Left Brain Right B - the DBS Vickers Securities Equities Research

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Regional Equity Strategy 4Q 2009 Country Assessment 2010 Budget: Shoring up growth Expect lower deficit. The 2010 Budget will be presented in Parliament on 23 October amidst a challenging economic environment. The Prime Minister will need to steer the economy towards robust economic growth while keeping the lid on a ballooning fiscal deficit. We expect a lower deficit in 2010 at 6.8% of nominal GDP versus 8.5% this year on lower operating expenses. Higher development expenditure. To help shore up growth, we expect a record allocation of RM55b-RM58b from RM53.7b in 2009. As pump-priming remains a cornerstone to drive economic growth, there will likely be renewed emphasis on the upcoming mega projects such as the LCCT, LRT extension and Interstate Water Transfer – which should start latest by next year-end. The focus should be on implementation of these key projects and as such, we do not expect many other new mega projects. Likely another raise in tobacco tax this year. In our opinion, there is good chance of higher excise duty for cigarette makers. Historically, the government increased sin taxes for the tobacco sector in eight out of the past eleven years. Our sensitivity analysis based on excise tax increase of 10%-40% indicates that the impact to BAT’s earnings would range from -1.7% to - 18.1% for FY10F (assuming full price pass through) and our fair value would fall to a range of RM36.70 – 44.00 per share (from RM44.80) In our opinion, there is a possibility of small incremental corporate tax cut, in line with the longer term objective to attract foreign investment. However, we think chances of individual tax cuts are low. The introduction of Goods and Services Tax (GST), which will broaden the tax base, is also unlikely next year given the economy is just recovering and the required preparations for implementation. But this budget could provide a timeframe for GST implementation in the future. In terms of GDP, we expect a contraction of 2.9% in 2009 with the manufacturing sector still in contraction mode. For 2010, we forecast 4.5% growth, driven by improvement in all sectors and a big swing in manufacturing. As part of the country’s longer term growth strategy, we also look for incentives/measures to stimulate investments in R&D, education and training. This will help upgrade our manufacturing capabilities and drive growth in selected services and sectors where we can achieve leadership, such as Islamic banking/securities business. Potential beneficiaries here would include CIMB, AMMB, Maybank. Construction growth and development expenditure RM billion 60 50 40 30 20 10 - % 20 15 10 5 0 -5 -10 -15 -20 -25 -30 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Development Expenditure 2003 2004 2005 2006 2007 2008 Construction Growth 2009F Source: Economic Report 2008/2009, Statistics Department Page 93
Regional Equity Strategy 4Q 2009 Country Assessment Expectations/wish list for 2010 Budget Sector Details Deficit Lower deficit in 2010 at 6.8% of nominal GDP versus 8.5% in 2009. Development Higher allocation of RM55b-RM58b from RM53.7b in 2009. Emphasis on implementation of key mega projects. Potential expenditure beneficiary: Construction sector; picks: IJM Corp, Gamuda. Tobacco Higher excise duty. Potential loser: BAT. Taxes Incremental corporate tax cut. Timeframe for implementation of Goods & Services Tax (GST) in future. Property Review of bumiputera policies for consistency and transparency. Redevelopment of more government land. Government to takeover provision of low-cost housing while developers contribute funds. Potential beneficiary: Property sector; picks: SP Setia, E&O, DNP. REITs Incentives to encourage cross-border acquisitions. Incentives for asset enhancement and/or asset acquisition. Relaxation of REIT ownership to encourage listing of foreign REITs in Msia. Further reduction in withholding tax. Potential beneficiary: REITs; pick: Axis REIT. Airlines Incentives such as rebates for airlines that achieve certain passenger growth. Waiver on landing charges for new foreign and existing airlines that add new destinations or flight frequencies for a number of years (after which discounts will be given). New parking charges after the first three hours of free parking. Potential beneficiary: Malaysia Airports. Financials Incentives/measures in selected sectors where we can achieve leadership such as Islamic banking/securities business. Potential beneficiaries: CIMB, AMMB, Maybank. Auto Incentives to attract foreign investment. We view it positively should the NAP offer incentives for foreign auto companies to take-up under-utilized capacity in Malaysia. Potential beneficiaries: Proton, APM. Source: DBS Vickers, various media Page 94
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Left Brain Right B - the DBS Vickers Securities Equities Research

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