Left Brain Right B - the DBS Vickers Securities Equities Research

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Regional Equity Strategy 4Q 2009 Country Assessment Sector recommendation and stocks for Malaysia SECTOR REMARKS STOCK SELECTION Concessionaires Overweight Gaming Overweight Shipping Neutral Motor Underweight The July 2009 deadline for the Economic Planning Unit (EPU) to address the potential future increases in toll rates has since been extended to end-2009. Of late, Asas Serba Sdn Bhd a private company submitted a proposal to the Works Ministry to buy all the toll concessionaire companies in the country for RM50bn. It has promised to cut toll rates by 20% in return for an extension in the concession period for the concessions. We think the probability of this occurring is low given financing a purchase consideration of RM50bn has to be government backed as the private sector will unlikely be able to swallow such a colossal amount. We do not think the government will privatise PLUS, based on the Prime Minister’s recent statements that PLUS is an important company for the government and a cash cow. Also its listed status is a key positive for the Malaysian equity market and its overseas ventures. Having said that, with the government paring down its stakes in other GLCs, there is always the odd possibility of this happening. We recently downgraded our rating on Litrak to Hold as we think the privatisation angle at current price is increasingly difficult to execute. All in, we are confident that any decision will be at least NPV neutral for the concessions. Our pick is PLUS, which will yield 5% based on its KPI dividend of 16 sen and is strong liquid proxy to stable free cash flows. Gaming operations should remain robust given its inelastic demand and being a small ticket item. Despite the H1N1 outbreak, visitor arrivals to Genting Highlands held up (during SARS outbreak in 2003, visitor arrivals grew 1.3%). The soft launch of Resorts World at Sentosa (RWS) may come as early as end-09. We expect Genting Highlands’ operations to remain largely resilient given 87% of visitor arrivals consist of locals (70% day-trippers) while Singaporeans 5%. Risks: a) Strict regulation on junket operators may affect RWS’ VIP business; b) viability of Genting Malaysia’s potential M&As with its RM5b cashpile. We expect petroleum tanker rates to improve from end 2009 onwards and grow by c.25% y-o-y in 2010 in anticipation of better tonnage demand and supply growth balance prospect. Downside risks to tanker rates could be limited as demand and supply growth gap is likely to narrow in 2010. Meanwhile, we also believe downside risk to container freight rates is limited, after touching its lowest level since 1993 and considering the supply-demand gap will narrow next year. We project average container freight rates to be unchanged y-o-y in 2010, supported by an expected recovery in demand. Our top pick is MISC (Buy; PT RM9.60). We like MISC given its better earnings outlook and it still lags the market despite its 3.7% weighting in the FBM KLCI. Improving consumer sentiment continues to lend support for auto sales. Aug09 TIV (total industry sales) recorded the first y-o-y growth of 2.8% (-6.5% m-o-m) since Oct08. We expect Sep09 sales to remain firm for the Hari Raya season, before entering the seasonally low fourth quarter. The NAP (National Automotive Policy), which has been postponed till Oct09, was speculated to offer incentives to foreign car manufacturers to use Malaysia as their export hub while Proton is rumoured to be getting a foreign partner (speculated to be VW) who can help to take up Proton’s excess capacity. The downside risks are that the NAP could disappoint (especially when it comes to execution) and that Proton may not secure a new partner. PLUS Genting MISC APM Page 103
Regional Equity Strategy 4Q 2009 Country Assessment Sector recommendation and stocks for Malaysia SECTOR REMARKS STOCK SELECTION Oil & gas Overweight Plantations Underweight Property Overweight Steel Neutral Telco Underweight We remain positive on the outlook of Malaysia oil and gas sector given Petronas’ resilient capex and recovery of crude oil price. The key concern for the sector is on the rollout of new projects, which has been delayed over the last few months. Nevertheless, we expect stronger contract flow in 4Q09 as Petronas has traditionally awarded most of the new projects towards year end. The continuous contract flow will help to enhance earnings visibility and benefit oil and gas players, especially those with captive market (such as Alam for Malaysian flagged vessels) and those with niche market such as KNM and Wah Seong for their exposure in process equipment and deep water pipe coating. Valuation of oil and gas stocks is reasonable, trading closer to their respective normalised mid-cycle valuation, but still decent at sector average 9x CY10 PE against sector average CY06-10 CAGR of 22%. We expect 4Q09 palm oil price to rebound on seasonally slower palm oil supply growth and run down in US soybean oil inventory. However, as most plantation stocks have not moved in-tandem with CPO price’s current correction, we recommend investors to remain selective. Sales expected to remain robust driven by record low mortgage rates, incentives offered by developers, and improving consumer sentiments. Developers may bring forward launches and raise ASPs – leading to faster earnings recovery. Potential risks: a) Sustainability of sales if interest rates rise and developers pull-back incentives, and b) Higher construction cost as raw material prices recover – potential margin squeeze if not passed on to buyers. Steel demand is improving underpinned by re-stocking activities, which is expected to last another 4 months (till the end of the year). Most steel mills have increased their plant utilisation (for example, Kinsteel's upstream utilisation was lifted from 50% to 100% and, Southern Steel’s overall utilisation was also raised from the previous low of 50%). In terms of new demand expected from government pump priming, we think meaningful contributions will flow in only next year. Overall, the current healthy steel demand would support steel prices. Our key concern remains the timely award and execution of the various government projects. We recommend Hold on Kinsteel (TP RM0.85) and Southern Steel (TP RM1.75). While competition in 1H09 centred on new broadband plans as well as iPhones and BlackBerrys, focus shifted back to prepaid voice plans in 3Q09. Celcom launched new plans that offer very cheap 12 sen/minute calls that led Digi to react in similar fashion. As usual, terms and conditions apply. Meanwhile, TuneTalk launched its cellular voice service in Aug09, with very attractive 25 sen/minute tariff. However, TuneTalk has limited distribution channel currently. We expect telcos to register a spike in volume during the Hari Raya season in Sep09, with even larger traffic volume in the seasonally high 4Q09. The key concern now is that a potential change in management of U Mobile could disrupt the competitive landscape in Malaysia, which is still rational. Among the telco stocks, we prefer TM for its commitment of 20 sen net DPS or c. 6% yield. However, Maxis, which is expected to be listed before the year-end, could put downward pressure on telco stock prices as investors rebalance their telco exposure in Malaysia towards Maxis. Alam Maritim KL Kepong SP Setia E&O DNP Southern Steel TM Page 104
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Left Brain Right B - the DBS Vickers Securities Equities Research

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