economics & market strategy 23 december 2013 2014...

SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

17 October 2011

PP16832/01/2012 (029059)

Economics & Market Strategy 23 December 2013

PP16832/01/2013 (031128)

of 2

Malaysia

2014 Outlook & Lookouts Defensiveness Returns

We expect a faster global economic growth of 3.5% in 2014 from an

estimated 3.1% in 2013 as major advanced economies – US, Europe,

Japan – simultaneously expand for the first time since 2011. In contrast,

ASEAN‟s growth trends are expected to be mixed on factors ranging

from favourable impact of external demand rebound on Singapore and

Malaysia, to transitory effects of domestic macroeconomic turbulence,

political uncertainties and natural disasters on Indonesia, Thailand and

the Philippines. This is amid the continued sub-8% expansion in China.

We are constructive on Malaysia‟s macroeconomic picture given the

steady growth momentum (GDP 2014E: 5%; 2013: 4.6%), clarity and

credibility in fiscal policy to address the budget deficit via spending and

tax measures, sustainable current account surplus, and the removal of

domestic political uncertainties. The key thing to watch is domestic

consumer spending as inflation accelerates and inflationary

expectations rise in reaction to subsidy rationalisation and price

adjustments. Against the consensus call of at least a 25bps rise in the

benchmark OPR in 2014, we are taking the view that BNM will keep the

OPR unchanged at 3.00% to support growth amid fiscal consolidation.

We expect Malaysian equities‟ defensiveness to stand out yet again

amid external volatilities in 2014, albeit at a milder level with the US QE

Taper being priced in. While the KLCI‟s 16.3x one-year forward PER on

an 8.1% earnings growth offering implies a rather “pricey” PEG of 2x,

the sustainability of Malaysia‟s longer term growth on strong macro-

economic policies and banking and corporate balance sheet strength

will continue to lend support to the premium rating. Political concerns

have diminished, fiscal balance issues are being addressed and

domestic liquidity remains ample.

We maintain our 1,940 end-2014 target for the KLCI. 2014 will very

much be a stock-picking year and we advise investors to focus on the

value stocks in the near term, and notice the big-caps on broader

market dips. Our top stock picks are TNB, Genting Malaysia, Hong

Leong Bank, AMMB, Bumi Armada, IJM Corp, Time dotCom, Cahya

Mata Sarawak and MPHB Capital. Meanwhile, we see continuous re-

rating for the Shariah stocks and higher upside for the Shariah mid-

caps in plantation, oil & gas, telco and property. Visit Malaysia Year

2014 will benefit those in the hospitality industries.

Wong Chew Hann [email protected] (603) 2297 8686 Suhaimi Ilias [email protected] (03) 2297 8680 Malaysia Research Team http://research.maybank-ib.com

mailto:[email protected]

23 December 2013 of 132

2014 Outlook & Lookouts 17 October 2011

Contents Page

ECONOMICS: Policy-Driven Macro Themes 3

MARKET STRATEGY: Defensiveness Returns 25

FEATURE ARTICLE: Subsidy Cuts - Tis’ The Season To Be Wary 45

FEATURE ARTICLE: Shariah Investing - Capitalising On Scarcity Premiums 56

SECTOR OUTLOOK

Automotive: Growth Still Amid Challenges (NT) 67

Aviation: The Great Malaysian Fare War is Ending (OW) 69

Banks: A Modest Pick-Up In 2014 (NT) 71

Building Materials: Mixed Fortunes (Steel UW, Cement NT) 73

Construction: Still Buzzing and Bustling (OW) 75

Consumer: Hungry for Growth (NT) 78

Gaming: Less Good Hands Next Year (Casino OW, NFOs NT ) 82

Gloves: Stretching Valuations (NT) 85

Media: Winter Ahead? (NT) 87

Oil & Gas: Shaping Up (OW) 89

Plantations: Turning Over A New Leaf (NT) 91

Property (Developers): Hard Times Ahead (UW) 94

Property (REITs): It’s All About The Fed (NT) 96

Telecoms: Trade On Catalysts (NT) 99

Utilities (Power): Basking In The New Tariffs (OW) 101

TECHNICALS: Near Exhaustion Point 104

FIXED INCOME: 2014 MYR Fixed Income Outlook 114

Maybank KE Equity Research Stock Universe 126



Policy-Driven Macro Themes

Global economy improves as 2013 closes and 2014 opens. Global

real GDP growth quickened between 1Q 2013 and 3Q 2013 on the

back of a gradual pick up in US, receding recession in Eurozone,

stabilizing China‟s economy and stimulus-driven growth in Japan amid

mixed performances in Asian NIEs and ASEAN. Forward-looking

signals like the index of leading economic indicators, purchasing

managers index (PMI) and business surveys point to continued positive

momentum in late-2013 and early-2014.

Major economies‟ performance and policies are the key

determinants to global economic direction in 2014. Impact of QE

Taper rollout and resolution of the US debt ceiling are the immediate

concerns. Policies in Europe are expected to be geared towards

upholding the fragile green shoot of recovery. The focus on China will

be on executing economic rebalancing and reforms. For Japan,

reforms are the crucial next step to sustain and enhance its reflation

story after the “quick wins” from monetary and fiscal stimuli.

For Asia, the outlook and lookouts are contingent on managing

internal risks, in view of the expected impact of QE Taper on the

region‟s capital flows and asset markets i.e. credit cycle, financial

stability and macroeconomic imbalances.

Pricing in a mild pick up in global economic growth. We expect a

faster global economic growth of 3.5% in 2014 from an estimated 3.1%

in 2013 as major advanced economies – US, Europe, Japan –

simultaneously expand for the first time since 2011. In contrast,

ASEAN‟s growth trends are expected to be mixed on factors ranging

from the favourable impact of external demand rebound on Singapore

and Malaysia to the transitory effects of domestic macroeconomic

turbulence, political uncertainties and natural disasters on Indonesia,

Thailand and the Philippines. This is amid the continued sub-8%

expansion in China.

We are constructive on Malaysia‟s macroeconomic picture given

the steady growth momentum (2014E: 5%; 2013: 4.6%); clarity and

credibility in fiscal policy to address the budget deficit via spending and

tax measures in Budget 2014; sustainable current account surplus; and

the removal of domestic political uncertainties.

The key thing to watch is domestic consumer spending following

the recent slump in consumer sentiment as inflation rate accelerates

and inflationary expectations rise in reaction to the recently announced

– and the upcoming – subsidy rationalisation and price adjustments.

Against the consensus call of at least a 25bps rise in the Overnight

Policy Rate (OPR) in 2014, we are taking the view that BNM will keep

OPR unchanged at 3.00% to support growth amid fiscal consolidation

as we believe the central bank would not automatically react to cost-

push inflation (as opposed to demand-pull inflation).

Economics

2014 Real GDP: 5.0% (unchanged)

Suhaimi Ilias [email protected] (03) 2297 8680 Dr. Zamros Dzulkafli [email protected] (603) 2082 6818 Ramesh Lankanathan [email protected] (603) 2297 8685 William Poh [email protected] (603) 2297 8683





LOOKING BACK AT 2013

Global economy improved as 2013 draws to a close. The

improvement in global real GDP growth in 2Q 2013 to 3.1% YoY from

2.6% YoY in 1Q 2013 was sustained in 3Q 2013 as the world economy

expanded further by 3.4% YoY. This was primarily on the back of a

gradual pick up in US, receding recession in Eurozone, stabilizing

China‟s economy from the earlier slowdown, and accelerating growth in

Japan amid mixed performances across Asian NIEs and ASEAN. The

value and volume of world trade also expanded at faster paces of 2.7%

and 3.1% YoY in 3Q 2013 versus 0.3% and 1.8% in 1H 2013.

Global: Quarterly Real GDP Growth, % YoY

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13

WORLD 4.3 4.0 3.4 3.1 2.6 3.1 3.4

US 3.3 2.8 3.1 2.0 1.3 1.6 1.8

Eurozone (0.2) (0.5) (0.7) (1.0) (1.2) (0.6) (0.4)

Germany 1.3 1.1 0.9 0.3 (0.3) 0.5 0.6

France 0.4 0.1 0.0 (0.3) (0.4) 0.5 0.2

Italy (1.8) (2.6) (2.8) (3.0) (2.5) (2.2) (1.8)

Spain (1.2) (1.6) (1.7) (2.1) (2.0) (1.6) (1.1)

Portugal (2.4) (3.2) (3.6) (3.8) (4.1) (2.0) (1.0)

Japan 3.1 3.2 (0.2) (0.3) 0.1 1.2 2.4

UK 0.6 0.0 0.0 (0.2) 0.2 1.3 1.5

Australia 4.6 3.8 3.2 2.8 2.1 2.4 2.3

China 8.1 7.6 7.4 7.9 7.7 7.5 7.8

India 5.1 5.4 5.2 4.7 4.8 4.4 4.8

Russia 4.8 4.3 3.0 2.1 1.6 1.2 1.2

Brazil 0.8 0.6 0.9 1.8 1.8 3.3 2.2

S. Korea 2.8 2.4 1.6 1.5 1.5 2.3 3.3

Taiwan 0.5 0.1 1.4 3.9 1.4 2.7 1.7

Hong Kong 0.7 0.9 1.5 2.8 2.9 3.2 2.9

Singapore 1.5 2.3 0.0 1.5 0.3 4.4 5.8

Indonesia 6.3 6.4 6.2 6.1 6.1 5.8 5.6

Thailand 0.4 4.4 3.1 19.1 5.4 2.9 2.7

Malaysia 5.1 5.6 5.3 6.5 4.1 4.4 5.0

Philippines 6.5 6.3 7.3 7.1 7.7 7.6 7.0

Vietnam 4.1 4.7 5.4 5.8 4.9 4.9 5.1

Sources: Bloomberg, CEIC, Maybank KE

Global Trade Volume & Value

(10)

(5)

0

5

10

15

20

25

30

35

Jan

-10

May

-10

Sep

-10

Jan

-11

May

-11

Sep

-11

Jan

-12

May

-12

Sep

-12

Jan

-13

May

-13

Sep

-13

World Trade Volume (% YoY) World Trade Value (% YoY)

Sources: Bloomberg, CEIC, Netherlands Bureau for Economic Policy Analysis, Maybank KE



Positive momentum was sustained in the final months of 2013.

The Composite Global Purchasing Managers Index (PMI) averaged

53.2 in Oct-Nov 2013 (3Q 2013: 54.2), indicating continued expansion

in economic activities, driven by the rise in manufacturing PMI (Oct-Nov

2013: 52.7; 3Q 2013: 51.4) and the sustained above-50 reading in

services PMI (Oct-Nov 2013: 52.9; 3Q 2013: 54.9). The data also

indicate the improvement in global economic condition is underpinned

by the major economies.

Global PMI Heat Map

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13

Oct-Nov/ 4Q

2013

Composite 54.8 51.6 51.7 52.8 53.0 52.0 54.2 53.2

Manufacturing 51.2 50.4 48.4 49.5 51.1 50.5 51.4 52.7

- - - -

US 53.3 52.7 50.9 50.6 52.9 50.2 55.8 56.9

Eurozone 48.5 45.4 45.1 45.9 47.5 47.9 50.9 51.9

Germany 49.9 45.5 45.0 46.3 49.7 48.7 51.2 52.2

France 48.4 45.6 44.0 44.3 43.6 46.4 49.7 48.8

Italy 47.5 44.4 44.5 45.8 46.0 47.3 50.8 51.1

Japan 50.8 50.4 47.9 46.1 48.9 51.6 51.8 54.7

UK 51.8 48.2 47.6 49.2 49.0 51.5 56.1 57.5 - - - -

China 51.5 51.3 49.7 50.5 50.5 50.5 50.8 51.4

China * 48.9 48.6 48.3 50.5 51.4 49.3 49.3 50.7

Brazil 51.0 49.0 49.3 50.7 52.5 50.5 49.3 50.0

India 56.3 54.9 52.8 53.8 53.1 50.5 49.4 50.5 - - - -

S. Korea 50.6 50.8 46.8 48.6 50.9 51.2 48.1 50.3

Taiwan* 51.9 50.3 46.4 48.6 51.0 49.1 50.2 53.2

Singapore 49.8 50.2 49.2 48.6 50.1 51.0 50.9 51.0

Indonesia 50.8 49.6 51.2 51.4 50.5 51.4 49.8 50.6

Services 55.5 51.7 52.8 53.8 53.3 52.2 54.9 52.9

- - - -

US 55.7 53.5 54.1 55.1 55.2 52.6 55.8 56.9

Eurozone 49.5 46.9 47.1 46.8 47.6 47.5 50.9 51.2

Germany 52.9 51.3 49.4 50.0 53.8 49.9 52.6 53.7

France 50.8 46.1 48.1 45.2 42.9 45.3 49.5 49.9

Italy 44.4 42.7 43.8 45.4 44.3 46.4 50.1 50.5

Japan 52.0 50.0 48.6 51.0 52.2 52.9 51.6 55.3

UK 55.0 52.6 52.3 49.9 51.9 54.9 60.3 62.5

China 57.0 56.0 55.2 55.7 55.4 54.2 54.5 56.2

China * 53.2 53.7 53.1 52.4 53.5 51.2 52.2 52.6

India 55.6 53.9 55.0 53.8 54.4 52.0 46.7 47.2

Note: Data for Eurozone and China * (manufacturing) are for 4Q 2013 Sources: Bloomberg, Markit (*)

Positive impact on ASEAN via the trade channel. US, Europe,

China and Japan collectively accounts for 53% of world GDP, 49% of

world trade and around 40% of ASEAN‟s total exports. The positive

impact of the improvements in these economies – hence global

demand – were visible in ASEAN‟s exports (in USD), which rebounded

in 3Q 2013 after the dismal 1H 2013. The data for Oct-Nov 2013

showed the positive momentum continued in 4Q 2013. This was

especially the case for Singapore, Malaysia and the Philippines.

Notable exceptions or laggards were Indonesia and Thailand, which we

pinned down to specific domestic factors, namely the domestic

macroeconomic, policy and political uncertainties.



ASEAN: % Share of US, Europe, Japan & China in Total Exports, 2013

ASEAN: Export Growth (in USD, % YoY)

29%

45%

41% 42%

56%

0%

10%

20%

30%

40%

50%

60%

Singapore Indonesia Thailand Malaysia Philippines

(10)

(5)

0

5

10

15

20

25

Singapore Indonesia Thailand Malaysia Philippines Vietnam

1Q 2013 2Q 2013 3Q 2013 Oct-Nov 2013

Sources: Bloomberg, CEIC Sources: Bloomberg, CEIC

ASEAN: Exports as % of GDP, 2013 ASEAN: Net External Demand as % of GDP, 2013

223.4

46.4

74.4

90.6

48.3

0

50

100

150

200

250

Sin

gapore

Ind

onesi

a

Th

ailand

Mala

ysia

Ph

ilip

pin

es

28.7

10.5

14.0

5.7

0.2

0

5

10

15

20

25

30

35

Sin

gapore

Ind

onesi

a

Th

ailand

Mala

ysia

Ph

ilip

pin

es


LOOKOUTS FOR 2014

Mindful of past “blips”. Having said all the above, the past 3-4 years

exhibited the global economy‟s penchant for displaying promising signs

of rebounds as one year closes and another year opens, only for the

momentum to fizzle out later as it fell victim to negative shocks and

surprises. Therefore, the natural question to ask is what could go

wrong (rather than what could go right)?

Global Composite PMI vs Real GDP Growth

(6)

(4)

(2)

0

2

4

6

8

35

40

45

50

55

60

Jan

-07

May-0

7

Aug

-07

No

v-0

7

Feb-0

8

May-0

8

Aug

-08

No

v-0

8

Feb-0

9

May-0

9

Aug

-09

No

v-0

9

Feb-1

0

May-1

0

Aug

-10

No

v-1

0

Feb-1

1

May-1

1

Aug

-11

No

v-1

1

Feb-1

2

May-1

2

Aug

-12

No

v-1

2

Feb-1

3

May-1

3

Aug

-13

No

v-1

3

Global Composite PMI (LHS) Global GDP (% YoY, RHS)

Sources: Bloomberg, Maybank KE

Euro Crisis

(Greece &

Ireland bailouts)

Euro Crisis

(Portugal bailouts);

Arab Springs; US debt ceiling crisis

Euro Crisis

(Greece &

Spain bailouts); US fiscal

cliff

Cyprus bailout; China

slowdown; US tax

increases & spending cuts; QE

Taper

???



Policies are key to the outlook and lookouts for 2014. The key

determinants of the global economy‟s direction in 2014 will be policies,

especially in the major economies.

US Fed‟s QE Taper takes off in Jan 2014. After months of waiting

and speculating, the 17-18 Dec 2013 FOMC meeting ended with the

Fed announcing the start of QE Taper in Jan 2014 where its asset

purchases is lowered by USD10b to USD75b per month from USD85b

per month i.e. reducing the monthly purchases of the agency mortgage-

backed securities to USD35b from USD40b and the longer-term

Treasury securities to USD40b from USD45b. The decision was clearly

and largely influenced by the job market data i.e. sustained drop in

jobless rate to a five-year low of 7% in Nov 2013; “normalization” in

non-farm payrolls and initial jobless claims to levels that are historically

consistent with cyclical expansion in the US.

QE Taper may be completed by late-2014 or early-2015, and the fed

funds rate‟s (FFR) normalization may start in mid-2015. QE Taper‟s

forward path is “data dependent” – especially on continued job market

improvement and inflation moving back towards the Fed‟s long-run

objective of 2% – according to the latest FOMC statement. In addition,

the Fed also indicate the FFR may stay at current 0%-0.25% even after

unemployment rate fell below 6.5% especially if inflation rate trend

continues to be below the Fed‟s target rate. Meanwhile, Fed‟s latest

key macroeconomic forecasts show unemployment rate and inflation

rate reaching 6.5% and approaching 2% as early as 4Q 2014. Taking

cue from the guidance and projections, we reckon QE Taper may be

completed by end-2014 or early-2015 (i.e. over 8-10 FOMC meetings),

and normalization of the FFR may start in mid-2015 at the earliest.

US: Unemployment Rate (%) US: Change in Non-Farm Payrolls („000)

4

5

6

7

8

9

10

11

Jan

-04

Jun

-04

No

v-0

4

Ap

r-05

Sep

-05

Feb-0

6

Jul-

06

Dec-0

6

May-0

7

Oct-

07

Mar-

08

Aug

-08

Jan

-09

Jun

-09

No

v-0

9

Ap

r-10

Sep

-10

Feb-1

1

Jul-

11

Dec-1

1

May-1

2

Oct-

12

Mar-

13

Aug

-13

(1,000,000)

(800,000)

(600,000)

(400,000)

(200,000)

0

200,000

400,000

600,000

Jan

-04

Jun

-04

No

v-0

4

Ap

r-05

Sep

-05

Feb-0

6

Jul-

06

Dec-

06

May-0

7

Oct

-07

Mar-

08

Aug

-08

Jan

-09

Jun

-09

No

v-0

9

Ap

r-10

Sep

-10

Feb-1

1

Jul-

11

Dec-1

1

May-1

2

Oct

-12

Mar-

13

Aug

-13

Source: Bloomberg Source: Bloomberg

US: Weekly Initial Jobless Claims US: Inflation Rates (% YoY)

100

200

300

400

500

600

700

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

(8)

(6)

(4)

(2)

0

2

4

6

8

10

12

Jan

-07

Ap

r-07

Jul-

07

Oct-

07

Jan

-08

Ap

r-08

Jul-

08

Oct-

08

Jan

-09

Ap

r-09

Jul-

09

Oct-

09

Jan

-10

Ap

r-10

Jul-

10

Oct-

10

Jan

-11

Ap

r-11

Jul-

11

Oct-

11

Jan

-12

Ap

r-12

Jul-

12

Oct-

12

Jan

-13

Ap

r-13

Jul-

13

Oct-

13

CPI %YOY PPI %YOY PCE Deflator %YOY




US mid-term election in 2014 looks like the catalyst that would

resolve the fiscal policy issues. 2014 is an election year in the US

(after the 2012 Presidential Election) where all 435 seats in the House

of Representatives and 33 of the 100 seats in the Senate will be

contested on 4 Nov 2014. Fiscal policy risks may be mitigated by the

incentive for lawmakers seeking re-elections to avoid the divisive

politics, fiscal policy deadlocks and legislative brinkmanship of the past

2-3 years. On that note, the Joint House-Senate Budget Committee

announced a two-year budget deal on 10 Dec 2013, ahead of the 13

Dec 2013 deadline. This was swiftly passed by the Republican-

controlled House of Representatives on 12 Dec 2013 and the

Democrat-controlled Senate on 19 Dec 2013. The budget deal provides

funding for the Federal Government in FY2014 and FY2015, averting

the risk of repeating the Oct 2013 shutdown. It also leaves debt ceiling

as the remaining fiscal hurdle which must be passed to ensure the

above budget deal can be implemented. We view the debt ceiling will

be raised given the lawmakers‟ recent display of accord (as opposed to

discord).

Fragile turnaround and “liquidity trap” in Eurozone. The emerging

recovery in Eurozone is fraught with vulnerabilities amid record-high

unemployment, risk of deflation as inflation rate is substantially below

the European Central Bank‟s (ECB) 2% target, contractions in bank

lending, indicating the risk of “liquidity trap” and the still uneven degree

of recovery across the single currency area. In response, ECB has cut

its benchmark interest rate twice in 2013 by 25bps each to the record-

low of 0.25%. One thing for sure, ECB will not be repeating the mistake

of 2011 when it prematurely hiked the policy rate when unemployment

rate temporarily stabilised, inflation rate accelerated and bank lending

rebounded.

Eurozone: Unemployment Rate (%) Eurozone: Inflation Rate (%)

7

8

9

10

11

12

13

Jan

-07

Ap

r-07

Jul-

07

Oct

-07

Jan

-08

Ap

r-08

Jul-

08

Oct

-08

Jan

-09

Ap

r-09

Jul-

09

Oct

-09

Jan

-10

Ap

r-10

Jul-

10

Oct

-10

Jan

-11

Ap

r-11

Jul-

11

Oct

-11

Jan

-12

Ap

r-12

Jul-

12

Oct

-12

Jan

-13

Ap

r-13

Jul-

13

Oct

-13

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan

-07

Ap

r-07

Jul-

07

Oct-

07

Jan

-08

Ap

r-08

Jul-

08

Oct-

08

Jan

-09

Ap

r-09

Jul-

09

Oct-

09

Jan

-10

Ap

r-10

Jul-

10

Oct-

10

Jan

-11

Ap

r-11

Jul-

11

Oct-

11

Jan

-12

Ap

r-12

Jul-

12

Oct-

12

Jan

-13

Ap

r-13

Jul-

13

Oct-

13

Headline Inflation Rate Core Inflation Rate


Eurozone: Banking System Loans Growth European Central Bank‟s Benchmark Rate (% p.a.)

(4)

(2)

0

2

4

6

8

10

12

Jan

-07

Ap

r-07

Jul-

07

Oct-

07

Jan

-08

Ap

r-08

Jul-

08

Oct-

08

Jan

-09

Ap

r-09

Jul-

09

Oct-

09

Jan

-10

Ap

r-10

Jul-

10

Oct-

10

Jan

-11

Ap

r-11

Jul-

11

Oct-

11

Jan

-12

Ap

r-12

Jul-

12

Oct-

12

Jan

-13

Ap

r-13

Jul-

13

Oct-

13

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Jan

-07

Ap

r-07

Jul-

07

Oct-

07

Jan

-08

Ap

r-08

Jul-

08

Oct-

08

Jan

-09

Ap

r-09

Jul-

09

Oct-

09

Jan

-10

Ap

r-10

Jul-

10

Oct-

10

Jan

-11

Ap

r-11

Jul-

11

Oct-

11

Jan

-12

Ap

r-12

Jul-

12

Oct-

12

Jan

-13

Ap

r-13

Jul-

13

Oct-

13




Amid stabilizing financial conditions and positive news flow on the

bailout recipients. The key positives for Eurozone right now are the

stabilisation of the financial conditions, exemplified by the normalization

of the sovereign bond yields that eases financial stress on the

Government and the banking sector, as well as the upgrades in the

sovereign credit ratings of Greece and Cyprus in Nov 2013. In addition,

there is also the expected exit of Ireland and Spain from the bailout

programmes in 2014. Notably, the talks of “Grexit” and Eurozone

breakup have died down, while the region is progressing towards

deeper integration of the monetary union with banking union via ECB‟s

banking supervision role starting Nov 2014.

Italy, Spain, Portugal, Greece, Ireland: 10-Year Sovereign Bond Yield (% p.a.)

Europe: Financial Stress Index

0

2

4

6

8

10

12

14

16

0

5

10

15

20

25

30

35

40

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-10

Jan

-11

Mar

-11

May-

11

Jul-

11

Sep

-11

No

v-1

1

Jan

-12

Mar

-12

May-

12

Jul-

12

Sep

-12

No

v-1

2

Jan

-13

Mar

-13

May-

13

Jul-

13

Sep

-13

No

v-1

3Greece

Portugal

Spain (RHS)

Italy (RHS)

Ireland (RHS)

(12)

(10)

(8)

(6)

(4)

(2)

0

2

Jan

-07

Ap

r-07

Jul-

07

Oct-

07

Jan

-08

Ap

r-08

Jul-

08

Oct-

08

Jan

-09

Ap

r-09

Jul-

09

Oct-

09

Jan

-10

Ap

r-10

Jul-

10

Oct-

10

Jan

-11

Ap

r-11

Jul-

11

Oct-

11

Jan

-12

Ap

r-12

Jul-

12

Oct-

12

Jan

-13

Ap

r-13

Jul-

13

Oct-

13


Unconventional monetary policy measures on the way. The ECB

can be expected to do more to support Eurozone‟s green shoots of

recovery given the central bank‟s remarks about the availability of other

policy tools to supplant the commitment to zero-bound interest rate for

an extended period of time. The non-conventional monetary policy

measures being talked about include negative interest rate on the

banking system‟s deposits with ECB and fresh round of liquidity

injection via the Long-Term Refinancing Operations (LTROs).

Economic rebalancing and reforms in China. China‟s new

leadership announced economic reforms and rebalancing after the

conclusion of the 3rd Plenum of the 18th Communist Party‟s Central

Committee meeting on 9-12 Nov 2013, consisting three key elements:

Social reforms to boost domestic consumption, which include

easing the one-child policy for parents who are themselves the only

child; overhauling “hukou” (Mao-era household registration system)

that restricts migration and urbanisation (i.e. scrapped for towns and

small cities; relaxed for mid-sized cities); granting more rights for

farmers to enable “monetisation” of land ownerships; and policy to

extend retirement age.

Political reforms – of which the main economic agenda is to

curb excessive or over-investment – via steps like reviewing the

evaluation of officials‟ performances from one that is based on

“growth rates” to “controlling overcapacity”, and strengthening anti-

corruption efforts e.g. setting up Central Commission for Discipline

Inspection to monitor State Government bureaus & State-Owned

Enterprises.



Financial & non-financial market reforms for greater role of

market forces and private sector, and to reform the public

sector and state-owned enterprises. Financial market reforms

include establishing deposit insurance; cleaning up NPLs;

liberalising interest rates; Renminbi convertibility and

internationalization; allowing qualified private investors to open

small-to-mid-sized bank; and permitting local governments to raise

bonds for urban construction projects. Non-financial market reforms

include fewer investment restrictions on foreigners and private sector

(e.g. open up more markets not in “negative lists”); exempting

corporate projects in “non-restricted areas” from government

approvals; pricing reforms for water, oil & gas, power, transport; and

establishing more free-trade zones. At the time of writing, there

have been indications and announcements that financial market

reforms are taking place e.g. the central bank slowing its currency

market intervention and announcing free convertibility of special

accounts at Shanghai Free Trade Zone, suggesting willingness to let

trade and investment flows determine Renminbi‟s exchange rate;

China‟s banking and securities regulators allowing the trading of

negotiable certificate of deposits (NCDs) and ending the freeze on

IPOs imposed back in Sep 2012.

While attending to the persistent macro risks in property amid the

resurgent house prices, and addressing the issues of shadow banking

and debt/credit growth. There were fresh rounds of measures by the

local authorities towards end-2013 to curb property speculations, while

the central bank‟s liquidity tightening operations have pushed up the

short-term and long-term market interest rates, on top of the widening

of regulatory oversights on credit growth and shadow banking as well

as curbing over-investments and reducing excess capacities.

China: House Price Index China: Short-Term & Long-Term Market Interest Rates (% p.a.)

(4)

(2)

0

2

4

6

8

10

12

14

16

18

95

105

115

125

135

145

155

165

Jan

-06

May-0

6

Sep

-06

Jan

-07

May-0

7

Sep

-07

Jan

-08

May-0

8

Sep

-08

Jan

-09

May-0

9

Sep

-09

Jan

-10

May-1

0

Sep

-10

Jan

-11

May-1

1

Sep

-11

Jan

-12

May-1

2

Sep

-12

Jan

-13

May-1

3

Sep

-13

Index % YoY

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Jan

-13

Jan

-13

Jan

-13

Feb-1

3

Feb-1

3

Mar-

13

Mar-

13

Ap

r-13

Ap

r-13

May-1

3

May-1

3

Jun

-13

Jun

-13

Jul-

13

Jul-

13

Jul-

13

Aug

-13

Aug

-13

Sep

-13

Sep

-13

Oct-

13

Oct-

13

No

v-1

3

No

v-1

3

Dec-1

3

3M SHIBOR 10Y Govt Bond Yield


China: Monthly New Loans & Total Loans Growth China: Credit Growth (Chg in CNY b)

0

5

10

15

20

25

30

35

40

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Jan

-07

May-0

7

Sep

-07

Jan

-08

May-0

8

Sep

-08

Jan

-09

May-0

9

Sep

-09

Jan

-10

May-1

0

Sep

-10

Jan

-11

May-1

1

Sep

-11

Jan

-12

May-1

2

Sep

-12

Jan

-13

May-1

3

Sep

-13

New Loans (CNYb) FI Total Loans (% YoY, RHS)

(100)

0

100

200

300

400

500

600

700

0

500

1,000

1,500

2,000

2,500

3,000

Jan

-07

May-0

7

Sep

-07

Jan

-08

May-0

8

Sep

-08

Jan

-09

May-0

9

Sep

-09

Jan

-10

May-1

0

Sep

-10

Jan

-11

May-1

1

Sep

-11

Jan

-12

May-1

2

Sep

-12

Jan

-13

May-1

3

Sep

-13

All-System Financing Aggregate Trust & Entrusted Loans - RHS




China: Money Supply Growth (M2, % YoY) China: Fixed Asset Investment (% Chg)

10

12

14

16

18

20

22

24

26

28

30

Jan

-07

Ap

r-07

Jul-

07

Oct

-07

Jan

-08

Ap

r-08

Jul-

08

Oct

-08

Jan

-09

Ap

r-09

Jul-

09

Oct

-09

Jan

-10

Ap

r-10

Jul-

10

Oct

-10

Jan

-11

Ap

r-11

Jul-

11

Oct

-11

Jan

-12

Ap

r-12

Jul-

12

Oct

-12

Jan

-13

Ap

r-13

Jul-

13

6

11

16

21

26

31

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013Y

TD


Abenomics‟ first two policy arrows hit the bull‟s eye. Japan‟s

monetary and fiscal stimuli have delivered the intended “quick wins” for

2013 i.e. Japanese Yen‟s 16% depreciation that help exporters, and the

equity market‟s 48% surge that boost domestic confidence and investor

sentiment. Deflation has also turned into inflation, by the various

measures of consumer and business price indices. The latest fiscal

stimulus announced in Dec 2013 also offer income tax and spending

offsets to the consumption tax rate hike to 8% from 5% effective 1 Apr

2014.

Bank of Japan‟s Balance Sheet (JPY b) Fiscal Stimulus (JPY tr & % of GDP)

90,000

100,000

110,000

120,000

130,000

140,000

150,000

160,000

170,000

180,000

190,000

200,000

210,000

220,000

230,000

Jan

-07

May-0

7

Sep

-07

Jan

-08

May-0

8

Sep

-08

Jan

-09

May-0

9

Sep

-09

Jan

-10

May-1

0

Sep

-10

Jan

-11

May-1

1

Sep

-11

Jan

-12

May-1

2

Sep

-12

Jan

-13

May-1

3

Sep

-13

0

1

2

3

4

5

6

0

5

10

15

20

25

30

Aug

92

Ap

r 93

Sep

93

Feb 9

4

Ap

r 95

Sep

95

Ap

r 98

No

v 9

8

No

v 9

9

Oct 0

0

Oct 0

1

Dec 0

1

Dec 0

2

Aug

08

Oct 0

8

Ap

r 09

Oct 1

2

No

v 1

2

Jan

13

Dec 1

3

JPY (tr) % of GDP (RHS)

Source: Bloomberg Sources: Official announcements, Media Reports, Maybank KE

JPY per USD NIKKEI

75

80

85

90

95

100

105

Jan

-12

Jan

-12

Feb

-12

Mar

-12

Mar

-12

Ap

r-12

Ap

r-12

May

-12

Jun

-12

Jun

-12

Jul-

12A

ug-1

2A

ug-1

2S

ep-1

2O

ct-1

2O

ct-1

2N

ov-

12D

ec-1

2D

ec-1

2Ja

n-1

3F

eb-1

3F

eb-1

3M

ar-1

3A

pr-

13A

pr-

13M

ay-1

3Ju

n-1

3Ju

n-1

3Ju

l-13

Aug

-13

Aug

-13

Sep

-13

Oct

-13

Oct

-13

No

v-13

Dec

-13

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

Jan

-12

Jan

-12

Feb-1

2M

ar-

12

Mar-

12

Ap

r-12

Ap

r-12

May-1

2Jun

-12

Jun

-12

Jul-

12

Aug

-12

Aug

-12

Sep

-12

Oct-

12

Oct-

12

No

v-1

2D

ec-1

2D

ec-1

2Jan

-13

Feb-1

3F

eb-1

3M

ar-

13

Ap

r-13

Ap

r-13

May-1

3Jun

-13

Jun

-13

Jul-

13

Aug

-13

Aug

-13

Sep

-13

Oct-

13

Oct-

13

No

v-1

3D

ec-1

3




Time for the “third arrow” to sustain and enhance Japan‟s

reflation story. However, the rise in general inflation has yet to

transmit into other key prices like labour (wages, income) and real asset

(properties, lands) prices. This is the next (and real) challenge for

Abenomics i.e. economic and structural reforms to spur investment and

lift income. Positively, businesses are gaining confidence on, and

buying in, Japan‟s reflation story. They are “investing” in the anticipated

reforms as indicated by the rise domestic capex indicators (e.g.

machinery orders). Moreover, from a strategic viewpoint and

geopolitical angle, Japan needs to proceed with its own reforms given

the markets‟ positive reactions to China‟s economic rebalancing and

reforms that will serve to sustain China‟s global ascendancy, or else

Japan will lag further.

Japan: Inflation Indicators (% YoY) Japan: Average Monthly Cash Earnings (% YoY)

(3.0)

(2.0)

(1.0)

0.0

1.0

2.0

3.0

Jan

-12

Feb-1

2

Mar-

12

Ap

r-12

May-1

2

Jun

-12

Jul-

12

Aug

-12

Sep

-12

Oct-

12

No

v-1

2

Dec-1

2

Jan

-13

Feb-1

3

Mar-

13

Ap

r-13

May-1

3

Jun

-13

Jul-

13

Aug

-13

Sep

-13

Oct-

13

No

v-1

3

CPI CORE CPI

CORP. GOODS PRICE INDEX CORP. SERVICES PRICE INDEX

(2.0)

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

Jan

-12

Feb-1

2

Mar-

12

Ap

r-12

May-1

2

Jun

-12

Jul-

12

Aug

-12

Sep

-12

Oct-

12

No

v-1

2

Dec-1

2

Jan

-13

Feb

-13

Mar-

13

Ap

r-13

May-1

3

Jun

-13

Jul-

13

Aug

-13

Sep

-13

Oct-

13


Japan: Land Prices Japan: Machinery Orders (% YoY)

(15)

(10)

(5)

0

5

10

15

20

25

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013 Y

TD

Land Price Residential Land Commercial Land

(55)

(44)

(33)

(22)

(11)

0

11

22

33

44

Jan

-07

May-0

7

Aug

-07

No

v-0

7

Feb-0

8

May-0

8

Aug

-08

No

v-0

8

Feb-0

9

May-0

9

Aug

-09

No

v-0

9

Feb-1

0

May-1

0

Aug

-10

No

v-1

0

Feb-1

1

May-1

1

Aug

-11

No

v-1

1

Feb-1

2

May-1

2

Aug

-12

No

v-1

2

Feb-1

3

May-1

3

Aug

-13

Total Machinery Orders

Private Sector Machinery Orders (ex Volatile Orders)


QE Taper impact on ASEAN. Our QE Vulnerability Score

(ASEANomics – QE Vulnerability Score, 1 July 2013) showed ASEAN

economies occupy the top half of the rankings of 11 Asia ex-Japan‟s

vulnerability to QE Taper amid factors like the strong correlations

between the region‟s stock, bond and property markets with Fed‟s

balance sheet, and the high foreign holdings of Government bonds in

ASEAN. The vulnerability was underscored by the tumble in ASEAN‟s

equity markets, bond markets and currencies amid capital outflows

back in May-Aug 2013 on QE Taper jitters. While the markets and

currencies recovered some lost grounds post-Sep 2013 FOMC as Fed

postponed QE Taper, the volatility resurfaced again as Dec 2013

FOMC approached. Our analysis also showed a permanent 100bps

rise in US 10-year Treasury yield could cut the region‟s real GDP

growth by between 0.3 percentage points to 2.0 percentage points

(ASEANomics – QE Taper Impact on ASEAN, 30 Sep 2013).



Stock Market Index Correlation with US Fed‟s Balance Sheet Since the Start of QE

10-Year Government Bond Yield Correlation with US Fed‟s Balance Sheet Since the Start of QE

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Ph

ilip

pin

es

Th

ailand

Mala

ysia

Ind

onesi

a

S. K

ore

a

Sin

gapore

Ind

ia

Taiw

an

Ho

ng K

ong

Vie

tnam

Ch

ina

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

Ind

ia

Ch

ina

Vie

tnam

Th

ailand

Taiw

an

Sin

gapore

Ho

ng K

ong

Mala

ysia

Ind

onesi

a

S. K

ore

a

Ph

ilippin

es


Change in Property Price Index Since the Start of QE Foreign Holdings of Government Bonds (% of Total Outstanding)

141.1

92.0

45.3 34.0 33.9 29.9 25.3

11.6 9.0 (1.7) (3.0)

(20)

0

20

40

60

80

100

120

140

160

HK

Taiw

an

Mala

ysia

Ch

ina

Sin

gapore

Ind

onesi

a

Austr

alia

UK

So

uth

Ko

rea

US

EU

10

15

20

25

30

35

40

45

50

55

Ap

r-13

May-1

3

Jun

-13

Jul-

13

Aug

-13

Sep

-13

Oct-

13

Malaysia Indonesia Thailand

Sources: CEIC, BIS Sources: Central Banks, ADB’s Asian Bond Online

Impact of a permanent 100bps increase in 10-Year US Treasury yield on ASEAN (plus China & Hong Kong) real GDP growth (chg in ppt)

(2.5) (2.0) (1.5) (1.0) (0.5) 0.0

Singapore

China

Thailand

Malaysia

Phillipines

Hong Kong

Vietnam

Indonesia

Source: Maybank KE



However, impact may have been priced in. Measures of global

equity, bond and currency volatilities indicate a more orderly and

gradual market direction ahead of the Dec 2013 FOMC and subsequent

reactions to QE Taper announcement. ASEAN currencies‟ earlier falls

versus US Dollar was sharp in the wake of Ben Bernanke‟s QE Taper

remark back in May 2013 and the ensuing market jitters ahead of Sep

2013 FOMC. But the currency impact was more muted in reaction to

the possibility of QE Taper in Dec 2013 FOMC. In addition, ASEAN‟s

10-year sovereign bond yields spiked again ahead of the Dec 2013

FOMC, but to levels that were more or less the same as the previous

highs ahead of Sep 2013 FOMC. Overall, these suggest the global and

regional markets have factored in the QE Taper event.

Equity Market Volatility Index (VIX) Bond Market Volatility Index (MOVE Index)

10

12

14

16

18

20

22

Jan

-13

Jan

-13

Jan

-13

Feb-1

3

Feb-1

3

Mar-

13

Mar-

13

Ap

r-13

Ap

r-13

May-1

3

May-1

3

Jun

-13

Jun

-13

Jul-

13

Jul-

13

Jul-

13

Aug

-13

Aug

-13

Sep

-13

Sep

-13

Oct-

13

Oct-

13

No

v-1

3

No

v-1

3

Dec-1

3

Dec-1

3

40

50

60

70

80

90

100

110

120

Jan

-13

Jan

-13

Jan

-13

Feb

-13

Feb

-13

Mar-

13

Mar-

13

Ap

r-13

Ap

r-13

May-

13

May-

13

Jun

-13

Jun

-13

Jul-

13

Jul-

13

Jul-

13

Aug

-13

Aug

-13

Sep

-13

Sep

-13

Oct

-13

Oct

-13

No

v-1

3

No

v-1

3

Dec-

13

Dec-

13


Currency Market Volatility Index ASEAN: Currencies vs USD (% chg)

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

Jan

-13

Jan

-13

Jan

-13

Feb-1

3

Feb-1

3

Mar-

13

Mar-

13

Ap

r-13

Ap

r-13

May-…

May-…

Jun

-13

Jun

-13

Jul-

13

Jul-

13

Jul-

13

Aug

-13

Aug

-13

Sep

-13

Sep

-13

Oct-

13

Oct-

13

No

v-1

3

No

v-1

3

Dec-1

3

Dec-1

3

(14)

(12)

(10)

(8)

(6)

(4)

(2)

0

2

4

IDR THB PHP MYR SGD VND

May-Aug 2013 Sep-Oct 2013 Nov-Dec 2013


ASEAN: Stock Market Benchmark Indices (% chg) ASEAN: 10-Year Government Bond Yields (% p.a.)

(20)

(16)

(12)

(8)

(4)

0

4

8

12

Thailand Indonesia Philippines Singapore Vietnam Malaysia

May-Aug 2013 Sep-Oct 2013 Nov-Dec 2013

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

01-J

an

-13

15-J

an

-13

29-J

an

-13

12-F

eb-1

3

26-F

eb-1

3

12-M

ar-

13

26-M

ar-

13

09-A

pr-

13

23-A

pr-

13

07-M

ay-1

3

21-M

ay-1

3

04-J

un

-13

18-J

un

-13

02-J

ul-

13

16-J

ul-

13

30-J

ul-

13

13-A

ug

-13

27-A

ug

-13

10-S

ep

-13

24-S

ep

-13

08-O

ct-

13

22-O

ct-

13

05-N

ov-1

3

19-N

ov-1

3

03-D

ec-1

3

17-D

ec-1

3

Thailand Malaysia Philippines

Singapore Indonesia (RHS)

Sources: CEIC Source: Bloomberg



Spotlight on Asia‟s internal risk factors like credit cycle,

macroeconomic imbalances and financial stability. A notable result

of the ultra-easy global monetary policy in the past five years is the

surge in Asia‟s bank credit, hence the risk of credit-fuelled growth.

China‟s current bank credit to GDP ratio of 164% is at a level that is

consistent with the historical pre-crisis peaks in other Asian countries

i.e. between 160%-180% of GDP. The ratio is higher if the shadow

banking credit to GDP ratio of around 40% is included. Hong Kong‟s

and Singapore‟s bank credit to GDP ratios are also at all-time highs

now. Even for economies where such ratios are lower, there are risks

on the specific components of bank credit, namely household debt,

which is an issue for the likes of Singapore, Malaysia and Thailand

given the rapid rise within the last five years. The risk of a credit-driven

economy is exacerbated by the danger of deteriorating macroeconomic

balance in the wake of India‟s and Indonesia‟s “twin deficits” that

triggered capital outflows and roiled their currencies, which forced the

central banks to react via aggressive interest rate hikes. Such

imbalances can trigger destabilising consequences such as capital

outflows, market and currency volatilities, and tightening of domestic

liquidity.

Domestic Banking Credit (% of GDP)

China India S. Korea HK Singapore Indonesia Thailand Malaysia Philippines Vietnam

1995 87.5 45.5 50.1 142.0 102.1 51.9 141.3 126.5 55.7 20.1

1996 93.0 45.6 53.5 151.8 108.8 54.4 146.3 142.4 67.9 20.1

1997 100.4 47.1 59.1 162.0 99.0 60.1 179.2 163.1 78.5 21.2

1998 112.8 47.4 66.9 144.6 129.2 60.4 176.9 162.1 63.3 22.0

1999 119.3 49.4 72.1 134.9 128.4 62.0 155.5 150.1 58.9 28.9

2000 119.7 52.9 74.7 134.0 121.0 60.9 137.9 138.4 58.3 35.1

2001 123.0 54.6 135.2 136.1 143.8 54.5 128.4 146.5 56.1 39.7

2002 143.5 58.0 141.9 140.3 136.9 52.4 127.6 143.6 55.1 44.8

2003 151.9 56.7 135.7 143.5 140.2 49.2 130.5 139.8 54.3 51.8

2004 140.4 59.3 128.6 143.9 128.9 49.7 124.4 127.5 54.0 62.0

2005 134.3 60.9 133.4 139.8 114.6 46.2 119.1 117.7 47.3 71.4

2006 133.5 63.6 147.3 132.0 114.3 41.6 109.0 114.6 48.2 75.5

2007 127.8 61.8 153.7 122.7 116.1 40.6 111.7 109.5 48.3 96.1

2008 120.7 72.7 171.1 122.4 121.4 36.8 106.5 110.9 47.4 93.1

2009 145.1 73.2 170.4 164.1 137.4 35.6 110.7 131.1 48.8 118.5

2010 149.7 75.5 163.0 195.2 133.0 35.5 110.1 127.7 49.2 130.4

2011 150.1 80.6 165.1 205.9 135.5 37.5 122.6 129.1 51.8 116.4

2012 159.4 83.7 162.4 197.5 154.7 41.1 126.9 131.3 51.0 105.5

2013 Latest 163.7 161.1 217.3 156.1 33.5 116.8 126.2 47.0 99.7

Sources: World Bank, IMF, CEIC, Maybank KE

Household Debt to GDP (%)

0

20

40

60

80

100

120

Austr

alia

UK

US

Jap

an

EU

Taiw

an

So

uth

Ko

rea

Ho

ng K

ong

Ch

ina

Mala

ysia

Th

ailand

Sin

gapore

Ind

onesi

a

Ph

ilip

pin

es

end-2012 / Latest end-2007

Source: CEIC



OUTLOOK FOR 2014

Pricing in a mild pick up in global economic growth. Factoring in

the aforementioned lookouts and the mitigating factors, we expect the

global economy to expand by 3.5% in 2014, up from the estimated

3.1% in 2013.

Global Real GDP

% chg 2012 2013 YTD 2013E 2014E

World 3.2 3.0 3.1 3.5

Advanced Economies 1.5 1.0 1.1 2.0

US 2.8 1.6 1.7 2.5

Eurozone (0.6) (0.7) (0.4) 1.0

Japan 2.0 1.2 1.9 1.5

UK 0.2 1.0 1.3 2.1

BRIC 3.8 4.0 4.2 4.4

Brazil 0.9 2.4 2.5 2.5

Russia 3.4 1.3 1.9 2.6

India 3.2 4.7 4.7 5.0

China 7.7 7.7 7.7 7.5

Asian NIEs 1.5 2.7 2.9 3.7

South Korea 2.0 2.4 2.7 3.6

Taiwan 1.3 1.9 2.3 3.5

Hong Kong 1.5 3.0 3.0 3.8

Singapore 1.3 3.5 3.6 4.0

ASEAN-5 6.3 5.3 5.0 5.4

Indonesia 6.2 5.9 5.7 5.6

Thailand 6.5 3.7 3.0 4.0

Malaysia 5.6 4.5 4.6 5.0

Philippines 6.8 7.4 7.0 6.8

Vietnam 5.2 5.1 5.0 5.5

Asia ex-Japan 6.4 NA 6.2 6.3

World Trade Volume 2.7 2.3 2.9 4.9

Sources: IMF, OECD, Consensus, Maybank-KE, Netherlands Bureau for Economic Analysis

As major advanced economies simultaneously expand for the first

time since 2011. Overall, this anticipated upturn would be

underpinned by the major advanced economies, as per the trends in

the forward-looking indicators. The index of leading economic

indicators point to gradual pickup in the US. The trend in Eurozone‟s

Composite PMI vis-à-vis its real GDP suggests the region‟s crisis-hit

economies are coming out of recession. Meanwhile, the Bank of

Japan‟s Tankan business surveys indicate that Abenomic‟s stimuli are

gaining traction to sustain the economic reflation. At the same time, the

OECD Business Cycle Clock shows the improving global economic

conditions are being mainly driven by the advanced economies that are

in the expansion phases of their cycles.



US: Real GDP Growth vs Leading Economic Indicators Index

Eurozone: Real GDP Growth vs Composite PMI

(5)

(4)

(3)

(2)

(1)

0

1

2

3

4

(21)

(18)

(15)

(12)

(9)

(6)

(3)

0

3

6

9

12

Jan

-07

Jul-

07

Dec-0

7

May-0

8

Oct-

08

Mar-

09

Aug

-09

Jan

-10

Jun

-10

No

v-1

0

Ap

r-11

Sep

-11

Feb-1

2

Jul-

12

Dec-1

2

May-1

3

Oct-

13

Leading Econ Indicator (% YoY) Real GDP (% YoY, RHS)

(6)

(4)

(2)

0

2

4

35

40

45

50

55

60

Mar-

06

Jul-

06

Dec-0

6

Ap

r-07

Aug

-07

Dec-0

7

Ap

r-08

Aug

-08

Dec-0

8

Ap

r-09

Aug

-09

Dec-0

9

Ap

r-10

Aug

-10

Dec-1

0

Ap

r-11

Aug

-11

Dec-1

1

Ap

r-12

Aug

-12

Dec-1

2

Ap

r-13

Aug

-13

Dec-1

3

Eurozone Composite PMI Eurozone Real GDP (% YoY)


Japan: Real GDP Growth vs BoJ Tankan Survey Index China: Real GDP Growth vs Leading Economic Indicators Index

(60)

(50)

(40)

(30)

(20)

(10)

0

10

20

30

(10)

(8)

(6)

(4)

(2)

0

2

4

6

8

Mar-

07

Jul-

07

No

v-0

7

Mar-

08

Jul-

08

No

v-0

8

Mar-

09

Jul-

09

No

v-0

9

Mar-

10

Jul-

10

No

v-1

0

Mar-

11

Jul-

11

No

v-1

1

Mar-

12

Jul-

12

No

v-1

2

Mar-

13

Jul-

13

No

v-1

3

Mar-

14

Real GDP

BoJ Tankan Survey - Large Mfg Business Conditions (RHS)

BoJ Tankan Survey - Large Non-Mfg Business Conditions (RHS)

6

7

8

9

10

11

12

97

98

99

100

101

102

103

104

105

106

107

Jan

-07

Jul-

07

Dec-0

7

May-0

8

Oct-

08

Mar-

09

Aug

-09

Jan

-10

Jun

-10

No

v-1

0

Ap

r-11

Sep

-11

Feb-1

2

Jul-

12

Dec-1

2

May-1

3

Oct-

13

Mar-

14

Index of Leading Econ Indicators Real GDP (RHS, % YoY)


OECD's Business Cycle Clock Heat Map

Country / Region Leading

end-2010 end-2011 end-2012 3Q 2013 Indicators

OECD Total

G7

US

UK

OECD Europe

Eurozone

Germany

France

Greece

Ireland

Italy

Portugal

Spain

Major Asia-5

Japan

China

India

South Korea

Indonesia

Brazil

Russia

Based on GDP Trends

Legend Expansion

Recovery

Slowdown

Recession

Mixed colour represents transition from one phase to another phase / "borderline case"

Source: OECD (http://stats.oecd.org/mei/bcc/default.html )

http://stats.oecd.org/mei/bcc/default.html



Amid mixed performance across Asia ex-Japan. Limiting the

upsides to the world‟s real GDP growth though is the mixed picture on

the large emerging and regional economies. In particular, while China‟s

economic slowdown has stabilized somewhat as suggested by its index

of leading economic indicators, growth in 2014 is expected to

decelerate slightly to 7.5% from the estimated 7.7% in 2013, reflecting

the impact of the announced and the expected measures to reduce

over-investment and excess capacity, curb the surge in property prices,

as well as to address the shadow banking, local government debt and

overall credit risks amid the growth rebalancing and economic reforms.

The variable growth trend is most visible in ASEAN:

Singapore and Malaysia‟s real GDP growth in 2014 (4.0% and

5.0% respectively) are expected to be faster than in 2013 (3.6%

and 4.6% respectively), primarily as external demand is expected to

turn into a driver to growth from a drag on growth previously.

Indonesia is projected to record a second consecutive year of sub-

6% economic expansion (2014E: 5.6%; 2013E: 5.7%) on impact of

the cumulative 175bps hikes in Bank Indonesia‟s benchmark

interest rate during 2013 to 7.5% – and to remain at this level

throughout 2014 – to address the current account deficit by way of

easing domestic demand. In addition to the effect of the monetary

policy tightening, investment activities are expected to be curtailed

somewhat by the upcoming Parliament election in Apr 2014 and

Presidential election in June 2014.

The Philippines economy is also expected to moderate slightly in

2014 to 6.8% from 7.0% in 2013 as the severe natural disaster

impact is estimated to have resulted in a significant real GDP

growth slowdown in 4Q 2013 to just under 6% versus the

unprecedented 7%-and-above growth in the preceding five quarters

and will linger into the early part of 2014 before economic activities

gradually normalize and pick up in 2H 2014, in part driven by the

reconstruction and rebuilding of the affected areas.

Meanwhile, expected pick up in Thailand‟s economic growth to

4.0% in 2014 (2013E: 3.0%) is susceptible to the downside risk

from the currently fluid domestic political situation. The decision by

the Prime Minister Yingluck Shinawatra to dissolve the Parliament

and call for a snap election on 2 Feb 2014 offers no guarantee that

the situation will be resolved as leaders of the anti-Thaksin

protestors stand firm on their demand for the removal of the so-

called “Thaksin regime” from Thai politics.

Monetary policy to stay accommodative. We expect the key

benchmark interest rates to remain steady to support the growth

recovery given constraints and limitations on fiscal policy as most

countries still have budget deficits and Government debts that are

above the prescribed prudent levels of 3% and 60% of GDP

respectively. Moreover, trends in the commodity, export and import

prices are not seen as posing any threat to global inflation at this

juncture. These are on top of the excess labour market and production

capacities, especially in the major economies. In fact, any inflationary

pressures are going to be domestically induced via specific policies,

structural issues and supply shocks like subsidy reform, tight labour

market and natural disasters, which is especially relevant to ASEAN

economies.



Global: Benchmark Interest Rates (% p.a.)

Country Benchmark Interest Rate Current end 4Q13 end 1Q14 end 2Q14 end 3Q14 end 4Q14 Chg in 2014

Major

US Fed Funds Target Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.00

Eurozone ECB Main Refinancing Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.00

Japan BOJ Target Rate 0.10 0.10 0.10 0.10 0.10 0.10 0.00

UK BOE Bank Rate 0.50 0.50 0.50 0.50 0.50 0.50 0.00

Asia Pacific

Australia RBA Cash Rate Target 2.50 2.50 2.50 2.50 2.50 2.50 0.00

China 1-Year Lending Rate 6.00 6.00 6.00 6.00 6.00 6.00 0.00

India India Repo Rate 7.75 7.75 8.00 8.00 7.75 7.75 0.00

Indonesia BI Reference Rate 7.50 7.50 7.50 7.50 7.50 7.50 0.00

Malaysia Overnight Policy Rate 3.00 3.00 3.00 3.00 3.00 3.00 0.00

Philippines Overnight Rate 3.50 3.50 3.50 3.50 3.50 3.50 0.00

S. Korea Target Overnight Rate 2.50 2.50 2.50 2.50 2.50 2.75 0.25

Taiwan Taiwan Discount Rate 1.88 1.88 1.88 2.00 2.13 2.13 0.25

Thailand BOT Repurchase Rate 2.25 2.25 2.25 2.25 2.25 2.25 0.00

Vietnam Vietnam Refinancing Rate 7.00 7.00 7.00 7.00 7.00 7.00 0.00

* Include changes that have taken place so far in 2013

Sources: Bloomberg, Consensus Survey, Maybank KE

Volatility in capital flows, financial markets and currencies will

continue. At the same time, we see the policy-driven volatilities in

capital flows, financial markets and currencies 2013 to persist in 2014

(as opposed to the crisis-driven volatilities in 2008-2012).

Consequently, on the foreign exchange market fronts, we see the

regional currencies to exhibit considerable swings against the US Dollar

during 2014, with a “weakness” bias in 1Q/1H 2014 before stabilizing

later in the year.

Major & Regional Currencies vs USD, 2014 Forecasts

End 1Q 2014 End 2Q 2014 End 3Q 2014 End 4Q 2014

USD/JPY 108.00 110.00 107.00 105.00

EUR/USD 1.3200 1.3500 1.3600 1.3400

GBP/USD 1.6100 1.6300 1.6400 1.6200

AUD/USD 0.8800 0.9000 0.9400 0.9800

USD/SGD 1.2650 1.2600 1.2550 1.2450

USD/MYR 3.2700 3.2300 3.1500 3.1200

USD/IDR 12,000 12,200 12,400 12,000

USD/THB 33.00 32.70 32.40 32.00

USD/PHP 44.00 43.70 43.50 43.30

USD/CNY 6.08 6.10 6.08 6.02

USD/HKD 7.75 7.75 7.75 7.75

USD/TWD 29.80 29.60 29.50 29.40

Source: Maybank FX Research



MALAYSIA‟S OUTLOOK & LOOKOUT FOR 2014

Constructive on Malaysia‟s macroeconomic fundamentals. We are

constructive on the macroeconomic picture from the perspectives of

growth momentum, fiscal policy, external balance and domestic politics:

Stable growth momentum. The trend in the index of leading

economic indicators suggests the pickup in Malaysia's real GDP

growth to 5% YoY in 3Q 2013 from 4.3% in 1H 2013 was sustained

in 4Q 2013, with steady growth trend expected in 2014. This

mainly reflect the improvement in external demand that is turning

into a growth driver from a growth drag in 2012 and 1H 2013, as

indicated by the rebound in exports since July 2013. In addition,

the investment growth momentum will be maintained given the

strong pipeline of major infrastructure and investment projects e.g.

yet-to-be-realised committed or planned investments under the

Economic Transformation Programme (ETP), regional development

corridors and PETRONAS capex plan.

Malaysia: Real GDP, Domestic Demand & External Demand (% YoY)

Malaysia: Real GDP Growth vs Index of Leading Economic Indicators

(60)

(40)

(20)

0

20

40

(10)

(5)

0

5

10

15

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

Gross Domestic Product (GDP) Domestic Demand Net Exports (RHS)

(8)

(6)

(4)

(2)

0

2

4

6

8

(8)

(4)

0

4

8

12

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

Real GDP (% YoY) Index of Leading Econ. Indicators (% YoY, RHS)

Source: Dept of Statistics Source: Dept of Statistics

Malaysia: Committed & Realised ETP Investments as at Dec 2013

Malaysia: Target & Realised ETP Investments, 2011-2014E

Total Committed ETP Investment

as at Dec 2013= MYR224.3b

Realised in 2011 = MYR14b

Realised in 2012 = MYR11.4b

Realised in Jan-Sep2013 = MYR14.2b

14.0

11.4

14.2

20.5

24.9

0

5

10

15

20

25

30

2011 2012 Jan-Sep 2013 2013E 2014E

Realised Targets

Source: PEMANDU Source: PEMANDU



Malaysia: PETRONAS Planned and Realised Capex Malaysia: PETRONAS Actual Capex, 2010-2013YTD

Total Petronas

Capex Plan2011-2015 = MYR300b

Realised in 2011= MYR41.2b

Realised in 2012 = MYR45.6b

Realised in Jan-Sep 2013

= MYR38.4b

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2010 2011 2012 2013

Full-Year Jan-Sep

Source: PETRONAS Source: PETRONAS

Malaysia: Committed & Realised Investments in Regional Development Corridors as at Sep 2013

Malaysia: Capacity Utilisation Rate vs Private Investment Growth

Total

Committed Investment

to-date = MYR364.3b

Realised to-date = MYR139.7b

(38% of total committed)

(30)

(20)

(10)

0

10

20

30

70

72

74

76

78

80

82

84

86

Mar-

06

Jul-

06

No

v-0

6

Mar-

07

Jul-

07

No

v-0

7

Mar-

08

Jul-

08

No

v-0

8

Mar-

09

Jul-

09

No

v-0

9

Mar-

10

Jul-

10

No

v-1

0

Mar-

11

Jul-

11

No

v-1

1

Mar-

12

Jul-

12

No

v-1

2

Mar-

13

Jul-

13

MIER: Capacity Utilization Rate: Month Average

Real Private Investment (% YoY, RHS)

Source: MoF Economic Reports (2012/2013 & 2013/2014) Sources: Dept of Statistics, MIER

Credible fiscal consolidation and reforms to address budget

deficit, in view of Budget 2014's key contents i.e., further subsidy

rationalisation with the removal of the sugar subsidy on 26 Oct

2013 and lower allocation for subsidy spending in 2014 in a follow-

up to the fuel price hike on 3 Sep 2013), plus the introduction of the

GST on 1 Apr 2015. The commitment to subsidy rationalisation is

further demonstrated by the announcement of the average

electricity tariff hikes of 14.9% for Peninsular Malaysia and 16.9%

for Sabah and the Federal Territory of Labuan in East Malaysia,

effective 1 Jan 2014. Other subsidy rollbacks that are expected to

materialize in 2014 include the adjustments in highway toll rates

and industrial gas prices, as well as another round of fuel price

increase. Actions on subsidies and details on GST implementation

package provide clarity and credibility to the target to reduce budget

deficit further to 3.5% of GDP in 2014 and 3.0% of GDP in 2015

(2013E: 4.0% of GDP).

Sustained trade balance / current account surplus eliminate

“twin deficit” risk. Current account surplus widened in 3Q 2013

after it narrowed sharply between 4Q 2012 and 2Q 2013 which

triggered fear of “twin deficits”. With the above-mentioned recovery

in exports and sustained trade surplus as per the latest external

trade data for Oct 2013, the current account surplus is unlikely to

turn into a deficit, although we are projecting narrower surplus of

+MYR31.8b (+3.3% of GDP) for 2013 and +MYR27.8b (+2.7% of

GDP) for 2014 versus +MYR57.3 (+6.3% of GDP) in 2012.



Malaysia: Exports, Imports & Trade Balance Malaysia: Trade and Current Account Balances (MYR b)

(40)

(30)

(20)

(10)

0

10

20

30

40

50

0

2

4

6

8

10

12

14

16

18

Mar-

08

Jun

-08

Sep

-08

Dec-0

8

Mar-

09

Jun

-09

Sep

-09

Dec-0

9

Mar-

10

Jun

-10

Sep

-10

Dec-1

0

Mar-

11

Jun

-11

Sep

-11

Dec-1

1

Mar-

12

Jun

-12

Sep

-12

Dec-1

2

Mar-

13

Jun

-13

Sep

-13

Trade Balance (RM b, LHS) Exports (% YoY) Imports (% YoY)

29.5

14.7

19.9

23.0

25.4

25.0

28.3

23.8

16.9

7.9

9.6

22.9

8.7

2.6

9.8

39.0

23.422.1

25.5

32.5

29.030.6

32.230.2

21.7

17.1

26.9

16.3

8.2

18.6

0

5

10

15

20

25

30

35

40

45

1Q

2010

2Q

2010

3Q

2010

4Q

2010

1Q

2011

2Q

2011

3Q

2011

4Q

2011

1Q

2012

2Q

2012

3Q

2012

4Q

2012

1Q

2013

2Q

2013

3Q

2013

Source: Dept of Statistics Source: Dept of Statistics

Malaysia: Fiscal Balance (% of GDP) Malaysia: Government Debt (% of GDP)

(18)

(15)

(12)

(9)

(6)

(3)

0

3

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2013E

25

35

45

55

65

75

85

95

105

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014E

Source: BNM, MoF Sources: BNM, MoF

Last but not least, the political overhang is over with the

passing of two key events i.e., the 13th General Election on 5 May

2013 and the UMNO Party Election on 12-19 Oct 2013. The status-

quo outcomes of these two major political events mean the Prime

Minister and his Government can now focus on managing the

economy for the next 3-4 years.

The key thing to watch for Malaysia in 2014 is consumer spending

which now accounts for 53% of GDP. This is in view of slump in

consumer confidence (which leads consumer spending growth) in

reaction to the above-mentioned resumption of subsidy rationalisation

that resulted in the acceleration in monthly consumer price index since

Sep 2013, which in turn fuels inflation expectations on the expected

knock on effects on other prices of goods and services (e.g. talks of

reviews in public transport fares), hence cost of living in general. Rising

inflationary pressures adds to the persistent issue of high and rising

household indebtedness. While we are pricing in slower consumer

spending growth in 2014, the moderation also factored in mitigating

factors such as the continuation of the conditional cash transfers to the

lower income group (e.g. increase in the financial assistance amount

and expansion in the criteria for eligibility) and the special personal

income tax rebate for the middle income group that was announced in

Budget 2014, as well as the expected increase in tourist spending

during Visit Malaysia Year 2014.



Malaysia: Consumer Price Index (% YoY) Malaysia: Consumer Confidence Index vs Real Private Consumption Growth

(3)

(1)

1

3

5

7

9

Ap

r-04

Oct-

04

Ap

r-05

Oct-

05

Ap

r-06

Oct-

06

Ap

r-07

Oct-

07

Ap

r-08

Oct-

08

Ap

r-09

Oct-

09

Ap

r-10

Oct-

10

Ap

r-11

Oct-

11

Ap

r-12

Oct-

12

Ap

r-13

Oct-

13

(3)

0

3

6

9

12

15

60

70

80

90

100

110

120

130

Mar-

01

Sep

-01

Mar-

02

Sep

-02

Mar-

03

Sep

-03

Mar-

04

Sep

-04

Mar-

05

Sep

-05

Mar-

06

Sep

-06

Mar-

07

Sep

-07

Mar-

08

Sep

-08

Mar-

09

Sep

-09

Mar-

10

Sep

-10

Mar-

11

Sep

-11

Mar-

12

Sep

-12

Mar-

13

Sep

-13

MIER: Consumer Sentiment Index Real Private Consumption (% YoY, RHS)

Source: Dept of Statistics Sources: MIER, Dept of Statistics

Malaysia: Overnight Policy Rate (% p.a.) Malaysia: Household Debt to GDP

1.5

2.0

2.5

3.0

3.5

4.0

Ap

r-04

Sep

-04

Feb-0

5

Jul-

05

Dec-0

5

May-0

6

Oct-

06

Mar-

07

Aug

-07

Jan

-08

Jun

-08

No

v-0

8

Ap

r-09

Sep

-09

Feb-1

0

Jul-

10

Dec-1

0

May-1

1

Oct-

11

Mar-

12

Aug

-12

Jan

-13

Jun

-13

No

v-1

3

63%66% 67% 66% 66%

64%

60%

72%74%

76%

80%

83%85%

50%

55%

60%

65%

70%

75%

80%

85%

90%

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

1Q

2013

2Q

2013

Source: BNM Source: BNM

Cash Assistance Programmes Details Beneficiaries Total (MYR m)

2012 2013 2014 BR1M 1.0 MYR500 per household earnings < MYR3,000 per month. 4.3m households 2,200

1Malaysia Book Voucher 1.0 MYR200 book vouchers for students in Secondary 6, matriculation and public and private local institutions of higher learnings.

1.2m students 244

Schooling Assistance 1.0 MYR100 for Primary 1 to Secondary 5 school students 5.4m students 545

BR1M 2.0 MYR500 per household earnings < MYR3,000 per month; MYR250 per single individual aged > 21 years old and earnings < MYR2, 000 per month.

4.3m households & 2.7m individuals

3,000


1.3m students 325


BR1M 3.0 MYR650 per household earnings < MYR3,000 per month; MYR450 per household earnings between MYR3,000 and MYR4,000; MYR300 per single individual aged > 21 years old and earnings < MYR2, 000 per month;

7.9m recipients 4,600


1.3m students 325


TOTAL 3,208 4,150 5,465

Sources: Economic Report 2012/2013, Budget Speech, Media Reports, Maybank KE Economics Research



Hence our view “contrarian” view on BNM‟s monetary policy.

While consensus is pricing in 25-50 bps interest rate hike in 2014 in

reaction to the expected rise in inflation rate, we are betting that Bank

Negara Malaysia (BNM) will keep the Overnight Policy Rate (OPR) at

3.00% throughout 2014. This is to support growth – particularly

domestic private sector demand – as fiscal consolidation gathers

momentum to reduce budget deficit and control government debt, which

will result in moderation in Government expenditure. We take the view

BNM will not hastily react to “cost-push” inflation (as opposed to a

“demand-pull” inflation) by automatically or mechanically raising OPR.

The central bank is likely to first gauge the impact and the downside

risk on domestic demand and consequently growth.

Malaysia: Real GDP

% chg ACTUAL MAYBANK KE OFFICIAL

2012 Jan-Sep 2013 2013E 2014E 2013E 2014E

Real GDP 5.6 4.5 4.6 5.0 4.5-5.0 5.0-5.5

Manufacturing 4.8 2.7 3.0 4.0 3.2 3.8

Services 6.4 5.7 5.6 5.8 5.5 5.7

Agriculture 0.8 2.8 2.0 2.0 2.7 3.0

Mining 1.4 1.3 2.0 2.5 2.2 3.1

Construction 18.5 11.4 10.8 10.0 10.6 9.6

Domestic Demand 10.6 8.0 7.8 6.6 8.4 5.2

Private Consumption 7.7 7.6 7.2 6.8 7.4 6.2

Public Consumption 5.1 6.7 4.7 2.7 7.3 3.3

Gross Fixed Capital Formation 19.9 9.2 10.7 8.1 11.7 6.6

Private Investment 21.9 13.9 14.0 11.3 16.2 12.7

Public Investment 17.1 3.2 6.1 3.4 5.5 (2.7)

Net External Demand (29.4) (25.5) (29.7) (17.6) (30.9) (6.5)

Exports of Goods & Services 0.1 (1.4) 0.1 3.8 1.2 1.6

Imports of Goods & Services 4.5 1.1 3.1 5.2 4.4 2.2

Sources: Dept. of Statistics, Ministry of Finance, (Economic Report 2013/2014), Maybank KE

Malaysia: Other Key Economic Indicators

ACTUAL MAYBANK KE OFFICIAL 2012 2013 YTD 2013E 2014E 2013E 2014E Gross Exports (% chg) 0.6 (0.2) 2.3 5.9 (0.4) 2.5 Gross Imports (% chg) 5.9 5.5 7.8 8.0 4.6 3.8 Trade Balance (RM b) 94.8 43.2 64.9 55.4 64.3 57.3 Current Account Balance (RM b) 57.3 21.1 31.8 27.8 26.6 23.9 Current Account Balance (% of GDP) 6.3 2.9 3.3 2.7 2.7 2.3 Fiscal Balance (% of GDP) (4.5) (3.4) (4.0) (3.5) (4.0) (3.5) Inflation Rate (CPI, %) 1.6 1.8 2.0 3.0-3.5 2.0-3.0 2.0-3.0 Overnight Policy Rate (% p.a., end-period) 3.00 3.00 3.00 3.00 NA NA Exchange Rate (RM/USD, end-period) 3.06 3.23 3.20 3.12 NA NA Unemployment Rate (%) 3.0 3.1 3.1 3.1 3.1 3.1 Crude Petroleum (USD/bbl, average) 94.1 98 97.5 95 115 110 Crude Palm Oil (RM/tonne, average) 2,865 2,370 2,380 2,600 NA NA

Note: Maybank KE crude oil price forecasts refer to WTI, official crude oil price forecast refers to Tapis

Sources: Bloomberg, Dept. of Statistics, BNM, Ministry of Finance, Maybank KE, Maybank FX Research



Defensiveness Returns

The KLCI outperformed in 2013, as confidence returned after the 13th

General Election in May that removed a major political overhang, which

would have had implications on policy direction. The subsequent

UMNO election cemented confidence, with Prime Minister Najib given

the full mandate to bring the country to a higher level, foremost is a

high-income economy by 2020. The appointment of corporate figures

as ministers brings a fresh perspective in leadership. In September,

Malaysia demonstrated its commitment to strengthening public finances

by reducing fuel subsidies. The Goods and Services Tax (GST)

implementation in Apr 2015 will be another milestone.

Looking into 2014, we think that Malaysian equities‟ defensiveness will

stand out yet again amid external volatilities, albeit at a milder level with

the US QE Taper being priced in. While the KLCI‟s 16.3x one-year

forward PER on an 8.1% earnings growth offering implies a rather

“pricey” PEG of 2x, the sustainability of Malaysia‟s longer term growth

on strong macro-economic policies and banking and corporate balance

sheet strength will continue to lend support to the premium rating.

Political concerns have diminished, fiscal balance issues are being

addressed and domestic liquidity remains ample.

We maintain our 1,940 end-2014 target for the KLCI. With subsidy

rationalisation rolling in, we expect household balance sheets to come

under pressure, which could affect spending. Drastic property cooling

measures will slow property sales. Positives will be in the construction

sector, where major infrastructure projects will continue, and in oil &

gas, where PETRONAS‟ domestic production growth target is intact.

We remain Overweight on the construction, oil & gas, power and

aviation sectors and are Underweight on property. We are Neutral on

the consumer and core KLCI banking, plantation and telco sectors.

2014 will very much be a stock-picking year. We advise investors to

focus on the value stocks in the near term, and notice the big-caps on

broader market dips. Our top stock picks are TNB, Genting Malaysia,

Hong Leong Bank, AMMB, Bumi Armada, IJM Corp, Time dotCom,

Cahya Mata Sarawak and MPHB Capital. Meanwhile, we see

continuous re-rating for the Shariah stocks and higher upside for the

Shariah mid-caps in plantation, oil & gas, telco and property, expecting

their valuation gaps to narrow considerably towards their larger peers.

Visit Malaysia Year 2014 will benefit those in the hospitality industries –

aviation, leisure and hotels, and indirectly, F&B, retail and retail REITs.

Market Strategy

Current KLCI: 1,851 (17 Dec 2013) YE KLCI target: 1,940 (unchanged)

Wong Chew Hann [email protected] (603) 2297 8686

M’sia equities growth & valuation at 17 Dec 2013

2012A 2013E 2014E

KLCI 30 @ 1,851 PE (x) 18.2 17.6 16.3

Earnings Growth (%) 7.6% 5.3% 8.1%

Research Universe PE (x) 18.9 18.0 16.3


Our sector weights

OW Construction, Oil & Gas, Power, Aviation

N Auto, Banking, Building materials, Consumer, Gaming, Gloves, Media, Plantation, Property (REITs), Telco, Petrochem

UW Property (developers)

Our top BUY picks

Stock Name Bloombg Ticker

Shr Px @ 17 Dec

TP

Tenaga TNB 11.02 12.50

Genting M’sia GENM 4.30 4.80

Hong Leong Bank HLBK 14.24 16.40

AMMB Holdings AMM 7.34 8.60

Bumi Armada BAB 3.97 4.40

IJM Corp IJM 5.92 6.75

Time dotCom TDC 3.88 4.40

Cahya Mata S’wak CMS 6.39 7.20

MPHB Capital MPHB 1.71 2.12

Source: Maybank KE




2013 IN REVIEW

Positive returns. 2013 has been a “political” year for Malaysia with two

major events: (i) the 13th General Election (13GE) on 5 May, which saw

Barisan Nasional returning to power after winning 60% of the

Parliament seats, and (ii) the UMNO supreme council election which

saw Prime Minister Najib unchallenged in his President post,

strengthening his stewardship of the country. Fitch Ratings‟ cut of

Malaysia‟s sovereign credit rating outlook to "negative" from "stable" on

30 Jul was swiftly acted upon, with the government implementing three

subsidy cuts – fuel, sugar, electricity – alleviating the risk of a

downgrade of Malaysia‟s credit rating. Importantly, Budget 2014 on 25

Oct reaffirmed the government‟s commitment to strengthening public

finances and building the base for a sustainable long-term growth.

A year of multiple highs. Market-friendly political outcomes and

macro-economic measures have restored confidence, with the KLCI

hitting multiple highs in 2013 – 1,788 on 14 May; 1,810 on 24 Jul; 1,818

on 24 Oct; and 1,851 on 17 Dec. The KLCI also succumbed to broad-

based selling, diving to an immediate low of 1,686 on 28 Aug, as

foreign investors exited the region and emerging markets in general on

concerns of an early tapering of quantitative easing (QE) in the US, the

prime driver of liquidity flows. The KLCI has gained 9.6% YTD (and

3.1% in USD terms) as at 17 Dec, outperforming its ASEAN peers,

which were beset by individual problems – current account deficits (in

Thailand and Indonesia), political turmoil (in Thailand) and the

destruction of Typhoon Haiyan (in the Philippines).

KLCI‟s 2013 journey, major events

1,600

1,650

1,700

1,750

1,800

1,850

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13

18/10:Westport listed

25/10:

Budget 2014

7/3: BNM keeps OPR at 3%

19/3: GTP & ETP Annual

Reports

20/3: BNM 2012 Annual Report

10/7: AirAsia X listed

11/7: BNM keeps OPR at 3%

21/8: 2Q13 GDP grew 4.3% YoY

3/9: Petrol/ diesel subsidycut - pump

prices up 10-11%

5/9: BNM

keeps OPR at 3%

21/9: Najib won

uncontested as UMNO President

1/11: UMW O&G listed

7/11: BNM keeps OPR

at 3%

15/11: Msia 3Q13 GDP up 5% YoY

20/11: Moody's raised M'sia sovereign credit rating outlook to

"positive" from "stable"

27/11: S&P lowered outlook on CIMB

Grp, AmBank, RHB Bk, RHB IB

31/1: BNMkeeps OPR at 3%

20/2: M'sia 4Q12 GDP up 6.4%

YoY

3/4: M'sia Parliament dissolved

5/5: M'sia 13th General Election

9/5: BNM keeps OPR at 3%; M'sia's 1st stapled REIT, KLCCP, listed

15/5: M'sia 1Q13 GDP up 4.1% YoY

17/7: Bernanke spoke on QE tapering, triggering

sell-downs

30/7: Fitch cut M'sia's sovereign

credit rating outlook to "negative" from "stable"

KLCI ralliedahead of13GE

Spookedby QE tapering

fears

2-7/12: UMNO Gen Assembly

Source: Maybank KE (compilation)



KLCI vs MSCI, 2013 YTD (17 Dec) KLCI vs regional markets, 2013 YTD in local currencies

85

90

95

100

105

110

115

120

1-Ja

n

1-F

eb

1-M

ar

1-A

pr

1-M

ay

1-Ju

n

1-Ju

l

1-A

ug

1-S

ep

1-O

ct

1-N

ov

1-D

ecIndex

MSCI AC WorldMSCI Asia Ex-JapanKLCI

(5.2)(3.9)(3.1)(3.1)

(1.6)(0.5)

1.8 2.0

6.1 8.5 9.6

22.2 47.0

-15 -5 5 15 25 35 45 55

ChinaThailand

SingaporeIndonesia

KoreaMSCI Asia ex Jap

Hong KongPhilippines

IndiaTaiwan

MalaysiaVietnam

Japan

Source: Bursa Malaysia, Maybank KE (chart, calculations) Source: Bloomberg, Maybank KE (chart, calculations)

KLCI vs regional markets, 2013 YTD in USD (17 Dec) USD/MYR down 5.9% YTD

(22.1)(8.5)

(6.2)

(6.0)

(5.3)

(2.7)

(0.4)

1.8

3.1

6.2

20.6

22.9

-25 -15 -5 5 15 25

Indonesia

Thailand

India

Singapore

Philippines

China

Korea

Hong Kong

Malaysia

Taiwan

Vietnam

Japan

2.90

3.00

3.10

3.20

3.30

3.40

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

USDMYR YTD ave MYR3.15

Source: Bloomberg, Maybank KE (chart, calculations) Source: Bloomberg, Maybank KE (chart, calculations)

Selling well absorbed. Foreigners were net buyers of Malaysian

equities in Jan-May, but turned net sellers in Jun-Nov. In the first 11

months of 2013, net foreign buying tapered off to just MYR4b, versus

MYR13.7b net buys in 2012. Net buying by local institutions was much

higher at MYR8.1b in 11M13 compared to a net sell of MYR4.1b in

2012. In contrast, local retail and local nominees have been net sellers

to the tune of MYR6.3b and MYR5.8b, respectively. Aggressive net

foreign selling in June, August and November were well absorbed, with

the KLCI up 0.4% in June, down 2.5% in August, and up again by 0.3%

in November. Consequently, market foreign shareholding also tapered

off to 23.6% at end-Nov from 23.9% at end-2012, after reaching an

annual high of 25.2% at end-May 2013.

Malaysia: Net foreign buying / (selling) (MYR b) Malaysia: Net domestic insti buying / (selling) (MYR b)

0.1

(3.4)

(0.1)

1.2 1.6

3.2

0.6

(3.8)

(0.3)

1.4

0.6 0.7

0.2

1.3

3.4

1.6 0.5

(0.8)

3.2

1.1 1.3

1.4

(0.3)

0.8 2.5

1.7

4.7 5.3

3.8

(3.5)

(0.3)

(6.8)

0.7

(0.9)

(3.2)

(8.0)

(6.0)

(4.0)

(2.0)

-

2.0

4.0

6.0

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

(0.1)

3.1

0.7

(1.2)(1.6)

(2.5)

(0.5)

4.3

0.3

(1.0)(0.8)

(0.4)

0.2

(1.0)

(2.8)(1.3)

(0.2)

1.4

(2.6)

(0.9)(0.9)

(1.0)

0.5

(0.5)

(1.7)(0.7)

(3.3)(3.5)

(2.8)

3.3

0.3

6.7

(0.2)

1.2

3.0

(6.0)

(4.0)

(2.0)

-

2.0

4.0

6.0

8.0

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Source: Bursa Malaysia, Maybank KE (chart) Source: Bursa Malaysia, Maybank KE (chart)



Malaysia: Cumulative net buying / (selling) (MYR b) Malaysia: Market foreign shareholding

(2.6) (2.8)

(4.4) (6.3)(9.2)

5.5

(4.1)

8.1

(4.3) (5.2)(5.0) (5.8)

15.9

1.8

13.7

4.0

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

2010 2011 2012 2013 YTD

Local retail Local insti Local nomi Foreign

15

17

19

21

23

25

27

29

Dec

98

Dec

02

Dec

06

Apr

07

Aug

07

Dec

07

Apr

08

Aug

08

Dec

08

Apr

09

Aug

09

Dec

09

Apr

10

Aug

10

Dec

10

Apr

11

Aug

11

Dec

11

Apr

12

Aug

12

Dec

12

Apr

13

Aug

13

23.6% end-Nov 2013 (Dec 2012: 23.9%, Dec 2011: 22.7%)

Source: Bursa Malaysia, Maybank KE (chart) Source: Bursa Malaysia, Maybank KE (chart)

Earnings growth continues. 9M13 core net profit of our research

universe grew 4.3% YoY, slowing from 6.8% growth in 2012. Much of

the slowdown was due to plantation, with core earnings down a sharp

23.3% YoY due to much lower CPO ASPs of MYR2,329/t in 9M13,

versus MYR3,094/t in 9M12 (-24.7% YoY). Banking sector core

earnings growth was slower at 4.4% due to NIMs compression (-10

bps) and higher provisioning on several lumpy corporate defaults.

Gaming sector core earnings declined 9.6% YoY due to lower overseas

contributions. Offsetting the impact were the telco, power, construction,

oil & gas, property, REITs, consumer and glove sectors, for which 9M13

core earnings growth were above 7% YoY. We forecast 5.2% core

earnings growth for our research coverage in 2013, 5.3% for the KLCI.

Maybank KE research forecast revisions

YoY growth (%) Early 2013 forecast Current forecast

2012 2013 2012 2013

Corporate earnings:

KLCI 30 10.8 8.0 7.6 5.3

Research universe 8.6 11.3 6.8 5.2

Malaysia real GDP 5.0 4.8 5.6 4.5

Source: Maybank KE

Quarterly recurring net profit of research universe Quarterly results expectation ratio (vs our expectations)

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

17,000

CY

1Q

10

CY

2Q

10

CY

3Q

10

CY

4Q

10

CY

1Q

11

CY

2Q

11

CY

3Q

11

CY

4Q

11

CY

1Q

12

CY

2Q

12

CY

3Q

12

CY

4Q

12

CY

1Q

13

CY

2Q

13

CY

3Q

13(MYR m)

9M13: +4.3% YoY

0.85 1.14

0.87 0.83

1.45

1.00

1.79

1.27

1.82

3.00

3.50

1.15 1.29

2.08 1.72

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

x Below/Above ratio

Source: Maybank KE Source: Maybank KE



Corporate activities slowed. Corporate activities slowed after a

bumper year in 2012. The first 10 months of 2013 saw 11 IPO listings

that raised MYR5.4b, versus 2012‟s MYR22.9b. This escalated in

November and December, with 16 listings YTD. High profile listings

were AirAsia X (in July), Westports (in October) and UMW Oil & Gas (in

November). Major corporate exercises included the privatisation of

Tradewinds Group, the proposed spin-off of IOI Corporation‟s property

business and FGV‟s MYR1.2b acquisition of 100% of Pontian and

MYR2.2b acquisition of 51% of Felda Holdings. Focal Aims, a lesser-

known property developer, saw a new major shareholder. In May, the

country‟s first stapled REIT, KLCC Property, was listed.

New equity issues and new listing

79

40

26 23

14

29 28

17

16

0

10

20

30

40

50

60

70

80

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2005 2006 2007 2008 2009 2010 2011 2012 10M13

Rights issues (MYR m, LHS) Initial Public Offering (MYR m, LHS) New listing (no., RHS)

Source: Bank Negara Malaysia, Bursa Malaysia, Maybank KE (compilation)

New Shariah screening. We believe the new Shariah screening will

help raise the profile of Malaysian Shariah stocks at the international

level. The methodology adopts a two-tier quantitative approach

comprised of business activity benchmarks and new financial ratio

benchmarks. The Securities Commission‟s new 29 Nov 2013 Shariah

list saw the removal of 164 stocks and the addition of 16 stocks, a net

reduction of 148 stocks (-18%) to 653 Shariah stocks from 801. Of the

30 stocks on the KLCI, the only change was the addition of PPB Group.

Nonetheless, the overall market cap of the Shariah stocks declined only

4% to MYR1.01t from MYR1.05t, representing 60% of Bursa Malaysia‟s

total market cap of MYR1.67t as at 28 Nov 2013.

Shariah stocks: List of additions/removal by sector (no. of stocks)

May 2013 Nov 2013 Net chg

MAIN MARKET

Consumer products 122 106 -16

Industrial products 234 179 -55

Construction 41 36 -5

Trading services 153 133 -20

Mining 1 1 0

Properties 71 59 -12

Plantation 37 34 -3

Technology 29 24 -5

Infrastructure 6 5 -1

Finance 2 2 0

SPAC 1 2 1

ACE MARKET

Industrial products 19 15 -4

Technology 64 47 -17

Trading/services 21 10 -11

Total 801 653 -148

Source: Securities Commission, Maybank KE (compilation)



2014 OUTLOOK

QE Taper starts. The US Fed will start QE Taper in Jan 2014 where its

monthly bond purchases will be trimmed by USD10b to USD75b from

USD85b. Beyond that, the Fed will reduce the pace of bond purchases

in “measured steps” if the US labour market continues to improve and

inflation moves towards the Fed‟s longer-run objective. Off-setting this

is the Fed‟s reaffirmation for a highly accommodative monetary policy

after the bond purchase programme ends and economic recovery

strengthens. The Fed‟s statement on 18 Dec 2013 suggest a “phased

and orderly” retreat from its bond purchases. And, the calm reaction

from the markets do suggest that QE Taper has been largely priced in.

Policy-induced volatility. Volatility nonetheless is expected going into

2014, but we expect it to be milder with the Fed‟s QE Taper being

priced in. Our economics team expects the volatilities in global capital

flows, financial markets and currencies in 2014 to remain policy-driven,

as opposed to crisis-driven back in 2008-2012. Consequently, on the

foreign exchange market fronts, we expect the regional currencies to

exhibit considerable swings against the US Dollar during 2014, with a

“weakness” bias in 1Q/1H14 before stabilizing later in the year. Relating

to capital markets, recoveries in the developed economies do suggest

further fund outflows from the emerging economies in 2014.

“Sedated” domestic news flow. In Asia, three countries will also hold

elections in 2014 – Thailand, Indonesia and India. Concerns are of

distractions to structural and economic reforms, with these countries

suffering from current account deficits. On a relative basis, Malaysia‟s

calendar appears rather “sedated” after a “politically charged” year in

2013. Some major news flow anticipated are that of the National

Automotive Policy review, which we expect to be market-neutral, and

PETRONAS‟ final investment decision on RAPID. Visit Malaysia Year

(VMY) 2014 could surprisingly bring in more tourists than targeted due

to the politics in Thailand and upcoming election in Indonesia.

Calendar of major domestic events in 2014

Politics

None noted

Economics / Policies

Bank Negara‟s Monetary Policy Committee meetings 28-29 Jan, 5-6 Mar, 7-8 May, 9-10 Jul, 17-18 Sep, 5-6 Nov

4Q 2012, 1Q-3Q 2013 GDP release Usually on the 3rd Wednesday of

February, May, August, November

Bank Negara 2013 Annual Report March

PEMANDU GTP/ETP 2013 Annual Report end-March

2015 National Budget * October

Subsidy rationalisation No specific dates

Capital market

FBMKLCI component stocks review # 20 Jun, 19 Dec

Sector related

National Automotive Policy (review) Mid-January

Opening of KLIA2 2-May

PETRONAS' final investment decision (FID) on RAPID April

Visit Malaysia Year 2014 Throughout 2014

* The norm is the last Friday of October. # Semi-annual review – using data from last day of trading in May and November and implemented after the third Friday in June and December.

Source: Bank Negara Malaysia, Maybank KE (compilation)



Malaysia enters a period of adjustments. Domestic focus in 2014 will

be on structural reform implementation, a delicate balance between

lowering government budget deficits and capping its debt levels, while

sustaining economic growth, which has been domestic driven of late.

With three subsidy cuts since Sep 2013 (which we expect to continue

into 2014) and the 6% GST implementation in Apr 2015, Malaysia has

entered a period of adjustments in terms of rising costs of living for

households and shifting cost structures for businesses. There is

potential downside of these reforms weakening consumer sentiment

and negatively impacting business margins more than expected.

Some offsetting factors. Besides higher electricity tariffs by an

average of 16.85% for industrial/commercial users and an anticipated

industrial/commercial gas price hike, 2014 will also see the full

implementation of the minimum wage; these events could crimp

business margins as the additional costs may not be fully passed on.

An offsetting factor will be a supportive interest rate environment, hence

our contrarian view that the benchmark overnight policy rate (OPR) will

remain unchanged throughout 2014. In addition, lower income taxes –

by 1-3ppt for individuals from assessment year 2015 and by 1ppt for

businesses from 2016 – would cushion the impact of the GST.

(Please see our feature article on the impact of subsidy cuts on the

consumer related sectors on pages 45-55.)

Subsidy rollbacks: Assessing the impact on sectors and PLCs

Sector Sector Rating Comments

3 Sep 2013: RON95 petrol and diesel prices up by 20sen to MYR2.10 per litre (+10.5%) and MYR2.00 per litre (+11.1%), effective immediately

Toll roads Neutral (unchanged)

Historically, traffic at the urban toll roads has been more sensitive on toll rate hikes than on petrol/diesel price hikes. In 2010, when petrol/diesel prices were raised by a total 5.5%-5.7% in July and Dec, traffic slowed in the quarter immediately after the hike, but rebounded subsequently.

LITRAK, in its 2QFY3/14 results announcement said that the Lebuhraya Damansara-Puchong has yet to see any material impact on its traffic post the petrol/diesel subsidy cut on 3 Sep 2013.

Construction Overweight (unchanged)

Higher diesel price will result in (i) higher costs in running the construction machineries/heavy equipment and (ii) higher transportation costs for the construction materials. Technically, the sector should not be impacted by the pump price hike for diesel, as they should already be paying the commercial and not the subsidised rate for diesel in running their machineries/heavy equipment. However, construction material prices could still increase due to rising transportation cost. Most contractors have imputed raw material cost increases into their construction projects.

Some construction groups, in their recent 3Q13 results announcements/ briefings have highlighted labour shortage issue, which had resulted in slower-than-expected work progress during the quarter. The higher diesel costs were not mentioned.

Property developers

Underweight (unchanged)

Similar with the construction sector, higher diesel cost impact the margins of property developers. However, diesel cost, we understand, is a small component of the total construction costs of a property project. With construction costs making up 50% of a typical property project‟s sales value and land costs making up another 10-20%, the 11% rise in diesel cost would merely affect margins by 2-3ppts, based on our back-of-the-envelope estimate.

Automotive Neutral (unchanged)

We have not seen an impact on vehicle sales to date. Assuming an average fuel consumption of 40 litres per week per household, the Sep 2013 petrol price hike would result in a higher fuel spending by MYR32 per month, which represents less than 1% of a monthly household income of MYR3,000-MYR5,000. The impact is small to deter on consumer‟s decision on car purchases.

Source: Maybank KE



Subsidy rollbacks: Assessing the impact on sectors and PLCs

Sector Sector Rating Comments

25 Oct 2013: Total removal of sugar subsidy of MYR0.34/kg, effective immediately

Sugar refiners

Neutral (unchanged)

We understand that sugar companies have raised selling prices by MYR0.30/kg to recoup the additional cost, in line with previous implementations of subsidy cuts. We observe that in the past, subsidy reductions resulted in lower demand from the industrial consumers but demand from retail consumers continued to grow due to inelasticity of demand. Having said that, since the last sugar subsidy reduction, MSM‟s 13 industrial customers, including Nestle and F&N Holdings, have been buying sugar at non-subsidised rates of MYR2.80-3.00/kg.

2 Dec 2013: Peninsular Malaysia blended electricity tariffs would be raised by 14.9% effective 1 Jan 2014. This is to reflect:

gas price hike to MYR15.20/mmBTU from MYR13.70/mmBTU,

LNG-sourced gas at MYR41.68/mmBTU,

coal price adjustment to USD87.5/t from USD85/t, and

2.69% rise in TNB‟s base tariff.

Sabah‟s blended electricity tariffs would be raised by 16.9%, also effective 1 Jan 2014.

Power Overweight (from Neutral)

By our estimates, the tariff and cost adjustments are earnings accretive for TNB. TNB's new earnings base of c.MYR5.5b is substantially above historical levels, and is likely sustainable given the impending implementation of a fuel-cost pass-through mechanism. Our FY14/15/16 net profit forecasts were raised by 12%/21%/16%, and our target price to MYR12.50. Our target price implies an FY8/14 P/B of 1.8x and PER of 14.4x for TNB.

Building materials

Neutral (unchanged)

The electricity hike for industrial (+16.85%) will add further pressure to the steel sector, which is facing losses. As the local steel ASPs track closely to the international ASPs, we think there is little room for the local steel players to raise their ASPs for cost pass-through.

As for the cement-makers, the fundamentals have turned more positive of late, allowing for a cost pass-through. Lafarge‟s electricity bill amounts to approximately MYR200m p.a., indicating an incremental cost of MYR34m p.a. or just 2% increase in its production cost.

Glove producers

Neutral (unchanged)

As electricity accounts for only 3% of the glove producers‟ production costs, the adverse impact to bottom line is immaterial at <1%. Given that the cost increase is insignificant, we think the glove players will absorb the higher electricity costs.

Source: Maybank KE

Market earnings growth. We project 8.1% KLCI core earnings growth

and 10.4% for our research universe in 2014, after a low base 5.3%/

5.2% growth forecasts in 2013. The growth drivers in 2014 will be:

Banking, on projected 9.6% loans growth versus 9.8% in 2013, a

milder 4bps compression in NIMs versus 9-10bps in 2013, and

improved efficiencies from merger synergies;

Plantation, on higher CPO ASPs of MYR2,600/t versus MYR2,380/t

in 2013 (+9% YoY) and projected 1-27% YoY FFB production

growth for the stocks under our coverage;

Power, on TNB‟s new earnings base of MYR5.5b based on its new

tariffs versus MYR4.6b net profit in FYAug13;

Aviation, on a smaller loss forecast of MYR249m for MAS versus

an anticipated MYR1.1b loss in 2013.

For 2015, we project 8.0% KLCI core earnings growth and 9.7% for our

research universe.



Malaysia market earnings growth and valuation as at 17 Dec 2013

2012A 2013F 2014F

KLCI 30 @ 1,850.9 PE (x) 18.2 17.6 16.3


Maybank IB‟s Research Universe PE (x) 18.9 18.0 16.3


Source: Maybank KE

Maybank IB Research Universe earnings growth, PERs, P/B, ROE

Earnings Growth (%) PE (x) P/B (x) ROE (%) Rec Sector CY 12A CY 13F CY 14F CY 12A CY 13F CY 14F CY 12A CY 13F CY 12A CY 13F

NT Banking & Finance 8.4 5.6 9.6 14.5 13.7 12.5 2.0 1.8 14.8 14.3

NT Building Materials (18.0) 14.6 9.0 24.7 21.6 19.8 1.9 1.9 7.8 9.0

NT Consumer 9.0 14.1 12.1 26.4 23.1 20.6 3.0 2.9 13.1 13.2

OW Construction, Infra 10.8 9.2 15.9 17.0 15.6 13.4 1.7 1.8 12.3 10.8

NT Gaming (2.5) (1.5) (2.9) 15.7 15.9 16.4 1.8 1.6 11.9 11.1

NT Gloves 22.5 10.8 13.6 21.7 19.6 17.3 3.9 3.5 20.3 20.1

OW Oil & Gas 6.6 24.6 3.1 24.2 19.4 18.8 3.2 2.8 14.9 16.2

NT Media (21.5) 1.4 14.7 22.7 22.4 19.5 5.4 5.0 24.3 24.3

NT Plantation (13.9) (13.6) 12.6 19.5 22.6 20.0 2.4 2.3 13.1 10.7

UW Property 33.7 21.4 7.1 19.5 16.1 15.0 1.2 1.2 7.2 7.5

NT Telcos (2.6) 9.5 4.8 25.5 23.2 22.2 4.8 4.9 18.5 20.8

OW Transport 155.4 (14.1) 63.2 24.2 28.2 17.3 1.4 1.3 6.7 4.9

OW Utilities 31.4 (1.2) 15.2 13.8 13.9 12.1 1.6 1.4 11.7 11.2

Stocks under cvrg 6.8 5.2 10.2 18.9 18.0 16.3 2.3 2.1 13.1 12.6

OW = Overweight; UW = Underweight; NT = Neutral; Source: Maybank KE

Research Universe: Earnings breakdown by sector – CY14

KLCI 30: Earnings breakdown by sector – CY14


Risks to earnings. The downside risks to our market earnings growth

forecasts for 2014 are higher-than-expected credit costs for banks amid

inflationary pressures and a shortfall in CPO ASPs. Banking and

plantation earnings, in total, comprise 53% of our KLCI and 42% of our

research universe core earnings, respectively. As for 2015, the “double

impact” of subsidy rationalisation and 6% GST implementation as well

as a potentially higher interest rate environment could dampen

consumer sentiment and further crimp business margins. 2015 could

also see weaker earnings in property if sales slow considerably in 2014

after the drastic cooling measures in Budget 2014.



Sectors outlook

Sectors Outlook BUYs

Automotive (NT) Challenging We forecast 3% TIV growth in 2014 having considered our in-house real GDP growth forecast of 5% for 2014, the normal replacement cycle for cars >10 years old and aggressive model launches lined up by the auto players in 2014.

Challenges include subsidy rationalisation, which would crimp discretionary spending and car purchases. Positives could, however, come from the National Automotive Policy revision in Jan 2014 and the GST impact on car prices, which is still unclear.

TCM, BAuto

Banking (NT) Stable We expect sector loan growth to hold up at 9.6% in 2014 vs 9.8% in 2013 on faster growth in non-household loans than household loans.

We expect a milder 4bps compression in NIMs versus 9-10bps in 2013 and improved efficiencies as recent merger synergies flow through.

However, we do expect credit costs to remain elevated with some stress on asset quality amid inflationary pressures.

AMMB, HL Bank, HLFG, BIMB

Building material (NT)

Negative for steel; Stable for cement

We are cautious on the steel sector as we think ASPs will continue to be weak on dumping activities from China.

In addition, the 17% hike in the electricity tariff for industrial users, effective Jan 2014, will suppress steel players‟ earnings as electricity is a big cost item.

For the cement sector, we expect ASP to stay flattish over the next year while demand growth will be sustained by big-scale infrastructure projects entering their peak construction phases and by strong property construction works due to record sales in the past two years.

-

Construction/Infra (OW)

Positive We expect sustained construction job flows to persist in 2014, driven by both public and private spending on infrastructure, property and onshore O&G related projects.

News flow should also stay positive on major infrastructure project awards and corporate activities involving water and highway assets.

IJMC, Gamuda, WCT, HSL, Eversendai, Kimlun, CMS

Consumer (NT) Challenging We expect consumer spending on discretionary goods to slow in 2014 alongside the government‟s subsidy rationalisation plan to address its budget deficit.

The key sub-sectors that could be affected are Retail and Brewery as they are less resilient than Tobacco, Staples and F&B, for which consumer demand is less elastic.

Visit Malaysia Year 2014 should offset the impact on Retail and Brewery and may benefit these sub-sectors.

Oldtown, JTI, Padini.

Gaming (NT) Mixed We are bullish only on GENM due to its MYR5b expansion/rejuvenation plan. We are less bullish on GENT due to the uncertain outlook surrounding its 52%-owned GENS.

Elsewhere, the two NFOs, BST and Magnum, face a stable outlook in 2014 but with a negative bias into 2015 due to implementation of the 6% GST on 1 Apr 2015.

GENM

Gloves (NT) Positive The sector will face structural cost inflation in 2014 from higher electricity tariffs and potentially higher gas prices, but we expect glove-makers to pass on the higher cost with a 2-3-month time lag, given the sound demand-supply fundamentals.

We expect demand growth to sustain at the 8% level for rubber gloves and 15% for nitrile gloves in 2014.

Kossan

Media (NT) Challenging We forecast total adex growth of 2.5% in 2014, or 0.5x real GDP growth, as we expect fuel price and electricity tariff hikes to suppress adex sentiment.

1H14 total gross adex growth may be buoyed by BRIM payments and the FIFA World Cup, but we expect 2H14 to be weak as advertisers prepare for GST implementation on 1 Apr 2015.

Astro

Oil & gas (OW) Positive The PETRONAS-driver will continue to shape the outlook for 2014. Momentum for the upcoming phase will be intense as the majority of projects under development move into the production phase.

Secular growth and thematic plays – RSC, drilling, OSVs, fabrication, RAPID – are set to drive prospects for the respective service providers along the various value chains.

Bumi Armada, SAKP, MMHE, Barakah, Alam, Perdana

Petrochemical (NT) Stable The global supply-demand relationship is in balance and petrochemical prices should be stable. An uptrend in crude oil prices will provide upside potential for petrochemical prices.

-

Source: Maybank KE



Sectors outlook (continued)

Sectors Outlook BUYs

Plantation (NT) Mildly positive

Higher CPO and palm kernel prices, lower fertilizer costs and FFB recovery will be the key earnings drivers in 2014. Our forecasts input MYR2,600/t CPO ASPs in 2014 (+9% YoY).

M&A momentum will sustain.

FGV, TSH, Ta Ann

Power (NT) Stable 2014 represents the trial year for the new tariff framework, IBR (Incentive-based Regulation), which incorporates a fuel cost pass-through mechanism, thereby reducing earnings volatility for TNB.

We do not expect major price and supply pressure for fuel. Gas supply is now ample. Coal prices are currently trending up, but they are unlikely to stay substantially elevated given unfavourable demand-supply dynamics.

TNB

Property (developers) (UW)

Challenging We expect property demand to be hit hard by the new property cooling measures of Budget 2014 and by some state governments. Stricter mortgage lending by the banks will also slow new transactions.

Developers have already expressed caution on the property market outlook over the next six months and are switching their product focus to affordable housing, which still has resilient demand, supported by a young demographic.

We lower our FY14/15/16 earnings forecasts by 5-30% to factor in: (i) lower sales assumptions due to the deferment of high-end/high-rise launches and (ii) lower pre-tax margin assumptions (-2ppt) for projects launched between end-2011 and 2013 to factor in higher construction costs.

Glomac

Property (REITs) (NT)

Challenging Electricity tariff and potential assessment rate hikes in 2014 are negative for M-REITs. While many leases include rent escalation clauses and cost pass-through to the tenants, their execution still depends on market conditions.

Together with rising bond yields, this does not make REITs an attractive investment class just yet.

CMMT, Pav REIT

Telecommunication (NT)

Mixed Data usage growth is both explosive and secular, driven by increased users, faster internet access and improved content.

For fixed-line players, we continue to expect growth in data revenue to more than offset falling voice revenue.

We expect competition among the cellular majors to remain rational, allowing the cellular majors to continue focusing on further monetising data.

We see pockets of trading opportunity for selected telco stocks given the potential crystallisation of stock-specific catalysts in 2014.

TDC

Aviation (OW) Recovering The Malaysian aviation sector has had a turbulent 2013 due to overcapacity and a fare war that decimated yields and profitability.

We forecast passenger traffic growth of 9-10% in 2014, which should be comfortably absorbed by the market.

The yield outlook should gradually improve as the supply-demand is in balance and airlines no longer need to engage in an all-out fare war.

AirAsia, AirAsia X

Source: Maybank KE



VALUATIONS

Slightly above average. At its 1,851 close on 17 Dec (+9.6% YTD),

the KLCI is trading at 16.3x FY14 earnings, close to +1SD of its long-

term mean PER (since 2001) of 16.5x (mean is 15.0x). It closed 2012 at

16.0x 1-year forward earnings, and so far during 2013 it has traded at a

low of 15.2x and a high of 16.5x. On a trailing P/B basis, the KLCI is

trading at 2.4x versus its mean of 2.2x since 2007.

KLCI„s forward PER: 16.3x (17 Dec) KLCI‟s trailing P/B: 2.4x (17 Dec)

8

10

12

14

16

18

20

22

01 02 03 04 05 06 07 08 09 10 11 12 13

(x)1-Yr Forward PER Mean +1 std -1 std

1.0

1.4

1.8

2.2

2.6

01 02 03 04 05 06 07 08 09 10 11 12 13

(x)KLCI P/B Mean

+1 SD -1 SD

Source: Maybank KE, Bloomberg Source: Maybank KE, Bloomberg

Against regional peers. On a PEG basis, the KLCI‟s ratio of 2 remains

above that of its ASEAN peers, which ranged from 0.9 (Indonesia and

Thailand) to 1.5 (Singapore) and 1.7 (Philippines). On a forward P/B

comparison, the KLCI‟s 2.2x (12.7% ROE) is above that of Thailand

(1.8x P/B, 16.1%). Although “pricey” (which has always been the case),

especially on a PEG basis, the sustainability of Malaysia‟s longer-term

growth on strong macro-economic policies and banking and corporate

balance sheet strength will continue to support its premium rating.

Regional: 2014 PER vs 2014 growth, as at 17 Dec 2013 Regional: 2014 P/B vs 2014 ROE, as at 17 Dec 2013

Source: Factset, Maybank KE Source: Factset, Maybank KE



STRATEGY

1,940 end-2014 KLCI target. We maintain our end-2014 KLCI target of

1,940, which is pegged to 15.8x 1-year forward earnings, in turn based

on +0.5SD of the KLCI‟s long-term mean PER. Our bottom-up approach

derives 1,920 KLCI. With projected 5% upside from the current levels,

2014 will very much be a stock-picking year. We advise investors to

focus on the value stocks in the near term, and notice the big-caps on

broader market dips. Our top stock picks are TNB, Genting Malaysia,

Hong Leong Bank, AMMB, Bumi Armada, IJM Corp, Time dotCom,

Cahya Mata Sarawak and MPHB Capital.

Sector weights (1). With subsidy rationalisation rolling in, we expect

household balance sheets to be under pressure, which would affect

discretionary spending. We are Neutral on the consumer, gaming and

auto sectors. Drastic property cooling measures in Budget 2014 will

slow property sales and banking sector loan growth, where mortgages

have been the driver. Offsetting the impact of slower household loan

growth is our expectation for non-household loans to pick up due to

investments under the Economic Transformation Programme. We

Underweight the property sector and are Neutral on the banks.

Sector weights (2). Positives will be in the construction sector, where

major infrastructure projects will continue – KVMRT 2, West Coast

Expressway, Gemas-Johor Baru double track rail and Kuantan Port

expansion. This should sustain job flows and earnings, supporting

valuations. In oil & gas, PETRONAS‟ domestic production growth target

is intact, and we continue to expect awards in the RSC, drilling, OSV

and fabrication spaces. We are Overweight on both sectors. Elsewhere,

TNB‟s tariff hike would raise its earnings base and further re-rate the

stock; we thus Overweight power. We also Overweight the aviation

sector with values in both AirAsia and AirAsia X.

Sector weights

Overweight Neutral Underweight

Construction Auto Property – developers

Oil & gas Banking Building material – steel

Power Building material – cement

Aviation Consumer

Gaming

Glove producers

Media

Petrochemical

Plantation

Property – REITs

Telcos

Source: Maybank KE

(Please see our sector write ups on pages 67-102.)



1-year, 3-year sectorial indices performance as at 17 Dec 2013

10

10

14

20

10

15

17

9

17

12

22

22

30

25

(22)

22

25

(3)

12

(26)10

26

(30) (20) (10) 0 10 20 30 40

KLCI

Consumer

Industrial Products

Technology

Finance

Services

Construction

Plantation

Mining

Industrial

Property

3 YEARS 1 YEAR


We also highlight two developments for consideration.

Shariah mid-caps

Narrowed valuation gaps. Over the past three years (2011-2013) to

date, the Shariah indices, ie FBM Emas Shariah (FBMS) and FBM

Hijrah Shariah (FBMHS), have outperformed, with cumulative returns

(before dividends) of 28.6% for the FBMS and 35.8% for the FBMHS,

vs 21.9% for the KLCI and 23.0% for FBM EMAS. The outperformances

are also reflected in the valuation gaps, which have reversed/widened:

(i) FBMS‟ trailing PER is now marginally above the KLCI, versus 1.4x

below the KLCI in early 2011, and (iii) FBMHS‟ trailing PER is now 2.5x

above the KLCI compared to a 1.5x premium in early 2011.

Yearly returns

KLCI FBM70 FBMEMAS FBMS FBMHS

2008 -39.3% -45.3% -41.6% -43.5% -43.1%

2009 45.2% 52.0% 48.6% 43.0% 40.2%

2010 19.3% 31.8% 21.9% 18.2% 12.3%

2011 0.8% 6.2% 1.1% 2.4% 5.4%

2012 10.3% 6.6% 9.0% 11.8% 15.0%

2013 YTD 9.6% 14.5% 11.5% 12.2% 12.0%

2011-13 YTD 21.9% 29.6% 23.0% 28.6% 35.8%

FBMS and FBMHS‟ PER valuation gaps versus the KLCI

10

12

14

16

18

20

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

(x) FBMKLCI FBM Emas Shariah FBM Hijrah




Further re-rating potential? The question at this juncture is whether

Shariah stocks will continue to re-rate. We do think so given that (i)

Islamic funds will continue to grow rapidly in size, (ii) we foresee

increased foreign participation, especially with the recent streamlining

of the Securities Commission‟s screening methodology to better reflect

international practices, and (iii) there is a scarcity premium for Shariah-

compliant stocks as the pool of such stocks is now more limited than

before. (Please see our feature article on pages 56-65.)

Investment strategy. We would add to our position in the Shariah big-

caps on any weakness in the broader market. We see higher upside for

the Shariah mid- and small-caps in: (i) plantation (SOP, TSH, Ta Ann),

(ii) oil & gas (Barakah, Alam, Perdana), (iii) telco (TDC), (iv) consumer

(OldTown, QL), and (v) property (Glomac), whose valuations still lag

that of their larger peers. Other Shariah stocks on our BUY list are: (i)

TNB, MISC, FGV, Gamuda, Westports, IJMC, MMHE and BIMB in the

big-caps, (ii) AirAsia X, Kossan, CMS and NCB in the mid-caps, and (iii)

Padini, HSL, Eversendai and Kimlun in the small-caps.

Visit Malaysia Year 2014

Malaysian Hospitality. 2014 will be the fourth VMY to help the country

achieve its target of 36m tourists and MYR168b in tourist receipts by

2020 as outlined under the Economic Transformation Programme (vs

25m tourists and MYR60.6b in receipts in 2012). The aim is not just to

grow the number of tourists or arrivals, but also the yield (amount spent

per tourist), which has been relatively low at MYR2,260 in 2009 (versus

MYR3,106 in Singapore and MYR3,785 in Thailand) and MYR2,420 in

2012 to the target of MYR4,675 by 2020. The target groups are the

medium- and long-haul tourists, avid shoppers and business travellers.

Higher spending anticipated. VMY 2014 will be the largest tourism

celebration ever, with hundreds of events lined up, according to

Tourism Malaysia. In the previous 1994/2007 VMYs, tourist arrivals

climbed 11%/20% YoY, while receipts jumped 63%/27% YoY. VMY

2014‟s targets are 28m tourists (which implies 12% YoY growth from

our estimate of 25m tourists in 2013, by annualising 9M13 arrivals) and

MYR76b in receipts (which implies a CAGR of 12% since 2012).

Malaysia tourist arrivals and receipts

4.87.4

5.8 6.0 6.5 7.2 7.5 7.1 6.2 5.67.9

10.212.813.3

10.6

15.716.417.6

21.0

22.123.724.6

24.725.025.0

28.0

0

10

20

30

40

50

60

70

80

0

5

10

15

20

25

30

35

40

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013E

MYR billionpax million Tourist arrivals (LHS) Tourist spend (RHS)

VMY 2

VMY 3

VMY 4

VMY 1

Source: Tourism Malaysia (from 1998), Economic Transformation Programme (1990-1997), Maybank KE’s estimates (for 2013)



Hospitality industries to benefit. The higher tourist spending from

VMY 2014 would benefit those in the hospitality industries – aviation

(AirAsia X, AirAsia, MAHB), leisure (GENM) and hotels (Shangrila). In

addition, there should be some positive spillovers for F&B (OldTown),

retail (Parkson, AEON) and retail REITs (PavREIT, CMMT, SunREIT,

IGB REIT), which have revenue-sharing arrangements with their

tenants. Our BUY calls are AirAsia, AirAsia X, GENM, OldTown,

PavREIT and CMMT. The KLIA2 opening in 2014 will be timely for VMY

2014 and will raise KLIA‟s profile as an aviation hub. An indirect

beneficiary is WCT for its Gateway@KLIA2.

Top BUYs for 2014

TNB We are bullish on TNB as valuations remain attractive, and we think the street has yet to incorporate the full earnings accretion from the tariff hike.

Genting Malaysia GENM‟s MYR5b integrated resorts plan is a game changer. Assuming 15% IRR, we estimate additional FCFs of >MYR750m p.a. and >23sen/sh accretion. We are convinced that RWG will shed its widely held image as a dated property and will attract more visitors going forward.

Hong Leong Bank Much room for cross-selling within the group especially since it has the third largest branch network in the country. We expect increased focus on the SME sector as well as a more aggressive push towards developing wealth management capabilities.

AMMB Unlike most of the other banks, we expect AMMB's ROEs to be sustainable and what is positive is management's focus on driving fee income expansion. A beneficiary of the ETP through its strong presence in the fixed income market.

Bumi Armada We see Bumi Armada as a direct proxy to global FPSO growth play. It has the balance sheet to pursue growth, backed by a team of dedicated, experienced management.

IJM Corporation Robust orderbook replenishment potential, high unbilled property sales and improving prospects of its other businesses.

Time dotCom We continue to like TDC as it is most exposed to the secular growth trends of data, and has capital management potential.

Cahya Mata Sarawak Key beneficiary of SCORE development in Sarawak, strengthening recurring income from strategic investments, with undemanding valuation.

MPHB Capital Very undervalued land bank and at the current price, investors are getting Multi-Purpose Insurans almost free. Growth is currently anchored by the insurance company and will be augmented by property contributions once the joint developments take off.

Source: Maybank KE

Top picks

Price TP EPS (sen) PE (x) EPS Growth (%) Div yld ROE P/B (x)

17 Dec CY12A CY13F CY14F CY12A CY13F CY14F CY12A CY13F CY14F CY14F CY13F CY12A

Large Cap

Tenaga 11.02 12.50 76.9 90.4 97.8 14.3 12.2 11.3 (1.7) 17.5 8.3 2.8 11.9 1.7

Genting M‟sia 4.39 4.80 32.3 28.6 30.4 13.6 15.3 14.4 14.1 (11.5) 6.3 1.5 12.6 1.9

HLBK 14.24 16.40 110.5 120.2 131.3 12.9 11.8 10.8 5.0 8.8 9.3 2.7 14.3 2.1

AMMB Holdings 7.34 8.60 58.6 64.7 70.7 12.5 11.3 10.4 9.7 10.4 9.3 3.6 13.7 1.9

Bumi Armada 3.97 4.40 16.0 18.2 20.3 24.8 21.8 19.6 18.5 13.8 11.5 0.0 11.3 3.1

IJM Corp 5.92 6.75 38.0 42.2 45.4 15.6 14.0 13.0 22.8 11.1 7.4 2.2 8.9 1.5

Small-mid Cap

Time dotCom 3.88 4.40 18.8 20.6 22.4 20.6 18.8 17.3 (6.9) 9.6 8.7 0.0 5.8 0.9

CMS 6.39 7.20 48.1 58.8 68.9 13.3 10.9 9.3 17.9 22.2 17.2 2.8 10.0 1.4

MPHB Capital 1.71 2.12 8.4 9.1 9.9 20.4 18.8 17.3 (5.6) 8.3 8.8 1.1 5.6 1.2

Source: Maybank KE



Appendix 1

Dividend stocks (Maybank KE‟s coverage; Excludes SELL calls; Stocks with more than 4% net yield)

Stocks Rec Shr px at 17-Dec-13

Market Cap (MYR m)

TP (MYR) 2014 Net Yld (%)

Upside to TP (%)

Potential total returns (%)

Quill Capita Hold 1.18 460.4 1.16 6.8 (1.7) 5.1

Padini Holdings Buy 1.76 1,157.9 1.87 6.4 6.3 12.6

Star Hold 2.38 1,756.5 2.65 6.3 11.3 17.6

CMMT Buy 1.34 2,375.6 1.76 6.2 31.3 37.6

Sunway REIT Hold 1.24 3,625.4 1.24 5.9 - 5.9

IGB REIT Hold 1.18 4,038.7 1.22 5.8 3.4 9.2

Axis REIT Hold 2.99 1,379.1 2.71 5.8 (9.4) (3.5)

Pavilion REIT Buy 1.27 3,822.3 1.53 5.6 20.5 26.1

Maybank NR 10.02 88,787.7 NR 5.6 NA NA

Maxis Hold 7.20 54,024.0 7.20 5.6 - 5.6

KLCC Prop Hold 5.76 10,398.7 6.26 5.5 8.7 14.2

Magnum Hold 3.10 4,424.7 3.12 5.5 0.6 6.1

Berjaya Sports Toto Buy 3.97 5,292.0 4.00 5.4 0.8 6.1

NCB Holdings Buy 3.55 1,669.4 4.84 5.1 36.3 41.4

MCIL Hold 1.00 1,687.2 1.01 5.1 1.0 6.1

MSM Malaysia Holdings Hold 4.93 3,465.7 5.30 5.0 7.5 12.5

Lafarge Hold 8.98 7,630.3 9.60 4.8 6.9 11.7

DiGi.Com Hold 4.92 38,253.0 4.95 4.7 0.6 5.3

Carlsberg Brewery Hold 12.00 3,691.5 11.70 4.7 (2.5) 2.2

Mah Sing Hold 2.23 3,096.0 2.45 4.7 9.9 14.5

SP Setia Hold 3.00 7,376.1 3.38 4.5 12.7 17.2

Glomac Buy 1.12 814.0 1.27 4.5 13.4 17.9

Wah Seong Hold 1.69 1,301.3 1.50 4.4 (11.2) (6.8)

Bursa Malaysia Hold 8.03 4,276.9 8.00 4.4 (0.4) 4.0

Axiata Hold 6.87 58,670.7 7.20 4.3 4.8 9.1

Oldtown Buy 2.43 881.1 3.34 4.2 37.4 41.7

Westports Buy 2.54 8,661.4 2.70 4.2 6.3 10.5

Petronas Chemicals Hold 6.83 54,640.0 6.70 4.0 (1.9) 2.0

Source: Maybank KE



Appendix 2

Foreign shareholding of selected stocks under coverage

Foreign shareholding Dec-09 Dec-10 Dec-11 Dec-12 Jun-13 Latest As at (month, year)

Malayan Banking 10.9 14.0 13.5 19.6 25.2 21.8 6-Dec-13

CIMB Group * 42.4 42.6 38.1 40.4 40.6 35.8 30-Sep-13

Public Bank 26.5 26.5 26.1 31.2 31.3 31.7 30-Sep-13

Axiata Group 6.7 12.2 28.0 28.0 27.0 25.0 30-Sep-13

Sime Darby 14.2 15.3 17.3 19.5 17.5 17.7 31-Oct-13

Petronas Chemicals NA NA 9.0 9.0 8.0 9.0 31-Oct-13

Maxis * 8.6 8.3 7.3 7.5 7.7 7.7 30-Sep-13

Tenaga Nasional 9.4 10.5 10.8 15.0 22.3 25.6 30-Sep-13

Petronas Gas 2.4 2.0 3.0 3.0 3.0 3.0 30-Sep-13

Genting Berhad 36.0 42.0 42.0 45.0 43.0 46.0 30-Sep-13

Digi.com 6.8 9.0 12.9 12.6 13.0 13.2 30-Sep-13

IOI Corporation 22.0 19.0 17.0 17.6 17.0 18.0 31-Oct-13

Hong Leong Bank NA NA 7.7 8.1 8.2 8.2 30-Sep-13

SapuraKencana * NA NA NA 22.0 32.8 32.1 31-Oct-13

KL Kepong 16.4 19.3 18.5 15.0 13.4 13.1 31-Oct-13

Genting Malaysia 31.0 35.0 37.0 38.0 39.0 39.0 30-Sep-13

RHB Capital 5.6 12.4 11.6 8.9 10.1 8.6 30-Sep-13

AMMB Holdings 29.6 30.0 26.2 29.0 32.0 34.0 30-Sep-13

MISC Bhd 4.3 4.9 3.9 5.5 6.1 6.0 30-Sep-13

Telekom Malaysia 9.1 11.0 19.9 16.2 12.6 12.6 30-Sep-13

British American Tobacco 22.0 25.3 26.8 28.4 28.9 28.0 30-Sep-13

YTL Corporation 22.0 23.0 23.0 27.0 27.0 27.0 30-Sep-13

UMW Holdings 5.9 11.7 13.5 25.8 24.2 19.8 30-Sep-13

UEM Sunrise NA NA 14.6 17.3 21.5 17.6 30-Sep-13

Bumi Armada NA NA NA 18.0 11.4 11.4 31-Oct-13

Gamuda 35.0 36.0 33.0 37.0 46.0 40.0 30-Nov-13

YTL Power Int'l 5.0 5.0 9.0 8.0 8.0 8.0 30-Sep-13

S P Setia 24.0 24.0 17.6 1.7 10.6 9.5 30-Sep-13

AirAsia NA 51.4 51.0 48.3 51.0 50.2 30-Sep-13

IJM Corp NA NA 41.3 36.6 43.1 40.5 30-Nov-13

MAHB NA NA 9.5 11.3 17.0 20.0 30-Sep-13

Dialog Group NA NA NA 16.0 16.0 16.0 30-Sep-13

Genting Plantations NA NA 9.8 9.0 8.7 8.0 30-Sep-13

Malaysia Airline System NA NA 4.0 4.5 2.0 2.0 31-Oct-13

Sunway Berhad * NA NA 21.8 20.5 18.6 17.7 30-Sep-13

MMHE NA 14.1 5.4 4.6 2.3 2.1 30-Sep-13

Mah Sing 17.7 16.7 20.9 24.8 27.5 27.1 30-Sep-13

WCT 9.0 14.0 14.0 10.0 16.6 16.9 30-Sep-13

KNM 16.0 26.0 16.0 16.0 16.0 20.0 30-Sep-13

Glomac NA NA NA NA 9.5 8.9 30-Sep-13

Oldtown * NA NA NA NA 41.0 40.0 31-Oct-13

Market 20.4 21.9 22.7 23.9 24.7 23.6 31-Nov-13

* CIMB: Inclusive of BTMU’s 5.0%;

* Maxis: Excludes Saudi Telco’s 17.5% effective stake;

* Sunway Berhad: Includes GIC’s 12.5%;

* SapuraKencana: Includes Seadrill’s 12%;

* OldTown: 4% at Feb 2012, 37% at Feb 2013

Note: Highlighted/shaded are stocks which have foreign shareholding close to, or above 20% (based on latest data available)

Sources: Companies, compiled by Maybank KE



Appendix 3

FBM KLCI 30 index weights, based on 17 Dec 2013 share price close

FBM KLCI 30 Index weights Market capitalisation (MYR m)

New FIF @ 17 Dec 2013

Free float adjusted

MALAYAN BANKING BHD 8.70% 0.51 88,788 45,282

PUBLIC BANK BHD 10.00% 0.80 65,069 52,056

CIMB GROUP HOLDINGS BHD 7.33% 0.64 59,671 38,189

SIME DARBY BERHAD 5.74% 0.52 57,450 29,874

AXIATA GROUP BERHAD 6.65% 0.59 58,671 34,616

TENAGA NASIONAL BHD 6.69% 0.56 62,193 34,828

PETRONAS CHEMICALS GROUP 3.78% 0.36 54,640 19,670

MAXIS BHD 3.63% 0.35 54,024 18,908

PETRONAS GAS BHD 3.53% 0.40 45,907 18,363

DIGI.COM BHD 3.53% 0.48 38,253 18,361

GENTING BERHAD 4.36% 0.60 37,832 22,699

IOI CORPORATION BHD 4.14% 0.58 37,133 21,537

IHH HEALTHCARE BHD 2.08% 0.34 31,808 10,815

PETRONAS DAGANGAN BHD 1.73% 0.30 30,002 9,001

SAPURAKENCANA PETROLEUM 3.30% 0.61 28,163 17,180

HONG LEONG BANK BERHAD 1.57% 0.32 25,615 8,197

KUALA LUMPUR KEPONG BHD 2.55% 0.50 26,518 13,259

MISC BHD 1.53% 0.33 24,194 7,984

GENTING MALAYSIA BHD 2.39% 0.50 24,898 12,449

AMMB HOLDINGS BHD 2.46% 0.58 22,124 12,832

RHB CAPITAL BHD 1.08% 0.28 20,095 5,627

TELEKOM MALAYSIA BHD 2.69% 0.71 19,711 13,995

BRITISH AMERICAN TOBACCO BHD 1.77% 0.50 18,440 9,220

PPB GROUP BERHAD 1.78% 0.50 18,494 9,247

YTL CORPORATION BERHAD 1.63% 0.50 17,000 8,500

FELDA GLOBAL VENTURE HLDGS 1.61% 0.51 16,417 8,373

HONG LEONG FINANCIAL GROUP 0.62% 0.20 16,234 3,247

ASTRO MALAYSIA 0.90% 0.30 15,699 4,710

UMW HOLDINGS BHD 1.58% 0.57 14,393 8,204

UEM LAND BHD 0.68% 0.35 10,091 3,532

Source: Maybank KE estimates

KLCI 30 sector weights

Financials, 32.0%

Plantations, 14.1%

Telcos, 16.5%

Gaming, 6.7%

O&G, 8.6%

Power, 6.7%

Others, 15.7%

Source: Maybank KE estimates



FEATURE ARTICLES



Tis’ The Season To Be Wary

Sharpest subsidy cuts in more than five years. The recent fuel price

(+20sen/litre) and electricity tariff (+15%) hikes were the steepest since

5 Jun 2008 and we take the view that there will be further subsidy roll-

backs ahead. These measures will negatively impact consumer

sentiment. The 2006 and 2008 experiences are most pertinent to our

research due to the sharp subsidy cuts then. We deem the 2006

scenario to be more relevant than the 2008 one as the fuel price

(+30sen/litre) and electricity tariff (+12%) hikes then are more similar to

the recent ones. Our economics research team is also forecasting 2014

real GDP growth of 5%, not dissimilar to the 2006 GDP growth of 5.8%.

History did not favour adex and mass-market gamblers at RWG.

Our research indicates that during 2006 and 2008, the consumer

(staple and discretionary), number forecast operators (NFO) and auto

sectors, and Astro Malaysia Holdings were relatively unaffected despite

reduced disposable incomes as a result of the aforementioned sharp

cuts in subsidies during those periods. Conversely, our research

indicates that adex was negatively impacted in 2006 and 2008 as

advertisers cut their advertising and promotional budgets to rationalise

cost. Visitor arrivals to Resorts World Genting (RWG) also fell in 2006

and 2008, but its revenue still grew due to the VIP segment.

Future may not favour media, brewers and NFOs. Despite higher

fuel prices and electricity tariffs, we believe that 1H14 consumer

sentiment will be temporarily buoyed by BRIM payments (government

aid) in early-1Q/3Q14 and the FIFA World Cup from Jun to Jul 2014.

That said, we expect 2H14 consumer sentiment to be weaker and adex

spend to be lower as advertisers prepare for the GST implementation in

Apr 2015. While brewers and NFOs were resilient in the past, they may

be vulnerable going forward. Both sectors reported lower sales even

before the recent fuel price and electricity tariff hikes; breweries due to

lifestyle changes and NFOs due to competition from the illegal NFOs.

Media, brewery and NFO sector valuations may de-rate. Media

valuations de-rated after the fuel price and electricity tariff hikes in 2006

and 2008. Brewery valuations were not negatively impacted in 2006. In

fact, they were re-rated to all-time highs of around 30x PERs in mid-

2013 due to stable earnings growth and high dividend payouts. But with

subsidy cuts adding onto changing lifestyle dynamics, which could

weaken earnings growth over the medium term, a de-rating of brewers‟

valuations is inevitable. NFO valuations may also be de-rated as

subsidy cuts add to the pressure from contracting industry gross NFO

revenue. That said, any de-rating is likely to be limited as the

contractions have been mild and NFOs offer decent yields of >5%.

Least affected: Consumer staples, auto, Astro and GENM. Drawing

from history, we believe that the consumer and auto sectors will be the

most resilient going forward. Our BUY calls in these sectors are Padini,

Oldtown, JT International, Berjaya Auto and Tan Chong Motor. We

also like Astro for the same reason. Although Genting Malaysia

(GENM) may record less mass-market visitations to RWG, we still like it

for its MYR5b expansion/rejuvenation plan. We are, of course, more

cautious on companies in the media, brewery and NFO sectors.

Subsidy Cuts

Yin Shao Yang [email protected] (603) 2297 8916

Ivan Yap

[email protected] (603) 2297 8612 Kang Chun Ee [email protected] (603) 2297 8675






Some qualifiers. This is a research feature on the impact of subsidy

rationalisation on consumer sentiment drawing comparisons to the past.

While past experiences may not be an accurate guide of the future, it

may provide some glimpses. Offsetting the impact of the recent and

upcoming subsidy cuts will be cash assistance to the low-income group

and tax breaks for the medium-income group, which were not there in

the past. Visit Malaysia Year 2014, which targets much higher tourist

arrivals and spending, could cushion the impact on the retailers. In

addition, comparisons are being made with the subsidy cut experience

in 2008, during the Global Financial Crisis, while this time round there is

greater confidence in the global recovery ahead.

Sharpest subsidy cuts in more than five years

Basis of our research. Given the 20sen/litre fuel (RON95 petrol and

diesel) price hike on 3 Sep 2013 and the 15% electricity tariff increase

on 1 Jan 2014, we thought it wise to examine the impact that these

subsidy cuts may have on consumer spend. In particular, we examined

the impact they may have on the consumer (staple and discretionary),

media, gaming (casino and NFO) and auto sectors. The recent fuel

price and electricity tariff hikes were the steepest since 5 Jun 2008 and

we take the view that there will be another fuel price hike in 2Q/3Q14.

Table 1: Historical fuel prices (MYR/litre) and electricity tariffs (sen/kWh)

Date Fuel price (MYR/litre)

Increment (MYR/litre)

Date Avg electricity tariff (sen/kWh)

Increment

1-Oct-00 1.20 +0.10 1-Jun-06 26.2 +12.0%

20-Oct-01 1.30 +0.10 5-Jun-08 32.5 +24.0%

1-May-02 1.32 +0.02 1-Mar-09 31.3 -3.7%

1-Nov-02 1.33 +0.01 1-Jun-11 33.5 +7.1%

1-Mar-03 1.35 +0.02 1-Jan-14 38.5 +15.0%

1-May-04 1.37 +0.02

1-Oct-04 1.42 +0.05

5-May-05 1.52 +0.10

31-Jul-05 1.62 +0.10

28-Feb-06 1.92 +0.30

5-Jun-08 2.70 +0.78

23-Aug-08 2.55 -0.15

25-Sep-08 2.45 -0.10

15-Oct-08 2.30 -0.15

1-Nov-08 2.15 -0.15

18-Nov-08 2.00 -0.15

3-Dec-08 1.90 -0.10

16-Dec-08 1.80 -0.10

16-Jul-10 1.85 +0.05

4-Dec-10 1.90 +0.05

3-Sep-13 2.10 +0.20

Sources: Ministry of Finance, Tenaga Nasional

2006 and 2008 are the best years to compare to. While there have

been many changes in fuel prices and electricity tariffs, the 2006 and

2008 scenarios are most pertinent to our research due to the sharp

hikes then. While useful, we deem the 2008 scenario to be less relevant

than the 2006 scenario as the fuel price (+78sen/litre) and electricity

tariff (+24%) hikes then were severe even by today‟s standards. The

financial crisis, which began unravelling in 2H08, sank the global

economy into a recession by 1H09, further complicating our research.



2006 more relevant than 2008. We deem the 2006 scenario to be

more relevant as the fuel price (+30sen/litre) and electricity tariff (+12%)

hikes then are more similar to the fuel price (+20sen/litre) and electricity

tariff hikes (+15%) recently. Our economics research team is also

forecasting 2014 real GDP growth of 5%, not dissimilar to the 2006 real

GDP growth of 5.8%. The only exception is that consumer sentiment in

2H06 was positively impacted by the commodity super-cycle with CPO

and rubber prices hitting new highs then, lifting the incomes of the rural

population. We are less sanguine on those prices in 2014. We forecast

MYR2,600/t CPO ASPs in 2014, 9% higher than MYR2,380/t in 2013.

Chart 1: Consumer sentiment index

50.0

60.0

70.0

80.0

90.0

100.0

110.0

120.0

130.0

140.0

150.0

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Source: Malaysian Institute Of Economic Research (MIER)

History did not favour adex and mass-market gamblers

Consumer, NFO and auto sectors plus Astro were relatively

unaffected. Our research indicates that during 2006 and 2008, the

consumer (companies covered: AEON Co. (M), Padini Holdings, Nestle

(M), QL Resources, Carlsberg Brewery Malaysia, Guinness Anchor,

British American Tobacco (M), JT International), NFO and auto sectors,

and Astro Malaysia Holdings were relatively unaffected despite reduced

disposable incomes. We believe this was due to:-

(i) AEON Co. (M), Nestle (M), QL Resources – their products are

staples and inexpensive and are therefore, less income elastic.

(ii) Padini Holdings – it has a wide product range and it caters to the

mass market (low- to middle-income groups). It also benefited from

the low base effect in the past.

(iii) Carlsberg Brewery Malaysia, Guinness Anchor – malt liquor market

(MLM) volume fell 5% YoY in 2006 after the excise duty was raised

23% to MYR740/Hli in 2004. That said, MLM volume grew 9% in

2008. We believe MLM volume is more sensitive to excise duty

hikes than fuel price and electricity tariff hikes.

30sen/litre fuel price hike

12% electricity tariff hike

78sen/litre fuel price and


GFC

Commodity super-cycle



(iv) British American Tobacco (M), JT International – tobacco TIV has

been contracting every year due to continuous excise duty hikes

but tobacco companies offset it by raising selling prices resulting in

flattish revenues. We believe that tobacco TIV is more sensitive to

excise duty hikes (2005, 2007, 2008, 2010) than fuel price and

electricity tariff hikes.

(v) NFOs – their products are inexpensive (minimum MYR1 bet). In

2006, the NFOs also benefitted from 4D permutation games

introduced from 2004 to 2006. In 2008, sales growth was driven by

jackpot games introduced by Berjaya Sports Toto (BST).

(vi) Auto – apart from the introduction of the National Automotive Policy

in 2006 (uncertainties in used car prices due to significant reduction

in new car prices, brought about by lower duties, which led to lower

sales), the Global Financial Crisis in 2009, and the Japan

earthquake and the Thai flood in 2011, vehicle sales did not exhibit

any inverse relationship with fuel price and electricity tariff hikes.

(vii) Astro Malaysia Holdings – churn rates fell YoY in 2006 (FY1/07)

and 2008 (FY1/09). Subscribers may have been more inclined to

stay and watch Astro at home due to higher fuel prices then.

FY1/06 churn rate was abnormally high due to CRM problems then.

Chart 2: AEON Co. (M) total sales and sales per store Chart 3: Nestle (M) revenue

0

20

40

60

80

100

120

140

160

180

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Feb

02

Feb

03

Feb

04

Feb

05

Feb

06

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10

Dec

11

Dec

12

Dec

13F

Dec

14F

Dec

15F

MYR mMYR m Total Sales (LHS) Sales / Store (RHS)

changed from gross to net revenue

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

0

1000

2000

3000

4000

5000

6000

7000

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

F

2014

F

2015

F

%MYR m Revenue YoY Growth

* financial year end changed from Feb to Dec in 2006

Source: AEON Co. (M)

Source: Nestle (M)

Chart 4: Tobacco TIV Chart 5: MLM volume

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

-

5,000

10,000

15,000

20,000

25,000

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

TIV (LHS) YoY Growth (RHS)

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

F

2014

F

2015

F

'000 Hli MLM volume (LHS) YoY Growth (RHS)

Source: British American Tobacco, JT International Source: Carlsberg Brewery Malaysia, Guiness Anchor



Chart 6: Padini total sales and sales per store Chart 7: Industry gross NFO revenue (MYRb)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0

200

400

600

800

1,000

1,200

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

F

FY15

F

FY16

F

MYR mMYR m Total sales (LHS) Sales / store (RHS)

6.9 6.7 6.7 6.5 6.3 6.8

7.4 7.9

8.3 8.6 8.8 9.0 9.1 9.0 8.9

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: Padini Holdings Source: Berjaya Sports Toto, Magnum, Pan Malaysian Pools

Chart 8: Vehicle sales and sales growth Chart 9: Astro ARPU and churn rate

84 80 81 81

83 81 80 79 78

82 82 82 85

89 93

7.8

3.7

5.4

7.9 6.9

7.9 9.0

13.4

8.8 10.1 9.7

11.4

10.0

6.6 7.8

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

70

75

80

85

90

95

FY1/99 FY1/01 FY1/03 FY1/05 FY1/07 FY1/09 FY1/11 FY1/13

ARPU (MYR) (LHS) Churn (%) (RHS)

Source: Malaysian Automotive Association Source: Astro All Asia Networks, Astro Malaysia Holdings

Adex and mass-market visitation to RWG were negatively

impacted. Conversely, our research indicates that adex was negatively

impacted in 2006 and 2008 as advertisers cut their advertising and

promotional budgets to compensate for higher fuel prices and electricity

tariffs. The negative adex sentiment in 1H06 was reversed in 2H06 only

due to the commodity super-cycle then, which lifted the incomes and

therefore the consumer sentiment of the rural population. Visitor arrivals

to RWG, an important indicator of mass market GGR, fell in 2006 and

2008 but its revenue continued to grow due to the VIP segment.

Chart 10: Qtrly adex % chg YoY Chart 11: Qtrly adex % chg YoY vs business confidence

(50.0)

(40.0)

(30.0)

(20.0)

(10.0)

-

10.0

20.0

30.0

40.0

50.0

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

50.0

60.0

70.0

80.0

90.0

100.0

110.0

120.0

130.0

140.0

150.0

(50.0)

(40.0)

(30.0)

(20.0)

(10.0)

-

10.0

20.0

30.0

40.0

50.0

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Total adex % change YoY (LHS) Business confidence index (RHS)

Source: Nielsen Media Research Source: Nielsen Media Research, MIER






Chart 12: RWG visitor arrivals chg YoY Chart 13: RWG revenue chg YoY

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: GENM Source: GENM

Future may not favour media, breweries and NFOs

1H14 consumer sentiment may still be positive. Despite the

20sen/litre fuel price hike of 3 Sep 2013, the upcoming 15% electricity

tariff hike on 1 Jan 2014 and our view that there will be another fuel

price hike in 2Q/3Q14, we believe that 1H14 consumer sentiment may

be temporarily buoyed by BRIM payments in early-1Q/3Q14 and the

FIFA World Cup from Jun to Jul 2014. The BRIM payments are likely to

support consumer staples and retailers, NFO and tobacco sales while

the FIFA World Cup will likely support adex and brewery sales. That

said, we expect 2H14 consumer sentiment to be weaker and adex

spend to be lower as advertisers prepare for GST implementation on 1

Apr 2015.

Table 2: Significant consumer sector related developments in 2014/2015

1Q14 2Q14 3Q14 4Q14 2015

Negative Electricity tariff hike (Jan) Potential fuel price hike 6% GST (Apr)

Positive BRIM 3 1st payment BRIM 3 2

nd payment

Personal income tax lower by 1-3 ppts,

chargeable income raised to MYR400,000 from

MYR100,000

FIFA World Cup (Jun-Jul)

|------------------------------------------------- Visit Malaysia Year 2014 -----------------------------------------------|

Source: Ministry of Finance, Tenaga Nasional, Maybank KE

High household debt and GST implementation unique to 2014.

While we opine that 2014 will be more similar to 2006 than 2008 in

terms of consumer sentiment, we notice three distinctions (i) we do not

expect another commodity super-cycle to lift incomes and therefore,

consumer sentiment of the rural population, (ii) preparation for GST

implementation on 1 Apr 2015 could negatively impact consumer

sentiment in 2H14 and (iii) any recovery in consumer sentiment is

unlikely to be strong as Malaysian household debt to GDP is at an all-

time high (end-June 2013: 85%).

30sen/litre fuel price and 12% electricity tariff hike







Chart 14: Household debt to GDP

66.4% 66.3% 65.9%60.4%

71.7% 73.8% 75.5%80.9%

85.1%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

31-Dec-0531-Dec-0631-Dec-0731-Dec-0831-Dec-0931-Dec-1031-Dec-1131-Dec-1230-Jun-13

Source: Bank Negara Malaysia

Our views on the impact to sectors. We expect the consumer and

auto sectors plus Astro to be the least impacted by the ongoing subsidy

rationalisation. Conversely, we are less bullish on the media sector

going forward. GENM‟s RWG may also be negatively impacted in the

short term but we are long term bullish on its MYR5b expansion/

rejuvenation plans. Although the brewery and NFO sectors were

resilient in the past, both sectors have reported lower sales even before

the recent fuel price and electricity tariff hikes. Therefore, we remain

cautious on these two sectors. We elaborate on our views on the

media, brewery and NFO sectors plus GENM below.

Forecasting 2014 total gross adex growth of 2.5%. We note that

2006 total adex growth of 4.4% was only 0.8x real GDP growth of 5.8%.

Despite a FIFA World Cup back then, we believe that adex growth was

suppressed due to the 30sen/litre fuel price hike on 28 Feb 2006 and

12% electricity tariff hike on 1 Jun 2006. There will be a FIFA World

Cup and fuel price/electricity tariff hikes in 2014 as well. Therefore, we

forecast that total adex will grow by 2.5% or 0.5x real GDP growth in

2014. We assume a lower total gross adex growth/real GDP growth

multiple of 0.5x as we do not expect another commodity super-cycle to

lift the incomes and consumer sentiment of the rural population.

Chart 15: Total adex chg YoY vs real GDP chg YoY

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Total gross adex growth Real GDP growth

Source: Nielsen Media Research, Bank Negara Malaysia



Forecasting 2014 RWG revenue growth of 4% but more optimistic.

There is a risk that visitor arrivals to RWG will fall in 2014. That said, we

are forecasting a modest 2014 RWG revenue growth of 4% premised

on visitor arrivals growth of 2% and average gaming revenue per visitor

growth of 2%. An off-setting factor in 2014 is the Visit Malaysia Year

which should bring in more visitors. Our estimates are conservative by

historical standards as RWG‟s revenue growth in 2006 and 2008 were

higher at 9% and 12% respectively (Chart 13). GENM also recently

announced that RWG will add 1,300 rooms (+13% to current room

inventory). We are positive on this as there is a positive historical

correlation between the number of rooms and revenue at RWG.

Chart 16: RWG revenue (MYRm) vs room count

-

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

-

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Revenue (LHS) Rooms (RHS)

Source: GENM

Forecasting 2014-2015 MLM growth of 0.2-1.2% p.a. We forecast a

modest 0.2-1.2% p.a. growth in MLM volume for 2014-2015, lower than

the 2006-2012 CAGR of 5%, as the consumption of alcoholic

beverages tapers off. In 2008, fuel price and electricity tariff hikes did

not have a negative impact on MLM volume (Chart 5) as there was no

excise duty hike for alcohol. That said, we note that Carlsberg and

Guiness Anchor‟s 3Q13 revenue fell 14% YoY and 17% YoY

respectively, even before the impact of the recent fuel price and

electricity tariff hikes was fully felt. There was also no excise duty hike

this year. As it stands, we project sluggish growth moving forward and

there is the risk that MLM volume may contract with lower disposable

income.

2014 industry gross NFO revenue growth forecast of 2% has risk.

We forecast that industry gross NFO revenue will grow by a modest 2%

in 2014, in tandem with population growth. While fuel prices and

electricity tariff hikes did not have a negative impact on industry gross

NFO revenue in the past (Chart 7), we note that it has already

contracted by 1% CAGR from 2010 to 2012 because the NFOs reduced

the 4D Big Special Prize by MYR20 to MYR180/MYR1 bet in Dec 2010.

Lower prizes encourage punters to bet with the illegal NFOs which offer

better prizes. Punters may be even less inclined to bet with legal NFOs

with less disposable incomes going forward.



Valuations and recommendations

2008-like trough valuations unlikely. In 2H08, valuations of most

companies under our coverage were on a downtrend leading to a

trough in 1Q09 due to the Global Financial Crisis then. As we do not

expect a global recession in 2014, we believe that the valuations of

companies under our coverage should be more similar to the 2006

scenario. We do not elaborate on the consumer staple and automotive

sectors plus Astro as they are more resilient. Instead, we focus on the

media, brewery and NFO sectors plus GENM as they are more at risk.

Media sector may de-rate. In 2006, there were only two media stocks

covered which are still listed today, Media Prima and Star Publications

(M). Media Chinese International (MCIL) was not listed then and Astro

All Asia Network was privatized only to be relisted as Astro Malaysia

Holdings. Both Media Prima and Star Publications‟ valuations de-rated

after sharp subsidy cuts via higher fuel prices and electricity tariffs back

in 2006. Therefore, we believe that their valuations, including MCIL‟s

may de-rate in 2014, although the extent may be smaller as their cost

structures have improved and so have their balance sheets.

Chart 17: Media Prima rolling 1-year forward PER (x) Chart 18: Star Publications rolling 1-year forward PER (x)

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Oct

-03

May

-04

Dec

-04

Jul-0

5

Feb

-06

Sep

-06

Apr

-07

Nov

-07

Jun-

08

Jan-

09

Aug

-09

Mar

-10

Oct

-10

May

-11

Dec

-11

Jul-1

2

Feb

-13

Sep

-13

Mean: 14.8x

+1 SD: 19.7x

-1 SD: 9.8x

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Mean: 15.8x

-1 SD: 11.3x

+1 SD: 20.2x

Source: Media Prima, Bloomberg, Maybank KE Source: Star, Bloomberg, Maybank KE

GENM may de-rate but we take a sanguine view. Although GENM‟s

earnings were unaffected in 2006 and 2008, its valuations surprisingly

de-rated in 2006 and 2008. Going forward, we take a more sanguine

view as GENM also recently announced that RWG will add 1,300

rooms (+13% to current room inventory) and construct a 20th Century

Fox Theme Park. We are positive on this development as historically,

there is a positive correlation between the number of rooms and

revenue at RWG. Therefore, we do not believe that GENM‟s valuations

will necessarily de-rate in 2014.



78sen/litre and 24% electricity tariff hike






Chart 19: GENM rolling 1-year forward PER (x)

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

-1 SD: 8.1x

+1 SD: 18.3x

Mean: 13.2x

Source: GENM, Bloomberg, Maybank KE

Brewers may de-rate further. Valuations of brewers were not

negatively impacted in 2006. The re-rating from 2009 to mid-2013 was

driven by solid earnings growth coupled with high dividend payouts by

both Carlsberg and Guinness Anchor. With earnings growth tapering

off, the valuation of brewers have de-rated from their all-time high PERs

of approximately 30x to 21-22x currently. With our view that MLM

volume will grow by a mere 0.2-1.2% in 2014-2015, valuations for both

Carlsberg and Guinness Anchor may de-rate further going forward. The

post-2000 average 1-year forward PERs of Carlsberg and Guinness

Anchor are much lower at 17.3x and 15x, respectively.

Chart 20: Carlsberg Brewery Malaysia 1-year forward PER Chart 21: Guinness Anchor 1-year forward PER

10

15

20

25

30

35

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

PE(X)

mean: 17.3

-1 sd:13.3

+1 sd: 21.3

Acquired Carlsberg Singapore

2010 profit +75% YoY

Bumper payout 111%

Dividendslashed

8

12

16

20

24

28

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

PE(X)

mean: 15.0

-1 sd:11.3

+1 sd: 18.8

Source: Carlsberg Brewery Malaysia, Bloomberg, Maybank KE Source: Guinness Anchor, Bloomberg, Maybank KE






NFOs may de-rate but unlikely to be severe. We note that industry

gross NFO revenue contracted by only 1% CAGR from 2010 to 2012

because the NFOs reduced the 4D Big Special Prize by MYR20 to

MYR180/MYR1 bet in Dec 2010. Even when the NFOs reduced the 4D

first prizes by a much larger MYR200/MYR1 bet in Apr 1999, industry

gross NFO revenue contracted by only 2% CAGR from 1998 to 2002.

These contractions are mild compared to the ones experienced by the

media and brewery sectors. Therefore, we do not believe any potential

de-rating of the NFO sector will be severe. Both NFOs, namely BST

and Magnum, also offer decent dividend yields of >5% as their dividend

payout ratios are at least 75%.

Chart 22: Berjaya Sports Toto rolling 1-year forward PER (x)

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

May

-98

May

-99

May

-00

May

-01

May

-02

May

-03

May

-04

May

-05

May

-06

May

-07

May

-08

May

-09

May

-10

May

-11

May

-12

May

-13

-1 SD: 10.8x

Mean: 14.2x

+1 SD: 17.6x

Source: BST, Bloomberg, Maybank KE



Capitalising On Scarcity Premiums

A fast-growing segment. The Islamic capital market in Malaysia has

expanded rapidly in recent years. The NAV of Islamic unit trust funds

(UTFs), for instance, has grown at a 6-year CAGR (2006-2012) of 25%

– versus 15% for conventional UTFs over the same period – to

MYR37b as at end-Jun 2013, representing about 12% of industry NAV

of MYR326b. Total assets under management have ballooned from

MYR58b at end-Jun 2011 to MYR82b at end-Jun 2013, a 2-year CAGR

of 19% and accounting for 15% of the industry‟s total NAV of MYR555b.

Sukuk market also buoyant. Malaysia continues to lead the global

sukuk market, accounting for a hefty 77% of the USD143.4b in sukuk

issued globally in 2012. Since the private debt securities market is still

in its infancy, domestic sukuk issuances have played a pivotal role in

supporting the entire debt capital market, accounting for 56% of total

issuances in 1H13. Sukuk accounted for 49% of the entire bond market

at end-1H13, from 47% at end-2012.

Shariah stocks have been outperforming the KLCI … Both the FBM

EMAS Shariah Index (FBMS) and the FBM Hijrah Shariah Index

(FBMHS) have consistently outperformed the KLCI since 2011. On an

aggregate basis, the FBMS and FBMHS have recorded returns of

28.6% and 35.8% respectively over the 2011-2013 YTD period, versus

just 21.9% for the KLCI and 23.0% for the FBM EMAS.

…and will continue to re-rate. While the FBMHS and FBMS Index

currently trade at premium to the KLCI in terms of PER valuations, we

do think that Shariah stocks will continue to re-rate given that (i) Islamic

funds will continue to burgeon in size, (ii) greater foreign participation is

envisaged, especially with the recent streamlining of the Securities

Commission‟s screening methodology to better reflect international

practices; and (iii) there is a scarcity premium for Shariah-compliant

stocks as the pool of such stocks is now more limited than before, at

just 653 Shariah compliant securities versus 801 in May 2013. Further,

of the 653 stocks, just 100 stocks (as at 18 Dec 2013) have a market

capitalisation of MYR1b or more.

Investing in Shariah stocks. With the above considerations in mind,

we recommend that investors increase exposure to Shariah-related

stocks, in particular small- and mid-cap stocks for which we see greater

re-rating potential. On a sectoral basis, our BUYs are: (i) plantation

(SOP, TSH, Ta Ann), (ii) oil & gas (Barakah, Alam, Perdana), (iii) telco

(TDC), (iv) consumer (OldTown, QL), and (v) property (Glomac).

Other Shariah stocks in our BUY list are: (i) Tenaga, MISC, FGV,

Gamuda, Westports, IJMC, MMHE and BIMB in the big cap space, (ii)

AirAsia X, Kossan, CMS and NCB in the mid-cap space, and (iii) Padini,

HSL, Eversendai and Kimlun for small caps.

Shariah Investing

Desmond Ch’ng [email protected] (603) 2297 8680




A growing pool of funds domestically

Islamic UTFs growing faster than the industry. The Islamic capital

market in Malaysia is a rapidly expanding subset of the overall capital

market. Taking the unit trust industry as an indicator, the number of

Islamic unit trust funds (UTFs) has doubled from 83 as at end-2005 to

173 as at end-Jun 2013. This represents about 29% of the 599 UTFs in

the country. The net asset value (NAV) of Islamic UTFs totalled

MYR37b as at end-Jun 2013, representing about 12% of industry NAV

of MYR326b.

While this may not seem large, what has to be borne in mind is that the

NAV of Islamic UTFs has expanded at a 6-year CAGR (2006-2012) of

25% as compared to a 15% CAGR for conventional UTFs over the

same period. With strong support from the Government, we see Islamic

UTFs commanding an ever-increasing share of the entire industry.

Total unit trust funds – Islamic vs Industry (2006 – 2012)

-40%

-20%

0%

20%

40%

60%

80%

100%

0

5

10

15

20

25

30

35

40

Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012

YoY chg(MYR'b)

Islamic UTF NAV (MYR'b) Islamic UTF growth Total UT industry growth

Source: Securities Commission (SC), Maybank KE

Greater proportion of wholesale funds. Expanding just as rapidly, if

not more so, is the number of Islamic wholesale funds, which has more

than doubled from 20 in 2009 to 48 as at end-Jun 2013, representing

26% of the 185 wholesale funds in the industry. The NAV of Islamic

wholesale funds has surged at a 3-year CAGR of 68% to MYR16b

today, representing about 27% of industry NAV of MYR58b.

Total Islamic assets under management (AUM) has ballooned from

MYR58b at end-Jun 2011 to MYR82b at end-Jun 2013, representing a

2-year CAGR of 19% and accounting for 15% of total industry NAV of

MYR555b.

Excludes Lembaga Tabung Haji (The Pilgrims‟ Fund). A point to

note is that the MYR82b of AUM as at end-Jun 2013 excludes funds

held by The Pilgrims‟ Fund, the bulk of which are managed in-house

and total about MYR49b presently. This itself would increase the value

of Islamic assets under management by more than 50%.



Islamic UTFs, wholesale funds and AUM

June 2013 Dec 2012 June 2012 Dec 2011

Islamic unit trust funds (UTF)

No. of launched funds

Islamic UTF 173 169 166 164

Total industry 599 589 597 587

NAV (MYR'b)

Islamic UTF 37 35 31 28


% to total industry 12% 12% 11% 11%

Islamic wholesale funds (WF)

No. of launched funds

Islamic WF 48 41 30 28


NAV (MYR'b)

Islamic WF 16 16 11 7



Islamic assets under management (AUM) (MYR‟b)

Islamic AUM 82 80 63 64



Source: SC

The deepening sukuk market

2012 a phenomenal year for the sukuk market. 2012 was a great

year for the bond market, which raised an impressive MYR637.2b

during the year, 23% over the MYR518.8b raised in 2011. Even more

impressive was the growth in the sukuk market, which saw funds raised

surge 76% YoY to MYR326.5b from MYR185b in 2011. Sukuk

accounted for 51% of total funds raised in 2012 versus just 36% in

2011.

Malaysia led the international sukuk market in 2012. 2012 saw

Kazakhstan and France emerge as issuers of sukuk for the very first

time, testimony to the growing influence of the Islamic debt capital

market globally. Nevertheless, Malaysia continues to lead the way,

accounting for a hefty 77% of the USD143.4b in sukuk issued globally

in 2012.

Total international sukuk issuance in 2012: USD143b Total international sukuk outstanding in 2012: USD268b

Malaysia, 77%

Cayman Islands, 7%

Saudi Arabia, 4%

Qatar, 3%

Indonesia, 2%

Others, 7%

Malaysia, 68%

Cayman Islands, 9%

Saudi Arabia, 6%

Qatar, 5%

Indonesia, 4%

Others, 8%

Source: SC, Mybank KE Source: SC, Maybank KE



Several new achievements. 2012 saw several new milestones for the

sukuk market. Firstly, PLUS Bhd‟s MYR30.6b sukuk offering was the

single largest sukuk issuance globally. Secondly, Malaysia Airlines

System Bhd issued the world‟s first-ever corporate perpetual sukuk.

There were also several new developments in 2013. Earlier in the year,

KLCC Property Holdings Bhd saw the successful listing of its Islamic

stapled securities, a first for Malaysia. Also during the year, Malaysia‟s

first retail (exchange-traded) sukuk was issued by government-owned

Danainfra Nasional, further deepening retail market offerings in the

country, particularly for Islamic products.

Retail participation encouraged. To further promote retail

participation in the sukuk market, Budget 2013 introduced stamp duty

exemptions to the subscription of retail bonds and sukuk. To encourage

companies to issue retail bonds and sukuk, a double deduction has

been given on additional expenses for the issuance of these from year

of assessment 2012 to 2015. As a result, costs such as rating rationale

fees, underwriting and placement fees, facility agency fees, advertising

costs and the cost of printing prospectuses can be reduced.

Contribution has risen in 1H13. 1H13 saw the cumulative issuance of

MYR142.9b in sukuk. Stripping out the exceptionally large PLUS

issuance of MYR30.6b in 2012, issuances in 1H13 represent 48% of

total issuances in 2012. Since the private debt securities market is still

in relative infancy, the sukuk issuances have essentially played a

pivotal role in providing support to the entire debt capital market,

accounting for 56% of total issuances in 1H13. Sukuk accounted for

49% of the entire bond market in 1H13, up from 47% at end-2012.

Total sukuk issued and outstanding

Corporate sukuk approved 1H13 2012 2011

No. of sukuk 23 41 44

Size of sukuk (MYR'b) 26.0 71.1 78.9

Size of total bonds approved (MYR'b)

46.2 103.3 112.0

% of size of sukuk to total bonds 56% 69% 70%

Total sukuk issued (MYR'b) 1H13 2012 211

Size of sukuk issued 142.9 326.5 185.0

Size of total bonds issued 257.7 637.4 518.8

% of sukuk issued to total bonds 56% 51% 36%

Total sukuk outstanding (MYR'b)

Jun 2013 Dec 2012 Dec 2011

Size of outstanding sukuk 492.0 474.5 349.3

Size of total outstanding bonds 998.8 1,006.8 845.0

% of outstanding sukuk to total 49% 47% 41%

Source: SC



A tighter screening methodology

Recent guidelines have reduced the number of investible stocks.

The Securities Commission‟s Sharia Advisory Council‟s revised Shariah

screening methodology came into effect on 29 Nov 2013 with the

purpose of facilitating the orderly development of the Islamic equity

market and fund management industry both domestically and

internationally. The new methodology now adopts a two-tier quantitative

approach to evaluation, which applies more stringent business activity

and new financial ratio benchmarks.

Fewer Shariah-compliant stocks now. As at the end of 2006, there

were 886 Shariah-compliant stocks. This had declined to 801 by end-

May 2013, representing 88% of the 910 stocks listed on Bursa

Securities. As at end-May 2013, the cumulative market cap of the

Shariah-compliant securities was MYR1t, representing 63% of Bursa‟s

total market cap of MYR1.6t.

No. of Shariah-compliant securities and % of total market cap

54%

56%

58%

60%

62%

64%

66%

68%

600

650

700

750

800

850

900

950

Dec06

Jun07

Dec07

Jun08

Dec08

Jun09

Dec09

Jun10

Dec10

Jun11

Dec11

Jun12

Dec12

Jun13

Nov13

No. of Shariah-compliant securities % of market cap

Source: SC, Maybank KE

With the revised screening methodology, however, the number of

Shariah-compliant securities has shrunk to 653, for many failed to meet

either the conventional deposits/total assets or conventional debt/total

assets ratio of <33%. Shariah-compliant securities now make up just

60% of Bursa‟s total market cap.

Shariah compliant securities

May 2013 Nov 2013

No. of Shariah-compliant securities 801 653

Total securities 910 914

% of total listed securities 88% 71%

Market cap of Shariah compliant securities (MYR'b) 1,017 1,011

Total market capitalization (MYR'b) 1,612 1,676

% of total market capitalization 63% 60%




On a sectoral basis, the one major sector not well represented among

Shariah-compliant names is the financial services sector, for the only

financial stocks deemed Shariah-compliant are BIMB Holdings and

Syarikat Takaful. In fact, Shariah-compliant stocks would account for a

76% of total market cap of the broader market excluding conventional

financial service providers. That aside, there is a fairly decent

representation of the various sectors of the economy in the latest

Shariah-compliant stock selection.

Number of Shariah-compliant securities by sector

Consumer, 106

Industrial; products, 194

Mining, 1

Construction, 36

Trading/svcs, 143

Properties, 59

Plantation, 34

Technology, 71 Infra, 5Finance, 2

SPAC, 2


Stocks with a market cap of >MYR1b that have dropped off the list

include: AirAsia, Amway, Bumi Armada, Dutch Lady, Keck Seng, Media

Chinese International, MRCB, Oriental Holdings, Panasonic

Manufacturing, Parkson Holdings, Press Metal, SP Setia, Tan Chong

Motor, Tasek Corp, Tropicana Corp, Yinson and YTL Power. Within our

stock coverage universe, Kinsteel and Ann Joo Resources were also

dropped from the list.

New additions of Shariah-compliant stocks with market cap

>MYR1b include: AirAsia X, Berjaya Auto, DRB-Hicom, PPB Group,

UMW Oil & Gas and Westports. Another stock within our coverage that

has been added to the Shariah list is Barakah Petroleum.



Overall implications for the equities market

Shariah stocks have been outperforming the KLCI. Both the FBM

EMAS Shariah Index (FBMS) and the FBM Hijrah Shariah Index

(FBMHS) have consistently outperformed the KLCI since 2011. On an

aggregate basis, the FBMS and FBMHS have recorded returns of

28.6% and 35.8% respectively over the 2011-2013 YTD period, versus

just 21.9% for the KLCI and 23.0% for the FBM EMAS.

Yearly returns

KLCI FBM70 FBMEMAS FBMS FBMHS

2008 -39.3% -45.3% -41.6% -43.5% -43.1%

2009 45.2% 52.0% 48.6% 43.0% 40.2%

2010 19.3% 31.8% 21.9% 18.2% 12.3%

2011 0.8% 6.2% 1.1% 2.4% 5.4%

2012 10.3% 6.6% 9.0% 11.8% 15.0%

2013 YTD 9.6% 14.5% 11.5% 12.2% 12.0%

2011-13 YTD 21.9% 29.6% 23.0% 28.6% 35.8%

Source: Bloomberg, Maybank KE

Performance of the various indexes (2011-2013 YTD)

-20%

-10%

0%

10%

20%

30%

40%

1/3

/11

2/3

/11

3/3

/11

4/3

/11

5/3

/11

6/3

/11

7/3

/11

8/3

/11

9/3

/11

10/3

/11

11/3

/11

12/3

/11

1/3

/12

2/3

/12

3/3

/12

4/3

/12

5/3

/12

6/3

/12

7/3

/12

8/3

/12

9/3

/12

10/3

/12

11/3

/12

12/3

/12

1/3

/13

2/3

/13

3/3

/13

4/3

/13

5/3

/13

6/3

/13

7/3

/13

8/3

/13

9/3

/13

10/3

/13

11/3

/13

12/3

/13

KLCI FBM70 FBMS FBMHS

Source: Bloomberg, Maybank KE

A comparison of the various indexes as at end-Nov 2013

FBMHS FBMS FBM EMAS

No. of constituents 31 173 226

Net market cap (MYR‟m) 312,936 415,964 682,855

Dividend yield (%) 2.69 2.65 2.88

Weight of largest constituent (%) 10.70 8.05 7.61

Top 10 holdings (% Index mkt cap) 68.02 52.71

82

45.02

Note: From 23 Dec 2013: (i) 24 stocks have been added and 30 removed from the FBMS, and (ii) 3 stocks have been added and 3 removed from FBMHS Source: FTSE Group



Constituents of the FBM Hijrah Shariah (FBMHS) Index. There are

presently 30 stocks on the FBMHS Index (31 stocks at end-Nov 2013).

Additions effective 23 Dec 2013 in the recent FTSE Bursa Malaysia

Index Series semi-annual review are Westports, UMW Oil & Gas, and

Malaysia Marine and Heavy Engineering Holdings; they replaced

SapuraKencana, Bumi Armada and SP Setia. Of these 30 stocks, 14

are also component stocks of the KLCI, as shaded below.

Constituents of the FBM Hijrah Shariah Index as at 23 Dec 2013

Company Mkt cap (MYR‟b)

Company

Mkt cap (MYR‟b)

Axiata Group 58,074 Maxis 54,099

BIMB Holdings 6,347 MISC 24,372

Dialog Group 8,086 MMC Corp 8,678

Digi.Com 38,486 MMHE 5,888

Gamuda 10,863 Petronas Dagangan 30,181

Gas Malaysia 4,982 Petronas Gas 46,144

Genting Plantations 8,210 Sime Darby 57,270

Hartalega Holdings 5,438 Sunway 4,481

IHH Healthcare 31,076 Telekom 19,998

IJM Corporation 8,189 Tenaga 62,305

IOI Corporation 29,336 UEM Sunrise 9,960

KPJ Healthcare 3,980 UMW Holdings 14,113

Kuala Lumpur Kepong 26,496 UMW O&G 8,713

Kulim Malaysia 4,399 Westports 8,661

Lafarge Malaysia 7,622 YTL Corporation 17,207

Source: Bloomberg

Shaded stocks denote KLCI components as well

Shariah stocks have been re-rating … From the chart below, a point

to note is that the PER discount of the FBMS Index to the KLCI has

narrowed, from a discount of 1.4x in early 2011 to almost slightly above

as at end-Nov 2013. The FBMHS Index, meanwhile, had traded at a

PER premium of about 1.5x to the KLCI since early 2011 and this has

widened to 2.5x presently.

FBMS and FBMHS‟ PER valuation gaps versus the KLCI

10

12

14

16

18

20

Ja

n-1

0

Ju

l-1

0

Ja

n-1

1

Ju

l-1

1

Ja

n-1

2

Ju

l-1

2

Ja

n-1

3

Ju

l-1

3

(x) FBMKLCI FBM Emas Shariah FBM Hijrah




… and will continue to re-rate. This re-rating of Shariah stocks is

likely to continue, in our view, for the following reasons:

Islamic funds will continue to burgeon in size. The Malaysian

Islamic capital market will continue to evolve alongside the

conventional market and will become increasingly important over

time as the market broadens and deepens, particularly with ever-

increasing support from the authorities. After all, the government‟s

long-term objective is to establish Malaysia as an international

Islamic financial hub and we see more incentives being offered to

push the capital market in that direction. This also means that

Islamic AUM will continue to grow, as would demand for Shariah-

compliant securities.

Greater foreign participation is envisaged. Globally, competition

is heating up but, positively, the recent streamlining of the Shariah

screening methodology to mirror international practices will prompt

greater confidence and thus increased participation in local

Shariah-compliant stocks among foreign investors, particularly from

other Islamic countries.

The pool of Shariah-compliant stocks is more limited now. With

the pool of available Shariah-compliant stocks having shrunk by

18% to just 653 presently, there will be a scarcity premium attached

to the existing names, in our view. In fact, of the 653 stocks, just

100 (as at 18 Dec) have a market capitalisation of MYR1b or more;

165 stocks (25% of all Shariah-compliant stocks) if we lower the

market capitalisation threshold to MYR500m.

Invest in Shariah stocks. With the above considerations in mind, our

advice to investors would be to invest in Shariah-related stocks, in

particular Shariah small- and mid-cap stocks for which we see greater

potential for re-rating. For exposure to small and mid caps on a sectoral

basis, our top picks are: (i) plantation (SOP, TSH, Ta Ann), (ii) oil & gas

(Barakah, Alam, Perdana), (iii) telco (TDC), (iv) consumer (OldTown,

QL), and (v) property (Glomac).

Other Shariah stocks in our BUY list are: (i) Tenaga, MISC, FGV,

Gamuda, Westports, IJMC, MMHE and BIMB in the big cap space, (ii)

AirAsia X, Kossan, CMS and NCB in the mid-cap space, and (iii) Padini,

HSL, Eversendai and Kimlun for small caps.



Shariah stocks with market cap > MYR1b as at 19 Dec 2013

Company MC (MYR'm)

Company MC (MYR'm)

1 TENAGA NASIONAL BHD 62,305

51 IJM PLANTATIONS BHD 2,791

2 AXIATA GROUP BERHAD 58,074

52 TSH RESOURCES BHD 2,754

3 SIME DARBY BERHAD 57,270

53 UOA DEVELOPMENT BHD 2,653

4 MAXIS BHD 54,099

54 KOSSAN RUBBER INDUSTRIES 2,558

5 PETRONAS CHEMICALS GROUP BHD 54,000

55 WCT HOLDINGS BHD 2,371

6 PETRONAS GAS BHD 47,529

56 AIRASIA X BHD 2,370

7 DIGI.COM BHD 38,486

57 ZHULIAN CORP BHD 2,295

8 IHH HEALTHCARE BHD 31,076

58 CAHYA MATA SARAWAK BHD 2,249

9 PETRONAS DAGANGAN BHD 30,181

59 LINGKARAN TRANS KOTA HLDGS 2,241

10 IOI CORPORATION BHD 29,336

60 TIME DOTCOM BHD 2,229

11 SAPURAKENCANA PETROLEUM BHD 28,343

61 JAYA TIASA HOLDINGS BHD 2,159

12 KUALA LUMPUR KEPONG BHD 26,496

62 HAP SENG PLANTATIONS HLDGS 2,152

13 MISC BHD 24,372

63 EASTERN & ORIENTAL BHD 2,124

14 TELEKOM MALAYSIA BHD 19,998

64 SHELL REFINING CO (F.O.M.) 2,064

15 PPB GROUP BERHAD 18,636

65 SUPERMAX CORP BHD 1,874

16 YTL CORPORATION BERHAD 17,207

66 SCOMI ENERGY SERVICES BHD 1,815

17 FELDA GLOBAL VENTURES 16,307

67 STAR PUBLICATIONS (MALAYSIA) 1,756

18 NESTLE (MALAYSIA) BERHAD 16,016

68 MALAYSIAN BULK CARRIERS BHD 1,740

19 UMW HOLDINGS BHD 14,113

69 NCB HOLDINGS BHD 1,674

20 GAMUDA BHD 10,863

70 TH PLANTATIONS BHD 1,671

21 UEM SUNRISE BHD 9,960

71 PADIBERAS NASIONAL BHD 1,656

22 UMW OIL & GAS CORP BHD 8,929

72 COASTAL CONTRACTS BHD 1,638

23 MMC CORP BHD 8,678

73 PERISAI PETROLEUM TEKNOLOGI 1,637

24 WESTPORTS HOLDINGS BHD 8,627

74 SYARIKAT TAKAFUL MALAYSIA 1,635

25 GENTING PLANTATIONS BHD 8,210

75 HONG LEONG INDUSTRIES BHD 1,597

26 IJM CORP BHD 8,189

76 MUDAJAYA GROUP BHD 1,589

27 DIALOG GROUP BHD 8,086

77 SELANGOR PROPERTIES BERHAD 1,567

28 BATU KAWAN BHD 8,023

78 MY EG SERVICES BHD 1,529

29 LAFARGE MALAYSIA BHD 7,622

79 TA ANN HOLDINGS BERHAD 1,519

30 FRASER & NEAVE HOLDINGS BHD 6,676

80 JOBSTREET CORP BHD 1,488

31 BIMB HOLDINGS BHD 6,347

81 UNITED MALACCA BHD 1,461

32 MALAYSIA MARINE AND HEAVY EN 5,840

82 TDM BHD 1,408

33 UNITED PLANTATIONS BHD 5,510

83 PUNCAK NIAGA HOLDINGS BHD 1,379

34 HARTALEGA HOLDINGS BHD 5,438

84 MBM RESOURCES BERHAD 1,352

35 DRB-HICOM BHD 5,181

85 DATASONIC GROUP BHD 1,331

36 MALAYSIAN AIRLINE SYSTEM BHD 5,097

86 BERJAYA AUTO BHD 1,325

37 GAS MALAYSIA BHD 4,982

87 WAH SEONG CORP BHD 1,293

38 AEON CO (M) BHD 4,914

88 KRETAM HOLDINGS BHD 1,268

39 SUNWAY BHD 4,481

89 SCIENTEX BHD 1,250

40 KULIM MALAYSIA BHD 4,399

90 ALAM MARITIM RESOURCES BHD 1,234

41 IJM LAND BHD 4,069

91 PADINI HOLDINGS BERHAD 1,204

42 KPJ HEALTHCARE BERHAD 3,980

92 JCY INTERNATIONAL BHD 1,187

43 TOP GLOVE CORP BHD 3,537

93 PHARMANIAGA BERHAD 1,152

44 BINTULU PORT HOLDINGS BHD 3,473

94 APM AUTOMOTIVE HOLDINGS BHD 1,141

45 MSM MALAYSIA HOLDINGS BHD 3,466

95 MATRIX CONCEPTS HOLDINGS BHD 1,105

46 QL RESOURCES BHD 3,336

96 DKSH HOLDINGS MALAYSIA BHD 1,072

47 DAYANG ENTERPRISE HLDGS BHD 3,078

97 FAR EAST HOLDINGS BHD 1,060

48 MAH SING GROUP BHD 3,068

98 RIMBUNAN SAWIT BHD 1,047

49 POS MALAYSIA BERHAD 2,943

99 PERDANA PETROLEUM BHD 1,025

50 SARAWAK OIL PALMS BERHAD 2,901

100 HOCK SENG LEE BERHAD 1,013

Source: Securities Commission, Maybank KE



SECTOR OUTLOOK



Growth Still Amid Challenges

Maintain NEUTRAL. We introduce our 2014 TIV forecast of 675k units

(+3% YoY) having considered (i) our in-house real GDP growth forecast

of 5% for 2014, (ii) the normal replacement cycle for cars >10 years old

and (iii) aggressive model launches lined up by the auto players. Share

prices of the auto players have softened in recent months on concerns

that subsidy rationalisation could crimp discretionary spending.

Positives could however come from (i) the National Automotive Policy

(NAP) review in Jan 2014 and (ii) the GST impact on car prices, which

is still unclear. For now, sector valuations are fair at 13.5x 2014 PER for

expected earnings growth of 16%. We are BUYers of TCM and BAuto.

2013 highlights. TIV could hit another record with 11M13 TIV already

at 595k (+5% YoY), tracking our full year estimate of 655k (+4% YoY).

Sales growth was led by the Japanese marques except Toyota at

+>45% YoY, while the national marques continued to dominate with a

combined 11M13 market share of 52%. In terms of earnings growth

and share price performance, TCM and BAuto raced ahead of peers

underpinned by (i) strong demand for their new models and (ii) a softer

Yen translating to component cost savings.

NAP review unlikely to spur market interest immediately. Focused

on establishing Malaysia as a regional hub for energy-efficient vehicles

(EEVs), the upcoming review is expected to put in place definitive

incentives for car and auto part manufacturers to set up facilities in

Malaysia. We do not rule out a discontinuation of the tax exemption for

imported hybrid cars in order to promote local assembly. Also, the NAP

will likely introduce an inspection policy (possibly for cars >10-15 years

old) to ease concerns on roadworthiness of such vehicles. Following

that, the government may explore the viability of an end-of-life vehicle

(ELV) policy which may provide an additional, gradual boost to TIV.

Looking into 2014, we believe that TIV growth, especially in 2H, will be

dependent on the GST impact on car prices which is unclear at present.

We see potential upside to our 2014 TIV forecast if car prices turn out

to be higher under the GST regime, spurring buying interest ahead of

its implementation in 2015. The ambiguity lies at the stage of inputs for

the GST computation. Our base case 2014 TIV growth forecast of 3%

also takes into consideration the normal replacement cycle for cars with

about 5m cars (40%) on the road >10 years old, and attractive model

launches lined up by the auto players in 2014.

Stock picks. We continue to like TCM and BAuto for their strong near-

term earnings growth prospects. TCM will launch its A/B-segment

Nissan Note by end-2014 to take advantage of the possible switch in

consumer preferences for smaller and more economical vehicles in light

of rising living costs and the GST in 2015. BAuto‟s strong earnings

growth would be anchored by (i) its fresh and popular SKYACTIV model

line-up and (ii) the turnaround of its 30%-owned assembly arm, MMSB.

Both TCM and BAuto are also set to enjoy better margins due to

cheaper component costs from their exposure to the suppressed yen.

Risks. Severe margin pressure from intense sales campaigns, potential

tightening of hire-purchase financing guidelines, possibly cheaper car

prices post GST implementation in Apr 2015 and unfavourable

economic growth and exchange rates are some of factors that could

blight the outlook for autos in 2014.

Automotive Neutral (unchanged)

Ivan Yap [email protected] (603) 2297 8612

Liaw Thong Jung [email protected] (603) 2297 8688



Total Industry Volume QoQ TIV growth against QoQ GDP growth

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

200,000

300,000

400,000

500,000

600,000

700,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

E

2014

E

Yearly TIV (LHS) YoY GDP growth (RHS)units

(25.0)

(20.0)

(15.0)

(10.0)

(5.0)

0.0

5.0

10.0

15.0

20.0

20,000

60,000

100,000

140,000

180,000

220,000

1Q07

4Q07

3Q08

2Q09

1Q10

4Q10

3Q11

2Q12

1Q13

Quarterly TIV TIV growth QoQ (RHS) GDP growth QoQ (RHS)%unit

Source: Maybank KE, MAA Source: Maybank KE, MAA

USD-MYR daily movement JPY-MYR daily movement

2.6

2.8

3.0

3.2

3.4

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

USD/MYR Currency

2.8

3.0

3.2

3.4

3.6

3.8

4.0

4.2

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

JPY/MYR Currency

Source: Bloomberg, Maybank KE Source: Bloomberg, Maybank KE

Automotive sector – Peer valuation summary

Stock Rec Shrpx Mkt cap TP PER (x) PER (x) PER (x) P/B (x) P/B (x) ROE (%)

ROE (%)

Net yield (%)

MYR MYR m MYR CY13E CY14E CY15E CY12A CY13F CY12A CY13F CY14F

UMWH Hold 12.32 14,393.4 13.20 15.1 16.4 14.1 3.1 1.9 19.6 11.2 3.5

Tan Chong Buy 5.99 3,910.3 7.50 24.8 12.8 11.2 2.0 1.8 8.2 14.3 1.5

MBMR Hold 3.50 1,367.5 3.80 10.4 9.6 9.2 1.0 0.9 9.8 9.8 2.2

BAuto Buy 1.67 1,340.7 2.00 26.0 15.1 10.9 8.5 5.3 32.4 35.1 2.8

Simple avg 5,253.0 19.1 13.5 11.4 3.7 2.5 17.5 17.6 2.5

Source: Maybank KE



The Great Malaysian Fare War is Ending

Value has emerged. The Malaysian aviation sector has had a turbulent

2013 due to price war and overcapacity that decimated yields and

profitability. The industry is gradually improving and we are more

optimistic on the balanced capacity planning and deployment in 2014.

We forecast sector earnings growth of 312% YoY in 2014, primarily

driven by narrowing losses at MAS. Excluding MAS, the industry‟s

earnings will grow by 4.9% YoY. With values having emerged, this

underpins our Overweight stance on the sector. Our top BUY pick is

AirAsia X, followed by AirAsia. We maintain our HOLD call on MAHB as

we think all the good news has been priced in. MAS is now a HOLD as

its share price has closed in to our target price since our SELL call.

2013 was a battle for market share. In 10M13, passenger traffic

growth was 17.3% YoY, which was the highest over the past two

decades. MAS achieved a record passenger load factor of 80.8% in this

period whereas other airlines managed to retain high load factors as

well. The market was stimulated by low yields, which fell on average by

8.0% in 2013, making it the third worse yield destruction since 2001.

Malindo‟s entry on 22 Mar had triggered this fare war, of which MAS

and AirAsia reacted fiercely. Everyone was practitioners of the load

active and yield passive strategy with devastating results.

Traffic growth will moderate to normal levels in 2014. We forecast

passenger traffic growth in 2014 to be lower than 2013‟s 18% YoY

growth. This is based on the net fleet addition plans by the respective

airlines as shown in the table below. There will be a net addition of 10

aircrafts in 2014, 33% lower than the 15 aircrafts received in 2013.

Based on this, we forecast passenger traffic growth of 9-10% in 2014,

which the market should absorb comfortably because it is close to

Malaysia‟s long-term growth rate of 8%. The yield outlook should

gradually improve as the supply-demand is in balance and airlines no

longer need to engage in an all-out fare war.

Malaysia airlines fleet deployment and capacity growth

Net fleet addition Fleet size (year end) Capacity growth (ASK)

2014 2013 change 2014 2013 2014 2013

AirAsia 4 4 - 72 68 +6% to +7% +12%

AirAsia X 7 7 - 23 16 +55% to +58% +30%

Malaysian Airlines (13) (7) (86%) 95 108 +6% to +7% +17%

Firefly 2 2 - 16 14 6% +7%

Malindo 10 9 +11% 19 9 >>100% n/a

Grand total +10 +15 (33%) 225 215

Sources: Respective companies’ data, Maybank KE

Visit Malaysia Year 2014, another growth driver. 2014 is the fourth

installment of the Visit Malaysia Year (VMY) campaign, the last being in

2007. VMY has generally been effective in boosting tourist arrivals with

its various promotional activities held all year round on an international

scale. VMY 2007 campaign saw a 19.5% YoY spike in tourist arrivals

and tourist receipt spiked by 27% YoY.

Aviation Overweight (unchanged)

Mohshin Aziz [email protected] (603) 2297 8692




KLIA2 will be a game changer. The KLIA2 promises a quantum leap

improvement over the existing LCCT, drawing strong traffic and

boosting loads. It will help airlines to reduce costs thanks to its high

levels of automation. KLIA2 provides the platform to be the premier

LCC hub of the region, and we expect large number of airlines to

launch their maiden services into Kuala Lumpur.

Risks. The main downside risk for the airline sector in 2014 is fuel

prices, the largest cost item, comprising 40%-45% of total costs.

Furthermore, there are fears about potential delays in the launch of

KLIA2, currently scheduled for 2 May 2014. If a delay is to materialize,

traffic growth might be a setback, as KLIA is already operating at 20%

above its design capacity and landing slots are scarce. Our current

forecasts impute a traffic growth of 10% in 2014; this may have to be

revised down.

Overweight on airlines. We believe that yields have adjusted to a new

level of equilibrium after Malindo Air's entry into the market. The

domestic yields will be lower than the levels achieved pre-2012 going

forward, but it should be above of the levels achieved in 2013. The

situation should get progressively better because every airline‟s

management has acknowledged that this price war is not sustainable

and they need to reverse the yield decline trend.

AirAsia X will deliver the strongest earnings growth among the lot, due

to the maturity of existing routes and economies of scale benefits. We

forecast AirAsia‟s profit to rise by 14.9% YoY in 2014 driven from the

stronger performance of its associates and JVs. We expect MAS to

incur losses in 2014, but it is expected to perform better with a 76%

reduction in losses.

KLIA2 uncertainty mars Airport. 2014 is supposed to be an exciting

year for MAHB due to the launch of KLIA2 on 2 May, higher airport

tariffs and the positive impact of VMY4. However, the uncertainty on the

start date of KLIA2 once again perturbs investors‟ mind. KLIA2 is the

single most important earnings driver in 2014 and a delay will put a new

financial burden on MAHB; it has to service its debt obligations of

MYR15m per month, and bear additional staff costs of MYR3-4m for the

hired workforce in anticipation of the 2 May 2014 launch date.

BUY, selectively. AirAsia X is poised for strong profit growth and is our

top BUY for the sector. AirAsia‟s share price has been over punished

and its valuation is in deep value territory compared to its peers.

MAHB‟s share price has had a good surge and its valuation is fully

valued compared to regional peers. MAS is now a HOLD. Yet, it still

needs to do a lot of soul searching to cut costs and boost revenues, we

think it will only be profitable in 2015, at best.

Aviation sector – Peer Valuation Summary

Stock Recco Shr $ Mkt cap TP PER (x) EV / EBITDAR (x)

P/B (x) ROE (%) ROAE (%) Div (%)

(MYR) (MYRm) (MYR) 2013E 2014E 2013E 2014E 2013E 2013E 2013E 2013E

AirAsia Buy 2.35 6,539 2.80 10.6 9.2 8.0 7.6 1.28 8.5 2.6 2.0

AirAsia X Buy 1.00 2,370 1.30 20.4 11.6 12.7 9.9 1.58 11.2 3.7 n.a.

MAS Hold 0.305 5,097 0.29 n.a. n.a. 12.7 9.4 1.19 n.a. n.a. n.a.

MAHB Hold 8.89 10,885 8.20 24.4 25.5 15.0 11.5 2.07 10.3 5.4 1.7

# Based on 17 Dec 2013 closing (cut-off); Source: Maybank KE



A Modest Pick-Up In 2014

NEUTRAL. With consumption demand likely to wane in the face of

rising inflationary pressure, we are pinning much hope on a revival of

investment spending to spur credit demand into 2014 and would await

firmer evidence of a pick-up in the pace of corporate activity

domestically before turning more positive on the sector. Meanwhile,

prevailing headwinds include capital market volatility and a still-

challenging operating environment in regional markets such as

Indonesia and Thailand. We continue to favour AMMB, HL Bank and

HL Financial Group for exposure to the Malaysian banking sector. We

also favour BIMB, the only Shariah representative in the sector.

A confluence of negatives in 2013. Our 2013 earnings growth

projection for the banking sector has steadily declined over the past few

quarters, from 8.7% post the 4Q12 results season to just 5.1%

presently. Not only has loan growth tapered off; NIMs have compressed

by about 10bps. Several lumpy corporate defaults have necessitated

higher provisioning levels, while overheads have risen due to ongoing

mergers. Last but not least, economic volatility within the region has

also negatively impacted the results of overseas operations.

Keeping the faith. The recent rebound in domestic business loan

growth offers hope that corporate lending momentum will gather pace in

2014 to offset slower consumer loan demand, supporting a pick-up in

GDP growth to 5% next year from 4.5% in 2013. As such, we expect

sector loan growth to hold up at 9.6% in 2014 vs 9.8% in 2013.

Consumer loan demand is likely to taper off on the back of the recent

moves to cool property demand as well as higher inflation, with the

Government‟s move to rationalize subsidies. As such, we expect

household loan growth to moderate to 9.9% in 2014 from 11.4% in

2013. This, we believe, will be supplemented in part by Economic

Transformation Programme (ETP)-driven loan growth, thus ensuring

that overall growth momentum is maintained. We have thus modelled

faster growth in non-household loans to 9.2% in 2014 from 8.0% in

2013.

Interest rates unlikely to rise. This is a contrarian call by our

economists and is predicated on the overriding need to sustain

economic momentum amid waning consumer demand and a still

uncertain outlook on the global economic front. As such, NIM expansion

is unlikely to be a 2014 story. Nevertheless, bond yields could still

continue to trend upwards amid expectations of further Fed tapering

and higher interest rates in the US. There is thus still the risk that banks

may continue to see marked-to-market losses into 2014.

Looking to 2014, we expect earnings momentum to pick up, with

operating profit growth rebounding to 11.9% from 7.5% in 2013. Net

profit growth is expected to gather pace to 9.8% from 5.1% in 2013.

Contributory factors include (i) a milder 4bps compression in NIMs

versus 9-10bps in 2013, and (ii) improved efficiencies as recent merger

synergies flow through. We do, however, expect credit costs to remain

elevated with some stress on asset quality amid inflationary pressures.

With most of the large banks on a capital conservation mode, ROEs are

generally trending down and we project a marginally lower ROE of

15.2% in 2014 vs 15.3% in 2013 and 14.9% in 2015.

Banks Neutral (unchanged)

Desmond Ch’ng [email protected] (603) 2297 8680




Valuations in line with historical averages ... At this stage, valuations

are fair, with the sector trading at a one-year forward PER of 12.8x,

very much in line with its longer-term mean of 13x. On a P/BV basis, it

trades at a one-year forward P/BV of 2.0x compared with the historical

mean of 1.7x, but this reflects the prevailing average ROAE of 15.9%

which is above the historical mean of 13.8%.

…but at a discount to the market. Against the market, the banking

sector would appear to be attractively valued. The sector now trades at

a forward PER of just 12.8x, a 20% discount to the KLCI‟s forward

multiple of 16.3x. Undoubtedly this gap will eventually narrow but it is

one that has persisted post the GFC and could last a little while longer

in the absence of clear catalysts for the sector.

1-year forward P/BV for banks (Jan 2001 to present) 1-year forward ROE for banks (Jan 2001 to present)

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

1/5/2001 1/5/2003 1/5/2005 1/5/2007 1/5/2009 1/5/2011 1/5/2013

(x)

mean: 1.7x

-1 std: 1.5x

+1 std: 2.0x

6%

8%

10%

12%

14%

16%

18%

1/5/2001 1/5/2003 1/5/2005 1/5/2007 1/5/2009 1/5/2011 1/5/2013

mean: 13.6%

Source: Bloomberg, Company, Maybank KE Source: Bloomberg, Company, Maybank KE

1-year forward PER for banking stocks (Jan 01 to present) Banking sector PER premium/discount to KLCI

0

5

10

15

20

25

1/5/2001 1/5/2003 1/5/2005 1/5/2007 1/5/2009 1/5/2011 1/5/2013

(x)

+1sd: 15.0x

-1sd: 10.6x

Mean: 13.0x

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

1/7/2000 1/7/2003 1/7/2006 1/7/2009 1/7/2012

Source: Bloomberg, Company, Maybank KE Source: Bloomberg, Company, Maybank KE

Banking sector – peer valuation summary

Stock Rec Shr px Mkt cap TP PER(x) PER(x) P/B (x) P/B(x) ROE (%)

ROE (%)

Yield (%)

Yield (%)

(MYR) (MYRm) (MYR) CY14E CY15E CY14E CY15E CY14E CY15E CY14E CY15E

AMMB BUY 7.45 22,456 8.60 11.5 10.5 1.6 1.5 14.5 14.5 3.5 3.8

CIMB HOLD 7.71 57,307 8.00 12.3 11.2 1.7 1.5 14.2 14.5 3.2 3.6

HL Bank BUY 14.26 26,808 16.40 11.9 10.9 1.7 1.5 15.0 14.8 2.7 2.9

Maybank * NR 10.08 75,380 NR 12.9 12.3 1.7 1.6 13.8 13.3 5.4 5.6

Public Bank HOLD 18.46 65,199 18.60 14.7 13.7 3.0 2.6 21.5 20.3 3.0 3.1

RHB Cap HOLD 7.78 17,153 7.90 9.9 9.1 1.2 1.0 12.2 12.1 3.1 3.4

Simple avg 264,303 12.2 11.3 1.8 1.6 15.2 14.9 3.5 3.7

MC-wtd 12.8 11.9 2.0 1.8 15.9 15.5 3.7 4.0

BIMB BUY 4.22 4,502 4.80 13.4 12.1 1.8 1.7 14.5 14.5 2.5 2.8

HLFG BUY 15.82 16,449 17.30 10.4 9.6 1.4 1.3 14.2 13.9 2.4 2.6

NR = Not Rated; * Consensus estimates; Source: Maybank KE



Mixed Fortunes

Prefer direct construction names. We Underweight the steel sub-

sector but are Neutral on the cement sub-sector. We advocate

investors to avoid the steel sector as its outlook remains negative and

earnings are likely to remain depressed in 2014. However, we have a

HOLD call on LMC as price competition has eased and it also offers a

decent net dividend yield of 4.4%. For exposure into the local

construction sector, we prefer direct exposure to the contractors.

2013: Modest local demand growth. In 9M13, we saw commendable

building materials demand growth of 4-5% YoY. However, long steel

players remained chronically unprofitable, owing to the rampant

dumping activity by the China mills which led to poor ASPs locally and

globally. On the other hand, cement players reported better earnings

(9M13 EPS: +5% YoY) on improved ASPs, lower coal costs and better

plant performance.

2014: Positive demand outlook. Going into 2014, we believe demand

growth will be sustained by big-scale infrastructure projects entering

their peak construction phases (Sg Buloh-Kajang MRT, KV LRT,

Janamanjung/Tg Bin power plants) and on strong property construction

works due to record sales in the past two years. Beyond 2015, demand

will be further supported by the rail jobs (MRT 2, KV double track,

Gemas-JB double track) and upcoming major property developments in

the Klang Valley (RRI, Tun Razak Exchange, Warisan Merdeka) and

ongoing developments in Johor (Iskandar and Pengerang).

Steel: Biting the bullet. Despite the positive domestic demand outlook,

we are cautious on the steel sector as we believe ASPs will continue to

be weak on dumping activities from China, as a result of the

overcapacity situation in China. To make matters worse, the 17% hike

in electricity tariffs for industrial users, effective Jan 2014, will further

suppress steel players‟ earnings as electricity is a big cost item and

steel players‟ earnings base is already very low or in the negative zone.

Cement: Improved fundamentals. The new capacity-led price

competition, which started in 4Q12, has stabilised in 3Q13 with the

ASPs improving to pre-competition level. We expect ASPs to stay

flattish over the next one year until new capacity from YTL Cement and

CIMA commence, potentially in 2015. Nevertheless, we believe LMC‟s

cash flows will remain strong even with its capex spending for new

capacity in 2014-15.

HOLD and SELL. We have a HOLD call on LMC with a TP of MYR9.60

(21x FY14 PER) as it is already trading at its peak valuation but offers a

decent net dividend yield of 4.4%. As for Ann Joo, we have a SELL call

with TP of MYR0.93, pegging it at -2SD mean P/B of 0.46x, in view of

its subdued outlook.

Key risks. Key risks to our forecasts and calls are: (i) a delay in

execution of existing construction jobs and slower-than-expected job

awards; (ii) a run-up in global commodity prices (coal, steel); and (iii) a

speedier steel capacity cut measure by the Chinese government to

relieve the global steel sector.

Building Materials Steel – Underweight (unchanged)

Cement – Neutral (unchanged)

Lee Yen Ling [email protected] (603) 2297 8691




Steel: Prices of inputs and outputs Ann Joo: Domestic sales volume on the rise

0

200

400

600

800

1,000

1,200

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

Sep

-12

Jan-

13

May

-13

Sep

-13

USD/mt Iron ore Scrap Billet Bar

42%

20%

8%5%

10%

3%-2%

-5%

0%

8%

24%

-10%

0%

10%

20%

30%

40%

50%

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

mt Volume: mt (LHS)

Volume: YoY growth (RHS)

Source: Bloomberg Source: Company

Cement: Coal input price remains low Cement: Domestic ASP has recovered from price competition in 4Q12

50

60

70

80

90

100

110

120

130

140

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

USD/mt

90

95

100

105

110

115

120

125 Ja

n 09

Apr

09

Jul 0

9

Oct

09

Jan

10

Apr

10

Jul 1

0

Oct

10

Jan

11

Apr

11

Jul 1

1

Oct

11

Jan

12

Apr

12

Jul 1

2

Oct

12

Jan

13

Apr

13

Jul 1

3

2008 = 100

Source: Bloomberg Source: CIDB

Building Material Sector – Peer Valuation Summary

Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) P/B (x) P/B (x) ROE (%)

ROE (%)

Net yield

(MYR) (MYRm) (MYR) CY12A CY13E CY14E CY12A CY13E CY12A CY13E CY14E

Lafarge Hold 8.98 7,630.3 9.60 21.8 21.0 19.9 2.4 2.4 11.0 11.5 4.8

Ann Joo Sell 1.05 525.7 0.93 n.a. 35.0 19.1 0.5 0.5 (1.8) 1.5 0.5

Simple average 4,078.0 21.8 28.0 19.5 1.5 1.5 4.6 6.5 2.6

Source: Maybank KE



Still Buzzing and Bustling

Maintain OVERWEIGHT. The sustained construction contract awards

in 9M13 would support sector earnings in 2014. Construction job flows

would also persist in 2014 driven by both public and private spending

on infrastructure, property, and onshore O&G related projects. News

flow should stay positive on major infrastructure project awards and

corporate activities involving water and highway assets. Valuations are

undemanding as the sector trades at 13.3x 12M forward PER, lagging

the KLCI‟s 16.3x. We stay Overweight on the sector; top pick is IJMC.

2013: Successful execution. The first full year of the KVMRT 1

construction in 2013 is a testament to Malaysia‟s execution ability,

boosting confidence. However, the government‟s fiscal cum

macroeconomic management raised uncertainties on the timing of the

implementation of other projects during the year. Continued delays in

several key projects have also led to disappointment. Nevertheless, job

awards in 9M13 were still sustained at MYR67b (-5% YoY), mainly

driven by private sector investments and non-residential projects.

2014 outlook: More jobs. Sentiment would be lifted by major projects

that are inching closer to crystalisation including the KVMRT 2, West

Coast Expressway, Kuantan Port expansion and Gemas-Johor double

track rail. Also, we expect construction job opportunities to flow from the

government‟s development expenditure on infrastructure and rural

developments allocated under the Budget 2014. Upcoming major O&G

projects and government land developments would bolster construction

works. Companies with overseas exposure could further boost their

orderbooks by riding on the infrastructure boom in the Middle East.

2014 outlook: Active corporate activities would drive excitement in

the sector. The sale of Selangor water assets looks likely to be delayed

to 2014. Besides, plans to monetize highway assets are ongoing.

Gamuda has proposed to acquire the remaining 70% stake in the Shah

Alam Expressway. It has hinted on a business trust for its highway

assets, which we believe may lead to more acquisitions including the

remaining stake in Litrak (LTK MK, HOLD). IJM Corp also owns a few

major highways in Malaysia and has spoken of listing these assets.

Undemanding valuations. The KLCon Index has surged 16.3% YTD,

outperforming the KLCI‟s 9.4% gain. Valuations remain undemanding

as construction stocks are trading at an average 13.3x 12M forward

PER, below the KLCI‟s 16.3x. All construction stocks under our

coverage are BUYs with strong outstanding orderbooks and/or

diversified income sources from property, building materials, or

infrastructure businesses spurring earnings growth. IJM Corp is our top

pick for its potential major construction orderbook replenishment and

strong unbilled property sales. CMS is our thematic play on accelerating

developments in Sarawak‟s Corridor of Renewable Energy (SCORE).

Risks. The operating environment is increasingly challenging due to a

shortage of construction workers and rising construction material costs

led by the electricity tariffs hike and the GST. Although rising costs

could be passed on, stiffening competition could deter full pass-

throughs. Hence, established construction players with better execution

power and financial capabilities or players with niche expertise are

better off. Companies under our coverage have manageable gearing

levels (14-65%) and are well equipped with niche expertise.

Construction Overweight (unchanged)

Chai Li Shin [email protected] (603) 2297 8684



Construction works done, MYR66.2b in 9M13 Category of construction works done, 9M13

58 60 61 64 81 58 66

32 29

31 32

36

26 28

0

5

10

15

20

25

30

35

40

0

10

20

30

40

50

60

70

80

90

2008 2009 2010 2011 2012 9M12 9M13

Construction works done MYR b(LHS)

Number of projects '000 (RHS)

27%

33%

35%

5%

Residential Non-residential Civil engineering Special trade

Source: Department of Statistics Malaysia Source: Department of Statistics Malaysia

New contracts reported to CIDB, MYR66.8b in 9M13 Government versus private sector jobs award

0

1,500

3,000

4,500

6,000

7,500

9,000

0

20

40

60

80

100

120

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

9M13

(no.)(MYRb)

Contract value (LHS) No. of contracts (RHS)

0%

10%

20%

30%

40%

50%

60%

0

20

40

60

80

100

120

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

9M13

(MYRb)

Govt (LHS) Private (LHS) Govt as % of total (RHS)

Source: CIDB Source: CIDB

Category of new contracts 9M 2013 Category of new contracts 2007-2012

22.0%

27.2%

43.2%

7.6%

Infrastructure Residential Non-residential Social amenities

33.2%

22.7%

31.8%

12.3%

Infrastructure Residential Non-residential Social amenities

Source: CIDB Source: CIDB

Construction Sector – Peer Valuation Summary Stock Rec Shr px

17 Dec Mkt cap TP PER

(x) PER (x)

PER (x)

P/B (x) P/B (x) ROE (%)

ROE (%)

Net yield

(MYR) (MYR m) (MYR) CY13E CY14E CY15E CY12A CY13E CY12A CY13E CY14E

Gamuda Buy 4.64 10,633.8 5.30 16.8 14.6 13.5 2.3 2.1 12.4 12.1 2.8

IJM Corp Buy 5.92 8,358.1 6.75 15.6 14.0 13.0 1.5 1.4 7.7 8.9 2.2

WCT Buy 2.16 2,359.7 3.00 11.9 11.1 10.1 1.1 1.1 9.2 9.7 3.0

CMS Buy 6.39 2,164.5 7.20 13.3 10.9 9.3 1.4 1.3 9.2 10.0 2.8

HSL Buy 1.85 1,018.4 2.20 11.7 10.5 9.9 2.2 1.9 18.9 16.0 2.3

Eversendai Buy 1.11 859.1 1.50 14.4 7.4 6.3 0.6 0.5 14.7 7.2 3.3

Kimlun Corp Buy 1.86 447.2 2.38 13.9 7.8 7.0 1.6 1.5 18.0 10.9 3.2

Average 15.3 13.3 12.2

Source: Maybank KE



Major projects pending Projects Value (MYR b) Remarks

Infrastructure

West Coast Expressway 6.0 Works to start in 2014

Kuantan Port Expansion 3.0 Works to start in end-2014 or early-2015 depending on the progress of works on the breakwater that is already ongoing

KVMRT 2 25.0 Awaiting formal approval by early-2014, works to start in 2016

Langat 2 water treatment plant 1.2 Awaiting for Selangor water issue to be resolved

KL-Spore High Speed Rail 30.0 Awaiting negotiations with Singapore to start

Electrified double track rail (Gemas-JB ) 8.0 Finalization by end-2014

East Coast Rail Link (620 km) 30.0 To complete feasibility study by early 2014*

LRT 3 (Kelana Jaya – Shah Alam – Klang) 8.0-9.0 Feasibility study ongoing

Upgrading of Klang Valley double tracking rail 5.0 Feasibility study ongoing

Penang Traffic Alleviation 7.0 Tenders have started

Damansara-Shah Alam Elevated Expressway & 8.0 Proposed by Prolintas

Sungai Besi-Ulu Kelang Elevated Expressway

Duta-Ulu Kelang Expressway (DUKE) extension 1.5 Ekovest's shareholders have approved extension

Kinrara-Damansara Expressway (Kidex) 2.2 Feasibility study ongoing

Project 3B - 2,000MW Coal fired plant 12.0 Shortlisted 5 consortia – IMDB, Formis Resources, TNB, Malakoff, YTLP

Balingian 600MW coal-fired power plant, Sarawak 1.8 Tenders closed in 2012 but not awarded yet

Real Estate

Tun Razak Exchange 26.0 Only earthworks for Zone 3 awarded

Kwasa (Sg Buloh) land development 10.0 Started pre-qualification for property development companies

Warisan Merdeka 5.0

Media City (Angkasapuri redevelopment) 0.9

Oil & Gas

RAPID (civil works only) 9.0 Total project value is MYR60b (15% civil works), tendering has started

Total 199

Source: Various * May be deferred due to government fiscal consolidation

Summary of construction companies Source: Companies, Maybank KE, Various

Companies Outstanding orderbook

(MYR b)

Outstanding orderbook/

trailing annual

revenue (x)

Construction as % of group EBIT/pretax

profit in latest quarter *

Net gearing

(%)

Niche

expertise

Unbilled property

sales

(MYR b)

Potential job wins in 2014 Potential corporate exercises

Gamuda 3.2 1.2 32.3 13.5 PDP,

Tunneling 1.7

KVMRT 2 PDP role (2014) and tunneling (tendering in 2015)

Gemas-JB double track rail (end-2014)

Langat 2 water treatment plant

Disposing water assets

Proposed acquisition of 70% stake in Shah Alam Highway

Potential business trust for its highway assets

IJM Corp 2.5 1.6 15.3 65.0 Large-scale

infrastructure construction

2.0

West Coast Expressway (MYR3.75b)

Kuantan Port expansion (MYR1.25b)

Sg Besi-Ulu Klang Elevated Expressway

Kinrara-Damansara Expressway

O&G infrastructure construction at RAPID

Potential listing of highway assets

Disposal of overseas non-core assets

WCT Holdings

2.7 2.7 44.0 36.2 Earthworks 0.6

Putrajaya building construction (MYR300m)

Qatar project (MYR1b)

Underground works for MRT 1

Earthworks for TRX (Zone 1 & 2)

Kwasa Damansara Land civil works (PDP role)

O&G infrastructure construction at RAPID

Potential listing of property arm (in the longer run when it is more sizeable)

Eversendai 1.2 1.2 100.0 37.4 Structural

steel works -

Crescent Hotel in Baku, Azerbaijan (MYR700m)

Structural steel works in Middle East

Petrochemical plant construction in RAPID, Johor (2015)

O&G offshore fabrication jobs in ME (2015)

None anticipated

Hock Seng Lee

1.2 2.1 83.5 Cash Marine

engineering -

Kuching Centralised Wastewater Management System Package 2

Infrastructure works in SCORE

None anticipated

Kimlun 1.1 1.4 95.7 64.2 IBS

construction -

Apartment construction works in Iskandar, Johor, and Klang Valley

Proposed rights issue



Hungry for Growth

Maintain NEUTRAL. The consumer sector remains a Neutral as we

expect consumer spending on discretionary goods to be slower in 2014

alongside the government‟s subsidy rationalisation plan to address its

budget deficit. The key sub-sectors that could be affected are Retail

and Brewery as they are less resilient than Tobacco, Staples and F&B,

for which the consumer demand is less elastic. Visit Malaysia Year

2014 should partially offset the impact on Retail and Brewery and may

benefit these sub-sectors. Our BUYs are Oldtown, JTI and Padini.

2013: Signs of slowing down. 2013 has been a year of slower

economic growth and weaker private consumption (our house view is

consumption growth of 7.2% YoY in 2013 vs 7.7% YoY in 2012). We

have begun to see weaker earnings from Carlsberg and GAB since

2QCY13 as well as a shift towards cheaper clothing for Padini. This

indicates a slowdown in consumer spending on discretionary goods,

and we believe the situation will persist in 2014. However, consumer

staples should remain stable with financial aid provided by the

government to the low-income and middle-income groups, as tabled in

Budget 2014.

Visit Malaysia Year 2014. With the initiatives and promotional activities

to attract foreign tourists, we believe Oldtown, AEON and Padini are

among the consumer names under our coverage that will benefit from

higher tourist arrivals. According to Tourism Malaysia, tourist arrivals

jumped 19.5% YoY during the last Visit Malaysia Year in 2007 and

average spending per tourist increased by 6.3% YoY.

2014: Preparing for GST. We believe retailers and manufacturers will

review their pricing and marketing strategy in 2014 to brace for the

Goods and Services Tax (GST) implementation in Apr 2015. Product

mix will be crucial in order to fetch higher margins and create demand

among consumers, such as Nescafe Dolce Gusto and Milo Sejukfor

Nestle. There could be additional operating costs as companies adapt

themselves to GST. As such, cost control remains key to profitability

amid changes in the operating structure as well as aggressive

advertising and promotional activities in order to drive sales. Demand

for discretionary goods such as apparel and alcoholic beverages could

be dampened due to higher living expenses post subsidy cuts in power,

fuel and sugar.

Our top picks. Oldtown is our top pick for the sector – we like it as the

biggest oriental café chain operator in Malaysia and the market leader

of white coffee in the region. In 2014, profit growth will be driven by

export sales growth for the FMCG division. Net cash stood at MYR68m

as at end-Sep 2013 and the stock is offering a net dividend yield of 3.7-

4.4% for FY3/15-16. That being said, its share price has dropped 26%

from its peak in June 2013 alongside a shaved foreign shareholding,

hence it has a better risk-to-reward ratio compared to other consumer

stocks. We also rate Padini and JTI as BUYs, premised on their decent

valuations, strong cash positions and the potential for special dividends.

Consumer Neutral (unchanged)

Kang Chun Ee [email protected] (603) 2297 8675




Brewery

Neutral. The share prices of the brewery stocks have fallen >20% YTD

in 2013 due to weaker-than-expected earnings reported by both GAB

and Carlsberg since 2QCY13. We expect the local malt liquor market

growth to be flat at best in 2013, after having enjoyed seven years

(2006-2012) of uninterrupted growth (CAGR of 5%). We expect MLM

volume to grow marginally by 0.2-1.2% in 2014-2015. Slower

consumption growth is further exacerbated by illicit beer in Malaysia as

well as stiff competition in Singapore by the international brands. As

living expenses continue to rise following subsidy cuts, we believe

growth in the super-premium segment will continue to moderate.

We reiterate our HOLD call on Carlsberg and SELL on Guinness, with

the former offering slightly better net yields of 4.6% in 2014 vs 4.4% for

Guinness. We also favour Carlsberg for its regional growth potential,

which we have yet to factor into our earnings model. As part of Asia

Pacific Breweries, Guinness is solely confined to Malaysia. Finally,

while the sector faces the risk of a surprise excise tax hike in Malaysia,

Carlsberg is less affected as c.20% of its earnings are from Singapore.

Tobacco

Neutral. The tobacco industry outlook remains lacklustre on regulatory

threats and a rise in the consumption of illicit cigarettes. Despite the

recent 14% increase in the excise duty from 22sen/stick to 25sen/stick,

we believe the government would not hesitate to further raise the excise

tax to discourage smoking. Furthermore, slow industry volume growth

would be exacerbated by stiff competition in the legal industry. We

expect industry volume to contract 6% p.a. in 2014-2015.

We maintain SELL on BAT and BUY on JTI as the latter‟s valuations

are relatively cheaper at 12.4x FY14 PER, which should provide

support to the share price. We also expect JTI to pay out another

special dividend in 2014 in addition to its normal 3% dividend yield,

which is the catalyst to our BUY call. JTI‟s earnings growth (6-9% p.a.

for 2014-2015) will be driven by the importation of cheaper tobacco leaf.

Brewery: Malt liquor market volume Tobacco : Total industry volume

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

F

2014

F

2015

F

'000 Hli MLM volume (LHS) YoY Growth (RHS)

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

-

5,000

10,000

15,000

20,000

25,000

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

TIV (LHS) YoY Growth (RHS)

Source: Guinness Anchor, Maybank KE Source: British American Tobacco, JT International, Maybank KE



Retail and F&B

Mixed on Retail and F&B. Despite headwinds from subsidy cuts,

consumer demand will not collapse in 2014 amid stable economic

growth and low unemployment rates. While sales should continue to

grow for AEON and Padini (due to new stores/outlets too), margins

could be flat as shoppers continue to favour value or marked-down

merchandise. In addition, we believe retailers will be reviewing their

pricing and marketing strategy in 2014 before the implementation of

GST in Apr 2015.

We maintain our BUY call on Padini for its strong cash position (net

cash per share of MYR0.27 as at end-Sep 2013) and potential special

dividends in the future. Despite facing tough competition due to the

influx of international brands, Padini still stands above the crowd with its

established brands, wide target market and nationwide presence. Its

gross profit margin stabilised at the 47% level in 3QCY13, and we

believe it can avoid head-on competition with the international brands

by penetrating into second-tier cities via its cheaper model – Brands

Outlet. Valuations are decent at 11x CY14 PER, coupled with a high net

dividend yield of more than 6% for FY6/14-15.

AEON‟s branding remains very strong and we see stable growth

prospects ahead as the group continues to expand its presence in

Malaysia. However, valuations are stretched, in our view, with the stock

trading more than 2 SD above its long-term historical mean. A future re-

rating catalyst could be the turnaround and integration of AEON Big‟s

(previously Carrefour Malaysia) 26 stores by AEON Japan which would

strengthen the argument for re-rating. We retain the stock as a HOLD.

Nestle is also a HOLD given its fair valuations, with the stock trading at

a hefty FY14 PER of 26x; net yields are just fair at 3.5%. Oldtown

(BUY) is our top pick for the sector. We forecast a net profit CAGR of

16% for FY3/13-16 premised on strong export sales growth in the

FMCG division. We like Oldtown as the market leader in the white

coffee segment as well as its regional expansion plans for both its F&B

and FMCG segments. The stock currently trades at 13x CY14 PER,

which is at a discount to its regional peers‟ 21-23x.

Consumer staples

HOLD QL and MSM. While QL‟s regional expansion story remains

intact, we think that it has been priced in given that its share price has

appreciated more than 30% in 2013 YTD, which had prompted us to

downgrade the stock to a HOLD. Its palm oil division has turned loss-

making due to lower CPO prices alongside start-up losses from

Indonesia‟s operations. We are closely monitoring the margins for its

livestock division, which were hit by oversupply and higher raw feed

costs during 2QFY3/13-1QFY3/14. Positively, we think its Vietnam

poultry operations should be profitable starting in FY3/15 and this will

help improve margins for the livestock division.



We projected 2% growth p.a. in Malaysia‟s sugar consumption for

2014-2015, lower than the historical 3-4% YoY growth, as we factored

in slower growth for retail sugar consumption following the removal of

sugar subsidies. MSM‟s key raw material, raw sugar, has been trending

lower (-13% YTD) due to a surplus in world supply, and the benefits

should filter through in 2014 as MSM depletes its inventory and

replenishes its stockpile with cheaper supply. However, MSM‟s future

earnings would be sensitive to the revised rates after the existing long-

term contract expires in Dec 2014.

Consumer sector – Peer valuation summary

Stock Rec Shrpx Mkt cap TP PER (x) PER (x) PER (x) P/B (x) P/B (x) ROE (%)

ROE (%)

Net yield

(MYR) (MYRm) (MYR) CY12A CY13F CY14F CY12A CY13F CY12A CY13F CY14F

IHH Sell 3.91 31,807.7 3.35 67.4 48.3 42.0 1.8 1.8 2.7 3.7 0.6

BAT (M) Sell 64.58 18,439.5 57.00 23.1 21.5 19.5 38.0 32.6 164.5 150.5 4.6

Nestle Hold 67.92 15,927.2 62.00 31.5 28.9 26.1 21.2 20.5 67.3 70.8 3.6

Guinness Sell 15.62 4,718.8 14.40 22.2 21.8 21.5 6.3 6.4 57.0 59.1 4.7

AEON Co Hold 14.40 5,054.4 15.00 23.8 19.7 18.3 3.4 3.1 14.5 15.6 1.6

Carlsberg Hold 12.00 3,691.5 11.70 19.1 22.2 21.4 12.8 14.8 66.6 66.6 4.7

MSM Malaysia Hold 4.93 3,465.7 5.30 17.2 13.5 13.0 3.2 2.9 11.5 14.0 5.0

QL Resources Hold 4.05 3,369.7 4.00 25.6 22.3 18.9 3.9 3.4 15.1 15.4 1.2

JTI Buy 6.47 1,692.1 7.20 14.5 13.9 12.8 4.6 4.0 32.3 33.6 3.4

Padini Holdings Buy 1.76 1,157.9 1.87 12.8 12.8 11.2 3.2 3.0 25.4 23.8 6.4

Oldtown Buy 2.43 881.1 3.34 16.6 15.3 13.0 2.7 2.5 16.5 16.6 4.2

Simple average 8,073.4 25.5 21.9 19.7 8.8 8.2 40.5 40.6 3.6

Source: Maybank KE



Less Good Hands Next Year

Betting only on GENM. Earnings wise, 2013 has been relatively

uneventful. GENT surprised by buying a property on the Las Vegas

Strip and declaring a special DPS. Going forward, we are bullish only

on GENM due to its MYR5b expansion/rejuvenation plan. We are less

bullish on GENT due to the uncertain outlook surrounding its 52%-

owned GENS. Meanwhile, the two NFOs, BST and Magnum, face a

stable outlook for 2014 but with a negative bias into 2015 due to

implementation of the 6% GST on 1 Apr 2015. Therefore, only GENM is

a BUY while we rate GENT, BST and Magnum as HOLDs.

Humdrum year … For GENM, 9M13 revenue grew 4% YoY but

EBITDA eased 2% YoY. This was due to RWG, whose 9M13 revenue

grew 3% but EBITDA fell 8% as a result of higher staff cost. For GENT,

9M13 revenue grew 4% but EBITDA fell 7% due also to 52%-owned

GENS whose 9M13 EBITDA fell 8% as a result of VIP hold rates falling

56bps and a 2% decline in mass-market GGR. The NFOs fared no

better. BST‟s principal subsidiary, STM‟s 2QFY4/14 revenue eased 3%

YoY and Magnum‟s 9M13 revenue fell 4% YoY due to market share

loss to Pan Malaysian Pools (Not Listed) and the illegal NFOs.

… except for GENT. GENT bought an 87-acre property on the Las

Vegas Strip known as „Echelon‟ for USD350m on 4 Mar 2013. It intends

to develop an integrated resort called „Resorts World Las Vegas‟ and to

open the first phase in either 2015 or 2016. On 30 Aug 2013, GENT

also announced a special DPS of MYR0.50 less tax. Concurrently, it

announced a non-renounceable restricted issue of warrants on the

basis of 1 warrant at MYR1.50 for every 4 existing shares. Investors

who reinvested the DPS into the warrants were cash neutral.

GENM still the one to bet on. At GENM, we expect mass-market GGR

to remain weak in 2014 due to the 20sen/litre fuel price hike on 3 Sep

2013 and the 15% electricity tariff hike from 1 Jan 2014 (Chart 1).

Visitor arrivals to RWG eased in 2006 and 2008, during years with

substantial hikes in fuel price and electricity tariff. 2014 is likely to be

similar. Nonetheless, we still expect RWG‟s revenue to rise in 2014

(+4%) due to VIP GGR growth. In 2006 and 2008, RWG revenue

growth was driven by the VIP segment (Chart 2). GENM also recently

announced that RWG will add 1,300 rooms (+13% to current room

inventory) and construct a 20th Century Fox Theme Park.

More cautious on GENT… While GENT has had an eventful year, we

are more cautious on its 2014 outlook as 52%-owned GENS is

struggling to deliver consistent results due to volatile VIP win rates and

its mass-market GGR is on a downtrend as from Jun 2013; frequent

local visitors have been heavily scrutinised and from Aug 2013, the IRs

are banned from marketing any loyalty programme to locals. GENS is

the single largest contributor to GENT‟s SOP valuation at ~50%.

GENT‟s issuance of up to 929.9m warrants may lead to an overhang in

the shares as they are deep in the money (exercise price: MYR7.96).

That said, GENT may benefit from GENS securing a casino license in

Japan.

Gaming – Casino Overweight (unchanged)

Gaming – NFO

Neutral (unchanged)





… and NFOs. Industry gross NFO revenue contracted by 1% CAGR

from 2010 to 2012. This was because the NFOs reduced the 4D Big

Special Prize by MYR20 to MYR180/MYR1 bet in Dec 2010 in

response to the pool betting duty hike from 6% to 8% in Jun 2010.

Lower prizes encouraged punters to bet with illegal NFOs which offered

better prizes. We forecast that industry gross NFO revenue will grow by

a modest 2% in 2014, in tandem with population growth. Historically,

fuel price and electricity tariff hikes did not appear to have had a

negative impact on NFO revenues as exhibited by Charts 4 and 5.

Uncertainty over the GST. The 6% GST will be implemented on 1 Apr

2015. RWG and the NFOs are currently not levied sales or service

taxes which the GST is meant to replace. This implies that the 6% GST

will be a new addition to the 25% casino tax that is levied on RWG and

the effective 18% statutory tax and duty rates that are levied on NFOs.

Should the gaming operators (and not the gamblers) absorb the GST, it

will cut our GENM earnings estimates by 10-12% on an annualised

basis, our GENT estimates by 5-6% but our BST estimates by 35% and

our Magnum estimates by 40-42%. This reinforces our preference for

casinos (GENM) over NFOs.

GENM is still our top pick. We are BUYers of GENM due to its

MYR5b expansion/rejuvenation plan for RWG. Historically, there is a

positive correlation between the number of rooms and revenue at RWG

(Chart 3). We are HOLDers of GENT due to the uncertain outlook for

GENS and potential overhang in shares as the warrants are deep in the

money. A potential re-rating for GENT would be a casino license for

GENS in Japan. We are HOLDers of BST and Magnum due to their

tepid outlook and potentially sharp earnings cut from the GST.

Risks. Gaming tax hikes, unfavourable economic conditions, and

competition from overseas casinos and illegal NFOs are some of the

factors that could dent the outlook for the gaming sector in 2014.

Chart 1: RWG visitor arrivals chg YoY Chart 2: RWG revenue chg YoY

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: GENM Source: GENM

Fuel price and electricity tariff hikes Fuel price and electricity tariff hikes



Chart 3: RWG revenue (MYRm) vs room count Chart 4: Gross industry NFO revenue (MYRb)

-

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

-

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Revenue (LHS) Rooms (RHS)

6.9 6.7 6.7 6.5 6.3 6.8

7.4 7.9

8.3 8.6 8.8 9.0 9.1 9.0 8.9

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: GENM Source: BST, Magnum, Pan Malaysian Pools

Chart 5: Industry gross NFO revenue/draw (MYRm) Chart 6: Gross revenue/draw/outlet by NFO (MYR)

-

10.0

20.0

30.0

40.0

50.0

60.0

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

-

5,000.0

10,000.0

15,000.0

20,000.0

25,000.0

30,000.0

35,000.0

40,000.0

45,000.0

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Sports Toto Malaysia Magnum 4D Da Ma Cai

Source: BST, Magnum, Pan Malaysian Pools Source: BST, Magnum, Pan Malaysian Pools

Gaming – Peer Valuation Summary

Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) P/B (x) P/B (x) ROE (%) ROE (%) Net yield

MYR MYRm MYR CY12A CY13E CY14E CY12A CY13E CY12A CY13E CY14E

Genting Hold 10.24 37,832.4 10.55 16.3 18.9 17.9 1.7 1.7 10.7 9.0 0.6

Genting Malaysia Buy 4.39 24,897.6 4.80 15.5 13.6 15.3 1.9 1.7 12.2 12.6 1.5

Berjaya Sports Toto Hold 3.97 5,292.0 4.00 13.8 14.3 14.1 9.8 8.5 71.0 59.1 5.4

Magnum Hold 3.10 4,424.7 3.12 14.7 13.2 14.7 1.3 1.3 8.8 9.6 5.5

Simple average 18,111.7 15.1 15.0 15.5 3.7 3.3 25.7 22.6 3.4

Source: Maybank KE

Fuel price and electricity tariff hikes



Stretching Valuations

Inflation proof. The sector will face structural cost inflation in 2014 but

we expect glove-makers to pass on the higher costs with a 2-3 month

time lag given the sound demand-supply fundamentals. The sector has

seen a substantial PER appreciation from 8x-17x to 15x-20x on its

resilient earnings profile and also the lack of quality healthcare stocks in

the market. Our top pick remains Kossan with a TP of MYR4.50 (17x

FY14 PER); its valuations still trails Hartalega‟s 20x.

Nitrile outperformers. In 2013, glove-makers weathered the minimum

wage hike (+29% in Jan 2013) and are expected to register flattish-to-

higher earnings growth, with Kossan posting the strongest net profit

growth of 37% YoY in 9M13. Additionally, share prices of the nitrile-

centric players (Kossan, Hartalega) outperformed that of latex-centric

player (Top Glove) by 91% in 2013-YTD on strong demand for nitrile

gloves.

Nitrile theme to persist. Looking ahead, we expect nitrile gloves will

continue to take market share away from latex gloves due to the

favourable input costs (NBR is 6% cheaper than latex input), which

allows for the ASP competitiveness of nitrile gloves over that of latex.

Nevertheless, we believe the new nitrile glove supply will likely match

the strong demand and cap margins, currently higher than that of latex.

Overdue gas tariff hikes. In addition to the announced electricity tariff

hike (+17% for industrial users from Jan 2014), we believe the sector

may also see a gas tariff hike in 2014. In total, Malaysia has missed five

proposed bi-annual gas price hikes (totaling MYR15/mmbtu), which

would have brought the supposed gas tariff to MYR31.10/mmbtu (+93%

from current actual rate). However, we believe the government will

phase out the impending increases to avoid inflicting a steep one-time

gas hike.

Impeccable cost pass through. Given that electricity accounts for only

3% of production costs, the adverse impact of the electricity hike to the

bottom line is <1% and can be easily absorbed by the glove-makers. As

for the impending gas hikes, we expect glove-makers to pass on the

higher cost over a 2-3 month timeframe, assuming a moderate gas hike

of MYR3/mmbtu (+19%). Note that gas accounts for 5-9% of production

costs and will reduce bottom lines by 2% without a corresponding

adjustment to the ASPs.

BUY Kossan. Within our glove universe, we only have a BUY call on

Kossan (TP MYR4.50, 17x FY14 PER) as: (i) we like its exposure in the

nitrile segment and robust 3-year EPS CAGR of 21%; and (ii) its current

FY14 PER of 16x is still below that of Hartalega, which is at 20x. We

have HOLD calls on Hartalega and Top Glove as we think their current

PER valuations of 20x and 16x are already fair.

Key risks. Key risks to our earnings forecasts are: (i) a jump in rubber

demand from China‟s auto market, which will shore up rubber prices; (ii)

price competition in the nitrile segment turning aggressive; (iii) steep

gas price hikes; and (iv) sharp appreciation of the Ringgit against the

USD.

Gloves Neutral (unchanged)

Lee Yen Ling [email protected] (603) 2297 8691




Input costs: NBR 6% below NR latex in Nov 2013 Planned gas price hikes

0

2

4

6

8

10

12

14

16

18

20

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

Sep

-12

Jan-

13

May

-13

Sep

-13

RM/kg Natural rubber latex Nitrile butadiene rubber

Source: Bloomberg, Company, Maybank KE Source: Ministry of Energy, Green Technology and Water

Planned nitrile capacity expansion in 2014 Malaysia glove export: Expect stronger volume growth for nitrile glove

5.4

5.0

2.2

1.0

13.0

1 2New supply New demand

Supermax

Top Glove

Kossan

Total new supply from Top 4 = 13.6b pcs

vs.

Hartalega

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Latex glove Synthetic rubber glove

m pcs 2011 2012

2012: +7% YoY

2012: +26% YoY

Source: Company, Maybank KE Source: MREPC, Maybank KE

USD:MYR rate: A steady rise or fall can be passed on promptly

One year rolling forward PERs: Hartalega and Kossan have re-rated upward significantly in 2013

2.80

2.90

3.00

3.10

3.20

3.30

3.40

3.50

3.60

3.70

3.80

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

Sep

-12

Jan-

13

May

-13

Sep

-13

0

5

10

15

20

25

30

35

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

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Apr

-11

Jul-1

1

Oct

-11

Jan-

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Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

x Top Glove Hartalega Kossan

Hartalega: 19.8xTop Glove: 16.0xKossan: 15.5x

H1N1 period: Mar 2009 - Aug 2010

Source: Bloomberg, Maybank KE Source: Bloomberg, Company, Maybank KE

Gloves Sector – Peer Valuation Summary Source: Maybank KE


ROE (%)

Net yield


Hartalega Hldgs Hold 7.25 5,400.8 7.10 23.4 21.0 19.6 7.3 6.1 31.1 29.4 2.4

Top Glove Hold 5.80 3,599.0 6.20 17.8 18.1 16.0 2.8 2.6 15.8 14.6 3.1

Kossan Rubber Buy 4.02 2,570.7 4.50 24.7 19.0 15.2 4.2 3.7 17.0 19.4 3.0

Simple average 3,856.8 21.9 19.4 16.9 4.7 4.2 21.3 21.2 2.8



Winter Ahead?

Maintain NEUTRAL. We forecast total adex growth of 2.5% in 2014 or

0.5x real GDP growth as we expect fuel price and electricity tariff hikes

to suppress adex sentiment. 1H14 total gross adex growth may be

buoyed by BRIM payments and the FIFA World Cup but we expect

2H14 to be weak as advertisers prepare for GST implementation on 1

Apr 2015. We are BUYers of Astro for its stable subscriber base;

HOLDers of MCIL and Star as we believe that their poor share price

performances have already reflected their weak outlook; and SELLers

of Media Prima as it is trading at a steep premium to MCIL and Star

even though TV adex is especially vulnerable to economic downturns.

Another „annus horribilis‟. 10M13 total gross adex grew only 2.6%

YoY (2012: +1.6% YoY). Of the four major mediums (TV, print, radio

and outdoor), only print and radio adex grew meaningfully both at 5%

YoY respectively (Table 1). 2013 started on a healthy footing with 1Q13

total gross adex growth of 4% YoY. That said, total gross adex

contracted YoY over the next two quarters on less public sector ads

after the 13th General Election of 5 May 2013 and poor adex sentiment

dented by the 20sen/litre fuel price hike of 3 Sep 2013 (Chart 1). 2013-

YTD, the share priceS of MCIL, Star and Astro are down 10%, 6% and

2% respectively but Media Prima is still up 18% (Chart 2).

2014 will be a tale of two halves. In addition to the 20sen/litre fuel

price hike, electricity tariffs will be raised by 15% from 1 Jan 2014. We

take the view that there will be another fuel price hike by mid-2014.

Therefore, we do not expect business and hence, adex sentiment to be

much better in 2014 (Chart 3). 2014 total gross adex may start on a

healthy footing in 1H14 due to business sentiment being temporarily

buoyed by BRIM payments expected in early-1Q/3Q14, and the adex-

friendly FIFA World Cup in June-July, but we expect 2H14 to be

especially weak as advertisers prepare for the implementation of GST.

Looks like 2006 all over again? We note that from 1998 to 2012, the

average total gross adex growth/real GDP growth multiple was 2.1x

(Chart 4). That said, we note that 2006 total adex growth of 4.4% was

only 0.8x real GDP growth of 5.8%. Despite a FIFA World Cup then,

adex growth was suppressed due to the 30sen/litre fuel price hike on 28

Feb 2006 and 12% electricity tariff hike on 1 Jun 2006. In a similar vein,

there will be a FIFA World Cup and the aforementioned fuel price/

electricity tariff hikes in 2014 as well. Therefore, we forecast that total

adex will grow by 2.5% or 0.5x real GDP growth in 2014. We assume a

lower multiple in 2014 as adex in 2H06 was positively impacted by the

commodity super-cycle then, lifting the incomes of the rural population.

We are less sanguine on those prices in 2014.

Astro is still our only BUY. We are BUYers of Astro as it is more

resistant to the vagaries of adex sentiment. Only 12% of its revenue are

derived from adex vs >50% for the others. 85% of Astro‟s revenues are

derived from its stable Pay TV subscriber base. We are HOLDers of

MCIL and Star as we believe their weak share price performance over

2013 has already reflected their poor outlook. We are SELLers of Media

Prima as TV adex is especially vulnerable to economic activities and

PER valuations are at 4x and 3x premium to MCIL and Star.

Media Neutral (unchanged)





Risks. Weaker-than-expected consumer and business sentiment

arising from the cutbacks in fuel and electricity subsidies, unfavourable

global economic conditions and higher-than-expected newsprint prices

(current price: ~USD600/tonne) are some of factors that could dent the

outlook for the media sector in 2014. We estimate that every

USD50/tonne rise in average newsprint price will cut our earnings

forecast by 8% for MCIL and 4% for both Media Prima and Star.

Table 1: YTD gross adex by medium (MYRm)

10M13 10M12 % YoY

FTA TV 2,539.3 2,500.0 1.6

Newspapers 3,731.3 3,551.9 5.1

Magazines 104.3 118.0 (11.7)

Radio 376.1 357.2 5.3

Cinema 27.9 26.7 4.5

Outdoor 107.2 117.7 (8.9)

In-Store Media 110.7 118.7 (6.7)

Internet - 28.2 (100.0)

Total 6,996.9 6,818.4 2.6

Source: Nielsen Media Research

Chart 1: Quarterly adex % chg YoY Chart 2: Indexed share price performance of media stocks

(50.0)

(40.0)

(30.0)

(20.0)

(10.0)

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Mar

-98

Mar

-99

Mar

-00

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-01

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Mar

-03

Mar

-04

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Mar

-07

Mar

-08

Mar

-09

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-10

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-11

Mar

-12

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-13

50%60%70%80%90%

100%110%120%130%140%150%

1-Ja

n-13

22-J

an-1

3

12-F

eb-1

3

5-M

ar-1

3

26-M

ar-1

3

16-A

pr-1

3

7-M

ay-1

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28-M

ay-1

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18-J

un-1

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9-Ju

l-13

30-J

ul-1

3

20-A

ug-1

3

10-S

ep-1

3

1-O

ct-1

3

22-O

ct-1

3

12-N

ov-1

3

3-D

ec-1

3

Media Prima Astro MCIL Star

Source: Nielsen Media Research Source: Bloomberg

Chart 3: Quarterly adex % chg YoY vs business confidence Chart 4: Total adex chg YoY vs real GDP chg YoY

50.0

60.0

70.0

80.0

90.0

100.0

110.0

120.0

130.0

140.0

150.0

(50.0)

(40.0)

(30.0)

(20.0)

(10.0)

-

10.0

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30.0

40.0

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Mar

-98

Mar

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Mar

-00

Mar

-01

Mar

-02

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-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Total adex % change YoY (LHS) Business confidence index (RHS)

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Total gross adex growth (A) Real GDP growth (B)

Source: Nielsen Media Research, MIER Source: Nielsen Media Research, Bank Negara Malaysia

Media Sector – Peer Valuation Summary Source: Maybank KE

Stock Rec Shr px Mkt cap TP PER (x)

PER (x)

PER (x)

P/B (x) P/B (x) ROE (%)

ROE (%)

Net yield MYR MYR m MYR CY12A CY13E CY14E CY12A CY13E CY12A CY13E CY14E

Astro Malaysia Buy 3.02 15,698.9 3.48 36.2 34.2 26.8 30.5 27.7 85.6 82.8 2.8

Media Prima Sell 2.58 2,839.2 2.40 14.1 14.2 13.9 1.8 1.7 13.5 13.0 5.1

Star Publications Hold 2.38 1,756.5 2.65 12.0 12.2 11.4 1.5 1.5 12.9 12.3 6.3

MCIL Hold 1.00 1,687.2 1.01 9.5 10.1 9.9 2.1 2.4 22.2 23.7 5.1

Simple average 5,495.4 17.9 17.7 15.5 9.0 8.3 33.6 33.0 4.8

Fuel price hikes

Electricity tariff hikes



Shaping Up

OVERWEIGHT. The PETRONAS-driver will continue to shape the

outlook for 2014. Momentum for the upcoming phase will be intense as

a majority of projects under development move into the production

phase. The secular growth thematic plays – RSC, drilling, OSVs,

fabrication, RAPID – are set to drive prospects for the respective

service providers along the various value chains. Bumi Armada and

SAKP are our preferred picks while Barakah is our choice small-cap.

Well-positioned to ride the offshore drilling up-cycle. Drilling

activities are on the rise. Rigs demand is nearing its all-time high. Idle

units are steadfastly diminishing, utilization levels are back to pre-crisis

levels and day rates are pushing up. The domestic market now offers (i)

import substitution opportunities, (ii) rising demand for new premium

JUs and (iii) strong replacement cycle prospects. Of the 18 JU contracts

in Malaysia, only 2 JUs are locally owned and 12 are to expire in 2014.

Employment opportunities are on the rise. 159 wells are programmed

for drilling p.a. in 2013-18 (+30% p.a.). Based on market research,

Malaysia‟s demand for JUs is set to rise by 20-22 units by 2018.

OSV activities are also on the rise on the back of sustained waves of

contract awards as OSV complements the drilling activities. With decent

day rates, high utilization (>70%) and long tenures (3-5 years), there is

strong demand for Malaysia-flagged mid-large sized AHTS,

workbarges/boats and PSVs to support green and brownfield activities.

Notwithstanding that, new building activities have resumed following

inactivity over the past few years and should see OSV operators

expanding their fleet size.

RAPID and rising fabrication works. We expect PETRONAS to

proceed with RAPID, of which a final investment decision will be

disclosed in April. What remains vague will be the size and pace of the

development. Meanwhile, the fabrication space will see a rise in work

orders. Capex for fixed platforms are set to rise by 50% YoY in 2014.

Several centralised processing platforms (CPPs) are due for awards in

2013-2015 with 70 units of smaller platforms (<20k tonnes) under way.

RSCs to hit the headlines. The setting-up of PETRONAS‟ Vestigo will

accelerate the development of marginal fields under the Risk-Sharing

Contract (RSC) concept. We foresee several new operators emerging

to tie-up with either Vestigo or international independent E&P

companies. The likes of the Angsi, St Joseph, Bubu fields, just to name

a few, are likely to be announced in 2013.

Opportunities for floating solutions to remain buoyant. We expect

10-12 new orders p.a. worldwide as marginal field works intensify on

the back of depleting hydrocarbon resources and steady oil price

environment. Companies with strong balance sheets and track records

will continue to prosper. While the small-size FPSO market (capex of

sub USD400m) is attracting new entrants into the market and causing

depression in rates, there are opportunities in the mid-size FPSO

segment (capex of USD400m-1b).

Oil & Gas Overweight (unchanged)

Liaw Thong Jung [email protected] (603) 2297 8688

Ivan Yap

[email protected] (603) 2297 8612



Stock picks. We are thematically-momentum driven. Bumi Armada,

and SAKP are our preferred picks in the O&G sector for their growth

prospects, balance sheet strength and stronger job wins outlook. Bumi

Armada, with its financial strength and execution profile, will continue to

capitalise on global FPSO orders. SAKP will grow with extended

earnings visibility via the Newfield Malaysia M&A. Barakah is our small-

cap pick, a top prospect for the Pan Malaysia T&I Package A works.

Risks. Volatility in oil price, cost overruns, slowdown in capex, forex

movements, and severe margin pressure are some of factors that could

blight the outlook in 2014.

A Snapshot Of Selected Tender Pipelines

Opportunities Types of project Estimated value

Potential beneficiary

Fabrication works

6-8 units of centralised processing platforms (CPPs);

>20,000 tonnes platform structure MYR6-8b MMHE, SAKP, THHE

70 units of small/ wellhead platforms <20,000 tonnes of platform structures MYR10-14b

MMHE, SAKP, TH Heavy, Dialog

RAPID onshore structures EPCC na MMHE, KNM, WSC, SAKP, Barakah

Jack Up (JU) rigs

16 foreign owned jack up rig contracts expiring Jack up rigs with drilling depth of 350-400 ft

na Perisai Petroleum, UMW OG, Coastal Contract

Inspection, Repair & Maintenance (IRM) works

4 contracts; 3-4 year contract Diving support vessels MYR1.1-1.6b

Alam, SAKP, Petra Energy, Jasa Marine

Early Production System (EPS) project

Murphy’s Permas field EPCC, wellhead platform, FSO na Labuan Shipyard, TH Heavy

Tj Baram field 1,000-,3,000bpd production target na Uzma

EOR project

Angsi CEOR A seawater reverse osmosis (SWRO) vessel to desalinate 150,000bpd of seawater to lift oil recovery by 20%

na MISC-Water Standard-Uzma

St Joseph Similar project to Angsi but with a smaller capacity (30,000bpd)

na Shell to undertake inhouse

Pipe Coating, HUC

Turkmenistan Phase 2 Pipe coating works MYR200m WSC Sources: Various, Maybank KE

Oil & Gas sector – Peer valuation summary Source: Maybank KE


ROE (%)

Net yield

(MYR) (MYRm) (MYR) CY12A CY13F CY14F CY12A CY13F CY12A CY13F CY14F

Petronas Gas Hold 23.20 45,906.6 20.20 32.3 21.8 27.1 5.0 4.5 15.5 20.4 2.2

SapuraKencana Buy 4.70 28,163.1 5.30 47.8 30.3 21.5 3.8 3.3 7.9 10.9 0.0

Bumi Armada Buy 3.97 11,638.4 4.40 29.4 24.8 21.8 3.1 2.8 10.5 11.3 0.0

MMHE Buy 3.68 5,888.0 4.20 21.3 34.4 32.9 2.3 2.3 11.0 6.8 1.4

Dialog Hold 3.25 7,891.5 3.05 41.1 33.5 27.0 6.0 5.4 14.5 16.0 1.5

Gas Malaysia Hold 3.88 4,981.9 3.90 31.3 28.1 25.4 4.9 4.9 15.7 17.4 3.9

Wah Seong Hold 1.69 1,301.3 1.50 24.9 30.7 15.6 1.1 1.0 5.3 4.2 4.4

Perisai Sell 1.50 1,626.2 1.25 12.9 17.4 16.9 2.6 2.5 20.4 14.1 0.0

Alam Maritim Buy 1.51 1,210.0 1.90 20.4 13.6 12.4 2.3 2.0 11.1 14.6 0.2

Perdana Buy 1.40 1,018.1 2.80 30.4 13.0 7.7 1.5 1.5 4.9 10.4 0.0

Barakah Buy 1.52 948.9 1.85 37.5 27.4 16.7 6.7 4.9 24.9 25.1 0.0

Simple average 10,052.2 29.9 25.0 20.4 3.6 3.2 12.9 13.7 1.2



Turning Over A New Leaf

Still go for growth. Higher CPO and palm kernel (PK) prices, lower

fertilizer costs, and FFB recovery will be the key earnings drivers in

2014. M&A momentum will be sustained. But the spotlight will largely

be on the re-rating of small-to-mid caps on their relatively stronger

earnings recovery, and a growing pool of Shariah-compliant funds. We

remain Neutral on a 12M view as the sector trades at lofty 20x FY14F

PER (on MYR2,600/t CPO ASP assumption). Our top BUYs are TSH

Resources and Ta Ann for their strong FFB output growth. Felda Global

is a Trading Buy for its earnings turnaround and M&A potential. We

advocate SELLs on KLK and TH Plant for their hefty valuations.

2013: strengthening fundamentals. Plagued by excess inventories of

2.63m MT at the start of the year, the industry took approximately six

months to clear ~1m MT of palm oil stocks. This was aided by: (i) CPO

price competitiveness as it traded at a huge discount to soyoil at

USD320/t in 1H13 (vs historical average of USD180/t), which boosted

exports; and (ii) biological tree stress in the region, which led to poor

yields. Low CPO and PK ASPs, low FFB yields on tree stress, and

higher wage costs effectively dragged down 9M13 results.

2014: year of earnings recovery. CPO spot price made a meaningful

recovery in 4Q13 to ~MYR2,600/t (+MYR370/t 2013-YTD) as palm oil

stocks were tight and as the market priced-in biological tree stress,

which may limit near-term palm oil supply growth. We believe the

current CPO price is sustainable and in line with our CPO ASP forecast

of MYR2,600/t for 2014-15. Higher CPO and PK prices, lower fertilizer

costs (which offset rising wages), and FFB recovery (after biological

tree stress hurt output in 2013) will be the key earnings drivers in 2014.

Relatively tight palm oil supply. Palm oil supply is expected to remain

relatively tight with stock-to-usage ratio (SUR) for 2013/14F marketing

year at 17.2% (2012/13F: 17.5%). However, as the supply of other

vegetable oils recover on normalised weather, the global 17 oils and

fats‟s SUR is expected to remain stable at 12.7% for 2013/14F

(2012/13F: 12.7%). The near-historically low discounts of CPO prices

relative to soybean oil (17 Dec 2013: USD90/t) and rapeseed oil

(USD206/t) presently may cap CPO price upside in the near term.

M&A momentum sustainable into 2014. Amid the availability of low

financing costs, M&A momentum will continue into 2014 as the balance

sheet of most plantation companies are healthy and have the capacity

to gear up for acquisitions. While land is scarce in Malaysia, there is no

shortage of opportunities in Indonesia but pricing and land suitability

remain the biggest challenges.

Upside risks: (i) weather anomalies at major producing areas remain

the biggest threat to supply; and (ii) strict and successful

implementation of Indonesia‟s ambitious biodiesel mandate. Downside

risks: (i) an unexpectedly steep slowdown in global growth (especially

China and India) impacting demand for palm oil; (ii) changes in

government policies; and (iii) non-governmental organisational (NGO)

activism pose serious threats to demand.

Plantations Neutral (unchanged)

Ong Chee Ting, CA [email protected] (603) 2297 8678

Chai Li Shin [email protected] (603) 2297 8684 Regional CPO price forecast

2013F 2014F

MYR/t MYR/t

Full year average (FOB) 2,380 2,600

MDEX:

3M CPO price (17 Dec) 2,576 -

YTD (17 Dec) CPO ASP 2,370 -

Source: Maybank KE, Bloomberg KL Plantation Index vs CPO price

1000

1500

2000

2500

3000

3500

4000

4500

2000

3000

4000

5000

6000

7000

8000

9000

10000

Jan

-05

Jul-

05

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

MY

R p

er

ton

ne

Ind

ex

KL Plantation Index CPO Price






Sector Summary Table

Company Rating Mkt Cap Shr px TP EPS Growth (%)

PE (x)

Div Yield (%)

EV/EBITDA (x)

P/B (x)

ROE (%)

17 Dec 17 Dec 13F 14F 13F 14F 13F 14F 13F 14F 13F 13F

(USD m) (LCY) (LCY)

Sime Darby Hold 17,673 9.56 9.80 (14.6) 1.1 17.8 17.6 3.3 3.1 10.9 10.6 2.1 11.6

IOI Corp Hold 11,423 5.81 5.42 (0.7) 5.9 21.6 20.4 2.5 2.5 15.6 16.0 2.7 13.4

KL Kepong Sell 8,158 24.90 19.90 (8.7) 16.2 28.3 24.3 2.1 2.5 17.2 14.9 3.6 12.9

FGVH Tr Buy 5,050 4.50 4.70 (46.4) 76.8 43.6 24.7 1.9 2.0 14.8 13.0 2.6 9.7

Gent Plant‟ns Hold 2,652 11.36 10.90 (15.2) 33.1 31.1 23.4 0.7 0.9 24.8 18.9 2.4 7.6

SOP Hold 890 6.60 6.30 (33.1) 72.6 27.1 15.7 0.7 0.8 14.3 9.6 2.3 8.2

TSH Resources Buy 842 3.05 3.40 30.0 36.9 26.4 19.3 1.1 1.6 23.1 16.3 2.8 10.3

Ta Ann Buy 471 4.13 4.50 17.6 62.3 22.3 13.8 1.7 3.2 10.3 7.5 1.6 9.1

TH Plant Sell 511 1.89 1.28 (62.8) 84.1 38.2 20.8 1.3 2.4 15.6 10.4 1.5 3.8

Average 24.6 20.5

Source: Maybank KE

Strong earnings recovery in 2014. Recent CPO price recovery has

fueled optimism of a strong earnings recovery in 2014 after 2013

disappointed on low FFB yields, low CPO ASPs and higher wage bills

on the minimum wage hike. We expect CPO ASPs to average

MYR2,600/t in 2014 (2013: MYR2,380/t; +9.2% YoY). This coupled with

higher palm PK price, lower fertilizer costs, and FFB yields recovery will

more than offset rising wages in 2014 to deliver solid earnings recovery.

Biological tree stress to hold up prices in 1Q14. Biological tree

stress, which impacted FFB yields, especially in Sumatra and

Peninsular Malaysia, have at least another quarter to play out.

Nonetheless, we believe the industry will not experience a V-shape

recovery for 2014‟s production, which in turn will help sustain CPO price

at above MYR2,600/t into 1Q14 during the seasonally low production

months. But we caution that CPO price could correct during 2Q14

(seasonal in nature) on the prospects of bumper crops in South

America and as the market looks forward to higher FFB output in 2H14.

PK price made a spectacular 66% recovery. It bottomed in early

2013 and made a gradual recovery as oleo-chemical demand picked up

as new capacity gradually came on stream in Indonesia. Typhoon

Haiyan further pushed PK prices higher on disruption to coconut oil

supply (ie. PK oil substitute) whereby approximately 5% of the

Philippines‟ coconut-producing region was severely affected. PK price

has risen MYR740/t in 2013-YTD, which is MYR185/t of CPO

equivalent, and will help offset labour costs increase in 2014.

All-in cost of production (per CPO tonne) is expected to be flat-to-

lower in 2014 as cost savings on lower fertiliser costs, higher FFB

yields, and higher PK prices would more than offset wage hike. Ahead

of the Indonesian presidential election, provincial governors announced

another round of minimum wage hike (+8%-30% YoY) effective 1 Jan

2014. This will have a spill over effect on Malaysia‟s wage bill as 50% of

plantation workers here are foreigners and mainly Indonesian origin.

Global supply of 17 oils and fats are ample in 2014 ... While palm oil

supply is expected to remain relatively tight with stock-to-usage ratio

(SUR) for 2013/14F marketing year estimated at 17.2% (2012/13F:

17.5%), the supply of other vegetable oils are recovering nicely in 2013

as weather normalised, boosting supply. This will result in a relatively

stable global 17 oils and fats with stock-to-usage ratio of 12.7% for the

2013/14F (2012/13F: 12.7%).

CPO price and Palm Kernel Oil

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Dec-1

1

Ja

n-1

2

Fe

b-1

2

Ma

r-12

Ap

r-12

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

Oct-

12

Nov-1

2

Dec-1

2

Ja

n-1

3

Fe

b-1

3

Ma

r-13

Ap

r-13

Ma

y-1

3

Ju

n-1

3

Ju

l-1

3

Au

g-1

3

Se

p-1

3

Oct-

13

Nov-1

3

USD/t

CPO spot Palm Kernel Oil


Stock-to-usage ratio of 17 global oils & fats

15.6%

18.2%

15.6%

16.7%

19.4%20.6%

17.5%17.2%

11.0%11.6%

11.9%12.1%

12.6%

13.5%

12.7% 12.7%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

06/07 08/09 10/11 12/13F

Palm Oil 17 Oils & Fats

Sources: Oil World, Maybank KE

Stock-to-usage ratio of Soybean & Soybean Oil

11.7%

9.7%

10.6%

11.8%

10.4%

9.9%

9.4% 9.8%

31.7%

25.6%

19.7%

27.2%

29.8%

21.1%

24.2%

28.3%

18.0%

20.0%

22.0%

24.0%

26.0%

28.0%

30.0%

32.0%

34.0%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

06/07 08/09 10/11 12/13F

Soybean Oil Soybean

Sources: Oil World, Maybank KE



…. so are global 10 oilseeds. Global 10 oilseeds supply are also

ample given recent normalised weather and as good oilseed prices

have encouraged plantings. Global 10 oilseeds SUR is expected to rise

to 19.7% (2012/13F: 16.5%). With recent improved soybean crush

margins in China, there could potentially be higher crushing of soybean

and result in more soyoil supply.

Soybean price may be under pressure over next 4-12 months. Corn

prices fell sharply by -37% YTD in 2013 (soybean: -7%) on good

harvest and rising stockpile. The price ratio of soybean-to-corn is now

near historical high at ~3x. Farmers will favour soybean over corn

planting next spring in the US as profitability dips for corn planting on

lower price. And a good soybean harvest next planting season will most

likely pressure soybean prices on the downside.

CPO price recently lost its competitiveness. CPO has traded at an

average USD280/t discount to soyoil for 10M13 and USD335/t to

rapeseed oil during the same period. This was significantly higher than

the historical average discount of USD180/t (soyoil) and USD300/t

(rapeseed oil). The wide discounts have made CPO exceptionally

attractive for 10M13, which boosted CPO exports by 7.6% YoY during

the same period. But after the recent CPO price spike, the 3M future

prices (on 17 Dec 2013) of CPO-soyoil and CPO-rapeseed oil have

converged, as discounts narrowed to USD90/t and USD206/t

respectively. This erased CPO‟s price competitiveness and is expected

to soften demand, and will likely cap near term CPO price upside.

Upside from Indonesia‟s ambitious biodiesel mandate. Indonesia

has set ambitious 2014 B10 biodiesel mandates for its subsidised and

non-subsidised transportation sector (from B3-B5), B10 for industrial

use (from B5) and B20 for the energy sector (from B7.5%) in an attempt

to reverse its twin deficits. A successful implementation could boost its

palm biodiesel demand to ~3.6m MT in 2014 (from 0.6m MT in 2012).

However, Indonesia has failed to meet its mandate in the past due to

lack of infrastructure and higher inter-island transport costs. While we

think there will be some pick-up in demand from the higher mandates,

blenders/users risk non-compliance when CPO price far exceeds diesel

price.

Benefits from Shariah-compliant status. There is a growing pool of

Shariah-compliant funds in Malaysia with limited asset choices, making

plantation stocks a natural favourite. And in response to the

government‟s recent call to promote small-to-mid cap stocks, we

believe there will be new funds dedicated to invest in small-to-mid caps

plantation stocks given their valuation gap with the large caps.

Top picks are TSH, Ta Ann and Felda Global. We prefer small-to-mid

cap plantation plays for 1Q14 on significant results turnaround

leveraging on higher CPO ASPs and their relative cheaper valuations.

Companies with good long-term growth proposition given their younger

age tree profiles like TSH and Ta Ann are our top picks. For large-cap

exposure, Felda Global with its relatively higher cost base, is expected

to deliver significant jump in core earnings.

Stock-to-usage ratio of Soybean & Soybean Oil

21.0%

17.3%

14.5%

18.6%

20.1%

14.6%

16.5%

19.7%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

06/0

7

07/0

8

08/0

9

09/1

0

10/1

1

11/1

2

12/1

3F

13/1

4F

10 Oilseeds

Sources: Oil World, Maybank-KE

Soybean-Corn-Ratio (3M futures)

1.50

1.70

1.90

2.10

2.30

2.50

2.70

2.90

3.10

3.30

3.50

Jan

-00

Jul-

00

Jan

-01

Jul-

01

Jan

-02

Jul-

02

Jan

-03

Jul-

03

Jan

-04

Jul-

04

Jan

-05

Jul-

05

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Soybean/Corn price ratio (x) Profit parity (x)

Favours soybean planting

Favours corn planting

Sources: Bloomberg, Maybank-KE

Palm biodiesel no longer as attractive in Europe

-100

-50

0

50

100

150

200

250

300

350

400

600

700

800

900

1000

1100

1200

1300

1400

1500

Jan

-11

Mar-

11

May-1

1

Jul-

11

Sep

-11

No

v-1

1

Jan

-12

Mar-

12

May-1

2

Jul-

12

Sep

-12

No

v-1

2

Jan

-13

Mar-

13

May-1

3

Jul-

13

Sep

-13

No

v-1

3

US

D p

er to

nn

e

US

D p

er to

nn

e

Surplus (PME-CPO) (RHS) Palm Biodiesel

CPO (CIF,Rotterdam) Wholesale Diesel


CPO price vs. Crude Oil, Soybean oil and Rapeseed Oil

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

Jan-1

1F

eb-1

1M

ar-

11

Apr-

11

May-

11

Jun-1

1Ju

l-11

Aug-1

1S

ep-1

1O

ct-11

Nov-

11D

ec-

11Ja

n-1

2F

eb-1

2M

ar-

12

Apr-

12

May-

12

Jun-1

2Ju

l-12

Aug-1

2S

ep-1

2O

ct-12

Nov-

12D

ec-

12Ja

n-1

3F

eb-1

3M

ar-

13

Apr-

13

May-

13

Jun-1

3Ju

l-13

Aug-1

3S

ep-1

3O

ct-13

Nov-

13D

ec-

13

USD/tSweet Crude PalmOil 1mthRapeseed oil Soyoil 1mth




Hard Times Ahead

Uncertainties prevail. We remain UNDERWEIGHT on the property

sector (developers). We expect the property market to be hard hit by

the new property cooling measures of Budget 2014 and by some state

governments. Stricter mortgage lending by the banks will also slow new

transactions. Already, developers have expressed caution on the

property market outlook over the next six months and are switching

their product focus to affordable housing where demand is still resilient

supported by a young demographic. Our pick for the sector is Glomac.

2013: A highly volatile year. Gains in share prices of listed developers

were short-lived post-13GE, no thanks to the exodus of foreign funds

out of the Asian region on US tapering fears. The sector was further hit

by drastic property cooling measures announced in Budget 2014. Post-

Budget 2014, the Johor and Penang state governments have also

imposed additional state-specific measures to cool their local property

markets. As a result, the KL Property Index (KLPI) has retreated by

16% (vs. KLCI +4%) from its peak in end-May 2013.

New cooling measures negative for demand. Buying interest

(especially on luxury and highly speculative properties in the hotspots)

has been dampened by the new property cooling measures, which will

come into effect in Jan 2014. We gather that the response to UEMS‟

recently-launched Almas Suites and WCT‟s Medini Sinature Tower 2

has been lukewarm. Given the uncertainties in demand, Glomac has

cut its internal sales target for FY4/14 by 18% while SP Setia has for

the first time refrained from committing to a sales target for FY10/14.

Competition heating up in Iskandar Malaysia. Competition is also

intensifying with the entry of Chinese developers into Iskandar

Malaysia. Guangzhou R&F Properties has recently acquired 116 acres

of land in Johor Bahru from the Sultan of Johor. We are concerned that

these developers will deluge the market with a massive supply of high-

rise mixed development projects, inducing price volatility, if there is no

synchronized planning and control by the authorities.

Earnings downgraded, TPs cut. We lower our FY14-16 earnings

forecasts by 3-24% to factor in: i) lower sales assumptions due to the

deferment of high-end/high-rise launches and ii) lower pre-tax margin

assumptions (-2ppts) for projects launched between end-2011 and

2013, to factor in higher construction costs. We have also updated our

beta assumptions and roll over our base year for valuations.

Consequently, we adjust our RNAV estimates by +1.6% to -5%.

Maintain UNDERWEIGHT; Glomac is our preferred pick. Our new

TPs are based on unchanged P/RNAVs of 0.5-0.79x. We continue to

rate Sunway and UEMS as SELLs; SP Setia and Mah Sing are HOLDs.

We upgrade Glomac to BUY as the stock now offers a total return of

>10%. Glomac‟s valuations have turned undemanding and its large

exposure to affordable housing makes it less vulnerable to policy risk.

Also, most of its landbank is located in the Klang Valley, making it a

prime beneficiary of the growing population and infrastructure

improvements there.

Property Underweight (unchanged)

Wong Wei Sum, CFA [email protected] (603) 2297 8679

Developers: Recommendation & RNAV-based TP

Trusts From To RNAV-based TP

(MYR) New/Old

Upside (%)

Glomac Hold Buy 1.27/1.28 13.6

Mah Sing Hold Hold 2.45/2.47 9.6

SP Setia Hold Hold 3.38/3.38 12.7

Sunway Sell Sell 2.56/2.52 -3.1

UEMS Sell Sell 2.13/2.25 -8.0

Source: Maybank KE Valuation basis

Trusts Price @ 17 Dec

RNAV (MYR)

Valuation (P/RNAV)

Current Maybank

Glomac 1.12 2.12 0.53 0.60

Mah Sing 2.23 3.09 0.72 0.79

SP Setia 3.00 4.83 0.62 0.70

Sunway 2.64 4.41 0.60 0.58

UEMS 2.32 4.18 0.55 0.51

Source: Maybank KE

Remaining Gross Development Values (GDV) and unbilled sales

Company Remaining GDV

(MYR b)

Unbilled sales

(MYR b)

(x) of our FY14 revenue

forecast

Glomac 6.6 858 1.0

Mah Sing 24.6 4.2 1.9

SP Setia 71.0 9.6 2.5

Sunway 31.4 1.8 1.1

UEMS 81.2 3.3 1.3

Source: Companies

Developers: Foreign shareholdings (%)

REITs Oct-13 Nov-13 % YTD Beta

Glomac 8.7 8.9 2.1 1.30

Mah Sing 26.2 24.8 -0.8 1.50

SP Setia 9.2 8.8 6.7 0.74

Sunway 5.7 5.5 -2.7 1.40

UEMS 17.2 16.1 -2.6 1.86

Source: Companies



Final push for sales. Developers are in the final push for sales before

the implementation of the new property cooling measures in 2014. In

our recent survey, we found that developers are offering very attractive

marketing packages including discounts/rebates of up to 15-17%. To

our surprise, the entitlement for mortgage loans is still based on gross

pricing, despite the enforcement of stricter loan-to-value ratios by BNM

since Nov 2013. The enforcement of new rulings in 2014, when

developers must fully disclose any rebates/discounts offered, should

make it harder to attract buyers with marketing gimmicks in future.

The losers. With several cooling measures implemented at one go and

stricter mortgage lending by the banks, we think the property market will

be hard hit as we expect speculators to hold back on new

commitments. Developer interest bearing scheme (DIBS)-driven luxury

and highly speculative properties in the hotspots would be impacted the

most. Developers with large exposure in these segments/areas are

UEMS, Sunway, E&O (Not Rated) and Tropicana Corp (Not Rated).

The less-affected developers. The new measures are however

unlikely to significantly deter real property demand, which will be

supported by owner-occupiers and a young demographic. Bigger

players such as SP Setia and Mah Sing have started switching their

focus to the affordable home segment, to ride on the current strong

demand especially for affordable landed properties. Other developers

with large exposure to this segment are Glomac, Hua Yang (Not

Rated), Matrix Concepts (Not Rated) and Tambun Indah (Not Rated).

KV infrastructure, government land boost. In 2014, investor interest

could return to developers with exposure to the Klang Valley (KV) on

news of government land awards, such as the RRIM land in Sungai

Buloh (probably in 2Q14). The KV MRT 2 and Circle lines (Gamuda

expects the MRT2 line to be approved by early 2014, with construction

to start in 2H16) are re-rating catalysts for land prices in the Klang

Valley. This could offer trading opportunities in government-linked

developers such as SP Setia, IJM Land, UEMS and MRCB.

Margin erosion. The GST implementation on 1 Apr 2015 will most

likely raise construction costs. While developers are able to pass on the

GST impact to buyers of non-residential properties, they may have to

absorb some of the GST impact (in the form of margin compression) for

residential properties that were sold recently and remain uncompleted

come 1 Apr 2015.

Under the radar – Focal Aims-Eco World. Eco World (EW) has been

in the limelight after the buyout of Focal Aims (FA). The buyout

effectively makes FA the listed vehicle for EW. To recap, EW is a fast-

growing developer, led by former top managers at SP Setia. It has

accumulated 3,000 acres of land (worth MYR30b in GDV) throughout

Malaysia in less than a year. It is currently undertaking a restructuring

exercise that could involve strategic landbank injection into Focal Aims

(probably by 2H14), we understand.

Property – Developer Sector – Peer Valuation Summary Source: Maybank KE

Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) P/B (x) P/B (x) ROAE (%)

ROAE (%)

Net yield


UEM Sunrise Sell 2.32 10,090.9 2.13 22.5 17.2 21.7 1.9 2.0 8.4 10.4 1.5

SP Setia Hold 3.00 7,376.1 3.38 16.0 16.3 13.4 1.4 1.3 8.9 7.8 4.5

Sunway Berhad Sell 2.64 4,550.1 2.56 9.7 9.3 11.2 1.0 0.8 9.9 8.6 1.8

Mah Sing Hold 2.23 3,096.0 2.45 11.0 9.6 8.6 2.0 1.7 18.4 15.8 4.7

Glomac Buy 1.12 814.0 1.27 8.2 7.6 6.6 1.0 1.0 12.7 12.7 4.5

Simple average 5,185.4 13.5 12.0 12.3 1.5 1.3 11.6 11.1 3.4

New property cooling measures

Budget 2014 – effective Jan 2014 onwards

1. RPGT hike (+5 –15ppt for the locals, +15-20ppt for foreigners

2. Higher floor price of MYR1m (from MYR500k currently) for foreign buyers

3. Developers are required to display detailed selling prices including all benefits and incentives offered to buyers

4. Ban on Developer Interest Bearing Scheme (DIBS)

By Johor state government – effective May 2014

5. 2% levy on foreign purchase (from the MYR10k flat rate currently)

By Penang state government – effective Feb 2014

6. 3% levy on foreign purchase ; foreigners can only buy property above MYR1m (or landed property over MYR2m)

7. 2% levy on the seller of all property within three years of the date of SPA signed from 1 Feb 2014

8. Low-cost and low-medium cost homes (up to MYR75k) cannot be sold within 10 years unless permission is obtained. Even so, it can only be sold to qualified buyers registered with the Housing Department

9. Affordable houses (up to MYR400k on the island and MYR250k on the mainland) cannot be sold within five years, unless permission is obtained

Source: Budget 2014, state governments

KLPI has declined by 5% since our sector downgrade

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Oct

-92

Oct

-93

Oct

-94

Oct

-95

Oct

-96

Oct

-97

Oct

-98

Oct

-99

Oct

-00

Oct

-01

Oct

-02

Oct

-03

Oct

-04

Oct

-05

Oct

-06

Oct

-07

Oct

-08

Oct

-09

Oct

-10

Oct

-11

Oct

-12

Oct

-13

KLPRP Index

Source: Bloomberg



It’s All About The Fed

All eyes on the west. US Fed‟s QE tapering has came in earlier than

expected. Market will continue to interpret the implications of US

economic data (i.e. inflation) to gauge the momentum and quantum of

QE tapering over the next months. While interest-sensitive M-REITs are

likely to be laggards in 1H14 against a volatile yield environment, a

large portion of the taper-related selloff is already factored in their unit

prices, we believe, hence, we maintain our NEUTRAL stance on the

sector. Our top pick is CMMT.

Glory days have passed. 1H13 was the best year on record for M-

REITs with the listing of Malaysia‟s first ever stapled REIT, KLCCP

(largest by market value and asset size) in May, further supported by

yield-seeking/risk-averse investors accumulating the M-REITs pre-

13GE in May 2013 as they turned defensive and shunned political

ambiguity. However, the M-REIT sector has been severely sold down

since the Fed hinted at QE tapering on 22 May 2013.

The bears overtake the bulls. The 10-year MGS yield has surged to

4.0% (+98bps) while average gross yields of the M-REITs have risen to

6.6% (+67ppt) since 22 May 2013. The yield spread between M-REITs

and MGS is now 258bps, below the average of 355bps since 2006 and

314bps between 2012-May 2013 (peak), suggesting that there could be

further downside for M-REITs. M-REITs are no longer defensive, with

average beta having jumped to 0.5-0.9 from 0.5-0.7 in 2011-12.

Rising rates curtail deals, make yield stocks less appealing. Rising

rates and stubbornly high property values would dampen acquisition

activities, making fundraising difficult, with acquisitions having been a

meaningful driver of earnings growth under a low interest-rate

environment over the past few years. We also see weaker demand for

yield stocks. Berjaya Sports Toto Bhd has cancelled the listing of its

gaming business trust on the Singapore Stock Exchange.

Cost pass-through depends on bargaining power. Electricity tariff

and potential assessment rate hikes in 2014 are negative for M-REITs.

While many commercial leases include rent escalation clauses and cost

pass-throughs to the tenants, their execution is still dependent on

market conditions, with tenant retention a top priority. In our view, the

presently oversupplied office market makes it difficult to pass on the

extra costs. Higher rentals on KL properties due to assessment fee

hikes could encourage decentralisation.

The time is not ripe to be bold, as the repricing of the REITs could

continue especially in 1H14. We may see M-REIT yields moving

towards the historical average spread over 10-year MGS yields of

314bps (+50bps), which implies 6-8% downside in unit prices. The re-

entry point will be when the bond market/yields start showing signs of

stabilisation, probably in 2H14 as uncertainty over the US Fed‟s

monetary policy subsides.

Our preference is for REITs with solid fundamentals, visible asset

pipelines from their sponsors, and that have good valuation buffers to

cushion the impact of a sudden surge in bond yields. We have cut our

TPs by 3-19% on higher beta and cap rate assumptions. We remain

BUYers of CMMT and PavREIT.

REITs Neutral (unchanged)

Wong Wei Sum, CFA [email protected] (603) 2297 8679 Yield comparison

Trust Price (MYR) 17/12

Mkt cap (MYRm)

Net D/Y

FY14 (%)

Gearing (x)

AL-Aqar KPJ REIT

1.31 912 6.2 0.47

AL-Hadharah Boustead REIT

2.07 1,298 4.3 0.14

Amanah Raya 1.00 573 5.4 0.35

AMFirst REIT 1.02 700 6.2 0.33

Atrium 1.30 158 6.9 0.29

Axis-REIT ^ 2.99 1,379 5.8 0.33

Hektar 1.53 613 6.5 0.41

QCT ^ 1.18 460 6.8 0.36

Starhill 1.01 1,338 7.6 0.52

Tower 1.50 421 7.2 0.19

UOA 1.45 613 6.2 0.37

SunREIT ^ 1.24 3,625 5.9 0.31

CMMT ^ 1.34 2,376 6.2 0.28

Pavilion^ 1.27 3,822 5.6 0.17

IGB REIT^ 1.18 4,039 5.2 0.25

KLCC^ 5.76 10,399 5.5 0.14

Average 32,726 6.1

Source: Maybank KE (^); consensus M-REITs: Recommendation & DCF-based TP (our main valuation method)

Trusts From To DCF-based TP (MYR) New/Old

Upside (%)

Axis REIT HOLD HOLD 2.71/3.35 -9.4

CMMT BUY BUY 1.76/1.82 31.3

IGB REIT HOLD HOLD 1.22/1.35 3.4

KLCCP HOLD HOLD 6.26/6.70 8.7

PavREIT BUY BUY 1.53/1.53 20.5

QCT HOLD HOLD 1.16/1.19 -1.7

SunREIT HOLD HOLD 1.24/1.31 0.0

Source: Maybank KE Yield benchmark-based TP (alternative)

Trusts Ave. yield

spread (bps)

Yield benchmark (gross) (%)

TP (MYR)

Upside (%)

Axis REIT 250 7.0 2.77 -7.2 CMMT 200 6.8 1.37 2.0 IGB REIT 200 6.5 1.05 -10.7 KLCCP - 6.5 5.17 -10.2 PavREIT 200 6.5 1.22 -3.7 QCT 380 7.5 1.18 0.2 SunREIT 250 6.8 1.20 -3.3

Source: Maybank KE



M-REITs‟ average yield gross is currently 258bps above 10-year MGS

The spread between M-REIT and 10-year MGS could revert to its historical mean/mean (2012-May 2013) of 355/314bps

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

10 Year MGS Yield M-REIT(%)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Spread Average(%)

Average: 3.6


Fed taper sooner than expected. The Fed will start trimming its

monthly bond purchases by USD10b to USD75b from Jan 2014

onwards to unwind the stimulus put in place since 2008. This came in

earlier than expected as we had anticipated it to happen sometime in

Mar 2014. Markets could continue focusing on the implications of US

economic data (i.e. inflation rate) over the next months to gauge the

momentum/quantum of QE tapering. Overall, the yield uptrend remains

very much intact.

Lack of sector catalysts – we expect property deals to slow down

amid rising rates. M-REITs have done extremely well over the past

two years amid a low interest rate and „risk-off‟ environment. Low

interest rates and strong demand for stable, income-producing

investments have made it much easier for REITs to acquire new assets

due to cheaper cost of funds/equity. Yields were further compressed

with the listing of giant REITs – PavREIT (2011), IGB REIT (2012) and

KLCCP (2013) that have made the M-REIT sector more investable and

appealing to international investors.

Conversely, rising rates and weaker demand for yield stocks would

dampen acquisition activities and could discourage asset owners from

REIT-ing their assets due to unfavourable pricing. PNB was earlier

reported to have appointed bankers to structure a merger of its property

assets valued at around MYR15b and list them as a property trust in

2014. This (a re-rating catalyst) may not happen if demand for yield

investments is weak. Meanwhile, Berjaya Sports Toto Bhd recently

cancelled the listing of its gaming business trust in Singapore due to the

current weak demand for yield instruments.

Rising operating costs – to pass on or not. A rising rate environment

typically reflects a recovering economy and should translate into better

bargaining power for rental hikes for asset owners. However, we think

this will be no easy task for the M-REITs in an environment of rising

costs. Next year will see higher fuel bills, electricity tariffs and potential

assessment fee hikes. 2015 will see the implementation of GST.

While many commercial leases include rent escalation clauses and cost

pass-through to the tenants, tenant retention remains a top priority and

REITs may have to absorb part of the additional costs. Also, slower

consumer spending (due to higher living costs) may affect turnover rent

at retail malls. Currently, turnover rent accounts for 3-5% of the retail

REITs' total gross income (except for IGBR's 12%). However, Visit

Malaysia Year 2014, which targets significant growth in tourist arrivals

and spending (benefiting the retail sector), could cushion the blow.

REITs: YTD unit price performance; high-yield REITs such as QCT is less volatile in rising rate environment Trusts 31-Dec-12 17-Dec-13 YTD

change MYR/unit MYR/unit

Axis REIT 3.13 2.99 -4%

CMMT 1.80 1.34 -26%

IGB REIT 1.33 1.18 -11%

KLCCP 6.3 5.76 -9%

PavREIT 1.39 1.27 -9%

Quill Capita 1.23 1.18 -4%

SunREIT 1.55 1.24 -20%

Source: Bloomberg

REITs: Foreign shareholdings (MoM %)

REITs 13-Oct 13-Nov % MoM Beta

CMMT^ 14-15 14-15 NA 0.73 SunREIT 20.1 20.1 0 0.84 PavREIT 7 7 0 0.56 KLCCP c.10.0 c.10.0 NA 0.92 Axis REIT** 5.2 5.5 0.3 0.66 QCT 4 4 0 0.53 IGB REIT 5 - NA 0.5

^ CMMT management is reluctant to provide the exact numbers **excluding related party; as at 30 Nov 2013

Source: Trusts



Rising interest cost risk but still manageable. Most REITs under our

coverage have been proactively managing their capital and have tilted

towards fixed instead of floating rate loans to reduce overall interest

cost risk to their portfolio income. In the event of a 25bps hike in interest

rates, QCT, PavREIT and IGB REIT will be the least affected as close

to 100% of their debts are fixed rate, while we estimate downgrades of

0.6% in our FY14 net profit forecast for Axis REIT, 0.4% for CMMT,

0.4% for SunREIT and 0.2% for KLCCP.

Rental outlook. Rents for offices may continue to be under pressure

due to the office supply glut (huge incoming supply of 16.2m sqft in the

Klang Valley by 2015, from 89.3m sqft in 1Q13, according to CBRE). As

a result, the office market would have relatively lower bargaining power

to pass on the additional operating costs as compared to the retail

asset owner. As for strategically-located retail malls such as Pavilion KL

Mall, Mid Valley Megamall, Suria KLCC, Sunway Pyramid shopping

mall, rental growth should stay strong at 8-10% in 2014 although

turnover rent could be affected from Apr 2015 onwards on slower

consumer spending post the implementation of GST.

Earnings downgrades. We lower our FY14/15 earnings forecasts by

0.2% to 0.9% to factor in electricity tariff hikes from Jan 2014. REITs

under our coverage are able to pass on the majority of these increases

to their tenants via higher service charges/rent escalation clauses, we

understand. We however have not factored in potential assessment fee

hikes for KL property owners, pending further clarifications from KL City

Hall (DBKL; public hearings will be in end-Mar 2014). Based on our

back-of-the-envelope calculations, we estimate an additional cost of

0.2-1.3sen/unit. Losers include KLCCP, IGBR and PavREIT who have

100% of their assets in KL, while Axis REIT has no exposure in the KL

area.

Maintain NEUTRAL; TPs cut. We roll over our base year for

valuations and lower our TPs by 3-19% after imputing higher betas of

0.75-0.85 (from 0.55-0.8) and higher cap rates of 7-8% (from 6-7%)

amid a volatile bond market. While we think a large portion of the taper-

related selloff is already factored into prices, there could be 6-8%

downside in unit prices as yields are still below its historical average of

314bps.

Our strategy. We favour the less interest rate-sensitive high-yield

REITs (e.g. QCT; HOLD) as we think they can hold up better in a rising

rate environment. We also like REITs with solid fundamentals and

sponsored REITs with visible asset pipelines. We are BUYERs of

CMMT and PavREIT. CMMT offers an attractive gross yield of 7%

(2014) after the recent selldown, while PavREIT‟s low gearing allows

the trust to acquire assets without the need to raise equity.

Property – REIT Sector – Peer Valuation Summary Source: Maybank KE

Stock Rec Shr px Mkt cap TP PER (x) PER (x) PER (x) P/B (x) P/B (x) ROAE (%)

ROAE (%)

Net yield (%) (MYR) (MYRm) (MYR) CY12E CY13E CY14E CY12E CY13E CY12E CY13E CY13E

IGB REIT Hold 1.18 4,038.7 1.22 20.6 19.3 18.7 1.2 1.1 4.6 5.8 5.8

Pavilion REIT Buy 1.27 3,822.3 1.53 19.5 18.1 16.9 1.2 1.2 5.9 6.4 6.2

Sunway REIT Hold 1.24 3,625.4 1.24 17.0 16.5 15.8 1.1 1.0 6.3 6.2 6.6

CMMT Buy 1.34 2,375.6 1.76 17.2 16.8 15.8 1.2 1.1 6.5 6.7 6.9

Axis REIT Hold 2.99 1,379.1 2.71 17.2 15.4 15.1 1.4 1.4 8.1 8.9 6.5

Quill Capita Hold 1.18 460.4 1.16 13.4 13.3 12.7 0.9 0.9 6.5 6.6 7.5

Simple average 2,616.9 17.5 16.6 15.8 1.1 1.1 6.3 6.8 6.6

Retail supply in KV is expected to increase to 60.8m

sq.ft. by 2015 (+26% from 2012)

Source: CBRE

Office supply in KV is expected to increase to 104.6m

sq.ft. by 2015 (+18% from 2012)

Source: CBRE

REITs: Debt composition

Trust Loans Eff. interest

cost (%)

Gearing (x) ^

Fixed rate (%)

Floating rate (%)

Axis REIT 60 40 4.35 0.33

CMMT 74 26 4.29 0.28

IGB REIT 99 1 4.55 0.25

KLCCP* 80 20 3.5-4.0 0.14

PavREIT 99.5 0.5 4.2-4.8 0.17

QCT 100 0 4.3 0.36

SunREIT 80 20 3.86 0.31

* management guidance ^ total debts-to-total assets

Source: Trusts



Trade On Catalysts

Valuations still not compelling. We remain Neutral on the telecom

sector. We see little scope for substantial share price appreciation given

1) the sector‟s still lofty valuations at 22x 2014 earnings vis-a-vis 4.8%

earnings growth; and 2) the likely rise in bond yields. Nevertheless,

downside is likely limited, a consequence of the trapped domestic

liquidity. We see pockets of trading opportunity for selected telco stocks

given the potential crystallisation of stock-specific catalysts in 2014.

A lacklustre year for performance. Having appreciated substantially

in 2012, the big-cap telcos underperformed the broader market in 2013.

The year saw the “awakening” of Maxis, which (after years of ceding

market share to its peers) undertook a major internal restructuring in an

attempt to redress the balance sheet. Data‟s contribution to revenue

continues to grow for both cellular and fixed-line players, although

cellular players still perceive data price points to be low. Margin trends

remained healthy, a reflection of the relatively benign competition.

Competition in the cellular space to remain rational. The possibility

of a price war heading into 2014 cannot be entirely dismissed,

particularly after the management restructuring at Maxis. Hence, the

new CEO‟s statement of not competing on pricing was a welcome relief.

We thus expect competition among the cellular majors to remain

rational in the next 12 months. This would allow the cellular majors to

continue to focus on further monetising data.

Data to continue to drive growth for fixed-line players. The growth

in data usage is both explosive and secular, driven by: 1) increased

users; 2) faster internet access; and 3) improved content. For fixed-line

players, we continue to expect growth in data revenue to more than

offset falling voice revenue. With Maxis re-evaluating its integrated

model, the competitive intensity in the fibre broadband segment could

potentially decline.

Stock-specific catalysts emerging. Within the next 12 months, Digi

will announce its decision on whether to pursue a business trust (to

overcome its dividend payout constraints). TM could potentially receive

a government grant for the rollout of HSBB Phase 2. Axiata is working

on a potentially value-creating tower divestment exercise. Longer term,

TDC could once again unload its remaining Digi shares. Maxis

meanwhile could demonstrate signs of a turnaround.

Buy TDC; TM and Digi our preferred big-cap picks. Our only BUY in

the sector is TDC (BUY, TP: MYR4.40), as it is most exposed to the

secular growth trends of data, and has capital management potential.

Among the big-caps, our relative preference is for Telekom Malaysia

(HOLD, TP: MYR5.50) and Digi (HOLD, TP: MYR4.95) given: 1) their

2013-YTD underperformance; and 2) the emergence of potential re-

rating catalysts in the near term.

Key risk: further yield compression. Telco stocks are perceived as

yield plays, and hence bond yields inevitably also drive share price

performance. Our expectation is for bond yields to rise, thus capping

share price performance of yield stocks. There is potential upside risk to

telco stocks should bond yields unexpectedly drop.

Telecoms Neutral (unchanged)

Tan Chi Wei, CFA [email protected] (603) 2297 8690



Share price performance (annual reset)

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

2009 2010 2011 2012 2013

Digi Maxis TM Axiata

Source: Maybank KE

Subscriber market share – Prepaid Subscriber market share – Postpaid

24%

26%

28%

30%

32%

34%

36%

38%

40%

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Celcom Digi Maxis

15%

20%

25%

30%

35%

40%

45%

50%

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Celcom Digi Maxis

Source: Companies Source: Companies

Data as a percentage of mobile revenue EBITDA margin (company normalised)

10%

15%

20%

25%

30%

35%

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Celcom Digi Maxis

38%

40%

42%

44%

46%

48%

50%

52%

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Celcom Digi Maxis


Telecommunication Sector – Peer Valuation Summary


ROE (%)

Net yield


Axiata Hold 6.87 58,670.7 7.20 21.3 20.6 19.7 2.9 2.9 13.6 13.8 4.3

Maxis Hold 7.20 54,024.0 7.20 29.1 26.5 26.1 7.7 8.9 26.3 33.5 5.6

DiGi.Com Hold 4.92 38,253.0 4.95 31.7 24.0 21.3 164.0 164.0 461.4 610.1 4.7

Telekom Hold 5.51 19,711.5 5.50 22.4 22.9 22.9 2.9 2.8 12.8 12.3 3.9

Time dotCom Buy 3.88 2,223.6 4.40 19.2 20.6 18.8 0.9 1.2 4.5 5.8 0.0

Simple avg 34,576.6 24.8 22.9 21.8 35.7 36.0 103.7 135.1 3.7

Source: Maybank KE



Basking In The New Tariffs

Tenaga triggers sector upgrade. We upgrade the power sector to

Overweight following our recent upgrade of Tenaga. Stock valuations

(Tenaga in particular) are undemanding. The recent tariff hike was

significantly earnings-accretive to Tenaga. Coupled with a fuel-cost

pass-through mechanism now in place, we expect Tenaga‟s valuation

discount to the market to continue to narrow.

Tariff hike takes the limelight. The ministry announced in Dec 2013

that Peninsular Malaysia‟s blended tariffs would be raised by 14.9%,

effective 1 Jan 2014. This reflected: 1) an increase in gas cost; 2) a

pass through in LNG cost; 3) a rise in the coal benchmark; and 4) an

increase in base tariff. Separately, the commissioning of PETRONAS‟

Melaka regasification plant commenced in May 2013, which brought an

end to the tight gas supply. Coal prices were manageable (below

USD90/t) for most parts of 2013.

Fuel cost pass through mechanism in place. 2014 represents the

trial year for the new tariff framework, IBR (Incentive-based Regulation),

with the first three-year regulatory period officially beginning in 2015

(the new base tariff is applicable for the next four years). The IBR also

incorporates a fuel-cost pass-through mechanism, where tariffs are to

be reviewed every six months. This would reduce earnings volatility for

Tenaga, hence allowing the stock to re-rate further.

No immediate fuel pressure. We do not expect major price and supply

pressure for fuel. Gas supply is now ample (averaging over

1,300mmscfd) following the commissioning of the Melaka regasification

plant. Any subsequent increase in gas prices would likely be fully

passed on to the consumers in the form of higher tariffs. Coal price is

trending up, but is unlikely to stay substantially elevated given

unfavourable demand-supply dynamics.

Track 3B results to be announced. New generation projects have

little impact on Tenaga‟s earnings, but can be significant for IPPs. Track

3B represents a 2,000MW greenfield coal plant, of which there have

been five submitted bids. Recent press reports suggested that YTL

Power submitted the lowest cost bid. Tenaga has won the two most

recent generation tenders (1,071MW gas plant in Prai and 1,000MW

coal plant in Manjung).

Bullish on Tenaga. We are bullish on Tenaga (BUY, TP: MYR12.50)

as we think the Street has yet to incorporate the full earnings accretion

from the tariff hike. TNB's new earnings base of c.MYR5.5b is

substantially above historical levels, and is likely sustainable given the

impending implementation of a fuel-cost pass-through mechanism. YTL

Power (HOLD, TP: MYR1.84) continues to aggressively buy back

shares. With the share price having exceeded our RNAV estimate, we

view the risk-reward as less compelling.

Key risk: fuel-cost pass-through not followed through. Electricity

tariffs are still subject to the cabinet‟s approval under the IBR, meaning

there is still the risk of the government vetoing any prospective tariff

hikes. Any veto would once again call into doubt the stability of

Tenaga‟s earnings, potentially resulting in the de-rating of the stock.

Power Overweight (from Neutral)

Tan Chi Wei, CFA [email protected] (603) 2297 8690



Gas volume to power sector Coal price

800

900

1,000

1,100

1,200

1,300

1,400

Jun-

Aug

10

Sep

-Nov

10

Dec

-Feb

11

Mar

-May

11

Jun-

Aug

11

Sep

-Nov

11

Dec

-Feb

12

Mar

-May

12

Jun-

Aug

12

Sep

-Nov

12

Dec

-Feb

13

Mar

-May

13

Jun-

13

Jul-1

3

Aug

-13

Sep

-13

Oct

-13

Nov

-13

(mmscfd)

40

60

80

100

120

140

160

2008 2009 2010 2011 2012 2013

(US$/t)Newcastle spot TNB average


Tenaga net profit estimates - FY13 Tenaga net profit estimates - FY15

3,000

3,200

3,400

3,600

3,800

4,000

4,200

4,400

Dec

-12

Jan-

13

Feb

-13

Mar

-13

Mar

-13

Apr

-13

May

-13

May

-13

Jun-

13

Jul-1

3

Jul-1

3

Aug

-13

Sep

-13

Sep

-13

Oct

-13

(MYR m)Consensus Maybank Actual

3,500

4,000

4,500

5,000

5,500

6,000

Dec

-12

Jan-

13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

(MYR m)Consensus Maybank


YTL Power share buybacks

1.20

1.40

1.60

1.80

2.00

2.20

0%

20%

40%

60%

80%

100%

15-M

ar-1

3

25-M

ar-1

3

28-M

ar-1

3

2-A

pr-1

3

5-A

pr-1

3

18-A

pr-1

3

24-A

pr-1

3

29-A

pr-1

3

3-M

ay-1

3

8-M

ay-1

3

17-M

ay-1

3

22-M

ay-1

3

29-M

ay-1

3

3-Ju

n-13

6-Ju

n-13

11-J

un-1

3

14-J

un-1

3

19-J

un-1

3

24-J

un-1

3

1-Ju

l-13

21-A

ug-1

3

26-A

ug-1

3

28-A

ug-1

3

2-S

ep-1

3

5-S

ep-1

3

10-S

ep-1

3

13-S

ep-1

3

19-S

ep-1

3

24-S

ep-1

3

27-S

ep-1

3

2-O

ct-1

3

7-O

ct-1

3

10-O

ct-1

3

16-O

ct-1

3

21-O

ct-1

3

24-O

ct-1

3

29-O

ct-1

3

1-N

ov-1

3

7-N

ov-1

3

12-N

ov-1

3

15-N

ov-1

3

20-N

ov-1

3

25-N

ov-1

3

28-N

ov-1

3

3-D

ec-1

3

6-D

ec-1

3

(MYR)% of daily vol (LHS) Avg price (RHS)

Source: Maybank KE

Power Sector – Peer Valuation Summary


ROE (%)

Net yield


Tenaga Buy 11.02 62,192.6 12.50 14.1 14.3 12.2 1.7 1.7 12.0 11.9 2.8

YTL Power Hold 1.87 12,332.3 1.84 12.3 12.8 12.6 1.4 1.3 10.5 9.0 0.5

Simple average 37,262.5 13.2 13.6 12.4 1.5 1.5 11.3 10.5 1.6

Source: Maybank KE



TECHNICALS



Nearer Exhaustion Point

2013 has been quite a pleasant year, with equity, commodity and

currency markets all up. However, 2014 may prove to be a more

challenging year fraught with uncertainties. Leading the list of macro

concerns is whether the US Federal Reserve will reduce its quantitative

easing (QE) policy further beyond the USD10b reduction from USD85b

to USD75b at their Dec 2013 FOMC meeting. Besides the QE worries,

there are concerns over the US “fiscal cliff” resolution due by 1Q14 and

rising bond yields there.

With these two major worries from the US, global investors will continue

to cast a wary eye over US economic figures. Usually, good economic

figures mean that equity markets would react positively. Instead, global

equity markets weaned on QE since the onset of the global financial

crisis (GFC) of 2007 would be looking to buy into equity markets on

news of weak economic figures, as poorer numbers would mean a

continuation of QE.

Peaking DJIA with bearish divergence. Since the Dow Jones‟ GFC

low of 6,469.95 in Mar 2009, this American index has surged to a new

all-time high of 16,174.51 (Nov 2013) – surpassing its previous all-time

high of 14,198.10 (Oct 2007). Despite its weekly and monthly chart

uptrends, the index‟s rise is accompanied by obvious bearish

divergence signals. Its extension Fifth Wave in its wave structure may

cause upside targets of 16,458, 16,825 and 17,680 to be sighted in the

medium term.

Key support levels on the index are located at 14,198, 14,719, 15,522

and 16,167, whilst its resistances of 16,170 and 16,174 may cap its

rise. Technical indicators like the CCI, DMI, MACD and Oscillator are

positive for the index on the weekly and monthly charts. However, there

are very obvious bearish divergences on these indicators as the index

tries to scale fresh all-time highs. The odds of a major reversal have

greatly increased.

Chart 1

Source: Advanced GET, Maybank-IB

Technicals

Lee Cheng Hooi [email protected] (03) 2297 8964



Chances of a S&P500 reversal are high. Since the SP500‟s GFC low

of 666.79 in Mar 2009, this broader American index has surged to a

new all-time high of 1,813.55 (Nov 2013) – surpassing its previous all-

time high of 1,576.09 (Oct 2007).

Despite its weekly and monthly chart uptrends, the index‟s rise is

accompanied by obvious bearish divergence signals. Its extension Fifth

Wave in the wave structure may cause upside targets of 1,819, 1,848,

1,861 and 1,938 to be sighted in the medium term.

Key support levels on the index are located at 1,576, 1,646, 1,722 and

1,809, whilst its resistances of 1,811 and 1,813 may cap its rise.

Technical indicators like the CCI, DMI, MACD and Oscillator are

positive for the index on the weekly and monthly charts. However, there

are very obvious bearish divergences on these indicators as the index

tries to scale fresh all-time highs. Chances of a major reversal have

greatly risen for this index too.

Chart 2


For how long can Malaysia go its own way? The Malaysian equity

market rose strongly after the country‟s 13th General Election in May

2013, with the FBMKLCI Index hitting a high of 1,826.22. The tensions

in Syria caused the index to drop to 1,660.39 (Aug 2013). Despite some

portfolio trimming by foreign funds in the latter part of the year,

rotational buying and year-end window dressing activities by local funds

caused the index to close at a healthy level of 1,850.90 (17 Dec 2013),

slightly short of its all-time high of 1,851.94 seen that day too.

The FBMKLCI has risen steadily since its Oct 2008 low of 801.27 on an

Elliott Wave “Flat” rise. Despite its daily, weekly and monthly chart

uptrends, the index‟s rise is accompanied by obvious bearish

divergence signals. Its extension Fifth Wave in the “Flat” wave structure

may cause upside targets of 1,853, 1,878 and 1,898 to be sighted in the

short-to-medium term. Key support levels on the index are located at

1,590, 1,660, 1,759 and 1,846, whilst its resistances of 1,848 and 1,850

as well as its all-time high of 1,851 may offer token selling activities.

Technical indicators like the CCI, DMI, MACD, Oscillator and Stochastic

are positive for the index on the daily, weekly and monthly charts.

However, there are very obvious bearish divergences on these

indicators as the index tries to scale new highs.



Given the divergences, there is a great chance that the index could

stage a major Wave “C” decline in 2014.

Chart 3


A firm tone in HK, but caution persists. The Hong Kong HSI Index

(HSI) fell from its Feb 2013 high of 23,944.74 as foreign funds flowed

out of the market on lower Chinese growth expectations as well as a

market rally in Japan. However, some strong buying in Jun 2013 at the

19,426.36 low caused the index to regain its upward trajectory.

The HSI Index has risen strongly since its Oct 2008 low of 10,676.29,

on an Elliott Wave “Flat” rise. Despite its daily, weekly and monthly

chart uptrends, the index‟s rise is accompanied by obvious bearish

divergence signals. Its extension Fifth Wave in the “Flat” wave structure

may cause upside targets of 24,542, 25,855 and 27,000 to be seen in

the short-to-medium term.

The obvious support levels on the index are located at 19,426, 21,004,

22,463 and 22,753, whilst its resistance areas of 23,000, 23,563,

23,944 and 24,111 may cap the rise of the Hong Kong index. Technical

indicators like the CCI, DMI, MACD and Oscillator are positive for the

index on the weekly and monthly charts. Sentiment and trend-wise, the

HSI Index looks remain strong in a lofty range, with some potential

upside.

Chart 4




Southbound Singapore STI. The Singapore Straits Times Index

(FSSTI) declined from its May 2013 high of 3,464.79 on foreign fund

selling and unwinding of their equity positions when QE taper talk

emerged from US then. The index formed a low of 2,990.68 (Aug 2013)

in tandem with the regional rebound.

The FSSTI Index has risen strongly since its Mar 2009 low of 1,455.47,

on an Elliott Wave “Irregular Flat” rise with ample bearish divergence

signals at its “C-Wave” high of 3,464.79. Due to its daily and weekly

chart downtrends, the index‟s decline may cause downside targets of

2,941, 2,875 and 2,747 to be seen in the short-to-medium term.

The weaker support levels on the index are located at 2,888, 2,931,

2,990 and 3,025, whilst its resistance areas of 3,062, 3,235, 3,277 and

3,303 will cap the rebound of the Singapore index. Technical indicators

like the CCI, DMI and MACD are negative for the index on the daily,

weekly and monthly charts. Sentiment and trend-wise, the FSSTI Index

looks likely to drift down further in 2014.

Chart 5


Turbulent Thailand. Thailand‟s SET Index (SET) has plunged from its

May 2013 high of 1,649.77 on foreign fund selling and unwinding of the

USD-THB equity and currency carry-trades when QE taper talk

emerged from the US. The country‟s slower economic growth rates also

caused foreign equity selling there. The index formed a low of 1,260.08

(Aug 2013) in tandem with the regional rebound.

The SET Index has risen strongly since its Nov 2008 low of 380.05 on

an Elliott Wave rise with ample bearish divergence signals at its “5-

Wave” high of 1,649.77 (May 2013). Due to its daily and weekly chart

downtrends, the index‟s decline may cause downside targets of 1,245,

1,195 and 1,126 to be seen in the short-to-medium term.


1,300 and 1,326, whilst its resistance areas at 1,349, 1,430, 1.494 and

1,519 will cap the Thai index‟s rebound. Technical indicators like the

CCI, DMI and Oscillator are negative for the index on the daily and

weekly charts. Sentiment and trend-wise, the SET Index looks likely to

drift down in tandem with regional indices.



Chart 6


Weaker trend in Indonesia. Indonesia‟s Jakarta Composite Index

(JCI) plunged from its May 2013 high of 5,251.30 on foreign fund selling

and unwinding of the USD-IDR equity and currency carry-trades when

QE taper talk emerged from the US. The index formed a low of

3,837.74 (Aug 2013) in tandem with the regional rebound.

The JCI Index has risen strongly since its Oct 2008 low of 1,089.34 on

an Elliott Wave “Flat” rise with ample bearish divergence signals at its

“C-Wave” high of 5,251.30. Due to its daily and weekly chart




4,012 and 4,172, whilst its resistance areas at 4,257, 4,346, 4,611 and

4,791 will cap the Indonesian index‟s rebound. Technical indicators like

the CCI, DMI, Stochastic and MACD are negative for the index on the

daily, weekly and monthly charts. Sentiment and trend-wise, the JCI

Index too looks likely to drift down further in 2014.

Chart 7




Poorer Philippine sentiment. The Philippines Composite Index

(PCOMP) plunged from its May 2013 high of 7,403.65 on foreign fund

selling and unwinding of the USD-PHP equity and currency carry-trades

when QE taper talk emerged from the US. The index formed a low of

5,562.13 (Aug 2013) in tandem with the regional rebound.

The PCOMP Index has risen strongly since its Oct 2008 low of 1,684.75

on an Elliott Wave “Flat” rise with ample bearish divergence signals at

its “C-Wave” high of 7,403.65. Due to its daily and weekly chart




5,562 and 5,709, whilst its resistance areas at 5,961, 6,269, 6,648 and

6,829 will cap the Philippine index‟s rebound. Technical indicators like

the CCI, DMI, Stochastic and MACD are negative for the index on the

daily, weekly and monthly charts. Sentiment and trend-wise, the

PCOMP Index looks likely to drift down further in 2014.

Chart 8


Steady Vietnam. The Vietnam equity market range-traded for most of

2013. The VNINDEX Index made a high of 533.15 (Jun 2013) and then

held its key 459 to 462 support area. It subsequently rose to re-

challenge the intermediate 514 resistance area towards Dec 2013.

The VNINDEX has risen steadily since its Nov 2012 low of 372.39 on

an Elliott Wave 5 rise. Despite its daily and weekly chart uptrends, the

index‟s rise is accompanied by obvious bearish divergence signals. Its

extension Fifth Wave in the wave structure may cause upside targets of

518, 531 and 549 to be sighted in the short-to-medium term.

Key support levels on the index are located at 462, 495, 500 and 502,

while its resistances of 505, 533, 551 and 633 may cap its rise.

Technical indicators like the CCI, DMI, MACD and Oscillator are

positive for the index on the daily, weekly and monthly charts. However,

there are some bearish divergences as the index scales new highs.



Chart 9


CPOF looks firm. For the first seven months of 2013, the CPO Futures

market meandered in a quiet range between MYR2,593/tonne to

MYR2,137/tonne on high Malaysian inventories. Towards the year-end,

diminishing inventories as well as Typhoon Haiyan aided a surge of the

CPOF prices towards the year‟s high of MYR2,692/tonne.

The CPOF‟s formation is an “Inverted Head and Shoulder (H&S)”

pattern which broke above its “Neckline” of MYR2,485/tonne in early

Nov 2013. As such, we believe accumulation on weakness towards its

support levels of MYR2,485, MYR2,506, MYR2,545 and

MYR2,552/tonne would be wise. Its resistances of MYR2,582,

MYR2,611, MYR2,692 and MYR2,754/tonne would cap its rebound for

now.

The upside target for the Inverted H&S breakout is MYR2,833/tonne in

the medium term, provided the CPOF holds above the critical

MYR2,485/tonne support level. Two other target levels for the CPOF

are MYR2,786/tonne (short-term) and MYR2,942/tonne (longer-term).

Chart 10




Firmer USD/MYR rate. The USD/MYR rate gyrated from the post GE-

2013 level of 2.9500 (low) to 3.3375 (high) as foreign funds began their

exodus between May and Aug 2013.

Key support levels on the US currency are located at 2.9335, 3.0000,

3.1975 and 3.2795, whilst the resistances of 3.2813, 3.2950, 3.3000

and 3.3375 may cap its rise. Technical indicators like the DMI and

Oscillator are positive for the USD on the weekly and monthly charts.

The current neutral trend makes it difficult to predict the USD‟s direction

against the MYR. However, in view of the USD‟s firm trend against the

JPY (see below), we believe that the Greenback could firm against the

MYR too in due course towards longer-term targets of 3.3900 and

3.5600.

Chart 11


A Weaker Yen trend to 108.35. The USD/JPY rate rose from its all-

time low of 75.38 (Oct 2011). Aided by Japan‟s “Abe-nomics” policies,

the USD gained against the Yen in a big way to its recent high of

103.74 (May 2013). The USD traced out a Symmetrical Triangle against

the Yen and broke above the critical triangle resistance trend-line in

mid-Nov 2013.

The USD/JPY chart is a classical Elliott Wave thrust to 103.74 for Wave

3 followed by a Symmetrical Triangle consolidation for Wave 4. The

USD should head higher against the JPY for its upward Wave 5 move.

The upside Symmetrical Triangle breakout now targets 108.35 for the

medium term. Beyond 108.35, we may also expect the USD to attain

upside target levels like 114.20 and 119.90 in the longer run.



We are concerned that the USD/JPY strength could lead to a

competitive devaluation of regional currencies like the Korean Won as

well as the ASEAN currencies. Weaker local currencies against USD

may also imply a softer tone for regional equity markets in 2014.

Chart 12




Page 1 of 2

FIXED INCOME



Page 1 of 2

2014 MYR Fixed Income Outlook

2013 MYR rates market review

MGS curve steepened under the shadow of uncertainty. Local

government bonds market was clouded with uncertainty, started with

the general election in 1H 2013, then followed by Malaysia‟s rating

outlook downgrade by Fitch and concern over QE tapering in 2H 2013.

MGS yields rose by between 29-68bps YoY across the 3y-20y part of

the curve on a bear-steepening stance. Meanwhile, the 20y-30y spread

flattened, as expected, to 32bps from 53bps in Sep 2013.

Higher volatility in the market. The MGS market saw larger swing in

yields, with the 10y yield reaching 3.05% after the general election, and

later peaked at 4.13% in July when the MGS market was beleaguered

by sovereign credit rating downgrade risk and foreign capital outflows

from the bond market. The difference between the highest and lowest

point of 10y MGS rose to 108bps in 2013, significantly higher than the

35bps in 2012.

10y MGS saw more volatile yields in 2013

10y MGS Yield 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

High (%) 5.224 4.732 5.134 4.187 5.042 4.381 4.340 4.140 3.700 4.134

Low (%) 4.611 3.876 3.730 3.060 3.152 2.968 3.612 3.530 3.350 3.050

Difference (bps) 61 86 140 113 189 141 73 61 35 108


MYR IRS curve equally steepened as rates increased by 12-60bps

during 2013. The curve steepness as measured by the 3y-10y spread

went up to 86bps versus 63bps at the start of the year.

MGS: Yield Curve Movement IRS: Yield Curve Movement

2.90

3.40

3.90

4.40

4.90

0 5 10 15 20 25 30

MGS 02-Jan-13 30-Sep-13 18-Dec-13

3.00%

3.25%

3.50%

3.75%

4.00%

4.25%

4.50%

0 2 4 6 8 10

Interest Rates Swap 02-Jan-13 30-Sep-13 18-Dec-13

Sources: Bank Negara Malaysia, Maybank KE

*30y MGS only debuted in Sep 13 hence shorter yield curve in Jan 13


Fixed Income

Winson Phoon, ACA [email protected] (603) 20747176



Page 1 of 2

2014 sovereign bond supply

Recap of 2013 issuance. The government raised a total of MYR92.5b

from govvies. MGS-GII issuance mix stood at 56:44, with GII‟s weight

expected to edge up further in 2014. Including the debt switch, govvy

issuance totaled MYR100.5b (2012: MYR96.2b) – breaching MYR100b

for the first time and a new record high, of which MYR59.5b (MYR8b via

debt switch) is from MGS and MYR41b from GII.

Debt switch alters gross govvy supply in 2014. Between Sep and

Nov 2013, BNM conducted several switch auctions on MGS 4/14 (i.e.

MGS maturing April 2014). Prior to the debt switch, the MGS 4/14

accounted for MYR24b of 70% of the total outstanding MGS maturing in

2014. Post the debt switch (both open tender and bilateral), some

MYR8b of MGS 4/14 is redistributed, with MYR7.3b switched to

maturities beyond 2014, while the remaining MYR0.7b will mature in

2014 (see table below for details).

While we believe the motive for the debt switch was primarily to avoid

maturity bunching, it has also reduced 2014‟s refinancing need and

thus altered the year‟s gross govvy supply. Nonetheless, we expect net

govvy issuance to remain at MYR37.1b (see table at bottom left for

Malaysia‟s budget deficit and funding strategy 2014).

Expect lower govvy issuance in 2014. Because of the debt switch,

we have revised our 2014 govvy issuance forecast from MYR89.1b to

MYR84b. While it is still possible that BNM may conduct another switch

auction on the remaining MYR16b MGS 4/14, we are maintaining our

MYR84b forecast pending further announcement from BNM. We also

expect the government‟s funding strategy to remain predominantly in

local currency. At the time of writing, the 2014 auction calendar has not

been issued.

Debt switch on MGS 4/14

Auction month Repurchased Replaced with MYR'b

Sep MN 4/14 MH 10/15 2.24

Oct MN 4/14 MH 8/14 0.70

Oct MN 4/14 MI 3/18 0.49

Oct MN 4/14 MK 7/20 0.47

Nov MN 4/14 MO 9/15 4.06

TOTAL 7.96

0.70

7.26

TOTAL 7.96

Switched to beyond 2014

Switched to within 2014

Sources: Bank Negara Malaysia, Maybank KE

Malaysia: Budget Deficit and Funding Strategy 2014 Malaysia: Government Bonds Maturing in 2014

MYR'b

Budget defici t @ 3.5% of GDP 37.1

MYR bonds maturi ties 46.9

Total funding requirement 84.0

MGS and GII i ssuances 84.0

Total issuances 84.0

Maturity Stock Name MYR'b

14-Feb-14 PROFIT- BASED GII 3/2008 14.02.2014 3.5

30-Apr-14 MGS 2/2004 5.09400% 30.04.2014 16.0

31-Jul-14 PROFIT-BASED GII 4/2009 31.07.2014 4.5

15-Aug-14 MGS 2/2011 3.434% 15.08.2014 8.4

30-Sep-14 PROFIT-BASED GII 2/2011 30.09.2014 3.0

30-Sep-14 PROFIT-BASED GII 2/2011 30.09.2014 4.0

01-Oct-14 MGS 5/1999 7.3% 01.10.2014 2.0

30-Dec-14 PROFIT-BASED GII 3/2009 30.12.2014 5.5

TOTAL 46.9



Page 1 of 2

Foreign holdings of MYR bonds

QE Taper – Now it is for real. At the 17-18 Dec 2013 FOMC meeting,

the Fed announced the reduction of its monthly asset purchases by

USD10b to USD75b from USD85b beginning Jan 2014. In reaction, 10y

UST yield only edged up slightly by 5bps at the time of writing, implying

that the market had mostly priced in the event. A similar market tone

was seen in the MGS market, where the 10-year yield inched up by

3bps in response to the Fed‟s QE Taper announcement as we write.

Earlier indecision by the Fed on QE Taper unleashed volatile bond

flows in 2013. MGS market suffered its worst single-month foreign

outflow of -MYR12.3b in Jul 2013, and later recorded its best monthly

inflow of +MYR10.3b in Oct 2013. The swing came about as jitters

triggered by comments by the Fed‟s Chairman Ben Bernanke in May

2013 and the June 2013 FOMC statements on QE Taper turned into

relief as Fed decided to delay slowing down its asset purchase at its

Sep 2013 FOMC. Although now the Fed has decided to start tapering,

the future pace of asset purchases remains “data dependent”.

Therefore, we expect policy-induced volatility to stay in 2014.

Foreign demand for MGS eased on QE Taper. Between 2010 and

2012, foreign demand constantly outstripped net MGS supply with

yearly absorption rate (measured by the ratio of foreign inflows to net

MGS supply) of 169%, 158% and 182% respectively. Even on gross

basis instead of net basis, foreigners absorbed nearly 59% of the

cumulative gross MGS supply from 2010 to 2012. But the trend was

reversed in 2013 with foreigners‟ absorption rate of net MGS supply

estimated to have dropped to around 90%.

Malaysia‟s fundamentals remain in better shape relative to

regional peers, but high foreign holding is still a risk. Malaysia will

remain better positioned with sustainable current account surplus

(2013F: MYR31.8b, 2014F: MYR21.8b), relatively stable currency and

political environment as well as higher depth and liquidity in the

domestic bonds market. Macroeconomic turbulence in Indonesia and

political turmoil in Thailand could potentially redirect some regional

flows to Malaysia, for instance. That said, MGS‟s vulnerability remains

with its high foreign holdings (latest, Oct 2013: 46.7%), although

indications that we gathered from regulators and market participants

are that the composition of the foreign holdings has gradually shifted

towards “real, long-term investors”.

Expect outflows in 1H 2014, but not severe as QE Taper is already

priced in. Assuming the gradual slowing of the Fed‟s asset purchase

and a complete end to the programme by late-2014/early-2015, coupled

with orderly market reactions, we expect to see some outflows in 1H

2014. However, barring other negative events, the outflows should be

less extreme than previously seen back in Jul 2013, as the QE Taper

event has been priced in by markets in our view.

Consequently, we expect MGS foreign holdings to bottom at

around 43% of the total outstanding in 1H 2014 from the latest level

of 46.7% as at Oct 2013 on the above-mentioned assumptions

regarding the pace of QE Tapering scenario. Furthermore, liquidations

by foreigners could be offset by local buyers from social security /

pension funds and insurance funds on structural demand.



Page 1 of 2

MGS: Foreign demand waned on QE Taper; expect further decrease in absorption rate by foreigners in 2014

MGS:Foreign ownership to drop in 2014, but met with demand from social security/pension funds and insurers

48%

77%

-1%

40%

169%

158%

182%

90%

-50%

0%

50%

100%

150%

200%

-5

0

5

10

15

20

25

30

35

2006 2007 2008 2009 2010 2011 2012 2013F

MYR'b

Foreign demand

Net MGS Supply

Foreign Demand to Net Supply % (Absorption Rate)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

YTD

Foreign EPF Insurance Banks Others

Sources: Bank Negara Malaysia, CEIC, Maybank KE’s forecast

*2013 absorption rate and foreign demand forecast by Maybank KE

Sources: CEIC, Maybank KE

Foreigners‟ participation in GII to remain low. Despite the change in

GII‟s Syariah principle from Bai Al-Inah, which is not accepted by the

Middle-East investors, to the widely-accepted Murabahah, we have not

yet seen a knock-on pickup in demand for GII from foreigners. While we

still view the change to the Murabahah-based GII as a key step towards

diversifying GII‟s investor base, the lack of liquidity and familiarity

among foreign investors will continue to be a major hindrance. In 2014,

we expect foreign ownership of GII to stay at around 1-3% of the total

outstanding.

Status-quo for Private Debt Securities (PDS). Similar to GII, demand

for PDS is mostly driven by local investors, hence the equally low

foreign participation. Foreign ownership in PDS ranged between 3.5-

3.8% most of the time in 2013. In 2014, we do not anticipate any major

changes and expect the share of foreigners to fluctuate between 3%

and 5%.

MGS: Foreign Holdings Level MGS: Monthly Foreign Inflow/Outflow

0%

10%

20%

30%

40%

50%

60%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

MYR'm

Foreign Holdings of MGS % Foreign Holdings of MGS

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

MYR'm

Monthly Foreign Inflows/Outflows to MGS

Sources: Bank Negara Malaysia, Maybank KE Sources: Bank Negara Malaysia, Maybank KE



Page 1 of 2

Discount Instruments: Foreign Holdings Level Discount Instruments: Monthly Foreign Inflow/Outflow

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

MYR'm

Discount Instruments % Foreign Holdings of Discount Instruments

-20,000

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

MYR'm

Monthly Foreign Inflows/Outflows to Discount Instruments


PDS: Foreign Holdings Level PDS: Monthly Foreign Inflow/Outflow

0%

1%

2%

3%

4%

5%

6%

7%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

MYR'm

Foreign holding of PDS % Foreign Holdings of PDS

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

MYR'm

Monthly Foreign Inflows/Outflows to PDS


MGS & GII: Foreign Holdings Level MGS & GII: Monthly Foreign Inflow/Outflow

0%

5%

10%

15%

20%

25%

30%

35%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

MYR'm

MGS + GII % Foreign Holdings of MGS + GII

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

MYR'm

Monthly Foreign Inflows/Outflows to MGS + GII




Page 1 of 2

Yield curve outlook

US Treasury Outlook

US economy is on the mend. As 2013 comes to a close, data pointed

to an improving US economy and jobs market. Nonfarm payrolls data

in Nov 2013 showed a better-than-expected 203,000 (consensus:

185,000) while unemployment rate dropped to 7.0% (consensus: 7.2%).

Meanwhile, 3Q 2013 GDP was revised upwards to the annualized rate

of 3.6% (consensus: 3.1%) from the advance estimate of 2.8%

previously.

Expect QE Taper to be completed by late-2014 or early-2015 at the

earliest. While further QE reduction will be “data dependent” as

indicated by the Fed, we expect the Fed to gradually reduce its pace of

asset purchase in future FOMC meetings and come to a complete end

by late-2014 or early-2015 at the earliest. Meanwhile, the Fed Funds

target rate will likely remain low at 0.25% until at least mid-2015, as the

end of Fed‟s asset purchases is unlikely to be immediately followed by

rate hike. In fact, as long as inflation remains below its long-run target

of 2%, the Fed sees the current 0-0.25% rate to remain even if

unemployment rate drops to below 6.5%, a threshold where the Fed

had previously indicated it will maintain the 0-0.25% target rate.

Forecast of 10y UST yield: 3.25% by Dec 2014.Expect the Fed to

gradually steer the yield rise. We expect the 10y UST yield to

continue its upward trajectory on expectation of the eventual end to QE

and normalization of interest rate, underpinned by better economic

conditions, in our view. However, as we had previously seen, the Fed

is not likely to let UST yields surge significantly. Therefore, we expect

the Fed to steer the rate rise at gradual pace. Our forecast of the 10y

UST yield is as follows: 1Q14: 3.00%, 2Q14: 3.05%, 3Q14: 3.15%,

4Q14: 3.25%

Significant influence of UST on Malaysia‟s bonds market. Since

2009, MGS yields have been strongly correlated with UST (R-Square =

0.76). The correlation would likely stay strong in 2014 as long as

foreign holding of MGS remains high (latest, Oct 2013: 46.7%).

Malaysia MGS & IRS Outlook

MGS yields to see mild increase in 1H2014. We expect MGS yields

to reach the following levels in 1H 2014: 3y: 3.40%, 5y: 3.70%, 7y:

4.00%, 10y: 4.15%, 15y: 4.40%, 20y: 4.60%, 30y: 4.90%. Primary

factors that underpin our view are:

QE Taper to come to a complete end by Dec 2014. Meanwhile,

the above-mentioned projected rise in UST yields is expected to

translate into upward pressure on MGS yields.

Higher domestic inflation but OPR to maintain at 3.0%. Our

Economics Research Team expects inflation rate to rise to 3.3%-

3.7% in 2014 (2013F: 2.1%) as a result of the subsidy

rationalization measures, which is expected to continue in the

medium term to achieve the Government‟s target of reducing the

fiscal deficit-to-GDP ratio by half a percentage point a year in 2014-

2015 and a balanced budget by 2020. Nevertheless, OPR is

expected to maintain at 3.0% as higher inflation is due to cost-push



Page 1 of 2

factors (as opposed to demand pull) amid downside risk to

domestic demand.

Weaker MYR. Our FX Research Team sees QE Taper event will

result in the softening of MYR against the US Dollar to 3.27 in 1Q

2014 (end-2013E: 3.20) before recovering to 3.23 by 2Q 2014,

hence adding upward pressure to MGS yield on expectation of a

weaker MYR.

Supply impact would be marginal. Supply dynamics appear positive

to the local bond market given the expected lower total govvy issuance

(2013: MYR92.5b, 2014F: MYR84b). However, for MGS alone, net

MGS supply is in fact expected to increase partly due to lower MGS

maturities in 2014 after the debt switch (and assume a 55:45 MGS-GII

2014 issuance ratio). While details from the auction calendar are still

pending, we expect the supply impact to be marginal in 1H 2014 as

outweighed by the abovementioned three primary factors.

Regional peers‟ weakness could benefit MGS from redirection of

regional flows, although the impact may be temporary. Political

unrest in Thailand would likely send jitters to foreign investors. Recent

dissolution of parliament and early election is not viewed as a quick fix

to the issue, and overall credit negative to the country, adding risk to its

already-decelerating economies. Meanwhile, for Indonesia, the

combination of current account deficits, very high interest rate risk and

volatile currency are the on-going key concerns to bond investors, and

the upcoming parliament and presidential elections add more

uncertainty to its bond market.

Positive sovereign credit rating event, if happen, would also be

favourable for the bond market, although less likely in 1H 2014, in

our view. In fact, part of the market optimism on Malaysia‟s sovereign

credit rating was already captured following the announcement of

Budget 2014 and the subsequent upgrade in rating outlook to “positive”

from “stable” by Moody‟s. But Malaysia‟s currently mixed rating outlook

among the big three international rating agencies – “positive” by

Moody‟s; “stable” by S&P; “negative” by Fitch – implies diverging views.

Still, we believe improvement in the rating outlook by Fitch would be

bond positive as this gives extra comfort primarily to foreign investors.

We expect Fitch to review Malaysia‟s rating outlook in 2H 2014 at the

earliest as the agency would likely want to see more progress on fiscal

consolidation measures.

IRS curve to move slightly higher in 1H 2014 with the following

targets: 1y: 3.35%, 3y: 3.70%, 5y: 3.95%, 7y: 4.20% and 10y: 4.60%.

MGS: Forecast of Yield Curve IRS: Forecast of Yield Curve

2.80

3.30

3.80

4.30

4.80

5.30

0 5 10 15 20 25 30

MGS 02-Jan-13 18-Dec-13 1H2014F

2.90%

3.15%

3.40%

3.65%

3.90%

4.15%

4.40%

4.65%

0 2 4 6 8 10

Interest Rates Swap 02-Jan-13 18-Dec-13 1H2014

Sources: Bank Negara Malaysia, Maybank KE Sources: Bloomberg, Maybank KE



Page 1 of 2

Private debt securities

Primary market

Lower 2013 issuance. 2013 issuance declined to MYR75.5b as of 18

Dec 2013 (2012: MYR121.1b) due to a combination of market

uncertainties and the absence of super-size issuance from a single

name like PLUS amounting to MYR30.6b in 2012. We expect total 2013

issuance to wrap up at around MYR76-78b.

Expect 2014 total issuance in the region of MYR70b. A stable and

improving macroeconomic condition as well as still-reasonable yield

levels will remain conducive to corporate issuance. Infrastructure

related debt, despite headwinds from government‟s prudent fiscal

management, is expected to see resilient issuance for projects with

high economic multiplier impact, and also on the back of visible

pipelines. Meanwhile, issuance in the financial institution (FI) sector is

likely to remain steady with Basel-III compliant sub-debt making up bulk

of the issuance. Currently, FI sub-debt facilities that have already been

announced but not yet unissued total around MYR22b, providing good

pipeline visibility to future issuance. We expect a good realisation rate

as sub-debt is still viewed as a relatively cheap form of funding source

as compared to equity.

Gross PDS Issuance

0

10

20

30

40

50

60

70

80

90

100

110

120

130

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13E

20

14F

MYR 'b

Source: Bloomberg, Bondstream, Maybank KE

PDS issuance by ratings in 2013 PDS issuance by sectors in 2013

Others (incl. NR)

13.5%

GG28.2%

AAA12.8%

AA44.0%

A1.4%

ASSET-BACKED SECURITIES

2.6%

CONSTRUCTION AND

ENGINEERING3.5%

CONSUMER PRODUCTS

0.4%

DIVERSIFIED HOLDINGS

6.3%

FINANCIAL SERVICES

33.3%

INDUSTRIAL PRODUCTS

0.2%

INFRASTRUCTURES AND UTILITIES

36.7%

PLANTATION AND AGRICULTURE

3.6%

PROPERTY AND REAL ESTATE

8.5%

TRADING & SERVICES

2.1%

TRANSPORTATION2.7%MINING &

PETROLEUM0.1%


*YTD as at 18 Dec 2013


*YTD as at 18 Dec 2013



Page 1 of 2

PDS: A list of future potential issuances

Issuer Currency

Facility

(MYR 'b)

Issued

(MYR 'b)

Unissued

(MYR 'b) Rating

1Malaysia Development Bhd MYR 1.5

Academic Medical Centre Sdn Bhd (over 3 years) MYR N.A. 1.5* N/A

AEON Credit (Perpetual Notes) MYR 0.4 0.1 0.3 N/A

Ahmad Zaki Resources Bhd MYR 1

Al-Bayan Holdings Company (ABHC) MYR 1 0.32 0.68 AA3

Aman Sukuk MYR 10 5.03 4.97 AAA

AmBank (Tier-2 Subordinated Notes) MYR 4 AA3

Aspion Sdn Bhd MYR 0.15 0.1 0.05 AAA

Bank Rakyat (Imtiaz Sukuk II Berhad) MYR 9 0.5 8.5

BerjayaCity Sdn Bhd MYR 0.15 0.11 0.04 AAA(fg)

Binariang GSM Sdn Bhd MYR 10 AA3

Bolton Bhd MYR 0.23 0.15 0.08 AAA(fg)

Boustead Holdings (Junior IMTN) MYR 1.2 0.683 0.517

Bright Focus Berhad MYR 1.35 1.35 AA2

Bumi Armada Capital Offshore Ltd Multi 4.89

Cagamas Bhd (MTN) MYR 20 11.42 8.58 AAA

Cagamas Bhd (IMTN) MYR 20 13.57 6.43 AAA

Cerah Sama Sdn Bhd MYR 0.75 0.42 0.33 AA-

CIMB (Tier-2 subordinated debt) MYR 10 1.05 8.95 AA+

CMMT MTN Bhd (REIT) MYR 3 0.3 2.7 Not Rated

Compact Generic Sdn Bhd MYR 0.15 0.0355 0.1145 Not Rated (PP only)

Dana Infra Nasional Bhd (MRT) MYR 8 6.5 1.5 GG

Tropicana Corp Bhd (previously Dijaya) MYR 0.3 0.215 0.085 AA2(bg)

Tropicana Corp Bhd (previously Dijaya) MYR 0.2 0.145 0.055 AA3(bg)

Emery Oleochemicals Group MYR N.A. Up to 0.48* N/A

Eversendai MYR 0.5 0.25 0.25 AA3

EXIM Bank - Senior Unsecured MTN Multi 1.5 0.77 0.73 A3 (Moody's)

EXIM Bank - Sukuk Programme Multi 1 A3 (Moody's)

F&N Capital Sdn Bhd (MTN) MYR 0.75 0.3 0.45 AA1

First Resources Limited MYR 2 1.6 0.4 AA2

Gamuda Bhd IMTN (2008-2028) MYR 0.8 0.72 0.08 AA3

Gamuda Bhd IMTN (2013-2038) MYR 0.8 0.4 0.4 AA3

Genting Plantations Bhd MYR 1.5 1.5 AA2

Glenealy Plantations (M) Bhd MYR 0.5 0.12 0.38 Not Rated

Golden Assets International Finance Limited MYR 5 2.25 2.75 AA2(s)

Gulf Investment Corporation MYR 3.5 1.675 1.825 AA1

Inverfin Sdn Bhd MYR 0.185 0.16 0.025 AAA

Jelas Puri Sdn Bhd MYR 0.6 0.5 0.1 Not Rated (PP only)

KDU University College MYR 0.35 0.039 0.311 N/A

Khazanah MYR 20 18.7 1.3 Not Rated (PP only)

Khazanah USD 0.5-1

Khazanah (Danga Capital) Multi 10 7.345 2.655 AAA

KMCOB Capital Berhad MYR 0.32 AAA(fg)

KPJ Healthcare MYR 1 0.5* N/A

Malaysia Airports Holdings Bhd (MAHB) MYR 2.5 1.5 1 GG

Malaysia Airports Holdings Bhd (MAHB) MYR 2.5 0.5 2 AAA/AA2

Maybank (Sub debt) MYR

MBSB (Jana Kapital Sdn Bhd) MYR 3 0.495 AA1

Media Prima Bhd MYR 0.5 0.3 0.2 AA2

MNRB Holdings Bhd MYR 0.15 0.12 0.03 Not Rated (PP only)

Mudajaya Corporation Berhad (CP/MTN) MYR 1 AA3

Noble Group Ltd Multi 3 0.9 2.1 AA2

NongHyup Bank (w holly ow ned by NACF) MYR 3.3 0.86 2.44 AAA

NU Sentral MYR 0.6 0.508 0.092 Not Rated (PP only)

ORIX Leasing MYR 0.5 0.2 0.3 A1

* Maybank-IB’s estimates

Source: Various newspapers, online news articles, market talk



Page 1 of 2

PDS: A list of future potential issuances (continued)

Issuer Currency

Facility

(MYR 'b)

Issued

(MYR 'b)

Unissued

(MYR 'b) Rating

Penerbangan Malaysia Bhd MYR 2.2 2 0.2 GG

Pengurusan Air SPV Bhd (PASB) MYR 20 9.85 10.15 GG

Pengurusan Air SPV Bhd (PASB) MYR 20 1.78 18.22 AAA

Perbadanan Kemajuan Negeri Selangor (IMTN) MYR 0.7 0.3 0.4 AA3

Petronas Dagangan MYR 2 2 AAA

Petronas Gas Bhd MYR Up to 5b

PLUS MYR 23.35 19.6 3.75 AAA

Poh Kong Holdings Bhd MYR 0.15 0.13 0.02 AAA(fg)

Prasarana MYR GG

ProHAWK MYR 0.9 0.2 0.7 AA2

Public Bank (Tier-2 Subordinated MTN) MYR 10 1.95 8.05 AA1

Putrajaya MYR 3 1.6 1.4 AAA

Putrajaya Management Sdn Bhd (IMTN) MYR 0.37 AAA

Quill Retail Malls Sdn Bhd - Tranche A MYR 0.26 0.2 0.06 AAA(fg)

Quill Retail Malls Sdn Bhd - Tranche B MYR 0.26 0.2 0.06 AAA(bg)

Quill Retail Malls Sdn Bhd - Tranche C MYR 0.18 0.135 0.045 AAA(bg)

Quill Retail Malls Sdn Bhd - Tranche D MYR 0.15 0.115 0.035 Not Rated

RHB Investment Bank (Subordinated MTN) Multi 1 AA2/AA3

Riverson Corporation MYR 0.2 0.15 0.05 AAA(fg)

Sabah Development Bank (MTN) MYR 1 0.66 0.34 AA1

Sabah Development Bank (CP/MTN) MYR 1 0.87 0.13 AA1

Sabah Development Bank (CP/MTN) MYR 1 0.83 0.17 AA1

Sabah Development Bank (CP/MTN) MYR 1.5 0.5 1 AA1

Saraw ak Energy Berhad MYR 15 5.5 9.5 AA1

Scomi Bhd MYR N.A. 0.11 N/A

Segi Astana Sdn Bhd MYR 0.47 0.44 0.03 AAA(fg)

Silver Sparrow Sdn Bhd MYR 0.22 0.12 0.1 AAA(bg)

Silver Sparrow Sdn Bhd MYR 0.295 0.165 0.13 AAA(fg)

Sime Darby MYR 4.5 3.2 1.3 AAA

Sime Darby USD 1.5 0.8 0.7

SME Bank MYR 3 0.5 2.5 GG

Societe Generale (Sukuk) MYR 1 1

Star Publication MYR 0.75 0.2 0.55 AA1

Sunw ay Berhad (CP/MTN) MYR 2 2 A2

Tanjung Bin Pow er MYR 4.5 4.195 0.305 AA2

Tanjung Offshore Bhd MYR 0.5 0.5

Telekom Malaysia Berhad (ICP/IMTN) MYR 3 0.2 2.8 AAA

TH Plantations MYR 1 0.71 0.29 Not Rated (PP only)

TNB MYR 3.7

TNB Northern Energy MYR 2 1.625 0.375 AAA

TNB Western Energy Berhad MYR 4 AAA

Turus Pesaw at Sdn Bhd MYR 5.311 5.31 0.001 GG

UEM Sunrise MYR 2 1.3 0.7 AA-

UMW Holdings Bhd MYR 2 0.44 1.56 AAA

UMW Holdings Bhd MYR 0.3 0.3 AAA

Westport Malaysia Sdn Bhd MYR 2 0.9 1.1 AA+

YTL Pow er International Bhd MYR 5 3.77 1.23 AA1

* Maybank-IB’s estimates

Source: Various newspapers, online news articles, market talk



Page 1 of 2

Credit conditions

Credit environment improved slightly in 4Q13, with 12 upgrades and

only 1 downgrade. Nonetheless, 9 upgrades were related to AMMB

Group which had already been put on positive outlook in 1Q13, while

another upgrade on Tropicana Corp‟s Tranche 2 debt guaranteed by

AmBank was also linked. Adjusting for these AMMB Group related

upgrades, credit environment in 4Q13 was generally stable.

The rest of the 2 upgrades were from Tele-Flow‟s MYR10m junior IMTN

and Mukah Power‟s MYR655m senior sukuk, while LEKAS‟s MYR633m

senior sukuk was downgraded. No defaults were reported in the

quarter.

Outlook revisions turned slightly downbeat. 4Q13 saw 2 outlook

decreases, 1 outlook decrease and 1 developing. Both DHTI Capital‟s

senior and junior debts outlook were revised down from stable to

negative, while SapuraKencana‟s MYR700m sukuk is currently on

watch with developing outlook pending the proposed acquisition of

Newfield‟s Malaysian oil & gas assets.

PDS: Rating upgrades vs downgrades PDS: Rating outlook revisions

-20

-15

-10

-5

0

5

10

15

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

Defaults Downgrades Upgrades

-15

-10

-5

0

5

10

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

Outlook Decrease Outlook Increase

Source: RAM, MARC, Maybank KE

* For years 2010-2011, defaults were classified as downgrades

Source: RAM, MARC, Maybank KE

PDS: Details of upgrades vs downgrades PDS: Details of outlook revision

YTD Rating Activities Upgrade Downgrade Default

Number of issues (including ABS) 17 9 2

Total issue size (MYR'm) 23,079 29,259 500

Average issue size (MYR'm) 1,358 3,251 250

Number of ABS - - -

ABS issue size (MYR'm) - - -

Average issue size (excl. ABS) (MYR'm) 1,358 3,251 250

* Ratings of OSK Investment Bank were upgraded, to reflect the credit standing of RHB investment

Bank, after all its assets and liabilities were transferred to the latter.

* Different classes of Senai-Desaru and MRCB Southern Link Bhd bonds were treated separately to

reflect the difference in ratings.

* Senai-Desaru, Kinsteel and Perwaja were downgraded more than once in the year, and counted as

one downgrade/default.

* UMW's Islamic CP/MTN downgrade by MARC excluded as rating was withdrawn and subsequently

rated AAA by RAM

* AMMB group's outlook revision (from Stable to Positive) involved 9 issues with total issue size of

MYR20b. The amount excludes the MYR500m Non-cumulative Perpetual Capital Securities issued by

AmBank Bhd, which was stapled to the Subordinated Notes issued by AmPremier, to avoid double

counting.

*Upgrade of Tropicana Corp's Tranche 2 debt BG by AmBank therefore reflects AMMB Group's

upgrade

YTD Outlook Revision Activities Increase Decrease Developing

Number of issues (including ABS) 15 6 1

Total issue size (MYR'm) 5,779 4,963 700

Average issue size (MYR'm) 385 827 700

Number of ABS 6 - -

ABS issue size (MYR'm) 465 - -

Average issue size (excl. ABS) (MYR'm) 590 827 700

* Different classes of ABS Logistics and Menara ABS and different issuances by MISC

were treated separately to reflect the difference in ratings.

* A negative watch placed on KNM Grop's rated facilities were excluded after the

ratings were withdrawn subsequently.

*Outlook changes on Maju Expressway was excluded as negative watch subsequently

removed

*9 issues of AMMB group related outlook increase in 1Q13 excluded as now reflected

by rating upgrade in 4Q13

*Dijaya Corp (now Tropicana Corp) outlook increase in 1Q13 excluded as now

reflected by rating upgrade in 4Q13

Source: RAM, MARC, Maybank KE Source: RAM, MARC, Maybank KE



Page 1 of 2

RESEARCH UNIVERSE

23 December 2013 23 December 2013 of 132

2014 Outlook & Lookouts

Maybank KE Equity Research Stock Universe

Ticker

Company FYE Price Market Target Recom Core Net Profit EPS CAGRCAGR

PER PER PER ROE Div Yld PBV Price Chg 17-Dec Cap Price CY12A CY13F CY14F CY12A CY13F CY14F 12-14 CY12A CY13F CY14F CY13F CY14F CY12A YTD (MYR m) (MYR) (MYR

m) (MYR

m) (MYR

m) (sen) (sen) (sen) (%) (x) (x) (x) (%) (%) (x) (%)

Autos

BAUTO MK Berjaya Auto * 4 1.67 1,340.7 2.00 Buy 46.4 87.3 122.6 6.4 11.1 15.3 54.0 26.0 15.1 10.9 35.1 2.8 8.5 NA

MBM MK MBM Resources * 12 3.50 1,367.5 3.80 Hold 131.2 142.9 148.6 33.6 36.6 38.0 6.3 10.4 9.6 9.2 9.8 2.2 1.0 9.0

TCM MK Tan Chong # 12 5.99 3,910.3 7.50 Buy 158.0 306.0 350.0 24.2 46.9 53.6 48.8 24.8 12.8 11.2 14.3 1.5 2.0 29.4

UMWH MK UMW Hldgs * 12 12.32 14,393.4 13.20 Hold 951.1 878.2 1,020.1 81.4 75.2 87.3 3.6 15.1 16.4 14.1 11.2 3.5 3.1 3.2

Banking

MAY MK Maybank 6 10.02 88,787.7 NR NR 6,054.9 6,700.2 7,402.0 73.3 76.0 80.5 4.8 13.7 13.2 12.4 13.2 5.6 1.9 8.9

AMM MK AMMB Holdings 3 7.34 22,124.1 8.60 Buy 1,597.4 1,762.9 1,949.1 53.4 58.6 64.7 10.0 13.7 12.5 11.3 13.7 3.6 1.9 7.9

BIMB MK BIMB Holdings * 12 4.30 6,422.1 4.80 Buy 282.3 299.9 335.4 26.5 28.1 31.4 9.0 16.3 15.3 13.7 13.8 2.5 2.1 59.5

CIMB MK CIMB 12 7.72 59,670.5 8.00 Hold 4,344.8 4,173.5 4,641.0 58.5 56.2 62.4 3.3 13.2 13.7 12.4 13.4 3.2 2.0 1.2

HLBK MK Hong Leong Bank 6 14.24 25,615.0 16.40 Buy 1,856.8 1,964.2 2,161.7 105.1 110.5 120.2 6.9 13.5 12.9 11.8 14.3 2.7 2.1 (3.7)

HLFG MK HL Financial 6 15.42 16,233.7 17.30 Buy 1,360.7 1,505.9 1,586.9 130.9 144.8 152.6 8.0 11.8 10.6 10.1 14.2 2.5 1.7 16.8

PBK MK Public Bank 12 18.58 65,069.5 18.60 Hold 3,869.3 4,113.6 4,403.5 110.5 117.5 125.7 6.7 16.8 15.8 14.8 21.6 3.0 3.6 14.1

RHBC MK RHB Capital 12 7.89 20,095.1 7.90 Hold 1,784.7 1,791.5 1,983.1 81.9 70.8 78.3 -2.2 9.6 11.1 10.1 11.6 3.1 1.3 2.6

Building Materials

AJR MK Ann Joo # 12 1.05 525.7 0.93 Sell -19.1 15.7 28.6 -3.7 3.0 5.5 n.a. n.a. 35.0 19.1 1.5 0.5 0.5 (20.5)

LMC MK Lafarge * 12 8.98 7,630.3 9.60 Hold 349.0 362.4 383.4 41.1 42.7 45.1 4.8 21.8 21.0 19.9 11.5 4.8 2.4 (6.7)

Construction / Infra

EVSD MK Eversendai * 12 1.11 859.1 1.50 Buy 115.4 59.7 115.0 14.9 7.7 14.9 0.0 7.4 14.4 7.4 7.2 3.3 0.6 (16.5)

GAM MK Gamuda * 7 4.64 10,633.8 5.30 Buy 544.8 592.6 686.7 26.0 27.7 31.8 10.7 17.9 16.8 14.6 12.1 2.8 2.3 27.5

HSL MK HSL * 12 1.85 1,018.4 2.20 Buy 90.7 88.3 98.1 16.4 15.9 17.6 3.6 11.3 11.6 10.5 16.0 2.3 2.2 23.3

IJM MK IJM Corp * 3 5.92 8,358.1 6.75 Buy 426.5 525.6 583.9 31.0 38.0 42.2 16.8 19.1 15.6 14.0 8.9 2.2 1.5 18.9

LTK MK Litrak * 3 4.26 2,194.5 4.45 Hold 118.9 133.1 142.2 23.4 26.1 27.8 8.9 18.2 16.3 15.3 28.0 4.0 5.2 0.2

WCT MK WCT * 12 2.16 2,359.7 3.00 Buy 167.1 208.6 208.2 36.9 18.2 19.4 -27.5 5.9 11.9 11.1 9.7 3.0 1.1 (8.1)

CMS MK Cahya Mata Swak * 12 6.39 2,164.5 7.20 Buy 135.7 159.9 195.5 40.8 48.1 58.8 20.0 15.7 13.3 10.9 10.0 2.8 1.4 91.9

KICB MK Kimlun Corp * 12 1.86 447.2 2.38 Buy 49.4 32.1 57.0 20.7 13.4 23.7 7.0 9.0 13.9 7.8 10.9 3.2 1.6 33.8

Consumer

AEON MK AEON Co * 12 14.40 5,054.4 15.00 Hold 212.8 256.5 277.1 60.6 73.1 78.9 14.1 23.8 19.7 18.3 15.6 1.6 3.4 2.0

ROTH MK BAT (M) 12 64.58 18,439.5 57.00 Sell 797.7 858.8 946.6 279.4 300.8 331.5 8.9 23.1 21.5 19.5 150.5 4.6 38.0 4.2

CAB MK Carlsberg Brewery 12 12.00 3,691.5 11.70 Hold 191.6 165.1 171.2 62.7 54.0 56.0 -5.5 19.1 22.2 21.4 66.6 4.7 12.8 (4.2)

GUIN MK Guinness 6 15.62 4,718.8 14.40 Sell 212.5 216.1 219.8 70.4 71.5 72.8 1.7 22.2 21.8 21.5 59.1 4.7 6.3 (5.9)

RJR MK JTI 12 6.47 1,692.1 7.20 Buy 113.5 121.4 132.2 44.5 46.4 50.5 6.5 14.5 13.9 12.8 33.6 3.4 4.6 (1.2)

PAD MK Padini Holdings * 6 1.76 1,157.9 1.87 Buy 90.4 90.6 102.8 13.8 13.8 15.7 6.7 12.8 12.8 11.2 23.8 6.4 3.2 (4.9)

NESZ MK Nestle * 12 67.92 15,927.2 62.00 Hold 505.4 551.5 610.1 215.5 235.2 260.2 9.9 31.5 28.9 26.1 70.8 3.6 21.2 8.1

QLG MK QL Resources * 3 4.05 3,369.7 4.00 Hold 131.7 150.9 177.6 15.8 18.1 21.4 16.3 25.6 22.3 18.9 15.4 1.2 3.9 30.6

MSM MK MSM Malaysia Holdings

* 12 4.93 3,465.7 5.30 Hold 201.4 256.7 266.0 28.7 36.5 37.8 14.8 17.2 13.5 13.0 14.0 5.0 3.2 3.8

OTB MK Oldtown * 3 2.43 881.1 3.34 Buy 53.2 57.8 68.1 14.6 15.9 18.8 13.3 16.6 15.3 13.0 16.6 4.2 2.7 7.5

IHH MK IHH * 12 3.91 31,807.7 3.35 Sell 470.4 661.8 752.3 5.8 8.1 9.3 26.6 67.4 48.3 42.0 3.7 0.6 1.8 16.0

* Shariah compliant (under Securities Commission’s new Shariah compliant list) # No longer Shariah compliant; Source: Maybank KE



Maybank KE Equity Research Stock Universe (continued)

Ticker Company FYE Price Market Target Recom Core Net Profit EPS CAGRCAGR


m) (MYR

m) (MYR

m) (sen) (sen) (sen) (%) (x) (x) (x) (%) (%) (x) (%)

Gaming

BST MK BToto 4 3.97 5,292.0 4.00 Hold 383.5 372.6 378.7 28.8 27.8 28.2 -1.1 13.8 14.3 14.1 59.1 5.4 9.8 (8.8)

MAG MK Magnum 12 3.10 4,424.7 3.12 Hold 300.5 335.0 301.3 21.1 23.5 21.1 0.0 14.7 13.2 14.7 9.6 5.5 1.3 (11.2)

GENT MK Genting Bhd 12 10.24 37,832.4 10.55 Hold 2,326.6 2,007.3 2,111.7 63.0 54.3 57.2 -4.7 16.3 18.9 17.9 9.0 0.6 1.7 11.3

GENM MK Genting Msia 12 4.39 24,897.6 4.80 Buy 1,605.0 1,831.5 1,622.1 28.3 32.3 28.6 0.5 15.5 13.6 15.3 12.6 1.5 1.9 23.7

Manufacturing

HART MK Hartalega Hldgs * 3 7.25 5,400.8 7.10 Hold 226.4 257.5 293.6 31.0 34.6 36.9 9.1 23.4 21.0 19.6 29.4 2.4 7.3 52.6

KRI MK Kossan Rubber * 12 4.02 2,570.7 4.50 Buy 104.5 135.5 168.6 16.3 21.2 26.4 27.3 24.7 19.0 15.2 19.4 3.0 4.2 139.3

TOPG MK Top Glove * 8 5.80 3,599.0 6.20 Hold 201.9 198.3 225.1 32.6 32.0 36.3 5.5 17.8 18.1 16.0 14.6 3.1 2.8 3.0

Media

ASTRO MK Astro Malaysia 1 3.02 15,698.9 3.48 Buy 436.2 461.7 589.5 8.3 8.8 11.3 16.4 36.2 34.2 26.8 82.8 2.8 30.5 0.7

MCIL MK MCIL # 3 1.00 1,687.2 1.01 Hold 177.8 166.7 170.4 10.5 9.9 10.1 -2.0 9.5 10.1 9.9 23.7 5.1 2.1 (10.7)

MPR MK Media Prima 12 2.58 2,839.2 2.40 Sell 209.0 210.9 214.4 18.3 18.2 18.5 0.5 14.1 14.2 13.9 13.0 5.1 1.8 10.3

STAR MK Star * 12 2.38 1,756.5 2.65 Hold 146.8 144.2 153.6 19.9 19.5 20.8 2.2 12.0 12.2 11.4 12.3 6.3 1.5 (7.8)

Non-Banking Finance

BURSA MK Bursa Malaysia 12 8.03 4,276.9 8.00 Hold 151.5 181.2 194.9 28.5 34.1 36.6 13.3 28.2 23.5 21.9 23.2 4.4 4.9 29.1

MPHB MK MPHB Capital 12 1.71 1,222.7 2.12 Buy 63.4 60.2 65.3 8.9 8.4 9.1 1.1 19.2 20.4 18.8 5.6 1.1 1.2 NA

Oil & Gas

AMRB MK Alam Maritim * 12 1.51 1,210.0 1.90 Buy 58.3 89.2 98.1 7.4 11.1 12.2 28.4 20.4 13.6 12.4 14.6 0.2 2.3 122.1

DLG MK Dialog * 6 3.25 7,891.5 3.05 Hold 185.2 231.5 288.1 7.9 9.7 12.1 23.5 41.1 33.5 27.0 16.0 1.5 6.0 35.4

PETR MK Perdana Petro * 12 1.40 1,018.1 2.80 Buy 22.5 53.5 89.5 4.6 10.8 18.1 98.4 30.4 13.0 7.7 10.4 0.0 1.5 81.6

PTG MK Petronas Gas * 12 23.20 45,906.6 20.20 Hold 1,424.4 2,101.5 1,691.5 71.8 106.2 85.5 9.1 32.3 21.8 27.1 20.4 2.2 5.0 18.9

WSC MK Wah Seong * 12 1.69 1,301.3 1.50 Hold 52.5 42.3 83.4 6.8 5.5 10.8 26.0 24.9 30.7 15.6 4.2 4.4 1.1 3.4

MMHE MK MMHE * 12 3.68 5,888.0 4.20 Buy 276.0 171.3 179.7 17.3 10.7 11.2 -19.5 21.3 34.4 32.9 6.8 1.4 2.3 (16.4)

BAB MK Bumi Armada # 12 3.97 11,638.4 4.40 Buy 394.9 467.3 534.4 13.5 16.0 18.2 16.1 29.4 24.8 21.8 11.3 0.0 3.1 (0.3)

BARAKAH MK Barakah * 9 1.52 948.9 1.85 Buy 35.2 47.6 78.8 4.1 5.6 9.1 50.1 37.5 27.4 16.7 25.1 0.0 6.7 NA

PPT MK Perisal Petroleum * 12 1.50 1,626.2 1.25 Sell 98.6 82.9 96.4 11.6 8.6 8.9 -12.4 12.9 17.4 16.9 14.1 0.0 2.6 38.9

SAKP MK SapuraKencana * 1 4.70 28,163.1 5.30 Buy 491.5 862.8 1,210.1 9.8 15.2 20.4 43.9 47.8 30.9 23.1 10.6 0.0 3.8 49.2

GMB MK Gas Malaysia * 12 3.88 4,981.9 3.90 Hold 157.9 177.7 196.3 12.4 13.8 15.3 11.1 31.3 28.1 25.4 17.4 3.9 4.9 51.0

Plantation

GENP MK Genting Plantation * 12 11.36 8,619.4 10.90 Hold 327.1 277.2 369.0 43.1 36.5 48.6 6.2 26.4 31.1 23.4 7.6 0.9 2.5 26.2

IOI MK IOI Corp * 6 5.81 37,133.2 5.42 Hold 1,743.4 1,732.5 1,835.0 27.1 26.9 28.5 2.6 21.4 21.6 20.4 12.3 2.6 3.0 13.9

KLK MK KL Kepong * 9 24.90 26,517.6 19.90 Sell 1,029.6 939.7 1,091.9 96.5 88.0 102.3 3.0 25.8 28.3 24.3 12.3 2.5 3.9 3.7

SIME MK Sime Darby * 6 9.56 57,450.5 9.80 Hold 3,772.5 3,222.0 3,258.0 62.8 53.6 54.2 -7.1 15.2 17.8 17.6 11.6 3.1 2.2 0.4

FGV MK Felda Global Vntrs * 12 4.50 16,416.7 4.70 Buy 702.1 376.4 665.4 19.2 10.3 18.2 -2.6 23.4 43.7 24.7 5.9 2.0 2.7 (2.6)

SOP MK Sarawak Oil Palms * 12 6.60 2,892.1 6.30 Hold 159.1 106.4 183.6 36.5 24.4 42.1 7.4 18.1 27.0 15.7 8.6 0.8 2.1 14.6

TSH MK TSH Resources * 12 3.05 2,735.7 3.40 Buy 76.7 102.0 142.7 8.9 11.5 15.8 33.4 34.3 26.5 19.3 9.3 1.5 3.0 40.6

THP MK TH Plantations * 12 1.89 1,661.4 1.28 Sell 84.7 43.5 79.9 13.3 5.0 9.1 -17.3 14.2 37.8 20.8 3.8 2.4 1.5 14.0

TAH MK Ta Ann * 12 4.13 1,530.3 4.50 Buy 58.3 68.5 111.2 15.7 18.5 30.0 38.2 26.3 22.3 13.8 6.8 3.2 1.7 18.0




Maybank KE Equity Research Stock Universe (continued)

Ticker Company FYE Price Market Target Recommm

m

Core Net Profit EPS CAGRCAGR


m) (MYR

m) (MYR

m) (sen) (sen) (sen) (%) (x) (x) (x) (%) (%) (x) (%)

Petrochemicals

PCHEM MK Petronas Chem * 12 6.83 54,640.0 6.70 Hold 3,662.0 4,202.3 4,178.6 45.8 52.5 52.2 6.8 14.9 13.0 13.1 19.1 4.0 2.0 6.7

Property

AXRB MK Axis REIT * 12 2.99 1,379.1 2.71 Hold 79.7 88.7 90.5 17.4 19.4 19.8 6.7 17.2 15.4 15.1 8.9 6.5 1.4 (4.5)

KLCC MK KLCC Prop * 12 5.76 10,398.7 6.26 Hold 355.0 514.3 620.8 27.4 28.5 34.4 12.0 21.0 20.2 16.7 4.9 5.5 0.9 (8.6)

MSGB MK Mah Sing * 12 2.23 3,096.0 2.45 Hold 228.5 287.1 349.6 20.3 23.3 26.0 13.2 11.0 9.6 8.6 15.8 4.7 2.0 43.0

QUIL MK Quill Capita 12 1.18 460.4 1.16 Hold 34.5 34.9 36.4 8.8 8.9 9.3 2.8 13.4 13.3 12.7 6.6 7.5 0.9 (4.1)

SPSB MK SP Setia # 10 3.00 7,376.1 3.38 Hold 380.4 436.4 552.6 18.7 18.4 22.5 9.6 16.0 16.3 13.4 7.8 4.5 1.4 (2.9)

ULHB MK UEM Sunrise * 12 2.32 10,090.9 2.13 Sell 448.4 583.5 464.1 10.3 13.5 10.7 1.9 22.5 17.2 21.7 10.4 1.5 1.9 10.5

SWB MK Sunway Berhad * 12 2.64 4,550.1 2.56 Sell 350.6 407.2 406.0 27.1 28.4 23.6 -6.7 9.7 9.3 11.2 8.6 1.8 1.0 27.7

GLMC MK Glomac * 4 1.12 814.0 1.27 Buy 94.1 106.9 122.7 13.6 14.7 16.9 11.5 8.2 7.6 6.6 12.7 4.5 1.0 34.9

CMMT MK CMMT 12 1.34 2,375.6 1.76 Buy 137.1 142.7 153.0 7.8 8.0 8.5 4.4 17.2 16.8 15.8 6.7 6.9 1.2 (25.6)

SREIT MK Sunway REIT 6 1.24 3,625.4 1.24 Hold 204.7 218.9 229.5 7.3 7.5 7.9 3.7 17.0 16.5 15.8 6.2 6.6 1.1 (20.0)

IGBREIT MK IGB REIT 12 1.18 4,038.7 1.22 Hold 159.9 207.7 215.0 5.7 6.1 6.3 4.9 20.6 19.3 18.7 5.8 5.8 1.2 (11.3)

PREIT MK Pavilion REIT 12 1.27 3,822.3 1.53 Buy 194.6 209.8 226.6 6.5 7.0 7.5 7.4 19.5 18.1 16.9 6.4 6.2 1.2 (8.6)

Telecommunications

DIGI MK DiGi.Com * 12 4.92 38,253.0 4.95 Hold 1,205.7 1,594.2 1,794.6 15.5 20.5 23.1 22.1 31.7 24.0 21.3 610.1 4.7 164.0 (7.0)

T MK Telekom * 12 5.51 19,711.5 5.50 Hold 880.9 861.5 860.6 24.6 24.1 24.1 -1.0 22.4 22.9 22.9 12.3 3.9 2.9 (8.8)

AXIATA MK Axiata * 12 6.87 58,670.7 7.20 Hold 2,738.5 2,833.0 2,956.9 32.2 33.3 34.8 4.0 21.3 20.6 19.7 13.8 4.3 2.9 4.2

MAXIS MK Maxis * 12 7.20 54,024.0 7.20 Hold 1,856.0 2,042.2 2,066.4 24.7 27.2 27.6 5.7 29.1 26.5 26.1 33.5 5.6 7.7 8.3

TDC MK Time dotCom * 12 3.88 2,223.6 4.40 Buy 110.4 107.7 118.3 20.2 18.8 20.6 1.0 19.2 20.6 18.8 5.8 0.0 0.9 29.6

Transport

AIRA MK AirAsia # 12 2.35 6,535.4 2.80 Buy 817.0 744.1 848.4 29.4 26.8 30.5 1.9 8.0 8.8 7.7 12.9 3.4 1.2 (14.2)

AAX MK AirAsia X * 12 1.00 2,370.4 1.30 Buy -1.1 116.3 203.7 0.0 4.9 8.6 NA NA 20.4 11.6 7.8 0.0 4.0 NA

MAHB MK MAHB 12 8.89 10,956.4 8.20 Hold 442.2 450.3 430.8 37.3 36.5 34.9 -3.3 23.8 24.4 25.5 8.5 1.9 2.5 70.6

MAS MK MAS * 12 0.31 5,096.8 0.29 Hold -523.5 -1,094.7 -260.5 -15.7 -6.6 -1.6 n.a. n.a. n.a. n.a. -25.6 0.0 0.5 (8.7)

WPRTS MK Westports * 12 2.54 8,661.4 2.70 Buy 403.3 454.2 482.4 11.8 13.3 14.1 9.3 21.5 19.1 18.0 28.3 4.2 5.8 NA

NCB MK NCB Holdings * 12 3.55 1,669.4 4.84 Buy 168.3 93.3 155.8 35.8 19.8 33.1 -3.8 9.9 17.9 10.7 6.3 5.1 1.2 (19.5)

MISC MK MISC * 12 5.42 24,193.8 5.70 Buy 1,147.2 1,345.0 1,580.8 25.7 30.3 35.4 17.4 21.1 17.9 15.3 5.8 0.0 1.2 26.0

Utilities

TNB MK Tenaga * 8 11.02 62,192.6 12.50 Buy 4,303.8 4,306.1 5,100.5 78.3 76.9 90.4 7.5 14.1 14.3 12.2 11.9 2.8 1.7 58.8

YTLP MK YTL Power # 6 1.87 12,332.3 1.84 Hold 1,105.2 1,038.5 1,054.9 15.3 14.6 14.9 -1.3 12.3 12.8 12.6 9.0 0.5 1.4 19.9




Page 1 of 2

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Page 1 of 2

APPENDIX I: TERMS FOR PROVISION OF REPORT, DISCLAIMERS AND DISCLOSURES

DISCLAIMERS

This research report is prepared for general circulation and for information purposes only and under no circumstances should it be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that values of such securities, if any, may fluctuate and that each security‟s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from the relevant jurisdiction‟s stock exchange in the equity analysis. Accordingly, investors‟ returns may be less than the original sum invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report.

The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Berhad, its subsidiary and affiliates (collectively, “MKE”) and consequently no representation is made as to the accuracy or completeness of this report by MKE and it should not be relied upon as such. Accordingly, MKE and its officers, directors, associates, connected parties and/or employees (collectively, “Representatives”) shall not be liable for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice.

This report may contain forward looking statements which are often but not always identified by the use of words such as “anticipate”, “believe”, “estimate”, “intend”, “plan”, “expect”, “forecast”, “predict” and “project” and statements that an event or result “may”, “will”, “can”, “should”, “could” or “might” occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward-looking statements. MKE expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events.

MKE and its officers, directors and employees, including persons involved in the preparation or issuance of this report, may, to the extent permitted by law, from time to time participate or invest in financing transactions with the issuer(s) of the securities mentioned in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. MKE may, to the extent permitted by law, act upon or use the information presented herein, or the research or analysis on which they are based, before the material is published. One or more directors, officers and/or employees of MKE may be a director of the issuers of the securities mentioned in this report.

This report is prepared for the use of MKE‟s clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of MKE and MKE and its Representatives accepts no liability whatsoever for the actions of third parties in this respect.

This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. This report is for distribution only under such circumstances as may be permitted by applicable law. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Without prejudice to the foregoing, the reader is to note that additional disclaimers, warnings or qualifications may apply based on geographical location of the person or entity receiving this report.

Malaysia

Opinions or recommendations contained herein are in the form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis.

Singapore

This report has been produced as of the date hereof and the information herein may be subject to change. Maybank Kim Eng Research Pte. Ltd. (“Maybank KERPL”) in Singapore has no obligation to update such information for any recipient. For distribution in Singapore, recipients of this report are to contact Maybank KERPL in Singapore in respect of any matters arising from, or in connection with, this report. If the recipient of this report is not an accredited investor, expert investor or institutional investor (as defined under Section 4A of the Singapore Securities and Futures Act), Maybank KERPL shall be legally liable for the contents of this report, with such liability being limited to the extent (if any) as permitted by law.

Thailand

The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information.The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey may be changed after that date. Maybank Kim Eng Securities (Thailand) Public Company Limited (“MBKET”) does not confirm nor certify the accuracy of such survey result.

Except as specifically permitted, no part of this presentation may be reproduced or distributed in any manner without the prior written permission of MBKET. MBKET accepts no liability whatsoever for the actions of third parties in this respect.

US

This research report prepared by MKE is distributed in the United States (“US”) to Major US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Maybank Kim Eng Securities USA Inc (“Maybank KESUSA”), a broker-dealer registered in the US (registered under Section 15 of the Securities Exchange Act of 1934, as amended). All responsibility for the distribution of this report by Maybank KESUSA in the US shall be borne by Maybank KESUSA. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if MKE is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Maybank KESUSA is permitted to provide research material concerning investments to you under relevant legislation and regulations.

UK

This document is being distributed by Maybank Kim Eng Securities (London) Ltd (“Maybank KESL”) which is authorized and regulated, by the Financial Services Authority and is for Informational Purposes only. This document is not intended for distribution to anyone defined as a Retail Client under the Financial Services and Markets Act 2000 within the UK. Any inclusion of a third party link is for the recipients convenience only, and that the firm does not take any responsibility for its comments or accuracy, and that access to such links is at the individuals own risk. Nothing in this report should be considered as constituting legal, accounting or tax advice, and that for accurate guidance recipients should consult with their own independent tax advisers.



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DISCLOSURES

Legal Entities Disclosures

Malaysia: This report is issued and distributed in Malaysia by Maybank Investment Bank Berhad (15938-H) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets and Services License issued by the Securities Commission in Malaysia. Singapore: This material is issued and distributed in Singapore by Maybank KERPL (Co. Reg No 197201256N) which is regulated by the Monetary Authority of Singapore. Indonesia: PT Kim Eng Securities (“PTKES”) (Reg. No. KEP-251/PM/1992) is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Thailand: MBKET (Reg. No.0107545000314) is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission.Philippines:MATRKES (Reg. No.01-2004-00019) is a member of the Philippines Stock Exchange and is regulated by the Securities and Exchange Commission. Vietnam: Kim Eng Vietnam Securities Company (“KEVS”) (License Number: 71/UBCK-GP) is licensed under the StateSecuritiesCommission of Vietnam.Hong Kong: KESHK (Central Entity No AAD284) is regulated by the Securities and Futures Commission. India: Kim Eng Securities India Private Limited (“KESI”) is a participant of the National Stock Exchange of India Limited (Reg No: INF/INB 231452435) and the Bombay Stock Exchange (Reg. No. INF/INB 011452431) and is regulated by Securities and Exchange Board of India. KESI is also registered with SEBI as Category 1 Merchant Banker (Reg. No. INM 000011708) US: Maybank KESUSA is a member of/ and is authorized and regulated by the FINRA – Broker ID 27861. UK:

Maybank KESL (Reg No 2377538) is authorized and regulated by the Financial Services Authority.

Disclosure of Interest

Malaysia: MKE and its Representatives may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies.

Singapore: As of 23 December 2013, Maybank KERPL and the covering analyst do not have any interest in any companies recommended in this research

report.

Thailand: MBKET may have a business relationship with or may possibly be an issuer of derivative warrants on the securities /companies mentioned in the research report. Therefore, Investors should exercise their own judgment before making any investment decisions. MBKET, its associates, directors, connected parties and/or employees may from time to time have interests and/or underwriting commitments in the securities mentioned in this report.

Hong Kong: KESHK may have financial interests in relation to an issuer or a new listing applicant referred to as defined by the requirements under Paragraph

16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.

As of 23 December 2013, KESHK and the authoring analyst do not have any interest in any companies recommended in this research report.

MKE may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment.

OTHERS

Analyst Certification of Independence

The views expressed in this research report accurately reflect the analyst‟s personal views about any and all of the subject securities or issuers; and no part of the research analyst‟s compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.

Reminder

Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct its own analysis of the product and consult with its own professional advisers as to the risks involved in making such a purchase.

No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior consent of MKE.

Definition of Ratings

Maybank Kim Eng Research uses the following rating system:

BUY Total return is expected to be above 10% in the next 12 months (excluding dividends)

HOLD Total return is expected to be between -10% to +10% in the next 12 months (excluding dividends)

SELL Total return is expected to be below -10% in the next 12 months (excluding dividends)

Applicability of Ratings

The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only

applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings

as we do not actively follow developments in these companies.

Some common terms abbreviated in this report (where they appear):

Adex = Advertising Expenditure FCF = Free Cashflow PE = Price Earnings

BV = Book Value FV = Fair Value PEG = PE Ratio To Growth

CAGR = Compounded Annual Growth Rate FY = Financial Year PER = PE Ratio

Capex = Capital Expenditure FYE = Financial Year End QoQ = Quarter-On-Quarter

CY = Calendar Year MoM = Month-On-Month ROA = Return On Asset

DCF = Discounted Cashflow NAV = Net Asset Value ROE = Return On Equity DPS = Dividend Per Share

NTA = Net Tangible Asset ROSF = Return On Shareholders’ Funds

EBIT = Earnings Before Interest And Tax P = Price WACC = Weighted Average Cost Of Capital

EBITDA = EBIT, Depreciation And Amortisation P.A. = Per Annum YoY = Year-On-Year

EPS = Earnings Per Share PAT = Profit After Tax YTD = Year-To-Date

EV = Enterprise Value PBT = Profit Before Tax



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Malaysia

Maybank Investment Bank Berhad (A Participating Organisation of Bursa Malaysia Securities Berhad) 33rd Floor, Menara Maybank, 100 Jalan Tun Perak, 50050 Kuala Lumpur Tel: (603) 2059 1888; Fax: (603) 2078 4194

Singapore

Maybank Kim Eng Securities Pte Ltd Maybank Kim Eng Research Pte Ltd 9 Temasek Boulevard #39-00 Suntec Tower 2 Singapore 038989 Tel: (65) 6336 9090 Fax: (65) 6339 6003

London

Maybank Kim Eng Securities (London) Ltd 6/F, 20 St. Dunstan’s Hill London EC3R 8HY, UK Tel: (44) 20 7621 9298 Dealers’ Tel: (44) 20 7626 2828 Fax: (44) 20 7283 6674

New York

Maybank Kim Eng Securities USA Inc 777 Third Avenue, 21st Floor New York, NY 10017, U.S.A. Tel: (212) 688 8886 Fax: (212) 688 3500

Stockbroking Business: Level 8, Tower C, Dataran Maybank, No.1, Jalan Maarof 59000 Kuala Lumpur Tel: (603) 2297 8888 Fax: (603) 2282 5136

Hong Kong

Kim Eng Securities (HK) Ltd Level 30, Three Pacific Place, 1 Queen’s Road East, Hong Kong Tel: (852) 2268 0800 Fax: (852) 2877 0104

Indonesia

PT Maybank Kim Eng Securities Plaza Bapindo Citibank Tower 17th Floor Jl Jend. Sudirman Kav. 54-55 Jakarta 12190, Indonesia

Tel: (62) 21 2557 1188 Fax: (62) 21 2557 1189

India

Kim Eng Securities India Pvt Ltd 2nd Floor, The International 16, Maharishi Karve Road, Churchgate Station, Mumbai City - 400 020, India Tel: (91).22.6623.2600 Fax: (91).22.6623.2604

Philippines

Maybank ATR Kim Eng Securities Inc. 17/F, Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City, Philippines 1200 Tel: (63) 2 849 8888 Fax: (63) 2 848 5738

Thailand

Maybank Kim Eng Securities (Thailand) Public Company Limited 999/9 The Offices at Central World, 20th - 21st Floor, Rama 1 Road Pathumwan, Bangkok 10330, Thailand Tel: (66) 2 658 6817 (sales) Tel: (66) 2 658 6801 (research)

Vietnam

In association with

Maybank Kim Eng Securities JSC 1st Floor, 255 Tran Hung Dao St. District 1 Ho Chi Minh City, Vietnam Tel : (84) 844 555 888 Fax : (84) 838 38 66 39

Saudi Arabia

In association with

Anfaal Capital Villa 47, Tujjar Jeddah Prince Mohammed bin Abdulaziz Street P.O. Box 126575 Jeddah 21352 Tel: (966) 2 6068686 Fax: (966) 26068787

South Asia Sales Trading

Kevin FOY [email protected] Tel: (65) 6336-5157 US Toll Free: 1-866-406-7447

North Asia Sales Trading

Alex TSUN [email protected] Tel: (852) 2268 0228 US Toll Free: 1 877 837 7635

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economics & market strategy 23 december 2013 2014...

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