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Sunday, May 31, 2009

Double Top Danger

Double top for DJIA? Odds are the DJIA completed a bearish “double top” last
week after testing its early May high. The index reached 8,591pts before correcting
over the past few days. It is now holding just above its key support trend line at
8,180pts. A break below this level would be bad news and would probably confirm
the end of the uptrend that started in early Mar. This should be followed by a
deeper correction, possibly towards the 7,500-7,800 levels.
• Bullish only if 8,600 breached. Our alternative wave count, which calls for a more
bullish outlook, would be confirmed only if the 8,600 resistance were overcome.
But looking at the negative divergence in the technical indicators, we rate this as a
low-probability scenario.
• Banking stocks to lead? We believe US banking stocks should provide some
indication of the direction of the US stock market over the next few weeks. The US
KBW Bank Index has been trading in an uptrend channel since early Mar. But last
Friday, it broke the support trend line at 36pts, which is a negative sign.
Furthermore, given the negative divergence in the daily technical indicators, the
odds favour more downside for the KBW Bank Index in the immediate term.
• Upside capped for Asian markets after new high. The MSCI Asia ex-Japan
Index (MAxJ) scaled a new high of 380pts for May, above the 371 resistance level.
But the near-term upside could be capped as the daily technical indicators are
showing strong negative divergence signals. The key support trend lines are now
at 363 and 355, which, if broken, would be very negative and likely confirmation of
the end of the uptrend that began in early Mar.
• Double top also seen in regional equity indices. Singapore’s STI, Hong Kong’s
Hang Seng and Indonesia’s Jakarta Composite Index were also showing bearish
“double tops” last week and pulled back sharply by the end of the week. In the
immediate term, these indices are likely to challenge the double top. Our concern
is that the rally may not be sustainable if trading volumes do not pick up soon. A
break below the support levels could lead to more consolidation in the near term.

Special Technical Perspective

Tactical move to “Take Profit Stance” Since the KLCI made a Wave 3 low at
801.27 (Oct ’08), the next key swings were at 936.63 (Wave 4A in Jan ’09) and
at 836.51 (Wave 4B in Mar ’09). We have peaked at 1,059.88 for Wave 4C.
There is an obvious minor 5 sub-wave sequence that ended the KLCI’s
rebound run to 1,059.88 on 27 May ’09.
Upward retracement targets for the KLCI were met. Our KLCI rebound
targets of 1,043.78 and 1,053.18 were slightly exceeded. With abundant
bearish divergence indicators (ADX, CCI, MACD, MACD Histogram, Oscillator,
RSI, ROC and Stochastic), we believe that the KLCI has peaked temporarily at
1,059.88.
The KL Plantation Index (KLPLN) peaked at 5,515.37. The KLPLN Index
peaked at this level on 21 May ’09. With the obvious bearish divergence
indicators on this index and also the sequence of poorer profit figures for SIME
and KLK, we believe that the KLPLN Index has much further room to fall.
CPOF Elliott Wave Count is also “3-3-5 Flat”. With the KLCI and KLPLN
Indices (and some of their key plantation components like IOICORP and KLK)
having a rebound “3-3-5” Flat Wave structure, the CPOF also traced out a
similar Wave rebound to RM2,799. Ample bearish divergence at RM2,799 also
suggests that the CPOF had peaked at that level on 13 May ’09.
Watch the Ringgit against USD. Some short-term hedge funds had entered
Malaysia in the last 2 months. With this, currency and equity market
appreciation for them may be in the 10% to 30%-region in total. As such, they
may not have any hesitation in exiting their speculative trades. Therefore, do
watch the Ringgit’s prices against the USD as a sign of hedge funds exiting the
country.
Tactically, take most positions off the table. As mentioned in our special
article on 10 Apr ’09, we stated that the “Bull Run” that began in early Mar ’09
was one of a “Bluff-Bull” nature. We firmly believe that a temporary top for the
KLCI formed yesterday at 1,059.88. As such, take most equity on 27 May
positions off the table and realize profits. A larger cash pile is preferable in view
of the potential US and local market downturn in the next few weeks.
News flow has turned negative. The poorer recent Malaysia GDP figures
have taken the markets by surprise. Also, the results of the plantation
companies such as SIME and KLK suggest that the market has run ahead of
true economic fundamentals.
Volumes and market liquidity shrinking As the market rose to 1,037.81, the
traded volumes were quite high (just under 4b). However, with the market
rising to higher levels such as 1,059.88, volumes traded were between 1b to
2b. As liquidity shrinks, it is more difficult for large funds to sell. Selling or
liquidation will take more days to complete and therefore, it has shown up in
the exhausting and bearish divergent indicators.
The defensive stocks are: We believe that despite the potential KLCI
downturn, there are some price defensive components. Among them are
AIRPORT, MMCCORP, PROTON & SUNCITY. Continue to buy them on dips

Banking:Weakness Ahead

Weakness ahead. Loan disbursements, applications and approvals
slowed in Apr, reflecting cautious sentiment. Loans growth was just
1.4% YTD, and 4.2% annualised. There was a slight uptick in absolute
NPLs, implying stress in some loans segments. The poor 1Q09 GDP
numbers suggest growing stress in system loans over the next few
months. We remain cautious on banks’ profits, especially from 3Q09.
1.4% YTD loans growth. Banking loans (net of repayments) grew to
RM736.5m in Apr ’09 (+0.4% MoM, +10.6% YoY) on expansion in both
household (+0.7% MoM, +8.5% YoY) and business loans (-0.03%
MoM, +9.2% YoY). Disbursements slowed (-6.6% MoM, -6.4% YoY)
but repayments were relatively stable (+1.3% MoM, -2.8% YoY). YTD
loans growth was +1.4% (4M2008: +3.4%), driven by household loans
(+2.2%) while business loans’ growth was anemic (+0.4%).
Forward indicators contracting. Loan applications and approvals fell
YoY: -5.4% and -18.2%. The business segment saw loan applications
and approvals down 24.2% and 35%, while the household segment
continued to see growing appetite in loan applications but flattish loan
approvals. On a MoM comparison, both indicators also showed
contraction. Loan applications fell 1.4% while approvals slipped 0.8%.
Absolute NPLs inched up. Absolute NPLs ticked-up by 0.34% MoM to
RM33.7b (Mar ‘09: -3.7% MoM). However, Apr ‘09’s absolute NPLs
were still lower than a year ago, by 14.7%. We suspect the rising NPLs
came from the business segment, especially exporters. The net NPL
ratio was unchanged at 2.24% due to the expanded loans base. Loan
loss coverage (LLC) remained adequate at 88.5% (Mar ’09: 88.3%).
Stay Underweight. The combined 1Q09 net profit of the six banking
stocks we cover was down 2.1% QoQ, and a sharper 13.1% YoY, on
lower treasury and FX income and higher loan loss provisions. We
expect sector earnings to contract 10% YoY in 2009 and reiterate our
concerns on asset and loan quality as the economy contracts over the
next two quarters. Our analysis shows a 3-6 months interval from GDP
trough to NPL peak. Banks are set to report weaker profits

Overnight Policy Rate (OPR) Stays at 2%

No change in OPR as widely expected. Bank Negara Malaysia
(BNM) left the Overnight Policy Rate (OPR) at a record-low of 2% after
the Monetary Policy Committee meeting yesterday (26 May ‘09), as it
did on 29 Apr ‘09. Previously, the OPR was lowered by a total of 150
bps on three occasions between Nov ’08 and Feb ’09

2009 Real Gdp

Government revises its 2009 real GDP growth forecast. The Prime
Minister (PM) announced yesterday that the official real GDP growth
forecast for this year is now between -4% and -5% from +1% to -1%
announced by Bank Negara Malaysia (BNM) in Mar 09. This is due to
the impact of the global recession on external demand which also
weakened domestic demand, especially private investment (1Q09: -
26% YoY), including FDI (1Q09: -50% YoY). However, apart from
mentioning a 25% drop in exports, no detailed breakdown of the
revised forecast was provided

Room To Run, But Value Vanishes

Be realistic, be selective. We believe this market rally has pushed
valuations to the point where growth expectations have reached
implausible levels. In fact, profits have just begun to turn down. We are
not overly bearish – our Buy list is longer than our Sell list – but we
caution that optimism over growth can disappear as quickly as it
appeared. Domestic factors, particularly political developments, may
be a positive catalyst.
Profit recession has just begun. Industrial production peaked in
January 2008, but profits only began a broad-based decline in 1Q09.
Within our coverage, 63% of the companies that have released 1Q
earnings reported lower sequential quarterly net profits. In seven
sectors, our entire coverage list suffered profit contractions. This
suggests the recession in profits has just begun.
Market valuation implies an optimistic view of growth. The market
currently trades at 15.2x 2009 earnings, up from 12x earlier this year.
This is only 10% below the previous cycle’s mid-cycle value, but today,
we face growth of -7.7% (2009) and +9.7% (2010), taking market
earnings only 1% higher by the end of 2010 from its end-2008 level.
Market growth expectations seem to be running ahead of reality.
History tells us the bear market isn’t over. Two previous bear
markets over 1981-86 and 1993-98 lasted 57 and 58 months
respectively. It has now been 17 months from the January 2008
collapse. Those bear markets had 22-38 trend reversals of 5% or more;
we have now seen 12 since January 2008. These comparisons suggest
we are, at best, half way through this bear market.
Bet on Prime Minister Najib, but Sell hope. Our top stock picks are
in the construction sector. We expect PM Najib will deliver on the fiscal
spending promises, reinvigorating the construction and building
materials sectors. Our top Sells are stocks where high hopes and
expectations have been built in; where current prices have run well
ahead of both our and consensus target prices.
Politics a positive wildcard. Beyond rapidly executed fiscal packages,
the country’s new leadership could make further changes to longstanding
policies to attract foreign investment and win back broader
support from all Malaysians. These initiatives should be positive for
equity market at least in the short-term

Sunday, May 24, 2009

Fake Degree in Malaysian Public Listed Companies

Do you know a lot of directors in public listed companies didn't have a degree?





They may have a lot of business sense but zero knowledge in managing a public company.





No wonder they cannot compete globally and remain as 'jaguh kampung'.





I'm not against 'directors without degree' setting direction for a public listed company because they can hire capable managers with management experience and MBA.





Securities Commission & Bursa Malaysia which are supposed to take care the interest of investors encourage these companies to make up before going to IPO.They have conflict of interest between encouraging businesses to be listed in Malaysia and protecting investors.





Directors who do not have formal education will be asked to 'get' a degree from local universities / online foreign universities.





I've one good example here.This was taken from one of the annual report from a public listed company in Malaysia.



Please tell me if you know Honolulu University in Hawaii.


Try to dig deeper into the profiles of directors in public listed companies and you'll be suprised.




Saturday, May 23, 2009

Further Easing In Inflation Rate

The Consumer Price Index (CPI, 2005=100) slowed for the eighth
consecutive month in Apr ’09 to 3% YoY (Maybank IB estimate:
3.3% YoY; Consensus estimate: 3.2% YoY), compared with 3.5% YoY
in Mar 09 and the peak of 8.5% YoY in Jul-Aug ’08. MoM, the inflation
rate fell by 0.2%, the seventh sequential drop in the past eight months.
Year-to-date inflation rate is 3.5%.
Slowing mainly on Food and Non Alcoholic Beverages (FNAB)
“disinflation” and Transport “deflation”. FNAB prices eased for the
seventh straight month while Transport costs fell for the fifth month in a
row. There were no major movements or changes in the price trends of
other goods and services. Consequently, our measure of CPI ex-FNAB
and Transport was little changed at 2% YoY last month (Mar 09: +2.1%
YoY).

Adex Data Point South

1Q09 adex data point south. Although total gross adex for Jan-Mar 09 shrank
3.9%, it was better than the 20% contraction seen after the 1997-8 Asian financial
crisis. The worst performer was the newspaper segment which saw a 9% decline
compared with a 3.7% growth for TV adex. But ad volume visibility extends only 2-3
months out, leaving question marks over advertising commitments for 2H09.
• Downbeat expectations. The lacklustre adex showing in Jan-Mar 09 ties in with
the 1Q09 results reported by Media Prima and NSTP. It also confirmed the
generally bearish expectations of the media companies since the beginning of the
year, with a few being taken by surprise by the magnitude of the deceleration. Our
previous 2009 projection of an adex range of 1.1% contraction to 6% growth does
not hold and we now revise it to 6-10% adex contraction.
• Newspapers at risk. Fundamental risks could be more severe for newspaper
companies as newspaper adspend continues to take a hit from depressed GDP
data. Although there are signs of resilience in the Malay newspaper segment, this
does not mean total immunity against the potential worsening of adex volume in the
coming months. The top Malay newspaper NST’s Harian Metro is the main winner
but this is not expected to help the group much given that Harian Metro is a small
contributor.
• Indicators leading at inflection point? We concur with our economic research
team’s view that the CLI could hit the trough in Jun-Aug 09 and that the economic
recovery from the trough is likely to take at least 12 months given the severity of the
current global crisis. Advertisers should reposition their spending for a gradual
recovery from 2010. Historical trends suggest that adex in Malaysia should recover
in 1Q2010 based on a 3-6 months’ lag period.
• End-2009 a good potential entry point. We believe end-09 will be a good re-entry
point for exposure to selected media stocks as positives such as earnings visibility,
improved sentiment of advertisers, cheaper newsprint and gradual economic
recovery are likely to kick in as catalysts then. We will monitor closely the situation
on the ground and official stats but so far, adex for the months ahead appears to be
southbound. The share prices of media companies have recovered somewhat since
the start of the year and we fail to see any additional near-term re-rating catalysts.
• Staying NEUTRAL on media sector for now. In view of this, we maintain our
NEUTRAL stance on the media sector but recommend investors to switch to Astro
(Trading Buy) which has very little exposure to adex and minimal downside risks to
its Malaysian operations where the subscriber trend could turn out to be resilient.
We remain NEUTRAL on Media Prima (MPR MK), Star Publications (STAR MK)
and Media Chinese International (MCIL MK). NSTP is kept as an
UNDERPERFORM

Tiv Still Drifting Down

Losing speed. The persistent weakness in TIV which extended into
Apr, reaffirms our depressing view of the sector. Overall, we expect
2009’s TIV to contract 15-20% YoY. An effective NAP is essential to
reverse the slide. Until then, the auto sector remains an Underweight.
TIV continues to drift lower. Apr’s TIV of 41,135 units continued to
slide, down 7% MoM and 18% YoY. The sequential drop in vehicle
sales was greater on national marques (-10% MoM) vis-à-vis nonnationals
(-3% MoM). Perodua suffered the biggest drop in sales (-14%
MoM) and market share (-2.5% MoM) but was still capable of retaining
its No.1 status in the industry with a 30% market share.
YTD’s TIV down 12% YoY. Other major marques – Toyota, Proton and
Honda too reported weaker sales (-3%, -4%, -12% MoM respectively).
Only Nissan (+2% MoM) showed a 3% rise in sales, spurred on by its
MPV Grand Livina model (+9%). YTD, TIV fell 12% YoY to 159,816
units, accounting for 35% of our estimates of 438,000-465,000 units.
We expect TIV to contract 15-20% for 2009, as the sector continues
to suffer from an absence of new model launches and a stricter
financing environment. Reject rates for Proton’s applicants remain high
whilst the 85-100bps hike in Hire Purchase (HP) rates on non-national
cars will further dampen sales.
A good NAP is needed to wake the sector up. The National
Automotive Policy (NAP), which will be revealed by 3Q09, needs to
boldly address among others: (i) consolidation of national marques and
vendors, and (ii) issues on Approved Permits (APs). A pro-active
guideline will help shape the sluggish sector. Until then, we maintain
our Underweight call, with Sell calls on Proton and Tan Chong

Cpo Price Assumption Raised

We raise our CPO price assumption to RM2,000/t (from RM1,600/t)
on the current high price of RM2,800/t and YTD RM2,178/t average.
We do not foresee CPO prices staying at current levels beyond 2Q due
to rising 2H production and slowing exports. The present CPO price is
81-123% above its long term historical price in USD and Ringgit
equivalents. EPS forecasts are upgraded by up to more than 100% but
company valuations remain stretched. Maintain Underweight.
Recent CPO price spike unsustainable. We view the recent 40%
spike to the RM2,800/t level from an average of RM1,950/t in 1Q09 as
too fast, too furious. Traders and speculators justified the high price on
tight inventory. We think a significant price correction in 2H is imminent
as inventory is expected to build up on slowing exports and stronger 2H
production. Also, the present CPO price is 81% and 123% above its 30-
year long term historical price in USD and Ringgit equivalents of
USD430/t and RM1,257/t respectively.
Bearish 2H price outlook. CPO production, which has disappointed in
1H09 due to poor weather and tree stress, is likely to rebound strongly
in 2H. Besides production recovery, narrowing palm oil discounts
against competing oils should slow exports. A return of normal weather
in the next planting season for South America, and increased trade
protectionism by the West on palm biodiesel are some of the other
bearish fundamental factors for CPO.
Earnings forecasts upgraded. With CPO price having averaged
RM2,178/t YTD and likely to remain high in 2Q on tight supply, we raise
our CPO price assumption from RM1,600/t to RM2,000/t for 2009-11.
This results in EPS upgrades for plantation companies under our
coverage ranging from 17% to over 100% for 2009-11.
Valuations remain expensive. We rate the sector Underweight.
Valuations remain stretched, especially for IOI and KLK which trade at
20.1x and 16.9x 2010 PER. We downgrade Asiatic to Sell (from Hold)
as the stock has soared 54% YTD and is highly leveraged on CPO
price swings. Sime has been raised to Hold (from Sell). Risks to our
price view are a weaker USD, higher energy prices, and further supply
shocks due to weather anomalies

Saturday, May 16, 2009

Palm Oil Stocks Hit Bedrock

• Palm oil stocks at 22-month low but… Malaysia’s palm oil stocks fell for the fifth
straight month to a 22-month low of 1.29m tonnes at end-Apr 09 as exports and
domestic consumption exceeded domestic palm oil production.
• … at high end of expectations. Stocks fell 5.4% mom to 1.29m tonnes, which is at
the high end of market expectations ranging from 1.2m tonnes to 1.3m tonnes. The
decline in inventory is bullish for CPO price as it suggests tight palm oil supplies for
Malaysia, a key palm oil producer.
• Stock level may have hit trough in April. Our rough modelling, which assumes
the mom growth pattern for production and exports in the month of May will be
similar to the historical 3-year average growth pattern, suggests that Malaysia’s
CPO stocks could rise 5% mom to around 1.35m tonnes in May due to higher
production and lower exports.
• CPO price forecast intact. For the first four months of the year, average CPO price
fell 41% yoy to RM2,031 per tonne. This is marginally higher than our 2009 CPO
price forecast of RM1,950 per tonne due to lower-than-expected soybean harvests
from Argentina and weaker palm oil production from Malaysia and Indonesia. We
maintain our view that CPO prices will remain firm in the next few months due to
current tight supplies and potential further downgrade in Argentina soybean
harvests but are likely to trend lower in 3Q when palm oil supply improves and
demand weakens due to the higher selling prices. That said, the recent CPO price
strength has taken us by surprise due to deteriorating soybean crop prospects for
Argentina. In view of lower-than-expected yields, Oil World has cut its current-year
soybean crop estimates for Argentina by a further 1.5m tonnes to 33m tonnes last
week or a decline of 28.5% yoy. Although we are not changing our CPO price
forecasts of RM1,950 per tonne for 2009 and RM2,150 per tonne for 2010, there is
RM100-200 potential upside to our forecast for 2009 in view of the recent
downgrade of soybean supply from Argentina.
• Maintain UNDERWEIGHT. Our earnings forecasts for all the Malaysian planters
remain intact, along with our UNDERWEIGHT stance on the Malaysian planters due
to their expensive valuations relative to their regional peers. Potential de-rating
catalysts for the Malaysian planters are falling CPO price in 3Q, lower crude oil price
and improved weather prospects in major planting areas. Our only pick in the
Malaysian plantation sector is Sime Darby as the stock stands to benefit from the
move towards the new FBM 30 index, has the lowest P/E multiple and foreign
shareholding among the three largest big-cap planters in Malaysia and may engage
in earnings-enhancing M&As. We maintain our preference for the Singapore-listed
planters.

SP Setia: The Strongest Developer In Malaysia

S P Setia Berhad is well diversified within property development industry.It develops residential and commercial properties. The company also engages in producing precast components for prefabricated reinforced dwellings; general building construction; and infrastructure business. In addition, S P Setia Berhad involves in the prefabrication, installation, and sale of timber doors, roof trusses, and timber flooring boards to the local construction industry, as well as production of custom-made timber frames and doors for export market; and provision of kiln dry services and property management services, as well as acts as a contractor for home automation and alarm systems, and roads and buildings.



SP Setia has a few advantages over other developers in Malaysia



a) It has good relationship with PNB which helps it to source valuable prime lands in various states in Malaysia.



b) It has been actively looking for prime lands in KL and SPSETIA has been lucky always.




c) It has been expanding its market aggressively mainly to Vietnam and other countires as well.





SP Setia has 0.19 times net gearing and RM572 million cash. Its market cap is around 3900 mil with P/E of around 20. Currently,it's trading around RM 3.86 per share. SP Setia is a good buy for those looking for long term value in Malaysian developers.

Sunday, May 10, 2009

Malaysia to merge Bursa main, second boards. Huh,does it matter?

Truthfully speaking, does that matter?

Merging (Mixing) the boards do not make any difference.I know Bursa is trying to spur trading in KLSE so they can make more money (transaction cost) but investors are much more informed now-thanks to the Internet.

The value of a company STILL depends on the free cash flow (FCF) which it is able to generate in its lifetime. No matter where you list the company (main board,2nd board),how you name the company(Axiata,TMI,UEM,UEMWorld),the growth of the company still depends on its PEOPLE.

One good example which I can relate to is our government department. Government can do all sort of things to increase its popularity:-PM visit to immigration department, PM took KTM,Increase salary for public servants,change to Open Tender,shrink the Cabinet,etc. The element which can affect the efficiency of the government department is the PEOPLE in these departments.No matter what you do,as long you're in government service,you'll be sure that you'll not get FIRED.

Firing people in Malaysia is a TABOO especially when it comes to Malay community which uphold "Semangat Perpaduan". If you fire one of his friend,the whole department will not cooperate with you.So,no high ranked officers dare to "Rock The Boat".The unwritten rule is still,"Sama-sama cari makan.You scratch my back,I scratch yours".That's why I think "ONE MALAYSIA" will remain as a slogan,just like "BERSIH,CEKAP,AMANAH".

It's extremely hard to break the "friend friend" culture in the government department.A good speech by PM Najib without much detail action plan won't work.Most of the high ranked officers in that speech were in for the big "jamuan" anyway.

So,if you think 1st board & 2nd board merging will make the companies more transparent,you're truly a sucker.

Thursday, May 7, 2009

Semiconductor

• Some glimmers of hope… Rays of hope are permeating the semiconductor
industry, which probably saw most of the bad news in 1QCY09. Global chip sales
improved slightly in Mar 09 with a 30.0% yoy decline compared with a 30.1% yoy
fall in Feb 09. The book-to-bill ratio has ticked up with preliminary Mar 09 numbers
hitting 0.61x, up from Feb 09’s abysmal 0.47x. Finally, utilisation rates have scraped
bottom as some production facilities have been shuttered and inventory control is
being exercised. The end-user markets appear to have troughed, with PC and
handset sales probably hitting the bottom. Furthermore, trade credit is now
normalising. That said, stabilisation does not equate to a recovery and we believe
that restocking activity as inventory runs low is the primary factor in the improving
outlook. We still expect 2009 to be a difficult year where the typical seasonal pick up
in 3Q may not materialise given the current re-stocking activities.
• …but no full-blown recovery until 2010. We argue that a true recovery will only
take root when the global economy begins to move upwards. A meaningful and
sustained recovery will only take place when consumer sentiment and spending
spring back to life and cause ASPs to start rising. We believe that a more
convincing uptrend will take hold only from 2H10 onwards.
• Global economies to start stabilising towards year-end. Our economists believe
that the world economy will feel the full impact of the global financial crisis this year.
Although the process of sorting out the financial system will take time and
resources, the cumulative effects of sizeable fiscal stimuli and aggressive monetary
easing globally will work to provide some stability. Recent global indicators are less
negative. Considering the extremely low base this year, global growth should pick
up in 2010 but will probably fall short of its long-run average growth rate of 3.7%.
• Upgrade sector to TRADING BUY. While the fundamentals for the sector remain
uncertain, we think that downside to share prices is limited as valuations are still
below trough levels. We upgrade the sector from Underperform to TRADING BUY.
Furthermore, in line with our market strategy, we think that investors’ risk appetite is
increasing and higher beta plays such as semicon should be in vogue. Investors
should start picking up semicon stocks ahead of the recovery of the sector as
historically, the share prices for both MPI and Unisem cratered 13-18 months before
the upturn of the sector. Sector catalysts include a) a sooner-than-expected revival
of end-user demand and b) a faster-than-expected economic recovery.
• Upgrade Unisem and MPI to Trading Buy. In tandem with the sector upgrade, we
upgrade MPI and Unisem from Underperform to Trading Buy. We raise our target
prices for both after cutting our discounts to their 5-year historical average by 30-
60% pts to 20-40% for Unisem and MPI respectively. We assign a lower discount to
Unisem, our top pick, as its higher liquidity and beta make it a better play on a
market rebound. Re-rating catalysts include a) qoq improvement in earnings, b)
revival of end demand and c) the higher betas on offer.

Say Good Bye To Property Market

We expect transactions to fall and prices to ease in 2009, in line with the projected 3%
real GDP contraction. Transactions could fall 20-30% or as much as 35-50% in the
worst-case scenario, matching the performance during the 1997/8 Asian financial
crisis. However, most major developers have pushed out innovative financing
schemes to lure buyers. Response has been mixed, with good response garnered by
the likes of SP Setia (RM500m sales) and Mah Sing (RM170m sales) but lacklustre
sales for many other developers

Tuesday, May 5, 2009

Global Equity Technicals

Extended wedge formation. We were expecting the DJIA to break down from its
wedge formation last week but it continued to rise further towards the 8,300 levels
before correcting end of last week. The Index could still be in an extended wedge
formation and the breakdown the wedge support trend line at the 8,100pt would
confirm the end of this pattern.
• If we are wrong… If we are wrong, our alternative wave count shows that DJIA
could have already started its minor wave “c” up leg after completion of the wave
“b” triangle consolidation since early Apr last week (refer to chart below). This wave
count is supported by the breakout of the major resistance trend line since Nov-08.
Confirmation of this alternative wave count if DJIA breaks above 8,300pt.
• US banking stocks remains in consolidation phase. If banking stocks are
leading the market, DJIA is still in an extended wedge formation. The KBW Bank
Index has just broken down below its uptrend channel support trend line since
early-Mar. This indicates further consolidation in the immediate term for the Index.
• Crude oil uptrend is not over. We were looking for crude oil prices to break down
last week but the price has since bounced back above the US$53/barrel levels.
This has negated our preferred wave count and a likely “double zig-zag” is taking
place, targeting the US$60-70/barrel levels in 2H09.
• Channel breakout. MSCI Asia ex-Japan Index (MAxJ) only experienced a mild
correction last week and closed strong for the week at 336. The Index just broke
out of its channel resistance trend line since Nov-08. This is a positive sign if the
Index is able to hold above this trend line over the next few weeks.
• Still expect consolidation. However, we still expect Asian equity markets to
consolidate over the next few weeks to build up a support base before charging up
in June-July. If RSI breaks out of its current consolidation range, this would likely
indicate that Asia has kick started its next up leg towards the June-Jul period

Tunnelling Job Bores Through

A milestone for the sector. We take a positive view of this news as it is a significant
milestone for the water sector. The timing of the award was a slight surprise as we
had expected the recent cabinet reshuffle to result in a slight delay for the project
award following the award of the letter of intent (LOI) to the Shimizu consortium a few
months back. The water transfer project is the first mega job to be rolled out under the
9MP after the announcement of the second stimulus package in Mar 09. Our channel
checks indicate that the tunnelling job will move fairly quickly from here on and the
notification to start work should be received in a matter of days. Once site possession
is obtained, major resource mobilisation will be underway, including Shimizu’s
positioning of the tunnel boring machine (TBM) near the Titiwangsa range. We think
that actual work could start within a month, suggesting a mid-2014 timeframe for
completion of the project.
No details on scope of works. Details of the scope of works are not available. IJM’s
share of works based on its 20% stake works out to RM260m or just RM26m profit
enhancement assuming a 10% pretax margin. We are not revising our earnings
forecasts as the RM260m share of works is already part of our assumption for new
contracts for IJM. That said, the award of the project raises IJM’s profile as it is one of
the main contractors of the country’s largest water infrastructure project.
Focus will now shift to the remaining major components of the water transfer project,
i.e. the Kelau dam and the Langat 2 water treatment plant. We expect the feasibility
studies for both to be concluded sometime in early 2H09, making way for the
tendering process. We gather that the Shimizu consortium is eyeing the Kelau dam
job which has an estimated value of roughly double the tunnelling job. This suggests
that IJM’s potential share of works could be more than RM500m

The Mega Projects

More excitement ahead. The eventual award of the RM1.3b Pahang-
Selangor raw water transfer tunnel works on 28 Apr confirms that the
new administration sees the urgency for construction in stimulating the
economy. Langat 2 should be next in the limelight, together with the
massive Klang Valley LRT system. We expect more positive news flow
over the near-term. Continue to Overweight Construction.
Langat 2 next. Langat 2, the downstream portion of the water transfer
project, comprises a 2,180 mld treatment plant and the distribution
pipelines. The estimated RM5b construction contract was awarded in
Feb ’08 to Kumpulan Darul Ehsan, which holds 60% of Kumpulan
Perangsang Selangor (KPS). As KPS does not have a major
construction arm, we think that potential beneficiaries are Gamuda, Loh
& Loh and Taliworks, which have had working experience with, and/or
are affiliated to KPS via shareholdings.
Klang Valley LRT to follow. Local companies have been invited to
submit “expressions of interest” for the LRT extension and upgrading
works, with the government keen to see construction works start within
the next 3-4 months, according to today’s Edge. The extension works
could cost RM7b, including RM1b to buy rolling stocks. Our view is that
the project may be parcelled out and experienced contractors like IJM,
Gamuda, UEM Builders and YTL Corp may bid as turnkey contractors.
Overweight Construction. We continue to expect mid-sized projects
to lead the momentum of construction sector recovery under the fiscal
stimulus. Meanwhile, the inter-state water transfer (including Langat 2)
and Klang Valley LRT extension are also two priority projects under the
9th Malaysia Plan with works expected to start before the decade turns.
IJM, WCT and HSL remain on our Buy list. Meanwhile, Gamuda is a
strong contender for the two mega water and LRT projects. Our Hold
call on the stock is under review, with upward revision potential

Monday, May 4, 2009

BANKING Mar 09 Statistics Some Resilience

Positive signs. Loan disbursements, repayments, applications and
approvals rebounded with strong double-digit MoM growth, flattish-tolow-
teens YoY growth, and in absolute term, were back to pre-Aug/Sep
’08 levels. Absolute NPLs continued to inch lower, mainly from the
working capital segment. Nonetheless, it is early to tell whether these
are sustainable as global fundamentals remain weak.
Strong loan disbursements and repayments. Banking loans (net of
repayments) grew to RM733.9m in Mar ’09 (+0.6% MoM, +10.9% YoY)
on expansion in both household (+0.4% MoM, +8.8% YoY) and
business loans (+0.9% MoM, +9.5% YoY). The pace of disbursements
and repayments was strong (disbursements: +27.4% MoM, +9% YoY;
repayments: +15.7% MoM, +4.8% YoY), mainly for working capital.
YTD loans growth was +1% (household: +1.5%, business: +0.5%).
Forward indicators bounced MoM but still flattish YoY. Loan
applications and approvals also rebounded strongly: +24.3% MoM and
+35.3% MoM respectively. On a YoY comparison, loan applications
were up 4.7%, driven by household loan applications (+21.5%), mainly
for home purchases, which off-set lower applications from businesses
(-11%). Overall loan approvals were rather flattish YoY, with approvals
up for household loans (+12.6%) but down for business loans (-13%).
Absolute NPLs contracted further. Absolute gross NPLs continued
to inch lower, at a slightly higher pace of -3.7% MoM to RM33.6b (Feb
‘09: -0.04% MoM). On a 3-month comparison (see table in page 4),
the lower NPLs came mainly from the working capital segment,
reflecting perhaps resilient business strength. Meanwhile, net NPL ratio
was little changed at 2.24% (Feb ‘09: 2.23%).
Remain Underweight. YTD loans growth, if sustained, should lead to
the upper end of our 2-3% loans growth forecast for 2009. Our other
assumption is for absolute NPLs to expand by 50% YoY by end-2009,
leading to a projected 10% decline in combined net profit for 2009.
While loans quality was resilient in Mar ’09, we remain concerned over
rising NPLs – our analysis shows a 3-6 months interval from GDP
trough to NPL peak. The other main risk is a protracted economic
slowdown leading to rising unemployment and asset deflation

MEDIA Strong Mar Showing Unsustainable

Welcome relief but maintain cautious outlook. Mar ’09 total adex
recorded a much lower YoY contraction of 1% (Feb ’09: -13% YoY)
driven by TV (+13% YoY). Despite this reprieve, the high 2Q08 and
3Q08 total adex base will be difficult to repeat due to lack of adex
friendly events this year. We downgrade Star and Media Prima to Sell
as valuations have run ahead of fundamentals.
TV adex rebounded... Mar ’09 TV adex rose by 13% YoY driven by
higher rates at Media Prima’s TV stations (TV3, 8TV, ntv7 and TV9)
effective 1 Feb ‘09. Due to the strong showing, YTD Mar ’09 TV adex
rose 4% YoY.
… but total adex fell. Mar ’09 total adex eased 1% YoY due to the
high base set in the preceding year by the 2008 General Election adex
of RM19.6m and continued deterioration in newspaper adex (-9% YoY).
Mar ’09 represents the sixth consecutive month of YoY newspaper
adex contraction. YTD Mar ’09 total adex was down 4% YoY,
One swallow does not make a spring. While we welcome the better
showing in Mar ’09, we believe that this momentum is unsustainable.
The high adex base of RM2.7b from May ’08 to Sep ’08 was fuelled by
Euro 2008 and the Beijing Olympics adex. Due to the lack of adex
friendly events and weak economic outlook this year, it will be difficult
to repeat this feat. We maintain our total adex forecast of -3% for now.
Sell Star and Media Prima. We raise Astro and NSTP target prices to
RM2.70 and RM0.95 on a lower WACC of 10.4% and 11% (13%
previously) but maintain our Hold and Sell calls respectively. We
downgrade Star and Media Prima to Sell as we believe their share
prices have run up ahead of fundamentals. The media sector is now
downgraded to Underweight from Neutral

BANKING A Picture Of Health

• Stable loan growth. The banking industry kept up its loan growth pace of 10.9%
yoy in Mar 09. This was partly driven by a 20-30% jump in loans classified as
“others”, which are loans extended to government agencies and non-bank
financial institutions. Business loan growth decelerated from 10% in Feb 09 to
9.5% in Mar 09 while the growth pace for consumer loans was sustained at 8.8%.
• Lethargic leading loan indicators. Leading loan indicators remained subdued in
Mar 09 – loan applications rose by only 4.8% yoy while loan approvals dipped by
0.7% yoy. The business loan segment was the culprit, with applications and
approvals dwindling 11-13% yoy and offsetting the 13-22% increase in the
indicators for consumer loans.
• Still expecting loan momentum to lose steam. We continue to expect a sharp
fall-off in industry loan growth from 12.8% in 2008 to 2-3% in 2009 given (1) the
sluggish leading loan indicators, (2) slower economic growth, and (3) the downshift
in car sales.
• Sliding lending rates. In response to the OPR cut on 24 Feb 09, banks reduced
their fixed deposit (FD) rates a few days later but BLRs for most banks were
lowered later by about 40bp in early Mar. As a result, FD rates were stable at 2.02-
2.52% but the average lending rate shrank by 105bp yoy and 33bp mom to an alltime
low of 5.16%.
• Ample liquidity. As loan growth of 10.9% outpaced the deposit growth of 8%,
banks’ loan-to-deposit rate tightened to 73.7% as at end-Mar 09 from 70.8% a
year ago. The system still has plenty of excess liquidity estimated to be about
RM219bn in mid-Apr 09 vs. RM216.8bn as at end-Mar 09.
• NPL ratio still improving, for now. Banks’ 3-month net NPL ratio declined by
73bp yoy to 2.2% in Mar 09 but was stable mom. Gross NPL ratio also fell by
154bp yoy and 21bp mom to 4.6%. The reserve coverage improved from 76.5% a
year ago to 86.4%, aided by a 16.9% yoy drop in gross NPLs against a 6.1%
decline in total provisioning.
• Maintain NEUTRAL. We remain NEUTRAL on Malaysian banks as the stillhealthy
banking numbers suggest that banks could perform better than we and the
market expect despite the downbeat economic outlook. Although banks’ net
earnings are estimated to pull back 6.5% this year, we anticipate a 17.4% rebound
in 2010. Over the longer term, many banks will also reap the benefits from their
ongoing revamps and regional expansion. Public Bank remains our top pick for the
sector

Overnight Policy Rate (OPR) at a record-low of 2%

OPR unchanged. Bank Negara Malaysia (BNM) maintained the
Overnight Policy Rate (OPR) at a record-low of 2% after the Monetary
Policy Committee (MPC) meeting yesterday (29 Apr ‘09). Earlier, the
OPR was cut three times by total of 150bps between Nov ’08 and Feb
’09. The latest move was not that surprising after the “not so subtle
hint” contained within recent comments by the central bank’s Governor

Friday, May 1, 2009

Juicing The Return

Momentum halted US equities indices were in a +/-1% range, after Treasury
Secretary Geithner said the “vast majority” of banks have enough capital and
comments allayed concerns about next month’s “stress test” results, after an earlier
leak indicating otherwise. Big European banks also reported a brighter 1Q09 results or
guidance. Regional markets were mixed, with profit taking in Indonesia, Hong Kong
and Singapore, while Thailand and Malaysia were up.
• 14 painful years to breakeven at 5.4% p.a. Based on the available sample of MSCI
FExJ data, the long term capital returns for the MSCI FExJ markets works out to 5.4%
p.a. Including dividends, the total returns go up to 8.4% to 9.4%. The bad news is that
at this rate, it would take 14 miserable years before breakeven is achieved for
investments made at the October 2007 market.
• But 6.8% is probably more accurate The good news is that the 8.4% to 9.4% p.a.
returns is likely to be an underestimation of the potential returns of Asian equities. A
sanity check based on the historical cost of equity and the underlying ROE of the
countries under our coverage suggests that the long term returns are likely to be in the
10-18% range. Adding a trendline – albeit crude – to the FExJ index throws up an
implied 6.8% p.a. long term capital returns, or close to 12% total returns if dividends
are accounted for. This is also consistent with the long term returns of 10.7% that have
been documented for US equities.
• Juicing the returns beyond long term returns Returns are determined by the timing
of entry into the market. By definition, markets tend to oscillate around the long term
trendline. The FExJ index is currently below the trendline of its long term growth profile,
as expected. If investors are accurately discounting the GDP turning point that is
months away, risk tolerance should improve and equities should continue its march
upward. A reversion to the long term growth profile of the FExJ markets by the end of
this year implies an annualised return of 52%, while a less optimistic view of a
reversion only by the end of next year produces annualised returns of 24%. At 3.5x and
7.6x long term returns on conservative forecasts, the timing factor favours investors

Technical View

Bank Negara: Tan Seri Dr Zeti Akhtar Aziz, pointed out that OPR had been
“front-loaded”. Zeti indicated that, there will not be any further OPR rate cuts
provided in improvement is seen in the second half of the year and further
improvement going into next year. Zeti expects the global and domestic
economies to improve by the second half of the year. (Source: The Edge Daily)
Axiata: Announcement of Headline KPIs for FY08. Axiata failed to achieve its
FY08 KPIs targets, citing increasing competition in the mobile market of Axiata’s
operating countries, currency volatility, liquidity shortages, and fluctuation of
interest rates. Axiata did not meet its target for revenue growth, EBITDA margin
and ROE for FY08. (Source: Bursa Announcement)
Ramunia: Currently engaging in preliminary discussion with Sime Darby
Engineering Sdn Bhd as a strategic partner. Ramunia and Sime Darby
clarified in an announcement that, they are in engaged in a discussion on a
potential corporate transaction as part of Ramunia’s search for a strategic
partner. (Source: Bursa Announcement)
Air Asia: Eyeing new associates in the Philippines and Vietnam. Datuk Seri
Tony Fernandes is keen on setting up affiliate airlines in the two countries. He
envisioned all AirAsia affiliates in Asean to become a single entity, ultimately.
(Source: Business Times)

G-7: Says strength of recovery depends on clean-up of banks' toxic
assets. In warning that the world economy could still take another turn for the
worse, the finance ministers and central bankers who met over the weekend in
Washington singled out the banks' impaired balance sheets as the biggest threat
to a sustainable recovery. Their remarks indicate it will be critical to follow
through on commitments to deploy taxpayer funds to buy distressed assets,
even as some gauges of financial stress ease. U.S. officials aim to finance the
purchases of as much as USD 1tr of loans and securities, and Germany is
pushing a plan to remove EUR 853b (USD 1.1tr) from balance sheets. (Source:
Bloomberg)
Mexico: Swine flu outbreak may deepen economic decline. The outbreak of
deadly swine flu may curtail tourism and compel shoppers to stay home, further
damaging an economy already reeling because of a U.S. recession that has cut
demand for exports. President Felipe Calderon closed Mexico City schools until
May 6, shut public events and declared emergency powers to order quarantines
to fight the flu, which has killed as many as 103 in Mexico. Finance Minister
Agustin Carstens said there’s “high potential” the outbreak will disrupt the
economy, with hotels and restaurants being the hardest hit. (Source: Bloomberg)
Germany: GfK consumer confidence holds steady for a third month in May
as slower inflation boosted household purchasing power and the recession
showed first signs of easing. GfK AG’s confidence index for, based on a survey
of about 2,000 people, was unchanged from April at 2.5%, the Nurembergbased
market-research company said in a statement. German business and
investor confidence increased this month on hopes that interest-rate cuts and
government stimulus packages will lift the economy out of its worst recession in
over six decades. Germany’s leading economic institutes predict the economy,
Europe’s largest, will shrink by 6% YoY this year. (Source: Bloomberg)
Ireland: Banks may report EUR 22.5b of loan losses. Ireland’s government is
preparing to buy EUR 90b (USD 119b) of property loans in a bid to stave off
nationalizing its biggest lenders. It may still end up with majority control of the
country’s banks. Companies led by Allied Irish Banks Plc may get 25% less than
the face value of their loans under the proposal from the National Asset
Management Agency, according to the median estimate of seven analysts
surveyed by Bloomberg News. That implies losses of EUR 22.5b. Analyst
estimates for the discount ranged from 15% to 30%. (Source: Bloomberg)
Japan: Cuts economic forecast to record 3.3% YoY decline for 2009 as
exports and corporate spending tumble at an unprecedented pace. The Cabinet
Office cut the forecast for the year started April 1 from a January prediction for
zero growth. Finance Minister Kaoru Yosano told parliament that the economy
remains in a “crisis” as the slump in exports and industrial output take a toll on
employment and companies struggle to raise funds. The world’s second-largest
economy would contract as much as 5.2% YoY without Prime Minister Taro
Aso’s JPY 15.4tr (USD 159b) stimulus plan, funding of which was approved by
the Cabinet, the government said. (Source: Bloomberg)
Japan: Pledges record JPY 13.9tr (USD 143b) budget for stimulus aimed at
pulling the nation out of its worst recession since World War II. The government
will sell JPY 10.8tr in new bonds to pay for most of the extra budget, according
to a proposal released by the Finance Ministry. The extra debt sale will bring the
government’s new bond sales for the year ending March 31 to a record JPY
44.1tr. Bond yields rose to the highest in almost five months on April 10, the day
Aso unveiled the record JPY 15.4tr stimulus spending. (Source: Bloomberg)

Berjaya Bjtoto

B-Toto is worth a bet now as i) its core gaming operations remained resilient even
during the post-CNY off-peak period and appear likely to surpass our 6-7% gaming
revenue growth target for FY4/09, ii) 2009’s special draw allocations for all three
NFOs could take place over the next few weeks and iii) there is upside potential to its
6-8% gross dividend yield based on its policy of a minimum payout of 75% if B-Toto
dishes out higher dividends to lend its parent a helping hand.
• Adjusting earnings but implied yields still decent. We raise our FY09-11’s
revenue per draw growth assumptions by 2-4% pts following the stronger-thanexpected
YTD showing. But FY10-11’s bottomline is lowered by 4-5% as we also
raise our blended prize payout assumption from 62-64% to 63-64% to better reflect
the payout trends seen so far. FY09’s numbers are largely intact despite these
adjustments. Even after a 3-5% cut in our FY10-11 DPS projections (unchanged
80% payout ratio), our forecasts still imply a decent yield.
• Reiterate OUTPERFORM. Our DPS downgrades trim our end-CY09 target price
from RM5.95 to RM5.65, based on an unchanged 5% discount to its DDM value. We
continue to like B-Toto for its steady, low-risk topline growth, superior ROEs and
sustainable dividend yields. Being a low-beta stock, B-Toto may fall out of favour in a
rising market. However, we flag the likelihood of bumper dividends over the short
term. This is a potential share price catalyst that underpins our OUTPERFORM
recommendation, along with the normalisation of luck factor and market share gains

Airlines On Alert

Harking back to the SARS nightmare? The surgical masks, empty stadiums and
deserted streets of Mexico’s cities remind Asians of the devastating outbreak of the
SARS avian flu in east Asia in early 2003.
Yesterday, aviation stocks responded to those fears. Singapore Airlines’ share price
declined 4.5%, Malaysia Airlines fell 3.8%, AirAsia dropped 8.8%, Thai Airways
corrected 6.9%, and Cathay Pacific (Not rated) fell 8%. Airport shares also dropped,
but not by as much. Airports of Thailand fell 2.1%, while Malaysia Airports (Not rated)
fell 0.6% yesterday.
The current swine flu outbreak in Mexico has already killed more than 100 people and
has spread to neighbouring US and Canada. The World Health Organization said that
the outbreak has “pandemic potential” and has rated the seriousness of the outbreak
as a 3 on the scale of 1 to 6, with 6 being the most severe. US President Obama said
that the swine flu outbreak is a "cause for concern and requires a heightened state of
alert…but is not a cause for alarm".
If the outbreak turns into a global pandemic, aviation could be hit by a sudden
collapse of travel demand. During SARS, Singapore Airlines’ passenger numbers fell
50% yoy in Apr 03 and 60% yoy in May (Figure 1) while Cathay Pacific’s passenger
traffic plunged by as much as 75% in May (Figure 2).
Malaysia Airlines saw a 40% yoy fall in international passengers in May 2003 although
domestic traffic was relatively more resilient, pulling back a maximum 25% yoy
(Figures 3 and 4). AirAsia also experienced a sudden demand fall during that period,
although official numbers are unavailable as the company was not listed then.
In Thailand, Airports of Thailand saw international passengers through its 5 airports
plunge 43% yoy in April 2003 and 48% yoy in May while domestic traffic retreated
15% yoy in April and 14% yoy in May (Figures 5 and 6).

Plantation: Swine flu hogs the limelight

CPO futures fell by 4%. Malaysian palm oil futures fell by as much as 4.3%
yesterday as global soya oil markets swooned on concern that an outbreak of swine
flu in Mexico may bite into the demand for meat and grains. Yesterday, CPO futures
fell by RM100-RM120 to RM2,405-2,690 per tonne (see Figure 1).
Background. Fear of a global flu pandemic is growing as new suspected cases of a
dangerous new strain of swine flu appeared around the world. It has killed up to 81
people in Mexico and spread to neighbouring US and also Canada. The virus is an
influenza that contains DNA from avian, swine and human viruses, including elements
from European and Asian swine viruses, according to the US Center for Disease
Control and Prevention. It is passed on by sneezing, coughing or through touch. It
probably originated in pigs though the Mexican government and the World Health
Organization have ruled out any risk of infection from eating pork.
Trade impact so far. Russia has banned all meat imports from Mexico and southern
US, and said that it would screen incoming passengers from those two countries for
swine flu by taking their temperatures. China has banned imports of pork products
from Mexico and parts of the US.We believe the potential impact of the swine flu outbreak on CPO price depends on
how it affects: (1) global economic growth and trade, and (2) the global poultry
business. The impact of the swine flu on the global economy depends on the duration
and severity of the outbreak. For comparison purposes, the most recent serious
outbreak that comes to mind is Severe Acute Respiratory Syndrome (SARS), which
hit Asia in 2003. The economics department of Asian Development Bank estimated in
2003 that the potential reduction of annual GDP growth to be 0.5% pts in southeast
Asian and 0.4% pts in east Asian countries should SARS last an entire quarter.
Our concern is that an extensive spread of swine flu to the US could deepen the US
recession and prolong the global economic downturn. This could, in turn, affect global
demand for edible oils including palm oil and lead to weaker prices. The good news is
that during the SARS outbreak, demand for palm oil or other edible oils did not drop
significantly despite the severity of the SARS episode. Based on Oil World stats,
global edible oil demand increased by 3.3% in Oct 02-Sep 03 while palm oil demand
rose by 10.6%. During the peak of the SARS epidemic, Malaysian CPO price fell by
RM101 per tonne or 6% mom in March 2003 and a further RM48 per tonne or 3%
mom in April 2003, due possibly to concern over weaker demand on CPO. However,
prices recovered towards the end of the year. Given the experience of handling
SARS, we do not expect a ham-handed response this time around as most countries

Gaming

QUICK TAKES 28 April 2009 MALAYSIA CIMB Research Report OVERWEIGHT Maintained Gaming Catching the flu? Soh May Yee +60 (3) 2084 9964 - mayyee.soh@cimb.com Swine flu outbreak Casino-related stocks shed as much as 6%. Resorts World’s (RWB) (RNB MK, Outperform) share price fell 5.9% yesterday on fears that a global flu pandemic could affect tourism-related activities within the region. RWB’s parent, Genting (GENT MK, Outperform) was not spared – its share price shed 5.7% while over in Singapore, its 54%-subsidiary, Genting International (GIL SP, Underperform) followed its parent on the downtrend, falling 5.5%. GIL operates casinos in the UK. What is swine flu? Suspected cases of a dangerous new strain of swine flu have appeared around the world. It has killed up to 81 people in Mexico and spread to neighbouring US and also Canada. The virus is an influenza that contains DNA from avian, swine and human viruses, including elements from European and Asian swine viruses, according to the US Center for Disease Control and Prevention. It is passed on by sneezing, coughing or through touch. It probably originated in pigs though the Mexican government and the World Health Organization have ruled out any risk of infection from eating pork. Comments A negative for tourism-related activities. A virulent flu outbreak is generally negative for tourism and services-related activities. For the gaming sector, the casino sub-sector rather than the number forecast operators (NFOs) appears to be the direct casualty as such outbreaks are likely to curtail travelling and induce people to stay home. Also, given that the swine flu is passed on by sneezing, coughing or through touch, people are likely to avoid public areas as well. Impact on RWB and Genting. For RWB, this development is likely to reduce visitor arrivals at its flagship Genting Highlands Resorts and, more importantly, casino patronage. Given that the bulk of the resorts’ visitors are locals, the stepped-up screening of inbound visitors by the Malaysian government should not pose a major threat. For Genting, the impact is felt indirectly via its shareholding in RWB and GIL. So far, the European Union has advised travellers to avoid areas affected by the outbreak. Australia, Japan, Singapore and South Korea are among the countries screening travellers for fever while Hong Kong has raised its swine-flu response level to “serious” from “alert.” How bad can it be, operationally? While generally a negative, the magnitude of the impact on tourism-related activities depends on the duration and severity of the outbreak. During previous pandemics such as the severe acute respiratory syndrome (SARS) in 2002/2003 and the bird flu in 2005/2006, Genting Highlands’ visitor arrivals did weaken (Figure 1). Visitor arrivals increased by only 1.2% in 2003 and fell 1.1% in 2006. RWB’s revenue dropped 2.6% yoy during the SARS period but there were no signs of stress during the bird flu outbreak in 2005/2006. Please read carefully the important disclosures at the end of this publication.
Figure 1: RWB’s visitor arrivals and growth trends 25 Visitor arriv als (m) Yoy grow th (%) 25% 20% 20 15% 15 10% 10 5% 5 0% 0 -5% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Company, CIMB Research Or just a perception? Based on historical trends, it appears that disease outbreaks have a mixed impact on the operations of the casino operators. What is undeniable is the negative impact on sentiment on gaming-related stocks. The share prices of Genting and RWB hit new lows during the previous outbreaks. Even then, valuations were not overly depressed, with both stocks trading at forward P/Es of 12-19x and P/BVs of 1.4-2.4x. RWB is currently trading at a forward P/E of <10x and a forward P/BV of 1.3x – well below the 18-19x P/E and 2.4x P/BV valuations seen during the SARS period. Genting, on the other hand, is trading at higher levels than those seen during the SARS period but this is justifiable as the conglomerate is now a sturdier gaming play with a much bigger earnings base. Valuation and recommendation No change to earnings forecasts. As it is too early to assess the impact of the swine flu outbreak on the casino operators, we are maintaining our FY09-11 earnings forecasts and recommendations for all gaming stocks under coverage. Our current earnings projection for RWB already implies a topline contraction of <2% in 2009, the first contraction since the SARS-affected 2003. Although we are expecting a 2% yoy growth in visitor arrivals in 2009, the lower topline is largely due to expectations of scaled-back wagers in view of the economic downturn. Maintain OVERWEIGHT. We believe that yesterday’s 5-6% drop in the share prices of Genting, RWB and GIL was a knee-jerk reaction to the fear that a flu pandemic could prolong the global recession. Given the experience of handling SARS, we do not expect a ham-handed response this time around as most countries should be more prepared to contain the outbreak. We remain OVERWEIGHT on the gaming sector with RWB as our top pick. Key re-rating catalysts are i) continued resilience demonstrated by the local casino and NFO businesses, ii) potential M&A activities and iii) impending KLCI rejig. Figure 2: 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 Genting GENT MK O 4.60 5.20 4,756 14.4 14.5 1.3 1.3 7.5 1.6 2.95 Resorts World RNB MK O 2.39 3,938 9.9 9.6 2.1 1.3 15.1 3.0 Genting International GIL SP U 0.60 0.33 3,880 nm nm 291.2 2.6 (19.4) 0.0 Simple average 12.2 12.1 98.2 1.7 1.1 1.5 O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy and TS = Trading Sell Source: Company, CIMB Research [2]
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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) [4]
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. [5]