Malaysia Strategy 2014

Malaysia Strategy
12 December 2013
MARKET DATELINE
PP7767/09/2012(030475) 12 December 2013
Malaysia Strategy 2014

Macro
Positive Local Backdrop But QE Taper Fears Linger
Risks Growth Value
FBM KLCI: 1826.95 as at 6/12/2013

Index 1,850 Volume mil 5,000 4,500 1,800 4,000 3,500 1,750 3,000 2,500 2,000 1,650 1,500 1,000 1,600 Jan-13 Feb-13 May-13 Jun-13 Aug-13 Nov-13 Sep-13 Apr-13 500
1,700
As the timing of the US QE tapering is still a moving target, we expect the global repricing of risks to continue each time expectations of it materialising resurface. Still, we expect the global economy to experience a more synchronised recovery in 2014 while the Malaysian economy is poised for a cyclical recovery. We see several factors working in the countrys favour that are likely to take the market to another level.
Volume (RHS)
Closing Index (LHS)
Source: Bursa Malaysia
Bond yields still on uptrend

% 4.5 4.0 3.5 3.0 2.5 2.0 1.5 Oct-13 Feb-13 Oct-13 Jan-13 Jan-13 Nov-13 M ay-13 M ay-13 A ug-13 A ug-13 Dec-13 M ar-13 M ar-13 Jun-13 Jun-13 Jul-13 S ep-13 Apr-13
Notwithstanding the uncertain timing of the US dialing-back its asset purchase programme and the resultant market volatility, financial markets are already responding to expectations of reduced money creation and eventual increases in interest rates, both in the developed and emerging world. Whilst receding stimulus will be the key focus in 2014, there is no real tightening of policies in the US per se and both the ECB and BOJ are likely to maintain a very accommodative policy going forward, and inject more liquidity into the system, if need be. Under such circumstances, the market reaction to a Fed move will likely be less violent than in June-August 2013, in our view. Meanwhile, the improving growth outlook in advanced economies and a more synchronised global recovery augur well for Malaysia, which will likely experience a cyclical economic recovery in 2014. Already, real GDP growth has picked up from 4.2% y-o-y in 1H 2013 to 5.0% y-o-y in the 3Q. The decline in exports appears to have bottomed out and with resilient domestic demand, we envisage economic growth to pick up to 5.4% in 2014, from +4.7% estimated for 2013. This augurs well for corporate earnings, with the normalised net EPS growth of the FBM KLCI benchmark projected to improve to 7.0% in 2014 and 10.1% in 2015, from +4.1% estimated for 2013. As it stands, there are several factors working in the countrys favour, including the implementation of bold reforms to improve public finances and put the economy onto a sustainable growth path. At the same time, macro prudential measures have also been implemented to tame property prices and contain the increase in household debt. With the turnaround in exports, the current account surplus in the balance of payments has also improved significantly in 3Q 2013 and, in our view, the country will unlikely fall into a twin deficit situation in 2014. These, coupled with the diminishing risk of a sovereign rating downgrade and a cyclical recovery in the economy, augur well for the market to trade at a higher level in 2014. We are raising our end-2014 FBM KLCI target to 1,940 based on 15.5x one-year forward earnings, from 1,910 previously, largely on account of the upward revision in earnings. While US QE debate lingers, it is a question of timing and will still likely to be the single largest factor influencing market movements in 2014, in our view. Under such circumstances, investors should make use of the current respite to do portfolio rebalancing and prepare for that eventuality. As the economy will likely experience a cyclical recovery in the period ahead, there are more values in high growth sectors, in our view. While more values could be found in the mid to smaller-cap stocks, investors should not ignore bigger-cap stocks with sound fundamentals and accumulate them on weakness. Sector-wise, our overweights are oil & gas, construction, banking, plantation, timber, rubber glove, media, utilities, aviation and non-bank financials.
US 10yr TB
MGS 10yr
Source: Bloomberg
Weak commodity prices

Index 170 160 150 140 130 120 Feb-13 May-13 Jan-13 Jun-13 Jul-13 Oct-13 Aug-13 Aug-13 Nov-13 Mar-13 Sep-13 Apr-13 Index 500 490 480 470 460 450
Metals (LHS)
CRB commodity index (RHS)
Source: DJ-UBS Metals Subindex, Commodity Research Bureau
MYR/USD: Weak and volatile

MYR/US$ 2.90 2.95 3.00 3.05 3.10 3.15 3.20 3.25 3.30 3.35 3.40
Fe b -1 3
Fe b -1 3
M a r-1 3
M a r-1 3
M a y-1 3
M a y-1 3
Ju l-1 3
Ju l-1 3
Ja n -1 3
Ja n -1 3
Ja n -1 3
Ju n -1 3
Ju n -1 3
Ju l-1 3
O ct-1 3
O ct-1 3
N o v-1 3
N o v-1 3
A u g -1 3
Source: Bloomberg
Lim Chee Sing +603 9280 2153

cslim@rhbgroup.com
See important disclosures at the end of this report
A u g -1 3
D e c-1 3
S e p -1 3
S e p -1 3
A p r-1 3
A p r-1 3
Malaysia Strategy
12 December 2013
Tables of Contents
EXECUTIVE SUMMARY MARKET REVIEW MARKET OUTLOOK MARKET STRATEGY FBM KLCI FROM TECHNICAL PERSPECTIVE 1 3 7 19 23
SECTOR COVERAGE Auto Aviation Banking Basic Material Consumer Construction Education Gaming Healthcare Logistics Media Non-Bank Financial Oil & Gas Plantation Property Property REITS Rubber Glove Shipping Technology Telecommunication Timber Utilities 24 26 30 32 34 36 38 40 42 45 46 48 52 54 56 58 60 62 64 66 68 70
APPENDIX Valuations and Ratings of Individual Stocks Under Coverage 72
Malaysia Strategy
12 December 2013
Market Review
Volatile year driven by general election uncertainty, QE tapering fears
General
election jitters dominated market scene in the earlier part of the year
The year 2013 has indeed been a volatile one for the local bourse, which was dominated by general election jitters in the earlier part of the year while a combination of US QE tapering fears and the deteriorating fundamentals of some key emerging economies affected the movements of market. The FBM KLCI benchmark retraced by 4.5% from end-2012 to a low of 1,613.3 points on 20 Feb 2013 as rumours of an imminent general election gave rise to market nervousness and selloffs. The bellwether index, however, surged to an intra-day record high of 1,826 points on 6 May -- the day after the general election as the ruling coalition retained control of the Government, albeit with a smaller simple majority than it did in the 2008 polls. The index closed at 1,752.02 points that day. As the election overhang has been removed and as global economic conditions turned favourable, the market continued to climb from thereon, with the FBM KLCI reaching a high of 1,788.43 points on 14 May (see Figure 1). Profit-taking activities, however, started to set in when the Central Bank released the countrys 1Q GDP numbers that showed the Malaysian economy slowed down from 6.5% y-o-y in 4Q 2012 to 4.1% in 1Q 2013, partly due to businesses holding back investments owing to the election overhang. Subsequently, the market was stuck in correction mode as global financial markets reacted to a confluence of negative developments. The most significant trigger came when US Federal Reserve chairman Ben Bernanke told Congress on 22 May that the Fed may start on QE tapering at the next few FOMC meetings. Global investors reacted to this by selling down bonds and equities as they recalibrated their expectations of when and how the US Fed would cut back on its USD85bn monthly asset purchases and unwind quantitative easing (QE). At the same time, the sharp drop in Chinas HSBC Purchasing Manager Index (PMI) for the manufacturing sector to below the 50 level in May for the first time in seven months, sparked concerns of Chinas economic growth losing momentum. This was exacerbated by the loss of confidence in Japans bet on a massive quantitative and qualitative easing programme, dubbed QQE, culminating in the Nikkei 225 plummeting 7.3% on 23 May while other Asian markets also reeled from losses. As liquidity tightens and the outlook for commodities dims, partly on account of a potential economic slowdown in China and India, investors focus shifted to emerging markets that have weak macroeconomic fundamentals such as Brazil, India, Indonesia and Turkey. The selldown spilled over to other emerging markets, with the better performing markets such as Philippines, Thailand and Indonesia being Aseans hardest hit. However, the FBM KLCI corrected the least - by 41.01 points or 2.5% from 22 May to 13 June - before some bargain-hunting interest returned. The mild bargain hunting, however, was shortlived as investors turned cautious a day ahead of the 18-19 June FOMC meeting. As it turned out, the FOMC statement and Bernankes press conference were more hawkish than expected. Bernanke made it clear that QE tapering is a matter of time, ie a question of when and not if, adding that unless things got worse, it will happen in the later part of the year while asset purchases could end by mid-2014. The global financial markets reacted adversely to the statement, and so did the FBM KLCI, which fell by as much as 10.54 points on 20 June. Investors were worried that a sharp spike in bond yields could crimp US growth prospects, dent business confidence and stall the nascent housing rebound. This, coupled with a self-made cash crunch by the Peoples Bank of China as a warning to the countrys over-extended banks, sent financial markets reeling. The bellwether index continued to slide, giving up a total of 45.41 points - or 2.6% - over a week to 1,728.64 points on 25 June before some bargain-hunting resurfaced. This helped sustain the uptrend, which saw the bellwether index hitting a fresh high of 1,810.00 points on 24 July, although there was intermittent profit-taking, influenced largely by economic data signalling Chinas slowing growth. However, the market came under selling pressure when Fitch Ratings Agency downgraded the countrys sovereign rating outlook to negative from stable on 30 July owing to concerns over Malaysias weak public finances. The outcome of the US FOMC meeting on 30-31 July indicating that the US was on course to taper QE in the later part of the year did not help matters. Amidst the bad news, the FBM KLCI caved in through the psychological 1,800 level, partly dragged down by the massive outflow of foreign funds from emerging markets, the depreciation of certain Asian currencies, including the ringgit vis--vis the USD, followed by the release of a slower-than-expected 2Q GDP growth, as well as jitters over a possible US-led military strike against the Syrian government for using chemical weapons on its civilians. The bellwether index
3
Subsequent
movements of the local bourse were influenced primarily by external factors, with the most significant trigger being the signal of US intention to taper off QE
The
spotlight then turned to the emerging markets shortfalls, although the local bourse outperformed its regional peers
Nevertheless,
the local bourse also came under selling pressure later on negative domestic news flow, exacerbated by a more hawkish FOMC and the possibility of a US military intervention in Syria
Malaysia Strategy
12 December 2013 slumped to a five-month intra-day low of 1,660.39 points on 28 Aug before ending the day at 1,686.17 points, down 6.8% from its 24 July high of 1,810.00. Figure 1: FBM KLCI movements from January to December 2013*
Source: Bloomberg, RHB estimates * up to 6 December
Market
sentiment remained cautious thereafter although better economic data from China and easing geopolitic tensions gave rise to some bargain-hunting activities. However, the market enjoyed a relief rally when the Fed left its stimulus policy intact
Subsequently, bargain-hunting activities came back when the market had seemed over-sold, while economic data from China showed that its economic slowdown has bottomed. The countrys HSBC manufacturing PMI recovered to 50.1 in August after having fallen to below 50 for three consecutive months. Similarly, that countrys industrial production rose 10.4% y-o-y during the same month, topping the 9.9% growth estimate in a Bloomberg News survey. Data on exports, retail sales and fixedasset investment also exceeded estimates, thus allaying fears that its economy may head for a hard landing. Meanwhile, with Russia acting as a mediator for the Syrian government to surrender its chemical weapons, the concern of a US-led military strikes in Syria escalating into a larger conflict in the Middle East started to ease and key emerging markets benchmark stock indices jumped to a 3-month high on 10 September. This was despite the underlying caution among investors given the risk of US commencing on QE tapering after its 18-19 Sept FOMC meeting. However, when QE tapering did not materialise, global financial markets enjoyed a significant relief rally. The local bellwether index surged by as much as 30.43 points - or 1.7% - on 19-20 Sept, closing on 20 Sept at 1,801.83 points. This was, however, just a temporary reprieve as new worries returned to haunt investors as no QE tapering implies a lack of confidence in the US economic recovery. Meanwhile, yet another partisan struggle over the US debt ceiling and its ability to iron out differences for a new budget to prevent a temporary shutdown of the government created new uncertainty for the global financial markets, causing markets to move lower. This eventually led to a partial shutdown of US governments operations for 16 days from 1-16 Oct. The local bourse fell into correction mode before investor interest returned after the Democrats and Republicans agreed to fund the government through 15 Jan 2014 and suspend the debt ceiling temporarily through 7 Feb 2014. This sent the bellwether index to a new high of 1,818.9 pts on 24 Oct. It stayed above the psychological 1,800-pt level until 11 Nov, before earlierthan-expected QE tapering concerns resurfaced as the US 29-30 October FOMC minutes signaled the likelihood of QE tapering in coming months. This was worsened by the release of a stronger-than-expected increase in non-farm payrolls of 204,000 in October versus a revised 163,000 in September, and much higher than the consensus estimate of 120,000. Nevertheless, investor flocked back to the local bourse after the Central Bank released data pointing to a stronger-than-expected pickup in the countrys 3Q GDP growth of 5.0% y-o-y on 15 Nov. This was aided further by Fed vice-chair Janet Yellens remarks at her confirmation hearing to succeed Ben Bernanke, that any change to the Feds accommodative policies was not imminent. The bellwether index welcomed the news by surpassing the 1,800-pt psychological mark again on 28 Nov. It closed at 1,826.95 pts on 6 Dec.
4
The
US debt ceiling woes and tapering timeline, however, came back to haunt market later, although the local bourse got a lift from the better-than-expected 3Q GDP numbers
Malaysia Strategy
12 December 2013
YTD,
the FBM KLCI was up by 8.2%, outperforming most of its regional peers except for Vietnam, China and Taiwan
After having caught up in 2Q following the removal of the general election overhang, the FBM KLCI continued to outperform the TIP (Thailand, Indonesia and Philippines) markets in 2H amid volatile market conditions. However, the focus of investors shifted to the North Asian markets in 3Q given the cheap valuations that have largely priced in the negatives. As a result, China, Hong Kong, South Korea and Taiwan outperformed the Asean markets in 3Q, although the Indian, Hong Kong and Vietnamese markets outperformed in 4Q (see Table 1). YTD, the FBM KLCI benchmark was up 8.2%, outperforming most of its regional peers, except for the markets in Vietnam (+23.3%), China (+19.8% for the Shenzhen index) and Taiwan (+8.7%) (see Table 1). Property, telecommunications & technology, construction, services & trading and industrial products were the key outperforming sectors during the period under review (see Table 2). In contrast, the plantation sector was the worst performing sector up to 3Q as CPO prices recovery was weaker than expected, although it rebounded strongly in 4Q following the pickup in CPO prices. Table 3 lists down the top performers and underperformers under our coverage.
Table 1 FBMKLCI performance versus other regional markets

Country Malaysia Singapore Thailand Philippines Indonesia Hong Kong Taiwan Korea China China India Vietnam Sri Lanka US US US indices KLCI STI SET Pcomp JCI Hang Seng TWSE Kospi Shanghai Shenzhen Mumbai VSE Colombo All-Share Dow Jones S&P 500 Nasdaq Index 06-Dec-13 1,827 3,114 1,362 6,015 4,181 23,743 8,368 1,980 2,237 1,056 20,997 510 5,810 16,020 1,805 4,063 2013 Q1 %, change (1.0) 4.5 12.2 17.8 14.5 (1.6) 2.8 0.4 (1.4) 5.3 (3.0) 18.7 1.6 11.3 10.0 8.2 6.1 (4.8) (7.0) (5.6) (2.5) (6.7) 1.8 (7.1) (11.5) (4.3) 3.0 (2.0) 6.7 2.3 2.4 4.2 (0.3) 0.6 (4.7) (4.2) (10.4) 9.9 1.4 7.2 9.9 19.0 (0.1) 2.4 (5.2) 1.5 4.7 10.8 3.3 (1.7) (1.6) (2.9) (3.1) 3.9 2.4 (0.8) 2.9 (0.1) 8.3 3.6 0.1 5.9 7.3 7.7 10.3 19.7 35.8 33.0 12.9 22.9 8.9 9.4 3.2 1.7 25.7 17.7 (7.1) 7.3 13.4 15.9 8.2 (1.7) (2.2) 3.5 (3.1) 4.8 8.7 (0.8) (1.4) 19.8 8.1 23.3 3.0 22.3 26.6 34.5 Q2 Q3 Q4* 2012 2013 YTD*
* As at 6 December 2013 Source: Bloomberg
Table 2 Bursa Malaysia performance by sector

Bursa Msia by sector^ FBM KLCI FBM Emas FBM 70 FBM 100 FBM Small Cap FBM Fledgling FBM Emas Syariah FBM ACE FBM Hijrah Syariah Industrial Telecom & Technology Contruction Consumer Finance Industrial Products Plantation Property Services & Trading Mining
^ According to Bursa Malaysia's classifications * As at 6 December 2013 Source: Bloomberg
Index 06-Dec-13 1,827 12,627 14,099 12,362 15,550 12,296 12,801 5,553 14,035 3,097 14 276 583 16,759 138 8,999 1,277 235 470
2013 Q1 (1.0) (0.2) 2.4 (0.4) 5.6 (0.5) (1.4) (4.9) (2.5) 2.9 (2.8) 3.7 3.7 2.2 (0.4) (4.9) 12.6 0.7 9.8 Q2 6.1 7.7 11.7 7.3 17.9 14.4 8.3 16.9 8.1 4.1 13.1 13.7 5.9 7.6 7.9 5.8 15.9 7.1 3.6 Q3 %, change (0.3) (0.1) (1.0) (0.4) 6.7 9.0 0.6 18.2 0.3 1.6 6.9 0.6 (1.6) (2.7) 3.9 (1.0) (3.1) 2.1 12.1 3.3 2.7 1.0 2.8 1.9 7.0 3.5 0.3 4.7 1.9 1.8 (1.2) 1.3 2.0 1.5 8.6 (4.1) 3.4 (10.8) Q4*
2012
2013 YTD* 8.2 10.4 14.3 9.4 35.5 32.7 11.1 31.8 10.7 10.8 19.7 17.0 9.4 9.1 13.4 8.2 21.2 13.8 7.0
10.3 9.0 6.6 9.6 (1.6) 6.2 11.8 3.6 15.0 1.9 (20.6) (4.2) 9.9 12.1 9.3 1.9 5.4 7.4 17.9
Malaysia Strategy
12 December 2013
Table 3: Top performers & underperformers under RHB coverage (YTD)

Gainers Datasonic Puncak Niaga Prestariang Dayang Enterprise Kossan Rubber Alam Maritim Naim Holdings Pintaras Jaya Sykt Takaful Cahya Mata Sarawak Tambun Indah Perdana Petroleum Catcha Media KKB Engineering Favelle Favco M'sia Airports TDM Faber Group Hua Yang NTPM Holdings
Source: Bloomberg
06/12/2013 (MYR/share) 9.05 3.29 2.59 5.35 3.73 1.51 3.58 6.26 10.50 6.30 1.39 1.41 0.66 2.60 2.94 9.12 0.97 2.44 2.05 0.75
31/12/2012 (MYR/share) 1.35 1.09 1.11 2.38 1.68 0.68 1.76 3.08 5.44 3.33 0.76 0.77 0.37 1.44 1.65 5.21 0.56 1.45 1.22 0.45
% chg. 571.9 201.8 133.3 124.8 122.4 122.1 103.4 103.2 93.0 89.2 84.1 83.4 80.8 80.6 78.2 75.0 73.2 68.3 67.6 67.4
Losers Masterskill Parkson Lion Industries Capitamalls Notion Vtec Sunway REIT Ann Joo Resources NCB Holdings SEG International MMHE MRCB Media Chinese Int'l Telekom Eversendai Kulim SKP Resources M'sia Smelting Corp JCY International IGB REIT B-Toto
06/12/2013 (MYR/share) 0.38 3.34 0.74 1.41 0.66 1.25 1.07 3.58 1.53 3.70 1.32 0.99 5.31 1.17 3.50 0.32 2.79 0.57 1.21 3.96
31/12/2012 (MYR/share) 0.59 5.20 0.99 1.80 0.84 1.55 1.32 4.41 1.85 4.40 1.55 1.12 6.04 1.33 3.97 0.36 3.14 0.63 1.33 4.35
% chg. (36.4) (35.8) (25.8) (21.7) (21.8) (19.4) (18.9) (18.8) (17.3) (15.9) (14.8) (12.1) (12.1) (12.0) (11.9) (9.9) (11.1) (8.8) (9.0) (9.0)
Malaysia Strategy
12 December 2013
Market Outlook
US
QE taper debate is set to continue and will remain the single largest factor influencing market movements in 2014, in our view
2014 market outlook: QE taper debate lingers and focus shifts to receding stimulus
The question of when the US Fed will taper off its bond-buying programme has been one of the biggest influences on financial markets since its chairman Ben Bernanke started talking about the timing of QE tapering in late May 2013. Assuming the US Fed does not begin QE tapering at its 17-18 Dec FOMC meeting, the guessing game on the timing of the Feds stimulus cuts will likely remain a key focus of global investors in 2014, in our view. This will likely give rise to volatility in financial markets despite the fact that QE tapering does not equate to monetary policy tightening as the Fed will merely purchase less than the USD85bn worth of treasury bills and mortgage-backed securities that it currently does monthly. In other words, the Fed will still be injecting liquidity into the market, albeit less than before. At the same time, QE tapering is also not a signal that the Fed is preparing to raise shortterm interest rates soon, and neither does it wish to trigger a sharp increase in longterm rates. Nevertheless, markets have an uncanny knack for discounting future events relatively quickly. This was evident in late May this year when US long-term bond yields rose rapidly at the first sign of possible QE tapering in the upcoming months, drawing capital away from emerging markets back to the US. Similarly, global financial markets underwent a relief rally when QE tapering did not happen at the widely-anticipated FOMC meeting in September and funds flowed back to emerging markets in hopes of better returns. This partly reflects a situation where many questions remain unanswered at this stage, including: i) what will prompt the Fed to begin tapering its bond-buying programme; ii) how aggressive will the tapering be; (iii) when will the Fed exit QE tapering; (iv) how long after that would it expect to raise short-term rates; and (v) how fast will rates rise. As the financial market is a key component of the US economy, the last thing the Fed would want to do is derail it. As a result, the timing of QE tapering has become, more than ever, data dependent and all these will imply sustained market volatility in the year ahead. We hold the view that the longer the US delays its QE tapering, the more painful the hangover would be for emerging markets, including Malaysia. As a result, investors in the emerging markets may have to live with volatile short-term capital movements from time to time in the year ahead. This was evident from June to Aug 2013, when MYR27.5bn of foreign money in the fixed income market and MYR10.6bn in the equity space exited the country on the first sign of QE tapering (see Figures 2 & 3). While foreign funds returned to the country after the Fed decided not to begin QE tapering in its September FOMC meeting, the risk of capital outflow is still significant given the high foreign holdings of financial assets in the country. Indeed, foreign ownership of Malaysian Government Securities (MGS) had increased from 42.8% at end-Sept to 46.4% at end-Oct, while about 69.4% of short-term money market papers are still in the hands of foreign investors (see Figure 4). Similarly, foreign ownership in the equity market remained in excess of 24.0% at end-Sept (see Figure 5), not far from the recent high of 27.5% in April 2007.
Given
high foreign holdings of financial assets in the emerging markets, investors may have to live with volatile short-term capital movements from time to time
Figure 2: Large swings of short-term capital in the fixed income market

MYR bil
Figure 3: Volatile capital flows in the equity market

MYR bil 6
+10.3
15 10 5 0 -5 -10 -15 Feb-12 Mar-12 Oct-12 Feb-13 Mar-13 May-12 May-13 Nov-12 Dec-12 Sep-12 Aug-12 Aug-13 Sep-13 Apr-12 Apr-13 Oct-13 Jan-12 Jun-12 Jul-12 Jan-13 Jun-13 Jul-13 -2.6
4 2 0 -2 -4 -6 -8 F eb-12 M ay -12 J an-12 M ar-12 J un-12 J u l- 1 2 O c t- 1 2 F eb-13 N ov -12 D ec -12 M ay -13 J an-13 M ar-13 J un-13 J u l- 1 3 O c t- 1 3 Aug-12 Aug-13 N ov -13 Sep-12 Sep-13 Apr-12 Apr-13 -3.2
MGS
Money Market
Source: Bank Negara Malaysia
Malaysia Strategy
12 December 2013 Figure 4: High foreign holdings of short-term money market papers
%
%
Figure 5: Foreign ownership in the equity market not far from recent high
80 70 60 50 40 30
19 27
69.4%
25 23.1 24.2
26.2
23.9 22.7
24.1
46.4%
23
21.8 21.2
21.6
21.9 21.3 20.4
21 19.5 18.5 18.1 18.1
20 10 0 2008 2009 MGS 2010 2011 2012 2013

17
15 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013(Sep)
Money market
Shifting
expectations on US Feds policy will lead to constant repricing of risks globally, although market reaction will likely be less violent than in June-Aug 2013
Given the mixed economic data at this stage and the yet-to-be-resolved debt ceiling issues, we see a possibility for the QE tapering to begin only in 1Q14 or even later. This is particularly so if, as expected, Janet Yellen - the current Feds vice-chairman - is named as the new Feds chairman as she has been more dovish in her view and advocated that more needs to be done to sustain the economic recovery. Meanwhile, uncertainty over USs government funding for the new fiscal year and its ability to raise the debt ceiling will come back to haunt investors in the 1Q. Thus far, the Democrats and Republicans have merely agreed to fund the government through 15 Jan and suspend the decision on the debt ceiling through 7 Feb 2014. Nevertheless, the challenge appears to be more manageable now given that its fiscal deficit has fallen from 9.8% of GDP in 2009 to 4.1% in 2013, thanks to higher government revenue from the increase in payroll taxes and the lower expenditure from the sequester that kick-started from 1 March 2013. As the timing of the US QE tapering is still a moving target, we expect the global repricing of risks to continue rattling emerging markets each time expectations of it materialising resurface - although market reaction to a Fed move will likely be less violent than in June-Aug 2013. No major crisis in emerging economies
Short-term
capital left emerging markets at the first sign of QE tapering as focus was on deteriorating fundamentals of some key emerging economies
A significant development in late May 2013 when the US Federal Reserve first signaled the potential of a QE taper was the reversal of short-term capital flow from emerging markets back to the developed ones. This was on the back of a contrast of situations between deteriorating fundamentals in some major emerging economies where global funds were heavily weighted and developed countries which were experiencing improving economic recovery prospects. The spotlight was on the BIITS (Brazil, India, Indonesia, Turkey and South Africa), where their economies were ailing with real GDP growth having plummeted, losing competitiveness and with some countries faced with rising twin deficit concerns. Many of these emerging economies enjoyed massive short-term capital inflows into their financial markets followed by swift capital reversal and significant currency depreciation. These were somewhat similar to developments during the 1997-98 Asian Financial Crisis (AFC), giving rise to concerns of a potential crisis in the making. However, following the Feds decision to hold back on QE tapering in its September FOMC meeting, capital has flown back to some emerging markets. This sparked off huge stock market rallies and a surge in fund raising as calm in the US, combined with low interest rates, has drawn large institutional investors back to the emerging markets in search for better returns. As QE tapering is a matter of timing, it begs the question whether this episode will repeat itself once the Fed gets its act together, or if the situation will get worse. While capital reversal and volatility is likely to come back to the emerging market space as investors move with the ebb and flow of a herd mentality, we do not expect it to be as bad as what we have seen in June-Aug 2013. This is simply because we do not see a crisis similar in magnitude to the 1997-98 Asian financial crisis in the making. We are of the view that macroeconomic fundamentals of major emerging economies are stronger and healthier now, with ample foreign exchange reserves and a much better-capitalised banking system and stronger corporate balance sheets. In addition, most emerging economies also have a more flexible exchange rate that will provide policy flexibility to deal with volatile capital movements. Overall, despite their high indebtedness and suffering from twin deficit problems, many emerging economies still have credible lines of defence, including access to a standby facility for liquidity back-up. The Asean region, for
8
But
short-term capital has returned to emerging markets in hopes of better returns when QE tapering did not happen and we do not see a crisis similar in magnitude to the 1997-98 AFC in the making
Malaysia Strategy
12 December 2013 instance, has in place the Asian regional financial safety net, dubbed the Chiang Mai Initiatives Mechanism with a fund size of USD240bn contributed by Asean + three countries (China, Japan and South Korea) that would provide short-term support to address sudden but temporary liquidity shortages. Meanwhile, countries in the region have also arranged bilateral swaps as a financial safety net (Malaysia and Thailand with China; Indonesia with China, Japan and Singapore; and Philippines with China, Japan and South Korea).
Meanwhile,
measures have been taken to address the weaknesses and it does not take much for the emerging economies to catch up and lead the global growth once external demand for their exports starts to recover
In the interim, emerging economies that face twin deficit concerns have undertaken measures to address them. Indonesia, for instance, has cut fuel subsidies (to reduce gasoline consumption and oil imports) and raised interest rates significantly and India has allowed foreign investors greater access to local industries. While emerging markets have lost some shine vs the developed ones and a risk-on, risk-off cycle will emerge from time to time and create market volatility given the uncertain timing of the US QE tapering, it does not take much for the emerging economies to catch up and lead global growth once external demand for its exports starts to recover. Structurally, as emerging economies have younger population demographics, are generally endowed with better natural resources and still possess stronger fundamentals for economic growth to scale up over the longer term, they have a better potential for higher returns for global portfolio investors, in our view. Confidence in Chinas economy returns
Ameliorating
growth concerns indicators suggest that its slowdown has bottomed out
in China, economic
While one of the triggers for the major selldown in emerging markets in late May 2013 was investors fear of a hard landing in Chinas economy on account of its economic imbalances and policy tightening, confidence over its economy is returning as major economic indicators suggest that its slowdown may have bottomed out. Not only has its economic growth bounced back to 7.8% y-o-y in 3Q, exports and both of its HSBC and official manufacturing PMIs are trending up (see Figure 6). Nevertheless, there is still a nagging concern that the pickup in economic activities thus far was coming from exports and investments, and not from the results of its economic transformation to achieve sustainable longer-term growth. At the same time, the over-extended bank lending, coupled with a sharp increase in nonbank lending or shadow banking in the recent past, the ascent of property prices (see Figure 7) despite administrative controls and high debt of the provincial governments, has created fears of a debt bubble. Figure 7: Resurgence of property prices in China despite administrative controls
%,yoy
Figure 6: Chinas HSBC and official manufacturing PMIs trending up

Index 55 54 53 52 51 50 49 48 47 2011 Jul 2012 Jul 2013 Jul Of f icial PMI
New home pricesin70 major citiesmonitoredbyNBS

(e xcl. affordable hom e s )
25% 20% 15% 10% 5% 0% 5% 10%
Jul13
A pr11
O ct11
A pr12
O ct12
Jan11
Highest
Jan12
Median
Jan13
Lowest
Source: China Federation of Logistics & Purchasing and Markit Economics
Source: China Real Estate Index System
While
stable, China will no longer be a significant booster for emerging Asian economies in the near term
Meanwhile, China has released more details of its major transformation programme in its Third Plenum, focusing on strengthening the role of market forces in the economy. While there are significant challenges to the transition to a new economy and China may not return to the double-digit rate of economic growth for some years to come, it will ultimately result in a more stable and stronger economy in our view. This will have positive implications for trade and investment to the rest of emerging Asia over the longer term. In the interim, we believe the Chinese government may still have the firepower to step in to balance out the various imbalances and bolster the financial system, if need be. This implies that China will likely achieve a growth of 7.0%-8.0% in the transition years. This growth rate is still decent and will likely continue to act as a stabilising force for the rest of Asia although it will no longer provide a significant booster for the region.
A pr13
O ct13
Jul11
Jul12
HSBC PMI
15% 20%
Malaysia Strategy
12 December 2013 Better growth prospects for advanced economies while global recovery will be more synchronised
In
contrast, key developed countries are experiencing improving prospects, with the US economy on a steady recovery path
The macro backdrop, however, is turning more positive with prospects of a more synchronised global economic recovery in 2014. This is led by the developed world, as the US and Japan are on a recovery path and Europe is stabilising. Despite higher payroll taxes since the beginning of the year and the USD85bn sequester (ie automatic spending cuts) that kick-started from 1 March, US economic growth has been trending up, from an annualised 1.1% in 1Q13 to 2.5% in 2Q and 3.6% in 3Q (see Figure 8). While the stronger-than-expected growth in 3Q came mainly from the build-up in inventories and this may drag on growth in 4Q - especially when there was a partial shutdown of government operations in the first half of October - we do not expect the recovery to be derailed. Indeed, higher inventories in 3Q could also suggest that businesses expect stronger demand going forward. Apart from the housing market recovery (see Figure 9), which has boosted consumer confidence and job creation, the shale gas revolution has given rise to a manufacturing renaissance in the US. This could be an added catalyst for the countrys economic recovery moving forward. Figure 9: US housing market recovering despite recent weakness
%, y-o-y 60
Figure 8: US Real GDP growth accelerating

%, annualised 6 4 2 0
+3.6
40 20 0
-2
-20
-4 -6 -8 -10 2005 2006 2007 2008 2009 2010 2011 2012 2013
-40 -60 05 06 07 08 09 10 11 Existing home sales Housing starts 12 13
S&P case-shiller house price index New home sales
Source: US Bureau of Economic Analysis
Source: US Census Bureau
While
the risk of a political brinkmanship will resurface in early 1Q 2014, we do not expect it to derail the economic recovery
While the risk of a political brinkmanship will resurface in early 2014, it was reported that US budget negotiators are near a deal in which Democrats would accept fresh revenue from user fees, including for airline passengers, and Republicans would agree to more federal spending - steps that could avoid another government shutdown in early 2014. Although this emerging deal does not include an agreement to raise the nations borrowing limit, we believe a deal would be struck eventually to remove the impasse given that both parties do not want to take the blame for derailing the economic recovery as they prepare for the mid-term election in late 2014. As mentioned earlier, its fiscal deficit has improved significantly from 9.8% of GDP in 2009 to just 4.1% in 2013, making it more manageable for the US administration to negotiate for a new budget for fiscal year 2014 and prevent another shutdown of government operations. With fewer headwinds from the government moving into 2014 and as the impact of the sequester fades, we expect the economic recovery to gain strength as consumers fully adjust to the tax increases, corporate spending picks up and the housing market recovery continues. We believe there is a good chance of the countrys economic growth advancing towards the 2.5-3.0% level in 2014, from around +2.0% estimated for 2013. In contrast, the economic recovery in Japan appears to be losing momentum, with its real GDP growth decelerating from an annualised 4.3% rate in 1Q13 to 3.8% in 2Q and 1.9% in 3Q. While the positive impact from its quantitative and qualitative (QQE) easing programme appears to be fading, the Japanese cabinet approved a USD182bn (JPY18.6trn) package in spending measures on 5 Dec 2013 to bolster the economy ahead of a sales tax hike in April 2014 (from 5% to 8% and further to 10% in Oct 2015 in an attempt to cut back soaring government debt). While part of this package includes loans from government-backed lenders and spending by local governments that was already scheduled and it may not be sufficient to fully offset the drag from the tax hike, Bank of Japan (BOJ) is reported to be looking at options, including major purchases of stock market-linked funds or other riskier than Japanese government bonds and more radical ideas to reflate the economy. In our view, whether this recovery can be sustained hinges on the implementation of bolder structural reforms to unlock its growth potential over the longer term, but a cyclical recovery appears unlikely to be derailed. Apart from the improving global outlook
10
We see a good chance of the US economic

growth advancing towards the 2.5-3.0% level in 2014
Japans
economic recovery losing momentum, but unlikely to be derailed
Malaysia Strategy
12 December 2013 that will underpin its export recovery, prime minister Shinzo Abes government also has more policy options to sustain its economic recovery, if need be.
Eurozone
has returned to positive growth since 2Q and is stabilising
Similarly, the Eurozone is on track for a gradual recovery, albeit slowly and unevenly, as it continues to struggle with the legacy of a debt crisis and a record unemployment rate. The regions economy has returned to a positive growth of 0.3% q-o-q in 2Q13, although it has slowed to just 0.1% in 3Q. The French economy unexpectedly shrank and Italy extended its longest postwar recession. Nevertheless, austerity measures are becoming less restrictive and the European Central Bank (ECB) has cut its key policy rate further to a record low of 0.25% in October and policymakers are looking into ways to boost economic growth. Meanwhile, the Eurozone composite PMI has resumed growth for five consecutive months up to November (see Figure 10) while business and consumer confidence are showing signs of a gradual improvement (see Figure 11). This suggests that the Eurozone as a region has stabilised and will no longer be a major drag to the recovery in the advanced economies. With member countries adjusting to the austerity programmes and as external demand for the regions exports improves, prospects for the regions economy, particularly Germany, will likely gradually improve in 2014. Meanwhile, the gradual return of investor confidence on the region and accessibility to financing from capital markets by peripheral countries in the region will imply that the massive systemic risk from a Eurozone meltdown will unlikely resurface in the foreseeable future, although a debt crisis of that nature will take many years to be fully resolved.
Figure 10: Eurozones composite PMI has resumed growth for the past 5 consecutive months
Index 65 60 55 50 45 40 35
Figure 11: Both business and consumer confidence showing signs of a gradual improvement in the Eurozone
Index 2 Business climate (LHS) Index 0 -5 1 -10 0 -15 -1 -20 -25 -2 -30 -3 Consumer confidence (RHS) -35 -40 05 06 07 08 09 10 11 12 13
30
05
06
07
08
09
10
PMI for Services
11
12
13
Composite PMI
-4
PMI for Manufacturing
Source: Markit Economics
Source: European Commission Economic Sentiment Indicators
Malaysian economy on path to cyclical recovery
Malaysias economic growth has picked up to

5.0% y-o-y in 3Q13 and is poised for a cyclical recovery
On the Malaysian front, real GDP growth has picked up to 5.0% y-o-y in 3Q13, from +4.2% in 1H. This was primarily on the back of a turnaround in exports, from -2.9% y-o-y in 1H13 to +1.7% in 3Q (see Figure 12), while real aggregate domestic demand had stayed relatively resilient at an average 8.0% growth in the first three quarters of the year. Apart from the resilient consumer spending, underpinned by high savings, rising consumerism from the young demographics of the population and favourable labour market conditions, a new investment cycle has emerged (see Figure 13) to reinforce the strength of the domestic demand in the period ahead. Indeed, real private investment accelerated to a strong double-digit rate of 21.9% in 2012, from +10.5% in 2011 and after having been stuck at an average annual growth of 7.4% in 2000-10. Despite the high base, real private investment was sustained at a strong growth rate of 12.9% y-o-y in the first three quarters of 2013, underpinned by long-gestation period projects from the various economic programmes, including the 10-year Economic Transformation Programme (ETP), Public-Private Partnership (PPP) projects, the Iskandar Malaysia Corridor (IMC) and the Sarawak Corridor of Renewable Energy (SCORE) (see Table 4). As the country enters the fourth year of ETP implementation in 2014 and the implementation will likely peak only in the fifth or the sixth year, given the long-gestation nature of a number of sizeable infrastructure related projects, the investment growth will likely remain relatively robust over the next 2-3 years. This is reinforced by the significant progress in the developments of the IMC and SCORE, both of which have gone beyond the tipping point and are contributing to the new investment cycle.
11
Malaysia Strategy
12 December 2013 Figure 12: A cyclical recovery in prospects as exports trend up
%, y-o-y 25 20 15 10 5 0 -5 -10 -15 -20 -25 00 01 02 03 04 05 06 07 08 09 10 11 12 13 GDP Exports Domestic demand
Figure 13: A revitalisation of investment

%, y-o-y 25 20 15 10 5 0 -5 -10 05 06 07 08 09 10 11 12
(Private investment growth)
Source: Bank Negara Malaysia and Dept. of Statistics
Source: Bank Negara Malaysia and Dept. of Statistics
Table 4 Long-gestation projects from various economic programmes and funding requirements
The 10-year ETP : MYR 1.4trn, 92% of the funding to come from the private sector largely via the issuance of debt securities (a significant portion of which may require government guarantee). Public-Private (PPP) partnership projects Iskandar M'sia Corridor Sarawak Corridor of Renewable Energy (SCORE) Key Projects 1 Refinery and Petrochemical Integrated Development (RAPID) 2 3 4 KL - Singapore High-Speed Rail project Tun Razak Exchange (TRX) Sg Buloh - Kajang MRT Line (Line1, Klang Valley MRT) 5 Sg buloh-Serdang-Putrajaya MRT Line (Line2, Klang Valley MRT) 6 Circle MRT Line (Line3, Klang Valley MRT) 7 8 9 10 11 12 River of Life Kwasa Damansara Gemas - Johor Bahru double tracking West Coast Expressway Warisan Merdeka Pan Borneo Express Way 17 10 8 7 5 10 Abt 20% from Govt. EPF Govt. allocation via development spending Govt. soft loan of MYR 2.24bn PNB Govt. allocation via development spending 25 SPV 25 SPV 30 - 50 26 23 SPV IMDB+Foreigner SPV MYR bn 60 Funding Sources Petronas : : Significant capital investment put forth by investors, both local and foreign, estimated at MYR383bn. MYR334bn of which MYR67bn will be from government funding and MYR267bn from private funding. : MYR115bn, funding mostly coming from private sector, but with government assistance.
Source: RHB estimates, various media reports.
The
countrys decline in exports appears to have bottomed out and given the resilient domestic demand, we envisage economic growth to pick up to 5.4% in 2014
Against an improving global economic backdrop, the countrys decline in exports appears to have bottomed out in June 2013 and growth is trending up on account of rising external demand, particularly from China and the European Union countries (see Figure 14). Going forward, we expect the country to enjoy a cyclical recovery as export growth gathers pace. This will, in turn, lift domestic demand and mitigate the dampening effect from the Governments fiscal consolidation and tightening measures tabled in the 2014 Budget. Coupled with the resilient consumer spending and a new investment cycle, this suggests that real aggregate domestic demand will likely be sustained at a growth of around 7.0% in 2014, albeit at a more moderate pace than +7.9% estimated for 2013. The pickup in real export growth from +0.2% estimated for 2013 to +4.5% in 2014, however, will likely lift the countrys overall economic growth to 5.4% in 2014, from +4.7% estimated for 2013 (see Table 5).
12
Malaysia Strategy
12 December 2013 Figure 14: Decline in exports appears to have bottomed out
%, y-o-y 50 40 30 20 10 0 -10 -20 -30 -40 05 06 Total exports 07 08 09 10 11 12 13 Exports to China %, y-o-y 160 140 120 100 80 60 40 20 0 -20 -40 -60
Figure 15: Current account surplus in the balance of payments bouncing back with export recovery
MYR bn 50
40
30
20
10
-10
-20 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Exports to EU
Source: Dept. of Statistics
Source: Dept. of Statistics
Table 5 Expect economic growth to improve in 2014 as external demand for the country's exports picks up
2012 3Q 4Q 1Q 2013 2Q 3Q % Growth in real terms Consumption Public Private Fixed capital formation Public Private Agg. Domestic demand Exports of goods and non-factor services Imports of goods and non-factor services GDP Agriculture Manufacturing Mining & quarrying Construction Services 5.3 0.6 3.3 (1.2) 17.9 7.0 6.5 5.6 5.7 4.2 17.6 6.4 4.1 6.0 0.3 (1.9) 14.2 6.1 4.4 0.4 3.5 4.1 9.9 5.0 5.0 2.1 4.2 1.7 10.1 5.9 5.6 2.7 4.8 2.2 18.1 6.4 4.5-5.0 2.7 3.2 2.2 10.6 5.5 4.7 2.7 3.2 1.2 12.0 5.7 5.4 2.8 6.0 1.5 8.0 5.8 4.5 (0.6) 3.6 (2.0) 1.8 4.7 4.4 3.0 6.0 2.4 8.6 22.3 22.2 22.4 11.4 (2.5) 1.2 6.2 16.0 12.9 20.1 7.8 (1.6) 0.6 7.5 13.1 17.3 10.8 8.2 (0.6) 11.8 7.2 6.0 (6.4) 12.7 7.4 (5.2) 7.8 8.2 8.6 (1.3) 15.2 8.3 1.7 5.1 7.7 19.9 17.1 22.0 10.6 (0.1) 7.3 7.4 11.7 5.5 16.2 8.7 1.2 6.3 7.2 10.1 4.6 14.0 7.9 0.2 4.0 6.0 10.3 4.0 14.5 7.0 4.5 2012 MOF 2013F RHBRI 2014F
F Forecasts; RHB and MOF (Ministry of Finance) Source: Department of Statistics and Economic Report 2013/2014, Ministry of Finance
Risk of near-term sovereign rating downgrade diminishes
Moodys
has upgraded the countrys sovereign rating outlook to positive while risk of a rating downgrade has diminished
The risk of a sovereign rating downgrade was first highlighted by The Fitch Ratings Agency when it downgraded the countrys sovereign rating outlook from stable to negative on 30 July 2013 on account of the countrys weak public finances and the lack of fiscal reform to address it. It warned that if nothing substantial was done to address it, a downgrade in the countrys rating is more likely than not over the next 18 to 24 months. This risk, however, is diminishing after the Government undertook a strong commitment to fiscal reform in its 2014 Budget tabled in Parliament on 25 Oct. This includes implementing a 6% goods and services tax (GST) from April 2015 to broaden its tax base and in the meantime, cutting subsidies to reduce its operating expenditure with the aim of reducing the fiscal deficit further to 3.5% of GDP in 2014 and working towards balancing the budget by 2020. Meanwhile, as exports are turning around, the surplus in the current account of the balance of payments has more than tripled from MYR2.6bn (1.1% of GNI) in 2Q13 to MYR9.8bn (4.1% of GNI) in 3Q (see Figure 15). In our view, the current account in the balance of payments will likely remain in a projected surplus of MYR20.1bn, or 1.9% of GNI in 2014, albeit smaller than the MYR30.1bn surplus, or 3.1% of GNI estimated for 2013. Indeed, On 20 Nov, Moodys Investors Service upgraded the countrys sovereign rating outlook from stable to positive, citing improving prospects for fiscal consolidation and reform as well as continued
13
The
surplus in the current account of the balance of payments more than tripled in 3Q13 and will unlikely fall into a deficit in 2014
Malaysia Strategy
12 December 2013 economic stability amid an increasing challenging external environment as the rationale for changing its outlook for Malaysia.
High
household debt, however, remains an area of concern, but is backed by high savings
Nevertheless, the countrys high household debt remains a concern among some investors. It has risen from 66.7% of GDP in 2004 to 85.1% of GDP by end-June 2013 (see Figure 16), and is one of the highest in the region. Standard & Poors, for instance, recently downgraded the credit rating outlook of four Malaysian banks from stable to negative, citing concerns of the potential for deterioration in the banks asset quality and financial profiles given the prolonged run-up in the countrys housing prices and household debt. Nonetheless, Malaysians high household debt is cushioned by high savings and is largely asset-based (see its composition in Figure 17) and is not likely to trigger any systemic risk to the banking system and the economy, in our view. Nevertheless, the rising cost of living and falling housing affordability remains a concern for the middle- to lower-income group of the population despite initiatives taken by the Government to contain the continued rise in household debt and tame property prices. At the same time, the countrys high household debt will also stifle future economic growth and potentially constrain policy decisions and their effectiveness in the future. Figure 17: Household debt is largely asset-based
Purchase of securities 6.1% Purchase of nonresidential properties 7.5% Credit card 4.2% Others 3.2% Housing loans 44.6%
Figure 16: Rising household debt an area of concern

MYR bn 900 800 700 600 500 400 300 200 100 02 03 04 05 06 07 08 09 10 11 12 13Q2 % GDP 90 85 80 75 70 65 60 55 50
Household debt (MYRbn) (LHS)
Household debt as % GDP (RHS)
Personal loans 16.8%
Auto f inancing 17.6%
Higher inflation largely policy-induced, no change in interest rates until 3Q14
Inflation
has been creeping up, but remains manageable
The headline inflation has been creeping up from more than a 2-year low of 1.2% y-o-y in Dec 2012 to 2.8% in Oct 2013 (see Figure 18), mainly on account of the 10.5-11.1% fuel price hike implemented by the Government on 3 Sept. Inflation will likely trend higher to around 3.0-3.4% in 2014 from an average 2.2% in 2013 due to subsidy rationalisation, and accelerate to 3.5-3.9% in 2015 when the proposed GST is implemented in 2015. Figure 19: Large amount of excess liquidity continued to be mopped out by the Central Bank
MYR bil 340 MYR263.6bn (as at end Nov)
Figure 18: The headline inflation is creeping up

%, y-o-y 6 5
290
4 3 2 1 0 10 11 12 13
90 140 240
190
Core CPI
Total CPI
Food
05
06
07
08
09
10
11
BN bills
12
Repo (estimate)
13
Excess funds mopped up by BNM from the interbank market
Source: Department of Statistics
No
change in policy rate envisaged until 3Q14
The current rise in inflation, however, is mainly policy-induced and the Central Bank, viewing it as a cost-push and temporary phenomenon, does not see a need to increase interest rates any time soon despite rising inflationary expectations. Nevertheless, we believe it is still important for the Central Bank to make a preemptive move to control rising inflationary expectations given that inflation is expected to accelerate for the next two years. All in, we expect the Central Bank to increase its overnight policy rate (OPR) by 25 bps to 3.25% in 3Q14.
14
Malaysia Strategy
12 December 2013 Some temporary currency weakness due to capital outflow
Ringgit
has been weak and volatile due to outflow of short-term capital, but could eventually settle at around MYR3.103.15/USD once the dust settles
On the currency front, the high foreign holdings of financial assets in the country and the possibility of the US Fed dialing back its monetary stimulus in 2014 point to a potential outflow of short-term capital from Malaysia as well as a temporary weakness in the ringgit. Once the timing of QE tapering becomes more certain, we expect the ringgit to weaken to around MYR3.30/USD before strengthening back to around MYR3.10-3.15/USD when the situation normalises. Despite the weakness in the ringgit, we do not expect the Central Bank to hike its key policy rate merely to take pressure off the ringgit.
Corporate earnings poised to improve
Net EPS growth is projected to improve from

to 7.0% in 2014 and 10.1% in 2015, from +4.1% in 2013
After several quarters of disappointments, corporate earnings in Malaysia have begun to stabilise, with more companies reporting better-than-expected numbers than those that disappointed in the Sept 2013 earnings quarter. We believe the earnings outlook will gradually improve as economic activities pick up. Based on our projection, the normalised net EPS of the FBM KLCI stocks under our coverage will likely improve to 7.0% in 2014 and 10.1% in 2015 (see Table 6), from the +4.1% estimated for 2013. The stronger earnings growth in 2014 will emanate largely from the plantation, construction, banking and healthcare sectors.
Table 6: Earnings Outlook And Valuations

06/12/2013 COMPOSITE INDEX @ 1,826.95 EBITDA Growth (%) Pre-Tax Earnings Growth (%) Normalised Earnings Growth (%)* Normalised EPS (sen)* Normalised EPS Growth (%)* Normalised EPS Growth ex-TNB (%)* Prospective PER (x)* Price/EBITDA (x) Price/Bk (x) Price/NTA (x) Net Interest Cover (x) Net Gearing (%) EV/EBITDA (x) ROE (%)
* Excludes MAS earnings in 2012-15. FBM KLCI stocks not under our coverage: HLFG, PPB, Pet Dagangan, RHB Cap and YTL. Source: Bloomberg, RHB estimates
2012A 14.4 14.8 9.3 41.8 7.1 5.0 18.4 10.2 2.5 3.1 14.9 26.9 7.2 13.6
FBM KLCI 2013F 2014F 2.8 8.6 5.4 7.6 6.0 7.6 43.5 46.5 4.1 7.0 1.8 7.4 17.3 16.1 9.9 9.1 2.3 2.2 2.8 2.6 13.9 17.0 28.4 26.9 7.2 6.5 13.5 13.4
2015F 8.4 10.3 10.6 51.2 10.1 10.3 14.6 8.4 2.0 2.3 19.1 22.3 5.9 13.8
2012A 13.5 13.8 8.9 29.8 0.7 (1.7) 18.4 9.8 2.4 2.6 11.0 36.1 8.2 12.8
RHB BASKET 2013F 2014F 1.9 10.8 (0.4) 11.6 6.3 11.1 30.6 33.7 2.6 9.9 0.7 10.8 17.3 15.6 9.6 8.7 2.2 2.0 2.4 2.2 13.3 15.6 34.8 32.9 8.3 7.4 12.5 12.9
2015F 7.3 7.8 10.6 37.1 10.1 10.4 14.1 8.1 1.9 2.0 19.7 30.1 6.8 13.3
Table 7: Regional Comparison

M'sia S'pore Thailand Philippines Indonesia Hong Kong
11.1 7.9 11.4 10.5 1.0 1.3
7.3 10.0 12.8 11.6 1.7 1.2
Taiwan
Korea
FactSet Asian Consensus Trends report dated 29 November 2013 2013 (Net Eps (%) 2014 (Net Eps (%) 2013f PER (X) 2014f PER (X) PER/Net EPS ratio 2013 2014 2013 (Net Eps (%) 2014 (Net Eps (%) 2013f PER (X) 2014f PER (X) PER/Net EPS ratio 2013 2014 Performance (%) 2012 (YOY) 2013 (YTD)*
10.3 8.2 19.7 (1.7) 35.8 (2.2) 33.0 3.5 12.9 (3.1) 22.9 4.8 8.9 8.7 9.4 (0.8)
(15.7) 8.6 17.2 15.8 (1.1) 1.8

(0.1) 12.5 15.9 15.0 (>100) 1.2
(13.2) 8.9 15.1 13.9 (1.1) 1.6

(0.1) 11.1 14.4 13.0 (>100) 1.2
7.2 13.0 13.8 12.2 1.9 0.9

12.6 15.4 14.5 12.6 1.1 0.8
12.0 7.6 18.1 16.8 1.5 2.2

5.1 8.4 17.5 16.1 3.4 1.9
3.6 14.5 14.9 13.0 4.1 0.9

7.8 15.9 15.1 13.0 1.9 0.8
32.0 14.0 16.5 14.5 0.5 1.0

45.2 12.2 15.7 14.1 0.3 1.1
13.3 19.2 10.7 8.9 0.8 0.5

10.7 26.8 11.8 9.3 1.1 0.3
IBES Consensus dated 14 November 2013
* As at 6 December 2013 closings

Source: FactSet Asian & IBES Consensus
15
Malaysia Strategy
12 December 2013
Malaysian market is a low beta and defensive

one that tends to outperform in a more volatile market environment
While the single-digit earnings growth is still unexciting, it is nevertheless trending up. The markets valuation is also not excessive, as it is trading at about 16.1x 1-year forward earnings and 2.2x price/book. Indeed, the Malaysian market is a low beta and defensive market that tends to outperform in a more volatile market environment, as evident from the recent selldown. Despite regional markets having suffered sharper corrections and valuations being cheaper (except for the Philippine market, see Table 7), these markets may continue to underperform amid volatility. The cheaper valuations in the Thai and Indonesian markets, to some extent, reflect the weaker fundamentals in their economies, including slowing economic growth, issues relating to government-sponsored programmes and political upheavals in the former and slowing growth, twin deficits and policy risks as well as rising inflation and surging bond yields in the latter. Apart from high domestic liquidity, the premium valuation of the FBM KLCI, in our view, reflects strong participation by the government company-linked (GLC) funds in the local bourse, which collectively accounts for about a quarter of the total market capitalisation. We also hold the view that the GLC-linked funds participation in the local bourse will remain high and will unlikely diminish in the foreseeable future. Market propped up by ample liquidity
Economy is still flush with liquidity
Despite the volatility of short-term capital flows, the Malaysian economy remains awash with liquidity. As at 29 Nov 2013, the amount of excess funds (including repos) that cannot be absorbed by the system and has to be mopped out by the Central Bank remained high at MYR263.6bn, although it has dropped from the 31 May peak of MYR295.8bn (see Figure 19). This pool of excess liquidity is constantly looking for a home in a low-interest rate environment and tends be supportive of higher asset prices when global uncertainties fade. Equity still the preferred asset class for portfolio investors
Notwithstanding
expectations of a volatile market, equity still stands up against alternative asset classes
As US QE tapering is now a question of timing, fixed-income markets will take a longer period to adjust to a higher-yield environment relative to equities. Indeed, if one were to take the Feds inflation target of 2.0% and a real 10-year Treasury Bill yield of 3.0% that used to be the average in the past, it is not inconceivable to expect the US 10-yield to rise to around 5.0% over the medium term, which is still a long way from the current 2.86%. As the eventual withdrawal of liquidity implies that US economic recovery is moving into a self-sustaining stage that will brighten the global economic outlook in the period ahead, we expect the equity market to bounce back after a phase of volatility. Meanwhile, commodities as an asset class will likely remain unexciting given the sluggish demand growth in China and India -- the two largest buyers of commodities -- and rising supply expectations. This is despite the recent temporary rise in commodity prices, which may not be sustained given the lack of strong underlying demand to sustain the rally. Basic industrial commodities such as copper, aluminium and iron & steel are still facing large oversupply while gold has lost its lustre as a hedge against short-term inflation, a weak USD and uncertainty. Meanwhile, rising yields on other assets are taking the shine off golds appeal given that the metal does not yield any investment income for investors. Under such circumstances, equity will likely remain as the preferred asset class among portfolio investors. End-2014 FBM KLCI target revised up to 1,940
While
investors focus will be on receding stimulus from the Fed, the market reaction will likely be less violent than in June-Aug 2013
Notwithstanding the uncertain timing of the US dialing back its asset purchase programme and the resultant market volatility, financial markets are already responding to expectations of reduced money creation and eventual increases in interest rates, both in the developed and emerging world. While receding stimulus will be the key focus in 2014, there is no actual tightening of policies in the US per se and both the ECB and BOJ are likely to maintain a very accommodative policy going forward, and inject more liquidity into the system, if necessary. Under such circumstances, the market reaction to the Feds move will likely be less violent than in June-Aug 2013. Meanwhile, the improving growth outlook in advanced economies and a more synchronised global recovery augur well for Malaysia, which will likely experience a cyclical economic recovery in 2014.
16
Malaysia Strategy
12 December 2013
Meanwhile,
Malaysias economic diminishing downgrade, fact that the recovery
several factors are working in favour, including the bold restructuring post election, the risk of a sovereign rating no twin deficit worries and the economy is on track to a cyclical
We are of the view that there are several factors working in Malaysias favour moving forward. First, both the general election and the United Malays National Organisation (UMNO) election are over and the Government can concentrate on implementing economic reforms and putting the country on a sustainable growth path. This is in contrast to the situation in Thailand and Indonesia. As it stands, the Government has undertaken bold measures starting with the 2014 Budget by implementing a subsidy rationalisation scheme to cut its operating expenditure and the GST in April 2015 to broaden its tax base, in an attempt to reduce its fiscal deficit gradually and balance the budget by 2020. At the same time, macro prudential measures have also been implemented to tame property prices and contain the increase in household debt. With the turnaround in exports, the current account surplus in the balance of payments also improved significantly in 3Q13 and, in our view, the country will unlikely fall into a twin deficit situation in 2014. These, coupled with the diminishing risk of a sovereign rating downgrade and a cyclical recovery in the economy, may lift the market to a higher level in 2014. Given the brighter economic and earnings outlook, we are raising our end-2014 FBM KLCI target to 1,940 from 1,910 on account of the upward revision in earnings, largely on the back of a higher CPO price assumption for the plantation sector. This is based on an unchanged 15.5x 1-year forward earnings forecast, which is at a slight discount to the mean of 16.0x over recent years, after incorporating the receding policy stimulus from the US during the year and a rising cost and interest rate environment locally.
With
upward revisions to 2014 and 2015 earnings, primarily on account of a higher CPO price assumption, we are raising our end-2014 FBM KLCI target to 1,940 pts
Risks to our view
The
dependence on the US economic recovery may yet prove to be fragile as normalising an economy that has been artificially supported for so long is unprecedented
While there is optimism, there are also good reasons for caution as the recovery in Japan and Europe remain tentative. In addition, China cannot be expected to spur growth for Asia ex-Japan given its focus on structural adjustments that will be done at the expense of overall economic growth. Meanwhile, the dependence on the US economic recovery may yet prove to be fragile. Indeed, the Feds decision to hold back from its massive asset purchase programme at its September FOMC meeting suggests that it is even more difficult now for it to take away the liquidity punchbowl. As its economy has yet to recover to a self-sustaining stage, sensitivity to risk perceptions resulting in higher investment risk premiums and borrowing costs as well as volatile financial asset prices could still dent consumer and business confidence, dampen corporate profitability and hiring, and in the process, feed into the real economy and drag down the nascent recovery. Nonetheless, it is difficult to gauge the actual outcome at this stage as there is no precedent for normalising an economy that has been artificially supported over a prolonged period by low interest rates and a massive injection of liquidity via QE. Meanwhile, if Yellen were to succeed Bernanke as Fed chairman, there is also a possibility that she could delay dialing back stimulus spending longer than most people expect. In addition, the yet-to-be-resolved debt ceiling issues could cause another shutdown of government operations if the Republican-controlled House of Representatives and president Barack Obama and his Democratic allies fail to agree on a budget for 2014. Recent past events suggest that the US economy has come close to stalling repeatedly since the recession ended four years ago. If the recovery falters again, the authorities may run out of ammunition to engineer another recovery given that successive rounds of monetary easing have had a diminishing impact on the economy. Although Japan has exited a recession, its cyclical recovery is fast losing momentum, suggesting that more needs to be done. Not only the effective implementation of the QQE is crucial, the timely implementation of structural reforms and trade liberalisation to boost potential growth is also needed to sustain investor confidence for it to engineer a more durable economic recovery. At this stage, it is still uncertain whether the third round of Abenomics will be implemented, and if the expected rise in consumption in 2014 will hamper the economic recovery. Although the Eurozone economy has returned to positive growth since 2Q and the threat of the euro collapsing has receded, the progress has been slow and issues could easily resurface as the euro-debt crisis has yet to be fully resolved. Economic hardship from austerity drives could lead to more social unrest, which in combination with high government indebtedness and an undercapitalised and weak banking system, could lead to new risks emerging from any one of the peripheral countries in the region. These imply that there may still be a need for debt forgiveness and repair of the damaged banking systems of some countries in the region before sustainable economic recovery can be assured. As Europeans are losing trust in the benefits of unifying the region, this makes efforts to revamp the
17
Meanwhile,
new challenges have emerged, including the risk of political brinkmanship in the US
In
Japan, structural reforms are still needed for recovery to be sustainable
Euro
debt crisis has yet to be fully resolved and any potential upheavals could lead to another round of instability
Malaysia Strategy
12 December 2013 euro and secure its long-term viability even more challenging in the period ahead. Any potential upheavals in the region could, therefore, lead to another round of instability and global financial market turbulence.
Risk
of policy overkill in China exists and a transition to the new economy will unlikely to be smooth
Meanwhile, as China is adjusting to too many of its imbalances at the same time overcapacity in industries, an overextended formal and informal banking sector amid rising non-performing assets, a property bubble and rising debt of provincial governments, any miscalculation of risks could set off a full-blown banking crisis at a time when the economy is being restructured. While it is commendable that the new leaders are attempting to rebalance the countrys economy by shifting from an investment-led to a consumption-driven economy, the risk of policy overkill is high. The more significant risk in our view lies in the property sector as the resurgence in home prices, despite limits on home purchases and hefty down payment rules, could again pressure China to tighten its policies. If this materialises, it could result in unintended consequences and spark a sharper-thanexpected economic slowdown. Meanwhile, the transition to the new economy by strengthening the role of market forces as outlined in the Third Plenum may not be easy to implement given the vested interest and resistance from certain political leaders. Meanwhile, Chinas slowdown contributed to the end of the commodity supercycle, which, together with the sharp rise in long-term interest rates on account of the prospects of US QE tapering, has led to economic and financial stresses in many emerging economies worldwide. Economies such as BIITS may need significant fundamental restructuring to be competitive again, and any policy miscalculation of risks could amplify the economic downturn in emerging economies and hamper the pace of the global recovery. In addition, geopolitical risk, particularly emanating from the Arab Spring, is still prevalent. While the encouraging interim deal reached on 24 Nov between six world powers and Iran has curbed the latters nuclear ambitions temporarily, much remains to be done before a durable solution can be assured. Meanwhile, the Sino-Japan territorial disputes, and the conflict between North and South Korea have yet to be resolved. In the interim, Chinas declaration of an air defence identification zone around the Japanese-occupied islands in the East China Sea on which it claims sovereignty has significantly raised tension in East Asia. Despite the benign intentions and no side wanting tensions to escalate, the risk of a miscalculation leading to military incidents has risen. The potential risk of any of the situations erupting into a major war could cause energy prices to escalate and dampen the pace of the global economic recovery. Any potential conflict of this nature could escalate within a relatively short span of time and it is usually very difficult for investors to pre-empt the situation and manage such risk.
Restructuring
of key emerging economies challenging given that the commodity supercycle has ended
Geopolitical risk, which is difficult to anticipate

and manage, still prevails
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Malaysia Strategy
12 December 2013
Market Strategy
Accumulate stocks in high-growth sectors on market weakness
Capitalise on the current respite to rebalance

portfolios and prepare for QE tapering eventuality
While the debate on QE lingers, it is a question of timing but would still be the single largest factor influencing market movements in 2014, in our view. As foreign holdings of financial assets in the local capital markets remain high, investors may still have to live with volatile short-term capital flows from time to time. This is despite our expectation of a less violent market compared to June-Aug 2013 given that shifting expectations on the US Feds policy will lead to constant repricing of risks globally. Under such circumstances, it may still pay for investors to make use of the current respite to rebalance portfolios and prepare for that eventuality. As the market runs up towards year-end, partly owing to the window-dressing activities of certain large domestic funds and as the January-effect sets in due to the rejigging of investment portfolios by institutional investors, opportunities will arise for investors to restructure their portfolios. We are of the view that investors should make use of the window of opportunity to trim exposure on stocks whose valuations have become rich and, in particular, stocks that behave like bonds given that real rate will continue to rise, irrespective of whether the Central Bank raises the policy rate. As the global macro backdrop is turning more positive, it is a matter of time before emerging economies catch up and lead global growth - once the external demand for their exports starts to recover. As it stands, there are already several factors working in Malaysias favour, including bold economic restructuring postelection, the diminishing risk of a sovereign rating downgrade, no twin deficit worries in the near term and the economy being on track to a cyclical recovery. Consequently, the anticipated outflow of short-term capital from emerging markets upon QE tapering will likely be temporary, in our view. All these suggest that after a phase of volatility, the equity market will likely trend higher as uncertainties clear. However, we hold the view that with an ultra-loose monetary policy being wound down gradually, investors would have no choice but return and focus on economic and corporate fundamentals as an investment strategy. Under such conditions, stocks with strong fundamentals, ie those with strong underlying growth prospects and sound management should eventually perform well over the longer term. As the economy may gradually trend higher in the period ahead, there is more value in high-growth sectors. While more value could be found in the mid- to smaller-cap stocks, investors should not ignore the bigger-cap stocks with sound fundamentals and accumulate these on weakness given the expectations of a volatile market in the period ahead. Our preference is for companies with good growth prospects, decent profit margins, strong cash flow and balance sheet, and which have limited cost exposure to exchange rate fluctuations. In a rising bond yield environment, high dividend-paying stocks that are trading at rich valuations may lose their appeal. As a result, the reach for yield has experienced a more violent pullback of late. A list of our top picks is reflected in Table 8.
Despite
expectations of the outflow of shortterm capital on QE tapering, the market will eventually rebound and trend higher as uncertainties clear up
We
see more value in high-growth sectors and stocks as the economy is poised for a cyclical recovery
Table 8:RHB's top picks

FYE Price (MYR/s) 06/12/2013 9.8 5.9 14.2 3.9 4.7 2.4 4.0 5.4 6.3 2.6 6.3 3.7 10.5 2.7 2.6 Fair Value (MYR/s) 11.40 6.50 16.60 4.50 5.45 3.70 4.90 6.72 6.05 3.60 7.55 4.13 12.00 3.50 3.37 Mkt Cap (MYRm) 86,410 37,921 26,657 11,424 10,029 6,730 3,295 2,943 2,841 2,812 2,094 1,789 1,710 765 570 EPS (sen) FY14 75.9 30.2 116.9 20.1 31.8 30.8 23.0 44.8 44.5 24.4 58.3 27.0 87.8 23.0 22.5 FY15 79.4 34.5 129.4 24.1 32.1 32.1 23.4 46.0 59.1 28.1 73.9 31.3 97.2 23.8 23.3 EPS GWTH (%) FY14 4.1 11.8 10.5 27.3 25.4 24.9 15.0 91.6 70.2 15.7 17.5 19.5 13.6 3.0 9.3 FY15 4.5 14.2 10.7 19.8 1.0 3.9 1.6 2.7 32.8 15.2 26.8 15.9 10.8 3.6 3.4 PER (x) FY14 12.9 19.5 12.1 19.4 14.8 7.8 17.2 11.9 14.2 10.7 10.8 13.8 12.0 11.8 11.5 FY15 12.4 17.1 11.0 16.2 14.6 7.5 16.9 11.6 10.7 9.3 8.5 11.9 10.8 11.3 11.1 P/BV(x) FY14 1.7 2.6 1.7 2.5 1.9 1.0 2.8 3.7 1.8 1.6 1.2 3.0 2.6 0.9 4.6 P/CF(x) FY14 n.a. 17.1 n.a. 20.0 25.0 2.8 11.0 17.2 10.6 6.1 8.3 12.1 n.m 7.3 0.1 NDY (%) FY14 4.6 2.6 2.8 1.1 2.6 3.0 1.5 4.2 1.0 6.1 3.7 3.9 3.4 3.0 4.6
Maybank IOI Corp Hong Leong Bank Bumi Armada Gamuda AirAsia QL Resources^ Dayang SOP Media Prima CMS Kossan Skt Takaful Suria Capital Prestariang
Dec Jun Jun Dec Jul Dec Mar Dec Dec Dec Dec Dec Dec Dec Dec
^ FY14-15 valuations refer to those of FY15-16 Source: RHB estimates
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Malaysia Strategy
12 December 2013
Key
OVERWEIGHT sectors are oil & gas, construction and banking
Our key OVERWEIGHT sectors are oil & gas, construction, banks, plantation, timber, rubber gloves, media, utilities, aviation and non-bank financials (see Table 9). We also like some property stocks on weakness although we are currently NEUTRAL on the sector. While values have emerged in the property space, investors may still prefer to wait and gauge the severity of the drop in property transactions from the tightening measures as most of the tightening measures will only come into effect from Jan 2014. Apart from this, we are NEUTRAL on most other sectors except telecommunications and real estate investment trusts (REITs), for which we have UNDERWEIGHT recommendations. The telcos valuations are demanding and players are facing headwinds in monetising data, with traditional short message service (SMS) revenues under threat from rising over-the-top (OTT) usage. REITs, on the other hand, lack earnings and rerating catalysts and will likely underperform in a rising bond yield environment.
Table 9: Sector Weighting and Valuations

Covered Stocks Banking Plantation Oil & Gas Utilities Construction Aviation Non-Bank Financials Media Rubber Glove Timber Consumer Gaming Healthcare Property Auto Shipping Basic Materials Logistics & Ports Technology Education Telecommunications Property-MREITs MKT CAP MYRbn 274.0 162.6 161.8 75.5 28.4 25.5 20.5 19.9 13.5 4.4 71.4 65.3 37.1 34.7 29.2 25.8 16.0 15.3 2.6 2.1 170.3 24.5 1280.3 * Excludes MAS earnings in 2013-15 Source: RHB estimates Weight % 21.4 12.7 12.6 5.9 2.2 2.0 1.6 1.6 1.1 0.3 5.6 5.1 2.9 2.7 2.3 2.0 1.2 1.2 0.2 0.2 13.3 1.9 100.0 FY13 4.0 (29.6) 23.7 27.0 (12.9) (10.5) 28.4 1.7 12.1 (52.1) 2.9 7.6 (7.0) 13.1 3.7 68.0 54.0 (2.6) (99.9) (25.2) 0.5 15.7 EPS GWTH(%) FY14 7.8 12.4 10.8 (0.3) 36.7 28.0 15.5 7.2 4.5 148.9 5.1 (0.9) 26.0 12.4 33.5 24.9 24.6 9.5 +>100 20.3 2.9 3.9 FY15 7.5 22.2 0.4 3.6 9.8 24.5 12.3 9.3 7.9 41.8 5.5 6.9 21.6 16.9 15.4 32.2 8.6 5.5 96.1 11.2 6.1 3.4 FY13 13.5 21.6 19.3 13.3 16.7 17.4 13.3 24.8 15.7 32.0 20.3 15.6 43.2 11.9 16.5 17.2 15.8 18.7 +>100 23.8 22.8 16.5 PER(x) FY14 12.2 19.2 17.3 13.2 12.1 13.6 11.5 23.1 14.1 12.9 19.3 15.7 34.3 10.2 12.4 13.8 12.7 17.1 31.6 19.3 22.2 15.2 Recommendation FY15 11.2 15.7 17.3 12.5 11.0 10.9 10.3 21.1 13.1 9.1 18.3 14.7 28.2 8.6 10.7 10.4 11.7 16.2 16.1 17.3 20.9 14.7 Overweight Overweight Overweight Overweight Overweight Overweight Overweight Overweight Overweight Overweight Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Underweight Underweight
Petronas is expected to accelerate its capital

spending from 2014 onwards and this will continue to benefit the oil & gas players
We continue to be positive on the oil & gas sector as we see buoyant news flow and activities being driven by Petronas MYR300bn capex for 2011-15, of which only about MYR118.9bn or 39.6% has been spent. The shortfall was partly due to delays encountered in the MYR60bn Refinery and Petrochemicals Integrated Development (RAPID) project. This leads us to believe that Petronas may accelerate its spending from 2014 onwards in a race against the inevitable rise in operating cost. At the same time, the local oil & gas service providers are also benefiting from oil & gas related contracts from other oil majors such as BP, Exxon Mobil, Chevron and Shell. In fact, we expect sustained contracts flow as a result of heightening marginal oil field developments, enhanced-oil recovery (EOR) projects, gas cluster developments for the North Malay Basin and the completion of the Bintulu LNG complex expansion in 2015. This will likely translate into more fabrication jobs and marginal field service contracts to be rolled out as Petronas accelerates its capital expenditure to boost national oil production. Indeed, it intends to deploy the EOR technology implemented at the Tapis field to 14 other fields nationwide, which could in turn lead to heightening offshore activities in 2014. Similarly, we maintain our OVERWEIGHT stance on the construction sector despite its generally disappointing 3Q13 earnings, as prospects remain strong - it rides on what we see as an extended upcycle, backed largely by the MYR73bn Klang Valley Mass Rapid Transit (MRT) project. We believe the Government will unlikely backpedal on its commitment to the implementation of the project. Given the scale of this project, its impact can be felt along the entire value chain of the sector. With Line
The
MRT will keep the construction sector buoyant until 2019 and its impact will be felt along the entire value chain of the sector
20
Malaysia Strategy
12 December 2013 1 worth MYR23bn currently under construction and Lines 2 & 3 worth MYR25bn each under planning, this mammoth project will keep players busy until 2019.
Risk-reward profile more favourable for banks
Meanwhile, we have upgraded our recommendation on the banking sector from now, as valuations are inexpensive and Neutral to OVERWEIGHT given a more favourable risk-reward profile of late as the prospects are looking up negatives have largely been priced in. Already, the banking systems loan growth has inched up steadily from a low of 9.1% y-o-y in June 2013 to 9.9% by October and we expect business lending activities to pick up pace in 2014, underpinned by the progress of long-gestation period projects under the various economic programmes. The fundraising for the various projects and the stronger economic growth envisaged for 2014, in our view, should also be positive for capital market activities and noninterest income going forward. While net interest margins may remain under pressure, the rate of compression should slow as lending yields have stabilised and rising bond yields from QE tapering may lead to better gapping opportunities. As the valuations of banking stocks are inexpensive relative to both the market and historical trends, we believe banks are due for a rerating once macro headwinds start to ease. Similarly, we have also upgraded our recommendation on the plantation sector from neutral to OVERWEIGHT as the earnings outlook brightens after two years of contraction. Our CPO price assumption for CY14 and CY15 is raised to MYR2,700 and MYR2,900 per tonne respectively, from MYR2,600 previously. This is on the back of: i) a stronger global economy, which means food demand will continue to grow; ii) Indonesias production growth will be lacklustre due to the double impact of dry weather in 2012 and 2013; iii) mandatory biodiesel implementation at the worlds two biggest palm oil-producing countries; and iv) production cost to remain flattish to lower due to significantly cheaper fertilisers following the breakup of the potash cartel in mid-2013. We continue to be positive on the prospects of the timber sector on the back of the ongoing monsoon season in Malaysia and Indonesia, which would lead to log shortages, as well as improving economic activity in Japan, which is spurring plywood imports. An added catalyst is the recent rise in CPO prices and stronger plantation earnings for some timber companies, while the recent MYR/USD weakness will also provide a fillip to earnings. For the smaller sectors, our positive stance on the rubber glove manufacturers is premised on resilient demand and sustained margins from stabilising raw material prices on the back of increasing supply from Thailand and Cambodia, with muted impact from the electricity tariff hike as well as the impending increase in gas prices. The media sector, on the other hand, will benefit from higher advertising spending in 2014 on account of the FIFA World Cup, Visit Malaysia Year and an increase in marketing activities as marketers prepare for the GST introduction come April 2015. This is against a backdrop of flat newsprint costs, coupled with an expanding earnings base for some media companies. On utilities, our OVERWEIGHT stance reflects positive developments by way of sector reforms, where the recently-announced electricity tariff hike, together with a revision in natural gas prices, will ensure the sustainability of Tenaga Nasionals business in the longer term. Meanwhile, we remain hopeful that the states proposed consolidation exercise for the water assets would be completed sooner rather than later, which will unlock more value for Puncak Niagas shareholders. In addition, the aviation sector is also on our investment radar screen given the strong passenger traffic growth, which will likely be enhanced upon the commencement of KLIA2 in May 2014 and Visit Malaysia Year next year. Lastly, the insurance companies within the non-bank financials sector under our coverage are experiencing stronger profit growth on improved margins and manageable claims, which are set to continue in the year ahead. Apart from the key sectors mentioned above, we will concentrate on picking winners in the other sectors and believe that stock-picking is key for investors to outperform the market moving forward.
CPO
prices to head higher and plantations are set for stronger earnings
Stable
to improving outlook for the timber industry, while some timber companies will also get a boost from stronger plantation earnings
The
operating environment remains favourable for the rubber glove makers, while media companies will benefit from higher adex spending in 2014
Utilities
reforms
are driven by favourable sector
Aviation
sector will benefit from strong passenger traffic growth, while the insurers within the non-bank financials sector are experiencing improving margins
Concentrate
sectors
on picking winners in other
21
Malaysia Strategy
12 December 2013 Figure 20 : FBM KLCIs monthly chart
1,826
1,660
Source: RHB, Bloomberg
The 7-Month Consolidation Phase
An attempt to end the 7-month consolidation

phase
The FBM KLCI has been consolidating the massive 131.45 pts intra-day gain recorded on the 6 May 2013 and this consolidation - ranging from the 1,660 pt-level to the 1,826 pt-level - dragged on for about seven months until the benchmark made an attempt to end it in early December. At the time of writing, the index finally managed to crack above the 1,826 historic high created on 6 May 2013. The question now is whether the FBM KLCI can stage a decisive breakout from the 1,826 pt-level to officially end the consolidation phase. Assuming a decisive breakout from the 7-month consolidation phase occurs, the odds are high that the FBM KLCI could rally towards the 2,000 mark in 2014. This is because the market has been consolidating sideways for about 7 months and this consolidation zone could be a solid launching pad that will propel the index towards the 2,000 milestone. Besides, the monthly RSI - currently hovering at the 70.5 ptlevel - is still below the 88.6-pt peak recorded in 2007 the year before the previous bear market started. Nevertheless, as we are only witnessing an initial attempt to end the 7-month consolidation, the market still faces great risk of making a failed breakout attempt at the 1,826 pt-level. If the FBM KLCI fails to sustain its gains at above the 1,826 ptlevel, the consolidation phase is likely to be extended. As the FBM KLCI is now trading at a historic high, the 2,000-pt milestone is the only remaining resistance which we can detect from here. If an attempt to break the 1,826 pt-level does not materialize, the 1,826 pt-level will remain as a tough resistance in 2014. To the downside, an immediate strong support lies at the 1,800 psychological mark, followed by another strong support at the 1,660 pt-level, which is the floor of the 7-month consolidation phase.
FBM KLCI may potentially rally towards the

2,000 milestone in 2014
Still too early to write off the possibility of a

lengthier consolidation phase
Tough resistance lies the 2,000 psychological

mark
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Malaysia Strategy
12 December 2013
Auto: Looking For New Catalysts
We expect 2013 auto TIV to exceed 650,000 units
Neutral
Volume growth in 2014 albeit slower
2013 has been a stop-start year for the auto industry volume-wise. Auto sales began the year well, with 1Q13 growth surging 13.8% y-o-y helped by a low base in 2012, when the industry was hit by supply chain issues in addition to new responsible lending guidelines. Total industry volume (TIV) in 2Q13 dipped 1.3% q-o-q, bringing cumulative 1H13 growth to 4.1% y-o-y. This was due to consumer hesitation in the th run-up to the 13 General Election in May amid market talk and sensationalist media reporting on the possibility of lower new car prices. Auto sales then rebounded in 3Q13 (+12.0% q-o-q, YTD +6.4% y-o-y) as consumer expectations moderated, 2014 auto TIV is forecast at 675,000 helped by the boost in sales from the Aidil Fitri festive holidays and the strong market reaction to the value-for-money (VFM) Proton Saga SV. We expect 2013 TIV to units exceed 650,000 units. We think auto sales will continue growing albeit at a slower pace and forecast TIV of 675,000 units in 2014.
Green light: The key growth drivers
Auto sales will be underpinned by RHB economists expect the economy to pick up pace with real GDP expanding 5.4% resilient domestic consumption in 2014 (2013: +4.7%), underpinned by a sustained increase in domestic demand, which will be driven by a revival in the private investment cycle, a sustained increase spending in consumer spending, as well as young demographics and favourable labour market conditions. A brightening external environment will also help lift growth and consumer sentiment. Liquidity should remain ample, with financing available for qualified buyers. Resilient consumption spending will boost demand for passenger cars while We expect more VFM models to be a pickup in economic activity will lift commercial vehicle sales. The pipeline of new models remains strong going into 2014, while market competition will give rise to introduced ongoing promotions and deals to entice car buyers. The introduction of more valuefor-money (VFM) models by car manufacturers will also help to sustain sales volume. Table 10: 2014 new model launches
1. Proton GSC 2. Proton Perdana Replacement 3. Nissan Sylphy 4. Nissan Serena Hybrid CKD 5. Nissan Teana FL 6. Lexus CT200h FL 7. Honda City 8. Renault Fluence EV
Source: RHB estimates, various
9. Toyota Corolla Altis 10. Toyota Camry Hybrid CKD 11. Mazda 3 CKD 12. Mazda 6 CKD 13. Mini Cooper 14. Mitsubishi ASX CKD 15. Volkswagen Polo hatchback CKD
Amber light: Proceed with caution!
Malaysian households are increasingly We acknowledge that households are already stretched, with household debt/GDP at 85.1%. Cost of living is also spiralling, with electricity tariffs due to go up and fuel stretched costs rising due to the Governments subsidy rationalisation programme. Consequently, inflationary pressure is on the rise with higher interest rates on the horizon. These factors will be negative for consumer discretionary spending.
Key trends in 2014
Key trends include cut-throat competition, greater consumer choices, consumers becoming increasingly price-sensitive, and margin pressure for distributors
Competition will remain intense in 2014, with new marques entering the market and trying to grow market share, and consumers increasingly spoilt for choice. While the Government has committed to lowering car prices by 30% in five years (without any change in the duty structure) by promoting competition and streamlining the industry, we think the initial progress will be slow-going as there are no incentives for the auto distributors to give up their profits given the limited volume growth prospects. We expect consumers to become increasingly price-sensitive and expect more buyers to trade down to cheaper models. Auto manufacturers, meanwhile, are likely to respond to these trends by introducing more VFM models. All these trends point to increasing margin erosion. We expect the current duty exemptions on hybrid vehicles expiring at year-end to be restricted to locally-assembled hybrid vehicles only. Toyota is the biggest loser here given that the Prius, Prius C and Lexus CT200h hybrids all do not enjoy sufficient economies of scale to be considered for local assembly. The local assembly of the Camry Hybrid is reportedly being planned for 2H14 but will not be a
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Malaysia Strategy
12 December 2013
volume seller. The only hybrid vehicle being assembled locally is the Honda Jazz Hybrid. Elsewhere, the planned introduction of GST in April 2015 could also result in unpredictable consumer behaviour towards the end of 2014. The base case expectation is for a slight downward reduction in car prices as the 6% GST replaces the 10% sales tax. However, as GST is a tax on the value added at each stage of the supply chain, it is difficult to predict the final impact on selling prices when the new tax comes into force.
New national automotive policy
New NAP is unlikely to be a re-rating The third iteration of the National Automotive Policy (NAP) is finally expected to be announced in Jan 2014 after a lengthy delay. The policy document, expected to be catalyst comprehensive and cut across the entire automotive eco-system, will address issues such as training and education, autoparts supply chain, fuel standards, vehicle endof-life, the green technology roadmap and vehicle safety standards. The NAP is expected to set the direction of the automotive industry for the next decade. The automotive duty structure is expected to remain unchanged for the time being. The NAP aims to transform Malaysia into a regional production hub for energy-efficient vehicles (EEV). Nonetheless, the reality is that Thailand and Indonesia have already established regional production hubs with industry policies promoting eco car and low-cost green car programmes respectively. We do not expect the NAP to be a rerating catalyst for the sector in the near term, as production plans from a wellconceived policy will likely take several years to come to fruition. In the medium to longer term, automotive parts suppliers that can innovate and raise efficiency levels to regional standards stand to benefit from the increased manufacturing presence of global OEMs in Malaysia.
Regulatory changes and unpredictable consumer behaviour are key risks
Key risks
These include unexpected regulatory changes, unfavourable forex trends, availability of financing, unpredictable consumer behaviour and weakening consumer confidence.
NEUTRAL
Tan Chong and DRB-HICOM remain our Top Picks NEUTRAL on the auto sector
No changes to our NEUTRAL call on the sector. Sector valuations adequately reflect industry prospects and we see few catalysts to re-rate the sector higher. We like Tan Chong (TCM MK, BUY, FV: MYR7.25) and DRB-HICOM (DRB MK, BUY, FV: MYR3.40). We like Tan Chongs long-term regional growth strategy, with plans to make inroads into markets in Indo-China and Myanmar. Domestically, the Nissan franchise is expected to continue growing its market share helped by a more active product cycle strategy, while higher contract assembly volume will also bring scale benefits and lower unit costs. We like DRBs latent earnings potential and hidden asset value. Continued evidence of a sustainable turnaround at Proton, a more substantive collaboration arrangement with Honda, and the commencement of armoured vehicle contract deliveries could help re-rate the stock higher.
Table 11: Valuations of auto stocks

Price (MYR/s) Fair Value (MYR/s) Mkt Cap (MYRm) FY14 P/E (x) FY15 EPS GWTH (%) FY14 FY15 P/BV (x) FY14 P/CF (x) FY14 ROE (%) FY14 NDY (%) FY14 Rec
Tan Chong DRB-Hicom^ UMW MBM APM Sector Avg
6.20 2.64 12.32 3.51 5.81
7.25 3.40 12.50 3.40 5.30
4,166 5,104 14,393 1,370 1,171
10.3 12.7 14.1 9.4 8.7 12.4
9.2 11.5 12.4 6.2 8.3 10.7
46.5 57.1 27.5 14.6 13.1 33.5
11.8 10.5 13.7 51.4 5.3 15.4
1.7 0.7 2.2 0.9 1.1
9.4 2.8 7.8 25.4 4.1
17.4 5.4 16.0 11.6 13.3
1.9 1.6 4.9 2.8 3.8
B B N N N
^ FY14-15 valuations refer to those of FY15-16
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Malaysia Strategy
12 December 2013
Aviation: Boost From Visit Malaysia Year
2013 a year for yield

Competition rose to new heights following Malindos entry, thus pressuring yields
Overweight
2013 has been a challenging year for Malaysian carriers, as they embarked on aggressive capacity expansion to boost topline and achieve economies of scale amid heightening competition driven by Malindo Airs debut. This has resulted in yields coming under pressure for Malaysian Airlines (MAS, NEUTRAL, FV: MYR0.30) and AirAsia (AIRA, BUY, FV: MYR3.70), dropping 12.7% and 5.3% YTD respectively. Other new foreign carriers have commenced flights to/from KL, sparking new competition (to a lesser extent) in the international segment as well. Although AirAsia Xs (AAX, BUY, FV: MYR1.31) yields were lower than expected (6.3% YTD), we think this is the result of newly-launched flights priced at promotional rates and not due to competition.
Only the strong will prevail during tough times

AirAsias low-cost model has enabled it to stand strong despite intensifying competition amid a cost-conscious culture With yields coming under pressure, margins took a hit. MAS reported a massive YTD core loss of MYR818m (+24% YTD) as management opted for a load-active strategy by lowering air fares significantly without meaningfully cutting costs. Its turnaround attempt was a disappointment despite its load factor rising to new highs and YTD (9MFY13) revenue passenger kilometre (RPK) climbing 28%. While we expected AIRAs earnings to decline, its results were commendable as it continued to report EBITDA growth (+2.8% YTD) - the low-cost carrier focused on cutting costs since revenue only inched up 6.7% vs the 11.5% growth in seat capacity. AIRA has exercised prudence in its fleet delivery, opting not to compete head-on with Malindos and MAS aggressive fare discounting strategy.
New kid on the block turns up the competition
Malindo has ambitions to be the next major player since AirAsia
Malindo, which commenced operation in late March, has a fleet of nine aircraft (including three turboprops) flying to 16 destinations, of which four are overseas. The carrier, which is partly owned by Lion Air of Indonesia (via a JV), is embarking on an aggressive expansion to increase its Malaysian-flagged fleet under Malindo Air by taking delivery of 100 aircraft over the next decade to compete with AIRA. Lion Air has also set foot in Thailand by establishing Thai Lion Air and taking the competition up a notch. Thai Lion Air also plans to expand its fleet to 12 aircraft by end-2014, before increasing to 50 aircraft within five years.
MAHB the winner amid tough competition
Malaysia Airports benefits the most from rising passenger demand, as low air fares stimulate air travel
Intensifying competition has resulted in airlines luring travellers with big discounts, which helped boost demand for air travel. This has largely benefited Malaysia Airports Holdings (MAHB, BUY, FV: MYR10.13), which reported a 17.3% jump in YTD passenger numbers in October, driven by strong growth in both the domestic (+16.6%) and international (+18.0%) segments. The airport operators traffic numbers are likely to outperform our FY13 growth forecast of 14.0%. The inclusion of new foreign carriers into KLIA also partly lifted the overall passenger traffic handled by the airport operator. As a measure of how much overall capacity has increased, the October YTD flights handled are 13.3% higher, mostly driven by domestic traffic.
Decent sector performance
Our OVERWEIGHT call on the sector in 2013 outperformed the benchmark index, with an equal weighting return on our BUY calls of 23% vs the FBM KLCIs 12%
We are OVERWEIGHT on the sector. MAHB, our preferred pick throughout 2013, has raked in YTD returns of 71%. The underperformer was MAS, which we downgraded to SELL when its 1QFY13 results fell way short of expectations. On an equal weighting basket in our aviation coverage which we have BUYs on, our sector call implies a YTD return of 23%, thanks to superb numbers from MAHB and AIRA in 1H, beating the FBM KLCIs 12%.
Competition to remain tight but less severe

Malindos expansion plan is likely to slow down as competition is tougher than it had originally anticipated 2014 is expected to be a challenging year as Malindo continues to spread its wings. However, we think Malindo will be less aggressive due to its high cost structure. We notice that its airfare discounts have narrowed while there have been capacity cutbacks on some of its routes. Furthermore, its fleet delivery so far (currently with six narrow-bodied aircraft) has been below its initial target of 12 aircraft. Malindo has adopted a new strategy of expanding to regional routes such as Indonesia, Bangkok and India, as opposed to competing for domestic market share given the challenges in the local competitive landscape. MAS appears to be aggressive in pricing its fares while AIRA seems to be chalking up encouraging loads, with load factor remaining strong. We believe that Malindo will take a longer time to obtain regulatory approval
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12 December 2013
for landing rights in international destinations compared with commencing new domestic routes. Hence, the time factor will favour MAS, AIRA and AAX.
Operating expenses, funding costs climb on currency fluctuation
Weakening MYR could increase debt levels, which could in turn translate into higher interest costs
The depreciation of some currencies due to the regional exodus of funds (on concerns over the US Feds timing for tapering off its bond-buying) is expected to boost the revenue of the airlines under our coverage. However, this will be more than offset by high jet fuel costs. Long-haul carriers like AAX and MAS will likely see higher yields and passenger demand from non-regional travellers, whose stronger currencies may translate into cheaper airfares and vacation cost. However, the risk of a further depreciation in the MYR will erode profits as jet fuel costs, aircraft maintenance fees and leases are typically paid in USD. This may offset the impact of the higher revenue churn. Meanwhile, debt will increase as local currencies weaken, since the funding of aircraft purchases are mostly in USD terms, which will accordingly result in higher interest expenses. We are of the view that carriers which are most sensitive to currency risks are those with low earnings bases such as MAS and AAX.
Buoyed by Visit Malaysia Year 2014

The effects of Visit Malaysia Year 2014 will spill over to neighbouring countries The Government has earmarked 2014 as Visit Malaysia Year. Its efforts to promote the country as a major tourist attraction bodes well for airport operator MAHB, as it will be buoyed by the expected rise in foreign tourist arrivals. The Government has been promoting the year-long tourism campaign since early 2013 and the calendar is now filled with events throughout the 12 months. We believe that the Visit Malaysia Year 2014 will not only increase the inflow of tourists but also create a positive spillover effect on neighbouring countries such as Singapore, Indonesia and Thailand. In view of the carriers rising capacity and expectations that air fares will continue to remain competitive, we expect passenger traffic handled by Malaysia Airports to grow by 12% in 2014 (vs 14% forecast in 2013), which we deem conservative. We see an upside to our passenger forecasts, as growth will be fuelled by AIRAs new hubs such as Penang, Kota Bharu and Kota Kinabalu, which are enjoying strong take-ups.
The yield picture for 2014
Passenger yields could stay flat in 2014
Given that MAS and AIRAs 9MFY13 (YTD) passenger yields have dropped 12.7% and 5.3% respectively, and in tandem with our assumption that discounts from Malindo will continue to narrow next year, we expect passenger yields to stay flat at best in FY14, before inching up slightly in FY15. AIRAs flat yields next year could likely be offset by a higher ancillary take-up as it expands its service offerings to include in-flight duty-free shopping, its high flyer programme and new fly-thru pairings. Meanwhile, we expect AAXs yields to be slightly higher as the pricing discount relative to full-service carriers for its mature routes narrow.
Cost discipline may be the new order

2014 will be a cost-conscious year for carriers after the aggressive expansion in 2013 Jet fuel prices have dropped 3.5% YTD and moving forward, we expect it will likely remain flat in FY14-15. Hence, we do not see higher jet fuel prices posing a significant threat to earnings. FY14 will be a cost-conscious year for the carriers as they strive to be profitable. This could see Malindo taking a more conservative approach in its future expansion plans. We are also positive on the commencement of KLIA2 in improving aircraft turnaround compared with the current congestion at the LCCT. AIRA believes its cost structure will continue to improve on potential fuel burn reduction upon the commencement of KLIA2. Furthermore, the automated baggage handling system to be installed at the new airport is also anticipated to lead to lower ground and baggage handling costs.
Maintain OVERWEIGHT on sector

Maintain OVERWEIGHT on sector, with AIRA as our Top Pick While the sectors outperformance was mostly driven by the strong rally from MAHB, we think AIRAs share price has been overly-punished despite its better-thanexpected 9MFY13 earnings amid intensifying competition. We see value in the airline as its valuations are relatively cheap compared to its regional and global peers. AIRA is our Top Pick for the growing overall income from its associates and improving performance at its Malaysia operations as air fare discounts from Malindo come down. Including the market cap of AirAsias listed entities and valuing its soon-to-belisted (in 2014) Indonesia unit at a 10x FY14 P/E, the Malaysian units P/E is only 6x FY14. Elsewhere, any selldown in MAHB will provide bargain-hunting opportunities in anticipation of its strong free cash flow generation on the commencement of KLIA2 and the higher potential rental revenue it can generate from a bigger airport. We also like AAXs aggressive capacity expansion, which will promote economies of scale
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12 December 2013
and accordingly propel its earnings. Meanwhile, MAS is still a NEUTRAL as we remain pessimistic on the carriers ability to bring down costs.
Figure 21: Passenger movement

y-o-y % chg Passenger
Figure 22: Aircraft movement

y-o-y % chg Aircraft
35 30 25 20 15 10 5 0 -5 -10 -15
8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0
25 20 15 10
70,000 60,000 50,000 40,000 30,000
5 0 -5
20,000 10,000 0
International Passenger Movement (RHS) Domestic Passenger Movement (RHS) y-o-y (total domestic and international) chg (LHS)
International Aircraft Movement (RHS) Domestic Aircraft Movement (RHS) y-o-y (total domestic and international) chg (LHS)
Source: Company Data
Figure 23: Yield trend sen/seat km

35 30 25 20 15 10 5 0 20 18 16 14 12 10 8 6 4 2 0
Figure 24: Revenue passenger kilometre trend (m)

14,000 12,000 10,000 8,000 6,000 4,000 2,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 -
Malaysia Airlines (LHS)
AirAsia (RHS)
Source: RHB estimates, Company Data
1Q-2009 2Q-2009 3Q-2009 4Q-2009 1Q-2010 2Q-2010 3Q-2010 4Q-2010 1Q-2011 2Q-2011 3Q-2011 4Q-2011 1Q-2012 2Q-2012 3Q-2012 4Q-2012 1Q-2013 2Q-2013 3Q-2013
MAS (LHS) AirAsia (RHS)
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12 December 2013
Table 12: Valuations of aviation stocks

Price (MYR/s) Target (MYR/s) Mkt Cap (MYRm) FY14 P/E (x) FY15 EPS GWTH (%) FY14 FY15 P/BV (x) FY14 P/CF (x) FY14 ROE (%) FY14 NDY (%) FY14 Rec
AirAsia AirAsia X MAHB MAS Sector Avg
2.42 1.03 9.12 0.31
3.70 1.31 10.13 0.30
6,730 2,441 11,138 5,180
7.8 10.7 27.5 n.m. 13.6
7.5 8.1 26.6 11.3 10.9
24.9 +>100 (5.3) 100 28.0
3.9 34.4 3.6 n.a. 24.5
1.0 1.4 2.3 1.1
2.8 3.1 14.9 4.1
10.9 20.1 8.6 n.m
3.0 0.0 1.8 0.0
B B B N
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Malaysia Strategy
12 December 2013
Banking: Negatives Largely Priced In
Turning more positive on sector

Negatives are largely priced in. Market is still ignoring improved prospects ahead
Overweight
We are upgrading our sector call to OVERWEIGHT from Neutral. In our view, the risk-reward profile for the sector has tilted to the positive. Current valuations suggest the market is pricing in most of the negatives but has yet to recognise the pickup in economic growth (both global and domestic) ahead.
GDP pickup to support lending and capital market activities
Business loans growth is expected to pick up in 2014, as the implementation of projects under the various economic programmes accelerates
Business loans growth has been muted this year (Oct 13: 7.4% y-o-y vs household loans growth of 11.9% y-o-y). We believe this was partly due to businesses taking a wait-and-see stance in the run-up to various major events this year (eg General Election, Budget 2014) as well as expectations of the potential QE tapering. Nevertheless, we expect business lending activities to pick up pace in 2014, underpinned by the progress of long gestation projects under the various economic programmes such as the Economic Transformation Programme (ETP). The ETP will be entering its fourth year of implementation next year and will only likely reach its peak in the fifth or sixth year of implementation. That said, we expect to see an acceleration of projects being implemented, one of them being the MRT project. The project is about 12-18% completed as at early 4Q13, but with a mid-2015 deadline for the completion of civil works, project activities are expected to peak next year. We also understand that project works have begun to flow through the value chain and this will benefit mid-sized businesses as well as SMEs. Already, we are seeing some potential green shoots emerging with respect to business lending ahead, with business loan disbursements gradually on the rise (see Figure 25). Meanwhile, lending to the household segment has been growing steadily and will continue to be bolstered by the countrys young demographic structure, high savings, rising consumerism, favourable labour market conditions and the current low interest rate environment. However, while the property tightening measures announced in Budget 2014 and BNMs measures to rein in housing debt will likely dampen household lending going forward, this would be cushioned by the pipelines of loans the banks have built up, as well as our expectations of stronger business lending. Furthermore, we believe these measures target specific groups ie low income households and property speculators, and should help put asset quality on better footing as we move into a period of higher inflation and interest rates. YTD (Jan-Oct 13) system loan grew 10.1% (annualised), close to our 10-11% growth estimate for 2013. We project 2014 system loan growth will be sustained at a similar pace. The pickup in GDP (2013: 4.7%; 2014E: 5.4%) should also be positive for capital market activities and non-interest income. This would be supported by fund-raising activities for the various projects. Volatile forex rates may also benefit banks in terms of stronger customer flows and wider spreads.
This would also help cushion the potential slowdown in household lending arising from the various measures to address household indebtedness
.. although this could be a longer-term positive to help keep asset quality intact
Interest rate hike may be a boon
9M13 sector NIM down 12bps vs 2012, but we expect the rate of compression to slow to mid-single digit in 2014. A potential 25bps hike in OPR in late3Q14 would be mildly positive to NIMs
We expect NIMs to remain under pressure, but the rate of compression should slow as lending yields have stabilised while rising bond yields from QE tapering may lead to better gapping opportunities. We see the possibility of BNM raising the OPR by 25bps in late 3Q14 to 3.25%. Banks tend to benefit from interest rates hikes as interest rate-sensitive assets are repriced quicker than liabilities, providing a temporary lift to NIMs. We have yet to factor a rate hike in our earnings forecasts.
Valuations inexpensive
Sector appears inexpensive, especially relative to the FBM KLCI
The sector is currently trading at a 2014F P/E of 12.2x, a 25% discount to the FBM KLCIs P/E of 16.2x. This is despite the sector offering stronger EPS growth of 8% for 2014 vs +6% for the FBM KLCI. In terms of P/BV, the sectors 2014F P/BV of 1.7x is lower than the FBM KLCIs 2.2x P/BV, despite better expected ROE of 14.2% (FBM KLCI: 13.3%). Thus, we think sector valuations are attractive and we expect the valuation gap to close, especially as macro headwinds start to ease. Our 2014F net dividend yield of 3.7% is also more attractive than the FBM KLCIs 2.8%, which would help provide support to share prices when markets are volatile, in our view.
Top sector picks
Maybank, HLB and CIMB are our sector picks
We see Maybank (MAY MK, BUY, FV: MYR11.40) as an excellent proxy to the ETP, while we expect HLB (HLBK MK, BUY, FV: MYR16.60)s growth to accelerate now that its post-merger restructuring activities are largely done. While CIMB (CIMB MK, BUY, FV: MYR9.50) is also a good proxy to the ETP, Indonesias challenging macro conditions remain a dampener but any sharp selldown is an opportunity to buy.
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12 December 2013
Figure 25: MRT works to accelerate next year to meet mid-2015 deadline for civil works
Source: Gamuda
Figure 26: Business loans disbursements gradually picking up

MYRbn 58
Figure 27: Approval pipeline to help support residential mortgages growth in near term
MYRbn 250
56
200
54
150
52
100
50
50
48 1Q13 2Q13 3Q13 Oct '13
0 2008 2009 2010 2011 2012 Disbursements 2013 2012-Oct '13
Avg monthly business loans disbursements
Approvals
Source: Bank Negara Malaysia (BNM), RHB estimates
Source: BNM
Figure 28: Sector P/BV not excessive

(x) 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0
Figure 29: P/E valuations appear attractive

(x) 25 23 21 19 17 15 13 11 9
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Sector P/B
Avg P/B (10-yr)
Avg + 1 s.d.
Avg - 1 s.d.
Sector P/E
Avg P/E (10-yr)
Avg + 1 s.d.
Avg - 1 s.d.
Source: Bloomberg, RHB estimates
Table 13: Valuations of banking stocks

Price Maybank CIMB HLB Public Bank AMMB^ Affin AFG^ RHB Cap* Sector Avg (MYR/s) 9.83 7.67 14.18 18.48 7.45 4.28 4.99 7.60 Fair Value (MYR/s) 11.40 9.50 16.60 19.40 8.35 4.40 5.15 NR Mkt Cap (MYR/s) 86,410 59,198 26,657 65,270 22,456 6,397 7,603 19,236 PER (x) FY14 12.9 11.3 12.1 14.3 11.3 9.7 12.6 9.5 12.2 FY15 12.4 10.3 11.0 13.2 10.5 8.9 11.6 8.7 11.2 EPS Growth (%) FY14 4.1 11.6 10.5 8.1 9.8 5.5 10.1 13.7 7.8 FY15 4.5 9.9 10.7 8.1 7.8 9.1 8.3 9.3 7.5 P/BV (x) FY14 1.7 1.6 1.7 2.8 1.6 0.9 1.7 1.1 1.7 FY15 1.5 1.4 1.5 2.5 1.4 0.9 1.5 1.0 1.6 NDY (%) FY14 4.6 3.6 2.8 3.1 3.5 3.1 3.9 3.3 FY15 4.8 4.0 3.1 3.4 3.8 3.4 4.3 3.6 ROE (%) FY14 13.5 15.1 14.9 20.9 14.3 9.9 13.6 11.6 FY15 13.1 14.9 14.8 20.1 14.1 10.1 13.8 11.8 Rec B B B N N N N NR
* Not under our coverage. I/B/E/S Estimates forecasts are used for companies not covered by RHB Research Institute. ^ FY14-15 valuations refer to those of FY15-16
Jan-13
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Malaysia Strategy
12 December 2013
Basic Materials: Select Buys Despite Gloomy Outlook
The Governments commitment to projects with high multiplier effects and pledge to support affordable housing projects may boost demand for basic materials
Neutral
Governments infrastructure and affordable housing projects a relief

We are relieved that there was no mention of any cancellation of mega projects in the Budget 2014. Instead, the Government pledged to help develop affordable homes. We are also heartened by the number of projects currently in progress vs those nearing completion or were recently handed over. In our view, the construction of the Mass Rapid Transit (MRT) Line 2 is proceeding as planned. These factors point to accelerated demand for basic materials like cement and steel.
The 18.8% electricity tariff hike from Jan 2014 was an unpleasant surprise for power-hungry steel and cement producers in Peninsular Malaysia
Electric shock from latest power tariff revision

News of the electricity tariff hike from Jan 2014 came as an unpleasant surprise to power-hungry steel and cement producers in Peninsular Malaysia. Heavy industries in West Malaysia fall under the special industrial tariff category, for which rates will be raised by 18.8% - 2% higher than the normal increase in industrial tariffs. Meanwhile, electricity costs represent ~10%/17-20% of steel/cement production costs. As local steel players are struggling to survive, the tariff hike is painful despite accounting for only 1.8% of production costs, compared to 2.9% for cement players. We have cut our estimates by 22-63% for integrated steel mills under our coverage. Ann Joo Resources (AKR MK, NEUTRAL, FV: MYR1.07) was least impacted as its mini blast furnace helps to save ~300 kilowatt hours (kWh) per tonne in billet production costs. The tariff hike is expected to pare LMCs FY14 earnings by just 9%, as the company enjoys a decent profit margin (which is in the teens).
The expected capacity expansion in the cement industry and threat from steel imports continue to dampen the sectors outlook
Fundamentals of basic materials sector not very conducive

We continue to like the cement sector, as there is only one producer each in Sabah and Sarawak while the West Malaysia market is dominated by an oligopoly. Some may argue that higher costs arising from the electricity tariff revision may be partially passed on to cement users in Peninsular Malaysia. Nonetheless, we think it may not be easy since YTL Cement, Cement Industries of Malaysia (CIMA) and LMC plan to expand their capacity on a staggered basis over the next two years, which will result in higher supply moving forward. On top of that, we had also earlier assumed a MYR15/tonne increase in the local cement price. As for steel, the industry outlook is largely dependent on macro factors in East Asia. Chinas economy may have shown signs of stabilising, but the steel industry still struggles to survive on the back of excess and fragmented capacity across the country. In Malaysia, the outlook for steel mills (post their recent results announcements) reveals concern over the threat from steel imports. Meanwhile, although the anti-dumping duty has been imposed on imported wire rods from some overseas producers since early 2013, we have heard that the import of such products remains rampant due to multiple loopholes in the duty structure.
Prefer Sarawak and niche players
We like players in niche product segments and with operations based in the state of Sarawak
Although the overall outlook for the sector looks gloomy, we continue to like players involved in niche products or businesses in Sarawak. The latest development once again substantiates our earlier view that the Sarawak Corridor of Renewable Energy (SCORE) benefits from cheap energy, with the states vast hydro energy resources helping to create a competitive business environment for heavy industries like aluminium smelting, cement production and others. Hence, we keep our BUY recommendations on Cahya Mata Sarawak (CMS MK, FV: MYR7.55) and Press Metal (PRESS MK, FV: MYR3.82). We also like Pantech (PGHB MK, BUY, FV: MYR1.43)s growth potential, particularly in its manufacturing division. Meanwhile, sales at the companys trading division may pick up, driven by Petronas aggressive capex spending. We are also upbeat on Hiap Teck Venture (HTVB MK, BUY, FV: MYR0.97) as the demand for water pipes may increase should replacement projects kick off.
Downgrade to NEUTRAL
As sub-sectors are negatively rated, we downgrade the basic materials sector rating to NEUTRAL With most basic materials counters under our coverage having been downgraded to NEUTRAL recently, along with likely negative investor sentiment on heavy industry players like steel and cement following the electricity tariff hike and two steel companies being designated under PN17, we downgrade our rating for the sector to NEUTRAL (from Overweight).
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Figure 30: Production cost of cement

250 18.8% hike in electricity tariff translate to ~2.9% increase in production cost of cement
Figure 31: Production cost of steel

700 600 500 18.8% hike in electricity tarif f translate to ~1.8% increase in production cost of steel
200
MYR / tonne
150
USD / tonne
400 300 200
100
50
100
0 Existing Lime stone & others Coal cost New Maintenance cost Electricity cost Admin & distribution
0 Existing Scrap metal New Other conversion cost Electricity cost
Source: RHB estimates
Figure 32: Cement consumption in Malaysia

20 16 12 8 4 0 2010 2011 2012 15.0% 10.0% 5.0% 0.0%
Figure 33: Long steel consumption in Malaysia

5 4 3 2 1 90% 60% 30% 0% -30% -60%
-5.0% -10.0%
Sarawak (m tonne) Peninsular (m tonne) Sabah (y-o-y %) Malaysia (y-o-y %)
Sabah (m tonne) Sarawak (y-o-y %) Peninsular (y-o-y %)
Table 14: Valuations of basic materials stocks

Price (MYR/s)
Hiap Teck Pantech^ CMS Press Metal Ann Joo Resources CSC Steel LMC Lion Industries Southern Steel KKB MSW MSC Sector Avg ^ FY14-15 valuations refer to those of FY15-16 0.71 0.98 6.30 2.40 1.07 1.29 9.40 0.74 1.52 2.60 1.05 2.79
Target (MYR/s)
0.97 1.43 7.55 3.82 1.04 1.30 9.61 0.76 1.57 2.74 1.07 2.35
Mkt Cap (MYRm)

503 563 2,094 1,219 559 490 7,987 528 625 670 229 279
P/E (x)
FY14 15.1 7.7 10.8 4.6 11.3 13.9 19.5 30.6 13.3 11.4 15.0 6.2 12.7 FY15 12.1 7.1 8.5 4.5 9.8 8.3 19.3 16.7 17.5 10.1 16.4 8.1 11.7
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Steel Bars (m tonne) Sections (m tonne) Wire Rods (y-o-y %) Long Steel (y-o-y %) Wire Rods (m tonne) Steel Bars (y-o-y %) Sections (y-o-y %)
EPS GWTH (%)

FY14 36.9 15.3 17.5 +>100 90.0 13.8 4.8 (63.1) 10.7 28.8 (54.2) 11.4 24.6 FY15 25.1 7.8 26.8 2.1 14.7 66.2 1.5 83.3 (23.7) 13.2 (8.6) (23.0) 8.6
P/BV (x)
FY14 0.5 1.2 1.2 0.7 0.5 0.6 2.5 0.2 0.7 2.0 0.4 1.0
P/CF (x)
FY14 9.6 10.9 8.3 1.7 9.2 9.6 14.2 1.1 7.1 185.7 3.0 5.0
ROE (%)
FY14 3.6 16.5 11.9 4.9 4.5 4.4 12.6 0.5 5.3 17.7 2.6 17.9
NDY (%)
FY14 0.7 5.2 3.7 6.6 3.5 3.7 4.6 1.8 5.0 3.5 0.9 5.3
Rec
B B B B N N N N N N N S
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Malaysia Strategy
12 December 2013
Consumer: Slow And Steady
Looking good
Consumer spending will continue to grow, but at a more moderate pace
Neutral
With the US and Eurozone economy on track for a gradual recovery, we believe Malaysias economic outlook will stay rosy as well. Our economists projected that Malaysias real gross domestic product (GDP) will likely expand to 5.4% in 2014 from 4.7% in 2013. The implementation of the minimum wage policy for small and medium enterprises (SME) effective 2014 and the generous cash handouts to low-income households under the BR1M scheme should help boost disposable income, which will in turn spur consumption. Going forward, we expect consumer spending to continue growing due to high savings, low unemployment rate and better tourist arrivals in conjunction with Visit Malaysia Year 2014, albeit at a more moderate pace of 6% in 2014, after the relatively strong 7.2% expansion we projected for 2013. We expect to see more prudent spending as consumers try to keep consumption within their budgets due to high household debt and the recently-announced power tariff hike by around 14.9% effective 1 Jan 2014. We are maintaining our NEUTRAL stance on the overall consumer sector. Since most of the stocks (especially big caps) are still trading at a premium, we recommend investors to look for high-growth and good dividend counters.
F&B and retail

As demand for basic necessities is usually stable and inelastic, the performance of F&B companies depends largely on commodity prices and manufacturing costs. While the lower-income groups might tighten their wallets, we believe this will have a minimal impact on the companies under our coverage, as their products are generally affordable and widely accepted. QL Resources (QLG MK, BUY, FV: MYR4.90) remains our Top Pick, as we continue to like its regional expansion story and improving poultry margin.
It is time to look at Padini again
Retail sales should be resilient in 1Q given the upcoming Chinese New Year shopping season. We believe the low- to mid-income earners will remain prudent in their spending, especially on non-necessities, due to higher living expenses arising from subsidy rationalisation. We like Padini (PAD MK, BUY, FV: MYR1.95) for its good dividend yield and aggressive store expansion which will spur the groups topand bottomline numbers.
Tight consumer wallet to weigh down beer and cigarette sales

We expect beer sales volume to stay depressed although the brewery sector was spared from an excise duty hike in Budget 2014. We opine that the Governments subsidy rationalisation efforts (such as on petrol, sugar & power) as well as the impending implementation of the goods and services tax (GST) in 2015 would be key dampeners in beer sales volume going forward, as consumers cut back on discretionary spending due to shrinking budgets. Similarly, for cigarette manufacturing, we foresee a significant slowdown in industry growth volume amid a proliferation in illicit cigarette trade. This should come after the steep ASP hike of MYR1.50/pack (+14-17%) three months ago, following Governments decision to raise excise duty on tobacco by 60 sen/pack to MYR5/pack (+14%). In view of all the headwinds mentioned above, we maintain our SELL calls on Guinness (GUIN MK, FV: MYR15.19), Carlsberg (CAB MK, MYR11.31) and British American Tobacco (ROTH MK, FV: MYR57.06). However, JT International (RJR MK, FV: MYR6.27) is NEUTRAL, as we think it is close to being fairly valued. Overall, we are UNDERWEIGHT on the brewery and tobacco sector given its lacklustre growth, rich valuation and waning dividend yield appeal.
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Figure 34: BSI and CSI
Figure 35: Retail Sales and Retail Trade Index
Source: Bloomberg
Source: Bloomberg
Figure 36: Beer duty structure (MYR/HL)

1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 900 800 200 400 300 500 700 800
Figure 37: Tobacco excise duties & illicit trade

40% 35%
22 22 22 25
30 25 20 15 10 5 0
30%
600
25%
15
18
19
20%
11
12 23.7% 25.7%
15% 10%
37.5% 36.3% 36.1% 34.5% 33.6%
8 14.4% 17.5% 21.0%
5% 0%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
MLM volume ('000 HL) - LHS
Source: Budget announcements, RHB estimates
Table 15: Valuations of consumer stocks

Price (MYR/s) NTPM^ QL Resources^ OldTown^ Hai-O^ Karex Padini Bonia Corp Daibochi Johore Tin VS Industry Parkson Amway AEON JT Intl MSM Nestle SKP Resources^ Carlsberg GAB BAT 0.75 3.96 2.45 2.62 3.71 1.80 3.42 4.10 1.72 1.39 3.34 12.12 15.12 6.45 5.20 67.16 0.32 12.48 15.98 62.86 Target (MYR/s) 0.73 4.90 2.90 3.28 3.51 1.95 3.14 3.53 1.60 1.18 3.40 12.20 15.90 6.27 4.59 67.00 0.20 11.31 15.19 57.06 Mkt Cap (MYR/m)
FY14
Sector Avg
1998
1999
2000
2001
2002
2003
2004
2005
2006
Excise duty (MYR per HL) - RHS
2007
2008
2009
2010
2011
837 3,295 889 531 1,002 1,217 690 414 161 253 3,653 1,992 5,307 1,687 3,656 15,749 299 3,845 4,828 17,949
2012
2013
Illicit trade (%) - LHS
Excise duty (sen per stick) - RHS
Source: Budget announcements, RHB estimates
P/E (x)
FY15
EPS GWTH (%)

FY14 FY15
P/BV (x)
FY14
P/CF (x)
FY14
ROE (%)
FY14
NDY (%)
FY14
Rec
13.2 17.2 16.9 11.3 25.7 12.9 12.6 13.9 5.4 6.5 19.6 18.9 20.0 12.3 14.7 26.6 7.5 21.6 21.2 19.2
12.1 16.9 14.8 9.0 21.1 12.4 11.4 13.5 6.4 6.1 15.9 17.7 17.2 12.0 15.1 24.5 9.7 20.9 20.2 19.5
13.3 15.0 (5.0) 10.6 34.5 10.3 7.1 14.5 28.0 6.2 (22.7) 5.1 7.4 10.5 (6.5) 7.3 0.2 6.9 4.6 11.5
9.5 1.6 13.9 26.2 21.5 4.3 10.3 3.4 (15.7) 6.2 23.5 6.9 16.0 2.4 (2.6) 8.5 (22.9) 0.0 4.9 (1.6)
2.3 2.8 2.7 1.8 4.7 3.1 1.9 2.7 0.8 0.6 1.3 8.6 3.0 3.8 1.8 20.6 1.2 12.2 12.3 33.9
10.5 11.0 8.0 12.1 24.6 11.7 18.0 7.5 4.5 3.9 4.9 10.9 9.7 11.0 13.7 16.7 7.1 19.5 18.6 17.9
16.9 17.2 17.2 16.7 24.5 23.8 16.7 19.9 13.4 9.2 6.5 45.7 15.9 34.1 12.9 77.9 13.4 57.2 60.0 180.5
4.0 1.5 3.3 6.5 0.0 5.6 1.5 4.1 3.8 3.6 3.9 5.3 1.7 3.5 3.6 3.7 3.2 4.4 4.2 5.1
B B B B B B N N N N N N N N N N S S S S
19.3
18.3
5.1
5.5
35
Malaysia Strategy
12 December 2013
Construction: Its All About The MRT

Sector on an extended upcycle
Overweight
An extended upcycle backed largely by the MYR73bn Klang Valley MRT project
The prospects for the construction sector are strong as it is riding on what we believe is an extended upcycle backed largely by the MYR73bn Klang Valley MRT project. With Line 1 worth MYR23bn currently under construction and Lines 2 & 3 worth MYR25bn each under planning, this mammoth mega project will keep players busy until 2019. That said, from a risk angle, we do acknowledge that the Klang Valley MRT project is practically the sectors lifeline over the medium term. As such, it is extremely crucial that the Government does not backpedal on its commitment to its implementation, and equally important, the timeliness of its implementation.
MRT reverberates along entire sector value chain

The impact of the Klang Valley MRT project can be felt along the sectors entire value chain Given its scale, the impact of the Klang Valley MRT project can be felt along the sectors entire value chain. Line 1, for instance, has given rise to orders to: i) project delivery partners (PDPs) MMC-Gamuda MMC (MMC MK, NR) and Gamuda (GAM MK, BUY, FV: MYR5.45); ii) the tunnelling contractors (again, MMC-Gamuda); iii) the viaduct/station/depot contractors IJM (IJM MK, NEUTRAL, FV: MYR6.21), Sunway (SWB MK, BUY, FV: MYR3.30), Mudajaya (MDJ MK, NEUTRAL, FV: MYR2.85), TRC (TRC MK, BUY, FV: MYR0.71), TSR (TSRC MK, NR), Naim (NHB MK, BUY, FV: MYR5.63), Gadang (GADG MK, NR), UEM, Ahmad Zaki (AZR MK, BUY, FV: MYR1.33), MTD and Gabungan AQRS (AQRS MK, SELL, FV: MYR0.95); iv) the piling contractors Pintaras Jaya (PINT MK, BUY, FV: MYR3.50) and Econpile; v) a long list of smaller and mostly privately-owned contractors; and vi) segmental box girders and tunnel lining segments suppliers like Kimlun (KICB MK, NR). Meanwhile, Lines 2 and 3 are expected to have the same profound impact on the sector.
Other mega projects deferred
Projects with low import content and high multiplier effects will be given priority
In the wake of warnings from an international rating agency of a potential sovereign rating downgrade, there is a risk that the Government may defer certain mega projects other than the Klang Valley MRT project to narrow its fiscal deficit and prevent further weakening of its current account. Already, the Government has said that projects with low import content and high multiplier effects will be given priority, while those with high import components will be sequenced accordingly. As the West Coast Expressway (WCE), the refinery & petrochemical integrated development (RAPID) in Pengerang, Johor, and the Gemas-Johor Bahru double track were specifically mentioned in the Budget 2014, we believe that these projects carry a lower risk of being deferred. This leaves us with prime suspects, namely, the Tun Razak Exchange (TRX), Bandar Malaysia (the redevelopment of the Sg Besi Airport), the Warisan Merdeka Tower (the redevelopment of Stadium Merdeka and its surrounding area) and the Kuala Lumpur-Singapore high-speed rail link. Nonetheless, we are not overly concerned as none of these are critical as a source of jobs for the sector like the Klang Valley MRT project. Mega property projects such as TRX, Bandar Malaysia and Warisan Merdeka Tower, for instance, will benefit largely earthworks and high-rise building specialists such as WCT (WCTHG MK, SELL, FV: MYR2.21), Sunway, Gadang, IJM and Ahmad Zaki. On the other hand, the West Coast Expressway will largely benefit IJM and its subcontractors, including WCT.
Gross development expenditure down marginally
Budget 2014 projected the years gross development expenditure at MYR44.5bn
Meanwhile, Budget 2014 projected the years gross development expenditure at MYR44.5bn, down slightly from 2013s MYR45bn estimate. The biggest recipients of the allocation are rural infrastructure (MYR4.1bn, including MYR500m for the muchtalked-about Pan-Borneo Highway), rail projects (MYR2.9bn), affordable housing (MYR1.7bn), five regional corridors (MYR1.6bn), airports (MYR1bn), schools (MYR831m) and flood mitigation (MYR659m) (see Table 16). We see sustained gross development expenditure as a safety net for the construction sector.
Our Top Picks: Gamuda, Pintaras and Protasco

We advocate a two-pronged stockpicking strategy Maintain OVERWEIGHT. We advocate a two-pronged stock-picking strategy, ie go for high-beta, highly liquid big-cap Gamuda that will take the lead in reacting to new price catalysts (such as Cabinet approval for Line 2 of the Klang Valley MRT project), and undervalued and under-researched small-cap stocks such as: i) Pintaras Jaya, which has good piling rates due to a capacity shortage in the market, and ii) Protasco
36
Malaysia Strategy
12 December 2013
(PRTA MK, BUY, FV: MYR1.80) as its 100-acre university campus land in Bangi is already ripe for redevelopment, coupled with its strong construction pipeline.
Table 16: Gross development expenditure main recipients

Value (MYRm) Rural infrastructure 4,100 Rural roads 980 Electricity supply (16,000 houses) 865 Pan-Borneo Highway 500 Portable water (8,000 houses) 457 Upgrading of the power system in Sabah 265 Refurbishment of houses of the poor in rural areas (20,000 houses) 179 Infrastructure & facilities for Orang Asli 109 Water tanks in Sarawak 75 Rail project including Ipoh Padang Besar & Gemas Johor Bahru double track & 2,900 upgrading of rail track nationwide Project Potential beneficiaries/comments
Small and mid-sized contractors. Contractors based in East Malaysia.
Affordable housing Under PR1MA (80,000 units) Under Program Perumahan Rakyat (16,473 units) Under Program Perumahan Rakyat Disewa & Bersepadu (600 units) Infrastructure for five regional corridors

1,724 1,000 578 146 1,500 n.a. n.a. n.a. n.a. 1,012 700 312 n.a. 831 659 79 62
Small contractors Small contractors Weida Gamuda is likely to be roped in by the Chinese main contractor (appointed via a G2G arrangement) as a JV partner or local subcontractor for the Gemas-Johor Bahru double track, bagging about MYR4bn worth of construction works. This is a half-share of the estimated project cost of MYR8bn Small- and mid-sized contractors
We think this MYR1.6bn allocation is on the low side given the long list of projects from the five regional corridors
Agropolitan and oil palm-based industries in Sabah Development Corridor Samalaju Industrial Park and Halal Hub in Sarawak Corridor of Renewable Energy (SCORE) Kuantan Port expansion and integrated petrochemical complex in Gebeng/Kertih in East Coast Corridor Planting of commercial crops and fertigation system in Northern Corridor Airports A new traffic management centre in KLIA Upgrading of airports West Coast Expressway (WCE) 33 new schools and upgrading of existing ones Flood mitigation projects Dredging & deepening of river estuaries Park & Ride facilities at LRT, KTM commuter and ERL stations
Source: Budget 2014, RHB
Mid-sized and large contractors
WCE could potentially generate MYR3-4bn worth of construction works for IJM Small contractors Mid-sized and large contractors MRCB Mid-sized and large contractors
Table 17: Valuations of construction stocks

Price Target Mkt Cap P/E (x) FY14 FY15 EPS GWTH (%) FY14 FY15 P/BV (x) FY14 P/CF (x) FY14 ROE (%) FY14 NDY (%) FY14 Rec
Gamuda TRC Synergy Eversendai Ahmad Zaki Naim Pintaras Protasco HSL Mudajaya MRCB IJM^ WCT Gabungan AQRS Sector Avg
(MYR/s) 4.70 0.55 1.17 0.92 3.58 3.13 1.39 1.92 2.78 1.32 5.74 2.24 1.11
(MYR/s) 5.45 0.71 1.46 1.33 5.63 3.50 1.80 2.06 2.85 1.32 6.21 2.21 0.95
(MYRm) 10,029 258 906 255 895 501 431 1,068 769 1,980 8,036 2,433 395
14.8 5.9 8.0 12.7 6.4 9.6 8.0 11.2 6.8 55.9 12.4 14.4 9.5 12.1
14.6 5.1 7.2 9.6 5.7 8.4 6.9 11.2 6.8 24.7 10.8 13.6 9.0 11.0
25.4 78.8 99.3 71.3 87.3 12.0 28.2 2.6 29.6 n.a. 25.2 0.6 16.9 36.7
1.0 16.6 11.0 32.2 11.0 14.5 16.2 (0.03) 0.7 +>100 14.9 6.1 5.4 9.8
1.9 0.7 1.0 1.1 0.9 1.6 0.0 1.7 0.5 1.3 1.2 1.2 1.4
25.0 5.3 6.1 8.8 33.4 10.3 6.0 11.2 4.7 9.5 8.2 15.5 87.8
13.5 12.5 13.1 9.1 14.8 18.1 15.2 15.8 16.8 2.3 10.4 9.0 16.0
2.6 2.8 3.4 2.4 2.2 3.2 7.2 2.1 2.9 1.1 2.1 3.3 2.7
B B B B B B B N N N N S S
Education: Subdued Outlook

Neutral
37
Malaysia Strategy
12 December 2013
Education: Subdued Outlook
Maintain NEUTRAL
Unfavourable conditions in the education sector continue to dog education providers
Neutral
Three out of the four education companies under our coverage - SEG International (SYS MK, SELL, FV: MYR0.76), Masterskill (MASEG MK, NEUTRAL, FV:MYR0.37) and HELP International (HELP MK, NEUTRAL, FV:MYR1.65) reported results that were below expectations during 9M13. We maintain our NEUTRAL stance given the lack of positive rerating catalysts, as the sectors operating environment gets even more challenging due to lacklustre student growth arising from growing competition as well as still-unfavorable sector conditions. Our Top Pick is still Prestariang (PRES MK, BUY, FV: MYR3.37) as we believe a rerating is in store following its acquisition of an oil & gas (O&G) training academy and on expectations of a slew of O&Grelated training contracts propelling its share price to new highs.
Delays in issuing foreign student visas continue to hamper the industry.
No signs of improvement
Earlier this year, the Ministry of Higher Education (MoHE) set up a one-stop centre called Education Malaysia Global Services (EMGS) to process foreign student visas. The move was in line with efforts to rationalise and regulate the intake of foreign students, with the guarantee that all applications will be processed within 14 days upon submission. Ironically, the stringent vetting and regulations slowed down applications to the extent that it caused a 30-40% drop in new foreign student enrolment. In June this year, EMGS announced that it will station an immigration team at its office by September to expedite visa applications. However, this was not implemented. Recent media reports indicate that foreign students are now facing difficulties in retrieving their passports sent for processing to EMGS and the Department of Immigration. Even though the centre has introduced a green lane to improve the processing of visa applications, we believe that it will take some time for it to be implementation. That said, we remain concerned over the near-term outlook for Malaysias education sector as the regulatory road blocks could cause foreign students to consider seeking higher education options in other countries.
Prestariang our sole star

PRES is our Top Pick PRES continues to be our Top Pick for the sector given that it acquired an oil and gas (O&G) academy in November, after which we expect it to secure a slew of O&Grelated training contracts, which would accordingly propel the share price to new heights. Although student enrolment for University Malaysia of Computer Science and Engineering (UniMy) was weaker than expected, we believe that PRES will be able to grow its student base by 2014 through early intakes as well as ramping up its marketing activities to improve brand awareness. We also like PRES for its attractive yields of 4-5% over the next two years.
HELPs private international school is ready to start classes in Jan 2014
HELPs first step into the international school space

We remain optimistic on the private international school education segment as parents from mid- to upper-income families are still clamouring for better education quality and are willing to pay extra for it. We gather that HELPs first international school was completed in November and will welcome its maiden intake of 400 students in Jan 2014. Although we are positive on the long-term prospects of the international school given its potential recurring income, we remain wary of the shortterm impact on earnings as the school may potentially register losses during the gestation period due to high start-up costs. SEGi, meanwhile, is still in the midst of planning for an international school on its 12-acre land in Bandar Setia Alam, Selangor which it acquired in June 2012.
MASEG is cleaning up its books and starting on a new chapter
MASEG cleans up its books

MASEG is still struggling to replenish its diminishing student base as it continues to register losses, weighed down by the reduction in National Higher Education Fund Corp (PTPTN) loans along with the more stringent entry requirements required for its nursing courses. That said, we believe that management is cleaning up its books to start on a new chapter. As such, we remain cautious over the companys near-term earnings as we await managements announcement of initiatives to revive its prospects and bring it back to the black.
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Malaysia Strategy
12 December 2013
Bleak outlook for SEGi

SEGi still buckling under the pressure of intense competition and regulatory hiccups We continue to remain wary on SYS in the short- to medium-term as regulatory hiccups continue to plague the company while positive catalysts are lacking. Even though channel checks indicate that SYS is qualified for EMGS new green lane policy - which would shorten the time to process foreign student visas - we believe that this could take some time to implement.
Table 18: Valuations of education stocks

Price (MYR/s) Prestariang Help Intl Masterskill Seg Intl Sector Avg 2.59 2.49 0.38 1.53 Target (MYR/s) 3.37 1.65 0.37 0.76 Mkt Cap (MYR/m)
FY14
P/E (x)
FY15
EPS GWTH (%)

FY14 FY15
P/BV (x)
FY14
P/CF (x)
FY14
ROE (%)
FY14
NDY (%)
FY14
Rec
570 354 154 1,017
11.5 18.1 n.m. 26.6 42.1
11.1 18.0 n.m. 22.0 41.5
9.3 71.1 10.6 21.7 20.3
3.4 0.5 (19.4) 21.1 11.2
4.6 2.2 0.5 2.9
0.1 8.8 n.m 18.8
35.2 12.7 n.m 11.6
4.6 1.0 0.0 1.3
B N N S
39
Malaysia Strategy
12 December 2013
Gaming: Lack Of Sparks

New regional opportunities the only sparkle
Neutral
Over the near to medium term, we believe the lack of exciting corporate developments as well as earnings may limit interest in the Genting group. Genting Malaysias (GENM MK, NEUTRAL, FV: MYR4.11) operations were partly affected by the implementation of the minimum wages on 1 July 2013 as well as startup losses of MYR50.3m incurred in its newly-opened Bimini operation. The near-term key rerating catalyst, in our view, would be the unveiling of its proposed MYR3bn facelift programme on Genting Highlands, for which only MYR1bn in capex has been announced so far. We expect plans for the remaining MYR2bn to be disclosed in 1Q14. This aside, now that New York voters have approved a constitutional amendment allowing up to seven new casinos in the state, we expect some new developments in this respect come 1Q14. We understand that the call for bids for casino licences is likely to be made by mid-2014 and the licences to be potentially given out as early as 2H14. We continue to believe that GENM is likely to submit a bid since the group intends to enlarge its regional gaming footprint. Interest on Genting (GENT, NEUTRAL, FV: MYR11.24), meanwhile, will be driven by potential casino legislation in Japan, which GENT is looking to venture into via Genting Singapore (GENS SP, NEUTRAL, FV: SGD1.49). Japans lawmakers are expected to table a bill requiring that the government enforce legislation on gaming resorts. The bipartisan bill, which is backed by the ruling Liberal Democratic Party, is likely to passed by parliament next year. Should this materialise, we believe the casino licences could be awarded as early as 2016, with the first casino likely to begin operating in 2019-20, before the 2020 Summer Olympics in Tokyo.
Keeping an eye on new casino licences in New York
More developments in Japan likely
GST may led to earnings erosion

All eyes on potential implementation of GST on the gaming sector We believe the earnings of the existing gaming stocks under our coverage could potentially be hit should the 6% goods and services tax (GST) be imposed on the sector when implemented on 1 April 2015. This, we believe, could dampen investor interest on the gaming sector as a whole as going into 2014. In our sensitivity analysis, the imposition of a 6% GST on the sector come April 2015 on top of the existing taxes could potentially erode GENMs FY15 net profit by a significant 13.8% and GENTs FY15 core earnings by 6.3%, while Magnums (MAG MK, NEUTRAL, FV: RM3.41) FY15 earnings estimate is also expected to decline by 13.4%. Table 19: Impact on FY15 earnings assuming GST of 6%
Genting Malaysia Genting Magnum -13.8% -6.3% -13.4%
The present casino tax is 25%
Maintain cautious stance

We remain NEUTRAL on the gaming sector, with potential earnings downgrades on all three gaming stocks under our coverage on confirmation of GST being implemented in the sector. In the meantime, we continue to keep an eye on potential regional developments in relation to Genting group. All three stocks are rated NEUTRAL at this juncture.
40
Malaysia Strategy
12 December 2013
Figure 38: NFO-related taxes

12% 10% 8% 6% 4% 2% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 NFO gaming tax Poolbetting duty
Figure 39: NFOs market share

45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Magnum
Da Ma Cai
Figure 40: Industry statistics on casino and NFO sales (MYRm)

9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Total NFO sales
Casino sales
Table 20: Valuations of gaming stocks

Price (MYR/s) Magnum Genting Genting M'sia Sector Avg 3.29 10.00 4.16 Target (MYR/s) 3.41 11.24 4.11 Mkt Cap (MYR/m)
FY14
P/E (x)
FY15
EPS GWTH (%)

FY14 FY15
P/BV (x)
FY14
P/CF (x)
FY14
ROE (%)
FY14
NDY (%)
FY14
Rec
4,730 36,946 23,597
17.2 16.9 14.0 15.7
17.0 15.4 13.4 14.7
(18.7) 6.4 (5.9) (0.9)
1.4 9.6 4.3 6.9
1.3 1.4 1.5
13.4 6.3 10.8
7.8 13.5 11.1
4.6 0.6 2.3
N N N
41
Malaysia Strategy
12 December 2013
Healthcare: Seeking Relative Performance

Limited choices among large caps
Neutral
Despite valuations, IHH exhibits the lowest downside risk for now CARiNG offers a high growth, quasi consumer alternative play
IHH Healthcare (IHH MK, NEUTRAL, FV: MYR3.87), KPJ Healthcare (KPJ MK, NEUTRAL, FV: MYR6.13) and Faber Group (FAB MK, NEUTRAL, FV: MYR2.28) all reported 3Q results that were in line with expectations. We have initiated coverage on CARiNG Pharmacy Group (CARiNG), with a BUY call and MYR2.17 FV. While a small cap, market cap MYR42.4.5m, CARiNG offers investors solid growth prospects, with a 18.1% 3-year (FY13-16) net profit CAGR. Regarding the larger cap hospital operators, we remain cautiously positive on their upcoming capacity expansion plans and keep our NEUTRAL stance on the sector. For larger cap sector exposure, despite its valuations, we feel IHH is the better pick as: i) its earnings are steadier vs. KPJ as its earnings base spans three countries, ii) its expansion into high affluence/medical tourist conducive regions eg HK and Medini (IDR), China, iii) the stocks limited downside catalysts, and iv) continued institutional buying. Our FV, call and forecast for all three healthcare stocks remain unchanged.
Overshadowed by external events in Dec 2013

KPJs MYR70.5m lawsuit and Fabers MYR1.2bn proposed acquisition of Opus and Propel take centre stage Both KPJ and Faber will witness major events in the coming weeks. KPJs court appeal against a MYR70.4m judgement is scheduled for hearing on 12 Dec while Fabers MYR1.2bn proposed takeover of Opus and Propel is expected by Jan 2014.
Our scenario analyses

Large cap hospital plays in 2014 to focus on IHH and KPJ For KPJ, our worst-case scenario will be an unfavourable ruling on 12 Dec. Assuming; i) KPJ does not further appeal the ruling, ii) we disregard legal costs, and iii) the entire sum is recognised in 2013, this would cut the groups 2013 earnings to MYR34.0m, a drop of 66.5% and a 0.8% for 2014. Our FV, pegged to 26x 2014 EPS (average forward P/E over six years) would dip to MYR6.08 from MYR6.13. Meanwhile, Fabers P/E valuation has risen to 19.2x 1-year forward - almost double its 3-year mean of 10.5x. While this equates to 12.8x-12.4x our estimated 2014-15 forecasts post acquisition, we feel that the 71.0% YTD run-up leaves limited upside. Going into 2014 we expect investor interest to be largely focused on either IHH or KPJ as: i) both are hospital managers, whereas Faber is a cleaning services provider, and ii) with the interest in Faber being deal-centric, a negative outcome in relation to its proposed acquisitions may lead to a substantial de-rating on the stock while consummation of the deal pushes its hospital derived earnings to the sidelines.
Expect a seasonally stronger 1Q14

We expect the healthcare stocks we cover to report sequentially stronger 4Q13 results (vs 3Q13) in February next year as patient admissions rise following the festive and holiday period lull during July-Sept. As an indication, IHH enjoyed a 9% m-o-m increase in foreign patient volume at its Singapore operations in October. Fabers hospital services concession business is also likely to benefit from increased patient volume while government hospitals seek to exhaust their budgets before year-end. That said, a successful conclusion of its M&A would render this moot.
but hospital expansion bears watching

Excited on expansion but competition is a worry 2014 and 2015 will witness the opening of new hospitals and capacity expansion at existing hospitals in Malaysia by both KPJ (five hospitals, total 780 bed capacity) and IHH (six hospitals, total 800 bed capacity). While the issue of gestation costs is obvious, we are more concerned about the potential pressure to fill the extra beds resulting in operators competing on pricing by putting price increases on hold (hospitals normally need to pass on rising utility and wage costs etc). This may exacerbate the current compression on margins. Meanwhile, IHHs Singapore operation has taken the step to publish the average charges for 30 of its more common procedures, including a breakdown of doctors fees and hospital charges. While we understand that this is aimed at increasing billing transparency and has actually helped attract new patients, we do discount this
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Malaysia Strategy
12 December 2013
being a pre-emptive move ahead of the competition from the 220-bed Connexion at Farrer Park, scheduled for opening in mid-2014.
KPJ hit by delays and expansion mostly to smaller towns...
While KPJ is solidifying its market share leadership in Malaysia, it may come at the price of lower inpatient revenue per pax
KPJ has been plagued by start-up delays in the past. Of its five hospitals planned for opening in 2014-15, four were actually scheduled for a year earlier. This is hurting KPJs 2013 bottomline as; i) it is incurring higher debt to finance construction (9M13: net debt MYR729.9m, net gearing 0.65x; 2012: MYR390.6m, net gearing 0.35x;), ii) this gives rise to greater net interest cost (9M13 net finance cost was MYR15.3m vs MYR11.1m for the whole of 2012), and iii) further exacerbated by higher pre-opening costs (average 9M13 EBITDA margin was as 9.9% vs 12.8% for 9M12). We thus expect KPJs earnings to contract for the second straight year - 2013F: 27.7%, 2012: 2.5%. The new hospitals will also weigh on KPJs balance sheet for the next 2-3 years before being REIT-able (as they would first need to breakeven). Also, we would note that four out its five hospitals planned for 2014-15 are in smaller towns. As these would handle lower intensity cases, we are mindful of a slide in average inpatient revenue and thus narrower EBITDA margins.
... with limited headway overseas
Astronomical valuations of Indonesian hospital companies make M&A plans challenging for KPJ
While IHH has acquired a greenfield site in Hong Kong and has signed hospital management agreements (HMAs) for China and Abu Dhabis wealthy/tourist markets, KPJ instead is venturing into Bangladesh. While we understand that its facility would be among the top four in the country, we feel the brand value enhancement is limited. The groups two hospitals in Indonesia are still loss-making. While KPJ plans to boost earnings via economies of scale, we think quick growth via M&As would be difficult. Recent hospital listings in Indonesia, eg Siloam International (SILO IJ, NR) and Sarana Meditama (SAME IJ, NR), are trading at 25-35x P/BV vs KPJs 3.5x 2014. Ramsay Health Care (RHC AU, NR) merged its Indonesian operation of three hospitals with Sime Darby (SIME MK, BUY, FV: 10.46) instead of expanding solo. All in, we expect KPJ to at best meet earnings forecasts in 2014. More importantly, as the selling on the stock by major institutional funds has been persistent. Without tangible catalyst, we feel that the share price will remain lacklustre.
IHH has its merits though expensive

IHH commands premium pricing, both from patients and investors IHHs operations have proven to be resilient, with i) sustained y-o-y increases in both inpatient admission numbers and revenue across the board, and ii) its Mount Elizabeth Novena has reached EBITDA breakeven. We understand that IHH is anticipating and preparing for competition in Singapore from Connexion at Farrer Park in mid-2014 (e.g., publication of its charges). IHHs two new Turkish hospitals in Ankara and Bodrum were nominally EBITDApositive in 3Q (MYR1.0m). While the earnings contribution is small, this reflects IHHs ability to execute plans in countries with vast cultural and legal differences, i.e., an endorsement of IHHs position as an international hospital operator. Furthermore, 2014 will also witness the commencement of HMA hospitals in Shanghai China (450 beds) and Abu Dhabi (126 beds), thus enlarging its international footprint. Despite its valuations remaining above its mean on both a P/E and EV/EBITDA basis, IHHs stock price has enjoyed consistent institutional support. IHH will finalise its dividend policy in February. Barring the emergence of any risks to earnings on the horizon, we feel that the stocks downside will be limited.
CARiNG offers an alternative
Possible proxy for anyone CARiNG for smaller cap exposure
CARiNG, while a small, cap offers enticing growth prospects. Currently operating Malaysias third largest chain of pharmacy outlets, CARiNG targets to open 30-35 new outlets by FY16. We currently project 30 new outlets, and based on current assumptions, forecast MYR24.8m/29.8m/33.8m in net profit for FY14/15/16 respectively. As we also do not discount the group taking an inorganic growth path, we think the prospect of M&As would further add excitement to the stock.
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Table 21: Valuations of healthcare stocks

Price (RM/s) KPJ Health Faber IHH Healthcare CARiNG Sector Avg 6.10 2.44 3.94 1.95 Target (RM/s) 6.13 2.28 3.87 2.28 Mkt Cap (RMm) 4,023 886 31,730 425 FY14 21.7 18.8 38.8 14.3 34.8 P/E (x) FY15 19.5 17.7 31.0 12.2 28.6 EPS GWTH (%) FY14 25.0 5.9 27.6 19.8 26.2 FY15 11.7 6.3 25.0 17.1 21.8 P/BV (x) FY14 3.3 1.6 1.7 3.1 P/CF (x) FY14 16.2 13.6 22.7 10.8 ROE (%) FY14 15.9 8.8 4.5 23.3 NDY (%) FY14 2.5 2.7 0.5 2.4 N N N B Rec
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Malaysia Strategy
12 December 2013
Logistics & Ports: Ready For a Brighter Year

Global economies are stabilising and we expect stronger growth in 2014 Our economists expect Malaysias real GDP to strengthen and expand by 5.4% in 2014
Overweight
Global economy set to strengthen

A view we have been highlighting is that the sector should gain pace in 2014. Our economists are of the view that Malaysia is on track for a cyclical recovery in 2014, bolstered by a sustained increase in domestic demand along with a pickup in exports. Our economists also believe that the global economy remains on track for stronger growth in 2014 despite challenges ahead eg the unresolved issues of the US budget and debt limit as well as expectations that QE tapering concerns will re-emerge in early 2014. The global economic growth will drive the countrys export growth in 4Q 2013 and in 2014. We expect Malaysias real GDP to strengthen and expand by 5.4% in 2014. As the logistics and ports sectors are highly correlated with economic growth, a steady recovery in the global economy would translate into stronger earnings for the logistics and ports counters under our coverage.
Operating expenses may increase due to subsidy rationalisation. POSM may be the most sensitive as it has higher exposure to fuel and electricity costs
Risks
We see downside risks to earnings in the ports and logistics companies under our coverage should the recovery in the macro economy derail. To be conservative, our topline growth forecasts factor in only a moderate cyclical recovery in global trade. A bigger concern is the higher-than-expected cost increase resulting from the recent fuel and electricity price hikes. We see Pos Malaysia (POSM) as most sensitive to such increases since the company incurs relatively higher fuel and electricity costs due to its nationwide postal fleet and branch network.
OVERWEIGHT on logistics
We maintain OVERWEIGHT on the logistics sector as we expect it to grow strongly in tandem with the recovery in the economy POSM is still our Top Pick
That said, we still like POSM as the company seems to be making headway in its transformation plan, as evidenced by its ability to generate revenue growth at its mail business after rolling out its direct mail operations. This has enabled the postal provider to mitigate the decline in conventional mail volume. We also like Freight Management Holdings (FMH) for its strong fundamentals and diverse customer base, which has benefitted from sustainable growth in domestic demand activities. We see long-term earnings potential in its recent tug and barge JV with Scomies, which will allow FMH to tap into the O&G sector. Meanwhile, Tascos recent results showed some improvement, and we believe the logistics operator will ride on the recovery in exports next year.
We adopt a more conservative stance on ports and remain NEUTRAL as we are still awaiting a pickup in trade volume
NEUTRAL on ports
While the macro prospects are set to improve next year, we are selective in our stock picks in the ports space. Bintulu Port and NCB remain NEUTRALs as we see the former at risk of cutting its dividends to fund its capex to expand the Samalaju port, while the latter continues to face its own internal issues in turning around its logistics segment. In the immediate term, we favour Suria Capital, which is also our Top Pick, as we think the market has yet to price in the cash proceeds from its JV with SBC Corp. Meanwhile, Westports share price will remain sluggish pending regulators decision on the P3 alliance, noting that this may give rise to risks of the container boxes from its number one client being diverted to Port of Tanjung Pelepas (PTP). We understand that regulatory approval may come as early as January. Meanwhile, Integrax - a small Lumut-based port operator - will experience modest growth by riding on Tenagas coal demand up to 2015, during which earnings will be propelled by an addition of 3m tonnes of coal on top of the 7m tonnes it currently handles.
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12 December 2013
Figure 41: South East Asia total import value
Figure 42: South East Asia total export value
Source: Department of Statistics Malaysia
Source: Department of Statistics Malaysia
Table 22: Breakdown of cargo at Port Klang

Port Klang Year Import 2005 2006 2007 2008 2009 2010 2011 2012 1,342,901 1,403,946 1,527,893 1,629,977 1,515,743 1,716,304 1,794,508 1,872,867 Export 1,276,661 1,367,625 1,474,193 1,598,544 1,478,354 1,718,845 1,720,542 1,821,995 Total Gateway 2,619,562 2,771,571 3,002,086 3,228,521 2,994,097 3,435,149 3,515,050 3,694,862 Transhipment 2,923,965 3,554,724 4,116,628 4,745,058 4,315,682 5,436,596 6,088,876 6,306,633 Total 5,543,527 6,326,295 7,118,714 7,973,579 7,309,779 8,871,745 9,603,926 10,001,495 Gateway 1,670,274 1,702,839 1,763,636 1,792,251 1,754,098 1,924,361 1,805,293 1,743,049 Northport Transhipment 961,983 958,245 1,042,361 1,213,669 1,104,243 1,381,403 1,394,559 1,348,903 Total 2,632,257 2,661,084 2,805,997 3,005,920 2,858,341 3,305,764 3,199,852 3,091,952 Gateway 949,288 1,068,732 1,238,450 1,436,270 1,239,999 1,510,788 1,709,757 1,951,813 Westports Transhipment 1,961,982 2,596,479 3,074,267 3,531,389 3,211,439 4,055,193 4,694,317 4,957,730 Total 2,911,270 3,665,211 4,312,717 4,967,659 4,451,438 5,565,981 6,404,074 6,909,543
Source: PKA, NCB, Westports
Table 23: Global container throughput by major region (million TEUs)

Region North America Western Europe Far East SEA Middle East Latin America Oceania South Asia Africa Eastern Europe World 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 34.2 37.5 40.8 44.5 46.9 47.9 45.8 39.9 45.4 46.2 47.4 49.0 51.0 53.4 57.7 63.1 70.9 75.5 81.0 90.3 91.2 78.7 86.5 92.4 94.8 96.6 98.8 102.3 89.5 104.2 122.8 138.2 158.3 181.0 194.0 178.7 210.2 231.2 243.0 257.4 274.5 294.9 41.4 45.9 51.8 55.1 59.9 68.0 71.8 67.4 76.3 82.7 87.4 92.7 98.4 104.2 13.8 16.5 20.1 22.4 24.5 27.5 32.6 31.2 34.5 36.5 39.2 41.8 44.5 47.2 19.3 21.5 25.2 27.9 32.0 35.4 37.4 34.6 39.8 43.9 45.3 47.2 49.9 53.3 6.0 6.6 1.9 6.5 7.3 2.4 7.3 8.6 3.1 7.5 7.9 8.7 9.4 8.9 9.5 10.2 10.5 10.9 11.4 11.9 9.8 11.5 13.6 14.8 14.0 16.8 17.6 17.6 17.8 18.4 19.1 4.3 5.4 7.2 8.1 5.1 6.7 8.3 9.0 9.7 10.8 11.9 Historical CAGR Forecast CAGR (2002 - 2012) (2012 - 2015) 3.3% 5.1% 10.5% 7.8% 11.0% 8.9% 5.7% 10.3% 10.3% 16.9% 8.3% 4.1% 2.6% 6.7% 6.0% 6.4% 5.5% 4.5% 2.9% 3.9% 9.7% 5.5%
9.0 10.8 12.1 13.9 15.6 17.6 21.0 21.1 23.7 25.2 23.9 23.7 25.1 26.8 279.4 315.7 362.8 399.1 443.1 497.1 525.9 479.6 549.2 594.2 618.0 646.7 682.7 725.0
Source: Drewry Maritime Advisors
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Table 24: Valuations of logistics & ports stocks

Price (MYR/s)
Pos M'sia^ Freight TASCO Westports Integrax Suria Capital Bintulu NCB Sector Avg ^ FY14-15 valuations refer to those of FY15-16 5.80 1.48 2.07 2.55 2.06 2.70 7.55 3.58
Target (MYR/s)
6.80 2.00 2.30 2.84 2.32 3.50 7.51 3.50
Mkt Cap (MYR/m)

3,115 240 207 8,696 620 765 3,473 1,684
P/E (x)
FY14 15.3 9.7 7.3 18.3 13.8 11.8 21.5 17.1 17.5 FY15 14.4 8.1 6.3 18.2 10.1 11.3 20.4 15.7 16.3
EPS GWTH (%)

FY14 12.2 10.4 33.3 4.0 6.3 3.0 9.1 39.0 6.7 FY15 5.7 20.2 15.8 0.7 36.0 3.6 5.6 8.9 7.4
P/BV (x)
FY14 2.6 1.5 0.7 5.0 1.0 0.9 3.2 1.1
P/CF (x)
FY14 11.5 6.3 9.0 13.1 15.2 7.3 20.8 5.5
ROE
FY14 18.0 16.1 10.2 28.2 7.1 7.5 15.0 6.5
NDY (%)
FY14 3.3 3.0 5.5 4.1 2.3 3.0 4.0 2.9
Rec
B B B B B B N N
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Malaysia Strategy
12 December 2013
Media: Starting Afresh In 1QFY14

We expect 1QFY14 adex to drop sharply q-o-q as 1Q is generally a normalising period Nonetheless, we expect adex to grow positively on a y-o-y basis
Overweight
A quiet first quarter for adex

1Q is usually a period during which adex normalises as advertisers have generally exhausted most of their budgets in the preceding years 4Q and move to the planning stage in 1Q of the following year. We expect adex numbers to fall sharply on a q-o-q basis but still think that it will continue to improve y-o-y. Nonetheless, the growth may be marginal as recent local developments, including the introduction of GST and the cutbacks in subsidies that have led to increases in fuel and electricity prices, may dampen consumer sentiment, and hence stunt adex growth.
World Cup Year may boost adex growth for 2014
2014 is World Cup Year

Although 2013 was not an eventful year for media adex, except the May general election, Malaysias gross adex (ex-pay TV) still ticked up 3.0% y-o-y in the first 10 months. We expect growth to reach 3.5% y-o-y, possibly boosted by the strongest months of November and December. Moving into 2014, which is the World Cup Year, we expect the World Cup effect to give adex a boost. During the 2011 World Cup, adex (ex-pay TV) jumped 15.7% y-o-y versus the preceding year.
The media industry is getting more competitive and the digital transformation is unavoidable. Investors should be more selective in gaining exposure to the media sector
Be more selective on media counters

As the industry evolves, we think that investors should position themselves in media counters that have the capability to ride on the waves of change. As technology improves and viewers clamour for quality and better media access, we believe digital media could be the next wave in the media sector. Apart from this, as adex revenue has always been vulnerable to economic uncertainties, media companies should diversify their business to reduce their reliance on adex. Furthermore, with the local media industry maturing, advertisers have more channels and platforms in which to allocate their budgets. This forces the industry to compete on pricing. That said, investors should look beyond the horizon and invest in counters that have staying power.
All media counters are no longer shariah-compliant
Dropped out of Shariah-compliant list

The recent update in the Securities Commissions shariah-compliant list excluded all the media counters on Bursa Malaysia from the list. Media companies are prone to be ruled as non shariah-compliant since their revenue from non-halal sources are greater than the 5% of the stipulated total revenue threshold. Media companies would not be able to turn down non-halal advertisers such as banks and insurance companies as these would hit their earnings. As Islamic funds are given six months to comply with the new ruling, we may see some selling pressure on these counters. We see the potential selldown by Islamic funds opening up numerous bargain hunting opportunities.
The supply and demand imbalance will continue to depress newsprint prices
Newsprint costs to remain stable

We expect newsprint prices to remain flat in the first quarter of 2014, mainly due to the supply and demand imbalance capping newsprint prices. We expect newsprint price to stay range-bound at USD595-605 per tonne in 2014.
OVERWEIGHT on media sector, with MPR as our Top Pick
Maintain OVERWEIGHT; Media Prima still our Top Pick

We maintain our OVERWEIGHT stance on the sector on expectations of higher adex spending against the backdrop of flat newsprint cost, coupled with its compelling valuations and expanding earnings base. Media Prima (MPR, BUY, FV: MYR3.60) remains our Top Pick in the media sector, as we continue to like its position as the only fully-integrated media platform in Malaysia and a leader in the traditional core businesses (free-to-air TV, print media, radio and outdoor), as well as its expansion into digital media and content production to grow its earnings base. We see Astro (ASTRO MK, FV: MYR3.36) as a longer-term investment as it is currently in a capex upcycle, which would pressure its ability to pay higher dividends in the near term. Furthermore, we see upside to its near-term earnings growth on the back of higher average revenue per user (ARPU). Its high P/E may not reflect the high recurring cash generation, given the accelerated depreciation expenses on capitalised set-top boxes (STBs). Astros profitability may improve once its capitalised depreciation is fully accounted for. We also like Catcha Media (CHM MK, BUY, FV: MYR0.96) in the small cap space as it ventures into new areas in the digital space segment and more importantly, for the contribution of its newly-merged entity, Says.com, which will help the media group turn around. We have a NEUTRAL recommendation on Media Chinese (MCIL MK, FV: MYR1.06) given its low earnings growth and the intense competition it faces in the overseas markets. Furthermore, we think MCIL lacks a strong earnings growth catalyst that would excite the market.
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Figure 43: Overall media adex growth
Figure 44: Market share breakdown by segment
Source: Nielsen Co
Source: Nielsen Co
Figure 45: Newspapers adex growth
Figure 46: Newspapers adex breakdown by language
Source: Nielsen Co
Source: Nielsen Co
Figure 47: FTA TV adex growth
Figure 48: FTA TV adex breakdown by TV channels
Source: Nielsen Co:
Source: Nielsen Co
Table 25: Valuations of media stocks

Price (MYR/s) 2.96 0.66 2.60 0.99 Target (MYR/s) 3.36 0.96 3.60 1.06 Mkt Cap (MYRm) 15,387 89 2,812 1,677 P/E (x) FY14 35.2 n.m. 10.7 10.5 23.1 FY15 34.9 +>100 9.3 10.3 21.1 EPS GWTH (%) FY14 FY15 1.0 7.7 45.9 n.a. 15.7 15.2 9.7 1.5 7.2 9.3 P/BV (x) FY14 21.0 4.8 1.6 2.5 P/CF (x) FY14 10.5 31.2 6.1 8.9 ROE (%) FY14 65.2 n.m 15.4 24.8 NDY (%) FY14 2.1 0.0 6.1 6.7 Rec B B B N
Astro^ Catcha Media Media Prima MCIL^ Sector Avg
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Malaysia Strategy
12 December 2013
NBFIs Prospects: Insurers The Winner
Insurers margins still strong

We retain our stance that improved underwriting margins should mitigate the softer topline growth All insurers reported flat 3Q topline premium growth, save for Allianz Malaysia, which posted double-digit growth. This is in line with our expectation of a moderate CY13 general insurance (GI) industry premium growth. On the brighter side, the insurers reported stronger profits on improved margins and manageable claims experience, which we had expected. Note that the GI industrys FY12 underwriting margin of 12.7% was its strongest in seven years. We also expect industry players to be given tax relief following losses from the Malaysian Motor Insurance Pool (MMIP) by endCY13. Both factors will mitigate the downside to topline growth.
Stable outlook through 2014

Insurers under our coverage have a track record for achieving commendable underwriting margins We expect a stable outlook through 2014 as topline growth should pick up after the removal of uncertainties from fiscal policies and event risk (ie the election and Budget 2014) in 2013. The insurers under our coverage have a track record of achieving superior growth or commendable underwriting margins via good product mixes. Operating costs, however, will remain elevated as the GI industry is ramping up distribution channels and infrastructure to prepare for detariffication by 2016. The GI players are also trying to meet regulatory requirements in areas relating to their actuarial departments and risk-based pricing. For the life insurance (LI) industry, we see Allianz Malaysia achieving better performance in its bancassurance business. We maintain a conservative stance on its outlook as the company (and the industry) has yet to develop a firm strategy for its agency business (at 86% premium concentration), which may be impacted by BNMs 13 Nov proposals on commission limits.
Diversification away from personal financing

is underway. ACSMs growth driver appears to be its motor easy payment schemes. MBSB, on the other hand, is confident of boosting its corporate loans portfolio. Both companies had recently carried out their longanticipated capital-raising exercises
New competitive landscape

In July this year, Bank Negara Malaysia (BNM) imposed a 10-year cap on personal financing (PF) tenure (from 20-25 years) as well as tightened the debt-service ratio (DSR). Subsequently, we saw growth trends in both system loans application and PF loan approval moderate in Aug-Sept 2013, based on BNM statistics. While the data was applicable only to the commercial banking industry, the non-bank lenders under our coverage AEON Credit Service (M) (ACSM) and Malaysia Building Society (MBSB) reported similar moderation in 3QCY13 household loans growth, especially in the PF segment. Despite higher loan impairment losses, asset quality however remained intact, although portfolio seasoning remains to be seen amid rising inflation pressure. Some players are actively diversifying into other forms of PF products by offering attractive rates. ACSM appeared to find a new growth driver in its motor easy payment scheme, while MBSB is confident of boosting its corporate loans portfolio. Both companies recently carried out their long-anticipated capital raising exercises ACSM issued perpetual bonds of up to MYR800m while MBSB made a MYR1.5bn rights issues and up to MYR3bn covered sukuk. These strategies, while positive from the diversification perspective, are expected to result in net interest margin compression.
Bursa offers growth at decent valuations

Bursa Malaysia (BURSA MK, BUY, FV: MYR9.20) is a proxy and likely beneficiary of the ongoing rollout of the Economic Transformation Programme, in our view. Meanwhile, on the retail front, macro factors look positive, thanks to the countrys young growing workforce as well as high savings rate. This could be further boosted if foreign retail participation picks up following the launch of the Asean Trading Link, although we see this as a longer term positive. We think Bursa offers investors a good blend of growth and value, coupled with the possibility of further special dividends down the road.
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Insurers the winner
We have an OVERWEIGHT call on the sector, as the insurers in our coverage are generally quality insurance stocks. Our Top BUYs are Syarikat Takaful Malaysia (STMB) and Tune Ins Holdings (TIH)
As our sector is heavily-tilted towards insurers, we maintain our OVERWEIGHT recommendation in view of the sectors improving margins. For investors in search of value, we have a BUY on Syarikat Takaful Malaysia (STMB) with a MYR12.00 FV (pegged to 14.0x FY14 EPS), which we see as a value stock as it is still inexpensive relative to the sector. For investors seeking growth, we advocate a BUY on Tune Ins Holdings (TIH), with a MYR2.40 FV (pegged to 22.0x FY14 EPS). We believe the stock deserves to trade at a premium to the sector given its high earnings growth potential, fuelled by margin expansion from its travel insurance unit, expansion plans as well as opportunities to boost take-up rates. Figure 50: Claims ratios by GI segment (I)
19.9% 9.6% 20.4% 9.9%
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2002 2003 2004 Fire 2005 2006 Motor 2007 2008 2009 2010 2011 Marine, aviation, transit 72.8%
Figure 49: GI industrys key insurance indicators

100% 21.0% 80% 60% 40% 20% 12.9% 0% 2005 2006 2007 2008 2009 2010 2011 2012 6.2% 0.9% 2.2% 7.5% 55.4% 60.6% 65.7% 65.5% 61.5% 60.3% 10.2% 60.7% 9.8% 57.1% 12.6% 10.7% 21.7% 11.5% 21.9% 11.5% 22.5% 9.8% 21.3% 9.7% 20.2% 9.3%
29.9% 27.8%
2012
Underwriting margin
Net claims
Commissions
Management expenses
Source: PIAM
Source: PIAM
Figure 51: Claims ratios by GI segment (II)

100% 80% 60% 40% 20% 0% -20% -40% -60% Medical Personal Accident Bonds 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 28.9% 2.2% 55.6%
Figure 52: Claims ratios by GI segment (III)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2002 2003 2004 Engineering 2005 2006 2007 Liability 57.3%
29.7% 14.4%
2008 2009 2010 2011 2012 Workmen compensation
Source: PIAM
Source: PIAM
Figure 53: GI industry premium portfolio

100% 80% 60% 40% 20% 20.8% 0% 2005 2006 2007 2008 2009 2010 2011 2012 20.7% 20.3% 19.8% 19.7% 18.5% 17.8% 17.7% 7.3% 6.0% 3.1% 36.7% 12.5% 7.6% 12.6% 8.0% 11.6% 8.5% 10.8% 8.8% 10.9% 8.6% 11.1% 8.1% 10.8%
Figure 54: Agents still the biggest distribution driver

Oth ers 5.0%
45.7%
45.2%
45.8%
46.5%
48.2%
47.6%
48.0%
Insurance Brokers 15.0% Direct Channel 19.0%
Agents 61.0%
Fire Marine, aviation, transit Personal Accident Engineering
Motor Medical Bonds Liability
Source: PIAM
Source: PIAM
Table 26: Valuations of NBFI stocks

Price (MYR/s) 2.65 7.83 10.50 16.06 17.24 1.87 10.40 3.56 Fair Value (MYR/s) 3.40 9.20 12.00 18.10 18.70 2.40 12.00 3.25 Mkt Cap (MYRm) 4,664 4,166 1,710 2,313 3,816 1,406 1,667 759 P/E (x)
FY14 FY15 FY14
EPS GWTH (%)

FY15
P/BV (x)
FY14
P/BV (x)
FY15
ROE (%)
FY14
NDY (%)
FY14
Rec B B B B B B N S
MBSB Bursa Syarikat Takaful Aeon Credit^ LPI Capital Tune Ins Allianz MNRB^ Sector Avg
6.6 21.3 12.0 11.8 18.1 17.3 12.5 5.8 11.3
5.8 19.7 10.8 10.2 17.0 14.4 11.0 5.4 10.1
17.2 9.3 13.6 21.0 7.0 29.6 20.5 7.1 15.0
13.6 7.9 10.8 16.6 6.7 20.2 13.7 7.6 11.9
1.7 5.2 2.6 3.6 2.5 3.4 1.6 0.6
1.4 5.0 2.4 2.9 2.2 3.0 1.4 0.6
27.7 24.6 23.3 33.1 13.9 20.9 13.9 10.4
7.0 4.2 3.4 3.2 5.3 2.3 0.8 8.0
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Malaysia Strategy
12 December 2013
Oil & Gas: Small, Mid-Caps To Gain Too

Petronas to accelerate capex in CY14
Development spending falls short of planned annual capex of MYR60bn Petronas expected to accelerate capital spending from FY14 onwards
Overweight
2013 may see Malaysias national oil & gas (O&G) corporation Petroliam Nasional Berhad (Petronas) fall short of its planned annual capital expenditure (capex) of MYR60bn. We note from its recent 9MFY13 results that it has only spent an estimated MYR38.4bn YTD on various developments. The total capex incurred by Petronas domestic and international developments since 2011 amounted to MYR118.9bn, making up only 39.6% of the 5-year planned capex of MYR300bn. The shortfall was partly due to delays encountered in the MYR60bn Refinery and Petrochemicals Integrated Development (RAPID) project. These lead us to believe that Petronas may accelerate its spending from FY14 onwards in a race against the inevitable rise in operating cost. Thus, we reaffirm our positive view on the sector, with Petronas 3-pronged strategy remaining relevant in CY14 to: i) enhance oil recovery (EOR), ii) develop marginal oilfields, and iii) enlarge its resource base. The oil giant intends to deploy the EOR technology implemented at the Tapis field to 14 other fields nationwide, which could in turn lead to heightening offshore activities in CY14.
Moving up the value chain
JVs allow small- to mid-cap companies to bid for projects traditionally dominated by larger O&G players Capital extensive asset acquisitions financed via conventional borrowings may risk non-compliance of Syariah requirements
We note the growing trend among Malaysian small- to mid-cap companies in establishing joint ventures (JVs) to co-own assets. These companies usually do not have the financial muscle to take on such capital intensive acquisitions, yet are ambitious to grow their technical capabilities to move up the oil & gas value chain. We like this form of off-balance sheet financing given that it helps the small- to midcap companies to competitively bid for projects that are traditionally dominated by the bigger and financially stronger players like SapuraKencana Petroleum (SAKP MK, BUY, FV: MYR4.96), Bumi Armada (BAB MK, BUY, FV: MYR4.50) and Dialog Group (DLG MK, BUY, FV: MYR3.18).
Be selective on small- and mid-cap stocks
We like stocks with domestic and international exposure
We like companies with both domestic and international exposure. Having international exposure helps to soften the impact of possibly another year of lower than expected spending by Petronas. We note some slowdown in works performed under contracts from Petronas to several small- to mid-cap companies from the recently concluded 3QCY13 results season. So long as the crude oil price remains above the USD80/barrel threshold, we see no risk of Petronas significantly holding back on spending. We are keeping our view that crude oil price will likely trade between the USD95-105 per barrel (bbl) range in CY14, supported by geopolitical challenges in the Middle East and Africa, and strong demand from Asia, especially China, given the regions growing population and increasing purchasing power among its middle class. We also believe that the small- to mid-cap stocks are poised to garner more contracts from the increasingly cost-conscious Petronas. Meanwhile, the larger O&G players like SAKP and BAB are likely to redirect their resources to bid for more lucrative international projects.
Our Top Picks
Our Top Picks are Bumi Armada, Dayang Enterprise, Perisai Petroleum Teknologi and Daya Materials
Our top pick for the big-cap space is BAB. After falling short on expectations on the contract front during the year, the group managed to end CY13 on a higher note by clinching a milestone contract the provision of its first floating production, storage and offloading (FPSO) vessel in the North Sea. Leveraging on its current partnership with LukOil which has a presence in the African region, we believe BAB is more interested in pursuing international projects. Dayang Enterprise (DEHB MK, BUY, FV: MYR6.72) is our preferred mid-cap stock, being one of the prime beneficiaries of the Pan-Malaysian topside major maintenance/hook-up construction & commissioning (TMM/HuCC) contracts awarded throughout CY2013. The MYR4.2bn worth of contracts are long term in nature, giving DEHB five years of earnings visibility.
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Malaysia Strategy
12 December 2013
Perisai Petroleum Teknologi (PPT MK, BUY, FV: MYR1.62) and Daya Materials (DAYA MK, BUY, FV: MYR0.42) are our top picks in the small-cap space. After being dealt a double blow by the expiry of contracts in CY13, we look forward to PPT making a fresh start in FY14, especially with the delivery of its first jack-up (JU) drilling rig next year and its second unit in the following year. We hold the view that PPT would be able to secure rig charters upon taking delivery of its rigs. Meanwhile, Daya plans to expand its fleet while its prospects of clinching more overseas charter contracts remain exciting. Despite its current focus on international subsea charter contracts, the company is still interested in bidding for Malaysian projects. Figure 55: Petronas annual planned and spent capex
70.0 60.0 50.0 40.0 30.0 20.0 10.0 CY11 Capex spent, MYR bn CY12 YTD13 41.0 45.6 38.4 19.0 14.4 21.6
Shortf all f rom planned capex, MYR bn
Source: Petronas, RHB estimates
Table 25: Petronas capital expenditure

CY11 MYR bn Total capex Annual planned capex Utilised Malaysia Proportion to total capex International Proportion to total capex 41 60 68% 41 100% 0 0% 45.6 60.0 76% 31.7 70% 13.9 30% 7.9 75% 2.6 25% 8.4 71% 3.4 29% 9.2 57% 6.9 43% CY12 1QCY13 10.5 CY13 2QCY13 11.8 3QCY13 16.1 YTD 38.4 60 64% 25.5 66% 12.9 34%
Source: Petronas, RHB estimates
Table 27: Valuations of oil & gas stocks

Price (MYR/s) 3.05 5.35 4.38 1.47 1.51 3.29 3.90 2.94 0.38 1.66 6.70 23.06 1.41 3.70 2.15 Fair Value (MYR/s) 3.18 6.72 4.96 1.62 2.25 3.77 4.50 3.55 0.42 1.56 6.48 22.10 1.80 3.80 2.45 Mkt Cap (MYRm) 7,339 2,943 26,246 1,590 1,189 1,590 11,424 624 497 1,286 53,600 45,630 698 5,920 692 P/E (x) FY14 FY15 33.3 26.7 11.9 11.6 20.0 17.6 16.3 9.4 9.7 8.6 10.5 9.8 19.4 16.2 8.3 7.0 13.6 13.1 13.5 11.3 14.5 14.3 28.4 26.8 10.1 8.6 21.4 18.4 13.9 10.1 17.3 17.3 EPS GWTH (%) FY14 FY15 24.2 25.0 91.6 2.7 49.3 13.5 26.4 72.8 38.2 12.4 10.1 6.8 27.3 19.8 16.4 18.1 64.0 3.4 +>100 19.8 1.6 1.4 6.8 5.9 81.5 18.2 34.8 16.1 +>100 38.3 10.8 0.4 P/BV (x) FY14 5.1 3.7 2.2 2.8 1.6 1.5 2.5 1.4 1.8 1.2 2.2 4.6 1.3 2.2 1.3 P/CF (x) FY14 n.m 17.2 10.9 192.3 n.m n.m 250.2 10.7 8.1 15.0 12.1 29.4 29.5 18.8 6.2 ROE (%) FY14 17.3 33.5 12.5 17.9 15.4 126.2 13.6 18.0 13.7 9.1 16.1 16.7 13.6 10.6 9.9 NDY (%) FY14 1.3 4.2 0.0 0.0 0.2 0.0 1.1 3.0 1.0 0.0 3.5 2.5 2.4 2.7 1.4
Dialog Dayang SKP^ Perisai Petroleum Alam Maritim Coastal Contract Bumi Armada Favelle Favco Daya Materials Wah Seong Petronas Chemical P Gas Perdana Petroleum MMHE Petra Energy Sector Avg
Rec B B B B B B B B B N N N N N N
53
Malaysia Strategy
12 December 2013
Plantations: Set For Stronger Earnings

Upgrade Plantation sector to Overweight
Overweight
CPO prices to head higher to average MYR2,700 per tonne in CY14
We upgrade the Malaysian plantation sector to Overweight from Neutral previously as earnings outlook brighten after two years of contraction. Our CPO price assumption for CY14 and CY15 is raised to MYR2,700 and MYR2,900 per tonne respectively from MYR2,600 previously. This is on the back of: 1. 2. 3. 4. Stronger global economy, which means food demand will continue to grow; Indonesias production growth will be lacklustre due to the double impact of dry weather in 2012 and 2013; Mandatory biodiesel implementation at the worlds two biggest palm oil producing countries; and Production cost to remain flattish to lower due to significantly cheaper fertilisers following the potash cartel breakup in mid-2013.
Stocks upgraded to BUYs

Following the upgrade in CPO price, we are upgrading IOI Corp, Kulim and TSH Resources to BUY from Neutral previously. Other Buy calls in the sector are Sime, FGV, SOP and CBIP.
Food demand continues to grow
Stronger global economy limits demand downside
With the global economy on a firmer footing, there should be no faltering in demand from the food sector. 2014 could see palm oil regaining lost market share in China as a result of the governments austerity drive. The austerity measures have hurt the restaurant business, which is a heavy user of palm oil.
Good year ahead for Malaysian plantations
Malaysian plantation to enjoy higher production and higher price next year
Unlike their Indonesian counterparts, Malaysian plantations will enjoy a good 2014 as they benefit from higher CPO prices as well stronger production as rainfall in Malaysia has been relatively normal compared with shortfalls in most parts of Indonesia last year and in 2012. Much of the strength in CPO price will be visible in 1H as Indonesias production struggles. We do not rule out the possibility of the CPO price strength extending into 3Q as certain parts of Indonesia experienced dryness up to October this year.
Biodiesel push
Palm oil biodiesel is attracting its strongest ever mandatory usage
Malaysia is raising its mandatory biodiesel blend to 7% from 5% currently as early as December while Indonesia is pushing for 3m tonnes of biodiesel (B100) consumption next year. We believe the move by the governments of the worlds two biggest biodiesel producing countries will have a significant impact on palm oil demand. Note that never before has palm biodiesel received such a strong mandate. Assuming Indonesia uses up 2m tonnes of CPO for biodiesel production (vs the target of 3m tonnes), export grows by 5% and Indonesias production goes up by 2m tonnes, the stock/usage ratio will fall to 8% (vs 13% at end-2013) - its lowest since 2009. Such a low stock/usage ratio is likely to result in CPO maintaining a very narrow discount against soybean oil.
Cheaper fertiliser a boon for sector

With the weaker fertiliser demand and the breakup of the potash cartel, fertiliser prices are going to be cheaper in 2014. In USD terms, composite fertiliser cost is 23% cheaper vs Oct 2012 when plantation companies locked in their 1HCY12 requirements. Some 45% of the decline in fertiliser price was due to ammonia and 39% to potash. With the higher production and lower fertiliser prices come 2014, plantation companies could enjoy lower unit cost of production, and in turn, margin expansion. In the worst-case scenario, cost of production will remain flat compared to multiple years of rising cost of production.
Risks
Major risks for the sector: i) slower than expected implementation of mandatory biodiesel, particularly due to pricing of biodiesel to Pertamina, Indonesias national oil company. We believe that hiccups such as these are not unexpected but should not derail the programme, ii) a significant decline in crude oil price, which could negatively affect CPO demand for energy purposes.
See important disclosures at the end of this report 54
Malaysia Strategy
12 December 2013
Figure 56: Composite fertiliser cost fell 23% since Oct 12
Figure 57: Indonesia's stock/usage ratio to fall to its lowest since '09
18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
900 800 700 600 500 400 300 200 100 0
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
SOA
MOP
RP
Composite cost (FOB)
Jan-13
Jul-13
Indonesia's palm oil stock/usage ratio

Source: Oil World, RHB estimates
Source: Indexmundi, RHB estimates
Figure 58: Indonesias 2014 production to suffer from insufficient rainfall in 2012 and 2013
Figure 59: Palm oil vs energy benchmarks (USD per barrel)

195 175 155 135 115 95 75 Jul-11
Nov-11 Gasoil
Mar-12 CPO
Jul-12
Nov-12 Brent crude
Mar-13
Jul-13
Nov-13
Biodiesel, SEA
Source: Ganling
Table 28: Valuations Of plantations stocks

Price (MYR/s) CBIP Sime Darby FGV IOI Corp SOP KLK TSH TDM Kulim Genting Plantation TH Plantation IJMP^ Sector Avg 3.17 9.53 4.55 5.90 6.34 24.40 2.94 0.97 3.50 10.98 1.86 3.48 Target (MYR/s) 3.88 10.85 5.20 6.50 7.12 24.40 2.28 1.04 3.53 10.95 1.26 2.80 Mkt Cap (MYR/m) 872 57,271 16,599 37,921 2,841 26,047 2,453 1,430 4,396 8,332 1,632 2,845 PER (x)
FY14 FY15
EPS GWTH (%)

FY14 FY15
P/BV (x)
FY14
P/CF (x)
FY14
ROE (%)
FY14
NDY (%)
FY14
Rec B B B B B N N N N N S S
9.8 18.2 23.0 19.5 14.2 21.1 16.6 15.5 17.9 23.2 23.7 17.8 19.2
8.9 14.5 20.0 17.1 10.7 15.7 14.0 12.4 19.2 17.1 16.6 14.2 15.7
4.7 (4.4) 9.3 11.8 70.2 35.9 51.3 +>100 56.6 38.4 97.8 77.9 12.4
9.2 25.1 15.1 14.2 32.8 34.2 18.6 24.8 (7.1) 35.7 43.0 25.5 22.2
1.4 2.0 2.4 2.6 1.8 3.2 2.3 1.0 3.5 2.2 1.4 1.9
8.3 12.2 18.2 17.1 10.6 18.1 17.0 11.5 9.5 18.9 9.9 13.9
15.2 11.3 10.9 13.7 5.8 15.8 13.8 6.9 5.8 9.7 5.9 10.8
3.2 2.9 2.2 2.6 1.0 2.7 1.0 2.5 1.4 1.3 1.6 2.7
55
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12 December 2013
Property: Back To Basics
Actual impact to be felt soon
Neutral
Cooling measures to come into effect in Jan 2014
We maintain our NEUTRAL stance on the property sector. While valuations are getting undemanding, positive catalysts are lacking over the near term. The impact of recent regulatory measures such as the new real property gains tax (RPGT) regime, a higher minimum price restriction for foreigners, and the abolishment of interest capitalisation schemes (or developer interest-bearing scheme (DIBS)), will start to be felt from Jan 2014. Some states such as Johor and Penang have also imposed additional tightening measures, such as the 2% and 3% levy on foreigners effective from 1 May 2014 and 1 Feb 2014 respectively. Given this scenario, we believe investors will need to monitor the severity of the combined measures in the physical property market.
Sales growth had been lethargic in the run-up to Budget 2014
Sales growth to slow in 2014

Prior to the announcement of Budget 2014, buyers had held back their purchases while some developers had delayed their launches. As a result, the property sales momentum started to taper off in 2Q13. This slowdown was even more evident from the recent 3Q results. Based on the numbers from the nine developers under our coverage, combined sales fell 13% q-o-q in 3Q13. Sentiment was dented by the punitive measures proposed in Budget 2014 that would be implemented next year, while rising inflationary pressure will dampen demand for big-ticket items in the near term. As expected, some developers planned to delay their product launches in 4Q13 given the weak demand. Hence, overall industry sales growth is expected to slow in 2014 as transaction volume declines. Thus far, Glomac is the first developer to have cut its property sales target. Going into 2014, we believe other developers will also announce more conservative sales target next year. As developers can no longer package discounts and incentives into their products, they would have to resort to more aggressive marketing campaigns and offer better product furnishings to attract buyers. These are expected to eat into margins given that all cost components building materials and labour remain steady.
Figure 60: New property sales growth slowing down
Note: We assume MYR2bn sales for SP Setia in 4QFY13 (Aug-Oct 2013), as sales data for Oct have yet to be announced. Source: Company, RHB estimates
Sectors potential catalysts to come from infrastructure projects
Potential sector catalysts

Without interest absorption schemes, developers will have to go back to basics, ie location. Properties in good location with amenities such as medical centre, schools, shopping malls and mature areas will continue to be in demand. Bandar Sunway, Puchong, and Bukit Jalil are among the established areas, while Kajang/Bangi/Semenyih, Canal City/Kemuning/Shah Alam are the new growth areas
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12 December 2013
in the Klang Valley. Also, the demand for affordable housing will be more sustainable due to affordability reasons. In the medium term, we believe the sectors potential re-rating catalysts would still be the major upcoming infrastructure projects. These include the MRT Lines 2 & 3 and the high-speed rail project, with the spillover to the property market expected to be similar to that from MRT Line 1. We expect more news to flow possibly after 1Q14. Meanwhile, although outlook for the Iskandar property market is becoming more challenging, sentiment and demand could be revived once Ascendas-UEMS kicks off its industrial development project at Gerbang Nusajaya, as this project will be an indication of SMEs actual relocation from Singapore, as well as the creation of new job opportunities.
Maintain positive view on Penang

Positive on Penang The news flow from Penang is expected to be strong next year. While 1Q14 will see the official opening of the Penang Second Bridge, the state government will likely announce the tender for the international golf course and theme park projects at Batu Kawan sometime in mid-2014. We also expect E&O to receive approval for its Seri Tanjung Pinang 2 project in 2Q/3Q14. The state-initiated Batu Kawan developments will continue to draw foreign investments to its industrial, commercial, education and retail segments. The growth prospects are expected to attract more landbanking by the big developers, which may set a new benchmark pricing. Ecoworld and IJMLD, which have acquired some land parcels in Seberang Perai Selatan this year, are likely to acquire more. Mah Sing has recently bought and other players are expected to follow suit. Given the still-decent property prices, the real estate value of properties in the mainland may be in for another re-rating.
Key risks
Another round of QE, which will pump more liquidity into the market. We think the chances of this happening are minimal.
Maintain Neutral sector rating; selective Maintain NEUTRAL in stock picks We maintain our NEUTRAL sector rating. While valuations are still undemanding, the sector lacks near-term catalysts. More regulatory measures are unlikely, but developers will have to endure 1-2 quarters of slow property sales before seeing a recovery. We are selective in our stock picks. We continue to like affordable housing players such as Tambun Indah and Hua Yang, as these companies can better withstand the headwinds given their product offerings. We also like IJMLDs diversified product exposure. On the other hand, despite its cheap valuations, we remain cautious on UEMS as the stock could be dropped from the FBM KLCI 30 in the mid-year review that will be announced on 12 Dec.
Table 29: Valuations Of property stocks

Price (MYR/s)
Sunway IJM Land^ Hua Yang^ Tambun Indah E&O^ Glomac^ UOA Dev Paramount UEM Sunrise SP Setia Mah Sing Sector Avg ^ FY14-15 valuations refer to those of FY15-16 2.66 2.70 2.05 1.39 1.92 1.09 1.99 1.53 2.30 2.92 2.17
Target (MYR/s)
3.55 3.70 2.76 2.05 2.70 1.36 2.45 1.71 2.73 3.54 2.42
Mkt Cap (MYR/m)

4,011 3,794 541 466 2,180 648 2,529 517 10,310 6,719 2,361
PER (x)
FY14 10.1 10.2 4.7 5.9 13.4 4.8 7.1 8.2 16.4 13.4 7.8 10.2 FY15 8.6 8.9 5.2 4.9 11.3 4.2 5.4 6.5 14.1 11.3 6.6 8.6
EPS GWTH (%)

FY14 3.7 22.3 2.5 29.5 21.4 17.8 11.8 12.1 7.5 16.6 8.9 13.1 FY15 17.0 14.8 (9.6) 21.5 18.4 15.1 31.0 25.0 16.1 18.9 18.0 16.7
P/BV (x)
FY14 1.1 1.2 1.1 1.7 1.4 0.7 1.0 0.7 1.5 1.4 1.5
P/CF (x)
FY14 14.0 11.9 4.6 9.7 17.2 7.4 16.1 4.7 41.9 26.6 55.1
ROE (%)
FY14 11.3 12.2 26.0 16.4 10.5 15.4 15.3 8.5 9.8 11.0 21.4
NDY (%)
FY14 3.0 1.7 6.4 5.6 1.5 5.8 7.0 5.9 1.7 4.1 4.5
Rec
B B B B TB TB N N N N N
57
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12 December 2013
Property MREITs: Tread With Caution

Aggressive acquisitions unlikely
Underweight
Less aggressive asset acquisition activities

going forward
We believe that growth will remain muted for the MREITs going into 2014. Acquisition activities moving forward will likely be less aggressive compared to the previous years. This is mainly because yield-accretive assets are getting more difficult to come by, as the steady rise in property prices continues to compress yields. Furthermore, as the sale of commercial assets will also be subject to a 6% goods and services tax (GST) effective from April 2015, this could result in further downward pressure on asset yields (due to higher effective asset prices). It is still uncertain whether the REITs can claim this additional expense as input tax credit post-acquisitions. In addition, an interest rate hike seems inevitable going forward, further affecting future acquisitions. The sector is highly sensitive to any interest rate movement as borrowing costs typically account for more than 50% of total trust expenses for REITs. New assets could be purely funded through debt, although most acquisitions are typically done through a mix of debt-equity funding to ensure that the REITs gearing stays below the 0.5x gearing cap set by the Securities Commission. As such, these factors could put off some REITs from acquiring new assets.
Kuala Lumpur-based REITs could suffer
DBKLs assessment rate hike could hurt

earnings of KL-based REITs
Various reports have stated that the Kuala Lumpur City Hall (DBKL) has proposed to increase the annual value of properties (on which the assessment is based) by about 200-300%. The official DBKL assessment rate of commercial assets is now based on 12% of their total annual rental. This could potentially have an adverse impact on REITs with large exposure to assets located in the Kuala Lumpur (KL) city centre. KL-focused REITs such as KLCC Stapled Group (KLCCSS MK, NEUTRAL, FV: MYR7.00), Pavilion REIT (PREIT MK, NEUTRAL, FV: MYR1.50) and IGB REIT (IGBREIT MK, NEUTRAL, FV: MYR1.31) are likely to be the most affected given that all of their assets are located in KL city centre. The MREITs have yet to indicate whether they will bear the extra cost or fully pass it on to their tenants, pending DBKLs final verdict on the issue in March 2014. Based on our sensitivity analysis, in the absence of mitigating factors (in the event that a REIT has to bear all of the extra expenses), we estimate that Pavilion REIT and IGB REIT could potentially see their earnings declining by about 4-15% in FY14. KLCCSS faces the highest risk exposure given that it has signed long-term fixed triple net lease agreements for assets such as the Petronas Twin Towers and Menara 3 Petronas, on top of the fact that all its assets are located in central KL. At this juncture, we are keeping our earnings forecasts for these REITs unchanged until DBKL announces its final decision on the matter. We caution that any substantial hike could dent the REITs future earnings prospects.
Table 30: Potential impact on Pavilion REIT's FY14 net profit

% of increase in assessment rate 100% 200% 300%
Table 31: Potential impact on IGB REIT's FY14 net profit
Decline in net profit (%) (3.90) (7.87) (11.85)
% of increase in assessment rate 100% 200% 300%

Decline in net profit (%) (4.93) (9.90) (14.88)
Asset enhancement initiatives (AEI) key to growth?
Asset enhancement could start to bear fruit in

2014, although earnings upside is likely to be seen only from 2HCY14 onwards
In 2014, we are likely to see the AEIs that have been announced by the REITs starting to bear fruit or nearing completion. The REITs that have announced major AEI works over the past 12 months include Sunway REIT (SREIT MK, NEUTRAL, FV: MYR1.47), Axis REIT (AXRB MK, SELL, FV: MYR3.24), CMMT (CMMT MK, SELL, FV: MYR1.47), and Hektar REIT (HEKT MK, NEUTRAL, FV: MYR1.46). Of these, Sunway REIT will be undergoing the most extensive AEI and is expected to spend a total of MYR460m over a 22-month period on the overhaul of Sunway Putra Place. However, this AEI is only expected to be fully completed in 1QCY15, although some phases like the refurbishment of the lobby areas for Sunway Putra Tower and Sunway Putra Hotel will be completed earlier. For the other REITs, as their AEIs will likely be completed by mid-2014, any earnings upside from the AEIs will only start to kick in from 3QCY14 onwards.
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Resilient consumer spending to underpin retail segment
Consumer
spending to remain resilient, although subsidy rationalisation measures and uncertainties from GST could have an impact on consumer sentiment
Although consumer sentiment could be somewhat dented over the short term given the fuel price and electricity tariff hikes, RHBRIs economics team expects consumer spending to remain resilient in 2014, underpinned by high savings, rising consumerism and a stable job market. Furthermore, the bracket for 1Malaysia People's Aid (BR1M) recipients have been widened to include households earning MYR3,0004,000 per month (previously limited to households earning MYR3,000 and below). With regard to the GST, the direct impact on the REITs remain uncertain for now given that it will only be implemented in 2015. Most MREIT managers are of the view that the tax will likely be incorporated into rental rates. However, tenants will be able to claim GST as input tax credit.
Commercial and hospitality segments to still see weaker growth
Oversupply in office space continues to be an

issue
According to the National Property Information Centre (NAPIC), as at 3QCY13, total private office space in KL and Selangor stands at 76.6m sq ft and 29.7m sq ft respectively. Total incoming supply of private office space in KL and Selangor is estimated at 13.6m sq ft and 4.0m sq ft respectively, which will increase total office space by about 13-18% over the next few years. The influx of new office space into the market will continue to limit rental growth as the REITs struggle to retain their tenants. Meanwhile, the hospitality segment will also continue to have a challenging outlook ahead, as some hotels have started to see a decline in both tourism and corporate businesses due to increasing competition from new hotels. Figure 61: Breakdown of private office space in Kuala Lumpur and Selangor
Source: National Property Information Centre (NAPIC), RHB estimates
Maintain UNDERWEIGHT
No
short-term UNDERWEIGHT
catalysts.
Maintain
We think that the sector will continue to underperform the market going into 1H2014. Unexciting earnings growth, the lack of re-rating catalysts, as well as risks of higher expenses for the KL-based REITs could dent investor sentiment towards the sector.
Table 32: Valuations of property MREITs stocks

Price (MYR/s) Pavilion REIT KLCC IGB REIT Hektar REIT Sunway REIT Axis REIT Quil Capita CMMT Sector Avg 1.30 5.85 1.21 1.53 1.25 3.19 1.19 1.41 Target (MYR/s) 1.50 7.00 1.31 1.46 1.47 3.24 1.10 1.35 Mkt Cap (MYR/m)
FY14
PER (x)
FY15
EPS GWTH (%)

FY14 FY15
P/B (x)
FY14
P/CF (x)
FY14
ROE (%)
FY14
NDY (%)
FY14
Rec
3,909 8,013 4,122 613 3,475 1,456 464 2,493
17.5 16.9 19.3 12.7 15.9 16.9 12.8 16.3 15.2
16.6 17.0 18.3 12.3 14.6 16.6 12.6 15.5 14.7
5.5 (13.9) 7.6 4.2 0.2 1.8 2.6 5.3 3.9
5.3 (0.0) 5.6 3.6 8.3 2.0 1.0 5.3 3.4
1.2 0.9 1.2 1.0 1.0 1.3 0.9 1.2
14.5 9.7 14.9 9.3 11.5 10.9 2.7 12.2
6.8 5.6 6.2 8.0 6.6 7.8 6.8 7.2
5.4 5.3 5.4 6.4 6.0 5.3 6.5 5.9
N N N N N S S S
59
Malaysia Strategy
12 December 2013
Rubber Gloves: Buoyant Outlook Ahead
The operating environment remains favourable for the rubber glove makers
Overweight
Optimistic on rubber gloves

We maintain our optimistic view on the rubber gloves sector as the operating environment continues to turn in favor of the glove manufacturers given the: i) stabilising of raw material prices on the back of increasing supply from Thailand and Cambodia, ii) muted impact from the electricity hike as well as the impending gas price hike, and iii) continuing resilience in rubber gloves demand. Our Top Pick for the sector is Kossan (BUY, FV: MYR4.13), on which we remain positive as we find Kossans valuations still attractive given that it is only trading at a 12.1x FY14F P/E, which is at discounts of 22.0% and 40.4% to market leaders Top Gloves 15.5x and Hartalegas 20.3x respectively.
A brewing H7N9 epidemic?
An outbreak of the H7N9 virus may potentially spark a surge in demand for rubber examination gloves
According to the World Health Organisation (WHO), reports of human infection from the H7N9 bird flu virus surfaced in Shanghai in March this year. To date, the number of confirmed cases has reached 139, including 49 deaths. Recently, cases of the virus reemerged in Hong Kong, which we believe could further drive home the importance of hygiene worldwide and potentially cause a surge in demand for rubber examination gloves. So far, although the H7N9 virus is only known to be transmitted from animal to human, WHO has expressed concern that the virus could spark a global healthcare threat should it mutate into a form that can be transmitted from one person to another.
Muted impact from electricity hike on rubber glove manufacturers
Hushed impact from electricity hike

On 2 Dec, the Malaysian Government announced that it is raising electricity tariffs by 16.85% for industrial consumers such as glove manufacturers to 38.5 sen/kWh from 33.5 sen/kWh effective from 1 Jan 2014. We believe that the impact of this hike on the rubber glove players will be nominal as electricity cost only makes up 2-3% of its total production costs, which we believe can easily be passed on to customers.
The potential hike in gas prices will have a nominal impact on the rubber glove manufacturers
Spectre of gas price hike looms over 2014

Given the Malaysian Governments intention to rationalise subsidies via petrol price and electricity tariff hikes, we believe that glove manufacturers are in for a gas price increase given that the last revision was implemented in June 2011. That year, gas price was raised to MYR13.7/mmbtu (million metric British thermal units) from MYR10.70/mmbtu, which was supposed to be followed by a gradual increase of MYR3.00/mmbtu every six months thereafter until it reaches market parity. Even so, we opine that the impact of higher gas prices on earnings will be nominal as it only comprises 5-6% of total production cost, and can easily be passed on to customers. Furthermore, glove manufacturers can minimise or mitigate the impact by using biomass as an alternative to natural gas.
Demand for rubber gloves to remain robust, stemming mostly from nitrilebased gloves, followed by natural rubber gloves.
Nitrile demand to remain robust

We expect the overall demand for rubber gloves to remain robust and resilient and grow at 8-10% annually over the coming few years, mostly driven by nitrile-based gloves. Our channel checks indicate that this segment is growing at 20% annually. With demand shifting significantly to nitrile-based gloves, most of the glove manufacturers have responded by ramping up their nitrile production capacity. Top Glove intends to expand its annual production to 47.9bn pieces (from 41.9bn pieces) by April 2014 while Hartalegas NGC would lift its overall output to 43.0bn pieces by 2020. At the same time, Kossan is boosting capacity to 22.0bn pieces by May 2014 while Supermax is doubling its nitrile capacity to 12.3bn pieces by end-2014. Based on the capacity expansion plans for nitrile, we estimate that nitrile capacity will grow 14.0% in FY14. That said, we also anticipate demand for natural rubber (NR) gloves to remain resilient and register positive sales growth as the prices of raw materials ease.
Raw material prices stabilise

Moving into 1QFY14, we anticipate NR prices will remain within the MYR5.00MYR5.50 per kg band on the back of increasing supply from Thailand, Cambodia and Vietnam amid lower demand for NR on a relatively weak global economy. We believe that this will ensure a steady operating environment and help glove manufacturers to generate stable margins in 2014.
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Retaining OVERWEIGHT call
We retain our OVERWEIGHT stance
In view of the favorable market conditions for glove makers, we maintain our OVERWEIGHT call on the sector. We have BUY recommendations for Kossan and Supermax (SUCB MK, FV: MYR3.01) and NEUTRAL calls on Top Glove (TOPG MK, FV: MYR6.34) and Hartalega (HART MK, FV: MYR7.95).
Figure 62: Monthly USD/MYR price movement
Figure 63: Monthly latex price movement (MYR sen/kg)

1200
3.9 3.7 3.5 3.3 3.1 400 2.9 2.7 2.5 200 0 1000 800 600
Source: Bloomberg
Source: Malaysian Rubber Board
Table 33: Valuations of rubber glove stocks

Price (MYR/s) Kossan Supermax Top Glove Hartalega^ Sector Avg 3.73 2.69 5.77 7.27 Target (MYR/s) 4.13 3.01 6.34 7.95 Mkt Cap (MYR/m) 1,789 1,784 3,569 5,314 PER (x)
FY14 FY15
EPS GWTH (%)

FY14 FY15
P/BV (x)
FY14
P/CF (x)
FY14
ROE (%)
FY14
NDY (%)
FY14
Rec
13.8 10.7 15.5 18.3 14.1
11.9 10.1 14.5 16.1 13.1
(19.5) 15.2 17.7 7.0 4.5
(15.9) 6.0 6.7 13.8 7.9
3.0 1.7 2.4 4.9
12.1 15.6 9.4 16.4
19.3 16.8 18.1 29.1
3.9 2.8 3.5 2.5
B B N N
61
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Shipping: Tale Of Two Cities
2014 is poised to be a better year for overall freight rates as both demand and supply will be more balanced. Clarksons Research expects both demand and supply to grow 5% in 2014.
Neutral
Dry bulk shipping: 2014 supply/demand to be more balanced

The BDI bounced back to the 2145 peak reached in early October owing to improved activities and volume, largely driven by the rise capesize vessel rates as Chinas iron ore appetite returned. We note that this is a seasonal trend and expect the BDI to trend lower at the time of writing and drop back to the 1700 bottom sometime endDecember or early January as the Chinese New Year approaches. The 6% supply growth in total capacity tonnage of dry bulk vessels this year is expected to marginally exceed the 5% growth in tonnage demand. 2014 is poised to be a better year for overall freight rates as both demand and supply will be more balanced. Clarksons Research expects both demand and supply to grow 5% in 2014. While the macro landscape has improved with a recovery in dry bulk freight rates within sight, we prefer to accumulate on dry bulk stocks in early January on anticipation of freight rates pulling back in the near term before inching higher from mid-January 2014 onwards. Overall, we expect a 20% lift in average freight rates in FY14.
Figure 64: Baltic Dry indices

6000 5000 4000 3000 2000 1000 0
Source: Bloomberg
Figure 65: Vessel fleet status bulk carrier total percentage orderbook by DWT (%)
80 70 60 50 40 30 20 10 0
Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Simpson Spence Young SSY 5 year old handysize / supramax vessel price Simpson Spence Young SSY Newbuild price Japan handymax / supramax vessel
Source: Bloomberg
Source: Bloomberg
Jan-13
Jul-13
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13
Baltic Dry Index Baltic Supramax Index Baltic Capesize Index Baltic Handysize Index Baltic Panamax Index
Figure 66: Movement of newbuild and 5-year-old vessel prices (USDm)

80 70 60 50 40 30 20 10 0
62
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12 December 2013
As the orderbook is now at the lowest level in several years and most companies are unable to cover their operating cost at current rates, it is likely that rates for petroleum tanker shipping have hit bottom.
Tanker shipping: Volatility to persist

Tanker rates remain volatile, with no clear indications of recovering in the near term as overall demand for oil continues to remain weak amid an oversupply of tankers. The daily earnings of very large crude carriers (VLCCs) showed a seasonal rebound at the start of September due to improved demand emanating from activities in the Far East, as long haul voyages to some extent mitigated the oversupply of tonnage. Aframax tankers, in which MISC (MISC MK, BUY, FV: MYR6.09) has significant exposure, continue to face oversupply as demand for these ships in the Gulf of Mexico remains weak, no thanks to the discovery of the cheaper shale gas, which has made the US less dependent on oil, and in turn led to a drop in oil imports to the country. Meanwhile, chemical tankers in Europe are still hit by surplus tonnage despite some activities on the Transatlantic Westbound route. As the orderbook is now at the lowest level in several years and most companies are unable to cover their operating cost at current rates, it is likely that rates have hit bottom. Wood Mackenzie expects Chinas oil imports to surpass the US in 2017, and be the key driver of a recovery in tanker shipping rates by 2015 given that the longer distance from the Atlantic to China will absorb the excess capacity. For 2014, volatility in the tanker shipping rates is expected to persist. Figure 68: VLCC and Aframax vessel prices has yet to show any signs of a firm recovery in sight in 2014
180 160 140 120 100 80 60 40 20 0
Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Figure 67: The Baltic Dirty Tanker Index still continues to be volatile trading at range bound level
2500
2000
1500
1000
500
0
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 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13
Simpson Spence Young SSY 10 year old aframax vessel price Simpson Spence Young SSY 10 year old VLCC vessel price Simpson Spence Young SSY Newbuild price south korea VLCC vessel
Source: Bloomberg
Source: Bloomberg
The shipping sector remains a NEUTRAL. MISC is our top pick
Stay NEUTRAL on shipping, MISC offers value

The shipping sector remains a NEUTRAL. We are NEUTRAL on MBC as we feel that expectations of a recovery in earnings have largely been priced in. MISC remains our Top Pick in the Malaysian shipping space despite the increasingly challenging landscape for tankers. Our investment thesis on MISC is centred on its diversified business portfolio. As its other business units, excluding the heavy engineering division, are still reporting earnings growth, this could well cushion the losses suffered by its petroleum and chemical shipping business. Furthermore, we are of the view that there is still value in its liquefied natural gas (LNG) segment even though its parent company, Petronas, has said that it will be acquiring its own LNG fleet. In our opinion, such a move signals the possibility of a second attempt by the national oil company to take its 63%-owned subsidiary private.
Table 34: Valuations of shipping stocks

Price (MYR/s) MISC (USD) Maybulk Sector Avg 5.39 1.79 Target (MYR/s) 6.09 1.75 Mkt Cap (MYR/m) 24,059 1,790 PER (x)
FY14 FY15
EPS GWTH (%)

FY14 FY15
P/BV (x)
FY14
P/CF (x)
FY14
ROE (%)
FY14
NDY (%)
FY14
Jan-13
Jul-13
Rec
13.3 27.0 13.8
10.1 16.9 10.4
23.0 +>100 24.9
31.2 59.6 32.2
1.1 1.0
5.0 26.3
8.3 3.8
2.8 1.7
B N
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12 December 2013
Technology: Negatives Mostly Priced In
Recent statistics point north but we are erring on the side of caution as sector visibility remains poor
Neutral
The worst may be over for semiconductor players

We are turning more optimistic on the semiconductor sector as recent industry statistics continue to be encouraging. In September, global chip sales accelerated 9% y-o-y, marking the fifth consecutive month of positive growth. However, on a YTD basis, sales grew 3% y-o-y, in line with World Semiconductor Trade Statistics (WSTS) FY13 forecast of 2.1%. For FY14, the organisation is projecting worldwide semiconductor sales to grow at a quicker pace of 5.1%. On the other hand, in the semiconductor equipment space, the industrys September book-to-bill ratio was a tad below parity at 0.97x, but still considered resilient nevertheless billings declined by 12% y-o-y, whereas bookings advanced by 9% y-o-y. With global chip sales staying above positive growth territory for the past five months, we think this could be the beginning of a structural recovery. That said, sector visibility remains short and thus, we prefer to be cautious on the industrys mediumto longer-term outlook. We believe semiconductor companies bottomline growth will largely depend on their product mixes and strategies going forward.
Sales of small screen devices gained pace at the expense of the PC market. That said, the latter is not over the hill but just temporarily lost its popularity
Small screen devices continue to dominate

The smartphone and tablet (S&T) industry continued to flourish in 9M13 on the back of strong consumer demand. However, this was at the expense of the mature personal computer (PC) market, which saw dwindling global sales. In 9M13, global shipments for PCs contracted by 10% while smartphone sales rose 45% y-o-y. Given tepid demand for big screen devices, the hard disk drive (HDD) sector was negatively impacted, as about 65% of HDD shipments are for the PC space. Nevertheless, the slowdown (9M13 HDD shipment: -8% y-o-y) was partially neutralised by robust growth in the enterprise division (9M shipment: +18% y-o-y), buoyed by demand for bulk data storage equipment along with its affordability. We think the low consumer appetite to replace ageing notebooks and desktops will continue to suppress PC market growth, which should put a soft patch on the HDD industry as well. We expect small screen devices to continue dominating the electronic gadget scene and remain consumers preferred choice. That said, we believe the PC industry is not over the hill, but just temporarily lost its popularity. Furthermore, aging PCs will have to be replaced one day and S&T cannot replicate the workplace utility of a big screen.
Smartphones with sophisticated built-in cameras are taking a toll on dedicated photographic devices
Cameras lose their shine

The camera market remained sluggish with no signs of improvement. In September, shipments of cameras with interchangeable lens (CIL) and related products fell by 9% while YTD shipments dipped 15% y-o-y. This came in significantly below the 13% y-o-y growth forecast by the Camera & Imaging Products Association (CIPA) for 2013. Similar to conventional digital cameras, CIL fell victim to smartphones which come with sophisticated built-in cameras. Hence, dedicated photographic devices are now losing their shine. For instance, Nikon, a leading camera maker, has for the second time this year, revised down the industrys global shipment forecast for CIL and related products by 4% to 47.7m units from 49.5m due to softening demand.
Maintain NEUTRAL on the sector. Our only BUY is MPI (FV: MYR3.67).
Maintain NEUTRAL on the sector

In the semiconductor assembly and test services industry, we reckon Malaysian Pacific Industries (MPI MK, BUY, FV: MYR3.67)s earnings have turned around, as the group chalked up two consecutive quarters of strong results. We have a BUY call on the stock, as we believe its successful transition to high-margin businesses, stringent cost controls and planned exit from the loss-making stamped lead frame business should keep it in the black going forward. Meanwhile, we are NEUTRAL on Unisem (UNI MK, NEUTRAL, FV: MYR0.95) as the stock lacks re-rating catalysts. We opine that most of its negatives (such as bleak near-term outlook) have been priced in. In the local HDD component space, JCY International (JCYH MK, SELL, FV: MYR0.45) is a SELL as its business depends solely on the HDD market while its high
64
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12 December 2013
opex is eroding profitability. However, we are NEUTRAL on Notion VTec (NVB MK, NEUTRAL, FV: MYR0.74) as there are no concrete near-term catalysts to prompt an upgrade. The weak outlook for HDDs and camera also does not bode well for the company, given that these segments make up 80-85% of total revenue. Overall, we maintain our NEUTRAL view on the tech sector.
Figure 69: Monthly worldwide semiconductor sales (USDbn)

30.0 25.0 20.0 15.0 0% 10.0 5.0 0.0
Jan-01 Aug-01 Mar-02 Oct-02 May-03 Dec-03 Jul-04 Feb-05 Sep-05 Apr-06 Nov-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12 Apr-13
Figure 70: Monthly book-to-bill ratio (x)

1.4 1.2 2.0 1.0 0.8 0.6 1.5 1.0 0.5 0.2 0.0
Oct-04 Oct-09 Apr-02 Apr-07 Apr-12 Jul-03 Jul-08 Jan-01 Jan-06 Jan-11 Jul-13
80% 60% 40% 20%
2.5
-20% 0.4 -40% -60%
0.0
Americas (LHS) Asia Pacific (LHS)

Source: SIA
Europe (LHS) Worldwide (RHS)
Japan (LHS) Book-to-bill ratio (LHS)

Source: SEMI
Bookings (RHS)
Billings (RHS)
Figure 71: Quarterly global PC vendor shipments (m)

120.0 100.0 20% 80.0 60.0 5% 40.0 20.0 -10% 0.0
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13
Figure 72: Quarterly global smartphone sales (m)

30% 25% 250.0 200.0 150.0 100.0 50.0 0.0
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13
300.0
120% 100% 80% 60% 40% 20% 0%
15% 10%
0% -5%
-15%
Total PC vendor shipments (LHS)

Source: Gartner
y-o-y growth (RHS)
Global smartphone sales (LHS)

Source: Gartner
y-o-y growth (RHS)
Table 35: Valuations of technology stocks

Price (MYR/s) Target (MYR/s) Mkt Cap (MYR/m)
FY14
PER (x)
FY15
EPS GWTH (%)

FY14 FY15
P/B (x)
FY14
P/CF (x)
FY14
ROE (%)
FY14
NDY (%)
FY14
Rec
MPI Datasonic Unisem Notion Vtec JCY Sector Avg
3.20 9.05 0.87 0.66 0.57
3.67 10.51 0.95 0.74 0.45
672 1,222 583 177 1,166
11.4 12.7 44.2 7.3 n.m. 31.6
9.3 11.2 9.7 6.3 +>100 16.1
+>100 19.5 n.a. 56.1 46.9 +>100
22.9 13.1 +>100 17.0 n.a. 96.1
0.9 9.1 0.6 0.5 0.6
3.1 15.1 3.1 1.9 7.0
8.0 45.1 1.3 7.3 n.m
3.9 1.6 2.3 2.7 0.0
B B N N S
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12 December 2013
Telecommunication: Waiting For Catalysts

Catalysts still some time away
Underweight
We remain UNDERWEIGHT on the Malaysian telecoms space due to the sectors demanding valuations vis--vis its regional peers. While we believe the sectors fundamentals remain sound, the telcos are facing headwinds in monetising data with traditional SMS revenues under threat. The notable highlights during 3Q13 were: i) a marked erosion in SMS revenue, and ii) the presence of tax incentives which boosted earnings. In the fixed line industry, TM continues to execute well on UniFi, although Maxis managed to capture a slightly higher share of the industry net additions in 3Q13. There is no change to our recommendations on the stocks.
Sectors re-rating is likely only in 2H14, nearer to the GST implementation
While we view the implementation of the 6% goods and services tax (GST) as a potential re-rating catalyst for the sector, we note that its implementation will only take place in April 2015. Hence, we believe the market will likely price in the positive earnings impact of passing on the prepaid service tax to consumers as we approach 2H14.
Pockets of earnings growth recovery in 2014

Overall, we expect industry revenue growth to moderate from 5.6% in 2013 to 4.6% in 2014. We note that SMS is facing notable cannibalisation from substitution into data. SMS revenues had been relatively flat following the restriction on mobile operators from selling bulk SMS since March 2012. However, with smartphone adoption and over-the-top usage rising, the sequential q-o-q decline (approximately mid-single digit) in SMS revenue has been quite noticeable in 2013. Going forward, we see the sectors sequential revenue growth to be largely dependent on initiatives to better monetise data. Among the telcos, Celcom appears to be looking to introduce a form of tiered data pricing mechanism sometime in 4Q13. We note, however, that Maxis leads in LTE coverage (~ 10% of the population) but has no immediate plans to introduce tiered pricing yet. The success of Celcoms tiered plans would be an indication of whether the Malaysian market is ready, in our view. Tiered data pricing was introduced in Singapore back in 3Q12, with relatively good traction as over a third of postpaid subscribers are now on tiered data plans, resulting in an uplift of 1-6% in postpaid ARPUs.
Expect stronger earnings growth from Axiata and DiGi in 2014
Looking ahead into 2014, we are modeling for stronger earnings growth for the industry (+3%). We expect both Axiata and DiGi to see mid-to-high single-digit earnings growth. Axiata will likely see a turnaround when XL gains better traction amid easing competitive pressures, while DiGis earnings will be free from accelerated depreciation with its network modernisation exercise completed in 3Q13. TM, however, will likely see its earnings contract by 12% due to the absence of further tax incentives, after they expired in 3Q13.
A good 3Q boosted by tax incentives

Based on the 3Q13 results, we believe the industry remains firmly on track for midsingle digit revenue growth in 2013, underpinned by strong data growth. A positive surprise has been the reliance on voice revenue, which has only seen marginal erosion so far (-1% to -3% y-o-y). Tax incentives was a key driver to TMs bottomline growth so far We maintain our view that the overall 2013 earnings growth for the sector will remain challenging, as we expect flattish growth, primarily due to negative earnings growth from Axiata (FY13: -6.7%), which in turn was dragged down by XL Axiata (EXCL IJ, NEUTRAL, TP: IDR4,600)s underperformance and unfavourable forex movements. TM, which surprised on the upside, was the industry outperformer with lower-thanexpected cost pressures and higher-than-expected HSBB-related tax incentives. We forecast Maxis and DiGi to achieve low but steady earnings growth of 2-3% for FY13. Although there were two minor negative changes to guidance by Maxis and DiGi, we did not revise our earnings estimates as we had largely anticipated these issues. Maxis lowered its 2013 revenue growth guidance to 2-3% (from mid-single digit), which partly reflects its decision to scale down on outright device sales. Meanwhile, DiGi updated its 2013 EBITDA margin guidance and now expects a 1-ppt y-o-y dilution (previously stable margins). The key reasons for DiGis lower EBITDA margin
See important disclosures at the end of this report 66
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12 December 2013
guidance were weakening international direct dial (IDD) margins and higher-thanexpected handset sales.
TM takes a breather as Maxis catches up

We think it is still too early to conclude that Maxis is beginning to chip away TMs dominance in the fibre market. Following our meeting with Maxis new CEO, Morten Lundal, the home segment still faces difficulties as we gather that inefficiencies still remain within the value chain. We believe that protecting and then growing its prepaid business will be a key focus, while the home segment will likely take a backseat. TMs UniFi momentum moderated somewhat in 3Q, with just 30k subscribers added (2Q13: +45k), due to festivities during the quarter. This translated into slower monthly run rate of 10k (2Q13: +15k) - not entirely surprising as take-up rate rose. The takeup for TMs UniFi broadband service has now risen to 42% (1Q13: 40%), based on 1.44m premises passed.
Maxis share of industry fibre net adds improved from c.10% to 19% in 3Q13
In contrast, Maxis managed to see an improvement in its fibre subscriber base, with 7k new customers in 3Q (2Q: +5k). TM has historically been grabbing the lions share (c.90%) of industry fibre net adds but saw this figure eroded to 81% in 3Q. However, we note that TM has responded last month with a limited time promotion of its UniFi broadband service, which involves upgrading both new and existing customers to higher broadband speeds if customers opt to sign up for one of their premium IPTV contents.
Risks
The risks to our view include: i) stronger-than-expected subscriber additions, ii) better-than-expected execution (such as network upgrades and expansion), and iii) a benign pricing environment.
Valuation and recommendation

We maintain our UNDERWEIGHT stance on the sector, as we believe the telcos are still facing headwinds in monetising data effectively alongside the cannibalisation of SMS revenues. We expect industry revenue growth to moderate slightly from 5.6% in 2013 to 4.6% in 2014. With no further expectations of tax incentives after they expired in 3Q13, we believe the prospect of positive earnings surprises in 2014 will be minimal. Nonetheless, the telcos will be mindful of operational challenges and are expected to resume their cost management initiatives to keep their margins stable. We keep our SELL calls on DiGi (FV: MYR4.10) and Maxis (FV: MYR5.90), while there is no change to our NEUTRAL ratings on TM (FV: MYR5.50), TdC (FV: MYR3.95) and Axiata (FV: MYR6.55). We still like Axiata for a potential turnaround in XL (EXCL IJ, NEUTRAL, FV: IDR4,600), which should lead to a rebound in its FY14 earnings growth.
Table 36: Valuations of telecommunication stocks

Price (MYR/s) 3.90 5.31 6.73 4.85 0.27 7.17 Target (MYR/s) 3.95 5.50 6.55 4.10 0.30 5.90 Mkt Cap (MYRm) 2,235 18,996 57,261 37,709 279 53,775 PER (x)
FY14 FY15
EPS GWTH (%)

FY14 FY15
P/BV (x)
FY14
P/CF (x)
FY14
ROE (%)
FY14
NDY (%)
FY14
Rec N N N S N S
Time dotCom TM Axiata Digi Instacom Maxis

Sector Avg
18.4 22.1 20.7 21.1 10.1 25.5

22.2
15.8 20.8 18.7 20.1 9.3 25.4

20.9
5.0 (12.7) 7.5 7.5 0.9 0.8

2.9
16.5 6.3 10.6 5.0 9.3 0.4

6.1
0.8 3.2 2.6 144.3 1.4 10.3
9.9 6.1 8.4 13.5 8.9 0.2
5.8 12.6 13.4 684.2 15.4 37.0

0.0
0.0 4.1 0.0 4.7 0.0 5.6
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Timber: Shifting Focus
Timber sectors positive outlook is still intact, with growth coming now from CPO price escalation
Overweight
Still positive, although focus has switched to plantation divisions. We continue to be positive on the prospects of the timber sector, on the back of the ongoing monsoon season in Malaysia and Indonesia which would lead to log shortages, and improving economic activity in Japan which is spurring plywood imports. However, the plywood price improvement we had expected to start coming through more sharply in 4Q13 seems to be happening on a gradual basis instead. Log prices, however, are holding up well, while an added benefit is seen in the recent rise in CPO prices. Log production affected by monsoon season. On the log front, production continues to be hampered by depleting natural resources, more stringent environmental safeguards being imposed and weather abnormalities, which have become commonplace due to global warming. In Jan-Sept, log production in Sarawak fell 16.4% y-o-y, caused by unusually wet weather (excess rain in certain logging areas in 1Q). As we enter the monsoon season in Malaysia, log production is set to fall again in the coming months, which could result in CY13 log production declining more than our originally-projected 10% y-o-y. As such, we lower our log production volume projection to -15% y-o-y for CY2013. Log prices moderated, but still up 14-15% y-o-y. After rising by a significant 2530% y-o-y in the four months between April-July 2013, tropical log prices moderated in Aug-Oct by almost 10%. However, we understand that log price indications for Nov/Dec have started to rise again due to expectations of a log shortage during the monsoon season and the recent stabilisation of the Indian rupee (INR). Currently, Malaysian log prices are about USD240-250 per cu m, up 14-15% y-o-y from USD210-230 per cu m a year ago. We continue to expect Indias investments in the infrastructure and industrial sectors to prop up demand for logs in CY14, holding up log prices at the current USD240-260 per cu m levels for the rest of the year and next year. We project average log prices to be about USD220-240 per cu m in 2013 and USD240-260 per cu m in CY14. Given the average log production cost of USD120140 per cu m, log manufacturers are continuing to reap very comfortable operating margins.
Monsoon season could result in sharper log shortages in Malaysia
Figure 73: Monthly Sarawak log production (cu m)

1,200,000 1,000,000 800,000 600,000 400,000 200,000
Figure 74: South-East Asian meranti log prices (USD/cu m)
320 270 220 170 120 70 20
0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2010
Source: ITTO
2011
2012
2013
Japans housing starts climbed 10.3% y-o-y in Jan-Sept CY13
Plywood prices stalled in 3Q13, but picking up again in Nov/Dec. We had originally expected a sharper price improvement for plywood to start coming through in 4Q13, but this seems to be happening on a gradual basis instead. We understand that there was a bit of inventory clearing by one of the major tropical plywood producers in Japan in 3Q13, which stalled prices somewhat, but this has since been completed in Nov. Japan continues to see good housing starts (+10.3% y-o-y in JanSept 2013 to 708.4k units vs +2.8% y-o-y in the same period last year) on the back of its aggressive policy-easing to reflate the economy, while plywood import volumes have also been improving, growing 7.4% y-o-y in Jan-Sept 2013, as demand from house builders and pre-cutting plants rise. Market prices for concrete panels in Japan
68
Jan-04 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 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13
Malaysia Strategy
12 December 2013
are still up by 3-5% while floorbase products have risen by about 7-9% in YTD Nov 2013. Concrete panel prices are now at USD530-540 per cu m (up from USD505-515 per cu m a year ago), while floorbase prices are currently around USD640-650 per cu m (vs USD580-590 per cu m a year ago). We believe plywood prices will resume its gradual upward trajectory in the beginning of 2014, on the back of stronger demand and weaker supply of raw materials (ie logs), given the upcoming monsoon season. We project plywood prices to rise by a further 4-6% in CY14 from current levels. Figure 75: Monthly Japan housing starts
'000units 130 120 110 100 90 80 70 60 50 40 30 20 10 0 Jan Feb Mar Apr May Jun 2005 2010
Source: ITTO
Figure 76: South-East Asian plywood prices (USD/cu m)

950 850 750 650 550 450 350 250
Jan-04 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 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13
Jul
Aug Sep Oct Nov Dec 2008 2013 2009
Concrete Panel
Floor Base
2006 2011
2007 2012
Stronger CPO prices are positive for two timber stocks
Stronger CPO prices would bode well for Ta Ann and Jaya Tiasa. With the recent rise in CPO prices, companies like Ta Ann (TAH MK, BUY, FV: MYR4.97) and Jaya Tiasa (JT MK, NEUTRAL, FV: MYR2.56) would benefit, as the plantation divisions currently contribute 40-50% of profit. In our 1Q14 plantation sector strategy, we raised our CPO price assumptions for 2014 and 2015 to MYR2,700/tonne (from MYR2,600/tonne) and MYR2,900/tonne (from MYR2,600/tonne) respectively. With this increase, our net profit forecasts for Ta Ann have been raised by 8-15% for FY12/14-15, while forecasts for Jaya Tiasa have been bumped up by 10-15% for FY06/14-15. WTK Holdings (WTKH MK, BUY, FV: MYR1.76) earnings would not be as positively affected, given its small mature hectarage at this juncture. We have raised earnings for WTK by 1-6% for FY14-15. Maintain OVERWEIGHT. With stronger plantations earnings, and a stable to improving outlook for the timber industry, as well as an added benefit of the recent MYR/USD weakening, we maintain our OVERWEIGHT rating on the sector. We also maintain our target P/Es of 12.0x CY14 for the timber divisions and 16.0x CY14 for the plantation divisions. Post-earnings revision, however, we raise our fair values for Ta Ann to MYR4.97 (from MYR4.53), Jaya Tiasa to MYR2.56 (from MYR2.20) and WTK to MYR1.76 (from MYR1.70). We keep our BUYs on Ta Ann and WTK, and upgrade our recommendation on Jaya Tiasa to BUY (from Neutral). We now have three BUYs in our sector, with our top pick being Ta Ann.
Ta Ann is our Top Pick now
Table 37: Valuations of timber stocks

Price (MYR/s) Ta Ann WTKH Jaya Tiasa Sector Avg 4.02 1.23 2.22 Target (MYR/s) 4.97 1.76 2.56 Mkt Cap (MYR/m)
FY14
PER (x)
FY15
EPS GWTH (%)

FY14
P/B (x)
FY15
P/CF (x)
FY14
ROE (%)
FY14
NDY (%)
FY14
Rec
1,490 539 2,162
11.6 8.4 16.3 12.9
10.1 7.1 9.1 9.1
+>100 42.4 +>100 148.9
14.5 19.1 79.2 41.8
1.4 0.4 1.2
7.7 6.0 10.9
11.7 4.9 7.3
2.6 2.4 1.4
B B B
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Malaysia Strategy
12 December 2013
Utilities: Driven By Favourable Sector Reforms
Sector reforms to re-rate share prices
Overweight
All eyes on positive sector reforms
Now that it is confirmed that electricity tariffs will go up from 1 Jan 2014 while the proposed consolidation of Selangors water industry is only a matter of weeks from the year-end deadline, we remain bullish on the utility sector. We maintain our OVERWEIGHT call as we see more positive developments by way of sector reforms, which could warrant another share price re-rating moving into 2014.
TNB our Top Pick

The recently-announced tariff hike will more than offset the incremental cost from a natural gas price revision Among the three stocks under our coverage, Tenaga Nasional (TNB MK, BUY, FV: MYR11.90) remains our Top Buy. The recently-announced tariff hike, together with a revision in natural gas prices, will ensure the sustainability of TNBs business in the long term. Revenue contribution from the electricity tariff hike of around 14.9% will more than offset the expected cost increase due to a revision in natural gas price to MYR15.20 per million British thermal unit (mmbtu), and liquefied natural gas price to MYR41.68 per mmbtu. On the other hand, coal prices continue to trend in power producers favour, with Newcastle and Richard Bay coal prices hovering at around USD80-85 per tonne currently. These factors, coupled with sustainable demand growth in tandem with domestic economic expansion, will potentially drive TNBs earnings to new highs in 2014. That said, we caution that headline numbers could potentially be eroded by possible forex losses relating to the utilitys borrowings should the USD and JPY rise strongly against MYR. Nonetheless, we deem forex gains/losses non-core operating in nature and estimate that a 10 sen change in MYR vs the USD and JPY may give rise to translation gains/losses of MYR100m/MYR140m.
Expect PAAB to absorb the shortfall between PNHs assets and liabilities value
Water players see light at the end of tunnel

Although Puncak Niaga (PNH MK, BUY, FV: MYR5.22) turned down the latest takeover offer from Selangors state government pending its proposed changes to certain terms, we remain hopeful that the states proposed consolidation exercise would be completed sooner rather than later upon obtaining the Federal Governments blessings. We believe the major hurdle here is Pengurusan Aset Air Bhd (PAAB)s reluctance to absorb the MYR556.3m shortfall between PNHs water assets and water-related borrowings. We expect PNH, the Selangor state government and the Federal Government to resolve their differences on time to meet the end-2013 deadline to wrap up talks.
More on Project 3B
New capacity to be awarded soon
We expect the Energy Commission to announce the winner of the proposed Project 3B, which comprises a 2x1,000MW new coal-fired power plant, latest by early-2014. On top of that, the Energy Commission has announced its intention of calling for tenders for two more expansion projects of 1,000MW each in the medium term. This, we believe, will generate positive news for independent power producers over the next 6-9 months, and hence spark investor interest.
Potential listing of 1MDBs and Malakoffs power assets
Listing of independent power producers (IPPs)

Meanwhile, speculation has it that 1Malaysia Development (1MDB) and Malakoff will list their power assets by 1HCY14. 1MDB currently owns generation capacity totalling 2,256MW in Malaysia, while Malakoff has an existing installed capacity of over 5,000MW in the country. If the listing of the two materialises, this may provide a major re-rating catalyst for Malaysias utilities sector as a whole.
70
Malaysia Strategy
12 December 2013
Figure 77: Coal prices since 2012

120 115 110 105 100 95 90 85 80 75 70
Richard's Bay Coal (USD/mt)

Newcastle Coal (USD/mt)
Figure 78: New generation capacity to come on stream (MW)

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2014F 2015F 2016F 2017F 2018F 2019F 2020F
Table 38: Valuations of utilities stocks

Price (MYR/s) Tenaga Puncak YTL Power Sector Avg 11.00 3.29 1.78 Target (MYR/s) 11.90 5.22 1.90 Mkt Cap (MYR/m) 60,961 1,352 13,213 FY14 14.0 5.8 11.8 13.2 PER (x) FY15 13.3 5.5 11.6 12.5 EPS GWTH (%) FY14 FY15 (0.0) 5.3 (2.7) 6.6 3.6 2.2 (0.3) 3.6 P/B (x) FY14 1.6 0.7 1.2 P/CF (x) FY14 6.5 5.5 6.2 ROE (%) FY14 11.9 11.0 10.7 NDY (%) FY14 2.3 0.0 0.6 Rec
B B N
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Malaysia Strategy
12 December 2013 Table 39: Valuations And Ratings Of Individual Stocks Under Coverage
FYE Price (MYR/s) BUY Fair Value (MYR/s) 13F Core EPS (sen) 14F 15F 13F EPS Growth (%) 14F PER (x) 15F 13F 14F 15F 13F EV/EBITDA (x) 14F 15F
Aeon Credit ^ Ahmad Zaki AirAsia AirAsia X Alam Maritim Astro^ Bumi Armada Bursa Malaysia CARiNG^ Catcha Media CBIP CIMB CMS Coastal Contract Datasonic Daya Materials Dayang Dialog DRB-Hicom^ Eversendai Favelle Favco Felda Global Freight Mgmt Gamuda Hai-O^ Hiap Teck HL Bank Hua Yang IJM Land^ Integrax IOI Corp Jaya Tiasa^ Karex Kossan LPI Capital Maybank MAHB MBSB Media Prima MISC MPI Naim NTPM Hldg OldTown^ Padini Pantech Perisai Pintaras Pos Malaysia
Feb Dec Dec Dec Dec Jan Dec Dec May Dec Dec Dec Dec Dec Dec Dec Dec Jun Mar Dec Dec Dec Jun Jul Apr Jul Jun Mar Mar Dec Jun Jun Jun Dec Dec Dec Dec Dec Dec Dec Jun Dec Apr Mar Jun Feb Dec Jun Mar
16.06 0.92 2.42 1.03 1.51 2.96 3.90 7.83 1.95 0.66 3.17 7.67 6.30 3.29 9.05 0.38 5.35 3.05 2.64 1.17 2.94 4.55 1.48 4.70 2.62 0.71 14.18 2.05 2.70 2.06 5.90 2.22 3.71 3.73 17.24 9.83 9.12 2.65 2.60 5.39 3.20 3.58 0.75 2.45 1.80 0.98 1.47 3.13 5.80
18.10 1.33 3.70 1.31 2.25 3.36 4.50 9.20 2.28 0.96 3.88 9.50 7.55 3.77 10.51 0.42 6.72 3.18 3.40 1.46 3.55 5.20 2.00 5.45 3.28 0.97 16.60 2.76 3.70 2.32 6.50 2.56 3.51 4.13 18.70 11.40 10.13 3.40 3.60 6.09 3.67 5.63 0.73 2.90 1.95 1.43 1.62 3.50 6.80
112.1 4.2 24.7 2.0 11.3 8.4 15.8 33.7 11.4 (4.8) 31.1 61.0 49.6 28.6 59.9 1.7 23.4 7.4 13.2 7.3 30.5 18.1 13.9 25.4 20.9 3.4 105.8 42.5 21.6 14.1 27.0 2.4 10.8 22.6 89.1 73.0 35.0 34.1 21.1 10.2 5.3 30.1 5.0 17.0 12.6 11.0 7.2 29.1 33.9
135.6 7.3 30.8 9.6 15.6 8.5 20.1 36.8 13.7 (2.6) 32.5 68.0 58.3 31.4 71.5 2.8 44.8 9.1 20.8 14.6 35.5 19.8 15.3 31.8 23.1 4.7 116.9 43.5 26.4 14.9 30.2 13.6 14.5 27.0 95.3 75.9 33.2 40.0 24.4 12.6 28.0 56.3 5.6 14.5 13.9 12.7 9.0 32.6 38.0
158.1 9.6 32.1 12.9 17.5 9.1 24.1 39.7 15.5 0.2 35.5 74.8 73.9 33.6 80.9 2.9 46.0 11.4 23.0 16.2 42.0 22.8 18.4 32.1 29.2 5.9 129.4 39.4 30.3 20.3 34.5 24.4 17.6 31.3 101.7 79.4 34.3 45.4 28.1 16.5 34.4 62.5 6.2 16.5 14.5 13.7 15.6 37.4 40.2
20.5 (41.8) (5.3) n.a. 48.1 4.5 19.7 18.3 20.8 53.8 (6.8) 4.3 18.7 16.5 91.6 (0.3) 27.1 (4.0) 57.3 (50.9) 4.9 (36.4) 7.8 (4.0) 6.8 7.8 0.8 16.2 56.0 1.5 (1.9) (85.2) +>100 (29.3) 17.6 0.4 5.3 51.6 7.2 71.1 146.4 (14.3) 13.6 78.5 (11.3) 2.1 (16.1) 30.2 25.6
21.0 71.3 24.9 +>100 38.2 1.0 27.3 9.3 19.8 45.9 4.7 11.6 17.5 10.1 19.5 64.0 91.6 24.2 57.1 99.3 16.4 9.3 10.4 25.4 10.6 36.9 10.5 2.5 22.3 6.3 11.8 +>100 34.5 19.5 7.0 4.1 (5.3) 17.2 15.7 23.0 +>100 87.3 13.3 (5.0) 10.3 15.3 26.4 12.0 12.2
16.6 32.2 3.9 34.4 12.4 7.7 19.8 7.9 13.6 n.a. 9.2 9.9 26.8 6.8 13.1 3.4 2.7 25.0 10.5 11.0 18.1 15.1 20.2 1.0 26.2 25.1 10.7 (9.6) 14.8 36.0 14.2 79.2 21.5 15.9 6.7 4.5 3.6 13.6 15.2 31.2 22.9 11.0 9.5 13.9 4.3 7.8 72.8 14.5 5.7
14.3 21.7 9.8 50.9 13.4 36.8 24.7 23.2 17.1 n.m. 10.2 12.6 12.7 11.5 15.1 22.3 22.9 41.4 19.9 16.0 9.6 25.1 10.7 18.5 12.5 20.7 13.4 4.8 12.5 14.7 21.8 93.0 34.5 16.5 19.4 13.5 26.1 7.8 12.3 16.4 60.1 11.9 15.0 14.4 14.3 8.9 20.6 10.7 17.1
11.8 12.7 7.8 10.7 9.7 35.2 19.4 21.3 14.3 n.m. 9.8 11.3 10.8 10.5 12.7 13.6 11.9 33.3 12.7 8.0 8.3 23.0 9.7 14.8 11.3 15.1 12.1 4.7 10.2 13.8 19.5 16.3 25.7 13.8 18.1 12.9 27.5 6.6 10.7 13.3 11.4 6.4 13.2 16.9 12.9 7.7 16.3 9.6 15.3
10.2 9.6 7.5 8.1 8.6 34.9 16.2 19.7 12.6 +>100 8.9 10.3 8.5 9.8 11.2 13.1 11.6 26.7 11.5 7.2 7.0 20.0 8.1 14.6 9.0 12.1 11.0 5.2 8.9 10.1 17.1 9.1 21.1 11.9 17.0 12.4 26.6 5.8 9.3 10.1 9.3 5.7 12.1 14.8 12.4 7.1 9.4 8.4 14.4
14.9 7.3 7.1 12.9 16.2 11.7 14.9 13.2 n.m n.m 6.7 n.a. 5.2 8.8 12.4 13.6 16.8 30.3 6.2 9.9 6.1 12.8 6.4 19.9 8.6 18.5 n.a. 3.4 8.8 7.9 16.5 20.4 22.8 7.4 13.5 n.a. 15.7 5.4 4.8 9.6 3.7 22.2 8.7 9.0 7.4 6.3 17.1 5.6 8.8
13.8 6.0 6.2 7.4 11.3 11.2 13.0 12.0 n.m n.m 6.3 n.a. 4.1 7.9 9.8 10.3 8.7 24.5 5.2 5.3 5.1 10.9 6.0 14.3 7.7 11.6 n.a. 3.3 7.0 7.1 14.3 9.4 15.7 9.1 12.6 n.a. 13.0 4.4 4.2 8.7 2.6 13.8 8.1 7.9 6.0 5.8 18.8 4.7 7.6
12.9 5.3 5.8 6.1 10.6 10.2 11.7 10.9 10.3 62.5 5.8 n.a. 3.2 7.3 8.1 10.1 8.1 19.8 4.7 4.3 4.1 10.3 5.2 14.0 7.4 9.7 n.a. 3.7 6.3 4.3 11.7 6.3 13.0 8.5 11.6 n.a. 11.6 4.2 3.8 7.4 2.0 13.3 7.4 7.4 5.5 6.1 9.7 3.8 7.0
^ FY13,14 & FY15 valuations refer to those of FY14,15 & FY16
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Malaysia Strategy
P/CF (x) 14F
P/BV (x)
15F 13F 14F 15F 13F
DIV YIELD
(%) 14F 15F 13F
ROE
(%) 14F 15F 1Mth
% Chg in price
3 Mth 12 Mth
Mkt
cap (RM Mil)
13F BUY
n.m 3.4 3.1 3.3 n.m 26.5 26.6 16.4 14.6 12.1 8.8 n.a. 9.8 (0.4) 29.3 6.9 25.0 n.m 3.6 10.3 n.m 20.8 11.7 32.8 10.8 18.3 n.a. 35.5 115.5 16.7 19.1 10.8 24.9 9.8 24.6 n.a. 13.8 6.6 9.2 12.2 4.4 256.2 10.7 8.5 8.5 7.00 19.2 10.8 26.1
n.m 8.8 2.8 3.1 n.m 10.5 20.0 14.9 10.8 31.2 8.3 n.a. 8.3 (0.4) 15.1 8.1 17.2 n.m 2.8 6.1 10.7 18.2 6.3 25.0 12.1 9.6 n.a. 4.6 11.9 15.2 17.1 10.9 24.6 12.1 43.1 n.a. 14.9 5.9 6.1 5.0 3.1 33.4 10.5 8.0 11.7 10.9 19.2 10.3 11.5
n.m 6.4 3.2 2.5 8.9 9.7 15.2 14.0 11.5 15.1 7.5 n.a 7.1 12.0 10.8 6.8 10.8 33.6 2.6 5.6 8.2 16.0 17.0 24.6 13.1 6.6 n.a. 4.9 7.6 10.6 15.1 6.9 19.9 13.4 34.5 n.a. 11.8 5.3 6.9 14.8 2.5 32.4 10.8 7.7 13.7 2.9 4.3 8.6 8.9
4.4 1.2 1.1 1.7 1.9 24.8 2.8 5.3 3.6 4.1 1.6 1.8 1.3 1.7 7.1 2.7 4.4 5.6 0.7 1.1 1.6 2.6 1.6 2.2 2.0 0.6 1.9 1.2 1.3 1.0 2.8 1.3 9.2 2.6 2.6 1.8 2.4 2.0 1.7 1.1 0.9 1.0 2.5 2.8 3.3 1.3 3.1 1.8 2.9
3.6 1.1 1.0 1.4 1.6 21.0 2.5 5.2 3.1 4.8 1.4 1.6 1.2 1.5 4.9 2.5 3.7 5.1 0.7 1.0 1.4 2.4 1.5 1.9 1.8 0.5 1.7 1.1 1.2 1.0 2.6 1.2 4.7 3.0 2.5 1.7 2.3 1.7 1.6 1.1 0.9 0.9 2.3 2.7 3.1 1.2 2.8 1.6 2.6
2.9 1.0 0.9 1.0 1.4 18.1 2.2 5.0 2.6 4.8 1.3 1.4 1.1 1.4 3.5 2.1 3.2 4.5 0.6 0.9 1.2 2.3 1.4 1.7 1.7 0.5 1.5 1.0 1.1 0.9 2.4 1.1 4.0 2.7 2.2 1.5 2.2 1.4 1.5 1.0 0.9 0.8 1.9 2.6 3.0 1.1 2.4 1.4 2.5
2.7 1.4 2.8 0.0 0.2 2.1 1.0 6.4 2.1 0.0 3.2 3.2 3.1 0.0 1.3 0.6 2.6 1.0 1.0 3.4 2.6 2.0 3.0 2.6 5.7 0.8 2.4 6.2 1.7 2.2 2.5 0.3 0.0 3.3 4.9 5.2 1.9 6.0 5.2 2.8 3.3 2.2 3.9 2.9 4.4 4.5 0.0 3.2 2.9
3.2 2.4 3.0 0.0 0.2 2.1 1.1 4.2 2.4 0.0 3.2 3.6 3.7 0.0 1.6 1.0 4.2 1.3 1.6 3.4 3.0 2.2 3.0 2.6 6.5 0.7 2.8 6.4 1.7 2.3 2.6 1.4 0.0 3.9 5.3 4.6 1.8 7.0 6.1 2.8 3.9 2.2 4.0 3.3 5.6 5.2 0.0 3.2 3.3
3.7 3.1 2.8 0.0 0.2 2.3 1.3 4.6 2.6 0.0 3.5 4.0 4.7 3.2 1.8 1.0 4.3 1.6 1.7 4.3 3.6 2.6 3.0 2.6 7.3 0.8 3.1 5.8 1.7 3.2 2.8 2.5 0.0 4.3 5.6 4.8 1.9 8.0 7.0 4.7 5.5 2.2 4.0 3.7 6.7 4.2 0.0 3.2 3.5
33.7 5.6 8.4 14.3 (88.0) 77.1 13.6 21.6 22.9 (25.9) 16.2 15.1 10.8 (68.2) 56.5 9.5 20.2 15.3 3.5 7.1 17.7 10.5 16.3 12.5 16.6 2.7 15.0 26.0 11.0 7.0 13.2 1.5 31.2 20.3 13.9 14.0 9.6 31.6 14.2 6.7 1.5 8.7 17.2 21.5 22.8 15.9 15.4 18.3 15.7
33.1 9.1 10.9 20.1 15.4 65.2 13.6 24.6 23.3 (17.5) 15.2 15.1 11.9 126.2 45.1 13.7 33.5 17.3 5.4 13.1 18.0 10.9 16.1 13.5 16.7 3.6 14.9 26.0 12.2 7.1 13.7 7.3 24.5 19.3 13.9 13.5 8.6 27.7 15.4 8.3 8.0 14.8 16.9 17.2 23.8 16.5 17.9 18.1 18.0
31.6 11.2 11.3 26.6 17.5 60.1 14.5 25.9 22.6 1.5 15.0 14.9 13.7 14.8 36.1 12.7 29.4 19.3 5.7 13.1 18.5 11.9 17.7 12.0 19.8 4.3 14.8 20.1 12.6 9.1 14.6 15.3 20.7 17.9 13.8 13.1 8.6 26.4 17.2 10.5 9.4 14.4 17.1 18.8 12.9 16.0 27.6 18.2 18.1
(1.0) (3.1) 0.4 0.9 0.7 2.1 2.1 2.6 1.1 3.4 2.2 4.6 (1.2) 8.2 41.0 (5.1) 4.6 0.8 (3.0) (2.6) (4.5) (0.5) 3.4 6.2 (0.8) 0.9 3.0 (5.6) 5.1 2.5 2.7 (4.6) 34.2 8.2 0.0 0.1 21.6 (1.7) 7.0 11.3 6.8 1.4 16.8 1.1 3.4 (2.0) (9.8) 3.8 3.2
(1.7) 18.8 (13.4) n.a 13.8 (2.6) 5.1 2.5 n.a 8.1 11.1 (3.0) (6.8) 49.0 171.9 15.6 7.1 (4.3) (3.7) 2.8 1.9 (6.3) 13.4 1.8 2.7 10.0 3.9 (0.4) 3.8 8.4 3.9 1.5 n.a 36.6 (1.2) (1.8) 26.5 (3.7) 4.9 5.7 4.7 (4.2) 17.9 2.3 (4.3) 8.3 (16.2) 28.4 10.5
60.2 41.8 (3.1) n.a 184.6 n.a 6.2 23.8 n.a 25.0 7.7 6.0 52.0 59.7 574.1 100 140 16.0 9.7 1.4 56.4 (12.3) 67.0 35.2 30.2 8.9 7.4 76.6 27.4 53.7 9.3 (14.1) n.a 114.0 11.9 10.5 39.4 28.0 23.7 25.2 3.9 105.7 41.9 47.5 (14.7) 59.7 43.3 100.3 69.5
2,313 255 6,730 2,441 1,189 15,387 11,424 4,166 425 89 872 59,198 2,094 1,589 1,222 497 2,943 7,339 5,104 906 624 16,599 240 10,029 531 503 26,657 541 3,794 620 37,921 2,162 1,002 1,789 3,816 86,410 11,138 4,664 2,812 24,059 672 895 837 889 1,217 563 1,590 501 3,115
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Malaysia Strategy
FYE Price (MYR/s) BUY Fair Value (MYR/s) 13F EPS (sen) 14F 15F 13F EPS Growth (%) 14F 15F 13F PER (x) 14F 15F 13F EV/EBITDA (x) 14F 15F
Press Metal Prestariang Protasco Puncak QL Resources^ SKP^ Sime Darby SOP Sunway Bhd Supermax Suria Capital Skyt Takaful Ta Ann Tambun Indah Tan Chong TASCO Tenaga TRC Synergy Tune Ins Westports WTK
Dec Dec Dec Dec Mar Jan Jun Dec Dec Dec Dec Dec Dec Dec Dec Dec Aug Dec Dec Dec Dec
2.40 2.59 1.39 3.29 3.96 4.38 9.53 6.34 2.66 2.69 2.70 10.50 4.02 1.39 6.20 2.07 11.00 0.55 1.87 2.55 1.23
3.82 3.37 1.80 5.22 4.90 4.96 10.85 7.12 3.30 3.01 3.50 12.00 4.97 2.05 7.25 2.30 11.90 0.71 2.40 2.84 1.76
17.5 20.6 13.6 57.9 20.0 14.7 54.8 26.2 26.7 21.8 22.3 77.3 16.9 18.2 41.1 21.1 78.7 5.1 8.3 13.4 10.3
52.2 22.5 17.5 56.4 23.0 21.9 52.4 44.5 26.4 25.1 23.0 87.8 34.8 23.6 60.2 28.2 78.7 9.2 10.8 13.9 14.6
53.3 23.3 20.3 60.1 23.4 24.9 65.6 56.1 31.2 26.6 23.8 97.2 39.8 28.6 67.3 32.6 82.8 10.7 13.0 14.0 17.4
38.9 21.5 7.8 +>100 25.0 69.6 (21.7) (26.6) (1.7) 19.1 18.6 29.9 (12.2) 22.0 69.9 (27.1) 36.7 +>100 32.0 (62.5) 0.8
+>100 9.3 28.2 (2.7) 15.0 49.3 (4.4) 70.2 (1.1) 15.2 3.0 13.6 +>100 29.5 46.5 33.3 (0.0) 78.8 29.6 4.0 42.4
2.1 3.4 16.2 6.6 1.6 13.5 25.1 32.8 18.4 6.0 3.6 10.8 14.5 21.5 11.8 15.8 5.3 16.6 20.2 0.7 19.1
13.7 12.6 10.2 5.7 19.8 29.8 17.4 24.2 10.0 12.3 12.1 13.6 23.8 7.6 15.1 9.8 14.0 10.6 22.5 19.1 12.0
4.6 11.5 8.0 5.8 17.2 20.0 18.2 14.2 10.1 10.7 11.8 12.0 11.6 5.9 10.3 7.3 14.0 5.9 17.3 18.3 8.4
4.5 11.1 6.9 5.5 16.9 17.6 14.5 10.7 8.5 10.1 11.3 10.8 10.1 4.9 9.2 6.3 13.3 6.3 14.4 18.2 7.1
12.1 10.3 3.8 8.5 11.5 19.6 10.6 11.1 11.6 10.1 5.5 3.4 10.4 4.3 10.1 4.2 7.1 6.5 18.9 13.6 6.1
5.5 9.0 3.5 7.7 10.5 15.3 10.5 7.3 13.1 9.4 6.0 3.0 6.6 4.0 7.2 3.3 6.7 3.5 14.0 12.9 4.8
4.7 8.2 3.0 6.7 10.3 13.1 8.8 5.8 13.8 9.7 5.7 2.6 5.4 3.1 6.4 2.7 6.2 2.6 11.3 11.6 4.1
TRADING BUY E&O Glomac^ Mar Apr 1.92 1.09 2.70 1.36 11.8 19.3 14.3 22.7 16.9 26.1 3.0 22.1 21.4 17.8 18.4 15.1 16.3 5.7 13.4 4.8 11.3 4.2 12.5 3.1 12.6 3.2 10.9 2.8
74
Malaysia Strategy
P/CF
(x) 13F BUY 14F 15F 13F
P/BV
(x) 14F 15F 13F
DIV YIELD
(%) 14F 15F 13F
ROE
(%) 14F 15F
% Chg in price
Mkt
cap
1Mth
3 Mth
12 Mth
(RM Mil)
n.m 0.1 15.0 6.0 9.0 14.4 12.4 14.1 18.3 17.2 7.6 n.a. 9.4 n.m 26.4 8.6 6.7 8.7 n.m 15.7 7.2
1.7 0.1 6.0 5.5 11.0 10.9 12.2 10.6 13.5 15.6 7.3 n.a. 7.7 9.7 9.4 9.0 6.5 5.3 n.m 13.1 6.0
2.1 0.1 5.4 5.1 13.2 10.4 10.3 7.7 18.5 13.6 6.8 n.a. 6.7 6.8 8.3 8.5 5.8 4.7 n.m 12.6 5.3
0.9 5.7 1.2 0.8 3.2 2.4 2.1 1.9 1.0 1.9 0.9 3.0 1.5 1.9 1.9 0.8 1.7 0.8 3.9 5.4 0.4
0.7 4.6 1.2 0.7 2.8 2.2 2.0 1.8 1.1 1.7 0.9 2.6 1.4 1.7 1.7 0.7 1.6 0.7 3.4 5.0 0.4
1.7 3.8 1.1 0.6 2.5 1.9 1.9 1.6 1.0 1.5 0.8 2.4 1.2 1.4 1.5 0.7 1.5 0.6 3.0 4.6 0.4
0.5 4.2 7.2 0.0 1.5 0.0 3.6 0.7 2.6 2.4 2.9 3.0 1.2 4.3 2.5 4.2 2.3 2.8 1.8 0.0 2.0
6.6 4.6 7.2 0.0 1.5 0.0 2.9 1.0 3.0 2.8 3.0 3.4 2.6 5.6 1.9 5.5 2.3 2.8 2.3 4.1 2.4
3.0 4.6 7.2 0.0 1.6 0.0 3.3 1.2 3.4 3.0 3.1 3.8 3.0 5.9 1.5 6.4 2.4 0.0 2.8 4.1 2.8
1.7 39.2 11.7 12.7 17.5 11.0 12.4 3.8 10.9 16.3 7.7 23.5 6.2 12.8 13.3 8.1 12.2 7.5 26.5 28.7 3.6
4.9 35.2 15.2 11.0 17.2 12.5 11.3 5.8 11.3 16.8 7.5 23.3 11.7 16.4 17.4 10.2 11.9 12.5 20.9 28.2 4.9
7.0 30.7 16.4 11.1 15.7 12.4 13.3 6.8 12.3 15.9 7.4 23.1 12.3 16.7 16.9 11.0 11.6 13.1 22.3 26.3 5.6
(1.8) 4.6 0.7 14.7 5.8 4.7 1.3 3.4 8.4 12.1 31.5 6.9 0.0 (8.0) 5.6 (1.9) 5.7 (0.9) 3.6 (0.4) 1.5
(7.6) 10.9 5.3 68.5 19.1 (6.7) 1.2 (0.7) 5.6 34.2 50.9 36.8 2.7 5.3 (1.5) (5.6) 10.4 (2.5) 7.4 (3.8) 26.4
31.3 78.9 29.9 136.4 18.3 58.9 (2.5) (11.2) 62.8 34.2 66.9 58.0 (3.3) 126.2 44.1 1.5 34.9 (1.7) n.a n.a 30.1
1,219 570 431 1,352 3,295 26,246 57,271 2,841 4,011 1,784 765 1,710 1,490 466 4,166 207 60,961 258 1406 8,696 539
TRADING BUY 12.8 9.6 17.2 7.4 14.2 6.5 1.5 0.8 1.4 0.7 1.3 0.6 1.4 5.2 1.5 5.8 1.5 6.5 9.3 15.5 10.5 15.4 0.0 15.1 1.5 7.3 17.5 4.4 26.1 49.4 2,180 648
75
Malaysia Strategy
FYE Price (MYR/s) NEUTRAL Fair Value (MYR/s) 13F Core EPS (sen) 14F 15F 13F EPS Growth (%) 14F 15F 13F PER (x) 14F 15F 13F EV/EBITDA (x) 14F 15F
Affin AEON AFG^ Allianz Malaysia AMMB^ Amway Ann Joo Resources APM Axiata Bintulu Bonia Corp CSC Steel Daibochi Faber Genting Bhd Genting M'sia Genting Plantation Hartalega^ Hektar REIT Help Intl HSL IGB REIT IHH Healthcare IJM Corp^ Instacom JT Intl Johore Tin KKB KLCCP^ KLK KPJ Healthcare Kulim Lafarge Lion Industries Mah Sing MAS Masterskill Maybulk MBM Media Chinese^ MMHE MSM Mudajaya Magnum MRCB M'sia Steel NCB Nestle Notion Vtec P Gas^
Dec Dec Mar Dec Mar Dec Dec Dec Dec Dec Jun Dec Dec Dec Dec Dec Dec Mar Dec Oct Dec Dec Dec Mar Dec Dec Dec Dec Dec Sep Dec Dec Dec Jun Dec Dec Dec Dec Dec Mar Dec Dec Dec Dec Dec Dec Dec Dec Sep Dec
4.28 15.12 4.99 10.40 7.45 12.12 1.07 5.81 6.73 7.55 3.42 1.29 4.10 2.44 10.00 4.16 10.98 7.27 1.53 2.49 1.92 1.21 3.94 5.74 0.27 6.45 1.72 2.60 5.85 24.40 6.10 3.50 9.40 0.74 2.17 0.31 0.38 1.79 3.51 0.99 3.70 5.20 2.78 3.29 1.32 1.05 3.58 67.16 0.66 23.06
4.40 15.90 5.15 12.00 8.35 12.20 1.04 5.30 6.55 7.51 3.14 1.30 3.53 2.28 11.24 4.11 10.95 7.95 1.46 1.65 2.06 1.31 3.87 6.21 0.30 6.27 1.60 2.74 7.00 24.40 6.13 3.53 9.61 0.76 2.44 0.30 0.37 1.75 3.40 1.06 3.80 4.59 2.85 3.41 1.32 1.07 3.50 67.00 0.74 22.10
41.9 70.5 36.1 69.1 59.9 61.0 5.0 58.7 30.3 32.1 25.4 8.2 25.7 12.2 55.7 31.5 34.2 37.2 11.5 8.0 16.7 5.8 8.0 37.1 2.6 47.3 25.0 17.7 40.1 85.1 22.5 12.5 45.9 6.5 25.6 (4.4) (16.2) 3.1 32.7 8.6 12.8 37.8 31.3 23.5 (7.9) 15.3 15.1 235.4 5.7 76.0
44.2 75.7 39.8 83.2 65.8 64.1 9.5 66.4 32.5 35.0 27.2 9.3 29.4 13.0 59.3 29.7 47.3 39.8 12.0 13.7 17.2 6.3 10.2 46.4 2.6 52.3 32.0 22.8 34.5 115.6 28.1 19.6 48.1 2.4 27.9 0.0 (14.5) 6.6 37.5 9.4 17.3 35.3 40.6 19.1 2.4 7.0 20.9 252.6 8.9 81.2
48.2 87.8 43.1 94.6 70.9 68.5 10.9 70.0 36.0 37.0 30.0 15.5 30.4 13.8 65.0 30.9 64.2 45.2 12.4 13.8 17.2 6.6 12.7 53.4 2.9 53.5 27.0 25.8 34.5 155.1 31.3 18.2 48.8 4.4 32.9 2.7 (17.3) 10.6 56.7 9.5 20.1 34.4 40.9 19.4 5.3 6.4 22.8 274.1 10.4 86.0
(0.5) 16.2 2.2 17.6 9.9 0.0 235.1 1.2 (7.2) (10.6) 0.5 10.9 18.7 (52.7) (27.5) 11.4 (18.8) 15.0 (1.4) (15.5) 2.2 7.6 (5.0) 21.6 73.9 22.1 1.0 +>100 0.7 (15.8) 7.5 +>100 11.7 (46.7) (7.6) 80.5 (135.7) (10.1) 1.4 (17.2) (15.3) 31.8 (32.6) 13.0 n.a. 36.6 (58.2) 21.0 (73.2) 7.0
5.5 7.4 10.1 20.5 9.8 5.1 90.0 13.1 7.5 9.1 7.1 13.8 14.5 5.9 6.4 (5.9) 38.4 7.0 4.2 71.1 2.6 7.6 27.6 25.2 0.9 10.5 28.0 28.8 (13.9) 35.9 25.0 56.6 4.8 (63.1) 8.9 100.0 10.6 +>100 14.6 9.7 34.8 (6.5) 29.6 (18.7) n.a. (54.2) 39.0 7.3 56.1 6.8
9.1 16.0 8.3 13.7 7.8 6.9 14.7 5.3 10.6 5.6 10.3 66.2 3.4 6.3 9.6 4.3 35.7 13.8 3.6 0.5 (0.0) 5.6 25.0 14.9 9.3 2.4 (15.7) 13.2 (0.0) 34.2 11.7 (7.1) 1.5 83.3 18.0 n.a. (19.4) 16.9 51.4 1.5 16.1 (2.6) 0.7 1.4 +>100 (8.6) 8.9 8.5 17.0 5.9
10.2 21.5 13.8 15.1 12.4 19.9 21.4 9.9 22.2 23.5 13.5 15.8 16.0 19.9 18.0 13.2 32.1 19.6 13.3 31.0 11.5 20.7 49.5 15.5 10.2 13.6 6.9 14.7 14.6 28.7 27.2 28.0 20.5 11.3 8.5 n.m. n.m. 58.1 10.7 11.5 28.9 13.8 8.9 14.0 n.m. 6.9 23.8 28.5 11.4 30.3
9.7 20.0 12.6 12.5 11.3 18.9 11.3 8.7 20.7 21.5 12.6 13.9 13.9 18.8 16.9 14.0 23.2 18.3 12.7 18.1 11.2 19.3 38.8 12.4 10.1 12.3 5.4 11.4 16.9 21.1 21.7 17.9 19.5 30.6 7.8 n.m. n.m. 27.0 9.4 10.5 21.4 14.7 6.8 17.2 55.9 15.0 17.1 26.6 7.3 28.4
8.9 17.2 11.6 11.0 10.5 17.7 9.8 8.3 18.7 20.4 11.4 8.3 13.5 17.7 15.4 13.4 17.1 16.1 12.3 18.0 11.2 18.3 31.0 10.8 9.3 12.0 6.4 10.1 17.0 15.7 19.5 19.2 19.3 16.7 6.6 11.3 n.m. 16.9 6.2 10.3 18.4 15.1 6.8 17.0 24.7 16.4 15.7 24.5 6.3 26.8
n.a. 8.4 n.a. 8.8 n.a. 12.6 13.5 4.4 8.8 8.5 6.5 3.8 9.5 5.0 5.0 8.2 22.9 14.5 16.2 11.6 6.0 20.8 27.0 9.1 10.2 8.5 3.1 8.8 10.4 16.9 15.5 7.8 11.7 7.9 6.6 18.9 n.m +>100 17.9 7.3 20.4 8.8 1.6 9.4 +>100 6.6 6.2 19.2 3.8 22.5
n.a. 7.6 n.a. 6.8 n.a. 11.8 11.8 3.5 7.9 8.0 6.6 3.3 8.5 4.6 4.2 7.4 16.3 13.6 15.5 8.9 5.2 19.6 22.1 7.3 9.6 7.4 2.6 6.5 12.4 12.7 13.1 5.3 11.0 6.0 6.0 8.8 (4.1) 14.0 13.7 6.6 15.7 9.0 1.9 11.1 20.1 8.1 5.1 17.9 2.6 21.4
n.a 6.5 n.a. 5.6 n.a. 11.0 11.3 3.1 7.1 7.6 6.1 3.3 8.0 4.0 3.5 6.7 11.8 11.7 14.9 7.6 4.6 18.8 18.2 6.5 8.6 6.8 2.1 5.6 12.1 9.8 12.0 4.8 10.7 7.0 5.4 6.7 (3.2) 5.9 9.2 6.3 13.2 9.0 2.0 10.8 15.9 8.4 4.5 16.5 2.0 20.3
76
Malaysia Strategy
P/CF (x)
13F NEUTRAL 14F 15F 13F
P/BV (x)
14F 15F 13F
DIV YIELD (%)

14F 15F 13F
ROE (%)
14F 15F 1Mth
% Chg in price
3 Mth 12 Mth
Mkt cap (RM Mil)
n.a. 7.5 n.a. n.m n.a. 11.7 2.2 17.2 8.9 36.9 13.4 5.7 6.8 7.3 6.2 10.2 24.9 15.9 9.2 14.3 11.3 15.7 27.8 9.9 12.3 12.5 4.1 25.0 5.1 21.4 19.4 19.6 15.7 10.5 n.m 11.7 n.m n.m 649.3 29.1 23.8 13.1 2.7 16.4 11.5 5.2 6.5 18.0 2.8 30.6
n.a. 9.7 n.a. n.m n.a. 10.9 9.2 4.1 8.4 20.8 18.0 9.6 7.5 13.6 6.3 10.8 18.9 16.4 9.3 8.8 11.2 14.9 22.7 8.2 8.9 11.0 4.5 185.7 9.7 18.1 16.2 9.5 14.2 1.1 55.1 4.1 n.m 26.3 25.4 8.9 18.8 13.7 4.7 13.4 9.5 3.0 5.5 16.7 1.9 29.4
n.a. 8.3 n.a. n.m n.a. 10.5 6.2 6.1 7.8 18.6 9.5 5.5 6.6 14.9 5.9 10.6 14.4 14.9 8.9 8.3 11.3 14.2 19.7 7.4 9.0 9.8 4.9 11.4 12.3 15.3 15.0 7.4 13.7 21.6 33.5 3.7 n.m 30.9 13.7 8.3 14.8 13.5 5.0 13.8 7.8 10.7 5.1 17.0 2.5 26.2
1.0 3.3 1.8 2.1 1.7 8.7 0.5 1.2 2.7 3.3 2.3 0.6 2.9 1.7 1.6 1.6 2.3 5.8 1.0 2.4 1.9 1.2 1.8 1.3 1.7 4.7 0.9 2.3 0.7 3.4 3.5 3.5 2.5 0.2 1.5 1.1 0.4 1.0 0.9 2.7 2.3 1.9 0.6 1.4 1.2 0.4 1.1 20.8 0.6 4.8
0.9 3.0 1.7 1.8 1.6 8.6 0.5 1.1 2.6 3.2 1.9 0.6 2.7 1.6 1.4 1.5 2.2 4.9 1.0 2.2 1.7 1.2 1.7 1.2 1.4 3.8 0.8 2.0 0.9 3.2 3.3 3.5 2.5 0.2 1.5 1.1 0.5 1.0 0.9 2.5 2.2 1.8 0.5 1.3 1.3 0.4 1.1 20.6 0.5 4.6
0.9 2.7 1.5 1.6 1.4 8.6 0.5 1.0 2.5 3.1 1.7 0.6 2.5 1.6 1.3 1.4 2.0 4.2 1.0 2.0 1.5 1.2 1.7 1.1 1.3 3.2 0.8 1.8 0.9 3.0 3.1 3.5 2.4 0.2 1.3 0.9 0.7 1.0 0.8 2.3 2.1 1.7 0.5 1.3 1.2 0.4 1.1 20.4 0.5 4.5
3.5 1.7 3.6 0.7 3.2 5.0 1.9 6.7 3.4 4.0 1.5 3.2 3.9 1.8 0.6 2.5 1.1 2.3 6.3 0.0 2.1 5.1 0.4 2.1 0.0 6.7 3.5 2.7 4.5 2.0 2.0 1.4 4.4 1.8 3.8 0.0 0.0 1.7 2.3 6.0 2.7 4.1 2.3 5.7 0.0 1.9 2.1 3.5 1.7 2.3
3.1 1.7 3.9 0.8 3.5 5.3 3.5 3.8 3.5 4.0 1.5 3.7 4.1 2.7 0.6 2.3 1.3 2.5 6.4 1.0 2.1 5.4 0.5 2.1 0.0 3.5 3.8 3.5 5.3 2.7 2.5 1.4 4.6 1.8 4.5 0.0 0.0 1.7 2.8 6.7 2.7 3.6 2.9 4.6 1.1 0.9 2.9 3.7 2.7 2.5
3.4 2.2 4.3 0.9 3.8 5.7 3.9 3.8 5.3 4.0 1.5 6.1 4.4 2.8 0.7 2.4 1.6 2.8 6.6 0.7 2.6 5.7 0.6 2.1 0.0 3.5 4.4 4.0 5.3 3.7 2.8 1.4 4.7 1.8 4.8 0.0 0.0 2.2 3.1 6.8 2.7 3.5 2.9 4.7 1.1 0.9 3.2 4.0 3.2 2.6
10.0 16.2 13.2 13.3 14.3 43.8 2.5 12.6 12.6 17.2 17.9 4.0 18.8 8.5 9.1 12.9 7.4 32.2 7.7 8.1 17.9 5.7 3.7 8.9 18.0 34.7 14.3 15.7 5.8 12.4 13.6 3.8 12.1 1.5 19.9 n.m n.m 1.8 10.9 23.0 8.1 14.7 14.7 9.8 n.m 6.0 4.8 73.2 4.9 16.1
9.9 15.9 13.6 13.9 14.3 45.7 4.5 13.3 13.0 15.0 16.7 4.4 19.9 8.8 8.9 11.1 9.7 29.1 8.0 12.7 15.8 6.2 4.5 10.4 15.4 34.1 13.4 17.7 5.6 15.8 15.9 5.8 12.6 0.5 21.4 n.m n.m 3.8 11.6 24.8 10.6 12.9 16.8 7.8 2.3 2.6 6.5 77.9 7.3 16.7
10.1 16.7 13.8 13.7 14.1 48.6 4.9 12.8 13.9 15.4 15.6 7.2 19.0 9.0 9.0 10.7 12.3 28.3 8.2 11.5 13.9 6.6 5.4 10.9 14.5 29.2 12.7 9.0 5.5 19.7 16.5 6.8 18.9 1.5 21.2 8.3 n.m 5.9 15.8 23.5 11.7 11.9 14.9 7.8 5.1 1.6 6.8 83.7 8.0 17.0
3.9 4.3 6.3 3.8 (0.5) 0.0 (2.3) (0.5) 5.7 (3.4) 0.3 (0.8) 0.3 2.0 9.3 2.4 7.4 9.3 (0.7) (11.1) (2.6) 3.2 2.4 4.9 (20.9) 2.6 (0.6) 7.1 2.6 6.6 (2.5) (0.3) 2.8 (5.3) (2.2) 0.0 (15.1) 4.6 0.6 0.9 5.8 0.2 1.1 (1.2) 0.0 1.0 (9.6) (0.5) 1.9 11.2
8.6 (0.5) 5.2 15.3 5.8 0.0 (3.1) 20.1 4.4 4.5 26.9 (8.6) (2.8) 44.5 3.2 15.9 11.0 13.3 (2.6) (14.7) 2.2 (5.2) 9.0 3.6 (10.2) (2.6) (3.3) 28.2 (1.8) 6.7 (3.4) (1.2) (5.6) (11.8) (5.9) 10.2 (20.2) 10.9 (3.9) (5.2) 12.9 2.9 4.7 4.5 2.7 5.3 (11.0) 3.2 11.1 9.0
25.5 44.7 29.6 71.6 17.8 13.3 (6.0) 21.8 14.6 5.9 30.3 7.5 52.7 116.5 18.6 26.5 7.5 74.8 8.6 (16.4) 18.5 (7.2) 33.3 12.9 7.6 3.1 4.1 62.8 11.7 2.4 3.5 (11.4) 12.2 (6.7) 41.2 (30.9) (34.2) 78.9 9.3 (8.9) (19.5) 3.1 1.1 5.9 (6.3) 11.9 (2.6) 12.1 (24.9) 16.3
6,397 5,307 7,603 1,667 22,456 1,992 559 1,171 57,261 3,473 690 490 414 886 36,946 23,597 8,332 5,314 613 354 1,068 4,122 31,730 8,036 279 1,687 160 670 8,013 26,047 4,023 4,396 7,987 528 2,361 5,180 154 1,790 1,370 1,677 5,920 3,655 769 4,730 1,980 229 1,684 15,749 177 45,630
77
Malaysia Strategy
12 December 2013
Table 39: Valuations And Ratings Of Individual Stocks Under Coverage

FYE Price (MYR/s) NEUTRAL Fair Value (MYR/s) 13F Core EPS (sen) 14F 15F 13F EPS Growth (%) 14F 115F 13F PER (x) 14F 15F 13F EV/EBITDA (x) 14F 15F
Petra Energy Paramount Parkson Pavilion REIT PBB-L Perdana Petroleum Petronas Chemicals Southern Steel SP Setia Sunway REIT TDM Time dotCom TM Top Glove TSH Resources UEM Sunrise UMW Unisem UOA Dev VS Industry Wah Seong YTL Power
Dec Dec Jun Dec Dec Dec Dec Jun Oct Jun Dec Dec Dec Aug Dec Dec Dec Dec Dec Jul Dec Jun
2.15 1.53 3.34 1.30 18.48 1.41 6.70 1.52 2.92 1.25 0.97 3.90 5.31 5.77 2.94 2.30 12.32 0.87 1.99 1.39 1.66 1.78
2.45 1.71 3.40 1.50 19.40 1.80 6.48 1.57 3.54 1.47 1.04 3.95 5.50 6.34 2.28 2.73 12.50 0.95 2.45 1.18 1.56 1.90
5.4 16.7 22.0 7.1 119.7 7.7 45.6 10.3 18.7 7.9 2.6 20.2 27.5 31.7 11.7 13.1 68.5 -3.5 25.2 20.1 5.3 14.6
15.4 18.7 17.0 7.4 129.4 13.9 46.3 11.4 21.8 7.9 6.2 21.2 24.0 37.3 17.7 14.0 87.4 2.0 28.2 21.3 12.3 15.1
21.3 23.4 21.0 7.8 139.9 16.4 46.9 8.7 25.9 8.5 7.8 24.6 25.5 39.8 21.0 16.3 99.4 8.9 36.9 22.7 14.7 15.4
+>100 (0.2) (36.6) 9.0 8.4 57.8 3.6 +>100 (7.6) 11.3 (58.2) 68.4 9.6 (9.4) 25.8 18.7 (15.8) (150.7) 2.5 9.2 (13.9) (14.2)
+>100 12.1 (22.7) 5.5 8.1 81.5 1.6 10.7 16.6 0.2 +>100 5.0 (12.7) 17.7 51.3 7.5 27.5 n.a. 11.8 6.2 +>100 3.6
38.3 25.0 23.5 5.3 8.1 18.2 1.4 (23.7) 18.9 8.3 24.8 16.5 6.3 6.7 18.6 16.1 13.7 +>100 31.0 6.2 19.8 2.2
39.5 9.2 15.2 18.4 15.4 18.4 14.7 14.8 15.6 15.9 37.2 19.4 19.3 18.2 25.1 17.6 18.0 n.m. 7.9 6.9 31.3 12.2
13.9 8.2 19.6 17.5 14.3 10.1 14.5 13.3 13.4 15.9 15.5 18.4 22.1 15.5 16.6 16.4 14.1 44.2 7.1 6.5 13.5 11.8
10.1 6.5 15.9 16.6 13.2 8.6 14.3 17.5 11.3 14.6 12.4 15.8 20.8 14.5 14.0 14.1 12.4 9.7 5.4 6.1 11.3 11.6
12.6 7.0 2.7 18.2 n.a. 10.9 7.8 9.9 16.8 11.1 15.9 11.7 4.7 8.5 19.2 17.6 7.1 6.1 5.2 3.8 12.5 8.8
7.6 6.5 2.9 17.3 n.a. 8.5 7.3 8.7 14.8 17.5 9.3 11.0 4.5 7.5 36.6 17.5 5.9 4.2 4.8 3.5 8.5 7.9
6.1 5.6 2.0 16.5 n.a. 6.8 6.8 8.1 13.4 16.4 7.9 9.9 4.3 6.9 11.7 15.4 5.5 2.7 3.7 3.2 7.8 7.4
SELL
AQRS Axis REIT BAT Carlsberg CMMT Digi.com Guiness IJM Plantations^ JCY Intl Maxis M'sia Smelting MNRB^ Quill Capita Seg International SKP Resources TH Plantation WCT
Dec Dec Dec Dec Dec Dec Jun Mar Sep Dec Dec Mar Dec Dec Mar Dec Dec
1.11 3.19 62.86 12.48 1.41 4.85 15.98 3.48 0.57 7.17 2.79 3.56 1.19 1.53 0.32 1.86 2.24
0.95 3.24 57.06 11.31 1.35 4.10 15.19 2.80 0.45 5.90 2.35 3.25 1.10 0.76 0.20 1.26 2.21
10.0 18.5 293.4 54.1 8.2 21.4 72.0 11.0 (3.8) 27.9 40.2 56.8 9.1 4.7 4.3 4.0 15.5
11.7 18.9 327.1 57.9 8.6 23.0 75.3 19.5 (2.0) 28.1 44.8 60.9 9.3 5.8 4.3 7.9 15.6
12.3 19.2 322.0 59.7 9.1 24.1 79.0 24.5 0.3 28.2 34.5 65.5 9.4 7.0 3.3 11.2 16.5
47.8 6.2 5.0 (13.0) 5.6 2.7 4.9 (25.0) (118.0) 2.2 251.1 6.0 2.9 (52.0) (3.3) (57.6) (4.9)
16.9 1.8 11.5 6.9 5.3 7.5 4.6 77.9 46.9 0.8 11.4 7.1 2.6 21.7 0.2 97.8 0.6
5.4 2.0 (1.6) 0.0 5.3 5.0 4.9 25.5 n.a. 0.4 (23.0) 7.6 1.0 21.1 (22.9) 43.0 6.1
11.1 17.2 21.4 23.1 17.2 22.7 22.2 31.7 n.m. 25.7 6.9 6.3 13.1 32.4 7.5 46.9 14.5
9.5 16.9 19.2 21.6 16.3 21.1 21.2 17.8 n.m. 25.5 6.2 5.8 12.8 26.6 7.5 23.7 14.4
9.0 16.6 19.5 20.9 15.5 20.1 20.2 14.2 +>100 25.4 8.1 5.4 12.6 22.0 9.7 16.6 13.6
7.8 24.6 15.4 15.4 17.6 12.2 14.7 20.7 30.1 13.3 6.8 6.2 13.7 17.0 3.8 12.4 11.7
7.0 24.2 13.9 14.5 16.8 11.4 13.9 13.1 14.6 13.1 8.9 5.9 13.4 14.1 3.6 9.4 11.3
6.8 23.7 14.1 14.1 16.1 11.0 13.1 10.9 7.8 12.9 6.0 5.0 13.2 11.4 3.1 5.6 10.6
78
Malaysia Strategy
P/CF (x) 13F NEUTRAL 14F 15F 13F P/BV (x) 14F 15F 13F DIV YIELD (%) 14F 15F 13F ROE (%) 14F 15F 1 Mth 3 Mth 12 Mth % Chg in price Mkt Cap RMm
8.0 n.m 5.1 15.7 n.a. 197.2 13.2 n.m n.m 11.7 21.0 10.7 6.6 10.6 16.4 n.m 7.0 3.5 10.9 4.1 8.4 7.0
6.2 4.7 4.9 14.5 n.a. 29.5 12.1 7.1 26.6 11.5 11.5 9.9 6.1 9.4 17.0 41.9 7.8 3.1 16.1 3.9 15.0 6.2
5.0 5.0 4.1 13.7 n.a. 15.0 12.0 3.2 12.0 10.7 9.6 8.6 5.9 8.9 12.8 18.1 7.3 2.5 9.4 3.7 7.8 6.2
1.4 0.7 1.3 1.2 3.2 1.5 2.4 0.7 1.5 1.0 1.1 0.8 3.2 2.6 2.6 1.7 2.3 0.6 1.1 0.6 1.3 1.3
1.3 0.7 1.3 1.2 2.8 1.3 2.2 0.7 1.4 1.0 1.0 0.8 3.2 2.4 2.3 1.5 2.2 0.6 1.0 0.6 1.2 1.2
1.2 0.6 1.2 1.2 2.5 1.2 2.1 0.7 1.3 1.0 1.0 0.8 4.2 2.1 2.0 1.4 2.1 0.6 0.9 0.6 1.1 1.1
0.5 5.6 5.4 5.1 2.9 2.4 3.4 6.1 3.6 6.0 1.1 0.0 4.7 3.3 0.9 1.5 4.5 2.3 6.5 3.6 0.0 0.5
1.4 5.9 3.9 5.4 3.1 2.4 3.5 5.0 4.1 6.0 2.5 0.0 4.1 3.5 1.0 1.7 4.9 2.3 7.0 3.6 0.0 0.6
2.0 6.2 3.3 5.7 3.4 2.4 3.5 3.8 4.1 6.1 2.8 0.0 4.3 3.6 1.3 2.0 5.3 2.3 8.0 4.3 3.5 0.7
4.2 7.9 8.7 6.4 21.8 8.1 17.2 4.9 10.1 6.7 3.0 6.4 15.0 17.6 10.2 10.2 14.5 n.m 14.8 8.9 4.1 11.0
9.9 8.5 6.5 6.8 20.9 13.6 16.1 5.3 11.0 6.6 6.9 5.8 13.7 18.1 13.8 9.8 16.0 1.3 15.3 9.2 9.1 10.7
12.5 10.1 7.9 7.6 20.1 14.4 15.1 3.6 12.3 7.1 8.2 0.0 14.1 17.0 15.2 10.5 17.2 5.9 18.3 9.5 10.3 9.9
(2.8) (3.2) 13.6 3.0 5.4 5.7 6.5 (1.7) 6.2 7.7 (20.9) 2.4 2.3 1.8 4.0 3.1 (4.5) 1.7 0.9 (3.1) (0.6) 12.0
3.4 (2.6) 2.4 (6.8) 6.5 13.6 4.9 0.0 3.3 (9.7) (10.1) 12.8 (1.3) (1.4) (1.7) (9.3) (12.0) (0.5) 2.8 (6.0) (4.9) 15.6
19.5 (1.3) (17.4) (1.4) 25.7 21.8 7.3 0.0 (8.8) (2.8)) 7.6 26.9 (9.5) 25.5 7.3 57.1 28.3 (8.5) 48.3 (15.4) 0.9 6.0
692 517 3,653 3,909 65,270 698 53,600 625 6,719 3,475 1,430 2,235 18,996 3,569 2,453 10,310 14,393 583 2,529 253 1,286.33 13,213
SELL
n.m 11.4 18.9 20.0 12.5 14.0 22.6 22.1 5.0 0.3 3.7 237.3 2.7 21.5 6.4 12.9 15.8
87.8 10.9 17.9 19.5 12.2 13.5 18.6 13.9 7.0 0.2 5.0 237.3 2.7 18.8 7.1 9.9 15.5
65.3 10.2 18.1 0.0 11.7 13.3 15.9 11.3 10.8 0.2 3.7 237.3 2.7 16.4 8.0 8.1 14.5
1.6 1.3 35.5 12.5 1.2 n.m 13.2 2.0 0.6 8.8 1.2 0.6 0.9 3.1 1.3 1.4 1.3
1.4 1.3 33.9 12.2 1.2 n.m 12.3 1.9 0.6 10.3 1.0 0.6 0.9 2.9 1.2 1.4 1.2
1.3 1.3 33.7 12.2 1.2 n.m 11.6 1.7 0.6 12.3 1.0 0.6 0.9 2.6 1.1 1.3 1.2
2.7 5.2 4.6 4.1 5.6 4.1 4.3 1.6 0.0 5.6 0.0 7.5 6.4 3.1 3.3 1.0 3.3
2.7 5.3 5.1 4.4 5.9 4.7 4.2 2.7 0.0 5.6 5.3 8.0 6.5 1.3 3.2 1.6 3.3
2.7 5.4 5.1 4.5 6.1 5.0 4.5 3.3 0.0 5.6 4.1 8.6 6.6 1.7 3.1 2.0 3.3
15.5 8.1 169.1 55.0 6.8 n.m 58.4 6.3 -7.0 31.7 17.3 10.2 6.7 10.1 14.9 3.1 9.0
16.0 7.8 180.5 57.2 7.2 n.m 60.0 10.8 -3.9 37.0 17.9 10.4 6.8 11.6 13.4 5.9 8.7
14.8 8.0 173.1 58.2 9.0 n.m 58.9 12.3 0.5 44.0 12.3 10.4 6.8 13.2 12.3 8.1 8.8
(9.4) 2.4 1.3 (11.0) 7.4 7.6 (5.4) 3.1 11.9 0.3 (0.3) 5.4 0.0 0.0 0.0 1.8 1.7
0.8 (5.7) 10.6 (16.0) (5.3) 5.8 (9.9) (8.3) (1.5) 3.7 (10.3) 13.1 (2.5) (4.3) 18.3 (7.0) (1.6)
10.6 16.8 3.5 11.4 (8.0) 1.9 11.2 (11.6) (18.0) 2.6 (12.0) 20.1 (0.8) (20.8) 2.9 (14.0) 5.1
395 1,456 17,948 3,845 2,493 37,709 4,828 2,845 1,166 53,775 279 759 464 1,017 300 1,632 2,433
79
Malaysia Strategy
12 December 2013
RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage
Disclosure & Disclaimer All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. This report is general in nature and has been prepared for information purposes only. It is intended for circulation to the clients of RHB and its related companies. Any recommendation contained in this report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This report is for the information of addressees only and is not to be taken in substitution for the exercise of judgment by addressees, who should obtain separate legal or financial advice to independently evaluate the particular investments and strategies. RHB, its affiliates and related companies, their respective directors, associates, connected parties and/or employees may own or have positions in securities of the company(ies) covered in this research report or any securities related thereto, and may from time to time add to, or dispose off, or may be materially interested in any such securities. Further, RHB, its affiliates and related companies do and seek to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies), may sell them or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory or underwriting services for or relating to such company(ies), as well as solicit such investment, advisory or other services from any entity mentioned in this research report. RHB and its employees and/or agents do not accept any liability, be it directly, indirectly or consequential losses, loss of profits or damages that may arise from any reliance based on this report or further communication given in relation to this report, including where such losses, loss of profits or damages are alleged to have arisen due to the contents of such report or communication being perceived as defamatory in nature. The term RHB shall denote where applicable, the relevant entity distributing the report in the particular jurisdiction mentioned specifically herein below and shall refer to RHB Research Institute Sdn Bhd, its holding company, affiliates, subsidiaries and related companies.
All Rights Reserved. This report is for the use of intended recipients only and may not be reproduced, distributed or published for any purpose without prior consent of RHB and RHB accepts no liability whatsoever for the actions of third parties in this respect. Malaysia This report is published and distributed in Malaysia by RHB Research Institute Sdn Bhd (233327-M), Level 11, Tower One, RHB Centre, Jalan Tun Razak, 50400 Kuala Lumpur, a wholly-owned subsidiary of RHB Investment Bank Berhad (RHBIB), which in turn is a wholly-owned subsidiary of RHB Capital Berhad. Singapore This report is published and distributed in Singapore by DMG & Partners Research Pte Ltd (Reg. No. 200808705N), a wholly-owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group) and OSK Investment Bank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad (the merged entity is referred to as RHBIB, which in turn is a wholly-owned subsidiary of RHB Capital Berhad). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited. DMG & Partners Securities Pte Ltd may have received compensation from the company covered in this report for its corporate finance or its dealing activities; this report is therefore classified as a non-independent report. As of 11 December 2013, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd do not have proprietary positions in the securities covered in this report, except for: a) As of 11 December 2013, none of the analysts who covered the securities in this report has an interest in such securities, except for: a) Special Distribution by RHB Where the research report is produced by an RHB entity (excluding DMG & Partners Research Pte Ltd) and distributed in Singapore, it is only distributed to "Institutional Investors", "Expert Investors" or "Accredited Investors" as defined in the Securities and Futures Act, CAP. 289 of Singapore. If you are not an "Institutional Investor", "Expert Investor" or "Accredited Investor", this research report is not intended for you and you should disregard this research report in its entirety. In respect of any matters arising from, or in connection with this research report, you are to contact our Singapore Office, DMG & Partners Securities Pte Ltd
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Malaysia Strategy

Malaysia Strategy 2014

Positive Local Backdrop But QE Taper Fears Linger

Risks Growth Value

FBM KLCI: 1826.95 as at 6/12/2013

Closing Index (LHS)

Source: Bursa Malaysia

Bond yields still on uptrend

Weak commodity prices

CRB commodity index (RHS)

Source: DJ-UBS Metals Subindex, Commodity Research Bureau

MYR/USD: Weak and volatile

Lim Chee Sing +603 9280 2153

See important disclosures at the end of this report

APPENDIX Valuations and Ratings of Individual Stocks Under Coverage 72

See important disclosures at the end of this report

See important disclosures at the end of this report

Source: Bloomberg, RHB estimates * up to 6 December

See important disclosures at the end of this report

Table 1 FBMKLCI performance versus other regional markets

* As at 6 December 2013 Source: Bloomberg

Table 2 Bursa Malaysia performance by sector

See important disclosures at the end of this report

Table 3: Top performers & underperformers under RHB coverage (YTD)

See important disclosures at the end of this report

Figure 2: Large swings of short-term capital in the fixed income market

Figure 3: Volatile capital flows in the equity market

Source: Bank Negara Malaysia

Source: Bursa Malaysia

See important disclosures at the end of this report

21.9 21.3 20.4

21 19.5 18.5 18.1 18.1

20 10 0 2008 2009 MGS 2010 2011 2012 2013

Source: Bank Negara Malaysia

Source: Bursa Malaysia

See important disclosures at the end of this report

Figure 6: Chinas HSBC and official manufacturing PMIs trending up

New home pricesin70 major citiesmonitoredbyNBS

25% 20% 15% 10% 5% 0% 5% 10%

Source: China Federation of Logistics & Purchasing and Markit Economics

Source: China Real Estate Index System

See important disclosures at the end of this report

Figure 8: US Real GDP growth accelerating

-40 -60 05 06 07 08 09 10 11 Existing home sales Housing starts 12 13

S&P case-shiller house price index New home sales

Source: US Bureau of Economic Analysis

Source: US Census Bureau

We see a good chance of the US economic

economic recovery losing momentum, but unlikely to be derailed

See important disclosures at the end of this report

has returned to positive growth since 2Q and is stabilising

PMI for Manufacturing

Source: Markit Economics

Source: European Commission Economic Sentiment Indicators

Malaysian economy on path to cyclical recovery

Malaysias economic growth has picked up to

See important disclosures at the end of this report

Figure 13: A revitalisation of investment

(Private investment growth)

Source: Bank Negara Malaysia and Dept. of Statistics

Source: Bank Negara Malaysia and Dept. of Statistics

Source: RHB estimates, various media reports.

See important disclosures at the end of this report

Source: Dept. of Statistics