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Thursday, April 30, 2009

Financial sector opens up further

QUICK TAKES 28 April 2009 MALAYSIA CIMB Research Report NEUTRAL Maintained Banks Liberalisation gains pace Winson Ng Gia Yann CFA +60(3) 2084 9686 - winson.ng@cimb.com Financial sector opens up further Bank Negara announced yesterday measures for further liberalisation of the financial sector: Increase in foreign equity limits. The foreign equity limit for investment banks, Islamic banks, insurance companies and takaful operators has been raised from 49% to 70%. It is envisaged that these institutions’ business potential and growth prospects will be enhanced by the international expertise and global networks of foreign shareholders. However, the cap on foreign shareholdings in domestic commercial banks remains at 30%. New banking and Takaful licences up for grabs. New licences will be issued to strong and world-class players in the following categories: In 2009, up to two new Islamic banking licences will be issued to foreign players to • establish new Islamic banks with paid-up capital of at least US$1bn. • In 2009, up to two new commercial banking licences will be issued to foreign players that will bring in specialised expertise. • In 2011, up to three new commercial banking licences will be dished out to world- class banks that can offer significant value propositions to Malaysia. • In 2009, up to two new family takaful licences will be made available. Greater operational flexibility for foreign banks. Locally-incorporated foreign commercial banks can establish up to 10 microfinance branches with immediate effect. Further branches will be considered based on the effectiveness of these branches in servicing microenterprises. Foreign banks will also be allowed to establish up to four new branches in 2010 based on the distribution ratio of 1 branch in market centres, 2 in semi-urban areas and 1 in non-urban areas. Locally-incorporated foreign insurance companies and takaful operators are now allowed to set up branches nationwide without restriction. The restriction against these companies entering into bancassurance/bankatakaful arrangements with banking institutions has been lifted. Other liberalisation. Banks, insurance companies and takaful operators now have greater flexibility to employ specialist expatriates with expertise to continue the development of Malaysia’s financial system. Offshore financial institutions that meet the predetermined criteria will be given the flexibility to have a physical presence onshore – from 2010 for banking institutions and from 2011 for insurance companies. Comments Liberalisation well expected. The further liberalisation of the financial sector is within our and market expectations as it is in line with the objectives laid out in the Financial Sector Master Plan (FSMP) issued in 2001. Furthermore, the government has alluded to announcements on this matter this week. Upping foreign equity limits for Islamic and investment banks... However, it is a surprise to us that Bank Negara has increased the foreign equity limits for Islamic and investment banks from 49% to 70% as this means that foreigners will control these entities. It appears that the authorities view the relaxation as necessary to attract more foreign players into the Malaysian market to help develop these segments. …but not for commercial banks. We are also surprised that the government did not increase the 30% foreign equity limit for domestic commercial banks, which is something the market had been looking forward to. An increase in the equity limit for Please read carefully the important disclosures at the end of this publication.
commercial banks would allow foreigners to hold higher stakes in the major banking groups, leading to more buying interest in these stocks. Other measures are broadly in line. Other measures announced are broadly in line with our expectations. They include (1) the granting of more commercial and Islamic banking licences to foreign parties, and (2) licences for more branches for locally- incorporated foreign banks. Measures that were anticipated but did not come through include (1) foreign banks’ access to the national ATM network, MEPS, and (2) the award of licences to foreign banks to carry out hire purchase businesses. On the increase in foreign equity limits Foreign banks to enhance local competence. The increase in the foreign equity limits for Islamic and investment banks will attract investments from foreign financial institutions. This will, in turn, enhance the capabilities of the local Islamic and investment banks. However, we believe the benefits will only be realised over the longer term. This move will have a greater positive impact on smaller banks as they will be able to compete more effectively with the bigger boys with the aid of foreign partners. On new licences to be issued It takes time to expand. Although the entry of new foreign players will increase competition in the industry, we believe that the impact on local banks will be minimal for the next 3-5 years. This is because the newcomers need time to build up their branch network, formulate strategies for the Malaysian market and build relationships with customers. Local banks still have distinct advantages in their extensive networks and strong relationships with borrowers. Before this, the most aggressive new entrant was Al Rajhi Bank, which first obtained its Islamic banking licences in 2006. We do not view competitive pressure from Islamic banks as being less than competition from commercial banks as they also have a full suite of financial products that appeal to the general public. However, Al Rajhi’s experience in Malaysia leads us to believe that new players will not pose a significant threat to local banks for at least the next 3-5 years. After 2-3 years of aggressive expansion of its network to 19 branches, Al Rajhi managed to garner a loan size of only RM2.4bn as at end-Sep 08, giving it a puny market share of 0.3%. On new branches by foreign banks Bricks and mortar not the key determinant. Although network expansion by foreign banks will be negative for local banks, we do not view this as a major threat for the following reasons: Local banks have been competing with foreign banks in key geographical markets • (Selangor, Kuala Lumpur, Penang and Johor) which make up 60-70% of the country’s banking business. We think that foreign boys’ expansion into the rural areas will have minimal impact on local banks’ profitability. Foreign banks are more ROE-conscious and do not focus purely on volume • growth. They would not want to bear the additional costs that more branches entail, especially in small towns that generate low income. Furthermore, aggressive branch expansion would take a longer time to bear fruit as they have to compete head-on with the local banks, which have stronger roots in these locations. We, therefore, believe that foreign banks will take the advantage of the relaxation to open new branches in strategic locations but will not expand their branch networks aggressively in the longer term. Foreign competition has been rife for years even though foreign banks have • smaller branch networks. However, local banks still have 70%+ market share for loans. To compete, foreign banks rely not on branches but on their mobile sales personnel and external marketing agents who operate beyond the constraints of branches. Furthermore, telemarketing is a key marketing channel for foreign banks and does not require physical proximity to prospective customers. As a result, we believe that allowing foreign banks to open more branches will not significantly alter the competitive landscape in the industry. Obstacles to the next round of bank mergers. We do not discount the possibility that continuing liberalisation of the financial sector will push the local banks to merge, reigniting the M&A theme for the sector. However, there are obstacles in the path of banks seeking to merge, including (1) the presence of strategic foreign shareholders in smaller banks who may not want to sell their stakes or hold a smaller stake in the merged entity, and (2) the need by bigger banks to set aside financial resources to acquire banking stakes in other countries for regional expansion. [2]
Valuation and recommendation Slightly negative. Overall, we are slightly disappointed that the much-anticipated increase in the equity limit for domestic commercial banks was not part of the liberalisation measures announced yesterday. We believe this will, to a certain extent, have a negative impact on the sentiment on banking stocks. The increase in the equity cap for Islamic and investment banks, in our view, will have limited impact on the industry. We also think that the move to allow for new entrants and more branches for existing foreign banks will not change the competitive landscape or threaten the dominant position of local banks given that foreign competition is not new and local and foreign banks have been competing in most business segments for decades. Resilient to foreign competition. We are sticking to our view that local banks will not be much affected if competition from foreign banks ratchets up. Over the past 3-5 years, local banks have been relentlessly improving their operations in the areas of IT infrastructure, marketing capability and risk management systems and have been catching up with the foreign boys. Also, some local banks have even been employing the systems used by foreign banks, including data mining and telemarketing. This has narrowed the operational gaps between local and foreign banks, enabling the local banks to withstand any increase in competition from their foreign counterparts. Maintain NEUTRAL. We are maintaining our NEUTRAL stance on Malaysian banks as the new liberalisation measures will have a slight negative impact on the sector. The proposals will increase industry competition though we do not anticipate a drastic change in the industry’s competitive landscape. The absence of the much-anticipated increase in the equity limit for domestic commercial banks is also not positive for short-term sentiment on banking stocks. As we stated in yesterday’s sector update, local banks could perform better than our and market expectations, going by the still- healthy banking numbers in Feb 09. We expect an earnings recovery for banks in 2010 on the back of better economic numbers. In the longer term, most banks will benefit from their ongoing transformation programmes and regional expansion. Public Bank still the top pick. Public Bank remains our top pick for the sector as it will be the most resilient to an economic downturn, thanks to its track record and prudent management. The group is still gunning for aggressive targets of 14-15% loan growth and a net NPL ratio of less than 1% in 2009. Although we view the targets as challenging and project more modest loan growth of 12% and net NPL ratio of 2.6%, Public will still outperform its peers in these aspects. The potential share price triggers include (1) its superior ROE in the mid-20s, (2) increased contributions from Greater China, (3) new growth avenue in bancassurance, and (4) above-industry loan growth. Figure 1: Sector comparisons Core ROE Target 3-yr EPS P/BV Div P/E (x) (x) yield (%) Bloomberg Price price Mkt cap CAGR (%) (Local) (Local) (US$ m) (%) ticker Recom. CY2009 CY2010 CY2009 CY2009 CY2009 Affin AHB MK U 1.74 1.36 722 11.8 10.7 (0.2) 0.6 4.8 2.8 2.36 Alliance AFG MK O 2.05 882 10.7 9.2 (5.0) 1.1 10.4 2.6 AMMB Hldgs AMM MK U 3.04 2.92 2,300 11.8 10.9 2.3 1.0 8.8 2.8 EON Capital EON MK U 3.58 2.65 689 14.5 13.8 25.3 0.7 5.2 2.1 Hong Leong Bank HLBK MK U 5.65 5.70 2,480 10.5 9.5 9.1 1.5 15.2 5.3 Malayan Banking MAY MK N 4.46 4.79 8,769 11.9 10.1 (7.1) 1.2 10.2 5.9 Public Bank PBK MK O 8.45 11.40 8,291 12.0 9.9 8.5 2.7 24.0 8.9 Public Bank-F PBKF MK O 8.45 11.40 8,291 12.0 9.9 8.5 2.7 24.0 8.9 RHB Cap RHBC MK O 4.10 5.22 2,453 12.1 10.3 (2.2) 1.1 9.1 3.3 Simple average 11.9 10.5 4.4 1.4 12.4 4.7 O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy and TS = Trading Sell Source: Company, CIMB Research [3]
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RECOMMENDATION FRAMEWORK #1* STOCK RECOMMENDATIONS SECTOR RECOMMENDATIONS OUTPERFORM: The stock's total return is expected to exceed a relevant OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is benchmark's total return by 5% or more over the next 12 months. expected to outperform the relevant primary market index over the next 12 months. NEUTRAL: The stock's total return is expected to be within +/-5% of a relevant NEUTRAL: The industry, as defined by the analyst's coverage universe, is benchmark's total return. expected to perform in line with the relevant primary market index over the next 12 months. UNDERPERFORM: The stock's total return is expected to be below a relevant UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, benchmark's total return by 5% or more over the next 12 months. is expected to underperform the relevant primary market index over the next 12 months. TRADING BUY: The stock's total return is expected to exceed a relevant TRADING BUY: The industry, as defined by the analyst's coverage universe, is benchmark's total return by 5% or more over the next 3 months. expected to outperform the relevant primary market index over the next 3 months. TRADING SELL: The stock's total return is expected to be below a relevant TRADING SELL: The industry, as defined by the analyst's coverage universe, benchmark's total return by 5% or more over the next 3 months. is expected to underperform the relevant primary market index over the next 3 months. * This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand and Jakarta Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons. CIMB-GK Research Pte Ltd (Co. Reg. No. 198701620M) [5]
RECOMMENDATION FRAMEWORK #2 ** STOCK RECOMMENDATIONS SECTOR RECOMMENDATIONS OUTPERFORM: Expected positive total returns of 15% or more over the next OVERWEIGHT: The industry, as defined by the analyst's coverage universe, 12 months. has a high number of stocks that are expected to have total returns of +15% or better over the next 12 months. NEUTRAL: Expected total returns of between -15% and +15% over the next NEUTRAL: The industry, as defined by the analyst's coverage universe, has 12 months. either (i) an equal number of stocks that are expected to have total returns of +15% (or better) or -15% (or worse), or (ii) stocks that are predominantly expected to have total returns that will range from +15% to -15%; both over the next 12 months. UNDERPERFORM: Expected negative total returns of 15% or more over the UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, next 12 months. has a high number of stocks that are expected to have total returns of -15% or worse over the next 12 months. TRADING BUY: Expected positive total returns of 15% or more over the next 3 TRADING BUY: The industry, as defined by the analyst's coverage universe, months. has a high number of stocks that are expected to have total returns of +15% or better over the next 3 months. TRADING SELL: Expected negative total returns of 15% or more over the next TRADING SELL: The industry, as defined by the analyst's coverage universe, 3 months. has a high number of stocks that are expected to have total returns of -15% or worse over the next 3 months. ** This framework only applies to stocks listed on the Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons. [6]

Monday, April 27, 2009

New Cabinet In Malaysia

 PM Dato’ Sri Najib Tun Razak announced the new Cabinet line up
yesterday (9 Apr ’09). Overall, it is a slightly “leaner” Cabinet as the
number of Ministers and Ministries are down to 29 and 25 respectively,
from 31 and 27 previously.
 PM retains the Finance Minister post, keeping the “tradition” set since
Tun Dr Mahathir’s time. However, Second Finance Minister is now
Datuk Ahmad Husni Mohammad Hanadzlah, replacing Tan Sri Nor
Mohamed Yakcop, who moved to the Economic Planning Unit as
Minister at PM’s Department.
 Other major changes and movements include Tan Sri Muhyiddin Yassin
being moved to the Education Ministry from International Trade &
Industry (MITI), while all three of the three newly-elected UMNO Vice
Presidents got new portfolios – Datuk Hishammuddin Hussein (Home
Ministry from Education), Datuk Zahid Hamidi (Defence from PM’s
Office) and Datuk Shafie Apdal (Rural Development from Unity,
Heritage, Culture & Arts). The new MITI is Datuk Mustapa Mohamad.
 Big surprises come from the UMNO Youth side following the inclusion
of Datuk Mukhriz Mahathir (who lost in the UMNO Youth Head election
to Khairy Jamaluddin) as the Deputy MITI, and Datuk Razali Ibrahim,
UMNO Youth No. 2 as Deputy Youth & Sports Minister. Notable
absentee is from UMNO Youth as well i.e. the Head, Khairy Jamaluddin.
 Key comebacks include Tan Sri Datuk Dr Koh Tsu Koon as Minister in
the PM’s Department, Senator Datuk Dr Awang Adek Hussein who is
back as as Deputy Finance Minister and newly-elected UMNO Women
Head, Datuk Shahrizat Jalil, who also return to as Women, Family &
Community Development Minister.
 Major survivors are Dato’ Seri Dr. Rais Yatim and Datuk Seri Mohd
Khaled Nordin who failed in their bids to be UMNO Vice Presidents.
 Overall, in line with our earlier expectation that the outcome of UMNO’s
election is not the major determinant of the Cabinet line up as well as
the outlook of more significant representations by East Malaysians in
the Cabinet, although we were a bit disappointed that the doors were
not opened for more professionals/technocrats in the administration.
 There will be no “honeymoon” for new PM and his Cabinet, who have to
perform and deliver on the economic and social front to regain the
political support to BN amid the “status quo” domestic political
landscape post-Mar ’08 General Election and the last five by-elections.

Industrial Production Index IPI

 The Industrial Production Index (IPI, 2005=100) contracted further – but
by a slower pace – of 14.7% YoY in Feb ’09 (Jan ’09: -19.8% YoY) amid
continued drop in manufacturing output (-18.8% YoY), mining activities
(-7.3% YoY) and power generation (-3.0% YoY).
 Although the YoY drop in Feb ’09 eased – in tandem with the earlier
released Feb ’09 external trade figures – we still expect industrial
production and export growth to remain in the red at least until 3Q09,
mainly as imports of intermediate goods i.e. mainly inputs for
manufacturers/exporters continue to fall.
 For Jan-Feb ’09 industrial production fell by 17.4% YoY (4Q08: -9.1%
YoY; Jan-Feb ’08: +9.6% YoY), signaling a contraction in 1Q09 real
GDP, which we currently expect to be -4% YoY (4Q08: +0.1% YoY)
under our full-year forecast of -1.3%.

CPI

Consumer Price Index (CPI, 2005=100) moderated further in Mar ’09 to 3.5% YoY (Maybank IB estimate: 3.7% YoY; Consensus estimate: 3.6% YoY) from 3.7% YoY in Feb 09 and the peak of 8.5% YoY in Jul-Aug ‘08. This marked the seventh consecutive month of disinflation. MoM, inflation rate was down by 0.2%, the sixth sequential drop over the past seven months. Led by “disinflation” in Food and Non Alcoholic Beverages (FNAB) prices and “deflation” in Transport costs... The YoY increase in FNAB prices slowed for the sixth straight month while Transport costs declined for the fourth month in a row. Both account for 47.3% of CPI’s basket of goods and services and ¾ of last month inflation rate. There were no significant movements or notable changes in the price trends of other goods and services. Consequently, our measure of CPI ex-FNAB and Transport was little changed at 2.1% YoY last month compared with 2.2% YoY in the preceding month. Technical deflation is on the card as % YoY monthly inflation rate may turn negative between mid-year up to late-3Q09 or early-4Q09 due to the high-base from last year’s sharp hike in fuel and energy prices, as well as taking cue from the producer price index (PPI) which has turned negative since Nov ‘08. Therefore, maintaining our 2009 and 2010 inflation rate forecasts of 1% and 1.5% respectively, which is a marked deceleration from 5.4% in 2008 amid the environment of global/local economic downturn and lower commodity prices. Year-to-date inflation rate is 3.7%.

Auto sector

Needs a good NAP. Proton, TCM now
Sells.
Total industry volume (TIV) still sluggish. Mar ‘09 and 1Q09 TIV
contracted 5% and 9% YoY as expected, reflecting the adverse impact
from the economic slowdown and tighter financing environment. We
expect weaker performance ahead, with 2009’s TIV to contract 15-20%
YoY. We recommend investors to Sell Proton and TCM.
Mar ‘09 TIV grew 21% MoM on low Feb base… Mar 09’s TIV of
44,205 units (+20.5% MoM) was in line, with both the commercial and
passenger segments growing by 24.2% and 20.2% MoM respectively.
All major marques enjoyed higher MoM sales with non-nationals
Honda and Toyota achieving stronger growth (+33-34% MoM)
compared to national models Proton and Perodua (+9-17% MoM).
YoY performance still down. Mar ‘09 TIV fell 4.8% YoY and 1Q09 TIV
fell 9.3%. Market share-wise, the Honda and Perodua marques grew
3.4-ppt YoY and 1.6-ppt YoY in Jan-Mar ‘09 at the expense of Toyota (-
3.9-ppt YoY) and Proton (-1.7-ppt YoY).
2009 is set to be a tough year. We expect TIV to fall by 15-20% YoY
to 438,000-465,000 units, due to fewer new model launches, tougher
economic conditions and tighter financing environment. We understand
that loan applications and approvals have dropped significantly
particularly for Proton cars. A further dampener is the 85-100 bps hike
in Hire Purchase (HP) rates on non-national cars in Apr ‘09.
Downgrade Proton and TCM to Sell. The industry expects a new
National Automotive Policy (NAP) to be revealed soon but we are
doubtful whether it will address Proton’s long term competitiveness. We
downgrade Proton to Sell (from Trading Buy) following the 68% share
price appreciation since our Jan ‘09 upgrade as well as anticipation of a
poor 4Q09 result, to be announced next month. We also downgrade
TCM to Sell (from Hold) as the share price has breached our TP.

Consumer confidence

Spend a little to make a bundle
 We maintain a selective Overweight call on the Consumer sector, mainly on market-leaders who continue to thrive even in the face of a domestic consumption slowdown.
 AEON Co, AEON Credit Services
 Top Buys are KFC and QL. Investors seeking liquid defensive plays should also be attracted to BAT’s earnings resilience and high dividend yield. , KFC Holdings and QL Resources are on track to continue posting >10% net growth rates in 2009-10, defying conventional logic and market expectations.
Reaping the fruits of disciplined ‘labour.’ AEON Co, AEON Credit Services
Sector Summary Table , KFC Holdings and QL Resources are expected to register double-digit net profit growth in 2009-10. For AEON Co and KFC, their less-than-one-year-old stores will contribute new sources of revenue and profits, even though existing stores, opened for more than one full calendar year, may not cumulatively register meaningful sales growth. AEON Co’s niche of providing comfortable one-stop shopping malls in many suburban areas continues to differentiate itself from other retailers domestically, whilst KFC continues to thrive as the most popular choice of fast food. Reaping the rewards of painstaking integration. In addition to the slew of growth activities at its Integrated Farming business, the integrated nature of QL Resources’ Marine Products business cushions fluctuating product prices. Although surimi (semi-processed fish paste) prices have fallen back to just above 2007-08 levels, this has instead made fishmeal and surimi-based products more affordable and encourages volume sales and margins for these products. Reaping the benefits of significant relationships. In AEON Credit Service’s case, despite the recent decline in motorcycle sales and relative uncertainty in 2009’s GDP growth prospects, its existing loans book, riding on 3-4 year loans profile, provides an earnings buffer against significant slow down in loans growth over the next 6-12months. Further, significant synergies with sister company AEON Co is expected to start showing with the likely combining of the latter’s privilege card (J Card) with the former’s credit cards. Currently, there are at least 10 times as many J Card holders as there are AEON Credit credit card holders. When growth and value come together. While we remain cautious of the broader market over the next few quarters, we continue to like the long-term value offered by our selection of four compelling growth stocks. Arguably, these three stocks offer the relative security of growing steadily within the generally defensive Consumer sector.

30% Scrapped

No more 30% Bumiputera equity rule in 27 services sub sectors… The Government removed the 30% Bumiputera equity requirement for the 27 services sub-sectors (see table in last page for details) with immediate effect in line with the ASEAN trade liberalisation and efforts to boost the services sector. Long overdue move... The decision came as no surprise and was somewhat long overdue as the liberalization of the non-financial services sector was mentioned in the first and second economic stimulus packages, but minus the details until yesterday’s announcement. In addition, it reflects the Government’s effort to address the long-standing issue of the New Economic Policy (NEP). … and logical next step in the country’s development i.e. further promote services sector as source of growth, output, employment and investment… Long-term trends show the growing importance of the services sector in the economy as summarized in the table below. We liken this liberalization of services sector to the opening up of the manufacturing sector in the late 80s that catalysed Malaysia’s industrialization from a commodity-based economy. A long-term positive, but not market moving. We do not believe this liberalization offers a direct advantage to any of the listed companies we cover. However, should it attract meaningful foreign investment, the new firms may intensify competition for existing players in these service sectors. Importantly, this liberalisation puts the new administration in a positive light with investors, as the Bumiputera equity ruling has been viewed as a sacred cow by locals but an obstacle by potential investors

Friday, April 24, 2009

Market Wrap for Global Market

WEEKLY HIGHLIGHTS
• The KLCI touched a 6-month intraday
high of 942.4 points in tandem with
higher regional markets before closing
at 941.4 points for a gain of 3.8% over
the week.
• Regional markets strengthened on
gains in the U.S. markets and
optimism over the latest Japanese
government’s stimulus package.
• The market is anticipated to move in
tandem with overseas markets as
investors monitor the outlook for the
U.S. credit market, global economic
growth and interest rates.
STOCKMARKET COMMENTARY
The KLCI touched a 6-month intraday
high of 942.4 points on Friday in tandem
with higher regional markets and gains in
selected index stocks. The KLCI closed at
941.4 points for a gain of 3.8% over the
week.
Average daily trading volume increased to
0.9 bil units from 0.6 bil units over the
preceding week while average trading
value rose to RM1.2 bil from RM0.9 bil
over the same period.
On Wall Street, share prices rose to a 2-
month intraday high of 8,087 points on
Thursday following better-than-expected
1Q2009 corporate earnings announced by
a major U.S. financial institution. The
Dow closed at 8,083 points for a gain of
0.8% while the Nasdaq rose by 1.9% to
1,653 points over the week.
U.S exports declined the most in 16 years
by 16.9% in February after contracting by
16.5% in January on lower exports of
industrial supplies, capital goods and
automobiles. Imports contracted by 28.8%
from a decline of 22.8% over the same
period. The cumulative U.S. trade deficit
for the first two months of 2009 narrowed
by 48.6% to US$62.2bil compared to the

Sharp Pullback Seen !

• Wedge breakdown points to 7,400 target. The DJIA broke below its wedge
formation early this week, confirming the end of the uptrend that started in early
Mar. At the very least, the DJIA should retreat to 7,400, the start of the wedge
formation. For the S&P500, the wedge target is 780pts.
• Deeper correction than 7,400? The DJIA may descend below the 7,400pt target.
Its MACD has just confirmed its bearish “dead cross”, which signals more
downside in the immediate term. Asia’s equity markets also look vulnerable in the
near term with the likely end of both the stockmarket rally in China and crude oil’s
rebound.
• End of China’s rally? China’s stockmarket upswing since Oct 08 may have ended
this week. A critical support for the Shanghai Composite Index gave way this week,
a likely sign that the bull run has ended. Furthermore, the daily RSI has not been
able to overcome its major resistance trend line since 3Q08. The key support is the
50-day SMA at 2,307pts.
• Crude oil heading south? The end of China’s stockmarket rally is also in line with
the likely breakdown of crude oil prices in the coming weeks. Crude oil price
recently broke down from its triangle consolidation. The major daily MACD support
trend line since Dec 08 caved in a fortnight ago while the RSI has not been able to
overcome its major resistance trend line since Dec 08. This could indicate the end
of crude oil’s rebound since Oct 08. The wave 5 down leg could be taking place,
taking crude oil back to the US$30/barrel level in the next few months.
• Consolidation ahead for Asia. The MSCI Asia ex-Japan Index (MAxJ) confirmed
its MACD bearish “dead cross” this week. The last time this happened was in Feb
09. The 200-day SMA at 323 remains a major resistance. The near-term support
trend line collapsed this week, a likely indication of more consolidation ahead. The
key support is at the 50-day SMA at 282 and the 50-61.8% FR at 276-287.

Wednesday, April 22, 2009

IT'S TIME TO SELL NOW !

Check out the full report here!

It's time to sell now !

• Uptrend ending soon? The recent behaviour of equity markets fits our preferred
wave count for the DJIA and regional markets. The DJIA’s rebound since early Mar
should be ending soon with the completion of the diagonal triangle (wedge). This
should be the completion of the wave “a” rally since early Mar.

• Correction ahead? If we are right, this should be followed by the corrective wave
“b” which could take anywhere between two and six weeks to complete and will be
followed by the final bullish wave “c” up leg.

• Support at 50-day SMA and 50-61.8% FR. We expect the DJIA to retreat to
7,110-7,318, based on the 50-61.8% Fibonacci retracement of the Mar rally. The
other key support level is the 50-day SMA at 7,537pts. A break below the 61.8%
FR would be a major concern for the outlook of the US market.

• Asia also completing wave “a”? Based on our preferred wave count, Asian
equity markets are also probably completing their wave a” rebound this week. The
MSCI Asia ex-Japan Index (MAxJ) has rallied by more than 35% since its early
Mar bottom of 240 and is long overdue for a correction. The daily RSI is
overbought at 72 and the index is also facing major resistance at the upper
trendline channel and the 200-day SMA at 327pts.

• Alternative wave count is possible. Also possible is our alternative wave count,
which sees Asian markets completing the wave 4 rebound which began in Oct 08
and would followed by a final wave 5 down leg, below Oct-08 lows. But this is a
low-probability scenario at this point as we believe the US market is going through
the major wave “B” rebound which is likely to last until Jul-Oct 09. Asian markets
are expected to join in this wave “B” rebound.

• How will we know? Whether the preferred or alternative wave count is in play
depends very much on how deep the coming correction is. A correction below the
61.8% FR of the Mar rebound would be an early sign that our alternative wave
count could be taking place.

Saturday, April 11, 2009

External Trade Still Low

Slower pace of declines…

 Exports contracted by a smaller quantum of 15.9% YoY in Feb ’09 (Jan
’09: -27.8% YoY). Imports also contracted at a slower pace of 27.3%
YoY (Jan ’09: -30.4% YoY). The trade surplus widened to RM12b (Jan
’09: +RM8.1b). YTD, exports and imports fell 22.2% YoY (Jan-Feb ’08:
+12.3% YoY) and 28.9% YoY (Jan-Feb ’08: +9% YoY) respectively, while
trade surplus broadened to RM20.1b (Jan-Feb ’08: +RM18.8b).

 However, export growth should remain negative for most of this year,
taking cue from indicators like intermediate goods imports, global chip
sales and index of leading economic indicators that point to underlying
weakness in the economy and key industry. Nonetheless, we note
recent improvements in data coming out of key economies like US and
China, which suggest the aggressive monetary, financial and fiscal
measures are taking effect.

 Therefore, we are maintaining our forecasts of exports and imports
falling by 16% (2008: +9.6%) and 13.2% (2008: +3.3%) this year, to result
in a narrower trade surplus of RM104.7b (2008: +RM142b). This will be
followed by rebounds of 6.4% in exports, 6.3% in imports and a
RM112.3b in trade surplus in 2010.






















Malaysian Politics: BN got BATANG,PKR got BUKITs

The three by-elections yesterday (7 Apr ’09) saw Pakatan Rakyat (PR) won in Bukit Gantang (Perak) and Bukit Selambau (Kedah), while Barisan Nasional (BN) won in Batang Ai (Sarawak).

 Overall, it is "status quo" for Malaysian politics after five by-elections so far, as BN continued to "struggle" in Peninsular Malaysia while still getting the support in East Malaysia, maintaining the trend seen in the Mar ’08 General Election.

 We view these by-election outcomes as "positive" for the economy in that the new leadership and the soon-to-be announced Cabinet must perform and deliver on economic and social fronts to regain political support.

PAS retained the Parliamentary seat of Bukit Gantang (Perak) and PKR won the State Assembly seat of Bukit Selambau (Kedah), while as consolation, BN kept the Batang Ai (Sarawak) State Assembly seat. Details of yesterday’s (7 Apr ‘09) three by-election results are in the appendix. In short:

 Former Perak Chief Minister Datuk Seri Mohammad Nizar Jamaluddin of the Islamic party PAS successfully defended the Bukit Gantang Parliamentary seat his party won in Mar ’08 General Election, with a larger majority of 2,789, beating BN’s Ismail Saffian and independent candidate Kamarul Ramizu Idris.

 The Bukit Selambau State Assembly seat in Kedah, where a record 15 candidates (including 13 independents) contested, was won by Datuk Seri Anwar Ibrahim-led PKR candidate, S. Manikumar, who defeated BN’s Datuk S. Ganesan (Kedah MIC Deputy Chairman and former State Assemblyman for Lunas) with a 2,403 majority – little changed from the Mar ’08 General Election results.

 In Batang Ai, Sarawak, the straight fight between BN’s Malcolm Mussem Lamoh (a newcomer) and PKR’s Jawah Gerang (a former five-term Lubok Antu MP) saw BN winning the State Assembly seat with an increased majority of 1,854.

BN: 1; PR: 4.
In total, there have been five by-elections, including the three held yesterday. Analysis of these by-election results shows that the percentage of votes (excluding spoilt votes) going to BN and PR were little changed from the Mar ’08 General Election. BN and PR respectively received 44% and 56% of the votes in the five by-elections so far, compared to 45% and 53% in these five constituencies during the Mar ’08 General Election. For the whole Mar ’08 General Election, BN and PR garnered 53% and 47% of votes, although for Peninsular Malaysia, PR actually edged BN on the percentage share of votes by 51% to 49%.

Overall, its "status quo" in Malaysian politics as the distribution of votes in the by-elections shows that BN is still finding it hard to win votes in Peninsular Malaysia, but has strong support in East Malaysia more than a year after the Mar ’08 General Election


















Malaysian REIT

Risks & EmergIng Trends

 M-REITs face 3 key risks in 2009-10: Refinancing, Recapitalisation and
Revaluation, as the domestic economy continues to weaken.

 If the economy worsens, we foresee M-REITs (in order of probability)
cutting dividend payouts, refinancing ST with LT loans, and engaging
in dividend reinvestment schemes, rights offers and asset disposal.

 However, the sector should remain resilient as M-REIT’s 9-13.7%
dividend yields have largely priced in zero acquisition growth and a 9-
35% drop in net property yields in 2009-10. Maintain Overweight.

M-REITs relatively resilient so far. Unlike REITs in other parts of the region,
M-REITs are much less susceptible to the risks of having little access to debt
capital, and requiring cash calls. M-REITs have also thus far been shielded by
their sheer simplicity, such as not having gearing and development limits (which
are imposed in Australia) and not having forex exposure (which is affecting
Singapore REITs).

Nevertheless, M-REITs still face 3 key challenges in 2009-
10:
(i) Refinancing (higher interest costs),
(ii) Recapitalisation (strengthening
balance sheets ahead of possible turmoil), and
(iii) Revaluation (capital values have peaked in 2008, and lower rental reversions may lead to downward revaluations).

The magnitude of these risks depends very much on the health
of Malaysian economy and the banks, which we assess as moderate.
Refinancing risk comes in two forms:

(i) the inability to refinance short term
liabilities, and

(ii) if refinanced, at higher interest rates. M-REITs have debt-toasset
ratios of 11-41% (Dec ’08) with about RM1.24b of short term debt (54%
of total debt) due for refinancing in 2009. Relative to regional peers, Malaysia’s
financial system is still flush with liquidity. But there is an ongoing false
assumption that cheap money is always available, especially if liquidity
tightens.

One foreign bank has cut off fresh loans to REITs (and property
developers) while others have increased credit spreads to compensate for
heightened business risk (thus offseting BNM’s 150bps cut in OPR since Nov
‘08). Overall, refinancing risk remains under control for M-REITs.
Recapitalisation risk hinges on refinancing risk. We may see equity raising
exercises by highly geared M-REITs that need to recapitalise balance sheets
and those wanting to position themselves for the next market recovery. A
common recapitalisation method in Singapore is rights offers (Saizen REIT
even threw in warrants) although it is dilutive in nature.

We think a dividend reinvestment scheme has longer term appeal, which may slowly gain popularity. But, asset disposal could be the last line of defence. Manageable revaluation risk. Steep upward rental reversions amid recent economic boom led to the asset bubbles in Singapore, which was also accentuated by lower cap rates used.

While capital values in Malaysia peaked in 2008, there was no asset bubble. Nonetheless, it is reasonable to anticipate downward rental reversions of 10-15% in 2009-10. In theory, the most
susceptible REITs to these three key challenges are (in order of susceptibility):
industrial (especially with export-oriented tenants), retail (in particular, high-end
retail) and office (especially those outside the CBD area) REITs.

Downside largely priced-in.
We believe the market has largely priced-in zero asset growth, lower rental reversions and a slowdown in rental collections (and perhaps some defaults) for 2009-10. M-REITs presently trade at 14-45% discount to NAV. With dividend yields of 9-13.7%, M-REITs have priced in net
property yield corrections of between 9-35% (see table on page 8), implying reasonable, sustainable dividend yields of 5.7-9.1% on a worst case basis. Our top picks among M-REITs are Quill Capita Trust and Axis REIT. We also like UOA REIT and Tower REIT for exposure to the office space segment. On the other hand, Starhill REIT is a prime takeover candidate.










































































































Friday, April 10, 2009

Banking Sector Is Going South

• Feb 09 loan growth remains southbound. In Feb 09, industry loan growth
continued the deceleration that started in Jan 09. From a high of 12.8% in Dec 08,
loan growth dropped to 11.7% yoy in Jan 09 and 10.9% in Feb 09. The loss of
traction came mainly from a slowdown in business loan growth from 13.2% in Dec
08 to 11.8% and 9.8% in the following two months. Consumer loan growth,
however, kept going at a rate of 9.1% yoy from Sep 08 to Feb 09.

• Anaemic leading loan indicators. Leading loan indicators remained subdued in
Feb 09 – loan applications rose by only 4.8% yoy while loan approvals declined by
15.9% yoy. Although the growth in the corporate segment was strong at an
estimated 20-30%, SME loan applications and approvals slid by 17-19% while
household loan indicators inched down by 1-2%.

• Loan momentum loses steam. We continue to expect a sharp fall-off in industry
loan growth from 12.8% in 2008 to 1-2% in 2009 given (1) lethargic leading loan
indicators, (2) slower economic growth, and (3) the downshift in car sales.

• Deposit and lending rates head south. Fixed deposit (FD) rates were lowered
by 47-49bp to 2.0-2.6% following the 50bp OPR cut on 24 Feb. Banks also
reduced their BLRs by about 40bp to 5.5-5.6%, leading to a 78bp yoy drop in
average lending rate. But the lower lending yields were mostly compensated by
the FD rate cuts.

• Ample liquidity. As loan growth of 10.9% outpaced the deposit growth of 8.3%,
banks’ loan-to-deposit rate tightened to 73.6% as at end-Feb 09 from 71.2% a
year ago. The system still has plenty of excess liquidity of about RM215.1bn in
mid-Mar 09 vs. RM225bn as at end-Feb 09.

• NPL ratio still improving, for now. Banks’ 3-month net NPL ratio declined by
95bp yoy to 2.2% in Feb 09 but was stable mom. Gross NPL ratio also fell by
157bp yoy to 4.8% while the reserve coverage improved from 73.8% a year ago to
87.3%, aided by a 16.5% yoy drop in gross NPLs against a 1.4% decline in total
provisioning.

• Reiterate UNDERWEIGHT. The lethargic loan indicators, especially in the SME
loan segment, point to softer loan growth ahead. This, coupled with the expected
rise in gross NPL ratio to a projected 7% in 2009, will exert great pressure on
banks’ earnings. On this score, the sector remains an UNDERWEIGHT, premised
on the de-rating catalysts of (1) slower loan growth, (2) rise in credit costs, (3)
lacklustre investment banking income, (4) decline in overseas contributions, and
(5) lower dividend payment. Public Bank is still our top pick for the sector.









































































































































Thursday, April 9, 2009

Penang Investment Trip

Bringing Back the Shine to the “Pearl of the Orient”…

 High concentration of export-based manufacturing – especially E&E – in Penang means the state’s economy is significantly affected by the current global economic downturn.

 However, action has been taken and plans made to reduce the vulnerability of – and remake – the state’s economy via a six-pronged strategy: (i) moving up the E&E value-added chain, (ii) diversifying and broadening the non-E&E manufacturing sector, (iii) reviving tourism, (iv) boosting intermediate and final services, (v) promoting a “knowledge-based” economy, and (vi) adopting best practices in governance and public service.

 Key infrastructure projects – MMC-Gamuda’s double tracking rail and CHEC-UEM Builders’ Penang Second Bridge – are progressing, which are integral in the rejuvenation of Penang’s economy.

 In essence, Penang is a sub-plot of Malaysian economic story - i.e. how to strategise and seize opportunities in the global financial and economic turmoil to undertake long-term restructuring of the economy.




























Wednesday, April 8, 2009

Strategy to Invest in Bursa Malaysia

Synopsis

Odds improving for region. As the jury is still out on whether this is a bear market
bounce or the start of a sustainable uptrend, we recently looked at whether regional
markets have performed in line with macro fundamentals. Trough valuations seen in
this bear market appear to be consistent with the macro outlook. Economic
indicators are expected to turn positive in 4Q09 as most of the monetary and fiscal
stimuli are likely to filter through by 3Q09. This should translate into a 2Q09 entry
point. If we wait for a post-rally window-dressing correction of 10-15%, the riskreward
ratio should move to 90:10, enhancing the odds of a profitable outcome.

• Political succession effect. Domestically, there are reasons to be more optimistic.
Dato’ Sri Najib Tun Razak will take over as prime minister shortly and will soon
unveil his cabinet. He will also be spelling out his vision for Malaysia and the
changes needed for Umno and the National Front coalition to stay relevant.
Historically, the market performed strongly in the 3-6 months before and after
changes in PMs. Given the lacklustre market performance in the run-up to this
handover, the post-handover succession effect could be stronger than expected.

• Foreign selling at tail end. Foreign funds have been persistent net sellers of
Malaysian equities over the past 12 months. Based on EPFR, foreign funds sold
down close to US$4bn or 40% of their Malaysian positions over the past year, much
higher than the 11-16% net disposals for other markets. The selling, however,
appears to have let up in the last couple of months. Considering the very high cash
level held by all funds, a reversal of the trend should give the market a big fillip.

• Climax of bad news in 2Q? In view of the high base, we expect more earnings
downgrades during the 1Q09 results season in May, making it the 5th straight
quarter of earnings letdowns and probably taking us to the tail end of downgrades.
In Apr/May, we are also likely to downgrade our GDP growth forecast for 2009 to a
sharper contraction. If the negative fundamental news sparks weakness in share
prices, investors should use this opportunity to accumulate positions. We expect
bad news on the economy and earnings to peak in 2Q.

• Upgrade to OVERWEIGHT. In addition to the fundamental reasons listed above,
Malaysia looks ripe for a rebound from a technical charting perspective. We
upgrade Malaysia from Neutral to OVERWEIGHT and raise our year-end KLCI
target from 1,013 to 1,060 points (based on 13.5x P/E) after cutting the discount to
the 3-year moving average P/E from 15% to 10%. On a regional basis, we believe
this is a hedged bet. To maximise returns in the 2H recovery, investors should
move away from defensive sectors to beaten-down cyclical sectors such as
construction. Our top-5 picks are Gamuda, MRCB, Lafarge, Kencana and Resorts