Malaysia Market Focus Malaysia Strategy

www.dbsvickers.com

ed: JS / sa: WMT

KLCIKLCIKLCIKLCI :::: 1,877.051,877.051,877.051,877.05

Analyst Bernard CHING +603 2604 3918 [email protected] Malaysian Research Team +603 2604 3333 [email protected]

Market Key Data

EPS Gth (%)EPS Gth (%)EPS Gth (%)EPS Gth (%) PER (x)PER (x)PER (x)PER (x) 3.9

Div Yield (%)Div Yield (%)Div Yield (%)Div Yield (%) 9.8 2013 8.7 17.8 3.3

2014F 7.8 16.5 3.1

2015F 7.3 15.3 3.2

Source: AllianceDBS TOP STOCK PICKS

Price Price Price Price Mkt CapMkt CapMkt CapMkt Cap Target PriceTarget PriceTarget PriceTarget Price Performance (%)Performance (%)Performance (%)Performance (%) RMRMRMRM US$mUS$mUS$mUS$m RMRMRMRM 3 mth3 mth3 mth3 mth 12 mth12 mth12 mth12 mth RatingRatingRatingRating Big cap Public Bank 20.00 22,036 22.60 1.9 20.6 BUY Sapura Kencana 4.34 8,182 5.55 0.5 7.2 BUY Gamuda 4.75 3,463 5.50 2.8 (2.1) BUY IJM Corp 6.70 3,091 7.85 5.9 13.0 BUY Genting Plant 11.46 2,760 13.35 5.9 15.1 BUY Small cap Dayang 3.79 983 4.55 0.8 15.8 BUY Coastal Contracts 5.07 848 6.00 1.4 88.5 BUY MKH Berhad 4.21 555 5.85 30.4 134.1 BUY Padini Holdings 2.01 416 2.55 3.1 9.8 BUY Globetronics 4.61 407 5.00 26.3 89.7 BUY Structural change / M&A HLFG 16.98 5,624 18.80 13.1 16.8 BUY RHB Capital 8.94 7,164 10.00 5.2 4.1 BUY MMC Corporation 2.45 2,347 4.95 (12.5) (10.6) BUY Bursa Malaysia 8.10 1,358 10.10 6.6 (3.3) BUY TA Enterprise 1.01 544 1.20 20.2 41.3 BUY

Source: AllianceDBS

DBS Group Research . Equity

25 Jul 2014

Malaysia Market Focus

Malaysia Strategy Refer to important disclosures at the end of this report

Time to be cautious and selective

• Macro conditions have improved

• But valuations are not exciting amid limited earnings growth potential

• Domestic growth drivers weak due to measures to rein in high indebtedness

• Be cautious and selective, focus on stocks with inorganic growth drivers

Macro conditions have improved. Concerns over QE tapering and slowdown in global growth have largely receded. With market expectations of continued easing of monetary policies, liquidity conditions are friendly towards equity markets again, particularly emerging markets.

Though not expensive, Malaysia’s market valuation is not compelling. With earnings growth estimated to moderate to 7.3% in 2015, there is little upside to FBMKLCI which trades at 15.3x CY15 PE. We project FBMKLCI to hit 1,910 by end 2014, based on 15.5x 2015 earnings, in line with historical mean. Domestic growth drivers are expected to be weak due to government measures to rein in burgeoning fiscal and household debts which have led to cost-push inflation and weak consumer sentiment. Be cautious and selective. Public BankPublic BankPublic BankPublic Bank is our top defensive pick for its strong deliverables. Within the big cap space, we also like Genting PlantationsGenting PlantationsGenting PlantationsGenting Plantations (strong FFB growth and downstream venture). Look for stocks with inorganic growth drivers for alpha. We favour oil & gas and construction stocks. Our picks are SapuraKencanaSapuraKencanaSapuraKencanaSapuraKencana (solid growth from Seadrill and Newfield acquisitions), Dayang EnterpriseDayang EnterpriseDayang EnterpriseDayang Enterprise (earnings visibility from Pan Malaysian jobs), Coastal ContractsCoastal ContractsCoastal ContractsCoastal Contracts (strong orderbook and venture into drilling rigs), IJM Corp IJM Corp IJM Corp IJM Corp (more job flows), and GamudaGamudaGamudaGamuda (most leveraged MRT proxy). Selective small/mid-caps stocks. In this space, we lean towards MKHMKHMKHMKH (resilient property earnings as strong FFB growth), PadiniPadiniPadiniPadini (store expansion and resilient sales) and GlobetronicsGlobetronicsGlobetronicsGlobetronics (strong growth from new LED sensor business). Structural changes/M&A plays. We like HLFGHLFGHLFGHLFG (potential privatization), RHBC RHBC RHBC RHBC (undervalued and poised to be re-rated in the on-going M&A exercise involving CIMB and MBSB), MMCMMCMMCMMC (unlocking value through the listing of Malakoff), Bursa Bursa Bursa Bursa MalaysiaMalaysiaMalaysiaMalaysia (revamp in fees and cost structure), and TA EnterpriseTA EnterpriseTA EnterpriseTA Enterprise (potential sale of its broking business).

Market Focus

Malaysia Strategy

Page 2

1H2014 m1H2014 m1H2014 m1H2014 market review

Similar to other emerging markets, FBMKLCI started the year on

a weak note as concerns over QE tapering and hard landing in

China led to foreign equity net outflows. Malaysian equities

rebounded marginally in 2Q14 on improved global sentiment

and receding selling pressure from foreign investors. In 1H14, the

FBMKLCI posted a marginal gain of 0.8%. Encouraging 1Q14

GDP growth of 6.2% was a bright spot for the market as the

strong recovery in net exports mitigated the moderating

domestic growth drivers. Furthermore, foreign net equity flows, a

bane to the market since 2H13, have turned positive over the last

3 consecutive months.

Malaysia 1H14 equity performance

15000

15500

16000

16500

17000

17500

18000

1,750

1,800

1,850

1,900

1,950

Jan

-14

Fe

b-1

4

Ma

r-1

4

Ap

r-1

4

Ma

y-1

4

Jun

-14

FBM KLCI (LHS) FBM Small Cap (RHS)

Source: Bloomberg Finance L.P

Foreign equity flows turned positive again

0.1

(3.4)

(0.1)

1.2 1.6

3.2

0.7

(3.8)

(0.3)

1.5 0.7 0.8

0.2

1.3

3.4

1.6

0.5

(0.8)

3.3

1.2 1.3 1.5

(0.3)

0.8

2.5 1.7

4.8 5.4

3.9

(3.5)

(0.3)

(6.8)

0.8

(0.8)

(3.1)

(1.6)

(3.6)

(1.6)

(0.5)

0.7

3.1

0.6

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

Jan-14

Apr-14

RM bn

Source: Bursa Malaysia

Over 1H14, big cap stocks in Malaysia underperformed mid and

small cap stocks. The FBM Small Cap index surged 14.3%,

continuing its rally post general election in May 2013 as

investors’ risk appetites improved. Hence, valuations have now

become increasingly stretched. The P/BV multiple of FBM Small

Cap Index increased from 0.8x before May 2013 to 1.1x at end

June 2014. Accordingly, the P/BV valuation gap between FBM

Small Cap Index and FBMKLCI has narrowed from 1.4x to 1.2x

over the same period.

P/B valuation gap of small cap stocks narrowing


Sector wise, the technology (+22.6%), property (+10.6%),

construction (+8.9%) and plantation (+3.2%) sectors posted

decent gains. Finance (+1.3%), trading & services (+1.0%),

industrial (+1.7%) and consumers (-0.6%) were laggards.

Malaysia 1H14 equity performance by sector

22.6%

14.3%

10.4%8.9%

3.2%1.7% 1.3% 1.0% 0.8%

-0.6%-5%

0%

5%

10%

15%

20%

25%

30%

Techno

log

y

FB

M S

mall

Ca

p

Pro

pert

y

Constr

uction

Pla

nta

tion

Ind

ustr

ial

Fin

an

ce

Tra

din

g &

Serv

ice

s

FB

MK

LC

I

Consum

er


Being a defensive market, Malaysia underperformed other

ASEAN equity markets in 1H14 as battered markets rebounded

amid receding tail risks.

Malaysia vs regional market performance in 1H14

20.0%

16.2%14.4% 14.1%

9.1%

2.8%0.8% 0.8%

-0.5% -0.5%-3.2%

-6.9%

India

Philippines

Thailand

Indonesia

Taiwan

Singapore

Malaysia

Australia

Korea

Hong Kong

China

Japan

YTD


Market Focus

Malaysia Strategy

Page 3

1H14 performance of FBMKLCI component stocks

Company NameCompany NameCompany NameCompany Name

PricePricePricePrice YTD PerformanceYTD PerformanceYTD PerformanceYTD Performance %%%% 31313131----DecDecDecDec----13131313 30303030----JunJunJunJun----14141414

AMMB Holdings Bhd 7.24 7.12 -1.7

Astro Malaysia Holdings Bhd 2.95 3.48 17.7

Axiata Group Bhd 6.76 6.97 3.1

British American Tobacco Malaysia Bhd 62.52 65.54 4.8

CIMB Group Holdings Bhd 7.51 7.32 -2.5

DiGi.Com Bhd 4.84 5.73 18.5

Felda Global Ventures Holdings Bhd 4.39 4.16 -5.2

Genting Bhd 10.26 9.99 -2.6

Genting Malaysia Bhd 4.34 4.20 -3.2

Hong Leong Bank Bhd 14.25 13.80 -3.1

Hong Leong Financial Group Bhd 15.24 16.14 5.9

IHH Healthcare Bhd 3.84 4.38 14.0

IOI Corp Bhd 4.52 5.13 13.4

KLCC Property Holdings Bhd 5.69 6.53 14.8

Kuala Lumpur Kepong Bhd 24.39 24.05 -1.4

Malayan Banking Bhd 9.63 9.83 2.1

Maxis Bhd 7.01 6.75 -3.8

MISC Bhd 5.66 6.50 14.9

Petronas Chemicals Group Bhd 6.80 6.77 -0.4

Petronas Dagangan Bhd 31.11 24.04 -22.7

Petronas Gas Bhd 23.87 24.50 2.7

PPB Group Bhd 15.97 15.14 -5.2

Public Bank Bhd 18.51 19.58 5.8

RHB Capital Bhd 7.80 8.55 9.6

SapuraKencana Petroleum Bhd 4.87 4.36 -10.6

Sime Darby Bhd 9.46 9.67 2.2

Telekom Malaysia Bhd 5.41 6.35 17.4

Tenaga Nasional Bhd 11.29 12.18 7.9

UMW Holdings Bhd 11.72 10.92 -6.8

YTL Corp Bhd 1.61 1.62 0.6

IOI Properties Group Bhd* 2.92 2.52 -13.7

UEM Sunrise Bhd^ 2.32 2.03 -12.4

*Entered index 21 Jan replacing UEM Sunrise, exited index 23 Jun replaced by KLCC Property

^Exited index 21 Jan replaced by IOI Properties Group

Source: AllianceDBS

Market Focus

Malaysia Strategy

Page 4

Macro conditions still favourable to equities

Concerns over QE tapering which led to massive outflow of

funds from emerging market have slowly receded from its height

in 2H13. Despite the USD10bn reduction in monthly bond buying

at every FOMC meeting since the beginning of 2014, the

prospects for tighter monetary conditions has been quelled by

the more dovish than expected stance taken by the new Federal

Reserve chairperson, Janet Yellen. Reflecting the easing concerns,

the US 10-year government bond yield has receded from its

recent high of 3.03% at end 2013 to 2.53% at end June 2014.

Another indicator that reflected easing concerns among equity

investors, the CBOE VIX index, which is a gauge of the fear level

in the market, is pointing that investors’ expectations are in fact

getting exuberant.

US 10-year bond yield eases on receding QE tapering fear


CBOE VIX index shows receding concerns among investors

5

7

9

11

13

15

17

19

21

23

Jan

-14

Feb

-14

Ma

r-1

4

Ap

r-1

4

Ma

y-1

4

Jun

-14

CBOE Volatility Index


Investors seem to continue to be caught in a dilemma between

global economic growth and cheap liquidity. Too strong a

growth may lead to early withdrawal of cheap liquidity by central

banks particularly US and ECB. At the other end of the spectrum,

too weak a growth raises the prospects of deflation. Both

scenarios are negative for equity markets. It seems consensus

prefers a slow growth and ample liquidity scenario and this

seems to be panning out at the moment.

Global PMI increased to 52.7 in June from 52.1 in May, pointing

towards the much anticipated rebound in the global economy

which was anchored by the economic rebound in US. Despite

that, the IMF recently downgraded US 2014 GDP growth

forecast to 1.7% from 2.0% previously due to an exceptionally

weak 1Q which was attributed to adverse weather conditions.

Although it is forecasting 3% growth for each of 2015 and

2016, Nigel Chalk, deputy director of the IMF Western

Hemisphere Department cautiously warned that "we still see that

there is a lot of slack in the economy, and so we believe that an

accommodative stance for monetary policy continues to be the

right choice, and we're supportive of that choice by the Federal

Reserve."

Global PMI

47

48

49

50

51

52

53

54

55

56

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14

Global PMI US ISM Euro PMI China PMI


ECB’s recent cut to its main refinancing rate from 25bps to

15bps in order to counter the risk of deflation in the Eurozone

also boosted equity markets.

ECB cut rates to counter deflation risk


While the short term impact of an easing monetary policy is

positive for equity markets, we warn that protracted exuberance

among investors will lead to markets running ahead of

fundamentals. Therefore, markets are likely to remain volatile and

susceptible to any change in liquidity conditions going forward.

Market Focus

Malaysia Strategy

Page 5

Malaysia equity valuation no longer compelling

The FBMKLCI is currently trading at 16.5x CY14 PE, ahead of

historical mean of 15.6x. With CY15 earnings growth estimated

to moderate to just 7.3% (based on free floated weighted

average earnings), CY15 PE of 15.3x suggests that Malaysian

blue chip counters are fairly valued with limited upside potential.

Much of the earnings growth for CY15 is expected to come from

the banking (59.9% of total growth), telco (11.6%) and utilities

(9.7%) sectors.

FBMKLCI P/E trend

8

12

16

20

24

FBMKLCI Index PE (x)

Mean:

15.6

- 1 s.d.

+ 1 s.d.


Source of FBMKLCI earnings growth in 2015

59.9%

2.5% 11.6%

1.4%4.0%

4.5%

9.7%

6.6%

Banking Media Telecommunications

Consumer Plantation Oil & Gas

Utilities Others

Source: AllianceDBS

On a relative basis, Malaysian equities PE valuation is not

excessive. Given that the FBMKLCI (+0.8%) has underperformed

the MSCI Southeast Asia Index (+7.7%) in 1H14, the valuation

spread of FBMKLCI over MSCI SEA of 1.61x is near historical

mean of 1.7x.

Malaysia – SEA P/E premium spread

-2

-1

0

1

2

3

4

5

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

Jan-14

Apr-14

MSCI MY - SEA spread

Mean:

1.7

+ 1 s.d.

- 1 s.d.


All said and done, investors need to be mindful that the earnings

yield gap (inverse of market PE minus risk-free return) has

compressed to 1.9% which is close to -1SD. Unless earnings

growth momentum picks up, and once the interest yield curve

steepens, equity PE de-rating will ensue.

Earnings yield gap has narrowed

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0FBMKLCI Earnings Yield minus 10Y MGS Yield

Mean:2.6

+ 1 s.d.

- 1 s.d.

%


Taking into account continued flushed liquidity conditions, both

domestic and abroad, we estimate the FBMKLCI to end 2014 at

1,910 based on 15.5x CY15 earnings.

Market Focus

Malaysia Strategy

Page 6

FBMKLCI earnings estimate for CY14 and CY15

FBMKLCI

2014 2015 2014 2015

AMMB Holdings Bhd 2.37 58.0 12,237.6 Yes 1,974.6 2,179.6 1,145.3 1,264.2

Astro Malaysia Holdings Bhd 1.01 30.0 5,160.9 Yes 541.0 765.9 162.3 229.7

Axiata Group Bhd 6.54 58.1 34,131.1 Yes 2,658.8 2,915.1 1,546.0 1,695.0

British American Tobacco Malaysia Bhd 1.81 50.0 9,970.7 Yes 962.6 971.7 481.3 485.9

CIMB Group Holdings Bhd 7.30 63.2 36,393.5 Yes 4,818.6 5,553.3 3,044.3 3,508.4

DiGi.Com Bhd 4.02 48.0 21,272.4 Yes 1,970.8 2,091.5 946.0 1,003.9

Felda Global Ventures Holdings Bhd 1.46 51.0 7,628.3 Yes 831.6 792.4 424.1 404.1

Genting Bhd 4.16 59.6 21,966.0 Yes 1,865.9 1,994.2 1,112.7 1,189.2

Genting Malaysia Bhd 2.33 52.3 12,731.2 Yes 1,510.7 1,546.8 790.5 809.4

Hong Leong Bank Bhd 1.59 33.7 8,494.7 Yes 2,299.7 2,575.9 775.7 868.9

Hong Leong Financial Group Bhd 0.63 20.0 3,575.2 Yes 1,689.8 1,923.6 338.0 384.7

IHH Healthcare Bhd 2.27 33.5 13,176.5 Yes 792.9 909.2 265.6 304.6

IOI Corp Bhd 3.67 58.5 18,896.8 Yes 2,448.7 1,776.7 1,432.6 1,039.4

KLCC Property Holdings Bhd 0.56 25.0 2,870.5 Yes 825.5 645.1 206.4 161.3

Kuala Lumpur Kepong Bhd 2.46 50.2 12,665.0 Yes 1,078.7 1,091.4 541.3 547.7

Malayan Banking Bhd 7.98 47.2 42,657.2 Yes 6,949.4 7,828.6 3,276.8 3,691.4

Maxis Bhd 3.35 35.0 17,692.5 Yes 2,048.1 2,173.0 716.3 760.0

MISC Bhd 1.81 33.0 9,810.5 Yes 1,602.5 1,686.8 528.8 556.7

Petronas Chemicals Group Bhd 3.68 36.0 19,324.8 Yes 3,479.4 3,494.5 1,252.6 1,258.0

Petronas Dagangan BHD 1.35 30.0 5,728.3 Yes 773.7 812.6 232.1 243.8

Petronas Gas Bhd 3.67 40.0 18,695.1 Yes 1,773.3 1,884.3 709.3 753.7

PPB Group Bhd 1.67 50.0 8,500.0 Yes 925.7 965.6 462.8 482.8

Public Bank Bhd 11.57 80.7 62,161.9 Yes 4,585.1 5,094.8 3,699.3 4,110.5

RHB Capital Bhd 1.12 27.0 6,209.8 Yes 2,094.7 2,422.3 565.6 654.1

Sapurakencana Petroleum Bhd 3.16 64.0 16,643.8 Yes 1,471.0 1,661.2 941.4 1,063.2

Sime Darby Bhd 5.69 51.4 30,097.9 Yes 3,419.3 3,652.5 1,758.7 1,878.6

Telekom Malaysia Bhd 2.52 57.6 13,445.0 Yes 939.3 1,060.8 540.6 610.6

Tenaga Nasional Bhd 7.26 55.5 39,361.7 Yes 5,009.9 5,380.1 2,782.0 2,987.6

UMW Holdings Bhd 1.37 56.7 7,750.7 Yes 1,029.5 1,130.9 583.8 641.2

YTL Corp Bhd 1.63 51.8 8,482.8 No 1,517.7 1,544.7 786.2 800.2

Total 527,732.3 29 63,888.7 68,525.2 32,048.3 34,388.6

% Coverage / earnings growth 98.39 7.2 7.3 7.8 7.3

Current implied P/E 16.6 15.5 16.5 15.3

Under

coverageNet Profit (CY)

Free Float Weighted

NP

Weight in

Index

Free float

%

Wgt'd Mkt

Cap

Source: AllianceDBS Price date: 24 July 2014

Market Focus

Malaysia Strategy

Page 7

Key themes for 2H2014

Corporate Malaysia is going through a rough patch now. Due

to the unsustainable government’s fiscal position and high

household debt per GDP, measures such as subsidy

rationalisation, utility tariff adjustments, tightening of lending

guidelines etc have been put in place. These have led to rising

cost-push inflation, dampening consumer sentiment as well as

consumer demand.

Government fiscal and household debts unsustainable

70%

75%

80%

85%

90%

50.0%

51.0%

52.0%

53.0%

54.0%

55.0%

Federal Government debt-to-GDP ratio (lhs) Household debt-to-GDP ratio (rhs)

Source: Bank Negara Malaysia

Malaysia CPI and PPI are rising

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0

6.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

Malaysia CPI Y-o-Y (lhs) Malaysia PPI Y-o-Y (rhs)


Consumer sentiment has dampened

80

90

100

110

120

130

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14

MIER Consumer Sentiment Index

Source: Bloomberg Finance L.P, MIER

Against such a backdrop, we expect corporates with exposure

to domestic markets to experience earnings pressure from

higher cost of doing business and/or slowdown in revenue

growth. Corporates which rely on export markets may only

have to grapple with higher cost and if they have strong

bargaining power, may even be able to pass on the higher cost

to customers.

As organic earnings growth becomes more challenging, alpha-

seeking investors would have to look for growth stocks which

are driven by investment and/or M&As. The oil & gas and

construction sectors fit this theme and we continue to

overweight these sectors.

There are no changes to other sectors which we rate neutral

except for the property sector which we upgraded from

underweight to neutral as valuations have largely factored in

weaker sales prospects from the government’s cooling

measures.

Sector Views

OverweightOverweightOverweightOverweight Oil & Gas Construction

NeutralNeutralNeutralNeutral

Automotive Aviation Banks Consumer Gaming Gloves Healthcare Plantation Property (↑) REITs Shipping Technology Telecommunication Utilities

Source: AllianceDBS

Oil & gas and construction as favoured sectors for growth

theme

Oil & gas and construction sectors remain our favoured growth

stocks although we need to be more selective now as

valuations are no longer cheap but growth prospects remain

promising given sizeable secured orderbooks and positive

newsflows ahead.

Within oil & gas, we like SapuraKencana SapuraKencana SapuraKencana SapuraKencana for its exciting

earnings growth following the Seadrill and Newfield

acquisitions. We also like Dayang EnterpriseDayang EnterpriseDayang EnterpriseDayang Enterprise given its strong

earnings visibility after securing the Pan Malaysian hook-up

and commissioning job, as well as Coastal ContractCoastal ContractCoastal ContractCoastal Contractssss for

improved earnings visibility from its shipbuilding orderbook

and venture into jack-up drilling rigs and gas compression

units.

Market Focus

Malaysia Strategy

Page 8

For construction, our sector pick is IJM CorpIJM CorpIJM CorpIJM Corp. With Zelan

completing its share disposal, a major overhang for IJM Corp

will be removed. We also like GamudaGamudaGamudaGamuda as it is the most

leveraged MRT proxy play.

Banks may temporarily benefit from interest rate uptick

Banks are prime beneficiaries of the recent 25bps hike in

overnight policy rate (OPR). Based on our sensitivity analysis,

every 10bps hike in NIM would raise earnings by c.5%. Banks

with higher proportions of variable rate loans (most banks

except for AMMB) and strong CASA base (Maybank, CIMB,

Public Bank and HLB) should benefit in a rising interest rate

environment. However, we remain cautious on the

sustainability of NIM expansion given intense competition in

the Malaysian banking sector. Based on past experience, our

banking analyst Lim Sue Lin expects any NIM expansion from

the OPR hike to be temporary as competition will likely erode

margin gains eventually.

Public BankPublic BankPublic BankPublic Bank is our top defensive pick as we like its consistent

deliverables. Apart from its bread-and-butter business, we

believe there is room for further non-interest income

expansion especially in bancassurance and unit trusts (Public

Mutual).

Be selective in plantation stocks

The plantation sector’s performance has been mixed YTD as

earlier gains in CPO prices due to expected El Nino fizzled out

amid weaker exports and better than expected soybean

planting in the US. As such, investors need to take a longer

term view (instead of relying on shorter term fluctuations in

CPO prices) and look for stocks with strong FFB growth. Our

top pick in the sector is Genting PlantationsGenting PlantationsGenting PlantationsGenting Plantations which is at an

inflection point with 31% 3-year earnings CAGR, underpinned

by strong Indonesian FFB growth and value accretive venture

into downstream activities.

Mid and small cap stocks still in vogue

Admittedly, mid and small cap stocks have run ahead of

fundamentals since the 13th general elections last year.

Although investors’ risk appetite for mid and small cap stocks

remains high, we need to be selective and focus on those with

strong fundamentals and clear earnings visibility.

Within the mid and small cap space, we like MKHMKHMKHMKH for its

resilient property earnings as it capitalizes on its cost

advantage in KL South which will benefit from the MRT project

as well as strong FFB production growth from its plantation

business.

We also like PadiniPadiniPadiniPadini as it is poised to enter another multi-year

growth phase driven by store space expansion and recovery in

same store sales growth. The recent share price weakness that

was affected by its removal from SC Shariah compliant list

offers an accumulation opportunity to investors as we

anticipate a swift reclassification as a Shariah compliant stock

given that management has taken remedial measures to

address this issue.

Within the technology space which benefits from improving

export demand, we like GlobetronicsGlobetronicsGlobetronicsGlobetronics for its strong 3-year

earnings CAGR of 18%, underpinned by the strong growth in

its new LED sensor business.

Structural changes/M&A plays

For M&A and structural change plays, we like HLFGHLFGHLFGHLFG which may

be privatized, RHBC RHBC RHBC RHBC which is undervalued and poised to be re-

rated in the on-going M&A exercise involving CIMB and MBSB,

MMCMMCMMCMMC whose hidden value will be unlocked by the listing of

Malakoff, Bursa MalaysiaBursa MalaysiaBursa MalaysiaBursa Malaysia which will benefit from a revamp in

fees and cost structure, and TA EnterpriseTA EnterpriseTA EnterpriseTA Enterprise which will be re-

rated for potential sale of its broking business.

Market Focus

Malaysia Strategy

Page 9

Sector Outlook

SectorSectorSectorSector OutlookOutlookOutlookOutlook Top Stock PicksTop Stock PicksTop Stock PicksTop Stock Picks

AutomotiveAutomotiveAutomotiveAutomotive

Neutral

• Higher 2014 TIV.Higher 2014 TIV.Higher 2014 TIV.Higher 2014 TIV. New car sales likely to continue to increase y-o-y, particularly

leading up to the Hari Raya festival at end-July due to various promotions.

Meanwhile, we think the stronger car sales volume in 2014, mainly for passenger

cars, would be driven by various new model releases from non-national brands. We

maintain our TIV growth forecast of 2.2% y-o-y to c.666k units.

• No upside surprises.No upside surprises.No upside surprises.No upside surprises. Despite expected higher y-o-y sales volume in 2014, volume

growth remains low and industry remains saturated.

None

AviationAviationAviationAviation

Neutral

• We expect MAS to restructure within the next 6-12 month. Capacity rationalisation is

likely to be a part of this exercise. This will remove excess capacity within the industry,

and bring yields to more sustainable levels. Further, LCC’s yields could improve in

2H14 as they gain pricing power from their move to klia2. The more pleasant

travelling experience driven by improved amenities and connectivity at klia2 will

enhance LCC’s appeal to passengers.

• The USD uptrend seen in early-2014 is easing, with rates correcting from a high of

RM3.35/USD in Feb to RM3.17/USD in Jul. We now expect USD to average RM3.21 in

2014. Meanwhile, jet fuel price which averaged USD121/barrel YTD, poses an

earnings risks for the airlines. Oil price could spike due to geographical tensions in

Ukraine, Iraq and Libya.

• Top pick for the sector is AirAsia as its significant cost advantage will allow it to

weather the current yield compression, and emerge the final victor. Current share

price ignores the prospects of a recovery in yields in 2015.

AirAsia

BanksBanksBanksBanks

Neutral

• NIM compression is likely to persist in 2H14 although the recent OPR hike (+25 bps)

could ease funding cost pressure for banks with strong CASA base.

• YTD loan applications and approvals remained soft. Revenue growth would be

capped by flat loan growth (our sector loan growth assumption is 10%).

• We like banks with defensive earnings with consistent earnings delivery (Public

Bank), and banks with opportunities to unlock value through restructuring and

balance sheet optimisation (Hong Leong Financial and RHB).

Public Bank, Hong Leong

Financial, RHB

Building materialsBuilding materialsBuilding materialsBuilding materials

Neutral

• Peninsular cement demand to remain stable from the ongoing implementation of

mega projects (e.g. MRT and LRT).

• Market leader Lafarge raised its list price by 9% in 2Q and we believe others will

follow suit following cost pressures from the 19% electricity tariff hike in Jan.

• Prefer Sarawak exposure for cement plays via monopoly CMS as the company is not

impacted by the electricity tariff hike suffered by Peninsular players. Margins are also

expected to expand following its 5-9% price hike in mid Feb.

Cahya Mata Sarawak

(CMS)

Market Focus

Malaysia Strategy

Page 10

Sector Outlook (cont’d)


ConstructionConstructionConstructionConstruction

Overweight

• Domestic contract awards remain robust with RM8.6bn awarded in 1H14 which is a

36% y-o-y increase.

• Mega projects this year will mostly be driven by highways which include WCE

(RM5bn), DUKE extension (RM1.2bn), KIDEX (RM2.5bn), SUKE (RM2.4bn) and DASH

(RM4.3bn). There are also 3 sizeable building jobs in the pipeline – Warisan Merdeka

(RM2.5-3bn), Four Seasons Hotel (RM1bn) and a Government building (RM1bn). The

implementation of RAPID (RM60bn) should also provide a slew of civil works for

contractors.

• Cabinet approval of the MRT line 2 (RM25bn) will be the next major catalyst for the

sector, although we reckon that awards will only take place next year.

• We like Gamuda and IJM, with orderbooks anchored by sizeable contracts from the

MRT and WCE respectively. For the small caps, we like Kimlun which should see

strong earnings recovery this year from its orderbook which stands at an all-time

high.

Gamuda, IJM Corp,

Kimlun

ConsumerConsumerConsumerConsumer

Neutral

• 2Q2014 consumer sentiment index recovered and climbed above the 100-point

threshold to 100.1, thanks to firm employment and stable and improving household

income. Nonetheless, consumer generally still jitter over cost inflationary pressure.

• Sector’s valuation is undemanding and supported by decent yield, therefore, we do

not foresee strong selling pressure due to weak operating environment.

• Going into 2H2014, we like companies that are embarking on network expansion

strategy as we believe earnings growth within the sector will likely be driven by

market penetration rather than same-store-sales growth. Hence, Padini is our top

pick in the sector with RM2.55 TP. Apart from that, we also like QL Resources (BUY,

TP RM3.60) for its aggressive regional expansion.

Padini, QL Resources

GamingGamingGamingGaming

Neutral

• We do not foresee any significant catalysts to re-rate the sector in the near term.

Falling domestic consumer sentiment could slow down discretionary spending, which

may in turn drag the leisure & hospitality business of Genting Malaysia’s domestic

operations and ticket sales of NFOs and.

• On the other hand, even though the sector was spared in the most recent budget,

domestic gaming players remain vulnerable in the upcoming budget. GST

implementation from 2015 onwards will also impact margins.

• Despite lacking short-term catalysts, we believe that Genting Bhd, as one of the

cheapest gaming stocks in the region, offers deep value and good exposure to the

global gaming scene.

None

GlovesGlovesGlovesGloves

Neutral

• In 1H2014, glove companies under our coverage are expected to deliver weaker

results as compared to 2HCY14, as we believe production recovery in 2H2014 after

temporary volume loss from lines revamping and fire incident in 1H2014.

• Apart from that, we anticipate (1) soft latex cost, (2) stable Ringgit against USD, and

(3) disciplined capacity expansion to drive earnings growth for the sector. We note

that the industry capacity expansion is slower than expected YTD.

• For the sector, Kossan (TP: RM4.90) is our only BUY. We anticipate the company to

outperform its peers due to (1) balanced product mix, and (2) breakthrough for its

3.0g nitrile glove that has met US’ FDA and EU requirements. For the remaining

companies, we have HOLD recommendations.

Kossan

Market Focus

Malaysia Strategy

Page 11



HealthcareHealthcareHealthcareHealthcare

Neutral

• We remain optimistic on the growth prospects of the private hospitals operators due

to increasing demand for quality healthcare amid the population’s rising disposable

income. Capacity constraint at government’s healthcare facilities is also expected to

drive patients to private hospitals. The constraint is expected to worsen with public

healthcare development expenditure cut from RM3.7bn in 2010 to RM1.6bn in 2014.

• Generic pharmaceutical players are expected to enter a new growth phase with the

approach of the patent cliff. This provides an opportunity for them to launch new

products and improve sales. Valuation are also more palatable vis-à-vis the hospital

operators.

None

MediaMediaMediaMedia

Neutral

• We expect dampened consumer sentiment and softer adex for the rest of this year on

further subsidy rationalisation measures and introduction of GST in 2015.

• Nonetheless, downside risks are limited given decent dividend yields of 4-6% for the

sector.

None

Oil & GasOil & GasOil & GasOil & Gas

Overweight

• PETRONAS has maintained its USD60bn annual capex plan. Continue to expect new

offshore development rollouts, re-developments projects, EOR activities and marginal

fields. OSV players and drillers are immediate beneficiaries.

• Overseas, there has been a pick-up in demand for FPSOs, drilling and OSVs in areas

like SEA, Africa and Brazil, thus benefitting local players with a global reach.

• Exciting times for the downstream segment as well with the PETRONAS RAPID slated

to take off in 3Q. USD27bn of capex is planned.

• Top pick is SapuraKencana with its solid RM27bn orderbook. We also like Dayang

Enterprises and Coastal Contracts for their strong execution track records and

attractive valuations.

SapuraKencana

Petroleum, Dayang

Enterprises, Coastal

Contracts

PlantationPlantationPlantationPlantation

Neutral

• We overestimated palm oil prices by 6% YTD due to 10% lower than expected

soybean prices. Better-than-expected progress on US planting on record acreage,

easing congestion problems in Brazil and clamp down on Chinese shadow banking

have all weighed on prices.

• In the short term, we will be watching the Argentine Peso, as a potential devaluation

may eventually inundate the export market with more soybeans.

• Palm oil prices may not recover significantly in 2H14 as we previously expected,

despite the prospect of y-o-y drop in peak yields in Peninsular Malaysia and Sumatra,

as demand substitution into soybean oil may pick up speed in the coming months.

• We will be reviewing our CPO prices after Jun14 data is made available. We

recommend shifting to fast-growing planters with strong balance sheets.

Genting Plantations

PropertyPropertyPropertyProperty

Neutral (upgraded

from underweight)

• We expect slower property sales volumes in 2014 although prices should hold up due

to cost push factors. While sentiment should remain subdued given recent tightening

measures and inflationary pressures, mass-market products at strategic locations will

continue to enjoy robust sales as affordability remains a factor among purchasers

• Rising building material prices as well as tight foreign labour supply could heighten

execution risk and dampen developers' margins. There is no property bubble for now

but we fear an oversupply of KL office space, hybrid high-rise units and Iskandar

Malaysia high-end condos.

• MKH is our top pick for the sector given its large exposure to affordable housing and

landed properties in the Kajang-Semenyih growth corridor. We also like Eco World

and SP Setia for their focus in township developments.

MKH

Market Focus

Malaysia Strategy

Page 12


SectorSectorSectorSector OutOutOutOutlooklooklooklook Top Stock PicksTop Stock PicksTop Stock PicksTop Stock Picks

REITsREITsREITsREITs

Neutral

• The demand for retail space in prime locations with large catchment areas will remain

resilient and support rental reversions. For the office market, we remain cautious on

the incoming supply entering the market which could impact capacity to raise rents.

• We expect stable earnings in 2H14 as rental reversions are offset by higher expenses.

Downside risk from higher electricity charges and assessment taxes will be partially

mitigated by rental reversions and higher service charges.

• We like Sunway REIT due to its large asset pipeline, higher distribution yield and

relative buffer from KL-imposed assessment taxes.

Sunway REIT

ShippingShippingShippingShipping

Neutral

• LNG rates are expected to remain under pressure due to lower cargo availability

following delays in several major LNG projects as well as the burgeoning LNG

orderbook which was largely driven by financial investors and private equity funds.

• Petroleum shipping rates spiked in 1Q14 due to a prolonged winter in the US. This

has since normalised. Crude tankers demand is expected to be limited by the weak

imports to Japan and US. The exception will be suezmax crude tankers, which will

benefit from the expected increase Indian imports this year. Escalating conflicts in Iraq

represent a major risk.

• The dry bulk sector should continue to improve with better sector dynamics. Falling

orderbook level coupled with rising Chinese iron ore imports could see rates firming

up over the near-term. Despite so, the Chinese government’s renewed focus to tackle

pollution and steel overcapacity could pose a downside risks to Chinese iron ore

imports over the longer term.

• We like MISC for its resilient LNG and oil & gas earnings.

MISC

TechnologyTechnologyTechnologyTechnology

Neutral

• Outlook for the semiconductor industry remains decent in view of the stable growth

for the global economy. Strong demand for cheaper devices is driving smartphone

sales, though the high-end segment of the market is experiencing slowing growth.

• The OSAT (outsourced assembly & test) industry is benefiting from the upward trend

in outsourcing activities by semiconductor companies. There are also tailwinds from

industry consolidation, with the most recent being the potential sale of STATS

ChipPAC. MPI and Unisem are clear beneficiaries, but current share prices appear to

have price in most of the positives.

• We like Globetronics for its healthy balance sheet and strong earnings growth,

underpinned by: 1) Robust demand from its key customers; and 2) Potential new

products or customers wins.

Globetronics

TelecommunTelecommunTelecommunTelecommunicationicationicationication

Neutral

• The sector lacks strong re-rating catalysts that would alleviate concerns on its

premium valuation amid a rising interest rate environment. Nonetheless, we believe

downside risks to share prices are limited as long as dividend commitments remain

intact and earnings revision trends do not turn negative.

• DiGi offers a decent dividend yield and strong balance sheet. Re-rating catalysts

include conversion into business trust structure and passing on its 6% service tax.

• Competition risks for TM have reduced, while further clarity on HSBB Phase 2 will be

a potential re-rating catalyst.

None

Market Focus

Malaysia Strategy

Page 13



UtilitiesUtilitiesUtilitiesUtilities

Neutral

• Expect promising energy demand growth with implementation of infrastructure

projects, export recovery and urbanisation

• Tenaga Nasional and Petronas Gas are the biggest beneficiaries of sector reform for

fuel subsidy rationalisation and fuel diversification

• Our top pick is TNB for its more attractive valuations and improving earnings visibility

from incentive based regulated return (IBR) implementation

TNB

Market Focus

Malaysia Strategy

Page 14

Top Stock Picks

StocksStocksStocksStocks Key Buy RKey Buy RKey Buy RKey Buy Reasons easons easons easons

SapuraKencanaSapuraKencanaSapuraKencanaSapuraKencana • Solid orderbook of RM27bn and new recurring income streams. Solid orderbook of RM27bn and new recurring income streams. Solid orderbook of RM27bn and new recurring income streams. Solid orderbook of RM27bn and new recurring income streams. SapuraKencana’s orderbook of RM27bn provides good

earnings visibility. Of this, 60% are long term contracts ranging from 2-10 years with options for extensions. Besides

that, the group’s venture into the upstream production segment is slated to bear fruit starting 1QFY15 with the inclusion

of the Newfield business and also growing contributions from the Berantai marginal fields.

• Well positioned for more Well positioned for more Well positioned for more Well positioned for more contracts contracts contracts contracts with expanding asset base. with expanding asset base. with expanding asset base. with expanding asset base. The group is well positioned in the market to secure more

work, especially in the transport & installation market space. Its outstanding orderbook will ensure a steady flow of work

and new assets will help to grow this further. So far, 2 new heavy lift pipe lay barges have been delivered along with

new drilling assets, all of which were immediately chartered out.

• MMMMaintain BUY and RM5.55 TP. aintain BUY and RM5.55 TP. aintain BUY and RM5.55 TP. aintain BUY and RM5.55 TP. Our TP is based on FY15F EPS and 22x PE. In the immediate term, earnings growth will be

driven by contribution from the Newfield acquisition as well as delivery and subsequent charter of new installation assets.

Dayang Dayang Dayang Dayang

EnterpriEnterpriEnterpriEnterprisessessesses

• Orderbook Orderbook Orderbook Orderbook of RM4of RM4of RM4of RM4bn.bn.bn.bn. DEHB is now at an inflection point which will herald a new era of strong growth trajectory. As the

biggest winner of RM10bn Pan Malaysia hook-up commissioning (HUC) contracts awarded in mid-13, DEHB is now the

undisputed leader in HUC and topside major maintenance (TMM) services in Malaysia, thanks to its excellent track

record. 1QFY14 earnings have started to show the potential from new contracts with 36% y-o-y net profit growth.

• Perdana Petroleum stake gives an additional boost.Perdana Petroleum stake gives an additional boost.Perdana Petroleum stake gives an additional boost.Perdana Petroleum stake gives an additional boost. DEHB’s 25%-stake in Perdana Petroleum Bhd (PETR MK) is poised to

accelerate its growth momentum given the expected high utilization of PETR’s 18 vessels in FY14 and the tightening

supply of accommodation vessels. Given that c.85% of its fleet is under long-term charters, PETR is still on the lookout

for more work barges to cater to rising demand. We estimate PETR will contribute 12% and 14% of DEHB’s FY14 and

FY15 earnings, respectively. The 25% stake is extremely synergistic for Dayang, which requires a steady supply of

workboats to carry out its HUC and TMM services.

• Maintain BUY with RM4.55 TPMaintain BUY with RM4.55 TPMaintain BUY with RM4.55 TPMaintain BUY with RM4.55 TP based on 18x FY15 EPS. We continue to like DEHB for its clear earnings visibility, solid

balance sheet (4% net gearing), and good execution track record. Its record high order book will keep the company busy

for the next five years and transform the O&G niche service provider into one of the largest in Malaysia.

Coastal Coastal Coastal Coastal

ContractsContractsContractsContracts

• Healthy orderbook for shipbuilding business. Healthy orderbook for shipbuilding business. Healthy orderbook for shipbuilding business. Healthy orderbook for shipbuilding business. Coastal Contract’s net profit is set to grow by 18% CAGR over the next 3

years, underpinned by record high offshore support vessel (OSV) newbuild orderbook of RM2.2bn and venture into new

businesses.

• Venturing into drilling rig business. Venturing into drilling rig business. Venturing into drilling rig business. Venturing into drilling rig business. Capitalising on strong demand for premium jack-up rigs, Coastal has two rigs on

order and plans to get another. First rig will be delivered in late FY14 and hopes to secure a long term charter by 1Q15.

This will raise EBIT by RM66m or 33%. Second rig to be delivered in 2H15.

• More potential contracts from Pemex. More potential contracts from Pemex. More potential contracts from Pemex. More potential contracts from Pemex. Coastal secured a RM1.24bn contract from Pemex for a 8+4 years charter of its

gas compression. The contract will commence in mid FY15. With Pemex reportedly seeking up to 8 units, Coastal stands

a good chance of securing more contracts from Pemex.

• Valuation Valuation Valuation Valuation is undemanding is undemanding is undemanding is undemanding at 12.7x FY15 earnings. BUY with TP of RM6.00 based on 15x FY15 earnings.

IJM CorpIJM CorpIJM CorpIJM Corp • WCE in the bag. WCE in the bag. WCE in the bag. WCE in the bag. It is now official that IJM will be undertaking RM2.8bn worth of works on the RM5bn WCE. Apart from

its already awarded portion, IJM will also be bidding for the open tender portion (RM2.2bn) where we expect its overall

work undertaken on the WCE to hit RM3.5bn (70% of project value).

• Acquires SILK Highway. Acquires SILK Highway. Acquires SILK Highway. Acquires SILK Highway. IJM has also proposed to acquire the SILK Highway for RM398m. We believe this acquisition will

complement its existing highway network in the Klang Valley (NPE, Besraya and LEKAS) by connecting them together.

Although SILK Highway is loss making, we expect it to return to the black once its scheduled 38% toll hike takes place in

mid-2015.

• MMMMaintain BUY, RM7.70. aintain BUY, RM7.70. aintain BUY, RM7.70. aintain BUY, RM7.70. Our TP is based on SOP methodology and implies 18x/16x FY15F/16F PE. This is slightly higher

than its mean of 15x, but we feel it is justified given the sizable contracts for the WCE and SILK Highway acquisition will

strengthen its portfolio of concession assets.

Market Focus

Malaysia Strategy

Page 15

Top Stock Picks (cont’d)


GamudaGamudaGamudaGamuda • Awaiting line 2. Awaiting line 2. Awaiting line 2. Awaiting line 2. The CEO of MRT Corp mentioned that the Government has approved the 2nd MRT Line (RM25bn) from

Sg Buloh to Serdang and is awaiting an official announcement. Given swift execution on the existing SBK line, we reckon

that the MMC-Gamuda JV will likely reprise its PDP role for Line 2. With sunk cost already incurred for the tunnel boring

machines for the SBK line, this provides the JV an edge to bid for Line 2.

• Water woes. Water woes. Water woes. Water woes. Investors have turned cautious on Gamuda following concerns that the Selangor Government may

forcefully acquire 40% owned SPLASH 90% below its book value. We think this concern may have been overplayed as

past experience such as the windfall tax on IPPs and toll rate restructuring were all proposed but never implemented. We

reckon that a higher and more palatable offer for SPLASH will be the end game.

• Maintain BUY, RM5.50 TP. Maintain BUY, RM5.50 TP. Maintain BUY, RM5.50 TP. Maintain BUY, RM5.50 TP. Our TP is based on the SOP method which implies FY14/15 PE of 18.1x and 15.7x

respectively. This compares to its 5 year mean of 19.x respectively. Any sell down from the water woes should provide a

good buying opportunity.

Public BankPublic BankPublic BankPublic Bank • Expect resilient share price performance. Expect resilient share price performance. Expect resilient share price performance. Expect resilient share price performance. Our RM23.00 TP is based on the Gordon Growth Model and assumes 8.4%

cost of equity (previously 9.5%), 3% long-term growth and 21% ROE. The Group stands out for its undisputed earnings

track record, best-in-class cost to income ratio and unrivalled asset quality. Despite the announcement of its proposed

RM5bn rights issue, PBK’s share price has remained resilient, a testimony of investors’ conviction on the growth

prospects of the bank

• Stable prospectStable prospectStable prospectStable prospectssss ahead; ahead; ahead; ahead; poised to poised to poised to poised to defy headwinds. defy headwinds. defy headwinds. defy headwinds. PBK’s consumer loan growth did not weaken following Bank

Negara’s tightening measures over the last three years, although we expect demand from pockets of speculative and

high-end properties to soften. As PBK’s key portfolio is in the mass market, we expect loan growth to remain resilient.

• Sustainable earnings. Sustainable earnings. Sustainable earnings. Sustainable earnings. As in its previous results, we do not expect earnings surprises especially in terms of growth, and

sustainability of market share especially in mortgages, auto and SME segments. Contribution from its asset management

business should be sustained and will continue to differentiate it from its peers.

Genting Genting Genting Genting

PlantationsPlantationsPlantationsPlantations

• At inflection pointAt inflection pointAt inflection pointAt inflection point. Genting Plantations (GENP) is ripe for 31% earnings CAGR over the next 3 years (based on current

CPO price projections). Own FFB output should likewise expand 11% CAGR over the next 3 years – thanks to rising

contribution from Indonesia. GENP has gradually picked up speed in new planting there since 2007; and contribution is

forecast to expand 46% CAGR through 2016F. By then, FFB output from Indonesia should account for c.39%

• AAAAdding value upstreamdding value upstreamdding value upstreamdding value upstream. GENP has begun using its biomarker to screen the seedlings for its new planting. The results

have yielded good results so far; and the group has decided to employ only screened seedlings from now. GENP is also

teaming up with DuPont to develop a faster way to screen seedlings; and the pipeline may be announced soon. New

planting using Lonsum and Socfindo seedlings in Indonesia has also been screened using the group’s biomarker.

• Adding value downstreamAdding value downstreamAdding value downstreamAdding value downstream. Genting Plantations is retrofitting its biodiesel plant in Sabah to be able to produce high-

value added palm oil derivatives in partnership with Elevance Renewable Sciences. Commercial production is expected to

begin in 2017

• Plenty of land bank leftPlenty of land bank leftPlenty of land bank leftPlenty of land bank left. GENP currently has c.60k ha of oil palm plantable reserve in Indonesia; which should keep the

group busy for the next 10 years. In Kulai GENP also has 5,000 acres of property land bank, where they can utilise c.100

acres p.a. In Batu Pahat the group owns 3,000 ha of property land bank, of which it can utilise c.200 acres p.a. For

commercial development, the group’s land is currently valued at RM30-40/sg ft (vs. RM5-12 employed in our valuation).

• UndervaluedUndervaluedUndervaluedUndervalued. We value the counter at RM13.35/share, based on SOP. We believe double-digit growth, strong balance

sheet and an 18% potential upside (excluding 1% dividend yield) still warrant a BUY rating.

Market Focus

Malaysia Strategy

Page 16



MKHMKHMKHMKH • Earnings growth will accelerateEarnings growth will accelerateEarnings growth will accelerateEarnings growth will accelerate at the Property and Plantation divisions close to 2016, as completion of MRT stations in

Kajang drive up property sales and the oil palms enter prime age; we are projecting 32% earnings CAGR over FY13-16F

• Property business is enjoying allallallall----time high unbilled salestime high unbilled salestime high unbilled salestime high unbilled sales and is on track to achieve record high sales target of RM800m

for FY14 (vs Rm580m in FY13)

• Impressive FFB production growthImpressive FFB production growthImpressive FFB production growthImpressive FFB production growth set to increase plantation’s contribution to 33% and 38% of Group earnings in FY14

and FY15, respectively, making MKH the cheapest plantation proxy at 8x PE vis-a-vis peers' average of 16x

• Maintain highMaintain highMaintain highMaintain high----conviction BUY with RM5.85 TPconviction BUY with RM5.85 TPconviction BUY with RM5.85 TPconviction BUY with RM5.85 TP as we believe that MKH is a rare gem that offers both deep value and

strong earnings growth unrivalled by peers

PadiniPadiniPadiniPadini • Entering another earnings upcycle.Entering another earnings upcycle.Entering another earnings upcycle.Entering another earnings upcycle. We like Padini on 3 investment angles, i.e. (1) strong store space expansion of 13%

CAGR, (2) SSS growth of 5% p.a. for FY14 and FY15, and (3) extensive distribution network and diversified brand

portfolio. On this note, we anticipate Padini to enter another 3-year earnings upcycle between FY14 and FY16 with

earnings CAGR of17%.

• Solid fundamentals with unjustified cheap valuation. Solid fundamentals with unjustified cheap valuation. Solid fundamentals with unjustified cheap valuation. Solid fundamentals with unjustified cheap valuation. Padini’s extensive distribution network and strong local knowledge

are its solid competitive advantages against its foreign competitors. This coupled with its diversified brand portfolio

would enable the company to capitalise on the structural discretionary consumption growth driven by the country’s

young population. Valuation (9x FY15 P/E- ex-cash) and yield are very compelling with the company consistently

generating high ROE of more than 24% over the past 6 years.

• BUY with RM2.55 TP. BUY with RM2.55 TP. BUY with RM2.55 TP. BUY with RM2.55 TP. Padini is our high-conviction BUY with TP of RM2.55, pegged to 14x FY15F EPS. Our target PE is

reasonable as it implies 12x ex-cash PE and falls within +1 and +2 SD of its 5-year historical PE band, and is well

supported by the expected earnings upcycle in FY14-FY16.

GlobetronicsGlobetronicsGlobetronicsGlobetronics • Strong growth in sensor business. Strong growth in sensor business. Strong growth in sensor business. Strong growth in sensor business. GTB continues to see improved loadings for proximity sensors (built into smartphone

and tablets) from its Swiss customer. In addition, the company has also recently started mass production of a new LED

sensor module which may be built into a new wearable device. The sensor division now accounts for 30-40% of GTB’s

revenue and will be the key growth driver going forward.

• Quartz devices and LQuartz devices and LQuartz devices and LQuartz devices and LED/SSL divisions remain solid. ED/SSL divisions remain solid. ED/SSL divisions remain solid. ED/SSL divisions remain solid. Current monthly production volumes for its quartz devices and

LED/SSL divisions remain solid, rising by 20% y-o-y given robust demand and new product transfers by existing key

customers such as Epson Toyocom and Cree.

• MaintMaintMaintMaintain BUY and RM5.00 TP ain BUY and RM5.00 TP ain BUY and RM5.00 TP ain BUY and RM5.00 TP pegged to 18x FY15 EPS which is +1 SD of the 10-year historical P/E band. We believe this

is reasonable given GTB’s strong earnings growth (3-year earnings CAGR of 18%) and healthy balance sheet. Moreover,

there is also further upside to our forecasts, which could potentially come from new products wins and stronger-than-

expected demand for wearable devices.

Market Focus

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Page 17



Hong Leong Hong Leong Hong Leong Hong Leong

Financial GroupFinancial GroupFinancial GroupFinancial Group

• UnderUnderUnderUnder----appreciated high quality laggardappreciated high quality laggardappreciated high quality laggardappreciated high quality laggard. With the strong foundation laid (post-EON), the Group’s banking operations are

poised to leverage on an enlarged base. Focus over the next 12-18 months will be on Islamic banking, wealth

management and SMEs. Success of these strategies will provide a good boost to earnings.

• HLA HLA HLA HLA –––– AAAAn overlooked jewel. n overlooked jewel. n overlooked jewel. n overlooked jewel. Higher standards of living, and low insurance penetration rate (3% of GDP) in Malaysia

should drive demand for life insurance products. HLA’s premium growth will be led by its strong distribution network

which includes 9,500 agents (fourth largest in Malaysia) and direct access to HLB’s network for distribution of

bancassurance products and cross-selling opportunities. We expect sequential improvement in underwriting margins, as

HLA grows the more profitable investment-linked products. An IPO could further unlock value once HLA becomes

sizeable, in our view. Assuming HLA is valued at 2.0x BV (insurance M&As in the last two years were priced at 1.4-2.9x

BV), this could unlock RM2.2bn and add RM1.00 to our SOP-derived TP for HLFG.

• Maintain BUY and RM18.80 TPMaintain BUY and RM18.80 TPMaintain BUY and RM18.80 TPMaintain BUY and RM18.80 TP,,,, based on SOP. HLFG has low trading liquidity and is trading at a discount (c.15%

holding company discount) to HLB. The previous offers to privatise HL Cap and Guoco are seen as a prelude to further

corporate streamlining, which could include a privatisation offer for HLFG. The previous two offers were priced at 30-

40% premiums to their 6-month average prices

RHB CapitalRHB CapitalRHB CapitalRHB Capital • Turning around. Turning around. Turning around. Turning around. RHBC should see its final days of high provisions as asset quality issues should have been settled. Cost

synergies should also start to materialise in subsequent quarters. Elsewhere, revenues should start to pick up in the next

few quarters after a fairly weak 1Q14. Improving loan loss coverage ratio as asset quality issues are resolved and model

risk adjustments are imputed would be an added catalyst.

• Potential restructuringPotential restructuringPotential restructuringPotential restructuring. CIMB, RHBC and MBSB had entered into a 90-day exclusive agreement to negotiate for a

proposed merger and creation of a mega Islamic bank. We estimate the enlarged banking group would have combined

assets valued at RM613bn (US$188bn; as at 31 Mar 2014). The merged entity would displace Maybank’s #1 ranking in

Malaysia (by total assets) with total assets of RM578bn (US$177bn) to become Malaysia’s largest banking entity.

• Maintain BUY and RM10.00Maintain BUY and RM10.00Maintain BUY and RM10.00Maintain BUY and RM10.00 TPTPTPTP. Taking the cue from the HLB-EON M&A transaction which priced EON at 1.4x BV, we

applied a 10% premium to the RHBC’s current valuation which lifts our TP to RM10.00 (stand-alone TP was RM9.10).

MMCMMCMMCMMC • Earnings momentum to pick upEarnings momentum to pick upEarnings momentum to pick upEarnings momentum to pick up.... MMC’s earnings for 2Q14 should rebound strongly as the maintenance at Tanjung Bin

was completed end-February. Additionally, berths 13 and 14 for PTP have been completed raising total installed capacity

to 10.5m TEU. It is targeting 9m TEU in 2014 (vs 7.6m in 2013) but there could be some downside with the abortment

of the P3 alliance.

• Increasing infrastructure exposure.Increasing infrastructure exposure.Increasing infrastructure exposure.Increasing infrastructure exposure. For YTD 2014, MMC has won two new infrastructure jobs worth RM668m without its

usual JV partner Gamuda. The first was Langat 2 Water Treatment Plant Phase 1 worth RM338m and the recent

RM300m civil and infrastructure facilities Pengerang Cogeneration plant for the RAPID project. With the eventual listing

of Malakoff and Johor Port, MMC’s holding company status will rise but its increased presence as an infrastructure proxy

should narrow the discount. For FY13, construction contributed 22% of net profit, the second highest after Johor Port

at 24% and the next major catalyst is the formalisation of PDP role for MRT Line 2.

• BUY, TP RM4.95.BUY, TP RM4.95.BUY, TP RM4.95.BUY, TP RM4.95. In our view, the market is still ignoring the deep intrinsic value of MMC due to lackluster earnings

delivery and delays in listing of its subsidiaries. We expect stronger momentum going forward with the conclusion of

maintenance works at Tanjung Bin and increased throughput for PTP. At the current price, the market is assigning a

residual value of just RM1.3bn (assuming listing of Malakoff at RM10bn) which is the implied value the market is

assigning to its ports, construction, water and 4,556 acres of land bank.

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Bursa MalaysiaBursa MalaysiaBursa MalaysiaBursa Malaysia • Low hanging fruitLow hanging fruitLow hanging fruitLow hanging fruit. We believe a revamp in fee structure is on the cards, given that the last revision on listing fees was

2008, and taking the cue from Singapore’s SGX revision in Jul 2013. A 40% increase in listing fees would raise FY15F

earnings by 8%.

• Streamlining regulatory and surveillance roles. Streamlining regulatory and surveillance roles. Streamlining regulatory and surveillance roles. Streamlining regulatory and surveillance roles. In our view, shifting the regulatory functions from Bursa to the Securities

Commission would eliminate duplications and conflict of interests for Bursa, currently a regulator and also a listed entity.

There should be immediate cost savings equivalent to 7% of earnings.

• Enhancing liquidityEnhancing liquidityEnhancing liquidityEnhancing liquidity; in line with the government’s efforts to liberalise capital markets. Bursa can enhance its retail

participation by offering incentives for share splits and by encouraging companies to voluntarily raise free floats. Many

strong listed companies in Malaysia are tightly held by their founders. In Indonesia, companies with a free float of over

40% will qualify for a 5% tax reduction. If GST replaces stamp duty (like in Singapore), it could lighten investors’ tax

burden. GST is levied on transaction costs and should be lower than the stamp duty currently levied on contract value.

Maintain BUY with DDM-based RM10.10 TP.

TA EnterpriseTA EnterpriseTA EnterpriseTA Enterprise • Deserves scarcity premiumDeserves scarcity premiumDeserves scarcity premiumDeserves scarcity premium.... TAE’s stockbroking franchise stands out among the remaining players because of its sizeable

market share and strong retail base. Consolidation among brokers had been apparent with increased competition

where valuations benchmarks were set between 1.1-1.9x BV.

• Improving property sales will continue to lift profits. Improving property sales will continue to lift profits. Improving property sales will continue to lift profits. Improving property sales will continue to lift profits. Development of its prime land bank in KL could raise our SOP

valuation. It owns 7 acres of very valuable land in key growth areas in the Klang Valley (2 acres in KLCC and 3 acres in

Bukit Bintang) as well as overseas in Canada and Australia.

• BUY withBUY withBUY withBUY with RMRMRMRM1.201.201.201.20 TPTPTPTP. The stock is trading at 0.9x BV. This is clearly not justified with the expected increase in

profitability from higher property income and scarcity premium with more consolidation in the broking industry taking

place.

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DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUYSTRONG BUYSTRONG BUYSTRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY BUY BUY BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLDHOLDHOLDHOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUEDFULLY VALUEDFULLY VALUEDFULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL SELL SELL SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER This report is prepared by AllianceDBS Research Sdn Bhd (“ADBSR”) (formerly known as HwangDBS Vickers Research Sdn Bhd), a subsidiary of Alliance Investment Bank Berhad (“AIBB”) and an associate of DBS Vickers Securities Holdings Pte Ltd (“DBSVH”). This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of ADBSR. The research set out in this report is based on information obtained from sources believed to be reliable and ADBSR, its holding company AIBB, their respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “Alliance Bank Group”) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The Alliance Bank Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The Alliance Bank Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The Alliance Bank Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other banking services for these companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the Alliance Bank Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months.

ANALYST CERTIFICATIONANALYST CERTIFICATIONANALYST CERTIFICATIONANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of the date the report is published, the analyst and his/her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities).

COMPANYCOMPANYCOMPANYCOMPANY----SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES

1.1.1.1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 23 Jul 2014.

2.2.2.2. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates may beneficially own a total of 1% of any class of common equity securities of the company mentioned as of 25 Jul 2014.

3.3.3.3.

Compensation for investment banking services:Compensation for investment banking services:Compensation for investment banking services:Compensation for investment banking services:

DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates may have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from the

Market Focus

Malaysia Strategy

Page 20

company mentioned.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

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MalaysiaMalaysiaMalaysiaMalaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR") (formerly known as HwangDBS Vickers Research Sdn Bhd). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

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