BUDGET 2012

7 October 2011
AmResearchTeam AmResearchSdnBhd 603-2036 2633 / www.amesecurities.com.my

Market Strategy: Which stocks to BUY?

Executive Summary We reaffirm our fair value for the FBM KLCI at 1,570 by end-2011, and 1,690 based on a PE of 15x for 2012. We remain committed to our investment thesis that the market may be approaching a trough, stemming from a bottoming out in the negative earnings revision cycle under our base case scenario of slower global growth. We forecast corporate earnings to reaccelerate from 7.9% in 2011 to 13% in 2012. Also, the market is now very under-owned! The pronouncements in Budget 2012 lend further conviction to our view that a market recovery may take hold because of its greater emphasis on execution of cornerstone projects to drive domestic demand in the face of external headwinds. This is the focal point of Budget 2012. Works on the MRT projects would commence in November 2011, followed by three mega projects the redevelopment of Sungai Buloh land, the 100-storey office tower (RM5bil), and the Kuala Lumpur Financial Centre and various highways under the Rolling Plan 2 of the 10th Malaysian Plan. The real property gains tax (RPGT) would be fine-tuned, but when viewed against the markets earlier worry of potentially draconian measures, the new RPGT structure proposed under Budget 2012 is a significant positive in moderating short-term speculation without undermining overall transaction volume, we believe. For holding periods of less than two years, the RPGT rate would be raised by 5ppts to 10%. The RPGT rate would remain the same at 5% for holding periods of between three and five years, and no RPGT thereafter. This removal of regulatory overhang should support sentiment on property equities. We switched our top pick from S P Setia to IJM Land because of the uncertainty over the continuity of management stemming from the general offer for the former. The sin sector tobacco, brewery and gaming was also spared from higher duties although there is the perennial risk of a tax hike off Budget. Carlsberg is among our top picks, along with F&N and KFC. Fast-growing MBSB is the prime beneficiary of salary hikes and other goodies for civil servants because of its monopolistic status in providing personal financing via the automatic deduction code. The impending listing of Felda Global Ventures would significantly increase the plantation sectors representation in the market. Felda Global is one of the largest integrated plantation companies globally. It manages about 800,000ha of plantation land and owns some 15 refineries in Malaysia and overseas. As a GLC, it offers a purer big-cap exposure to the sector compared to Sime Darby. This weeks pre-Budget rally (KLCI bounced by some 5% off its low of 1,332) coincided with some improvements in global risk appetite following nascent signs of concerted efforts by the European Central Bank (ECB) to tackle its debt crises as well as better macro data points from the US. In the near term, we continue to expect further ECB and FED policy actions to address the twin-challenge of European sovereign debt woes and by extension, the markets gyrations from swings in risk appetite. While we believe that volatility may persist, our sense is that the balance of risk is now on the upside. Barring a relapse of the global economy to recession, we believe that the market has already priced-in a slower growth environment. Domestic unit trust funds are already cashed up. In the past month, the common feedback from our domestic institutional clients is that their equity exposure is already at or close to the minimum permissible level. Therefore, we believe that the current market rebound, if sustained, may set off a vicious cycle of buying because of the need to increase equity weighting in the portfolios. Foreign ownership dipping to a three-year low. Based on data from Bursa Malaysia, foreign ownership dipped further to 21.9% in August 2011 from 22% in July 2011, just a tad above the three-year low of 20.4% in December 2009. Foreign ownership was a high 26.5% at the onset of the global recession in January 2008. The market collapse saw foreign ownership shrinking to 20.9% by December 2008. The starting point of foreign ownership from here onwards is from a depressed base at 22% as of August 2011, versus the three-year low of 20.4%. The incremental foreign selling looks to be at the tail-end, barring any redemption-driven selling. Domestic funds (including GLC institutions) have turned net buyers. For the first time in the past five months, trade data from Bursa Malaysia reveals that domestic institutional funds had turned net buyers in August 2011. Our top picks are the select index-heavyweights that have already priced-in a slower growth scenario: Tenaga, CIMB, AXIATA, MMHE, IOI Corp, IJM (and IJM Land), AirAsia and Genting Bhd. We remain committed to the renewable energy theme embedded in Sarawaks SCORE. PMetal and Sarawak Cable are direct beneficiaries of SCOREs accelerated capex spending.
PP12247/06/2012(030106)

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7 October 2011

TABLE 1 : TOP BUYs

Stock Tenaga CIMB Axiata MMHE* IOI Corp* IJM Corp* IJM Land* AirAsia Genting Bhd Press Metal Sarawak Cable Rating Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Share price (RM) as at 7 Oct 2011 5.38 7.11 4.79 5.37 4.82 4.96 1.89 3.06 9.13 1.55 1.76 Fair value (RM) 6.40 9.00 6.08 9.90 5.75 7.71 4.00 5.00 11.85 3.28 2.86 Mkt Cap. (RM bil) 29.4 52.8 40.5 8.6 31.0 6.8 2.6 8.5 33.9 0.7 0.2 EPS (sen) FY10 /11F 17.9 57.1 35.3 39.0 35.0 31.9 21.1 32.1 66.2 24.2 14.1 FY11/12F 66.6 57.6 41.8 45.8 38.3 37.0 23.2 34.4 75.2 31.4 29.7 PE (x) FY10/11F 30.0 12.4 13.6 13.8 13.8 15.5 9.0 9.5 13.8 6.4 12.5 FY11/12F 8.1 12.3 11.5 11.7 12.6 13.4 8.1 8.9 12.1 4.9 5.9 P/B (x) FY10 / 11F 0.9 2.1 1.8 2.8 2.4 1.3 1.1 1.9 1.9 0.7 1.7 Div yield (%) FY10 / 11F 1.1 3.7 2.4 1.2 3.7 2.9 2.2 n.m. 1.0 1.6 2.3 FY11 / 12F 3.7 3.7 2.9 1.5 4.1 2.9 2.5 n.m. 1.2 1.9 2.8

* Estimates are for FY11/FY12F and FY12/FY13F

Source: Company Data, AmResearch Estimates,Bloomberg

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7 October 2011

Key 2012 Budget Proposals: Construction

Construction: Positive overtones moving into 2012

Positive budget for Malaysian contractors. Public transportation (including highways) and East Malaysia (rural development, SCORE) continue to be dominant themes along with the inclusion of several new projects and the re-affirmation of others. Another positive surprise is the annoucement of a special RM6bil stimulus package for projects to be undertaken on a Private Finance Initiative (PFI) basis. Construction works on the first phase of the Klang Valley MRT is set to go ahead as scheduled by November 2011. Taken together, the ramp-up of both existing and new projects would anchor a doubling of the 2012 construction GDP target to 7%.

Key snapshots : (1) Sg.Buloh Kajang (SBK) MRT line - construction works to start in November 2011. (2) Projects under the 10th Malaysia Plan (10MP) Rolling Plan 2 [RP2]: - Gemas Johor Bahru Double Tracking project - West Coast Expressway (WCE), - East Coast Expressway Phase 2 (ECE 2: Jabor-Kuala Terengganu), - Lebuhraya Central Spine - Segamat-Tangkak Highway - Kota Marudu-Ranau road - Redevelopment of Sg.Besi Kuala Lumpur Air Base (3) Integrated iconic developments: 100-storey tower, KL International Financial District (KLIFD), RRIM Land. (4) Building opportunities under the Program Perumahan Rakyat 1 Malaysia (PR1MA) (5) RM978mil allocated for the five regional corridors: SCORE: - Various access roads, - Samalaju water supply, - Other basic rural infrastructure (e.g. electricity). Other corridor developments: - Johor Bahru-Nusa Jaya coastal highway (Iskandar Johor) - Heritage tourism development Taiping (Northern Corridor) - Agropolitan Scheme Besut (East Coast Economic Region) - Palm oil industrial cluster Lahad Datu (Sabah Development Corridor) (7) RM6bil Special stimulus package under the Private Financing Initiative (PFI). (8) RM5bil for rural basic infrastructure: - Rural road programme and village link (2,749 km) - RM1.8bil - Clean water supply for 200,000 households (RM2.1bil) - RM1.1bil for electricity supply to 39,000 households in rural areas, particularly in Sabah and Sarawak. (9) Flood mitigation programmes (RM1bil):

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- Perlis (upgrading of Timah Tasoh Phase 2, widening/deepening of Sg.Arau) - Perak (Sg. Kerian, Sg. Kurau and Kolam Bukit Mewah) - Johor (Sg. Segamat) (9) Construction and upgrading of new hospitals (RM1.8bil) - Hospital Kuala Lumpur (RM300mil) - Hospitals in Bera, Kuala Krai, Dungun, Sri Aman, Tuaran - Maternity block (Hospital Putrajaya) - Upgrading of 81 rural health clinics nationwide and launch of 50 new 1Malaysia clinics. (10) Other notable projects: - Upgrading of airports in Sibu, Kota Baru and Ipoh. - Two more Integrated Transport Terminal (ITT) projects in Gombak and Sg.Buloh Comment:

Construction GDP expanded at a slower pace of 2.1% in 1H2011 compared with a 6.2% growth in 1H2010. This is due to moderation in construction activities arising from the completion of projects earmarked under the Malaysian governments various stimulus packages as well as completion of several highways (e.g. Senai-Desaru Expressway, KL-Kuala Selangor or LATAR highway). But, the growth momentum is expected to accelerate in 2H11 - with the rollout of select big-ticket projects and an increase in housing activities during the second half of this year. Key projects would include: (1) (2) (3) Sg.Buloh-Kajang MRT line (SBK); Integrated Transport Terminal (ITT) projectin Gombak; Sabah Oil & Gas Terminal (SOGT) project - including a 300MW gas fired power plant at Kimanis; KLIA2 low cost carrier terminal project; and Rural and basic infrastucture initiatives under the National Key Results Area (NKRA)

(4) (5)

This would set the stage for a stronger 7% growth in 2012 construction GDP against an estimated 3.4% in 2011.

Gross development expenditure is expected to remain relatively unchanged YoY at ~RM49bil in 2012, and lower than RM52.8bil in 2010, as the federal government juggles between achieving fiscal consolidation and economic growth. The federal fiscal deficit target is expected to be at 5.6% for 2011 (2010: 5.4%), improving further to 4.7% for 2012. Domestic infrastructure momentum would be largely sustained via increasing private sector particpation via the Private-Public Partnership (PPP) moving into 2012, amid flattish government development spend targets. An allocation of RM2.5bil has been provided under the PPP facilitation fund to assist several catalyctic projects (RM300mil alone for bumiputera entrepreneurs). The RM6bil special stimulus package encompasses the upgrading and maintenance of schools, including construction of new blocks, upgrading hospitals, flood mitigation programme, upgrading basic rural infrastructure as well as construction of public houses, including housing for fishermen and low-income group. As it would be implemented on a PFI basis, we

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believe contractors with healthier/larger balance sheets would be in a better position to secure these jobs.

Construction of the SBK MRT line costing around RM20bil - the largest project under the governments Economic Transformation Program (ETP) - is on track to kick-off in November. This implies that the roll-out of elevated packages under the SBK MRT Line would likely gain traction from September until year-end. To be sure, tenders (two viaducts and one supply package) for the first three elevated contracts are already out. Based on track record, we believe IJM Corp, WCT and MRCB could be in the mix of things. As the only leading local consortium among the final five bidders, we reckon that the MMC-Gamuda JV has a good chance of clinching the tunnelling portion (~RM7bil and RM8bil) of the SBK MRT line. Select high-impact public transportation as well as highway projects forms the basis of the RP2. A total allocation of RM98bil and RM42bil has been allocated for 2012 and 2013, respectively. Notably: (i) IJM is a front-runner for the WCE, having secured approval-inprinciple from the government to implement the project back in April. Together with the NPE extension, IJM expects potentially RM5bil worth of new orderbook from this two jobs to anchor its targeted record orderbook of ~RM9bil. (ii) While Chinese contractors appear to have been given the nod to construct the Gemas to Johor Bahru double tracking project, we expect some positive spin-offs to local contractors for sub-tracting works. Again, IJM features prominently on the list while WCT could also bid due to its competitive cost structure. Four integrated development projects were re-affirmed during the tabling of the budget: (i) (ii) (iii) (iv) 100-storey tower: Construction works on the tower - to be spearheaded by PNB - is expected to start by next year. KLIFD: The master plan is due to be completed in 1Q 2012. RRIM Sg.Buloh land: Project to be launched in 2012. Sg.Besi Airport redevelopment (to be rolled out during the RP2).

Further details remain sketchy on the status and progress of these iconic developments. If implemented, IJM could be a key beneficiary given its status as a premium Grade A building contractor. East Malaysia features prominently under th e RM5bil rural infrastructure initiatives for 2012. Similarly, more spending on basic infrastructure would be further required to support SCORE. Pioneer investments are scheduled to take off in batches from 2Q/3Q 2012 onwards. These would include the: (i) Construction of major access roads to energy sites earmarked within the growth corridor (Murum, Nanga Merit, Baram, Buluh, Tutoh, Limbang). Samalaju water supply - phase 1 was completed by KKB New Mukah Airport.

(ii) (iii)

Home-grown Sarawakian contractors such as Hock Seng Lee and Naim Holdings could be at the forefront of construction works in Sarawak. On the other hand, Bintulu Port is a leading candidate to develop a new port at Samalaju - near the Samalaju Industrial Park - where a bulk of the energyintensive industries would be located.

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Another key focus is on rural electrification scheme (RES) projects in East Malaysia under the NKRA, where the electification rate is only ~60++ in both Sabah and Sarawak. With time already running out for the Sarawak government to meet the 95% targeted coverage by end-2012, Sarawak Cables recent move to expand its fabrication capacity is timely ahead of an expected upswing in RES spending. Equally, we believe Sarawak Cable would be at the forefront of Sarawaks immense hydro potential under SCORE - where a rising proliferation of transmission lines are required to support increasing power needs within the state. It is the only local power transmission line specialist that is shortlisted for the 500kV backbone transmission system estimated to cost ~RM3bil whereby a decision could be known by year-end/early-2012. Significant gains are also envisaged for suppliers of building materials, especially for projects to be implemented on a multi-year basis (e.g. WCE, SBK MRT, RRIM). By extension, this would have a positive impact on Ann Joo Resources (steel), Lion Industries (steel), Lafarge Malayan Cement (cement) and KimLun Corp (tunnel lining). However, we prefer steel and tunnel lining proxies over cement due to the former duos relatively cheaper valuations. Lastly, we expect smaller-scale contractors to be the main beneficiaries of the PR1MA housing programme. These would include 7,700 houses to be built in Cyberjaya, Putra Heights, Seremban, Damansara and Bukit Raja (2011: 1,880 houses in Putrajaya and Bandar Tun Razak).

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7 October 2011

Key 2012 Budget Proposals: Banking

Banking Sector: Several significant budget goodies in store for civil servants (Overweight)

Budget 2012 confirmed several significant goodies in store for government civil servants. Firstly, it is proposed that the salary of government civil servants be improved through a single-tier structure under a New Civil Servants Remuneration Scheme, which essentially means a much higher salary increment with a difference of up to 39% from the current amounts. The new scheme also proposes a faster promotion path for teachers, as well as a revision in annual increments for government civil servants. Secondly, effective 2013, the government will implement an annual pension increment of 2% without having to wait for any review of the remuneration system or salary adjustments. Thirdly, the government also announced an additional bonus of a half-month salary with a minimum payment of RM500 and an assistance of RM500 to government pensioners. This will be paid together with the December 2011 salary. Fourthly, the government will also extend the compulsory retirement age from 58 years old to 60 years old to optimise civil servants contribution. Comments: With better prospects for government civil servants, this should augur well for Malaysia Building Society Bhds personal loan segment, which is targeted mainly at government civil servants, and which contributed 40% of MBSBs total loans as at end-June 2011. We are maintaining BUY on MBSB with a fully-diluted fair value of RM2.30/share. Our fair value is based on both exrights and ex-warrants. This is based on an unchanged adjusted FY11F ROE of 19.6%, leading to fair P/BV of 2.5x.

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7 October 2011

Key 2012 Budget Proposals: Tobacco/ Liquor

Tobacco Sector: No huff, just more puff

Tobacco excise duty maintained at 22 sen/stick. Comments: Status-quo of tobacco excise duty is positive for TIV growth. The government unexpectedly maintained excise duty on tobacco at 22 sen/stick marking the first-ever reprieve for the industry. This is a sea-change to the punitive hike of 3 sen/stick implemented last year. We believe this latest positive development by the government could have been triggered by the industrys depressed growth, which ultimately poses a risk to governments revenue collection. As it is, a higher excise duty leads to higher ASPs as additional costs are typically borne by end-consumers. Given that higher pricing structures are correlated to shrinking legitimate total industry volume (TIV), a depressed TIV growth will invariably continue to exert downward pressure on earnings growth of tobacco manufacturers. No change to our TIV forecast of -4% for 2011F and -3% for 2012F. We believe further TIV contractions are imminent as the current high level of illicit trades has shown little signs of abating. However, TIV contractions moving forward would be less severe than the 11% YoY decline seen back in 2009. Illicit trades surged over 8ppts to an estimated 37.5% in just over the last 3 years. We maintain NEUTRAL on the sector. The industry is fraught with regulatory risks and we fear this reprieve may be short-lived. Additionally, the business operating environment remains challenging and the industry lacks positive catalysts. Other key risks to industry health includes: - 1) The proliferation of ELPC (exceptionally low-priced cigarettes) trades and; 2) Illegal sale of cigarettes below the minimum selling price of RM7.00/pack. No change to our HOLD rating on BAT with unchanged DCF-based fair value of RM45.90/share, as the group has a stellar dividend track record and net dividend yield of 5.5% is decent. Management adheres to a minimum dividend payout of 90% per annum. We are upgrading JTI to a BUY with unchanged DCF-based fair value of RM7.20/share, as the stock now offers a 24% upside potential given its share price weakness. Our dividend forecast with a 6% yield is well supported by the groups burgeoning cash pile (1H2011: RM240mil).

TABLE 1 : HISTORICAL EXCISE DUTY

Year Excise duty (sen/stick) % Change Excise duty (RM/pack of 20s)

2004 8.1 39.6* 1.62

2005 11.0 35.8 2.20

2006 12.0 9.1 2.40

2007 15.0 25.0 3.00

2008 18.0 20.0 3.60

2009 19.0 5.6 3.80

2010 22.0 15.8 4.40

2011 22.0 Nil 4.40

*Estimates based on RM58/kg in 2003

Source : Company, AmResearch

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Malt Liquor Sector Lets cheers Alcohol excise duty remains unchanged at RM7.40/litre

7 October 2011

Comments: Positive, absence of an increase in excise duty should promote improvement in TIV. As anticipated, the Government extended its reprieve to the malt liquor industry for the seventh consecutive year. The status quo of excise duty on alcohol at RM7.40/litre augurs well for brewers Carlsberg (CAB) and Guinness Anchor Berhad (GAB). The absence of a hike should promote TIV growth, reinforcing the malt liquor markets (MLM) cyclical upward trend. As it is, the latest consumption of malt liquor has surpassed its peak of 1.3 hectolitre in 2004/2005 marking a significant industry turnaround. Recall, MLM growth had been relatively stagnant post the 23% jump in excise duty from RM6.00/litre to RM7.40/litre back in 2004. No change to our MLM forecast at 4%-5% for 2011 and 2012. Notwithstanding a slight moderation in consumption due to the lack of special world events, demand momentum should remain relatively stable going forward. We reckon improving consumer confidence and government measures in promoting tourism in Malaysia should spur consumption. Demand would also be well underpinned by more brewer-organised events and festivities, as well as the special UEFA European Cup further out in 2012. We maintain NEUTRAL on the sector. Effects of a higher cost structure due to costlier hops and malting barley should filter through from 2012 onwards. However, this would be partially cushioned via higher ASP. Annual price adjustments averaged 3%-4%. We maintain HOLD on GAB with unchanged DCF-based fair value of RM10.20/share for an attractive dividend yield of 6% per annum (p.a.). For exposure to MLM sector, we prefer CAB (Buy, Fair value: RM8.30/share) for its cheaper valuation. CABs undemanding P/BV of 3x is near its mean, at a deep discount to GABs 6x (2.5x standard deviation) while EPS growth is comparable to GAB.

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7 October 2011

Key 2012 Budget Proposals: Agriculture

Plantation Sector: Biodiesel proceeding ahead KEY PROPOSALS: The Government will list FELDA Global Ventures Holding (FGVH) on Bursa Malaysia by mid-2012. FELDA settlers are expected to receive a windfall, with the amount to be announced before the listing; The Government will establish Rural Transformation Centres, which will integrate agriculture, banking, retail and insurance activities. The existing National Agrobusiness Terminal in Wakaf Che Yeh in Kelantan and Gopeng, Perak will be developed as RTC pilot projects. Four more RTCs will be developed in Kedah, Johor, Sabah and Sarawak; The Government will implement the Rural Mega Leap Programme covering 6,500ha in 11 Agropolitan Projects nationwide for the cultivation of cash crops and fish culture with an allocation of RM110mil; Rubber Industry Smallholders Development Authority will implement new plantings and rubber-replanting with an allocation of RM140mil. This is expected to benefit 20,000 smallholders; The Government will allocate RM1.1bil in 2012 for the development of the agriculture sector. Some of the main projects are the Northern Terengganu Integrated Agricultural Development Project in Sabah and Sarawak Irrigation Projects; The Government will expand the scope of the Commercial Agriculture Fund to include innovative agriculture projects. An allocation of RM300mil will be provided; The Government will extend the contract farming programme to ensure sufficient food supply. The programme will be handled by the Federal Agricultural Marketing Authority. A total of 4,500 agropreneurs will be involved encompassing 7,000ha of land. An allocation of RM14mil will be provided; and The Government will establish the Special Housing fund for Fishermen with an allocation of RM300mil to build and refurbish houses with basic infrastructure. Comment: On the whole, there has been more incentives for the agricultural sector in Budget 2012 compared with Budget 2011.

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Listing of FELDA Global Ventures

7 October 2011

The listing of FELDA Global Ventures would give investors exposure to one of the largest integrated plantation companies in the world.In the crop business, FELDA Global Ventures manages about 880,000ha of land. Out of these, about 90% is planted with oil palm. In the downstream segment, FELDA owns 15 palm oil refineries in Malaysia and countries such as like Turkey and Pakistan. FELDAs palm oil refining capacity is roughly 14,100 tonnes/day or 4.7 million tonnes/year. FELDA also has operations overseas. The group owns Twin Rivers Technologies Holdings Inc, which manufactures oleochemicals and processes agricultural crops in the US and Canada. Depending on valuations and operational efficiencies, the listing of FELDA may result in some switching from plantation stocks like Kuala Lumpur Kepong Bhd, Sime Darby and IOI Corporation. However, there is a possibility that FELDA may be viewed as another version of Sime Darby - large in size but inefficient. Currently, the large-cap plantation companies in Malaysia like Sime Darby, IOI and KLK are trading at FY12F PEs of 13x to 15x. In Singapore, the likes of Wilmar International and Olam International are trading at 13x of FY12F EPS. In Indonesia, the most expensive plantation company is PT Astra Agro Lestari, which has a FY12F PE of 10x only. Other proposals The other proposals in Budget 2012 would help smallholders and villagers in the rural areas. Replanting of rubber would help improve yields and boost the countrys rubber production in the longer-term while Rural Transformation Centres would act as a one-stop centre for farmers. The Special Housing Fund for Fishermen would help fishermen with their housing expenses. Tthis would help boost the fishermens disposable income and stimulate consumer spending.

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Key 2012 Budget Proposals: Property

Property Sector : New RPGT ruling is not so bad after all Two key take-aways from 2012 budget speech:

No more 5% flat RPGT rate : In order to curb speculative activities in the property market, the government announced a proposal to amend the RPGT ruling. The government is looking at imposing an RPGT of 10% for properties sold within 2 years. Meanwhile, a rate of 5% will be charged on properties disposed of after two years and up to five years. Properties held and disposed of after five years will not be subjected to RPGT. We view this move positively given that the market has been expecting the worst. Together with the external headwinds, regulation risks had resulted in the weak performance of property stocks over the past few months with the property index down by about 15% year-to-date. Rumours earlier had it for a re-instatement of the previous unfavourable RPGT regime that was abolished in 2007. Recall, the previous RPGT regime was a staggered rate of between 5%-30% for properties sold within 1 to 5 years with those sold within the early years to be hit with the maximum rate. We do not believe the new ruling would derail demand for residential properties given that speculative buying only makes up a small portion of the transactions in the market and recent robust prices in the market were driven by solid fundamentals. M-REIT could do without withholding tax: The government is proposing to extend the existing concessionary withholding tax of 10% on dividends for noncorporate institutional and individual investors in REIT for a further five years i.e. from 1 January 2012 to 31 December 2016. We are disappointed with this proposal as M-REIT would have benefited from an abolition of the withholding tax. We believe the interest in M-REIT would remain subdued and weak liquidity in these stocks would continue to remain prevalent. The complete removal of the withholding tax as currently being practised by Singapore and Hong Kong would have otherwise provided a much-needed rerating catalyst for the sector. Other takeaways: (1) EPF withdrawal for expats for property purchase: The government will allow the withdrawal of their Employees Provident Fund (EPF) contributions to purchase a residential property akin to what is available to local residents. Although this would provide more financial means for the expats, we do not believe there will be any significant impact on the transaction volume in the property market given the small expat community in Malaysia. (2) KLIFD development to be accelerated with 70% tax exemption: There will be income tax exemption of 70% for a period of five years for developers to encourage them to be involved in the Kuala Lumpur International Financial District (KLIFD). We believe this may be done to alleviate the concerns about the viability of the proposed development due to unfavorable supply/demand dynamics of the office space in the market.

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Key 2012 Budget Proposals: Oil & Gas

Oil & Gas Sector: Pressing on with earlier announced projects

Encourage private investments of up to RM6bil over a 10-year period to establish an oil field services and equipment centre in Johor. Comments: The initiatives to develop Johor into an oil-field services and equipment centre has been proposed by Pemandu since late last year. Recall that Southern Johor has been identified to be the oil storage and trading hub for South East Asia. This includes Tanjung Bin, Tanjung Langsat, Port of Tanjung Pelepas and Pengerang. Pemandu has proposed the construction of up to 10 million cu meter of oil storage facilities by 2020, of which half is expected to be located in Pengerang, Johor. These additional tank facilities are to complement Singapores existing 10 million cu meter capacity as the neighbouring country has limited land for expansion. Besides the tank terminal project in Pengerang, Petronas plans to build a RM60bil Refinery And Petrochemical Integrated Development (RAPID), which will catalyse a huge inflow of foreign investments. Dialog and Malaysia Marine & Heavy Engineering (MMHE) are key beneficiaries of the planned expansion of oil & gas related facilities. Dialog recently entered into a joint-venture with China Aviation Oil Ltd to add 380,000 cu m of new tank capacity in Tanjung Langsat by end-2013 while the first phase of Dialogs Pengerang terminal, which will cost RM1.9bil and have a capacity of 1.3 million cu m, is expected to be ready by 2014. We expect MMHE, which will be adding Sime Engineerings Pasir Gudang yard, to secure fabrication contracts from the RAPID project at a later stage. Hence, we remain positive on oil & gas fabricators such as Dialog, MMHE and Kencana Petroleum.

Complete Petronas RM3bil regassification project in Melaka to enable the import of liquified natural gas (LNG) to Peninsula Malaysia. Comments: This project, which will have a capacity of 3.8 million tones of LNG, will be undertaken by a a joint-venture between Petronas Gas and MISC. Early this year, Petronas Gas had awarded the contract for the engineering, procurement, construction, installation and commissioning works for the LNG Regasification Unit, Island Berth and Subsea Pipeline to a consortium comprising Perunding Ranhill Worley Sdn Bhd and Muhibbah Engineering. We understand that this project will be completed by end-2012, which means some delay from the earlier schedule of July next year. But we remain positive on Petronas Gas, as its earnings will be enhanced by the additional imported gas of up to 500mmscfd, 23% of the gas supply in Peninsula Gas Utilisation pipelines.

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7 October 2011

Key 2012 Budget Proposals: Auto

Auto Sector: Full duty exemption on hybrid and electric vehicles extended till 2013 The full exemption on import duty and full exemption on excise duty for CBU hybrid and electric cars & electric motorcycles will be extended till 31 December 2013. Pursuant to Budget 2009, franchise holders of hybrid cars were only given a 50% exemption on excise duty and full exemption on import duty until 31 December 2010. Comment: Long-term positive, but minimal impact in near term. Boosting volumes: The move should benefit local distributors of hybrid and electric vehicles in the country major players in the hybrid segment currently are Honda and Toyota. Prior to the excise duty exemption last year, sales of hybrid vehicles have been less than encouraging partly due to high prices. Hondas Civic hybrid model generated sales of a mediocre 13 units per month while Toyotas Prius model churned up 20 units sales per month in 2009-10. However, since the full exemption on excise duty was first announced in late 2010, sales of hybrid cars have improved and selling prices lowered. The Honda Civic hybrid as an example saw pricing reduced to RM108,980/unit. Prior to the tax exemptions in Budget 2011, Hondas Civic hybrid (1.4 litre-engine) retailed at RM129,980/unit comparable to the C-segment Japanese models. Honda introduced the Honda Insight hybrid in 2010, (launched late 2010) post 100% excise duty exemption which generates sales of 439 units/month vs. 33 units/month from combined sales of the Honda Civic hybrid and Toyota Prius in 2009. Continuation of the tax exemption should help spur sales of hybrid and electric vehicles and encourage introductions of more new models. Addressing stumbling blocks to local assembly: We believe this is a preliminary move to increase sales volume of hybrid/electric vehicles. If sufficient scale is created, it should justify investments by auto manufacturers in local assembly and eventually develop Malaysia as a regional assembly hub. This, we believe, is the longer-term aim. The move to stimulate sales volume complements earlier measures announced under the NAP 2009: (1) pioneer status and investment tax allowance for five years for the manufacture of selected critical components supporting hybrid/ electric vehicles; (2) The draw-up of a roadmap to develop infrastructure for electric vehicles by the Ministry of Energy, Green Technology and Water. These should address key stumbling blocks that the segment currently faces i.e. lack of volume which leads to: (1) lack of local parts suppliers e.g. batteries and electric motors; and (2) lack of supporting infrastructure for electric vehicles. We note that Proton too is in the midst of developing its own electric and hybrid vehicles. The creation of a well-supported infrastructure and parts vendor system is a critical component in helping Proton penetrate into this relatively new segment. A long-term positive: As the hybrid/electric vehicle segment is still at its infancy in Malaysia, we see this development as a long-term positive but expect minimal impact to the sector in the near term. Our NEUTRAL rating on the auto sector is retained given the current high expectations amid increasing earnings risk arising from: (1) Price discounting given increased competition from Japanese marques to re-gain lost market share over the past 6 months; (2) Softening underlying demand. Top pick is APM (BUY, FV: RM6.60/share) given: (1) Prospects of regional expansion; (2) Proxy to the influx of local assembly by foreign marques; (3) Benefits from artificially higher TIV, stemming from price discounting by car distributors.

AmResearch Sdn Bhd

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Budget 2012

7 October 2011

Published by AmResearch Sdn Bhd (335015-P) (A member of the AmInvestment Bank Group) 15th Floor Bangunan AmBank Group 55 Jalan Raja Chulan 50200 Kuala Lumpur Tel: (03)2070-2444 (research) Fax: (03)2078-3162 Printed by AmResearch Sdn Bhd (335015-P) (A member of the AmInvestment Bank Group) 15th Floor Bangunan AmBank Group 55 Jalan Raja Chulan 50200 Kuala Lumpur Tel: (03)2070-2444 (research) Fax: (03)2078-3162 The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. For AmResearch Sdn Bhd

Benny Chew Managing Director

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