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Platform 1

1 July 2015

Malaysia Strategy 2H15

Headwinds Quickening But Don’t Lose Sight of

Catalysts

Macro

3

Risks

2

Growth

2

Value

2

Top Buys

TP (MYR/s)

AirAsia 2.89

CMS 6.00

Dialog 1.90

GD Express 1.98

GHL Systems 1.42

Globetronics 7.10

IHH 7.00

IJM Plantations 3.90

Inari Amerton 4.35

Karex 3.63

Source: RHB

Top Sells

TP (MYR/s)

Alam Maritim 0.45

AMMB 5.70

APM 4.30

CIMB 5.20

Daibochi 3.80

Media Prima 1.40

Parkson 1.70

TH Plantations 1.00

UMW 8.65

Source: RHB

Top Yield Stocks

Yield (%)

Kulim* 14.9

SHL Consolidated 7.9

MRCB-Quill REIT 7.5

Media Prima 7.4

Hua Yang 7.1

Hektar REIT 7.0

CapitaMalls 6.8

Matrix 6.6

B-Toto 6.5

Protasco 6.5

IGB REIT 6.4

Source: RHB

* Special dividend

Lim Chee Sing +603 9285 9693

[email protected]

Alexander Chia +603 9207 7621

[email protected]

Peck Boon Soon 603 9280 2163

[email protected]

The negative news flow avalanche accumulating in recent months has presented new challenges for the market to overcome. Satisfactory resolutions to political disagreements and governance concerns would be major catalysts. Oil price recovery remains on track while the global economy’s rehabilitation ought to be reaffirmed by US interest rate normalisation. Resilient domestic demand would help to engineer a gradual corporate earnings turnaround.

Potent cocktail of negatives. The collapse in oil and other commodity

prices occurred in tandem with a renaissance in the USD on an imminent rise in US interest rates. Weaker oil has given rise to domestic fiscal concerns, given that Malaysia is ASEAN’s only net oil & gas (O&G) exporter. Its vulnerability is underscored by the high foreign ownership in financial assets The bull market in North Asia has hastened a sell-off in ASEAN markets, while escalating domestic political tension and other governance concerns have made investors increasingly nervous. The deteriorating situation in Greece ought to keep investors on tenterhooks. This potent cocktail of negative factors is a recipe for volatility in financial asset prices, as the market works through these challenges going into 2H15. Although sentiment remains bearish, we see the market remaining well supported on the downside, with foreign investors already grossly underweighting Malaysia. The unexpected affirmation of the country’s credit rating and the lifting of the outlook back to stable by Fitch Ratings (Fitch) will lift the market and the MYR.

Do not lose sight of market catalysts. While the oil price recovery has

been shallower than expected, it has tracked expectations directionally. We now expect Brent to average the year at USD67.30/barrel (bbl) from USD72.50/bbl before moving to USD80/bbl in 2016. Lower oil will grease the economic health of developed economies, while its gradual recovery should banish domestic fiscal concerns. The expectation for US interest rates to lift-off in September ought to remove the overhang for emerging markets, concurrently reaffirming expectations that the US (and global) economic recovery is intact. We believe corporate Malaysia is well positioned to record growth in earnings this year, after the 4.1% EPS contraction in 2014, by leveraging on investments in manufacturing capacity, manpower and technology. As consumers and businesses adjust to the goods and services tax (GST), the earnings outlook should gradually improve going into the latter part of 2015. The impending 1ppt reduction in corporate income tax rate from YA2016 should also be supportive of 2016 earnings growth. A quick and satisfactory resolution to domestic political issues and concerns regarding a certain government-linked strategic development firm will help to lift investor sentiment and stem the portfolio funds outflow, and help relieve pressure on the MYR. We reiterate our end-2015 FBMKLCI target of 1,865 pts based on an unchanged 16.5x 1-year forward P/E.

Still a stock picker’s market. We continue to prefer equities as an

asset class. Investors will need to remain nimble and identify stocks with strong governance, good growth prospects, steady cash flows and unstressed balance sheets. Earnings growth remains key to the creation of new shareholder value. Yield stocks are becoming relatively less attractive due to the expected narrowing of the yield gap as the US interest rate moves higher. Sectors that can offer resilient growth include healthcare, rubber products, logistics and utilities. We are also OVERWEIGHT on construction, ports & shipping and technology.

30 March 2015

MARKET DATELINE

PP7767/09/2012(030475)

http://www.efa.biz/

Strategy - Malaysia 1 July 2015

See important disclosures at the end of this report 2

Table of Contents

EXECUTIVE SUMMARY 1

MARKET REVIEW 3

MARKET OUTLOOK 7

MARKET STRATEGY 32

FBM KLCI FROM A TECHNICAL PERSPECTIVE 44

SECTOR OUTLOOK

Auto 45

Aviation 47

Banking 50

Basic Materials 53

Construction 55

Consumer 58

Gaming 61

Healthcare 63

Logistics 66

Media 68

Non-Bank Financials 70

Oil & Gas 72

Plantation 75

Plastic Packaging 77

Ports & Shipping 79

Property 82

Property MREITs 84

Rubber Products 86

Technology 88

Telecommunication 90

Timber 93

Utilities 95

APPENDIX

Valuations and Ratings of Individual Stocks Under Coverage 98



Market Review

Figure 1: FBM KLCI Movements from January 2015 to June 2015

Source: Bloomberg, RHB

Challenging start to 2015

2015 began with a sell-off across most markets on the back of concerns over global economic growth, deflationary risks and lower commodity prices as the European Central Bank (ECB) manoeuvred to meet market expectations for full-scale quantitative easing (QE). Subsequently, lower crude oil prices helped to lift other regional markets in countries that are net oil importers, as the reduced inflationary pressures would allow for more accommodative monetary policies. Many countries implemented easier monetary policies in 1Q, including Australia, China, Singapore, India and Thailand.

The FBMKLCI rebounded in mid-January, tracking crude oil prices that also saw a bottom during the month. The revision of the 2015 Budget on 20 Jan – to factor in a lower USD55/bbl oil price assumption – helped to reassure the markets of the country’s fiscal health, although the budgeted 2015 fiscal deficit deteriorated to 3.2% (original target: 3%). Petronas did help to balance the books by maintaining its 2015 dividend along with savings from the elimination of retail fuel subsidies. However, this was not sustained, as the bellwether index remained in a range-bound pattern. Comments from Fitch – in a teleconference on 20 Jan – that it might downgrade Malaysia’s sovereign rating helped to deflate sentiment. Externally, the ECB’s announcement of a full-scale QE towards the end of January helped to offset rising concerns of a Greek exit (Grexit) from the Eurozone after the anti-austerity Syriza party was elected to power in Greece. Better-than-expected 4Q14 GDP data helped to lift the index to a 1Q15 high of 1,825.54 pts on 4 Mar, although it then corrected to 1,778.16 pts as the market digested the implications of another lacklustre Dec 2014 earnings quarter.

Subsequently, the market recovered to a YTD high of 1,862.80 pts on 21 Apr helped by the stabilisation of crude oil prices. At the March US Federal Open Market Committee (FOMC) meeting, the federal fund rate (FFR) was kept unchanged with the US Federal Reserve (US Fed) reiterating its patient guidance. It is also worth noting that foreign investors turned net buyers (MYR156m) in April and remains the only month so far this year where foreign funds were not net sellers. The MYR recovered strongly all the way to MYR3.55 on 28 Apr from MYR3.73 on 20 Mar.

Macroeconomic worries drive the FBMKLCI lower

A topsy-turvy 1H15 for the FBMKLCI

YTD high reached in April



Thereafter, the benchmark index began to slide as the market continued to be broadsided by negative news flow. Political tensions rose as the spat between senior political personalities escalated into the open. More revelations, allegations and concerns pertaining to a strategic development company wholly-owned by the Ministry of Finance (MOF) emerged and boiled over. April also marked the beginning of a bull market in China and Hong Kong (the HSI gained 13% in April). With regional institutional investors’ attention firmly affixed on North Asian markets, portfolio funds flowed out of ASEAN. The announcement of the 11

th Malaysia Plan on 21 May failed

to excite the market as it contained few new initiatives, highlighting the funding constraints faced by the Government.

The recent June FOMC meeting refocused investor expectations that the US Fed is on track to raise interest rates in 2H15. While this outcome remains data dependent, focusing on jobs and inflation, the expectation for a shallow pace of increase was reinforced. Global equity markets remain concerned after talks between Greece and its creditors stalled, with both parties yet to reach a deal. Investors retained their cautious stance, taking into consideration the possibility of Greece being forced out of Eurozone if it fails to repay EUR1.6bn due to the International Monetary Fund (IMF) by end-June.

The FBMKLCI has slumped 2.9% YTD and is the second worst-performing market in ASEAN behind Indonesia (-5.2%). Sri Lanka is the worst performing market YTD, with a decline of 3.9%. The markets in China were the best performers in Asia so far, with Shenzhen nearly doubling (+76.9%) and Shanghai surging 29.6%. At the same time, the Hang Seng also posted impressive gains (+13.0%) on the back of the “through train” arrangements implemented in 4Q14, which has unleashed an avalanche of retail money into equity markets.

On the local front, the telecom, technology, industrial products, consumer and construction sectors were the best performing YTD. Telecom stocks have been seen as a refuge from volatility, while many tech companies are beneficiaries of the strong USD. Construction remains in focus, owing to the maintaining of the Government’s development expenditure programme. Plantations and property were the worst-performing sectors. CPO prices remain lacklustre while the presence of large blue chip companies in the industry has seen solid government-linked investment company (GLIC) ownership levels keep valuations high and unattractive. The property sector continues to be affected by weak consumer sentiment for big ticket spending, resulting in poor take-up rates and slow project launches. On the downside, the plantation, banking, finance and property sectors were the key underperforming stocks, with plantations as the worst performing. Table 3 provides the list of outperformers and underperformers under our coverage.

A wall of negative news toward the end of April dragged the market lower

The timing of the US interest rate hike and turmoil in the Eurozone continues to rattle Asian markets

Malaysia is the second worst-performing market in ASEAN this year

Telecom, tech, construction, industrials, construction and consumer sectors outperformed



Table 1: FBMKLCI performance versus other regional markets

Index 2014 2015 2014 2015

Country indices 26-Jun-15 Q3 Q4 Q1 Q2* YTD

% change

Malaysia KLCI 1,710.5 (1.9) (4.6) 3.9 (6.6) (5.7) (2.9)

Singapore STI 3,320.9 0.6 2.7 2.4 (3.7) 6.2 (1.3)

Thailand SET 1,518.0 6.7 (5.5) 0.6 0.8 15.3 1.4

Philippines Pcomp 7,622.1 6.4 (0.7) 9.8 (4.0) 22.8 5.4

Indonesia JCI 4,923.0 5.3 1.7 5.6 (10.8) 22.3 (5.8)

Hong Kong Hang Seng 26,663.9 (1.1) 2.9 5.5 7.1 1.3 13.0

Taiwan TWSE 9,462.6 (4.5) 3.8 3.0 (1.3) 8.1 1.7

Korea Kospi 2,090.3 0.9 (5.2) 6.5 2.4 (4.8) 9.1

China Shanghai 4,192.9 15.4 36.8 15.9 11.9 52.9 29.6

China Shenzhen 2,503.0 21.6 6.1 38.4 27.8 33.8 76.9

India Mumbai 27,811.8 4.8 3.3 1.7 (0.5) 29.9 1.1

Vietnam VSE 581.8 3.6 (8.9) 1.0 5.6 8.1 6.6

Sri Lanka Colombo All-Share 7,016.2 13.7 0.6 (6.6) 2.9 23.4 (3.9)

US Dow Jones 17,946.7 1.3 4.6 (0.3) 1.0 7.5 0.7

US S&P 500 2,101.5 0.6 4.4 0.4 1.6 11.4 2.1

US Nasdaq 5,080.5 1.9 5.4 3.5 3.7 13.4 7.3

Note: *As at 26 Jun 2015 Source: RHB

Table 2: Bursa Malaysia’s performance by sector

Index 2014 2015 2014 2015

Bursa Msia by sector^ 26-Jun-15 Q3 Q4 Q1 Q2* YTD

% change

KLCI 1,710.5 (1.9) (4.6) 3.9 (6.6) (5.7) (2.9)

FBM Emas 11,832.9 (1.0) (6.6) 4.1 (5.8) (6.1) (1.9)

FBM 70 12,881.8 0.6 (8.6) 3.2 (4.5) (7.9) (1.4)

FBM 100 11,510.7 (1.4) (5.5) 3.8 (6.1) (6.2) (2.6)

FBM Small Cap 15,973.6 4.1 (19.4) 8.3 (1.9) (4.2) 6.2

FBM Fledgling 15,683.5 8.3 (15.3) 9.7 1.9 11.1 11.8

FBM Emas Shariah 12,306.4 (1.5) (5.1) 4.9 (6.2) (4.2) (1.6)

FBM ACE 6,398.4 9.1 (22.3) 25.9 (10.1) (0.4) 13.2

FBM Hijrah Shariah 13,905.8 (1.8) 0.1 4.8 (8.3) 1.0 (3.9)

Industrial 3,140.2 (1.4) (0.7) 5.5 (6.4) (0.3) (1.2)

Telecom & Technology 22.3 6.3 (15.2) 27.7 4.8 10.4 33.8

Construction 281.6 0.4 (8.2) 6.6 (5.1) 0.4 1.1

Consumer 583.1 1.2 (6.4) 7.5 (2.6) (5.8) 4.7

Finance 15,514.2 0.3 (8.9) 3.4 (4.4) (7.4) (1.2)

Industrial Products 137.7 (1.3) (11.1) 6.5 1.0 (9.2) 7.6

Plantation 7,258.3 (9.4) (5.7) (1.1) (7.0) (11.8) (8.0)

Property 1,224.4 4.5 (13.9) 2.3 (6.9) (0.6) (4.8)

Services & Trading 226.5 (0.4) (5.3) 5.2 (6.3) (4.8) (1.3)

Mining 547.1 5.5 (18.2) 10.3 (2.9) 6.8 7.1

Note: ^According to Bursa Malaysia's classifications Note 2: *As at 26 Jun 2015 Source: RHB



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

Gainers 26-Jun-15 31-Dec-14 % chg. Losers 26-Jun-15 31-Dec-14 % chg.

(MYR/share) (MYR/share)

(MYR/share) (MYR/share)

Evergreen Fibreboard 1.41 0.61 133.1 AirAsia X 0.22 0.52 (57.6)

SKP Resources 1.21 0.64 89.1 AirAsia 1.54 2.72 (43.4)

VS Industry 4.69 2.52 86.1 Malaysia Steel Works 0.62 0.93 (33.3)

Prestariang 2.65 1.44 84.0 MMHE Holdings 1.22 1.78 (31.5)

IQ Group 2.58 1.59 62.3 Petra Energy 1.20 1.73 (30.6)

GHL Systems 1.13 0.72 56.9 Lion Industries Corp 0.36 0.51 (28.7)

MPI 6.79 4.53 49.9 UEM Sunrise 1.01 1.41 (28.4)

Top Glove 6.70 4.52 48.2 Parkson 1.61 2.25 (28.3)

Kossan Rubber Industries 6.60 4.47 47.7 Hiap Teck Venture 0.42 0.58 (27.6)

Globetronics 6.11 4.23 44.5 Malaysia Building Society 1.77 2.41 (26.5)

TASCO 4.00 2.78 43.9 Jaya Tiasa 1.50 2.02 (25.7)

Hovid 0.50 0.35 42.9 Felda Global Ventures 1.68 2.18 (22.9)

Karex 3.15 2.25 39.8 Dayang Enterprise 2.26 2.90 (22.1)

Pestech International 4.87 3.50 39.1 IOI Properties 1.85 2.35 (21.4)

Inari Amertron 3.32 2.40 38.3 Naim Holdings 2.35 2.98 (21.1)

Perdana Petroleum 1.53 1.11 37.8 Eastern & Oriental 1.68 2.05 (17.8)

UEM Edgenta 3.45 2.55 35.6 IOI Corp 3.97 4.80 (17.3)

Time dotCom 6.57 4.88 34.6 Berjaya Food 2.57 3.10 (17.1)

Paramount Corp 2.07 1.54 34.4 Glomac 0.82 0.98 (16.8)

Cahya Mata Sarawak 5.23 3.96 32.1 TDM 0.70 0.83 (15.7)

Source : Bloomberg



Market Outlook

Headwinds turn blustery in 2H15, caution advised

The global economic recovery continues at a patchy and uneven pace. The collapse in oil and other commodity prices has happened in tandem with a renaissance in the USD on the back of an impending normalisation of US interest rates. Weaker oil has given rise to domestic fiscal concerns. These pre-existing concerns, which drove the market lower in the last quarter of 2014, returned with a vengeance toward the end of April. This was in addition to new negative factors that turned headwinds even more blustery than before.

These new factors include a bull market in North Asia that hastened a sell-off in ASEAN markets in addition to domestic political issues and other concerns. The potential Greek debt default saga has also roiled investors concerned with what a potential exit of Greece from the EU could mean for both Europe and its economically weaker members. This potent cocktail of negative factors is a recipe for volatility in financial asset prices, and Malaysia is vulnerable to this given the higher foreign ownership in its financial assets. Corporate earnings have so far failed to spark, with tepid 1Q15 earnings. Prospects for earnings growth appear to be challenging over the next two quarters, as consumers and the economy at large adjusts to the new GST regime and expectations that living costs are escalating. These factors combined contrive to erase all gains (and more) made by the FBMKLCI during the first four months of 2015.

Nonetheless, the unexpected U-turn by Fitch ought to eliminate one worry overhanging the market and help stem the tide of foreign selling in addition to supporting the MYR.

Greece is the word

Greece is the word on the lips of investors as the long-drawn out saga – that arguably began when the anti-austerity Syriza Party was elected to power in Jan 2015 – came to a head. The deadline to repay the IMF’s EUR1.6bn loan expired on 30 Jun. The Greek Government has called for a referendum on 5 Jul on the cash-for-reforms proposal after negotiations with creditors failed to make any progress. On 28 Jun, all banks in Greece were ordered to close for a week, with ATM cash withdrawals limited to EUR60 per day. Although Greece is a small economy, accounting for less than 2% of the Eurozone’s GDP, a potential “Grexit” scenario could threaten to undo much of the work that ECB has done to shore up confidence in the EUR. ECB President Mario Draghi’s miracle cure of “doing whatever it takes to preserve the EUR” may no longer mean the bank’s policy of buying bonds to hold down yields only. Common deposit insurance, resolution authority and capital rules may become critical to stem the spread of financial instability in the future, should similar risk emerge in any parts of the Eurozone. At the same time, Greece moves itself into unchartered territory by setting a precedent for other nations to reconsider membership. The 5 Jul referendum is panning out to be a vote to remain in the EU. 20 Jul is the next date for a bond repayment. We note that other economically weaker countries in the Eurozone, such as Portugal, Italy and Spain, are today much less vulnerable to market contagion, having taken steps to correct economic imbalances. The Greek debt crisis has also been long in the making and is not a new surprise to markets. In addition, most of the Greek debt papers are owned by governments and not by the private sector. While the direct impact of “Grexit” on Malaysia’s economy is limited, the concern is on the contagion effect on emerging market assets.

More negative news add to headwinds

North Asia pull factor and domestic political issues hasten domestic sell-off

Fitch unexpectedly upgrades Malaysia’s outlook to “Stable” and reaffirms the “A-“ credit rating

The Greece saga is weighing down markets



Oil – the worst looks over

Figure 2: Brent crude oil prices (2014-present)

Source: Bloomberg

The International Energy Agency’s (IEA) expectations of the markets have improved since the January-April period, with lower inventory expected in 2H15. If demand and supply play out the way that the Organisation of the Petroleum Exporting Countries (OPEC) and the IEA anticipate, then equilibrium could be reached in 2H15. The last time there was a balanced market was in 1Q14, with oversupply starting around 2Q14 thereafter. In 1H14, crude oil prices were still trending at USD100-110/bbl. Prices started sliding since 2H14 as the oversupply worsened. We are seeing the crossover point again in 3Q15, where a balanced market may occur. However, we do not expect market equilibrium to come so soon, as the new dynamics of crude oil markets have arrived. This is because we believe that the shale oil producers are ready and willing to ramp up production as soon as it becomes profitable to do so.

Figure 3: Crude oil demand and supply balance


Oil market still finding an equilibrium



Demand is rising…

In its latest report, the IEA expects global additional oil demand for 2015 to increase by 1.1m bbls per day (mbpd) (+1.2% YoY) to 93.6mbpd, up from additional demand of 0.7mbpd (+0.7% YoY) recorded in 2014. This is also an increase from the agency’s initial forecast of additional oil demand of 910,000bpd for 2015 as of January. The main factor driving demand is from the Organisation for Economic Co-operation and Development (OECD) countries, which is up 175,000bpd in YTD 2015 vs a decline of 460,000bpd in 2014.

… but the markets are well supplied

The US shale oil market is playing out the way we expected, namely: i) the number of rigs is now down by 60% from its peak, ii) crude oil production has reached its inflection point and has started to decline, and iii) the US commercial oil stocks remain at an all-time high but is forecasted to decline. When crude oil prices neared USD70/bbl, a chorus of shale oil producers said they would start producing again. Saudi Arabia’s strategy going forward would be to prevent crude oil prices from rising high enough to cause it to lose market share again. This means it would have to allow crude oil prices to increase just enough to sustain its own economy but not so high as to allow non-OPEC producers (ie the shale oil producers) to be able to significantly increase production – unless it is to meet incremental demand. As such, it is possible that Saudi Arabia may raise its production and exports again, should the occasion arise. We believe the new dynamics have started, bringing more uncertainty and higher volatility to the oil markets. Iran may reach a partial nuclear deal with world powers by this year. Such a deal could end sanctions, thus allowing more crude oil to enter the market. We expect that around 700,000bpd-1mbpd more exports may be achieved by end-2016, if not earlier. This could provide a further downside or put a cap on crude oil prices for this year, in our view.

Figure 4: Baker Hughes’ US oil rig count

Source: Baker Hughes

Rising oil demand from OECD countries

An Iran nuclear deal could add up to 1m bbls to global oil supply



Figure 5: Saudi Arabia crude oil production Figure 6: US crude oil production to decline further

Source: EIA Source: EIA

Figure 7: US crude oil stocks are starting to decline from a peak

Source: EIA



Our view on crude oil

The price of crude oil (Brent) averaged at USD57.10/bbl for 1H15, c.USD8/bbl lower than our forecast of USD65/bbl. The crude oil price had a solid rally towards the end of 1H15, reaching USD69/bbl at one time, but not enough to push the quarter average up to meet our expectation. Crude oil prices have since rebounded and are up 45% from its bottom. We revise down our 2015 average crude oil price forecast by 7% to USD67.30/bbl, after accounting for 1H15 average Brent at USD57.10/bbl. We lower our 3Q15 average to USD75/bbl from USD80/bbl and maintain forecasts for 4Q15 and 2016 onwards at USD80/bbl. The fundamental downside risk now depends on how quickly and by how much the US shale oil producers can ramp up shale oil production, keeping in mind that Saudi Arabia can also ramp up production in order to preserve its market share and drive down prices. Middle East tensions (in which Saudi Arabia is now very much involved in) remain as factors that could provide an upside to crude oil prices.

Table 4: RHB crude oil price forecast (USD)

1Q15 2Q15F 1H15 3Q15F 4Q15F 2H15F 2015F 2016F onwards

RHB ave. Brent (revised Jun 2015) 53.90 62.00 57.10 75.00 80.00 77.50 67.30 80.00

RHB ave. Brent (old, Jan 2015) 60.00 70.00 65.00 80.00 80.00 80.00 72.50 80.00

% change -10% -11% -12% -6% 0% -3% -7% 0%

RHB ave.( implied WTI) 43.90 52.00 47.10 65.00 70.00 67.50 57.30 70.00

RHB ave. (implied Dubai) 49.90 58.00 53.10 71.00 76.00 73.50 63.30 76.00

PTT (Jan 2015, Dubai) 45.00 48.00 46.50 58.00 64.00 61.00 53.80 N/A

PTTGC (Jan 2015, Dubai) 50.90 51.50 51.20 56.00 62.60 59.30 55.30 N/A

Petronas/ Malaysian Government (Brent) 55.00 55.00 55.00 55.00 55.00 55.00 55.00 55.00

Wood Mackenzie

59.0 85.0

Bloomberg

63.9 N/A

Brent (actual/QTD/YTD) 53.9 62 57.1 WTI (actual/QTD/YTD) 48.6 57 51.8 Dubai (actual/QTD/YTD) 55.8 61 55.8

Source: RHB, Bloomberg

Fiscal concerns from lower oil continues to linger

Oil prices stabilised after bottoming out in January and this also helped the broader market to recover. The FBM KLCI’s trading pattern this year has been closely correlated with Brent crude prices and are in line with our expectations, as Malaysia is the only net O&G exporter in ASEAN. The market remains concerned that sharply lower crude oil prices could result in Malaysia’s current account falling into a deficit from a narrowing of the commodity trade surplus. Concerns continue to linger particularly as liquefied natural gas (LNG) prices typically lag crude prices by six months. A current account deficit would bring Malaysia the dubious honour of qualifying to join the “Twin Deficit Club”, given that it also runs a budget deficit.

Figure 8: Brent crude oil vs FBM KLCI

Source: Bloomberg

Brent crude to average USD67.30/bbl and USD80/bbl for 2015 and 2016 respectively

Low oil prices continue to spur fiscal worries



Figure 9: Brent crude oil vs LNG import price to Japan

Source: Bloomberg

The 59.5% peak to trough collapse in Brent crude price in January from Jun 2014, forced the government to issue a revised 2015 Budget with an adjusted USD55/bbl oil price assumption, down from USD100/bbl in the original budget tabled in Parliament in Oct 2014. Despite the sharply lower oil price, the budget shortfall was not as negative as feared. The revised 2015 target fiscal deficit rose to 3.2% of GDP (from 3%), but was still lower than the 2014 deficit of 3.4%. This was achieved by: i) Petronas paying a similar quantum of dividend in 2015, ii) savings from the abolishment of fuel subsidies after the implementation of a managed float mechanism for retail fuel and diesel, and iii) a reduction in operating expenditure of MYR5.5bn. In addition, Petronas has agreed to pay the Government MYR26bn in dividend this year, making the first payment in the early part of 2015. The remaining payments slated to come in several tranches of around MYR2bn until completion this year. At the same time, the Government is expected to bring in MYR31bn annually from the implementation of the GST, which is expected to be double that of the previous sales and services taxes of MYR15.0bn.

Smaller current account surplus

Malaysia’s export growth is envisaged to improve gradually in 2H15, while the growth in imports is likely to trail that of exports. Lower commodity prices, in particular oil and liquefied natural gas (LNG) prices, as well as lower palm oil output due to floods in the eastern states of West Malaysia, are likely to translate into lower export earnings in nominal terms in 2015. While Malaysia stands to lose in oil and LNG export revenues, the impact is likely to be offset by cheaper crude oil import bills. This would likely be cushioned by higher export volume of crude oil, as output from the Gumusut-Kakap field came into production in late 2014. This would result in a narrower O&G trade surplus instead of treading into a deficit. On balance, we expect a narrower surplus in the merchandise trade account during the year. At the same time, the services account is projected to record a slightly smaller deficit due to an improvement in travel receipts on the back of a cheaper MYR, which ought to encourage in-bound tourists and discourage Malaysians from travelling abroad. Also, the deficit in the income account is likely to narrow during the year, contributed by smaller outflows by non-resident controlled companies operating in Malaysia. This ought to be helped by higher repatriation of profits, dividends and interests from local companies investing abroad. We also expect repatriation of salaries by foreign workers to drop marginally during the year, due to lower remittances by foreign workers on account of higher cost of living post GST implementation. As a whole, we expect the current account surplus of the balance of payments to narrow significantly to MYR31.0bn, or 2.6% of GDP in 2015. BY comparison, 2014 saw a surplus of MYR47.3bn, or 4.3% of GDP.

Budget shortfall is manageable

Malaysia’s current account to narrow but remain in surplus



Table 5: Federal Government's financial position

2012 2013 2014 2015F

MYRbn % change MYRbn % change MYRbn % change MYRbn % change

Revenue 207.9 12.1 213.4 2.6 220.6 3.4 222.9 1.0

Total expenditure 252.5 10.2 253.5 0.4 259.1 2.2 260.9 0.7

Operating expenditure 205.5 12.6 211.3 2.8 219.6 3.9 212.4 (3.3)

Gross development expenditure 46.9 1.1 42.2 (10.1) 39.5 (6.4) 48.5 22.8

Less: loan recoveries (2.6)

(1.5)

(1.1)

(1.0)

Net development expenditure 44.3

40.7

38.4

47.5

Overall balance (42.0)

(38.6)

(37.4)

(37.0)

% to GDP (4.3) (3.8) (3.4) (3.2)

Note: “F” = budget forecast, excluding 2015 tax measures

Source: MOF's Economic Report 2014/2015

Table 6: Balance of payments

2014 2015 2012 2013 2014 2015(F)

1Q 2Q 3Q 4Q 1Q

(MYRbn)

Current account 19.5 15.0 7.1 5.7 10.0 50.2 35.5 47.3 31.0

(% of GDP) (7.3) (5.5) (2.6) (2.0) (3.6) (5.2) (3.5) (4.3) (2.6)

(% of GNI) (7.5) (5.7) (2.7) (2.1) (3.7) (5.4) (3.6) (4.4) (2.7)

Goods 31.2 27.3 25.5 29.4 27.5 113.0 96.6 113.4 91.3

Services (0.5) (1.6) (3.6) (5.5) (3.8) (8.5) (9.6) (11.2) (10.3)

Income (6.6) (8.0) (9.6) (13.2) (8.5) (35.8) (34.0) (37.3) (35.3)

Current transfers (4.6) (2.8) (5.2) (5.0) (5.3) (18.5) (17.5) (17.6) (16.0)

Capital account 0.0 0.0 0.0 0.3 0.0 0.2 0.0 0.3 0.0

Financial account (38.2) (11.0) (5.8) (26.6) (29.7) (23.0) (20.2) (81.6) (82.2)

Errors & omissions* 1.4 (5.0) (8.0) 9.1 4.0 (23.5) (0.6) (2.5) (3.0)

Overall balance (17.3) (1.0) (6.7) (11.5) (15.7) 3.9 14.6 (36.5) (54.2)

Outstanding reserves^ 424.6 423.6 416.9 405.5 389.7 427.1 441.7 405.5 349.5

(USD)^ 130.2 131.9 127.3 116.0 105.1 139.7 134.8 115.9 99.4

Note: “(F)” = RHBRI’s forecasts

Note 2: ^As at end-period

Note 3: *Reflects mainly revaluation gains/losses from MYR depreciation/appreciation and statistical discrepancies.

Source: Department of Statistics, RHB

Fitch unexpectedly affirms credit rating, lifts outlook to “Stable”

In an unexpected move, Fitch announced on 30 Jun that it has affirmed Malaysia’s long-term foreign currency sovereign credit rating at “A-” while the outlook has been upgraded to “Stable” from “Negative”, on the back of improving fiscal position, financing flexibility and favourable GDP growth. The ratings agency had earlier downgraded the outlook for Malaysia to “Negative” back in Jul 2013.

Fitch now holds the view that Malaysia's fiscal finances have improved since 2014, with the general government deficit falling to 3.8% of GDP in 2014 from 4.6% of GDP in 2013 and general government debt/GDP declining to 53.9% at the end of 2014 from 54.7% at the end of 2013. The ratings agency views progress on the GST and fuel subsidy reform as supportive of the fiscal finances. It forecasts for a further narrowing of the deficit in 2015 despite lower oil prices. In addition, the depth of Malaysia's local capital markets provides financing flexibility and supports the sovereign's domestic financing needs. While the share of non-resident holdings of government securities is high and there is weakness in the sovereign's debt profile, local agencies such as Employees Provident Fund (EPF) can provide funding to support to the sovereign in the event of a sell-off by non-residents.

Fitch reaffirms Malaysia’s “A-” credit rating and lifts outlook to “Stable”



Also, Malaysia's rating remains supported by reasonably strong real GDP growth rates and low inflation volatility. The country's 5-year real GDP growth averaged 5.8% over 2010-2014, as against 3.1% for the “A” median, whereas inflation volatility was 1.3% as against 1.7% for the “A” median. Nevertheless, as against the “A” median, the country's fiscal position continues to remain weak, according to Fitch. The rating agency continues to believe that the Malaysian sovereign is incurring additional contingent liabilities beyond explicit guarantees because of quasi-fiscal operations of a state-owned strategic development firm. Also, the current account surplus continues to decline and from an average of 15.6% of GDP from 2005-2009, falling to 7.2% during 2010-2014. Fitch forecasts for the current account surplus to fall to 1.4% in 2015 and 1.1% in 2016, from about 4% in 2014.

The Fitch affirmation of Malaysia’s sovereign credit rating and upgrade of the outlook would likely provide a relief to the MYR, which is under selling pressure due to concern of a credit ratings downgrade and made worse by outflow of capital as foreign investors adjusted their investment portfolios in anticipation of an interest rate hike by the US Fed. Earlier on 21 Jan, the ratings agency indicated that it was more likely than not to downgrade the ratings within the next 12-18 months, after maintaining a “Negative” outlook on Malaysia's long-term issuer default ratings. Despite this positive development, we believe the MYR is likely to remain weak and hover at around MYR3.65-3.75, as foreign investors are likely to continue adjusting their portfolios ahead of the US interest rate increase.

Figure 10: Slowly shifting away from dependence on oil revenue

Source: Bloomberg



Table 7: Sovereign rating comparison

Category:

HY (high yield) or IG (investment grade)

Moody's Standard & Poor's Fitch

IG Aaa AAA AAA

IG Aa1 AA+ AA+

IG Aa2 AA AA

IG Aa3 AA+ AA+

IG A1 A+ A+

IG A2 A A

IG A3 A- A-

IG Baa1 BBB+ BBB+

IG Baa2 BBB BBB

IG Baa3 BBB- BBB-

HY Ba1 BB+ BB+

HY Ba2 BB BB

HY Ba3 BB- BB-

HY B1 B+ B+

HY B2 B B

HY B3 B- B-

HY Caa1 CCC+ CCC+

HY Caa2 CCC CCC

HY Caa3 CCC- CCC-

HY Ca CC CC

HY C C C

Source: RHB

Despite the underlying concerns raised by the rating agencies, we do note that measures have been implemented in recent years, which has helped Malaysia to maintain fiscal integrity. Bank Negara Malaysia (BNM) has attempted to rein in household debt with a 2012 initiative geared towards responsible lending, in addition to introducing cooling measures on the property sector. The central bank has also successfully exercised strong oversight over the domestic banking industry to ensure a robust banking system and reduce the likelihood of systemic risks. Industry metrics continue to indicate a healthy and well-policed banking system. Not least, the Government bit the bullet and finally introduced the GST in April, which would help broaden the tax base.

Figure 11: Household debt is largely asset-based

Source: Bank Negara Malaysia’s (BNM) Financial Stability & Payment Systems Report 2014

Fiscal reform is already underway



Growth prospects to improve in 2H as GST impact gradually fades

Malaysia’s real GDP growth held up relatively well at 5.6% YoY in 1Q15, from a revised +5.7% in 4Q14 and +5.6% in 3Q14, boosted by pre-GST spending. The reading, however, was lower than our expectation of a 6.0% growth in 1Q15, due to weaker-than-expected growth in external demand. The decline in exports was attributed to a higher base effect, softer global semiconductor sales, as well as weak demand from Japan, Europe and China. Domestic demand, however, remained the anchor of growth in 1Q, mainly on account of stronger growth in public and private consumption and investment.

However, we are likely to see a payback as the growth is envisaged to slow down in 2Q15, as business and consumer spending take a breather post the GST. This consumer behaviour, as observed in many countries, is likely to be temporary and spending is likely to gradually return to normal within 6-9 months as consumers get used to the new tax. Likewise, private investment, which grew by a robust 11.7% YoY in 1Q, is projected to grow at a slower pace in subsequent quarters. This is on the back of uncertainties caused by the GST implementation, made worse by lower crude oil prices and a clampdown on the property sector, which could lead to pessimism among businesses to commit to additional capex for 2H.

Nevertheless, growth in the 2H is likely to be spearheaded by the Government’s development spending, aided by the implementation of infrastructure projects under the various economic programmes. Indeed, the Government has collected revenue from GST of about MYR6.3bn in the first two months since its implementation, lending weight to its forecast of MYR31bn in revenue collection from GST annually, which is slightly more than double the previous sales & services tax collection of about MYR15bn. This should help to shore up the Government’s coffers and partly finance these infrastructure projects. We understand that the figure, however, was still preliminary, as it has yet to deduct input tax and some companies have yet to submit their tax returns. Meanwhile, the weakening of the MYR to more than a 9-year low of MYR3.772 against the USD on 8 Jun is likely to be conducive for exports and cushion the slow recovery of global demand.

While the implementation of the 6% GST was widely thought to result in a significant jump in inflationary pressure, hurt consumers’ pockets and have an adverse impact on business profits, this was not displayed in April and May’s consumer price index (CPI). The CPI only increased YoY by a modest 1.8% and 2.1% respectively, from +0.7% in 1Q. Also, other consumption and investment indicators that were released for April were mixed and have yet to provide compelling evidence to support the notion of a significant slowdown in consumer and investment spending. For instance, the imports of consumption goods jumped by 12.4% YoY in April from the +4.4% YoY registered in 1Q, while consumption credit in April only moderated slightly to 3.1% YoY from +3.5% as at end-March. A sharp decline was, however, seen in the sales of passenger cars, which slid 22.1% YoY in April before improving to -8.0% in May, after expanding by 14.0% in March.

On the private investment front, total corporate loan growth slowed slightly but remained healthy at 8.3% YoY in April, compared to +8.9% as at end-March, while issuance of private debt securities rebounded with a gain of 14.2% YoY during the month, following four straight months of contraction. These were, however, offset by the sales of commercial vehicles, which fell sharply by 31.4% YoY in April before improving to -11.5% in May, after rising by 16.4% in March, while imports of capital and intermediate goods, dropped 16.0% and 3.0% YoY respectively in April, from the corresponding rates of +8.4% and +3.0% in 1Q. Given these early indicators, we think the impact from GST on the economy will likely be felt the most in 2Q before gradually diminishing in the subsequent quarters. On balance, real GDP growth is still estimated to slow to 4.8% YoY in 1H, though the pace is expected to improve to +5.2% in 2H15. As a result, we are maintaining our forecast for real GDP growth at 5.0% in 2015, albeit slower compared to +6.0% in 2014. Downside risk, however, still remains should consumers and businesses take a longer-than-expected time to adapt to the GST while a weaker-than-anticipated recovery of the global economy could also derail Malaysia’s export performance in 2H15.

5.6% 1Q15 GDP growth

Demand to normalise by end-2015

GST revenue off to a good start

Real GDP growth to pick up pace in 2H15



Figure 12: Private consumption indicators Figure 13: Private investment indicators

Source: BNM, Department of Statistics Source: BNM, Department of Statistics

More moderate growth in domestic demand for 2H

On the home front, we expect domestic demand to ease to a growth of 4.6% YoY in 2H15, from an estimated +5.9% in 1H, as consumers and businesses gradually adjust to the new consumption tax. This is likely to cause annual domestic demand to slow to 5.2% in 2015 from +5.9% in 2014. The impact from lower oil prices on O&G investments and government spending is likely to constrain the growth of domestic demand in 2H15, and lead to a more moderate increase in consumer spending and private investments. The impact from the earlier policy tightening over the last two years – to control rising household debt and cool down property speculation – is also likely to curb domestic demand during the period. As a result, consumer spending is projected to grow at a more moderate pace of 4.2% YoY in 2H, compared with an estimated +6.3% in 1H. This would result in a full-year growth estimate of 5.2% for 2015, which is slower when compared to the +7.0% registered in 2014. Although lower oil prices are likely to increase consumers’ disposable income, it would likely be offset partially by the subsequent increases and the implementation of the GST, as consumers turn cautious in spending.

Nevertheless, we still expect consumer spending to remain resilient and would likely be supported by a higher amount of cash assistance via the 1Malaysia People’s Aid (BR1M) initiative for the low-income group. In addition, the individual tax burden would be reduced by 1-3ppts, as well as a higher tax threshold for individual tax payers, which ought to help to mitigate the moderation in the growth of consumer spending. It would also be cushioned by stable employment conditions, high savings and sustained wage growth.

Consumer spending to remain resilient



Table 8: GDP by expenditure components and by industrial origin (at constant 2010 prices)

2014 2015 2013 2014 2015F 2016F

Q1 Q2 Q3 Q4 Q1

EPU* RHBRI

% growth in real terms

Consumption Public 12.2 (0.2) 5.1 2.5 4.1 5.9 4.4 (1.9) 4.0 3.9

Private 7.0 6.5 6.8 7.6 8.8 7.2 7.0 6.0 5.2 5.3

Fixed capital formation 6.7 6.9 1.3 4.3 7.9 8.2 4.8 7.6 5.9 8.5

Public (6.3) (3.2) (8.5) (1.9) 0.4 1.9 (4.7) 5.3 1.2 4.0

Private 14.9 11.6 7.0 11.1 11.7 12.8 11.0 9.0 8.5 11.0

Agg. domestic demand 7.6 5.6 5.0 5.7 7.9 7.3 5.9 5.3 5.2 6.1

Exports of goods and 7.9 8.7 2.6 1.9 (0.6) 0.3 5.1 2.6 4.2 5.9

non-factor services Imports of goods and 7.8 4.5 2.0 2.6 1.0 1.7 4.2 3.7 4.6 6.1

non-factor services GDP 6.2 6.5 5.6 5.7 5.6 4.7 6.0 5.0 5.0 5.5

Agriculture 2.6 6.7 3.4 (3.7) (4.7) 1.9 2.1 0.2 2.3 2.5

Manufacturing 7.0 7.3 5.3 5.4 5.6 3.4 6.2 4.7 5.7 7.0

Mining & quarrying (0.1) 2.1 1.4 9.5 9.6 1.2 3.3 3.3 1.6 1.0

Construction 19.3 10.0 9.7 8.8 9.7 10.8 11.8 10.5 7.7 5.0

Services 6.7 6.4 6.5 6.6 6.4 6.0 6.5 5.7 5.5 6.0

Note: F = Forecasts

Note 2: *Latest projections under the 11MP

Source: Department of Statistics, RHBRI

Private investment is projected to grow at a slower pace in 2H15, on the back of uncertainties caused by the GST implementation, made worse by lower oil prices and a clampdown on the property sector. Already, Petronas has announced its decision to cut its capital expenditure by 15% and operating expenditure by 25% in 2015, which would likely spill over into private O&G investments. Indeed, Petronas, of late, said that it is delaying the start-up of its Refinery and Petrochemical Integrated Development (RAPID) complex in the southern state of Johor until mid-2019, pushing it back from early that year. This was because the slide in oil prices over the past year had forced the national oil company to review and re-bid for some of its engineering, procurement and construction (EPC) contracts. In addition, Malaysian Investment Development Authority’s (MIDA) investment approvals dropped by 51.5% YoY to MYR8.3bn in 1Q after stripping out the Pengerang investment. Public investment, however, is projected to pick up to 1.6% YoY in 2H, from an estimated +0.6% in 1H, resulting in a full-year growth of 1.2% for 2015, after contracting by 4.7% in 2014. This is on the back of an acceleration in development spending by the Government and an increase in capital spending by the non-financial public enterprises (NFPEs), as well as the progress in the implementation of some large infrastructure projects.

Monetary and loan growth should remain soft

The broader money supply, M3, weakened 6.5% YoY in April from +7.9% in March, but off the low of +4.8% recorded in Aug 2014. This suggests that economic activities moderated amid the implementation of the GST on 1 Apr. This was on account of the lower demand for funds by the private sector on the back of weaker growth in business and household loans as they turned cautious after the implementation of the GST. As a whole, we expect M3 growth to slow down to around 6.0% in 2015 from +7.0% at end-2014 on the back of weaker economic activities. Loan growth eased to 8.8% YoY in April from +9.2% in March, but off the low of +8.6% in Jan 2015 and Aug 2014. This was attributed to weaker growth in both corporate and household loans during the month.

The former was on account of slower growth in loans extended to the primary agriculture, manufacturing, transport & storage and real estate sectors, as well as a sharper drop in loans extended to the utilities and education & healthcare sectors in April. In the same vein, household loans inched lower to 9.4% YoY in April, after picking up to +9.8% in the previous month and compared with a high of +11.6% a year ago.

The pick-up in public investment will help offset slower private investment

8-9% loan growth in 2015



The slowing trend in household loans clearly showed that the Central Bank’s macroprudential measures imposed in Jan 2012, followed by tighter credit conditions in Jul 2013, as well as a set of property cooling measures introduced in Oct 2013, are putting a lid on the rising household debt. Indeed, excluding housing loans, consumption loans only expanded by a modest 3.1% in April, only slightly higher than the +2.7% registered in 2014 and a high of +9.5% in 2011. Although housing loans were still expanding at a double-digit rate, the pace of growth moderated to 13.0% YoY in April, from +13.1% in March. It is likely to ease further, as it took about 2-3 years for the previous loans approved to be fully disbursed and, given that the approved housing loans slowed to 0.1% in 2014 after surging by 30.3% in 2013. This suggests that household loans are likely to moderate further, but could be cushioned by a pick-up in business loans. As a whole, we project loan growth to be sustained at 8-9% in 2015, which is a more moderate increase when compared with +9.3% in 2014 and +10.6% in 2013. This is constrained by more stringent rules on lending to households and curbs on the property market.

Subdued inflation despite GST impact

The headline inflation rate picked up to 2.1% YoY in May, after rising by +1.8% in April and compared with +0.9% in March. This was reflected in broad-based price increases in May, suggesting that the effect arising from the implementation of the GST on 1 Apr continued to be felt. At the same time, there could be some elements of higher imported inflation due to the MYR depreciation. As a whole, the core inflation rate, which excludes food & non-alcoholic beverages, picked up in tandem with the headline inflation to 1.4% YoY in May, from a +1.2% in April and compared with 0.3% in March. As the back-to-back pick-up in April-May inflation continues to be more subdued than our expectation, this indicates that businesses were holding back and exercising control to pass on rising costs to consumers in the early months of GST implementation. Meanwhile, the price-controlled items in the basket of the CPI could also have helped to muzzle the price increase. Going forward, inflationary pressure are likely to receive a boost due to a RM0.10 hike in the RON95 retail fuel price on 1 Jun on the back of an uptick in crude oil prices, while the coming Aidilfitri festive season could also place upward pressure on inflation. Nevertheless, slower consumption spending post GST, following front loading activities in 1Q, is likely to cause demand pressure to be subdued. As a result, inflation is expected to slow to 2.3% in 2015 from +3.2% in 2014.

Figure 14: The spike in inflation after GST was milder than expected

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

11 12 13 14 15

Core CPI Total CPI Food

%, YoY

Source: Department of Statistics

Inflation to remain subdued



Monetary policy to remain focused on economic growth

As inflationary pressure is more subdued than expected – despite the implementation of the GST – we believe the strength of economic growth is likely to be a more important consideration relative to inflation for monetary policy decisions in 2015, given the challenging global economic environment. At the same time, there are also downside risks emanating from domestic demand factors, including: i) lower O&G prices and its impact on investment in this sector, ii) slowing investment in the property sector, and iii) risk of businesses and consumers overreacting to the implementation of the GST. While there are expectations in the market for BNM to cut interest rates to support economic growth, we are of the view that such a cut is unlikely unless the economy slows down significantly. We believe that the central bank would need to strike a balance between economic growth, inflation and the potential risk of further significant outflows of short-term capital. Our assessment is that BNM is likely to keep the overnight policy rate (OPR) stable at 3.25% in 2015.

US leads modest recovery in the global economy

Externally, the global economic recovery remains uneven and slow, and we believe its recovery in the 2H of the year is likely to continue to be modest amid the headwinds. Although US GDP contracted and consumer spending contracted in 1Q, economic growth is likely to pick up – albeit at a modest pace moving forward – as consumers return to spend, and after disruption caused by the workers strike in West Coast ports eases off. As it stands, more workers are joining the US workforce with job creation remaining strong at an average of 217,000 a month in the first five months of 2015 vs an average of 254,000 jobs a month created in 2014. Similarly, consumer confidence picked up in May as Americans grew more sanguine about the economy and employment situation, though the level is still a tad lower than the high recorded in January. While consumers were feeling upbeat, they appear not to be letting loose their purse strings entirely despite the lower gasoline prices that boosted their disposable income compared to last year. This development, as seen in a more moderate increase in April’s personal consumption expenditure, is likely to cap the upside of consumer spending in the US. A sustained growth in consumer spending, aided by lower energy costs, is likely to encourage businesses to invest going forward, even though they remain cautious. Indeed, non-manufacturing activities held up relatively well in the first five months of 2015, despite easing slightly in May. Similarly, manufacturing activity improved in May, as manufacturers benefited from the end of a labour dispute at West Coast ports. Nevertheless, the sector may continue to be weighed down by weakness abroad and a surge in the value of USD, which is near its strongest level since 2005. Although the shale energy revolution suffered a setback due to falling oil prices, it has changed the energy landscape and created a manufacturing renaissance that is likely to provide a multi-year growth catalyst for the US economy.

Figure 15: US - sustained jobs creation underscores the strength of the economy

Figure 16: US - manufacturing activities pick up pace while services activities ease

-1000

-800

-600

-400

-200

0

200

400

600

05 06 07 08 09 10 11 12 13 14 15

('000)

(non-farm payroll)

49

51

53

55

57

59

61

12 13 14 15

Index

ISM PMImanufacturing

ISM PMInon-manufacturing

Source: US Bureau of Labour Statistics Source: US Institute for Supply Management (ISM)

BNM is likely to keep interest rates stable

US economic recovery is intact



Signs of life in the Eurozone

In the Eurozone, economic growth was sustained in 1Q15 and is likely to continue to expand modestly in the months ahead, aided by the QE that has weakened the EUR against the USD. Indeed, the Eurozone has emerged from a deflation threat with consumer prices climbing for the first time in six months in May. Also, manufacturing and services activities continued to expand for the 23

rd and 22

nd consecutive month

respectively in May, although the rates of expansion have since retraced slightly from the highs registered early in the year. Similarly, money supply growth picked up from a low of 0.8% YoY in Apr 2014 to +5.3% in April this year, along with sustained economic growth. Nonetheless, the unemployment rate still stayed high at a double-digit rate in April, though it has fallen to the lowest level since Apr 2012. In addition, a major concern remains on negotiations between Greece and its creditors with the risk of a default rising. While the country could potentially vote itself out from the Eurozone at the 5 Jul “Greferendum”, leading to volatility in the financial markets, its impact is likely to be manageable and is unlikely to derail the Eurozone’s economic recovery.

Figure 17: Eurozone GDP continues to grow Figure 18: Eurozone manufacturing gains pace but services are moderating

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

2011 2012 2013 2014 2015

% q-o-q

+0.4(Q1)

42

44

46

48

50

52

54

56

12 13 14 15

Index

PMImanufacturing

PMIservices

Source: European Commission Eurostat Source: Markit Economics

China is still a drag

China’s economy, on the other hand, continues to pose a drag to the global economic recovery. Its manufacturing activities barely increased in the March-May period, after two consecutive months of contractions, suggesting that the economy is still struggling. Also, services activities grew at a more moderate pace during the month. The disappointing economic data prompted the authorities to launch a series of policy-easing moves to prevent the economy from falling into a hard landing. Indeed, the Chinese Government loosened its curb on property speculation on 30 Mar after the People’s Bank of China (PBOC) cut its benchmark lending rate by 25bps for the second time in less than four months on 28 Feb. Earlier, the central bank reduced the required reserve ratio (RRR) by 50bps to 19.5% effective 5 Feb. Along with the RRR and interest rate cuts, the Government has rolled out more supportive fiscal policies, such as the CNY2.0trn local government debt swap plan, lower bond issuance requirement for corporates and local government financing platforms. In addition, the banking regulator has also allowed commercial banks to extend maturities on construction loans to developers short of cash. Despite the headwinds, we believe China would be able to engineer a soft landing for the economy in 2015, given its strong political will.

Eurozone to expand modestly

Strong political will to engineer a soft landing for the economy



Figure 19: China - retail sales and industrial production sliding down

Figure 20: GDP growth moderating, in danger of missing target

0

5

10

15

20

25

05 06 07 08 09 10 11 12 13 14 15

% YoYRetail sales

Industrial production

5

6

7

8

9

10

11

12

13

05 06 07 08 09 10 11 12 13 14 15

% YoY

7.0%(Q1)

Source: China's National Bureau of Statistics Source: China's National Bureau of Statistics

Japan picking up pace

In Japan, the economy emerged from a brief period of recession to record an annualised growth rate of 3.9% in 1Q, the fastest pace in a year, underpinned mainly by a build-up in inventory. Nonetheless, we believe a recovery in Japan’s exports, aided by a cheaper currency, is likely to contribute to a sustained economic growth in the months ahead. Furthermore, the Japanese Government implemented a stimulus spending worth JPY3.5trn (USD29bn) in late Dec 2014, aimed at helping the country's lagging regions and households with subsidies. It has also cut the corporate tax rate to promote private investment. Notwithstanding the challenges faced by the global economy, it is envisaged to sustain its growth during the year. This is likely to provide some support to Malaysia’s exports, particularly manufactured goods. The sharp depreciation of the MYR (-6.9% for the YTD-17 Jun), is likely to improve Malaysia’s price export competitiveness, setting the stage for a recovery by 2H. We expect the country’s real exports to grow by 2.7% YoY in 2015 – albeit at a more moderate pace when compared with +5.1% YoY in 2014.

Figure 21: Japan - consumer and business spending still struggling after sales tax hike

Figure 22: Japan - weaker JPY helping a rebound in exports

-50

-40

-30

-20

-10

0

10

20

30

40

05 06 07 08 09 10 11 12 13 14 15

Retail sales IPI

% YoY

-15

-10

-5

0

5

10

15

20

25

11 12 13 14 15

% YoY

+2.4%(May)

Source: Japan's Ministry of Finance Source: Japan's Ministry of Finance

Impending normalisation of US interest rates

At the recent 16-17 Jun FOMC meeting, interest rates were held steady at 0-0.25% and the results provided only faint clues about when the first hike in nine years might occur. Nevertheless, according to US Fed chair Ms Janet Yellen, she was encouraged by tentative signs that wage growth was picking up, but these were not yet definitive. Indeed, an increase in the growth rate of the employment-cost index and the rise of average hourly earnings were seen in recent months. As the rate of unemployment has declined, companies are finding that they must offer higher pay to attract workers.

Improved exports aiding recovery of Japan’s economy

Rate hike would be data dependent



Wages for private-sector employees rose 2.8% in the 12 months through March, the biggest gain in more than six years, while the US jobless rate stood at 5.5% in May, down from 6.3% a year earlier. Ms Yellen wants to see additional strength in the labour market for her to have confidence that inflation will move back up to 2%. Although progress clearly has been achieved, room for further improvement remains. Economic conditions are currently anticipated to evolve in a manner that would warrant only gradual increases in the target federal funds rate, according to Ms Yellen.

The June FOMC statement showed modest upgrades of the economic assessment in response to recent evidence that the economy is recovering from the 1Q stall. Nonetheless, policy makers indicated that the economy would be hard-pressed to reach their previous growth target for the full year, given the washout quarter in 1Q. The most important new information came from the dot plot, which held firm that interest rates could be raised in two 25bps moves through year-end, which was similar to what was signalled in March. The US Fed clearly remains data-dependent, but appears to be increasingly comfortable with the notion of a modest increase in rates. The dot plot signalled a slightly slower pace of rate increases following a lift-off. US Fed officials have maintained their forecast for the benchmark interest rate at 0.625%, implying two rate hikes at the end of this year while cutting their forecast for 2016 to 1.625% from 1.875% previously. They also cut their economic growth estimates for 2015 to 1.8-2.0%, down from their previous 2.3-2.7% in March while raising their assessments marginally for 2016-2017.

The unemployment rate is forecast by the FOMC to be at 5.2-5.3% at the end of 2015, up slightly from 5.0-5.2% before. The assessment on inflation was, however, unchanged at 0.6-0.8% at the end of this year, before rising to 1.6-1.9% in 2016 and 1.9-2.0% in 2017. Ms Yellen stressed that the date of the first interest-rate increase was less important than the trajectory of subsequent ones.

The shallower interest-rate outlook shows that this tightening cycle is likely to be very unlike previous ones and may not be a cycle at all. In previous periods, US Fed officials were intent on getting ahead of inflationary pressure that usually emerges in recoveries. By contrast, inflation has been below the US Fed’s 2% goal for three years, and there are few signs of resurgence. Aside from reiterating the data dependent message, Ms Yellen reemphasised that the current tightening cycle is expected to be gradual but less uniform. The definition of a “gradual” tightening path for this cycle seems consistent with an average intended pace of rate hikes of “around 100bps” per year.

The immediate source of risk, which may be causing some officials to lower their pace of rate increases for this year, is the linkage between interest rates and the USD. Because rates are low around the world, a fairly steep cycle of increases in the US would attract capital into US assets out from developing countries and push the USD higher. This would be negative for US exports, as it makes imports more attractive and undercuts growth. This phenomenon is known as “spill back”, a term coined by the IMF.

For now, we are sticking with our prevailing call for a Sep 2015 lift-off, while recognising that expectations on the timing of liftoff have become increasingly fluid. But the odds of lift-off slightly later, either in October or December vs September, might be roughly balanced at this time.

When lift-off finally occurs, the overhang would be removed, signalling the US Fed’s confidence in the durability of the US economic recovery. A stronger US economy has positive implications for the export-dependent emerging market economies, especially considering that expectations are for the pace of interest rate normalisation being gradual.

In this regard, the strength of the USD would continue to be biased to the upside. Asset reallocation in favour of USD-denominated assets is already well underway since 2H14. YTD, the MYR has retraced 7.7% against the USD, currently hovering at around MYR3.77/USD. We expect the MYR’s weak bias to remain in the near term, on account of the large foreign holdings of fixed income instruments in the country, weighed down by fiscal concerns and the impending US rate hike.

US economy is on the mend

Interest rate rise will be gradual…

…to avoid “spill back”

Sep 2015 lift-off for US interest rates

Normalisation of US interest rates signals Fed’s confidence in the economy

USD to remain firm



Figure 23: USD spot index

Source: Bloomberg

North Asia bull run leaves ASEAN markets in the shade

The stellar performance of equity markets in China and Hong Kong in 2015 have left ASEAN markets trailing in its wake. Markets in North Asia have traditionally traded at less demanding P/Es, with the lack of open access to stock markets in China. The commencement of the Shanghai-Shenzhen link to Hong Kong (HK-Shanghai Stock Connect) – colloquially referred to as the “through-train” – from Nov 2014 meant that investors in Mainland China and Hong Kong now have greater access to each other’s markets. After a quiet start, the Shanghai and Shenzhen markets are up 29.6% and 76.9% respectively since Oct 2014, while the Hang Seng Index has risen 13.0% in the same period.

Figure 24: Regional markets YTD performance - local currency

Figure 25: Regional markets YTD performance - USD currency

Source: Bloomberg Source: Bloomberg

ASEAN market performance has lagged



Figure 26: ASEAN markets’ 5-year performance chart

-0.5

0

0.5

1

1.5

2

FBMKLCI SET Index PCOMP Index JCI Index FSSTI Index

PCOMP

FBMKLCI

FSSTI

JCI

SET

Source: Bloomberg

Figure 27: Indonesia’s foreign holdings Figure 28: Indonesia’s foreign flows

Source: KSEI Source: Bloomberg

Figure 29: Thailand’s foreign ownership in equities Figure 30: Thailand’s foreign portfolio flows


FBMKLCI

JCI

SET



Figure 31: Philippines’ foreign ownership in equities Figure 32: Philippines’ foreign portfolio flows

Source: Public Ownership Report Philippine Stock Exchange Source: Bloomberg

Figure 33: Malaysia’s foreign ownership in equities Figure 34: Malaysia’s foreign portfolio flows

Source: Bursa Malaysia Source: Bursa Malaysia

Portfolio funds continue to exit

Foreign institutions continue exiting domestic equities, with YTD net foreign selling of MYR8.5bn having exceeded the MYR6.9bn seen in 2014. As a result, foreign shareholding levels declined to 23.2% at end-May from 23.6% at end-February. Most foreign institutional funds continue to remain bearish on Malaysian equities – driven in part by expectations of higher US interest rates, high foreign shareholding levels, fiscal worries, in addition to signs of political issues and governance concerns. Negative flows out of Malaysia have exceeded by far the outflows from other ASEAN markets.

Foreign funds remain net sellers



Figure 35: Foreign ownership of financial assets

Note: *Latest data as of Apr 2015

Note 2: ^Latest data as of May 2015

Source: BNM, Bursa Malaysia

Uninspiring 1Q15 corporate results

Corporate earnings for Mar 2015 quarter were generally uninspiring with 35.1% of results falling below expectations (54.5% of earnings were in line). In particular, results from the heavyweights such as plantations, gaming and O&G sectors disappointed, although banks, telecoms and utilities were in line. 49.4% of the stocks under our coverage received earnings downgrades, while 15 of the 25 FBM KLCI component stocks under our coverage saw earnings downgrades with no upgrades. Overall, FBM KLCI stock earnings were lowered by 2.7% and 2.5% for 2015 and 2016 respectively. We now forecast earnings growth of 3.9% for 2015 and 11.8% for 2016.

Headwinds are expected to pick up from 2Q15 as consumers learn to adjust to the GST that is generally perceived to have raised living costs. Some front-loading of spending in the preceding quarters will also mean a period of consolidation as consumers throttle back. This consumer trend has been observed in other countries that had implemented a similar consumption tax. Our expectation is for consumer spending to normalise within a few quarters. While it is still early days, consumption and investment indicators for April were mixed and do not provide compelling evidence to support the notion of a significant slowdown in consumer and investment spending. However, anecdotal evidence, while unscientific, suggests a softer 2Q15.

In line with our current market earnings forecasts, 2015 earnings growth looks likely to be more gradual than we had anticipated at the start of the year. Nonetheless, we believe corporates are in a better position now, more so than in the past two years, to grow earnings, leveraging on investments in manufacturing capacity, manpower and technology. As consumers and businesses adjust to the GST, the earnings outlook should improve gradually going forward. The impending 1ppt reduction in corporation income tax rate from YA2016 will also be supportive of 2016 earnings growth.

We reiterate our end-2015 FBM KLCI target of 1,865 pts based on an unchanged 16.5x 1-year forward P/E.

Soft 1Q15 results

Consumers and businesses would take time to adjust to the new tax regime

Corporate earnings to register growth in 2015



Table 9: Earnings outlook and valuations FBM KLCI RHB BASKET

COMPOSITE INDEX @1,710.47 2013A 2014A 2015F 2016F 2013A 2014A 2015F 2016F

26-Jun-2015

EBITDA Growth (%) 1.7 0.4 6.8 9.5 2.3 1.2 6.6 9.6

Pre-Tax Earnings Growth (%) (1.0) 3.4 0.30 11.9 1.2 (1.6) 2.8 12.6

Normalised Earnings Growth (%) 3.1 (2.6) 4.7 12.3 2.4 (2.5) 5.8 13.6

Normalised EPS (sen) 43.3 41.6 43.2 48.3 29.7 27.7 28.5 32.0

Normalised EPS Growth (%) (0.7) (4.1) 3.9 11.8 (2.1) (6.7) 2.9 12.2

Normalised EPS Growth ex-TNB (%) 0.6 (5.5) (0.02) 12.2 (1.7) (8.4) (0.2) 12.9

Prospective PER (x) 17.3 17.7 17.0 15.1 17.3 17.7 16.7 14.7

Price/EBITDA (x) 9.6 9.6 9.0 8.2 9.7 9.6 9.0 8.2

Price/Bk (x) 2.3 2.1 2.0 1.9 2.1 1.9 1.8 1.7

Price/NTA (x) 2.8 2.6 2.4 2.2 2.6 2.4 2.2 2.0

Net Interest Cover (x) 11.8 12.4 12.1 11.7 9.1 8.4 8.2 8.5

Net Gearing (%) 31.2 33.6 32.0 31.4 37.1 34.7 34.1 34.9

EV/EBITDA (x) 7.2 7.3 6.9 6.4 8.2 8.4 8.0 7.3

Div Yld (%) 3.3 3.4 3.2 3.6 3.2 3.2 3.1 3.5

ROE (%) 13.4 12.0 11.8 12.4 12.3 11.0 10.9 11.6

FBM KLCI stocks not under our coverage: HLFG, PPB, Pet Dagangan, RHB Cap and YTL.

Source: Bloomberg, RHB estimates

ASEAN markets out of favour

From a regional portfolio manager’s perspective, the performance of markets in North Asia is impossible to ignore especially given the size, depth and scale of the Chinese economy. Morgan Stanley Capital International’s (MSCI) deferment of the inclusion of Shanghai and Shenzhen shares into its global benchmark – due to concerns over market restrictions such as foreign ownership and freedom of movement of capital – is a near-term relief for ASEAN market as it could have accelerated the pace of portfolio reallocation. MSCI said it will work with the China Securities Regulatory Commission to resolve concerns and if enough progress is made, it could consider China for inclusion outside of its annual review, which typically concludes in June each year. The elevated valuation premiums many ASEAN markets have reached have made it a relatively easy decision to rebalance portfolios out of ASEAN into North Asia. Other than the pull factor of North Asia, ASEAN markets have also presented push factors for portfolio investors ranging from political uncertainty, policy implementation challenges to unattractive valuations, twin deficits, local currency depreciation and other structural challenges. We see Singapore adjusting to rising US interest rates, labour shortages and diminishing export competitiveness. Indonesia and Thailand face policy execution risks while political uncertainty looms in the Philippines as President Benigno Aquino’s 6-year term ends in 2016 with no obvious successor in sight. Overall, we believe ASEAN markets are out of favour for now and see outflows continuing as the booming Chinese stock markets suck portfolio investment dollars out. If this continues for a prolonged period, ASEAN markets could suffer a de-rating.

Investors’ attention on North China markets



Political issues

Issues pertaining to a strategic development company wholly-owned by the Ministry of Finance have become highly-politicised. In a series of high-profile exposes in the media, many questions have been asked. This includes high accumulated debt levels, amongst others. BNM Governor Tan Sri Dr Zeti Akhtar Aziz has reiterated that were no obvious systemic risks to the domestic banking system. In our opinion, increasing political issues and other related concerns have arguably contributed to the continued Underweight stance on Malaysia by foreign investors.

Market has downside support

We continue to believe that the captive participation from GLC-linked funds would continue to be supportive of the market and help to limit downside – a massive deterioration in economic fundamentals and/or political stability notwithstanding. We also note that the domestic market remains unloved by foreign investors who have been cumulative net sellers to the tune of MYR15.4bn since the beginning of 2014. Other asset classes also have limited appeal with rising interest rates tempering the bond market while commodities continue to be depressed. At current levels, the FBMKLCI trades at 15.1x forward P/E. We do not consider current market valuations to be excessive.

Figure 36: FBMKLCI’s 3-year forward P/E band Figure 37: FBMKLCI’s small cap 3-year forward P/E band


Table 10 : Regional comparisons

Malaysia Singapore Thailand Philippines Indonesia Hong Kong Taiwan Korea

FactSet Asian Consensus Trends report dated 31 March 2015

2015 EPS Growth (%) 7.7 1.2 28.0 15.8 11.0 (0.7) 14.4 32.0

2016 EPS Growth (%) 7.8 9.6 10.9 15.5 14.1 10.8 6.6 5.4

2015 P/E (x) 16.5 14.2 14.0 20.2 16.7 11.9 13.1 9.8

2016 P/E (x) 15.3 13.0 12.7 17.5 14.7 10.8 12.3 9.3

PE/EPS Growth

2015 2.1 11.8 0.5 1.3 1.5 (17.0) 0.9 0.3

2016 2.0 1.4 1.2 1.1 1.0 1.0 1.9 1.7

IBES Consensus dated 18 Jun 2015

2015 EPS Growth (%) 0.7 5.3 19.8 14.4 14.2 (4.9) 12.5 44.5

2016 EPS Growth (%) 12.0 10.8 14.5 14.0 18.8 12.8 8.6 7.0

2015 P/E (x) 16.3 14.6 15.4 17.7 15.3 13.8 13.2 11.1

2016 P/E (x) 14.6 13.2 13.5 15.5 12.8 12.3 12.2 10.3

PE/EPS Growth

2015 22.0 2.8 0.8 1.2 1.1 (2.8) 1.1 0.2

2016 1.2 1.2 0.9 1.1 0.7 1.0 1.4 1.5

Performance (%)

2014 (YoY) (5.7) 6.2 15.3 22.8 22.3 1.3 8.1 (4.8)

2015 (YTD)* (2.9) (1.3) 1.4 5.4 (5.8) 13.0 6.4 9.1

Note: * As at 26 Jun closings

Political issues worry investors

Current market valuations are not excessive



Base case assumptions and potential re-rating catalysts

Our base-case assumptions are: i) the global economic recovery will not be derailed, ii) there is no risk of a significant tightening of monetary policies in developed economies to trigger a rate shock in emerging markets, and iii) crude oil prices will continue to stabilise and gradually trend higher going forward.

An improvement in the external environment would be positive for export-driven emerging market economies. A gradual pace of normalisation of US interest rates ought to ensure that rates continue to remain supportive of growth and minimise the risk of “spill back”, allowing US consumers to enjoy the benefit of a stronger USD that would increase consumer purchasing power. The onset of the normalisation of US interest rates also signals that the US Fed is becoming more confident on the durability and sustainability of the US economic recovery, which ought to have a positive impact on global growth. With oil prices remaining sharply lower YoY, this is likely to help increase the disposable incomes of consumers in oil-importing countries, although US consumer spending remains cautious recently. Domestically, a recovery in oil prices, in addition to lifting stocks in the O&G sector and encouraging new investment in the industry, is likely to ease fiscal worries and be supportive of the MYR as Malaysia is the only net O&G exporter in the ASEAN region. Meanwhile, the current weak MYR helps to raise the competitiveness of Malaysian exports.

As we enter the latter half of 2015, other potential catalysts for the market include an initial US rate hike that we believe should remove the overhang for emerging markets. A quick and satisfactory resolution of domestic political issues/concerns over a certain government-linked strategic development company would help to lift investor sentiment and stem the outflow of portfolio funds. This would help to relieve pressure on the MYR.

Base case assumptions are realistic

Higher oil prices are likely to be a major re-rating catalyst

US rate lift-off should remove overhang



Key Risks

If China’s equity market bubble bursts

With China’s economic fundamentals having worsened since the inception of the through-train link, the gains in the Hong Kong and China markets have undoubtedly been driven by a surge in liquidity resulting in massive P/E expansion. Fuelled by government stimulus and retail investor frenzy – the latter no doubt encouraged by a weak property market and falling interest rates – have resulted in a shift in retail savings into equities and a surge in margins financing. Already, the capital inflows into Hong Kong is fuelling inflationary pressure, driving property prices higher and putting pressure on the HKD-USD peg. In a worst-case scenario, if China’s equity market bubble bursts, this could lead to a deterioration of asset quality within the banking system, erode consumer and business confidence, and making it more challenging for policymakers to manage a soft landing for the Chinese economy. This could have negative implications for export-driven emerging market economies in ASEAN including Malaysia. A contagion effect on other emerging markets cannot be ruled out.

Lower oil prices

A renewed collapse in oil prices is expected to have serious ramifications for Malaysia's fiscal health, as the country is the only net exporter of O&G in ASEAN. Although Malaysia has gradually reduced its dependency on oil revenue, it would still contribute 21% of total revenue in 2015, down from 28.3% in 2014. The current account falling into a deficit position would be a significant credit-negative development from the perspective of the international rating agencies, along with negative implications for the MYR. Lower crude oil prices are also likely affect O&G investment activities in the country. GDP growth, thus, could be significantly lower than expected.

Global deflationary threat

Deflation with overhanging debt burdens can cause deep recessions that can become entrenched and hard to shake off. Falling prices of goods and services can also cause consumers to postpone their purchases in anticipation of cheaper prices in the period ahead. This could, in turn, weaken business prospects with companies cutting investments, employment and wages, which could become a vicious cycle. Japan's nearly two decades of deflation is a case in point.

Corporate earnings disappointment

By and large, corporate earnings have fallen below expectations for much of the past three years. Corporate earnings need to deliver to relieve the pressure on valuations to allow the market to move higher. While we expect corporate Malaysia to be reasonably placed to deliver earnings growth this year and next, leveraging on investments in new capacity and technology, persistent disappointments in corporate earnings will limit the market's headroom for further upside.

Health pandemics

Four countries outside Saudi Arabia have reported Middle East Respiratory Syndrome (MERS) cases to date, with one case each in Thailand, China and the Philippines. South Korea was the worst hit last month with 27 deaths so far. A total of 172 people have been infected and 6,700 people are in quarantine. The spread of health pandemics would have negative repercussions for the aviation, tourism, hotel, consumer retail and REIT sectors, while healthcare and rubber glove sectors would be beneficiaries.

Geopolitical risks

There are many geopolitical flashpoints across the globe, anyone of which could have major global economic repercussions at any time.

If China’s equity market bubble ends in tears, there could be contagion impact on other emerging market economies

A renewed decline in oil prices could have serious implications for Malaysia’s fiscal health

Deflation could weaken business prospects and become hard to shake off

Continued earnings disappointment will cap upside for the market

A major health scare would be a negative for the market

Geopolitical risks are hard to predict



Market Strategy

Market has challenges to overcome

With recent news flow remaining consistently negative for the most part, we think in the near term, the market has challenges to overcome. The tensions within the nation’s political arena, in addition to well-documented concerns over the strategic development company wholly-owned by the Ministry of Finance, continue to be a source of concern for financial markets. Perceived risk of changes to the political status quo could add to market volatility in the weeks and months ahead.

With consumers and businesses still adjusting to the GST, economic data points in respect of 2Q15 and 3Q15 are likely to be instructive. Crude oil prices are well off their January’s lows and we expect prices to trend higher going into 2016. However, the rate of increase is now likely to be at a shallower pace than previous expectations. While the undemanding energy prices are positives for the utility and aviation sectors, this would mean a continued tough environment for O&G players. The US rate hike overhang is another source of uncertainty for the market and this is another factor that is likely to keep the MYR weak going forward in the foreseeable future. While North Asia markets have been volatile of late, the continuation of the bull run there is likely to continue holding investors’ attention, leaving ASEAN in the shade.

While some of the bad news is already reflected in the price, the headroom for the market could be limited until we have better clarity on some or all of the concerns highlighted above.

Investors should not lose sight of potential catalysts

While there are headwinds in the immediate term, investors should not lose sight of potential catalysts that could help to lift the market. We continue to see global growth gaining traction as we move through 2H15, led by economies in the US and the Eurozone. This would offer a reprieve for export-dependent emerging economies like Malaysia. Higher oil prices going into 2016 (2016F average: USD80/bbl) should ease fiscal worries and support the MYR. If the liftoff for the normalisation of US interest rates proceeds as we expect in the September FOMC meeting – and continues at a gradual pace as guided – this ought to help to confirm the sustainability and durability of the US recovery, in addition to eliminating the overhang that would lift investor sentiment. An earlier satisfactory solution of domestic political and governance issues should be seen as a major re-rating catalyst. We also remain confident that corporate Malaysia is likely to generate positive earnings growth in 2015 and 2016 and we are currently forecasting for EPS growth of 3.9% and 11.8%, a sharp turnaround from the 4.1% contraction recorded in 2014. Despite the GST implementation, RHB economists see consumer spending remaining resilient, helping domestic demand to grow 5.2% in 2015, down from 5.9% in 2014. This is on the back of stable employment conditions, high savings and sustained wage growth. The impact of the GST would be most keenly felt in 2Q15, but should gradually diminish heading into the latter part of 2015. We also note that Malaysia has been an Underweight market among foreign investors for some time, and we expect a reassessment before the end of this year, especially if our macroeconomic and market expectations come to bear.

Still a stock picker’s market

We continue to prefer equities as an asset class. To generate outperformance, investors will need to remain nimble and identify stocks that offer strong governance, good growth prospects with steady cash flows and unstressed balance sheets. Earnings growth remains key to the creation of new shareholder value and at current prices, this can be more readily found in mid- to small-cap stocks. Yield stocks are becoming relatively less attractive. This is due to the expected narrowing of the yield gap as US interest rates move higher. Meanwhile, defensive stocks typically mean high valuations with limited growth. Few large-cap stocks currently represent compelling buys. Sectors that can offer resilient growth – a rare combination of attributes – are few. We identify sectors falling into this category as healthcare, rubber products, logistics and utilities.

Market needs to work through some uncertainties

2Q15 economic data could be weak

Near-term headwinds, but better clarity should emerge in the latter part of 2H15

Growth stocks preferred



Table 11: Top Picks

FYE Price

(MYR/s)

TP

(MYR/s)

Mkt Cap

(MYRm)

Shariah

Compliant

EPS

(sen)

EPS GWTH

(%)

P/E

(x)

P/BV

(x)

P/CF

(x)

NDY

(%)

26 June 2015 FY15 FY16 FY15 FY16 FY15 FY16 FY16 FY16 FY16

IHH Dec 5.67 7.00 Y 46,372 12.2 14.9 37.5 21.9 46.4 38.0 2.2 19.7 0.7

MISC Dec 7.76 9.49 Y 34,638 53.2 59.6 24.8 12.0 14.6 13.0 1.1 11.0 1.9

Dialog Jun 1.63 1.90 Y 8,351 5.1 6.0 28.4 17.5 32.1 27.3 5.1 27.1 1.5

Sunway Dec 3.45 4.10 Y 6,010 33.8 33.5 (1.5) (0.8) 10.2 10.3 3.5 5.1 3.2

CMS Dec 5.23 6.00 Y 5,503 24.8 29.6 22.2 19.2 21.1 17.7 2.6 31.7 2.3

KPJ Dec 4.26 5.10 Y 4,466 14.3 16.4 15.4 14.4 29.8 26.0 3.0 15.5 1.9

AirAsia Dec 1.54 2.89 N 4,282 24.1 28.8 145.7 19.5 6.4 5.3 0.7 3.7 5.4

Yinson^ Jan 3.18 4.02 N 3,284 14.3 13.9 (4.4) (2.8) 22.3 22.9 2.1 17.3 0.0

IJM Plantation Mar 3.59 3.90 Y 3,161 20.7 25.5 32.5 23.1 17.3 14.1 1.7 11.9 2.9

Inari Amerton Jun 3.32 4.35 Y 2,599 18.0 21.7 (6.1) 20.5 18.4 15.3 5.0 15.4 2.8

GD Express Jun 1.40 1.98 Y 1,742 2.2 3.0 (23.9) 37.4 64.7 47.1 11.6 43.9 0.7

Globetronics Dec 6.11 7.10 Y 1,703 28.8 39.5 30.6 37.3 21.3 15.5 5.0 9.4 3.9

Karex Jun 3.15 3.63 N 1,690 11.2 12.2 (16.2) 8.6 28.1 25.9 4.6 28.2 1.0

Matrix Dec 3.05 3.65 Y 1,415 45.3 48.6 13.3 7.4 6.7 6.3 1.5 7.5 6.6

Muhibbah Dec 2.30 3.39 Y 992 27.4 30.9 49.7 12.8 8.4 7.5 1.2 6.2 3.2

Pestech Dec 4.87 6.18 Y 674 30.1 32.3 +>100 7.2 16.2 15.1 4.0 15.3 3.0

GHL Systems Dec 1.13 1.42 Y 20 2.8 5.3 +>100 88.6 40.5 21.5 2.6 62.0 0.0

Note: ^FY15-16 valuations refer to those of FY16-17

Source: RHB

Table 12: Top Sell

FYE Price Target Price

Shariah

Compliant

Mkt

Cap

EPS

(sen)

EPS GWTH

(%)

P/E

(x)

P/BV

(x)

P/CF

(x)

NDY (%)

(MYR/s) (MYR/s) (MYRm) FY15 FY16 FY15 FY16 FY15 FY16 FY16 FY16 FY16

26 June 2015

CIMB Dec 5.50 5.20 N 46,761 38.6 50.6 2.9 31.1 14.3 10.9 1.1 n.a. 3.7

AMMB^ Mar 6.06 5.70 N 18,216 55.5 59.7 (13.0) 7.4 10.9 10.2 1.1 n.a. 4.3

UMW Dec 10.28 8.65 Y 12,010 58.3 66.8 32.5 14.7 17.6 15.4 1.8 10.9 3.9

Parkson Jun 1.61 1.70 N 1,761 8.7 10.3 (31.3) 18.0 18.4 15.6 0.7 19.8 5.1

Media Prima Dec 1.55 1.40 N 1,691 15.2 16.5 16.1 8.7 10.2 9.4 1.0 8.2 7.4

TH Plantations Dec 1.60 1.00 Y 1,409 4.6 6.1 18.1 33.3 35.0 26.3 1.1 7.9 1.5

APM Dec 4.78 4.30 Y 935 45.2 47.8 (10.2) 5.8 10.6 10.0 0.7 6.5 4.2

Alam Maritim Dec 0.56 0.45 Y 513 4.5 5.9 (28.2) 30.6 12.4 9.5 0.6 3.9 0.0

Daibochi Dec 4.32 3.80 Y 492 25.3 27.5 21.4 8.5 17.1 15.7 2.6 13.0 3.8


Source: RHB



Table 13: High dividend yield stocks

Price NDY (%) EPS GWTH (%) P/E (x) P/BV (x) ROE (x)

(MYR/s) FY15 FY16 FY15 FY16 FY15 FY16 FY16 FY16

26 June 2015

Kulim* 2.52 14.9 14.9 0.3 84.0 45.9 24.9 2.5 2.8

MRCB-Quill REIT 1.17 7.5 7.5 27.9 (14.9) 10.5 12.3 0.8 6.6

Padini 1.36 7.4 6.3 (22.0) 8.6 13.0 11.9 2.2 19.1

Parkson 1.61 7.3 5.1 (31.3) 18.0 18.4 15.6 0.7 4.3

SHL Consolidated 3.40 7.1 7.9 7.4 7.9 7.3 6.8 1.0 15.0

Hektar REIT 1.51 7.0 7.0 2.4 2.8 13.3 13.0 1.0 7.4

Hua Yang 1.97 6.9 7.1 4.2 3.6 4.5 4.4 0.8 20.4

Media Prima 1.55 6.8 7.4 16.1 8.7 10.2 9.4 1.0 10.8

CapitaMalls 1.39 6.6 6.8 5.0 5.5 15.7 14.9 1.0 6.8

Protasco 1.86 6.5 6.5 18.4 13.7 9.5 8.3 1.8 21.7

LPI Capital 14.00 6.4 7.0 11.2 9.2 12.6 11.5 1.4 13.2

UOA Dev 2.06 6.3 6.3 (6.2) (6.2) 9.6 10.2 1.0 10.4

B-Toto 3.23 6.3 6.5 (5.6) 2.8 13.5 13.1 5.6 43.8

Magnum Bhd 2.65 6.2 6.2 (1.5) 0.2 14.5 14.5 1.5 10.5

Pantech 0.66 6.1 6.1 11.8 22.3 7.7 6.3 0.7 11.6

Matrix 3.05 6.1 6.6 13.3 7.4 6.7 6.3 1.5 25.8

Glomac^ 0.82 6.1 6.3 35.0 3.4 7.1 6.8 0.6 8.7

IGB REIT 1.35 6.0 6.4 3.9 6.0 19.1 18.0 1.3 7.0

Favelle Favco 2.80 5.9 6.2 0.6 4.0 6.8 6.5 1.0 16.9

Maybank 9.22 5.6 5.8 1.9 2.8 12.2 11.9 1.4 12.4

Carlsberg 12.46 5.6 6.0 1.0 7.0 18.0 16.8 12.3 73.2

Axis REIT 3.48 5.6 5.8 18.3 4.4 18.0 17.2 1.6 9.3

Pavilion REIT 1.49 5.6 5.8 3.7 3.8 18.6 17.9 1.2 6.5

Sunway REIT 1.60 5.5 6.0 3.7 15.9 19.0 16.4 1.3 7.8

BAT 60.50 5.4 5.5 5.5 1.0 18.2 18.0 30.7 173.8

Tambun Indah 1.70 5.3 5.8 11.6 11.2 6.3 5.6 1.3 24.8

Oka Corp 0.86 5.2 5.8 (0.2) 8.7 8.3 7.6 1.0 12.6

Dayang 2.26 5.1 5.9 15.1 15.6 9.7 8.4 1.7 21.2

KLCCSS 6.90 5.1 5.2 7.4 2.3 18.1 17.7 1.0 5.8

Berjaya Auto 2.78 5.0 5.9 15.0 18.1 9.1 7.7 3.3 48.5

Digi.Com 5.40 5.0 5.2 1.9 4.3 20.0 19.2 82.8 431.1


Note 2: *Special dividend Source: RHB



Beware stocks with high foreign shareholding

With foreign funds continuing to trim their exposure to ASEAN and Malaysian equities in particular – arising from the bearish cloud engulfing domestic equities and a shift in portfolio funds to other markets – stocks that have high foreign shareholding levels could be vulnerable in the short term.

Stocks with high foreign shareholdings could be vulnerable

Table 14 : Foreign shareholding levels of the largest 50 stocks under coverage

FYE Rec Price TP Shariah Foreign

Shareholdings

(MYR/s) (MYR/s) (%)

Malayan Banking Dec N 9.22 10.00 N 21.0

Public Bank Dec B 18.72 21.00 N 31.5

Tenaga Nasional Aug B 12.66 15.53 Y 26.3

Axiata Dec N 6.46 7.20 Y 20.3

Sime Darby Jun N 8.50 8.75 Y 13.9

Petronas Chemicals Dec B 6.25 6.75 Y 6.7

Maxis Dec N 6.41 6.47 Y 6.8

CIMB Group Dec S 5.50 5.20 N 30.0

IHH Healthcare Dec N 5.67 6.23 Y 42.6

Petronas Gas Dec N 21.48 22.40 Y 7.9

DiGi.Com Dec B 5.40 6.60 Y 15.8

MISC Dec B 7.76 9.49 Y 8.5

Genting Bhd Dec N 8.13 9.30 N 5.0

IOI Corp Jun N 3.97 4.40 Y 17.0

Genting Malaysia Dec N 4.18 4.23 N 35.0

Telekom Malaysia Dec N 6.67 7.40 Y 15.5

Hong Leong Bank Jun N 13.50 15.00 N 9.1

Kuala Lumpur Kepong Sep N 21.42 22.00 Y 12.3

AMMB Holdings Mar S 6.06 5.70 N 52.8

BAT Dec N 60.50 63.10 N 83.4

Nestle Dec N 72.00 68.59 Y 78.4

Astro Malaysia Jan N 2.94 3.28 N 18.8

Westports Holdings Dec B 4.30 4.85 Y 9.6

SapuraKencana Petroleum Jan N 2.41 2.34 Y 24.6

KLCCP Stapled Dec N 6.90 7.06 Y 4.6

UMW Holdings Dec S 10.28 8.65 Y 16.8

Gamuda Jul N 4.70 5.26 Y 27.0

YTL Power Jun N 1.55 1.69 N 14.5

IJM Corp Mar B 6.70 7.84 Y 36.0

MAHB Dec B 6.15 8.11 N 19.6

Dialog Jun B 1.63 1.90 Y 18.9

SP Setia Oct B 3.18 4.08 Y 7.8

Genting Plantations Dec B 10.02 11.50 Y 7.0

Lafarge Malaysia Dec N 8.57 9.52 Y 81.5

Bumi Armada Dec B 1.19 1.57 N 12.4

Hartalega Mar N 8.41 8.48 Y 13.6

Alliance Financial Group Mar N 4.40 4.40 N 30.2

Felda Global Ventures Dec N 1.68 1.60 Y 10.0

BIMB Dec N 4.08 4.30 Y 1.0

IOI Properties Jun N 1.85 2.25 Y 17.6

Sunway Bhd Dec B 3.45 4.10 Y 12.0

Cahya Mata Sarawak Dec B 5.23 6.00 Y 22.3

Affin Holdings Dec N 2.73 2.70 N 1.9

QL Resources Mar N 3.99 4.14 Y 3.5

Malaysia Building Society Dec N 1.77 1.70 N 3.0

Sunway Reits Jun N 1.60 1.55 N 20.1

IGB Reits Dec N 1.35 1.40 N 11.2

UEM Sunrise Dec N 1.01 1.26 Y 13.0

KPJ Healthcare Dec N 4.26 4.25 Y 9.5

AEON Co. Dec N 3.17 3.09 Y 86.7

Source : Company data, RHB



USD has upside bias

We expect the USD to retain a strengthening bias, given the imminent hike in US interest rates. A weak MYR would have positive implications for exporters, while sectors that benefit include tourism, aviation, healthcare (medical tourism), hotels, rubber products and technology. A stronger USD would be negative for companies with USD-denominated borrowings and firms with costs denominated in greenback, ie media, auto, healthcare, consumer and aviation.

Table 15: Beneficiaries of a stronger USD

Company Sector / Industry Comments & reasons

Hartalega Rubber products 90-95% sales denominated in USD

Kossan Rubber products 90-95% sales denominated in USD

Top Glove Rubber products 90-95% sales denominated in USD

Supermax Rubber products 90-95% sales denominated in USD

Karex Rubber products 90-95% sales denominated in USD

MPI Technology All revenue from exports in USD

Unisem Technology All revenue from exports in USD

Inari Amertron Technology 90% of revenue from exports in USD

Globetronics Technology Majority of revenue from exports in USD

Press Metal Basic materials Revenue in USD, while 30% - 35% of cost is in MYR

Ta Ann Timber 60% of its revenue is from timber exports in USD, while costs are in MYR

WTK Timber 80% of its revenue is from timber exports in USD, while costs are in MYR

Jaya Tiasa Timber 70% of its revenue is from timber exports in USD, while costs are in MYR

Hovid Healthcare 53% of its revenue is from export in USD

MISC Shipping Revenue and costs in USD

Scientex Plastic Packaging >90% of its manufacturing production are catered for exports

SKP Resources Plastic Packaging ~60% of sales denominated in USD

Thong Guan Plastic Packaging ~75% sales from exports denominated in USD.

Source: RHB

USD is likely to remain firm



Table 16: Losers from a stronger USD


Astro Media Overseas TV Content costs denominated in USD

Media Prima Media Overseas content costs denominated in USD (25-30% of its TV content)

Inari Amertron Technology 25% of total borrowings in USD

MPI Technology 100% of total borrowings in USD

Unisem Technology 80% of total borrowings in USD

Press Metal Basic Materials 30% of total borrowings in USD

Tenaga Utilities 10% of total borrowings in USD, but position substantially hedged

Hovid Healthcare Raw material imports in USD, 40% of COGS

Axiata Telco 40% of total borrowings in USD

Time dotcom Telco 30% of total borrowings in USD

TM Telco 20% of total borrowings in USD

AirAsia Aviation 80% of total borrowings in USD, leases and maintenance expenses paid in USD

AirAsia X Aviation 90% of borrowings in USD. Jet fuel, leases and maintenance expenses paid in USD

Nestle Consumer 50% raw material costs (cocoa and coffee beans) in USD

NTPM Consumer 100% raw material costs (pure pulp and recycle pulp) in USD

Berjaya Food Consumer 50% of BStarbucks COGS denominated in USD

OldTown Consumer 21% of total borrowings in USD.

Thong Guan Plastic Packaging ~50 of COGS denominated in USD

SKP Resources Plastic Packaging ~70% or more of COGS denominated in USD

Scientex Plastic Packaging 40% of total borrowings in USD

BAT Consumer 2% of COGS denominated in USD. Others in EUR, GBP

Wah Seong O&G 90% debt is in USD as at 4Q14

Perdana O&G 90% of borrowings in USD

Tan Chong Auto Component import costs mainly denominated in USD

UMW Auto Toyota component imports denominated in USD

Source: RHB

Table 17: Beneficiaries of a weak JPY


Tenaga Utilities 13% of total borrowings in JPY

Berjaya Auto Auto Auto imports denominated in JPY

MBM Resources Auto Component imports denominated in JPY

Source: RHB

Table 18: Losers from a weak JPY


Ta Ann Timber 80% of its timber revenue (which makes up 60% of group revenue) comes from Japan, and weaker JPY could mean weaker purchasing power from the East Asian nation

WTK Timber 80% of its timber revenue (which makes up 80% of group revenue) comes from Japan, and weaker JPY could mean weaker purchasing power from this East Asian country

Thong Guan Plastic Packaging 30% sales from Japan, and weaker JPY could mean weaker purchasing power from this country

Source: RHB



Table: 19: FX debt exposure of the largest 50 stocks under coverage

end-2014 Net Gross Gross

Net Gearing Cash/(Debt) Cash Debt Currency of Gross Debt

Company (%) (MYR/m) (MYR/m) (MYR/m) MYRm USDm JPYbn

Maybank n.m. 12,788.4 52,852.9 (40,064.4) 13,606.8 3,302.2 96.1

Tenaga (31.5) (13,697.0) 11,759.0 (25,456.0) 19,510.0 3,280.0 2,640.0

PBB n.m. 5,389.1 16,816.8 (11,427.8) 10,728.5 200.0 -

Axiata (42.0) (8,777.7) 5,115.6 (13,893.3) 5,026.0 1,697.0 -

Sime Darby (22.7) (6,306.1) 5,123.3 (11,429.4) 4,901.3 1,238.0 -

Petronas Chemicals Net cash 9,807.0 9,807.0 - - - -

Maxis (159.0) (7,496.0) 1,531.0 (9,027.0) 5,696.0 899.6 -

IHH Healthcare (9.0) (1,801.5) 2,467.8 (4,269.3) 76.1 313.4 376.9

CIMB n.m. 3,923.5 33,462.8 (29,539.3) 20,259.6 574.6 -

Digi.com (77.0) (528.1) 519.5 (1,047.6) 1,047.6 - -

P Gas^ (2.3) (244.0) 638.0 (882.0) - 882.0 -

MISC (13.5) (3,900.3) 4,838.8 (8,739.2) 1,223.5 2,153.5 -

Genting Bhd Net cash 3,838.6 16,391.2 (12,552.6) 3,595.3 1,021.4 -

IOI Corp (83.3) (4,573.3) 3,495.1 (8,068.4) 688.6 2,037.4 21.0

Genting M'sia Net cash 1,152.1 2,770.3 (1,618.2) - 230.3 -

TM (46.0) (3,462.6) 2,985.8 (6,448.4) 4,822.3 398.9 78.0

HL Bank n.m. (1,540.5) 7,135.5 (8,676.1) 6,565.4 600.0 -

KLK (20.0) (1,649.3) 1,413.0 (3,062.4) 1,300.0 102.7 -

AMMB^ n.m. (2,481.5) 9,123.4 (11,604.9) 11,189.0 415.8 -

BAT (67.9) (356.0) 14.5 (370.4) (370.4) - -

Nestle (20.4) (158.9) 15.5 (174.4) (147.4) - -

Astro^ (301.0) (2,149.7) 1,353.6 (3,503.3) 2,429.5 307.0 -

Westports (40.0) (705.4) 444.6 (1,150.0) 1,150.0 - -

SapuraKencana (130.9) (15,426.7) 1,256.6 (16,683.3) 13,852.4 3,822.9 -

KLCCSG (8.3) (1,389.6) 1,121.9 (2,511.5) - - -

UMW (12.4) (819.1) 3,370.7 (4,189.8) 838.0 958.0 -

Gamuda (26.8) (1,649.0) 882.0 (2,531.0) 1,802.0 452 -

YTL Power (136.3) (14,562.0) 8,958.0 (23,520.0) 4,641.0 1,327.0 -

IJM Corp^ (40.2) (3,597.0) 2,008.0 (5,605.0) 4,307.0 1235 -

MAHB (57.7) (4,283.9) 2,041.1 (6,325.0) 4,218.2 - -

SP Setia (16.3) (2,141.0) 1,246.9 (3,387.9) - - -

Dialog (19.6) (334.8) 697.2 (1,032.0) 32.0 9.1 -

Lafarge Net cash 460.9 460.9 - - - -

Genting Plantation Net cash 49.4 1,076.6 (1,027.2) - 295.5 -

Hartalega^ Net cash 83.0 85.7 (2.7) 2.7 - -

AFG^ n.m. 1,243.3 1,849.3 (606.0) 606.0 - -

Bumi Armada (43.2) (2,889.6) 3,303.2 (6,192.8) - - -

BIMB n.m. 2,764.9 3,898.2 (1,133.3) 1,133.3 - -

IOI Prop (13.1) (1,926.0) 131.2 (2,057.2) - - -

Felda Global Net cash 1,248.8 3,673.8 (2,425.0) 1,826.1 66.1 -

Sunway Bhd (16.8) (983.8) 336.0 (1,319.9) - - -

Cahya Mata Sarawak Net cash 724.8 829.6 (104.8) - - -

Affin n.m. 6,388.1 7,360.6 (972.5) 972.5 - -

QL Resources^ (41.8) (600.2) 202.9 (803.0) - - -

MBSB n.m. 2,967.4 5,683.9 (2,716.5) 2,716.5 - -

Sunway REIT (30.1) (1,687.4) 54.6 (1,742.0) - - -

UEM Sunrise (14.6) (1,618.8) 739.3 (2,358.1) - - -

KPJ Healthcare (75.1) (946.1) 305.3 (1,251.4) 1,251.4 - -

AEON (3.3) (59.7) 76.7 (136.4) (136.4) - -

IGB REIT (18.2) (937.1) 231.9 (1,168.9) - - -

Source: Company data, RHB



Post GST – spending patterns to normalise by end-2015

We reiterate our view that the impact of the GST on sectors and industries is likely to gradually diminish as we progress through 2H15, as consumers and businesses adapt to the new consumption tax.

Table 20: Ongoing impact of GST

Sector Comment

Auto

Neutral. List prices of new cars were not materially changed after GST replaced sales tax. The impact of GST on the auto sector is more on how consumers and businesses react to a macroeconomic environment where living costs are perceived to have escalated and how this affects their decision on big ticket consumer discretionary items like cars. We expect car buyers to gradually adapt to the new tax regime over the course of 2015.

Aviation

Negative. While international routes and routes departing from tax-free zones such as Langkawi would be exempted from GST, domestic routes would see a GST of 6% imposed. However, we expect carriers to absorb part of the taxes, thus potentially capping the yield upside for AirAsia and Malaysia Airlines. Passenger service charges (both international and domestic) would also incur GST, although the impact on consumers should be fairly minimal as it would only translate into a 6% increase in the airport tax base. Duty-free goods and charges of parking and landing of aircraft are also understood to be zero-rated. On a positive note, Malaysia Airports Holdings may stand to benefit from the GST implementation, as this could boost sales of duty-free goods. On the cost front, airlines are expected to pay for higher jet fuel serving local flights.

Banking

Neutral. Given the difficulties faced by the banks in matching the input tax with the type of supply, we understand that the fixed input tax recovery (FITR) method would be used to allow such financial institutions to claim a portion of the GST incurred. Under this method, a bank is allowed to recover a specific percentage of the total input tax incurred, which encompasses input tax relating to exempt, standard-rated and zero-rated supplies. For banks, overheads comprise personnel, establishment, marketing and general and administration costs. Personnel costs do not carry GST, but a portion of other overheads would be subjected to the tax. However, we think the impact is not likely to be too significant, given that personnel costs typically make up the bulk of overheads, ie up to 70% of total overheads.

Basic Materials

Neutral. GST should not have a significant impact on the sector. The cement, steel and other material manufacturers would be liable to register as GST-registered persons. A registered person is required to charge the GST (output tax) on his taxable goods and services provided to his customers. He is allowed to claim a refund of any GST incurred on his purchases (input tax), which are inputs for his business. Therefore, the tax itself is not a cost to the intermediaries (manufacturers) and does not appear as an expense item in their financial statements. Meanwhile, products that are exported out of the country will be zero rated, while input costs can be claimed back.

Construction

Neutral. The impact of GST on construction services, which are standard rated, is neutral. A provider of construction services is entitled to recover the GST paid on inputs used as input tax credits, as all inputs used can be attributable to the making of taxable supplies. There is no clear GST winner or loser in the construction services space. On the other hand, toll roads are an exempt supply and, as such, are not subject to the tax. This also means a toll road concessionaire is not entitled to recover the GST paid on inputs used as input tax credits. However, these GST-taxable inputs typically make up only about 30% of total costs and, as such, the non-recoverability of the tax paid on them would not put a significant dent on earnings. The other key cost components of a toll road concessionaire are depreciation and amortisation (50%) and staff cost (20%). In short, while the GST is negative to toll road concessionaires, its impact on their bottomlines is negligible.

Consumer

Neutral. F&B operator and staple players may see favourable impact from the GST implementation, as some of their raw materials are zero rated. Retailers may experience a lower sales volume in short to medium term, as prices of their goods are expected to be higher when the GST imposed is passed on to their consumers. For tobacco and breweries, the impact is negligible.

Gaming Negative. We expect GST to be negative for gaming companies, as the additional 6% would be chargeable over and above the current gaming taxes.

Healthcare

Neutral-Positive. The healthcare services and products provided (including consultation by doctors whom are employed by the hospitals) to patients by the hospital operator would be GST exempt. As such, the various consumables would be subjected to GST. Meanwhile, pharmaceutical products, as well as consultation by doctors and/or medical practitioners that are not employed by the hospital, would be subjected to the standard GST rate. To ensure margins are sustained, hospital operators have adopted various cost-saving measures as well as raised prices that are factored together with its annual price increments, which factors the cost inflation from the GST imposition. Judging from historical trends, seen over the past eight quarters or so, the growth in inpatient admissions have remained despite the continued growth in revenue intensity. We believe this is partly due to the growing adoption of insurance coverage, which “insulates” patients from the real medical costs. For IHH and KPJ, the payment method for 70% of its patients are based on insurance coverage while the remaining 30% are out-of-pocket payments (OPP), which mostly comprise high net worth patients.

Logistics

Neutral. GST is not likely to impose much impact on the logistics sector, as it would replace the existing sales and service tax. We also understand that contracts entered into before GST implementation would also stand. If the contracts are non-renewable, companies are allowed to zero rate the goods and services supply of the contract even though they are subject to GST. It is also understood that a 5-year grace period after GST implementation would be given for companies to review the contracts, and those with a review clause would automatically be adjusted for GST. The tax only applies to services provided to domestic market. As such, export related services are deemed zero rated.

Media

Negative. For advertising businesses, such companies would bill the GST to the advertisers, where the tax replaces the current sales tax of 6%. In terms of circulation selling price, publishers like Media Prima have raised their circulation prices, although this could be due less to the GST and more about recouping costs. Note that, while newsprint costs are GST chargeable, the publishers may be able to claim back the input tax. All in all, we believe that the GST is likely to have a negative impact, primarily on consumer sentiment due to living cost escalations, and this would have an impact on media companies’ earnings.

Non-Bank Financials

Neutral. We maintain our stance as general insurers/takaful players will see GST replace the existing 6% services tax. General insurance and takaful policies will be standard rated while life insurance and takaful policies will be exempt from GST, irrespective of whether they are sold by conventional methods, online or via telemarketing. The GST impact on general insurance and reinsurance will be zero-rated if a policy covers international risk, as coverage outside Malaysia is deemed a zero-rated. The GST on nonlife riders issued by life insurers or family takaful players are, however, subject to GST at the standard rate. For life insurers/family takaful players that are exempt from GST output tax, the pricing of new products may go up due to GST-related costs given that life insurers cannot claim input tax. If the tax is not passed down to the end-customer through increases in pricing, margins may be squeezed. This could be slightly negative for the life insurance industry, but we believe can be mitigated through economies of scale. Insurers that rely heavily on distributors like agents may also see higher costs in implementing GST, although these are likely to be non-recurring costs.

Consumers and businesses would need a few quarters to adapt to the new tax



O&G

Neutral. We believe the impact overall is minimal to the sector as most of the companies under our coverage are service-driven. The Oct 2013 GST update for upstream/downstream petroleum activities stipulates business input tax is claimable and can be offset against GST charged on supply. For the upstream segment, this applies for services rendered for the sector’s operators, essentially means the service players can pass the GST costs to the operators (the end-customer).

For the downstream sector, this applies to the entire supply chain. Generally speaking, the output tax for crude oil/condensate/gas produced is standard rated if they are supplied locally. The exceptions lie with the exporting of raw and refined petroleum products, which are subject to GST at zero rate, as well as products that are consumed during business operations. Owners of assets, eg offshore support vessels, drilling rigs and FPSOs, are already subject to a 6% service tax that could be easily replaced by the GST. For fabricators and service providers, any increase in costs from this tax will be passed on.

Plantation

Neutral. The GST should not have a material impact on the plantations sector. As most of the final products are exported, they would be zero rated while input costs can be claimed back. This is slightly positive and would apply to plantation companies with downstream facilities that export their products, such as IOI Corp, KLK and Sime Darby. Meanwhile, the pure planters with no downstream facilities that mostly sell their CPO to domestic refiners would attract GST. However, as input costs can be claimed back, the impact would be more or less neutralised. This applies to companies like Genting Plantations and IJM Plantations, amongst others.

Property

Negative. Some developers have yet to factor in the GST financial impact for contracts that were awarded 2-3 years ago and works that are to be carried on post GST. Hence, there could be some downside in earnings going forward. Meanwhile, while commercial properties are standard rated for the GST, residential properties are exempted from the tax. In general, property prices are expected to go up after the GST kicks in. However, as we expect demand for properties to soften this year due to the slowdown in economic growth and weak sentiment, we believe developers may face difficulties in passing on incremental costs. Margins are expected to narrow.

Property-MREITs

Based on our channel checks, it seems that the REITs would be able to manage any adverse impact from the GST, although the retail REITs are generally cautious on the short-term outlook post GST. In general, the retail REITs believe that the impact of an expected dip in retail sales would not be significant to their earnings, as turnover rent only contributes less than 5% of total income. It is understood that all REITs would be collecting the GST from their tenants on behalf of the Government. The REITs would also be subjected to the 6% tax on property expenses, which would be partially offset by claimable input tax credit. The overall impact to their net property income would be minimal.

Rubber Products

Neutral. Under the current GST implementation scheme, all exports from Malaysia are zero rated. In particular, rubber products manufacturing companies such as Hartalega and Kossan export over 95% of their respective manufacturing products. Although these manufacturers procure 60-90% of their raw materials from overseas (imports are subject to GST), they are eligible to claim for a GST refund due to their export-oriented sales. Hence, all in, we believe the impact of a potential implementation of the GST on the rubber products sector would be relatively insignificant. The concerns over the 2015 Budget would lie with further fuel subsidies rationalisation and the reviewing of minimal wages, which would exert more pressure on the rubber products manufacturing companies’ profit margins.

Port/Shipping

Neutral. We conclude from our channel checks with port operators that the GST would not hit port handling charges, as most are zero rated. In any case, one certainty is that transshipment cargoes as well as exported goods would be exempted. The tax may, however, hit warehousing and storage rental, although the impact would be minimal as it would also replace the existing sales and services tax. For shipping, there will be no impact on our coverage, as most are operating in international waters. As most shipping companies ply international routes to export goods, they are hence exempted from the GST. We understand, however, that the GST would not be zero rated for domestic shipments and would, instead, replace the existing sales and services tax. As such, the impact of this new tax would be negligible. Given that our shipping sector coverage universe only plies international waters, there would not be any impact.

Technology

Neutral. The impact of GST implementation on the technology sector would be relatively insignificant. All exports from Malaysia are zero rated, ie GST to be charged is at 0%. In particular, semiconductor players and hard-disk drive (HDD) component manufacturers export over 95% of their respective manufacturing products. Although these manufacturers procure 60-90% of their raw materials from overseas (imports are subject to GST), they are eligible to claim for a GST refund due to their export-oriented sales. Hence, all in, we believe the impact of potential GST implementation on the technology sector would be relatively insignificant.

Telecommunications

Neutral-Positive. The brouhaha over the way GST should be levied has led to confusion and great discontent among prepaid users, and gravely impacted prepaid airtime reloads for the larger part of 2Q15. While mobile prepaid users would eventually get used to the telcos passing on the 6% as a standard rated service, we expect the typically price sensitive users to claw back on usage and exercise greater discretion on spending, notwithstanding the implementation of the “usage-based framework” by year end. With the anticipated moderation in prepaid spending, we suspect the benefits of the GST pass through to be diluted and could potentially result in a less than 2% earnings upside in the best case scenario. The GST impact looks more likely to be a neutral event in our view, given the overall sluggish mobile revenue outlook. Digi.com (Digi) remains the largest beneficiary followed by Maxis and Axiata of the tax pass through.

Timber

Neutral. The implementation of GST should not have a material impact on the timber sector. As timber products like logs and plywood are exported, they would be zero rated while input costs can be claimed back. The main input cost that can be claimed back would be the purchase of logs from domestic parties, which would attract GST. For the companies with plantations exposure, the impact would also be neutral.

Plastic Packaging

Neutral. The impact of GST implementation on the plastic packaging sector would be negligible. All exports from Malaysia are zero rated, ie GST to be charged is at 0%. In particular, plastic packaging players export over 75% of their respective manufacturing products. Although these manufacturers procure 60-90% of their raw materials from overseas (imports are subject to GST), they would be eligible to claim for a GST refund due to their export-oriented sales.

Utilities

Neutral. Treated water and electricity are standard rated, other than treated water and the first 200 units of electricity per month supplied to domestic consumers, which are zero rated. In either case, the impact of the GST on providers of treated water and electricity (including producers and distributors) is neutral, as the providers are entitled to recover the GST paid on inputs used as input tax credits. This is because all of the inputs used (including fuel, chemicals and spare parts) can be attributable to the making of taxable supplies.

Source: RHB



Table 21: FBM KLCI weightings and valuations

Mkt cap Weight EPS Growth (%) P/E(x)

MYRbn (%) FY15 FY16 FY15 FY16

Petronas Chemicals 50.00 5.5 24.2 12.7 14.4 12.8

SapuraKencana Petroleum 14.44 1.6 -27.7 16.2 14.8 12.7

Oil & Gas 64.44 7.13 7.3 13.4 14.5 12.8

BAT 17.3 1.9 7.5 0.3 17.8 17.8

Consumer 17.3 1.9 7.5 0.3 17.8 17.8

Genting 30.42 3.4 16.1 14.4 16.0 14.0

Genting Malaysia 24.82 2.7 8.0 8.5 16.9 15.6

Gaming 55.2 6.12 12.4 11.8 16.4 14.7

Astro 15.3 1.7 14.7 27.4 25.7 20.1

Total 15.3 1.7 14.7 27.4 25.7 20.1

Media

UMW 12.0 1.3 32.5 14.7 17.6 15.4

AUTO 12.0 1.3 32.5 14.7 17.6 15.4

MISC 34.6 3.8 24.8 12.0 14.6 13.0

Westports 14.66 1.6 37.5 21.9 46.4 38.0

Ports &Shipping 49.3 5.5 20.5 17.1 16.8 14.4

Telekom 24.33 2.7 -3.3 7.1 26.2 24.5

Axiata 55.31 6.1 1.7 4.3 23.1 22.2

Digi 41.99 4.6 1.9 4.3 20.0 19.2

Maxis 48.11 5.3 0.2 3.5 25.3 24.4

Telecommunication 169.7 18.8 0.7 4.4 23.2 22.2

Tenaga 71.4 7.9 37.2 7.2 11.0 10.3

Petronas Gas 42.5 4.7 3.1 0.9 22.4 22.2

Utilities 114.0 12.6 27.6 5.8 13.6 12.8

AMMB 18.22 2.0 -13.0 7.4 10.9 10.2

CIMB 46.76 5.2 2.9 31.1 14.3 10.9

HL Bank 23.78 2.6 5.0 6.5 10.8 10.1

Maybank 86.24 9.5 1.9 2.8 12.2 11.9

Public bank 72.12 8.0 1.0 8.2 15.1 13.9

Banking 247.1 27.4 0.8 9.5 13.0 11.6

IOI Corp 25.61 2.8 -40.6 30.0 24.9 19.1

KLK 22.87 2.5 -12.7 42.2 26.1 18.4

Sime Darby 51.55 5.7 -36.5 39.8 25.8 18.5

Plantation 100.0 11.1 -33.8 37.7 25.7 18.6

KLCC 12.5 1.4 7.4 2.3 18.1 17.7

Property 12.5 1.4 7.4 2.3 18.1 17.7

IHH Healthcare 46.37 5.1 37.5 21.9 46.4 38.0

Healthcare 46.4 5.1 37.5 21.9 46.4 38.0

Source: RHB



Table 22 : RHB basket of stocks - sector weightings & valuations

Covered Stocks Mkt Cap Weight EPS Growth (%) P/E (x) Recommendation

MYRbn % FY14 FY15 FY16 FY14 FY15 FY16

Utilities 127.0 10.3 8.1 19.4 2.9 15.8 13.2 12.7 Overweight

Oil & Gas 94.0 7.6 (11.9) 6.8 17.5 16.3 15.1 12.8 Overweight

Healthcare 52.2 4.2 5.6 25.1 18.9 48.3 38.5 32.3 Overweight

Ports & Shipping 49.3 4.0 18.8 20.5 17.1 20.3 16.8 14.4 Overweight

Construction 27.8 2.2 (7.1) 13.3 0.3 16.5 14.0 13.6 Overweight

Technology 10.1 0.8 31.0 41.6 23.1 29.8 19.8 16.1 Overweight

Logistics 4.7 0.4 (29.3) 3.7 (7.8) 20.2 19.0 16.3 Overweight

Aviation 13.1 1.1 (128.7) 343.4 84.6 (84.8) 26.4 14.3 Overweight

Banking 265.4 21.5 (5.9) (0.2) 10.1 13.3 12.9 11.5 Neutral

Telecommunications 173.9 14.1 (7.6) 1.0 4.6 23.5 23.2 22.2 Neutral

Plantation 125.5 10.2 (11.0) (25.0) 36.6 19.0 25.0 18.3 Neutral

Gaming 63.4 5.1 (16.2) 9.7 10.3 17.6 16.0 14.5 Neutral

Consumer 62.9 5.1 0.6 6.6 7.3 21.6 20.0 18.7 Neutral

Property 40.9 3.3 (8.7) (0.1) 5.1 12.7 11.9 10.8 Neutral

Property-MREITs 31.9 2.6 2.8 6.3 4.2 19.4 17.9 16.8 Neutral

Auto 21.6 1.7 (31.8) 27.8 12.6 19.5 15.2 13.5 Neutral

Rubber Products 18.2 1.5 (8.4) 24.7 13.4 26.9 20.1 17.1 Neutral

Basic Materials 17.6 1.4 (6.0) 1.8 38.3 20.4 18.4 13.0 Neutral

Media 17.0 1.4 (0.2) 15.0 23.4 25.7 22.3 18.1 Neutral

Non-Bank Financials 12.5 1.0 11.7 (32.5) 10.4 8.2 12.1 10.7 Neutral

Plastic Packaging 4.2 0.3 19.2 18.0 21.7 18.1 12.1 9.9 Neutral

Timber 3.4 0.3 54.2 (25.5) 36.9 15.5 20.5 15.0 Neutral

RHB BASKET 1236.6 100.0 (6.7) 2.9 12.2 17.7 16.7 14.7

Source: RHB estimates

Rubber products and NBFI sectors downgraded to NEUTRAL

Since our last quarterly strategy report, we have downgraded the rubber products and non-banks financial institution (NBFI) sectors to NEUTRAL (from Overweight), mainly on valuation grounds.

While demand fundamentals for companies in the rubber products sector look robust, helping to support solid earnings growth made possible by capacity expansion, we are NEUTRAL on the sector. We recommend investors adopt a selective stock-picking strategy or accumulate when valuations are more attractive.

We believe the NBFI sector now warrants a NEUTRAL call. While 1Q15 earnings were in line with expectations, stocks in the sector have outperformed the market YTD.

We maintain our OVERWEIGHT stance on the utilities sector. This is premised upon our positive recommendations on Tenaga Nasional, which is a good proxy to the economy. It is appealing to investors, given its earnings defensiveness, large market value and high share liquidity.

We are OVERWEIGHT the O&G sector, which continues to take measures to optimise costs, and improve equipment and organisational efficiencies. It is also driving innovations to address the low oil price environment. We also believe that there would be consolidation and collaboration between many O&G players in the market. We prefer firms that exhibit earnings growth and have a proven track record, as well as the ability to react to the tough market conditions. While opportunities and contracts to be handed out were delayed in 1H15, we believe there is likely to be more visibility in the second half of the year and going into 2016.

We remain OVERWEIGHT on the healthcare sector going into 2H15. This is on the back of our positive outlook for the hospital operators, IHH and KPJ. We expect demand for quality private healthcare to remain robust despite the challenging economic backdrop.

We maintain our OVERWEIGHT stance on the ports & shipping sector, as we expect both Westports and MISC to continue registering decent earnings growth going forward.

Our OVERWEIGHT stance on the construction sector is reaffirmed by the Government’s commitment towards public infrastructure spending under the 11MP.

Rubber products and NBFI sectors downgraded



We reiterate our OVERWEIGHT stance on the technology sector as we move into 2H15. We expect near-term sentiment on technology stocks to be supported by continued weakness in the MYR against the USD, which would further enhance earnings visibility. Over the medium to long term, we remain positive on the global sales of smart devices on cheaper price points, as well as the introduction of new flagship premium models.

We maintain our OVERWEIGHT stance on the logistics sector. The growth potential in the courier industry is significantly driven by the rise in the online retail shopping industry – from both the business-to-consumer (B2C) and customer-to-consumer (C2C) segments.



FBM KLCI From A Technical Perspective

Figure 38 : FBM KLCI’s weekly chart


The strong 1,660-1,671 support floor The FBMKLCI was in rebound mode in 1Q15, basically recovering the losses triggered by the second major breakdown from the 50-week MAV line since the bull market started in 2009. The rebound continued well into the early 2Q15, which then saw the index facing a major challenge at the downtrend line extending from the historic high. This also coincided with the 50-week MAV line mentioned above.

In the previous strategy report, we said that the FBMKLCI would need to overcome the downtrend and 50-week MAV lines in order to extend the rebound. In fact, the index did successfully crack above these two major hurdles in April and, at one point, we thought that it would be able to climb to greater heights after this breakout. Surprisingly, the breakout momentum was short and the FBMKLCI subsequently returned back below the downtrend and 50-week MAV lines in the following month. Meanwhile, there are no clear signs of reversal for the recent correction that started in May. There is a rather strong support at the 1,706 pt-level, followed by a more significant support floor situated at the 1,660-1,671 pts area. Both the 1,660-pt and 1,671-pt levels represent a major low recorded in 2013 and 2014 respectively. The FBMKLCI has a good chance to bottom out here for the third time. At this juncture, the overall uptrend started since 2009 is still firmly intact. A major technical breakdown is expected to occur should the index close below the 1,660-1,671 pts area, given that this represents an obvious and significant support floor. If such a breakdown occurs, the next strong support can only be found at the 1,590 level, as shown in the weekly chart above. From the current level, look for major resistances at the 50-week MAV line, which is now situated at the 1,807-pt level, followed by the recent major peak at 1,868 pts.

The two major resistances in 2Q15 – the downtrend and 50-week MAV lines

A short breakout momentum

The very strong 1,660-1,671 support area is a good level for the FBMKLCI to end the market correction

What if the 1,660-1,671 pts area is violated?

3Q15 major resistances – the 50-week MAV line and the 1,868 pt-level

Robust undertone for

consumer spending

MAA is forecasting higher

sales in Mar

Risk of car buyers deferring

their purchase decisions

Regulatory risks from

potential changes to the

automotive duty structure

DRB-HICOM, Buy, FV =

RM3.20

Tan Chong, Buy, FV =

RM6.00

50-week MAV line

1st major breakdown

2nd

major breakdown

Breakout

1,660-1,671

Downtrend line

1,590 pt-level



Auto: Few Re-Rating Catalysts In Sight Neutral

Weak March quarter earnings

The March quarter results for the stocks in the automotive sector were disappointing, after four of six companies under our coverage missed expectations. Berjaya Auto (BAUTO MK, BUY, TP: MYR4.70) remains our sector Top Pick and reported 3QFY15 (Apr) results in line with expectations. Its 4QFY15 earnings announced last week was also in line, with FY15 earnings up 62.7% YoY to MYR215.4m helped by a 27.8% rise in Mazda vehicle registrations. 1Q15 earnings at MBM Resources (MBM MK, BUY, TP: MYR3.80) disappointed after weaker Perodua contributions and a slower-than-expected turnaround at its loss-making alloy wheel manufacturing start-up. UMW Holdings (UMW) (UWMH MK, SELL, TP: MYR8.65) 1Q15 was sub-par, on account of the collapse in Toyota sales and challenging business conditions at its oil & gas division. Tan Chong Motor (Tan Chong) (TCMH MK, NEUTRAL, TP: MYR2.80) and APM Automotive (APM MK, SELL TP: MYR4.30) were both affected by the strong USD and margin pressure, while DRB-HICOM (DRB MK, BUY, TP: MYR2.15) continues to be dragged by weaker Proton sales, although its other business divisions performed creditably. There were no changes to stock recommendations.

A buyer’s market

The domestic auto market place continues to be very competitive, compounded by consumer expectations for cheaper cars, fuelled by the Government’s pledge to lower car prices by up to 30% by 2018. Given the rising cost of living exacerbated by the introduction of the goods and services tax (GST), many potential car buyers are increasingly price sensitive. Expanded dealership networks enable the consumer to shop around for the best deals, and consumers continue to gravitate towards the latest and greatest models with state-of-the-art and up-to-the-minute features. Models that are more than two years old will typically see volumes drop off sharply unless there is a comprehensive facelift. Distributors who are able to schedule a steady stream of well-priced, new facelifted models will be able to enjoy balanced sales volumes. Distributors also need to be in a position to locally assemble models if the potential volumes justify the investment. The lower effective duties will enable the distributor to price the cars lower, which will lift sales. Companies with gaps in their launch schedule could lose market share to newer competitors. A good example is Honda, which has overtaken Toyota as the top selling non-national vehicle marque for passenger and commercial vehicles combined. This is a remarkable feat as Honda only produces passenger vehicle models. In the last 21 months, it has launched a steady stream of new models, including the Accord (Sep 2013), City (Mar 2014), Jazz (Jul 2014), Civic facelift (Nov 2014) and HR-V (Feb 2015).

GST only affected the timing of car sales

The introduction of the GST on 1 Apr had an impact on the auto industry, contributing to a divergence in the number of vehicles registered – as per Malaysian Automotive Association (MAA) data – and invoiced sales between wholesalers and their dealers. The introduction of the new tax meant that interim stocks at dealerships held on 31 Mar, on which sales tax had already been paid, resulted in double taxation as only 2% of the 10% sales tax paid could be refunded (GST chargeable from April). The situation meant that dealers stopped taking new stock from wholesalers in March and ran down existing inventory. Hence, while new vehicle registrations spiked to over 67,000 units in March, invoiced sales were much lower at the wholesale/distributor level. In April, however, new vehicle registrations fell off sharply (-32.9% MoM), as dealer inventory was nearly exhausted, although wholesale vehicle invoicing spiked up as dealerships began re-ordering. As expected, new vehicle registrations rebounded in May, which recorded total industry volume (TIV) of 51,254 units (+13.4% MoM and -8.4% YoY) bringing YTD TIV to 264,747 units (-3.6% YoY). Although sales recovered MoM, it was boosted by the spillover of vehicles ordered during the preceding month helping to mask a relatively subdued automotive market. This is unsurprising as consumers and businesses will take time to adjust to the new consumption tax.

No material change in car prices post GST

Post GST, street prices of cars are unlikely to see any material reduction, as list prices of cars only fell by 1-2% on average. Apart from the GST, other factors affecting a vehicle’s final selling price include automotive duties, exchange rates, profit margins, supply chain costs and model specific considerations (run out models will have a higher propensity for discounts to enable distributors to clear stocks). The

March quarter earnings were unexciting

A competitive market with consumers increasingly price sensitive

GST skewed new car registrations in March and April

Post GST, list prices of new cars only declined 1-2% on average



automotive duty structure has not changed, save for the elimination of the 5% import duty on cars imported from Japan from 1 Jan under the terms of the Japan-Malaysia Free Trade Agreement.

Availability of bank financing is a choke point

Other factors affecting auto sales – other than the general strength of the economy – include the cost of financing and the availability of bank financing. While financing costs have been stable, the availability of financing has been a recurring issue. Banks are more cognisant of the high household debt levels and resilience of consumers to stress. With more exacting credit standards in force, better asset quality has come at the expense of marginal borrowers – or those who are unable to prove documented stable incomes – who now have difficulty securing loans. This buyer profile is typically customers of national cars where anecdotal loan approval rates are as low as 40%. Buyers of cars costing MYR80,000 or more typically have less issues with financing.

USD strength will hurt UMW and Tan Chong

Distributors importing cars and components priced in USD will also have seen a squeeze in margins in MYR terms after the strong run-up in the USD. USD strength will be negative for UMW and Tan Chong, while JPY weakness will benefit Berjaya Auto, MBM Resources and DRB-HICOM.

Key risks

Unexpected regulatory changes, unfavourable forex trends, availability of financing, unpredictable consumer behaviour and a weakening of consumer confidence are the main risks for the sector. The rising cost of living, inflation and the higher interest rate environment are also factors that could limit consumer discretionary spending. The elevated household debt levels and high price of cars relative to incomes are significant factors limiting the headroom for growth in auto sales. However, if the Malaysia Automotive Institute (MAI) achieves its goal of bringing down car prices gradually by up to 30% in the next few years, then affordability levels will improve with commensurate upside to industry volumes. The used car market will also need time to adjust to accelerated depreciation rates as new car prices adjust lower. The health of the used car market has implications for the new car market, as many new car buyers trade in their used cars to make up the down payment for their new vehicle. The new GST regime could also dampen the propensity of consumers to splurge on big ticket consumer discretionary items over the next few months.

650,000 unit TIV forecast maintained

Given the upheavals in the industry and economy, there is no change to our expectations for a slight contraction in TIV to 650,000 units in 2015 (2014: 666,465 units). MAA is forecasting 680,000 units while the MAI is estimating 700,000 units. The street is expecting flat TIV. Auto sales have already seen three consecutive years of higher YoY sales. The implementation of the GST and rising living costs are negative drivers. On the flip side, however, sales volumes should be helped by a strong product pipeline and a competitive marketplace where manufacturers are prepared to discount. These factors should help to support auto sales in 2015. We remain NEUTRAL on the sector. Our Top Pick remains Berjaya Auto, the distributor of Mazda cars in Malaysia and Philippines. A focused business plan, growth from a small base and compelling product range ought to enable Mazda cars to gain market share.

Banks are more selective in lending

The strong USD is negative for UMW and Tan Chong

Availability of financing, forex and unpredictable consumer behaviour are key risks

RHB’s 2015 TIV forecast of 650,000 units is below consensus

Table 23: Valuations of auto stocks

Price Target Mkt

Cap

P/E

(x)

EPS GWTH

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec

(MYR/s) (MYR/s) (MYRm) FY15 FY16 FY15 FY16 FY15 FY15 FY15 FY15

Berjaya Auto^ 2.78 3.36 2,249 9.1 7.7 15.0 18.1 4.3 10.0 49.5 5.0 B

DRB-Hicom^ 1.60 2.15 3,093 15.1 14.7 0.8 3.0 0.4 3.9 2.7 3.8 B

MBM 3.52 3.80 1,375 10.5 8.9 14.8 17.5 0.8 n.m 8.3 2.3 B

Tan Chong 2.95 2.80 1,926 11.6 10.0 +>100 16.0 0.7 6.8 5.8 1.4 N

UMW 10.28 8.65 12,010 17.6 15.4 32.5 14.7 1.8 7.4 10.3 3.4 S

APM 4.78 4.30 935 10.6 10.0 (10.2) 5.8 0.8 4.3 7.6 4.2 S

Sector Avg 15.2 13.5 27.8 12.6

^ FY15-16 valuations refer to those of FY16-17



Aviation: Best Of Times Overweight Post QZ8501 Blues

On a core earnings basis, both Malaysia Airports (MAHB MK, BUY; TP: MYR8.11) and AirAsia X (AAX MK, BUY; TP: MYR0.38) reported numbers that were within our forecasts, leaving only AirAsia’s (AIRA MK, BUY, TP: MYR2.89) results seeing a miss on a sharper-than-expected drop in yields. While AirAsia and Malaysia Airports recorded cuts in net profit, we wish to highlight that the cut for the latter was only from an accounting perspective from the additional amortisation of the Istanbul Sabiha Gokcen International Airport (Sabiha Gokcen). This was because operating earnings came in largely in line. Following the tragic Flight QZ8501 crash at end-Dec 2014, which resulted in the AirAsia Group halting marketing campaigns, 1Q passenger traffic numbers in Malaysia – reported by Malaysia Airports – came in weaker by 1.5% YoY. This has consequently led to the drop in load factors for both AirAsia (down 5.2ppts to 75%) and AirAsia X (dropped 11.8ppts to 74%).

Passenger yields still under pressure

In the absence of marketing campaigns, coupled with the intensifying competition with Malaysia Airlines (MAS) in the domestic space, yields for regional short-haul player Malaysia AirAsia suffered a contraction of 6.9% YoY. At the same time, though, AirAsia X saw a 10% YoY improvement in its yields following the termination of two loss-making routes. Yields in the coming quarters are expected to see further improvements, as indicated by the average forward bookings seen so far. Furthermore, MAS finally began cutting capacity in recent weeks. This also includes cutting four routes entirely, namely Kunming, Krabi, Kochi and Frankfurt. AirAsia X benefits on MAS’ Kunming route termination whilst AirAsia should benefit from higher yields on the terminated Krabi destination. As the capacity cuts by MAS have been relatively modest so far, we see most of the yield improvement for the AirAsia group coming from a rational air fare pricing environment and lower discount allocations by MAS. This, however, ought to be more evident on the mid haul routes – which is positive for AirAsia X – where FY15 yields are expected to improve by 2.3% YoY. This is still on the conservative side, noting that 1QFY15 yields have improved by 10% YoY. However, owing to the abolishment of fuel surcharges, AirAsia’s yields are expected to be lower by 4.5% YoY when compared to last year.

Figure 39: % chg YoY on overall yields Figure 40: Historical yields (sen)

Title:

Source:

Please fill in the values above to have them entered in your report

-30%

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AirAsia AirAsia X Malaysian Airlines

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Malaysia AirAsia overall yields (sen/RPK)

AirAsia X overall yields (sen/RPK)

Malaysian Airlines yields (sen/RPK)

Source: RHB, Company data Source: RHB, Company data

Passenger growth thus far

We estimate that Malaysia ought to see a passenger traffic growth forecast of 6%. This is owing to the low base last year in 2Q-4Q, which had been impacted by the missing MH370 incident. YTD May, passenger traffic growth is so far only up 0.7%. We remain confident that Malaysia passenger traffic growth should hit our target of 6% this year. Our FY16 forecast stands at 5%. We estimate that AirAsia and AirAsia X will see a YoY passenger growth of 8% and -2% respectively. The drop in AirAsia X’s passenger numbers stemmed from the slowdown in 1Q15 of 15.3% YoY, where the carrier suffered from a drop in Australian passengers as its reputation that country was tarnished by the delay in launching Indonesia AirAsia X’s Bali-Melbourne route.

1Q15 earnings came in line for AirAsia X and Malaysia Airports while AirAsia’s earnings came in below expectations on weaker than expected yields

Yields in the coming quarters are expected to see further improvements, as indicated by the average forward bookings seen so far

YTD May, passenger traffic growth is so far only up 0.7%. We remain confident that Malaysia passenger traffic growth should hit our target of 6% this year.



Figure 41: Total passenger traffic (% chg YoY)

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International % chg YoY Domestic % chg YoY

Source: MAHB, RHB

Jet fuel average to be lower ahead

Both AirAsia and AirAsia X’s jet fuel costs averaged at MYR321.70/MYR303.60 respectively in 1Q15. This was YoY lower by 20%/29.5% respectively vs the spot average of MYR243.40 (down by 39% YoY). The higher average fuel costs incurred by the AirAsia Group were due to the higher hedged position it locked in earlier in the middle of last year. As more of these hedge positions average down lower in tandem with the lower fuel price, we expect jet fuel prices to be -8% QoQ (-27% YoY) for AirAsia and by -3% QoQ (-30% YoY) for AirAsia X. Aside from improved yields and loads, we anticipate that the lower jet fuel price QoQ would bring room for further earnings improvement.

Figure 42: Jet fuel price (USD/barrel)

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Source: Bloomberg

Aside from improved yields and loads, we anticipate that the lower jet fuel price QoQ would bring room for further earnings improvement.



Recovering receivables from its associates

We remain confident that AirAsia will be able to recover the MYR2.7bn amount owed by its Indonesia and Philippine associates through their own internally-generated cash flows – even without equity funding – although this will require time. It may take as long as five years. The outlook for both these ailing associates is expected to improve, as yields and loads are showing signs of improvements. Furthermore, judging from how much higher the yields generated by their respective associates are contributing, this gives room for further improvements for a turnaround.

Valuations becomes more compellingly attractive vs global peers

We remain confident on the earnings outlook of our aviation coverage. AirAsia is expected to see core earnings grow by 145.7% YoY, while AirAsia X’s core losses are expected to narrow by 80.4% YoY and, by FY16, it ought to mark its first net profit (forecasted at MYR146m) after three years. Meanwhile we expect Malaysia Airports’ FY15 EBITDA to grow to MYR1.47bn from MYR800m last year following the full consolidation of Sabiha Gokcen’s numbers (at 100%) and the operational improvement in earnings from KLIA2 on higher rental revenue as more outlets are tenanted. All the counters in our Malaysian aviation coverage are trading at attractively lower valuations vs comparable global peer and, as such, we do not see any downside from here as share prices seem fairly supported at current levels. We continue to reiterate our OVERWEIGHT recommendation on the sector.

Table 24 : Global low cost carrier comparison

Name USD market cap (m)

Net income margin (%)

PE (x)

P/B (x)

EV/EBITDA (x)

Dividend yield %

ROE (%)

Net Gearing

FY1 FY2 FY1 FY2 FY1 FY1 FY2 FY1 FY1

Airasia Bhd ^ 1,146.2 11.4 12.3 6.4 5.3 0.8 4.6 4.3 4.5 12.8 262.6

Airasia X Bhd ^ 233.0 (3.6) 4.1 - 5.7 0.9 8.7 3.1 0.0 (11.9) 206.4

Nok Airlines Pcl ^ 184.1 3.0 5.0 12.1 6.4 1.5 9.9 2.2 0.0 10.6 (74.2)

Asia Aviation Pcl ^ 631.6 5.7 3.4 12.9 18.8 1.0 6.6 8.7 0.0 5.5 21.4

Tiger Airways Holdings Ltd 537.3 4.6 6.6 26.4 13.8 3.1 7.8 6.1 0.0 14.2 (1.5)

Cebu Air Inc 1,142.3 9.4 10.8 8.3 7.5 1.9 5.8 5.7 2.2 26.8 138.8

Jet Airways India Ltd 502.6 (0.6) 0.7 - 18.8 - 25.5 19.0 0.0 (0.4) -

Southwest Airlines Co 22,113.9 11.6 10.6 9.9 9.8 2.6 4.4 4.2 0.9 30.7 (4.4)

Air Arabia Pjsc 2,058.4 15.5 15.2 11.7 10.8 1.4 10.0 9.0 5.8 13.3 30.1

Ryanair Holdings Plc 17,894.7 16.1 18.0 16.3 13.7 3.5 9.7 7.9 0.2 23.1 (18.1)

Allegiant Travel Co 3,050.3 15.8 13.5 15.3 15.1 6.2 7.2 7.2 2.0 58.1 79.5

Norwegian Air Shuttle As 1,464.1 2.3 3.8 25.0 12.8 4.2 14.5 11.7 0.0 16.9 530.8

Aer Lingus Group Plc 1,432.6 5.0 5.4 16.3 14.3 1.8 4.8 4.2 2.5 13.7 (37.2)

Easyjet Plc 9,632.5 10.8 11.3 12.1 10.9 2.5 7.3 6.6 3.9 21.8 (19.4)

Jetblue Airways Corp 6,503.4 9.7 9.7 11.8 10.6 2.2 5.6 4.8 - 22.1 60.3

Gol Linhas Aereas Intel-Adr 671.1 (8.5) (2.4) - - - 12.2 9.4 0.5 89.4 -

Westjet Airlines Ltd 2,663.1 10.2 9.2 8.0 8.0 1.6 5.2 5.2 2.1 21.1 (9.5)

Spirit Airlines Inc 4,532.5 15.6 14.1 12.9 11.5 3.4 6.7 5.6 0.0 30.9 (48.3)

Average 7.4 8.4 13.7 11.4 2.4 8.7 6.9 1.5 21.1 69.8


Price as of 30 June closing

^RHB estimates

We remain confident that AirAsia will be able to recover the MYR2.7bn amount owed by its Indonesia and Philippine associates through their own internally-generated cash flows – even without equity funding – although this will require time

Maintain OVERWEIGHT recommendation. Our Malaysian aviation coverage are trading at attractively lower valuations vs comparable global peer and, as such, we do not see any downside from here as share prices seem fairly supported at current levels.

Table 25: Valuations of aviation stocks

Price Target Mkt

Cap

P/E

(x)

EPS GWTH

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec


MAHB 6.15 8.11 10,159 +>100 85.5 (81.7) +>100 1.3 8.2 0.4 0.1 B

AirAsia 1.54 2.89 4,282 6.4 5.3 145.7 19.5 0.8 4.8 13.7 4.5 B

AirAsia X 0.22 0.38 913 n.m. 5.9 88.5 n.a. 0.9 4.0 n.m 0.0 B

Sector Avg 26.4 14.3 +>100 84.6



Banking: Macro Conditions Cloud Outlook Neutral

A weak start to 2015

The recent 1Q15 reporting quarter was disappointing, with three out of the seven banking stocks that we cover booking numbers that were below our and consensus estimates, while the rest were within expectations. The reasons for the earnings disappointment generally varied and included sharper-than-expected net interest margin (NIM) contraction, weaker-than-expected non-interest income and higher-than-expected loan impairment allowances. Overall, 1Q15 sector net profit fell 3% QoQ and 8%YoY, with the QoQ decline in net profit due to a combination of weaker non-interest income and higher loan impairment allowances – while the YoY drop was due to higher overheads and loan impairment allowances. The weak numbers led to several banks toning down targets and expectations ahead, with weak macro conditions being the common cited reason for the more bearish tone.

Confluence of factors dampening underlying activities

During our recent round of meetings with the banks, we gathered that underlying activities in 2Q were, not surprisingly, soft. First, consumer spending is likely to have slowed down post the implementation of the GST, after consumers front-loaded their purchases to avoid paying the tax while some may have turned more cautious in spending due to the lower purchasing power. The moderating demand, in turn, has impacted industrial activities. Second, the volatility in the exchange rate is likely to have caused businesses to adopt a wait-and-see stance with respect to capex spending, among others. We expect the above to translate to system loan growth staying muted in 2Q15. We note that April’s system loan growth moderated to 8.8% YoY, vs +9.2% YoY in Mar 2015 (we project system loan growth of 8-9% for 2015 vs +9.3% YoY in 2014). Apart from that, we expect capital market activities to remain subdued. We understand from one of the banking groups with a significant investment banking franchise that, while the investment banking pipeline appears healthy, there has been a delay in deals getting mandated. All these suggest that the upcoming 2Q15 results are unlikely to be too exciting.

We expect the weakness in consumer spending to continue in the coming months. This, coupled with macro factors, is likely to cause businesses to adopt a wait-and-see stance that would likely weigh on manufacturing production. While a quick turnaround in consumer and business sentiment will bode well for the sector, at this stage, the banks were of a similar view that the timeline for a recovery remains cloudy at this juncture.

NIMs to stay under pressure

1Q15 sector NIM slipped 6bps QoQ (-16bps YoY) mainly due to pressure from the liability side of banks’ books cost stemming from a combination of: i) repricing of fixed deposits following Jul 2014’s overnight policy rate (OPR) hike; and ii) deposit competition to meet regulatory requirements (eg liquidity coverage ratio) and the need to build up liquidity. From a sectorial perspective, the loan-to-deposit ratio (LDR) as at end-1Q15 was marginally lower QoQ at 88.8% (end-2014: 89.1%) but up from 88.1% a year ago.

While the banks under our coverage said that they met the minimum liquidity coverage ratio (LCR) requirement of 60% (effective Jun 2015), nevertheless, we expect competition for deposits to remain keen as banks will need to adhere to more stringent LCR requirements ahead. This should keep pricing for retail deposits tight. At face value, banks with low LDR and a high proportion of retail deposits should be in a more comfortable position relative to minimum regulatory levels in terms of LCR. An example would be Hong Leong Bank (HL Bank) (HLBK MK, NEUTRAL, TP: MYR15.00), where its LDR and retail deposit mix stood at 80% and 51% as at end-Mar 2015. However, as competitive pressures drive up funding costs, we think even banks such as HL Bank will not be spared as it will need to pay up to defend its deposit market share, which, in turn, would impact its net interest margin (NIM) as well.

1Q15 sector net profit growth hampered by weak income growth and higher loan impairment allowances …

… while 2Q15 results are not likely to be too exciting as underlying activities have softened after the GST implementation and from macro uncertainties.

We expect 2015 sector NIM to remain under pressure due to regulatory requirements and the need to build up liquidity, among others



In mitigation, the softer loan growth expected for 2015 could help ease some pressure on deposit-gathering activities – but we believe some banks may take the opportunity to build up liquidity and lower their LDRs, which would also put downward pressure on NIMs.

Asset quality – Nothing systemic thus far

Sector absolute gross impaired loans in 1Q15 ticked up by 1% QoQ (+5% YoY). The sequential rise in absolute impaired loans came mainly from corporate-focused banks, although it appears that the issues were company/sector-specific, rather than due to a systemic deterioration in asset quality. On the other hand, retail-focused banks generally saw asset quality continue to improve. Overall, we expect sector credit cost to tick up in 2015 to 26bps vs 19bps in 2014, mainly on expectations of normalising recoveries. As at end-Mar 2015, aggregate loan loss coverage stood at 89.5%, down from 95.8% a year ago. From an asset quality standpoint, our preference is for retail-focused banks. Unemployment levels remain broadly stable while we note that impaired loan incidences in recent years have mainly centred around the corporate portfolio. Moreover, loan loss coverage levels for retail-focused banks are healthier, ie above the 100% mark, while coverage levels for corporate-focused banks range between 61% and 105%.

2015 net profit growth likely to rebound but ROE to remain subdued

Our 2015/2016/2017 sector net profit projections were revised down by 5%/3%/3% respectively post the 1Q15 reporting quarter. Consequently, we now project a milder rebound in 2015F sector net profit growth of +3% YoY (+11% YoY previously), underpinned by: i) net interest income growth of +6% YoY, amid loan growth of 8.6% YoY and 8bps NIM compression, ii) a +7% YoY rise in non-interest income, albeit from a low base effect. Our 2015 non-interest income/total income contribution projection of 28.8% still trails the high of 33.8% in 2007 and 30.6% posted in 2013, iii) stable cost-to-income ratio of around 48%, partly due to restructuring costs, and iv) sector credit cost of 26bps, up from 19bps in 2014 and the low of 16bps in 2012. 2015 sector EPS, however, is expected to remain flat due to dilution from 2014’s capital-raising exercises. Similarly, we expect 2015 sector ROE to be diluted further to 12% from 2014’s 13.2%, as sector leverage continues to trend lower due to Basel III capital requirements as well as lower ROAs (2015: 1.06% vs 2014: 1.13%).

Capital – 2H15 spotlight on the Banks

CET-1 ratios (fully-loaded) of most Malaysian banks are now above the 9% mark, ie higher than the minimum common equity plus capital conservation buffer requirement of 7% by 1 Jan 2019. The industry, however, is still awaiting further details regarding the countercyclical and systemically important buffers that BNM may require banks to hold. We expect HL Bank to reveal more details regarding its capital-raising plan in 2H15. We estimate that it may need to raise about MYR1.9bn-2.9bn in order to lift its CET-1 ratio (at the bank level) to 10-11% from the estimated fully-loaded CET-1 ratio of 8.1% as at Mar 2015. However, this would result in ROEs diluting to 11.7-12.9% vs our current FY16-17 ROE projections of 13.2-13.6%.

Sector Top Picks

Given the challenging macro environment, we like banks that offer strong and predictable book value growth to continue creating shareholder value. This would entail a combination of superior returns, sound earnings predictability (eg less reliant on markets-related income) and/or solid asset quality. Also, banks with relatively lower market risk should aid in insulating book value against adverse bond yield and foreign exchange rate movements. In our view, Public Bank (PBK MK, BUY, TP: MYR21.00) meets the criteria above and is our sole BUY call for the sector.

2015 credit cost expected to tick up to 26bps vs 19bps in 2014 on normalising recoveries

We expect a modest rebound in 2015 sector net profit growth but EPS is likely to stay flat due to capital-raising exercises

2H15 spotlight on HL Bank for details on capital-raising exercise

Public Bank is our sole BUY

Robust undertone for consumer

spending

MAA is forecasting higher sales

in Mar



Regulatory risks from potential

changes to the automotive duty

structure



Table 26: Valuations of banking stocks

Price Target Mkt

Cap

P/E

(x)

EPS Growth

(%)

P/BV

(x)

NDY

(%)

ROE

(%)

Rec

(MYR/s) (MYR/s) (MYR/s) FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16

Public Bank 18.72 21.00 72,116 15.1 13.9 1.0 8.2 2.3 2.1 3.0 3.3 16.3 16.1 B

Maybank 9.22 10.00 86,239 12.2 11.9 1.9 2.8 1.5 1.4 5.6 5.8 12.7 12.4 N

HLB 13.50 15.00 23,776 10.8 10.1 5.0 6.5 1.5 1.3 2.9 3.1 14.3 13.6 N

AFG^ 4.40 4.40 6,702 11.7 11.1 7.6 5.7 1.4 1.3 4.2 4.4 12.3 12.2 N

BIMB 4.08 4.30 6,292 12.2 11.1 (2.8) 9.4 2.0 1.9 4.1 4.5 16.9 17.3 N

Affin 2.73 2.70 5,304 10.6 8.3 (27.1) 27.6 0.6 0.6 3.8 4.8 6.2 7.5 N

CIMB 5.50 5.20 46,761 14.3 10.9 2.9 31.1 1.2 1.1 2.8 3.7 8.4 10.4 S

AMMB^ 6.06 5.70 18,216 10.9 10.2 (13.0) 7.4 1.2 1.1 4.1 4.3 11.2 11.3 S

Rhb Cap* 7.25 NR 18,651 9.1 8.6 0.8 6.3 1.0 0.9 2.8 2.4 10.4 10.4 NR

Sector Avg 12.9 11.5 (0.2) 10.1 1.5 1.4

* Not under our coverage. I/B/E/S estimates forecasts are used for companies not covered by RHB Research Institute.




Basic Materials: Looking Beyond Temporary Slowdown Neutral

Demand lacks fizz, but set to improve in 2016

Construction activities and demand for basic materials normally pick up pace after Lunar New Year, but typical seasonal pickup may be weaker than originally anticipated for this year. Meanwhile, civil works for some key infrastructure and property development projects are close to the tail-end of construction. Therefore, we only expect satisfactory growth in demand for basic materials in the coming months. That said, we remain hopeful as the Mass Rapid Transit’s (MRT) Line 2 (MRT2) and Light Rail Transit (LRT) Line 3 (LRT3) are proceeding as widely anticipated. Although the actual awarding of contracts in parcels may be some months away, this ought to keep sentiment towards construction and basic materials stocks positive. Apart from that, the Government has continued to reiterate its commitment to build more affordable houses.

“Steel” no excitement

The outlook for the sub-sectors – namely steel – is still largely dependent on macroeconomic factors in China, which is struggling for survival owing to excess and fragmented capacity across the country. In Malaysia, although the demand for long steel in particular has been encouraging, this was not been fully reflected in local steel mills’ recent financial results. This was due to the threat from rampant steel imports, in particular from China. Although the Chinese Government has cancelled its value added tax rebate for boron added steel from 1 Jan 2015, we heard it was fast being replaced by other metallic elements, which would continue to enjoy tax incentives. The situation was also made worse by the International Trade and Industry Ministry’s (MITI) termination of its investigation into the import of Chinese steel bars. Therefore, we expect prices of local steel bars and wire rods to remain distressed for some time.

Consolidation period for West Malaysia cement boys

We continue to like the cement segment as there is only one producer each in Sabah and Sarawak, while the West Malaysia market is dominated by an oligopoly. Meanwhile, the results of pure cement players in West Malaysia like Lafarge Malayan Cement (LMC MK, NEUTRAL, TP: MYR9.52) have picked up in 1Q15. We attribute this to construction activities that have picked up during the quarter ahead of the implementation of the good and services tax (GST) from Apr 2015, as well as better realised cement price during the period. Hence, the improved profit margins. That said, until new major infrastructure projects hit the ground running, we expect the selling price of cement to be under close check among rivals as we project a softer seasonal pickup moving into 2H15. YTL Cement has just commissioned its new production line, which also suggests a possible extension of price competition in the near future.

SCORE still a better play

We have been promoting basic materials players that are involved in niche products or businesses in Sarawak whose share prices have performed well thus far. Meanwhile, the availability of hydroelectric power at attractive tariff rates under the implementation of the Sarawak Corridor of Renewable Energy (SCORE) is still its main competitive edge. This, in particular, gives rise to a competitive business environment for power-hungry heavy industries like aluminium, ferrosilicon, manganese and other smelters. Already, this puts Press Metal’s (PRESS MK, BUY, TP: MYR3.21) aluminium smelters in Sarawak in the first quartile of the global production cost curve. The company is now expanding into its Phase 3 smelter in Samalaju. Initiatives rolled out at SCORE also benefit home-grown conglomerates like Cahya Mata Sarawak (CMS) (CMS MK, BUY, TP: MYR6.00). This conglomerate continues to be an excellent proxy to SCORE play via its direct and indirect business exposure to the special economic region. CMS, which is a key manufacturer cum trader of basic materials, also stands out as the State Election is just around the corner. This is given the historical trend for construction and maintenance works to normally pick up ahead of the polling.

While we expect a slowdown in basic material requirements in the next few months, the Government’s commitment to carry on with the MRT2 and LRT3 projects, as well as build more affordable homes, may see demand pick up again moving into 2016

As the excess capacity and threat from imports continue to dampen the steel industry’s outlook, we advise investors to continue avoiding this sub-segment

We expect the competitive business environment in West Malaysia’s cement space to be extended after taking into consideration the additional capacities that are entering the market, coupled with the possible slowdown in demand

We continue to like players whose operations are based in Sarawak, as they leverage on SCORE-related projects



Maintain NEUTRAL

Taking into consideration that the demand for basic materials are likely to slow down in the months to come, we have decided to keep our NEUTRAL rating on this sector. In the interim, until the demand for basic materials makes a comeback in 2016, we continue to prefer players that are directly and indirectly involved in SCORE.

Figure 43: Five growth nodes of SCORE Figure 44: Long steel consumption in Malaysia (‘000 tonne)

Source: Recoda, RHB Source: Malaysian Iron & Steel Industry Federation (MISIF), RHB

Figure 45: Cement consumption in Malaysia (‘000 tonne) Figure 46: New and pipeline cement capacity in Malaysia

0

5,000

10,000

15,000

20,000

25,000

2009 2010 2011 2012 2013 2014

West Malaysia Sarawak Sabah

No Company Clinker Grinding Status

1 Hume Cement (Phase 1) 1,500 2,000 Operational since 2013

2 Cement Industries of Malaysia1,500 1,800 Operational since 2014

3 YTL Cement 1,500 1,800 Operational since 2015

4 CMS Cement - 1,000 Commissioning expected in 2016

5 Lafarge Malaysia - Rawang - 300 Commissioning expected in Jul' 16

6 Lafarge Malaysia - Kathan - >900 Commissioning expected in Jul' 16

7 Hume Cement (Phase 2) 1,500 1,800 Commissioning expected in 2H16

Capacity (k-tpa)

Source: Various sources, RHB Source: Various sources, RHB

Table 27: Valuations of basic materials stocks

Price Target Mkt Cap P/E

(x)

EPS GWTH

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec


CMS 5.23 6.00 5,503 21.1 17.7 22.2 19.2 2.8 24.2 13.8 1.9 B

Press Metal 2.64 3.21 3,159 9.2 7.3 (20.2) 25.6 1.3 4.8 15.9 3.0 B

LMC 8.57 9.52 7,282 20.7 19.5 36.0 6.3 2.3 17.7 11.2 4.4 N

Ann Joo Resources 0.96 1.10 502 19.3 14.8 (24.1) 30.2 0.5 8.2 2.4 1.6 N

Pantech^ 0.66 0.79 376 7.7 6.3 11.8 22.3 0.8 8.6 10.1 6.1 N

Hiap Teck 0.42 0.40 297 n.m. 11.1 (100) +>100 0.3 n.m n.m. 0.0 N

Lion Industries 0.36 0.40 258 n.m. 9.1 ->100 n.a. 0.1 0.8 n.m 2.8 N

MSW 0.62 0.63 173 5.4 4.3 67.5 25.0 0.3 2.5 5.2 1.6 N

Sector Avg 18.4 13.0 1.8 38.3


We keep our rating for the basic materials sector at NEUTRAL in general, but players involved in SCORE are still BUYs



Construction: Sizeable 11MP Development Expenditure Overweight

Strong public infrastructure spending commitment in the 11MP

Development expenditure during the 11th Malaysia Plan (11MP) is projected at MYR260bn, which is up 16% vis-à-vis the estimated MYR223.6bn incurred during the 10

th Malaysia Plan (10MP). Meanwhile, real construction GDP is projected to grow at

a CAGR of 10.3% during the 11MP, which is broadly in line with the 11.1% achieved under the previous 5-year plan. Among the key recipients of development allocation are roads, rural water and electricity supplies, and public housing (see Table 28).

Table 28 : Key recipients of 11MP development expenditure

Sector Initiatives Potential beneficiaries

Roads 3,000km of paved roads will be constructed, with priority given to those connecting village to village and villages to the nearest towns. New roads will be constructed while existing roads (including ex-logging roads) will be upgraded to improve connectivity, particularly in Sabah and Sarawak as well as Orang Asli (indigenous people) settlements in West Malaysia.

Small and mid-sized contractors, particularly road specialists such as Protasco (PRTA MK, BUY, TP: MYR2.27).

Pan Borneo Highway (MYR27bn).

Contractors based in East Malaysia.

Rural water & electricity

Access to clean and treated water for 90,000 additional rural houses, boosting coverage to 99% of the population. Similarly, access to electricity for 36,800 additional rural houses, raising coverage to 99% of the population.

Small contractors and pipe makers.

Langat 2 water treatment plant Ahmad Zaki Resources (AZR MK, BUY, TP: MYR0.98), Salcon (SALC MK, NR) and MMC Corp (MMC MK, NR).

Public housing Various programmes for the poor, low- and middle-income households (including PR1MA and PPA1M), and second-generation FELDA and FELCRA settlers.

Property developers/contractors with experience in public housing projects such as Protasco, Gadang (GADG MK, NR), WCT (WCTHG MK, BUY, TP: MYR1.99), MCT (MCT MK, NR) and Mah Sing (MSGB MK, NEUTRAL, TP: MYR 2.18)

Source: 11MP, RHB

Going hand-in-hand with these development expenditure-funded projects is a long list of mega infrastructure, property and industrial works. These are largely financed by the national oil company, the national sovereign wealth fund, government-owned special purpose vehicles (SPVs), government-linked companies (GLCs) or the private sector. These include Iskandar Malaysia (MYR383bn), the Sarawak Corridor of Renewable Energy (SCORE) (MYR334bn), the Refinery and Petrochemical Integrated Development (RAPID) project (MYR89bn), the Klang Valley Mass Rapid Transit (MRT) (MYR80bn), the Kuala Lumpur-Singapore High-Speed Rail (MYR40bn), Penang Transport Master Plan (MYR27bn), the Light Rail Transit 3 (LRT3) (MYR9bn) and West Coast Expressway (WCE) (MYR5bn).

Urban public transport a key focus

Urban public transport is a key focus area under the 11MP, as 75% of the population in Malaysia will live in cities by 2020. The 11MP sets a 40% public transport modal share in the Klang Valley by 2020 from 17.1% in 2014. This is hardly a surprise to us as we hold the view that spending on MRT developments will be one of the key pillars of support for the construction sector in Malaysia over the next decade and beyond, particularly in the Klang Valley and Penang. Rail-based mass transit networks will eventually take over the existing land-based road networks as the backbone of the public transportation system in densely populated areas like the Klang Valley and Penang. This is as Malaysia marches towards developed nation status. Industry players are set for an exciting time ahead, with the almost concurrent implementation of MRT2, LRT3, Penang Transportation Master Plan and more bus rapid transit (BRT) projects (see Table 29).

Development expenditure up by 16% under 11MP

Also a long list of SPV-funded mega projects

Rail-based mass transit networks to eventually replace existing land-based road networks



We maintain our OVERWEIGHT stance on the construction sector

Our bullish stance on the construction sector is reaffirmed by the Government’s commitment towards public infrastructure spending under the 11MP. In terms of stock picks, we prefer IJM Corp (IJM MK, BUY, TP: MYR7.84) over Gamuda (GAM MK, NEUTRAL, TP: MYR5.35) as our large-cap pick. This is because IJM Corp: i) offers a greater upside vs Gamuda based on our TPs, ii) is less vulnerable to policy risk (deferment of public projects on the continued slump in oil & gas prices) as more than half of its outstanding orderbook is made up of in-house jobs (WCE and Kuantan Port expansion) vs Gamuda that relies solely on a single public project (eg Klang Valley MRT project), and iii) IJM Corp has virtually zero risk of a cash call – we cannot rule out this possibility for Gamuda, given that it may be entering into a new “investment phase” if it wins the MYR27bn Penang Transport Master Plan project.

In the small-cap space, we believe Kimlun Corp (KICB MK, BUY, TP: MYR1.65) is a “must-own” stock along the value chain of the MYR73bn Klang Valley MRT project. As in the case of MRT1, we expect Kimlun Corp to supply at least half of MRT2’s requirements for segmental box girders (SBGs) and tunnelling lining segments (TLS). This is because it is one of only two established suppliers of MRT segments in Malaysia. The other player is privately-held Eastern Pretech (M) SB). To recap, for MRT1, Kimlun Corp secured two concrete products contracts, ie TLS (MYR48.5m) and SBG (MYR223.2m). Both were fully delivered in early 2015.

The prospects for the piling segment are strong, backed by: i) the MRT2 and LRT3 projects, and ii) a proliferation of high-rise developments amid rising land scarcity in prime locations that require extension piling. Pintaras Jaya’s (PINT MK, BUY, TP: MYR4.60) key strengths are: i) its full range of piling machines, tools and accessories; ii) its ability to improvise piling solutions to diverse ground conditions given its experience spanning more than two-and-a-half decades in the local piling sector; and iii) its ability to secure cash discounts for key inputs, given its strong balance sheet.

Table 29 : MRT developments in the pipeline

Project Briefing description Status and potential beneficiaries

MRT2 (MYR28bn)

A 52km radial mass rapid transit line linking Sungai Buloh in the north-west of the Klang Valley to Putrajaya in the south via Serdang, with 36 stations.

The project delivery partner (PDP) for the MYR18bn elevated portion of the project, the MMC-Gamuda joint-venture (JV) last guided for: i) tender calling by 4Q15 and, ii) award of contracts by mid-2016. For the MYR10bn underground (tunnelling) portion, it will be awarded on a Swiss challenge basis, as per MRT1, ie via an international tender with the sole local bidder – the MMC-Gamuda JV – being given “the first right of refusal at the lowest bid plus a 2.5% to 7.5% margin”.

LRT3 (MYR9bn)

A 36km spur light rail transit line linking Bandar Utama to Klang via Shah Alam, with 26 stations.

Prasarana in Mar 2015 shortlisted six bidders for the PDP role of the project, comprising Naza-CSR, the MMC-Gamuda JV, Malaysian Resource Corp (MRC MK, NEUTRAL, TP: MYR1.31)-George Kent (M) (GKEN MK, NR), UEM Group, Sunway (SWB MK, BUY, TP: MYR4.10) and WCT-AlloyMTD. A decision from Prasarana is pending.

Penang Transport Master Plan (MYR27bn)

A blueprint spanning from 2014 to 2030 by the Penang State Government to improve the highway network and develop an integrated public transport system that combines buses, trams, LRT and water taxis on Penang Island and Seberang Prai.

The Penang State Government received six proposals for the PDP role of the master plan at the close of the bid in February. Thus far, Gamuda and WCT have confirmed with us that they have submitted a bid while the identities of the remaining four bidders are unknown. The state has appointed consultancy firm KPMG to evaluate the bids and is expected to announce the winner soon. We believe that one of the larger components of the plan that will be the first to hit the ground running is the 17.5km LRT line connecting Komtar in the heart of George Town to the Penang International Airport (MYR4.5bn).

BRT High capacity and increased frequency bus services operating on a dedicated (and elevated) alignment or a partial segregated alignment (as part of the highway).

The first BRT in Malaysia, the BRT Sunway Line – operating on a dedicated and elevated 5.4km alignment with seven stations – has been operational since Jun 2015. The Land Public Transport Commission (SPAD) has identified another 11 BRT corridors for future development, with the priority being given to the Kuala Lumpur-Klang and Kuala Lumpur-Taman Melawati corridors “to be assessed for detailed design”.

Source: RHB, SPAD, Media reports

Our Top Picks are IJM Corp, Kimlun Corp and Pintaras Jaya



Table 30: Valuations of construction stocks


(x)

EPS GWTH

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY (%)

Rec


IJM^ 6.70 7.84 10,986 15.8 15.3 33.2 3.7 1.1 9.6 7.3 1.8 B

WCT 1.45 1.99 1,580 11.4 11.2 49.6 2.1 0.7 13.6 6.1 1.5 B

Pintaras 3.82 4.60 639 12.3 12.5 (6.2) (1.6) 1.8 13.4 15.7 3.9 B

Protasco 1.86 2.27 624 9.5 8.3 18.4 13.7 1.8 6.4 19.7 6.5 B

Naim 2.35 3.63 588 7.2 6.5 (16.9) 11.2 0.4 14.4 6.3 1.5 B

Kimlun 1.33 1.65 400 7.3 7.2 38.8 2.1 0.9 4.8 13.0 2.9 B

HO Hup 1.23 2.29 383 5.4 4.3 7.0 28.0 2.0 4.4 44.6 0.0 B

Ahmad Zaki 0.67 0.98 324 12.5 9.3 +>100 34.8 0.9 8.0 7.7 1.5 B

OKA^ 0.86 1.15 133 8.3 7.6 (0.2) 8.7 1.0 7.6 12.3 5.2 B

Gamuda 4.70 5.26 11,117 15.8 18.6 (4.2) (14.8) 1.8 26.0 12.1 2.6 N

HSL 1.86 1.95 1,035 12.4 11.4 8.2 8.8 1.6 11.1 13.2 1.6 N

Sector Avg 14.0 13.6 13.3 0.3




Consumer: Prospects Mainly Supported By F&B Neutral

Cautious outlook post-GST

The Malaysian Institute of Economic Research’s (MIER) consumer sentiment index (CSI) fell to 72.6 points in 1Q15, almost the same level seen during the economic crisis in 2008. This was due to the anticipation of higher cost of living resulting from the implementation of the goods and services tax (GST) in Apr 2015. With the weaker consumer sentiment, we continue to foresee a more moderate increase in consumer spending in 2015, with RHB economists projecting consumption spending to grow at a slower pace of 5.2% in 2015 (from +7.1% in 2014), reflecting a more cautious tone among consumers. However, we believe that consumer spending will unlikely fall off the cliff and the dampening effect of the GST will likely be short-lived, supported by stable employment conditions, high savings, as well as sustained wage growth in Malaysia. Consumer spending will also be cushioned by the higher amount of cash assistance via 1Malaysia People’s Aid (BR1M) and the reduced individual tax burden by 1-3ppts.

Food and beverage (F&B) performance should be better

Despite consumers’ careful spending, we believe demand for food and basic necessities would remain stable. We are of the view that there would be minimal GST impact on F&B operators like restaurants, as their selling prices will not be significantly affected by the new tax, given that they had been charging a 6% government sales tax prior to GST implementation. Thus, there should be little need for F&B players to raise prices post-GST, and this should lessen the impact on their sales. In view of that, we remain positive on Berjaya Food (BFD MK, BUY, TP: MYR3.90) as we think that its Starbucks’ same-store sales growth (SSSG) should be sustainable due to strong customer loyalty and premium branding coupled with attractive promotions. We believe the expansion of its Starbucks business should continue to drive the company’s growth.

Also, we continue to like 7-Eleven Malaysia (SEM MK, BUY, TP: MYR1.98) as we remain upbeat on its aggressive store expansion plans, which we believe could drive its revenue and earnings moving forward. The slower consumer spending also should not have a large impact on its sales as it sells mostly small and inexpensive items. For basic food players, we like MSM Malaysia (MSM MK, BUY, TP: MYR6.10) as we foresee potential margin expansion due to low raw sugar prices currently.

Retailers may see further margin compression

We remain cautious on the retail sub-sector, with the weakening consumer sentiment posing a greater challenge to retail spending in 2015. We expect to see some margin compression for retailers like Padini Holdings (PAD MK, NEUTRAL, TP: MYR1.26) and AEON (AEON MK, NEUTRAL, TP: MYR3.09) in the next few months, as these retailers may have to continue incurring higher marketing expenses and offering discounts to stimulate sales. Some players are absorbing the 6% GST in the near term to remain competitive, and this could exert pressure on retailers’ margins moving forward. However, we believe the GST impact on consumer spending will likely be temporary, and spending will gradually return to normal in 6-9 months when consumers become more accustomed to the GST.

Neutral on sin stock

We are turning cautious on the outlook for sin stocks under our coverage. For the brewery sub-sector, we foresee a tough operating environment as a slowdown in consumer spending could dampen sales volume growth and affect future earnings. However, we believe that as consumer spending recovers gradually, beer consumption should also recover as well. That said, we are NEUTRAL on Guinness Anchor (GUIN MK, TP: MYR14.10) and Carlsberg (CAB MK, TP: MYR13.80), due to their rich valuations currently.

For the tobacco sub-sector, we expect competition to remain stiff among tobacco players as the operating environment becomes more challenging. Declining sales volume, stricter regulations on cigarette consumption, fairly high levels of contraband cigarettes coupled with frequent excise duty hikes could pose further downside risks to the tobacco sector. We remain NEUTRAL on British American Tobacco (ROTH MK, TP: MYR62.50) given its relatively decent yields of ~5%.

RHB economists project consumption spending to grow at a slower pace (+5.2% YoY) in 2015

Berjaya Food remain as our Top Pick for the sector

Retailers may have to continue incurring high marketing expenses, which could impact their margins

A slowdown in consumer spending could weigh on brewers’ sales volume

Challenging operating environment for tobacco players will likely continue to persist



Figure 47: Malaysia consumer sentiment index

100 indicates neutrality, >100 indicates expected improvement in conditions,<100 indicates lack of confidence

Source: Malaysia Institute of Economic Research (MIER)

Figure 48: Malaysia retail industry's annual growth rate (%)

Source: Retail Group Malaysia (RGM)

Maintain NEUTRAL.

We maintain NEUTRAL on the consumer sector, for which prospects would be mainly supported by the F&B sub-sector, given the more resilient demand for F&B products. We continue to like Berjaya Food and 7-Eleven Malaysia, given their earnings resilience and growth potential from aggressive expansion plans. Meanwhile, we maintain our cautious stance on retail, brewery and tobacco sub-sectors, which rely on the recovery in consumer spending post-GST implementation. Nonetheless, we believe that consumer stocks will continue to garner interest from investors seeking defensive quality and stable dividend yields, despite stretched valuations.



Table 31: Valuations of consumer stocks

Price Target Mkt Cap P/E EPS GWTH P/BV P/CF ROE NDY Rec

(x) (%) (x) (x) (%) (%)

(MYR/s) (MYR/s) (MYR/m) FY15 FY16 FY15 FY16 FY15 FY15 FY15 FY15

MSM 5.15 6.10 3,620 13.4 12.7 3.1 6.1 1.8 7.8 13.5 4.5 B

7-Eleven 1.70 1.98 2,097 27.1 21.5 22.9 26.0 8.4 0.8 32.0 2.2 B

Berjaya Food^ 2.57 3.90 979 18.6 14.2 74.9 30.4 2.4 3.8 13.1 2.7 B

Evergreen 1.41 1.50 723 14.1 10.5 +>100 34.9 0.8 6.0 6.0 0.0 B

IQ Group^ 2.58 3.20 225 9.7 8.8 9.1 10.5 1.7 8.7 17.1 3.5 B

BAT 60.50 63.10 17,275 17.8 17.8 7.5 0.3 31.8 16.7 181.7 5.5 N

Nestle 72.00 68.59 16,884 28.5 26.7 7.6 6.7 21.6 21.3 75.9 3.5 N

QL Resources^ 3.99 4.14 4,980 23.2 20.6 17.6 12.7 3.1 1.1 14.2 1.2 N

AEON 3.17 3.09 4,451 20.9 18.1 0.7 15.3 2.2 0.6 11.2 1.9 N

GAB 14.40 14.10 4,350 18.9 18.7 15.9 1.4 11.5 16.2 62.6 4.8 N

Carlsberg 12.46 13.80 3,839 18.0 16.8 1.0 7.0 12.3 16.1 68.5 5.6 N

Padini 1.36 1.26 919 13.0 11.9 (22.0) 8.6 2.3 1.2 18.2 7.4 N

NTPM^ 0.70 0.75 786 14.7 11.9 36.9 23.7 2.0 0.9 14.3 3.1 N

OldTown^ 1.61 1.66 717 14.5 13.7 5.0 5.7 1.9 2.1 13.9 3.8 N

Parkson 1.61 1.70 1,761 18.4 15.6 (31.3) 18.0 0.7 3.2 3.7 7.3 S

Sector Avg 20.0 18.7 6.6 7.3




Gaming: Lacking Excitement For Now Neutral

Mixed 1Q15 on poor Singapore’s performance

1Q15 earnings of two out of the five gaming companies under our coverage fell below expectations. Notably, Genting Singapore (GENS SP, NEUTRAL, TP: SGD1.03) reported another weak quarter as 1Q15 VIP rolling volume declined 48% YoY while bad debt provisions surged 29.9% YoY to SGD76.3m. By the same token, Genting Bhd’s (GENT MK, NEUTRAL, TP: MYR9.30) 1Q15 numbers disappointed, dragged down further by its plantation division due to poor production resulting from the dry weather in Sabah. On the other hand, Genting Malaysia’s (GENM MK, NEUTRAL, TP: MYR4.23) 1Q15 core earnings of MYR349.8m were within expectations. In the number forecast operator (NFO) space, both Magnum (MAG MK, NEUTRAL, TP: MYR2.74) and Berjaya Sports Toto (BJ Toto)’s (BST MK, NEUTRAL, TP: MYR3.48) 1Q15 numbers were within expectations. Dividend offerings continue to be generous as both NFOs announced interim DPS of 5.0 sen, which translates into a payout ratio of over 78% for the quarter for the former. The latter’s FY15 (Apr) DPS of 21.5 sen, at an appealing yield of 6.6% pa, implies a payout ratio of 84.5%.

GST impact to kick in come 2Q15

That said, we caution that the upcoming 2Q15 earnings release by end-Aug 2015 could potentially spring some negative surprises as we foresee potential earnings pressure due to the implementation of the goods and services tax (GST) in Apr 2015 (which all gaming operators have to fully absorb), as well as a temporary blip in gambling interest amid the rising inflationary pressure and higher living cost. For instance, we expect Magnum’s 2Q15 ticket sales to fall 9-14% YoY as punters are now spending less on draws based on our computation of its April-June draws.

Weakness in gaming segment likely to persist

1Q15 visitor arrivals to Genting Highlands grew 4.0% YoY as rolling volumes in both its VIP and mass market segments expanded by low single-digits. The remaining 800 rooms of its Tower 2A remain on track to open for bookings by mid-2015. Construction of its MYR5bn Genting Integrated Tourism Plan is currently ongoing, with its retail podium targeted to open by 2H16 while the outdoor theme park could be ready by end-2016. We expect visitation interest to remain subdued over the next 6-12 months until the official opening of its new facilities, which we deem crucial to rejuvenate the hilltop resorts’ appeal as a family-friendly gaming destination. On a side note, the group will convene an EGM on 2 Jul to vote for the proposed disposal of its 17.8% stake in Genting Hong Kong (678 HK, NR). Assuming full disposal at USD0.33 per share, we expect the exercise to raise net proceeds of approximately MYR1.65bn to further contribute to Genting Malaysia’s existing net cash coffer of MYR1.12bn as of Mar 2015. We continue to advise minorities to vote for the proposal to unlock the value of its passive investment in Genting Hong Kong.

Across the Johor-Singapore Causeway, Resorts World Sentosa’s 1Q15 VIP rolling volume declined by 48% YoY and 15% QoQ, dragged down by China’s ongoing crackdown on corruption. As such, we reiterate our cautious medium-term outlook on potential further weakness in its premium segment due to lower volume from regional customers as well as further difficulty in receivables recovery. Although we are glad to see some positive progress on its proposed Resorts World Jeju now that the local authority has approved the casino ordinance, we believe earnings accretion is unlikely to be significant give the country’s prohibitive stance on barring locals from entering all but one local casino. By the same token, we maintain our cautious stance on Genting Bhd.

For the NFOs, we continue to see both Magnum and BJ Toto as appealing dividend plays given their decent annual dividend yields of >6%. Industry growth, however, is unlikely to be exciting in the foreseeable future at annual growth of low single digits due to the proliferation of illegal operators.

Reaffirm NEUTRAL stance

All in, we maintain our NEUTRAL stance on the sector as a lack of re-rating catalysts in the near term, coupled with a likely subdued 2Q15 reporting season come August, warrants our cautious stance as we move into 2H15. Among our neutral picks, we like Genting Malaysia the most given its relatively more resilient earnings.

Another mixed quarter

2Q15 marks the incorporation of the GST in earnings

Visitation to Genting Highlands remains weak

Genting Singapore’s VIP segment is likely to face further headwinds



.Figure 49: NFO-related taxes

0%

3%

6%

9%

0%

2%

4%

6%

8%

10%

12%

Poolbetting duty (LHS) GST (LHS) NFO gaming tax (RHS)

Source: RHB

.Figure 50: Regional casino-related taxes

39%

25%

5% 5%

39%

25%

15% 15%

0%

6% 7%

0%0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Macau Malaysia Singapore Philippines

VIP Mass market GST

Source: RHB

Table 32: Valuations of gaming stocks


(x) (%) (x) (x) (%) (%)


Genting 8.13 9.30 30,421 16.0 14.0 16.1 14.4 1.1 5.0 6.9 0.6 N

Genting M'sia 4.18 4.23 24,821 16.9 15.6 8.0 8.5 1.4 11.1 8.7 1.4 N

B-Toto^ 3.23 3.48 4,364 13.5 13.1 (5.6) 2.8 6.0 11.2 45.6 6.3 N

Magnum 2.65 2.74 3,810 14.5 14.5 (1.5) 0.2 1.5 16.8 10.6 6.2 N

Sector Avg 16.0 14.5 9.7 10.3




Healthcare: Resilient Growth Overweight

Robust demand for quality private healthcare

We remain OVERWEIGHT on the sector going into 2H15 on the back of our positive outlook for the hospital operators, ie IHH Healthcare (IHH) (IHH MK, BUY, TP: MYR7.00) and KPJ Healthcare (KPJ) (KPJ MK, BUY, TP: MYR5.10).

We expect demand for quality private healthcare to remain robust despite the challenging economic backdrop. This is due to the growing adoption of healthcare insurance and/or availability of universal healthcare system which provides some much needed buffer against price inflation.

Furthermore, the exposure to countries with affluent aging populations underpins the strong demand for quality premium healthcare services, which is also compounded by the high likelihood of more complex cases.

IHH and KPJ both posted strong 1Q15 earnings, with the main drivers being cited as: i) higher inpatient admission, and ii) increased revenue intensity resulting from price increments and more complex cases attended. We expect the earnings growth momentum for IHH and KPJ to sustain in 2H15, with both companies being on track to achieve another record year.

Paving the way for a promising 2H15

There are several new hospital openings in 2H15 within the hospital networks of both IHH and KPJ. Naturally, a brownfield project would see an almost instantaneous accretion to earnings as opposed to a greenfield one due to the lower overhead costs incurred and better operating leveraging achieved from the expansion.

Spurred by Mount Elizabeth Novena’s (Novena) performance in 1Q15 (it turned profitable in this quarter), IHH has guided for the addition of another 30 beds in 3Q15. This is in tandem with the opening of an Oncology Centre of Excellence there. With the new beds, Novena’s total operational beds in 2H15 ought to increase to 189 out of the 333-bed planned capacity.

Other new hospital openings for IHH in 2H15 are:

Gleneagles Medini. A greenfield project which marks IHH’s expansion into the

Southern Johor territory with 150 beds initially which are expected to be opened in stages. While sales of the medical suites are underway, sales proceeds would not be recognised until the medical suite blocks are completed in FY16.

Gleneagles Kuala Lumpur. A brownfield project which would see capacity

expansion of the existing hospital with the addition of another 100 beds – boosting the hospital’s capacity to over 400 beds. This should see improved operating leverage and structural earnings growth from IHH’s Malaysia operations.

Acibadem Bodrum. Opened since 2012, the hospital is already into its second

expansion phase, which would boost capacity to over 100 beds from the current 70 to cater to growing demand. Similar to the Gleneagles Kuala Lumpur expansion, we expect a structural earnings growth from the capacity expansion.

Acibadem Taksim. The 120-bed capacity hospital was expected to have been

completed sometime in 1H15 and due for commencement of operations in 2H15. Despite being a “new” hospital, Acibadem Taksim is deemed as a brownfield project as it is a rebuilding of an old hospital that was acquired by IHH’s Turkish subsidiary.

Given the low population density in the Iskandar Malaysia development area at this juncture, management indicated that the immediate target market for Gleneagles Medini would be patients living in East Jurong, which are not served by IHH’s existing Singapore operations. The hospital has a capacity of 300 beds.

IHH made its maiden foray into East Malaysia in 2Q15 with the opening of Gleneagles Kota Kinabalu Hospital, a 250-bed capacity hospital. The new facility is expected to benefit from the pent up demand for quality premium healthcare there.

Meanwhile, KPJ is likely to miss its annual target of two new hospital openings this year while some of its major openings in the pipeline are delayed indefinitely. We are not too concerned, as this is a much needed reprieve to its cash flow. At end Mar 2015, KPJ’s net gearing was already at 71%.

Hospital operators are on track for another record year, driven by increasing insurance adoption, price increases and more complex cases

New hospitals and additional bed capacities underway in 2H15

KPJ to miss its two hospitals per year target in FY15 while major openings in the pipeline are delayed, which is good for its cash flow



The sole new opening in 2H15 would be the KPJ Pahang Specialist Hospital, which is also a relocation of the existing KPJ Kuantan Hospital. The Perlis Specialist Hospital is currently delayed, with its opening slated for FY16.

KPJ also has several capacity expansions in the pipeline, some of which are due for completion in 2H15, namely: i) the addition of 80 new beds at KPJ Seremban Hospital, and ii) 54 new clinics at the KPJ Selangor Hospital.

Meanwhile, KPJ’s overseas operations also fared well in 1Q15, with its Indonesia operations remaining profitable while losses from its Australia division narrowed. Management expects the performance of its Australian operations to continue improving, following the capacity expansion that saw the addition of 72 beds for the nursing segment in Jun 2015. This ought to boost the unit’s performance in 2H15.

Depressed MYR is a positive

IHH is also poised to benefit from the less-than-favourable outlook of the MYR, as this would boost its Singapore-derived earnings, thus, mitigating the earnings dilution from its Turkish operations following the collapse of the TRY. We estimate that every 1% change in the MYR/SGD exchange rate impacts IHH’s earnings by 0.7%. We currently assume an exchange rate of MYR2.75/SGD, which is slightly ahead of the YTD average of MYR2.69/SGD.

In our view, the weak MYR could also see Indonesian patients as well as Singapore-based patients seeking treatments in Malaysia. The latter can utilise the MediSave at IHH hospitals, possibly expediting the gestation period of Gleneagles Medini.

Figure 51: MYR/SGD spot rate

2.10

2.20

2.30

2.40

2.50

2.60

2.70

2.80

2.90

Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15

MYR

Source: Bloomberg

Maintain OVERWEIGHT

YTD, the healthcare sector has gained 20.8%, outperforming the FBMKLCI by 23.2%. The best performer was Hovid (HOV MK, TP: MYR0.48), which is up 47.6% YTD. This is followed by UEM Edgenta (UEME MK, TP: MYR3.44), IHH and KPJ. The only laggard has been Caring Pharmacy (Caring) (CARING MK, TP: MYR1.10), which has seen its share price retrace by 10.9% YTD. The share price weakness reflects the poor 1Q15 earnings, which were impacted by weak consumer sentiment and hefty upfront costs arising from its aggressive expansion plans.

We upgraded IHH and KPJ to BUYs (from Neutral) after reassessing our views on the two stocks. While these two companies trade at premiums to the broader market, we believe this is warranted given the resilient growth, underpinned by new hospital openings and bed additions at existing hospitals, as a result of strong demand.

Our NEUTRAL calls on Hovid, UEM Edgenta, and Caring are mainly due to the lack of catalysts that these stocks provide vis-à-vis the rich valuations that are being reflected at current share price levels.

IHH to benefit most from MYR’s depreciation, while we believe arrivals of Indonesian and Singaporean patients could increase

Maintain OVERWEIGHT with IHH and KPJ as our sector Top Picks



Table 33: Valuations of healthcare stocks

Price Target Mkt

Cap

P/E

(x)

EPS GWTH

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec

(RM/s) (RM/s) (RMm) FY15 FY16 FY15 FY16 FY15 FY15 FY15 FY15

IHH Healthcare 5.67 7.00 46,372 46.4 38.0 37.5 21.9 2.3 22.8 5.0 0.5 B

KPJ Health 4.26 5.10 4,466 29.8 26.0 15.4 14.4 3.2 17.7 11.3 1.7 B

Esthetics^ 0.96 1.32 177 10.2 9.6 7.3 6.8 1.2 7.5 12.0 4.2 B

CARiNG^ 1.06 1.10 231 12.8 11.8 53.1 8.2 1.6 4.8 13.1 0.0 N

Faber 3.45 3.44 2,807 15.3 13.7 (9.2) 11.7 2.5 7.0 16.0 3.3 N

Hovid 0.50 0.45 384 18.8 14.9 12.4 26.1 1.8 38.6 11.0 0.0 N

Apex Healthcare 4.17 3.75 440 11.9 12.6 (2.9) (5.4) 1.5 12.4 13.0 2.4 N

Sector Avg 38.5 32.3 25.1 18.9




Logistics: E-Commerce Trends Picking Up Overweight

Despite improvements, results missed our high expectations

All four companies under our coverage missed our earnings expectations, for which those of TASCO (TASCO MK, BUY, TP: MYR4.76) and GD Express Carrier (GDEX) (GDX MK, BUY, TP: MYR1.98) had earlier been raised. While earnings were higher YoY for most, there were not within our expectations. That was attributed to higher-than-expected costs incurred, notably on staffing, as the sector is generally in an expansion mode. The industry’s capex expansion was related to warehousing and fleets. The former was due to the strong demand for warehousing space in a bid to secure jobs while growth in the latter was attributed to the strong expansion in the courier segment, which is riding on the rising e-commerce trend for online shopping.

Courier providers to see exciting times ahead on e-commerce theme

Courier players such as GDEX and Pos Malaysia’s (POSM MK, BUY, TP: MYR5.44) Pos Laju promises growth in the logistics sector. The rise in the online retail shopping segment – from both the business-to-consumer (B2C) and customer-to-consumers (C2C) businesses – has been the driving force of the burgeoning courier delivery industry. While there is no valid data on how much these online retail sales contribute to total deliveries, according to GDEX, household goods represent as much as 40% of their total deliveries. With Malaysia seeing only 0.9% of its retail sales transacted online as of 2014, and as more middle-income households are created – coupled with the improved smartphone penetration rate – we think the country is well positioned to post further growth in the online retail sales segment to potentially position itself at the level where Singapore is currently. The city state is currently seeing almost 3.4% of its total retail sales transacted online. This essentially means that Malaysia’s online retail shopping segment could more than triple if it accounts for at least 3% of the total retail online shopping market.

Figure 52: ASEAN internet retailing as a % of total retail sales Figure 53: Potential online retail market sizes in ASEAN*

Title:

Source:


3.4

0.9

1.2

0.7

0.50.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Singapore Malaysia Thailand Indonesia Philippines Vietnam

%

Title:

Source:


1,267

2,730

4,501

7,524

3,481

4,153

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Singapore Malaysia Thailand Indonesia Philippines Vietnam

USD m

Source: Euromonitor 2014 Note: *Assuming online retail hits 5% of current total retail sales

Source: Euromonitor 2014

Moving to the online concept could propel growth

Another driving force that could propel the growth of the courier industry is if the traditional brick and mortar retail outlets start to expand their distribution channels online. This should build up the need to outsource delivery services to courier providers. We opine that this is a more feasible avenue for the traditional outlets, given the massive capex outlay and costs required to set up an in-house fleet of delivery trucks. Research by eCommerceMILO revealed that only 16, or 44% of the top 36 retail brands, have set up their own online shopping portals. Additionally, the implementation of the goods and services tax (GST), although negative for consumer spending, could actually encourage thrifty consumers to switch to online shopping, in our view.

Earnings for most disappointed in the 1Q15

The rise in the online retail shopping segment – from both the business-to-consumer (B2C) and customer-to-consumers (C2C) businesses – has been the driving force of the burgeoning courier delivery industry

Benefiting on the expansion into online platform from the traditional brick and mortar concept



Figure 54: 2010 market share of the top 10 courier players (by revenue)

Figure 55: Quarterly revenue (MYRm) of the three listed courier companies

Title:

Source:

Please fill in the values above to have them entered in your report23%

24%

15%

12%

7%

6%

5%

4%

2% 2%

DHL Fedex UPS Pos Laju TNT

City Link GD Express Nationwide Skynet ABX

Title:

Source:


0

20

40

60

80

100

120

140

1Q

00

4Q

00

3Q

01

2Q

02

1Q

03

4Q

03

3Q

04

2Q

05

1Q

06

4Q

06

3Q

07

2Q

08

1Q

09

4Q

09

3Q

10

2Q

11

1Q

12

4Q

12

3Q

13

2Q

14

Nationwide GD Express Pos Laju

Source: Malaysian Communications and Multimedia Commission (MCMC) Source: RHB, Companies data

Earnings growth in expansion drive likely despite challenging outlook

While the moderating economic landscape poses challenges for export-import trade oriented logistics players such as TASCO and Freight Management (FMH MK, BUY, TP: MYR1.87), we do not expect earnings growth across the board. This is on the expansion plans in areas like warehouses and trucking fleets in new territories. For instance, TASCO is banking on the Iskandar Malaysia growth story by opening a sizeable warehouse there while Freight Management is looking to expand its trucking fleet in the Penang area, where demand remains strong. On the postal and courier express play, GDEX and Pos Malaysia are aggressively growing their courier fleet. The former has plans to further boost its parcel sorting capacity, which has been the bottleneck for the company to grow at a much faster pace.

OVERWEIGHT maintained

We maintain our OVERWEIGHT stance on the logistics sector, maintaining GDEX as our Top Pick followed by Pos Malaysia. That said, both remain our preferred picks in the logistics play, given the growth potential in the courier industry ahead. While 40% of GDEX’s volume comprises household products, only 10% of its total volume handled is from B2C customers like Lazada, Zalora and Go Shop, Astro’s home TV shopping arm. As online retail continues to grow, we believe GDEX is poised to be on a growing earnings trajectory ahead. Astro Malaysia (ASTRO MK, NEUTRAL, TP: MYR3.28), which kicked off Go Shop in Nov 2014, is becoming one of GDEX’s fastest-growing customers and could become a Top 5 client if its home-shopping business does well going forward.

Most companies in our coverage are embarking on expansion plans

OVERWEIGHT stance maintained with GDEX as our top pick followed by Pos Malaysia

Table 34: Valuations of logistics stocks


(x)

EPS GWTH

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec


Pos M'sia^ 4.27 5.44 2,293 14.1 12.5 4.5 13.2 2.0 9.1 14.4 3.2 B

GD Express 1.40 1.98 1,742 64.7 47.1 (23.9) 37.4 13.9 58.3 24.1 0.5 B

TASCO 4.00 4.76 400 10.9 9.5 19.1 15.2 1.2 7.4 11.7 0.3 B

Freight 1.49 1.87 264 12.2 10.4 (5.9) 17.3 1.5 20.1 12.4 3.0 B

Sector Avg 19.0 16.3 3.7 (7.8)




Media: Cautious Outlook Neutral

Mixed 1Q15

The media sector reported mixed 2Q15 results with subscription-based media companies outperforming their advertising expenditure (adex)-dependent counterparts. Astro’s (ASTRO MK, NEUTRAL, TP: MYR3.28) 1QFY16 (Jan) results were better than expected on the back of stronger revenue growth as well as lower installation, depreciation and distribution costs. Revenue and EBITDA climbed 6.1% and 7.1% YoY. However, Media Prima’s (MPR MK, SELL, TP: MYR1.40) 1Q15 results missed expectations, making up just 11.4% of our full-year earnings estimate, as the subdued adex market weighed on earnings. Media Prima recorded earnings contractions in major business segments such as free-to-air (FTA) TV (-56% YoY) and print media (-41% YoY).

Malaysia’s total gross adex grew by 6.2% YoY in 1Q15. Nevertheless, upon closer inspection, with the exception of pay-TV, in-store media and radio, all other media channels registered gross adex declines for the quarter (see Figure 56). Pay-TV chartered the strongest growth of 26.3% YoY, while FTA TV and newspaper adex contracted 5.7% and 6.6% YoY respectively. Excluding pay-TV contribution, total gross adex would have contracted by 5.3% YoY. Note that the numbers compiled by Nielsen are on a gross basis and do not reflect the real net revenue received after discounts.

Expect tough operating environment

Media Prima reported that 1Q15 adex revenue contracted 6.5% YoY as expectations of advertisers rushing to target consumers before the implementation of the goods and services tax (GST) did not materialise. Subsequently, Media Prima lowered its adex growth guidance to a flattish FY15 (from mid-single digit growth). We also note that the discount factor in its FTA TV segment was higher YoY (72% in 1Q15 vs 71% in 1Q14). The company also revealed that print circulation volume contracted by 11% YoY. While Astro reported a stronger set of results, it is worth noting that pay-TV net add turned negative on a QoQ basis, only the second time since relisting. It registered a decline of 5,000 households, led by a higher churn rate of 10.3% (4QFY15: 9.9%). Management attributed this to the rationalisation of consumer spending post-GST, which has also seen some customers downgrading their subscriptions to Value Pack from Super Pack previously.

Overall, media players are cautious on the 2015 outlook, as they expect Malaysia’s GDP to weaken for the rest of the year, reflecting uncertainty in consumer sentiment post GST.

Shying away from traditional media

Media companies are diversifying away from the traditional media space as they hope to: i) depend less on adex as a source of revenue, ii) ride on the structural shift in content consumption from traditional media to digital media. Astro generated MYR37m in 1QFY16 revenue from its home shopping venture ‘Go Shop’, in line to meet its MYR150m full-year target. The company aims to grow its home shopping business revenue to MYR500m by FY20.

Media Prima remains committed to growing its digital media and content creation business segments in a bid to diversify its revenue streams to be less dependent on adex, while defending its existing adex market share in traditional media segments (FTA TV and print media). Nevertheless, as the digital media and content creation business segments contribute only 10.2% of revenue, we believe this strategy would only bear fruit with meaningful topline contribution over the longer term. As such, we believe Media Prima will likely face challenges in the near term amid a weaker adex market.

Maintain NEUTRAL

We maintain our NEUTRAL recommendation on the media sector, as we believe weak consumer sentiment may persist in 2015 post-GST, which could translate into weaker adex. We have a SELL recommendation on Media Prima as we believe the company, which is implementing a revenue diversification strategy, may face strong headwinds in the near term. We believe a subscription-based business model would fare better in the current environment, and prefer Astro for exposure to the media

1Q15 sector earnings and adex growth were a mixed bag

Media players remain cautious on outlook

Revenue diversification is the name of the game



sector, given that its earnings are dependent on subscription fees and, therefore, less impacted by adex volatility.

Figure 56: Total gross adex Figure 57: FTA TV adex

Source: Nielsen Co Source: Nielsen Co

Figure 58: Pay-TV adex Figure 59: Newspaper adex

Source: Nielsen Co Source: Nielsen Co

Table 35: Valuations of media stocks


(x)

EPS GWTH

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec


Astro^ 2.94 3.28 15,294 25.7 20.1 14.7 27.4 18.1 7.1 77.5 2.9 N

Media Prima 1.55 1.40 1,691 10.2 9.4 16.1 8.7 1.0 9.4 10.2 6.8 S

Sector Avg 22.3 18.1 15.0 23.4




NBFIs: Awaiting a Turn In Sentiment Neutral

1Q15 results snapshot

The 1Q15 reporting quarter saw the non-bank financial institution (NBFI) companies report results that were generally in line with estimates. The insurers demonstrated sound cost control and better investment income while maintaining good margins, which helped cushion our expectation that 1Q business would be weak due to the pre-GST implementation and higher claims liabilities provisioning due to a decline in bond yields. Results from the non-bank lenders were mixed. Malaysia Building Society’s (MBSB) (MBS MK, NEUTRAL, TP: MYR1.70) 1Q15 results missed estimates as the group’s ongoing move to raise loan provisioning standards led to higher-than-expected credit costs. On the other hand, Aeon Credit Service (M) (Aeon Credit) (ACSM MK, NEUTRAL, TP: MYR13.40) reported stronger-than-expected 4QFY15 (Feb) numbers, thanks to incremental contributions from the change in its FYE to 28 Feb from 20 Feb. Otherwise, Aeon Credit’s FY15 results were within expectations. Bursa Malaysia’s (BURSA MK, NEUTRAL, TP: MYR9.20) 1Q15 results were in line with expectations, as the derivatives business continued to chalk up robust volume and revenue growth. However, contributions from the securities market were more muted.

Outlook for insurers

Challenging start to the year. 1Q15 gross written premium growth was subdued as insurers were faced with moderating demand on the retail front – a reflection of soft auto and house sales, as well as consumer sentiment. That said, the insurers appear hopeful that a recovery in retail sentiment would lead to stronger topline growth ahead. We believe the general insurance industry could also look out for potential opportunities to underwrite insurance businesses related to flood reconstruction activities. Recall that the Government had approved MYR800m under the 2015 Budget for flood repair and reconstruction of basic facilities and MYR893m for flood mitigation projects. All these could partially cushion the softness from the retail side.

Compared to the general insurance (GI) and general takaful (GT) segments, where GST will replace the 6% sales tax, life insurance (LI) and family takaful products will be GST-free for policyholders. However, the associated fees (eg service charges for LI policies) and non-life riders such as critical illness, medical and personal accident (PA) will be subject to GST. This was within our expectations, though we highlighted the possibility of a slight margin squeeze if insurers do not pass the GST down to their customers via a repricing. This is because LI falls under “exempt supply”, which is not subject to GST. However, expenses (business inputs) are not eligible to claim for GST incurred.

We forecast single digit FY15 gross premium growth for GI and GT insurers (at 1.2-1.8x of our in-house 5% real GDP forecast), in line with the softer economic growth (similar to FY14). Yet, we still forecast strong underwriting (UW) margins at 18-30%. LI’s long-term growth is dictated by a low penetration rate and a rising middle-income population – the United Nations sees Malaysia reaching ageing population status (>15% population age >60 years old) by 2030.

Further out, our channel checks suggest that the GI detariffication of motor and fire insurance may materialise in 2H16. Theoretically, GIs should not underprice a product if it bears a high loss ratio and places a heavy strain on its capital adequacy ratio. This effect caused the collapse of the GI industry in other countries when they experienced full detariffication together with absent strong regulatory capital enforcements. Bank Negara is aware of this, and stated that the risk of industry underpricing would be mitigated by applying premium bands, improving UW standards and continuing to enforce strict capital buffering requirements. We think the premium band is essentially a form of restricted deviation on changes in premiums for motor and fire insurance products.

Given the higher CAR for GI, we take it as a leading indicator that the industry players may be: i) adding further buffers to preserve capital in anticipation of uncertainties – which, amongst others, include the industry detariffication for GI and the LI framework for LI, and ii) possible indication of heightened competition, given that some insurance players may have greater appetite to underwrite riskier businesses.

Tune Ins (TIH MK, BUY, TP: MYR2.30) is our pick among the insurers. In our view, it remains a growth stock, supported by swift expansion and partnerships, which are pivotal to support its diversification strategies.

1Q15 results for NBFI companies were generally in line with expectations

Challenging start to the year for insurers, but hopeful of a recovery in the coming quarters



Non-bank lenders – Still watching out for asset quality

We expect topline growth for Aeon Credit to moderate, reflecting the weaker retail sentiment and efforts to tighten credit underwriting standards. That said, we believe investors’ focus will continue to be on Aeon Credit’s ability to contain asset quality. We note that its NPL ratio had improved to 2.76% as at end-FY15 from 3.07% at end-3QFY15 but even then, NPL levels are currently elevated, relative to past trends (NPL ratio was <2% between FY09-FY13). Meanwhile, MBSB reported a sequential rise in absolute gross NPLs in its 1Q15 results. It remains committed to its programme to raise provisioning standards as part of efforts to “close the gap”. This is expected to take two years and may keep credit cost elevated ahead. MBSB has also unveiled its new 5-year plan, with the key focus being to be a fully-compliant Islamic financial institution.

Bursa Malaysia – Market activities softened

Bursa Malaysia’s average daily value (ADV) has softened, averaging MYR1.91bn thus far in 2Q15 vs 1Q15’s ADV of MYR2.08bn (2Q14: MYR2.05bn). Similarly, average daily contract volumes (Apr-May 2015) for derivatives has eased to 51,600 as compared to 60,300 in 1Q15, but up from 44,100 in 2Q14. IPO activities, however, have improved sequentially (2Q15E: MYR1.9bn vs 1Q15: nil), but still down from the MYR2.8bn raised in 2Q14. We maintain our 2015 ADV assumption of MYR2.15bn (+7.5% YoY) for now.

Overall, we are NEUTRAL on the sector as valuation appears fine amid a more challenging operating environment ahead.

Asset quality is mixed among NBFIs

Burs Malaysia’s market activities softened sequentially

Table 36: Valuations of NBFI stocks


(x)

EPS GWTH

(%)

P/BV

(x)

ROE

(%)

NDY

(%)

Rec


Tune Ins 1.68 2.30 1,263 16.5 14.1 5.7 16.9 2.8 2.5 17.6 2.4 B

MBSB 1.77 1.70 4,796 9.8 8.2 (53.8) 18.9 1.4 1.3 10.3 3.7 N

Bursa 8.20 9.20 4,362 21.3 20.0 3.4 6.5 5.7 5.7 27.2 4.5 N

Aeon Credit^ 14.22 13.40 2,048 8.5 7.9 11.9 8.0 2.5 2.2 32.5 4.5 N

Sector Avg 12.1 10.7 (32.5) 10.4


Robust undertone for consumer

spending

MAA is forecasting higher sales

in Mar



Regulatory risks from potential

changes to the automotive duty

structure

DRB-HICOM, Buy, FV = RM3.20

Tan Chong, Buy, FV = RM6.00



Oil & Gas: Heading Towards The New Normal Overweight

Cost optimisation is the name of the game

Petronas’ cost reduction plan, dubbed CORAL 2.0, has three main objectives – optimise costs, increase efficiencies and drive innovations. As such, the oil & gas industry has responded to this direction, as companies seek to weather the challenges brought about by the low crude oil prices. We believe that firms that are able to optimise their costs and increase efficiencies would be better off in the long run, although there could be some short-term challenges. This learning experience would also be useful in the event that another crisis befalls the industry. We believe the companies under our coverage have started to respond to CORAL 2.0 as they have outlined measures to optimise cost and increase efficiency, eg chartering a bigger vessel that is able to take in more supplies and personnel to reduce the number of runs, reviewing standard operating procedures and looking into joint-ventures (JVs) to generate synergies. Most of the companies under our coverage have reported better margins in 1Q15 vs 4Q14 numbers, and we expect their profitability levels to remain intact or increase.

The spice must flow

We believe contracts for the industry will start to flow again following a quiet period as the industry picks up after the plunge in oil prices. We are of the view that contracts that were delayed in the first half of the year could be handed out in the second half, or early 2016. We are looking forward to the petrochemical packages for the mega Refinery and Petrochemical Integrated Development (RAPID) to be handed out. We believe this ought to benefit downstream players such as Petronas Chemicals (PCHEM MK, BUY, TP: MYR6.75), Muhibbah Engineering (Muhibbah) (MUHI MK, BUY, TP: MYR2.83) and Dialog Group (Dialog) (DLG MK, BUY, TP: MYR1.90). Upstream newspaper reported that Vestigo Petroleum SB, a subsidiary of Petronas Carigali SB, will undertake production in marginal fields and is looking to award 4-5 fabrication contracts for wellhead platforms (WHP), with the tender expected to be issued in 3Q15. We believe SapuraKencana Petroleum (SapuraKencana) (SAKP MK, NEUTRAL, TP: MYR2.34), Malaysia Marine and Heavy Engineering (MMHE) (MMHE MK, NEUTRAL, TP: MYR1.22), Dialog and TH Heavy Engineering (TH Heavy) (RH MK, NR) would be frontrunners in bidding for the project. Looking outside Malaysia, SapuraKencana and MMHE are in the running to secure one of four WHPs for Phase 1C of PTT Exploration & Production’s (PTTEP) (PTTEP TB, NEUTRAL, TP: THB123.00) Zawtika project in Myanmar. Bumi Armada (BAB MK, BUY, TP: MYR1.65) and Yinson (YNS MK, BUY, TP: MYR4.50) are also in the running for a floating production unit in the Madura Straits, offshore Indonesia. In an environment of low crude oil prices, contracts are still flowing.

Brent crude to average at USD67.3/bbl in 2015

The oil markets have reacted the way we had expected in the first half of 2015. Oil companies are cutting their capex, production from US drilling rigs has declined by 60% from its peak last year, and US output has reached an inflection point and has started to decline. Crude oil prices rose by 45% from a 6-year low of USD45/barrel (bbl) in Jan 2015. We expect intense competition in 2H15, as shale oil produces concentrate their efforts on improving technology and lowering costs while having more restrained and responsible financing. The Organisation of Petroleum Exporting Countries (OPEC) is sticking to its current strategy of maintaining its production quota and not cut supply in order to compete against the rise in shale oil production. The price of Brent averaged at USD57.10/bbl for 1H15, c.USD8/bbl lower than our forecast of USD65/bbl. Crude oil prices rallied at the end of 1H15, reaching USD69/bbl at one point, but this was not enough to push the quarter’s average up to meet our expectation. As such, we revise down our 2015 average crude oil price forecast by 7% to USD67.30/bbl after taking into account the 1H15 average price of Brent of USD57.10/bbl. We lower our 3Q15 average to USD75/bbl (from USD80/bbl) and maintain our forecasts for 4Q15 and 2016 onwards, at USD80/bbl.

Oil & gas players making efforts to optimize cost and increase efficiency

Contracts are still in the pipeline

Expect crude oil to inch up in 2H15



Still OVERWEIGHT

We are keeping our OVERWEIGHT call on the oil & gas sector as we believe the industry is taking measures to optimise costs, and improve equipment and organisational efficiencies. It is also driving innovations to address the low oil price environment. We also believe that there would be consolidation and collaboration between many oil & gas players in the market. We prefer companies that exhibit earnings growth and have a proven track record, as well as the ability to react to the tough market conditions by implementing cost optimisation measures, improving organisational efficiencies and making innovations. While opportunities and contracts to be handed out were being delayed in 1H15, we believe they could have more visibility in the second half of the year as well as in early 2016.

Figure 60: Total market cap (MYRm) of O&G stocks vs Brent crude price

Title:

Source:


75,000

80,000

85,000

90,000

95,000

100,000

105,000

110,000

115,000

120,000

45

55

65

75

85

95

105

Brent (USD/bbl) Total Market Cap (MYRm)


Stock recommendations

We like Muhibbah owing to its track record in petrochemicals as well as oil & gas infrastructure contractor. We believe the rollout of RAPID’s petrochemical packages will benefit the company. Muhibbah is targeting around MYR1bn-1.5bn worth of contracts coming from RAPID as it leverages on its unique position as a Petronas licensed fabricator and infrastructure player. The company holds 21% of Cambodia Airports, which holds the concession for three Cambodian international airports until 2040. We are expecting passenger traffic in 2015 to grow by 15% as the country opens up its tourism sector. We also like Bumi Armada, as we believe its strategy of moving into floating gas production units is a positive for the long term. With three floating, production storage and offloading (FPSO) vessels under conversion and due for completion in 2016, the company could have, a record year in 2016. We also like Yinson for its USD4.2bn firm orderbook with an average contract tenure of more than 10 years. Further contract wins could lead to possible changes in our estimates. Although most of its value enhancement lies in JV profits rather than revenue, Dialog’s long-term value remains attractive – its storage terminal is a beneficiary of an oil contango – as suggested by our expectations of long-term Brent being at USD80/bbl. Any risk to Dialog’s upstream ventures is minor in our view – our analysis values both the full-scale development of its storage terminals and core downstream businesses at >90% of our SOP calculation (P/E for its core downstream services, DCF for its upstream and storage divisions).

Maintaining our Overweight stance on the oil & gas sector as we believe opportunities are still there for the taking



Table 37: Valuations of oil & gas stocks

Price Target Mkt

Cap

P/E

(x)

EPS GWTH

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec

(MYR/s) (MYR/s) (MYRm FY15 FY16 FY15 FY16 FY15 FY15 FY15 FY15

PChem 6.25 6.75 50,000 14.4 12.8 24.2 12.7 2.0 13.0 14.7 3.5 B

Dialog 1.63 1.90 8,351 32.1 27.3 28.4 17.5 4.9 19.1 15.9 1.2 B

Bumi Armada 1.19 1.57 6,981 20.6 11.8 5.5 75.5 1.0 4.4 5.0 1.2 B

Yinson^ 3.18 4.02 3,284 22.3 22.9 (4.4) (2.8) 2.1 22.1 9.8 0.0 B

Dayang 2.26 3.40 2,012 9.7 8.4 15.1 15.6 1.9 11.2 20.3 5.1 B

Coastal 2.79 4.30 1,651 7.7 6.5 15.5 17.7 1.0 6.8 14.3 3.3 B

Wah Seong 1.33 1.55 1,031 9.8 8.6 (23.6) 14.1 0.9 9.8 9.5 4.1 B

Muhibah 2.30 3.39 992 8.4 7.5 49.7 12.8 1.3 n.m 17.1 2.8 B

Favelle Favco 2.80 3.68 594 6.8 6.5 0.6 4.0 1.2 4.8 18.0 5.9 B

Petra Energy 1.20 1.70 386 8.2 7.3 93.9 12.3 0.7 2.1 8.8 3.2 B

SKP^ 2.41 2.34 14,441 14.8 12.7 (27.7) 16.2 1.2 n.m 8.1 0.0 N

MMHE 1.22 1.28 1,952 20.8 13.8 (17.6) 51.2 0.7 6.8 3.5 0.0 N

Perdana Pet 1.53 1.55 1,145 14.4 11.1 (6.7) 29.4 1.5 5.6 11.2 0.0 N

Perisai 0.46 0.60 549 27.0 11.3 70.3 +>100 0.5 10.0 1.7 0.0 N

Alam Maritim 0.56 0.45 513 12.4 9.5 (28.2) 30.6 0.6 12.3 4.9 0.0 S

Sector Avg 15.1 12.8 6.8 17.5




Plantation: It Is Now Or Never Neutral

The weather authorities declared El Nino in May, which is the first one in five years. El Nino is a global weather phenomenon which causes drought in South-East Asia

and potentially below-normal rainfall in India, while bringing excessive rain to North America. While the heat wave has yet to arrive in South-East Asia, we note that it usually takes a little time from the point of declaration to actual drought. We also note that there is a tendency for El Nino-related dryness to start hitting oil palm plantation

areas in June-July, which means drought may be imminent very soon. Australia’s Bureau of Meteorology indicated in its 23

Jun report that El Nino is gaining strength.

The recent heatwave notwithstanding, India’s monsoon has so far turned out to be healthy with above average rainfall in its first month. India’s monsoon season, which runs from June to September, provides much-needed rain for its oilseed planting. A normal monsoon would mean that India does not need to import additional edible oil to make up for the shortfall in its own oilseed production. Nevertheless, we believe it is still early in the season and rainfall could still fall short when El Nino intensifies.

With the significantly wider discount of USD139/tonne against soybean oil, there is likely to be a switch back to palm oil. Recall that the spread was under USD60 several months back, and it encouraged a switch from palm oil to soybean oil and other soft oils. As the situation has reversed, demand should flow back to palm oil.

Despite the delay in the implementation of Indonesia’s biodiesel programme due to economic and policy hurdles, we still expect the demand for biodiesel in that country to kick in in 3Q15, as all the various issues have been taken care of. Indonesia will start charging export levies of USD50/tonne for CPO and up to USD30/tonne for refined products in July, the proceeds of which will be used to fund its B15 biodiesel programme. We also expect a mild increase in demand from Malaysia’s biodiesel sector following the nationwide rollout of its B7 programme this year.

The seasonal pickup in production has started to lift inventory. As we are now coming to 3Q, which is the strongest quarter for production, inventory may continue to inch up – as it typically does during this time of the year. Nevertheless, we believe that the increase in the stockpile could be slow and do not expect it to rise to alarming levels as the dryness in Indonesia in 2H last year could lead to poor production during the peak months.

1Q15 financial results were mostly disappointing, although this was not unexpected. We believe 1Q may end up being the worst quarter this year and 2Q could turn out to be significantly better. This is due to the low harvest, as 1Q production was further aggravated by the effect of the drought from 1Q14. In contrast, production was seasonally stronger in 2Q when output somewhat normalised and was potentially up by 40% QoQ, which would more than offset the 3% decline in the average price.

Fertiliser prices have eased, mainly due to the slide in urea prices. Composite fertiliser costs per hectare have declined by 8.3% to USD298 from Nov2014 to May 2015. However, the ringgit has weakened by 8.4% against the USD over the same timeframe. This means the absolute input cost could remain stable in 2H compared to 1H but the cost per tonne will be lower, due to the seasonally stronger production. We do not expect to see cost pressures this year.

While soybean acreage continued to chart record highs this year, the planting rate –at 90% this year – is the lowest since 1996 due to heavy rain and flooding. Soybean prices have been climbing, thereby correcting the over-pessimism. In any case, we do not expect the soybean stock/usage ratio to be sustained at 30% levels and it may likely fall back next season. We view the high soybean stock/usage ratio as a temporary depressant for palm oil, as well as a depressant that provides an opportunity to buy into palm oil equities.

While we have upgraded Indonesia and Singapore plantation sectors to OVERWEIGHT in April, we have continued to maintain Malaysia as a NEUTRAL on valuations. We believe our average CPO price assumption of MYR2,350/tonne remains achievable and MYR2,500/tonne for 2016 has an upside risk due to El Nino, which could lift CPO price to MYR2,900/tonne by end-2016.

Our Top Pick for Malaysia is IJM Plantations (IJMP MK, BUY, TP: MYR3.90. We also have BUY calls for Genting Plantations (GENP MK, TP: MYR11.50), Sarawak Oil Palms (SOP MK, TP: MYR7.07), TSH Resources (TSH MK, TP: MYR2.57) and Kulim Malaysia (KUL MK, TP: MYR2.95).

First El Nino since 2009

India monsoon is healthy so far

Widened discount to encourage switching

Biodiesel demand likely to pick up

Inventory on the rise

Worst quarter is behind us

Input cost stable in 2H

US soybean planting

Sector positioning for 2015



Figure 61: Palm oil trades at a USD139/tonne discount to soybean oil

Figure 62: Short-covering in soybean, speculative position near neutral

Title:

Source:


-50

-

50

100

150

200

250

300

350

400

450

500

-

200

400

600

800

1,000

1,200

1,400

1,600

Premium, USD (RHS) Soyoil, USD (LHS) CPO, USD (LHS)

Title:

Source:

-100,000

-50,000

0

50,000

100,000

150,000

200,000

250,000

300,000

600

800

1,000

1,200

1,400

1,600

1,800

2,000

May-07 May-09 May-11 May-13 May-15

Soybean price, Usd per bushel (LHS) Speculative long (RHS)

Source: Bloomberg Source: CFTC

Figure 63: Fertiliser cost per hectare is at USD298 Figure 64: Southern Oscillation Index is heading downwards

again

Title:

Source:


0

100

200

300

400

500

600

700

800

900

Jul-0

3

Jan-0

4

Jul-0

4

Jan-0

5

Jul-0

5

Jan-0

6

Jul-0

6

Jan-0

7

Jul-0

7

Jan-0

8

Jul-0

8

Jan-0

9

Jul-0

9

Jan-1

0

Jul-1

0

Jan-1

1

Jul-1

1

Jan-1

2

Jul-1

2

Jan-1

3

Jul-1

3

Jan-1

4

Jul-1

4

Jan-1

5

SOA MOP RP Composite cost (FOB)

Source: RHB, Indexmundi Source: Australia’s Bureau of Meteorology

Table 38: Valuations of plantations stocks


(x)

EPS GWTH

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec


Genting Plantation 10.02 11.50 7,720 24.1 18.6 (17.1) 29.6 2.0 20.2 8.4 1.0 B

Kulim* 2.52 2.95 3,283 45.9 24.9 0.3 84.0 2.5 n.m 1.6 14.9 B

IJMP^ 3.59 3.90 3,161 17.3 14.1 32.5 23.1 1.8 15.8 11.0 2.4 B

TSH 2.25 2.57 2,816 19.4 15.6 7.0 24.5 2.2 8.4 11.6 1.4 B

SOP 4.70 7.07 2,159 14.9 10.6 19.6 40.4 1.3 7.5 9.6 1.1 B

Sime Darby 8.50 8.75 51,546 25.8 18.5 (36.5) 39.8 1.8 7.6 6.9 2.5 N

IOI Corp 3.97 4.40 25,608 24.9 19.1 (40.6) 30.0 3.9 28.3 16.3 2.0 N

KLK 21.42 22.00 22,866 26.1 18.4 (12.7) 42.2 2.9 25.5 11.1 2.7 N

FGV 1.68 1.60 6,129 24.3 18.0 53.4 35.1 1.0 5.9 3.9 3.3 N

CBIP 2.00 2.20 1,076 13.3 12.4 (37.4) 7.1 1.6 12.0 12.9 2.3 N

TDM 0.70 0.63 1,037 22.6 18.8 (14.3) 19.8 0.8 11.7 3.4 2.3 N

TH Plantation 1.60 1.00 1,409 35.0 26.3 18.1 33.3 1.1 n.m 3.3 1.2 S

Sector Avg 25.0 18.3 (25.0) 36.6


* Special dividend

Source: RHB estimates



Plastic Packaging: Selected Beneficiaries Neutral

1Q15 results a mixed bag

1Q15 was a mixed quarter for the plastic packaging players under our coverage. VS Industry (VSI) (VSI MK, TP: MYR4.70) reported earnings above our expectations, as the company continues to gain from the strengthening of USD and improved in its product mix. We believe the company continues to benefit from increasing orders from its key customers, particularly for its higher-margin coffee machine. However, we maintain NEUTRAL on the stock, as we believe much of the positive news has been priced in. Meanwhile SKP Resources’ (SKP) (SKP MK, BUY, TP: MYR1.18) results were in line, with growth in earnings mainly driven by increasing orders from both Dyson and non-Dyson brands. We remain positive on its prospects moving forward, riding on Dyson’s expansion. SKP announced earlier in May that it has secured a 5-year MYR400m pa contract from its key customer Dyson to manufacture

the new cordless vacuum cleaners. Both Thong Guan Industries (TGI) (TGI MK, NEUTRAL, TP: MYR2.05) and Daibochi Plastic & Packaging Industry (Daibochi) (DPP MK, SELL, TP: MYR3.80) recorded results that missed expectations. TGI’s 1Q15 earnings miss was largely due to a realised forex loss of MYR3.4m and declining sales volume in the Japanese market due to a value-added tax hike since 1 Apr 2014. As for the flexible plastic packaging player Daibochi, the below-than-expected results can be attributed to the decline in sales on slower demand from export markets and higher operating costs incurred from higher depreciation and labour overheads. We continue to be negative on Daibochi due to its rich valuations and downside risks to earnings. Meanwhile Scientex (SCI MK, BUY, TP: MYR8.20) is due to announce its results at the end of this month.

Overall, we still see various demand drivers for the sector. We expect both SKP and VSI to continue benefitting from the strong ties with key customers, being Dyson Ltd and Keurig Green Mountain (Keurig) (GMCR US, NR) respectively. VSI is on track to manufacture a third coffee brewer model for Keurig in its 4QFY15, while SKP is expected to start production of Dyson’s new vacuum cleaners in 2H15. This could drive both companies’ earnings growth moving forward. We also believe that the risk of dependency on key customers is mitigated by the established relationships that the companies have with their key partners. However, we foresee demand for TGI and Daibochi products may continue to be soft, particularly from their export markets.

Selected beneficiaries on strengthening of USD/MYR

RHB economists continue to expect the ringgit to remain weak in the near term, on the back of large foreign holdings of fixed income instruments in Malaysia and the expectation of rising interest rates in 2H15 in the US that could lead to a capital outflow. Having said that, we believe the strengthening of USD/MYR would only benefit selected plastic packaging players under our coverage even though most of their sales are for the export market (USD-denominated). This is due to the adoption of a cost-plus approach on the exchange rate by most of the companies, while some have a natural hedge as well – where both sales and purchases are denominated in USD. However, among the companies under our coverage, we view VSI as the only company to continue benefitting from this theme, as approximately one-third of its sales are not subjected to the cost-plus basis and only a portion of its raw material

VS Industry and SKP Resources continue to deliver better earnings

Figure 65: USD/MYR trends Table 39: VS Industry’s earnings sensitivity to USD/MYR

Title:

Source:


2.8

2.9

3

3.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

Jan-

15

Apr

-15

FYE July FY15F FY16F FY17F Comments

Scenario 1:

USD/MYR 3.60 3.50 3.35 Our current assumptions

Recurring earnings (MYRm) 90.0 109.1 103.0

Scenario 2:

USD/MYR 3.80 3.70 3.50


Scenario 3:

USD/MYR 3.50 3.40 3.30


Source: Bloomberg Source: RHB



purchases is denominated in USD. In view of this, we have revised our USD/MYR assumption in our earnings forecasts for VSI to reflect the current forex movement.

Resin prices to remain below average

Although the resin prices (linear low-density polyethylene (LLDPE) and polypropolene (PPH)) have rebounded slightly at end-1Q15, we believe that prices could remain flat in the near term as we foresee the crude oil prices to continue consolidating at current levels this year. Our oil and gas team is forecasting Brent crude to average USD67.30/bbl and USD80/bbl in 2015 and 2016 respectively, which is still lower than last year’s average price. Our previous analysis shows that resin cost has a positive correlation of 0.8 to the price of crude oil, as it is a downstream petrochemical product. Having said that, we believe the positive impact of the lower resin price to earnings is minimal, as raw material prices are accounted for on a cost-plus basis for most companies under our coverage. Only Daibochi is expected to benefit from lower resin prices, as it revises contract terms every quarter. This is a different approach from the other players like TGI, Scientex (stretch film manufacturers), VSI and SKP (plastic manufacturers) who adjust their product pricing every month.

Figure 66: Polypropylene prices Figure 67: Polyethylene prices

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15

USD/MT

3Q13average

USD1,519

4Q13average

USD1,550

1Q14average

USD1,568

2Q14average

USD1,589

3Q14average

USD1,605

4Q14average

USD1,389

1Q15average

USD1,167

Tit le:

S ourc e:

P leas e fill in the values above to have them entered in y our report

1,100

1,200

1,300

1,400

1,500

1,600

1,700

Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15

USD/MT3Q13

average

USD1,490

4Q13average

USD1,547

1Q14average

USD1,570

2Q14average

USD1,589

3Q14average

USD1,618

4Q14average

USD1,441

1Q15average

USD1,210

Source: ChemOrbis Source: ChemOrbis

Maintain NEUTRAL

We maintain NEUTRAL on the consumer packaging sector, as we believe most of the upsides have already been priced in and the upside is limited at current levels for most of the stocks under our coverage. Since we view that only selected industry players would benefit from the strengthening of the USD against the MYR and lower raw material prices, this would not warrant a more positive outlook.

Table 40: Valuations of plastic packaging stocks


(x) (%) (x) (x) (%) (%)


Scientex 6.86 7.90 1,550 9.9 8.3 5.2 18.6 1.9 7.3 21.7 3.0 B

SKP Resources^ 1.21 1.18 1,518 15.9 12.1 63.3 31.7 7.0 3.8 51.9 3.1 B

VS Industry 4.69 4.70 1,079 12.0 9.9 +>100 21.2 1.7 7.2 18.1 3.4 N

Thong Guan 1.98 2.05 208 7.4 8.9 39.5 (16.5) 2.0 2.1 8.0 3.6 N

Daibochi 4.32 3.80 492 17.1 15.7 21.4 8.5 2.7 10.5 16.6 3.5 S

Sector Avg 12.1 9.9 18.0 21.7



consumer spending


sales in Mar








Ports & Shipping: Do Not Miss This Ride Overweight

MISC (MISC MK, BUY, TP: MYR9.49)

Petroleum tanker rates remain buoyant. Daily tanker rates of late have continued

to hold up fairly well, owing to low crude oil prices and cheaper bunker costs. This has given a lift to demand for shipments for ship operators. Based on Bloomberg numbers – average QTD in the 2Q15 period – YoY daily tanker rates for Aframaxes (Caribbean-US Gulf) and very large crude carriers (VLCCs) (Arabian Gulf-South-East Asia) are up by 161%/215% YoY (+53%/103% YTD) respectively, with the Baltic Dirty Tanker Index (BDIY) showing an increase of 18% YoY. On a QoQ basis, Aframax rates were down by 23% while VLCC rates and the BDIY are only down by 6% and 8% respectively. This supports our view that MISC should see its average daily tanker rates holding up well at an average increase of 20%, which we deem as conservative. At this rate, it should be enough for the petroleum tanker division to turn around, from which we estimate a profit of MYR143.5m. We thus see more potential upside in earnings from this division. The outlook for the tanker shipping segment into the remaining 2015 and 2016 remains promising owing to record production levels, thus consequently lifting demand for floating storage and tanker demand.

Figure 68: Baltic Dirty Tanker Index Figure 69: Baltic Clean Tanker Index

Source: RHB Source: RHB

Liquefied natural gas (LNG) a near-term blip. We see FY15 PBT for MISC’s LNG

division softening slightly by 9.7%, noting that three of its vessels go off charter in 1H15. These vessels are expected to commence new charters by 3Q15 onwards. Despite the setback from the LNG side, narrowing losses from MISC’s chemical shipping (from a loss before tax of USD38.4m to USD21m in FY15) – coupled with the higher FY15 PBT from its offshore division (to USD179m from USD162m) and turnaround from its petroleum tanker wing – should still give commendable growth to its FY15 earnings (+24.8% YoY). We expect earnings growth to remain exciting into FY16, as profitability further improves from the company’s petroleum tanker division, as this will be the year most of its old term charters are renewed at much higher year rates that we have seen this year. Tenderbook of MYR7.2bn. MISC subsidiary Malaysia Marine and Heavy

Engineering (MMHE) (MMHE MK, NEUTRAL, TP: MYR1.28) is currently bidding for MYR7.2bn worth of projects, the majority of which (MYR4.5bn) is overseas and the remainder from local jobs (MYR2.6bn). We understand that, for the overseas projects, MMHE is bidding for projects in the Middle East, Africa and Canada for offshore and onshore fabrication. We see this is a positive sign that it is moving away from the domestic market and venturing out to the international arena. We believe, in the long term, this could enable the company to build up its brand and operate on the same level as other major fabrication players. Locally, the Kasawari central processing platform (CPP) makes up the majority of the tenderbook, while the rest are for Refinery and Petrochemical Integrated Development (RAPID)-related subcontracting works as well as facilities improvement bids.

Daily petroleum tanker rates of late have continued to hold up fairly well

Despite the setback from the LNG side, narrowing losses from MISC’s chemical shipping coupled with the higher FY15 PBT from its offshore division and turnaround from its petroleum tanker wing – should still give commendable growth to its FY15 earnings

MMHE is bidding for projects in the Middle East, Africa and Canada for offshore and onshore fabrication. We see this is a positive sign that it is moving away from the domestic market and venturing out to the international arena.



Westports (WPRTS MK, BUY, TP: MYR4.85)

Throughput volume still encouraging. Logs on vessel calls registered through the

Port Klang Authority show that vessel calls reported by Westports/Northport have grown by 5%/6% QTD (up to 31 May), bringing YTD vessel call growth to 14%/3% respectively. We expect Westports’ throughput growth in 2Q15 to grow 8% YoY, which would bring its 1H15 throughput growth to 12% YoY – putting it well on track to achieve our FY15F throughput growth of 12.2%. While logs on vessel calls may not truly reflect container throughput, we take comfort in the fact that its vessel calls still point to an uptrend. Tariff hike and downside risk. The decision to raise tariffs is still pending, and we

believe that approval would be granted in mid-2015 at the earliest. We continue to factor in a full implementation of the hike come 1 Jan 2016. Removing this completely would reduce our TP to MYR4.00 (from MYR4.85). A delay in implementation to 2017, at a 30%/20%/10% hike assumption, would cut our TP to MYR4.82/MYR4.55/MYR4.27 respectively. A hike is likely, in our view, although the quantum and timing remain uncertain. If the hike does not materialise, this would represent a downside risk to the stock.

Table 41: Sensitivity of our TP to the tariff hike When Quantum TP

2016 +30% 4.85

2016 +20% 4.57

2016 +10% 4.28

2017 +30% 4.82

2017 +20% 4.55

2017 +10% 4.27

2018 +30% 4.79

2018 +20% 4.52

2018 +10% 4.26

Source: RHB

Supply glut continues. The prospects of the container shipping sector continue to

remain challenging, and we believe that consolidation would be inevitable – the capacity growth of 7% this year, as forecasted by AP Moeller-Maersk (Maersk) (MAERSKB DC, NR) and Alphaliner, is set to outpace their projected 3-5% growth in demand. More deliveries of new larger containers are expected to enter the market and, to date, new orders are still being secured. One notable reason for the continued interest in newbuild vessels in the container shipping sector is the expansion of the Panama Canal – expected to be completed sometime in 2016 – where waterway traffic capacity could easily double. The supply glut has put pressure on freight rates (some key routes are at record lows), but the significant cost savings from lower bunker prices and improved economies of scale from the larger vessel capacity have provided some temporary relief for the sector over the recent quarters. We, however, foresee a further consolidation in the sector, with the supply and demand dynamics worsening as more deliveries of the largest container vessels are made. This could result in smaller liners exiting the market and leading players absorbing more throughput market share. As such, port operators with a customer base comprising leaders in the container shipping segment would stand to benefit from the box spillover as smaller players exit the industry. We believe Westports would benefit from this in the long run, as its leading customer CMA CGM ranks just behind Maersk in liner profitability.

Recommendation

Decent earnings growth for both these KLCI index stocks. We believe near-term

concerns on MISC’s LNG side are overdone, as overall earnings growth, moving forward, remains encouraging. This is being driven by the stronger offshore earnings, given the full year contributions from the Cendor floating production storage and offloading (FPSO) vessel (vs 1Q last year) and increased contribution from its heavy engineering. This is coupled by the turnaround from its petroleum segment and narrowing losses from the chemical tanker segment as utilisation rate improves. We maintain our SOP-derived TP of MYR9.49. MISC offers strong earnings growth in FY15 vs the KLCI’s average earnings growth of 3.9%. Westports too is expected to see commendable earnings growth of 5.4%, driven by economies of scale on the back of higher volume growth this year. With a tariff hike potentially materialising as early as 2016, Westports earnings growth is expected to grow stronger by 39.1% in FY16. As such, we continue to maintain our OVERWEIGHT stance on the ports & shipping sector.

Throughput growth on track

Removing a tariff hike completely would reduce our TP to MYR4.00 (from MYR4.85). A delay in implementation to 2017, at a 30%/20%/10% hike assumption, would cut our TP to MYR4.82/MYR4.55/MYR4.27 respectively.

We see consolidation in the container shipping sector benefiting Westports given their stronger client base profile

Both KLCI index stock to outpace KLCI’s earnings growth



Table 42: Valuations of ports & shipping stocks


(x)

EPS GWTH

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec


MISC 7.76 9.49 34,638 14.6 13.0 24.8 12.0 1.2 10.3 8.3 1.7 B

Westports 4.30 4.85 14,663 26.5 19.0 5.2 39.1 7.6 18.7 29.9 2.8 B

Sector Avg 16.8 14.4 20.5 17.1



Property: Still On a Softening Cycle Neutral

The Malaysia property sector corrected more in 2Q

The property sector in Malaysia has declined further in 2Q, given more macroeconomic issues that have dented market sentiment. YTD, the Kuala Lumpur Property Index has fallen by 4% vs the FBMKLCI’s -1.5%. It is one of the worst performing countries compared with the Jakarta Real Estate Index (JAKPROP) and Thailand Property Development Index (SETPROP) which have declined by 4% and 1.6% respectively – in local currency terms – over the same period.

Weak growth in new sales and developers still cutting sales target

1Q15 new property sales fell by about 35% QoQ and flat YoY. The weak numbers were within expectations, as new launches were minimal in 1Q due to the slump in crude oil prices in Dec 2014 amidst weak market sentiment. Sales in the Iskandar Malaysia region remained the worst, as take-up rate for some recent roll-outs – especially high-rise projects – stood at just 20-30%. The Klang Valley region also saw the softening trend, but matured and more established areas were showing some resilience. The Penang market was quiet especially on the island, but Aspen Vision City launched its 441 units of commercial shop lots in Batu Kawan, located on a site next to the upcoming IKEA store, saw 100% bookings.

We expect 2Q new property sales to be worse than 1Q’s as the GST was just implemented in April. The market is likely to hold back on the purchase of big-ticket items such as properties, especially during the first few months of implementation. Essentially, developers are left with a short 6-month window to chalk up new sales for the full year. As a result of the challenging environment, SP Setia (SPSB MK, BUY, TP: MYR4.08) has cut its sales target to MYR4bn from MYR4.6bn previously while some developers have already guided lower FY15 sales target much earlier. A few developers, such as Sunway (SWB MK, BUY, TP: MYR4.10) and UEM Sunrise (UEMS MK, NEUTRAL, TP: MYR1.26), are likely to rely on overseas projects in 2H for their new sales. Hence, their existing sales targets may still be achievable.

Macroeconomic prudential measures unchanged

Aside from the implementation of the GST – and, hence, inflationary pressure – the weak economic growth is also hurting consumer sentiment. While the correction in the local equity market has already reflected the weak crude oil prices and the expected softening economic growth, the economy on the ground is now starting to feel the slowdown. Concerns over a major government-linked company, the severe depreciation of MYR and the much-anticipated downgrade of Malaysia’s sovereign ratings certainly are not helping to revive the weak sentiment. In the meantime, while the risk of further tightening is low, as certain countries such as China have started to unwind some of their policies, we believe that the Malaysian Government and Bank Negara Malaysia are likely to keep the current set of cooling measures unchanged, at least for this year. This is because the country’s indebted households (household debt/GDP ratio stands at 87.9% in 2014) are one of the highest in the region, albeit at a slower growth in debt now. As such, the Malaysian banks continue to tighten their mortgage lending.

Figure 70: Monthly loan applications (residential property) Figure 71: Monthly loan approvals (residential property)

Source: Bank Negara Malaysia (BNM) Source: BNM

More severe de-rating in 2Q

Slow sales in 1Q

Too many macroeconomic issues dented sentiment



Current demand is more location specific

Although the real estate industry is seeing a sector-wide slow down, demand is very much location specific at this juncture. Apart from the Aspen Vision City’s shop lots, Malton (MALT MK, NR) also made a debut for its Bukit Jalil City project in June. Of the 549 units service apartments previewed (two out of four blocks), the developer has so far received over 700 bookings (MYR15,000 booking deposit). Pricing at MYR800 psf on average, the project is located within a matured area that is 20-25km away from the Kuala Lumpur city centre, and is equipped with public amenities such as the Lai Meng primary school, the International Medical University (IMU) and a light rail transit (LRT) station slated for completion next year. The development also includes a regional shopping mall with a 2m sqf net lettable area (NLA) under the “Pavilion” flagship, called Pavilion Bukit Jalil. We believe the design and concept of the mall have also substantially helped in pulling buying interest for the residences. The “oversubscription”, therefore, indicates that the underlying demand for properties is still strong, but buyers tend to be more cautious and selective now, and are willing to buy only for those that are strategically located with good prospects. While developers, in general, ought to still experience longer periods to convert bookings into contract sales, those with strategic projects should have lower risk of unsold units given the amount of buyers on the “waiting list”.

Key risks

Stronger-than-expected GDP growth may derail our investment thesis. However,

given the outlook of the economy, we think this is unlikely to happen.

Maintain Neutral

Looking ahead, we expect demand for properties to return in late 2015 or early 2016. According to our analysis, based on projected GDP growth and historical population growth cycles, the property market is expected to pick up next year. However, the rebound may not be that robust given our GDP growth forecast of only 5.5% next year vs 5.0% in 2015. The expected timing of recovery, ie 2016, may seem to be slightly longer this round (almost two years vs one year historically), but we think this is reasonable, considering the additional impact from the GST implementation and, hence, the period needed for the economy to digest.

We maintain our NEUTRAL rating for the sector, which is currently trading at a 47% discount to RNAV. The de-rating from 2Q is in line with our earlier expectation. Although downside could be limited, near-term re-rating catalysts are lacking. Hence, we believe 4Q is a better time to revisit the sector. For stock picks, we continue to like Sunway for its windfall dividend payout after the listing of Sunway Construction. Other preferred stocks include Matrix Concepts (MCH MK, BUY, TP: MYR3.65), as an affordable housing player, and Paramount (PAR MK, BUY, TP: MYR2.40), which is a defensive stock in a cyclical sector, given its 30% exposure to the education sector. Earnings turnarounds is expected to set in this year and asset monetisation could be a wild card for this stock.

Table 43: Valuations of property stocks


(x)

EPS GWTH

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec


SP Setia 3.18 4.08 8,150 19.3 15.5 12.1 24.2 1.4 17.0 7.1 3.1 B

Sunway 3.45 4.10 6,010 10.2 10.3 (1.5) (0.8) 3.5 8.8 9.6 3.2 B

Matrix 3.05 3.65 1,415 6.7 6.3 13.3 7.4 1.7 6.2 27.9 6.1 B

Paramount 2.07 2.40 874 11.8 11.1 25.5 6.4 1.0 8.1 8.5 3.9 B

Tambun Indah 1.70 2.28 720 6.3 5.6 11.6 11.2 1.5 7.2 26.4 5.3 B

Hua Yang^ 1.97 2.52 520 4.5 4.4 4.2 3.6 1.0 3.9 22.9 6.9 B

IOI Prop 1.85 2.25 6,117 13.9 13.1 1.7 5.6 0.5 12.6 3.9 4.3 N

UEM Sunrise 1.01 1.26 4,583 10.7 10.6 (12.6) 0.6 0.7 7.0 6.5 3.0 N

Mah Sing 1.66 2.08 3,692 9.8 9.8 (26.5) (0.1) 1.0 174.6 12.9 4.5 N

UOA Dev 2.06 2.45 2,987 9.6 10.2 (6.2) (6.2) 1.0 15.8 11.1 6.3 N

E&O^ 1.68 2.02 2,290 26.5 24.4 51.4 8.5 1.3 4.4 5.2 2.1 N

MRCB 1.22 1.31 2,147 26.9 21.7 78.6 24.3 1.1 14.6 4.0 2.0 N

Glomac^ 0.82 0.88 593 7.1 6.8 35.0 3.4 0.6 6.6 8.9 6.1 N

Sector Avg 11.9 10.8 (0.1) 5.1


Demand is more location specific

Maintain NEUTRAL


consumer spending


sales in Mar







RM3.20


RM6.00


consumer spending


sales in Mar







RM3.20


RM6.00



Property – MREITs: Awaiting Potential Catalysts Neutral

MREITs valuation remains decent

In view of the volatility in the local equity market due to uncertain economic conditions, we believe MREITs should continue to provide flight to safety for investors due to its defensive nature and more importantly, we think MREITs should be able to maintain its dividend payout. Although MREITs are currently trading at premium valuations, sector average yield remains attractive at above 4%, even for large-cap REITs. Based on our observation, the 10-year Malaysian Government Securities (MGS) bond yields remain stable at around 3.9% while the average MREIT yield spread is still hovering close to about 180bps, despite continued sector yield compression. Thus, we expect the valuation of MREITs to hold, even amid the ongoing uncertainty in the local market.

Figure 72: Yield comparison (Jan 2014 – Jun 2015)

Source: Savills Research

Expect soft retail sales post-GST

We expect retail REITs to perform better than its office and industrial peers. At present, retail-focused REITs are providing stable and decent dividend yields of about 5-7%. We believe the market has factored in the impact of slow retail sales in 2Q-3Q following the implementation of the goods and services tax (GST). Weak consumer spending had been reflected in 1Q15 consumer sentiment index, which dropped to 72.6, the lowest in the past three years. However, we anticipate this will likely improve from 4Q onwards as consumers begin to adapt to the new consumption tax 3-6 months after the GST implementation.

We think the impact of GST on retail-focused REITs would be minimal as the REITs’ turnover rent portion (rental income based on tenant sales) only accounts for less than 5% of the trusts’ revenue, as most of its rental income is fixed. Based on our channel checks, aside from fashion which showed a considerable drop in sales (about -30%), sales in other segments such as food and beverage (F&B) remained resilient. Although there are no major asset enhancement initiatives (AEIs) in the pipeline and no major renewals expected this year except for Hektar REIT (HEKT MK, NEUTRAL, TP: MYR1.51), we expect the REITs’ earnings to be supported by the fruition of AEIs performed in FY14.

Lacklustre performance of office sector to continue

We believe the office sector outlook in the near term will likely remain challenging as we note an influx of office supply into the market. Savills Research estimated that 7m sq ft of new office space will enter the market in 2015, translating into 100m sq ft of total office supply in Greater Kuala Lumpur (KL) by the end of 2015.

Amid weak crude oil prices, we think the office take-up rate especially in KL city centre could be adversely affected by oil and gas players scaling back expansion or relocation. We note that demand for office space in KL city centre is mostly driven by the oil and gas sector as well as banking and finance, as the area typically offers large office space and high specifications that suit multinational corporations’ (MNCs) needs. As of 1Q15, the office supply in KL city made up 45% of total office supply in Greater KL.

Decent earnings for REITs this year

Impact of GST largely factored in

The office segment will likely remain challenging, as oil and gas players are more cautious on expanding and relocating



Figure 73: Cumulative office space supply in Greater KL

Source: Savills Research

However, for certain REITs such as KLCC Stapled Group (KLCCSS MK, NEUTRAL, TP: MYR7.06), the potential risk of its losing tenants may be mitigated by its long-term triple net master leases. Meanwhile, Axis REIT (AXRB MK, NEUTRAL, TP: MYR3.82) plans to customise its office space in a bid to attract new and existing tenants in the future. On the other hand, we expect the growth of Sunway REIT (SREIT MK, NEUTRAL, TP: MYR1.55) to be driven by the recent opening of Sunway Putra Mall late last month, given that the lease prospects for Sunway Tower remain challenging.

Industrial segment remains unexciting

We expect rental rate growth in the industrial segment to remain stable for the rest of 2015. This is mainly due to the absence of new industrial assets available in the market as well as the long-term leases for most tenants. We note that the growth in this segment is typically not as exciting as the retail segment, given that most tenants are on long-term leases (five years and above), while the tenancy period for retail assets is typically around three years. Therefore, we expect rental growth for the industrial segment to remain stable at about 2-3% pa.

Maintain NEUTRAL

We believe the expectation of a zero hike in interest rates will be favourable to the REITs this year. However, the GST impact and unexciting prospects for both office and industrial segments may continue to put pressure on the REITs’ growth. Hence, we expect low single-digit sector revenue growth for FY15. With the REITs still a defensive sector offering an average yield of 6.2% for FY16F, we maintain our NEUTRAL stance on the sector. Within our coverage, we like Pavilion REIT (PREIT MK, NEUTRAL, TP: MYR1.55) and Sunway REIT.

Maintain NEUTRAL

Table 44: Valuations of MREIT stocks


(x) (%) (x) (x) (%) (%)


KLCCSG 6.90 7.06 12,457 18.1 17.7 7.4 2.3 1.0 12.4 5.7 5.1 N

Axis REIT 3.48 3.82 1,905 18.0 17.2 18.3 4.4 1.6 11.4 8.4 5.6 N

Sunway REIT 1.60 1.55 4,686 19.0 16.4 3.7 15.9 1.3 17.2 6.7 5.5 N

Pavilion REIT 1.49 1.55 4,491 18.6 17.9 3.7 3.8 1.2 15.8 6.3 5.6 N

Hektar REIT 1.51 1.51 605 13.3 13.0 2.4 2.8 1.0 24.5 7.3 7.0 N

CMMT 1.39 1.48 2,514 15.7 14.9 5.0 5.5 0.9 11.8 6.4 6.6 N

IGB REIT 1.35 1.40 4,613 19.1 18.0 3.9 6.0 1.3 15.2 6.6 6.0 N

MRCB-Quill Reit 1.17 1.25 584 10.5 12.3 27.9 (14.9) 0.6 10.7 7.7 7.5 N

Sector Avg 17.9 16.8 6.3 4.2



Rubber Products: Seeking Value In Resilience Neutral

Strong fundamentals but NEUTRAL recommendation on valuation

We maintain our optimism on global glove fundamentals and are pleased to note that rubber gloves players have managed to secure orders ahead of their upcoming capacity enhancement in 2015. We are not overly-concerned on the much-touted oversupply issue, as we believe the rubber gloves players would be pragmatic with their expansion plans to suit the prevailing demand landscape.

As such, we recommend investors adopt a selective stock-picking strategy or accumulate when valuations are more attractive. Our Top Picks for the sector are Karex (KAREX MK, BUY, TP: MYR3.63) and Top Glove (TOPG MK, BUY, TP: MYR7.02) – both have successfully translated their respective competitive advantages into higher margins while Karex is expanding capacity aggressively.

Demand

Global glove demand remains robust. Malaysian gloves export figures, which are

the benchmark used to approximate global glove demand owing to the around 60% global market share enjoyed by Malaysian exporters, recorded an 8.6% YoY increase in 2014. In fact, the strong demand has continued into 2015 with industry players reporting orders ahead of incoming capacity. Kossan Rubber Industries (Kossan) (KRI MK, NEUTRAL, TP: MYR6.35) shared that its upcoming 4bn capacity from Plant 2 and 3 has been fully taken up by its customers. Hartalega (HART MK, NEUTRAL, TP: MYR8.48) has managed to fill all of its upcoming 8bn capacity from the Next Generation Complex (NGC) in 2015. Meanwhile, Riverstone (RSTON SP, BUY, TP: SGD1.54) has reported healthy demand for its upcoming 1bn capacity expansion where 75% of new orders are from existing customers.

Proxy for the healthcare industry. Around 86.7% of total Malaysian gloves exports

in 2014 were medical-related, up from 85.3% in 2013. This highlights the increasing importance of gloves within the healthcare industry, which gives credence to the resilient demand of the sector. Premised on rising global healthcare standards, coupled with better healthcare education and awareness, we expect global glove consumption to increase. By comparison, glove per capita consumption in emerging markets such as China and Asia ex-Japan is only 3-4% of that of developed markets such as the US.

Growth prospects. Nitrile gloves, which are seeing strong capacity expansion in

Malaysia, have experienced a demand slowdown in developed markets. In particular, key markets such as the US, the UK, Germany and Japan have reported modest growth relative to their previous 5-year CAGR as the switch from latex to nitrile gloves reaches its tail-end. Nonetheless, industry players remain optimistic on the prospects of nitrile gloves, citing various potential high-growth markets (see Table 44). Overall, industry players forecast that global glove demand will likely grow at an average rate of 8% pa going forward

Table 45: Top nitrile gloves growth by country

Million pairs 2012 2013 2014 2014 YoY (%) 5-yr CAGR (%)

Poland 161 309 389 26.9 110.3

China 183 293 329 12.1 89.6

Thailand 31 51 121 137.1 82.0

Russia 95 115 191 65.1 66.7

Singapore 43 74 102 38.3 54.9

Germany 1,673 2,511 2,580 2.7 43.9

Netherlands 444 378 580 53.3 38.8

Sweden 200 227 315 39.0 36.0

Italy 383 494 584 18.3 33.5

Denmark 149 181 277 53.2 32.9

Spain 292 589 561 (4.7) 30.9

Norway 79 89 168 89.6 29.9

Brazil 69 79 115 46.0 25.3

UK 1,459 1,704 1,662 (2.5) 24.8

France 175 272 365 34.3 24.1

Australia 302 405 417 2.9 20.3

Japan 1,393 1,757 1,697 (3.4) 16.8

Belgium 156 181 292 61.2 12.8

USA 9,642 10,801 10,557 (2.3) 11.3

Canada 566 704 650 (7.7) 4.8


Karex and Top Glove are our Top Picks for the sector

Glove demand prospects remain resilient while global condom demand exceeds supply



Karex. Based on historical analysis and future estimates of industry capacity, we

believe that demand growth in the condom industry will be stronger than the upcoming supply expansion. Global demand is expected to grow at a 5-year CAGR of 7.1% vs a 5-year CAGR of 4.2% for supply. As such, we believe that Karex would have no difficulty filling its upcoming capacity expansion (7bn from 4bn in three years). Karex has also shared, at its recent analyst conference, that the tender market demand has been robust. The company has won four out of five of its last tender bids while awaiting the results of a 3bn pieces condom tender in South Africa, which, if won, would easily fill its upcoming capacity.

Supply

We have tabulated our best estimate of upcoming Malaysian glove production for companies under our coverage and note that the supply growth figures are much higher than the 8% demand growth forecasted by industry players (see table 45). Nonetheless, it may be premature to conclude an oversupply scenario due to a dearth of public information on glove manufacturers outside Malaysia. Our channel checks with industry players reveal that glove manufacturers in China, Thailand and Indonesia are not expanding as aggressively, indicating that although global supply might be expanding, it would be growing at a much slower rate than expected.

Should this be the case, it would imply that Malaysia would grow its global market share going forward and we think this is highly probable owing to the superior margins enjoyed by Malaysian rubber glove producers over their global peers (EBIT margins of 16% vs global peers of 6%). The margin gap would grant Malaysian players greater pricing power and help them gain market share. The relative weakness of the MYR against currencies of other major gloves-producing nations also helps boost the attractiveness of Malaysian glove products.

Nonetheless, we believe glove manufacturers would likely exercise caution and evaluate the prevailing demand before building capacity to prevent an oversupply, in line with historical industry practice. In addition, we believe the resilient nature of rubber glove demand would shorten the time frame required to absorb excess capacity, should there be any.

Table 46 : Malaysia’s glove production, 2014-2018F

Bn pieces 2014 2015F 2016F 2017F 2018F

Riverstone 3.0 3.8 4.7 5.6 5.6

Top Glove 30.8 33.2 35.3 39.2 40.4

Supermax 13.0 14.8 17.9 20.0 22.7

Kossan 13.3 17.5 19.4 22.5 26.2

Hartalega 12.1 15.4 21.5 25.6 29.0

Total 72.1 84.8 98.8 112.9 124.0

Growth (%)

17.6 16.4 14.3 9.8


Strategy

Top Glove our Top Pick. We remain confident on prospects of the rubber products

industry and recommend that investors adopt a selective stock-picking strategy or accumulate when valuations are more attractive. Our Top Pick for the rubber gloves sector is Top Glove for its initiative in driving operating efficiency and further automation that would sustain its margin expansion.

BUY recommendation for Karex. We continue to like the stock due to its leadership

in industry capacity for winning four out of its last five tender orders as well as continued margin expansion on the back of its better product mix and increased operating efficiency, helped by favourable macroeconomic factors.

Risks. The key upside risk to our view is the re-rating of the sector driven by liquidity

as investors switch to defensive stocks amid market uncertainty, despite the lack of new catalysts in the industry. Other upside/downside risks include a stronger USD/MYR, a spike in raw material prices and delays in capacity expansion plans.

Table 47: Valuations of rubber glove stocks


(x)

EPS GWTH

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec


Top Glove 6.70 7.02 4,159 17.2 15.7 34.0 9.8 3.0 9.0 17.5 2.9 B

Karex 3.15 3.63 1,690 28.1 25.9 (16.2) 8.6 4.2 19.8 19.3 0.7 B

Hartalega^ 8.41 8.48 6,700 23.2 17.9 33.9 29.6 4.8 17.6 21.7 2.0 N

Kossan 6.60 6.35 4,220 21.8 19.4 32.9 12.1 5.4 10.9 24.4 1.4 N

Supermax 2.15 2.11 1,426 11.8 10.9 26.4 7.7 1.4 8.3 12.2 2.4 N

Sector Avg 20.1 17.1 24.7 13.4


We believe the oversupply issue has been over-hyped

NEUTRAL on valuation grounds



Technology: Riding On MYR Weakness Overweight

2Q15 earnings could surprise on the upside

The majority of the technology companies listed in Malaysia are export-oriented, with over 90% of their products typically shipped to foreign countries and quoted in USD terms. As such, the MYR’s continued weakness against the USD will likely help to propel earnings growth for these players in 2Q15’s results releases, ie by July/August. The USD/MYR has averaged at MYR3.66 for April-June vis-à-vis 1Q15’s MYR3.60 (+1.7% QoQ) and 2Q14’s MYR3.24 (+13.0% YoY). We expect the current downtrend to persist over the immediate term, as the US Federal Reserve is widely anticipated to raise the country’s interest rates in due course. Our in-house 2015 USD/MYR forecast is at an average of MYR3.60. We do not discount the possibility of short-term volatility on the upside and estimate that every 1% depreciation in the MYR against the USD could mean a potential earnings upgrade of 3-5% for the technology manufacturers under our coverage, ceteris paribus. That said, we believe the positive impact might not be fully felt yet, as we understand that most of the exporters’ customers are looking for potential price revisions to take advantage of the current forex environment.

Figure 74: The USD/MYR trend

3

3.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2014 2015

Source: Bloomberg

Industry experts cautiously optimistic on 2015 outlook

Both the Semiconductor Industry Association (SIA) and the World Semiconductor Trade Statistics (WSTS) are forecasting for semiconductor sales to grow at 3.4% in 2015, driven by the smartphone and automotive segments. Although this implies a substantial slowdown from the 10% growth registered in 2014, we expect growth momentum for our local technology players to outpace the industry as a whole, given our relatively smaller base. To illustrate this, the combined revenue share of the semiconductor players under our coverage makes up less than 0.5% of the global semiconductor sales reported by SIA for 2014. We also take into consideration the ongoing diversification by local peers to penetrate into new sub-segments and products within the semiconductor supply chain.

Industry smartphone shipments to grow, albeit at a slower pace

International Data Corp (IDC), on the other hand, expects worldwide smartphone shipments to grow at 11.3% in 2015, vis-à-vis the 27.6% YoY growth registered in 2014. This is because the Chinese smartphone market (which accounted for over 35% of total industry shipments in 2014) is gradually hitting saturation. This is within our previous expectations of 10-15% growth and is evident in Xiaomi Corp’s recent move to penetrate the overseas market in its quest for higher growth opportunities. Going forward, we expect smartphone shipments to be driven by escalating demand from emerging economies such as India, South Africa, the Middle East and Latin America, leveraging on the transition from feature phones to smartphones. This is on the introduction of next-generation 4G networks in those regions.

Potential earnings surprise for 2Q15 results

Smartphone shipments to drive demand



Table 48: Breakdown of smartphone shipment forecasts by operating systems (m units)

Operating Systems 2015 shipment forecasts

(m) YoY growth

(%) 2019 shipment forecasts

(m) 5-year CAGR

(%)

Android 1,149.3 8.5% 1,524.1 7.5%

iOS 237.0 23.0% 274.5 7.3%

Windows Phone 46.8 34.1% 103.5 24.3%

Others 14.2 3.9% 26.3 14.0%

Total 1,447.3 11.3% 1,928.4 8.2%

Source: International Data Corp (IDC)

Within the premium segment, we continue to expect sales momentum to be driven by upgrades on improved hardware specifications as well as migration towards latest operating systems. Samsung Electronics’ (Samsung) (005930 KS, NR) latest flagship devices, ie the Galaxy S6 and curved Galaxy S6 Edge, have received rave reviews from professional technology blogs. Counterpoint Technology Market Research estimates that the South Korean handset maker shipped about 6m units in the first three weeks since the launch on 10 Apr and pointed out that the group was on track to break its previous annual sales record of 45m units. Interest in Samsung’s phone-tablet (phablet) line-up is expected to be revived with the impending launch of the Galaxy Note 5, which the market is expecting to take place in mid-September. Apple’s (AAPL US, NR) iPhone sales, meanwhile, registered another solid quarter in

1Q15, with shipments of more than 60m units. IDC is forecasting for a significant annual shipment growth of 23% YoY in iPhones, which we attribute to the widely anticipated launch of its iPhone 6s and 6s Plus series come September. The recent introduction of Apple’s next-generation operating system, ie the iOS 9, convinced market observers that the launch of iPhone 6s line-up was imminent, considering the company’s tendency to release new iOS software alongside new iPhone hardware. On the mass market side, we believe the proliferation of models at lower price points will continue to entice take-ups. This will likely be driven by cheaper and more competitive offerings from Chinese handset makers such as Xiaomi, Huawei Technologies (Huawei) (002502 CH, NR) and Lenovo (992 HK, BUY, TP: HKD14.80) penetrating into new growth regions. Of note, Xiaomi recently launched a mid-range product line, with its first model Mi 4i priced at an affordable sub-MYR800 per unit

level.

Stocks recommendation

All in, we reiterate our OVERWEIGHT stance on the technology sector as we move into 2H15. Despite the current weakness in the local equity market, we expect near-term sentiment on technology stocks to be supported by continued weakness in the MYR against the USD, which will further enhance earnings visibility. Over the medium to long term, we remain positive on the global sales of smart devices on cheaper price points, as well as the introduction of new flagship premium models. Within the semiconductor assembly and test services universe, our Top Picks are Inari Amertron (INRI MK, BUY, TP: MYR4.35) and Globetronics Technology (GTB MK, BUY, TP: MYR7.10). This is because we expect the duo to register earnings CAGR of 27.5% and 24.3% respectively over the next three years, leveraging on their smart devices-centric approach to further scale up their production. On the non-manufacturing technology stocks under our coverage, we like Prestariang (PRES MK, BUY, TP MYR3.03), as we are adamant that the group will register its all-time high earnings in FY15, leveraging on its recently secured Microsoft (MSFT US, NR) contract as the sole supplier of Microsoft solutions to the public sector. Besides that, we expect its share price to further re-rate over the near term due to a stream of positive news flow on potential orderbook replenishment over the next 1-6 months.

Reiterate bullish stance

Table 49: Valuations of technology stocks


(x) (%) (x) (x) (%) (%)


MPI 6.79 7.69 1,425 15.7 14.1 70.2 11.5 1.8 4.9 11.9 2.9 B

Datasonic^ 1.08 1.29 1,458 22.0 20.6 22.7 6.6 5.6 13.0 27.3 1.9 B

Inari Amertron 3.32 4.35 2,599 18.4 15.3 (6.1) 20.5 6.9 18.7 44.3 2.4 B

Globetronics 6.11 7.10 1,703 21.3 15.5 30.6 37.3 5.6 14.1 27.3 3.6 B

GHL Systems 1.13 1.42 20 40.5 21.5 +>100 88.6 3.0 78.3 7.7 0.0 B

Prestariang 2.65 3.03 1,283 25.2 17.5 +>100 44.0 6.9 35.5 28.6 2.6 B

Unisem 2.35 2.42 1,584 16.2 14.2 54.4 13.8 1.4 6.3 9.2 3.0 N

Sector Avg 19.8 16.1 41.6 23.1




Telecommunication: The Going Gets Tough Neutral

Competition shifts into higher gear

We remain NEUTRAL on the sector going into 2H15 due to: i) rising competitive risks, ii) the overall cautious consumer sentiment post the implementation of the goods and services tax (GST), and iii) valuations. The earlier confusion over the mechanics in which GST should be imposed is likely to be a drag on the already sluggish mobile revenue growth in 2Q15. This, alongside escalating competition, should contribute towards a patchy 2H15 as price sensitive prepaid users adjust their spending habits. The bright spot for cellular companies (cellcos) continues to be from robust mobile data adoption via more innovative pricing and smartphone bundles. While a seeming panacea to the structural decay in legacy revenues and an unwavering catalyst for the sector, it is still insufficient to mitigate the slowdown in industry growth as data monetisation remains an arduous task.

Figure 75: Mobile internet (MI) revenue as % of service revenue

Figure 76: Data revenue and industry growth (RHS)

Title:

Source:


10%

15%

20%

25%

30%

35%

Celcom DiGi Maxis Industry average

Title:

Source:


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

300

400

500

600

700

800

900

1,000MYRm

Celcom Maxis Digi Total

Source: RHB, Companies data Source: RHB, Companies data

Post the 1Q15 results season, most cellcos have retained their FY15 high level guidance (see Figure 3) of “low- to mid-single-digit growth’ in revenues. Maxis (MAXIS MK, NEUTRAL, TP: MYR6.50), however, guided for lower dividends going forward (no longer debt financed) and its capex potentially surpassing the base allocation of MYR1.1bn for the year as it intends to spend more to improve the customer experience on its network. In preparation for the higher capex and working capital needs, the telco recently undertook an Islamic debt facility/sukuk of up to MYR5bn, which would have the effect of raising its net debt/EBITDA to over 1.7x- the highest among the local telcos. Meanwhile, Axiata’s (AXIATA MK, NEUTRAL, TP: MYR7.65) management had categorised its KPIs as “challenging”, owing to currency volatility and mid-term issues affecting Celcom and XL Axiata (EXCL IJ, BUY, TP: IDR5,100).

Table 50: Management guidance post 1Q15 results

Company Revenue guidance EBITDA guidance Comments

Axiata 4% growth 4% growth Management guided that meeting its growth targets could be a challenge

Digi Low-mid single digit growth

Sustained margins at 45%

Revenue growth guidance has largely taken into account the GST impact

Maxis Low single digit growth

Sustained margins at 50%

Dividend payout ratio based on >75% net profit payout, capped at FCF

TM 4-4.5% growth 4-4.5% growth Headline KPI excludes P1, HSBB2, SUBB and other mega projects

Source: RHB, Companies

Many ‘firsts’ and a sprinkling of magic

There has been a noticeable increase in the level of marketing intensity in recent weeks as the cellcos attempt to defend or improve their wallet share, and mitigate the effects of the GST. Some of the more notable acquisition campaigns include:

Cautious consumer sentiment and rising competition portends earnings risks

Guidance from management remains largely unchanged post 2Q15 but there could be downside should competition intensify

Celcom is making a comeback after a washed-out 2014 marked by IT woes



Celcom First Basic 38 postpaid plan. Introduced in late April, subscribers are

offered generous 3GB data + 3GB Wifi (50 minutes of calls and SMS) for MYR38 per month during the promotional period. A “complementary” smartphone can be bundled for MYR10 more on the monthly commitment fee.

Celcom prepaid starter pack (Magic). The new MYR5 starter pack replaces its previous Xpax plan and offers free basic internet access (similar to Maxis’ Hotlink). A key feature of the pack is the option to carry forward unused data

quota to the next billing cycle – an industry first for a prepaid starter pack.

Digi.com's (Digi) (DIGI MK, BUY, TP: MYR6.60): 20th

anniversary promotions. For a limited period, Digi is offering its SmartValue 50 Plan at

MYR36/mth (previously MYR50), which is bundled with 3G internet. It is also throwing monthly rebates of MYR5-20 per month on its regular postpaid plans – Digi Smart Plan 78, Digi Smart Plan 108 and Digi Smart Plan 148. The promotions are complemented by call minutes, SMS and internet quotas that match or double Celcom’s offerings.

Hotlink reload plus. Every MYR15 and MYR10 top-up entails equivalent

amount of free calls and SMS with data allowances doubled to 500MB and 200MB.

U-Mobile unlimited mobile internet plan (UMI25). U-Mobile’s prepaid mobile

internet plan, priced at MYR25 per month is bundled with 1GB of data

Telekom Malaysia (TM) gearing up for a big bang launch in 4Q15

We expect TM’s (T MK, NEUTRAL, TP: MYR7.40) 55%-owned P1’s losses to continue weighing-in on its earnings due to start-up and marketing costs associated with the re-entry into the market. P1’s extended losses partly explained the subdued showing for TM in 1Q15 (-8% YoY in core earnings), although the broadband operator is EBITDA positive (1Q15: EBIT loss of MYR49.6m). We gather from industry sources that TM-P1 is in talks with mobile operators on interconnect arrangements and have commenced its network rollout ahead of a commercial launch in 4Q15. On the High-Speed Broadband 2 (HSBB2) and Suburban Broadband (SUBB) projects (scope unveiled in the 11

th Malaysia Plan), TM is only expected to

guide on its capex commitments after commercial agreements are inked with the Government in 3Q15.

Spectrum re-farming

There remains little visibility on the timeline for the re-farming of the 900Mhz and 1800Mhz spectrum. We believe the exercise remains top on the agenda for the Malaysian Communications and Multimedia Commission (MCMC), which saw the appointment of Datuk Seri Dr Halim Shafie as its new chairman in January. Datuk Seri Dr Halim was formerly the chairman of TM and had served in the same capacity at the MCMC from 2006-2009. Given repeated calls for a more equitable distribution of spectrum, we do not rule out the possibility of MCMC conducting an outright auction exercise. Here, Digi, which has the smallest chunk of the 900MHz spectrum, stands to be the biggest beneficiary while Maxis and Axiata may lose out given their current stranglehold over spectrum. We note the ownership of both low and high frequency bands (850MHz/2300MHz/2600MHz) does bode well for TM, as it seeks to rollout a 4G product. Together with U-Mobile, the incumbent may also vie for additional spectrum.

Maintain NEUTRAL

We recently upgraded Digi to BUY (from Neutral) following the sharp share price retracement and on expectations that the GST impact has more or less been priced-in. Axiata remains our preferred longer-term pick as we expect earnings momentum for Celcom and XL Axiata to recover in 2H15, paving the way for a re-rating of the stock. We keep our NEUTRAL ratings on TM, Maxis and Time dotCom (TDC MK, TP: MYR6.10) due to the lack of meaningful catalysts and the already fair valuations of the stocks. OCK is our sole small cap BUY (OCK MK, TP: MYR1.06) for exposure to the sector.

TM may have an ace up its sleeves

Spectrum re-farming – the key regulatory overhang

Maintain NEUTRAL on the sector. Digi and Axiata are our preferred picks



Table 51: Valuations of telecommunication stocks


(x)

EPS GWTH

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

NDY

(%)

Rec


Digi 5.40 6.60 41,985 20.0 19.2 1.9 4.3 82.8 12.6 351.3 5.0 B

OCK Group 0.84 1.06 444 13.3 12.7 +>100 4.7 2.1 26.0 17.1 0.0 B

Time dotCom 6.57 6.10 3,765 27.3 24.1 6.3 13.6 2.4 23.7 7.9 1.9 N

TM 6.67 7.40 24,335 26.2 24.5 (3.3) 7.1 3.3 7.2 12.5 3.4 N

Axiata 6.46 7.20 55,306 23.1 22.2 1.7 4.3 2.7 9.8 11.6 3.7 N

Maxis 6.41 6.50 48,110 25.3 24.4 0.2 3.5 10.5 15.0 41.1 3.5 N

Sector Avg 23.2 22.2 1.0 4.6



Timber: Positives and Negatives Balance Each Other Out Neutral Maintain NEUTRAL We maintain our NEUTRAL stance on the timber sector. The strength of the USD is a boon to the sector, while the log division continues to provide a stable profit base. However, we continue to see weakness in the plywood division from weak Japanese demand, while the plantation divisions earnings remain volatile due to unexciting CPO prices.

Log supply shortage worsening Log production in Sarawak fell 9.2% YoY in 4M2015, on the back of the extra-wet monsoon season in 1Q15 as well as the aggressive clampdown on illegal logging by the Sarawak state government. The timber companies under our coverage suffered more significant declines in logging harvests during the same period, as seen by the 25.6% YoY decline in Ta Ann’s (TAH MK, BUY, TP: MYR4.40) harvests, the 16.4% drop in Jaya Tiasa’s (JT MK, NEUTRAL, TP: MYR1.40) harvests and the 19.2% fall in WTK’s (WTK) (WTKH MK, NEUTRAL, TP: MYR1.00) harvests. We believe the clampdown on illegal logging has had an indirect effect on the timber companies under our coverage, as the companies now have to get the customs documentation and inspection done at the point of logging instead of at the log ponds. This requires additional time and manpower, which means delays could occur quite easily. The added risk of an upcoming El Nino weather phenomenon could also hamper the log transportation system, as river levels may not be high enough for the log barges.

Besides the illegal logging clampdown, the Sarawak State Government is also revamping the state’s timber licensing policy, in light of its renewed commitment to sustainability and conservation. We believe this could potentially result in a reduction in logging quotas for the timber companies during the upcoming quota review in July – although we do not think the reduction, if any, will be substantial. We understand that, within each timber concession, there are protected areas of the forest that are not harvested. The State Government may decide to exclude those areas from the timber licence, which could subsequently result in an overall reduction in the annual logging quota. Nevertheless, as the timber companies under our coverage generally do not even log to their annual quotas every year, we do not think this will have a significant impact to their bottomlines.

We are therefore reducing our log production forecasts for the companies under our coverage, to reflect a decline of 5-15% for FY15, followed by flattish production for FY16-17. We expect log harvests in Sarawak overall to register a decline in 2015, of 4-6%, on the back of these circumstances.

With this supply shortage, meranti log prices are, therefore, expected to continue

rising in 2015. In May 2015, log prices are still up 15-16% YoY, although from the end of 2014, the rise is a small 2%. For 2015-2016, we have projected a price rise of 4-6% p.a., which we are keeping for now.

Figure 77: Sarawak log production (cu m) Figure 78: South-East Asian meranti log prices (USD/cu m)

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2010 2011 2012 2013 2014 2015

20

70

120

170

220

270

320

Source: ITTO, Sarawak Timber Association Source: Japan Lumber

No joy on plywood front The rate of decline of Japan’s housing starts has slowed, with YTD-April starts down 3.9% YoY, from a decline of 13% YoY in Jan 2015. In terms of plywood imports however, this has deteriorated, plummeting by 15.5% YoY in YTD-April. Japan Lumber highlighted that due to the log supply shortage in Malaysia, plywood manufacturers have higher log costs and lower volumes to export, and therefore try to keep plywood prices up to offset the higher log costs. As a result, Japan has switched its imports to Indonesian plywood from Malaysian plywood in the first few months of the year, resulting in four months of decline of Malaysian plywood imports and three months of increase of Indonesian plywood imports.

Maintain NEUTRAL sector call

Log supply shortage is worsening …

…But log prices are holding steady

Despite an improvement in housing starts, plywood imports have deteriorated



Plywood prices have therefore remained flattish despite the weak sales volumes, likely due to the passing through of high log costs. Concrete panel prices remain at around USD550-560 per cu m – up 1-2% YoY, while floorbase prices are around USD680-690 per cu m, down 0-1% YoY. We are leaving our average plywood price assumptions at +0-3% YoY for 2015-16.

Figure 79: South-East Asian plywood prices (USD/cu m) Figure 80: USD/JPY and MYR/USD exchange rate

250

350

450

550

650

750

850

950

Concrete Panel Floor Base

Source: Japan Lumber Source: Bloomberg

Exchange rates to help support earnings The further strengthening of the USD against MYR will continue to help offset the impact of weak sales volumes and flattish price trends; given that timber companies export their products in USD while costs are mostly in MYR. We have revised our MYR/USD rates to reflect RHBRI’s latest in-house forecasts of 3.62/3.55 for 2015/2016. However, we continue to highlight the sensitivity of every MYR0.10/USD change in the exchange rate in the table below

Table 52: Summary of sensitivity analysis

Jaya Tiasa Ta Ann WTK

USD10/cu m change in log price 9-11% 3-5% 7-9%

USD10/cu m change in plywood price 3-4% 3-4% 8-9%

MYR0.10/USD change in exchange rate 10-12% 10-12% 15-17% Source: RHB

No changes in CPO prices As for the plantation divisions, we maintain our CPO price assumptions of MYR2,500/tonne for 2015 and 2016. We expect CPO prices to strengthen in 2H15, due to the 12-month impact of this year’s dry weather. One catalyst to look out for would be the El Nino weather phenomenon, which would boost CPO prices.

Maintain NEUTRAL We make no change to our NEUTRAL sector rating. While we continue to expect the current state-wide log supply shortage situation to help keep log prices up, this will be slightly offset by the impact of weaker log sales as a result. Earnings from the plywood subsector are anticipated to remain weak, given sombre plywood demand from Japan and lacklustre plywood prices. On the palm oil plantations front, FFB production should increase on improving maturity of oil palm plantations hectarage, although CPO prices remain flattish currently. However, if El Nino happens, the consequent FFB production decline would generally be more than offset by the rise in CPO prices. The exchange rate factor is also a positive factor, which will help boost earnings for the sector, as 60-80% of timber companies’ earnings are in USD, while costs are all in MYR. We maintain our SOP-based valuations for the timber companies, valuing their log concessions using DCF, their plywood facilities using replacement value and a target 16x 2016F P/E for the plantation divisions. We now have one BUY recommendation (Ta Ann) and two NEUTRAL (Jaya Tiasa and WTK) recommendations.

Plywood prices are still flattish

Strength in USD is a boon for earnings

No changes in our CPO price assumptions, but watch out for El Nino

Table 53: Valuations of timber stocks


(x) (%) (x) (x) (%) (%)


Ta Ann 3.90 4.40 1,445 15.2 11.6 (14.6) 31.5 1.3 19.4 8.7 2.3 B

Jaya Tiasa 1.50 1.40 1,461 39.8 25.5 (47.3) 56.0 0.8 16.5 2.1 0.5 N

WTKH 1.05 1.00 505 14.6 11.1 (17.1) 31.4 0.4 n.m 2.6 1.5 N

Sector Avg 20.5 15.0 (25.5) 36.9



Utilities: Low Oil Prices Still a Respite To Tenaga Overweight

Sector’s OVERWEIGHT call anchored by Tenaga

We maintain our OVERWEIGHT stance on the utilities sector. This is premised upon our positive recommendations on Tenaga Nasional (Tenaga) (TNB MK, BUY, TP: MYR15.53).

Tenaga has to pass back fuel cost savings to consumers

A good proxy to the economy, the national utilities company also appeals to investors due to its earnings defensiveness, large market value and high share liquidity. We also advocate owning Tenaga for its ability to gradually regain its lost ground in the more lucrative power generation business, vis-à-vis transmission and distribution, having emerged as the biggest winner of new power plant projects in Malaysia in recent years (see Table 54). However, we do acknowledge the current general cautious sentiment towards utilities stocks, as 1Malaysia Development (1MDB) scouts for a buyer for its power assets.

Meanwhile, Tenaga no longer stands to gain directly from lower fuel costs. This is following the Government’s decision in February to cut power tariffs by 5.8%, or 2.25sen/kilowatt hour (kWh) to 36.28sen/kWh in West Malaysia and 3.5%, or 1.20sen/kWh to 33.32sen/kWh, in Sabah for four months (March-June) to pass back fuel cost savings to consumers. The reduction applies to all users (domestic, commercial and industrial), other than domestic users with electricity consumption of 300kWh/month or less. This is in accordance with the fuel cost pass-through (FCPT) mechanism, as stipulated in the new energy policy effective 1 Jan 2014. On the other hand, it is unclear if there is political will to invoke the FCPT mechanism to raise power tariffs if fuel costs go up. Nonetheless, the continued slump in fuel costs is surely a respite for Tenaga.

Table 54: Key new generation capacity in the pipeline

Project Manjung 4 Track 1 (Prai)

Tg Bin 4 Track 3A (Manjung 5)

Track 3B (Jimah East)

Track 4A Track 4B

IPP Tenaga Tenaga Malakoff Tenaga TNB, Mitsui Tenaga, SIPP Energy

1MDB

Capacity (MW) 1,000 1,071 1,000 1,000 2 x 1,000 1,000 - 1,400 2,000

Type Coal Gas Coal Coal Coal Gas Gas

Location Manjung, Perak

Prai, Penang

Tg Bin, Johor

Manjung, Perak

Jimah, N. Sembilan

Pasir Gudang, Johor

Melaka

Commercial operation date Mar 2015 Jan 2016 Mar 2016 Oct 2017 June & Dec 2019

2018 2021

Source: Companies, Media reports

YTL Power needs more power in Malaysia

YTL Power International’s (YTL Power) (YTLP MK, NEUTRAL, TP: MYR1.69) fundamentals do not excite investors as it has yet to secure any new power plant projects in Malaysia while its existing ones are about to be retired. There is a possibility that one of its plants (retiring in Sep 2015) may be renewed for 1-2 years due to delays in the completion of the 1,000 megawatt (MW) coal-fired plant of a competitor. However, even if this happens, it would likely have only a one-off impact on earnings. Also, the market may be slow in warming up to its new overseas investments, particularly in greenfield projects given the high execution risks.

Petronas Gas – a second regasification plant under construction

Petronas Gas (PTG MK, NEUTRAL, TP: MYR22.40) is investing in a new MYR2.7bn regasification terminal project at the Pengerang Deep Water Terminal, which is an integral part of the MYR89bn Refinery and Petrochemical Integrated Development (RAPID) project in Pengerang, Johor. The project will be carried out via a 65:25:10 joint-venture (JV) called Pengerang LNG (Two) SB between Petronas Gas, Dialog (DLG MK, BUY, TP: MYR1.90) and the Johor State Government. Construction for the plant, with an annual capacity of 3.5m tonnes, will start in 2Q15 with a targeted commercial operations date by 4Q17. Separately, Petronas Gas has entered into heads of agreement with Linde (M) SB to “pursue possibility of the development” of an air separation unit on a JV basis in Pengerang, to be operational by 4Q18.

Tenaga our sector Top Pick

Tenaga offers size and earnings defensiveness

A new power plant in Malaysia still elusive for YTL Power

Near-term earnings catalysts priced in for Petronas Gas



Its earnings growth is unlikely to be significant in FY15-17, until maiden contributions from the Pengerang regasification terminal kicks in by FY18. We like Petronas Gas for its earnings defensiveness and strong long-term fundamentals backed by continued industrialisation in Malaysia and, hence, rising demand for gas.

Water restructuring in limbo, yet again

The Selangor State Government’s takeover offer for Puncak Niaga’s (PNH MK, NEUTRAL, TP: MYR2.61) water assets and operations, which would have boosted the company’s coffers by MYR1.56bn, is still in limbo. This is because the Federal and State Governments have yet sort out their differences in relation to the exercise.

Table 55: Valuations of utilities stocks


(x) (%) (x) (x) (%) (%)


Tenaga 12.66 15.53 71,448 11.0 10.3 37.2 7.2 1.5 6.0 14.4 3.0 B

P Gas 21.48 22.40 42,503 22.4 22.2 3.1 0.9 3.8 17.4 17.5 2.9 N

YTL Power 1.55 1.69 11,312 12.9 15.7 (26.4) (17.7) 1.0 4.0 8.0 0.6 N

Puncak 2.70 2.61 1,110 3.6 3.3 23.4 8.3 0.5 41.8 14.6 0.0 N

Pestech 4.87 6.18 674 16.2 15.1 +>100 7.2 3.5 n.m 21.7 2.1 B

Sector Avg 13.2 12.7 19.4 2.9

Water asset disposal in a stalemate

97

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Malaysia Strategy 1 July 2015


Table 56: Valuations and ratings of individual stocks under coverage

FYE Price Target Core EPS

(sen)

EPS Growth

(%)

P/E

(x)

EV/EBITDA

(x)

(MYR/s) (MYR/s) 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F

BUY

7-Eleven Dec 1.70 1.98 5.1 6.3 7.9 21.8 22.9 26.0 33.2 27.1 21.5 20.0 10.9 9.2

Ahmad Zaki Dec 0.67 0.98 2.6 5.4 7.2 31.7 +>100 34.8 25.5 12.5 9.3 11.0 10.3 10.8

AirAsia Dec 1.54 2.89 9.8 24.1 28.8 (40.1) 145.7 19.5 15.7 6.4 5.3 10.0 6.9 6.8

AirAsiaX Dec 0.22 0.38 (24.4) (2.8) 3.7 +>100 88.5 n.a. n.m. n.m. 5.9 n.m 8.9 3.2

Berjaya Auto^ April 2.78 3.36 26.6 30.6 36.1 64.6 15.0 18.1 10.4 9.1 7.7 6.7 5.9 4.8

Berjaya Food Apr 2.57 3.90 7.9 13.8 18.1 (6.0) 74.9 30.4 32.5 18.6 14.2 20.2 10.7 8.7

Bumi Armada Dec 1.19 1.57 5.5 5.8 10.1 (62.8) 5.5 75.5 21.7 20.6 11.8 11.6 8.4 6.3

CMS Dec 5.23 6.00 20.3 24.8 29.6 16.7 22.2 19.2 25.7 21.1 17.7 12.8 11.6 11.0

Coastal Contract Dec 2.79 4.30 31.5 36.4 42.9 28.1 15.5 17.7 8.8 7.7 6.5 7.1 6.1 5.1

Datasonic Mar 1.08 1.29 4.0 4.9 5.2 (66.7) 22.7 6.6 27.0 22.0 20.6 11.4 15.2 15.9

Dayang Dec 2.26 3.40 20.2 23.2 26.9 38.2 15.1 15.6 11.2 9.7 8.4 8.2 7.3 6.3

Dialog Jun 1.63 1.90 4.0 5.1 6.0 (0.9) 28.4 17.5 41.2 32.1 27.3 30.7 25.2 23.8

Digi.com Dec 5.40 6.60 26.5 27.0 28.1 11.2 1.9 4.3 20.4 20.0 19.2 13.3 12.5 12.2

DRB-Hicom^ Mar 1.60 2.15 10.5 10.6 10.9 +>100 0.8 3.0 15.2 15.1 14.7 7.8 9.2 8.5

Esthetics^ Mar 0.96 1.32 8.7 9.4 10.0 4.3 7.3 6.8 11.0 10.2 9.6 4.9 4.3 3.6

Evergreen Fibreboard Dec 1.41 1.50 0.0 10.0 13.5 n.a. +>100 34.9 +>100 14.1 10.5 11.5 5.6 5.2

Favelle Favco Dec 2.80 3.68 41.2 41.4 43.1 29.6 0.6 4.0 6.8 6.8 6.5 3.9 3.3 3.0

Freight Mgmt Jun 1.49 1.87 13.0 12.2 14.3 (3.6) (5.9) 17.3 11.5 12.2 10.4 6.2 6.7 5.7

GD Express Jun 1.40 1.98 2.8 2.2 3.0 53.8 (23.9) 37.4 49.2 64.7 47.1 36.0 42.0 31.6

Genting Plantation Dec 10.02 11.50 50.1 41.5 53.9 27.3 (17.1) 29.6 20.0 24.1 18.6 13.4 16.6 13.3

GHL Systems Dec 1.13 1.42 1.1 2.8 5.3 29.3 +>100 88.6 +>100 40.5 21.5 28.3 18.4 11.2

Globetronics Dec 6.11 7.10 22.0 28.8 39.5 19.6 30.6 37.3 27.8 21.3 15.5 16.4 13.4 10.1

Ho Hup Dec 1.23 2.29 21.1 22.6 28.9 (4.3) 7.0 28.0 5.8 5.4 4.3 5.0 3.4 2.0

Hua Yang^ Mar 1.97 2.52 41.9 43.6 45.2 14.9 4.2 3.6 4.7 4.5 4.4 4.7 4.3 4.2

IHH Healthcare Dec 5.67 7.00 8.9 12.2 14.9 3.6 37.5 21.9 63.8 46.4 38.0 25.1 22.0 19.2

Inari Amerton Jun 3.32 4.35 19.2 18.0 21.7 +>100 (6.1) 20.5 17.3 18.4 15.3 13.1 14.6 11.7

IJM Corp^ Mar 6.70 7.84 31.8 42.3 43.9 (17.9) 33.2 3.7 21.1 15.8 15.3 8.3 9.5 9.1

IJM Plantations^ Mar 3.59 3.90 15.6 20.7 25.5 6.4 32.5 23.1 23.0 17.3 14.1 18.8 12.7 10.5

IQ Group Mar 2.58 3.20 24.4 26.6 29.4 +>100 9.1 10.5 10.6 9.7 8.8 5.4 4.4 3.7

Karex Jun 3.15 3.63 13.4 11.2 12.2 24.5 (16.2) 8.6 23.5 28.1 25.9 16.8 21.4 18.0

Kimlun Dec 1.33 1.65 13.1 18.2 18.6 (11.9) 38.8 2.1 10.2 7.3 7.2 4.9 4.2 3.7

KPJ Healthcare Dec 4.26 5.10 12.4 14.3 16.4 26.3 15.4 14.4 34.3 29.8 26.0 17.7 15.3 13.2

Kulim Dec 2.52 2.95 5.5 5.5 10.1 +>100 0.3 84.0 46.0 45.9 24.9 9.2 6.7 6.7

MAHB Dec 6.15 8.11 9.3 1.7 7.2 (63.0) (81.7) +>100 66.2 +>100 85.5 15.7 9.6 8.7

Matrix Dec 3.05 3.65 40.0 45.3 48.6 19.4 13.3 7.4 7.6 6.7 6.3 5.6 4.6 4.3

MBM Dec 3.52 3.80 29.2 33.5 39.3 (17.7) 14.8 17.5 12.1 10.5 8.9 75.3 22.7 25.4

MISC Dec 7.76 9.49 42.6 53.2 59.6 20.0 24.8 12.0 18.2 14.6 13.0 12.8 10.7 9.6

MPI Jun 6.79 7.69 25.4 43.2 48.1 +>100 70.2 11.5 26.8 15.7 14.1 5.1 3.9 3.4

MSM Dec 5.15 6.10 37.2 38.3 40.7 (2.3) 3.1 6.1 13.8 13.4 12.7 8.9 7.6 7.0

Muhibbah Dec 2.30 3.39 18.3 27.4 30.9 (3.1) 49.7 12.8 12.6 8.4 7.5 3.6 3.5 3.1

Naim Dec 2.35 3.63 39.3 32.6 36.3 +>100 (16.9) 11.2 6.0 7.2 6.5 10.6 13.5 13.1

Oka Corp Mar 0.86 1.15 10.4 10.4 11.3 (29.2) (0.2) 8.7 8.3 8.3 7.6 4.2 4.4 3.9

OCK Dec 0.84 1.06 3.0 6.3 6.6 15.8 +>100 4.7 28.5 13.3 12.7 13.4 7.6 7.3

Paramount Dec 2.07 2.40 14.0 17.6 18.7 (11.7) 25.5 6.4 14.8 11.8 11.1 9.5 8.2 7.8

Pestech Dec 4.87 6.18 14.1 30.1 32.3 (43.3) +>100 7.2 34.5 16.2 15.1 n.a. n.a. n.a.

PBB Dec 18.72 21.00 122.9 124.1 134.2 9.3 1.0 8.2 15.2 15.1 13.9 n.a. n.a. n.a.

Petra Energy Dec 1.20 1.70 7.5 14.6 16.4 23.7 93.9 12.3 15.9 8.2 7.3 9.9 6.0 5.5

Petronas Chemicals Dec 6.25 6.75 34.8 43.3 48.7 (13.5) 24.2 12.7 17.9 14.4 12.8 11.7 6.5 6.0

Pintaras Jun 3.82 4.60 33.1 31.0 30.5 19.7 (6.2) (1.6) 11.5 12.3 12.5 5.5 5.8 5.6

Pos Malaysia^ Mar 4.27 5.44 28.9 30.2 34.2 (1.5) 4.5 13.2 14.8 14.1 12.5 6.4 5.5 4.6

Press Metal Dec 2.64 3.21 35.9 28.6 36.0 54.0 (20.2) 25.6 7.4 9.2 7.3 5.5 6.9 5.2

^ FY14,15 & 16 valuations refer to those of FY15,16 & 17




P/CF

(x)

P/BV

(x)

DIV YIELD

(%)

ROE

(%)

% Chg in price Mkt

cap

14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F 1Mth 3 Mth 12 Mth (MYRm)

BUY

1.8 0.8 0.7 8.9 8.4 7.3 3.0 2.2 2.8 40.7 32.0 36.4 1.2 9.7 1.1 2,097

n.m 8.0 6.4 1.0 0.9 0.9 0.0 1.5 1.5 4.7 7.7 9.6 (4.3) (4.3) (3.6) 324

21.9 4.8 3.7 0.9 0.8 0.7 0.0 4.5 5.4 5.7 13.7 14.5 (25.2) (30.3) (32.2) 4,282

n.m 4.0 2.0 0.7 0.9 0.8 0.0 0.0 0.0 n.m n.m 14.7 (20.0) (40.5) 0.0 913

10.4 10.0 9.1 4.7 4.3 3.3 5.3 5.0 5.9 52.4 49.5 48.5 8.7 5.5 67.0 2,249

5.7 3.8 2.9 2.5 2.4 2.2 1.5 2.7 3.5 11.0 13.1 15.9 (7.6) (3.0) 78.5 979

8.1 4.4 5.5 1.0 1.0 0.9 0.8 1.2 2.1 5.8 5.0 8.3 (3.3) 13.3 (43.7) 6,981

12.8 24.2 31.7 3.0 2.8 2.6 1.6 1.9 2.3 12.1 13.8 15.2 1.0 17.0 42.9 5,503

n.m 6.8 5.6 1.2 1.0 0.9 2.6 3.3 3.8 15.4 14.3 15.1 (4.8) (3.8) (43.4) 1,651

13.1 13.0 16.4 6.5 5.6 4.8 1.9 1.9 2.2 28.8 27.3 25.1 3.8 (7.7) (45.7) 1,458

11.4 11.2 9.2 2.1 1.9 1.7 4.5 5.1 5.9 22.0 20.3 21.2 (7.4) (4.6) (37.2) 2,012

90.5 19.1 27.1 5.1 4.9 5.1 1.0 1.2 1.5 13.4 15.9 17.6 (2.4) 4.5 (12.8) 8,351

15.2 12.6 14.8 61.2 82.8 82.8 4.8 5.0 5.2 305.4 351.3 431.1 (6.7) (14.1) (5.8) 41,985

6.4 3.9 4.0 0.4 0.4 0.4 3.8 3.8 3.8 4.0 2.7 2.7 (1.2) (20.0) (28.9) 3,093

7.3 7.5 7.8 1.3 1.2 1.1 3.6 4.2 4.2 12.1 12.0 12.0 (1.5) (4.0) (23.2) 177

7.6 6.0 6.7 0.9 0.8 0.8 0.0 0.0 1.4 0.0 6.0 7.6 20.5 17.5 171.2 723

5.7 4.8 5.7 1.3 1.2 1.0 4.4 5.9 6.2 20.3 18.0 16.9 (0.7) 0.7 (22.2) 594

6.4 20.1 7.8 1.6 1.5 1.3 3.0 3.0 3.6 14.5 12.4 13.4 4.2 (3.9) (17.2) 264

42.8 58.3 43.9 11.7 13.9 11.6 0.8 0.5 0.7 28.6 24.1 26.9 (7.3) (15.7) (14.0) 1,742

15.6 20.2 14.2 2.1 2.0 2.0 1.0 1.0 1.2 10.7 8.4 10.8 0.4 0.2 (13.2) 7,720

n.m 78.3 62.0 3.2 3.0 2.6 0.0 0.0 0.0 4.9 7.7 13.1 (0.9) 17.1 88.3 20

19.8 14.1 9.4 5.9 5.6 5.0 3.3 3.6 3.9 21.8 27.3 34.1 2.7 16.3 44.9 1,703

n.m 4.4 3.8 3.1 2.0 1.4 0.0 0.0 0.0 63.9 44.6 41.0 (0.4) (0.7) 8.8 383

4.2 3.9 3.7 1.1 1.0 0.8 6.6 6.9 7.1 26.0 22.9 20.4 (5.3) (4.8) (10.0) 520

29.7 22.8 19.7 2.4 2.3 2.2 0.4 0.5 0.7 3.9 5.0 5.9 (3.7) (5.5) 30.3 46,372

40.0 18.7 15.4 6.6 6.9 5.0 2.0 2.4 2.8 47.7 44.3 38.1 (1.2) 3.1 16.1 2,599

7.7 9.6 9.8 1.1 1.1 1.2 2.2 1.8 1.8 5.8 7.3 7.8 (3.9) (6.6) 0.0 10,986

13.5 15.8 11.9 2.0 1.8 1.7 1.7 2.4 2.9 9.2 11.0 12.6 2.9 5.9 (7.7) 3,161

8.9 8.7 8.4 1.9 1.7 1.5 3.1 3.5 3.9 17.5 17.1 16.8 (8.4) 4.1 (22.6) 225

28.1 19.8 28.2 4.8 4.2 4.6 0.8 0.7 1.0 22.5 19.3 19.0 2.6 3.2 57.0 1,690

4.3 4.8 4.8 0.9 0.9 0.8 2.9 2.9 2.9 12.9 13.0 12.0 2.3 3.9 (17.9) 400

14.5 17.7 15.5 3.5 3.2 3.0 1.5 1.7 1.9 10.9 11.3 11.9 1.9 2.2 29.1 4,466

n.m n.m n.m 2.5 2.5 2.5 3.9 14.9* 14.9* 1.8 1.6 2.8 (5.0) (11.7) (27.7) 3,283

14.4 8.2 6.6 1.3 1.3 1.3 0.1 0.1 0.1 2.3 0.4 1.6 (7.4) (12.5) (18.5) 10,159

18.4 6.2 7.5 2.0 1.7 1.5 5.7 6.1 6.6 29.5 27.9 25.8 (4.7) 7.4 9.7 1,415

13.5 n.m 27.2 0.9 0.8 0.8 2.3 2.3 2.3 7.7 8.3 9.0 2.3 7.6 14.7 1,375

12.1 10.3 11.0 1.2 1.2 1.1 1.3 1.7 1.9 7.3 8.3 8.7 2.3 7.6 14.7 34,638

5.4 4.9 4.4 1.9 1.8 1.7 2.2 2.9 2.9 7.3 11.9 12.4 (3.3) (0.7) 32.6 1,425

15.5 7.8 10.6 1.9 1.8 1.7 4.7 4.5 4.7 13.8 13.5 13.6 (4.6) 3.0 5.3 3,620

n.m n.m 6.2 1.5 1.3 1.2 2.0 2.8 3.2 13.0 17.1 16.9 (8.4) 4.1 (22.6) 992

n.m 14.4 14.2 0.5 0.4 0.4 1.2 1.5 1.5 8.5 6.3 6.6 (11.0) (11.3) (44.3) 588

6.2 7.6 7.2 1.0 1.0 1.0 4.7 5.2 5.8 11.8 12.3 12.6 0.0 0.0 0.0 133

155.3 26.0 62.4 2.5 2.1 1.8 0.0 0.0 0.0 12.1 17.1 15.3 1.6 13.2 13.6 444

6.4 8.1 8.7 0.9 1.0 0.9 3.6 3.9 4.1 6.7 8.5 8.6 17.6 35.3 39.9 874

6.5 n.m 15.3 5.0 3.5 4.0 2.5 2.1 3.0 14.6 21.7 26.5 (2.4) 0.4 36.9 674

n.a. n.a. n.a. 2.5 2.3 2.1 2.8 3.0 3.3 18.7 16.3 16.1 (1.5) 0.6 (5.9) 72,116

9.6 2.1 4.6 0.7 0.7 0.7 1.7 3.2 3.6 4.9 8.8 9.3 (14.3) (16.1) (61.2) 386

18.7 13.0 11.5 2.2 2.0 1.9 2.6 3.5 3.9 12.5 14.7 15.3 0.3 15.1 (7.8) 50,000

9.7 13.4 12.9 2.0 1.8 1.7 3.9 3.9 3.9 18.8 15.7 13.9 (8.2) (6.1) (13.2) 639

21.2 9.1 8.3 2.2 2.0 1.9 3.0 3.2 3.6 14.4 14.4 13.9 (7.2) (15.4) (19.4) 2,293

6.7 4.8 4.3 1.1 1.3 1.2 4.2 3.0 4.1 18.4 15.9 17.9 (1.1) (20.0) 34.7 3,159


*Special dividend




FYE Price Target Core EPS

(sen)

EPS Growth

(%)

P/E

(x)

EV/EBITDA

(x)


BUY

Prestariang Dec 2.65 3.03 4.2 10.5 15.1 (56.1) +>100 44.0 63.2 25.2 17.5 51.2 21.7 15.0

Protasco Dec 1.86 2.27 16.6 19.7 22.4 14.5 18.4 13.7 11.2 9.5 8.3 3.8 4.2 3.6

Scientex Jul 6.86 7.90 56.7 66.0 69.4 16.3 5.2 18.6 10.4 9.9 8.3 7.7 6.6 5.5

SHL Consolidated Mar 3.40 5.60 43.2 46.4 50.1 79.3 7.4 7.9 7.9 7.3 6.8 5.0 3.9 3.6

SKP Resources^ Mar 1.21 1.18 4.7 7.6 10.0 39.7 63.3 31.7 25.9 15.9 12.1 15.4 9.8 7.8

SOP Dec 4.70 7.07 26.3 31.5 44.2 8.4 19.6 40.4 17.9 14.9 10.6 9.1 8.5 5.6

SP Setia Oct 3.18 4.08 14.7 16.5 20.5 (22.7) 12.1 24.2 21.6 19.3 15.5 11.0 11.1 11.6

Sunway Dec 3.45 4.10 34.3 33.8 33.5 7.2 (1.5) (0.8) 10.1 10.2 10.3 8.8 9.2 8.8

Ta Ann Dec 3.90 4.40 30.0 25.6 33.7 73.6 (14.6) 31.5 13.0 15.2 11.6 6.7 7.0 5.8

TASCO Dec 4.00 4.76 30.7 36.6 42.1 16.5 19.1 15.2 13.0 10.9 9.5 6.8 5.6 5.0

Tambun Indah Dec 1.70 2.28 24.3 27.1 30.1 47.2 11.6 11.2 7.0 6.3 5.6 5.1 4.3 3.8

Tenaga Aug 12.66 15.53 83.8 114.9 123.3 15.8 37.2 7.2 15.1 11.0 10.3 7.9 6.4 5.9

Top Glove Aug 6.70 7.02 31.7 29.1 39.0 (8.2) 34.0 9.8 23.0 17.2 15.7 15.7 11.8 10.9

TSH Resources Dec 2.25 2.57 10.8 11.6 14.4 2.7 7.0 24.5 20.8 19.4 15.6 16.0 14.1 12.1

Tune Insurance Dec 1.68 2.30 9.6 10.2 11.9 3.5 5.7 16.9 17.5 16.5 14.1 16.3 15.5 13.4

Wah Seong Dec 1.33 1.55 17.8 13.6 15.6 +>100 (23.6) 14.1 7.5 9.8 8.6 6.2 7.5 7.1

WCT Dec 1.45 1.99 8.5 12.7 13.0 (32.7) 49.6 2.1 17.1 11.4 11.2 16.7 12.7 12.5

Westports Dec 4.30 4.85 15.4 16.2 22.6 14.8 5.2 39.1 27.9 26.5 19.0 17.4 14.5 11.2

Yinson^ Jan 3.18 4.02 14.9 14.3 13.9 +>100 (4.4) (2.8) 21.3 22.3 22.9 13.8 14.9 16.5

NEUTRAL

Affin Dec 2.73 2.70 35.3 25.7 32.8 (18.9) (27.1) 27.6 7.7 10.6 8.3 n.a. n.a. n.a.

AEON Dec 3.17 3.09 15.1 15.2 17.5 (8.5) 0.7 15.3 21.0 20.9 18.1 9.3 8.1 7.5

Aeon Credit ^ Feb 14.22 13.40 149.8 167.6 181.0 23.0 11.9 8.0 9.5 8.5 7.9 13.1 12.2 12.3

AFG^ Mar 4.40 4.40 34.8 37.5 39.6 (6.2) 7.6 5.7 12.6 11.7 11.1 n.a. n.a. n.a.

Ann Joo Dec 0.96 1.10 6.6 5.0 6.5 47.7 (24.1) 30.2 14.6 19.3 14.8 15.2 17.1 15.5

Apex healthcare Dec 4.17 3.75 36.1 35.1 33.2 12.8 (2.9) (5.4) 11.5 11.9 12.6 6.2 6.4 6.5

Astro^ Jan 2.94 3.28 10.0 11.5 14.6 15.9 14.7 27.4 29.4 25.7 20.1 5.8 6.3 6.2

Axiata Dec 6.46 7.20 27.4 27.9 29.1 (15.0) 1.7 4.3 23.5 23.1 22.2 9.3 8.9 8.4

Axis REIT Dec 3.48 3.82 16.4 19.3 20.2 (14.0) 18.3 4.4 21.3 18.0 17.2 22.3 18.9 18.3

BAT Dec 60.50 63.10 315.9 339.7 340.8 9.5 7.5 0.3 19.2 17.8 17.8 13.8 12.9 13.1

B-Toto^ Apr 3.23 3.48 25.3 23.9 24.6 8.8 (5.6) 2.8 12.8 13.5 13.1 8.2 9.0 8.7

BIMB Dec 4.08 4.30 34.5 33.5 36.6 99.9 (2.8) 9.4 11.8 12.2 11.1 n.a. n.a. n.a.

Bursa Malaysia Dec 8.20 9.20 37.3 38.5 41.0 14.5 3.4 6.5 22.0 21.3 20.0 20.6 19.8 18.7

Carlsberg Dec 12.46 13.80 68.7 69.4 74.2 15.0 1.0 7.0 18.1 18.0 16.8 13.0 12.2 11.6

CBIP Dec 2.00 2.20 24.0 15.0 16.1 (33.0) (37.4) 7.1 8.3 13.3 12.4 6.0 8.9 8.9

CMMT Dec 1.39 1.48 8.4 8.9 9.4 0.7 5.0 5.5 16.5 15.7 14.9 17.4 17.6 16.3

CARiNG^ May 1.06 1.10 5.4 8.3 9.0 (26.6) 53.1 8.2 19.6 12.8 11.8 8.7 5.5 4.2

E&O^ Mar 1.68 2.02 4.2 6.3 6.9 (43.3) 51.4 8.5 40.1 26.5 24.4 21.5 21.5 17.1





P/CF

(x)

P/BV

(x)

DIV YIELD

(%)

ROE

(%)

% Chg in price Mkt

cap

14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F 1Mth 3 Mth 12 Mth (MYRm)

BUY

68.2 35.5 21.8 7.6 6.9 5.7 1.6 2.6 2.6 15.3 28.6 35.6 4.3 6.0 41.0 1,283

6.1 6.4 5.9 1.9 1.8 1.8 6.5 6.5 6.5 15.5 19.7 21.7 1.1 20.8 (5.6) 624

9.9 7.3 6.3 2.1 1.9 1.6 3.1 3.0 3.6 21.7 20.4 21.0 (3.4) 2.4 18.5 1,550

n.m 6.1 10.6 1.2 1.1 1.0 5.0 7.1 7.9 15.0 14.9 15.0 0.3 8.3 53.2 823

0.5 3.8 1.1 7.2 7.0 5.4 1.9 3.1 4.1 22.6 51.9 50.7 26.0 60.3 130.5 1,518

14.6 7.5 7.3 1.6 1.3 1.2 1.0 1.1 1.6 9.4 9.6 11.5 5.6 (7.3) (31.9) 2,159

n.m 17.0 6.9 1.4 1.4 1.3 3.1 3.1 3.5 6.4 7.1 8.7 (5.6) (7.3) 4.3 8,150

61.5 8.8 5.1 3.5 3.5 3.5 3.2 3.2 3.2 10.5 9.6 9.0 (2.0) (2.1) 16.6 6,010

6.5 19.4 7.5 1.4 1.3 1.2 5.1 2.3 2.8 10.8 8.7 10.8 3.2 0.5 (10.3) 1,445

8.6 7.4 6.5 1.3 1.2 1.1 0.2 0.3 0.3 10.7 11.7 12.4 (4.1) 7.0 55.6 400

5.9 7.2 6.3 1.8 1.5 1.3 4.7 5.3 5.8 28.9 26.4 24.8 (2.3) (7.1) (22.4) 720

6.8 6.0 5.6 1.7 1.5 1.4 2.3 3.0 3.2 11.7 14.4 14.1 (4.8) (12.4) 3.6 71,448

13.2 9.0 11.1 3.0 3.0 2.9 2.6 2.9 3.2 13.2 17.5 19.0 20.5 19.9 47.3 4,159

22.5 8.4 13.0 2.4 2.2 2.0 1.3 1.4 1.7 12.0 11.6 13.2 0.0 (1.3) (8.0) 2,816

n.a. n.a. n.a. 3.1 2.8 2.5 2.3 2.4 2.8 18.8 17.6 18.4 (8.2) (15.6) (26.0) 1,263

n.m 9.8 4.5 1.0 0.9 0.9 4.9 4.1 4.7 13.4 9.5 10.3 0.8 5.6 (30.0) 1,031

n.m 13.6 13.4 0.7 0.7 0.6 1.5 1.5 1.5 4.2 6.1 5.9 (18.1) (2.4) (33.4) 1,580

25.6 18.7 14.4 8.3 7.6 6.4 2.6 2.8 3.9 31.2 29.9 36.3 0.0 16.2 59.3 14,663

15.9 22.1 17.3 2.3 2.1 2.1 0.0 0.0 0.0 15.6 9.8 8.8 1.6 13.2 13.6 3,284

NEUTRAL

n.a. n.a. n.a. 0.6 0.6 0.6 5.5 3.8 4.8 8.4 6.2 7.5 (2.8) (5.9) (18.8) 5,304

0.9 0.6 0.6 2.5 2.2 2.0 1.9 1.9 2.2 12.4 11.2 11.7 0.0 6.0 (20.4) 4,451

n.m n.m n.m 3.0 2.5 2.2 4.0 4.5 4.8 35.2 32.5 29.8 (3.3) 12.1 (8.6) 2,048

n.a. n.a. n.a. 1.5 1.4 1.3 3.5 4.2 4.4 12.3 12.3 12.2 (5.8) (7.8) (7.4) 6,702

1.1 8.2 5.3 0.5 0.5 0.5 3.1 1.6 2.0 3.2 2.4 3.1 (5.9) (5.9) (17.2) 502

11.1 12.4 11.1 1.5 1.5 1.6 2.3 2.4 2.6 13.0 13.0 12.5 (5.8) (7.8) (7.4) 440

7.9 7.1 8.0 22.0 18.1 14.8 3.7 2.9 3.7 79.5 77.5 81.0 (6.7) (7.5) (17.2) 15,294

7.2 9.8 8.3 2.7 2.7 2.6 3.4 3.7 3.8 11.6 11.6 12.0 (2.1) (8.6) (7.4) 55,306

13.0 11.4 10.5 1.3 1.6 1.6 5.7 5.6 5.8 7.0 8.4 9.3 (2.8) (0.3) 2.7 1,905

17.7 16.7 16.6 33.0 31.8 30.7 5.1 5.5 5.5 174.7 181.7 175.8 (5.5) (12.8) (9.6) 17,275

8.6 11.2 11.6 6.4 6.0 5.6 6.6 6.3 6.5 52.5 45.6 43.8 0.6 (2.7) (16.1) 4,364

n.a. n.a. n.a. 2.1 2.0 1.9 4.2 4.1 4.5 18.5 16.9 17.3 2.0 2.3 (2.6) 6,292

n.a. n.a. n.a. 5.8 5.7 5.7 6.6 4.5 4.7 25.4 27.2 28.6 (2.8) (4.7) 8.9 4,362

16.0 16.1 15.2 12.3 12.3 12.3 5.7 5.6 6.0 72.2 68.5 73.2 (2.8) (6.9) 4.2 3,839

4.4 12.0 11.0 1.4 1.6 1.5 1.5 2.3 2.5 16.5 12.9 12.7 (2.0) (4.8) (8.0) 1,076

12.3 11.8 11.1 1.1 0.9 1.0 6.4 6.6 6.8 6.7 6.4 6.8 (4.8) (5.4) (7.3) 2,514

5.1 4.8 4.3 1.8 1.6 1.4 0.0 0.0 0.0 9.8 13.1 13.3 9.7 5.4 0.5 231

n.m 4.4 16.7 1.3 1.3 1.3 2.3 2.1 2.4 3.4 5.2 5.4 (11.6) (13.8) (32.1) 2,290





FYE Price Target

Core EPS

(sen)

EPS Growth

(%)

P/E

(x)

EV/EBITDA

(x)


NEUTRAL

Faber Dec 3.45 3.44 24.9 22.6 25.2 8.4 (9.2) 11.7 13.9 15.3 13.7 9.5 7.1 5.9

Felda Global Dec 1.68 1.60 4.5 6.9 9.3 (84.2) 53.4 35.1 37.3 24.3 18.0 5.4 5.0 3.6

Gamuda Jul 4.70 5.26 31.0 29.7 25.3 1.5 (4.2) (14.8) 15.2 15.8 18.6 24.5 17.5 20.7

Genting Bhd Dec 8.13 9.30 43.8 50.9 58.2 (16.5) 16.1 14.4 18.5 16.0 14.0 4.7 5.0 5.0

Genting M'sia Dec 4.18 4.23 22.9 24.7 26.8 (20.0) 8.0 8.5 18.3 16.9 15.6 10.5 9.1 8.2

Glomac^ Apr 0.82 0.88 8.5 11.5 11.9 (42.5) 35.0 3.4 9.5 7.1 6.8 5.9 6.2 6.2

Guiness Jun 14.40 14.10 65.6 76.0 77.1 (9.2) 15.9 1.4 21.9 18.9 18.7 14.2 12.4 12.1

Hartalega^ Mar 8.41 8.48 27.1 36.3 47.0 (13.9) 33.9 29.6 31.1 23.2 17.9 19.6 14.6 11.4

Hektar REIT Dec 1.51 1.51 11.0 11.3 11.6 (4.1) 2.4 2.8 13.7 13.3 13.0 16.4 16.1 15.6

Hiap Teck Jul 0.42 0.40 6.4 (1.8) 3.8 88.0 (128) +>100 6.6 n.m. 11.1 8.6 11.0 9.2

HL Bank Jun 13.50 15.00 119.4 125.3 133.5 12.8 5.0 6.5 11.3 10.8 10.1 n.a. n.a. n.a.

HSL Dec 1.86 1.95 13.8 15.0 16.3 (9.7) 8.2 8.8 13.4 12.4 11.4 8.1 6.9 5.9

Hovid Jun 0.50 0.45 2.4 2.7 3.4 (8.2) 12.4 26.1 21.2 18.8 14.9 11.5 10.6 7.8

IGB REIT Dec 1.35 1.40 6.8 7.1 7.5 12.2 3.9 6.0 19.8 19.1 18.0 19.9 19.3 18.4

IOI Corp Jun 3.97 4.40 26.8 15.9 20.7 (0.1) (40.6) 30.0 14.8 24.9 19.1 12.3 15.9 15.2

IOI Prop Jun 1.85 2.25 13.1 13.3 14.1 (38.7) 1.7 5.6 14.1 13.9 13.1 6.1 9.9 11.9

Jaya Tiasa Jun 1.50 1.40 7.1 3.8 5.9 +>100 (47.3) 56.0 21.0 39.8 25.5 10.1 13.4 11.6

KLCCSG Dec 6.90 7.06 35.4 38.0 38.9 2.1 7.4 2.3 19.5 18.1 17.7 13.8 13.4 13.1

KLK Sep 21.42 22.00 93.9 82.0 116.6 9.0 (12.7) 42.2 22.8 26.1 18.4 14.1 15.2 11.7

Kossan Dec 6.60 6.35 22.8 30.3 33.9 6.7 32.9 12.1 29.0 21.8 19.4 17.8 13.9 12.3

Lafarge Dec 8.57 9.52 30.5 41.5 44.1 (33.6) 36.0 6.3 28.1 20.7 19.5 13.8 11.1 10.4

Lion Industries Jun 0.36 0.40 -4.9 -13.8 3.9 n.a. ->100 n.a. n.m. n.m. 9.1 n.m n.m 2.6

M'sia Steel Dec 0.62 0.63 6.9 11.5 14.4 (47.4) 67.5 25.0 9.0 5.4 4.3 6.4 4.0 3.1

Mah Sing Dec 1.66 2.08 23.0 16.9 16.9 13.8 (26.5) (0.1) 7.2 9.8 9.8 6.5 6.8 6.9

Magnum Dec 2.65 2.74 18.5 18.2 18.3 (18.5) (1.5) 0.2 14.3 14.5 14.5 10.0 10.6 10.5

Maxis Dec 6.41 6.50 25.3 25.4 26.3 (9.1) 0.2 3.5 25.3 25.3 24.4 13.5 13.8 13.2

Maybank Dec 9.22 10.00 74.2 75.5 77.7 (2.2) 1.9 2.8 12.4 12.2 11.9 n.a. n.a. n.a.

MBSB Dec 1.77 1.70 39.1 18.1 21.5 5.6 (53.8) 18.9 4.5 9.8 8.2 n.a. n.a. n.a.

MMHE Dec 1.22 1.28 7.1 5.9 8.9 (51.9) (17.6) 51.2 17.2 20.8 13.8 8.3 7.7 5.7

MRCB Dec 1.22 1.31 2.5 4.5 5.6 n.a. 78.6 24.3 48.1 26.9 21.7 11.4 14.3 13.3

Nestle Dec 72.00 68.59 234.7 252.5 269.4 (2.0) 7.6 6.7 30.7 28.5 26.7 21.0 19.7 18.2

NTPM^ Apr 0.70 0.75 3.5 4.8 5.9 (27.6) 36.9 23.7 20.2 14.7 11.9 9.6 7.5 6.3

OldTown^ Mar 1.61 1.66 12.0 10.6 11.1 (11.9) 5.0 5.7 15.2 14.5 13.7 7.3 6.2 5.5

P Gas^ Dec 21.48 22.40 93.1 96.0 96.8 (11.3) 3.1 0.9 23.1 22.4 22.2 14.6 14.2 14.2

Perdana Petroleum Dec 1.53 1.55 11.4 10.6 13.8 50.2 (6.7) 29.4 13.4 14.4 11.1 12.5 9.9 8.2

Perisai Petroleum Dec 0.46 0.60 1.0 1.7 4.1 (82.4) 70.3 +>100 45.9 27.0 11.3 30.6 20.3 14.9

Pantech^ Feb 0.66 0.79 7.6 8.5 10.4 (19.9) 11.8 22.3 8.6 7.7 6.3 5.9 6.6 6.5

Padini Jun 1.36 1.26 13.4 10.5 11.4 6.5 (22.0) 8.6 10.1 13.0 11.9 5.3 5.3 4.6

Pavilion REIT Dec 1.49 1.55 7.7 8.0 8.3 8.4 3.7 3.8 19.3 18.6 17.9 19.3 18.8 18.1

Puncak Dec 2.70 2.61 60.4 74.6 80.8 23.6 23.4 8.3 4.5 3.6 3.3 n.m 11.7 9.2





P/CF

(x)

P/BV

(x)

DIV YIELD

(%)

ROE

(%)

% Chg in price Mkt

Cap

14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F 1 Mth 3 Mth 12 Mth (MYRm)

NEUTRAL

n.m 7.0 7.0 2.4 2.5 2.5 6.6 3.3 5.1 15.9 16.0 18.1 (8.3) 3.6 33.5 2,807

4.1 5.9 4.4 1.0 1.0 0.9 6.0 3.3 3.9 2.5 3.9 5.3 (16.4) (20.8) (60.5) 6,129

n.m 26.0 35.2 2.0 1.8 1.8 2.5 2.6 2.6 13.9 12.1 9.7 (5.8) (9.6) (0.4) 11,117

6.3 5.0 5.2 1.1 1.1 1.0 0.5 0.6 0.7 6.3 6.9 7.4 (6.7) (7.1) (19.5) 30,421

16.0 11.1 10.3 1.5 1.4 1.3 1.6 1.4 1.6 8.6 8.7 8.8 (1.2) 1.5 (0.5) 24,821

2.7 6.6 4.0 0.6 0.6 0.6 6.9 6.1 6.3 6.9 8.9 8.7 (14.2) (16.4) (23.1) 593

18.2 16.2 15.1 12.2 11.5 10.9 4.5 4.8 4.9 54.9 62.6 60.0 (0.4) (0.7) 8.8 4,350

27.5 17.6 13.5 5.1 4.8 4.3 1.4 2.0 2.5 19.0 21.7 25.3 5.8 (1.2) 34.6 6,700

25.3 24.5 23.9 1.0 1.0 1.0 7.0 7.0 7.0 7.2 7.3 7.4 (1.3) 0.7 0.0 605

2.5 n.m 8.9 0.3 0.3 0.3 1.4 0.0 0.9 4.9 (1.3) 2.8 (17.6) (20.0) (41.3) 297

n.a. n.a. n.a. 1.6 1.5 1.3 2.8 2.9 3.1 15.3 14.3 13.6 (1.6) (5.3) (2.6) 23,776

12.0 11.1 10.3 1.7 1.6 1.4 1.6 1.6 1.6 13.6 13.2 13.0 1.6 5.7 (7.0) 1,035

29.5 38.6 14.9 2.4 1.8 1.6 0.0 0.0 0.0 11.4 11.0 11.3 2.0 16.3 38.9 384

14.3 15.2 14.5 1.3 1.3 1.3 5.8 6.0 6.4 6.4 6.6 7.0 0.0 2.3 8.9 4,613

12.1 28.3 23.1 4.2 3.9 3.5 5.0 2.0 2.5 17.4 16.3 19.4 (2.0) (14.3) (24.5) 25,608

11.5 12.6 6.6 0.5 0.5 0.6 4.3 4.3 4.3 8.5 3.9 4.4 2.9 5.9 (7.7) 6,117

6.8 16.5 10.2 0.8 0.8 0.8 0.8 0.5 0.7 4.0 2.1 3.2 (4.5) (11.8) (43.4) 1,461

14.7 12.4 13.2 1.0 1.0 1.0 4.9 5.1 5.2 5.4 5.7 5.8 (0.9) (1.4) 8.0 12,457

27.8 25.5 16.8 2.9 2.9 2.7 2.6 2.7 3.5 13.1 11.1 15.1 (1.9) (4.9) (11.9) 22,866

25.7 10.9 14.9 5.2 5.4 4.6 1.2 1.4 1.5 19.3 24.4 25.6 3.0 18.3 78.9 4,220

15.8 17.7 19.5 2.3 2.3 2.3 4.0 4.4 4.6 8.2 11.2 11.8 (10.1) (14.2) (14.6) 7,282

6.0 0.8 (63.6) 0.1 0.1 0.1 0.0 2.8 2.8 n.m n.m 1.1 (10.0) (21.7) (40.0) 258

5.1 2.5 2.4 0.2 0.3 0.3 0.0 1.6 2.3 2.8 5.2 6.8 (28.3) (26.2) (38.0) 173

228.9 174.6 9.3 1.1 1.0 1.1 3.9 4.5 4.5 16.1 12.9 11.7 (2.1) 1.2 (1.0) 3,692

11.4 16.8 13.6 1.5 1.5 1.5 7.5 6.2 6.2 10.7 10.6 10.5 (1.9) (3.3) (12.5) 3,810

13.7 15.0 15.3 10.2 10.5 10.8 6.2 3.5 4.0 35.5 41.1 43.8 (8.2) (10.3) (5.0) 48,110

n.a. n.a. n.a. 1.6 1.5 1.4 6.1 5.6 5.8 13.6 12.7 12.4 0.8 0.0 (6.2) 86,239

n.a. n.a. n.a. 1.0 1.4 1.3 6.8 3.7 4.2 29.6 10.3 11.5 (4.6) (14.8) (42.5) 4,796

7.9 6.8 14.1 0.7 0.7 0.7 4.4 0.0 0.0 4.4 3.5 5.1 (2.4) (3.2) (66.8) 1,952

9.2 14.6 12.8 1.0 1.1 1.0 2.0 2.0 2.0 7.5 4.0 4.8 (3.9) 1.7 (27.4) 2,147

19.7 21.3 21.1 21.7 21.6 21.4 3.3 3.5 3.7 69.1 75.9 80.4 0.6 (2.7) 7.6 16,884

1.5 0.9 0.7 2.2 2.0 1.9 2.7 3.1 3.8 11.2 14.3 16.3 (2.1) (4.8) (16.7) 786

2.7 2.1 2.1 2.0 1.9 1.8 3.6 3.8 4.0 14.8 13.9 13.7 (1.8) (10.6) (27.5) 717

16.0 17.4 17.4 4.0 3.8 3.6 2.6 2.9 3.1 17.7 17.5 16.7 (0.5) (6.7) (12.9) 42,503

10.6 5.6 6.3 1.7 1.5 1.3 1.3 0.0 0.0 13.8 11.2 12.6 1.3 23.4 (19.0) 1,145

-11.3 10.0 7.7 0.5 0.5 0.4 0.0 0.0 0.0 1.2 1.7 4.0 (1.1) (21.4) (69.9) 549

33.5 8.6 6.8 0.8 0.8 0.7 6.1 6.1 6.1 9.8 10.1 11.6 (7.1) (12.1) (39.4) 376

1.2 1.2 1.2 2.4 2.3 2.2 7.4 7.4 6.3 23.9 18.2 19.1 (2.9) (5.6) (31.3) 919

16.5 15.8 15.3 1.2 1.2 1.2 5.3 5.6 5.8 6.3 6.3 6.5 (3.2) (1.3) 11.2 4,491

6.9 41.8 24.9 0.5 0.5 0.5 0.0 0.0 0.0 12.9 14.6 15.5 1.1 2.7 (25.4) 1,110





FYE Price Target

Core EPS

(sen)

EPS Growth

(%)

P/E

(x)

EV/EBITDA

(x)


NEUTRAL

MRCB-Quill Reit Dec 1.17 1.25 8.7 11.2 9.5 (1.2) 27.9 (14.9) 13.4 10.5 12.3 15.6 15.7 15.9

QL Resources^ Mar 3.99 4.14 14.6 17.2 19.4 14.1 17.6 12.7 27.3 23.2 20.6 16.8 13.8 12.2

Sapura Kencana^ Jan 2.41 2.34 22.6 16.3 19.0 22.9 (27.7) 16.2 10.7 14.8 12.7 11.4 13.9 12.4

Sime Darby Jun 8.50 8.75 51.8 32.9 46.0 (8.0) (36.5) 39.8 16.4 25.8 18.5 14.3 22.8 17.2

Supermax Dec 2.15 2.11 14.4 18.2 19.6 (19.5) 26.4 7.7 14.9 11.8 10.9 11.1 10.4 10.2

Sunway REIT Jun 1.60 1.55 8.1 8.4 9.8 1.7 3.7 15.9 19.7 19.0 16.4 21.4 20.6 18.4

T Chong Dec 2.95 2.80 9.8 25.3 29.4 (74.4) +>100 16.0 30.0 11.6 10.0 9.3 7.9 7.2

TDM Dec 0.70 0.63 3.6 3.1 3.7 34.2 (14.3) 19.8 19.3 22.6 18.8 16.6 13.4 12.5

Thong Guan Dec 1.98 2.05 19.1 26.7 22.3 (28.6) 39.5 (16.5) 10.4 7.4 8.9 5.3 2.5 2.8

Time dotCom Dec 6.57 6.10 22.6 24.0 27.3 16.9 6.3 13.6 29.0 27.3 24.1 15.7 15.0 12.2

TM Dec 6.67 7.40 26.3 25.4 27.2 (19.6) (3.3) 7.1 25.4 26.2 24.5 7.7 7.6 7.3

UEM Sunrise Dec 1.01 1.26 10.8 9.5 9.5 (21.5) (12.6) 0.6 9.3 10.7 10.6 11.1 11.6 12.7

Unisem Dec 2.35 2.42 9.4 14.5 16.6 n.a. 54.4 13.8 24.9 16.2 14.2 7.1 5.5 4.7

UOA Dev Dec 2.06 2.45 22.9 21.5 20.1 (15.5) (6.2) (6.2) 9.0 9.6 10.2 5.2 5.4 5.6

VS Industry Jul 4.69 4.70 19.1 39.1 47.4 +>100 +>100 21.2 24.5 12.0 9.9 9.7 6.1 5.3

WTK Dec 1.05 1.00 8.7 7.2 9.4 (29.8) (17.1) 31.4 12.1 14.6 11.1 5.7 7.0 5.8

YTL Power Jun 1.55 1.69 16.3 12.0 9.9 13.6 (26.4) (17.7) 9.5 12.9 15.7 9.0 8.4 9.2

SELL

Alam Maritim Dec 0.56 0.45 6.2 4.5 5.9 (21.5) (28.2) 30.6 8.9 12.4 9.5 8.8 9.3 7.6

AMMB^ Mar 6.06 5.70 63.8 55.5 59.7 7.6 (13.0) 7.4 9.5 10.9 10.2 n.a. n.a. n.a.

APM Dec 4.78 4.30 50.3 45.2 47.8 (16.8) (10.2) 5.8 9.5 10.6 10.0 4.1 3.6 3.5

Daibochi Dec 4.32 3.80 20.9 25.3 27.5 (13.5) 21.4 8.5 20.7 17.1 15.7 12.6 10.3 9.5

Media Prima Dec 1.55 1.40 13.1 15.2 16.5 (34.4) 16.1 8.7 11.9 10.2 9.4 3.4 2.8 2.6

Parkson Jun 1.61 1.70 12.7 8.7 10.3 (41.7) (31.3) 18.0 12.7 18.4 15.6 1.3 2.1 2.3

TH Plantation Dec 1.60 1.00 3.9 4.6 6.1 (46.0) 18.1 33.3 41.4 35.0 26.3 14.1 13.8 12.1

UMW Dec 10.28 8.65 44.0 58.3 66.8 (39.7) 32.5 14.7 23.4 17.6 15.4 7.0 7.9 7.5

CIMB Dec 5.50 5.20 37.5 38.6 50.6 (37.5) 2.9 31.1 14.7 14.3 10.9 n.a. n.a. n.a.






P/CF

(x)

P/BV

(x)

DIV YIELD

(%)

ROE

(%)

% Chg in price Mkt

Cap

14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F 1 Mth 3 Mth 12 Mth (MYRm)

NEUTRAL

14.7 10.7 12.6 0.8 0.6 0.8 7.2 7.5 7.5 6.3 7.7 6.6 0.0 (3.3) 0.9 584

2.8 1.1 1.2 3.5 3.1 2.8 1.0 1.2 1.4 13.4 14.2 14.5 (1.5) 3.9 22.8 4,980

23.3 n.m 30.8 1.3 1.2 1.1 0.0 0.0 0.0 12.4 8.1 8.7 (7.7) 0.4 (45.2) 14,441

18.4 7.6 14.2 1.8 1.8 1.7 4.2 2.5 3.5 11.2 6.9 9.4 (0.8) (8.3) (12.0) 51,546

8.6 8.3 11.6 1.5 1.4 1.3 2.4 2.4 2.4 10.4 12.2 12.1 9.7 5.4 0.5 1,426

17.9 17.2 14.4 1.2 1.3 1.3 5.2 5.5 6.0 6.4 6.7 7.8 (3.0) 1.9 11.9 4,686

4.5 6.8 8.2 0.7 0.7 0.6 0.9 1.4 1.7 2.3 5.8 6.4 1.7 (2.0) (42.0) 1,926

14.0 11.7 10.6 0.8 0.8 0.7 2.1 2.3 2.3 4.2 3.4 4.0 3.7 (11.4) (29.3) 1,037

(6.1) 2.1 5.7 2.0 2.0 2.0 3.5 3.6 3.1 6.4 8.0 8.8 (1.0) (1.0) (15.7) 208

6.2 23.7 12.2 1.6 2.4 2.2 0.9 1.9 0.9 7.1 7.9 10.6 7.5 11.9 41.6 3,765

7.4 7.2 7.0 3.2 3.3 3.2 3.4 3.4 3.7 12.8 12.5 13.3 (9.1) (6.7) 4.9 24,335

(4.9) 7.0 8.3 0.7 0.7 0.6 3.0 3.0 3.0 7.8 6.5 6.1 (9.0) (24.6) (51.2) 4,583

7.2 6.3 5.6 1.5 1.4 1.3 2.6 3.0 3.4 6.5 9.2 9.8 (4.5) 11.9 63.2 1,584

12.2 15.8 7.1 1.0 1.0 1.0 6.3 6.3 6.3 12.2 11.1 10.4 (7.2) (4.6) 0.0 2,987

18.8 7.2 9.7 1.7 1.7 1.5 2.5 3.4 4.1 10.7 18.1 16.3 10.4 6.3 180.8 1,079

4.3 n.m 6.4 0.4 0.4 0.4 1.7 1.5 2.0 3.1 2.6 3.3 2.9 (12.5) (25.0) 505

5.2 4.0 4.4 1.1 1.0 0.9 6.5 0.6 0.5 11.7 8.0 6.2 (5.5) 4.0 4.7 11,312

SELL

n.m 12.3 3.9 0.6 0.6 0.6 0.0 0.0 0.0 8.0 4.9 6.0 (11.9) (20.1) (64.2) 513

n.a. n.a. n.a. 1.3 1.2 1.1 4.5 4.1 4.3 13.9 11.2 11.3 (3.8) (4.3) (15.2) 18,216

5.9 4.3 6.5 0.8 0.8 0.7 4.1 4.2 4.2 9.2 7.6 7.7 (3.4) 5.1 (20.1) 935

13.5 10.5 13.0 2.9 2.7 2.6 3.0 3.5 3.8 14.4 16.6 16.8 1.4 (2.9) (2.3) 492

4.8 9.4 8.2 1.1 1.0 1.0 7.1 6.8 7.4 8.7 10.2 10.8 (4.9) (9.4) (39.9) 1,691

6.0 3.2 19.8 0.7 0.7 0.7 0.0 7.3 5.1 5.2 3.7 4.3 (15.5) (23.1) (23.7) 1,761

3.4 n.m 7.9 1.2 1.1 1.1 0.9 1.2 1.5 2.8 3.3 4.3 3.2 1.3 (21.2) 1,409

11.3 7.4 10.9 1.8 1.8 1.8 4.0 3.4 3.9 7.9 10.3 11.9 (3.9) (5.5) (5.7) 12,010

n.a. n.a. n.a. 1.2 1.2 1.1 2.7 2.8 3.7 9.2 8.4 10.4 (2.0) (11.1) (24.9) 46,761



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

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