INVESTMENT RESEARCH PP13693/04/2011(029398)

Initiating Coverage

14 December 2010

QL Resources
(RM5.60 QLG MK)

Buy
Target Price: RM7.30

Making the most of ASEANs natural assets

Riding uptrend in demand for food commodities
Initiate coverage on QL Resources (QL with a Buy recommendation and target price of RM7.30) based on 20x CY11 P/E. QLs products will benefit directly from the rising global demand and price trend for food commodities. The group is one of Asias largest surimi manufacturers and a Malaysian market leader in livestock feed trading, fishmeal and egg production.
Share Price Chart
RM 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 Jan-10 Feb-10 Mar-10

CONSUMER
% 60 50 40 30 20 10 0 -10 Jun-10 Nov-10 May-10 Aug-10 Dec-10 Jul-10 Sep-10 Apr-10 Oct-10

We have forecast a 3-year forward forecast EPS CAGR of 17.3% (FY1113), that will be driven by strong demand for QLs marine, livestock feed, poultry products and palm oil, with rising population and disposable income, as well as the groups steady capacity expansion. Diversification reduces earnings volatility by smoothening out cyclicality of its resourcebased activities.

Dec-09

Sustainable earnings growth

Share price (lhs) Source: Bloomberg

Relative perf (rhs)

Assertive regionalisation drive

QLs expansion plan is both local and regional, with total group capex set to increase by 60% in the next 2 years to RM200m annually. The group is replicating its business model in the ASEAN region with new poultry farms in Tay Ninh, Vietnam and Cianjur, Indonesia; a new marine plant being constructed in Surabaya, Indonesia and further planting and palm oil mill slated for its plantation in Tarakan, Kalimantan, Indonesia.

Price Performance Price (RM) 52-week Range (RM) Avg Daily Volume (000) 1M -3.1 -2.9 3M 22.3 19.3

5.60 3.13 5.88 206,438 6M 50.9 29.8

Absolute (%) Relative (%)

Benefits from government incentives for agriculture

QL benefits from the governments pro-agriculture stance via tax incentives that translate to a lower tax rate (15% in FY10) and subsidised diesel for its deep sea fishing operations. The groups latest venture into renewable energy is directly in accordance with the governments promotion of green technology as contained in the Budget 2011 announcement.

Key Data Market Cap (RM m) Issued Shares (m)

2,213 395

Major Shareholders CBG Holdings Sdn Bhd Farsathy Holdings Sdn Bhd

% 47.3 13.6

Further upside to share price

Despite what seems like expensive valuations, we are bullish on QL as we firmly believe it deserves premium valuation to peers as well as market. QLs next 2 years earnings CAGR of 16.1% is impressive as compared to Malaysian peers of 5.6%. Furthermore, over the last 10 years, QLs average 12-month forward earnings growth is impressive at 23%. At our target price, PEG ratio is undemanding at only 0.9x based on 10-year average growth rate.
Balance Sheet Highlights (RM m)
(@ 31.3.2011) (performance indicators annualised)

Total Assets Total Liabilities Total Debt (Gross) Shareholders Equity Return on Assets (%) Return on Equity (%) Net Cash / Share (RM) Debt/Equity (x) Interest Cover (x)

1,268.6 607.3 381.4 597.8 9.8 20.8 n/a 0.4 11.9

Financial summary FYE 31 Mar Revenue EBITDA Adj net profit Adj EPS ECM / Consensus Adj EPS growth Adj P/E Net DPS Net dividend yield BVPS P/BV

2009 1,397.9 159.6 89.3 21.7 11.0 25.8 7.0 1.3 1.02 5.5

2010 1,476.4 187.9 106.9 27.3 25.6 20.5 7.5 1.3 1.29 4.4

2011F 1,597.5 217.8 124.3 31.5 99.9 15.2 17.8 8.0 1.4 1.53 3.7

2012F 1,820.4 252.8 150.7 38.1 101.0 21.2 14.7 8.5 1.5 1.83 3.1

2013F 2,025.4 323.1 200.6 50.8 106.6 33.1 11.0 9.0 1.6 2.26 2.5

Bernard Ching hyching@ecmlibra.com +603 2089 2985

INVESTMENT RESEARCH

Investment case
QL is now one of the largest surimi manufacturers in Asia and a Malaysian market leader in livestock feed raw material distribution, fishmeal and egg production. Earnings growth will come from all 3 business divisions, with key earnings growth catalyst being the Indonesian plantation. Robust demand for QLs food supply-related products will be driven by growing Asian food demand in tandem with rising population and disposable income. QL has grown earnings at a CAGR of 20.5% from FY01 to FY10, and has achieved uninterrupted earnings growth since FY88. Given its regional expansion and resilient, inflation-resistant business, we anticipate a 3-year forward EPS CAGR of 17.2% (FY11-13) driven by capacity expansion and firm prices for feed commodities, poultry, marine products and CPO. QL largest surimi producer in Asia

Diversified play on food demand

Figure 1 : QLs share price performance vs. FBMKLCI (indexed)

Index 300 250 200 150 100 50 Jul-09 Mar-09 May-09

Absolute

Relative

Mar-10

May-10

Nov-09

Jan-10

Jul-10

Source: Bloomberg

QL is replicating its business models in the ASEAN region, with layer and breeder farms in Cianjur, Indonesia, layer farm in Tay Ninh, Vietnam; surimi and fishmeal plants in Surabaya; and oil palm plantation and mill in Tarakan, Indonesia. By venturing into neighbouring countries, QL leverages on its knowledge and skills to take advantage of the natural resources available and tap on new markets. Palm oil activities will be the key earnings growth catalyst when the Indonesian plantation matures in FY12. While the POA segment only accounted for 18% of group revenue in FY10, we expect that it will increase to 26% in FY13.

Nov-10

Sep-09

Sep-10

Regional replication of business models

Indonesian palm oil plantation begins to mature in FY12

Background
The group began modestly as a small family business distributing livestock feed, CBG Holdings, in 1984. QL Resources was incorporated in 1997, listed on Bursa Malaysias Second Board in 2000 and transferred to Main Board in 2002. QL is 61%-owned by the Chia family via CBG Holdings and Farsathy Holdings. The management team of QL is led by Mr Chia Song Kun, age 60, who is the managing director as well as one of QLs founding member. He is supported by 5 executive directors who are members of the Chia family. Institutional investors make up c.21% of group shareholdings. Listed on Bursa in 2000

Chia family own 61% of QL

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Figure 2 : Corporate structure

CBG Holdings Sdn Bhd 47.37%

Farsathy Holdings Sdn Bhd 13.6 0%

QL Resources Bhd

Integrated Livestock FarmingQL Feedingstuffs Sdn Bhd 100%

Marine Products ManufacturingQL Fishery Sdn Bhd 100%

Palm Oil Ac tivitiesQL Oil Sdn Bhd 100%

Source: Company

Business Activities
Vertically diversified range of agriculture-based businesses, broadly divided into Integrated Livestock Farming (ILF), Marine Products Manufacturing (MPM) and Palm Oil Activities (POA). The ILF segment is the biggest revenue and pretax profit contributor. However, the marine division earns higher pretax profit margins (16% in FY10) compared to ILF (9%). Integrated Livestock Farming is biggest earnings contributor but Marine Product Manufacturing is the most profitable

Figure 3 : FY10 revenue and pretax profit, segmented by business divisions

FY10 Revenue FY10 Pretax Profit

MPM 24%

MPM 41%

ILF 58%

ILF 53% POA 18% POA 6%

Source: Company

Integrated Livestock Farming: Largest earnings contributor

The ILF division consists of livestock feed raw materials trading and poultry farming. The trading segment contributed 63% of QLs FY10 ILF revenue and the remaining 37% came from the farming segment. QLs trading arm imports grains and protein meal from countries like Argentina, US and India, as part of a consortium of local companies including Gold Coin Feedmills and KFC Holdings. QL then distributes the feed commodities to local users of animal feed raw materials and earns a profit margin of 45%. The group distributed 550,000 mt of feed-related soft commodities in FY10 that represents approximately 18% of the Malaysian market.

QL distributes 18% of Malaysias livestock feed commodities

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Figure 4 : Segmental ILF revenue (FY10) Trading of feed grains & protein meal makes up the bulk of ILF revenue

Farming 38%

Trading 62%

Source: Company

Key feed commodity prices- maize and soybean meal- rose in CY10 in tandem with high wheat prices resulting from drought-ridden Russias halt on exports. We expect further uptrend in CY11 wheat price due to excessive year-end rainfall in Australia and Europe. Maize price is expected to increase as well because stocks of yellow maize have fallen to lows last seen in 2008. Higher soybean meal price in CY11 will be driven by increase in livestock farming activities to fulfil the global demand for meat.

Figure 5 : Historical prices of maize, soybean meal (Apr 2004- Nov 2010)
Maize US$/mt 500 450 400 350 300 250 200 150 100 50 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 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 Jul-10 Oct-10 Soybean meal

Rising price trend of wheat & maize in CY10 to continue into CY11

Source: International Monetary Fund (IMF)

ILF farming operations comprises 5 layer farms and 1 broiler farm, spread out across Peninsula and East Malaysia. QL is one of the largest layer farming outfits in the country with FY10 output of 913m eggs that accounts for c.10% of Malaysian market share. The group also produced 10m day-old chicks and 7m broilers in FY10.

QL is one of the largest egg producers in the country with 10% market share

Figure 6 : ILF production

No. 1 2 3 4 5 6 Plant location Kulim, Kedah Rawang, Selangor Nilai, Negeri Sembilan Kota Kinabalu, Sabah Papar, Sabah Kuching, Sarawak Activities Layer farming Layer farming Layer farming Layer farming Broiler production Layer farming

Source: Company

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QLs poultry products generally enjoy resilient demand as demonstrated by the egg consumption in Peninsula Malaysia that has increased by a CAGR of 4% over the past 10 years. The demand for eggs is fairly inelastic as it is a basic food item and one of the cheapest sources of protein available.

Figure 7 : Egg output in Peninsula Malaysia (CY95-CY10F)

bn 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 2010F 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Steady domestic demand for eggs

Source: Federation of Livestock Farmers Associations of Malaysia (FLFAM)

QL earns 0.5-1.0 sen more profit per egg compared to its competitors because of cost savings from importing its own feed. Generally, QL makes a profit margin of 2-3 sen per egg with average selling price of 23.0 sen per egg. The price of eggs in Malaysia has risen gradually, as shown below. Figure 8 : Historical ex-Farm price of eggs (May 2004-Nov 2010)
Sen 30 28 26 24 22 20 18 16 14 12 10 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 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 Jul-10 Oct-10 Avg=22.6

By importing its own feed, QL earns 0.5-1.0 sen more profit per egg than its rivals

Source: Federation of Livestock Farmers Associations of Malaysia (FLFAM)

Regional expansion to Vietnam and Indonesia will add 60% to the groups total egg production upon completion by end-FY12. Construction began on a Vietnam layer farm in May 2010 and an Indonesian layer and breeder farm in August.

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Figure 9 : Upcoming poultry farms

No. Plant location 1 2 Activities Annual Capacity 180m eggs Capex US$10m (RM31.5m) Begins ops 4QFY12 4QFY12

Tay Ninh, Ho Chi Minh, Layer farming Vietnam Cianjur, Indonesia Layer farming Breeder farm

ILF operations expanding to Vietnam & Indonesia

180m eggs US$20m (RM69.2m) 12m day old chicks

Source: Company

Further growth via acquisitions is likely as illustrated by QLs move to buy a 23.29% stake in Lay Hong for RM11.6m in August 2010. The acquisition price of RM1.05 per share represents an undemanding 4.7x FY10 P/E and 52% of RM2.00 NTA per share. By buying into Lay Hong, QL intends to improve its supply chain network and enables cheaper raw material procurement via economies of scale.

M&A growth from acquisition of 23.3% of Lay Hong

Marine Products Manufacturing: Most profitable division

QL is the largest surimi manufacturer in Asia and Malaysias largest fishmeal producer. Its MPM operations comprise 9 plants that generated 25,000 mt surimi, 19,000 mt surimibased products, 26,000 mt fishmeal and 20,000 mt of other seafood products in FY10. The marine plants are located in major fishing towns to ensure fresh supply of raw materials. Largest maker of surimi in Asia & fishmeal in Malaysia

Figure 10 : MPM production

No. 1 2 3 4 5 6 7 8 9 Plant location Hutan Melintang, Perak Hutan Melintang, Perak Hutan Melintang, Perak Endau, Johor Endau, Johor Johor Bahru, Johor Kota Kinabalu, Sabah Kota Kinabalu, Sabah Singapore Activities Surimi, surimi-based products Fishmeal Deep-sea fishing Surimi, deep sea fishing Fishmeal Frozen seafood Surimi, deep sea fishing Fishmeal Surimi, surimi-based products

Source: Company

The biggest contributors to MPM revenue are surimi and surimi-based products (70% of FY10 MPM revenue), followed by fishmeal (22%). QL also has a small frozen seafood division (<5% MPM revenue) that exports frozen fish, shellfish and squid to the US, Australia, EU, China and Hong Kong.

Surimi & surimi-based products make up 70% of MPM revenue

Figure 11 : Segmental MPM revenue (FY10)

Deep sea fishing 8% Surimi 27%

Surimi-based products 43% Fishmeal 22%

Source: Company

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Surimi is a paste made from white-fleshed fish that has been rinsed and pulverized. The paste is frozen in blocks and is used to make end-products such as fish cakes and crabsticks. Approximately 50% of QLs surimi output is exported to key markets of Japan, Korea, Singapore, China and Taiwan. The company also manufactures downstream surimi-based products for the local market to counter volatility in surimi prices. The chilled and frozen products such as seafood tofu and fish balls are sold under the brand names Ocean Ria, Mushroom and Figo.

Half of QLs surimi is exported

Surimi-based products for domestic market help counter fluctuations in surimi price

Figure 12 : Surimi production process

Source: Company

Surimi prices have been steadily recovering in CY10 due to tightening global whitefish supplies (with Alaska Bering Sea Pollock quota cut in CY10). The price of surimi has increased by approximately 16% y-o-y in FY10. This is encouraging after the steep decline in 1HCY09 that was caused by the economic crisis curtailing Japanese demand for surimi products and moderation from the spike in 1HFY09 as a result of elevated oil price. 25% of Malaysias fishmeal output comes from QLs 4 plants (26,000 mt). 90% of QLs fishmeal production is exported to the likes of China and Indonesia. Fishmeal processing entails cooking, drying and grinding the waste from surimi production- head, bones and skin of the fish- into a nutrient-rich ingredient used in aquaculture and livestock feed. Fishmeal price in FY10 has came off by 15% since the record high of US$1,961/mt in April 2010 as a result reduced demand from Chinas aquaculture industry that has been negatively impacted by severe flooding this year. The decline in fishmeal price also represents a moderation from the surge in April 2010 caused by supply shortages from the Chilean earthquake in February 2010.

Surimi prices recovering in CY10 due to tight fish supplies

QL makes 25% of Malaysias fishmeal

Global fishmeal prices heavily reliant on China aquaculture industry

INVESTMENT RESEARCH

Figure 13 : Price of Peru Fishmeal pellets 65% protein CIF (Apr 2004- Nov 2010)
US$/mt 2,500 2,000 1,500 1,000 500 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Oct-10

Source: International Monetary Fund (IMF)

Having Malaysia as its marine base presents QL with the competitive advantages of subsidised diesel for its deep sea fishing activities, plentiful supply of fish (with the absence of national fishing quotas) and tax incentives for its fishing vessels. Approximately 5% of QLs total fish requirements are supplied by its own 23 fishing fleet, based in Hutan Melintang, Perak and Sepangar Bay, Sabah. QL is not resting on its laurels however and is seeking further growth opportunities in Indonesia. The group is building a marine plant on a 10-hectare piece of land in Surabaya that is due for completion by end-FY11. Phase 1 of the plant will cost USD10m (RM31.5m) and will increase QLs marine production capacity by 20% (5,000 mt surimi and 5,000 mt fishmeal). We anticipate that the Surabaya plant will begin to make positive earnings contribution in FY12.

Malaysia offers cheaper fuel, abundant fish supplies & tax incentives for deep sea fishing

Surabaya marine plant to add 20% capacity by FY12

Palm Oil Activities: Gaining prominence

QLs POA division consists of 2 palm oil plantations in Tawau, Sabah and Tarakan, Kalimantan, Indonesia, and 2 CPO mills in Kunak and Tawau, Sabah. Its 1,200 hectare mature oil palm plantation in Sabah produces 30,000 mt FFB per year. QL supplements its own FFB harvest with that of third parties to supply its 2 CPO mills that are capable of processing a total of 500,000 mt FFB per year. The mills produced 110,000 mt CPO in FY10 and run at an average 70% utilisation rate. 2 CPO mills in Sabah, 2 plantations in Sabah & Indonesia

Figure 14 : POA Production

No. 1 2 3 4 Plant location Kunak, Sabah Tawau, Sabah Tawau, Sabah Tarakan, Indonesian Activities CPO mill CPO mill Oil palm plantation- 1,200 hectares Oil palm plantation- 20,000 hectares

Source: Company

CPO price has been trending upwards in CY10 supported by weaker Malaysian production in early-CY10 and strong exports, soybean shortage due to strong demand from China and unfavourable weather conditions negatively impacting South American soybean crops.

INVESTMENT RESEARCH

Strong CPO price in CY10 Figure 15 : Price of CPO (Apr 2004- Nov 2010)
RM/mt 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 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 Jul-10 Oct-10
Source: Malaysian Palm Oil Board (MPOB)

The biggest catalyst for QLs POA division will be the 20,000 hectare Indonesian plantation once it reaches maturity. QLs 75% stake in the Indonesian plantation is expected to deliver positive earnings contribution in FY12 once the trees begin to bear fruit but expect significant contribution in FY13. Currently 8,000 hectares have been planted to-date with internal target of 15,000 hectares to be reached by end-FY13. A CPO mill is also being constructed on the Indonesian site that will have a total annual capacity of 90,000 mt when it is completed by end-CY11. QL is also venturing into renewable energy with construction of zero-waste palm oil mill and acquisition of a 40.5% stake in Boilermech Sdn Bhd. Under the zero-waste palm oil mill, QL is setting up a palm biomass pelletization plant that will use its proprietary system to produce palm pellets from empty fruit bunches (EFB) for industrial steam and power generation and palm oil mill effluent (POME) biogas power plant that will generate power to fuel the pelletization plant. The plants are slated to begin operations in December 2010 and will be located at QLs CPO mill in Tawau, Sabah. The pelletization plant will have a production capacity of 40,000 mt per year and will cost QL RM10m capex. The palm oil pellets target export markets of Japan, Korea and the EU where there is a ready market for wood biomass pellets that are mainly used in domestic central heating furnaces. The key advantage that palm pellets have over wood pellets are long-term sustainability of raw material supply with an estimated dried EFB supply of 7-8m mt per year in Malaysia alone. QL acquired a 40.51% stake in Boilermech Sdn Bhd (BSB) by QL in October 2010. BSB designs, manufactures and installs biomass boilers mainly for the palm oil industry. The acquisition price of RM29.2m represents a FY10 P/E of 5.9x. QLs investment in BSB complements its renewable energy business and provides access to the burgeoning markets of Thailand, Myanmar and Cambodia that BSB has a presence in. Having acquired the 40.51% stake in BSB, QLs wholly owned subsidiary QL Green Resources Sdn Bhd subsequently undertook a share swap with BHB for its 40.51% interest in BSB in exchange for 40.51% in BHB. The purpose of the restructuring is to facilitate the listing of BHB that will enable the company to raise funds for future expansion.

Indonesian plantation to begin earnings contribution in FY12

Patented palm pellets & POME biogas power plants to be future catalysts

Acquisition & future listing of Boilermech ties in with QLs renewable energy business

INVESTMENT RESEARCH

Risks
Economic slowdown may reduce demand for QLs products. However, given that these are largely staple food-based products, we believe that the fall in demand would be minimal as compared to discretionary consumer products. Historically, QLs earnings have proven to be resilient in the face of challenging economic conditions, as shown below. In FY11, global supply issues have thus far supported the robust prices for feed grains, fish products and palm oil. Economic slowdown would negatively impact demand but QLs earnings resilient

Figure 16 : Resilient revenue, PBT and PAT (FY88-FY10)

Turnover Revenue (RMm) 1600 1400 1200 1000 800 600 400 200 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 97/98 Asian financial crisis 2011 Sept 11 2006/2008 Oil price hike

PBT

PAT PBT/PAT (RMm) 2008/2009 Global dow nturn 160 140 120

2002/2003 SARS

100 80 60 40 20 0

2000 2001

2002

2003 2004

2005

2006

2007 2008

2009

Source: Company

2010

A stronger Ringgit would have a slightly negative impact on QL as its MPM business is export-dependent with approximately 60% of sales denominated in foreign currencies (mainly USD). However, QLs ILF business would benefit from a stronger Ringgit as the trading division imports large quantities of livestock feed ingredients that are denominated in USD. Bio-security threat from disease outbreak such as Avian flu would endanger its poultry farming operations and negatively impact demand for its livestock feed ingredients. The group has minimised its direct risk by using the closed housed system on its poultry farms that prevents contact with potentially infected wild birds; and spacing out its farms geographically. Ironically, the last outbreak of avian flu was positive for QL as the lower supply of eggs nationwide drove prices up and reduced competition by forcing smaller players to consolidate. QL is exposed to fluctuation in maize and soybean meal prices. While QL is generally able to pass on costs to its customers, there will be a time lag of 1-2 months and profit margin compression during that time. However, by importing feed ingredients directly, QLs farming segment benefits from lower operating costs. Generally, QLs cost of production per egg is 2-3 sen lower than its competitors.

Risk from forex translation as 60% of sales are in foreign currencies

Health scares would negatively impact demand for poultry products

Fluctuation in maize & soybean meal prices would adversely affect ILF trading margins

10

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Financials
QLs revenue has increased by a 10-year CAGR (FY01-10) of 12.0%. Topline growth has been supported by steady, sustainable capacity expansion particularly in the ILF and MPM divisions, as well as strong price fundamentals for surimi, fishmeal, CPO, feed commodities and eggs. Net profit has grown by a 10-year historical CAGR (FY01-10) of 20.5% with net profit margin having more than doubled to 7.2% in FY10 from 3.5% in FY01. QLs earnings have grown steadily without a single dip since 1988 thanks to robust demand and strong underlying prices for the groups food supply-related products, as well as its efficient, vertically diversified operations. Revenue 10-year CAGR growth of 12.0%

Uninterrupted net profit growth for 22 years

Figure 17 : Historical net profit (FY01-FY10)

Net profit

Net profit margin

RMm 120 100 80 60 40 20 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 8% 7% 6% 5% 4% 3% 2% 1% 0%

Source: Company

We anticipate 3-year forward (FY11-13) earnings growth of 16-33% and EPS CAGR of 17% over the same period. We expect topline to be buoyed by robust demand for QLs poultry, marine and palm oil products in tandem with the rising global food demand, as well as strong prices for food commodities such as livestock grains, surimi and fishmeal due to tightening supply as a result of weather conditions. Earnings momentum will gather speed in FY13 and the groups net profit margin is expected to improve to 10% (from 8% in FY11) as the Indonesian plantation matures and begins to make material earnings contribution and regional expansion (Tay Ninh and Cianjur poultry farms, as well as Surabaya marine plant) begins to bear fruit.

Earnings momentum to pick up in FY13 once Indonesian plantation matures & regional expansion bears fruit

11

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Figure 18 : Segmental EBIT (FY04-FY13E)

MPM RMm 300 250 200

POA

ILF

45%

56% 150 100 50 46% 23% 31% 2004 41% 20% 38% 44% 13% 43% 47% 11% 42% 53% 10% 37% 50% 10% 39% 7% 41% 6% 36% 9% 35% 26% 52% 58% 29%

2005

2006

2007

2008

2009

2010

2011F 2012F 2013F

Source: Company

Net gearing level of 0.6x (at end-June 2010) is not cause for concern and does not indicate high operational risk as the bulk of QLs debt consists of short term bankers acceptances for its livestock feed trading activities. Short term debt accounts for 48% of the RM401.4m total borrowings. Excluding short term debt, QLs net gearing level would decrease to 0.3x, well within the internal comfort level of 0.5x. The group has budgeted capex of RM200m per year in FY11 and FY12. As capex is expected to outpace free cash flow generation, QL is carrying a several corporate exercises to raise funds and improve the liquidity of its share. These are: (1) private placement of up to 20.9m shares, or 5.3% of existing share capital, (2) a 1-to-2 share split, and (3) issuance of 41.6m free warrants on a 1-for-20 basis. QL announced on 30 November 2010 that Bursa Malaysia has approved its corporate proposals that are due to be completed by 1QCY11. The private placement would raise c.RM104.1m (based on RM5.00 placement share price), of which QL intends to spend 70% on ILF and POA capex while the remaining 30% would be used for working capital and cost of the corporate exercises. ILF capex includes raising capacity of existing farms, and the construction of poultry farms in Vietnam and Indonesia. As for POA, QL will use the funds for the development of its Indonesian plantation, construction of a CPO mill on the site and to finance its downstream renewable energy projects. The overall impact of the exercise is positive as it will raise funds for QLs expansion and lower net gearing.

Net gearing of 0.6x mainly due to trade finance for ILF trading activities

Private placement, 1-to-2 share split & free warrants by 1QCY11

Placement proceeds to be used for ILF & POA

12

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Valuation and recommendation

We initiate coverage on QL with a BUY call and target price of RM7.30, which is based on 20x P/E CY11 earnings. Our key FY12 assumptions are (1) revenue growth of 9.7% for MPM, 26.7% for POA and 11.0% for ILF and (2) EBIT margin of 15.2% for MPM, 4.1% for POA and 11.1% for ILF. Upon completion of private placement and share split, our target price would be adjusted to RM3.46. There are no direct comparables for QL. As such, we have compiled comparative valuations for its regional peers in each line of business. At current price, QL is trading at CY11 15.4x P/E which is at premium to peer average for ILF and POA of 11.4x but at discount to peer average for POA of 16.5x. When compared to average P/E of 11x for selected Malaysian consumer stocks, QL is also trading at a premium. Against historical average P/E, QL seems expensive as it is trading above 10-year average P/E of 9.1x as well as 2x standard deviation of 12.5x. Despite what seems like expensive valuations, we are bullish on QL as we firmly believe it deserves premium valuation to peers as well as market. QLs next 3 years earnings CAGR of 16.1% is impressive as compared to Malaysian peers of 5.6%. Furthermore, over the last 10 years, QLs average 12-month forward earnings growth is impressive at 23%. At our target price, PEG ratio is undemanding at only 0.9x based on 10-year average growth rate. We expect the group to maintain an informal dividend payout ratio of 25-30%. It is unlikely that the group will raise its dividend payout anytime soon as it is still in expansionary mode and has annual capex demand of RM200m for the next 2 years. At current share price, we anticipate net dividend yields of 1.4% in FY11 and 1.5% in FY12. RM7.30 target price based on 20x CY11 P/E

At premium to peers

but deserves premium valuation for average earnings growth of 23% over last 10 years

25-30% informal dividend payout ratio

Figure 19 : Peer comparison- Integrated Livestock Farming (Global)

Company Ticker Curr FYE Share Price 13 Dec 5.60 32.97 7.95 7.59 43.56 43.56 Mkt Cap (m) 2,213.0 786.4 9,967.9 1,626.4 990.5 990.5 P/E (x) Div. Yield (%) CY11F CY12F CY11F CY12F 15.4 12.0 7.6 13.4 12.7 12.7 11.4 11.8 n.a. 6.6 10.8 n.a. n.a. 8.7 1.5 2.8 4.1 1.5 1.5 2.1 1.6 n.a. 5.3 n.a. n.a. n.a. 5.3 ROE (%) CY11F CY12F 21.0 n.a. 22.3 10.0 7.9 7.9 13.4 22.3 n.a. 21.3 13.0 n.a. n.a. 17.2

QL Resources Cal-Maine Foods Inc CCK Consolidated GFPT PCL Pilgrims Pride Sanderson Farm Inc Average

QLG MK CALM US CCK MK GFPT TB PPC US SAFM US

MYR USD MYR THB USD USD

Mar May June Dec Dec Oct

Source: Bloomberg, ECM Libra

Figure 20 : Peer comparison- Marine Products Manufacturing (Asia)

Company Ticker Curr FYE Share Price 13 Dec 5.60 23.80 2.18 33.55 254.00 3.14 4.74 13.98 54.25 1845.00 44.61 44.61 Mkt Cap P/E (x) Div. Yield (%) (m) CY11F CY12F CY11F CY12F 2,213.0 178,974.5 2,185.3 9,769.8 70,411.4 6,673.2 2,104.3 8,857.7 51,880.9 204,575.5 20,181.6 20,181.6 15.4 11.5 13.3 32.9 17.2 19.0 9.5 11.4 12.0 38.2 38.2 16.5 11.8 10.5 12.4 25.6 12.2 15.4 n.a. 34.8 10.0 11.6 28.2 28.2 17.9 1.5 4.5 2.5 1.2 3.9 1.6 9.5 2.8 2.2 n.a. 3.1 1.6 5.0 2.7 1.4 3.9 2.0 1.0 2.7 2.2 n.a. 2.6 ROE (%) CY11F CY12F 21.0 22.9 21.6 11.9 7.5 17.5 15.1 19.2 9.2 22.4 22.4 14.7 22.3 22.6 20.3 13.7 9.6 18.7 n.a. 13.2 19.2 8.7 23.7 23.7 16.6

QL Resources Charoen Pokphand China Fishery Guangdong Haid Group Nippon Suisan Kaisha Olam Int Ltd Seafresh Industry PCL Shandong Homey Synear Food Hldgs Thai Union Frozen Toyo Suisan Kaisha Zhangzidao Average

QLG MK CPF TB CFG SP 002311 CH 1332 JP OLAM SP CFRESH TB 600467 CH SYNF SP TUF TB 2875 JP 002069 CH

MYR THB SGD CNY JPY SGD THB CNY SGD THB JPY CNY

Mar Dec Sept Dec Mar June Dec Dec Dec Dec Mar Dec

Source: Bloomberg, ECM Libra

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INVESTMENT RESEARCH

Figure 21 : Peer comparison- Palm Oil Activities (Malaysia)

Company Ticker Curr FYE Share Price 13 Dec 5.60 3.13 2.97 2.57 1.61 2.53 17.52 Mkt Cap P/E (x) Div. Yield (%) (m) CY11F CY12F CY11F CY12F 2,213.0 2,504.0 2,380.0 784.4 785.4 1,048.8 3,646.5 15.4 12.3 16.3 9.2 9.2 11.0 10.5 11.4 11.8 11.8 15.5 8.4 8.5 9.4 9.8 10.6 1.5 5.4 2.5 4.7 5.5 2.1 4.7 4.2 1.6 5.6 2.7 4.7 6.0 2.3 5.5 4.5 ROE (%) CY11F CY12F 21.0 11.6 10.4 18.5 17.1 11.5 18.1 14.5 22.3 11.3 10.9 17.1 16.7 11.9 17.8 14.3

QL Resources Hap Seng Plantations IJM Plantation Kim Loong Resources TH Plantations TSH Resources United Plantations Average

QLG MK HAPL MK IJMP MK KIML MK THP MK TSH MK UPL MK

MYR MYR MYR MYR MYR MYR MYR

Mar Dec Mar Jan Dec Dec Dec

Source: Bloomberg, ECM Libra

Figure 22 : Peer comparison- Food and Beverage (Malaysia)

Company Ticker Curr FYE Share Price 13 Dec 5.60 3.70 2.32 3.43 43.30 Mkt Cap P/E (x) Div. Yield (%) ROE (%) 2-yr EPS (m) CY11F CY12F CY11F CY12F CY11F CY12F CAGR 2,213.0 525.4 398.1 519.1 10,153.8 15.4 11.5 10.4 9.4 22.2 13.4 11.8 10.4 9.2 8.3 21.3 12.3 1.5 3.4 4.5 5.2 4.3 4.4 1.6 3.4 4.9 6.0 4.9 4.8 21.0 29.4 19.6 20.4 64.1 33.4 22.3 36.5 19.8 21.4 56.4 33.5 16.1 8.2 20.7 9.1 3.2 5.6

QL Resources

QLG MK

MYR MYR MYR MYR MYR

Mar June Dec Dec Dec

C.I. Hldgs CIH MK Cocoaland Hldgs COLA MK Mamee MAMEE MK Nestle (M) NESZ MK Average Source: Bloomberg, ECM Libra

Figure 23 : Impact of corporate exercises on share capital, target price

Par value (RM) Current After private placement After share split After free warrants (Assume fully-exercised) Source: Company, ECM Libra 0.50 0.50 0.25 0.25 No. of shares (m) 395.2 416.0 832.0 873.6 EPS (Sen) FY11 31.5 29.9 14.9 14.2 FY12 38.1 36.2 18.1 17.3 Share Price (RM) 5.60 2.80 Target Price (RM) 7.30 3.46 -

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INVESTMENT RESEARCH

Figure 24 : 1-year rolling forward P/E trend

P/E (x) 17 15 13 11 9 7 5 Mar-00 Mar-01 Mar-02 Mar-03

P/E

Average P/E

+2 SD @ 12.5x +1SD @ 10.8x Average @ 9.1x -1 SD @ 7.4x -2 SD @ 5.7x

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Source: Bloomberg, ECM Libra

Figure 25 : 12-month forward earnings growth

12-mth fw d earnings grow th % 50 45 40 35 30 25 20 15 10 5 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08

Average

Mar-10

Average @ 23%

Mar-09

Mar-10

Mar-11

Sep-01

Sep-02

Sep-03

Sep-04

Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Source: Bloomberg, ECM Libra

Sep-11

Mar-12

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INVESTMENT RESEARCH

QL RESOURCES BHD
Balance Sheet FY 31 Mar (RM m) PPE Biological assets Prepaid lease payments Inventories Receivables Other assets Deposit, bank and cash Total Assets LT borrowings ST borrowings Payables Other liabilities Liabilities Share capital Reserves Shareholders' equity Minority interest Total Equity Total Equity and Liabilities 2009A 416.4 68.7 94.2 128.0 154.0 23.9 68.3 953.5 163.1 215.5 77.5 32.2 488.2 165.0 252.9 417.9 47.4 465.4 953.5 2010A 481.4 92.1 97.0 131.5 174.8 23.1 106.1 1,106.1 215.4 196.9 91.2 44.0 547.5 197.6 305.2 502.8 55.8 558.6 1,106.1 2011F 611.2 106.6 97.0 166.3 183.8 23.1 80.5 1,268.6 254.9 216.5 91.9 44.0 607.3 197.6 400.2 597.8 63.5 661.3 1,268.6

FINANCIAL SUMMARY
2012F 730.5 122.1 97.0 189.5 209.5 23.1 89.1 1,460.9 272.2 250.3 104.7 44.0 671.2 197.6 519.3 716.9 72.8 789.7 1,460.9 2013F 810.9 138.1 97.0 210.9 233.1 23.1 145.2 1,658.3 253.4 275.2 116.5 44.0 689.1 197.6 686.4 884.0 85.1 969.1 1,658.3 Income Statement FY 31 Mar (RM m) Revenue EBITDA Depreciation & amortisation Net interest expense Share of associates Pretax profit Taxation Minority interest Net profit Adj net profit Key Statistics & Ratios FY 31 Mar (RM m) Growth Revenue EBITDA Pretax profit Net profit Adj EPS Profitability EBITDA margin Net profit margin Effective tax rate Return on assets Return on equity Leverage Total debt / total assets (x) Total debt / equity (x) Net debt / equity (x) Key Drivers FY 31 Mar (RM m) ILF Maize price (RM/mt) Soybean meal price (RM/mt) Egg price (Sen) MPM Surimi price (RM/mt) Fishmeal price (RM/mt) POA CPO price (RM/mt) Valuation FY 31 Mar (RM m) EPS (sen) Adj EPS (Sen) P/E (x) EV/EBITDA (x) Net DPS (sen) Net dividend yield BV per share (RM) P/BV(x) 2009A 1,397.9 159.6 (34.2) (16.0) 0.4 109.9 (13.2) (7.3) 89.3 89.3

Price Date: 13 December 2010

2010A 1,476.4 187.9 (39.4) (12.9) 0.5 136.0 (20.9) (8.2) 106.9 106.9 2011F 1,597.5 217.8 (52.0) (13.1) 2.6 155.3 (23.3) (7.7) 124.3 124.3 2012F 1,820.4 252.8 (62.6) (11.8) 9.8 188.2 (28.2) (9.3) 150.7 150.7 2013F 2,025.4 323.1 (71.4) (11.1) 9.9 250.6 (37.6) (12.4) 200.6 200.6

2009A

2010A

2011F

2012F

2013F

7.0% 15.7% 14.7% 10.6% 11.0%

5.6% 17.7% 23.8% 19.7% 25.6%

8.2% 15.9% 14.2% 16.3% 15.2%

14.0% 16.1% 21.2% 21.2% 21.2%

11.3% 27.8% 33.1% 33.1% 33.1%

Cash Flow Statement FY 31 Mar (RM m) Pretax profit Depreciation & amortisation Change in working capital Net interest received / (paid) Tax paid Others Operating Cash Flow Capex Others Investing Cash Flow Issuance of shares Changes in borrowings Dividend paid Others Financing Cash Flow Net cash flow Forex Beginning cash Ending cash

2009A 109.9 34.2 (64.5) (7.6) (11.9) 24.2 84.3 (88.2) (41.7) (129.9) 104.4 (24.0) (1.6) 78.8 33.2 35.1 68.3

2010A 136.0 39.4 (2.7) (3.1) (13.9) 13.2 168.9 (109.1) (20.2) (129.3) 32.4 (25.3) (8.9) (1.8) 37.9 68.3 106.1

2011F 155.3 52.0 (43.1) (13.1) (23.3) 11.2 139.0 (180.0) (14.4) (194.4) 59.0 (29.3) 29.7 (25.7) 106.1 80.5

2012F 188.2 62.6 (36.0) (11.8) (28.2) 10.0 184.7 (180.0) (15.6) (195.6) 51.1 (31.6) 19.5 8.7 80.5 89.1

2013F 250.6 71.4 (33.1) (11.1) (37.6) 9.3 249.5 (150.0) (16.0) (166.0) 6.1 (33.6) (27.4) 56.0 89.1 145.2

11.4% 6.4% 12.0% 9.4% 21.4%

12.7% 7.2% 15.4% 9.7% 21.3%

13.6% 7.8% 15.0% 9.8% 20.8%

13.9% 8.3% 15.0% 10.3% 21.0%

16.0% 9.9% 15.0% 12.1% 22.7%

0.30 0.64 0.65

0.25 0.50 0.60

0.20 0.37 0.43

0.16 0.28 0.25

0.13 0.21 0.10

2009A

2010A

2011F

2012F

2013F

796 1,278 23.9

624 1,285 22.7

643 1,090 24.3

675 1,123 24.8

708 1,157 25.3

8,728 3,916

6,112 4,938

6,173 4,963

6,667 5,013

6,800 5,113

2,458

2,373

2,500

2,700

2,700

2009A 21.7 21.7 25.8 11.8 7.0 1.3% 1.02 5.5

2010A 27.3 27.3 20.5 10.1 7.5 1.3% 1.29 4.4

2011F 31.5 31.5 17.8 7.7 8.0 1.4% 1.53 3.7

2012F 38.1 38.1 14.7 7.1 8.5 1.5% 1.83 3.1

2013F 50.8 50.8 11.0 6.5 9.0 1.6% 2.26 2.5

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INVESTMENT RESEARCH

Key to stock recommendations: Buy = Share price is expected to appreciate by >10% over the next 12 months Hold = Share price is expected to move by less than +/-10% over the next 12 months Sell = Share price is expected to decline by >10% over the next 12 months

Key to sector recommendations: Overweight = Industry expected to outperform the market over the next 12 months Neutral = Industry expected to perform in-line with the market over the next 12 months Underweight = Industry expected to underperform the market over the next 12 months

This report is for information purposes only and general in nature. The information contained in this report is based on data and obtained from sources believed to be reliable. However, the data and/or sources have not been independently verified and as such, no representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in this report. Accordingly, neither we nor any of our related companies and associates nor persons related to us accept any liability whatsoever for any direct, indirect or consequential losses (including loss of profits) or damages that may arise from the use of or reliance on the information or opinions in this publication. Any information, opinions or recommendations contained herein are subject to change at any time without prior notice. It is not possible to have regard to the specific investment objectives, the financial situation and the particular needs of each person who may receive or read this report. As such, investors should seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. Under no circumstances should this report be considered as an offer to sell or a solicitation of an offer to buy any securities referred to herein. This company and its related companies, their associates, directors, connected parties and/or employees may, from time to time, own, have positions or be materially interested in any securities mentioned herein or any securities related thereto, and may further deal with such securities and provide advisory, investment or other services for any company or entity mentioned in this report. In reviewing this report, investors should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflict of interests.

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