ASEAMBANKERS - 3Q08 Quarterly Outlook

Equity Research
PP11072/04/2009
QUARTERLY OUTLOOK
3Q08 Outlook
Lingering overcast outlook YE KLCI Target: 1,220
Table of Contents A lingering cloudy political outlook, combined with the recent drastic
energy subsidy reductions and introduction of windfall taxes on IPPs,
Market Strategy 1 will likely shroud the KLCI in an extended period of mediocrity,
Economy: Devt & Outlook 21 potentially leading to its underperformance vis-a-vis regional peers.
Themes: Steel Sector 46 These measures have reduced our 2008-09 earnings forecasts by
Fixed Income: Devt & Outlook 56 about 2-3%. Investors are likely to stay sidelined amid a foggy
Company highlights: economic outlook, as spiralling inflation in 2H08 could shave
Ann Joo Resources 68
domestic consumption and corporate earnings expectations. The
introduction of windfall taxes on IPPs has stoked fears that such
SapuraCrest Petroleum 70
taxes could seep into other lucrative sectors.
Tanjong plc 72
Aseam Stock Universe 74 Externally, while the financial storm (credit crunch) in the western
world has eased significantly, equity markets could face a “triple
jeopardy” of stagflation, a weakening US dollar and the start of a
hawkish interest rate cycle. Albeit temporary, the convergence of
these headwinds suggests downside bias at least through parts of
3Q08. Meanwhile, inflation remains a problem, fuelled by the
“destructive” liquidity created by the US Federal Reserve’s easy
monetary policy. Expect anaemic domestic consumption trends in the
US to resume after a fleeting stimulus from tax rebates (April-July),
amid swelling loan delinquencies (subprime mortgages, credit card
loans), falling home prices and stubborn inflation.
We have trimmed our YE KLCI target to 1,220, based on a target 2009
PER of 13x, as key sectors get buffeted by various headwinds.
Nevertheless, there could be important buying opportunities during
3Q08, as the KLCI drifts down to an important fundamental support
level of 1,180 points (13x 1-year forward earnings). A potential fall in
crude oil prices could ease inflation expectations and redirect our
amply liquid domestic market back into equities. Notwithstanding
this, there are still sunny sectors like steel and O&G.
Seek shelter “indoors”, in high yielding sectors/companies like REITs
and consumer companies, although investors should also brave
roaring cyclical sectors like steel and O&G. The drop in consumption
of FMCG goods should be much more moderate than that of
consumer non-durables, allowing companies in our Buy list to
sustain attractive dividends. We have upgraded the construction
sector to Neutral and Gamuda as a Buy for its high dividend yields.
Also, the banking sector has been upgraded to Overweight from a
valuation perspective. Buy Tenaga on weakness for its newly
installed fuel cost pass-through pricing mechanism.
Top Picks
Stock Rec Price TP PER (x) Div Yld (%)
20-Jun (RM) 2007 2008 2009 2007 2008 2009
Large Caps
Digi.Com Buy 24.20 25.20 17.1 14.8 13.2 9.4 5.8 5.8
Gamuda Buy 2.19 2.90 16.5 12.2 9.9 10.9 11.4 8.9
Public Bank Buy 10.30 13.00 16.3 14.1 13.4 7.3 7.8 7.8
Tanjong Buy 14.20 17.80 10.5 10.7 9.0 6.3 6.3 6.3
UMW Hldgs Buy 6.35 7.15 14.6 12.4 12.9 4.7 5.3 5.3
Mid Caps
SapuraCrest Buy 1.39 1.85 20.7 12.1 10.4 1.4 1.4 1.4
Ann Joo Res Buy 3.78 5.25 10.1 5.2 5.1 3.5 4.2 4.2
Hap Seng Cons Buy 2.76 3.85 8.5 8.1 7.8 19.0 3.8 3.8
Guinness Buy 5.25 6.20 13.4 13.1 13.4 9.0 9.5 9.5
SunCity Buy 2.77 4.20 9.5 8.5 7.3 2.9 3.2 3.2
Source: Aseambankers
3Q08 Quarterly Outlook
Market Strategy
Overshadowed by a cloudy domestic outlook
Looming clouds of Investor sentiment will remain cautious for most of 3Q08 due to a sharp rise
spiraling inflation, in inflation (our economics team expects monthly inflation rates of 7.5-8.0%
consumption fall-off and YoY in 2H08), moderating domestic consumption, and lingering political
political uncertainties uncertainties. Although the Prime Minister has overcome a recent intention to
indirectly seek a motion of no confidence in Parliament, and signed a
handover pact with the Deputy Prime Minister, investors are wary that more
political changes may be brewing ahead of the UMNO branch (17 Jul - 24
Aug) and divisional meetings (9 Oct - 9 Nov) and party elections on 16-20
Dec. More critically, uncertainties stem from the much touted formation of a
new Federal Government by Pakatan Rakyat (People's Alliance), led by de-
facto Opposition leader, Anwar Ibrahim. The potential wrestling of power by
Malaysia Day on 16 Sep, could be signified by cross-overs of Barisan
Nasional (National Front) Members of Parliament. A detailed assessment on
politics is presented in our Economics section.
Fuel restructuring package
Measures Effective
Petrol and diesel subsidy at the pumps 5 Jun ’08
1. Prices raised by 78sen/litre to RM2.70/litre for petrol, and RM1.00/litre to RM2.58/litre for diesel
2. Cash rebates given on renewal of road tax:
- RM625 for car owners of ≤2,000cc, and jeeps and trucks of ≤2,500cc
- RM150 for motorcycle owners of ≤250cc
3. Reduction in road tax for those not qualified for cash rebates, by:
- RM200 for vehicle owners of >2,000cc
- RM50 for motorcycle owners of >250cc
Note that the cash rebates and road tax reduction are one-offs, and would be reviewed next year
Diesel subsidies for public transportation, vessel owners, and fishermen 5 Jun ’08
1. Standardisation of diesel prices to RM1.43/litre from RM1.20/litre for public transportation, RM1.00/litre for fishermen.
2. Part of the cost increases will be absorbed by the Government via:
- RM200 p.m. cash payment to each owner and Malaysian workers of vessels registered with the Fisheries
Department
- An incentive to vessel owners at 10sen/kg of fishes landed at registered centres in Malaysia
PETRONAS gas subsidy

1. PETRONAS’ gas subsidy to be lowered as follows: 1 Jul ’08
- to RM14.31/mmBtu from RM6.40/mmBtu (+124%) for the power (electricity) sector;
- to RM24.54/mmBtu from RM9.40/mmBtu (+161%) for industrial users of <2mmscfd;
- to RM32.56/mmBtu from RM11.32/mmBtu (+188%) for industrial users of >2mmscfd.
SMEs will be given special assistance via a lower gas tariff increase (amount not quantified).
2. Gradual phasing out of gas subsidies by PETRONAS:
- over 15 years for the power (electricity) sector;
- over 11 years for the industrial sector.
3. No changes to LPG prices (at RM1.75/litre) and natural gas for NGV vehicles (at 63.5sen/litre).
Electricity tariff 1 Jul ’08
1. Higher electricity tariff by:
- up to 37% for households and up to 26% for commercial and industrial users.
2. Exclusion / lower tariff increases:
- No increases for households with electricity usage of <200 kWh p.m. (estimated billing of RM43.60 p.m.),
affecting 59% of households in Peninsular Malaysia;
- Lower increases of up to 18% for commercial and industrial users of <200 kWh p.m. (mainly the retail, restaurant
operators, cottage industries).
3. The higher tariffs are applicable to Peninsular Malaysia, while a new structure for East Malaysia will be announced.
Independent Power Producers (IPPs) and Palm Oil Millers – Imposition of Windfall taxes 1 Jul ’08
1. Imposition of windfall tax on IPPs – 30% on ROAs (return on assets) above 9%
2. Imposition of windfall tax on palm oil millers:
- 7.5% on CPO prices >RM2,000/tonne in Sabah and Sarawak
- 15% on CPO prices >RM2,000/tonne in Peninsular Malaysia
In return, the levy system on cooking oil will be abolished. However, prices of cooking oil will remain unchanged.
Source: Prime Minister’s Department
Page 2 of 76 3Q08 QUARTERLY OUTLOOK

IPP windfall tax stirs up The surprise introduction of windfall taxes (announced on 4 Jun), which could
“subsidy” concerns, puts cost the IPPs a whopping RM600m (about 30% of aggregate bottomline,
market multiple under the although our preliminary estimates suggest a less ominous impact), has
weather raised concerns that similar taxes could be imposed on other lucrative
sectors, including other concession companies which previously secured
favourable Government-sanctioned terms. However, the imposition of a
“friendlier” windfall tax structure on plantation companies suggests
moderation in the Government’s approach. Still, the persistent rise in crude
oil prices and hence, pressure on the Government’s fiscal balance, will
continue to stoke fears that toll road and water concessionaires, and even
steel companies could be hit next. Such ongoing concerns will moderate the
PE multiples of these lucrative sectors.
Nevertheless, a “reprieve” Positively, we still do not expect excise duty hikes on tobacco and brewery
for consumer sin stocks companies to exceed our 15-20% base case in the upcoming 2009 Federal
still anticipated Budget (reading scheduled for 29 Aug), as illegal activities would pick up and
hurt Government tax receipts. Such moderate increases would allow
consumer companies to fully pass on costs to maintain gross margins. By the
same token, we do not expect gaming taxes to be raised for NFOs. Lastly,
we do not expect taxes on Genting’s casino operations to be increased due
to an already high tax regime which blunts its regional competitiveness.
Mediocre growth prospects in the shadow of inflation
Potentially lethargic The direct and knock-on impact of energy subsidy reductions and windfall
growth in 2009 as runaway taxes reduced our 2008-09 corporate earnings forecasts by around 2-3%.
inflation and windfall taxes However, our new 2008-09 corporate earnings growth forecasts of 11.4%
roll in… and 6.5% respectively (vs. 11.0% and 6.9% in our post-May reporting season
assessment) feature revised growth upgrades for the steel sector, and the
inclusion of TM International in the KLCI.
With the recent price hikes – 41% for petrol, 24% for average electricity tariffs
and 161-188% for industrial gas – our economics team has trimmed its 2008
GDP forecast to 5.3% from 5.7%. There is potential downside to our 2009
corporate earnings and GDP forecasts, which have not explicitly assumed
further energy subsidy cuts or interest rate hikes, which could moderate the
anticipated consumption recovery in 2H09.
Market: Earnings Breakdown by Sector
Banking Plantations
27% 18%
Others
12% Telcos
Gaming 10%
Utilities
5% Construction / Oil & Gas Transport 9%
Infra 6% 8%
5%
3Q08 QUARTERLY OUTLOOK Page 3 of 76

Market: Earnings Growth and Valuations (by sector)

|---- Earnings Growth (%) ----| |-------------- PER (x) --------------|
Sector 2007 2008 2009 2007 2008 2009
Automotive * 800.9 56.8 (15.1) 21.5 13.7 16.1
Banking 30.8 16.0 7.8 13.5 11.7 10.8
Building Materials 131.7 70.6 6.8 10.3 6.6 6.1
Construction / Infra 24.8 4.3 10.7 13.4 12.8 11.6
Consumer 3.1 4.8 2.7 17.5 15.7 15.3
Gaming 36.8 0.1 2.5 13.4 13.6 13.3
Media 11.7 17.0 17.3 25.3 21.6 18.4
Non Bank Financials # 122.6 (35.7) 13.3 16.9 26.3 23.2
Oil & Gas ## 13.6 16.5 14.6 19.5 16.7 14.6
Plantations @ 53.9 22.8 (2.5) 21.4 17.5 17.9
Property 15.6 11.6 18.5 11.4 10.2 8.6
Technology 23.9 (6.5) 15.4 8.8 9.4 8.2
Telecommunications 24.8 13.1 11.0 15.1 14.3 12.9
Transport 51.0 (10.1) 9.3 12.1 13.2 12.1
Utilities 20.4 (2.0) 7.3 11.3 11.5 10.7
Total 33.6 11.4 6.5 14.6 13.7 12.9
Note: Comprises 55 KLCI components within the Aseam universe.
* Principally due to much lower losses at Proton
# Comprising Bursa Malaysia
## Ex- Shell and Petronas Gas, O&G sector earnings growth would be 91.5% (’07), 61.0%
(’08) and 37.5% (’09)
@ Based on average CPO price of RM3,000/t (’08) and RM2,500/t (’09)
…hurting the earnings The most impacted sectors would be transport (including aviation), consumer
outlook of selected durables (property and autos) and toll road concessionaires (see detailed
manufacturers, consumer assessment below). We believe that the knock-on impact of decelerating
durables, toll road consumption and discretionary spending would have a significant impact on
concessionaires property developers, auto distributors and airline operators. There could also
be negative bias on banks’ 2009 earnings due to slower loans growth and
rising wages.
Steel sector the most Among manufacturers, the steel sub-sector appears to be least impacted as
resilient among it continues to benefit from rising international prices, amid growing demand
manufacturers and a regional supply tightness. Likewise, with the recent lifting of ceiling
prices, cement manufacturers are able to pass on higher operating costs. We
believe domestic selling prices have risen by 15% on average to RM250-
260/t (before rebates). This pricing level is deemed competitive, comparable
to total costs of regional imports.
Conversely, rubber glove makers are probably the most impacted among the
manufacturers within our coverage, although our preliminary earnings
downgrades are only a modest 2-3% as selling price adjustments could
largely offset higher utility (4% of turnover before the 161-188% increase in
gas utility tariffs) and feedstock (rubber) costs.

Sectors most adversely affected (directly and indirectly) by energy subsidy reductions, windfall taxes
Sectors Comments Implications on earnings, recommendations and
(2009 earnings target prices
downgrade)
Aviation Adverse double impact from lower discretionary MAS and AirAsia are the most impacted as we lower
(30-60% downgrade) spending, such as traveling, and rising operating earnings forecasts by about 30% p.a. for MAS and
costs. 60% p.a. for AirAsia. We have raised our average
In isolation, higher crude oil prices could have been crude oil price assumptions from USD100/bbl to
mostly mitigated (65-90%) by higher air fares. USD120/bbl for 2008-10, based on current futures
However, every USD1/bbl increase in crude oil prices indicating US$150/bbl by end-08.
prices will now impact earnings more than before as We maintain our Buy call on MAHB (MAHB MK; Buy;
we expect yields to decline more sharply, assuming TP: RM3.40), which should be minimally affected. Our
no decline in passenger traffic growth. Buy call and TP for MAS (MAS MK; Buy; TP: RM3.95)
are under review.
We have a Hold call on AirAsia (AIRA MK; Hold; TP:
RM0.88)
Property developers We anticipate a 10-20% downside to earnings The following types of developers are at higher risk:-
(10-20% downgrade) forecasts for most developers. (i) Mass market developers in non-strategic areas,
Unlike the past, we believe the middle income group (ii) Developers without strong balance sheets,
will turn cautious in discretionary spending on
(iii) Developers without strong branding,
properties.
(iv) Developers who engage lower grade contractors.
The sector is also hit by higher material and
transportation costs arising from higher diesel prices, Nonetheless, we maintain our longer term Buy calls on
impacting margins on sold units. Mah Sing (MSGB MK; Buy; TP: RM1.90), SunCity
(SCITY MK; Buy; TP: RM4.20), Sunrise (SUN MK;
In the event that property sales values fall over the Buy; TP: RM3.30), and YNH Property (YNH MK; Buy;
next 12-18 months, forward earnings, i.e. from 2009,
TP: RM2.80) as they are better positioned to pull
are at risk of contraction, leading to further
through this challenging time.
downgrades.
Auto Expect adverse impact on consumer spending on Higher impact on sales of non-national car producers
(10-20% downgrade) big-ticket items, resulting in a 5-10% drop in overall which concentrate on vehicles of over 2.0 litres, like
auto demand, including demand for sub-2.0 litre Tan Chong (Nissan) and UMW (Toyota). 2.0 litre and
cars. Maintaining 2008 TIV growth of 3-5%, but we above cars make up about 11% and 25% of their
now expect 2009’s TIV to contract by 5-10%, instead respective auto divisions’ revenues.
of growing by 3-5%. Margins are set to ease, Nevertheless, we maintain our Buy calls on UMW
although our previous forecasts have already Holdings (UMWH MK; Buy) and MBM Resources
assumed lower margins. (MBM MK; Buy), but with lower target prices of
Within our coverage, Tan Chong and Proton are RM7.15 and RM3.15 (previously RM8.30 and
most impacted. The impact on UMW is relatively RM4.00).
lower as autos contribute only about 59% to pretax
profit, with the balance coming from the equipment,
and oil & gas segments.
Power – IPPs Although IPPs enjoy a fuel cost pass-through We have left our earnings forecasts for Tanjong (TJN
(Under review - mechanism, sentiment on the sector has been hit by MK; Buy) unchanged for now and advocate a Buy on
marginal downgrade the imposition of a 30% windfall tax on excess the stock for its defensive earnings quality with an
expected within returns above 9% on ROA (defined as profit before RNAV-based target price of RM17.80. Based on our
Aseam’s coverage) interest and taxes over total assets). estimates, the net impact of the windfall tax on its
While the impact is small to Tanjong, other IPPs like bottom line is around 1.2%.
YTL Power and MMC (which are not under our Tanjong is clearly oversold, having hit a 52-week low,
coverage) could be the prime losers of the windfall down 23% YTD. Since the windfall tax announcement,
tax implementation. the stock has fallen nearly 11% and wiped off
RM686m in market capitalisation.
Power – Tenaga The average 24% tariff hike granted to Tenaga Our FY09 forecast for Tenaga (TNB MK; Hold; TP:
(No downgrade) effective 1 Jul ’08 is sufficient to cover PETRONAS’ RM9.60) is relatively unchanged as we had imputed a
123% gas price hike and increases in international contraction in electricity demand (approximately 2-
coal prices for FY08-09 (up >100% YoY). ppts) and higher coal cost assumptions (average
USD100/t).
Nonetheless, we have re-rated Tenaga with a higher
PE target of 13x CY09 EPS (previously 11x) and
upped our TP to RM9.60 (from RM8.00) as it has
obtained an “informal” fuel cost pass-through
mechanism, which will be reviewed every year on top
of its triennial base tariff review.

Sectors most adversely affected (directly and indirectly) by energy subsidy reductions, windfall taxes (continued)
Sectors Comments Implications on earnings, recommendations and
(2009 earnings target prices
downgrade)
Toll road Higher petrol and diesel pump prices will, to a large PLUS (PLUS MK; Hold; TP: RM2.65): Our previous
concessionaires extent, discourage long-distance travelling – fewer forecasts assumed 5% traffic growth at the NSE in
(13-16% downgrade) “balik kampung” trips and “Cuti-cuti Malaysia” 2008 and 0% growth in 2009. Our revised
packages. expectations are for traffic to contract by 3% in 2008
We expect traffic contraction in 2H08, and into early- and 0% growth in 2009. Traffic contraction is expected
2009. to be more pronounced in 2H08 (reduced “leisurely”
travels during Hari Raya and year-end school
holidays) where we project a contraction of 12% YoY
in 2H08, vs. a growth of e.5% YoY in 1H08.
Consequently, our earnings forecasts are lowered by
16% for FY08 and 13% for FY09, while our TP is also
lowered to RM2.65 from RM3.10 (unchanged 10%
discount to DCF). Hold call maintained.
Litrak (LTK MK; Buy; TP: RM4.00): Our previous
forecasts assumed 3% p.a. traffic growth at the LDP in
FY09-10 (FYE Mar). Our revised expectations are for
traffic to contract by 2% in FY09, and 0% growth in
FY10. Our earnings forecasts are therefore cut by
13% for FY09 and 16% for FY10, while our TP is
lowered to RM4.00 from RM4.40 (20% discount to
DCF, revised from a 15% discount to impute higher
risks relating to intra-urban toll road concessions).
Maintain Buy.
Consumer FMCGs’ sales volumes should remain resilient, Expect about a 7% reduction to retailer AEON Co
(1-7% downgrade) although constrained consumer spending and dearer (M)’s 2008-09 earnings forecasts - the most impacted
goods and services will affect sales volumes for non- consumer company in our coverage.
essential items. In general, we expect more Downgrades for F&B players (Nestle, F&N Holdings,
consumer companies to pass on higher raw material breweries) are more modest (<5% earnings reduction)
costs, albeit at a modest cost to margins.
Maintain Buy on Aeon Co (M) but with a lower TP of
We are leaving tobacco companies’ earnings RM5.15 (previously TP: RM5.60).
unchanged for now as we do not expect excise duty Maintain Buy on QL Resources (QLG MK; Buy; TP:
hikes on tobacco companies to exceed our 15-20%
RM3.50) and F&N Holdings (FNH MK; Buy; TP:
base case in the upcoming Budget 2009 proposal.
RM10.00).
Construction Higher diesel costs will result in higher transportation We have left our earnings forecasts for construction
(No downgrade) costs for construction materials, reducing estimated stocks unchanged, as we had already imputed
project margins by <1%. This could cripple earnings conservative margin assumptions in view of rising
considering that construction margins are also being material and other construction costs.
hit by higher construction material prices. Maintain Buy call on Gamuda (GAM MK; Buy; TP:
Badly hit would be the contractors with a large RM2.90), which was upgraded from Hold on 2 Jun ’08
proportion of projects secured from the private after its share price fell sharply on concerns over its
sector. The consolation here is that Government property project in Vietnam.
contracts are subject to renegotiation for higher Our other Buy calls are WCT (WCT MK; Buy; TP:
construction costs. RM4.15), Sunway Holdings (SGW MK; Buy; TP:
Among the local contractors, WCT is “relatively RM2.00) and Hock Seng Lee (HSL MK; Buy; TP:
insulated” as 71% of its construction order book RM1.00).
relates to overseas projects. Hold maintained on IJM Corporation (IJM MK; Hold:
TP: RM5.90), which was upgraded from Fully Valued
on 28 May 2008.
Our call and target prices on Putrajaya Perdana
(PUPB MK) and Loh & Loh (LLHL MK) are both
Withheld.
Banking Expect slower consumer loans growth particularly for We are leaving our earnings forecasts unchanged as
(No downgrade) mortgages and auto purchases, but inflationary a 1-ppt shortfall in loans growth would negatively
pressure may lead to higher personnel and credit impact our banking earnings forecasts by a small 1-
card loans. 3%, while we have already imputed an 8% rise in
Asset quality, particularly consumer loans, could be wage bill in our 2009 forecasts for the bigger banks.
at risk - leading to rising NPLs. Consumer loans Our top buy in banking remains Public Bank (PBK MK;
accounted for about 55% of total banking loans. Buy; TP: RM13.00), while our other Buys are AMMB
Also, expect inflationary pressure to impact wages. (AMM MK; Buy; TP: RM4.25), and Bumiputra-
Commerce Holdings (BCHB MK; Buy; TP: RM10.35).
Our call and target prices on RHB Capital (RHBC MK)
and EON Capital (EON MK) are both Withheld.

Too early to gauge, but Domestic trends remained fairly resilient 2 weeks into the fuel subsidy
early signs of a mild reductions, due to seasonalities (the announcement coincided with the tail
consumption slowdown end of school holidays) and the delayed impact of knock-on effects. For
are already showing example, we note that freight forwarders have just announced 25-40% fee
hikes on 21 Jun. Nevertheless, some sectors have started to feel the impact,
most prominently property developers (see table below) and tolled
expressways like the Penang Bridge, where traffic has dropped by some
4,000 vehicles each way per day (6%) to 63,000 vehicles now.
Fuel Price Hikes: Operational Updates for Selected Sectors

Sector Update
Auto Informal surveys indicate that car demand has generally eased, although bookings for smaller cars remained
healthy. A rising concern is autoparts suppliers’ requests for price hikes. An extended period of sluggish auto
demand could force auto producers to absorb higher component costs as well as raise A&P expenses.
Positively, motorcycle sales are reportedly up by as much as 25%.
Consumer Most companies’ sales were steady, e.g. KFC’s same store sales (SSS) continue to grow in the mid-teens,
although consumption was probably supported by the tail end of school holidays. Retailers (including non-listed
retailers) reported that June SSS were very strong, up by >10%.
On the cost side, raw material suppliers did not raise prices significantly, although 5-10% price hikes were
reported by smaller companies. Logistics costs are up 5-20%, but logistic providers are finding it hard to raise
prices as retailers are resisting. More price increases are expected later in the year. Most companies think that
it is too early to say if prospects will be significantly affected, although all expect some slowdown.
Property Many property developers are deferring or toning down new launches. Some building material suppliers have
reportedly raised prices immediately after the fuel subsidy reduction.
Toll concessionaires Traffic flow at the Penang Bridge has dropped by over 6%, while traffic at the Lebuh Raya Damansara-
Puchong has eased by 3%.
th
We estimate that traffic flow at PLUS’ North-South Expressway for the week of 9-15 Jun was still up a few
percentage points YoY, but growth was much slower than the >10% YoY increase in May. However, as the
North-South Expressway is very much an inter-urban connection, the negative impact on traffic should be felt
more prominently during the school holidays and major festive seasons, when “leisure” travel could ease.
Less sunny outlook The 1Q08 results season already hinted at slowing earnings momentum.
already emerged in the Although the results were generally in line with our expectations, the
1Q08 results season reporting season was disappointing in that it featured a balanced breadth of
companies beating (19%) and missing our expectations (18%), reversing the
past two quarters’ positive breadth (see chart below). Many bellwethers also
disappointed, including TM, Tenaga and BCHB. Other large cap companies
which disappointed were Bursa and MPI.
Aseam Universe: Quarterly Results Tally
%
Above In Line Below
80
70
60
50
40
30
20
10
0
Nov-06 Feb-07 May-07 Aug-07 Feb-08 May-08

March 2008 Quarter Results: Prominent Underperformers

Stock YTD annualised NI Details
BCHB 18% below Aseam Affected by the weaker capital markets.
MAS 50% below Aseam Impacted by runaway crude oil prices.
Maybank 11% below Consensus Affected by losses on revaluation of securities and/or derivatives.
MPI 16% below Aseam Ringgit’s sharp appreciation against the US dollar significantly reduced revenues.
Tenaga 10% below Aseam Impacted by sharp rise in coal costs.
TM 20% below Aseam Declining fixed line business.
Politics and inflation may side-track development growth
Mid-term review of the 9MP The Parliament commenced the mid-term review of the Ninth Malaysia Plan,
2006-10 (9MP) on 26 Jun. Until Mar ’08, gross development spending by the
Government totalled RM81.6b, representing 40.8% of the original RM200b
9MP allocation. Due to soaring steel, fuel and other building material prices,
priorities have been re-balanced, with several mega infrastructure projects
being deferred, and social infrastructure projects hogging the limelight of
development for the remaining 2½ years. These priorities are within
expectations, as the Government faces mounting financial constraints and
social pressure amid sky-rocketing food and crude oil prices, which are
threatening the livelihoods of a large number of Malaysians.
Government to fund mega The mid-term review takes into consideration original plans for several mega
projects infrastructure projects which were intended to be financed via private finance
initiatives (PFI), but are now no longer viable due to soaring construction
costs. Among these is the double-tracking rail project (northern) which has
since been awarded as a straight, Government funded project. The mid-term
review also considered a revision to the Penang Second Bridge project,
which will now be Government-funded vs. build-operate-and-transfer when
first mooted.
9MP: Development Spending To-Date
Gross devt exp (quarterly) (LHS)
(RM b) (%)
% of 9MP RM200b allocation (cumulative quarters) (RHS)
25 50%
45%
20 40%
35%
15 30%
25%
10 20%
15%
5 10%
5%
0 0%
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
Source: Malaysian Treasury, Bank Negara Malaysia

Frenzied rally in steel and Soaring steel and fuel prices have been the major dampener to the country’s
fuel prices a spanner in development plans. Global steel bar prices have shot up 140% since early-
the works ’07 to about USD1,200/t at the time of writing, while demand-supply
dynamics point to another 20% upside to prices by end-’08. Rising global
fuel prices also raised costs, affecting cement, aggregates, bitumen and
transportation. Building material cost indices compiled by the authorities
show that the domestic selling prices of steel reinforcement bars rose 66%
over Jan ’07-Mar ’08, while aggregates were up 19%. In May-Jun ’08, the
long steel and cement sectors were liberalised (ceiling prices removed)
giving rise to even higher prices, while aggregate prices will undergo a
second round of increases for 2008, by an average 19% effective Jul ’08.
Building Material Cost Indices: YoY comparison

(YoY) Cement
60% Aggregates
Sand
50% Steel reinforcement
Steel & metal sec
40%
30%
20%
10%
0%
Nov
Nov
Jan 2006
Jul 2006
Jan 2007
Jul 2007
Jan 2008
Mar
Mar
Mar
Sep
Sept
May
May
(10%)
Source: Construction Industry Development Board
Quarry Aggregates: Price Revisions (minimum ex-quarry selling price)

Price wef (RM/tonne) % inc
1 Jul ’08 1 Jan ’08 1 Mar’ 07
Jul ’08 vs. Jul ’08 vs.
Jan ’08 Mar ’07
Area A (which includes Sg Buloh, Gombak / Ampang and Rawang)
¾” aggregates, metals 22.00 18.00 15.00 +22% +47%
Crusher run 15.00 12.50 9.50 +20% +58%
Quarry dust 17.50 17.50 12.00 - +46%
Area B (which includes Cheras / Hulu Langat, and Kajang / Semenyih)

¾” aggregates, metals 22.00 19.00 16.00 +16% +37%
Crusher run 15.00 13.00 10.00 +15% +50%
Quarry dust 17.50 17.50 13.00 - +35%
Source: Various
9MP allocation up 15%, As a result of the highly inflationary environment in construction and the
several major projects broader economy, and the re-balancing of government’s priorities, the 9MP
deferred mid-term review has proposed to raise the Government’s development
spending allocation by 15% or RM30b to RM230b. Based on RM81.6b spent
since early-’06 to 1Q08, this implies a balance of RM148.4b to be spent from
2Q08 to end-’10, or RM54b p.a. (vs. an average of RM38b in 2006-07). The
tables overleaf list where the extra RM30b goes to, and some of the major
infrastructure projects retained in 9MP mid-term review, and some projects
which are “missing” (presumably deferred).

9MP Mid-Term Review: Extra RM30b Development Spending Allocation

Projects/Sectors/Areas RMb
• Regional development corridors 10.0
• Double-Tracking Railway Projects i.e. Ipoh-Padang Besar, Seremban-Gemas 9.9
• Strategic investment fund 3.0
• Additional allocation for Sabah & Sarawak 2.0
• Additional rural infrastructure 2.0
• Public transportation 1.6
• Low and medium cost housing projects 1.0
• High-impact education fund 0.5
Source: 9MP Mid-Term Review
9MP Mid-Term Review: Major Infrastructure Projects

Remaining, listed in the 9MP Mid-Term Missing from the 9MP Mid-Term Review
Review document document (but in original 9MP)
- Double tracking rail – northern (Ipoh- - Pahang-Selangor raw water transfer and
Padang Besar), part of southern Langat 2 water treatment plant *
(Seremban-Gemas)
- West Coast Expressway (Banting-
- Klang Valley light rail transit (LRT) Taiping)
extension – by a total of 32 km (Kelana
Jaya-Putra Heights [16km] and Sri
- Trans-Eastern Kedah Hinterland Highway
Petaling-Putra Heights [16km]) - Penang Outer Ring Road #
- Integrated transport terminal at Bandar - Penang Monorail #
Tasik Selatan
- Penang Second Bridge *
- East Coast Expressway Phase 2
- Double tracking rail – part of southern
(Kuantan-Kuala Terengganu)
(Gemas-Johor Bahru)
- Senai-Desaru Highway
- KLIA expansion (from 25 mmpa to 45
- Kemuning-Shah Alam Highway mmpa capacity)
- Roads to link resettlement areas with - Bakun Hydroelectric Project
rural industrial areas and estates,
particularly in Sabah and Sarawak
- Upgrading of Kuching, Kota Kinabalu,
Kuala Terengganu and Labuan airports,
and LCC terminal at KLIA
- 5 corridors of development – Iskandar,
ECER, NCER, Sabah, SCORE
Note:
* It is premature to assume that the Pahang-Selangor raw water transfer and Penang Second
Bridge projects are OFF as financing could take a different form (thus, not reflected in the
Government’s development budget) and as construction works for the Penang Second Bridge
have also started.
# Two major projects deferred are the Penang Outer Ring Road and Penang Monorail.
Source: 9MP Mid-Term Review, 9MP
Our concerns: As the Federal Government grapples with the risk of an Opposition-led
Development growth may be pledge to take control by Malaysia Day (16 Sep), we are concerned that its
side-tracked by politics and focus on development may be side-tracked. The knock-on impact on the
inflation domestic economy is immense, which needs not just fiscal stimulus, but also
timely disbursement of funds to stimulate on-the-ground activities amid
external economic uncertainties. Also, the continued escalation of building
material prices, particularly steel, is threatening the pace of work of existing
construction projects. Should long steel prices reach RM5,000/t by end-‘08
(as anticipated by some), contractors could stop work, which would impede
development growth.

We are still Neutral on We are still Neutral on the construction sector – we upgraded the sector from
construction, but are more Underperform on 3 Jun after the steep fall in IJM Corp’s and Gamuda’s share
positive for contractors prices in 2Q08. Key issues facing the sector remain rising construction
with exposure in East costs, and most recently, the loss of skilled manpower to the construction
Malaysia boom in the Middle East and even Singapore. Nonetheless, we reiterate our
Buys on selected stocks, including those with a larger exposure to East
Malaysia which has a larger Government’s budget under the 9MP mid-term
review – by RM1b each to RM16.7b for Sabah and RM14.4b for Sarawak.
We reiterate our Buy call on Hock Seng Lee and are closely monitoring UBG,
which will be the “new boy” of Sarawak construction – a new Middle-Eastern
shareholder, together with the Chief Minister’s family holdings, and the
injection of Loh & Loh and Putrajaya Perdana as operating units, makes a
strong combination out of UBG.
A triple wave cloud formation in US equity market ?

A potential triple jeopardy The start of a hawkish interest rate cycle and potential USD weakening could
compound the present stagflation situation in the US, thus highlighting the
downside risk to equities in 3Q08.
Hawkish interest rate cycle The futures market is now betting that the US Federal Reserve (Fed) could
soon raise interest rates as it focuses on combating inflation. While we
believe that the Fed is unlikely to raise rates soon, corporate bond yields
have reacted, moving up by about 25-50 bps in June. Rising rates could
dampen the stock market’s performance.
Potential weakness in the Although the greenback has appreciated about 3.3% from 2008’s low due to
greenback the easing credit crunch and the Fed’s more hawkish signal, a pall of
weakness could manifest again. Potentially, the Fed’s US treasury bill
reserve could be drawn down again to provide liquidity to investment banks.
The Fed’s T-bill reserve has plunged from USD629b in Mar ’08 to USD491b
in May ’08, after bailing out Bear Stearns. Even though the credit crunch has
eased, we note that US banks may still need to recapitalise amid rising
delinquencies in the mortgage market.
US: Treasury Securities vs. US Dollar Index
USD bn
100 850
95
750
90
85 650
80
550
75
70 450
Mar-03
Jul-03
Nov-03
Mar-04
Jul-04
Nov-04
Mar-05
Jul-05
Nov-05
Mar-06
Jul-06
Nov-06
Mar-07
Jul-07
Nov-07
Mar-08
Reserve Funds Treasury Securities Held Outright

USD Trade Weighted Index: Nominal: Major Currencies
Source: CEIC, Aseambankers

End of a relief rally, amid a The 10-week long relief rally in Mar-May ‘08, which saw the S&P500 rising
second wind for the 5.2% from 1Q08’s low, has been interrupted by a list of sundry concerns
commodity (energy) ranging from the surprise 0.5 ppt rise in the US unemployment rate to 5.5%,
bubble… to rising inflation expectations. On the inflation front, crude oil prices have
again led the charge, rising by over 44% to peak at USD138/bbl on 6 Jun
(and over 30% quarter-to-date), pulling up vegetable oil prices. Should the
parabolic rise in crude oil prices persist, it could reignite broader speculation
on commodities, which is symptomatic of “destructive” excess liquidity and
too few investment alternatives.
CBRE vs. S&P 500, KLCI

S&P 500 (LHS)
1700 KLCI (LHS) 320
Commodity price index (RHS)
1600
300
1500
1400 280
1300
260
1200
1100 240
1000
220
900
800 200
Nov-06
Nov-07
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Mar-06
May-06
Sep-06
Mar-07
May-07
Sep-07
Mar-08
May-08
Source: Bloomberg
…which could extend the Should such a situation persist, global inflation would continue to remain
period of global inflation significantly above long term trends for an extended period even if global
commodity prices start to ebb, as higher commodity costs gradually emerge
in retail prices. As the chart below aptly shows, core inflation in the US still
rose significantly years after a major spike in commodity prices in 1973.
US: Headline and Core Inflation
100 16
80
12
60
40 8
20
4
0
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
(20) 0
CRB Comm Futures Price Index (YoY)
Headline CPI (YoY) (RHS)
Core CPI
Source: CEIC, Aseambankers

US averting a technical The persistent rise in crude oil prices has sparked fears of a repeat of the
recession... 1970’s stagflation scenario, as fuel prices have surged to account for a
projected 4.6% of consumer expenditure. The ratio was 4.1% in Apr ’08
based on an average crude oil price of USD103/bbl vs. 3.7% in 2007 and
<3.0% pre-2004. Nevertheless, we maintain our view for a mild form of
stagflation in the US. Inflationary pressures have been more gradual – the
CRB Index has risen by only 120% over a longer six year period (Jan ’02-
Feb ’08) compared to a 137% rise in just over 2½ years (Nov ’71-Jul ’74)
during the 1970’s stagflation period. Besides this, US consumption has been
surprisingly resilient even before fiscal stimulus from tax rebates kicked in.
US: Energy Goods as a % of Total Personal Consumption Expenditure
7.0
Aseam
6.0 estimates
5.0
4.0
3.0
2.0
1.0
0.0
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Gasoline, Fuel Oil, and Other Energy Good as a % of Total PCE
… but with muddled Nevertheless, US domestic consumption trends will likely remain anaemic
economic recovery with a continuing decline in home prices. Based on the latest data for the
prospects and still gloomy month of April, the median existing home price has fallen 12% from the peak
“old economy” problem in Jul ’06, rendering 18.4m (14.2%) of US homeowners with negative home
equity values.
US: Median Home Equity Prices and Subprime Mortgage NPLs

Subprime Loan Delinquencies As % of Adjustable Loan Rates (LHS)
Median Existing Home Price: USD (RHS)
21.0 240,000
220,000
17.0
200,000
13.0
180,000
9.0
160,000
5.0 140,000
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Source: CEIC, Bloomberg, Aseambankers

Credit crunch has abated, While the subprime mortgage-related credit crunch in the western world has
but banks still need to abated with effective liquidity injections primarily from the Fed, banks still
recapitalise need to recapitalize, having raised only USD300b of fresh capital against
total estimated losses of USD393b, based on the latest data provided by
Bloomberg. In addition, we reckon that banks’ losses will continue to soar
towards the International Monetary Fund’s assessment of USD1tr.
US: Losses by Major Financial Institutions

Firm Write Down and Capital Capital Raised (b)
Losses (USD b)
Citigroup Inc 42.9 44.1
UBS AG 38.2 28.2
Merrill Lynch & Co 37.1 17.9
HSBC Holdings Plc 19.5 3.5
IKB Deutsche 16.0 13.2
Royal Bank of Scotland 15.4 24.3
Bank of America 15.1 20.7
Morgan Stanley 14.4 5.6
JP Morgan Chase 9.8 7.8
Credit Suisse Group 9.6 1.5
Washington Mutual 9.1 12.1
Credit Agricole 8.3 9.2
Lehman Brothers 8.2 13.9
Deutsche Bank AG 7.6 3.2
HBOS Plc 7.1 7.9
Source: Bloomberg
Subprime-related Losses and Capital Raised (USDb)

Total 2Q08 1Q08 4Q07 3Q07 Prior
Loss Capital Loss Capital Loss Capital Loss Capital Loss Capital Loss Capital
Worldwide 393.3 299.9 9.6 153.2 171.9 89.4 166.1 46.3 42.2 5.4 3.5 5.6
Americas 171.9 156.0 9.1 65.4 65.9 60 69.9 29.8 26.3 0 0.7 0.8
Europe 200.3 127.7 0 74.9 96.5 25.9 85.4 16.6 15.6 5.4 2.8 4.9
Asia 20.9 16.3 0.5 12.9 9.4 3.4 10.7 0 0.3 0 0 0
Source: Bloomberg (as at 20th June)
Risk aversion has eased… Credit spreads have eased for both sovereign bonds (as indicated by the JP
Morgan Emerging Market Bond Index) and US corporate bonds. However,
risk aversion remains high and the US corporate credit spread still matches
the levels of the 2001 recession.
JP Morgan Emerging Bond Index vs. KLCI US Bond Spread

BB Yield Spread (LHS)
JPEIPLSP Index KLCI (RHS) BBB Yield Spread (LHS)
370 1600 600
320 1500 500

1400 400
270
1300 300
220
1200 200
170 1100 100
120 1000 -
Jun-07
Dec-06
Feb-07
Apr-07
Aug-07
Oct-07
Dec-07
Feb-08
Apr-08
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Source: Bloomberg Source: Bloomberg, Aseambankers

..but prime brokers may The latest available data shows that our sample of prime brokers’ asset-to-
still be too highly equity leverage remains high at 30.5x (see below) even after many cash
leveraged raising exercises. These prime brokers’ aggregate assets totalled USD3.7tr.
This highlights the risk that prime brokers may be forced to de-leverage
further, which points to potential softness in stock markets, as rising
mortgage delinquencies (primarily subprime and Alt-A) potentially trigger
more provisions/write-offs.
Asset-to-equity Leverage of Selected Prime Brokers
x Financial leverage
33
31
29
27
25
23
21
19
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Aggregate asset leverage of a sample of banks with prime brokerage operations, namely Bear
Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley and Skandinaviska Enskilda Banken
(based on latest available data).
Source: Bloomberg, Aseambankers
Market strategy: Stay indoors
Trimming YE KLCI target Our new YE KLCI target implies a target 2009 PER of 13x. The KLCI has
to 1,220 underperformed the regional bourses since the Mar ’08 General Election,
and is likely to underperform again during 3Q08 as inflation catches up.
Meanwhile, the KLCI’s PE rating relative to the regional bourses is fair.
Asia: Regional Indices YTD Performance
%
-
INDEX
INDEX
INDEX
INDEX
INDEX
INDEX
INDEX
PCOMP
SENSEX
KOSPI
TWSE
INDEX
KLCI
(5)
INDEX
SET
HSI
STI
JCI
(10)
(15)
(20)
(25)
(30)
(35) in USD in local currency
(40)

Asia: Selected Regional Market Valuations

|-------------- PE (x) --------------| |------------ Growth (%) ------------|
2007 2008 2009 2007 2008 2009
Hong Kong 16.1 15.0 12.8 26.1 7.4 16.7
Korea 13.4 11.5 10.0 12.0 14.1 15.0
Indonesia 16.7 12.8 10.8 42.8 27.6 16.7
Malaysia - Aseam 14.6 13.7 12.9 33.6 11.4 6.5
Philippines 11.9 10.8 9.3 10.2 5.8 16.2
Singapore 14.0 14.3 12.7 16.7 (1.8) 12.4
Thailand 17.7 10.5 9.7 (21.7) * 67.4 8.7
Source: Regional markets – Thompson Financial Watch, KLCI – Aseambankers
*Due to a sharp rise bank provisions
Stable domestic interest Expectations of rising inflation and the onset of a hawkish interest rate cycle
rates for now in the US should not affect Malaysia’s interest rate policy from now through
2008. Historically, the KLCI has been negatively correlated to interest rates,
especially during the start of interest rate up-cycles.
Potential bottom fishing Downside for most Malaysian stocks appears limited, having fallen
opportunities below significantly from their respective year highs. However, since ongoing
fundamental support of domestic concerns suggest that there is only little upside to the KLCI’s post-
1,180 Asian Financial Crisis fundamental support level of around 13x 1-year
forward earnings (i.e. mid-2009 earnings) or 1,180 points, we advocate that
investors get more aggressive only when the KLCI dips below the support
level. At this support level, the market not only provides a regionally attractive
gross dividend yield of 5%, it also promises good dividend growth as the
country’s adoption of a single-tiered tax system encourages cash-rich
companies to raise dividend payouts.
Market: KLCI vs. 1-yr forward PE
KLCI (LHS) 1-Yr PER (RHS) (x)
1600 22
1400 20
1200 18
1000 16
800 14
600 12
400 10
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
External catalysts could be Malaysia could be an eventual beneficiary of a potential late-3Q rally, as
regional monetary easing, investors could position themselves for the following: (i) tail-end of the
year-end optimism housing market contraction and US subprime problems; and (ii) trend
reversals of monetary tightening in China and India, as their respective
economies could cool off significantly by then. Meanwhile, crude oil prices
could ease significantly if the US confirms the onset of a hawkish interest
cycle, thereby easing inflation expectations. Such comforts could redirect our
amply liquid domestic market back into equities. We reckon that local funds’
cash allocations have crept up above 40%. By year-end, foreign ownership in
the Malaysian bourse could also improve slightly after falling by an estimated
3-4 ppt to 24-25% in 2Q08 for Aseam’s stock coverage, as global equity
allocation for Asia could potentially improve.

Still seeking shelter in high High yielding defensive stocks should continue to outperform the KLCI.
dividend yielding, non- Present market conditions continue to highly favour large caps which feature
cyclical large cap stocks cash rich businesses, progressive and high dividend policies and ideally,
stocks backed by share buybacks. Valuations of small-mid caps will continue
to be depressed at single-digit prospective PE multiples, even though the
FBM Small Caps index has fallen 22.6% from its peak (-19.9% YTD).
Price Performance: Large vs. Mid-Small Caps
Mid-Small Cap Index
110
Large Cap Index
105
100
95
90
85
80
1-Jan-08
15-Jan-08
29-Jan-08
3-Jun-08
17-Jun-08
12-Feb-08
26-Feb-08
11-Mar-08
25-Mar-08
8-Apr-08
22-Apr-08
6-May-08
20-May-08
Source: Bloomberg, Aseambankers. *Purely based on price performance, exclude dividends
High yielding stocks As an asset class, high yielding stocks should significantly outperform during
should outperform an uncertain market. Companies in our Buy list in this category would include
Guinness Anchor, which could surprise by declaring a special dividend, TH
Plantations, Bintulu Port, UMW Holdings and Gamuda.
Dividends: High yielding stocks in Aseambankers’ coverage
Company Price Call TP Div Yield (%) YTD price
20-Jun (RM) 2007 2008 2009 perf (%)
JTI 4.00 Hold 4.45 11.3 14.5 15.0 8.7
Gamuda 2.19 Buy 2.90 10.9 11.4 8.9 (54.6)
Atrium REIT 0.82 Buy 1.28 10.6 10.4 10.5 (18.0)
Carlsberg 3.98 Hold 4.40 9.9 9.9 9.9 (6.1)
Guinness 5.25 Buy 6.20 9.0 9.5 9.5 (5.4)
TH Plantations 3.48 Buy 4.00 6.1 8.9 7.8 3.0
Bintulu Port 6.30 Buy 6.70 8.7 8.7 8.7 3.3
Amway (M) 6.90 Hold 7.00 8.2 8.7 8.7 9.5
Axis REIT 1.72 Buy 2.40 7.9 8.4 8.9 (7.0)
BAT (M) 44.00 Hold 44.75 7.5 7.9 8.1 6.7
Public Bank 10.30 Buy 13.00 7.3 7.8 8.3 (6.4)
Berjaya Toto 4.84 Buy 5.00 12.4 7.6 7.9 (4.2)
Star 3.50 Buy 3.90 6.3 7.1 7.4 1.7
YNH 1.92 Buy 2.80 5.7 7.1 8.4 (28.9)
Sunrise 2.10 Buy 3.30 5.4 6.9 9.2 (34.4)
Quill Capita 1.09 Buy 1.74 5.9 6.6 7.5 (15.5)
Tanjong 14.20 Buy 17.80 6.3 6.3 6.3 (23.2)
MAHB 2.95 Buy 3.40 6.0 6.3 6.8 (2.3)
KFC 6.25 Buy 7.60 5.8 6.2 7.2 (2.3)
Telekom 3.26 Hold 3.25 - 6.0 6.4 4.0

Overweight defensive Still Overweight consumer (FMCG) stocks and REITs for their resilient
subsectors – consumer earnings streams and high dividend yields. Most consumer companies
and REITs, although should be able to maintain respectable dividend yields (>7%) above 2007
cyclical sectors like steel levels, despite expectations of a consumption slowdown. Similarly, REITs
and O&G still appeal should continue to deliver high dividend yields as concerns of rising interest
costs are too premature. Among the cyclical sectors, we like steel and O&G
for their strong earnings momentum. We have also upgraded construction to
Neutral following the selldown in Gamuda and IJM Corp shares in 2Q. Also,
banking has been upgraded to Overweight from a valuation perspective.
Warming up to gaming We are also warming up to the gaming sector, particularly to Resorts World,
after the steep YTD fall in Genting’s (31.6%) and Resorts’ (27.6%) share
prices. We will reassess the sector for a potential upgrade if the Budget 2009
reading in August confirms our view that duties in the gaming sector would
not be raised. However, we note that NFOs have not received 2008’s special
draw allocations, which could penalise sector earnings by 2-3%.
Sector calls
Overweight Neutral Underweight
Consumer Gaming Plantation
REITs Media Technology
Building material (steel) Construction Transport
Banking Telco
Oil & Gas Auto
Property
Malaysia: Sectorial performances, 2007 and YTD
100% 2007 YTD 2008
80%
60%
40%
20%
0%
-20%
-40%
Services
Industrial
KLCI
Technology
Consumer
Finance
Construction
Steel
Plantations
Property
Source: Bloomberg
Plantation sector The risk-reward ratio of the plantation sector remains unfavourable, given
valuations still lofty that the sector’s market cap has eased only 0.9% YTD (as at 20 Jun), thus
keeping most of the stunning 189% gains made from end-2005 to end-2007.
While CPO prices have borrowed strength from crude oil prices and
remained firm at the RM3,600/t level, the sector is unlikely to rise further, due
to concerns of a potentially steep correction in crude oil prices.
Notwithstanding this, CPO prices may weaken in the coming months, as we
note that they are starting to react to supply-demand fundamentals and
decouple from soyoil prices. Malaysia’s palm oil inventory level in May ’08
almost matched the historic high of 1.93m tonnes reached in Feb ’08, and
may breach 2m tonnes in Jun ‘08 as we move towards the peak production
season in August-September.

Plantations: CPO, Soyoil and Rapeseed Oil Prices

USD/t Sweet Crude PalmOil 1mth
1,800 Rapeseed oil Soyoil 1mth
1,700
1,600
1,500
1,400
1,300
1,200
1,100
1,000
900
800
700
600
500
400
300
Nov-06
Nov-07
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Mar-06
May-06
Sep-06
Mar-07
May-07
Sep-07
Mar-08
May-08
Plantations: Malaysian CPO Production and Inventory Levels

'000
RM/t
tonnes Production Stock CPO price (RHS)
2,500 4,000
3,500
2,000
3,000
1,500 2,500
2,000
1,000 1,500
1,000
500
500
- -
May-02
May-03
May-04
May-05
May-06
May-07
May-08
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Source: MPOB, Aseambankers
Themes and Issues for 3Q08
Thematically, steel and Apart from the focus on inflation and politics, other issues which are
O&G sectors should expected to gain attention in 3Q08 include the 9MP mid-term review which
appeal affects the construction sector. At the positive end, the steel sector’s sunny
profit growth is an interesting investment theme. Our steel sector report on
page 46 discusses the details of this investment theme. Meanwhile,
exploration and production (E&P) investments in oil & gas are surging ahead,
underpinned by favourable crude oil prices. The sector is also not affected
by the global credit crunch.

Stock picks
Top shelters remain Public Top “shelters” with reasonable trading liquidity and reasonably attractive
Bank, Tanjong, UMW and dividend yields are Public Bank, Tanjong plc, UMW and Gamuda. Tanjong
Gamuda has fallen 11% since the announcement of windfall taxes on IPPs (-23%
YTD), even though this would only modestly impact its bottomline. Gamuda’s
26% share price fall since 29 May (on worries over its property development
project in Vietnam) has significantly enhanced dividend yields to 11.4% (on
FY09 DPS, as at 20 Jun) as management retains a projected 25sen gross
DPS for FY09, backed by cash from capital repayment by associate, Litrak
over the next few months. Also, interest to the stock should return as
concerns over the financial prospects in Vietnam abate, and fuel and steel
prices peak. Digi.com retains its status as a defensive Buy, although the
telco industry will face more challenging times in quarters to come – tougher
competition of new entrant U Mobile, and the eventual adoption of Number
Portability.
Opportunities to We advocate buying on anticipated weakness for selected large cap
accumulate steadfast companies in our Hold list such as Tenaga, which now enjoys a more benign
companies on weakness regulatory environment with allowance for an annual cost pass-through, and
Resorts World, for its on-going share buyback support and large cash pile.
Among banks, we are positive on BCHB’s regional expansion strategy since
early this year – the merger of Bank Niaga with Lippo Bank to create
Indonesia’s fifth largest bank, and acquisitions of a 19.99% equity stake in
Bank of Yingkou, China, and an initial 42.1% stake in BankThai Plc, Thailand
– are positive developments in growing BCHB’s universal banking franchise.
Some mid-caps with For mid cap exposure, we like Ann Joo, whose 2Q08 results should trounce
strong growth potential consensus forecasts yet again, and SapuraCrest for its brisk growth and
still appeal having addressed several key legacy issues, namely its loss-making IPF
divisoin, the delayed delivery of Sapura 3000 and management’s credibility.
Top Picks
Stock Rec Price TP P/E (x) Div Yld (%)
20-Jun (RM) 2007 2008 2009 2007 2008 2009
Large Caps
Digi.Com Buy 24.20 25.20 17.1 14.8 13.2 9.4 5.8 5.8
Gamuda Buy 2.19 2.90 16.5 12.2 9.9 10.9 11.4 8.9
Public Bank Buy 10.30 13.00 16.3 14.1 13.4 7.3 7.8 7.8
Tanjong Buy 14.20 17.80 10.5 10.7 9.0 6.3 6.3 6.3
UMW Hldgs Buy 6.35 7.15 14.6 12.4 12.9 4.7 5.3 5.3
Mid Caps
SapCrest Buy 1.39 1.85 20.7 12.1 10.4 1.4 1.4 1.4
Ann Joo Res Buy 3.78 5.25 10.1 5.2 5.1 3.5 4.2 4.2
Hap Seng Cons Buy 2.76 3.85 8.5 8.1 7.8 19.0 3.8 3.8
Guinness Buy 5.25 6.20 13.4 13.1 13.4 9.0 9.5 9.5
SunCity Buy 2.77 4.20 9.5 8.5 7.3 2.9 3.2 3.2
Small Caps
Axis REIT Buy 1.72 2.40 12.7 11.6 10.8 7.9 8.4 8.4
RCE Capital Buy 0.50 1.10 6.2 5.5 4.7 2.0 2.0 2.0
TH Plantations Buy 3.48 4.00 11.0 7.5 8.8 6.1 8.9 8.9

3Q08 Economic Developments & Outlook
Economy: Developments & Outlook

“Unholy Trinity”
After a sizzling 1Q08, Malaysia’s economic growth is expected to
fizzle in the following three quarters. The culprit is the “unholy
trinity” of (i) a slowing US/global economy; (ii) prolonged domestic
political uncertainties and risks; and (iii) rising inflationary pressures
externally, which clouds the global and local economic outlook
further.
Consequently, real GDP growth this year is expected to come in lower
at 5.3% vs. 6.3% recorded last year. Next year, economic growth is
expected to plod along at 5.1% amid an expected gradual uptrend in
quarterly growth. But this projection is contingent on several “no
change” assumptions, namely status quo fuel-energy prices and
benchmark interest rate.
Nevertheless, to counter any further downside and damage to the
economy, we expect monetary and fiscal policies to be “supportive”
and “expansionary” respectively. This will entail an unchanged
Overnight Policy Rate (OPR) and the likelihood of people-oriented tax
incentives and spending in Budget 2009, plus the 15% increase in the
development expenditure allocation following the Mid-Term Review of
the Ninth Malaysia Plan. Meanwhile, we see the Ringgit to shaking off
its seasonal summer blues since its de-pegging to end the year firmer
at RM3.10 per USD.
Malaysia: Key Macroeconomic Indicators

% Growth Actual Figures Official Aseambankers Forecasts
Forecasts
2007 1Q 2008 2008 2008 2009
Real GDP 6.3 7.1 5.0 - 6.0 5.3 5.1
Manufacturing 3.1 6.9 1.8 4.2 4.0
Services 9.7 8.0 7.7 6.3 6.8
Agriculture 2.2 6.3 3.4 4.1 3.0
Mining 3.2 3.7 6.0 4.0 3.5
Construction 4.6 5.3 5.5 4.0 5.0
Domestic Demand 10.5 10.1 5.6 6.6 7.0

Private Consumption 11.7 11.8 6.5 6.9 7.0
Government Consumption 6.4 10.5 6.0 8.0 9.0
Gross Fixed Capital Formation 10.2 6.0 3.5 5.1 5.8
Private Investment 12.3 NA 6.3 6.6 6.5
Public Investment 8.0 NA 0.5 3.5 5.5
Exports of Goods & Services 3.7 6.0 0.9 5.3 5.0
Imports of Goods & Services 4.1 3.4 2.3 5.0 7.5
Actual Figures Official Aseambankers Forecasts

Forecasts
2007 2008 YTD 2008 2008 2009
Trade Balance (RMb) 100.3 38.3 104.2 117.5 110.1
Gross Exports 2.7 12.6 1.8 7.0 5.0
Gross Imports 5.0 7.6 1.4 5.0 7.5
Fiscal Balance (% of GDP) (3.2) (4.4) (3.1) (3.5-4.0) (3.5-4.0)
Overnight Policy Rate (% p.a.) 3.50 3.50 NA 3.50 3.50-4.25
Banking Sector Loans 8.6 10.1 NA 7.0-8.0 7.0-8.0
Inflation Rate (CPI, %) 2.0 2.9 4.0-6.0 5.7 4.8
RM/USD (end-period) 3.31 3.26 NA 3.10 2.875
Source: Dept. of Statistics, BNM Annual Report 2007, Aseambankers

Strong start to 2008
Sustained growth 1Q08 real GDP growth was above 7% YoY for the second consecutive quarter.
momentum in 1Q08… The economy expanded by 7.1% YoY in the opening three months of 2008,
after the 7.3% YoY expansion in the closing three months of 2007.
Growth dynamics remained the same. Robust domestic demand (+10.1%
YoY), namely consumer (+11.8% YoY) and Government (+10.5% YoY)
spending, was supported by factors like higher income, especially following the
increment in public sector salaries, higher spending on big-ticket items like
passenger cars and defence, as well as festive (Chinese New Year) spending.
Coupled with continued firm commodity prices, these boosted activities in
domestic and resource-based manufacturing (e.g. auto, building materials,
metals, petroleum products, rubber products, off-estate processing) and
services (e.g. wholesale, retail, hotels, restaurants), construction industry as
well as commodity-related sectors i.e. agriculture and mining. This countered
slower growth in investments (+6% YoY) as well as exports (+6% YoY) and
imports (+3.4% YoY) of goods and services, which hit the external trade-
related manufacturing (e.g. E&E) and services (e.g. transport, storage,
business services, real estate) industries.
Malaysia: Quarterly Real GDP Growth (% YoY, 1Q 2005 – 1Q 2008)

8
7.3
7.1
7 6.7
5.9 5.9 6.0 5.9

6 5.6 5.7
5.6 5.5
5.3
5
4.3
3
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08
Source: Department of Statistics, BNM
Malaysia: Quarterly Real GDP

% YoY Growth 1Q08 4Q07 3Q07 2Q07 1Q07
Real GDP 7.1 7.3 6.7 5.7 5.5
Manufacturing 6.9 5.6 3.3 1.5 2.0

Services 8.0 9.3 10.5 9.4 9.4
Agriculture 6.3 4.7 1.9 (1.5) 3.8
Mining 3.7 3.5 2.5 7.8 (0.4)
Construction 5.3 4.7 4.7 4.8 4.1
Domestic Demand 10.1 9.1

Source: Department of Statistics, BNM’s Quarterly Economic Bulletin

Malaysia: Quarterly Real GDP

% Contribution to Growth 1Q08 4Q07 3Q07 2Q07 1Q07
Real GDP 7.1 7.3 6.7 5.7 5.5
Manufacturing 2.1 1.7 1.0 0.5 0.6

Services 4.3 4.9 5.4 4.9 4.9
Agriculture 0.5 0.4 0.2 (0.1) 0.3
Mining 0.3 0.3 0.2 0.6 (0.0)
Construction 0.2 0.1 0.1 0.2 0.1
Domestic Demand 8.5 8.0 9.9 8.3 6.7

Source: Department of Statistics, BNM’s Quarterly Economic Bulletin
Same stories in other Malaysia’s sustained 1Q08 real GDP growth was consistent with the trends
regional economies... across the major and regional economies, which have also retained their
growth momentum in the first three months of this year. This came amid the
surprisingly resilient US – and thus global – economy, enabling regional
countries to benefit from export growth, on top of domestic demand, to drive
economic expansion. The notable exceptions were Vietnam and the
Philippines, where 1Q08 growth moderated from 4Q07 by more than 1 ppt.
Ranking wise, Malaysia and Hong Kong posted the joint fourth fastest 1Q08
real GDP growth, after China, India and Vietnam.
Quarterly Real GDP Growth: Major and Regional Economies

% YoY Growth 1Q08 4Q07 3Q07 2Q07 1Q07 4Q06
US 2.5 2.5 2.8 1.9 1.5 2.6
Eurozone 2.2 2.1 2.7 2.6 3.2 3.3
Japan 1.3 1.7 1.7 1.8 3.2 2.4
UK 2.5 2.8 3.1 3.2 3.0 3.2
China 10.8 11.2 11.5 11.9 11.7 10.4
India 8.8 8.8 9.3 9.2 9.7 9.3
South Korea 5.8 5.7 5.1 4.9 4.0 4.2
Taiwan 6.1 6.5 6.9 5.2 4.2 4.1
Hong Kong 7.1 6.9 6.8 6.2 5.5 6.6
Singapore 6.7 5.4 9.5 9.1 7.0 7.0
Malaysia 7.1 7.3 6.7 5.7 5.3 5.7
Thailand 6.0 5.7 4.8 4.3 4.2 4.3
Indonesia 6.3 6.3 6.5 6.4 6.1 6.0
Philippines 5.2 6.4 7.1 8.3 7.0 5.5
Vietnam 7.4 8.5 8.2 7.8 7.7 8.2
Source: Bloomberg, CEIC
... but Malaysia’s growth The importance of domestic demand to Malaysia’s economic growth is further
was especially domestic- demonstrated by comparing the demand-side breakdown of 1Q08 real GDP
driven performance among the major and regional economies. Similar to last year,
Malaysia recorded among the fastest consumer spending, Government
consumption and investment growth, with limited contribution from external
trade growth. This is also consistent with the trend over the past five years,
which saw the increasing role of internal spending in driving Malaysia’s overall
economic expansion.

Key Economies: Real GDP Growth by Expenditure, 1Q 2008 (% YoY)

Country Real GDP Consumption Investment Exports Imports
Private Govt
US 2.5 1.9 2.9 (2.4) 8.8 (0.6)
Japan 1.3 1.5 0.6 (3.0) 11.1 3.0
Eurozone 2.2 1.2 1.4 3.6 5.4 4.3
Germany 1.8 0.1 1.2 2.6 5.9 4.0
UK 2.5 3.0 1.7 1.1 1.6 1.9
India 8.8 8.3 16.7 11.2 10.1 9.6
S. Korea 5.8 3.4 3.9 0.5 11.8 9.0
Taiwan 6.1 2.0 1.7 5.8 11.4 n.a
Singapore 6.7 4.7 10.2 30.0 9.2 13.8
Hong Kong 7.1 7.9 0.3 8.9 8.8 8.7
Malaysia 7.1 11.8 10.5 6.0 6.0 3.4
Source: CEIC, Bloomberg
Malaysia: Real GDP Growth by Demand (1998 - 1Q 2008)

% Chg YoY Real GDP Consumption Investment Exports Imports
Consumer Govt
1998 (7.4) (10.2) (8.9) (43.0) 0.5 (18.8)
1999 6.1 2.9 17.1 (6.5) 13.2 10.6
2000 8.9 13.0 1.6 25.7 16.1 24.4
2001 0.5 3.0 15.7 (2.1) (6.8) (8.2)
2002 5.4 3.9 11.9 0.6 5.4 6.2
2003 5.8 8.1 8.6 2.8 5.1 4.5
2004 6.8 9.8 7.6 3.6 16.1 19.6
2005 5.0 8.7 6.4 5.0 7.9 8.9
2006 5.9 7.1 5.0 7.9 7.4 8.6
2007 6.3 11.7 6.4 10.2 3.7 4.1
1Q08 7.1 11.8 10.5 6.0 6.0 3.4
Source: BNM
… but stuttering for the rest of the year
Quarterly real GDP growth However, we are projecting a steady deceleration in real GDP growth post-
to decelerate post-1Q08… 1Q08 to 5.5% YoY in 2Q08, 4.4% YoY in 3Q08 and 4% YoY in 4Q08. As a
result, our 2008 economic growth is now lower at 5.3% (2007: +6.3%) from
5.7% previously. This is the second downward revision to our full-year real
GDP growth forecast from the 6.3% predicted late last year, reflecting the
combined downside effects of the 8 Mar General Election results and the fuel-
energy price hikes on 4 Jun. The biggest “casualties” in our latest round of
economic growth revisions are services, consumer spending and investment.
On the other hand, we have upgraded the full-year growth projections for
manufacturing and external trade, in view of their strong 1Q08 performance.
Resulting in lower growth The official 2008 real GDP growth forecast remains at 5.0-6.0%, although the
this year vs. last year… authorities admitted that there is now a likelihood of the actual number coming
in at the lower end of this range. The latest official stand on this year’s growth
forecast corroborates our projection of slowing quarterly growth.
…due to an The expected slowing growth momentum in 2Q08-4Q08 versus 1Q08 – and
“unholy trinity” consequently this year versus last year – are due to what we termed as the
“unholy trinity”:
• Slowing US/global economy
• Prolonged domestic political uncertainties and risks
• Rising inflationary pressures.

Malaysia: Quarterly Real GDP Growth (% YoY, 1Q 2006 – 4Q 2009E)

8
7.3
7.1
7 6.7
5.9 6.0 5.9 5.8

6 5.7
5.5 5.5
5.3 5.3
5.0
5
4.4 4.5
4.0
4
3
1Q06 3Q06 1Q07 3Q07 1Q08 3Q08E 1Q09E 3Q09E
Source: Department of Statistics, Aseambankers
Malaysia: Annual Real GDP (2006-2008E)

% Growth Actual Figures Official Aseambankers
Forecast Forecast
2007 1Q 2008 2008 2008 2008
Revised Previous
Real GDP 6.3 7.1 5.0 - 6.0 5.3 5.7
Manufacturing 3.1 6.9 1.8 4.2 2.8

Services 9.7 8.0 7.7 6.3 8.0
Agriculture 2.2 6.3 3.4 4.1 3.5
Mining 3.2 3.7 6.0 4.0 5.0
Construction 4.6 5.3 5.5 4.0 4.0
Domestic Demand 10.5 10.1 5.6 6.6 7.5

Private Investment 12.3 NA 6.3 6.6 7.5
Public Investment 8.0 NA 0.5 3.5 5.0
Source: Dept. of Statistics (Actual Figures), BNM Annual Report 2007 (Official Forecast),
Aseambankers
Outlook for 2009 subject to As for 2009, we are tentatively projecting real GDP growth of 5.1% for 2009, on
“uncertain” assumptions… the back of a gradual uptrend in quarterly real GDP growth to 4.5% YoY in
1Q09, 5.0% YoY in 2Q09, 5.3% YoY in 3Q09 and 5.8% YoY in 4Q09, driven
essentially by recovery in domestic spending. However, the caveat is that next
year’s forecast is premised on the following “uncertain” assumptions:
• No fuel price hikes.
• No annual review in Petronas gas price and Tenaga’s power tariff.
• Acceleration in major infrastructure and development projects after the
unveiling of the Mid-Term Review of 9MP.
• Stable-to-moderate hike (< 75bps) in Overnight Policy Rate (OPR).

US / World: Slowdown, if not recession…
Surprisingly resilient US The US economy has thus far defied expectations of heading into a recession.
economy so far… It expanded by 2.5% YoY and 0.9% QoQ in 1Q08, sustaining 4Q07’s 2.5%
YoY and 0.6% QoQ growth performance. The resilience thus far stems much
from the American consumers who steadfastly refuse to change their lifestyles
and spending habits. At the same time, the US economy’s external sector is
benefiting from the equally resilient global economy and enhanced export
competitiveness from the slump in the US Dollar.
US: Summary of Key Economic Indicators

(% YoY) Apr-08 Mar-08 Feb-08 Jan-08
New Home Sales (42.0) (38.2) (30.2) (31.5)
Existing Home Sales (17.5) (19.1) (23.8) (23.4)
May-08 Apr-08 Mar-08 Feb-08
Housing Starts (44.6) (49.8) (47.8) (53.2)
Building Permits (53.7) (58.0) (54.8) (53.5)
CPI Headline 4.2 3.9 4.0 4.0
CPI Core 2.3 2.3 2.4 2.3
PPI Headline 7.2 6.5 6.9 6.4
PPI Core 3.0 3.0 2.7 2.4
Import Prices 17.8 16.3 15.1 13.5
Retail Sales 2.5 3.0 2.3 2.7
Retail Sales ex Auto & Gasoline 3.3 3.7 1.8 2.3
Industrial Production (0.1) 0.1 1.4 1.2
Non-Defence Capital Goods Orders (5.0) (2.7) 6.4 12.5
Leading Economic Indicators (0.8) (1.8) (2.1) (1.7)
ISM Manufacturing (Index) 49.6 48.6 48.6 48.3
ISM Non-Manufacturing (Index) 53.6 50.9 52.2 50.8
Non-Farm Payrolls (Chg, ‘000) (49.0) (28.0) (88.0) (83.0)
Unemployment Rate (%) 5.5 5.0 5.1 4.8
Consumer Confidence (Index) 57.2 62.8 65.9 76.4
1Q08 4Q07 3Q07 2Q07
Real GDP (% QoQ, Annualised) 0.9 0.6 4.9 3.8
Real GDP (% YoY) 2.5 2.5 2.8 1.9
Source: Bloomberg
...but consumer spending However, the fundamentals underpinning consumer spending in the US are not
and the financial system so rosy, with the US economy having its own “unholy trinity”, namely:
are still “fragile”
• Continued “housing recession” amid a persistent slump in residential
property market activities, steepening drops in home prices, rising
mortgage delinquencies and property foreclosures, and falling household
net worth.

US: Key Housing Market Indicators (m, annualised) US: Home Prices (% YoY)
9.5 Unsold Hom es (RHS) 5.5 20
9.0 5.0
15
8.5 Hom e Sales (LHS) 4.5
8.0 4.0 10
7.5 3.5
5
7.0 3.0
6.5 2.5 0
Jan-00
Mar-01
Oct-01
May-02
Dec-02
Jul-03
Feb-04
Nov-05
Jun-06
Jan-07
Mar-08
Sep-04
Aug-00
Apr-05
Aug-07
6.0 2.0 (5)
5.5 Housing Starts & 1.5
5.0 1.0 (10)
Building Perm its (RHS)
4.5 0.5 (15)
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
(20)
Existing Homes New Homes S&P/Case Shiller
Source: Bloomberg Source: Bloomberg
US: Housing Indicators (’000) & Economic Cycles US: Household Net Worth (% YoY)
3,000 2
20
2,500 15
2,000
10
1,500 1
5
1,000
0
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
500
(5)
0 0
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
(10)
Recession Period Housing Starts

Building Permits New Home Sales
Source: CEIC, Bloomberg Source: Bloomberg
US: Mortgage Delinquencies (Ratio, %) US: Property Foreclosures (Ratio, %)

20 12
18
16 10
14 8
12
10 6
8
4
6
4 2
2
0 0
Mar-00
Oct-00
May-01
Dec-01
Jul-02
Feb-03
Nov-04
Jun-05
Jan-06
Mar-07
Oct-07
Sep-03
Mar-00
Oct-00
May-01
Dec-01
Jul-02
Feb-03
Nov-04
Jun-05
Jan-06
Mar-07
Oct-07
Apr-04
Aug-06
Sep-03
Apr-04
Aug-06
Total Subprime Prime Total Subprime Prime

US: Quarterly Foreclosure Filings (2006 – 2008 YTD) US: Annual Foreclosure Filings (2005-2008 YTD)
800,000 2,500,000
2,203,295
700,000
600,000 2,000,000
691,337
635,159
642,150
500,000
504,608
400,000 1,500,000
488,488
1,259,118 1,195,945
437,498
300,000
323,101
345,554
885,000
318,355
200,000
272,108
1,000,000
100,000
0 500,000
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 Apr-
May
0
08
2005 2006 2007 Jan-May 2008
Source: RealtyTrac Source: RealtyTrac
• Weakening job market following the “destruction” rather than “creation” of

jobs in the non-farm sectors and the consequent rise in the unemployment
rate. In the first five months of 2008, non-farm payrolls dropped by 324,000
compared to the increases of 1.1m in 2007, 2.1m in 2006 and 2.5m in 2005,
indicating the steady downward momentum in US job creation in the past three
years have worsened into job destruction. Consequently, the jobless rate in
the US has risen steadily from 4.8% in February to 5.5% in May, the highest
since Jun ’04.
US: Monthly Change in Non-Farm Payrolls (m) US: Unemployment Rate (%)
1.2 2
12.0 2
10.0
0.8
8.0
0.4
6.0
0.0
1948
1958
1968
1978
1988
1998
2008
4.0
(0.4)
2.0 0
1948
1951
1955
1959
1963
1967
1971
1974
1978
1982
1986
1990
1994
1997
2001
2005
(0.8) 0
Recession Period Non-Farm Payroll Recession Period Unemployment (LHS)
Source: CEIC, NBER Source: CEIC, NBER

• Rising inflationary pressure, especially in the “lead indicators” of

consumer prices like producer and import prices, is crimping consumers’
purchasing power.
US: Inflation Rates (% YoY)

20.0
15.0
10.0
5.0
0.0
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
(5.0)
(10.0)
CPI PPI Import Prices
Source: Bloomberg
US consumers living on Meanwhile, the continued spending by Americans is largely financed by credit
“credit cards”… and one-off fiscal stimulus cheques. Growth in revolving consumer credit (e.g.
credit cards) has surged and outpaced non-revolving consumer credit (e.g.
auto loans) since mid-2006 as consumers seek to cover the increase in prices
of necessities like food and fuel by swiping their credit cards more.
US: Consumer Credit (% YoY)

14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Total Non-Revolving Revolving
Source: Bloomberg
… and “Government And, starting late-April through to July, Americans are receiving payouts
cheques” courtesy of courtesy of the USD152b Economic Stimulus Act 2008 approved by Congress
Uncle Sam… and signed by President Bush back in Feb ’08. The package – equivalent to
about 1% of US GDP – pays USD600 to most individual taxpayers and
USD1,200 to married taxpayers filing joint returns, so long as they are below
income caps of USD75,000 for individuals and USD150,000 for couples. There
is also an additional tax credit of USD300 per child below 17 years of age for
families. However, the effect of this stimulus package is expected to be felt
only in 2Q08-3Q08, raising question on the outlook for the US economy in
4Q08 onwards.

US economy not Moreover, the US economy is not really out of the woods as far as the
completely out of the subprime crisis is concerned, since the credit and liquidity crunch is still there.
“subprime crisis”… The US Federal Reserve (Fed) continued to inject liquidity into the banking
system, and despite the relatively lower amount of lending by the Fed to banks
via the discount window in recent weeks, the size of lending is far from
“normalising”.
US: Fed’s Lending to Banks to Discount Windows US: Fed’s Lending to Banks to Discount Windows
(USDb, Annual) (USDm, Weekly)
480 50000
430.574
440 45000
400 40000
360
35000
320
30000
280
240 25000
200 20000
160 15000
120 10000
80
30.564 5000
40 8.80111.07518.76620.705 7.598 5.208 7.959 10.364 11.68
0 0 Jan-06
Mar-06
May-06
Jul-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Nov-07
Jan-08
Jun-08
Sep-06
Sep-07
Apr-08
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
YTD
… amid continued Fed There is also evidence that commercial banks are tightening lending standards
liquidity injections and for loans to consumers and industries. Based on the Fed’s survey of the
credit tightening by banking system’s senior loans officers, the number of banks raising their loans
banks… standards and spread between loan rates and cost of funds are now at levels
that are consistent with past US recessions.
US: More Banks Are Tightening Lending Standards US: More Banks Are Widening Spreads Between Loans
(Net percentage surveyed) Rates & Cost of Funds (Net Percentage Surveyed)
80 2
80
60
60
40
40
20
20 0
2Q90
3Q91
4Q92
1Q94
2Q95
3Q96
4Q97
1Q99
2Q00
3Q01
4Q02
1Q04
2Q05
3Q06
4Q07
(20)
0
2Q90
3Q91
4Q92
1Q94
2Q95
3Q96
4Q97
1Q99
2Q00
3Q01
4Q02
1Q04
2Q05
3Q06
4Q07
(40)
(20)
(60)
(40) 0
(80)
Recession Period Large and medium Small Recession Period Large and medium Small
Source: US Federal Reserve’s Senior Loans Officers Opinions Source: US Federal Reserve’s Senior Loans Officers Opinions
Survey of Bank Lending Practices Survey of Bank Lending Practices

Anemic US economic Consequently, the prevailing outlook on the world’s largest economy now is
growth, if not recession… that of anemic growth of between 1.0% and 1.5% in 2008-09, based on the
average of the latest available forecasts by international agencies like the IMF
and OECD as well as Bloomberg’s consensus survey. Meanwhile,
Bloomberg’s consensus forecast also showed that the probability of a
recession in the US has fallen to 50% as of June from 75% back in April.
US: Real GDP Growth (2003-2009E)

2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E
Avg: Avg:
3.7 0.8 1.6 2.5 3.6 3.1 2.9 2.2 1.2 1.3
Bloomberg Consensus (June 08) 1.4 1.9
International Monetary Fund (June 08) 1.0 0.8
OECD Economic Outlook (June 08) 1.2 1.1
Source: Bloomberg, IMF, OECD
Inflationary – thus Concurrently, the outlook for the global economy now is also overshadowed by
monetary tightening – the threat of rising inflation. This could lead to actual tightening or tightening
risks temper the global bias in global monetary policies, which runs the risk of dampening economic
outlook… growth further. Our in-house benchmark interest rate diffusion index has
shown an uptick in recent months as more and more central banks – especially
in the region – started to raise interest rates or make “hawkish” statements
regarding their monetary policy stance, especially Fed Chairman, Ben S.
Bernanke and ECB President, Jean-Claude Trichet.
Global Benchmark Interest Rates Diffusion Index

12
0
Dec-99
Nov-02
Dec-04
Nov-07
Feb-99
Jul-99
May-00
Oct-00
Mar-01
Jan-02
Jun-02
Feb-04
Jul-04
May-05
Oct-05
Mar-06
Jan-07
Jun-07
Sep-03
Aug-01
Apr-03
Aug-06
Apr-08
(4)
(8)
(12)
(16)
Note: The Benchmark Interest Rate Diffusion Index is the difference between the number of
central banks raising interest rates and the number of central banks cutting interest rates, while
central banks that keep interest rates unchanged are excluded. A positive / negative index
number shows more central banks are raising / cutting interest rates than those cutting / raising
interest rates, hence indicate a global monetary policy tightening / easing bias. The sample size
is 24 central banks in major industrial countries and key Asian economies.
Our views on the downside risks to the US and global economy is also
corroborated by the latest data and trends of the OECD Index of Leading
Economic Indicators (OECD LEI), which implies a global economic slowdown
in 2Q08 and 3Q08.

OECD Index of Leading Economic Indicators & Industrial Production (% Chg)

8
0
Jan- Sep- May- Jan- Sep- May- Jan- Sep- May- Jan- Sep- May- Jan- Sep-
(2) 00 00 01 02 02 03 04 04 05 06 06 07 08 08
(4)
(6)
Leading Indicators Industrial Output
Source: Bloomberg
Domestic politics: The plot thickens…
The domestic political Domestic political risks have risen by several notches following recent
dusts are far from settled... developments, which include:
• Former PM and UMNO President, Tun Dr. Mahathir’s resignation from
UMNO announced on 20 May.
• Statements of no confidence in the PM and ruling Barisan Nasional (BN)
coalition by BN party member, Sabah Progressive Party’s (SAPP)
President, Datuk Yong Teck Lee, on 18 Jun.
• Court decision on 18 Jun that the Perlis’ State Assembly seat of Sanglang
(won by BN in the 8-Mar General Election) is now vacant after the petition
by PAS to declare the result null and void was accepted, which will result in
a by-election if the appeal process fails to reverse the decision. To note,
there are several such cases pending following petitions filed by both
sides. These Parliamentary and State Assembly seats include:
− Kuala Kangsar, Perak (Parliament – BN seat of Datuk Seri Rafidah
Aziz, former Minister of International Trade & Industry and UMNO
Wanita Head)
− Pensiangan, Sabah (Parliament – BN seat of Tan Sri Joseph Kurup,
Deputy Rural & Regional Development Minister and Parti Bersatu
Rakyat Sabah President)
− Sandakan, Sabah (Parliament – BN seat of Datuk Liew Vui Keong,
Deputy International Trade & Industry Minister and Liberal Democratic
Party President)
− Setiawangsa, KL (Parliament – BN seat of Datuk Zulhasnan Rafique,
Federal Territories Minister)
− Bukit Bintang, KL (Parliament – DAP)
− Kulim-Bandar Baharu, Kedah (Parliament – PKR)
− Kuala Terengganu, Terengganu (Parliament – PAS)
− Teja, Perak (State Assembly – PKR)

The domestic political We expect that domestic political waters will remain choppy for months after
scenario will remain fluid… the landmark Mar ’08 General Election where BN lost its two-thirds majority of
Parliamentary seats and four more State Assemblies (Selangor, Penang,
Perak, Kedah) on top of Kelantan, was decimated in the Federal Territory of KL
when 10 out of the 11 Parliamentary seats contested went to Pakatan Rakyat
(PR), and failed to secure two-thirds majority in Negeri Sembilan’s State
Assembly.
… amid East Malaysian – The 129-to-78-vote support that the PM and Government received for the
especially Sabahan – motion to reduce fuel-energy subsidies and raise prices, tabled in the
political intrigue… Parliament on 23 Jun, and the fact that there was no “no-confidence”
motion/vote proposed during the session, does not significantly reduce or
eliminate the perception that the PM and BN Federal Government leadership
has been “weakened” post-General Election. The weakened position is
highlighted by the SAPP President’s statement expressing the loss of faith in
PM/BN, coming from within BN rather than from PR as initially and widely
expected. Interestingly, Datuk Anifah Aman, a BN-UMNO MP from Sabah and
brother to the State’s Chief Minister, shared Datuk Yong Teck Lee’s
dissatisfactions over the various issues raised by Sabahans, although he
disagreed on the no-confidence matter. This means Sabah politics remains a
thorn in BN flesh despite the multi-billion Ringgit goodies announced for the
East Malaysian States recently, which included additional RM1b development
spending allocation each for Sabah and Sarawak and greater administrative
role and autonomy for the locals.
And Anwar-PR factor still Further, the event involving SAPP was also “symbolic” as Datuk Seri Anwar
at large… Ibrahim (DSAI), the de-facto leader of PR, has served notice that talk of PR
forming the Federal Government via BN MPs crossovers is no empty threat or
mere political gimmick, given his apparent involvement and influence in
SAPP’s “bombshell”.
Consequences of a “No Confidence” motion and vote, and crossovers

A vote for a “no confidence” motion in Parliament and State Assembly requires simple
majority.
Even with the simple majority, without a minimum of 30 MPs from BN leaving the party
or joining PR, then BN still forms the Federal Government. But the future of the PM will
be in doubt as even MPs from his party (UMNO/BN) would have supported and voted
for the “no confidence” motion. If the PM decides to step down, he must pick a
replacement that is acceptable to UMNO and BN, and then seek the King’s consent for
the proposed successor.
If there are:
• BN MPs who left BN to be “Independents” or formed their own party/parties, such
that BN no longer has the simple majority of 112 or 51% of the total 222 seats in
the Parliament (Scenario I), OR
• BN MPs cross over and join parties in PR, such that PR gains at least simple
majority of 112 or 51% of Parliament seats (Scenario II),
the PM would then have to meet the King and propose to dissolve Parliament and call
for a fresh Parliamentary election. This will not involve the State Assemblies, as there is
no need to call for state elections. However, the prerogative to dissolve Parliament lies
with the King. If King says no to the Parliament’s dissolution and election, then:
• Under Scenario I, the PM will continue as the leader – or step down with the
successor becoming the leader – of a “minority” Government, OR
• Under Scenario II, the leader of PR will be called to form the Federal Government.
This is also a possibility if the new party/parties formed by ex-BN MPs decide to
become part of PR.
Historically, there has never been “no confidence” motions and votes on the PM and the
Federal Government. However, in the past, there have been three “no confidence”
motions and votes in three different States Assemblies that led to the downfalls of the
States’ Chief Ministers, namely in Sarawak (1966), Selangor (1976), Kelantan (1977).

Upcoming UMNO Even if PR fails to entice the required number of crossovers from BN between
Branch/Division meetings, now and the much-touted 16 Sep deadline, the various developments
General Assembly and mentioned above makes the upcoming UMNO Branch (17 Jul - 24 Aug) and
Election a key event to Division (9 Oct - 9 Nov) meetings, and ultimately the UMNO General
watch… Assembly/Party Election (16-20 Dec), much more interesting.
While the PM announced that he will defend the party President post, he has
said that Dato’ Seri Najib Tun Razak, Deputy PM and Deputy President of
UMNO, will be the next PM and party head. However, the timing of the
handover is not known at the moment.
Nonetheless, as far as the upcoming UMNO election in December is
concerned, it will be interesting to see whether veteran UMNO leader and ex-
Cabinet Minister, Tengku Razaleigh Hamzah, who has indicated that he will
compete for the President’s post, will garner the required 30% nominations
from 191 Divisions.
Following that, it will also be interesting to see whether he will be running the
“crusade” on his own, or will proceed to create a “Team A-Team B”-like
situation as in the 1987 UMNO election. The latter scenario will mean that
Tengku Razaleigh needs a strong running mate for the number two post and
assemble a team for the assault on Vice Presidents and Supreme Council
posts.
The three positions of UMNO VPs are also of added significance now, since
assuming the party is okay with the succession plan laid out by PM, then one
of the occupants of UMNO VP seats stands to be Datuk Seri Najib’s number
two.
Consequently, between now and 16-20 Dec, and during the Branch and
Division meetings, we are likely to see and hear more messages and signals
from the party grassroots with regard to the party’s leaderships and direction,
as well as from the party leaders on their intentions with regards to the
positions in the Party’s hierarchy.
Until then, there are several key political events to watch, namely:
• a planned mass fuel-energy price hike protest on 15 Jul.
• DSAI is reportedly going to the Federal Court soon to get his Sep ’98
sacking as Deputy Prime Minister declared illegal and a violation of the
Federal Constitution of Malaysia after the Court early this week
unanimously gave him the green light to challenge the legality and
constitutionality of his sacking 10 years ago.
• MCA and Gerakan party elections on 18 October and 10-12 October
respectively. These two are two of the major component parties of BN who
were also the major casualties in the Mar 08 General Election.
Risk of “policy paralysis” As for the impact of domestic political development on the economy, the most
amid the distractions …? visible thus far has been the delays (Second Penang Bridge, Pahang-Selangor
Raw Water Transfer, Sabah Oil & Gas Terminal, Ipoh-Padang Besar double
tracking railway projects) and cancellations (KL-JB Bullet Train, Penang Global
City Centre) of 9MP and regional development corridors. More worryingly
however, is the danger of a “policy paralysis”, as the PM and ruling BN party
may be distracted by politicking and internal strife at least in the next 6 months.

Inflationary pressures the latest “negative”…
Inflation rearing its ugly The monthly inflation rate has been creeping up steadily from 1.4% YoY in mid-
head… 2007 to 3.8% YoY as of May. YTD, the inflation rate quickened to 2.9% from
2.0% in the whole of last year. The pick up in inflation thus far has been largely
driven by the “food and non-alcoholic beverages (FNAB)” component of the
CPI, in tandem with the rising global prices of food-related commodities such
as wheat, cocoa and dairy products, and in the month of May, was dominated
by the jump in rice prices. Indeed, more than half of the inflation rates in May
(67.6%) and 2008 YTD (58.7%) came from the higher costs of FNAB (48.1%
for the whole of 2007).
Malaysia: Consumer Price Index (CPI, % YoY)

10 20
FNAB
8 15
6 10
4 5
CPI
Transport (RHS)
2 0
Utilities, Housing & Other Fuels

0 (5)
Jan-02
Jun-02
Feb-04
Jul-04
May-05
Oct-05
Mar-06
Jan-07
Jun-07
Nov-02
Dec-04
Nov-07
Sep-03
Apr-03
Aug-06
Apr-08
Source: Department of Statistics
Malaysia: Contribution to Inflation Rate (2005-2008YTD, ppt)

1.8
1.5
1.2
0.9
0.6
0.3
0.0
Food and Non- Alcoholic Transport (incl. Restautants & Housing, Water, Others
Alcholic Beverages & fuel) Hotels Electricity, Gas &
Beverages Tobacco Other Fuels
2008 YTD 2007 2006 2005
Source: Department of Statistics

Fuel-energy price hikes Monthly inflation rate is expected to surge dramatically from June onwards,
adding to costlier foods… following the broad and steep hikes in fuel and energy prices announced by the
Government on 4 Jun as detailed below:
Malaysia: Fuel & Energy Price Reviews, 2008

Measures Effective
Petrol and diesel prices at the pumps 5 Jun ’08
Prices to be raised by:
41% or 78sen/litre to RM2.70/litre for petrol
63% or RM1.00/litre to RM2.58/litre for diesel
Diesel prices for public transportation, vessel owners, and fishermen 5 Jun ’08
Diesel prices for public transportation of RM1.43/litre (from RM1.20/litre), while
the diesel price for fishermen maintained at current RM1.00/litre.
PETRONAS gas subsidy
1. Higher PETRONAS’ gas prices as follows: 1 Jul ’08
to RM14.31/mmBtu from RM6.40/mmBtu (+124%) for the
electricity sector
to RM24.54/mmBtu from RM9.40/mmBtu (+161%) for industrial
users of <2mmscfd
to RM32.56/mmBtu from RM11.32/mmBtu (+188%) for
industrial users of >2mmscfd
But, SMEs will be given a special assistance via lower gas tariff increase
(amount not quantified)
2. Gradual phasing out of gas subsidy by PETRONAS:
over 15 years for the electricity sector
over 11 years for the industrial sector
3. No changes to prices of LPG (RM1.75/litre) and natural gas for NGV
vehicles (63.5sen/litre).
Electricity tariff 1 Jul ’08
1. Higher electricity tariff by:
up to 37% for households
up to 26% for commercial and industrial
2. Exclusion / lower tariff increases:
No increases for households with electricity usage of <200 kWh
p.m. (estimated billing of RM43.60 p.m.), affecting 59% of
households in Peninsular Malaysia
Lower increases of up to 18% for commercial and industrial
users of <200 kWh p.m. (mainly the retail, restaurant operators,
cottage industries)
3. The higher tariffs are applicable to Peninsular Malaysia, while a new
structure for Sabah and Sarawak will be announced later
Source: Prime Minister’s Department
Expect a sharp rise in Consequently, we expect a sharp jump in the monthly inflation rate to 7.5%-
inflation rate June 8.0% YoY range between Jun and Dec ’08, resulting in a 5.7% inflation rate for
onwards… the whole of 2008. There are already significant price responses to the fuel-
energy price hikes – especially that of food and transportation – within the
month of June as per the table overleaf.

Malaysia: The Inflation Pulse – Beating Faster…

Items Remarks/Comments
Food • Fresh food prices at wet markets nationwide rose by an average of 21%
for meat, 18% for fish and 17% for vegetables between end-May and 19
Jun.
• Operators of restaurants, cafes, canteens and food stalls have raised
their prices.
• RM6 ceiling price of chicken removed.
• Possible increase in sugar prices next year.
Bus operators Some school and express bus operators have raised their fares by RM5-
RM40. Associations representing bus (school, factory, stage, express
buses) and taxi operators formally requested for 20-100% fare increases.
Lorry operators Charges up by 35-50% this month.
Others • At least 10% increase in essential items in July, higher increase for
canned food and items with plastic packages, according to the
Federation of Sundry Goods Merchants Associations of Malaysia.
• Higher DBKL parking charges in the city centre (80 sen from 60 sen),
but lower parking charges outside the city centre (50 sen from 60 sen).
Source: Media Reports, Aseambankers
Made worse by We believe the general price increases listed above are exacerbated by what
“enforcement slacks and we term as “enforcement slacks and lags”. Complaints by the public and
lags” businesses that price and supply controlled essential items like local Super
Grade rice and flour are not available or being sold above their ceiling prices,
plus the difficulties fishermen in the East Coast are facing in getting supplies of
the extra-subsidised diesel (RM1 per litre). Moreover, the Government also
removed the RM6 ceiling price for chicken recently.
Previous fuel price hikes An analysis of what happened to key consumer indicators following the string
had negative impact on of major price hikes between 2004-06 (mainly fuel, energy and transportation
consumers… costs) showed a visible negative impact of rising inflation on consumers, while
the decision not to raise fuel prices in 2007 resulted in a positive impact.
Malaysia: Impact of 2004-2006 Fuel Price Hikes on Consumers

Indicators 2004 2005 2006 2007
Inflation Rate (CPI, %) 1.4 3.1 3.6 2.0
CPI Food & Non-Alcoholic Beverages (%) 2.1 3.7 3.4 3.0
CPI Transport (%) 0.7 6.3 11.0 2.3
Petrol Price (RM per litre, end-period) 1.42 1.62 1.92 1.92
Petrol Price (Chg, %) 5.2 14.1 18.5 0.0
Diesel Price (RM per litre, end-period) 0.831 1.281 158.1 158.1
Diesel Price (Chg, %) 9.2 54.2 23.4 0.0
Real GDP Growth (%) 6.8 5.0 5.9 6.3

Real Private Consumption Growth (%) 9.8 8.7 7.1 11.7
MIER Consumer Sentiment Index (Avg) 113.2 112.3 103.2 117.1

MIER Consumer Sentiment Index (Chg, pts) 3.1 (0.9) (9.2) 13.9
MasterCard Index of Consumer Confidence (Avg) 81.0 65.1 44.5 71.8
MasterCard Index of Consumer Confidence (Chg, pts) (1.7) (16.0) (20.6) 27.3
Malaysians' Credit Card Spending Growth (%) 19.4 17.1 14.9 19.9
Total Motor Vehicle Sales Growth (%) 20.2 13.3 (11.1) (0.7)
Passenger Car Sales Growth (%) 19.0 5.5 (8.7) 3.5
Motorcycle Sales Growth (%) 43.2 11.3 4.0 6.4
Source: Dept. of Statistics, BNM

Mainly in terms of slowing From the table in the previous page, as fuel price-induced inflation rate trended
consumer spending upwards to over 3% in 2005 (3.1%) and 2006 (3.6%) from just 1.4% in 2004,
growth… the following impact was seen on consumers:
• Slowing consumer spending, as measured by real private consumption
growth, which moderated to 8.7% in 2005 and 7.1% in 2006 from 9.8% in
2004.
• Dips in consumer sentiment, as indicated by declines in MIER’s Consumer
Sentiment Index and the MasterCard Index of Consumer Confidence.
• Adjustments to spending patterns e.g. better performance in sales of motor
cycles vs. passenger cars. Motorcycle sales jumped 15.8% between 2004
and 2006, while passenger car sales declined by 3.4% over the same
period, suggesting a switch to cheaper modes of transportation as
motorcycles consume less petrol and are not subjected to highway tolls.
Even more so now …so The expected negative impact on the economy this time around, particularly on
“goodbye prosperity, hello consumer spending, is not merely a case of stating the obvious. Apart from the
poverty”…? wide-ranging and sharp increases in fuel (petrol, diesel, gas) prices and
electricity tariffs, the deeper issue lies in the impact on the country’s socio-
economic structure, specifically with regard to income profile and distribution.
The Second Finance Minister’s statement that only 1.2m or 11.4% of the
10.538m working population in the country paid personal income taxes and a
mere 38,500 paid the top rate of 28%, implies that most workers in Malaysia
earn RM3,000 or less per month. This is supported by the monthly income
profile of EPF contributors, which showed that 72% of them earn RM2,000 or
less per month, and would officially be defined as “low income” groups,
accounting for only 36% of EPF savings. In addition, our analysis of spending
patterns of Malaysian consumers by income group showed that the “low
income” groups would be the hardest hit by surging inflation as two-thirds of
their spending is on essentials – food, housing, fuel, transportation and utilities.
We are very concerned that the surge in inflation without any compensating
increase in income for these groups will result in the creation of what we called
the “new poor”.
Malaysia: Monthly Income Profiles of EPF Contributors Malaysia: Savings Profile of EPF Contributors
28% 10%
34% 5%
21%
54%
29% 10%
RM800 and less RM1,001 - RM2,000

RM800 and less RM1,001 - RM2,000
RM801 - RM1,000 More than RM2,000
RM801 - RM1,000 More than RM2,000
Source: EPF Source: EPF
Government is also Inflation is not the problem of consumers only. The Government is also
directly affected by affected, particularly from the rising cost of construction and building materials.
inflation… A good example of ballooning inflation in the infrastructure sector is the Second
Penang Bridge, where construction costs have jumped from RM2.7b quoted in
the 9MP two years ago to RM4.3b at the start of this year. Consequently, the
gross development spending allocations under 9MP was raised by 15% to
RM230b from the original RM200b. Given that RM81.6b has been utilised from
2006 up to 1Q08, this leaves another RM148.4b over the following 2-¾ years
of the 9MP period. However, we believe the higher allocation reflects mainly
“inflation” rather than more projects.
Overnight Policy Rate (OPR) – To raise or not to raise…?
Despite surging inflation, With surging inflation, all eyes are now on Bank Negara Malaysia (BNM) and
we expect stable OPR at its monetary policy. Historically, BNM did respond to surge in inflation rate via
3.5% interest rate hikes as per the chart below, particularly during the “oil price
shock” in the early-70s and 80s, the pre-crisis boom years of the 90s, and
more recently, the late 2005-early 2006 period.
Malaysia: Inflation Rate (%) and Interest Rates (% p.a.)

18 13
16 12
14
11
12
10
10
(% p.a.)
(%)
9
8
8
6
7
4
2 6
0 5
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006
CPI (LHS) 3M KLIBOR (RHS) BLR (RHS)
Historically, BNM raised However, the more recent episodes of benchmark interest rate hikes occurred
interest rate when inflation at a time of strong economic and domestic demand growth e.g. pre-crisis 90s
rate up… when real GDP and domestic demand growth averaged 9.5% p.a. and 11.4%
p.a. respectively, while the 80bps hike in OPR between Oct ’05 and Apr ’06
was preceded by two years (2004-05) of 6.1% p.a. real GDP expansion and
7.6% p.a. domestic demand growth, above the average of 5.8% and 6.5%
respectively for 2002-06, i.e. the years after the East Asian financial crisis and
dotcom bubble (1997-2001). The exception was in 1997-98 when the surge in
interest rates was due to a liquidity crunch following capital flight, triggered by
the stock market collapse and Ringgit devaluation – the real culprits behind the
acceleration in inflation rate.
Moreover, there’s negative The call for an OPR hike under current inflationary circumstances is
real interest rate now, predominantly about addressing falling/negative real rates of returns on
especially on deposits... savings/deposits. However, this assumes that an overwhelming majority of
Malaysians are net “voluntary” savers and interest rate hikes provide a major
boost to overall income/wealth via higher savings/deposit rates. To note, the
high savings ratio in Malaysia (RM237b or 38% of Gross National Income last
year) is partly due to workers’ contributions to EPF. However, this savings is
meant for retirement rather than funding current consumption of cash-strapped
consumers. Furthermore, the income and savings profiles of personal income
taxpayers and EPF contributors mentioned earlier casts doubts on the amount
of “voluntary savings” among the masses, hence putting into question the merit
of an interest rate hike for such a purpose.

Malaysia: Inflation Rate (%) and 3-Month Deposit Rates (% p.a.)

5
0
Jun-04
Oct-04
Dec-04
Feb-05
Jun-05
Oct-05
Dec-05
Feb-06
Jun-06
Oct-06
Dec-06
Feb-07
Jun-07
Oct-07
Dec-07
Feb-08
Apr-04
Aug-04
Apr-05
Aug-05
Apr-06
Aug-06
Apr-07
Aug-07
Apr-08
(1)
(2)
Real 3MFD CPI 3MFD
But “non-interest rate Therefore, notwithstanding the elevated inflationary pressures and risks, we
measures” to deal with see Bank Negara Malaysia (BNM) maintaining its benchmark interest rate at
inflation so far… 3.5% for the rest of this year. This is essentially to support local economic
growth amid uncertainties on the external front, which is dominated by the
outlook of anemic US economic growth, if not an outright recession, which is
accompanied by the increasing risk of a potential slowdown in other major and
regional countries as inflation rears its ugly head that may necessitate
monetary policy tightening globally. In addition, domestic construction and
public investment activities have been hampered by reviews, delays and
cancellations of infrastructure and investment projects under the 9MP and
regional development corridors in the aftermath of the General Election and
rising building material and fuel costs.
The “commodity cost-push” nature of the present inflationary episode explains
the use of “non-interest rate” measures to deal with inflation and cushion the
impact of the recent fuel-energy price hikes, summarised in the table overleaf.

Anti-Inflation “Non-Interest Rate” Measures Announced So Far

Measures/Policies Details
Supply • Banned exports of 10 essential items – sugar, wheat flour, cooking
oil, chicken, cement and clinker (except with permits), mild steel bars,
petrol, all grades of spirits and gasoline for motors, diesel and LPG.
• RM4b allocation for agriculture sector for “food security policy” to
boost local food production, increase self-sufficiency, build up
national stockpiles, ensure adequate supplies of basic food items at
affordable prices - e.g. RM750m for the import of 500,000 metric
tonnes of rice to build national rice stockpiles.
• Additional RM500m allocation for the agriculture sector and agro-
based industries to cover the rising costs of inputs and production.
Price • Streamlined LPG prices between Sabah-Sarawak with Peninsular
Malaysia at RM1.75 per kg. This lowered East Malaysia’s LPG
prices by 8 sen, and will cost the Government an additional RM16.3m
in LPG subsidies annually.
• Maintained controlled pricing for Local Super Grade with 15% broken
content (Super Tempatan or ST15) at between RM1.65 per kg and
RM1.80 per kg according to specified zones nationwide, and imposed
ceiling prices on another two types of local rice i.e. RM2.80 per kg for
Local Super Grade 5% (ST5) and RM2.70 per kg for Local Super
Grade 10% (ST10).
• No further revision in fuel prices until end-2008 after the hikes on 4
Jun.
Income • Extension of the public sector retirement age to 58 from 56 effective 1
Jul ’08, and improvement in the pension system effective 1 Jan ’09
e.g. calculating pensions based on a maximum of 30 years of service
(25 years currently) and 100% derivative pension received by next-of-
kin (depreciates to 70% after 12½ years currently).
• Raised the Guaranteed Minimum Price (GMP) for padi planters to
RM750 per metric tonne from RM650 per metric tonne.
Others • One-off cash rebates of RM625 for private vehicle owners of cars
(<2,000cc) and SUV/jeeps/trucks (<2,500cc), and RM150 for
motorcycles (<250cc) between Apr ’08 and Mar ’09, plus road tax
cuts of RM200 for vehicle owners and RM50 for motorcycle owners
who are not eligible for the cash rebates effective 1 Jul ’08. The
RM625 cash rebate and RM200 road tax cut were extended to
include private vehicles with capacity of up to 3,000cc in the interiors
of Sabah and Sarawak.
• RM2b austerity measures by Federal Government
• Small business permits for low income groups, including civil
servants e.g. petty trading and hawkers at agro markets (pasar tani),
night markets and housing areas.
• Government raised petrol stations operators’ sales commission to
12.19 sen per litre (9.5 sen previously) for petrol and 7 sen per litre
for diesel (4.5 sen previously).
• RM100m micro-credit scheme under Amanah Ikhtiar Malaysia (AIM)
for urban low income group.
At the same time, between now and Budget 2009 scheduled for tabling in
Parliament on 29 Aug, the Government is looking at other measures,
summarised in the table next page:

Other “Non-Interest Rate” Measures Under Considerations

Measures/Policies Details
Supply/Price • Adding more to the list of controlled items to ensure supplies and
affordable prices.
• Further standardization in the prices of essentials nationwide e.g.
cooking oil, eggs, sweetened condensed milk and rice.
• Additional RM500m allocation for the agriculture sector and agro-
based industries to cover the rising cost of inputs and production.
• Outcome of the Ministry of Works’ study by Aug/Sep on privatised
highway concessions that may lead to lower toll rates.
• Improving the infrastructure and provision of public transport services
nationwide, which will be one of the priorities of Budget 2009.
• Raising the amount of transportation sector’s diesel quota at the
extra-subsidised price of RM1.43 per litre.
• Dual pump system at petrol stations in border towns so that
foreigners will pay market prices while locals get subsidized prices of
petrol and diesel.
Income • Decision on the remaining CUEPACS demands, i.e. reinstatement of
critical allowances for Group II staff, higher housing allowances and
absorption of contract employees into permanent service, before the
tabling of 2009 Budget on 29 Aug.
• Evaluating minimum wage policy, which was requested by the
Malaysian Trade Union Congress (MTUC) i.e. RM900 minimum wage
plus RM300 cost of living allowance.
• Budget 2009 proposals to raise personal income tax relief/rebates or
even lower the income tax rate, plus cut in EPF contributions.
Others • Extending and expanding the coverage of social safety net currently
available only in Peninsular to include indigenous groups, Sabah and
Sarawak, as well as raising the income threshold to qualify for the
benefits and increases in several types of allowances/assistance.
“Dovish” rather than Moreover, we believe that BNM can and should exercise monetary policy
“hawkish” statements by flexibility given the absence of an inflation target – unlike other major and
MoF2 and BNM regional economies, and to avoid creating more hardships for the people, the
Governor… majority of which are low income. And based on the statements by the Second
Finance Minister (MoF2) and the central bank Governor after the
announcements of the fuel-energy price hikes, changes to the OPR are not
likely to happen anytime soon:
• MOF2 – No need to raise interest rates, many non-interest rate measures
have been announced to deal with rising inflation/cost of living (The Edge,
9-15 Jun).
• BNM Governor – Still too early to assess impact on fuel & energy subsidies
review on growth and inflation, implying “wait & see” (12 Jun).
• BNM Governor – The central bank is not in a hurry to revise interest rates
to counter the present inflationary pressure, and has no intention to call for
a Monetary Policy Committee (MPC) meeting before the scheduled
meeting on 25 Jul. It expects inflation to taper off in the second half of next
year if there are no more adjustments to prices which makes it
unnecessary to consider a monetary policy response (16 Jun).
“Moral suasion” replaces We also would not rule out that the possibility of “moral suasion” being used
OPR on interest rate with regards to interest rate. In fact, we believe “moral suasion” was at work
policy…? recently. Some of the commercial banks were preparing to raise their hire-
purchase (HP) rates to 2.7%-3.7% from 2.45%-2.50% effective 23 June. We
understand from the banking sources that after consultations with BNM, the
banks have decided to not raise their HP rates as planned.

Ringgit – Maintaining year-end target of RM3.10 per USD
RM/USD to end 2008 on Another issue being taken up by proponents of interest rate hikes is the need
higher note after “summer to address the current weakness in Ringgit/US Dollar exchange rate, which is
blues”… inflationary in itself via higher import costs.
So far this year, the Ringgit advanced to a high of RM3.131 on 23 Apr from
RM3.307 at end-2007, but then fell to a low RM3.2762 on 13 Jun, and at the
time of writing, is hovering at the RM3.24-RM3.27 range. However, we note
that current softening in the Ringgit against the greenback appears to be
“seasonal”. Since Ringgit was de-pegged from the US Dollar back in Jul ’05,
the currency appears to rally in the first and fourth quarters, and retreat in the
second and third quarters.
Malaysia: Ringgit per USD (2005-2008 YTD)

3.9
3.8
3.7
3.6
3.5
3.4
3.3
3.2
3.1
3- 3- 3- 3- 3- 3- 3- 3- 3- 3- 3- 3- 3- 3-
Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr-
05 05 05 05 06 06 06 06 07 07 07 07 08 08
Source: Bloomberg
Moreover, the fundamentals underpinning the Ringgit remain positive and point
to long-term upside for the currency, i.e. sustained trade/current account
surplus, revival in foreign direct investments (FDI), improvements in banking
and corporate financials, and rising external reserves. In contrast, the US
Dollar is plagued by the perennial “bogey” of twin deficits (current account and
fiscal shortfalls) and a fragile economic outlook and banking/financial system
that should be negative for the currency. Therefore, we continue to expect the
Ringgit to end this year firmer at RM3.10 per USD.

Fiscal Policy – “Expansionary” by default and design…
Budget deficit target for Meanwhile, we do not see how the Government is going to achive this year’s
2008 “busted” budget deficit target of RM21b or 3.1% of GDP. The shortfall was already
RM7.7b or 4.4% in 1Q08 alone.
Malaysia: Fiscal Balance (2000 – 1Q 2008)

0
2000 2001 2002 2003 2004 2005 2006 2007 1Q 2008
(4)
(8)
(12)
(16)
(20)
(24)
RMbn % of GDP
Source: BNM
Need for higher spending Although the Government said it saved RM13.7b in fuel and energy subsidies
…“confirmed” following last month’s decision to raise fuel-energy prices, this has been
negated by several instances of “backpeddaling”, namely:
• The Government’s pledge not to raise fuel prices further for the rest of this
year, against the previous plan of a monthly review in fuel prices and
capping fuel subsidies at 30 sen per litre. Currently, with crude oil prices at
around USD135 per barrel, unsubsidised petrol prices are estimated to be
around RM3.45-RM3.50 per litre. Therefore, we think fuel subsidies (i.e.
direct subsidies and sales tax exemptions on petrol and diesel prices) will
cost the Government more than the expected RM28.9b this year (2007:
RM16.2b) after the recent fuel-energy price hikes.
• Removing the short-lived bans on sales of subsidized petrol and diesel to
foreigners at border towns. However, there is now a plan to introduce a
dual pump system at filling stations in these towns so that foreigners will
have to pay unsubsidized market prices for petrol and diesel, to ensure that
only locals benefit from fuel subsidies. But the exact timing to implement
the plan is not known.
• Raising the diesel quota further for the transportation sector.
• Indefinite deferment of Goods and Services Tax (GST) against the original
proposal to impose the tax last year.
At the same time, Government expenditure – both operating and development
spending – are coming under upward pressure to increase to more than what
was originally allocated under Budget 2008 and the whole of 9MP (2006-2010)
due to:
• Further goodies for civil servants and pensioners already announced – and
to be announced – this year after last year’s salary and pension hikes.
• Rising costs of construction and building materials affecting development
spending allocations (as mentioned earlier).

• The likelihood of people-friendly measures in the upcoming Budget 2009,

including higher personal income tax reliefs/rebates or even reduction in
personal income tax rates as well as larger operating and development
spending allocations for priority areas like food security, transportation,
security, education, health and rural development.
• Expansion and extension in social safety nets for low income groups and
the poor, especially in terms of financial assistance for housing, education,
health, disability and old age.
Fiscal balance of minus Consequently, we are looking at a budget deficit of 3.5%-4.0% of GDP this
3.5%-4.0% of GDP year and expect it to remain stuck in the same range next year. The lower end
in 2008-09 “plausible” of this fiscal balance range assumes the Government postpones or cancels
some of the major projects identified under 9MP and regional development
corridors, giving priority to critical areas like food security, transportation,
security, education, health and rural development. The higher end of the range
assumes the Government proceeds with all the 9MP and regional development
corridors’ infrastructure and development projects, on top of the high-priority
segments mentioned.
What could go wrong…or right?
Downside risks…? We see several downside risks to our current views and projections on the
Malaysian economy, namely:
• Crude oil price surging towards USD200 per barrel within next 6-12
months, forcing the Government to either review fuel subsidies and prices
again this year, or otherwise “foot the bill” in terms of larger fuel subsidies
and hence budget deficit.
• Further increases in food commodity prices, further worsening inflationary
pressures.
• BNM unexpectedly raising the OPR this year and global central banks
tightening monetary policy aggressively, dampening local and global
economic outlooks.
• More domestic political headwinds.
Upside surprises…? On the other side of the coin, there could be some upside surprises from:
• A more resilient US economy, in turn registering stronger than expected
real GDP growth in 2008-2009.
• Government-initiated macroeconomic policy stimulus packages that BNM
alluded to during its Annual Report 2007 briefing back in March, which the
central bank claimed could boost Malaysia’s real GDP growth by between
0.5-1.5 ppts.
• Stronger-than-expected growth in private investment amid “positive
momentum” in key indicators so far this year – e.g. MIDA’s approved
manufacturing investment in Jan-Apr ’08 was RM23.9b (Jan-Apr ’07:
RM12.6b; 2007: RM59.9b) while actual FDI was RM6.8b in 1Q08 (1Q07:
RM5.7b; 2007: RM29.1b).

Steel
Steel
Steel retains its luster
Demand for steel is still expected to remain strong, given tight global
supply, and firm demand from Asia and the Middle East.
Outlook for Malaysian long steel players remains positive, although
higher utility costs have altered producers’ cost structure slightly,
and could lead to margin contraction over the next quarter or two.
We remain selective in our stock picks, preferring Ann Joo for its cost
minimization strategies, and Kinsteel for its exposure to DRI exports.
Growth momentum to run The International Iron and Steel Institute (IISI) recently forecast that global
into 2009 steel consumption will grow by 6.7% in 2008 and 6.3% in 2009, led by Asia,
particularly China, with strong steel demand growth of 11.5% in 2008 and 10%
in 2009. This was only a marginal downgrade from an earlier forecast, which is
positive, considering that expectations were for steel consumption to decline
considerably as a US-led slowdown spreads to the rest of the world. On the
supply side, capacity constraints remain. With a perceived shortage in steel
supply over the near-term, we expect steel prices to at least be supported into
early-09.
Changing cost structure Despite the Jul ’08 increase in electricity and gas prices, Malaysian steel
for Malaysian players producers are still expected to achieve earnings growth, backed by firm steel
prices. Nonetheless, the cost structure of steel production in Malaysia has
changed somewhat, given higher utility tariffs which used to account for <10%
of total production costs. Although the recent price liberalization for billets and
bars have made the passing on of higher costs more transparent, we believe
the increase in utility costs may still result in some profit margin contraction
over the next quarter or two for certain steel producers, unless effective cost
minimization strategies are firmly in place. Nevertheless, earnings reported
over the next two quarters are still expected to be strong YoY.
Selective local steel Due to the cyclical nature of the steel industry, our sector picks are more
stock picks conservative, preferring companies with extensive experience, especially in
inventory management, which manage their costs well, and which offer a
diversified business direction (either upstream or downstream). Also, in view of
the challenges facing the industry, particularly with rising material costs, we
prefer exposure to selected stocks such as Ann Joo Resources, for its prudent
procurement of scrap, and its progression towards becoming an integrated
steel player once its mini-blast furnace is operational in early-09. We also like
Kinsteel, which, apart from benefiting from the high prices of bars and billets,
stands to benefit from the export of direct-reduced iron (DRI) where prices trail
the strong trends of scrap prices. Also, the listing of Perwaja Steel in Aug ‘08
should benefit Kinsteel’s minority shareholders.
Comparison of selected steel stocks
Company FY Price Mkt PER (x) EV/EBITDA (x) Div Yield (%) PBV (x) ROE (%)
20-Jun Cap 2008 2009 2008 2009 2008 2009 2008 2008
Malaysia RM RM b
Kinsteel Dec 1.43 1.3 5.9 5.2 5.5 5.0 1.9 1.9 1.3 23.0
Ann Joo Dec 3.78 2.0 5.2 5.1 3.5 3.4 4.2 4.2 1.5 40.0
Lion Industries June 2.67 1.9 3.5 4.2 4.7 5.6 0.4 0.5 0.7 15.5
M’sia Steel Works Dec 1.56 0.2 3.2 3.7 N/a N/a 4.3 3.7 N/a 20.7
Southern Steel Dec 2.92 1.2 4.6 5.3 4.6 4.5 6.1 5.1 1.4 24.4
Thailand THB THB b

Thainox Stainless Dec 1.14 9.1 7.5 6.7 5.7 4.0 7.9 8.3 0.7 10.0
Sahaviriya Steel Inds Dec 1.06 13.9 7.6 8.6 9.3 7.8 3.8 3.8 0.6 7.2
South Korea Won KRW b

Korea Iron & Steel Dec 86900 1043 9.3 8.1 6.7 5.8 0.9 0.9 1.2 14.8
POSCO Dec 552000 48127 11.0 10.6 6.8 6.5 1.8 1.9 1.7 16.0
Dongkuk Steel Mill Dec 45100 2788 8.8 8.8 5.4 5.4 1.7 1.7 1.1 13.2
Source: Aseambankers, Bloomberg estimates

Steel
Growth momentum to run into 2009

Global steel consumption Global steel demand, which recorded steady growth of 6.6% in 2007, is set to
continues to grow … grow further in 2008-09. IISI’s latest (Apr ’08) forecast was for steel
consumption to grow by 6.7% in 2008 (marginally lowered from Oct ‘07’s
projection of 6.8%), with Asia taking the lion’s share (56%) of global demand.
Despite a slugglish economy and lower exports to the US, other parts of the
world are expected to continue registering positive growth in steel
consumption, particularly China, which is set to display 10-11% p.a. growth
over 2008-09. We view IISI’s marginal downgrade in forecast positively, as
expectations were for steel consumption to dampen considerably with the
slowdown in US, and spill over to the rest of the world.
Steel: Global outlook for consumption (2007-09) (m tons)
Region (YoY growth)
2007 2008 2009
EU 3.4 1.6 2.3
Other Europe 9.4 6.0 6.7
Commonwealth of Independent States 13.7 8.9 9.6
North America (9.1) 1.9 1.0
Central and South America 13.7 8.9 7.0
Africa 8.5 5.9 5.9
Middle East 12.7 11.1 9.0
Asia and Oceania (ex-China) 5.0 4.2 4.6
China 14.2 11.5 10.0
Brazil, Russia, India, China 13.1 11.1 10.3
World 6.6 6.7 6.3
Source: International Iron and Steel Institute
Note: Driven by development infrastructure in transportation, telecommunications and utilities,
global steel demand will be led by Asia, which took up 56% of world steel consumption in 2007, of
which, China accounted for 34%.
Steel: Consumption by region (2008) Steel: Consumption by region (2009)

Central &
Central &
South
South America Africa North America Africa
Middle East America Middle East
3% 2% Asia (ex 2%
North America 4% 11% 4% Asia (ex
China) CIS 3%
11% China)
21% 5%
21%
CIS
5%
EU & other
EU & other China
Europe China
Europe 36%
17% 37%
18%
Source: International Iron and Steel Institute Source: International Iron and Steel Institute
… but supply is still tight Concerns about a steel shortage still remain as demand growth is not matched
in India… by capacity additions in Asia. In India, domestic steel production grew only
5.2% p.a. in 2007-08 while steel consumption grew at a much higher 11.7%
p.a.. The total production of finished steel in India hovered at 55m tons p.a. in
2007-08 vs. consumption of almost 52m tons p.a.. According to India’s
Associated Chambers of Commerce and Industry, steel demand in the country
is expected to reach 66-70m p.a. tons in 2011-12, while the industry’s capacity
is expanding at 31m tons p.a. by 2012. Thus, demand growth still out-paces
that of supply, at least, until 2010.

Steel
… and China Over in China, crude steel demand is expected to rise 11% in 2008. Yet, crude
steel production in the country is anticipated to grow by only 6.3%. China’s
crude steel production recorded a CAGR of 16% from 1996 to 2006. While
steel production capacity grows every year, we understand that the rate of
growth has tapered off since 2004 with the Chinese Government’s heightened
efforts to close down inefficient, marginal steel mills, and clean up the
environment.
China: Output of pig iron, crude steel and rolled steel (1978-2006)
(m tons)
500
400
300
200
100
0
1978
1985
1990
1992
1994
1996
1998
2000
2002
2004
2006
Pig iron Crude Steel Rolled steel
Source: National Bureau of Statistics of China
China: Newly-added capacity – coke, pig iron and steel making (2002-2006)
(m tons)
100
80
60
40
20
0
2002
2003
2004
2005
2006
Coke Pig iron Steel making
Source: National Bureau of Statistics of China
Tight flat steel supply due to With a three-year reconstruction period, China’s Sichuan province is expected
Sichuan’s reconstruction to face tight steel supplies, given that the province has a current total
programme … construction steel capacity of approximately 16m tons, with a full utilisation rate
of 99% (15.9m tons). Based on media sources, the province is expected to
face a construction steel shortage of 3.0m-3.6m tonnes p.a over the next three
years, assuming there is no significant capacity expansion,stemming from its
post-quake reconstruction programme. As it stands, efforts to provide
emergency housing or temporary shelter to the quake victims have also
spurred a surge in demand for flat steel, particularly hot rolled-coil, which is
used to manufacture coated sheets.

Steel
China: Hot-rolled coils market gets a mini-boost

Though previously deemed to be a softer market than long products, prices of hot rolled coils jumped over 20% YTD to reach a record
USD860/t in early Jun ’08, before settling at USD830/t. Concern over increasing prices of steel products for Sichuan’s reconstruction works
has led the China Iron and Steel Association to request that its members maintain prices at pre-quake levels.
An estimated 900,000 tonnes of colour coated sheet will be required by China for its 1.5m prefabricated emergency houses, to be built by
mid-Aug ’08, of which about 250,000 are to be completed by end-Jun ’08.
The Sichuan reconstruction programme should keep Chinese steel mills busy, catering to internal demand and foregoing export
opportunities, given the priority to fulfill the national agenda. We understand that China’s leading steelmaker, Baosteel Iron and Steel, has
received orders for about 50,000 tonnes of coated sheets, and has temporarily suspended export contracts for Jun-Jul ’08, while its other
domestic clients have been placed in the queue for coated steel deliveries until Aug ’08. Meanwhile, coated sheet manufacturers in Beijing
and the Hebei province have also received orders for approximately 100,000 tonnes of sheet for the Sichuan’s temporary housing project.
The concentration of supplies to China’s domestic requirements should help South-East Asian flat steel manufacturers to fill in any supply
gaps in the rest of Asia, and hence, prices of hot-rolled coil should stay firm in 3Q08.
World: Hot-rolled coil export prices (FOB) China: Mainland hot-rolled coil prices
(USD/ton) (USD/ton)
950 750
850 650
750
550
650
450
550
350
450
Jan-07
Mar-07
Jul-07
Sep-07
Jan-08
Mar-08
May-07
Nov-07
May-08
Jan-07
Mar-07
Jul-07
Sep-07
Jan-08
Mar-08
May-07
Nov-07
Source: Bloomberg
… to flow into the long Once heavy reconstruction works in Sichuan start, we expect demand for long
(construction) steel sector, products to take shape, in tandem with infrastructure rebuilding. Initial quake
creating a supply gap damage is estimated at >CNY190b (USD28b) for property, CNY15b (USD2.2b)
for roads, and CNY7b (USD1b) for telecommunications. The concentration of
China’s steel supply towards reconstruction efforts could create a supply gap in
Asia, which should support regional steel prices.
Feverish development in Elsewhere, it is estimated that the UAE consumed 3.5m tonnes of steel in 2006
the Middle East also saps (out of 15m tons consumed in the Mid-East region), with key development
supply… areas being Dubai and Abu Dhabi. It is believed that there are still
infrastructure projects totaling AED3.7tr (USD1tr) in the Gulf region, which
could push steel consumption by 31% to 19.7m tonnes by end-08. Rising
global crude oil prices led to a feverish pace of development in the Gulf region.
The increase in demand for steel bars from the UAE has, to some extent,
pushed import prices from Turkey to USD1,400/t fob, over the last two weeks,
vs. USD1,000/t in May ’08, and USD730/t in early Jan ’08.

Steel
Steel: Price trends of selected products in Dubai
(AED/tonne)
2700
2500
2300
2100
1900
1700
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07
Flat steel (tonne) (Turkey) Flat steel (tonne) (UAE)

Steel bars (6-8mm) (tonne) Steel bars (10-32mm) (tonne)
Source: Statistics Centre of Dubai
Middle East: Steel capacity expansion plans

There is still an acute need for steel in the Middle East. Plans are underway to construct steel mills in the Gulf region over the next few
years, with an estimated total investment cost of USD18b. We understand that 47 steel plants are either in the midst of being planned, or
are undergoing construction in the UAE, Saudi Arabia, Oman, Bahrain and Qatar, encompassing the manufacturing of reinforcing bars
(rebars) and railway tracks.
The construction of the new steel plants is aimed at easing dependence on imports, in view of the shortage in steel supply and price
volatility. In any case, the said steel plants are not expected to be commissioned in the immediate term.
Over the next two to three years, demand for steel imports would still be strong in the Middle East. Nonetheless, South East Asian
suppliers would have to contend with fierce competitors from the region’s primary suppliers in Turkey and India.
Middle East: Steel production trends (1980-2007)
(m tons)
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Source: Source: International Iron & Steel Institute

Steel
…thus supporting steel Following infrastructure development, prices of billets and bars have been on a
prices into early-2009 marked uptrend since 2007, and have risen sharply, by at least 50% since the
start of 2008. While the prices have been buouyed by robust demand, equally
important was the incidence of high input costs, leading manufacturers to pass
on higher scrap and iron ore prices, and for some manufacturers (with blast
furnaces), coke costs, to steel buyers. In the tight steel market which has
looked more acute since 1Q08, producers have had the upper hand in
dictating selling prices. And, going by the expected 6.3-6.7% increase in global
steel demand in 2008-09 amid supply constraints, we expect the current high
steel price to be at least maintained into early-2009.
Turkey: Export prices of billets (FOB) China: Export prices of billets (FOB Shanghai)
(USD/ton) (USD/ton)
1400 1050
1200 950
850
1000
750
800 650
600 550
450
400
350
200 Oct-06
Oct-07
Jan-07
Apr-07
Jul-07
Jan-08
Apr-08
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
World: Price trend of rebars since 2006 CIS: Export prices of rebars (FOB)
(USD/ton) (USD/ton)
1100 1300
1000 1100
900
900
800
700 700
600 500
500
300
400
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jan-06
Sep-06
Jan-07
Sep-07
Jan-08
May-06
May-07
May-08
Source: Bloomberg, Steel Business Briefing Commodities Research *CIS – Commonwealth of Independent States (formerly Union of
Soviet Socialist Republics (USSR)) Source: Bloomberg

Steel
Steel: Growing demand since early 2000s
Steel: Consumption growth trends in selected regions (2001-2006

35% The increase in steel demand
from emerging economies was
30% evident since the early 2000’s
with demand from China, India
25%
and the Middle East,
20% experiencing a CAGR of 19%,
9% and 11%, respectively, over
15%
2001-2006.
10%
5%
0%
-5%
-10%
2001 2002 2003 2004 2005 2006
EU Middle East Central and South America China India
Source: International Iron & Steel Institute
China, India, UAE : Gross investment as % of GDP (1998-2009)

Gross inv as % of Media reports have cited
GDP development expenditure in
emerging economies to stand
50
at about USD1tr in 2008, with
45 China accounting for almost
9% of the total, and India,
40 about 3%, driven by rapid
35 urbanisation. Gross investment
as a proportion of GDP for
30 China and India have also seen
25 CAGR of 2% and 5%,
respectively, over 1997-2007.
20
15
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008F
2009F
India China UAE

Source: Moody’ Investors Service
Selected ASEAN countries: Gross investments as % of GDP (1998-2009)

Gross inv as % of In South East Asia, the level of
GDP capital injection, gauged from
gross investments (measured
40 as expenditure on housing,
structures and equipment) as a
35 proportion of GDP, saw
positive investment growth in
30
Thailand, Indonesia and
25 Vietnam, which experienced a
CAGR of 3-4% over 1998-
20 2007. We believe infrastructure
development had a hand in
15 sustaining regional steel
consumption, and positive
10 investment growth is still
expected in 2008-09 for
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008F
2009F
Thailand, Indonesia and

Malaysia, although at low-
Thailand Indonesia Malay sia Vietnam Singapore single digit levels of 1-3%.
Source: Moody’ Investors Service

Steel
Steel: Growing demand since early 2000s
Malaysia / Asia: Steel production trends (1980-2007)

A natural consequence of the
(m tons) (m tons) rising Asian steel demand is
800000 7000 the growth of steel production
within the region, which has
700000 6000 seen a CAGR of 12% over
2000-07. Similarly, Malaysia
600000 also saw a healthy steel
5000
production CAGR of 8% over
500000 the same period, which we
4000
400000 believe was driven by its
3000 increase in exports to the
300000 region and beyond, given
2000 slower domestic construction
200000 activities during the early
1000 2000s.
100000
0 0
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Asia Malay sia
Source: International Iron & Steel Institute
Malaysia: consumption of long and flat products (1992-2006)
(000 tons) (000 tons)
5000 9000
4500 8000
7000
4000
6000
3500 5000
3000 4000
3000
2500
2000
2000 1000
1500 0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Long products Flat products Total
Source: Source: MISIF

Steel
Changing cost structure for Malaysian players
Cost structure changes Raw material makes up the bulk (70-80%) of steel producers’ costs, while
electricity and gas accounts for about 10% or less (depending on the
technology used). However, the Jul ’08 increase in electricity tariffs (+26%) and
gas prices (+187%) have somewhat altered the cost structure of Malaysian
steel players. Amidst firm steel prices, there is likelihood that some producers
may experience margin contraction in the coming quarter or two, given their
increased sensitivity towards changes to energy costs. Nevertheless, local
producers should still achieve positive earnings growth over 2008-09.
Gross margin to be lower While the different technology applications in steel production (i.e. electric arc
from 3Q08 furnace vs. basic oxygen furnace) yield different margins, we estimate that at
an average steel bar selling steel price of USD1,000/t, average gross profits
would probably hover at USD180/t from 3Q08, vs. USD250/ previously, given
higher input and utility costs.
Key input comparisons: Electric Arc Furnace vs. Basic Oxygen Furnace
Electric Arc Furnace Basic Oxygen Furnace
Factor Unit Factor Unit
Steel scrap 1.1 ton Iron ore 1.8 ton
Oxygen 50 M3 Coking coal 0.7 ton
Electricity 0.4 MW/hr Steel scrap 0.14 ton
Thermal energy 0.4 GJ Oxygen 210 m3
Electricity 0.13 MW/hr
Source: SteelOnTheNet
Beijing Olympics … The ongoing closure of polluting steel production plants in China in view of the
Beijing Olympics in Aug ’08 could have a positive immediate term impact on
steel input costs in the region. Beijing officials have laid out a series of
measures to halt construction works, slow down steel production, and shut
down quarries in the capital’s vicinity in the weeks prior to the Summer Games,
and even after the event, due to environmental controls. We understand that a
two-month construction ban would be in place, beginning mid-Jul ’08, while
heavy-polluting entities, including steel mills, coke plants and refineries would
be temporarily closed, or forced to reduce production.
… to provide respite to The move could lower raw material consumption and electricity use, which
material costs? could result in a temporary consolidation of input prices, such as iron ore, given
lower demand. This would augur well for regional steel players’ procurement.
While costs of iron ore have somewhat abated in the recent weeks due to
stockpiles built up at Chinese ports, iron ore prices could soften further over the
near-term, given lower consumption for steel during the Olympics. As it stands,
export prices of iron ore from India have already dropped USD10-15/t, to
USD115-120/t over the past six weeks, and are only expected to pick up from
end-3Q08.

Steel
Selective picks in local steel stocks
Given that steel is a cyclical industry, our sector picks are conservative,
preferring companies with extensive experience especially in inventory
management, with well-managed costs and a diversified business direction
(either upstream or downstream).
Ann Joo Resources – good While rising costs would be passed on in the form of higher selling prices, we
procurement strategy; mini believe some steel players are already taking steps for prudent procurement of
blast furnace to boost raw materials to guard against potential margin erosion and supply fluctuations.
gains and savings A case in point is Ann Joo Resources (AJR MK, Buy, TP: RM5.25), which has
procured its scrap supply up to 3Q08 at considerably lower prices than current
levels, allowing estimated gross margins of at least USD200/t, on the back of
selling steel prices of about USD1,000/t.
Ann Joo is also looking to buy containerized scrap (currently priced at
USD650/t-USD700/t cfr in the region) vs. bulk scrap (priced at USD770/t cnf),
which may result in further cost savings. We remain positive on the company’s
scrap procurement strategy as part of its cost minimization efforts in the face of
rising commodity costs. We also welcome its progression towards becoming an
integrated steel player once its mini-blast furnace is operational in early-09,
which would boost production gains and cost savings.
Kinsteel – DRI alternative; We also like Kinsteel (KSB MK; Buy; TP: RM1.95) for its exposure to the
Perwaja listing to benefit global direct-reduced iron (DRI) market, on top of its production of billets and
minorities bars. As an alternative to scrap, DRI prices tend to trail those of scrap. 40% of
Kinsteel’s DRI production is exported, and with scrap prices remaining above
USD700/t, there are potential gains for the group, offsetting rising operating
costs due to higher electricity and gas prices.
Meanwhile, the listing of its 51% subsidiary, Perwaja Steel, should benefit
Kinsteel’s minority shareholders given the possibility of subscribing for the
shares below the IPO price of RM2.90, under the recently revised flotation
scheme. The listing, expected by Aug ‘08, would raise about RM174m,
allowing Kinsteel the financial capacity for expansion, and to refocus on the
midstream segment which has much growth potential.

Fixed Income: Developments & Outlook
Fixed Income Research

Inflation driven steepening…
The shape of the MGS yield curve for the next 3 months will be
affected by 3 factors:
– foreign participation;
– inflation; and
– supply and demand.
The overall effect of the 3 factors will be a bear steepening in the
3/10 segment, while the 10/20 will experience a milder form of bear
steepening. The T-bills market will stay mostly range-bound with a
slight upward bias.
Expect the current wide IRS/MGS spread to persist into 3Q08 and to
only start narrowing towards the end of the year.
Maintain 2008 forecast of total MGS and GII issuances of RM45.4b,

based on a budget deficit of 3.1% of GDP, and total maturity of
RM23.4b. The Government is currently on track in its issuances to
cover the expected budget deficit.
Post fuel hike, PDS issuances will not be as strong compared to the
first 5 months of the year. Expect minimal contribution (if any) from
foreign issuers for the rest of the year, and limited issuances from
local issuers. Therefore, we maintain our 2008 PDS issuances
estimate at between RM35b and RM40b.
The credit environment is expected to deteriorate further especially

in the single-A and below segments. We also caution against ABS
backed by loans to small companies.


Malaysian Rates Market
MGS and IRS rates on The Malaysian Government Securities (MGS) and Interest Rates Swap (IRS)
the rise since the fuel markets saw yields inching higher in the month of May, pushed by
price hike expectations of higher future inflation in anticipation of a hike in petrol retail
prices. The market was proven correct on 4 Jun, with the Government’s
gutsy move to increase petrol and diesel prices by 41% and 63%
respectively.
In addition to the RM0.78 and RM1.00 increase in petrol and diesel prices
respectively, electricity prices will also rise on 1 Jul. All these will cause
higher inflation going forward. Our economist expects CPI to average at
5.7% this year.
The yield curve to Recall in our last quarterly outlook, we predicted that the yield curve will start
steepen to steepen in May/June. Under the current scenario, it is a foregone
conclusion that the govvies’ yield curve will steepen. The question to ask is
by how much will it steepen?
MGS: Yield Curve Movements
MGS 3-yr 5-yr 10-yr 20-yr
5.50
5.00
4.50
4.00
3.50
3.00
Jan/06
Mar/06
May/06
Jul/06
Nov/06
Jan/07
Mar/07
May/07
Jul/07
Nov/07
Jan/08
Mar/08
May/08
Jul/08
Sep/06
Sep/07
Source: BNM Indicative Yields
IRS: Yield Curve Movements
IRS 3yr 5yr 7yr 10yr

6.0%
5.5%
5.0%
4.5%
4.0%
3.5%
Jan-07
Mar-07
May-07
Jul-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-07
Source: Bloomberg

Factors Affecting the Yield Curve

Foreign participation, We believe the shape of the MGS yield curve in the next 3 months will be
inflation, and supply affected by 3 factors:
and demand will affect
– foreign participation;
the yield curve
– inflation; and
– supply and demand.
While each of the 3 factors will affect the overall yield curve’s shape, we
believe that individually, each will impact different parts of the yield curve.
Foreign Participation
Foreign participation It is well known that since the Ringgit de-peg, foreigners invested in the local
will mostly affect the T- bond market to take advantage of the appreciating Ringgit. Given their risk
bills market aversion, foreign investors tend to invest in the shorter-end of the yield curve.
We have previously noted that they used to be very active in carry trades in
the bills market, and also up to the 3-year segment of the MGS curve.
However, due to the softer Ringgit of late, their presence has diminished
slightly.
The 3-month Malaysian T-bill has been hovering between 3.25% and 3.55%,
while the 6-month bill has been range bound between 3.30% and 3.60%.
Given our view of a soft and range-bound Ringgit, and steady overnight
policy rate (OPR) over the next 3 months, we expect the T-bills market to
stay within its current range, but with a slight upward bias.
Should the Ringgit show signs of strengthening in the near future, we can
expect foreign investors to bid down the T-bills level.
Malaysian T-bills: 3- and 6-months
MTB 3M MTB 6M
3.65
3.60
3.55
3.50
3.45
3.40
3.35
3.30
3.25
3.20
3.15
3.10
1-Jan-08
21-Jan-08
10-Feb-08
1-Mar-08
21-Mar-08
20-May-08
9-Jun-08
29-Jun-08
10-Apr-08
30-Apr-08
Inflation
Inflation will take Meanwhile, inflation will take center-stage in influencing the yield curve.
center-stage and is Overall, it is expected to cause a bear steepening on the curve, eroding the
expected to cause a purchasing power of bonds' fixed interest payments. In an environment
bear steepening on the where inflation is expected to rise, investors would demand larger coupons
curve from newly issued bonds, or higher yields from existing bonds.
We expect inflationary pressures to have the strongest impact on the 3/10
segment. At the point of writing, the 3- and 10-year MGS have risen by 55
and 73 bps respectively – a widening of 18 bps.

3/10 to experience a Overall, we expect the 3/10 segment of the MGS market to continue to
parallel shift upwards and experience both a parallel shift upwards and a widening of spreads.
widening
Fund of spreads
managers’ However, we believe the 3-year’s rise will be capped as most local fund
demand for the 3-year managers are still awash with cash. These funds are mandated to invest in
security will cap yields fixed-income securities and will therefore be looking to purchase them when
yields rise to levels at which they are comfortable. We believe, during periods
of rising inflation, fund managers will go short on duration, and therefore will
purchase more 3s than 10s. This action will cause the 3/10 spread to widen
further.
Supply and Demand

Demand for the 20-year Ceteris paribus, inflation should have a more devastating effect on the 10/20
will counter the inflation compared to the 3/10 segment, which should cause a more severe form of
effect on the 10/20 bear steepening on the former segment. However, inflation is not the only
segment factor that will affect the 10/20 segment. Similar to the 3-year security, we
believe there is pent-up demand for the 20-year paper.
The amount outstanding for the current 20-year MGS MX5/27 is only RM6b.
Meanwhile, the auction for the new 20s is scheduled only in Sep ’08. Despite
the low supply of the 20s, demand for the long bond is high especially among
insurance companies. The expected demand for the 20s will therefore
counter the inflation effect, causing the 10/20 spread to widen slightly as the
final result.
Insurance companies Therefore, the interplay between inflation, and the supply and demand for the
are expected to support 20-year bond will firstly cause a parallel upward shift in the 10/20 segment,
the 20-year bond mirroring the expected shift in the 3/10 segment. Secondly, there should be a
form of widening in the 10/20 spread, but this will be capped by demand for
the 20s.
A quick check on the historical 10/20 spreads confirmed our suspicions as
the 10- and 20-year has risen 77 and 71 bps since early May – a
combination of a parallel shift upward and narrowing of spreads.
Nevertheless, we think there will be a mild widening going forward, but not to
the extent of that for the 3/10 segment.
MGS: Yield Curve Movement
MGS Current A month ago

6 months ago A year ago
5.00
4.80
4.60
4.40
4.20
4.00
3.80
3.60
3.40
3.20
0 5 10 15 20

Overall effect
T-bills - range bound The overall effect of the 3 factors will be a bear steepening in the 3/10
with upward bias; segment, while the 10/20 will experience a milder form of bear steepening.
3/10 - bear steepening; The T-bills market will stay mostly range-bound with a slight upward bias.
10/20 - mild bear
steepening
Comparison between MGS and IRS markets
Sometime during the third week of May, the IRS market started moving
significantly higher compared to the MGS market, as talks of a potential cut
in fuel subsidies permeated the market. In theory, these two markets should
move in tandem, but market players’ reluctance to offer their MGS holdings
at higher rates caused it to stay artificially low.
Malaysia: IRS/MGS Spread
IRS3yr-MGS3yr IRS5yr-MGS5yr IRS10yr-MGS10yr

2.3%
1.8%
1.3%
0.8%
0.3%
-0.3%
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
IRS/MGS spread to Since 2005, the spread between the 5-year IRS and MGS has been around
remain wide in 3Q08, 50 bps, but this has widened to about 100 bps now. The spread between IRS
and will only start and MGS was also seen widening significantly during the recessionary
narrowing towards the periods of 2001-02. While today’s spread is not as wide as that of 2001-02,
end of the year this could still signal a probable slowdown in the nation’s economy going
forward.
We expect the current wide IRS/MGS spread to persist into 3Q08 and only
start narrowing towards the end of the year.

Sovereign Bond Supply
Expected total gross MGS We maintain our forecast of MGS and GII issuances in 2008 at RM45.4b,
and GII issuances in 2008 based on a budget deficit of 3.1% of GDP (the Government’s 2008 GDP
at RM45.4b growth forecast of 5-6%), and total maturity of RM23.4b.
The maturity profile of Government bonds in 2008 is as follows:
Malaysia: MGS and GII Maturing in 2008
Month Stock Date Maturing Amount Maturing (RM b)
March MW3/08 15 Mar ’08 3.650
GII3/08 3 Mar ’08 2.000
July MV7/08 1 Jul ’08 8.998
September MI9/08 30 Sep ’08 4.150
November MV11/08 30 Nov ’08 2.60
December MN12/08 15 Dec ’08 2.000
Total 23.400
Source: Bloomberg
The Government’s auction calendar for 2008 is as follows:

Malaysia: Auction Calendar for 2008
Date Size Average Bid-to-cover
(RM 'm) Yield ratio
3yr MGS Reopening MJ04/11 14 Jan ’08 3,500 3.525% 2.55
5yr MGS New 31 Jan ’08 3,500 3.461% 2.04
3yr MGS Reopening MN09/11 28 Feb ’08 3,000 3.438% 1.87
3yr MGS Callable New 28 Feb ’08 500 3.582% 1.92
10yr MGS Reopening 13 Mar ’08 3,500 3.796% 2.35
5yr GII New 28 Mar ’08 2,000 3.604% 2.07
3yr MGS Reopening 14 Apr ’08 3,500 3.438% 1.47
5yr MGS Reopening 29 May ’08 3,500 3.815% 1.45
3yr GII New Jun
10yr MGS Reopening Jul
5yr GII New Aug
20yr MGS New Sep
10yr GII New Oct
5yr MGS Reopening Nov
5yr MGS Callable New Nov
10yr MGS Reopening Dec
Total 23,000
Source: Bank Negara Malaysia
Government is on track in At the time of writing, securities worth RM23.0b have been issued while
its issuances to cover the RM5.65b have matured. We believe the Government is on track in its
expected budget deficit issuances to cover the expected budget deficit. We maintain our view that all
future issuances will have an issue size of between RM3.0b and RM3.5b,
except for the callables which will likely have a size of RM0.5b.
Low bid-to-cover trend in The low bid-to-cover ratio trend is expected to continue in 3Q08 amid a softer
auctions to persist Ringgit, which will discourage foreign investors’ participation. Local funds,
especially those that have held back their investments in anticipation of
higher future yields, will provide some support for the auctions in 3Q08.

Private Debt Securities
Primary Market
New PDS issuances fell in According to BNM’s statistics, the cumulative gross PDS issuances in Jan-
the first 4 months of 2008 Apr ’08 stood at RM15.7b, compared to RM18.5b in the same period in 2007.
compared to the same After deducting the RM13.6b that was redeemed in the same period, net
period in 2007 PDS issuances in 1Q08 was RM2.1b.
As at May ’08, total PDS outstanding rose to RM213.6b from RM209.7b in
Dec ’07.
PDS: Gross and Net Amount Raised
Gross PDS Raised Net PDS Raised
80,000
70,000
60,000
50,000
RM 'million
40,000
30,000
20,000
10,000
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Apr-08
Source: BNM
PDS: Amount Outstanding

250,000
200,000
150,000
RM 'million
100,000
50,000
0
May-08
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Source: BNM
SC approved more In 1Q08, RM38.3b worth of PDS were approved by the Securities
PDS in 1Q08... Commission (SC), compared to RM40.9b in the previous quarter. This is a
considerable increase compared to the RM16.6b approved in 1Q07. 29
issues were approved in 1Q08, slightly higher than the 27 in 4Q07.
The strong number of issuances in 1Q08 can be attributed to the relatively
low interest rate environment, which encouraged not just local but also
foreign issuers to issue bonds.

... but issuances are Post fuel hike, PDS issuances will not be as strong compared to the first 5
expected to decline months of the year. We expect minimal contribution (if any) from foreign
post fuel hike issuers for the rest of the year, and limited number of issuances from local
issuers.
As such, we maintain our view for total expected PDS issuances this year at
between RM35b and RM40b.
Secondary Market
PDS yields also shot up Activities in the secondary PDS market decelerated in terms of volume, with
after the fuel price hike… RM15.7b in turnover from Apr to May ’08, compared to RM12.6b in the first 2
months of 2008. Early in 2Q08, yields in the secondary PDS market trended
higher at a slow pace, but shot up sharply after the petrol and diesel price
hikes, led by fears of higher future inflation.
Malaysia: AAA Yield Movements

AAA Yields 2-mths ago 1-mth ago Current
6.00
5.00
4.00
3.00
2.00
1.00
0.00
3 5 7 10 15
Malaysia: AA1 Yield Movements

AA1 Yields 2-mths ago 1-mth ago Current
6.00
5.00
4.00
3.00
2.00
1.00
0.00
3 5 7 10 15

Malaysia: A1 Yield Movements

A1 Yields 2-mths ago 1-mth ago Current
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
3 5 7 10 15
… but should be Just like the govvies markets, PDS yields should be somewhat supported by
supported by local funds cash rich fund managers with mandates to invest in local bonds. While we
expect PDS yields to rise, we do not think they will rise too drastically.
Another factor to consider is the lack of supply of new PDS papers going
forward as issuers find market conditions unfavourable. The lack of supply,
coupled with strong demand, may create wide two-way quotes in the market,
producing an illiquid market. We believe this is a highly probable scenario for
the single-A segment and certain less-popular AA names.
Credit Conditions
Credit conditions in the Credit conditions in the PDS market continued to deteriorate since our last
PDS market continued to publication. Total rating changes since the start of the year to 16 Jun ’08 are
deteriorate as follows:
Rating Activities
Upgrades Downgrades
Number of issues (including ABS) 13 18*
Total issue size RM11.970b RM3.772b*
Average issue size RM921m RM210m
Number of asset-backed securities (ABS) 1 4*
ABS issue size RM13.3m RM1.763b*
Average issue size (excluding ABS) RM996m RM144m
Source: RAM, MARC, Aseambanker’s analysis
* BSA International Bhd, which was downgraded 3 times, is counted as ONE downgrade;
Idaman Capital, which was downgraded twice, is counted as ONE downgrade
Analysis of Rating Activities excluding ABS

No. of Issues Issue Sizes
Upgrades
Initial rating AA3 and above 5 RM9.097b
Initial rating A1 and below 7 RM2.860b
Downgrades
Initial rating AA3 and above 4 RM835m
Initial rating A1 and below 10* RM1.174b*
Source: RAM, MARC, Aseambanker’s analysis
* BSA International Bhd, which was downgraded 3 times, is counted as ONE downgrade;
Idaman Capital which was downgraded 2 times is counted as ONE downgrade

Expect more Based on the trend above, and with softer economic conditions going
downgrades than forward, we maintain our view that there will be more downgrades than
upgrades – especially in upgrades to come. We also reiterate our stance that most downgrades will
the single-A and below come from small companies (hence also small issue sizes) in the single-A
segments and below segments.
ABS Sector
Rating Activities on ABS
Issuers Tranches From To
Downgrades
Kerisma RM870m Senior Secured AAA AA
RM30m Mezzanine Secured AA A
RM100m Subordinated B C
st
Idaman RM220m Senior – 1 downgrade AAA A3
nd
RM220m Senior – 2 downgrade A3 BBB2
st
RM20m Mezzanine – 1 downgrade AA2 BBB2
nd
RM20m Mezzanine – 2 downgrade BBB2 BB2
RM80m Subordinated B3 C3
Aldwich RM246m Class A AA2 A1
RM47m Class B A1 A3
CapOne RM50m Class B Mezzanine AA A-
RM100m Subordinated B C
Upgrades
AmpleZone RM13.3m Class B A AA+
Source: RAM and MARC
Be wary of ABS backed Rougher operating conditions ahead may also affect ABS credit ratings,
by loans to small especially collateralised debt obligations (CLOs), as these are typically
companies backed by loans to small companies with lower credit ratings. Hence, we
reiterate our caution on ABS, advising investors to consider the credit
strength of each obligor in an ABS, and not just the structure of the ABS.
Independent Power Producer sub-sector

The Government recently imposed a 30% windfall tax effective 1 Jul on
independent power producers (IPPs) with ROAs of over 9%. We understand
that the tax will be imposed on ROAs in excess of 9% (e.g., if an IPP’s ROA
is 10%, then the tax will be levied on the incremental 1%). Also, the
Government defines ROA as profit before interest and tax (PBIT) over net
book value of fixed and current assets.
EPU expects the IPP The Economic Planning Unit (EPU) estimates the imposition of windfall taxes
windfall tax to provide on IPPs will generate RM600m in revenue to the Government in the first
the Government RM600m year. This is higher than our equity analyst’s original estimate.
in the first year… The table overleaf lists the IPPs with outstanding bonds and their respective
windfall taxes (where applicable). Please note that some of the data is based
on financials which are 1-2 years old, and may not accurately reflect current
positions.

IPPs: Estimated windfall tax

IPP Rating FY Windfall Tax
(RM'm)
Sejingkat AA2 Dec ’06 -
Prai Power AA3 Dec ’07 -
Musteq A2 Dec ’06 -
Magna Segmen A3 Sep ’06 -
Stratavest A3 Dec ’06 -
TTPC AA1 Dec ’06 5.6
Tanjung BP AA3 Just started operations Unknown
Serudong AA2 Dec ’06 2.3
Sarawak Power AA1 Dec ’06 -
Segari AA1 Aug ’06 30.8
GB3 AA1 Aug ’07 18.8
Kapar AA+ Aug ’07 -
ARL A+ Mar ’07 -
Powertek AA1 Jan ’07 19.7
Panglima AA2 Jan ’07 18.5
Pahlawan AA1 Jan ’07 4.2
YTL PG AA1 Jun ’07 58.6
Source: RAM, MARC, Aseambankers’ analysis
…but our Based on the estimates above, the total amount of windfall tax is slightly
approximations show below RM200m – well below EPU’s RM600m estimate. If our analysis is
that windfall tax is accurate, we do not think it will affect any of the IPPs credit ratings. However,
slightly below RM200m the policy is still rather unclear, and as such, there could be some changes
later which may alter our analysis.
The table below presents our outlook for selected PDS issues.
Malaysia: Outlook of selected PDS issues
Issuer Rating Aseam Comments
Outlook
Leader Universal A Positive • Continuously improving financial results. FY07 operating profit stood at
(Dev about RM110m compared to RM92m in FY06;
Outlook) • Gearing has improved to 1.07x from 1.19x a quarter ago;
• Cash and cash equivalents stand at RM213m compared to RM169m in
Sept 07 which is more than enough to meet maturing MTNs.
Leader Universal: MTN maturities
Year Amount of MTNs maturing
2008 RM30m
2009 RM10m
2010 RM30m
IJM Plantation A+ Positive Improved credit matrices put it at par (if not better) with higher-rated TSH
Resources (AA-).
• Gearing of 0.1x is much lower than TSH’s 0.47x;
• Pre-tax margin of 40% is higher than TSH’s 14%.
Scomi Bhd AA- Negative Newly elected state Governments will want to review the feasibility of certain
projects in their respective states. Scomi is in the final stage of award for the
Penang Monorail project.
Tracoma BBB+ Negative • We do not think the company can generate enough revenue to meet the
punishing debt repayment schedule.
Tracoma: MTN maturities
Year Amount of MTNs maturing
2009 RM50m
2010 RM50m

Malaysia: Outlook of selected PDS issues (continued)

Issuer Rating Aseam Comments
Outlook
Pendidikan Industri YS AA1 Negative Rating was based on a “strongly worded Letter of Support” by the Selangor
State Government. It remains to be seen whether this will be honoured by the
newly elected state officials.
Tenaga AA1 Neutral The new “informal” fuel cost pass-through mechanism is positive for Tenaga.
However, it is still vulnerable to changes in Government policy.
UEM Builders AA3 Neutral UEMB is the EPC contractor for the proposed Second Penang Bridge.
However, the maintenance and toll collection concession will be tendered out.
We do not think the AA3 rating will be affected as it was accorded without
taking cash flows from the toll concession into consideration.
Gamuda AA3 Neutral Gamuda has only committed about RM10m into its property project in Vietnam
Berjaya Land A Neutral Despite the group’s heavy exposure to Vietnam’s property sector, its credit
rating will not be affected as the bonds are largely be supported by dividends
from Berjaya Sports Toto.
IPPs Various Neutral Not all IPPs will be affected by the windfall tax. Preliminary research shows that
those who are affected will not be too badly stressed.
Recomendation…
Shorten duration of bond For the MGS market, in view of the higher inflation rate going forward,
portfolios; insurance investors should shorten the duration of their portfolios, targeting the 3-year
companies should pick 10- and below segment. Insurance companies, due to the nature of their
and 20-year MGS businesses, should pick the 10- and 20-year bonds at levels which they are
comfortable at, as their yields rise.
Bet on the narrowing of Investors can also bet on the narrowing of the IRS/MGS spread going
IRS/MGS spreads forward, by shorting MGS (although practically, this may be difficult to do)
and receiving fix on the IRS.
PDS: Do not wait to Yields in the PDS market are expected to rise, but we recommend that
buy as there may be a investors with mandates to invest in PDS do not wait until it is too late.
lack of supply Investors may find it difficult to find securities they are interested in due to the
mismatch in supply and demand for PDS bonds going forward. Also,
ABS: Study the credit investors who are into ABS should study the credit of each individual obligor
strength of each obligor when analyzing their investment decision.

Ann Joo Resources
Ann Joo Resources Buy

2008 earnings to heat up TP: RM5.25
Current Price: RM3.78
Resilient global steel prices up to mid-08 and through 3Q08 should
underpin very strong FY08 results for Ann Joo, shielding the group
from higher gas and electricity costs effective 2H08.
Its low scrap procurement costs since end-FY07 and on-going cost
minimisation strategies provide further opportunities for margin
expansion.
We welcome Ann Joo’s progression towards becoming an integrated
steel player once the mini-blast furnace is operational in early-09,
boosting production gains and cost savings.
Expect a stronger 2Q08 While Ann Joo’s 1Q08 results were strong, with net profit more than doubling
YoY to RM105m, 2Q08 could be even stronger. With steel bar prices up by at
least 20% QoQ to current levels of USD1,120/t, and relatively low locked-in
scrap costs until 3Q08, we believe 2Q08 net profit could rise by at least 50%
QoQ. We estimate that at an average steel bar price of USD1,000/t in 2Q08,
Ann Joo could realize an estimated gross profit of USD200/t.
Scrap procurement Ann Joo has secured its scrap requirements up to 3Q08 at considerably lower
strategy remains prudent price levels, and is buying containerized scrap for 4Q08 and beyond. Currently
priced at about USD650/t cfr in the region, containerized scrap is a much
cheaper alternative to conventional bulk scrap, which is priced at USD770/t cnf.
The key difference between the two types of steel is in the timing of delivery,
where containerized scrap has a longer delivery time than bulk. Since Ann Joo
has already locked in scrap requirements for 3Q08, it should be in no hurry for
scrap delivery. Also, we understand that freight charges are much cheaper for
containerized scrap, which partly explains the difference in pricing. Hence, we
remain positive on the company’s scrap procurement strategy as part of its
cost minimization efforts in the face of rising commodity prices.
We like Ann Joo for its exposure to high selling prices of bars and billets, while
Ann Joo is our top pick for targeting margin expansion by containing input costs. There is further upside
the steel sector potential to earnings coming from its new mini-blast furnace, due to be
commissioned by end-08, which should generate production gains and cost
savings from 2009.
Buy with TP of RM5.25 Our TP of RM5.25 is based on 7x CY09 FD EPS. Our low target PER multiple
reflects the risks associated with the cyclical nature of the steel industry, but we
believe Ann Joo will be able to maintain operational efficiencies to sustain
positive earnings growth through 2010.
Price Chart Ann Joo Resources – Summary Earnings Table Stock Information
RM FYE Dec (RM m) 2007A 2008F 2009F 2010F Ticker: AJR MK
5.0
Turnover 1,947.9 3,235.1 3,599.7 3,666.5 Price: RM3.78
4.0
EBITDA 268.1 697.8 711.9 741.9 Sector: Bldg Materials
3.0
Pretax Profit 212.6 607.5 608.3 632.3 Shares (m): 522.7
2.0
Net Profit ex. EI 192.6 536.1 551.6 573.7 Mkt Cap (RMm): 1,954.9
1.0
EPS - FD (sen) 37.5 72.8 74.8 77.7 3M Avg Vol 0.5
-
Net profit Gth 102.8 94.2 2.8 3.8
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
PE (x) 10.1 5.2 5.1 4.9 Major Shareholders (%)

EV/EBITDA (x) 8.8 3.4 3.3 3.2 Ann Joo Corp S/B 64.3
Price Performance: DPS (sen) 13.3 16.0 16.0 16.0
52-week High/Low RM4.18 / RM2.067 Div Yield (%) 3.5 4.2 4.2 4.2
1-mth 3-mth 6-mth 1-yr YTD Net Gearing (%) 63.0 47.9 33.9 20.5
(5.0) 28.1 50.6 52.4 41.6 ROE (%) 26.3 50.3 35.7 28.0
Book Value (RM) 1.59 2.50 3.44 4.42
P/Book Value (x) 2.4 1.5 1.1 0.9

Ann Joo Resources
Infopage
Profit & Loss Balance Sheet

FYE Dec (RM m) 2007A 2008F 2009F 2010F FYE Dec (RM m) 2007A 2008F 2009F 2010F
Turnover 1947.9 3235.1 3599.7 3666.5 Net Fixed Assets 464.3 848.4 983.8 933.9
COGS (1679.8) (2537.4) (2887.8) (2924.6) Invts in Assocs & JVs 0.4 0.4 0.4 0.4
EBITDA 268.1 697.8 711.9 741.9 Other LT Assets 34.6 34.0 34.3 34.7
Depreciation (32.7) (45.8) (59.0) (70.0) Cash & ST Invts 92.9 75.9 72.3 57.9
EBIT 235.4 651.9 652.9 672.0 Other Current Assets 1096.9 1363.1 1699.5 2075.2
Net int (exp)/ Inc (22.8) (44.5) (44.6) (39.7) Total Assets 1689.2 2321.8 2790.4 3102.1
Associates & JV 0.0 0.0 0.0 0.0
EI 0.0 0.0 0.0 0.0 ST Debt 498.6 400.0 400.0 300.0
Pretax profit 212.6 607.5 608.3 632.3 Other Current Liab 151.9 214.1 204.8 146.6
Tax (14.7) (60.7) (48.7) (50.6) LT Debt 116.0 300.0 280.0 230.0
Minority interest (26.9) (10.6) (8.1) (8.0) Other LT Liab 50.4 50.4 50.4 50.4
Net profit 192.6 536.1 551.6 573.7 Shareholders Equity 827.8 1302.1 1792.0 2304.0
Net profit ex EI 192.6 536.1 551.6 573.7 Minority Interest 44.5 55.1 63.1 71.1
Total Cap. & Liab 1689.2 2321.7 2790.3 3102.1
Turnover Gth (%) 35.4 66.1 11.3 1.9
EBITDA Gth (%) 77.6 160.3 2.0 4.2 Key statistics and ratios
Pretax Gth (%) 60.7 185.7 0.1 3.9 FYE Dec 2007A 2008F 2009F 2010F
Net profit Gth (%) 72.1 178.3 2.9 4.0
Effective Tax Rate (%) 6.9 10.0 8.0 8.0 EBITDA Margin (%) 13.8 21.6 19.8 20.2
EBIT Margin (%) 12.1 20.2 18.1 18.3
Cash Flow Net Profit Margin (%) 9.9 16.6 15.3 15.6
FYE Dec (RM m) 2007A 2008F 2009F 2010F ROAE (%) 26.3 50.3 35.7 28.0
Net Profit 192.6 536.1 551.6 573.7 ROAA (%) 12.1 26.7 21.6 19.5
Dep. & amort 32.7 45.8 59.0 70.0 ROCE (%) 13.4 26.8 22.3 20.2
Chg. in wkg cap (163.3) (204.1) (345.7) (433.9) Div Payout Ratio (%) 26.4 11.5 11.2 10.8
Other ope. CF 73.4 0.0 (0.3) (0.6) Interest Cover (x) 10.8 14.7 15.0 17.7
Operating CF 113.8 377.9 264.6 209.2 Debtors Turn (days) 35.1 35.1 35.1 40.0
Net capex (17.6) (430.0) (190.0) (20.0) Creditors Turn (days) 6.2 6.2 6.2 6.0
Chg in LT inv (201.0) (50.0) (40.0) (10.0) Inventory Turn (days) 144.9 114.5 133.1 161.7
Chg in oth assets 11.5 20.0 15.0 15.0 Current Ratio (x) 1.8 2.3 2.9 4.8
Investment CF (207.0) (460.0) (215.0) (15.0) Quick Ratio (x) 0.6 0.7 0.8 1.1
Net chg in debt 173.4 85.4 (20.0) (150.0) Net Debt/Equity (x) 0.6 0.5 0.3 0.2
Chg in oth LT liab (16.2) 0.0 0.0 0.0 Opg CFPS (sen) 22.1 72.5 50.7 40.1
Oth. Financing CF 7.0 10.0 5.0 8.0 Free CFPS (sen) 18.7 (10.0) 14.3 36.3
Financing CF 164.2 95.4 (15.0) (142.0) EBITDA Margin (%) 13.8 21.6 19.8 20.2
Net cash flow 70.9 13.3 34.6 52.2 EBIT Margin (%) 12.1 20.2 18.1 18.3

SapuraCrest Petroelum
SapuraCrest Petroleum Buy

Restoring its credibility TP: RM1.85
SapCrest’s operations are on stronger footing, having turned-around
its previously loss-making IPF division, taken delivery of the delayed
Sapura 3000, and re-established management’s credibility.
Expect a 34% FY09-10 net profit CAGR with upside potential as it
exerts control over margins and de-gears to comfortable levels.
SapCrest is a growth stock with a compelling turnaround story. It is
well-equipped to pursue rewarding regional deepwater opportunities.
Key legacy issues SapCrest’s operations are on stronger footing now, having addressed several
addressed: key legacy issues. Firstly, the installation, pipeline and facilities (IPF) division,
(i) turn-around of IPF its Achilles heel in the past, has turned around after it successfully negotiated
operations, ... an unorthodox hybrid deal that eliminates execution risks (i.e. weather down-
time, rising fuel costs and wage escalation), by allowing it to pass on these
costs to clients.
(ii) taken delivery of the Also, the much-delayed Sapura 3000 – a dynamically positioned heavy-lift and
delayed Sapura 3000 pipe laying vessel – has finally arrived (albeit at a higher cost). This income-
vessel, ... generating asset will allow SapCrest to pursue rewarding opportunities in
Asia’s offshore pipe-laying market. Its strategy to form strategic tie-ups with
renown global operators also offers SapCrest the opportunity to de-gear (by
co-owning key assets) and grow its regional presence at the same time.
(iii) re-establishing Meanwhile, the emergence of Seadrill as its second largest shareholder
management’s credibility provided a timely boost to investors’ confidence, strengthening management’s
operating credibility, while maximising potential values of its key assets.
Expect a 2-year 34% net We expect a 34% FY09-10 net profit CAGR as the company reaps returns from
profit CAGR … its key investments, exerts greater control over margins and de-gears to
comfortable levels. With key-owned assets in place, SapCrest now has better
control over its operations, allowing it to mitigate exposure to volatile spot rates
and carry out its working schedule with minimal disruptions.
… with further upside We foresee further earnings upside as the company is scheduled to take
potential delivery of another heavy-lift pipe laying vessel (similar to Sapura 3000 but
smaller in size), and will directly benefit from soaring charter rates after the
contracts for its 5 existing drilling rigs expire in 2009. It is also committed to
grow its marine, operations & maintenance (O&M) services division, to further
tap the rewarding brownfield segment as oil majors seek to optimize production
at existing fields. We have yet to impute all these positives into our forecasts.
A growth stock with an SapCrest is a growth stock with an attractive turnaround story. It is also well-
attractive turnaround story positioned to tap rewarding deepwater opportunities in Asia, especially in
and deepwater exposure Malaysia’s deepwater development programme, which is set to grow
exponentially. Our RM1.85 TP pegs the stock to 14x CY09 PER.
Price Chart SapCrest Petroleum – Summary Earnings Table Stock Information
RM FYE Jan (RM m) 2007A 2008A 2009F 2010F Ticker SCRES MK
3.0 Turnover 1,766.1 2,261.9 2,628.1 2,718.6 Price: RM1.39
2.5 EBITDA 196.2 336.4 403.2 433.3 Sector: Oil & Gas
2.0 Pretax Profit 41.2 171.3 260.5 295.2 Shares (m): 1,168.4
1.5 Net Profit ex. EI (17.7) 78.4 124.3 141.0 Mkt Cap (RMm): 1,624.1
1.0 EPS - FD (sen) (2.0) 7.5 11.9 13.5 3M Avg Vol 6.4
0.5 Net profit Gth (123.8) (474.7) 58.6 13.5
- PE (x) (69.5) 18.5 11.7 10.3 Major Shareholders (%)
Sapura Technology 38.5
Dec-05
Dec-06
Dec-07
EV/EBITDA (x) 9.0 5.2 3.9 3.4

Apr-06
Aug-06
Apr-07
Aug-07
Apr-08
DPS (sen) 1.5 2.0 2.0 2.0 Seadrill Limited 19.0

Div Yield (%) 1.1 1.4 1.4 1.4 EPF 3.9
Price Performance:
52-week High/Low RM2.71 / RM0.98 Net Gearing (%) 199.2 88.7 59.3 43.0
ROE (%) (3.9) 12.7 14.7 14.7
1-mth 3-mth 6-mth 1-yr YTD Book Value (RM) 0.3 0.6 0.7 0.8
(6.1) 31.1 (5.4) (28.4) (12.0) P/Book Value (x) 4.2 2.2 1.9 1.7

SapuraCrest Petroelum
Infopage

FYE Jan (RM m) 2007A 2008A 2009F 2010F FYE Jan (RM m) 2007A 2008A 2009F 2010F
Turnover 1,766.1 2,261.9 2,628.1 2,718.6 Net Fixed Assets 784.6 873.4 999.4 1,123.4
Cost of goods sold (1,546.9) (1,979.2) (2,260.2) (2,310.8) Invts in Assocs & JVs 108.6 155.6 160.9 168.8
Gross profit 219.2 282.7 367.9 407.8 Other LT Assets 146.2 146.0 146.0 146.0
Other ope. (exp)/ Inc. (92.6) (18.3) (38.7) (50.5) Cash & ST Invts 291.8 350.6 466.2 561.5
EBIT 126.6 264.4 329.2 357.3 Other Current Assets 1,222.7 1,461.2 1,430.2 1,445.5
Net int (exp)/ Inc (79.4) (77.6) (74.0) (70.0) Total Assets 2,554.0 2,986.8 3,202.7 3,445.2
Associates & JV (6.0) (15.5) 5.3 7.9
Exceptional gain/ (loss) - - - - ST Debt 268.8 540.1 500.0 500.0
Pretax profit 41.2 171.3 260.5 295.2 Other Current Liab 729.0 850.8 930.9 952.3
Tax (8.1) (20.2) (46.9) (53.1) LT Debt 894.1 516.8 500.0 500.0
Minority interest (50.8) (72.8) (89.4) (101.0) Other LT Liabilities 8.2 10.0 10.0 10.0
Net profit (17.7) 78.4 124.3 141.0 Shareholder’s Equity 437.2 796.6 899.9 1,020.1
Net profit ex EI (17.7) 78.4 124.3 141.0 Minority Interests 216.8 272.5 361.8 462.8
Total Cap. & Liab. 2,554.0 2,986.8 3,202.7 3,445.2
EBITDA 196.2 336.4 403.2 433.3
Sales Gth (%) (1.5) 28.1 16.2 3.4 Key statistics and ratios
EBITDA Gth (%) (13.1) 71.4 19.9 7.5 FYE Jan 2007A 2008A 2009F 2010F
EBIT Gth (%) (16.5) 108.9 24.5 8.5 Gross Margins (%) 12.4 12.5 14.0 15.0
Effective Tax Rate (%) 19.6 11.8 18.0 18.0 EBITDA Margin (%) 11.1 14.9 15.3 15.9
EBIT Margin (%) 7.2 11.7 12.5 13.1
Cash Flow Net Profit Margin (%) (1.0) 3.5 4.7 5.2
FYE Jan (RM m) 2007A 2008A 2009F 2010F ROAE (%) (3.9) 12.7 14.7 14.7
Pre-Tax Profit (17.7) 78.4 124.3 141.0 ROA (%) 5.3 9.0 10.8 11.0
Dep. & Amort. 69.7 72.0 74.0 76.0 ROCE (%) 7.8 14.7 15.9 16.4
Chg in Wkg.Cap. (84.0) (105.3) 111.1 6.0 Div Payout Ratio (%) (0.7) 0.3 0.2 0.1
Other ope. CF 21.5 112.9 84.1 93.1 Interest Cover (x) 1.6 3.4 4.5 5.1
Operating CF (10.5) 158.0 393.5 316.2 Debtors Turn (days) 62.6 61.0 56.5 54.0
Net capex 100.2 (150.0) (200.0) (200.0) Creditors Turn (days) 105.5 96.8 95.2 100.8
Chg in LT inv (83.8) - - - Inventory Turn (days) 9.2 9.3 8.7 8.1
Chg in oth assets 29.0 (156.8) - - Current Ratio (x) 1.5 1.3 1.3 1.4
Investment CF 45.4 (306.8) (200.0) (200.0) Quick Ratio (x) 1.5 1.3 1.3 1.3
Net chg in debt (103.5) (105.9) (56.9) - Net Debt/Equity (X) 0.6 0.4 0.3 0.2
Chg in other LT liab (11.7) (12.4) (20.9) (20.9) Capex to Debt (%) (8.6) 14.2 20.0 20.0
Oth. Financing CF 2.2 326.0 - - N.Cash/(Debt)PS (sen) 490.9 302.3 228.4 187.7
Financing CF (112.9) 207.6 (77.8) (20.9) Opg CFPS (sen) 41.4 112.7 120.8 132.7
Net cash flow (17.7) 78.4 124.3 141.0 Free CFPS (sen) 50.5 3.4 82.8 49.7

Tanjong PLC
Tanjong PLC Buy

Selldown overdone TP: RM17.80
Tanjong has been oversold. It lost 11% or RM686m in market cap
since 4 Jun, after the announcement of a 30% windfall tax on IPPs,
which we estimate will have a minimal impact on Tanjong’s earnings.
Tanjong’s power and gaming divisions, which collectively contribute
about 97% of group EBIT are relatively defensive bets amid external
and domestic uncertainties.
Tanjong is a Buy with RNAV-based target price of RM17.80,
supported by an attractive dividend yield of 6.3%.
Clearly oversold Tanjong’s share price hit a 52-week low of RM14.20 on 20 Jun (-23% YTD).
The stock lost 11% or RM686m in market capitalisation since 4 Jun, after the
Government announced a 30% windfall tax on independent power producers
(IPP) with ROAs in excess of 9%. ROA is defined as PBIT (profit before
interest and taxes) / Total Assets (fixed plus current assets), per EPU’s briefing
on 6 Jun. Based on our preliminary estimates, Tanjong may need to pay a
windfall tax of RM8.3m in FY09. After the tax shield, net impact to its bottom
line is a minimal RM6.3m, or 1.2% of our FY09 net profit forecast. The risk
however, is a change to the present definition of ROA.
Relatively resilient power Tanjong’s power division accounts for 78% of group EBIT (48% from overseas
division operations, 30% from Malaysia). All of its IPPs have relatively resilient earnings
models given their fuel pass-through mechanisms to weather rising fuel prices.
With power concessions in Malaysia, Eqypt, Bangladesh, Pakistan and Sri
Lanka (with an effective total installed capacity of 3,951 MW), this division
continues to be Tanjong’s main growth engine. In Malaysia, Power Purchase
Agreement (PPA) negotiations have recommenced, but we think it could hit a
deadlock again. In any case, we believe that the impact of successful PPA
renegotiations is likely to be NPV neutral to Tanjong.
Gaming taxes unlikely to We do not foresee Tanjong’s gaming division to be affected by the recent
be raised political changes. However, to appease grassroot supporters, we understand
that the Government has yet to approve any special draws post the Mar ’08
General Election. Nonetheless, we do not think the Government will raise
gaming taxes as this would only encourage more illegal gaming operations in
Malaysia. We expect gaming to contribute about 19% of Tanjong’s FY09 EBIT.
Defensive earnings model Tanjong’s power and gaming divisions have relatively defensive earnings
qualities, and the stock is a relatively safe investment bet amid external and
domestic uncertainties. We believe that opportunities for new investments in
the power sector still abound in India, Indonesia, Pakistan, Sri Lanka and the
Middle East. In the past, mainstream IPPs like Tanjong had to compete with
hedge funds which had access to cheaper costs of funds in bidding for
greenfield or brownfield IPPs. With the present global credit crunch, this has
turned the tables in favour of mainstream players like Tanjong.
Price Chart Tanjong Plc– Summary Earnings Table Stock Information
RM FYE Jan (RM m) 2008A 2009F 2010F 2011F Ticker: TJN MK
21.0 Turnover 4,041.0 4,686.9 4,740.7 4,795.8 Price: RM14.20
16.0 EBITDA 1,237.5 1,368.2 1,430.3 1,370.4 Sector: Utilities
11.0
Pretax Profit 773.5 886.8 959.8 948.7 Shares (m): 403.3
Net Profit ex. EI 554.5 531.5 644.6 640.4 Mkt Cap (RMm): 5,726
6.0
EPS - FD (sen) 137.5 131.8 159.8 158.8 3M Avg Vol 0.4
1.0
Net profit Gth (%) 18.1 (4.1) 21.3 (0.6)
Dec-05
Dec-06
Dec-07
Apr-06
Aug-06
Apr-07
Aug-07
Apr-08
PE (x) 10.3 10.8 8.9 8.9 Major Shareholders (%)

EV/EBITDA (x) 7.3 6.4 5.6 5.4 Ananda Krishnan 30.9
Price Performance: DPS (sen) 90.0 90.0 90.0 90.0 Ultimate Corporate 7.5
52-week High/Low RM19.9 / RM14 Div Yield (%) 6.3 6.3 6.3 6.3 Capital Research 5.0
Net Gearing (%) 132.1 104.0 78.2 57.0 & Management
1-mth 3-mth 6-mth 1-yr YTD ROE (%) 16.8 16.4 16.1 14.7
(12.3) (9.6) (21.5) (26.8) (23.2) Book Value (RM) 8.06 8.86 9.79 10.72
P/Book Value (x) 1.8 1.6 1.4 1.3

Tanjong PLC
Infopage

FYE Jan (RM m) 2008A 2009F 2010F 2011F FYE Jan (RM m) 2008A 2009F 2010F 2011F
Revenue 4,041.0 4,686.9 4,740.7 4,795.8 Fixed Assets 2,656.1 2,466.8 2,310.5 2,154.2
EBITDA 1,237.5 1,368.2 1,430.3 1,370.4 Other LT Assets 7,109.2 7,109.2 7,109.2 7,109.2
Dep’n & Amortisation (259.7) (253.7) (217.7) (216.7) Cash/ST Investments 1,288.0 1,584.9 1,936.6 2,269.6
Operating Profit 977.7 1,114.5 1,212.5 1,153.6 Other Current Assets 1,074.6 1,107.4 1,108.2 1,108.9
Associates 23.6 20.3 20.8 21.4 Total Assets 12,127.8 12,268.2 12,464.5 12,641.9
Interest (Exp)/Inc (227.8) (248.0) (273.6) (226.3)
Pre-Tax Profit 773.5 886.8 959.8 948.7 ST Debt 1,165.4 965.4 965.4 965.4
Tax (195.3) (186.6) (210.4) (206.0) Other Current Liabilities 618.3 619.2 624.2 629.4
Minority Interest (23.8) (106.7) (104.7) (102.2) LT Debt 4,479.0 4,386.8 4,097.3 3,795.4
Net Profit 554.5 593.5 644.6 640.4 Other LT Liabilities 2,189.0 2,189.0 2,189.0 2,189.0
Net Profit Ex. El 554.5 531.5 644.6 640.4 Minority Interest 378.3 485.1 589.8 692.1
Shareholders' Equity 3,297.8 3,622.7 3,998.7 4,370.6
Revenue Growth % 6.2 16.0 1.1 1.2 Total Capital 12,127.8 12,268.2 12,464.5 12,641.9
EBITDA Growth (%) 8.9 10.6 4.5 (4.2)
EBIT Growth (%) 10.4 14.0 8.8 (4.9) Share Capital (m) 403.3 403.3 403.3 403.3
Net Profit Growth (%) 8.8 7.0 8.6 (0.6) Net Cash/Debt (4356.5) (3767.4) (3126.0) (2491.2)
N.P. Ex. El Groth (%) 18.1 (4.1) 21.3 (0.6) Working Capital 578.9 1107.7 1455.2 1783.7
Tax Rate % 25.2 21.0 21.9 21.7 Gearing % 171.2 147.7 126.6 108.9
Cash Flow Key statistics and ratios

FYE Jan (RM m) 2008A 2009F 2010F 2011F FYE Jan 2008A 2009F 2010F 2011F
Profit before taxation 773.5 886.8 959.8 948.7 EBITDA Margin % 30.6 29.2 30.2 28.6
Depreciation 259.7 253.7 217.7 216.7 Op. Profit Margin % 24.2 23.8 25.6 24.1
Working capital change (41.8) (55.9) (52.2) (51.0) Net Profit Margin % 13.7 12.7 13.6 13.4
Cash tax paid (195.3) (192.6) (210.4) (206.0) ROE % 16.8 16.4 16.1 14.7
Others (incl'd EI) 259.7 0.0 0.0 0.0 ROA % 4.6 4.8 5.2 5.1
CF from operations 1,055.9 892.0 914.9 908.4 Net Margin Ex. El % 13.7 11.3 13.6 13.4
Capex (142.3) (5.0) (5.0) (5.0) Dividend Cover (x) 2.1 2.2 2.4 2.4
Disposal/(purchase) (1,581.1) 0.0 0.0 0.0 Interest Cover (x) 4.3 4.5 4.4 5.1
Others 71.2 0.0 0.0 0.0 Asset Turnover (x) 33.3 38.2 38.0 37.9
CF from investing (1,652.2) (5.0) (5.0) (5.0) Asset/Debt (x) 2.1 2.3 2.5 2.7
Debt raised/(repaid) 38.8 (92.2) (289.6) (301.9) Net Gearing % 132.1 104.0 78.2 57.0
Equity raised/(repaid) 0.0 0.0 0.0 0.0 Debt/ EBITDA (x) 4.6 3.9 3.5 3.5
Dividends (paid) (264.0) (267.2) (268.6) (268.6) Debt/ Market Cap (x) 1.0 0.9 0.9 0.8
Interest payments (333.0) 0.0 0.0 0.0 EV (RMm) 9,031.5 8,792.0 8,062.8 7,418.5
Others 922.5 0.0 0.0 0.0 EV/EBITDA (x) 7.3 6.4 5.6 5.4
CF from financing 364.4 (359.4) (558.1) (570.4)
Change in cash (232.0) 527.6 351.8 332.9

Aseambankers Equity Research Stock Universe

Bloomberg Company FYE Price Market TP Rec EPS EPS PER PEG Div Price
Code 20-Jun Cap (calendarised) CAGR Yld change
2007 2008 2009 07-09 2007 2008 2009 2008 1-yr YTD
(RM) (RM m) (RM) (sen) (sen) (sen) (%) (x) (x) (x) (x) (%) (%) (%)
Autos
MBM MK MBM Res 12 2.63 634.2 3.15 Buy 50.6 49.4 50.0 (0.6) 5.2 5.3 5.3 (9.2) 4.9 (21.3) (17.8)
PROH MK Proton 3 3.08 1,702.6 3.90 Hold (19.8) (1.1) (7.0) (40.5) n.a. n.a. n.a. n.m. - (50.3) (16.3)
TCM MK Tan Chong 12 1.82 1,216.3 2.00 Hold 14.8 25.7 17.5 8.7 12.3 7.1 10.4 1.4 4.7 43.3 (12.5)
UMWH MK UMW Hldgs 12 6.35 6,682.2 7.15 Buy 43.5 51.2 49.4 6.5 14.6 12.4 12.9 2.2 5.3 - (18.6)
Banking
AMM MK AMMB Hldgs 3 3.18 8,931.3 4.25 Buy 18.5 29.3 32.5 32.3 17.2 10.9 9.8 0.5 2.1 (31.5) (16.3)
BCHB MK BCHB 12 8.25 27,810.0 10.35 Buy 66.2 73.9 79.6 9.7 12.5 11.2 10.4 1.3 3.0 (30.7) (25.0)
EON MK EON Capital 12 4.66 3,188.8 WH WH 32.1 41.0 44.1 17.3 14.5 11.4 10.6 0.8 2.1 (31.5) (29.4)
PBK MK Public Bank 12 10.30 36,025.6 13.00 Buy 63.3 73.0 76.6 10.0 16.3 14.1 13.4 1.6 7.8 4.0 (6.4)
RHBC MK RHB Capital * 12 4.46 9,432.2 WH WH 35.8 42.3 46.8 14.3 12.4 10.5 9.5 0.9 3.8 (6.7) (23.8)
Building Materials
AJR MK Ann Joo Res 12 3.78 1,954.9 5.25 Buy 37.5 72.8 74.8 41.3 10.1 5.2 5.1 0.2 4.2 52.4 41.6
KSB MK Kinsteel 12 1.43 1,259.8 1.95 Buy 15.0 24.2 27.4 35.3 9.5 5.9 5.2 0.3 1.9 34.9 6.7
LMC MK Lafarge 12 4.24 3,517.7 4.50 Hold 33.9 34.5 37.7 5.4 12.5 12.3 11.3 2.3 4.7 (34.4) (27.5)
Construction / Infra
GAM MK Gamuda 7 2.19 4,588.3 2.90 Buy 13.3 18.0 22.0 28.7 16.5 12.2 9.9 0.6 11.4 (47.9) (54.6)
HSL MK HSL 12 0.71 407.9 1.00 Buy 7.0 8.7 10.3 21.4 10.2 8.2 6.9 0.5 4.9 (21.1) (33.0)
IJM MK IJM Corp 3 5.35 4,554.8 5.90 Hold 36.4 42.5 48.9 15.9 14.7 12.6 10.9 0.9 2.8 (37.4) (37.8)
LLHL MK Loh & Loh 12 4.48 301.9 WH WH 23.7 26.8 31.8 15.8 18.9 16.7 14.1 1.2 1.8 55.6 17.3
LTK MK Litrak 3 3.28 1,628.9 4.00 Buy 19.5 15.7 15.7 (10.3) 16.8 20.9 20.9 (1.6) 4.2 (20.8) (15.5)
PUPB MK P’jaya Perdana 12 4.40 614.9 WH WH 30.2 27.1 37.4 11.4 14.6 16.2 11.8 1.3 2.7 109.5 22.9
SGW MK Sunway Hldgs 6 1.24 674.0 2.00 Buy 11.8 17.6 20.1 30.2 10.5 7.1 6.2 0.3 - (16.2) (32.6)
WCT MK WCT Eng 12 2.97 2,210.0 4.15 Buy 22.4 31.7 37.0 28.5 13.2 9.4 8.0 0.5 2.8 7.8 (28.9)
YLI MK YLI Hldgs 3 1.26 123.2 1.80 Hold 11.8 12.8 14.4 10.1 10.6 9.8 8.8 1.0 5.6 (60.6) (54.2)
PLUS MK PLUS 12 2.82 14,650.0 2.65 Hold 25.0 20.9 21.5 (7.1) 11.3 13.5 13.1 (1.6) 5.6 (14.5) (14.0)
Consumer
AEON MK AEON Co 12 4.60 1,623.4 5.15 Buy 59.9 64.0 74.2 11.3 7.7 7.2 6.2 0.7 5.2 (8.0) (56.6)
AMW MK Amway (M) 12 6.90 1,109.6 7.00 Hold 53.5 53.3 51.9 (1.5) 12.9 12.9 13.3 (8.7) 8.7 - 9.5
ROTH MK BAT (M) 12 44.00 12,135.0 44.75 Hold 256.3 263.9 271.2 2.9 17.2 16.7 16.2 6.0 7.9 (3.8) 6.7
CAB MK Carlsberg 12 3.98 1,220.0 4.40 Hold 25.7 30.5 26.7 2.0 15.5 13.0 14.9 7.7 9.9 (18.8) (6.1)
FNH MK F&N Hldgs 9 8.95 3,208.4 10.00 Buy 47.3 52.2 59.0 11.7 18.9 17.1 15.2 1.6 5.0 23.4 12.6
GUIN MK Guinness 6 5.25 1,586.0 6.20 Buy 39.3 40.2 39.1 (0.2) 13.4 13.1 13.4 (55.5) 9.5 (11.8) (5.4)
RJR MK JTI 12 4.00 1,040.9 4.45 Hold 31.2 34.6 36.8 8.6 12.8 11.6 10.9 1.5 14.5 (6.1) 8.7
KFC MK KFC 12 6.25 1,269.0 7.60 Buy 52.6 56.2 64.5 10.7 11.9 11.1 9.7 1.1 6.2 (7.4) (2.3)
NESZ MK Nestle 12 29.00 6,859.1 28.90 FV 124.5 134.5 143.9 7.5 23.3 21.6 20.1 3.1 4.0 20.3 10.5
QLG MK QL Resources 3 2.63 874.5 3.50 Buy 33.5 40.2 48.4 20.2 7.9 6.5 5.4 0.4 5.5 12.7 4.9
Non-Banking Finance
ACSM MK AEON Credit 2 3.50 420.0 4.30 Buy 26.5 35.1 42.8 27.0 13.2 10.0 8.2 0.5 3.2 n.m. (9.8)
BURSA MK Bursa M’sia 12 7.75 4,018.2 WH WH 46.1 29.5 33.5 (14.8) 16.8 26.2 23.2 (1.1) 4.6 (38.0) (45.8)
RCE MK RCE Capital 3 0.50 355.5 1.10 Buy 8.1 9.0 10.7 15.0 6.2 5.5 4.7 0.4 2.0 (51.9) (40.5)
Gaming
BST MK Berjaya Toto 4 4.84 6,512.0 5.00 Buy 28.5 31.5 33.9 9.1 17.0 15.4 14.3 1.9 7.6 (9.5) (4.2)
DCB MK Dreamgate 12 0.35 300.9 0.59 Buy 5.3 4.6 5.4 0.6 6.6 7.7 6.5 11.1 2.9 (43.3) (39.1)
GENT MK Genting 12 5.40 19,259.0 6.70 Hold 42.8 41.9 42.4 (0.5) 12.6 12.9 12.7 (27.6) 5.2 (32.9) (31.6)
RNB MK Resorts 12 2.81 16,384.5 3.70 Hold 20.8 22.8 21.8 2.4 13.5 12.3 12.9 5.6 2.3 (19.7) (27.6)
Manufacturing
KRI MK Kossan 12 2.89 463.6 3.50 Hold 37.7 40.9 43.9 8.0 7.7 7.1 6.6 1.0 2.9 (47.5) (25.9)
Media
ASTR MK Astro 1 3.40 6,459.7 3.90 Hold 7.2 8.4 12.2 30.0 47.2 40.2 27.9 1.6 2.1 (27.0) (2.9)
MPR MK Media Prima 12 1.92 1,649.7 3.22 Buy 14.5 17.0 19.4 15.7 13.2 11.3 9.9 0.8 3.1 (35.4) (31.7)
NST MK NST 12 1.63 358.4 1.96 Hold 8.7 12.7 15.2 32.2 18.7 12.8 10.7 0.6 4.9 (33.2) (18.1)
STAR MK Star 12 3.50 2,570.2 3.90 Buy 22.9 26.6 25.8 6.1 15.3 13.2 13.6 2.5 7.1 (2.2) 1.7

Aseambankers Equity Research Stock Universe (continued)

Bloomberg Company FYE Price Market TP Rec EPS EPS PER PEG Div Price
Code 20-Jun Cap (calendarised) CAGR Yld change
2007 2008 2009 07-09 2007 2008 2009 2008 1-yr YTD
(RM) (RM m) (RM) (sen) (sen) (sen) (%) (x) (x) (x) (x) (%) (%) (%)
Oil & Gas
AMRB MK Alam Maritim 12 1.97 961.2 3.13 Buy 10.4 14.3 18.9 35.1 19.0 13.7 10.4 0.5 0.3 20.9 (20.2)
EPIC MK EPIC 12 1.91 318.0 1.85 Hold 21.2 20.5 23.0 4.2 9.0 9.3 8.3 2.1 4.5 (26.0) (27.1)
DLG MK Dialog 6 1.42 1,907.8 2.35 Buy 4.6 6.6 9.5 43.6 30.9 21.5 15.0 0.7 3.2 (29.0) (21.5)
KNMG MK KNM Group 12 5.95 7,846.1 6.50 Buy 18.2 31.6 41.9 51.5 32.6 18.8 14.2 0.6 0.7 88.8 (15.4)
PENB MK Petra Energy 12 2.20 432.9 2.58 Hold 25.9 29.3 32.3 11.5 8.5 7.5 6.8 0.7 2.0 n.a. (34.9)
PETR MK Petra Perdana 12 4.00 1,190.4 5.60 Buy 31.2 34.6 52.2 29.3 12.8 11.6 7.7 0.4 1.2 2.6 (25.9)
PTG MK Pet Gas 3 10.00 19,589.4 10.50 Hold 56.9 57.8 59.0 1.8 17.6 17.3 17.0 10.0 5.0 (6.5) (6.5)
RH MK Ramunia 10 1.51 822.7 1.70 Tr Buy 3.6 3.0 8.0 50.0 42.5 51.1 18.9 0.8 - (6.8) 46.6
SCRES MK SapCrest 1 1.39 1,627.2 1.85 Buy 6.7 11.5 13.4 41.1 20.7 12.1 10.4 0.5 1.4 (28.4) (12.0)
SHELL MK Shell 12 10.70 3,240.0 9.10 FV 91.6 88.7 88.3 (1.8) 11.7 12.1 12.1 (6.5) 4.7 - (5.3)
TOFF MK Tj Offshore 12 2.25 437.8 2.50 Hold 9.8 14.5 18.1 36.4 23.1 15.5 12.4 0.6 1.4 (24.0) (25.0)
WSC MK Wah Seong 12 2.10 1,337.1 2.65 Buy 16.3 17.6 20.9 13.3 12.9 11.9 10.0 1.0 3.3 (28.1) (31.4)
Plantation
ASP MK Asiatic 12 8.40 6,163.7 8.40 Hold 45.6 64.9 52.6 7.5 18.4 12.9 16.0 2.5 2.2 33.3 (2.9)
CBP MK CB Ind Prod 12 3.88 547.5 5.70 Buy 32.8 51.7 56.8 31.5 11.8 7.5 6.8 0.4 5.4 (30.7) (36.9)
HAP MK Hap Seng Con 12 2.76 1,699.9 3.85 Buy 32.6 33.9 35.3 4.2 8.5 8.1 7.8 2.0 3.8 (17.9) 3.0
IOI MK IOI Corp 6 7.60 46,027.6 5.90 Sell 26.3 33.7 32.8 11.6 28.9 22.5 23.2 2.5 3.2 42.3 (1.9)
KLK MK KL Kepong 9 17.80 18,574.6 15.40 FV 74.9 102.4 96.3 13.4 23.8 17.4 18.5 1.8 3.9 33.8 2.3
SIME MK Sime Darby 6 9.35 55,287.1 9.90 Hold 51.2 59.4 58.5 7.0 18.3 15.7 16.0 2.6 4.2 n.a. (21.4)
TSH MK TSH Res 12 2.88 1,173.5 3.10 Hold 22.4 29.3 30.9 17.5 12.9 9.8 9.3 0.7 2.3 (2.7) (10.6)
THP MK TH Plant 12 3.48 678.5 4.00 Buy 31.6 46.2 39.7 12.2 11.0 7.5 8.8 0.9 8.9 0.6 3.0
TWPB MK T’wind Plant 12 3.86 2,042.5 4.40 Buy 19.8 38.0 36.1 34.9 19.5 10.1 10.7 0.6 4.7 17.7 (3.0)
Property
ATRM MK Atrium REIT 12 0.82 101.1 1.28 Buy 8.7 8.7 8.7 (0.3) 9.4 9.5 9.5 (35.5) 10.4 (15.9) (18.0)
AXRB MK Axis REIT 12 1.72 450.4 2.40 Buy 13.6 14.8 15.9 8.0 12.7 11.6 10.8 1.6 8.4 (17.3) (7.0)
KLCC MK KLCC Prop 3 2.88 2,652.8 3.60 Buy 17.6 18.4 20.3 7.4 16.3 15.7 14.2 2.2 4.9 (23.8) (17.7)
MSGB MK Mah Sing 12 1.45 926.7 1.90 Buy 14.1 17.2 21.0 22.0 10.3 8.4 6.9 0.5 5.7 (34.8) (24.5)
QUIL MK Quill Capita 12 1.09 429.1 1.74 Buy 6.5 7.2 8.2 12.5 16.9 15.1 13.3 1.3 6.6 (33.5) (15.5)
SCITY MK SunCity 6 2.77 1,301.7 4.20 Buy 29.1 32.7 37.7 13.8 9.5 8.5 7.3 0.7 3.2 (45.7) (44.4)
SPSB MK SP Setia 10 3.56 3,680.4 WH WH 25.6 25.8 28.6 5.6 13.9 13.8 12.5 2.5 5.6 (42.6) (28.5)
SUN MK Sunrise 6 2.10 900.4 3.30 Buy 23.7 29.9 40.7 31.0 8.8 7.0 5.2 0.3 6.9 (41.3) (34.4)
YNHB MK YNH 12 1.92 759.8 2.80 Buy 22.2 29.0 34.6 24.8 8.6 6.6 5.5 0.3 7.1 (41.5) (28.9)
Tech
REXI MK Rexit 6 1.51 299.1 2.50 Hold 5.4 6.6 3.7 (17.5) 28.0 22.8 41.1 (1.6) 3.0 (45.3) (40.1)
MPI MK MPI 6 7.20 1,500.7 8.30 FV 59.1 60.2 69.4 8.4 12.2 12.0 10.4 1.5 5.1 (23.8) (22.6)
UNI MK Unisem 12 1.35 645.9 WH WH 25.4 21.5 24.9 (1.0) 5.3 6.3 5.4 (5.4) 7.4 (20.6) (18.2)
Telecommunications
DIGI MK Digi.Com 12 24.20 18,750.0 25.20 Buy 141.7 163.9 183.3 13.7 17.1 14.8 13.2 1.2 5.8 (2.4) (2.4)
T MK Telekom 12 3.26 11,304.6 3.25 Hold 24.9 23.0 24.2 (1.5) 13.1 14.2 13.5 (8.6) 6.0 6.9 4.0
TI MK TM Int'l 12 7.00 25,335.5 WH WH 47.3 47.8 52.7 5.6 14.8 14.6 13.3 2.6 - n.a. n.a.
Transport
AIRA MK AirAsia 12 0.87 2,089.2 0.88 Hold 17.7 15.3 18.0 0.7 4.9 5.7 4.8 6.7 - (55.9) (45.9)
BPH MK Bintulu Port 12 6.30 2,520.0 6.70 Buy 33.9 35.8 36.7 4.1 18.6 17.6 17.2 4.6 8.7 5.9 3.3
MAHB MK MAHB 12 2.95 3,289.0 3.40 Buy 21.1 24.6 26.9 12.8 14.0 12.0 11.0 1.1 6.3 (0.3) (2.3)
MAS MK MAS 12 3.34 5,347.2 3.95 Buy 46.8 34.0 38.9 (8.8) 7.1 9.8 8.6 (0.8) 0.7 (38.3) (31.6)
MISC MK MISC 3 8.40 31,804.5 8.80 Hold 61.7 59.7 64.2 2.0 13.6 14.1 13.1 7.0 4.2 (15.6) (13.8)
Utilities
MFCB MK Mega First 12 1.19 284.7 2.10 Buy 21.4 23.5 26.8 11.9 5.6 5.1 4.4 0.5 5.3 (22.7) (15.6)
TJN MK Tanjong 1 14.20 5,726.2 17.80 Buy 135.7 132.3 157.5 7.7 10.5 10.7 9.0 1.4 6.3 (26.8) (23.2)
TNB MK Tenaga 8 8.15 34,668.3 9.60 Hold 71.3 70.0 73.6 1.6 11.4 11.6 11.1 7.2 5.1 (29.7) (15.1)
Abbreviations:
FYE - Financial Year End (month) TP - Target price Rec - Recommendation Div Yld - Dividend Yield
Str Buy - Strong Buy Tr Buy - Trading Buy FV - Fully Valued NR – Not Rated WH – Withheld

Definition of Ratings
Aseambankers uses the following rating system:
STRONG BUY Total return is expected to exceed 20% in the next 12 months; high conviction call
BUY Total return is expected to be above 10% in the next 12 months
HOLD Total return is expected to be between above 0% to 10% in the next 12 months
FULLY VALUED Total return is expected to be between -10% and 0% in the next 12 months
SELL Total return is expected to be below -10% in the next 12 months
TRADING BUY Total return is expected to be between 10-20% in the next 6 months arising from positive newsflow e.g. mergers and
acquisition, corporate restructuring, and potential of obtaining new projects. However, the upside may or may not be
sustainable
WITHHELD Rating and target price withheld in the exercise of Aseambankers' duties under the applicable laws, rules, regulations,
policies and procedures for the time being in force, and is not a reflection of expected returns.
Applicability of Ratings
The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are
only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not
carry investment ratings as we do not actively follow developments in these companies.
Some common terms abbreviated in this report (where they appear):

Adex = Advertising Expenditure FCF = Free Cashflow PE = Price Earnings
BV = Book Value FV = Fair Value PEG = PE Ratio To Growth
CAGR = Compounded Annual Growth Rate FY = Financial Year PER = PE Ratio
Capex = Capital Expenditure FYE = Financial Year End QoQ = Quarter-On-Quarter
CY = Calendar Year MoM = Month-On-Month ROA = Return On Asset
DCF = Discounted Cashflow NAV = Net Asset Value ROE = Return On Equity
DPS = Dividend Per Share NTA = Net Tangible Asset ROSF = Return On Shareholders’ Funds
EBIT = Earnings Before Interest And Tax P = Price WACC = Weighted Average Cost Of Capital
EBITDA = EBIT, Depreciation And Amortisation P.A. = Per Annum YoY = Year-On-Year
EPS = Earnings Per Share PAT = Profit After Tax YTD = Year-To-Date
EV = Enterprise Value PBT = Profit Before Tax
Disclaimer
This report is for information purposes only and under no circumstances is it to be considered or intended as an offer to sell or a solicitation
of an offer to buy the securities referred to herein. Investors should note that income from such securities, if any, may fluctuate and that each
security’s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental
ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on
price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis. Accordingly, investors may
receive back less than originally invested. Past performance is not necessarily a guide to future performance. This report is not intended to
provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the
particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding
the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report.
The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently
verified by Aseambankers Malaysia Bhd and consequently no representation is made as to the accuracy or completeness of this report by
Aseambankers Malaysia Bhd and it should not be relied upon as such. Accordingly, no liability can be accepted for any direct, indirect or
consequential losses or damages that may arise from the use or reliance of this report. Aseambankers Malaysia Bhd, its affiliates and related
companies and their officers, directors, associates, connected parties and/or employees may from time to time have positions or be
materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting
commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services
for or relating to those companies. Any information, opinions or recommendations contained herein are subject to change at any time,
without prior notice.
This report may contain forward looking statements which are often but not always identified by the use of words such as “anticipate”,
“believe”, “estimate”, “intend”, “plan”, “expect”, “forecast”, “predict” and “project” and statements that an event or result “may”, “will”, “can”,
“should”, “could” or “might” occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions
made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ
materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward-
looking statements. Aseambankers Malaysia Berhad expressly disclaims any obligation to update or revise any such forward looking
statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated
events.
This report is prepared for the use of Aseambankers Malaysia Bhd's clients and may not be reproduced, altered in any way, transmitted to,
copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of Aseambankers
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Equity Research

PETRONAS gas subsidy

Page 2 of 76 3Q08 QUARTERLY OUTLOOK

Mediocre growth prospects in the shadow of inflation

3Q08 QUARTERLY OUTLOOK Page 3 of 76

Market: Earnings Growth and Valuations (by sector)

Page 4 of 76 3Q08 QUARTERLY OUTLOOK

3Q08 QUARTERLY OUTLOOK Page 5 of 76

Page 6 of 76 3Q08 QUARTERLY OUTLOOK

Fuel Price Hikes: Operational Updates for Selected Sectors

3Q08 QUARTERLY OUTLOOK Page 7 of 76

March 2008 Quarter Results: Prominent Underperformers

Politics and inflation may side-track development growth

Source: Malaysian Treasury, Bank Negara Malaysia

Page 8 of 76 3Q08 QUARTERLY OUTLOOK

Building Material Cost Indices: YoY comparison

Source: Construction Industry Development Board

Quarry Aggregates: Price Revisions (minimum ex-quarry selling price)

Area B (which includes Cheras / Hulu Langat, and Kajang / Semenyih)

3Q08 QUARTERLY OUTLOOK Page 9 of 76

9MP Mid-Term Review: Extra RM30b Development Spending Allocation

9MP Mid-Term Review: Major Infrastructure Projects

Page 10 of 76 3Q08 QUARTERLY OUTLOOK

A triple wave cloud formation in US equity market ?

Reserve Funds Treasury Securities Held Outright

Source: CEIC, Aseambankers

3Q08 QUARTERLY OUTLOOK Page 11 of 76

CBRE vs. S&P 500, KLCI

US: Headline and Core Inflation

Source: CEIC, Aseambankers

Page 12 of 76 3Q08 QUARTERLY OUTLOOK

US: Energy Goods as a % of Total Personal Consumption Expenditure

US: Median Home Equity Prices and Subprime Mortgage NPLs

Source: CEIC, Bloomberg, Aseambankers

3Q08 QUARTERLY OUTLOOK Page 13 of 76

US: Losses by Major Financial Institutions

Subprime-related Losses and Capital Raised (USDb)

JP Morgan Emerging Bond Index vs. KLCI US Bond Spread

320 1500 500

Source: Bloomberg Source: Bloomberg, Aseambankers

Page 14 of 76 3Q08 QUARTERLY OUTLOOK

Market strategy: Stay indoors

Source: Bloomberg, Aseambankers

3Q08 QUARTERLY OUTLOOK Page 15 of 76

Asia: Selected Regional Market Valuations

Source: Bloomberg, Aseambankers

Page 16 of 76 3Q08 QUARTERLY OUTLOOK

3Q08 QUARTERLY OUTLOOK Page 17 of 76

Malaysia: Sectorial performances, 2007 and YTD

100% 2007 YTD 2008

Page 18 of 76 3Q08 QUARTERLY OUTLOOK

Plantations: CPO, Soyoil and Rapeseed Oil Prices

Plantations: Malaysian CPO Production and Inventory Levels

Source: MPOB, Aseambankers

Themes and Issues for 3Q08

3Q08 QUARTERLY OUTLOOK Page 19 of 76

Page 20 of 76 3Q08 QUARTERLY OUTLOOK

Economy: Developments & Outlook

Malaysia: Key Macroeconomic Indicators

Domestic Demand 10.5 10.1 5.6 6.6 7.0

Actual Figures Official Aseambankers Forecasts

3Q08 QUARTERLY OUTLOOK Page 21 of 76

Strong start to 2008

Malaysia: Quarterly Real GDP Growth (% YoY, 1Q 2005 – 1Q 2008)