Left Brain Right B - the DBS Vickers Securities Equities Research

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Regional Equity Strategy 4Q 2009 Country Assessment VALUATIONS Impressive gains todate. Since the stock market’s recovery in March 2009, the benchmark KLCI has gained a hefty 45%. With that, the KLCI has regained 57% of the points lost in the crisis and is now 20% from its all-time high of 1,516 points achieved in January 2008. Despite the stellar performance, the KLCI has lagged key regional markets in the run-up. And yet, at 15x forward earnings, the KLCI remains the most expensive compared to its peers because it did not drop as much in the crisis. At normalized valuations. At 15x forward earnings and 1.7x book value, the KLCI is at its historical average (since 1997; range: 10-19x earnings) levels. Post 1998 crisis, the KLCI’s historical average is 14x earnings (and 1.7x book value). To move up from here on, there needs to be stronger earnings upgrades. This could come from: (i) stronger than expected capital market activities, lower provision chargeoff rates and NPLs for banks; (ii) higher crude palm oil (CPO) prices; (iii) faster progress billings on property sales; and (iv) for construction: faster margin recovery and bigger sized contract wins. We believe 14x forward earnings is a fair multiple for the KLCI, given that post-1998 crisis the KLCI had only traded above 15x earnings from mid-June 2007 in the run-up to hit its all-time high of 1,516 in January 2008. Given the prospects of earnings upgrades, if we assume 5% upgrade in our 2009-11 universe earnings, we derive an end-2010 target of 1,300 (without earnings upgrade end-2010: 1,240). Malaysia: Broader Market Underperformed YTD 120.0 Malaysia: Relatively High 2010 PE Multiples 100.0 80.0 60.0 40.0 10F PE (x) 16.0 14.0 12.0 10.0 8.0 20.0 6.0 - 4.0 Indonesia China Thailand Hong Kong Korea YTD chg (%) Since 1Mar09 chg (%) Singapore Philippines Malaysia 2.0 Korea Thailand China Indonesia Hong Kong Philippines Singapore Malaysia Source: DBS Vickers KLCI forward PE KLCI forward P/BV 35.0 30.0 25.0 20.0 15.0 10.0 5.0 - Dec-97 Dec-98 Nov-99 Nov-00 Oct-01 Oct-02 Sep-03 Sep-04 Aug-05 Aug-06 Jul-07 Jul-08 Jun-09 1,600 1,400 1,200 1,000 800 600 400 200 - F orward PE (LHS) Mean 1 Std Dev +/ - 6.4x FBMKLCI Index 3.0 2.5 2.0 1.5 1.0 0.5 - Dec-97 Dec-98 Nov-99 Nov-00 Oct-01 Oct-02 Sep-03 Sep-04 Aug-05 Aug-06 Jul-07 Jul-08 Jun-09 1,600 1,400 1,200 1,000 800 600 400 200 - Forward PBV (LHS) Mean 1 Std Dev +/ - 0.3x FBMKLCI Index Source: DBS Vickers Page 99
Regional Equity Strategy 4Q 2009 Country Assessment STRATEGY Banks: Positive Outlook. We expect: (i) stronger non-interest income on the back of improved pipeline of debt and equity deals in 2H09; (ii) possible capital repayment and/or higher dividend payouts could be a feature given that banks are generally well capitalized; (iii) stronger growth with lower provisions and better loans growth. Among the heavyweights on the index, this sector is trading at relatively low PE multiples with Public Bank and BCHB trading on 13x forward earnings (although the common and our preferred valuation benchmark is P/Bk). Within our coverage, only Maybank trades above 16x forward earnings. Large caps sorted by PE: banks at relatively lower multiples (x) 25.0 20.0 15.0 10.0 5.0 - Telekom Axiata Petronas Gas Sime Darby Source: DBS Vickers MISC-F IOI Corporation KL Kepong Maybank BAT Average In terms of picks, we like: (i) Public Bank for its superior asset quality, extraordinary loans growth and inspiring ROEs of above 23%; (ii) capital market recovery plays: AMMB and BCHB; (iii) high quality laggard such as Hong Leong Bank that also has impressive ROEs and EON Capital, which is the cheapest bank in our universe at 0.9x book value. Digi.Com Tenaga Nasional Genting Malaysia Genting AMMB Holdings CIMB Public Bank YTL Power PPB Group PLUS Expressway Hong Leong Bank RHB Capital Construction pump-priming: a sustainable theme. We remain optimistic about the construction sector and expect positive newsflow in the coming 12 months. The upcoming Budget in October would likely focus on key mega projects in the pipeline such as the LCCT, remaining phases of the inter-state water transfer and LRT extensions. The sector had been one of the better performers in the market rebound. As a result, some profit-taking is bound to happen. Yet, we believe this would be good opportunity to accumulate stocks as we expect further upside. We believe our and market assumptions for potential new orders are conservative, in our opinion. Our large cap picks in the sector are IJM Corp and Gamuda. As the excitement in the sector heats up, there may be attractive upside for the small-mid cap contractors – which have smaller orderbooks and earnings base. Our picks in this space includes MRCB and Sunway Holdings. Fajarbaru (Not Rated) could be an upstart to watch for specific projects such as the LCCT. Property: Room for more upside. We have seen continued warm response for recent launches in KL and Penang. Developers are now resuming launches (including high-end), compared to their earlier focus on clearing inventories. Selling prices may be raised soon and incentives gradually pulled-back, resulting in margin expansion. We expect continued positive newsflow, ample liquidity and underinvestment in the sector to drive valuations higher. Our picks: large cap sector leader SP Setia and high-end niche developers E&O and DNP. Updates on key mega projects Project Est value (RMbn) Comment Potential beneficiaries Remaining portions of Interstate 2-3 Prequalification for Kelau Dam expected to commence IJM, UEM water transfer soon; actual award likely towards 2Q10. Low Cost Carrier Terminal 2.0 Prequalification closed end-July. Tender likely in October 2009. WCT, Fajarbaru, IJM Southern stretch of double tracking rail 7-9 Mentioned by PM as project that the govt would consider awarding to Chinese companies. Nevertheless, Msian contractors may get subcontracts. LRT extension 6-7 Syarikat Prasana Negara expected to call for civil works prequalification next month. New LRT lines 10-20 Talk on intended work commencement in 4Q09, although likely to be delayed given the preparations required (design, determining alignment). Source: Bursa Malaysia, DBS Vickers IJM, WCT IJM, MRCB, Gamuda, WCT, UEM IJM, MRCB, Gamuda, WCT, UEM Page 100
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