PP 7767/09/2010(025354)

Malaysia
RHB Research
2 September 2010
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

S t rat eg y / Ear ni ng s R e vi ew
MARKET DATELINE
2 September 2010
Earnings Beat Our Expectation;
But Global Recovery Fears Persist

2Q Earnings Slightly Above Expectations

The 2Q results report card was slightly better than our expectation. This was reflected primarily in the
banking results, which were largely boosted by lower-than-expected allowances for impairment on loans.
Overall, unlike the previous quarter, there were more companies reporting results that exceeded our
expectations during this results reporting season compared with those that were below forecasts. Nonetheless,
the bulk of the corporate results that we covered came in within our as well as market expectations. Of the
105 companies that we covered, 63 of the results (60% of the total) were within our expectations, 23 above
projections (21.9% of the total) and 19 below forecasts (18.1% of the total) (see Table 1). Against the
consensus numbers, 50.5% of the reported earnings were within expectations, 21.9% above and 27.6% below
projections (see Table 2).

The overall upgrade to downgrade ratio improved slightly to 0.9 time during the current reporting
season, from 0.8 time in the previous quarter. Despite the slightly better-than-expected 2Q results, we still
see a risk of earnings disappointment in the quarters ahead on account of : (i) A sharper-than-expected
slowdown in external demand caused by the slowdown in the US and Chinese economies as well as the debt
crisis in Europe, and as effect of the global stimulus spending packages dissipates; (ii) Impact from a stronger
ringgit vis-a-vis the US dollar and the euro; and (iii) Unforeseen write-downs of companies similar to Sime
Darby’s cost overruns for its engineering and utilities division.

Sequentially, net EPS for the FBM KLCI stocks under our coverage was sustained at +6.2% qoq in the
2Q (+6.4% in 1Q; see Chart 1). However, on a yoy comparison, net EPS for the FBM KLCI stocks under our
coverage accelerated to +60.8% in the 2Q, from +31.7% in the 1Q. The sustained strong growth in EPS
measured on a yoy basis, however, reflected partly a low base effect, although it points to sustained recovery
in corporate earnings. Overall, the strong earnings momentum in the just concluded results reporting season
was consistent with the recovery in the economy, where real GDP was sustained at a stronger-than-expected
growth of 8.9% yoy in the 2Q, compared with +10.1% in the 1Q.

Chart 1
Net EPS Changes On A Sequential And Yoy Comparisons

%
80
+60.8
60

40
+31.7
20
+6.4 +6.2
0

-20

-40 qoq yoy

-60
1QCY06

2QCY06

3QCY06

4QCY06

1QCY07

2QCY07

3QCY07

4QCY07

1QCY08

2QCY08

3QCY08

4QCY08

1QCY09

2QCY09

3QCY09

4QCY09

1QCY10

2QCY10

Note : Net EPS Changes for RHBRI covered stocks in FBM KLCI Lim Chee Sing
(603) 9280 2153
Please read important disclosures at the end of this report. cslim@rhb.com.my

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 2 September 2010

Table 1
Comparison Of Actual Earnings Reported For 2QCY10 Against RHBRI's Forecasts
Covered Stocks Covered In Line Above Below Total reported

Building Material 8 5 2 1 8

Semiconductor/ IT 4 1 2 1 4
Oil & Gas 7 2 1 4 7
Timber 4 2 1 1 4
Consumer 11 10 1 11
Gaming 3 1 1 1 3
Media 3 2 1 3
Motor 5 3 2 5
Construction 8 7 1 8
Infrastructure 2 2 2
Transportation 6 4 2 6
Telecommunication 4 2 1 1 4

Power 3 2 1 3

Banks & Finance 9 4 5 9

Insurance 4 1 1 2 4
Property 11 8 3 11

Plantation 6 5 1 6
Manufacturing 7 4 3 7
Total 105 63 23 19 105

% of total reported 60.0 21.9 18.1 100

Table 2
Comparison Of Actual Earnings Reported For 2QCY10 Against Market Consensus
Covered Stocks Covered In Line Above Below Total reported

Building Material 8 4 1 3 8

Semiconductor/ IT 4 1 1 2 4
Oil & Gas 7 3 1 3 7
Timber 4 2 1 1 4
Consumer 11 8 1 2 11
Gaming 3 1 1 1 3
Media 3 2 1 3

Motor 5 3 2 5
Construction 8 5 3 8
Infrastructure 2 1 1 2
Transportation 6 4 2 6
Telecommunication 4 1 1 2 4
Power 3 2 1 3
Banks & Finance 9 4 5 9

Insurance 4 2 2 4
Property 11 7 3 1 11
Plantation 6 3 1 2 6
Manufacturing 7 4 3 7
Total 105 53 23 29 105
% of total reported 50.5 21.9 27.6 100.0

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Most of the bigger cap companies reported earnings that were within or above (Genting Berhad,
Sime Darby, Axiata, Petronas Gas and YTL Power) our expectations. In this results reporting season,
the only big cap stock that reported disappointing earnings was Maxis on account of lower-than-
expected revenue as well as higher-than-expected administrative and network operation expenses. The better-
than-expected earnings of Genting Berhad came mainly from its leisure and hospitality division on account of
stronger-than-expected contribution from Resorts World Sentosa in Singapore. This was on the back of better
luck in the premium players business, which led to much higher EBITDA margins vis-a-vis our forecast, as well
as the positive effective tax rate in the 2Q (due to S$86.8m deferred tax writeback). The key variances of Sime
Darby’s earnings against our forecast, on the other hand, came largely from higher turnover and improvement
in EBIT from higher margins in the plantation, property and energy & utilities divisions. For Axiata, the key
variance against our forecast was the lower-than-expected effective tax rate, while higher transportation fees
charged on a zoning basis under the new Gas Processing and Transmission Agreement (which came into effect
from 1 April 2010) and lower operating costs that led to higher EBIT margins lifted earnings of Petronas Gas to
above our expectation. The main deviation of YTL Power’s results from our projection was the lower-than-
expected interest expense.

Banks The Key Sector With Better-than-expected Earnings

In the just concluded results reporting season, banking was the key sector that reported better-than-expected
earnings. Out of the eight banking stocks we covered (excluding RCE Capital), five results were above our
expectations (AMMB, EON Capital, HL Bank, Affin Holdings and AFG), while earning of the remaining three big
cap banks (CIMB, Maybank and Public Bank) were generally in line with our projections. The common factor
that caused earnings to exceed our expectations is the lower-than-expected allowances for
impairment on loans (AMMB, HL Bank, Affin and AFG), although AMMB’s results were also lifted by stronger-
than-expected non-interest income and HL Bank by lower-than-expected effective tax rate. The key variance
of EON Capital’s earnings vis-a-vis our forecast, however, came mainly from stronger-than-expected net
income interest, while its absolute overhead and impairment levels remained broadly stable.

Apart from the banks, the media, motor, property, steel manufacturers and the power sector also
reported earnings that were slightly above our expectations. Within the media sector, both Star
Publications and Media Chinese International reported results that were above our expectations, the former
stemmed from stronger-than-expected advertising revenue while the latter was boosted by better margins.
Earnings of Media Prima, in contrast, came in below our forecast, dragged down by weaker-than-expected
EBITDA margins and higher-than-expected effective tax rate. In the motor sector, both MBM Resources and
APM Automotive reported earnings that were above our expectations on account of stronger car sales and
better-than-expected margins, while results of Proton, Tan Chong and UMW were in line with our forecasts.

During the quarter under review, most property earnings were within our expectations, except for IJM Land,
Glomac and Hunza Properties which came in above forecasts. Results of IJM Land were bolstered by more
property launches and sales as well as better margins on the back of the better product mix, while earnings of
Glomac were helped by better margins as input costs eased. Results of Hunza Properties, on the other hand,
were boosted by a faster pace in the construction of Gurney Paragon residential blocks. Within the building
material sector, the steel manufacturers reported earnings that were slightly above our expectations as
earnings of two (Ann Joo Resources and Sino Hua-An International) out of the six steel companies exceeded
our forecasts, while three results were within (CSC Steel, Hiap Teck and Perwaja) and one below (Kinsteel)
expectations. The variance against our forecast for Ann Joo Resources came from better product selling prices
and Sino Hua-An from the wider-than-expected spread between metallurgical coal (input) and metallurgical
coke (output) prices. Earnings of Kinsteel, in contrast, were dragged down by lower-than-expected sales
volume from its downstream operations. The two cement companies (Lafarge Malayan Cement and YTL
Cement) reported earnings that were largely within our expectations.

In the Power sector, YTL Power’s results were above our expectation largely on account of lower-than-expected
interest expense, while earnings of Tanjong and Tenaga were in line with our forecasts.

In contrast, the oil & gas, transportation, manufacturing and insurance sectors reported earnings
that were generally below our expectations. Of the seven oil & gas companies we covered, four results
came in below forecasts (Kencana Petroleum, Wah Seong, Petra Perdana and KNM) and two within expectations
(SapuraCrest and Dialog) and one above forecast (Petronas Gas). Earnings of Kencana Petroleum were
dragged down by higher-than-expected operating expenses, Wah Seong by lack of oil & gas contracts, Petra

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Perdana by higher costs (lease rental charges, mobilisation cost for new vessels as well as repair and
maintenance cost), and KNM on continuing difficult operating conditions and low utilisation rates.

In the transportation sector, earnings of both Malaysia Airline System (MAS) and Malaysia Airports were below
forecasts. The former was on account of slower-than-expected recovery in yields and the latter from the share
of losses in an associate company (the adoption of FRS 139 that required MAHB to recognise concession
payable by the associate company at fair value and subsequently at amortised cost). The other transportation
and logistics companies such as MISC, AirAsia, ILB and Freight Management reported earnings that were
generally within our expectations.

For the manufacturing sector, results of three (BP Plastics, Wellcall Holdings and Adventa) out of the seven
stocks we covered came in below our expectations and the rest were within forecasts (Top Glove, Kossan
Rubber, Hartalega and VS Industry). Earnings of BP Plastics were weighed down by higher-than-expected input
costs and hence weaker margins, while that of Wellcall Holdings and Adventa by higher-than-expected effective
tax rate.

In the insurance sector, results of LPI Capital and Kurnia Asia were below forecasts. The former was on account
of lower-than-expected investment income at the group level and the latter on the back of slower-than-
expected premium growth as well as higher-than-expected increases in unearned premium reserves,
management expense ratio and effective tax rate. The earnings of MNRB, however, were above our
expectation largely due to better reinsurance claims ratio, while results of Allinaze were within our forecast.

Earnings Growth Revised Up

Following the better-than-expected 2Q earnings, our 2010’s net EPS growth for the FBM KLCI stocks
under our coverage has been revised up to +23.5% (see Table 3), from +18.3% two months ago. This
was largely on account of the upward revision in earnings in the banking, telecommunications and gaming
sectors (see Table 4). However, our 2011’s net EPS growth forecast was adjusted down to +12.3%,
compared to +14.4% previously, largely on the back of a higher base effect.

Based on the latest FactSet Asian and IBES consensus numbers, the local market is trading at comparable
valuations vis-a-vis the Singapore and Indonesian markets (see Table 5). Whilst it is still trading at a premium
vis-a-vis other regional peers, this, in our view, is a reflection of high domestic liquidity and strong participation
by the Government-linked funds, and will unlikely change in the foreseeable future. It is, however, still a
very under-owned market by foreign investors although the non-strategic foreign equity ownership of the
Malaysian market has picked up slightly to 20.8% at end-July 2010, form 20.4% at end-January after having
fallen sharply from a recent high of 27.5% at end-April 2007.

Table 3

Earnings Outlook And Valuations

FBM KLCI RHBRI's BASKET
COMPOSITE INDEX @ 1,422.49 2009a 2010f 2011f 2012f 2009a 2010f 2011f 2012f
30 Aug 2010

EBITDA Growth (%) -6.6 25.8 10.8 7.3 -2.2 22.7 10.9 7.3

Pre-Tax Earnings Growth (%) -10.0 37.9 17.0 9.1 -2.7 30.0 16.6 9.9

Normalised Earnings Growth (%)* -10.2 29.8 12.6 9.2 -6.5 28.3 13.4 9.9

Normalised EPS Growth (%)* -14.9 23.5 12.3 9.2 -10.1 21.8 13.3 9.9

Prospective PER (x)* 19.8 15.9 14.2 13.0 18.9 15.3 13.5 12.1
Price/EBITDA (x) 10.4 8.2 7.4 6.9 8.6 7.9 7.0 6.6

Price/Bk (x) 2.5 2.2 2.1 2.0 2.0 2.1 1.9 1.8
Price/NTA (x) 3.2 2.7 2.5 2.3 2.3 2.4 1.3 1.2

Net Interest Cover (x) 5.9 6.0 9.0 10.0 6.9 7.8 8.8 10.1

Net Gearing (%) 61.3 52.6 49.1 45.3 50.5 42.0 44.1 39.8
EV/EBITDA (x) 8.2 6.6 5.9 5.5 8.0 6.6 5.9 5.4
ROE (%) 12.4 14.7 15.1 15.4 11.7 13.8 14.2 14.9
* Exclude MAS earnings in 09-11

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Table 4
Sector Weightings & Valuations
EPS GWTH (%) EPS GWTH (%) PER (x)
Covered Stocks MKT CAP Weight Before After Before After Recom
RMbn % FY10 FY10 FY11 FY11 FY10 FY11 FY12
Banks & Finance 204.8 26.0 19.7 24.0 14.4 13.4 14.7 13.0 11.8 Overweight
Telecommunications 109.8 14.0 16.8 23.2 11.3 11.5 17.1 15.3 14.1 Overweight
Power 62.9 8.0 29.6 14.6 10.2 11.0 13.1 11.8 10.6 Overweight
Construction^ 20.2 2.6 30.2 27.8 7.8 8.3 17.4 16.0 15.2 Overweight
Motor 19.4 2.5 61.4 58.9 10.4 10.2 10.1 9.2 7.9 Overweight
Property 15.2 1.9 20.1 11.1 17.8 14.7 13.3 11.5 10.6 Overweight
Media 14.3 1.8 39.6 35.4 7.0 11.4 13.2 11.8 10.8 Overweight
Insurance 2.9 0.4 18.8 11.3 9.8 9.8 9.1 8.3 6.8 Overweight
Plantation 110.0 14.0 0.3 5.4 24.2 17.9 19.1 15.9 15.2 Neutral
Gaming 59.2 7.5 21.1 52.8 6.0 0.2 12.6 12.6 11.5 Neutral
Transportation* 57.4 7.3 41.3 36.9 16.3 14.7 21.5 18.7 13.5 Neutral
Consumer 30.3 3.9 7.9 7.8 6.7 11.9 15.8 14.8 13.0 Neutral
Oil & Gas 30.3 3.8 8.0 14.6 12.9 14.5 15.3 13.4 12.2 Neutral
Infrastructure 22.2 2.8 -1.1 2.0 47.8 49.0 16.4 11.0 10.1 Neutral
Building Materials 11.9 1.5 11.0 14.6 23.2 18.5 11.8 10.3 10.0 Neutral
Manufacturing 7.6 1.0 31.4 23.8 19.0 20.0 11.9 9.9 9.0 Neutral
Semiconductors & IT 4.8 0.6 63.6 32.7 22.2 7.8 8.3 8.3 7.6 Neutral
Timber 3.4 0.4 87.6 75.4 39.8 41.8 11.2 7.9 7.1 Neutral
786.6 100
* Exclude MAS earnings in 2010-2011
Note : RHBRI's basket

Table 5
Regional Comparisons
M'sia S'pore Thailand Philippines Indonesia Hong Kong Taiwan Korea
FactSet Asian Consensus Trends report dated 28 July 2010
EPS growth (%)

2009a 5.0 -0.7 44.0 30.5 39.7 8.5 37.8 41.4

2010f 22.8 12.5 16.5 14.4 30.8 23.2 76.4 69.8
2011f 12.5 8.6 15.2 9.2 17.8 17.4 12.3 5.3

PER (X)

2009a 18.2 16.3 11.8 13.0 16.0 16.1 22.5 14.2

2010f 14.9 14.5 12.1 12.7 15.4 13.8 13.3 9.1
2011f 13.3 13.4 10.5 11.7 13.1 11.8 11.9 8.7
IBES Consensus dated 19 August 2010
EPS growth (%)

2009a -20.6 -11.6 28.3 20.4 5.2 17.8 73.0 -14.3

2010f 27.5 22.9 17.0 28.4 29.2 20.9 119.9 60.3
2011f 15.2 12.2 17.3 9.0 22.3 10.6 13.8 9.0
PER (X)

2009a 19.5 17.3 14.6 16.6 20.1 16.8 31.9 25.7

2010f 14.8 13.8 12.5 13.0 15.3 12.3 14.3 9.5
2011f 12.8 12.3 10.7 11.9 12.5 11.1 12.1 8.6
Performance (%)
2008 (yoy) -39.3 -49.2 -47.6 -48.3 -50.6 -48.3 -46.0 -40.7
2009 (yoy) 45.2 64.5 63.2 63.0 87.0 52.0 78.3 49.7
2010 (ytd)* 11.8 1.8 24.3 16.8 21.6 -6.1 -7.0 3.6
* as at 30 Aug 2010 closings

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The gradual increase in foreign participation in the local markets was partly on account of a strengthening
ringgit on the back of rising currency yields, improving macroeconomic fundamentals as well as the recent
liberalisation moves by the Central Bank to allow international trade to be settled in ringgit. Year-to-date, the
ringgit has strengthened by about 9.0% vis-a-vis the US dollar, and hit near a 13-year high of RM3.15/US$
recently (see Chart 2). This has enticed foreign portfolio inflows, particularly into the short-term debt market
with foreigners owing over 25% of Malaysian government securities.

Chart 2
Significant Appreciation Of The Ringgit Against The US Dollar

M Y R /U S $

2 .9 5
3 .0 0
3 .0 5
3 .1 0
3 .1 5
3 .2 0
3 .2 5
3 .3 0
3 .3 5
3 .4 0
3 .4 5
3 .5 0
1/2/2010

1/16/2010

1/30/2010

2/13/2010

2/27/2010

3/13/2010

3/27/2010

4/10/2010

4/24/2010

5/8/2010

5/22/2010

6/5/2010

6/19/2010

7/3/2010

7/17/2010

7/31/2010

8/14/2010

8/28/2010
As international trade is now allowed to be settled in ringgit and the use of domestic currency in the settlement
of trade with its major Asian trading partners is likely to increase over time, and as China has also allowed the
ringgit to be traded vis-a-vis the yuan in its interbank market, we expect the ringgit to be well supported
moving forward. In addition, the ringgit’s fundamentals are also underpinned by sustained current account
surplus in the balance of payments and rising foreign exchange reserves of the country, and we expect the
ringgit to remain relatively firm and could trade at around RM3.10/US$ in 2011. Meanwhile, expectations of
a relatively firm to appreciating currency tend to be supportive of greater foreign participation in
the local capital markets (For an analysis of the stronger ringgit and the equity market, refer to our Market
Update on “Sensitivity Analysis” dated 23 August 2010).

In addition, the country has been approved as an investment destination under the China’s Republic’s
Qualified Domestic Institutional Investor (QDII) scheme in June 2010. Malaysia is the first emerging
market and the 11th member of a small group of China’s QDII approved investment destinations which
comprises Australia, Canada, Hong Kong, Germany, Japan, Luxembourg, Singapore, South Korea, the UK and
the US. In China, domestic funds are not allowed to invest outside the country and only those approved under
the QDII scheme can do portfolio investments overseas, which is governed by a quota system. Currently,
some 41.8% (US$20bn) of the quota (US$47.8bn) remains to be invested.

Global Recovery Fears Persist

Despite the sustained 8.9% yoy economic growth in the Malaysian economy in the 2Q, albeit more moderate
than the record of +10.1% registered in the 1Q, worries about the sustainability of the global economic
recovery persist. Whilst industrial production and services activities have recovered globally from low levels in
2009, the pace of recovery is fast losing momentum (see Charts 3-4). As it stands, the US economic growth
has slowed sharply from an annualised pace of 3.7% in the 1Q to 1.6% in the 2Q (see Chart 5). The
pace of deceleration is worrying amid plunging home sales and the still weak labour market conditions. Added
to the pessimism was the most recent congressional testimony from Federal Reserve Chairman Ben Bernanke
that the outlook was “unusually uncertain”.

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Chart 3 Chart 4
Industrial Production In Major Economies Turning Down
Global Manufacturing And Services Activities Heading South

In d e x % yoy

40
65
30

60 20
PMZ Manufacturing
10
55
0
50
PMZ Services -1 0

45 -2 0
US E u ro z o n e
-3 0
40 Ja p a n C h in a
-4 0
35
-5 0
05 06 07 08 09 10
30
05 06 07 08 09 10

Chart 5 Chart 6
US Economic Growth Decelerating Japan's Economic Recovery Has Stalled

% y oy % y oy % y oy

10 6 50

8 40
4
30
6 2
20
4
0
10
2
-2 0

0 -1 0
-4

-2 -2 0
GDP -6
G D P (L H S ) -3 0
-4 E x p o rt s
-8 H o u s e h o ld s p e n d in g (L H S )
c o n s u m e r s p e n d in g -4 0
-6 E x p o rt s (R H S )
-1 0 -5 0
-8 05 06 07 08 09 10
05 06 07 08 09 10

At the same time, the economic recovery in Japan appears to have stalled with real GDP growth plunging
from an annualised rate of 4.4% to 0.4% during the same period (see Chart 6). Apart from contractions in
public investment and investment in the housing sector, household spending decelerated to a mere 0.1% in the
2Q, from +2.2% in the 1Q. This was made worse by a softer growth in exports, which is further threatened by
weakening external demand and a strong yen that has hit a 15-year high of 84 yen vis-a-vis the US dollar.

Although the recovery in Euroland has accelerated from an annualised rate of 0.8% in the 1Q to a 4-year high
of 4.0% in the 2Q, powered by Germany with 9.0% growth in the 2Q on account of a surge in exports and
consumer spending, conditions in the highly-indebted European countries are fast deteriorating. This
was on the back of a combination of an austerity-induced slowdown and debts, public and private, which
threaten their banking systems, local governments and Treasuries.

A Sharper Economic Slowdown In The 2H

Whilst we believe the risk of a global “double-dip” recession is manageable, we see a sharper slowdown in
the global economy in the second half that could persist into the first half of 2011 before the recovery
starts to build momentum in this new global economic growth cycle. This is attributable mainly to the austerity
drive to reduce fiscal deficit in the highly-indebted European countries, credit tightening to cool down property
prices in China, and as worldwide stimulus spending dissipates. Overall growth will, however, be supported by
sustained growth in emerging and developing countries, particularly in Asia and better business and consumer
confidence worldwide that has already spurred pockets of investments, leading to a gradual improvement in
labour market conditions.

Malaysia would not be spared as Europe accounts for about 10.7% of its total exports directly, which have been
growing robustly by 25.8% yoy in the first six months of this year. There would be indirect impact as well since
Malaysia exports 13% of its exports to China (+45.9% yoy growth in 1H 2010) and Europe is China’s largest
export market (accounting for about one-fifth of its total exports). As it stands, the Chinese economy is
already showing signs of moderation after its government implemented credit tightening measures to cool
down the surge in asset prices.

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Even before taking into account these potential developments, one would expect the sharp “V-shape” export
recovery to normalise as the low base effect fizzles out. In effect, this has begun to be reflected in the latest
sets of export and industrial production numbers (see Charts 7-8). Consequently, the country’s economic
growth will likely slow down more significantly to around 5.0% yoy in 2H 2010, from +9.5% in the
1H. While the overall growth would still average a commendable 7.3% in 2010, it will likely normalise to about
5.0% in 2011, in our view.

Chart 7 Chart 8
Exports And Industrial Production In Malaysia Showing Malaysia's Exports To China And Europe Will Likely
Early Signs Of Easing Slow Down In 2H

% y oy % yoy
% yoy
50 IP I
160 40
E x ports China (LHS)
40 140
Euro (RHS) 30
120
30
20
100
20
80 10
10 60
0
0 40

20 -10
-1 0
0
-20
-2 0
-20
-30
-3 0 -40

-4 0 -60 -40
06 07 08 09 10
06 07 08 09 10

Market Volatility As Economic Worries Persist

Meanwhile, investors in emerging markets appear to have ignored the warning signals coming from the
developed world. This was partly caused by inflows of portfolio funds to the emerging markets as investors
switched out of the developed markets. As a result, equities in the emerging markets continued to trend up.
In our view, this may not be sustainable given that the slowing economic growth in the developed world will
eventually translate to weaker external demand for the export-dependent developing countries and cause a
sharper-than-expected slowdown in the developing region as well. Consequently, we continue to believe
that the equity market may move into a phase of greater volatility in the months ahead until a clearer
picture emerges on the strength of the global economic recovery.

The market correction, if any, however, is not likely to be sharp given ample liquidity and sustainable economic
and earnings growth, albeit at more moderate pace moving forward. Consequently, we see a potential for
the FBM KLCI benchmark to trade up to 1,450 by end-2010, based on unchaged 14.5x 2011 earnings.
This is higher than our previous year-end FBM KLCI target of 1,400 on account of the upward revision in
earnings. As we head towards 2011, we believe there is still room for the market to trend higher given our
view that the global economic recovery is more sustainable than feared. This would imply sustained corporate
earnings growth that will continue to create shareholders’ value for investors. On this basis, a mid-cycle PER
of 15x on 2012 earnings would translate into an end-2011 FBM KLCI target of 1,640. This, however,
will not be without volatility given the uncertain global economic conditions and expectations of an uneven
global economic recovery.

Market Strategy : Top Slicing And Accumulate On Weakness

Whilst we acknowledge that the long-term economic picture remains positive for the equity market, the revival
of a “double-dip” recession fear can have a disproportionate impact on the market in the foreseeable future.
Under such circumstances, it may be timely for investors to be 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. A list of our top picks is reflected in Table 6.

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Table 6
RHBRI's Top Picks
FYE Price Fair Value Mkt Cap EPS (sen) EPS GWTH (%) PER (x) P/BV(x) P/CF (x) GDY (%)
30 Aug 2010 (RM/s) (RM/s) (RM m) FY11 FY12 FY11 FY12 FY11 FY12 FY11 FY11 FY11
Maybank Jun 8.39 9.86 59,384 61.9 69.6 14.7 12.4 13.6 12.1 2.0 n.a. 4.2
CIMB Dec 7.80 8.40 57,186 56.3 64.5 17.2 14.6 13.9 12.1 2.0 n.a. 1.6
Tenaga Aug 8.86 10.20 38,395 78.7 90.8 15.8 15.4 11.3 9.8 1.3 4.7 3.6
Gamuda Jul 3.46 3.85 7,024 16.1 16.3 17.9 1.5 21.5 21.2 1.9 54.3 3.5
MRCB Dec 1.66 1.94 2,260 6.4 6.7 23.5 4.9 26.0 24.8 1.7 16.2 0.0
Media Prima Dec 2.10 2.57 1,985 16.4 19.7 24.5 19.9 12.8 10.7 2.0 6.4 5.4
KPJ Dec 3.45 4.51 1,820 26.6 29.9 10.7 12.2 13.0 11.5 2.0 10.2 4.6
Mah Sing Dec 1.82 2.06 1,513 17.2 21.2 22.8 23.2 10.6 8.6 1.5 20.5 3.8
Faber Dec 2.61 3.82 947 26.4 45.7 0.5 73.5 9.9 5.7 1.8 6.1 3.1
HSL Dec 1.54 1.95 857 16.2 17.7 21.4 8.9 9.5 8.7 2.0 11.2 1.6

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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
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Industry/Sector Ratings

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