Investment Strategy - DBS Bank

Malaysia Market Focus

Investment Strategy Refer to important disclosures at the end of this report

DBS Group Research . Equity

The grind continues •

Despite widespread media coverage of political and governance issues, economic issues remain a key concern for electorates

Strong 1Q15 GDP due to pre-GST front-loading; consumer sentiment and spending may take up to four quarters to normalise

Valuations are rich; end-2015 KLCI target unchanged at 1,750

Focus on defensive stocks and proxies for strong USD and 11MP

Economic issues remain a concern. Rising cost of living has depressed the consumer sentiment index to a 6-year low. The strong 1Q15 GDP growth of 5.6% was likely due to pre-GST front-loading. Consumer sentiment and spending are unlikely to improve in the near term due to GST implementation in April, and could take up to four quarters to normalise. Corporate earnings remain lacklustre. Weak consumer spending, normalisation of credit growth, and weak commodity prices, continue to dampen corporate earnings growth. Following a 4.7% decline in 2014 FBMKLCI earnings, we forecast earnings will rebound by 9.3% in 2015, but there is still downside risk particularly from the banking sector. It pays to be defensive. The FBMKLCI is trading at 17x CY15 P/E (+1 SD) amid risk of downgrades to earnings and sovereign credit rating. And in the immediate term, Malaysian equity performance is likely to be pedestrian at best. We are retaining our end-2015 KLCI target of 1,750 (CY16 14.6x P/E), and do not see immediate re-rating catalysts to support broad-base accumulation until fundamentals improve. Key themes for 2H15: strong USD and 11MP. The flip side of a weaker MYR is stronger export earnings. In this respect, the technology sector is a prime beneficiary, besides riding on sustained demand for smartphones and wearable devices. Meanwhile, the construction sector will be a prime beneficiary th of infrastructure spending under the 11 Malaysia Plan (11MP) which will be released on 21 May. We also overweight the utilities sector because of resilient earnings. Buy on weakness. We would advise to sell on technical rebound and buy on weakness. Our top picks for 2H15 include Tenaga, Petronas Gas, Gamuda, Muhibbah, Time dotCom, Globetronics, and Unisem. ed: SGC / sa: WMT

20 May 2015 KLCI :

1,809.72 1,809.72

Analyst Bernard CHING +603 2604 3918 [email protected] Malaysian Research Team +603 2604 3333 [email protected]


Tenaga Nasional Petronas Gas Bhd Gamuda Time dotCom Unisem Globetronics Technology Bhd Muhibbah Engineering

Mkt Cap Target Price

Performance (%)



3 mth

12 mth


13.98 21,849 22.10 12,110 5.21 3,430 6.12 973 2.56 481 6.09 474 2.64 342

16.00 25.40 6.00 7.10 3.05 7.50 3.50

(1.3) (0.9) 1.2 5.7 28.6 25.8 18.4

13.8 (8.1) 14.3 36.9 91.0 58.6 (4.0)




Maxis Petronas Chem IOI Corp KLK UMW OG MMHE

Source: AllianceDBS

Mkt Cap Target Price

Performance (%)



3 mth

12 mth


6.99 14,534 6.29 13,935 4.19 7,362 22.06 6,506 2.04 1,221 1.33 589

5.85 4.25 4.15 19.60 1.75 0.90

(1.3) 16.7 (11.0) (1.6) (27.7) (9.5)

0.9 (7.6) (20.3) (10.7) (49.0) (65.5)



Market Focus Investment Strategy

A depressed nation? There is generally weak sentiment in Malaysia currently as the media has been rife with issues that include rising cost of living, high indebtedness (at both household and government levels), domestic political concerns, and the lack of transparency at 1MDB. In a March survey by the Merdeka Center on public perception towards the 1MDB controversy, 69% of respondents seem to have little awareness of the issue, and only 33% feel they are affected. In the January survey, 47% of respondents feel the Results of voters survey on 1MDB

Source: Merdeka Center

Approval rating for the Prime Minister

Source: Merdeka Center

Page 2

country is heading in the wrong direction compared to 39% who feel it is moving in the right direction. Note that the percentage of naysayers has exceeded the optimists since end 2013. While approval ratings for the Prime Minister has dropped to 44%, the lowest since Jan 2014, what is interesting is that an overwhelming 62% of respondents viewed economic concerns as the main issue compared to only 3% each who believe it is political and racial issues which have hogged the headlines. Clearly, the electorates are more interested in issues which hurt their pockets rather than engage in coffee shop politics.

Market Focus Investment Strategy

Issues facing voters

Source: Merdeka Center

Strong 1Q GDP but slower growth ahead While 1Q15 real GDP growth of 5.6% was close to expectations (5.5%), the strength of private consumption (1Q15: +8.8% y-oy) was largely attributed to pre-GST front-loading of consumer spending. As GST was implemented on 1 April 2015, we expect GDP growth to moderate from 2Q onwards. Drawing from observations of GST implementation/rate hikes in other nations, inflation will spike while GDP growth will slow post-GST implementation. Though this is transitory, it typically takes up to four quarters to normalise. Furthermore, the expected slowdown in domestic consumption is supported by a 6-year low MIER consumer sentiment index reading of 72.6 in 1Q15. Impact of GST implementation/rate hike on GDP

Impact of GST implementation/rate hike on inflation

Source: AllianceDBS

MIER consumer sentiment index 130 120 110 100 90 80 70

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15


Source: Malaysian Institute of Economic Research Source: AllianceDBS

Page 3

Market Focus Investment Strategy

We had highlighted in our strategy report dated Dec 2014, that besides slower domestic consumption as a result of weak consumer sentiment, growth trajectory would also be affected by cyclically slower credit growth and depressed commodity prices. Our banking analyst, Lim Sue Lin, is now projecting industry loan growth of just 8% in 2015 and 2016, at the lower end of the 8%-14% range over the last six years. BNM-led tighter credit underwriting, high household indebtedness and subdued business conditions are among the reasons for the slower credit growth ahead.

Earnings growth comparison in ASEAN 5 18.8%







South East Asia





While crude oil price has rebounded 15.5% YTD and is now hovering at around USD66 (Brent), we remain cautious of the near-term outlook for oil price given continued aggressive production by OPEC members, prospect of large supply from Iran after the sanction is lifted, and a pick-up in shale oil production at higher price levels. In 2015, Malaysia will also be impacted by the lag effect of lower LNG prices, which typically lag crude prices by six months.






Source: AllianceDBS, Bloomberg Finance L.P.

FBMKLCI earnings growth trend 60% 50% 40% 30% 20% 9.3%



-20% -30% -40%

Source: AllianceDBS, Bloomberg Finance L.P.

We expect corporate earnings growth to remain lacklustre in the near term in view of the weak growth drivers outlined earlier. Our forecast for FBMKLCI aggregate free-float weighted earnings for CY2015 is cut by 2.4%. We are now projecting 9.3% earnings growth in 2015 (2014: -4.7%), the second slowest growth among the ASEAN-5. The banking sector is the largest earnings growth driver in 2015 with 37.6% contribution to growth. This remains a concern as banking earnings have been under pressure due to NIM compression, slow loan growth, higher provisions, and GST-induced higher operating costs. Hence, we remain convinced the earnings downgrade cycle is not over yet.

Source of FBMKLCI earnings growth in 2015


Aggregated free-float weighted 2015 KLCI earnings

34,000 33,000 32,000 31,000 30,000 29,000 28,000

Source: AllianceDBS, Bloomberg

Page 4
























Corporate earnings to remain lacklustre

FBMKLCI CY15 earnings forecasts


0% -10%


Crude palm oil (CPO) spot prices have fallen 5.7% YTD to RM2,166/MT (as of 18 May) because of excess supply of soybean and CPO, as well as weak exports. Though the recent El Nino reporting by Australia’s Bureau of Meteorology has created some excitement, it is still at a nascent stage and much depends on the severity of the El Nino and the impact it has not just on oil palm plantation, but more importantly, soybean harvest.

KLCI CY15 Earnings Growth Contributors


35% 30% 25%

22.0% 17.8%

20% 15%






5% 0%





Source: AllianceDBS


Consumer Plantation Oil & Gas Utilities


Market Focus Investment Strategy

On a brighter note, Malaysia is a low beta market, and the leastsensitive to a weak domestic currency among the ASEAN-5. In the event of a global equity sell down on US interest rate hike, we expect Malaysian equity to remain relatively sheltered.

Key themes for 2H15 It pays to be defensive The FBMKLCI is currently trading at 17x CY15 P/E (marginally higher than +1SD P/E of 16.8x) on the back of CY15 earnings growth of 9.3%. Given the prevalent earnings risk, Malaysian equities are trading at rich valuations. And given the risk of a potential sovereign credit rating downgrade by Fitch Rating and weaker earnings post-GST implementation, Malaysian equity performance is likely to be pedestrian at best in the immediate term. On the external front, the impending interest rate hike in the US and risk of Greece exiting the Eurozone are some of the risk factors in the global equity markets.

Ranking of Asia markets’ sensitivity to domestic currency weakness

FBMKLCI P/E trend 20



+ 1 s.d. 16.8x


Mean: 15.2x


- 1 s.d. 13.6x


Source: Datastream, DBS Bank

10 8 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Source: AllianceDBS, Bloomberg

Despite weaker fundamentals, Malaysian equities are still trading at 0.9x P/E premium over the MSCI ASEAN Index, in line with its historical mean premium of 1.1x.

We are retaining our end-2015 KLCI target of 1,750 (CY15 16.3x P/E, CY16 14.6x P/E), which reflects our current cautious stance. Although we estimate only 5% downside to our KLCI target from current level, there are no immediate re-rating catalysts to justify broad-base accumulation until fundamentals improve. As such, we advise investors to be defensive, to sell on strength and buy on weakness. We prefer stocks with resilient earnings, strong cash flows, and that are liquid. The large caps that fit these criteria include Tenaga Nasional, Nasional Petronas Gas, Gas and Public Bank. Bank

Malaysia P/E premium over ASEAN 2.5 2 + 1 s.d.

1.5 Mean: 1.1


Our top sell ideas include IOI Corp, KLK, Maxis, Petronas Chemicals, MMHE and UMW Oil & Gas.

- 1 s.d.


Strong USD continues to favour technology players


Source: Bloomberg



















Over the last 12 months, the Ringgit has depreciated by 9.4% against the USD. A weaker Ringgit favours corporates which revenues are denominated in a stronger foreign currency, such as the USD. Some of the sectors that have benefitted from this include technology, oil & gas, glove and furniture. Among these sectors, we prefer the technology sector as a proxy play because they will also benefit from sustainable demand for smartphones and wearable devices. Our top picks in this sector are Globetronics and Unisem. Unisem

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Market Focus Investment Strategy

While construction players are generally bullish on the outlook for contract flows from the government, a lot still hinges on the implementation timeline for these projects. Our top pick for the construction sector is Gamuda as it is the best proxy to the transportation projects (MRT, High Speed Rail and Penang Transport). The smaller cap companies which we like include Muhibbah (diversified expertise in civil engineering works, marine and oil & gas) and Kimlun (front-runner for more tunnelling lining segment and segmental box girders for MRT Line 2).

MYR-USD cross rate 3.80 3.70 3.60 3.50 3.40 3.30 3.20 3.10 3.00 2.90 Jan-05

Sector weightings Jan-06










Source: Bloomberg th

11th Malaysia Plan is a sentiment booster th

The 11 Malaysia Plan (11MP), a development blueprint by the government for 2016-2020, will be announced on 21 May. Like the previous Malaysia Plans, the construction sector will be a major recipient of budget allocation. Therefore, any increase in the headline budget over the previous amount of RM230bn will likely be a sentiment booster. Key mega projects to be included in the 11MP are unlikely to surprise as most have been muchanticipated, including MRT Line 2, LRT Line 3, RAPID, Pan Borneo Highway, five highways in Peninsular Malaysia, and Penang Integrated Transport Master Plan. The KL Construction Index is currently trading at mean level or 1-year forward P/E of 17x. Drawing parallels from the onset of the 10MP in June 2010, the Index also traded at mean level but subsequently moved up to >2SD six months later.

There are no changes to our sector weightings except for a downgrade of the shipping sector from overweight to neutral following the recent run up in share prices. We continue to overweight the following sectors: Construction (infrastructure spending under 11MP), technology (benefit from sustained global demand for smartphones/wearable devices and stronger USD), and utilities utilities (resilient earnings stream and beneficiary of energy reform in Malaysia). The consumer sector remains our only underweight as continued weak consumption will dampen spending ahead. Sector Views Overweight

Construction Technology Utilities


Automotive Aviation Banks Gaming Glove Healthcare Oil & Gas Plantation Property REITs Shipping (↓) Telecommunication



KL Construction Index PE PE (x) 24.0 22.0






16.0 -1SD




Source: AllianceDBS, Bloomberg

Page 6















Source: AllianceDBS

Market Focus Investment Strategy

Top stock picks Our top picks for 2H15 reflect our defensive stance until sentiment and outlook improve: Tenaga Nasional (TP: RM16.00) has strong earnings visibility from full implementation of the fuel cost pass-through mechanism as it will no longer bear the risk of volatile fuel costs. It will also benefit from the expansion of its internal power generation capacity (Janamanjung 4 commissioned in Mar 15) which will reduce its generation cost. Petronas Gas (TP: RM25.40) is defensive with steady recurring income from the processing and distribution of gas, but without exposure to the volatility in energy prices. Pengerang regasification plant is the next earnings growth catalyst when it commences operation by 2018. Gamuda (TP: RM6.00) is the best proxy to the transportation project play. After clinching the PDP role for MRT line 2, it will be a front-runner for tunnelling works for MRT line 2 as tunnel boring machines used for line 1 are a sunk cost. It is also a front runner for Penang Integrated Transport and LRT Line 3. Muhibbah (TP: RM3.50) has been excessively sold down along with other oil & gas stocks, which is not justified given its exposure to various segments of infrastructure other than oil &

gas. It remains in a good position to secure jobs in RAPID and is our favoured mid-cap pick for exposure to RAPID. Globetronics (TP: RM7.50) continues to see healthy volume growth for its proximity sensors which are used in smartphones and tablets, and wearable sensors. The ongoing ramp up in capex for a new depth imaging sensor will double its capacity by 1H16. Despite a good run in the share price, Globetronics should trade at a premium to its historical P/E given impressive 3-year earnings CAGR of 25%. Globetronics is also our sole High Conviction BUY. Unisem (TP: RM3.05) is poised to see improving margins due to strong demand for its high-margin wafer bumping and waferlevel chip scale packaging segment (WLCSP) and cost rationalisation exercises. Furthermore, it is a net beneficiary of a stronger USD as all its sales are in USD, compared to only 5060% of total cost. Time dotCom (TP: RM7.10) is a prime beneficiary of the secular growth trend in data, amid the rapid expansion of its global bandwidth and data centre business. The recent disposal of 49.9m DiGi shares will boost its war chest for regional expansion, consolidation of the data centre market in Malaysia, and/or raising dividend payout. Please refer to page 16 and 17 for detailed key investment merits of these stock picks.

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Market Focus Investment Strategy

FBMKLCI earnings estimate for CY15 and CY16 FBMKLCI

AMMB Holdings Bhd

Weight in Index


Shares in Wgt'd Mkt KLCI Cap



Under coverage


Net Profit (CY)

Free Float Weighted NP









Astro Malaysia Holdings Bhd









Axiata Group Bhd









British American Tobacco Malaysia Bhd









CIMB Group Holdings Bhd









DiGi.Com Bhd









Felda Global Ventures Holdings Bhd









Genting Bhd









Genting Malaysia Bhd









Hong Leong Bank Bhd









Hong Leong Financial Group Bhd









IHH Healthcare Bhd









IOI Corp Bhd









KLCCP Stapled Group









Kuala Lumpur Kepong Bhd









Malayan Banking Bhd









Maxis Bhd


















Petronas Chemicals Group Bhd









Petronas Dagangan BHD









Petronas Gas Bhd









PPB Group Bhd









Public Bank Bhd









RHB Capital Bhd









Sapurakencana Petroleum Bhd









Sime Darby Bhd









Telekom Malaysia Bhd









Tenaga Nasional Bhd









UMW Holdings Bhd









YTL Corp Bhd























Total % Coverage / earnings growth Current implied P/E

Source: AllianceDBS

Page 8


Price date: 18 May 2015

Market Focus Investment Strategy

Sector Outlook Sector



Tighter consumer conditions could further dampen consumer sentiment. This may be partly offset by aggressive product launches and promotions.

For manufacturers, the USD would increase the cost of imported material and pressure margins. Hence, 2015 will be a challenging year for auto players.

Malaysia Airlines (MAB) is in the midst of a restructuring exercise to return the airline to profitability by 2017. It plans to cut capacity by 10% in 2015, the bulk of which will be from the European and Middle-Eastern routes. Thereafter, MAB plans to grow domestic and ASEAN route capacity by 6-7% per annum, and Asia-Pacific route capacity by 5% per annum. In the near-term, MAB’s plan to shed 6,000 or 30% of its existing workforce (at the old entity i.e. Malaysian Airline System) will be closely watched as a key milestone of the restructuring exercise.

The cheaper fuel cost is a boon for airlines, but we expect the airlines to pass on a significant portion of the fuel cost savings to consumers. AirAsia and AAX’s decision to remove fuel surcharge suggests that a significant portion of the fuel cost savings will be passed on to the consumers. Meanwhile, the stronger USD will weigh on the airlines’ profitability, as USD-denominated OPEX (fuel, maintenance, operating lease) and finance cost (from USD-borrowings) will be more expensive. Note that the majority of Malaysian-listed airlines’ revenues are denominated in local and regional currencies (i.e. RM, IDR, THB, SGD).

MAHB’s near-term earnings outlook remains bleak, bogged down by weak passenger traffic and higher depreciation and finance charges. MAB is planning to cut capacity by 10% in 2015, and will focus on yield management going forward. Meanwhile, the other domestic airlines are also toning down their capacity growth going forward, in a bid to reduce the downward pressure on airfares. Also, the implementation of GST could reduce consumer discretionary spending – another dampener of travel demand. In light of all these challenges, the airport operator is only targeting 3% growth in passenger traffic in 2015, but even this seem to be a tall order to achieve, going by the YTD passenger statistics (-1.5% y-o-y in 1Q15).

NIM is expected to remain under pressure due to deposit competition as banks prepare to meet the Liquidity Coverage Ratio requirement under Basel III.

Sector loan growth forecast is 8% for 2015. Downside risk to our loan growth assumption would be conversion of loans to bonds as an alternative method of funding.

We like PBK and HLBK for its strong credit culture and liquidity. However, HLBK is contemplating a capital raising exercise to beef up their capital position.

Competition among cement players is likely to intensify in 2015 as YTL Cement will add 8% to industry capacity when its expansion is completed early 2015.

The saving grace for the industry is the prevailing low coal prices. Meanwhile, subsidy rationalisation measures for electricity tariff have been put on hold.

CMS is on a better footing as the Sarawak-based company will not be impacted by price competition, unlike its Peninsular peers.






Building materials


Top Stock Picks None


Public Bank, Hong Leong Bank


Page 9

Market Focus Investment Strategy

Sector Outlook (cont’d) Sector



11MP to lay foundation. foundation The next key event for the sector is the tabling of the 11MP in late May. This will create the foundation for the sector over the next five years (2015-2020) and provide some indication of what projects would be rolled out. A headline number above the RM230bn allocated under the 10MP would be a sentiment booster, although we would not read too much into this.

Timely rollout and execution is more crucial. crucial We feel the priority should be the scheduled rollout of key high-multiplier projects. Based on our conversation with contractors, they are more bullish now on potential contract flows compared to beginning of the year. We expect some overlap of projects mentioned in Budget 2015 as well as the ETP, such as five highways (RM16bn), MRT Line 2 (RM25bn), LRT 3 (RM9bn), High Speed Rail (RM40bn). and Pan Borneo Highway (RM27bn). MRT Line 2 public display will be from May 15 to August 17, suggesting no more delays to the tender scheduled for end-2015 and awards by mid-2016. Recently, PDP fees for LRT 3 had been finalized at 6% and an award is expected by July 2015.

Top picks Gamuda, Muhibbah, Kimlun. Kimlun. For larger caps, we prefer Gamuda over IJM. Gamuda is the best proxy to transportation projects (MRT, High Speed Rail and Penang Transport) while it also has ample capacity now to take on more projects. For exposure to smaller cap names, we like Muhibbah which is a good all-round proxy to civil engineering, marine and oil & gas works. Kimlun is also a good proxy to MRT Line 2 given its niche in tunnelling lining segment and segmental box girders.

1Q15 consumer sentiment index slumped 10.4 points q-o-q to a six-year low of 72.6 (4Q14: 83), indicating a potentially sharp drop in consumer spending in the coming quarters as consumers are increasingly wary of the future and becoming more cautious due to rising cost of living.

Companies are still in the midst of reporting their 1QCY15 results, with the majority of the announcements expected out later this month. Overall, we expect quarterly results to be unexciting given that the sector is generally plagued by rising cost pressures and is unable to pass on the higher costs due to (1) slower consumer spending, and. (2) an increasingly competitive operating environment. As such, margins could continue to be suppressed. We also do not anticipate the pre-GST front-loading to boost sector earnings significantly in 1QCY15.

In view of the uninspiring near-term earnings prospects, we are maintaining our Underweight call for the sector. OldTown remains our top pick for the following reasons: (1) undemanding valuation compared to regional peers, and (2) the group is well-positioned to capitalise on rising coffee consumption in Asia, particularly China.

We do not see any major re-rating catalysts for the sector in the near term. We had downgraded earnings for gaming players in February, as we understand they would fully absorb the 6% GST imposed without lowering prize payouts. Nonetheless, weakening domestic consumer sentiment could slow down discretionary spending, which could in turn further drag Genting Malaysia’s domestic leisure & hospitality operations and NFO ticket sales.

Also, the sector may be exposed to the risk of higher sin tax at the next budget.






Page 10

Top Stock Picks Gamuda, Muhibbah and Kimlun



Market Focus Investment Strategy

Sector Outlook (cont’d) Sector



The top four Malaysian-listed glovemakers are set to grow production capacity by 14%/11%/11% in 2015/16/17. While this will exceed forecast global glove consumption growth of 6-8% p.a., the additional output will be readily absorbed as (1) these are mainly nitrile gloves where global demand remains strong (i.e. the 6-8% global glove consumption growth are mainly driven by this product segment), and (2) increasing trend for outsourcing to Malaysian shores (Halyard Health will close one of its Thai glove facilities and outsource the production of 3bn gloves p.a. to Malaysian glovemakers). Meanwhile, progressive commissioning of the production lines and potential delays in some expansion plans present downside risk to the incoming supply forecast.

Nevertheless, competition would likely still heat-up among the glovemakers. Hartalega with its best-in-class operating structure (i.e. lowest breakeven utilisation) could choose to be more aggressive in its pricing to: (1) grab market share, (2) maximise utilisation and profits, and (3) derail competitors expansion plans by depressing IRRs for future projects. Already, the price competition could be underway, with Hartalega registering a decline in EBIT/k gloves in 1Q15.

After the recent run-up in the prices of glove stocks, we only have Supermax on our BUY list for the sector, premised on its cheap valuation. After repeated delays, commissioning works at its Plant #10 and #11 are reportedly in progress, and are on track for full commercial production by end-2015 However, Supermax’s longer-term growth outlook remains uncertain at this juncture, given the challenges in securing the necessary infrastructure for the production of rubber gloves.

We remain optimistic of the growth prospects for private hospitals operators due to None increasing demand for quality healthcare amid rising disposable income. Capacity constraint at government healthcare facilities is also expected to drive affluent patients to private hospitals. The constraint is expected to worsen with public healthcare development expenditure cut from RM3.7bn in 2010 to RM1.6bn in 2015.

Generic pharmaceutical players are expected to enter a new growth phase with the approach of the patent cliff. This provides an opportunity for them to launch new products and improve sales. Valuation are also more palatable vis-à-vis the hospital operators.

There is increasing competition within the retail pharmacy segment with the emergence of several independent retail pharmacies. The exceptionally high ROEs of 30-40% will be a thing of the past. We expect an industry-wide price war to drive margins down going forward.

GST implementation will be a dampener for adex in 2015, although adex should recover slightly in the absence of negative events. Thus, our view is that adex would remain flat in 2015 as consumers slowly get used to the new tax system and consumer sentiment gradually normalises.

Low newsprint cost is a blessing for newspapers publishers, though this will be partly offset by the weaker Ringgit.

Nonetheless, downside risks are limited given decent dividend yields for the sector.






Top Stock Picks Supermax


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Market Focus Investment Strategy

Sector Outlook (cont’d) Sector


Oil & Gas Gas

Our view for the year is that crude oil prices will average between USD55-65/barrel. While there are some catalysts emerging, like US stockpiles inching down, there remains a possibility of Iran flooding the market with more output. The confluence of these factors, we believe, will keep crude oil prices range-bound.

The decision by PETRONAS to cut capex and opex is beginning to take its toll on companies in the sector. There are similar cuts at other oil majors like Shell and Exxon’s Malaysia operations. 4Q14 and 1Q15 results have started to show weakness as companies find that work orders have slowed, there is pressure to cut chartering rates, and services costs are rising. Furthermore, tender books are shrinking as many projects, local and abroad, are either delayed or re-tendered, or taken off the table.

We continue to find room for earnings downgrades, especially in FY15 estimates, but view that earnings could start to normalise from FY16 onwards. We forecast FY16 crude oil prices will be stronger at USD65-75/barrel as demand and supply forces adjust to the new crude oil price equilibrium. This will bring many projects back to the market, although we expect cautiousness to ensue, which suggests lingering margin pressure for contractors.

For a play on the recovery of crude oil prices, SapuraKencana is a good proxy given its upstream exposure. However, we reiterate our HOLD recommendation for now, as weaker earnings on the back of a sluggish contracting market have not been fully priced in. In the small cap space, we like Pantech for its RAPID exposure. Tendering activity is picking up at RAPID, and the group is poised to see improving orderflow from late FY15 onwards. We continue to recommend avoiding fabricators like MMHE and TH Heavy which are seeing depleting orderbooks with no replenishment in sight. We would also avoid pure play rig owner UMW Oil & Gas, which is fighting an uphill battle with an oversupply of rigs coupled with declining drilling activity.

After hitting a low of RM2,082 at end Apr15, palm oil futures bounced back 7% to Genting Plantations RM2,225 by mid-May. This was largely driven by a similar jump in soybean oil prices. Unless El Nino conditions worsen dramatically, we do not expect recent price recovery to maintain its current trajectory; as we understand fruit formation is currently set for a strong peak season.

So far, 1QCY15 results revealed a more pronounced low crop season. While some producers have attributed the lower yields to dry weather in 1QCY14, comparisons were made against a high base. Lower CPO output did not prevent CPO prices (in USD terms) from dropping 23% y-o-y in 1QCY15 - given record global soybean crop in the current season. While stronger USD YTD helped to buffer earnings in Ringgit and Rupiah, it also encouraged South American farmers to plant more soybeans and caused translation FX losses for planters with USD borrowings.

Assuming Indonesia’s B15 programme kicks off on 1 July 2015, we expect Indonesian biodiesel production to reach 2.6m MT by the end of this year – representing a 28% drop y-o-y. While we believe efforts to channel palm oil exports for domestic biodiesel consumption should necessitate faster crushing of global soybean supply to replace the oil, we believe this would only impact CY16 prices – rather than CY15

In the short term, Indonesian B15 export levies will have negative impact on Indonesian planters’ earnings as well as on Malaysian planters with significant contribution from Indonesian subsidiaries. Our earnings forecasts are under review pending the publication of Indonesian regulations.

We remain cautious on CPO prices and plantation earnings in the near term, subject to deterioration of El Nino conditions and a recovery in crude oil prices. Based on our




Page 12

Top Stock Picks SapuraKencana, and Pantech.

Market Focus Investment Strategy

sensitivity analysis, at current CPO prices, biodiesel production would breakeven at Brent price of US$78/bbl. Property

We expect slower property sales volumes in 2015 although prices should hold up due MKH, SP Setia to cost-push factors. Sentiment should remain subdued following the recent tightening measures and inflationary pressures, but mass-market products at strategic locations will continue to enjoy robust sales as affordability remains a factor among purchasers.

Rising building material prices as well as tight foreign labour supply could heighten execution risk and dampen developers' margins. There is no property bubble for now but we fear an oversupply of KL office space, hybrid high-rise units and Iskandar Malaysia high-end condos.

MKH is our pick for the sector given its large exposure to affordable housing and landed properties in the Kajang-Semenyih growth corridor. We also like SP Setia for its strong earnings visibility and focus on sustainable township developments.

Rental reversion growth is expected to be moderate-to-low for all subsectors. Retail Sunway REIT rents and occupancy should remain resilient at prime locations, but weak consumer sentiment and the GST implementation will dampen spending, thus reducing tenants’ ability to stomach higher rentals. Office spaces continue to be in an oversupply, and will focus more on maintaining occupancy than hiking rents. Industrial rents should maintain a steady growth pace, but is also subject to the general climate of softer business and consumer sentiment.

Inorganic growth via acquisitions is the theme for the year in the face of weak organic growth. To date MRCB-Quill, Axis and Sunway REIT have completed some planned purchases in 1Q; while CapitaMalls Malaysia Trust, Amanah Harta Tanah, Amfirst REIT, and Al-‘Aqar Healthcare REIT have respectively announced proposed acquisitions targets. However, the key point remains as to whether the REITs manage to inject at a value that will be DPU accretive to unitholders.

Overall, the prospects for REITs in 2015 are neutral. Valuation-wise, spreads of largercap REITs of c.1.9% are near the longer-term average of 2% against the 10-year Malaysian Government Security yield of c.3.9%. We deem this comfortable barring interest rate changes, as spreads historically have narrowed to below 1.7% before.

Our top pick is Sunway REIT predicated on strong DPU growth from the completion of Sunway Putra refurbishments, as well as a visible pipeline of potential asset injections from sponsor Sunway Bhd.




Page 13

Market Focus Investment Strategy

Sector Outlook (cont’d) Sector



LNG rates are expected to remain under pressure due to smaller cargo following delays in several major LNG projects, as well as the burgeoning LNG orderbook which is largely driven by financial investors and private equity funds. Japan’s bid to restart its nuclear power plants could lead to a more acute oversupply situation in the LNG tanker markets, as it will dampen the LNG trade.

Crude tanker rates will continue to trend up. Increasing long-haul trade (i.e. West Africa to China and India) is expected to generate higher tonne-miles, which will lead to higher deadweight demand (+2.3% in 2015). This comes at a time when crude tanker supply is expected to contract (+1.1% in 2015). Product tanker rates are expected to remain lacklustre, with tonnage supply expected to grow at a faster 5.7% vs tonnage demand growth of 4.4% in 2015.

Chemical tanker rates are expected to remain lacklustre on slower eastbound trade, due to weak Chinese chemical imports. Rates for the transatlantic eastbound routes are most affected by this.

Dry bulk recovery is expected to be punctuated with volatile rates, as the reversal of slow-steaming could unwind the trapped capacity and pressure rates. The risk of this happening is higher if oil prices remain at current depressed levels. Meanwhile, China’s determination to tackle air pollution and excess steel capacity may put a brake on Chinese iron ore and coal imports. This will reduce demand for capesize and panamax bulkers.

We like MISC for its resilient cash flow, backed by its-long-term LNG charters and offshore Oil & Gas assets. In addition, its petroleum segment has firmly turnaround, and will be a key earnings driver in FY15F. However, valuation is rich at the moment, which lead us to rate the stock as a HOLD.

Earnings of Malaysian semiconductor players have been largely underpinned by healthy demand growth and the weaker Ringgit. Forward guidance remains positive with most players busy expanding their capacity to meet customers’ demand. This is mainly driven by the smartphone segment, where their key customers (mainly in RF) are gaining additional content wins in new smartphone models amid the secular growth trend in rising 4G LTE adoption.

We like Globetronics for its healthy balance sheet and strong earnings growth, underpinned by new product wins for a key customer of its sensor division.

We also expect better performance by Unisem given robust demand and capacity expansion of its high-margin wafer bumping and wafer level chip-scale packaging (WLCSP) segment in FY15.

We believe expectations of the positive impact of passing on the 6% GST to prepaid subscribers have been priced in, and hence, a reversion will be a setback for mobile operators.

Recent quarterly results of mobile operators have also been lacklustre, while there are signs that competition is heating up especially in the prepaid segment.

We prefer fixed-line operators TIME and TM, given their compelling valuation and growth potential.






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Top Stock Picks None

Globetronics, Unisem

Time dotCom

Market Focus Investment Strategy

Sector Outlook (cont’d) Sector Sector



Expect promising energy demand growth with the implementation of infrastructure projects, export recovery and urbanisation. The resilient and growing recurring income for utilities players could re-rate the sector further.

Tenaga Nasional and Petronas Gas are the biggest beneficiaries of the sector reform (fuel subsidy rationalisation and fuel diversification).

Our top pick is TNB for more attractive valuation and improving earnings visibility from the implementation of the incentive-based regulated return (IBR). We also like Petronas Gas for its solid fundamentals with no fuel and pricing risks as well as potential upside from gas subsidy rationalisation plan.


Top Stock Picks TNB, Petronas Gas

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Market Focus Investment Strategy

Top Stock Picks Stocks

Key Investment Merits

Tenaga Nasional

Strong earnings visibility. The full implementation of fuel cost pass through mechanism will be a strong re-rating catalyst for TNB as the national utility will no longer bear the burden of volatile fuel cost.

Capacity expansion expansion. xpansion TNB’s coal-fired Janamanjung 4 (1010 MW) plant will be commissioned by Mar15. All in, we estimate TNB’s net generation capacity would increase by 15% by 2017. Ultimately, the new power plants will reduce generation cost because of more efficient technology.

Top pick. pick Current valuation remains undemanding despite the strong performance of the share price in FY14. The tariffsetting mechanism and robust outlook for electricity demand will support strong earnings ahead.

Steady recurring recurring earnings. The new Gas Processing Agreement and Gas Transportation Agreement will continue to underpin earnings visibility going forward. With the higher reservation charges, Petgas will enjoy more resilient earnings which will help to offset the lower charge under the performance-based earnings.

Pengerang regas plant the next growth driver. The recently announced Pengerang regasification terminal is expected to enhance Petgas’ earnings by 6-7% when the plant is operational by 2018. The LNG will be mainly supplied to PETRONAS’ Refinery and Petrochemical Integrated Development (RAPID) and there will be no fuel risk to Petgas.

Maintain BUY with RM25.40 TP. We continue to like Petgas for its promising outlook, supported by rising gas demand, solid balance sheet, and strong parentage. Our DCF-derived TP is based on 7% WACC and 3% terminal growth.

Best transportation transportation proxy. proxy Gamuda has ample capacity to take on large scale projects given MRT line 1 is at its tail end. We expect it to be a front runner for more transportation related works such as MRT line 2, Penang Integrated Transport and also LRT 3. The recent finalisation of the public display for MRT Line 2 also suggests that the project is on track.

Earnings uptrend to resume in FY17. FY17 FY15 is expected to be a peak year for earnings with earnings expected to decline in FY16 as MRT Line 2 will not yet contribute. Starting FY17, we expect its high quality earnings to start its uptrend again once it beefs up its orderbook.

BUY, TP RM6.00. RM6.00 Our preference is for Gamuda among the large caps as we think there will be more catalysts to look out for. Given its less diversified nature compared to IJM, it also represents a more leveraged proxy to the sector.

Infrastructure division most promising. Muhibbah believes the infrastructure sector is on a multi-year upcycle with potentially RM140bn worth of projects (Table 1) up for grabs. Also, raw material costs are more benign now with cement and steel prices 5% and 15% cheaper y-o-y, respectively. Muhibbah will be bidding for major projects such as RAPID, MRT Line 2 and West Coast Expressway, and is quietly confident of clinching two other jobs with a combined value of RM900m. One is for a local port and the other an overseas job. YTD win is RM277m, and it should close the year better than the RM504m wins in 2014.

Cambodian airports double capacity. Effective July, the Siam Reap and Phnom Penh airports will double their existing capacity to 12m passengers. The US$85m capex was financed by only one year of operating cashflow, which suggests the airports are cash cows. Passenger arrivals reached 5.7m in 2014 (+12 % y-o-y) led by a recovery in Chinese tourists (20% of total; +22% y-o-y). We estimate its 21% stake is worth RM580m (DCF, WACC of 10%, RM/USD3.65 and average passenger growth of 5% until 2040) which is already 63% of its market cap.

Favco capitalising on other revenue streams. Favco has been receiving increasing orders in the US for tower cranes, and is beefing up its maintenance division (c.10% of revenues). This should cushion potentially softer orders for oil and gas cranes. We still expect a record year for Favco as it runs down its high-margin peak RM1bn orderbook. It is also exploring supplying cranes to RAPID.

Separating wheat from chaff - BUY. We remain convinced the stock had been unfairly sold down for its implied O&G exposure. Petronas has reiterated that RAPID will proceed as planned, and it represents just one of the many projects Muhibbah is looking to capitalise on. At current price, the market is assigning negligible value for the infrastructure, shipyard, Roadcare and Petronas license. BUY for 58% upside to our TP of RM3.50, which is pegged to 15x CY15 EPS (sector average).

Petronas Gas



Page 16

Market Focus Investment Strategy

Top Stock Picks (cont’d) Stocks

Key Investment Merits

Time dotCom

Leveraging on secular growth in data. data TIME is a prime beneficiary of the secular growth trend in data (>80% of revenue) amid the rapid expansion of its global bandwidth and data centre business. Investment into 3 new submarine cable systems (i.e. APG, FASTER, and AAE-1) will underpin near-term earnings growth once they start to come online in 20162017

Domestic business still growing healthily. healthily Demand for higher speed bandwidth services and fibre connectivity requirements by Malaysia mobile operators for their LTE network rollout will drive further growth for TIME domestic wholesale bandwidth business in 2015.

Beefing up war chest. chest The company recently disposed 49.9m DiGi shares (out of 137.5m shares it owned) and raised RM311m cash. This could potentially be utilized in the near term for its regional expansion, consolidation of the data centre market in Malaysia, and/or higher dividend payout.

Undemanding valuation. valuation Our SOP-based RM7.10 TP implies a FY16 valuation of 18.8x PE for TIME core business (excluding net cash, dividend income, and the value of DiGi stake), cheapest among the Malaysian telcos.

Strong growth in sensor business. GTB continues to see healthy volume for proximity sensors (built into smartphone) and wearable sensors from its Swiss customer. In addition, the company is also ramping up capex for a new depth imaging sensor which will more than double its existing capacity upon completion by 1H16. We expect contribution from the sensor division to rise to 41-53% in FY15-16F, vs. 32% in FY14.

Quartz devices and LED/SSL divisions remain solid. Monthly production volumes for its quartz devices and LED/SSL divisions remain healthy given robust demand and new product transfers by existing key customers i.e. Epson Toyocom, Osram and Cree.

HighHigh-conviction BUY, RM7.50 TP pegged to 18x FY16 EPS, which is +2 SD of its 5-year historical P/E band. This is reasonable given GTB’s strong earnings growth (3-year earnings CAGR of 25%) and healthy balance sheet with net cash position. A key re-rating catalyst will be its new depth imaging sensor going into mass production.

Improving margins. margins The company’s margins and profitability have been improving, thanks to: 1) strong demand for its high-margin wafer bumping and wafer-level chip scale packaging segment (WLCSP); and 2) cost rationalisation exercises.

WLCSP and wafer bumping a sweet spot. spot Unisem is targeting 8% revenue growth (in USD terms) in FY15, largely underpinned by the 25-40% capacity expansion of its wafer bumping and WLCSP segment. The strong demand for its advanced packaging segment is stemming from its top 2 customers i.e. Skyworks Solutions and Qorvo.

Benefiting from weaker Ringgit. Ringgit The company is a net beneficiary of a stronger USD as its sales are 100% based in USD, while only 50-60% of total cost is based in USD.

Compelling valuation. valuation Our RM3.05 TP is pegged to 1.7x FY16 BV (with 14% ROE). We believe rising contribution from advanced packages amid strong relationship with RF customers should drive a re-rating in Unisem’s valuation.



Page 17

Market Focus Investment Strategy

AllianceDBS Research recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e.> -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by AllianceDBS Research Sdn Bhd (“ADBSR”), a subsidiary of Alliance Investment Bank Berhad (“AIBB”) and an associate of DBS Vickers Securities Holdings Pte Ltd (“DBSVH”). This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of ADBSR. 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As of the date the report is published, the analyst and his/her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). COMPANYCOMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 18 May 2015. 2.

Page 18

DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates may beneficially own a total of 1% of any class of common equity securities of the company mentioned as of 20 May 2015.

Market Focus Investment Strategy 3.

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Investment Strategy - DBS Bank

Malaysia Market Focus Investment Strategy Refer to important disclosures at the end of this report DBS Group Research . Equity The grind continues ...

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