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Malaysia Strategy

PP7767/09/2012 (030475)

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4 April 2016 Strategy | Strategy - Malaysia

Malaysia Strategy 2Q16

Risk-On, Risk-Off: Make Hay While The Sun Shines But…

Shifting expectations for the pace of US monetary policy normalisation and the direction of oil prices continue to influence the MYR, resulting in a resurgence of foreign portfolio funds. While RHB remains cautious on the global and local macroeconomic outlook, we expect policymakers to continue their stimulus programmes to extend the global growth cycle. The expected market volatility going forward would demand the adoption of shorter-term investment horizons by investors. Malaysia remains a trading market where stock-picking would be critical for outperformance.

FBM KLCI P/E band chart

Source: Bloomberg

SELLs

TP (MYR/share)

Maxis 4.70

HL Bank 11.00

AMMB Holdings 3.60

UMW Holdings 5.00

Lafarge Malaysia 7.41

Affin Holdings 1.80

AEON Co 2.20

APM Automotive 3.33

Daibochi 1.65

CARiNG Pharmacy 1.35

Source: RHB

Yield stocks

Yield (%)

SHL Consolidated 9.2

Matrix Concepts 8.1

MRCB-Quill REIT 7.1

UOA Development 7.0

Hektar REIT 7.0

Hua Yang 6.9

Magnum Bhd 6.5

SP Setia 6.3

Padini 6.3

Sunway REIT 6.2

Source: RHB

A confluence of positives. A confluence of positive developments has helped

to lift investor sentiment. These include the rebound in commodity prices, further policy easing in Japan, Europe and China in addition to shifting expectations for the pace of interest rate increases in the US. The downward nudge in the federal funds target rate projection at the March Federal Open Market Committee (FOMC) meeting and subsequent dovish comments by the Federal Reserve (Fed) chair have raised the bar for additional rate hikes in 2016, suggesting near-term USD weakness. These positives are also anchored by easing domestic risk premiums.

Foreign flows. After two consecutive years of net selling by foreign institutional

funds totalling MYR26.5bn, foreign funds returned to domestic equity markets with a bang. YTD cumulative net buy reached MYR4.25bn, after a slow start to 2016 (January net sell: MYR975m). Drivers of foreign flows include the perceived undervaluation of the MYR and Malaysia being perceived as a safe haven, low beta market. Despite winning the lion’s share of ASEAN inflows in 2016, we are not convinced that this represents a structural shift in foreign money back into Malaysia or a fundamental upgrade of the outlook for Malaysian equities. The recent flows only represent a narrowing of their underweight position.

Slowing domestic growth offers a weak backdrop for equities. Tight

government finances from lower oil revenue would translate into slower public spending and more cautious investment trends. Consumer spending would also slow while sluggish global growth would not provide a strong boost for exports. RHB forecasts Malaysia’s real GDP to slow to 3.9% in 2016 (2015: 5%). We note that risks are rising for a premature downturn in the global economy.

Stock-picking for outperformance. Amid the clearly weak global

macroeconomic fundamentals, we remain cautious but maintain our expectations for continued policy easing by policymakers to extend the global growth cycle. The resulting heightened market volatility would require a trading stance to outperform. With the FBM KLCI already trading at a hair’s breadth away from +1SD to the 10-year mean with downside risk to mid-single digit 2016 earnings growth in a slowing economic growth environment, the P/E-to-growth equation does not look compelling compared to those of our regional peers. While foreign interest has centred mainly on large-cap, blue-chip stocks, we also see value beginning to emerge amongst mid and small caps. We like stocks offering growth with good governance, while high yielding stocks are also attractive in a low growth environment. We see the benchmark index remaining within the 1,650-1,780 pts trading range on the back of ample domestic liquidity. We retain our end-2016 FBM KLCI target of 1,700 pts (15x 1-year forward P/E) although our bottom-up computation now stands at 1,750 pts.

Source: Company data, RHB

P/E (x) P/B (x) Yield (%)

Dec-16F Dec-16F Dec-16F

Datasonic Group MYR1.32 MYR1.87 24.4 6.3 1.9 BUY

Genting Plantations MYR11.02 MYR12.60 20.6 1.9 1.0 BUY

Kimlun Corporation MYR1.78 MYR2.13 8.5 1.1 3.0 BUY

Kuala Lumpur Kepong MYR24.18 MYR26.40 18.2 2.5 3.3 BUY

MISC Bhd MYR8.89 MYR11.84 11.4 1.0 2.6 BUY

MMC Corp MYR2.06 MYR3.45 13.4 0.6 1.5 BUY

Muhibbah Engineering MYR2.48 MYR3.34 12.9 1.3 1.5 BUY

Press Metal MYR2.52 MYR3.56 8.5 1.5 3.5 BUY

Tenaga Nasional MYR14.08 MYR18.20 10.8 1.5 3.1 BUY

Time dotCom MYR7.45 MYR8.60 22.3 1.9 1.0 BUY

Company Name Price Target Rating

Analysts

Lim Chee Sing

+603 9285 9693

[email protected]

Alexander Chia

+603 9207 7621

[email protected]

Peck Boon Soon

+603 9280 2163

[email protected]

http://www.efa.biz/

mailto:[email protected]



Strategy - Malaysia Malaysia Strategy

4 April 2016

2

Table Of Contents

Executive Summary 1

Market Review 3

Market Outlook 7

Key Risks 32

Market Strategy 34

FBM KLCI From a Technical Perspective 42

Sector Outlook

Auto 43

Aviation 45

Banking 47

Basic Materials 49

Construction 51

Consumer 53

Gaming 55

Healthcare 57

Logistics 60

Media 62

Non-Bank Financials 64

Oil & Gas 66

Plantation 68

Plastic Packaging 71

Property 73

Property MREITs 75

Rubber Products 77

Technology 79

Telecommunication 81

Timber 84

Utilities 87

Appendix

Valuations And Ratings Of Individual Stocks Under Coverage 90


4 April 2016

3

Market Review

Figure 1: FBM KLCI’s movements from Jan to 23 Mar 2016

Source: RHB

Markets have a soft start to 2016

The FBM KLCI started the year in volatile fashion, falling 2.3% on the first trading day of the year, along with other key Asian markets that posted large declines as weaker-than-expected Chinese manufacturing data raised fresh fears over China’s economic growth prospects and potential contagion on markets and economies across the region. In China, the CSI 300 plummeted 7% and triggered circuit breakers. Brent crude prices, however, remained buoyant at the start of January as renewed tension in the Middle East prompted concerns about possible supply disruptions.

More fiscal worries in January

On 10 Jan, the local benchmark saw steep declines when Moody downgraded Malaysia’s sovereign rating outlook to stable from positive, citing:

i. Deterioration in the external environment that has crimped government revenue;

ii. Heightened macro-financial risk posed by a high system-wide leverage;

iii. Expectation of limited improvements in fiscal consolidation as reasons for the rating cut.

The MYR/USD weakened sharply to a YTD-low of MYR4.41 on 12 Jan on fiscal concerns as crude oil prices flirted with the USD30 per barrel (bbl) level following warning remarks from Petroliam Nasional (Petronas) that oil could see two to three more tough years, with prices averaging at USD30 per bbl in 2016.

More good news

Brent crude reached a YTD low on 19 Jan but the FBM KLCI gained 1.5% on 22 Jan on the heels of an unexpected move by Bank Negara Malaysia (BNM) to lower the statutory reserve requirement ratio (SRR) for banks to 3.5% from 4%, effective 1 Feb 2016. The local benchmark index extended its gain in late January as the market reacted positively

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Index

Crude oil price

reached a new low.

Brent was at

USD27.70/bbl.

19 Jan

PM announced

revised Budget for 2016.

28 Jan

1) Regional and China stock

markets rout as CNY

devalued at a faster pace

than anticipated

2) China’s foreign-exchange

reserves shrank by a record

USD108bn to USD3.33trn in

December. 7-8 Jan

Moody cut Malaysia’s

sovereign rating from

positive to stable

10 Jan

Terror attack

in Jakarta.

14 Jan

BNM announced a

reduction of SRR from 4%

to 3.5% effective 1 Feb

21 Jan

1) First concerted efforts by

Russia, Saudi, Venezuela &

Qatar in years to freeze oil

output

2) Japan’s economy contracted

at annualised 1.4%

3) BOJ’s negative interest rates

came into effect.

4) China’s Yuan makes largest

gain since 2005

16 Feb

1) M’sia's exports slid into

a 2.8% YoY contraction,

first in eight months

2) Crude oil surged above

USD40/bbl amid hopes for

a deal between OPEC and

Russia to curb supplies.

7 Mar

Malaysia

GDP eased

to 4.5% YoY

in 4Q15

18 Feb

China reported sluggish real

GDP growth of 6.8% in 4Q15

and 6.9% for the whole year of

2015. 18 Jan

Zika virus outbreak

in America.

1 Feb

Fitch affirmed Malaysia’s

sovereign rating with a

stable outlook

23 Feb

MYR strengthened against

the USD and breached the

MYR4.00 level and settled

at 3.9927, strongest YTD.

22 MarECB eased

policies more

aggressively

10 Mar

US Fed slashed

projections for future

rate hikes on external

risks

16 Mar

Brussels

terror attack

23 Mar

PBOC easing

policies

further by

cutting RRR

by 50bps

1 Mar

A difficult beginning to 2016

Moody’s downgraded Malaysia’s outlook to stable

Brent crude reached YTD lows in January


4 April 2016

4

to the recalibration of the 2016 Budget to reflect a lower crude oil price assumption of USD30-35 per bbl, compared with USD48 per bbl previously. Amongst key takeaways from the budget include:

i. MYR9bn savings would arise from the revised budget;

ii. Fiscal deficit would be maintained at 3.1% of GDP;

iii. GDP growth outlook was lowered to 4-4.5%, from 4-5%;

iv. Reduced Employees Provident Fund (EPF) contribution from employees by 3% to stimulate private consumption expenditure.

The FBM KLCI, along with major equity markets, saw a lift-off during end-Jan 2015 after the surprise move by the Bank of Japan (BOJ) to join the European Central Bank (ECB) in negative-interest rate territory injected optimism and help cap a turbulent month for financial markets.

More quantitative easing (QE)

Early-Feb 2016 saw losses in plantation stocks after the announcement of a steep hike in foreign worker levy (for which the quantum was later reduced) dragged the FBM KLCI into the red. Sequentially, the FBM KLCI, along with other Asian markets, decelerated after the Lunar New Year holidays as lingering concerns over the creditworthiness of European banks led to risk-aversion amongst investors. However, the local benchmark found support in mid-February when the ECB signalled that it was ready to ease policy further in March if low energy prices threaten to keep inflation persistently low. The FBM KLCI rebounded in early March as China unleashed further monetary easing by cutting bank’s reserve ratio requirement (RRR) to allay worries about tightening liquidity in the country’s financial system. The ECB also lifted market sentiment and financial markets by cutting interest rates on the main refinancing operations of the Euro system to zero from 0.05%, expanding its asset purchase programme to EUR80bn from EUR60bn beginning in April, and also slashing the interest rate on deposit facility by 10bps to -0.4%.

Brent crude breaches USD40 per bbl

The recovery in crude oil prices in March, which breached the USD40 per bbl mark for the first time this year continued to lend support to equity markets as investors grew hopeful about a possible resolution among major global oil producers to freeze production. Major state producers, including Saudi Arabia have agreed to meet on 17 Apr to discuss a potential output freeze. Citing uncertainties in the global economy and weak inflation, the US Fed left the federal funds rate unchanged at its March meeting, which provided further support for crude oil price that tends to move inversely to the value of the USD. The FBM KLCI and MYR trended higher on expectations that the USD would stay weak in the near term.

MYR rebounds

The MYR remains the best-performing currency amongst the ASEAN-5 YTD-2016, gaining 7.0% YTD-2016 after depreciating 22.8% against the USD in 2015. The plantation and construction sectors remain the biggest winners YTD-2016 - gaining 4.9% and 4.4% respectively - in contrast to the telecommunications (telecom) and technology (tech) sector which declined 11.6%.

A proposed hike in foreign worker levy spooks plantation stocks

China cut RRR as the ECB expanded its QE programme

Hopes of oil production freeze lifts oil price

US Fed pauses in March

MYR is the best-performing ASEAN currency so far in 2016


4 April 2016

5

Figure 2: FBM KLCI performance vs other regional markets

Index 2015 2016 2015 2016

Country indices 23 Mar 2016 2Q 3Q 4Q 1Q YTD

% change

Malaysia KLCI 1,724.6 (6.8) (5.0) 4.4 1.9 (3.9) 1.9

Singapore STI 2,882.0 (3.8) (15.9) 3.3 (0.0) (14.3) (0.0)

Thailand SET 1,412.2 (0.1) (10.3) (4.5) 9.6 (14.0) 9.6

Philippines PCOMP 7,360.1 (4.7) (8.9) 0.8 5.9 (3.9) 5.9

Indonesia JCI 4,854.2 (11.0) (14.0) 8.7 5.7 (12.1) 5.7

Hong Kong Hang Seng 20,615.2 5.4 (20.6) 5.1 (5.9) (7.2) (5.9)

Taiwan TWSE 8,766.1 (2.7) (12.2) 1.9 5.1 (10.4) 5.1

Korea KOSPI 1,995.1 1.6 (5.4) (0.1) 1.7 2.4 1.7

China Shanghai 3,010.0 14.1 (28.6) 15.9 (15.0) 9.4 (15.0)

China Shenzhen 1,902.5 25.8 (30.3) 34.5 (17.6) 63.2 (17.6)

India Mumbai 25,337.6 (0.6) (5.9) (0.1) (3.0) (5.0) (3.0)

Vietnam VSE 574.7 7.6 (5.1) 2.9 (0.7) 6.1 (0.7)

Sri Lanka Colombo All-Share 6,073.5 2.9 0.4 (2.2) (11.9) (5.5) (11.9)

US Dow Jones 17,502.6 (0.9) (7.6) 7.0 0.4 (2.2) 0.4

US S&P 500 2,036.7 (0.2) (6.9) 6.5 (0.4) (0.7) (0.4)

US Nasdaq 4,768.9 1.8 (7.4) 8.4 (4.8) 5.7 (4.8)

* As at 23 Mar 2016 Source: Bloomberg

Figure 3: Bursa Malaysia performance by sector

Index 2015 2016 2015 2016

Bursa Malaysia by sector^ 23 Mar 2016 2Q 3Q 4Q 1Q

YTD

% change

KLCI 1,724.6 (6.8) (5.0) 4.4 1.9 (3.9) 1.9

FBM Emas 11,940.3 (6.3) (4.8) 5.3 1.2 (2.3) 1.2

FBM 70 13,171.7 (5.6) (3.6) 7.1 0.3 0.5 0.3

FBM 100 11,642.9 (6.5) (4.7) 5.0 1.5 (2.9) 1.5

FBM Small Cap 15,533.5 (3.3) (6.9) 8.6 (2.6) 6.0 (2.6)

FBM Fledgling 15,797.6 0.4 (4.8) 12.7 (4.7) 18.2 (4.7)

FBM Emas Shariah 12,553.1 (7.0) (2.6) 7.7 (1.9) 2.3 (1.9)

FBM ACE 5,659.8 (12.6) (10.5) 14.8 (11.4) 13.0 (11.4)

FBM Hijrah Shariah 14,007.8 (9.0) (1.6) 5.6 (2.3) (0.9) (2.3)

Industrial 3,291.9 (6.6) 1.1 3.3 0.7 2.9 0.7

Telecom & Technology 22.5 2.4 (2.6) 19.7 (11.6) 52.4 (11.6)

Construction 288.4 (6.4) (5.9) 5.7 4.4 (0.8) 4.4

Consumer 593.9 (3.1) (2.7) 4.5 0.8 5.8 0.8

Finance 14,670.9 (4.9) (9.8) 1.8 3.6 (9.8) 3.6

Industrial Products 143.9 0.7 (0.1) 13.5 (7.5) 21.6 (7.5)

Plantation 7,992.8 (6.8) (1.5) 6.5 4.9 (3.4) 4.9

Property 1,188.5 (7.8) (4.7) 2.7 0.1 (7.6) 0.1

Services & Trading 232.5 (6.8) (3.6) 5.5 1.4 (0.1) 1.4

Mining 486.3 (4.3) (7.5) 0.8 (3.2) (1.6) (3.2)

^ According to Bursa Malaysia's classifications

* As at 23 Mar 2016 Source: Bloomberg


4 April 2016

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Figure 4: Top performers & underperformers under our coverage (YTD)

Gainers 23 Mar 2016 31 Dec 2015 % chg Losers 23 Mar 2016 31 Dec 2015 % chg

(MYR/share) (MYR/share)

(MYR/share) (MYR/share)

AirAsia X 0.31 0.18 69.44

Evergreen Fibreboard 1.00 1.57 (36.44)

AirAsia 1.86 1.29 44.19

Kossan Rubber 5.97 9.30 (35.81)

Genting Bhd 9.90 7.34 34.88

Top Glove Corp 4.91 6.79 (27.53)

Scientex 12.60 9.75 29.23

Hartalega 4.55 5.94 (23.40)

Kimlun 1.78 1.38 28.99

Bumi Armada 0.80 1.02 (21.57)

NTPM 1.07 0.88 22.29

Wah Seong Corp 0.75 0.96 (21.47)

Press Metal 2.52 2.09 20.57

Supermax Corp 2.55 3.24 (21.30)

Carlsberg 13.96 11.70 19.32

VS Industry 1.24 1.57 (21.02)

Eastern & Oriental 1.70 1.43 18.88

Malaysian Pacific Industries 7.45 9.31 (19.98)

Media Prima 1.50 1.27 18.11

Globetronics 5.43 6.50 (16.46)

Malaysia Airport Hldg 6.57 5.61 17.11

DRB-HICOM 1.04 1.24 (16.13)

Hong Leong Industries 6.80 5.93 14.67

Alam Maritim Resources 0.36 0.43 (15.29)

IGB REIT 1.51 1.34 12.69

Inari Amerton 3.12 3.66 (14.85)

Muhibbah Engineering 2.48 2.21 12.22

Ho Hup Construction 0.92 1.06 (13.68)

Sunway Construction 1.56 1.40 11.43

Felda Global Ventures 1.51 1.71 (11.70)

Jaya Tiasa 1.48 1.33 11.28

UMW Holdings 7.00 7.87 (11.05)

Padini Holdings 2.06 1.87 10.16

Karex 3.70 4.13 (10.41)

Pintaras Jaya 3.63 3.30 10.00

Prestariang 2.67 2.97 (10.10)

Pavilion REIT 1.70 1.55 9.68

Berjaya Food 2.10 2.33 (9.87)

OKA Corporation 1.01 0.93 9.19 GHL Systems 0.88 0.97 (9.33)

Source : Bloomberg


4 April 2016

7

Market Outlook

Expect more volatility in the coming months

The topsy turvy start to the year is a vindication of our expectations that 2016 is set to be a choppy year for equity markets (see our 14 Dec 2015 report 2016 Strategy – Volatile Volatility: The New Normal In A Low Growth World). We expect that external macroeconomic developments would continue to exert the biggest influence on equity markets. Key near-term drivers include:

i. Oil price trends;

ii. The pace of US interest rate increases;

iii. Developments in China’s economy.

Further out, the health of the global economy would be the main factor influencing the outlook for markets.

A confluence of positive developments

After reaching the YTD low (1,600.92 pts) on 21 Jan, the FBM KLCI staged a strong rally, gaining 124 pts and 7.7% to 1,724.55 pts, as a confluence of positive factors helped to lift investor confidence. The amelioration of domestic risks, a reasonable Dec 2015 reporting quarter, the strong rebound in crude oil price, China cutting reserve ratios, expansion of the ECB QE programme and shifting expectations for the pace of interest rate increases in the US have all contributed to a firmer MYR, encouraging the return of foreign institutional flows and lifting investor sentiment. We note that this counter-trend market rally comes amid RHB economists retaining their bearish view on the global macroeconomic outlook and the ongoing negative domestic news flow on declining job security, rising cost pressures and softening consumer spending.

Easing domestic risk premiums

We see continued stability in Malaysia’s political leadership at least through the next general elections that are due by 2018. The high-profile campaign against the incumbent political leadership from within the main ruling party appears to have lost momentum. Domestic concerns over contagion risks posed by the high accumulated debt load (reported at up to MYR42bn) at a Ministry of Finance-owned investment company has also eased following the back-to-back disposals of Edra Global to China General Nuclear Power (CGN) for MYR9.83bn cash in Nov 2015 and the sale of a 60% stake in Bandar Malaysia to a consortium (Iskandar Waterfront and China Railway Engineering Corp) for MYR7.41bn in Dec 2015. Nonetheless, the impending appointment of a new BNM governor poses some concerns to investors.

Oil: Production freeze talks lift sentiment

Figure 5: Crude oil price forecast

Crude oil price (USD/bbl) 1Q16F 2Q16F 3Q16F 4Q16F 2016F 2017F 2018F

onwards

RHB (Brent ave.) - Jan 2016 30.0 35.0 40.0 45.0 37.5 45.0 60.0

Bloomberg YTD actual 33.6

Bloomberg - consensus March 2016 34.0 37.0 42.5 46.0 40.0 54.0 61.0

Bloomberg - consensus Jan 2016 50.0 50.0 55.0 60.0 53.9 61.3 68.8

EIA, February 2016 N/A N/A N/A N/A 34.3 40.1 N/A

EIA, Jan 2016 N/A N/A N/A N/A 55.8 N/A N/A

Source: RHB, Bloomberg, US Energy Information Administration (EIA)

Brent crude bottomed out to close at USD27.88 per bbl on 20 Jan 2016 and has since rebounded to close at USD40.47 per bbl on 23 Jan after peaking at USD41.79 per bbl the previous day, without any meaningful change in supply-demand dynamics. We note that the fundamentals of the oil market remain weak, given overproduction, historically-high inventories, major capex cuts, and huge layoffs. We do not expect capex spending cuts by both the national oil companies (NOCs) and international oil companies (IOCs) to be revised up in the near term unless crude oil prices demonstrate stability at a much higher range.

Market volatility is the order of the day

Counter-trend rally amid a weak macroeconomic environment

Market awaits the appointment of the new BNM governor

Brent crude rebounds 45% off January’s low

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http://rhb.ap.bdvision.ipreo.com/NSightWeb_v2.00/Downloads/Files/292ec76a-5565-4d55-a501-7ff3b42caefe.pdf?tics=635941279461219964


4 April 2016

8

The possible freeze in production may have put a floor on crude oil prices for the time being. All eyes are now on the 17 Apr meeting of major oil producers in Doha, Qatar. We expect some sort of agreement to be announced, as Iran has already been excluded from the negotiations. For other Organisation of the Petroleum Exporting Countries (OPEC) members, there is not much to lose, as most were already producing near maximum capacity in January. At the moment, three OPEC members (Saudi Arabia, Venezuela and Qatar) plus Russia have already agreed to a production freeze. We expect the other eight members to fall in line, as their total production capacity may not be large enough to make much impact on the oil market. The production freeze agreement should support the current positive sentiment and provide confidence to both the oil & equity markets. The freeze, if set at January levels, would not have any major impact on the current physical oil market, as most countries were producing flat out anyway.

However, if the major oil producers do not act, OPEC has spare capacity of 2.4m bbls per day (mbpd). Excluding Iran, 2mbpd of this is Saudi Arabia’s. This means capacity can be reached within 90 days and sustained for an extended period of time. If no agreement is reached, confidence and sentiment may turn more negative as more oil could potentially enter the already oversupplied market. This could cause another round of collapse in crude oil price. We believe that the possible production freeze agreement comes at a time when shale oil producers’ retrenchments are severe enough that a rapid price response may now be difficult. The cash-strapped shale oil producers have had to cut capex and labour. It may take time to bring back this labour. Although a potential agreement could support oil prices, we believe that oil prices of USD45 per bbl and above for a sustained period of time would most probably entice the shale oil producers to come back online again. However, their response may not be as rapid now. As such, we believe that crude oil prices would swing within our expected forecasted range. We forecast crude oil price (Brent average) to be USD37.50/USD45/USD60 per bbl for 2016-2018 respectively.

Figure 6: Oversupply through 2017 – bearish oil market remains a reality

Source: IEA, RHB

Figure 7: FBM KLCI vs Brent crude oil Figure 8: Crude oil’s demand and supply

Source: Bloomberg Source: IEA

0.1

-0.7

0.9

2.01.8

0.6

-0.6

2012 2013 2014 2015 2016F 2017F 2018F

mbpd

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60.0

80.0

1,500.0

1,600.0

1,700.0

1,800.0

1,900.0

usd/bblIndex

FBMKLCI Index CO1 Comdty

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mb/d

Demand Supply

April meeting of oil producers would have a strong bearing on the direction of oil prices

No change to our oil price forecasts


4 April 2016

9

Figure 9: US crude inventory Figure 10: Baker Hughes US rig count

Source: EIA Source: EIA

China cuts RRR

On 29 Feb 2016, the People’s Bank of China (PBoC) lowered the RRR by 50bps for all of the financial institutions that would inject CNY650bn worth of liquidity into the market. The new ratio took effect from 1 Mar 2016 and is the first rate cut since Oct 2015 (the fifth since Feb 2015), as the Government did not want to bring too much pressure on the exchange rate. The RRR cut adds to the supply of money in the economy, as opposed to cutting borrowing costs directly as an interest-rate reduction could lead to capital outflows. As the central bank mentioned in its announcement, the cut was mainly to maintain a suitable liquidity condition and create a proper monetary environment for its “supply-side structure reform”. We believe there would be another 200-250bps RRR cut later in 2016 to offset capital flight, and a possible 25bps interest rate cut in 1H16 if real GDP moderates at a faster pace.

More stimulus packages by the ECB

In March, the ECB unveiled a more aggressive-than-expected stimulus package. It would increase its monthly bond purchases by EUR20bn to EUR80bn beginning in April, offering four additional longer-term refinancing operations (LTROs) and widening the scope of its asset purchases by adding corporate bonds (corporate sector purchase programme (CSPP)). The ECB also reduced interest rates on reserves to -0.4% from -0.3% in an effort to stimulate bank lending and cut to zero its benchmark interest rate.

US Fed turns more dovish

The downward nudge in the fed funds target rate projection at the 15-16 Mar FOMC meeting has raised the bar for additional rate hikes in 2016 and perhaps muddied the magnitude of future rate hikes. RHB economists now expect two rate hikes for the rest of 2016, for a total of 50bps increase in the target range for the funds rate, down from our prior call of a 75bps rise overall for this year. We expect a 25bps increase in either the June or July meeting. Thereafter, the next 25bps rise might only transpire in Nov or Dec 2016. While we do not expect the Fed to move in the April meeting, we should not rule out this possibility completely. Going against expectations, an April hike could give the USD a renewed lift.

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Feb

-14

Mar-

14

Ap

r-1

4

May-1

4

Ju

n-1

4

Ju

l-14

Au

g-1

4

Se

p-1

4

Oct-

14

Nov-1

4

Dec-1

4

Ja

n-1

5

Feb

-15

Mar-

15

Ap

r-1

5

May-1

5

Ju

n-1

5

Ju

l-15

Au

g-1

5

Se

p-1

5

Oct-

15

Nov-1

5

Dec-1

5

Ja

n-1

6

Feb

-16

Mar-

16

mbbls

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

1,800.0

Ja

n-1

4

Feb

-14

Mar-

14

Ap

r-1

4

May-1

4

Ju

n-1

4

Ju

l-14

Au

g-1

4

Se

p-1

4

Oct-

14

Nov-1

4

Dec-1

4

Ja

n-1

5

Feb

-15

Mar-

15

Ap

r-1

5

May-1

5

Ju

n-1

5

Ju

l-15

Au

g-1

5

Se

p-1

5

Oct-

15

Nov-1

5

Dec-1

5

Ja

n-1

6

Feb

-16

Mar-

16

(no. of rigs)

More RRR cuts expected

Aggressive easing by the ECB

Dovish Fed dampens the USD


4 April 2016

10

Figure 11: Changing Fed interest rate expectations

Source: Bloomberg

Both the added QE by the ECB as well as the slower-than-expected pace of increase in US interest rates would be positive for emerging markets including their currencies, as some of this monetary stimulus could find its way back to emerging markets. We specifically highlighted in our previous quarterly outlook reports of the capacity for more policy stimulus by global policymakers that could extend the global growth cycle although this would likely result in diminishing returns over time.

Foreign funds make a comeback

After two consecutive years of net selling by foreign institutional funds totalling MYR26.5bn, foreign funds returned to domestic equity markets with a bang. YTD cumulative net buy reached MYR4.25bn, after a slow start to 2016 (January: net sell of MYR975m). We believe the rebound in oil price and diminishing expectations of US rate hikes were key factors for foreign funds revisiting Malaysia after net foreign shareholding fell to just 22.3% at end-Jan 2016, a level not seen since 2010. Other drivers of foreign flows include the perceived undervaluation of the MYR (and consensus expectation for the MYR to move higher in the next 12 months) and Malaysia being perceived as a safe haven, low beta market considering the dominance of local government-linked company (GLC) funds.

Figure 12: Malaysia’s foreign portfolio flows: Daily Figure 13: Malaysia’s foreign portfolio flows: Monthly

Source: Bursa Malaysia Source: Bursa Malaysia

-800.0

-600.0

-400.0

-200.0

0.0

200.0

400.0

600.0

800.0

Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16

MYRmil

(2,214.30)

(407.00) (539.20)

156.10

(2,541.90)

(3,153.60)(3,013.60)

(3,965.50)

(2,354.50)

622.20

(787.60)

(1,440.60)(975.50)

433.10

6,081.50

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

8,000

Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16

MYRmil

More policy stimulus to extend the global growth cycle

MYR4.25bn YTD net buy by foreign institutions


4 April 2016

11

Figure 14: Bursa foreign ownership based on market capitalisation (%)

Source: Bursa Malaysia

While the pace of foreign buying has been strong, we are not convinced that this represents a structural shift in foreign money back into Malaysia or a fundamental upgrade of the outlook for Malaysian equities. We believe foreign funds remain underweight on Malaysia and the recent flows only represent a narrowing of this underweight position. Nonetheless, we have been surprised at the pace and scale of the foreign flows into Malaysia that have outstripped the flows into other ASEAN markets MTD and YTD. This may have been due to the recent relative YTD outperformance of the Stock Exchange of Thailand (SET) and Jakarta Composite Index (JCI), resulting in a shift of funds into Malaysian equities in the search for relative performance. We continue to see relatively higher interest in Indonesia and Thailand equities from RHB’s foreign client base.

Figure 15: ASEAN MTD cumulative net foreign equity flows Figure 16: ASEAN YTD cumulative net foreign equity flows

Source: Bloomberg, RHB Source: Bloomberg, RHB

22.3

23.1

24.4

24.0

24.3 24.1

24.0 24.1 24.1

23.7

23.4 23.3

23.1

22.8 22.8

22.5 22.3 22.3

22.5

-200

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200

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1-Mar 3-Mar 5-Mar 7-Mar 9-Mar 11-Mar 13-Mar 15-Mar 17-Mar 19-Mar 21-Mar 23-Mar

USDmil

Asean MTD Cumulative Net Foreign Equity Flows

Malaysia

Philippines

Thailand

Indonesia

-800

-600

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0

200

400

600

800

1,000

1,200

USDmil

Malaysia

Indonesia

Thailand

Philippines

Foreign funds are still underweight on Malaysia


4 April 2016

12

Figure 17: ASEAN markets performance in 2014, 2015 & YTD 2016

Source: Bloomberg

Figure 18: North Asia blues

Source: Bloomberg

(20.0)

(15.0)

(10.0)

(5.0)

0.0

5.0

10.0

15.0

20.0

25.0

FBMKLCI STI SET JCI PCOMP

(%)

2014 2015 2016 YTD

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

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70.0

HSI SHCOMP SZCOMP KOSPI NKY

(%)

2015 2016 YTD


4 April 2016

13

Figure 19: Foreign ownership of debt instruments

Source: Bloomberg

Figure 20: Credit default swaps fall as global growth concerns ease

Source: Bloomberg

MYR strengthens on USD weakness

The YTD 7.0% gain in the MYR may have been attributed to the bounce in oil prices and the return of portfolio flows as much as to the USD weakness on the back of changing US rate hike expectations. Nonetheless, markets continue to question the sustainability of the recent MYR gains as we cannot totally rule out a US rate hike next month although RHB economists only expect a 25bps hike at the June meeting.

With foreign exchange reserves having stabilised and the current account surplus looking more entrenched, the MYR looks to be on a firmer footing. Foreign exchange reserves gained a marginal USD0.1bn to USD95.6bn as at 29 Feb 2016, following an increase of USD0.2bn in January and a USD0.7bn gain in December. This was likely attributed to the continued, albeit narrowing current account surplus recorded during the month and the stabilisation of capital flows. Moving forward, we note the MYR could still be volatile in the near term with the likelihood of further US interest rate hikes should US economic growth strengthen, a potential CNY devaluation, and large foreign holdings of fixed income instruments. Volatility could heighten in the run-up to the announcement of the next BNM governor to replace outgoing Tan Sri Dr Zeti. Subsequently, the MYR could stabilise in

29.8%

10%

14%

18%

22%

26%

30%

34%

-15.0

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Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16

MYR bn

Foreign inflows/outflows relating to MGS/GII/SPK (LHS) % of Foreign Holdings in MGS/GII/SPK (RHS)

-40.0

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Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16

(%)

MALAYS CDS USD SR 5Y D14 Corp INDON CDS USD SR 5Y D14 Curncy

THAI CDS USD SR 5Y D14 Curncy

MYR is the best-performing ASEAN currency in 2016

Dovish Fed implies more near-term upside for the MYR


4 April 2016

14

2H16 as the markets acclimatise to the current US tightening cycle, where the perceived undervaluation of the MYR alongside relatively sound fundamentals could attract investors. The recent dovish comments from the US Fed and the receding implied probability of interest rate hikes in the forthcoming FOMC meetings suggest further upside risks for the MYR that could help to attract more foreign portfolio funds.

Figure 21: Consensus USD/MYR trend

Source: Bloomberg

Figure 22: Brent crude oil vs MYR

Source: Bloomberg

3.20

3.40

3.60

3.80

4.00

4.20

4.40

4.60

4.80

2Q16 3Q16 4Q16 1Q17 2017 2018 2019 2020

USD/MYR

Median High Low

2.50

3.00

3.50

4.00

4.50

5.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

(USD/MYR)(USD/bbl)

CO1 Comdty USDMYR


4 April 2016

15

Figure 23: RHB currency forecasts

1Q16F 2Q16F 3Q16F 4Q16F 1Q17F

EUR/USD 1.10 1.12 1.11 1.10 1.09

GBP/USD 1.42 1.41 1.44 1.47 1.50

USD/JPY 115 114 114 116 118

AUD/USD 0.71 0.71 0.72 0.73 0.71

USD/SGD 1.40 1.40 1.43 1.42 1.40

USD/HKD 7.80 7.80 7.75 7.75 7.80

USD/KRW 1215 1240 1250 1270 1275

USD/CNY 6.55 6.65 6.70 6.80 6.85

USD/MYR 4.19 4.22 4.15 4.10 4.12

USD/THB 35.75 35.90 36.20 36.60 37.00

USD/IDR 13600 13300 13200 13000 13400

USD/INR 67.90 68.10 67.70 67.50 67.80

Note: Current denotes 4 March 2016, forecasted numbers represent quarterly averages

Source : Bloomberg, RHBFIC

Figure 24: Regional currencies vs USD Figure 25: USD vs regional currencies

Source: Bloomberg Source: Bloomberg

Figure 26: Foreign reserves Figure 27: Excess liquidity chart

Source: BNM, RHB Source: BNM, RHB

A firmer MYR would be a negative for exporters who would enjoy lower translation gains, while importers would be happier with the reduced cost of sales in MYR terms. More importantly for policymakers is the reduced threat from a negative feedback loop where investors and consumers delay their investments and spending and postpone consumption of higher-priced imports and services.

70.0

75.0

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95.0

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105.0

Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16

(%)

MYR

IDR

THB

SGD

PHP

USD

(7.9)

(2.7)

(1.7)

(7.7)

(0.9)

(13.8)

(6.6)

(5.3)

(3.4)(4.0)

8.1

2.6

4.0

5.5

1.6

(15.0)

(10.0)

(5.0)

0.0

5.0

10.0

USDMYR USDTHB USDSGD USDIDR USDPHP

(%)

1H2015 2H2015 2016 YTD

0.0

20.0

40.0

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100.0

120.0

140.0

160.0

14 J

an

Fe

b

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r

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y

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ly

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c

15 J

an

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r

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b

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r

USDbn

2

52

102

152

202

252

302

352

07 08 09 10 11 12 13 14 15 16

MYRbn

Excess Funds Mopped Up By BNM from Interbank Market BNM Bills Repos

Negative for exporters


4 April 2016

16

Increasingly difficult global growth environment

The sluggish global economic growth is unlikely to provide a strong boost to Malaysia’s exports in 2016. This is despite a sharp weakening of the MYR that could make Malaysia’s exports more competitive in international markets. As a result, we expect the country’s real exports to grow modestly by 2.5% in 2016, picking up from +0.7% in 2015 but still about half the growth recorded in 2014.

As it stands, the global economy is still faced with many downside risks and is in its seventh year of growth in the current cycle in 2016 where the late stage of an economic growth cycle tends to be associated with higher downside risk. A premature downturn in the global economy is the biggest risk for markets.

Recent G20 meeting highlights downside risks and vulnerabilities to growth

At the recent G20 meeting of finance ministers and central bank governors held in Shanghai last February, the leaders highlighted downside risks to sustained economic growth. The global recovery remains uneven and falls short of achieving strong, sustainable and balanced growth. The main downside risks and vulnerabilities highlighted were volatile capital flows, the large drop of commodity prices, escalated geopolitical tensions, the shock of a potential UK exit from the European Union, and a large and increasing number of refugees in some regions. There were also growing concerns about the risk of further downward revision in global economic prospects. The group stressed on the need for governments to do more but believes that monetary policy alone cannot lead to balanced growth. It pledged to refrain from competitive devaluations, resolved not to target exchange rates for competitive purposes, and agreed to consult closely on exchange markets. However, the G20 did not agree on a conclusive and coordinated strategy to stimulate the global economy.

Negative interest rate experiment could backfire

Several central banks have moved forward with negative interest rates (NIR) including Denmark, the Eurozone, Switzerland, Sweden and Japan, following the failure of zero interest rates and then QE to revive aggregate demand and spur sustainable economic growth. The theory involves imposing penalties on excess reserves left on deposit with central banks. Negative interest rates drive stimulus through the supply side, in effect urging banks to make new loans regardless of the demand for such funds. NIR penalises banks for not lending and could lead to more “zombie lending” and encouraging malinvestment. NIR may also create deflationary pressures as the artificial reduction in the cost of capital encourages investment in excess capacity, which in turn drives down prices for goods and services. Most banks have not passed on the negative rates to customers for fear of losing their deposit base. Concerns over margins, compounded by capital and liquidity regulations, also reduce banks’ propensity to lend. NIR stretches monetary policy to the extreme and may result in a counter-productive outcome. The adoption of NIR also suggests that policymakers are running out of policy ammunition.

Is “helicopter money” a better solution than QE?

Recently, policymakers and market commentators have been discussing the merits of “helicopter money”, a 47-year-old idea first mooted by economist Milton Friedman. It theorises a way to kick-start an economy through dropping money on its citizens by placing money directly into bank accounts or via a tax rebate, with the central bank creating the money to do so. Studies have estimated that cash transfers of 2% of GDP would boost the economy by 2.6% (using a multiplier of 1.3). It would also be more efficient than boosting infrastructure given the time lag, since projects take so long to build. The aim of helicopter money is to boost nominal GDP, overcome deflation and help reduce unemployment. Unlike QE, helicopter money is non-reversible although its effects could be reversed by tightening fiscal policy and selling bonds in order to absorb excess money. Helicopter money could boost growth immediately, albeit temporary and unlikely to be sustainable.

Tepid export growth

Late stage of the global growth cycle

G20 highlighted downside risks to growth

NIR could be counter-productive

Helicopter money could be suitable for Europe and Japan


4 April 2016

17

US GDP growth slowed to 1.0% annualised in 4Q15, from +2.0% in 3Q, as businesses stepped up efforts to reduce an inventory glut and a strong USD and tepid global demand weighed on exports. Similarly, retail sales had a poor start to 2016 as prior strong readings early in the year were subsequently revised to a decline. Nevertheless, job creation is seen to be healthy with an average of 207,000 a month in the first two months of 2016, compared with an average of 229,000 jobs a month in 2015, while the unemployment rate has fallen to the pre-crisis level of 4.9% of total labour force that is deemed full employment by the Fed. While hiring has been robust in recent months, faster wage gains remain elusive. Weakness persisted in the manufacturing sector amid the strong USD and threatens to spread to the non-manufacturing activities that have also slowed in recent months. As a whole, the US economy will likely continue to expand at a sub-par rate in 2016. The rising downside risks, coupled with policy easing adopted by other major central banks, prompted the US Fed to pause lifting rates in January through March, after hiking 25bps in December. The Fed also indicated that it could do just another two rate hikes this year, backing down from the four indicated at end-2015. Nonetheless, with core inflation creeping up, this will likely complicate the Fed’s monetary policy in the months ahead, if price pressure continues to accelerate.

In the Eurozone, economic activities eased slightly in 4Q15, but sustained at a positive annualised rate of growth for the ninth consecutive quarter. However, solid growth is by no means broad-based, with strong expansions recorded in all major economies with the exception of France where the upturn has come almost to a halt. Elsewhere, business activities were showing signs of weakness despite rising further in February, with the manufacturing and services activities expanding by the 33rd and 32nd consecutive months respectively. Similarly, business and consumer confidence weakened during the month, while deflation threat remains as its headline inflation slipped into a contraction in February. These weaknesses could have prompted the ECB to undertake more monetary

Figure 28: US: Healthy job creation underscores the strength of the economy

Figure 29: US: Manufacturing activities fell into contraction while growth of services activities moderated significantly

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

Sub-par US economic growth

Figure 30: Eurozone: GDP continued to grow for ninth straight quarter

Figure 31: Eurozone: Manufacturing and services activities losing momentum

Source: European Commission, Eurostat Source: Markit Economics

More QE in the EU

-1000

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0

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05 06 07 08 09 10 11 12 13 14 15 16

MoM, thousand 12-mth MA 6-mth MA

('000)

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50

52

54

56

58

60

62

12 13 14 15 16

Index

ISM PMImanufacturing

ISM PMInon-manufacturing

-1.5

-1.0

-0.5

0.0

0.5

1.0

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2.0

2.5

3.0

2011 2012 2013 2014 2015

% QoQ annualised

42

44

46

48

50

52

54

56

2013 2014 2015 2016

Index

PMImanufacturing

PMIservices


4 April 2016

18

policy easing in March by bringing the deposit rate 10bps lower to -0.4%, and a EUR20bn expansion of QE – which for the first time opens the door to purchases of investment-grade EUR-denominated bonds issued by non-bank corporations established in the Eurozone. Despite expanding gradually, the growth outlook for the Eurozone was lowered by policymakers, reflecting weaker international prospects while the region still faces mounting pressure of managing the influx of immigrants.

In Japan, the economy shrank at an annualised rate of 1.1% in 4Q, compared with +1.4% in 3Q, on the back of falling consumer spending and public investment. This underscores the challenges faced by Prime Minister Shinzo Abe, who has been trying to pull the economy out of nearly two decades of deflation through a stimulus and restructuring programme known as Abenomics. Whilst Japan has avoided a technical recession, it is struggling to grow out of deflation and deliver consistent growth. The BOJ downgraded its view of the economy but maintained its commitment to raising the monetary base by JPY80trn annually and left the rate it charges commercial banks on certain reserves at 0.1% in March, as it waits to assess the impact of its uncharted entry into NIR but highlighted the possibility of more easing later in the year. The move into negative rates in end-January had prompted falls in banks’ share prices and led financial trade unions to scrap their wage demand, the opposite of what the central bank needs to fuel inflation.

China’s economy, on the other hand, is still facing downward pressure. Indeed, its Purchasing Managers' Index (PMI) was still stuck in negative territory in February and the weakness is threatening to spill over to the services sector as the non-manufacturing PMI slipped further, albeit remaining in modest expansion. China’s industrial production and retail sales both slowed in the first two months of the year, highlighting the pressure leaders would face to meet this year’s annual growth target. The Government recently set a 6.5-7.0% target range for annual economic growth from 2016 to 2020 in an apparent attempt to temper expectations that China’s slowing economy would rebound to anything

Figure 32: Japan: Consumer and business spending still struggling after sales tax hike

Figure 33: Japan: Exports declined sharply amid weak global demand

Source: Japan’s Ministry of Finance Source: Japan’s Ministry of Finance

Further monetary expansion in Japan

Figure 34: China: Retail sales and industrial production trending downward

Figure 35: China: GDP growth continues to fall below government target

Source: China’s National Bureau of Statistics, RHB (for unavailable data for some years’ Jan-Feb periods)

Source: China’s National Bureau of Statistics

China is a major risk to global growth

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05 06 07 08 09 10 11 12 13 14 15 16

Retail Sales Industrial Production

% YoY

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% YoYRetail Sales

Industrial Production

5

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11

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13

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15

05 06 07 08 09 10 11 12 13 14 15

% YoY

6.8%(Q4)


4 April 2016

19

near the double-digit growth in recent decades. Earlier, China cut its RRR on 1 Mar and lowered the minimum down payment for first home purchases in most cities on 2 Feb to spur the real estate market. It also unveiled higher fiscal spending and a larger budget deficit of 3% of GDP for 2016 (-2.3% in 2015). The renewed signs of further weakening economic growth in China resulted in its central bank devaluing the currency further in the first week of January to the lowest level in five years.

Slowing economic growth offers a weak backdrop for markets

Figure 36: Economic and financial indicators

(% YoY) 2015 2016F 2017F 4Q14 1Q15 2Q15 3Q15 4Q15

Real GDP Growth 5.0 3.9 4.0 5.7 5.6 4.9 4.7 4.5

Domestic Demand (% contribution) 5.1 3.4 4.3 5.7 7.9 4.6 4.0 4.0

External Demand (% contribution) 0.7 2.5 3.1 1.9 -0.6 -3.7 3.2 3.7

Govt Budget Balance (% of GDP) -3.2 -3.1 -2.9 -5.7 -4.2 -1.4 -1.6 -5.6

Current Account Balance (% of GDP) 2.9 2.5 2.9 2.0 3.6 2.7 1.7 3.8

Inflation Rate 2.1 2.1 2.5 2.8 0.7 2.2 3.0 2.6

Overnight Policy Rate 3.25 3.25 3.00 3.25 3.25 3.25 3.25 3.25

Money Supply (M3) 2.7 4.5 4.0 7.0 7.9 6.0 5.2 2.7

Loan Growth 7.9 7.0 6.0 9.3 9.2 9.1 9.7 7.9

F: RHB forecast Source : Department of Statistics (DOS), BNM, RHB

Malaysia’s 4Q15 real GDP growth moderated further to 4.5% YoY, slowing from +4.7% and +4.9% in 3Q15 and 2Q15 respectively, resulting in the annual GDP slowing to 5.0% in 2015 (2014: +6.0%). This was weighed down by slower public spending due to tight government finances and more cautious business investment during the quarter. Slower government spending will likely extend into 2016 and weigh on economic growth. Already, in the recalibrated 2016 Budget, the Government proposed to cut expenditure by MYR8bn-9.5bn or a 3-3.6% reduction, which would feed through to the private sector in the months ahead. Private investment growth is also projected to slow as private businesses, in general, still face challenges from higher input prices and cash flow issues arising from the implementation of the goods and services tax (GST) and longer debt collection period amid weakening demand. This is compounded by a weaker MYR, making imported capital goods more costly. We are also seeing businesses in certain sectors like oil & gas and finance & insurance facing tough business conditions and reducing capital expenditure and cutting costs. Similarly, the property market continues to languish with falling transactions and rising unsold residential units. Despite the more resilient-than-expected consumer spending data in 4Q15 in the face of the GST implementation, subsidy rationalisation and a sharp weakening of the MYR, we do not think this pace would be sustainable through 2016. As such, we believe that along with the decelerating business investment and government spending, consumer spending will also likely to slow this year. On the external front, although Malaysia’s exports are envisaged to improve, the subdued growth would not be enough to lift the country’s overall GDP growth. On balance, we expect Malaysia’s real GDP to slow down to 3.9% in 2016, from +5.0% registered in 2015 and after slowing from +6.0% in 2014.

RHB forecasts a 3.9% GDP growth in 2016


4 April 2016

20

Source: BNM, RHB

Weaker domestic demand

The decline in oil revenue has compelled the Government to cut its 2016 expenditure to show its commitment to containing its budget deficit. Post-2016 Budget recalibration in January, we project the public investment to decline further and by a larger magnitude of 4.1% this year, after falling 1.0% in 2015, in line with an 8-10% cut in development expenditure. This is on the back of the Government’s move to delay the non-physical projects and projects that are still under study that would reduce its cash flow commitments by up to MYR5bn. Similarly, public consumption is also anticipated to slow to +1.8% in 2016, from +4.3% registered last year, in line with cuts in operating expenditure in areas such as supplies & services and grants & transfers under the revised 2016 Budget.

The austerity measures would spill over to the private sector, in our view and will likely aggravate business conditions that are already challenging, with rising costs of doing business following the upward revision in foreign worker levy, an increase in minimum wage starting July and GST compliance costs. In addition, tight cash flows from delays in debt collection and the implementation of the GST pose challenges for businesses. Although the MYR has appreciated somewhat, it is still relatively weak and at 11% lower compared to the early part of 2015. The weakness in the MYR will likely prompt some investors to delay their investments, as imported capital goods would be more expensive. Petronas announced its decision to cut its capital expenditure by about MYR50bn for the next four years and delayed the start-up of its Refinery and Petrochemical Integrated Development (RAPID) refining and petrochemical complex in Johor until mid-2019, pushing it back from early that year. In the housing sector, developers will likely reduce

Figure 37: Rising unemployment amid increased layoffs, a bane to consumer spending

Figure 38: Private consumption indicators point to a slowdown

* Workers affected by retrenchments and Voluntary Separation Scheme (VSS) offerings (including MAS) in Jan-Oct 2015

Source: BNM, RHB

Figure 39: GDP by expenditure components (at constant 2010 prices)

2014 2015 2015 2016(F) 2017(F)

3Q 4Q 1Q 2Q 3Q 4Q

% YoY

Consumption:

Private Sector 6.8 7.6 8.8 6.4 4.1 4.9 6.0 4.5 4.7

Public Sector 5.1 2.5 4.1 6.8 3.5 3.3 4.3 1.8 3.1

Gross Fixed Capital Formation 1.3 4.3 7.9 0.5 4.2 2.8 3.7 1.6 3.9

Private Sector 7.0 11.1 11.7 3.9 5.5 5.0 6.4 4.6 4.7

Public Sector -8.5 -1.9 0.5 -8.0 1.8 0.4 -1.0 -4.1 2.4

Aggregate domestic demand 5.0 5.7 7.9 4.6 4.0 4.0 5.1 3.3 4.3

Exports of Goods & Services 2.6 1.9 -0.6 -3.7 3.2 3.7 0.7 2.5 3.1

Imports of Goods & Services 2.0 2.6 1.0 -2.8 3.2 3.6 1.3 1.6 3.3

GDP 5.6 5.7 5.6 4.9 4.7 4.5 5.0 3.9 4.0

F: RHBRI’s forecasts Source: DOS, RHB

2016 Budget recalibration due to lower oil revenue

Lower private investment

12,689

20,031

14,46512,406

21,713

3.1

3

3.1

2.9

3.2

2.7

2.8

2.9

3.0

3.1

3.2

3.3

0

5,000

10,000

15,000

20,000

25,000

2011 2012 2013 2014 2015

(%)No of Persons

Layoffs (LHS) Unemployment Rate (RHS)

-50

0

50

100

05 06 07 08 09 10 11 12 13 14 15

% YoY Passenger vehicles salesConsumption creditMarket Cap of Bursa MalaysiaOutstanding credit card


4 April 2016

21

their investment in view of sluggish sales and stringent banks credit approval standards. Already, real estate investment approvals fell sharply by 69.6% in 2015, while construction & real estate loans moderated to 12.1% in 2015, after growing 19.7% in 2014. In addition, the Malaysian Investment Development Authority’s (MIDA) manufacturing investment approvals growth slowed sharply to 4.0% in 2015, from strong double-digit rates of 27-38% in the previous two years. It fell by 31.4% to MYR49.3bn in 2015, excluding the Pengerang investment. Nonetheless, investment growth will likely continue to be supported by the implementation of projects under the various economic programmes, in particular the construction of mega infrastructure projects such as the Mass Rapid Transit (MRT) Line 1 & Line 2, and various highway projects. Several projects were also announced in the 2016 Budget to boost domestic investment, such as the development of Samalaju Industrial Park, Sarawak and Palm Oil Jetty in Sandakan, Sabah as well as acceleration in the project timeline for the Pan-Borneo Highway to 2021 from 2025. The Government’s move to encourage more domestic investments by GLCs such as Khazanah Nasional, Kumpulan Wang Persaraan (KWAP) and Penabungan Nasional Bhd (PNB), may also provide some relief to business spending. As a whole, private investment is projected to grow at a slower pace of 4.6% in 2016, from +6.4% last year. Sluggish public investment, coupled with slowing private investment, suggests that fixed capital formation will likely slow down to 1.6% for 2016, from +3.7% in 2015.

Consumer spending is still projected to grow at a more moderate pace of 4.5% for 2016, compared with +6.0% in 2015, as consumer confidence was badly shaken by the GST and concerns over job security. This is reaffirmed by the Malaysian Institute of Economic Research’s (MIER) consumer sentiments index (CSI), which plunged for the sixth consecutive quarter to a record low of 63.8 in 4Q15, from 100.1 in 2Q14, as the outlook for jobs and income posed a drag on sentiment. In addition, higher cost of living and the elevated household debt of 89.1% of GDP at end-2015 will likely put a cap on consumer spending. The unemployment rate ticked up to 3.2% in Dec 2015, from 2.9% a year ago, with the number of layoffs in Malaysia rising to 21,713 in 2015, a 75% increase compared to 2014 levels, reflecting the current economic slowdown and challenging business climate. Nevertheless, we do not expect consumer spending to fall off the cliff, as the Government would increase cash assistance via Bantuan Rakyat 1Malaysia (BR1M) for

the low-income group of population while additional tax relief would be provided for individuals in 2016 to help ease their burden. It would also be cushioned by high savings and an increase in minimum wage as well as the Government’s recent measure to cut employees’ contribution to the EPF by 3ppts. This initiative could boost disposable incomes by up to MYR4bn pa if half of contributors agree to the reduced rate as seen in the past. As a whole, we expect domestic demand growth to ease to 3.3% for 2016, from +5.1% in 2015.

Manufacturing and services activities to lead in a broad-based slowdown

Figure 40: GDP by industrial origin (at constant 2010 prices)

2014 2015 2015 2016 (F) 2017 (F)

3Q 4Q 1Q 2Q 3Q 4Q

% YoY

Agriculture 3.4 -3.7 -4.7 4.6 2.4 1.3 1.0 -0.2 2.2

Mining 1.4 9.5 9.6 6.0 5.3 -1.4 4.7 3.4 3.0

Manufacturing 5.3 5.4 5.6 4.2 4.8 5.0 4.9 4.3 4.5

Construction 9.7 8.8 9.7 5.6 9.9 7.4 8.2 5.5 5.3

Services 6.5 6.6 6.4 5.0 4.4 5.0 5.1 4.5 4.3

GDP 5.6 5.7 5.6 4.9 4.7 4.5 5.0 3.9 4.0

F: RHBRI’s forecasts Source: DOS

Manufacturing and services activities would slow in 2016, dampened by weak domestic demand and a soft global growth environment. Meanwhile, mining activities are expected to ease on the back of base-effect normalisation of the additional oil field coming into production in late 2014. Although construction activities are expected to remain relatively strong in 2016, it will unlikely emulate the growth rates seen in previous years. Unfavourable weather conditions triggered by the El Niño phenomenon is expected to have an adverse impact on agricultural output. Value added in the manufacturing sector is projected to slow further to 4.3% in 2016, from +5.1% in 2015, on the back of slower domestic demand and weak trade activities. Export-oriented industries fared well in 2015, supported by the resilient electrical & electronics (E&E) segment, but even this sector would likely see a slowdown this year, on the back of declining global semiconductor demand, especially as consumer electronics and smart devices reach saturation. At the

Consumer spending to ease

Tepid global growth will likely cap export sector performance


4 April 2016

22

same time, growth in the resource-based industry will likely continue to be bogged down by weak demand amid tepid global growth, capping the growth of export-oriented industries.

Sustained fiscal consolidation a drag on economy

Table 41: Federal Government’s financial position

Brent Crude Prices

20151

USD52/bbl

20162

USD48/bbl

Revised 20163

USD35/bbl

Revised 20163

USD30/bbl

MYRbn MYRbn MYRbn % chg MYRbn % chg

Revenue 219.1 225.7 217.9 -3.5 216.3 -4.2

Total Expenditure 257.8 265.2 257.2 -3.0 255.7 -3.6

Operating Expenditure 217.0 215.2 211.2 -1.9 210.7 -2.1

Gross Development Expenditure 40.8 50.0 46.0 -8.0 45.0 -10.0

Less: Loan Recoveries 1.5 0.8 0.8 - 0.8 -

Net development expenditure 39.3 49.2 45.2 -8.1 44.2 -10.2

Overall Balance -37.2 -38.8 -38.5 -0.8 -38.7 -0.3

% to GDP -3.2 -3.1 -3.1 -3.1

1: Actual figures 2: Initial estimate 3: Revised estimate

Source: Revised 2016 Budget Speech, Ministry of Finance

A revision to the 2016 Budget for the second consecutive year was necessitated by the collapse in oil revenue. The recalibrated Budget brings down its oil price assumption to USD30-35 per bbl from USD48 per bbl projected previously. The Government plans to reduce operating and development expenditure by MYR8.0bn-9.5bn in order to maintain its fiscal deficit target at 3.1% of GDP for 2016 at the expense of economic growth. While this underscores the severe fiscal constraints facing the Government, the display of fiscal discipline was well-received by the market and rating agencies, mitigating the risk of a sovereign rating downgrade. As it stands, Petronas already announced plans to cut capital expenditure by MYR50bn to MYR300bn over the next four years although it has agreed to pay MYR16bn in dividends to the Government for 2016, (2015: MYR26bn). Both operating and development expenditures would share the burden of the cut equally at MYR4bn each, or -1.9% and -8.0% respectively.

The budget deficit would have ballooned to 3.8-3.9% of GDP if nothing had been done to rein in spending. The Government has pledged to reduce spending, particularly on supplies and services, which from the budget announcement in Oct 2015, was targeted at MYR36.3bn or about 16.9% of operating expenditure and is the second-largest allocation after emoluments (salaries). 53 wide-ranging measures to optimise public expenditure in the face of current economic challenges were proposed and include a freeze on hiring new staff, stricter controls on overtime, curbs on various expenses and a minimum 30% cut in spending on all government-organised events. At the same time, the Government has pledged not to reduce the emoluments of civil servants (MYR70.5bn) and pensions of retirees (MYR19.5bn) so as not to affect the delivery mechanism of the Government as well as to maintain the BR1M handouts (MYR5.9bn), which means almost 60% share of the operating expenditure would not be curtailed, leaving the job of sharp cuts in the remaining sectors like supplies & services and grants & transfers an uphill task.

On the development expenditure front, the Government would place importance on high-priority projects and jobs with a high multiplier effect and low import content, which include the construction of affordable houses, hospitals, schools, roads and public transport as well as security. The implementation of non-physical projects and projects that are still under study would be rescheduled. This measure would involve a reduction in cash flow commitments by up to MYR5bn. Given the danger of foregoing development, particularly for infrastructure investments, the Government affirmed that the implementation of major projects such as MRT and Light Railway Transit (LRT), Pan-Borneo Highway, Malaysian Vision Valley, Cyber City Centre, RAPID Pengerang and High-Speed Rail would be continued.

On the whole, the Government’s revised budget measures are aimed to maintain fiscal discipline and provide confidence to investors. Although crude oil prices had since recovered closer to USD40 per bbl in March, the rebound may not be sustainable due to persistent oversupply and prices could still remain weak and volatile for the rest of the year. Therefore, government-initiated spending cuts are timely to arrest investor concerns.

Revised 2016 Budget demonstrates fiscal discipline

Austerity measures in place

Prioritise high-multiplier projects

Spending cuts are timely


4 April 2016

23

Monetary and loan growth to remain soft

Broader money supply M3 growth eased further to 2.2% YoY in January, from +2.7% in December and compared with a high of +7.9% in March last year. This was due to a moderation in the growth of private sector’s demand for funds to 8.2% YoY, from +8.3% in December and +9.1% in Mar 2015, which was mainly caused by a slowdown in private demand for loans, in line with slowing private spending during the period following the GST implementation and the authorities’ efforts to rein in household debt. This was made worse by a 6.3% YoY decline in demand for funds by the public sector, after falling by 8.4% in December, as the Government reduced its expenditure. These were, however, mitigated by stronger growth of external operations, which picked up to 5.6% YoY, from +4.9% in December and -1.6% in March last year, pointing to a return of foreign portfolio investment into the country.

Loan growth slowed further to 7.7% YoY in January, from +7.9% in December and compared with a high of +10.2% recorded in August. This was attributed to a weaker reading in corporate loan growth and made worse by the consolidation in the growth of household loans during the month. As it stands, corporate loans slowed of late, on account of lower loans extended not only to the manufacturing sector but also to the wholesale & retail, construction & real estate, transport & storage and financing, insurance & business services sectors. Meanwhile, household loans continue to ease caused by a decline in loans for purchases of residential properties and consumer durable goods, but was partly mitigated by a slight uptick in the growth of personal and credit card loans, while car loans remained relatively stable. Household loan growth has been unwinding gradually since peaking at 13.9% in late 2010, after BNM’s introduction of macroprudential measures in 2012 and tighter credit conditions as well as property-cooling measures in 2013. These measures were meant to rein in elevated household debt that reached 89.1% of GDP as at end-2015. Stricter credit approval standards also mean that further slowdown in the growth of household loans is expected going forward. As a result, we project loan growth to slow down to 6.0-7.0 % in 2016, from 7.9% in 2015, constrained by more stringent rules on lending to households and curbs on the property market as well as a slowdown in economic growth.

Figure 42: Money supply growth slowed amid lower demand for funds by both public and private sectors

Figure 43: Loan growth eased amid ongoing consolidation of household and business loans

Source: BNM, RHB

Source: BNM, RHB

Slowing M3 growth

RHB forecasts 6-7% loan growth in 2016

0

2

4

6

8

10

12

14

16

18

20

10 11 12 13 14 15 16

% YoY

M1 M3

0

2

4

6

8

10

12

14

16

10 11 12 13 14 15 16

Loan Growth Deposit Growth

% YoY


4 April 2016

24

Current account surplus expected to narrow further in 2016

Given the challenging global environment and the ongoing slump in commodity prices, Malaysia’s export growth is envisaged to remain soft, albeit growing modestly in MYR terms for 2016. In particular, the commodity surplus is expected to narrow further in 2016, after shrinking 11.4% to MYR110.8bn in 2015, from MYR125.1bn in 2014 as export proceeds, particularly liquefied natural gas (LNG), palm oil and rubber were eroded by falling prices. Nonetheless, the drop was not as bad as feared, partly mitigated by higher volume of commodity exports, especially in crude oil and LNG. In addition, the sharp weakening of the MYR, which resulted in large exchange translation gains, helped to cap the non-commodities trade deficit. As a whole, this will likely translate into a lower merchandise trade surplus during the year. The resilient growth in imports due to infrastructure spending will likely further erode the trade surplus during the year. In contrast, the services account is projected to record a smaller deficit in 2016 due to an expected pickup in travel receipts, as tourists take advantage of the weak currency and promotional activities supported by the Government. Furthermore, demand for foreign services is likely to be dampened by the MYR weakness. Similarly, the deficit in the income account will likely narrow during the year, contributed by local companies and GLCs repatriating income invested overseas to support the domestic economy. This may be aided further by foreign companies delaying their profit repatriation back to their home countries to avoid foreign exchange losses. We also expect repatriation of salary by foreign workers to stay large, albeit smaller, during the year due to a higher minimum wage rate and project remittances by foreign workers to make up for the sharp weakening of the MYR. As a whole, we expect the current account surplus of the balance of payments to narrow further to MYR30.9bn or 2.5% of GDP in 2016, compared with MYR34.0bn or 2.9% of GDP in 2015.

We remain wary on the return of volatility in the financial markets, especially as the US Fed is still unclear on its stance over the pace of interest rate hikes this year while China is still struggling with excess capacity in its industrial sector. On the domestic front, market sentiment is still jittery over the replacement of the current central bank governor, although other political risks have since stabilised of late. Nonetheless, we think the capital outflow will likely subside somewhat in 2016. In this regard, we expect net portfolio investment to reverse into a net inflow of MYR5.0bn in 2016, from a net outflow of MYR28.2bn in 2015. Other private investment (capital that is not classified as direct outward investment) will also likely see a slowdown in outflow of about MYR10.0bn in 2016, compared with an outflow of MYR24.9bn in 2015. These will likely be offset by a net outflow of direct investment of about MYR3.0bn in 2016, compared with a net inflow of MYR0.2bn in 2015, as lower inflow of foreign direct investment (FDI) is expected during the year given the challenging global economic environment. As a whole, the financial account is envisaged

Figure 44: Balance of payments

2014 2015 2015 2016 (F) 2017 (F)

3Q 4Q 1Q 2Q 3Q 4Q

(MYRbn)

Current account 7.1 5.7 10.0 7.6 5.1 11.4 34.0 30.9 37.8

(% of GDP) (2.6) (2.0) (3.6) (2.7) (1.7) (3.8) (2.9) (2.5) (2.9)

(% of GNI) (2.7) (2.1) (3.7) (2.7) (1.8) (3.9) (3.0) (2.6) (3.0)

Goods 25.5 29.4 27.5 23.3 27.1 30.9 108.9 103.3 109.7

Services -3.6 -5.5 -3.8 -4.6 -5.9 -6.2 -20.5 -19.5 -19.1

Income -9.6 -13.2 -8.5 -5.1 -10.3 -8.2 -32.2 -31.4 -30.5

Current transfers -5.2 -5.0 -5.3 -6.0 -5.9 -5.0 -22.2 -21.5 -22.3

Capital account 0.0 0.3 0.0 -1.1 0.0 0.0 -1.2 0.0 0.0

Financial account -5.8 -26.6 -29.7 2.3 -31.2 5.3 -53.3 -9.0 -15.0

Errors & omissions* -8.0 9.1 4.0 -0.3 43.1 -22.7 24.1 -3.0 -3.0

Overall balance -6.7 -11.5 -15.7 8.4 17.0 -6.0 3.7 18.9 19.8

Outstanding reserves^ 416.9 405.5 389.7 398.1 415.1 409.1 409.1 428.0 447.9

(US$)^ 127.3 116.0 105.1 105.5 93.3 95.3 95.3 107.0 112.0

(F) : RHBRI's forecast ^ : As at end-period * : Reflect mainly revaluation gains/losses from MYR depreciation/appreciation and statistical discrepancies

Source: DOS, RHB

Current account surplus to narrow

Capital outflows to subside in 2016


4 April 2016

25

to record a smaller net outflow of MYR29.0bn in 2016, compared with an outflow of MYR53.3bn in 2015. After taking into account a deficit in errors & omissions, the overall balance of payments is projected to register a larger surplus of MYR18.9bn in 2016, after recording a surplus of MYR3.7bn in 2015. This will likely lead to an increase in the country’s foreign exchanges reserves to USD107.0bn by end-2016, from USD95.3bn as at end-2015.

Lower fuel prices to mitigate higher imported inflation

Figure 45: Inflation to remain subdued after a sharp reduction in domestic retail fuel prices in 1Q16

Source: BNM, DOS, RHB

The headline inflation rate accelerated to 3.5% YoY in January – the fastest pace in more than four years – from +2.7% in December. This was mainly attributed to base effects due to a sharp retracement in fuel prices in January last year in tandem with the fall in global crude oil prices. As it stands, the cost of transport rebounded by 0.6% YoY in January, following a 6.2% decline in the previous month while the costs of housing, water, electricity and gas picked up to 3.1% YoY in January, from +2.5% in November-December. In tandem with the rise in headline inflation, the new core inflation rate moderated to 3.6% YoY in January, from +3.8% in December.

As a whole, the inflation rate will likely peak in 1Q16. Looking ahead, the adjustments in administered prices and the weaker MYR exchange rate will likely push up prices of imported goods and exert some upward pressure on inflation this year. This, however, is expected to be mitigated by the continued low energy and commodity prices and the generally subdued global inflation. Since end-2015, domestic retail fuel prices have seen a sharp reduction of about 18-29% in 1Q16, after crude oil prices fell below USD30 per bbl in early 2016, although it has recovered slightly thereafter. As a result, we envisage the headline inflation rate to remain manageable at the 2.0-2.5% level this year, compared with +2.1% in 2015. At the same time, slower consumption spending following the GST implementation, a downturn of the property sector and elevated household debt should continue to place a lid on inflation pressure going forward.

Inflation to be contained

Imported inflation offset by lower energy prices

% YoY % YoY


4 April 2016

26

Room for rate cut, but not the current policy preference

Figure 46: Room for interest rate cut but not the current policy preference

(%)

Source: BNM, RHB

The central bank’s Monetary Policy Committee (MPC) decided to keep the overnight policy rate (OPR) unchanged at 3.25% for the 10th consecutive meeting on 9 Mar, in line with our expectations and the median estimate. Meanwhile, the central bank also did not follow up on the cut in the statutory reserve requirement (SRR) ratio in the previous meeting, leaving it unchanged at 3.50% of total eligible liabilities. This may likely be due to improved liquidity conditions on account of the reversal of capital flows back to the country, as seen in the 3-month Kuala Lumpur Interbank Offered Rate (KLIBOR) that fell to 3.71% in early March from 3.84% in mid-January.

While inflation will unlikely pose a threat going forward and there is room for BNM to cut its OPR to promote economic growth, it has emphasised that the country would not over-rely on monetary policy to drive economic growth in the period ahead and would look into promoting growth via a combination of monetary, fiscal and other policies to promote sustainable economic growth. BNM’s view is that cutting interest rates from the current level is unlikely to generate much marginal growth for the economy but could lead to disintermediation of savings, perpetuate excessive risk-taking by borrowers, and risk building up financial imbalances that could be equally damaging to the economy. As such, we maintain our expectations for BNM to keep its OPR stable at 3.25% in 2016. Nonetheless, the case for a rate cut may come into consideration should economic growth slow more than expected.

December 2015 quarter results in line

The December 2015 quarter results were generally in line, although the ratio of misses to beats improved to 1.2x (3Q15: 1.6x) and was the lowest seen in two years. Nonetheless, earnings revisions remained negative with FY16 earnings trimmed by 1.2% YoY with the biggest cuts coming from healthcare, plantations, telecom and auto sectors. Four of 21 sectors disappointed overall (namely auto, media, aviation and healthcare), while the remainder were in line. No individual sector surprised on the upside. Of the 25 FBM KLCI component stocks under our coverage, most (64%) reported earnings that were in line with expectations although 24% disappointed. The misses include Sime Darby, IHH Healthcare (IHH), Petronas Gas, Hong Leong (HL) Bank, UMW and KLCC REIT while Public Bank, Genting and Telekom Malaysia beat expectations. Component stock earnings were cut by 1.6% with the biggest absolute earnings reductions coming from HL Bank and IHH.

No change to the OPR in 2016

Lower interest rates is not the current policy preference

Earnings revisions negative


4 April 2016

27

Figure 47: Tracker - results vs RHB estimates

Source: RHB, Company data

2016 earnings growth forecasts slide

Figure 48: Earnings outlook and valuations

FBM KLCI RHB Basket

COMPOSITE INDEX @ 1,724.55 2014A 2015A 2016F 2017F 2014A 2015A 2016F 2017F

23 Mar 2016

EBITDA Growth (%) 3.1 1.8 10.4 8.1 4.5 2.0 9.7 8.9

Pre-Tax Earnings Growth (%) 0.0 (11.1) 16.9 9.9 1.0 (7.8) 14.9 10.2

Normalised Earnings Growth (%) (1.3) (1.9) 8.6 10.0 (1.5) (1.0) 10.0 10.5

Normalised EPS (sen) 42.3 41.2 44.3 48.4 28.1 26.7 28.9 31.7

Normalised EPS Growth (%) (3.2) (2.7) 7.5 9.4 (4.9) (4.8) 8.0 9.6

Normalised EPS Growth (%) ex-Plantation (2.7) 0.7 6.9 6.4 (3.4) (2.3) 7.1 7.4

Prospective P/E (x) 17.8 18.2 16.7 15.2 17.9 18.1 16.5 14.9

Price/EBITDA (x) 9.7 9.6 8.7 8.0 9.4 9.2 8.4 7.7

Price/Bk (x) 2.2 2.0 1.8 1.7 2.0 1.8 1.7 1.6

Price/NTA (x) 2.7 2.4 2.3 2.1 2.6 2.3 2.1 1.9

Net Interest Cover (x) 12.7 10.2 10.9 11.4 8.0 6.2 7.1 8.2

Net Gearing (%) 34.7 37.3 40.7 43.2 46.7 43.2 46.0 47.3

EV/EBITDA (x) 7.7 7.7 7.1 0.0 8.4 8.4 7.8 0.0

Div Yld (%) 3.2 2.9 3.1 3.4 3.2 3.0 3.1 3.4

ROE (%) 12.2 10.7 10.9 11.3 11.2 9.9 10.3 10.7

FBM KLCI stocks not under our coverage: Hong Leong Financial Group, PPB, Petronas Dagangan, RHB Capital and YTL.

Source: Bloomberg, RHB

0%10%20%30%40%50%60%70%

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Dec-14

Mar-15

Jun-15

Sep-15

Dec-15

Above 15.7%12.3%15.9%17.6% 9.8% 18.1%22.6%19.0% 8.6% 8.8% 10.9%17.7%10.4%11.2%19.6%22.0%

In Line 53.7%58.5%48.6%48.6%60.1%51.0%52.8%51.5%60.5%57.2%52.1%50.0%54.5%46.1%48.3%51.1%

Below 30.6%29.2%35.5%33.8%30.1%31.0%24.5%29.4%30.9%34.0%37.0%32.3%35.1%42.8%32.2%27.0%


4 April 2016

28

Figure 49: FBM KLCI weightings & valuations

Market Cap Weight EPS Growth (%) P/E (x)

MYRbn (%) FY16 FY17 FY16 FY17

MISC 39.7 4.3 20.6 11.0 11.4 10.3

Petronas Chemicals 53.7 5.8 21.3 3.8 15.9 15.3

SapuraKencana 12.0 1.3 14.5 14.2 10.4 9.1

Oil & Gas 105.3 11.4 20.0 8.4 13.2 12.1

BAT 15.8 1.7 (1.7) 2.2 17.7 17.3

Consumer 15.8 1.7 (1.7) 2.2 17.7 17.3

Genting 37.0 4.0 7.9 13.1 17.8 15.8

Genting Malaysia 26.4 2.9 33.7 9.8 17.7 16.1

Gaming 63.5 6.9 17.4 11.7 17.8 15.9

Astro 15.4 1.7 11.6 17.1 22.5 19.2

Media 15.4 1.7 11.6 17.1 22.5 19.2

UMW Holdings 8.2 0.9 +>100.0 17.3 19.9 17.0

Auto 8.2 0.9 179.4 17.3 19.9 17.0

Westports 13.9 1.5 15.8 5.8 23.5 22.2

Logistic 13.9 1.5 15.8 5.8 23.5 22.2

Telekom 24.0 2.6 (15.9) 15.5 31.8 27.6

Axiata 51.3 5.6 12.2 10.2 21.7 19.7

Digi.Com 38.8 4.2 2.1 0.6 21.7 21.6

Maxis 47.5 5.1 (1.4) (6.1) 25.9 27.6

Telecommunication 161.6 17.5 1.9 3.8 24.0 23.2

Tenaga 79.5 8.6 4.0 1.7 10.8 10.7

Petronas Gas 43.3 4.7 6.9 3.5 23.2 22.4

Utilities 122.8 13.3 4.6 2.0 13.3 13.1

AMMB 13.8 1.5 (2.2) 0.5 10.7 10.7

CIMB 42.4 4.6 36.4 5.5 10.6 10.1

HL Bank 27.0 2.9 (23.9) 10.8 14.3 12.9

Maybank 88.9 9.6 (6.2) 3.4 13.2 12.8

Public Bank 72.4 7.8 1.9 6.4 14.0 13.2

Banking 244.5 26.5 0.7 5.0 12.9 11.9

IOI Corp 31.1 3.4 9.3 23.6 27.2 22.0

KLK 25.8 2.8 62.6 25.4 19.4 15.5

Sime Darby 49.6 5.4 (0.3) 69.7 26.0 15.3

Plantation 106.5 11.5 15.7 44.2 24.3 16.8

KLCC Stapled 12.9 1.4 1.5 3.2 19.9 19.3

Property 12.9 1.4 1.5 3.2 19.9 19.3

IHH Healthcare 53.7 5.8 16.1 25.6 51.1 40.7

Healthcare 53.7 5.8 16.1 25.6 51.1 40.7

FBMKLCI 924.2 100.0 7.5 9.4 16.7 15.2

Source : RHB

We are now expecting normalised EPS growth of 7.5% in 2016, down from +8.4% in our 2016 market outlook report. The softer 2016 earnings growth forecasts were attributed to cuts in the oil & gas, gaming, telecom, plantations and healthcare sectors, offset by upgrades from utilities. We are forecasting low single-digit growth for heavyweight sectors like telecom and banks. Despite satisfactory December quarter results, we believe that it is

Downside risks to earnings growth


4 April 2016

29

premature to conclude that corporate Malaysia is firmly out of the earnings recession it has been mired in for the past three years. With tepid demand trends and cost pressures on the rise resulting in waning margins, we continue to believe that downside risks to earnings continue to persist. Consensus 2016 EPS growth estimates for FBM KLCI stocks stand at about 10%, leaving room for disappointments and downgrades by the street in the coming quarters. Pedestrian corporate earnings growth will likely limit the headroom for further upside to the benchmark index.

Valuations look steep

With the FBM KLCI already trading at a hair’s breadth away from +1SD above the 10-year mean of 16x and considering that 2016 earnings growth is merely in the mid-single digits with downside risk in a slowing economic growth environment, the P/E-to-growth equation does not look compelling. Relative to other markets in ASEAN, the P/E-to-growth relationship looks more attractive in Thailand, the Philippines and Indonesia. We recognise that Malaysia’s loftier valuations are also partly attributed to captive GLC-linked funds that are sizeable and highly liquid.

Figure 50: FBM KLCI P/E band chart Figure 51: FBM SCI P/E band chart


The recent outperformance of the FBM KLCI over the FBM SCI reflects the foreign funds inflow where interest has centred mainly on large-cap, blue-chip stocks. The relatively lower interest in small-cap issues has led to the FBM SCI now trading at below the 10-year mean, suggesting that value is beginning to emerge.

Figure 52: Comparative performance: FBM KLCI, FBM100 & FBM SCI

Source: Bloomberg

5.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0

25.0

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16

(x)

+1sd: 18.5x

-1sd: 13.5x

Mean: 16.0x

+2sd: 21.0x

-2sd: 10.9x

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16

(x)

+2sd: 24.6x

+1sd: 18.7x

Mean: 12.8x

-1sd: 6.9x

-2sd: 1.0x

-20%

-15%

-10%

-5%

0%

5%

10%

FBMKLCI Index FBMSC Index FBM100 Index

Other ASEAN markets look more attractive on valuations

Recent focus on large caps


4 April 2016

30

Figure 53 : Regional comparisons

M'sia Singapore Thailand Philippines Indonesia Hong Kong Taiwan Korea

FactSet Asian Consensus Trends report dated 31 March 2016

2016 EPS Growth (%) 7.8 (2.3) 8.8 12.2 12.1 1.5 4.5 3.3

2017 EPS Growth (%) 7.1 5.4 14.1 10.2 14.0 10.2 9.2 10.2

2016 P/E (x) 16.2 12.4 14.8 18.0 17.7 10.8 13.3 10.7

2017 P/E (x) 15.2 11.8 13.0 16.3 15.6 9.8 12.4 9.7

PE/EPS Growth

2016 (x) 2.1 (5.4) 1.7 1.5 1.5 7.2 3.0 3.2

2017 (x) 2.1 2.2 0.9 1.6 1.1 1.0 1.3 1.0

IBES Consensus dated 17 March 2016

2016 EPS Growth (%) (6.5) 3.1 11.3 12.1 15.7 8.0 4.6 21.3

2017 EPS Growth (%) 10.5 12.0 13.3 9.6 15.6 11.5 9.0 11.0

2016 P/E (x) 18.6 13.8 14.9 16.3 17.0 12.1 13.4 11.7

2017 P/E (x) 14.5 12.3 13.2 15.0 14.7 10.8 12.3 10.6

PE/EPS Growth

2016 (x) (2.8) 4.4 1.3 1.4 1.1 1.5 2.9 0.6

2017 (x) 1.4 1.0 1.0 1.6 0.9 0.9 1.4 1.0

Performance (%)

2015 (YoY) (3.9) (14.3) (14.0) (3.9) (12.1) (7.2) (10.4) 2.4

2016 (YTD)* 1.9 (0.0) 9.6 5.9 5.7 (5.9) 5.1 1.7

Note: * As at 23 Mar closings

Figure 54: Regional market YTD performance - Lcy Figure 55: 2015 comparative valuations of regional markets (Lcy & USD)


Base-case assumptions

We expect that the pace of global economic growth will likely remain sluggish and patchy going forward. In particular, the Eurozone and Japan continue to struggle to transition towards sustainable growth while the experiment with NIR is fraught with risks. We expect China’s economy to face downward pressure with growth likely to fall below the Government targets. In the matured stage of the global growth cycle, we see rising risks arising from a policy misstep and/or the “Black Swan” event. The near-term direction for domestic equity markets would be determined by the pace of US interest rate hikes and the direction of oil prices. While a tightening of US interest rates should in fact signal stronger confidence in the durability of a US economic recovery, the Fed’s monetary policy is being complicated by growth concerns in other parts of the world. This centres on how the prospect of higher US rates would impact the USD and the real US economy. RHB’s crude oil price (Brent average) forecasts for 2016-2017 of USD37.50 and USD45 per bbl respectively imply expectations for a relatively range-bound trading. In reality, near-term price would be dependent on the April meeting of oil producers while in the medium term, oil markets remain oversupplied through 2017 which we expect would cap fundamental oil price performance although financial demand would add to price volatility.

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

FBM KLCI SET PCOMP JCI STI HSI KOSPI SHCOMP SZCOMP

(%)

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

FBM KLCI SET PCOMP JCI STI HSI KOSPI SHCOMP SZCOMP

(%)

Lcy currencies USD currencies

Shaky global macroeconomic outlook

US monetary policy and oil are key market drivers


4 April 2016

31

However, although we retain our cautious stance, a global recession in the next 12 months is not our base-case assumption as we believe that the current global growth cycle can be prolonged by continued policy stimulus by global policymakers resulting in heightened market volatility, with investors adopting increasingly short-term investment horizons. This would manifest itself in the “bad news is good news” contradiction, where markets tend to react positively to negative macroeconomic developments as this is more likely to elicit an expansionary policy response. However, beyond this, we remain gravely concerned on the ability of policymakers in the major world economies to hold up growth given diminishing policy ammunition in the event of another global downturn.

We leave our end-2016 FBM KLCI target unchanged at 1,700 pts, based on ascribing a P/E of 15x to 1-year forward earnings. The discount to the 10-year mean of 16x reflects the lacklustre domestic and global macroeconomic growth outlook. Our bottom-up target FBM KLCI computation stands at 1,750 pts. Market valuations are demanding with Malaysia’s P/E-to-growth metric comparing less favourably with those of other ASEAN peers especially considering the downside risks to domestic earnings growth. While the alleviation of local risks and perceived undervaluation of the MYR have spurred the return of foreign institutional funds, we believe consensus weighting still places Malaysia in the underweight category although this would have narrowed somewhat following the YTD net foreign buying of MYR4.3bn.

Continued policy stimulus by global regulators

Policymakers running out of policy ammunition to prop up global growth

End-2016 FBM KLCI forecast of 1,700 pts


4 April 2016

32

Key Risks

Premature downturn in global economic cycle

The global economy is in its seventh year of growth in the current cycle where the late stage of an economic growth cycle tends to be associated with higher downside risk. This happens when business cycles become stretched and inventories build as spending is postponed. The International Monetary Fund (IMF) recently warned that it could downgrade projected global growth yet again despite unprecedented QE programmes by global policymakers. With debt already at record highs, the scope for continued fiscal stimulus diminishes while stretching monetary policy to the extreme can be counter-productive. Indeed, policymakers in the major world economies are running out of policy ammunition should global economic growth take another turn for the worse. A policy misstep or the unexpected “Black Swan” event could tip the global economy into a recession.

Hard landing for China

While not RHB’s base-case assumption, a sharper-than-expected deceleration of China’s economy would have negative implications for export-driven emerging market economies in ASEAN, including Malaysia. China’s economy continues to navigate through some difficult macroeconomic adjustment to weed out excesses. Both export and import growth missed the market expectation again in Feb 2016. We have observed weakening demand across the board. Looking ahead, we remain cautious on China’s exports given a fragile global economic recovery, while import growth could gradually improve in the near term due to a low base effect and a recent rebound of commodity prices. China absorbed 13% of Malaysia’s exports in 2015 and is Malaysia’s single-largest non-ASEAN export destination.

CNY devaluation

The PBoC depreciated its reference exchange rate by 1.9% against the USD on 11 Aug, shocking global markets. This was the largest single-day devaluation since the exchange rate reform in 1994. A further significant CNY devaluation would be perceived negatively, raising fears of a competitive devaluation and implying that China could be facing bigger economic problems than previously anticipated. This could put pressure on the MYR, and reduced Chinese purchasing power would be negative for Malaysia’s exports and commodity prices. The CNY has stabilised at 6.50-6.52 levels against the USD in recent days, due to PBoC’s intervention during the National People's Congress (NPC) meeting period. Both the PBoC governor and Premier of the State Council have reiterated during the meeting that there were no fundamentals to support a large devaluation of the currency and the Government would maintain a relatively stable exchange rate against other currencies. Thus, the currency will likely stay at current levels in the near term. In the longer term, there is still depreciation pressure for the CNY against the USD given the economic downturn and a potentially strong USD due to Fed rate hikes in the coming quarters. We believe a mild managed depreciation could be the best choice for the Government. We hold the view that CNY would depreciate by 4.7% against the USD to 6.80 CNY/USD (from 6.60) by end-2016 and further down to 7.00 by end-2017.

Renewed downturn in oil prices

A renewed downturn in oil prices would have serious ramifications for Malaysia's fiscal health. This is because the country is the only net oil & gas exporter in ASEAN. Although Malaysia has gradually reduced its dependency on oil revenue, it is likely to still contribute 21.5% of total revenue in 2015, before falling to 13-14% projected for 2016, down from 29.7% in 2014. Significantly lower crude prices could also have a negative impact on the prices of CPO and LNG as well as GDP growth from reduced investments in the oil & gas sector.

Risk of a global recession is rising

Downside risks for China’s economy and currency

CNY devaluation would be negative for emerging markets’ currencies

Oil still a significant contributor to fiscal revenue


4 April 2016

33

Brexit = Disintegration of the EU?

Brexit refers to the proposal for the withdrawal of the United Kingdom (UK) from the European Union (EU). British Prime Minister David Cameron campaigned in the 2015 elections on a promise that it would renegotiate Britain’s membership and hold an in-out referendum on EU membership if re-elected. Following the Conservative Party’s 2015 election victory, the European Union Referendum Act 2015 was introduced in the parliament. The referendum will be held on 23 Jun 2016. The key issues for the UK include regulatory compliance costs and immigration policy. In the event of Brexit, there would be a transitional period of uncertainty and instability for the UK economy that could have an impact on investment, capital flows, asset prices, currency stability and London’s importance as a global financial centre. For the EU, the cost of raising finance in Europe would increase and more importantly, Brexit would set precedence for other EU member states to consider leaving the bloc, encouraging the spread of disintegrative forces.

Timing and pace of US interest rate hikes

The more dovish statements from the Fed in the March FOMC meeting helped to spur the return of funds back to emerging markets and crimping the strength of the USD. With the fed funds futures only implying an 8% and 39.3% probability of an interest rate hike in the April and June FOMC meetings respectively, an unexpected hike in April would come as a shock, lifting the USD against emerging market currencies and reverse portfolio flows back into USD-denominated assets.

In-out referendum could go either way

US monetary policy is a major market influence


4 April 2016

34

Market Strategy

Figure 57: Top Sells

FYE Price TP Shariah

compliant

Market cap

EPS

(sen)

EPS growth

(%)

P/E

(x)

P/BV

(x)

P/CF

(x)

DY

(%)

(MYR/s) (MYR/s) (MYRm) FY16 FY17 FY16 FY17 FY16 FY17 FY17 FY17 FY17

23 Mar 2016

Maxis Dec 6.33 4.70 Y 47,539 24.4 22.9 (1.4) (6.1) 25.9 27.6 11.6 14.1 3.7

HL Bank Jun 13.34 11.00 N 26,999 93.3 103.4 (23.9) 10.8 14.3 12.9 1.3 n.a. 3.0

AMMB^ Mar 4.58 3.60 N 13,767 42.6 42.8 (2.2) 0.5 10.7 10.7 0.8 n.a. 3.8

UMW Holdings Dec 7.00 5.00 Y 8,178 35.1 41.2 +>100 17.3 19.9 17.0 1.4 9.4 4.1

Lafarge Malaysia Dec 8.94 7.41 Y 7,596 34.3 36.7 18.1 7.2 26.1 24.3 2.4 24.3 3.7

Affin Dec 2.31 1.80 N 4,488 24.2 26.3 27.6 8.6 9.5 8.8 0.5 n.a. 4.8

AEON Co. Dec 2.65 2.20 Y 3,721 10.4 12.1 10.8 16.4 25.5 21.9 1.8 0.5 1.8

APM Automotive Dec 3.90 3.33 Y 763 29.9 33.3 (3.3) 11.4 13.1 11.7 0.6 6.1 4.5

Daibochi Dec 2.17 1.65 Y 593 11.0 11.6 19.9 5.8 19.8 18.7 2.9 5.6 3.2

CARiNG Pharmacy^ May 1.88 1.35 Y 409 6.4 7.0 3.3 9.2 29.3 26.8 2.8 32.7 1.9

Note: ^FY16-17 valuations refer to those of FY17-18

Source: RHB

Figure 56: Top Buys

FYE Price TP Shariah

compliant

Market cap

EPS

(sen)

EPS growth (%) P/E

(x)

P/BV

(x)

P/CF

(x)

DY (%)

(MYR/s) (MYR/s) (MYRm) FY16 FY17 FY16 FY17 FY16 FY17 FY17 FY17 FY17

23 Mar 2016

Tenaga Aug 14.08 18.20 Y 79,462 129.9 132.1 4.0 1.7 10.8 10.7 1.4 5.9 3.1

MISC Dec 8.89 11.84 Y 39,682 77.9 86.4 20.6 11.0 11.4 10.3 1.0 9.2 2.7

KLK Sep 24.18 26.40 Y 25,812 124.6 156.3 62.6 25.4 19.4 15.5 2.4 14.2 3.9

SapuraKencana Jan 2.00 2.42 Y 11,984 19.3 22.0 14.5 14.2 10.4 9.1 0.8 2.8 2.0

Genting Plant Dec 11.02 12.60 Y 8,490 53.5 64.8 97.6 21.1 20.6 17.0 1.7 16.0 1.2

Malakoff Dec 1.66 2.18 Y 8,300 10.2 12.0 12.8 17.8 16.2 13.8 1.4 3.2 6.2

MMC Dec 2.06 3.45 Y 6,273 11.4 11.4 85.2 0.2 18.0 18.0 0.6 6.6 1.5

KPJ Healthcare Dec 4.30 5.00 Y 4,534 15.2 18.7 11.0 23.0 28.2 23.0 2.8 13.5 2.2

Time dotCom Dec 7.45 8.60 Y 4,270 33.4 40.0 27.7 20.0 22.3 18.6 1.7 12.1 1.2

Press Metal Dec 2.52 3.56 Y 3,273 29.5 36.9 29.0 25.0 8.5 6.8 1.3 2.6 4.4

Datasonic^ Mar 1.32 1.87 Y 1,782 5.9 8.0 50.3 35.6 22.4 16.5 5.1 16.6 2.7

Globetronics Dec 5.43 6.66 Y 1,524 37.0 41.1 44.8 10.9 14.7 13.2 4.0 5.7 4.6

HSL Dec 2.05 2.64 Y 1,129 14.8 18.0 7.0 21.7 13.8 11.4 1.4 19.8 1.3

Muhibbah Dec 2.48 3.34 Y 1,167 19.2 20.9 (19.0) 9.1 12.9 11.8 1.2 6.7 1.7

Tune Protect Dec 1.39 1.65 N 1,045 10.5 12.7 14.2 20.8 13.3 11.0 1.9 n.a. 3.6

Kimlun Dec 1.78 2.13 Y 535 20.9 24.3 (1.7) 16.4 8.5 7.3 1.0 5.4 3.4

Gadang^ May 1.94 2.83 Y 456 33.8 36.6 9.5 8.4 5.7 5.3 0.8 6.4 3.1

Petra Energy Dec 1.28 1.56 Y 411 16.9 25.4 6.1 50.1 7.6 5.0 0.7 3.6 5.3

Note: ^FY16-17 valuations refer to those of FY17-18

Source: RHB


4 April 2016

35

Figure 58: High-dividend yield stocks

Price DY (%) EPS Growth (%) P/E (x) P/BV (x) ROE (x)

(MYR/s) FY16 FY17 FY16 FY17 FY16 FY17 FY17 FY17

23 Mar 2016

SHL Consolidated^ 2.95 9.2 9.8 1.1 0.1 7.1 7.1 0.9 12.6

Matrix Concepts 2.48 8.1 7.7 8.8 5.7 6.1 5.8 1.2 21.6

MRCB-Quill REIT 1.14 7.1 7.4 (4.3) 1.4 13.2 13.0 0.8 6.4

UOA Development 2.13 7.0 7.0 (9.3) (7.9) 8.6 9.3 1.0 11.1

Hektar REIT 1.51 7.0 7.0 2.8 1.4 13.0 12.8 1.0 7.5

Hua Yang^ 1.89 6.9 7.2 (2.4) 4.8 4.5 4.3 0.7 17.6

Magnum Bhd 2.48 6.5 6.6 8.9 1.3 13.7 13.6 1.4 10.6

SP Setia 3.16 6.3 7.0 (15.6) 23.1 12.3 10.0 1.1 11.6

Padini 2.06 6.3 7.0 +>100 11.0 11.9 10.7 2.9 28.1

Sunway REIT 1.53 6.2 6.5 9.5 5.2 17.0 16.2 1.1 7.0

IGB REIT 1.51 6.2 6.5 10.5 6.1 18.4 17.3 1.4 8.2

Wah Seong 0.75 6.1 6.7 61.2 10.6 6.6 6.0 0.5 8.1

Tambun Indah 1.51 6.0 6.3 0.3 4.8 6.8 6.5 1.1 18.5

B-Toto^ 3.29 5.9 5.9 12.2 0.9 14.4 14.3 5.4 39.0

CapitaMalls 1.46 5.9 6.0 (0.2) 0.1 17.2 17.2 1.1 6.4

Axis REIT 1.56 5.6 6.0 5.6 5.2 17.7 16.8 1.3 7.6

Pantech^ 0.59 5.6 6.0 21.2 7.4 6.7 6.2 0.6 10.1

GAB 13.98 5.6 5.8 6.6 3.4 17.3 16.7 10.7 64.5

BAT 55.30 5.6 5.7 (1.7) 2.2 17.7 17.3 27.1 159.3

Glomac^ 0.83 5.5 5.8 (9.9) 7.9 8.7 8.1 0.6 7.2

Pavilion REIT 1.70 5.4 5.6 12.1 2.8 19.0 18.5 1.3 7.2

Maybank 8.95 5.4 5.4 (6.2) 3.4 13.2 12.8 1.3 10.4

Paramount 1.55 5.3 5.5 8.9 11.4 8.9 8.0 0.7 8.6

Carlsberg 13.96 5.3 5.7 5.9 6.6 18.8 17.6 13.9 78.9

Malakoff 1.66 5.3 6.2 12.8 17.8 16.2 13.8 1.4 10.2

Media Prima 1.50 5.3 5.4 4.7 1.5 11.4 11.2 1.0 8.7

UEM Edgenta 3.60 5.2 5.9 (7.4) 12.1 13.4 11.9 2.4 19.3

Coastal Contract 1.67 5.2 5.5 10.6 5.8 4.8 4.5 0.5 11.0

Aeon Credit^ 12.24 5.2 5.7 9.6 9.4 7.4 6.7 1.7 26.5

Berjaya Auto^ 2.18 5.0 6.0 16.1 17.7 10.9 9.3 3.5 41.9

MSM Malaysia 4.69 5.0 5.3 (10.8) 5.7 12.9 12.2 1.5 12.3

Pintaras Jaya 3.63 5.0 5.2 (38.5) 87.1 18.4 9.8 1.6 16.6

^ FY16-17 valuations refer to those of FY17-18 Source: RHB


4 April 2016

36

Figure 59 : Foreign shareholding levels of the largest 50 stocks under coverage

FYE Rec Price TP Shariah Foreign

23 Mar 2016

Compliant Shareholdings

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

Maybank Dec N 8.95 7.80 N 18.0

Tenaga Aug B 14.08 18.20 Y 23.1

Public Bank Dec N 18.80 19.40 N 31.3

Petronas Chemicals Dec N 6.71 7.19 Y 7.1

IHH Healthcare Dec N 6.56 6.60 Y 21.3

Axiata Dec N 5.90 6.32 Y 13.6

Sime Darby Jun N 7.99 7.70 Y 13.5

Maxis Dec S 6.33 4.70 Y 6.3

Petronas Gas Dec N 21.88 22.55 Y 8.7

CIMB Dec N 4.88 4.50 N 27.0

MISC Dec B 8.89 11.84 Y 5.6

Digi.Com Dec N 4.99 4.70 Y 9.9

Genting Bhd Dec N 9.90 9.08 N 50.0

IOI Corp Jun N 4.81 4.65 N 16.4

HL Bank Jun S 13.34 11.00 N 8.1

Genting Malaysia Dec N 4.45 4.46 N 39.0

Kuala Lumpur Kepong Sep B 24.18 26.40 Y 12.0

Telekom Dec N 6.57 6.40 Y 11.7

Nestle Dec N 75.48 72.90 Y 80.8

BAT Dec N 55.30 55.60 N 30.9

Astro Jan N 2.97 2.94 N 11.4

Westports Dec B 4.09 4.66 Y 33.9

AMMB Mar S 4.58 3.60 N 50.0

KLCC Stapled Dec N 7.17 6.85 Y 4.5

IJM Corp Mar B 3.53 3.90 Y 31.0

SapuraKencana Petroleum Jan B 2.00 2.42 Y 30.1

Gamuda Jul N 4.93 5.21 Y 22.0

YTL Power Jun N 1.48 1.55 N 8.6

MAHB Dec B 6.57 7.75 N 18.9

IOI Properties Jun TB 2.39 2.38 Y 14.4

SP Setia Dec N 3.16 3.10 Y 6.7

Dialog Jun B 1.60 1.82 Y 16.2

Genting Plantations Dec B 11.02 12.60 Y 7.0

Malakoff Dec B 1.66 2.18 Y 3.0

UMW Holdings Dec S 7.00 5.00 Y 12.5

Lafarge Malaysia Dec S 8.94 7.41 Y 81.5

Hartalega Mar N 4.55 4.95 Y 16.3

MMC Corp Dec B 2.06 3.45 Y 4.7

Alliance Financial Group Mar N 3.86 3.45 N 29.3

BIMB Dec N 3.80 4.10 Y 2.5

Sunway Bhd Dec B 3.14 3.40 Y 7.2

Felda Global Dec N 1.51 1.58 Y 9.0

QL Resources Mar N 4.33 4.21 Y 11.9

UEM Sunrise Dec N 1.11 0.95 Y 8.9

Cahya Mata Sarawak Dec B 4.85 5.86 Y 15.0

AirAsia Dec UR 1.86 2.19 N 46.0

IGB REIT Dec N 1.51 1.50 N 11.0

Pavilion REIT Dec B 1.70 1.72 N 4.6

Top Glove Aug N 4.91 5.63 Y 42.0

Sunway REIT Jun N 1.53 1.61 N 12.4

Source : Company data, RHB


4 April 2016

37

Market volatility requires investors to adopt a trading stance

A whipsaw 1Q16 saw regional markets pulverised at the start of the year by fear, before the storm passed and the rainbows emerged. Greed then took over, pushing markets higher supported by the easing domestic risk premiums, more dovish US Fed comments, a nascent recovery in oil prices and continued policy easing initiatives by regulators in key jurisdictions. We see external developments continuing to exert the greatest influence on the domestic equity markets with the biggest factors being the direction of oil prices, the US monetary policy and China’s economy. Expectations of the outlook for these market drivers remain extremely fluid, pulling one day and pushing the next depending on economic data, geopolitics, financial demand, inventory levels and global markets. Amid the clearly weak global macroeconomic fundamentals, we remain cautious but maintain our expectations for continued policy easing by regulators to extend the global growth cycle. The expected market volatility going forward is already resulting in the adoption of shorter-term investment horizons by investors. Although tepid corporate earnings growth has swelled valuations, this should be offset by ample domestic liquidity. Accordingly, we see the benchmark index remaining within the 1,650-1,780 pts trading range. As we remain unconvinced that recent flows represent a structural shift in foreign money back into Malaysia or a fundamental upgrade of the outlook for Malaysian equities, this is supportive of our trading stance on the market requiring investors to buy on weakness and sell into strength.

If expectations for a more dovish US rate policy pan out – RHB economists are now expecting two hikes totalling 50bps – this could set the stage for a more benign USD in the near term.

Investment themes

We see several trends that should play out over the next few quarters, which investors should stay cognisant of. These include the currency theme, play on commodities, the Sarawak theme, foreign funds inflows and a scarcity premium on preferred stocks and sectors.

Weaker USD

The dovish signals from the US Fed and diminishing expectations of the number of rate hikes in the US this year continue to point to a softer USD, at least for now. While the Fed is guiding for two hikes this year, the latest futures data shows that the implied probability of an April hike has fallen to zero with only a 20% chance of a hike in the June FOMC meeting. Indeed, some market commentators are already using the phrase “one and done” to suggest that the Fed would be unable to raise interest rates at all in 2016. In the domestic context, the stronger outlook for the MYR would remain a negative overhang for exporters who would suffer from negative sentiment and the preponderance of stale bulls given their strong price performance in 2015 when the MYR weakened. These sectors include rubber products, tech, furniture and timber. Winners from a bullish MYR trend would include importers, companies that have a significant non-MYR cost component and companies with significant non-MYR debt (see tables below for a list of winners and losers). Expectations for a firmer MYR could also help to encourage foreign portfolio funds back into domestic markets.

Markets will likely stay choppy

1,650-1,780 pts trading range

Several themes in play

A weak USD theme


4 April 2016

38

Figure 60: Winners of a stronger MYR

Company Sector / Industry Comments & reasons

Astro Media Overseas TV content costs denominated in USD

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

Inari Amertron Technology 25% of total borrowings in USD

MPI Technology 40% of total borrowings in USD; 52% in CNY

Unisem Technology 100% of total borrowings in USD

Axiata Telco 40% of total borrowings in USD

Time dotcom Telco 30% of total borrowings in USD

TM Telco 25% of total borrowings in USD

AirAsia Aviation 86.5% of total borrowings are in USD. Jet fuel, aircraft lease and maintenance costs are paid in USD

AirAsia X Aviation 100% of borrowings are in USD. Jet fuel, aircraft lease and maintenance costs are paid in USD

NTPM Consumer 70% raw material costs (pure pulp and recycle pulp) in USD

Berjaya Food Consumer 40% of BStarbucks COGS denominated in USD

Tenaga Utilities 11% of total borrowings in JPY, while 7% of total borrowings in USD

Tan Chong Auto Component import mainly denominated in USD

UMW Auto Toyota component imports denominated in USD

Berjaya Auto Auto Component imports denominated in JPY

MBM Resources Auto Component imports denominated in JPY

DRB-HICOM Auto Auto component imports mainly denominated in JPY

Source : RHB

Figure 61: Losers of a stronger MYR

Company Sector / Industry Comments & reasons

Hartalega Rubber products 90-95% sales denominated in USD

Kossan Rubber Rubber products 90-95% sales denominated in USD

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

Supermax Rubber products 90-95% sales denominated in USD

Karex Rubber products 90-95% sales denominated in USD

MPI Technology All revenue from exports in USD

Unisem Technology All revenue from exports in USD

Inari Amertron Technology 90% of revenue from exports in USD

Globetronics Technology 65% of revenue from exports in USD

Press Metal Basic materials Revenue in USD, while 30% - 35% of cost is in MYR, Nonetheless, there is a -0.6x correlation of the USD to the movement of aluminum price thus impact from weaker USD may be partly cushion by potential gain in aluminum price

YTL Power Utilities ~85% of revenue are in GBP and SGD

IHH Healthcare Healthcare ~70% of revenue are in SGD and TRY

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

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

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

Evergreen Timber 70-80% of revenue are denominated in USD

Petronas Chemicals

Oil & gas 80% of sales of products priced in USD, 60% of cost is in MYR

Scientex Plastic packaging 70-80% of its manufacturing production are catered for exports

Thong Guan Plastic packaging 70-80% sales from exports denominated in USD.

Source : RHB

In general, a weaker USD also helps to lift commodities that are mainly priced in that currency. If aluminium prices adjust higher in the face of a weaker USD, we would recommend Press Metal, a smelter that operates in the first quartile of the global production cost curve. For the timber sector, while log prices (in USD terms) have adjusted downwards for the past few months as buyers asked for lower prices due to the stronger USD, log prices remain a negotiated price, which means that it is still very much dependent on market demand and supply. While there is a possibility that log suppliers may ask for higher log prices in USD-term from buyers (barring changes in market dynamics), there could be a time lag before log prices adjust upwards. While oil prices have bounced higher since January, the demand-supply (including financial demand)

A weak USD, higher commodities prices


4 April 2016

39

dynamics are probably exerting a greater influence compared to purely USD movements. Although a stronger MYR would nominally benefit importers such as auto distributors, we remain bearish on the sector due to tepid consumer discretionary spending trends. However, aviation stocks should benefit from lower operating costs which are mainly USD-denominated. The plantations sector should not be significantly affected by the appreciation of the MYR, given that CPO prices are generally based in the MYR. When the MYR weakened, CPO prices were not negatively affected either. In terms of earnings, most companies that generate USD revenues also have USD debt as a hedge, so any forex swings should be more or less neutralised.

Figure 62: Commodity index vs DXY

Source: Bloomberg

Sarawak theme

We see continued and sustained interest in Sarawak-related stocks given the state’s rapid industrialisation and pace of infrastructure development, the upcoming Sarawak state elections notwithstanding. Our two main Sarawak plays are Hock Seng Lee (HSL) and Cahya Mata Sarawak (CMS). HSL should benefit from the infrastructure and construction aspects having recently secured the MYR750m Kuching centralised sewerage contract and the MYR1.71bn roadworks package for the Pan Borneo Highway (PBH). CMS is a direct proxy to Sarawak’s development, being the only cement manufacturer in the state in addition to supplying various other construction materials. It is also a frontrunner for other PBH packages in addition to other road maintenance contracts.

Foreign funds focus on big caps

The recent resurgence of foreign funds into Malaysian equities has centred on liquid large caps despite small- to mid-cap stocks offering more attractive valuations. The preference for more liquid names suggests that flows would be volatile, offering the foreign institutional funds opportunities to exit easily if market dynamics change. We note that seven of the 18 stocks on this quarter’s BUY list command market caps in excess of MYR6bn. Going forward, should sentiment improve further and inflows persist, the chase for alpha means that small- to mid-cap stocks should not be ignored given that valuations for the FBM KLCI are already lofty, trading just below +1SD to the mean.

Scarcity premiums

Valuation factors and various other macroeconomic and sector-specific headwinds mean that only five of the 22 sectors under RHB’s coverage are ranked OVERWEIGHT. The growing assets under management (AUMs) of local institutional funds and the re-emergence of foreign investors suggest that these preferred sectors would continue to enjoy premium valuations given their relative scarcity. Stocks with growth potential that are attractively-valued remain few and far between. Stocks in this category may well trade

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HSL and CMS for Sarawak exposure

Focus on large caps

Preferred sectors and stocks that command premium valuations


4 April 2016

40

above and beyond their historical trading range. Liquid shariah-compliant stocks with strong fundamentals would command premium valuations.

Figure 63: RHB coverage universe weighting by sector recommendation

Source: RHB

A trading market implies that stock-picking would be key for outperformance. We prefer companies that offer resilient growth characteristics, strong corporate governance cultures, steady cash flows and unstressed balance sheets. Earnings growth is the key to the creation of new shareholder value. In a low-growth environment, stocks with good dividend yields are also attractive.

We like stocks in the utilities, construction, tech, basic materials and plantations sector. We reiterate our UNDERWEIGHT ranking on the auto sector. Following the changes in stock calls on the back of the recently-concluded Dec 2015 reporting quarter, we downgraded the healthcare sector to NEUTRAL (from Overweight) on the back of IHH’s results that disappointed, while the consumer sector was raised to NEUTRAL (from Underweight) after upgrades on Carlsberg Brewery Malaysia, Guinness Anchor and Oldtown. 14 sectors are weighted NEUTRAL while the aviation sector is UNDER REVIEW due to a reallocation of coverage. While the outlook for basic materials remains mixed, we have conviction picks on some stocks in the sector. Accordingly, we upgrade the sector back to OVERWEIGHT (from Neutral).

We are OVERWEIGHT on the plantations sector as we expect a severe El Nino effect to significantly curtail production and drive CPO prices higher.

Our OVERWEIGHT stance on the construction sector is reaffirmed by the Government’s commitment towards public infrastructure spending. In terms of stock picks, we prefer smaller-cap contractors as their businesses mostly focus only on construction that is least impacted by the cooling property market.

We maintain our OVERWEIGHT stance on utilities premised on our positive recommendations on the national utility company Tenaga Nasional (Tenaga) and the pure-play independent power producer (IPP) Malakoff on the back of good earnings visibility and reasonable valuations.

We are OVERWEIGHT on tech as we believe that the earnings momentum of the semiconductor players would pick up substantially come 2H16 on capacity expansion and mass production of new components for incorporation into next-generation smartphones.

Overweight

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Stock-picking is critical

OVERWEIGHT: Utilities, construction, tech, basic materials and plantations

UNDERWEIGHT: Auto


4 April 2016

41

Figure 64: RHB basket of stocks - sector weightings & valuations

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

MYRbn % FY15 FY16F FY17F FY15 FY16F FY17F

Utilities 149.6 11.7 19.1 5.4 3.8 14.5 13.6 13.1 Overweight

Plantation 127.1 9.9 (31.3) 20.9 39.1 28.7 23.5 16.9 Overweight

Construction 31.1 2.4 (0.1) (3.2) 14.3 16.3 16.3 14.2 Overweight

Basic materials 16.6 1.3 (10.7) 21.6 16.0 20.2 16.1 13.9 Overweight

Technology 10.8 0.8 39.0 33.3 18.3 19.2 14.3 12.1 Overweight

Banking 260.7 20.4 (4.8) 1.5 5.4 13.2 12.7 11.7 Neutral

Telecommunications 165.9 13.0 (9.1) 2.5 4.3 24.7 24.0 23.1 Neutral

Oil & gas 127.4 10.0 (0.3) 13.6 10.2 15.5 13.6 12.3 Neutral

Gaming 71.5 5.6 (17.7) 16.4 10.3 20.1 17.3 15.7 Neutral

Healthcare 62.3 4.9 24.0 10.7 22.7 46.0 41.5 33.8 Neutral

Consumer 61.2 4.8 4.1 3.3 (2.9) 20.8 19.6 20.2 Neutral

Property 45.3 3.5 1.7 (8.4) 5.0 12.3 12.7 11.7 Neutral

Property-MREITs 33.7 2.6 2.3 4.9 3.4 19.5 18.4 17.7 Neutral

Rubber products 20.1 1.6 11.9 6.9 6.1 21.5 16.3 14.4 Neutral

Logistics 18.1 1.4 (9.5) 11.0 7.2 27.1 23.6 22.1 Neutral

Media 17.1 1.3 26.4 10.3 14.3 22.7 20.5 18.0 Neutral

Non-bank financials 10.9 0.8 2.4 9.4 10.6 16.9 15.4 14.0 Neutral

Plastic packaging 7.1 0.6 25.1 47.3 22.3 17.2 11.4 9.3 Neutral

Timber 4.0 0.3 20.0 44.7 (3.1) 14.8 10.2 10.6 Neutral

Auto 18.1 1.4 (65.9) 63.1 28.7 31.9 19.5 15.2 Underweight

Aviation 21.6 1.7 293.6 n.a. n.a. 79.3 n.a. n.a. Under Review

RHB BASKET 1275.7 100.0 (4.8) 8.0 9.6 18.1 16.5 14.9

Source: RHB


4 April 2016

42

FBM KLCI: From a Technical Perspective

Figure 65 : FBM KLCI’s weekly chart

Source: RHB, Bloomberg

Still Below The 200-Week MAV Line As shown in the weekly chart above, the FBM KLCI has been able to continue its rebound after creating the “Morning Star” bullish reversal pattern in January. Its technical landscape has improved after it surged above the downtrend line extending from 2014’s historical high.

Although the FBM KLCI had successfully breached above the downtrend line, the violation is not a major technical development. This is because the downtrend line had been violated in April last year. However, the index failed to sustain its upward momentum and subsequently retraced back below the line in less than two months. Due to this market action, the recent breakout from the downtrend line may not be a significant technical breakout.

In our opinion, the 200-week SMA line is more important than the downtrend line, as highlighted by the two circles in the chart above. In Dec 2014, the FBM KLCI rebounded sharply after gaining support at the line. However, the index retraced significantly after it violated the same line in mid-2015.

Hence, we believe that the FBM KLCI’s technical landscape would only be significantly enhanced if the index stages a clean breakout from the 200-week SMA line. Otherwise, we may still see the index languishing sideways between the recent 1,600-pt major low and the 200-week SMA line – which was the same trading zone experienced by the market in 1Q16.

The critical 200-week SMA line is currently situated at the 1,742-pt level. Should this level be taken out, look for an additional tough resistance in the wide area of 1,767-1,800 pts, which is represented by several key lows created since early 2014.

To the downside, strong support levels can be found at the 1,700-pt psychological level, 1,658 pts which was March’s opening level, and the 1,600-pt key low.

Progress made in 1Q16

Downtrend line violation is not a major breakout

The 200-week MAV line is more important than the downtrend line

May still be range-bound between 1,600 pts and the 200-week MAV line in 2Q16

Watch out for the key 200-week MAV line resistance

Strong support levels are at 1,700 pts, 1,658 pts and 1,600 pts

200-week SMA line

Downtrend line

Morning Star


4 April 2016



Auto: Staying Alive Underweight

December quarter earnings slump

The auto industry remained weak with most auto stocks seeing deterioration in their December quarter earnings. Of the six stocks that we cover, three were in line with our expectations, i.e. UMW Holdings (UWMH MK, SELL, TP: MYR5.00), APM Automotive (APM) (APM MK, SELL, TP: MYR3.33) and Tan Chong Motor (Tan Chong) (TCMH MK, NEUTRAL, TP: MYR2.40). Intense competition, higher cost of sales (due to a weaker MYR) and lower consumer demand were the common culprits for a slump in auto players’ revenues and margins. UMW recorded a net loss as its subsidiary, UMW Oil & Gas (UMWOG) recognised an impairment charge during the quarter, despite its auto division’s solid performance. Tan Chong reported revenue growth, driven by improved sales volume for Nissan and Renault during the quarter. However, the increase was most likely achieved by sacrificing margins. APM’s revenue was lower as demand from major original equipment manufacturers (OEMs) decreased. Berjaya Auto’s (BAUTO MK, BUY, TP: MYR2.40) sales were broadly in line, but margins continued to narrow due to an unfavourable sales mix and a weaker MYR. MBM Resources’ (MBM MK, NEUTRAL, TP: MYR2.25) earnings were below expectations, despite a spike in volumes for Perodua (4Q15). Contributions from associates also fell, as Perodua and Hino took a hit from unfavourable forex. DRB-HICOM (DRB MK, BUY, TP: MYR1.14) incurred a net loss during the quarter, mainly from its Proton operations due to impairments, write-offs and mark-to-market losses.

2016: A Buyers’ market

The sluggish consumer demand has intensified competition within the industry. Despite the aggressive sales and promotions, YTD Feb 2016 total industry volume (TIV) declined 18.3% YoY, according to data from the Malaysian Automotive Association (MAA). 2016 sales have dipped as auto sales were brought forward in 4Q15 on expectations of price hikes. Other than price discounts, consumers also demand a combination of free servicing, extended service warranty and other giveaways.

Figure 66: TIV trend

Source: Malaysian Automotive Association (MAA)

More car buyers trading down

In light of economic uncertainties and rising cost of living, consumers are shifting their spending pattern towards basic necessities, while discretionary items such as new vehicles are less of a priority. Consumer spending remains sluggish and heightened price sensitivity means a greater reluctance to make a multi-year commitment to big-ticket discretionary items. We see consumers trading down to cheaper alternatives (e.g. opting for a Honda Civic instead of an Accord). The national marques are not immune to the challenging environment since the middle-income consumers are especially susceptible to higher living costs. The higher sales mix of cheaper models would dilute profit margins of the auto distributors.

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Consumer demand remains soft

Consumers are increasingly cautious of spending on discretionary items

Alexander Chia

+603 9207 7621

[email protected]

http://www.efa.biz/



4 April 2016



Strong product pipeline to sustain sales

Distributors with the ability to introduce new model variants to keep their model line-ups fresh would have an advantage given consumers’ preference for the newest models. Distributors with the fewest new model launches will likely see their market share diminish or face greater margin erosion from the need to discount to make sales. Marques that can quickly introduce a local assembly programme would also gain an advantage from the more competitive product pricing.

Figure 67: New model launches in 2016

1. Honda Civic 13. Mazda CX-3 ckd

2. Honda Accord facelift 14. Mazda 6 diesel

3. Toyota Hilux 15. Mazda CX-5 diesel

4. Toyota Fortuner 16. Mazda CX-5 facelift

5. Toyota Innova 17. Mazda BT-50 facelift

6. Toyota Vellfire 18. Kia Rio Sedan variant

7. Toyota Alphard 19. Mercedes E-Class

8. Proton Perdana 20. Mercedes A-Class facelift

9. Proton Persona 21. BMW M2 Coupe

10. Proton Saga 22. Ford Focus facelift

11. Perodua Sedan 23. Ford S-Max

12. Mitsubishi Outlander 24. Subaru Forester facelift

Source: www.paultan.org

Key risks

Risks to our recommendation include a strong recovery of the MYR and higher consumer demand for vehicles on the back of improved consumer sentiment. Other macroeconomic factors such as regulatory changes, availability of financing and general living costs could also influence the sector.

Maintain UNDERWEIGHT

We expect the TIV in 2016 to contract to 640,000 units (2015: 666,635 units). Outlook for the auto industry remains challenging in a lacklustre economic environment where tepid consumer sentiment and intense competition are the order of the day. A weaker MYR, coupled with an unfavourable sales mix would also put margins under pressure. We maintain our UNDERWEIGHT call on the sector.

Consumers prefer the latest models

Risks are weighted on the downside

RHB forecasts 2016 TIV to decline to 640,000 units

Figure 68: Valuations of auto stocks

Price Target Mkt

Cap

P/E

(x)

EPS Growth

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

DY

(%)

Rec

(MYR/s) (MYR/s) (MYRm) FY16F FY17F FY16F FY17F FY16F FY16F FY16F FY16F

Berjaya Auto^ 2.18 2.40 2,469 10.9 9.3 16.1 17.7 4.3 12.0 43.0 5.0 B

HL Industries 6.80 7.78 2,230 10.1 9.9 27.2 2.0 1.7 7.9 17.7 4.9 B

DRB-Hicom^ 1.04 1.14 2,011 n.m. +>100 40.5 n.a. 0.3 6.7 (1.0) 1.4 B

Tan Chong 2.38 2.40 1,555 +>100 28.5 (83.3) +>100 0.6 4.2 0.3 1.7 N

MBM Resources 2.20 2.25 860 11.0 10.1 4.8 9.2 0.5 8.4 4.8 3.2 N

UMW Holdings 7.00 5.00 8,178 19.9 17.0 +>100 17.3 1.3 12.3 6.5 3.5 S

APM Automotive 3.90 3.33 763 13.1 11.7 (3.3) 11.4 0.6 3.7 4.9 4.5 S

Sector Avg 19.5 15.2 63.1 28.7

^ FY16-17 valuations refer to those of FY17-18

http://www.efa.biz/


4 April 2016



Aviation: Continuing Earnings Improvement Under Review Lots of kitchen-sinking in 2015

For 2015, Malaysia Airports Holdings’ (MAHB) (MAHB MK, Under Review) recurring earnings came in below our expectations, as management took the opportunity to book a large increase in provisioning for doubtful debts, maintenance charges and other costs during 4Q15. Weakness in the Malaysian operations could not be offset by strong results reported by Istanbul Sabiha Gokcen (ISG). AirAsia (AIRA MK, Under Review) reported strong improvement in operational performance in 2015, with its EBITDAR of MYR3.1bn exceeding our estimate by c.20%. However, poor results from associates dragged its PATMI below our expectations. Except for Thailand, all the other associates continued to report losses. The full-year net loss for AirAsia X (AAX) (AAX MK, Under Review) was lower than our estimate, as the airline posted its first headline profit after nine quarters in 4Q15, aided by a strong improvement in load factors and yields.

Figure 69: Load factors for AirAsia and AirAsia X (%) Figure 70: MAHB’s monthly passenger traffic (m)

Source: Company, RHB Source: Company, RHB

Overview of earnings outlook

We expect MAHB’s earnings to recover in FY16, aided by the expansion in capacity by foreign airlines and AirAsia. The transition of Malindo to KLIA from KLIA2 would also allow MAHB to earn higher passenger service charges tariffs. We remain optimistic on ISG reporting double-digit passenger traffic growth in FY16. Both AirAsia and AirAsia X should continue to report earnings improvement amidst the announcement of new destinations, more rational competition from Malaysia Airlines and a lower average FY16 jet fuel price compared to FY15.

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Earnings growth would be driven largely by declining jet fuel prices, resulting in lower fuel costs

Shekhar Jaiswal

+65 6232 3894 [email protected]

http://www.efa.biz/


4 April 2016



Key risks

Key risks include a sudden and sustained rise in oil prices, a depreciation of MYR against USD and deterioration in air travel demand amidst an uncertain economic environment.

Sector rating is Under Review

While we remain positive on the earnings growth outlook for Malaysia’s aviation sector, we have placed our published earnings estimates and TPs for AirAsia, AirAsia X and MAHB under review, pending the transfer of coverage and material changes to our estimates.

Figure 73: Valuations of aviation stocks

Price Target

Mkt Cap

P/E (x)

EPS Growth (%)

P/BV (x)

P/CF (x)

ROE (%)

DY (%) Rec

(MYR/s) (MYR/s) (MYRm) FY14 FY15 FY14 FY15 FY15 FY15 FY15 FY15

AirAsia 1.86 n.a 5,176 15.0 8.2 (16.1) 83.5 1.1 2.3 12.0 0.0 UR

MAHB 6.57 n.a 10,901 70.7 +>100 (63.0) (92.1) 1.4 20.2 (0.3) 0.0 UR

AirAsia X 0.31 n.a 1,265 n.m. n.m. ->100 72.3 1.9 n.m. (54.4) 0.0 UR

Sector Avg (203.0) 79.3 (114.6) 293.6

UR: Under Review

Figure 71: Brent crude vs jet fuel prices Figure 72: Fuel cost per ASK (US cents)

Source: Bloomberg, RHB Source: Company, RHB

Rising competition emanating from low fuel prices may lead to lower revenue yields

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http://www.efa.biz/


4 April 2016



Banking: Lacks Catalyst Neutral

4Q15 results mixed

Three of the seven banking stocks that we cover reported results that met our and consensus estimates. Affin (AHB MK, SELL, TP: MYR1.80) and Hong Leong (HL) Bank (HLBK MK, SELL, TP: MYR11.00) both reported results that missed our and consensus estimates due to weaker-than-expected contributions from their respective associates (insurance associate for Affin while HL Bank was dragged by its China operations). HL Bank was also weighed by lower-than-expected net interest margin (NIM). CIMB’s (CIMB MK, NEUTRAL, TP: MYR4.50) results were in line with our expectations but missed consensus estimates. Public Bank (PBK MK, NEUTRAL, TP: MYR19.40) reported a strong set of numbers that was ahead of our and consensus estimates thanks to lower-than-expected credit cost. Sector 4Q15 reported net profit was flat QoQ and YoY, mainly due to a higher effective tax rate during the quarter. At the pre-tax level, profit rose 3% QoQ and YoY with the QoQ increase aided by lower loan impairment allowances while YoY, net interest income rose 9% driven by balance sheet expansion. Stripping out staff separation costs, sector 4Q15 pre-tax profit was down 1% QoQ (seasonally higher opex), but up 6% YoY.

2016 themes - asset quality and liquidity

We continue to hold the view that the two key themes in 2016 for the sector are asset quality and liquidity. Banks’ earnings are more sensitive to factors such as credit cost and NIMs.

Asset quality cycle – just the beginning? We continue to expect asset quality to be at

the forefront of investors’ concerns. Banks are heading into softer macroeconomic conditions, amid above-average credit growth in recent years as households continue to leverage up. As for the business segment, weaker consumer spending and macroeconomic conditions, coupled with low commodity prices, are potential factors that may impact asset quality ahead. Even more disconcerting, sector loan loss coverage (LLC) has dropped to 82% in 2015 (2014: 90%, 2013: 94%). This raises concerns that banks may not have built up sufficient loss coverage as we enter the soft patch ahead.

Retail-focused banks in a better position to weather asset quality cycle. In our view,

the retail-focused banks would offer a safer hideout for investors. Firstly, household debt is largely asset-based (70% of debt backed by assets). Secondly, LLC levels for these banks are relatively higher. We believe the downside risks are more significant for corporate-focused banks given the nature of business impaired loans. More importantly, the drop in sector LLC noted above was largely caused by corporate-focused banks drawing down on coverage buffers. LLC levels for these banks are significantly lower and range between 63% and 95%.

System deposit growth likely to remain under pressure ahead. Dec 2015 system

deposits growth slowed down to 1.8% YoY, when compared with 7.6% YoY as at end-2014 resulting from the moderation in deposits from financial institutions and business enterprises. Factors that could have contributed to the weaker deposit growth from these groups include, among others, capital outflows and weaker underlying economic activities, in our view. Thus, system loan-to-deposit ratio (LDR) had risen to 89% at end-2015 from 87% at end-2014, while sector LDR increased to 90% from 89% over the similar period. Previously, the banks had guided for a target LDR range of 85-90% but due to the weakness in deposit-gathering activities, banks are increasingly more willing to accommodate higher LDR levels (90-95%). We also understand that despite the higher LDR levels banks are currently operating at, liquidity coverage ratios (LCR) remain comfortably above the minimum regulatory requirements. Baring a reversal in capital flow, we expect system deposit growth to stay muted due to weaker macroeconomic conditions.

Better bottomline growth in 2016 but EPS growth likely to stay subdued due to capital preservation efforts

We project underlying sector net profit to rise 4% YoY in 2016 (2015: flat YoY) on the back of operating income growth of 4% YoY. 2016 net interest income is expected to rise by a modest 4% YoY, with loan growth of 7% partly offset by 7bps NIM compression. Non-interest income growth is expected to be at a slower clip of 3% YoY as last year’s strong forex income (partly unrealised from forex positions) is unlikely to be repeated. We project loan-related fee income to moderate, in tandem with the slower loan growth ahead. We expect 2016 operating expense growth to ease to 3% YoY, as the impact from the cost restructuring exercises in 2015 kicks in. This ought to result in the cost-to-income ratio

4Q15 results were a mixed bag

Two key themes for the sector in 2016 are asset quality and liquidity

Banks are facing a softer macroeconomic environment on the back of stronger credit growth post-global financial crisis (GFC) as well as lower LLC buffers

Corporate-focused banks are at bigger risk to the asset quality cycle due to the lumpy nature of business impaired loans as well as lower coverage levels compared to retail-focused banks

Better growth prospects in 2016, but risks are high

David Chong, CFA +603 9207 7618 [email protected]

http://www.efa.biz/


4 April 2016



(CIR) trending down to 47.2% in 2016F from 47.8% in 2015. These, however, would be partly offset by higher loan impairment allowances (+21% YoY), as we project sector credit cost to rise to 40bps from 36bps in 2015. We expect 2016 sector EPS, however, to rise by a more modest 2%. This is due to dilution from 2015’s capital-raising exercises and ongoing capital preservation initiatives. Similarly, 2016 sector ROE is expected to be diluted further to 10.7% from 2015’s 11.3%, as sector leverage continues to trend lower due to the Basel III capital requirements.

Expectations of softer ROEs and rising credit cost appear consistent with banks’ guidance

For banks that reported 4Q results, we note that 2016 ROE targets and guidance are about 100-200bps lower, when compared to respective targets for 2015. For the non-FYE Dec banks, managements of these banks either guided that the FY16 ROE target would be missed or revised down their targets. Possibly, rising credit cost ahead could suppress ROEs. 2015 credit costs for the larger banks, ie Malayan Banking (Maybank) (MAY MK, NEURAL, TP: MYR7.80) and CIMB, were both higher than our estimates due to the deterioration of asset quality in their overseas operations. For banks that are predominantly domestic-based, asset quality was relatively more benign. That said, we note from the guidance provided that expectations are for credit costs to rise ahead, in line with our forecast.

Surprising improvement from capital management initiatives

Both Maybank and CIMB reported a surprising 100-130bps sequential improvement in their CET-1 ratios in the 4Q15 reporting quarter. Reasons provided for the improvement include risk weighted asset (RWA) management, asset disposals as well as favourable market trends (eg forex). As at end-Dec 2015, AMMB (AMM MK, SELL, TP: MYR3.60) appeared light on the capital front but we believe there is scope for capital management initiatives. We believe the ratio of the group’s RWA-to-total assets is in excess of 70%, vs above 60% for CIMB and 53% for Maybank.

Sector Top Picks

Given the challenging macroeconomic environment, we like banks that offer strong and predictable book value growth to continue creating shareholders value. This would entail a combination of superior returns, sound earnings predictability (eg less reliant on markets-related income) and/or solid asset quality. Also, banks with relatively lower market risk should aid in insulating book value against adverse bond yield and foreign exchange rate movements. Public Bank meets the criteria above and is our preferred pick, although we think upside potential may be capped by valuations that appear to have priced in much of the positives. Our least preferred pick is AMMB. The bank’s NIMs have fallen significantly (1.97% currently) due to its portfolio rebalancing efforts, and are likely to continue drifting lower. We are concerned on the levels to which its NIMs have dropped, especially amid soft capital market conditions and a turn in the impaired loan cycle.

RWA and capital management initiatives helped boost CET-1 ratios of Maybank and CIMB

We have a NEUTRAL sector call with Public Bank as our preferred pick due to its consistent earnings delivery and solid asset quality

AMMB is least preferred as we think its NIMs may have fallen to levels that are too low amid soft capital market conditions and a turn in the impaired loan cycle

Figure 74: Valuations of banking stocks

Price Target Mkt

Cap

P/E

(x)

EPS Growth

(%)

P/BV

(x)

DY

(%)

ROE

(%)

Rec

(MYR/s) (MYR/s) (MYRm) FY16F FY17F FY16F FY17F FY16F FY17F FY16F FY17F FY16F FY17F

Maybank 8.95 7.80 88,857 13.2 12.8 (6.2) 3.4 1.3 1.3 5.4 5.4 10.5 10.4 N

Public Bank 18.80 19.40 72,424 14.0 13.2 1.9 6.4 2.1 1.9 3.1 3.3 15.8 15.3 N

CIMB 4.88 4.50 42,447 10.6 10.1 36.4 5.5 1.1 0.9 3.8 3.9 9.3 9.4 N

AFG^ 3.86 3.45 5,880 11.2 10.9 1.3 3.1 1.2 1.1 4.4 4.5 10.7 10.5 N

BIMB 3.80 4.10 5,860 10.6 9.7 1.1 8.8 1.6 1.4 3.3 3.6 15.4 15.1 N

HLB 13.34 11.00 26,999 14.3 12.9 (23.9) 10.8 1.3 1.3 2.5 3.0 9.9 10.1 S

AMMB^ 4.58 3.60 13,767 10.7 10.7 (2.2) 0.5 0.9 0.8 3.7 3.8 8.3 7.9 S

Affin 2.31 1.80 4,488 9.5 8.8 27.6 8.6 0.5 0.5 4.5 4.8 5.6 5.9 S

RHB Cap* 5.80 NR 14,921 6.9 6.5 6.3 6.2 0.9 4.2 3.0 3.3 10.4 10.3 NR

Sector Avg** 12.7 11.7 1.5 5.4 1.3 1.2

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

**FY16 EPS growth is based on FY15F EPS underlying net profit, ie. excluding restructuring costs


http://www.efa.biz/


4 April 2016



Basic Materials: Selective BUYs Overweight

Demand for basic materials capped by property slowdown

We are relieved that the construction sector has emerged relatively unscathed from the recalibrated Budget 2016 tabled by Prime Minister Datuk Seri Najib Razak in Jan 2016. Focus remains on projects and programmes that are rakyat-centric, with a high multiplier effect and low import content. Physical projects that would be prioritised include construction of affordable houses, hospitals, schools, roads and public transport as well as security. Prime Minister reaffirmed the implementation of Mass Rapid Transit 2 (MRT2), Light Rail Transit 3 (LRT3), the Refinery and Petrochemical Integrated Development project (RAPID), Pan Borneo Highway, Malaysian Vision Valley, Cyber City Centre, and high-speed rail, which would be carried out as planned. Although the infrastructure boom may keep local contractors busy, hence boosting demand for basic materials, this may be pulled down by sluggish new property launches. Meanwhile, aggregate new property sales fell another 28% in 2015 after a 26% drop in 2014. After almost two years of slowdown, there is still no positive re-rating catalyst for the sector. We expect the sector to go through a longer downcycle, with a recovery likely in 2017 at the earliest.

Consolidation period for the cement boys

In the interim, pure cement players like Lafarge Malaysia (Lafarge) (LMC MK, SELL, TP: MYR7.41) suffered stiff competition. This led to the cement boys in West Malaysia offering larger bulk discounts at the expense of margins. Until more new major property projects hit the ground running, we expect selling prices of cement to be under close scrutiny among the market rivals as we projected for a softer seasonal pickup moving into end-2016. Hume Industries is scheduled to commission its new production line at later part of this year, which also suggests a possible extension of price competition in the near future. That said, we continue to like the cement segment as there is only one producer each in Sabah and Sarawak while the West Malaysia market is dominated by an oligopoly. We will continue to monitor developments for any re-rating catalysts.

Figure 75: Cement consumption in Malaysia (‘000 tonnes) Figure 76: New and pipeline cement capacity in Malaysia

Capacity (k-tpa)

Company Clinker Grinding Status

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

Cement Industries of M’sia 1,500 1,800 Operation since 2014

YTL Cement 1,500 1,800 Operation since 2015

Lafarge Malayan Cement - 300 Commission by Feb 16

Lafarge Malayan Cement - >900 Commission by Jul 16

CMS Cement - 1,000 Commission by 1H16

Hume Cement (Phase II) 1,500 1,800 Commission by 2H16

Source: RHB, Various sources Source: RHB

Sarawak play ahead of the state election

We continue to promote basic materials players that are involved in niche products or businesses in Sarawak. On top of the competitive edge from the availability of hydroelectric power at attractive tariff rates under the implementation of the Sarawak Corridor of Renewable Energy (SCORE), the impending state election may put this land of the hornbill in the limelight. Typically, construction and maintenance works have historically picked up ahead of any polling day. For the time being, we have witnessed the long mooted Pan Borneo Highway project – which has an overall build cost of MYR27bn – finally hitting the ground. Already, Cahya Mata Sarawak (CMS) (CMS MK, BUY, TP: MYR5.86), which is an excellent proxy to Sarawak and SCORE, has seen its recent earnings from its road maintenance, and materials and trading divisions rise ahead of the impending election.

0

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West Malaysia Sarawak Sabah

We expect demand for basic materials to take a breather in the interim period as a slow down on new property launches may cap its demand

The competitive business environment in West Malaysia’s cement space is to be extended. This is after taking into consideration the additional capacities entering the market coupled with the possible slowdown in basic materials requirements

The impending state election may put Sarawak counters in the limelight, in particular CMS

Ng Sem Guan, CFA +603 9207 7678 [email protected]

http://www.efa.biz/


4 April 2016



Some niche players worth a closer look

Within our basic materials sector universe, we also like Pantech (PGHB MK, BUY, TP: MYR0.64) despite its business being directly related to oil & gas (O&G) industry. We believe its physical presence in Johor also suggests that it may win more supply contracts from the RAPID project to help the company survive the oil price volatility. Meanwhile, we also re-categorise OKA Corp (OKA) (OKAC MK, BUY, TP: MYR1.16) from construction to basic materials sector. We like this company on its more aggressive pricing in order to capture a bigger market share. Yet, its internal cost optimisation strategies would support its margins going forward. Demand for OKA’s products is to remain cautiously stable, underpinned by various infrastructure projects that were announced under Budget 2016, such as new highways and flood mitigation projects.

Upgraded Press Metal as sector Top Pick

After a quiet eight months post the fire incident in May 2015, we think it is time for investors to put Press Metal (PRESS MK, BUY, TP: MYR3.56) back on their radar screens. The company is all set to make a comeback with its Phase II aluminium smelter in Samalaju having just resumed normal operations. Meanwhile, Phase III is slated for commissioning by May. Press Metal commands 1.5% of the global primary aluminium capacity, with costs in the first quartile of the global production cost curve. Despite our conservative aluminium price assumption, we still expect 3-year earnings CAGR of 20.5%. This stock is now our new Top Pick for the basic materials sector.

Figure 77: Press Metal’s upstream production


Upgrade to OVERWEIGHT

While the outlook for the basic materials sector remains mixed, individual companies under our coverage are still able to benefit from their respectively niches. Thus, we have BUY recommendations on them. The exception is Lafarge, as the cement industry in West Malaysia may take a while to consolidate. This is why we have a SELL call on the company. Therefore, we upgrade the sector back to OVERWEIGHT (from Neutral). Risks to our recommendations include weaker-than-expected demand and ASPs for products engaged by a respective company.

Figure 78: Valuations of basic materials stocks

Price Target Mkt Cap P/E

(x)

EPS Growth

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

DY

(%)

Rec


CMS 4.85 5.86 5,211 18.2 15.8 16.8 15.2 2.4 18.4 13.7 2.2 B

Press Metal 2.52 3.56 3,273 8.5 6.8 29.0 25.0 1.5 8.1 18.4 3.5 B

Pantech^ 0.59 0.64 339 6.7 6.2 21.2 7.4 0.6 5.6 10.0 5.6 B

OKA^ 1.01 1.16 161 8.7 8.2 4.6 6.3 1.1 8.3 12.7 5.0 B

Lafarge 8.94 7.41 7,596 26.1 24.3 18.1 7.2 2.4 26.1 9.4 3.5 S

Sector Avg 16.1 13.9 21.6 16.0


Title:

Source:


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0

100,000

200,000

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800,000

2010 2011 2012 2013 2014 2015 2016 2017 2018

P1020 A356 Billes Others YoY (%) (rhs)

We also like Pantech and OKA – niche players within the basic materials space

Press Metal is all set to make a comeback, thus is now our new Top Pick for the basic materials sector

We upgrade our rating for basic materials sector to OVERWEIGHT (from Neutral)

http://www.efa.biz/


4 April 2016



Construction: Series Of Project Awards In 2016 Overweight

Riding on the infrastructure construction cycle

The construction sector emerged relatively unscathed from the recalibrated Budget 2016 tabled by Prime Minister Datuk Seri Najib Razak in Jan 2016. The focus remains on projects and programmes that are rakyat-centric, as well as with a high multiplier effect and low import content. Physical projects that will be prioritised include the construction of affordable houses, hospitals, schools, roads and public transport as well as security. The Prime Minister reaffirmed the implementation of Mass Rapid Transit (MRT) 2, Light Rail Transit (LRT) 3, the Refinery and Petrochemical Integrated Development project (RAPID), Pan Borneo Highway, Malaysian Vision Valley, Cyber City Centre, and High-Speed Rail to be carried out as planned. Therefore, the infrastructure boom may keep local contractors busy, at least for the short-to-medium term, in our opinion.

Figure 79: Selected projects slated for implementation Project Value

(MYRm) Potential beneficiaries

Highways

Pan-Borneo Highway (Sarawak) Pan-Borneo Highway (Sabah)

16,100 12,800

Contractors based in East Malaysia Contractors based in East Malaysia

Sg Besi-Ulu Klang Expressway (SUKE) 5,300 Permodalan Nasional Bhd (concessionaire) and mid-sized contractors.

Damansara-Shah Alam Highway (DASH) 4,200 Permodalan Nasional Bhd (concessionaire) and mid-sized contractors.

Pulau Indah Highway na Mid-sized contractors

Central Spine Road 6,600 Mid-sized contractors

Jalan Tun Razak Traffic Dispersal 900 Large contractors

Coastal highway in Melaka na Mid-sized contractors

Rail projects

MRT 2 (Sg Buloh-Serdang-Putrajaya) 28,000 Gamuda/MMC (MMC MK, NR) (project delivery partner (PDP) and tunneling contractor) and the entire construction sector

LRT 3 (Bandar Utama-Shah Alam-Klang) 10,000 Malaysian Resource Corp (MRC MK, BUY, TP: MYR1.60) and George Kent (M) (GKEN MK, NR) (PDP) and the entire construction sector

BRT Kuala Lumpur-Klang 1,500 Mid-sized contractors

BRT Kota Kinabalu 1,000 Contractors based in East Malaysia

Water and electricity

Water treatment plants 877 Water pipe manufacturers

Electricity supply in Sabah 515 Power equipment and cable manufacturers

Rural infrastructure

New and upgrading of roads (700km) 1,400 Small and mid-sized contractors

Electricity connection(10,000 houses) 878 Power equipment and cable manufacturers

Water supply (3,000 houses) 568 Water pipe manufacturers

Upgrading of roads in FELDA settlements 200 Small and mid-sized contractors

Drainage for flood mitigation 60 Small contractors

Affordable housing

Under 1Malaysia Public Housing Programme (PR1MA) (175,000 units)

1,600 Mid-sized contractors

Under People’s Housing Programme (32,100 units) 863 Mid-sized contractors

Under Rumah Mesra Rakyat scheme (10,000 units) 200 Small and mid-sized contractors

Under 1Malaysia Civil Servants’ Housing Programme (PPA1M) (100,000 units)

na Mid-sized contractors

Houses for the Orang Asli community 60 Small contractors

Houses for FELDA, FELCRA and RISDA settlers (24,000 units)

na Small and mid-sized contractors

Revival of abandoned housing projects 40 Small contractors

New houses and repairs for dilapidated rural houses (11,000 units)

150 Small contractors

Maintenance of public housing 155 Small contractors

Source: Budget 2016, RHB

Mainly SPV-funded mega projects

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

The construction sector was unscathed from the recalibrated Budget 2016

SPV funding ensures smooth implementation of the long list of projects

Ng Sem Guan, CFA +603 9207 7678 [email protected]

http://www.efa.biz/


4 April 2016



Pan Borneo Highway (Sarawak) ahead of the state election

The impending state election in the land of the hornbill may put the state in the limelight. Already, we have witnessed the long-mooted Pan Borneo Highway project – which has an overall build cost of MYR27bn – finally hitting the ground. Meanwhile, two of 10 roadwork packages have been awarded to the 70:30 joint venture (JV) of Zecon (ZEC MK, NR) and Kimlun Corp (KICB MK, BUY, TP: MYR2.13), with the contract valued at MYR1.46bn. The JV between Hock Seng Lee (HSL MK, BUY, TP: MYR2.64) and Dhaya Maju Infrastructure (Asia) SB was awarded a MYR1.71bn contract. We think a few of the remaining eight roadwork packages may also be awarded by the pooling date, and the balance by end-2016.

KVMRT2 contract awards imminent

The Klang Valley Mass Rapid Transit Line 1 (KVMRT1) has reached an overall 79% completion rate. Meanwhile, Gamuda (GAM MK, NEUTRAL, TP: MYR5.21) has been appointed as the project delivery partner (PDP) for the MRT2 contract. In Gamuda’s recent results briefing, management indicated that the underground portion of MRT2 may be 40% larger than Line 1, and that the results of the tender bid would be known fairly soon. Meanwhile, two packages (Northern session) have been awarded to Sunway Construction (SCGB MK, BUY, TP: MYR1.86) and Ahmad Zaki Resources (AZRB MK, NR) recently, both of which are deemed to be more critical as the route passes through highly-populated areas. Apart from that, Kimlun has been appointed as the designated supplier of segmented box girders (SBG) to certain packages of the MRT2 for MYR199.9m. We are still awaiting the results of the tunnel lining segments (TLS) supply contract for the MRT2 project, which are expected to be announced soon.

Awards of the other projects likely in 2H16

Aside from the Pan Borneo highway and KVMRT contract awards, the market is also eagerly awaiting the awards for the other projects. The other key project would be LRT3, as we understand the pre-qualification exercise has been completed. The recalibrated budget did not mention several major expressways (like the Sg Besi-Ulu Klang Expressway (SUKE), the Damansara-Shah Alam Highway (DASH), etc) which are at various stages of implementation. Yet, we believe those projects remain intact, as the construction of expressways (other than the Pan Borneo Highway) would be carried out on a build-operate-transfer (BOT) basis, where financing is backed by future toll collection. Most of the RAPID construction contracts have already been awarded, and we understand from our sources that the remaining packages are expected to be awarded soon.

Maintain OVERWEIGHT with preference for pure contractors

Our bullish stance on the construction sector is reaffirmed by the Government’s commitment towards public infrastructure spending. In terms of stock picks, we prefer the smaller-cap contractors whose businesses mostly focus on construction, and have less exposure to the property sector (and would be less impacted by the cooling property market). The key risks for the sector include new job awards falling short of our estimates and higher input costs, which may translate into poor margins.

Figure 80: Valuations of construction stocks


(x)

EPS Growth

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

DY (%)

Rec


IJM Corp^ 3.53 3.90 12,613 17.4 15.7 0.3 10.9 1.3 15.2 7.8 2.3 B

Sunway Con 1.56 1.86 2,017 13.8 12.5 14.9 10.0 3.7 25.8 29.3 2.5 B

HSL 2.05 2.64 1,129 13.8 11.4 7.0 21.7 1.6 9.4 11.8 1.1 B

Pintaras 3.63 3.97 591 18.4 9.8 (38.5) 87.1 1.7 11.5 9.3 5.0 B

Kimlun 1.78 2.13 535 8.5 7.2 (1.0) 17.0 1.1 3.1 13.1 3.0 B

Gadang 1.94 2.83 456 5.7 5.3 9.5 8.4 0.9 12.7 16.2 2.8 B

Ho Hup 0.92 1.22 343 4.1 3.6 9.6 13.7 1.1 (9.1) 31.0 0.0 B

Gamuda 4.93 5.21 11,861 19.7 17.1 (11.5) 15.1 1.8 425.0 9.3 2.4 N

Sector Avg 16.3 14.2 (3.2) 14.3


More roadwork packages are expected to be awarded prior to the state election, which is slated for end-Apr 2016

Most of the KVMRT2 packages are scheduled to be awarded in the next few months

There are more projects that may be dished out in the later part of 2016

We keep our OVERWEIGHT stance on the construction sector

http://www.efa.biz/


4 April 2016



Consumer: Worst Is Over Neutral

Retail spending has bottomed out but margins may deteriorate

We think 1H16 may offer some headway in terms of consumer spending. This is only by virtue of spending and sentiment bottoming out in 4Q15 (Figure 81), as reflected by the decline in Malaysian Institute of Economic Research’s (MIER) consumer sentiment index to 63.8 points at end-4Q15. The bellwether for the sector, the retail subsector, has finally registered a quarter of positive growth (Figure 82). However, we believe that the earnings recovery is likely to be U-shaped, rather than V-shaped, implying a protracted recovery owing to higher operating expenses across the board. This is evidenced by margins on average remaining under pressure amidst a broad, but flat 4Q15 earnings growth YoY. Going forward, this may be further compounded by:

i. A hike of 11-15% in minimum wage effective 1 Jul 2016;

ii. Increasingly restricted supply of foreign labour.

Despite the broad data pointing to a recovery in spending, AEON’s (AEON MK, SELL, TP: MYR2.20) sales have been sluggish. We foresee the retailer to continue to face headwinds including higher operating expenses. A long gestation period of up to six years for its newly-opened malls could also weigh on its earnings in the near term.

Figure 81: Malaysia consumer sentiment index Figure 82: The retail subsector recorded positive quarterly earnings growth YoY (%)

100 indicates neutrality, >100 indicates expected improvement in conditions,<100

indicates lack of confidence

Source: Malaysia Institute of Economic Research (MIER)


Beneficiaries of stronger MYR

NTPM (NTPM MK, NEUTRAL, TP: MYR0.98) and Berjaya Food (BFD MK, BUY, TP: MYR2.90) will likely be the two biggest beneficiaries of a stronger MYR against the USD. 70% of NTPM’s raw material costs and 40% of Berjaya Food’s cost of goods sold (COGS) are transacted in the USD. By our estimates, for a 1% change in the USD/MYR, NTPM and Berjaya Food’s FY17F earnings could be impacted by 1.5% and 0.7% respectively.

Breweries are best positioned

We believe the recent excise duty hike is likely to have a neutral to positive earnings impact on the brewers. The ultimate impact on retail prices is relatively insignificant, with prices of most beers impacted by 3-6%. Prices of beers with higher alcoholic content are impacted by >20% (Figure 83), but they only make up 10% of topline contribution. This coupled with a recovery in consumer spending and resilient demand for alcohol (Figure 84) puts the breweries in good stead for a mid-single digit growth for FY16F. Apart from that, we think the recent excise duty – the first in 10 years, is unlikely to be an annual occurrence as Malaysia’s excise duty on alcohol is the third-highest in the world, behind only Norway and Singapore, which are higher-income nations. Lastly, based on our channel checks, the outstanding bills of demand of MYR56m, constituting ~25% of both Carlsberg (CAB MK, BUY, TP: MYR13.90) and Guinness Anchor’s (Guinness) (GUIN MK, BUY, TP: MYR14.90)

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All time low at 63.8

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AEON - Retail Parkson - Malaysia

Padini Bonia

VOIR - Apparels Average

Positive growth registered

NTPM and Berjaya Food should benefit the most from a stronger MYR

Carlsberg and Guinness are our Top Picks for the sector

Philip Wong +603 9207 7686 [email protected]

http://www.efa.biz/


4 April 2016



FY16F earnings, are unlikely to be resolved in the immediate term. The full impact on our TP is estimated to negatively range between 2-3%. Despite this, taking into account the rather favourable excise duty hike and capped downside risk, we like Guinness for its margin expansion driven by operational efficiency. In addition, we are bullish on Carlsberg for its diversified income base through its Singapore sales, which contribute c.40% of its operating income.

Figure 83: Impact of the excise duty hike on types of alcoholic beverages

Figure 84: Excise hike’s effect on industry volume sales

Source: RHB Source: RHB

Maintain NEUTRAL

We are NEUTRAL on the consumer sector, premised on consumer spending and sentiment bottoming out in 4Q15. In addition, we believe the lifting of the Price Control Anti-Profiteering Act (PCAP) restriction from 1 Jul should coincide with a further recovery in spending as it allows companies to make the much-needed price adjustments. While valuations appear cheap, it is a fair reflection of the limited earnings growth for the broad consumer sector in the immediate term. Our Top Picks for the sector are Guinness and Carlsberg on the back of the reasonable excise duty hike and resilient demand for alcoholic beverages. Our have a SELL call on AEON as we anticipate the company to face continued headwinds including higher operating expenses.

Figure 85: Valuations of consumer stocks

Price Target Mkt Cap P/E EPS Growth P/BV P/CF ROE DY Rec

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

(MYR/s) (MYR/s) (MYR) FY16F FY17F FY16F FY17F FY16F FY16F FY16F FY16F

Carlsberg 13.96 13.90 4,301 18.8 17.6 5.9 6.6 13.9 16.5 71.0 5.3 B

Guinness Anchor 13.98 14.80 4,223 17.3 16.7 6.6 3.4 10.9 16.9 63.6 5.6 B

Evergreen Fibreboard 1.00 1.40 846 7.1 6.6 (16.3) 6.7 0.7 4.5 10.5 2.4 B

Berjaya Food^ 2.10 2.90 800 20.0 13.7 46.2 45.6 1.6 3.4 8.4 2.5 B

IQ Group^ 1.93 2.75 170 8.4 7.4 7.4 14.1 1.2 7.1 13.9 4.7 B

Esthetics^ 0.84 1.05 155 9.1 8.5 7.8 6.6 1.0 7.0 11.2 4.8 B

Nestle 75.48 72.90 17,700 28.0 27.5 6.9 1.7 24.8 22.3 88.8 3.5 N

BAT 55.30 55.60 15,790 17.7 17.3 (1.7) 2.2 28.0 18.5 161.0 5.6 N

QL Resources^ 4.33 4.21 5,404 23.0 20.8 14.8 10.5 3.1 1.3 14.1 1.2 N

MSM Malaysia 4.69 5.09 3,297 12.9 12.2 (10.8) 5.7 1.5 14.7 12.2 5.0 N

7-Eleven 1.40 1.43 1,727 28.1 25.1 10.0 11.9 6.5 0.7 28.2 2.1 N

Padini 2.06 2.22 1,355 11.9 10.7 +>100 11.0 3.1 1.8 27.1 6.3 N

NTPM^ 1.07 0.98 1,202 16.7 15.0 16.7 11.6 2.9 1.2 17.8 3.3 N

OldTown^ 1.49 1.45 664 12.0 11.2 11.7 7.5 1.7 1.9 13.7 4.6 N

AEON Co 2.65 2.20 3,721 25.5 21.9 10.8 16.4 1.9 0.6 7.7 1.6 S

Sector Avg 19.6 20.2 3.3 (2.9)


2.60 2.60 2.60 0.53 0.042.80 4.93 4.20 0.86 0.19

3%

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Carlsberg (5%) CarlsbergSpecial Brew

(8.8%)

GuinnessForeign Extra

(7.5%)

Cider (4.5%) Shandy (1.0%)

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Demand proved resilient in the face of much higher excise duty hike. We project for the similar occurence for 16F

http://www.efa.biz/


4 April 2016



Gaming: Lacking Catalysts For Now Neutral

Mixed 4Q15 on volatility in luck factor

4Q15 earnings of three out of the five gaming companies under our coverage fell below expectations. Notably, Genting Singapore (GENS SP, TRADING BUY, TP: SGD1.00) reported another weak quarter as 4Q15 VIP hold rate sank to a low of 2.1% (vs theoretical level of 2.75%). Magnum (MAG MK, NEUTRAL, TP: MYR2.56) and Berjaya Sports Toto (BJ Toto) (BST MK, NEUTRAL, TP: MYR3.15) also disappointed due to higher-than-expected prize payouts. Although Genting Malaysia’s (GENM MK, NEUTRAL, TP: MYR4.46) numbers were largely in line, management surprised the market by doubling the allocation for its Genting Integrated Tourism Plan (GITP) to MYR10.4bn. Genting Bhd (GENT MK, NEUTRAL, TP: MYR9.08), on the other hand, reported a strong 4Q15 as the weakness in its gaming segment was more than offset by the outperformance of its non-gaming divisions.

Potential hike in gaming taxes?

Following the hikes in excise duties on local cigarettes in Nov 2015 and on malt liquor in Mar 2016, there have been speculations that the Government could soon revisit a potential hike in gaming taxes. We do not discount such a possibility as the Government is exploring various options to enlarge its taxation revenue base. The gaming industry contributes an estimated MYR2.5bn-2.7bn pa on gaming-related taxes and an additional MYR800m-950m on the typical corporate taxations currently. We estimate that every 1% hike in casino tax could potentially erode Genting Malaysia’s earnings by 2.5-3% and Genting’s earnings by 1.5-2.2%. The potential impact on number forecast operators (NFOs), meanwhile, would be more profound at earnings erosion of 8-9% for every 1% hike in pool-betting duties for both Magnum and BJ Toto.

GITP could re-rate visitations in the long run

Although details of the revised GITP are scant at this juncture, we understand that Phase 1 of the revamped GITP will now cost MYR8bn-8.4bn. This includes the proposed 20th Century Fox outdoor theme park (which would now cost over MYR2bn vis-à-vis MYR1bn previously), revamp of its indoor theme park, construction of new staff accommodations and investments in new supporting infrastructure. Phase 2 of the development would cost over MYR2bn and involve the construction of new luxury hotels as well as a new show arena. While we continue to believe that this would help to spur visitation interest in its flagship Genting Highlands in the long run, we are wary of the series of delays in the proposed timeline of completion. Funding, however, should not be an issue given its current net gearing of 0.01x and annual operating cash flow of over MYR2bn-2.5bn.

Worst is likely over for Singapore

As for Resorts World Sentosa, we expect to see improvements in the quality of its books this year, owing to the group’s more selective credit offerings and the tightening of its collection procedures over the past 12 months. We are forecasting for its bad debt provisions to improve to SGD180m-230m pa going forward (from SGD270.7m in 2015). While the operating environment remains challenging given Singapore’s subpar tourist arrivals and regional competitive pressure, we think this well-executed approach would help to boost its bottomline for FY16F-17F. Besides, we also find positives in management’s move to reduce its holdings of derivatives and financial instruments in addressing market concerns over the volatile nature. Notably, its available-for-sale financial current assets and the derivative financial instruments under its current liabilities were both reduced to zero as at Dec 2015 (from SGD1.31bn and SGD246.9m in Dec 2014 respectively).

Las Vegas ready in 2018

Genting Bhd’s proposed USD4bn Resorts World Las Vegas (RWLV) has recently received the green light from the Clark County commissioners for construction progress to proceed. The site office and parking garages are currently being constructed and would be completed by mid-2016. A public tender on the work packages would soon be called with physical construction works likely to begin in 2H16. We reiterate our view that Phase One of the project, which comprises a hotel tower with 3,307 rooms, a public space in excess of 657k sq ft including convention facilities and a movie theatre, would open earliest by mid-2018. Although near-term earnings accretion is unlikely, RWLV, in the long run, could help to address investors’ perception of the group being a holding company with no directly-owned gaming assets.

Another mixed quarter

Potential gaming tax hike to boost the Government’s tax coffers

GITP investment more than doubled

Worst is likely over for Genting Singapore

Kong Heng Siong +603 9207 7666 [email protected]

http://www.efa.biz/


4 April 2016



NFOs all about yields

For the NFOs, we continue to see both Magnum and BJ Toto as appealing dividend plays as the duo offer decent annual dividend yields of 5-7%. Industry growth, however, is unlikely to be exciting in the foreseeable future – at an annual growth of low single-digits – due to the continued proliferation of illegal operators.

NEUTRAL stance reaffirmed

All in, we maintain our NEUTRAL stance on the sector as we do not see any major re-rating catalyst in the near term. Within Malaysia, Genting Malaysia remains our Top Pick as its MYR10.4bn capex for Genting Highlands could propel earnings growth in the long run. We also see trading opportunities for Genting Singapore, given its attractive current valuation at a steep discount of 60%/70% over its historical mean of 10x and Macau gaming peers’ 13.3x respectively.

.Figure 86: NFO-related taxes

Source: RHB

.Figure 87: Regional casino-related taxes

Source: RHB

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Figure 88: Valuations of gaming stocks


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


Genting 9.90 9.08 37,044 17.8 15.8 7.9 13.1 1.1 5.6 6.2 0.6 N

Genting M'sia 4.45 4.46 26,424 17.7 16.1 33.7 9.8 1.3 11.2 7.6 1.4 N

B-Toto^ 3.29 3.15 4,445 14.4 14.3 12.2 0.9 5.8 13.1 41.1 5.9 N

Magnum 2.48 2.56 3,566 13.7 13.6 8.9 1.3 1.4 12.7 10.5 6.5 N

Sector Avg 17.3 15.7 16.4 10.3


http://www.efa.biz/


4 April 2016



Healthcare: Managing Expectations Neutral We downgrade the Malaysian healthcare sector to NEUTRAL from Overweight on our expectations of less resilient earnings prospects for the sector. This is due to the heightened risk from growing macroeconomic headwinds vis-à-vis the high expectations reflected in the sector’s lofty valuations (Figure 89).

Figure 89: Peer comparison

Companies Market Cap (MYRm)

PEG (x) EV/EBITDA (x) EV/E-G (x) EBITDA margin (%) Dividend yield (%)

FY15-17F 2015 2016F 2017F FY15-17F 2015 2016F 2017F 2015 2016F 2017F

Hospital operators

KPJ Healthcare 4,470 1.7 15.9 14.1 11.8 0.8 12.4 11.8 12.1 1.6 1.8 2.2

IHH Healthcare 53,947 2.5 26.9 23.0 19.8 1.4 25.8 26.0 25.6 0.5 0.5 0.6

Pharmaceutical

Hovid 365 0.9 8.9 7.7 5.9 1.0 21.3 19.0 19.4 0.0 0.0 0.0

Pharma retail

Caring Pharmacy 409 7.3 16.3 14.5 14.2 1.7 5.6 5.9 5.8 1.1 0.0 1.7

Sector 59,191 2.4 25.0 21.5 18.5 1.3 21.9 21.8 21.7 0.5 0.6 0.7

Simple average

3.1 17.0 14.8 12.9 1.2 16.3 15.7 15.7 0.8 0.6 1.1

Weighted average

2.4 25.9 22.2 19.0 1.4 24.7 24.7 24.4 0.5 0.6 0.7

Source: Company, RHB

Hospital operators’ outlook. We believe that demand for quality private healthcare

would sustain in the long term amidst rising income and the growing adoption of health insurance coverage. While we believe that expectations have been mostly priced in, we see value within the sector. In our view, KPJ Healthcare’s (KPJ) (KPJ MK, BUY, TP: MYR5.00) valuation is still largely underappreciated relative to IHH Healthcare (IHH) (IHH MK, NEUTRAL, TP: MYR6.60) and some of its regional peers.

IHH. Its 4Q15 results were not par for the course vis-à-vis the lofty valuations it

commands and despite its diversified earnings base. Management attributed the weakness to start-up costs from new hospitals opened during the period – Gleneagles Medini and Acibadem Taksim. In addition, the Gleneagles Kota Kinabalu (KK) was opened in 2Q15 while the Pantai Sri Manjung, opened in 2014, is still loss-making. These were exacerbated by wage inflation amidst heightened competition within the sector.

We expect near-term macroeconomic headwinds to persist given softer economic prospects at its home market and start-up losses from its steady pipeline of new hospitals in recent and coming years. IHH is expected to open its 500-bed hospital – the Gleneagles Hong Kong in early 2017 and we expect the start-up costs would be reflected in 3Q and 4Q, ahead of the opening of the hospital in 1Q17 (Figure 90).

Figure 90: Peer comparison

Hospitals Expansion Opening Location

Gleneagles KK Greenfield Q2 2015 Malaysia

Gleneagles Medini Greenfield Q4 2015 Malaysia

Acibadem Taksim Greenfield Q4 2015 Turkey

Gleneagles Hong Kong Greenfield JV Q1 2017 Hong Kong

Gleneagles Khubchandani Greenfield JV 2017 India

Source: Company, RHB

KPJ. KPJ’s robust earnings growth and relatively resilient inpatient volume in 4Q15

(declined by only -0.9% YoY compared with IHH’s -3.2% YoY for its Malaysian operations) led us to believe that its earnings are fairly solid despite limited earnings diversity. However, we note that it still trades at a discount to its 4-year historical multiples (Figures 91 & 92) and most of its regional peers.

Annuar Rahman +603 9207 7622 [email protected]

http://www.efa.biz/


4 April 2016



Figure 91: KPJ’s 12-month forward PE Figure 92: KPJ’s 12-month forward EV/EBITDA


KPJ expects to see completion of several brownfield projects in the coming years (Figure 93). It also expects to open KPJ Pahang Specialist Hospital in 1Q16. We are not expecting significant margin dilution, if any, as the new hospital is a relocation of an existing operation. The opening of KPJ Perlis has been delayed further but we believe its small size (90-bed capacity) should not be a drag on earnings.

Figure 93: KPJ’s brownfield expansions in 2016 and 2017

Hospitals Purpose Capacity (beds/clinics) Completion Opening

KPJ Selangor Clinics 54 1Q16 2Q16

KPJ Puteri Beds 220 4Q16 1Q17

Taiping Clinics 18 4Q16 1Q17

KPJ Ampang Beds 150

1Q17 2Q17 Clinics 33

KPJ Johor Beds 53 1Q17 2Q17

KPJ Seremban Beds 90 1Q17 2Q17

Sri Manjung Beds 30 1Q17 2Q17

KPJ Penang Beds 156 2Q17 3Q17

Total beds 699 Total clinic 105

Source: Company

Pharmaceutical players’ outlook. We believe the outlook for Caring Pharmacy (Caring)

(CARING MK, SELL, TP: MYR1.35) remains bleak. However, it could change once the Government undertakes the dispensary separation which would novate pharmacies as the sole medicine dispensers. However, benefits could be limited by competition from other pharmaceutical chains, hospital operators and wholesale pharmacy outlets. Meanwhile, we believe the outlook for Hovid (HOV MK, NEUTRAL, TP: MYR0.45) is largely positive in the medium to longer term as it grows into new markets and increase production capacity.

Caring. 1HFY16 (May) was deemed within expectations despite making up only 22%

of our estimate ahead of a seasonally strong 2HFY16. 2QFY16 earnings also marked the first YoY decline in its bottomline after strong YoY growth in the past four quarters. We believe this reflects the impact from heightened competition and weak consumer sentiment. In the long term, we expect Caring to benefit from the Government’s plan to undertake dispensary separation given its extensive network of outlets, although benefits could be mitigated by competition from established players.

Hovid. 1HFY16 (Jun) results trailed our and consensus estimates as management

attributed the weakness to higher operational and promotional sales. We expect earnings to catch up in 2H underpinned by its new manufacturing facility coming on-stream. We remain NEUTRAL on the stock as we believe the growth potential from the new capacity has been fairly priced in while volatile currency movements in the near term could pose a risk to earnings.

Title:

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26.8

+1 SD, 36.1

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http://www.efa.biz/


4 April 2016



Downgrade to NEUTRAL

Our sector downgrade was largely attributed to the downgrade in IHH’s recommendation and TP given its sizeable weightage within the sector. We believe IHH’s less-than-stellar growth implies that the sector’s earnings are not as robust as initially thought, with macroeconomic headwinds likely posing higher-than-expected earnings risks to the sector.

On the flip side, any adverse movement in the MYR would be in favour of IHH and, to a lesser extent, Hovid given both companies’ sizeable non-MYR earnings exposure. Meanwhile, better-than-expected inpatient admission volume for hospital operators would also be a risk to our call on the sector.

Figure 94: Valuations of healthcare stocks

Price Target MktCap P/E

(x)

EPS Growth

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

DY

(%)

Rec

(RM/s) (RM/s) (RMm) FY16F FY17F FY16F FY17F FY16F FY16F FY16F FY16F

KPJ Healthcare 4.30 5.00 4,534 28.2 23.0 11.0 23.0 3.0 15.4 10.8 1.8 B

IHH Healthcare 6.56 6.60 53,651 51.1 40.7 16.1 25.6 2.3 21.7 4.6 0.5 N

UEM Edgenta 3.60 3.45 2,929 13.4 11.9 (7.4) 12.1 2.2 9.7 16.4 5.2 N

Apex Healthcare 3.60 3.52 380 12.3 11.7 (9.6) 4.8 1.4 10.1 11.1 3.1 N

Hovid 0.45 0.45 348 15.0 12.0 9.4 24.8 1.4 15.0 10.9 0.0 N

CARiNG Pharmacy ^ 1.88 1.35 409 29.3 26.8 3.3 9.2 2.9 54.2 9.9 1.7 S

Sector Avg 41.5 33.8 10.7 22.7


http://www.efa.biz/


4 April 2016



Logistics: Subdued Growth Outlook Neutral

Another mixed bag quarter

The sector’s 4Q15 results were a mixed bag with two companies reporting results that were below our expectations while another three had results that were in line with our expectations. POS Malaysia’s (POSM MK, NEUTRAL, TP: MYR2.30) results disappointed again due to increased exposure to the transshipment business that led to higher transportation costs. Tasco (TASCO MK, NEUTRAL, TP: MYR1.55) also recorded a lacklustre quarter despite its international freight business registering robust earnings growth. Earnings were dragged by its domestic businesses, namely warehousing and trucking. Freight Management (FMH MK, NEUTRAL, TP: MYR1.40) reported in line results with its earnings growth driven by its resilient sea freight division and good results from its warehousing business. Freight Management’s warehousing business witnessed a successful turnaround aided by a better mix of high-yielding customers. GD Express’ (GDX MK, NEUTRAL, TP: MYR1.70) results were in line with our expectations. The company’s courier business witnessed strong growth aided by higher demand from its e-commerce customers. Westports’ (WPRTS MK, BUY, TP: MYR4.66) FY15 earnings also met our expectations with a respectable 8% YoY growth in throughput volume.

Weathering an economic slowdown

Businesses in general are expected to face trying times amidst a challenging macroeconomic environment, which should remain subdued amidst poor consumer and business sentiments and expectations of a tepid global economic growth. We believe that this would inadvertently affect demand for logistics services. Domestic demand catalysts are likely to remain weak as we expect real GDP growth to slow down to 3.9% in 2016 from 5% YoY in 2015. Subdued global growth also presents downside risks to international trade which in turn, would negatively impact Westports’ (WPRTS MK, BUY, TP: MYR4.66) transshipment throughput volume.

Figure 95: Malaysia consumer sentiment index Figure 96: Malaysia business conditions index

Source: Malaysia Institute of Economic Research (MIER), RHB Source: Malaysia Institute of Economic Research (MIER), RHB

Courier players continue to see resilient demand

Consumer sentiment in Malaysia deteriorated to a record low in 4Q15, with consumers still reeling from the impact of goods and services tax (GST). Malaysia Institute of Economic Research cited that consumers are to watch their spending moving forward amidst growing fears of higher prices. However, we do not expect to witness a significant slowdown in online shopping transaction activities due to its relatively small but growing base. Furthermore, online retailers are likely to be more aggressive in giving discounts, given their lower operating costs vis-à-vis the traditional brick and mortar retailers. We also believe that growing number of online marketplace would further provide support to the e-commerce industry. As such, we continue to expect the business volumes of courier companies under our coverage to grow further this year. The growth signs have been very encouraging thus far with both companies under our coverage registering double-digit revenue growth in their respective courier divisions. Among the logistics players, we prefer exposure to GD Express over Pos Malaysia given the former’s superior customer base, which is still on an aggressive growth trajectory (eg Astro Go Shop and Lazada). Pos Malaysia’s customer base, on the other hand, predominantly comprises companies that employ a consumer-to-consumer marketplace-like format like Lelong.my and Mudah.my.

We expect Pos Malaysia to continue dominating this segment largely due to its pricing advantage and wider network of drop-off points for online merchants.

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Mixed results among companies under our coverage

Challenging macroeconomic environment likely for 2016

Encouraging growth for couriers players driven by volume from e-commerce

Izzat Esa


http://www.efa.biz/


4 April 2016



Figure 97: Documents and parcels handled by the courier industry

Figure 98: Westport's throughput volume

Source: RHB Source: Company data

Uncertainties among the shipping alliances

FY15 was a record year for the sole listed port operator in Malaysia, namely Westports, in terms of container throughput handled. Its overall volume increased by 8% to 9.05m twenty-foot equivalent units (TEUs). While the intra-Asia trade lane saw flattish growth, the Asia-America trade lane posted the strongest growth during the year, underpinned by increased number of services offered by the shipping liners. We believe the current M&A activities seen among the shipping liners are unlikely to have any impact on Westports’ throughput volume in 2016, as the shipping companies involved in M&A activities have agreed to stick to their existing alliances until their expiration in 2017. Post expiration of the current alliances, we expect another round of musical chair among the liners to form new alliances. Irrespective of how the new shipping alliances take shape, we expect Westports to stand out as port of choice for the shipping companies due to its clear cost advantage in comparison to its nearest rival, Port of Singapore Authority (PSA). We also note that its largest client, CMA-CGM has given its commitment to keep Westports as its transshipment hub in the ASEAN region after the completion of its own merger exercise.

Maintain NEUTRAL

Moving forward, we expect earnings prospects for the companies under our coverage to be largely unexciting (with downside risks). This is largely due to the lack of domestic catalysts coupled with challenging external demand on the back of the tepid global economic environment. As such, we maintain our NEUTRAL call the sector. Wesports is our Top Pick in the sector as we expect its 2016 earnings growth to be supported by:

i. The full impact of the gateway tariff hike (+15%) that just took effect in Nov 2015;

ii. Increased economies of scale and favourable operational costs to improve margins;

iii. Recent investment tax allowance approval for FY15-17 (effective tax rate: c.15-16% vs 22% in FY15).

Key risks to the sector would be a sharp slowdown in the Malaysian and global economy as well as international trade.

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Another round of musical chair among the shipping liners is expected in 2017

Westports is our Top Pick

Figure 99: Valuations of logistics stocks


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Westports 4.09 4.66 13,947 23.5 22.2 15.8 5.8 6.3 15.7 28.8 2.9 B

GD Express 1.58 1.70 2,151 57.9 43.2 12.6 34.2 5.6 49.7 14.1 0.5 N

POS M'sia^ 2.67 2.30 1,434 17.6 16.6 6.9 6.0 1.3 8.4 6.7 2.5 N

TASCO 1.57 1.55 314 10.7 10.1 6.0 6.1 0.9 6.2 8.9 2.8 N

Freight 1.30 1.40 231 9.5 9.0 4.2 5.3 1.0 5.3 11.3 4.5 N Sector Avg 23.6 22.1 11.0 7.2


http://www.efa.biz/


4 April 2016



Media: Gloomy Outlook Neutral

FY15 results in line

The results of the media sector were in line with our expectations. Despite the challenging operating environment, an increase in cost efficiency has supported sector earnings. With two stocks under our coverage, Astro’s (ASTRO MK, NEUTRAL, TP: MYR2.94) earnings were in line while Media Prima’s (MPR MK, NEUTRAL, TP: MYR1.32) disappointed expectations. Astro recorded higher revenue for FY16 (4.7% YoY), driven by growth in subscription, advertising and other revenue. Core profit expanded 24.4% YoY, on the back of an improved operating performance, lower depreciation and better performance from its associate. Astro’s home shopping venture, Go Shop, continued to deliver robust growth as it generated MYR189m in revenue for FY16. For Media Prima, FY15 revenue fell 5.3% YoY due to 4.0% YoY and 15% YoY decreases in advertising expenditure (adex) and circulation revenue respectively. Despite the contraction in revenue, FY15’s EBIT margin increased to 13.4% from 12.1%, largely attributed to its improved cost efficiency across the business. However, we forecast a tough operating environment in 2016 amidst the expectation of consumer sentiment being weak. Maintain NEUTRAL.

Malaysia’s total gross adex plunged by 4.9% YoY in 4Q15. Traditional media such as free-to-air (FTA) and newsprint led the bulk of contraction, declining by 8.9% and 9.7% YoY respectively. Meanwhile, the adex share for FTA and newsprint continued to decrease, 21.6% YoY and 29.1% YoY (4Q15), from 22.5% YoY and 30.6% YoY (4Q14) respectively. Note that the numbers compiled by Nielsen are on a gross basis and do not reflect the real net revenue media sector received after discounts.

Figure 100: Malaysia gross adex in 4Q15

Media 4Q14

(MYRm) 3Q15

(MYRm) 4Q15

(MYRm) QoQ change

(%) YoY change

(%) Adex share 4Q14 (%)

Adex share 4Q15 (%)

YoY change (ppts)

FTA television 823.9 697.1 750.3 7.6% -8.9% 22.5% 21.6% (0.9)

Pay television 1,506.0 1,364.6 1,480.8 8.5% -1.7% 41.1% 42.6% 1.4

Newspapers 1,121.0 1,021.3 1,012.5 -0.9% -9.7% 30.6% 29.1% (1.5)

Magazines 33.5 32.3 35.7 10.5% 6.6% 0.9% 1.0% 0.1

Radio 120.8 123.0 132.1 7.4% 9.3% 3.3% 3.8% 0.5

Cinema 11.6 14.9 19.6 31.8% 68.6% 0.3% 0.6% 0.2

In-store media 43.1 48.3 47.9 -0.7% 11.2% 1.2% 1.4% 0.2

Total 3,659.9 3,301.5 3,478.9 5.4% -4.9% 100.0% 100.0%

Source: Nielsen Co.

Challenging operating environment

We remain cautious on the sector, largely due to weak consumer sentiment. According to Malaysian Institute of Economic Research (MIER), the Consumer Sentiment Index stood at 18-year low as at Dec 2015. Consumer sentiment would likely remain fragile in 2016, as the lacklustre economic environment is expected to continue. Hence, coupled with a weaker MYR, advertisers would be more cautious to incur adex.

Focusing on content development

In the medium term (3-5 years), Astro aims to be a platform-agnostic content provider of choice. In achieving this, the management would focus on the quality of content, by further developing both its vernacular content as well as local films (recently Police Evo and Ola Bola generated MYR18m and MYR16m respectively). Apart from that, Astro recently launched Tribe, an over-the-top (OTT) service for ASEAN video consumers. Besides partnering with other players in the region, Tribe is leveraging on Astro’s vernacular library, as Astro currently has the largest vernacular content in South-East Asia. Through Tribe, Astro would be able to set its footing and capture the regional non-Astro subscribers, as Astro OnThe Go caters specifically to the Malaysian Astro subscribers.

Media Prima has also ventured into home shopping. It has registered encouraging improvement from its digital media and content creation – which we believe would help diversify revenue and alleviate the structural decline in traditional media revenue going forward.

FY15 results were in line despite weaker gross adex revenue as cost-saving measures supported earnings

We expect subdued consumer sentiment in 2016

Focus on content and e-commerce to diversify revenue stream

Wong Cheng Horng, CFA +603 9207 7607 [email protected]

http://www.efa.biz/


4 April 2016



Maintain NEUTRAL

We maintain a NEUTRAL rating on the media sector. With the subdued consumer sentiment and unconducive economic environment likely to persist in 2016, we expect growth on adex spending to remain flattish.

Figure 101: Total gross adex Figure 102: FTA TV adex

Source: Nielsen Co Source: Nielsen Co

Figure 103: Pay-TV adex Figure 104: Newspaper adex

Source: Nielsen Co Source: Nielsen Co

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Figure 105: Valuations of media stocks


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Astro^ 2.97 2.94 15,449 22.5 19.2 11.6 17.1 21.9 5.8 105.0 4.2 N

Media Prima 1.50 1.32 1,664 11.4 11.2 4.7 1.5 1.0 10.0 8.9 5.3 N

Sector Avg 20.5 18.0 10.3 14.3


http://www.efa.biz/


4 April 2016



NBFIs: Softer Topline Growth Expected Ahead Neutral

4Q15 results – generally within expectations

The results of the non-bank financial institutions (NBFIs) were generally in line with our and consensus expectations. As expected, both Tune Protect (Tune) (TIH MK, BUY, TP: MYR1.65) and Syarikat Takaful Malaysia (STMB) (STMB MK, NEUTRAL, TP: MYR3.80) reported better results sequentially on the back of improved underwriting margins and investment income. As for the non-bank lenders, Aeon Credit’s (ACSM MK, NEUTRAL, TP: MYR12.75) results met expectations as net interest margin (NIM) expansion helped lift profitability. Bursa Malaysia’s (Bursa MK, NEUTRAL, TP: MYR9.00) results were within expectations. 4Q15 securities average daily value (SADV) was up 6% QoQ, partly offset by a 10% drop in derivatives average daily volume.

Tough operating environment to persist for insurers

Given the softer macroeconomic environment ahead, not surprisingly, the insurers expect 2016 to be another challenging year. This would be on the back of, among others, tighter corporate budgets and weaker consumer spending. Apart from that, competition is also stiff in the corporate segment with both conventional and takaful players eyeing a slice of the pie.

Notwithstanding the above, we believe the takaful operators are in a better position to

weather the storm and record above-industry growth. Based on data from Bank Negara, 2015 net contribution for family takaful (annualised) rose 7% YoY compared with +5% YoY for the industry while for general takaful, it recorded YoY growth of 14% vs +6% for the industry. While part of the stronger growth for the takaful industry is due to the low base effect, we believe there are also ongoing structural changes taking shape in the industry that would continue to benefit the takaful operators such as the continued switch to takaful products from conventional ones. We see STMB as a beneficiary of the general industry trend above.

Figure 106: Life and family takaful net

premium/contribution trends

Figure 107: General insurance and takaful – earned

premium/contribution trends

Source: BNM, RHB Source: BNM, RHB

Apart from the above, we think STMB’s topline growth should hold up relatively better vs that of its peers, thanks to its “Cash Back” proposition where STMB offers policy holders 15% cash back if there are no claims made within the coverage period. We think this should be an even more attractive proposition for both the corporate and retail segments amid a soft macroeconomic environment. STMB should also benefit from the full impact of its bancatakaful tie-up with RHB Islamic Bank in 2016. Recall that STMB entered into an exclusive 10-year bancatakaful service agreement with RHB Islamic Bank in August. STMB would pay RHB Islamic Bank a total service fee of MYR110m in exchange for RHB Islamic Bank distributing STMB’s family and general takaful products.

A priority in 2016 for Tune Protect is profitable growth. Tune had already cut back on some marketing expenses in 4Q15 to protect its bottomline. For the travel business, efforts to improve take-up rates (2015: 21%, blended) include growing offline markets as well as channel innovation, among others. For general insurance, topline is expected to outpace industry’s low single-digit growth due to its smaller base and continued focus on profitable segments. Partnerships and its digital platform could help provide a further boost. On the whole, elevated marketing expenses for its digital business and branding in 2015 should level off this year and together with new product launches and partnerships (airline and non-airline), we expect its earnings momentum to accelerate again in 2016.

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4Q15 reporting quarter met expectations

Weak consumer sentiment to weigh on topline growth

Takaful operators are expected to

continue taking market share from conventional players

STMB longer-term trends are intact but for the near term, valuations appear fair

Tune Protect is our Top Pick among the insurers

David Chong, CFA


http://www.efa.biz/


4 April 2016



Non-bank lenders – asset quality a key focus

We expect topline growth for Aeon Credit to moderate, reflecting a combination of moderating receivables growth due to a base effect, weaker retail sentiment, efforts to tighten credit underwriting standards, and NIM pressures. That said, we believe investors’ focus would continue to be on Aeon Credit’s ability to contain asset quality. Its gross non-performing loan (NPL) ratio ticked up 10bps QoQ to 2.68% in the recent 3QFY16 (Feb) results, but management appears optimistic that the worst is over with the NPL ratio having peaked at 3.07% in 3QFY15. Nevertheless, these levels are currently elevated relative to past trends (NPL ratio was less than 2% between FY09 and FY13).

Bursa Malaysia – YTD SADV is flattish

Bursa Malaysia’s SADV for the first two and a half months of 2016 was MYR1.95bn, close to MYR1.98bn a year ago. We are assuming 2016 SADV of MYR2.18bn and derivatives average daily contracts (ADC) of 62,300, up 9% YoY. As the SADV growth is seen to be mild, and there are no key catalysts at this junction, we maintain NEUTRAL on Bursa Malaysia. Our TP of MYR9.00 is pegged to 21x FY17 EPS, -1SD from its 5-year historical average of 25x.

Still NEUTRAL on the sector

Overall, there is no change to our NEUTRAL call on the sector. Tune Protect is our sole BUY call.

Asset quality still the main focus for AEON Credit

Bursa lacks catalysts at this juncture

Figure 108: Valuations of NBFI stocks


(x)

EPS Growth

(%)

P/BV

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ROE

(%)

DY

(%)

Rec

(MYR/s) (MYR/s) (MYRm) FY16F FY17F FY16F FY17F FY16F FY1F7F FY16F FY16F

Tune Protect 1.39 1.65 1,045 13.3 11.0 14.2 20.8 2.1 1.9 16.6 3.0 B

Bursa Malaysia 8.90 9.00 4,758 21.9 20.3 9.1 8.2 5.8 5.8 26.8 4.3 N

Syarikat Takaful 4.04 3.80 3,293 19.7 17.8 7.3 10.5 4.2 3.7 22.7 2.0 N

Aeon Credit^ 12.24 12.75 1,763 7.4 6.7 9.6 9.4 1.9 1.7 28.0 5.2 N

Sector Avg 15.4 14.0 9.4 10.6


http://www.efa.biz/


4 April 2016



Oil & Gas: Found Bottom But No Catalyst Neutral

Lower earnings expectations materialise

For the 4Q15 earnings season, seven companies reported numbers in line with our estimates, five above our expectations while two companies disappointed. Bumi Armada (BAB MK, NEUTRAL, TP: MYR1.10) reported better-than-expected earnings, with the surprise coming from its transport and installation (T&I) segment, which saw work during 4Q15 in the Caspian Sea. Favelle Favco (FFB MK, NEUTRAL, TP: MYR2.95) also reported better earnings in 4Q15, due to the favourable currency exchange rate, as the MYR was weaker against all major currencies in the quarter. Petra Energy (PENB MK, BUY, TP: MYR1.56) benefited from the early capex recovery of its risk service contract (RSC) in the Kapal, Beranang, Meranti (KBM) cluster, as earnings contributions from the RSC were higher than expected. SapuraKencana Petroleum (SAKP MK, BUY, TP: MYR2.42) reported better earnings, with the surprise coming from its engineering & construction (E&C) and its drilling arms, as its cost rationalisation measures bear fruit.

Another round of capex and opex cuts

At the announcement of Petronas’ results, the national oil company’s president and CEO Datuk Zulkiflee Wan Ariffin said that its capex and opex for FY16 would decrease by MYR15bn-20bn. The reduction in spending would come about by revising and renegotiating current contracts such as risk-sharing contracts, enhanced oil recovery and relooking at its PFLNG2 project. He also mentioned that Petronas’ cash flow from operations would not be able to cover its capex and dividend commitments to the Government. The national oil company expects to pay the Government MYR16bn in dividends for FY16.

All has been priced in

The possibility of contract revisions and renegotiation could likely send another round of jitters through the Malaysian players on the operational side. According to our industry sources, Petronas has already asked local asset players for a reduction in charter rates and work order fees. RSC players are also likely to face renegotiations in lifting fees. These include Petra Energy, SapuraKencana Petroleum and Uzma. However, we believe the market has priced in this possibility. Having said that, there still lacks a re-rating catalyst for the sector to outperform in the near term.

Crude oil price to be rangebound

We view the agreement by Saudi Arabia, Venezuela, Russia and Qatar to freeze production at January levels as an effort to put a downside to the oil price. Having said that, should the recent oil price rally lift it above USD45 per barrel (bbl) for a sustained period of time, we think that shale oil producers may come back into the market. We keep our crude oil price forecast intact and expect the price to average USD37.50 per bbl in FY16, USD45 per bbl in FY17 and for the long-term average to be USD60 per bbl.

Figure 109: RHB’s crude oil price forecast

Crude oil price (USD/bbl) 1Q16F 2Q16F 3Q16F 4Q16F 2016F 2017F 2018F

RHB (Brent) 30 35 40 45 37.5 45 60

Bloomberg 35.7 40 45 50 43 55 64.5


Top Pick: SapuraKencana Petroleum

Our Top Pick for the sector remains SapuraKencana Petroleum. We believe its earnings are only marginally affected by the low oil price, due to a combination of low prices as well as low production numbers. Its engineering and construction divisions are still doing swimmingly, owing to its presence in developing oil markets.

We also like Muhibbah Engineering (MUHI MK, BUY, TP: MYR3.34), being a beneficiary of the Refinery and Petrochemical Integrated Development project (RAPID), as well as the strong passenger growth numbers registered by its three Cambodian airports subsidiaries.

Another company that we would like to highlight is Petra Energy, as we believe the market has not fully appreciated the earnings coming from its RSC. Petra Energy is the first RSC holder in Malaysia to successfully recover its costs as well as register earnings. Although

Expected lower earnings

Another round of opex and capex cuts from the Government

The market has priced in the cuts

Wan Mohd Zahidi +603 9207 7609 [email protected]

http://www.efa.biz/


4 April 2016



its main hook-up, commissioning (HUC) and topside major maintenance work is slowing down due to lower capex spending, we expect the contribution from its RSC to offset the slowdown of its main business.

NEUTRAL stance reaffirmed

We believe the market has already taken into account the negative news of the sector, ie the rangebound movement of the crude oil price, as well as further cuts in capex and rates – not just by Petronas, but by oil players around the world. However, although we think the market has somehow found a bottom, we think the sector lacks any significant re-rating catalyst. As such, we hold on to our NEUTRAL stance.

Figure 110: Valuations of oil & gas stocks


(x)

EPS Growth

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P/CF

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ROE

(%)

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MISC 8.89 11.84 39,682 11.4 10.3 20.6 11.0 1.0 7.4 9.5 2.6 B

SapuraKencana^ 2.00 2.42 11,984 10.4 9.1 14.5 14.2 0.9 3.9 9.1 1.8 B

Dialog 1.60 1.82 8,537 29.2 25.8 14.6 13.1 4.3 19.8 14.1 1.4 B

Yinson^ 2.75 3.37 2,840 16.0 8.1 21.8 98.2 1.6 18.9 9.7 0.5 B

Muhibah Engineering 2.48 3.34 1,167 12.9 11.8 (19.0) 9.1 1.3 20.5 10.5 1.5 B

Wah Seong 0.75 1.06 581 6.6 6.0 61.2 10.6 0.5 2.4 7.7 6.1 B

Petra Energy 1.28 1.56 411 7.6 5.0 6.1 50.1 0.7 16.8 9.6 3.5 B

Alam Maritim 0.36 0.55 333 6.0 5.7 22.8 5.9 0.4 4.4 6.1 0.0 TB

Petronas Chemicals 6.71 7.19 53,680 15.9 15.3 21.3 3.8 2.0 14.3 13.2 3.1 N

Bumi Armada 0.80 0.94 4,693 16.8 17.6 (25.5) (4.8) 0.6 n.m. 3.8 1.1 N

MMHE 1.06 0.90 1,696 43.1 36.2 (73.0) 19.2 0.6 70.9 1.5 0.0 N

Coastal Contract 1.67 1.80 988 4.8 4.5 10.6 5.8 0.5 2.5 11.3 5.2 N

Favelle Favco 2.79 2.95 592 6.3 6.0 (24.7) 4.8 1.0 5.1 16.2 4.7 N

Perisai Petroleum 0.26 0.30 304 11.5 7.1 (67.0) 62.5 0.4 4.2 3.8 0.0 N

Sector Avg 13.6 12.3 13.6 10.2


http://www.efa.biz/


4 April 2016



Plantation: Strong CPO Prices To Sustain Overweight El Nino hit its peak in Dec 2015 and is now receding. Nevertheless, we are still officially in El Nino territory, with the phenomenon expected to be over by mid-2016. At the recent 2016 Palm and Lauric Oils Conference, most speakers projected global palm oil production to decline by 0-2m tonnes in 2016. Pitting this against the normal annual production increase of 2m-3m tonnes and the projected 2m-3m tonne rise in CPO consumption for 2016, we expect to see a global palm oil deficit of at least 2m tonnes in 2016. Assuming global palm oil production falls to 61m tonnes in 2016 (2015: 62.5m tonnes), while demand grows to 63m tonnes (2015: 60m tonnes), this would result in stock usage ratios falling to 16.5% (from 17.8% in 2015). With this severity of impact, we expect CPO prices to continue rising through 2Q16, once the bulk of the reduction in productivity comes though.

The possibility of La Nina is increasing, and should this happen, this would cause another disruption to the global vegetable oil complex, resulting in another run-up in prices. The probability of La Nina occurring in 4Q16 has now risen to 57% (from 25% in Dec 2015). Should La Nina occur, it would result in a drought in the Western hemisphere, affecting

soybean crops in North and South America. This could then push up soybean and soybean oil (SBO) prices, as well as pull up CPO prices in the process, due to the substitutability factor. We have seen this happening with soybean oil prices during this current El Nino, with the rise in CPO prices pulling up SBO prices by 14.7% YTD.

Figure 111: SST anomaly at 1.5 degrees Celsius, still in El Nino territory

Figure 112: La Nina probability rises to 57%, to occur in 4Q16

Source: Australia’s Bureau of Meteorology Source: University of Columbia

We expect demand to remain relatively stable this year, despite the slowdown in China’s economic growth and its purported soybean and rapeseed oil reserves of 6m tonnes each. China continued to register a 4% YoY rise in edible oil import in 2015 and a 35.6% YoY rise for the Jan-Feb 2016 period. As for palm oil, China imported 11% more palm oil in 2015, and for the Jan-Feb 2016 period, this rose another 5.7% YoY. We opine that China’s reserves of soybean would not likely be crushed anytime soon, given the abundance of soybean meal in the country and the lack of demand. Soybean in China is crushed primarily for the meal, which is used as feed, while the oil is just a by-product. As such, we expect demand for palm oil in China to only decline by a slight 0.1m-0.2m tonnes in Oct/Sep 2016.

For India, we expect demand to continue to grow in 2016, however, more than offsetting the small decline in China. This would be due to India’s El Nino-affected vegetable oil

crops, which are turning out smaller than expected, at an estimated 4.7m tonnes in 2016 (from 6m tonnes in 2015). As a result, Oil World expects India to import an additional 0.3m-0.4m tonnes of CPO in 2016.

The other big demand driver would be Indonesia, which is set to consume an additional 1m tonnes of CPO in 2016 (+14%). This increase in demand would be driven partly by the Indonesian biodiesel mandate (of which we have assumed will soak up approximately 1m-1.5m tonnes of CPO in 2016) and an increase in food consumption.

Although we are still in El Nino territory, its severity is receding

Probability of La Nina is increasing, however

Demand is still on a rising trend, particularly from India and Indonesia

Hoe Lee Leng


http://www.efa.biz/


4 April 2016



Figure 113: China's Jan-Feb 2016 edible oil imports rose 35.6%, while palm oil increased 5.7%

Figure 114: India's Jan-Feb 2016 edible oil imports increased 21.8% YTD, while palm oil imports rose 11%


Soybean production is likely to have another year of growth in 2016, with global output projected at 320.4m tonnes (+0.2% YoY), the fourth year of consecutive growth. This, vs the estimated demand of 315.6m tonnes, implies a surplus of 4.76m tonnes in 2016. Despite this strong soybean supply, we note that Oil World still expects the overall supply/demand scenario for the 17 oils and fats complex to be in a deficit this year of 1.2m tonnes, due to the drought-affected rapeseed (-5% YoY) and cottonseed production (-13% YoY), which, combined, comprise 20% of total global oilseed production. The current premium of soybean oil to palm oil stands at USD83 a tonne. Although this premium is lower than the historical average of USD100-150 a tonne, we believe this premium is usually reduced significantly when palm oil supply is severely restricted.

Figure 115: Palm oil trades at USD83/tonne discount to soybean oil

Figure 116: CPO's negative spread against gasoil price USD41.60/bbl – but CPO no longer correlated with gasoil price


We maintain our CPO price assumption of MYR2,700 a tonne for 2016, which implies a 15% increase in USD terms. We believe CPO prices would continue their upward momentum in 2Q16 before taking a breather in 3Q16, as we move into the seasonal peak production period. CPO prices may possibly move up again in 4Q16, should La Nina arrive during that period. We will be reviewing our MYR2,750 a tonne price forecast for 2017 towards the later part of this year.

We maintain our OVERWEIGHT call on the sector. Our Top Pick for Malaysia is Genting Plantations (GENP MK, BUY, TP: MYR12.60). We also have BUY calls for Kuala Lumpur Kepong (KLK MK, BUY, TP: MYR26.40), IJM Plantations (IJMP MK, BUY, TP: MYR4.00) and Sarawak Oil Palms (SOP) (SOP MK, BUY, TP: MYR5.65). We are NEUTRAL on IOI Corp (IOI MK, NEUTRAL, TP: MYR4.65), and Sime Darby (SIME MK, NEUTRAL, TP: MYR7.70).

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CPO price assumption of MYR2,700 a tonne maintained

Maintain OVERWEIGHT on the sector

http://www.efa.biz/


4 April 2016



Figure 117: Valuations of plantations stocks


(x)

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KLK 24.18 26.40 25,812 19.4 15.5 62.6 25.4 2.5 20.5 13.4 3.1 B

Genting Plantation 11.02 12.60 8,537 20.6 17.0 97.6 21.1 1.9 17.2 9.4 1.0 B

IJM Plantations^ 3.70 4.00 3,258 16.2 15.0 53.2 7.8 1.8 13.1 11.8 3.1 B

SOP 4.75 5.65 2,182 14.9 14.2 91.5 4.8 1.4 8.0 10.1 1.6 B

CBIP 2.23 2.55 1,200 11.8 11.2 4.0 5.4 1.6 9.2 14.4 2.2 B

Sime Darby 7.99 7.70 49,040 26.0 15.3 (0.3) 69.7 1.6 7.2 6.2 2.5 N

IOI Corp 4.81 4.65 30,581 27.2 22.0 9.3 23.6 5.6 61.7 21.4 2.0 N

Felda Global Ventures 1.51 1.58 5,509 34.3 25.2 (10.0) 36.1 0.9 3.9 2.5 2.5 N

Sector Avg 23.5 16.9 20.9 39.1


http://www.efa.biz/


4 April 2016



Plastic Packaging: Banking On Exports Neutral

4Q15 results recap

The quarter under review saw uneven performances across the plastic packaging companies. Companies with a larger proportion of revenue derived domestically underperformed our expectations, while those with a larger proportion of export revenue fared better and reported results that either came within or above our expectations. Despite higher export sales which rose 13.4% YoY in 4QFY15, Daibochi’s (DPP MK, SELL, TP: MYR1.64) results missed expectations, as domestic sales remained vulnerable post-goods and services tax (GST) implementation and amid weaker consumer sentiment. On the other hand, Scientex’s (SCI MK, BUY, TP: MYR14.54) 1QFY16 (Jul) results beat our and consensus’ expectations as it started to see the fruition of its ongoing expansion in consumer packaging division and contribution from the recently-acquired Scientex Great Wall (SGW) Ipoh. Thong Guan Industries (Thong Guan) (TGI MK, NEUTRAL, TP: MYR2.94) also posted impressive results that were in line with our expectations, as core profit doubled on the back of higher contribution from its stretch film, industrial bag and garbage bag divisions.

For the consumer electronics manufacturers, VS Industry’s (VSI MK, BUY, TP: MYR1.68) 1QFY16 (Jul) core profit grew 29.7% YoY on the back of higher brewer sales and printed circuit board (PCB) sales volume. The stronger PCB volume was expected as one of the company’s key customers ramped up production of a popular cordless vacuum cleaner. While SKP Resources’ (SKP) (SKP MK, NEUTRAL, TP: MYR1.42) results came in at the lower end of our estimates, we remain positive about the company’s FY17-18 earnings outlook which would be anchored by its contract wins from Dyson. SKP would also be well-positioned to secure more potential jobs from Dyson given available capacity at its new factory.

Earnings resilience

The plastic packaging companies under our coverage continued to see a common theme of rising exports during the quarter. We expect strong export resilience going forward, which could help cushion weaker domestic sales. Our economics team expects real exports to grow 2.5% in 2015, compared with +0.7% a year ago. We think that demand for consumer packaging materials would be underpinned by the relative defensive nature of the food and beverage (F&B) and fast-moving consumer goods (FMCG) segments, while resilient GDP growth across key export markets should help support demand for industrial packaging which has wide applications across various industries.

MYR/USD impact

The MYR has shown signs of strengthening lately and averaged at MYR4.21/USD in YTD-2016 and 4.10 in March at the time of writing. Given that our latest in-house MYR/USD forecast stands at 4.17 for 2016, we think earnings growth of the export-based manufacturers would still be underpinned by the MYR/USD exchange movement. Nonetheless, we highlight that every MYR0.10/USD change would translate to an earnings impact of 1-8% on the plastic players. The exchange movement has minimal impact on SKP as only 5% of its revenue is denominated in the USD.

Subdued resin prices to be supportive of margins

Resin prices such as polyethylene (PE) and polypropylene (PP) would likely remain under pressure in 2016 as the low crude oil price environment should persist into 2016. RHB expects crude oil price to average USD37.50/barrel (bbl) in 2016 from USD53.70/bbl in 2015. According to Platts, Asian polypropylene (PP) supply is expected to outpace demand as new capacities from China add to the existing oversupply situation caused by a slew of new projects that started in late 2015. Asian demand for PE remains lacklustre due to lower run rates across the downstream sectors in China, which are feeling the effect of China’s economic slowdown. The depreciation of most Asian currencies against the USD has also led to softer demand among PE importers.

Recall that while most companies under our coverage have a cost pass-through mechanism in place, plastic manufacturers typically see better margins when resin prices are low. This may be due to longer contract lead time or if the company is not required to pass back the cost savings from lower resin prices to its customers. For the companies that we cover, Daibochi and VS Industry review their contracts more infrequently – ie

One above, two in line and two below expectations

Exports to drive growth

The MYR/USD factor

Low resin prices to persist into 2016

Christine Chua +603 9207 7620 [email protected]

http://www.efa.biz/


4 April 2016



every quarter and every six months respectively – compared to Thong Guan, SKP and Scientex which review prices almost every 1-2 months.

Maintain NEUTRAL

We maintain our NEUTRAL recommendation on the sector. While we think packaging demand resilience is a bright spot amid economic uncertainties, we believe current valuations are already reflective of most of the positive news. We highlight that the rebound of the MYR beyond our house view could pose earnings risk to the plastic companies, potentially impacting earnings by 1-8%.

Figure 118: Prices of PE and brent crude Figure 119: Prices of PP and brent crude


Figure 120: MYR/USD movement


Figure 121: Valuations of plastic packaging stocks


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


Scientex 12.60 14.54 2,886 11.8 8.8 54.1 34.5 2.6 11.3 19.1 2.5 B

VS Industry 1.24 1.68 1,449 10.0 8.0 34.7 24.5 1.7 6.9 17.6 4.2 B

Thong Guan 3.11 2.94 573 11.1 12.7 32.4 (12.5) 3.1 3.6 11.6 4.5 N

SKP Resources^ 1.27 1.42 1,591 10.3 8.9 84.9 15.8 5.4 0.6 60.8 4.8 N

Daibochi 2.17 1.65 593 19.8 18.7 19.9 5.8 3.1 6.9 16.1 3.0 S

Sector Avg 11.4 9.3 47.3 22.3


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http://www.efa.biz/


4 April 2016



Property: No Easy Way Out Neutral

No recovery catalysts in sight

Aggregate new sales fell another 28% YoY in 2015 after a 26% YoY drop in 2014. After almost two years of slowdown, there is still no positive re-rating catalyst for the sector. Key concerns remain relatively unchanged, ie weak market sentiment due to inflationary pressure, job security and oversupply issues as well as credit tightening. We expect the sector to go through a longer downcycle, and a recovery may only come in late 2017.

Any impact of policy easing should be short-lived

Property stocks have rebounded somewhat lately, partly due to market anticipation of some policy easing. Some investors also think that the incoming central bank governor may adopt more friendly policies to lend developers a helping hand amidst the current slowdown. Easing measures that have been brought up include interest rate cuts as well as reinstatement of the developers’ interest bearing scheme (DIBS) for first-time home buyers. While the direction of interest rates is very much underpinned by the economic growth momentum, we think even if there is an interest rate cut, we do not expect the sector to be substantially affected.

Note that, historically, the property sector is largely driven by GDP growth as well as labour force participation and the unemployment rate. In addition, the reintroduction of DIBS would only be a temporary measure, as the prevailing issue with the property market is oversupply. Population growth and income growth need to be more significant so that the supply can be absorbed. The re-introduction of DIBS would also possibly lead to a further increase in household debt, and the trend is certainly not healthy for the market fundamentally. The current household debt-to-GDP ratio has already reached 89.1%, ie one of the highest in the region, and the ratio may be held up further in the near term due to sluggish economic growth, in our view. We highlight that the high household leverage would make households vulnerable to any changes in the macro-economy. Therefore, the “expected” positive impact from DIBS would still be capped, as long as the banks continue to tighten their mortgage lending.

Oversupply issue is most severe in Johor and Penang island

Based on National Property Information Centre (NAPIC) data, the housing oversupply issue is more severe in Johor and Penang. The oversupply situation in Johor is well-known, largely due to the mega new launches by Chinese developers that are flooding the market. As a result, local developers with projects there – especially the high-rise residences – are struggling to reach reasonable take-up rates to hit their breakeven points for the respective projects. Coupled with the set of cooling measures imposed since 2014, we observe that foreign investors, particularly the Singaporeans, have lost confidence in the region. For now, we do not expect the Iskandar market to be revived in the foreseeable future until we see a substantial increase in foreign direct investment (in productive sectors apart from property) in the state.

The oversupply in Penang, however, could be more concentrated on the island. We understand that there will be 22,000 units of affordable houses that are scheduled to be released over the next five years on the island, in addition to the current high-rise/high-end residential units that are still in the pipeline. Due to income eligibility limits and mortgage rejections, these houses could become a supply glut. However, as Penang’s mainland is a relatively new market for developers, new projects are largely under planning. Key catalytic projects that have boosted the property market there are the IKEA store, Design Village, Batu Kawan Industrial Park and some education institutions.

Job security could potentially be a key issue

In our view, the key risk to the housing market at this juncture is a potential surge in unemployment. In Figure 122, we analyse the relationship between the change in residential property prices against the change in the labour force participation rate. Note that the weak housing cycles in 1998, 2001-2002, 2005, and 2008-2009 were typically associated with a drop in the labour force participation rate, and vice versa. Based on the latest available data, the labour force participation rate stood at 67.5% in 2014, rising steadily from 62.6% in 2008 post the subprime crisis.

Still not out of the woods yet

Is policy easing possible?

Severe housing oversupply in Johor and Penang island

High correlation between property cycle and labour participation

Loong Kok Wen, CFA +603 9207 7614 [email protected]

http://www.efa.biz/


4 April 2016



However, given the recent economic developments, we expect the rate in 2016 to fall, which in turn could most likely lead to a fall in residential property prices. Last year, the sectors that were negatively affected the most were oil and gas, as well as banking, given the sharp plunge in crude oil prices – which in turn led to weak economic growth. Correspondingly, many local banks undertook cost-saving measures in late 2015, such as voluntary/mandatory separation schemes, lay-offs, and downsizing operations. The oil and gas companies cut employees’ salaries while reducing the number of working days, and downsizing office space. We also understand that some banks have started to restrict lending to borrowers who work in the oil and gas sector.

Key risks

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

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

Maintain NEUTRAL

We maintain our NEUTRAL sector rating. The overall sector would continue to be driven by the macro-economy. We think investors should take opportunity of the recent rebound to trim their exposure to the property sector. Property sales should remain sluggish, and some developers may have to rely on their overseas projects to generate sufficient levels of sales. Sales in the local property market would likely be flat, but we expect affordable housing players to fare better compared with the others. Should the unemployment rate increase substantially, we expect that the outlook for this sector to become gloomier.

The sector is currently trading at around the mean level of a 48% discount to RNAV, which is a mild rebound from 53% in Jan 2016. Trading opportunities are diminishing, in our view. We prefer developers that offer good dividend yields and with solid balance sheets. Our stock picks are Matrix Concepts (MCH MK, BUY, TP: MYR2.73) and Tambun Indah Land (TILB MK, BUY, TP: MYR1.66).

Figure 122: Property cycle vs change in labour force participation rate

Figure 123: Sector discount to RNAV (for large caps only)

Source: Department of Statistics, NAPIC, RHB Source: Bloomberg, RHB

Figure 124: Valuations of property stocks


(x)

EPS Growth

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

DY

(%)

Rec


Sunway 3.14 3.40 5,651 10.9 10.3 (12.3) 5.5 3.1 7.8 7.8 3.5 B

UOA Dev 2.13 2.40 3,239 8.6 9.3 (9.3) (7.9) 1.0 5.6 12.2 7.0 B

MRCB 1.21 1.60 2,146 26.2 21.7 +>100 20.7 0.9 2.6 3.7 0.0 B

Matrix^ 2.48 2.73 1,275 6.1 5.8 8.8 5.7 1.3 4.2 23.1 8.1 B

Paramount 1.55 2.32 655 8.9 8.0 8.9 11.4 0.7 6.9 8.1 5.3 B

Tambun Indah 1.51 1.66 640 6.8 6.5 0.3 4.8 1.3 7.7 19.7 6.0 B

IOI Prop 2.39 2.38 8,386 18.4 19.1 (20.6) (3.8) 0.7 10.0 3.7 2.5 TB

E&O^ 1.70 1.80 2,317 30.6 28.3 +>100 7.9 1.3 47.9 4.3 2.4 TB

SP Setia 3.16 3.10 8,199 12.3 10.0 (15.6) 23.1 1.1 4.0 9.3 6.3 N

UEM Sunrise 1.11 0.95 5,045 23.2 20.8 (15.3) 11.2 0.8 10.9 3.3 1.4 N

Mah Sing 1.44 1.36 3,470 10.1 10.6 (3.8) (5.2) 1.1 8.7 11.2 4.5 N

Glomac^ 0.83 0.87 603 8.7 8.1 (9.9) 7.9 0.6 3.7 6.9 5.5 N

Hua Yang^ 1.89 1.98 499 4.5 4.3 (2.4) 4.8 0.8 4.0 19.1 6.9 N

Sector Avg 12.7 11.7 (8.4) 5.0


-2.0%

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Discount to RNAV Mean +1 stdev -1 stdev +2 stdev -2 stdev

Maintain NEUTRAL. Matrix Concepts and Tambun Indah are our preferred picks

http://www.efa.biz/


4 April 2016



Property - MREITs: Potential Upside Is Limited Neutral

Changing interest rate expectations could have been fully priced in

In tandem with the expectation of a delay in interest rate hikes in the US, and as more countries move into a new negative interest rate frontier (including Denmark, Eurozone, Switzerland, Sweden and Japan), the widening yield spread has benefitted the REITs in the region.

In Malaysia, although RHB’s economics team expects the interest rate to remain stable for 2016, there may be downside risks. We think there could be some room for interest rates to be cut should economic growth decelerate faster than expected. Meanwhile, the incoming central bank governor may also have a different stance on the formulation of the monetary policy. Therefore, these external and potential internal changes in the monetary policy very much explains the sharp appreciation in MREIT prices over the last two months.

That said, the 10-year Malaysia Government bonds (MGS) yield currently stands at 3.88% (a 40bps decline since end-2015) vs 3.10% when the global interest rate was low in 2012-2013, ie at some 78bps from the trough. Based on the current average yield of 6% for MREITs and compared with the 5.3% peak valuation in 2012-2013, we think the upside to REIT prices could therefore be limited, for now. We also think that the prices have largely reflected the change in interest rate estimates, and the expectation of an interest rate hike may build up again in 2H16.

Possibly a safe haven

Given the volatility in the equity market, REIT is an attractive sector that can provide investors some defensiveness in their portfolios. The large-cap REITs that we cover have been consistently offering a dividend yield of 5-6% since being listed, and we expect the yield to be sustained – even if rental reversion may slow down. In comparison to mid-sized retail malls, the anchor retail malls that most of the retail REITs own will likely see more stable tenancy achieved on the back of stable shopper traffic, given their sizes and professional management. Meanwhile, the quality and value of the anchor property assets would also be fairly stable, in our view. In the event of a devaluation of property assets, we think these large-cap REITs would have the ability to withstand the stress given their gearing of about 30%, compared with the regulatory cap of 50%. Newly-completed malls without experienced property and leasing teams would be more vulnerable during the stressful period – especially if occupancy is less than 60%.

Prefer REITs with strong sponsors

Given the challenging economic growth outlook, we expect a lack of inorganic growth opportunities as quality property assets – those with decent yields and reasonable occupancy rates – may be scarce, in addition to the looming supply of retail malls in Malaysia. Hence, we prefer REITs with strong sponsors that would typically nurture the investment properties to a certain stage, so that assets can be injected into the REITs at reasonable yields.

In our view, among the REITs that are backed by solid sponsors are Pavilion REIT (PREIT MK, BUY, TP: MYR1.72), Sunway REIT (SREIT MK, NEUTRAL, TP: MYR1.61) and MRCB-QUILL REIT (MQREIT) (MQREIT MK, BUY, TP: MYR1.23). For Pavilion REIT, the pipeline assets over the medium term include Elite Pavilion mall (the extension), Fahrenheit 88, and possibly Pavilion Bukit Jalil City and Pavilion Damansara Heights. Sunway REIT, on the other hand, could be more active, as its Sunway Pyramid 3 and Sunway Pinnacle office may be ripe for injection in 2H16, while Sunway Velocity mall would be opened by end of this year. MQREIT should stand out as an office REIT, given strong backing from Malaysian Resources Corp (MRC MK, BUY, TP: MYR1.60) and Quill Group. The office blocks in KL Sentral (a renowned transportation hub) typically reach occupancy levels of over 90%.

Key risks

These include worse-than-expected economic conditions and sudden fluctuations in

interest rates.

Easing expectation of an interest rate hike

A place to hide?

Pavilion REIT, Sunway REIT and MQREIT are backed by strong sponsors

Loong Kok Wen, CFA +603 9207 7614 [email protected]

http://www.efa.biz/


4 April 2016



Maintain NEUTRAL

Maintain NEUTRAL. While we think the renewed interest rate expectation should return in 2H16 and may possibly de-rate the REIT sector, REIT prices will still likely be held up in the near term. Although earnings growth may be largely flattish, the resilient dividend yield would help to garner investor interest in times of market uncertainty. Fundamentally, we like Pavilion REIT and Sunway REIT. However, given its relatively higher upside compared to other large-cap REITs, our preferred pick is MQREIT.

Figure 125: 10-year Malaysia Government bonds yields (%) Figure 126: Dividend yield trend for MREITs

Source: Bloomberg Source: Bloomberg, RHB

2.0

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KLCCSS

PREIT

SREIT

IGBREIT

CMMT

MQREIT

HektarREIT

Axis REIT

Maintain NEUTRAL. We prefer MQREIT due to its relatively higher upside

Figure 127: Valuations of MREIT stocks


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


Pavilion Reit 1.70 1.72 5,126 19.0 18.5 12.1 2.8 1.3 14.1 7.0 5.4 B

MRCB-Quill Reit 1.14 1.23 677 13.2 13.0 (4.3) 1.4 0.8 13.6 6.3 7.1 B

KLCCSG 7.17 6.85 12,944 19.9 19.3 1.5 3.2 1.1 14.9 5.4 4.9 N

IGB Reit 1.51 1.50 5,160 18.4 17.3 10.5 6.1 1.4 14.8 7.7 6.2 N

Sunway Reit 1.53 1.61 4,481 17.0 16.2 9.5 5.2 1.1 14.4 6.6 6.2 N

CMMT 1.46 1.35 2,668 17.2 17.2 (0.2) 0.1 1.1 12.1 6.2 5.9 N

Axis Reit 1.56 1.67 1,711 17.7 16.8 5.6 5.2 1.3 10.0 7.2 5.6 N

Hektar Reit 1.51 1.51 605 13.0 12.8 2.8 1.4 1.0 23.9 7.4 7.0 N

Sector Avg 18.4 17.7 4.9 3.4

http://www.efa.biz/


4 April 2016



Rubber Products: Competition Marginalising Earnings Neutral

Strategy

Maintain NEUTRAL. We remain NEUTRAL on the rubber products sector due to the

recent volatility of the MYR although we see interesting trading opportunities on stocks in the sector. We believe that when the MYR stabilises, stock valuations can close the gap to their respective intrinsic values as investors focus on fundamentals.

Supermax (SUCB MK, BUY, TP: MYR3.88) remains our Top Pick for the sector on the back of superior earnings growth (3-year EPS CAGR of 22%) as well as cheaper valuations (Figure 128). We also like Karex (KAREX MK, BUY, TP: MYR4.31) for its strategic diversification into original brand manufacturing (OBM) while maintaining its dominant position in the original equipment manufacturing (OEM) market

Earnings round-up

Earnings in line. The 4Q15 earnings of the rubber products sector were in line with

expectations, posting a marginal 2.3% QoQ contraction while still registering robust 66.7% YoY growth. Earnings contracted for the quarter due to the lack of new capacity growth, as well as on the cost-savings pass-through to clients – which led to lower ASPs. PAT margins for the sector continued to improve on the back of better operating efficiency, as well as favourable raw material prices and forex movements. We expect 1Q16 sector earnings to be relatively flattish QoQ, with earnings growth from added capacity dampened by higher costs and ASP pressures stemming from more intense competition, particularly within the nitrile glove segment.

Figure 128: 4Q15 earnings and margins

Earnings PAT margin (%)

MYRm 4Q14 3Q15 4Q15 QoQ (%) YoY (%) 4Q14 3Q15 4Q15

Hartalega 49.5 60.4 72.9 20.7 47.2 17.3 15.9 18.3

Karex 14.5 22.3 17.9 (19.5) 23.4 18.9 29.3 18.6

Kossan Rubber 37.9 55.2 56.6 2.6 49.2 10.5 12.5 12.9

Riverstone 22.4 35.3 37.2 5.4 66.2 20.0 23.5 24.3

Supermax 20.1 38.2 38.8 1.5 93.4 7.8 12.3 13.4

Top Glove 56.1 128.3 104.6 (18.5) 86.6 9.8 16.0 15.1

Total 186.0 317.5 310.1 (2.3) 66.7 11.7 15.3 15.7


Sector fundamentals

Robust demands. The Malaysian Rubber Glove Manufacturers Association (MARGMA)

forecasts 2016 global demand to grow 8-10% pa to reach 212.2bn pieces of gloves. Of these, the association expects Malaysian manufacturers to maintain their dominant market share of 63% (2014: 62%).

Supply growth. We expect the sector’s production output growth (Figure 129) to

decelerate in 2016 to 15.6% YoY (2015: 21.1% YoY) as manufacturers like Kossan (KRI MK, BUY, TP: MYR7.53) would not be adding new capacity during the year. Nonetheless, our industry channel checks have highlighted increased concerns of price competition. We believe glove manufacturers would remain price-competitive as they compete for market share, particularly in the nitrile segment.

Figure 129: Forecasted production output by manufacturers

Bn pieces 2014 2015 2016F 2017F 2018F

Hartalega 9.3 15.2 19.6 25.2 28.3

Kossan Rubber 13.3 17.6 18.6 19.8 24.4

Riverstone 2.7 3.6 4.4 5.3 6.1

Supermax 15.0 15.2 18.7 19.6 24.7

Top Glove 30.8 34.5 38.0 41.7 43.2

Total Glove 71.1 86.0 99.4 111.6 126.7

Growth (%)

21.1 15.6 12.2 13.6

Karex 2.9 2.9 3.5 4.5 5.2

Growth (%) 1.2 20.7 26.9 16.2


Our Top Picks in the sector include Supermax and Karex

4Q15 earnings were in line

Our industry channel checks have highlighted increased concerns of price competition

Wong Cheng Horng, CFA +603 9207 7607 [email protected]

http://www.efa.biz/


4 April 2016



Condoms for growth. We continue to like Karex for its strategic diversification into the

OBM segment while maintaining its dominant position in the OEM market, where we forecast a 3-year EPS growth of 26%. We are also positive on the company’s acquisition of TheyFit® intellectual property, which we think would complement its OBM ambitions.

Competition conundrum

Impact on margins. More intense industry competition could complicate the cost pass-

through mechanism between manufacturers and clients, as manufacturers would have to absorb some or all of the incremental costs to remain competitive. This scenario could transpire in 2016, given the slew of cost increases such as the increase in natural gas tariff (from the government subsidy removal) and labour cost increases (minimum wage hike coupled with foreign labour levy). We forecast that, should manufacturers choose to absorb the MYR600 per worker hike in the foreign worker levy, earnings would be impacted by 1-2% pa.

Consolidation of supply. Nevertheless, over the long run, we think that the increasing

competition is healthy for the industry as weaker manufacturers would be weeded out. This would concentrate supply while glove manufacturers would enjoy better pricing power. Due to the structure of the industry – low entry barriers and homogenous products – cost efficiency could be a major differentiating factor, where we believe better operating margins could translate into better pricing power vs other global manufacturers. In that respect, we were pleased to note that most Malaysian glove manufacturers continued to record EBIT margin improvements in 4Q15 (Figure 130).

Figure 130: EBIT margins of Malaysian rubber product manufacturers

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Hartalega 25.1% 27.1% 23.6% 24.1% 22.1% 24.9% 19.8% 23.0%

Kossan Rubber 16.0% 15.4% 14.5% 14.2% 16.6% 16.2% 16.6% 18.5%

Riverstone 22.8% 19.6% 19.3% 20.0% 25.9% 25.0% 26.6% 25.6%

Supermax 14.8% 14.6% 12.4% 13.8% 13.6% 13.7% 16.5% 16.3%

Top Glove 9.5% 8.1% 11.1% 12.9% 15.4% 19.9% 20.5% 19.2%

Glove Sector 15.4% 14.9% 14.8% 15.8% 17.4% 19.6% 19.4% 19.9%

Karex 17.8% 21.8% 23.0% 25.2% 23.4% 24.7% 33.4% 26.9%

Source: RHB

Figure 131: Rubber Glove Index – 1-year forward P/E Figure 132: Karex’s 1-year forward P/E


Figure 133: Valuations of rubber products stocks


(x)

EPS Growth

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

DY

(%)

Rec


Kossan Rubber 5.97 7.53 3,818 16.9 15.7 11.0 8.1 3.4 11.9 21.5 1.8 B

Karex 3.70 4.31 1,986 27.8 24.1 19.9 15.5 5.8 19.5 20.7 0.9 B

Supermax 2.55 3.88 1,734 12.4 11.0 19.0 13.0 1.6 11.3 13.6 2.4 B

Hartalega^ 4.55 4.95 5,556 20.5 16.3 (1.4) 25.5 4.3 15.9 22.6 1.8 N

Top Glove 4.91 5.63 3,048 11.1 14.1 (1.7) (21.2) 2.6 7.6 24.5 3.4 N

Sector Avg 16.3 14.4 6.9 6.1


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Competition could complicate the cost pass-through mechanism for glove manufacturers

http://www.efa.biz/


4 April 2016



Technology: Buying Into 2H16 Overweight

1Q16 could see some softness

Nikkei Asian Review recently reported that Apple has reduced the output of its latest iPhone models by 30% in 1Q16 to 40m-50m units. According to the report, the leading smartphone maker had initially told component makers to maintain production of the iPhone 6s and iPhone 6s Plus for 1Q16 at the same levels as their predecessors, ie the iPhone 6 and iPhone 6 Plus launched a year earlier. Although there has been no official confirmation by management, we understand that the revised volume guidance took into account the slow-moving inventories. This is because markets ranging from China and Japan right up to Europe have all witnessed a slowdown in sales while consumer sentiment was further aggravated by the steep USD appreciation against regional currencies in 4Q15.

Short-term impact on local players

The unexpected cut in orders from Apple, in our view, could translate to a soft start to 2016 for smartphone-centric packaging and testing players under our coverage, ie Globetronics (GTB MK, BUY, TP: MYR6.66) and Inari (INRI MK, BUY, TP: MYR3.96) , as we expect the impact to spill over into the back-end services supply chain. Taking that into account, we expect to see a 15-20% QoQ drop in 1Q16 earnings for the two firms. We note that Globetronics is set to release its 1Q16 results on 26 Apr while Inari is looking to announce its 3QFY16 results by end-May. That said, we expect production to normalise come 2Q16 as our channel checks indicate that inventory adjustment would be completed by April/May while the components manufacturing for the next-generation iPhone 7 series is likely to commence latest by June. This new phone’s commercial launch is set to take place in September.

Figure 134: Quarterly shipments of Apple’s iPhones

Source: RHB, Statista

All eyes on the iPhone 7…

While there have been various rumours and speculation over the technical specifications of the iPhone 7 series, we gather that the final versions have yet to be confirmed at this point of time. We believe this could be due to the escalating competition from the Android-based smartphone brands, which – in our view – compels Apple to go back to the drawing board on the designs of its next-generation flagship models. Based on our conversations with local components suppliers, a large majority is waiting for the final confirmation of orders from their respective customers. We expect mass production to commence by April/May, with full volume loadings by June.

…as well as the USD/MYR rate

Share prices of the semiconductor manufacturers under our coverage have retraced by 10-20% YTD. We think the selling interests intensified in tandem with the rebound in the MYR against the USD, which last closed at MYR4.01 vis-à-vis the YTD average of MYR4.22. Given that our latest in-house USD/MYR forecast is at an average of MYR4.17 for 2016, we remain positive on the earnings momentum of our export-based manufacturers. That said, we highlight that every 1% appreciation in the MYR against the USD could translate

0

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70

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Likely soft start to 2016

Momentum to pick up by 2Q16

iPhone 7 could propel demand in 2H16

USD/MYR volatility could provide trading opportunities

Kong Heng Siong +603 9207 7666 [email protected]

http://www.efa.biz/


4 April 2016



into earnings downgrades of 2-5% for the technology manufacturers under our coverage, ceteris paribus. In the event of a prolonged appreciation of the local currency against the USD, we think that most manufacturers would have to embark on pricing renegotiations with their direct customers to help mitigate the forex impact on their respective bottomlines.

Reiterate our OVERWEIGHT stance

All in, we maintain our OVERWEIGHT stance on the sector as we think that the earnings momentum of the semiconductor players would pick up substantially come 2H16 on capacity expansion and new components mass production for the incorporation into the next-generation smartphones. Our Top Picks are Globetronics and Inari. Outside the semiconductor space, we like Datasonic as we believe its recent passport chips job win, coupled with the likely renewal of its existing contracts over the next 3-9 months, would propel earnings to a new high in 2017.

Key risks to our bullish stance on the sector include: i) a potential recovery of the MYR against the USD, which could affect the sector’s earnings visibility; ii) a potential decline in the worldwide demand for semiconductor components should the global economic recovery falter; and iii) potential margins erosion in the long run given that packaging and testing services are at the lower-end of the semiconductor supply chain.

Figure 135: The USD/MYR trend

Source: Bloomberg

Figure 136: Valuations of technology stocks


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


Inari Amertron 3.12 3.96 2,420 12.3 10.0 35.3 22.6 3.5 11.0 32.3 3.4 B

Datasonic^ 1.32 1.87 1,782 22.4 16.5 50.3 35.6 6.1 20.6 29.4 2.0 B

Unisem 2.26 2.82 1,658 12.0 10.0 (14.5) 19.2 1.2 5.4 10.0 4.9 B

MPI 7.45 11.64 1,564 9.7 9.5 48.1 2.9 1.6 4.4 17.5 2.7 B

Globetronics 5.43 6.66 1,524 14.7 13.2 44.8 10.9 4.5 10.6 32.7 4.4 B

Prestariang 2.67 2.70 1,292 25.2 19.8 +>100 27.1 6.9 28.9 28.9 2.6 N

GHL Systems 0.88 0.93 561 25.3 18.2 +>100 39.4 2.2 16.4 9.0 0.0 N

Sector Avg 14.3 12.1 33.3 18.3


3.4

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2016 2015

http://www.efa.biz/


4 April 2016



Telecommunication: Challenging Tone Ahead Neutral

Weak outlook remains amidst the challenging environment

We project the telcos’ service revenue growth to remain lacklustre in 2016 due to: i) the keen competition in the market; ii) persistently weak consumer sentiment; and iii) difficulties in monetising data traffic as data yields continue to slide. While stiff price competition within the mobile prepaid segment dominated marketing activities in 2015, competition to-date has shifted to the mobile postpaid segment as operators target higher-ARPU customers with bigger data bundles.

We expect the share prices of the telcos to come under pressure as the US sets on its interest rate normalisation path although the Federal Open Market Committee’s (FOMC) recent stance on a “shallower” rate hike this year may have provided a brief reprieve to yield plays. The larger telcos have been most affected by the foreign sell-down since 2014 – as can be seen from the 4-20% share price de-ratings to 23 Mar 2016. That said, the sector would still be a net beneficiary of the domestic “flight to safety” theme as investors adopt a defensive stance due to the uncertain economic outlook. We note that the Malaysian telcos are backed by strong cash flows and balance sheets, which would provide good downside support to share prices.

Figure 137: Foreign shareholdings

Telco YTD share price

performance since

Dec 2014 (%)

Foreign shareholdings %

As at end-2014 As at end-Feb 2016

Axiata (17.2) 21.0% 13.6%

Digi.Com (19.6) 15.6% 9.9%*

Maxis (8.0) 6.6% 6.3%

TM (4.5) 16.7% 11.7%

*Digi’s foreign shareholding as at Jan 2016

Source: RHB

Spectrum reallocation

On 1 Feb, the Malaysian Communication and Multimedia Commission (MCMC) re-allocated the 900/1800MHz bands to Celcom, Digi (DIGI MK, NEUTRAL, TP: MYR4.70), Maxis (MAXIS MK, SELL, TP: MYR4.70) and U-Mobile. The direct allocations, via a new spectrum assignment process effectively rules out a spectrum auction, originally proposed under the Budget 2016 recalibration. U-Mobile has emerged the biggest winner of the spectrum award as it never had a lower band spectrum (only 2100MHz) while incumbents Celcom and Maxis were the biggest losers (Figure 138). We expect the telcos to be informed of their respective spectrum outlays by Aug 2016 with the re-farmed spectrum coming into effect from Jul 2017. The cost of the spectrum should be manageable in our view as the Government has taken into account the industry’s heavy capex and the interest of mobile subscribers. This should eliminate the need for telcos to undertake potential cash calls. There is, however, an upside risk to industry capex/opex as the incumbents will need to spend more to retune their radio/transmitters including optimising their networks to make up for the spectrum shortfall.

Figure 138: Malaysia spectrum reallocation details

Before allocation After allocation

Spectrum ownership 900MHz 1800MHz 900MHz 1800MHz

Celcom 2x17MHz 2x25MHz 2x10MHz 2x20MHz

Digi.Com 2x2MHz 2x25MHz 2x5MHz 2x20MHz

Maxis 2x16MHz 2x25MHz 2x10MHz 2x20MHz

U-Mobile 2x5MHz 2x15MHz

Source: RHB

Muted service revenue growth ahead

U-Mobile and Digi were winners of the 900/1800MHz spectrum reallocation


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4 April 2016



Capex intensity to remain high due to the insatiable demand for data

We expect the industry’s capex intensity to remain elevated at 12-25% in 2016 (from the estimated 13-20% in FY15 and 13-22% in FY14) as the telcos continue to expand their mobile LTE footprint (currently 53-71% of the population). About 59-69% of Digi and Maxis mobile subscribers were active mobile internet users as at 4Q15. This compares with the 53-61% as at end-3Q14, reflecting the steady data uptake. Axiata’s (AXIATA MK, NEUTRAL, TP: MYR6.32), mobile arm, Celcom, which was earlier plagued by IT issues has seen a stabilisation in mobile revenue – helped by the resumption in channel activities and the launch of new products. We believe the industry would continue to find it an uphill battle to effectively monetise data, with data yields and ARPUs reeling under pressure.

As at end-4Q15, Maxis’ data volume has seen a 67% YoY increase to 50,000 terrabytes (TB) (from 32,000TB in 4Q14), driven by the steady data consumption. This in turn, was largely driven by the proliferation of affordable smartphones in the market and the introduction of data-centric plans. We note that Digi’s and Celcom’s data volumes have also been on the rise, with Digi recording a 110% YoY growth in data volume in 4Q15. Based on our estimates, average monthly data consumption per user for the three telcos is at about 1.7-1.9GB as at end-4Q15 (vs 1.0-1.2GB in 4Q14). Going into 2016, we expect to see a steady uptake in data consumption as more LTE sites are rolled out and smartphone penetration increases – although we expect the total data volume to grow at a slower pace.

Figure 139: Telcos’ capex intensity (capex / revenue)

Telco FY14 (actual) FY15f FY16f

Axiata 21.5% 24.9% 22.4%

Digi.Com 12.9% 12.6% 11.5%

Maxis 13.6% 14.1% 13.8%

TM 16.3% 18.6% 16.7%

Source: RHB

In our view, Time dotcom (Time) (TDC MK, BUY, TP: MYR8.6) and Telekom Malaysia (TM) (T MK, NEUTRAL, TP: MYR6.40) will continue to benefit from the growing demand for mobile data due to their existing backhaul infrastructures (next-generation fibre) and the strong momentum for bandwidth sales. We are more positive on the growth prospects of Time as we expect the group to sustain mid-teens growth in data revenue due to resilient demand from the mobile operators for LTE rollouts. Time is also well-positioned to ride on the growth of its data centres (DC), being a carrier-neutral provider – and should continue to enjoy double-digit growth in the DC space. In anticipation of the stronger demand and as its current DC operating at almost full capacity, management will be spending at least MYR100m to build a new DC on a 3-acre plot of land in Cyberjaya. Time’s three new cables (to start commissioning in 2016-2017) and ongoing regional expansions are strong earnings catalysts.

Waiting for the new converged offering

TM, which has deferred the launch of its converged service twice (now slated by 1H16) is set to utilise both its low- and high-frequency bands (850MHx/2300MHz and 2600MHz) for its mobile LTE rollout. We believe its LTE service would be disruptive as it looks to drive market share as a quad-play operator with a strong base of fixed broadband users to cross-sell to. TM also recently inked a domestic roaming pact with Celcom which addresses its coverage issue in the interim. We expect P1’s earnings to be dilutive over the next 1-2 years due start-up costs (distribution, marketing, device subsidy, etc) for the converged product.

TM also signed a formal contract in Dec 2015 with the Government for the High-Speed Broadband 2 (HSBB2) and Suburban Broadband (SUBB) projects. The earnings impact from these projects is expected to be modest when compared to HSBB1and back-loaded. Organic growth will come more from its new UniFi Advance broadband plans, as the upselling opportunities among existing subscribers should result in further ARPU uplift.

No slowdown in capex going into 2016

P1’s losses are likely to accelerate in 2H16

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4 April 2016



Maintain NEUTRAL

We remain NEUTRAL on the telco sector against the backdrop of lacklustre earnings growth stemming from: i) the continued pressure on legacy revenues; ii) competitive headwinds; and iii) weak consumer sentiment. While there remain forex risks – given the telcos’ exposure to USD debt and IDD-related traffic costs – we expect this to be manageable. Our house view is for the MYR/USD rate to average at MYR4.18 in 2016 from MYR/USD rate of MYR4.31 in 4Q15.

Axiata is our preferred exposure to Malaysia telecoms. We expect XL Axiata (EXCL IJ, BUY, TP: IDR4,900) to show stronger recovery in 2016 while the growth at Axiata’s other operating companies should remain resilient, providing further support to the group’s overall growth trajectory. We also like Time due to its stronger growth prospects and the resilient demand for data and data centres while the stock is a direct beneficiary of the weaker MYR. Maxis remains as our Top Sell as it is most predisposed to the unwinding of the yield compression theme among the local mobile operators given the lower dividend payouts going forward and its high net debt/EBITDA. The keen competition in the market could further dilute its premium position in the market and make it more challenging for management to monetise data. Overall, the valuation of the Malaysian telco sector remains rich when compared against its regional peers – at 24.6x FY16 P/E (vs the regional peer average of 19.5x). With no re-rating catalysts, the sector could be vulnerable to more foreign sell-downs going forward.

Figure 140: Valuations of telecommunication stocks


(x)

EPS Growth

(%)

P/BV

(x)

P/CF

(x)

ROE

(%)

DY

(%)

Rec


Time dotCom 7.45 8.60 4,270 22.3 18.6 27.7 20.0 1.9 16.2 15.4 1.0 B

Axiata 5.90 6.32 51,327 21.7 19.7 12.2 10.2 2.2 10.1 10.1 3.9 N

Digi.Com 4.99 4.70 38,797 21.7 21.6 2.1 0.6 74.7 13.7 343.8 4.6 N

TM 6.57 6.40 23,970 31.8 27.6 (15.9) 15.5 3.5 9.5 10.3 3.0 N

Maxis 6.33 4.70 47,539 25.9 27.6 (1.4) (6.1) 11.0 13.2 43.1 3.5 S

Sector Avg 24.0 23.1 2.5 4.3

NEUTRAL on the sector. Axiata is our preferred pick

http://www.efa.biz/


4 April 2016



Timber: Emerging Weakness On Earnings Drivers Neutral

Maintain NEUTRAL

We remain NEUTRAL on the sector, premised on emerging signs of weakness in the earnings drivers for the timber companies. Log prices have fallen while Japanese plywood demand remains soft. The continuous rebound of the MYR against USD could negatively impact earnings.

MYR is strengthening

The exchange rate movement is the single biggest earnings catalyst for the timber companies as 80-90% of their revenue is in USD and a majority of costs are in MYR terms. The MYR has shown increasing signs of strengthening against the USD, averaging at MYR4.21 per USD in YTD-March and MYR4.10 per USD in March at the time of writing. We continue to highlight the companies’ earnings sensitivity to every MYR0.10 per USD in Figure 141.

Figure 141: Summary of sensitivity analysis

Source: RHB

Cracks in log price trend

Log prices have softened for the past five months with no sign of a trend reversal. The steep depreciation of the INR against the USD (2015: -4.9% YoY, YTD-2016: -0.8%) have led some buyers from India to down-trade to cheaper sources such as the Solomon Islands. Consequently, South-East Asian meranti log prices have fallen 4.4% YoY in YTD-February and averaged lower at USD273 per cu m compared with USD285 per cu m a year ago. We are projecting log prices to decline 1-3% YoY in 2016, as we think the weakened INR may lead to lower negotiated offer prices by log suppliers to retain buying interest from India – its single largest export market. We expect log prices to recover 3-4% in 2017 on the assumption that the INR rebounds against the USD. Despite lower-trending log prices, we think log prices would be supported by the scarce supply of logs in Sarawak and still-robust underlying demand for logs in India.

Sarawak’s log production contracted 5.9% YoY in 2015, as the state-wide clampdown on illegal harvesting continues to exert its toll on log production. As a result of delays arising from more stringent log harvesting procedures, the timber companies under our coverage recorded declines in log production. Ta Ann (TAH MK, NEUTRAL, TP: MYR5.93) recorded a 15.4% YoY decline, while Jaya Tiasa (JT MK, NEUTRAL, TP: MYR1.59) and WTK (WTKJ MK, NEUTRAL, TP: MYR1.47) experienced 22.7% and 5.4% YoY declines respectively in 2015. We expect log production to stay flattish in 2016 as the timber companies adjust to new administrative changes in logging activities.

Jaya Tiasa Ta Ann WTK

USD10/cum change in log price 9-11% 3-5% 7-9%

USD10/cum change in plywood price 3-4% 3-4% 8-9%

MYR100/tonne change in CPO price 6-8% 7-9% 2-4%

MYR0.10/USD change in exchange rate 10-12% 10-12% 15-17%

Maintain NEUTRAL

MYR reversal could pose an earnings risk

Log prices have been on a decline

Christine Chua +603 9207 7620 [email protected]

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4 April 2016



Figure 142: South-East Asian meranti log prices (USD/cu m)

Figure 143: Comparison of log and plywood prices in USD and MYR

Source: Japan Lumber Source: RHB, Japan Lumber

No significant turnaround expected for plywood demand

Japan’s housing starts ended the year on a flat note, at 1.9% YoY. While this was an improvement from the 8.9% contraction last year, the country’s total plywood imports were down 16.9% YoY in 2015. Plywood imports from Malaysia and Indonesia declined 18.9% and 18.2% YoY respectively in 2015. We saw all the companies we cover post flattish to negative plywood sales volume growth in 2015, reflecting an underlying weakness in plywood demand. In our forecasts, we have assumed plywood sales growth to be flattish to slightly negative in FY16-18.

On the outlook for plywood demand, the Timber Supply and Demand Conference of Japan expects demand for imported plywood to stay flattish in 2016 on the back of sluggish housing starts (projected at 2-3% YoY). Japan Lumber continues to report slow inventory movement of imported plywood in Japan, where plywood importers and wholesalers have resorted to giving discounts to spur demand. We are projecting plywood sales to be flattish for FY16-17. As a result of lacklustre demand, plywood prices have also trended down since Mar 2015. In December, concrete panel prices slid 6.4% YoY to USD510 per cu m while floorbase prices fell 9.6% to USD610 per cu m. We expect plywood prices to decline 1-5% YoY in FY16 and stay flat throughout FY17-18.

Plantation division is the only bright spot

We expect FFB production of the timber companies to grow by double digits on the back of the improving maturity of oil palm hectarage, at a time where CPO prices are expected to continue rising. Our CPO price per tonne assumptions remains unchanged at MYR2,700 for 2016 and MYR2,750 for 2017.

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Log Pr ices USD - LHS Plywood (CP) Prices USD - LHS

Log Pr ices MYR - RHS Plywood (CP) Prices MYR - RHS

Plywood demand remains weak

FFB production should grow on increasing maturity hectarage

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4 April 2016



Figure 144: FFB production of timber companies (tonnes)

Source: RHB, Company

Maintain NEUTRAL. We see emerging weakness in the earnings drivers for the timber

companies Log prices have started to soften while earnings from the plywood segment are anticipated to remain weak. The recent rally of the MYR against the USD, if sustained, would mean a reversal in the performance of the timber players. The only remaining bright spot is on the palm oil plantation front, as FFB production should increase on improving maturity of oil palm hectarage on the back of the anticipated continued rise in CPO prices.We maintain our SOP-based valuations for the timber companies, valuing their log concessions using DCF, their plywood facilities using replacement value and a target 16x 2016F P/E for the plantation divisions. We have NEUTRAL calls on Ta Ann, Jaya Tiasa and WTK.

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813,748 885,790

993,760

630,383 694,034

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40,326 64,00097,700

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Jaya Tiasa Ta Ann WTK

NEUTRAL stance on Ta Ann, Jaya Tiasa and WTK

Figure 145: Valuations of timber stocks


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


Ta Ann 5.10 5.93 1,890 8.7 9.4 38.9 (7.7) 1.4 8.4 17.3 3.7 N

Jaya Tiasa 1.48 1.59 1,441 16.0 13.4 92.5 19.3 0.8 8.7 5.0 1.3 N

WTKH 1.31 1.47 631 8.0 9.5 23.7 (15.9) 0.4 12.5 5.6 2.4 N

Sector Avg 10.2 10.6 44.7 (3.1)

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4 April 2016



Utilities: Stable Outlook Overweight

OVERWEIGHT sector call anchored by Tenaga and Malakoff

We maintain our OVERWEIGHT stance on the utilities sector, premised on our positive recommendations on the national utility company Tenaga Nasional (Tenaga) (TNB MK, BUY, TP: MYR18.20) and the pure-play independent power producer (IPP) Malakoff (MLK MK, BUY, TP: MYR2.18).

We believe the players, particularly Tenaga, are sailing into calmer waters in 2016 with the implementation of the imbalance cost pass through (ICPT) mechanism under the new incentive-based regulation (IBR) framework. While the ICPT has yet to be implemented in a high-fuel costs scenario, the effective tariff increase for end-users for 1H16 – in view of lower savings generated under the ICPT mechanism – was an encouraging signal that the Government has strong political will to abide by the mechanism.

Tenaga – Looking out for overseas opportunities

In our view, the implementation of the IBR framework has enabled Tenaga to focus its efforts on growing its foreign portfolio. At end-2015, the national utility company announced its acquisition of a 30% stake in a Turkish company, Gama Enerji for USD243m. The price tag has since been upped by 5% to USD255m to account for a new hydro asset purchased just prior to Tenaga’s announcement in Dec 2015. Nevertheless, we remain positive on the acquisition as the price works out to over USD700,000 per megawatt (MW) (MYR2.8m per MW) which is still significantly lower than existing power plant projects in Malaysia that cost about MYR5m per MW.

We view the acquisition as also doubling up to be Tenaga’s beachhead for further power plant projects and/or to secure power purchase agreements (PPA) in the East European and Middle East and North Africa (MENA) region.

Meanwhile, the recent heatwave has seen Malaysia’s peak electricity demand in 2016 hit 17,175MW, a new record. The previous demand peak was recorded at 16,901MW on 6 Jun 2014 amidst rising sea temperature which was thought to be the onset of a strong El Nino occurrence since 1997/1998. Peak demand is one variable in total electricity sales as historical trends have shown sales demand has a close correlation with Malaysia’s economic performance. Nevertheless, we believe the strong demand would provide some support to electricity sales ahead of the slowing economic growth in 2016.

We also believe that the recent strength in the MYR against the USD which has been largely attributed to the recovery in crude oil prices could indirectly benefit Tenaga. With the ICPT mechanism, we expect Tenaga to generate higher over-recovery which would lead to higher tariff rebates for 2H16 (which implies lower electricity tariffs for end-users). This could also provide some support to electricity sales in 2016.

Fundamentally, Tenaga is a good proxy to the economy. We continue to like the stock for its: i) defensive earnings, ii) large market cap, and iii) high liquidity. We also like the stock for its ability to gradually regain lost ground in the more lucrative power generation business, vis-à-vis transmission and distribution, having emerged as the biggest winner of new power plant projects in Malaysia in recent years (Figure 146).

Figure 146: Key new generation capacity in the pipeline

Project Manjung 4 Track 1 (Prai)

Tg Bin 4 Track 3A (Manjung 5)

Track 3B (Jimah East)

Track 4A Track 4B

IPP Tenaga Tenaga Malakoff Tenaga Tenaga, Mitsui SIPP Energy 1MDB

Capacity (MW) 1,000 1,071 1,000 1,000 2 x 1,000 1,000 - 1,400 1,800 - 2,400

Type Coal Gas Coal Coal Coal Gas Gas

Location Manjung, Perak

Prai, Penang

Tg Bin, Johor

Manjung, Perak

Jimah, N. Sembilan

Pasir Gudang, Johor

Alor Gajah, Melaka

Commercial operation date Mar 2015 Jan 2016 Mar 2016 Oct 2017 Jun & Dec 2019

2018 2021

Source: Companies, Media reports

Tenaga and Malakoff are our sector Top Picks that offer good earnings visibility and limited downside risks

We are positive on Tenaga’s recent acquisition for a 30% stake in Gama Enerji as it also acts as a beachhead into the energy market of East Europe and the MENA region

Recent heatwave could provide some support to electricity demand ahead of slowing economic growth

Favourable movement in MYR could boost ICPT rebates in 2H16 and thus provide support to electricity demand.


http://www.efa.biz/


4 April 2016



Malakoff – Firing up emerging value

We like Malakoff for its: i) strong earnings visibility backed by long-term agreements with Tenaga; and ii) the commissioning of the Tanjung Bin Unit 4 (TB4) power plant. Furthermore, we also see a potential earnings upside as it could accommodate additional power plant(s) with generation capacity of up to 1,000MW. Its dividend yields are attractive at 4-6%.

We also note that losses at its 40%-owned power plant, the Kapar Energy Ventures (KEV) has narrowed in 4Q. We believe this proves that turnaround efforts are gaining good traction and would contribute towards its earnings growth going forward.

Its latest power plant, the TB4, finally achieved commercial operation date (COD) on 21 Mar 2016. TB4 is an ultra-supercritical coal-fired power plant with a generation capacity of 1,000MW. This would boost its total generating capacity in Malaysia to 6,346MW and its entire generating capacity to 7,036MW from 6,036MW (+17%). We expect the addition of TB4 to be a key earnings driver for FY16 while allowing for higher power generation to the grid over the longer term. Meanwhile, its second smallest power plant within Malaysia, the Port Dickson Power (PD Power), has resumed operations from 1 Mar 2016 for another three years up to 28 Feb 2019 after executing a new PPA on 12 Feb 2016. Management guided for PD Power to contribute c.MYR20m per annum to its EBITDA, similar to the Segari Energy Ventures (SEV) plant.

YTL Power – Risks from Brexit

YTL Power International (YTL Power) (YTLP MK, NEUTRAL, TP: MYR1.55) won a short-term capacity bid from the Energy Commission for the supply of power from its 808MW Paka Power Plant from 1 Mar 2016 to 31 Dec 2018. This extends the economic life of the plant beyond its original PPA which ended on 30 Sep 2015. Clearly this is earnings-accretive but the impact is short term and we believe the terms would be less accretive than the original PPA. Meanwhile, the 404MW Pasir Gudang Power Plant, its other domestic power plant, also saw its original PPA ended on 30 Sep 2015 with no renewals in sight. Coupled with the fact that it has yet to secure any new power plant projects in Malaysia, YTL Power is losing its appeal as a domestic IPP play.

While the company has been actively scouting for opportunities in overseas markets, we believe investors are slow in warming up to its efforts, particularly when it comes to greenfield projects, given the high execution risks. Furthermore, its WiMAX unit has yet to gain meaningful traction against a highly competitive backdrop within the mobile space while earnings from Power Seraya had been largely volatile in 2015.

We believe the Brexit threat is another factor added on to its list of earnings risks. Wessex Water has, thus far, been YTL Power’s sole business unit posting stable earnings growth. However, the ongoing Brexit saga has seen the GBP weakening against the MYR by over 10% YTD. With the referendum set for 23 Jun 2016, we believe the currency overhang could weigh on YTL Power’s FY16F earnings. The water and sewerage unit contributes over 65% to pretax profits, based on our forecasts, while every 1% change in GBP would impact its earnings by 1.5%.

Petronas Gas – Higher opex but attractive qualities remain

Petronas Gas (PGas) (PTG MK, NEUTRAL, TP: MYR22.40) is investing in a new MYR2.7bn regasification terminal project at the Pengerang Deep Water Terminal, which is an integral part of the MYR89bn Refinery and Petrochemical Integrated Development (RAPID) project in Pengerang, Johor. The project is to be carried out via a 65:25:10 joint-venture (JV) called Pengerang LNG (Two) SB between Petronas Gas, Dialog (DLG MK, BUY, TP: MYR1.83) and the Johor State Government. Construction for the plant, with an annual capacity of 3.5m tonnes, is to start in 2Q15 with a targeted commercial operations date by 4Q17.

Following higher-than-expected opex in FY15, PGas’ operating expenses may remain elevated in FY16F amidst its ongoing plant rejuvenation and revamp (PRR) project. As such, its earnings growth is likely to be modest in FY15-17F, but would rise more significantly in FY18F with a maiden contribution from the Pengerang regasification terminal. We like Petronas Gas for its earnings defensiveness and strong long-term fundamentals backed by continued industrialisation in Malaysia and, hence, rising demand for gas.

Emerging value at current price levels with attractive dividend yields of 4-6%

Earnings growth to be driven by the new TB4 and turnaround at KEV.

YTLP’s earnings risks are heightened by Brexit as the outlook for other businesses remains poor

PGas’ FY16 opex are expected to be elevated amidst ongoing PRR project

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4 April 2016



Conclusion

Despite the expectation of slower economic growth for Malaysia in 2016, we believe the downside risk to the sector in 2Q16 is limited due to the depressed global energy prices, the recovery of the MYR and the ongoing heatwave. This would benefit Tenaga in anticipation of higher electricity sales while the favourable MYR could generate higher ICPT tariff rebates in 2H16, leading to a lower risk of end-users holding back on consumption. Meanwhile, the outlook for YTL Power remains bleak as the weakening GBP could lead to weaker earnings from Wessex Water while the outlook of its other businesses remains weak. We are positive on Malakoff and, to a lesser extent, PGas for their good earnings visibility which are underpinned by long-term offtake contracts.

Figure 147: Valuations of utilities stocks


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


Tenaga 14.08 18.20 79,462 10.8 10.7 4.0 1.7 1.5 6.1 14.8 3.0 B

Malakoff 1.66 2.18 8,300 16.2 13.8 12.8 17.8 1.4 3.3 8.8 5.3 B

MMC Corp 2.06 3.45 6,273 13.4 13.3 +>100 0.8 0.6 5.2 4.9 1.5 B

Pestech 6.69 7.48 1,243 21.6 18.0 42.1 19.7 4.7 21.0 21.6 2.1 B

Petronas Gas 21.88 22.55 43,295 23.2 22.4 6.9 3.5 3.6 16.9 15.9 3.1 N

YTL Power 1.48 1.55 10,980 15.2 13.0 (17.0) 16.9 0.9 4.2 6.1 0.5 N

Sector Avg 13.6 13.1 5.4 3.8

Positive on Tenaga and Malakoff, our sector Top Picks, given their stable outlook and good earnings visibility

http://www.efa.biz/


90


4 April 2016

90

Figure 148: Valuations and ratings of individual stocks under coverage

FYE Price Target Core EPS

(sen)

EPS Growth

(%)

P/E

(x)

EV/EBITDA

(x)

(MYR/s) (MYR/s) 15 16F 17F 15 16F 17F 15 16F 17F 15 16F 17F

BUY

Berjaya Auto^ April 2.18 2.40 17.2 20.0 23.5 (9.5) 16.1 17.7 12.7 10.9 9.3 8.2 6.9 5.7

Berjaya Food^ Apr 2.10 2.90 7.2 10.5 15.3 5.4 46.2 45.6 29.2 20.0 13.7 11.6 9.3 7.4

Carlsberg Dec 13.96 13.90 70.1 74.2 79.1 2.0 5.9 6.6 19.9 18.8 17.6 14.0 13.1 12.4

CBIP Dec 2.23 2.55 18.1 18.9 19.9 (25.7) 4.0 5.4 12.3 11.8 11.2 7.3 8.3 7.0

CMS Dec 4.85 5.86 22.9 26.7 30.8 12.5 16.8 15.2 21.2 18.2 15.8 12.2 10.8 9.4

Dialog Jun 1.60 1.82 4.8 5.5 6.2 20.8 14.6 13.1 33.5 29.2 25.8 18.7 21.9 22.5

Datasonic^ Mar 1.32 1.87 3.9 5.9 8.0 (8.2) 50.3 35.6 33.7 22.4 16.5 21.8 17.2 13.9

DRB-Hicom^ Mar 1.04 1.14 -6.7 -4.0 0.6 n.a. 40.5 n.a. n.m. n.m. +>100 10.8 10.3 8.9

Esthetics^ Mar 0.84 1.05 8.6 9.3 9.9 (1.7) 7.8 6.6 9.8 9.1 8.5 3.8 3.1 2.4

Evergreen Dec 1.00 1.40 16.9 14.1 15.0 +>100 (16.3) 6.7 5.9 7.1 6.6 3.3 3.5 2.9

Gadang May 1.94 2.83 30.8 33.8 36.6 6.8 9.5 8.4 6.3 5.7 5.3 3.7 3.5 2.9

Genting Plant Dec 11.02 12.60 27.1 53.5 64.8 (46.3) 97.6 21.1 40.7 20.6 17.0 26.3 14.3 12.1

Globetronics Dec 5.43 6.66 25.6 37.0 41.1 16.2 44.8 10.9 21.2 14.7 13.2 16.8 9.6 8.5

Guiness Dec 13.98 14.80 75.8 80.8 83.5 11.0 6.6 3.4 18.5 17.3 16.7 12.1 11.6 11.1

Ho Hup Dec 0.92 1.22 20.5 22.5 25.5 (2.9) 9.6 13.7 4.5 4.1 3.6 4.6 4.5 3.6

Hong Leong Ind Jun 6.80 7.78 52.8 67.2 68.5 3.4 27.2 2.0 12.9 10.1 9.9 6.3 6.0 5.2

HSL Dec 2.05 2.64 13.8 14.8 18.0 (1.0) 7.0 21.7 14.8 13.8 11.4 9.5 11.7 11.7

IJM Corp^ Mar 3.53 3.90 20.3 20.3 22.6 3.7 0.3 10.9 17.4 17.4 15.7 11.4 10.1 8.9

IJM Plant^ Mar 3.70 4.00 14.9 22.9 24.7 (7.2) 53.2 7.8 24.8 16.2 15.0 17.1 12.0 11.3

Inari Amertron Jun 3.12 3.96 18.8 25.5 31.2 (10.9) 35.3 22.6 16.6 12.3 10.0 11.9 8.8 6.8

IQ Group^ Mar 1.93 2.75 21.3 22.9 26.1 (12.5) 7.4 14.1 9.1 8.4 7.4 3.2 2.7 2.0

Karex Jun 3.70 4.31 11.1 13.3 15.4 (17.1) 19.9 15.5 33.3 27.8 24.1 25.4 19.2 16.5

Kimlun Dec 1.78 2.13 21.2 21.0 24.6 67.6 (1.0) 17.0 8.4 8.5 7.2 5.6 4.2 3.2

KLK Sep 24.18 26.40 76.7 124.6 156.3 (17.4) 62.6 25.4 31.5 19.4 15.5 17.9 12.5 10.3

Kossan Dec 5.97 7.53 31.8 35.3 38.1 39.6 11.0 8.1 18.8 16.9 15.7 11.4 10.6 9.6

KPJ Healthcare Dec 4.30 5.00 13.7 15.2 18.7 15.4 11.0 23.0 31.4 28.2 23.0 16.1 14.3 12.0

Malakoff Dec 1.66 2.18 9.1 10.2 12.0 32.7 12.8 17.8 18.3 16.2 13.8 9.2 8.4 7.5

Matrix^ Mar 2.48 2.73 37.4 40.7 43.0 (4.9) 8.8 5.7 6.6 6.1 5.8 4.7 3.8 3.8

MISC Dec 8.89 11.84 64.5 77.9 86.4 27.4 20.6 11.0 13.8 11.4 10.3 10.9 7.9 7.0

MMC Corp Dec 2.06 3.45 6.2 11.4 11.4 (63.3) 85.2 0.2 33.4 18.0 18.0 12.8 12.1 12.9

MPI Jun 7.45 11.64 51.7 76.5 78.7 +>100 48.1 2.9 14.4 9.7 9.5 4.3 3.2 2.7

MRCB Dec 1.21 1.60 1.1 4.6 5.6 (54.8) +>100 20.7 +>100 26.2 21.7 8.5 14.0 14.2

MRCB-Quill Dec 1.14 1.23 9.0 8.6 8.7 2.9 (4.3) 1.4 12.7 13.2 13.0 16.4 16.7 16.4

Muhibbah Dec 2.48 3.34 23.7 19.2 20.9 18.9 (19.0) 9.1 10.5 12.9 11.8 4.1 4.7 4.1

Oka Corp^ Mar 1.01 1.16 11.1 11.6 12.4 14.3 4.6 6.3 9.1 8.7 8.2 4.5 4.1 3.7

Pantech^ Feb 0.59 0.64 7.3 8.9 9.5 (4.0) 21.2 7.4 8.1 6.7 6.2 5.7 6.2 5.1

Paramount Dec 1.55 2.32 16.0 17.5 19.4 14.6 8.9 11.4 9.7 8.9 8.0 9.0 8.3 7.8

Pavilion REIT Dec 1.70 1.72 8.0 8.9 9.2 3.4 12.1 2.8 21.3 19.0 18.5 21.3 20.5 19.2

Pestech Jun 6.69 7.48 21.8 31.0 37.1 (3.8) 42.1 19.7 30.7 21.6 18.0 21.9 16.8 15.0

Petra Energy Dec 1.28 1.56 15.9 16.9 25.4 +>100 6.1 50.1 8.0 7.6 5.0 12.1 10.6 9.8

Pintaras Jun 3.63 3.97 32.2 19.8 37.0 (28.8) (38.5) 87.1 11.3 18.4 9.8 5.0 7.3 4.4

Press Metal Dec 2.52 3.56 22.9 29.5 36.9 (36.8) 29.0 25.0 11.0 8.5 6.8 8.8 6.5 5.0

SapuraKencana^ Jan 2.00 2.42 16.8 19.3 22.0 (29.5) 14.5 14.2 11.9 10.4 9.1 7.2 6.3 5.3

Scientex Jul 12.60 14.54 69.1 106.4 143.1 4.7 54.1 34.5 18.2 11.8 8.8 16.2 8.1 5.8

SHL Cons^ Mar 2.95 3.50 41.2 41.7 41.7 (3.5) 1.1 0.1 7.2 7.1 7.1 3.1 2.8 3.0

SOP Dec 4.75 5.65 16.6 31.8 33.4 (37.9) 91.5 4.8 28.6 14.9 14.2 11.1 8.7 8.2

Sunway Bhd Dec 3.14 3.40 32.9 28.8 30.4 (4.2) (12.3) 5.5 9.6 10.9 10.3 12.9 9.8 9.6

Sunway Con Dec 1.56 1.86 9.8 11.3 12.4 11.4 14.9 10.0 15.9 13.8 12.5 10.0 7.7 6.5

^ FY15, 16 & 17 valuations refer to those of FY16



4 April 2016

91


P/CF

(x)

P/BV

(x)

DIV YIELD

(%)

ROE

(%)

% Chg in price Mkt

cap

15 16F 17F 15 16F 17F 15 16F 17F 15 16F 17F 1Mth 3 Mth 12 Mth (MYRm)

BUY

12.2 12.0 10.1 5.2 4.3 3.5 4.6 5.0 6.0 41.0 43.0 41.9 2.3 1.4 (16.5) 2,469

(64.7) 3.4 3.0 1.7 1.6 1.5 1.7 2.5 3.6 6.3 8.4 11.6 1.9 (9.5) (22.2) 800

18.3 16.5 16.4 12.8 13.9 13.9 5.1 5.3 5.7 66.7 71.0 78.9 14.8 19.1 4.2 4,301

11.8 9.2 8.7 1.8 1.6 1.5 4.5 2.2 2.5 15.4 14.4 13.8 5.7 9.8 13.6 1,200

(59.5) 18.4 14.1 2.5 2.4 2.2 0.9 2.2 2.5 12.6 13.7 14.5 (4.3) (4.9) 8.7 5,211

19.7 19.8 65.6 4.1 4.3 4.0 1.1 1.4 1.5 13.8 14.1 14.7 1.3 1.9 2.6 8,537

18.1 20.6 16.6 7.2 6.1 5.1 1.5 2.0 2.7 22.4 29.4 33.5 (1.5) (11.4) 20.0 1,782

5.0 6.7 6.2 0.3 0.3 0.3 1.4 1.4 1.4 (1.7) (1.0) (1.0) 2.0 (18.8) (48.0) 2,011

7.1 7.0 6.7 1.0 1.0 0.9 4.8 4.8 4.8 11.1 11.2 11.2 (6.7) (8.7) (16.0) 155

4.7 4.5 4.7 0.5 0.7 0.7 0.9 2.4 3.8 9.1 10.5 10.3 (14.5) (34.5) 25.0 846

11.7 12.7 6.4 1.0 0.9 0.8 2.6 2.8 3.1 16.6 16.2 15.4 (7.6) (11.4) 40.6 456

57.8 17.2 16.0 2.0 1.9 1.7 0.5 1.0 1.2 5.2 9.4 10.6 0.9 8.0 7.2 8,490

16.4 10.6 5.7 5.0 4.5 4.0 4.1 4.4 4.6 24.4 32.7 32.1 0.8 (17.9) 1.3 1,524

15.5 16.9 14.2 11.1 10.9 10.7 5.3 5.6 5.8 61.3 63.6 64.5 3.5 7.7 (1.1) 4,223

(5.2) (9.1) 5.7 1.4 1.1 0.8 0.0 0.0 0.0 40.5 31.0 26.5 6.4 (10.3) (29.1) 343

9.5 7.9 8.5 1.9 1.7 1.6 4.3 4.9 5.0 14.1 17.7 16.6 12.4 13.7 51.1 2,230

(57.2) 9.4 19.8 1.7 1.6 1.4 1.2 1.1 1.3 12.2 11.8 12.9 3.5 9.6 15.2 1,129

9.8 15.2 12.2 1.3 1.3 1.3 2.1 2.3 2.6 7.6 7.8 8.2 3.5 3.2 (1.9) 12,613

21.2 13.1 12.5 2.0 1.8 1.7 2.3 3.1 3.4 8.0 11.8 11.9 (0.5) 4.5 8.8 3,258

13.8 11.0 9.5 4.5 3.5 2.8 2.9 3.4 4.1 38.4 32.3 31.4 (7.7) (12.2) 16.6 2,420

5.2 7.1 5.9 1.3 1.2 1.1 4.1 4.7 5.2 14.1 13.9 14.5 (4.9) (10.6) (29.6) 170

41.9 19.5 20.5 4.6 5.8 5.5 0.0 0.9 1.0 18.2 20.7 23.5 (8.9) (8.4) 20.9 2,473

17.1 3.1 5.4 1.2 1.1 1.0 3.3 3.0 3.5 14.8 13.1 13.8 17.9 26.2 39.1 535

162.7 20.5 14.2 2.7 2.5 2.4 1.9 3.1 3.9 9.4 13.4 15.9 (1.2) 5.1 7.0 25,812

20.2 11.9 12.6 3.9 3.4 3.0 0.7 1.8 1.9 22.7 21.5 20.5 (11.6) (35.5) 6.2 3,818

15.2 15.4 13.5 3.1 3.0 2.8 1.6 1.8 2.2 10.7 10.8 12.5 (1.1) 1.7 5.7 4,534

4.3 3.3 3.2 1.4 1.4 1.4 4.7 5.3 6.2 9.3 8.8 10.2 2.5 4.4 NA 8,300

13.4 4.2 6.4 1.4 1.3 1.2 4.9 8.1 7.7 23.5 23.1 21.6 4.6 0.4 0.9 1,392

9.6 7.4 9.2 1.1 1.0 1.0 2.2 2.6 2.7 9.1 9.5 9.8 3.4 (3.6) 5.6 39,682

5.6 5.5 6.6 0.7 0.6 0.6 2.4 1.5 1.5 2.3 3.7 3.5 21.2 6.2 (18.3) 6,273

5.1 4.4 3.9 1.8 1.6 1.4 2.7 2.7 3.0 13.6 17.5 15.9 (5.7) (23.0) 8.0 1,564

2.4 2.6 (41.0) 0.9 0.9 0.9 0.0 0.0 0.0 0.9 3.7 4.3 1.7 (4.7) (2.4) 2,384

12.8 13.6 13.4 0.7 0.8 0.8 7.4 7.1 7.4 7.4 6.3 6.4 3.6 6.5 (5.8) 754

36.3 20.5 6.7 1.4 1.3 1.2 1.5 1.5 1.7 14.5 10.5 10.6 8.8 9.7 15.9 1,167

6.3 8.3 7.8 1.2 1.1 1.0 4.5 5.0 5.4 13.0 12.7 12.6 (1.9) 8.0 9.2 161

4.7 5.6 5.4 0.7 0.6 0.6 4.6 5.6 6.0 8.7 10.0 10.1 (1.5) (11.4) 20.0 339

5.4 6.9 6.4 0.7 0.7 0.7 5.3 5.3 5.5 7.8 8.1 8.6 0.9 (0.8) (18.4) 655

18.4 14.1 14.9 1.3 1.3 1.3 4.8 5.4 5.6 6.3 7.0 7.2 1.8 14.1 12.6 5,133

(21.0) 21.0 19.4 4.0 4.7 4.1 0.3 2.1 2.5 12.9 21.6 22.6 5.4 (1.6) 41.1 1,243

3.0 16.8 3.6 0.8 0.7 0.7 7.8 3.5 5.3 9.6 9.6 13.2 (1.5) 9.4 (3.7) 411

8.4 11.5 14.6 1.7 1.7 1.6 5.0 5.0 5.2 15.9 9.3 16.6 11.3 8.7 (9.7) 591

3.2 8.1 2.6 1.6 1.5 1.3 3.0 3.5 4.4 14.3 18.4 20.1 17.8 21.7 (25.9) 3,273

6.0 3.9 2.8 1.0 0.9 0.8 0.7 1.8 2.0 8.3 9.1 9.6 5.3 10.5 (13.0) 11,984

26.8 11.3 8.2 3.1 2.6 2.2 1.7 2.5 3.4 19.1 23.7 26.7 14.3 32.2 90.9 2,886

4.6 9.1 30.6 1.0 0.9 0.9 8.5 9.2 9.8 13.6 13.1 12.6 3.1 2.1 (6.3) 714

(29.1) 8.0 9.6 1.6 1.4 1.3 1.3 1.6 1.6 5.6 10.1 9.8 6.3 9.2 (4.6) 2,182

6.5 7.8 9.7 3.1 3.1 3.1 15.6 3.5 3.8 9.5 7.8 7.9 4.7 3.0 (2.8) 5,708

25.4 25.8 9.7 4.5 3.7 3.1 0.0 2.5 2.8 32.4 29.3 26.9 11.4 11.4 NA 2,017


4 April 2016

92


FYE Price Target Core EPS

(sen)

EPS Growth

(%)

P/E

(x)

EV/EBITDA

(x)


BUY

Supermax Jun 2.55 3.88 17.2 20.5 23.2 8.7 19.0 13.0 14.8 12.4 11.0 11.5 10.0 8.2

Tambun Indah Dec 1.51 1.66 22.3 22.3 23.4 (8.3) 0.3 4.8 6.8 6.8 6.5 4.7 4.7 4.5

Tenaga Aug 14.08 18.20 124.9 129.9 132.1 49.1 4.0 1.7 11.3 10.8 10.7 6.6 6.3 6.0

Time dotCom Dec 7.45 8.60 26.1 33.4 40.0 14.1 27.7 20.0 28.5 22.3 18.6 12.4 9.4 8.2

Tune Protect Dec 1.39 1.65 9.2 10.5 12.7 (4.5) 14.2 20.8 15.2 13.3 11.0 13.3 12.7 10.7

Unisem Dec 2.26 2.82 22.1 18.9 22.5 +>100 (14.5) 19.2 10.2 12.0 10.0 4.4 4.8 4.2

UOA Development Dec 2.13 2.40 27.4 24.9 22.9 19.8 (9.3) (7.9) 7.8 8.6 9.3 4.0 4.1 3.9

VS Industry Jul 1.24 1.68 9.2 12.4 15.4 +>100 34.7 24.5 13.5 10.0 8.0 6.8 5.8 4.9

Wah Seong Dec 0.75 1.06 7.0 11.4 12.6 (60.5) 61.2 10.6 10.6 6.6 6.0 11.4 5.9 5.8

Westports Dec 4.09 4.66 15.0 17.4 18.4 (2.8) 15.8 5.8 27.3 23.5 22.2 15.1 13.0 12.7

Yinson^ Jan 2.75 3.37 14.1 17.1 34.0 (7.3) 21.8 98.2 19.5 16.0 8.1 12.2 14.2 6.6

TRADING BUY

Alam Maritim Dec 0.36 0.55 4.8 6.0 6.3 (22.4) 22.8 5.9 7.4 6.0 5.7 11.3 4.8 3.6

E&O^ Mar 1.70 1.80 2.2 5.6 6.0 (48.1) +>100 7.9 78.3 30.6 28.3 60.9 20.0 19.0

IOI Prop Jun 2.39 2.38 16.4 13.0 12.5 24.6 (20.6) (3.8) 14.6 18.4 19.1 8.1 10.7 10.3

NEUTRAL

7-Eleven Dec 1.40 1.43 4.5 5.0 5.6 (11.4) 10.0 11.9 30.9 28.1 25.1 12.8 9.8 8.7

Aeon Credit^ Feb 12.24 12.75 151.9 166.5 182.3 1.4 9.6 9.4 8.1 7.4 6.7 12.2 12.3 12.2

AFG^ Mar 3.86 3.45 34.0 34.4 35.5 (2.4) 1.3 3.1 11.4 11.2 10.9 n.a. n.a. n.a.

Apex healthcare Dec 3.60 3.52 32.5 29.4 30.8 (10.1) (9.6) 4.8 11.1 12.3 11.7 5.5 6.1 5.5

Astro^ Jan 2.97 2.94 11.8 13.2 15.5 18.4 11.6 17.1 25.1 22.5 19.2 5.3 5.9 5.8

Axiata Dec 5.90 6.32 24.2 27.1 29.9 (11.9) 12.2 10.2 24.4 21.7 19.7 9.3 8.9 7.7

Axis REIT Dec 1.56 1.67 8.3 8.8 9.3 12.6 5.6 5.2 18.7 17.7 16.8 19.6 19.3 18.4

BAT Dec 55.30 55.60 318.7 313.3 320.0 0.9 (1.7) 2.2 17.4 17.7 17.3 12.5 13.1 12.8

BIMB Dec 3.80 4.10 35.5 35.9 39.0 (0.3) 1.1 8.8 10.7 10.6 9.7 n.a. n.a. n.a.

B-Toto^ Apr 3.29 3.15 20.3 22.8 23.0 (20.2) 12.2 0.9 16.2 14.4 14.3 10.1 9.1 9.0

Bumi Armada Dec 0.80 0.94 6.4 4.8 4.5 (12.5) (25.5) (4.8) 12.5 16.8 17.6 12.0 16.6 8.2

Bursa Malaysia Dec 8.90 9.00 37.2 40.6 43.9 0.0 9.1 8.2 23.9 21.9 20.3 23.1 20.3 18.9

CIMB Dec 4.88 4.50 33.6 45.9 48.4 (10.3) 36.4 5.5 14.5 10.6 10.1 n.a. n.a. n.a.

CMMT Dec 1.46 1.35 8.5 8.5 8.5 0.5 (0.2) 0.1 17.2 17.2 17.2 18.5 18.3 18.0

Coastal Contract Dec 1.67 1.80 31.4 34.7 36.7 (0.5) 10.6 5.8 5.3 4.8 4.5 11.7 (0.2) (1.0)

Digi.Com Dec 4.99 4.70 22.5 23.0 23.1 (15.0) 2.1 0.6 22.2 21.7 21.6 13.4 13.2 13.4

Favelle Favco Dec 2.79 2.95 58.9 44.4 46.5 43.1 (24.7) 4.8 4.7 6.3 6.0 2.5 2.2 1.8

Felda Global Dec 1.51 1.58 122.5 93.3 103.4 6.2 (23.9) 10.8 10.9 14.3 12.9 n.a. n.a. n.a.

Freight Mgmt Jun 1.30 1.40 13.1 13.7 14.4 (6.8) 4.2 5.3 9.9 9.5 9.0 5.7 5.2 4.7

Gamuda Jul 4.93 5.21 28.4 24.9 28.4 (7.6) (12.1) 13.7 17.4 19.8 17.4 20.7 22.4 19.5

GD Express Jun 1.58 1.70 2.4 2.7 3.7 18.3 12.6 34.2 65.2 57.9 43.2 45.4 34.9 28.1

Genting Bhd Dec 9.90 9.08 51.4 55.5 62.8 (18.3) 7.9 13.1 19.3 17.8 15.8 6.6 5.5 5.5

Genting M'sia Dec 4.45 4.46 18.8 25.2 27.7 (17.6) 33.7 9.8 23.6 17.7 16.1 13.2 10.0 9.1

GHL Systems Dec 0.88 0.93 1.6 3.5 4.8 4.9 +>100 39.4 55.0 25.3 18.2 10.6 10.5 7.9

Glomac^ Apr 0.83 0.87 10.6 9.5 10.3 12.6 (9.9) 7.9 7.9 8.7 8.1 8.6 9.4 8.8

Hartalega^ Mar 4.55 4.95 22.5 22.2 27.9 (17.1) (1.4) 25.5 20.2 20.5 16.3 13.1 13.2 10.6

Hektar REIT Dec 1.51 1.51 11.3 11.6 11.8 2.4 2.8 1.4 13.3 13.0 12.8 16.1 15.6 8.9

^ FY15, 16 & 17 valuations refer to those of FY16, 17

^ FY15, 16 & 17 valuations refer to those of FY16, 17 & 18


4 April 2016

93


P/CF

(x)

P/BV

(x)

DIV YIELD

(%)

ROE

(%)

% Chg in price Mkt

cap


BUY

11.5 11.3 8.4 1.8 1.6 1.5 2.2 2.4 2.7 12.3 13.6 14.0 (16.7) (25.4) 25.0 1,734

8.1 7.7 7.4 1.4 1.3 1.1 6.4 6.0 6.3 22.0 19.7 18.5 11.9 7.1 (17.9) 654

6.2 6.1 5.9 1.7 1.5 1.4 2.1 3.0 3.1 15.6 14.8 13.7 6.7 6.7 (2.6) 79,462

14.6 16.2 12.1 2.1 1.9 1.7 12.1 1.0 1.2 25.2 15.4 16.3 (0.4) 4.8 41.8 4,270

n.a. n.a. n.a. 2.3 2.1 1.9 2.6 3.0 3.6 16.1 16.6 18.1 13.0 4.5 (30.8) 1,045

4.8 5.4 5.0 1.2 1.2 1.1 4.4 4.9 5.3 13.1 10.0 11.4 1.8 (8.1) 7.6 1,658

6.5 5.6 5.9 1.0 1.0 1.0 7.0 7.0 7.0 14.1 12.2 11.1 2.4 2.9 (1.4) 3,369

127.5 6.9 9.9 1.9 1.7 1.5 3.8 4.2 5.2 20.4 17.6 19.7 (6.1) (23.0) 41.9 1,449

3.5 2.4 2.4 0.5 0.5 0.5 0.7 6.1 6.7 5.0 7.7 8.1 (12.8) (19.8) (39.0) 581

18.1 15.7 14.9 7.3 6.3 5.8 2.8 2.9 3.2 27.9 28.8 27.1 3.0 1.5 11.1 13,947

5.9 18.9 5.1 1.6 1.6 1.5 0.5 0.5 0.5 9.3 9.7 16.9 (1.8) (2.8) (2.5) 2,840

TRADING BUY

6.1 4.4 3.8 0.4 0.4 0.3 0.0 0.0 0.0 5.2 6.1 6.1 (6.5) (16.3) (43.8) 333

3.5 47.9 5.3 1.3 1.3 1.3 2.1 2.4 2.4 1.8 4.3 4.7 9.7 11.8 (14.6) 2,317

16.7 10.0 7.3 0.6 0.7 0.7 2.5 2.5 2.5 4.7 3.7 3.5 14.9 9.6 9.1 9,417

NEUTRAL

0.7 0.7 0.6 10.1 6.5 5.9 2.0 2.1 2.4 27.5 28.2 24.7 (5.1) 1.7 (7.5) 1,727

n.m n.m n.m 2.2 1.9 1.7 4.7 5.2 5.7 29.7 28.0 26.5 7.2 3.4 (3.6) 1,763

n.a. n.a. n.a. 1.2 1.2 1.1 4.3 4.4 4.5 11.2 10.7 10.5 7.8 8.4 (18.9) 5,880

16.8 10.1 10.4 1.3 1.4 1.3 3.1 3.1 3.1 11.9 11.1 10.8 4.3 (2.7) (7.7) 422

13.4 5.8 6.8 25.7 21.9 17.7 4.0 4.2 4.7 95.1 105.0 101.8 11.7 11.7 (6.3) 15,449

8.0 10.1 6.8 2.1 2.2 2.2 3.4 3.9 4.4 9.4 10.1 11.2 (0.2) (6.3) (16.5) 51,327

10.9 10.0 9.1 1.3 1.3 1.3 5.4 5.6 6.0 6.8 7.2 7.6 0.0 (2.5) (13.3) 1,713

15.5 18.5 16.3 28.9 28.0 27.1 5.6 5.6 5.7 170.0 161.0 159.3 (0.5) 3.4 (18.4) 15,790

n.a. n.a. n.a. 1.7 1.6 1.4 3.2 3.3 3.6 17.2 15.4 15.1 7.6 3.0 (5.2) 5,860

12.7 13.1 12.5 6.1 5.8 5.4 5.2 5.9 5.9 38.9 41.1 39.0 3.5 8.9 (0.8) 4,445

5.9 (931.0) 2.7 0.6 0.6 0.6 1.0 1.1 1.4 5.4 3.8 3.5 (22.3) (23.1) (20.8) 4,693

n.a. n.a. n.a. 5.9 5.8 5.8 3.9 4.3 4.7 25.6 26.8 28.6 4.7 6.0 3.7 4,758

n.a. n.a. n.a. 1.2 1.1 0.9 2.9 3.8 3.9 7.3 9.3 9.4 14.3 8.4 (20.8) 42,447

11.5 12.1 12.3 1.0 1.1 1.1 5.8 5.9 6.0 6.3 6.2 6.4 (0.7) 6.6 0.7 2,852

4.0 2.5 4.2 0.6 0.5 0.5 3.5 5.2 5.5 11.7 11.3 11.0 (0.6) (7.2) (42.8) 988

17.4 13.7 15.0 74.7 74.7 74.7 4.4 4.6 4.6 290.1 343.8 346.0 (0.4) (5.8) (20.7) 38,797

3.6 5.1 5.2 1.1 1.0 0.9 4.7 4.7 4.9 24.8 16.2 15.2 (1.8) 4.1 (2.1) 592

n.a. n.a. n.a. 1.4 1.3 1.3 3.0 2.5 3.0 14.3 9.9 10.1 (5.0) (12.2) (29.1) 5,509

11.0 5.3 4.8 1.1 1.0 1.0 3.7 4.5 4.7 12.4 11.3 11.2 0.0 (7.8) (16.7) 231

52.0 434.6 59.1 1.9 1.8 1.7 2.4 2.4 2.4 11.6 9.2 10.0 10.0 6.5 (6.1) 11,861

87.5 49.7 51.0 13.2 5.6 5.1 0.7 0.5 0.7 24.0 14.1 12.4 (4.8) (7.6) (3.7) 2,151

7.4 5.6 5.7 1.1 1.1 1.0 0.4 0.6 0.6 6.5 6.2 6.6 26.0 37.7 13.8 37,044

45.9 11.2 10.3 1.4 1.3 1.2 1.6 1.4 1.5 6.3 7.6 7.9 6.0 1.4 6.2 26,424

15.8 16.4 11.8 2.4 2.2 1.9 0.0 0.0 0.0 4.5 9.0 11.3 0.6 (2.2) (10.3) 561

4.2 3.7 4.7 0.6 0.6 0.6 5.4 5.5 5.8 8.0 6.9 7.2 (2.4) (5.7) (16.2) 604

11.6 15.9 13.4 3.7 4.3 4.0 1.7 1.8 2.8 19.9 22.6 25.5 (6.6) (23.3) 8.3 7,466

24.5 23.9 23.8 1.0 1.0 1.0 7.0 7.0 7.0 7.3 7.4 7.5 (1.3) (1.3) 0.0 605


4 April 2016

94

^ FY15, 16 & 17 valuations refer to those of FY16,

^ FY15, 16 & 17 valuations refer to those of FY16, 17 &


FYE Price Target

Core EPS

(sen)

EPS Growth

(%)

P/E

(x)

EV/EBITDA

(x)


NEUTRAL

Hovid Jun 0.45 0.45 2.8 3.0 3.8 (11.9) 9.4 24.8 16.4 15.0 12.0 8.5 7.4 5.5

Hua Yang^ Mar 1.89 1.98 42.9 41.9 43.9 2.5 (2.4) 4.8 4.4 4.5 4.3 4.3 4.5 4.4

IGB REIT Dec 1.51 1.50 7.4 8.2 8.7 9.0 10.5 6.1 20.3 18.4 17.3 19.9 18.3 17.4

IHH Healthcare Dec 6.56 6.60 11.1 12.8 16.1 24.3 16.1 25.6 59.4 51.1 40.7 26.7 22.9 19.7

IOI Corp Jun 4.81 4.65 16.2 17.7 21.8 (29.1) 9.3 23.6 29.8 27.2 22.0 20.8 18.5 15.9

Jaya Tiasa Jun 1.48 1.59 4.8 9.3 11.1 (37.2) 92.5 19.3 30.7 16.0 13.4 11.7 9.3 8.3

KLCCSG Dec 7.17 6.85 35.5 36.1 37.2 0.4 1.5 3.2 20.2 19.9 19.3 14.5 13.6 12.8

Magnum Dec 2.48 2.56 16.6 18.0 18.3 (10.5) 8.9 1.3 15.0 13.7 13.6 10.7 10.4 10.3

Mah Sing Dec 1.44 1.36 14.8 14.3 13.5 (35.5) (3.8) (5.2) 9.7 10.1 10.6 6.5 7.0 7.3

Maybank Dec 8.95 7.80 72.0 67.6 69.8 (2.9) (6.2) 3.4 12.4 13.2 12.8 n.a. n.a. n.a.

MBM Resourcs Dec 2.20 2.25 19.1 20.0 21.8 (33.6) 4.8 9.2 11.5 11.0 10.1 6.0 20.0 17.7

Media Prima Dec 1.50 1.32 12.6 13.2 13.4 80.9 4.7 1.5 11.9 11.4 11.2 3.1 3.1 2.9

MMHE Dec 1.06 0.90 9.1 2.5 2.9 12.2 (73.0) 19.2 11.6 43.1 36.2 4.0 8.4 7.0

MSM Malaysia Dec 4.69 5.09 40.7 36.3 38.4 9.3 (10.8) 5.7 11.5 12.9 12.2 8.6 7.0 6.6

Nestle Dec 75.48 72.90 252.1 269.5 274.0 7.4 6.9 1.7 29.9 28.0 27.5 21.1 19.2 18.7

NTPM^ Apr 1.07 0.98 5.5 6.4 7.2 44.7 16.7 11.6 19.5 16.7 15.0 10.7 9.5 8.6

OldTown^ Mar 1.49 1.45 11.1 11.1 12.4 5.3 11.7 7.5 13.4 12.0 11.2 5.6 4.8 4.4

Petronas Gas^ Dec 21.88 22.55 88.3 94.4 97.6 0.4 6.9 3.5 24.8 23.2 22.4 15.4 14.8 13.5

Padini Jun 2.06 2.22 7.7 17.3 19.2 (26.7) +>100 11.0 26.8 11.9 10.7 9.9 6.2 5.5

Perisai Petroleum Dec 0.26 0.30 6.7 2.2 3.6 100 (67.0) 62.5 3.8 11.5 7.1 -3.1 16.3 13.5

Petronas Chemicals Dec 6.71 7.19 34.8 42.2 43.8 (0.2) 21.3 3.8 19.3 15.9 15.3 8.9 7.3 6.7

POS Malaysia^ Mar 2.67 2.30 14.2 15.2 16.1 (42.5) 6.9 6.0 18.8 17.6 16.6 5.0 4.4 3.9

Prestariang Dec 2.67 2.70 3.5 10.6 13.5 (15.9) +>100 27.1 75.9 25.2 19.8 46.8 21.4 16.7

Public Bank Dec 18.80 19.40 131.4 133.9 142.4 6.9 1.9 6.4 14.3 14.0 13.2 n.a. n.a. n.a.

QL Resources^ Mar 4.33 4.21 16.4 18.8 20.8 12.1 14.8 10.5 26.4 23.0 20.8 15.5 13.8 12.4

Sime Darby Jun 7.99 7.70 30.9 30.8 52.2 (38.3) (0.3) 69.7 25.9 26.0 15.3 22.4 22.0 16.7

SKP Resources^ Mar 1.27 1.42 6.7 12.3 14.3 41.5 84.9 15.8 19.1 10.3 8.9 12.2 7.0 5.7

SP Setia Dec 3.16 3.10 30.3 25.6 31.5 75.2 (15.6) 23.1 10.4 12.3 10.0 6.6 8.2 7.7

Sunway REIT Jun 1.53 1.61 8.2 9.0 9.5 1.1 9.5 5.2 18.6 17.0 16.2 21.3 19.2 18.3

Syarikat Takaful Dec 4.04 3.80 19.3 20.5 22.4 11.8 6.3 9.4 21.0 19.7 18.0 18.1 16.9 15.3

Tan Chong Dec 2.38 2.40 7.0 1.2 8.4 (29.0) (83.3) +>100 34.1 +>100 28.5 10.5 14.1 10.6

Ta Ann Dec 5.10 5.93 42.2 58.6 54.1 48.2 38.9 (7.7) 12.1 8.7 9.4 6.2 5.0 5.0

TASCO Dec 1.57 1.55 13.9 14.7 15.6 (8.6) 6.0 6.1 11.3 10.7 10.1 5.1 4.8 4.5

Thong Guan Dec 3.11 2.94 36.9 27.9 24.4 +>100 (24.4) (12.5) 8.4 11.1 12.7 4.3 5.1 4.7

TM Dec 6.57 6.40 24.5 20.6 23.8 (13.3) (15.9) 15.5 26.8 31.8 27.6 7.7 7.9 7.2

Top Glove Aug 4.91 5.63 45.1 44.3 34.9 54.9 (1.7) (21.2) 10.9 11.1 14.1 8.1 8.1 10.0

UEM Edgenta Dec 3.60 3.45 29.1 26.9 30.2 41.8 (7.4) 12.1 12.4 13.4 11.9 7.0 7.7 6.9

UEM Sunrise Dec 1.11 0.95 5.7 4.8 5.3 (47.8) (15.3) 11.2 19.6 23.2 20.8 22.8 29.4 27.6

WTK Holdings Dec 1.31 1.47 13.3 16.4 13.8 53.2 23.7 (15.9) 9.9 8.0 9.5 5.7 4.3 4.6

YTL Power Jun 1.48 1.55 11.7 9.7 11.4 (33.9) (17.0) 16.9 12.6 15.2 13.0 8.0 9.1 8.5



4 April 2016

95


P/CF

(x)

P/BV

(x)

DIV YIELD

(%)

ROE

(%)

% Chg in price Mkt

Cap


NEUTRAL

158.5 15.0 11.5 1.9 1.4 1.2 0.0 0.0 0.0 12.3 10.9 10.8 (2.2) (3.2) 4.3 350

3.8 4.0 3.9 0.9 0.8 0.7 7.1 6.9 7.2 22.6 19.1 17.6 3.3 1.6 (8.3) 499

16.0 14.8 14.1 1.4 1.4 1.4 5.8 6.2 6.5 6.9 7.7 8.2 2.7 16.2 13.5 5,170

33.0 21.7 18.4 2.4 2.3 2.2 0.5 0.5 0.6 4.3 4.6 5.6 0.5 2.5 11.0 53,651

18.6 61.7 20.1 6.0 5.6 5.0 1.8 2.0 2.5 18.5 21.4 23.9 1.5 11.9 4.3 31,069

13.0 8.7 7.6 0.8 0.8 0.7 0.5 1.3 1.5 2.7 5.0 5.7 (1.3) 12.1 (13.5) 1,441

12.9 14.9 7.3 1.1 1.1 1.1 4.8 4.9 5.1 5.3 5.4 5.6 0.4 0.3 2.4 12,944

16.8 12.7 13.2 1.5 1.4 1.4 6.5 6.5 6.6 9.7 10.5 10.6 (2.4) (1.6) (7.8) 3,566

(52.5) 8.7 9.3 1.1 1.1 1.1 4.5 4.5 4.5 13.2 11.2 10.2 11.6 2.1 (12.2) 3,640

n.a. n.a. n.a. 1.4 1.3 1.3 6.0 5.4 5.4 11.9 10.5 10.4 3.7 7.8 (2.2) 88,857

n.m 8.4 22.8 0.5 0.5 0.5 3.2 3.2 3.6 4.8 4.8 5.1 (9.5) (8.7) (31.8) 860

11.1 10.0 10.0 1.0 1.0 1.0 6.7 5.3 5.4 8.6 8.9 8.7 7.1 16.3 (12.3) 1,664

2.8 70.9 14.1 0.6 0.6 0.6 0.0 0.0 0.0 5.5 1.5 1.7 2.9 6.0 (8.6) 1,696

(40.2) 14.7 11.4 1.6 1.5 1.5 5.2 5.0 5.3 14.3 12.2 12.3 (0.2) 0.9 (8.2) 3,297

23.6 22.3 18.8 25.0 24.8 24.5 3.4 3.5 3.6 79.6 88.8 89.5 1.1 3.4 2.7 17,700

1.0 1.2 1.0 3.1 2.9 2.6 2.8 3.3 3.7 16.5 17.8 18.3 11.5 26.6 45.6 1,202

1.9 1.9 1.7 1.8 1.7 1.6 4.1 4.6 0.0 13.9 13.7 14.5 (3.2) (8.0) (15.3) 664

15.2 16.9 16.5 3.8 3.6 3.5 2.7 3.1 3.2 15.9 15.9 15.8 (2.3) 0.4 (5.0) 43,295

1.8 1.8 1.8 3.3 3.1 2.9 4.9 6.3 7.0 12.8 27.1 28.1 (2.8) 5.6 45.1 1,355

-0.5 4.2 4.2 0.4 0.4 0.4 0.0 0.0 0.0 8.7 3.8 5.9 (8.9) (7.3) (51.9) 304

17.8 14.3 13.8 2.2 2.0 1.9 2.6 3.1 3.3 11.7 13.2 12.8 (4.8) (6.7) 20.9 53,680

10.8 8.4 7.2 1.3 1.3 1.2 2.3 2.5 2.7 6.7 6.8 7.3 21.4 (8.9) (47.6) 1,434

118.0 28.9 21.4 7.6 6.9 5.9 1.4 2.6 2.6 10.1 28.9 32.3 (6.3) (7.9) 16.6 1,292

n.a. n.a. n.a. 2.3 2.1 1.9 3.0 3.1 3.3 17.1 15.8 15.3 2.5 2.3 2.1 72,424

1.3 1.3 1.2 3.4 3.1 2.7 1.1 1.2 0.0 13.6 14.1 13.8 (3.6) 1.9 12.5 5,404

16.2 7.2 12.8 1.6 1.6 1.6 3.1 2.5 4.3 6.4 6.2 10.3 4.6 6.0 (14.1) 49,627

-2.5 0.6 0.6 7.4 5.4 4.2 2.6 4.8 5.6 45.4 60.8 53.0 (2.3) (5.9) 66.0 1,591

8.0 4.0 7.2 1.1 1.1 1.1 6.2 6.3 7.0 11.7 9.3 11.6 9.3 (1.6) (9.7) 8,566

16.1 14.4 13.5 1.1 1.1 1.1 5.7 6.2 6.5 6.3 6.6 7.0 (2.5) 6.2 (1.9) 4,481

n.a. n.a. n.a. 5.3 5.0 4.6 3.6 3.8 4.2 26.1 26.0 26.6 4.9 4.4 61.6 3,293

(7.5) 4.2 16.3 0.6 0.6 0.6 1.7 1.7 1.7 1.6 0.3 2.0 0.0 (6.3) (20.9) 1,555

7.5 8.4 6.8 1.6 1.4 1.3 3.9 3.7 3.5 14.0 17.3 14.4 (7.8) 1.2 30.8 1,890

6.3 6.2 5.8 1.0 0.9 0.9 2.6 2.8 3.0 9.0 8.9 8.9 3.3 (10.3) (10.8) 314

3.8 3.6 4.9 3.1 3.1 3.1 4.2 4.5 2.5 10.6 11.6 8.8 4.7 6.1 53.2 573

8.1 9.5 7.0 3.1 3.5 3.4 3.3 3.0 3.3 11.7 10.3 12.4 (0.8) (2.1) (8.1) 23,970

8.6 7.6 10.7 1.9 2.6 3.3 4.1 3.4 3.6 18.6 24.5 23.9 (15.5) (27.8) 80.9 4,604

-32.4 9.7 11.4 2.2 2.2 2.4 5.6 5.2 5.9 18.9 16.4 19.3 7.1 8.1 6.5 2,929

7.2 10.9 (53.0) 0.7 0.8 0.8 2.7 1.4 2.0 3.9 3.3 3.8 8.8 (0.9) (17.8) 5,336

8.7 12.5 6.5 0.5 0.4 0.4 1.9 2.4 2.0 4.7 5.6 4.5 (8.4) (0.8) 11.0 631

3.7 4.2 4.1 0.9 0.9 0.8 6.5 0.5 0.6 7.8 6.1 6.7 1.4 0.0 0.7 10,980


4 April 2016

96



FYE Price Target

Core EPS

(sen)

EPS Growth

(%)

P/E

(x)

EV/EBITDA

(x)


SELL

AMMB^ Mar 4.58 3.60 43.6 42.6 42.8 (31.7) (2.2) 0.5 10.5 10.7 10.7 n.a. n.a. n.a.

AEON Dec 2.65 2.20 9.4 10.4 12.1 (37.8) 10.8 16.4 28.3 25.5 21.9 10.0 8.9 8.1

Affin Dec 2.31 1.80 19.0 24.2 26.3 (44.9) 27.6 8.6 12.2 9.5 8.8 n.a. n.a. n.a.

APM Automotive Dec 3.90 3.33 30.9 29.9 33.3 (38.5) (3.3) 11.4 12.6 13.1 11.7 4.1 3.4 2.9

CARiNG Pharmacy^ May 1.88 1.35 6.2 6.4 7.0 5.0 3.3 9.2 30.3 29.3 26.8 14.5 14.2 13.3

Daibochi Dec 2.17 1.65 9.2 11.0 11.6 5.5 19.9 5.8 23.7 19.8 18.7 12.7 12.3 11.6

HL Bank Jun 13.34 11.00 122.5 93.3 103.4 6.2 (23.9) 10.8 10.9 14.3 12.9 n.a. n.a. n.a.

Lafarge Malaysia Dec 8.94 7.41 29.0 34.3 36.7 (4.8) 18.1 7.2 30.8 26.1 24.3 15.0 13.5 12.7

Maxis Dec 6.33 4.70 24.7 24.4 22.9 (2.3) (1.4) (6.1) 25.6 25.9 27.6 12.5 14.4 14.8

UMW Holdings Dec 7.00 5.00 12.6 35.1 41.2 (81.7) +>100 17.3 55.7 19.9 17.0 20.2 10.6 9.8



4 April 2016

97



P/CF

(x)

P/BV

(x)

DIV YIELD

(%)

ROE

(%)

% Chg in price Mkt

Cap

15 16F 17F 15 16F 17F 15 16F 17F 15 16F 17F 1 Mth 3 Mth 12 Mth (MYRm)

SELL

n.a. n.a. n.a. 0.9 0.9 0.8 3.9 3.7 3.8 8.9 8.3 7.9 1.1 5.3 (27.9) 13,767

0.7 0.6 0.5 2.0 1.9 1.8 1.7 1.6 1.8 7.3 7.7 8.5 2.7 (1.9) (13.4) 3,721

n.a. n.a. n.a. 0.5 0.5 0.5 3.5 4.5 4.8 4.6 5.6 5.9 6.0 3.1 (20.6) 4,488

4.3 3.7 6.1 0.6 0.6 0.6 5.0 4.5 4.5 5.2 4.9 5.3 0.0 0.5 (15.2) 763

25.8 54.2 32.7 3.1 2.9 2.8 0.0 1.7 1.9 10.7 9.9 10.8 (5.1) (6.0) 55.4 409

3.5 6.9 5.6 3.3 3.1 2.9 2.7 3.0 3.2 14.3 16.1 16.1 (0.5) 1.1 17.0 593

n.a. 0.0 1137.4 1.4 1.3 1.3 3.0 2.5 3.0 14.3 9.9 10.1 1.7 0.8 (2.7) 26,999

21.6 26.1 24.3 2.5 2.4 2.4 3.5 3.5 3.7 7.9 9.4 10.0 (2.6) 1.5 (10.6) 7,596

11.7 13.2 14.1 11.3 11.0 11.6 3.2 3.5 3.7 41.7 43.1 40.9 0.5 (6.2) (11.8) 47,539

13.8 12.3 9.4 1.3 1.3 1.4 2.9 3.5 4.1 2.3 6.5 7.9 1.4 (8.6) (36.2) 8,178

^ FY15, 16 & 17 valuations refer to those of FY16, 17 & 18


4 April 2016

98

RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

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Indonesia

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not be construed as an offer of securities in Indonesia. Any securities offered or sold, directly or indirectly, in Indonesia or to any Indonesian citizen or

corporation (wherever located) or to any Indonesian resident in a manner which constitutes a public offering under Indonesian laws and regulations must

comply with the prevailing Indonesian laws and regulations.

Singapore

This report is issued and distributed in Singapore by RHB Research Institute Singapore Pte Ltd and it may only be distributed in Singapore to accredited

investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as

amended from time to time. By virtue of distribution to these categories of investors, RHB Research Institute Singapore Pte Ltd and its representatives are

not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of RHB Research Institute Singapore

Pte Ltd ’s interest and/or its representative's interest in securities). Recipients of this report in Singapore may contact RHB Research Institute Singapore

Pte Ltd in respect of any matter arising from or in connection with the report.

Hong Kong

This report is issued and distributed in Hong Kong by RHB Securities Hong Kong Limited (興業僑豐證券有限公司) (CE No.: ADU220) (“RHBSHK”) which is

licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities.

Any investors wishing to purchase or otherwise deal in the securities covered in this report should contact RHB Securities Hong Kong Limited.

United States

This report was prepared by RHB and is being distributed solely and directly to “major” U.S. institutional investors as defined under, and pursuant to, the

requirements of Rule 15a-6 under the U.S. Securities and Exchange Act of 1934, as amended (the “Exchange Act”). RHB is not registered as a broker-

dealer in the United States and does not offer brokerage services to U.S. persons. Any order for the purchase or sale of the securities discussed herein

that are listed on Bursa Malaysia Securities Berhad must be placed with and through Auerbach Grayson (“AG”). Any order for the purchase or sale of all

other securities discussed herein must be placed with and through such other registered U.S. broker-dealer as appointed by RHB from time to time as

required by the Exchange Act Rule 15a-6.

This report is confidential and not intended for distribution to, or use by, persons other than the recipient and its employees, agents and advisors, as

applicable.

Additionally, where research is distributed via Electronic Service Provider, the analysts whose names appear in this report are not registered or qualified

as research analysts in the United States and are not associated persons of Auerbach Grayson AG or such other registered U.S. broker-dealer as

appointed by RHB from time to time and therefore may not be subject to any applicable restrictions under Financial Industry Regulatory Authority

(“FINRA”) rules on communications with a subject company, public appearances and personal trading.

Investing in any non-U.S. securities or related financial instruments discussed in this research report may present certain risks. The securities of non-U.S.

issuers may not be registered with, or be subject to the regulations of, the U.S. Securities and Exchange Commission. Information on non-U.S. securities

or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements

comparable to those in the United States.

The financial instruments discussed in this report may not be suitable for all investors.

Transactions in foreign markets may be subject to regulations that differ from or offer less protection than those in the United States.

OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST

Malaysia

RHB does not have qualified shareholding (1% or more) in the subject company (ies) covered in this report except for:

a) -

RHB and/or its subsidiaries are not liquidity providers or market makers for the subject company (ies) covered in this report except for:

a) -

RHB and/or its subsidiaries have not participated as a syndicate member in share offerings and/or bond issues in securities covered in this report in the

last 12 months except for:

a) -

RHB has not provided investment banking services to the company/companies covered in this report in the last 12 months except for:

a) -


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101

Thailand

RHB Securities (Thailand) PCL and/or its directors, officers, associates, connected parties and/or employees, may have, or have had, interests and/or

commitments in the securities in subject company(ies) mentioned in this report or any securities related thereto. Further, RHB Securities (Thailand) PCL

may have, or have had, business relationships with the subject company(ies) mentioned in this report. As a result, investors should exercise their own

judgment carefully before making any investment decisions.

Indonesia

PT RHB Securities Indonesia is not affiliated with the subject company(ies) covered in this report both directly or indirectly as per the definitions of

affiliation above.

Pursuant to the Capital Market Law (Law Number 8 Year 1995) and the supporting regulations thereof, what constitutes as affiliated parties are as follows:

1. Familial relationship due to marriage or blood up to the second degree, both horizontally or vertically;

2. Affiliation between parties to the employees, Directors or Commissioners of the parties concerned;

3. Affiliation between 2 companies whereby one or more member of the Board of Directors or the Commissioners are the same;

4. Affiliation between the Company and the parties, both directly or indirectly, controlling or being controlled by the Company;

5. Affiliation between 2 companies which are controlled, directly or indirectly, by the same party; or

6. Affiliation between the Company and the main Shareholders.

PT RHB Securities Indonesia is not an insider as defined in the Capital Market Law and the information contained in this report is not considered as insider

information prohibited by law.

Insider means:

a. a commissioner, director or employee of an Issuer or Public Company;

b. a substantial shareholder of an Issuer or Public Company;

c. an individual, who because of his position or profession, or because of a business relationship with an Issuer or Public Company, has access to

inside information; and

d. an individual who within the last six months was a Person defined in letters a, b or c, above.

Singapore

RHB Research Institute Singapore Pte Ltd and/or its subsidiaries and/or associated companies do not make a market in any securities covered in this

report, except for:

(a) -

The staff of RHB Research Institute Singapore Pte Ltd and its subsidiaries and/or its associated companies do not serve on any board or trustee positions

of any issuer whose securities are covered in this report, except for:

(a) -

RHB Research Institute Singapore Pte Ltd and/or its subsidiaries and/or its associated companies do not have and have not within the last 12 months had

any corporate finance advisory relationship with the issuer of the securities covered in this report or any other relationship (including a shareholding of 1%

or more in the securities covered in this report) that may create a potential conflict of interest, except for:

(a) -

Hong Kong

RHBSHK or any of its group companies may have financial interests in in relation to an issuer or a new listing applicant (as the case may be) the securities

in respect of which are reviewed in the report, and such interests aggregate to an amount equal to or more than (a) 1% of the subject company’s market

capitalization (in the case of an issuer as defined under paragraph 16 of the Code of Conduct for Persons Licensed by or Registered with the Securities

and Futures Commission (the “Code of Conduct”); and/or (b) an amount equal to or more than 1% of the subject company’s issued share capital, or issued

units, as applicable (in the case of a new listing applicant as defined in the Code of Conduct). Further, the analysts named in this report or their associates

may have financial interests in relation to an issuer or a new listing applicant (as the case may be) in the securities which are reviewed in the report.


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102

Kuala Lumpur Hong Kong Singapore

RHB Research Institute Sdn Bhd Level 11, Tower One, RHB Centre

Jalan Tun Razak Kuala Lumpur

Malaysia Tel : +(60) 3 9280 2185 Fax : +(60) 3 9284 8693

RHB Securities Hong Kong Ltd.

12th Floor World-Wide House 19 Des Voeux Road Central, Hong Kong

Tel : +(852) 2525 1118 Fax : +(852) 2810 0908

RHB Research Institute Singapore

Pte Ltd. 10 Collyer Quay

#09-08 Ocean Financial Centre Singapore 049315

Tel : +(65) 6533 1818 Fax : +(65) 6532 6211

Jakarta Shanghai Bangkok

PT RHB Securities Indonesia

Wisma Mulia, 20th Floor Jl. Jenderal Gatot Subroto No. 42

Jakarta 12710, Indonesia Tel : +(6221) 2783 0888 Fax : +(6221) 2783 0777

RHB (China) Investment Advisory Co. Ltd.

Suite 4005, CITIC Square 1168 Nanjing West Road

Shanghai 20041 China

Tel : +(8621) 6288 9611 Fax : +(8621) 6288 9633

RHB Securities (Thailand) PCL

10th Floor, Sathorn Square Office Tower 98, North Sathorn Road, Silom

Bangrak, Bangkok 10500 Thailand

Tel: +(66) 2 862 9999 Fax : +(66) 2 862 9799

RHBSHK or any of its group companies may make a market in the securities covered by this report.

RHBSHK or any of its group companies may have analysts or their associates, individual(s) employed by or associated with RHBSHK or any of its group

companies serving as an officer of the company or any of the companies covered by this report.

RHBSHK or any of its group companies may have received compensation or a mandate for investment banking services to the company or any of the

companies covered by this report within the past 12 months.

Note: The reference to “group companies” above refers to a group company of RHBSHK that carries on a business in Hong Kong in (a) investment

banking; (b) proprietary trading or market making; or (c) agency broking, in relation to securities listed or traded on The Stock Exchange of Hong Kong

Limited.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever

for the actions of third parties in this respect.

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Lim Chee Sing Director