malaysia market focus malaysia strategy market focus 2017 outlook page 3 macro outlook remains...

ed: JS / sa: WMT, PY

KLCIKLCIKLCIKLCI : : : : 1,648.081,648.081,648.081,648.08

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

Market Key Data

(%)(%)(%)(%) EPS GthEPS GthEPS GthEPS Gth Div YieldDiv YieldDiv YieldDiv Yield

2016F (0.3) 3.0

2017F 9.2 3.4

2018F 9.4 3.5

(x)(x)(x)(x) PEPEPEPE PBPBPBPB

2016F 17.0 1.6

2017F 15.6 1.6

2018F 14.3 1.5

Source: AllianceDBS STOCKS

Source: AllianceDBS, Bloomberg Finance L.P.

Closing price as of 3 Nov 2016

Malaysia Market Focus

Malaysia Strategy

Refer to important disclosures at the end of this report DBS Group Research . Equity 7 November 2016

Another unexciting year ahead • Challenging macro conditions dampen outlook

• Themes to look out for: (1) infrastructure spending,

(2) non-commodity exports, (3) demand for yield, and

(4) weaker MYR

• Stay defensive and focus on small- and mid-cap

stocks for alpha; end-2017 FBMKLCI target is 1,720

• Top picks: TNB, PBK, HLBK, GAM, SREIT, INRI, CMMT,

SCGB, VSI and SKP

Macro outlook remains unflattering. We expect another flat performance for the FBMKLCI in 2017 given challenging macro conditions. Weak consumption amid rising unemployment rate, low wage growth and high household debts are some of the overhangs. While earnings is estimated to rebound by 9.2% after three years of weak growth, this is coming from a low base and there is lack of conviction as banks and telcos, which account for 64% of growth in 2017, still face earnings headwinds.

Investment themes to look out for. Domestically, we see four themes. Infrastructure spendingInfrastructure spendingInfrastructure spendingInfrastructure spending will continue to provide a boost to the construction sector. But with peak order books, the next re-rating catalyst for most contractors will be earnings delivery in the year ahead. NonNonNonNon----commodity exportscommodity exportscommodity exportscommodity exports are expected to continue to show encouraging growth underpinned by exports of electronics and electrical goods. Demand for yieldDemand for yieldDemand for yieldDemand for yield will remain strong after witnessing the compression in Malaysian Government Securities (MGS) yield amid strong foreign buying. A widening earnings yield gap favours dividend paying stocks as an alternative to fixed income instruments. Weaker MYRWeaker MYRWeaker MYRWeaker MYR is expected in the run up to the anticipated Fed fund rate hike in Dec. A weaker MYR favours exporters such as those in the glove, technology, oil & gas and plantation sectors.

Strategy: Stay defensive and focus on small/mid cap for alpha generation. Despite all the headwinds and earnings disappointment in 2016, FBMKLCI is still trading at 15.6x CY17PE which is slightly above mean. Our bottom-up valuation pegs end-2017 FBMKLCI target at 1,720 which implies 16.3x PE and offers 4.4% upside. Our top picks for big cap stocks include TenagaTenagaTenagaTenaga (TNB), Public BankPublic BankPublic BankPublic Bank (PBK), Hong Leong BankHong Leong BankHong Leong BankHong Leong Bank (HLBK) and GamudaGamudaGamudaGamuda (GAM). To generate alpha, we prefer small cap stocks with strong re-rating catalysts. Our top picks for small- and mid-cap stocks are SKP ResourcesSKP ResourcesSKP ResourcesSKP Resources (SKP), VS VS VS VS IndustryIndustryIndustryIndustry (VSI), InariInariInariInari AmertronAmertronAmertronAmertron (Inari) and Sunway ConstrSunway ConstrSunway ConstrSunway Constructionuctionuctionuction (SCG). For dividend stocks, we like CapitaMall Malaysia TrustCapitaMall Malaysia TrustCapitaMall Malaysia TrustCapitaMall Malaysia Trust (CMMT) and Sunway REITSunway REITSunway REITSunway REIT (SREIT).

External headwinds are key risks. An unexpected election win by Trump will likely lead to a market selldown due to policy uncertainties. Market under-pricing the pace of US interest rate hikes is another risk to watch out for. A severe slowdown in global trade will impact an export-dependent economy such as Malaysia.

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

Tenaga Nasional 14.28 19,203 17.00 (0.8) 12.8 BUY Public Bank 19.84 18,255 22.60 1.2 9.5 BUY Hong Leong Bank 13.08 6,396 15.00 0.2 (3.6) BUY Gamuda 4.84 2,794 5.80 (0.2) 7.8 BUY Sunway REIT 1.77 1,242 1.95 2.9 16.5 BUY Inari Amertron Bhd 3.32 760 4.00 5.4 12.8 BUY CapitaLand Malaysia Mall Trust

1.60 774 1.70 3.2 15.1 BUY Sunway Construction Group

1.70 524 1.92 1.2 32.8 BUY VS Industry 1.38 385 1.70 0.7 (13.2) BUY SKP Resources Bhd 1.32 371 1.88 7.3 (7.0) BUY

Market Focus

2017 Outlook

Analysts

Bernard Ching +603 2604 3918

[email protected] Chong Tjen-San + 603 2604 3972

[email protected] Lim Sue Lin +65 6682 3711 [email protected] Ben SANTOSO +65 6682 3707 [email protected] Cheah King Yoong +603 2604 3908 [email protected] Quah He Wei, +603 2604 3966 [email protected] Toh Woo Kim, +603 2604 3917 [email protected] Lynette Cheng +603 2604 3907 [email protected] Marvin KHOR +603 2604 3911 [email protected] Siti Ruzanna Mohd Faruk +603 2604 3965 [email protected] Inani Rozidin +603 2604 3905 [email protected] Malaysian Research Team +603 2604 3333

[email protected]

Table of Contents

Macro outlook remains unflattering 3

Theme #1: Infrastructure upcycle peaking but not over yet 4

Theme #2: Non-commodity exports remain vibrant 4

Theme #3: Yield play still alive amid low interest rate 5

Theme #4: Currency fluctuation 6

Strategy: Cautious and focus on small- and mid-cap 6

Key risks 9 Sector OutlookSector OutlookSector OutlookSector Outlook

Automotive - Underweight 11

Banks - Neutral 13

Building materials - Underweight 15

Construction - Overweight 17

Consumer - Neutral 19

Gaming - Neutral 21

Gloves - Neutral 23

Media - Neutral 25

Oil & gas - Neutral 27

Plantations - Neutral 29

Property - Neutral 31

REIT - Neutral 33

Technology - Overweight 35

Telecommunication - Underweight 37

Transport - Neutral 39

Utilities - Overweight 41 Stock ProfilesStock ProfilesStock ProfilesStock Profiles

Tenaga Nasional 44

Public Bank Bank 51

Hong Leong Bank 59

Gamuda 67

Sunway REIT 73

Inari Amertron 81

CapitaMall Malaysia Trust 87

Sunway Construction 94

VS Industry 100

SKP Resources 107

Market Focus

2017 Outlook

Macro outlook remains unflattering

Going into 2017, macro conditions for Malaysia remain

unexciting and pretty much in the same tune as 2016. Weak

domestic consumption amid rising unemployment rate, low

wage growth and high household indebtedness will continue

to be a dampener on the domestic economy.

As such, we are not surprised that corporate earnings growth

will continue to be muted. We recall that besides the

slowdown in the overall domestic economy, 2016 earnings for

FBMKLCI is expected to decline by 0.3%, dragged by margin

compression from telcos as a result of intense competition,

weather-induced production losses from plantation companies

and rising credit cost of banks. Going into 2017, earnings is

expected to grow by 9.2% but this is mainly from a low base.

With banks and telcos accounting for 57% and 7%

respectively of the overall earnings growth, there is still risk of

further earnings downgrades as banks and telcos face earnings

headwinds from rising credit cost and xxx (ARPU) erosion

respectively.

Private consumption growth & consumer sentiments index

Source: MIER, Department of Statistics

Household debt-to-GDP ratio

Source: Bank Negara Malaysia

Unemployment rate

Source: Department of Statistics

EPF contribution growth rate (proxy for wage growth)

Source: Bank Negara, AllianceDBS

FBMKLCI earnings growth trend

Source: Thomson Reuters, Bloomberg Finance L.P, AllianceDBS

50

60

70

80

90

100

110

120

130

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

s.a. % qoq Private consumption growth (lhs)

Consumer sentiments index (rhs)

69.1 68.865.9

60.4

74.5 74.5 76.180.5

86.1 86.8 89.1 89.1

0

10

20

30

40

50

60

70

80

90

100

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Jul-16

% to GDP

3.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan

-09

Jun

-09

No

v-0

9

Ap

r-1

0

Se

p-1

0

Fe

b-1

1

Jul-

11

De

c-1

1

Ma

y-1

2

Oct

-12

Ma

r-1

3

Au

g-1

3

Jan

-14

Jun

-14

No

v-1

4

Ap

r-1

5

Se

p-1

5

Fe

b-1

6

Jul-

16

%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

Jan

-14

Ap

r-1

4

Jul-

14

Oct

-14

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

% y-o-yEPF contribution growth Est. trend growth

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F2017F2018F

9.4%

(0.3)%

9.2%

Market Focus

2017 Outlook

2017 earnings growth contributor by sector

Source: AllianceDBS

Theme #1: Infrastructure upcycle peaking but not over yet

The construction sector has been a multi-year beneficiary of

the roll-out of mega transport-related infrastructure projects in

Malaysia. This was anchored by the implementation of MRT, of

which Line 1 is nearing completion while the award of

contracts for Line 2 is ongoing until mid-2017. Besides the

remaining contracts for MRT Line 2, other key projects to

watch out for in 2017 include LRT 3, Gemas – JV double

tracking and Pan Borneo Sabah. Having said that, the pace of

award of new contracts is expected to slow down in 2017

compared to 2016. This raises the question of whether the

construction sector has peaked in terms of share price

performance. We believe there is still upside in the

construction sector as the forward PE of our construction

universe is undemanding at 13.8x, which is roughly at

historical mean level. The key catalysts for the sector in 2017

would be (1) earnings delivery as many construction stocks are

sitting on peak order books, and (2) timely award of key

projects. Our top picks for the construction theme are Gamuda

and Sunway Construction.

AllianceDBS construction universe PE

Source: Bloomberg Finance L.P, AllianceDBS

Theme #2: Non-commodity exports remain vibrant

Malaysia is an export-oriented nation with gross exports

accounting for around 120.1% of GDP in 2016. The collapse

of commodity prices has severely impacted overall export

performance as fossil fuel and palm oil account for 12.5% and

8.6% of total exports respectively. Year-to-date, export values

of both of these commodities have contracted. On the other

hand, non-commodity exports have fared better especially

exports of electronics and electrical (E&E) goods which

expanded 2.0% for the first nine months of 2016. The outlook

for the smartphone supply chain particularly for Apple is

looking bright again after going through inventory

adjustments in late 2015/early 2016. This benefits downstream

semiconductor players such as Globetronics, Inari, Unisem and

Malaysian Pacific Industries. Beyond semiconductor, the

outlook for electronic manufacturing services (EMS) sector in

Malaysia is also looking bright with improving order volumes

given its cost competitiveness and efficient process

engineering. We continue to see improving volume growth for

Malaysian EMS players such as VS Industry and SKP Resources

as they secure more orders from key customers.

While crude oil and CPO prices have rebounded in 2016, we

remain less sanguine on the prospects for oil & gas services

and plantation stocks in the near term. For oil & gas stocks, we

believe crude oil price rally will be capped at USD60 per barrel

despite OPEC’s decision to curb production at its recent

informal meeting at Algiers. While OPEC remains the largest

producer, the swing producer is currently the US who is not

bound by OPEC’s production curb. Any production cut by

OPEC without the cooperation of non-OPEC major oil

producers will likely be futile. Furthermore, as oil prices edge

higher, more shale oil fields will resume production and that

will cap the oil price in the near term. Under such an

environment, oil majors will likely remain cautious on

exploration and development spending. As such, we do not

expect a turnaround in the earnings prospects of Malaysian oil

& gas services companies in the near term. On the other hand,

those with oil & gas production assets such as SapuraKencana

and Hibiscus (not-rated) will benefit from higher oil prices.

As for plantation companies, our regional plantation analyst is

expecting a recovery in palm oil supply in 2017 after a

contraction this year due to the lagged effect of 2015 El Nino.

While imputing lower crude palm oil (CPO) price for 2017 in

USD terms, earnings of Malaysian planters will be boosted by a

weaker RM as we impute an average CPO price of

RM2,610/MT for 2017, up marginally from an estimated

RM2,600/MT for 2016. While we like TSH to ride on this

56.5%

1.8%

7.4%

1.7%

10.5%

1.3%

8.0%

12.8%

0%

10%

20%

30%

40%

50%

60%

Banking Media Telco Consumer Plantation Oil & Gas Utilities Others

-2SD

-1SD

Mean

+1SD

+2SD

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

2-Jan-09

2-Jun-09

2-Nov-09

2-Apr-10

2-Sep-10

2-Feb-11

2-Jul-11

2-Dec-11

2-M

ay-12

2-Oct-12

2-M

ar-13

2-Aug-13

2-Jan-14

2-Jun-14

2-Nov-14

2-Apr-15

2-Sep-15

2-Feb-16

2-Jul-16

PE (x)

Market Focus

2017 Outlook

recovery theme, valuation for the sector as a whole remains

unexciting at +1SD PE of 24x.

Exports growth of major goods

Source: Department of Statistics

Crude oil and CPO prices

Source: Bloomberg Finance L.P

Plantation sector P/

Source: AllianceDBS

Theme #3: Yield plays still alive amid low interest rate

Monetary divergence is expected to remain prevalent going

into 2017 as central bankers grapple with uneven global

economic growth. With the US economy on firmer footings

particularly evidenced by further improvements in employment

and wage growth, expectation is rising that the Feds fund rate

will be raised by 25 bps before end of 2016. At the same time,

growth challenges in rest of the world have led to continued

easy monetary policy stance outside of the US, including

Malaysia. A 25 bps Overnight Policy Rate (OPR) cut by Bank

Negara in July has caught the market by surprise as the central

bank pre-emptively lower its benchmark interest rate to boost

Malaysia’s flagging economic growth amid tame inflationary

pressure. Given fiscal constraint by the federal government,

the range of growth stimulating policy measures at its disposal

will be limited. As such, we do not rule out that interest rate

cuts will be used again to boost the domestic economy.

However, we are anticipating Bank Negara to take a measured

approach in easing the OPR. While interest rate cuts are

negative for banks (conversely positive for borrowers), the

impact is expected to be minimal to lenders.

While there are initial concerns that annuity investments

(including high yielding equities) may succumb to a selldown in

the wake of an US interest rate hike, we expect the pace of

hikes will be gradual from a low base. As such, global investors

will continue to look for higher yielding assets given the large

interest rate differential between advanced and emerging

economies. The continued compression of 10-year MGS yield

to 3.6% as of end-October (vs 4.2% at end-Dec 2015)

supports this thesis. With widening earnings yield gap (inverse

of equity earnings multiple minus 10-year MGS yield), we

believe dividend yielding stocks are increasingly attractive,

particularly those with strong cash generation and resilient

earnings growth. Our top dividend stock picks are

Globetronics, Bermaz Auto, CMMT and Sunway REIT.

10-year MGS yield


-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Jan

-14

Ma

r-1

4

Ma

y-1

4

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Ma

r-1

5

Ma

y-1

5

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Ma

r-1

6

Ma

y-1

6

Jul-

16

Sep

-16

% y-o-y% y-o-y

E&E

Others

Commodities (O&G, CPO, agricultural)

0

20

40

60

80

100

120

140

0

500

1000

1500

2000

2500

3000

3500

4000

4500

De

c-1

0

Ma

r-1

1

Jun

-11

Sep

-11

De

c-1

1

Ma

r-1

2

Jun

-12

Sep

-12

De

c-1

2

Ma

r-1

3

Jun

-13

Sep

-13

De

c-1

3

Ma

r-1

4

Jun

-14

Sep

-14

De

c-1

4

Ma

r-1

5

Jun

-15

Sep

-15

De

c-1

5

Ma

r-1

6

Jun

-16

Sep

-16

USDMYR

CPO(LHS) Brent Crude(RHS)

10

12

14

16

18

20

22

24

26

28

30

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Malaysia 1-year Forward PE

+2sd: 27.3x

+1sd: 23x

Avg: 18.7x

-1sd: 14.4x

-2sd: 10.1x

2.50

2.75

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75

5.00

Jan-

07M

ay-0

7Se

p-07

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Jan-

11M

ay-1

1Se

p-11

Jan-

12M

ay-1

2Se

p-12

Jan-

13M

ay-1

3Se

p-13

Jan-

14M

ay-1

4Se

p-14

Jan-

15M

ay-1

5Se

p-15

Jan-

16M

ay-1

6Se

p-16

%

Mean

3.9x

- 1 s.d.

3.6x

+ 1 s.d.

4.2x

Market Focus

2017 Outlook

Earnings yield gap

Source: AllianceDBS

High yield stocks under coverage

Source: AllianceDBS

Theme #4: Currency fluctuation

Historically, RM has a high correlation with crude oil price.

However, this relationship has seemingly decoupled since

3Q16 when crude oil prices surged past the USD50 per barrel

level. In fact, despite a higher crude oil price now, RM has

weakened against the USD. This is mainly due to the

anticipated Feds fund rate hike in Dec which has led to the

strengthening of the USD. Since July, the implied probability of

a rate hike in Dec has risen from around 40% in mid-July to

78% as of early November. Correspondingly, since July, the

RM has depreciated by around 4.3% against the USD. While

the impact of a weaker RM may be temporary, we highlight

below the sectors which are benefitting from it as well as

those which will be adversely impacted.

USDMYR and crude oil price


Sector impact from RM depreciation against USD

PositivePositivePositivePositive Glove (revenue in USD) Technology (revenue in USD) Oil & gas (revenue in USD, excluding those with USD borrowings) Plantation (CPO priced in USD, excluding those with USD borrowings) NegativeNegativeNegativeNegative Automotive (input cost in USD) Aviation (fuel cost and borrowings in USD) Oil & gas – OSV players (borrowings in USD) Media (newsprint and TV contents in USD)

Source: AllianceDBS

Strategy: Cautious and focus on small- and mid-cap

After three consecutive years of weak earnings growth, we

expect some form of cyclical earnings recovery with a 9.2%

earnings growth estimate for FBMKLCI in 2017. That said,

there is lack of conviction that we have seen the end of

earnings downgrade cycle, we remain cautious on the market

outlook in 2017. This is particularly so for the big cap stocks as

the FBMKLCI is currently trading at 15.6x CY17 PE which is

slightly above historical mean of 15.4x.

In the absence of earnings growth visibility, market direction is

likely to be choppy and dictated by exogenous factors in 2017.

Our bottom-up valuation pegs the FBMKLCI end-2017 target

at 1,720 implying a 16.3x CY17 PE.

From top-down perspective, we prefer exposure to

construction, technology and utilities sectors. We remain

underweight on automotive, building materials (cement),

chemical and telecommunication sectors.

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

Jan

-07

Ma

y-0

7Se

p-0

7Ja

n-0

8M

ay

-08

Sep

-08

Jan

-09

Ma

y-0

9Se

p-0

9Ja

n-1

0M

ay

-10

Sep

-10

Jan

-11

Ma

y-1

1Se

p-1

1Ja

n-1

2M

ay

-12

Sep

-12

Jan

-13

Ma

y-1

3Se

p-1

3Ja

n-1

4M

ay

-14

Sep

-14

Jan

-15

Ma

y-1

5Se

p-1

5Ja

n-1

6M

ay

-16

Sep

-16

%

Mean

2.7x

- 1 s.d.

1.8x

+ 1 s.d.

3.6x

Recomm

endationCY2017 CY2018 CY2017 CY2018

Media Prima HOLD 7.8% 8.7% 22% 12%

Globetronics BUY 7.2% 8.9% 30% 23%

Star HOLD 7.2% 7.2% 0% 0%

Berjaya Sports Toto HOLD 6.9% 7.0% 6% 3%

Bermaz Auto BUY 6.8% 7.2% 0% 7%

Magnum HOLD 6.5% 6.6% 20% 2%

MRCB-Quill REIT HOLD 6.3% 6.6% 10% 6%

CapitaMall Malaysia Trust BUY 6.2% 6.4% 3% 4%

Maybank HOLD 6.1% 6.2% 11% 2%

Matrix Concepts BUY 6.1% 6.1% -1% 1%

Sunway REIT BUY 6.0% 6.5% 0% 8%

Media Chinese HOLD 6.0% 6.4% 0% 7%

Pantech Holdings BUY 5.8% 6.3% 14% 8%

IGB REIT HOLD 5.3% 5.5% 11% 3%

BAT HOLD 5.3% 5.3% 9% 1%

Axis REIT HOLD 5.3% 5.5% 12% 4%

YTL Power HOLD 5.2% 5.2% -11% 0%

Pavilion REIT HOLD 5.2% 5.5% -10% 6%

Astro HOLD 5.2% 6.2% 15% 20%

Unisem HOLD 5.0% 5.4% 8% 8%

DPS Growth

(YoY)Dividend Yield

45

55

65

75

85

95

3.00

3.20

3.40

3.60

3.80

4.00

4.20

4.40

4.60

4.80

5.00

30

-Se

p-1

4

21

-Oct

-14

11

-No

v-1

4

2-D

ec-

14

23

-De

c-1

4

13

-Ja

n-1

5

3-F

eb

-15

24

-Fe

b-1

5

17

-Ma

r-…

7-A

pr-

15

28

-Ap

r-1

5

19

-Ma

y-…

9-J

un

-15

30

-Ju

n-1

5

21

-Ju

l-1

5

11

-Au

g-1

5

1-S

ep

-15

22

-Se

p-1

5

USDMYR Curncy(LHS) Brent crude oil(RHS) USD/bbl

Market Focus

2017 Outlook

For big cap stock selections, we prefer those with good

earnings visibility. These include Tenaga NasionalTenaga NasionalTenaga NasionalTenaga Nasional, Public BankPublic BankPublic BankPublic Bank,

Hong Leong BankHong Leong BankHong Leong BankHong Leong Bank and GamudaGamudaGamudaGamuda.

To generate alpha, we prefer exposure to selective small- and

mid-cap stocks with strong re-rating catalysts. Our conviction is

further boosted by the federal government’s recent Budget

2017 proposal for government-linked investment companies to

allocate up to RM3bn to external fund managers to invest in

small- and mid-cap companies. We believe this initiative will

provide strong price support to small- and mid-cap stocks with

good fundamentals. Our top picks for small- and mid-cap

stocks are SKP ResourcesSKP ResourcesSKP ResourcesSKP Resources, VS IndustryVS IndustryVS IndustryVS Industry, InariInariInariInari and Sunway Sunway Sunway Sunway

ConstructionConstructionConstructionConstruction.

For dividend stocks, we like CMMTCMMTCMMTCMMT and Sunway REITSunway REITSunway REITSunway REIT.

Sector call OverweightOverweightOverweightOverweight Construction (peak order book and strong earnings visibility) Technology (improving earnings visibility) Utilities (resilient earnings)

UnderweightUnderweightUnderweightUnderweight Automotive (weak demand, adverse FX impact) Building materials – cement (intensifying competition) Chemical (weak demand and depressed petrochemical prices) Telecommunication (intensifying competition)

Source: AllianceDBS

FBMKLCI PE trend


AllianceDBS’s coverage earnings estimates for CY17 and CY18

Source: AllianceDBS

15.4x

17.0x

13.8x

10

11

12

13

14

15

16

17

18

19

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

P/E

ADBS Universe vs KLCI (CY)

Sector Call RM m RM m % % CY2017 CY2018 CY2017 CY2018 CY2017 CY2018 CY2017 CY2018 CY2017 CY2018

Automotive Underweight 7,780.3 7,479.6 (3.9) 0.6 21.5x 17.0x 50% 26% 2.3% 2.9% 0.9x 0.9x 4% 5%

Aviation Neutral 20,353.4 22,085.4 8.5 1.7 29.0x 19.8x 210% 33% 1.6% 2.0% 1.3x 1.2x 10% 10%

Banking Neutral 273,527.6 292,151.4 6.8 22.5 11.6x 10.7x 11% 9% 4.2% 4.4% 1.3x 1.2x 11% 12%

Building Materials Underweight 10,896.7 7,802.5 (28.4) 0.9 30.8x 29.8x 57% 5% 2.2% 2.3% 2.0x 2.0x 7% 8%

Chemicals Underweight 55,520.0 44,000.0 (20.7) 4.6 21.8x 0.0x 4% 0% 2.4% 0.0% 2.0x 0.0x 10% 0%

Conglomerate Neutral 7,338.6 10,657.7 45.2 0.6 14.0x 13.1x 26% 8% 1.9% 1.9% 0.8x 0.7x 5% 6%

Construction Overweight 29,762.9 32,739.0 10.0 2.5 17.4x 9.3x 10% 4% 2.6% 1.9% 1.6x 0.9x 10% 6%

Consumer Neutral 52,140.4 54,553.6 4.6 4.3 21.1x 19.1x 8% 7% 3.6% 3.6% 10.8x 9.8x 54% 56%

Financial non-bank Neutral 13,479.8 14,151.0 5.0 1.1 14.2x 13.0x 6% 9% 3.7% 4.0% 3.0x 2.9x 20% 21%

Gaming Neutral 62,028.0 71,632.5 15.5 5.1 16.3x 14.5x 9% 12% 1.8% 2.0% 1.3x 1.2x 9% 9%

Glove Neutral 19,387.5 18,248.6 (5.9) 1.6 22.1x 17.3x 4% 25% 2.4% 2.9% 3.6x 3.2x 17% 19%

Healthcare Neutral 56,651.1 67,355.8 18.9 4.7 40.8x 30.8x 26% 34% 0.7% 1.0% 2.2x 2.1x 6% 7%

Media Neutral 18,896.6 19,945.2 5.5 1.6 17.2x 15.0x 17% 14% 5.7% 6.6% 18.6x 19.2x 102% 119%

Oil & Gas Neutral 26,998.4 26,555.5 (1.6) 2.2 22.5x 9.0x 34% 23% 1.1% 0.7% 1.4x 0.4x 6% 3%

Plantation Neutral 145,180.5 137,416.2 (5.3) 12.0 24.7x 21.6x 18% 13% 2.3% 2.5% 2.0x 1.9x 8% 9%

Port Neutral 14,867.6 15,174.5 2.1 1.2 9.8x 9.2x 2% 6% 3.6% 3.8% 0.5x 0.5x 6% 6%

Property Neutral 28,372.9 28,952.7 2.0 2.3 16.1x 16.0x 15% (3%) 2.9% 2.5% 0.9x 0.8x 8% 6%

REIT Neutral 36,199.8 38,109.0 5.3 3.0 18.2x 7.4x 6% 1% 5.3% 5.5% 1.3x 1.3x 11% 11%

Shipping Neutral 32,273.2 33,924.8 5.1 2.7 9.5x 8.7x 6% 6% 3.3% 3.3% 0.6x 0.6x 4% 5%

Technology Overweight 7,568.7 8,645.7 14.2 0.6 12.5x 11.0x 35% 13% 4.3% 4.8% 2.6x 2.4x 21% 22%

Telecommunication Underweight 155,349.2 148,837.6 (4.2) 12.8 22.6x 21.0x 7% 8% 3.9% 4.3% 22.4x 22.3x 93% 96%

Utilities Overweight 139,191.8 152,687.4 9.7 11.5 15.3x 14.4x 2% 5% 3.1% 3.3% 2.0x 1.9x 14% 13%

ADBS Universe 1,213,764.8 1,253,105.7 3.2 100.0 19.2x 15.5x 15% 10% 3.2% 3.3% 5.0x 4.8x 24% 25%

FBMKLCI 1,648.08 1,720.00 4.4 15.6x 14.3x 9% 9% 3.4% 3.5% 1.6x 1.5x

Dividend Yield Price/ BVPS ROAEMarket Cap Target Mkt Cap Upside Weightage P/E EPS Growth (YoY)

Market Focus

2017 Outlook

Investment thesis of top picks StockStockStockStock TPTPTPTP (RM)(RM)(RM)(RM) % Upside% Upside% Upside% Upside Share price catalystsShare price catalystsShare price catalystsShare price catalysts Tenaga Nasional 17.00 19% Revision of dividend policy; smooth implementation of fuel cost pass-through mechanism in 2017

Public Bank 22.60 14% We expect PBK’s consistent delivery of resilient earnings and above-industry growth while

maintaining steadfast asset quality to re-rate its share price

Hong Leong Bank 15.00 15% We believe share price performance will improve as earnings traction builds. Amid challenging operating environment, we expect the market to attribute a higher premium to HLB’s solid attributes, i.e. robust asset quality indicators and strong liquidity position.

Gamuda 5.80 20% Securing new contracts for LRT 3, Pan Borneo Sabah, and/or Gemas-JB double tracking projects, and resolution for Splash.

Sunway REIT 1.95 10% Acquisition of new assets including injection from major shareholder Sunway Bhd

Inari 4.00 21% Strong earnings growth for its RF division and faster ramp-up of its new testing division

CapitaMall Malaysia 1.70 6% Accretion from asset-enhancement works (Gurney Plaza and Tropicana City Property)

Sunway Construction 1.92 13% Higher margin wins for manufacturing; better earnings delivery

VS Industry 1.70 23% Securing more contracts from client D, including an anticipated additional line of box build assembly of vacuum cleaner by Mar 2017

SKP Resources 1.88 42% Earnings improvement in 3QFY17 (Dec 2016) results due to; 1) contribution from the recent hairdryer contract from its key customer, client D, 2) improved operating margins from the high value contract and 3) resolution of the labour issues in Sept 2016.

Top stock picks

Source: AllianceDBS Price date: 3 Nov 2016

CY2016/2017

Recommen

dation

Target

Price

Current

Price

Market

CapCY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017

Tenaga BUY 17.00 14.28 80,590.8 10.1x 9.9x 2% 2% 3.0% 3.0% 1.3x 1.2x 14% 13%

Public Bank BUY 22.60 19.84 76,612.0 13.8x 12.7x 9% 9% 3.1% 3.3% 2.1x 1.9x 16% 16%

Hong Leong Bank BUY 15.00 13.08 26,842.3 11.9x 10.8x 11% 11% 3.0% 3.1% 1.2x 1.1x 11% 11%

Gamuda BUY 5.80 4.84 11,723.8 19.1x 0.0x 9% 0% 1.8% 0.0% 1.8x 0.0x 10% 0%

Sunway REIT BUY 1.95 1.77 5,212.8 16.0x 0.0x 13% 0% 6.0% 6.5% 1.3x 1.3x 8% 8%

Inari Amertron BUY 4.00 3.32 3,189.2 14.3x 12.6x 26% 14% 3.5% 4.0% 3.8x 3.3x 28% 28%

CapitaMall Malaysia Trust BUY 1.70 1.60 3,250.3 17.2x 0.0x 7% 0% 6.1% 6.3% 1.2x 1.2x 7% 7%

Sunway Construction BUY 1.92 1.70 2,197.9 13.6x 12.0x 14% 13% 3.3% 3.7% 3.6x 3.1x 28% 27%

VS Industries BUY 1.70 1.38 1,615.9 10.0x 8.9x 13% 12% 4.0% 4.5% 1.6x 1.5x 17% 18%

SKP Resources BUY 1.88 1.32 1,556.4 10.1x 8.2x 36% 24% 4.9% 6.1% 3.5x 2.9x 38% 39%

ROAEP/E EPS Growth (YoY) Dividend Yield Price/ BVPS

Malaysia Strategy

2017 Outlook

Key risks

US election.US election.US election.US election. An unexpected win by Trump will likely lead to

market selldown given policy uncertainties going forward

which will reverberate beyond US’ shores. While the latest

polls suggest that Clinton is the likely winner of the US

presidential election, memory of Brexit will remind us that

nothing should be taken for granted.

Market underMarket underMarket underMarket under----pricing the pace of US interest rate hike.pricing the pace of US interest rate hike.pricing the pace of US interest rate hike.pricing the pace of US interest rate hike.

Implied fed fund rate has generally been substantially lower

than the median forecast by Fed on expectation of a lower

for longer interest rate environment. However, in the event

the pace of interest rate hike matches or exceed Fed’s

forecast, there will likely be significant market adjustment.

Severe slowdown in global trade.Severe slowdown in global trade.Severe slowdown in global trade.Severe slowdown in global trade. This will adversely affect

Malaysia given that it is an export-dependent economy

which is further exacerbated by the lack of domestic growth

drivers. Furthermore, fiscal constraint faced by the federal

government may also impede its ability to implement

counter-cyclical stimulus to boost the economy in the even

global trade falters.

Malaysia Strategy

2017 Outlook

Sector Brief

Malaysia Strategy

2017 Outlook

Automotive

Underweight

Analyst Siti Ruzanna MOHD FARUK +603 2604 3965 [email protected]

Price Target

Price PE

2017F

Div Yld

2017201720172017F

EPS CAGR 2015201520152015-2017201720172017

(RM) (RM) Rec (x) (%) (%)

UMW Holdings 5.79 5.75 HOLD 22.9 2.2 41

Bermaz Auto 2.25 2.55 BUY 12.5 6.4 8

MBM Resources 2.60 1.95 FV 12.0 3.2 10

Source: AllianceDBS Historical Total Industry Volume

Source: MAA Statistics, AllianceDBS

Market Share of Car Brands YTD Aug 2016

Source: MAA Statistics, AllianceDBS

Stuck in traffic • Attractive launches may help sustain volume amid

still weak consumer sentiment • Margins erosion from higher cost and promotions • Bermaz Auto our top pick for the sector Outlook • Volume to remain muted.Volume to remain muted.Volume to remain muted.Volume to remain muted. TIV came in at 370,254 units for

YTD Aug 2016 which is 14.8% lower y-o-y. Volume growth will be dampened by the weak consumer sentiment as well as stringent lending policies by the banks. MAA has forecasted a contraction of TIV by 13.8% to 65,000 units for FY16. This is due to the low sales volume in 1H16, as consumers shied away from buying vehicles amid price hikes by auto players. Volume seems to have recovered slightly in 3Q16 from exciting launches and festive promotions. The final boost in numbers should filter through in 4Q16, as the sales figures from the Perodua Sedan Bezza and the all new Proton Saga kick in. Given the tough economic conditions, the lower-end car segment should be able to sustain the volume as consumers opt for cheaper options.

• Not heading for the highway yet.Not heading for the highway yet.Not heading for the highway yet.Not heading for the highway yet. MAA forecasted 8.6% growth for FY17 in anticipation of an economic recovery. We expect minimal growth to remain the norm for auto players in FY17, as there are no major catalysts to help lift numbers. The continued weak consumer sentiment and tighter hire purchase controls will weigh on growth. Upcoming launches by major auto players include the Honda BRV, new Toyota Innova, Toyota Camry face-lift, City face-lift, Jazz and Accord. These launches are targeted at the middle-class consumers who are more cost-cautious during economic slowdowns. Such launches will enable TIV to grow by 8.6% y-o-y.

• Margins pressured by higher cost and promotions.Margins pressured by higher cost and promotions.Margins pressured by higher cost and promotions.Margins pressured by higher cost and promotions. While exciting launches and promotions may be able to support volume, margins will remain pressured by higher cost. Promotions and road shows to spur excitement in the market will incur costs and eat into margins. Margins have been on a downtrend since 2013 for UMW and MBM, and this trend may continue as cost will remain high in light of the unfavourable USD/MYR rate.

Risks • FFFFurther weakness in auto sectorurther weakness in auto sectorurther weakness in auto sectorurther weakness in auto sector. Continued weakness in the

auto sector from unfavourable regulations and tighter consumer spending may cause further earnings downside

• Higher production costs. Higher production costs. Higher production costs. Higher production costs. The auto sector could face margin deterioration as a result of higher production costs – arising from the unfavourable USD/MYR exchange rate as well as higher raw material prices. The intense competition and aggressive promotions will also eat into margins

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

0

10000

20000

30000

40000

50000

60000

70000

80000

TIV Growth

Proton, 11.9%

Honda, 15.1%

VW, 1.4%

Toyota/ Lexus,

7.53%

Mitsubishi,

2.20%Perodua,

26.30%

Others, 35.7%

Malaysia Strategy

2017 Outlook

Valuation & Stock Picks

• We maintain a BUY call on Bermaz AutoWe maintain a BUY call on Bermaz AutoWe maintain a BUY call on Bermaz AutoWe maintain a BUY call on Bermaz Auto. Our TP of

RM2.50 that is based on 13.0x CY17F EPS. This is

equivalent to +0.5 SD of its historical mean PE. Bermaz

Auto is our top pick as the stock has 1) attractive dividend

yield backed by asset-light business model and net cash

position, 2) increasing capacity from expansion in Inokom

plant and 3) exciting upcoming launches such as Mazda

CX-9 and Mazda CX-5.

• HOLD call for UMWHOLD call for UMWHOLD call for UMWHOLD call for UMW.... We maintain our HOLD rating for

UMW with our SOP-derived TP RM5.75. In our view, a

recovery in O&G earnings and Toyota profits would be re-

rating catalysts.

• FULLY VALUED on MBM ResourcesFULLY VALUED on MBM ResourcesFULLY VALUED on MBM ResourcesFULLY VALUED on MBM Resources. We have a FULLY

VALUED call on MBM with a TP of RM1.95. In view of the

headwinds ahead, our TP is pegged to 9x FY17 EPS which is -

1SD of its 5-year mean PE. We expect the challenging

conditions for the auto segment to weigh on the group’s

share price performance until its auto part manufacturing

contributions become more material.

Peers comparison

Source: AllianceDBS

CallTarget

PriceCurrent Price

Market Cap

(USD)CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017

UMW Holdings HOLD 5.75 5.56 1,542.9 34.1x 22.0x (67%) 55% 1.5% 2.3% 1.0x 1.0x 3% 4%

Bermaz Auto BUY 2.55 2.25 612.2 12.7x 11.5x (0%) 10% 6.8% 6.9% 4.6x 4.3x 38% 38%

MBM Resources FULLY VALUED 1.95 2.60 241.3 14.1x 12.0x (45%) 17% 3.2% 3.2% 0.6x 0.6x 5% 5%

Average 2,396.4 26.6x 18.3x (48%) 40% 3.0% 3.5% 1.9x 1.8x 12% 13%

Price/ BVPS ROAEP/E (FD)EPS (FD) Growth

(YoY)Dividend Yield

Malaysia Strategy

2017 Outlook

Banks

Neutral

Analyst LIM Sue Lin +65 6682 3711 [email protected] Lynette CHENG +60 32604 3907 [email protected]

MALAYSIAN BANKS COVERAGE

Price Target

Price PB

2017F

Div Yld

2017201720172017F

EPS CAGR 2015201520152015-2017201720172017

(RM) (RM) Rec (x) (%) (%)

Affin Holdings 2.18 1.90 FV 0.5 4.3 11.6

Alliance* 3.83 NA NR 1.2 4.0 (0.7)

AMMB 4.12 4.60 HOLD 0.8 4.1 (18.8)

CIMB Group 4.76 4.80 HOLD 0.9 4.2 16.8

Hong Leong Bank

13.08 15.00 BUY 1.2 2.9 (0.4)

Maybank 7.78 7.50 HOLD 1.2 6.1 (2.9)

Public Bank 19.84 22.60 BUY 2.1 3.1 5.1

RHB Bank 4.61 5.50 BUY 0.7 3.6 1.5

BIMB 4.27 NA NR 1.6 2.9 1.5

Hong Leong Financial Group

15.48 18.00 BUY 1.1 3.2 (2.6)

* Based on Bloomberg consensus

Source: DBS Bank, AllianceDBS, Bloomberg Finance L.P. Malaysian banks: Net profit growth

Source: Companies, DBS Bank, AllianceDBS

Malaysian banks: Credit cost


Testing Murphy’s Law • 2017 earnings set to be tested; NIM and credit costs

are key downside risks • Base-case earnings growth is high, premised on

credit cost declining from a high base in 2016; worst-case scenario could see earnings growth at 4% y-o-y

• Sticking to the defensive; Public Bank (PBK) and Hong Leong Bank (HLB) remain our top picks

Outlook

• Earnings growth driven by lower provisionsEarnings growth driven by lower provisionsEarnings growth driven by lower provisionsEarnings growth driven by lower provisions. Although we have imputed for credit cost to trend lower in CY17, this is largely driven by MAY, RHB and CIMB which have incurred significant provisions in 2016, from its Indonesian operations (CIMB), oil & gas (MAY and RHB), as well as steel (RHB) exposure. Excluding these three banks, our credit cost assumption would be higher y-o-y at 10bps for CY17F (CY16F: 8bps).

• Headwinds to revenue growthHeadwinds to revenue growthHeadwinds to revenue growthHeadwinds to revenue growth. Excluding the effect of credit cost, pre-provision operating profit is expected to grow at the same rate as in CY16 (c. 6%). Revenue growth remains a challenge as loan growth moderates, NIM narrows and non-interest income continue to lack impetus. NIM may at best remain stable unless there are subsequent policy rate cuts ahead. Amid lacklustre loan application and approval trends, we expect 2017 loan growth to hit mid-single digits at best.

• More restructuring to come?More restructuring to come?More restructuring to come?More restructuring to come? We have thus far seen RHB and AFG taking the route of collapsing its financial holding structure and transferring the listing status to its key operating entity (i.e. the bank entity). While the benefits reaped by the remaining financial holding companies may not be as substantial as in RHB’s case (due to its high double leverage ratio), we believe there could be more to come, thanks to the exercise’s appeal in reducing inefficiencies. Apart from RHB and AFG, there are five other financial holding companies in our coverage (AMMB, AFFIN, CIMB, HLFG and BIMB).

Risks • Further cuts in OPR may drag NIMsFurther cuts in OPR may drag NIMsFurther cuts in OPR may drag NIMsFurther cuts in OPR may drag NIMs. Our base-case

assumption is for NIM to drop by 3bps. However, further cuts in Overnight Policy Rate (OPR) may result in more NIM pressures than expected. The full impact of the surprise OPR cut of 25bps in July will surface in the coming quarter’s (3QCY16) results. As variable rate loans are re-priced faster (typically within a week) than fixed deposits (56% of fixed deposits mature within six months; 95% within a year), the impact would be negative initially, before the drop in cost of funds mitigates the impact.

17.0 17.0 17.0 17.0

8.2 8.2 8.2 8.2

(2.4)(2.4)(2.4)(2.4) (3.7)(3.7)(3.7)(3.7)

0.0 0.0 0.0 0.0

14.1 14.1 14.1 14.1

-40

-30

-20

-10

0

10

20

30

40

CY12 CY13 CY14 CY15 CY16F CY17F

%%%%

AMMB AFFIN CIMBHLB MAY PBKRHBBANK AFG Sector

1.16%

1.02%

1.08%

1.12%

0.80%

0.68%

0.71%

0.49%

0.28%

0.16%

0.20%

0.18%

0.33%

0.43%

0.31%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

CY03

CY04

CY05

CY06

CY07

CY08

CY09

CY10

CY11

CY12

CY13

CY14

CY15

CY16F

CY17F

Sector credit cost Sector credit cost ex CIMB, MAY, RHB

Malaysia Strategy

2017 Outlook

Malaysian banks: NIM trends


Malaysian banks: Forward-rolling P/BV band

Source: Bloomberg Finance L.P, DBS Bank, AllianceDBS

• Keeping watch on asset qualityKeeping watch on asset qualityKeeping watch on asset qualityKeeping watch on asset quality. Asset quality of Malaysian banks have held up better than expected, except for two banks, positively surprising the market. While banks have indicated that they have prudently impaired loans and provided for them, vulnerable segments (such as oil & gas, commodities, steel and commercial property) may still cause more incidences of restructured and rescheduled (R&R) loans. Meanwhile, on the retail front, asset quality has been largely held up by mortgages. That said, if the operating environment improves, asset quality could also surprise on the upside from a reclassification of R&R loans to non-impaired (allowed upon observance of continuous repayment for at least six months).

• WorstWorstWorstWorst----case scenario. case scenario. case scenario. case scenario. On a worst-case scenario of a 10-bp NIM compression and credit cost of 40bps, our back of the envelope calculation estimates sector earnings to be lower by 9%. If such a scenario were to pan out, sector earnings growth is expected to drop to 4% y-o-y, albeit a recovery from a contraction in CY16.


• Asset quality the critical factor for Asset quality the critical factor for Asset quality the critical factor for Asset quality the critical factor for the sector. the sector. the sector. the sector. Malaysian banks are trading at 10-year trough valuations, pricing in concerns of further ROE de-rating from a significant blow up in asset quality. While this is not our base-case view, we believe this remains the critical factor in determining share price performance in the year to come.

• Stay safe; PBK (RM22.60 TP) and HLB (RM15.00 TPStay safe; PBK (RM22.60 TP) and HLB (RM15.00 TPStay safe; PBK (RM22.60 TP) and HLB (RM15.00 TPStay safe; PBK (RM22.60 TP) and HLB (RM15.00 TP) remain our top picks. . . . In view of the challenging operating environment, we continue to favour banks with defensive attributes, i.e. PBK and HLB. Both banks have strong asset-quality attributes and are expected to see loan growth driven by mortgages from strong pipelines built up in the past few quarters.

Malaysian banks: Peer comparison

Banking GroupBanking GroupBanking GroupBanking Group Market Market Market Market capcapcapcap

PricePricePricePrice Target Target Target Target PricePricePricePrice

RatingRatingRatingRating PE (x)PE (x)PE (x)PE (x) CAGRCAGRCAGRCAGR P/BV (x)P/BV (x)P/BV (x)P/BV (x) ROROROROE (%)E (%)E (%)E (%) Net div Net div Net div Net div (%)(%)(%)(%)

(US$bn)(US$bn)(US$bn)(US$bn) (RM/s)(RM/s)(RM/s)(RM/s) (RM/s)(RM/s)(RM/s)(RM/s) CY15ACY15ACY15ACY15A CY16FCY16FCY16FCY16F CY17FCY17FCY17FCY17F ^ (%)^ (%)^ (%)^ (%) CY15ACY15ACY15ACY15A CY16FCY16FCY16FCY16F CY17FCY17FCY17FCY17F CY16FCY16FCY16FCY16F CY16FCY16FCY16FCY16F

Affin HoldingsAffin HoldingsAffin HoldingsAffin Holdings 1,009 2.18 1.90 FV 11.5x 9.3x 9.2x 11.6 0.5x 0.5x 0.5x 5.4% 4.3%

Alliance*Alliance*Alliance*Alliance* 1,392 3.83 NA NR 11.4x 11.2x 10.9x 2.2 1.3x 1.2x 1.2x 11.2% 3.7%

AMMBAMMBAMMBAMMB 2,959 4.12 4.60 HOLD 8.4x 9.3x 8.6x -1.2 0.8x 0.8x 0.8x 8.7% 4.4%

CIMB GroupCIMB GroupCIMB GroupCIMB Group 10,059 4.76 4.80 HOLD 14.2x 11.4x 10.4x 16.8 1.0x 0.9x 0.9x 8.4% 3.8%

Hong LeongHong LeongHong LeongHong Leong 6,396 13.08 15.00 BUY 12.2x 12.6x 11.1x 4.9 1.4x 1.3x 1.2x 11.0% 2.6%

MaybankMaybankMaybankMaybank 18,897 7.78 7.50 HOLD 10.9x 13.4x 11.5x -2.9 1.2x 1.2x 1.2x 9.0% 5.5%

Public BankPublic BankPublic BankPublic Bank 18,255 19.84 22.60 BUY 15.2x 15.1x 13.8x 5.1 2.5x 2.3x 2.1x 15.6% 2.8%

RHB BankRHB BankRHB BankRHB Bank 3,377 4.61 5.50 BUY 8.6x 9.3x 8.4x 1.5 0.6x 0.7x 0.7x 8.1% 2.9%

Weighted averageWeighted averageWeighted averageWeighted average 12.6x12.6x12.6x12.6x 13.0x13.0x13.0x13.0x 11.6x11.6x11.6x11.6x 4.14.14.14.1 1.5x1.5x1.5x1.5x 1.4x1.4x1.4x1.4x 1.3x1.3x1.3x1.3x 11.0%11.0%11.0%11.0% 3.9%3.9%3.9%3.9% Weighted average (exWeighted average (exWeighted average (exWeighted average (ex----Public Bank)Public Bank)Public Bank)Public Bank) 11.5x11.5x11.5x11.5x 12.1x12.1x12.1x12.1x 10.7x10.7x10.7x10.7x 3.73.73.73.7 1.1x1.1x1.1x1.1x 1.1x1.1x1.1x1.1x 1.0x1.0x1.0x1.0x 9.0%9.0%9.0%9.0% 4.3%4.3%4.3%4.3% Simple averageSimple averageSimple averageSimple average 11.5x11.5x11.5x11.5x 11.5x11.5x11.5x11.5x 10.5x10.5x10.5x10.5x 4.74.74.74.7 1.2x1.2x1.2x1.2x 1.1x1.1x1.1x1.1x 1.1x1.1x1.1x1.1x 9.9%9.9%9.9%9.9% 3.8%3.8%3.8%3.8% Simple average (exSimple average (exSimple average (exSimple average (ex----Public BankPublic BankPublic BankPublic Bank)))) 11.0x11.0x11.0x11.0x 10.9x10.9x10.9x10.9x 10.0x10.0x10.0x10.0x 4.74.74.74.7 1.0x1.0x1.0x1.0x 1.0x1.0x1.0x1.0x 0.9x0.9x0.9x0.9x 9.3%9.3%9.3%9.3% 3.9%3.9%3.9%3.9%

BIMBBIMBBIMBBIMB 1,616 4.27 NA NR 11.8x 12.0x 11.5x 1.6 1.9x 1.8x 1.6x 17.2% 2.8% Hong Leong Financial Hong Leong Financial Hong Leong Financial Hong Leong Financial GroupGroupGroupGroup

4,224 15.48 18.00 BUY 10.6x 10.3x 9.1x 7.8 1.2x 1.1x 1.1x 11.6% 2.4%

* Based on Bloomberg consensus

^ Refers to a 2-year EPS CAGR for CY15-17F

Source: Companies, Bloomberg Finance L.P., DBS Bank, AllianceDBS

2.46% 2.38%2.25%

2.16% 2.12% 2.09%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

CY12 CY13 CY14 CY15 CY16F CY17F

AMMB AFFIN CIMB HLB MAY

PBK RHBBANK AFG Sector

Mean, 1.59

+1SD, 1.85

+2SD, 2.12

-1SD, 1.32

-2SD, 1.06

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

06 07 08 09 10 11 12 13 14 15 16

PBV (X)PBV (X)PBV (X)PBV (X)

Malaysia Strategy

2017 Outlook

Building Materials

Underweight

Analyst Woo Kim TOH +60 32604 3917 [email protected]

Price Target

Price PE

2017F

Div Yld

2017201720172017F

EPS CAGR 2015201520152015-2017201720172017

(RM) (RM) Rec (x) (%) (%)

Cahya Mata Sarawak

3.76 3.90 HOLD 18.9 2.6 42

Lafarge Malaysia 8.07 4.25 FV 37.9 1.9 20

Source: AllianceDBS Newcastle thermal coal prices (USD/tonne)

Source: Bloomberg Finance L.P., AllianceDBS

Facing stumbling blocks • No major improvement in demand-supply

dynamics to drive higher cement ASP in 2017 • Rising coal prices will lead to higher costs and

could exert further pressure on margins • HOLD call on CMS; FULLY VALUED on Lafarge due

to rich valuation Outlook • Oversupply in Peninsular MalaysiaOversupply in Peninsular MalaysiaOversupply in Peninsular MalaysiaOversupply in Peninsular Malaysia. We do not expect any

major improvement in the demand-supply dynamics of the cement industry in Peninsular Malaysia in 2017. Despite uptick in cement demand arising from new large infrastructure projects (such as MRT 2), the cement market in Peninsular Malaysia should still remain in oversupply situation given sizeable capacity expansion activities by cement players over the past few years.

• Sarawak market buoyed by the massive Pan Borneo Highway Sarawak market buoyed by the massive Pan Borneo Highway Sarawak market buoyed by the massive Pan Borneo Highway Sarawak market buoyed by the massive Pan Borneo Highway project.project.project.project. The massive RM36bn Pan Borneo Highway project should lead to higher demand for building materials in Sarawak starting 2017. This will largely benefit CMS which is the sole manufacturer of cement in the state of Sarawak. In addition to that, CMS is also a major supplier of other building materials such as aggregates, premix, wire mesh, etc.

• Higher cost lead by rising coal pricesHigher cost lead by rising coal pricesHigher cost lead by rising coal pricesHigher cost lead by rising coal prices. Thermal coal prices have rebounded significantly in 2H16 to about US$75-80/MT, from its low of US$50-55/MT in early 2016. As coal supply contracts are typically negotiated yearly, this might not affect costs in 2016 but should lead to higher annual contract prices fixed in 2017. Higher coal prices will put pressure on cement manufacturers’ margins because coal accounts for 25-30% of cement production cost.

Risks • Rebates getting more aggressive. Rebates getting more aggressive. Rebates getting more aggressive. Rebates getting more aggressive. Cement players seeking to

gain market share in order to fill their capacity may offer larger rebates. This would generally result in lower cement ASP for the industry.

• Weaker domestic cement demand. Weaker domestic cement demand. Weaker domestic cement demand. Weaker domestic cement demand. Weaker domestic cement demand as a result of slowing construction activities could force cement players to export their cement, but export prices are usually lower than prevailing domestic prices....

40

50

60

70

80

90

100

110

120

130

2012 2013 2014 2015 2016

Malaysia Strategy

2017 Outlook

Valuation & Stock Picks • Lafarge Malaysia Lafarge Malaysia Lafarge Malaysia Lafarge Malaysia ---- lofty valuationlofty valuationlofty valuationlofty valuation. We maintain our FULLY

VALUED rating on Lafarge Malaysia with a RM4.25 TP, implying 47% downside. The stock is trading at a lofty valuation, failing to take into account the heightened competition and pricing pressures in the Malaysian cement sector from new capacity coming on stream. The sector’s profitability has been declining since 2013 despite the benefit from lower coal prices.

• CMS CMS CMS CMS –––– waiting for OMwaiting for OMwaiting for OMwaiting for OM----SaraSaraSaraSarawak turnaroundwak turnaroundwak turnaroundwak turnaround. We have a HOLD call on CMS with an SOP-based TP of RM3.90. While the outlook for most of CMS key operating segments looks favourable in 2017 due the rollout of Pan Borneo Highway projects, we expect ongoing weakness at 25%-owned OM Sarawak to be a drag on earnings and sentiment on the stock. As such, we do not foresee a major re-rating of CMS’s share price unless there is a turnaround in OM Sarawak from improving ferrosilicon prices.

Peers comparison

CallTarget

Price (RM)

Current

Price (RM)

Market Cap


LMC FULLY VALUED 4.25 8.07 1,633.9 (50%) 43% 54.2x 37.9x 20.1x 16.3x 1% 2% 4% 6%

CMS HOLD 3.90 3.76 962.6 (52%) 80% 34.0x 18.9x 12.3x 8.9x 1% 3% 6% 10%

Average (51%) 57% 46.7x 30.8x 17.2x 13.5x 1% 2% 5% 7%

ROAE (%)EPS Growth (%) P/E (x) EV/EBITDA (x) Divd yield (%)

Malaysia Strategy

2017 Outlook

Construction

Overweight

Analyst Chong Tjen-San,CFA +60 3 26043972 [email protected]

Price Target

Price PE

2017F

Div Yld

2017201720172017F

EPS CAGR 2015201520152015-2017201720172017

(RM) (RM) Rec (x) (%) (%)

Gamuda 4.84 5.80 BUY 17.1 1.8 (15)

IJM Corp 3.28 3.30 HOLD 24.7 3.3 (13)

Kimlun Corp 2.22 2.87 BUY 9.2 1.8 30 Muhibbah Engineering

2.27 3.10 BUY 12.9 1.7 9

WCT Holdings Bhd 1.80 1.55 HOLD 12.5 2.0 (4) Sunway Construction

1.70 1.92 BUY 17.2 2.4 7

Source: AllianceDBS PE Band for AllianceDBS Construction Universe

Source: Bloomberg Finance L.P., AllianceDBS P/BV Band for AllianceDBS Construction Universe


Focus on earnings delivery and execution

• Contracts pipeline remains strong. Contracts pipeline remains strong. Contracts pipeline remains strong. Contracts pipeline remains strong. Near-term contract opportunities include MRT Line 2, LRT 3, Gemas-JB Double tracking and Pan Borneo Sabah.

• Overseas projects will be more crucial. Overseas projects will be more crucial. Overseas projects will be more crucial. Overseas projects will be more crucial. Long-term

pipeline is promising until the end of this decade but overseas projects to feature more prominently.

• Top picks Top picks Top picks Top picks –––– Gamuda and Suncon. Gamuda and Suncon. Gamuda and Suncon. Gamuda and Suncon. Both have peak

orderbooks and experience in large-scale transportation infra projects.

Outlook • Focus on transportationFocus on transportationFocus on transportationFocus on transportation----led projects. led projects. led projects. led projects. The priority for

Malaysian infrastructure projects over the past few years has been more transportation-led, anchored by the MRT project with a total of three lines. MRT Line 1 is nearing completion while for MRT Line 2, 22 work packages worth RM24bn have been awarded. The remaining six out of the 10 large viaduct packages will be awarded by mid-2017. Other transportation projects awarded in 2016 were highways (DASH and SUKE) and Pan Borneo Sarawak. Moving into 2017, we expect the focus to be on LRT 3, Gemas–JB double tracking and Pan Borneo Sabah. It is worthy to note that most of these projects have embraced the Project Delivery Partner (PDP) approach which, in our view, minimises the execution risk.

• Strong pipeline of projects will wane in coming years. Strong pipeline of projects will wane in coming years. Strong pipeline of projects will wane in coming years. Strong pipeline of projects will wane in coming years. On top of the projects above, three large-scale projects which are the High Speed Rail, MRT Line 3 and Penang Transport Master Plan will keep contractors busy until the end of the decade. The timeline for MRT Line 3 appears to have been brought forward with awards slated for end-2018 vs 2020/2021 previously. Malaysia’s MyHSR and Singapore’s Land Transport Authority have called for a joint tender to appoint a Joint Development Partner who will assist in providing project management support, technical and procurement advice.

• HenceHenceHenceHence, overseas projects to feature more. , overseas projects to feature more. , overseas projects to feature more. , overseas projects to feature more. Among the ASEAN countries, Malaysia’s infrastructure is second best behind Singapore. This implies while there is a surge in transport-related infrastructure currently, contractors will eventually need to venture overseas again. Based on the 2015/16 Global Competitiveness Index, Malaysia’s infrastructure ranking stood at 24 vs 25 in the 2014/15 ranking. Within ASEAN, the biggest opportunities lie in Indonesia given the concerted efforts by the Jokowi-led government to address the huge infrastructure gap while Malaysian contractors which have similar languages, cultural and historical precedence may have the upper hand.

-2SD

-1SD

Mean

+1SD

+2SD

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

2-Jan-09

2-Jun-09

2-Nov-09

2-Apr-10

2-Sep-10

2-Feb-11

2-Jul-11

2-Dec-11

2-M

ay-12

2-Oct-12

2-M

ar-13

2-Aug-13

2-Jan-14

2-Jun-14

2-Nov-14

2-Apr-15

2-Sep-15

2-Feb-16

2-Jul-16

PE (x)

-2SD

-1SD

Mean

+1SD

+2SD

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2-Jan-09

2-Jun-09

2-Nov-09

2-Apr-10

2-Sep-10

2-Feb-11

2-Jul-11

2-Dec-11

2-M

ay-12

2-Oct-12

2-M

ar-13

2-Aug-13

2-Jan-14

2-Jun-14

2-Nov-14

2-Apr-15

2-Sep-15

2-Feb-16

2-Jul-16

PBV (x)

Malaysia Strategy

2017 Outlook

• Focus on earnings delivery. Focus on earnings delivery. Focus on earnings delivery. Focus on earnings delivery. With the pace of construction awards expected to slow down moving into 2017 as compared to 2016, we expect a strong emphasis on earnings delivery. Most contractors have peak orderbooks now with strong wins YTD where current revenue visibility is between two and three years. Hence, the execution and timeliness of projects is the next important milestone to monitor. YTD, consensus earnings revision for FY16F and FY17F have been rather flattish at c.1% for both years. The most significant upgrade involves Kimlun, whose FY16F and FY17F earnings were raised 28% p.a. for both years. For 1H16, Kimlun’s positive earnings delivery has been driven by margin expansion for both its construction and manufacturing divisions.

On the flipside, IJM has seen the steepest downgrades with FY17F and FY18F earnings cut by 22% and 17%, respectively, due to poorer property and plantation earnings. For Gamuda, consensus has cut FY17F earnings by 8% since the start of 2016 but this still assumes growth of 14% as MRT Line 2 contribution is expected to kick in and there should be better contribution from property given that the presales for FY16 was RM2bn. Consensus earnings for Suncon for FY16 has been rather flattish but for FY17, earnings have been raised by 13%. This was likely from the ‘S curve’ effect from its peak orderbook of RM5bn.

Risks • Raw material Raw material Raw material Raw material price. price. price. price. Steel prices have been on an uptrend

the start of this year, raising some concerns for contractors. Contractors which have exposure to MRT Line 2 aboveground works are somewhat shielded as fluctuations in prices are borne by the government. We expect contractors to strike a balance when bidding for projects which require higher steel content such as building jobs.

• More competition from foreign contractors. More competition from foreign contractors. More competition from foreign contractors. More competition from foreign contractors. While this is may not be an immediate concern, we think this is something to be cautious about in the future. We have seen the presence of more foreign contractors in Malaysia, articularly from China. A case in point is the Gemas-JB

double tracking which was awarded to a consortium of three Chinese parties.

Valuation & Stock Picks • Valuations at meValuations at meValuations at meValuations at mean. an. an. an. Our construction universe is now trading

at 1-year forward PE of 13.8x and P/BV of 1.7x. This is roughly at mean levels. We think the catalyst for valuation expansion will be a combination of timely awards of key projects such as LRT 3, Pan Borneo Sabah and Gemas-JB double tracking, more positive newsflow on MRT 3 and HSR, and more importantly strong earnings delivery.

• Gamuda Gamuda Gamuda Gamuda –––– best transportation proxy. best transportation proxy. best transportation proxy. best transportation proxy. After bagging the Pan Borneo Highway Sarawak project with partner Naim that brings its outstanding to a peak of RM9bn, it remains confident of another RM3-4bn worth of new orders over the next 12 months. This will come from largely three projects – Gemas-JB double tracking, LRT 3 and Pan Borneo Sabah. A resolution for Splash at a price close to its BV will be a positive catalyst but investors should not expect any special dividends as proceeds will be used for its PTMP project. 4QFY16 marked the bottom of its earnings downcycle and we expect FY17F to see a resumption of its growth trajectory.

• Suncon Suncon Suncon Suncon - MalMalMalMalaysia’s leading pure construction player.aysia’s leading pure construction player.aysia’s leading pure construction player.aysia’s leading pure construction player. Suncon is the largest listed pure play construction player in Malaysia. Given its strong track record with MRT, LRT and BRT jobs previously, we are of the view that SCG is on a strong footing to bag several key infrastructure packages such as LRT3 and BRT as well as other infrastructure-related projects. SCG has also established itself as the only construction specialist to be involved in all three Rapid Line infra projects (MRT, LRT and BRT). Its precast division will also benefit from Singapore’s public housing development. YTD wins of RM2.6bn has exceeded its RM2.5bn forecast, bringing its outstanding orderbook to a high of RM5bn. This ensures strong earnings visibility for two and a half years.

Construction peer

Source: AllianceDBS

Market CapMarket CapMarket CapMarket Cap Rec.Rec.Rec.Rec. T PT PTPTP

(USDm)(USDm)(USDm)(USDm) (Local currency )(Local currency )(Local currency )(Local currency ) CY15CY15CY15CY15 CY16CY16CY16CY16 CY17CY17CY17CY17 CY15CY15CY15CY15 CY16CY16CY16CY16 CY17CY17CY17CY17 CY15CY15CY15CY15 CY16CY16CY16CY16 CY17CY17CY17CY17 CY15CY15CY15CY15 CY16CY16CY16CY16 CY17CY17CY17CY17

Malay siaMalay siaMalay siaMalay sia

Gamuda 2,824.8 BUY 5.80 18.6 20.6 19.0 1.9 1.9 1.8 1.9 1.9 1.9 10.7 9.6 9.7

IJM 3,055.4 HOLD 3.30 15.3 18.3 18.8 1.5 1.4 1.4 3.2 3.2 3.2 9.8 7.9 7.4

WCT 473.8 HOLD 1.55 11.6 16.8 15.5 0.7 0.9 0.9 2.2 2.2 2.2 9.0 5.7 5.9

Muhibbah Eng 255.7 BUY 3.10 12.0 10.6 9.7 1.2 1.1 1.1 1.8 1.9 2.1 11.7 11.2 11.6

Kimlun 133.5 BUY 2.87 10.0 8.3 7.4 1.2 1.0 1.0 2.1 2.3 2.6 14.8 15.6 15.4

SunCon 525.0 BUY 1.92 16.1 14.3 12.6 4.5 3.8 3.8 2.5 2.7 2.9 33.2 28.7 27.4

Simple A v erageSimple A v erageSimple A v erageSimple A v erage 13.913.913.913.9 14.814.814.814.8 13.813.813.813.8 1.81.81.81.8 1.71.71.71.7 1.71.71.71.7 2.32.32.32.3 2.42.42.42.4 2.52.52.52.5 14.914.914.914.9 13.113.113.113.1 12.912.912.912.9

Dilut ed PE (x)Dilut ed PE (x)Dilut ed PE (x)Dilut ed PE (x) P/NTA (x )P/NTA (x )P/NTA (x )P/NTA (x ) Net Div Y ield (%)Net Div Y ield (%)Net Div Y ield (%)Net Div Y ield (%) ROE (%)ROE (%)ROE (%)ROE (%)

Market Focus

2017 Outlook

Consumer

Neutral

Analyst King Yoong CHEAH +60 32604 3908 [email protected] Inani ROZIDIN +603 2604 3905 [email protected]

Price Target

Price PE

2017F

Div Yld

2017201720172017F

EPS CAGR 2015201520152015-2017201720172017

(RM) (RM) Rec (x) (%) (%)

British American Tobacco

47.90 50.20 HOLD 17.9 5.3 5 Petronas Dagangan

23.30 23.85 HOLD 26.2 2.9 5 MSM Malaysia Holdings

5.00 4.60 HOLD 16.2 4.0 15

QL Resources 4.42 4.60 HOLD 23.8 1.3 16

Padini Holdings 2.82 2.95 BUY 11.9 3.5 7

OldTown Berhad 1.90 2.15 BUY 14.9 3.2 7

Sasbadi Holdings 1.43 1.58 BUY 17.7 2.8 27

Source: AllianceDBS Private consumption growth and consumer sentiment index- expected to pick up


Malaysia GDP growth

Source: AllianceDBS

Prospects remain cloudy • Despite recovery in consumer spending, cost

pressure and labour issues could drag earnings • Prefer stocks with regional exposure, potential

capital management initiatives and strong brands • Oldtown remains our top pick in the sector Outlook • Indicators point to a gradual recoveryIndicators point to a gradual recoveryIndicators point to a gradual recoveryIndicators point to a gradual recovery. More than six quarters

have passed since GST was implemented in April last year, and we have observed that its impact is fading with a gradual recovery in consumer spending and visits to shopping malls. Our observations are also supported by recent statistics released by the Malaysian Institute of Economic Research (MIER). Since hitting a record low of 64 points in December 2015, the Consumer Sentiment Index (CSI) has gradually recovered and reached 74 points in Sept 2016, although still below the threshold level of optimism of 100. The recovery in CSI was attributed to (1) waning concerns regarding job prospects, (2) stable currency, and (3) stable household incomes.

• Consumer spending recovery Consumer spending recovery Consumer spending recovery Consumer spending recovery ---- slowly but surelyslowly but surelyslowly but surelyslowly but surely. We remain cautiously optimistic that consumer spending is expected to continue to recover gradually in 2017, supported by (1) government stimulus announced this year such as higher BRIM payment, (2) hike in minimum wage in July, and (3) the stable ringgit.

• Still cautious on earnings outlookStill cautious on earnings outlookStill cautious on earnings outlookStill cautious on earnings outlook. The earnings outlook for the sector is expected to remain cloudy as the gradual improvement in consumer spending in the coming quarters could support top-line growth, but cost pressures and potential labour shortage issues may adversely impact earnings prospects

Risks • Unexpected slowdown in consumer spendingUnexpected slowdown in consumer spendingUnexpected slowdown in consumer spendingUnexpected slowdown in consumer spending. Any event that

triggers an unexpected slowdown in consumer spending will derail the consumer recovery story.

• Cost pressure and labour issuesCost pressure and labour issuesCost pressure and labour issuesCost pressure and labour issues. As mentioned above, such issues will pose a downside risk to the sector’s prospects....

60

70

80

90

100

110

120

130

4

5

6

7

8

9

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

% y-o-yPrivate consumption growth (lhs)

Consumer sentiments index (rhs)

Market Focus

2017 Outlook

Valuation & Stock Picks • Stock picks. Stock picks. Stock picks. Stock picks. Given the concerns outlined above, we favour

stocks with (1) resilient business models, (2) established brand names in their respective sectors to withstand the continued challenging operating environment, (3) strong balance sheets to undertake earnings-accretive M&A activities to drive growth and/or engage in capital management exercises to reward shareholders, (4) regional exposure to mitigate (potential) domestic earnings risks, and (5) attractive value propositions. OldTown is our preferred pick in the sector.

Peers comparison

Source: AllianceDBS

CallTarget

Price

Current

Price

Market Cap


BAT HOLD 50.20 47.90 3,259.0 19.5x 17.9x (23%) 9% 4.9% 5.3% 25.5x 31.1x 137% 157%

MSM Malaysia HOLD 4.60 5.00 837.5 16.9x 16.2x (26%) 4% 3.9% 4.0% 1.7x 1.6x 10% 10%

Oldtown BUY 2.15 1.90 204.4 15.1x 13.9x 6% 8% 3.5% 3.6% 2.3x 2.1x 15% 16%

Padini BUY 2.95 2.82 442.1 12.6x 11.9x 35% 6% 3.8% 3.5% 3.7x 3.2x 32% 29%

Petronas Dagangan HOLD 23.85 23.30 5,515.6 27.3x 26.2x 7% 4% 2.7% 2.9% 4.5x 4.3x 17% 17%

Sasbadi Holdings BUY 1.58 1.43 95.2 25.2x 16.6x 10% 52% 1.3% 3.0% 2.7x 2.4x 12% 15%

QL Resources HOLD 4.60 4.42 1,314.4 24.8x 21.8x 17% 14% 1.2% 1.4% 3.2x 2.9x 14% 14%

Average 18.2x 16.9x (17%) 8% 5% 5% 18.3x 22.0x 100% 113%

ROAEP/E (FD)EPS (FD) Growth

(YoY)Dividend Yield Price/ BVPS

Market Focus

2017 Outlook

Gaming

Neutral

Analyst King Yoong CHEAH +60 32604 3908 [email protected]

Price Target

Price PE

2015F

Div Yld

2015201520152015F

EPS CAGR 2013201320132013-2015201520152015

(RM) (RM) Rec (x) (%) (%)

Genting Berhad 7.57 9.70 BUY 15.8 0.5 (8)

Genting Malaysia 4.66 5.00 BUY 19.5 1.5 6 Berjaya Sports Toto

3.11 3.06 HOLD 12.0 6.6 (8)

Magnum Bhd 2.27 2.15 HOLD 14.3 7.0 (17)

Source: AllianceDBS KLCI vs Gaming YTD Return


Gaming related tax for the sector (excluding GST and corporation tax)

Source: AllianceDBS

Betting on Genting • Prospects look bright for Genting Group but

unexciting for NFOs • Genting Group to benefit from weak RM and GITP

launches • Challenging times for NFOs with illegal activities

picking up Outlook • Betting on the Genting GroupBetting on the Genting GroupBetting on the Genting GroupBetting on the Genting Group. The sector is dominated by

Genting Group and number forecasting operators (NFOs). We are positive on Genting Group’s earnings prospects, supported by upcoming launches of Genting Integrated Tourism Plan (GITP) coupled with weak Ringgit to attract more foreign tourists and encourage more local travelling among Malaysians.

• NFOsNFOsNFOsNFOs---- hold your betshold your betshold your betshold your bets. On the other hand, while we acknowledge that the current easy monetary policy environment favours NFOs, we remain unexcited on Berjaya Sports Toto (BToto) and Magnum given their challenging earnings prospects. Other than the weak consumer sentiment, the intensifying competition from illegal NFO activities continues to drag growth prospects of the sector.

• New game variants may bring some excitement to NFOs, but New game variants may bring some excitement to NFOs, but New game variants may bring some excitement to NFOs, but New game variants may bring some excitement to NFOs, but don’t bet on it.don’t bet on it.don’t bet on it.don’t bet on it. Introduction of new game variants by legalised NFOs could potentially expand their market reach at the expense of illegal NFOs. The authorities have been more receptive towards new game variants between 2012 and 2014, but the momentum has slowed in 2015 and this year.

Risks • Rising competition and weaker consumer sentRising competition and weaker consumer sentRising competition and weaker consumer sentRising competition and weaker consumer sentiment. iment. iment. iment.

Increased industry competition (particularly from the illegal NFOs) and weaker consumer sentiment could significantly impact ticket sales.

• Malaysian gaming tax hike. Malaysian gaming tax hike. Malaysian gaming tax hike. Malaysian gaming tax hike. Gaming was spared in the recent budget, but the sector remains vulnerable to potentially higher taxes going forward.

Valuation & Stock Picks • GENM remains our top pick. GENM remains our top pick. GENM remains our top pick. GENM remains our top pick. Genting Malaysia (GENM)

remains our top pick of the sector as we foresee three catalysts to re-rate the stock: (1) additional gaming capacities arising from Genting Integrated Tourism Plan-related (GITP) launches, (2) the weak RM to attract more foreign tourists and encourage more local travelling among Malaysians, which could benefit GENM, and (3) rising optimism over the group’s earnings outlook as GITP launches could help to re-rate the stock closer to its intrinsic value. Genting Bhd (GENT) remains a BUY from a valuation perspective.

1%

11%

15%

10%

-4%

-20%

-10%

0%

10%

20%

30%

40%

50%

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16

%

KLCI Genting Genting Malaysia Berjaya Sport Toto Magnum

Tax type Affected player Tax rate

Casino duty Genting Malaysia 25%

Gaming tax NFOs 8%

Pool betting duty NFOs 8%

Malaysia Strategy

2017 Outlook

Peers comparison

Source: AllianceDBS

CallTarget

Price

Current

Price

Market Cap


Genting Malaysia BUY 5.00 4.66 6,294.8 18.1x 16.9x 21% 7% 1.6% 1.8% 1.3x 1.2x 8% 7%

Magnum HOLD 2.15 2.45 769.7 18.3x 13.6x (22%) 34% 5.5% 6.6% 1.4x 1.4x 7% 10%

Genting BUY 9.70 7.92 6,716.8 18.3x 16.9x 11% 8% 0.5% 0.5% 0.8x 0.8x 5% 5%

Berjaya Sports Toto HOLD 3.06 3.57 998.9 12.0x 11.2x 8% 7% 6.6% 7.0% 5.2x 4.8x 46% 45%

Average 17.8x 16.3x 13% 9% 1.6% 1.8% 1.4x 1.3x 9% 9%



Malaysia Strategy

2017 Outlook

Gloves

Neutral

Analyst Siti Ruzanna MOHD FARUK +603 2604 3965 [email protected]

Price Target

Price PE

2017F

Div Yld

2017201720172017F

EPS CAGR 2015201520152015-2017201720172017

(RM) (RM) Rec (x) (%) (%)

Hartalega 4.68 4.20 HOLD 31.6 1.5 1

Top Glove 4.85 4.30 HOLD 18.7 2.7 0

Kossan Rubber 6.57 6.50 HOLD 18.1 2.8 16

Supermax 2.13 2.70 HOLD 7.6 3.4 17

Source: AllianceDBS Top four glove makers’ sales volume

Source: Company, AllianceDBS

Top four glove makers’ unit profitability trend


In a tight spot • Volume growth from higher demand but fierce

competition could weigh on ASP • Higher operating costs and raw material prices can

erode margins • Neutral on the glove stocks Outlook • Volume growth guaranteed by global demandVolume growth guaranteed by global demandVolume growth guaranteed by global demandVolume growth guaranteed by global demand.... The volume

growth for the glove makers is pegged to global consumption which is expected to grow by 6%-8% annually. This is backed by the better standards encapsulated in healthcare reforms and hygiene practice in emerging markets. The sector has a 5- year volume CAGR of 8.4%. As for the type of gloves, there is a gradual shift from latex to nitrile gloves which provide better comfort and are lightweight. Glove players are catching up to this trend as they focus more on nitrile gloves for their upcoming expansion plans. We deem this a positive development as nitrile gloves have higher margins vs. latex gloves. We forecast volume growth for Malaysian glove players at 15%/13% for FY16/17F.

• Average selling price (ASP) may normaliseAverage selling price (ASP) may normaliseAverage selling price (ASP) may normaliseAverage selling price (ASP) may normalise.... Given the intense competition among glove players and the time lag in passing on higher costs, ASP has contracted in the recent quarters. The glove makers practise a cost-pass through mechanism whereby additional cost will be passed on to customers by adjusting ASPs accordingly; though this may entail a time lag of 1-2 months as orders are booked three months in advance. This mechanism will be able to mitigate increases in certain costs such as higher raw material prices, wages and natural gas tariffs. The glove players are also pushing back incoming supply to avoid an oversupply and shift the bargaining power back to the suppliers.

• No booNo booNo booNo boost st st st forforforfor margins. margins. margins. margins. Record-high margins are a thing of the past, as glove makers no longer benefited from a rapidly rising USD and cheaper raw material prices. The weaker USD and rising operating costs were a double whammy for the glove players in FY16. A recovery could be underway as glove players enhance their cost efficiency via higher automation.

Risks • Rising competition could erode margins. Rising competition could erode margins. Rising competition could erode margins. Rising competition could erode margins. Competition is

heating up in the glove sector with several players embarking on aggressive expansion plans, which could lead to lower unit profitability (EBIT/k gloves) going forward.

• Rising costRising costRising costRising cost.... Rising cost from higher raw material prices and gas tariffs will cause margins to decline. This presents downside risks to the glove players.

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2009 2010 2011 2012 2013 2014 2015 2016F 2017F

Hartalega Top Glove Kossan Supermax

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

2009 2010 2011 2012 2013 2014 2015 2016F 2017F

Hartalega Top Glove Kossan Supermax

Malaysia Strategy

2017 Outlook


• RecentlRecentlRecentlRecently downgraded Top Glove from a BUY to a HOLD.y downgraded Top Glove from a BUY to a HOLD.y downgraded Top Glove from a BUY to a HOLD.y downgraded Top Glove from a BUY to a HOLD. We have a HOLD recommendation for Top Glove with TP RM4.30. Top Glove is trading at 18.9x FY17 EPS , which is unjustified as 1) upside from forex gains is diminishing, 2) competition among glove players is intensifying especially in the nitrile segment, and 3) operating costs are rising from natural gas hike and higher raw material prices. Our TP is based on 16x CY17F EPS which is broadly in line with its 5-year mean EPS.

Source: AllianceDBS

Peers Valuation

CallTarget

PriceCurrent Price

Market Cap


Hartalega HOLD 4.20 4.68 1,812.6 32.8x 31.6x 1% 4% 1.5% 1.5% 5.1x 4.7x 16% 15%

Top Glove HOLD 4.30 4.85 1,428.3 17.8x 18.4x 13% (4%) 2.8% 2.7% 3.3x 3.1x 20% 17%

Kossan HOLD 6.50 6.57 1,000.9 20.3x 18.6x 5% 9% 2.5% 2.7% 4.0x 3.6x 21% 21%

Supermax HOLD 2.70 2.13 336.4 8.6x 7.4x 31% 16% 3.1% 3.6% 1.3x 1.2x 16% 17%

Average 3,150.0 23.7x 23.0x 8% 4% 2.2% 2.3% 4.0x 3.7x 18% 17%

Price/ BVPS ROAEP/E (FD)EPS (FD) Growth

(YoY)Dividend Yield

Malaysia Strategy

2017 Outlook

Media

Neutral


Price Target

Price PE

2017F

Div Yld

2017201720172017F

EPS CAGR 2015201520152015-2017201720172017

(RM) (RM) Rec (x) (%) (%)

Astro 2.78 3.00 HOLD 21.6 4.7 13

Media Chinese 0.69 0.71 HOLD 11.9 5.9 (5)

Media Prima 1.28 1.35 HOLD 10.5 7.6 17

Star Media Group 2.48 2.20 HOLD 15.4 7.3 14

Source: AllianceDBS MIER Consumer Index

Source: Malaysian Institute of Economic Research

Cheap for a reason • No catalyst to drive a recovery in consumer

sentiment in 2017 • Traditional media are losing market share • Valuations are cheap but for good reason Outlook • Adex spending remains weak due to poor consumer Adex spending remains weak due to poor consumer Adex spending remains weak due to poor consumer Adex spending remains weak due to poor consumer

sentimentsentimentsentimentsentiment. We believe there is no catalyst to drive a strong recovery in consumer sentiment, and hence adex spending should remain weak in 2017. Furthermore, unlike 2016, there are no major sporting events to help to spur adex. Timing of the 14th general election could also affect adex spending because advertisers generally turn more cautious given the uncertainties leading up to the polling date.

• Traditional media losing market share.Traditional media losing market share.Traditional media losing market share.Traditional media losing market share. Adspend on Media Prima FTA-TV has been quite weak, losing market share to Astro Pay-TV. Although not captured by official statistics, we think online media (such as Youtube) has been gaining market share as well. Similarly, most newspaper publishers are suffering from declining circulation and adex as consumption trends towards online media as well.

• Weak Ringgit still a key issueWeak Ringgit still a key issueWeak Ringgit still a key issueWeak Ringgit still a key issue. Although newspaper publishers benefitted from the low newsprint prices (30-40% of production cost), this had been partly offset by the weaker Ringgit. Other than that, TV operators such as Astro and Media Prima are also affected by the weak Ringgit which results in more costly foreign content.

Risks • Sharp depreciation in Ringgit vs. USD. Sharp depreciation in Ringgit vs. USD. Sharp depreciation in Ringgit vs. USD. Sharp depreciation in Ringgit vs. USD. Revenues of Malaysian

media companies are predominantly denominated in Ringgit, while certain costs such as programme rights and newsprint costs are denominated in USD. A sharp appreciation in USD vs. MYR will be negative for earnings.

Valuation & Stock Picks • HOLD calls for all media companies. HOLD calls for all media companies. HOLD calls for all media companies. HOLD calls for all media companies. Our TP for the media

companies are pegged to 11-12x CY17 EPS, in line with their respective 5-year historical average multiples. The sector lacks re-rating catalysts given persistent weak adex. Nevertheless, net dividend yield for the sector remains decent at 5-7%.

HOLD call on Astroon Astroon Astroon Astro. We have a RM3.00 DCF-based TP for Astro (8.4% WACC, 1.0% TG). The stock trades at about 9.6x EV/EBITDA, similar to other listed pay-TV operators in this region.

Malaysia Strategy

2017 Outlook

Peers comparison

Sources: AllianceDBS, Bloomberg Finance L.P

CallTarget

Price (RM)

Current

Price (RM)

Market Cap


Astro HOLD 3.00 2.78 3,450.9 10% 18% 21.7x 18.5x 9.3x 8.9x 5% 5% 111% 130%

Media Prima HOLD 1.35 1.28 338.3 (20%) 22% 12.9x 10.5x 5.2x 4.4x 6% 8% 7% 8%

Star HOLD 2.20 2.48 436.1 (26%) 20% 18.5x 15.4x 8.3x 6.8x 7% 7% 9% 11%

Media Chinese HOLD 0.71 0.69 277.4 (15%) (2%) 11.5x 11.7x 5.4x 5.4x 6% 6% 12% 11%

Average 2% 17% 20.1x 17.2x 8.7x 8.2x 5% 6% 87% 102%

ROAE (%)EPS Growth (%) P/E (x) EV/EBITDA (x) Divd yield (%)

Market Focus

2017 Outlook

Oil and Gas

Neutral

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

Price Target

Price PE

2017F

Div Yld

2017201720172017F

EPS CAGR 2015201520152015-2017201720172017

(RM) (RM) Rec (x) (%) (%)

Petronas Chemical 6.64 5.50 FV 19.1 2.7 0

Bumi Armada 0.71 0.85 BUY 12.8 2.3 (20)

SapuraKencana 1.63 1.16 FV 8.8 2.7 (22)

Dialog 1.51 1.70 HOLD 33.3 1.4 10

MMHE 1.02 0.98 FV 18.8 0.0 (20)

UMWOG 0.88 0.80 FV nm 0.0 nm

Dayang 1.00 0.88 FV 6.9 3.5 (64)

Coastal Contracts 1.50 1.40 HOLD 4.8 3.3 (24)

Deleum 1.06 1.02 HOLD 9.6 5.2 (33)

Pantech 0.54 0.64 BUY 8.2 7.2 (20)

Source: AllianceDBS Malaysia O&G Contract Flow

Source: Bursa Malaysia, AllianceDBS

Still too early for a relook

• Challenging growth outlook over the next one year. Sector growth for 2017 is guided to be negative 1%

• Continue to be watchful over corporate earnings

disappointment, asset impairments and debt defaults

• Bumi Armada remains our top pick as its long-term

recurring-income business model provides a degree of certainty under current situation

Outlook • Roller coaster ride. Crude oil prices have rebounded from the

2016 low of USD28/bbl. For now, our crude oil price outlook is maintained at USD50-55/bbl for 2017 as we expect supply-demand conditions to balance by next year. This follows the commitment by OPEC to lower output from 33.2m to 32.5m-33.0mmbpd in the Algiers meeting in Sept. However, we need to continue monitoring non-OPEC output decisions.

• Muted earnings growthMuted earnings growthMuted earnings growthMuted earnings growth. Corporate results released thus far have been disappointing. Moreover, sector growth for 2017 is guided to be around -1% despite the low base of this year which recorded 10% decline.

• Slightly positive on domestic contractsSlightly positive on domestic contractsSlightly positive on domestic contractsSlightly positive on domestic contracts. New tenders and contracts have been moving at a sluggish pace over FY16 (9M16 declined 35% y-o-y), but we expect this situation to improve over FY17.

Risks • Persistently low oil prices. Persistently low oil prices. Persistently low oil prices. Persistently low oil prices. Further capex cuts could happen if

oil prices continue to trade below US$50/bbl. This would in turn limit any upside in corporate earnings growth due to slow rollout in contracts.

• Further slowdown in work orders. Further slowdown in work orders. Further slowdown in work orders. Further slowdown in work orders. There is no doubt that oil and gas service providers have been facing a slowdown and margin compression in terms of orderbook execution. There is a risk that the slowdown would persist into next year....

• Asset imAsset imAsset imAsset impairments and default risk. pairments and default risk. pairments and default risk. pairments and default risk. We could potentially see more asset impairments for Malaysian oil and gas players (SapuraKencana, Bumi Armada and UMWOG). Furthermore, some are seeing difficulties in meeting their short-term debt obligations (big cap namely UMWOG) with their operating cash flow and cash in hand.

3,488

255 603

5,759

540

1,020

981

3,539

1,131

4,230

460

7,189

1,601

3,833

1,716 2,239

8,526

14,512

4,484

16,242

11,570

16,082

5,538

2,317

9,743

4,216

2,472

8,005

3,187 1,491

6,047

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

RMm

Market Focus

2017 Outlook

Valuation & Stock Picks • BUY Bumi Armada (TP: RM0.85). BUY Bumi Armada (TP: RM0.85). BUY Bumi Armada (TP: RM0.85). BUY Bumi Armada (TP: RM0.85). We believe that Bumi

Armada could weather the storm quite comfortably compared to its peers, thanks to its decent valuation and long-term FPSO earnings business model which should provide earnings stability under the current market conditions. We believe the potential upside significantly outweighs downside risks. Nonetheless, in the event of potential kitchen sinking exercise we do not rule out the possibility of further downside risk to the stock.

Peers comparison


CallTarget

Price

Current

Price

Market Cap


Bumi Armada BUY 0.85 0.70 978.5 24.8x 11.3x (49%) 121% 1.0% 2.2% 0.6x 0.5x 2% 5%

Coastal Contracts HOLD 1.40 1.52 192.1 7.7x 7.9x (37%) (3%) 2.1% 2.0% 0.5x 0.4x 6% 6%

Dayang Enterprises FULLY VALUED 0.88 0.86 178.6 32.9x 9.8x (82%) 237% 0.0% 0.0% 0.7x 0.7x 2% 7%

Deleum HOLD 1.02 0.99 94.4 16.3x 10.7x (40%) 53% 3.1% 4.7% 1.4x 1.3x 9% 13%

Dialog Group Bhd HOLD 1.70 1.51 1,909.0 27.9x 24.4x 15% 15% 1.5% 1.6% 3.5x 3.2x 14% 14%

MMHE FULLY VALUED 0.98 0.99 377.4 23.2x 20.7x (20%) 12% 0.0% 0.0% 0.6x 0.6x 3% 3%

Pantech Holdings BUY 0.64 0.55 80.7 8.8x 7.7x 9% 15% 5.1% 5.8% 0.6x 0.6x 8% 9%

SapuraKencana FULLY VALUED 1.16 1.53 2,184.6 50.5x 39.9x (74%) 27% 0.2% 0.3% 0.8x 0.8x 1% 2%

UMW Oil & Gas FULLY VALUED 0.80 0.85 437.9 nm nm 477% (34%) 0.0% 0.0% 0.6x 0.7x (9%) (7%)

Average 32.1x 23.8x (3%) 34% 0.8% 1.1% 1.5x 1.4x 5% 6%



Market Focus

2017 Outlook

Plantations

Neutral

Analyst Ben SANTOSO +65 6682 3707 [email protected] Marvin KHOR +60 32604 3911 [email protected]

Price Target

Price PE

2016F

Div Yld

2016201620162016F

EPS CAGR 2014201420142014-2016201620162016

(RM) (RM) Rec (x) (%) (%)

Felda Global Ventures

1.94 1.55 FV 40.1 2.6 91 Genting Plantations

10.54 11.60 HOLD 24.5 0.9 32

IOI Corporation 4.35 4.30 HOLD 36.6 1.4 17

KL Kepong 24.10 22.40 HOLD 21.8 2.8 10

Sime Darby 8.16 7.40 HOLD 24.0 2.6 1

TSH Resources 1.87 2.20 BUY 20.7 1.2 29

Source: AllianceDBS, DBS Bank CPO, soybean, soybean oil forecast revisions

Source: Bloomberg Finance L.P., DBS Bank, AllianceDBS

CPO prices and USDMYR

Source: AllianceDBS, DBS Bank

The currency play • Global palm oil output set to expand 8% in 2017

after shrinking 5% this year, but biodiesel blending will help support demand

• CY16/17F palm oil price forecasts in Ringgit terms

tweaked -0.7%/+2.0% to RM2,600/RM2,610; pressure from lower soybean prices but lifted by weaker Ringgit

• Upgraded BUY recommendation on TSH Outlook • Palm oil supply to rebound after 2016 contraction.Palm oil supply to rebound after 2016 contraction.Palm oil supply to rebound after 2016 contraction.Palm oil supply to rebound after 2016 contraction. The

lagged impact of 2015 El Nino should cut global palm oil output by 5% this year (steeper than the 3% previously estimated). But we also expect palm oil output to jump 8% next year (low-base effect) to 64.3m MT, as fresh fruit bunch (FFB) yield recovers. Demand from food sector is projected to expand by a smaller 1.4m MT. However, as Indonesia’s export volume rebounds, so too will its collection of export levies – thus allowing Indonesia to fund its biodiesel mandate next year. All things considered, we expect palm oil prices (US$/MT, FOB) to average marginally lower next year.

• Biodiesel mandates to help absorb volume.Biodiesel mandates to help absorb volume.Biodiesel mandates to help absorb volume.Biodiesel mandates to help absorb volume. Indonesia’s biodiesel mandate – including exports and non-subsidised absorption – is assumed to reach 3.7m MT (+46% y-o-y) next year. In Malaysia, total biodiesel output is also expected to expand 15% y-o-y to 0.9m MT (based on USDA projection). Combined with biodiesel output from Indonesia and Malaysia, global palm oil demand is forecast to reach 64.6m MT (+4% y-o-y).

• Currency booster for Malaysian planters.Currency booster for Malaysian planters.Currency booster for Malaysian planters.Currency booster for Malaysian planters. Imputing up to 44% h-o-h recoveries in 2H16 output, we expect plantation firms’ 3QCY16 earnings to sequentially rebound by up to >100%. While better short-term earnings are generally expected, diverging trends in regional currency (i.e. weaker Ringgit and stronger Rupiah) indicate that Malaysian plantation firms will come out better ahead in terms of valuations and reported earnings.

Risks • Where we can go wrong.Where we can go wrong.Where we can go wrong.Where we can go wrong. Palm oil price forecasts are based

on assumed output recovery, crude oil prices/currency exchange rates and no change in policies (i.e. export/import taxes, biodiesel mandates, etc.). Any change in biodiesel price formula/export levies in Indonesia could affect our palm oil supply/demand/price assumptions.

• Global weather phenomena.Global weather phenomena.Global weather phenomena.Global weather phenomena. The US’ National Oceanic and Atmospheric Administration (NOAA) is currently forecasting a 70% chance of La Nina weather formation in fall 2016

3.00

3.40

3.80

4.20

4.60

1,400

1,900

2,400

2,900

3,400

Jan-14

Mar-14

May-14

Jul-14

Sep-14

Nov-14

Jan-15

Mar-15

May-15

Jul-15

Sep-15

Nov-15

Jan-16

Mar-16

May-16

Jul-16

Sep-16

Nov-16

MPOB spot prices (RM/mt) (lhs) USDMYR (rhs)

15151515 16F16F16F16F 17F17F17F17F 18F18F18F18F 19F19F19F19F 20F20F20F20F

CPO price

(RM/MT FOB P.Gudang) 2,168 2,600 2,610 2,720 2,770 2,820

CPO price

(US$/MT FOB P.Gudang) 560 633 618 622 626 637

Prev. CPO price

(RM/MT FOB P.Gudang) 2,168 2,620 2,560 2,530 2,520 2,560

Prev. CPO price

(US$/MT FOB P.Gudang) 560 639 629 630 629 639

Soybean price

(US$/MT FOB Chicago) 346 364 335 335 340 349

Soybean oil price

(US$/MT FOB Chicago) 667 732 711 717 728 747

Previous SB price

(US$/MT FOB Chicago) 346 360 337 338 341 349

Previous SBO price

(US$/MT FOB Chicago) 667 731 723 724 730 748

Market Focus

2017 Outlook

(4QCY16) with 55% chance of persisting into winter 2016/17 (1QCY17). This has potential to impact South American soybean crops in 1QCY17 onwards, where supply disruption may mean upside risks to both soybean/palm oil prices.

• USUSUSUSD strength.D strength.D strength.D strength. In our forecasts, we assume a strong USD. A reversal of this trend would have an adverse impact on soybean and crude oil prices in USD terms as well as CPO prices in Ringgit and Rupiah terms. A strong USD would also make planting soybeans in South America more profitable in local currencies.

Valuation & Stock Picks • TSHTSHTSHTSH is our is our is our is our top picks with revised outlooktop picks with revised outlooktop picks with revised outlooktop picks with revised outlook. While our

CY16/17F CPO price forecasts are revised down in US$/MT, FOB terms to 633/618; weaker imputed USD/MYR exchange rates of 4.10/4.22 (from 4.10/4.07) raise the Ringgit forecasts for CY17F onwards. Malaysian plantation firms are net beneficiaries, and we had upgraded most under our coverage. We now rate TSH (TP to RM2.20) a BUY as its production growth should outperforms peers in the coming years thanks to its maturity pipeline.

• Improvements are priced in for most othersImprovements are priced in for most othersImprovements are priced in for most othersImprovements are priced in for most others. We have also upgraded IOI (TP raised to RM4.30), GENP (TP to RM10.70) and SIME (TP to RM7.40) to HOLD on better ASPs. KLK (TP to RM22.40) remains a HOLD. FGV (TP to RM1.55) is kept at FULLY VALUED as its share price rally has run ahead of fundamentals, albeit the improved outlook.

Peers comparison

CallTarget

Price

Current

price

Market Cap

(USD m)CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017

Felda Global Ventures FULLY VALUED 1.55 1.94 1,691.5 93.8x 40.1x n.m. 134% 1.1x 1.1x 1% 3% 2.6% 2.6%

Genting Plantations HOLD 11.60 10.54 1,998.3 34.2x 24.5x 27% 40% 1.9x 1.8x 6% 7% 0.7% 0.9%

IOI Corporation HOLD 4.30 4.35 6,537.4 39.7x 33.8x 101% 17% 3.8x 3.6x 10% 11% 1.6% 1.5%

KL Kepong HOLD 22.40 24.10 6,133.9 23.7x 21.3x 18% 11% 2.4x 2.3x 14% 11% 3.4% 2.8%

Sime Darby HOLD 7.40 8.16 12,956.0 22.8x 22.5x (7%) 1% 1.6x 1.5x 7% 7% 3.0% 2.8%

TSH Resources BUY 2.20 1.87 605.9 26.4x 20.7x 8% 27% 1.8x 1.7x 7% 8% 0.9% 1.2%

Sector weighted average 31.5x 25.8x 17% 17% 2.2x 2.1x 9% 8% 2.5% 2.3%

P/E EPS Growth (YoY) P/BV ROAE Dividend Yield %

Market Focus

Plantations

Property

Neutral

Analyst QUAH He Wei, CFA +603 2604 3966 [email protected]

Price Target

Price PE

2016F

Div Yld

2016201620162016F

EPS CAGR 2014201420142014-2016201620162016

(RM) (RM) Rec (x) (%) (%)

SP Setia 3.37 3.40 HOLD 14.1 4.3 (12)

Sunway Bhd 3.06 2.90 HOLD 11.0 2.7 (9)

UEM Sunrise Bhd 1.10 1.00 HOLD 29.7 0.9 0

Eco World 1.33 1.80 BUY 24.4 0.0 89 Eastern & Oriental Bhd

1.53 1.20 FV 127.0 1.3 4 Matrix Concepts Holdings Bhd

2.54 3.20 BUY 5.5 7.3 9

MKH Berhad 2.72 3.20 BUY 7.5 2.9 19

Source: AllianceDBS Weak consumer sentiment


Breakdown of residential property transactions by price

Source: AllianceDBS

Challenging outlook • Slow sales is the new norm due to weak

affordability and low supply of affordably-priced properties

• Increasing supply from public housing may

intensify competition in affordable segment • Top pick: Matrix Concepts – affordable township

developer with sustainable earnings and yield Outlook • No signs of recoveryNo signs of recoveryNo signs of recoveryNo signs of recovery. After the sluggish property sales in

2016, we expect the property market to remain lacklustre in 2017, driven by prolonged weak sentiment, low affordability and accelerating incoming supply. Property buyers are likely to adopt a wait-and-see attitude in anticipation of lower selling prices in the near to medium term.

• Demand for valueDemand for valueDemand for valueDemand for value----adding products remaiadding products remaiadding products remaiadding products remains resilientns resilientns resilientns resilient. We are still seeing strong demand for selective new projects which offer value proposition to buyers despite the relatively weaker market. Differentiating features and value-driven pricing have increasingly dominated buyers’ priority list given the weak sentiment.

• Intensifying competition for private developers. Intensifying competition for private developers. Intensifying competition for private developers. Intensifying competition for private developers. Private developers face the challenge of supplying affordably-priced properties at the expense of lower profitability due to the rising cost environment (land, compliance, construction). Developers will have to revise their product offerings to incorporate more ‘value-buy’ properties with differentiating lifestyle amenities that will distinguish themselves from lower-priced public housing.

Risks • Potential earnings downside risk. Potential earnings downside risk. Potential earnings downside risk. Potential earnings downside risk. While unbilled sales remain

healthy for near-term earnings visibility, weaker-than-expected sales replenishment over the next 12 months could pose further earnings risk come 2H17-2018. With most developers vying for the affordable housing space now, this could come at the expense of margins as well. . . .

• Deteriorating economic outlook. Deteriorating economic outlook. Deteriorating economic outlook. Deteriorating economic outlook. This could lead to more stringent bank assessment of property buyers in obtaining bank financing. High loan rejection rates have resulted in slow take-up rates for new property projects.

Valuation & Stock Picks • Prefer pure township developerPrefer pure township developerPrefer pure township developerPrefer pure township developer. Matrix is the best proxy to

affordable housing as it mainly focuses on landed properties priced below RM600k. Its property sales remain robust

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

60

70

80

90

100

110

120

130

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16

MIER consumer sentiment (LHS)

Total approved property loan growth (RHS)

87% 85% 83% 83% 81% 78% 75%72%

60%53%

61% 58%

9% 11% 12% 12% 14% 15% 16% 18%

27%31%

25% 27%

2% 3% 3% 4% 4% 5% 6% 7% 9% 11% 11% 11%

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1H16

<250k 250-500k 500k-1m

Market Focus

2017 Outlook

despite the tough operating environment, and it is on track to achieve its record-high property sales of RM1bn in FY17.

Number of property transactions


Peer comparison

Market Market Market Market capcapcapcap

(USDm)(USDm)(USDm)(USDm) RNAV RNAV RNAV RNAV discountdiscountdiscountdiscount

PEPEPEPE PBPBPBPB ROEROEROEROE

CompanyCompanyCompanyCompany FYEFYEFYEFYE RatingRatingRatingRating PricePricePricePrice TPTPTPTP CY16CY16CY16CY16 CY17CY17CY17CY17 CY16CY16CY16CY16 CY17CY17CY17CY17 CY16CY16CY16CY16 CY17CY17CY17CY17

SP Setia Dec Hold 3.37 3.40 2,264 40% 14.1 12.1 1.2 1.1 8% 9%

Sunway Dec Hold 3.06 2.90 1,483 27% 11.0 11.1 0.8 0.8 7% 7%

UEM Sunrise Dec Hold 1.10 1.00 1,189 68% 29.7 22.9 0.8 0.8 2% 3%

Eco World Oct Buy 1.33 1.80 871 38% 23.5 18.6 1.0 0.9 4% 5%

E&O Mar FV 1.53 1.20 458 61% 55.8 43.6 1.1 1.1 2% 3%

Matrix Concepts Dec Buy 2.54 3.20 346 44% 6.2 6.1 1.4 1.2 23% 20%

MKH Sep Buy 2.72 3.20 272 46% 7.4 7.1 0.9 0.8 12% 12%

AverageAverageAverageAverage

46%46%46%46% 21.1 21.1 21.1 21.1 17.4 17.4 17.4 17.4 1111.0 .0 .0 .0 1.0 1.0 1.0 1.0 8%8%8%8% 8%8%8%8%


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Residential Commercial Industrial Agricultural Development land others

Market Focus

2017 Outlook

REIT

Neutral

Analyst Inani ROZIDIN +603 2604 3905 [email protected]

Price Target

Price PE

2017F

Div Yld

2017201720172017F

EPS CAGR 2015201520152015-2017201720172017

(RM) (RM) Rec (x) (%) (%)

Sunway REIT 1.77 1.95 BUY 16.8 5.7 13

CMMT 1.60 1.70 BUY 17.2 6.2 6 KLCCP Stapled Group

7.80 8.05 HOLD 18.6 4.8 2

IGB REIT 1.62 1.70 HOLD 20.8 5.3 4

Pavilion REIT 1.74 1.85 HOLD 18.8 5.2 5

Axis REIT 1.71 1.80 HOLD 16.0 5.2 1

MRCB-Quill REIT 1.28 1.30 HOLD 14.5 6.2 4

Source: AllianceDBS M-REIT yield chart


Consumer Sentiment

Source: MIER, Department of Statistics

Holding up well • Limited organic growth; weak consumer sentiment

is the prevailing impediment • Acquisition play to boost earnings in CY17 • Selective BUY of M-REITs with robust asset

portfolio: SunREIT, CMMT Outlook • The MIER Consumer Sentiment Index has shown some signs The MIER Consumer Sentiment Index has shown some signs The MIER Consumer Sentiment Index has shown some signs The MIER Consumer Sentiment Index has shown some signs

of recovery in 2QCY16 at 78.5 pts (+6.8 pts yof recovery in 2QCY16 at 78.5 pts (+6.8 pts yof recovery in 2QCY16 at 78.5 pts (+6.8 pts yof recovery in 2QCY16 at 78.5 pts (+6.8 pts y----oooo----y)y)y)y). Although still below the 100-pt threshold level of confidence, we believe this is an indication that the prolonged weak domestic consumption may have bottomed out since the implementation of GST last year and we expect the consumer sentiment to gradually improve moving forward. In addition, the improvement in consumer spending was also supported by fiscal measures to raise household disposable income such as the EPF contribution rate cut (March), tax relief (March), salary increment for civil servants (July) and minimum wage hike (July). We expect the implementation of further fiscal measures to raise household disposable income in CY17.

• We expect to see the following prevailing challenges in CY17We expect to see the following prevailing challenges in CY17We expect to see the following prevailing challenges in CY17We expect to see the following prevailing challenges in CY17: 1) weak consumer spending to affect retail segment, 2) oversupply of office space, and 3) weaker hotel segment due to softer demand. That being said, we have incorporated the weak/negative reversions and poor occupancies of underperforming assets in our portfolio. As such, we believe the fundamentals are intact given that major earnings risks have been accounted for, and our estimates are conservative compared to consensus.

• In the near term, organic rental income is expected to remain In the near term, organic rental income is expected to remain In the near term, organic rental income is expected to remain In the near term, organic rental income is expected to remain steady with flattish growthsteady with flattish growthsteady with flattish growthsteady with flattish growth due to moderate reversions and the current weak consumer sentiment. Any substantial improvement in NPI growth will be driven by acquisitions and portfolio expansions. While rental reversions from retail assets have moderated, it has remained in positive territory. However, the hospitality and office segments continue to struggle in filling up vacancies. In order to grow further, the majority of the REITs are looking at potential acquisitions with immediate earnings accretions to boost NPI and DPU.

• Retail segmentRetail segmentRetail segmentRetail segment. The tepid consumer sentiment may have a negative effect on the retail sector, in the form of lower retail spending, rental reversions and visitor traffic. In light of the prolonged weak sentiment and sluggish same store sales growth, REIT managers have begun to negotiate tenancy renewals in advance. Across the board, occupancy levels remained resilient for all the retail REITs under our coverage as REIT managers focused on retaining tenants rather than securing high reversions. Aside from prime shopping hotspots

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Private consumption growth (lhs)

Consumer sentiments (rhs)

Market Focus

2017 Outlook

such as Suria KLCC, Sunway Pyramid, Mid Valley Megamall and The Gardens mall, REITs are adopting a different strategy for other malls in their portfolio. For small- to mid-sized urban malls, management is adjusting the tenants mix and re-positioning the malls’ target market to cater to the needs of the neighbourhood. One of the focuses is to improve the F&B tenant mix at the expense of other segments, as F&B is less vulnerable to fluctuations in discretionary spending.

• Office segmentOffice segmentOffice segmentOffice segment. The National Property Info Centre’s most recent data release is for 4Q15, which showed that the composite Kuala Lumpur office rental index rose 3.2%. However, the average availability rate (or vacancy rate) had increased in 2H15 to 21.5% from 19.7% (2H14). Although occupancy levels have been struggling to trend up, the average rental rates have been increasing due to the presence of more investment-grade properties and newer buildings with better facilities. The increase was also influenced by upgraded services and facilities provided in existing buildings. Nonetheless, vacancy rate is still a worrying issue faced by the office REITs in our coverage. Out of all the REITs in our coverage, Axis REIT and MQ-REIT are office and industrial-based REITs, while KLCCSS has high exposure to the office segment at 82% of its total NLA. On the other hand, CMMT, PavREIT and IGB REIT are retail-focused REITs.

• Acquisition playAcquisition playAcquisition playAcquisition play. There have been few acquisitions in CY16. Year-to-date, Axis REIT has agreed to acquire four logistics assets worth RM177m and Sunway REIT has announced its planned acquisition of a vacant land next to

Sunway Carnival Mall for RM17m that is intended to facilitate future expansion of the mall. Furthermore, the most sizeable announcement is MRCB-Quill REIT’s proposed acquisition of Menara Shell for RM640m. Nonetheless, we expect the conditions to improve in CY17, with more proposed acquisitions in the pipeline – involving PavREIT (Pavilion Extension and Fahrenheit88 Mall) and Axis REIT (six assets with an indicative value of RM242m). Moreover, in the mid to long term, we foresee injection opportunities for SunREIT and IGB REIT, as their sponsors are developing new retail malls.

Risks • Pace of acquisitionsPace of acquisitionsPace of acquisitionsPace of acquisitions. A REIT’s draw is its potential to secure a

steady stream of DPU-accretive acquisitions. On this note, any significant delay in acquisitions could cap a REIT’s share price appreciation, especially as its peers could also be looking at asset growth.

• Weak general sentimentWeak general sentimentWeak general sentimentWeak general sentiment. The tepid consumer sentiment may have a negative effect on the retail and hospitality sectors, in the form of lower retail spending, rental reversions and local tourist visits.

• Office space oveOffice space oveOffice space oveOffice space oversupplyrsupplyrsupplyrsupply. If the supply overhang of office space persists, it could be challenging to refill vacancies and rental rates may see negative growth.

Valuation & Stock Picks • Selective picks. We continue to like Sunway REIT for its

diversified segmental asset portfolio and acquisition pipeline, and CMMT for its diversified retail presence in the Klang Valley, Penang and Kuantan.

Peer comparison


Call TP PriceMkt Cap


AllianceDBS forecasts

Sunway REIT BUY 1.95 1.77 1,241.3 8% 10% 9.7 10.7 1.29x 1.30x 5.5% 6.0% 9.8 11.1

CapitaMalls Malaysia Trust BUY 1.70 1.60 764.3 1% 12% 8.7 9.8 1.21x 1.21x 5.4% 6.1% 8.7 9.3

KLCC Stapled Securities HOLD 8.05 7.80 3,374.7 4% 3% 35.9 37.2 1.12x 1.12x 4.6% 4.8% 40.8 42.0

IGB REIT HOLD 1.70 1.62 1,347.7 0% 5% 8.2 8.6 1.52x 1.51x 5.0% 5.3% 7.5 7.8

Pavilion REIT HOLD 1.85 1.74 1,266.8 (1%) 11% 8.2 9.1 1.37x 1.36x 4.7% 5.2% 8.5 9.3

Axis REIT HOLD 1.80 1.71 450.0 0% 8% 8.4 9.1 1.39x 1.39x 4.9% 5.3% 9.8 10.7

MRCB-Quill REIT HOLD 1.30 1.28 203.2 5% (10%) 8.9 8.0 0.94x 1.02x 6.9% 6.2% 8.6 8.8

ADBS total / weighted avg 8,648.0 3% 6% 19.3 20.2 1.26x 1.26x 5.0% 5.3% 21.2 22.1

less KLCCSS 5,273.3 2% 8% 8.7 9.4 1.35x 1.35x 5.2% 5.6% 8.7 9.4

EPS (sen)DPU Growth

(YoY)DPU (sen) Price/NAV Dividend Yield

Malaysia Strategy

2017 Outlook

Technology

Overweight


Price Target

Price PE

2017F

Div Yld

2017201720172017F

EPS CAGR 2015201520152015-2017201720172017

(RM) (RM) Rec (x) (%) (%)

Globetronics 3.57 4.00 BUY 12.6 7.3 85

Inari Amertron 3.32 4.00 BUY 15.5 3.2 27

MPI 7.92 8.15 HOLD 10.4 2.9 7

Unisem 2.45 2.80 HOLD 11.2 5.3 6

Source: AllianceDBS Smartphone shipments (in million units)

Source: IDC

Indexed performance of Malaysian semi vs. regional index (Jan 2015 = 100)


Slow growth, the new normal • A phase of slow growth for the industry as the

current growth driver, smartphone is peaking out • Prefer companies with identifiable growth drivers

such as new content wins that will help to offset slowing unit growth

• Top pick is Inari Outlook • Slow growth is the new normalSlow growth is the new normalSlow growth is the new normalSlow growth is the new normal. We expect the

semiconductor industry to undergo a phase of slow growth as smartphone sales reach its peak. While semiconductor content in automotive is rising with the move towards advanced driver assistance systems (ADAS) and driverless cars, we think this is more of a longer-term trend as the qualification process and widespread adoption will need more time (due to safety issues, legislations, etc.).

• Favourable outlook for Apple supply chainFavourable outlook for Apple supply chainFavourable outlook for Apple supply chainFavourable outlook for Apple supply chain. The iPhone 7 is generally well received, and this is sufficient to serve as a re-rating catalyst for the supply chain because prior expectations were very low. With a decent iPhone 7 cycle till 2Q17, followed by a 2H17 iPhone 8 supercycle where a major design overhaul and new features are expected, we believe the outlook for the Apple supply chain looks favourable over the next 12 months.

• New content wins will be key.New content wins will be key.New content wins will be key.New content wins will be key. New content wins will be the key driver for earnings growth and performance by Malaysian semiconductor companies. In this context, we still like companies involved in radio frequency (RF) such as Inari and Unisem which have better earnings visibility due to growing RF content in smartphones. We also like Globetronics due to the introduction of new sensor products that will underpin its earnings recovery in 2017.

Risks • Major slowdown in smartphone salesMajor slowdown in smartphone salesMajor slowdown in smartphone salesMajor slowdown in smartphone sales. Global semiconductor

sales in recent years have been mainly driven by the explosive growth in demand for smartphones. Thus, a major slowdown in smartphone sales will be negative for the industry.

• Forex riskForex riskForex riskForex risk. Earnings and margins of Malaysian semiconductor companies could also be affected if there is a strong reversal in the RM vs. USD trend.

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2010 2011 2012 2013 2014 2015 2016F

Smartphone shipments YoY growth

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Jan 2015 Apr 2015 Jul 2015 Oct 2015 Jan 2016 Apr 2016 Jul 2016

SOX TWSESCI Equal-Weighted (INRI, GTB, MPI, UNI)

Malaysia Strategy

2017 Outlook

Valuation & Stock Picks • Top pick is Inari (BUY; TP: RM4.00). Top pick is Inari (BUY; TP: RM4.00). Top pick is Inari (BUY; TP: RM4.00). Top pick is Inari (BUY; TP: RM4.00). Significant content

gains in latest smartphone models should comfortably help to drive our 30% growth forecast for Inari's RF segment in FY17. The medium-term outlook appears to be relatively secure as well because of Broadcom’s 3-year supply agreement with Apple (till 2018). As such, with strong visibility for the RF segment and contribution from new testing division driving robust 3-year earnings CAGR of 22%, we believe Inari's valuation could trade up to 18x PE, +1SD of its 3-year average forward PE.

• Globetronics is also a BUY (TP: RM4.00) Globetronics is also a BUY (TP: RM4.00) Globetronics is also a BUY (TP: RM4.00) Globetronics is also a BUY (TP: RM4.00) as we believe its risk-reward is compelling, with clearer signs emerging to underpin growth recovery in FY17 from new sensor products (i.e. new proximity sensors, gesture sensors, and 3D imaging sensors).

• HOLD on Unisem (TP: RM2.85) and MPI (TP: RM8.15). HOLD on Unisem (TP: RM2.85) and MPI (TP: RM8.15). HOLD on Unisem (TP: RM2.85) and MPI (TP: RM8.15). HOLD on Unisem (TP: RM2.85) and MPI (TP: RM8.15). We expect earnings growth for Unisem and MPI to moderate given the lack of strong growth drivers for the semiconductor sector in general. Valuations for both companies are also fair with decent dividend yields, in line with Taiwanese peers....

Peers comparison


CallTarget

Price

Current

Price

Market Cap


Inari Amertron BUY 4.00 3.32 759.9 18.9x 15.0x 16% 25% 2.9% 3.5% 4.3x 3.8x 26% 28%

Unisem HOLD 2.80 2.45 428.4 11.7x 11.2x (2%) 4% 4.9% 5.3% 1.3x 1.2x 11% 11%

Malaysian Pacific Industries HOLD 8.15 7.92 375.4 10.2x 10.1x 16% 1% 2.9% 2.9% 1.5x 1.4x 16% 14%

JCY International NR NR 0.53 264.8 8.9x 11.6x (39%) (24%) 9.4% 9.4% 0.8x 0.7x 3% 4%

Globetronics Technology BUY 4.00 3.57 239.8 33.0x 12.6x (58%) 162% 5.6% 7.3% 3.6x 3.6x 11% 28%

Vitrox Corporation NR NR 3.81 216.5 15.6x 11.6x 29% (24%) 1.7% 9.4% 3.5x 0.7x 22% 4%

Uchi Technologies NR NR 1.65 174.7 15.6x 12.7x 29% 0% 1.7% 7.0% 3.5x 2.7x 22% 24%

Average 16.1x 12.6x 2% 20% 4.0% 5.5% 2.8x 2.3x 17% 18%



Malaysia Strategy

2017 Outlook

Telecommunication

Underweight


Price Target

Price PE

2017F

Div Yld

2017201720172017F

EPS CAGR 2015201520152015-2017201720172017

(RM) (RM) Rec (x) (%) (%)

Large Caps

Axiata Group 4.83 4.95 HOLD 20.5 4.1 9

Digi.Com 5.01 4.35 HOLD 24.6 4.1 0

Maxis Bhd 5.89 5.10 FV 22.5 3.7 4

Telekom Malaysia 6.50 7.50 BUY 23.7 3.8 21

TIME dotCom Bhd 7.99 7.50 HOLD 21.1 1.2 21

Source: AllianceDBS Estimate of subscriber market share in 1Q16 (%)

Source: MCMC, Companies, AllianceDBS

Spectrum distribution after re-allocation exercise

MHzMHzMHzMHz

Spectrum BandSpectrum BandSpectrum BandSpectrum Band 900900900900 1800180018001800 2100210021002100 2300230023002300 2600260026002600 Maxis 20 40 30 - 20 Celcom Axiata 20 40 30 - 20 DiGi 10 40 30 - 20 UMobile 10 30 30 - 20 P1/TM - - - 30 20 YTL e-Solutions - - - 30 20 RedTone - - - 25 20 Puncak Semangat - - - - 40

Source: MCMC, AllianceDBS

Spectrum of competition • 2017 could be another shake-up year for

competition in the mobile sector as new spectrum is allocated to U Mobile

• Potential spectrum re-allocation for other bands

(700MHz, 2600MHz, etc.) is also a key thing to watch out for

• Prefer fixed-line operators. Top pick is TM Outlook • A stronger 4th playerA stronger 4th playerA stronger 4th playerA stronger 4th player. 2017 will be the start of the year

where the fourth player, U Mobile will have an almost equal amount of spectrum relative to the incumbents. As such, we believe it is reasonable to expect U Mobile to turn more aggressive in order to gain market share, which currently stands at about 11% vs. 28-29% each for DiGi, Maxis, and Celcom. If history is any indication, market share should eventually converge between the four mobile players in the long run, similar to what happened after DiGi acquired its 3G spectrum in 2008.

• Another specAnother specAnother specAnother spectrum retrum retrum retrum re----allocation in 2017?allocation in 2017?allocation in 2017?allocation in 2017? With existing licences of 2100MHz and 2600MHz bands expiring in April 2018 and December 2017 respectively, we believe MCMC could likely call for another spectrum allocation exercise in 2017. This could be followed by the 700MHz band which is targeted to be freed up by 2018 at the earliest after complete migration of analogue TV to digital TV broadcasting in Malaysia. Based on Singapore spectrum reserve pricing, we estimate this round of spectrum re-allocation exercise to cost as much as RM9.0bn for the mobile industry.

• Prefer fixedPrefer fixedPrefer fixedPrefer fixed----line operatorsline operatorsline operatorsline operators. With the move towards a new regime for spectrum allocation as well as a stronger fourth player, we believe questions will eventually be raised on competition risk and margin sustainability, as well as premium valuation vs. regional peers for the Malaysian mobile operators. As such, we prefer the fixed-line operators, with TM being our top pick.

Risks • Intensified competitionIntensified competitionIntensified competitionIntensified competition. Further increase in competitive

pressure will drag down ARPU, leading to lower margins. In addition, the incumbents could also potentially concede some market share to the smaller players.

• High spectrum feeHigh spectrum feeHigh spectrum feeHigh spectrum fee. There could be another spectrum allocation exercise in 2017. A high spectrum fee will put pressure on free cashflow generation and dividend payout. Earnings could also be impacted by increased amortisation charges for the spectrum.

U Mobile, 11%

MVNOs / discrepancy,

4%

DiGi, 28%

Celcom, 28%

Maxis, 29%

Malaysia Strategy

2017 Outlook

Valuation & Stock Picks • Top pick is TM (BUY, TP: RM7.50). Top pick is TM (BUY, TP: RM7.50). Top pick is TM (BUY, TP: RM7.50). Top pick is TM (BUY, TP: RM7.50). We are optimistic that

the rollout of the High-Speed Broadband Phase 2 (HSBB2) project, Sub Urban Broadband (SUBB) project, and Webe mobile services would drive the long-term growth for TM, as the company expands the coverage of its high-speed broadband network to more areas. Our TP implies 7.8x FY17 EV/EBITDA and 26x FY17 PE.

• PrPrPrPremium valuation unsustainable. emium valuation unsustainable. emium valuation unsustainable. emium valuation unsustainable. Domestic-focused operators such as DiGi and Maxis are trading at around 12.6-12.8x CY16 EV/EBITDA, a premium relative to regional average of 8.6x. With potential earnings risks and falling free cashflow translating into lower dividend going forward, we do not think the current premium valuation is justified.

Regional peers comparison

Sources: DBS Bank, AllianceDBS, Bloomberg Finance L.P

LC USD CY16 CY17 CY16 CY17 CY16 CY17 CY16 CY17 CY16 CY17

Axiata HOLD MYR 4.95 4.83 10,273 22.1x 20.5x 3.8% 4.1% 1.8x 1.8x 8.1x 7.6x 2.4x 2.3x

Maxis FULLY VALUED MYR 5.10 5.89 10,541 23.7x 22.5x 3.4% 3.7% 9.7x 9.1x 12.5x 12.6x 2.1x 2.1x

DiGi.Com HOLD MYR 4.35 5.01 9,282 24.1x 24.6x 4.2% 4.1% 75.0x 75.0x 14.1x 13.9x 0.7x 0.7x

Telekom BUY MYR 7.50 6.50 5,820 28.4x 23.7x 3.2% 3.8% 3.1x 3.1x 7.4x 7.2x 1.2x 1.2x

TIME dotCom HOLD MYR 7.50 7.99 1,101 26.9x 21.1x 7.6% 1.2% 2.2x 2.1x 15.0x 12.2x nm nm

Starhub FULLY VALUED SGD 2.80 3.27 4,088 15.1x 16.3x 6.1% 6.1% 26.1x 25.6x 8.7x 8.9x 0.8x 0.9x

M1 FULLY VALUED SGD 1.97 2.06 1,385 12.5x 13.1x 6.4% 6.1% 4.6x 4.3x 6.8x 6.9x 0.8x 0.9x

PT Telekom HOLD IDR 3800 4150 31,977 23.4x 21.6x 3.4% 3.7% 5.4x 5.3x 8.3x 8.0x 0.0x nm

XL Axiata BUY IDR 3300 2270 1,855 61.2x 38.4x 1.0% 1.6% 1.1x 1.1x 5.5x 5.4x 2.6x 2.5x

Indosat HOLD IDR 5900 6500 2,700 37.8x 30.2x 0.0% 0.0% 2.6x 2.4x 4.3x 3.8x 1.4x 1.0x

Advance Info Service HOLD THB 160.00 153.50 13,051 13.7x 15.1x 7.3% 5.3% 10.0x 9.7x 8.7x 8.4x 1.3x 1.6x

Intouch Holdings BUY THB 90.00 53.25 4,883 9.4x 0.0x 10.5% 0.0% 12.0x 0.0x 9.3x 0.0x nm #DIV/0!

Total Access Comm FULLY VALUED THB 33.00 31.00 2,099 28.9x 24.3x 2.6% 3.0% 2.7x 2.6x 3.8x 3.6x 1.2x 1.1x

Average 22.3x 20.2x 4.4% 3.7% 13.3x 12.6x 9.1x 8.4x 0.9x 0.9x

Call LC

Target

PriceNet Debt/EBITDADivd yield

Current

Price

Market

CapP/E Price/ BVPS EV/EBITDA

Malaysia Strategy

2017 Outlook

Transport

Neutral

Analyst Marvin KHOR +60 32604 3911 [email protected]

Price Target

Price PE

2017F

Div Yld

2017201720172017F

EPS CAGR 2015201520152015-2017201720172017

(RM) (RM) Rec (x) (%) (%)

Aviation

AirAsia 2.86 3.20 HOLD 9.2 2.4 (1)

AirAsia X 0.39 0.46 HOLD 6.6 0.0 15

Malaysia Airports 6.68 6.20 HOLD 74.8 0.9 89

Shipping/Ports

MISC 7.56 7.60 HOLD 12.9 4.6 6 Westports Holdings

4.40 4.45 HOLD 24.2 3.1 3

Source: AllianceDBS Spot Jet Fuel


Baltic Dirty Tanker Index


A need to keep pace • Key subsectors to see normalisation, after enjoying

respective periods of upcycle within 2015-16 timeframe

• Air fares, shipping rates seeing pressure from

competition/supply growth, macro factors • Control over volume, productivity will separate

winners from losers Outlook Aviation • Airlines coming out of sweet spotAirlines coming out of sweet spotAirlines coming out of sweet spotAirlines coming out of sweet spot. Moving into 2017, the

key theme for the airlines sub-sector will shift from cheaper fuel (key earnings booster in 2016) towards the management of supply. The recovering growth ambitions of Malaysia Airlines’ (MAB) will be key – namely if it will result in earnings-destructive competition akin to the 2014 period; or if the players can settle into respective profitable niches. Yield management is also crucial, as domestic demand may be affected by weaker macroeconomics.

• PSC PSC PSC PSC revision a needed boost forrevision a needed boost forrevision a needed boost forrevision a needed boost for airportsairportsairportsairports. Passenger service charges (PSCs) are now confirmed to be revised in 2017, generally being higher and with rates at klia2 being gradually equalised with those of KLIA. We do not expect material adverse impact on passenger traffic given that the PSCs are still among the lowest in the region, plus the introduction of cheaper ASEAN tier provides travellers with more options. We expect Malaysian passenger traffic growth to be nominal, yet still recovering (FY17F: +5%, FY16F: +3.5%). On the other hand, instances of instability in Turkey are expected to have slower passenger traffic at the Istanbul Sabiha Gokcen from its previous trajectory of double-digit growth. (FY17F: +7%, FY16F: +5%).

Shipping/Ports • Headwinds for LNG, petroleum shipping. Headwinds for LNG, petroleum shipping. Headwinds for LNG, petroleum shipping. Headwinds for LNG, petroleum shipping. The pipeline of

newbuild vessel supply for LNG and petroleum shipping look to be higher in 2017, which will be suppressive to rates. Contrasted to tepid shipping demand, LNG rates are unlikely to recover to 2014 levels. Petroleum shipping demand is variable to seasonality, but large volume surges will be less likely given tepid crude oil prices.

• Global container shipping facing challenges. Global container shipping facing challenges. Global container shipping facing challenges. Global container shipping facing challenges. Global container shipping economics continue be challenging, resulting in consolidation of industry players and more recently, the insolvency of Hanjin Shipping. While global container throughput is not expected to expand, there may be pockets of growth, especially within the intra-Asia region. The shuffling of alliances may also shift volume around transhipment ports.

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140Spot jet fuel (US$/bbl) Calendar quarter average

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1200

1400Baltic Dirty Tanker Index

Malaysia Strategy

2017 Outlook

Risks • Competitive forces. Competitive forces. Competitive forces. Competitive forces. We think overbearing supply is the key

dampening force on rates for transportation in 2017, as demand is unlikely to be substantially spurred. Excessive acceleration in supply growth is a threat to profitability. Conversely, supply disruption (player exits, deferred deployments etc) will ease the market condition for existing players.

• Oil price spikes. Oil price spikes. Oil price spikes. Oil price spikes. A surge in crude oil prices will have impact on sub-sectors, which may have begun to treat the lower prices as a new normal. Airlines would be negatively hit by higher jet fuel expenses, though hedges will delay full impact for up to a year. On the other hand, rebalancing of petroleum stockpiles may result in higher demand for movement, helping shipping rates.

Valuation & Stock Picks • WPRTS may yet come out ahead. WPRTS may yet come out ahead. WPRTS may yet come out ahead. WPRTS may yet come out ahead. WPRTS is at a turning

point with regard to the growth direction of its container volume traffic, as M&A in the container shipping scene plays out. While full clarity will only come late-2016 to 2017, we are reassured by its cost advantage of cheaper box handling rate than geographic peers. Beating our conservative 7.5%/5% container throughput volume

growth assumptions for FY16/17F will provide upside. Our current TP is RM4.45 with a HOLD recommendation.

• Neutral on airlines. Neutral on airlines. Neutral on airlines. Neutral on airlines. We think that valuations have run up for AIRA and AAX, particular in 1H16 in response to the surging earnings recovery. While 2H16 will maintain the same strength, growth momentum into 2017 will be more challenging. There is downside risk to our FY17F yield growth assumption of 5% for AIRA and AAX. We have HOLD recommendations for both, with RM3.20 TP on AIRA and RM0.46 TP on AAX.

• MAHB MAHB MAHB MAHB faces external headwindsfaces external headwindsfaces external headwindsfaces external headwinds. . . . While MAHB benefits from favourable PSC revisions, the impacted passenger growth at its Istanbul Sabiha Gokcen airport will impede re-rating as those operations continue to be loss-making. Our current SOP-based TP is RM6.80, with a HOLD recommendation.

• Noticeable challenges for shipping. Noticeable challenges for shipping. Noticeable challenges for shipping. Noticeable challenges for shipping. Given the weak rates outlook for MISC we think that organic earnings growth will be muted. A saving grace is that its functional currency is the USD, which will give it appeal in a weaker-Ringgit scenario. Our TP is RM7.60 with a HOLD recommendation.

Peers comparison

Source: AllianceDBS

CallTarget

Price

Current

price

Market Cap


Aviation

AirAsia HOLD 3.20 2.79 1,855.6 8.3x 8.9x 292% (7%) 1.3x 1.2x 28% 15% 2.6% 2.5%

AirAsia X HOLD 0.46 0.435 431.3 8.8x 7.4x n.m. 19% 2.2x 1.7x 28% 26% 0.0% 0.0%

Malaysia Airports HOLD 6.80 6.50 2,577.5 234.6x 47.1x n.m. 398% 1.4x 1.4x 1% 3% 1.4% 1.3%

Sector weighted average 128.3x 29.0x n.m. 210% 1.4x 1.3x 13% 10% 1.7% 1.6%

Shipping / Ports

MISC HOLD 7.60 7.23 7,713.1 15.0x 13.9x (19%) 8% 0.9x 0.9x 8% 6% 4.8% 4.8%

Westports Holdings HOLD 4.45 4.36 3,553.3 24.7x 23.9x 19% 3% 7.0x 6.6x 31% 28% 3.1% 3.1%

Sector weighted average 18.1x 17.1x (7%) 7% 2.8x 2.7x 15% 13% 4.3% 4.3%

EPS Growth (YoY) P/BV ROAE Dividend Yield %P/E

Market Focus

2017 Outlook

Utilities

Overweight

Analyst QUAH He Wei, CFA +603 2604 3966 [email protected]

Price Target

Price PE

2016F

Div Yld

2016201620162016F

EPS CAGR 2014201420142014-2016201620162016

(RM) (RM) Rec (x) (%) (%)

Tenaga Nasional 14.28 17.00 BUY 10.4 2.2 12

Petronas Gas Bhd 22.04 21.50 HOLD 25.2 2.7 0

YTL Power 1.51 1.45 HOLD 13.0 6.6 (9)

Gas Malaysia 2.55 2.30 HOLD 23.1 4.1 18

Source: AllianceDBS Electricity demand highly correlated with GDP growth


Increasing electricity demand in Peninsular Malaysia

Source: AllianceDBS

Smooth sailing • Improved earnings clarity with cost pass-through in

full force • Resilient energy demand to underpin strong

recurring earnings base • Top pick: Tenaga Nasional Outlook • Strong earnings clarity. Strong earnings clarity. Strong earnings clarity. Strong earnings clarity. The smooth implementation of the

Imbalance Cost Pass-Through (ICPT) mechanism has effectively insulated utilities players from fuel-cost volatility. Therefore, this gives rise to strong earnings visibility for utilities players going forward as earnings growth will be mainly driven by sales volume and operational efficiency. We also take comfort that the gradual increase in piped gas price has quashed concerns about the government’s commitment to address the gas subsidy rationalisation issue given the large discount for local piped gas prices against international prices.

• Steady energy demand. Steady energy demand. Steady energy demand. Steady energy demand. A relatively healthy economic outlook in Malaysia will help underpin steady demand growth for electricity which will in turn sustain the strong recurring earnings base of utilities players in Malaysia.

Risks • Regulatory risk. Regulatory risk. Regulatory risk. Regulatory risk. Government’s approval is required for tariff

adjustments. Therefore, there is no guarantee that a large tariff hike will be approved in the event of a sharp increase in fuel cost the though ICPT mechanism has already been running smoothly with timely tariff revisions since 2015.

• EcoEcoEcoEconomic recession. nomic recession. nomic recession. nomic recession. This could lead to lower electricity consumption, as evidenced during the global financial crisis in 2008-2009.

Valuation & Stock Picks • Buy Tenaga Nasional. Buy Tenaga Nasional. Buy Tenaga Nasional. Buy Tenaga Nasional. Tenaga continues to trade at an

undemanding valuation of 10x FY16 compared to Gas Malaysia’s 23x. Also, Tenaga is set to benefit from its aggressive capacity expansion plan which has also resulted in the utility giant gaining more generation market share against the independent power producers. Since 2015, 3,092MW of new capacity have been planted up by Tenaga, and this will be followed by 3,080MW assets over the next three years, thus leading to a higher market share for TNB

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

GDP growth Electricity sales growth

60,000

65,000

70,000

75,000

80,000

85,000

90,000

95,000

100,000

105,000

110,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

GWhGWhGWhGWh

Market Focus

2017 Outlook

Historical revisions of electricity tariff and gas tariff

Effective dateEffective dateEffective dateEffective date Jun06Jun06Jun06Jun06 Junl08Junl08Junl08Junl08 Mar09Mar09Mar09Mar09 Jul09Jul09Jul09Jul09 Jun11Jun11Jun11Jun11 Jan14Jan14Jan14Jan14 Mar15Mar15Mar15Mar15 Jun15Jun15Jun15Jun15 Jan16Jan16Jan16Jan16 Jul16Jul16Jul16Jul16

Tariff (sen/kWh) 26.2 32.5 31.3 31.3 33.5 38.5

36.3

36.3

37.0

37.0

changes 12% 24% -4% 0% 7% 15% -6% 0% 2% 0% Gas price (RM/mmbtu) 6.4 14.3 10.7 10.7 13.7 15.2 15.2 16.7 18.2 19.7

changes 0% 124% -25% 0% 28% 11% 0% 10% 9% 8%


Peer comparison

Market Market Market Market capcapcapcap

(USDm)(USDm)(USDm)(USDm)

PEPEPEPE PBPBPBPB ROEROEROEROE YieldYieldYieldYield

CompanyCompanyCompanyCompany FYEFYEFYEFYE RatingRatingRatingRating PricePricePricePrice TPTPTPTP FY16FY16FY16FY16 FY17FY17FY17FY17 FY16FY16FY16FY16 FY17FY17FY17FY17 FY16FY16FY16FY16 FY17FY17FY17FY17 FY16FY16FY16FY16 FY17FY17FY17FY17

Tenaga Nasional Aug Buy 14.28 17.00 19,822 10.4 10.3 1.5 1.4 15% 14% 2.2% 2.9%

Petronas Gas Dec Hold 22.04 21.50 10,297 25.2 24.4 3.6 3.5 14% 14% 2.7% 2.7%

YTL Power Jun Hold 1.51 1.45 2,593 11.7 15.0 1.0 1.0 8% 6% 6.6% 5.3%

Gas Malaysia Dec Hold 2.55 2.30 728 23.1 22.1 3.3 3.3 14% 15% 4.1% 4.3%

AverageAverageAverageAverage

17.6 17.6 17.6 17.6

18.0 18.0 18.0 18.0 2.4 2.4 2.4 2.4 2.3 2.3 2.3 2.3 13%13%13%13% 12%12%12%12% 3.9%3.9%3.9%3.9% 3.8%3.8%3.8%3.8%


Market Focus

2017 Outlook

Stock Profile

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:WMT, PY

BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 3 Nov 20163 Nov 20163 Nov 20163 Nov 2016)))): : : : RM14.28 (KLCIKLCIKLCIKLCI : : : : 1,648.08) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM17.00 (19% upside) (Prev RM17.00)

Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Stronger electricity consumption

Where we differWhere we differWhere we differWhere we differ:::: Higher earnings possibly due to higher electricity sales

growth Analyst QUAH He Wei, CFA +603 2604 3966 [email protected]

What’s New • FY16 results met expectations; 22sen final DPS

proposed

• Raised FY17-18F earnings by 5% p.a. on lower

effective tax rate and operating expenses

• Maintain BUY, TP raised to RM17.00

Price Relative

Forecasts and Valuation FY FY FY FY AugAugAugAug ((((RMRMRMRM m) m) m) m) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Revenue 44,532 46,839 47,878 48,935 EBITDA 14,919 15,444 16,215 16,715 Pre-tax Profit 8,067 8,531 8,931 9,121 Net Profit 7,368 7,849 8,128 8,119 Net Pft (Pre Ex.) 7,758 7,849 8,128 8,119 Net Pft Gth (Pre-ex) (%) 24.8 1.2 3.6 (0.1) EPS (sen) 131 139 144 144 EPS Pre Ex. (sen) 137 139 144 144 EPS Gth Pre Ex (%) 25 1 4 0 Diluted EPS (sen) 131 139 144 144 Net DPS (sen) 32.0 41.7 43.2 43.2 BV Per Share (sen) 928 1,026 1,127 1,227 PE (X) 10.9 10.3 9.9 9.9 PE Pre Ex. (X) 10.4 10.3 9.9 9.9 P/Cash Flow (X) 6.1 5.9 5.8 5.6 EV/EBITDA (X) 6.6 6.3 5.9 5.6 Net Div Yield (%) 2.2 2.9 3.0 3.0 P/Book Value (X) 1.5 1.4 1.3 1.2 Net Debt/Equity (X) 0.3 0.3 0.2 0.2 ROAE (%) 14.8 14.2 13.4 12.2 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 131 133 74.0 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 22 S: 3 H: 0

Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P

Smooth sailing Steady eSteady eSteady eSteady electricity lectricity lectricity lectricity demanddemanddemanddemand. . . . After experiencing stronger electricity demand growth of 4% in Peninsular Malaysia in FY16 due to the El-Niño phenomenon, consumption is set to normalise in FY17, growing in tandem with the relatively healthy economic outlook in Malaysia which is projected to grow between 4%-5% in 2017. We believe electricity consumption will continue to grow steadily, driven by the domestic and commercial segments. Energy reform remains on track. Energy reform remains on track. Energy reform remains on track. Energy reform remains on track. The government is fully committed to the implementation of the Imbalance Cost Pass-Through which has removed the burden of fuel cost volatility and ensures strong earnings clarity for Tenaga Nasional (TNB). More importantly, the gradual increase in piped gas price has quashed concerns over the government’s commitment to address the gas subsidy rationalisation issue given the huge discount for local gas prices against international prices. Management is also likely to review its dividend policy given the improved earnings visibility. New stateNew stateNew stateNew state----ofofofof----thethethethe----art power plants to drive expansion.art power plants to drive expansion.art power plants to drive expansion.art power plants to drive expansion. Since 2015, 3,092MW of new capacity has been planted up by TNB, and this will be followed by 3,000MW assets over the next three years, leading to a higher market share for TNB. Also, the adoption of the latest power generation technologies such as ultra-supercritical technology and efficient combined cycle gas turbines will result in better operational efficiency.

Valuation:

We revised up our DCF-derived TP to RM17.00 (WACC 7.2%,

1.5% terminal growth) after increasing our FY17-18F earnings

by 5% p.a. Our BUY rating is premised on healthy power

demand growth and improving earnings visibility arising from

the incentive-based regulation framework.

Key Risks to Our View:

Operational breakdownOperational breakdownOperational breakdownOperational breakdown. Unplanned outages may result in the

shortage of electricity which may necessitate expensive

overseas procurement.

At A Glance Issued Capital (m shrs) 5,644

Mkt. Cap (RMm/US$m) 80,591 / 19,203

Major Shareholders (%)

Khazanah Nasional 28.3

EPF 15.7

Skim ASB 6.8

Free Float (%) 49.2

3m Avg. Daily Val (US$m) 35.7

ICB IndustryICB IndustryICB IndustryICB Industry : Utilities / Electricity

DBS Group Research . Equity

4 Nov 2016

Malaysia Company Guide

Tenaga Nasional Version 5 | Bloomberg: TNB MK | Reuters: TENA.KL Refer to important disclosures at the end of this report

ASIAN INSIGHTS VICKERS SECURITIES

Company Guide

Tenaga Nasional

WHAT’S NEW

Strong FY16

Within expectationsWithin expectationsWithin expectationsWithin expectations. Excluding RM115m translation loss,

TNB’s 4QFY16 earnings came in at RM1.88bn, taking FY16

core earnings to RM7.76bn - 104% of our FY16 forecast.

FY16 results have largely benefitted from the strong electricity

sales (inclusive of non-Peninsular Malaysia) which grew 4.2%

- Peninsular Malaysia 4.0%, Sabah 3.1%, Pakistan 25.9% -

largely driven by warm weather conditions in Malaysia which

occurred during 3QFY16. Meanwhile, TNB’s 4QFY16

electricity demand grew by 2.7% y-o-y, compared to 6.2% in

3QFY16 as weather patterns normalised.

Higher coalHigher coalHigher coalHigher coal----fired power generation.fired power generation.fired power generation.fired power generation. Coal-fired generation mix

improved to 57% in 4QFY16 (vs 44% in 4QFY15) – highest in

recent years – due to the contribution of Tanjung Bin 4 which

was commissioned in Mar 16. Meanwhile, lower gas-fired

generation mix of 38.9% (vs 51% in 4QFY15) has resulted in

lower consumption of LNG.

Healthy financials.Healthy financials.Healthy financials.Healthy financials. TNB incurred RM11.4bn capex in FY16, of

which 45% was utilised for new generation capacity. This is

also the highest capex amount spent over the past five years.

Nevertheless, balance sheet remains very healthy with 33%

net gearing levels despite its aggressive expansion plans.

Management has also proposed a final DPS of 22 sen, taking

FY16 DPS to 32 sen. This translates into 23% of FY16 core

net profit.

Potentially higher dividend in FY17Potentially higher dividend in FY17Potentially higher dividend in FY17Potentially higher dividend in FY17. Management is currently

embarking on a capital structure review which seeks to

optimise its debt-equity ratio. This is in view of the strong

earnings clarity after the smooth implementation of

Imbalance Cost Pass-Through mechanism since 2014 which

has effectively removed the burden of fuel cost volatility.

Management has shared that the result will be known by

end-CY16, which may result in a change in dividend policy

which is currently based on 40-60% payout of free cash flow.

Lift Lift Lift Lift FYFYFYFY17171717----18F 18F 18F 18F earnings by earnings by earnings by earnings by 5555%%%% largely due to a lower effective

tax rate and lower operational cost. Overall, we are projecting

3% electricity sales growth (inclusive of non-Peninsular

Malaysia sales) in FY17, before tapering off to 2.2% in FY18.

Quarterly / Interim Income Statement (RMm)

FY FY FY FY AugAugAugAug 4Q4Q4Q4Q2015201520152015 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq

Revenue 11,744 12,129 11,237 (4.3) (7.4)

Cost of Goods Sold (9,756) (9,570) (9,355) (4.1) (2.2)

Gross ProfitGross ProfitGross ProfitGross Profit 1,9881,9881,9881,988 2,5592,5592,5592,559 1,8821,8821,8821,882 (5.3)(5.3)(5.3)(5.3) (26.4)(26.4)(26.4)(26.4)

Other Oper. (Exp)/Inc 231 188 203 (12.1) 8.0

Operating ProfitOperating ProfitOperating ProfitOperating Profit 2,2192,2192,2192,219 2,7472,7472,7472,747 2,0852,0852,0852,085 (6.0)(6.0)(6.0)(6.0) (24.1)(24.1)(24.1)(24.1)

Other Non Opg (Exp)/Inc (25.9) 30.1 7.20 nm (76.1)

Associates & JV Inc 44.5 25.4 24.6 (44.7) (3.1)

Net Interest (Exp)/Inc (91.5) (231) (130) (42.2) 43.7

Exceptional Gain/(Loss) (734) (39.8) (115) 84.3 (188.4)

PrePrePrePre----tax Profittax Profittax Profittax Profit 1,4131,4131,4131,413 2,5322,5322,5322,532 1,8721,8721,8721,872 32.632.632.632.6 (26.0)(26.0)(26.0)(26.0)

Tax (603) (225) (136) (77.5) (39.5)

Minority Interest 11.3 1.50 25.8 128.3 1,620.0

Net ProfitNet ProfitNet ProfitNet Profit 821821821821 2,3092,3092,3092,309 1,7621,7621,7621,762 114.7114.7114.7114.7 (23.7)(23.7)(23.7)(23.7)

Net profit bef Except. 1,554 2,349 1,877 20.8 (20.1)

EBITDA 3,751 4,271 3,634 (3.1) (14.9)

Margins (%)

Gross Margins 16.9 21.1 16.7

Opg Profit Margins 18.9 22.6 18.6

Net Profit Margins 7.0 19.0 15.7

Source of all data: Company, AllianceDBS


Company Guide

Tenaga Nasional

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Electricity demand. Electricity demand. Electricity demand. Electricity demand. This is the key earnings driver for TNB.

Historically, the growth in electricity sales has been highly

correlated with the country’s GDP growth. Industrial and

commercial users typically account for ~75% of TNB’s electricity

usage, and therefore a healthy economy is of utmost

importance to TNB.

Transparent tariffTransparent tariffTransparent tariffTransparent tariff----setting mechanism. setting mechanism. setting mechanism. setting mechanism. The implementation of

the Incentive Based Regulation (IBR) framework will have a base

tariff that reflects: 1) capex and opex of transmission and

distribution business, 2) return on regulated assets, and 3)

power purchase cost charged by generators. The

implementation of the imbalance cost pass-through (ICPT)

mechanism which is part of IBR will offer strong earnings clarity

going forward with a tariff revision every six months. We believe

the government is committed to the energy reform that was

started on 1 Jan 2014.

New power plants coming onNew power plants coming onNew power plants coming onNew power plants coming on----streamstreamstreamstream. TNB is set to benefit from

the new generation capacity that is under construction which

will progressively increase its capacity by ~30% by 2019. The

new power plants will be completed progressively to boost its

generation capacity. Ultimately, the new power plants will help

reduce generation cost due to the more efficient technology.

The new additions will also help replace expiring power

purchase agreements/service level agreements which tend to be

more costly.

Favourable generation costFavourable generation costFavourable generation costFavourable generation cost. TNB’s coal-based generation mix

has improved to 57% in 4QFY16, compared to 44% a year ago,

likely due to the contribution of Tanjung Bin 4 which was

commissioned in Mar 16. This enables TNB to consume less LNG

for power generation which is more expensive. Also, weak coal

prices are in its favour, and will translate into lower fuel cost

and energy payments. While these savings will eventually be

transferred to consumers, there will be a lagged impact on

quarterly results, as tariff revision is only carried out every six

months.

Overseas expansionOverseas expansionOverseas expansionOverseas expansion. TNB’s overseas footprint is still minimal at

this juncture, though it intends to expand into energy-related

businesses overseas such as project management, operation and

maintenance, as well as power generation. Its 100%-owned

Liberty Power Ltd, which operates a 235-MW combined-cycle

natural gas power plant, currently contributes ~1% of TNB’s

revenue. We understand the group will focus on the Middle

East and ASEAN regions as its target markets.

Electricity sales growth (%)

Coal price (US$/MT)

Gas price (RM/mmbtu)

Gas-based generation (%)

Coal-based generation (%)



Company Guide

Tenaga Nasional

Balance Sheet:

More debt headroom to gear up. More debt headroom to gear up. More debt headroom to gear up. More debt headroom to gear up. TNB’s net gearing stood at

33% as at end-Aug 16. This is after taking into consideration its

total capex spending of RM11.4bn in FY16. The recent award of

Project 3B will not strain its balance sheet, as we understand the

group is still able to stomach more than RM20bn of borrowings.

Share Price Drivers:

Strong power consumptionStrong power consumptionStrong power consumptionStrong power consumption. Higher-than-expected electricity

consumption will be TNB’s key earnings driver given the

implementation of ICPT mechanism which insulates the

company from fuel cost volatility.

Government’s commitment on ICPTGovernment’s commitment on ICPTGovernment’s commitment on ICPTGovernment’s commitment on ICPT. There have always been

doubts on TNB's ability to implement ICPT fully, due to the

government’s intervention. We believe the government is

committed to energy reform, as evidenced by the latest piped

gas price hike. A smooth implementation of ICPT will be a

strong re-rating catalyst for TNB as ICPT will remove the burden

of volatility in its energy procurement.

Key Risks:

Increase in fuel costs. Increase in fuel costs. Increase in fuel costs. Increase in fuel costs. Gas and coal account for more than

90% of TNB's fuel mix and a hike in the costs of these inputs

would reduce TNB's profitability. The timing of tariff

adjustments is uncertain in Malaysia, but TNB has historically

been fully compensated by a tariff hike for each gas cost

increase, with a small net enhancement.

Demand weakness. Demand weakness. Demand weakness. Demand weakness. TNB's earnings are sensitive to power

demand growth, which is affected by the overall economic

condition.

Company Background

Tenaga Nasional Berhad (TNB) is the largest electricity provider

in Malaysia. Its core business comprises the generation,

transmission & distribution of electricity. It has 11,000MW total

installed generation capacity.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide

Tenaga Nasional

Key Assumptions

FY FY FY FY AugAugAugAug 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Electricity sales growth (%)

2.22 4.21 2.99 2.25 2.24

Coal price (US$/MT) 57.7 55.7 68.0 68.0 68.0

Gas price (RM/mmbtu) 21.6 20.9 20.9 20.9 20.9

Gas-based generation (%) 49.4 42.7 43.4 41.9 40.8 Coal-based generation (%)

45.6 53.1 52.6 54.2 55.2 Income Statement (RMm)

FY FY FY FY AugAugAugAug 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenue 43,287 44,532 46,839 47,878 48,935

Cost of Goods Sold (35,483) (36,171) (38,146) (38,660) (39,452)

Gross ProfitGross ProfitGross ProfitGross Profit 7,8037,8037,8037,803 8,3618,3618,3618,361 8,6938,6938,6938,693 9,2189,2189,2189,218 9,4839,4839,4839,483 Other Opng (Exp)/Inc 824 712 849 866 883

Operating ProfitOperating ProfitOperating ProfitOperating Profit 8,6288,6288,6288,628 9,0729,0729,0729,072 9,5429,5429,5429,542 10,08410,08410,08410,084 10,36610,36610,36610,366 Other Non Opg (Exp)/Inc (833) 31.8 0.0 0.0 0.0

Associates & JV Inc 101 93.3 96.1 99.0 102

Net Interest (Exp)/Inc (663) (740) (1,107) (1,252) (1,347)

Exceptional Gain/(Loss) (99.3) (390) 0.0 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 7,1347,1347,1347,134 8,0678,0678,0678,067 8,5318,5318,5318,531 8,9318,9318,9318,931 9,1219,1219,1219,121 Tax (1,073) (746) (759) (883) (1,082)

Minority Interest 57.5 46.8 77.7 80.5 80.4

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net ProfitNet ProfitNet ProfitNet Profit 6,1186,1186,1186,118 7,3687,3687,3687,368 7,8497,8497,8497,849 8,1288,1288,1288,128 8,1198,1198,1198,119 Net Profit before Except. 6,218 7,758 7,849 8,128 8,119

EBITDA 13,190 14,919 15,444 16,215 16,715

Growth

Revenue Gth (%) 1.2 2.9 5.2 2.2 2.2

EBITDA Gth (%) 14.0 13.1 3.5 5.0 3.1

Opg Profit Gth (%) 30.9 5.2 5.2 5.7 2.8

Net Profit Gth (Pre-ex) (%) 14.5 24.8 1.2 3.6 (0.1)

Margins & Ratio

Gross Margins (%) 18.0 18.8 18.6 19.3 19.4

Opg Profit Margin (%) 19.9 20.4 20.4 21.1 21.2

Net Profit Margin (%) 14.1 16.5 16.8 17.0 16.6

ROAE (%) 13.5 14.8 14.2 13.4 12.2

ROA (%) 5.4 5.9 5.7 5.6 5.3

ROCE (%) 7.2 7.4 7.1 7.0 6.7

Div Payout Ratio (%) 26.7 24.5 30.0 30.0 30.0

Net Interest Cover (x) 13.0 12.3 8.6 8.1 7.7


Lifted by heat wave

Steady growth


Company Guide

Tenaga Nasional


FY FY FY FY AugAugAugAug 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 Revenue 11,744 10,677 10,489 12,129 11,237


Gross ProfitGross ProfitGross ProfitGross Profit 1,9881,9881,9881,988 2,2582,2582,2582,258 1,6611,6611,6611,661 2,5592,5592,5592,559 1,8821,8821,8821,882 Other Oper. (Exp)/Inc 231 139 181 188 203

Operating ProfitOperating ProfitOperating ProfitOperating Profit 2,2192,2192,2192,219 2,3982,3982,3982,398 1,8421,8421,8421,842 2,7472,7472,7472,747 2,0852,0852,0852,085 Other Non Opg (Exp)/Inc (25.9) 6.10 (11.6) 30.1 7.20

Associates & JV Inc 44.5 16.9 26.4 25.4 24.6

Net Interest (Exp)/Inc (91.5) (199) (180) (231) (130)

Exceptional Gain/(Loss) (734) (58.5) (177) (39.8) (115)

PrePrePrePre----tax Profittax Profittax Profittax Profit 1,4131,4131,4131,413 2,1632,1632,1632,163 1,4991,4991,4991,499 2,5322,5322,5322,532 1,8721,8721,8721,872 Tax (603) (201) (184) (225) (136)


Net ProfitNet ProfitNet ProfitNet Profit 821821821821 1,9761,9761,9761,976 1,3211,3211,3211,321 2,3092,3092,3092,309 1,7621,7621,7621,762 Net profit bef Except. 1,554 2,035 1,498 2,349 1,877

EBITDA 3,751 3,761 3,254 4,271 3,634

Growth

Revenue Gth (%) 18.6 (9.1) (1.8) 15.6 (7.4)

EBITDA Gth (%) 19.1 0.3 (13.5) 31.2 (14.9)

Opg Profit Gth (%) 13.9 8.1 (23.2) 49.2 (24.1)

Net Profit Gth (Pre-ex) (%) (7.4) 30.9 (26.4) 56.8 (20.1)

Margins

Gross Margins (%) 16.9 21.2 15.8 21.1 16.7

Opg Profit Margins (%) 18.9 22.5 17.6 22.6 18.6

Net Profit Margins (%) 7.0 18.5 12.6 19.0 15.7 Balance Sheet (RMm)

FY FY FY FY AugAugAugAug 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Net Fixed Assets 90,300 96,513 101,707 105,675 109,428

Invts in Associates & JVs 758 1,838 1,934 2,033 2,135

Other LT Assets 7,282 7,796 7,796 7,796 7,796

Cash & ST Invts 8,910 17,154 19,627 22,547 25,840

Inventory 844 792 869 877 892

Debtors 8,639 8,277 8,896 9,094 9,294

Other Current Assets 402 533 533 533 533

Total AssetsTotal AssetsTotal AssetsTotal Assets 117,135117,135117,135117,135 132,902132,902132,902132,902 141,362141,362141,362141,362 148,554148,554148,554148,554 155,919155,919155,919155,919

ST Debt

1,986 1,489 1,582 1,641 1,700

Creditor 10,412 11,409 11,588 11,691 11,898

Other Current Liab 3,195 3,186 3,895 4,019 4,218

LT Debt 22,713 32,818 34,880 36,177 37,473

Other LT Liabilities 31,363 31,401 31,401 31,401 31,401

Shareholder’s Equity 47,208 52,389 57,883 63,573 69,256

Minority Interests 259 211 133 52.9 (27.5)

Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 117,135117,135117,135117,135 132,902132,902132,902132,902 141,362141,362141,362141,362 148,554148,554148,554148,554 155,919155,919155,919155,919

Non-Cash Wkg. Capital (3,721) (4,994) (5,185) (5,207) (5,397)

Net Cash/(Debt) (15,789) (17,153) (16,835) (15,271) (13,334)

Debtors Turn (avg days) 66.5 69.3 66.9 68.6 68.6

Creditors Turn (avg days) 111.1 130.8 129.8 130.2 129.6

Inventory Turn (avg days) 10.5 9.8 9.4 9.8 9.7

Asset Turnover (x) 0.4 0.4 0.3 0.3 0.3

Current Ratio (x) 1.2 1.7 1.8 1.9 2.1

Quick Ratio (x) 1.1 1.6 1.7 1.8 2.0

Net Debt/Equity (X) 0.3 0.3 0.3 0.2 0.2

Net Debt/Equity ex MI (X) 0.3 0.3 0.3 0.2 0.2

Capex to Debt (%) 43.6 32.5 30.2 26.4 25.5

Z-Score (X) 1.8 1.8 1.8 1.8 1.8


Induced by El-Nino phenomenon

Healthy balance sheet


Company Guide

Tenaga Nasional

Cash Flow Statement (RMm)

FY FY FY FY AugAugAugAug 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Pre-Tax Profit 7,134 8,067 8,531 8,931 9,121

Dep. & Amort. 5,294 5,722 5,806 6,032 6,246

Tax Paid (811) (721) (50.6) (759) (883)

Assoc. & JV Inc/(loss) 0.0 0.0 (96.1) (99.0) (102)

Chg in Wkg.Cap. 974 1,412 (517) (102) (9.3)

Other Operating CF (1,152) (1,188) 0.0 0.0 0.0

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 11,43911,43911,43911,439 13,29313,29313,29313,293 13,67213,67213,67213,672 14,00314,00314,00314,003 14,37314,37314,37314,373 Capital Exp.(net) (10,774) (11,143) (11,000) (10,000) (10,000)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF (2,052) (7,253) 0.0 0.0 0.0

Net Investing CFNet Investing CFNet Investing CFNet Investing CF (12,826)(12,826)(12,826)(12,826) (18,396)(18,396)(18,396)(18,396) (11,000)(11,000)(11,000)(11,000) (10,000)(10,000)(10,000)(10,000) (10,000)(10,000)(10,000)(10,000) Div Paid (1,637) (1,806) (2,355) (2,438) (2,436)

Chg in Gross Debt (1,775) 9,063 2,156 1,356 1,356

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF (840) (664) 0.0 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF (4,252)(4,252)(4,252)(4,252) 6,5936,5936,5936,593 (199)(199)(199)(199) (1,083)(1,083)(1,083)(1,083) (1,080)(1,080)(1,080)(1,080)

Currency Adjustments (2.6) 9.90 0.0 0.0 0.0

Chg in Cash (5,641) 1,500 2,473 2,920 3,293

Opg CFPS (sen) 185 211 251 250 255

Free CFPS (sen) 11.8 38.1 47.4 70.9 77.5


Target Price & Ratings History

Source: AllianceDBS

Analyst: QUAH He Wei, CFA

Capex for new power plants and maintenance capex

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY

BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 3 Nov 20163 Nov 20163 Nov 20163 Nov 2016)))): : : : RM19.84 (KLCIKLCIKLCIKLCI : : : : 1,648.08) Price Price Price Price Target 12Target 12Target 12Target 12----mthmthmthmth :::: RM22.60 (14% upside) (Prev RM22.60) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Sustainable and robust earnings deliveries

Where we differ:Where we differ:Where we differ:Where we differ: Our TP is higher than consensus as we believe its

consistent earnings delivery could help re-rate its share price

Analyst Sue Lin LIM +65 8332 6843 [email protected] Lynette CHENG +60 32604 3907 [email protected]

What’s New • 3Q/9M16 earnings within expectations; revenue

growth supported by robust loan growth and stable NIM

• NIM pressure alleviated by lower wholesale funding costs; loan growth still outpacing the industry’s

• Challenges aplenty for the Malaysian banking sector; but expect PBK to defy headwinds and continue to deliver better-than-industry metrics

• Maintain BUY, TP of RM22.60; remains our top pick among Malaysian banks

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRMmmmm) ) ) ) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Pre-prov. Profit 6,631 6,791 7,413 8,073 Net Profit 5,062 5,106 5,588 6,080 Net Pft (Pre Ex.) 5,062 5,106 5,588 6,080 Net Pft Gth (Pre-ex) (%) 12.0 0.9 9.4 8.8 EPS (sen) 130 132 144 157 EPS Pre Ex. (sen) 130 132 144 157 EPS Gth Pre Ex (%) 12 1 9 9 Diluted EPS (sen) 130 132 144 157 PE Pre Ex. (X) 15.2 15.1 13.8 12.7 Net DPS (sen) 56.0 58.0 62.0 66.0 Div Yield (%) 2.8 2.9 3.1 3.3 ROAE Pre Ex. (%) 17.1 15.6 15.7 15.6 ROAE (%) 17.1 15.6 15.7 15.6 ROA (%) 1.4 1.4 1.4 1.4 BV Per Share (sen) 804 878 960 1,051 P/Book Value (x) 2.5 2.3 2.1 1.9 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 151 N/A N/A

Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 12 S: 3 H: 9

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

The exception to the rule

Still making headway amid challenging times, BUY.Still making headway amid challenging times, BUY.Still making headway amid challenging times, BUY.Still making headway amid challenging times, BUY. Public Bank (PBK) is our top pick among Malaysian banks. Our BUY rating is premised on its sustainable earnings and robust asset quality. Despite macro headwinds, we expect PBK to continue to deliver above-industry growth and dominant market share in mortgages, auto and SME segments. Contribution from the unit trust business will continue to differentiate it from peers. PBK’s ability to safeguard its asset quality despite years of outperforming industry growth attests to the success of its prudent practices.

3Q16/9M3Q16/9M3Q16/9M3Q16/9M16 net profit largely within our and consensus 16 net profit largely within our and consensus 16 net profit largely within our and consensus 16 net profit largely within our and consensus expectations.expectations.expectations.expectations. Revenue growth remained strong, underpinned by strong loan/deposit growth (7.2%/7.4% y-o-y respectively), outpacing industry metrics, and surprisingly stable NIM despite the OPR cut in July. We understand that the stable NIM was held up by lower wholesale funding costs which offset most of the re-pricing effect from retail loans. Non-interest income was lower largely due to forex, prompting us to trim our non-interest income forecasts by 4% across FY16-18F. Provisions increased but were still within expectations. Absolute NPLs increased 5% y-o-y, but NPL ratio stayed low at 0.5%. The increase came mainly from its Laos operations; domestic NPLs were largely stable. Residential mortgage NPLs arose from pockets of its mass-market customers but recovery efforts are underway. Positively, impaired loans from the hire-purchase stayed healthy despite earlier caution on the vulnerability of this segment.

Sector will be challenging in Sector will be challenging in Sector will be challenging in Sector will be challenging in 2017201720172017; PBK will still defy headwinds. ; PBK will still defy headwinds. ; PBK will still defy headwinds. ; PBK will still defy headwinds. Further cuts in OPR may pose sector-wide downside risk to NIM. Although growth expectations have moderated slightly and the industry appears to be seeing more challenges to come, PBK remains the silver lining in the banking sector as its financial metrics (such as loan growth, deposit growth, asset quality and cost efficiency) remain superior to its peers.

Valuation: Our target price of RM22.60, which implies 2.3x FY17F BV, is derived using the Gordon Growth Model and assumes 9% cost of equity, 4% long-term growth and 16% ROE. PBK’s premium valuation vs. peers is justified, as it continues to deliver solid growth and quality trends, contrary to peers.

Key Risks to Our View: Failure tFailure tFailure tFailure to sustain aboveo sustain aboveo sustain aboveo sustain above----industry growth and asset qualityindustry growth and asset qualityindustry growth and asset qualityindustry growth and asset quality. A key de-rating factor for PBK would be the failure to sustain its excellent growth and asset quality track record, as well as faltering market share in segments which it excels in.


Mkt. Cap (RMm/US$m) 76,612 / 18,255


Tan Sri Dato' Dr Teh Hong Piow (%) 21.8%

Employees Provident Fund (%) 15.4%

Free Float (%) 62.4


ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks


4 Nov 2016


Public Bank Version 5 | Bloomberg: PBK MK | Reuters: PUBM.KL Refer to important disclosures at the end of this report

88

108

128

148

168

188

208

13.4

14.4

15.4

16.4

17.4

18.4

19.4

20.4

21.4

22.4

Nov-12 Nov-13 Nov-14 Nov-15 Nov-16

Relative IndexRM

Public Bank (LHS) Relative KLCI (RHS)


Company Guide

Public Bank

WHAT’S NEW

Still making headway amid challenging times

HighlightsHighlightsHighlightsHighlights

Strong revenues led by robust loan growthStrong revenues led by robust loan growthStrong revenues led by robust loan growthStrong revenues led by robust loan growth and stable NIMand stable NIMand stable NIMand stable NIM....

PBK’s net profit came in largely within our and consensus

expectations. Net interest income growth remained strong,

underpinned by stable NIM and strong loan growth of 7.5% y-

o-y. NIM held up, despite the lowering of its Base Rate (BR)

and Base Lending Rate (BLR) by 23bps (effective 27 July)

following a cut in the Overnight Policy Rate (OPR) by 25bps, as

wholesale deposit costs eased, offsetting the effect of the

lower lending yields. Non-interest income fell due to lower

gains on financial instruments and forex transactions. There

were some structural non-operational forex gains recorded last

year which were not recurring. PBK’s cost efficiency remains

best in class, with cost-to-income ratio of 33% (unchanged q-

o-q).

Superior loan and deposit growthSuperior loan and deposit growthSuperior loan and deposit growthSuperior loan and deposit growth. The segments contributing

to its healthy loan growth include residential and construction

loans. Deposit growth stood at 7.3% y-o-y, led by growth in

fixed deposits (+10% y-o-y). Given the similar growth pace of

its loans and deposits, its loan to deposit ratio was relatively

unchanged at 90%. Annualised domestic loan/deposit growth

stood at 7.2%/7.4% which outpaced industry metrics of

2.8%/-1.4%.

Asset quality in check.Asset quality in check.Asset quality in check.Asset quality in check. Absolute NPLs increased by 5% y-o-y,

attributable to an increase in residential and working capital

impaired loans. Nonetheless, gross NPL ratio remained low at

0.5% (vs the industry’s 1.7%). Provisions increased but were

within expectations, keeping its loan loss coverage ratio high

at 110% (247% including regulatory reserve). No dividends

were declared, as expected. PBK is sufficiently capitalised with

Total/Tier 1/CET1 ratio of 15.2/11.9/11.0%.

OutlookOutlookOutlookOutlook

Further cut in OPR pose downside risk to NIMsFurther cut in OPR pose downside risk to NIMsFurther cut in OPR pose downside risk to NIMsFurther cut in OPR pose downside risk to NIMs.... Despite

challenging times ahead, we believe PBK will continue to

deliver sustainable earnings growth. This should be supported

by resilient loan growth, best-in-class cost-to-income ratio, and

unrivalled asset quality. Contribution from its asset

management business will continue to set the bank apart from

peers. Our base-case assumption is for PBK to experience a

slight decline in NIM of 4bps from FY16 to FY17. Deposit

competition which could be seasonal during the yearend

period could etch that trend in 4Q. In the event of further cuts

in OPR, NIM pressure may be more pronounced than expected.

PBK has seen it NIM hold up well despite the OPR cut in July.

The slower forex income trends prompted us to reduce our

FY16-18F earnings forecasts by 4% per annum. As the revision

to our risk-free rate assumption has offset the changes to our

Gordon Growth assumptions, our TP is unchanged.

Valuation and recommendationValuation and recommendationValuation and recommendationValuation and recommendation

Maintain BUY,Maintain BUY,Maintain BUY,Maintain BUY, RM22.60 TP. RM22.60 TP. RM22.60 TP. RM22.60 TP. PBK remains the top pick in our

Malaysian bank universe. Our TP, which implies 2.3x FY17F BV,

is derived using the Gordon Growth Model and assumes 9%

cost of equity, 4% long-term growth and 16% ROE. In our

view, PBK’s premium valuation vs. its Malaysian and ASEAN

peers is justified for a quality defensive bank.


Company Guide

Public Bank


FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq

Net Interest Income 1,629 1,700 1,736 6.6 2.2

Islamic Income 211 233 249 18.0 18.0

Non-Interest Income 631 492 482 (23.7) (2.1)

Operating IncomeOperating IncomeOperating IncomeOperating Income 2,4712,4712,4712,471 2,4252,4252,4252,425 2,4672,4672,4672,467 (0.2)(0.2)(0.2)(0.2) 1.81.81.81.8

Operating Expenses (741) (803) (815) 9.9 1.5

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 1,7301,7301,7301,730 1,6221,6221,6221,622 1,6521,6521,6521,652 (4.5)(4.5)(4.5)(4.5) 1.91.91.91.9

Provisions (117) (68.9) (93.7) (19.7) 35.9

Associates 0.76 (1.2) (0.4) nm 66.8

Exceptionals 0.0 0.0 0.0 nm nm

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 1,6141,6141,6141,614 1,5521,5521,5521,552 1,5581,5581,5581,558 (3.4)(3.4)(3.4)(3.4) 0.40.40.40.4

Taxation (397) (281) (306) (23.0) 8.8

Minority Interests (15.6) (14.4) (14.4) 7.7 (0.5)

Net ProfitNet ProfitNet ProfitNet Profit 1,2011,2011,2011,201 1,2561,2561,2561,256 1,2381,2381,2381,238 3.13.13.13.1 (1.4)(1.4)(1.4)(1.4)

Growth (%)

Net Interest Income Gth 4.4 0.9 2.2

Net Profit Gth 0.4 2.1 (1.4)

Key ratio (%)

NIM 2.1 2.1 2.2

NPL ratio 0.5 0.5 0.5

Loan-to deposit 89.8 90.5 90.2

Cost-to-income 30.0 33.1 33.0

Total CAR 14.8 15.4 15.2

Source of all data: Company, DBS Bank


Company Guide

Public Bank


Earnings Drivers:

NIM compression largely from funding cost pressures.NIM compression largely from funding cost pressures.NIM compression largely from funding cost pressures.NIM compression largely from funding cost pressures. Like its

peers, PBK expects continued pressure on NIM arising from

higher cost of funds and is guiding for NIM to decline by 8-

10bps in FY16F. PBK will be focusing on garnering core deposits

(CASA and FD) while managing expensive wholesale deposits.

Loan yields are expected to stay stable.

Strong consumer franchise to defy headwindsStrong consumer franchise to defy headwindsStrong consumer franchise to defy headwindsStrong consumer franchise to defy headwinds. PBK has

consistently beat industry loan growth and for 2016, it targets

around 8% growth. The bank expects growth in deposit to be a

tad bit lower at 7%. Despite the weaker consumer sentiment,

we expect loan growth to remain resilient as its key portfolio lies

in the mass market. The bank is expected to maintain its market

share positions, particularly in the mortgages, auto and SME

segments. Consumer loans make up close to 60% of PBK’s loan

book.

Asset management contribution drives nonAsset management contribution drives nonAsset management contribution drives nonAsset management contribution drives non----intereintereintereinterest income.st income.st income.st income.

Sustainable and growing contribution from its asset

management arm, Public Mutual, continues to differentiate PBK

from its peers. Despite the volatile market, Public Mutual

continued to deliver profits and grow its assets under

management (FY15: RM65bn). This business unit is a key driver

of recurring income. PBK’s recurring income to non-interest

income ratio is among the highest in the industry at c.75%. On

top of that, PBK also has a strategic bancassurance partnership

with AIA Group that enables the group to offer life, health and

investment-linked products to its customers. Although

bancassurance’s contribution is still small as a percentage of

non-interest income, its growth has been strong.

PBK has the lowest costPBK has the lowest costPBK has the lowest costPBK has the lowest cost----totototo----income ratioincome ratioincome ratioincome ratio in the industry at

c.30%. The bank intends to keep that under 33% in 2016. We

forecast its cost-to-income ratio to remain flat. The cost

containment measures, coupled with its targeted income

growth, should keep ROE above 16% (taking into account the

full dilution impact of the rights issue completed in July 2014).

Small regional franchise.Small regional franchise.Small regional franchise.Small regional franchise. Apart from domestic operations, PBK

also has a regional presence, in Hong Kong, Sri Lanka, Laos,

Cambodia, and Vietnam. That said, overseas operations remain

a small contributor to PBK, at about 9% of PBT. Since April

2016, PBK has full control of its Vietnam operations. At this

juncture, operations remain small. PBK intends to build its

franchise in Vietnam in the retail segment. While it is still keen

on expanding regionally, PBK’s mode of expansion will remain

organic.

Margin Trends

Gross Loan & Growth

Customer Deposit & Growth

Loan-to-Deposit Ratio Trend

Cost & Income Structure

Source: Company, DBS Bank

1.9%

2.0%

2.0%

2.1%

2.1%

2.2%

2.2%

2.3%

2.3%

2.4%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2014A 2015A 2016F 2017F 2018F

RM m

Net Interest Income Net Interest Income Margin

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

50,000

100,000

150,000

200,000

250,000

300,000

2014A 2015A 2016F 2017F 2018F

RM m

Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2014A 2015A 2016F 2017F 2018F

RM m

Customer Deposits (LHS)

Customer Deposits Growth (%) (YoY) (RHS)

79%

84%

89%

94%

99%

218,900

268,900

318,900

368,900

418,900

2014A 2015A 2016F 2017F 2018F

RM bn

Loans Deposit Loan-to-Deposit Ratio (RHS)

29.4%

29.6%

29.8%

30.0%

30.2%

30.4%

30.6%

30.8%

31.0%

31.2%

0

2,000

4,000

6,000

8,000

10,000

12,000

2014A 2015A 2016F 2017F 2018F

Net Interest Income Non-interest Income

Islamic Banking Income Cost-to-income Ratio


Company Guide

Public Bank

Balance Sheet:

Unrivalled asset quality.Unrivalled asset quality.Unrivalled asset quality.Unrivalled asset quality. PBK leads the industry in terms of asset

quality with an enviable NPL ratio of 0.5%. The bank’s ability to

safeguard its asset quality despite years of outperforming

industry growth attests to the success of its prudent practices.

Given its strong credit culture, we expect its NPL ratio to remain

low and stable.

PBK is wellPBK is wellPBK is wellPBK is well----capitalised,capitalised,capitalised,capitalised, boosted by the RM5bn rights issue

completed in 2014. PBK aims to keep total capital ratio at not

less than 13%. It does not have a dividend reinvestment plan

but its dividend payout ratio has been stable at slightly more

than 40%.


PBK is trading at premium valuation vs. peersPBK is trading at premium valuation vs. peersPBK is trading at premium valuation vs. peersPBK is trading at premium valuation vs. peers. This is justified

for a quality defensive bank. PBK is currently trading close to -

2SD of its 10-year P/BV mean. This represents a good

opportunity to accumulate the stock to gain exposure to long-

term sustainable earnings.

Consistent earnings delivery.Consistent earnings delivery.Consistent earnings delivery.Consistent earnings delivery. PBK’s consistent earnings delivery

and robust underlying trends amid a challenging operating

environment could act as the key catalysts for the stock.

Key Risks:

Sharp deterioration in retail growth prospects.Sharp deterioration in retail growth prospects.Sharp deterioration in retail growth prospects.Sharp deterioration in retail growth prospects. PBK’s consumer

loan growth did not weaken following Bank Negara’s

tightening measures over the last three years, although we

expect pockets of speculative and high-end properties to

soften. As PBK’s key portfolio focus is the mass market, we

expect its loan growth to remain resilient.

Company Background

Public Bank Berhad provides a range of commercial banking

and financial services which include unit trust management,

financing for the purchase of licensed public vehicles, and

other financial services. The group's overseas operations

include branches in Hong Kong, Sri Lanka, Laos, Cambodia,

and Vietnam.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)


0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1.0%

2014A 2015A 2016F 2017F 2018F

NPL Ratio Provision Charge-Off Rate

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

2014A 2015A 2016F 2017F 2018F

Tier-1 CAR Total CAR

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2014A 2015A 2016F 2017F 2018F

Avg: 14.4x

+1sd: 15.3x

+2sd: 16.1x

-1sd: 13.6x

-2sd: 12.8x

11.4

12.4

13.4

14.4

15.4

16.4

17.4

18.4

Nov-12 Nov-13 Nov-14 Nov-15

(x)

Avg: 2.76x

+1sd: 3.16x

+2sd: 3.56x

-1sd: 2.35x

-2sd: 1.95x

1.7

2.2

2.7

3.2

3.7


(x)


Company Guide

Public Bank

Key Assumptions

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Gross Loans Growth 10.8 11.6 8.0 8.0 8.0

Customer Deposits Growth 10.2 8.9 8.0 8.0 8.0

Yld. On Earnings Assets 4.1 4.2 4.2 4.2 4.1

Avg Cost Of Funds 2.4 2.6 2.6 2.6 2.6

Income Statement (RMm)


Net Interest Income 5,930 6,377 6,613 6,994 7,422

Islamic Income 831 829 903 985 1,073

Non-Interest Income 1,912 2,340 2,316 2,676 3,035

Operating IncomeOperating IncomeOperating IncomeOperating Income 8,6738,6738,6738,673 9,5469,5469,5469,546 9,8329,8329,8329,832 10,65510,65510,65510,655 11,53011,53011,53011,530

Operating Expenses (2,606) (2,915) (3,041) (3,241) (3,456)

PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 6,0676,0676,0676,067 6,6316,6316,6316,631 6,7916,7916,7916,791 7,4137,4137,4137,413 8,0738,0738,0738,073

Provisions (258) (147) (268) (274) (305)

Associates 4.98 7.56 7.56 7.56 7.56

Exceptionals 0.0 0.0 0.0 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 5,8145,8145,8145,814 6,4916,4916,4916,491 6,5306,5306,5306,530 7,1477,1477,1477,147 7,7767,7767,7767,776

Taxation (1,251) (1,370) (1,378) (1,508) (1,641)

Minority Interests (44.5) (59.1) (45.7) (50.0) (54.4)


Net ProfitNet ProfitNet ProfitNet Profit 4,5194,5194,5194,519 5,0625,0625,0625,062 5,1065,1065,1065,106 5,5885,5885,5885,588 6,0806,0806,0806,080

Net Profit bef Except 4,519 5,062 5,106 5,588 6,080

Growth (%)

Net Interest Income Gth 6.5 7.5 3.7 5.8 6.1

Net Profit Gth 11.2 12.0 0.9 9.4 8.8

Margins, Costs & Efficiency (%)

Spread 1.7 1.6 1.6 1.6 1.5

Net Interest Margin 2.2 2.1 2.1 2.1 2.0

Cost-to-Income Ratio 30.0 30.5 30.9 30.4 30.0

Business Mix (%)

Net Int. Inc / Opg Inc. 68.4 66.8 67.3 65.6 64.4

Non-Int. Inc / Opg inc. 22.0 24.5 23.6 25.1 26.3

Fee Inc / Opg Income 15.9 16.3 16.4 17.4 18.5

Oth Non-Int Inc/Opg Inc 6.1 8.2 7.1 7.7 7.8

Profitability (%)

ROAE Pre Ex. 18.7 17.1 15.6 15.7 15.6

ROAE 18.7 17.1 15.6 15.7 15.6

ROA Pre Ex. 1.4 1.4 1.4 1.4 1.4

ROA 1.4 1.4 1.4 1.4 1.4


Expect loan growth to outpace the industry’s


Company Guide

Public Bank


FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016


Islamic Income 211 204 227 233 249

Non-Interest Income 631 638 592 492 482


Operating Expenses (741) (749) (788) (803) (815)

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 1,7301,7301,7301,730 1,7481,7481,7481,748 1,7161,7161,7161,716 1,6221,6221,6221,622 1,6521,6521,6521,652

Provisions (117) 106 (67.0) (68.9) (93.7)

Associates 0.76 4.41 2.88 (1.2) (0.4)

Exceptionals 0.0 0.0 0.0 0.0 0.0

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 1,6141,6141,6141,614 1,8581,8581,8581,858 1,6521,6521,6521,652 1,5521,5521,5521,552 1,5581,5581,5581,558

Taxation (397) (351) (407) (281) (306)

Minority Interests (15.6) (14.7) (15.3) (14.4) (14.4)


Growth (%)

Net Interest Income Gth 4.4 1.6 1.8 0.9 2.2

Net Profit Gth 0.4 24.2 (17.6) 2.1 (1.4)

Balance Sheet (RMm)


Cash/Bank Balance 16,817 14,831 17,178 19,898 23,052

Government Securities 6,314 4,379 4,817 5,299 5,829

Inter Bank Assets 0.0 0.0 0.0 0.0 0.0

Total Net Loans & Advs. 243,222 271,814 293,529 317,017 342,384

Investment 64,237 54,955 58,361 61,990 65,857

Associates 157 191 191 191 191

Fixed Assets 1,476 1,423 1,494 1,569 1,647

Goodwill 2,083 2,376 2,376 2,376 2,376

Other Assets 11,415 13,789 14,746 15,774 16,879


Customer Deposits 276,540 301,157 325,250 351,270 379,371

Inter Bank Deposits 20,670 9,970 10,966 12,063 13,269

Debts/Borrowings 11,428 11,667 11,667 11,667 11,667

Others 8,209 8,657 9,600 10,674 11,896

Minorities 850 1,077 1,122 1,172 1,227

Shareholders' Funds 28,025 31,231 34,085 37,267 40,784

Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 345,722345,722345,722345,722 363,758363,758363,758363,758 392,691392,691392,691392,691 424,113424,113424,113424,113 458,215458,215458,215458,215


Consistent earnings delivery


Company Guide

Public Bank

Financial Stability Measures (%)


Balance Sheet Structure

Loan-to-Deposit Ratio 88.0 90.3 90.2 90.2 90.3

Net Loans / Total Assets 70.4 74.7 74.7 74.7 74.7

Investment / Total Assets 18.6 15.1 14.9 14.6 14.4

Cust . Dep./Int. Bear. Liab. 89.6 93.3 93.5 93.7 93.8

Interbank Dep / Int. Bear. 6.7 3.1 3.2 3.2 3.3

Asset Quality

NPL / Total Gross Loans 0.6 0.5 0.5 0.4 0.4

NPL / Total Assets 0.4 0.4 0.4 0.3 0.3

Loan Loss Reserve Coverage 122.4 120.8 129.4 135.8 142.5

Provision Charge-Off Rate 0.1 0.1 0.1 0.1 0.1

Capital Strength

Total CAR 15.8 15.5 15.3 15.3 15.4

Tier-1 CAR 12.2 12.0 12.5 12.7 13.0



Source: DBS Bank

Analyst: Sue Lin LIM

Lynette CHENG

S.No.S.No.S.No.S.No.Date of Date of Date of Date of

ReportReportReportReport

Closing Closing Closing Closing

PricePricePricePrice

12-mth 12-mth 12-mth 12-mth

Target Target Target Target


Rat ing Rat ing Rat ing Rat ing

1: 10 Dec 15 18.24 21.95 BUY

2: 22 Jan 16 18.20 21.95 BUY

3: 02 Feb 16 18.34 21.95 BUY

4: 04 Feb 16 18.48 21.95 BUY

5: 25 Feb 16 18.38 21.95 BUY

6: 01 Mar 16 18.52 21.95 BUY

7: 02 Mar 16 18.64 21.95 BUY

8: 24 Mar 16 18.78 21.95 BUY

9: 04 Apr 16 18.84 21.95 BUY

10: 20 Apr 16 19.02 21.95 BUY

11: 03 May 16 18.56 21.95 BUY

12: 04 May 16 18.92 21.95 BUY

13: 02 Jun 16 19.04 21.95 BUY

14: 03 Jun 16 19.12 21.95 BUY

Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 04 Jul 16 19.38 21.95 BUY

16: 12 Jul 16 19.36 21.95 BUY

17: 14 Jul 16 19.44 21.95 BUY

18: 29 Jul 16 19.50 21.80 BUY

19: 01 Aug 16 19.68 21.80 BUY

20: 05 Aug 16 19.60 21.80 BUY

21: 02 Sep 16 19.90 21.80 BUY

22: 05 Sep 16 19.84 22.60 BUY

23: 06 Oct 16 19.96 22.60 BUY

24: 21 Oct 16 19.80 22.60 BUY

25: 24 Oct 16 19.82 22.60 BUY

26: 31 Oct 16 19.86 22.60 BUY

1

2

3

4

5

67

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

16.92

17.42

17.92

18.42

18.92

19.42

19.92

20.42

20.92

Nov-15 Mar-16 Jul-16 Nov-16

RMRMRMRM

Lowest NPL ratio among peers

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: BC, PY

BUYBUYBUYBUY Last Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: RM13.08 (KLCIKLCIKLCIKLCI : : : : 1,648.08) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth :::: RM15.00 (15% upside) (Prev RM15.00) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Improved earnings traction

Where we differ:Where we differ:Where we differ:Where we differ: We are more bullish on non-interest income growth as

we expect HLB’s wealth management contribution to gain traction

Analyst Sue Lin LIM +65 8332 6843 [email protected] Lynette CHENG +60 32604 3907 [email protected]

What’s New • 4QFY16 earnings surged on stronger non-interest

income and write-backs; ex-MSS, FY16 net profit was largely in line

• Ensuring asset quality and liquidity preservation; loan growth expected to be in line with industry

• Strategic initiatives focused on digital capabilities

• Maintain BUY, TP raised to RM15.00 as we shift our valuation base to CY17

Price Relative

Forecasts and Valuation FY FY FY FY JunJunJunJun ((((RMRMRMRMmmmm) ) ) ) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Pre-prov. Profit 2,263 2,511 2,807 3,149 Net Profit 1,903 2,257 2,494 2,769 Net Pft (Pre Ex.) 2,034 2,257 2,494 2,769 Net Pft Gth (Pre-ex) (%) (6.7) 10.6 10.5 11.1 EPS (sen) 87.8 104 115 128 EPS Pre Ex. (sen) 94.1 104 115 128 EPS Gth Pre Ex (%) (10) 11 11 11 Diluted EPS (sen) 87.8 104 115 128 PE Pre Ex. (X) 13.9 12.6 11.4 10.2 Net DPS (sen) 41.0 38.4 39.8 42.2 Div Yield (%) 3.1 2.9 3.0 3.2 ROAE Pre Ex. (%) 10.0 10.3 10.7 11.0 ROAE (%) 10.0 10.3 10.7 11.0 ROA (%) 1.0 1.2 1.2 1.3 BV Per Share (sen) 974 1,040 1,115 1,201 P/Book Value (x) 1.3 1.3 1.2 1.1 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 NA Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 103 110 116


Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Backed by solid fundamentals

NNNNormaliseormaliseormaliseormalisedddd FY17FY17FY17FY17 backed by solid fundamentalsbacked by solid fundamentalsbacked by solid fundamentalsbacked by solid fundamentals; BUY.; BUY.; BUY.; BUY. Hong Leong Bank’s (HLB) banking franchise remains undervalued in our view. We believe the market is not attributing sufficient premium to its key attributes of solid asset quality indicators and strong liquidity position. In this current uncertain environment, balancing liquidity versus profitability will be crucial. We expect HLB to grow cautiously in the current operating environment, ensuring asset quality and liquidity preservation while delivering decent earnings growth and ROEs. Bank of Chengdu (BOCD), its 20% associate remains a wildcard. 4Q16 earnings surged on 4Q16 earnings surged on 4Q16 earnings surged on 4Q16 earnings surged on stronger revenues and writestronger revenues and writestronger revenues and writestronger revenues and write----backsbacksbacksbacks;;;; FY16 earnings saw several distortionsFY16 earnings saw several distortionsFY16 earnings saw several distortionsFY16 earnings saw several distortions. . . . As expected, 4QFY16 (FYE June) earnings improved sequentially led by non-interest income with write-backs as a bonus. Expenses were well contained. Topline growth benefited from improved net interest margin (NIM) as asset yields were lifted despite funding cost pressures. Contribution from BOCD was a tad lower q-o-q. On a full year basis, HLB’s FY16 numbers were distorted by (1) Mutual Separation Scheme (MSS) costs booked in 2Q16, (2) larger equity base from its rights issue (completed in Dec 2015), and (3) lower contribution from BOCD. Cautious outlookCautious outlookCautious outlookCautious outlook for FY17Ffor FY17Ffor FY17Ffor FY17F. . . . FY17F targets appear to skew towards a cautious mode with loan growth at 5-6%. Deposits would likely grow at the same pace. HLB aims to keep NIM stable by managing its liability mix. Non-interest income to total income ratio is targeted at above 25%, driven by transactions and customer flows. Cost savings from the MSS will be reinvested to enhance digital capabilities. Digital banking initiatives are expected to drive transaction banking volumes higher over time. Cost-to-income ratio is targeted to be below 46%. Guidance is for credit costs excluding recoveries to normalise at 25-35bps; there are still some recoveries that could be expected but chunky ones are largely done. BOCD is expected stabilise. Post rights and with slower growth expected, ROE is targeted at 10-11%. Valuation: HLB is a BUY, with a target HLB is a BUY, with a target HLB is a BUY, with a target HLB is a BUY, with a target price of RMprice of RMprice of RMprice of RM15.0015.0015.0015.00. . . . The higher TP is a result of the shift in our valuation base to CY17 despite some minor tweaks to our forecast to reflect a cautious outlook. Our TP is derived using the Gordon Growth Model and assumes 11% ROE, 9% cost of equity and 4% long- term growth rate; it implies 1.4x CY17 BV. Key Risks to Our View: SlowerSlowerSlowerSlower----thanthanthanthan----expected materialisation of growth plans.expected materialisation of growth plans.expected materialisation of growth plans.expected materialisation of growth plans. Inability to deliver growth plans for wealth management and excessive NIM compression could limit earnings growth. At A Glance Issued Capital (m shrs) 2,052

Mkt. Cap (RMm/US$m) 26,842 / 6,396


Hong Leong Financial Group (%) 64.4 EPF (%) 14.0 Free Float (%) 21.6


ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks


4 Nov 2016


Hong Leong Bank Version | Bloomberg: HLBK MK | Reuters: HLBB.KL Refer to important disclosures at the end of this report

74

94

114

134

154

174

194

214

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

15.0

15.5

16.0


Relative IndexRM

Hong Leong Bank (LHS) Relative KLCI (RHS)


Company Guide

Hong Leong Bank

WHAT’S NEW

Core earnings within expectations

HighightsHighightsHighightsHighights: : : :

4Q16 earnings surged.4Q16 earnings surged.4Q16 earnings surged.4Q16 earnings surged. As expected, 4Q16 net profit improved

sequentially. NIM improved as loans were re-priced after a

10bps hike in Base Rate (BR) and Base Lending Rate (BLR) in

April 2016. Funding costs however negated some of the

increase. Deposit growth of 6% y-o-y was driven by fixed

deposits. Retail deposits comprise 55% of total deposits, the

highest mix vs peers. Loans grew 2% q-o-q and 6% y-o-y

driven by mortgages and SMEs. Hire-purchase loans grew

marginally while unsecured loans (credit cards and personal

loans) were flattish. Non-interest income rose on higher forex

gains; these were largely from customer flows for hedging

activities. Cost-to-income for the quarter dipped a little thanks

to stronger revenues. The strong pre-provision profits were

further exacerbated by writebacks for the quarter but net

profit was partially negated by a slightly lower contribution

from BOCD.

FY16 distorted by several oneFY16 distorted by several oneFY16 distorted by several oneFY16 distorted by several one----offs.offs.offs.offs. FY16 net profit was 6%

lower y-o-y, excluding the RM172m one-off MSS costs, was in

line. Topline growth was softer due to NIM pressure y-o-y as

funding costs mounted. Non-interest income saw broad base

improvements with a surge in fee income from wealth

management (bancassurance driven) and credit card fees as

well as forex and higher investment income. Excluding the

MSS, cost-to-income ratio was 46%. Provisions normalised as

recoveries tapered off. Credit cost excluding recoveries was at

22bps. Its associate, BOCD, contributed 14% to pre-tax profit,

lower than previous years, as it was dampened mainly by

higher provisions and NIM pressure following rate cuts in

China. Its NPL ratio hit a high of 2.5% for FY16 while its loan

loss coverage ratio was still elevated at 159%.

Asset quality remains sound.Asset quality remains sound.Asset quality remains sound.Asset quality remains sound. Positively, NPL ratios were lower

at 0.8% with absolute NPLs only rising by 1% y-o-y. NPL ratios

in its core segments were stable: NPL ratios for mortgages

were at 0.45%, hire-purchase at 0.79% and SME at 1.42%

respectively. Loan loss coverage ratio stood at 120%, albeit

lower than a year ago, remains among the highest vs peers.

Concerns on commodities and oil & gas sectors should be

minimal with only 4% exposure to commodities and less than

1% to the oil & gas sector. HLB’s asset quality appears well

under control and is unlikely to experience blips.

Capital ratios reCapital ratios reCapital ratios reCapital ratios remained robust.mained robust.mained robust.mained robust. HLB’s capital ratios remained

robust with CET1 (fully loaded), Tier-1 and Total CAR at

11.7%, 13.1% and 14.7% respectively. Note that the rights

issue was completed in Dec 2015. HLB declared a final DPS of

26sen, bringing full year DPS to 41sen, equivalent to a 47%

payout ratio.

OutlookOutlookOutlookOutlook: : : :

CCCCautious mood for FY17F.autious mood for FY17F.autious mood for FY17F.autious mood for FY17F. FY17F targets appear to skew

towards a cautious mode with loan growth targeted at 5-6%.

Deposits would likely grow at the same pace. HLB aims to keep

NIM stable by managing its liability mix. Non-interest income

to total income ratio is targeted at above 25% driven by

transactions and customer flows. Cost savings from the MSS

will be reinvested to enhance digital capabilities. Digital

banking initiatives are expected to drive transaction banking

volumes higher over time. Cost-to-income ratio is targeted to

be below 46%. Credit costs excluding recoveries are guided to

normalise at 25-35bps; there are still some recoveries that

could be expected but chunky ones are largely done. Post

rights and with slower growth expected, ROE is targeted at 10-

11%.

Trim earTrim earTrim earTrim earnings by 3nings by 3nings by 3nings by 3----4% across FY174% across FY174% across FY174% across FY17----18F18F18F18F.... With more clarity on

HLB’s targets for FY17, we have adjusted our assumptions

accordingly. Both loan and deposit growth assumption now

stands at 6% for FY17-18F and 8% for FY19F. This should

keep loan-to-deposit ratio at c.80%. Our credit cost

assumption for FY17-19F is 9/12/14bps.

BOCD should stabilize but remains a wildcard. BOCD should stabilize but remains a wildcard. BOCD should stabilize but remains a wildcard. BOCD should stabilize but remains a wildcard. After a weak

showing in FY16, BOCD is expected to see a peak of its NPL

issues by 1QFY17 with NPLs stabilising in the recent quarters.

BOCD’s earnings have improved compared to trends booked

six months ago. With such stable trends in the past two

quarters, BOCD should continue to contribute at least 15% of

pre-tax profit in FY17F. This, however, remains a wildcard.

Digital banking, a strategic direction Digital banking, a strategic direction Digital banking, a strategic direction Digital banking, a strategic direction forward.forward.forward.forward. HLB’s new CEO,

Mr Domenic Fuda, identified digital banking as its key strategic

initiative to drive the bank forward. It is not a matter of how

much digital banking will be able to contribute to the bank’s

earnings but more of the stance where if nothing is done, the

bank will stand to lose traction amid the fintech boom. Over

time, digital banking transaction volumes are expected to rise

and potential cross selling opportunities would further

enhance its capabilities to deliver growth.

ValuationValuationValuationValuation::::

Maintain BUY, TP raised to Maintain BUY, TP raised to Maintain BUY, TP raised to Maintain BUY, TP raised to RM15.00RM15.00RM15.00RM15.00.... HLB’s banking franchise

remains undervalued in our view. We believe market is not

attributing sufficient premium to its key attributes of solid asset

quality indicators and strong liquidity position. We have shifted

our valuation base to CY17. Our TP of RM15.00 is based on

the Gordon Growth Model and implies 1.4x CY17 BV. Our TP

assumes 11% ROE, 9% cost of equity and 4% long- term

growth rate.


Company Guide

Hong Leong Bank


FY FY FY FY JunJunJunJun 4Q4Q4Q4Q2015201520152015 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq FY15FY15FY15FY15 FY16FY16FY16FY16 % chg yoy % chg yoy % chg yoy % chg yoy

Net Interest Income 657 654 663 0.9 1.3 2,741 2,655 (3.1)

Islamic Income 105 114 121 15.6 15.6 420 468 11.4

Non-Interest Income 279 234 295 5.7 26.1 906 1,055 16.5

Operating IncomeOperating IncomeOperating IncomeOperating Income 1,0411,0411,0411,041 1,0021,0021,0021,002 1,0791,0791,0791,079 3.73.73.73.7 7.67.67.67.6 4,064,064,064,067777 4,174,174,174,178888 2.72.72.72.7

Operating Expenses (471) (472) (494) 4.9 4.6 (1,769) (1,914.8) 8.3

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 570570570570 530530530530 585585585585 2.72.72.72.7 10.310.310.310.3 2,2982,2982,2982,298 2,2632,2632,2632,263 (1.5)(1.5)(1.5)(1.5)

Provisions (13.7) (17.7) 54.1 nm nm 75 (43) nm

Associates 116 94.2 85.3 (26.6) (9.4) 418 333 (20.2)

Exceptionals 0.0 0.0 0.0 nm nm (45) (172) 282.2

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 673673673673 607607607607 724724724724 7.77.77.77.7 19.419.419.419.4 2,746.2,746.2,746.2,746. 2,382,382,382,382222 (13.3)(13.3)(13.3)(13.3)

Taxation (57.7) (109) (166) 187.7 52.4 (513) (478) (6.8)

Minority Interests 0.0 0.0 0.0 nm nm - - nm

Net Net Net Net ProfitProfitProfitProfit 615615615615 498498498498 559559559559 (9.2)(9.2)(9.2)(9.2) 12.212.212.212.2 2,2332,2332,2332,233 1,9031,9031,9031,903 (14.8)(14.8)(14.8)(14.8)

Net Profit (exNet Profit (exNet Profit (exNet Profit (ex----oneoneoneone----offs)offs)offs)offs) 579579579579 498498498498 559559559559 (3.5)(3.5)(3.5)(3.5) 12.212.212.212.2 2,1562,1562,1562,156 2,0342,0342,0342,034 (5.6)(5.6)(5.6)(5.6)

Growth (%)

Net Interest Income Gth 0.0 (3.5) 1.3 3.0 (3.1)

Net Profit Gth 18.4 44.7 12.2 6.2 (14.8)

Key ratio (%)

NIM 1.94 1.91 1.95 1.94 1.86

NPL ratio 0.8 0.8 0.8 0.8 0.8

Loan-to deposit 79.9 80.5 80.4 79.9 80.4

Cost-to-income 45.3 47.1 45.8 44.6 49.9

Total CAR 14.3 15.7 14.7 14.3 14.7

Source of all data: Company, DBS Bank


Company Guide

Hong Leong Bank


Earnings Drivers:

NIM compression largely unavoidable.NIM compression largely unavoidable.NIM compression largely unavoidable.NIM compression largely unavoidable. Although we expect

funding cost pressures, we believe HLB’s active treasury

functions would strive to keep NIM as stable as possible. CASA,

as a low-cost funding source, should help to alleviate NIM

compression as well. HLB’s CASA-to-total deposits ratio

currently stands at 26% of total deposits and it intends to build

up this portfolio to 28-30% over the next 3-5 years.

Room to scale up loan growth; loanRoom to scale up loan growth; loanRoom to scale up loan growth; loanRoom to scale up loan growth; loan----totototo----deposit ratio is still deposit ratio is still deposit ratio is still deposit ratio is still

among the lowestamong the lowestamong the lowestamong the lowest. HLB’s loan growth is driven by mortgage

and SME loans. We are assuming 6% loan growth in our

forecasts, while deposit should track loan growth. With a loan-

to-deposit ratio still among the lowest in the industry, HLB

would have room to further leverage its asset-liability mix to

accelerate loan growth and optimise NIM. We expect its loan-

to-deposit ratio to hover around 80%.

Wealth management a crucial new driver.Wealth management a crucial new driver.Wealth management a crucial new driver.Wealth management a crucial new driver. Recurring fee income

(loan-related and credit card fees) remains HLB’s key non-

interest income driver. However, it is also building up income

from wealth management. HLB has established a regional

wealth management and private banking platform in Singapore.

Wealth management is expected to be HLB’s new growth driver

as it gradually gains prominence.

Addressing efficiency issues.Addressing efficiency issues.Addressing efficiency issues.Addressing efficiency issues. From a business-as-usual (BAU)

perspective, costs should remain nimble, and cost-to-income

ratio should hover below 45%. HLB announced a Mutual

Separation Scheme (MSS) on 20 Oct which resulted in an

acceptance rate of 12.5%. The MSS cost incurred was RM172m

while savings are expected to be RM109m per annum from as

early as Jan 16. Cost savings are likely to be used for

investments in the bank’s digitisation agenda

Bank of Chengdu contribution should stabilize, but remains a Bank of Chengdu contribution should stabilize, but remains a Bank of Chengdu contribution should stabilize, but remains a Bank of Chengdu contribution should stabilize, but remains a

wildcardwildcardwildcardwildcard.... After a weak showing in FY16, BOCD is expected to

see a peak of its NPL issues by 1QFY17 with NPLs stabilising in

the recent quarters. Our forecast assumes contribution from

BOCD to drop to hover around 15% of pre-tax profit in FY17-

19F. This, however, remains a wildcard.

Margin Trends

Gross Loan& Growth

Customer Deposit & Growth

Loan-to-Deposit Ratio Trend

Cost & Income Structure


1.8%

1.8%

1.9%

1.9%

2.0%

2.0%

2.1%

2.1%

0

500

1,000

1,500

2,000

2,500

3,000

2015A 2016A 2017F 2018F 2019F

RM m

Net Interest Income Net Interest Income Margin

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2015A 2016A 2017F 2018F 2019F

RM m

Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2015A 2016A 2017F 2018F 2019F

RM m

Customer Deposits (LHS)

Customer Deposits Growth (%) (YoY) (RHS)

71%

73%

75%

77%

79%

81%

83%

85%

87%

89%

100,912

120,912

140,912

160,912

180,912

200,912

2015A 2016A 2017F 2018F 2019F

RM bn

Loans Deposit Loan-to-Deposit Ratio (RHS)

36.0%

37.0%

38.0%

39.0%

40.0%

41.0%

42.0%

43.0%

44.0%

45.0%

46.0%

47.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

2015A 2016A 2017F 2018F 2019F

Net Interest Income Non-interest Income

Islamic Banking Income Cost-to-income Ratio


Company Guide

Hong Leong Bank

Balance Sheet:

Superior asset quality.Superior asset quality.Superior asset quality.Superior asset quality. At <1%, HLB’s NPL ratio is second only to

Public Bank (PBK). Similar to PBK, HLB also boasts a prudent

credit culture. We expect HLB to continue recording resilient

asset quality indicators. Normalised credit cost is expected to

hover around 25bps, excluding recoveries.

Stronger capital ratios post rights.Stronger capital ratios post rights.Stronger capital ratios post rights.Stronger capital ratios post rights. Post-rights, capital ratios are

now stronger, comfortably above the minimum required CET1

of 9.5% (inclusive of conservation and countercyclical buffers)

by 2019 as per Basel III requirements. Any capital overhang

should be removed with this rights issue. HLB does not have a

dividend reinvestment plan in place, but we expect at least 35%

payout for FY17F.


Charting the next course.Charting the next course.Charting the next course.Charting the next course. HLB is currently trading just below -

1SD of its 10-year P/BV mean. We believe that the current

valuation has unfairly priced this strong banking franchise with

solid asset quality and liquidity indicators. In addition, the stock

provides a decent dividend yield of 3-4%.

Book value growth has been underappreciated.Book value growth has been underappreciated.Book value growth has been underappreciated.Book value growth has been underappreciated. HLB has been

consistently seeing its book value and earnings grow at c.10%

p.a., save for the year when it raised capital to acquire EON

Capital and the recent rights issue. This however, has not been

reflected in its share price performance. Furthermore, we

believe HLB's resilient earnings, with wealth management and

SME business as key drivers, coupled with strong liquidity

indicators and asset quality parameters, should act as a catalyst

for the stock.

Key Risks:

SlowerSlowerSlowerSlower----thanthanthanthan----expected materialisation of plans.expected materialisation of plans.expected materialisation of plans.expected materialisation of plans. Inability to

deliver growth plans for wealth management and slowdown in

regional operations. While loan-to-deposit ratio is at 80%,

which is the lowest among peers, slower-than-expected loan

growth and excessive NIM compression could limit earnings

growth.

Company Background

Hong Leong Bank Berhad provides commercial banking and

related financial services. The company's services include

leasing and hire purchase, nominee, Islamic banking, and unit

trust management.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)


-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

2015A 2016A 2017F 2018F 2019F

NPL Ratio Provision Charge-Off Rate

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

2015A 2016A 2017F 2018F 2019F

Tier-1 CAR Total CAR

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2015A 2016A 2017F 2018F 2019F

Avg: 13.5x

+1sd: 14.1x

+2sd: 14.8x

-1sd: 12.8x

-2sd: 12.2x

10.7

11.7

12.7

13.7

14.7

15.7

16.7


(x)

Avg: 1.84x

+1sd: 2.18x

+2sd: 2.52x

-1sd: 1.51x

-2sd: 1.17x

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8


(x)


Company Guide

Hong Leong Bank

Key Assumptions

FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Gross Loans Growth 8.9 6.3 6.0 6.0 8.0

Customer Deposits Growth 7.7 5.9 6.0 6.0 8.0

Yld. On Earnings Assets 3.7 3.8 3.6 3.6 3.6

Avg Cost Of Funds 2.2 2.2 2.2 2.2 2.2




Islamic Income 420 467 514 555 600

Non-Interest Income 906 1,055 1,214 1,359 1,522


Operating Expenses (1,859) (1,915) (1,972) (2,031) (2,092)

PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 2,2082,2082,2082,208 2,2632,2632,2632,263 2,5112,5112,5112,511 2,8072,8072,8072,807 3,1493,1493,1493,149

Provisions 75.4 (42.8) (114) (158) (207)

Associates 418 333 423 468 519

Exceptionals 45.0 (172) 0.0 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 2,7462,7462,7462,746 2,3822,3822,3822,382 2,8212,8212,8212,821 3,1173,1173,1173,117 3,4623,4623,4623,462

Taxation (513) (478) (564) (623) (692)

Minority Interests 0.0 0.0 0.0 0.0 0.0



Net Profit bef Except 2,156 2,034 2,257 2,494 2,769

Growth (%)

Net Interest Income Gth 3.0 (3.1) 3.8 6.1 6.7

Net Profit Gth 6.2 (14.8) 18.6 10.5 11.1

Margins, Costs & Efficiency (%)

Spread 1.6 1.5 1.5 1.5 1.5

Net Interest Margin 1.9 1.9 1.9 1.9 1.9

Cost-to-Income Ratio 45.7 45.8 44.0 42.0 39.9

Business Mix (%)

Net Int. Inc / Opg Inc. 67.4 63.6 61.5 60.4 59.5

Non-Int. Inc / Opg inc. 22.3 25.3 27.1 28.1 29.0

Fee Inc / Opg Income 14.8 14.8 15.8 16.4 17.0

Oth Non-Int Inc/Opg Inc 7.5 10.5 11.2 11.7 12.1

Profitability (%)

ROAE Pre Ex. 14.3 10.0 10.3 10.7 11.0

ROAE 14.3 10.0 10.3 10.7 11.0

ROA Pre Ex. 1.2 1.1 1.2 1.2 1.3

ROA 1.3 1.0 1.2 1.2 1.3


FY16 earnings dragged by one-off MSS cost


Company Guide

Hong Leong Bank


FY FY FY FY JunJunJunJun 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016

Net Interest Income 657 660 678 654 663

Islamic Income 105 115 118 114 121

Non-Interest Income 279 249 278 234 295


Operating Expenses (471) (463) (486) (472) (494)

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 570570570570 561561561561 587587587587 530530530530 585585585585

Provisions (13.7) (21.1) (58.0) (17.7) 54.1

Associates 116 85.5 68.5 94.2 85.3

Exceptionals 0.0 0.0 (172) 0.0 0.0

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 673673673673 625625625625 426426426426 607607607607 724724724724

Taxation (57.7) (122) (81.7) (109) (166)


Net ProfitNet ProfitNet ProfitNet Profit 615615615615 503503503503 344344344344 498498498498 559559559559

Growth (%)

Net Interest Income Gth 0.0 0.4 2.7 (3.5) 1.3

Net Profit Gth 18.4 (18.2) (31.6) 44.7 12.2

Balance Sheet (RMm)


Cash/Bank Balance 6,230 7,474 8,857 9,732 11,299

Government Securities 3,476 4,296 3,853 4,079 4,396

Inter Bank Assets 3,982 2,057 2,160 2,268 2,382

Total Net Loans & Advs. 112,125 119,457 126,451 133,885 144,513

Investment 42,421 41,712 43,797 45,987 48,287

Associates 3,107 3,323 3,746 4,213 4,733

Fixed Assets 679 1,382 1,410 1,438 1,467

Goodwill 2,149 2,096 2,096 2,096 2,096

Other Assets 9,852 8,030 8,190 8,354 8,521


Customer Deposits 140,276 148,524 157,435 166,881 180,232

Inter Bank Deposits 7,096 6,201 6,511 6,837 7,179

Debts/Borrowings 8,847 4,523 4,523 4,523 4,523

Others 11,010 9,463 9,550 9,640 9,732

Minorities 0.0 0.0 0.0 0.0 0.0

Shareholders' Funds 16,790 21,117 22,541 24,172 26,027

Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 184,020184,020184,020184,020 189,828189,828189,828189,828 200,561200,561200,561200,561 212,053212,053212,053212,053 227,693227,693227,693227,693


Earnings led by strong non-interest income and higher writebacks


Company Guide

Hong Leong Bank

Financial Stability Measures (%)


Balance Sheet Structure

Loan-to-Deposit Ratio 79.9 80.4 80.3 80.2 80.2

Net Loans / Total Assets 60.9 62.9 63.0 63.1 63.5

Investment / Total Assets 23.1 22.0 21.8 21.7 21.2

Cust . Dep./Int. Bear. Liab. 89.8 93.3 93.5 93.6 93.9

Interbank Dep / Int. Bear. 4.5 3.9 3.9 3.8 3.7

Asset Quality

NPL / Total Gross Loans 0.8 0.8 0.8 0.8 0.7

NPL / Total Assets 0.5 0.5 0.5 0.5 0.4

Loan Loss Reserve Coverage 136.3 119.8 135.8 150.0 179.5

Provision Charge-Off Rate (0.1) 0.0 0.1 0.1 0.1

Capital Strength

Total CAR 14.7 15.1 15.3 16.1 16.6

Tier-1 CAR 12.3 13.6 13.8 14.7 15.4



Source: DBS Bank

Analyst: Sue Lin LIM

Lynette CHENG









1: 18 Nov 15 13.14 15.66 BUY

2: 10 Dec 15 13.20 14.80 BUY

3: 15 Dec 15 13.40 14.80 BUY

4: 14 Jan 16 13.04 14.80 BUY

5: 22 Jan 16 12.90 14.80 BUY

6: 02 Feb 16 13.36 14.80 BUY

7: 24 Feb 16 13.12 14.70 BUY

8: 01 Mar 16 13.10 14.70 BUY

9: 02 Mar 16 13.16 14.70 BUY

10: 24 Mar 16 13.32 14.70 BUY

11: 04 Apr 16 13.62 14.70 BUY

12: 03 May 16 13.20 14.70 BUY

13: 04 May 16 13.40 14.70 BUY

14: 25 May 16 13.40 14.70 BUY

Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 02 Jun 16 13.16 14.70 BUY

16: 03 Jun 16 13.16 14.70 BUY

17: 12 Jul 16 13.24 14.70 BUY

18: 14 Jul 16 13.26 14.70 BUY

19: 01 Aug 16 13.22 14.70 BUY

20: 05 Aug 16 13.06 14.70 BUY

21: 30 Aug 16 13.08 15.00 BUY

22: 02 Sep 16 13.10 15.00 BUY

23: 05 Sep 16 13.10 15.00 BUY

24: 06 Oct 16 13.10 15.00 BUY

25: 10 Oct 16 13.16 15.00 BUY

26: 21 Oct 16 13.28 15.00 BUY

27: 24 Oct 16 13.30 15.00 BUY

28: 31 Oct 16 13.32 15.00 BUY

1

23 4

5

6

7

89

10111213

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

12.06

12.56

13.06

13.56

14.06


RMRMRMRM

Low loan-to-deposit ratio



Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Sale of Splash, higher margin wins

Where we differ:Where we differ:Where we differ:Where we differ: We are below consenus likely due to timing of

earnings recognition for MRT Line 2 Analyst Chong Tjen-San,CFA +60 3 26043972 [email protected]

Price Relative

Forecasts and Valuation FY FY FY FY JulJulJulJul ((((RMRMRMRMmmmm) ) ) ) 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF

Revenue 2,400 2,122 4,498 5,784 EBITDA 590 470 641 702 Pre-tax Profit 858 781 917 977 Net Profit 682 626 691 739 Net Pft (Pre Ex.) 682 626 691 739 Net Pft Gth (Pre-ex) (%) (5.2) (8.2) 10.3 6.9 EPS (sen) 28.4 22.3 24.6 26.3 EPS Pre Ex. (sen) 28.4 22.3 24.6 26.3 EPS Gth Pre Ex (%) (8) (21) 10 7 Diluted EPS (sen) 28.4 22.3 24.6 26.3 Net DPS (sen) 8.88 8.88 8.88 8.88 BV Per Share (sen) 263 245 262 281 PE (X) 17.1 21.7 19.7 18.4 PE Pre Ex. (X) 17.1 21.7 19.7 18.4 P/Cash Flow (X) 19.3 129.2 62.6 56.1 EV/EBITDA (X) 24.9 36.8 27.0 24.8 Net Div Yield (%) 1.8 1.8 1.8 1.8 P/Book Value (X) 1.8 2.0 1.8 1.7 Net Debt/Equity (X) 0.4 0.5 0.4 0.4 ROAE (%) 11.6 9.5 9.7 9.7 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sen):::: N/A 28.6 31.9

Other Broker Other Broker Other Broker Other Broker Recs:Recs:Recs:Recs: B: 18 S: 2 H: 4

Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P....

Best transportation proxy

Best proxy to transportation infrastructureBest proxy to transportation infrastructureBest proxy to transportation infrastructureBest proxy to transportation infrastructure Gamuda is our top large cap pick in the sector, as it is the best proxy to a slew of upcoming transportation-related projects. Its strong reputation for MRT Line 1 and PDP appointment for Penang Transport Master Plan (PTMP) provide it with leverage for other large-multiplier projects such as LRT 3, Gemas-JB double tracking, Pan Borneo Highway and High Speed Rail. Large multiLarge multiLarge multiLarge multi----year projects ensure strong earnings visibilityyear projects ensure strong earnings visibilityyear projects ensure strong earnings visibilityyear projects ensure strong earnings visibility Gamuda’s outstanding orderbook now stands at RM9bn which does not include the PDP fees for MRT Line 2 aboveground works. The final contract value for the whole project will only be known once all the packages are awarded which will likely be about RM30bn. Gamuda is also vying for other large-scale projects such as Pan Borneo Highway Sabah, LRT 3 and Gemas-JB double tracking, and is confident of adding another RM3-4bn of new orders in the next 12 months. This will bring its orderbook to a new high and ensure strong earnings visibility from FY17F onwards. Swapping oneSwapping oneSwapping oneSwapping one----off dividend for longoff dividend for longoff dividend for longoff dividend for long----term growthterm growthterm growthterm growth There are expectations for the Splash deal to be concluded in 2016 at close to the book value of RM2.8bn. We do not expect special dividends as the proceeds will likely be used for the Penang Transport Master Plan project; this will be positive as Gamuda could secure long-term construction earnings and a firm footing in Penang’s property market. Valuation:

We maintain our BUY rating and SOP-derived TP of RM5.80.

We have accounted for the dilution of warrants and a

corresponding increase in cash raised from the full conversion

of warrants while also assuming some marginal wins outside

of MRT 2.


High raw material price. The tunnelling portion of MRT Line 2

is its largest project and is susceptible to fluctuations of raw

material prices, particularly for steel. Nonetheless, we think this

is partly mitigated by the higher contract value on a per km

basis. At A Glance Issued Capital (m shrs) 2,422

Mkt. Cap (RMm/US$m) 11,724 / 2,794


EPF 9.8

KWAP 6.8

Free Float (%) 78.8


ICB ICB ICB ICB IndustryIndustryIndustryIndustry : Industrials / Construction & Materials


4 Nov 2016


Gamuda Version | Bloomberg: GAM MK | Reuters: GAMU.KL Refer to important disclosures at the end of this report

89

109

129

149

169

189

209

3.2

3.7

4.2

4.7

5.2

5.7


Relative IndexRM

Gamuda (LHS) Relative KLCI (RHS)


Company Guide

Gamuda


Earnings Drivers:

On track for next earnings upcycleOn track for next earnings upcycleOn track for next earnings upcycleOn track for next earnings upcycle. After the 8% decline in

FY16 earnings, we think Gamuda is on track for the next

earnings upcycle with its strong high-margin orderbook of

RM9bn. We think this is a key price catalyst. Drawing parallels

to FY13 where it delivered 19% growth in net profit driven by

maiden contributions from MRT Line 1, we think MRT Line 2

earnings contribution from FY17F onwards will be a key share

price driver. It is also confident of clinching another RM3-4bn

worth of new orders in the next 12 months.

MRT Line 2 to contribute in FY17.MRT Line 2 to contribute in FY17.MRT Line 2 to contribute in FY17.MRT Line 2 to contribute in FY17. There is low risk of the

project being delayed or shelved because it is deemed a high-

multiplier and top priority ETP project. The PDP fee remains at

6%, similar to MRT Line 1. The only difference is MRT Co. has

introduced three additional KPIs (safety, quality and public

response) which will constitute half a percentage point out of

the 6%. The MMC-Gamuda JV has returned as the tunnelling

contractor with a total contract value of RM15.47bn or

RM7.7bn per contractor. A few viaduct packages for the

aboveground works have been awarded and all should be

awarded by mid-2017. Sale of Splash.Sale of Splash.Sale of Splash.Sale of Splash. The sale of Splash remains the biggest overhang

for Gamuda. It remains optimistic about concluding the deal by

end-2016 with pricing likely at a book value of about RM2.8bn.

Given that it is actively pursuing the Penang Integrated

Transport System project which requires higher upfront capex,

there may not be special dividends from the sale. Awaiting approvals for Penang Transport Master Plan (PTMP).Awaiting approvals for Penang Transport Master Plan (PTMP).Awaiting approvals for Penang Transport Master Plan (PTMP).Awaiting approvals for Penang Transport Master Plan (PTMP).

Gamuda has received a Letter of Award (LOA) – via SRS

Consortium – from the Penang State Government to be the PDP

for the Roads and Public Transport Projects in Penang (Penang

Transport Master Plan Strategy 2013-2030). The key hurdle for

this project is obtaining the federal government’s approval for

land reclamation and for the LRT. Gamuda is hoping to have

two bites of the cherry – PDP, and also as turnkey contractor for

some key components – but these are uncertain at this stage.

The two main components of the project are LRT from George

Town to Bayan Lepas and the Pan Island Link highway. The

railway scheme has been submitted to SPAD while the

environmental and social impact assessment studies are

ongoing. In our view, this project will only take off post the next

general elections. Property sales driven by overseas projects.Property sales driven by overseas projects.Property sales driven by overseas projects.Property sales driven by overseas projects. Gamuda ended FY16

with strong presales of RM2.05bn (+69% y-o-y). FY17F presales

target has been set at RM2.1bn (RM0.79bn local and

RMRM1.33bn overseas) with two key launches planned –

Gamuda Gardens (March 2017) and Kundang Estates

(December 2016), both in Rawang and will have good MRT

accessibility.

Construction margins

Property launches Malaysia

Construction profit contribution

Property profit contribution

New order wins


8.7

7.6 7.4

9.5

11.8

0.0

1.7

3.4

5.1

6.8

8.5

10.2

11.9

2014A 2015A 2016A 2017F 2018F

1,700.0

950.0 900.0 850.0

1,330.0

0

347

694

1,040

1,387

1,734

2014A 2015A 2016A 2017F 2018F

32.0

24.723.4

26.9

29.5

0.0

6.5

13.0

19.6

26.1

32.6

2014A 2015A 2016A 2017F 2018F

26

29

24

27 26

0.0

6.0

11.9

17.9

23.8

29.8

2014A 2015A 2016A 2017F 2018F

7,735

1,5002,000

0

1,562

3,125

4,687

6,250

7,812

2016A 2017F 2018F


Company Guide

Gamuda

Balance Sheet:

Manageable net gearing. Net gearing remained manageable at

0.46x as at 31 July 2016, but has inched up from 0.4x as at 31

July 2015 largely due to land banking over the past two years.

More recent land bank purchases include its maiden project in

Toa Payoh, Singapore for S$345.9m (Gamuda has a 50%

share), a small parcel of freehold land in Melbourne for

AUD40m, an 18-acre land in Kota Kinabalu for RM100m, and a

257-acre parcel located just 2km from Kota Kemuning for

RM392m.

Further land banking could raise gearing.Further land banking could raise gearing.Further land banking could raise gearing.Further land banking could raise gearing. Gamuda is still

seeking to land bank further in choice locations despite the

softening property market. But it will be more selective now

given its aggressive land banking over the past year or so.


Proxy to transportationProxy to transportationProxy to transportationProxy to transportation----related projects.related projects.related projects.related projects. Besides having a strong

reputation, it also has ample capacity and the technical know-

how to bid for large upcoming transport-related projects such

as LRT 3, PTMP, Pan Borneo Sabah, Gemas-JB double tracking

and High Speed Rail. Thus far, execution for MRT Line 1 has

been smooth. It is confident of replenishing its RM9bn

ordebook by another RM3-4bn in the next one year. We have

assumed a total of RM3.5bn worth of new orders over FY17-

187F.

Resolution for SplashResolution for SplashResolution for SplashResolution for Splash. A successful resolution for Splash would

remove the overhang on the stock. Investors could welcome

potential earnings prospects from the Penang Integrated

Transport project at the expense of a one-off special dividend. We understand Splash’s book value now is close to RM3bn

which would imply Gamuda’s 40% stake is worth c.RM1.2bn. A

key event to watch out for which will facilitate the completion

of this exercise is a potential water tariff increase, making it a

stronger case to pay a higher price for Splash. Recall the last

offer was just RM250m or 10% of its BV then of RM2.5bn.

Key Risks:

Macroeconomic factors.Macroeconomic factors.Macroeconomic factors.Macroeconomic factors. Generally, an economic slowdown

could adversely affect the group because this could defer or

halt some projects, especially infrastructure projects. This could

result in slower order book replenishment.

Slowdown in property marketSlowdown in property marketSlowdown in property marketSlowdown in property market. The various tightening policies

for the Malaysian property sector could reduce the demand for

properties (i.e. residential and commercial) in the near future.

Company Background

Gamuda's core businesses focus on three segments which are

engineering & construction, infrastructure concessions, and

property development.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2014A 2015A 2016A 2017F 2018F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

2014A 2015A 2016A 2017F 2018F

Capital Expenditure (-)

RMm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2014A 2015A 2016A 2017F 2018F

Avg: 17.8x

+1sd: 20.3x

+2sd: 22.9x

-1sd: 15.2x

-2sd: 12.7x

11.4

13.4

15.4

17.4

19.4

21.4

23.4


(x)

Avg: 1.97x

+1sd: 2.12x

+2sd: 2.26x

-1sd: 1.82x

-2sd: 1.67x

1.3

1.5

1.7

1.9

2.1

2.3

2.5


(x)


Company Guide

Gamuda

Key Assumptions

FY FY FY FY JulJulJulJul 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF

Construction margins 8.70 7.60 7.41 9.54 11.8 Property launches Malaysia

1,700 950 900 850 1,330 Construction profit contribution

32.0 24.7 23.4 26.9 29.5 Property profit contribution

26.1 29.5 23.6 26.6 26.4

New order wins #,##0;(#,##0)

#,##0;(#,##0)

7,735 1,500 2,000 Segmental Breakdown

FY FY FY FY JulJulJulJul 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Revenues (RMm)

Construction 1,180 1,158 905 2,765 3,741

Property development 895 842 758 660 790

Infrastructure 154 401 459 468 477

TotalTotalTotalTotal 2,2302,2302,2302,230 2,4002,4002,4002,400 2,1222,1222,1222,122 4,4984,4984,4984,498 5,7845,7845,7845,784

Pretax profit (RMm) Construction 294 242 212 291 341

Property development 239 289 214 198 204

Infrastructure 385 450 481 503 508

Overseas property 0.0 0.0 0.0 89.6 101

Others (66.4) (124) (126) (164) (177)

TotalTotalTotalTotal 852852852852 858858858858 781781781781 917917917917 977977977977

Pretax Margins (%) Construction 24.9 20.9 23.4 10.5 9.1

Property development 26.7 34.4 28.2 30.0 25.8

Infrastructure N/A N/A N/A N/A N/A

Others N/A N/A N/A (27.1) (22.8)

TotalTotalTotalTotal 38.238.238.238.2 35.735.735.735.7 36.836.836.836.8 20.420.420.420.4 16.916.916.916.9


FY FY FY FY JulJulJulJul 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Revenue 2,230 2,400 2,122 4,498 5,784


Gross ProfitGross ProfitGross ProfitGross Profit 488488488488 580580580580 437437437437 710710710710 823823823823

Other Opng (Exp)/Inc (28.2) (10.4) 10.9 (95.7) (152)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 460460460460 570570570570 448448448448 614614614614 671671671671 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0

Associates & JV Inc 430 375 413 417 421

Net Interest (Exp)/Inc (38.0) (86.6) (79.7) (114) (115)

Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 852852852852 858858858858 781781781781 917917917917 977977977977 Tax (117) (133) (112) (183) (195)

Minority Interest (15.7) (43.3) (42.6) (42.6) (42.6)


Net ProfitNet ProfitNet ProfitNet Profit 719719719719 682682682682 626626626626 691691691691 739739739739 Net Profit before Except. 719 682 626 691 739

EBITDA 481 590 470 641 702

Growth

Revenue Gth (%) (42.6) 7.6 (11.6) 112.0 28.6

EBITDA Gth (%) 42.7 22.7 (20.4) 36.6 9.5

Opg Profit Gth (%) 47.4 23.9 (21.4) 37.1 9.3

Net Profit Gth (Pre-ex) (%) 33.0 (5.2) (8.2) 10.3 6.9

Margins & Ratio

Gross Margins (%) 21.9 24.2 20.6 15.8 14.2



ROAE (%) 13.9 11.6 9.5 9.7 9.7

ROA (%) 7.7 5.8 4.6 4.7 4.7

ROCE (%) 4.8 4.6 3.2 3.7 3.8

Div Payout Ratio (%) 28.7 31.3 39.8 36.1 33.7




Company Guide

Gamuda


FY FY FY FY JulJulJulJul 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 Revenue 623 513 527 467 614

Cost of Goods Sold (531) (428) (454) (377) (478)

Gross ProfitGross ProfitGross ProfitGross Profit 91.891.891.891.8 84.984.984.984.9 73.973.973.973.9 89.989.989.989.9 136136136136 Other Oper. (Exp)/Inc 43.0 24.2 35.6 16.8 32.4


Associates & JV Inc 99.3 114 112 109 78.3

Net Interest (Exp)/Inc (43.6) (30.2) (29.2) (29.7) (37.0)


PrePrePrePre----tax Profittax Profittax Profittax Profit 191191191191 193193193193 192192192192 186186186186 210210210210 Tax (35.5) (19.7) (22.2) (20.7) (49.4)

Minority Interest (1.3) (11.6) (9.9) (12.5) (8.6)

Net ProfitNet ProfitNet ProfitNet Profit 154154154154 161161161161 160160160160 153153153153 152152152152 Net profit bef Except. 154 161 160 153 152

EBITDA 234 223 221 215 247

Growth

Revenue Gth (%) 12.5 (17.7) 2.9 (11.4) 31.5

EBITDA Gth (%) 0.3 (4.9) (0.6) (2.7) 14.7

Opg Profit Gth (%) (8.5) (19.0) 0.4 (2.6) 58.1

Net Profit Gth (Pre-ex) (%) (4.2) 4.9 (0.7) (4.6) (0.4)

Margins

Gross Margins (%) 14.7 16.6 14.0 19.2 22.2



FY FY FY FY JulJulJulJul 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Net Fixed Assets 285 312 420 492 561

Invts in Associates & JVs 1,234 2,621 2,881 3,298 3,719

Other LT Assets 3,125 5,163 5,529 5,529 5,529

Cash & ST Invts 920 1,438 1,473 1,831 2,226

Inventory 295 186 117 135 155

Debtors 1,716 1,377 1,441 1,657 1,905

Other Current Assets 2,778 2,230 2,297 2,297 2,297


ST Debt

792 777 640 1,040 1,440

Creditor 881 1,355 1,046 1,203 1,383

Other Current Liab 126 327 413 413 413

LT Debt 1,739 3,358 4,169 4,169 4,169

Other LT Liabilities 653 815 676 676 676

Shareholder’s Equity 5,474 6,337 6,878 7,360 7,890

Minority Interests 687 356 336 379 421


Non-Cash Wkg. Capital 3,783 2,110 2,395 2,472 2,560

Net Cash/(Debt) (1,611) (2,698) (3,335) (3,377) (3,383)




Asset Turnover (x) 0.2 0.2 0.2 0.3 0.4

Current Ratio (x) 3.2 2.1 2.5 2.2 2.0

Quick Ratio (x) 1.5 1.1 1.4 1.3 1.3

Net Debt/Equity (X) 0.3 0.4 0.5 0.4 0.4


Capex to Debt (%) 0.7 0.6 2.1 1.9 1.8

Z-Score (X) 2.8 1.9 2.0 2.1 2.1



Company Guide

Gamuda


FY FY FY FY JulJulJulJul 2014201420142014AAAA 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF Pre-Tax Profit 852 858 781 917 977

Dep. & Amort. 20.9 20.2 21.6 27.2 31.0

Tax Paid (72.9) (882) (124) (183) (195)

Assoc. & JV Inc/(loss) (430) (375) (413) (417) (421)

Chg in Wkg.Cap. (712) 164 (228) (76.7) (88.2)

Other Operating CF (83.7) 818 67.3 (50.4) (61.2)

Net Operating CFNet Operating CFNet Operating CFNet Operating CF (426)(426)(426)(426) 604604604604 105105105105 217217217217 242242242242 Capital Exp.(net) (16.6) (24.3) (102) (100.0) (100.0)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 123 83.5 189 0.0 0.0

Other Investing CF 88.1 (1,473) (743) 50.4 61.2

Net Investing CFNet Investing CFNet Investing CFNet Investing CF 195195195195 (1,413)(1,413)(1,413)(1,413) (656)(656)(656)(656) (49.6)(49.6)(49.6)(49.6) (38.8)(38.8)(38.8)(38.8) Div Paid (277) (285) (289) (209) (209)

Chg in Gross Debt 354 1,561 650 400 400

Capital Issues 142 219 27.3 0.0 0.0

Other Financing CF (374) (167) 198 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF (155)(155)(155)(155) 1,3281,3281,3281,328 586586586586 191191191191 191191191191

Currency Adjustments 0.0 0.0 0.0 0.0 0.0

Chg in Cash (386) 518 35.2 358 394

Opg CFPS (sen) 12.3 18.3 11.9 10.5 11.8

Free CFPS (sen) (19.0) 24.1 0.10 4.17 5.06



Source: AllianceDBS

Analyst: Chong Tjen-San






T arget T arget T arget T arget



1: 15 Dec 15 4.38 5.60 BUY

2: 17 Dec 15 4.40 5.60 BUY

3: 02 Mar 16 4.66 5.60 BUY

4: 25 Mar 16 4.93 5.80 BUY

5: 01 Apr 16 4.85 5.80 BUY

6: 04 Apr 16 4.88 5.80 BUY

7: 04 May 16 4.75 5.80 BUY

8: 17 May 16 4.72 5.80 BUY

9: 03 Jun 16 4.86 5.80 BUY

10: 24 Jun 16 4.82 5.80 BUY

11: 30 Jun 16 4.86 5.80 BUY

12: 11 Jul 16 4.91 5.80 BUY

13: 05 Aug 16 4.85 5.80 BUY

14: 02 Sep 16 4.85 5.80 BUY

Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 29 Sep 16 4.90 5.80 BUY

16: 06 Oct 16 4.85 5.80 BUY

17: 21 Oct 16 4.93 5.80 BUY

18: 24 Oct 16 4.95 5.80 BUY

1

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3

4

5

6

7

8 9

10

11

12

13

14

15

16

17

18

4.15

4.35

4.55

4.75

4.95

5.15


RMRMRMRM

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: WMT, PY


Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Yield-accretive acquisitions, higher reversions

Where weWhere weWhere weWhere we differ:differ:differ:differ: Higher DPU accretion forecast compared to consensus Analyst Inani ROZIDIN +603 2604 3905 [email protected]

What’s New • In-line 1Q17 earnings

• Earnings boosted by improvements in the retail

segment

• Retaining our positive outlook on rising Sunway

Putra contributions, asset-enhancement work and

asset-injection opportunities

• DPU of 2.27 sen declared with ex-date of 10 Nov

Price Relative


Gross Revenue 507 562 600 626 Net Property Inc 374 428 462 484 Total Return 271 306 338 354 Distribution Inc 271 306 338 354 EPU (sen) 8.92 10.2 11.2 11.8 EPU Gth (%) (52) 14 10 5 DPU (sen) 9.19 10.2 11.2 11.8 DPU Gth (%) 5 11 10 5 NAV per shr (sen) 136 136 136 136 PE (X) 19.9 17.4 15.8 15.0 Distribution Yield (%) 5.2 5.7 6.3 6.7 P/NAV (x) 1.3 1.3 1.3 1.3 Aggregate Leverage (%) 35.5 35.7 35.9 36.2 ROAE (%) 6.5 7.5 8.2 8.6 Distn. Inc Chng (%):Distn. Inc Chng (%):Distn. Inc Chng (%):Distn. Inc Chng (%): 0 0 0 Consensus DPU Consensus DPU Consensus DPU Consensus DPU (sensensensen):::: 9.20 10.0 10.1 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 6 S: 1 H: 6

Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P.

To keep for FY17 Still positive about its prospects.Still positive about its prospects.Still positive about its prospects.Still positive about its prospects. We remain positive on Sunway REIT (SunREIT). Its DPU remains attractive in the near to medium term, following the completion of refurbishment works for Sunway Putra assets (mall, office and hotel) and full-year income contribution from Sunway Hotel Georgetown. Furthermore, we expect further earnings accretion from the asset-enhancement work done on Sunway Pyramid Hotel, slated to be completed by 2QFY17. Furthermore, SunREIT could benefit further from the continued expectations of further monetary policy easing. Asset enhancement underwayAsset enhancement underwayAsset enhancement underwayAsset enhancement underway. Management plans to embark on a refurbishment project for Sunway Pyramid Hotel which saw its occupancy rate dropping to 55% in 3QFY16 (3QFY15: 74%). The drop is mainly due to lower demand from corporates. The decline is mainly due to lower demand from corporates and the progressive closure of the hotel pre-prior to the commencement of its refurbishment plan. The project (with a budgeted capex of c.RM120m) is expected to commence progressively in April 2016 with full closure of the hotel by 4QFY16 for approximately 12 months with a budgeted capex of c.RM120m. The NPI foregone (FY15: RM18m) will be offset by the recent inclusion of assets. Visible sponsor asset pipeline.Visible sponsor asset pipeline.Visible sponsor asset pipeline.Visible sponsor asset pipeline. Sunway REIT’s sponsor and shareholder (37% stake) Sunway Bhd has a large pipeline of potential assets for injection under its “build-own-operate” model. Future injections could include Sunway University and Monash University campuses, The Pinnacle office tower, Sunway Giza mall, Sunway VeloCity mall and Sunway Pyramid Phase 3. These underpin an attractive growth pipeline for the REIT. We are optimistic about potential injections from sponsor Sunway Bhd to meet the REIT’s RM7bn asset target.

Valuation: Our DDM-derived TP rises to RM1.95, with 7% cost of equity and 1% TG, as we adjust our risk-free rate assumption from 4.0% to 3.9% to reflect the compression in MGS yield. Key Risks to Our View: Pace of acquisitions.Pace of acquisitions.Pace of acquisitions.Pace of acquisitions. Sunway REIT’s yields are on par with its larger M-REIT peers. The draw is the potential to secure steady acquisitions. On this note, any significant delay in acquisitions could hamper its share price appreciation, especially as its peers are also looking at asset growth.


Mkt. Cap (RMm/US$m) 5,213 / 1,242


Sunway Berhad 37.3

Employees Provident Fund 12.04

Skim Amanah Saham 9.88

Free Float (%) 39.7


ICB IndustryICB IndustryICB IndustryICB Industry : Real Estate / Real Estate Investment Trusts


4 Nov 2016

Company Guide

Sunway REIT Version 5 | Bloomberg: SREIT MK | Reuters: SUNW.KL Refer to important disclosures at the end of this report


Company Guide

Sunway REIT

WHAT’S NEW

Resilient earnings

• 1QFY17 net distributable income of RM72m (15% y-o-y)

was largely in line with our expectations and consensus

forecasts, taking into account contribution from Sunway

Putra Mall (SPM) and improvement in NPI for the retail

segment. NPI margins remained stable at 74.5%.

• A DPU of 2.27 sen was declared, implying a full payout.

• Management has received RM3.2m court award that is

related to Sunway Putra which will be recognised in

2QFY17 following confirmation of the legal case closure.

Resilient performance from retail segmentResilient performance from retail segmentResilient performance from retail segmentResilient performance from retail segment

• The highest contributing retail segment recorded a

1QFY17 NPI of RM71.5m (+17% y-o-y), as Sunway

Pyramid’s occupancy was steady at c.97.9% in 1QFY17

(1QFY16: 98.3%). The shift in occupancy level is due to

the introduction of two anchor tenants and reshuffling of

the mall’s existing tenant mix. We understand that retail

sales in Jan-Aug 2016 grew by 10% y-o-y. The

percentage of lease expiring in Sunway Pyramid for FY17

is 19% of total portfolio NLA. Out of which, 59.6% of the

leases expiring for the mall in FY17 were renewed in

1QFY17 at a single-digit rental reversion rate over the

three-year tenancy term.

• The percentage of lease expiring in Sunway Carnival for

FY17 is 28% of total portfolio NLA. Out of which, 60% of

the leases expiring for the mall in FY17 were renewed in

1QFY17 at a single-digit rental reversion rate over the

three-year tenancy term. The renewal has included the

anchor tenant in the mall.

• It was disclosed that SPM’s occupancy reached 85.2%

(from 83.9%), and tenants such as TGV Cinema, Padini

and Uniqlo have opened to help draw footfall. We look

forward to higher contributions as we expect occupancy

to reach c.90% by end-FY17.

• We expect SunREIT’s retail assets to maintain its

performance throughout FY17.

Hotel segment improvingHotel segment improvingHotel segment improvingHotel segment improving withwithwithwith plans for asset enhaplans for asset enhaplans for asset enhaplans for asset enhancement.ncement.ncement.ncement.

• The hospitality segment continues to progress with

1QFY17 NPI of RM15.4m registering a y-o-y decline of

22%, due to the closure of Sunway Pyramid Hotel

(formerly known as Pyramid Tower East). Sunway Pyramid

Hotel is undergoing refurbishment during the quarter,

which is expected to complete by 2QFY17. Excluding the

NPI contribution from Sunway Pyramid Hotel in 1QFY16,

overall hotel portfolio’s NPI grew by 13% y-o-y.

• Sunway Resort Hotel & Spa’s average occupancy rate rose

to 94.3% in 1QFY17 (1QFY16: 87.4%). The encouraging

occupancy was attributable to strong Middle-Eastern

tourists during the summer holiday season.

• The average occupancy rate for Sunway Putra Hotel has

also improved to 69.0% in 1QFY17 (1QFY16: 36.5%) as

the hotel was still undergoing refurbishment during the

same period last year. Post completion of refurbishment in

2QFY16, the hotel has embarked on active marketing

activities and promotional rates to regain market shares

across all segments.

Office segment strugglOffice segment strugglOffice segment strugglOffice segment struggleseseses

• The office segment remained a drag due to significant

vacancies at Sunway Tower and Sunway Putra Tower,

leading to 1QFY17 NPI of RM3.7m (- 9% y-o-y).

• We foresee the office segment facing challenges in filling

up occupancies in the current oversupplied and weak

market environment. Additionally, little headway was

made in replenishing occupancies at Sunway Tower and

Sunway Putra Tower after the departure of anchor

tenants.


Company Guide

Sunway REIT


FY FY FY FY JunJunJunJun 1Q1Q1Q1Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq

Gross revenue 121 124 129 6.3 4.3

Property expenses (31.3) (33.4) (32.8) 4.9 (1.8)

Net Property Income 89.9 90.2 96.1 6.8 6.5

Other Operating expenses (3.9) (9.2) (10.2) 157.7 10.4

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 N/A N/A


Exceptional Gain/(Loss) (4.0) 1.20 2.59 N/A N/A

Net IncomeNet IncomeNet IncomeNet Income 60.660.660.660.6 60.660.660.660.6 66.766.766.766.7 10.210.210.210.2 10.110.110.110.1

Tax 0.0 0.0 0.0 N/A N/A

Minority Interest 0.0 0.0 0.0 N/A N/A

Net Income after Tax Net Income after Tax Net Income after Tax Net Income after Tax 60.660.660.660.6 60.660.660.660.6 66.766.766.766.7 10.210.210.210.2 10.110.110.110.1

Total Return 60.6 60.6 66.7 10.2 10.1

Non-tax deductible Items 0.0 7.82 4.50 nm (42.5)

Net Inc available for Dist. 62.3 70.7 71.7 15.1 1.4

Ratio (%)

Net Prop Inc Margin 74.2 73.0 74.5

Dist. Payout Ratio 99.1 112.4 106.7



Company Guide

Sunway REIT


Earnings Drivers:

Performance at Sunway Pyramid a key earnings driver.Performance at Sunway Pyramid a key earnings driver.Performance at Sunway Pyramid a key earnings driver.Performance at Sunway Pyramid a key earnings driver. Despite

its diversified portfolio of 14 assets, SunREIT derives the bulk of

its income (c.60% NPI) from its crown jewel, the 1.6m sq ft NLA

Sunway Pyramid retail asset. Located in the Sunway Resort City

township, the Egyptian-themed mall is one of the better

performing properties in its portfolio. The property enjoys

strong visitation from locals and tourists, and has sustained high

occupancy rates of 98-99%. Rental reversions have averaged in

the high single digits per annum. As a result of the strong

recurring footfall and connectivity, we expect such trends to

continue against a modest retail market outlook.

Sunway Resort City’s performance will accelerate going Sunway Resort City’s performance will accelerate going Sunway Resort City’s performance will accelerate going Sunway Resort City’s performance will accelerate going

forward.forward.forward.forward. We remain positive on the outlook for Sunway Resort

City township. It is already registering strong visitations of 40m

per annum. And, visitations should leap with the completion of

the BRT-Sunway Line – a 6-km elevated bus rapid transit path

that will connect seven key public transport stations. In addition,

ongoing developments at Sunway Pyramid Phase 3 – an

integrated retail and hotel project by the Sunway Group – will

improve the township’s appeal to locals and tourists. SunREIT is

expected to benefit from the ongoing rejuvenation of the

township. And apart from Sunway Pyramid, the REIT has four

other assets – Sunway Resort, Hotel & Spa, Pyramid Tower

hotel, Menara Sunway office tower, and Sunway Medical

Centre. All these properties are expected to perform strongly on

the back of a growing population and higher visitations.

AssetAssetAssetAsset----enhancement plans.enhancement plans.enhancement plans.enhancement plans. Management plans to embark on a

refurbishment project for Pyramid Tower East, which saw its

occupancy rate dropping to 55% in 3QFY16 (3QFY15: 74%).

The drop is mainly due to lower demand from corporates and

the progressive closure of the hotel prior to the commencement

of its refurbishment plan. The project (with a budgeted capex of

c.RM120m) is expected to commence progressively in April

2016 with full closure of the hotel by 4QFY16 for approximately

12 months. The NPI foregone (FY15: RM18m) will be offset by

the recent inclusion of assets.

Weakness in office segment will moderate growth potential.Weakness in office segment will moderate growth potential.Weakness in office segment will moderate growth potential.Weakness in office segment will moderate growth potential.

We foresee the office segment to face challenges in filling up

occupancies in the current oversupplied and weak market

environment. Additionally, little headway has been made in

replenishing occupancies at Sunway Tower and Sunway Putra

Tower after the departure of their anchor tenants.

Net Property Income and Margins (%)


Distribution Paid / Net Operating CF

Interest Cover (x)



Company Guide

Sunway REIT

Balance Sheet:

Sensible gearing levels.Sensible gearing levels.Sensible gearing levels.Sensible gearing levels. SunREIT has historically kept total

debt/total assets ratio at 33-35%, which is a comfortable level.

This leaves room to gear up for acquisition opportunities, but

we believe any deals are likely to be funded by a mixture of

debt and equity, given the manager’s track record of

conservative gearing levels. At present, of its RM2.1bn

borrowings, RM1.4bn is from a commercial paper facility that

will expire in four tranches between Oct 2017 and Apr 2018.

The rest are on a monthly rollover basis. We also note that

about half of SunREIT’s manager fees are paid in units.


Acquisition newsflow.Acquisition newsflow.Acquisition newsflow.Acquisition newsflow. One of SunREIT’s appeal is the availability

of asset acquisition pipeline of completed investment properties

from sponsor Sunway Bhd. Confirmation of injections at

accretive yields will be key re-rating signals for the stock.

Yield spread.Yield spread.Yield spread.Yield spread. A REIT’s attractiveness depends on its distribution

yield relative to other fixed-income assets. A common

benchmark is the REIT’s yield spread over the indicative 10-year

Malaysian Government Securities yield, which is currently

stabilising near the 3.8% level.

Key Risks:

Pace of acquisitiPace of acquisitiPace of acquisitiPace of acquisitions.ons.ons.ons. SunREIT’s yields are on par with its larger

M-REIT peers, so the draw is the potential to secure a steady

stream of acquisitions. On this note, any significant delay in

acquisitions could cap its share price appreciation, especially as

its peers are also looking at asset growth.

Weak general sentiment.Weak general sentiment.Weak general sentiment.Weak general sentiment. A dampened consumer sentiment

may have a negative effect on the retail and hospitality sectors,

in the form of lower retail spending, rental reversions and local

tourist visits.

Office space oversupply.Office space oversupply.Office space oversupply.Office space oversupply. As the supply overhang of office

space persists, it could be challenging to refill vacancies and

rental rates may see negative growth

Company Background

Sunway REIT is a real estate investment trust with key assets in

Bandar Sunway, Selangor, primarily the Sunway Pyramid mall.

It also has hospitality and office assets, and is geographically

diversified to the Penang and Perak states.

Aggregate Leverage (%)

ROE (%)

Distribution Yield (%)

PB Band (x)



Company Guide

Sunway REIT

Key Assumptions


Lease Expiry Profile (%) of NLA

26.2 6.91 38.3 22.0 17.3

SP Rental Gth (%) 11.0 8.00 10.0 12.0 12.0 SP Annual Step Up Gth (%)

3.00 3.00 3.00 3.00 3.00 Segmental Breakdown

FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenues (RMm)

Retail 333 383 398 421 443

Hotel 61.3 72.8 66.4 79.2 81.4

Office 39.1 30.3 49.4 50.5 51.6

Others 20.4 21.1 47.5 49.1 50.7


(RMm) Retail 237 269 291 310 328

Hotel 58.7 68.8 61.7 74.1 76.1

Office 24.8 14.5 30.7 31.3 32.0

Others 20.4 21.1 45.0 46.5 48.0


Margins (%) Retail 71.2 70.4 73.1 73.6 74.0

Hotel 95.8 94.5 92.9 93.6 93.5

Office 63.5 47.9 62.2 61.9 62.0

Others 100.0 100.0 94.7 94.7 94.7



FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Gross revenue 453 507 562 600 626

Property expenses (113) (133) (133) (138) (143)

Net Property IncomeNet Property IncomeNet Property IncomeNet Property Income 341341341341 374374374374 428428428428 462462462462 484484484484 Other Operating expenses 0.0 (27.4) 0.0 0.0 0.0

Other Non Opg (Exp)/Inc (32.9) 0.0 (36.0) (37.1) (38.0)


Exceptional Gain/(Loss) 307 2.26 0.0 0.0 0.0

Net IncomeNet IncomeNet IncomeNet Income 547547547547 262262262262 306306306306 338338338338 354354354354

Tax (5.9) 0.0 0.0 0.0 0.0



Net Income After Tax Net Income After Tax Net Income After Tax Net Income After Tax 541541541541 262262262262 306306306306 338338338338 354354354354 Total Return 541 271 306 338 354

Non-tax deductible Items 14.1 8.51 0.0 0.0 0.0

Net Inc available for Dist. 256 271 306 338 354

Growth & Ratio

Revenue Gth (%) 6.0 11.8 10.8 6.8 4.5

N Property Inc Gth (%) 6.2 9.7 14.6 7.8 4.8

Net Inc Gth (%) 31.7 (51.5) 16.6 10.4 4.9

Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0

Net Prop Inc Margins (%) 75.2 73.7 76.3 77.0 77.2

Net Income Margins (%) 119.4 51.8 54.5 56.4 56.6

Dist to revenue (%) 56.5 53.4 54.5 56.4 56.6

Managers & Trustee’s fees to sales %)

0.0 5.4 0.0 0.0 0.0

ROAE (%) 14.1 6.5 7.5 8.2 8.6

ROA (%) 9.0 4.0 4.5 4.9 5.1

ROCE (%) 5.8 5.4 6.5 6.9 7.2

Int. Cover (x) 5.1 4.0 5.0 5.3 5.3 Source: Company, AllianceDBS


Company Guide

Sunway REIT


FY FY FY FY JunJunJunJun 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 Gross revenue 121 132 130 124 129

Property expenses (31.3) (34.8) (33.7) (33.4) (32.8)

Net Property Income 89.9 97.1 96.7 90.2 96.1 Other Operating expenses (3.9) (3.9) (10.3) (9.2) (10.2)

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (21.5) (21.6) (21.6) (21.5) (21.8)

Exceptional Gain/(Loss) (4.0) 2.06 2.95 1.20 2.59


Tax 0.0 0.0 0.0 0.0 0.0

Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax Net Income after Tax Net Income after Tax Net Income after Tax 60.660.660.660.6 73.673.673.673.6 67.767.767.767.7 60.660.660.660.6 66.766.766.766.7

Total Return 60.6 73.6 67.7 60.6 66.7

Non-tax deductible Items 0.0 0.0 0.0 7.82 4.50 Net Inc available for Dist. 62.3 75.6 69.7 70.7 71.7

Growth & Ratio

Revenue Gth (%) 5 9 (1) (5) 4

N Property Inc Gth (%) 7 8 0 (7) 7

Net Inc Gth (%) 6 21 (8) (10) 10

Net Prop Inc Margin (%) 74.2 73.6 74.2 73.0 74.5

Dist. Payout Ratio (%) 99.1 99.3 99.4 112.4 106.7 Balance Sheet (RMm)

FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Investment Properties 6,324 6,697 6,726 6,754 6,783

Other LT Assets 5.27 7.60 9.92 12.3 14.6

Cash & ST Invts 80.6 88.9 92.3 97.9 100

Inventory 0.0 0.0 0.0 0.0 0.0

Debtors 20.2 22.7 25.0 26.7 27.9

Other Current Assets 0.0 0.0 0.0 0.0 0.0


ST Debt

763 793 823 853 853

Creditor 0.0 3.53 3.81 3.95 4.08

Other Current Liab 223 223 223 223 223

LT Debt 1,379 1,624 1,624 1,624 1,654

Other LT Liabilities 83.0 83.0 83.0 83.0 83.0

Unit holders’ funds 3,982 4,090 4,097 4,105 4,109


Total Funds & LiabilitiesTotal Funds & LiabilitiesTotal Funds & LiabilitiesTotal Funds & Liabilities 6,4306,4306,4306,430 6,8166,8166,8166,816 6,8536,8536,8536,853 6,8916,8916,8916,891 6,9266,9266,9266,926

Non-Cash Wkg. Capital (203) (204) (202) (200) (199)

Net Cash/(Debt) (2,061) (2,328) (2,355) (2,379) (2,407)

Ratio

Current Ratio (x) 0.1 0.1 0.1 0.1 0.1

Quick Ratio (x) 0.1 0.1 0.1 0.1 0.1

Aggregate Leverage (%) 33.3 35.5 35.7 35.9 36.2

Z-Score (X) 1.6 1.5 1.5 1.5 1.5



Company Guide

Sunway REIT


FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Pre-Tax Income 547 271 306 338 354

Dep. & Amort. 0.36 0.91 1.19 1.47 1.75

Tax Paid (5.9) 0.0 0.0 0.0 0.0

Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. 101 0.97 (2.0) (1.6) (1.1)

Other Operating CF (295) 89.8 86.4 86.6 91.5

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 348348348348 363363363363 392392392392 424424424424 447447447447 Net Invt in Properties (404) (376) (32.3) (32.3) (32.3)

Other Invts (net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc. & JVs 0.0 0.0 0.0 0.0 0.0

Other Investing CF 3.34 2.48 2.80 2.92 3.34

Net Investing CFNet Investing CFNet Investing CFNet Investing CF (401)(401)(401)(401) (374)(374)(374)(374) (29.5)(29.5)(29.5)(29.5) (29.4)(29.4)(29.4)(29.4) (29.0)(29.0)(29.0)(29.0) Distribution Paid (255) (274) (299) (330) (350)

Chg in Gross Debt 393 275 30.0 30.0 30.0

New units issued 0.0 102 0.0 0.0 0.0

Other Financing CF (72.0) (83.8) (89.2) (89.5) (94.9)

Net Financing CFNet Financing CFNet Financing CFNet Financing CF 65.165.165.165.1 19.219.219.219.2 (359)(359)(359)(359) (389)(389)(389)(389) (415)(415)(415)(415)


Chg in Cash 11.6 8.32 3.43 5.57 2.49

Operating CFPS (sen) 8.40 12.3 13.1 14.1 14.9

Free CFPS (sen) (1.9) (0.5) 11.9 13.0 13.8 Source: Company, AllianceDBS


Source: AllianceDBS

Analyst: Inani ROZIDIN

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: BC, PY

BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 3 Nov 20163 Nov 20163 Nov 20163 Nov 2016)))): : : : RM3.32 (KLCIKLCIKLCIKLCI : : : : 1,648.08) Price TaPrice TaPrice TaPrice Target rget rget rget 12121212----mthmthmthmth:::: RM4.00 (20% upside) (Prev RM4.00)

Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Faster ramp-up at IIS; stronger smartphone sales

Where we differWhere we differWhere we differWhere we differ:::: FY17-18F EPS slightly above consensus Analyst Woo Kim TOH +60 32604 3917 [email protected]

Price Relative


Revenue 1,041 1,315 1,453 1,576 EBITDA 207 286 333 364 Pre-tax Profit 153 217 256 282 Net Profit 148 204 240 265 Net Pft (Pre Ex.) 148 204 240 265 Net Pft Gth (Pre-ex) (%) (2.8) 37.9 17.6 10.2 EPS (sen) 15.5 21.4 25.1 27.7 EPS Pre Ex. (sen) 15.5 21.4 25.1 27.7 EPS Gth Pre Ex (%) (8) 38 18 10 Diluted EPS (sen) 14.8 20.3 23.8 26.2 Net DPS (sen) 8.40 10.7 12.6 13.8 BV Per Share (sen) 71.2 81.9 94.4 108 PE (X) 21.4 15.5 13.2 12.0 PE Pre Ex. (X) 21.4 15.5 13.2 12.0 P/Cash Flow (X) 19.2 11.2 10.8 9.7 EV/EBITDA (X) 14.5 10.3 8.6 7.6 Net Div Yield (%) 2.5 3.2 3.8 4.2 P/Book Value (X) 4.7 4.1 3.5 3.1 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 24.4 27.9 28.5 27.3 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sen):::: N/A N/A N/A



Strong earnings visibility

Maintain BUY; RM4.00 TPMaintain BUY; RM4.00 TPMaintain BUY; RM4.00 TPMaintain BUY; RM4.00 TP. We like Inari for its strong earnings

visibility, mainly underpin by its RF division where growth is

relatively secured due to significant content gains in

smartphone. Beyond that, there are also other growth avenues

for Inari arising from: 1) Its new testing division, Inari

Integrated System (IIS); 2) The tie-up with PCL Technologies;

and 3) New business opportunities from Osram. With strong

visibility for the RF segment and new contribution from IIS

driving robust 3-year earnings CAGR of 22%, we believe Inari

valuation could trade up to 18x PE, +1 SD of its 3-year average

forward PE. Maintain BUY and RM4.00 TP.

RF segment RF segment RF segment RF segment –––– still strong growth. still strong growth. still strong growth. still strong growth. Significant content gains in

latest smartphone models (especially Apple iPhone) would

comfortably help to drive our 30% growth forecast for Inari RF

segment in FY17F, despite concerns over slowing smartphone

sales. The medium-term outlook appears to be relatively secure

as well because of Broadcom’s 3-year supply agreement with

Apple (till 2018). Broadcom is in the midst of increasing its RF

filters capacity (by converting 6-inch wafer to 8-inch wafer

fabs), which should ease supply constraints and possibly allow

the company to supply to other smartphone manufacturers in

the future besides Apple and Samsung.

Valuation:

Our RM4.00 TP for Inari is based on 18x CY17 fully-diluted

EPS, which is +1 SD of its 3-year average forward PE. Maintain

BUY recommendation.


Significant slowdown in demand for smartphonesSignificant slowdown in demand for smartphonesSignificant slowdown in demand for smartphonesSignificant slowdown in demand for smartphones. This could

affect sales for the RF segment. However, the impact may not

be as severe because of the rising RF content in smartphones. At A Glance Issued Capital (m shrs) 961

Mkt. Cap (RMm/US$m) 3,189 / 760


Insas Berhad 27.8

KWAP 6.9

Employee Provident Fund 6.4

Free Float (%) 72.2


ICB IndustryICB IndustryICB IndustryICB Industry : Technology / Technology Hardware & Equipment


4 Nov 2016


Inari Amertron Bhd Version 8 | Bloomberg: INRI MK | Reuters: INAR.KL Refer to important disclosures at the end of this report


Company Guide

Inari Amertron Bhd


Earnings Drivers:

Riding on Broadcom’s strong lead in RF.Riding on Broadcom’s strong lead in RF.Riding on Broadcom’s strong lead in RF.Riding on Broadcom’s strong lead in RF. The key customer for

Inari’s RF division is US-listed Broadcom (formerly Avago), one of

the top RF chipmakers in the world. Inari’s RF segment has

grown at a 4-year CAGR of 39% since listing in 2011,

underpinned by strong orders from Broadcom. We expect

demand for Broadcom’s RF content in smartphones to continue

to grow rapidly in the medium term, driven by three key factors:

1) rising adoption of 4G LTE; 2) smartphone variant

consolidation; and 3) further integration of RF modules.

Significant capacity eSignificant capacity eSignificant capacity eSignificant capacity expansion.xpansion.xpansion.xpansion. To prepare for the increase in RF

sales volumes in the coming years, Inari had doubled floor space

at its Penang facility with the new P13 plant in 2015. It has also

expanded capacity of its RF segment by 30%, and there are

plans to increase by another 30% during 2HCY16. It may also

need to build or lease another plant within the next 12 months.

However, the significant capacity expansion will nudge down

overall utilisation rate at the RF segment to 70-80% in FY16-

17F (from 85-90% in previous years), as the incremental wafer

volume from Avago will be staggered. Given its improving

economies of scale, ASP cost-down should be higher in FY16-

18F as Inari passes on some of the cost-savings to Broadcom.

Stable growth at Amertron. Stable growth at Amertron. Stable growth at Amertron. Stable growth at Amertron. Amertron’s growth was relatively

stable at 5-6% in FY16, but we expect growth to pick up to

10+% from FY17F onwards, when the 90k-sqft expansion at

the Clark Field factory is completed.

Margins should improve further. Margins should improve further. Margins should improve further. Margins should improve further. After consolidating Amertron

in FY14, Inari’s net margins fell to 12.5% because of lower

profitability at Amertron, before recovering in FY15. After the

dip in FY16, we expect margins to recover to around 16% in

FY17-18F given: 1) better economies of scale from higher

volumes; 2) cost-saving initiatives at Amertron; and 3) larger

contribution from the RF segment.

Benefitting from stronger USD.Benefitting from stronger USD.Benefitting from stronger USD.Benefitting from stronger USD. While most of Inari’s sales are

denominated in USD, only 50% of its costs (mainly raw material

costs) are priced in the greenback. As such, the company will be

a net beneficiary of a stronger USD, all things being equal.

Revenue breakdown, by segment (in RM m)

Inari RF division revenue (in RM m)

No. of testers (RF division)

Inari net margins (%)


0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2014 2015 2016 2017F 2018F 2019F

RF Amertron IIS Others

120

181233

309

448 454

592

652696

0

200

400

600

800

2011 2012 2013 2014 2015 2016 2017F 2018F 2019F

180

270 326

422

522

640

760 810

860

-

200

400

600

800

1,000

2011 2012 2013 2014 2015 2016 2017F 2018F 2019F

15.7%

11.0%

17.4%

12.5%

16.3%

14.2%

15.5%

16.5%16.8%

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

18%

2011 2012 2013 2014 2015 2016 2017F 2018F 2019F


Company Guide

Inari Amertron Bhd

Balance Sheet:

Net cash position. Net cash position. Net cash position. Net cash position. Despite rapid expansion over the years, Inari

has been able to maintain a net cash position because of cash

proceeds from warrant conversion and two rights issues. As at

30 June 2016, the company had RM210m net cash.

Higher capex in FY17F. Higher capex in FY17F. Higher capex in FY17F. Higher capex in FY17F. There is no cutback on capex spending

and expansion of manufacturing facilities will take place in FY17

to cater to higher orders from Broadcom and new business

initiatives. Inari had spent RM129m capex in FY16 (FY15:

RM62m) for the purchase/construction of a new plant,

additional equipment, and automation processes.


Rising LTE adoption Rising LTE adoption Rising LTE adoption Rising LTE adoption will drive Broadcom's growth, and in turn,

Inari's, as Broadcom is the dominant supplier of high-band

frequency (>2.0 GHz) RF products, thanks to its superior film

bulk acoustic resonator (FBAR) filters.

Broadcom’s guidance and capex plan. Broadcom’s guidance and capex plan. Broadcom’s guidance and capex plan. Broadcom’s guidance and capex plan. As demand continues to

outstrip supply, we understand Broadcom’s current FBAR

production is on an allocation basis only to its main customers.

To resolve this, Broadcom is currently doubling its FBAR filter

capacity, likely to be completed by 3Q16. In turn, Inari also

needs to expand its manufacturing capacity to prepare for the

increase in RF sales volumes from Broadcom.

Key Risks:

Slower demand for smartphonesSlower demand for smartphonesSlower demand for smartphonesSlower demand for smartphones. A significant slowdown in

demand for smartphones could affect sales at the RF segment.

However, the impact may not be as severe because of rising RF

content in smartphones.

Single customer riskSingle customer riskSingle customer riskSingle customer risk. Risk factors that could affect Broadcom’s

RF sales (such as introduction of better technology by peers)

are also risks for Inari. Nevertheless, this risk is mitigated by

continuous high-level R&D spending by Broadcom to improve

and maintain the competitive edge of its FBAR filters.

Company Background

Inari is principally involved in back-end semiconductor

packaging services, which comprise mainly back-end wafer

processing, package assembly and RF final testing.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide

Inari Amertron Bhd

Key Assumptions


No. of testers (RF division) 522 640 760 810 860

Utilisation rate (%) 90.0 70.0 85.0 90.0 93.0

Amertron (y-o-y growth) (6.5) 3.00 3.00 3.00 3.00

RM vs. USD 3.45 4.10 4.00 4.00 4.00 Segmental Breakdown

FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenues (RMm)

Inari RF 448 454 592 652 696

Inari Integrated System 0.0 0.0 65.0 109 169

Amertron & Others 485 587 658 692 711

TotalTotalTotalTotal 933933933933 1,0411,0411,0411,041 1,3151,3151,3151,315 1,4531,4531,4531,453 1,5761,5761,5761,576


FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenue 933 1,041 1,315 1,453 1,576

Cost of Goods Sold (736) (827) (1,010) (1,101) (1,190)

Gross ProfitGross ProfitGross ProfitGross Profit 197197197197 214214214214 305305305305 352352352352 386386386386 Other Opng (Exp)/Inc (39.7) (56.0) (85.5) (94.5) (102)









EBITDA 191 207 286 333 364

Growth

Revenue Gth (%) 17.6 11.6 26.3 10.5 8.4

EBITDA Gth (%) 41.0 8.4 38.2 16.4 9.3

Opg Profit Gth (%) 40.0 0.6 38.3 17.5 10.2

Net Profit Gth (Pre-ex) (%) 53.7 (2.8) 37.9 17.6 10.2

Margins & Ratio

Gross Margins (%) 21.1 20.6 23.2 24.2 24.5



ROAE (%) 38.4 24.4 27.9 28.5 27.3

ROA (%) 22.9 17.4 21.2 21.3 20.8

ROCE (%) 30.8 22.1 26.5 27.2 26.3

Div Payout Ratio (%) 53.1 54.2 50.0 50.0 50.0



Driven by significant content gains in new smartphone model


Company Guide

Inari Amertron Bhd


FY FY FY FY JunJunJunJun 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 Revenue 255 275 294 217 255


Gross ProfitGross ProfitGross ProfitGross Profit 56.656.656.656.6 57.757.757.757.7 63.363.363.363.3 41.441.441.441.4 52.052.052.052.0 Other Oper. (Exp)/Inc (15.3) (12.4) (17.0) (16.6) (10.0)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 41.341.341.341.3 45.345.345.345.3 46.346.346.346.3 24.824.824.824.8 42.042.042.042.0 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0




PrePrePrePre----tax Profittax Profittax Profittax Profit 39.839.839.839.8 43.943.943.943.9 44.844.844.844.8 23.023.023.023.0 41.341.341.341.3 Tax 0.34 (1.5) (2.0) (0.3) (2.3)

Minority Interest 0.25 3.02 (1.4) (1.3) 0.90

Net ProfitNet ProfitNet ProfitNet Profit 40.440.440.440.4 45.545.545.545.5 41.441.441.441.4 21.421.421.421.4 39.939.939.939.9 Net profit bef Except. 40.4 45.5 41.4 21.4 39.9

EBITDA 51.5 57.1 58.2 35.9 56.6

Growth

Revenue Gth (%) 11.7 7.8 6.8 (26.0) 17.3

EBITDA Gth (%) 7.8 10.8 1.9 (38.4) 57.8

Opg Profit Gth (%) 4.7 9.7 2.3 (46.4) 69.1

Net Profit Gth (Pre-ex) (%) 6.0 12.7 (9.0) (48.3) 86.5

Margins

Gross Margins (%) 22.2 21.0 21.6 19.0 20.4



FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Net Fixed Assets 190 274 327 352 371

Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0

Other LT Assets 14.3 50.7 50.7 50.7 50.7

Cash & ST Invts 298 210 272 345 439

Inventory 145 165 188 208 225

Debtors 187 172 219 242 263


Total AssetsTotal AssetsTotal AssetsTotal Assets 835835835835 873873873873 1,0581,0581,0581,058 1,1981,1981,1981,198 1,3501,3501,3501,350

ST Debt

45.3 16.0 16.0 16.0 16.0

Creditor 171 136 219 239 258

Other Current Liab 15.6 11.1 11.1 11.1 11.1

LT Debt 22.0 17.8 17.8 17.8 17.8


Shareholder’s Equity 535 681 783 903 1,036


Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 835835835835 873873873873 1,0581,0581,0581,058 1,1981,1981,1981,198 1,3501,3501,3501,350

Non-Cash Wkg. Capital 146 191 178 201 219

Net Cash/(Debt) 231 176 238 311 405




Asset Turnover (x) 1.4 1.2 1.4 1.3 1.2

Current Ratio (x) 2.7 3.4 2.8 3.0 3.2

Quick Ratio (x) 2.1 2.3 2.0 2.2 2.5

Net Debt/Equity (X) CASH CASH CASH CASH CASH

Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH

Capex to Debt (%) 94.3 380.5 355.1 295.9 295.9

Z-Score (X) 8.7 12.7 9.8 9.5 9.1


Initial ramp-up ahead of new smartphone launches


Company Guide

Inari Amertron Bhd


FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Pre-Tax Profit 152 153 217 256 282

Dep. & Amort. 33.3 48.5 66.8 75.4 80.3

Tax Paid (1.1) (6.4) (13.0) (15.3) (16.9)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (1.9) (41.8) 13.0 (22.8) (18.7)

Other Operating CF (5.8) 11.6 0.0 0.0 0.0

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 176176176176 165165165165 284284284284 293293293293 327327327327 Capital Exp.(net) (63.4) (129) (120) (100.0) (100.0)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV (25.6) 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF 0.0 (44.9) 0.0 0.0 0.0

Net Investing CFNet Investing CFNet Investing CFNet Investing CF (89.0)(89.0)(89.0)(89.0) (173)(173)(173)(173) (120)(120)(120)(120) (100.0)(100.0)(100.0)(100.0) (100.0)(100.0)(100.0)(100.0) Div Paid (49.3) (75.8) (102) (120) (132)

Chg in Gross Debt 12.3 (33.5) 0.0 0.0 0.0

Capital Issues 174 68.5 0.0 0.0 0.0

Other Financing CF (6.2) (41.3) 0.0 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF 131131131131 (82.1)(82.1)(82.1)(82.1) (102)(102)(102)(102) (120)(120)(120)(120) (132)(132)(132)(132)


Chg in Cash 222 (88.4) 62.0 72.8 94.1

Opg CFPS (sen) 19.6 21.6 28.3 33.0 36.1

Free CFPS (sen) 12.4 3.82 17.2 20.2 23.7



Source: AllianceDBS

Analyst: Woo Kim TOH

Includes capex for new testing equipment



Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Higher rental reversion and occupancy

Where we differ:Where we differ:Where we differ:Where we differ: Higher operating expenses assumptions Analyst Inani ROZIDIN +603 2604 3905 [email protected]

What’s New • 3QFY16 earnings below expectations on weaker

than expected rental reversion

• Near term challenges priced in; earnings inflection

in FY17 still intact, supported by improvement in

overall portfolio’s visitor traffic

• We cut FY16F/FY17F/FY18F earnings by

9%/6%/6%

• Maintain BUY, TP of RM1.70

Price Relative


Gross Revenue 345 384 408 422 Net Property Inc 226 254 273 283 Total Return 155 166 188 196 Distribution Inc 163 177 199 208 EPU (sen) 11.9 8.15 9.21 9.57 EPU Gth (%) (10) (32) 13 4 DPU (sen) 8.59 8.69 9.78 10.1 DPU Gth (%) (4) 1 12 4 NAV per shr (sen) 132 132 132 132 PE (X) 13.4 19.6 17.4 16.7 Distribution Yield (%) 5.4 5.4 6.1 6.3 P/NAV (x) 1.2 1.2 1.2 1.2 Aggregate Leverage (%) 31.7 34.8 34.8 34.9 ROAE (%) 9.1 6.2 7.0 7.3 Distn. Inc Chng (%):Distn. Inc Chng (%):Distn. Inc Chng (%):Distn. Inc Chng (%): 0 0 0 Consensus DPU Consensus DPU Consensus DPU Consensus DPU (sensensensen):::: 8.8 10.0 10.2 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 4 S: 1 H: 6

Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P.

Revamping the malls Maintain BUY.Maintain BUY.Maintain BUY.Maintain BUY. We cut our FY16/FY17/FY18 earnings by 9%/6%/6% as NPI margins grew at a slower pace than anticipated, with 3Q16 NPI standing at 65.7% vs. our forecast of 70%. This is due to the negative reversions from Tropicana City Mall at 6.7% y-o-y. The negative reversions were due to management’s efforts to realign the mall and include mini anchor tenants in the mix. Occupancy improved to 92.5% in 3Q16 (2Q16: 91.9%). Tropicana City Mall presents CMMT with a good growth avenue. The property’s occupancy has room to rise, while rental rates of c.RM6/psf/mth has upside potential in view of the impending asset-enhancement initiatives. Increase in shopper traffic a positive indicator.Increase in shopper traffic a positive indicator.Increase in shopper traffic a positive indicator.Increase in shopper traffic a positive indicator. Excluding the newly acquired Tropicana City Property, CMMT’s portfolio shopper traffic improved by c.9.4% y-o-y in 3Q16, marking a turnaround in the visitor footfall downtrend in the previous year. This was attributable to the enhancement initiatives carried out and tenant-mix improvements for GP, ECM and the Mines. We note that SWP also experienced a rise in shopper traffic by c.3% y-o-y in 3Q16, attributed to the introduction of new tenants and enhancement initiatives carried out, including the extension of its unique F&B cluster and introduction of the toys and hobbies cluster. We are positive on this development as it signals an improvement in CMMT’s malls popularity, specifically SWP. Assets enhancement work in plan.Assets enhancement work in plan.Assets enhancement work in plan.Assets enhancement work in plan. Management plans to carry out asset-enhancement works for GP and Tropicana City Property with an estimated budget of RM30m. The enhancement work will be carried out in stages in FY16, with targeted full completion by 4Q16. We believe this will contribute positively to overall rental reversion in FY16/FY17. In particular, GP has expiring leases for c.14% of its total NLA.

Valuation: Our DDM-derived TP remains at RM1.70, with 7.5% cost of equity and 1.5% TG, as we trimmed our earnings forecasts but was mitigated by a cut in risk-free rate assumptions from 4.0% to 3.9% to reflect compression in MGS yield. We maintain our BUY call in anticipation of DPU growth from potential upside from further enhancement initiatives. The stock provides an FY17 yield of c.6.3%. Key Risks to Our View: Weak consumer sentiment.Weak consumer sentiment.Weak consumer sentiment.Weak consumer sentiment. The soft retail spending outlook may impact CMMT, as it is largely retail-focused. Tenants’ capacity to absorb rental increases may be affected by their lower sales, and this would negatively impact CMMT as it also derives 3-4% of its top-line from turnover rent.

At A Glance Issued Capital (m shrs) 2,031 Mkt. Cap (RMm/US$m) 3,250 / 774 Major Shareholders (%) CapitaMalls Asia Ltd (%) 35.4 Employee Provident Fund (%) 9.7 Skim Amanah Saham Bumiputera 6.6 Free Float (%) 42.7 3m Avg. Daily Val (US$m) 0.92 ICB IndustryICB IndustryICB IndustryICB Industry : Real Estate / Real Estate Investment Trusts


4 Nov 2016


CapitaLand Malaysia Mall Trust Version 5 | Bloomberg: CMMT MK | Reuters: CAMA.KL Refer to important disclosures at the end of this report


Company Guide

CapitaLand Malaysia Mall Trust

WHAT’S NEW

Asset enhancements underway

Steady growthSteady growthSteady growthSteady growth

• 3Q16 NPI came in at RM61.4m (+3% y-o-y), which is below our and consensus expectations. The growth was mainly driven by contribution from Tropicana City Property upon its acquisition in 3Q15 and improved performance from Gurney Plaza (GP) and East Coast Mall (ECM) on the back of higher rental rates achieved from new and renewed leases.

• However, the NPI margins grew at a slower pace than anticipated, with 3Q16 NPI standing at 65.7% vs. our forecast of 70%. This was due to the negative reversions from Tropicana City Mall at 6.7% y-o-y. The negative reversions were due to management’s efforts to realign the mall and include mini anchor tenants in the mix. Occupancy improved to 92.5% in 3Q16 from 2Q’s 91.9%. We expect reversions to steadily improve in FY17, supported by the asset-enhancement works and marketing initiatives carried out.

Steady performance due to Gurney Plaza and East Coast MallSteady performance due to Gurney Plaza and East Coast MallSteady performance due to Gurney Plaza and East Coast MallSteady performance due to Gurney Plaza and East Coast Mall

• Organic growth came mainly from GP, which registered 11% growth in NPI, supported by the increase in gross rental revenue of RM35m (+9% y-o-y). NPI margins in 3Q16 for GP also improved to c.71% (3Q15: c.70%) amid

a stable occupancy level of c.98.8%. Positive reversions were supported by the completion of major enhancement works in 2015 as well as reversions of expiring leases. ECM NPI grew by 1.3% y-o-y in this quarter due to the lower number of reversions.

• Sungei Wang Plaza (SWP) continued to struggle, with NPI dropping 26.5% y-o-y as a result of the adjacent MRT station construction. However, occupancy remained stable at 90.2% and management has revised rentals down by c.37% to keep tenants. As the construction works will only be completed in 2HFY17, we expect no recovery until then. That being said, we have incorporated the weak/negative reversions and poor occupancies of SWP in our forecasts. As such, we believe CMMT’s fundamentals are intact given that major earnings risks have been accounted for.

• Excluding SWP, rental reversions for the portfolio rose a decent 5.3%. There are remaining 11% of overall leases by NLA expiring in FY16. However, lease expiries from SWP are minimal at 1.3% of overall leases by NLA.

• We are positive about the upcoming reversions as a sizeable portion of the remaining expiries comes from GP/ECM, with 1.4%/4.8% of overall leases by NLA. We understand that GP and ECM registered positive reversions of 6% and 12%, respectively, in this quarter.


FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq

Gross revenue 90.9 92.0 93.5 2.8 1.6

Property expenses (31.2) (32.0) (32.1) 2.9 0.4

Net Property Income 59.8 60.0 61.4 2.8 2.3

Other Operating expenses (6.5) (6.5) (6.4) (1.4) (1.3)

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 N/A N/A

Net Interest (Exp)/Inc (13.5) (13.4) (13.5) 0.0 (0.9)

Exceptional Gain/(Loss) 12.7 2.57 0.0 N/A N/A

Net IncomeNet IncomeNet IncomeNet Income 52.552.552.552.5 42.842.842.842.8 41.541.541.541.5 (20.8)(20.8)(20.8)(20.8) (2.9)(2.9)(2.9)(2.9)

Tax 0.0 0.0 0.0 N/A N/A

Minority Interest 0.0 0.0 0.0 N/A N/A

Net Income after Tax Net Income after Tax Net Income after Tax Net Income after Tax 52.552.552.552.5 42.842.842.842.8 41.541.541.541.5 (20.8)(20.8)(20.8)(20.8) (2.9)(2.9)(2.9)(2.9)

Total Return 52.5 42.8 41.5 (20.8) (2.9)

Non-tax deductible Items 0.0 0.0 0.0 nm nm

Net Inc available for Dist. 41.6 42.3 43.2 3.8 2.3

Ratio (%)

Net Prop Inc Margin 65.7 65.3 65.7

Dist. Payout Ratio 0.0 99.9 0.0



Company Guide



Earnings Drivers:

Positive rental reversion.Positive rental reversion.Positive rental reversion.Positive rental reversion. In FY15, CMMT managed to secure

positive rental reversion for four of its five malls, with reversions

of c.7.9% (excluding SWP). SWP was the only drag with a

negative reversion of 31.5%. But this is a strategic decision by

management to retain key tenants, as the ongoing MRT

construction works nearby have reduced shopper footfall.

Looking at FY16F/FY17F, we expect reversion rates to average

8-10% (except for SWP) which is supported by asset-

enhancement works.

Maintaining occupancy levels.Maintaining occupancy levels.Maintaining occupancy levels.Maintaining occupancy levels. Occupancy rates directly affect

the income received by mall owners. It is also an indicator of the

quality of the mall, which is determined by shopper footfall,

pace of vacancy-replenishment, and general attractiveness of

the asset as a retail hub. CMMT has a decent track record of

securing c.96% to full occupancy of net lettable area (NLA).

Occupancy at SWP has fallen over the last few quarters to

c.90% because of the ongoing MRT construction works.

AssetAssetAssetAsset----enhancement initiatives.enhancement initiatives.enhancement initiatives.enhancement initiatives. Besides regular rent increases,

the REIT’s earnings would also be boosted by enhancement

works for its assets. This encompasses a wide range of actions,

including increasing NLA, improving facilities and amenities,

refreshing external appearances, and restructuring rentable

space and tenant mix. CMMT has a good track record in this

space, with successful enhancement works done on The Mines

and East Coast Mall, leading to NPI growth of 24% and 15%,

respectively, over two years.

Sensible financing rates, the bulk of whiSensible financing rates, the bulk of whiSensible financing rates, the bulk of whiSensible financing rates, the bulk of which are already locked in.ch are already locked in.ch are already locked in.ch are already locked in.

About 74% of CMMT’s debts have fixed interest rates ranging

from 4.1% to 4.6%, and the rest are at floating rates. Its

average financing cost was c.4.4% in FY15, and we expect this

to increase to 4.6% over the next few years due to rate

fluctuations from floating-rate debts.



Distribution Paid / Net Operating CF

Interest Cover (x)



Company Guide


Balance Sheet:

Staying conservative.Staying conservative.Staying conservative.Staying conservative. CMMT has kept gearing at about 31% in

recent years, and financed the purchase of the Tropicana assets

with a 30:70 debt-equity mix to keep gearing within that limit.

We expect its balance sheet to remain strong going forward.

Decent maturity profile.Decent maturity profile.Decent maturity profile.Decent maturity profile. Interest rates are fixed for 74% of its

debt, with the remaining debts on floating rate. More than

70% of borrowings mature in 2022 and beyond.


DPU growth.DPU growth.DPU growth.DPU growth. The steady occupancy levels and positive rental

reversions will help lift DPU, which would in turn translate into a

higher unit price.

Key Risks:

Weak consumer sentiment.Weak consumer sentiment.Weak consumer sentiment.Weak consumer sentiment. The soft retail spending outlook

may impact CMMT, as it is largely retail-focused. Tenants’

capacity to absorb rental increases may be affected by their

lower sales, and this would negatively impact CMMT as it also

derives 3-4% of its top-line from turnover rent.

PostPostPostPost----acquisition sentiment.acquisition sentiment.acquisition sentiment.acquisition sentiment. The RM540m acquisition price for

the Tropicana assets involves a substantial placement of new

units at an indicative RM1.32/unit (c.13% increase in unit

base), plus some debt financing. As such, we feel that the

market has reacted to the implied dilution (which is now

largely priced in) with the selldown of CMMT shares since

April. Nonetheless, the sentiment towards the stock might

recover more gradually than expected.

Deteriorating performance at SWP.Deteriorating performance at SWP.Deteriorating performance at SWP.Deteriorating performance at SWP. SWP is currently affected

by construction works for a new MRT station nearby. Footfall

at SWP will be weak until 2HFY17, when the MRT works will

be completed.

Company Background

CMMT is a retail-focused real estate investment trust with

malls in Kuala Lumpur, Selangor, Penang, and Pahang. Its malls

employ a mass-market profile, but it is moving up to the

middle- to upper-income segments.

Aggregate Leverage (%)

ROE (%)

Distribution Yield (%)

PB Band (x)



Company Guide


Key Assumptions


Lease expiry (% NLA) 53.2 20.5 33.7 42.5 20.7

Avg rental growth (%) 1.23 1.96 2.15 6.41 2.50 Segmental Breakdown

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Revenues (RMm)

Gurney Plaza 123 128 137 146 150

Mines 79.7 81.6 87.8 92.2 98.9

Sungai Wang Plaza 67.2 55.0 50.3 53.8 50.4

East Coast Mall 45.9 55.1 62.0 66.4 70.1

Others #,##0;(#,##0)

25.1 46.9 50.1 51.7


NPI (RMm) Gurney Plaza 83.3 83.3 99.1 104 108

Mines 48.6 51.6 59.4 60.9 67.0


East Coast Mall 27.9 35.0 41.9 43.3 46.5

Others #,##0;(#,##0)

19.3 32.2 34.1 35.2


NPI Margins (%) Gurney Plaza 67.9 65.0 72.2 71.3 71.6

Mines 60.9 63.3 67.6 66.1 67.7


East Coast Mall 60.8 63.5 67.6 65.2 66.4

Others N/A 76.9 68.6 68.1 68.0



FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Gross revenue 315 345 384 408 422

Property expenses (106) (118) (130) (136) (139)

Net Property IncomeNet Property IncomeNet Property IncomeNet Property Income 209209209209 226226226226 254254254254 273273273273 283283283283 Other Operating expenses (22.5) (24.4) (27.0) (28.1) (28.8)

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0



Net IncomeNet IncomeNet IncomeNet Income 236236236236 227227227227 166166166166 188188188188 196196196196 Tax 0.0 0.0 0.0 0.0 0.0



Net Income After Tax Net Income After Tax Net Income After Tax Net Income After Tax 236236236236 226226226226 166166166166 188188188188 196196196196

Total Return 150 155 166 188 196

Non-tax deductible Items 0.0 0.0 0.0 0.0 0.0

Net Inc available for Dist. 158 163 177 199 208

Growth & Ratio

Revenue Gth (%) 3.4 9.3 11.4 6.3 3.2

N Property Inc Gth (%) 0.1 8.4 12.2 7.3 3.8

Net Inc Gth (%) 2.9 (4.4) (26.8) 13.5 4.2

Dist. Payout Ratio (%) 99.9 99.9 99.9 99.9 99.9

Net Prop Inc Margins (%) 66.2 65.7 66.1 66.7 67.1

Net Income Margins (%) 74.9 65.5 43.1 46.0 46.4

Dist to revenue (%) 50.2 47.3 46.0 48.9 49.3

Managers & Trustee’s fees to sales %)

7.1 7.1 7.0 6.9 6.8

ROAE (%) 10.5 9.1 6.2 7.0 7.3

ROA (%) 7.1 6.0 3.9 4.3 4.5

ROCE (%) 5.8 5.5 5.5 5.8 6.0

Int. Cover (x) 5.1 4.3 3.7 4.3 4.4 Source: Company, AllianceDBS

Lease expiries skewed towards 2017

NPI margins to be relatively stable


Company Guide



FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 Gross revenue 90.9 93.3 93.6 92.0 93.5

Property expenses (31.2) (32.7) (33.1) (32.0) (32.1)

Net Property Income 59.8 60.6 60.6 60.0 61.4 Other Operating expenses (6.5) (6.6) (6.3) (6.5) (6.4)

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (13.5) (13.4) (13.3) (13.4) (13.5)



Tax 0.0 0.0 0.0 0.0 0.0

Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax Net Income after Tax Net Income after Tax Net Income after Tax 52.552.552.552.5 46.746.746.746.7 41.141.141.141.1 42.842.842.842.8 41.541.541.541.5

Total Return 52.5 46.7 41.1 42.8 41.5

Non-tax deductible Items 0.0 0.0 0.0 0.0 0.0 Net Inc available for Dist. 41.6 42.4 43.0 42.3 43.2

Growth & Ratio

Revenue Gth (%) 14 3 0 (2) 2

N Property Inc Gth (%) 14 1 0 (1) 2

Net Inc Gth (%) (41) (11) (12) 4 (3)

Net Prop Inc Margin (%) 65.7 65.0 64.7 65.3 65.7

Dist. Payout Ratio (%) 0.0 98.1 0.0 99.9 0.0 Balance Sheet (RMm)

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Investment Properties 3,233 3,886 3,940 3,994 4,048

Other LT Assets 1.86 2.47 3.09 3.70 4.31

Cash & ST Invts 157 187 348 310 271

Inventory 0.0 0.0 0.0 0.0 0.0

Debtors 13.3 16.4 18.2 19.4 20.0



ST Debt

145 307 307 307 317

Creditor 70.0 61.7 68.8 73.1 75.5


LT Debt 817 951 1,151 1,151 1,151


Unit holders’ funds 2,287 2,675 2,681 2,691 2,694


Total Funds & LiabilitiesTotal Funds & LiabilitiesTotal Funds & LiabilitiesTotal Funds & Liabilities 3,4053,4053,4053,405 4,0924,0924,0924,092 4,3094,3094,3094,309 4,3274,3274,3274,327 4,3444,3444,3444,344

Non-Cash Wkg. Capital (89.9) (84.3) (93.9) (99.8) (103)

Net Cash/(Debt) (806) (1,071) (1,110) (1,149) (1,197)

Ratio

Current Ratio (x) 0.7 0.5 0.9 0.8 0.7

Quick Ratio (x) 0.7 0.5 0.9 0.8 0.7

Aggregate Leverage (%) 29.3 31.7 34.8 34.8 34.9

Z-Score (X) 1.9 1.6 1.6 1.6 1.6



Company Guide



FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Pre-Tax Income 236 226 166 188 196

Dep. & Amort. 1.16 1.11 1.11 1.11 1.11

Tax Paid 0.0 0.0 0.0 0.0 0.0

Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. 3.91 19.0 9.60 5.92 3.24

Other Operating CF (41.3) (15.0) 71.6 67.2 69.2

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 200200200200 231231231231 248248248248 262262262262 269269269269 Net Invt in Properties (52.2) (603) (55.8) (55.8) (55.8)

Other Invts (net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc. & JVs 0.0 0.0 0.0 0.0 0.0


Net Investing CFNet Investing CFNet Investing CFNet Investing CF (47.5)(47.5)(47.5)(47.5) (598)(598)(598)(598) (50.0)(50.0)(50.0)(50.0) (44.8)(44.8)(44.8)(44.8) (46.0)(46.0)(46.0)(46.0) Distribution Paid (160) (160) (170) (188) (203)

Chg in Gross Debt 13.8 245 133 (67.6) (58.1)

New units issued 0.0 313 0.0 0.0 0.0

Other Financing CF 0.0 0.0 0.0 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF (146)(146)(146)(146) 398398398398 (37.0)(37.0)(37.0)(37.0) (256)(256)(256)(256) (261)(261)(261)(261)


Chg in Cash 6.08 30.5 161 (38.3) (38.3)

Operating CFPS (sen) 11.0 11.2 11.7 12.6 13.0

Free CFPS (sen) 8.33 (19.6) 9.45 10.1 10.4 Source: Company, AllianceDBS


Source: AllianceDBS



BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 3 Nov 20163 Nov 20163 Nov 20163 Nov 2016)))): : : : RM1.70 (KLCIKLCIKLCIKLCI : : : : 1,648.08) Price TaPrice TaPrice TaPrice Target rget rget rget 12121212----mthmthmthmth:::: RM1.92 (13% upside) (Prev RM1.92) Shariah Compliant: Shariah Compliant: Shariah Compliant: Shariah Compliant: No Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Higher-than-expected construction and manufacturing wins Where we differ: Where we differ: Where we differ: Where we differ: Broadly in line with consensus Analyst Chong Tjen-San +60 3 26043972 [email protected]

Price Relative


Revenue 1,917 1,989 2,361 2,769 EBITDA 178 221 244 269 Pre-tax Profit 141 178 202 229 Net Profit 127 143 162 183 Net Pft (Pre Ex.) 127 143 162 183 Net Pft Gth (Pre-ex) (%) 1.9 12.1 13.5 13.1 EPS (sen) 9.84 11.0 12.5 14.2 EPS Pre Ex. (sen) 9.84 11.0 12.5 14.2 EPS Gth Pre Ex (%) 2 12 14 13 Diluted EPS (sen) 9.84 11.0 12.5 14.2 Net DPS (sen) 4.00 4.96 5.63 6.37 BV Per Share (sen) 34.9 41.0 47.8 55.6 PE (X) 17.3 15.4 13.6 12.0 PE Pre Ex. (X) 17.3 15.4 13.6 12.0 P/Cash Flow (X) 9.3 12.7 10.2 9.3 EV/EBITDA (X) 10.5 8.1 6.9 5.8 Net Div Yield (%) 2.4 2.9 3.3 3.7 P/Book Value (X) 4.9 4.2 3.6 3.1 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 33.2 29.1 28.2 27.4 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sen):::: 10.6 12.5 13.1

Other Broker Other Broker Other Broker Other Broker Recs:Recs:Recs:Recs: B: 10 S: 0 H: 3


Strong and dependable Malaysia’s leading pure construction player.Malaysia’s leading pure construction player.Malaysia’s leading pure construction player.Malaysia’s leading pure construction player. Sunway Construction Group (SCG) is the largest listed pure play construction company in Malaysia. Given its strong track record with MRT, LRT and BRT jobs previously, we are of the view that SCG is on a strong footing to bag several key infrastructure packages such as LRT3 and BRT as well as other infrastructure-related and building projects. SCG has also established itself as the only construction specialist to be involved in all three Rapid Line infra projects (MRT, LRT and BRT). This makes the group one of the strongest contenders to win the pipeline of 11MP projects. Riding on Singapore’s public housing development. Riding on Singapore’s public housing development. Riding on Singapore’s public housing development. Riding on Singapore’s public housing development. Its precast division is a strong proxy to the growing demand for HDB residences in Singapore, where the government is targeting to build an additional 88,000 units of public housing in FY16-FY19. With premium EBIT margins recorded over the past few years, the business is ROE-enhancing and also synergistic to its construction business. The completion of its 3rd precast plant in Iskandar should give it ample capacity to cater for more orders while also compensating for the eventual return of the Tampines plant. Still bidding for more jobs and ahead of RM2.5bn forecast. Still bidding for more jobs and ahead of RM2.5bn forecast. Still bidding for more jobs and ahead of RM2.5bn forecast. Still bidding for more jobs and ahead of RM2.5bn forecast. Not one to rest on its laurels, SCG will be bidding for LRT 3 (already prequalified), private and public sector building jobs and the internal projects from the property arm of its holding company. With YTD wins reaching RM2.6bn (including precast), it has exceeded its RM2.5bn forecast this year where the more recent wins have been for internal jobs and MRT 2 advanced works.

Valuation:

BUY, TP set at RM 1.92. BUY, TP set at RM 1.92. BUY, TP set at RM 1.92. BUY, TP set at RM 1.92. Our TP is based on sum-of-parts (SOP)

valuation to reflect the growing contribution from its high-

margin precast business. While our SOP value is RM2.77bn or

RM2.14/share, we have ascribed a 10% discount to arrive at

our target price of RM1.92.


The timely execution of its peak orderbook of RM5bn is crucial

to minimise any earnings cuts. With its strong execution track

record and experience, we believe the group is able to execute

the projects in a timely manner. At A Glance Issued Capital (m shrs) 1,293

Mkt. Cap (RMm/US$m) 2,198 / 524


Sunway Berhad 55.6

Tan Sri Jeffrey Cheah & Family 7.6

Free Float (%) 37.9


ICB IndustryICB IndustryICB IndustryICB Industry : Industrials / Construction & Materials


4 Nov 2016


Sunway Construction Group Version 5 | Bloomberg: SCGB MK | Reuters: SCOG.KL Refer to important disclosures at the end of this report


Company Guide

Sunway Construction Group


Earnings Drivers:

Sweet spot ahead. Sweet spot ahead. Sweet spot ahead. Sweet spot ahead. We think SCG’s construction segment is

entering a ‘sweet spot’ on the back of the expected upturn in

Malaysia’s construction industry. Given its notable brand name

and strong execution track record, we believe the group is one

of the strongest contenders to bag several key projects under

the Eleventh Malaysia Plan (11MP). We are of the view that SCG

is on a strong footing to bag several key infrastructure packages

such as LRT3, BRT and other private sector building jobs.

Stronger infrastructure orderbStronger infrastructure orderbStronger infrastructure orderbStronger infrastructure orderbook.ook.ook.ook. With MRT2 viaduct package

(V201) being the major infra win in 2016 so far, its construction

orderbook now stands at RM5.0bn. We think SCG has gotten

off to a strong start with construction YTD wins of RM2.6bn

(excluding precast). We have assumed no more new wins for

this division for FY16F and any incremental wins from here

onwards will only be accretive to FY17F earnings and beyond.

Additionally, we think margins should also be relatively intact as

c.50% of its outstanding orderbook comes from two key

projects – MRT Line 2 V201 and Putrajaya Parcel F where the

raw material requirements for MRT aboveground works are

borne by the government while it has also locked in half of the

steel requirements for the Putrajaya job at lower prices.

Highly proHighly proHighly proHighly profitable precast segment. fitable precast segment. fitable precast segment. fitable precast segment. SCG’s precast segment

should be sturdy in contributing a larger share of earnings to

the group. SCG’s precast division made up 13-16% of revenue

in FY12-FY15. It was the largest earnings contributor in FY15,

accounting for 57% of the group’s overall EBIT. The group

believes the normalised margin lies in the 20-25% range. This is

supported by sustainable orders from the Singapore market.

Assuming that it will retain the 3rd precast plant this year, its

total annual production capacity in 2016 is estimated to rise to

251,000 m³. The continuous expansion of its plants enables the

group to have ample capacity to cater for more orders from the

Singapore market, as the group plans to return the Tampines

plant by 2017.

Potential Potential Potential Potential writebacks. writebacks. writebacks. writebacks. We understand SCG may recognise

potential writebacks from its KLCC project, Indian tollroads and

MRT V4 package. It was initially quite positive on recognising

RM40m worth of writebacks for its Indian tollroads this year but

this has been delayed – due to the ongoing arbitration process

for legacy highway-related projects in India.

New order wins

Construction revenue

Precast revenue

Construction EBIT margins

Precast EBIT margins



Company Guide


Balance Sheet:

Strong balance sheet and cash generation ability.Strong balance sheet and cash generation ability.Strong balance sheet and cash generation ability.Strong balance sheet and cash generation ability. As at 30 June

2016, the company has a net cash position of RM315m, with

no long-term borrowings and minimal working capital

requirements going forward. We estimate the group will retain

its strong balance sheet with a net cash position of RM417m in

for FY16F and RM527m in FY17F. Meanwhile, its ROAE is

expected to hover around the 27-29% level.


Executing on peak orderbook.Executing on peak orderbook.Executing on peak orderbook.Executing on peak orderbook. Suncon's orderbook now stands

at RM5bn which is at its peak. This will give it two and a half

years’ visibility. The largest projects are Putrajaya Parcel F and

MRT Line 2, V201 package which form 53% of the orderbook.

More importantly, we think pretax margins for these two key

projects will also be at least 7-8%. Recall that 2015 pretax

margin was low at 3.6% due to MRT Line 1 and KLCC project

(NEC and Package 2 and 2A) where certain losses and

provisions were fully provided for.

Dividend payout policy of at least 35%Dividend payout policy of at least 35%Dividend payout policy of at least 35%Dividend payout policy of at least 35%. . . . SCG is committed to

distribute a minimum 35% of its core profit to shareholders,

which is rare among construction players. This could be

attributable to its sizeable operations with a large asset base

that requires little capex spending going forward. We have

imputed a 45% dividend payout ratio, based on our strong net

cash forecasts. This translates into decent yields of c.3-3.9%.

Key Risks:

Delays in construction. Delays in construction. Delays in construction. Delays in construction. There may be project cost overruns due

to several factors such as design and engineering issues and

soil conditions.

Fluctuating prices of raw materials. Fluctuating prices of raw materials. Fluctuating prices of raw materials. Fluctuating prices of raw materials. The construction business

typically requires a wide range of raw materials including steel

bars, ready-mixed concrete, diesel, electrical cables and fittings,

which are all subject to price fluctuations.

Company Background

An established player with >30 years of heritage, Sunway

Construction Group (SCG) is one of Malaysia’s largest

construction companies. It adopts an integrated business

model that covers various phases of construction activities,

from project design to completion.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide


Key Assumptions


New order wins 800 2,600 2,600 2,100 2,100

Construction revenue 2,032 1,664 1,690 2,012 2,469

Precast revenue 301 253 300 350 300

Construction EBIT margins 3.56 6.90 6.48 6.77

Precast EBIT margins 30.5 21.0 21.0 21.0 Segmental Breakdown

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Revenues (RMm)

Construction 2,032 1,664 1,690 2,012 2,469

Precast Concrete 301 253 300 350 300

Consolidated Adjustments (452) 0.0 0.0 0.0 0.0

Segment 4 0.0 0.0 0.0 0.0 0.0

Others 0.0 0.0 0.0 0.0 0.0


EBIT (RMm) Construction 59.2 117 130 167

Precast Concrete 77.1 62.9 73.5 63.0


EBIT Margins (%) Construction 3.6 6.9 6.5 6.8

Precast Concrete 30.5 21.0 21.0 21.0



FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Revenue 1,881 1,917 1,989 2,361 2,769


Gross ProfitGross ProfitGross ProfitGross Profit 395395395395 403403403403 460460460460 485485485485 513513513513

Other Opng (Exp)/Inc (275) (267) (280) (281) (283)


Associates & JV Inc 30.4 (0.1) 0.0 0.0 0.0

Net Interest (Exp)/Inc 0.72 4.54 (1.4) (1.4) (1.5)

Exceptional Gain/(Loss) (10.6) 0.0 0.0 0.0 0.0


Minority Interest 0.05 (0.6) 0.0 0.0 0.0



EBITDA 162 178 221 244 269

Growth

Revenue Gth (%) 2.2 1.9 3.8 18.7 17.3

EBITDA Gth (%) 90.0 10.1 24.0 10.3 10.4

Opg Profit Gth (%) 183.7 13.4 31.7 13.5 13.0

Net Profit Gth (Pre-ex) (%) 86.5 1.9 12.1 13.5 13.1

Margins & Ratio

Gross Margins (%) 21.0 21.0 23.1 20.5 18.5



ROAE (%) 24.6 33.2 29.1 28.2 27.4

ROA (%) 8.5 9.2 9.1 9.2 8.9

ROCE (%) 21.8 25.3 22.3 22.4 22.3

Div Payout Ratio (%) 0.0 40.7 45.0 45.0 45.0

Net Interest Cover (x) NM NM 130.7 144.1 158.3



Company Guide



FY FY FY FY DecDecDecDec 2Q2Q2Q2Q2015201520152015 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 Revenue 500 450 470 424 430

Cost of Goods Sold 0.0 0.0 0.0 0.0 0.0

Gross ProfitGross ProfitGross ProfitGross Profit 500500500500 450450450450 470470470470 424424424424 430430430430 Other Oper. (Exp)/Inc (459) (422) (443) (389) (393)



Net Interest (Exp)/Inc 0.37 1.90 1.84 2.14 0.51


PrePrePrePre----tax Profittax Profittax Profittax Profit 41.741.741.741.7 30.130.130.130.1 29.429.429.429.4 37.537.537.537.5 38.138.138.138.1 Tax (3.8) (5.0) 0.97 (8.5) (6.8)

Minority Interest 0.0 0.46 (1.0) 0.0 0.0


EBITDA 41.3 28.2 27.6 35.4 37.6

Growth

Revenue Gth (%) 0.8 (10.0) 4.4 (9.8) 1.4

EBITDA Gth (%) 5.4 (31.6) (2.4) 28.4 6.3

Opg Profit Gth (%) 5.4 (31.6) (2.4) 28.4 6.3

Net Profit Gth (Pre-ex) (%) 10.0 (32.1) 14.4 (1.0) 7.8

Margins

Gross Margins (%) 100.0 100.0 100.0 100.0 100.0



FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Net Fixed Assets 179 163 156 151 147


Other LT Assets 10.8 17.4 17.4 17.4 17.4

Cash & ST Invts 222 468 543 653 774

Inventory 20.2 17.3 19.8 23.7 27.8

Debtors 790 835 872 1,035 1,214



ST Debt

135 137 138 139 140

Creditor 791 913 942 1,123 1,322


LT Debt 0.07 0.0 0.0 0.0 0.0


Shareholder’s Equity 315 451 529 618 719

Minority Interests (5.2) 0.63 0.63 0.63 0.63


Non-Cash Wkg. Capital 14.1 (56.1) (45.1) (59.3) (74.9)

Net Cash/(Debt) 86.4 332 406 514 634




Asset Turnover (x) 1.4 1.4 1.3 1.3 1.4

Current Ratio (x) 1.1 1.3 1.3 1.4 1.4

Quick Ratio (x) 1.1 1.2 1.3 1.3 1.4



Capex to Debt (%) 33.8 18.8 25.4 25.2 25.0

Z-Score (X) 3.4 3.1 3.3 3.2 3.0



Company Guide



FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Pre-Tax Profit 151 141 178 202 229

Dep. & Amort. 41.6 41.9 41.5 40.1 39.0

Tax Paid (26.5) (13.0) (35.6) (40.5) (45.7)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. 297 79.9 (11.0) 14.2 15.6

Other Operating CF (279) (13.6) 0.0 0.0 0.0

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 184184184184 236236236236 173173173173 216216216216 238238238238 Capital Exp.(net) (45.7) (25.7) (35.0) (35.0) (35.0)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF 395 (38.8) 0.0 0.0 0.0

Net Investing CFNet Investing CFNet Investing CFNet Investing CF 349349349349 (64.5)(64.5)(64.5)(64.5) (35.0)(35.0)(35.0)(35.0) (35.0)(35.0)(35.0)(35.0) (35.0)(35.0)(35.0)(35.0) Div Paid (429) (70.0) (64.1) (72.8) (82.3)

Chg in Gross Debt 46.5 1.64 1.00 1.00 1.00

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF (85.5) 65.7 0.0 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF (468)(468)(468)(468) (2.6)(2.6)(2.6)(2.6) (63.1)(63.1)(63.1)(63.1) (71.8)(71.8)(71.8)(71.8) (81.3)(81.3)(81.3)(81.3)


Chg in Cash 65.5 169 74.9 109 121

Opg CFPS (sen) (8.7) 12.1 14.2 15.6 17.2

Free CFPS (sen) 10.7 16.3 10.7 14.0 15.7



Source: AllianceDBS

Analyst: Chong Tjen-San

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:BC, PY

BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price ((((3333 Nov 2016Nov 2016Nov 2016Nov 2016)))): : : : RM1.38 (KLCIKLCIKLCIKLCI : : : : 1,648.24) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM1.70 (23% upside) (Prev RM1.70) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: New contracts; better-than-expected margins Where we differ:Where we differ:Where we differ:Where we differ: Lower margins assumptions compared to consensus Analyst Inani ROZIDIN +603 2604 3905 [email protected]

What’s New • Growth will be driven by new contracts from its

largest customer, client D

• Specialised portfolio catering to clients with large-

scale expansion plans

• Improving overseas prospects

• Maintain BUY with TP of RM1.70

Price Relative

Forecasts and Valuation FY FY FY FY JulJulJulJul ((((RMRMRMRM m) m) m) m) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Revenue 2,176 2,703 3,390 3,676 EBITDA 247 278 317 337 Pre-tax Profit 142 190 224 239 Net Profit 118 158 184 195 Net Pft (Pre Ex.) 137 158 184 195 Net Pft Gth (Pre-ex) (%) 39.5 15.2 16.7 5.9 EPS (sen) 10.2 12.9 15.1 16.0 EPS Pre Ex. (sen) 11.8 12.9 15.1 16.0 EPS Gth Pre Ex (%) 24 10 17 6 Diluted EPS (sen) 11.2 12.4 14.4 15.3 Net DPS (sen) 4.74 5.17 6.04 6.40 BV Per Share (sen) 75.8 79.9 89.0 98.6 PE (X) 13.6 10.7 9.1 8.6 PE Pre Ex. (X) 11.7 10.7 9.1 8.6 P/Cash Flow (X) 12.1 11.2 14.9 8.3 EV/EBITDA (X) 8.0 7.3 6.5 6.0 Net Div Yield (%) 3.4 3.7 4.4 4.6 P/Book Value (X) 1.8 1.7 1.6 1.4 Net Debt/Equity (X) 0.2 0.2 0.2 0.1 ROAE (%) 14.2 17.0 17.9 17.1 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 14.0 16.0 18.0 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 3 S: 0 H: 0


Passion to grow We recommend BUY on VSI as we believe it is a high growth We recommend BUY on VSI as we believe it is a high growth We recommend BUY on VSI as we believe it is a high growth We recommend BUY on VSI as we believe it is a high growth company with potential for significant contract wins. company with potential for significant contract wins. company with potential for significant contract wins. company with potential for significant contract wins. We expect VSI’s growth to be driven by its largest client (with 30% of total revenue in FY16) – client D. We forecast strong growth from client D due to contributions from a sizeable box-build assembly contract for vacuum cleaners worth RM400m p.a. which started operations in Oct 2016. While this has been priced in, we believe the imminent signing of another contract for an additional line of box-build assembly of vacuum cleaners by Mar 2017 has not been factored in yet. Taking these two contracts into account, we forecast client D’s revenue contribution to grow at a CAGR of 42% in FY16-FY19F. Beyond these two contracts, we believe there is high potential for further contract wins from client D as it launches more products.

Specialised portfolio catering to clients with largeSpecialised portfolio catering to clients with largeSpecialised portfolio catering to clients with largeSpecialised portfolio catering to clients with large----scalescalescalescale expansion plans.expansion plans.expansion plans.expansion plans. VSI’s top 3 customers (client D, Keurig and Zodiac) account for 58% of its total revenue in FY16. All three of VSI’s main clients are expanding and we expect each to contribute to VSI’s overall growth in FY17-FY19. VSI has both the capacity and capability to cater to its main clients’ growing needs. We believe VSI is protected against termination risk from its key clients in the mid-term due to: 1) the long-standing working relationships, 2) VSI’s participation in the product development for Keurig and Zodiac, and 3) client D’s need for additional contract manufacturers to cater to its expansion plan. Valuation: More conservative view than consensus.More conservative view than consensus.More conservative view than consensus.More conservative view than consensus. Our fair value of RM1.70 is based on 12x fully-diluted CY17F EPS, which is the industry’s average. In the mid-term, we conservatively forecast VSI’s revenue/core EPS to grow at a 3-year CAGR of 19%/11% over FY16-FY19F. We are factoring a decline in margins due to large increase in sales from client D which carries a lower margin in comparison to VSI’s other key customers due to its large order size. Consensus is more bullish on topline growth and margin assumptions. A +/- 0.1% shift in net margin will affect earnings by +/-2%, causing our fair value to increase/decrease by 3%. Key Risks to Our View: LowerLowerLowerLower----thanthanthanthan----expected margins.expected margins.expected margins.expected margins. Lower-than-expected margins due to raw material costs escalation and/or sub-optimal operational efficiency could dampen VSI’s earnings growth momentum, in comparison to its top-line growth. At A Glance Issued Capital (m shrs) 1,171 Mkt. Cap (RMm/US$m) 1,616 / 384 Major Shareholders (%) Datuk Beh Kim Ling 20.6 BNP Paribas Wealth Management 8.8 Datuk Gan Sem Yam 7.0 Free Float (%) 51.0 3m Avg. Daily Val (US$m) 1.7 ICB IndustryICB IndustryICB IndustryICB Industry : Industrials / Electronic & Electrical Equipment


4 Nov 2016


VS Industry Version 1 | Bloomberg: VSI MK | Reuters: VSID.KL Refer to important disclosures at the end of this report

70

170

270

370

470

570

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8


Relative IndexRM

VS Industry (LHS) Relative KLCI (RHS)


Company Guide

VS Industry

WHAT’S NEW

Things to look out for in FY17

Growth driven by client D.Growth driven by client D.Growth driven by client D.Growth driven by client D. Client D’s contribution to VSI’s total

revenue grew at a 2-year CAGR of 24%, from RM420m in

FY14 to RM644m in FY16, thus making it VSI’s largest client at

30% of total revenue. Currently, the bulk of revenue from

client D is from printed circuit boards (PCB) and battery pack

assembly. In fact, VSI supplies approximately 80% of client D’s

PCB and battery pack requirements. We expect strong double-

digit growth from client D from FY17 onwards due to

contributions from a sizeable box-build assembly contract for

vacuum cleaners worth RM400m p.a. which has started

production in Oct 2016. We also anticipate another contract

for an additional line of box build assembly of vacuum cleaner

by Mar 2017. There is also high potential for future contract

wins. We have incorporated these developments in our model.

As such, we forecast client D’s revenue contribution to grow at

a CAGR of 42% in FY16-FY19F. Client D will remain VSI’s

main client in FY17-19 due to its aggressive growth.

Turnaround in overseas plants.Turnaround in overseas plants.Turnaround in overseas plants.Turnaround in overseas plants. VSI has a presence in China

through 43.9%-owned VS International Group Ltd (VSIG), and

in Indonesia through wholly-owned VS Technology Indonesia.

As at end-FY16, China/Indonesia accounted for 26%/5% of

total revenue. However, we note its China earnings are

currently in the red while its Indonesia unit, previously in the

red, registered positive PBT of RM7.1m in FY16. The main issue

with its overseas operations is underutilisation. In addition,

earnings from operations in China were affected by the one-off

provision for impairment of RM21.8m in FY16. We understand

that operations in China would have broken even in FY16,

excluding the provisions made. However, we expect operations

to improve in China and Indonesia from the increase in

production volume and capacity utilisation. Operations in China

are expected to be profitable in FY17 due to the increase in

production from customers such as Perfect China, NEP,

Georgia-Pacific and Amway. We expect operations in Indonesia

to remain profitable from FY17, boosted by orders from Fluidic

Energy, LG Innotek, Epson and Sanken.

Synergistic partnership with NEP.Synergistic partnership with NEP.Synergistic partnership with NEP.Synergistic partnership with NEP. In Jul 2016, VSI announced its

proposed acquisition of a 20% stake in NEP Holdings (Malaysia)

Sdn Bhd (NEP) for RM60m in cash. NEP is one of the largest

water filtration system companies in Asia with operations in

Malaysia (c.30% market share), Singapore (c.20% market

share), Hong Kong (c.30% market share), plus new markets

such as Taiwan and China. Upon completion of the transaction

by March 2017, NEP will become an associate of VSI. NEP will

benefit from leveraging on VSI’s design and R&D expertise and

manufacturing capacity; and VSI will benefit from having NEP as

a new and secure long-term high volume ODM customer. With

the new orders from NEP as well as increase in orders from the

existing clients in China, we expect operations in China to be

profitable from FY17 onwards. NEP has committed to RM100m

in sales order p.a. starting from FY17. In addition, the

acquisition of NEP comes with a profit guarantee of RM40m for

NEP’s FY17 (ending June 2017) results, which will benefit VSI in

the form of share of profit from associate. NEP registered a net

profit of RM29m in FY16 (June-2016). We have incorporated

the RM100m sales order p.a. into our model but conservatively

assume flat earnings growth for NEP, i.e. RM29m p.a.

Acquired 12% stake in Seeing Machines Ltd. Acquired 12% stake in Seeing Machines Ltd. Acquired 12% stake in Seeing Machines Ltd. Acquired 12% stake in Seeing Machines Ltd. Seeing Machines

Ltd (SML), a vehicle operator monitoring technology company,

is listed on the AIM market of London Stock Exchange. Its

products have been successfully commercialised, as evidenced

by its licensing arrangement with Caterpillar, as well as its

success in securing a major follow-on order from one of the

world’s largest car manufacturers in March 2016. We are

positive on VSI's latest acquisition of a 12% stake in SML, as it

has the potential to generate lucrative prospects. Although VSI

is well known as a consumer OEM, it also manufactures

automotive component parts for leading multinational (MNC)

automotive suppliers. VSI is well positioned for potential

collaborative opportunities with SML.


Company Guide

VS Industry


Earnings Drivers: Expanding earnings base.Expanding earnings base.Expanding earnings base.Expanding earnings base. We expect growth to come from new and existing customers securing more manufacturing orders, thus boosting its earnings growth to double digits in FY17F. In addition, VSI has the technology and space capacity at its existing Johor plants to support an increase in production volume. We conservatively forecast VSI’s revenue/earnings to grow at a 3-year CAGR of 19%/18% over FY16-FY19F. Growth driven by client D.Growth driven by client D.Growth driven by client D.Growth driven by client D. Client D’s contribution to VSI’s total revenue grew at a 2-year CAGR of 24%, from RM420m in FY14 to RM644m in FY16, thus making it VSI’s largest client at 30% of total revenue. Currently, the bulk of revenue from client D is from printed circuit boards (PCB) and battery pack assembly. In fact, VSI supplies approximately 80% of client D’s PCB and battery pack requirements. We expect strong double-digit growth from client D from FY17 onwards due to contributions from a sizeable box-build assembly contract for vacuum cleaners worth RM400m p.a. which has started production in Oct 2016. We also anticipate another contract for an additional line of box-build assembly of vacuum cleaner by Mar 2017. As such, we forecast client D’s revenue contribution to grow at a CAGR of 42% in FY16-FY19F. There is also high potential for future contract wins from client D as it rolls out more products. Client D will remain VSI’s main client in FY17-19. Enduring relationship with Keurig.Enduring relationship with Keurig.Enduring relationship with Keurig.Enduring relationship with Keurig. Keurig’s contribution to VSI’s total revenue grew at a 4-year CAGR of 147%, from RM14m in FY12 to RM528m in FY16. The high growth rate of VSI’s revenue from Keurig signifies the growing confidence in VSI’s quality and delivery. VSI’s partnership with Keurig began in 2011 and the group has progressively grown to be one of Keurig’s main manufacturers. Furthermore, VSI is Keurig’s only manufacturer outside of China. We believe there are ample growth opportunities given: a) VSI’s share of Keurig’s production sales volume stands at only 25-30% currently, and b) the group recently clinched a full-assembly contract for Keurig’s upcoming new coffee machine model, in which the new model is fully designed by VSI. Correspondingly, VSI has been given 18 months’ manufacturing exclusivity for this model. Keurig has awarded to VSI a minimum order of USD82m for this model over the next three years. We forecast Keurig’s revenue contribution to grow at 9% CAGR in FY16-FY19F. Sole OEM for Zodiac robotic pool cleaners.Sole OEM for Zodiac robotic pool cleaners.Sole OEM for Zodiac robotic pool cleaners.Sole OEM for Zodiac robotic pool cleaners. VSI has been appointed the sole original equipment manufacturer (OEM) for Zodiac robotic pool cleaners. Zodiac streamlined its production in France and Australia in 2H14 and 2H15, respectively, due to high production costs and consequently, VSI was appointed the sole OEM for its Zodiac pool cleaners. As a result, Zodiac’s contribution to VSI’s total revenue increased from RM26m in FY14 to RM79m/RM94m in FY15/FY16. Although Zodiac’s contribution to VSI's total revenue was only at 4% in FY15/FY16, its contribution to group PBT was higher at an estimated 7%/9%. Management has guided that the turnover from Zodiac is expected to grow steadily at 8-10% per annum in FY17 and FY18. We forecast Zodiac’s revenue contribution to grow at a CAGR of 8% in FY16-FY19F.

Keurig growth (%)

Client D growth (%)

Zodiac growth (%)

Others growth (%)

Margin trends


53.7

-6.4

28.8

0 0

-7.0

1.7

10.5

19.2

28.0

36.7

45.5

54.2

2015A 2016A 2017F 2018F 2019F

1.0

51.6

63.2

54.0

14.4

0.0

12.9

25.8

38.7

51.5

64.4

2015A 2016A 2017F 2018F 2019F

206.6

19.28.0 8.0 8.0

0

42

84

126

169

211

2015A 2016A 2017F 2018F 2019F

-4

5

-4

13

4

-4.6

-1.1

2.4

5.9

9.5

13.0

2015A 2016A 2017F 2018F 2019F

14.8%15.5%

13.8%12.9% 12.7%

7.3%8.0%

7.2% 6.8% 6.7%

6.9%

5.4% 5.8% 5.4% 5.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

FY15A FY16A FY17F FY18F FY19F

Gross Margin (%) EBIT Margin (%) Net Margin (%)


Company Guide

VS Industry

Balance Sheet: Strong balance sheet with low gearing.Strong balance sheet with low gearing.Strong balance sheet with low gearing.Strong balance sheet with low gearing. Despite rapid expansion in the past few years, VSI has been able to maintain net gearing at c.0.2x due to its strong earnings growth and healthy cash-flow generation. Moving forward, we expect net gearing to be sustained at the current level amid minimal maintenance capex. With its strong cash position of RM218m as of end-FY16, we believe this cash pile allows the group to seize any good business opportunities as and when they arise.

Share Price Drivers: New contract awards.New contract awards.New contract awards.New contract awards. VSI’s price movement is highly sensitive to new contract announcements, as seen in the past when the share price rose by c.30% from the date of the announcement of the first contract from client D in July 2016. Margin expansion.Margin expansion.Margin expansion.Margin expansion. Expect margins to fall in FY17-FY19, mainly due to the shift in customer mix, as VSI undertook more of client D’s projects which incurred high costs for purchasing specific components to support orders. Nevertheless, the shortfall in margins has been compensated by the increase in contract values. We note that any slight improvement in margins will considerably improve VSI’s earnings as the contract values are significant.

Key Risks: LowerLowerLowerLower----thanthanthanthan----expected margins.expected margins.expected margins.expected margins. VSI’s FY16 net margin stood at 5.4% (-1.4bps y-o-y). The reduction in margins was due to a large increase in sales from client D, which shifted the margin dynamics of VSI. This is because client D‘s volume is higher but entails a lower margin in comparison to VSI’s other key customers. Margins were also affected by the one-off impairment made in FY16. Adjusted for the impairment, net margin would have been in the region of 5.8%. Going forward, a lower-than-expected margin due to raw material costs escalation and/or sub-optimal operational efficiency could dampen VSI’s earnings growth momentum, in comparison to its top-line growth Foreign currency fluctuation risk.Foreign currency fluctuation risk.Foreign currency fluctuation risk.Foreign currency fluctuation risk. Approximately 90% of its Malaysia sales are denominated in USD while c.65% of its cost of sales is also denominated in USD. Nevertheless, there is still a net exposure of c.25% per dollar of sales. In times of the USD strengthening against the RM, VSI will profit from the currency gain as a large portion of its coffee machines, battery packs and PCB sales are denominated in USD. Conversely, VSI will be negatively affected when the USD weakens. Downturn of the consumer electronics industry.Downturn of the consumer electronics industry.Downturn of the consumer electronics industry.Downturn of the consumer electronics industry. VSI, as an EMS provider, is primarily dependent on the global demand for consumer electronics products. In FY16, almost 100% of its revenue was generated from the consumer electronics industry. Hence, any unfavourable macro factors such as a global economic slowdown or another global financial crisis will negatively impact the demand for VSI’s products.

Company Background

VSI offers integrated services from product mould design to

tool fabrication; injection moulding; finishing process; PCB

assembly, sub-assembly and full assembly.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.1

1.2

1.2

1.3

1.3

1.4

1.4

1.5

1.5

0.00

0.10

0.20

0.30

0.40

0.50

2015A 2016A 2017F 2018F 2019F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

2015A 2016A 2017F 2018F 2019F

Capital Expenditure (-)

RMm

0.0%

5.0%

10.0%

15.0%

20.0%

2015A 2016A 2017F 2018F 2019F

Avg: 6.8x

+1sd: 9.8x

+2sd: 12.8x

-1sd: 3.8x

-2sd: 0.9x0.7

2.7

4.7

6.7

8.7

10.7

12.7

14.7


(x)

Avg: 1.04x

+1sd: 1.6x

+2sd: 2.15x

-1sd: 0.49x

0.0

0.5

1.0

1.5

2.0

2.5


(x)


Company Guide

VS Industry

Key Assumptions

FY FY FY FY JulJulJulJul 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Keurig growth (%) 53.7 (6.4) 28.8 0.0 0.0

Client D growth (%) 1.00 51.6 63.2 54.0 14.4

Zodiac growth (%) 207 19.2 8.00 8.00 8.00

Others growth (%) (3.6) 4.64 (4.2) 12.9 4.44

Segmental Breakdown

FY FY FY FY JulJulJulJul 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenues (RMm)

Malaysia 1,328 1,489 1,981 2,555 2,797

China 526 565 603 716 759

Indonesia 80.8 119 119 119 119

Others 2.02 1.99 0.0 0.0 0.0


Segmental profit (RMm) Malaysia 170 163 160 189 202

China (7.6) (18.9) 18.1 21.5 22.8

Indonesia (3.6) 7.10 8.33 8.33 8.33

Others 0.0 (9.2) 3.60 5.42 5.55


Segmental profit Margins (%)

Malaysia 12.8 10.9 8.1 7.4 7.2

China (1.5) (3.3) 3.0 3.0 3.0

Indonesia (4.5) 6.0 7.0 7.0 7.0



FY FY FY FY JulJulJulJul 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenue 1,937 2,176 2,703 3,390 3,676


Gross ProfitGross ProfitGross ProfitGross Profit 287287287287 337337337337 372372372372 438438438438 466466466466 Other Opng (Exp)/Inc (146) (163) (176) (207) (220)


Associates & JV Inc (1.6) 1.62 8.00 8.00 8.00


Exceptional Gain/(Loss) 34.6 (19.0) 0.0 0.0 0.0




Net ProfitNet ProfitNet ProfitNet Profit 133133133133 118118118118 158158158158 184184184184 195195195195

Net Profit before Except. 98.2 137 158 184 195

EBITDA 203 247 278 317 337

Growth

Revenue Gth (%) 12.9 12.3 24.2 25.4 8.4

EBITDA Gth (%) 70.9 21.6 12.7 13.9 6.2

Opg Profit Gth (%) 144.2 22.4 12.8 18.1 6.6


Margins & Ratio

Gross Margins (%) 14.8 15.5 13.8 12.9 12.7



ROAE (%) 20.4 14.2 17.0 17.9 17.1

ROA (%) 7.8 6.1 7.7 8.1 7.8

ROCE (%) 6.5 8.2 9.2 10.1 10.0

Div Payout Ratio (%) 40.6 46.6 40.0 40.0 40.0



Growth will be driven by client D

To be profitable in China from FY17 onwards


Company Guide

VS Industry


FY FY FY FY JulJulJulJul 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 Revenue 507 612 501 508 554


Gross ProfitGross ProfitGross ProfitGross Profit 72.372.372.372.3 107107107107 85.985.985.985.9 70.770.770.770.7 73.373.373.373.3 Other Oper. (Exp)/Inc (11.8) (27.5) (46.2) (44.1) (64.4)


Associates & JV Inc (1.0) (0.1) (0.3) (1.0) 2.99



PrePrePrePre----tax Profittax Profittax Profittax Profit 57.157.157.157.1 74.974.974.974.9 35.835.835.835.8 22.322.322.322.3 8.868.868.868.86 Tax (6.9) (16.2) (7.7) (4.6) (9.2)

Minority Interest 2.51 1.50 (0.6) 1.55 11.3


EBITDA 76.0 97.2 58.4 43.6 28.9

Growth

Revenue Gth (%) 20.6 20.8 (18.2) 1.3 9.1

EBITDA Gth (%) 41.2 27.9 (39.9) (25.4) (33.6)

Opg Profit Gth (%) 57.8 30.9 (49.8) (33.1) (66.5)

Net Profit Gth (Pre-ex) (%) 98.8 14.2 (54.3) (29.8) (43.3)

Margins

Gross Margins (%) 14.3 17.4 17.1 13.9 13.2



FY FY FY FY JulJulJulJul 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Net Fixed Assets 664 681 634 636 641


Other LT Assets 164 184 219 219 219

Cash & ST Invts 244 218 226 235 273

Inventory 273 307 367 465 506

Debtors 501 583 673 845 916



ST Debt

289 323 300 350 350

Creditor 396 441 530 672 730


LT Debt 123 92.5 100 100 100


Shareholder’s Equity 777 880 975 1,085 1,202

Minority Interests 203 186 172 159 145


Non-Cash Wkg. Capital 367 440 501 629 682

Net Cash/(Debt) (168) (197) (174) (215) (177)




Asset Turnover (x) 1.1 1.1 1.3 1.5 1.5

Current Ratio (x) 1.5 1.4 1.5 1.5 1.6

Quick Ratio (x) 1.1 1.0 1.1 1.0 1.1

Net Debt/Equity (X) 0.2 0.2 0.2 0.2 0.1


Capex to Debt (%) 15.6 12.4 16.0 17.9 19.4

Z-Score (X) NA NA NA NA NA


Impairment loss of RM21.8m from China subsidiary


Company Guide

VS Industry


FY FY FY FY JulJulJulJul 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Pre-Tax Profit 160 142 190 224 239

Dep. & Amort. 63.1 72.1 74.8 78.2 82.5

Tax Paid (34.2) (37.6) (45.5) (53.8) (57.3)

Assoc. & JV Inc/(loss) 1.57 (1.6) (8.0) (8.0) (8.0)

Chg in Wkg.Cap. (159) (96.3) (60.9) (128) (53.2)

Other Operating CF 25.0 54.4 0.0 0.0 0.0

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 56.556.556.556.5 133133133133 150150150150 113113113113 203203203203 Capital Exp.(net) (64.3) (51.6) (64.1) (80.4) (87.2)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF (44.7) (60.0) 0.0 0.0 0.0

Net Investing CFNet Investing CFNet Investing CFNet Investing CF (109)(109)(109)(109) (112)(112)(112)(112) (64.1)(64.1)(64.1)(64.1) (80.4)(80.4)(80.4)(80.4) (87.2)(87.2)(87.2)(87.2) Div Paid (53.9) (55.0) (63.1) (73.7) (78.1)

Chg in Gross Debt (6.3) (24.2) (15.0) 50.0 0.0

Capital Issues 118 15.7 0.0 0.0 0.0

Other Financing CF 70.4 (6.8) 0.0 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF 128128128128 (70.3)(70.3)(70.3)(70.3) (78.2)(78.2)(78.2)(78.2) (23.7)(23.7)(23.7)(23.7) (78.1)(78.1)(78.1)(78.1)


Chg in Cash 117 (24.9) 7.77 8.98 37.5

Opg CFPS (sen) 20.9 19.7 17.3 19.7 21.0

Free CFPS (sen) (0.8) 6.98 7.04 2.68 9.48



Source: AllianceDBS










1: 18 Apr 16 1.22 1.60 NOT RATED

2: 04 Nov 16 1.38 1.70 BUY

Note Note Note Note : Share price and Target price are adjusted for corporate actions.

1

2

1.10

1.20

1.30

1.40

1.50

1.60

1.70

Nov-15 Mar-16 Jul-16

RMRMRMRM

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:BC, PY


Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: New contracts; higher utilisation at Senai, Johor plant

Where we differ:Where we differ:Where we differ:Where we differ: Largely in-line with consensus Analyst Inani ROZIDIN +603 2604 3905 [email protected]

What’s New • 2QFY17 earnings to be resilient; rise in costs being

mitigated by inclusion of high value contract

• Single customer risk not an alarming; secured

contracts will run for another 4-5 years

• High-growth prospects on ample spare capacity

and potential further high value contract wins

• Reiterate BUY with higher TP of RM1.88

Price Relative

Forecasts and Valuation FY FY FY FY MarMarMarMar ((((RMRMRMRM m) m) m) m) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Revenue 1,051 1,783 2,354 2,781 EBITDA 125 201 270 328 Pre-tax Profit 105 167 226 279 Net Profit 82.1 129 174 211 Net Pft (Pre Ex.) 82.1 129 174 211 Net Pft Gth (Pre-ex) (%) 94.0 57.5 34.6 21.3 EPS (sen) 7.12 10.3 13.9 16.9 EPS Pre Ex. (sen) 7.12 10.3 13.9 16.9 EPS Gth Pre Ex (%) 51 45 35 21 Diluted EPS (sen) 6.55 10.3 13.9 16.9 Net DPS (sen) 3.56 5.16 6.95 8.43 BV Per Share (sen) 29.4 32.2 39.2 47.6 PE (X) 18.5 12.8 9.5 7.8 PE Pre Ex. (X) 18.5 12.8 9.5 7.8 P/Cash Flow (X) nm 12.9 7.6 7.2 EV/EBITDA (X) 12.0 7.9 5.5 4.2 Net Div Yield (%) 2.7 3.9 5.3 6.4 P/Book Value (X) 4.5 4.1 3.4 2.8 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 33.4 34.8 38.9 38.9 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 10.3 13.4 15.8 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 5 S: 0 H: 1


FY17 earnings still intact Expect 2Q17 results to still be affected by cost issues.Expect 2Q17 results to still be affected by cost issues.Expect 2Q17 results to still be affected by cost issues.Expect 2Q17 results to still be affected by cost issues. We expect earnings for 2QFY17 to be similar to 1QFY17 due to the labour issues that prevailed during the quarter and provisions for additional costs from production shift of the new hairdryer product. However, we understand that in the past any provisions made for unexpected product start-up costs are claimable from the client in due course. Taking these into account, we see improved visibility for the group’s earnings from 3QFY17 onwards, arising from; 1) the accretion of the recent hairdryer contract from its key customer, client D, 2) supported by improved operating margins from the high value contract and 3) resolution of the labour issues in Sept 2016. In our view, we believe there is further upside to its share price given the high-growth momentum from its sizeable contract wins and prospective expansion in margins.

SingleSingleSingleSingle----customer concentration riskcustomer concentration riskcustomer concentration riskcustomer concentration risk not a pressing issuenot a pressing issuenot a pressing issuenot a pressing issue. In FY16, c.55% of revenue is derived from client D. Looking forward, we forecast this key customer to contribute an even higher portion, c.72% in FY17F. In the event that its key customer reduces or terminates contracts with SKPRES, the latter’s earnings could be materially and adversely affected. However, we are not overtly alarmed by this risk, as the contract wins are on a mid-term basis. SKPRES currently has two significant contracts from client D worth c.RM1.1bn p.a. which will run for another 4-5 years; contracts to manufacture cordless vacuum cleaners and hairdryers. Given its longstanding relationship with client D, we are positive about SKPRES’ long-term prospects as it has been able to continuously secure manufacturing contracts for client D’s latest flagship products.

New celebrated product. New celebrated product. New celebrated product. New celebrated product. The recent product launch of the group’s key customer has the potential to be the next best-selling product, following glowing reviews from the Japan and UK launches. The recent US launch of the product (which is carried by large retailers) in Sept 2016 has been met with positive reviews. We are positive on the developments as SKPRES is currently the sole manufacturer for this product.

Valuation: We maintain our BUY call on SKPRES with a higher TP of RM1.88. Our revised TP is pegged to FY18 PE of 13.5x, which is +1SD of its 5-year average forward PE. We previously peg it to the industry average PE of 12x but believes it deserves a premium valuation given much stronger earnings growth than peers especially post-resolution of its recent labour issue. Key Risks to Our View: Slower Slower Slower Slower than expected than expected than expected than expected margins margins margins margins recoveryrecoveryrecoveryrecovery. . . . SKPRES’s net margin dropped to 5.7% in 1QFY17 (7.8% in FY16) due to operation shifts and labour issues. While resolved, it will take time for SKPRES to gradually achieve optimal efficiency levels. Thus, we conservatively forecasts FY17-19 net margin at 7.3%-7.6%. At A Glance Issued Capital (m shrs) 1,179 Mkt. Cap (RMm/US$m) 1,556 / 371 Major Shareholders (%) Dato’ Gan Kim Huat 51.7 EPF 6.0 Free Float (%) 42.4 3m Avg. Daily Val (US$m) 0.77 ICB IndustryICB IndustryICB IndustryICB Industry : Industrials / Electronic & Electrical Equipment


4 Nov 2016


SKP Resources Bhd Version 4 | Bloomberg: SKP MK | Reuters: SKPR.KL Refer to important disclosures at the end of this report


Company Guide

SKP Resources Bhd

WHAT’S NEW

FY17 earnings intact

• We expect earnings for 2QFY17 to be similar to 1QFY17

due to the labour issues that prevailed during the quarter

and provisions for additional costs from production shift

of the new hairdryer product.

• However, we understand that in the past any provisions

made for unexpected product start-up costs are

claimable from the client in due course.

• Taking these into account, we see improved visibility for

the group’s earnings from 3QFY17 onwards, arising

from; 1) the accretion of the recent hairdryer contract

from its key customer, client D, 2) supported by

improved operating margins from the high value

contract and 3) resolution of the labour issues in Sept

2016.

• To recap, SKPRES has clinched a four-year contract worth

RM2bn (RM500m p.a.) for manufacturing a newly

launched product from its key customer. However,

SKPRES would be foregoing the previous RM400m p.a.

contract, for the manufacturing of a specific model of

cordless vacuum cleaner. The move is to optimise and

shift the existing limited labour resources to work on the

higher valued product, following the government’s

decision to freeze the hiring of foreign labour in Feb

2016. To ensure continued production, the group has

resorted to hiring significantly higher-cost contract

workers in the quarter.

• The contract awarded in Sep 2015 (contract value of

RM600m/p.a. over five years) for the manufacturing of

another model of cordless vacuum cleaner remains in

production.

• The labour issue has been resolved with 1,000 new

workers coming in batches from Sept 2016. Currently,

almost 400 new foreign workers have arrived, with an

agency providing the hostel management services. These

new foreign workers will be given on-the-job training.

Once the new foreign workers are familiarised with their

workspace, the higher-cost contract workers will be

discontinued. To-date, half of the 600 higher-cost

contract workers have been discontinued, with the

remaining half to be let go by end of Oct 2016.

• With the labour issues being resolved recently, we see

more certainty for the group’s mid-term prospects arising

from the accretion of sizeable contracts.

OUTLOOK

New celebrated product. New celebrated product. New celebrated product. New celebrated product. The recent product launch of the

group’s key customer has the potential to be the next best-

selling product, following glowing reviews from the Japan and

UK launches. The recent US launch of the product (which is

carried by large retailers) in Sept 2016 has been met with

positive reviews. We are positive on the developments as

SKPRES is currently the sole manufacturer for this product.

Vertical integrated manufacturer.Vertical integrated manufacturer.Vertical integrated manufacturer.Vertical integrated manufacturer. SKPRES intends to go into the

production of PCBA in the mid-term. This will complement its

present tooling, plastic moulding and full-assembly operations.

There will be a cost-saving opportunity as SKPRES will no longer

need to purchase PCBA for the assembly of vacuum cleaners.

Expanding clientele base.Expanding clientele base.Expanding clientele base.Expanding clientele base. Growth is also supported by SKPRES’

initiative to expand its clientele base and management has

targeted 8% annual growth for non-key customer contracts.

Among the areas management is looking into is the plastic

moulding and F&B packaging segment, with plans to increase

supply to existing customers such as Sony, Panasonic, Unilever,

Nestle, Suntory and Shell.

Well positioned for further contract awards.Well positioned for further contract awards.Well positioned for further contract awards.Well positioned for further contract awards. Only c.25% of the

capacity at SKPRES’ new plant in Senai, Johor has been utilised.

With ample spare capacity, we believe the group is well

prepared to take on more contracts. We forecast the utilisation

rate to increase steadily with the addition of two assembly lines

p.a. to cater for the expected increase in order volume.

Exhibit 1: Revenue and net profit trends


413 619

1,051

1,783

29

42

82

129

-

20

40

60

80

100

120

140

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

FY14 FY15 FY16 FY17F

RM'mRM'm

Revenue (LHS) Net Profit (RHS)

Rising trend


Company Guide

SKP Resources Bhd


Earnings Drivers:

Longstanding relationship with key customer.Longstanding relationship with key customer.Longstanding relationship with key customer.Longstanding relationship with key customer. SKPRES has

proven to be a capable and reliable world-class manufacturer

for its key customer. SKPRES is one of its key customer’s four

main contract manufacturers. The other three contract

manufacturers are Flextronics (US), Meiban Group (Singapore)

and ATA Industrial (Singapore). Its key customer is also the

group’s main client. The bulk of SKPRES’ business (c.55% in

FY16) comes from key customer-related contracts.

Benefiting from key customer’s expansion plans.Benefiting from key customer’s expansion plans.Benefiting from key customer’s expansion plans.Benefiting from key customer’s expansion plans. Given the

group’s enduring partnership with its key customer, we are

positive of SKPRES’ long-term prospects as we expect it to gain

further contracts from its key customer’s aggressive expansion

plan. SKPRES has secured substantial contracts from its key

customer for the manufacturing of cordless vacuum cleaners

and hairdryers totalling RM1.1bn p.a. for the next four years.

After imputing the new contract wins into our model, revenue

contribution of its key customer-related contracts is forecasted

at c.72% in FY17F. We foresee more contract flows for SKPRES

in the future as this key customer progresses along its expansion

plan.

Expanding clientele base.Expanding clientele base.Expanding clientele base.Expanding clientele base. Growth is also supported by SKPRES’

initiative to expand its clientele base and management has

targeted 8% annual growth for non-key customer contracts.

Among the areas management is looking into is the F&B

packaging segment, with plans to supply more plastic

packaging to existing customers such as Unilever, Nestle,

Suntory and Shell. The recent acquisition of Tecnic has not only

increased SKPRES’ production capacity but also enabled the

group to leverage on Tecnic’s existing clientele to grow its

customer base.

Well positioned for more contract awards.Well positioned for more contract awards.Well positioned for more contract awards.Well positioned for more contract awards. Taking into account

the projects at hand, only c.25% of the floor capacity in

SKPRES’ new plant in Senai, Johor has been utilised.

Furthermore, the new plant has a potential capacity for 20

assembly lines. The remaining c.75% of floor capacity is

currently unutilised. With ample spare capacity, we believe the

group can take on further contracts, both from key customer-

and non-key customer-related parties. We forecast the

utilisation rate to increase steadily with the addition of two

assembly lines p.a. to cater for the expected increase in order

volume.

Key customer-related weightage (%)

Key customer-related growth (%)

Other customer related weightage (%)

Other customer-related growth (%)

New plant utilisation (%)



Company Guide

SKP Resources Bhd

Balance Sheet:

Strong balance sheet in net cash position.Strong balance sheet in net cash position.Strong balance sheet in net cash position.Strong balance sheet in net cash position. Despite its rapid

expansion in the past few years, SKPRES has been able to

maintain a net cash position due to its strong earnings and

healthy cashflows. In addition, SKPRES has minimal debt and

prior to FY15, the group had no debt. The group took up a

long-term debt of c.RM24m to partly finance the construction

of a new plant in Senai, Johor with an estimated capex of

RM40m and additional short-term debt of c.RM25m to finance

the capex of RM20m for equipment and machineries for the

new plant and other working capital purposes. However, we

expect total capex to normalise to RM25m p.a. from FY17F

onwards mainly for maintenance works. We estimate SKPRES to

be in net cash position in FY17F-FY19F.


New contract awards.New contract awards.New contract awards.New contract awards. SKPRES’s price movement is highly

sensitive to new contract announcements, as seen in the past

when the share price rose by c.40% from the date of the

announcement of the first contract from its key customer in

May 2015.

Margin expansion.Margin expansion.Margin expansion.Margin expansion. Margins fell in FY14-FY15 mainly due to the

shift in customer mix, as SKPRES undertook more of its key

customer-related projects which incurred high costs for

purchasing specific components to support its key customer’s

orders. Nevertheless, the shortfall in margins has been

compensated by the increase in contract values. We note that

any slight improvement in margins will considerably improve

SKPRES’s earnings as the contract values are significant.

Key Risks:

Slower Slower Slower Slower than expected than expected than expected than expected margins margins margins margins recoveryrecoveryrecoveryrecovery.... SKPRES’s FY16 net

margin stood at 7.8% (+1bps y-o-y). The improvements in

margins are due to higher value contracts and increased

production efficiency. However, its net margin dropped to

5.7% in 1Q17 due to operation shifts and labour issues. It will

take time for SKPRES to gradually achieve optimal efficiency

levels. Thus, we conservatively forecasts net margin to be at

7.3%/7.4%/7.6% for FY17/FY18/FY19.

Relatively high customer concentration risk.Relatively high customer concentration risk.Relatively high customer concentration risk.Relatively high customer concentration risk. In FY16, c.55% of

revenue is derived from its key customer. Looking forward, we

forecast its key customer to contribute an even higher portion,

c.72% in FY17F. In the event that its key customer reduces or

terminates contracts with SKPRES, the latter’s earnings could

be materially and adversely affected. However, we are not

overtly alarmed by this risk, as the contract wins are on a mid-

term basis.

Company Background

SKPRES is principally involved in manufacturing plastic

components, precision mould-making, advance secondary

processes, sub-assembly of electronics equipment and full turn-

key contract manufacturing.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide

SKP Resources Bhd

Key Assumptions

FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Key customer-related weightage (%) 55.0 55.2 71.5 76.7 78.7

Key customer-related growth (%) 50.0 70.5 120 41.6 21.2

Other customer related weightage (%) 45.0 44.8 28.5 23.3 21.3

Other customer-related growth (%) 50.0 68.8 8.00 8.00 8.00

New plant utilisation (%) 0.0 25.0 30.0 40.0 50.0 Income Statement (RMm)

FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenue 619 1,051 1,783 2,354 2,781

Cost of Goods Sold (532) (902) (1,533) (2,025) (2,392)

Gross ProfitGross ProfitGross ProfitGross Profit 87.187.187.187.1 149149149149 250250250250 330330330330 389389389389 Other Opng (Exp)/Inc (32.1) (42.6) (80.9) (102) (113)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 55.055.055.055.0 106106106106 169169169169 227227227227 277277277277 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0


Net Interest (Exp)/Inc 0.83 (1.6) (1.9) (1.1) 1.07


PrePrePrePre----tax Profittax Profittax Profittax Profit 55.855.855.855.8 105105105105 167167167167 226226226226 279279279279 Tax (13.5) (22.6) (37.6) (52.0) (66.7)



Net ProfitNet ProfitNet ProfitNet Profit 42.342.342.342.3 82.182.182.182.1 129129129129 174174174174 211211211211 Net Profit before Except. 42.3 82.1 129 174 211

EBITDA 64.6 125 201 270 328

Growth

Revenue Gth (%) 50.0 69.7 69.6 32.0 18.1

EBITDA Gth (%) 37.8 94.1 60.5 34.2 21.6

Opg Profit Gth (%) 42.9 93.2 58.9 34.6 21.8


Margins & Ratio

Gross Margins (%) 14.1 14.2 14.0 14.0 14.0



ROAE (%) 22.7 33.4 34.8 38.9 38.9

ROA (%) 9.8 14.3 18.6 18.6 18.2

ROCE (%) 21.9 28.0 28.9 33.4 34.7

Div Payout Ratio (%) 50.2 50.0 50.0 50.0 50.0

Net Interest Cover (x) NM 68.0 89.8 208.3 NM



Company Guide

SKP Resources Bhd


FY FY FY FY MarMarMarMar 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 Revenue 243 261 315 232 321


Gross ProfitGross ProfitGross ProfitGross Profit 33.933.933.933.9 36.336.336.336.3 43.843.843.843.8 34.834.834.834.8 41.141.141.141.1 Other Oper. (Exp)/Inc (9.9) (11.7) (11.5) (9.5) (16.8)





PrePrePrePre----tax Profittax Profittax Profittax Profit 23.523.523.523.5 24.224.224.224.2 31.831.831.831.8 25.125.125.125.1 24.024.024.024.0 Tax (5.6) (5.8) (7.6) (3.5) (5.8)



EBITDA 28.7 29.3 37.1 30.3 29.4

Growth

Revenue Gth (%) 25.0 7.5 20.5 (26.3) 38.2

EBITDA Gth (%) 56.6 2.0 26.6 (18.2) (3.1)

Opg Profit Gth (%) 52.2 2.3 31.1 (21.5) (4.1)

Net Profit Gth (Pre-ex) (%) 58.3 3.0 31.0 (10.5) (15.5)

Margins

Gross Margins (%) 14.0 13.9 13.9 15.0 12.8



FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Net Fixed Assets 179 193 186 168 143


Other LT Assets 3.23 1.82 1.57 1.33 1.08

Cash & ST Invts 83.4 73.1 112 218 318

Inventory 74.9 89.8 140 185 218

Debtors 219 220 366 484 572


Total AssetsTotal AssetsTotal AssetsTotal Assets 565565565565 582582582582 810810810810 1,0601,0601,0601,060 1,2561,2561,2561,256

ST Debt

0.0 38.2 38.2 38.2 38.2

Creditor 398 173 336 499 590


LT Debt 0.0 15.3 15.3 15.3 15.3


Shareholder’s Equity 152 339 404 491 596


Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 565565565565 582582582582 810810810810 1,0601,0601,0601,060 1,2561,2561,2561,256

Non-Cash Wkg. Capital (98.6) 141 175 174 204

Net Cash/(Debt) 83.4 19.6 58.3 164 265




Asset Turnover (x) 1.4 1.8 2.6 2.5 2.4

Current Ratio (x) 1.0 1.8 1.7 1.7 1.8

Quick Ratio (x) 0.8 1.4 1.3 1.3 1.4



Capex to Debt (%) N/A 62.9 46.7 46.7 46.7

Z-Score (X) 3.6 7.1 6.2 5.6 5.4



Company Guide

SKP Resources Bhd


FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Pre-Tax Profit 55.8 105 167 226 278

Dep. & Amort. 9.61 19.1 32.5 42.9 50.6

Tax Paid (13.5) (22.6) (37.6) (52.0) (66.7)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (29.2) (138) (33.4) 0.93 (30.7)

Other Operating CF 0.15 (0.2) 0.0 0.0 0.0

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 22.822.822.822.8 (37.4)(37.4)(37.4)(37.4) 128128128128 218218218218 231231231231 Capital Exp.(net) (40.7) (33.6) (25.0) (25.0) (25.0)

Other Invts.(net) 71.4 (19.4) 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0


Net Investing CFNet Investing CFNet Investing CFNet Investing CF 47.047.047.047.0 (51.7)(51.7)(51.7)(51.7) (25.0)(25.0)(25.0)(25.0) (25.0)(25.0)(25.0)(25.0) (25.0)(25.0)(25.0)(25.0) Div Paid (21.2) (41.0) (64.7) (87.0) (106)

Chg in Gross Debt 0.0 53.5 0.0 0.0 0.0

Capital Issues 0.0 18.3 0.0 0.0 0.0

Other Financing CF 5.93 27.4 0.0 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF (15.3)(15.3)(15.3)(15.3) 58.258.258.258.2 (64.7)(64.7)(64.7)(64.7) (87.0)(87.0)(87.0)(87.0) (106)(106)(106)(106)

Currency Adjustments 0.26 (0.1) 0.0 0.0 0.0

Chg in Cash 54.8 (31.1) 38.7 106 100

Opg CFPS (sen) 5.79 8.76 12.9 17.3 20.9

Free CFPS (sen) (2.0) (6.2) 8.25 15.4 16.4



Source: AllianceDBS


Market Focus

2017 Outlook

AllianceDBS 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

Completed Date: 14 Oct 2016 10:17:46 Dissemination Date: 7 Nov 2016 15:43:25

GENERAL DISGENERAL DISGENERAL DISGENERAL DISCLOSURE/DISCLAIMER CLOSURE/DISCLAIMER CLOSURE/DISCLAIMER CLOSURE/DISCLAIMER

This report is prepared by This report is prepared by This report is prepared by This report is prepared by AllianceDBS Research Sdn BhdAllianceDBS Research Sdn BhdAllianceDBS Research Sdn BhdAllianceDBS Research Sdn Bhd. . . . This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities

(Singapore) Pte Ltd, its respective connected and associated corporations and affiliates 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 AllianceDBS Research Sdn Bhd.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS

Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,

the “DBS 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 DBS 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 DBS 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 DBS Group may have

positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and

other banking services for these 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 and the DBS Group is under no

obligation to update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned

schedule or frequency for updating research publication relating to any issuer.

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 DBS 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.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

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, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction

in the past twelve months and does not engage in market-making.

Market Focus

2017 Outlook

ANALYST CERTIFICATIONANALYST CERTIFICATIONANALYST CERTIFICATIONANALYST CERTIFICATION

The research analyst(s) 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(s) 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 the report. The DBS Group has

procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of

research reports. As of 7 Nov 2016, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold

interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s)

responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and

procedures are in place to ensure that confidential information held by either the research or investment banking function is handled

appropriately.

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

1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary position in

StarHub, M1 recommended in this report as of 30 Sep 2016.

2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

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

3. DBS Bank Ltd, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for

investment banking services from StarHub, Indosat as of 30 Sep 2016.

4. DBS Bank Ltd, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for

StarHub in the past 12 months, as of 30 Sep 2016.

5. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a

manager or co-manager or in any other investment banking transaction 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.

Directorship/trustee interests:Directorship/trustee interests:Directorship/trustee interests:Directorship/trustee interests:

6. Peter Seah Lim Huat, Chairman of DBS Group Holdings, is a Director of Starhub as of 3 Aug 2016. Nihal Vijaya Devadas Kaviratne CBE, a

member of DBS Group Holdings Board of Directors, is a Director of Starhub as of 3 Aug 2016.

RESTRICTIONS ON DISTRIBUTION RESTRICTIONS ON DISTRIBUTION RESTRICTIONS ON DISTRIBUTION RESTRICTIONS ON DISTRIBUTION

GeneralGeneralGeneralGeneral This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

AustrAustrAustrAustraliaaliaaliaalia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong KongHong KongHong KongHong Kong This report is being distributed in Hong Kong by or on behalf of, and is attributable to DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission and/or by DBS Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission. Where this publication relates to a research report, unless otherwise stated in the research report(s), DBS Bank (Hong Kong) Limited is not the issuer of the research report(s). This publication including any research report(s) is/are distributed on the express understanding that, whilst the information contained within is believed to be reliable, the information has not been independently verified by DBS Bank (Hong Kong) Limited. This report is intended for distribution in Hong Kong only to professional investors (as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules promulgated thereunder.)

For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].

IndonesiaIndonesiaIndonesiaIndonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.

MalaysiaMalaysiaMalaysiaMalaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). 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.

Wong Ming Tek, Executive Director, ADBSR

Market Focus

2017 Outlook

SingaporeSingaporeSingaporeSingapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

ThailandThailandThailandThailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

United KingdomUnited KingdomUnited KingdomUnited Kingdom This report is produced by AllianceDBS Research Sdn Bhd which is regulated by the Securities Commission Malaysia. This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates 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 DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

DubaiDubaiDubaiDubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3

rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC),

Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United StatesUnited StatesUnited StatesUnited States This report was prepared by AllianceDBS Research Sdn Bhd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictionsOther jurisdictionsOther jurisdictionsOther jurisdictions In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

AllianceDBSAllianceDBSAllianceDBSAllianceDBS Research Sdn BhdResearch Sdn BhdResearch Sdn BhdResearch Sdn Bhd

(128540 U) 19th Floor, Menara Multi-Purpose, Capital Square,

8 Jalan Munshi Abdullah 50100 Kuala Lumpur, Malaysia.

Tel.: +603 2604 3333 Fax: +603 2604 3921 email : [email protected]

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