PP 7767/09/2010(025354)

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Com pany Visit

16 July 2010
MARKET DATELINE

Tanjong plc Share Price

Fair Value
:
:
RM17.38
RM18.30
Gaming Under Pressure Recom : Market Perform
(Maintained)

Table 1 : Investment Statistics (TANJONG; Code: 2267) Bloomberg: TJN MK

Net Core EPS Net
FYE Turnover profit EPS EPS# Growth# PER# C.EPS* P/NTA Gearing ROE GDY

Jan (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2010 5,219.9 676.8 167.8 165.1 26.4 10.5 - 1.9 0.95 18.8 5.8
2011f 5,325.4 649.9 161.2 161.2 -2.4 10.8 165.9 1.7 0.76 16.3 5.9
2012f 5,403.7 674.3 167.2 167.2 3.7 10.4 172.8 1.6 0.59 15.5 6.0
2013f 5,474.0 678.3 168.2 168.2 0.6 10.3 182.6 1.5 0.44 14.4 6.1
Main Market Listing / Trustee Stock / Non-Syariah-Approved Stock By The SC # Excl EI * Consensus Based On IBES Estimates

♦ NFO - Exploring potential measures to offset higher betting duties.

Issued Capital (m shares)
Market Cap (RMm)
403.3
7,008.6
We gather that management is still exploring various steps via the reduction
Daily Trading Vol (m shs) 0.4
of the prize payout to mitigate the recent 2%-pt hike in pool betting duties.
52wk Price Range (RM) 14.00-19.12
This could involve either: 1) a direct reduction in individual prizes; 2)
reduction in the total number of consolation prizes; and/or 3) a combination Major Shareholders: (%)
thereof. Assuming there is no change in sales volumes, we estimate a 2%- Tan Sri Ananda Krishnan 30.9
pt reduction in prize payout should allow Tanjong to fully offset the impact Capital Group 8.9
of the higher betting duties. In terms of the impact of sales/draw to the
group’s earnings, we estimate that every 1%-pt decline in sales/draw
FYE Jan FY11 FY12 FY13
volume growth would impact net profit by just 0.2%. At this juncture, we
EPS chg (%) (4.0) (1.3) (1.3)
have not imputed any reduction in our prize payout assumptions, pending
approval from the Government. Var to Cons (%) (2.9) (3.3) (7.9)

♦ Power division. The next leg of growth for the power division would PE Band Chart
depend on additions of new power assets and management had previously
expressed a target of doubling its current power capacity to 8,000MW over PER = 14x
the next five years. This could include greenfield and/or brownfield projects PER = 12x
PER = 10x
with particular focus on regions such as South Asia, South East Asia, Middle PER = 8x
East and North Africa. We believe Tanjong has a strong chance of securing
some of the projects in countries such as Bangladesh, Egypt and UAE given
their existing presence in these places. We understand Tanjong has been
selected as one of the 10 prequalified bidders for the Dairut power plant
project, which is expected to be awarded in early-2011. Potentially, there
could be more news flow on the outcome of other bids in the months ahead.
Relative Performance To FBM KLCI
♦ Leisure division. For Tropical Islands (TI), visitor arrivals and ARPUs have
been trending up while construction of accommodation (23 homes built and
sold thus far) should further help address the challenge of low weekday
visitor attendances and short stay visitors. As for TGV, we expect its FY10 Tanjong plc
operating profit contribution of RM14.8m to hold steady going forward.

♦ Others. While Tanjong does not have a specific dividend policy, we FBM KLCI

understand that dividends going forward should not be lower than FY10’s
gross DPS of RM1. We project FY11-13 gross DPS of RM1.02-1.06, which
translates to gross dividend yields of 5.9-6.1% p.a..

♦ Risks. 1) Stronger RM/US$ would impact overseas power profits; 2)

Higher-than-expected NFO prize payout; 3) Sovereign risk of overseas
power projects; 4) Change in landscape under the National Energy Plan;
and 5) High foreign shareholding (39% as at end-Jun).

♦ Forecasts. We have fine-tuned our earnings forecasts and coupled with the
higher operating losses assumed for FY11 for RTO, we reduced our FY11-13
net profit forecasts by 1.3-4% p.a..
David Chong, CFA
♦ Investment case. Following the revision to our earnings forecasts, our
(603) 9280 2186
SOP-derived fair value has been reduced by 1.3% to RM18.30. Market
david.chong@rhb.com.my
Perform call, however, is unchanged.

Please read important disclosures at the end of this report. Page 1 of 6

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 16 July 2010

Gaming division

♦ NFO - Exploring potential measures to offset higher betting duties. We gather that management is still
exploring various steps via the reduction of the prize payout to mitigate the recent 2%-pt hike in pool betting
duties. This could involve either: 1) a direct reduction in individual prizes; 2) reduction in the total number of
consolation prizes; and/or 3) a combination thereof. As highlighted in our BToto report dated 12 Jul 2010, we
believe the NFOs would likely lobby for a reduction in the 4D prize pool for the secondary prizes (20 prizes in all)
and not for the first prize. This is because punters tend to use the first prize pool as an indicator to decide on
their bets and not the secondary prizes. Thus, a reduction in the first prize pool could impact average
sales/draw.

♦ Given past experience, we think the Government is likely to approve a reduction in secondary prizes
rather than the first prize this time round. Tracking back to 1999, the Government then raised gaming
taxes by 1%-pt to 8% and pool betting duties by 3%-pts to 10% before reducing pool betting duties to 6% in
2002. As a result, we understand that Tanjong (and the other NFO players) reduced the prize pool by RM200 to
RM2,000, leading to a drop in sales/draw by a CAGR of 2.5% during this period. With the drop in gaming taxes
experienced by the Government back then, we believe it is more likely for the Government to approve a
reduction in the secondary prizes rather than the first prize this time round.

♦ New game – likely on ice for now. In our Strategy Report dated 30 Jun 2010 “Still A Bumpy Ride”, our
gaming analyst believes that on the back of the recent sports betting licence incident, there could be potential
backlash in the form of more protests by the opposition parties and the public against any other gaming
liberalisation measures proposed by the Government. One such measure that could be affected is the new game
that Tanjong had been planning.

♦ Sensitivity analysis. Assuming there is no change in sales volumes, we estimate a 2%-pt reduction in prize
payout should allow Tanjong to fully offset the impact of the higher betting duties. In terms of the impact of
sales/draw to the group’s earnings, we estimate that every 1%-pt decline in sales/draw volume growth would
impact net profit by just 0.2%. At this juncture, we have not imputed any reduction in our prize payout
assumptions, pending approval from the Government.

♦ MoF roped-in to help resolve RTO woes, but this could take time. As for the RTO segment, recall that this
segment incurred an operating loss of RM65.8m in FY10 as a result of escalating totalisator expenses and
consequently, the RTO segment is now the biggest drag to the group’s earnings. The group is engaging the turf
clubs, Malaysian Totalisator Board and Ministry of Finance to resolve the operating losses. While the involvement
of MoF would be positive, management cautioned that it would still take time to reach a resolution (12 months)
and see the losses moderate. In addition, although we note that 1Q operating loss was stable yoy at RM16.8m
(4QFY10 operating loss: RM19m), management is keeping to its full-year operating loss guidance of RM80m.
Consequently, we have now assumed operating losses of RM80m for FY11 but have given management the
benefit of doubt and retained our FY12 and FY13 operating losses of RM60m p.a. for RTO.

Power division

♦ Still waiting results for overseas power project bids. As mentioned previously, the next leg of growth for
the power division would depend on additions of new power assets and management had previously expressed a
target of doubling its current power capacity to 8,000MW over the next four to five years. This could include
greenfield and/or brownfield projects (preference for greenfield) with particular focus on regions such as South
Asia, South East Asia, Middle East and North Africa. From the list of potential greenfield opportunities below
(Table 2), we believe Tanjong has a strong chance of securing some of the projects in countries such as
Bangladesh, Egypt and UAE given their existing presence in these places. Indeed, we note that Tanjong has
been selected as one of the 10 prequalified bidders for the Dairut power plant project in Egypt (others include
Sumitomo, Marubeni, EDF, Mitsui and TNB). The Dairut contract is expected to be awarded in early-2011 and
there could potentially be more news flow on the outcome of other bids in the months ahead.

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 16 July 2010

Table 2 : Potential Greenfield Opportunities

Project Type Capacity (MW) Project Type Capacity (MW)
Bangladesh (Meghnaghat 2) CCGT 350-450 Oman (Duqm) Coal 1,000
Egypt (Dairut) CCGT 1,500 Saudi Arabia (Qurayyah) Thermal 2,000
India (UMPP) Coal 4,000 Tunisia (Bizerte) CCGT 300-450
Indonesia (Java) Coal 2,000 UAE (Shuweihat 3) CCGT 1,600
Source: Company

♦ Domestic power – no new developments. At the domestic front, there has been no new development with
respect to the renegotiation of PPAs. As for the requirement of another 6,000MW in capacity by 2020, while
Tanjong would be open to bid for such projects, we sensed that management’s preference remains with
overseas opportunities.

Others

♦ Leisure division - TI results improving, further supported by stable TGV earnings. In the recent 1QFY11
results, Tropical Island (TI) reported 1QFY11 operating profit of RM4.1m, a significant improvement over
1QFY10’s operating loss of RM0.6m despite revenue staying flat (4QFY10 operating profit: RM6.3m, although 4Q
tends to be a seasonally stronger quarter for TI). While we understand that the improved results were partly due
to certain expenses, e.g. marketing, being deferred, nevertheless, we expect TI to continue to improve on its
results on a full-year basis with visitor arrivals and ARPUs generally on an uptrend. The issue of low weekday
visitor attendances and short stay visitors remain as TI’s biggest challenges, although this would be partly
addressed with the construction of accommodation. 23 homes have been built thus far (all fully taken up) while
another 25 homes are scheduled for completion by Sep. In total, the developer targets to have ready 400 homes
by end-2012. Other possible measures include the construction of hotels and additional leisure facilities as well
as tie-ups with other leisure industry players. As for TGV, we expect its FY10 operating profit contribution of
RM14.8m to hold steady going forward.

♦ Dividend. Notwithstanding the increase in betting duties, management reiterated that dividends going forward
should not be lower than FY10’s gross DPS of RM1. In its recent 1QFY11 results announcement, Tanjong
declared a first interim gross DPS of 20 sen (1QFY10: 17.5 sen, gross). While we believe Tanjong is likely to
keep its future quarterly interim gross DPS at 20 sen, the final DPS is a wildcard. Thus, we had kept our full-year
gross DPS projection at RM1.02, which implies a final gross DPS of 22 sen (FY10: 30 sen, gross).

Risks

♦ Risks to our view. 1) Stronger RM/US$ would impact overseas power profits; 2) Higher-than-expected NFO
prize payout; 3) Sovereign risk of overseas power projects; 4) Change in landscape under the National Energy
Plan; and 5) High foreign shareholding (39% as at end-Jun).

Forecasts

♦ Forecasts fine-tuned. We have fine-tuned our earnings forecasts and coupled with the higher operating losses
assumed for FY11 for RTO, we reduced our FY11-13 net profit forecasts by 1.3-4% p.a.. We now project a 2.4%
decline in FY11 net profit (flat previously) mainly due to a combination of lower contribution from both power
(mainly scheduled maintenance cost) and gaming (higher RTO losses and hike in betting duties).

Valuations And Recommendation

♦ SOP-valuation lowered but Market Perform call unchanged. Following the revision to our earnings
forecasts, our SOP-derived fair value has been reduced by 1.3% to RM18.30. In our view, a near-term share
price catalyst is the addition of new power assets, although the impact to earnings would depend on whether
these are greenfield or brownfield projects. Our SOP-derived fair value has yet to reflect such additions.
Resolution of the operating losses incurred by the RTO segment would be both earnings and value-accretive, but
this may take time. Thus, our Market Perform call is unchanged.

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Table 3 : SOP Fair Value Calculation

SOP (RMm) SOP/share (RM)
Domestic power DCF @ WACC of 9.7% 3,278.4 8.13
Egypt power DCF @ WACC of 9.5% 637.4 1.58
Globeleq power DCF @ WACC of 10% 586.8 1.46
Gaming @ 15x PER 1,581.6 3.92

Other assets:
Tropical Island (BV less losses) 70.0 0.17
TGV @ BV 70.2 0.17
Menara Maxis @ BV 672.0 1.67
Taweelah B (10%) - Equity value of US$3bn cost 204.0 0.51
Less: Net debt (excl debt arising from acquisitions) 271.1 0.67
Total revalued NAV (RMm) 7,371.5 18.28
Share cap (m) 403.3
Source: RHBRI estimates

Table 4 : Earnings Forecasts Table 5 : Forecast Assumptions

FYE Jan (RMm) FY10a FY11F FY12F FY13F FYE Jan FY11F FY12F FY13F
Power 2,811.7 2,767.0 2,793.4 2,809.6 Power plant capacity (MW)
Gaming 2,043.2 2,164.2 2,196.7 2,229.7 - Teluk Gong (Powertek) 440 440 440
Property 57.1 53.9 55.2 56.6 - Tanjung Kling (Pahlawan) 330 330 330
Leisure 307.8 340.3 358.3 378.1 - Teluk Gong 2 (Panglima) 720 720 720
Turnover 5,219.9 5,325.4 5,403.7 5,474.0 - Suez Gulf 683 683 683
Growth (%) 4.8 2.0 1.5 1.3 - Port Said East 683 683 683
- Globeleq (effective stake) 751 751 751
EBITDA 1,499.1 1,427.4 1,429.5 1,425.0 Total installed capacity - Msia 1,490 1,490 1,490
EBITDA margin (%) 28.7 26.8 26.5 26.0 Total installed capacity - Overseas 2,116 2,116 2,116
Depreciation (296.8) (308.6) (313.9) (318.9) Gaming
No. of outlets 347 347 347
EBIT 1,202.3 1,118.8 1,115.6 1,106.1 Ticket sales (RMm) 2,164 2,197 2,230
Net int exp/Other inc (358.9) (309.1) (284.3) (273.6) Ticket sales growth (%) 5.4 1.5 1.5
Associates 87.8 92.5 94.8 98.1 Sales/Draw (RMm) 12.7 12.9 13.1
Exceptionals 22.0 0.0 0.0 0.0 Payout (% of gross sales) 65.0 65.0 65.0
Pre-tax profit 953.3 902.2 926.1 930.7
Tax (204.7) (180.1) (176.9) (177.0)
Minorities (71.8) (72.2) (74.9) (75.4)
Net profit 676.8 649.9 674.3 678.3
Net excl EI 665.7 649.9 674.3 678.3

Source: Company data, RHBRI estimates

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Chart 1: Tanjong Technical View Point

♦ After consolidating just below the tough resistance
level of RM18.00 for three months, Tanjong
successfully broke out from the level in early Apr
2010 and extended its uptrend to an all-time high
of RM19.12.

♦ However, a swift profit-taking pressure emerged

and dragged the stock to below RM18.00 shortly
afterward.

♦ Thereafter, the stock has been trading at below

RM18.00.

♦ The stock continued to consolidate at below that

level and closed at RM17.38 yesterday.

♦ Registered with four negative candles in a row, and

a fresh fall to below the 10-day and 40-day SMAs,
the stock is expected to ease further in the near
term.

♦ We see a support zone near the RM16.70 to

RM17.00 region, which could potentially trigger a
technical rebound on the stock.

♦ Resistance is still set at RM18.00.

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
(previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

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

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

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

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

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

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

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the actions of third parties in this respect.

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