The 2011 Budget: Setting The Pace Towards Transformation-15/10/2010

MARKET DATELINE
• PP 7767/09/2011(028730)
15 October 2010
Malaysia
The 2011 Budget
Setting The Pace Towards Transformation
Executive Summary
◆ The 2011 Budget sets the pace of economic transformation with the right emphasis on reinvigorating private
investment and intensifying human capital development. These are the major positives in the Budget which,
in our view, are critical to chart the direction of the country in moving towards a high income economy.
There are, however, no substantial new information that will likely excite equity investors in the immediate
term, in our view.
◆ Whilst the Budget aims to strike a balance between fiscal consolidation and the need to sustain spending
to cushion the economy against the risk of a sharper-than-expected slowdown in the global economy, the
lack of broader measures to increase revenue, and reduce subsidies and other operating expenditure
suggests that there is limited room for manoeuvre. As a result, despite a less expansionary Budget, the
fiscal deficit is only projected to ease marginally to 5.4% of GDP in 2011, from 5.6% estimated for 2010.
◆ Consequently, our views on the market outlook, earnings and sector calls remain relatively unchanged. In
fact, the Budget speech focused attention primarily on private sector projects that are already in the news.
While there are still lack of details, we believe the news flow will likely come after the Budget speech, now
that the timelines for the major projects have been set and are mostly expected to begin in 2011. This
suggests that the groundwork will accelerate from here on and we believe this will maintain the positive
flow of news to the construction sector and, to a lesser extent, the property sector. Therefore, we believe
any knee jerk to sell would only be temporary as the post-Budget news flow continues to sustain the
liquidity-driven rally.
◆ Whilst market valuations are no longer cheap, the influx of G3 liquidity to Emerging Asia's equity, bond and
currency markets in search for higher returns could still send the market higher in the near term, in our
view. These short-term capital, however, are transient in nature and could reverse out relatively quickly
with changes in outlook. Already, the destabilising capital flows and sharp appreciation of currencies in
Emerging Asia have created concerns and induced policy intervention in the form of short-term capital
control and currency intervention in some countries. As a result, we believe the market may move into
a phase of greater volatility in the months ahead.
◆ Longer term, we believe there is still room for the market to trend higher in 2011. This is primarily
predicated on the view the global economy is more sustainable than feared, which in turn implies sustained
corporate earnings growth (+12.8% projected for 2011) that will continue to create new shareholders' value
for investors. Consequently, our end-2011 FBM KLCI target remains unchanged at 1,640, based on 15x
mid-cycle 2012 earnings. This, however, will not be without volatility as the global economy enters into
a period of slowing growth in an uneven phase of recovery.
◆ Under such circumstances, investors should remain vigilant and do some top slicing on stocks where
valuations have become rich in the run-up of the market. This would then provide more room for investors
to accumulate fundamentally-robust stocks on weakness.
Please read important disclosures at the end of this report.

Key Tax And Expenditure Measures
◆ Fiscal consolidation is not as sharp as earlier expected given that the projected budget deficit comes
in higher than the guidance provided under the Tenth Malaysia Plan. This suggests that the Government
intends to front load its expenditure to facilitate the implementation of the various initiatives proposed for the
NKRAs and NKEAs under the New Economic Model. This is prudent given rising risk of a sharper-than-
expected slowdown in the global economy.
◆ The deficit of the Federal Government is projected to drop slightly to 5.4% of GDP in 2011, from
a deficit of 5.6% of GDP estimated for 2010. Taken together, the impact on the Malaysian economy
is likely to be less expansionary in 2011, but still contributing to growth, albeit by a smaller
magnitude compared with 2010, in our view.
◆ The consolidated public sector is projected to record a smaller deficit in 2011 due mainly to a reduction
in development expenditure by both the general government and the non-financial public enterprises (NFPEs).
As a result, the consolidated public sector is also expected to exert a less expansionary impact on
the economy during the year.
Reinvigorating Private Investment

Measures
◆ Given the budget constraints, the Government appears to be even more dependent on Public-Private Partnership
(PPP) initiatives to drive investments.
◆ Although some of the investments were already announced previously, the market has been waiting for
confirmation and more details on:
o RM46bn Kuala Lumpur International Financial District, to be developed by 1Malaysia Development Berhad
(1MDB) and Abu Dhabi’s Mubadala Development Company, commencing next year.
o Mass Rapid Transit (MRT) project within the Greater KL NKEA, which will be implemented between 2011 and
2020 with an estimated private investment of RM40bn.
o Development of the 2,680-acre Malaysian Rubber Board land in Sungai Buloh by EPF, which is estimated
to be worth RM10bn and expected to be completed by 2025.
o PNB’s RM5bn 100-storey Warisan Merdeka to be built on the site of the Stadium Merdeka and Stadium
Negara, and targeted for completion by 2015.
◆ The Government repeated earlier statements for the Government-Linked Investment Companies (GLICs) to
divest their shareholdings in major listed companies. However, the GLICs will now also be allowed to increase
their overseas investments, e.g. EPF’s overseas investments will be allowed to rise to 20%, from 7% currently.
◆ Three new stockbroking licences will be issued to local or foreign players to increase the retail market
participation, while new fixed income and equity products such as Exchange Traded Funds will be facilitated
by the Securities Commission and launched by Bursa Malaysia to meet investors’ demand.
◆ The Government will establish a RM1bn syariah-compliant Bumiputera Property Trust Scheme under the
Bumiputera Property Trust Foundation (BPTF) to enable more bumiputera ownership of prime commercial
properties in the Klang Valley, through a group ownership scheme.
◆ In the oil & gas industry, as previously mentioned in the Economic Transformation Programme (ETP), the
Government will allocate RM146m to help establish an Oil Field Services and Equipment Centre in Johor
although the project will be mainly driven by RM6bn private investments over 10 years.
◆ For green technology, the Government extended the pioneer status and investment tax allowance for renewable
energy and energy efficiency activities until 31 Dec 2015. Import duty and sales tax exemption on related
equipment has been extended until 31 Dec 2012. Full import duty exemption for hybrid cars will be extended
to 31 Dec 2011, while excise duty exemption was raised to 100%, from 50% previously.
◆ The B5 programme to blend biofuels with petroleum diesel will be mandatory from June 2011 in Putrajaya,
Kuala Lumpur, Selangor, Negeri Sembilan and Melaka. The Government also intends to follow up with the Feed
in Tariff (FiT) mechanism under the Renewable Energy (RE) Act, but no timeline was given.
◆ The Government plans to boost the tourism industry via a number of measures including improving infrastructure
and facilities. The Government also mentioned but did not elaborate on the RM3bn integrated eco-nature resort
in Karambunai, Sabah, which will commence in 2011. More importantly, import duties on 300 consumer goods
(including apparel, handbags and shoes) ranging between 5% and 30% were abolished.
◆ For palm oil, plans are to encourage replanting activity by replacing aged trees with high quality new clones,
through a RM297m fund, while RM150m will be allocated to support downstream oleo derivatives and vitamin
production.
THE 2011 2 BUDGET

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◆ RM199m will be allocated to multimedia content, while the import duty and sales tax exemption on broadband
equipment will be extended until 2012. The investment tax allowance period for the last mile broadband service
providers has also been extended. All mobile phones will also now be exempted from sales tax.
◆ Allocations have been given to the economic corridors of Iskandar Malaysia (RM339m), Northern (RM133m),
East Coast (RM178m), Sarawak (RM93m) and Sabah (RM110m) for development of infrastructure and industrial
projects.
◆ The service tax will be raised from 5% to 6%. The service tax will also be imposed on pay-TV services.
Intensifying Human Capital Development

Measures
◆ The Government will establish a Talent Corporation in early 2011.
◆ RM6.4bn is to be allocated for building and upgrading of schools, hostels, facilities and equipment, plus
RM250m to be allocated for development expenditure to religious schools, vernacular schools, missionary
schools, and Government-assisted schools nationwide.
◆ RM576m will be allocated for scholarships, while RM213m will be allocated to enhance proficiency in the
national and English languages.
◆ RM474m is provided to enhance productivity and skills of non-graduates to meet the demand for skilled
workforce in technical fields.
◆ The 1Malaysia Training Programme will commence in Jan 2011 with an allocation of RM500m.
◆ Basic minimum wages will be enforced for security guards with effect from Jan 2011. This follows the increase
in salaries of postmen on 1 Jul 2010.
Enhancing Quality Of Life Of The Rakyat

Measures
◆ RM1.2bn is allocated to the Ministry of Women, Family and Community Development to carry out various
welfare and community programmes.
◆ The rebate for electricity bills of less than RM20 will continue to ease the burden of the low-income group.
◆ RM568m is provided to build houses for the poor and low-income group, while a scheme is open to all
Malaysian permanent estate workers to obtain housing loans at 4% interest rate and a repayment period of
up to 40 years extending to the second generation.
◆ Cagamas will introduce the Skim Rumah Pertamaku, which will provide a guarantee on down payment of 10%
for houses below RM220,000, and only for first-time house buyers with household income less than RM3,000
per month.
◆ First time buyers will also be given stamp duty exemption of 50% on instruments of transfer and loan
agreement instruments on a house price not exceeding RM350,000.
◆ For the rural population, RM6.9bn will be allocated to implement basic infrastructure such as water and
electricity supply and rural roads.
◆ RM974m will be allocated to increase food production, plus RM170m incentives for fishermen as well as boat
owners and workers to increase fish landing.
◆ The Government is allocating RM200m to standardise the prices of rice, cooking oil, sugar, flour, gas, petrol
and diesel in rural areas.
◆ The Government will increase the monthly allowance for various community leaders, religious leaders and
village heads.
◆ Toll rates for four highways owned by PLUS Expressway will not be raised for the next five years, effective
immediately.
◆ RM15.2bn will be allocated to construct new hospitals, increase the number of doctors and nurses as well as
to obtain supplies of medicines and equipment.
◆ RM350m will be allocated to various programmes to combat crime.
◆ RM1.9bn will allocated to finance environmental preservation projects, including implementing the River of Life
Programme (under the ETP) and greening of Kuala Lumpur.
Strengthening Public Service Delivery

Measures
◆ The Government will introduce a point system to facilitate applications for permanent residence status.
◆ Civil servants will be given financial assistance, and easier access to housing loans with effect 1 Jan 2011.
The maximum loan eligibility will be raised to RM450,000, from RM360,000 currently.
THE 2011 3 BUDGET

Impact On The Economy : Less Expansionary But Still
Contributing To Growth
THE REVENUE AND EXPENDITURE PROPOSALS
Federal Government : Less Expansionary
Although the Government will continue to reduce its budget deficit in 2011, it is The reduction in the
not as sharp as earlier expected given that the projected budget deficit Government’s budget
comes in higher than the guidance provided under the Tenth Malaysia Plan (10MP).
deficit is not as sharp as
As a result, the Federal Government’s budget deficit is projected to only narrow
earlier expected in 2011
slightly to 5.4% of GDP in 2011, from 5.6% of GDP estimated for 2010 and
compared with the guidance of 4.2% provided under the 10MP. We view it as a
prudent move given rising risk of a sharper-than-expected slowdown in the global
economy, which will in turn hurt the country’s exports. Furthermore, the
Government intends to spend more in the initial period of introducing the New
Economic Model (NEM), particularly to facilitate the implementation of various
The Government is serious
initiatives under the model. This, together with measures announced in the 2011
in transforming the
Budget, is also aimed at convincing the general public and, investors in particular,
economy by taking the
that the Government is serious in transforming the economy by taking the
lead
lead and putting the money where its mouth is, in order to instill confidence.
We believe the Government’s initiatives announced in the 2011 Budget to Initiatives announced in
reinvigorating private investment will help to sustain the sector’s growth, the 2011 Budget will help
albeit at a more moderate pace. These measures include an allocation to encourage
to sustain private
electrical & electronics industry to invest in high value-added activities, an extension
investment growth
of tax incentives for another 5 years to 2015 to encourage companies to undertake
food production activities, a cut in import duties to boost tourism and incentives
to develop green technology. Infrastructure and property developments are
expected to drive private investment in 2011 as well, in our view. As it stands,
the Government has allocated RM1.0bn for the Facilitation Fund to drive the
Public-Private Partnership projects, targeting construction of highways, power plant
and healthcare related projects. It also indicated that the Mass Rapid Transit
(MRT) which cost about RM40bn will be implemented in 2011. The Government-
linked investment corporations such as the 1Malaysia Development Bhd, the
Employees Provident Fund and Permodalan National Bhd, have also been earmarked
to undertake some huge development projects. Similarly, the Government will
offer three new stock broking licences to increase retail market participation. As
a whole, we expect private investment to moderate to 7.8% in 2011, from +8.6%
estimated for 2010.
Although consumer spending will be affected somewhat by the reinstatement of Consumer spending will
employees’ contribution to the Employee Provident Fund back to 11% in 2011, we likely remain resilient,
believe the 1.0% increase in services tax to 6.0%, is unlikely to impact consumer underpinned by rising
spending significantly. The 1% increase is estimated to bring in additional tax consumerism and high
revenue of RM0.7bn for the Government. In addition, the abolishment of 5-30% savings in the country
import duties of approximately 300 goods preferred by tourists and locals and the
RM500 Special Financial Assistance money provided for civil servants will help to
sustain consumer spending. As a result, we expect consumer spending to
remain resilient, underpinned by rising consumerism and high savings in the
country.
As a whole, given that the Federal Government will spend more than what it Fiscal policy will exert a
collects in terms of revenue, this will exert a less expansionary impact on the less expansionary impact
economy, but still contributing to growth in 2011, albeit by a smaller on the economy, but still
magnitude compared with 2010 (see Table 1). Meanwhile, we believe the contributing to growth in
Government is committed to reduce its budget deficit, albeit gradually, to ensure 2011
that fiscal policy remains supportive of economic growth.
THE 2011 4 BUDGET

Table 1
Federal Government Financial Position
2009 2010(e) 20111(f) 2010(e) 2011(f)

(RM bil) (%, change)
Revenue 158.6 162.1 165.8 2.2 2.3

Operating Expenditure 157.1 152.2 162.8 -3.1 7.0
Current balance 1.6 10.0 3.0
Gross development expenditure 49.5 54.0 49.2 9.1 -9.0
Less : Loan recoveries 0.5 0.7 0.7 41.0 -6.8
Net development expenditure 49.0 53.3 48.5 8.8 -9.0
Overall balance -47.4 -43.3 -45.5
% to GDP -7.0 -5.6 -5.4
1
Budget estimate, excluding 2011 tax measures
e : Estimates f : Forecasts
Source : MOF's Economic Report 2010/2011
Consolidated Public Sector : Also Less Expansionary
The consolidated public sector’s fiscal spending, which includes the state The consolidated public
governments, statutory authorities, local governments and non-financial public sector’s fiscal spending will
enterprises (NFPEs), will also be less expansionary in 2011. This is reflected in also be less expansionary
a smaller deficit projected for the consolidated public sector, which is envisaged to in 2011
narrow slightly to 7.6% of GDP or RM63.5bn in 2011, from a deficit of 7.8% of GDP
or RM60.1bn estimated for 2010 (see Table 2). This is on account of a smaller deficit
of 5.1% projected at the general government level for 2011, compared with a deficit
of 5.2% of GDP estimated for 2010, on the back of a reduction in development
expenditure. Similarly, the NFPEs development expenditure is projected to slow
down and its deficit is projected to record a smaller deficit of 2.4% in 2011, compared
with a deficit of 2.5% estimated for 2010.
Table 2
Consolidated Public Sector Financial Position
2009 2010(e) 20111(f) 2009 2010(e) 2011(f)

(RM bil) (%, change)
Revenue 134.0 132.8 138.6 4.4 -0.9 4.4

Operating expenditure 170.3 168.0 176.8 3.2 -1.3 5.2
NFPEs current surplus 101.2 94.2 93.2 -15.2 -6.9 -1.1
Public sector current balance 64.9 59.0 55.0
% of GDP +9.6 +7.6 +6.6
Development expenditure 111.3 119.1 118.5 -10.5 7.0 -0.5
General government 54.5 57.1 54.8 7.9 4.8 -4.1
NFPEs 56.8 62.0 63.7 -23.1 9.2 2.8
Overall balance -46.4 -60.1 -63.5
% of GDP -6.8 -7.8 -7.6
1 Budget estimate, excluding 2011 tax measures

Source : Ministry Of Finance Economic Report 2010/2011
THE 2011 5 BUDGET

Impact On The Equity Market : Neutral
Given the 2011 Budget’s spending constraints, it is perhaps not surprising that there No significant catalysts for
was a lack of major incentives and significant measures from the Government. While key economic sectors
there were the usual allocations for healthcare, education, rural development, and
incentives for civil servants, there were no significant catalysts for other key
economic sectors.
In fact, the Budget speech focused attention primarily on private sector projects that Focus on private sector
are already in the news. These included the RM40bn MRT, the RM26bn Kuala Lumpur projects
International Financial District, and EPF’s RM10bn development of the Malaysian
Rubber Board land in Sungai Buloh, plus the revival of PNB’s proposed 100-storey
RM5bn Warisan Merdeka building on the site of the old national stadium.
While the lack of details on these projects could be a major disappointment for News flow likely to come
investors, we believe the news flow will in fact come after the Budget speech, now after the Budget speech
that the timelines for each of these projects have been set. In fact, the projects are
mostly expected to begin in 2011, which suggest that the groundwork will accelerate
from here on. We believe this will maintain the positive flow of news to the
construction sector, and sustain the bullish sentiment for Gamuda (TB, FV =
RM4.51) and MRCB (TB, FV = RM2.49).
As for the property sector, we note the Government’s focus on the low- to mid-end Incentive for first-time
range housing with incentives for first-time buyers, which was in line with the theme house buyers
to assist the lower-income groups. However, we believe this does not preclude
subsequent post-Budget measures to curb speculation on mid- to high-end
properties, and this uncertainty could have a negative impact on the property sector.
Our preference would thus still be on the mass housing developers like Mah Sing
(OP, FV = RM2.33).
The PM’s call again to the Government-Linked Investment Companies (GLICs) to GLICs called upon to divest
divest their shareholdings in listed companies will once again focus attention on the GLC shares
key GLCs, like Axiata (MP, FV = RM5.75), TM (MP, FV = RM3.55), TNB (OP, FV
= RM10.30) and MAHB (OP, FV = RM5.96). We note that EPF and UEM Group’s
proposal on 15 Oct to jointly acquire PLUS’s assets and liabilities for RM23bn cash
could be seen as a contradictory move, but the upshot is that investors will receive
a capital repayment that can be redeployed in other stocks, thereby indirectly
improving the market’s liquidity.
We believe the 2011 Budget has not provided major catalysts for the equity market, Post-Budget news flow to
but this has been the case even with past budget speeches. Therefore, we believe sustain liquidity-driven
that a knee jerk reaction to sell would only be temporary as the post-Budget news rally
flow (relating to the ETP blueprint to be published on 25 Oct, the MMHE and Petronas
Chemicals listings, and the potential Sarawak state election) continues to sustain the
liquidity-driven rally.
THE 2011 6 BUDGET

Market Outlook : Short-term Liquidity And News
Flow Driven
The 2011 Budget sets the pace of economic transformation with the right emphasis Setting the pace towards
on reinvigorating private investment and intensifying human capital development. transformation with the
These are the major positives in the Budget which, in our view, are critical to chart right emphasis
the direction of the country in moving towards a high income economy. There are,
however, no substantial new information that will likely excite equity investors in the
immediate term, in our view.
Whilst the Budget aims to strike a balance between fiscal consolidation and the need Balancing fiscal
to sustain spending to cushion the economy against the risk of a sharper-than- consolidation with growth
expected slowdown in the global economy, the lack of broader measures to increase but with limited room for
revenue, and reduce subsidies and other operating expenditure suggests that there manoeuvre
is limited room for manoeuvre. As a result, despite a less expansionary Budget, the
fiscal deficit is only projected to ease marginally to 5.4% of GDP in 2011, from 5.6%
estimated for 2010.
Consequently, our views on the market outlook, earnings and sector calls remain No substantial new
relatively unchanged (see Tables 3 & 4). Whilst market valuations are no longer information from the
cheap, the influx of G3 liquidity to Emerging Asia's equity, bond and currency mar- Budget, but influx of
kets in search for higher returns could still send the market higher in the near term, short-term liquidity could
in our view. These short-term capital, however, are transient in nature and could still send the market
reverse out relatively quickly with changes in outlook. Already, the destabilising higher in the near term
capital flows and sharp appreciation of currencies in Emerging Asia have created
concerns and induced policy intervention in the form of short-term capital control and
currency intervention in some countries. As a result, we believe the market may
move into a phase of greater volatility in the months ahead.
Table 3
Earnings Outlook And Valuations
FBM KLCI RHBRI’s Basket
COMPOSITE INDEX @1,489.86 2009a 2010f 2011f 2012f 2009a 2010f 2011f 2012f
15/10/2010
EBITDA Growth (%) -6.6 26.2 11.3 7.3 -2.0 23.5 11.2 7.3
Pre-Tax Earnings Growth (%) -10.0 38.5 17.8 9.0 -2.4 32.0 15.9 9.9
Normalised Earnings Growth (%)* -10.2 30.0 13.1 9.1 -6.3 28.8 13.9 9.8
Normalised EPS Growth (%)* -14.9 23.7 12.8 9.1 -9.7 19.7 13.8 9.8
Prospective PER (x)* 20.7 16.7 14.8 13.6 19.8 16.1 14.1 12.8
Price/EBITDA (x) 10.9 8.7 7.8 7.3 8.6 8.3 7.4 6.9
Price/Bk (x) 2.6 2.4 2.3 2.1 2.0 2.2 2.0 1.9
Price/NTA (x) 3.4 2.8 2.6 2.4 2.3 2.5 1.3 1.3
Net Interest Cover (x) 7.6 8.2 9.5 10.8 7.1 8.0 9.3 10.4
Net Gearing (%) 48.8 46.3 40.7 37.5 47.6 37.4 37.4 33.1
EV/EBITDA (x) 8.4 6.7 6.0 5.6 8.3 6.9 6.1 5.5
ROE (%) 12.3 14.7 15.2 15.4 11.7 13.6 14.2 14.8
* Exclude Mas earnings in 09-11
THE 2011 7 BUDGET

Table 4
Sector Weightings & Valuations
Covered Stocks Mkt Cap Weight EPS Gwth (%) PER (x) Recommendation
RMbn % FY10 FY11 FY12 FY10 FY11 FY12
Banks & Finance 213.3 25.6 24.0 13.4 10.5 15.4 13.5 12.2 Overweight
Power 63.9 7.7 16.8 12.3 12.3 13.7 12.2 10.9 Overweight
Construction 22.9 2.8 28.4 12.7 6.8 19.6 17.3 16.2 Overweight
Motor 21.4 2.6 58.9 10.2 17.2 10.8 9.8 8.4 Overweight
Property 21.3 2.6 -13.5 16.1 11.4 14.4 12.3 11.0 Overweight
Media 15.0 1.8 40.5 8.9 7.5 14.0 12.9 12.0 Overweight
Timber 3.6 0.4 68.4 41.8 14.6 12.3 8.7 7.5 Overweight
Insurance 3.8 0.5 6.6 8.7 21.5 9.4 8.6 7.1 Neutral
Plantation 119.4 14.3 5.9 19.9 3.0 20.7 17.0 16.5 Neutral
Telecommunications 109.6 13.2 23.2 11.5 8.9 17.1 15.3 14.0 Neutral
Gaming 64.2 7.7 51.7 0.9 9.4 14.0 13.8 12.6 Neutral
Transportation* 59.7 7.2 44.9 12.5 17.3 21.1 18.7 13.7 Neutral
Oil & Gas 33.9 4.1 9.7 16.4 9.8 17.3 14.9 13.5 Neutral
Consumer 32.6 3.9 -6.2 11.1 10.7 16.9 15.9 14.3 Neutral
Infrastructure 23.5 2.8 2.0 49.0 9.0 17.3 11.6 10.7 Neutral
Building Materials 12.9 1.6 14.1 21.3 4.1 12.9 10.9 10.5 Neutral
Manufacturing 7.2 0.9 25.7 14.4 10.3 11.4 10.0 9.0 Neutral
Semiconductors & IT 5.0 0.6 32.7 7.8 10.4 8.8 8.7 7.9 Neutral
833.1 100.0
* Exclude MAS earnings in 10-11
Note : RHBRI’s basket
Longer term, we believe there is still room for the market to trend higher in 2011. Longer-term outlook,
This is primarily predicated on the view the global economy is more sustainable than however, remains positive
feared, which in turn implies sustained corporate earnings growth (+12.8% projected and our end-2011 FBM
for 2011) that will continue to create new shareholders' value for investors. Con- KLCI target remains
sequently, our end-2011 FBM KLCI target remains unchanged at 1,640, based on 15x unchanged at 1,640
mid-cycle 2012 earnings. This, however, will not be without volatility as the global
economy enters into a period of slowing growth in an uneven phase of recovery.
THE 2011 8 BUDGET

Market Strategy
Top Slicing On Further Run-up
Whilst the long-term economic picture remains positive for the equity market, the Top slicing on further run-
revival of a “double-dip” recession fear and destabilising capital flows can have a up of stocks where
disproportionate impact on the market in the foreseeable future. Under such circum- valuations have become
stances, investors should remain vigilant and do some top slicing on stocks where excessive
valuations have become rich in the run-up of the market. This would then provide
more room for investors to accumulate fundamentally robust stocks on weakness.
Under such circumstances, stock picking is key. As key risks are mainly external, Stock picking is key and
we believe investors may find greater price stability in companies that have less or any significant pullback
hedged exposure to overseas markets. Meanwhile, there is still room for some
should be taken as an
tactical plays in the near term given the positive news flow on the award of projects
opportunity to pick stocks
now that the timelines for major projects have been set. Overall, we believe the
and reposition for the new
market will be volatile in the months ahead, but any significant pullback in the
year
market should be taken as an opportunity to pick stocks and reposition for the new
year. A list of our tactical plays and longer-term picks is reflected in Table 5.
Table 5
Top Picks
Fair Mkt EPS EPS GWTH PER P/BV P/CF GDY
FYE Price Value Cap (sen) (%) (x) (x) (x) (%)
15/10/2010 (RM/s) (RM/s) (RM Mil) FY11 FY12 FY11 FY12 FY11 FY12 FY11 FY11 FY11
Tactical Plays
Tenaga Aug 8.93 10.30 38,698 75.5 87.3 16.2 15.7 11.8 10.2 1.3 4.8 3.4
Gamuda Jul 3.89 4.51 7,849 19.0 20.5 36.5 7.9 20.5 19.0 2.2 50.9 3.1
MRCB Dec 2.08 2.49 2,832 6.4 6.7 23.5 4.9 32.6 31.1 2.1 20.4 0.0
Faber Dec 3.08 3.82 1,118 34.2 38.2 30.4 11.4 9.0 8.1 2.0 5.8 2.6
HSL Dec 1.82 1.95 1,012 16.2 17.7 21.4 8.9 11.2 10.3 2.3 13.2 1.4
Longer -Term Picks
Maybank Jun 8.88 10.50 62,852 61.9 69.6 14.7 12.4 14.3 12.8 2.1 n.a. 3.9
CIMB Dec 7.94 9.60 58,212 56.3 64.5 17.2 14.6 14.1 12.3 2.0 n.a. 1.6
IOI Jun 5.80 6.75 36,987 33.6 34.9 28.3 3.8 17.3 16.6 3.4 15.3 2.9
KLK Sep 19.00 22.05 20,283 124.4 131.4 42.1 5.6 15.3 14.5 3.0 14.5 3.4
AirAsia Dec 2.36 3.01 6,561 25.1 27.8 9.4 10.7 9.4 8.5 1.6 5.4 0.0
Parkson Jun 5.96 7.72 6,177 37.3 47.9 26.6 28.5 16.0 12.4 2.7 5.8 1.3
Dialog Jun 1.23 1.30 2,435 8.8 10.7 50.4 21.1 13.9 11.5 4.0 12.7 3.9
Media Prima Dec 2.30 2.75 2,174 16.5 19.4 21.3 17.6 14.0 11.9 2.1 7.0 4.9
KPJ Dec 3.55 4.51 1,873 26.6 29.9 10.7 12.2 13.3 11.9 2.1 10.5 4.5
Carlsberg Dec 5.21 6.03 1,605 42.8 47.5 5.2 10.8 12.2 11.0 2.6 10.1 4.9
Mah Sing Dec 1.87 2.33 1,555 17.2 21.2 22.8 23.2 10.9 8.8 1.6 21.1 3.7
THE 2011 9 BUDGET

Banking : Revitalising Domestic Capital Market Overweight
And Strengthening Position In Islamic
Capital Market
Consistent with the recently announced ETP, the Government plans to implement Measures targeted to
measures that will revitalise the domestic capital market and strengthen Malaysia’s revitalise the domestic
position in the Islamic capital market. These include: 1) the launch of sukuk and capital market and
conventional bonds by Bursa Malaysia to help meet demand from retail investors for strengthen Malaysia’s
fixed income instruments; 2) the issuance of three new stock broking licences; 3)
position in the Islamic
development of an international board to enable foreign securities to be listed; and
capital market
4) tax deductions for expenses in relation to the issuance of certain Islamic securities.
On the whole, we are neutral about the incentives and measures mentioned above,
although we do note that these could provide further opportunities for banks to grow
non-interest income.
Missing from the budget, in our view, was the much anticipated measures to reign Much anticipated
in household debt (e.g. the imposition of a cap on the loan-to-value (LTV) ratio). That measures to rein in
said, we would not discount the possibility that BNM may yet still impose such household debt missing
measures ahead. In our view, a 70% or 80% cap per se on LTV ratio is unlikely to from budget, but this
impact property sales momentum too significantly but harsher measures such as the could still come later
discontinuance of incentives by developers, on top of a cap, could potentially hit the
property sector badly and impact mortgage loan growth. We estimate every 1%-pt
change in our loan growth assumption would impact our net profit projections for the
banks by 0.7-1%.
Finally, RCE could be a potential beneficiary of the Government’s move to increase RCE potential beneficiary
the benefits to civil servants, given its niche in the civil servant personnel financing of better benefits to civil
segment. We do note that this space is becoming increasingly competitive given servants
attractive margins and low default rates (as monthly repayments from civil servants
are deducted at source or salary). However, we think much of such concerns have
already been factored in its cheap valuations.
Table 6
Valuations Of Banking Stocks
FYE Price EPS EPS Growth PER P/BV GDY ROE Rec
(sen) (%) (x) (x) (%) (%)
(RM/s) FY11 FY12 FY11 FY12 FY11 FY12 FY11 FY12 FY11 FY12 FY11 FY12
CIMB Dec 7.94 56.3 64.5 17.2 14.6 14.1 12.3 2.0 1.8 1.6 1.6 15.1 15.5 OP
PBB-L Dec 12.60 91.7 99.2 11.8 8.2 13.7 12.7 3.1 2.8 5.2 5.6 23.8 23.0 OP
AMMB^ Mar 5.91 47.8 51.8 14.1 8.3 12.4 11.4 1.5 1.4 3.8 4.1 13.0 12.9 OP
Affin Dec 3.24 34.4 35.7 6.4 3.6 9.4 9.1 0.9 0.8 2.6 2.6 9.6 9.2 OP
RCE^ Mar 0.62 11.3 11.6 4.6 2.8 5.4 5.3 0.8 0.7 1.6 1.6 16.4 14.6 OP
Maybank Jun 8.88 61.9 69.6 14.7 12.4 14.3 12.8 2.1 1.9 3.9 4.4 15.0 15.5 OP
HL Bank Jun 9.30 70.8 72.5 3.9 2.3 13.1 12.8 1.9 1.7 2.6 2.6 15.1 13.9 OP
AFG^ Mar 3.24 27.3 29.1 9.0 6.3 11.8 11.1 1.4 1.3 2.6 2.6 12.5 11.8 MP
EON Cap Dec 6.98 69.4 75.9 14.3 9.3 10.1 9.2 1.1 1.0 1.9 1.9 11.6 11.5 UP
RHB Cap* Dec 7.74 71.3 80.9 11.1 13.5 10.9 9.6 1.4 1.3 3.3 3.7 14.9 14.9 NC
Sector Avg 13.4 10.5 13.5 12.2
* Not under our coverage. I/B/E/S estimates are used for companies not covered by RHB Research Institute.
^ FY11-12 valuations refer to those of FY12-FY13
THE 2011 10 BUDGET

Building Materials : Positive But Priced In For Neutral
Cement, Neutral For Steel
Domestic cement producers are expected to benefit from the anticipated pick-up in Cement sub-sector poised
domestic cement consumption, underpinned by the rollout of large-scale infrastructure to benefit
projects and pick-up in property development activities. An increase in domestic
demand will also enable cement producers to sell more domestically (which command
a better margin) rather than exporting their excess production. We believe net selling
prices will also be higher as rebates given by the cement producers will be lower.
Fuel and electricity cost constitute about 50% of cement production cost. We believe …but will be partly offset
high thermal coal price and potential hike in electricity tariff in the future will partly by higher energy prices
offset the benefits of higher net selling price.
We are maintaining the forecasts for cement producers under over coverage (Lafarge Valuation has become rich
and YTL Cement) as the pick-up in domestic cement consumption has been widely
expected. However, with the recent run-up in its share prices, Lafarge’s (UP, FV
= RM6.88) valuation has become very rich at 16.1x to our estimated FY11 earnings
(as opposed to our PER target of 14x FY11 earnings). For YTLCement (OP, FV =
RM4.69), its share price is currently close to our fair value of RM4.69 (based on 11x
CY2011 fully diluted EPS of 42.7 sen). We think YTLCement is due for a re-rating
given that it has been a laggard despite being the second largest cement producer
in Malaysia after Lafarge. For now, we maintain our recommendation on YTLCement
pending a meeting with management. Overall, our stance on the cement sub-sector
is maintained at Neutral. Both Lafarge and YTLCement offer decent dividend yield at
5-6% given their strong free cash flow and healthy balance sheet at net cash
position.
Although domestic long steel demand is expected to recover with the pick-up in Neutral stance maintained
construction activities and infrastructure developments, we believe the impact is for steel sub-sector
likely to be minimal, as fortunes of long steel players’ are tied more to the demand-
supply balance in the global market. Overcapacity (particularly in China) remains a
key issue over the medium to long term despite the recent plants closure, as the
excess capacity in China’s steel sector is still high. Maintain our Neutral stance on
the steel sub-sector.
Table 7
Valuations Of Building Materials Stocks
FYE Price Fair EPS EPS Gwth PER EV/EBITDA P/NTA P/CF GDY Rec
Value (sen) (%) (x) (x) (x) (x) (%)
(RM/s) (RM/s) FY11 FY12 FY11 FY12 FY11 FY12 FY11 FY11 FY11 FY11
Hiap Teck Jul 1.26 1.63 16.0 16.7 25.3 4.1 7.9 7.5 8.8 0.6 n.m 2.0 OP
YTL Cement Jun 4.59 4.69 58.9 57.5 17.5 -2.4 7.8 8.0 4.1 1.2 15.0 4.4 OP
CSC Steel Dec 1.83 2.33 23.3 24.7 6.4 5.9 7.8 7.4 0.9 0.8 6.4 8.2 OP
Perwaja Hldgs Dec 1.11 1.37 13.5 16.9 16.9 24.8 5.1 4.6 7.3 0.6 13.4 0.0 OP
Ann Joo Dec 2.98 3.14 38.9 41.1 18.6 5.6 7.7 7.3 5.8 1.1 30.0 5.0 MP
Lafarge Dec 7.94 6.88 49.2 50.6 15.8 2.8 16.1 15.7 10.6 2.0 12.2 3.8 UP
Sino Hua Dec 0.36 0.36 3.6 3.9 +>100 8.2 9.9 9.1 6.9 0.6 10.9 0.0 UP
Kinsteel Dec 0.91 0.86 8.6 9.2 77.0 6.4 10.5 9.9 4.9 0.9 7.5 1.1 UP
Sector Avg 21.3 4.1 10.9 10.5
THE 2011 11 BUDGET

Construction : Key Projects Reaffirmed, To Kick- Overweight
Start In 2011
Gross development expenditure in 2011 is projected at RM49.2bn, down -9% from Gross development
RM54bn estimated for 2010. As a result, construction GDP growth is projected to expenditure down 9%
ease to +4.4% in 2011 from +4.9% estimated for 2010. Key areas of spending (that
will generate construction jobs) are rural infrastructure (RM6.9bn), building/upgrading
of schools (RM6.4bn) and environmental preservation (RM1.9bn). Of total rural
infrastructure spending (comprising largely water, electricity and roads), 70% or
RM4.8bn goes to Sabah and Sarawak. The impact of a lower gross development
expenditure will be cushioned by projects to be carried out on a Public-Private
Partnership (PPP) or privatised basis, projected to rack up RM12.5bn private investment,
anchored by RM1bn facilitation fund (see Table 8).
We view positively that key high-profile projects identified during the announcement Key high-profile projects
of the 10th Malaysia Plan (10MP) (2011-2015) in June this year have been reaffirmed, reaffirmed, to kick-start
with commencement explicitly spelt out to be during the first year of the 10MP, i.e. in 2011
in 2011. These include the RM40bn MRT project, the RM26bn KL International
Financial District (KLIFD), the RM10bn redevelopment of the Rubber Research Board
land in Sungai Buloh and six toll roads including the West Coast Expressway.
One interesting observation is that the MRT project is regarded as a PPP/privatised MRT to attract RM40bn
project “with an estimated private investment of RM40bn”. This is not consistent with private investment?
the Gamuda-MMC JV’s proposal to the Government, i.e. to fund the project with
RM10bn allocation each from the 10MP and the 11th Malaysia Plan (11MP), and the
balance to be financed via an off-balance sheet deferred payment scheme (to keep
the budget deficit under control). The Gamuda-MMC JV’s position has been not to
carry out the project on a PPP/privatised basis as it is fully aware that large public
transport projects are generally not commercially viable.
Three new inclusions that we believe worth highlighting are: (1) The “revived” RM5bn Several new inclusions
Warisan Merdeka integrated development comprising a 100-storey tower led by
Permodalan Nasional Bhd; (2) The “River of Life”, i.e. the clean-up/beautification of
the Klang Valley that can unlock the real estate potential of land parcels along the
river, funded by part of the RM1.9bn allocation under environmental preservation;
and (3) The Academic Medical Centre, a JV between Academic Medical Centre, Johns
Hopkins Medicine International and Royal College of Surgeons, Ireland, that will
bring in RM2bn private investment.
The Government has reaffirmed its commitment towards key large-scale projects, as Maintain Overweight
well as the speediness of their implementation in Budget 2011. We view this
positively. We remain upbeat on construction stocks as we believe they will continue
to generally outperform the market from 4Q2010, buoyed by news flow from: (1)
The infrastructure development for the Greater KL National Key Economic Area
(NKEA) under the Economic Transformation Programme (ETP), particularly, the RM40bn
MRT project; (2) The RM7bn Ampang and Kelana Jaya LRT line extension project;
and (3) Federal land deals. Our top “tactical” pick for the sector is Gamuda
(Trading Buy, FV = RM4.51) as we believe its share price will be buoyed by the
sustained news flow from the RM40bn MRT project. Our top “value” pick for the
sector is Sunway (Outperform, FV = RM2.35) due to its undemanding valuations,
coupled with its strong earnings visibility stemming from its firm construction margins
and growing non-construction profits.
THE 2011 12 BUDGET

Table 8
Key Projects To Be Implemented
Project Value Potential Beneficiaries

(RMm)
Funded By Development Expenditure
Rural infrastructure 6,900
♦ Rural water & electricity in Sabah & Sarawak 2,700
♦ Rural roads in Sabah & Sarawak 2,100 East Malaysia-based contractors
♦ Rural roads in Peninsular Malaysia 696
♦ Rural water & electricity in Peninsular Malaysia 556
♦ Housing for rural hardcore poor 300
Building/upgrading of schools, hostels, facilities & equipment 6,400 Mid-sized contractors
Environmental preservation projects 1,900
♦ “River of Life” and greening of KL na YTL
♦ Preservation of marine sources and coastal areas in Melaka, na Emas Kiara, MRCB
Kelantan, Terengganu & Pahang
Corridor & regional development 850
♦ Iskandar Malaysia 339
♦ East Coast Economic Region (ECER) 178
♦ Northern Corridor Economic Region (NCER) 133
♦ Sabah Development Corridor 110
♦ Sarawak Corridor of Renewable Energy (SCORE) 93
Public housing 568
Aquaculture zones in Sabah & Sarawak 252 East Malaysia-based contractors
Drainage & irrigation in Muda Agriculture Development Area, Kedah 235
Basic infrastructure for swiftlet nets, aquaculture, seaweeds, ornamental 135
fish and herbs & spices ventures
Integrated eco-nature resort in Nexus Karambunai, Sabah 100 Karambunai
Hotels & resorts in remote areas 85
Diagnostic lab at Agriculture College in Kubang Pasu, Kedah 70
Shaded walkways in KLCC-Bukit Bintang area 50
Via Public-Private Partnership (PPP)/Private Investment

MRT in Greater KL 40,000 Gamuda, MMC
Kuala Lumpur International Financial District (KLIFD) 26,000 1MDB (Awarded), Mudabala
(Awarded)
Development of Malaysia Rubber Board land in Sg Buloh 10,000 EPF (Awarded), MRCB
Warisan Merdeka integrated development with a 100-storey tower 5,000 PNB (Awarded)
Academic Medical Centre 2,000
Ampang-Cheras-Pandan Elevated Highway na
Guthrie-Damansara Expressway na
Damansara-Petaling Jaya Highway na
Pantai Barat-Banting-Taiping Highway (West Coast Expressway) na Kumpulan Europlus, IJM
Sungai Dua-Juru Highway na
Paroi-Senawang-KLIA Highway na
300MW combined-cycle gas power plant in Kimanis, Sabah na Zelan, Mudajaya
International Islamic University Malaysia Teaching Hospital in Kuantan, na Ahmad Zaki (Awarded)
Pahang
Women and Children’s Hospital in KL na Ranhill
Integrated Health Research Institute Complex in KL na
Table 9
Valuations Of Construction Stocks
Value (sen) (%) (x) (x) (x) (x) (%)
HSL Dec 1.82 1.95 16.2 17.7 21.4 8.9 11.2 10.3 6.5 2.3 13.2 1.4 OP
Fajarbaru Jun 1.07 1.37 14.4 15.2 -10.8 5.5 7.4 7.0 1.5 1.2 13.3 5.6 OP
Sunway Hldgs Dec 1.97 2.35 25.2 28.3 10.2 12.5 7.8 7.0 6.7 1.3 8.5 1.4 OP
Emas Kiara Dec 0.78 1.52 15.2 16.9 16.7 11.1 5.1 4.6 3.6 0.7 3.4 1.9 OP
Gamuda Jul 3.89 4.51 19.0 20.5 36.5 7.9 20.5 19.0 22.5 2.4 50.9 3.1 TB
MRCB Dec 2.08 2.49 6.4 6.7 23.5 4.9 32.6 31.1 20.3 2.1 20.4 0.0 TB
IJM^ Mar 5.42 5.01 32.6 34.2 2.7 5.0 16.6 15.8 9.0 1.3 8.7 2.0 UP
WCT Dec 3.24 2.30 16.9 17.4 -7.0 2.6 19.2 18.7 15.8 1.7 19.0 1.9 UP
Sector Avg 12.7 6.8 17.3 16.2
^ FY11-12valuations refer to those of FY12-FY13
THE 2011 13 BUDGET

Consumer : Not As Exciting As Previous Budget Neutral
This time around, consumers did not get any new tax goodies from the Consumers did not get any
Government, although we believe there are some measures introduced which new tax goodies
would boost overall consumer spending in terms of promoting Malaysia as a
tourist destination and also to ease the burden of the rakyat:-
1. Import duty on approximately 300 goods preferred by tourists and locals, of

5% to 30% be abolished.
2. A continuation of a rebate on electricity bill payment for monthly consumption
of below RM20.
3. An extension to the current tax relief for parents to include other expenses
such as day care centre, cost incurred to employ caretaker for parents and
other daily needs such as diapers, from just medical treatments previously.
The tax relief amount is maintained at a maximum of RM5k.
4. Increasing the monthly allowance for various community leaders such as
Ketua Kampung, Imam etc. by 60-78%.
5. No increase in toll rates for the four highways owned by PLUS for the next
five years.
Aside from the above, the civil servants force, which comprises approximately
1.2m people, will benefit from:
1. A RM500 assistance for all civil servants grade 54 and below to cope with
schooling expenses.
2. Increasing the rate of Funeral Arrangement Assistance to RM3k from RM1k
previously. This is also extended to retired civil servants.
Although the measures introduced during the 2011 Budget is not as exciting as Consumer spending growth
the various income tax goodies introduced in the previous budget tabling, we of 5.4% for 2011
believe that all the measures above will, to a certain extent be a driver for
growth in consumer spending, as consumer disposable income is expected to
improve together with consumer sentiment. RHBRI projects a consumer spending
growth of 5.4% for 2011 (2010: 5.6%).
Retail
These measures augur well for the retail and MLM players such as Parkson Retail and MLM players to
(OP, FV=RM7.72), AEON (MP, FV=RM5.72), Amway (MP, FV=RM8.45), and benefit
Hai-O (UP, FV=RM2.84), as their revenues are generally driven by growth in
consumer spending. In particular, the abolishment of import duty on 300 various
products will be one of the key drivers for the retail players’ revenues (like
Parkson and AEON).
The Government also announced two non-quantitative policies which include: 1)

the establishment of a “1Malaysia Smart Consumer” portal to provide information
on price movements of goods in about 7k business premises nationwide; and 2)
introduction of the Retail Shop Transformation Programme (TUKAR), which will
be for the modernisation of small retailers (mom and pop stores). We believe
that the 1Malaysia Smart Consumer portal will increase consumer price sensitivity,
while the TUKAR programme would increase competition for department stores
cum supermarkets such as AEON’s Jusco as it gives the smaller players more
edge to compete with the bigger players.
F&B
The new policy which will affect F&B players is 1%-point increase to the current Increase in Service Tax to
5% service tax to 6%. This will increase KFCH’s (OP, FV=RM3.61) product 6%
selling prices. However, we believe this will not have a significant impact on
demand, given that a 6% service tax will only increase the average selling
prices of KFCH’s products by 1%.
QL Resources to enjoy
Basic food manufacturer QL Resources (OP, FV=RM5.41) will continue to
various incentives for its
benefit from the extension of the food production tax incentive to 2015 and the
RM170m incentives allocated for fishermen. The incentives for fishermen will palm oil division
THE 2011 14 BUDGET

ensure the sustainability of fish supply for its Marine Product Manufacturing
(MPM) division given that QL sources 95% of its fishes from local fishermen.
Besides the above incentives, QL’s palm oil division will benefit from the extension
of the application period for tax incentives for: 1) the generation of energy from
renewable sources; 2) energy conservation; and 3) reduction of greenhouse gas
emission to 2015. The palm oil division will benefit from these incentives given
its venture into renewable energy (RE) such as its palm pelletisers and biomass
boilers. Furthermore, the division will benefit from implementation of the Feed
In Tariff (FiT) mechanism under the RE Act, which allows QL to sell its RE
generated from its biomass plant to be sold to electricity utility companies. We
recently highlighted QL’s ultimate aim to manufacture a zero-waste palm oil
milling system to palm oil millers using its pelletising and biomass boiler
technology, which will be able to generate energy through palm oil wastes. QL’s
palm pelletisation is targeted to be commercialised by Dec 2010. The FiT will
further increase the attractiveness and marketability of this system, although we
are unable to gauge the impact of this yet, given the lack of details on the
incentives.
Brewery and Tobacco

The brewers enjoy another year of no increase in excise duty, which is positive Another year of cheer for
for Carlsberg (OP, FV=RM6.03). Note that the Government has not increased the brewers
excise duties on beer since the year 2005. Due to this, we expect that overall
Malt Liquor Market (MLM) TIV would not be affected in 2011, which is positive
for Carlsberg. We maintain our projected flat TIV growth of 0% for FY11. The
Government also did not introduce a subsequent hike in excise duty for cigarettes
after the increase of 16% earlier this month, nor did it mention anything regarding
the cess issue, which in the context of the 2011 Budget outcome, is positive for
BAT (UP, FV= RM42.90).
Healthcare
As for the healthcare sector, the Government has committed to allocate RM15.2bn
in 2011 (vs. RM14.8bn in 2010) to construct new hospitals, increase the number
of doctors and nurses as well as to obtain supplies of medicines and equipment.
Under the 10MP, out of the eight hospitals that will be built, four have been
identified, where two will be in Perak while the other two will be in Sabah. As
Faber (OP, RM=RM3.82) currently holds the concession agreement to provide
hospital support services in Perak and Sabah, it would likely benefit. However,
it would be dependent on whether Faber’s application for the concession is
renewed by the Government. Nevertheless, we maintain our view that the renewal
will likely be granted on the back of: 1) continuous effort by management to
improve its services; 2) Faber’s 14-year track record and technical expertise;
and 3) service benchmarks are consistently met without any unit price increase.
In addition, with more new government hospitals being built across Malaysia,
this could have an impact on private hospital operator KPJ (OP, FV=RM4.51).
Nevertheless, we expect this to be minimal due to Malaysia’s rising affluence
towards seeking better quality of care, greater uptake in medical insurance and
general dissatisfaction with the service of public hospitals.
Table 10
Valuations Of Consumer Stocks
Value (sen) (%) (x) (x) (x) (x) (%)
KFC Dec 3.26 3.61 22.5 26.1 16.7 15.7 14.5 12.5 7.3 1.6 10.7 2.1 OP
Carlsberg Dec 5.21 6.03 42.8 47.5 5.2 1 0 . 8 12.2 11.0 7.6 2.6 10.1 4.9 OP
KPJ Health Dec 3.55 4.51 26.6 29.9 10.7 12.2 13.3 11.9 7.8 1.6 10.5 4.5 OP
Parkson Jun 5.96 7.72 37.3 47.9 26.6 28.5 16.0 12.4 3.8 2.7 5.8 1.3 OP
Faber Dec 3.08 3.82 34.2 38.2 30.4 11.4 9.0 8.1 3.5 2.1 5.8 2.6 OP
QL Resources Mar 5.08 5.41 34.7 41.1 13.0 18.4 14.6 12.4 6.0 2.9 14.0 2.3 OP
Daibochi Dec 3.00 4.12 31.9 35.3 9.3 1 0 . 9 9.4 8.5 5.5 2.9 7.8 6.7 OP
AEON Dec 5.85 5.72 44.0 47.5 7.2 7.8 13.3 12.3 2.5 1.7 5.5 2.1 MP
Amway Dec 8.09 8.45 56.5 58.4 3.5 3.5 14.3 13.8 9.2 5.3 8.9 6.4 MP
Hai-O^ Apr 3.21 2.84 28.6 32.2 2.5 1 2 . 6 11.2 10.0 6.7 1.0 4.4 5.9 UP
BAT Dec 47.72 42.90 233.3 230.0 -7.8 -1.4 20.5 20.7 14.2 n.m 17.7 4.4 UP
Sector Avg 11.1 10.7 15.9 14.3
THE 2011 15 BUDGET

Infrastructure : Government Introduces Populist Neutral
Measures
Measure: To reduce transportation costs in the country, the Government announced Toll hike freeze for next
that the toll rates in the four highways owned by PLUS Expressways Berhad will not five years
be raised for the next five years, effective immediately.
Impact: We note that the toll hike freeze applies only to PLUS, while the other toll
concessionaires remain unaffected. However, no details on the form of compensation
to PLUS were forthcoming. While the announcement at first appears negative to
PLUS, we note that on the very same day itself, UEM and EPF together made a joint
offer to buy all the assets and liabilities of PLUS at an aggregate purchase consideration
of RM23bn or RM4.60 per share. We think the takeover offer is fair though not very
compelling given our fair value of RM4.76 (10% premium to NPV of RM4.60). Besides
that, the proposed takeover will essentially put aside any concern about the potential
adverse earnings impact of the toll hike freeze, which will be borne by UEM and EPF.
Table 11
Valuations Of Infrastructure Stocks
Value (sen) (%) (x) (x) (x) (x) (%)
Puncak Dec 2.88 3.01 36.3 72.5 14.1 99.7 7.9 4.0 3.2 0.8 2.7 2.1 MP
PLUS Dec 4.46 4.60 37.4 38.0 5 2 . 7 1.8 11.9 11.7 8.7 3.2 9.7 4.5 UP
Sector Avg 49.0 9.0 11.6 10.7
Insurance : Budget Impact Not Significant Neutral
The 2011 Budget will not significantly impact the insurance sector given that there No significant impact to
were no new incentives introduced. However, indirectly, we believe that the insurance the sector
sector will benefit from the various budget measures for other sectors to boost
economic activity. Heightened economic activities will provide opportunities for the
general insurers such as Allianz (OP, FV=RM5.32), LPI (UP, FV=11.40) and
Kurnia (MP, FV=RM0.44), to grow their other business segments such as workmen
compensation and marine, aviation and transit insurance. The sector will also benefit
from the government policy to make it mandatory for employers to procure health
insurance for their foreign workers as it would provide another avenue of premium
growth. For motor insurance, there was no update on the reform of the existing Third
Party Bodily Injury and Death (TPBID) policy.
For life insurance, no new measures were introduced that would boost the segment, The new Private Pension
although we believe the new Private Pension Fund (PPF) that was introduced for the Fund (PPF) could pose
private sector and self-employed workers could provide competition for life insurance competition for the life
existing products. The PPF is an equivalent of the EPF and the RM6k tax incentive insurance segment
for EPF contribution is also extended for the PPF.
Given that the measures introduced have limited impact for the sector, we are Maintain Neutral
maintaining our current forecasts and assumptions for all four insurance companies
under our coverage, i.e. Allianz, LPI, Kurnia, and MNRB (MP, FV=RM2.98).
Table 12
Valuations Of Insurance Stocks
Value (sen) (%) (x) (x) (x) (x) (%)
Allianz Dec 4.11 5.32 86.2 99.7 19.9 15.8 4.8 4.1 -5.1 0.9 5.5 0.5 OP
MNRB^ Mar 2.74 2.98 19.5 29.5 -35.9 51.0 14.0 9.3 -36.0 0.6 12.0 3.6 MP
Kurnia Asia Dec 0.43 0.44 4.9 6.0 27.8 22.8 8.8 7.2 6.2 1.5 8.8 2.3 MP
LPI Capital Dec 11.70 11.40 70.2 82.9 12.4 18.0 16.7 14.1 10.8 1.5 2.8 5.9 UP
Sector Avg 8.7 21.5 8.6 7.1
THE 2011 16 BUDGET

Motor : Enticing Hybrid Car Buyers Overweight
There was no mention of any incentives for the conventional passenger and commercial Full exemption of import
car segments but the Government proposed to make do with the excise duty that and excise duties till 31
is currently being imposed for the hybrid cars. At present, we understand there are December 2011
only two hybrid car models in Malaysia – the Toyota Prius and the Honda Civic.
Previously, franchised holders of hybrid cars are given 100% exemption of import
duty and 50% exemption of excise duty on new completely-built-up (CBU) hybrid
cars until December 2010. The incentive was limited to new CBU hybrid passenger
cars with engine capacity below 2,000cc. This meant that hybrid car users previously
paid no import duty and around 40% of excise duty.
Table 13
Duties And Taxes On Motor Vehicles
CBU & CKD

Engine Capacity (cc)
Excise Duties (%) Sales Tax (%)
<1,800 75 10
1,800-1,999 80 10
2,000 -2,499 90 10
Above 2,500 105 10
Source: MAA
In the current Budget, the Government proposed that full exemption of import and Hybrid car prices could
excise duties be given on new CBU hybrid cars, electric cars as well as hybrid and potentially be priced
electric motorcycles which applied with the Ministry of Finance from 1 January until 14-19% lower
31 December 2011.
We gather that current on-the-road prices for the Toyota Prius and Honda Civic stand However, hybrid car unit
at RM175k and RM130k respectively. With this incentive, prices could drop to RM141k movements do little to
and RM111k respectively based on the Labuan prices (RM128k and RM101k change total TIV
respectively) inclusive of the sales tax of 10%.
Overall, while the incentive is a big plus for interested hybrid car buyers, it will have Maintain Overweight call
minimal impact on the total TIV of the industry, given its immaterial numbers thus on the sector
far. YTD TIV units for the Prius and Honda Civic Hybrid stand at 169 and 107
respectively. We reiterate our Overweight stance for the sector and maintain APM
Automotive as our top pick.
Table 14
Valuations Of Motor Stocks
Value (sen) (%) (x) (x) (x) (x) (%)
APM Dec 4.85 5.53 50.3 57.2 7.0 13.8 9.7 8.5 3.0 1.2 5.2 2.7 OP
Proton^ Mar 4.87 5.50 75.2 80.3 11.6 6.8 6.5 6.1 7.2 0.5 n.m 0.0 OP
MBM Dec 3.17 5.30 48.2 50.7 5.3 5.0 6.6 6.3 14.3 0.7 14.8 3.8 OP
UMW Dec 6.75 7.27 59.2 66.3 7.2 11.9 11.4 10.2 5.3 1.7 7.9 3.6 MP
Tan Chong Dec 5.68 6.16 45.3 67.3 16.2 48.6 12.5 8.4 9.3 2.0 10.8 2.1 MP
Sector Avg 10.2 17.2 9.8 8.4
Sector Avg(ex-Proton) 9.69 20.8 11.01 9.1
THE 2011 17 BUDGET

Oil & Gas : Reiterating Key Measures Neutral
Key points highlighted were:
1) The listing of Petronas Chemicals Group (PCG) and Malaysia Marine & Heavy Key highlights were
Engineering (MMHE) to offer higher public shareholding this year;
previously mentioned
projects
2) The Government would allocate RM146 million to support the sector;
3) Projects to be implemented include the establishment of the Oil Field Services

and Equipment Centre in Johor with private investment of RM6bn over a
period of 10 years;
4) To meet the increase in gas demand by industries, Petronas will implement

a regasification project in Melaka with an investment of RM3bn. This is
expected to be operational in 2012; and
5) Petronas Gas Bhd constructing a 300-megawatt Combined-Cycle Gas Power

Plant in Kimanis, Sabah to increase electricity generation capacity to meet
rising demand.
In regards to the two Petronas listings, the bookbuilding exercise for MMHE was MMHE listing is completed,
closed on 14 Oct with final retail and institutional prices set at RM3.61-3.80 respectively. for now Petronas
The listing of Petronas Chemicals Group is expected to be in Nov. Chemicals Group listing
tentatively set for Nov
The rest of the projects above, were mentioned previously in the Economic
Transformation Programme Open Day as key projects and measures that the private
sector (in tandem with the Government) would undertake for the sector.
Petronas Gas is currently undertaking the feasibility study on the RM3bn regasification Neutral call maintained
project while we expect the Kimanis Combined-Cycle Gas Power Plant to cost at
least RM1bn, on the basis of US$1m per MW.
Overall, we reiterate our short-term Neutral call on the sector given that most of
the projects have been mentioned before. We look to better contract flows in the
coming two months. Again, longer-term earnings visibility for O&G service providers
remains intact on the back of reserve replenishment activities. We keep Dialog (OP;
FV= RM1.30) as our top pick.
Table 15
Valuations Of Oil & Gas Stocks
Value (sen) (%) (x) (x) (x) (x) (%)
Dialog Jun 1.23 1.30 8.8 10.7 50.4 21.1 13.9 11.5 7.9 4.0 12.7 3.9 OP
P Gas^ Mar 11.42 11.63 72.9 75.6 2.7 3.7 15.7 15.1 8.3 3.6 11.0 6.8 OP
Dayang Dec 2.38 2.61 20.1 22.9 22.6 14.0 11.9 10.4 9.6 1.8 9.0 2.5 OP
Kencana July 1.88 1.80 12.0 13.8 46.0 14.5 15.6 13.7 9.0 3.2 11.7 0.5 MP
SapuraCrest^ Jan 2.43 2.41 18.5 19.5 10.0 5.2 13.1 12.5 3.8 2.1 4.8 2.9 MP
Wah Seong Dec 2.17 1.79 13.8 15.9 62.5 15.2 15.7 13.7 6.1 1.7 4.5 2.4 UP
Petra Perdana Dec 0.82 0.50 5.3 1 1 . 3 +>100 n.m 15.5 7.2 7.0 0.5 13.2 2.5 UP
KNM Dec 0.50 0.37 3.7 5.1 +>100 3 7 . 4 13.3 9.6 9.9 5.2 8.7 4.0 UP
Sector Avg 16.4 9.8 14.9 13.5
Sector Avg (EX P Gas) 46.2 18.8 13.7 11.5
THE 2011 18 BUDGET

Plantation : No Exciting News Neutral
◆ There are not many new measures affecting the palm oil plantation sector in the Two new measures
2011 Budget. Only two new proposals were made, including: affecting plantation
sector
- (1) The encouragement of replanting activity to replace aged trees with
high quality new clones, through a fund of RM297m; and
- (2) A sum of RM127m to be allocated to support domestic oleo derivatives
companies as well as a sum of RM23.3m to expand downstream palm oil
industries including production of vitamins.
- As there were no details as to how the funds allocated will be distributed, Encouragement of
it is hard to gauge the impact of these measures. Firstly, we note that under replanting activity to
incentive (1), the fund of RM297m to encourage replanting activity is different replace aged trees with
from the previous replanting incentive, where a sum of money is given to high quality new clones…
planters for each hectare of land which is replanted. This time, the fund is
targeted to encourage replanting with high quality new clones, which could
mean that planters may get a subsidy for buying new clone seedlings from
government-backed research centres like MPOB. This, we believe, would
mainly benefit smaller companies and smallholders, who do not have their
own R&D division. Most of the companies under our coverage have their
own research centres and already develop their own high quality clones
which would be used for their new planting and replanting activities.
- Under incentive (2), again there is no clarity on how the sum of RM127m … and RM127m to be
is to be distributed to oleo derivatives companies. Assuming it is in the form allocated to support
of a tax incentive, it would benefit companies like IOIC (OP, FV = RM6.75), domestic oleo derivatives
KLK (OP, FV = RM22.05) and Sime Darby (MP, FV = RM9.40), as they companies
all have oleochemical manufacturing operations, although we would not be
able to quantify the impact given the lack of details. As for the RM23.3m
incentive to produce vitamins, this would likely benefit Carotech (Not Rated)
and KLK, as they produce nutraceuticals, which could be classified as a
form of vitamin.
◆ One measure which is not new, which was mentioned in the Budget, is the B5 biodiesel programme
mandatory implementation of the B5 biodiesel programme in Putrajaya, Kuala mentioned again…
Lumpur, Selangor, Negeri Sembilan and Melaka, starting from June 2011.
- This is not a new policy, as the Government first set out its Biofuel Policy … but issue of pricing still
2006, with initial plans to commence nationwide implementation in 2010, outstanding
while the implementation deadline was pushed back to June 2011 back in
March 2010. Although the Government has since come up with a plan which
includes the RM43m instigation of depots with inline blending facilities to be
placed in Port Klang, the Klang Valley Distribution Terminal (KVDT) in
Selangor, Port Dickson, Negri Sembilan and in Tangga Batu, Malacca, and
the rule that the costs of installing the blending terminals are to be borne
by the petroleum companies, it still has not come out with any details on
the B5 pricing issue. The only mention of pricing made by the Agriculture
Minister earlier in the year was to say that the price of biofuel under the
plan will not be fixed as it will oscillate depending on the price of palm oil
and diesel. If this is the case and pricing is based on market prices of CPO,
demand may not be too strong for the B5 blend, given the high price of
CPO currently at RM2,890/tonne.
◆ Other non-plantation related measures introduced in the Budget which Non-plantation related
would affect some of the plantation companies include: measures like…
… tax incentives for

- Pioneer status and Investment Tax Allowance for the generation of energy
renewable energy and
from renewable sources and energy efficiency activities for own consumption
sale of carbon credits
and for sale be extended to 31 Dec 2015 (from 31 Dec 2010).
extended…
THE 2011 19 BUDGET

- Extension of tax incentive for reduction of greenhouse gas emission via the
sale of Certified Emission Reductions (CERs) to year of assessment 2012
(from YA 2010).
- We believe this is positive for CBIP (OP, FV = RM4.60), who is in the … which could be positive
midst of developing and testing its zero discharge “green palm oil mill”, for CBIP in the long term
which comes together with a biogas plant. Currently, four of these CPO
mills are being tested, two for Felda and two on its own premises. Although
the mill has not been commercialised yet, we believe once it is able to do
so, it will be able to enjoy the tax incentives given not only for generating
renewable energy, but also for the sale of CERs.
◆ Overall, we believe the 2011 Budget is a slight positive for the plantation sector, Overall, slight positive
although the impact is not expected to be significant. We maintain our Neutral impact on sector, but not
stance on the sector, although we highlight selective stock picks which we have significant
Outperform recommendations on, including IOIC (FV = RM6.75), KLK
(FV=RM22.05), First Resources (FV = S$1.40) and CBIP (FV = RM4.60).
We maintain our Market Perform recommendations on Sime Darby (FV =
RM9.40) and IJMP (FV = RM2.56) and our Underperform recommendation on
Genting Plantations (FV = RM7.40).
Table 16
Valuations Of Plantation Stocks
Value (sen) (%) (x) (x) (x) (x) (%)
KLK Sep 19.00 22.05 124.4 131.4 42.1 5.6 15.3 14.5 9.8 3.1 14.5 3.4 OP
IOI Corp Jun 5.80 6.75 33.6 34.9 28.3 3.8 17.3 16.6 12.0 3.3 15.3 2.9 OP
CBIP Dec 3.56 4.60 52.7 55.1 21.6 4.4 6.7 6.5 6.6 1.4 6.0 4.8 OP
First Resources D e c S$1.25 S$1.40 8.8 10.2 30.1 15.1 11.0 9.5 7.5 1.9 10.8 2.3 OP
IJMP^ Mar 2.68 2.56 16.1 14.8 2.0 -8.2 16.7 18.2 10.0 1.7 14.3 2.2 MP
Sime Darby Jun 8.84 9.40 48.6 49.9 9.0 2.6 18.2 17.7 10.3 2.4 13.1 3.5 MP
Genting Plant Dec 8.37 7.40 46.3 44.5 17.5 -4.0 18.1 18.8 12.5 2.1 16.2 1.6 UP
Sector Avg 19.9 3.0 17.0 16.5 10.8 2.7
THE 2011 20 BUDGET

Power : Emphasis On Green Technology Overweight
The Government appears to have reaffirmed its commitment towards the development Going green …
and adoption of green technology. Firstly, tax incentives in the form of pioneer status
and investment tax allowances will be extended until end-2015 for the generation of
renewable energy (RE). Secondly, energy conservation equipment will enjoy
exemption from import duty and sales tax. Finally, the Government will also implement
the Feed-in Tariff (FiT) mechanism under the RE Act to help promote the generation
of electricity from renewable resources. Apart from the above, the Government will
continue to provide a rebate to households that incur monthly electricity bills of RM20
or less.
On the whole, the budget did not hold any significant surprises for the sector. At this … but much would still
stage, it is unclear when the Government plans to implement the FiT mechanism, depend on Government’s
which we think would be a key support mechanism in helping the country meet the willpower to implement
target of increasing the availability of RE to around 2,000MW by 2020 (currently changes
around 55MW). While the move towards RE should be a long-term positive in terms
of, among others, energy security, much would depend on the Government’s will
power especially in tackling issues such as the need for electricity tariffs to be raised
under the FiT mechanism, in our opinion.
Table 17
Valuations Of Power Stocks
Value (sen) (%) (x) (x) (x) (x) (%)
Tenaga Aug 8.93 10.30 75.5 87.3 16.2 15.7 11.8 10.2 7.0 1.3 4.8 3.4 OP
YTL Power Jun 2.33 2.20 17.8 18.3 3.3 3.3 13.1 12.7 9.7 1.8 7.3 7.5 MP
Sector Avg 12.3 12.3 12.2 10.9
^ FY11-12 valuations refer to those of FY12-FY13
Property : Friendly Measures……First… Overweight
Measure: Increasing house ownership
i) To promote home ownership, a sum of RM568m is provided to build a total of Positive measures for
87,300 units of low cost houses. Skim Pembiayaan Perumahan Kos Rendah with first-time home buyers
an allocation of RM50m will be open to all Malaysian permanent estate workers
to assist them to obtain housing loans with a maximum of RM60k for the
purchase of low-cost houses at 4% interest rate and a repayment period of up
to 40 years extending to the second generations.
ii) The Government will introduce Skim Rumah Pertamaku through Cagamas Berhad.
A guarantee on downpayment of 10% for houses below RM220k will be provided
for first-time house buyers with household income less than RM3k per month,
i.e. a 100% loan can be obtained without any down payment.
iii) First-time home buyers will be given stamp duty exemption of 50% on
instruments of transfer on a house priced not more than RM350k, effective for
sales and purchase agreements executed from 1 Jan 2011 – 31 Dec 2012.
Previously, the exemption is granted for residential property priced less than
RM250k, effective for SPA executed from 8 Sept 2007 – 31 Dec 2010.
iv) First time home buyers will also be given stamp duty exemption of 50% on loan
agreement instruments for residential properties priced less than RM350k,
effective for SPA executed from 1 Jan 2011 – 31 Dec 2012. Previously, the
exemption is granted for residential property priced less than RM250k, effective
for SPA executed from 30 Aug 2008 – 31 Dec 2010.
THE 2011 21 BUDGET

Impact: The 50% discount on stamp duty is encouraging for first-time home buyers, Mid-end housing
but it is only for houses priced below RM350k. Under the existing tax structure, 1% developers to benefit
is imposed on the first RM100k, 2% on the next RM400k and 3% on the remaining
amount. With the exemption, stamp duty would cost only RM3k (from RM6k) for a
house valued at RM350k. We believe the direct beneficiaries under these measures
will be the mass housing developers, such as LBS and Hua Yang in the Klang Valley,
and to some extent SP Setia, IJM Land, Mah Sing, KSL, etc. for their housing projects
in Johor pricing at below RM350k. The 50% exemption will also benefit the secondary
housing market as the stamp duty paid by the first-time home buyers who purchase
a second-hand house is now cheaper.
Measure: Mega developments
i) The development of the Kuala Lumpur International Financial District (KLIFD), Still waiting for more
which is worth RM26bn, will kick off next year. The project is jointly developed details on RRI land…
by 1Malaysia Development Berhad (1MDB) with Mubadala Development
Company.
ii) The EPF will undertake the mixed development comprising affordable houses,
commercial, industrial and infrastructure facilities of the Malaysian Rubber Board
land in Sungai Buloh, covering an area of 2,680 acres. The development is
estimated to worth RM10bn and is expected to be completed by 2025.
iii) Another landmark named Warisan Merdeka will be developed by Permodalan
Nasional Berhad. This is an integrated development project comprising a 100-
storey tower, which will be the tallest in Malaysia. The project will retain Stadium
Merdeka and Stadium Negara as national heritage. The total project cost is
RM5bn, with the tower expected to be completed by 2015, and the entire
project to be completed by 2020.
Impact: We remain upbeat on the development plan for the RRI land in Sungai
Buloh, especially in the current property upcycle, as participating developers will be
able to enlarge their development landbank and GDV with this JV project. While we
believe demand for residential properties will remain strong, we note that the
oversupply of commercial properties, particularly office towers, has yet to be absorbed
by the market. Although the development of KLIFD and Warisan Merdeka will only
be completed in 2015-2020, we believe the development will contribute to another
oversupply wave of office space in future considering the scale of the projects.
Our view on the sector. We note that the measures introduced during the Budget Credit tightening
2011 are targeted at only the middle-end housing and first-time home buyers, and measures are still in
we believe the Government is still keeping its agenda to target the “overheating” Government’s agenda?
property market, to be in line with the tightening measures implemented in the
regional markets. As such, over the intermediate term, we think the Government or
Bank Negara Malaysia will still announce some new credit tightening measures to
address the issue, such as the imposition of cap on loan-to-value (LTV) ratio, and
a threshold at above RM350k could be set to target the mid to high-end properties.
Nevertheless, even if a 70% or 80% cap on LTV ratio is implemented, we expect
the current property sales momentum to continue as we believe that developers will
still continue with their aggressive home ownership campaign, offering attractive
rebates that lower the downpayment.
We highlight that the story would be different if (i) The Government is to stop Sector will be hit badly if
developers from offering innovative scheme in addition to a 70% or 80% cap on LTV incentives offered by
ratio; or (ii) The commercial banks are instructed to adjust the house price for the developers are
rebates (offered by developers) as the “real” house price for the application of discontinued
mortgage loan. In any of these two scenarios, buying power of property buyers/
investors will be dampened due to lower leverage ability. Property sales will be
adversely affected as the upfront “entry cost” (downpayment) for property buyers
will be much higher, at 20% or 30% of the house value.
THE 2011 22 BUDGET

Still positive. We remain positive on the property sector, as the fundamental Remain positive, as
demand will still be driven by the growing young population group. Although regulatory Government is unlikely to
risk still exists, we believe the Government would not want to badly hit the property implement harsh
sector. We still see a few strong supports for the sector, and these include: (i) Low
measures on the property
mortgage rate as commercial banks continue to offer discount to BLR; (ii) Aggressive
sector
incentives provided by developers; (iii) Strengthening in ringgit and low interest
rates in the region that encourage foreigners participation and liquidity flow; (iv)
Property is a preferred vehicle to hedge against inflation; and (vi) Good news flow
on the Government’s development plans. Overall, we continue to like IJM Land (OP,
FV = RM3.18), Mah Sing (OP, FV = RM2.33) and Suncity (OP, FV = RM5.48).
Incentives for REITs are missing. Having some good news on the mid-end Budget 2011 – a
housing, the Budget 2011 is rather disappointing for the REIT sector, as reduction disappointment for
or removal of withholding tax was not mentioned. Although the current withholding
MREITs
tax structure will still somewhat shy away foreign investors (especially), we are
hopeful that the recent two additions – Sunway REIT and CapitaMalls Malaysia Trust
into the MREITS will boost the liquidity and investibility of MREITs. Yields remained
attractive for MREITs at around 7-8%, suitable for investors who are looking for
defensive investments. We continue to like Sunway REIT (OP, FV = RM1.05) for
its asset size and liquidity, and Axis REIT (OP, FV = RM2.67) for its strong
acquisition track record.
Table 18
Valuations Of Property Stocks
Value (sen) (%) (x) (x) (x) (x) (%)
Glomac^ Apr 1 . 6 5 1.72 24.3 28.9 23.3 18.8 6.8 5.7 6.4 0.8 8.5 8.9 OP
Suncity Dec 4.00 5.48 41.3 48.2 18.6 16.8 9.7 8.3 6.9 0.8 8.2 2.1 OP
Sunrise Jun 2.22 2.88 29.9 33.2 10.6 11.1 7.4 6.7 7.3 0.9 10.7 1.9 OP
Axis REIT Dec 2.17 2.67 18.7 18.9 12.3 0.8 11.6 11.5 16.7 1.2 12.1 8.6 OP
IJM Land^ Mar 2 . 6 7 3.18 19.4 21.3 53.0 9.8 13.8 12.5 9.6 1.8 11.0 1.1 OP
Mah Sing Dec 1.87 2.33 17.2 21.2 22.8 23.2 10.9 8.8 7.2 1.6 21.1 3.7 OP
Paramount Dec 4.85 5.80 63.1 71.8 9.4 13.8 7.7 6.8 3.8 1.0 7.8 6.5 OP
Quil Capita Dec 1.04 1.23 9.3 9.6 4.7 3.4 11.1 10.8 12.9 0.7 2.8 8.3 OP
Sunway REIT Jun 0.98 1.05 6.7 7.3 10.1 8.6 14.4 13.3 16.9 1.0 11.7 6.9 OP
Hunza Prop Jun 1.45 1.58 27.6 20.9 3.4 -24.2 5.3 6.9 5.0 0.6 5.1 3.9 TB
SP Setia O c t 4.88 4.95 22.8 27.4 14.6 19.8 21.4 17.8 19.4 2.2 39.7 2.9 MP
YNHB Dec 1.79 1.86 17.6 20.3 11.6 15.2 10.2 8.8 8.5 0.9 -36.3 2.5 MP
KLCC^ Mar 3.32 3.80 26.3 27.3 4.5 3.8 12.6 12.2 5.4 0.6 2.7 3.3 MP
Sector Avg 16.1 11.4 12.3 11.0
THE 2011 23 BUDGET

Semiconductor & IT : Upping The Ante Neutral
Upgrade Mode
Measure: A total of RM857m will be allocated to local industry players in order to

enhance the electrical and electronics (E&E) sector. The investment will be mainly in
key strategic areas i.e. Penang and Kulim High-Tech Park, Kedah. The investment
is expected to drive the local industry up the value chain and improve its international
competitiveness.
Impact: We believe the allocation would support the establishment of five wafer fab
plants in Kulim High-Tech Park. We highlight that these plants will focus on higher
technology nodes i.e. analogue (power applications) and mixed signals (wireless
applications). Already, a JV between QT Hightech Malaysia Sdn Bhd and Lfoundry
Gmbh has been established to develop a wafer fab plant in Kulim. Note that the plant
is expected to have a production capacity of 60,000 wafers (200mm) a month. With
these facilities, the development is expected to attract around 50 integrated circuit
(IC) design companies. Therefore, in our view, this augurs well for the industry
mainly due to: 1) further business opportunities for packing assembly, and testing
(PAT) players i.e. MPI and Unisem given that IC design companies require these
services; and 2) reduction of logistics costs and lead time given that the majority
of wafer fabs are sourced from Taiwanese players. While we are positive on these
developments, we believe the risks include: 1) capacity glut of wafers that could
potentially cause wafer prices to fall as the industry is highly competitive; 2) wafer
fabs are a highly cyclical industry; and 3) the fab facility are small vs. major foundry
players and hence may lack similar economies of scale.
Table 19
Valuations Of Semiconductor/IT Stocks
Value (sen) (%) (x) (x) (x) (x) (%)
Unisem* Dec 1.96 2.31 21.0 23.4 4.9 11.4 9.3 8.4 4.0 1.4 4.6 2.6 OP
JCY Sep 1.06 1.32 13.2 14.2 9.9 7.6 8.1 7.5 5.7 2.0 5.8 6.1 OP
MPI^ Jun 5.95 6.35 53.8 61.6 7.2 14.6 11.1 9.7 2.8 1.2 2.7 3.4 MP
Notion Sep 1.69 1.54 21.0 22.5 3.1 7.4 8.1 7.5 3.8 1.3 4.1 3.8 UP
Sector Avg 7.8 10.4 8.7 7.9

* Fully Diluted
THE 2011 24 BUDGET

IMPORTANT DISCLOSURES
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circulation only to clients of RHBRI and RHB Investment Bank Berhad (previously known as RHB
Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may
be permitted by applicable law. The opinions and information contained herein are based on
generally available data believed to be reliable and are subject to change without notice, and
may differ or be contrary to opinions expressed by other business units within the RHB Group
as a result of using different assumptions and criteria. This report is not to be construed as
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warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon
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or its associated persons may from time to time have an interest in the securities mentioned
by this report.
This report does not provide individually tailored investment advice. It has been prepared without
regard to the individual financial circumstances and objectives of persons who receive it. The
securities discussed in this report may not be suitable for all investors. RHBRI recommends that
investors independently evaluate particular investments and strategies, and encourages investors
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have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.
This report has been prepared by the research personnel of RHBRI. Facts and views presented
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The research analysts, economists or research associates principally responsible for the preparation
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The recommendation framework for stocks and sectors are as follows :-
Stock Ratings
Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage
points over the next 6-12 months.
Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price
and translate into an absolute return of 15% or more over a period of three months, but fundamentals are
not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher
risks.
Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage
points) over the next 6-12 months.
Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five
percentage points over the next 6-12 months.
Industry/Sector Ratings
Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over
the next 6-12 months
Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation,
over the next 6-12 months.
Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation,
over the next 6-12 months.
THE 2011 25 BUDGET

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Lim Chee Sing

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The 2011 Budget: Setting The Pace Towards Transformation-15/10/2010

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The 2011 Budget: Setting The Pace Towards Transformation-15/10/2010

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MARKET DATELINE

The 2011 Budget

Setting The Pace Towards Transformation

Please read important disclosures at the end of this report.

Reinvigorating Private Investment

THE 2011 2 BUDGET

Intensifying Human Capital Development

Enhancing Quality Of Life Of The Rakyat

Strengthening Public Service Delivery

THE 2011 3 BUDGET

THE REVENUE AND EXPENDITURE PROPOSALS

Federal Government : Less Expansionary

THE 2011 4 BUDGET

2009 2010(e) 20111(f) 2010(e) 2011(f)

Revenue 158.6 162.1 165.8 2.2 2.3

Consolidated Public Sector : Also Less Expansionary

2009 2010(e) 20111(f) 2009 2010(e) 2011(f)

Revenue 134.0 132.8 138.6 4.4 -0.9 4.4

1 Budget estimate, excluding 2011 tax measures

THE 2011 5 BUDGET

THE 2011 6 BUDGET

* Exclude Mas earnings in 09-11

THE 2011 7 BUDGET

THE 2011 8 BUDGET

Top Slicing On Further Run-up

THE 2011 9 BUDGET

THE 2011 10 BUDGET

Sector Avg 21.3 4.1 10.9 10.5

THE 2011 11 BUDGET

THE 2011 12 BUDGET

Project Value Potential Beneficiaries

Via Public-Private Partnership (PPP)/Private Investment

Sector Avg 12.7 6.8 17.3 16.2

^ FY11-12valuations refer to those of FY12-FY13

THE 2011 13 BUDGET

1. Import duty on approximately 300 goods preferred by tourists and locals, of

The Government also announced two non-quantitative policies which include: 1)

THE 2011 14 BUDGET

Brewery and Tobacco

THE 2011 15 BUDGET

Insurance : Budget Impact Not Significant Neutral

^ FY11-12valuations refer to those of FY12-FY13

THE 2011 16 BUDGET

CBU & CKD

^ FY11-12valuations refer to those of FY12-FY13

THE 2011 17 BUDGET

Key points highlighted were:

3) Projects to be implemented include the establishment of the Oil Field Services

4) To meet the increase in gas demand by industries, Petronas will implement

5) Petronas Gas Bhd constructing a 300-megawatt Combined-Cycle Gas Power

^ FY11-12valuations refer to those of FY12-FY13

THE 2011 18 BUDGET

… tax incentives for

THE 2011 19 BUDGET

Sector Avg 19.9 3.0 17.0 16.5 10.8 2.7

^ FY11-12valuations refer to those of FY12-FY13

THE 2011 20 BUDGET

Sector Avg 12.3 12.3 12.2 10.9

^ FY11-12 valuations refer to those of FY12-FY13

Property : Friendly Measures……First… Overweight

Measure: Increasing house ownership

THE 2011 21 BUDGET

Measure: Mega developments