Budget 2011

MARKET DATELINE

PP 7767/09/2011(028730)

15 October 2010

Malaysia

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The 2011 Budget
Setting The Pace Towards Transformation

Executive Summary
◆ The 2011 Budget sets the pace of economic transformation with the right emphasis on reinvigorating private investment and intensifying human capital development. These are the major positives in the Budget which, in our view, are critical to chart the direction of the country in moving towards a high income economy. There are, however, no substantial new information that will likely excite equity investors in the immediate term, in our view.

◆ Whilst the Budget aims to strike a balance between fiscal consolidation and the need to sustain spending to cushion the economy against the risk of a sharper-than-expected slowdown in the global economy, the lack of broader measures to increase revenue, and reduce subsidies and other operating expenditure suggests that there is limited room for manoeuvre. As a result, despite a less expansionary Budget, the fiscal deficit is only projected to ease marginally to 5.4% of GDP in 2011, from 5.6% estimated for 2010. ◆ Consequently, our views on the market outlook, earnings and sector calls remain relatively unchanged. In fact, the Budget speech focused attention primarily on private sector projects that are already in the news. While there are still lack of details, we believe the news flow will likely come after the Budget speech, now that the timelines for the major projects have been set and are mostly expected to begin in 2011. This suggests that the groundwork will accelerate from here on and we believe this will maintain the positive flow of news to the construction sector and, to a lesser extent, the property sector. Therefore, we believe any knee jerk to sell would only be temporary as the post-Budget news flow continues to sustain the liquidity-driven rally.

◆ Whilst market valuations are no longer cheap, the influx of G3 liquidity to Emerging Asia's equity, bond and currency markets in search for higher returns could still send the market higher in the near term, in our view. These short-term capital, however, are transient in nature and could reverse out relatively quickly with changes in outlook. Already, the destabilising capital flows and sharp appreciation of currencies in Emerging Asia have created concerns and induced policy intervention in the form of short-term capital control and currency intervention in some countries. As a result, we believe the market may move into a phase of greater volatility in the months ahead. ◆ Longer term, we believe there is still room for the market to trend higher in 2011. This is primarily predicated on the view the global economy is more sustainable than feared, which in turn implies sustained corporate earnings growth (+12.8% projected for 2011) that will continue to create new shareholders' value for investors. Consequently, our end-2011 FBM KLCI target remains unchanged at 1,640, based on 15x mid-cycle 2012 earnings. This, however, will not be without volatility as the global economy enters into a period of slowing growth in an uneven phase of recovery. Under such circumstances, investors should remain vigilant and do some top slicing on stocks where valuations have become rich in the run-up of the market. This would then provide more room for investors to accumulate fundamentally-robust stocks on weakness.
Please read important disclosures at the end of this report.

◆

Key Tax And Expenditure Measures
◆ Fiscal consolidation is not as sharp as earlier expected given that the projected budget deficit comes in higher than the guidance provided under the Tenth Malaysia Plan. This suggests that the Government intends to front load its expenditure to facilitate the implementation of the various initiatives proposed for the NKRAs and NKEAs under the New Economic Model. This is prudent given rising risk of a sharper-thanexpected slowdown in the global economy. The deficit of the Federal Government is projected to drop slightly to 5.4% of GDP in 2011, from a deficit of 5.6% of GDP estimated for 2010. Taken together, the impact on the Malaysian economy is likely to be less expansionary in 2011, but still contributing to growth, albeit by a smaller magnitude compared with 2010, in our view. The consolidated public sector is projected to record a smaller deficit in 2011 due mainly to a reduction in development expenditure by both the general government and the non-financial public enterprises (NFPEs). As a result, the consolidated public sector is also expected to exert a less expansionary impact on the economy during the year.

◆

◆

Reinvigorating Private Investment
Measures
◆ Given the budget constraints, the Government appears to be even more dependent on Public-Private Partnership (PPP) initiatives to drive investments. ◆ Although some of the investments were already announced previously, the market has been waiting for confirmation and more details on: o RM46bn Kuala Lumpur International Financial District, to be developed by 1Malaysia Development Berhad (1MDB) and Abu Dhabi’s Mubadala Development Company, commencing next year. o Mass Rapid Transit (MRT) project within the Greater KL NKEA, which will be implemented between 2011 and 2020 with an estimated private investment of RM40bn. o Development of the 2,680-acre Malaysian Rubber Board land in Sungai Buloh by EPF, which is estimated to be worth RM10bn and expected to be completed by 2025. o PNB’s RM5bn 100-storey Warisan Merdeka to be built on the site of the Stadium Merdeka and Stadium Negara, and targeted for completion by 2015. ◆ The Government repeated earlier statements for the Government-Linked Investment Companies (GLICs) to divest their shareholdings in major listed companies. However, the GLICs will now also be allowed to increase their overseas investments, e.g. EPF’s overseas investments will be allowed to rise to 20%, from 7% currently. ◆ Three new stockbroking licences will be issued to local or foreign players to increase the retail market participation, while new fixed income and equity products such as Exchange Traded Funds will be facilitated by the Securities Commission and launched by Bursa Malaysia to meet investors’ demand. ◆ The Government will establish a RM1bn syariah-compliant Bumiputera Property Trust Scheme under the Bumiputera Property Trust Foundation (BPTF) to enable more bumiputera ownership of prime commercial properties in the Klang Valley, through a group ownership scheme. ◆ In the oil & gas industry, as previously mentioned in the Economic Transformation Programme (ETP), the Government will allocate RM146m to help establish an Oil Field Services and Equipment Centre in Johor although the project will be mainly driven by RM6bn private investments over 10 years. ◆ For green technology, the Government extended the pioneer status and investment tax allowance for renewable energy and energy efficiency activities until 31 Dec 2015. Import duty and sales tax exemption on related equipment has been extended until 31 Dec 2012. Full import duty exemption for hybrid cars will be extended to 31 Dec 2011, while excise duty exemption was raised to 100%, from 50% previously. ◆ The B5 programme to blend biofuels with petroleum diesel will be mandatory from June 2011 in Putrajaya, Kuala Lumpur, Selangor, Negeri Sembilan and Melaka. The Government also intends to follow up with the Feed in Tariff (FiT) mechanism under the Renewable Energy (RE) Act, but no timeline was given. ◆ The Government plans to boost the tourism industry via a number of measures including improving infrastructure and facilities. The Government also mentioned but did not elaborate on the RM3bn integrated eco-nature resort in Karambunai, Sabah, which will commence in 2011. More importantly, import duties on 300 consumer goods (including apparel, handbags and shoes) ranging between 5% and 30% were abolished. ◆ For palm oil, plans are to encourage replanting activity by replacing aged trees with high quality new clones, through a RM297m fund, while RM150m will be allocated to support downstream oleo derivatives and vitamin production.

THE 2011

2

BUDGET

◆ RM199m will be allocated to multimedia content, while the import duty and sales tax exemption on broadband equipment will be extended until 2012. The investment tax allowance period for the last mile broadband service providers has also been extended. All mobile phones will also now be exempted from sales tax. ◆ Allocations have been given to the economic corridors of Iskandar Malaysia (RM339m), Northern (RM133m), East Coast (RM178m), Sarawak (RM93m) and Sabah (RM110m) for development of infrastructure and industrial projects. ◆ The service tax will be raised from 5% to 6%. The service tax will also be imposed on pay-TV services.

Intensifying Human Capital Development
Measures
◆ The Government will establish a Talent Corporation in early 2011. ◆ RM6.4bn is to be allocated for building and upgrading of schools, hostels, facilities and equipment, plus RM250m to be allocated for development expenditure to religious schools, vernacular schools, missionary schools, and Government-assisted schools nationwide. ◆ RM576m will be allocated for scholarships, while RM213m will be allocated to enhance proficiency in the national and English languages. ◆ RM474m is provided to enhance productivity and skills of non-graduates to meet the demand for skilled workforce in technical fields. ◆ The 1Malaysia Training Programme will commence in Jan 2011 with an allocation of RM500m. ◆ Basic minimum wages will be enforced for security guards with effect from Jan 2011. This follows the increase in salaries of postmen on 1 Jul 2010.

Enhancing Quality Of Life Of The Rakyat
Measures
◆ RM1.2bn is allocated to the Ministry of Women, Family and Community Development to carry out various welfare and community programmes. ◆ The rebate for electricity bills of less than RM20 will continue to ease the burden of the low-income group. ◆ RM568m is provided to build houses for the poor and low-income group, while a scheme is open to all Malaysian permanent estate workers to obtain housing loans at 4% interest rate and a repayment period of up to 40 years extending to the second generation. ◆ Cagamas will introduce the Skim Rumah Pertamaku, which will provide a guarantee on down payment of 10% for houses below RM220,000, and only for first-time house buyers with household income less than RM3,000 per month. ◆ First time buyers will also be given stamp duty exemption of 50% on instruments of transfer and loan agreement instruments on a house price not exceeding RM350,000. ◆ For the rural population, RM6.9bn will be allocated to implement basic infrastructure such as water and electricity supply and rural roads. ◆ RM974m will be allocated to increase food production, plus RM170m incentives for fishermen as well as boat owners and workers to increase fish landing. ◆ The Government is allocating RM200m to standardise the prices of rice, cooking oil, sugar, flour, gas, petrol and diesel in rural areas. ◆ The Government will increase the monthly allowance for various community leaders, religious leaders and village heads. ◆ Toll rates for four highways owned by PLUS Expressway will not be raised for the next five years, effective immediately. ◆ RM15.2bn will be allocated to construct new hospitals, increase the number of doctors and nurses as well as to obtain supplies of medicines and equipment. ◆ RM350m will be allocated to various programmes to combat crime. ◆ RM1.9bn will allocated to finance environmental preservation projects, including implementing the River of Life Programme (under the ETP) and greening of Kuala Lumpur.

Strengthening Public Service Delivery
Measures
◆ The Government will introduce a point system to facilitate applications for permanent residence status. ◆ Civil servants will be given financial assistance, and easier access to housing loans with effect 1 Jan 2011. The maximum loan eligibility will be raised to RM450,000, from RM360,000 currently.

THE 2011

3

BUDGET

Impact On The Economy : Less Expansionary But Still
Contributing To Growth
THE REVENUE AND EXPENDITURE PROPOSALS
Federal Government : Less Expansionary
Although the Government will continue to reduce its budget deficit in 2011, it is not as sharp as earlier expected given that the projected budget deficit comes in higher than the guidance provided under the Tenth Malaysia Plan (10MP). As a result, the Federal Government’s budget deficit is projected to only narrow slightly to 5.4% of GDP in 2011, from 5.6% of GDP estimated for 2010 and compared with the guidance of 4.2% provided under the 10MP. We view it as a prudent move given rising risk of a sharper-than-expected slowdown in the global economy, which will in turn hurt the country’s exports. Furthermore, the Government intends to spend more in the initial period of introducing the New Economic Model (NEM), particularly to facilitate the implementation of various initiatives under the model. This, together with measures announced in the 2011 Budget, is also aimed at convincing the general public and, investors in particular, that the Government is serious in transforming the economy by taking the lead and putting the money where its mouth is, in order to instill confidence. We believe the Government’s initiatives announced in the 2011 Budget to reinvigorating private investment will help to sustain the sector’s growth, albeit at a more moderate pace. These measures include an allocation to encourage electrical & electronics industry to invest in high value-added activities, an extension of tax incentives for another 5 years to 2015 to encourage companies to undertake food production activities, a cut in import duties to boost tourism and incentives to develop green technology. Infrastructure and property developments are expected to drive private investment in 2011 as well, in our view. As it stands, the Government has allocated RM1.0bn for the Facilitation Fund to drive the Public-Private Partnership projects, targeting construction of highways, power plant and healthcare related projects. It also indicated that the Mass Rapid Transit (MRT) which cost about RM40bn will be implemented in 2011. The Governmentlinked investment corporations such as the 1Malaysia Development Bhd, the Employees Provident Fund and Permodalan National Bhd, have also been earmarked to undertake some huge development projects. Similarly, the Government will offer three new stock broking licences to increase retail market participation. As a whole, we expect private investment to moderate to 7.8% in 2011, from +8.6% estimated for 2010. Although consumer spending will be affected somewhat by the reinstatement of employees’ contribution to the Employee Provident Fund back to 11% in 2011, we believe the 1.0% increase in services tax to 6.0%, is unlikely to impact consumer spending significantly. The 1% increase is estimated to bring in additional tax revenue of RM0.7bn for the Government. In addition, the abolishment of 5-30% import duties of approximately 300 goods preferred by tourists and locals and the RM500 Special Financial Assistance money provided for civil servants will help to sustain consumer spending. As a result, we expect consumer spending to remain resilient, underpinned by rising consumerism and high savings in the country. As a whole, given that the Federal Government will spend more than what it collects in terms of revenue, this will exert a less expansionary impact on the economy, but still contributing to growth in 2011, albeit by a smaller magnitude compared with 2010 (see Table 1). Meanwhile, we believe the Government is committed to reduce its budget deficit, albeit gradually, to ensure that fiscal policy remains supportive of economic growth.
The reduction in the

Government’s

budget

deficit is not as sharp as earlier expected in 2011

The Government is serious in lead transforming the economy by taking the

Initiatives announced in the 2011 Budget will help to sustain private investment growth

Consumer spending will likely remain resilient, underpinned by rising consumerism and high savings in the country

Fiscal policy will exert a less expansionary impact on the economy, but still contributing to growth in 2011

THE 2011

4

BUDGET

Table 1

Federal

Government Financial Position
2010(e) (RM bil) 20111(f) 2010(e) (%, change) 165.8 162.8 3.0 49.2 0.7 48.5 -45.5 -5.4 9.1 41.0 8.8 -9.0 -6.8 -9.0 2.2 -3.1 2.3 7.0 2011(f)

2009

Revenue Operating Expenditure Current balance Gross development expenditure Less : Loan recoveries Net development expenditure Overall balance % to GDP
1

158.6 157.1 1.6 49.5 0.5 49.0 -47.4 -7.0

162.1 152.2 10.0 54.0 0.7 53.3 -43.3 -5.6

Budget estimate, excluding 2011 tax measures f : Forecasts

e : Estimates

Source : MOF's Economic Report 2010/2011

Consolidated Public Sector : Also Less Expansionary The consolidated public sector’s fiscal spending, which includes the state governments, statutory authorities, local governments and non-financial public enterprises (NFPEs), will also be less expansionary in 2011. This is reflected in a smaller deficit projected for the consolidated public sector, which is envisaged to narrow slightly to 7.6% of GDP or RM63.5bn in 2011, from a deficit of 7.8% of GDP or RM60.1bn estimated for 2010 (see Table 2). This is on account of a smaller deficit of 5.1% projected at the general government level for 2011, compared with a deficit of 5.2% of GDP estimated for 2010, on the back of a reduction in development expenditure. Similarly, the NFPEs development expenditure is projected to slow down and its deficit is projected to record a smaller deficit of 2.4% in 2011, compared with a deficit of 2.5% estimated for 2010.
The consolidated public sector’s fiscal spending will also be less expansionary in 2011

Table 2

Consolidated Public Sector Financial Position
2009 2010(e) (RM bil) 20111(f) 2009 2010(e) (%, change) 2011(f)

Revenue Operating expenditure NFPEs current surplus Public sector current balance % of GDP Development expenditure General government NFPEs Overall balance % of GDP 1

134.0 170.3 101.2 64.9 +9.6 111.3 54.5 56.8 -46.4 -6.8

132.8 168.0 94.2 59.0 +7.6 119.1 57.1 62.0 -60.1 -7.8

138.6 176.8 93.2 55.0 +6.6 118.5 54.8 63.7 -63.5 -7.6

4.4 3.2 -15.2

-0.9 -1.3 -6.9

4.4 5.2 -1.1

-10.5 7.9 -23.1

7.0 4.8 9.2

-0.5 -4.1 2.8

Budget estimate, excluding 2011 tax measures

Source : Ministry Of Finance Economic Report 2010/2011

THE 2011

5

BUDGET

Impact On The Equity Market : Neutral
Given the 2011 Budget’s spending constraints, it is perhaps not surprising that there was a lack of major incentives and significant measures from the Government. While there were the usual allocations for healthcare, education, rural development, and incentives for civil servants, there were no significant catalysts for other key economic sectors.
No significant catalysts for key economic sectors

In fact, the Budget speech focused attention primarily on private sector projects that are already in the news. These included the RM40bn MRT, the RM26bn Kuala Lumpur International Financial District, and EPF’s RM10bn development of the Malaysian Rubber Board land in Sungai Buloh, plus the revival of PNB’s proposed 100-storey RM5bn Warisan Merdeka building on the site of the old national stadium.

Focus on private sector projects

While the lack of details on these projects could be a major disappointment for investors, we believe the news flow will in fact come after the Budget speech, now that the timelines for each of these projects have been set. In fact, the projects are mostly expected to begin in 2011, which suggest that the groundwork will accelerate from here on. We believe this will maintain the positive flow of news to the construction sector, and sustain the bullish sentiment for Gamuda (TB, FV = RM4.51) and MRCB (TB, FV = RM2.49).

News flow likely to come after the Budget speech

As for the property sector, we note the Government’s focus on the low- to mid-end range housing with incentives for first-time buyers, which was in line with the theme to assist the lower-income groups. However, we believe this does not preclude subsequent post-Budget measures to curb speculation on mid- to high-end properties, and this uncertainty could have a negative impact on the property sector. Our preference would thus still be on the mass housing developers like Mah Sing (OP, FV = RM2.33).

Incentive for first-time house buyers

The PM’s call again to the Government-Linked Investment Companies (GLICs) to divest their shareholdings in listed companies will once again focus attention on the key GLCs, like Axiata (MP, FV = RM5.75), TM (MP, FV = RM3.55), TNB (OP, FV = RM10.30) and MAHB (OP, FV = RM5.96). We note that EPF and UEM Group’s proposal on 15 Oct to jointly acquire PLUS’s assets and liabilities for RM23bn cash could be seen as a contradictory move, but the upshot is that investors will receive a capital repayment that can be redeployed in other stocks, thereby indirectly improving the market’s liquidity.

GLICs called upon to divest GLC shares

We believe the 2011 Budget has not provided major catalysts for the equity market, but this has been the case even with past budget speeches. Therefore, we believe that a knee jerk reaction to sell would only be temporary as the post-Budget news flow (relating to the ETP blueprint to be published on 25 Oct, the MMHE and Petronas Chemicals listings, and the potential Sarawak state election) continues to sustain the liquidity-driven rally.

Post-Budget news flow to sustain liquidity-driven rally

THE 2011

6

BUDGET

Market Outlook : Short-term Liquidity And News Flow Driven
The 2011 Budget sets the pace of economic transformation with the right emphasis on reinvigorating private investment and intensifying human capital development. These are the major positives in the Budget which, in our view, are critical to chart the direction of the country in moving towards a high income economy. There are, however, no substantial new information that will likely excite equity investors in the immediate term, in our view. Whilst the Budget aims to strike a balance between fiscal consolidation and the need to sustain spending to cushion the economy against the risk of a sharper-thanexpected slowdown in the global economy, the lack of broader measures to increase revenue, and reduce subsidies and other operating expenditure suggests that there is limited room for manoeuvre. As a result, despite a less expansionary Budget, the fiscal deficit is only projected to ease marginally to 5.4% of GDP in 2011, from 5.6% estimated for 2010. Consequently, our views on the market outlook, earnings and sector calls remain relatively unchanged (see Tables 3 & 4). Whilst market valuations are no longer cheap, the influx of G3 liquidity to Emerging Asia's equity, bond and currency markets in search for higher returns could still send the market higher in the near term, in our view. These short-term capital, however, are transient in nature and could reverse out relatively quickly with changes in outlook. Already, the destabilising capital flows and sharp appreciation of currencies in Emerging Asia have created concerns and induced policy intervention in the form of short-term capital control and currency intervention in some countries. As a result, we believe the market may move into a phase of greater volatility in the months ahead.
Setting the pace towards transformation with the right emphasis

Balancing

fiscal

consolidation with growth but with limited room for manoeuvre

No

substantial from but

new the of

information Budget, still

influx

short-term liquidity could send the market higher in the near term

Table 3 Earnings Outlook And Valuations
FBM KLCI COMPOSITE INDEX @1,489.86 15/10/2010 EBITDA Growth (%) Pre-Tax Earnings Growth (%) Normalised Earnings Growth (%)* Normalised EPS Growth (%)* Prospective PER (x)* Price/EBITDA (x) Price/Bk (x) Price/NTA (x) Net Interest Cover (x) Net Gearing (%) EV/EBITDA (x) ROE (%) * Exclude Mas earnings in 09-11 -6.6 -10.0 -10.2 -14.9 20.7 10.9 2.6 3.4 7.6 48.8 8.4 12.3 26.2 38.5 30.0 23.7 16.7 8.7 2.4 2.8 8.2 46.3 6.7 14.7 11.3 17.8 13.1 12.8 14.8 7.8 2.3 2.6 9.5 40.7 6.0 15.2 7.3 9.0 9.1 9.1 13.6 7.3 2.1 2.4 10.8 37.5 5.6 15.4 -2.0 -2.4 -6.3 -9.7 19.8 8.6 2.0 2.3 7.1 47.6 8.3 11.7 23.5 32.0 28.8 19.7 16.1 8.3 2.2 2.5 8.0 37.4 6.9 13.6 11.2 15.9 13.9 13.8 14.1 7.4 2.0 1.3 9.3 37.4 6.1 14.2 7.3 9.9 9.8 9.8 12.8 6.9 1.9 1.3 10.4 33.1 5.5 14.8 2009a 2010f 2011f 2012f 2009a RHBRI’s Basket 2010f 2011f 2012f

THE 2011

7

BUDGET

Table 4
Covered Stocks Mkt Cap RMbn Banks & Finance Power Construction Motor Property Media Timber Insurance Plantation Telecommunications Gaming Transportation* Oil & Gas Consumer Infrastructure Building Materials Manufacturing Semiconductors & IT 213.3 63.9 22.9 21.4 21.3 15.0 3.6 3.8 119.4 109.6 64.2 59.7 33.9 32.6 23.5 12.9 7.2 5.0 833.1 * Exclude MAS earnings in 10-11 Note : RHBRI’s basket

Sector Weightings & Valuations
Weight % 25.6 7.7 2.8 2.6 2.6 1.8 0.4 0.5 14.3 13.2 7.7 7.2 4.1 3.9 2.8 1.6 0.9 0.6 100.0 EPS Gwth (%) FY10 24.0 16.8 28.4 58.9 -13.5 40.5 68.4 6.6 5.9 23.2 51.7 44.9 9.7 -6.2 2.0 14.1 25.7 32.7 FY11 13.4 12.3 12.7 10.2 16.1 8.9 41.8 8.7 19.9 11.5 0.9 12.5 16.4 11.1 49.0 21.3 14.4 7.8 FY12 10.5 12.3 6.8 17.2 11.4 7.5 14.6 21.5 3.0 8.9 9.4 17.3 9.8 10.7 9.0 4.1 10.3 10.4 FY10 15.4 13.7 19.6 10.8 14.4 14.0 12.3 9.4 20.7 17.1 14.0 21.1 17.3 16.9 17.3 12.9 11.4 8.8 PER (x) FY11 13.5 12.2 17.3 9.8 12.3 12.9 8.7 8.6 17.0 15.3 13.8 18.7 14.9 15.9 11.6 10.9 10.0 8.7 FY12 12.2 10.9 16.2 8.4 11.0 12.0 7.5 7.1 16.5 14.0 12.6 13.7 13.5 14.3 10.7 10.5 9.0 7.9 Overweight Overweight Overweight Overweight Overweight Overweight Overweight Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Recommendation

Longer term, we believe there is still room for the market to trend higher in 2011. This is primarily predicated on the view the global economy is more sustainable than feared, which in turn implies sustained corporate earnings growth (+12.8% projected for 2011) that will continue to create new shareholders' value for investors. Consequently, our end-2011 FBM KLCI target remains unchanged at 1,640, based on 15x mid-cycle 2012 earnings. This, however, will not be without volatility as the global economy enters into a period of slowing growth in an uneven phase of recovery.

Longer-term

outlook,

however, remains positive and our end-2011 FBM KLCI target remains unchanged at 1,640

THE 2011

8

BUDGET

Market Strategy
Top Slicing On Further Run-up
Whilst the long-term economic picture remains positive for the equity market, the revival of a “double-dip” recession fear and destabilising capital flows can have a disproportionate impact on the market in the foreseeable future. Under such circumstances, investors should remain vigilant and do some top slicing on stocks where valuations have become rich in the run-up of the market. This would then provide more room for investors to accumulate fundamentally robust stocks on weakness. Under such circumstances, stock picking is key. As key risks are mainly external, we believe investors may find greater price stability in companies that have less or hedged exposure to overseas markets. Meanwhile, there is still room for some tactical plays in the near term given the positive news flow on the award of projects now that the timelines for major projects have been set. Overall, we believe the market will be volatile in the months ahead, but any significant pullback in the market should be taken as an opportunity to pick stocks and reposition for the new year. A list of our tactical plays and longer-term picks is reflected in Table 5.
Table 5
Fair FYE 15/10/2010 Tactical Plays Tenaga Gamuda MRCB Faber HSL Maybank CIMB IOI KLK AirAsia Parkson Dialog Media Prima KPJ Carlsberg Mah Sing Aug Jul Dec Dec Dec Jun Dec Jun Sep Dec Jun Jun Dec Dec Dec Dec 8.93 3.89 2.08 3.08 1.82 8.88 7.94 5.80 19.00 2.36 5.96 1.23 2.30 3.55 5.21 1.87 10.30 4.51 2.49 3.82 1.95 10.50 9.60 6.75 22.05 3.01 7.72 1.30 2.75 4.51 6.03 2.33 38,698 7,849 2,832 1,118 1,012 62,852 58,212 36,987 20,283 6,561 6,177 2,435 2,174 1,873 1,605 1,555 75.5 19.0 6.4 34.2 16.2 61.9 56.3 33.6 124.4 25.1 37.3 8.8 16.5 26.6 42.8 17.2 87.3 20.5 6.7 38.2 17.7 69.6 64.5 34.9 131.4 27.8 47.9 10.7 19.4 29.9 47.5 21.2 16.2 36.5 23.5 30.4 21.4 14.7 17.2 28.3 42.1 9.4 26.6 50.4 21.3 10.7 5.2 22.8 15.7 7.9 4.9 11.4 8.9 12.4 14.6 3.8 5.6 10.7 28.5 21.1 17.6 12.2 10.8 23.2 11.8 20.5 32.6 9.0 11.2 14.3 14.1 17.3 15.3 9.4 16.0 13.9 14.0 13.3 12.2 10.9 10.2 19.0 31.1 8.1 10.3 12.8 12.3 16.6 14.5 8.5 12.4 11.5 11.9 11.9 11.0 8.8 1.3 2.2 2.1 2.0 2.3 2.1 2.0 3.4 3.0 1.6 2.7 4.0 2.1 2.1 2.6 1.6 4.8 50.9 20.4 5.8 13.2 n.a. n.a. 15.3 14.5 5.4 5.8 12.7 7.0 10.5 10.1 21.1 3.4 3.1 0.0 2.6 1.4 3.9 1.6 2.9 3.4 0.0 1.3 3.9 4.9 4.5 4.9 3.7 Price (RM/s) Value (RM/s) Mkt Cap (RM Mil)

Top slicing on further runup of stocks where valuations have become excessive

Stock picking is key and any significant pullback should be taken as an opportunity to pick stocks and reposition for the new year

Top Picks
EPS (sen) FY11 FY12 EPS GWTH (%) FY11 FY12 PER (x) FY11 FY12 P/BV (x) FY11 P/CF (x) FY11 GDY (%) FY11

Longer -Term Picks

THE 2011

9

BUDGET

Banking : Revitalising Domestic Capital Market
And Strengthening Position In Islamic Capital Market

Overweight

Consistent with the recently announced ETP, the Government plans to implement measures that will revitalise the domestic capital market and strengthen Malaysia’s position in the Islamic capital market. These include: 1) the launch of sukuk and conventional bonds by Bursa Malaysia to help meet demand from retail investors for fixed income instruments; 2) the issuance of three new stock broking licences; 3) development of an international board to enable foreign securities to be listed; and 4) tax deductions for expenses in relation to the issuance of certain Islamic securities. On the whole, we are neutral about the incentives and measures mentioned above, although we do note that these could provide further opportunities for banks to grow non-interest income. Missing from the budget, in our view, was the much anticipated measures to reign in household debt (e.g. the imposition of a cap on the loan-to-value (LTV) ratio). That said, we would not discount the possibility that BNM may yet still impose such measures ahead. In our view, a 70% or 80% cap per se on LTV ratio is unlikely to impact property sales momentum too significantly but harsher measures such as the discontinuance of incentives by developers, on top of a cap, could potentially hit the property sector badly and impact mortgage loan growth. We estimate every 1%-pt change in our loan growth assumption would impact our net profit projections for the banks by 0.7-1%. Finally, RCE could be a potential beneficiary of the Government’s move to increase the benefits to civil servants, given its niche in the civil servant personnel financing segment. We do note that this space is becoming increasingly competitive given attractive margins and low default rates (as monthly repayments from civil servants are deducted at source or salary). However, we think much of such concerns have already been factored in its cheap valuations.
Table 6 Valuations Of Banking Stocks
FYE Price (RM/s) CIMB PBB-L AMMB^ Affin RCE^ Maybank HL Bank AFG^ EON Cap RHB Cap* Sector Avg Dec Dec Mar Dec Mar Jun Jun Mar Dec Dec 7.94 12.60 5.91 3.24 0.62 8.88 9.30 3.24 6.98 7.74 EPS (sen) FY11 FY12 56.3 91.7 47.8 34.4 11.3 61.9 70.8 27.3 69.4 71.3 64.5 99.2 51.8 35.7 11.6 69.6 72.5 29.1 75.9 80.9 EPS Growth (%) FY11 17.2 11.8 14.1 6.4 4.6 14.7 3.9 9.0 14.3 11.1 13.4 FY12 14.6 8.2 8.3 3.6 2.8 12.4 2.3 6.3 9.3 13.5 10.5 PER (x) FY11 14.1 13.7 12.4 9.4 5.4 14.3 13.1 11.8 10.1 10.9 13.5 FY12 12.3 12.7 11.4 9.1 5.3 12.8 12.8 11.1 9.2 9.6 12.2 P/BV (x) FY11 FY12 2.0 3.1 1.5 0.9 0.8 2.1 1.9 1.4 1.1 1.4 1.8 2.8 1.4 0.8 0.7 1.9 1.7 1.3 1.0 1.3

Measures capital

targeted market

to and

revitalise the domestic strengthen Malaysia’s

position in the Islamic capital market

Much measures from

anticipated to rein but in this

household debt missing budget, could still come later

RCE potential beneficiary of better benefits to civil servants

GDY (%) FY11 FY12 1.6 5.2 3.8 2.6 1.6 3.9 2.6 2.6 1.9 3.3 1.6 5.6 4.1 2.6 1.6 4.4 2.6 2.6 1.9 3.7

ROE (%) FY11 FY12 15.1 23.8 13.0 9.6 16.4 15.0 15.1 12.5 11.6 14.9 15.5 23.0 12.9 9.2 14.6 15.5 13.9 11.8 11.5 14.9

Rec

OP OP OP OP OP OP OP MP UP NC

* Not under our coverage. I/B/E/S estimates are used for companies not covered by RHB Research Institute. ^ FY11-12 valuations refer to those of FY12-FY13

THE 2011

10

BUDGET

Building Materials

: Positive But Priced In For

Neutral

Cement, Neutral For Steel

Domestic cement producers are expected to benefit from the anticipated pick-up in domestic cement consumption, underpinned by the rollout of large-scale infrastructure projects and pick-up in property development activities. An increase in domestic demand will also enable cement producers to sell more domestically (which command a better margin) rather than exporting their excess production. We believe net selling prices will also be higher as rebates given by the cement producers will be lower. Fuel and electricity cost constitute about 50% of cement production cost. We believe high thermal coal price and potential hike in electricity tariff in the future will partly offset the benefits of higher net selling price. We are maintaining the forecasts for cement producers under over coverage (Lafarge and YTL Cement) as the pick-up in domestic cement consumption has been widely expected. However, with the recent run-up in its share prices, Lafarge’s (UP, FV = RM6.88) valuation has become very rich at 16.1x to our estimated FY11 earnings (as opposed to our PER target of 14x FY11 earnings). For YTLCement (OP, FV = RM4.69), its share price is currently close to our fair value of RM4.69 (based on 11x CY2011 fully diluted EPS of 42.7 sen). We think YTLCement is due for a re-rating given that it has been a laggard despite being the second largest cement producer in Malaysia after Lafarge. For now, we maintain our recommendation on YTLCement pending a meeting with management. Overall, our stance on the cement sub-sector is maintained at Neutral. Both Lafarge and YTLCement offer decent dividend yield at 5-6% given their strong free cash flow and healthy balance sheet at net cash position. Although domestic long steel demand is expected to recover with the pick-up in construction activities and infrastructure developments, we believe the impact is likely to be minimal, as fortunes of long steel players’ are tied more to the demandsupply balance in the global market. Overcapacity (particularly in China) remains a key issue over the medium to long term despite the recent plants closure, as the excess capacity in China’s steel sector is still high. Maintain our Neutral stance on the steel sub-sector.
Table 7
FYE Price (RM/s) Hiap Teck YTL Cement CSC Steel Perwaja Hldgs Ann Joo Lafarge Sino Hua Kinsteel Sector Avg Jul Jun Dec Dec Dec Dec Dec Dec 1.26 4.59 1.83 1.11 2.98 7.94 0.36 0.91 Fair Value (RM/s) 1.63 4.69 2.33 1.37 3.14 6.88 0.36 0.86 FY11 16.0 58.9 23.3 13.5 38.9 49.2 3.6 8.6

Cement sub-sector poised to benefit

…but will be partly offset by higher energy prices

Valuation has become rich

Neutral stance maintained for steel sub-sector

Valuations Of Building Materials Stocks
EPS (sen) FY12 16.7 57.5 24.7 16.9 41.1 50.6 3.9 9.2 EPS Gwth (%) FY11 FY12 25.3 17.5 6.4 16.9 18.6 15.8 77.0 21.3 4.1 -2.4 5.9 24.8 5.6 2.8 6.4 4.1 PER (x) FY11 7.9 7.8 7.8 5.1 7.7 16.1 9.9 10.5 10.9 FY12 7.5 8.0 7.4 4.6 7.3 15.7 9.1 9.9 10.5 EV/EBITDA (x) FY11 8.8 4.1 0.9 7.3 5.8 10.6 6.9 4.9 P/NTA (x) FY11 0.6 1.2 0.8 0.6 1.1 2.0 0.6 0.9 P/CF (x) FY11 n.m 15.0 6.4 13.4 30.0 12.2 10.9 7.5 GDY (%) FY11 2.0 4.4 8.2 0.0 5.0 3.8 0.0 1.1 OP OP OP OP MP UP UP UP Rec

+>100 8.2

THE 2011

11

BUDGET

Construction

:

Key Projects Reaffirmed, To Kick- Overweight Start In 2010
Gross development

Gross development expenditure in 2011 is projected at RM49.2bn, down -9% from RM54bn estimated for 2010. As a result, construction GDP growth is projected to ease to +4.4% in 2011 from +4.9% estimated for 2010. Key areas of spending (that will generate construction jobs) are rural infrastructure (RM6.9bn), building/upgrading of schools (RM6.4bn) and environmental preservation (RM1.9bn). Of total rural infrastructure spending (comprising largely water, electricity and roads), 70% or RM4.8bn goes to Sabah and Sarawak. The impact of a lower gross development expenditure will be cushioned by projects to be carried out on a Public-Private Partnership (PPP) or privatised basis, projected to rack up RM12.5bn private investment, anchored by RM1bn facilitation fund (see Table 8). We view positively that key high-profile projects identified during the announcement of the 10th Malaysia Plan (10MP) (2011-2015) in June this year have been reaffirmed, with commencement explicitly spelt out to be during the first year of the 10MP, i.e. in 2011. These include the RM40bn MRT project, the RM26bn KL International Financial District (KLIFD), the RM10bn redevelopment of the Rubber Research Board land in Sungai Buloh and six toll roads including the West Coast Expressway. One interesting observation is that the MRT project is regarded as a PPP/privatised project “with an estimated private investment of RM40bn”. This is not consistent with the Gamuda-MMC JV’s proposal to the Government, i.e. to fund the project with RM10bn allocation each from the 10MP and the 11th Malaysia Plan (11MP), and the balance to be financed via an off-balance sheet deferred payment scheme (to keep the budget deficit under control). The Gamuda-MMC JV’s position has been not to carry out the project on a PPP/privatised basis as it is fully aware that large public transport projects are generally not commercially viable. Three new inclusions that we believe worth highlighting are: (1) The “revived” RM5bn Warisan Merdeka integrated development comprising a 100-storey tower led by Permodalan Nasional Bhd; (2) The “River of Life”, i.e. the clean-up/beautification of the Klang Valley that can unlock the real estate potential of land parcels along the river, funded by part of the RM1.9bn allocation under environmental preservation; and (3) The Academic Medical Centre, a JV between Academic Medical Centre, Johns Hopkins Medicine International and Royal College of Surgeons, Ireland, that will bring in RM2bn private investment. The Government has reaffirmed its commitment towards key large-scale projects, as well as the speediness of their implementation in Budget 2011. We view this positively. We remain upbeat on construction stocks as we believe they will continue to generally outperform the market from 4Q2010, buoyed by news flow from: (1) The infrastructure development for the Greater KL National Key Economic Area (NKEA) under the Economic Transformation Programme (ETP), particularly, the RM40bn MRT project; (2) The RM7bn Ampang and Kelana Jaya LRT line extension project; and (3) Federal land deals. Our top “tactical” pick for the sector is Gamuda (Trading Buy, FV = RM4.51) as we believe its share price will be buoyed by the sustained news flow from the RM40bn MRT project. Our top “value” pick for the sector is Sunway (Outperform, FV = RM2.35) due to its undemanding valuations, coupled with its strong earnings visibility stemming from its firm construction margins and growing non-construction profits.

expenditure down 9%

Key high-profile projects reaffirmed, to kick-start in 2011

MRT to attract RM40bn private investment?

Several new inclusions

Maintain Overweight

THE 2011

12

BUDGET

Table 8 Key Projects To Be Implemented
Project Funded By Development Expenditure Rural infrastructure ♦ Rural water & electricity in Sabah & Sarawak ♦ Rural roads in Sabah & Sarawak ♦ Rural roads in Peninsular Malaysia ♦ Rural water & electricity in Peninsular Malaysia ♦ Housing for rural hardcore poor Building/upgrading of schools, hostels, facilities & equipment Environmental preservation projects ♦ “River of Life” and greening of KL ♦ Preservation of marine sources and coastal areas in Melaka, Kelantan, Terengganu & Pahang Corridor & regional development ♦ Iskandar Malaysia ♦ East Coast Economic Region (ECER) ♦ Northern Corridor Economic Region (NCER) ♦ Sabah Development Corridor ♦ Sarawak Corridor of Renewable Energy (SCORE) Public housing Aquaculture zones in Sabah & Sarawak Drainage & irrigation in Muda Agriculture Development Area, Kedah Basic infrastructure for swiftlet nets, aquaculture, seaweeds, ornamental fish and herbs & spices ventures Integrated eco-nature resort in Nexus Karambunai, Sabah Hotels & resorts in remote areas Diagnostic lab at Agriculture College in Kubang Pasu, Kedah Shaded walkways in KLCC-Bukit Bintang area Via Public-Private Partnership (PPP)/Private Investment MRT in Greater KL Kuala Lumpur International Financial District (KLIFD) Development of Malaysia Rubber Board land in Sg Buloh Warisan Merdeka integrated development with a 100-storey tower Academic Medical Centre Ampang-Cheras-Pandan Elevated Highway Guthrie-Damansara Expressway Damansara-Petaling Jaya Highway Pantai Barat-Banting-Taiping Highway (West Coast Expressway) Sungai Dua-Juru Highway Paroi-Senawang-KLIA Highway 300MW combined-cycle gas power plant in Kimanis, Sabah International Islamic University Malaysia Teaching Hospital in Kuantan, Pahang Women and Children’s Hospital in KL Integrated Health Research Institute Complex in KL Value (RMm) 6,900 2,700 2,100 696 556 300 6,400 1,900 na na 850 339 178 133 110 93 568 252 235 135 100 85 70 50 Potential Beneficiaries

East Malaysia-based contractors

Mid-sized contractors YTL Emas Kiara, MRCB

East Malaysia-based contractors

Karambunai

40,000 26,000 10,000 5,000 2,000 na na na na na na na na na na

Gamuda, MMC 1MDB (Awarded), Mudabala (Awarded) EPF (Awarded), MRCB PNB (Awarded)

Kumpulan Europlus, IJM

Zelan, Mudajaya Ahmad Zaki (Awarded) Ranhill

Table 9
FYE Price (RM/s) HSL Fajarbaru Sunway Hldgs Emas Kiara Gamuda MRCB IJM^ WCT Sector Avg Dec Jun Dec Dec Jul Dec Mar Dec 1.82 1.07 1.97 0.78 3.89 2.08 5.42 3.24 Fair Value (RM/s) 1.95 1.37 2.35 1.52 4.51 2.49 5.01 2.30

Valuations Of Construction Stocks
EPS (sen) FY11 16.2 14.4 25.2 15.2 19.0 6.4 32.6 16.9 FY12 17.7 15.2 28.3 16.9 20.5 6.7 34.2 17.4 EPS Gwth (%) FY11 FY12 21.4 -10.8 10.2 16.7 36.5 23.5 2.7 -7.0 12.7 8.9 5.5 12.5 11.1 7.9 4.9 5.0 2.6 6.8 PER (x) FY11 11.2 7.4 7.8 5.1 20.5 32.6 16.6 19.2 17.3 FY12 10.3 7.0 7.0 4.6 19.0 31.1 15.8 18.7 16.2 EV/EBITDA (x) FY11 6.5 1.5 6.7 3.6 22.5 20.3 9.0 15.8 P/NTA (x) FY11 2.3 1.2 1.3 0.7 2.4 2.1 1.3 1.7 P/CF (x) FY11 13.2 13.3 8.5 3.4 50.9 20.4 8.7 19.0 GDY (%) FY11 1.4 5.6 1.4 1.9 3.1 0.0 2.0 1.9 OP OP OP OP TB TB UP UP Rec

^ FY11-12valuations refer to those of FY12-FY13

THE 2011

13

BUDGET

Consumer : Not As Exciting As Previous Budget Neutral
This time around, consumers did not Government, although we believe there would boost overall consumer spending tourist destination and also to ease the 1. 2. 3. get any new tax goodies from the are some measures introduced which in terms of promoting Malaysia as a burden of the rakyat:Consumers did not get any new tax goodies

4. 5.

Import duty on approximately 300 goods preferred by tourists and locals, of 5% to 30% be abolished. A continuation of a rebate on electricity bill payment for monthly consumption of below RM20. An extension to the current tax relief for parents to include other expenses such as day care centre, cost incurred to employ caretaker for parents and other daily needs such as diapers, from just medical treatments previously. The tax relief amount is maintained at a maximum of RM5k. Increasing the monthly allowance for various community leaders such as Ketua Kampung, Imam etc. by 60-78%. No increase in toll rates for the four highways owned by PLUS for the next five years.

Aside from the above, the civil servants force, which comprises approximately 1.2m people, will benefit from: 1. A RM500 assistance for all civil servants grade 54 and below to cope with schooling expenses. 2. Increasing the rate of Funeral Arrangement Assistance to RM3k from RM1k previously. This is also extended to retired civil servants. Although the measures introduced during the 2011 Budget is not as exciting as the various income tax goodies introduced in the previous budget tabling, we believe that all the measures above will, to a certain extent be a driver for growth in consumer spending, as consumer disposable income is expected to improve together with consumer sentiment. RHBRI projects a consumer spending growth of 5.4% for 2011 (2010: 5.6%). Retail These measures augur well for the retail and MLM players such as Parkson (OP, FV=RM7.72), AEON (MP, FV=RM5.72), Amway (MP, FV=RM8.45), and Hai-O (UP, FV=RM2.84), as their revenues are generally driven by growth in consumer spending. In particular, the abolishment of import duty on 300 various products will be one of the key drivers for the retail players’ revenues (like Parkson and AEON). The Government also announced two non-quantitative policies which include: 1) the establishment of a “1Malaysia Smart Consumer” portal to provide information on price movements of goods in about 7k business premises nationwide; and 2) introduction of the Retail Shop Transformation Programme (TUKAR), which will be for the modernisation of small retailers (mom and pop stores). We believe that the 1Malaysia Smart Consumer portal will increase consumer price sensitivity, while the TUKAR programme would increase competition for department stores cum supermarkets such as AEON’s Jusco as it gives the smaller players more edge to compete with the bigger players. F&B The new policy which will affect F&B players is 1%-point increase to the current 5% service tax to 6%. This will increase KFCH’s (OP, FV=RM3.61) product selling prices. However, we believe this will not have a significant impact on demand, given that a 6% service tax will only increase the average selling prices of KFCH’s products by 1%. Basic food manufacturer QL Resources (OP, FV=RM5.41) will continue to benefit from the extension of the food production tax incentive to 2015 and the RM170m incentives allocated for fishermen. The incentives for fishermen will
THE 2011 14 BUDGET
Consumer spending growth of 5.4% for 2011

Retail and MLM players to benefit

Increase in Service Tax to 6%

QL Resources to enjoy various incentives for its palm oil division

ensure the sustainability of fish supply for its Marine Product Manufacturing (MPM) division given that QL sources 95% of its fishes from local fishermen. Besides the above incentives, QL’s palm oil division will benefit from the extension of the application period for tax incentives for: 1) the generation of energy from renewable sources; 2) energy conservation; and 3) reduction of greenhouse gas emission to 2015. The palm oil division will benefit from these incentives given its venture into renewable energy (RE) such as its palm pelletisers and biomass boilers. Furthermore, the division will benefit from implementation of the Feed In Tariff (FiT) mechanism under the RE Act, which allows QL to sell its RE generated from its biomass plant to be sold to electricity utility companies. We recently highlighted QL’s ultimate aim to manufacture a zero-waste palm oil milling system to palm oil millers using its pelletising and biomass boiler technology, which will be able to generate energy through palm oil wastes. QL’s palm pelletisation is targeted to be commercialised by Dec 2010. The FiT will further increase the attractiveness and marketability of this system, although we are unable to gauge the impact of this yet, given the lack of details on the incentives. Brewery and Tobacco The brewers enjoy another year of no increase in excise duty, which is positive for Carlsberg (OP, FV=RM6.03). Note that the Government has not increased excise duties on beer since the year 2005. Due to this, we expect that overall Malt Liquor Market (MLM) TIV would not be affected in 2011, which is positive for Carlsberg. We maintain our projected flat TIV growth of 0% for FY11. The Government also did not introduce a subsequent hike in excise duty for cigarettes after the increase of 16% earlier this month, nor did it mention anything regarding the cess issue, which in the context of the 2011 Budget outcome, is positive for BAT (UP, FV= RM42.90). Healthcare As for the healthcare sector, the Government has committed to allocate RM15.2bn in 2011 (vs. RM14.8bn in 2010) to construct new hospitals, increase the number of doctors and nurses as well as to obtain supplies of medicines and equipment. Under the 10MP, out of the eight hospitals that will be built, four have been identified, where two will be in Perak while the other two will be in Sabah. As Faber (OP, RM=RM3.82) currently holds the concession agreement to provide hospital support services in Perak and Sabah, it would likely benefit. However, it would be dependent on whether Faber’s application for the concession is renewed by the Government. Nevertheless, we maintain our view that the renewal will likely be granted on the back of: 1) continuous effort by management to improve its services; 2) Faber’s 14-year track record and technical expertise; and 3) service benchmarks are consistently met without any unit price increase. In addition, with more new government hospitals being built across Malaysia, this could have an impact on private hospital operator KPJ (OP, FV=RM4.51). Nevertheless, we expect this to be minimal due to Malaysia’s rising affluence towards seeking better quality of care, greater uptake in medical insurance and general dissatisfaction with the service of public hospitals.
Table 10
FYE Price Fair Value (RM/s) 3.61 6.03 4.51 7.72 3.82 5.41 4.12 5.72 8.45 2.84 42.90

Another year of cheer for the brewers

Valuations Of Consumer Stocks
EPS (sen) FY11 FY12 22.5 26.1 42.8 47.5 26.6 29.9 37.3 47.9 34.2 38.2 34.7 41.1 31.9 35.3 44.0 47.5 56.5 58.4 28.6 32.2 233.3 230.0 EPS Gwth (%) FY11 FY12 16.7 15.7 5.2 1 0 . 8 10.7 12.2 26.6 28.5 30.4 11.4 13.0 18.4 9.3 1 0 . 9 7.2 7.8 3.5 3.5 2.5 1 2 . 6 -7.8 -1.4 11.1 10.7 PER EV/EBITDA (x) (x) FY11 FY12 FY11 14.5 12.5 7.3 12.2 11.0 7.6 13.3 11.9 7.8 16.0 12.4 3.8 9.0 8.1 3.5 14.6 12.4 6.0 9.4 8.5 5.5 13.3 12.3 2.5 14.3 13.8 9.2 11.2 10.0 6.7 20.5 20.7 14.2 15.9 14.3 P/NTA (x) FY11 1.6 2.6 1.6 2.7 2.1 2.9 2.9 1.7 5.3 1.0 n.m P/CF (x) FY11 10.7 10.1 10.5 5.8 5.8 14.0 7.8 5.5 8.9 4.4 17.7 GDY (%) FY11 2.1 4.9 4.5 1.3 2.6 2.3 6.7 2.1 6.4 5.9 4.4 Rec

(RM/s) KFC Dec 3.26 Carlsberg Dec 5.21 KPJ Health Dec 3.55 Parkson Jun 5.96 Faber Dec 3.08 QL Resources Mar 5.08 Daibochi Dec 3.00 AEON Dec 5.85 Amway Dec 8.09 Hai-O^ Apr 3.21 BAT Dec 47.72 Sector Avg ^ FY11-12valuations refer to those of FY12-FY13

OP OP OP OP OP OP OP MP MP UP UP

THE 2011

15

BUDGET

Infrastructure :

Government Measures

Introduces

Populist

Neutral

Measure: To reduce transportation costs in the country, the Government announced that the toll rates in the four highways owned by PLUS Expressways Berhad will not be raised for the next five years, effective immediately. Impact: We note that the toll hike freeze applies only to PLUS, while the other toll concessionaires remain unaffected. However, no details on the form of compensation to PLUS were forthcoming. While the announcement at first appears negative to PLUS, we note that on the very same day itself, UEM and EPF together made a joint offer to buy all the assets and liabilities of PLUS at an aggregate purchase consideration of RM23bn or RM4.60 per share. We think the takeover offer is fair though not very compelling given our fair value of RM4.76 (10% premium to NPV of RM4.60). Besides that, the proposed takeover will essentially put aside any concern about the potential adverse earnings impact of the toll hike freeze, which will be borne by UEM and EPF.
Table 11
FYE Price (RM/s) 2.88 4.46 Fair Value (RM/s) 3.01 4.60

Toll hike freeze for next five years

Valuations Of Infrastructure Stocks
EPS (sen) FY11 FY12 36.3 72.5 37.4 38.0 EPS Gwth (%) FY11 FY12 14.1 99.7 5 2 . 7 1.8 49.0 9.0 PER EV/EBITDA (x) (x) FY11 FY12 FY11 7.9 4.0 3.2 11.9 11.7 8.7 11.6 10.7 P/NTA (x) FY11 0.8 3.2 P/CF (x) FY11 2.7 9.7 GDY (%) FY11 2.1 4.5 Rec

Puncak PLUS Sector Avg

Dec Dec

MP UP

Insurance : Budget Impact Not Significant
The 2011 Budget will not significantly impact the insurance sector given that there were no new incentives introduced. However, indirectly, we believe that the insurance sector will benefit from the various budget measures for other sectors to boost economic activity. Heightened economic activities will provide opportunities for the general insurers such as Allianz (OP, FV=RM5.32), LPI (UP, FV=11.40) and Kurnia (MP, FV=RM0.44), to grow their other business segments such as workmen compensation and marine, aviation and transit insurance. The sector will also benefit from the government policy to make it mandatory for employers to procure health insurance for their foreign workers as it would provide another avenue of premium growth. For motor insurance, there was no update on the reform of the existing Third Party Bodily Injury and Death (TPBID) policy. For life insurance, no new measures were introduced that would boost the segment, although we believe the new Private Pension Fund (PPF) that was introduced for the private sector and self-employed workers could provide competition for life insurance existing products. The PPF is an equivalent of the EPF and the RM6k tax incentive for EPF contribution is also extended for the PPF. Given that the measures introduced have limited impact for the sector, we are maintaining our current forecasts and assumptions for all four insurance companies under our coverage, i.e. Allianz, LPI, Kurnia, and MNRB (MP, FV=RM2.98).
Table 12
FYE Price (RM/s) Allianz MNRB^ Kurnia Asia LPI Capital Sector Avg ^ FY11-12valuations refer to those of FY12-FY13 Dec Mar Dec Dec 4.11 2.74 0.43 11.70 Fair Value (RM/s) 5.32 2.98 0.44 11.40 FY11 86.2 19.5 4.9 70.2

Neutral
No significant impact to the sector

The new Private Pension Fund (PPF) could pose competition for the life insurance segment

Maintain Neutral

Valuations Of Insurance Stocks
EPS (sen) FY12 99.7 29.5 6.0 82.9 EPS Gwth (%) FY11 FY12 19.9 27.8 12.4 8.7 15.8 22.8 18.0 21.5 -35.9 51.0 PER (x) FY11 4.8 14.0 8.8 16.7 8.6 FY12 4.1 9.3 7.2 14.1 7.1 EV/EBITDA (x) FY11 -5.1 -36.0 6.2 10.8 P/NTA (x) FY11 0.9 0.6 1.5 1.5 P/CF (x) FY11 5.5 12.0 8.8 2.8 GDY (%) FY11 0.5 3.6 2.3 5.9 OP MP MP UP Rec

THE 2011

16

BUDGET

Motor : Enticing Hybrid Car Buyers
There was no mention of any incentives for the conventional passenger and commercial car segments but the Government proposed to make do with the excise duty that is currently being imposed for the hybrid cars. At present, we understand there are only two hybrid car models in Malaysia – the Toyota Prius and the Honda Civic. Previously, franchised holders of hybrid cars are given 100% exemption of import duty and 50% exemption of excise duty on new completely-built-up (CBU) hybrid cars until December 2010. The incentive was limited to new CBU hybrid passenger cars with engine capacity below 2,000cc. This meant that hybrid car users previously paid no import duty and around 40% of excise duty.

Overweight
Full exemption of import and excise duties till 31 December 2011

Table 13

Duties And Taxes On Motor Vehicles
CBU & CKD Excise Duties (%) 75 80 90 105 Sales Tax (%) 10 10 10 10

Engine Capacity (cc) <1,800 1,800-1,999 2,000 -2,499 Above 2,500 Source: MAA

In the current Budget, the Government proposed that full exemption of import and excise duties be given on new CBU hybrid cars, electric cars as well as hybrid and electric motorcycles which applied with the Ministry of Finance from 1 January until 31 December 2011. We gather that current on-the-road prices for the Toyota Prius and Honda Civic stand at RM175k and RM130k respectively. With this incentive, prices could drop to RM141k and RM111k respectively based on the Labuan prices (RM128k and RM101k respectively) inclusive of the sales tax of 10%. Overall, while the incentive is a big plus for interested hybrid car buyers, it will have minimal impact on the total TIV of the industry, given its immaterial numbers thus far. YTD TIV units for the Prius and Honda Civic Hybrid stand at 169 and 107 respectively. We reiterate our Overweight stance for the sector and maintain APM Automotive as our top pick.
Table 14
FYE Price (RM/s) APM Proton^ MBM UMW Tan Chong Sector Avg Sector Avg(ex-Proton) ^ FY11-12valuations refer to those of FY12-FY13 Dec Mar Dec Dec Dec 4.85 4.87 3.17 6.75 5.68 Fair Value (RM/s) 5.53 5.50 5.30 7.27 6.16 FY11 50.3 75.2 48.2 59.2 45.3

Hybrid car prices could potentially be priced 14-19% lower However, hybrid car unit movements do little to change total TIV

Maintain Overweight call on the sector

Valuations Of Motor Stocks
EPS (sen) FY12 57.2 80.3 50.7 66.3 67.3 EPS Gwth (%) FY11 FY12 7.0 11.6 5.3 7.2 16.2 10.2 9.69 13.8 6.8 5.0 11.9 48.6 17.2 20.8 PER (x) FY11 9.7 6.5 6.6 11.4 12.5 9.8 11.01 FY12 8.5 6.1 6.3 10.2 8.4 8.4 9.1 EV/EBITDA (x) FY11 3.0 7.2 14.3 5.3 9.3 P/NTA (x) FY11 1.2 0.5 0.7 1.7 2.0 P/CF (x) FY11 5.2 n.m 14.8 7.9 10.8 GDY (%) FY11 2.7 0.0 3.8 3.6 2.1 OP OP OP MP MP Rec

THE 2011

17

BUDGET

Oil & Gas : Reiterating Key Measures
Key points highlighted were: 1) The listing of Petronas Chemicals Group (PCG) and Malaysia Marine & Heavy Engineering (MMHE) to offer higher public shareholding this year; The Government would allocate RM146 million to support the sector; Projects to be implemented include the establishment of the Oil Field Services and Equipment Centre in Johor with private investment of RM6bn over a period of 10 years; To meet the increase in gas demand by industries, Petronas will implement a regasification project in Melaka with an investment of RM3bn. This is expected to be operational in 2012; and Petronas Gas Bhd constructing a 300-megawatt Combined-Cycle Gas Power Plant in Kimanis, Sabah to increase electricity generation capacity to meet rising demand.

Neutral

Key

highlights

were

previously projects

mentioned

2) 3)

4)

5)

In regards to the two Petronas listings, the bookbuilding exercise for MMHE was closed on 14 Oct with final retail and institutional prices set at RM3.61-3.80 respectively. The listing of Petronas Chemicals Group is expected to be in Nov. The rest of the projects above, were mentioned previously in the Economic Transformation Programme Open Day as key projects and measures that the private sector (in tandem with the Government) would undertake for the sector. Petronas Gas is currently undertaking the feasibility study on the RM3bn regasification project while we expect the Kimanis Combined-Cycle Gas Power Plant to cost at least RM1bn, on the basis of US$1m per MW. Overall, we reiterate our short-term Neutral call on the sector given that most of the projects have been mentioned before. We look to better contract flows in the coming two months. Again, longer-term earnings visibility for O&G service providers remains intact on the back of reserve replenishment activities. We keep Dialog (OP; FV= RM1.30) as our top pick.
Table 15
FYE Price (RM/s) Dialog P Gas^ Dayang Kencana SapuraCrest^ Wah Seong Petra Perdana KNM Sector Avg Sector Avg (EX P Gas) ^ FY11-12valuations refer to those of FY12-FY13 Jun Mar Dec July Jan Dec Dec Dec 1.23 11.42 2.38 1.88 2.43 2.17 0.82 0.50 Fair Value (RM/s) 1.30 11.63 2.61 1.80 2.41 1.79 0.50 0.37 FY11 8.8 72.9 20.1 12.0 18.5 13.8 5.3 3.7

MMHE listing is completed, for now Petronas Chemicals Group listing tentatively set for Nov

Neutral call maintained

Valuations Of Oil & Gas Stocks
EPS (sen) FY12 10.7 75.6 22.9 13.8 19.5 15.9 5.1 EPS Gwth (%) FY11 FY12 50.4 2.7 22.6 46.0 10.0 62.5 21.1 3.7 14.0 14.5 5.2 15.2 PER (x) FY11 13.9 15.7 11.9 15.6 13.1 15.7 15.5 13.3 14.9 13.7 FY12 11.5 15.1 10.4 13.7 12.5 13.7 7.2 9.6 13.5 11.5 EV/EBITDA (x) FY11 7.9 8.3 9.6 9.0 3.8 6.1 7.0 9.9 P/NTA (x) FY11 4.0 3.6 1.8 3.2 2.1 1.7 0.5 5.2 P/CF (x) FY11 12.7 11.0 9.0 11.7 4.8 4.5 13.2 8.7 GDY (%) FY11 3.9 6.8 2.5 0.5 2.9 2.4 2.5 4.0 OP OP OP MP MP UP UP UP Rec

1 1 . 3 +>100 n.m +>100 3 7 . 4 16.4 46.2 9.8 18.8

THE 2011

18

BUDGET

Plantation : No Exciting News
◆ There are not many new measures affecting the palm oil plantation sector in the 2011 Budget. Only two new proposals were made, including: (1) The encouragement of replanting activity to replace aged trees with high quality new clones, through a fund of RM297m; and (2) A sum of RM127m to be allocated to support domestic oleo derivatives companies as well as a sum of RM23.3m to expand downstream palm oil industries including production of vitamins. As there were no details as to how the funds allocated will be distributed, it is hard to gauge the impact of these measures. Firstly, we note that under incentive (1), the fund of RM297m to encourage replanting activity is different from the previous replanting incentive, where a sum of money is given to planters for each hectare of land which is replanted. This time, the fund is targeted to encourage replanting with high quality new clones, which could mean that planters may get a subsidy for buying new clone seedlings from government-backed research centres like MPOB. This, we believe, would mainly benefit smaller companies and smallholders, who do not have their own R&D division. Most of the companies under our coverage have their own research centres and already develop their own high quality clones which would be used for their new planting and replanting activities. Under incentive (2), again there is no clarity on how the sum of RM127m is to be distributed to oleo derivatives companies. Assuming it is in the form of a tax incentive, it would benefit companies like IOIC (OP, FV = RM6.75), KLK (OP, FV = RM22.05) and Sime Darby (MP, FV = RM9.40), as they all have oleochemical manufacturing operations, although we would not be able to quantify the impact given the lack of details. As for the RM23.3m incentive to produce vitamins, this would likely benefit Carotech (Not Rated) and KLK, as they produce nutraceuticals, which could be classified as a form of vitamin.

Neutral
Two sector new measures plantation

affecting

-

Encouragement replanting activity

of to

replace aged trees with high quality new clones…

-

… and RM127m to be allocated companies to support domestic oleo derivatives

◆

One measure which is not new, which was mentioned in the Budget, is the mandatory implementation of the B5 biodiesel programme in Putrajaya, Kuala Lumpur, Selangor, Negeri Sembilan and Melaka, starting from June 2011. This is not a new policy, as the Government first set out its Biofuel Policy 2006, with initial plans to commence nationwide implementation in 2010, while the implementation deadline was pushed back to June 2011 back in March 2010. Although the Government has since come up with a plan which includes the RM43m instigation of depots with inline blending facilities to be placed in Port Klang, the Klang Valley Distribution Terminal (KVDT) in Selangor, Port Dickson, Negri Sembilan and in Tangga Batu, Malacca, and the rule that the costs of installing the blending terminals are to be borne by the petroleum companies, it still has not come out with any details on the B5 pricing issue. The only mention of pricing made by the Agriculture Minister earlier in the year was to say that the price of biofuel under the plan will not be fixed as it will oscillate depending on the price of palm oil and diesel. If this is the case and pricing is based on market prices of CPO, demand may not be too strong for the B5 blend, given the high price of CPO currently at RM2,890/tonne.

B5 biodiesel programme mentioned again…

… but issue of pricing still outstanding

◆

Other non-plantation related measures introduced in the Budget which would affect some of the plantation companies include: Pioneer status and Investment Tax Allowance for the generation of energy from renewable sources and energy efficiency activities for own consumption and for sale be extended to 31 Dec 2015 (from 31 Dec 2010).
THE 2011 19 BUDGET

Non-plantation measures like… … tax

related

incentives energy

for and

renewable extended…

sale of carbon credits

-

Extension of tax incentive for reduction of greenhouse gas emission via the sale of Certified Emission Reductions (CERs) to year of assessment 2012 (from YA 2010). We believe this is positive for CBIP (OP, FV = RM4.60), who is in the midst of developing and testing its zero discharge “green palm oil mill”, which comes together with a biogas plant. Currently, four of these CPO mills are being tested, two for Felda and two on its own premises. Although the mill has not been commercialised yet, we believe once it is able to do so, it will be able to enjoy the tax incentives given not only for generating renewable energy, but also for the sale of CERs.
… which could be positive for CBIP in the long term

-

◆

Overall, we believe the 2011 Budget is a slight positive for the plantation sector, although the impact is not expected to be significant. We maintain our Neutral stance on the sector, although we highlight selective stock picks which we have Outperform recommendations on, including IOIC (FV = RM6.75), KLK (FV=RM22.05), First Resources (FV = S$1.40) and CBIP (FV = RM4.60). We maintain our Market Perform recommendations on Sime Darby (FV = RM9.40) and IJMP (FV = RM2.56) and our Underperform recommendation on Genting Plantations (FV = RM7.40).

Overall, slight positive impact on sector, but not significant

Table 16
FYE Price (RM/s) KLK IOI Corp CBIP IJMP^ Sime Darby Genting Plant Sector Avg Sep Jun Dec Mar Jun Dec 19.00 5.80 3.56 2.68 8.84 8.37 Fair Value (RM/s) 22.05 6.75 4.60 S$1.40 2.56 9.40 7.40

Valuations Of Plantation Stocks
EPS (sen) FY11 124.4 33.6 52.7 8.8 16.1 48.6 46.3 FY12 131.4 34.9 55.1 10.2 14.8 49.9 44.5 EPS Gwth (%) FY11 FY12 42.1 28.3 21.6 30.1 2.0 9.0 17.5 19.9 5.6 3.8 4.4 15.1 -8.2 2.6 -4.0 3.0 PER (x) FY11 15.3 17.3 6.7 11.0 16.7 18.2 18.1 17.0 FY12 14.5 16.6 6.5 9.5 18.2 17.7 18.8 16.5 EV/EBITDA (x) FY11 9.8 12.0 6.6 7.5 10.0 10.3 12.5 10.8 P/NTA (x) FY11 3.1 3.3 1.4 1.9 1.7 2.4 2.1 2.7 P/CF (x) FY11 14.5 15.3 6.0 10.8 14.3 13.1 16.2 GDY (%) FY11 3.4 2.9 4.8 2.3 2.2 3.5 1.6 OP OP OP OP MP MP UP Rec

First Resources D e c S$1.25

^ FY11-12valuations refer to those of FY12-FY13

THE 2011

20

BUDGET

Power : Emphasis On Green Technology
The Government appears to have reaffirmed its commitment towards the development and adoption of green technology. Firstly, tax incentives in the form of pioneer status and investment tax allowances will be extended until end-2015 for the generation of renewable energy (RE). Secondly, energy conservation equipment will enjoy exemption from import duty and sales tax. Finally, the Government will also implement the Feed-in Tariff (FiT) mechanism under the RE Act to help promote the generation of electricity from renewable resources. Apart from the above, the Government will continue to provide a rebate to households that incur monthly electricity bills of RM20 or less. On the whole, the budget did not hold any significant surprises for the sector. At this stage, it is unclear when the Government plans to implement the FiT mechanism, which we think would be a key support mechanism in helping the country meet the target of increasing the availability of RE to around 2,000MW by 2020 (currently around 55MW). While the move towards RE should be a long-term positive in terms of, among others, energy security, much would depend on the Government’s will power especially in tackling issues such as the need for electricity tariffs to be raised under the FiT mechanism, in our opinion.
Table 17
FYE Price (RM/s) Tenaga YTL Power Sector Avg ^ FY11-12 valuations refer to those of FY12-FY13 Aug Jun 8.93 2.33 Fair Value (RM/s) 10.30 2.20 FY11 75.5 17.8

Overweight
Going green …

… but much would still depend on Government’s willpower to implement changes

Valuations Of Power Stocks
EPS (sen) FY12 87.3 18.3 EPS Gwth (%) FY11 FY12 16.2 3.3 12.3 15.7 3.3 12.3 PER (x) FY11 11.8 13.1 12.2 FY12 10.2 12.7 10.9 EV/EBITDA (x) FY11 7.0 9.7 P/NTA (x) FY11 1.3 1.8 P/CF (x) FY11 4.8 7.3 GDY (%) FY11 3.4 7.5 OP MP Rec

Property : Friendly Measures……First…
Measure: Increasing house ownership
i) To promote home ownership, a sum of RM568m is provided to build a total of 87,300 units of low cost houses. Skim Pembiayaan Perumahan Kos Rendah with an allocation of RM50m will be open to all Malaysian permanent estate workers to assist them to obtain housing loans with a maximum of RM60k for the purchase of low-cost houses at 4% interest rate and a repayment period of up to 40 years extending to the second generations. The Government will introduce Skim Rumah Pertamaku through Cagamas Berhad. A guarantee on downpayment of 10% for houses below RM220k will be provided for first-time house buyers with household income less than RM3k per month, i.e. a 100% loan can be obtained without any down payment. First-time home buyers will be given stamp duty exemption of 50% on instruments of transfer on a house priced not more than RM350k, effective for sales and purchase agreements executed from 1 Jan 2011 – 31 Dec 2012. Previously, the exemption is granted for residential property priced less than RM250k, effective for SPA executed from 8 Sept 2007 – 31 Dec 2010. First time home buyers will also be given stamp duty exemption of 50% on loan agreement instruments for residential properties priced less than RM350k, effective for SPA executed from 1 Jan 2011 – 31 Dec 2012. Previously, the exemption is granted for residential property priced less than RM250k, effective for SPA executed from 30 Aug 2008 – 31 Dec 2010.

Overweight

Positive measures for first-time home buyers

ii)

iii)

iv)

THE 2011

21

BUDGET

Impact: The 50% discount on stamp duty is encouraging for first-time home buyers, but it is only for houses priced below RM350k. Under the existing tax structure, 1% is imposed on the first RM100k, 2% on the next RM400k and 3% on the remaining amount. With the exemption, stamp duty would cost only RM3k (from RM6k) for a house valued at RM350k. We believe the direct beneficiaries under these measures will be the mass housing developers, such as LBS and Hua Yang in the Klang Valley, and to some extent SP Setia, IJM Land, Mah Sing, KSL, etc. for their housing projects in Johor pricing at below RM350k. The 50% exemption will also benefit the secondary housing market as the stamp duty paid by the first-time home buyers who purchase a second-hand house is now cheaper.

Mid-end

housing

developers to benefit

Measure: Mega developments
i) The development of the Kuala Lumpur International Financial District (KLIFD), which is worth RM26bn, will kick off next year. The project is jointly developed by 1Malaysia Development Berhad (1MDB) with Mubadala Development Company. The EPF will undertake the mixed development comprising affordable houses, commercial, industrial and infrastructure facilities of the Malaysian Rubber Board land in Sungai Buloh, covering an area of 2,680 acres. The development is estimated to worth RM10bn and is expected to be completed by 2025. Another landmark named Warisan Merdeka will be developed by Permodalan Nasional Berhad. This is an integrated development project comprising a 100storey tower, which will be the tallest in Malaysia. The project will retain Stadium Merdeka and Stadium Negara as national heritage. The total project cost is RM5bn, with the tower expected to be completed by 2015, and the entire project to be completed by 2020.
Still waiting for more details on RRI land…

ii)

iii)

Impact: We remain upbeat on the development plan for the RRI land in Sungai Buloh, especially in the current property upcycle, as participating developers will be able to enlarge their development landbank and GDV with this JV project. While we believe demand for residential properties will remain strong, we note that the oversupply of commercial properties, particularly office towers, has yet to be absorbed by the market. Although the development of KLIFD and Warisan Merdeka will only be completed in 2015-2020, we believe the development will contribute to another oversupply wave of office space in future considering the scale of the projects. Our view on the sector. We note that the measures introduced during the Budget 2011 are targeted at only the middle-end housing and first-time home buyers, and we believe the Government is still keeping its agenda to target the “overheating” property market, to be in line with the tightening measures implemented in the regional markets. As such, over the intermediate term, we think the Government or Bank Negara Malaysia will still announce some new credit tightening measures to address the issue, such as the imposition of cap on loan-to-value (LTV) ratio, and a threshold at above RM350k could be set to target the mid to high-end properties. Nevertheless, even if a 70% or 80% cap on LTV ratio is implemented, we expect the current property sales momentum to continue as we believe that developers will still continue with their aggressive home ownership campaign, offering attractive rebates that lower the downpayment. We highlight that the story would be different if (i) The Government is to stop developers from offering innovative scheme in addition to a 70% or 80% cap on LTV ratio; or (ii) The commercial banks are instructed to adjust the house price for the rebates (offered by developers) as the “real” house price for the application of mortgage loan. In any of these two scenarios, buying power of property buyers/ investors will be dampened due to lower leverage ability. Property sales will be adversely affected as the upfront “entry cost” (downpayment) for property buyers will be much higher, at 20% or 30% of the house value.
Credit measures tightening are still in

Government’s agenda?

Sector will be hit badly if incentives developers discontinued offered by are

THE 2011

22

BUDGET

Still positive. We remain positive on the property sector, as the fundamental demand will still be driven by the growing young population group. Although regulatory risk still exists, we believe the Government would not want to badly hit the property sector. We still see a few strong supports for the sector, and these include: (i) Low mortgage rate as commercial banks continue to offer discount to BLR; (ii) Aggressive incentives provided by developers; (iii) Strengthening in ringgit and low interest rates in the region that encourage foreigners participation and liquidity flow; (iv) Property is a preferred vehicle to hedge against inflation; and (vi) Good news flow on the Government’s development plans. Overall, we continue to like IJM Land (OP, FV = RM3.18), Mah Sing (OP, FV = RM2.33) and Suncity (OP, FV = RM5.48). Incentives for REITs are missing. Having some good news on the mid-end housing, the Budget 2011 is rather disappointing for the REIT sector, as reduction or removal of withholding tax was not mentioned. Although the current withholding tax structure will still somewhat shy away foreign investors (especially), we are hopeful that the recent two additions – Sunway REIT and CapitaMalls Malaysia Trust into the MREITS will boost the liquidity and investibility of MREITs. Yields remained attractive for MREITs at around 7-8%, suitable for investors who are looking for defensive investments. We continue to like Sunway REIT (OP, FV = RM1.05) for its asset size and liquidity, and Axis REIT (OP, FV = RM2.67) for its strong acquisition track record.

Remain

positive,

as

Government is unlikely to implement sector harsh measures on the property

Budget MREITs

2011

–

a for

disappointment

Table 18
FYE Price Fair Value (RM/s) (RM/s) Glomac^ Suncity Sunrise Axis REIT IJM Land^ Mah Sing Paramount Quil Capita Sunway REIT Hunza Prop SP Setia YNHB KLCC^ Sector Avg Apr 1 . 6 5 Dec 4.00 Jun 2.22 Dec 2.17 Mar 2 . 6 7 Dec 1.87 Dec 4.85 Dec 1.04 Jun Jun 0.98 1.45 1.72 5.48 2.88 2.67 3.18 2.33 5.80 1.23 1.05 1.58 4.95 1.86 3.80 FY11 24.3 41.3 29.9 18.7 19.4 17.2 63.1 9.3 6.7 27.6 22.8 17.6 26.3 EPS (sen)

Valuations Of Property Stocks
EPS Gwth (%) FY11 23.3 18.6 10.6 12.3 53.0 22.8 9.4 4.7 10.1 3.4 14.6 11.6 4.5 16.1 FY12 18.8 16.8 11.1 0.8 9.8 23.2 13.8 3.4 8.6 -24.2 19.8 15.2 3.8 11.4 FY12 28.9 48.2 33.2 18.9 21.3 21.2 71.8 9.6 7.3 20.9 27.4 20.3 27.3 PER (x) FY11 6.8 9.7 7.4 11.6 13.8 10.9 7.7 11.1 14.4 5.3 21.4 10.2 12.6 12.3 FY12 5.7 8.3 6.7 11.5 12.5 8.8 6.8 10.8 13.3 6.9 17.8 8.8 12.2 11.0 EV/EBITDA (x) FY11 6.4 6.9 7.3 16.7 9.6 7.2 3.8 12.9 16.9 5.0 19.4 8.5 5.4 P/NTA (x) FY11 0.8 0.8 0.9 1.2 1.8 1.6 1.0 0.7 1.0 0.6 2.2 0.9 0.6 P/CF (x) FY11 8.5 8.2 10.7 12.1 11.0 21.1 7.8 2.8 11.7 5.1 39.7 -36.3 2.7 GDY (%) FY11 8.9 2.1 1.9 8.6 1.1 3.7 6.5 8.3 6.9 3.9 2.9 2.5 3.3 OP OP OP OP OP OP OP OP OP TB MP MP MP Rec

O c t 4.88 Dec 1.79 Mar 3.32

^ FY11-12valuations refer to those of FY12-FY13

THE 2011

23

BUDGET

Semiconductor & IT : Upping The Ante
Upgrade Mode
Measure: A total of RM857m will be allocated to local industry players in order to enhance the electrical and electronics (E&E) sector. The investment will be mainly in key strategic areas i.e. Penang and Kulim High-Tech Park, Kedah. The investment is expected to drive the local industry up the value chain and improve its international competitiveness. Impact: We believe the allocation would support the establishment of five wafer fab plants in Kulim High-Tech Park. We highlight that these plants will focus on higher technology nodes i.e. analogue (power applications) and mixed signals (wireless applications). Already, a JV between QT Hightech Malaysia Sdn Bhd and Lfoundry Gmbh has been established to develop a wafer fab plant in Kulim. Note that the plant is expected to have a production capacity of 60,000 wafers (200mm) a month. With these facilities, the development is expected to attract around 50 integrated circuit (IC) design companies. Therefore, in our view, this augurs well for the industry mainly due to: 1) further business opportunities for packing assembly, and testing (PAT) players i.e. MPI and Unisem given that IC design companies require these services; and 2) reduction of logistics costs and lead time given that the majority of wafer fabs are sourced from Taiwanese players. While we are positive on these developments, we believe the risks include: 1) capacity glut of wafers that could potentially cause wafer prices to fall as the industry is highly competitive; 2) wafer fabs are a highly cyclical industry; and 3) the fab facility are small vs. major foundry players and hence may lack similar economies of scale.
Table 19
FYE Price Fair Value (RM/s) (RM/s) Unisem* Dec JCY MPI^ Notion Sep Jun Sep 1.96 1.06 5.95 1.69 2.31 1.32 6.35 1.54 FY11 21.0 13.2 53.8 21.0

Neutral

Valuations Of Semiconductor/IT Stocks
EPS (sen) FY12 23.4 14.2 61.6 22.5 4.9 9.9 7.2 3.1 7.8 EPS Gwth (%) FY11 FY12 11.4 7.6 14.6 7.4 10.4 FY11 9.3 8.1 11.1 8.1 8.7 PER (x) FY12 8.4 7.5 9.7 7.5 7.9 EV/EBITDA (x) FY11 4.0 5.7 2.8 3.8 P/NTA (x) FY11 1.4 2.0 1.2 1.3 P/CF (x) FY11 4.6 5.8 2.7 4.1 GDY (%) FY11 2.6 6.1 3.4 3.8 OP OP MP UP Rec

Sector Avg ^ FY11-12valuations refer to those of FY12-FY13 * Fully Diluted

THE 2011

24

BUDGET

IMPORTANT DISCLOSURES
This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/ or its associated persons may from time to time have an interest in the securities mentioned by this report. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report. RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of any company that may be involved in this transaction. “Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors, officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports. This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel. The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues. The recommendation framework for stocks and sectors are as follows :-

Stock Ratings
Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months. Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks. Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months. Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings
Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months. Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

THE 2011

25

BUDGET

RHB DEALING AND RESEARCH OFFICES

MALAYSIA RHB Investment Bank Bhd Level 10, Tower One, RHB Centre, Jalan Tun Razak 50400 Kuala Lumpur P.O. Box 12699 50786 Kuala Lumpur, Malaysia Tel (General) : (603) 9285 2233 Dealing Office Tel (Dealing) : Fax (Dealing) : (603) 9285 2288 (603) 9284 7467

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Lim Chee Sing
Director
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