PP 7767/09/2010(025354)

23 August 2010

Malaysia Corporate Highlights

RHB Research
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Marke t Upda te
23 August 2010
MARKET DATELINE

Sensitivity Analysis
The Stronger Ringgit And The Equity Market

♦ Stronger RM. The recent stronger-than-expected GDP growth has led to Table 1. Companies With Foreign
expectations of another 25 basis points (bps) hike in the Overnight Policy Currency Exposure
Rate (OPR) to 3.0% in Bank Negara’s 2 Sep monetary policy Stocks FV (RM) Rec
announcement (or 100bps for the year). The RM has already moved Amway 8.45 MP
ahead of expectations, and is currently hovering at RM3.14/US$, up 1.7% Carlsberg 6.03 OP
over the last month, and up by 7.7% vs. end of 2009. Star 4.20 OP

♦ Forex at RM3.10-3.20/US$ by year end. RHBRI’s current view is that MCIL 1.16 OP
Media Prima 2.80 OP
the RM will hover within the RM3.10-3.20/US$ range through the
UMW 7.25 OP
remainder of 2010. This compares with our previous assumption of
Tan Chong 6.16 OP
RM3.20-3.30. However, we have also assumed that China will continue to
KNM 0.36 UP
diversify its forex holdings away from the US$ and into other Asian
Petra Perdana 1.15 UP
currencies. Therefore, although the RM’s appreciation vs. the US$ appears
Tenaga 10.20 OP
to be ahead of the pack (except the Thai baht), we expect other regional
YTLP 2.20 MP
currencies to catch up.
IOIC 6.65 OP
♦ Bad for manufacturers. The RM similarly spiked up in 2006 and 2007, KLK 20.75 OP
rising by 7.1% and 6.7% p.a. respectively. We believe this was one of the Sime Darby 8.00 UP
key reasons for Malaysia’s exports of manufactured goods slowing down Top Glove 6.90 MP
from 10.6% in 2005 to 9.5% in 2006 and 0.1% in 2007. Kossan 5.36 OP
Adventa 4.16 OP
♦ This time around … We believe manufacturers face a similar situation in
Hartalega 9.29 OP
the near term, which is further exacerbated by the expected global
Unisem 2.31 MP
economic slowdown in 2H2010. In our view, the negative impact will be
MPI 6.80 MP
felt more by the smaller SMEs which are less able to absorb the RM’s
JCY 1.32 MP
sharp rise, but the larger exporters would likely be cushioned by their
Notion 1.54 UP
ability to re-price their products on the spot market (e.g. CPO), or with a
Axiata 4.75 OP
short time lag (e.g. rubber gloves and steel companies). By 2H2011, we
Evergreen 2.67 OP
expect stronger economic conditions (and thus consumer demand), which
Jaya Tiasa 4.90 OP
should help exporters to re-adjust prices. However, if we assume a lack of
Ta Ann 6.75 OP
pricing power, our sensitivity analysis shows an estimated 9.2-20.7% and
WTK 1.25 MP
7.5-11.1% negative impact to our FY11 EPS forecasts for the plywood
AirAsia 2.08 OP
players and technology stocks respectively based on a 10 sen
MAS 1.94 UP
appreciation in the RM/US$.
MISC 8.07 UP

♦ Clear beneficiaries. The beneficiaries of a stronger RM include the Source: RHBRI

airlines (with an estimated +11% and +18% uplift to our AirAsia and MAS
FY11 EPS estimates respectively, assuming a 10 sen appreciation in the
RM/US$ to RM3.10), TNB (with an estimated +3.9% boost to our FY11
EPS estimate), and newspaper companies (with an estimated +9-28%
p.a. boost to our FY11 EPS forecasts for Media Prima, MCIL and Star).

♦ Conclusion. While we are concerned that the market may not have fully
discounted the negative impact of the RM’s sharp rise in the near term,
we believe other regional currencies will catch up, which would thus re-
set the relative competitiveness of the RM in the longer term. We also
reiterate our view that the market is currently driven more by news flow
than by macro factors. We thus continue to recommend investors focus Yap Huey Chiang
on the better-rated stocks that will be able to ride through the near-term (603) 92802171
volatility. yap.huey.chiang@rhb.com.my

Please read important disclosures at the end of this report.

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 23 August 2010

Sensitivity Analysis – Stronger Ringgit

♦ Strengthening ringgit. The recent stronger-than-expected GDP growth has led to expectations that Bank
Negara Malaysia will hike the Overnight Policy Rate (OPR) by another 25 basis points (bps) hike to 3.0% in the 2
Sep monetary policy announcement. The ringgit has already moved ahead of expectations, and is currently
hovering at RM3.14/US$, up 1.7% over the last month, and up by 7.7% vs. end of 2009. Following on from
RHBRI’s Economic Highlights (23 Aug 2010), in which we discussed the possibility of the ringgit strengthening
further, we now look at the impact on corporate earnings.

♦ Not just the ringgit. Other currencies in Asia also appear to have strengthened in tandem, including the Thai
baht, Japanese yen, Philippines peso and Korean won, in the last month. We believe the US$ weakness is one
factor driving up relative currencies, plus China’s diversification of its forex holdings away from the US$ and into
the currencies of the larger economies in Asia.

Table 2. Regional Currencies vs. US$

Last one month Chg (%) YTD Change (%)
EUR/USD 2.4 11.9
THB/USD 2.3 5.3
MYR/USD 1.7 7.7
JPY/USD 1.3 7.7
PHP/USD 0.9 2.1
KRW/USD 0.7 (1.3)
SGD/USD 0.2 3.0
TWD/USD 0.1 0.2
HKD/USD (0.1) (0.3)
IDR/USD (0.3) 4.4
INR/USD (0.6) (0.4)
AUD/USD (1.6) (1.7)

Ringgit against other currencies:

MYR/EUR 3.9 18.7
MYR/GBP 2.1 11.5
MYR/CNY 1.8 7.2
MYR/SGD 1.4 4.9
MYR/JPY 0.2 0.1
Source: Bloomberg

Chart 1. RM/US$ Exchange Rate

Source: Bloomberg

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 23 August 2010

♦ Sensitivity analysis – forex at RM3.10-3.20/US$. RHBRI’s revised view is that the RM will hover within the
RM3.10-3.20/US$ range through the remainder of 2010. This compares with our previous assumption of
RM3.20-3.30. However, we have also assumed that China will continue to diversify its forex holdings away from
the US$ and into the currencies of the larger economies in Asia, e.g. the Japanese Yen and the Korean Won.

♦ Bad for manufacturers. The RM similarly spiked up in 2006 and 2007, rising by 7.1% and 6.7% p.a.
respectively. We believe this was one of the key reasons for Malaysia’s exports of manufactured goods slowing
down from 10.6% in 2005 to 9.5% in 2006 and 0.1% in 2007.

♦ This time around … We believe manufacturers face a similar situation in the near term, which is further
exacerbated by the expected global economic slowdown in 2H2010. In our view, the negative impact will be felt
more by the smaller SMEs which are less able to absorb the RM’s sharp rise, but the larger exporters would
likely be cushioned by their ability to re-price their products on the spot market (e.g. CPO), or with a short time
lag (e.g. rubber gloves and steel companies). By 2H2011, we expect stronger economic conditions (and thus
consumer demand), which should help exporters to re-adjust prices.

♦ Neutral for the planters. Plantation companies do not directly benefit from RM/US$ movements as CPO sales
contracts are priced in ringgit, and currency-hedged. However, we highlight that the stronger ringgit would be
positive for IOI Corp due to its US$1.2bn outstanding (or about 70% of total debt) in the form of bonds and
guaranteed notes. Every 1% appreciation of the ringgit would improve earnings by 1-1.5% p.a..

♦ Good for …

o Airlines. The ringgit’s strength against US$ is positive for airlines. For AirAsia, sales are almost entirely
denominated in RM with some in regional currencies. On the other hand, we estimate that about 60-70% of
its total cost is denominated in US$. The appreciation of the ringgit from RM3.20/US$ to RM3.10 would
boost our FY12/10-12 net profit forecasts by 11% p.a.. For MAS, about 15-20% of its total sales are
denominated in US$ (with the balance in RM and other key currencies in the world). On the other hand,
about 40-50% of its total cost is denominated in US$. Therefore, using the same assumptions, the stronger
ringgit would reduce our RM141m net loss forecast in FY12/10 to only RM56m and boost FY12/11-12 net
profit forecasts by 18% and 15% respectively.

o Media. For Media Prima, although revenue is primarily driven by the local market and we see around 14-
15% gross adex growth this year, 40% of content cost is from foreign programming (or 12-14% of total
operating costs). The company is seeking to increase the local content, but in the near term, earnings
should benefit from the stronger ringgit. The company will also benefit from lower ringgit cost of newsprint.
We estimate that every 10 sen appreciation of the ringgit results in 9.0-27.8% uplift to our FY11 EPS
forecasts for Media Prima, MCIL and Star. The three companies currently have around 6-11 months’ stock
levels at US$635-660/tonne.

o Motor. Among the auto players under our coverage, Tan Chong would be most sensitive while UMW would
be least sensitive. We estimate a 10 sen increase in our RM/US$ assumption would result in our FY11 EPS
forecasts rising by 1.5-3.9% p.a.. We note that Proton and MBM costs are primarily denominated in Yen,
which in contrast has been rising.

o TNB. TNB would be a beneficiary from a strengthening RM as this would mean cheaper coal costs, which are
priced in US$. We estimate every 1% change in our RM/US$ assumption would impact our FY08/11 net
profit forecast by 1.3%. We note that our forecasts currently assume an average exchange rate of
RM3.30/US$ for FY11 and RM3.20/US$ for FY12.

o Consumer stocks. The stronger RM vs. US$ is marginally positive for some consumer companies like
Amway as it sources approximately 80% of its products from the US, although we highlight that the
company actively hedges its forex exposure. Longer term however, the stronger ringgit would still be
positive for the company, and our sensitivity analysis suggests that every 10 sen increase in the RM/US$
exchange rate would lift gross margins by 0.6-1.2%-pts. As for Carlsberg, its exposure to the US$ is in the
aluminium for its canned products. We note that canned drinks account for 20-25% of overall off-trade
sales, and aluminium makes up around 10% of overall canned drinks’ raw material costs. Thus, the positive
impact towards its margin is very minimal. The raw material exposure to the Euro is more substantial and if
we assume the ringgit also strengthens against the Euro by 10 sen, our FY12/11 EPS would rise by 3%.

o Mildly positive for steel players. We believe the stronger ringgit is mildly positive for Ann Joo, CSC Steel,
and Perwaja, as they are net payers of US$ given the bulk of their raw materials are imported while only a

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 23 August 2010

fraction of the products are exported. Based on our estimates, every 10% rise in our RM/US$ assumption
would boost our FY12/11 EPS by only 0.7-1.1%.

♦ Bad for … (with mitigating factors).

o Rubber gloves. We estimate that for every 10 sen appreciation in the RM/US$ exchange rate, our earnings
estimates for the rubber glove companies would theoretically drop by 11.8-20.5% p.a. for FY10-11.
Nevertheless, past trends suggest that the rubber glove companies are able to adjust selling prices
accordingly for currency effects, but this could happen 1-2 months later. The time lag is mildly negative, but
should not be too significant.

o Timber. Timber products are normally sold in US$, while production costs are mostly in RM. To a small
extent, production cost will be slightly lower as glue or resin costs are influenced by the US$ exchange rate.
For Evergreen, the currency impact is lower compared to the plywood manufacturers as it is currently
operating at a high utilisation rate and is making decent profits. The impact however on the log and plywood
exporters like Jaya Tiasa, Ta Ann and WTK may be significant due to the low earnings base effect. Their
plywood divisions are just making small or very minimal profit at current utilisation rate of 60-70%.
Therefore, further appreciation of the RM vs. US$ would likely turn their plywood operations back into the
red. However, in mitigation, we note that the currency impact may be offset by rising demand for plywood
(mainly from Japan). In addition, Jaya Tiasa and Ta Ann have significant earnings contribution from oil palm
plantations, which should provide some cushion to earnings.

Table 3. Timber Stocks – EPS Sensitivity To RM Appreciation

FY11
Evergreen -3.0%
Jaya Tiasa^ -11.9%
Ta Ann -9.2%
WTK -20.7%
^FY04/11-12
Assume RM/US$ exchange rate is revised from RM3.25-3.20 to RM3.15-3.10
Source: RHBRI

o Technology. For the semiconductor players like Unisem and MPI, the impact of the stronger ringgit would
be negative as 70-75% of their receivables are denominated in US$ even though this is partly hedged by
US$ raw material costs as well as foreign denominated loans. We believe MPI may be affected more than
Unisem as it currently does not have a hedging policy, although management said that it may adopt hedging
policies in the future depending on the situation. For the hard disk drive component manufacturers like
Notion Vtec and JCY, there is a natural hedge between US$-based revenue and raw materials, but we
believe the exposure is only partially covered as 90% of revenue to Western Digital and Seagate are mainly
denominated in US$ but raw materials account for 30-35% of total costs (of which 20% is for aluminium).

Table 4. Technology Stocks – EPS Sensitivty To RM Appreciation

FY11
Unisem -2.8%
MPI -3.7%
Notion -2.5%
JCY -3.4%
Assuming a 1% appreciation in the RM/US$ exchange rate
Source: RHBRI

o YTL Power. The impact of a stronger RM would be marginally negative for YTL Power in terms of associate
contribution from PT Jawa Power. However, the impact is only expected to be marginal given that PT Jawa
Power only contributes 16-18% of our FY6/11-13 net profit forecasts for the group. The impact from a
weaker pound sterling (GBP) would be more severe given Wessex Water contributes significantly to the
group (41.9% of FY10 group pre-tax profit). In mitigation however, recent 4QFY6/10 results suggest that
the UK subsidiary still has underlying operating earnings growth, which would offset the translation effects
of the weaker GBP.

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 23 August 2010

Conclusion

♦ While we are concerned that the market may not have fully discounted the negative impact of the stronger
ringgit in the near term, we also highlight that other regional currencies are expected to catch up, which
would thus re-set the relative competitiveness of the ringgit in the longer term. We also reiterate our view
that the market is currently driven more by newsflow than by macro factors. We thus continue to recommend
investors focus on the better-rated stocks that will be able to ride through the near-term volatility.

IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take
on higher risks.

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Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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