 2.05 16.3 18.0 +>100 10.1 12.6 11.4 7.2 2.8 6.3 4.9 OP
Media Chinese^ Mar 0.86 9.0 8.7 12.7 -4.1 9.5 9.9 4.6 1.5 7.5 7.0 OP
Star Dec 3.40 22.6 25.8 15.3 14.0 15.0 13.2 6.8 2.0 11.5 6.8 MP
Sector Avg 39.6 7.0 12.4 11.6
Chart 16 Chart 17
Annual Adex Growth vs.GDP YoY Adex Growth
Growth
0.3
0.25
0.2
0.15
0.1
0.05
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-0.05
GDP ADEX
Source: RHBRI
Source: Bloomberg
Chart 18 Chart 19
Print And TV Gross ADEX YoY Adex Growth
(RMm)
(yoy growth)
600.0
0.6
500.0 0.5
400.0 0.4
300.0 0.3
200.0 0.2
0.1
100.0
0
0.0
-0.1 Jul Sep Nov Jan '09 Mar May Jul Sep Nov Jan Mar May
Jul
Sep
Nov
Jan
May
Jul
Sep
Nov
Jan
May
Jul
Sep
Nov
Jan
May
Mar
Mar
Mar
-0.2
Print TV Print TV Print + TV
Source: NMR
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Motor : First Growth Year Of A New 3-Year Cycle Overweight
We believe it is now the best time to invest in local motor stocks as the motor sector First growth year in a new
is currently into its second year of a new 3-year cycle that has started in 2009. 3-year cycle
A closer look at Malaysia’s TIV reveals that the local motor sector has been moving Replacement cycle
in 3-year cycles since 2000, i.e. 2000-2002, 2003-2005, 2006-2008 and potentially accelerated
we see this again for 2009-2011. TIV growth is normally seen in the second and
third years of the cycle (also see Chart 20). We believe the replacement cycle for
motor vehicles, widely believed to be 5-7 years, may have accelerated in recent
years as:
1. Buyers may have been enticed by more new models (see Table 28); and
2. Car owners may have realised that the re-sale values of their new cars can only
be maximised if the cars are replaced within three years given the shortened
product life cycle of new models now.
We project Malaysia’s total industry volume (TIV) to jump +9.5% in 2010, followed
by a decent +4% growth in the second year of the cycle (see Chart 20). This is now
higher than our previous projections of +8.9% and 2.8% as we have revised our
projections for Proton due to positive sentiment. Our projections are higher vis-à-
vis those of Malaysian Automobile Association (MAA), but this is understandable as
MAA is known to be conservative in its projections (see Table 29).
Chart 20
TIV vs. YoY Growth
700000 25.0
600000 20.0
15.0
500000
10.0
400000
5.0
300000
0.0
200000
-5.0
100000 -10.0
0 -15.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010f 2011f
TIV growth yoy %
Source: MAA, RHBRI
Table 28
New Models Launched
Year Models launched
2000 Proton Waja, Perodua Kenari, Nissan Sentra

2001 Proton Juara, Perodua Kelisa
2002 Honda City (4th gen), Honda CRV (2nd gen)
2003 Proton Saga, Proton Arena, Toyota Vios, Honda Accord (7th Gen), Nissan X-Trail
2004 Gen-2, Toyota Avanza
2005 Proton Savvy, Perodua MyVi, Toyota Innova, Toyota Fortuner
2006 Satria Neo, Toyota Camry (4th gen), Toyota Yaris, Toyota Wish, Honda Civic
2007 Proton Persona, Perodua Viva, Toyota Vios (2nd gen), Honda CRV (3rd gen), Grand Livina
2008 Toyota Rush, Nissan Sylphy, Honda City (5th gen), Honda Accord (8th gen)
2009 Proton Exora, Perdua Alza, Toyota Prius, Toyota Camry (5th gen)
2010 Waja replacement model, Nissan X-Trail, Nissan Teana
Table 29
TIV Comparison: RHBRI vs. MAA
TIV TIV Growth (%)

Year RHBRI MAA Var* (%) RHBRI MAA Var* (%-pts)
2010 587,698 550,000 +6.9 +9.5 +2.4 +7.1

2011 611,265 566,500 +7.9 +4.0 +3.0 +1.0
2012 630,953 583,500 +8.1 +3.2 +3.0 +0.2
*RHBRI against MAA

Source: MAA, RHBRI
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We believe our new TIV projection of 587,698 units in 2010 is achievable. TIV for Our 2010 TIV forecast
the first five months in 2010 of 247,072 already made up 42% of our full-year looks achievable
forecast. In terms of yoy growth rate, it came in at +19.9% for the first five months
in 2010 largely due the low base in 2009. Given the higher base for the remaining
months, our forecast of +9.5% implies TIV growth would need to average around
3.0% yoy between Jun and Dec to come in within our forecast.
Table 30
Motor Sales For May 2010
May-09 Apr-10 May-10 Mom Chg Yoy Chg YTD 09 YTD 10 Yoy chg
(Nos.) (Nos.) (Nos.) (%) (%) (Nos.) (Nos.) (%)
Proton 12,542 11,269 14,110 25.2 12.5 53,856 65,511 21.6

Perodua 13,194 15,915 15,016 (5.6) 13.8 63,855 78,682 23.2
Toyota 6,696 7,456 8,091 8.5 20.8 30,884 36,661 18.7
Nissan 2,664 2,999 2,874 (4.2) 7.9 12,363 14,520 17.4
Honda 3,247 3,980 3,887 (2.3) 19.7 17,310 17,892 3.4
TIV 43,985 48,812 50,845 4.2 15.6 206,060 247,072 19.9
Passenger 40,159 43,661 46,229 5.9 15.1 187,270 222,947 19.1
Commercial 3,826 5,151 4,616 (10.4) 20.6 18,790 24,125 28.4
Source: MAA
We have rolled forward our valuation base year for motor stocks to FY11 (from FY10 Fair values raised
previously):
a) Tan Chong: Our indicative fair value has been raised to RM6.16/share (from
RM5.26 previously) which is now based on 14x FY11 EPS. Maintain Outperform.
b) UMW: Our SOP-based fair value has been reduced slightly to RM7.50 (previously
RM7.52) based on 14x PER (previously 16x PER) for its automotive and oil & gas
divisions, 8x for its heavy equipment and 7x for its manufacturing division.
Maintain Outperform.
c) Proton: We raised our EPS forecasts from 65.3sen to 67.4sen for FY11 and from
70.2sen to 75.2sen for FY12. We reiterate our Outperform call on the stock with
an indicative fair value of RM 5.50 based on stripped down book value.
d) MBM: Fair value was revised up to RM5.31/share (from RM5.04 previously),
based on 11x FY11 EPS. Reiterate Outperform.
Table 31
Changes in Fair Value
Fair Value Recommendation
Company Method Before After Change (%) Before After Remarks
Tan Chong PER 5.26 6.16 17.11% OP OP Unchanged
UMW PER 7.52 7.50 -0.2% OP OP Unchanged
Proton P/Book 5.50 5.50 Unchanged OP OP Unchanged
MBM PER 5.04 5.31 5.36% OP OP Unchanged
Source: RHBRI
Table 32
Motor Sales Forecast By Key Marques
2009a 2010 2011 2012 2010 2011 2012
(Nos.) (Nos.) (Nos.) (Nos.) (% yoy) (% yoy) (% yoy)
Proton 148,031 162,114 174,837 182,346 9.5 7.8 4.3
Perodua 166,736 195,090 196,803 202,252 17.0 0.9 2.8
Toyota 81,785 89,692 91,286 97,290 9.7 1.8 6.6
Nissan 31,493 41,410 43,599 57,813 31.5 5.3 32.6
Honda 38,783 40,000 44,000 48,517 3.1 10.0 10.3
TIV 536,905 587,698 611,265 630,953 9.5 4.0 3.2
Passenger 486,342 536,392 558,417 584,398 10.3 4.1 4.7
Commercial 50,563 51,306 52,848 46,555 1.5 3.0 -11.9
Source: RHBRI
Table 33
Valuations Of Motor Stocks
(sen) (%) (x) (x) (x) (x) (%)
UMW Dec 6.32 55.3 59.2 64.4 7.2 11.4 10.7 5.2 1.8 7.6 3.7 O P
Proton^ Mar 4.57 67.4 75.2 49.2 11.6 6.8 6.1 7.4 0.5 n.m 0.0 O P
MBM Dec 2.93 45.8 48.2 62.3 5.3 6.4 6.1 15.4 0.7 15.4 4.1 O P
Tan Chong Dec 4.31 39.0 45.3 72.0 16.2 11.1 9.5 8.2 1.8 9.3 2.6 O P
Sector Avg 61.4 10.4 9.7 8.8
Sector Avg(ex-Proton) 66.6 9.91 10.8 9.86
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Oil & Gas : Taking A More Cautious View Neutral
While the anticipation of stronger crude oil demand in tandem with global economic Uncertain direction for
recovery had previously helped to support crude oil prices above US$65/barrel, we crude oil prices
believe the near-term outlook has turned cautious. Demand for crude oil remains
relatively lacklustre, while supply remains ample. Moreover, financial demand has
dwindled due to credit tightening. And we note that the crude oil price since Mar 2010
appears to have broken out from the •/US$ exchange rate trend that was clearly
evident since the upturn in mid-2006 (see Chart 21).
Chart 21
Crude Oil Price Trend vs. •/US$ Trend
No clear trend for crude

oil prices since Mar 2010
Source: Bloomberg
We thus see a lack of fundamental catalysts for crude oil prices and prices are likely Crude oil prices likely to
to drift at current levels of around US$75/barrel at least through the 2H10 with remain within a tight
intermittent spikes due to pockets of geopolitical unrest, and the hurricane factor that range, notwithstanding
normally affects the US Gulf region between 1 Jun and 30 Nov. Looking further out, spikes due to hurricanes
our expectations remain on the positive side, and we thus expect crude oil prices
in the US Gulf and
to pick up to a range of US$75-85/barrel in 2011. Nevertheless, we highlight that
geopolitical unrest
longer-range projections are still unreliable at this stage.
Near-Term Concerns And Long-Term Growth Drivers For Domestic Players
We believe BP’s oil spill in the Gulf of Mexico may have adverse repercussions for Negative repercussions
deepwater E&P activities in other regions: from BP’s oil spill …
o With deepwater exploration assets in the Gulf of Mexico now in limbo, any … as US Gulf assets move
prolonged freeze could result in these assets competing for jobs in other regions out to look for new jobs
and thus put downward pressure on the already lacklustre charter rates.
… and tougher safety
o Tougher regulatory rules could be adopted in all deepwater regions, potentially
causing a delay in award of new contracts as safety requirements are reviewed. regulations are imposed
This is already happening in the North Sea and China. Nevertheless, equipment on drilling in other
and support services providers that are able to meet these higher-end deepwater regions
requirements (e.g. Dialog, Wah Seong and KNM) could potentially benefit.
Notwithstanding the uncertainties caused by external factors, Petronas’ shift in its Petronas’ capex shift
capex strategy back to the development of reserves in Malaysia would be positive back to Malaysia is
and provide a base level of activity for the domestic support services industry in the positive for the local
longer term. As it stands, ExxonMobil and Petronas Carigali recently announced support services players
capex of around US$1-2bn for the enhanced oil recovery project in Tapis field …
beginning 2013.
… and positive for the
Also longer term, downstream onshore projects would be positive for the EPCC
(Engineering, Procurement, Construction and Commissioning) players like Dialog and long term
Kencana. The key projects include: 1) the long-awaited Sabah Oil & Gas Terminal
(SOGT) in Kimanis, Sabah scheduled for partial completion in early-2013 (and full
completion end-2013) and now estimated to cost around RM2-3bn; 2) the ammonia
and urea plant in Kimanis, Sabah estimated to cost RM1.52bn; 3) the expansion of
STRATEGY 46 PAPER
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the Petronas’ Melaka refinery complex currently undergoing feasibility studies; and
4) the proposed LNG regassification terminal in Melaka to address long-term shortages
in natural gas supply from oil & gas fields offshore Terengganu.
In the near to medium term, we thus believe the market is looking at uninspiring Near- to medium-term
earnings growth for the O&G service providers. Already, Singapore peers are trading outlook remains
average FY11 PER of 12.7x, which compares to its high of 15.5x in mid-April 2010. uninspiring
In our view, share prices could remain stuck at current levels for the next six
months.
Sector Valuations
 Premium plays. We believe the more consistent, and conservatively-managed Premium plays like Dialog
companies deserve to trade at a premium of 15x vs. the sector benchmark of deserve to trade at a
13x. Dialog is the only stock in this group due to its earnings consistency, a premium
growing level of recurrent earnings, plus it is a key player for Petronas’ growing
onshore investments, from construction to maintenance of plants and tank
terminals.
 Growth plays. While we remain optimistic about the asset players for longer- Long-term positive on
term growth prospects, the near-term uncertainty in the industry has shifted the growth plays, but near-
attention to the potential earnings risk due to competitive conditions in their term outlook likely to
respective sub-sectors. However, we are cognisant of the fact that these stocks focus on earnings risk
also attract significant trading interest. We have thus pegged this group of
stocks including Kencana, Wah Seong and SapuraCrest at the sector benchmark
of 13x. The three companies are major players in their respective sub-sectors,
and have strong earnings growth over the next two years but we take note of
potential risk to earnings if new contracts do not materialise.
 Stocks with downside risk to earnings. At the bottom, we highlight the Some stocks still
laggards which will likely continue to be hampered by fundamental issues, such hampered by
as Petra Perdana’s ongoing dispute with its former CEO, and KNM’s exposure fundamental issues
to Europe and to higher-end market which is likely to be more heavily affected
by an uncertain crude oil price outlook. We have thus pegged both stocks at 10x
FY11 PER.
 Petronas Gas continues to be valued on a DCF basis, while we maintain our

target PER for EPIC at 10x (albeit based on FY11 EPS vs. FY10 previously).
Conclusion
Although the longer-term earnings visibility for O&G service providers remains intact Long-term visibility
on the back of reserve replenishment activities, as well as Petronas’ growing remains intact, but near-
investments in downstream onshore facilities, we believe the focus will be on the term uncertainties may
near-term uncertainties and risk of earnings disappointment. Therefore, against this cap share price upside for
backdrop of uncertainty, we maintain our Neutral stance on the sector. Dialog now
remains our top pick for this sector.
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) (%)
Dialog Jun 1.06 6.1 8.8 14.9 44.8 17.4 12.0 15.2 4.2 15.3 3.2 OP
EPIC Dec 1.82 26.9 27.2 7.9 1.1 6.8 6.7 5.3 0.9 4.7 5.2 OP
Wah Seong Dec 2.26 16.1 18.3 23.1 14.0 14.1 12.3 5.5 2.8 4.9 2.8 MP
P Gas^ Mar 9.85 62.6 64.4 31.6 2.9 15.7 15.3 8.0 3.1 10.6 6.8 MP
SapuraCrest^ Jan 2.25 16.9 18.9 26.5 12.0 13.3 11.9 4.3 2.2 8.0 3.1 MP
Kencana July 1.47 8.0 9.8 11.3 22.5 18.5 15.1 10.9 3.0 12.7 0.4 UP
Petra Perdana Dec 1.32 6.8 12.2 -31.1 79.9 19.5 10.8 4.8 0.8 1.4 1.5 UP
KNM Dec 0.53 2.9 4.9 -24.1 69.7 18.5 10.9 11.5 8.5 15.1 3.8 UP
Sector Avg 8.0 12.9 15.4 13.6
Sector Avg (EX P Gas) -5.9 28.5 14.8 11.5
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Plantation : No Positive Catalysts, More Cautious Neutral
Short-Term Outlook
Downgrading sector, no short-term positive catalysts. We are downgrading No short-term positive

our recommendation on the plantation sector to Neutral (from Overweight) on the catalysts, four main
back of four main factors: (1) the onset of the peak palm oil production season which factors preceding
will dampen CPO prices in the short term; (2) the reduced possibility of an El Niño downgrade…
impact, although talk of La Niña has now started; (3) the potential impact of exchange
rate movements and reduction in crude oil price forecasts; and (4) valuations of
plantation stocks which are no longer as attractive after rolling forward valuation
targets to CY11. We believe there are not many positive catalysts which would move
CPO prices up in the near term, and therefore expect plantation companies’ share
prices to remain lacklustre until this scenario changes.
The onset of the peak production season for palm oil is starting soon, and … firstly, onset of CPO
barring any unforeseen weather abnormalities, should see CPO production in both peak production season…
Malaysia and Indonesia picking up pace. In general, this would then see CPO prices
moving in the opposite direction during the period, although this could start reversing
towards the end of the year, once the peak production season is over. In Malaysia,
production of CPO in May is still showing a decline of 0.7% yoy, although on a mom
basis, this has started to improve already, rising 6.1% from April 2010. Despite this,
closing CPO stock levels fell further to 1.56m tonnes in May (from 1.62m tonnes in
Apr), thus resulting in another fall in stock/usage ratios to 8.5% (from 8.8% in Apr
and versus the 7-year average of 9.1%). We expect this to stabilise over the next
month or so and then start to increase as we approach the peak seasonal production
period. We believe the recovery in production should start taking place more
significantly by July, at the very latest, provided there is no impact from the El Niño
weather phenomenon experienced in the first few months of the year, which means
CPO prices could remain lacklustre for the next few months. This can be seen in the
chart below where we plot the inverse relationship between CPO prices and Malaysian
CPO production.
Chart 22
Inverse Relationship Between Malaysian CPO Production And
CPO Prices
2,100 4,200
2,000 4,000
1,900 3,800
1,800 3,600
1,700 3,400
CPO Production ('000 tonnes)
1,600 3,200
1,500 3,000
CPO prices (RM/tonne)
1,400 2,800
1,300 2,600
1,200 2,400
1,100 2,200
1,000 2,000
900 1,800
800 1,600
700 1,400
600 1,200
500 1,000
400 800
300 600
200 400
100 200
- -
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10
CPO prices (RM/tonne) CPO production ('000 tonnes)
Source: MPOB, Bloomberg, RHBRI
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Reduced possibility of El Niño impact, although talk of La Niña has started.
… secondly, reduced
The El Niño phenomenon and its potential impact seem to have faded much faster
possibility of El Niño
than expected of late, with prospects of higher rainfall coming through in 2H2010 in
impact…
South-East Asia, particularly in Malaysia, Indonesia and Philippines. While this would
be positive for vegetable oil supply in South East Asia, there can be too much of a
good thing, as the majority of international weather models are now forecasting a
continued cooling of the tropical Pacific to below La Niña thresholds in the coming
months, as temperatures below the surface of the equatorial Pacific are now around
3 to 4 degrees cooler than normal. The Southern Oscillation Index (SOI) remains in
the positive territory, and is currently around +8.0 (+10.0 in May). Should this
sustain at above +5.0 for a few consecutive months, this is a typical indicator of La
Niña. Historically, about 35-40% of El Niño events are followed by a La Niña within
the same year. While we would not impute the impact of a potential La Niña into
our price forecasts to be conservative, we note that the faster- than-expected fading
of El Niño and quick appearance of La Niña could offset each other, and could
translate to improved productivity in the South-East Asian region. In Malaysia, Oil
World expects this to translate to a 1.8% yoy growth in CPO production, which is
higher than our original estimates of a 0.8% yoy growth; while in Indonesia, this is
expected to translate to a 7.2% yoy growth in CPO production (in line with our
expectations).
The potential impact of exchange rate and crude oil price movements. With … thirdly, potential
the recent decision by the Chinese government to abandon the RMB6.83 peg to the impact of exchange rate
US dollar and to increase the flexibility of the exchange rate, the Chinese Yuan is and crude oil price
expected to appreciate against the US$, making dollar-based commodities cheaper
movements…
in China and potentially bolster demand. However, RHBRI’s economics team expects
this appreciation to be limited to just 2-3% for the rest of this year, which means
the initial euphoria and reaction may reverse at a later stage. We expect to see
continued volatility in the US$ and in commodities prices, particularly for crude oil,
which has seen major movements of +14.4% in the space of the last four weeks.
Chart 23
CPO and Crude Oil Price Movement vs RM:US$ Exchange Rate
850 4.00
800 3.90
750 3.80
700
3.70
650
600 3.60
US$/tonne
550 3.50
RM:US$
500 3.40
450 3.30
400 3.20
350 3.10
300 3.00
250 2.90
200
2.80
150
100 2.70
50 2.60
0 2.50
01 15 09
02 29 09
02 12 09
03 26 09
03 12 09
04 26 09
04 09 09
05 23 09
05 07 09
06 21 09
06 04 09
07 18 09
07 02 09
07 16 09
08 30 09
08 13 09
09 27 09
09 10 09
10 24 09
10 08 09
11 22 09
11 05 09
12 19 09
12 03 09
12 17 09
01 31 09
01 14 09
02 28 10
02 11 10
03 25 10
03 11 10
04 25 10
04 08 10
05 22 10
6/ 0
10
/0 /1
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
01 01
/
01
CPO Crude Oil USD/MYR Crude oil (US$/tonne) CPO (US$/tonne)
Source: Bloomberg, RHBRI
Exchange rate assumptions revised. We have revised the RM:US$ exchange … as our exchange rate
rates in our forecasts to reflect the recent changes in assumptions made by RHBRI’s assumptions revised up…
economics team. We are now projecting the RM:US$ rate to be RM3.25 (from
RM3.30) for CY2010, RM3.20 (from RM3.25) in CY2011 and RM3.15 (from RM3.20)
in CY2012. This would have a negative impact on companies with matured plantations
in Indonesia (like KLK, Sime Darby, IOIC and First Resources) and companies with
downstream or other operations located overseas (like Sime Darby, KLK and IOIC),
albeit not in a significant manner, given that most of these companies hedge their
overseas revenue exposure.
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Theoretical CPO price to range between RM2,178-2,848/tonne based on … and our crude oil price
revised crude oil price projections. Despite the recent spike in crude oil prices, projections revised
which we believe is likely to be unsustainable, our in-house crude oil price forecasts down…
have been cut recently, as RHBRI’s oil & gas analyst believes that the near-term
outlook has turned cautious. In the absence of fundamental catalysts for crude oil
prices to move higher, our crude oil forecasts have been reduced to US$75/barrel
for the rest of 2010 (from US$80-100) and US$75-85 for 2011 (from US$80-100).
Longer-term projections are unreliable at this stage, although our expectations remain
on the positive side. Based on these revised crude oil price forecasts, and assuming
that the correlation between crude oil and CPO price goes back to the historical
average correlation level of 0.7x, we estimate this would result in CPO prices
ranging between RM2,178-2,513/tonne for 2010 and RM2,513-2,848/tonne for 2011.
CPO price assumptions maintained. Despite our now more cautious outlook for
the plantation sector for the short term, we are maintaining our CPO price forecasts
of RM2,500/tonne for 2010, RM2,700 for 2011 and RM2,500 for 2012. We believe the
medium-to long-term prospects for CPO remain relatively stable, given the still
positive stock/usage ratio trends for the global 17 vegetable oils and fats and the
still positive news flow which would support CPO prices above RM2,000/tonne for the
longer term. We have, however, tweaked our forecasts for the plantation stocks
under our coverage slightly, taking into account the exchange rate assumption
changes. As a result, earnings have been revised down by between 0.1-1.1% for
FY10-12 for most of the companies covered.
Table 35
RM: US$ CPO Price Sensitivity To Crude Oil Price
exchange
rate
Crude Oil Px
(US$/barrel) 3.10 3.15 3.20 3.25 3.30 3.35 3.40 3.50 3.55 3.60
40 1,298 1,319 1,340 1,361 1,382 1,403 1,424 1,466 1,487 1,508
45 1,461 1,484 1,508 1,531 1,555 1,579 1,602 1,649 1,673 1,696
50 1,623 1,649 1,675 1,702 1,728 1,754 1,780 1,833 1,859 1,885
55 1,785 1,814 1,843 1,872 1,901 1,929 1,958 2,016 2,045 2,073
60 1,948 1,979 2,011 2,042 2,073 2,105 2,136 2,199 2,230 2,262
65 2,110 2,144 2,178 2,212 2,246 2,280 2,314 2,382 2,416 2,450
70 2,272 2,309 2,346 2,382 2,419 2,456 2,492 2,566 2,602 2,639
75 2,435 2,474 2,513 2,552 2,592 2,631 2,670 2,749 2,788 2,827
80 2,597 2,639 2,681 2,723 2,764 2,806 2,848 2,932 2,974 3,016
85 2,759 2,804 2,848 2,893 2,937 2,982 3,026 3,115 3,160 3,204
90 2,922 2,969 3,016 3,063 3,110 3,157 3,204 3,299 3,346 3,393
95 3,084 3,134 3,183 3,233 3,283 3,333 3,382 3,482 3,531 3,581
100 3,246 3,299 3,351 3,403 3,456 3,508 3,560 3,665 3,717 3,770
105 3,408 3,463 3,518 3,573 3,628 3,683 3,738 3,848 3,903 3,958
110 3,571 3,628 3,686 3,744 3,801 3,859 3,916 4,032 4,089 4,147
115 3,733 3,793 3,853 3,914 3,974 4,034 4,094 4,215 4,275 4,335
120 3,895 3,958 4,021 4,084 4,147 4,210 4,272 4,398 4,461 4,524
Source: RHBRI estimates
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Rolling forward valuations and downgrading sector. We are rolling forward … and fourthly,
our valuation targets for the plantation stocks under our coverage to CY11 (from valuations no longer look
CY10). We believe earnings growth for the planters in the medium term are no as attractive, after rolling
longer as exciting as before, while big premium valuations of plantation companies forward to CY2011.
are no longer justified. For the Malaysian planters, we note that the premium
valuations over their Singapore and Indonesia peers are back to excessive levels
of 35-45%, versus the traditional 20-30% premium. For the big-cap plantation
stocks like Sime Darby, IOIC and KLK, we now assign a target CY11 PE of 16x
(from 18x CY10) for their plantation divisions. For the mid-cap plantation stocks like
Genting Plantations and IJMP, we now assign a target PE of 14.5x CY11 (from 16.5x
CY10) and for small-cap stocks like CBIP, we now assign a target PE of 12x CY11
(from 14x CY10). We also reduce our target PE for First Resources to 10x CY11
(from 11.5x CY11), which is based on an unchanged 30% discount to our revised
target PER for the Malaysian mid-cap plantation stocks. No change to our Outperform
recommendations on IOIC, KLK, First Resources and CBIP and our Underperform
recommendations on Sime Darby, Genting Plantations and IJMP. We downgrade
the plantation sector to NEUTRAL.
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) (%)
KLK Sep 16.38 87.4 123.1 23.5 40.8 18.7 13.3 11.6 3.0 15.0 2.7 OP
IOI Corp Jun 5.11 26.8 33.1 -16.3 23.3 19.1 15.4 13.2 3.7 16.6 2.3 OP
CBIP Dec 2.69 41.2 49.7 37.5 20.6 6.5 5.4 5.9 1.3 5.2 5.2 OP
First Resources D e c 1.09 7.9 9.5 +>100 19.9 9.9 8.3 6.8 1.8 9.8 2.3 OP
IJMP^ Mar 2.49 13.5 14.6 20.5 8.2 18.4 17.0 10.7 1.7 14.5 2.2 UP
Genting Plant Dec 6.79 40.2 45.0 29.3 11.9 16.9 15.1 12.0 1.8 15.1 1.6 UP
Sime Darby Jun 8.10 39.7 48.0 5.9 20.9 20.4 16.9 12.1 2.3 14.4 2.7 UP
Sector Avg 0.3 24.2 19.3 15.5
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Power : Subsidy Restructuring Ahead But Likely Overweight
Neutral To TNB
Recall that under the proposal unveiled by Pemandu end-May, gas price to the power Pemandu has proposed to
sector would see an initial increase of RM4.65/mmbtu to RM15.35/mmbtu (+43.5%). remove gas subsidy to the
Thereafter, the price of gas will be raised by a fixed rate of RM3/mmbtu every six power sector by 2015 …
months until 2015, where the price of gas is expected to reach market price (LNG
import value price), barring which, an adjustment would be made to bring the prices
to parity. Based on this schedule, the gas price to the power sector is expected to
reach RM39.35/mmbtu by end-2014, which appears close to the current market
price of RM38.80/mmbtu.
To compensate TNB for the higher gas price, electricity tariffs would be adjusted … but electricity tariffs
upwards by 2.4 sen/kWh for the initial RM4.65/mmbtu increase in gas price. Thereafter, would be raised
TNB will be allowed to raise electricity tariffs by 1.6 sen/kWh every six months to accordingly
cater for the corresponding increase in gas price. The new electricity tariffs, however,
would not impact household consumers with monthly electricity consumption of <
200kWh.
Overall, we estimate the impact would be earnings neutral to TNB, although this Impact should be neutral
would depend on the level of demand. Assuming: 1) the power sector continues to to TNB, depending on
receive its natural gas allocation of 1,250mmscfd; 2) gas price and average electricity demand
tariff are raised by RM4.65/mmbtu and 2.4 sen/kWh respectively; and 3) average
daily demand of 244GWh (based on TNB’s Sep ’09 – Apr ’10 unit sales), we estimate
the incremental gas cost to TNB would amount to RM5.93m/day. This increase,
however, would be roughly matched by the incremental revenue of RM5.85m/day
from the electricity tariff hike of 2.4 sen/kWh.
With gas allocation capped at 1,250mmscfd, thus, the main variable would now be
demand. If we assume a higher average daily unit sales of 266GWh (based on our
FY11 electricity demand forecast), the incremental revenue from the 2.4 sen/kWh
tariff hike would amount to RM6.39m/day, i.e. more than sufficient to cover the
increase in gas price. Conversely, TNB would be negatively affected if demand
deteriorates from current levels, although a “double dip” in the global economic
recovery is unlikely, in our view.
Notwithstanding the above proposed tariff adjustments, these are just to cover Apart from higher gas
higher gas prices. TNB would still need an upward adjustment in tariffs to cover prices, tariff adjustment
higher coal cost. We estimate TNB’s all-in coal cost is currently around US$97/tonne, also required for rising
as compared to the benchmark US$85/tonne recoverable under the current tariff coal cost …
structure. Based on our sensitivity analysis, every 1% change in our coal cost
assumption (FY10-12: US$90/tonne) would impact our net profit forecasts by 1%.
Apart from higher tariffs to cover rising coal cost, a base tariff is past due and, if
approved, would be even more positive as this would flow straight down to TNB’s
bottomline (1% change in tariff would affect net profit by 6.5%). However, the
probability that this may take place appears low at this juncture, in our view. In the
meantime, potential mitigating factors include: 1) 54% of FY10’s coal requirement … while base tariff
has been locked-in at around US$80-90/tonne; 2) strengthening RM vs. US$; and review is past due
3) stronger demand (especially to help cover higher capacity payments).
The Energy Commission is also expected to call for bids in 2H2010 to expand Bids for next plant-up
Peninsular Malaysia’s generation capacity. TNB’s management had estimated that cycle could be called in
another 6,000MW would be required by 2020, on top of the current existing capacity
2H2010
and additional capacity from the Hulu Terengganu (250MW, by end-2014) and Ulu
Jelai (372MW, by mid-2015) hydroplants. Of the total capacity mentioned above,
2,000MW would be required by 2015 as replacement for Bakun, according to TNB.
The 2,000MW expansion is expected to cost around RM6-7bn and among the reported
interested bidders includes TNB as well as Malakoff. We believe TNB stands a strong
chance with its bid as this expansion would take place at its existing facility at
Manjung, which has sufficient space to accommodate the entire 2,000MW expansion.
Thus, with the basic infrastructure already in place, TNB would be able to put in a
competitive bid.
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Fundamentally, we see TNB as an excellent proxy to a recovering economy. Apr ’10 Apr ’10 demand up
electricity demand surged 18.3% yoy (Mar ’10: +11.7% yoy). YTD (Sep ’09 - Apr 18.3% yoy, reinforcing
’10), unit sales growth for Peninsular Malaysia stood at 9.7% yoy with all three our view that TNB is an
segments reporting stronger demand (industrial: +11.2% yoy; commercial: +7.7% excellent proxy to a
yoy; domestic: +9.8% yoy). Going forward, while we expect electricity demand to
recovering economy
remain healthy, the growth rate would likely moderate as demand would now be
coming from a higher base. We have assumed FY10 demand growth of +7% while
our FY11 and FY12 annual demand growth assumptions stand at +5%. Our FY10
demand growth assumption implies a GDP multiplier of 1.03x, i.e. below the average
multiplier of 1.2x since 2000 and hence, there could be some upside potential to our
FY10 demand growth assumption. Every 1%-pt change in our demand growth
assumption would help lift our net profit forecast by 2.5-3%. Furthermore, as highlighted
above, higher average daily unit sales would also be positive for TNB should the
Government implement its proposal on gas subsidy.
As for Tanjong and YTL Power (YTLP), both have diversified and/or overseas businesses Both Tanjong and YTLP
to help cushion the impact of domestic power policy changes, if any. Both remain on offer rather similar
the lookout for growth opportunities in overseas markets given huge energy demand investment cases
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
sustainable, in our view (Tanjong: FY01/11-13 gross yields of 5.5-6%; YTL Power:
FY06/10-12 gross yields of 9%).
The next leg of growth for Tanjong’s power division would depend on securing new Tanjong’s next leg of
power assets. With the global economy recovering, power projects are being opened growth would depend on
for bidding and in line with this, Tanjong targets to double its generating capacity to securing new power
8,000MW over the next five years through a combination of greenfield developments projects
and M&A activities. 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%. The group is also actively engaging with the turf clubs, Malaysian
Totalisator Board and Ministry of Finance to resolve the operating losses posted by
the RTO division (FY10: RM65.8m).
As for YTLP, focus, we think, would increasingly turn towards the group’s WiMax YTLP- focus to turn 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 XL strategy in Indonesia 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
Company Recommendation FV RM Comments
TNB Outperform 10.50 Target FY11 PER of 13x
Tanjong Market Perform 19.20 SOP comprising DCF for power and target FY11 PER of 15x for gaming
YTL Power Market Perform 2.15 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 8.45 70.7 80.9 42.0 14.4 12.0 10.4 7.2 1.3 4.6 3.3 OP
Tanjong^ Jan 17.80 171.9 175.5 4.1 2.1 10.4 10.1 7.0 1.7 7.6 5.7 MP
YTL Power Jun 2.24 13.7 14.2 18.8 3.6 16.4 15.8 8.8 1.9 10.9 8.9 MP
Sector Avg 29.6 10.2 11.6 10.6
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Property : Still Room For Growth For Developers, Overweight
M-REITs Poised For More Re-Rating
In 2H2010, we believe news flow will take precedence over fundamentals in driving Short-term trading
the share price performance of property developers. Positive news flow is likely to dominated by news flow
come from: (1) The formal awards of Federal land parcels (see Table 39) to “master
developers” and the subsequent farming out of the sub-divided smaller land parcels
to various developers; and (2) The increased interest and hence prices in land and
properties including residential, commercial and industrial in Iskandar Malaysia on
expectation of rising investment and hence economic activities in the growth corridor,
on the back of the improving ties between Malaysia and Singapore.
On the flip side of the coin, share prices of developers may take a beating if the IFRIC 15 could be a drag
International Financial Reporting Interpretations Committee 15 (IFRIC 15) is to be
adopted as per scheduled on 1 Jul 2010. Basically, IFRIC only allows property
development income to be recognised on a “completion” basis, vis-à-vis “progress”
previously. This will result in high earnings volatility due to lumpy profit recognition.
Naturally, developers with a large portfolio of projects (including township development)
and investment properties (such as SP Setia, IJM Land, Mah Sing and SunCity) will
be less affected, while project-driven developers especially those in the high-rise
and commercial segments (such as Glomac, YNHP, Sunrise and Hunza) will take the
full blunt.
Table 39
Federal Land To Be Awarded
Land Area GDV Potential Master Developer(s)
(acres) (RMm)
Matrade Jalan Duta 65 15,000 Naza TTDI (Awarded)
Rubber Research Institute, Sungai Buloh 3,000 10,000 EPF, MRCB
Royal Malaysian Air Force, Sungai Besi 400 Multi-billion 1Malaysia Development Bhd (1MDB), Qatar
Investment Authority
Jalan Cochrane 150 Multi-billion MRCB
Dataran Perdana, Jalan Davis 85 Multi-billion 1MDB, Mubadala
Batu Cantonment army base, Jalan Ipoh, KL 245 - 1MDB, LTAT (Boustead)
KLCC, Jalan Ampang & U-Thant vicinity - - MRCB
Source: Various news reports
Fundamentally, we expect key property developers to continue to report sales growth Growth to sustain
in 2H2010 as well as into 2011, underpinned by: (1) Improving economic outlook;
(2) The still relatively easy monetary conditions; and (3) The rising inflationary
expectation.
The improving economic outlook eases the concern that sales may fall off the cliff Baseline demand for
once the pent-up demand from the crisis years of 2008 and 2009 is gradually property remains strong
exhausted. A better economic outlook will provide an extra kicker to growth in
baseline demand for properties, in addition to favourable structural attributes such
as a young population, rapid urbanisation and the continued shift to nuclear families
from extended families in Malaysia.
Bank Negara Malaysia (BNM) raised the Overnight Policy Rate (OPR) by another Interest rate to remain
25bps on 13 May 2010 to 2.5%, following 25bps on 4 Mar 2010 to normalise interest low vis-à-vis historical
rates. We expect BNM to raise the OPR by another 25bps during its Sep 2010 policy average
meeting. While we acknowledge that, ceteris paribus, the rising OPR will have some
negative bearing on property sales as it erodes affordability, based on our projections
of 2.75% by end-2010 and 3.25-3.50% by end-2011, the OPR is still below the
historical average of 3.00-3.50% in 2010, before it normalises in 2011.
Our top developer picks are Mah Sing (opportunistic land acquisition strategy, fast We like Mah Sing, IJM
turnaround time; OP, FV = RM2.09), IJM Land (highly diversified geographically as Land & SunCity
well as in terms of product offering; OP, FV = RM3.11) as well as SunCity (an
established commercial/high-end residential property developer primarily in the Klang
Valley; OP, FV = RM5.33).
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We believe the M-REIT sector is due for another round of re-rating, thanks largely More re-rating ahead
to the rising investability of the sector on the back of a quantum-leap in the sector’s
size after the listing of at least three new M-REITs comprising Sunway REIT, CapitaMalls
Malaysia Trust and Qatar REIT. While there has been a re-rating of the M-REIT
sector in recent years, it has very much gone unnoticed due to the lack of research
coverage. We believe this is about to change.
Chart 24
Yield Gap Between M-REITs And S-REITs
(%)
13
11
7 197 bps 132 bps

316bps Crisis
5
3
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10
M-REITs (%) S-REITs (%)
* Net yield
Source: RHBRI
The re-rating of the M-REIT sector, which we define as the valuation convergence Convergence with S-REITs
between M-REITs and their more established peers S-REITs, has actually become
apparent since 2007. On a normalised basis (i.e. excluding 4Q08, 1Q09 and 2Q09
at the height of the recent financial crisis), the yield gap between M-REITs and S-
REITs has narrowed from 316 bps in 2007 to 197 bps in 2008, and further to 132
bps in 2009-2010 (see Chart 24). With the more-than-doubling in the M-REIT
sector’s market value from about RM5bn currently to RM11bn over the near term
that will bring along with it a much improved relative investability of the M-REIT
sector vis-à-vis the S-REIT sector, we expect the convergence/re-rating to accelerate
further.
Our top pick for the sector is Axis REIT (proven track record with hands-on We like Axis REIT
management and its aggressive acquisition plans; OP, FV = RM2.35).
Table 40
RNAV And Fair Value Of Developers
RNAV Discount To RNAV Fair Value
(RM/shr) (%) (RM/shr)
Sunrise 3.94 30 2.76

Glomac 2.23 30 1.56
Sunway City 6.27 15 5.33
IJM Land 3.11 0 3.11
Mah Sing 2.09 0 2.09
SP Setia 4.66 0 4.66
YNHB 3.11 40 1.86
KLCC 4.47 15 3.80
Hunza Prop 2.85 50 1.43
Table 41
Valuations Of Property Stocks
(sen) (%) (x) (x) (x) (x) (%)
Sunrise Jun 1.92 32.9 36.2 17.6 10.1 5.8 5.3 3.7 0.8 6.2 2.6 OP
Glomac^ Apr 1.24 15.4 19.4 24.7 26.5 8.1 6.4 4.9 0.6 9.8 7.3 OP
Sunway City Dec 3.90 34.8 38.8 9.8 11.6 11.2 10.1 12.3 0.8 7.2 2.1 OP
Axis REIT Dec 2.01 16.4 17.9 3.0 8.7 12.2 11.2 13.4 1.2 5.9 8.2 OP
IJM Land^ Mar 2.19 18.3 27.3 +>100 49.4 12.0 8.0 11.0 1.3 2.1 0.9 OP
Mah Sing Dec 1.72 13.1 18.3 15.8 39.3 13.1 9.4 4.7 1.6 9.3 4.1 OP
SP Setia Oct 4.19 18.6 21.7 16.4 16.7 22.6 19.3 27.4 1.9 18.2 2.2 MP
YNHB Dec 1.64 16.1 18.0 15.8 11.6 10.2 9.1 6.4 0.9 7.6 3.9 MP
KLCC^ Mar 3.07 26.3 27.3 4.4 3.8 11.7 11.2 5.2 0.5 2.5 3.6 MP
Hunza Prop Jun 1.28 24.2 24.7 27.4 2.1 5.3 5.2 5.0 0.6 5.0 5.8 MP
Quil Capita Dec 1.01 8.9 9.3 7.3 4.7 11.3 10.8 13.1 0.8 2.9 8.1 MP
Sector Avg 20.1 17.8 12.2 10.3
Sector Avg (EX- REIT & KLCC 21.3 18.5 12.2 10.2
STRATEGY 55 PAPER
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Semiconductor & IT : Chip Sales Back To Neutral
Normalised Levels
SIA has raised its global chip sales forecasts for FY10-11 to 28.4% and 6.3% Higher chip sales forecast
respectively (vs. 10.2% and 8.4% previously) on the back of a brighter outlook for
the industry. We believe chip sales will be mainly driven by the robust demand for
consumer electronics in emerging markets as well as stronger-than-expected de-
mand for new innovative devices such as tablets i.e. iPad. Nonetheless, we believe
that it is unlikely that chip sales will continue to register sharp yoy growth going into
2H2010. However, chip sales will likely normalise as demand for electronics recovers
from the downturn. Already, chip sales growth appears to have peaked and is
showing signs of easing – see Chart 25).
Chart 25
Regional and Global Chip Sales (% yoy, April 2008-April 2010)
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
-20.0%
M 08
Ju 08
Ju 08
A 08
S -08
O 08
N 8
D -08
Ja 08
Fe 09
M 09
A 09
M 9
Ju 09
Ju 09
A 09
S -09
O 09
N 9
D -09
Ja 09
Fe 10
M 10
A 10
0
-0
-0
-0
-1
-
-
n-
l-
-
n-
b-
-
n-
l-
-
n-
b-
-
ay
ct
ov
ay
ct
ov
pr
ec
ar
pr
ec
ar
pr
ug
ep
ug
ep
-40.0%
A
-60.0%
Americas Europe Japan Asia Pacific Worldwide
Source : SIA
According to industry sources, key customers of TSMC and UMC such as Qualcomm, Higher bookings seen in
Integrated Memory Logic (iML), Microsoft and Silicon Image are booking higher 2H2010 for TSMC and UMC
orders in the coming quarters due to strong demand stemming from growing inter-
est in innovative devices i.e. high-definition multimedia interface (HDMI) related
chips and smartphones as well as in anticipation of the holiday sales in October in
China and year-end shopping season. Already, TSMC and UMC expect wafer starts
in foundries for these devices to grow over 30% qoq in 3QCY10.
May equipment booking orders surged 415.3.2% yoy (vs. 479.3% in Apr) to US$1.48bn Equipment bookings
mainly due to higher investments in packaging, testing and fabrication equipment as remain above parity
well as the low base factor in May 09. Furthermore, with a book-to-bill ratio of 1.12,
May 2010 was the eleventh consecutive month of a book-to-bill ratio above parity,
suggesting resilient growth in capex trend since July 2009. Further out, capex
spending momentum will be mainly driven by: 1) conversion from gold to copper
wire bonding process; and 2) investment in fabs for fine-pitch immersion machines.
However, we understand chip players are facing difficulties coping with the surge in
demand due to capacity constraints as well as shortages of labour and raw materials
. Note that MPI, Unisem, Notion and JCY are expanding capacity in anticipation of
stronger-than-expected demand for consumer electronics in 2H2010.
According to iSuppli, chip inventory levels remain at low levels despite marginal Inventory levels still
increase in the 1Q. Statistics show that inventory in the 2Q is significantly lower than below norm
expected despite capacity ramp up by tech companies. This indicates that stockpiles
were not replenished in the 1Q and device manufacturers continue to operate on
just-in-time production. We believe the low levels of inventory may cause lead times
to extend through the supply chain which in turn causes shortages for components.
We note that the semiconductor sector (led by large cap stocks such as TSMC and TWSESCI has
ASE) has underperformed Taiwan’s TAIEX Index by -2.4% since early-Jan on the underperformed the
back of concerns on the Euro debt crisis. More recently, the concern has shifted to TWSE beginning Jan
fears of a sharper-than-expected slowdown as global economy begins to normalise.
Therefore, we highlight potential price weakness ahead for Unisem and MPI as their
share price performance usually lags Taiwanese peers.
Going forward, we believe earnings growth for semiconductor players will likely Sector de-rated on
begin to moderate given the rapid growth in the first five months of this year. normalising growth
Therefore, we are downgrading our target PER for semiconductor stocks under our
coverage from 15x to 11x CY11 PER to reflect a more modest growth in the coming
quarters and in line with the weighted average PER for regional peers – see Table
42).
STRATEGY 56 PAPER
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Unisem plans to increase capacity for its higher-end packages. We believe Unisem’s Unisem: Expanding
near-term earnings would be mainly driven by: 1) stronger-than-expected chips higher-end packaging in
demand for its higher-margin QFN packages; 2) lower operating expenses due to Chengdu
cost-cutting measures; and 3) higher contribution from Chengdu and Ipoh. Never-
theless, given the potential slowdown in chip sales as economic growth normalises,
we have cut our FY11-12 revenue growth to 10% p.a. (from 13.8-13.4%). In addi-
tion, we have rolled forward our valuation base year to FY11 (from FY10) and
lowered our target PER. Hence, our fair has been cut to RM3.26 (from RM4.06/share
previously) based on 11x FY11 EPS. We thus downgrade Unisem to Market Perform
(from outperform previously).
Table 42
Global Peer Comparisons
Company Bloomberg ticker Market cap (US$m) Average FY11 PER (x)
TSMC 2330 TT 49,284.3 10.9
ASE 2311 TT 4,516.3 8.6
Amkor AMKR US 1,118.9 5.8
Silicon Precision Ware SPIL US 3,534.0 9.9
UMC UMC US 7,844.6 13.8
Market cap weighted average 11.0
Source: Bloomberg, RHBRI
We are positive on MPI’s near-term earnings outlook given still-resilient chips de- MPI: Rolling out new chips
mand from China as well as its move to roll out the higher-margin X3-MLP (approxi-
mately 50% of current MLP footprint). We highlight that MPI’s earnings would be
driven by: 1) higher margins from high-density matrix leadframe as well as the
migration from gold to copper wirebonding process; and 2) higher contribution from
module packages. Further out, however, we believe the focus will be on sustainability
of growth and the risk that the European debt crisis may begin to affect demand.
Note that 31% of its revenue contribution is derived from Europe. Hence, given the
potential slowdown in chip sales in the region, we have trimmed our FY11 revenue
growth to 9%. Similarly, we have trimmed our EBITDA margins to 28.5% (from
29.3%) to reflect lower sales of its higher-margin packages i.e. X-MLP. We have
rolled forward our valuation base year to FY11 (from FY10) and reduced our target
PER from 15x to 11x. Hence, we have lowered our fair value to RM6.80 (from
RM8.46) and we are downgrading MPI to Market Perform (from outperform pre-
viously).
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 maintain
our Outperform call with a fair value of RM4.68/share which is based on unchanged
10x FY11 PER.
JCY’s earnings will be mainly driven by: 1) strong demand for the 2.5’’ HDD fuelled Banking on data storage
by stronger-than-expected demand for mobile PCs and consumer electronics; 2)
resilient demand for the 3.5’’ HDD stemming from resilient demand for desktops and
gaming consoles; and 3) improving corporate and consumer IT spending. We main-
tain our fair value of RM2.16 which is based on an unchanged 12x FY11 PER with
an Outperform call.
While we believe demand for consumer electronic remains solid given the tech- Downgrade to Neutral
hungry emerging markets, we believe the prolonged Euro debt crisis may be det-
rimental to consumer sentiment in the region. Note that Europe accounts for an
estimated 19% of the global market share for consumer electronics. Hence, in view
of the risk of potentially weaker demand for chips, we have downgraded the sector
to Neutral (from overweight).
Table 43
Valuations Of Semiconductor/IT Stocks
(sen) (%) (x) (x) (x) (x) (%)
Notion Vtec Sep 2.93 34.7 46.8 35.3 35.1 8.6 6.4 6.6 2.2 6.3 2.2 OP
JCY Internal Sep 1.51 14.7 18.0 45.5 22.2 10.2 8.4 9.1 2.2 0.5 4.6 OP
Unisem Dec 2.98 27.1 29.6 +>100 9.3 11.0 10.1 5.3 1.4 3.5 1.7 MP
MPI Jun 6.20 45.1 60.8 +>100 3 4 . 7 13.7 10.2 4.0 1.4 3.4 3.2 MP
Sector Avg 63.6 22.2 10.1 8.8
STRATEGY 57 PAPER
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Telecommunication : Upside Potential For Non-Voice Overweight
Revenue And Dividends
With the exception of Digi, voice revenue has been declining since 4Q09 mainly due Voice revenue growth
to a combination of declining minutes of usage (MOU), revenue per minute (RPM) slowing
and net adds. Looking forward, we expect voice revenue growth to continue to slow,
as voice minutes are increasingly becoming commoditised and tariffs would continue
to be under pressure (hence resulting in declining ARPU).
While we expect voice revenue growth to decline further, we see strong growth … but expected to be
ahead for the non-voice services, and this is mainly supported by factors such as: mitigated by strong data
1) young demographic profile that are internet savvy; 2) acceleration in deployment and broadband revenue
of advanced technologies as well as faster and more advanced mobile internet growth
networks; 3) influx of feature-rich as well as data-optimised handsets and
smartphones; 4) falling device prices; 5) mobility lifestyles and rising popularity of
social networking services such as Facebook, Friendster and Twitter; and 6) content
and application availability. A case in point is Celcom, where data revenue/mobile
revenue grew from 27.2% in 1Q09 to 30.4% in 1Q10.
We expect EBITDA margins to remain stable mainly due to: 1) mid-to-high single-
digit revenue growth; 2) greater economies of scale; 3) players’ ongoing cost
management initiatives; and 4) the shift in players’ focus towards the provision of
non-voice services, in particular, the wireless broadband and data value-added
services, which would help mitigate pricing pressures and higher subscriber/reten-
tion costs.
We are keeping our view that with the exception of Axiata, the telcos will continue Capital management still
to offer generous dividend yields to investors on the back of: 1) stable EBITDA on the cards
margins; 2) capex spending likely to trend down further; and 3) clean balance
sheets. On top of regular dividends, we believe there is a strong chance that the
telcos would supplement these further with specials.
The current Mandatory Standard on Access Pricing is expiring on 30 Jun 2010 and Access pricing review due
we believe the review may see the gap between mobile and fixed termination rates out anytime soon
narrow further. If that happens, potential beneficiaries including TM (higher fixed
termination rate and lower mobile termination rate) and Digi as both these compa-
nies have a relatively smaller customer base. On the other hand, this would likely
affect both Celcom and Maxis, although Maxis’ management had previously said that
the impact is likely to be insignificant.
We continue to like Axiata (Outperform, FV = RM4.53) for its strong earnings Axiata – Improvements
growth, driven by operational improvements from all main subsidiaries, namely gaining momentum, but
Celcom, XL, Dialog and Robi. Earnings momentum aside, we believe concerns on potential writedown on
whether Axiata would write down its investment in Idea would remain in the near
Idea may dampen
term. While this may affect sentiments, we highlight that the impairment (if any):
sentiment
1) is a non-cash item; 2) would not impact our core net profit forecasts; 3) does
not affect our SOP-derived fair value; and 4) is not likely to impair Axiata’s ability
to pay future dividends. Fundamentals aside, management revealed that it is in the
midst of formulating a dividend policy (and it is expected to be announced by
3QFY12/10). We estimate a full-year DPS of 8.6sen (which in turn translates to a net
yield of 2.2%), assuming: 1) a dividend payout ratio of 30%; and 2) dividends are
declared from FY12/11 net profit.
Looking forward, we believe Digi’s (Outperform, FV = RM25.70) key revenue Digi – iPhone to drive
growth drivers include: 1) further penetration into the underserved markets; 2) data revenue growth, and
market share gains for existing subscribers; and 3) continued focus on CRM activi- better clarity on recurring
ties to upsell to existing customers. Beyond 2010, non-voice revenue should start dividends now
to contribute more significantly. The recent announcement on Digi’s target capital
structure (i.e. net debt:equity that ranges from 35:65 to 45:55), coupled with its 1Q
STRATEGY 58 PAPER
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dividend payout ratio of close to 100% indicate that it will likely continue to keep
dividends attractive going forward. Assuming Digi is to achieve its target net debt:equity
ratio of 45:55 by end-FY12/10, we estimate Digi would need to declare another 48
sen/share in addition to our FY12/10 net DPS projection of RM1.39/share.
We believe Maxis (Outperform, FV = RM6.20) is in a strong position to capture Maxis - riding on rising
the rising popularity of mobile broadband and strong data revenue growth, given its data traffic and dividends
large customer base with a relatively higher proportion of postpaid subscribers, could surprise on the
which we believe are typically of higher value relative to its rivals given that the upside
majority of Maxis’ customers are in the more affluent regions of Peninsular Malaysia.
These customers, we think, are also likely to be early adopters of technology and
this would be positive in terms of adoption of wireless broadband and smartphones.
We believe Maxis would remain generous with dividends as: 1) management is
committed to optimise the balance sheet; and 2) Aircel’s recent successful bid for
both the wireless broadband internet and 3G licences in India for US$2.1bn as well
as network rollout plan mean that further funding could be required from Maxis
Communications Bhd (MCB). This could put pressure on Maxis to declare higher
dividends. Maxis targets a total net DPS of 35 sen for FY10 and we estimate
additional net DPS of around 13 sen (2.5% yield), assuming net debt/EBITDA reaches
1x by end-2010.
We believe the attention on TM (Market Perform, FV = RM3.55) would still remain TM – All eyes on HSBB and
on the recently launched UniFi service (i.e. High Speed Broadband service). Since potential special
launch on 26 Mar 10, the UniFi packages registered a take up of approximately 2,400 dividends
customers (as at end-May 10). Management is positive that the take-up would
increase significantly in the remaining months of FY10 as it is on track to extend its
coverage from 4 areas currently to 22 areas by Jul 10 and 48 areas by end-10. In
our view, TM’s investment thesis has not changed, i.e. a dividend policy that offers
investors the comfort of a minimum dividend income stream. On top of its commit-
ment of minimum dividend of RM700m p.a., we believe TM has the ability to pay
shareholders in excess of its dividend policy, given: 1) its healthy cash pile and gross
debt/EBITDA of RM3.9bn and 2.3x as at 31 Mar 10 (vs. gross debt/EBITDA comfort
zone of 2-2.5x); and 2) its 200m Axiata shares, which will immediately raise its cash
pile by RM788m or 9.3 sen/share upon monetisation.
Table 44
Valuations Of Telecommunications Stocks
(sen) (%) (x) (x) (x) (x) (%)
Digi Dec 22.96 139.0 152.4 8.0 9.7 16.5 15.1 8.1 13.0 9.9 6.1 OP
Axiata Dec 3.94 24.7 28.5 34.0 15.5 15.9 13.8 6.5 2.8 6.2 0.0 OP
Maxis Dec 5.29 33.2 36.2 6.6 9.1 15.9 14.6 8.9 n.m 10.3 6.3 OP
TM Dec 3.36 12.5 13.5 -6.1 8.2 27.0 24.9 5.7 1.9 4.1 7.8 MP
Sector Avg 16.8 11.3 16.8 15.1
STRATEGY 59 PAPER
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Timber : Gradual Recovery Anticipated Neutral
Latest April Japan housing starts saw a marginal improvement (+0.6% yoy to 66,568 Japan housing recovery
units), the first in 17 months, which signifies that Japan’s housing recovery may start may start gaining pace
gaining pace soon. This is supported by the number of building permits issued, which soon
has been increasing for the past six months. April permits were about 11% up yoy.
Going forward, we expect housing starts to improve further on a gradual basis yoy,
mainly due to the low base effect.
Chart 26
Japan Housing Starts
'000 units
130
120
110
100
90
80
70
60
50
40
30
20
10
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2005 2006 2007 2008 2009 2010
According to Japan Lumber Report (JLR), there is still strong demand for selective June tropical log prices
logs from India and China, which is leading to an upward movement in log prices. are up due to supply
Coupled with tight log supply in Malaysia due to adverse weather conditions and constraint
dwindling log production arising from smaller balance in log production quota (a new
one-year quota from Sarawak state government to be set in Jul 2010), log export
prices are now at US$200/cum for meranti regular FOB, which is up US$2-3/cum (or
1-2%) from May 2010. This is also up about 10% from the YTD low of about US$180/
cum. We understand that log inventories in Japan plywood mills are also currently
at the lower end, and as such, some trading houses have been receiving offers of
up to US$220/cum for meranti regular FOB. These selling prices for logs are higher
than our assumption of US$180-185/cum levels for 2010. However, while we prefer
to maintain our assumptions for now to remain conservative, we highlight that there
could be potential upside for the logging division if prices remain at current levels
for the rest of the year.
According to JLR, average selling prices for plywood have also started to firm up Selling prices for plywood
since Apr 2010, after a 10-15% increase from the YTD-low. However, industry firming up
sources are more bullish, reporting an average of 15-22% increase from the YTD-
low. We note that the industry numbers are currently in line with our forecasts. We
believe that the price increases were mainly a cost-push factor, caused by the: 1)
limited supply of tropical plywood in Japan, as Japanese manufacturers continued
cutting production in the midst of rising input costs; and 2) rising input costs for
Malaysia plywood manufacturers such as log, glue and logistics cost. We understand
that most of the timber players have cleared their outstanding plywood inventories
in 1QCY10, when demand started to pick up due to restocking activities. Together
with more predictable tropical plywood demand from gradually improving housing
activities coupled with low inventory levels in Japan of about one month (domestic
plywood inventory in Japan dropped 26% yoy in YTD-Apr 2010), we expect plywood
prices to stabilise at current levels, as we believe that current price levels of plywood
products are more reflective of the current demand and supply situation. This in turn
would help timber players start recording some profits / minimise their losses in their
plywood division from CY10 onwards.
STRATEGY 60 PAPER
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We have rolled forward our valuation targets for the timber division to CY11 (from Valuation targets
CY10), given that we are already midway through 2010. We believe that near-term
reduced and rolled
earnings growth for the timber division may not be exciting, as we still anticipate
forward to CY2011
recovery in the division to be gradual. Meanwhile, we have reduced our valuation
target for the timber division for CY11 to 12x (from 14x CY10 previously). Following
RHBRI’s plantation sector update, we have also rolled forward and reduced our
valuation target for the plantation division to 12x CY11 (from 14x CY10). Subse-
quently, we also rolled forward and reduced our target PER for Evergreen to 10x
CY11 (from 11x CY10).
Despite the lacklustre growth in timber division earnings, we anticipate greater

plantation earnings for timber players with plantation exposure i.e. Ta Ann and Jaya
Tiasa, due to maturing plantation hectarage and improving FFB yield. After our
change in valuation targets, we upgrade Jaya Tiasa to an Outperform (FV =
RM4.95) and downgrade WTKH to a Market Perform (FV = RM1.25). We maintain
our Outperform recommendations for Ta Ann (FV = RM6.95) and Evergreen (FV
= RM2.30). Top Picks are Ta Ann and Evergreen.
Table 45
Change In Valuation Bases
Company Fair Value (RM/share) Valuation Methodology Recommendation

Before After Before After Before After
Ta Ann 6.45 6.95 Target PER of 14x CY10 Target PER of 12x CY11 OP OP
earnings for the timber di earnings for the timber
vision and 14x CY10 earn division and 12x CY11
ings for the plantation di earnings for the plantation
vision division
WTKH 1.45 1.25 Target PER of 14x CY10 Target PER of 12x CY10 OP MP
earnings earnings
JTiasa 3.05 4.95 Target PER of 14x CY10 Target PER of 12x CY11 UP OP
earnings for the timber di earnings for the timber
vision and 14x CY10 earn division and 12x CY11
ings for the plantation di earnings for the plantation
vision division
Evergreen 2.30 2.30 Target PER of 11x CY10 Target PER of 10x CY11 OP OP
earnings
earnings
Table 46
Valuations Of Timber Stocks
(sen) (%) (x) (x) (x) (x) (%)
Ta Ann Dec 5.15 44.7 56.3 50.3 25.9 11.5 9.2 7.6 1.6 7.7 5.8 OP
Evergreen Dec 1.53 21.0 23.0 27.0 9.4 7.3 6.7 6.5 1.0 6.6 5.5 OP
Jaya Tiasa^ Apr 3.28 27.7 55.5 +>100 +>100 11.9 5.9 9.0 0.8 7.6 0.0 OP
WTKH Dec 1.16 10.4 14.3 +>100 37.3 11.2 8.1 6.4 0.6 n.m 5.2 MP
Sector Avg (Timber) 87.6 39.8 10.2 7.3
STRATEGY 61 PAPER
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Transportation : Modest Recovery Neutral
Airlines: Returning To Profitability In 2010
International Air Transport Association (IATA) expects the global airline industry to US$2.5bn profits for
return to the black with US$2.5bn profits in 2010 vis-à-vis US$9.9bn losses in 2009 global airline sector in
(see Table 47). It said that while the global traffic is already back to its pre- 2010
recession levels, not all the regions are recovering equally with the weakest link
being Europe. It cautioned that apart from the volatile crude oil prices, excess
capacity is another key downside risk as of the total 1,340 aircraft to be delivered
in 2010, only 500 are for replacement.
We are positive on AirAsia as we believe it has finally done the right things such as: We like AirAsia
(1) To adopt a more “disciplined” growth strategy (i.e. less aggressive fleet expansion)
to ensure that its gearing level is in check; (2) To gradually take back the financial
and non-financial support lent to associates Thai AirAsia, Indonesia AirAsia and
AirAsia X as the time has come for them to stand on their own feet (via, among
others, debt raising in their own capacity or IPO); and (3) To deliver the earnings.
However, we remain cautious on MAS as: (1) It is still saddled with fuel hedges at We are cautious on MAS
high prices; (2) Its much anticipated fleet renewal programme may be derailed with
the uncertainty surrounding its order for the six A380 aircraft; and (3) Its quarterly
operating results remain volatile with a loss in the latest quarter, i.e. 1QFY12/10.
Table 47
Airline Industry P&L
US$bn 2007 2008 2009E 2010F
Revenue 510.0 564.0 483.0 545.0
Fuel cost -134.0 -189.0 -113.0 -140.0
Non-fuel cost -363.1 -391.0 -379.9 -402.5
Net profit 12.9 -16.0 -9.9 2.5
Breakeven weight load factor (%) 60.8 63.8 63.4 64.5
Weight load factor achieved (%) 63.3 62.8 63.2 66.1
Crude oil price (US$/barrel) 73.0 99.0 62.0 79.0
Source: IATA
Chart 27
Global Air Passenger & Freight Growth Rates
20
15
10
5
%
0
2007 2008 2009E 2010F 2011F 2012F 2013F
-5
-10
-15
Revenue Passenger Km Freight Tonne Km
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.
STRATEGY 62 PAPER
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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 28), 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 1.1% growth in world crude oil
demand to 85.37m barrels/day projected by OPEC. The demand for petroleum
tanker service correlates to world crude oil demand.
Meanwhile, MISC’s shareholders may be in for a windfall if the much-talked-about OFS pursuant to MMHE’s
listing of its unit, Malaysia Marine and Heavy Engineering (MMHE), entails an offer listing?
for sale (OFS) to MISC’s shareholders at attractive valuations. On the other hand,
there are concerns if MMHE will be hit by cost-overrun as well, as in the case of
Sime Darby. We take comfort that MMHE is very well managed and its earnings
track record has been good in the past.
Chart 28
Arabian Gulf To Singapore 80,000-Tonne Dirty Tanker Rate
30,000
25,000
US$/Day
20,000
15,000
10,000
5,000
09/W2
09/W5
09/W8
09/W11
09/W14
09/W17
09/W20
09/W23
09/W26
09/W29
09/W32
09/W35
09/W38
09/W41
09/W44
09/W47
09/W50
10/W2
10/W5
10/W8
10/W11
10/W14
10/W17
10/W20
10/W23
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 for
signing of idX, a US-based international interior design firm, as the tenant for ILB’s 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 48
Valuations Of Transportation Stocks
(sen) (%) (x) (x) (x) (x) (%)
Ai rA sia Dec 1.27 15.5 19.7 -15.3 26.9 8.2 6.5 9.8 1.1 4.4 0.0 OP
ILB Dec 0.93 10.0 11.4 +>100 1 3 . 2 9.3 8.2 5.4 0.5 8.2 3.2 OP
Freight Jun 0.81 13.0 15.1 17.0 16.4 6.2 5.4 3.3 0.8 5.0 5.6 OP
MAHB Dec 5.00 34.1 39.0 19.3 14.4 14.7 12.8 9.6 1.4 10.3 3.4 OP
MAS Dec 2.10 11.4 14.4 +>100 2 5 . 8 18.4 14.6 10.8 1.9 11.0 0.0 UP
MISC^ Mar 8.70 33.0 36.7 81.2 11.2 26.4 23.7 13.6 1.6 1 2.2 4.1 UP
Sector Avg 41.3 16.3 20.8 17.6
STRATEGY 63 PAPER
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Table 49
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 3.22 4.92 22.0 27.4 37.8 +>100 24.4 38.1 14.6 11.8 8.5 10.9 9.3 7.3
AEON Dec 4.90 5.80 38.0 41.4 45.2 10.7 8.7 9.4 12.9 11.8 10.8 5.2 5.1 3.7
AFG^ Mar 2.97 3.40 19.5 24.4 26.6 30.6 25.2 9.1 15.3 12.2 1 1 . 2 n.a. n.a. n.a.
Affin Dec 3.04 3.55 24.9 27.5 29.6 27.0 10.5 7.6 12.2 11.1 1 0 . 3 n.a. n.a. n.a.
AirAsia Dec 1.27 1.88 18.3 15.5 19.7 +>100 (15.3) 26.9 6.9 8.2 6.5 8.0 9.8 9.2
Allianz Malaysia Dec 4.69 6.68 77.2 71.9 86.2 68.0 (7.0) 19.9 6.1 6.5 5.4 n.a. n.a. n.a.
AMMB^ Mar 5.03 6.60 34.7 39.9 45.7 11.7 14.8 14.6 14.5 12.6 1 1 . 0 n.a. n.a. n.a.
Amway Dec 7.68 8.45 44.1 54.5 56.5 (23.7) 23.6 3.5 17.4 14.1 13.6 10.4 8.9 8.7
Axiata Dec 3.94 4.53 18.4 24.7 28.5 27.8 34.0 15.5 21.4 15.9 13.8 7.8 6.5 5.6
Axis REIT Dec 2.01 2.35 16.0 16.4 17.9 4.8 3.0 8.7 12.6 12.2 11.2 13.9 13.4 12.8
B-Toto^ Apr 4.33 5.05 28.9 32.3 33.8 (11.6) 11.7 4.9 15.0 13.4 12.8 9.9 9.7 9.5
CIMB Dec 7.06 8.40 39.8 47.8 56.3 37.5 20.2 17.9 17.8 14.8 1 2 . 5 n.a. n.a. n.a.
BP Plastics Dec 0.60 0.88 8.7 10.0 10.9 31.9 15.7 8.9 6.9 5.9 5.4 3.3 1.8 1.2
Carlsberg Dec 4.98 5.85 24.7 40.7 42.8 0.0 64.8 5.2 20.1 12.2 11.6 12.0 8.1 7.3
CBIP Dec 2.69 3.70 30.0 41.2 49.7 (32.0) 37.5 20.6 9.0 6.5 5.4 7.5 5.9 5.1
Dialog Jun 1.06 1.30 5.3 6.1 8.8 37.0 14.9 44.8 20.0 17.4 12.0 11.5 15.2 6.6
Daibochi Dec 3.18 4.20 30.0 35.1 38.0 +>100 16.9 8.3 10.6 9.1 8.4 7.1 5.7 5.0
Digi.com Dec 22.96 25.70 128.7 139.0 152.4 (13.4) 8.0 9.7 17.8 16.5 15.1 8.6 8.1 7.4
Emas Kiara Dec 0.52 1.52 11.4 13.1 15.2 (14.7) 15.0 16.7 4.6 4.0 3.4 4.3 3.4 2.9
Evergreen Dec 1.53 2.30 16.6 21.0 23.0 5.9 27.0 9.4 9.2 7.3 6.7 8.1 6.5 5.5
EPIC Dec 1.82 2.72 24.9 26.9 27.2 81.0 7.9 1.1 7.3 6.8 6.7 4.9 5.3 4.5
Faber Dec 2.80 3.54 22.8 26.5 24.2 35.3 16.4 (8.8) 1 2 . 3 10.6 11.6 5.3 4.2 4.1
FajarBaru Builder Jun 0.97 1.39 15.2 13.6 14.7 56.3 (10.1) 7.7 6.4 7.1 6.6 n.m n.m n.m
First Resources (S$) Dec 1.09 1.35 2.7 7.9 9.5 (61.5) +>100 19.9 28.8 9.9 8.3 7.9 6.8 5.9
Freight Mgmt Jun 0.81 1.53 11.1 13.0 15.1 11.0 17.0 16.4 7.3 6.2 5.4 4.3 3.3 3.0
Genting Bhd Dec 7.43 8.95 31.6 53.4 56.4 (31.3) 68.8 5.7 23.5 13.9 13.2 7.6 5.1 4.0
Genting S’pore (S$) Dec 1.14 1.35 -1.4 2.7 3.8 (>100) +>100 37.9 n.m. 41.8 3 0 . 3 n.m 2 1 . 3 1 5 . 0
Glomac^ Apr 1.24 1.56 12.3 15.4 19.4 (1.4) 24.7 26.5 10.1 8.1 6.4 5.7 4.9 4.4
Hartalega Mar 7.93 9.29 59.1 71.5 83.6 80.8 21.0 16.9 13.4 11.1 9.5 9.8 8.0 6.2
HSL Dec 1.45 1.95 10.2 13.4 16.2 35.3 30.8 21.4 14.2 10.8 8.9 9.1 6.5 4.9
IJM Land^ Mar 2.19 3.11 8.9 18.3 27.3 50.4 +>100 49.4 24.6 12.0 8.0 19.8 11.0 7.8
ILB Dec 0.93 1.48 -9.0 10.0 11.4 (>100) 2 1 1 . 5 13.2 n.m. 9.3 8.2 10.5 5.4 5.5
IOI Corp Jun 5.11 6.65 32.1 26.8 33.1 (0.1) (16.3) 23.3 15.9 19.1 15.4 12.9 13.2 11.3
Jaya Tiasa^ Apr 3.28 4.95 9.4 27.7 55.5 91.5 +>100 +>100 3 4 . 9 11.9 5.9 13.0 9.0 5.6
JCY Intl Sep 1.51 2.16 10.1 14.7 18.0 2.2 45.5 22.2 14.9 10.2 8.4 12.4 9.1 7.3
KFCH Dec 10.06 11.20 65.8 77.1 89.5 10.0 17.2 16.2 15.3 13.1 11.2 7.7 6.6 5.5
KL Kepong Sep 16.38 20.55 70.8 87.4 123.1 (33.3) 23.5 40.8 23.1 18.7 13.3 14.8 11.6 8.5
Kossan Dec 7.59 13.39 74.9 82.6 1 0 3 . 0 +>100 10.3 24.7 10.1 9.2 7.4 7.5 6.2 4.8
KPJ Healthcare Dec 3.38 4.25 21.0 24.0 26.6 29.2 14.6 10.7 16.1 14.1 12.7 9.7 8.3 7.5
Kurnia Asia Dec 0.50 0.63 3.8 6.6 7.0 +>100 73.7 5.3 12.9 7.4 7.1 13.5 5.1 5.0
LPI Capital Dec 15.30 16.70 90.9 111.4 128.2 21.0 22.5 15.1 16.8 13.7 11.9 16.6 14.0 11.9
MAHB Dec 5.00 6.24 28.6 34.1 39.0 3.0 19.3 14.4 17.5 14.7 12.8 10.2 9.6 8.8
Maybank Jun 7.58 9.66 37.8 51.3 60.7 (39.7) 35.7 18.1 20.0 14.8 1 2 . 5 n.a. n.a. n.a.
Mah Sing Dec 1.72 2.09 11.3 13.1 18.3 (8.5) 15.8 39.3 15.2 13.1 9.4 6.3 4.7 2.8
^ FY09, FY10 & FY11 valuations refer to those of FY10, FY11 & FY12
STRATEGY 64 PAPER
Table 49
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
13.9 8.2 6.3 2.6 2.3 1.9 2.9 3.7 4.6 18.1 20.1 44.0 9.5 (12.7) 187.5 467
18.6 10.8 2.6 1.7 1.6 1.4 2.4 2.4 2.4 14.3 13.9 13.7 (1.8) 0.0 15.0 1,720
n.a. n.a. n.a. 1.8 1.6 1.4 2.9 2.9 2.9 10.6 12.2 12.0 10.4 6.1 28.6 4,598
n.a. n.a. n.a. 1.2 1.2 1.2 2.8 2.8 2.8 8.1 8.6 9.0 7.0 7.4 81.4 4543
4.3 4.4 3.7 1.2 1.1 1.0 0.0 0.0 0.0 20.9 15.0 16.2 14.4 (7.3) 6.7 3531
6.1 7.1 6.3 1.4 1.2 1.0 0.4 0.4 3.2 26.6 18.3 17.2 (2.3) (9.8) 14.4 722
n.a. n.a. n.a. 1.9 1.7 1.5 2.5 3.7 4.2 11.6 11.9 12.3 8.2 1.2 47.9 15,161
16.9 7.6 8.4 5.3 5.1 5.0 6.3 6.5 6.8 30.7 37.1 37.3 3.1 4.6 11.5 1,263
6.3 6.2 5.7 3.5 2.8 2.4 0.0 0.0 2.5 9.6 10.9 11.2 10.1 3.1 3.1 33,274
10.0 5.9 5.5 1.1 1.2 1.2 7.9 8.2 8.9 8.6 9.6 10.8 1.5 0.0 33.1 617
13.0 17.6 17.5 n.m n.m n.m 6.2 6.0 6.5 82.4 103.4 104.9 0.9 (2.0) (8.1) 5,850
n.a. n.a. n.a. 4.5 4.1 3.4 1.7 1.7 1.7 15.0 16.1 17.4 7.3 1.1 57.8 49,869
4.8 3.7 3.0 0.8 0.7 0.7 6.7 6.8 7.4 11.9 12.5 12.5 (4.0) (4.0) 45.1 107
14.3 n.m 9.7 3.0 2.7 2.5 3.5 4.9 5.2 15.4 23.2 22.3 7.3 1.5 34.4 1,534
7.0 5.2 4.5 1.5 1.3 1.1 3.7 5.2 6.3 17.4 22.3 22.5 14.0 (6.3) (18.0) 400
12.4 15.3 11.0 3.4 4.2 3.5 2.7 3.2 4.6 25.3 25.3 56.8 17.3 (12.6) 335.6 2098
7.0 7.6 7.1 4.0 3.4 2.9 6.1 7.1 7.9 19.2 20.5 20.1 5.0 (3.6) 37.6 241
10.7 9.9 8.8 11.7 13.0 12.7 4.5 6.1 6.8 58.5 74.7 85.5 1.7 1.0 8.0 17,851
1.9 2.5 2.2 0.6 0.5 0.5 2.9 2.9 2.9 13.4 13.3 13.7 1.7 1.0 8.0 44
6.3 6.6 5.4 1.1 1.0 0.9 2.6 5.5 6.8 12.9 14.6 14.5 15.0 (7.3) 96.2 785
3.8 4.7 4.2 1.0 0.9 0.8 4.8 5.2 5.2 14.2 13.9 12.9 15.2 13.0 15.9 626
7.6 6.6 7.0 2.9 2.4 2.0 2.1 2.5 2.9 23.4 22.5 33.0 33.3 25.0 185.7 1,016
3.1 14.7 12.3 1.2 1.3 1.2 5.7 5.7 5.7 21.1 20.4 20.2 1.6 (9.0) 0.4 158
10.2 9.8 8.1 2.1 1.8 1.5 1.9 2.3 2.8 8.5 19.1 19.7 1.6 (9.0) 0.4 1,157
5.8 5.0 4.7 0.9 0.8 0.7 6.2 5.6 5.6 16.7 18.5 19.3 4.5 2.5 26.6 99
11.2 14.9 5.4 2.8 2.3 2.0 1.0 1.3 1.5 8.9 13.3 12.4 17.0 12.9 12.9 27,527
n.m 11.1 12.5 4.9 4.4 3.8 0.0 0.0 0.0 n.m 7.4 9.4 23.2 23.2 77.8 13,327
6.9 9.8 7.3 0.7 0.6 0.6 7.3 7.3 7.3 12.9 16.8 18.0 4.2 (8.1) 47.6 368
12.1 10.2 8.8 5.4 3.9 3.0 1.3 1.5 1.8 47.0 70.6 63.0 4.5 (3.4) (3.4) 1922
19.8 13.1 10.5 2.8 2.3 1.8 1.7 1.7 1.7 21.1 23.0 22.8 10.1 (1.8) 86.3 806
11.8 2.1 2.0 1.5 1.3 1.1 0.9 0.9 0.9 6.1 11.5 15.2 6.3 (3.5) (3.5) 2,416
4.6 8.2 9.1 0.5 0.5 0.4 3.2 3.2 3.2 n.m 5.2 5.6 1.7 3.3 2.3 183
14.3 16.6 13.7 3.8 3.7 3.2 1.6 2.3 2.6 22.7 19.4 21.2 7.1 (5.2) 12.5 32609
10.3 7.6 4.4 0.9 0.8 0.7 0.6 0.0 0.0 2.4 6.6 11.7 9.3 (6.3) 33.9 927
0.5 0.5 0.3 3.8 2.2 2.7 3.4 4.6 6.0 31.1 32.3 31.8 4.1 (12.2) n.a 3,088
8.2 8.3 8.3 2.8 2.4 2.0 2.4 2.6 2.8 17.6 18.0 18.2 18.4 28.2 45.8 1,995
17.4 15.0 12.5 3.1 3.0 2.7 2.4 2.7 4.0 13.5 15.9 20.6 5.3 0.2 36.5 17,486
14.9 8.0 8.1 3.4 2.6 1.9 1.6 1.4 1.6 36.5 31.7 52.5 7.2 (3.7) 102.9 1,213
18.7 13.4 10.0 1.5 1.5 1.5 3.6 4.1 4.7 18.2 18.2 17.0 24.7 17.4 191.5 1,783
12.9 7.4 7.1 2.3 1.9 1.5 0.0 0.0 2.8 17.2 25.1 22.0 7.6 (10.0) 23.8 738
4.1 3.9 3.7 2.3 2.2 2.1 0.0 7.2 8.3 27.2 27.3 23.9 0.7 11.7 40.4 2,122
n.m 10.3 9.6 1.6 1.4 1.3 3.0 3.4 3.9 9.0 9.7 10.1 2.0 5.3 56.3 5,500
n.a . n.a. n.a. 2.2 2.0 1.8 1.1 3.8 4.6 9.9 14.0 15.2 7.8 2.6 28.5 53,649
8.2 9.3 3.0 1.7 1.6 1.4 3.8 4.1 5.7 12.3 12.4 15.9 2.0 5.3 56.3 1,351
STRATEGY 65 PAPER
Table 49

OUTPERFORM
Maxis Dec 5.29 6.20 31.1 33.2 36.2 (2.7) 6.6 9.1 17.0 15.9 14.6 10.1 8.9 8.0
MBM Dec 2.93 5.31 28.2 45.8 48.2 (41.7) 62.3 5.3 10.4 6.4 6.1 26.9 15.4 12.9
Media Chinese^ Mar 0.86 1.16 8.0 9.0 8.7 80.1 12.7 (4.1) 1 0 . 7 9.5 9.9 5.9 4.6 4.5
Media Prima Dec 2.05 2.80 6.9 16.3 18.0 (50.4) +>100 10.1 29.7 12.6 11.4 22.3 7.2 6.4
Notion Vtec Sep 2.93 4.68 25.6 34.7 46.8 6.7 35.3 35.1 11.6 8.6 6.4 7.3 6.6 5.1
Parkson Jun 5.66 6.40 25.4 29.2 36.3 22.0 15.0 24.3 22.3 19.4 15.6 6.0 5.1 3.7
Plus Dec 3.39 4.13 23.7 23.6 36.3 9.8 (0.3) 53.5 14.3 14.3 9.3 9.6 9.9 7.4
Proton^ Mar 4.57 5.50 45.2 67.4 75.2 +>100 49.2 11.6 10.1 6.8 6.1 n.m 7.4 7.0
Public Bank-F Dec 11.90 13.75 73.3 82.0 91.7 (4.7) 11.8 11.8 16.2 14.5 1 3 . 0 n.a. n.a. n.a.
Public Bank-L Dec 11.90 13.75 73.3 82.0 91.7 (4.7) 11.8 11.8 16.2 14.5 1 3 . 0 n.a. n.a. n.a.
QL Resources^ Mar 4.01 4.60 26.9 31.1 36.5 19.4 15.4 17.4 14.9 12.9 11.0 7.8 6.1 5.8
RCE Capital^ Mar 0.64 1.12 10.4 10.8 11.3 10.8 4.3 4.6 6.1 5.9 5.6 7.1 8.2 8.6
Suncity Dec 3.90 5.33 31.7 34.8 38.8 9.3 9.8 11.6 12.3 11.2 10.1 6.9 12.3 9.4
Sunrise Jun 1.92 2.76 27.9 32.9 36.2 10.5 17.6 10.1 6.9 5.8 5.3 4.7 3.7 3.5
Sunway Dec 1.52 2.35 13.6 22.8 25.2 (27.0) 68.0 10.2 11.2 6.7 6.0 7.3 5.5 5.6
Ta Ann Dec 5.15 6.95 29.7 44.7 56.3 (11.5) 50.3 25.9 17.3 11.5 9.2 9.1 7.6 6.2
Tan Chong Dec 4.31 6.16 22.7 39.0 45.3 (24.9) 72.0 16.2 19.0 11.1 9.5 12.6 8.2 7.2
Tenaga Aug 8.45 10.50 49.8 70.7 80.9 (7.4) 42.0 14.4 17.0 12.0 10.4 8.1 7.2 6.5
Top Glove Aug 13.38 16.40 57.3 89.0 96.2 54.2 55.3 8.1 23.3 15.0 13.9 13.1 9.2 8.2
UMW Dec 6.32 7.50 33.6 55.3 59.2 (35.8) 64.4 7.2 18.8 11.4 10.7 7.4 5.2 4.9
VS. Industry Jul 1.21 1.87 6.6 12.7 24.9 (81.4) 92.2 95.5 18.3 9.5 4.9 4.5 3.9 2.8
YTL Cement Jun 3.99 5.51 51.3 50.1 54.5 74.8 (2.2) 8.8 7.8 8.0 7.3 4.3 3.9 3.2
TRADING BUY
Gamuda Jul 3.24 3.85 9.7 13.6 16.1 (40.1) 40.4 17.9 33.3 23.7 20.1 34.8 30.0 23.4
MRCB Dec 1.59 2.10 3.8 7.1 7.6 161.3 86.4 8.0 41.8 22.4 20.8 20.6 15.3 14.0
^ FY09,10 &11 valuations refer to those of FY10, FY11 & FY12
STRATEGY 66 PAPER
Table 49

(x) (x) (%) (%) Cap
OUTPERFORM
10.3 10.3 9.1 n.m n.m n.m 3.8 6.3 6.8 26.9 26.1 25.9 2.0 5.3 56.3 39,675
16.6 15.4 13.7 0.8 0.7 0.7 3.1 4.1 4.1 7.9 11.9 11.5 8.1 8.9 36.3 709
8.2 7.5 7.8 1.7 1.5 1.4 6.4 7.0 7.0 12.7 13.2 11.9 10.3 14.8 52.7 1,442
6.2 6.3 6.0 3.5 2.8 2.4 3.6 4.9 5.5 9.8 17.1 16.9 1.0 (0.5) 73.8 1,938
7.6 6.3 4.5 2.6 2.2 1.7 1.7 2.2 2.2 24.0 28.9 30.4 11.4 (11.2) 113.1 412
6.8 7.7 5.6 3.4 3.0 2.6 0.9 1.2 1.4 18.0 18.8 18.9 10.5 (1.9) 13.2 5866
8.2 8.7 7.5 2.8 2.8 2.5 4.9 5.3 5.9 19.5 19.3 26.6 2.7 (0.6) 4.6 16,950
n.m n.m n.m 0.5 0.5 0.4 0.0 0.0 0.0 4.7 6.5 6.8 2.9 7.0 65.6 2,510
n.a. n.a. n.a. 4.7 3.9 3.4 4.6 5.0 5.5 24.5 24.2 23.8 5.3 2.6 36.4 42,030
n.a. n.a. n.a. 4.7 3.9 3.4 4.6 5.0 5.5 24.5 24.2 23.8 5.3 2.2 37.2 42,030
20.5 8.9 16.4 3.3 2.8 2.3 2.5 2.6 3.0 13.9 12.8 12.8 9.9 17.3 71.2 1,585
n.m n.m n.m 1.3 1.1 0.9 1.6 1.6 1.6 19.4 17.0 15.3 10.4 (5.9) 2.4 497
1.6 7.2 7.2 0.8 0.8 0.7 3.3 2.1 2.1 7.7 7.2 7.4 14.7 17.8 45.0 1,833
n.m 6.2 6.5 1.0 0.8 0.7 1.6 2.6 2.6 15.8 15.5 14.9 7.3 (7.7) 9.7 940
2.9 5.9 6.5 1.4 1.2 1.0 1.5 1.8 1.8 15.9 16.4 15.4 16.0 0.0 29.9 814
15.4 7.7 5.9 1.7 1.6 1.5 1.0 5.8 7.3 8.9 12.4 14.6 6.2 (11.2) 26.8 1,105
14.5 9.3 8.2 2.0 1.8 1.5 2.1 2.6 2.8 11.1 17.2 32.3 14.6 21.8 156.5 6,119
5.5 4.6 4.4 1.4 1.3 1.2 2.1 3.3 3.8 8.4 11.3 11.9 4.1 6.0 8.3 36,618
17.3 12.3 11.4 5.1 4.1 3.5 2.2 3.4 3.5 22.6 28.7 26.0 10.6 (1.0) 107.0 4,064
9.8 7.6 7.4 1.9 1.8 1.6 3.2 3.7 3.9 10.5 16.1 29.6 1.1 0.8 7.1 7054
4.9 4.8 3.7 0.8 0.7 0.7 1.4 4.1 8.8 3.3 6.2 11.5 2.5 (1.6) (4.0) 272
6.1 5.4 5.7 1.3 1.2 1.1 7.5 7.5 7.5 16.3 15.2 15.9 0.5 (5.9) (1.7) 1,962
n.m n.m 50.8 2.2 2.1 2.0 2.5 3.7 3.7 6.1 8.4 9.1 17.8 14.1 20.4 6577
n.m 23.1 22.7 2.1 1.7 1.6 0.0 0.0 0.0 5.3 9.9 7.8 16.9 5.3 38.5 1,443
STRATEGY 67 PAPER
Table 49

MARKET PERFORM
CSC Steel Dec 1.86 1.82 24.0 24.4 26.0 55.1 1.8 6.3 7.8 7.6 7.2 2.7 1.9 0.9
EON Cap Dec 6.93 7.92 49.2 53.8 60.9 +>100 9.4 13.2 14.1 12.9 11.4 n.a. n.a. n.a.
Genting M’sia Dec 2.78 2.90 24.2 21.0 22.4 (0.5) (13.4) 6.8 11.5 13.2 12.4 5.3 5.9 5.1
Hai-O Ent^ Apr 4.12 4.06 35.0 37.3 42.3 35.4 6.7 13.2 11.8 11.0 9.7 7.8 7.2 6.1
HL Bank Jun 8.68 9.20 53.7 56.5 56.6 14.5 5.1 0.2 16.2 15.4 15.3 n.a. n.a. n.a.
Hunza Prop Jun 1.28 1.43 19.0 24.2 24.7 (44.9) 27.4 2.1 6.7 5.3 5.2 9.7 5.0 4.7
IJM Corp^ Mar 4.91 5.01 20.0 31.7 32.6 (14.8) 58.9 2.7 24.6 15.5 15.1 11.2 8.9 8.4
KLCCP^ Mar 3.07 3.80 25.2 26.3 27.3 5.1 4.4 3.8 12.2 11.7 11.2 6.3 5.2 4.8
Lafarge Dec 6.55 6.83 48.5 42.5 48.8 1 2 . 1 (12.4) (14.8) 1 3 . 5 15.4 13.4 8.7 11.3 8.5
MPI Jun 6.20 6.80 -7.1 45.1 60.8 (>100) +>100 3 4 . 7 n.m. 13.7 10.2 9.7 4.0 3.6
P Gas^ Mar 9.85 10.71 47.5 62.6 64.4 1.4 31.6 2.9 20.7 15.7 15.3 9.8 8.0 7.8
Puncak Niaga Dec 2.75 2.92 34.7 31.8 36.3 +>100 (8.2) 14.1 7.9 8.6 7.6 4.5 3.3 3.2
SP Setia Oct 4.19 4.66 16.0 18.6 21.7 (13.7) 16.4 16.7 26.3 22.6 19.3 23.8 27.4 21.2
SapuraCrest^ Jan 2.25 2.46 13.3 16.9 18.9 37.5 26.5 12.0 16.9 13.3 11.9 5.9 4.3 3.3
Quill Capita Dec 1.01 1.17 8.3 8.9 9.3 10.2 7.3 4.7 12.2 11.3 10.8 12.9 13.1 12.7
Star Dec 3.40 3.86 19.6 22.6 25.8 (9.9) 15.3 14.0 17.4 15.0 13.2 9.4 6.8 5.9
Tanjong^ Jan 17.80 19.20 165.1 171.9 175.5 26.4 4.1 2.1 10.8 10.4 10.1 7.2 7.0 6.6
TM Dec 3.36 3.55 13.3 12.5 13.5 (41.8) (6.1) 8.2 25.3 27.0 24.9 5.0 5.7 5.2
Unisem Dec 2.98 3.26 11.5 27.1 29.6 (17.1) +>100 9.3 25.8 11.0 10.1 7.9 5.3 4.6
Wah Seong Dec 2.26 2.38 13.1 16.1 18.3 29.4 23.1 14.0 17.3 14.1 12.3 6.6 5.5 5.1
Wellcall Sep 1.26 1.33 10.2 11.9 14.7 (24.0) 17.3 23.7 12.4 10.6 8.5 6.9 5.5 4.1
WTK Dec 1.16 1.25 -0.2 10.4 14.3 (>100) +>100 3 7 . 3 n.m. 11.2 8.1 16.7 6.4 5.4
YNH Property Dec 1.64 1.86 13.9 16.1 18.0 (36.3) 15.8 11.6 11.8 10.2 9.1 7.2 6.4 5.8
YTL Power Jun 2.24 2.15 11.5 13.7 14.2 (12.3) 18.8 3.6 19.5 16.4 15.8 12.2 8.8 8.7
STRATEGY 68 PAPER
Table 49

(x) (x) (%) (%) Cap
MARKET PERFORM
4.2 9.5 6.7 0.9 0.9 0.8 10.8 8.1 8.1 11.7 11.3 11.5 6.9 5.7 82.4 707
n.a. n.a. n.a. 1.4 1.3 1.2 1.1 1.4 1.4 10.1 10.0 10.4 0.4 (1.4) 46.8 4,804
10.1 10.4 9.8 1.6 1.5 1.3 2.6 2.4 2.7 15.0 12.2 11.9 4.5 (1.1) 2.2 17142
6.0 5.1 4.2 1.7 1.5 1.2 5.8 6.0 6.8 38.7 34.5 60.7 13.5 (6.2) (6.2) 835
n.a. n.a. n.a. 2.4 2.2 2.0 2.8 2.8 2.8 16.7 14.8 13.4 1.5 0.9 51.0 13715
12.3 5.0 4.9 0.6 0.6 0.5 4.4 5.8 5.8 8.7 12.5 11.0 5.3 6.1 2.3 302
10.0 8.0 7.9 1.3 1.2 1.2 2.2 2.2 2.2 5.3 8.1 7.8 10.6 2.9 20.6 6629
5.2 2.5 5.9 0.6 0.5 0.5 3.6 3.6 3.6 12.9 12.9 12.9 7.3 (5.8) (5.2) 2868
8.0 9.7 8.9 1.8 1.8 1.8 5.8 4.6 6.1 12.8 10.3 11.4 2.5 6.3 10.1 5,566
7.6 3.4 2.8 1.4 1.4 1.3 3.2 3.2 3.2 n.m 10.1 12.9 3.3 (7.2) 24.0 1,301
12.5 10.6 10.4 3.0 3.1 3.1 5.1 6.8 7.0 29.1 38.8 40.5 1.9 1.2 0.5 19491
n.m 2.6 2.6 1.2 0.7 0.7 2.2 2.2 2.2 9.7 7.2 8.2 14.6 0.4 (16.2) 1131
15.5 18.2 16.7 2.1 1.9 1.8 3.3 2.2 2.6 8.1 8.9 9.7 10.3 2.4 4.8 4.8
3.5 8.0 4.4 2.7 2.2 1.9 2.7 3.1 3.1 17.2 32.8 31.9 19.0 (9.6) 51.0 2873
8.9 2.9 2.8 0.8 0.8 0.7 7.6 8.1 8.5 6.8 6.6 6.7 1.0 (2.9) 11.6 394
12.0 11.5 10.6 2.1 2.0 1.9 6.8 6.8 6.8 11.7 13.1 14.4 3.0 0.3 10.2 2511
4.7 7.6 7.2 1.9 1.7 1.6 5.6 5.7 5.8 17.7 16.5 15.4 4.1 (0.6) 31.9 7,178
1.4 4.1 3.7 1.8 1.9 1.9 7.8 7.8 7.8 5.4 6.4 7.2 4.1 6.0 8.3 11906
13.4 3.5 4.5 1.6 1.4 1.3 0.8 1.7 1.7 7.4 13.7 13.3 16.9 7.2 134.6 1,545
20.3 4.9 5.0 3.6 2.8 2.3 3.3 2.8 3.2 23.1 43.8 41.8 1.8 (11.7) 23.9 1,603
5.9 13.2 8.1 2.0 2.0 1.9 11.6 10.2 11.9 17.0 19.2 0.0 2.4 (2.3) 32.7 166
n.m n.m n.m 0.7 0.6 0.6 5.2 5.2 5.2 n.m 4.2 5.5 7.4 (2.5) (3.3) 508
16.1 7.6 8.3 0.9 0.9 0.8 3.9 3.9 3.9 7.7 8.7 9.2 5.8 9.3 (1.8) 647
8.0 10.9 6.7 2.0 1.9 1.9 7.8 8.9 8.9 17.8 17.5 17.4 2.8 1.8 1.8 15011
STRATEGY 69 PAPER
Table 49

(RM/s) (RM/s) 09f 10f 11f 09f 10f 11f 09f 10f 11f 09f 10f 11f
UNDERPERFORM
Ann Joo Resources Dec 2.44 2.25 6.0 35.5 39.9 (77.3) +>100 1 2 . 4 40.3 6.9 6.1 18.6 6.2 6.0
B AT Dec 44.52 38.95 261.5 243.5 233.2 (8.0) (6.9) (4.2) 17.0 18.3 19.1 12.1 12.9 13.3
Genting Plantation Dec 6.79 6.50 31.1 40.2 45.0 (37.0) 29.3 11.9 21.8 16.9 15.1 15.9 12.0 10.3
Hiap Teck Jul 1.24 1.28 5.3 15.5 18.0 (88.7) +>100 1 6 . 3 23.3 8.0 6.9 11.1 9.1 8.2
IJM Plantations^ Mar 2.49 2.30 11.2 13.5 14.6 (41.6) 20.5 8.2 22.2 18.4 17.0 10.6 10.7 10.2
Kinsteel Dec 0.84 0.64 -1.3 7.9 9.2 (>100) +>100 1 6 . 1 n.m. 10.6 9.1 17.1 5.1 4.6
Kencana Jul 1.47 1.27 7.2 8.0 9.8 38.9 11.3 22.5 20.6 18.5 15.1 7.4 10.9 8.8
KNM Dec 0.53 0.49 3.8 2.9 4.9 (55.2) (24.1) 6 9 . 7 14.1 18.5 10.9 12.3 11.5 8.5
MAS Dec 2.10 2.01 -40.3 11.4 14.4 (>100) +>100 2 5 . 8 n.m. 18.4 14.6 n.m 10.8 10.0
MISC^ Mar 8.70 8.07 18.2 33.0 36.7 (51.7) 81.2 11.2 47.8 26.4 23.7 15.3 13.6 12.8
MNRB^ Mar 2.68 2.98 21.3 22.8 18.1 72.9 6.9 (20.8) 1 2 . 6 11.7 14.8 n.m n.m n.m
Perwaja Dec 1.24 1.12 -20.6 13.5 16.4 (>100) +>100 2 1 . 5 4.6 4.0 3.4 n.m 7.7 6.9
Petra Perdana Dec 1.32 1.15 9.8 6.8 12.2 (53.1) (31.1) 7 9 . 9 13.4 19.5 10.8 4.5 4.8 3.8
Sime Darby Jun 8.10 8.15 37.5 39.7 48.0 (38.1) 5.9 20.9 21.6 20.4 16.9 12.9 12.1 10.2
Sino Hua An Dec 0.35 0.21 -1.8 -0.7 3.0 (>100) n.m. +>100 n.m. n.m. 11.7 21.3 32.0 8.1
WCT Dec 2.82 2.30 18.8 18.2 16.9 43.6 (3.0) (7.0) 15.0 15.5 16.7 9.8 13.4 14.2
STRATEGY 70 PAPER
Table 49

(x) (x) (%) (%) Cap
09f 10f 11f 09f 10f 11f 09f 10f 11f 09f 10f 11f 1 Mth 3 Mth 12 Mth (RMm)
UNDERPERFORM
4.5 n.m n.m 1.4 1.1 1.1 3.7 9.8 11.1 3.6 18.3 17.8 0.7 3.4 (10.0) 1,275
15.5 13.6 19.3 n.m n.m n.m 5.3 4.9 4.7 n.m 135.1 114.3 4.0 3.8 0.6 12712
19.6 15.1 13.4 2.0 1.8 1.7 1.3 1.6 1.9 9.6 11.4 11.6 12.2 (2.9) 19.1 5146
3.1 n.m n.m 0.7 0.7 0.6 0.8 1.6 2.0 3.1 8.3 8.8 7.6 (10.0) 23.8 406
11.9 14.5 13.3 1.7 1.7 1.6 2.0 2.2 2.4 8.8 9.6 9.8 2.0 (0.8) 1.6 2195
43.3 4.9 6.7 1.0 0.9 0.8 1.2 1.2 1.2 n.m 9.9 10.5 7.7 (14.7) (7.7) 791
7.6 12.7 10.7 3.4 3.0 2.5 0.6 0.4 0.5 32.0 20.8 31.7 15.7 (7.5) 35.3 2425
n.m 15.1 12.5 10.8 8.5 5.5 3.8 3.8 3.8 8.6 6.3 10.2 10.4 (26.9) (39.8) 2122
-2.2 11.0 9.3 5.7 1.9 1.7 0.0 0.0 0.0 n.m 16.9 11.9 14.1 (3.2) (18.3) 7019
12.0 12.2 10.9 1.6 1.6 1.6 4.0 4.1 4.3 3.2 6.2 6.9 3.3 8.9 4.8 38835
12.5 10.3 12.5 0.6 0.6 0.6 0.0 3.7 3.7 6.9 7.4 7.3 (2.5) (11.8) (11.3) 571
n.m 26.0 6.2 0.7 0.7 0.6 0.0 0.0 0.0 n.m 7.8 8.7 9.7 (12.1) (3.9) 888
2.8 1.4 10.0 0.8 0.8 0.7 1.5 1.5 1.5 6.0 7.9 13.3 25.7 (4.3) (51.1) 393
15.8 14.4 12.2 2.3 2.3 2.2 2.5 2.7 3.6 10.5 11.1 13.1 4.7 (5.9) 18.2 48,677
6.7 n.m 14.4 0.5 0.6 0.6 0.0 0.0 0.0 n.m n.m 5.0 7.8 (26.6) (34.9) 387
7.6 15.2 16.6 1.7 1.6 1.5 3.5 2.1 2.1 12.1 10.6 9.1 13.7 2.9 34.9 2179
STRATEGY 71 PAPER
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STRATEGY 72 PAPER
STRATEGY 73 PAPER
STRATEGY 74 PAPER
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STRATEGY 75 PAPER
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Market Outlook & Strategy 2H2010: Still A Bumpy Ride - 1/7/2010

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MARKET DATELINE

Still A Bumpy Ride

Please read important disclosures at the end of this report.

MACRO ECONOMIC OUTLOOK 3

FBM KLCI FROM THE TECHNICAL PERSPECTIVE 23

Signs Of Slower Economic Growth In The 2H Emerging

PMI % 12-mth annualised rate of change

Major Economies Showing Signs Of Softening

Global Demand For Electronic Exports Will Likely Moderate

Domestic Demand Will Likely Turn Softer

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

% Growth in Real Terms

(f): RHBRI's forecasts

Fiscal Consolidation Would Be Less Severe Than Initially Thought

Manufacturing And Services Sectors Will Likely Moderate In The 2H

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

(f) : RHBRI's forecasts

2H of the year will likely be broad-based. As a result, we expect activities in utilities,

Money Supply And Loans To Continue Expanding In The 2H

Smaller Current Account Surplus; Ringgit Will Remain Range-Bound

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

(f) : RHBRI's forecast ^ : As at end-period

Price Pressure Building Up, But Likely To Be Manageable

Policy Normalisation To Be At A Measured Pace

Downdraft Of Fear And Volatile Market Movements

PM launched Greece won S’pore revalued its BNM released 1Q Moody’s

taking activities country’s 12 Apr junk

1,340 0.25% & 2.0%  a • 750bn

1,320 tightened new credit. 1.China 1.DJIA debt crisis

27 Jan Goldman tightened plunged by 11 May

1,300 Transformation 16 Apr 2. Sime

1,280 ratings RM1bn cost the peg.

1,260 raised credit rating.

1. Release of BNM PM unveiled

Index 2009 2010 2009 2010

US Dow Jones 10,143.8 15.0 7.4 4.1 -6.6 +18.8 -2.7

Index 2009 2010 2009 2010

FBM KLCI 1,326.5 11.8 5.9 3.8 0.4 +45.2 +4.2

^ According to Bursa Malaysia’s classifications.

Top performers 25/6/10 31/12/09 % chg. Underperformers 25/6/10 31/12/09 % chg.

Unisem 2.98 1.64 +81.7 KNM Group 0.53 0.77 -31.2

Uncertainty Persists In The Global Economy

Greece 13.6 8.7 <3.0

% yoy (Property prices) % yoy (Property prices)

Risk Is A Sharper-than-expected Slowdown In 2H, Not A “Double-

Nevertheless, the austerity measures undertaken by each of the major economies

Slowing Economic Growth As Export Recovery Normalised; Speed

Earnings Growth Likely To Have Peaked

Market Valuations, Though Not Cheap, Remain At Reasonable Levels

Malaysia Singapore Thailand Philippines Indonesia Hong Kong Taiwan Korea

FactSet Asian Consensus Trends report dated 28 May 2010

IBES Consensus dated 17 June 2010

Just Been Listed As China’s QDII Destination

Greater Volatility But Longer-term Outlook Remains Positive

Accumulate On Weakness And Ride The Volatility

Fair Mkt EPS EPS GWTH PER P/BV P/CF GDY

^ Exclude MRCB earnings in 2009

AXIS Reit 2.01 8.2 8.9 1.2 9.6 Outperform

^ FY10-11 valuations refer to those of FY11-12

Near a strong support of

Sector Avg 19.7 14.4 14.3 12.5

Source: The 10MP

Source: Ministry of Health, Malaysia