Volatility As Economic Worries Persist - rhbinvest.com file3 Reinvigorating private investment and intensifying human capital development. Balancing fiscal consolidation with growth

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Volatility As Economic Worries Persist

30-OCTOBER 2010 Le-Meridien Kota Kinabalu

RHB Research Institute

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Market Outlook: Volatility As Economic Worries Persist

RHB Research Institute30th October 2010

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Strong 3Q performance on the back of rising inflows of foreign portfolio funds into emerging markets, and partly on account of a strengthening ringgit.

Interesting times given G3 quantitative easing, currency war and influx of hot money into the emerging markets.

May not be sustainable and we believe that the market may move into a phase of greater volatility in the months ahead.

Market outlook for 4Q2010

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Reinvigorating private investment and intensifying human capital development.

Balancing fiscal consolidation with growth.

No substantial new information that will excite equity investors in the immediate term.

Consequently, our views on the market outlook, earnings and sector calls remain relatively unchanged.

Focused attention primarily on private sector projects that are already in the news.

Major positive: timelines for the major projects have been set and are mostly expected to begin in 2011.

The 2011 Budget: Setting the pace towards transformation

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RM 40bn MRT project.

RM26bn KL International Financial District.

RM10bn redevelopment of the Rubber Research Board land in Sungai Buloh.

Six toll roads, including the West Coast Expressway.

New Inclusions

The “revived” RM5bn warisan Merdeka integrated development comprising a 100-storey tower led by PNB.

The “River of Life”, ie. The clean-up / beautification of the Klang Valley (RM1.9bn allocation under environment preservation).

The Academic Centre, i.e. a JV between Academic Medical College, Johns Hopkins Medicine International and Royal College of Surgeons, Ireland (to bring in RM2bn private investment).

Key projects to kick-start in 2011

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Key projects to be implemented

Funded By Development ExpenditureRural infrastructure 6,900• Rural water & electricity in Sabah & Sarawak 2,700• Rural roads in Sabah & Sarawak 2,100 East Malaysia-based contractors• Rural roads in Peninsular Malaysia 696• Rural water & electricity in Peninsular Malaysia 556• Housing for rural hardcore poor 300Building/upgrading of schools, hostels, facilities & equipment 6,400 Mid-sized contractorsEnvironmental preservation projects 1,900• “River of Life” and greening of KL na YTL• Preservation of marine sources and coastal areas in Melaka,

Kelantan, Terengganu & Pahang na Emas Kiara, MRCBCorridor & regional development 850• Iskandar Malaysia 339• East Coast Economic Region (ECER) 178• Northern Corridor Economic Region (NCER) 133• Sabah Development Corridor 110• Sarawak Corridor of Renewable Energy (SCORE) 93Public housing 568Aquaculture zones in Sabah & Sarawak 252 East Malaysia-based contractorsDrainage & irrigation in Muda Agriculture Development Area, Kedah 235Basic infrastructure for swiftlet nets, aquaculture, seaweeds,

ornamental fish and herbs & spices ventures 135Integrated eco-nature resort in Nexus Karambunai, Sabah 100 KarambunaiHotels & resorts in remote areas 85Diagnostic lab at Agriculture College in Kubang Pasu, Kedah 70Shaded walkways in KLCC-Bukit Bintang area 50

Project Value Potential beneficiaries(RMm)

(cont’d…)

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Key projects to be implemented

Via Public-Private Partnership (PPP)/Private InvestmentMRT in Greater KL 40,000 Gamuda, MMCKuala Lumpur International Financial District (KLIFD) 26,000 1MDB (Awarded),

Mudabala (Awarded)Development of Malaysia Rubber Board land in Sg Buloh 10,000 EPF (Awarded), MRCBWarisan Merdeka integrated development with a 100-storey tower 5,000 PNB (Awarded)Academic Medical Centre 2,000Ampang-Cheras-Pandan Elevated Highway naGuthrie-Damansara Expressway naDamansara-Petaling Jaya Highway naPantai Barat-Banting-Taiping Highway (West Coast Expressway) na Kumpulan Europlus, IJMSungai Dua-Juru Highway naParoi-Senawang-KLIA Highway na300MW combined-cycle gas power plant in Kimanis, Sabah na Zelan, MudajayaInternational Islamic University Malaysia Teaching Hospital in Kuantan, Pahang na Ahmad Zaki (Awarded)Women and Children’s Hospital in KL na RanhillIntegrated Health Research Institute Complex in KL na

Project Value Potential beneficiaries(RMm)

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The detailed ETP blueprint

Driven by the 12 National Key Economic Areas (NKEAs) and supported by the 8 strategic reform initiatives (SRIs).

Identified 131 Entry Point Projects (EPPs) and 60 Business Opportunities (BOs).

Total investment of about US$444bn (RM1.3trn) required over the next 10 years, of which 92% is expected to be funded by the private sector (73% from domestic, of which 68% from non-GLCs).

Major projects include:

i). The RM40bn MRT project;

ii). The high-speed rail from KL to Singapore and Penang;

iii). The clean-up/beautification of the Klang River;

iv). Creation of a regional oil storage and trading hub by 2017; and

v). making Malaysia a preferred Asian hub for oil field services by 2015.

(cont’d…)

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The success of the ETP could depend on the effective implementation of certain NKEAs.

In our view, the Greater KL NKEA holds great potential as enabler for the construction and housing sectors, but it is also cross-linked to other NKEAs such as financial services, tourism, and education.

Conceptually the plan is sound, and is ready to go in our view, but execution risk from political and social perspective is relatively high.

Securing the buy-in from private sector is key.

Overall, the ETP will likely continue to provide news flow for the market and certain key sectors.

The detailed ETP blueprint

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9 key private sector-led projects

Value (RMm)

1. LFoundry relocation of wafer fab to Malaysia 1,900

2. Mydin – 14 new branches and assist in upgradingsmall sundry shops 1,000

3. St. Regis in KL Sentral (hotel) 1,200

4. Schlumberger – Eastern Hemisphere Global FinancialServices Hub and Shared Services in Bandar Utama 300

5. Malaysia Airports – 25 years concession for WCT tobuild the integrated complex for the new LCCT (KLIA2) 486

6. 1MDB and Mudabala – KL International Financial District 26,000

7. Premium Renewable Energy – Bioplant in Lahad Datu 124

8. Asia e-University – gateway university for internationaleducation for distance and online learning 100

9. Genting Plantation Johor Premium Outlet 150

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Other near-term catalysts for the market

Sarawak state elections (due by May 2011) could be another emerging domestic theme.

Could gradually attract more focus into Sarawak-based companies and keep Sarawak-related stocks relatively buoyant.

More FDI flows from Singapore to Iskandar Corridor following the recent land swap deal agreement.

Spur property and land values.

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Near-term risks

Mainly external.

Reversal of short-term capital.

Revival of a “double-dip” recession fear for the global economy.

Domestically, potential credit tightening by Central Bank on mortgages and credit card spending.

Reducing loan-to-value for mortgages (from 90% to 70% for third and subsequent purchases of high-end residential properties).

Stricter credit-card and personal loan limits to keep household debt in check (rose from 63.9% of GDP in 2008 to 76.6% of GDP in 2009).

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Investors’ focus likely turning to 2011

We believe there is still room for the market to trend higher in 2011.

Primarily on the view that global economic recovery is more sustainable than feared.

Sustained corporate earnings growth (+13.0% projected for 2011) will continue to create new shareholders’ value for investors.

Our end-2011 FBM KLCI target remains unchanged at 1,640 based on 15x mid-cycle 2012 earnings.

This, however, will not be without volatility as the global economy enters into a period of slowing growth in an uneven phase of recovery.

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Uncertainty persists in the global economy

Whilst industrial production and services activities have recovered globally from low levels in 2009, the pace of recovery is losing momentum.

Global manufacturing & services activities heading south

Index

PMI manufacturing

Source: Institute for supply management (ISM), RHBRI.

PMI services

30

35

40

45

50

55

60

65

05 06 07 08 09 10

Industrial production in major economies turning down

% yoy

Source: Bloomberg, RHBRI

-50

-40

-30

-20

-10

0

10

20

30

40

05 06 07 08 09 10

US Eurozone

Japan China

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US growth is losing momentum

Source: Bloomberg, RHBRISource: Bloomberg, RHBRI

US economic growth decelerating Still weak labour market conditions

(000)% yoy

-8

-6

-4

-2

0

2

4

6

8

10

05 06 07 08 09 10

GDP Exports

consumer spending

% of labour force

-1000

-800

-600

-400

-200

0

200

400

600

00 01 02 03 04 05 06 07 08 09 100

2

4

6

8

10

12

Non-farm payrolls (LHS)

Unemployment rate (RHS)

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Japan is export-dependent, tightening measures in the highly-indebted European countries are beginning to be felt

Source: Various news reportsSource: Bloomberg, RHBRI

Japan’s economic recovery has stalled

% yoy / % annualised % yoy

Greece 13.6 8.1 <3.0

Portugal 9.4 7.3 4.61

Italy 5.3 3.9 2.72

Spain 11.2 7.3 3.0

Ireland 14.3 11.7 2.9

Germany 3.3 n.a 3.0

UK 11.5 12.6 4.71 for year 20112 for year 2012

Country 2009 2010 2014

Budget Deficit (% of GDP)

Fiscal Austerity In Europe

-20

-15

-10

-5

0

5

10

15

05 06 07 08 09 10-50

-40

-30

-20

-10

0

10

20

30

40

50

GDP annualised (LHS)

Household spending (LHS)

Exports (RHS)

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Unwelcome capital inflows, causing volatility to currencies and surging asset prices.

Fear of unsustainable asset bubble in China.

Many emerging / developing economies are facing with a different set of issues

Surging asset prices in some countries led to fears of asset bubbles

% yoy

Hong Kong

China

(Property prices)

Source: Bloomberg, RHBRI.

PMI(RHS)

Fixed-assetInvestment

(LHS) Loan growth(LHS)

China’s economic slowdown appears to have stabilised

% yoy Index


-20

-10

0

10

20

30

40

06 07 08 09 1010

15

20

25

30

35

40

06 07 08 09 100

10

20

30

40

50

60

70

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Normalisation of policies will continue in these countries, albeit at a slower pace.

Some emerging economies also face rising inflation

Rising inflation a concern in some countries


% yoy (CPI / WPI)

Vietnam

India

China

% p.a

Rising interest rates in some countries

Australia

India


-5

0

5

10

15

20

25

30

06 07 08 09 102

3

4

5

6

7

8

9

10

05 06 07 08 09 10

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Immediate key issues facing Asian countries

Currency battles across the globe.

Quantitative easing in G3 countries / currency intervention

G3 liquidity is flooding Asia’s equity, bond and currency markets to seek higher return.

Destabilising capital inflows a key risk to Asian growth.

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Global economic recovery is more sustainable than feared, in our view.

e estimatesf forecasts*Total OECD growth

Global Economy 3.0 -0.6 4.8 4.2 3.3 3.3 3.5 4.6 4.5 2.7* 2.8*

US 0.4 -2.4 2.6 2.3 3.3 2.9 3.0 3.2 3.2Euroland 0.6 -4.1 1.7 1.5 0.7 1.3 1.8 1.2 1.8UK 0.5 -4.9 1.7 2.0 0.5 2.0 n.a 1.3 2.5Japan -1.2 -5.2 2.8 1.5 2.5 2.1 2.2 3.0 2.0Canada 0.5 -2.5 3.1 2.7 1.5 2.5 n.a 3.6 3.2China 9.6 9.1 10.5 9.6 9.5 8.5 8.2 11.1 9.7India 6.4 5.7 9.7 8.4 8.2 8.7 8.2 8.3 8.5Asia ex-Japan 7.7 6.9 9.4 8.4 6.6 7.8 n.a n.a n.aMalaysia 4.7 -1.7 6.7 5.3 5.7 5.3 5.5 n.a n.a

Advance economies 0.5 -3.2 2.7 2.2 2.3 2.4 2.7 - -Emerging & developing 6.1 2.5 7.1 6.4 6.2 6.0 6.0 - -

economies

IMF World Bank OECD

2008 2009 2010f 2011f 2010f 2011f 2012f 2010f 2011f

A new global economic cycle

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“V-shape” export recovery set to normalise as low base effect fizzles out.

Speed bumps from Europe and China.

M’sia: slowing economic growth in the 2H

Exports and industrial production in M’sia showing signs of easing

% yoy

Source: Dept of statistics, RHBRI

% yoy

China

Europe

M’sia’s exports to China & Europe will likely slow down more significantly in 2H

Source: Dept of statistics, RHBRI

% yoy

Exports

IPI

-40

-30

-20

-10

0

10

20

30

40

50

06 07 08 09 10-60

-40

-20

0

20

40

60

80

100

120

140

160

06 07 08 09 10-40

-30

-20

-10

0

10

20

30

40

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Expect the Malaysian economic growth to slow down and normalise to 5.0% in 2011

f: forecasts

Agriculture 4.3 0.4 -0.4 5.9 6.8 2.0 0.4 3.3 3.5 3.4 4.5

Manufacturing 1.3 -14.5 -8.6 5.0 16.9 15.2 -9.4 12.3 8.0 10.8 6.7

Mining & quarrying -2.4 -3.5 -3.6 -2.8 2.1 2.5 -3.8 2.1 2.3 1.0 2.9

Construction 4.2 4.5 7.9 9.3 8.7 6.8 5.8 4.2 2.8 4.9 4.4

Services 7.4 1.7 3.4 5.2 8.5 6.5 2.6 6.3 4.6 6.5 5.3

GDP 4.7 -3.9 -1.2 4.4 10.1 8.9 -1.7 7.3 5.0 7.0 5.0-6.0

Consumption Public 10.7 1.5 9.4 0.7 6.3 6.9 3.1 -0.4 4.5 0.2 4.6Private 8.5 0.3 1.3 1.6 5.1 7.9 0.7 5.6 5.4 6.7 6.3

Fixed capital formation 0.7 -9.6 -7.9 8.2 5.4 12.9 -5.6 9.7 6.3 11.6 5.3Public 0.5 n.a n.a n.a n.a n.a 8.0 10.8 4.9 8.3 0.6Private 1.0 n.a n.a n.a n.a n.a -17.2 8.6 7.8 15.2 10.2

Agg. domestic demand 6.8 -2.2 0.1 2.8 5.3 9.0 -0.5 5.6 5.5 6.9 5.8

Exports of goods andnon-factor services 1.6 -17.9 -12.9 6.0 19.3 13.8 -10.4 11.7 7.6 11.6 6.7

Imports of goods and non-factor services 2.2 -19.4 -13.2 7.0 27.5 21.9 -12.3 16.5 8.4 16.6 7.2

GDP 4.7 -3.9 -1.2 4.4 10.1 8.9 -1.7 7.3 5.0 7.0 5.0-6.0

2008 2009 2010 2009 2010f 2011f 2010f 2011f

Q2 Q3 Q4 Q1 Q2

% Growth in Real Terms

Q2 Q3 Q4 Q1 Q2

% Growth in Real Terms

2008 2009 2010 2009 2010f 2011f 2010f 2011f

Source: Dept of Statistics, Ministry of Finance and RHBRI.

RHBRI MOF

RHBRI MOF

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Revenue 158.6 162.1 165.8 2.2 2.3Operating Expenditure 157.1 152.2 162.8 -3.1 7.0Current balance 1.6 10.0 3.0Gross development expenditure 49.5 54.0 49.2 9.1 -9.0

Less : Loan recoveries 0.5 0.7 0.7 41.0 -6.8Net development expenditure 49.0 53.3 48.5 8.8 -9.0Overall balance -47.4 -43.3 -45.5

% to GDP -7.0 -5.6 -5.4

Federal Government revenue and expenditure proposals

1 : Budget estimate, excluding 2011 tax measures.Source : Ministry of Finance Economic Report 2010/2011

2009 2010(e) 20111(f) 2010(e) 2011(f)(RM bn) (%, change)

Federal Government Financial Position

Less expansionary but still contributing to growth.

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Consolidated Public Sector* Finance

Revenue 134.0 132.8 138.6 4.4 -0.9 4.4Operating expenditure 170.3 168.0 176.8 3.2 -1.3 5.2NFPEs current surplus 101.2 94.2 93.2 -15.2 -6.9 -1.1Public sector current balance 64.9 59.0 55.0

% of GDP +9.6 +7.6 +6.6Development expenditure 111.3 119.1 118.5 -10.5 7.0 -0.5

General government 54.5 57.1 54.8 7.9 4.8 -4.1NFPEs 56.8 62.0 63.7 -23.1 9.2 2.8

Overall balance -46.4 -60.1 -63.5% of GDP -6.8 -7.8 -7.6

1 : Budget estimate, excluding 2011 tax measures.Source : Ministry of Finance Economic Report 2010/2011* Includes the state governments, statutory authorities, local governments and non-financial public enterprises (NFPEs)

2009 2010(e) 20111(f) 2009 2010(e) 2011(f)(RM bn) (%, change)

Also less expansionary than in 2010.

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Sustained earnings growth to underpin market performance

Fairly valued on 2010 earnings, but there is still potential for upside when investors look forward to 2011.

EBITDA Growth (%) -6.6 26.3 11.4 7.4 -2.0 23.5 11.3 7.4

Pre-Tax Earnings Growth (%) -10.0 38.4 18.0 9.0 -2.4 31.9 16.1 10.0

Normalised Earnings Growth (%)* -10.2 30.2 13.3 9.1 -6.3 28.7 14.0 10.0Normalised EPS Growth (%)* -14.9 24.1 13.0 9.1 -9.7 19.6 13.9 9.9Prospective PER (x)* 20.7 17.0 14.9 13.7 19.9 16.2 14.2 12.8Price/EBITDA (x) 11.2 8.8 7.9 7.4 8.6 8.4 7.5 7.0

Price/Bk (x) 2.6 2.4 2.3 2.1 2.0 2.2 2.0 1.9

Price/NTA (x) 3.3 2.8 2.6 2.4 2.3 2.5 1.3 1.3

Net Interest Cover (x) 7.6 8.0 9.7 10.8 7.1 7.8 9.3 10.4

Net Gearing (%) 48.8 46.2 44.8 40.9 47.6 46.2 41.9 37.6

EV/EBITDA (x) 8.6 7.0 6.1 5.6 8.3 6.9 6.1 5.5

ROE (%) 12.1 14.3 15.1 15.3 11.7 13.5 14.3 14.8

COMPOSITE INDEX @ 1,499.11 FBM KLCI RHBRI 27th October 2010 2009a 2010f 2011f 2012f 2009a 2010f 2011f 2012f

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Regional comparisons

Comparable valuations to Singapore and Indonesian markets

But still a very under-owned market by foreign investors

Has been listed as China QDII destination

Currently, some 41.8% (US$20bn) of the quota (US$47.8bn) remains to be invested

Also supported by a relatively firm to appreciating ringgit.

* as at 27th October 2010

FactSet Asian Consensus Trends report dated 29 September 2010

2009 Net EPS (%) 3.4 -3.6 29.8 31.0 6.6 8.5 26.6 40.32010 Net EPS (%) 27.3 11.4 13.8 18.1 37.1 29.2 75.8 67.02011 Net EPS (%) 12.8 10.8 21.2 8.0 15.7 12.4 11.9 7.6

2009 PER (x) 18.2 16.3 11.8 13.0 16.0 16.1 22.5 14.22010 PER (x) 15.7 15.5 14.4 15.0 16.7 13.9 13.9 9.52011 PER (x) 13.9 14.0 11.9 13.8 14.5 12.3 12.4 8.9

IBES Consensus dated 14 October 2010

2009 Net EPS (%) -22.8 -11.6 30.4 19.7 4.9 17.0 78.8 -24.32010 Net EPS (%) 29.2 21.6 17.8 32.1 29.1 23.9 98.1 213.12011 Net EPS (%) 15.8 11.7 17.6 10.7 22.6 8.5 12.2 10.2

2009 PER (x) 21.3 18.3 16.5 19.9 23.1 18.5 27.8 31.82010 PER (x) 15.7 14.7 14.1 15.2 17.7 14.9 13.8 10.12011 PER (x) 13.6 13.2 12.0 13.8 14.4 13.7 12.4 9.2

Performance* (%)2008 (YOY) -39.3 -49.2 -47.6 -48.3 -50.6 -48.3 -46.0 -40.72009 (YOY) +45.2 +64.5 +63.2 +63.0 +87.0 +52.0 +78.3 +49.72010 (YTD)* +17.6 +9.1 +35.6 +40.2 +44.2 +7.9 +1.9 +14.1

M'sia S'pore Thai’d P’pines Indon H.Kong Taiwan Korea

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In summary…

Expect the equity market to be volatile in the near term until a clearer picture emerges from the global economy.

The market correction, if any, however, is not likely to be sharp given ample liquidity and sustainable economic and earnings growth, albeit at more moderate pace moving forward.

However, the longer-term outlook remains positive and we expect the FBM KLCI to trade towards 1,640 at end-2011.

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Market strategy

Whilst we acknowledge that the longer-term economic picture remains positive for the equity market, the revival of a “double-dip” recession fear can have a disproportionate impact on the market in the foreseeable future.

Ride the volatility and top slice news flow-driven stocks where valuations have become rich. This would provide more room for investors to accumulate fundamentally robust stocks on weakness.

Stock picking is key.

Still a tactical play on construction and property stocks given a flurry of news flow and impending award of projects.

Continue to see values in the banking sector and positive on power, motor, media and timber sectors.

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Top Picks

Tactical Plays

Gamuda Jul 3.81 4.51 7,688 19.0 20.5 36.5 7.9 20.1 18.6 2.1 49.8 3.1MRCB Dec 2.05 2.49 2,791 6.4 6.7 23.5 4.9 32.2 30.7 2.1 20.1 0.0Faber Dec 2.98 3.82 1,082 34.2 38.2 30.4 11.4 8.7 7.8 1.9 5.6 2.7HSL Dec 1.86 1.95 1,035 16.2 17.7 21.4 8.9 11.5 10.5 2.4 13.5 1.3

Longer-Term Picks

Maybank Jun 8.97 10.50 63,490 61.9 69.6 14.7 12.4 14.5 12.9 2.1 n.a. 3.9CIMB Dec 8.15 9.60 59,752 56.3 64.5 17.2 14.6 14.5 12.6 2.1 n.a. 1.5IOI Jun 5.83 6.75 37,179 33.6 34.9 28.3 3.8 17.3 16.7 3.4 15.4 2.9KLK Sep 19.50 22.05 20,816 124.4 131.4 42.1 5.6 15.7 14.8 3.1 14.9 3.3AirAsia Dec 2.52 3.01 7,006 25.1 27.8 9.4 10.7 10.0 9.1 1.8 5.8 0.0Parkson Jun 5.90 7.72 6,115 37.3 47.9 26.6 28.5 15.8 12.3 2.7 5.7 1.4Dialog Jun 1.25 1.30 2,475 8.8 10.7 50.4 21.1 14.2 11.7 4.0 12.9 3.9Media Prima Dec 2.23 2.75 2,108 16.5 19.4 21.3 17.6 13.5 11.5 2.1 6.8 5.0KPJ Dec 3.70 4.51 1,952 26.6 29.9 10.7 12.2 13.9 12.4 2.2 11.0 4.3Carlsberg Dec 5.33 6.03 1,642 42.8 47.5 5.2 10.8 12.4 11.2 2.7 10.4 4.8Mah Sing Dec 1.87 2.33 1,555 17.2 21.2 22.8 23.2 10.9 8.8 1.6 21.1 3.7

Stocks FYE Price Fair Mkt Cap EPS Eps Growth PER P/BV P/CF GDY(27/10/10) Value (sen) (%) (X) (x) (x) (%)

(RM/s) (RM/s) RM mil 11f 12f 11f 12f 11f 12f 11f 11f 11f

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Sector Weightings & ValuationsCovered Stocks MktCap Weight EPS Growth PER Recommendation

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

Banks & Finance 216.5 25.9 24.0 13.4 10.5 13.7 12.4 OverweightPower 63.6 7.6 16.8 12.3 12.3 12.1 10.8 OverweightConstruction 23.0 2.8 29.4 13.4 6.7 17.2 16.1 OverweightProperty 21.8 2.6 -13.5 16.1 11.4 12.6 11.3 OverweightMotor 21.3 2.5 58.9 10.2 17.2 9.9 8.4 OverweightMedia 14.9 1.8 40.5 8.9 7.5 12.7 11.9 OverweightTimber 3.6 0.4 68.4 41.8 14.6 8.7 7.6 OverweightPlantation 120.4 14.4 5.9 19.9 3.0 17.2 16.7 NeutralTelecommunications 108.2 12.9 23.2 11.5 8.9 15.1 13.9 NeutralGaming 64.7 7.7 51.7 0.9 9.4 13.9 12.7 NeutralTransportation* 60.5 7.2 44.4 12.9 17.6 19.0 13.9 NeutralOil & Gas 33.7 4.0 9.7 16.4 9.8 14.8 13.5 NeutralConsumer 32.6 3.9 -6.1 11.3 11.1 15.8 14.2 NeutralInfrastructure 23.1 2.8 2.0 49.0 9.0 11.4 10.5 NeutralBuilding Materials 13.2 1.6 6.7 26.6 8.4 11.3 10.5 NeutralManufacturing 7.4 0.9 25.7 14.4 10.3 10.2 9.3 NeutralSemiconductors & IT 4.8 0.6 32.7 7.8 10.4 8.4 7.6 NeutralInsurance 3.7 0.4 6.6 8.7 21.5 8.5 7.0 Neutral

837.3 100.0

* Exclude MAS earnings in 09-11Note : RHBRI's Basket

FY10 FY11f FY12f FY11f FY12f

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High Dividend Yielding StocksHigh Dividend Yielding Stocks

^ FY11 & FY12 refer to FY12 & FY13 forecasts.

Maxis 5.25 9.7 10.4 n.m 27.2 OutperformVS Industry 1.62 9.5 10.7 0.9 12.8 Outperform Glomac^ 1.64 8.9 10.6 0.8 12.2 Outperform AXIS Reit 2.23 8.4 8.5 1.2 11.2 Outperform Quil Capita 1.03 8.3 8.6 0.7 6.7 Outperform Digi 25.00 8.1 8.5 27.4 85.5 Outperform CSC Steel 1.92 7.8 7.8 0.9 10.6 Outperform P Gas^ 11.24 6.9 7.2 3.5 22.8 Outperform Daibochi 2.89 6.9 7.4 2.8 17.3 Outperform MCIL^ 0.87 6.9 7.2 1.4 12.9 Outperform Sunway REIT 0.99 6.8 7.4 1.0 6.9 Outperform Evergreen 1.51 6.6 4.0 0.9 15.7 Outperform Paramount 4.84 6.5 7.4 1.0 13.2 OutperformFreight 0.98 5.6 5.6 1.1 17.2 Outperform STAR 4.13 5.6 5.6 2.3 15.0 Market PerformTM 3.39 7.8 7.8 1.9 7.2 Market PerformYTL Power 2.35 7.4 7.4 1.8 16.7 Market Perform B-Toto^ 4.15 6.5 6.7 n.m 80.8 Market Perform Amway 8.11 6.4 6.7 5.3 37.3 Market Perform Adventa^ 2.40 6.1 7.2 1.5 22.3 Market Perform

Share Price Gross Div. Yield (%) P/NTA (x) ROE (%) Recommendation(27/10/10)(RM/shr) FY11f FY12f FY11f FY11f

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Bank & Finance

^ FY11 & FY12 refer to FY12 & FY13 forecasts# Not under our coverage, IBES estimates are used.

Maybank OP 8.97 10.50 61.9 69.6 14.7 12.4 14.5 12.9 2.1 3.9 16.3CIMB OP 8.15 9.60 56.3 64.5 17.2 14.6 14.5 12.6 2.1 1.5 10.1PBB-F OP 12.72 14.70 91.7 99.2 11.8 8.2 13.9 12.8 3.1 5.1 4.3PBB-L OP 12.74 14.70 91.7 99.2 11.8 8.2 13.9 12.8 3.1 5.1 4.4AMMB^ OP 6.19 6.95 47.8 51.8 14.1 8.3 12.9 11.9 1.6 3.6 19.5HL Bank OP 9.15 10.70 70.8 72.5 3.9 2.3 12.9 12.6 1.8 2.6 3.3Affin OP 3.16 4.10 34.4 35.7 6.4 3.6 9.2 8.9 0.8 2.7 5.0RCE^ OP 0.62 1.12 11.3 11.6 4.6 2.8 5.5 5.3 0.8 1.6 -1.6AFG MP 3.27 3.50 27.3 29.1 9.0 6.3 12.0 11.2 1.4 2.6 10.8EON Cap UP 7.00 7.30 69.4 75.9 14.3 9.3 10.1 9.2 1.1 1.9 0.9RHB Cap# NR 7.89 NR 71.3 80.9 11.1 13.5 11.1 9.8 1.4 3.2 24.8

Recom Price Fair EPS EPS Gwth PER P/BV GDY Price Chg (27/10/10) Value (sen) (%) (x) (x) (%) (%)

RM RM 11f 12f 11f 12f 11f 12f 11f 11f 3mths

We believe the sector is the best proxy to the economy and would help take the lead in lifting the market to higher grounds.

Looking ahead, loan applications have remained healthy notwithstanding three OPR hikes thus far. We expect consumer spending to remain resilient next year on the back of high savings and rising consumerism and this would help support household loans. Fund raising activities by corporates could also pick up next year as key projects under the 10MP and Federal land deals get implemented.

We expect another 50-75bps hike in OPR in 1H2011, which would generally be positive for banks given the time lag between the repricing of assets and liabilities. By our estimates, most of the banks (except for AMMB) should be beneficiaries from a rate hike and this would also help cushion competitive pressures on NIMs.

The minimum capital levels banks would be required to hold under Basel III was announced in mid-Sep, which, we believe, virtually puts to rest lingering concerns investors may have had with respect to capital adequacy. By our calculations, the banks under our coverage should comfortably meet the minimum common equity ratio schedule. With that we see scope for some of the banks (e.g. Maybank, CIMB and AFG) to raise dividends.

Despite the recent five new banking licences issued, we believe earnings growth of the local banks remain intact. This is because: 1) the new commercial banking licences are niche banks and unlikely to compete head-on with the domestic institutions; and 2) the local banks are already very competitive given their increased share of overall assets as well as overseas ventures.

We are maintaining our Overweight stance on the sector. Maybank, CIMB, Public Bank, AMMB and HL Bank are all rated Outperform for bigger cap and liquidity exposure while smaller market capitalised stocks like Affin and RCE are also rated as Outperform.

32

Building Materials

Hiap Teck OP 1.33 1.63 16.0 16.7 25.3 4.1 8.3 8.0 9.0 0.7 1.9 5.6CSC Steel OP 1.92 2.33 23.3 24.7 6.4 5.9 8.2 7.8 1.1 0.9 7.8 14.3YTL Cement OP 4.70 5.59 60.1 59.8 19.8 -0.4 7.8 7.9 4.1 1.3 3.2 19.0Perwaja Holdings OP 1.16 1.37 13.5 16.9 16.9 24.8 4.9 4.4 7.4 0.6 0.0 -2.5Ann Joo MP 3.20 3.14 31.4 32.3 28.8 2.9 10.2 9.9 6.1 1.2 4.7 27.0LM Cement UP 7.91 7.42 46.4 53.3 30.2 15.0 17.1 14.8 9.5 2.1 4.8 18.4Kinsteel UP 1.00 0.86 8.6 9.2 77.0 6.4 11.6 10.9 5.1 1.0 1.0 18.3Sino Hua An UP 0.38 0.36 3.6 3.9 +>100 8.2 10.6 9.8 7.2 0.6 0.0 7.0

Recom Price Fair EPS EPS Growth PER EV/EBITDA P/NTA GDY Price Chg(27/10/10) Value (sen) (%) (x) (x) (x) (%) (%)

RM RM 11f 12f 11f 12f 110f 12f 11f 11f 11f 3 mths

NeutralNeutral

Cement: The implementation of large-scale infrastructure projects, coupled with a pick-up in property development activities will boost domestic cement consumption from 4Q10 onwards as well as cement producers’ pricing power. However, this will be partly offset by higher production costs (in particular, coal, diesel and electricity).

Steel: Both prices and demand for steel products will likely stage a rebound in 4Q, as: 1) steel consumption is seasonally stronger in 4Q; 2) concerns on overcapacity are likely to ease in the near term; and 3) spot price of iron ore fines (the key steelmaking input for most large steel mills in the world) has bottomed. However, it is still too early to turn bullish, as: 1) this risk on a sharper-than-expected slowdown in global economy remains; and 2) overcapacity (in particular, China) remains an issue.

33

Sunway Hldgs OP 2.00 2.35 25.2 28.3 10.2 12.5 7.9 7.1 6.8 1.3 1.4 25.0HSL OP 1.86 1.95 16.2 17.7 21.4 8.9 11.5 10.5 6.7 2.4 1.3 24.0Fajarbaru OP 1.09 1.37 14.4 15.2 -10.8 5.5 7.6 7.2 1.6 1.3 5.5 21.5Emas Kiara OP 0.74 1.52 15.2 16.9 16.7 11.1 4.9 4.4 3.5 0.6 2.0 27.6MRCB TB 2.05 2.49 6.4 6.7 23.5 4.9 32.2 30.7 20.1 2.1 0.0 19.2Gamuda TB 3.81 4.51 19.0 20.5 36.5 7.9 20.1 18.6 22.1 2.3 3.1 13.4IJM Corp^ UP 5.67 5.01 32.6 34.2 2.7 5.0 17.4 16.6 9.4 1.3 1.9 11.0WCT UP 3.15 2.56 19.1 19.7 -0.8 2.9 16.5 16.0 14.0 1.6 1.9 14.5^ FY11 & FY12 refer to FY12 & FY13 forecasts

ConstructionRecom Price Fair EPS EPS Growth PER EV/EBITDA P/NTA GDY Price Chg

(27/10/10) Value (sen) (%) (x) (x) (x) (%) (%)RM RM 11f 12f 11f 12f 11f 12f 11f 11f 11f 3 mths

Overweight. Gross development expenditure in 2011 is projected at RM49.2bn, down -9% from RM54bn estimated for 2010. However, this will be cushioned by projects to be carried out on a Public-Private Partnership (PPP) or privatised basis, projected to rack up RM12.5bn private investment, anchored by RM1bn facilitation fund.

Key large-scale projects to kick-start in 2001 are the RM40bn MRT project, the RM26bn KL International Financial District (KLIFD), the RM10bn redevelopment of the Rubber Research Board land in Sungai Buloh and six toll roads including the West Coast Expressway. Others include the RM5bn Warisan Merdeka integrated development comprising a 100-storey tower led by PNB, the “River of Life”, i.e. the clean-up/beautification of the Klang Valley (funded by part of the RM1.9bn allocation under environmental preservation) and the RM2bn Academic Medical Centre (a JV with Johns Hopkins Medicine International and Royal College of Surgions, Ireland).

For the LRT, tenders for the first four packages (two main contracts and two sub-contracts) already closed in end-Aug 2010, Tenders for the remaining four packages (two main contracts and two sub-contracts) will also be called soon. We expect the award of the first four packages to happen by the end of the year, and if not, by early next year.

Buoyed by news flow, we foresee construction stocks to continue to generally outperform the market from 4Q2010. Our top “tactical” pick is Gamuda as we believe its share price will be buoyed by the sustained news flow from the RM40bn MRT project. Our top “value” pick is Fajarbaru due to its undemanding valuations, it being a strong contender for work packages of the LRT line extension project given its strong foreign partner, i.e. China Railway Construction Corporation, and a strong balance sheet with a net cash per share of 75sen.

34

ConsumerConsumer

^ FY11 & FY12 refer to FY12 & FY13 forecasts

Carlsberg OP 5.33 6.03 42.8 47.5 5.2 10.8 12.4 11.2 7.8 2.7 4.8 3.9KPJ Health OP 3.70 4.51 26.6 29.9 10.7 12.2 13.9 12.4 8.1 1.7 4.3 1.6Parkson OP 5.90 7.72 37.3 47.9 26.6 28.5 15.8 12.3 3.7 2.7 1.4 5.4QL R OP 5.40 5.50 35.4 43.5 12.7 22.9 15.3 12.4 6.4 3.1 2.2 25.6Faber OP 2.98 3.82 34.2 38.2 30.4 11.4 8.7 7.8 3.3 2.0 2.7 3.8Daibochi OP 2.89 4.12 31.9 35.3 9.3 10.9 9.1 8.2 5.3 2.8 6.9 -13.5KFCH TB 3.44 3.85 22.5 26.1 16.7 15.7 15.3 13.2 7.8 1.7 2.0 25.1AEON MP 5.66 5.72 44.0 47.5 7.2 7.8 12.9 11.9 2.4 1.6 2.1 12.7Amway MP 8.11 8.45 56.5 58.4 3.5 3.5 14.4 13.9 9.2 5.3 6.4 1.4Hai-O^ UP 3.14 2.84 28.6 32.2 2.5 12.6 11.0 9.8 6.5 1.0 6.1 -15.1BAT UP 46.98 42.92 234.6 231.8 -7.3 -1.2 20.0 20.3 13.9 n.m 4.5 7.3



Retail and MLM players to be driven by consumer spending. RHBRI’s economics team forecasts that consumer spending will likely grow at a softer rate of 5.4% in 2011 (vs. 5.6% estimated for 2010) as it is coming from a slightly higher base. We expect consumer spending growth to continue to drive topline growth for AEON, Hai- O and Amway. Parkson would also be driven by the growth in local consumer spending, however, we believe that its core driver would be its China department stores (95% of PBT), especially as China recently announced measures to gradually double its minimum wage by 2015.

Consumer spending growth will also drive F&B. Consumer spending growth will drive revenues for both KFC and QL Resources. However, in the longer run, we believe KFC’s expansion locally and overseas, mainly India, will likely be the revenue driver. For QL, we are positive on its outlook given its recent acquisition of a 23.29%stake in Lay Hong, which has a similar business activity, i.e. eggs, broiler farming and feedmill. We believe the acquisition will provide synergistic benefits and incremental earnings.

Healthcare poised for growth and resilient earnings. Both public and private healthcare sectors are poised for growth in FY11. Private healthcare business will grow on the back of growing uptake in medical insurance policies. Meanwhile, with strong news flow on the M&A in private healthcare sector in the region, we believe that KPJ will be in investors’ spotlight and deserves to be trading at a higher valuation, further narrowing its discount to regional peers’ PER of 18x.

Plastic packaging player Daibochi to benefit from expected drop in raw materials price. We expect Daibochi’s margins to improve following an expected oversupply of plastic resin, its main raw material. Demand wise, we expect its continuous product innovation and foray into the non-F&N sector will continue to drive revenue growth.

Excise duty on cigarettes were increased in early October, effectively increasing cigarette prices by 7.5%, which would put further downward pressure on TIV. However, the brewers were spared another year of an excise duty hike, which augurs well for Carlsberg.

Top pick is Faber. We like KPJ due to its resilient earnings, leading position and expansion plans in Malaysia coupled with strong news flow from the sector.

35

Gaming

^ FY11 & FY12 refer to FY12 & FY13 forecasts * Normalised

Genting Bhd OP 10.36 11.90 79.0 88.7 -2.5 12.3 13.1 11.7 5.3 2.4 1.1 34.5Genting S'pore OP S$2.13 S$2.55 9.7 11.9 13.2 21.9 21.9 18.0 19.9 5.1 0.0 80.5Genting M'sia MP 3.50 3.95 22.4 23.6 6.8 5.1 15.6 14.9 7.4 1.7 2.1 29.2B-Toto^ MP 4.15 4.35 29.0 29.8 9.6 3.0 14.3 13.9 10.0 n.m 6.5 -0.5

Recom Price Fair EPS * EPS Growth PER EV/EBITDA P/NTA GDY Price Chg(27/10/10) Value (sen) (%) (x) (x) (x) (%) (%)


Neutral. An additional risk has emerged for the gaming sector, as the recent move by the Government to increase pool betting duties by 2%-pts to 8% from 1 June 2010, as well as the abortion of the sports betting licence deal, could potentially signify a turnaround in policy with regards to the gaming sector and could mean a further crackdown on industry players. This could also potentially spell an oncoming hike in casino gaming duties (now at 25%) and a non-approval of Tanjong’s new lotto game application which is still pending. We estimate every 1%-pt hike in casino gaming tax would impact earnings by 2-3% p.a..

For Genting Malaysia, all eyes are going to be on potential returns coming from its new overseas ventures in the form of the recently approved acquisition of Genting UK and the New York racino venture. Our initial assessments of these projects seem to be disappointing, with an estimated ROI of 8-9% for both Genting UK (based on our FY11 earnings projections) and the New York racino (based on our back-of-the-envelope calculations). As all necessary aoprovals have been obtained, we have added our estimated DCF value for the New York racino of RM2.1bn into our RNAV calculation. Our revised target price for Genting Malaysia is now RM3.95 and we maintain our Market Perform recommendation on the stock.

The bright spark in the group is Genting Singapore (Outperform, FV = S$2.55), as we continue to expect to see strong visitor and casino patronage numbers, driven by its strong branding and appeal as a “family” destination while riding on Singapore’s anticipated tourism-led economic recovery. However, we are watchful of GenS’ planned use of the S$725m cash proceeds from the sale of Genting UK, as well as the unused S$1.6bn proceeds from its rights issue. Genting will be a beneficiary of GenS’ admirable profits, given its 54.3% stake in GenS, which results in an earnings contribution of 50-55% to the group. In addition, the valuation gap between Genting and Genting Singapore provides investors with an arbitrage opportunity, as Genting is a much cheaper entry point into GenS, both on a PE (by 40-50%) and an EV/EBITDA (by 60-70%) basis. Maintain Outperform on Genting with fair value of RM11.90.

As for BToto, prospects look bleak after the pool betting duty hike which would reduce its earnings by 12% p.a.. We note that this does not take into account the potential impact of a reduction in prize payouts, although this could be slightly offset by a resultant fall in sales volumes. Nevertheless, the potential of higher dividends given Berjaya Land’s need for RM711m in cash for its convertible bonds maturing in Aug 2011, could provide support for BToto’s share price. As such, we maintain Market Perform with fair value of RM4.35.

36

Infrastructure

Puncak MP 2.89 3.01 36.3 72.5 14.1 99.7 8.0 4.0 3.2 0.8 2.1 4.3PLUS UP 4.38 4.60 37.4 38.0 52.7 1.8 11.7 11.5 8.6 3.2 4.6 19.3



Neutral.

PLUS: UEM and EPF have made a joint offer to acquire all assets and liabilities of PLUS at an aggregate purchase consideration of RM23bn or RM4.60 per share via a Special Purpose Vehicle (SPV). The RM4.60 takeover price is slightly under our fair value of RM4.76 (10% premium to NPV of RM4.33) based on DCF. While the takeover price is not very compelling, it presents investors the opportunity to cash out and remove the uncertainty of toll rate hikes that have been a constant contentious issue. To reflect the likelihood that the takeover offer will be successful, we revised our fair value from RM4.76 to RM4.60.

To reduce transportation costs in the country, the Government announced that the toll rates in the four highways owned by PLUS Expressways Berhad will not be raised for the next five years, effective immediately. . However, no details on the form of However, no details on the form of compensation to PLUS were forthcoming. Nonetheless, the proposedcompensation to PLUS were forthcoming. Nonetheless, the proposed takeover will essentially put aside any concern about the takeover will essentially put aside any concern about the potential adverse earnings impact of the toll hike freeze, whichpotential adverse earnings impact of the toll hike freeze, which will be borne by UEM and EPF. will be borne by UEM and EPF.

Puncak Niaga: Having peaked in March 2010 on the back of the surprised move by Splash to offer to take over all water assets in the Klang Valley for RM10.75bn, the news flow and momentum on the water sector restructuring appear to have fizzled out, prompting rating agencies to downgrade the ratings of bonds of water concessionaires recently.

This is consistent with our view that the water sector restructuring is never a stroll in the park given: (1) The pricing issue; and (2) The tussle for the lucrative O&M contract post the restructuring. Similarly, we continue to believe that the long overdue 37% scheduled tariff hike (or the “compromised” 15-20% hike reported recently) is unlikely to happen any time soon without the blessing from the Selangor state government.

37

Insurance

Allianz* OP 4.20 5.32 86.2 99.7 19.9 15.8 4.9 4.2 0.9 0.5 1.4MNRB^ MP 2.77 2.98 19.5 29.5 -35.9 51.0 14.2 9.4 0.6 3.6 2.6Kurnia Asia MP 0.42 0.44 4.9 6.0 27.8 22.8 8.5 6.9 1.5 2.3 -15.3LPI Capital UP 11.46 11.40 70.2 82.9 12.4 18.0 16.3 13.8 1.5 6.0 -1.2^ FY11 & FY12 refer to FY12 & FY13 forecasts * Price and fair value are ex-rights. EPS is not diluted until conversion of ICPS to shares.

Recom Price Fair EPS EPS Gwth PER P/NTA GDY Price Chg (27/10/10) Value (sen) (%) (x) (x) (%) (%)

RM RM 11f 12f 11f 12f 11f 12f 11f 11f 3mths

Neutral.

No clear decision by BNM yet with regards to the new scheme for the TPBID policies. But we believe BNM would not be able to delay the reforms for too long.

Four new family takaful licences were awarded to four JV’s: AIA-Alliance Bank, AMMB-Friends Provident Group Plc, ING-Public Bank-Public Islamic Bank, and Great Eastern-Koperasi Angkatan Tentera. The new licences will increase competition in the life insurance segment.

Life insurance growth will be backed by the low penetration rate relative to other countries in the region, higher medical costs, additional disposable income, the tax relief announced in the 2010 Budget and increased awareness on life products. Competition is expected to heat up as four new family takaful licences were issued.

General insurance growth will be backed by increase in demand following increase in business activities from the economic recovery, and improving Motor TIV growth. Recent merger between HLA’s general insurance arm and MSIG Insurance indicates a changing competitive landscape, as MSIG will be the second largest general insurer in the country, with the biggest fire and marine cargo portfolio.

Top Pick is Allianz.

38

VS Industry OP 1.62 2.24 28.0 32.5 42.0 16.3 5.8 5.0 3.3 0.9 9.5 36.1

Kossan OP 3.30 4.25 44.7 47.2 20.3 5.6 7.4 7.0 4.8 1.8 1.9 -17.5

Adventa MP 2.40 2.47 33.8 43.3 53.2 28.1 7.1 5.5 6.4 1.5 6.1 -22.3

Hartalega^ MP 5.51 5.64 55.7 59.1 16.9 6.0 9.9 9.3 6.7 2.3 4.9 0.9

Wellcall UP 1.15 1.13 12.0 14.1 7.8 18.4 9.6 8.1 3.5 1.8 13.0 -10.9

Top Glove UP 5.65 5.40 41.2 45.9 0.8 11.2 13.7 12.3 7.7 2.9 4.5 -13.6

Manufacturing




Neutral.

Softening external demand for the country’s exports that could persist into 1H2011. This would translate to slowing manufacturing activities going forward.

We are cautious on the near-term outlook for the glove manufacturers largely due to: 1) slowdown in demand for rubber gloves as customers opt to run down their inventory levels due to high latex price; 2) high latex price; and 3) weakening US$ against RM (by around 10.5% YTD). The slow down in orders has adversely affected some glove manufacturers to adjust prices for the higher costs. Given the challenging near-term outlook for the sector, we downgrade our stance on the rubber gloves sub-sector to Neutral from Overweight.

39

Media


Media Prima OP 2.23 2.75 16.5 19.4 21.3 17.6 13.5 11.5 7.3 2.7 5.0 5.7MCIL^ OP 0.87 1.21 9.5 9.9 3.1 3.7 9.1 8.8 4.2 1.4 6.9 -2.8Star MP 4.13 4.43 27.7 28.2 4.4 1.8 14.9 14.6 7.1 2.3 5.6 18.0



Overweight

While YTD (Jan-Aug) adex growth stood at 20.3% yoy, we expect the growth rate to slow down in 2H10 following the strong start to the global economic recovery in 1HFY10 given that adex will now be coming from a higher base. Nevertheless, adex growth should continue to remain healthy, supported by sporting events such as the Commonwealth Games and upcoming festive season.

At the cost side, newsprint prices have crept up recently, but the weakening US$ against RM should help to improve margins for the companies moving forward.

Media Prima (FV=RM2.75) remains our preferred pick as we believe adex (especially TV) will be a prime beneficiary of a recovering economy. In addition, Media Prima now controls NSTP and will be able to fully consolidate NSTP’s strong 2010 earnings growth. Potentially, there could be merger synergies that the enlarged entity may be able to reap. In addition, another potential catalyst is that the enlarged entity may be able to command better valuations.

We also like MCIL its as valuations are currently trading at a cheaper discount to Star’s despite both companies offering roughly similar earnings growth.

40

MotorMotor


MBM OP 3.12 5.30 48.2 50.7 5.3 5.0 6.5 6.2 14.0 0.7 3.8 2.6Proton^ OP 4.90 5.50 75.2 80.3 11.6 6.8 6.5 6.1 7.2 0.5 0.0 10.1APM OP 5.10 5.53 50.3 57.2 7.0 13.8 10.1 8.9 3.3 1.3 2.5 6.9UMW MP 6.78 7.27 59.2 66.3 7.2 11.9 11.4 10.2 5.3 1.7 3.6 8.7T Chong MP 5.61 6.16 45.3 67.3 16.2 48.6 12.4 8.3 9.2 2.0 2.1 17.9



TIV numbers have soared since the beginning of the year, reaffirming our view that 2010 is the second year of a new 3- year cycle for motor stocks which began in 2009. As at August, YTD TIV is 409,806. This achieves 70% of our full-year forecasts of 587,220 and 72% of MAA’s forecast of 570,000.

Our 2010 earnings growth is expected to continue gaining traction on the back of: 1) sustained industry TIV growth; and 2) strengthened RM against US$ and Yen that would help to reduce costs of imported materials; and 3) positive consumer sentiment with the greater stability of the economy.

We are maintaining the fair values of stocks under coverage, but downgrading our call on Tan Chong and UMW to a Market Perform (previously Outperform) as we believe that both are fully valued at this juncture. For Tan Chong we will review our call should there be an earlier-than-expected contribution from their Indochina play; while for UMW should auto division outperfom our numbers, will we look to upgrade numbers and call.

Our top-pick is now APM (FV = RM 5.53). The stock has performed well in 1HFY10, with 6MFY10 net profit of RM54.9m. Going into FY11, growth prospects will be underpinned by a) Tan Chong’s entry into the small car segment and the Indochina market; and b) consolidation of their Seri Kembangan facilities to Port Klang that would improve its operating efficiency.

41

Oil & Gas


Dialog OP 1.25 1.30 8.8 10.7 50.4 21.1 14.2 11.7 8.0 4.1 3.9 15.7P Gas^ OP 11.24 11.63 72.9 75.6 2.7 3.7 15.4 14.9 8.2 3.5 6.9 9.1Dayang OP 2.35 2.61 20.1 22.9 22.6 14.0 11.7 10.3 9.5 1.8 2.6 12.4SapuraCrest ^ MP 2.54 2.41 18.5 19.5 10.0 5.2 13.7 13.0 4.0 2.2 2.8 14.4Wah Seong MP 2.18 2.21 13.8 15.9 62.5 15.2 15.8 13.7 6.1 1.7 2.3 -7.2Kencana MP 1.90 1.80 12.0 13.8 46.0 14.5 15.8 13.8 9.1 3.2 0.4 24.2Petra Perdana UP 0.83 0.50 5.3 11.3 +>100 n.m 15.8 7.3 7.0 0.5 2.4 -30.8KNM Group UP 0.49 0.37 3.7 5.1 +>100 37.4 13.0 9.5 9.7 5.0 4.1 -3.0



The oil and gas sector being one of the 12 Malaysian National Key Economic Areas (NKEA) means that it will get ample attention going forth. The Government has mentioned that it hopes to see an incremental gross national income (GNI) of RM131.5bn from the oil, gas and energy sectors and looks to some RM271bn of investment, primarily sourced from the private sector (51.7%) over the next decade to enable the sector to perform as such. This points towards Petronas’ being committed to maintain capex levels, and more importantly, to focus spending on the domestic business that will benefit the local support services players.

Risk of continued earnings disappointment (especially for the offshore vessel players) in the coming quarters is still high. However, short-term trading for the upstream offshore players such as SapuraCrest, Kencana and Dayang Enterprise is expected as: 1) more rejuvenation awards emerge in 4QFY10; 2) the sector is buoyed by the listing of MMHE and Petronas Chemicals; and 3) continual highlights of the NKEA.

On overall, we believe the oil & gas industry still faces some uncertainty, although there has been some positive news flow. As such we reiterate our neutral call on the sector for now. Longer-term, we are bullish on the sector as global demand recovers, and more exploration & production activities will have to pick up in pace in order to ensure replenishment of reserves. Dialog (OP, FV = RM1.30) remains our top pick given its defensive nature.

42

IOI Corp OP 5.83 6.75 33.6 34.9 28.3 3.8 17.3 16.7 19.0 3.3 2.9 13.9KLK OP 19.50 22.05 124.4 131.4 42.1 5.6 15.7 14.8 20.8 3.2 3.3 14.8CBIP OP 3.54 4.60 52.7 55.1 21.6 4.4 6.7 6.4 22.1 1.4 4.8 15.3First Resources OP S$1.29 S$1.50 8.8 10.2 30.1 15.1 11.0 9.5 18.9 1.9 2.3 20.6IJM Plantation^ MP 2.82 2.56 16.1 14.8 2.0 -8.2 17.5 19.1 9.8 1.8 2.1 11.9Sime Darby MP 8.84 9.40 48.6 49.9 9.0 2.6 18.2 17.7 13.8 2.4 3.5 13.5Genting Plant UP 8.65 7.40 46.3 44.5 17.5 -4.0 18.7 19.5 12.0 2.1 1.5 21.8

Plantations

^ FY11 & FY12 refer to FY12 & FY13 forecasts * Normalised

Recom Price Fair EPS * EPS Growth PER ROE P/NTA GDY PriceChg(27/10/10) Value (sen) (%) (x) (x) (x) (%) (%)


Although not much has changed in the fundamental demand and supply factors of CPO in the last few months, there have been changes in the dynamics of other vegetable oils, and this has had a knock-on effect on CPO prices. Since June 2010, soyoil prices have risen 25%, rapeseed oil prices by 20% and CPO prices by 14.4%. The La Niña event which has strengthened over the past two weeks and is expected to persist into at least early 2011, has had negative effects on planting and harvesting activities of soybean in South America and of sunflower seed and rapeseed production in Russia and the Ukraine. Global stock/usage ratio for the 17 oils and fats is now expected to fall to 10.6% in 2011 from 11.4% in 2010, a significant reduction from the previously estimated 11.2% for 2011.

We believe CPO is going to be relied upon more to fill the gap of the other vegetable oils and should there be any disappointment in the production of CPO, due to external circumstances, this could likely result in a larger-than-expected spike in CPO prices. Global CPO stock/usage ratios are expected to be relatively flat in 2011, at 15.5%, which means that while CPO prices would be affected by the anticipated bullish trend of the other vegetable oils, the increase could be capped given the as yet unaffected fundamentals of CPO. As such, we maintain our CPO price forecasts at RM2,500/tonne for CY2010, RM2,700/tonne for CY2011 and RM2,500/tonne for CY2012.

We have raised our PE valuation targets by 1-1.5x, taking into account the more positive fundamentals of the vegetable oil industry and RHBRI’s rolled forward market PER targets of 16x CY11 (from 15x previously). For big-cap stocks, we now assign a target CY11 PE of 17x (from 16x CY11) for their plantation divisions; for mid-cap stocks we assign a target PE of 16x CY11 (from 14.5x CY11); and for small-cap stocks, we assign a target PE of 13x CY11 (from 12x CY11). We also raise our target PE for First Resources to 11x CY11 (from 10.5x CY11), based on an unchanged 30% discount to the Malaysian mid-cap planters. No change to our Outperform recommendations on IOIC, KLK, First Resources and CBIP, Market Perform recommendation on Sime Darby and Underperform recommendation on Genting Plantations. However, post-target price upgrade, we raise our recommendation on IJMP to Market Perform (from UP). Maintain NEUTRAL on the sector.

43

Power

Tenaga MP 8.83 9.40 75.5 87.3 16.2 15.7 11.7 10.1 7.0 1.3 3.4 2.6YTL Power MP 2.35 2.20 17.8 18.3 3.3 3.3 13.2 12.8 9.7 1.8 7.4 4.4

Recom Price Fair EPS EPS Growth PER EV/EBITDA P/NTA GDY PriceChg(27/10/10) Value (sen) (%) (x) (x) (x) (%) (%)


Overweight – In our view, the main focus for the sector next year would be on industry reforms. These could potentially include: 1) renegotiations on the first generation power purchase agreements (PPAs) with the independent power producers (IPPs), which are ongoing; 2) the removal of subsidies for natural gas; and 3) a formal tariff formula for TNB.

A compromise reached from the renegotiation of PPAs be positive for TNB in terms of lower capacity payments that TNB would need to pay. This could then be passed on to consumers either in terms of lower tariffs or lower hikes required for higher fuel costs. As for the IPPs, we believe, at the minimum, the players would be looking at an NPV neutral outcome to the negotiations.

Separately, Pemandu has proposed to remove gas subsidy to the power sector by 2015 but TNB would be allowed to raise electricity tariffs accordingly to pass on the higher cost. We estimate that the impact should be neutral to TNB, depending on demand.

While we understand that an informal tariff formula is currently in place, formalisation of the formula would, in our view, be positive in terms of: 1) allowing TNB to pass on higher fuel costs in a more timely manner while cost savings could be passed back to consumers quicker; 2) aid transparency; and 3) the formula could incorporate efficiency/service quality measures that reward (or penalise) TNB according to the achievement of targets and spur TNB to improve efficiency and service quality. Overall, we believe it is just a matter of time before such a formula is introduced.

In the meantime, potential mitigating factors include: 1) strengthening of the ringgit versus US dollar; and 2) stronger demand (especially to help cover higher capacity payments).

For TNB, going forward, while we expect electricity demand to remain healthy, the growth rate would likely moderate as demand would now be coming from a higher base. We have assumed FY11 demand growth of +4.5%, slightly below our GDP growth projection of 5%. We think valuations remain attractive for a big-cap stock and relative to the market. Any favourable outcome from external developments mentioned should, in our view, serve as a further catalyst to share price performance.

We think the market would be watching YTLP’s WiMAX rollout (expected 4QCY10) and strategy closely. A potential concern here is that YTLP could decide to start a price war in order to win subscribers, especially given that it would be coming into the market with a largely unutilised network. For now, management’s reassurance regarding dividends means that a key investment thesis for the stock remains intact, i.e. attractive dividend yields.

44

Property

^ FY11 & FY12 refer to FY12 & FY13 forecasts* NAV per share

Recom Price Fair EPS EPS Growth PER ROE P/NTA RNAV GDY Price Chg(27/10/10) Value (sen) (%) (x) (%) (x) (%) (%)

Sunrise OP 2.19 3.30 29.9 33.2 10.6 11.1 7.3 6.6 12.8 0.9 4.12 1.9 12.9Glomac^ OP 1.64 2.09 24.3 28.9 23.3 18.8 6.7 5.7 12.2 0.8 2.46 8.9 22.4Sunway City OP 4.02 5.80 41.3 48.2 18.6 16.8 9.7 8.3 8.0 0.8 6.44 2.1 9.5Axis REIT OP 2.23 2.67 18.7 18.9 12.3 0.8 11.9 11.8 11.2 1.2 1.60* 8.4 6.2Quill Capita OP 1.03 1.23 9.3 9.6 4.7 3.4 11.0 10.7 6.7 0.7 1.38* 8.3 1.0IJM Land OP 2.73 3.50 19.4 21.3 53.0 9.8 14.1 12.8 11.3 1.9 3.18 1.1 23.0Mah Sing OP 1.87 2.33 17.2 21.2 22.8 23.2 10.9 8.8 14.9 1.6 2.11 3.7 7.5Paramount OP 4.84 5.80 63.1 71.8 9.4 13.8 7.7 6.7 13.2 1.0 8.93 6.5 30.8Sunway REIT OP 0.99 1.05 6.7 7.3 10.1 8.6 14.7 13.5 6.9 1.0 0.97 6.8 0.9SP Setia OP 5.27 5.94 22.8 27.4 14.6 19.8 23.1 19.3 10.7 2.4 4.95 2.7 27.9YNH Prop MP 1.78 2.17 17.6 20.3 11.6 15.2 10.1 8.8 9.0 0.9 3.10 2.5 10.5Hunza Prop MP 1.61 1.58 27.6 20.9 3.4 -24.2 5.8 7.7 12.2 0.7 3.16 3.5 28.8KLCC Prop MP 3.32 3.80 26.3 27.3 4.5 3.8 12.6 12.2 4.6 0.6 4.47 3.3 4.4

RM RM 11f 12f 11f 12f 11f 12f 11f 11f RM 11f 3 mths

Overweight. We maintain our positive view on the sector. Concerns on a blanket imposition of the loan-to-value (LTV) ratio has been addressed, and measures are likely to target at buyers who own > two properties.

Key factors driving demand: (1) Faster growth in young demographics; (2) Easy financing in addition to aggressive incentives offered by developers; (3) Strengthening in ringgit to spur foreign participation; (iv) Property is a preferred hedge against inflation.

News flow supporting the sector: (1) The awards of Sg Buloh land parcels and the subsequent farming out of the sub- divided land parcels to various developers; (2) The increased sentiment and interest in land and properties in Iskandar Malaysia on expectation of rising investment on improving ties between Malaysia and Singapore; and (3) Integrated MRT network to benefit property development along the rail lines.

Key risks for the sector: (1) Cap rate on LTV ratio for third and subsequent house purchases to be reduced to 70% or less from the assumed rate of 80%; (2) Other regulatory risks.

MREITs are back in flavour by foreigners, due to better investibility, attractive dividend yield and expected currency gain arising from the strengthening of ringgit.

45

Semiconductor & IT

Unisem OP 1.86 2.31 21.0 23.4 4.9 11.4 8.8 7.9 3.8 1.3 2.7 -23.1JCY Intl OP 1.02 1.32 13.2 14.2 9.9 7.6 7.7 7.2 5.5 2.0 6.4 -26.1MPI MP 5.82 6.35 53.8 61.6 7.2 14.6 10.8 9.4 2.7 1.1 3.4 -6.6Notion Vtec UP 1.70 1.54 21.0 22.5 3.1 7.4 8.1 7.5 3.8 1.3 3.8 -37.5



Neutral. We believe chip sales are likely to grow at a more moderate pace, after surging in 1Q2010. Note that chip sales have already peaked at 58.4% yoy in Mar. According to SIA, chip sales in 2011 is projected to grow at a slower pace of 6.3% (vs. 28.4% in 2010).

In our view, demand for smaller form factor devices i.e. smartphones and mp3 players as well as new innovative products such as tablets (i.e. iPad and Galaxy Tab) will remain robust given increasing interests. This augurs well for Unisem and MPI given the exposure to the consumer electronic and communication segments.

Despite the less optimistic outlook on PC sales, we believe demand will remain resilient in the longer term on the back of Intel’s new superior microprocessing chips. Hence, we believe JCY and Notion Vtec could leverage on the demand for the 2.5’’ hard disk drives (used for notebooks).

In conclusion, in view of normalising growth for global demand for electronics coupled with a moderating economic growth, we maintain our Neutral call on the sector. Although we remain cautious on the outlook for the semicon players, we believe the sell-down of Unisem and JCY is overdone. Therefore, we are upgrading the stocks to Outperform because valuations have become compelling.

46

Telecommunications

Digi.Com OP 25.00 26.35 152.4 160.9 9.7 5.6 16.4 15.5 8.3 27.4 8.1 2.2Maxis OP 5.25 5.75 34.0 36.7 8.5 8.0 15.4 14.3 8.6 n.m 9.7 -1.3TM MP 3.39 3.55 13.5 15.8 8.2 17.4 25.1 21.4 2.7 1.9 7.8 0.9Axiata MP 4.43 4.75 35.0 38.4 15.6 9.6 12.6 11.5 5.8 2.6 3.2 7.0



The telecom sector, excluding Axiata’s 45.6% YTD gain, has underperformed the FBM KLCI by 8.2% YTD due to concerns that: 1) the high mobile penetration rate (110.6% estimated for 3Q 2010) may hamper the industry’s growth outlook; and 2) the Wimax players may bring more intense competition to the cellular companies (cellcos). In the near term, we believe this perception is unlikely to change as the cellcos continue to report of challenging conditions.

We are Neutral on the sector although we believe that in the increasingly volatile market driven by short-term liquidity flows, the key attractions of the sector include: 1) continued active capital management by major players; and 2) the longer-term growth of non- voice revenue, especially for cellcos.

We reiterate our Outperform call for both Digi and Maxis. We have tweaked our DCF-based fair value for Digi to RM26.35 (after adjusting for the FY10 balance sheet), but we maintain our DCF-based fair value of RM5.75 for Maxis.

While we like Axiata’s regional growth prospects, the stock’s YTD outperformance, limited capital upside based on our unchanged SOP fair value of RM4.75, and comparatively lower yield of 3%, we downgraded the stock to Market Perform, from outperform.

TM is primarily a dividend story, and upside will hinge on potential special dividends that may be forthcoming. Market Perform.

Telco Guidance Potential Upside

Digi Net debt:equity ratio Possible 27 sen more atof 35:65 and 45:55 higher end of the range

Maxis Committed to net interim Net debt/EBITDA of 1x DPS of 32sen implies another 13 sen

Axiata 30% of normalised 10.5sen, with potential net profit for more later

TM Minimum RM700m High potential forspecial DPS

We expect non-voice revenue, in particular from wireless broadband and data value-added services, to provide longerterm support to EBITDA margins. In the near term, however, the cellcos have had to play catch up on network capacity due to the strong demand for bandwidth, while competition for data subscribers has also resulted in higher subscriber retention costs. Longer term, the margin erosion will be mitigated by: 1) greater economies of scale; and 2) ongoing cost management initiatives.

47

Timber

^ FY10& FY11 refer to FY11 & FY12 forecasts

Evergreen OP 1.51 2.57 25.7 26.4 4.9 2.6 5.9 5.7 4.8 0.9 6.6 -7.4Jaya Tiasa^ OP 3.96 4.43 42.6 48.6 66.9 13.9 9.3 8.2 6.6 0.9 0.0 10.9WTKH OP 1.20 1.60 13.5 17.0 49.1 25.6 8.9 7.1 5.3 0.6 3.9 4.3Ta Ann MP 4.61 4.83 40.3 50.1 87.8 24.3 11.4 9.2 7.2 1.4 2.9 8.7



Latest July 10 Japan housing starts saw a better-than-expected improvements (+4.3% yoy) – this brings it to two consecutive months of growth (June 10 +0.6% yoy), which signifies that Japan’s housing recovery may start gaining pace soon. This is supported by the number of building permits issued, which has been increasing for the eight months up to the latest May 2010 data (8.7% yoy). We expect further improvement in Japan housing starts to gain momentum in 4Q10 and 2011, and this will improve the overall sentiment for the timber sector.

In addition, we understand from Japan Lumber reports and timber players that plywood prices have increased gradually since early this year (+7-17% YTD in June 2010) on the back of steady import demand from Japan (+8.3% yoy in 1H10). Log prices have increased as well (+17% from YTD-low) following supply shortages in Sarawak and strong demand from India as well as China. We have upgraded our call on the timber sector to Overweight due to these positive signs of recovery.

Our top pick is Evergreen. For Evergreen, structural changes in the industry i.e. gradual increase in real demand and supply shortages from the closure of plants will be major boosters to capacity utilisation and average selling prices and thus, earnings for the group. We expect Evergreen to pay out 30-50% of its net profit as dividend for FY10-11, which translates to attractive net dividend yields of 5.2-7.6%

48

Transport / Logistics


ILB OP 0.96 1.47 11.3 14.3 95.3 26.0 8.5 6.7 7.6 0.5 3.1 6.7Freight Mgmt OP 0.98 1.57 15.4 16.0 13.8 4.2 6.4 6.1 3.9 1.1 5.6 -4.9AirAsia OP 2.52 3.01 25.1 27.8 9.4 10.7 10.0 9.1 9.8 1.8 0.0 75.0MAHB OP 5.86 6.81 37.3 45.0 24.4 20.9 15.7 13.0 10.2 3.1 3.2 17.2MAS UP 2.30 1.91 13.6 16.1 n.a. 18.1 16.9 14.3 11.5 2.1 0.0 10.6MISC ^ UP 8.76 8.07 36.7 43.9 11.2 19.6 23.9 20.0 12.9 1.7 4.2 -0.5



Neutral. The airline sector is poised for better prospects over the near term on improved yields and load factors, thanks to rising demand for air travel on the back of the recovery in the global economy. This augurs well for airport operators such as Malaysia Airports as well.

AirAsia has finally done the right things: (1) To adopt a more “disciplined” growth strategy to keep gearing level in check; (2) To gradually take back financial/non-financial support lent to Thai AirAsia, Indonesia AirAsia and AirAsia X; and (3) To deliver the earnings.

We remain cautious on MAS: (1) It is still saddled with fuel hedges at high prices; (2) Its quarterly operating results remain volatile with losses during the latest two quarters; and (3) The massive funding for its fleet renewal programme in 2010- 2015 may mean more cash calls down the road.

The shipping sector will continue to be weighed down by weak freight rates on the back of just a mild recovery in volumes while new capacity continues to flood the market.

One key speed bump to the recovery of the transportation and logistics sector as a whole is rising crude oil prices that could crimp margins.

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors, officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended securities, subject to the duties of confidentiality, will be made available upon request.

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.

50

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